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Navigating FDI challenges in power sector

The latest investment setback suffered by the renewable energy sector in Pakistan is the unsuccessful endeavour to attract investors for a 600-megawatt solar power initiative in Muzaffargarh. Despite the provision of numerous incentives and the extension of deadlines, the initiative failed to garner any bids. This exemplifies some profound issues plaguing Pakistan’s energy sector, a microcosm of the more significant economic challenges. This fiasco is a perfect example of the numerous barriers and impediments the nation is evading in its pursuit of renewable energy sources and carbon footprint reduction.

The solar power venture, intended to serve as a model for boosting renewable energy via international competitive bidding as per the Indicative Generation Capacity Expansion Plan (IGCEP), encountered challenging circumstances. After several iterations of bidding and additional incentives initiated in the latter part of 2023, the energy sector’s investment attractiveness was indeed cast doubt on January 11, 2024, due to the absence of potential bidders. This situation also leads to more extensive inquiries regarding the energy incentives and the sector’s modus operandi.

Analysts cite several key factors that contributed to this failure when analysing the inability to attract bids. Political instability emerges as a primary concern, providing an environment with policy inconsistency discouraging investment. This instability further raises investor risks already on the higher side due to low credit ratings facilitated by challenging currency devaluation, high inflation, and fiscal deficits lurking big on the macroeconomic makeup. Massive circular debt outstripping Rs2.6tn as of October 2023 indicates systemic inefficiencies and payment delays impacting financial viability, rendering the power sector unattractive. These include the issues arising from delayed payments to Chinese investors within the CPEC and underlining the risk in the energy sector. Again it is believed that the benchmark tariff regime, at rates too low for investor interest, was enabled by project costs out of derivatives of government expectations and the reality of markets. Although revisions and improved conditions continued, these fell short of offsetting the predominant concerns shaped by the broader economic and political climate.

Despite commonly agreed wisdom, one can quickly finds several examples where political instability, macroeconomic conditions, circular debt and poor credit rating did not affect FDI.

Although challenged politically, the Democratic Republic of the Congo has the largest reserve of minerals, attracting a lot of FDI in this mining sector. One such country that still witnesses investment is Nigeria, with political unrest at hand and security risks, which, around a decade ago, had raised doubts about the safety of business pursuits in Nigeria. Iraq is another example where prolonged conflicts have failed to affect FDI flow into the oil and gas industry, even with proven resources in mind. Venezuela has historically seen investments in its petroleum-rich sector that dwindled further with severe political and economic problems, including social unrest and corruption.

Egypt, undergoing political upheavals since the Arab Spring, has attracted FDI across various sectors, including energy and infrastructure, leveraging its strategic location and large market size. Despite political instability and international scrutiny, Myanmar attracts FDI in the natural resources-based garment manufacturing and natural gas sectors on the strength of its natural resources and labour market. These examples underscore that, while political stability is desirable, other compelling factors, from natural resources to market size to strategic positioning and sector-specific opportunities, can outweigh political risks and draw FDI even in less stable environments.

Similarly, despite facing unfavourable macroeconomic conditions, several countries have successfully attracted FDI in renewable energy. India, Brazil, South Africa, Kenya, and Mexico have demonstrated that supportive government policies, abundant natural resources, and strong market potential can significantly outweigh economic challenges. These countries have drawn substantial investments in renewable energy projects, showcasing that strategic advantages and targeted policy initiatives can effectively compensate for less-than-ideal economic environments, thus maintaining their appeal to foreign investors in the renewable energy sector.

Furthermore, countries like India, South Africa, Greece, and Egypt exemplify power sector debt resilience. Despite its considerable circular debt in the energy sector, Pakistan continued to draw FDI in renewable energy projects, buoyed by its high potential in these areas and government initiatives promoting renewable energy development. Similarly, India has maintained its appeal as a destination for renewable energy FDI, leveraging its large market, ambitious renewable energy goals, and supportive government policies despite facing power sector debts.

South Africa, too, has attracted significant FDI in renewable energy, navigating through the financial difficulties of its power utility Eskom, primarily due to the success of its Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) and abundant renewable resources. Greece and Egypt, each battling their energy sector challenges, have also managed to draw substantial investments in renewable energy, particularly solar and wind, aided by favourable conditions and strong government commitment. These instances illustrate that while sector-specific debts can impede investment, they are not the sole determinants of FDI flow in renewable energy.

The critical question centres on identifying the fundamental issues that have hindered the successful acquisition of bids for the solar project. Several contributing factors emerge from this analysis. Initially, bureaucratic hurdles within the power sector have proven to be a significant impediment. While the PPIB extends its support to all investors, the performance of other government entities has offset this effort. Most departments have been misguided by pseudo-consultants and held back by conservative perspectives. Furthermore, the frequent shifts in investment policies and regulatory frameworks have confused investors, hampering market competition. A limited mindset among government officials has also stagnated progress, necessitating a shift towards more innovative thinking.

The proof of all these factors is a concentration of power generation projects/ sponsors at the Special Investment Facilitation Council (SIFC), which was constituted to address the regulatory and bureaucratic challenges that hinder FDI.

The frequent policy shifts and regulatory inconsistencies within the IGCEP significantly impede the efforts to attract FDI in renewable energy. The practice of reclassifying projects (as committed, optimised and candidates) within the IGCEP, coupled with prolonged approval processes and dynamic regulations, generates an atmosphere of instability. Investors grapple with heightened administrative burdens and compliance costs, necessitating continuous adaptation to a turbulent policy landscape. These delays and unpredictabilities in project timelines and financial planning markedly dissuade foreign investors who prioritise predictability and long-term stability.

The preparation of a new IGCEP is in process and a totally new set of assumptions is recommended by the consultants of Power Division, which exacerbates these uncertainties. Proposed alterations to previously ratified assumptions by the Council of Common Interests (CCI) are being made by the Power Division and its consultants without involving the critical private sector, which plays a pivotal role in investment decisions. This raises crucial questions about the consultants’ unilateral modification of CCI-approved decisions. The core issue of uncertainty stemming from these policy and regulatory shifts remains unaddressed, undermining the energy sector’s ability to attract the necessary FDI.

Drawing upon an exhaustive examination of the obstacles confronting renewable energy industry, specifically the investment environment characterised by ambiguities in policy and regulation, it is critical that the nation enact substantial reforms to entice FDI. The primary advice is to establish a solid, transparent, and predictable policy framework. Ensuring transparency and coherence in the IGCEP should be the primary focus of this framework. Furthermore, any alterations to the IGCEP must be executed via a consultative procedure that engages all relevant parties, including the private sector. Adherence to international best practices ensures that these rules and laws cultivate a reliable investment climate.

Furthermore, it is imperative to optimise approval procedures and reduce bureaucratic obstacles to alleviate the administrative strain experienced by investors. This includes ensuring the consistency of roles and regulations established by organisations such as power sector regulator NEPRA across time. The country can alleviate the unpredictability and hazards that dissuade prospective investors by minimising policy changes and regulatory oddities. In addition, by facilitating a discourse among governmental bodies, investors, and other relevant parties, it is possible to address apprehensions and expectations and assist in bridging the gap in trust. Consistent communication and transparent decision-making have the potential to bolster investor confidence significantly.

Asim Javed, "Navigating FDI challenges in power sector," Business recorder. 2024-01-16.
Keywords: Economics , Energy sector , Renewable Energy , Political instability , International scrutiny , Solar power , Circular debt , Macroeconomic conditions , Economic challenges , Pakistan , Nigeria , Iraq , Nepra , IGCEP , FDI

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