PIB aims to fill infrastructure gap

Widening infrastructure gap in the region’s fastest-growing population has swayed the economy from attaining its potential. The improvement and expansion of infrastructure is a prerequisite for sustaining and accelerating economic growth and social development. Enhancing quality and service coverage in power, water supply and sewerage treatment, transport and logistics is crucial for Pakistan’s economy and to raise the quality of life.

The main source of infrastructure in Pakistan has remained government development spending, which is supplemented by banks’ and DFIs’ financing to government, private, and public-private projects. Government’s total development and lending spending, including both federal and provinces, averaged 4.2 percent of GDP in the last ten years; while the financial institutions contributed 1.5 percent of GDP in the same period. In FY16, the commutative infrastructure spending was 6 percent of GDP or Rs1.75 trillion (4.6% government- Rs1,314bn and 1.4% - Rs471bn by banks and DFIs).

The World Bank estimated that a 10 percent rise in infrastructure assets leads to a 1 percent increase in GDP. Infrastructure financing has globally accounted for 3-4 percent of GDP versus 1.5 percent of GDP in Pakistan in recent decades. According to the SBP quarterly infrastructure financing review, infrastructure spending in Pakistan is required to increase to 10 percent of GDP from existing 6 percent of GDP by 2020 to fill the enormous infrastructure gap.

Fiscal resources are limited as both federal and provincial governments cannot stretch to enhance development spending; the amount ought to come from other sources. On the other hand, commercial banks are deploying a major part of their financing to fill in the fiscal deficit, as the liability maturity profile is too short to fund long-term infrastructure spending. The gap of 4 percent of GDP has to be filled by other sources.

The step of having a Pakistan Infrastructure Bank (PIB) is in the right direction. The government is aiming to start the PIB with a paid-up capital of $1 billion with 20 percent ownership by GoP and IMF each, and the rest to be filled by the IFC and other multilateral lending agencies.

Deteriorating infrastructure, especially in energy, has hurt Pakistan’s economy. The growth rate was between 6-9 percent for India, Bangladesh, and Sri Lanka, the gap in infrastructure limited Pakistan’s per capita income growth to less than 3 percent per year”. The economic progression in the country considerably slowed down after the 2008 crisis. GDP growth averaged 3 percent in FY09-14, while the economy grew at an average of 6.6 percent during FY04-08.

The economy is getting back on track with average GDP growth of 4.4 percent in FY15-16. However, in order to sustain the GDP growth at over 5 percent and to have inclusive growth; investment requirements in Pakistan till 2020, across different infrastructure sectors, range from $116 billion to $165 billion. If this investment gap is to be filled during FY18-23, average investment required per year is 9-12 percent of GDP (assuming GDP grows at current pace).

According to a study in 2006, logistical bottlenecks increase the cost of production of goods by about 30 percent. This has eroded Pakistan’s export potential in the last decade, as the country faced stiff competition from the likes of India and China in export markets. That partially explains why exports to GDP fell from the peak of 13.1 percent in FY05 to 7.8 percent in FY16; and is falling further in FY17.

The other infrastructural impediment to inclusive economic growth is a poor transport system, which has an estimated economic cost of 8.5 percent of GDP. The energy deficit and inefficiencies in the sector alone is estimated to have reduced the GDP growth by 2-3 percent. Urban centers are overcrowded. Moreover, lack of investment and poor management has yielded low coverage and poor quality of services. During 2007-13, the use of piped water decreased from 62 percent to 56 percent in urban areas.

Another challenge looming with growing population and increased urbanization is of water shortage. The per-capita water availability has declined from 5,260 cubic metres in 1951 to 1,032 cubic metres in 2014. The country is experiencing water stressed conditions since 1990.

The need is to create a special purpose vehicle similar to an existing model in India – Indian Infrastructure Finance Company (IIFC) – which is registered as NBFC. The SPV would finance commercially viable infrastructure projects and also facilitate banks and DFIs to enhance participation through its sole expertise in infrastructure financing. Let’s hope the envisaged Pakistan Investment Bank would fit in the role and help develop the requisite infrastructure.

The PIB should not work in isolation, it should facilitate building a financing market for long-term projects, Banks in Pakistan not only lack long-term capital but also have limited capability in funding long-term projects. Private sector participants are also not geared up to bet on infrastructure projects even if they have equity muscle. There should be a consortium of banks, DFIs, and the PIB in various infrastructure projects in public domain, public-private partnership, and those solely owned by private sectors.

Exposure of the PIB in any single project should be kept low (less than 20 percent) for initial period and be enhanced for remaining cycle of projects through quasi-equity arrangements. The bank should also provide credit guarantees to enhance the credit ratings of infrastructure bonds for refinancing of existing loans.

The need is to facilitate and incentivise commercial banks, DFIs, pension and insurance companies to supply credit for the long-term financing projects. PIB, owned by government and international lending agencies need to have technical and financial support to develop long term financing market and credit as viability gap fund. This will allow local banks and other financial institutions to get involved.

The first step is to deploy Pakistan development fund for infrastructure projects; the PDF was created in 2004 after the country received $1.5 billion from friendly countries; but that money is lost in the fiscal black hole. Now Dar is talking about building PDF by issuing bonds to the Pakistan Diaspora; and then listing it at the PSX. It is time to stop talking, and start doing!