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IMF says PSDP projects cost in FY23 exceeds budget by 14 times

IMF asks for developing new 5-year strategy identifying major projects across all sectors, funding sources to guide investment plans

September 19, 2023
IMF Chief Economist Pierre Olivier Gourinchas speaks during an interview with AFP at the IMF headquarters in Washington, DC, on July 26, 2022. — AFP
IMF Chief Economist Pierre Olivier Gourinchas speaks during an interview with AFP at the IMF headquarters in Washington, DC, on July 26, 2022. — AFP

ISLAMABAD: Amid receiving directives from the caretaker regime for abandoning projects that are politically motivated and of provincial nature executed through the federal Public Sector Development Program (PSDP), the IMF has pointed out that the total cost to complete projects in the PSDP stands at Rs10.7 trillion, 14 times more than the budget allocation of Rs727 billion in last financial year.

The IMF also asks for developing a new five-year strategy identifying major projects across all sectors and funding sources to guide sectoral investment plans.

“The caretaker prime minister and finance minister have wished to exclude the provincial nature and politically motivated projects from the federal PSDP for the current fiscal year. It has coincided with the Technical Assistance (TA) report prepared by the IMF under the $3 billion Standby Arrangement (SBA) program for recommending improvement for Public Investment Management Assessment (PIMA) as this report will have special focus on climate-related vulnerabilities being faced by Pakistan,” top official sources confirmed while talking to The News here on Monday.

The IMF team in consultation with relevant stakeholders has prepared a detailed report and its adoption along with an action plan might bring some conditions for getting approval of PC-1 of multibillion rupees cost projects through a professional manner instead of getting approval in haste on the basis of appeasing the political masters.

The IMF’s prepared detailed TA report states that with Pakistan’s rapid population growth and large diverse country, it is imperative that public infrastructure effectively supports economic growth and service delivery.

In practice, public investment by the federal government, which accounts for less than half of all public investment in Pakistan, has tended to vary with economic conditions.

Comparisons with peers suggest that Pakistan’s capital stock and efficiency of public investment are both relatively low. Ensuring public infrastructure is climate resilient is also critical given Pakistan’s exposure to climate risks.

“All modeled global warming scenarios suggest that Pakistan’s weather patterns will become more unstable and severe” the IMF’s TA report states and added that increasingly frequent and severe extreme weather events such as floods, heatwaves, and droughts pose a significant threat to the country’s infrastructure.

This report finds scope to strengthen Pakistan’s institutions for public investment management. The report applies the Public Investment Management Assessment (PIMA) framework. There are still significant gaps in key areas that impede the delivery of critical infrastructure services in Pakistan. Pakistan has taken some important steps to improve public investment management, including through reforms incorporated in the Public Financial Management (PFM) Act 2019 and the 2021 Manual for Development Projects.

As one of the countries most exposed to climate change, Pakistan is ahead of many of its peers in understanding the importance of sustainable and resilient public infrastructure, with a strong framework for climate action across the country.

Still, there is room to accelerate progress on climate-sensitive public investment management, which can be expected to improve Pakistan’s ability to attract climate finance. Some mechanisms are in place to ensure coordination and alignment between national goals and strategies, and individual investment projects.

The previously well-established national planning process was interrupted by the failure to formalize the 2018 National Plan. Sectoral plans provide strong guidance in some sectors, with more comprehensive plans in place in energy and climate. Mechanisms for coordination with the provinces, culminating in the National Economic Council (NEC), are effective— particularly for projects within the Public Sector Development Program (PSDP). However, state-owned enterprises (SOEs) and other federal government entities that fund infrastructure investment projects from their own revenues are not presented comprehensively with other plans.

This creates the potential for a lack of coordination and limits the visibility of all stakeholders of the investment plans of the public sector as a whole and the risks that they may entail. Climate-relevant actions are coordinated by a range of investment plans including the National Climate Change Policy Implementation Framework, which contributes to the high score for climate change coordination. Notwithstanding this, determining the allocation of Pakistan’s Nationally Determined Contribution between sectors and levels of government, along with finalizing the National Adaptation Plan, will be important in establishing sound planning frameworks for resilient infrastructure

Timely implementation of planned steps to update the project appraisal methodology is needed, including the incorporation of climate change adaptation and mitigation. The Planning Commission and the Ministry of Climate Change (MoCC) are working on additional guidance and methodologies, including operationalizing the requirements to consider climate change adaptation and mitigation in project development and appraisal.

These will be important to ensure that projects are appraised consistently, and similar rules and rigor should apply to all major projects, regardless of financing source. Updating complementary regulations for PPPs led by the PPP Agency, which manages a portion of federal PPPs, is important given the intention to expand the use of PPPs. With a fragmented PPP framework, the Finance Division should also actively monitor fiscal risks across the entire PPP portfolio, both at federal and provincial levels.

With Pakistan’s highly constrained budgetary resources, selecting the right projects for funding becomes even more critical. The PFM Act requires that all projects must be technically approved before receiving funds in the budget. This is a good practice and should be maintained. However, other selection criteria to guide the allocation of limited budget resources are not in place and would help ensure projects are aligned with policy goals, including Pakistan’s climate commitments.

Pakistan’s tight fiscal environment generates acute challenges for the implementation of the investment program. Funding allocated to ongoing projects in the PSDP is insufficient to meet project implementation plans and leads to slowing down the delivery of the projects (both between and within the budget year). This creates inefficiencies in project delivery and may lead to governance challenges. It can also mask other sources of delays and difficulties in project implementation. Weaknesses in core budgetary processes for expenditure planning and control, shown by Pakistan’s high reliance on virements and supplementary grants, also contribute to inefficiencies in capital spending.

More broadly, the PSDP is unaffordable and should be reassessed. The total cost to complete projects in the PSDP is Rs10.7 trillion, more than 14 times the budget allocation of Rs727 billion in 2022-23. Notwithstanding intentions to prioritize the completion of ongoing projects, new projects with a total cost of Rs2.3 trillion were added by the government in the last budget. In addition, the separate preparation and oversight of the current budget and the development budget, by the Finance Division and the Planning Commission respectively, can lead to inconsistent and sub-optimal decision-making.

The IMF says that on paper, Pakistan’s project and portfolio implementation and monitoring systems are sound. However, implementing the current requirements for ex-post evaluation, and establishing more active portfolio oversight, would better inform decision-makers on the status of the portfolio and identify lessons to be applied in implementing ongoing projects and preparing new ones. This could draw from the strong systems to record project-level information already in place and inform analytical portfolio reports such as a strategic report to NEC on the implementation of core projects. The government has some skilled staff that can move reforms to address these challenges forward, though it will be difficult. While some staff have a good understanding of strong practices, achieving implementation through changed approaches and culture across the public sector requires focused and sustained effort. Building knowledge of climate change aspects at all stages of the project cycle is also a priority, it concluded.