Pakistan’s privatization quagmire: The case of K-Electric
https://arab.news/gdtkk
In the annals of economic reform, privatization stands as a double-edged sword: a potential catalyst for efficiency and growth when executed with credible commitments, or a harbinger of stagnation when mired in mistrust. Across the developing world, from Russia’s tumultuous 1990s fire sales to India’s measured telecom auctions, the lesson is clear: success hinges not just on divesting assets, but on forging institutions that safeguard investor returns against the whims of politics.
Pakistan, alas, exemplifies the latter. As the government labors over offloading the albatross of Pakistan International Airlines (PIA) to slightly more palatable power utilities, a toxic brew of domestic capital flight and foreign investor disillusionment brews, threatening to entrench a vicious cycle of low investment and tepid growth. The recent flare-up in the K-Electric saga, where Saudi and Kuwaiti stakeholders are reported to have sent a $2 billion arbitration notice, serves as a warning.
Consider the macroeconomic backdrop. Pakistan’s economy, long plagued by fiscal profligacy and external imbalances, is looking at privatization proceeds to plug yawning budget deficits, projected at close to 4 percent of GDP for the current fiscal year, and to lure much-needed foreign direct investment (FDI). Yet inflows, excluding retained earnings, have cratered, dipping below $1billion in recent years. This isn’t mere cyclical misfortune; it’s a symptom of deeper rot. Domestic tycoons, once pillars of local investment, now hoard “trapped cash” in low-yield bank deposits or mutual funds, victims of implicit capital controls that cap outflows above $5 million without state nod.
The Privatization Commission, tasked with unloading loss-makers like PIA, confronts not just bureaucratic inertia but a chorus of demands for ironclad guarantees.
-Javed Hassan
This inward atrophy dovetails perilously with privatization’s snail’s pace. The Privatization Commission, tasked with unloading loss-makers like PIA, confronts not just bureaucratic inertia but a chorus of demands for ironclad guarantees; arbitration in London under English law, repatriation assurances, and insulation from currency volatility. Potential bidders for PIA, eyeing a transaction cleared of sales tax by the IMF, still demur, insisting on terms that “hedge against domestic judicial uncertainties.” It’s a rational calculus: why commit capital to an arena where policy U-turns, abrupt and ostensibly arbitrary tariff revisions, and enforcement caprice have long inflated transaction costs and eroded net profitability?
Enter K-Electric, the privatized Karachi utility once hailed as a poster child for reform. Acquired in 2005 by a consortium led by Saudi’s Al Jomaih Power and Kuwait’s Denham Capital, the deal promised to modernize a creaking grid serving 3.8 million customers. Fast-forward two decades, and the grievances are vast. Chronic delays in tariff approvals by the National Electric Power Regulatory Authority (Nepra), billions in unpaid subsidies, and alleged encroachments on governance rights, including a thwarted $1.77 billion sale to China’s Shanghai Electric Power.
At root, this is purportedly a tale of broken promises. The original privatization compact was meant to have included subsidies to offset the utility’s legacy burdens: unmetered theft, outdated infrastructure, and political meddling. But as Pakistan’s energy crisis deepened, these commitments frayed. Investors accuse Islamabad of “blocking tariff implementation” and orchestrating a “takeover attempt” via proxies, eroding their control and returns.
Economists will recognize this as classic financial repression in action: controls that trap capital domestically while inflating risks, per the models of McKinnon and Shaw from the 1970s. In Pakistan’s case, both local and foreign investors flee to jurisdictions with robust property rights. K-Electric’s woes amplify this, signalling that even a Gulf-financed deal is caught in the vortex of regulatory caprice.
With FDI at a nadir, Pakistan’s growth sputters below 3 percent, far shy of the 7 percent needed to absorb its youth bulge and service $135 billion in external debt. Power sector circular debt, now PKR 1.693 trillion, exemplifies sclerosis. To signal commitment and restore confidence, Pakistan must ring-fence privatized assets with independent regulators, enforce arbitration clauses domestically, and dismantle capital controls gradually. For K-Electric, an urgent settlement, perhaps via mediated subsidies and tariff hikes, could avert arbitration and rebuild trust. More broadly, jettisoning G2G deals for transparent auctions would level the field, shielding national interests from geostrategic leverage.
In a globalized arena where capital is footloose, Pakistan’s privatization paralysis isn’t just a domestic debacle; it’s a self-inflicted wound that repels rescuers. Until Islamabad prioritizes the rule of law over revenue raids, its dreams of revival will remain just that, dreams, deferred by the very hands meant to build them.
– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He is a senior visiting fellow at Pakistan Study Center, Fudan University.
X: @javedhassan
