Minister for Finance Muhammad Aurangzeb claimed at the launching ceremony of BYD, a Chinese company globally regarded as the frontrunner in the manufacture of electronic vehicles (EVs), in partnership with Mega Motor Company (a unit of Hubco, the first Independent Power Producer established in Pakistan), that the government has launched a comprehensive plan to achieve economic stability driven by private sector investment, export-led development and foreign direct investment.
BYD decision to set up a factory in Karachi must be appreciated, be it reflective of the Pakistani stakeholders’ success in luring foreign direct investment, or be it BYD’s perception that setting up a plant in this country will be profitable - from the perspective of a vibrant market and cheaper labour and/or lower taxes that would bring its manufacturing cost down to make its EVs even more competitive in the domestic market as well as internationally.
BYD would have almost certainly taken note of Pakistan’s current GSP Plus status with the European Union (EU) granted in 2014 in the aftermath of the devastating August 2013 floods which affected 1.5 million people, destroyed 80,000 houses and 1.5 million acres of crops.
A 21 November 2023 EU press release, citing the fourth biennial report covering the period from 2020 to 2022 tasked to assess effective implementation of 27 underlying international core conventions that cover areas of human rights, environmental standards, and good governance, noted that GSP: “serves as a special incentive arrangement to promote good governance and sustainable development by facilitating trade.
The incentive grants Pakistan zero-rated or preferential tariffs on nearly 66% of tariff lines, enhancing the country’s ability to export to the EU market.“ And it acknowledged “Pakistan’s progress on the legislative front, while emphasising the need to improve practical application in both letter and spirit.”
It is unclear whether EVs made in Pakistan by BYD will be eligible for zero-rated or preferential tariffs in the EU. Earlier this year the European Commission (EC) slapped prohibitive tariffs on EV cars though companies (Chinese or others including Tesla and BMW) that cooperated with EU’s anti-subsidy faced a lower hike – 17.4 percent on top of the existing 10 percent. While other companies have stated they will raise prices in the EU market, BYD faces the lowest hike of 17.4 percent (above the 10 percent) and has yet to reveal if it will raise the price of its car in the EU.
Be that as it may, Pakistan is not the first country where BYD has decided to set up a plant. In the first week of July 2024 BYD opened a factory in Thailand, its first outside China, at an estimated cost of 450 million dollars, a decision announced two years ago, with the declared intent to export to other ASEAN countries. The right-hand drive EVs will, there is speculation, potentially allow BYD to circumvent the prohibitive tariffs imposed by the EC on China-made EVs.
The BYD plant in Thailand will be part of the 1.44 billion-dollar investment envisaged from Chinese EV manufacturers into Thailand, helped by subsidies and tax incentives.
Xueliang BYD General Manager for Asia Pacific stated in Thailand that “we will also assemble batteries and other important parts here.” Apart from Pakistan, BYD has signed deals to begin manufacturing in Hungary, Turkey, and Brazil.
Xueliang while attending the launching ceremony in Lahore stated that “our entry into the Pakistani market is not just about bringing advanced vehicles to consumers, it’s about driving a broader vision of environmental responsibility and technological innovation.” He added that the company intends to open “three flagship stores and experience centres” in Pakistan and intends to sell two SUV models and a sedan from October-December 2024.
Hubco Chief executive during the launch referred to the “landmark investment” by BYD, adding that the plant will begin operations in 2026 and pledged the establishment of Pakistan’s first electronic vehicle plant dedicated to producing BYD’s cutting edge new energy vehicles. The amount of foreign direct investment that would be forthcoming, nor the envisaged and/or negotiated local and foreign equity or applicable taxes for the project, was revealed.
Pakistan to date has only 8 electric vehicle charging stations, as per Electromaps that globally tracks EV stations, 3 in Islamabad, 2 in Lahore, and one each in Karachi, Hafizabad and Sargodha.
Hubco has pledged its intent to set up fast charging stations across major cities, motorways and highways to strengthen the charging infrastructure though there is one glaring impediment it faces: the power sector in Pakistan is appallingly poorly managed and accounts for the highest tariffs in the region partly due to reliance on imported fuel and partly due to contracts signed with the IPPs. At present, the circular energy debt is 2.4 trillion rupees, 3.8 percent of the country’s Gross Domestic Product and 5.6 percent of government debt.
The energy sector issues remain hopelessly entangled in firm contracts with 2015 Independent Power Producers (IPPs), mostly Chinese firms, that envisage capacity payments (which will make electricity even more expensive if provincial attempts to shift to cheaper renewables come to fruition as demand from the IPPs will decline though capacity payments will not), with the consumers forced to pay interest on borrowings by the sector as well as losses due to the antiquated transmission system and theft.
To date the focus of energy reforms has been on (i) shutting off feeders where receivables are high though the focus should be on shutting off electricity to those who do not clear their bills (above a certain minimum bill after three warnings like in other countries) as shutting off feeders in poor areas is a serious human rights issue (as pointed out by the Law Ministry). Reports that Discos staff/law enforcement officials who went on site to disconnect supply were beaten up by staff of public and private sector entities needs to be dealt with through punitive law enforcement measures; (ii) providing untargeted subsidy to those consuming 200 units or less (with the Punjab government announcing a two-month subsidy of 14 rupees per unit to those who consume under 500 units per month), subsidies that should be channelled through Benazir Income Support Programme; and (iii) privatisation should not be entertained without an in-depth study of K-Electric’s performance which was privatised in 2005 but remains the recipient of 174 billion rupees under the policy of tariff differential equalization from the federal 2024-25 budget – money sourced to all taxpayers and in addition is supplied 1400MW from the national grid.
The focus of the government must first be on reforming the power sector by out-of-the-box solutions including abandoning the tariff equalization policy and taking care that monopolies are not created after the sale of Discos. In addition, Pakistan’s fragile economy militates against extending tax incentives and/or subsidies to any company – foreign or local.
To conclude, one hopes that the Law Ministry, the FBR and the Finance Ministry carefully review the agreement with BYD to ensure that the general public is not forced to pay a heavy price at a later date as has been the case with contracts signed with IPPs.
Copyright Business Recorder, 2024
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