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Public sector input and more FDI attraction can help gas, oil and energy grow up

Public sector input and more FDI attraction can help gas, oil and energy grow up

Interview with Dr. Ayub Mehar — a renowned economist

PAGE: Tell me something about yourself, please:

Dr. Ayub Mehar: I am serving as ‘Professor’ in Iqra University Karachi and also ‘Economic Advisor’ of the Employers’ Federation of Pakistan. Currently, I am also associated with the Asian Development Bank Institute on a project for Infrastructure Financing in CAREC member countries. Development Financing, Macroeconomic Policies, International Trade and Finance and Economic and Financial Modeling are areas of my research interests. I have completed several policy research studies for international financial institutions and think tanks including ‘Impacts and Financing Infrastructure Development in Pakistan: Role of CPEC and FDI’, ‘Infrastructure Development by Liberalizing Economic Policies: The Straight Path of Economic Prosperity’, ‘Financial Cooperation in South Asia: Recent Development and Challenges’, ‘Political Economy of Subsidies’, ‘Magnitude and Determinants of the Flows of Investment among South Asian Countries: Considering Economic Prosperity without Politics’, ‘Privatization in Pakistan: Theoretical Evidences and Policy Implication’, and ‘South Asia in New Economic Order: Need of Accelerated Liberalization Process’.

In recognition of my expertise, the Technology Policy and Assessment Center at Georgia Institute of Technology acknowledged its membership in the distinguished panel of international experts for Indicators of Technology-based Competitiveness, which is a project of the US National Science Foundation, United States government.

PAGE: How would you comment on the investment in gas and oil sectors?

Dr. Ayub Mehar: The largest consumer of oil in Pakistan is the transport sector. In last fiscal year, it consumed 65 percent (16 million tons) of the total 24.7 million tons oil consumption. The consumption of oil has increased by 40 percent during the last 10 years, however, growth of consumption in transport sector was more than 90 percent. A sharp decline of oil consumption in industrial sector has been noted which indicates the shift in industry from oil to natural gas. The growth in consumption of natural gas was almost 100 percent in industrial sector during the last 10 years. These statistics reflect the need of investment in oil and gas sector.

Total investment (gross fixed capital formation) in electricity and gas generation and distribution sectors in Pakistan was Rs.210 billion during the last fiscal year which was around 4 percent of gross investment (Rs. 5340 billion) in the country. However, 96 percent of this gross fixed capital formation in electricity and gas generation and distribution sector belongs to the public sector. The share of private sector in this activity is negligible. It indicates the important fact that domestic private sector is reluctant to participate in the gigantic investment in this sector. Consequently the dire need of development in this sector depends on the public sector participation and foreign direct investment.

Current efforts to bring improvement as well as attracting foreign investment in this sector include international agreements for exploration of oil and gas, erection of new refineries, and enhancement in the existing refineries. For instance, Byco Oil Pakistan Limited (BYCO) has established an oil refinery at Hub, Balochistan with refinery capacity of 5 million tons per annum at cost of US$400 million, Attock Refinery Limited (ARL) has started producing Euro-II (0.05 % Sulphur HSD), Pakistan Refinery Limited (PRL) has also installed isomerization plant and has doubled its production of Motor Gasoline, Pak Arab Refinery Limited (PARCO) is implementing PARCO Coastal Refinery project at Khalifa Point, near Hub, Balochistan, with the capacity of over 11 million tons per annum. Estimated cost of the project is over US$5 billion.

PAGE: What is your opinion about the increase in cost of doing business because of mounting energy costs?

Dr. Ayub Mehar: To understand the problem it is important to note that the consumption of electricity has increased about more than 220 percent during the last 10 years. Now, it is around 107 GWH. The joint share of industrial and commercial sectors in total energy consumption is around 34 percent while the growth of energy consumption in industrial sector was much less than growth in total energy consumption. It corroborates the bitter fact that either industrial sector is using the energy produced by itself (captive power projects) or there is a decline in industrial activities. Both reflects the fact that cost and uninterrupted supply of energy from national grids are not affordable or reliable. Certainly, this is a bad indicator for the industrial development in the economy and it is one of the more important causes of decline in the growth of industrial output.

The National Electric Power Regulatory Authority (NEPRA) has approved further increase in electricity prices and a uniform increase of Rs1.494 per unit in tariff for all the distribution companies (Discos) of ex-Wapda to recover Rs190 billion from all consumers in 15 months in line with the agreement with International Monetary Fund (IMF). Similarly, 191 percent increase in gas prices has also been approved by the Economic Coordination Committee (ECC). The rise in gas rates would generate about Rs510 billion next fiscal year for the two gas companies and meet their requirements of Rs487bn and create about Rs23 billion surplus to take care of previous circular debt. The increase in gas and electricity rates will be applicable from 1st July 2019. The prices of petroleum products have already increased through two consecutive jumps during the last two months. Now, price of super petrol in Pakistan is Rs.112.68 per liter. Though these increase in the prices of electricity, gas and petroleum products will create severe problems in the economy through unexpected acceleration in the rate of inflation and further increase in the cost of doing business, however it indicates that Pakistan is trying to overcome the severe energy crisis that has directly and indirectly damaged the various sectors of its economy. The recent hike in gas prices may solve the circulatory debt problem in near future. The import of oil from Saudi Arabia on deferred payments is another step in this direction.


PAGE: Your views on the foreign investment in gas exploration over the period of last 10 years:

Dr. Ayub Mehar: Unfortunately the last decade is not a good example of the inflow of Foreign Direct Investment (FDI) in Pakistan. In past, Pakistan has achieved 7 billion dollars inflow of FDI in a year. But a declining trend of FDI can be observed in Pakistan during the last decade. In this period, the yearly inflow of FDI was less than $3 billion and even less than $1 billion FDI was also observed in a year.

The oil and gas exploration and energy generation and distribution were always the top most sectors in FDI. The inflow of FDI during the last year (From July 2018 to May 2019) was $3.0 billion, out of which $47 million were invested in oil refinery, 300 million in oil and gas exploration, and 346 in power sector (71 in thermal, 163 in hydroelectricity, and 112 in coal). One-third of Foreign Direct Investment (FDI) in 2018-19 is belonged to China, while UK and Norway were at 2nd and 3rd numbers.

I have mentioned already that domestic private sector is reluctant to participate in gigantic investment activities in energy sector. Consequently, the public sector entities – OGDLC, PPL, and WAPDA etc. have been investing in these sectors. Now, these sectors are waiting for foreign investment. It was expected that the present government will be successful to attract foreign investment, but the policies to attract foreign investment are not still in action. I have been suggesting at various platforms that at the initial stage government should focus only on the inflow of FDI and enhancement of exports. These are the only two sources to build the foreign exchange reserves. Once we succeeded to build handsome foreign exchange reserves the remaining issues will be solved automatically. The handsome reserves of foreign exchange will strengthen Pakistani rupee. Consequently, inflation and cost of doing business will reduce. This situation will attract the domestic and foreign investment, creation of employment opportunities, growth in GDP and growth in tax revenues. But, government has initiated its economic agenda in reverse order. Government has started its move from enhancement in tax revenue, which can reduce the size of economic activities.

PAGE: Your views on the depreciation of rupee and its impact on manufacturing sector?

Dr. Ayub Mehar: The severe adverse impacts of depreciation of Pakistani rupee on the manufacturing sector are quite obvious. This depreciation will damage the manufacturing sector by two ways: first it will create inflation in the economy. It is expected that this year rate of inflation will be recorded in double digits. So, cost of indigenous raw materials and overheads will increase. The increase in the cost of indigenous raw materials and overheads along with higher rate of interest and further increase in tax rate will hamper the industry. This situation may lead the higher cost of labor and transportation. But the second major adverse effect on the industry will come from the higher prices of imported raw materials in Pakistani rupee. It is noteworthy that this time the quantum of depreciation is much higher and unhistorical. The economy of Pakistan has never observed such a high devaluation in the value of local currency in the shortest time except 1971 after Dacca fall.

If remedial policy measures have not been taken and a mechanism to provide the relief the manufacturing sector was not developed, the rate of industrial growth will drop steeply. This drop in industrial growth will lead to disinvestment and unpredictable unemployment in the country. But, I hope that before arising of such a situation the government will take necessary policy measures to avoid such a situation.

PAGE: Your views on the investment in power generation in Pakistan:

Dr. Ayub Mehar: In fiscal year 2000-01, the installed capacity was 17,498 MW and generation was 68,117 GW per hour. Now the installed capacity is 33,553 MW while generation is 120,715 GW per hour. However, the share of thermal capacity has increased which is the cause of increase in power tariff. Another surprising fact is that the installed capacity has increased by 92 percent during the last 10 years but increase in generation is 77 percent much less than growth in installed capacity. It reflects that the share of idle capacity has increased in power sector.

In fact, the oil based thermal units are idle because of hike in oil prices. In term of energy-mix, Pakistan reliance on oil was reached at 43.5 percent in fiscal year 2000-01. Now, oil reliance has reduced to 31 percent which is a welcoming sign. Similarly, hydroelectricity had a 13 percent share in 1997-98, which is now at 7.7 percent. It can be observed that the share of hydro in electricity generation has decreased over the last few decades. Non availability of water is one of the main reason for reduced generation of hydroelectricity. The hydroelectricity is the cheapest energy, but, hydropower plants are the most capital intensive projects and for Pakistan, it is not possible to undertake such big projects without the financial support of international development organization (World Bank, Asian Development Bank, and International Finance Corporation etc.).

The government efforts to construct the large dam for water reservoirs and energy are quite obvious but current fiscal space does not allow government to construct these dams through tax payers’ money. Government has formed a task force on energy to propose immediate, medium and long-term policy interventions with the aim to provide indigenous, affordable and sustainable energy for all. The large scale grid connected renewable energy based power generation projects are being pursued through private sector. Five wind power projects of 247 MW capacity have started the supply of electricity to the national grid. Though the direct contribution of electricity and gas generation and distribution in GDP growth is 2 percent only, its growth in value addition has arrived at 40 percent in last fiscal year from minus 23 percent in 2012-13. But, still this sector requires further participation of private sector. The implementation of Public Privatization Partnership Act 2017 may provide incentives to the private sector for investment in this sector.

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