By Megha Bahree, Forbes, July 13, 2009.
One big contributor to the chaos in Pakistan is power outages. They can last for 14 hours. They crimp an already troubled economy, playing into the hands of the Taliban and Al Qaeda. As recently as May citizens of the financial and port city of Karachi thronged the streets and attacked a government electricity office because of long and frequent outages. In summer 2006 Karachi was out of power for 36 hours and gripped by rioting.
Iqbal Z. Ahmed, chairman of the privately held Associated Group, identifies with his suffering countrymen. On a 110-degree day in late May he sat for an interview at the sweltering head office of his energy firm in Lahore, commercial center of the Punjab region. Barely a mile away and two days earlier jihadists blew up a security building, killing at least 35 and injuring 400.
On this afternoon at AG periodic silence in the room was broken by the loud throbbing noise of generators in the vicinity—the sound of another outage. But the generator that would normally kick into gear at his office had overheated and was not working.
At a peak moment the supply of juice in Pakistan is 28 percent, or five gigawatts short of demand. For Ahmed, 63, this is an opportunity. His family-owned business is the nation’s biggest producer of liquefied petroleum gas (LPG). That led Pakistan’s former ruler Pervez Musharraf to come knocking in 2006. Musharraf needed help generating electricity.
Despite a history of crash projects and billions of dollars in handouts from the U.S. and Europe for power production, Pakistan was still gasping for juice. Solution: small power plants built quickly and rented out to federal power authorities. Cities globally have, on occasion, used short-term equipment rentals to fill a special need, such as hosting the Olympics. Ahmed’s plants are larger (at 50 to 205 megawatts) and longer lasting. They can be put up in six months, as opposed to the minimum three years required for a larger permanent power plant. A typical AG contract lasts from three to five years, at the end of which AG can dismantle and move the equipment or renew the pact.
Ad hoc is sometimes the best way to do business in as volatile a place as Pakistan. Ahmed credits the idea of temp power to AG’s U.S. business partner David Walters, a former governor of Oklahoma, whom he’d met through another American in the energy field. Walters Power International, the ex-official’s firm, had been trying for years to gain a foothold in Pakistani power generation.
Other companies have had the same idea. General Electric was first to land one of the Pakistan rental power contracts, and several small domestic entities are now in the business.
Walters was in Pakistan within 72 hours of Musharraf’s request to Ahmed. The partners set up Pakistan Power Resources, incorporated in Oklahoma and 65 percent owned by Ahmed’s group. Their first plant, opened in late 2007 near Lahore, was built with a couple of stipulations: The government had to guarantee payments for service and uninterrupted gas supplies.
Ahmed and Walters plan four subsequent plants, but—a renewed commitment from Pakistan after Musharraf lost the presidency in 2008 notwithstanding—they are not having an easy time of it. The venture’s prices are controlled under the pacts with the authorities. Last year AG enjoyed a 12 percent net margin on its revenues. This year’s margin won’t be as good, says Ahmed. The reason is not just the cost of setting up the electric plants but also the drop in oil prices that brought down its profits from the LPG business. Last year PPR contributed 10 percent to AG’s revenues. This year it’s expected to be 18 percent and next year 40 percent.
The government debt guarantee should make financing a cinch. Alas, the government itself does not enjoy good standing in the credit market, and PPR, on its new projects, faces 17 percent interest on domestic rupee-denominated loans from Pakistani banks.
Pinching pennies at the initial 136-megawatt gas-fired plant outside Lahore, Ahmed uses as much zero-rated equipment as he can, bought in the U.S. and refurbished. The six-acre site uses three gas turbines, cousins of those that (using jet fuel instead) go on a Boeing 747. PPR figures that if it can’t get an extension when the initial contracts run out, it can sell the machinery or take it elsewhere in the region, including Iraq, Yemen, Kuwait and Bangladesh, and clear $50 million on each setup.
“Look, the rewards are [not] proportionate to the effort—but only until things get going,” says Ahmed, clad in his everyday shalwar-kameez, a traditional knee-length tunic worn over loose pants. “I’m taking a businessman’s risk. Three years later there will still be a demand for power, things won’t have crashed, and all will be well.”
Ahmed is used to taking entrepreneurial risks and suffering the bumps that come with them. Born in Patna in eastern India a year before partition, he reached Lahore as a teenager (after bouncing around the newly created Pakistan), when his father retired there as deputy inspector general of police. In 1965, while he was still in college, he and his father started a business with $6,000, importing Lambretta scooters from Italy. This didn’t do too well as Vespas were the fad.
Father and son switched to importing and manufacturing television sets from the Japanese company NEC. This had a successful run for several years until NEC abandoned the TV business. In between Ahmed was also importing tractors from Yugoslavia, at least when the Pakistani government wasn’t busy nationalizing all businesses in the 1970s. “We were in a lurch until 1980, when the private sector was allowed back in,” he recalls. Tractors proved “a real money spinner for us”—until the Balkan wars ended that business, too.
Along the way Ahmed set up a company to store, bottle and sell LPG to distributors, which led to his next big move: In 2005 he built a plant to produce LPG from “wet” natural gas. AG’s revenues have grown tenfold since then.
“My dreams are really fulfilled,” he says. “I’ve set up projects that are the envy of Pakistan. People are coming from the Middle East, eastern Europe, Africa, to learn from us. We can help solve the country’s power crisis.” Let us all hope.