Pakistan has been offered more private foreign investment in the next four years than it has received in the last four decades. On the face of it, we should be overjoyed at our good fortune. After all, every third world country, including “friend” China and “enemy” India, is desperately trying to lure foreign investments to its shores. Yet some people have responded in a cynical, even hostile, fashion to foreign interest in Pakistan’s economy.
A close look at the arguments offered by critics of the government’s power package reveals much misplaced concreteness among retired officials, opposition politicians and hard-boiled ideologues. It also leads to the conclusion that perhaps Benazir Bhutto’s media managers haven’t presented the government’s case forcefully.
The facts are fairly straightforward. Owing to short-sighted and inefficient policies in the past, Pakistan faces a shortage of at least 2000 MW of power today which is expected to increase to 7000 MW by 1998. Instead of allowing the power crisis to assume crippling effect, the Bhutto government has decided to tackle it head on. Its “power package” comprises an interesting mix of short-term thermal projects based on imported furnace oil to longer-term gas, coal or hydel-based power plants. Ms Bhutto is hoping that several billion dollars will be invested by foreigners in the next four years to help overcome the country’s power shortages.
A major criticism relates to the incentive package offered to the private sector. It is argued that the government’s agreement to buy power from the private sector at 6.5 cents pKWh in 1997-98 is far too high and will make power prohibitively expensive in the years to come. How far is this criticism justified?
At current exchange rates, 6.5 cents translates into Rs 1.98. Assuming that the Rupee will depreciate by about 20 per cent by 1997-98, this works out to about Rs 2.40 pKWh to WAPDA by the time the projects are on-line. An average consumer tariff of about Rs 3 can therefore be targeted. How does this compare with the forecasts for average WAPDA rates in 1997-98 without private power sources but with increased loadshedding and power breakdowns?
Not unfavourably. The average WAPDA selling tariff in 1993-94 was Rs 1.51 pKWh. The proposed WAPDA tariff for 1994-95 is Rs 2.13 pKWh and the forecast without private power plants but with acute loadshedding for 1997-98 is Rs 2.82 pKWh. If, as the government envisages, consumer tariff rates will progressively reflect time-of-use and seasonal loads, the adverse effect of private power tariffs on the consumer price index will not be significant. At any rate, electricity will be available to all, there will be no power shutdowns and efficiency will increase all round. What some of us lose on the downswing (through slightly higher rates) will be more than offset by what the country gains on the upswing (an additional Rs 10 billion in GNP growth at current prices).
Even by current standards for private power generation, the rationale for a tariff of 6.5 cents pKWh to WAPDA is within acceptable limits. For example, the HUBCO tariff in the first ten years of operation is forecast at 6.74 cents pKWh. India is offering up to 7.2 cents pKWh and Indonesia as much as 8.5 cents pKWh for comparable power projects.
There is, therefore, a more fundamental question at stake. If Pakistan had not offered an internationally competitive rate of 6.5 cents pKWh, how much private foreign capital would have flown into the country? Next to nothing, we fear, given continuing political instability and Pakistan’s dismal credit ratings abroad. Therefore those who argue that the government should not have offered 6.5 cents pKWh are, in effect, saying that we should not welcome foreign capital into the power sector and learn instead to live with increasing power shutdowns and load-sheddings.
Criticism is also levelled against the government for encouraging the establishment of a number of oil based plants instead of gas based ones, thereby increasing Pakistan’s dependence on imported sources of energy. But this charge is also misplaced. At the moment, our proven natural gas reserves are estimated to be only 22.8 tcf which, if exploited for power-generation, will be depleted in ten years’ time. If adequate exploration and development were to be undertaken today, the reserve position could conceivably improve several times. But exploration and development need a lot of money and time, both of which are in desperately short supply. Thus there is really no short-term choice between gas-fired and oil-fired power plants. The former is a long-term option while the latter has become a short-term necessity.
The same sort of arguments hold for coal-fired thermal plants in relation to oil-fired ones. Our coal reserves are estimated to be about 734 million tons. Of these, however, we only produce 3.3 million tons. Even if foreign capital inputs were to flow into this sector immediately and even if substantially higher figures of reserves were to materialize after exploration, it would take years before these resources could be harnessed to provide meaningful amounts of energy. Therefore this, too, is a longer-term option.
Many people also ask why, when hydel power is so much cheaper than thermal power, the government appears to be pushing for thermal power plants. This question would be relevant only if a short-term choice actually existed between the two routes to power generation. The fact, however, is hydel power generation is a long-term public sector option, it requires huge inputs of foreign capital and it is often hostage to complex political and environmental considerations. Forget about the Kalabagh Dam which has been on the drawing boards for more than a decade. Even the proposed US$ 2.5 billion Ghazi Barotha project has run into snags: there is shortage of public sector capital, foreign capital is reluctant to come into long-gestation projects and international lending agencies have become extremely sticky about environment-related human resettlement questions. At any rate, even if all goes well, this project isn’t scheduled to come on line until 2001 AD.
That said, it needs to be emphasised that the government’s package does not ignore gas and coal-fired power plants. At least six US companies are expected to invest in over 2000 MW gas-fired thermal plants. There is also good news that Hopewell Holdings has unveiled plans to invest several billion dollars in the development and exploitation of our huge coal reserves in Thar for power generation. Hopewell, it may be recalled, has recently set up two 660 MW coal-fired plants in Indonesia and is likely to kick off with two similar plants in Sindh.
Some ideologues, however, are worried about the political implications of such large foreign investments in Pakistan. One conspiracy theory says that the United States is trying to sneak into Pakistan through the back door, that by making us economically dependent the US will eventually have us by the throat. Applied logically, this would suggest that the only way Pakistan can retain its independence is by boycotting all trade and aid and isolating itself from the rest of the world. The tragedy is that Mr Nawaz Sharif, who once flew all over the world begging for foreign investment, should now also be talking of the return of the “East India Company”!
This attitude is a recipe for disaster. It puts such critics in the same dock as certain retired generals who want to liberate Kashmir from India by going to war or those religious extremists who would like to trap Pakistan in a 7th century time warp.
Much more realistic issues, however, have been raised by local businessmen. Despite the government’s tall claims, they believe that, given far more attractive opportunities for investing elsewhere, Pakistan would be lucky to eventually end up with a fraction of the funds claimed by the government. Relevant questions are also being asked about the government’s financial and administrative ability to provide extensive and expensive infrastructural facilities required to make the proposed power plants work efficiently.
In time, we shall know whether such comments were justified or not. Nonetheless, they do not detract from the government’s brave efforts to try and resolve the power shortage in the country. Surely we can do better than look a gift horse in the mouth.