By Hasaan Khawar
Monday, 15 Feb, 2010 | 02:39 AM PST | Economic & Business Review
THE government is considering a possible reduction of more than Rs160 billion in the Public Sector Development Programme (PSDP), while the ministry of finance is pushing for an even bigger cut of close to Rs190 billion.
These massive cuts indicate the rising constrains on fiscal space, partly owing to sluggish economic performance translating into shortfall in projected tax revenue receipts and partly to the unfulfilled pledges of Friends of Democratic Pakistan.
This proposed reduction in development budget will take a severe toll on a number of mega infrastructure projects in power generation, transport, urban development and irrigation sectors. On the social side, it is likely to dilute government’s poverty alleviation efforts.
The government is projecting an estimated GDP growth rate of 3.3 per cent in the current financial year, whereas the long-term GDP growth target stands at 6-8 per cent. While in the short- run, the proposed reduction in development expenditure would further delay the much needed development projects, in the long run, it would seriously impede government’s efforts to achieve the projected economic growth.
Infrastructure development and economic growth are strongly correlated. By ensuring availability of energy, providing for a well-developed road and rail network and ensuring efficient urban services, infrastructure development induces investments, creates employment and spurs industrial development, thus contributing towards sustainable economic growth.
If however, infrastructure is not developed at the requisite pace, economic growth is threatened by deficient coverage and poor quality of infrastructure services, which manifest themselves in power shortages, traffic congestion, high transport costs and other infrastructure bottlenecks.
According to World Bank, an increase of one per cent in a infrastructure stock is associated with a one per cent increase in the level of GDP. China has been investing up to nine per cent of its GDP in infrastructure to sustain the dynamic economic growth of 9-11 per cent per annum. Similarly, before the Asian financial crisis of 1997, Indonesia invested about six per cent or more of its GDP to sustain the long-term economic growth of eight per cent annum.
Although there is no single benchmark for assessing adequacy of infrastructure investments but according to an estimate, the low-income countries in East Asia need to spend at least 6.3 per cent of their GDP on infrastructure, to meet the investment needs. It is no surprise that ‘development of world-class infrastructure’ was termed as one of the seven pillars under the Poverty Reduction Strategy Paper II. Interestingly however, the public sector infrastructure spending stands at less than two per cent of the GDP.
Besides low public spending, the dismal state and inadequacy of infrastructure makes it necessiry to focus on this area. Currently, about 45 per cent of population has no access to electricity and even those with access suffer from frequent power outages. The lack of power generation capacity is compounded by a worn out transmission system, resulting in a whopping 25 per cent transmission and distribution losses.
In transport sector, almost half of the national highway network is in a poor to very poor condition and it is increasingly becoming difficult for this network to serve bulk of the passenger and freight traffic. Moreover, with urban population of more than 35 per cent and a staggering three per cent rate of urbanisation, the need for adequate investments in infrastructure services such as water supply and sanitation and urban transportation becomes all the more critical. Within the social sectors, the public education infrastructure is in a dilapidated condition, whereas in health sector, only three per cent of rural households have access to government hospitals, four per cent to rural health centers and 18 per cent to basic health units, highlighting the need to build new facilities. According to Asian Development Bank, Pakistan needs $65 billion for infrastructure development during the next five years, whereas IPDF estimates the requirement to be $110 billion.
The projected infrastructure investment needs are humongous in magnitude and cannot be met by the government kitty alone. The recent reduction in PSDP would worsen the situation and therefore underscores the need for government to tap into other resources. In the wake of resource crunch, the government should adopt a four-pronged approach.
First, the government should prioritise development projects, which need public spending and have little attraction for the private sector, and the PSDP funding should only be directed towards these high priority initiatives, rather than keeping the taps flowing for all the projects and allowing the proposed cuts to slow down the overall development pace.
Second, in projects with reasonable prospects for cost recovery, such as tolled roads, bridges, urban water supply and sanitation, solid waste management, transport, etc. the government should promote public-private partnerships. Although IPDF has been actively involved in this area, till date, there has been no federal legislation on this subject. A draft PPP policy has also been pending for approval since long.
A comprehensive, transparent, legal and policy framework can play a key role in assuaging the concerns of the private investors in dealing with the government. Once the PPP framework is developed, the focus should be to quickly prepare a portfolio of projects and offering them to prospective investors, through competitive bidding, while generating wider interest through international investment roadshows.
The projects originally planned under PSDP, with detailed PC-Is and feasibilities already developed, can be prepared for PPP transactions, with little effort and relatively quickly.
Promoting private investment can be the third prong of this strategy, although given the current law and order situation, it would be a long and arduous process. Besides general security situation, such investments would depend upon fostering an investor- friendly business environment.
Last but not the least, the government should also consider other financing means to fund infrastructure development. Such means may include tapping into domestic capital markets through issuance of municipal bonds, seeking multilateral project financing or commercial lending.
There is no single solution to meet the widening infrastructure needs and the government will have to adopt a multi-pronged strategy to face this challenge. It is time that infrastructure development should be given a key priority in government’s agenda, followed by developing sufficient institutional capacity within government to be able to execute an effective strategy.