Review of the federal PSDP

The Federal Public Sector Development Programme (PSDP) has been set at Rs 1001 billion for 2017-18. This represents a 'big push', with a 40 percent growth over the development spending in 2016-17. In effect, the Federal PSDP is expected to rise from 2.2 percent of the GDP to over 2.8 percent of the projected GDP in 2017-18. Inclusive of the four Provincial Development Programmes, the national PSDP will reach a new peak of 6 percent of the GDP.
What are the motivations for targeting such a big increase in the size of the Federal PSDP by almost Rs 300 billion? First, infrastructure investments, especially in expanding the capacity for transmission and distribution of electricity, have to be completed in time to enable the utilization of generation capacity of the new power plants. Second, CPEC infrastructure projects related to the two highway corridors and the Gwadar port are in the process of implementations and will require larger allocations for early completion. Third, 2017-18 is the election year and the objective of the incumbent government may obviously be to create space for a larger quantum of populist spending and pork-barreling. Further, the multiplier effect of the larger PSDP will help in accelerating the growth process in the economy. There is evidence also that higher public investment crowds-in more private investment.
A number of questions arise with regard to the size and composition of the Federal PSDP for 2017-18. Will there be enough funds available to finance the big jump in development spending? Does adequate implementation capacity exist to ensure completion of projects in time and without large cost overruns? Is the sectoral distribution of the PSDP adequately reflecting the stated priority of focusing on the water and power sectors and CPEC?
The experience during the four years of the present Government is that there have been significant shortfalls in financing the budgeted Federal PSDP, as indicated by the shortfall in releases in relation to the budgeted amount. On average, the targeted size has been missed by 13 percent, even though there was a relatively modest growth annually in the budgeted PSDP of 15 percent. This raises serious doubts about the ability to finance the big push this year. Further, after the big shortfall in FBR revenues in 2016-17, the required growth rate in these revenues is over 19 percent, when the nominal GDP is expected to grow at a significantly lower rate of about 11 percent. Also, the budgeted level of non-tax revenues looks unattainable, given the likelihood of no receipts from the Coalition Support Fund.
Fortunately, concessional project financing of CPEC should be available in larger amounts from China. Hopefully, this will be at similar terms as project loans from ADB and IBRD/IDA. It is surprising, however, that the Budget of 2017-18 expects an increase of only 14 percent in project loans. In fact, a major portion, 52 percent, is expected to be for financing the Provincial PSDPs. As such, the Ministry of Finance may be left with no other option than to target for a larger fiscal deficit by over 2 percent of the GDP, primarily by printing of money through large-scale borrowing from the SBP.
During the election year, the experience in 2007-08 and 2012-13 is that the Federal fiscal deficit goes beyond 6 percent of the GDP. If this also happens in 2017-18, as in 2016-17, it will push up significantly the rate of inflation and also create demand pressures leading to a higher current account deficit in the balance of payments.
Turning to the issue of implementation capacity, the large portfolio of projects has led to a 'spreading thin' of the PSDP. In 2017-18, there are 1148 projects under implementation, implying that the average allocation per project is even less than Rs 1 billion. Given the financing constraint and limits to implementation capacity the emphasis should be on completion of on-going projects rather than take on new projects, except those in CPEC and the water and power sectors.
Unfortunately, with political pressures to placate different constituencies there continues to be a proliferation of projects. For example, the Higher Education Commission, the Ministry of Health Services and the Railway have allocated 26 percent, 31 percent and 22 percent respectively of their earmarked funds to new projects.
This tendency to multiply the number of projects has delayed the completion of on-going projects. As of end-June 2017, the throw forward of ongoing projects is very large. For example, in the portfolio of projects with National Highway Authority the overall throw forward is as much 74 percent of the total cost. With full implementation of the allocated PSDP in 2017-18, only 47 percent on average of the cost of ongoing projects will have been incurred. A typical NHA ongoing project will take almost four more years to complete. This not only delays the development impact of completed projects but also implies significant cost overruns during the execution.
The overall remaining cost of ongoing projects in the Federal PSDP is Rs 6.6 trillion, while the cost of new projects is Rs 1.3 trillion. With the size of the PSDP at Rs 1 trillion, a typical project will take seven to eight years to complete. In the case of the vital project, the Diamer-Bhasha Dam, the cost is Rs 894 billion and the allocation is Rs 21 billion. At this rate, the Dam will take decades to complete.
The time has probably come for imposition of a moratorium on approval of new projects by the CDWP/ECNEC, except those related to water and power and CPEC and for substantial pruning of new projects in other sectors. Also, a serious malpractice has emerged. A large number of unapproved projects are being allocated funds in the PSDP. This must stop.
Turning to the sectoral distribution of the PSDP, a very serious problem has been identified. During 2017-18, WAPDA and PEPCO are expected to spend Rs 377.6 billion on the portfolio of projects. However, only Rs 60.9 billion has been allocated in the PSDP for these projects. The implication is that there will have to be self-financing of as much as Rs 316.7 billion. This is highly unlikely. Ultimately, borrowed funds will have to be arranged probably through the support of government guarantees. In effect, the PSDP size will be significantly larger.
Investments by PEPCO in transmission and distribution are crucial for ensuring that the new generation capacity in the pipeline becomes functional. The financing strategy being adopted is risky. Instead, a substantially larger share of the costs should be financed by the PSDP. This year's allocation to the power sector has, in fact, been reduced by more than half in relation to last year.
The question that arises is how the higher allocation to the priority sectors can be achieved without increasing further the size of the already bloated PSDP. As highlighted earlier, this means first the deferment of implementation of new projects. Second, the ministries/divisions share in allocations has been increased from 35.3 percent in 2016-17 to 37.7 percent in 2017-18. Simultaneously, the share of Corporations (NHA and WAPDA) has been decreased from 39.8 percent to 38 percent. This is fundamentally a move in the wrong direction. There is need for review of the PSDP allocations to raise the share of the Corporations to over 50 percent, as they are implementing high priority CPEC and water and power sector projects.
The importance of CPEC to Pakistan cannot be overemphasized. Bulk of the projects within the ambit of CPEC is being implemented within the PSDP by Ports and Shipping and Railway Divisions and the NHA. The largest part is currently with NHA.
A detailed examination of the portfolio of CPEC projects with NHA has been undertaken. Only 27 percent of the cost of these projects has been incurred up to the end of June 2017. With this year's allocation it will take almost four more years to implement a typical project. Further, less than on half the financing has been arranged from China up to now for the CPEC highway projects in the Eastern and Western Corridors. This phasing is far too staggered in terms of benefiting from the multifarious development consequences of CPEC. As such, efforts should be made to increase the component of concessional Chinese financing to enable earlier execution. Further, the Planning Commission may wish to examine the proposal of establishing an independent CPEC Authority, similar to NHA and Wapda, to implement projects other than those related to highways.
The last issue is the size of special programs in the Federal PSDP of 2017-18. Some of these programs are in continuation of the previous year's allocations, like the special Federal Development Programme, SDGs programme, PM's Youth Programme, funds for TDPs and security enhancement and to ERRA. Further, some new programmes have been added like the Energy for All, Clean Drinking Water for All and special provision for CPEC projects. The total expenditure on these programmes is 2016-17 was Rs 72 billion. This has been raised massively to Rs 255 billion in 2017-18. Many of these programmes essentially provide a camouflage to populist spending and pork-barreling. Proper mechanisms are necessary to rationalize the size of these programmes, ensure spending in priority areas and avoid leakages of funds.
Overall, the Federal PSDP of 2017-18 is confronted with a number of serious issues. These include the limits to financing and implementation capacity, wrong prioritization, relative priority to ongoing versus new projects, feasibility of adequate self-financing by Corporations in key sectors and dangers of leakages and wastages in special programs, primarily in the nature of populist spending prior to elections.
Fortunately, the Planning Commission has a new Deputy Chairman. Sartaj Aziz has a long and distinguished career in public service, especially in the field of economic management. He will, no doubt, ensure that the development impact of the PSDP is maximized, CPEC is given top priority and execution of projects is adequately monitored to prevent delays, cost overruns or leakages.
(The writer is Professor Emeritus and a former federal minister)