Amending laws to allow Chinese investment
Should China be allowed to take control of our power projects without engaging in a competitive bidding process?
The writer is a graduate of Columbia Law School and a partner at the Lahore-based law firm of Rana Ijaz & Partners
According to a recent news report, China has demanded that all mega power projects, including the Bhasha Dam, the Gadani and Lakhra coal plants, the Tarbela extension project and several transmission lines be handed over to China without any competitive bidding in exchange for a $22 billion dollar Chinese investment in Pakistan. Surprisingly, it was also mentioned in this report that the Pakistani government is seriously considering this offer and is contemplating either using a loophole in Pakistan’s public procurement rules or amending these rules to close the deal.
One obvious benefit of this proposed deal is that Pakistan can get the much-needed cash to shore up its foreign exchange reserves and give its power sector a shot in the arm. The first question though is whether or not Pakistan is being offered the right amount. The second question is that even if we assume that it is the right amount, should China, or for that matter, any foreign country/investor be allowed to take control of these projects without engaging in a competitive bidding process?
The purpose of the competitive bidding process is to obtain services at the lowest prices, openly and competitively, without any nepotism. While cost efficiency is an overriding consideration in awarding such a contract, it must also be ensured that it is not awarded to a company that does not have the requisite experience and expertise. For the Chinese offer, in the absence of competitive bidding, it would be impossible to determine whether or not another foreign company could provide the same service at a lower cost or provide better quality service at the same cost.
As an alternative to competitive bidding, China has demanded that these projects be awarded through direct contracting. Although there is a provision for direct contracting under Pakistan’s public procurement rules, it can only be done in certain exceptional cases. For example, it could be done if there is only one supplier of the service or if changing the current supplier would entail technical difficulties in operation and maintenance. Pakistan’s government could come up with a creative interpretation of the emergency exception for direct contracting and maybe this is the loophole being referred to in the news report. However, citing ‘emergency’ as grounds for direct contracting would be a tough sell, which is why the possibility of amending the law was also mentioned.
Even if the government can show that the Chinese supplier has the requisite expertise and offers the most cost-efficient option, amending our country’s laws to accede to a foreign country’s demand would set a bad example. What if other countries also refuse to participate in competitive bidding before investing in Pakistan in the future? They could argue that if Pakistan made an exception for China, why can’t it do the same for them? It is a slippery slope.
Amending our laws would also signal to the international community that by throwing money at Pakistan, a foreign company can change Pakistan’s laws to fit its own requirements. Even if we disregard the financial and legal aspects, there is an important strategic element to this. The proposed transaction involves our power sector and it needs to be thoroughly deliberated whether or not it would be wise to hand over a substantial part of our power infrastructure to a foreign entity that may not be the most reliable and efficient manager of such assets.
This proposed deal seems like a quid pro quo for essentially getting a loan from China. It seems to be motivated by the same short-termism and myopia our leaders have been guilty of whereby they look for quick fixes and the political mileage that comes with it. The considerations for such large investments in our power sector should not be some superficial political gain or short-term economic gain. These decisions should be based on a national policy that encompasses economic factors, a coherent and stringent regulatory framework and a long-term vision for our national assets.
Published in The Express Tribune, January 23rd, 2014.
One obvious benefit of this proposed deal is that Pakistan can get the much-needed cash to shore up its foreign exchange reserves and give its power sector a shot in the arm. The first question though is whether or not Pakistan is being offered the right amount. The second question is that even if we assume that it is the right amount, should China, or for that matter, any foreign country/investor be allowed to take control of these projects without engaging in a competitive bidding process?
The purpose of the competitive bidding process is to obtain services at the lowest prices, openly and competitively, without any nepotism. While cost efficiency is an overriding consideration in awarding such a contract, it must also be ensured that it is not awarded to a company that does not have the requisite experience and expertise. For the Chinese offer, in the absence of competitive bidding, it would be impossible to determine whether or not another foreign company could provide the same service at a lower cost or provide better quality service at the same cost.
As an alternative to competitive bidding, China has demanded that these projects be awarded through direct contracting. Although there is a provision for direct contracting under Pakistan’s public procurement rules, it can only be done in certain exceptional cases. For example, it could be done if there is only one supplier of the service or if changing the current supplier would entail technical difficulties in operation and maintenance. Pakistan’s government could come up with a creative interpretation of the emergency exception for direct contracting and maybe this is the loophole being referred to in the news report. However, citing ‘emergency’ as grounds for direct contracting would be a tough sell, which is why the possibility of amending the law was also mentioned.
Even if the government can show that the Chinese supplier has the requisite expertise and offers the most cost-efficient option, amending our country’s laws to accede to a foreign country’s demand would set a bad example. What if other countries also refuse to participate in competitive bidding before investing in Pakistan in the future? They could argue that if Pakistan made an exception for China, why can’t it do the same for them? It is a slippery slope.
Amending our laws would also signal to the international community that by throwing money at Pakistan, a foreign company can change Pakistan’s laws to fit its own requirements. Even if we disregard the financial and legal aspects, there is an important strategic element to this. The proposed transaction involves our power sector and it needs to be thoroughly deliberated whether or not it would be wise to hand over a substantial part of our power infrastructure to a foreign entity that may not be the most reliable and efficient manager of such assets.
This proposed deal seems like a quid pro quo for essentially getting a loan from China. It seems to be motivated by the same short-termism and myopia our leaders have been guilty of whereby they look for quick fixes and the political mileage that comes with it. The considerations for such large investments in our power sector should not be some superficial political gain or short-term economic gain. These decisions should be based on a national policy that encompasses economic factors, a coherent and stringent regulatory framework and a long-term vision for our national assets.
Published in The Express Tribune, January 23rd, 2014.