Don’t paint us black

WHEN two years ago I suggested a lucrative project investment opportunity to a Middle Eastern based investment banker friend, quite predictably his response was “heck, no its Pakistan’s credit rating”.

What then is a rating? In the words of the rating agencies themselves, it’s an “informed opinion”. So last week I asked my research associate to dig up the sources of information on which the rating agencies would typically base their opinion. She dug up a sample of ten leading international business and financial publications and extracted and analysed the last five years coverage on Pakistan. The same old predictable themes, phrases and thought patterns recurred: Osama bin Laden, safe havens, drone strikes, Taliban, energy crisis, floods, IMF, suicide bomb, nuclear weapons, terror attack, blasphemy and the occasional cricket.

Meanwhile, scores of foreign investors, businessmen and dignitaries who had visited our offices in the previous year were pleasantly surprised at Lahore’s flamboyant, lush and hospitable environment something quite in contrast to what the media in their home countries had told them. And yet, two years after my banker friend brushed aside the Pakistan opportunity, it was not Pakistan with its B negative credit rating that was brushing against default. Instead the house was coming down on economies like Greece, Portugal, Italy, Spain, Ireland and the recent “almost default” of the US. Pakistan on the other hand has gained territory with its current account deficit turning to surplus and its foreign exchange reserves climbing to an all time high.

The Pakistan discourse appears to have gotten caught in a closed loop and vicious “copy paste cycle”. It has come to be dominated by media coverage, broker reports and rating agencies that feed off each other and betray a lack of both, original thinking and an understanding of the fundamentals. Three quarters of Pakistan’s urban workforce finds work in the informal sector. Almost half of the rural agricultural workforce is engaged in subsistence agriculture. Together these constitute the bedrock underneath Pakistan’s economy – below which it can’t sink – and essentially that is where it sits today. At worst this is an underpinning that limits systemic risk in the “Pakistan System”. At best it’s a launch pad.

Cliché is a French term for a stereotype printing block which produces the same page over and over again. One way to break this printing block is to dwell on two notions. The first is Certain Realities about Pakistan’s present i.e. that which is known and hard to disagree with. The second is the notion of Real Certainties about its future i.e., that which is plausible and hard to dismiss.

Let’s turn to some certain realities: As the Arab Spring turns to summer, it remains to be seen which way the cookie will crumble, and once it does, how the individual states fare with their decades long course to democracy. Pakistan has already settled its questions in its constitutional framework of 1973 and today there are few here who would question the constitution and challenge the state – and I will address the Taliban in a moment. With a vibrant multiparty system and the peculiar but familiar South Asian brand of democracy, there is broad agreement by all parties and the military on maintaining a liberal and investment friendly regime and on private sector led growth. But beyond that, Pakistan’s political system is beginning to demonstrate a remarkable propensity to resolve some of the most contentious political issues. Some worth mentioning are the devolution of power to the provinces, the need or otherwise for more provinces, the mode of governance at the district and local levels, water sharing, allocation of funds and fighting the war on terror. On indicators such as freedom of press, independence of judiciary and on the relative ease of doing business, Pakistan already punches above its weight

A large indigenous market, a young and upwardly mobile population as well as a large and affluent overseas diaspora are certain realities. Pakistan’s underutilized position as the fastest transit corridor offering the closest seaport access for the rapidly developing Xingiang province of Western China and for Afghanistan’s over USD 1 trillion mineral wealth is a certain reality. Pakistan’s position as a sleeping giant in the US $ 600 billion market for halal food products is yet another certain reality.

Perhaps the rating agencies and media ought to also probe into the country’s best in class legislation and regulatory frameworks covering private power production, telecom, banking, stock exchanges and for public private partnership. In an attempt to create economic stimulus central banks in Japan, the US and Europe have gradually dropped interest rates to near zero. Pakistan’s present high 13 percent interbank rate signifies tremendous reserve energy to create that stimulus when the time comes.

The future of most economies may now be uncertain. Nevertheless, there are some real certainties about Pakistan’s future that are plausible and hard to dismiss. The Taliban is on the run. Its vigilantism has been militarily defeated. The eventual defeat of its ideology is a real certainty. Improving relations with India and the emergence of a South Asian regional economic integration is also a real certainty. Also, once the lawmakers are ready to bring the untaxed sectors into the tax net, the doubling of the country’s present 9 percent tax to GDP ratio is also a certainty. The consequent retirement of Pakistan’s entire public debt in a few years of this happening is also a certainty.

Driven by robust corporate earnings year after year the KSE 100 index has outperformed its peers and indeed the MCSI Bric and every single OECD index. And now suddenly it’s me who doesn’t have the heart to tell my banker friend that ratings or no ratings, had he invested in the KSE 100 in January 2009, he’d have doubled his wealth by now. Money talks after all and everything else, including copy pasting negative clichés, walks.

Financing Development

RECENTLY, the Planning Commission (PC) was handed a paltry Rs280bn for the annual development plan 2011-12. With fiscal space closing in year after year, the federal government’s allocated spending on infrastructure and social services is now down to Rs1,500 per Pakistani.

With the list of development projects earlier sent by the ministries in hand, and less than a fortnight to go before the budget announcement, the PC got to work with a simple formula: 171 projects on which less than 30 per cent of the work had been completed were to be abandoned. However, projects nearing completion were to receive funding. Most of these development projects are for water storage and irrigation, hydropower and grid improvement. Of course, little in the way of new projects could be accommodated.

I haven’t seen the list of the 171 projects to be abandoned or the list of those to receive funding. But I know that with a bit of imagination and commercial savvy, a good number of projects in both lists can be structured for private investment, in modes such as BOT (Build-Operate-Transfer) or one of its many variants. That would greatly reduce the public-funding component of each project. What it would take is the detailed design and PC1 for a project — like a toll road — being converted to an investor-grade feasibility study and for a bankable concession agreement prepared by experienced legal experts.

Such a finished product can then be pitched to investors through what investment bankers refer to as ‘transaction advisory’.

This involves investor road shows in financial capitals to generate investor interest, followed by procuring a winning bidder through a transparent international tendering process. Consulting, legal and transaction advisory services can be purchased for a fee typically amounting to two and a half per cent of the project cost plus a small retainer.

The head of an international development agency recently asked my view for the best way in which Pakistan could be assisted. “Just finance the retainer and success fee,” was my response. “This way, your couple of million dollars would help us raise $100m in project funding from private sponsors, capital markets as well as from hedge funds, eximbanks and sovereign wealth funds.” However, it’s no good making an approach to these institutions without proper homework and unless project documentation of a very high standard has been prepared.

All this would mean a lot of work by the originating line ministries. At this time each year, clerks in these ministries populate a pro forma with topline project information updating last year’s figures and making any required clerical adjustments in the form of adding and deleting from the list of projects. Instead of simply signing the dotted line at the bottom of this spreadsheet, senior bureaucrats would now have to spend time and intellectual effort to understand the projects in depth and then classify these into three groups: those that are commercially feasible in private mode, those that are marginally feasible and the remaining i.e. that are unfeasible in commercial mode.

Next, they would have to take the ones in the first category, then perhaps unbundle monolithic service models, identify where the revenue streams can be created and guide them through the above investor-feasibility process. The second category would be more difficult and require the ministries to calculate the viability gap which refers to the amount of subsidy the government will plug into the project’s revenue stream each year until it is financially viable for the investor. In fact, multilateral lenders could be more responsive if approached to finance the viability gap, as opposed to funding an entire project. Once they are given bankable project documents and en-cashable government guarantees, private sponsors can easily mobilise financial commitments and bring the project to the next stage referred to as ‘financial close’.

It is time to think outside the box. Instead, the ministries appear to have chosen the easy path of least resistance and parked all projects at the door of the PC requesting public funding, of which there is very little. So little in fact that at the present rate of accumulated ‘throw forward’, which refers to the nearly $150bn infrastructure projects awaiting funding, we have muddled into a 27-year-long tunnel just to clear the present backlog and during this time no additional project can be initiated.

Conversely, Rs280bn, together with savvy financial structuring and matched with private money, can arguably be leveraged into Rs1tr. This can begin wiping out the ‘throw forward’. Repeated year after year, the timeline to clear the backlog of current projects can be reduced from 27 years to perhaps 12 which lands us in 2023, in an alternate future — a country with world-class transportation and civic infrastructure, cheaper energy from indigenous sources, a completed Diamer-Bhasha and all its children in school.

As a first step, instead of putting up the list to the PM, it may be best if the PC were to refer it back to the line ministries asking that from this year and every year following as many projects be identified, then structured for private investment and only then submitted to the PC for minimal public component. If they look around, one of the world’s best legislative and institutional framework for public private partnership has been given to them already. The provinces with their Rs433bn should follow suit.

Copyright © 2011 – Dawn Media Group

The other Pakistan

GLORIOUS countryside lies between Rahim Yar Khan and Bahawalpur. Travelling across six districts in Punjab, before a blazing summer sets in, I experienced endless fields of wheat waiting to turn golden, of freshly harvested mustard, acres of ripe sugarcane and sprawling mango orchards.

Far from the drudge and gloom of metropolitan Pakistan, economic privation, traffic snarls, extreme religion and the cricket World Cup agony, this is another Pakistan. Over a quarter of a century after the green revolution ended the rural economy is back in boom, this time on the back of rising prices. The feel-good factor is all around.

Burgeoning commodity prices are churning unprecedented amounts of cash through the farm sector. I pass tractor-pulled trolleys laden with sugarcane waiting outside sugar mills. The crushing season is in full swing. Meanwhile, the flour mills are still grinding away at last year’s surplus crop. This is an agro economy at serious work.

Alongside the cash economy, the place is also brimming with ideas, and with an entrepreneurial spirit. A young man I meet at Rahim Yar Khan’s chamber of commerce has an IT degree and owns an ice cream distribution business spawning an elaborate cold chain across three districts. He tells me that sales are surging because rural society is transitioning to modern desserts which are now more affordable than traditional sweets like mithai and khoya.

Meanwhile, he’s toying with the bigger vision of an electronic marketplace for agricultural produce. Live connectivity to grain mandis and markets for fresh produce and milk will empower farmers to obtain prices online and through their cellphones. He wants to materialise this and wants tips. I give him my two cents worth: study similar models, write a concept paper, galvanise partners around it, put in seed money and get the venture to mezzanine level.

For now the agricultural economy is growing more in value than in volume. As it does, it pulls in a rising demand for inputs. Fertiliser and agrochemical companies, some listed on the stock exchange are making record profits. Still, few find time to complain about rising input prices. With a population of 400,000, Rahim Yar Khan sports showrooms displaying cars, motorcycles and generators, fast food outlets and even private healthcare clinics.

Even then, not all the cash would appear to go into consumption. Pakistan now ranks amongst the world’s top 10 markets for tractors. Alongside, and despite constrained credit to agriculture, farmers are investing in agricultural implements, irrigation channels and farm modernisation.

In 2008, the cotton harvest was in crisis. Ginning factories had no power and could not operate. There were sellers, mostly small farmers but there were no takers. Un-ginned cotton is a perishable commodity and the farmers were receiving throwaway prices. “How have you overcome that problem?” I asked my host, a local businessman, the owner of a number of cotton-ginning factories, as he treated us to a lavish lunch.

“Simple”, he explains, “this year the ginners got together with the local utility company, Mepco. We’ve instituted a system whereby instead of intermittent hours of loadshedding we get it in one block of 12 hours. This way we can run the factory on one shift per day”. With that problem behind him he now wanted to move on; that is, to a pasteurised milk business.

As the green revolution tapered off, a poultry revolution began; in the late 1970s. Ever since, Pakistan has been gnawing away at broiler chicken and there’s no turning back. Today a dairy revolution is sweeping Pakistan. As the world’s fifth largest milk producer, the country can only process three per cent of its milk production. Sitting in his factory office in Khanpur — one could have been in any plush office in a metropolis — we open his wireless notebook and download a pre-feasibility study for a milk pasteurising business from Smeda’s website. We glean through it, and at a Rs160m capital outlay it looks doable for him.

The ‘go’ decision is made on the spot and my host asks me to recommend a good consultant.

In 2009, an NGO distributed young cattle on micro-credit to 1,000 small farmers and built an apex organisation to collect and market milk from these grass-roots. The Dutch consultant for the NGO informs me that a modern farmers’ cooperative model is now evolving. Such models have long been in vogue in Europe and indeed in several developing countries. Usually the extended supply chain ends at farmer-owned retail outlets — co-ops. Why hasn’t this concept gained traction in Pakistan?

Several of us seated around the conference table are unable to provide an intelligent answer until one of the NGO’s employee’s mutters something about biradari-based rivalries as the stumbling block. Indeed. After he hanged Bhutto, Ziaul Haq, to keep the PPP out of Punjab, had gone on to fragment politics in this province along biradari lines.

As I take off from Bahawalpur and four minutes into flight time, I look down to the spot where his C-130 must have come down. A glistening water channel is visible in the Sutlej over Khairpur Tamewali. This was a dry riverbed for the last several years. Until a year ago, water stress being brought on by rapidly depleting groundwater was a major concern. Now the aquifers have been recharged and as a post flood bonus from nature, soil deposition from floodwaters has enhanced yields.

And so Pakistan prepares to harvest another bumper wheat crop in 2011.

Copyright © 2011 – Dawn Media Group

The Future of the Middle East

OUR campus lay on the other side of Tahrir Square — from the now burnt-out headquarters of the Egyptian Democratic Party on the Nile corniche. During the peak of Mubarak’s power, I was a young student at the American University in Cairo in an Egypt that was a bastion of order and stability.

While outside Tahrir Square was being dug up to make way for the Cairo underground metro, a symbol of the regime’s prestige, inside, above the loud thudding of the piling machinery, Prof Tarek Ismael would explain the foreign policy behaviour of Arab states by drawing typologies on the blackboard.

“The swathe of territory across North Africa, Mesopotamia and Arabia has been carved out into a series of states with artificial borders.” He would draw two by two matrices to explain that among these successors to the Ottoman pre-system, there were rich states and poor states, there were capitalist and socialist development models and there were regimes threatening to the West and regimes that were allies of the West. However, despite differing orientations, one common strand ran through all of them: authoritarian regimes ruled by autocrats.

The Cairo metro was inaugurated, I graduated with my degree in Middle East politics and subsequently a $100bn in foreign aid and investment have poured into Egypt. Two decades later, Mubarak’s regime is tottering but Prof Ismael’s hypotheses stand even more robust. And when people ask me whether the scenes witnessed on the streets of Cairo would indicate similar vulnerability elsewhere in the region, I am tempted to return to his frame of reference to construct my answer.

True to form, the present unrest has hit poor states — Tunisia, Egypt, Jordan, Yemen and Sudan — that had long pursued the capitalist development model. On the other side of the Red Sea, do the rich states such as Saudi Arabia and others in the GCC have cause for anxiety? With the enormous resources and reserves at their disposal, surely they can throw more money at the problem. But generous public spending is seldom a substitute for political expression and inclusion.

Kuwait with a parliament and Qatar with Al Jazeera TV began experimenting with limited political freedoms, some years ago. Suddenly much more is needed and much faster to keep this flood out. Even with these, some level of domestic disturbances can be expected in the months to come.

The 40 per cent of Egyptians living below the two-dollar-a-day poverty line are not the ones converging on Tahrir Square. Instead, it’s the students and young educated unemployed and white-collar middle class galvanised by social media like Facebook. Meanwhile, many Cairo taxi drivers and small shopkeepers have lamented the protests which have deprived them of daily earnings.

Similarly, the peasantry appears aloof from the protests or mildly in favour of the Mubarak regime. So is it really economic hardship or the demand for political freedom that is driving the protesters? For the moment the anger appears directed against the ruling party and the state as is evident by the burning down of the party headquarters, of police stations and by the attack on the information ministry and state television, while the worst wrath is reserved for the person of Hosni Mubarak who for most Egyptians is a symbol of repression and tyranny.

Accordingly the chant of the protesters was ‘Freedom’. These features of the uprising would indicate that Saudi Arabia and the other rich GCC states on the capitalist model may not be that immune after all.

On the other hand, the rich states that adopted socialist development models, Iraq, Libya and Algeria would be relatively less affected and may have the longest time to begin reform. Their prosperity and relatively better social structure may serve as shock-absorbers. Still, their political systems would need to become less clogged — as has Iraq’s after Saddam Hussein.

Predictably, their response would be to strengthen their welfare state models and move towards greater political freedom. Of course, a Middle Eastern perestroika carries inherent risks. Algeria, which started this process over 20 years ago, was soon confronting an Islamist rebellion.

Nonetheless, the risks of not acting are greater.

Whether the regimes embrace change or have change forced upon them will depend on how well they ‘get it’ and how fast they act. When he uttered remarks in support of Mubarak on the fifth day of protests, the Saudi king obviously didn’t get it. Mubarak himself didn’t get it when he offered the proposition of “security for Egypt” while the protesters demanded freedom. Neither does the Jordanian monarch get it when he sacks the government and appoints an army general as prime minister.

Five years of reform undertaken by the Egyptian regime’s technocrats, $45bn in foreign direct investment and 3.5 million jobs later, the grievances still remain. It is difficult to imagine how more such reforms would be any more effective. Nevertheless, now that the genie of people’s power is out of the bottle and on the streets of cities across the Arab world, there are many scenarios going forward. Here powerful forces like Arab nationalism, a common language and culture, the role of Islam and the question of Palestine ensure regional cohesion and threaten potential systemic contagion.

What is certain is that order and stability are bygones and change is the new buzzword. Israel gets that — and we can expect it to remain ahead of the curve. I only got a ‘B’ in Prof Ismael’s course but America, like the slow learner, has stayed behind the curve. Probably a C minus for that.

Copyright © 2011 – Dawn Media Group

Time to trade with India

THE return flight from Bangkok crosses Indian airspace flying low over the physical boundary on the final descent into Lahore.

Unlike the Swiss-German border or indeed even the border at Torkham, there is no line of parked cars, buses and trucks, waiting patiently for customs formalities. Instead, one sees a concertina wire fence complete with searchlights, watchtowers and motion sensors.

Before I folded the meal table I had been drawing three overlapping circles, one each representing South Asia, Central Asia and West Asia — or call it the Middle East. The region where the three circles overlap was Pakistan … an enviable strategic position indeed! The finality of being fenced out would appear to indicate one less circle.

Meanwhile I had folded the drawing paper and was now using it as a bookmark placed inside my in-flight read; Imtiaz Gul’s The Most Dangerous Place: Pakistan’s Lawless Frontier resting in the seat pocket in front of me.

“What Pakistan faces today is not a ragtag army comprised of just a few thousand religious zealots,” writes Gul, who also runs the Centre for Research and Security Studies in Islamabad. “Beyond a doubt, the TTP [Taliban] is out to destroy the entire Pakistani security establishment. This will be possible only if the security forces face a continuous and sustained challenge all over the border regions, where one-fourth of the Pakistan Army is now deployed. One thing is clear: a long, bloody struggle lies ahead.”

And whilst the mess in Afghanistan may or may not have been influenced by our own blinkered strategic vision, even after 14 years, the supposed trucks from Torkham crossing the Oxus into Central Asia remain a mirage. Effectively, this brings us to only one strategic circle, the Middle East. Even there for the last two decades, Pakistan as a locked state with an impoverished economy has had little to offer (other than a pool of semi-skilled labour).

Judging from the shopping bags my fellow passengers have stuffed in the overhead cabin compartments, it is apparent that not just the Middle Eastern market but Pakistani consumers themselves now demand quality and standards. Accordingly, the last remaining circle, too, fades away. This leaves only Af-Pak. So how do you squander a huge strategic geopolitical advantage? Easy! Hold firm to a flawed strategic vision that is underpinned by an even more flawed ideology — that sees strategic depth to the west and an enemy to the east. How does one change this endemic condition? One way is with economics.

Since 9/11, Pakistan has lobbied for greater market access for its textile products to the US market. “What benefit will this bring?” asked the US administration. “Five-fold increase in exports — from $3bn to $15bn,” responded the Pakistani textile industry; a verbal attestation without any economics research to back it up with.

Ten million new jobs thus created would water down religious militancy, a favourably inclined US administration pleads to a reluctant US Congress. “Well, also please do tell us who will bear the cost: US industry and taxpayers or the other textile-producing Asian countries?” asks the US Congress. Once again, without rigorous quantitative analysis these questions cannot be answered and so the issue of free-market access continues to languish.

The gravity model for trade is an econometric estimation technique to simulate trade volume flows between two countries (or two regions). In similar fashion to a war game exercise, it churns out predictions based on input parameters such as the distance between and the relative sizes of the two economies. This technique has been used to predict the outcomes of trade agreements like Nafta (North American Free Trade Agreement).

According to our own logic, Pakistan needs a big market for its export, one that will stabilise the shattered economy. For 10 years we have chased the US market but have missed seeing the huge market next door that even the US and the rest of the world vie for. This is because even while India may have the world’s 10th most regressive trading regime it is still the world’s second or third most sought after business destination on account of the size and growth rate of its consumer market.

India offered Pakistan the most-favoured nation status, a position any other country would bend over backwards to obtain. Pakistan has yet to reciprocate. The Gravity Model has been applied several times to simulate trade between the two countries under varying assumptions. On average, it has indicated a twenty-fold increase — from the present $2bn to $40bn in two-way trade. This implies a doubling of exports in one stroke. It also implies a cheaper total import bill.

In what may be a competitive model to Singapore, the Malaysian province of Penang is positioning itself to become a regional economic powerhouse. In this scheme of things, Penang’s greater economy would incorporate southern Thailand and the Indonesian island of Sumatra. All will benefit. In similar fashion, Lahore, together with central Punjab, stands to gain immensely as a potential hub of a greater economy.

From a geopolitical perspective, the Indian cities of Amritsar, Jullunder, Ludhiana and Patiala are closer to Lahore, (and to Punjab’s golden triangle comprising the manufacturing clusters of Gujranwala, Gujrat and Sialkot) than to northern Indian industrial cities in Uttar Pradesh, Bihar or Bengal. Generally for the Indian states of East Punjab, Haryana and Himachal Pradesh, Lahore is the nearest commercial hub and Karachi is the nearest seaport and there is a plausible rail link in between.

The GHQ probably realises that a flooded Pakistan, facing an existential threat emanating from its lawless tribal frontier is also a country with diminished economic war potential to ward off this threat. There is nothing unusual about a policy reappraisal following a calamity. In that sense, the opening of Wagah represents the decisive round in the battle between the forces of progress and the forces of reaction. The choice of moment for that showdown has never been more urgent.

Copyright © 2010 – Dawn Media Group

Flood Aftermath

ON the night of Nov 12, 1970, Cyclone Bhola — one of the worst natural disasters in recorded history — struck the shores of former East Pakistan. Around 350,000 lives were lost. With damage estimated at $86m (inflation adjusted to $1bn today) relief was slow to arrive.

The government of Yahya Khan came under severe criticism from Bengali leaders and from the local and international press. This Category 3 hurricane and its aftermath were to change the course of history.

This time the Indus River basin, a cradle of ancient civilisations and one of the world’s largest natural resource has been the scene of a human catastrophe. Prime Minister Gilani has already termed the situation as being beyond the capacity of the government alone. This is indeed true. The damage to infrastructure alone has been staggering, with roads, bridges, power plants, refineries, dams, barrages and the irrigation system damaged across all four provinces, Azad Kashmir and Gilgit-Baltistan.

In a snap, 750,000 destroyed and damaged houses have been added to the national housing backlog of 7.5 million units. With some 1,600 dead and 14 million displaced, millions others are at risk of infections and waterborne diseases. Further beyond, tens of millions stand to lose their meagre capital and means of livelihood as crops and livestock are destroyed, markets do not operate, shops collapse and transport and communications come to a standstill.

In Khyber Pakhtunkhwa, Information Minister Mian Iftikhar Hussain estimates early losses at $2bn whilst Chief Minister Azam Khan Hoti terms this the worst natural disaster that has pushed back the province by 50 years. In Sindh and Punjab, the mainstay agricultural industry has been decimated. Crops and livestock spread over 1.6m acres in Punjab’s agricultural heartland have been destroyed. While cotton and rice have already been affected, farmers may not be able to sow their next season crops as their cash cycle is interrupted. Meanwhile, according to the United Nations World Food programme, 80 per cent of the food reserves have been wiped out.

In recent years, Pakistan’s agricultural growth has been stagnant. In renewed circumstances, and with the number of districts inundated, the sector could potentially contract by three to four per cent. With agriculture and livestock contributing 21 per cent to the national economy this could translate to 0.7 per cent being knocked off from the already low 4.5 per cent targeted GDP growth rate this year.

Losses, however, are not likely to remain confined to the crop and livestock sector but may extend to the value-added agro-processing sector like cotton ginning, rice milling and milk processing and also affect derived demand for seed, fertilisers and pesticide. This consequent ripple effect may chip off another half to three quarters of a percentage point from the GDP or approximately $1bn in absolute terms. The resulting supply side contraction has in fact already started to fuel inflation at a precarious time when Pakistan is struggling to stimulate economic growth.

Losses to infrastructure could translate to tens of billions of rupees in lost productivity and reconstruction costs. Finally the costs of relief operations and subsequent resettlement would also have to be borne by the exchequer. Together these costs will further balloon the fiscal deficit. With Islamabad already struggling, this consequence would make the chances of meeting the conditionalities appear even more remote as it meets the IMF’s board in Washington to convince it to release the next two tranches of $ 1.3bn each.

All this while, the threat from faith-based terror and insurgent groups continues to loom as they evolve tactics and open new fronts in a war being fought for control of the state. The newest of these would be on the charity front, where in pursuit of a hidden agenda, a stray ideology will seek to undertake fundraising and relief operations and exploit the state’s failing.

There may be temptations to channel the assistance already in the pipeline towards the flood emergency. While expedient, this course would detract from this aid’s original objectives, which have been well thought out. De-prioritising these earlier objectives would therefore be unwise. Instead, this is the time for our friends to step forward to help a country — a member of the international community — that has been the largest contributor of troops to UN peacekeeping missions around the world. A new multibillion dollar assistance package would need to target three urgent needs: one, relief operations through genuine charities and state organs; two, aid to farmers through innovative microfinance to restore their economic bases; and three, support for the Public Sector Development Programme and other programmes for the reconstruction of damaged infrastructure.

Of course there are three major challenges with mobilising such large-scale assistance. First, where will the money come from amidst a tight global financial environment? Second, how long will the process of allocation and subsequent disbursement take? Third, is there demonstrable and credible capacity available with the federal and provincial governments to effectively utilise these funds for the purposes and within the time frame intended? Each challenge can take months to address.

On the other hand, if the assistance does not materialise soon, then nearly half of the expected 4.5 per cent GDP growth — of a struggling economy — is under threat of being lost and Pakistan faces the spectre of a descent into a deeper economic quagmire.

Within months of Cyclone Bhola, an ideology — Bengali nationalism — feeding off economic deprivation and post disaster hopelessness took half the country away. This time, a renegade religious ideology — feeding off the consequences of the present disaster — is drooling to take away the remainder. This must not be allowed to happen.

Copyright © 2010 – Dawn Media Group

Pakistan’s energy future

The rental power plants are, at best, a quick and dirty fix. A quicker and cleaner one might have been if last winter the turbine blades in the government’s own generation plants had been replaced with modern, aerodynamic designs.

That action alone would have added a few percentage points in efficiency to plants like Guddu, Shahdara and Kotri and to KESC’s at Bin Qasim.

Today the result would have been a few hundred extra megawatts in capacity — gained without burning a single gallon of furnace oil — and higher approval ratings for the PPP government. Arguably the cost could have been financed through raising debt against future receivables from the additional output and through a carbon credits programme as the increased efficiency would reduce greenhouse gas emissions.

The Government of Pakistan is now expected to be writing a plan on how it proposes to overcome the power shortage. Meanwhile, a US team arranged by the Obama administration’s point man in Pakistan, Richard Holbrooke, is also presently in Pakistan to make its own assessments. If this arrangement works well, the Holbrooke team will also provide inputs into the GoP’s plan, then carry out a final review and make recommendations. If the GoP accepts those recommendations, the US administration will use its influence to get this plan funded.

In writing this plan, a good starting point for the government would be to define plan objectives that have measurable benchmarks. For instance, the planners may want to lay down ‘promotion of socio-economic development (and justice)’ and ‘the sharpening of Pakistan’s competitive advantage in agriculture and certain industrial sectors’ as the energy plan’s objectives. Lowering the cost of energy is akin to raising GDP per capita as it leaves more purchasing power in the hands of households. It also drives down the cost of doing businesses.

Other objectives could include energy security, the development of indigenous resources and saving of foreign exchange. Whilst Pakistan’s energy mix is skewed towards oil and natural gas, still, and rather remarkably, three quarters of energy needs are met by domestic resources. Indigenous oil and gas reserves, however, are depleting faster than new discoveries are being made. Accordingly, this ratio is fast falling. As another objective, the plan could aim to redress or reverse this trend.

The 14-year delay in developing the Thar coal reserves has brought home two lessons. One, fuel and electricity need to be dealt with in an integrated way. Two, Islamabad must not play tug-of-war with the provinces.

The power sector can be best optimised if the brief is expanded to include transport fuels, renewable energy, conservation initiatives and the carbon trading mechanism. At present, these are scattered across the ministries of petroleum, communications, agriculture and environment, while others are with the Planning Commission and still others with the provincial (in some cases even city) governments.

If upgrading four turbines can take so long one can imagine the mental exhaustion when these additional bureaucracies get involved. Probably as a way to avoid getting bogged down in management frustrations, Pakistan’s energy planners and Richard Holbrooke’s team of experts may be tempted to limit the plan only to the power sector.

This would be suboptimal. It would pose two risks: one, that this narrow approach may defy an optimal solution, and two, that inefficiencies and costs may instead be shifted or imposed elsewhere. To preclude these, the planners need to be given a larger sandbox in which to play. The energy sector needs to be dealt with in an integrated way.

Natural gas is an exhaustible resource. Coal — given the size of Thar’s reserve — is not. For this reason it is central to Pakistan’s energy solution. Half of the world’s electricity is generated from coal. The Thar coal seam lies 130-250m under the desert and for the most part, sandwiched between water tables above and below the coal seam. This poses a mining challenge.

The coal is lignite and of low rank. It has a tendency to spontaneously combust when brought out to the open. This poses storage, transport and a general logistic challenge. Also because it has high sulphur content it emits large quantities of sulphur dioxide when burnt. This poses conversion challenges.

Together these challenges limit the options. Not long ago coal was a dirty fuel. Today, there are clean technologies; a popular one is underground gasification in which the coal never sees the sky. Instead, compressed air is piped down into the coal seam in a way to change its molecular structure and turn it into gas which is then recovered as it gushes out from beneath the surface. The process involves costs but saves on mining, handling, transportation and cleaning the coal.

The resulting gas — syngas — can be used as a fuel in its own right or further converted to natural gas. It can be used for power generation, as transportation fuel and for the production of fertilisers and chemicals. The technology is nothing new. However, the process is capital-intensive and requires know-how. This is where Holbrooke’s team and Pakistan’s allies are needed most.

Coal gasification also offers a halfway house where environmentalists and ‘developmentalists’ coming as they do from opposite directions, can meet and shake hands.

Pakistan’s total energy requirement works out to a little over 100m tons of coal equivalent (mtce) each year. In addition another 50 mtce is provided by burning firewood, dung and crop residues in the rural sector. This uncharted opportunity for biofuels and natural fertilisers is at present outside the mandate of the planners.

Farm waste augmented by jatropha grown on marginal lands can be converted to biofuels, and their residues to organic fertilisers. These together with local wind and solar energy solutions can meet the entire energy requirement of the rural sector. Such programmes have shown to raise rural incomes and alleviate poverty in Latin America and sub-Saharan Africa and must be included in the terms of reference for this plan.
 
The Kalabagh experience taught us that power cannot be dealt with separately from the water issue. The real world often requires us to handle more complex things than changing a light bulb; even if to an energy saver, or, for that matter, changing four-turbine blades. But first, let’s get the big picture right.

Copyright © 2009 – Dawn Media Group

A rejoinder to my article “India still shining?”

A good criticism of my article “India still shining?” Dawn published my article under the title ”Two different paths” . Now a writer critiques the article in a letter to Dawn’s editor here:

http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/the-newspaper/letters-to-the-editor/putting-faith-in-pakistan-079

Definately worth reading.

The only observation I’ll make here is this: Regardless of the way it was written, it was not my intent in the article to compare a snapshot of India with a snapshot of Pakistan. That has been done many times and the writer is correct that both pictures offer a mixed bag.

The essence of the article was to look at trends , the trajectories both countries have travelled along. That is an open question and readers ought to discuss and determine for themselves.

However, a few questions:

The writer himself says that western visitors visiting the region in the 1990′s rated Pakistan’s standard of living better than India. How come they have stopped visiting Pakistan since then? Meanwhile, how many western expats have moved to live and work in Mumbai … just Mumbai, and with their families? I don’t know but maybe somebody here can provide us an answer. Have we come down the right path? When will these visitors start visiting Pakistan again? We need to think. Maybe all is not well.

The writer again seems to blame Pakistan’s woes on “America’s war against the Soviets in the 1980′s”. But weren’t we calling it jihad … and wasn’t it being waged in the name of the faith?

On the assertion of Pakistani professionals doing well in the west. Is this because of our education system or despite it? Something to think about.

How much research is coming out of the writer’s Engineering Institute where he says he studied in Karachi? How many scholarly articles were published in engineering journals by its faculty say in the last 10 years?

I have chosen not to get into the subject of India Vs China, Japan Korea etc and I would like to explain my reasons. 1) It is beyond the scope of my piece which is primarily about Pakistan.2) The discussion is beyond my “bandwidth” … meaning I do not have enough know how and stamina and 3) maybe its best for the Indians to take that initiative.

Moazzam Husain

The courage to question

IT’S sometimes tempting to think of the power crisis as a simplified model of the national crisis today. A large part of the role behind Japan’s success was played by its corporations. Companies like Mitsubishi, Nissan and Sumitomo excelled by teaching their managers to ask questions.

For example, they would ask why we didn’t meet our sales target last month. To the answer our production was slow, the follow-up question would be why it was slow. We’re short of spare parts; machines kept breaking down, would come the answer. Why were we short of …. And in this way Japan probed its way to the bottom of its problems and very soon became a rich country.

Getting rich by asking questions? Why, sounds absurd? Not to the US Navy which then sported an “if it ain’t broke, don’t fix it” attitude. In 1984 it adopted the technique and — after adding additional content — branded it Total Quality Management. TQM became a buzzword and spread like wildfire to just about every US corporation and onwards to Europe and Asia.

A few days ago, as the lights and air-conditioning suddenly died on me and I put down Dr (Justice) Javid Iqbal’s book, Islam and Pakistan’s Identity, the last words to stick in my mind were: “Pakistan is not a failed state; it is in the hands of a ‘failed generation’.” Iqbal envisioned a homeland for Muslims, Maudoodi, counter-intuitively, resisted on two counts: one, a separate Muslim state would limit Islam which had not fully done its work in India. Two, that the Musalmans of India were not ‘pure’ enough (read not fundamentalist enough) to be deserving of an all-Muslim state. Iqbal retorted that “Muslim state and society were always in a process of becoming and never became a finished product.”

Nevertheless there were problems with Iqbal’s approach, as he too maintained that the religious ideal could not be separated from the social order. Was he implying an Islamic state (or republic)? Because once you’re on that turf aren’t you left with little room for debate about implementing Sharia? Isn’t it setting you up as a target for a fundamentalist onslaught that an unfulfilled promise of an ‘Islamic republic’ brings on?

Unlike his predecessors Ziaul Haq not only gave way to this onslaught, he harnessed it. Then again in the summer of 1998 came another close call. That year, with his intended 15th Amendment, Nawaz Sharif brought Pakistan within inches of becoming a theocratic state. By 1998 weren’t Iqbal, Maudoodi, Zia and Nawaz Sharif all on the same page? True, Jinnah hadn’t wanted an Islamic state; just a state for Muslims but then, doesn’t the basis for Pakistan boil down to Muslims being only able to live with other Muslims?

The lights flickered back on, the AC started to hiss and the reassuring hum of appliances could be heard again. Then they dimmed and finally died again. Is there a power shortage? Apparently not. By some accounts, installed capacity is enough to meet all except peak demand. So why the blackouts? Circular debt … Mangla tripped … Lesco’s transformer at the Kot Lakhpat grid gave way. In the end we may find that there was less a shortage of capacity, and more a shortage of intelligent questions; and an inability to clear a cobweb of stupidity.

So if Dr (Justice) Javid Iqbal’s lament is that Pakistan is in the hands of a failed generation Aitzaz Ahsan, in his book, The Indus Saga, explains why. “Pakistanis have spent almost half a century of their existence without asking any questions.” Indeed bold, courageous and informed questions are anathema in Pakistan. The book raises the question of whether Pakistan is the result of a “two-nation theory” hastily put together and announced in 1940 as the Lahore Resolution, or has there been a historical separatist urge in the territory we know as the Indus Basin.

Recently, Pakistan lost its most distinguished historian. K.K Aziz believed that like governments, a people get the historians they deserve. In a country of 160 million people, only five or six historians actually wrote and published. And soon this ‘failed generation’ gets set to pass the state into the hands of an even more hopeless generation. This one opened its eyes under the dreadful rule of Ziaul Haq; when textbooks were mangled to portray Pakistan as a ‘besieged state’ under threat from a Hindu India, a godless Soviet Union and an anti-Islamic West. The result is now all around us.

Some time back prominent educator Dr Pervez Hoodbhoy had explained: “Most students have not learnt how to think; they cannot speak or write any language well, rarely read newspapers and cannot formulate a coherent argument or manage any significant creative expression. This generation of Pakistanis is intellectually handicapped.”

If inquiry and analysis were forbidden for the earlier generation, then the present one may not even have learnt how to construct a question. In such a culture isn’t it natural that obscurantist explanations and fundamentalist dogma will take over, conspiracy theories will flourish?

Against this the Jamaat has kept its fundamentalist narrative evergreen and intact, when it says that it is not religion’s fault the state of Pakistan hasn’t succeeded, it’s the fault of the people who never became ‘pure Muslims’. Within these wheels are the recruitment networks of the various jihadi outfits — in an environment of multiple social anomalies and economic deprivation — and we are facing a very real spectre of a radicalisation of many of the 93 million Pakistanis who are today under the age of 24. Out of curiosity: how many will turn to radicalism to chase the promise of untold pleasures in paradise and how many will actually be seeking to improve their lot in this world?

According to Ali Dayan Hasan of Human Rights Watch, “Pakistan is indeed a failed state. A state that does not have enough self-confidence to take criticism…. A state that feels constrained to legalise bigotry and exclusion, extremism and prejudice, coercion and oppression in order to survive … [Pakistan] is certainly not presiding over a vibrant, successful and self assured society.” If Ali was to travel to the past and meet Jinnah, with this message from the future, what would Jinnah’s response be to him? Perhaps more importantly, what would Jinnah’s questions be to him? Might one of the questions be “when did you people stop asking questions?”

Copyright © 2009 – Dawn Media Group

India still shining?

IN the early 20th century the British-American Tobacco Company knew that a hookah-smoking Indian population would gradually switch to cigarettes. Towards the middle of the century Anglo-Dutch Unilever came to the same realisation that its banaspati could displace more traditional cooking mediums such as desi ghee and mustard oil.

Things moved slowly then. Clunky old lorries would bring the goods from the port or factory. Bullock carts would take them down shantytown lanes and dusty village tracks and finally skinny barebacked porters pulling wooden handcarts would deliver shop to shop. Today every major international retail brand and chain eyes the Indian market. Marks and Spencer has 12 stores in India and local chains such as Godrej Lifespace boasts 50 home and interiors stores offering furniture, appliances, health and massage products, digital cameras and other lifestyle products. Interestingly, their home range includes electronic security systems, vault equipment and burglary resistant safes.

Despite the retail temptation offered by the shopping malls, multiplexes, gyms, spas, restaurants and travel packages, Indian households still manage to save over a quarter of their disposable incomes, one of the highest rates in the region. By habit or custom, a large part of their accumulated savings is held in gold. In this way, Indian households accumulate 800 tons of gold each year — representing 20 per cent of the world’s demand for gold — to store which Godrej has to sell a lot of vaults and safes!

The Indian household has also learnt that in bearish economic times, gold prices peak. Accordingly, in times of bust or drought, many opt to sell the gold and buy other low-priced assets. In the absence of an institutional mechanism, households turn to their nearest jeweller.

In a country with as many mobile phones as people and a 3 G licence auction months away, a sharp entrepreneur saw an opportunity. Jignesh Shah has created an Internet-based electronic spot market for gold. Now households can obtain prices and transact online. His company, the National Spot Exchange, had already done this for a number of other commodities including agricultural produce, eliminating the ageless institution of the middleman. With the resulting documentation, electronic commodity exchanges bring money from the informal economy into the banking system.

In turn, the Indian central bank has mandated the commercial banks to lend to the agriculture sector. This has created a strong demand from a flourishing rural sector creating a virtuous cycle that drives Indian industry and urban employment. Today India’s forex reserves hover around $240bn and each year IT exports bring in $60bn into the economy. Meanwhile non-resident Indians or NRIs, by sending their savings, and often themselves, home — are the largest foreign investors in India. In the current fiscal year India will spend a luxurious $29bn on defence.

The day it placed an order for eight Boeing P-8I maritime reconnaissance planes, Boeing shares rose 27 cents. The P81 is the most advanced anti-submarine and anti-surface warfare aircraft in the world today. Its capability to watch India’s coastline and maritime waters is undoubted. The defence budget includes $10bn for a next generation fighter jet, a mouth-watering contract for which both Boeing and Lockheed are competing.

The second item on the shopping list is the Aegis combat system. This is an integrated system that uses powerful computers and radars to track and destroy enemy targets and is only in use by the most advanced navies in the world. Just as Jignesh Shah’s electronic commodity exchange is modernising an ancient system of trade, so will Aegis move the Indian navy into electronic warfare mode.

Today US defence equipment manufacturers represent a powerful lobby for India on Washington’s Capitol Hill. They are interested in India’s shopping list for the same reason British American tobacco was interested in the hookah-smoking village headman, commercial capitalism. Even the civilian nuclear deal extended by the US is primarily intended for American companies to win an estimated $100bn in consulting and contracting opportunities in India. All purchases are paid for in cold cash.

“History will be the ultimate judge of Pakistan,” Jinnah had said at the time of partition. Whilst history may be some years away, it appears that the Indian defence establishment has begun preparations to firewall the country against a “rogue-state-failed-state next door” scenario. The measures include acquiring the capability, by 2015, to take down any incoming ballistic missiles. Accordingly the third item on the shopping list is a ballistic missile defence system, like the Patriot Advanced Capability-3.

Bollywood star Shilpa Shetty and business tycoon Mukesh Ambani both own cricket teams which the Indian Premier League brings, together with glamour and thrill under the media spotlight. And while Ratan Tata acquires British carmaker Land Rover and Jaguar he also gets ready to launch the world’s smallest car, the Nano. The country has learnt to create wealth and now needs to give it time to work during which India is expected to invest $500bn in the next few years on upgrading its infrastructure.

Much as Godrej Lifespace sells electronic security systems and safes to increasingly affluent Indian households, the Indian security establishment appears to want to throw a security cordon around the country so that within it a secular and democratic Indian polity can get to work at addressing two internal challenges: to better distribute the wealth that is being created and to improve social inclusiveness within Indian society.

How did the two countries end up on such different trajectories?

While there may be several answers to that, V.S. Naipaul, writing 10 years ago had spoken of a growing intellectual distance between the Hindus who embraced the New Learnings of Europe brought by the British Raj, and “the Muslims, who, wounded by their loss of power, and religious scruples, stood aside. This distance has grown with independence; and it is this — even more than religion now — that makes India and Pakistan quite distinct countries. India, with an intelligentsia that grows by leaps and bounds, expands in all directions. Pakistan, proclaiming only the faith and then proclaiming the faith again, ever shrinks”.

Copyright © 2009 – Dawn Media Group