Banking on infrastructure

Tough times call for difficult decisions; while that argument generally holds true in Pakistan, it seems crunch phases call for sanity to prevail. The Pakistani economy is running into a wall, with inflation and fiscal indiscipline largely being blamed on the government.
Top officials in the Ministry of Finance reportedly voiced concerns about the dwindling state of development finance institutions (DFIs) and there were talks of plans to launch an infrastructure bank to facilitate the development of the real sector of the country.
For those unfamiliar with DFIs, their role in the financial services sector is to invest in long-term capital-intensive projects; and facilitate the development of alternative capital-raising avenues, such as bond markets.
This puts them distinctly apart from commercial banks, whose mandate is to focus on the short-term financing and working capital needs catering to the SME and retail segments of the market.
"Banks appetite for long-term loans is low because our deposit base is of a rather short term nature," commented Ali Raza, President of NBP in a recent interview with BR Research.
Infrastructure institutions pave the way for investments in the economy for projects that offer long-term benefits and create employment in the short term. Development spending has been curtailed in Pakistan due to lack of fiscal space.
According to a 2009 ADB survey, Pakistans total requirements for infrastructure development over the next five years are in the range of $40 billion, but are much higher at about $65 billion if the planned large water storage dams are also included.
Finding financing for the proposed projects is a major concern for the officials. Since the 90s, the IFIs have shifted their focus towards social and humanitarian aspects of social development, so looking to them to bridge the gap won serve the purpose.Long term sovereign bonds may well serve the purpose. But, if recent debt market auction activity is anything to go by, the 30-year PIB remains largely unsubscribed, primarily because major participants are money market players looking for short-term fixed income stakes.
The government and the central bank, together, will need to find incentives such as income tax benefits to make the long-term offering more lucrative. On the monetary side as well, efforts to incentivise the 30-year bond would be necessary.
Similarly, if government debt were to be made exchange traded, it would pave the way for individual investors to be able to offload their investments if they so wished before maturity.
Raising financing for infrastructure may not be a walk in the park, but is certainly possible with the forgotten financial innovation of the 50s and 60s when policymakers from other developing nations used to look towards Pakistan for guidance.