Pakistan’s infrastructure spending lags behind regional peers, experts say

KARACHI: Pakistan’s weak public finances limit its spending on infrastructure, which is among the lowest in the region and well below the required level, experts said on Saturday.

The country spends about 2.1 percent of its gross domestic product on infrastructure, one of the lowest rates in the region and well below the 8-10 percent of GDP required to bridge the gap.

Experts believe that the issue may be addressed by encouraging public-private partnership investments that will help channel private funds into public infrastructure projects.

The government allocates an amount of the budget to the federal public sector development programme (PSDP) each year and for the fiscal year 2023-2024, the government has allocated about Rs1,150 billion.

Given the country's financial constraints, the budget is usually slashed or underspent to meet budget deficit targets required under the IMF programme. During the last fiscal year, the government had allocated about Rs727 billion for the PSDP budget, but ended up spending only about one-third of the budget due to budgetary constraints.

Aside from Pakistan's budgetary restrictions and fiscal deficits, the nation’s foreign exchange reserves drastically declined four to five months ago, and it was on the verge of defaulting on its foreign debt. But at the end of June, the nation received a much-needed $3 billion short-term financial package from the IMF, providing the South Asian economy with an urgent respite.

There is a savings and investment issue in Pakistan. According to Pakistan’s Economic Survey 2022–23, the country’s investment-to-GDP ratio remains stagnant at roughly 14 percent, the lowest among the regional countries, while the country’s saving rate is stuck at around 11 percent.

“The current savings and investment level is insufficient to boost sustainable growth,” the survey said.

Experts advise that to solve this saving and investment issue, the government should provide incentives for private capital to flow into important economic sectors like infrastructure.

Maheen Rahman, the chief executive of InfraZamin Pakistan (IZP) said in a written response to questions that infrastructure development requires careful long-term planning around all aspects, including financing.

The IZP is a for-profit credit enhancement guarantee company that is committed to promoting private-sector investment in infrastructure.

“In Pakistan, we have issues in both upstream development of projects as well as in execution and financing of the same. We have had some successes, in particular, our road networks as well as our energy generation capacity have developed considerably; however other areas related to irrigation, water management, warehousing, supply chains, agriculture, health, and education remain vastly underdeveloped,” Rahman said.

Consistent government focus, especially in the face of persistent political instability and policy changes has been challenging to maintain. Whereas private sector efforts have remained in the industry/manufacturing and services sector or on unproductive assets or rent-seeking.

Efforts to develop projects under public-private partnership mode are the need of the hour, she added.

According to her, consistent policies are needed to incentivise and crowd in private sector financing to increase infrastructure development and spending.

Unfortunately, government being the largest borrower in the financial markets, fiscal space creation to reduce the government’s borrowing need is fundamental in the form of structural reform that includes wider tax participation, privatisation of state-owned enterprises, and elimination of subsidies, she noted.

At the same time, private sector fears of persistent policy changes are real and government assurances of long-term policy consistency (and a decoupling of the economic agenda from the political one) are needed to build confidence, she said.

Focused actions can be taken in the following areas: creating five-year plans to encourage the private sector to invest in infrastructure projects, developing capital markets and funds that can support infrastructure development; and promoting projects of national importance in the sectors of energy, agriculture, technology, trade, health, and education, she suggested.

“We don’t need to reinvent the wheel – there are enough examples in our neighbourhood and region on how infrastructure development vehicles have been created by the state to crowd in private sector participation. We should learn from those examples and work towards customising for our benefit.”

In response to a query about whether developing agricultural infrastructure might improve Pakistan’s food security, Rahman stated, that the country’s agricultural issues are two-pronged, one is on farm issues and the other is the off-farm issues, Rahman said, “We are more food secure than many other developing countries due to our agrarian base.” “However, we are behind other developing countries due to our per-acre yield in almost every crop. Low mechanisation, poor seed development and storage, and recent variations in rainfall due to climate change; all contribute to vulnerabilities in agricultural output,” she said.

Our irrigation system, one of the largest in the world, has not been upgraded since the 1960s. And while India and Bangladesh have invested in sophisticated flood protections, our plans gather dust on government shelves, she added.

Very few farms in Pakistan have the facilities of grain silos, therefore, the farmers are forced to sell their crops to middlemen who have access to grain silos and other storage facilities to keep the crop safe.

Middlemen while indispensable to farmers also pocket considerable profits – which could stay in the hands of small farmers with viable storage and supply chains, according to Rahman.

She thinks the government can significantly reduce its agricultural imports such as palm oil and dry milk via better investments in oil seed producing and refining capability as well as milk collection, processing, and storage.

“We also have considerable benefit we can derive from technology particularly ag-tech developments that can help farmers study the soil, determine correct fertiliser, pre-empt the weather conditions, and improve yields via better farming techniques,” she noted.

In response to the query of whether the government should set up a fund to boost infrastructure, Rahman stated that instead of an Infrastructure Fund, the government should evaluate other infrastructure vehicles in neighbouring countries of India and Bangladesh, which have utilised existing state and private resources to create long-term sustainable financing availabilities. “InfraZamin would be happy to work with the government to evaluate such solutions.”

InfraZamin and the Private Infrastructure Development Group can provide substantial support in the form of feasibilities, grants, and blended finance solutions to crowd in private sector investments towards infrastructure projects. “This is our primary function and over the last 20 years, we have supported over $37 billion in infrastructure investments across South and South East Asia and Sub-Saharan Africa. We plan to do the same in Pakistan via credit enhancement through InfraZamin and GuarantCo and early-stage equity via InfraCo Asia,” she added.