ISLAMABAD, June 27: The creation of a multi-billion dollar infrastructure fund is facing stiff resistance within the government from elements who fear it will lead to negative macro-economic consequences. Informed sources told Dawn here on Tuesday that some senior economists and experts had proposed the creation of infrastructure funds “outside the budget” through the launching of public-private partnership to avoid an increase in budget deficit.
The Asian Development Bank (ADB) has agreed to initially offer $2.6 billion by associating itself with some other donors, including the World Bank, to help establish the new fund for improving or building new roads, airports, ports and shipping and communication networks, etc.
The sources said that the development expenditure of the government was bound to increase if the proposed fund was created within the budget and would lead to a violation of the Fiscal Responsibility Law approved by parliament.
“If we create this infrastructure fund within the budget, it will also increase public debt to GDP ratio and it will have a crowding out impact on investment,” said a source.
The Indian government, he said, had also being advised by its experts and economists against launching any infrastructure fund within the budget as it would further increase the overall budget deficit and development spending.
India plans to create a $5billion infrastructure fund which will be stretched to $25 billion in five years. The Indian government was told that the budget deficit, which was already 10 per cent of the GDP, would shoot up along with the increase in the public debt to GDP ratio in case an infrastructure fund was set up within the budget.
The sources said that the government of Prime Minister Shaukat Aziz wanted to create an infrastructure fund as a ring-fenced Special Purpose Vehicle Account (SPVA) to be managed by the Ministry of Finance/fund managers.
The fund will act as a financial intermediary to extend funding in the shape of guarantees to fill the viability gap of a project during its operation. The private sector operating project will be able to encash the guarantee for meeting its shortfalls during the operation phase of a project and once the project starts making profit, the encashed amount will be repaid to the fund.
The fund will be initiated through contributions by the government and supplemented by financing from international development partners.
The infrastructure fund will be used for pre-feasibility studies, equity contributions if required, guarantees and grants, in exceptional cases to fill the gap between income and expenditure.
Through the proposed fund, the government plans to decentralize the actual implementation of projects. Transaction capabilities will need to be developed at the provincial and district levels to structure transactions in a way that could be taken to the market by creating bankability and business value. The capacity will include taking the project through an entire project life cycle with technical assistance from the government.
The project after being scrutinized in conjunction with sponsoring/executing agencies will be forwarded to the Central Development Working Party (CDWP) and the Executive Committee of the National Economic Council (Ecnec) for clearance and then implemented through line ministries.
