ISLAMABAD: There have been various challenges to Public Private Partnership (PPP) implementation in Pakistan including the lack of coordination results in overlapping efforts and regulatory risks for the private sector, unclear framework for dispute resolution, conciliation, and arbitration and lack of long-term debt financing in the market, says the Asian Development Bank (ADB).
The ADB, in its latest report, "Public Private Partnership Monitor Pakistan," stated that though the PPP market in Pakistan has relatively matured because of constitutional provisions, much of the activity in PPPs has been at the provincial level.
There have been various challenges to PPP implementation in Pakistan.
The federal procurement policy provides a sufficient framework for transparency and competition, but projects are subject to sector and provincial laws, which add a layer of regulatory uncertainty.
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However, projects under the provincial PPP framework are not subject to federal PPP framework.
Further, till recently, all energy projects higher than 50-megawatt capacity and ports were under the federal government. These projects have moved to provincial level only recently.
However, the federal government gets involved during the final phases of the project development, mainly during the approval of government guarantee frameworks.
It further stated that the federal government recognises the potential of PPPs in infrastructure development.
However, the lack of coordination results in overlapping efforts and regulatory risks for the private sector.
In addition, the framework for dispute resolution, conciliation, and arbitration is unclear.
Many line ministries lack experience in negotiating contracts and rely on technical assistance from international consultants.
Another challenge is the lack of long-term debt financing in the market.
Currently, in majority of the cases, commercial banks only offer short- to medium-term loans which shorten the payback period and financial viability for PPPs.
However, there are instances where commercial banks have also provided 10- to 15-year loans on a floating rate basis linked to the Karachi Interbank Offered Rate.
Such instances were exceptional and have been done under the regulatory regime, which provided them the certainty of returns (e.g., wind and solar projects that have feed-in-tariff pre-fixed protecting the revenue risk for the private sector).
At the provincial level, capacity and the efficient use of resources are key challenges.
Provincial governments have limited capacity to identify a pipeline of viable projects, develop these projects, and provide adequate guarantees and financing.
The country does not have sufficient guidelines, checklists, and model documents for various sectors, which discourage private sector investments.
In 2019, the Government of Pakistan introduced a three-year Public Sector Development Plus Program (PSDP+) that involves 53 mega projects with $33.58 billion (Rs5.2 trillion at the end of 2019) investment to be implemented in three years during fiscal years (fiscal years) 2020-2023.
PSDP+ projects will be implemented throughout Pakistan and are divided into two broad categories.
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At the start, there are 29 projects in 11 sectors with zero government investment, which are expected to inject a direct investment of $18.73 billion (Rs2.9 trillion at the end of 2019) into the economy.
The government, through public sector investment, will also provide an enabling environment to crowd in the private sector-fostering PPPs and joint ventures to reduce the burden on the PSDP.
As approved by the National Economic Council in June 2020, the size of the Federal PSDP 2020-21 is set at Rs650 billion, including foreign assistance of Rs72.5 billion.
The PPPA has been activated leveraging a private sector investment of Rs50 billion to complement public resources.
During fiscal year 2020/21, four projects with a tentative cost of Rs300 billion and an estimated investment of Rs50 billion would be implemented in PPP mode.
To augment the PSDP, resources of the private sector would be leveraged with the help of the PPPA, attracting domestic and foreign direct investments in commercially viable projects.
The PPPA will reduce transaction cost, ensure appropriate regulatory control, and provide the legal and economic mechanism to facilitate development initiatives.
Based on the World Bank Private Participation in Infrastructure (PPI) database, the total number of infrastructure projects that attracted private investments and achieved financial closure from 1990 to 2019 were 108.
The projects were predominantly in the energy sector (88 percent), with the remaining 12 percent in ports, information and communication technology (ICT), airports, and waste disposal sectors.
Of these, only one project in the energy sector was in a distressed state by 2020.
The total investment made in the 108 PPP projects is approximately $28.4 billion (Rs4.40 trillion at the end of 2019).
Only one project in the energy sector is in a distressed state. From a sector perspective, the energy sector attracted most PPPs followed by the port sector.
While only two projects were witnessed in the ICT sector, the average size of a project reaching financial closure was highest in that sector at $454 million (Rs70.3 billion at the end of 2019), followed by ports and energy sectors.
The higher investments into energy and port sectors were due to the indexation of the United States dollar, which led the international banks and multilateral agencies to direct their investments into these two sectors. Challenges observed in the road sector included inconsistencies between policy and institutional development. These include the lack of comprehensive strategy and action plan, inadequate institutional capacity, and poor coordination between agencies on road safety.
Transport O&M is inefficient.
Road safety is a serious issue in Pakistan due to poor safety design, poor vehicle regulation, and inadequate traffic enforcement and driver training. There is, therefore, a need to adopt a national road safety strategy with clear action plan and targets. Lack of capacity among federal and provincial agencies. Suboptimal contract management and governance-related challenges have led to delays in construction and cost increases.
The role of Pakistan Railways as a catalyst for economic development experienced a setback due to significant under-investment by successive governments, who preferred investment in road infrastructure at the cost of Pakistan Railways, the report noted.
Although the National Aviation Policy intends to introduce PPP models in the airport sector, the sector focus is on the use of public funding for the procurement of airport projects.
Copyright Business Recorder, 2021
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