AMID much fanfare, Prime Minister Imran Khan and Saudi Arabia’s Crown Prince Mohammed bin Salman witnessed the signing of several MOUs a few days ago during the latter’s visit to Pakistan.
Our jubilant government appears to want everyone to share its firm belief that these agreements definitively guarantee the inflow of multibillion-dollar investment into the country over the next few years. The yearning for foreign capital in Pakistan, like in most states, is understandable, but MOUs between the two countries will invariably have varying degrees of success, and their ability to stimulate economic prosperity is likely overestimated.
The agreements — worth $21 billion in total — are mostly concentrated in the energy sector. The partnering entities intend to mobilise investment in three phases: short term (one to two years), medium term (two to three years), and long term (three to five years). The recently established Supreme Coordination Council, co-chaired by Imran Khan and Mohammed bin Salman, will monitor and facilitate the implementation process. The leaders’ direct involvement in overseeing these agreements underlines their commitment and is a promising development.
The short-term plan includes a $6bn investment in gas power plants and renewable energy projects. In October last year, the government approved the privatisation of the 1,233 megawatt Balloki and the 1,230MW Haveli Bahadur power plants, which are apparently marked for sale to the Saudis now and expected to fetch $4bn. A few serious concerns stem from this potential transaction.
Apart from the project-specific glitches, the Pak-Saudi MOUs face other challenges too.
First, Balloki and Haveli Bahadur are among our most efficient power plants in our otherwise highly inefficient state-owned power generation portfolio. What is the rationale behind vending these lucrative plants while retaining ownership of loss-making plants? Second, it’s a well-known fact that the regasified liquefied natural gas-based plants can attract investors from across the world. So why does it appear as though the government isn’t all too keen to create competition among interested parties to seek better terms? Is this an act of desperation on its part, fast-tracking the sale of these plants to make up for the 2019 budget deficit?
Another $2bn investment is pledged in renewable energy through ACWA Power, a Saudi-based power producer. ACWA Power is a capable developer that has been expanding its footprint in emerging markets. Ironically, on Feb 27, the Cabinet Committee on Energy decided to procure further renewables exclusively through competitive procurement unless a developer has achieved certain milestones. So, at present, we don’t have a support mechanism for developers who decide to kick start renewables projects today.
The government needs to conduct its business with ACWA Power in a transparent manner without circumventing the interests of our domestic developers who have just received favourable policy news.
Some reports suggest that ACWA Power will develop these projects in Balochistan. Although the province hosts excellent solar and wind energy resources, there is a dire need to mobilise investment in this least-developed arm of the federation, and the absence of grid infrastructure for power evacuation and the long distance from our major load centres may impact the projects’ viability.
Meanwhile, the medium-term goal of investing $2bn in petrochemical, food and agriculture projects is rather humble. The petrochemical project is closely linked to the future establishment of an oil refinery by Saudi Aramco near the port of Gwadar. The $10bn refining complex is situated in the long-term plan and is expected to help us expand our local refining capacity and curtail our import bill caused by petroleum products. This particular project has better chances of materialising due to its importance for the sponsor: Saudi Aramco, a state-owned global energy giant.
Following its strategy to diversify away from the Saudi kingdom, Aramco has been signing agreements to establish oil-refining and petrochemical complexes across the region, including in China and India. To maximise the value of its crude produce, the company is gearing up to invest in integrated processes for refining and petrochemicals, which hold substantial growth potential for oil and gas companies. Interestingly, the UAE’s Mubadala is expected to finalise its investment decision of $6bn in a similar complex in Pakistan by end-2019, implying that we may have the prospect of being able to create competition in this sector too.
Apart from the project-specific glitches, the Pak-Saudi MOUs face other challenges too. Most importantly, the young crown prince’s has a tendency of announcing mega projects that rarely see the light of day. The much-hyped privatisation of Saudi Aramco and a $200bn investment plan in solar energy together with Japan’s SoftBank proved to make little progress beyond newspaper headlines. It’s not unusual for the Gulf leaders to package their political and business interests together. Therefore, these agreements often entail political risks that are higher than a purely commercial transaction.
Against this backdrop, I would leave it for the government to account for these challenges. All the same, it is important that our policymakers’ attention be drawn to the fact that we are a nation of over 200 million people, holding an enormous untapped economic potential. We must realise that and strive to position ourselves as an attractive destination for investors by creating a stable, transparent and competitive environment in all sectors of the economy to create optimum economic value.
As the government is entrusted with acting in the nation’s best interest, it needs to prioritise and exploit the opportunities that ensure the most economic value for us.
The writer is an analyst specialising in energy policy and political economy.
This article has been updated online to include the government’s most recent renewable energy policy decision announced on Feb 27,2019.
Published in Dawn, March 1st, 2019