Let’s get it on

When discussing India and Pakistan, the phrase “let’s get it on” might conjure up images of legendary fight referee Mills Lane talking to the boxers just before the start of the bout. But with the recent improvement in relations between the two countries, thoughts of Marvin Gaye might be more appropriate.

No doubt the ongoing dispute between India and Pakistan has had some impact on foreign investment ” more so on Pakistan than India. Over the last two years or so, the international private power sector has not seemed prepared to touch Pakistan with a barge pole. At least in India they appeared to be more willing; even though with excessive bureaucracy and the slow pace of reform, there was every chance that the barge pole might get stuck.

Caught between strained political relations with India; wars in neighbouring countries; electricity tariff uncertainties and slow reform; Pakistan has struggled. But times are changing. This month a consortium of Gulf entrepreneurs known as Coastal plans to invest $1.2 billion in the 1000 MW Neelum-Jhelum hydropower project in the area of Azad and Kashmir. The project is claimed to be the largest self-financing investment in the history of Pakistan. In a separate deal, International Power (IP) acquired a 40 per cent stake in the 586 MW Uch power plant. IP bought the stake from Powergen, a unit of E.ON, for a total of à‚£21 million ($37.8 m) and the assumption of contingent liabilities up to a further à‚£8.6 million.

Key to attracting this foreign investment has been the existing government’s progress in terms of reforming the structure of the market and introducing private capital in a systematic manner. Economic fundamentals have also improved significantly over the last two years. The macro-economic situation and the financial health of the country is now much better. Commenting on the renewed interest in Pakistan Rob Montgomery, director of project finance and privatization at PricewaterhouseCoopers (PwC), Singapore said: “Colleagues on the ground have noted that business seems to be picking up and there is a renewed interest in infrastructure generally by foreign parties. In places like Karachi, hotels are reasonably full. They may not be front-line investors, but foreign businessmen are back and looking at deals. Most of them are from the equipment supply or technical services and support to the domestic power sector.”

Pakistan has a real need for sector investment. The country has an installed capacity of 18 GW and although it has excess capacity for the short term, significant power demand growth is expected in the long term. Also, less than half the population is connected to the national grid

The government is soliciting proposals for new power development but most of the response has come from domestic industrial groups. “They are obviously comfortable with their own country [risks],” noted Montgomery. There does however, seem to be more foreign interest in investing is existing assets. This is not surprising since risks are usually lower. “You are buying into existing cash flows and don’t have to go through the hassles and risks associated with permitting new plant. You don’t have to negotiate tariffs and you avoid the risks associated with construction,” commented Montgomery.

PwC is well placed to comment on the intricacies of asset sales in Pakistan. The company is the lead financial advisor in the sale of the Karachi Electricity Supply Company (KESC). The sale of KESC has been on and off since before the first Gulf War but is now making real progress. The privatization process was re-launched in September. Potential investors have been shortlisted and are now in the process of doing their own due diligence.

Raymond Bordeaux, director of privatization at PwC, UK, said: “KESC is a complex situation since it has its own set of specific issues. It is a mix of generation, transmission and distribution and is a very important part of the electricity structure in Pakistan. But the government is keen to see it successfully privatized and the plan is to achieve it this summer.”

This would be excellent news as Pakistan moves forward. “Seeing the private sector make the potential performance improvements within KESC would be good for Karachi as a whole and the whole commercial sector in Karachi,” said Bordeaux. Certainly it would allow the government to demonstrate significant infrastructure improvement when talking to lenders such as the World Bank as well as investors.

Montgomery noted: “If you’re thinking seriously about doing business in Pakistan, to get the best picture you need to get over there and look around ” rather than look in from the outside.”

Perhaps you could even take in the cricket while you are there. India vs Pakistan, in Pakistan, is a huge occasion and a big step for both countries. Seeing it first hand, while making inroads to what could once again be an important market in Asia, should be a wonderful experience. Unless of course India wins.

Junior Isles, Publisher & Editorial Director

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