Infrastructure development: Challenges and prospects

The economy of Pakistan is presently fluctuating between 3.5 to 3.7 percent, although the country remained successful in maintaining an average GDP growth of 5 percent (1972-2013). This is by far an average performance; although the political instability, policy hiccups and other socio-economic reasons hampered the smooth sailing in the economic domain. Moreover, the historical data since 1960 depicts rather a bleak view of ‘investment to GDP ratio’ that has also been very low within the range of 18 percent. The recent history shows a consistent fall from 22 percent in 2007 to existing 13.4 percent.

This clearly shows hindsight of monetary policy and laid-back attitude towards attracting investment in the potential sectors of economy. Although there could be multiple reasons underneath the low investment response; however the frail status of infrastructure is one of the debarring reasons, which caused the slowing down of the overall pace of development. The performance in the infrastructure sector is the key factor that motivates the investors for the informed investment decisions in favour of certain country. In the case of Pakistan; the shabby performance in the infrastructure sector has rather hastened the collapse on the economic side.

Pakistan is an example of typical developing economy where the status of infrastructure is still not up to mark in comparison with international standards. The performance in the infrastructure development side can be gauged from the Global Competitiveness Index (2012-13); recently issued by World Economic Forum (WEF). In this respect, Pakistan could hardly manage the rank of 116 among 144 economies of the world in terms of the status of infrastructure. Due to unavailability of quality infrastructure, Pakistan loses almost 4-6 percent of its GDP, which is approximately $6 billion. In this regard the logistic problems also cause substantial increase in the production cost by 33 percent that puts a lot of pressure on the economy in competing at international level. The naïve complacency over this performance is simply unaffordable and some serious efforts are required to improve the dilapidated status of infrastructure as well as financing this widening gap. Against this backdrop, the injection of local as well as foreign investment on acceptable terms and through right kind of policy instruments is the imminent need of the hour.

While financing its infrastructure requirements, the fiscal performance of Pakistan is one of the main barriers, which leaves little space for its optimum performance in the infrastructure development. In this regard the Current Account Deficit (CAD) stands around $1.418 billion during July-April 2013; which is quite alarming. In this regard the consolidated budget deficit appears to surpass Rs 2 trillion, which is equivalent to about 8.5 percent of GDP. With this dismal scenario, there is little left for the government to fund infrastructure projects from public sector resources. In addition to this the reasons behind such poor performance are not only financial in nature but there are other potential causes which deal with the operational capacity at institutional levels to run the national enterprises efficiently on pure business and commercial lines.

By the careful estimates the existing backlog in the infrastructure sector (including power, transport, health and education sectors etc) exceeds $100 billion. In this situation this will be a far cry to expect from the government to pull the load from its own pocket resources. The logical alternate option is to look for either multilateral or private sector’s support in managing this uphill task. But the question is; how far we are ready at our policy and institutional levels to address this challenge?

In order to manage infrastructure projects through public-private partnership, The Infrastructure Project Development Facility (IPDF) was created to function under Ministry of Finance in 2006. The organisation has been functioning with a bulged scope across transport, energy and municipal level projects. Although the functional scope seems ambitious; it rather hampered the focused performance in certain sub sector. At the time of its establishment there was no other similar kind of organisation at federal or provincial levels except PPIB that has been facilitating the development of IPPs at federal level. However, with the passage of time the ground realities started changing and the provinces took charge of infrastructure finance matters in their hands through opening their own Public-Private Partnership (PPP) organisations.

Presently, the PPP units in Sindh, Punjab as well as BOIT in KP are already working on the themes of procuring Public Private Partnership for their infrastructure projects within their functional domains. In this regard Sindh and Punjab have already sought the enactment of PPP law in 2010, which shows the agility of provinces in managing their core infrastructure requirements. These PPP units at provincial levels have clear mandate to work for the generation of PPP projects in their area of jurisdiction. With this development in hand, the conflict of interest and mandate between federal and provincial organisations seems dangerously evident. In this regard the policy makers should take up this matter seriously and spell out an unambiguous division or modification of institutional scope that may offset the eruption of galling differences across the board. In this regard any duplication or overlapping may also confuse the foreign investors who always prefer the least risk option for their investment.

Needless to mention that the mushroom growth of PPP units in the provinces is not in any way the part of a coherent and well-hatched PPP strategy, rather the system has been allowed to react by the internal pressure of the immediate infrastructure requirements. Although, this tendency in some situations may yield good results, however, in a country like Pakistan with tightened fiscal situation, we can hardly afford to have a loosely-structured institutional set-up with blunt focus and overlapping functional jurisdictions. In this regard, the parenting ministries like P&D and Finance at federal level share major responsibilities to revisit the mandate and functions of different PPP units working at federal and provincial levels. This accordingly will determine the level and mode of interdepartmental collaboration as well as to build a coherent and well-co-ordinated PPP structure for the infrastructure projects in Pakistan in the long run. In the face of continued institutional development at the end of provinces, the IPDF at federal level has rather became an irrelevant organisation; if not completely obsolete. In this regard the most immediate responsibility of the government is to review the mandate as well as past performance of IPDF and revamp its existing set-up with sheer spirit of accountability and readjustment.

The Public-Private Partnership (PPP) mode of financing infrastructure projects is still maturing in Pakistan and the process can be further expedited through the immediate enactment of PPP law at federal level. This law is expected to streamline the responsibilities of different organisations, which are supposedly managing PPP projects in different infrastructure sectors. In the absence of any such legal initiative, the role of institutions like IPDF has been reduced to mere forum shopping. For the anticipated Public-Private Partnership, although different organisations converge towards IPDF for seeking PPP support, but either at their own sweet will, or through the persuasion of IPDF itself. However these are not being driven through mandatory legal provisions and the course of action enshrined by law. In the past we have witnessed many projects, where different public sector organisations approached IPDF for the technical support and later on abstained amidst; despite the deployment of resources from the other side. This practice is tantamount to sheer wastage of resources and time and clearly indicates a legal gap which ought to be filled through some solid and irreversible enactment of legal framework for the PPP projects at federal level.

At the moment, infrastructure finance is one of the crucial challenges being faced by the economy and therefore should be owned and protected at the highest levels of governance. Without consistent and continued support by the government, this process will definitely increase the risks of stakeholders and may yield only half-baked results. While understanding the true importance of infrastructure development, this sector should not at all be treated as cut on budget or mere an investment-intensive activity, rather to be taken as strong attractant of foreign direct investment.

(The writer is US State Alumni, Massachusetts Institute of Technology (MIT), USA)