May 8, 2006	Monday	Rabi-us-Sani 9, 1427

PRIVATE businesses primarily work for profit and Pakistani entrepreneurs, like foreign businessmen, would not easily let go an attractive investment opportunity. If they are not buying large energy companies, an expectation of many, there are some reasons for it and one has to look back into the past to arrive at right conclusions.

PSO, Sui Southern and Sui Northern have their origin in the local private sector. These companies were nationalized and given new names. At the time of partition in 1947, power firms generating and distributing electricity in Lahore, Rawalpindi, Multan and Karachi also had their origin in the local private sector. The power companies at Lahore, Rawalpindi and Multan were eventually absorbed in Wapda.

The government took control of KESC by acquiring majority shares in 1952. Local entrepreneurs were also associated in setting up oil refineries in Karachi. To be fair, Pakistani entrepreneurs did play an important role in the establishment and operation of energy projects up to the time when large industries were nationalized.

The cautious response of the rich Pakistani entrepreneurs about taking over KESC jointly could have been understandable in the late 1980s. At that time, there was lukewarm response from top business houses to the offer from NDFC for free supply of selected power project profiles out of the five profiles got prepared on different fuels for power generation. This was an NDFC attempt to familiarize private sector on power policy for inducting private sector in power generation for bulk sale to Wapda/KESC.

At that time Hub Power Project (HPP) was being processed by the government on complicated BOT basis, then largely unfamiliar to the country. The sponsors of other power projects and other potential investors were patiently waiting to first see the outcome of HPP.

After nationalization of large industries sometime in 1970s, activities such as power generation and distribution, oil exploration and refining, gas prospecting, gathering and distribution etc were largely the exclusive domain of public sector. To meet capacity shortfall in power generation and to supplement Wapda efforts, it was decided around 1985 to induct private sector.

The policy parameters were developed in a few years in consultation with the international financial institutions and development agencies including US AID. The complicated financing and approval framework was simplified in the coming years.

There was tremendous interest from local and foreign private sector for setting up independent power projects (IPPs) after approval of Hub Power Project, which proved sort of a trail-blazer. The applications were processed at PPIB and Power Policy was amended to make it more responsive. Agreements for Implementation, Power Sale to Wapda and Fuel Purchase from PSO were standardized.

Fourteen IPPs including Hub Power Project materialized and became operational in due course. Gul Ahmed Energy and Tapal Energy are supplying power in bulk to KESC and the rest are selling power to Wapda. A number of these IPPs are considering addition of new units to raise the generation capacity and meet the growing demand.

The federal minister for privatization, in early 2004, had asked the Karachi Chamber of Commerce and Industry (KCCI) members to form a consortium or a business group and come up with a bid for privatization of the KESC, which was to be undertaken before June 2004.

The multinational companies operating in Pakistan are generally doing very well. They were not touched when large industries were nationalized. The foreign investors have recourse to a number of measures to safeguard their investment. There are guarantees from the agencies of their respective governments for almost the entire amount of investment.

They are aware that because of the special relations of their governments with Pakistan, the GOP is not likely to consider any adverse action. The local entrepreneurs are aspiring for similar guarantees for their investment.

Local entrepreneurs, like in other countries, are our mainstay for industry particularly energy projects. Admittedly, they invested reasonably well in industry including in energy in the past and in most cases were amply rewarded. Also, they are currently undertaking a number of large power generation and oil refining projects. They are in many cases investing jointly with foreign investors. Joint ventures with foreign investors are considered safer than purely local investment.

The Pakistani entrepreneur would avoid undertaking a large industrial project in association with other local big business houses. Single business families command the majority share in many listed companies, though there may be some exceptions. This approach may possibly be one of the reasons why the local entrepreneurs did not accept the offer of jointly taking over KESC after privatisation.

Energy projects are capital intensive and need large resources- both financial and managerial. Local entrepreneurs need to rationalize their business philosophy. Two or three business families can join hands and start grabbing opportunities offered by lack of capacity in the energy field. The new generation of the local entrepreneurs is highly educated.

For them it should not be a problem to develop enough of understanding among them to jointly own large industrial or energy projects and manage the same through professional management for mutual benefit. This might add to their stature.

The GOP wants fast economic growth of the country and is going out of its way to attract foreign investors. Investment Conferences are being organized to attract local and foreign investors. The incentives and concessions, being offered to investors from a number of friendly countries, are unprecedented. With that the inflow of foreign direct investment (FDI) has started growing. The governments of the friendly countries are asking the GOP for further measures to protect foreign investment and to give them more operational independence.

FDI is desirable in a number of areas and may be encouraged. However, FDI may not be promoted in other areas which are within the managerial and financial capability of large number of local entrepreneurs. Once the FDI project starts operations, the FDI sponsors would start taking out handsome dividends. Divesture of local capacity to foreign investors entails similar results. We should not grudge such high dividends.

However, concurrently with attracting FDI in the desired areas, the GOP may consider ways and means to keep outflow of foreign exchange within sustainable limits. The country is already suffering large trade deficit.

The foreign investors might be aware that the local entrepreneurs including rich Pakistani expatriates are to some extent hesitant of investing big in their country at a time when the government wants faster economic growth. Their demands for additional incentives for their investments are understandable.

If the country remains mainly dependent on FDI for economic growth for a few more years, volume of foreign exchange outflow by way of dividends on FDI may become next to country’s oil import bill, if not surpassing it. The GOP is therefore urged to rationalize the whole economic / investment scenario, bring optimal balance and fully restore the confidence of the local entrepreneurs.