Pakistan needs $40bn for infrastructure development: ADB

[LahoreEstate]

RAWALPINDI: Pakistan’s physical infrastructure is inadequate in comparison with world standards and has been identified as one of the critical reasons holding back more rapid economic growth in the country.

An assessment report on the private sector carried out by the Asian Development Bank stated that the infrastructure sector in the country consists of power, telecommunications, roads, ports, railways, air transport, urban infrastructure, information technology cyber parks, and industrial estates.

The public sector has been the main provider of basic infrastructure in Pakistan. However, given the major unmet needs and limited fiscal space, the government’s capacity to address the infrastructure deficit is severely constrained.

To augment limited public resources for infrastructure, private sector participation in infrastructure development has to be encouraged by creating the necessary enabling environment for increased private sector involvement.

While Pakistan holds up generally well on infrastructure sector performance compared to other South Asian and low income countries, it is clearly way below the averages for the OECD countries.

Pakistan’s electricity and power infrastructure has already come under major strain, and there is a danger that the infrastructure sector in its totality will become a major bottleneck for continued growth and development unless a well designed long-term strategy to enhance infrastructure investment and expand private sector participation in infrastructure development is evolved and implemented.

The report said that the potential of the private sector to meet Pakistan’s pressing infrastructure needs is largely untapped. Thus far, the government’s initiatives to promote the private sector’s role have only succeeded to a certain extent with private sector investment having come in the power and cellular telecommunications sectors.

The private sector is now also setting up an oil terminal at the Karachi Port. There is also a proposal to set up an urban mass transit system in Karachi by the private sector. But attempts to privatise the road infrastructure, for example, have met with little success.

As another example, other than a public-private desalination project in Karachi, the private sector has not financed any water supply and sanitation projects or projects targeted at solid waste management, it stated.

Available data indicates that Pakistan had total private sector investment in infrastructure of $17.206 billion during 1990-2006, with a major concentration of 96 per cent in the energy and telecom sectors. There was very little private investment in transport and no investment in water and sewerage sectors.

Despite the laggard interest of the private sector so far, the government remains keen to tap private sector participation and investment in the infrastructure sector. The MTDF for 2005-10 has earmarked $16 billion for public sector investment in the infrastructure sector.

Pakistan’s 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.

The funding gap between the total requirements and the available government’s public sector resource is expected to be filled by the private sector. Such a strategy, however, seems very ambitious given the existing constraints to private sector participation in infrastructure development.

The bulk of private sector financing for infrastructure development in Pakistan, concentrated in the telecommunication and financial sectors, has been generated offshore and entered Pakistan as FDI.

In order to encourage private sector financing in other infrastructure sectors like road networks and transportation and water and sanitation, it will be essential to tap domestic financial markets given that foreign capital would be less likely to flow in these ‘riskier’ sectors.

However a major constraint to generating domestic sources is the absence of a secondary market in debt securities and the governments’ pre-emption of funds of large public sector savings institutions like the State Life Insurance Company and provident and pension funds - some of the potential major providers of long-term investment funds.

The absence of an active market in long-term debt securities is a major reason for the dearth of local financing in the amount and tenor required to finance infrastructure.

Considering the large investment requirements for infrastructure development, direct financing from financial institutions would be insufficient given the balance sheet and credit exposure limitations of these institutions.

The alternative would be to raise funds directly from the public.

To do this would require, in conjunction with ongoing capital market reforms, raising institutional capabilities and developing financing instruments that more appropriately meet the long-term financing requirements of infrastructure projects so that resources can be mobilised on a sustained basis.

Over the long-term, only an efficient and properly functioning banking sector and capital market can sustain large-scale infrastructure financing in the country.

While some progress in developing a corporate bond market was made during the period 2000-03 using typically term finance certificates (corporate debt paper issued in Pakistan with maturity generally not exceeding five years), the stock market boom and low interest rates effectively stopped further growth and development of the market for longer term maturity bonds. In addition, markets or instruments do not exist at present for zero coupon municipal bonds in Pakistan due in part to the legal constraint on local and provincial government to directly issue debt.

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