Russia’s overtures

THE endgame in Afghanistan appears to be trending towards a happy ending and Pak-Afghan-US relational harmony has never been better. At the same time we have seen an anxious Russia reach out to Pakistan in ways unprecedented.

How can we interpret the recent visit of the Russian Defence Minister, Sergei Shoigu and the sudden warming up in military ties?

Last month Shoigu led a 41-member delegation to Islamabad, at a time when the Pakistani army chief was himself visiting Washington. A defence cooperation agreement was also signed. A broader view of events seems to suggest that the Russians’ visit was not about supplying 20 helicopters nor indeed about discussing the post US withdrawal situation in Afghanistan. It was about more immediate Russian concerns.

A week earlier Vladimir Putin had been at the G20 summit in Brisbane. Here he had been confronted and rebuked by Western leaders over actions in Ukraine. The strongest one had come from the Canadian Prime Minister Stephen Harper telling Putin: “I guess I’ll shake your hand but I have only one thing to say to you, you need to get out of Ukraine.”

On its part Russia feels boxed in by three factors. One is its sense of ‘Western intrusion’ into the former Soviet territories; the Baltic states are now snugly in Nato’s embrace as also are two former Warsaw Pact countries. From Moscow’s perspective its ‘strategic depth’ is rapidly shrinking, which may have prompted desperate actions in Crimea.

Secondly, the pivot of world power is also shifting from Europe (which the USSR as a land power once dominated) to Asia — with a locus in the South China Sea. And while Russia is striving for an important Asian role to maintain great power status it is limited by access to the southern Eurasian rimland that stretches from the Gulf of Aden to the Taiwan straits. Unlike the US it does not have a navy that can project power over such a vast distance.

The third factor is the collapse of oil prices which has struck a deathly blow to the Russian economy and currency. Together the three have made for a perfect storm.

China — rattled by pro-democracy protests in Hong Kong — had to face similar admonitions from Obama at the G20 summit. These were over its naval posturing against other states around the South China Sea as well as accusations of manipulating its currency which, the US believes, slows down its own economic recovery.

Immediately after the G20 summit Shoigu arrived in Beijing. Russia and China are keen to keep the US out of Asia and the Pacific and have evolved common interests directed against the US and its Nato allies. China for instance is dependent on Russia’s aerospace technology which has developed high-speed and long-range aircraft needed to patrol Russia’s vast airspace that spans 11 time zones. China, which lacks aircraft carriers, could make use of latest generation aircraft because they can operate from land bases, to protect its territorial claims in the South China Sea.

Yet, even as it has sold weapons to China, Russia has hedged against China militarily by arming India and Vietnam with even more sophisticated weapons, intended for use against China. Now, a major shift may be in the making, with China urging Russia to resolve this paradox. At any rate, India has recently been turning to the US for its arms requirements. Strategically, it would make sense for China to form a common front with Russia to counter Western naval presence in the Indian Ocean and the Western Pacific. Russia’s news agency Tass quoted Shoigu in Beijing as saying that “strengthening and expanding ties with China remains Russia’s overriding priority”.

Two days after leaving Beijing, Shoigu and his delegation arrived in Islamabad. The visit was only announced a day before his arrival. It is likely that the Chinese may have helped facilitate the visit. Ideally Russia would like its warships to be able to draw logistic support from Pakistani ports. Russian warships have visited Karachi this year, something not seen in recent decades.

So where are we to go with all this? Russia is looking to sell arms. For Pakistan, new-generation Russian aircraft and submarines would be attractive offerings, if money can be found. Warships of friendly navies drawing logistic support at our ports during peacetime may also not be problematic.

Nevertheless, a major foreign policy shift — from our traditional orientation towards the West and Saudi Arabia — is neither possible nor desirable any time soon. While Russia can have ambitions of great power status, the Cold War is long over and in the globalised world of today it is economic interests rather than military rivalries that ought to shape our foreign policy.

2014 – Dawn Media Group

Rethinking cities

By Nadeem ul Haq and Moazzam Husain

FROM antiquity, cities have performed political and commercial functions and served as cultural and social centres. In recent history, the ideas of the Renaissance were incubated in Florence. From here they grew out and ignited the Industrial Revolution which paved the way for the rise of Western civilisation. Cities were small and compact.

Ours too were dense cities, with skill and professional clusters and culture. Go back to pre-colonial Peshawar. Inside the walled city you would find clusters of dentists, potters, money changers and coppersmiths. In Qissa Khwani bazaar, listen! Story poems (badalas) recited beautifully to interested, inquiring audiences in dense urban, commercial settings.

But now we have uncultured suburban sprawl where once was a vibrant city. Why?

The car and cheap oil changed the anatomy of cities everywhere. In addition, bureaucratic and pretentious planning believed life could be segmented into compartments of commerce, housing and entertainment. The result was complex zoning laws that spread the city far and wide, making people hostage to cars. Wide avenues, underpasses and overhead highways became the arteries of cities while people were hived into housing colonies to work in distant commercial areas and seek officialdom in still distant compartments.

Not surprisingly, community, culture, public space and life were crowded out. The cosmopolitan city experience that energised Leonardo, Dickens, Picasso, Marquez and Iqbal has been strangled by the car and that new priesthood, the urban planner. As a result, density has given gave way to sprawl; community to heightened individualism; and sidewalk, walkability and human interaction to the automobile.

The post-colonial bureaucracy who had gained control of our cities’ inherited elite, publicly owned housing for private use. It didn’t take it long to realise that zoning could be a lucrative rent-seeking game and land development could bring personal rewards.

The result was sprawling DHAs and similar developments for the rich, in some places eating up valuable agricultural land — 200 years of irrigation investments — which continue to be converted into suburban housing year after year. Karachi’s protected mangrove forests could face similar predation. Of course, the poor were zoned out of the system and thrown to squatter settlements to suffer epithets of ‘informal’ and ‘illegal’.

So if cites are engines of growth, are we giving ours traction to pull the economy? Karachi has grown rapidly into an unmanageable urban mess. What can we learn from experience elsewhere?

Bogotá was a troubled city, characterised by drugs, conflict, lawlessness and crime. It was without self-esteem and ownership, its quality of life one of the lowest in Latin America. Yet a city governance model transformed Bogotá in the course of a decade. Copying isolated projects of Bogotá, (like the Metro buses) does not bring transformation without including the kernel ingredients of the policy: densification, high rise — mixed use developments, walkability and improved citizenship.

The current paradigm favouring cars and sprawl must change to one that favours people, community and life. Bogotá’s dangerous ghettos and slums have been opened up by a wide strip of 27 kilometres featuring play spaces, park land and walking and cycling tracks. Such initiatives nurture identity, encourage volunteerism, and have been known to improve citizenship and reduce crime rates.

Cities and citizens thrive when culture thrives. In contrast we have seen cultural focal points including foreign ones such as the Goethe Institutes and Alliance Française centres in our cities diminish. Cultural vitalisation begins with ‘place-making’ — creating destinations that people want to go to. Streets, public markets, waterfronts, public buildings, libraries, exhibition centres, museums, downtowns, squa­res and parks are foundations of civil society and cornerstones of democracy. Cultu­rally vibrant cities are creative cities. They catalyse innovation, private investment and foster grass-roots entrepreneurial activities.

Transformation, how? By writing new rules to change rules. Developing new zoning regulations to favour high density, mixed use developments over sprawl, favouring public transport over cars and creating public spaces for cultural revitalisation.

The maze of bureaucracies and antiquated regulations only perpetuate status quo and foster entropy. They need to be replaced with autonomous city governments that can reduce over-regulation, allow urban reform and bring in open, consultative policy and decision-making mechanisms. With its road map to achieve transformation, Bogotá was able to increase city revenues. It was able to bring in private investment through public-private partnership mechanisms and float municipal bonds to raise money for transformation.

The genius of turning our cities to become engines of growth already exists in our people. All they need is to be given an enabling environment.

2014 – Dawn Media Group

The political economy of LNG imports

THE petroleum minister has described as a game changer an initiative to import Liquefied Natural Gas to fuel cars with CNG. Under the proposal the CNG pump operators can set up one or more special purpose vehicles (SPV) to import LNG, which would be re-gasified on arrival at the Port Qasim terminal facility presently under construction. It will then be piped to CNG stations countrywide through the leaky pipelines’ infrastructure of the two gas utility companies.

The minister has claimed this would shave $2.5 billion off the oil import bill, make available a 35pc cheaper fuel for consumers and also save the sagging CNG industry.

That the initiative also proposes to exempt LNG imports from GST and the gas infrastructure development cess (GIDC) suggests that the rate differential between the landed costs of crude oil and LNG may not be very much. That in fact if these are applied, it may squeeze the profit margins of the CNG pump operators down to the bone. This also potentially belies the $2.5bn saving claim.

This is akin to providing a subsidy to a scheme that may not otherwise be viable. The petroleum ministry’s argument that the imported LNG would free up gas that the CNG sector presently receives and this would then be diverted to the textile sector and independent power producers (IPP) where it would continue to yield taxes and the cess is fallacious and a distortion of competition.

While the measure may simultaneously placate PML-N’s traditional constituencies — the textile lobby, IPP owners, CNG station owners and millions of vehicle owners — it violates the principle of neutrality of broad-based taxation. The principle states that GST is a tax on consumption, irrespective of the product being consumed, and is to be paid by the final consumer.

Similarly the cess is meant to be used on developing future gas infrastructure and it makes little sense to exempt LNG because at some stage, if demand picks up, more pipeline capacity would need to be built.

At least transparency and national accounting practices would be better served if the government were to levy the tax and cess with one hand and with the other give a direct cash subsidy to vehicle drivers buying CNG at the stations.

So why have the CNG pump operators, with their SPV and the best of intentions, been unable to make this scheme commercially viable? To comprehend this we need to understand that the international LNG trade is carried on between a closed club, where the buyers and sellers are blue chip entities with A or AA credit ratings. As such, entities with lower ratings should expect to receive less favourable terms.

There are 19 exporting countries, Qatar accounting for a third of global production; and 25 importing countries led by Japan, South Korea and Europe. A limited 400 special LNG tankers ply cargo, spanning the globe from Alaska to Australia, the typical cargo value being $200 million. Among these, smaller size vessels of cargo worth $30m to $80m are also available but buying in smaller lots pushes up the landed cost per unit.

Vessel charter rates are also highly volatile. A good part of the cost in this business is in the supply chain and the handling. Importantly, Qatar with its predisposition for larger cargoes, would mean the SPV will have to pick up cargo from more distant destinations which would further drive up its per unit landed cost.

Even once it arrives, a further 10pc of the gas will be lost (and become part of the unaccounted for gas losses) during distribution. The final price at the CNG pumps, including profit, may well be only a fraction lower than petrol — hence the proposal to exempt it from GST and cess.

A better option may be to capacitate PSO, the country’s largest fuel importer, to handle LNG imports. PSO has a more robust financial position than any SPV the CNG pump operators will be able to come up with. It also has better experience of negotiating contracts, procurement procedures and can source much better deals. PSO will be able to achieve an economies effect and land the product at lower per unit prices.

It makes more sense for PSO to spin off a division to handle LNG requirements of all industrial sectors than for individual sectors to go it alone. The petroleum ministry must ask PSO to conduct a feasibility study on the opportunity.

Utmost, of course, systemic gas losses need to be plugged before piping expensive gas into it. This issue should be addressed head on rather than glossing over it by extending tax subsidies and distorting markets.

2014 – Dawn Media Group

Responsibly please

THAT reservations over the Pak-China bi­la­­teral coal power projects were raised in rabble-rousing forums instead of the sober atmosphere of a parliamentary committee is unfortunate. Whatever the merits of the objections to the proposed deals, they ought to have been raised in a more responsible manner. Further damage can be averted if we clear the air, unbundle some of the issues and see how these project opportunities have evolved.

Last summer the incoming PML-N government released the National Power Policy 2013. As one of the policy objectives, the weighted average cost of producing electricity was to be brought down. To do this the policy proposed to characteristically change the energy mix — from gas, which is a depleting resource, and furnace oil, which is an expensive fuel, to coal.

Over the longer term, the policy proposed to tap the hydropower potential of the Indus Basin cascade at sites like Thakot, Patan and Dasu and subsequently at Bunji and Diamer-Basha. Coal, it was felt was not just economical but also the fastest solution since projects could be commissioned within three to four years from financial close. After whetting by all provinces the policy was approved by the Council of Common Interests and work on implementation began.

A month later, in September 2013, Nepra, the electric power regulatory authority, announced an upfront tariff on coal power projects. The aim was to help the project sponsors arrive at their investment decisions early and then achieve financial close on fast track. That not too many investment decisions were forthcoming; and the one that was, Engro Energy, was unable to achieve financial close; perhaps indicated that the tariff was too low. There was little wrong with Nepra’s conservative approach. Often a ‘reverse auction’ of this sort is an effective method to arrive at fair pricing.

Of course there was the added complication of coal’s deleterious climate effects. No worries, we justified to ourselves, because Pakistan’s grid — thanks to the large share of natural gas and hydro power — is one of the cleanest in the world. Surely we could get away with a bit of coal in the mix. Western financial institutions had a different view. Coal was an absolute no-no. Their stakeholders would have none of it. At any rate, given the chronic circular debt malaise, global financial institutions had little appetite to invest in our power sector.

In the face of these roadblocks the government reached out to the Chinese leadership. A number of projects have been identified that can be jointly developed. These include, among others, two power plants each at Gadani, Sahiwal, Thar and one at Bin Qasim. A coal handling and logistics infrastructure is also part of the parcel as is a transmission infrastructure for evacuation of electricity from the site to the grid.

Amidst a global economic slowdown and the slack demand for coal power plants, Chinese power plant manufacturers didn’t have too many orders either. A meeting point was possible if the Pakistan government enhanced the tariff somewhat and improved the rates of return; the projects would become viable to receive Chinese funding. In June this year, Nepra revised the tariff. To minimise the cost of capital, power projects need to be structured at around 80:20 debt-equity ratio. Chinese government financing could now be provided to cover the debt component.

One reservation that has been aired about the deal is of bypassing of the public procurement rules. These reservations are not valid for private-sector projects in IPP mode. Even for Gencos that may opt for retrofitting for coal conversion and for Greenfield projects involving federal/provincial government equity there is no harm if the government puts such projects under independent boards and empowers these boards to procure through direct negotiations while keeping the global industry benchmarks on cost per megawatt, efficiency and other key parameters in view.

This information is widely and freely available. To further address transparency concerns, negotiated proposals can be made the subject of public hearings before they are signed. The larger consideration is whether the policy objective of bringing down the weighted average cost of electricity production is being met. Another consideration should be that the equipment is of high quality and must perform up to the standard, unlike the earlier experience with Chinese locomotives.

But perhaps even more than capital cost, the mechanism to procure fuel supply contracts needs to be fully transparent because fuel is a recurring and ‘pass through’ cost — passed on to the government — and prices are harder to ascertain for coal than for furnace oil and natural gas.

Pakistan needs affordable energy. A course has been charted, and while differences in viewpoints can exist, issues must not be obfuscated for political gain.

2014 – Dawn Media Group

The last chance

SOUTH Indian-style prawns cooked in spices and coconut milk next to a Lucknavi specialty, galouti kebabs and an array of mouth-watering dishes, signified a celebration of the cuisines of South Asia. And bringing the leadership of the Saarc countries together for his swearing-in was a skilful manoeuvre from Indian Prime Minister Narendra Modi. It signified a celebration of South Asian democracy; all eight Saarc leaders are democratically elected.

The last time India and Europe stood at similar stages of historical development was in the 16th century. As Mughal Emperor Akbar expanded his empire across North India, Europe was experiencing plague deaths as well as terrible massacres and conquests. But at another level, a renaissance of learning and ideas was spreading fast across the continent. Thus began the rise of the Western civilisation. Thereafter, their paths diverged.

Today, South Asia faces the monumental challenge of meeting the basic need of its inhabitants for food, water, energy, healthcare, education and access to justice. In its essence the agenda facing all Saarc countries is the twin challenge of human development and economic betterment of its people: How to get incomes to rise, how to raise revenues for the state, how to build quality institutions and government capacity that can address this agenda.

In 1980, China’s per capita income stood at $300, in line with Saarc countries. Deng Xiaoping’s reforms had only just begun, premised as they were on de-collectivisation of agriculture, opening up to foreign direct investment and enforcement of a one-child policy.

These measures were followed up by privatisation and allowing private enterprise. Today China’s demographic dividend may be running out, but the average Chinese enjoys a per capita income nearly five times that of their South Asian counterpart.

So where next for South Asia? Demographers and development specialists may differ whether South Asia’s demographic dividend would last another two decades or four. At any rate, without jobs this dividend becomes a liability. But these decades may represent South Asia’s last chance.

Modi’s challenges are domestic — slowing growth, rising inflation, an economy that is not creating enough jobs and where government finances are a mess. The expectations from him are huge, as is his burden of responsibility. The fact that India is riddled with corruption and crony capitalism further complicates matters. Economic engagement with Pakistan is probably peripheral, if at all visible on his radar at this stage.

Can Modi deliver? After all, what he did in Gujarat, can it not be scaled up, replicated in the rest of India? Some regard this sceptically; a ‘provincial’ solution to a national problem. True, Modi made Gujarat India’s most favoured investment destination and in 2013 Gujarat bagged nearly a quarter of the country’s industrial investment proposals.

Most of that success can be put down to the favourable incentives Modi’s Gujarat would offer to cut itself a larger slice of India’s cake — and this is not the same thing as India getting a bigger cake.

A case in point would be Tata’s decision to move the location of its automobile assembly plant for the Nano from West Bengal to Gujarat. From the left pocket to the right pocket. Similarly for FDI, once the decision to invest in India had been made in Tokyo, Seoul, London or Rotterdam the next step would be to select the site location. And Gujarat was where land acquisition was the fastest.

Granted, this may be a rather harsh evaluation of Modi’s performance in Gujarat; still the question is, can the South Asian governments in power today (and their successors) deliver in the next couple of decades what has eluded their predecessors in the last six? After all Deng Xiaoping did it in China. But unlike the Communist Party whose party structure was organised from the ground up, from the village commune to the politburo, South Asian governments have to depend on decaying colonial-era state structures for implementation, on bureaucracies and ‘babus’, who themselves represent a force of the status quo.

Beyond this organisational and institutional incapability it is the politics, prejudice, mistrust and territorial issues among states that keep things gridlocked.

Yet there are successful examples of ‘bottom up’ development initiatives in South Asia which include India’s Amul dairy farmers’ cooperative model, Pakistan’s Orangi Pilot Project and Bangladesh’s Grameen Bank and these ought to be replicated across South Asia.

The coming decades cannot afford to be squandered. The consequence of that would be catastrophic and would condemn too much of humanity to permanent backwardness and misery.

2014 – Dawn Media Group

The energy challenge

IT was a freezing winter night in 2010 and I had just checked into the government rest house at the Lal Sohanra national park when the lights had gone out. The caretaker at the premises had lit a bonfire in the sprawling backyard which extended on one side to the edge of a lake.

“This is Nawaz Sharif’s favourite spot sahib, right where you are sitting. Been here several times, and we would chat late into the night sometimes” he told me as we warmed our hands in the bonfire heat. “The younger one is more reserved … he’s a grouch. But the elder one’s very relaxed. Oh, and he loves to listen to the flute” he went on to disclose.

Recently, Prime Minister Nawaz Sharif returned here to inaugurate the Quaid-i-Azam solar park. Situated on the edge of the Cholistan desert near Bahawalpur, the region which is famous for its peacock, gazelle and black buck is now set to become the world’s largest solar park. Investment commitments totalling nearly 1,000 megawatts have already been received from local and Chinese business groups.

Energy requirement and economic growth are strongly correlated. Pakistan’s per capita energy demand is one fifth of the world average. Electric power is a factor of production presently in short supply. And it is holding back economic growth.

The present peak electricity demand is estimated at 25,000MW while studies indicate that to cater to the projected electricity demand, an additional 100,000MW of capacity would need to be installed over the medium term.

One limitation of renewable energy is its fluctuating availability. Solar power is only available during daytime, wind power when there is breeze and hydropower is dependent on the ebb and flow of the water. This keeps renewable energy from becoming the mainstay in the overall energy mix. For this reason the base load in most grid systems is carried by thermal (and nuclear) power stations which can provide a steady supply all day and all year.

One would imagine urban solid waste to be a steadier source of fuel. But scavenging at various stages of the waste management process and inelegant waste disposal and handling mechanisms make it hard to work with. The end result is high cost-per-ton of fuel.

Similarly biomass generated in the agriculture and livestock sector fulfils about a third of Pakistan’s total primary energy requirement. This, like so much else in this country, takes place in the non-commercial sector and remains undocumented. Nevertheless, projects can be conceived and commercialised where crop residues and animal dung is purchased from the farmers for conversion to higher forms of energy while simultaneously creating markets for this energy.

A successful commercial model will be one that can extract more energy from the same quantity of fuel, creating enough value to recompense farmers for the forgone fuel; with which they can buy their energy requirements from the market and still have money left over.

Such a model will bring parts of the rural subsistence economy into the commercial, documented economy. This way, much of the future growth can be based on indigenous fuel.

Contrary to what many believe, all renewable energy is not cheap. The present wind and solar power tariffs are close to what is being paid to oil-based Independent Power Producers and twice as high as the 8.5 US cents that was offered to private hydropower producer, Laraib Energy, a couple of years ago.

Dams at Bunji, Diamer-Bhasha, Dasu and Kalabagh (if consensus can be built) can potentially contribute 20pc of the projected requirement of 100,000MW. Other smaller dams, biomass, wind and solar potential should be tapped to the maximum extent possible. The base load will, however, need to be carried by thermal (including coal) and nuclear.

Assuming a benchmark price of $1.3 million per installed megawatt, the country would need an investment of $130 billion in the next 15 to 20 years. To put this figure in perspective, the total foreign direct investment, or FDI, in Pakistan in the last 50 years in all business sectors is in the region of $20bn.

However, lately, perhaps because of our failure to carry through reforms in the power sector, sensing a lack of seriousness to fix the structural issues, players like Xenel, National Power and AES have left Pakistan after selling off their stakes.

The key to overcoming the energy challenge, then, lies in the governance of the energy sector.

The writer has served the Punjab Board of Investment & Trade as its director general and is assisting the Planning Commission and its working groups in developing Pakistan Vision 2025 and the 11th Five-Year Plan.

2014 – Dawn Media Group