Pakistan risks shooting itself in foot over Etisalat spat

The country's government is at loggerheads with Etisalat, one of its major investors, and now seems to be doing all it can to dissuade new foreign backers.

Pakistan's political elite do not seem to be concerned enough by the fact that economic chaos and a security situation that has degenerated almost beyond control is deterring new foreign investment. The powers that be appear to have another idea now: to drive away those who have already put their money into the country.

Pakistani politicians are engaged in a heavy verbal skirmish with Etisalat, the single largest telecommunications investor the country has managed to attract over the past decade. It does not seem so long ago that the entry of Etisalat, the UAE's largest telecoms company, into Pakistan was termed the biggest success story in the country's struggle for foreign direct investment and marked a milestone in its privatisation drive.

The Pakistan government agreed to sell Etisalat a 26 per cent stake in Pakistan Telecommunication Company Limited (PTCL) in 2006 - its prized possession in the basket of assets on sale - along with the management control for US$2.6 billion (Dh9.55bn). Under the terms of the contract, Pakistan was to receive payments in instalments, but that arrangement appears to be on hold. The government is waiting for about $800m that Etisalat has been withholding for more than a year.

The bone of contention is the transfer of ownership to PTCL and Etisalat of some expensive properties in two major cities in Pakistan, which Etisalat claims is part of the contract it signed when it took over the company. But by the look of things, the authorities in Islamabad have no intention of conceding to Etisalat's position. Senior politicians claim the government does not own the properties anyway, and therefore cannot transfer ownership.

There has been a lot of posturing since the start of the year by both sides, but now the situation is in danger of spinning out of control. Mohammed Omran, the chairman of Etisalat, met the president and the prime minister of Pakistan at the end of last year to convey his concerns, while the senator Waqar Ahmed Khan, the federal minister for privatisation, and senior officials from Islamabad have been frequent visitors here.

But it seems as if the shuttle diplomacy has failed to iron out wrinkles in a relationship that had worked well for four years. Mr Khan is standing his ground, saying Pakistan is under no contractual obligation to meet Etisalat's demand and transfer any properties. This month he told the legislative assembly that there were discrepancies in the PTCL stake sale. He said the properties Etisalat was demanding to be transferred to PTCL under the deal included land that was not owned either by the federal or the provincial government, and that the privatisation commission had not been involved when the deal was signed in 2006.

It did not take the parliament long to send the matter to a standing committee and propose an inquiry into the Etisalat-PTCL deal. Mr Omran's response was that Etisalat had done its due diligence and had obtained legal opinion from international and national external counsels to confirm that its stake in PTCL would be legal before agreeing to the purchase. "Etisalat applies the highest standards of transparency in conducting its business operations and international expansion strategy," he said.

Pakistan is also seeking legal advice and Mr Khan says his ministry is launching an inquiry into why a share purchase agreement was signed with Etisalat for the PTCL stake in 2006 after Etisalat had allegedly defaulted on a similar agreement signed for the same stake in 2005. "They just left their deposit and walked away," Mr Khan claimed, alleging "they could have been sued for specific performance, but the then government didn't do that".

He added that "even the advisers, JPMorgan Chase, advised against the deal". "It is our principal stance that the transaction was not done transparently by the previous government," Mr Khan said. Etisalat declined to comment on his claims. But analysts remain baffled as to why Pakistan cannot reach a mutually acceptable solution. What can it gain from this controversy? What impact could this war of words have on the future of foreign investments? And can Pakistan afford to be at loggerheads with foreign investors?

Salman Shah, an economist and former finance minister, thinks not. Mr Shah is convinced Pakistan's stance will do nothing but scare off investors. "If you continue to harass people no one will come here," he says. "Etisalat is a global firm and their arrival in Pakistan has put Pakistan on the global investor list, and for them to complain they did not get a good deal will hurt Pakistan." In Mr Shah's opinion, turning the controversy into a "political football for everyone to see" does not serve any purpose.

The country has failed to close a privatisation deal in the past 18 months. "Because of the security situation, FDI [foreign direct investment] is not coming. Pakistan is on the back foot," says Shahid Javed Burki, an economist and former World Bank vice president for Latin America. Mr Burki, also a former finance minister, thinks Pakistan needs to create a sense of confidence by implementing and honouring contracts.

"Playing around with the contracts when they are signed and implemented does not create a good impression," he says. "If there are issues to be sorted, they should be sorted out in an open and transparent manner here." Until April last year, Etisalat had big plans for the Pakistan market. The company was aiming to raise shareholding in PTCL by another 25 per cent and had an eye on Pakistan's first 3G licence.

But any future investment in Pakistan now hinges on a satisfactory resolution of its dispute with the government. Etisalat last year communicated its expansion plans to the government, which could have seen additional billions of dollars going into the federal purse. Pakistan's roadshow in the final quarter of last year, which was designed to promote a sale of the government's stake in the country's top 10 companies, was well received in the UAE. But the investors who expressed interest in possible deals will probably be having second thoughts after the Etisalat controversy.

For Pakistan, one would feel, there is a lot more at stake than just a few properties. [e-mail]