Profit E-Magazine Issue 212

Everyone aboard the solar express?

By Profit energy

You would think that the announcement from any govern ment anywhere in the world that they were installing 10,000 MW of solar energy and enter ing the clean energy into the system would be received as welcome news. And in Pakistan, that was the initial response. After all, energy prices have skyrocketed in the last few months and one of the reasons behind the substantial increase has been rising oil, coal, and gas prices in the international market.

This is true especially when it comes to thermal IPP’s. Our major dependence is on imported fuel and electricity rates are substantially orchestrated with any variation of fuel prices in the international market. Another factor to consider here is that since the electricity tariff of IPPs is in dollars, the depreciation of the rupee has also added to misery during this period. As a matter of fact, fuel cost per unit of electricity was Rs 6.4121 in August 2021, which amidst high fuel prices has reached a level of Rs. 10.05 in August 2022. Had there not been some conservation measures by Govt to curtail imported fuel-based power generation along with some breather in demand due to floods, it was a high chance that this component might have reached 12 to 13 Rupees per KW.

Add on top of all of this capacity trans fer charges, transmission charges, market operation fee and GST and the end result is ultimately what we are observing — very high electricity bills. Take an example of the latest applicable tariff of IESCO published on 1st August 2022, Unit rate for domestic consum ers above 700 units is 31.12 & for 33.23 for Peak time consumption for TOU meters. This rate is without FPA, GST or any duties.

So when prices are looking skywards, is the solution also not up in the sky? Solar ener gy provides a breath of fresh air to our energy mix since it is clean as well as indigenous and not wont to the fluctuations of the internation

al market. However, after the initial enthusi asm it has become clear that matters are not that simple and the response has been mixed.

The story started on September 14 2022, when the federal government in an investors attraction session announced salient features offered to investors for its landmark initiative of 10,000MW solar power addition in the grid system. These features raised a lot of eyebrows about an initiative which had previously been acclaimed by all as a very attractive initiative for our electricity mix. \

The real problem with our electricity market is a lack of competitiveness induced via long term Power Purchase Agreements.

While hese long-term agreements may or may not have seemed competitive at the time of signing, they have over time become the white elephants of our power system. The evolution of external factors such as improved technology and fuel prices further exacerbate the problem.

Take the example of Quid e Azam Solar power park, which was offered with a refer ence tariff of 17.6365 in Rs per KWH in 2014 and its current tariff rate is 24.3394 Rupees per KWH. This rate was a bit higher back in 2014 but if we consider the current day per KW rate of Solar power generation , those tariff rates are totally absurd to say the least. And the rea son behind this is that PV solar technology has been totally transformed and its prices have decreased rapidly in the last five years.

The same worry has been exhibited by a lot of stakeholders in the energy sector with a fear that the government is going to commit the mistake of Indexed tariff and long term guaranteed returns. This approach is already a major contributor to the genie we call “Circular debt”. Additionally, as per IGCEP 2021-30 approved by NEPRA in September 2021, we already have a committed capacity addition of 22,500MW in next 9 Years which is in addition to this 10,000MW addition. So, the Government has to reasonably analyze & assess this addition of capacity in our system in a way that it is in line with our future projections and must ensure that we don’t end

up with too much capacity burden.

In all this, another controversy emerged when some government officials mentioned that the buy back rate of Net metering should be rationalized to counter the aspect that the burden of net metering is borne by poor consumers who can not afford net metering. It was also hinted that net metering should be considered as a facilitation and should not be used as a business. Additionally, it was also highlighted that as per the projections, installed net metering capacity will reach 3,600 MW by 2027 ultimately resulting in a loss of PKR 100 billion to power companies. There was an abrupt & severe response from net metering users as well as professionals associated with the energy sector. A few people termed that rather its Govt which is `buying electricity from net metered consumers at Rs 12.95 in day time and selling it back to the same consumer at 33.23 Rupees.

We would like to mention that assumptions of both sides are too much hyped and misaligned with reality. Fact is that there is no specific fixed unit rate of net metering by distribution companies. Rather NEPRA has issued a very clear guideline for net metering consumers that any export

adjustment to grid will not include adjustment of variable Charges for Peak time, fixed charges, FPA, Duties or levies and subsequent ly buy back rate is adjusted accordingly. It is due to this reason that a separate TOU tariff is issued for 3 Phase meters which is higher than normal single phase consumer’s tariff. Additionally, as per MOE Tweet in June, 2022 total net metering capacity in Pakistan (except K.E.) was 419 MW & K.E has installed net metering capacity of 89 MW which means we have just crossed 500MW mark of net metered system in more than 5 years of net metered regime. So, the projection of 3,600 MW via net metering also needs some reconsideration.

On the other hand, electricity suppliers via net metering systems need to understand that electricity generation from solar panels is intermittent, however the grid isn’t. And to en sure this reliability Grid creates a pool of different energy sources also called “Energy Mix”. If this pool is for a short period or if Grid has excess/variety of generation sources that its demand, it opts for an “Energy Pool”. However, for a longer period of reliable electricity supply a “Capacity Pool” is introduced. All these measures of reliability have an added cost. So this assumption that we sell at 12.95 Rs & buy at 33.23 is neither valid nor realistic. n

By Abdullah Niazi

Thebulldozers came at the crack of dawn, and they came with no warning. As they rumbled through farmland with the watery September sun at their backs, they were accompanied by a small army of private guards and officials from the Ravi Urban Development Authority (RUDA). Tenants and landowners that farm the land watched on with resignation while their crops were destroyed and waterways blocked.

For the past two years, what was a quaint chunk of farmland away from the humdrum of Lahore has been the site of a cold war between the state and an agrarian community that has existed for generations along the banks of the Ravi. The moment those bulldoz ers arrived on the horizon, however, the cold war was over. This was an invasion. Since then, the bulldozers and guards have reappeared almost everyday to level crops and stop anyone from harvesting.

Under dispute are roughly 4,000 acres. For the farmers who live here this area is Ferozewala, a rich swathe of agricultural land directly fed by the Ravi and lush with guava orchards and seasonal plantations of maize, wheat, pumpkins, and other cash crops popu lar in farmlands close to the edges of Lahore’s peri-urban sprawl. For the officials of RUDA, it is Sapphire Bay — the location for phase one of the Ravi Riverfront Urban Development Project. And since they claim that the land is theirs, legally acquired and possessed, they are now within their complete rights to bulldoze and bully as they please.

The Ravi Riverfront Project is many things. At its best, it is a vain, bloated, misguid ed attempt that many environmentalists and hydrological experts have called an impending ecological and social disaster. At its worst, it is an uncaring attempt to turn the Ravi and its embankments into a playground for real estate developers that intend to treat it as a cash-cow for at least the next two decades.

For better or worse, it has become a bone of contention with political undertones. A pet project of former prime minister Imran Khan, it was declared illegal and unconstitutional by the Lahore High Court last year and has recently been given reprieve by the Supreme Court. That verdict in addition to the PTI back in charge in Punjab may be what is behind the latest attempt by RUDA to seize lands that they claim they have legally acquired and which the owners of these lands say have not been.

Largely forgotten in the midst of this tussle is the Ravi itself. After all, the project will have an impact on the fate of the river,

and along with it all of the people who draw their livelihoods, homes, and identities from the river. Profit met with farmers, landowners, hydrologists, engineers, lawyers, and activists as well as RUDA chairman Imran Amin to understand what is going on in Ferozewala right now and what will become of the project. To understand it entirely, we go back to the very beginning.

Origins The

idea for a riverfront project on the banks of the Ravi is not a new one. In fact, it was first proposed as far back as 2006, and underwent a feasibility study in 2013 under the PML-N government. The idea has long been a lucrative if elusive pipe-dream. Lahore, as many are aware, has swelled up and its urban sprawl has seen it become one of the most polluted cities in the world which regularly tops the global rankings for the worst air quality.

Decades of unbridled real estate devel opment, unsustainable horizontal growth, and massive coal power plant projects in adjoining cities have left the ancient Mughal capital on the path to being unlivable. There is much that could be done to solve Lahore’s prob lems. For starters, a viable network of public transport could reduce the city’s growing traffic congestion and restrictions on real estate development and the encouragement of vertical growth could help contain the sprawl. Investments could be made for forestation and an overall plan to make the city more high-density, more walkable, and most importantly more liveable.

Ideas like the Ravi Riverfront Urban Development Project are the sort of sweeping solutions that populists like to extoll. Essen tially, the Ravi riverfront is the plan to make a new city from scratch. The project would be Pakistan’s second-largest planned city after Islamabad, covering an area of 102,074 acres, catering to a population of up to 15 million people. It is an ambitious undertaking — one that is born as much out of a sense of frustra-

tion with the state of our urban centres as it is out of necessity. In fact, in a comprehensive and eye-opening article published in Dawn back in June 2021, it was pointed out that the development of new cities and riverfront projects is not unique to Pakistan, and that such projects and several new cities have been planned across Asia and Africa in recent years.

It is essentially a desire to start from scratch. To plan and control and build a city with the benefit of hindsight. The foundation rock for the utopian riverfront project was first laid in 2019 with the passage of the special legislation that established RUDA. The author ity would not work under any other body in or related to Lahore, and would have complete control over the project. In fact, the Lahore De velopment Authority (LDA) and similar bodies in Gujranwala and Sialkot would be subser vient to RUDA. So complete were the powers given to RUDA that not only was the authority entrusted with the entire responsibility for the project from planning, to acquisition, to development that the legislation which created RUDA granted the authority and its employ ees immunity from all legal proceedings, and “no court or other authority” can “question the legality of anything done or any action taken in good faith under this Act, by or at the instance of the Authority.”

The court cases

Fromthe get-go, the warning signs were present. The law that had created and empowered RUDA seemed to go beyond reasonable limits because of the lack of accountability that the authority had to office. By early 2021, when the pro ject was in its early stages of acquiring land, troubles began to rise when local communities resisted selling their lands to the state after which RUDA announced that it would feel free to acquire the lands by force — something that article 4 of the special legislation that RUDA created allowed. The matter went to court. In January 2022, Justice Shahid Karim of the

“Everything RUDA has ever said is a lie. It is nothing more than a yateem khana for retired brigadiers. This is nothing short of a brazen land grab. This is complete horseshit.”

Ahmad Raffay Alam, lawyer

Lahore High Court (LHC) in a 298-page long judgement declared that the scheme was “unconstitutional” on the grounds that it lacked a master plan.

Justice Karim said that the RUDA failed in preparing a master plan in accordance with the law as “all schemes are under a master plan”. The court noted that proper procedure was not adopted in purchasing agricultural land for the Ravi Urban Development project in Lahore and Sheikhupura, therefore, it declared the practice of acquiring the land through amendment in Section 4 of the RUDA Ordinance “unconstitutional”. RUDA was barred from acquiring land for the project.

The then prime minister Imran Khan immediately visited the project site and announced that his government in Punjab would challenge the verdict in the Supreme Court. Less than a month later in February, the Supreme Court threw out the LHC’s detailed verdict after less than 10 days of hearing and deliberating on the matter. The two-judge Supreme Court consisting of Justice Ijaz-ulAhsan and Jus¬tice Mazahar Ali Akbar Naqvi held that RUDA could continue working on lands it had already acquired, but barred it from undertaking any work on the ground be yond the lands that had already been acquired, possession taken and compensation paid.

“It is brazen land grabbing”

“InDecember 2021, the Lahore High Court passed a judgement that declared the RUDA law illegal and unconstitutional. In January 2022, within 10 minutes, the Supreme Court put a stay on the very well reasoned and detailed judgement passed by the LHC. Even then the SC held that RUDA could only operate on the land that it had already acquired, paid for, and possessed,” explains Ahmad Raffay Alam, a lawyer and activist that has been working on the ground with those affected by the project. “This is nothing short of a brazen land grab. This is complete horseshit. And you can quote me on that.”

The words are harsh but they may ring true. To hear Alam speak, the project does not have anything to do with containing Lahore’s urban sprawl or for that matter with once again making the Ravi a bastion of life. “It is a very simple ploy,” explains Alam. “By form ing RUDA they have a body on their hands that is empowered and can under article 4 acquire land by force. When land acquisitions happen, the government is only really obliged to acquire this land at a DC rate. This rate is significantly lower than the market value of the land. These developers will buy the land cheap at the DC rate, develop it, sell files, and make huge profits off this unconstitutional lie.”

It is worth wondering a little what this means, because as we will see further ahead DC rates, market rates, and everything in between are a major talking point for the stakeholders in this entire situation. Pakistan currently has at least three different ways to evaluate real estate prices. There is the DC rate, which is usually almost 10 times lower than the actual market rate, and then there was the FBR valuation rate which was around three to four times less than the actual market rate. The DC rate is the official price that is quoted on transfer documents and the likes. Since the government charges taxes on the sale and purchase of property as a percentage, it is in the interest of both buyers and sellers to quote a smaller price in the documents and exchange whatever the real value was determined off the books.

This means that whenever the state requires land and undertakes acquisition efforts, they compensate people through the DC rate which means they end up getting shortchanged. RUDA claims that they have figured out a mechanism to solve this problem. “The board of revenue is responsible for the ac quisition payments and they pay in accordance with the DC rate. In this area, the rate of land was Rs200,000 per acre for lands that are right on the bank of the river and prone to becoming a part of its course, and Rs 400,000 per acre for the land a little further out,” says Imran Amin, chairman of RUDA.

However, since RUDA is an empowered organisation, Amin claims that they came up with a system whereby landowners that felt they were not compensated enough would be given developed files for plots in the riverfront project. “We have announced the file price of the plot at Rs500,000 per marla and for this we have also taken a commitment from these people that if their plot file is not sold in the market for one year, then the authority will buy it itself. This means we are buying land worth Rs800,000 per acre for as high as Rs3.7 million per acre,” says Amin.

There is however an issue with this logic. For starters, all of the land values being determined here are being done by RUDA themselves. To hear the landowners speak of it, they first underestimate the price of the agricultural land and then overshoot estimates of what their files will be worth in a year — not to mention there is no knowing whether the project will be successful or received well within the market.

It must be said that this is deeply ironic. As has been mentioned earlier and pointed out on other occasions ad nauseum, one of the big gest reasons for Lahore’s urban sprawl is the impunity with which the real estate industry develops unnecessarily and ties up capital and useless plots and plazas. The same real estate craze that has led Lahore to these unfortunate

circumstances is what is currently driving the Ravi Riverfront project. The same real estate tactics that can be found in Lahore can now be found at the edge of the Ravi.

“Everything RUDA has ever said is a lie,” says Alam. “I am saying this openly: they are thieves that are exploiting people. There is nothing about controlling urban sprawl; this is simply minting real estate money. The Ravi Riverfront Urban Development Project is nothing more than a yateem khana that houses retired brigadiers and others of the same ilk”

In all fairness, Amin claims that the farmers protesting RUDA’s movements are landowners unhappy with their compensation trying to drive up the price. When asked about the direct complaints of some of the affectees, he refuses to comment. What he does say, however, is that RUDA has been good to these farmers and they are now trying to blackmail them.

“The perception of bulldozers running on agricultural land is being misconstrued and attempts are being made to politicise it. This land belongs to us. Farming on it is illegal. Last year, since the case was pending in the court, we allowed people to grow crops and this permission was given by the authority, but the BOR said that we have made payment for this land and after that we have to take possession of it in the form of Clear-land.”

There is an issue here again. For starters, RUDA could not have ‘allowed’ anything after the LHC’s verdict since its own existence had been called into question by the ruling and it had been told to cease and desist. On top of that, the farmers in this area claim that pay ments have not been made to them — which would make it in violation of the recent stay given by the Supreme Court which restricts RUDA to work only on lands that they have already acquired, paid for, and possessed. And that is where the current resistance is being put up.

The state of Sapphire Bay

Westarted with the bulldozers, and now we come back to the people standing in front of those very machines. Large, talkative, and shrewd Sajjad Warraich would like to cut the image of the rural rebel. He is one of the largest landowners in the area that RUDA claims is earmarked for phase one of their riverfront project called Sapphire Bay. He has also been one of the most vocal. Sitting on plastic lawn furniture on the veranda of a white washed dera, he meanders in great detail. There is nothing quite as appetising for an old man with stories to tell than a captive audience.

But in the midst of languid extolations

on the Russia-Ukraine war and anecdotes from his youth he holds one staunch claim — that his land is being illegally occupied by RUDA. Warraich claims that RUDA is acquiring more farmlands forcibly and in violation of a recent order of the Supreme Court instructing them to only continue development on land they have already acquired and paid for.

“This land that you see here is what feeds all of Lahore. Fresh vegetables are transported from here to markets in the city. At a time when so much farmland has already been destroyed due to the floods, does it make sense for RUDA to be doing this? And what for? These are all intimidation tactics and nothing more. It does not matter, we have decided not to allow anyone to take our land from us,” he says.

The sentiment is widespread among the tenant farmers. In fact, the words that many of Warraich’s tenants use are eerily similar to his own. Warraich does not hide that he has tried to unify and instruct these farmers on what is going on. The farmland has clearly been ravaged. Bulldozer tracks, knocked down walls, and uprooted crops dot the place. Many have lost their yearly investments.

Warraich claims that their land has not been paid for and no agreement was reached over it. “During for the last few days, they (Ruda people) have suddenly appeared and started development work at our land by destroying the crops, vegetables, fodders etc on hundreds of acres,” he said, criticising the government for destroying vegetables and crops at a time when the crops at one/third of the agricultural land has already been ruined by massive floods. “It is really a great tyranny against us as well as with the country,” he said in a recent Dawn report.

Amin has said in response that RUDA has already made necessary transactions with the Board of Revenue which will disperse the final payments, and that all land in the Sapphire Bay area has been completely acquired and hence is fair ground for development. However, the landowners are holding their own and are taking the matter up with the Su preme Court again, hoping that the court will look at RUDA’s actions as contempt of court. At the end of this, of course, there is one other stakeholder that has possibly got the least amount of attention and which has the most to lose —- the Ravi.

into an exercise in real estate development and a battle between agrarian natives and the bigbad cement jungle trying to come in and build a city on their land.

But behind the project was a concept, and it was not just to create another city to give Lahore some much needed respite. The concept of the riverfront was to create a city along a raised riverbank. The end-goal was to revitalise the Ravi by building a series of barrages and rechanalising it.

Taken at face value, the riverfront project is an attempt to exert control over the Ravi. RUDA claims that to avoid flooding, revive the Ravi, and ensure more equitable water distri bution it is necessary to recanalize the river by building a series of barrages and raising its em bankment walls. To afford the project, they are planning and developing the riverfront project which will fund work on the river.

In this vein, RUDA has regularly tried to portray itself as an environmental necessity. On March 21 this year for example, soon after the SC’s verdict, RUDA claimed that the water in the Ravi was toxic and any produce grown through it was bad for the health. It was something Amin pointed towards in his interview with Profit as well. “According to international reports, the Ravi River is highly toxic and when its water samples were taken, a large amount of pharmaceutical waste and toxic substances were found in it,” he said.

“Similarly, if we talk about our environment, every year we face problems like air pollution and smog. Then the forest cover of the city is only one percent. Forests have either been encroached or where there are not enough trees. Now even if vegetables are grown on Ravi’s side, they cannot be healthy because there is not a single mechanical treat ment plant in this entire bench.”

Yet for all its claims that Ruda is a fix-all to save the environment, the research collected is doubtful. “These are all excuses. Hands down all of them. They are claiming that they are raising the embankments to make sure that the river can carry more water to avoid flooding for example. This is ridiculous hydro logically speaking. This means that if there is a high amount of rainfall, as there was this year in Sindh and Balochistan, the walls will be so high that water will begin to collect outside the walls and have nowhere to go — flood ing the fields on either side,” says Dr Hassan Abbas, a hydrologist with extensive work on dams.

no solution and all of these claims are mere eyewash. Recanalisation is absolutely wrong as a concept, and this is all an excuse to give development groups and real estate moguls stakes in this area,” he claimed.

This is something that has been pointed out by Profit before. Building barrages and controlling the ebb and flow of a river can often have detrimental effects on a river. In a story titled The fate of the Indus, it was pointed out how dams and barrages built on the Indus have generally been identified as a major reason for the end of communities in the deltaic region dependent on the Indus. One example is Keti Bunder, which lies to the east of Karachi. This was once a bustling port and trading centre with a population of 40,000, but is today a ghost town with most of its pop ulation moving to more economically viable areas. Shah Bunder tells a similar story, as do several other port towns which once dotted the coast.

Meanwhile, a 2021 report commissioned by RUDA found that much of Ravi City’s impacts on ecological resources would be long-term and irreversible. And as the earlier mentioned Dawn article pointed out, that “in spite of this, the EIA report concluded that the project will have an ‘overall positive impact’ on the entire ecosystem, and deemed the strategic development plan of the project ‘feasible’ at the proposed location, as long as the recommendations made in the report are implemented in ‘true spirit’.”

“One struggles to reconcile the optimism of the Ruda EIA with the findings of a feasibili ty study of a similar Ravi project considered by the PML-N government in 2013. The study concluded that there was no water in the Ravi to make its riverbed an attractive real-estate proposition.”

Conclusion

Atthe core of the issue is the ethos behind the project. And no, we are not at all talking about the realities. Currently, the project has morphed

“This is an unmitigated environmental disaster. When you start to mess with a river you mess with nature. Building excessive barrages changes its natural course. Trying to control it is not going to work. Then there are also dams on the Ravi, and if they ever have to open those dams a situation like the great floods of 1992 might occur again. They have

Theproblem with the Ravi project is that it has largely remained unplanned and has seemed more inter ested in creating real estate develop ment opportunities rather than building a city. It would be mawkish even to say that RUDA has tried its best to promote and make work a largely flawed concept. In the kindest possible terms, the Ravi Riverfront Urban Development Project is over enthusiastic to fix the very real problems of Lahore with the “new is always better” philosophy. In straighter words, it is a real estate development project in the garb of an environmental and urban necessity that will end up harming not just people, communities, and farmland but an essential river in the longrun. The rest, as they say, are all details. n

Additional reporting and interview of Imran Amin by Shahab Omer.

“An unmitigated environmental disaster”

OPINION

Ammar H. Khan

Debt, Climate, and Moral Hazard

Pakistan has an external debt of more than US$ 99.9 billion, of which US$ 9.2 billion is owed to the Paris Club, and roughly US$ 41 billion is owed to various multilateral institutions including the International Monetary Fund (IMF), about US$ 18.2 billion is owed to private debt holders, either in the global capital markets, or through commercial bank borrowings, while the remaining is owed to other bilateral creditors.

Following the great floods of 2022, there has been an accelerated movement calling for climate reparations. Although a hard sell, a quick win here is a reprofiling of existin g external debt, such that Pakistan is able to get sufficient fisca l space to redirect its efforts towards, relief, rehabilitation, and reconstruction of the flood-hit areas. Potential economic loss is expected to be more than US$ 30 billion, which includes loss in economic output, as well as damages, and reconstruction costs. The country has been consistently running twin deficits for more than a decade now, and at this stage it doesn’t have any fiscal room to spend on rehabilitation, and reconstruction, potentially leading to disastrous social and economic outcomes for more than 30 million people affected by the floods.

A potential reprofiling of multilateral and bilateral debt, which makes up more than xx percent of total external debt, would delay any potential repayments, thereby freeing up space for investment in rehabilitation and reconstruction during the current, and potential subsequent fiscal year. However, it stil l

remains to be seen whether bilateral sovereign creditors, such as China will be reprofling any debt, other than the usual rollovers. Similarly, there is also substantial Chinese project debt assumed under the umbrella of CPEC – the same may also not be restructured at this stage.

Although the reprofiling would create fiscal space, it would also create a moral hazard, as the foreign currency saved could potentially be used to fund excess consumption, and import luxury automobiles, and other luxury goods, thereby using precious foreign currency saved in the pro cess. In effect instead of utilizing the funds saved for build ing back better, previous experiences suggest that there is a high likelihood that the same is used to fund conspicuous consumption of the country’s elite, while those adversely affected by climate change barely get to see any of the funding raised, or saved. As elections draw closer, the obsessions to maintain PKR against a narrow range against the US$ may also materialize, as the central bank burns precious foreign currency to maintain a certain peg, thereby depleting foreign exchange reserves in the process.

This time is different. The last time such shenanigans were leveraged to support the value of the PKR, interest rates in US$ terms were close to zero. Meanwhile, as monetary policy across the globe turns hawkish, utilizing the same strategy would be increasingly expensive, and would eventually lead to a very quick disaster. The global macroeconomic environment has changed, but the realization of the same does not seem to be in place among local policymakers.

The writer is an independent macroeconomist and energy analyst.

A debt relief is what the country needs at this stage, even if that is a moratorium on repayment for a year or two. However, if the opportunity is missed, and necessary cli mate resilient infrastructure is not developed, or the capital is reallocated to bridging deficit for elite consumption, then it will be yet another opportunity missed, and a glaring example of moral hazard. If policy makers don’t get their act together, then it will be yet another opportunity lost to build back better, and we will just have more debt, and even more constrained resource set.

This is essentially about the country’s survival now, or even b reaking out from the bad governance-growth loop. If the same continues, then there is no hope. We will have anoth er external liquidity crisis within the next 12 months, and the incoming government will be knocking at the IMF’s door yet again, like it’s groundhog day.

OPINION

Tapping into the Green Climate Fund Khurram Lalani

Pakistanis suffering from one of its worst natural calamities. In all the pain and agony, a viral video of a small boy pro vides hope against hope. His hair grubby, his clothes dirty; he takes out thirty rupees out of his pocket and deposits them in a relief camp for flood victims. His total earnings of the day: sixty rupees.

What Pakistanis have learned this monsoon is that the ravages of floods are severe and know no boundaries. All four provinces were affected – some more than the others. In parts of Balochistan, it rained incessantly; for more than seven days a week where it rarely rains for a day or a two usually, not only destroying crops and live stock but also shattering hope, optimism, and confidence.

The losses have been outrageous. We lost cotton crops spread over 1.4 million acres, rice standing on 0.6 million acres, and dates on 0.1 million acres. 7 per cent of our sugarcane, and 50 per cent each of sesame, tomato, chili, vegetables and onions have been destroyed, which will affect already rising inflation. Almost 900,000 livestock have perished so far, leaving small farm holders with no real assets.

Agriculture is not the only affected sector. In education, around 17,000 primary, secondary, and higher secondary schools for boys and girls have been destroyed. In addition, approximately 5,400 schools are being used as shelters for displaced people, preventing school go ing children from resuming education until all refugees are relocated.

The health sector is even worse. So far, more than 1,500 have died while 15,000 are injured. An estimated 6,400,000 people, including 3,000,000 children are vulnerable to outbreaks of cholera, typhoid, measles, leishmaniasis, and HIV; 52,000 people are suffering from diarrhea and around 650,000 pregnant women are stranded with no healthcare facilities. More than 1,000 health facilities have been damaged by floods, with 180 completely destroyed.

The global response has been muted thus far. However, the architects of climate finance remind us of the availability of funds from the Green Climate Fund (GCF), which can be accessed by the Least Developed Countries (LDCs) like Pakistan. The progress on this so far includes four funding project approvals for a total committed funding of $131 million since its inception. Actual disbursement fig ures are even lower, around 20 per cent, which is paltry as compared to GCF’s own climate ambitions and our climate vulnerability.

In an ideal scenario, the most vulnerable countries should receive more funding. Not with the GCF, however. The finance is

The writer heads a development consulting firm Resources Future and is an energy and climate finance expert

competitive which means that countries with higher capacities can tap into the GCF space more than the others (such as China and India). On the contrary, countries susceptible to climate change are the ones that have weak governance systems, rely on inadequate and outmoded disaster preparedness levels and ill-equipped technical and financial capacities to work on long-gestation project proposals and execution. This means that vulnerable countries continue to lag, especially for mobilising investments for climate finance activities.

Let’s pick up a few statistics. In Pakistan’s case, the GCF has taken on average 538 days to process an application in the pipeline phase. This is roughly a year and a half per project.

Once the project is accepted, the GCF board’s approvals follow. In Pakistan’s case, the GCF took another 288 days on average to process ap provals. Overall, this has meant that a total of 826 days were spent to get one project past the approval line. This does not factor in the work that a project proponent does on its own before submitting anything.

These numbers are not standalone for Pakistan. Almost all countries vulnerable to climate change see similar profiles of project approvals from the GCF. Bangladesh, for instance, has seen an average of 608 days per project in the pipeline phase and another 580 days in the approval phase; Sudan has numbers of 1,168 days and 190 days; Malawi 407 and 381 days, while one project in Myanmar usually takes 1,172 days to be processed and 159 days to get approved. The most vulnerable countries to climate change remain the most vulnerable countries to access climate finance also. For this to change, two things must happen. First, the GCF needs to speed up its approval timelines, especially for vulnerable countries. Vulnerable countries just don’t have the time for an elaborate ap proval process, bureaucratic delays or to run back and forth for document screening and validations. In a typical government bureaucracy (which GCF is beginning to look like), this may well be a norm. This is suicidal for countries facing imminent climatic catastrophes.

One problem here is the over reliance of former and current bureau crats in its hiring structure. All of the Fund’s senior positions represent government bureaucracy appointed by national governments as their representatives. There is nothing wrong with an appointment of a bureau crat; however, they often come with a generalist training and are not the most suited decision makers when it comes to climate finance, transaction structuring and blended finance deal flows. To tackle the size and scale of climate finance, some sort of blitz-scaling is required. Some new iterations, trial and errors, speedier processes and faster timelines. Time for business as usual is receding fast.

Second, not everything needs to be done by the GCF alone. Vulnerable countries need to ramp up their climate actions as well. If one third of Pakistan’s is submerged then a response must come from within too. Today, more than ever, its ecological integrity is at the cross-roads with its territorial integrity. Any imbalance between the two will only worsen the situation from hereon. What it needs to do to tap climate finance is more than obvious. Lead technical and financial capacity building through enhanced institutional capacities. Invest time and resources on quality feasibility studies, participate and advance its climate adaptation plan and start investing in critical infrastructure. Small steps will make a difference but the time to take those small steps is today. That boy may have given the most he could that day. Now, it is time our leadership’s time to stand up for the cause. n

By Daniyal Ahmad

Youmust have seen it on the roads. A massive multi-purpose-vehicle (MPV) with a sleek design. The KIA Carnival is a car that fits more categories than it should. The 11 seater monster is essentially a van - not even a soccer-mom min ivan but simply a large car meant to transport around a dozen people. Except its front facelift and interior give it the look of a cushy SUV.

The car defies odds and expectations in terms of design. With this one car, KIA has taken aim at a number of different categories of buyers, including families, up-market consum ers, and commercial vehicles.

However, what makes the case of the Carnival interesting is not its design or utility

– but its pricing, and the way that pricing works. For a completely-built-up (CBU) car, in terms of features provided, it is incompara ble in pricing to other ‘luxury’ CBUs. This is all thanks to the way Pakistan’s customs are levied, and perhaps the greatest ingenuity in the automotive industry.

The current Carnival also builds upon its predecessor of having the title of being one of the very few CBUs that could be imported in the midst of the national import ban. To add to its accolades, it was also one of the very few CBUs to have continuously dodge an incumbent government bent on stamping duties on cars. Albeit, neither of the two were due to its own doing but a stroke of sheer luck. Talk about living on a prayer.

What are we on about here? Well let’s start off with the most interesting bit.

The KIA Carnival’s tryst with customs

Thecrux of the matter relates to how Pakistan’s customs are levied on CBUs. The KIA Carnival has managed to play four-dimensional space chess whilst the rest of the industry was busy playing checkers.

But first, what exactly is a CBU? Well, cars in Pakistan are normally of two varieties; completely-built-up (CBU) units and completely-knocked-down (CKD) ones. The latter are cars that are assembled in Pakistan whereas the latter are imported entirely from abroad. Needless to say, the State incentivizes companies to focus on the latter rather than the former.

How does the government incentivise

The Carnival looks to take on the big boys of the automobile market on its own terms

this? Duties. Customs duties, regulatory duties, federal excise duty, income tax, sales tax. Let’s just say, if they could, they’d ban the import of CBUs altogether. Which they did actually. Our protagonist, however, managed to escape to come out relatively unscatherd. We’ll get to this as well.

Why does the State do this? To conserve forex, promote industrialisation, technology transfer, and a myriad of other reasons. However, there are times when companies simply cannot build some cars in Pakistan. In such situations it is relatively easier to just import the car and sell it with the duties attached if the company believes that there is enough demand for the car.

From a company perspective, what’s important here is that automobile importers have had to perform portfolio gymnastics to understand how to curate their ideal CBU basket to balance duties and price. Until Lucky Motors cracked the code that is.

You see, Pakistan Customs employs a two-round structure to levy duties as they are dependent upon whether an automobile has a combustion engine, is a hybrid electric vehicle (HEV), or an electric vehicle (EV). This much is perhaps common knowledge given Paki stan’s enduring love for the Toyota Prado, and our shopping sprees for the Prius and E-Tron in the past respectively.

However, most of us miss one of the categories within the combustible engines section: commercial vehicles.

Now this may sound odd at first glance as to why we are equating the sleek KIA Carni val with something that we may associate normally with, say e.g. a Suzuki Bolan known as carry dabbas in our vernacular. The interesting part about this is that the KIA Carnival, or at least the one available in Pakistan, has a higher seating capacity than the Bolan and this is where Lucky Motors have worked their magic.

There are two categories of commercial vehicles per Pakistan’s Customs Code; motor vehicles for the transport of goods and motor vehicles for the transport of ten or more pas

sengers, including the driver. Guess how many the Carnival has? 11.

It is this particular nuance that allows the KIA Carnival to be subject to the lowest total tax incidence within the combustible engines section, and overall amongst all CBUs.

The story doesn’t just end there. Imports have been a hot topic for anyone following the economic turmoil over the past few months. The incumbent government, bent on stamping out imports to ‘fix’ the economy, banned imports outright in May. Imported cars in particular took the fall for being one of the major reasons for why Pakistan suffers from chronic balance of payments issues. German automotive companies even complained that the ban would strain bi-lateral relations between Pakistan and the European Union. Talk about not holding back.

But whilst companies and private dealers bemoaned the ban, everyone forgot to properly read the list of banned cars. The government had not included commercial vehicles in the list of banned cars. Now they, like most others, must have thought of the carry dabba or even the local pick-up trucks when they put the ban in-effect and not the KIA Carnival.

Talk about dodging a bullet. But as they say, when it rains, it pours. The Government revoked the import with Miftah Ismail saying “So, the choice is simple; we either use that money to buy cars or wheat. That we buy mobile phones or grain, or home appliances, microwaves and air conditioners as opposed to edible oil.” Furthermore, Ismail stated that he would levy the “maximum amount of permissi ble regulatory duties.” However, at this point, you’d think someone might have actually visited a KIA showroom. We say this because the Carnival escaped this as well.

Let’s take a breather and catch up. We’ll need it. To summarise, the government imposed an import ban that was not applicable on commercial vehicles which is the customs category for the KIA Carnival so it was never banned. The Government then revoked the ban with a sweeping set of duties to discourage the

purchase of CBUs. What were the duties?

Well, the FBR issued two notifications. The first one slapped a 100% regulatory duty on all luxury vehicles whereas the second one slapped an additional 35% customs duty of 35% for luxury vehicles. Now, what did the government define as a luxury vehicle? Well, everything above 1000cc. Our protagonist comes in at a nice 3,470cc.

We’ll give this to the government. They came close. They slapped a flat 7% additional customs duty as a sweeping measure across vehicles. However, where they missed again was Carnival's variety of commercial vehicles. The Carnival sits at a 6% regulatory duty that the government levied back in June, and then completely forgot about the category.

These episodes of luck are a movie on their own. However, what they realistically translate into is a much significantly more affordable vehicle than would otherwise be possible.

How much would the Carnival cost otherwise?

Whatwould be the price of a KIA Carnival if it ditched the last row of seats and was levied duties based on its engine displacement?

Profit looked at the Pakistan’s Customs’ Code and the Federal Bureau of Revenue’s (FBR) WeBOC platform to understand the mathematics behind the KIA Carnival’s esca pades.

Profit reversed engineered the prices of the GLS and GLS+ variants to understand the mathematics behind the KIA Carnival’s escapades. The GLS and GLS+ Variants retail for Rs 10.2 million and Rs 12.6 million respectively. Profit incorporated a gross profit margin of 10-15% when doing the maths. We chose the specific values for the range because we had been told earlier by Muhammad Faisal, President of the Automotible Division at Lucky

The Carnival was a good decision because of the improvements in road infrastructure. We saw a lot of people avoid air travel during covid and a lot of people with larger families preferred using the Carnival instead for inter-city travel. Many were buying the Carnival because of its comfort, its luxury, and its capacity

Muhammad Faisal, President of the Automotive Division at Lucky Motors Corporation

Motors, that 15% was a hefty margin. However, at the same time, we had been told by another industry executive that 15% was the margin that automotive assemblers aimed for.

In looking at the duties levied we utilised the Pakistan’s Customs’ Code and the Federal Bureau of Revenue’s (FBR) WeBOC platform. Profit found that the customs assessable value of the GLS could range from Rs 5.4 million to Rs 5.67 million depending upon the profit margin. Whereas the GLS+ ranged from Rs 6.7 million to Rs 7 million.

What is the customs assessable value? This is the price of the car that is declared for the KIA Carnival, or any car for that matter, at the port after which Pakistan Customs levies duties.

After obtaining the custom assessable value, we then levied the duties that are applicable on cars that have engine displacements exceeding 3000cc. This has a 3500cc engine for context, but we’ll get to that later. Levying the new duties increases the total incident of taxa tion on the KIA Carnival from 63.6 to 465.6%.

The prices for the GLS and GLS+ would be Rs 35 million and Rs 43 million respectively, if duties were levied upon its engine displacement and not its seats.

The difference, as you can see, is not just big. It’s huge. Lucky Motors have perhaps pulled the jugaar of ages with the KIA Carni val. Now none of this is illegal. It’s just smart business and Lucky Motors were able to pull this off, where others failed, because they had tested the waters with Carnival's previous iteration.

The only thing different this time around is that, whereas the previous (Grand) Carnival was perhaps simply a utilitarian vehicle. The Carnival is now an MPV in SUV clothing.

Welcome to the Carnival

In2018 KIA was trying to make its third entry into Pakistan - this time with Lucky Cement. This time, however, they came in with a blitzkrieg strategy of flooding the market with affordable cars. What was the first car they brought in? The Grand Carnival. It was a CBU that came with an extensive feature list, a seating capacity of 11, a 3,300cc engine, and an entry price of PKR 3.99 million.

Though derided by some as highly unfashionable, it was the Swiss army knife of vehicles. It was a people hauler, cargo carrier, mobile campsite, and could even improvise as a work vehicle for when a utility van was unavailable. It also drove more like a car than it's SUV and pickup segment counterparts, making it easier for some drivers to live with.

“The Carnival was a good decision because of the improvements in road infra structure. We saw a lot of people avoid air

travel during Covid and a lot of people with larger families preferred using the Carnival instead for inter-city travel. Many were buying the Carnival because of its comfort, its luxury, and its capacity,” recounted Faisal when asked about the Grand Carnival.

Faisal’s statement about the Grand Carnival’s success is likely to be true as Lucky Motors introduced its successors, and our pro tagonist, the Carnival in 2021. The update was in line with KIA international introducing the fourth generation of the line. The new automo bile brought with it a host of features that may have enticed Lucky Motors to import the unit directly as a CBU. These meticulous updates included an SUV-esque redesign, 3,470cc engine, cooled seats (foresight given our current heatwave), and a host of other features.

“The Carnival is a product for mass commute. It is a different category. It’s not like a Landcruiser, Prado, Audi, or BMW.” said Faisal. Notwithstanding the utilitarian nature of the KIA Carnival as a commercial vehicle –it probably is used by many for the intended purpose – the Carnival is more comparable to the aforementioned competitors than Lucky Motors would like to admit.

Let’s take the example of Prado and the Toyota Fortuner. The Carnival is wider, longer, has greater seating capacity, and even has worse mileage that is comparable to a certain elder sibling of the Toyota SUVs. Hint, it’s the Landcruiser. For all intents and purposes, it allows customers to feel like a Chaudhry Sb without breaking the bank like one.

The thing is that it’s not just Lucky Motors that thought they could take aim at the SUV segment with the Carnival; KIA Motors International thought so as well. The Carnival comes in various more premium configurations such as e.g. a 6 seat variant. These more premium models have had some success globally with a popular subculture for premium MPVs.

However, understanding the pricing

elucidates upon both the ingenuity of Lucky Motors and their constraints. It’s almost as if they are suffering from success with this move. They too know that they may never be able to import the other variants of the KIA Carnival that may benefit from the 11-seat models’ van guard efforts. As a result of this, the Carnival will remain a minivan in disguise and will have to continue operating within a niche.

Were all of the hoops that Lucky Motors went through to bring the Carnival into Pakistan worth it in terms of sales is thus the question.

Third time’s the charm?

Thething with the KIA Carnival is that it stays true to its MPV moniker in terms of determining whether or not it’s a success. What do we mean by that? Well, it’s all over the place in terms of any benchmark that could classify whether the KIA Carnival is a success or not.

Firstly, no one can really make a verdict on it other than Lucky Motors because there are no sales figures available for it. Lucky Mo tors is not a part of the Pakistan Automotive Manufacturers Association’s (PAMA) and is thus not bound to release sales figures. When asked about this, Lucky Motors told Profit that it is their company policy to not disclose sales figures.

It is because of this that we have to employ creativity to ascertain the success of the KIA Carnival.

One barometer for an automobiles’ success in Pakistan are wait times, and another is the on-money attached to it. For the uninitiated, these are characteristics that are associated with automobiles that are so high in demand that supply cannot keep pace. The applicability to CBUs, however, is usually difficult. They have to be imported, and subsequently do have

wait times. Usually multiple months at times.

The Toyota Hiace for e.g., a competitor to the Carnival in the sense of a commercial vehicle, has a wait time of 3 months. However, it also does not have any on-premium attached to it. The wait time is simply the time it will take for Toyota Indus Motor Company (IMC) to import the Hiace to and deliver it via any of their dealerships.

Profit called their local KIA dealership and found that this is also the case with the KIA Carnival. Dealerships are now taking orders for deliveries that will arrive by 2023. However, this was not always the case. The KIA Carnival was widely available over the course of the summer. A senior official at Profit purchased their own Carnival in March and recounting their purchase experience cited nei ther of the two to be present then as well. This was the case for the KIA Carnival from roughly November till earlier last month in August. So what gives?

There is one thing. The KIA Carnival has seen a price increase from Rs 9.19 million and Rs 9.99 million to the aforementioned Rs 10.2 million and PKR 12.6 million respectively from the end of last year till now. The importance of this in the local Pakistani automobile market is that price increases are a sign of an automobile actually doing well.

Remember how we said only Lucky Motors could pass the verdict on the Carnival? Well this is why.

Companies increase prices when they believe the customer is willing to pay the extra cost. Doubling down on this particular metric, Lucky Motors’ price increases for the GLS+ variant have equaled the increase in the value of the USD. At least from 1st December to 19th July, which is when the last KIA price increase came. The GLS, however, only increased in value by 10% over the same time period in comparison to the 26% of the USD and the GLS+. However, this is where the fact that the KIA Carnival lacked on-payments and queues actually comes to the rescue.

But before that. Let’s do a recap on CBU imports to catch up. CBU’s are imported into a country either through a private importer. Thus, necessarily it takes time for the buyer to actually receive their car. It has to actually be shipped from its point of origin towards Pakistan after all. But then one might ask how some people are able to get their imported cars immediately, say one from a nice fancy German showroom? Well, that’s because companies are able to predict demand in-advance at times and thus have inventory on-hand. Remember, how the KIA Carnival was always available throughout the time period that Profit found?

Unless Lucky Motors has hacked global shipping, the likely explanation is that they an ticipated our current economic turmoil. In par-

ticular, they probably anticipated the Rupee to depreciate against the USD, and decided to have buffer stock for the KIA Carnival to hedge against forex risk. Now Lucky Motors is no stranger to having buffer stock. It’s practically the pillar of their production policy that sets them apart from the industry. Profit speculates that they ordered a lot of KIA Carnivals.

So, when they did order them, they may have been able to meet most of their demand through their buffer stock alone. If we were to assume that any amount of buffer stock lasted into the months that Lucky Motors did increase their prices, then Lucky Motors would have absorbed the increase as pure profit. This would have brought them closer to the aforementioned 15% desired gross margin, if not push them even further above it.

This is unless of course they had perhaps the single best demand modelling on the planet from November till August, and have somehow suddenly lost that ability for some reason.

In discussing the Carnival, it would be remiss to not talk about the Toyota Hiace and the Hyundai Staria. The other two premium commercial vehicles available. These two are afflicted by the same problems that inhibit the KIA Carnival from becoming mainstream. The Staria and Hiace are more reminiscent of the conventional notion of what a commercial vehicle looks like. Think van. In such a direct comparison, the KIA Carnival is actually very successful.

Taking a shot at the KIA Carnival wanting to break out of the conventional MPV category would perhaps be unfair. The catego ry is not the most dynamic, even globally, and everyone wants to increase their margins on any product. This is also likely why the KIA Carnival has picked up more traction in Pakistan, and why it sought to appeal to variegated sets of customers.

However much the KIA Carnival may bejewel itself like an SUV, the matter remains that it is not one. Lucky Motors is also explic itly clear on the matter. It has certainly tried to play the part to attract additional customers. Its aesthetic does equate to bringing a gun to a knife fight when compared against the aforementioned vehicles in the same customs category,but it neither enjoys the sales figures nor the Pakistani automobile barometers of success akin to the Fortuner. It also lacks the cultural status in Pakistan of the Toyota Prado and Landcruisers, at least for now.

The story is somewhat similar against other competitors that the KIA Carnival supposedly does not take aim at. Even with our best guess this may be due to the fact that the Carnival is just not SUV enough amongst Pakistani consumers to warrant the hefty sums they pay. It remains on the precipice of the definition of what Pakistani’s would classify as a “bari gaari”. Maybe it's the Carnival’s height?

Not having a seat on the German and Japanese up-market table is neither a success nor a failure for the Carnival, depending upon how you look at it. The KIA Carnival is clearly the biggest fish in a small pond, but it’s unable to enter the far larger petrol-guzzling pond it wants to for additional sales volume.

The Carnival may need its own version of automobile bournvita for the additional height to add to its SUV-esque allure given how it seeks to conquer both the up-market and commercial vehicle category in Pakistan. However, whilst we say this, Lucky Motors has gone on to double down on the base that they have created by announcing an even more up-market variant of the Carnival. Lucky Motors will likely be playing catch me if you can with Pakistan Customs till they likely introduce one that can finally cement itself as the ultimate SUV replacement in Pakistan. Third time’s the charm? n

You’re not an industry, telcos told

A bid by telecommunications companies to change their power tariff from commercial to industrial shot down, and they’re not happy about it

By Ahtasam Ahmad

Aplea by telecommunication companies for their power tariff to be lowered was recently dismissed by the country’s power regulator after protracted deliberations, which has sparked resentment among many in the IT industry who are questioning the merits of the decision.

The plea by the telecom companies was to change the category of the sector from

commercial to industrial, which would have meant lower power tariffs. The demand was based on the argument that multiple laws consider the telecom sector as an industry, therefore, the National Electric Power Regulatory Authority (NEPRA) should also do the same.

“The Telecom Sector has been given the status of an industry by the Government of Pakistan and we believe that it is the right of telecom companies to get electricity tariff at industrial rates,” federal Minister for IT and Telecom -

munications Syed Amin Ul Haque expressed his resentment. He said such steps were important to incentivise investment in the country - both for those working here and others to come in too. On the other hand, opponents of the move, including stakeholders in the power sector, are of the view that the criteria to be eligible for an industrial tariff is not met by the telecom sector and a change in categorisation would lead to a transfer of burden on other consumers, including residential users.

“It’s a very unfortunate decision. It is difficult to understand that when the gov ernment, including all its relevant ministries, gives industrial status to telecom, how can NEPRA deny it?

Telecom is now the backbone of every enterprise in the country; treating it as a luxury is criminal. Granting industrial status would help the telecom industry to provide better service to all the segments and sectors of the country.”

Parvez Iftikhar, Senior IT consultant and Founding CEO of Pakistan’s Universal Service Fund (USF) told Profit

NEPRA’s tariff categories

To figure out who makes the better point, it is important to first un derstand how the power categories work.

Basically, NEPRA segregates its final consumers into categories based on the purpose of electricity consumption. The charges for each segment vary according to the time of usage and the distribution company (DISCO) supplying the electricity.

As per NEPRA, “industry” is defined as “a bona fide undertaking or establishment engaged in manufacturing, value addition and/ or processing of goods.” Therefore “industrial supply” means the supply for ‘bona fide indus trial purposes in factories’ hence, according to this definition, indicating that the application of industrial supply tariff would be on industries involved in some manufacturing or production activities.

Under the current structure, telcos are being charged a “two part” tariff. Through this mechanism, the total charges are computed by combining fixed charges on the basis of capacity and variable charges based on actual consumption. We will get to why this is a problem a little later.

How important is this for telcos?

To answer this question simply, consider that energy costs are the single larg est contributor to the cost of running tower sites that are the backbone of telecom systems. The image of figures shows an extract from the financial statement of Deodar (Jazz) representing the cost of service data for 2020 and 2019. Over those two years, the utility costs, consisting of fuel and electricity charges, account for an average 45% of overall service cost. When compared to the net revenues of Deodar, utility costs stand at an average of 38% over the given period. Further, compared

to December 31, 2020, fuel costs have almost doubled, meaning the costs of services would have risen disproportionately compared to the revenues.

Deodar isn’t the only one. If we look at Ufone’s financial statements for the year ended 31st December 2021, ‘power and fuel’ costs stood at around Rs7.4 billion, which is around 14% of Ufone’s revenue in 2021. For Telenor Pakistan, results for the second quarter of this year were also negative. The Earnings Before Interest Tax Depreciation and Amortization (EBITDA) experienced a decline of 15% as oper ating costs increased by 30% partly because of high energy costs.

Further, PTCL in its submission to NEPRA, declared that the company had 7,823 connections to telephonic exchanges across 19 regions that consume around 16-17.0 million Kilowatt hours (Kwh) of electricity per month, which costs them approximately Rs340 million. These exchanges are essential for smaller rural districts where this infrastructure allows subscribers to call each other by switching (interconnecting) their lines.

The additional power costs, as per PTCL, have undermined revenues generated by exchanges with the company closing approxi-

mately 10 exchanges every month.

PTCL, in its submission, stated that it has 75% of its total telephone exchanges installed in the rural areas of Pakistan with small switch ing arrangements as per villagers’ demand.

The sanctioned/connected load of these connections fall between 5 kW to 40 kW and the running load of these exchanges is a maximum of 10 kW. Why is this a problem? Essentially, the commercial ]users are charged on a two-part basis (actual energy consumed and maximum demand) as mentioned earlier.

Having a sanctioned load, which is the expected electricity consumption registered by WAPDA, in excess of usage adds to the fixed part of the electricity bill. PTCL claims that, in many cases, the sanctioned loads of its exchanges do not even reflect the actual load, especially in the winter season. It further claims that, sometimes, the Maximum Demand Indicator (MDI) is recorded three to four times higher than the sanctioned load or a deliberately wrong reading is recorded by the reading staff of DISCOs.

Jazz, which was also part of the proceedings, submitted that it has 14,558 towers across the country which rely primarily on the power supplied by the DISCOs and the company is compelled to pay the electricity costs at higher commercial rates. These costs, Jazz said, have an egregiously overbearing financial impact on the telco.

As a bottom line, Jazz stated that, by converting to industrial tariff, the telecom industry can save up to Rs7 billion annually.

The rationale for not assigning industrial tariff

On the flip side, K-Electric, a DISCO, in its official submission to NEPRA stated: “As per terms of tariff, the categories are decided as per nature

Industrial tariff would have resulted in lower energy cost for telecom operators and this saving would have been passed on to the consumers as lower voice and data rates

Aslam Hayat, Senior ICT regulatory official and Former Chief of Corporate Affairs and Strategy at Telenor Pakistan

of use, instead of the status of the sector. The industry tariff as per terms of tariff is specified for the entities that are involved in manu facturing, value addition and processing of goods which are considered for application of industrial’ tariff.”

“We understand that the petitioner sector (Telecom) is not involved in manu facturing of goods and is a service industry and accordingly levies services tax in bills to consumers and hence as per current terms of tariff, the industrial tariff is not applicable on the petitioner,” K-Electric added.

Ministry of Energy (MOE), as part of the proceedings, were also opposed to the change of status: “Telecom companies being engaged in the provision of telecom services through the retail distribution network infrastructure, may be treated as a commercial value-added activity for which consumer has to pay and, therefore, the same may be continued to be served electricity under commercial tariff category.”

“Any change in tariff category of telecom sector would directly impact the other con

sumers and the impact would be around Rs20 billion. It also submitted that various other sectors like ‘film’ have also been declared as Industry and they are also eying for the shift in tariff to Industrial Category,” MOE further added.

However, probably the most bizarre comment came from the Central Power Purchasing Authority (CPPA), whose official representative stated that allowing the switch to industrial tariff would burden the power sector in order to support “luxury products” offered by the telecom sector.

The counter-argument of the Telcos

The CMOs, while presenting their case, argued that multiple laws and legal precedents also refer to the telecom sector as an industry. Most notably, a Ministry of Industries and Production notification dating back to 2004 and the amendments in the finance act 2021.

Further, telcos were of the opinion

that the processes deployed by the sector starting from buying spectrum to providing services to the consumers include a lot of value addition.

Aslam Hayat, Senior Information and Communication Technology regulatory official and former chief of corporate affairs and strategy at Telenor Pakistan, told Profit: “There are two angles to it. One that industrial tariff would have resulted in lower energy cost for telecom operators and this saving would have been passed on to the consumers as lower voice and data rates.”

“Another angle is that no investor will now trust a government promise made in any policy. The telecom sector invested heavily based on the promises made in the Deregulation Policy of 2003 including giving industrial status to the telecom sector. After 19 years, this status was not accepted by the power sector and FBR. This would definitely shake the confidence of the investors going forward,” he added.

When NEPRA inquired about passing on the benefits of reduced costs to the consumers, PTCL stated: “In peak hours, when they are paying huge bills for electricity, the telecom operator is offering different discounted packages to the public. Similarly, in areas where frequent load-shedding is observed, telecom operators continue their services by generating electricity on alternate fuel-based sources to ensure uninterrupted signals.”

Unfortunately, for the telecom sector, NEPRA was not convinced by their arguments. Amongst many reasons to reject their petition was adherence to the strict definition of value additions.

The regulator was of the view that acceptance of the telcos’ rationale can set an undesired precedent which would lead to other commercial users also demanding a change in tariff, resulting in an imbalance of the consumer mix. How ever, the telcos are still hopeful and are gearing up to challenge the decision. n

Telecom is now the backbone of every enterprise in the country, treating it as a luxury is criminal. Granting industrial status would help the telecom industry to provide better service to all the segments and sectors of the country

Parvez Iftikhar, Senior IT consultant and Founding CEO of Pakistan’s Universal Service Fund (USF)

By Shahab Omer

Pakistan’s bastion of political power and its largest province, Punjab, which has also been ground zero for recent political confrontation, continues to push an industrial reforms and innovation agenda.

Spearheading this push is the focus on Special Economic Zones (SEZs), but following closely are other innovations targeting speciality zones and policies that can help boost high potential sectors.

Industries in Punjab, which range from textile to surgical instruments, make a substantial contribution to Pakistan’s economy. According to government data, there are more than 48,000 industrial units in Punjab, which includes over 39,000 small and cottage industries.

A big chunk of industries belong to the textile sector. According to data obtained from the Punjab government, there are currently 11,820 textile units functional in Punjab while the number of ginning industries is 6,778.

Amidst political wrangling, the country’s largest province aims to keep industrial growth on track with policy continuity and innovation

But textile is just one part. Some 6,355 units process agricultural raw materials, including food industries. Lahore and the Gujranwala division have the highest number of small and light engineering units while Sialkot district is best in sports and surgical equipment as well as cutlery. Moreover, Pun jab also has vast mineral deposits like coal, rock salt, dolomite, gypsum and silica sand.

The effort to grow industry to non-tra ditional areas and further strengthen established sectors is ongoing. Profit sat down with Dr Ahmed Javed Qazi, appointed on May 10, 2022 as Secretary of Industries, Commerce Investment & Skills Development Department (ICI&SDD) to understand the size, state, and future of the industries housed in the Punjab.

‘Catalysts not regulators’

Qazi tells Profit that, with increasing domestic demands and expanding export market access, both regionally and globally, his department’s top priority is to encourage rapid industrialisation and move up the value chain.

Qazi, who stresses he sees his depart ment not as a regulatory body but a catalyst force, believes Punjab offers a complete package for practical economic opportunities and investment as it has an enabling and efficient business environment, including infrastruc ture, market connectivity, supply of skilled labour, free flow of capital, excellent incentives and a broad-based regulatory regime.

In essence, while the target is big, the plan is quite simple: make Punjab as conducive for investment as is possible.

“Obviously, if the environment is not conducive, why would investors come?” Qazi asks, adding that this part of the equation relates to policy.

Within this, there is another important aspect, which is the continuity of policies – a difficult task in a politically polarised environment, particularly in Punjab, which

has been a battleground for the last decade between the Pakistan Muslim League-Nawaz (PML-N) and the Pakistan Tehreek-e-Insaaf (PTI).

“The larger political situation has a profound impact on the national economy and foreign investment… but the good thing is that the legal framework has not been changed by any government, but has been improved,” he says.

This includes landmark work like the SEZ Act 2012 and incentives such as a waiver of customs duties for investments in SEZs, which are very lucrative to both foreign and local investors.

“Under the Special Economic Zones Act 2012, Punjab has established 10 SEZs to present the province as an internationally competitive industrial landscape to attract FDI via the provision of a facilitative, busi ness-friendly institutional, legal and infra structural ecosystem. The creation of SEZs promotes ease of doing business, furthering the goals of economic development and pov erty alleviation,” he said.

SEZ innovation

There is also innovation beyond simple SEZs. According to Qazi, Punjab is a trailblazer in establish ing the first ever private sector SEZ in Lahore and also offers development of Sole Enterprises SEZs by the private sector.

“Punjab is receiving many applications from investors who want to set up their SEZs. If any enterprise wants to set up its own SEZ by purchasing land, the law gives it opportunities, and it is also given all the priv ileges that are being given in other SEZs like tax holidays and import waivers, et cetera. If we remain competitive, we will be able to increase investment and industry growth,” he maintains.

Then there is also the aim to develop the national innovation and entrepreneurship ecosystem through world-class technology clusters, Special Technology Zones (STZs), across Pakistan, which are key in the effort to transform human capital into a high-end fu

ture workforce.

A specialised development and regu latory framework of the Special Technology Zones Authority Act, 2021 has already been introduced, which enables meeting the peculiar demands of this high growth sector by offering incentives and operational ease for information technology, research & devel opment, training, hi-tech manufacturing, biotech and other high-end innovation busi nesses so that they can build a self-sustained smart eco-system.

“Similarly, we have a Zero Time to Startup (ZTTS) policy which aims to substitute documentation requirements for business start-ups with a robust and for ward-looking compliance system, utilising a risk-based inter-agency coordination mecha nism to ease enterprise formation,” Qazi says.

This pioneering policy aims to facilitate new businesses by abolishing licensing requirements or easing grants of necessary permissions in a pre-fixed time period.

“So if you look at the whole, we are providing a conducive environment to investors and many international companies have invested in Punjab” he states.

The cluster development initiative

Qazi is also big on the development of industrial clusters, which will allow small and medium enterpris es (SMEs) to compete more effectively in both the local and global markets. Clusters are geographical concentrations of interconnected firms that produce a similar range of goods or services and face similar threats and opportunities. The idea is that firms within a cluster can connect to global value chains by creating strong back ward and forward linkages.

He said the Punjab government was working on the development of four clusters, including auto parts, footwear, readymade

The larger political situation has a profound impact on the national economy and foreign investment… but the good thing is that the legal framework has not been changed by any government, but has been improved

Dr. Ahmed Javed Qazi, Punjab Secretary of Industries, Commerce Investment & Skills Development Department

garments and surgical instruments. Each of these clusters have both tremendous potential and policymakers are identifying areas of improvement and how authorities can help.

Auto parts

The auto parts sector, which falls within the larger automobile indus try, contributes around 2.3% to the country’s Gross Domestic Product. The sales volume is Rs 214 billion and it pays Rs 63 billion in taxes. A huge vendor industry is in place, including around 2,500 units of tier 1, 2 and 3. Around 500 tier 1 units are di rectly supplying parts to original equipment manufacturers.

The overall contribution of the auto sector in manufacturing is 22% and there is a potential to increase this figure. The overall auto industry’s paid-up capital is $1.5 billion with a direct workforce of 192,000. More than 80 assemblers have been producing a range of products including, passenger cars, light commercial vehicles, trucks, buses, tractors as well as two- and three-wheelers.

The government of Pakistan recently approved the Automotive Development Pol icy to stimulate investment levels to over $4 billion over the next five years, Qazi adds.

Yet, there remain hurdles despite the promising figures and policies.

Qazi says the challenges hampering the competitiveness of the auto industry include low quality of work, lack of compliance with standards, low productivity and sluggish technological adaptation. Due to these reasons, the higher value-added automotive components are being imported with a negative impact on the process of indigenising component production and substituting imports.

Pakistan’s focus has been on import substitution, hence the export figures per taining to parts and accessories are meagre: just over $45 million compared to a global market of more than $13 trillion. In order to improve the import substitution and to also penetrate the world market, specific attention needs to be given to the improvement of the existing vendor industry in terms of improved management systems by engaging the international expertise to boost the produc tivity levels coupled with enhanced corporate social responsibility, Qazi believes.

Surgical instruments

Unlike the auto parts cluster, the surgical instruments cluster, which belongs to the light engineering industry category, is export oriented and is a specialty of one region: Sialkot. About 99% of the production comes from the city, Qazi says, adding that it

contributes to 0.13% of GDP.

“The cluster comprises over 3,600 companies including industrial units, vendors and traders, and employs around 100,000 to 150,000 workers. It produces a wide range of surgical and beauty instruments for interna tional producers and brands with a diversified range of designs on their demand. Almost 95% production is export oriented,” Qazi says, adding that it has remained stable over the years.

Surgical instruments manufactured in Sialkot are highly acknowledged all over the world due to their quality, and advanced countries, such as European states and the United States, are the leading buyers.

“Outside Sialkot city we are going to build a surgical city for this cluster where they will be provided with a state-of-the-art laboratory and will also overcome the certification issues they face,” Qazi says, commenting on plans to further boost this sector.

Tanneries

Pakistan tanning industry is well-established and produces high quality finished leather from hides as well as skins. Within this sector, Pakistan produces a wide range of footwear to cater to the needs of a variety of customers – joggers, business executives, mountaineers, forest ers, as well as for security personnel such as policemen and soldiers.

According to Qazi, footwear is a la bour-intensive industry employing nearly half a million people directly and indirectly and has high value addition.

“In a country like Pakistan, there exists an opportunity to excel in this sector as, due to rising costs of manufacturing units in the developed countries, there is a shift towards low cost regions like Asia where roughly more than 70% of world production is made. There is potential to multiply the volume of exports with the improvement in quality and innovation,” he says.

However, despite being the major raw material producer, Pakistan is unable to tap the world market as its share is below 1% of world footwear exports.

“The industry has the capabilities and resources to take lead in the world market and it can be achieved by better utilisation

of resources, skill-building and promoting allied industries. There are issues like lack of export marketing intelligence, seasonality of demand for leather shoes, wide gap in the designs being followed by the industry and the frequently changing pattern of design in foreign markets, shortage of trained manpower, non-availability of creative designers, tech nology gap between small and large firms. We are also solving these issues,” he maintained.

As an example, he cited a tannery zone in Sialkot which had no electricity, no infrastructure and no chrome recovery units which are now being addressed. “Similarly, in Kasur, we are going to build New Leather City,” he said.

Moving ahead…

Qazi admits there are problems, but the government is moving to address all of them in a sustainable and speedy manner.

He said the Punjab government has established 24 industrial estates in the prov ince and many of them have been colonised already, adding that more industrial estates will be created in Gujarat and then in DG Khan and Sargodha. Similarly, small industries are being given chunks in SEZs as well.

“Moreover, we are going to spend money on uplifting the existing industrial estates in remote areas like DG Khan, Taunsa and Bahawalpur,” he concluded.

On the foreign investment front, Qazi said policies were already bearing fruit. He said a delegation from Saudi Arabia had recently visited Punjab and was interested in investing in poultry meat, renewable energy, IT and rice cultivation.

“Growing rice in Saudi Arabia is very difficult and to grow such commodities, Saudi Arabia has allocated funds to partner with countries where rice can be grown. Now, under the partnership, 50% of the crop remains for the country in which it is grown and the remaining 50% goes to Saudi Arabia. A draft policy has been prepared by the Punjab government regarding the allocation of land in this regard, which will soon get approval from the provincial cabinet. This type of investment will not only increase our productivity, but also overcome problems like food security,” he added. n

Unlike the auto parts cluster, the surgical instruments cluster, which belongs to the light engineering industry category, is export oriented and is a specialty of one region: Sialkot. About 99% of the production comes from the city, Qazi says, adding that it contributes to 0.13% of GDP.