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July 25, 2019

Attracting the private sector

Opinion

July 25, 2019

Chief of Army Staff Gen Qamar Javed Bajwa, during a recent seminar on ‘Security through Self Reliance’, emphasized the need to attract the private sector in the field of defence production.

This is a brilliant idea indeed, especially in the backdrop of increasing regional instability and the consequent security challenges faced by Pakistan. Let us also keep in mind that in wake of austerity measures being taken by the government, the security forces voluntarily opted to maintain the defence budget at the previous year level, albeit in real terms it has actually decreased.

The current fiscal year defence allocation comes to Rs5,227 or $32 per capita. Clearly, there is a need to adopt innovative solutions like Public-Private Partnerships to mitigate the challenges posed by a tight fiscal situation and the demands of emerging regional security paradigm. This however is quite a tough ask as, in addition to the strategic decision of which areas to open for partnerships, there are numerous systemic hurdles and deficiencies that need immediate attention.

The Public Private Partnership (P3) environment in Pakistan is not efficient. Some projects have been delivered by Sindh and Punjab but the there is not much to boast about in sectors controlled by the federal government except energy (which is regulated outside P3 law and requires a separate discussion). Although a P3 authority was setup by an act of parliament in 2017, it is yet to become operational. The authority needs to be made functional without further delay by removing legal glitches and installing the right human resource.

Another extremely important issue is the low preference for P3s. Compared to regular procurement, P3s present reduced opportunities of rent seeking and are therefore considered less desirable. This can be overcome in two ways; first, by providing full political ownership

to mainstream P3s as the preferred mode of procurement, and second, by installing a system of reward and

accountability for efficient delivery of P3 projects.

Infrascope Index is a benchmark developed by the Economist Intelligence Unit (EIU) that evaluates the capacity of countries to implement sustainable and efficient P3s on the touchstone of enabling laws and regulations, institutional framework, operational maturity, business climate and financing facilities. In the latest report, Pakistan is ranked ninth in Asia out of 19 countries. Alarmingly, Pakistan is ranked 16th in business climate and 15th in access to finance. The recent increase in the State Bank policy rate will further aggravate this situation.

It is to be appreciated that the private sector is driven by profitability and profitability alone. Not-for-profit or philanthropic organizations neither have the appetite for big-ticket investments, nor are they sustainable in the long run. It is therefore crucial to create such investment opportunities for the private sector where they are able to make an honest buck. In an environment of capital market volatility, changing tax and tariff structures and increasing production costs ie utilities, financing, raw materials to mention a few, most investors are sitting on the fence to weather the storm.

Given the overall investment and business climate in the country, defence production presents a workable business proposition for the private sector primarily because of its import substitution and export potential. Pakistan has already had some success in exporting small arms and ammunition as well as light training aircrafts. The JF17 project perhaps is too strategic to consider for opening to private investors at this stage. The IDEAS exhibition organized by the Defence Export Promotion Organization has become a regular event attended by a decent number of foreign delegations.

There are many brownfield facilities under the Ministry of Defence Production like the Pakistan Ordnance Factories-Wah, Heavy Industries Taxila, Heavy Mechanical Complex, Pakistan Aeronautical Complex Kamra, Military Vehicles Research and Development Establishment, Karachi Shipyard and Engineering Works, National Radio Telecommunication Corporation, etc.

The first step is to open up these brownfield facilities for private investment by corporatization and public offering of shares to local and foreign investors. This will not only finance growth opportunities for these facilities but will certainly earn/save precious foreign exchange. Pakistan also has numerous small arms manufacturing companies mostly in the erstwhile Fata region; the best amongst them should be given opportunity for green-field Joint Ventures with established platforms like the Pakistan Ordnance Factories.

In the end, I would emphasize that limiting the private sector only to marginal roles in enhancing raw material base as recommended by the seminar may not achieve the desired results. The private sector should be provided maximum opportunities to contribute in enhancing the capabilities and output of the brown-field facilities and also to participate in green field ventures incrementally.

Most brilliant ideas fail because important aspects fall through the cracks in understanding resulting and loss of execution momentum which is the life-blood of success for such initiatives.

The writer is an international development consultant.

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