New ways to finance infrastructure

The Finance Secretary while briefing Federal Finance Minister Ishaq Dar on the status of infrastructure projects highlighted various measures and options for financing projects that are in the pipeline. This prompted the Finance Minister to direct him to explore new and innovative ways of financing infrastructure development. This newspaper would take this opportunity to restate and reemphasis its long-standing recommendation to the Sharif administration in this regard: innovation defined in this context must entail financing infrastructure development without burdening the nation with higher debt procured at high rates of return.
There is no doubt that the country's economy requires massive injections to develop its inadequate (i) physical infrastructure that includes sub-sectors like energy, roads, airports as well as (ii) social infrastructure notably education, health, clean drinking water. Physical infrastructure is being developed primarily with expensive loans procured from China or such is the perception given that the government has not uploaded any of the contracts or their terms signed under the China Pakistan Economic Corridor (CPEC). Furthermore, there is a growing concern that the government is manipulating the cost-benefit analysis of mega projects by overstating the benefits that accrue over the life of the project due to political considerations as opposed to investing in social infrastructure projects that have a higher internal and economic rate of return but lower political benefits. And lastly, as constantly noted by the international lending agencies governance and transparency continue to take a backseat to mega project implementation and unfortunately this relates to the Prime Minister's priority sectors: road building and energy projects. Be that as it may, there is a nation-wide consensus that the CPEC could be a game changer if only the government would be more transparent about the terms of the loans procured and ease the concerns of the country's productive sectors with respect to different rules/taxes applying to them as opposed to Chinese businesses; or in other words, focus on sequencing under the CPEC.
However what is a source of further serious concern to local economists is the fact that the government only set aside Rs 120 billion for the CPEC in the current year, an amount that is grossly insufficient to meet the local component, a fact that would either slow down the pace of implementation or compel the Finance Minister to enhance reliance on his favoured source of financing: borrowing.
Social sectors subsequent to the 18th Constitutional Amendment have devolved to provinces; however, the federal government has been placing increasing pressure on the provinces to show a surplus that would enable it to show a lower fiscal deficit which, in turn, has had a negative impact on the provinces' capacity to enhance outlay for social sector development. While during the recently concluded $ 6.64 billion Extended Fund Facility by the International Monetary Fund the provinces had little manoeuvrability yet in the current year with a surplus target of Rs 339 billion it is unlikely to be met as Punjab and KPK are not expected to show a surplus. The failure to meet the budgeted revenue during the first six months coupled with the announcement of the export package with a cost of around 100 billion rupee on the revenue capacity of the country would, it is feared, compel the government to borrow ever greater amounts.
So far the government has relied on borrowing - multilateral/bilateral sources and/or from the domestic/external commercial banks/bond market - to meet its expenditure with the bulk allocated for current as opposed to development expenditure. Pakistan needs to pay $ 15 billion to service/pay off principal on its external debt by the end of next fiscal year (with exports unable to cover this large amount) and with heavier reliance on borrowing from the foreign commercial banking sector by December 2016 there were net outflows rather than net inflows during the first half of the current year that prompted the government to raise reliance on internal borrowing. The state of affairs reflects flawed policy decisions that need an urgent revisit; however, sadly there appears to be no attempt by the Ishaq Dar-led Finance Ministry to acknowledge serious mistakes during the past three and a half years.