950812

ADB publication's report

Large scale foreign

investment in energy

sector will lead

to economic growth

RECORDER REPORT

ISLAMABAD: While large scale foreign investment in energy in Pakistan will lead to economic growth, the Asian Development Bank sees some macro-economic imbalances in the short run.

The imbalance in the short run will be worsening of the trade balance, as current account and trade account would further go in deficit. Morever increased debt burden would mean much higher debt service payments and a consequent adverse impact on the foreign reserves situation.

The ADB annual publication 'Asian Development Outlook' 1995-96 mentions specially of Pakistan's efforts of revitalising the energy sector through private investment and concludes that the long term benefits will outweigh the economic costs of the imbalances.

It says that Pakistan economy has suffered from severe energy shortages. The installed capacity of 11,000 megawatts was insufficient. Since early 80's power shortages have run between 15 and 35 percent in peak loads, leading to billions of rupees worth of economic losses annually.

The task force appointed in 1993 made recommendations to mobilise resources and promote private sector investment in energy sector, to improve the efficiency of the existing system and to enhance indigenous oil and gas production.

The task force assessed the average annual growth rate for energy demand over a five-year period (until 1998) at around 8 percent. An additional generating capacity of 7,000 mw over this period would be required to overcome existing shortages and meet increased demand. By improving existing operational efficiency of the power generating and distribution agencies and by reducing energy system losses, estimated at between 23 and 34 percent, the additional generation capacity required is 5,000 mw. The task force estimated the total financial outlay required to implement the recommended programme at over $ 10 billion, of which approximately 60 percent would be foreign currency requirements. They also proposed that close to 35 percent of this investment should come from the private sector.

Resource mobilization on such a large scale would require major policy reforms and structural changes to make the investment environment attractive to foreign and domestic investors.

A historical lack of consistency and continuity in government policy towards private sector involvement in the energy sector has been a major factor in discouraging prospective investors. In addition, the price and financial incentives has been neither internationally competitive nor attractive to domestic investors. To counter this situation, a very attractive policy package was recommended and approved to encourage foreign direct investment and to facilitate the creation of a debt securities market to raise domestic financing for energy development projects.

The response, particularly from foreign investors, to the package of incentives offered was overwhelmingly positive. From the time approval was given to the recommended package in March 1994, until November 1994, twenty-seven proposals had received letters of support. The total power generation capacity of these projects and proposed fast-track projects was over 8,500 mw and the proposed investment was over $ 22 billion. Not only was this for more investment than had been hoped or planned for, it was much more than the expected private sector participation. Even on the assumption that only a third of the proposed projects come to fruition, the investment outlay would be over $ 7 billion. Based on the proposed 80/20 debt/equity ratio and the 60/40 foreign to domestic currency component, the foreign exchange debt requirement alone would be close to $ 3.5 billion.

What are the likely macro-economic implications of this very large investment in the energy sector? First, the easing of the energy shortage, through both increased investment and operational efficiency would increase economic growth. In particular, industry and services, the two sectors that have suffered most from energy shortages, would receive a tremendous boost. To match the domestic financial outlay, gross domestic investment would increase, and it is forecast that by 1996, the increase in gross domestic investment would be almost $ 1 billion. Increased investment in the energy sector would also imply increased imports of machinery and equipment. There would be a worsening of the trade balance in the short run. Thus, over the next few years, both the current account and the trade account would go further into deficit. The increased debt burden would also mean much higher debt-service payments and a consequent adverse impact on the foreign exchange reserve situation.

An important consideration is that the beneficial impact on growth would help ease the unemployment situation in the long run. Even in the short run, employment opportunities as a direct result of the power projects would expand. Of course once the benefits to industry and services are realized, the impetus given to export growth is likely to be very strong. Overall, therefore, while there may be some short-run macro-economic imbalances as a result of the increased investment in the energy sector, the long term benefits will out-weigh these costs.