Morning Briefing for Sep 12, 2011 – Standard Capital


Government ignorance putting US$500mn investment at stake
Lotte Pakistan PTA, one of the sole producers of Purified Terephthalic Acid (PTA) in Pakistan, has been facing protection level issues since quite some time as the Pakistani government has discouraged the production of PTA in Pakistan by reducing protection level from 7.5% to 3% after the takeover by KP Chemicals, the majority shareholder of Lotte Pakistan PTA.

According to Standard Capital, this lowering level of protection is now putting a US$500mn investment at stake. The major issues causing hindrances in investing US$500mn in Pakistan include:

• High income tax in Pakistan (42% rate);

• Low tariff protection (below international levels)

• Lack of other general investment incentives

The Korean parent company KP Chemicals is therefore considering shifting its expansion of PTA plant to another country in Asia or Middle East such as:

• China (where the import tariff on PTA is at 6.5%);

• India; or

• Saudi Arabia (which has no income tax along with large amounts of feedstock paraxylene which can provide huge savings in logistics costs).

Thus, in order to keep the investment of US$500mn, which according to Lotte PTA would help meet the future 30% increase in PTA demand(in 3years time) and generate exports of US$300mn, Lotte PTA has submitted a proposal to Board of Investment (BOI) consisting of tariff revision back to 7.5%, tax concessions and general investment incentives which, if approved, would result in an investment in Pakistan that would positively affect FDI, import substitution, export earnings technology transfer and employment generation.