I am currently faced with a situation. I have a fully executed, legally binding contract, and nobody is responding to our letters or phone calls to make payments, let alone executing them.
The ordeal is over seven months old with no end in sight, and the bad news is that this is not the only case. This is how the public sector functions. Businesses are repeatedly told that if they want to do business with the public sector, this is how it will be; hence it needs to be factored in.
It seems beyond the comprehension of our policymakers that such processes are disastrous. Over decades, the public sector has decided that businesses are villainous. Paying money on time is a cardinal sin. Profit is sinister. Violating contracts is child’s play.
Consequently, despite being an attractive destination for investments, investors shy away from coming to Pakistan.
New investors demand increasingly strict conditions, including the parliament’s and Supreme Court’s approval
When we talk about the government, most say it is caught between a rock and a hard place. Whether it is or is not, the fact of the matter is we are under a mountain of debt.
Recent International Monetary Fund negotiations have centred around reevaluating every corner of Pakistan’s economy, including the energy sector.
The worrisome circular debt within the energy sector is among the top pain points dominating negotiations. At approximately Rs4.2 trillion, it can bring the country to a standstill if corrective treatment is not urgently administered.
The malaise, however, is a combination of several factors aside from the fiscals. Absence of a business-friendly and competitive environment for investors in the sector and an inability to ensure governance and consistency of agreed policies have brought us to this stage where most investors prefer rent-seeking models and pass all market risk to the government and ratepayers.
An unsatisfied customer is bad news and is very expensive for the business. A recent survey conducted by PricewaterhouseCoopers found that 59 per cent of customers will give up on a company after several bad experiences and 17pc after only one.
Investors are no different. Rather, they are far more stringent in the way they evaluate countries and investment opportunities.
In Pakistan, deals have been struck without working out the potential consequences. Steel mill privatisation and Reqo Diq are prime examples. Moreover, power purchase agreements and energy purchase agreements are not honoured, with some ending in litigation and some under renegotiation.
Adhocism drives decisions, further complicating matters. As a result, the new investors are demanding increasingly strict conditions, including the parliament and Supreme Court approval. Public sector corporations or relevant ministerial departments deal with these matters in other countries.
Pakistan’s energy needs are rising as the youth bulge adopts a high-energy way of living. With surplus capacity existing within its power generation sector and depleting gas reserves, significant upgrades are required for its transmission and distribution and supply infrastructure as well as reforms in the energy sector to tackle the issue.
The government has again reiterated its commitment to privatise distribution companies, which are one of the root causes of the circular debt along with inconsistent and counterproductive policies. The regulator has repeatedly raised this point in its State of Industry reports.
However, the treatment meted out to K-Electric investors does not bode well. Media reports indicate that Saudi investors lament that they have invested billions of rupees into the company, which has benefited the consumers as well as the government, but have been unable to earn any return.
Ironically, the government itself owns 26pc stake, but a lack of consistent policies has prevented it from earning from this transaction. It is safe to assume that any new investor coming into the transmission and distribution segment would also want similar guarantees and a rent-seeking model as adopted by independent power producers instead of trusting the government to do the right thing on commercial terms.
Another example is the unfinished transaction of PTCL, where Etisalat has been withholding the payment because Pakistan did not transfer several properties as per the deal terms. The government was again unable to benefit from the transaction as it owns a significant portion of PTCL.
Similarly, the value of OGDCL and PPL, which was Rs160.44 and Rs207.07 in 2011-12, had gone down to Rs93.37 and Rs75.31 in February 2023. The main reason behind their decline is the circular debt, which is ironic as the government holds 74.97pc and 67.51pc stakes, respectively, in these entities. Once circular debt is cleared, these entities will pay dividends, most of which will go back to the government.
Had these entities been commercially treated, the value of these entities, which can be considered national wealth, could have increased substantially over time, benefiting the government itself. More importantly, investor confidence in Pakistan would have risen.
It is food for thought for our bureaucrats, regulators, policymakers and those who matter why investments are made on market terms abroad but require iron-clad agreements in Pakistan.
Are these investors different from the ones conducting business elsewhere? Or are policy inconsistencies, rigid regulatory and bureaucratic mindset inculcated through years of National Accountability Bureau, judicial activism and populist narratives which drive them away?
The writer is a director and Chief Executive at Jaffer Business Systems. He can be reached at @VeqarIslam
Published in Dawn, The Business and Finance Weekly, April 10th, 2023
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