Wednesday, December 30, 2009

Is Pakistan A Resource Rich Country

Is Pakistan A Resource Rich Country?

The popular myth is that Pakistan is a very resourceful country, and that the foreign powers and their local agents do not let us exploit our resource potential. An alternate religious version is that if we build a true Islamic state , the Earth will bring out it’s hidden gold and the like.

In my childhood days, there was a myth that the Shah of Iran did not permit us oil exploration , fearing that it’s oil may flow down to Pakistan, little did we know that Iranian oil is mostly concentrated on it’s Southwestern frontier bordering Arab countries.

As a continuation of these myths, Baluch nationalists have nursed the same fallacies. They dream of huge resources which they would be able to effortlessly benefit from, but for the Punjab ‘Samraj’, which does not let us enjoy these benefits.

The painful and plain truth is that the bogey of richness in natural resources in Pakistan and even Baluchistan is far fetched and unrealistic .Here and there are some resources, some discovered and some yet to be

There is nothing on world scale. There are four components of natural resources; Land,water, minerals and natural Gas. Land are of Pakistan is very small and unevenly populated. Saudi Arabia, Iran and even Ethopia’s land area is twice than that of Pakistan; 50% of the land area is occupied by less than 10% Baluch population, which is blocking the entry of everyone to it , for good and bad reasons. Rainfall is extremely low, less than the average of India, with resultant reliance on rivers , amidst increasing threats of Indian and Afghan withdrawal from common river resources.Except for low grade copper, nothing worthwhile has been discovered. Whatever Oil and Gas was discovered is going to be finished in a decade or two. Only Thar Coal resources are there which of whose exploitation we have been postponing for one reason or the other. The Saindak copper Project has been a begging bowl. Government of Pakistan kept on losing money, and somehow managed to convince Chinese to run it and get back their investments, which they are doing.

Where are those resources?. And let me tell you, these mineral resources are being termed as a mere ‘curse’ than a blessing, as we see the fate of most of such countries in the Middle East , Africa and South America. Poverty has not gone away from Iran, Iraq or Saudi Arabia, not to talk of the poor and resourceful countries of Africa like Niger, Congo, Zaire etc.Resources or perception of these have invited coup, colonialism, war and strife. Oil rich Iraq and Nigeria are under threat of breakup. Nigeria was partitioned but got united again.Kurds of Kurdistan are on the verge of separation. In Pakistan, some Baluch nationalists have built their dreams on the myth of over blown natural resources.

On the other hand , the resource rich Europe , US, and Australia have built their societies based on an integrated combination of technology and resources.

They have and relied on exports of mineral resources. They have benefited from there Internally. Similarly Baluch and Baluchistan have a future within a united Pakistan and outside Pakistan it is only a basti of impoverished people. Having said that let me add that our treatment of Baluch and Baluchistan has not been fair, to say the least. One after the other , military actions and campaigns have been perpetrated on them both by democratic and as well as dictatorial regimes. Less than the required attention has been given to them on their economic and social development. Why cannot (twenty brothers) be able to help one brother (5%) of the population? They have been short changed on Gas Royalties.The murder of Sardar Akbar Bugti is one such mistake.The new leaders in Pakistan, elected and non- elected, in government or out of government are sorry. They have formally apologized. A package has been announced. Let us have a new beginning, a new start, a new morning.

It is not absolutely essential to nurse grandeur and grand objectives of becoming a great and powerful nation , of conquering and subdueing one’s neighbours. In South Asia this disease is not on one side of the border .Across the border they want to be one of the world’s six powers despite having hundreds of millions of people living in hunger and extreme poverty.

It may not be a small objective or achievement if in two or three decades, we are able to provide a reasonably decent living to the bulk of our own people; 100% education, clean water, sanitation,liveable housing and adequate health system.

Let us enrich that slogan or dream of Roti , Kapra aur Makan. Let us add to it; Taleem ,Sehat.

Time passes by. When I was a boy I used to think that in 2-3 decades these objectives would be achieved. Ironically, now that today I am 60, I am hoping and arguing that the same maybe achieved in the next 2-3 decades. Will it happen? Unfortunately or fortunately, I would not be there to celebrate the success or bemoan the failure!

Tuesday, December 29, 2009

Strengthening Political Parties

Strengthening Political Parties.


Akhtar Ali.


Why does military takes over power so swiftly and comfortably without any meaningful resistance during and after the process of the takeover. Prime ministers are put behind bars and sent to gallows through manipulating the judicial process. Military rule is legitimized by referendums and judicial validations. The usurper is given powers to amend the constitution.

One of the many reasons is the weaker base of political parties in terms of membership cadre and organization. Except for  Pakistan Peoples Party which has a large political base, most other parties have a weaker political base. Parties are dominated by individuals and the families. The electoral process also throws up entrenched wealthy individuals, strengthening status qou and thwarting social and political change.

In most parties there is a narrow core of formal members, around which is  a large number of  political supporters. Ironically political parties’ leadership are reported to be even discouraging local cadre in launching membership campaigns, perhaps in vain attempt to maintain control of the party or entrenched groups or perhaps  thwarting organized  take over.

Pakistan Peoples Party (PPP) has a large popular support entrenched by a large number of workers. Successive victimization and eventual murder of Bhutto family has largely been responsible for legitimizing the party control  by the Bhutto family.

There are some small exceptions. Jamaat –I –Islami is an Islamic ideological party which manages  to gather support from far and wide parts of the country. This party also has narrow strenghth of formal members due to it’s doctrine of making the “ Muttaqi”(pious)  only.the core of the ‘ Muttaqis’ is surrounded by  most of it’s informal members which it calls ‘Muttafiq’(agreed). However the party is well organized and is quite capable of organizing resistance  movements.

Muttahida Qaumi Movement(MQM) is the third largest party in terms of membership in the national assembly. It has a lrge and active membership and leadership coming from lower party cadre.How ever due to it’s initial ethnic basis, located in Karachi and other Sindh’s urban areas mostly, it’s effectiveness at Pakistan level remains wanting.

Other parties like the Pakistan Muslim League (Nawaz) , Pakistan Muslim League(Q), Tehrike Insaaf( Imran Khan’s party) are tightly controlled by wealthy individuals like Mr. Nawaz Sharif, Chaudry Shujaat Hussain and Imran Khan. In all these parties a total of less than 100 individuals control .The wealth of these  individuals is largely their source of strength. Although participation in the long political process spread over more than two decades is also the part of their political capital.

Ironically there is a typical trend to political induction of party leadership .An aspiring and  ambitious politician is first discovered and  coopted by the military rulers.

Military rule gets legitimacy and wider political base through such inductions and the individual power, pelf and wealth increases by various transfers and  favors made for such cooptees. Typically and eventually, the fate of military dictator goes down after having ruled for an average period of a decade.

Dichotomy and contradictions develop amongst the political and military leaders and the cooptee joins the opposition and democratic forces suffer for a period  in the form of jail or exile  and is thus legitimized and becomes a bonafide political leader . .


ZA Bhutto was hanged among unexplainable silence of the masses and supporters and Nawaz Sharif was jailed and exiled  with comfortable ease by the two respective military dictators. Both the PPP , PML- N , more so the latter, have suffered due to the lack of an organized  large political cadre as is found in most democracies of the world. PML-N should not be afraid of new membership. They should shun their fear and skepticism of the people and masses  . A shift towards middle class power may not be able to unseat the top leadership in the short run, which is what matters for political control. In the long run, it would reward them with strength , appeal and vitality. While top leadership and it’s continuity maybe indispensable for most parties, there is no justification of monopoly    of landed aristrocracy over the political party. Tickets for assembly memberships are awarded   based on district power base which largely comes from land power. Overall party  finances also come from this core group.

If political parties are provided public funding (government financial support), the influence of this typical core group would be gradually and partly replaced by new forces from middle classes.

In most democratic countries of the world especially in South America and Europe such funding is common. Normally such funds are given on the basis of votes caste in the elections; about 10 Euros per vote on the average, as straight transfers to political parties’ central funds.

In Pakistan such support maybe differentiated and targeted to encourage reforms in the political parties. Following criteria and targets maybe kept in view:

  1. Number of voters
  2. Number of workers.
  3. Direct financial support to eligible candidates for assembly seats.
  4. In kind support such as allotment of urban plots and rural land for political parties, to generate income sources and build party offices, meeting halls, libraries etc.

Political parties fund maybe created to be managed by eminent persons, administrative persons and financed by the following:

    1. Federal and provincial government budget.
    2. Levy on media and advertising.
    3. Funding from multilateral and bilateral donors, countries and organisations.

A fund of Rs. 1.00 billion (seed fund) should be initially created and should be feasible.

This fund would go a long way towards building strong and organized political party system in the country and fostering new entrants representing a diverse social base

Monday, December 28, 2009

Concurrent Powers and Provincial Autonomy

Concurrent Powers and Provincial Autonomy.

Akhtar Ali .

In Pakistan , concurrent list has become a victim of popular protest and condemnation. People think that concurrent list is only specific snd unique to Pakistan. While the facts are to the contrary.

In almost all constitutions, defence , foreign affairs, currency, commerce and communication are exclusive federal subjects. In the US , the federal list covers 18 heads out of which, defence, foreign affairs and currency are exclusive federal domain and other 15 heads are are under shared/concurrent domain; all other subjects are under provincial/ state domain, without any specific state list.

In India on the other hand there are three long lists; federal (union), concurrent and state. There are 97 heads in the federal list, 47 heads in concurrent list and 67 in state list.

In Australian constitution, 39 heads of power are defined as federal and rest of powers with the state, with no specific list. Many federal powers are excercised as shared/ concurrent powers.

In the German constitution, federal list is limited to only 11 heads, and there is a large concurrent list of 24 heads. Implementation of most federal powers and all concurrent powers fall in the domain of provinces.

In Pakistan , 67 heads of power are awarded to federation (less than India) and 47 heads are in concurrent list ( equal to India); all others to provinces. Hence the notion of doing away with the concurrent list is absurd. It is a useful and indispensable tool of federal and provincial government coordination .The culprits have been the dictatorial centrist regimes, which have mostly ruled Pakistan for long continuous periods. Civilian rules have been short, intermittent, unstable and often victims of shadow powers.

Also concurrent powers do not always mean federal paramountcy. This need not be defined in the constitution and the matters should be decided through the democratic process and executive support on a case to case basis taking into account economic and administrative efficiency and regional equality.


· Reduce the federal exclusive list and transfer these heads to concurrent .

· Promote discussion, negotiation and democracy.

· Recent NFC consensus award is just one indicator.

Wednesday, December 23, 2009

Federalism and Provincial Autonomy.

Federalism and Provincial Autonomy

Akhtar Ali.

Federalism is practiced in twenty four countries of the world having 40% of world population. All large and populous countries with democratic dispensations are federations. Only four or five of the 30 plus prosperous democracies are running on a federal system. However, there is no unified theory or even concept of federalism. All countries have shaped their system according to their conditions and mutual agreement.

The Six–Point Formula that Sheikh Mujibul Rehman of the former East Pakistan gave is pure federalism is a misnomer in Pakistan. There is another misunderstanding in Pakistan whereby many parties and individuals ideal British system and want to replicate . Britain is not a federation, although it practices the parliamentary system of governance. . Germany, India, and Australia have a federal parliamentary system. These three countries should be kept in mind while trying to replicate or borrow from the external models and democracies.

Pakistan’s 1973 constitution heavily resembles Australian constitution, with the only difference that the senate members are directly elected. There is a provision of referendum in the Australian constitution, and in Pakistan referendum has been resorted to, although not being provided in the constitution. Germany has some peculiarities of Bundesrat, with provisions of parliamentary ratifications of judiciary and a few other features. India’s similar socio-economic conditions make it very useful for us to benefit from its experience. In Pakistan provincial boundaries are sacrosanct, while in India states’ boundaries have been redefined on the basis of languages, and thus more states have been added and the process continues. In Pakistan the institution and definition of provinces has been stuck to very rigidly, although recently the elections in Gilgit and Baltistan assembly indicate a new trend, along with stronger voices of Seraiki province.
Provincial Autonomy:
In Pakistan, provincial autonomy is being perceived by many as a panacea for growth, development and democracy. Some are reviving debate on Mujibul Rehman’s six point formula. For some it is a symbol of liberation from local” samraj “, and for others it may be a recipe for disaster and disintegration. In India this issue of separation of powers has long been more or less settled and does not invite much of a debate. They have three long lists of subjects; Union, Concurrent and States. There is no parliamentary or constitutional pledge to withdraw the Concurrent List neither is there any demand to do so. Despite all this India is perceived as more plural democracy, within and outside.

Whatever be the choice of dispensation, it should be a well thought through and planned implementation and not a hasty decapitation. Government Of Pakistan should commission studies by external consultants and ask the respective ministries to submit proposals, consequences and the required arrangements that have to be made for a selected approach of provincial autonomy. In the current dispensation, most of the economic structure is centrally organized and managed. Overnight or hasty announcement of withdrawal of concurrent list without adequate preparation would be potentially disruptive and disastrous. Instead of bringing a large comprehensive package, a gradual approach may be a preferred option. Surely there maybe a few cases, where near and immediate actions can be taken such as in this case of the powers and domain of the federal ministry of Petroleum and Natural Resources, whose Baloch demand is the loudest. Government of Pakistan has already announced several concessions in the Baluchistan Package, which initiative should be sustained for further reforms. A lot of provincial disharmony and grievances may be direct result of dictatorial rule in Pakistan over a long period of time, both in pre and post1973 constitution era. Consultation and participation can sometimes yield better result than the iron-clad rules of the constitution.

Another issue is of size and capability. Already in Baluchistan most of the civil service comes from outside the province, due to shortage of supply of cadre. In North West Frontier Province the situation is not very different. An open question is the ability and capability of the smaller provinces, to practically exercise the functions and powers allocated to them under a future dispensation.
Concurrent List:

Concurrent List has been a source of contention, although it provides for an efficient and workable joint performance. The Concurrent List provides a vehicle for defining a distribution of powers, functions and responsibility without loss of economic efficiency and order. Concurrent List may have been abused in the past for which evidence ought to be studied .It should not be the excuse for federal preponderance on the subject. It may be and it may not be. Its implementation can be variously and asymmetrically exercised; different approaches and arrangements in provinces; there should be no fixation with uniformity. Although 1973 constitution provided for 25 years limit for the life of the Concurrent List, it has been successively extended by legislation. Let us put one‘s hearts and minds together towards objective determination and resolution of the subject.

On the other hand, if one examines the Concurrent List from economic or income’s point of view, out of 47 subjects on the Concurrent List only three have any potential for income which is electricity, tourism and Zakat. On electricity federation is giving subsidy of billions of rupees. Zakat, however, should be a provincial and even local government subject, as Zakat in Islam is to the close-byes. All other 44 subjects have no potential for income. It will only add to the functions and responsibility, even if expense is self –financed by the stakeholders. So if the grievance is economic, why insist on assuring the liability of expense items in the Concurrent List.
Why and How Provincial Autonomy:

The prevalent wisdom in some quarters is that road to economic justice and prosperity lies in very narrow and rigid interpretation of Federalism and it’s off shoot provincial autonomy. Although I am not opposed to provincial autonomy, but keep wondering whether majority of the world living in no-federal system are not enjoying economic growth, justice, and prosperity? Perhaps there is more to it, than it is being realized by us. Expanding provincial autonomy in a planned manner may, however, be desirable, as it would remove another escape- goat and induce us towards solving the real problems.

If at all the concurrent list may have to expanded to affect more provincial autonomy, by shifting some subjects on center’s list of the concurrent list. A case in point is Oil & Gas, where in exploitation is complained of by Balochistan. With the reforms under discussion and demands on the street on the subject, it appears that oil and gas would have to go to concurrent list, and perhaps eventually to the provinces. In almost all the relevant federations, Canada, Australia and US etc, oil and gas including natural resources are provincial subjects; In the earst-while six point era of 1960’s, Jute and its foreign trade and foreign exchange earnings was indeed the core issue along with taxation and economic policy. Today it is oil, gas and natural resources, especially in Balochistan concurrent list provides a flexible option, whereby apportioning of the roles and responsibility could be negotiated among the respective federal and provincial ministries on a daily basis and decided upon on the basic of merit, efficiency and welfare.

Out of 63 federal subjects that merit transfer to the provinces are the following.
1. Oil & Gas
2. Excise duty
3. Estate duty in respect of property
4. Taxes on oil & gas
5. Terminal taxes on goods & passengers
6. Duties in respect of succession to the property.

Out of the above mentioned six subjects, items 3,5 and 6 may be readily accepted by the federation, being of lesser consequence. Major issues of contention would be 1, 2&4. There is a trend towards maximizing revenues. Oil and Gas to the provinces, only the corporate tax is to be left with the centre. Thus negotiation is require on excise duty only. One may also like the industry to be in concurrent list, as well as oil and gas for coordination purposes and not the revenue.
Bengali Nationalism an Example:

Tracing the Bengali nationalism culminating into Bangladesh, the two provinces were so distant that a more than normal decentralization was infact a necessity and should have been conceded. They had fundamentally two grievances; firstly, jute earned bulk of the foreign exchange, while its utilization was more in the west Pakistan, Secondly, due to Kashmir problem and the consequent foreign policy agenda, military expenditure not as diverted precious economic resources, but enhanced the political power of Punjab or West Pakistan which was utilized initially passively and ultimately militarily against them. And finally all defense planning catered to west Pakistan requirements.

On the other hand, what did Bangladesh achieve as a consequence of separation; freedom, democracy, prosperity, development; none of it, except Bangla identity, which could also have blossomed within the confines of one Pakistan – federal or confederal.
Baluch should see reality:
However similar problems remain in the remaining Pakistan. Baloch nationalists feel that their oil, gas and mineral resources have been exploited by Federal Pakistan and that they may be better off without the burden of the other provinces. They are wrong on a number of counts. Exploitation is a wrong to choose. Yes, there have been mistakes, which are being corrected e.g. streamlining the oil/ gas royalty policies and repayment of Rs 120 billion as royalty dues. The case of natural resources of Balochistan is over-blown. The natural resources existing and potential are not as much as being perceived by national quarters. Had there so big, oil companies would have explored and recovered those. There is an adequate potential, may be good enough for Pakistan’s need, but definitely not in gigantic world scale. Some goes for other mineral resources. Saindak (Cu) mine has been a begging-bowl case, where in GOP has lost money for more than two decades. Regodeq deposits with 65 billion USD resource value at the surface, if exploited our-period of next 30 yrs, would mean annual sales of 2 billion USD and a royalty income of hardly 20-40 million USD per year. Take the example of other “resourceful” countries in Africa and Latin America, most are poor, under-developed and suffering; Nigeria, Columbia, Namibia, Zaire, Congo etc. Are these awfully happy and prosperous countries? However Balochistan integrated, as a part of prosperous Pakistan has much more to benefit as have the minerals supported the integrated economies of the resourceful countries such as Australia, Norway, US and others.
Individual human rights and equality:
Perhaps more important issues are of the rights of the individual human rights, freedom, liberty and democracy. It is the individual who is entitled to prosperity and deliverance from wants and disease and the fulfillment of dreams and pursuit of happiness. Province is just a sub-group, among many approaches to group-making.

Then there are problems of ethnicity and languages; there are Pashto speaking Pathan in equal proportion in Balochistan with Rushtum. Saraikis in Punjab and Mahajirs in Sindh along with old-sind his in Sindh. India partly solved its similar problems, by reorganizing its states (provinces) along linguistic lines. In Pakistan, old and existing provincial boundaries are sacrosanct.

Cultural and linguistic identities can best furnish in peaceful environments of freedom and liberty and not in narrow provincial enclaves of retrogression and hatred. Let us build a Federal Pakistan with mutual love and respect built in the foundations of democracy, freedom and liberty.
The Six Point Formula of Federalism:
Mujibul Rehman’s six-point formula was essentially for confederation, which nationalists like Mumtaz Bhutto seem to be working for. It may be interesting here to quote Mujib’s six point formula.
1. Federation on the basis of Lahore Resolution, democracy based on parliamentary form of government.
2. Federal domain to be justified to only defense and foreign affairs.
3. Two separate currencies of separate foreign exchange accounts to prevent flight of capital.
4. Power of taxation to be nested only on the federating units.
5. Independent foreign trade and foreign currency accounts.
6. Separate Militia or Para-military force for East Pakistan.

Concurrent List has been potrayed by many as anti-federalist and a kind of instrument of federal domination and exploitation. It is a common feature in many federal constitutions including India , Spain and Germany. we need to have a very close look at cooperative fedralism of Germany. the concurrent list needs to be expanded rather than bieng done away with, by transfering several federal subjects to it. lukewarm support of Baluchistan Package by the Baluch nationalists or rejection of it once again indicates that human rights requirements dominate their list of grieviences over and above the constitutional issues of a rigid interpretation of provincial autonomy and withdrawal of the concurrent list.

Tuesday, January 13, 2009

Hydel power Royalties conundrum

Hydel power Royalties conundrum.

The issue of hydro-power royalties has been a bone of contention among NWFP government,WAPDA and Federal government .Article 161 of the constitution of Pakistan provides for royalty on gas and hydropower profits to be given to the producer provinces .For some strange reasons, there is no mention of such royalties on mineral and coal .And even more so oil has also

been ignored .It is understood that 12.5% royalty on gas is being paid to the provinces. However Baluchistan laments for past over-dues not having been paid and the reference gas price on which the royalty is being computed being too low,Rs. 131 per unit, as opposed to elsewhere where this figure is more than double.

On hydro profit, the constitution speaks of “ net profit “ at bus-bar. Various interpretations of the constitutional provision have been made .The late redoubtable AGN Kazi gave a formula ,which has been termed unrealistic and outdated. As per formula, annual net profit of RS.6.00 billion was computed in 1991.NWFP claims an amount of Rs.595 billion in arrears, including a principal of Rs 293 billion and Rrs.302 billion interest. Interestingly NWFP Government led by MMA did not mind claiming interest or” Riba”.

A tribunal had been formed under Justice Ajmal Mian, which upheld the big claim of Rs. 193.76 million, disallowing markup. The award of the tribunal did not solve the technical problem. WAPDA says it is in red. Paying such big sums would mean enhancement of already very high tariffs .In this space ,we will try to interpret the constitutional provision in an economic perspective and examine various strains emanating from it. We would also apprise the reader of other possible formulae and international evidence in this respect.

The constitution speaks of “bus-bar”, ( station to put it simply)which implies it means whole sale electricity sales to purchasers, whether it is WAPDA or its subsidiary or any other body. There would be problems of computation ,if whole- sale does not take place and WAPDA retails itself. Barring some initial years ,WAPDA has been in red. GOP is currently subsidizing at a rate of Rs.1.60 ,as per TV statement of the current minister of water and power, which means a loss to the same effect. Under current and recent dispensation ,Central Power Purchasing Authority(CCPA) purchases electricity. If it purchases hydro-electricity separately from every production unit computation of net profit is not very difficult. As per NEPRA rules, a 15% return on equity is provided. But is return on equity a net profit? Some people ask. Some argue that the cost of capital(12%) should be subtracted from it, which makes it 20% of the return on equity.

Internationally, the practice is simple and similar to royalty computation in other resources mineral or oil or gas, that is , a certain percentage of output or revenue at the point of output. It may be in cash or in kind. Normally it is taken as cash on prevailing sales prices. In India it is flat 12%,easy and simple and there are no disputes. The amount goes straight to the kitty of the provincial governments. In Nepal the formula is a bit more complicated .In initial years (10-15 yrs) 2% of the royalty plus a capacity charge is levied as royalty. In later years (15-30 yrs),royalty rate goes up to 10 % plus a capacity charge. The total average effect should be the tune of 10-12% on output/sales at the bus bar rate or whole- sale rate to put it simply. In Brazil , the royalty rate is 6 % on output , which is shared among the federal , provincial , and local governments respectively as 10% ,45 % and 45% . In Turkey m, there is no royalty and in many other countries , it is only 4 %.We would recommend , a rate of 12% which is presumably highest in the world . At this proposed rate of 12 % , and at Rs. 4 per unit, which is the current cost for new power plants ,the royalty would be Rs 0.48 per unit, indeed quite a good and reasonable figure .

A third approach proposed for consideration by the authorities is the payment for the energy content of the hydel electricity. Let us try to understand this through the UCH-2 thermal power plant (gas) which was recently advertised by NEPRA for public hearing. An energy charge of EPP Rs 3.2338per unit and a capital charge (CPP) of Rs.2.007 per unit has been asked for. The hydro power is giving a benefit of Rs.3.2338 per unit as being free(no fuel). Normalising for load factor(capacity utilization) differences (40% LF for hydro and 80% for thermal),the normalized energy charge for hydel comes about to be Rs.1.6164 per unit. This is the fuel value of hydropower in the parlance of oil and gas, with which one is familiar .A 12 % royalty on this, comes out to be RS.0.20 per unit (KWh).For 3428 MW of tarbela , with an estimated 12 billion units of electricity sold at bus –bar, the claim of NWFP government comes out to be RS.2.4 billion per year.

A simple rendition of this approach would be “6% of the average EPP charges for the same year of thermal power plants” .It may please be noted that 12.5% is the international royalty charge rate on oil and gas including Pakistan.

Royalty is to be received by every producer province and paid by all utilities not just WAPDA. IPPs should also pay. Currently NEPRA does not seem to have provision for royalty, although water user charges to the tune of Rs.0.15 per unit have been provided in a recent hydro power project for which a petition for Nepra has been submitted. This may be termed as a royalty of about 3-4% on sales. If the constitutional provision is to be followed brutally, the profits would go to the provincial governments and not to the investors. End of IPPs in the hydro sector! Hence inappropriatness of the net profit approach. The constitutional provision should be either amended or CCI be convened to make a determination keeping in view the constitutional spirit along with economic realities, common sense and international practice.

Conceptually, royalty is a rent or presumptive tax. It is not a share in profit. It is to be paid even if there is no profit. It is a part of the cost of production. Hence conceptually, the net profit approach is misleading, ambiguous and impracticable. It is to be replaced and brought in line with widely practiced international approaches based on a percentage of output or sales. The question of course would be ,reasonably ,how much is reasonable? What is the norm? What would be politically acceptable in the light of varying claims at extremes.

There are two further issues that need to be sorted out;

a) sharing of royalty among provinces where utility is in both the provinces that is Ghazi Barotha ;

b)the share of district(s) from the provincial royalty income, where the resource is actually located and faces the environmental brunt and dislocations of the project This issue would be specially relevant for Skardu and Northern areas, where many new dams are to be built. All these issues are solvable There is enough international evidence available, provided rationality and flexibility is applied. Postponement can only complicate the problems and not solve them.

Analyzing AGN Kazi Award of Rs. 6.billion per year on an annual generation of 6.0 billion units in 1990-1991 ,when award was given, royalty rate or profit ,whatever be the semantics ,comes out to be Rs.1.00 per KWh. For 1990-1991,this is a strange figure, when probably the whole retail tariff was under Rs.1.00 per unit. At current level of Tarbela generation of 12 billion units per year, the NWFP profit/royalty would be Rs.12 billion per year, as per this grotesque formula . Even in 1990-91 prices and without any markup or escalation ,the total NWFP claim would be Rs.326 billion. This is killing the goose that lays the golden eggs.

If a-la India , royalty rates of 12 % ,which in fact are very liberal ,are assumed and current hydro costs of Rs. 4.00 are taken into account , a case for 48 paisas per unit of royalty is made. To give the reader an idea of how low or high the rate of 12% is , in many business sector a profit rate of 7 % is a norm . At this royalty rate current royalty claim of NWFP would come out to be Rs.6.00 billion per annum ,the level at which NWFP royalty has been capped .By the way who says , hydro electricity is cheap. The current spot prices of electricity (firm and at peak) at Henry –Hub in USA are 5.7 cents.

Even the industrial tariff in many states is about at the same level.

Thus there would be no justification of increase or escalation .If retrospective calculations are made, based on an average of Rs.1.35 per unit whole sale tariff, and 12% royalty rate , a claim of RS.48 billion units is generated on a total electricity generation of 326 billion units to date. Add to it a mark up at 10% per annum ,a sum of rs.28 billion, the total NWFP dues come out to be RS.76 billion ,which WAPDA has already paid. Please note that Rs.1.35 is a weighted average of 30 paisas,Rs.1.00 andRs.2.00 per unit respectively for the period 1977-91,1992-2000,2001-2007. In fact these are quite realistic even liberal values.

NWFP leaders would be well advised to look forward to other income from other hydro-projects, which can only be realised through a realistic and affordable, and logical formula. Total hydro power generation these days exceeds 25 billion units per year, generating a royalty of about Rs.12 billion ,based on the proposed formula. Hydro capacity would be doubled in the next ten years ,which would mean an additional royalty income of RS.25 billion at current prices and much more on the then prevailing prices. Efforts should also be made for uniform applicability of the royalty ,irrespective of public or private sector IPPs, which currently is not the case, as said earlier , the latter pay only water use charge amounting to 3-4 % royalty , if you will .

Sindh’s Opposition to Dams;

Sindh has been opposing construction of dams and thus hydroelectricity for a variety of reasons ,including supply risks, environmental consequences in the delta areas and the loss of land. This is not a place to examine the merits of the arguments and losses feared by Sindh. Practically, no hydel capacity could have been added after Tarbela and Mangla and Ghazi Barotha .All major projects are being opposed .Zia and Musharraf both tried their best to get Kalabagh dam implemented. Present government, for reasons of politics of consensus, have not touched the issue and have not made any budgetary allocation for Bhasha or Basu .Only Neelum Jehlum is due for implementation. Why not involve and placate Sindh through a share in royalty on new hydro projects, especially the ones that may come up in Punjab or Northern areas, where the royalty issue has not been completed or has not arisen yet. After royalty is a kind of compensation for loss or consumption of resources, and to the associated environmental and other risks. It has come out that such consequences are not only at the site of the hydro dams , but also affect the delta areas where the rivers fall into the sea. Would a share of 10 % in royalties please the sindh government and the public and political parties? A share of 10 % would mean an annual income of Rs.600 million, if a major hydro scheme is implemented in the northern areas. One could double it , without aggrieving the northern areas as theses are small territories with small populations .This money could be utilized to compensate private and public losses and used for enhancing the incomes and employment in the interior of Sindh. This should not be converted in to cheap slogan of attempts to buy the province. This is a scientific and reasonable approach. If they are lucky, they (sindh) would not get more than Rs. 1200 million from thar coal project of 1000 MW.

Constitutional Ammendment

It is said that article 151) was hastily drafted in 1973 , to solicit support of late Wali Khan of ANP in the atmosphere of coaxing and cajoling which is normal for such bargaining processes. The drafting was bad. Those were difficult times , whoever was available at hand did the job. After the political agreement is reached with the political parties , article 151 a) should be amended, in fact repealed. And article151b) should be modified to include hydel and other mineral resources to be eligible for royalties with gas. The issue of rates and computation to be the domain of administrative matter , as is the case with gas already.

Saturday, January 10, 2009

Coal Power Royalties and Provincial Autonomy

Syed Akhtar Ali


Federal government should sort out the royalty issue on the exploitation of natural resources,so that the lacunae in this respect are removed and the investors feel secure in making their investment decisions. Although the 1973 constitution lays down some guidelines with respect to royalty payments ,these are either vague or outdated
by the events that have subsequently taken place. Take the example of NWFP royalty in hydel power.The matter has been a subject of debate and contention for along time.there have been inputs from late Ghulam Ishaque Khan,AGN Kazi formula,Council of Common Interests’ determinations and tribunals. The constitution provides for the “net profits” from hydel sales to be given to the province where it is located ie., for the time being NWFP.Net profit is avague term.NAPDA is not making any profit It subsidizes
electricity.Government is paying as revealed by consent of minister for water and power,a subsidy of Rs.1.67 per unit.It does not mean that the NWFP should not get royalty.The intent of the law makers should be seen and decisions on specific rates should be left to the administration.There are several approaches which could be
adopted. and a rational and just one adopted through consensus.
Our orthodox bureaucracy may not be in a position to evolve
a suitable formula,neither do they have the ability or capacity.
We have seen foreign consultants coming for even drafting Terms and
References for studies which in a way seems to be a better solution
than beating about the bush and coming out with half baked solutions.
Energy content of the hydel power needs to be rewarded with
royalty.This is not the time and space to discuss technical
details.However,one would like to briefly mention some outlines,so as
to guide the discussion of the issue which has defied solution for
more than two decades.

The possible royalty approach may have the following components;
Firstly, the main premise that has to be accepted is that the energy
content of hydel power is to be rewarded to the producing province
and region(including districts) at par with other energy
resources.Although at par or more or less may be decided according
to relative economics,it has to have some relevance and comparison
with the competing resources.

Secondly,measurement of energy content of hydel power being easier
said than one view the EPP charges of abasket of thermal
resources of thermal plants measures the corresponding energy
contribution of a hydel plant.12 % of the earlier mentioned ought
to be the hydel royalty. The same rate of royalty applies to oil and

Coming to the oil and gas sector,luckily the royalty rates well
defined.But then again there are the issues of well-head provinces.
For some historical reasons,the well-head prices of PPL-Baluchistan
gas are fixed at an incredibly low rate. Baluch leaders are very
angry over this as this does not result in a just and meaningful
revenue,the natural gas pices at well-head being much higher in other
provinces.The royalty could be and should be calculated at the
generally prevailing well-head prices in the country,even if the
fixed well-head prices are to be maintained for contractual reasons.

Similarly the royalty issue on coal and other natural resources is to
be sorted out. At least part of the tusle on Thar coal between the
provincial and the federal government comes out from the
uncertaineties in this respect.due to alack of the public
information system and transparency,we only hearof rumours in this
respect.Vague statements on sindh to get a big royalty or news of
cajoling on a paltry sum of Rs.60 per ton as royalty is heard.We
would recommend a royalty rate of 12% at coal minehead prices,as is
the case in oil and gas,although the general rates are between in India and Australia.In Bangladesh ,it is variable
between6-16% depending on the coal prices.Indonesia being a more
relevant country ,charges 13.5%.of mine head prices. In Indonesia
also now there are issues related to mine-head prices,which they are
trying to tackle through developing a coal price index.

A framework of other provincial taxes on coal such as excise (in
American parlance severance tax),property and other local taxes
should be discussed..In Wyoming,USA in addition to
royalties,additional taxes almost equal to royalty or more are
levied.A total revenue of 850 million dollars,is revised in a
production of 350 million tons,such taxes should be fixed and
guaranteed for a period of ten years.