Pakistan needs PPP

Governments in Pakistan, including provincial ones, do not have money to spend on development. Private sector is cash rich – and the economic growth model historically revolved around the public sector development spending (PSDP). That is one reason Punjab and KP governments are keen on having private sector engagement in public projects under the structure of public private partnership (PPP).

However, PPP shouldn’t be seen under this lens as someone at some time has to pay for it – you may call it defer payment; or the amount not to be reflected in budget could have been seen in contingent liabilities.

The basic idea of PPP is for projects where there are efficiencies to be gained from private sector involvement, but lack of commercial viability eludes the participation in long gestation projects where economic returns are present, but not commercial. Therefore, in public goods and services provisioning – such as road infrastructure to sewerage and water supply to health and education projects, a viability gap funding (VGF) is created by government in the form of land or other support, and by development agencies in terms of cash injections, guarantees and capacity building, to make commercial sense for the private sector.

Thus, creating the VGF should be the key. Within Pakistan, Sindh has taken decent strides in PPP projects while Punjab and KP are still hovering around amending and improving laws or in the process of making PPP authority. Since Karachi has a vibrant private sector which is more receptive to new ideas, and it is the best place to attract good human resource, PPP has had more success in Sindh.

According to a recent report ‘The 2108 infrascope’ by The Economist Intelligence Unit, Sindh ranked at 6 out of 19 entities assessed for enabling PPP in Asia.  There is some success in road projects such as Karachi Thatta dual carriage way and Hyderabad Mirpurkhas dual carriage way. Although, no mega project is closed in the past few years, lots of activities are going in Karachi, and a mega project Malir Expressway is under the process of designing.

Then there are projects of schools, water supply and sewerage, energy and other areas under consideration or in execution phase. And there is much more in the scope. The enabling framework is formed with the help of ADB which has not only created a funding of $100 million of VGF but has helped in building the intuitional capacity including trainings, consulting and hiring financial advisors through its grants.

There were some reservations earlier on the skewed risk return matrix. In a typical infrastructure model, land is provided by the government (public risk) and private player puts equity (private risk) in the special purpose vehicle (SPV) formed for PPP project, while the debt on the project is financed by banks. In cases, government provided guarantee on the debt servicing (or cash in some cases).

The project is usually on build operate and transfer (BOT) for long term – the private sector builds it and can get its equity back from revenues in early days of operations, and for the remaining time till the project is being transferred back to government, private sector is not really in the game. But, government guarantees or cash are required to inculcate the culture of PPP – as the projects are for long time, and banks are reluctant to finance, government intervened. Now the framework is rolling in Sindh and that issue is on the backburner.

In case of Punjab, there are some PPP projects such as M2 overhauling, and Lahore Ring Road Southern Loop 1 and 2.  But in both cases, SPVs are formed as wholly owned subsidiary of FWO – not really a private sector involvement. The PPP is yet to test water in Punjab. The government has recently repealed the PPP Act 2014 and replaced it by PPP Ordinance 2019 which has to be enacted by the parliament.

The reason presented by Punjab government is that the PPP in previous Acts was under various departments and there was fear to undertake projects. The capacity was missing in departments and they used to have stereotype PC-1. There was no incentive for PPP and no legal framework was there. Now the remedy is to introduce PPP authority – projects to be identified, prepared and approved and latter monitor and to transfer back after the concession under one roof. The authority will be headed by CM.

The critics are saying that the change might be detrimental as there are numerous operational anomalies and there is conflict of interest of developing proposal and monitoring under one head. However, the proponents are confident that the change may reduce the frictions and let the ball rolling.

Punjab government is keen on having numerous projects in PPP framework. This year, the government has envisaged around Rs40-45 billion for 71 PPP projects in sports, health, women development, local government, roads, energy, urban development, agriculture, tourism and other areas.  Then there is much more that can be done under PPP. Prime Minister flagship project of building 5 million houses cannot even achieve 10 percent of the target without PPP – with government providing the land and private sector to bid for low cost housing. Pakistan does not have to reinvent the wheel. The PPP has shown great success in other developing economies such as Brazil, India, China, turkey etc. In short to medium term, the biggest friction is the fear of NAB. No one in Punjab is ready to sign on run of the mill projects; forget about innovation, till the NAB fear is managed.