Interview Published in Pakistan and Gulf Economist and South Asian Pulse

South Asian Pulse   

Interview Link on the Web Journal

  Interview : Kashif Mateen Ansari, Finance Expert

Q.No.01: Tell me something about yourself AND your company, please?
I started my career from the army where I completed my training with the distinction of winning the “Sword of Honor” along with five gold medals, which is a record in itself. After serving the army for few years I left it to pursue a very different career in the corporate world. I completed my studies and became a Management Accountant. I did not stop there and went to Harvard Business School, so today apart from being a Fellow Management Accountant I am also a Harvard alumni. Currently I am serving as the secretary of the Harvard Club of Pakistan.

As I travelled along the career path, I tried to gain as diverse experience as I could. I have worked for local and international organizations and lead teams across various countries and territories. In the initial part of my career I have found a lot of opportunity to travel across the globe as part of my various assignments. This has greatly enhanced my experience and exposure. Prior to starting my current Wind Project I was the chief operating officer of Askari group (Army Welfare Trust).
On a personal level my main interests include reading and writing. I have presented a number of papers at national and international conferences. Very recently my papers on Alternative Energy and Accounting for Micro Enterprise have been very well received. I have written on various topics including Privatization, Corporate Governance, Economy, and Energy. I am actively involved in philanthropic work. I feel most satisfied about the humble work that I am doing to help the special children. I am raising funds for the construction of a residential school for special children. Another area of my involvement is education where we are providing scholarships to the needy students of the professional universities.

Currently I am leading Sachal Energy Development, which is a wind IPP. It has completed its development phase which includes getting all the consents and approvals from regulatory authorities and finalization of all the contracts etc. We are about to start the implementation phase and the dream that I saw a few years back will be fulfilled, Insha’Allah. This project will be amongst the initial projects in the alternative energy sector in Pakistan. By the Grace of Allah this project has many achievements where it has achieved first of its kind milestones including it being the first ever privately sponsored power project financed by Chinese institutions. The project is named in the Pak-China Energy corridor in the fast track projects for the first phase. I am quite sure that this project and many others that are coming up will lay a solid foundation for enhancing the energy security of Pakistan through the production of alternative energy.

Q.No.02: Your views on consumer financing in Pakistan
Consumer finance is a well-known financial product across the globe, particularly in developed economies, where it constitutes a significant portion of banks’ lending portfolios. In the Pakistani banking sector, however, the evolution of the consumer financing portfolio is a more recent phenomenon, as banks have traditionally focused on lending to the corporate sector and public sector entities. It started with some prominent foreign banks introducing credit cards in the banking sector in the nineties; their outreach was limited to the top‐tier of salaried customers and businessmen.

Domestic private banks have followed suit and have shown great acumen in adopting new procedures and policies. These include credit risk assessment, setting up the requisite policy and collection units, and upgrading the scope of their IT based systems. In doing so, they successfully introduced several innovative products for the individual consumer segment. On the other side, the consumers responded well to these products as previously they did not have access to bank credit without sufficient liquid collateral.

A combination of factors is responsible for the widespread popularity of consumer finance in the recent years; I will enumerate three of these: first is the financial liberalization process, second is the liquidity and third is the lower interest rate. The financial liberalization over the last decade or so, has led to the creation of a privately owned banking system which is free to allocate resources in response to the demands of the market. Then we saw influx of liquidity in the banking sector in the last decade which motivated the banks to diversify and expand their earnings base by venturing into previously untapped areas, and third, the easy monetary policy stance of the central bank in the same period provided eligible customers with financing options at historically low rates to meet their consumption demand. In this backdrop, consumer finance has emerged as one of the most promising product for banks. Providing access to purchasing power to the middle‐class consumer has been the most significant achievement of this development of consumer financing. People have been able to raise their standard of living by purchasing various consumption goods which were previously treated as luxuries in reach of only a few. The demand for these goods has also led the manufacturing sector to expand its capacity. So the both sides of this consumer financing growth; demand and supply have contributed to the expansion in economic activities. Banks’ auto loans product and loans for consumer durables, for instance, have been instrumental in this aspect. Though still small in proportion, the rising demand for mortgage finance reflects the individual consumer’s need and financial capacity, to acquire private ownership of houses. Hence through consumer financing, banks have played a positive role in promoting economic development in Pakistan.

Q.No.03: How would you comment on consumerism and its benefits to Pakistan?
Answer: Consumerism is defined as the belief that it is good for people to spend a lot of money on goods and services. It is also seen as the actions of people who spend a lot of money on goods and services. As the Society progresses and grows economically consumerism also grows. Consumerism is seen as something directly related to the increasing standards of living. Economic growth can be achieved through consumerism. But economic growth led by consumerism alone may do more harm than good. As any other aspect of life things are good till the time they are balanced whereas overdose can turn even medicine into poison. If we discuss the disadvantages of consumerism there are numerous arguments that can be stated against it. Consumerism encourages highly wasteful behaviour. We waste our money on goods that we often do not need. Advertisers work tirelessly to create an environment conducive to impulsive buying. We waste our time in search of new things to buy rather than thinking ways to use the things we already have. Consumerism also leads to the waste of valuable resources and energy. It also contributes to increasing amounts of garbage and waste in our environment.

Keeping these negatives in the view we can coin a term as balanced consumerism which we take as good consumerism. So for our discussion here we are talking about balanced and good consumerism which balances spending and investment. Good consumerism is very important for Pakistan’s economic growth as it will boost healthy economic activity, manufacturing and employment.

Consumerism can help Pakistan by inducing mechanism of compulsory savings among the masses this way they would try to create assets and uplift their standards of livings. On the other hand, it will usher new investment in the industry thus promoting employment and economic activities. In the specific Pakistani contest our large population itself can become an engine of economic growth. Demand of consumer goods and availability of consumer financing can give rise to indigenous economic activities.

Higher consumer spending contributes in the economic activity by creating more demand for goods and services which encourages more investments in plants, equipment, services and real estate. These investments create jobs which further encourage demand. Higher consumer spending also indicates the emergence of a strong middle class with growing purchasing power. It should be clear that the very act of consumption is likely to encourage the private sector to expand their businesses to meet the growing demand.


Q.No.04: Could you comment on prospects of investment in financial sector of Pakistan?
Answer: Pakistani financial sector is one of the well organized and better regulated sectors in Pakistan. However, currently it is facing challenging conditions due to macroeconomic problems and law and order issues. According to a recent report by the international rating agency Moody’s; current conditions are weighing on business generation, asset quality and increasing exposure to government securities. However, Pakistani Banks have a strong deposit base and as confirmed by the rating agencies the deposit growth is also quite healthy. This makes our banking sector quite lucrative for investments. If we couple this with demographic growth and the density of the banking services to the general public, it appears that in the long run this sector will remain the darling of the investors.

As we discussed earlier that higher consumer spending feeds back into economy by creating more demand for goods and services which encourages more investments in plants, equipment and services etc. These investments create jobs which further arouse demand. This consumption encourages the private sector to expand their businesses to meet the growing demand. Many countries in Asia like Indonesia, India and Vietnam promoted consumerism as a policy to promote and sustain economic growth. From investment perspectives, these countries have emerged as the most exciting destinations for the investors. Keeping in view the future expectations of the GDP growth of Pakistan it is highly likely that it will be led by consumer spending and obviously consumer financing on one hand and long term financing for the businesses on the other hand will be the drivers of this growth. This means that the financial sector will be at the heart of this economic growth. So in my view the prospects of the financial sector are very bright.


Q.No.05: Your views on competition in the banking sector:
Answer: There is a healthy competition in the Pakistan financial sector. Specifically this competition among the banks has resulted into increased product range for the consumer. There has been a gradual shift from the traditional limited product range of credit to the government and the public sector enterprises, trade financing, well known large corporate loans, and credit to multinationals. This has resulted into better access to the general public of the consumer finance at affordable rates. Because of this competition SME’s and non-traditional sectors have also benefitted. The borrower base of the banks expanded significantly as the banks diversified into agriculture, SMEs, Consumers financing, mortgages, etc. The middle class that could not afford to buy cars or houses/apartments as they were excluded from the clientele of the banks as far as the lending is concerned, had been the biggest beneficiaries of these new products and services. Now they have the financial means available in the form of consumer financing for their requirements. This has resulted into increased consumer spending on one hand and higher investment in the related manufacturing set ups and also in the non-traditional sectors on the other; having said that I think that we can still see some increase in this competition if the regulators nudge the sector in the right direction.

Q.No.06: What must be done to promote the financial sector of Pakistan?
Answer: Although Pakistan financial sector is well regulated and quite developed but there are still areas which can be improved. It is needless to say that the stabilization of the micro economic situation is most important to promote the financial sector. Improved corporate governance will help strengthen this sector further. This sector has to further reform itself to bring the fruits of financial liberalization to the common man. In order to further grow this sector the simple grievances of the ordinary people have to be addressed. First and foremost would be the access to finance as that has been a sour area in Pakistan traditionally; as per reports just till few years ago hardly 12% of the population had access to formal banking which includes almost 3% for the women. Access to informal financing is a bit higher but none the less this state of affairs is quite sorry in this age of information and development. Although some work has been done on the rates for small deposit holders but this area also needs some more attention. Then there is in-availability of suitable assortment of flexible products for smaller costumers, service delivery standards and the general availability of the services.

Government can contribute in the promotion of this sector by further strengthening the regulatory framework so as to reduce any mal-practice by any player as this will increase the credibility and reach of financial sector. Also government can reduce the tax burden on the banks and ease out the bureaucratic red tape.

Interview : Kashif Mateen Ansari, Finance Expert - South Asian Pulse

Interview : Kashif Mateen Ansari, Finance Expert - South Asian Pulse

My Interview on IDPs ---FACE 2 FACE(NISAR HUSSAIN)P1 8-7-14 - Video Dailymotion

FACE 2 FACE(NISAR HUSSAIN)P1 8-7-14 - Video Dailymotion

Privatisation-More Important; Right Intentions or Correct Action ?

The decision to privatise government-owned entities brought the subject to the lime light. The debate that has been going on for some time has been reinvigorated again with both the camps - for and against privatisation - coming up with everything in their arsenal of arguments.

As I noted in another article "Privatisation; salvation or an incomplete truth" the debate whether privatisation is good or bad and whether it is required or not has to come to an end soon. Privatisation has been the order of the new era. In the last more than two decades global economy has seen a lot of privatisation. We have seen that the number of transactions across the globe have risen and the size and value have also increased.

It is hard to find a country that has not embarked on a privatisation programme. Malaysia has sold its National Lottery, Buenos Aires its zoo, Poland has privatised its glass and picture tube factories, etc etc

Margaret Thatcher noted in one of her articles citing "the Economist": "Nationalisation, once all the rage, is out; privatisation is in. And the followers of the new fashion are of the left, the right and all hues in between."

The new thought says that ownership is a significant determinant of enterprise performance. In both developed and developing countries, good SOE performance has been very difficult to bring about and even harder to sustain. Those who prefer state ownership advise for the induction of highly-paid and obviously-motivated managers backed by changes in the systems and incentive plans. Very often governments comply and try to improve performance by bringing in new and dynamic managers, and paying them incentive salaries. These measures sometimes have a positive effect. But as the crisis dissipates, so does political resolve.

Political interference is a common syndrome of SOEs and it tends to re-emerge. According to a World Bank Study in Korea, where reform short of ownership change ended losses in a group of SOEs for three years in the mid-1980s, large deficits reappeared later on. In New Zealand and Japan, SOE reforms were successful only when done in conjunction with privatisation.

SOE reforms have been seen as limited and unmaintainable by many governments. The burden of funding loss-makers has put the poor governments to opt for privatisation. Same is the case in Pakistan where the giants owned by the weak state are bleeding our anemic economy to death. The only good these SOEs are doing is providing nice job opportunities with magnificent titles to the mighty bureaucrats and an ever obliging employment exchange to the politicians.

The debate whether privatisation works or not appears to have long been won by the proponents of privatisation. But for a privatisation programme to be really successful, it has to be properly structured. Only then it will yield enduring benefits.

In a book titled "Privatisation in Malaysia: Regulation, Rent-Seeking and Policy Failure" by Jeff Tan, the author has studied the process and concluded that privatisation does not necessarily lead to efficient economic outcomes and that its success or failure depends on the political context in which it is formulated and implemented. It highlights the role of politics and its interconnection with the underlying class structure in determining the nature and outcome of privatisation. It is also suggested that privatisation should not be undertaken unless the government has the political and institutional capacity to regulate it.

"The outcome of privatisation, including what is privatised, how, to whom, and more crucially, the performance of privatised entities, will thus be determined by both institutional and political factors." Furthermore, success or failure of privatisation in developing countries depends not on whether the government intervention remains, but on both the government capacity to monitor and regulate the privatised entities and socio-political constraints on it.

This clearly indicates that the discourse has to shift. We need to understand what has to be done right to make the privatisation successful. While going over some articles I read a report published in 1992 by the World Bank written by SunitaKikeri, John Nellis and Mary Shirley. They concluded that "Privatisation is not a blanket solution for the problems of poorly performing SOEs. It cannot in and of itself make up totally for lack of competition, for weak capital markets, or for the absence of an appropriate regulatory framework."

They synthesised a few lessons to make privatisation a fruitful process. In their view, it works best when a larger programme of reforms is under way and privatisation fits into that. In the countries where successful privatisation happened like New Zealand, UK and Mexico it was accompanied by reforms to open markets, removing price and exchange rate distortions, and encouraging the development of the private enterprise. It has worked best where regulations have been created to protect consumers. Improving competition and reduction of monopoly has been a part of such reforms.

In our context the privatisation of larger companies like OGDCL there has to be a detailed preparation and homework before they are brought to the block. This preparation includes the scoping of the assets, thereby identifying what we have on the books, which are valued properly and what we do not have in a proper valuation on the books. Further if larger organisations require injection of cash or modernisation or induction of machinery or aircrafts as in the case of PIA that has to be left for the next phase when the private sponsors come in, as privatisation is undertaken for the same reason that new sponsors bring in capital and make these investments. A few ways in which this preparation has happened across the globe in successful privatisation's: breaking the organisation into competitive and marketable units, bringing in dynamic private sector managers (this has been done in airline sales around the world) and settling past liabilities. In Argentina while privatising the steel and railways, they shed excess labour. It sounds familiar as Pakistan Railways and PIA are notoriously high on the number of employees per operative unit of their business assets.

Much has been said about free market these days in Pakistan. Privatisation and free market require a well-developed, properly managed regulatory framework. In Pakistan regulatory scene is not that bad. We have a number of regulatory authorities in place with a fair level of policy and regulation framework. However, the requirement is to reduce the red tape and make these regulatory authorities more responsive to change.

While talking about the regulatory framework I am reminded of another book published by the World Bank. Commenting on the objectives and strategy for the privatisation in their book, "Privatisation the lessons of experience", John R Nellis and Mary M. Shirley put forward the conditions for success of any privatisation programme. They have enumerated two main aspects, which will affect the strategy and outcome of the privatisation. One of them is the macroeconomic policy framework of the country and the other is the nature of the market where the enterprise is offloaded. As far as the first one is concerned, they think that a well-developed institutional and regulatory capacity has to exist for a privatisation programme to become successful and yield better financial economic results. For the strength and efficiency of this macroeconomic framework a well-functioning legal structure is very important. According to them such a framework contains important aspects of various business laws, including the competition law, dispute settlement laws, etc. If we examine how we are faring on this count we can look at the World Bank report on Doing Business. According to the report of 2012, as far as the regulatory quality is concerned Pakistan's performance was somewhat better than the developing countries of Asia, however, on the criteria of "Rule of Law" and "Control of Corruption" Pakistan is performing lower than the average of its peers in the region. Similarly another important area where our performance is not up to the mark is "Enforcing contracts" and "Paying Taxes".

It goes without saying that the whole process of privatisation has to be charted out in a manner that it is fully transparent and should be perceived as the same. Many countries have taken the route of competitive bidding, developing objective criteria for selecting bids, and creating a proper monitoring process.

Privatisation does come with its price, especially for the underprivileged working class of these SOEs. Privatisation's have been followed by large scale downsizing. This gives rise to a lot of apprehension that also becomes a motivation for the stakeholders to rise against the idea. Government can help by developing a safety net for the employees. This may include a generous severance package encouraging voluntary departures precluding the need of painful downsizing. Other ways of creating such safety nets may include employee ownership schemes thereby making the employees become part of the shareholder community and retraining the employees for other suitable trades so that they may get re-employed either with the same company or with some other business. These measures will reduce the problems of the employees and also add to the productive workforce of the country.

In the same way privatisation must help in changing the public-private mix in the economy. This can be brought about by encouraging the growth of a dynamic private sector by creating an enabling environment. In Pakistan the biggest hurdle in this enabling environment is red tapism and corruption. Though corruption gets a lot of attention and obviously a volley of statements from the top political leadership but "In-action" goes unpunished. Rather sometimes inaction is rewarded as those who do nothing and neither allow anyone to do anything get away with flying colours when judged for corruption. But this menace of inaction damages the private sector in the same manner as corruption does.

If we are sincere in turning around the economy and bringing in efficiency in the SOEs by Privatisation we need to take into account the lessons learnt from the past experiences all over the globe. It is said, the road to hell is paved with good intentions. Privatisation though intended for good can only achieve the right results only if it is done right and for the right purpose.

Sustainable Energy

 

“Sustainable Energy for all” is an initiative taken by the Secretary General of UN Ban Ki-Moon. He describes energy in these words: ““Energy is the golden thread that connects economic growth, increased social equity, and an environment that allows the world to thrive.”

The objectives of this initiative are three fold and the timeline to achieve these objectives is 2030. The First objective is about universal access to modern energy services. The second is about energy efficiency and the third is about the share of renewable energy in the global energy mix. The last two objectives are about doubling both the levels of efficiency and the utilization of renewable energy by 2030.

Energy is very important in the modern world as it is the gateway to everything modern and progressive. In Pakistan we understand better than anyone else that what it means to be without access to energy and how it would affect the studies of children, the livelihood of the youth and the quality of life of the elderly.

Energy access is a one of the great divides of the modern times and as noted by the website of this initiative “Nearly one person in five on the planet still lacks access to electricity. More than twice that number, almost three billion people, rely on wood, coal, charcoal or animal waste for cooking and heating. This is a major barrier to eradicating poverty and building shared prosperity.”

The situation in Pakistan is no different where, as per some estimates almost more than 40% of the population has no access to the grid. In other words, these people are without access to the modern way of living and the basic amenities of life. Their children are denied any up word mobility by default and their economic plight is set in stone with no sign of any change in the foreseeable future.  As per the World Bank, per capita utilization of electricity in Pakistan is almost 450 Kwh, or in lay man’s language 450 units of electricity. How we compare to others? Indonesia is almost double this value and Malaysia is more than nine times our usage per capita of power. India is more than a billion people of population with much larger geographical distribution; its electric consumption is above 680 units per capita.

The other aspect of problem is that where we are providing power, most of it is generated through Thermal sources. Almost 68% is produced by burning the fossil fuels and out of this 35% is from oil. The share of hydro power in this mix is almost 30% and other renewables, including Wind and Solar is almost nil.  Though the share of other renewables is more than nil, but for percentage please use your calculators to find out what 106 MW of Wind Power would stand for as against approximately 23000 MW.

The energy security of our country can be reflected by the fact that the imported source of energy is almost 30% of the total energy requirements in the form of imported fuels like furnace oil and diesel.

As per the final report of Pakistan Integrated Energy Model by “IRG” sponsored by Asian Development Bank the conclusions based on scenario based projections include that to sustain economic growth corresponding to 5.6% average GDP by 2030, Pakistan would require a fourfold increase in electricity generation, which corresponds to approximately 82,000 MW of new capacity additions. It would require a threefold increase in consumption of high value petroleum products. The report concluded that if the government does not act quickly, it will be difficult to avert a looming Energy Security crisis.

By 2030 the outlook as per the report is that our proven conventional natural gas reserves will be depleted and energy imports would jump from 27% to over 45% of the total supply of energy.

With this outlook obviously the objective of providing energy access to everyone becomes a daunting task. The other two objectives are not easier either.

As they say, if there is a will there is a way. Renewable energy can come to our rescue and increasing the share of renewables can help us achieve the goal of energy access to all. The potential of renewable energy in Pakistan is enormous. According to a study, Pakistan has identified cumulative potential to generate 3.2 million MW of renewable energy from resources including: 340,000 MW from wind, 2.9 million MW from solar, 50,000 MW from hydro (large), 3,100 MW from hydro (small),1,800 MW from biogases cogeneration and 500 MW from waste.

There has been a view from some quarters that the renewable resources like Wind and Solar are expensive and thus they are not good enough to be utilized in poor countries like Pakistan. However, without going into the technicalities of the issue, this is not a correct idea. The cost of power produced from many thermal power plants is more expensive than the renewable resources like Wind and Solar. Globally these technologies are becoming pervasive and currently global installed wind capacity has exceeded 300,000MW and Solar has exceeded 100,000MW. According to a report since the year 2000, more than 70% of the growth in the electricity generation from renewable resources came from non-OECD countries.

Hydropower is cheaper than all these resources and enhancing the Hydropower capacity is an important aspect of the future energy mix of our country, however excessively relying on the run of the river generation is not without its risks. Most important of these is the risk of availability of water, or the hydro risk.  At the government level the Hydropower projects that come with a reservoir base must be given a priority. But the utilization of Wind and Solar for cleaner energy at an affordable price cannot be ruled out. These renewable resources have capital costs, but almost no hidden costs like the environmental costs associated with thermal plants in the form of pollution and displacement costs in the case of Dams.   

Power produced by any IPP or Genco, may those be thermal or renewable will go as far as the grid. However vast expanse of our people is not served by the grid. To improve the accessibility for such areas solar appears to be the priority number one. Solar as a resource is widely available all across the country and must be tapped with the help of “off-grid” and “grid tied” power generation for residential household, basic amenities like dispensaries, schools and hospitals.  We will talk a bit more about these boring terms “off-grid” and “grid tied” later in this article.

If we have to prioritize our work we need to look at the picture as it would emerge with respect to the requirement of energy in the future. Currently residential load is almost 46% of the total power consumption in our country. As we look into the future, it is predicted that the residential energy use will double, and it will continue to be the second largest component of final energy use in 2030.

Without going into the nitty gritty of the usage of energy in the future, it can be pointed out that by 2030 the growth in the residential sector energy consumption will be driven by utilization of air conditioning, cooking  and water heating. On the other hand rural household energy will grow by only 30% and is dominated by the demand for cooking.

In this scenario a less thrilling and till now a much less glamorous way to harness the energy of the Sun can be utilized; the Solar Thermal panels.  These are basically collectors of the Solar energy in the form of heat. These are successfully used when we require capturing heat. There are 4 major types and inquisitive readers can easily google the types.  Any of these thermal panels are more efficient (60 to 80%) and cheaper than the famous and more known Solar panels, which are technically called PV panels and collect the solar energy in the form of light. Efficiency is also gained by not having to transform the light energy to electrical energy. Many of these collectors even work on cloudy days and in cold wind and weather. These systems cost less and their return is far better thus the payback is more favorable. Utilizing these thermal panels can help us reduce the load in the areas where our residential consumers utilize the energy the most, i.e water heating, home cooling and heating, etc. we have already discussed above that the largest requirement of energy in residential sector which is our second largest energy consuming sector pertains to these aspects.

To help achieve the objectives of “Sustainable Energy for All”, another important area is “grid-tied” solar system, which is the most common method of installing a residential solar power system. Grid-tied systems are connected to the main power grid and are designed to sell power back to the utility company. In an arrangement known as “net metering”, residential consumers get paid for the electricity they generate in excess of what they use. Residential consumers often not only completely eliminate their electric utility bill, but they may actually realize a net profit.

The third area of importance is the off-grid power systems. These are useful in providing access to power to those who are not connected to the grid. These are small solar based systems that generate power for lighting and some other essential requirements.

At a national level we need to discuss the detailed aspects of the above mentioned solutions in a framework suitable to Pakistan’s context. We will deal with these in more detail in some other time. However it is clear that providing sustainable energy to everyone is a huge undertaking and will only be achievable if all the stakeholders, i.e government, consumers and businesses join hand together. Only then we can see better economic equality and growth for everyone. With concerted efforts in the right direction we will be able to achieve a bright future (without power outages).

 

 

(The writer is the CEO of a power project and can be reached at kashifmateenansari@post.harvard.edu)

Interview Published in Business Recorder on Energy Scenario

http://epaper.brecorder.com/2014/03/21/18-page/553389-news.html

 

“Wind energy has massive potential “, CEO Sachal Energy Development

 http://epaper.brecorder.com/news_416297.pdf

Kashif Mateen Ansari is the CEO of Sachal Energy Development - a wind power IPP in Pakistan. Before joining Sachal, a wholly-owned project of Arif Habib Group, Kashif has had more than 20 years of diversified experience of leadership and management. His last recent assignment was as the Chief Operating Officer of Askari Group overseeing more than 30 companies.

 A Harvard alumnus, Kashif has served as a member of the executive board of Harvard Club of Pakistan in 2012. He is also a Fellow of the Institute of Cost and Management Accountants of Pakistan.
Below is the edited transcript of a recent discussion with Kashif at his office in Islamabad, where he sheds light on the company he runs, the renewable energy industry as a whole and the prospects of, what he calls, the democratisation of energy in Pakistan.

“We have achieved all the major milestones. Earlier this month we signed the Energy Purchase Agreement with the NTDC, which is one of the most important milestones. Contracts including equipments and construction have also been finalised. Now we are waiting for the signing of implementation agreement, which will hopefully be done this month,” says Kashif.
For the uninitiated, the implementation agreement is an agreement between the project and the federal government. Not only does it set out the terms of the implementation of the project but also spells out the guarantees that come from the federal government.
Once the implementation agreement is signed, Sachal’s financial close can be expected within the ongoing financial year and Kashif says that due diligence is already under way with banking institutions. “The project will commence operations within 18 months after the financial close, which means we should be online by December 2015,” he said.
BANKING ON CHINA

“In the private sector we would be the first project in Pakistan bringing Chinese financing into the country. The company has a debt to equity of 80:20, and about 90 percent of the debt component is from China,” he said.

The project’s EPC contractor is also a Chinese firm called HydroChina, which is one of the largest companies in the power sector in China. “Our wind turbine generator is provided by a firm called Goldwind, which stood third globally last year and the year before. Prior to that, it was first globally and the only reason it has gone down because GE’s sales have gone up due to American spending on wind,” says Kashif.
 Explaining the technology, Kashif said that Sachal’s is permanent magnet and direct drive. “Permanent magnet means that once the machine is stopped and the wind starts blowing again, this machine will not require any external excitation from the grid to start producing energy, which is a big thing.”
He says that most machines coming into Pakistan at the moment require an external excitation, if and when the machine is stopped and the wind starts blowing again. This means that if there is a problem with the grid, then you won’t be able to start producing from the wind. “We are among the the first few Pakistani projects to have this technology,” he said.

 And how does direct drive machine help? Kashif replies by explaining that his machine has no gear box, which means it reduces the probability of breakdowns because the moveable parts are reduced. “In turn it reduces the burden on the maintenance side and it gives more reliability,” he said.

 Following the completion of its ongoing project, the firm plans to explore more projects in wind. “Before exploring solar, we are looking to put up 200 megawatt wind energy projects in total, spread over a time line of 7-8 years,” said Kashif.

 WIND ENERGY PROSPECTS IN PAKISTAN

 Citing a study conducted by the National Renewable Energy Laboratory, America, Kashif says that the theoretical potential of producing wind energy is Pakistan is 133,000 MW that includes the two main corridors Nuk Kundi corridor in South Western tip of Balochistan and the Gharo-Jhimpir corridor in Sindh. He adds that the generation capacity factor in Pakistan is also decent at 33-34 percent, compared to 40 percent in the best of wind corridors in the world.
All this is hunky dory. But how much of this potential is realistic, considering the difficulties surrounding the Nuk Kundi corridor and the usual differences between theory and reality, BR Research inquires.

“For arguments sake, even if we take a conservative estimate and say that the actual potential may well be one-eighth of the theoretical potential, we are still talking about more than 20,000 MW,” Kashif replies.

“In the Rajasthan corridor, India, which is the backyard of our Sindh corridor, their installed wind energy capacity is 18000 MW,” he adds.
Responding to a question on size of investment, Kashif agrees that per mega watt investment required for producing is higher in the case of wind energy.
 However, he maintains that a comparison only in terms of investment is flawed; because in the case of wind there is no fuel cost. “In terms of tariff, many thermal tariffs based on fuel oil arehigher than the tariff for wind projects, whereas for wind the tariffs are 13-14 cents, which is fixed for next 20 years, unlike the thermal one, where the cost of fuel may increase the tariff any time in future during the project life” he said. Surely in case of hydro the tariff is far less and gas fired plants may be still cheaper than renewables at the moment but the requirement of renewables is a must from the point of view of Energy Mix of a country.

 POLICY ENVIRONMENT
 Kashif say that a number of wind energy projects totalling about 1000-1200 MW are expected to commence operations in the next few years.
 However, he does expect much after that because of pending issues with the evacuation of power.

“For the projects that are underway, the NTDC has started towards putting up the grid. But it appears that for the next wave to come in, we have to gear up ourselves on that grid side,” he said. He added that the NTDC had been delaying the signing of EPAs because there was no progress on the loops needed to connect he projects with the main grid.

“If the government is really willing to push wind energy, it can privatise the grid for the section that connects wind projects to the main grid. There will be investors who will be ready to invest, as a separate project,” he said.
 Explaining the nitty-gritty, Kashif says that the ball park cost of connecting the upcoming cluster of wind projects, for which the government is signing EPAs these days, to the main grid would be around $50-70 million. “With a debt/equity of 80:20, the equity requirement would be $14 million, which is an easy investment for those that already have stakes in wind power sector.”
While Kashif thinks the country’s renewable energy policy is “very good” with the “right incentives”, he suggests improvements in two areas.

“The policy does not stipulate the time during which the EPA or IA must be signed, which means the government can delay the EPA or IA till such time it wants. If we have to improve the policy, we have to spell out realistic timelines for various processes,” he said.

 DEMOCRATISATION OF ENERGY
 The second aspect of improvement lies in what he calls the democratisation of energy. “The renewable energy policy talks about allowing households to produce solar energy and putting excess production on the grid. But it only talks about it in one paragraph.

“The government has simply ticked a check box. But is there any detail to that? No. Are there any established rules to that? No. The government has to come up with a detailed policy and regulatory framework to incentivise individual consumer to come in as a small investor in the power sector,” says Kashif.

He adds that Pakistan has very good radiation levels all across the country which means that “we can generate electricity at a distributed level”.
Explaining his model, Kashif says that in order to reduce the requirement of the battery bank, the policy should be devised for a grid-tied system, where if there is excess energy, the producer can give it to the grid and the same producer uses the energy from the grid. And the metering can be done on a net basis.

But is it economical? “The good thing is that this does not entail a huge investment on any individuals.

 A good system may cost you roughly $1000 USD per kilowatt, which mean Rs300,000-400,000 for three kilowatt. This seems expensive as upfront and it might not be enough for you to have solar only. But it will take some of your load at lower cost of production. The payback will be in 5-6 years, whereas the life of the panel is 20 years. And more importantly, it will make people part of the process,” he replied.

 Kashif added that the government can incentivise the setting up costs by asking banks to give loans to households to set up the solar panels, with the government picking up the interest cost. “The move will trigger investments, which when pooled together, will reduce the load on domestic consumption which is the biggest consumer,” he said.
 He maintains that renewable is the only energy that can be produced efficiently at household level. “Millions of households and SME are currently producing thermal energy via generators, but at obnoxiously inefficient rates. It produces a unit at Rs40-50. Look at the foreign exchange which is being wasted due to this; had this money been pooled, we could have had three times the power produced,” he said.

Privatization; Salvation or an Incomplete Truth By Kashif Mateen Ansari - South Asian Pulse

Privatization; Salvation or an Incomplete Truth By Kashif Mateen Ansari - South Asian Pulse

Privatization;
Salvation or an Incomplete Truth

By

Kashif Mateen Ansari

These days with the news of the government’s agenda of privatization
many questions are making the rounds; why privatize? Why might privatization
fail? What is needed to make privatization work? To answer these questions, it
is usually argued that government’s intervention causes economic inefficiencies.
There are many who support privatization and there is no dearth of those who
are protesting and arguing against it.

 The debate on the issue is
raging and both the camps are putting forward their arguments. According to
PIDE Vice-Chancellor Dr Rashid Amjad, “Policy stances which reflect our best
economic interests and take into account the political economic dimensions
should be adopted.” In his views there is a need for a refurbishment of the
system for increasing efficiency and productivity of loss making public
enterprises

There are many pro-privatization experts like, NUST Dean Ashfaq
Hassan Khan, “Benefits of privatization help reduce the country’s debt burden
and also help improves the allocation of resources.”

State owned enterprises (SOEs) are generally considered unproductive
all around the world, primarily because they serve the political masters and
the bureaucracy more than the business and the owner (state) they represent.



The privatization of these SOEs is considered to be the solution on the premise
that the private sector is more efficient and cost effective than the
government. The role of government should be narrowed down to policymaking and ensuring
that the right business environment exists. Efficiency of a government in
running any business can be captured in these words of Milton Friedman, “If you put the federal
government in charge of the Sahara Desert, in 5 years there'd be a shortage of
sand.”

Present government has embarked on a strategy for privatizing a
number of SOEs. Why should these organizations, like Pakistan Steel or Pakistan
International Airlines (PIA) be privatized? They are inefficient and poorly
managed and on top of that they are a heavy burden on the national kitty. They
are costing Rs400-Rs500 billion annually. They wear the crown of destabilizing
the budget and adding burden to the national debt. How can a financially poor
country like Pakistan continue to foot the bill of the inefficiencies of these
institutions? In the words of Margaret Thatcher  “The problem with
socialism is that you eventually run out of other peoples' money.” Same is the case here that
we are running out of other people’s money to fund these giant government owned
businesses.

The debate on the point of “to be or not to be”; “To privatize or not to
privatize” is relatively simple. For this part of the debate it is easy to see
the writing on the wall. These SOEs cannot survive without budgetary support
from the government.  They are the mega
employment exchanges for the kith and kin of the high and mighty. Do we really
want to add thousands of workers to already bankrupt institutions? For how long
we can rely on our friends and masters to help us with funding support, debt
and grants to keep these giants afloat? Privatization is the answer to many of
these woes. But privatization as an ideology is not the solution to all the
ills that befall the public sector.  

Privatization for the sake of privatization is not the answer.
Privatization has worked in many cases and it has failed in many other
instances. According to Kevin R. McDonald who published his article “Why Privatization
Is Not Enough” in Harvard Business Review; that most newly privatized companies
need dominant, experienced shareholders to compensate for the weaknesses of
managers. Without the backing and nudging of such shareholders, companies tend
to operate in the same inefficient ways they have learnt over the years.

Kevin further noted based on his research that the positive effects
of privatization are not spontaneous. Investors earn outstanding returns only
when they themselves add value in the form of leadership, systems, experience
and direction.

Privatization taken as the salvation of all the woes of state-owned
enterprises, seen as a panacea for improving corporate governance, management,
and performance may be an incomplete truth and therefore, in Kevin’s words “it’s
like a runway that is just a bit too short, extremely dangerous.”

Developing on the stories that Kevin R. McDonald put forward through his research in Poland, there
were many success stories like Thomson Polkolor which was a joint venture post
privatization between Thomson, the French electronics giant that acquired RCA
in 1987, and Polkolor, a Warsaw-based producer of picture tubes for color
television sets.   Problems were the same
as we see in our SOEs, very big payroll but there was no cash to pay the
employees. There was urgent requirement of capital, better management, better
work attitudes, and an injection of basic business skills and procedures. The
main sources of operational difficulties were the lack of sense of
responsibility in the employees and lack of motivation to improve productivity.

Nevertheless, the Thomson Polkolor joint venture achieved impressive
financial results in first 16 months of operation. Its sales doubled, the joint
venture generated an operating profit in the same period. It started paying
taxes, whereas the former state-owned enterprise paid no taxes at all.  

An example of privatization gone wrong is As a result of Thomson’s changes, employees are visibly cheerful
for the first time in memory.

An Krosno Glass Works (Krosnienskie Huta Szkla). Krosno
was privatized in November of 1991. Important aspect of this privatization was
the way the ownership was distributed between the government, employees,
development bank and general public. After the government which held 35% of the
shares; 28% of the shares were widely dispersed among the public. The remaining
shares were held by the employees, bank and another company purchasing the
products from Krosno.

Krosno’s revenues fell dramatically after privatization. One of the reasons
was the worldwide recession but that was not the only reason. The management of
the company failed to respond to the falling sales and was unable to exploit
the only profitable business of hand-blown glass.

Management’s failure to exploit their profitable line of business
hurt the company.  Unfortunately, there
was no dominant investor with sufficient experience to turn this around. Replacing
the company president twice in two years was the board’s response to this
problem.  The inadequacy of the corporate
governance revealed itself and the dispersed share ownership was seen as the
reason behind this lackluster performance. Contributing reasons were no
market-oriented governance; board members lethargic participation, government
nominated members failing to attend the key board meetings.  This pointed to one big flaw that there was no
strong third voice in the shape of strong sponsor guiding the management.

In various other studies it has been
pointed out that certain
positive effects are evident from all privatizations many of these related to
sales effort. But the overall performance is more linked to a dominant
shareholder whose intervention is the key to improving corporate performance
and governance.

Privatization as an ideology that has to be followed for the sake of
it would not work. Also the experience of privatization has given out mixed
results all across the globe. Evidence suggests that privatization which
results into distributed and fragmented shareholding has less chances of
success as compared to the instances where we have a strong, capable
shareholder in the form of a local or foreign business house with sound
expertise and exposure in the same sector.

So the debate is not about privatization itself, rather it is about
how we do it. Privatization is more akin to selling the family silver. We can
do it once. It will surely give us the much needed funds but we must do it
right the first time. Otherwise the future generations will find neither the
silver nor the benefit of the funds. Privatization can energize the economy and
put right many institutions that were once great. We may find PIA again
training the leading twenty plus airlines in the world or we may find Pakistan
Steel turning the wheel of our infrastructure and economy.

In the words of top manager of one of the privatized entities in
east Europe, “Privatization alone is like throwing a person into the water and
calling it a swimming lesson.”

Privatization alone is not the answer. We have to be very careful
about the process and the results both. Just throwing the shareholding away to
scattered shareholders may result into a change in the ownership but it will
not result into the change in the performance of these institutions. Privatization
must be done in a manner that large institutions, both local and foreign are attracted
and they take up sizeable stakes in the privatized entities. This will ensure
new management thinking and active board governance by the new shareholders. Otherwise
in the case of scattered holding our institutions will remain rudderless and
drift away on the currents of economic distraction one after the other.  

 

(The writer is the CEO of a
power project and can be reached at kashifmateenansari@post.harvard.edu)

Karachi Stock Exchange Stellar Performance; A Green Pasture or a Deadly Moat?

 

Karachi stock exchange has performed surprisingly well in the current year also. The annual report released last year said that KSE 100 index yielded return of 29 % which was highest amongst regional markets.  The strange thing is that Pakistan’s economy cannot be compared to anything with developed world. Pakistan as a country is marred by excessive shortage of power and energy which has resulted into long shut downs of power and unavailability of gas for the production units. On the scales of power consumption per capita Pakistan ranks with the lowest countries in the ladder with just 450 Kwh consumed per capita.  

Contrasting these facts is the pleasant performance of our stock market that has been giving out returns which were in access of the stock markets from the developed world including NASDAQ   which gave a return of 25% for the same period. If we compare other stock markets like Singapore, Jakarta, Vietnam, and India with Karachi stock exchange, its performance can be ranked amongst the top tier.

This apparent anomaly has kept everyone thinking about the reasons behind the great rally. “The Economist” considers that the strong performance is partly due to improving conditions in Pakistan, including a reasonably free and fair election followed by a peaceful handover of power. The slowing down of the BRIC economies has also driven investors to try out ever more unusual markets. Some reasons as indicated by KSE itself are strong underlying corporate earnings’ growth and de-leveraging. Another reason is “attractive valuations” as the market capitalization-to-GDP ratio is also very low.  

Stock exchange has been seen as an institution which helps any economy in raising capital for its businesses; existing and new. KSE has a market capitalization of above 6 trillion Rs.  The number has jumped astronomically in the last one year and in the analysis of “The Economist” it is due to the amnesty passed in January 2012. The authorities affirmed that from that date, investors would be allowed to buy shares with no questions asked about where their money came from. The remission, which is due to last until June 2014, is designed to nudge people with undocumented funds to invest them in the market, thus bringing the cash into the formal economy. This has worked it appears. The average daily volumes traded on the KSE have more than doubled after this scheme was announced. This means that KSE managed to induct quite a lot of money from the undocumented sector to the documented realm. By some measure this is also a way of capital formation as it is only the white money that can give rise to corporate capital and new projects.

Stock exchanges always have been a target of a lot of ridicule lately. There was a lot of mayhem in front of the Wall Street in the last year with occupy Wall Street activists and also Wall Street has not been saved from the fun that has been made out of it. On a lighter side I think we refer to Warren Buffet. Today, Buffett's personal net worth is around $55 billion and his investment firm, Berkshire Hathaway, owns a number of prominent American companies including: GEICO, Dairy Queen, Fruit of the Loom and Helzberg Diamonds. Buffett's annual letters to Berkshire Hathaway shareholders are highly anticipated; his writings are widely lauded for their effective storytelling and clear, simple language. So the quote: “I never attempt to make money on the stock market, I buy on the assumption that they could close the market next day and not reopen it for five years.” I think this is good quotation but it has a lot of wisdom that Warren Buffet has put forth in a lighter manner. Stock market should not be viewed as a place where quick buck can be made although this is what a lot of individual investors try to do as they come to the stock market. There was another good quotation which said “United States has developed the new weapon that destroys people but leave buildings standing, it is called stock market.”

If we look at these few quotations stock market is seen as something which does more harm than good to a lot of people that’s why we look at these of kind of funny quotations. A very important thing we will deal with in this article is the way normal investors have been understanding the markets and how they should rather look at it. The focus of this article will be on the question whether general investors have made similar kind of money while investing in this market. Have they benefitted to the same extent or again the market has outsmarted them.

 William Bernstein said "There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor -the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know."

An important factor is that it is very difficult to predict the future earnings of a company without going through the data and second it is further difficult to predict the market price.in the spectacular rise of the stock market in the last one year and so if you see the stock market has consistently turned all the analysis upside down by way of its own performance as compared to the economic data. Let me  give you some examples  here, CPI  in November 2013 was higher than expected at 10.9 % YOY, foreign exchange reserves have been skipping downwards by that time they were close to 8 Billion dollars only and there were troubling news  on account of foreign exchange receipts by virtue of the funds that were expected from the privatization of PTCL. Further there was troubling news with respect to the targets that were suggested by the IMF with regard to fiscal deficit.  Data on General Economic Front did not present a very rosy picture. If you couple it with the energy shortfall which was almost to the tune 5500 MW and the shortage of natural gas in the system there by making it impossible to run the industries. Further on top of it the problems of gas with the fertilizer sector which would impact the availability of urea and further down the line prices of fertilizer having it negative effect trickling on agriculture.

With all the above in formulating the general scenario the market performed remarkably positively. If you look at the various analysis and recommendations by the research houses of the top brokerage houses in Pakistan we saw that a number of stocks were breaking the upper level expectations of the analyst. Just given an example there were recommendations about the PPL having a target price of 236 in October in various research reports and that time the stock was trading at 195 but in November we saw the stock climbed up to 290 a share. So the market has a mind of its own! Proved once again here!

We can compare some research reports and calls by various research houses for 2013 with the actual year end market prices and earnings of a few companies to understand how right or wrong the forecasts hold against the real results.  We compared the research paper of a leading brokerage house with the actual results, for Fauji Fertilizer the call was buy with a target price of 136, actual Dec end price was 112. Likewise Nishat Chunian power target price was 25 but it achieved Rs. 34.78 by the year end. However the target price matched the actual year end market price for PTCL that was trading at Rs. 28.44. We can go on and on in this comparison and find similar kind of very mixed results with a majority of mismatch between the target prices and actual results.

This puts all those investors in a lot of confusion who look at the research reports and tend to take recommendations by the analyst very seriously. They use this data to make their investing decisions based on recommendations   of buy, sell and hold by the renowned research teams of leading brokerage firms.  This mismatch between the research and the actual can be captured in a very good quote that appeared in an article “All of this shows that the market has mind of its own and most of what is taught about investing in business schools is theoretical nonsense. There are very few rich professors.”   

All this shakes the confidence of the ordinary investor as to how he should understand the recommendation which he reads in the research reports or which he listens from the analyst by virtue of seeing  them on the talk shows or taking advice directly.  In a recent research which has been published by Dean of Harvard Business School, Nitin Nohria along with Boris Goryseberg, Paul Helay and George Cerafem; they tried to look into this. They surveyed one thousands analyst in Asia, Europe and America asking to them to rate one thousand large companies on twelve factors on a scale of one to five  and forecast revenue growth and gross margin on the basis of the ratings assigned by them. They found out that the strongest determent of the buy and sell recommendations by any analyst was “projected industry growth” which was followed by “the top management team”. But the commonality in the analysis tends to fade ahead of this as there were quite a lot of differences.  First of all the analysts in the survey differed in what kind of weight they assigned to various factors. For example “a very well communicated strategy” was very important thing with the US and European analysts but it was low importance to the analysts of other regions. Likewise the importance of the “governance” was rated much higher by the US and the European analyst as compared to Latin America and Asia. This signifies that analysts are analyzing based their own tools along with their on biases and understandings of the sector and also based on the relative weight which they place on various factors. Ordinary investor has to understand some what the mind of the analysts before following them blindly.

I have come across a number of investors who are happy in investing in individual shares but they tend to shy away from investing in the market through the mutual funds. There can be many reasons for that which is not the scope of this article but it appears that actively trading in individual scrips has some kind of thrill attached to it. This dose of adrenaline is not available in the boring method of taking up some units in a fund and then divesting them after a long time. Although if someone has done that by investing in a fund that represents the whole market (Karachi Stock Exchange) , he or she would have made a killing just by tracking the performance of Karachi Stock Exchange.

For the individuals a right strategy to make money from the magnificent KSE would be to follow some pieces of advice from Warren Buffet. Using excerpts from an article by “Schuyler Velasco” of Christian Science Monitor:

·         “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”  This is one of Buffett's more famous quotes, and it reflects one of the basic tenets of his investment strategy: He sticks with companies he can fully comprehend, and ones for which the intrinsic value is self-evident, regardless of the current state of their finances. It's a philosophy that has served him well;

·         “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

·         “The stock market is a no-called-strike game. You don't have to swing at everything – you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, "Swing, you bum!"

·         “Price is what you pay; value is what you get. Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.”

·         “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

·         “If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety.”

·         “'We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie Munger and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”  Charlie Munger is Buffett's longtime business partner and the vice chairman of Berkshire Hathaway.

Karachi Stock Exchange has emerged as a darling for the investors and without doubt its performance has dazzled the local and foreign investors both. But more often than not the individual investors follow rumours and botched assessments mostly based on nothing concrete and professional. This leads to destruction of value and loss for the individuals.  If the individual investors follow sound advice and invest properly instead of following leads based on speculations or emotions, they would be able to ride the crest of this wave of profitability and returns.

 

(The writer can be reached at kashifmateenansari@post.harvard.edu)