Governor State Bank of Pakistan, Syed Salim Raza, revealed that currently the country's premier bank is working to establish an infrastructure development bank and a mortgage refinance company under public-private partnership.
The need for an infrastructure bank is evident in this country given the serious dearth of infrastructural facilities ranging from the acute energy supply shortage, as reflected by the heavy loadshedding that the country experienced during the past year and a half, especially during the summer months when demand peaked, to issues relating to the crumbling distribution network of energy, to poor roads, especially farm to market roads, to very low availability of education and health facilities per capita.
In other words both physical and infrastructure sectors are sadly deficient in this country which has fuelled public discontent that has had severe security implications as it provided fertile ground for recruitment by elements challenging the writ of the government. There is also a need for a mortgage company that would provide loans to those who are unable to generate sufficient funds from private resources to build a house.
Inability to borrow to build a home for one's family by the end of one's career is one of the reasons given for corruption amongst bureaucrats as their pay packages are simply insufficient to enable them to do so. Details of when these two institutions would be established and how they will be financed were not shared by the State Bank Governor. Would the central bank provide a line of credit to these institutions and/or allow the big commercial banks to lend for this purpose?
The answer to these questions would allow for a more detailed evaluation of the success/failure of the proposed institutions. If the SBP provides a line of credit then it may have to absorb the loss if the risk taken is not justified. And surely lending costs may well rise if large commercial banks provide the loans - banks who would naturally take account of the high risks inherent in such loans.
Be that as it may, it is pertinent to remember that the SBP's monetary policy does stipulate how much credit must be allocated to different sectors, a policy that is in line with the federal government's objectives with respect to which sector would be used as an engine of growth for any given year. In some years, the focus has been on physical infrastructure while in other years, on agriculture or indeed on industrial sector growth.
This does not imply that the SBP supports one sector at the cost of others in any given year, but that it merely reprioritizes between sectors. Within this context the state had so far been mainly involved in providing infrastructure investment which is one of the reasons why lack of adequate investment in this sector is considered one of the major failings of the Musharraf era.
The success of a public-private partnership in the development of infrastructure is possible only if the private sector feels that it will be able to not only make full cost recovery, which has been compromised in the past as the government has resisted moves to enhance user rates, but also make some profit.
If one adds the element of security issues as well as the perception that governance needs improvement the obvious conclusion to draw would be that at present private sector, local as well as foreign, maybe reluctant to enter the arena.
To overcome this reluctance the Infrastructure Bank would have to provide not only a fair return of investment but also spread the perception that those who win the contracts do so under the public procurement rules and regulations act.
The same must apply to the mortgage company which in addition must follow a strict criterion of who is eligible for the loan and what collateral is acceptable. These are sensitive issues and one would have hoped that the Governor had ironed these issues out prior to announcing the establishment of a bank and company that are still in the conceptual stage.
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