Energy Crisis in Pakistan: Fact or Fiction

If one looks at the history of power sector in Pakistan, a few points are clear. These include: 1) a myth that the country has been persistently suffering due to the shortage of energy products, 2) the successive power policies have been have been introduced to serve the interest of local and overseas investors, 3) blatant theft of electricity and gas has been going on with the connivance of employees of utility companies, 4) regulatory authorities have failed in protecting the interest of consumers and remained subservient to the incumbent governments.

Energy shortage

Pakistan is blessed with an enormous potential of hydel power generation. According to the experts Mighty River Indus along has the potential to generate more than 40,000MW electricity per annum. Another 10,000MW electricity per annum can be generated from smaller hydel plants (run of the river type facilities which does not require construction of dams/reservoirs. In addition to that 50,000MW electricity can be produced annually from Thar coal. However, at present total hydel generation is around 8,000MW, which goes down when water level drops in dams. Thermal power plants (mostly owned and operated by the private) have the lion’s share in the total generation. The share of coal and nuclear power plants in the total electricity generated has remained minuscule. Though, a lot is being talked about changing the energy mix and curtailing use of gas for power generation, a little success has been achieved.

Serving vested Interest

Major hydel power generation facilities, i.e. Warsak, Mangla, Tarbella and Ghazi Brotha are located in the northen parts of the country and cater to the needs to KPK and upper Punjab. Karachi is hub of trading and industrial hub and it is totally dependent on thermal power generation. The city has 10% of the total population of the country but gets nothing from low cost electricity generated from hydel power plants. To be precise, K-Electric supplies electricity to some parts of Sindh and Baluchistan. If transmission of hydel electricity to Karachi is difficult or uneconomical, quota allocation of gas to K-electric should be doubled. Karachi is surviving on self generated electricity, the city has a latent demand of 5,000MW, whereas K-Electric is capable of meeting only half of this demand. One can still recall that in the early nineties E-Electric used to export electricity to Punjab. HUBCO was constructed to primarily meet Karachi’s demand, but it was ‘hijacked’ by WAPDA for meeting Punjab’s demand.

Blatant Theft

Blatant theft of electricity and gas been been going on for ages with the connivance of utilities. On top of all some of the parts of Pakistan are provided free of cost electricity. One may recall that at one time the average T&D losses of electric utilities were as high as 40%. Lately, gas UFG, which mostly comprise of theft hover a little less than 10%. On top of this, utility companies carry the load of billions of rupees of receivables, the probability of recovery is very low. According to some analysts, if K-Elecric pays off its outstanding dues, SSGC will be able to pay off almost all the payable amount to E&P companies. Containing theft or recovering outstanding dues does not require any rocket science, but a firm commitment. However, utilities fail completely helpless because of the pressure of political and linguistic groups. It is also necessary to put on record that utilities don’t provide connections, taking refuge behind non-availability of electricity/gas, but are prompt in providing ‘temporary connections, which are often without meters. Analysts term this ‘offical kunda’.

Regulatory Authorities

The Government of Pakistan (GoP) initiated the process of liberalization, deregulation and privatization. Under this policy, the private sector was encouraged to establish industries, which remained the exclusive domain of the state for decades and it was also offered the stake in state owned enterprises along with management control. Prior to that the World Bank has refused to lend more money to WAPDA and the shift in policy gave birth to HUBCO and other IPPs. 

IMF Recipe

Many analysts have the consensus that the International Monetary Fund (IMF) is the lender of last resort, but its recipes are not aimed at enabling any country to ‘stand on its own feet.’ Often the country is trapped in a vicious cycle of borrowing. However, the advantage is that if the country succeeds in developing its own home grown plan and meeting the condition imposed by the IMF, it may overcome the balance of payment crisis. 

Pakistan has a long history of remaining under the IMF support program. In one of the latest country report, the Fund has once again highlighted the need to introduce structural reforms for the power sector. These weaknesses identified are: 1) the persistence of circular debt, 2) DISCOs still operating under the state control, 3) high T&D losses, 4) failure to follow corporate governance and 5) lack of the mechanism for passing on input cost adjustments to end consumers.

Emphasizing US$55 billion in planned investments as a part of CPEC, the Fund anticipates improved economic activity made up of 19 Chinese sponsored power sector investments (US$17.7 billion) and non-CPEC energy projects (US$25.4 billion). Mode of financing for energy projects has been bifurcated into: 1) direct borrowing and investment from Chinese financial institutions, and 2) financing of projects by private domestic sponsors as well as government backed borrowing from multilateral lenders.

A detailed analysis of the power sector shows: 1) the country has enormous resources to produce low cost electricity, 2) if pilferage is contained cash flow of DISCOs will improve and 3) circular debt issue will be resolved. Appropriately managed conventional sources of power generation can help in meeting the electricity demand and there may not be an urgent need to invest in alternative sources of power generation.

Investment opportunities in Pakistan

It is an undeniable fact that Pakistan suffers from two contentious problems: 1) low savings and 2) limited opportunities for investment. All the successive governments have been making efforts to lure foreign investors. However, they fail to understand that if the local investors are shy no foreign investor would be keen in investing in Pakistan. The problem is further aggravated because per capita income is low and there is hardly any incentive for saving. Those who have some money want to become rich overnight but mostly fall in the trap of cheaters and ultimately loose whatever amounts they have. The successive governments have not been doing anything more than lip service and regulators can be termed ‘sleeping watch dogs’. If one looks at the history of financial scams taking place in Pakistan, only the regulators could be held responsible for those.

Lately, some of the cheats ripped off people and the event was termed ‘Modaraba Scam’. Interestingly media flashed headlines, which gave an impression as if the Modarabas listed at Pakistan Stock Exchange (PSX) were involved in the scam. In fact a few clerics belonging to KPK were the master minds, who cheated the innocent people. The amount involved is estimated from Rs6 billion to Rs45 billion. The most regrettable point is that the regulators failed in identifying the crisis, while it was brewing. According to a financial analyst, “State Bank of Pakistan (SBP) considered it an issue which pertained to Securities and Exchange Commission of Pakistan (SECP) and the high ups at the Commission had an opposite view”. Another analyst said, “The quantum of money involved is still not known because some of those having given the money to the cheaters preferred to remain silent and also didn’t lodge any claim because they couldn’t provide evidence of source of fund”.

As stated above there is little incentive for saving in the country, not only that the opportunities are limited, the investors are penalized by the government in one way or the other for making investment. To begin with, people having other sources of income have to pay tax, often at a fabulous rate, but the income of feudal lords is tax exempt because it is termed income from agriculture. It has been highlighted by experts repeatedly that that now business tycoons have also learnt the trick of clubbing income from other sources into income from agriculture.

It would not be out of context to cite two example, rate of tax applicable on the income of listed companies and tax charged on dividend income. The number of listed companies at Pakistan Stock Exchange (formerly Karachi Stock Exchange) is on constant decline because of merger and acquisitions and voluntary delisting. At an average the listed companies pay above 30% tax on their income and when they distribute dividend, on that income tax/withholding tax is charged. The rationale put forward is that listed company is a legal entity and shareholders are different, therefore both have to pay tax on their income. The propagators of this philosophy tend to forget that listed companies also pay taxes on import of machinery and raw material, GST on finished goods and effectively act as tax collection agents for the government. Therefore, not more than 5% tax should be charged on the income of listed companies. On top of all these listed companies are the providers of employment and also the earners of much needed foreign exchange for the country.

Investment in listed companies is still considered risky by the small investors, particularly after the global financial crisis of 2008. Unlike developed countries, Pakistan didn’t suffer from ‘sub-prime loans issue’. However, imposition of floor for a long time, did not allow the small shareholders to take an exit. On top of all shares kept by investors in subaccounts were sold by some of the brokerage houses that created the real havoc. This disheartened many investors of stock market, who pulled out their investment from capital market and invested it real estate, foreign exchange and precious metals.

Around the world mutual funds are considered a safe haven for the small investors. The logic is simple that asset management companies have substantial investments in various types of funds and that any decline in the income of on particular company does not affect the overall income of a particular type of fund and in turn the income of the unit holders. Along with this there is constant sale and redemption by the unit holders that save does not causes spikes in value of the asset under management (AUM). However, in various funds bulk of the investment is by corporates and large net worth investors that results in sudden rise and fall in the value of AUM.

The big investors also invest in real estate, foreign exchange, precious metals and energy products. One of the reasons for investing in these products is the lack of documentation, which allows the investors to evade tax payment. It is estimated that the documented economy constitutes only one-third of county’s total economy and size of undocumented economy is always increasing due to exemptions and evasions. There is always an incentive for the evasion because the incumbent governments have been offering amnesty schemes with regular intervals. It is also on record that billions of rupees are being sent out of Pakistan in the form of US dollars every year. According to certain estimates, funds kept by Pakistanis outside the country range from US$50 billion to US$500 billion. Bulk of this amount has been invested in real estate, international trading and manufacturing facilities. Some of the favorite destinations are India, UAE, Malaysia and Singapore. If the government of Pakistan is serious in accelerating GDP growth rate, it has to ensure that each penny saved is invested in Pakistan.

This article was originally published in Pakistan & Gulf economist

India opposing CPEC

Indian Ocean is the oldest and most efficient trade corridor. On its one side are hydrocarbon rich countries and on the other side are energy deficient but major energy consuming and industrially developed countries. The ships carrying goods destined for Europe using Suez Canal also passes through Indian Ocean. In order to provide security to their maritime trade navies of different countries are also present in the Indian Ocean. In the recent past pirates having safe sanctuaries in Somalia have created serious havoc, which prompted many countries to further enhance their presence in the Indian Ocean, which also included India.

India not only claims that it is the strongest regional super power, but also openly denounces any world super power that refuses to accept its hegemony in the Indian Ocean. India is fully cognizant of the fact that bulk of the international trade, energy products, consumable and capital goods pass through Indian Ocean. It is also a fact that India and China have never enjoyed cordial relationships; in fact they are involved in boarder disputes for decades. In such a scenario, China has no option but to protect its maritime trade, particularly movement of energy products. The US Navy is also active in Indian Ocean and it has been constantly increasing its presence around Striate of Hurmaz and in the Malacca Striate. In South China Sea dispute, Japan and Korea are fully supported by the US, which also wishes to contain Chinese growth.

India has emerged as the biggest opponent of Chinese program, which is commonly known as ‘String of Pearls’. Under this program China is building sea ports in various countries and out of these Gwadar is one. While China says that all these ports fall under the category of ‘Listening Ports’ that helps in the movement of merchant ships. However, India has been refuting Chinese claim and call these ‘Chinese Naval Bases’ and term these a serious threat to its sovereignty.

India is actively operating in Afghanistan, under the disguise of developmental work. Afghanistan is a land locked country and bulk of its transit goods having been passing through Pakistan for ages. India often complains that its Afghan destined goods are not allowed to pass through Pakistan conveniently. In this backdrop India has invested huge amounts in constructing Chabahar port in Iran and linking it to the Central Asian Countries via Afghanistan by road and rail. While the Indian endeavor may succeed in offering an alternative route, the undeniable fact is that Pakistan offers the shortest and the most efficient passage to Afghanistan. This fact became most obvious when Pakistan stopped movement of NATO supplies though land route.

Pakistan decided to handover management control of Gwadar Port to China and also entered into an agreement for the construction of China Pakistan Economic Corridor (CPEC). The corridor will link Gwadar with Kashgar and enable China to contain transit time of its imports/exports. The goods will move on-land rather than sea. Under CPEC, Gwadar port will be linked to china by construction of allied infrastructure­ - road and railway track. India is opposing construction of CPEC section passing through newly constituted Gilgit-Baltistan Province of Pakistan.

With the commencement of full scale activities at Gwadar Port and construction of road and rail networks, Baluchistan is likely to reap enormous benefits. Over the years India has been supporting rebel groups and supplying them funds and arms. A banned outfit Jundullah had enjoyed external support but the group was disintegrated after the hanging of its chief in Iran. Lately, ‘Free Baluchistan’ banners were seen in Switzerland and analysts suspect that it is the work of those Baloch groups who have obtained political asylum there.

One can still recall that India announced to disassociate itself from Iran-Pakistan-India (IPI) project due to security reasons as the gas pipeline has to pass through troubled Baluchistan province. Later on, it dawned that another gas pipeline project, Turkmenistan- Afghanistan-Pakistan-India (TAPI) was being sponsored by the opponents of IPI.  A point beyond comprehension was that India decided to quit IPI because of security issue in Baluchistan, but joined TAPI that has to pass through war-torn Afghanistan.

A substantial part of road network that will ultimately become part of the CPEC has already been constructed and now it is being revamped to offer speedy and safe mode of transportation. It is believed that CPEC will change the entire landscape. India has the realization that it has missed the opportunity by strangulating its relationship with China. It also fears that Chabahar port would never be as efficient and cost effective as Gwadar. Therefore, it is making last ditched efforts to sabotage Gwadr Port and CPEC projects. Now it is the responsibility of all the Pakistanis to frustrate Indian efforts and make Pakistan ‘natural corridor for trade and energy’.

This article was originally published in Pakistan & Gulf Economist

CPEC Myths and Realities

In Pakistan a lot is being said and talked about China Pakistan Economic Corridor (CPEC). While some analysts term it a mega initiative by Pakistan’s ‘time tested friend’, cynics label it ‘another East India Company in Making”. Another group says, “British Raj undertook many mega developmental project in Indian subcontinent but most of these were aimed at taking the raw materials from one of its bountiful colony to the home town and sell its finished products to one of the huge markets enjoying substantial purchasing power, as against this CPEC is aimed at ushering prosperity in the rural areas of Pakistan”.

China has one of the largest population and industrial base. The country is deficient in indigenous production of energy products. To keep the factories running it has to import huge quantities of crude oil and finished products. Bulk of these products comes from Middle East and North Africa (MENA). Carrying these through ships takes long time and the cost is also high. Presence of navies of various super powers, particularly the US Navy, poses serious security risks for the ship carrying oil to China. Therefore, another route has to be constructed that is short, efficient and cost effective. Taking goods from Gwadar to Kashgar though Pakistan does not pose serious problems because most of the road and rail network is already in place, which can be further improvised at a faster pace and with lesser expenditures.

China, the fast growing economic power has embarked upon ‘One Road, One Belt’ program, which consists of economic belt and maritime road. A closer look at the illustration hardly shows any road or railway track passing through Pakistan. This implies that Pakistan is not the sole beneficiary of this grand plan but will reap the benefits to the extent it is able to use the corridor. At the best it will collect transit fee and the roads may make any contribution in boosting Pakistan’s GDP. The experts having futuristic vision say that adding to power generation and developing robust infrastructure can help in containing electricity outages and post-harvest losses, which means additional contribution to country’s GDP. However, reaping benefits will totally depend on conceiving right policies and their implementation in letter and spirit. The overwhelming perception is that the Government of Pakistan has not come up with any ‘home grown plan’ to fully exploit the true potential of CPEC.  

It is being said that CPEC envisages investment ranging from US$46 billion to US$72 billion. However, only scanty details are available about the projects and component of equity and debt. The overwhelming perception is that bulk of the money will come as debt and Pakistan may face serious debt serving constraints. Drawing substantial and sustainable income from infrastructure projects is a long drawn process. Sri Lanka already faces such a problem. Therefore, local policy planners have to take swift remedial steps to avoid a similar situation. It may be true that CPEC may yield enormous benefits for Pakistan, but it is more important to take into account any potential fallout and come up with ‘Disaster Recovery Plan’.

One of the basic lessons taught in management sciences is having a recovery plan in case the original plan fails. This is unavoidable because Pakistan faces internal and external treats. Even after seventy years of independence Pakistan is surviving on aid, grants, and loans and on the crutches of multilateral donors, particularly International Monetary Fund (IMF).

The primary obstacle to the CPEC’s full implementation is security. To address Chinese concerns and ensure the safety of these projects, Pakistan has created a dedicated CPEC force, but even a force of that size may not prove substantial. Many of the constituent projects are being constructed in the areas having sanctuaries of terrorist and anti-state groups. Attacks on the work force or Chinese engineers could delay or derail the CPEC.

A decades-long insurgency simmers in Baluchistan, where a number of important CPEC projects are underway. The CPEC also faces domestic political opposition in Pakistan, with infighting between provinces and the central government over the allocation of investments. The lack of transparency surrounding the negotiated deals has heightened concerns and skepticism that only a select few, if any in Pakistan, will benefit from the investments. In case Pakistan is unable to provide sufficient security or address the concerns of domestic opponents, projects will have trouble getting off the ground and will fail to prompt follow-on investments or deliver commercial success.

On the external front, CPEC face threats from the United States, India and Afghanistan. Indian Prime Minister has already lodged protest with China. Washington is likely to join hands with India, having concerns about the CPEC, as it represents the leading edge of China’s expanding access to, and likely influence within Eurasia. Any direct intervention by the US or India could be costly, unwinnable and almost certainly counterproductive to other US goals in Pakistan and the region.

This article was originally published in Pakistan & Gulf Economist

Implications of Kurd referendum outcome

The big news is that the overwhelming majority of Iraqi Kurds have voted in favor of an indecent state of their own. Now the big question is, will the other states harboring Kurds approve splitting of Iraq or support it in defying the Kurd verdict.

The initial reports indicate that Iraq, Turkey, Syria and Iran, having already rejected the idea of holding a referendum collectively decided to resist formation of an independent Kurd state. However, it is feared that the US and Israel will provide money and arms to the Kurds to initiate full-scale encounter with Iraqi forces that are already busy in fighting ISIS. All the stakeholders must keep in mind that the war among the Muslim countries, which are also major oil producing countries would benefit their enemies.

While many Muslim countries of the Arabian Peninsula have chosen to remain silent, Hezbollah has categorically stated that Kurdish vote marked the first step towards fragmentation of the Middle East, which could lead to the Muslims killing each other. Hezbollah Chief, Sayyed Hassan Nasrallah, said Kurds vote for independence was a threat to the whole region and not just Iraq and neighboring states with Kurdish populations.

Nasrallah said pointblank that arch enemy of Muslims, Israel had come out in support of independent Kurdish state and described the referendum as part of a US-Israeli plot to carve up the region. He had warned earlier this year that a future Israeli war against Syria or Lebanon could draw thousands of fighters from countries such as Iran, Iraq, Afghanistan, Yemen and Pakistan, and could take place inside Israel.

Turkey’s President Tayyip Erdogan said that Iraqi Kurdish authorities would pay the price of the referendum. Turkey had built strong commercial ties with Kurdish authorities, which pump hundreds of thousands of barrels of oil daily through Turkey for export to world markets. However, after the referendum Turkey threatened to impose economic sanction, effectively cutting their main access to international markets. Erdogan went to the extent of saying that Iraqi Kurds would go hungry if Ankara halted export of Kurdish oil.

Prior to referendum, Saudi Arabia had urged Kurdish leaders to call off planned referendum in the interests of Iraq’s stability, security, unity and sovereignty. The referendum “may result in negative repercussions” for the fight against terrorist organizations, and “it would be best to avoid new crises,” said a Saudi government.

I am of the view that the Kurd referendum is part of creation of ‘Greater Kurdistan’ which will be formed by instigating Kurds from Turkey, Iran and Syria to also take similar decision. I would also say that separating Kurds from Iraq is the preamble of splitting the country into Sunni and Shia states. The US has been working on this plan ever since it attacked Iraq accusing it for developing weapons of mass destruction soon after 9/11.

US adamant at destroying the world

My special thanks to Bryan Drurzin for posting this on Linkedin. I started writing blogs in June 2012 and named my website Geo politics in South Asia and MENA. The caption of my second blog was US – The biggest Arm Seller . I would not hesitate for a second in admitting my inadequacy at that time, but had a strong faith that the US creates conflicts around the world, facilitate in forming rebel groups, supply them funds and arms for spreading anarchy.

I often wonder that the citizens of the largest democracy never demand their government to stop spending taxpayers’ money on destruction. At times I feel that the US citizens suffer from the worst apathy. They are hard working, but their sole objective is to make money and spend it for pleasure, from alcohol to drugs and from satisfying labedo to gayism. In a way the US government  endorses production of kids without marriage and permits same sex marriages. I suspect that all these liberties are given to keep them under sedation so that they don’t question what the government is doing.

Pakistan: Time to quit US proxy war in Afghanistan

My narrative may sound undiplomatic, but it is a true reflection of the feelings of Pakistanis. Those in power or seeking access to the corridors of power may still be willing to negotiate the terms to continue to tow the US foreign policy. However, the demonstrations held in various cities of Pakistan on Sunday were a clear demonstration of the feelings of the masses. The use of power to disperse the demonstrators, the use of tear gas shells and the insulting attitude towards religious clerics was enough to instigate the mob.

The worst was the helplessness of the government that was evident when it admitted that resorting to assault by police was uncalled for and those arrested were also released to avoid further agitation. It is a practice around the world that people submit a note of descent at the embassy/consulate which is received by them. Pakistanis were also following the same protocol/code of conduct and wanted to hand over their note to the US Consulate in Karachi.

The anti Pakistan statements of the US president and other functionaries (including foreign office and the army) are nothing but the release of growing frustration after facing defeat after defeat. Though, the US administration is still not ready to accept its defeat in Iraq and Syria, it is eager to shift the attention to some other parts of the world.

The effort by the US to initiate an arm- encounter between Saudi Arabia and Qatar failed and no one seems to be ready to accept its allegation against Iran. In the Korean Peninsula the US faces serious resistance from China and Russia. India already faces strangulated relationship with China and seems not ready to indulge in any other adventure.  This gives it (the US) the chance to talk about Afghanistan, where the war is going on among the tribes to get control over opium cultivation.

The US has already lost its war in Afghanistan and its sympathizers are confined to the presidential palace in Kabul. The classification of the good and the bad Taliban has also lost its meaning. It is apprehended that the ISIS members on the run from Iraq and Syria are landing in Afghanistan. To keep these blood-thirsty and ruthless beasts busy the US has the option to herd them into Pakistan or Iran. After the recent failed adventure of ISIS in Iran, Pakistan becomes the softest target, because of hundreds of kilometers highly porous Pak-Afghan border.

Under the prevailing circumstances, Pakistan Army has the prime responsibility of protecting its borders with ever hostile India and Afghanistan and stopping any attack on Iran from Pakistani soil. Many of the critics have already pointed out that some of the local channels, getting support from outside Pakistan, are busy in creating anti army sentiments, this policy in the past has led to the creation of Bangladesh. The masses expects that the army will not move its focus away from defending Pakistan to fighting any proxy war.

The Government of Pakistan will have to tell the US in clear words that it does not need the paltry payment for providing logistic support to the US troops. Pakistan will also have to mend its relationships with India and Iran. My humble advice to the Indian government is that it should abstain from opening fronts against Pakistan, because the war would force the foreign investors not to invest in war-ridden country.