Motorways needed?

ON a recent visit to Karachi the prime minister announced plans to build a Karachi-Lahore motorway. The groundbreaking of the first segment from Karachi to Hyderabad was also performed. The existing four lane Karachi-Hyderabad ‘super highway’ is in rundown condition. The plan is to upgrade it to a six-lane motorway, fenced on both sides.

This is to be done in public-private-partnership, a mode known as rehabilitate-operate-transfer. Under this, a private investor would upgrade the road at his own cost and then operate it for 25 years during which the investment would be recovered, the main revenue coming from toll collection. In this way, the government says the project would not require public funds.

This is all very well on paper; except when we examine the track record, successive governments have tried and been unable to make this scheme work. A ‘groundbreaking’ of this nature has been done before. One fails to see what will be done now that is characteristically different from previous attempts. I will return in a moment to why these past attempts didn’t work. But first let’s look at where we are going with our national development priorities.

In Pakistan, the main instrument for financing development is the Public Sector Development Programme (PSDP) of the federal budget. This includes heads for infrastructure and social sector components. Pakistan has grossly neglected its social sector (read human development) responsibilities and this has led to the present problems of unchecked population growth, appalling levels of education enrolment, skills development and healthcare provision, leading to rampant poverty, unemployment and lawlessness.

On the infrastructure side, Pakistan spends little over 2pc of GDP on capital spending on physical infrastructure. This is the lowest among peer countries. A 2011 working paper titled Public Investment Program Phase-I Report on Macro-Fiscal and Development Framework by Hafiz Pasha et al (among them Saqib Sherani) observed that Pakistan remained over-invested in roads; meanwhile railways, ports and the water sector remained insufficiently funded.

With the 18th Amendment, most of the PSDP subjects and funds have been transferred to the provinces and it is hoped that the provinces will now pay more attention to the human development factor. With the remaining federal funds the priority areas would appear to be building water storage, improving watercourses and restructuring the railways.

Which brings us to the question, do we need more motorways? Regional connectivity and the Pak-China corridor are important but why can’t these be built, for the most part, on the back of upgrading existing highways, building fuel pipelines and restructuring the rail system?

To date I have not seen a study on the socio-economic benefits that have accrued from building the Lahore-Islamabad motorway. Have the original objectives laid down in 1993 been met? And how do these benefits compare with alternative project opportunities that may have been available at that time? It is also worth observing that simple things like the new traffic policing systems introduced in Lahore and Islamabad in recent years have in fact brought greater everyday life and economic benefits to the citizens of these cities than the motorway.

According to the Pasha-Sherani report: to ‘crowd in’ sustained private investment requires more than just a high level of public investment in physical infrastructure and development of human capital. It requires the government to play its role as an ‘enabler’ (or facilitator) in the economy, by providing the appropriate institutional framework, including laws and regulations, such as guaranteeing property rights, providing for contract enforcement and dispute re­­so­­­lution mechanisms.

In this way, the tough laws on cheque bouncing for ins­tance, may have had a more palpable effect on the economy (by building trust in economic transactions) than the building of expensive flyovers.

And that also explains why previous attempts at upgrading the Karachi-Hyderabad ‘super highway’ under the public-private-partnership mode have failed. Why Reko Diq turned into a fiasco. And why Pakistan Steel and the Railways continue to languish.

Recently Finance Minister Dar has spoken of the need for a ‘Charter of Economy’, a minimum economic agenda that may be agreed by all political parties to repair Pakistan’s serious economic dysfunction. One of the bullet point items on that agenda ought to be the determination of national development priorities governing the use of PSDP funds. While the provinces can focus on human development, the guiding principles for the centre should be to focus on schemes that will kick-start growth, bring about equitable distribution, improve productivity, create a high multiplier effect, and crowd in private investment. If we look around, are the motorways the best schemes available to do that? Or can we identify others?

2015 – Dawn Media Group

Rise Gwadar

THE opening of the Suez Canal in 1869 provided the British with a much shorter route to access their colonial possessions in India. With that, the importance of Aden as a transit and refuelling stop multiplied — sitting as it does, at the point where the Red Sea enters the Indian Ocean. The British made Aden part of its Indian holdings and by 1937 had turned it into a full-fledged crown colony. With that, Aden became one of the most important ship bunkering, trans-shipment and duty free ports in the world.

A direct conduit to western China could be many times more valuable in the event of a blockage in the Straits of Malacca.

A direct conduit to western China could be many times more valuable in the event of a blockage in the Straits of Malacca.

By 1967 decolonisation had almost run its course. Arab nationalism also peaked. When a local rebellion and uprising in Yemen forced the British to evacuate their naval base and ultimately get out of Aden, it was clear that its age of maritime pre-eminence was over.

Even before the oil riches had started to arrive in his little emirate, Dubai’s Sheikh Rashid Al Maktoum was envisioning Dubai as the alternative to Aden. As the British were evacuating from Aden, he began constructing a deep water harbour, one that could service the world’s largest vessels. Six years later, in 1972, Dubai’s Port Rashid opened. A few years later as the oil riches arrived, the world’s largest man-made port was constructed at Jebel Ali, opening Dubai’s second port in 1979.

That was followed in 1985 by the Jebel Ali Free zone, a veritable entrepôt; complete with a free zone, an industrial area and sprawling warehousing and logistic facilities. Dubai’s rise followed. Driven by political vision, executed on a master plan and enabled by a corporate structure, DP World, Dubai transformed itself into one of the world’s largest trading hubs that it is today.

Of course, Japan’s economic ascendency, followed by the Asian ‘Tiger’ economies and after 1980, the Chinese economic miracle, only bourgeoned Dubai’s fortunes as world trade also flourished. The key trade corridor now ran along the Southern Eurasian rimland, which starts in Aden and runs all the way to Hong Kong. Now sitting on this corridor, waits Gwadar.

Its military utility apart, from a commercial perspective Gwadar can claim three distinct advantages over Dubai and the other Gulf ports that have followed a similar template. It lies on the main route, without vessels needing to enter the Straits of Hormuz. It has a large hinterland, which includes Pakistan, Afghanistan and at some point in future, Central Asia. Third, it offers a direct conduit to western China, which could be many times more valuable in the event of a blockage in the Straits of Malacca, a critical bottleneck. Dubai on the other hand enjoys the huge advantage of incumbency.

Gwadar’s game plan needs to be ambitious, grandiose even. But hoping for things to fall in place by themselves is not good business strategy. ‘Build it and they will come’ is a dangerous mind trap. Gwadar’s success will depend on the quality of the commercial strategy it pursues.

The first key will be crafting Gwadar’s business model. This will detail how to make it a viable destination. It will include a marketing plan and an associated traffic forecast explaining how it will be achieved. Why will they come? What will they gain from coming here as opposed to going to other competitive ports in the region? Why would they switch from their traditional preference? The best consultants in the world cannot build your business models. That is a job the government’s own ‘Team Gwadar’ must do.A general view of Pakistan's Gwadar deep-sea port on the Arabian Sea

The second key to success will be to build the critical mass of vessel traffic and cargo handling volumes needed for the port operator to break even. Gwadar port’s business plan must achieve break even quickly. The port will drive the whole port city ecosystem, but only after it commercially takes off. The hard truth is that either it will achieve early commercial success or it will languish forever; like the railways where you have the infrastructure and even ready traffic but can’t seem to make it work.

As I see it now, critical missing pieces include rail and pipeline connectivity, a processing zone, a cargo break-bulk area as well as a coherent investment attraction strategy that would lure break-bulk operators from neighbouring ports to relocate to Gwadar.

As it proceeds to operationalise the port the government must think about the answers to questions like who will use Gwadar. For instance, why will a container destined for Afghanistan or China opt to land in Gwadar as opposed to say Karachi or the neighbouring Iranian port of Chah Bahar? The time to play in the sand is over. It is time to start talking specifics. And that means talking business.

2015 – Dawn Media Group

Iron ore ‘discovery’

ON that bright sunny morning, the villagers must have been delighted at the unusual sight of a small propeller plane flying over their fields. It was the 1970s, and the OGDC’s aircraft was conducting an aeromagnetic survey over northern Punjab.

As it repeatedly flew over in a grid-like pattern, it was detecting a magnetic anomaly near Chiniot, pointing to the possible presence of iron ore beneath the surface. The aircraft returned to base, the data was logged and the matter rested.

It wasn’t until 1989 that the Geological Survey of Pakistan picked up the dusty file and carried out a geophysical survey, in which a small ore body was identified. Nevertheless, a geophysical survey is a limited study and does not confirm the resource with the degree of certitude that would motivate commercial interest. That would require more detailed investigations.

Yet another decade passed when in 1999, the Punjab Mineral Development Company commissioned an international geological firm to carry out the detailed investigations over a small area. After digging boreholes it confirmed the presence of a small deposit of iron ore.

While the size of the deposit was of little commercial value, more importantly, the investigations, using extrapolations and inferences from the collected data, pointed to the presence of much greater quantities of iron ore (in addition to other minerals) — over 500 million tons — in the wider area. However, to confirm that would require a larger, detailed investigation. At that the matter rested.

In 2009 I had accepted a position with the Punjab Board of Investment and Trade. It was apparent to me that Chief Minister Shahbaz Sharif understood the subject of iron and steel well. Perhaps for that reason I picked up this initiative as my pet project.

In November 2009 I commenced a series of strategic conversations across a range of stakeholders, businessmen and technical experts in the field who were conversant with the subject. What do we do with these bits and fragments of geological information? What would it take to have this classified as a proven reserve? And afterwards who would invest in this mega mining project?

What would be the terms of the transaction? What kind of mining methodology would be required? What kind of logistic and transport infrastructure would be needed to remove earth to the depth of a 30-storey building and then haul the millions of tons of excavated ore?

How would we depopulate the hundreds of acres of farmland and villages — underneath which the ore was located? What would we do with the iron ore? Could we convert some of it to steel? If so, where would the energy come from in an already energy-starved country? Could we also sell some of the raw iron ore?

By April 2010 our rigorous consultations had led to the development of a road map that staked out a path to commercially tap these resources. The first requirement was to carry out a full-blown geological investigation that would authenticate these deposits to an acceptable international standard. And even with the chief minister applying full force, it took a slothful Punjab bureaucracy nearly half a decade to get this done.

But finally it has happened. A Chinese company has authenticated the deposit to be qualified as “reserves”. And while they are sizeable they are not very large by global standards. The entire reserve quantity is little more than what Australian mining giant BHP-Billiton would typically produce in two years.

The hard work only now begins. The ore is lodged deep under the surface. The area is well drained by the Chenab river, which may pose hydraulic challenges during excavation. The resulting mining solution could be costly.

That would make the Punjab iron ore project marginal on a world scale. Any investor will look at a range of comparable mines in the world’s ore-producing regions and compare the extraction costs per ton. And in the presently oversupplied world market many marginal mines have become dormant and are available.

Then getting the land cleared would pose a challenge for the Punjab government. The land acquisition for the Mangla reservoir expansion took years.

Structuring a mining concession, especially against the backdrop of the Reko Diq fiasco, will pose another challenge.

If the project envisages steel production on site then the government will have to think about ways to provide energy — either coking coal or gas.

Finally, to move ore (and even steel) through overland transport to our steel mills and ports requires a modern, heavy haul rail system.

We will turn to ways of addressing these challenges at a later time.

2015 – Dawn Media Group

What led to the iron ore discovery

In 2010, Moazzam Husain working with a small group of colleagues and stakeholders, helped stake out a roadmap to develop the abundant iron ore resources of the Punjab province.

His initiative led to a geological study that today has confirmed the presence of large scale reserves of the Punjab province.

His 2010 roadmap is available here:

The report about the discovery today is here:

Still, this is only a beginning he says, as going forward, the govt needs to develop a sensible/ workable policy to grant mining concessions. And it would require large rail/ road infrastructure development in the region.

Moazzam Husain who was Director General of the Punjab Board of Investment says the ore is deep under abundant alluvial overburden and the Chenab river flows nearby which could pose hydraulic challenges. It would need a proper technical mining solution to be developed

All told this would now need a couple of hundred million dollars in investment before large scale mining and ore production and transportation of a few million tons a year can commence.

In addition the government can benefit hugely from royalty payments, private led infrastructure development, employment creation and taxes paid by the concessionaire (s).

Fighting ISIS

LAST week a group of retired US generals warned Congress that by disengaging from the region, the US may lose the war against extremists. This is sound advice that President Obama may have heard before.

The US is leaving the region more unstable and less secure than it was before its military interventions in Afghanistan and Iraq. And while for Pakistan and Afghanistan, stability and security will now largely depend on how well the Ashraf Ghani administration and Pakistan’s security establishment are able to work together, it is Iraq and Syria where the situation is far more complicated. Only the US as the sole superpower can help resolve this dreadful mess. And more than military power or ‘nation building programmes’, this may be more a job for US diplomacy.

The full-fledged ‘Sunni’ rebellion that Iraq faces today is no less a consequence of premature US disengagement as it is of former prime minister Nouri al-Maliki’s misrule who made sure to completely disenfranchise Iraq’s Sunni population. Building on this disaffection, the Islamic State has overrun the Sunni regions where the Iraqi army units defected without a fight, leaving behind vast arsenals. It has established a ‘caliphate’, a totalitarian ‘state’, over territory larger than Jordan. The perfect storm that created IS would not have been possible without the Syrian civil war, which affords it much strategic depth.

IS has galvanised Salafist fighters and funds from across the world. It has begun to spread its influence to distant Libya and Yemen. It is not strictly an insurgency but a ‘state’ building organisation, whose military council includes well-trained former officers of Saddam Hussain’s disbanded army and intelligence services.

On the other hand, the response against the group has been a patchwork of uncoordinated actions rather than a unified strategy put up by the states of the region. Iraq, Syria, Saudi Arabia, Iran and Turkey, the Kurdish peshmerga militia as well as Russia and countries of Western Europe have divergent interests and mutual mistrust. They are unable to act against this formidable fighting force or check the flow of motivated fighters and its sources of funds. Their national intelligence agencies rarely share information or collaborate. Meanwhile IS has threatened retaliatory attacks if the West gets in its way. Amidst this response paralysis the organisation thrives and grows.

Yet there is a silver lining. The Islamic State is a common threat to all players. It has no state backing; at least not just yet. And this may provide an opening from where US diplomacy could pick up the thread.

Perhaps the most debilitating obstruction to coining a joint strategy is the Saudi-Iranian rivalry; a religious rivalry that extends deep into the vault of Islamic history. The key here lies with the powerful establishments on both sides. A Byzantine challenge for US diplomacy, the Gordian knot as it were, would be to facilitate a détente.

The Islamic State is inimical to the interests of both Iran and Saudi Arabia, to a larger extent than they are to each other. A US-brokered Faustian bargain between these two establishments will leave their respective regimes with more latitude to work with each other towards the common objective. As no less a byproduct it would stall the production of toxic sectarian ferment and bring a windfall to the entire region, especially Pakistan, one of the world’s largest sectarian hotbeds.

The other hugely complicating factor is the Syrian civil war. Russia and Iran will not let the Assad regime in Syria fall anytime soon. And nobody wants to contemplate the mayhem that, in the event, will see extremist factions scrambling for power.

The second best option is for the US, working with Russia and Iran to force President Assad’s hand to widen his regime, maybe even to the extent of a national reconciliation government. In return, he can get two things. A lowered intensity of rebellion against his regime and co-option into the coalition on the war against IS.

Granted, these are staggeringly difficult diplomatic objectives. But with these two big-ticket items in place, the others — precision aerial strikes, Special Forces ground operations, choking the sources of external funds, preventing the recruitment and flow of fighters into the region and undertaking state building — would be relatively easy.

This is not a job the US can get done alone. Washington will serve its own interests by addressing the region’s fault lines and align a broad coalition of states to act together. The war against IS cannot be won by coalition airstrikes alone. Even if the Islamic State unravels, it will go back to insurgency mode. And unless the difficult diplomatic challenges are taken on, the group will keep winning and the apprehensions of the former generals may well prove right.

2015 – Dawn Media Group

Story of fuel shortages

ONE can tell a story from different starting points. And the story can be told from the perspective of different protagonists; in which each one will embellish their narrative to make them feel they are better people than they really are. And that is the sense one gets from watching the protagonists of the oil shortage saga on prime time television.

One thing is for sure. The crisis did not begin with petrol pumps in Punjab drying up.

And it will not end with the arrival of vessels bringing fresh supplies. In fact we may not see the back of this crisis for a long time. But a story has been spun to prevent us from getting to the bottom of this malaise.

For now, PSO (and the petroleum ministry) has been made the fall guy. This story begins on Jan 1 when after the price reduction the demand spiked; it was not foreseen and neither had sufficient supplies been arranged for. The tipping point had arrived at which a couple of million motorists would switch fuel from CNG to petrol.

The story went on that the oil marketing companies (OMCs) were required to carry statutory reserves. They did not. And Ogra, the oil and gas authority, failed to regulate or enforce. Ogra should have realised that OMCs and dealers will skimp on buying and holding stocks in a falling market. To make matters worse, a refinery went out of action for four days. Consumers went into panic, the media fuelled the frenzy. And the shortage arrived.

For the sake of argument, let’s suppose PSO had been carrying three weeks of reserve. That the tipping point to switch from CNG had not arrived. The refinery hadn’t tripped. Was all else well? Would the crisis not have happened, even if a few weeks later? Would PSO’s cash flow position, its credit with banks and suppliers, its ability to sustain imports, have been in any better shape?

The story also does not explain why the furnace oil stocks depleted. Was there a spike in demand here too?

And this is where it starts running into problems of credibility. Surely there is more than is being told us.

Now with PSO as protagonist what is the story? Was PSO not crying out all of last year for its receivables due from the power sector to be paid because they were hampering its ability to import fresh stocks? How many times, in how many meetings and through how many letters was the issue raised?

Did the finance ministry and the cabinet’s Economic Coordination Commit­tee not foresee an impending supply chain disruption? The finance minister has stated it’s not a “financial issue”. Right.

The country cannot import fuel because LC limits have been maxed out and it’s not a financial issue? What is a financial issue then?

So when they sat around the table, something had to give. A story had to be spun. One would be let off the hook. Another would apologise. A committee would be made as would a promise of fresh supplies in the days to come. End of story.

The character deleted from this story was the power sector. Furnace oil is what straddles the power and petroleum sectors. And this is really a furnace oil payment cycle crisis.

Furnace oil accounts for almost half of our fuel import bill. A third of all our electricity is generated by burning furnace oil. And while there is no crisis in other products which are sold on cash and on which PSO and other oil marketing companies make a neat profit margin, furnace oil is what causes them cash flow difficulties.

The previous PPP-led ruling coalition had pumped Rs1.5 trillion into the power sector to cover for losses caused by inefficiencies and theft.

But it could not muster the political capital necessary to undertake the painful power sector reform during its tenure, especially as oil prices were going through the roof. The present government injected another Rs500 billion at the start of its term into a sector that was hemorrhaging nearly Rs1bn a day. But because the root causes were not addressed, the hemorrhaging continued and it’s piled up again.

Apart from the inability to pursue reform there is another story about institutional breakdown. And yet another about the management style of this government. But I will leave these for later.

What will happen now? A tranche will be released. Some or all of the circular debt of Rs600bn will be settled. Petrol supplies will resume.

Furnace oil will also be procured on emergency basis. We will tide over the immediate difficulty without addressing the underlying malaise. Until another story develops. More on that later.

2014 – Dawn Media Group