Government’s commercial capability

The potential fine in Reko Diq case could run into billions of dollars. Apparently the country is now looking for a new investor who could pay off the expected fines against the future earnings from the mine. But ultimately it’s the taxpayers who would be paying this cost.

Ironically, this is not an isolated incident. In recent years, Pakistan has had a dismal experience in negotiating and settling complex commercial transactions. For instance, the proposed acquisition of K-Electric by Shanghai Electric Power and the LNG deal with Qatar have been questioned time and again.

This track record of having so many outstanding international disputes and their poor handling is a direct manifestation of government’s inability to manage complex commercial transactions. More than a trillion rupees are spent every year in public procurement, yet most of the government agencies seem to perpetually wrestle with procurement modalities. In case of such expensive complex transactions however, this weak capacity becomes all the more critical.

The fear of harassment by anti-corruption watchdogs with poor procurement capacity then forms the perfect recipe for such commercial disasters which on the one hand results in billions of dollars of lawsuits and arbitration claims and on the other discourages other foreign investors to come to Pakistan.

How do other countries deal with such capacity challenges? The UK government manages public procurement through a specially-constituted government commercial function, with 4,000 civil servants especially trained in public procurement of goods and services.

But more importantly, within this function, the government employs a handful of senior commercial experts from the private sector, with years of experience and deep industry knowledge, who provide support in designing and managing important commercial contracts.

In Pakistan, we must realise that the role of the government has greatly evolved over the last few decades. Much of the work at senior government level now is about anticipating and planning for commercial needs and then designing and executing these contracts. This has become all the more important with constraining fiscal space, bilateral investment frameworks such as CPEC, emphasis on public-private partnerships and increasingly complex nature of mega contracts with huge contingent liabilities.

Conceptualising, designing and executing such complex commercial contracts are a specialised function, requiring special skills even to hire external transaction advisers and to oversee them. And in Pakistan, the bureaucracy has little capacity to undertake requisite commercial analysis, develop business cases, provide procurement advice or negotiate and close deals. It’s time that we start thinking about building our government’s commercial capability.

In the short term, the solution is to employ experienced experts from the private sector and deploying them in ministries/agencies with major commercial portfolios such as power, oil and gas, mining, civil aviation and ports and shipping. In the medium term, the government should introduce professionally-designed procurement curriculum in mid-career and senior management courses at the National School of Public Policy and possibly introduce a stream of civil servants specialised in commercial management.

A number of important transactions are presently in the pipeline such as the proposed Russian investment in Pakistan Steel Mills and the $10b offshore pipeline, future CPEC contracts, Iran-Pakistan gas pipeline, expected Saudis investment in refinery and LNG power plants, etc.

A timely action can greatly support the government in managing these future projects well, claiming maximum value for the government and preventing unnecessary expensive disputes in future.

Published in The Express Tribune, March 19^th, 2019.

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