To undertake construction of mega dams, the government plans to set up companies and the required money is to be raised from the local and international markets. Not finding many borrowers, the World Bank and the Asian Development Bank may join as investment partners on “ commercial terms.”

The equity participation by international financial institutions (IFIs) may help raise foreign investment and debt for the major water projects. Much would however depend on how the economy performs. It is high economic growth that attracts foreign capital.

The government wants to encourage public private partnerships (PPP) in the field of energy, roads, airports, ports and shipping, water and sewerage. The projects listed in the Infrastructure Development Facility pipeline are stated to be over 50, of which 21 are stated to be on the active list. A draft law on public private partnership framework is awaiting the approval of the cabinet.

Recently, the President of the World Bank group Robert B. Zoellick said that the bank’s affiliates IFC/IDA can co-invest to support public private partnerships in infrastructure projects. ”

Though the IBRD is well capitalised,” he said, “our loan business is shrinking.” The bank’s strong point is “its mix of lending and knowledge services” that can cater to the “diverse needs” of borrowing countries. This may not be wholly factual.

In the recent credit crunch crisis, the international financial institutions were criticised for their failure to forecast the turbulence accurately. The IMF is in the red and its deficits are seen rising.

A majority of the emerging markets have built huge foreign exchange reserves and are no longer eyeing IMF bailout. The IFIs, creditability has been impaired by the recurring international financial crises. In case of current credit crunch, even the regulators---the central banks---have been caught napping.

So the IFIs have to think of other ways to strengthen their business One of the option is to become joint investment partners.

If the past experience is any guide, the emerging markets like Pakistan should prefer investment partners to project loans, wherever possible.

In recent years, multilateral institutions have been frequently questioned for project failures on account of faulty planning, designing, monitoring and implementation and social costs of the programmes funded by them.. Project planning done without respecting local advice often ends in a fiasco.

Many projects are abandoned half way. The borrowed money has to be repaid by the recipient to the donor whether the project is a success or failure. And fees are paid for funds committed by IFIs for projects remaining in the pipeline for years for shortage of matching local currency amounts.

The IFIs do not share the project risks. Much of debt created in the past was because the loans were either not utilised prudently or the macro-economic policies did not provide the right environment, resulting in debt trap. It is time for a cost benefit analysis of development projects funded by multilateral agencies.

By becoming investment partners, the international financial institutions would get returns on the financial performance of the projects, barring preferential treatment as is the practice in case of repayment of their loans. There should be a right mix of loans and equity in every project to ensure that the investors have enough stake in project viability and the returns are fairly distributed among shareholders.

The recurring global debt crises and the current credit crunch indicate that lenders cannot do business if the borrowers sink under debt unless they are bailed out. This is also evident from the case of South East Asian crisis or debt relief provided by the donors to Pakistan after 9/11. Many in the industrialised West are also convinced that debt is not the best way to finance development in emerging markets And ,in real terms, global bilateral official assistance is on the decline.

The integration of the financial sector into the global market and a high growth rate of over seven per cent averaging over the past five years, have helped Pakistan attract a record of $8.4 billion foreign investment last year, roughly three times of the multilateral assistance.

By and large, the trend seems to be continuing despite political tensions and uncertainties. The drop in foreign investment in the first quarter of fiscal 2008is of a mere 10 per cent, explained by a standstill in privatisation.

No doubt, the commercial banks do play a key role in any economy despite an expanded capital market , particularly in developing countries like Pakistan.

But the banking system is fragile and prone to increasing risks. Once again, the local commercial banks have started piling up debts. This has forced the State Bank to direct them to make 100 per cent provisioning against defaulted debts.

It was only a few years ago that banking reforms were carried out with Rs40-50 billion of tax payers’ money going into state-run units to prepare them for privatisation.

The local capital market needs to grow much faster to meet the diverse needs of the economy. In fact, ,there a strong need to reinvent the entire financial system to promote prudent investment.

In the wake of the “earthquake in the credit market” the IMF says that some emergingmarkets that have relied on external financing to fund large current account deficits, could be tipped into crisis by a combination of reduced demand for their exports and tighter financial market conditions.”

Going by the growing fiscal and current account deficits, the government alone cannot undertake the gigantic task of revamping the country’s entire infrastructure.

Local and foreign investment is necessary. No doubt, the repatriation of profits and dividends are rising fast ---$870 in fiscal year 2007 against $536 million in FY 2006----but these outflows are governed by good financial performance in a fast growing economy.

Profits are based on financial performance and multilateral loans are guaranteed by the state, irrespective how the money has been used or misused.

All foreign funded projects are more expensive than those financed by local resources. In many cases in the past, Sindh chief minister’s inspection team discovered that school building built by the local community is far more cheaper than a similar quality structure raised through donor’s funds.

If the IFIs become investment partners in the infrastructure projects , they would have to ensure that the cost of projects is minimised to secure better returns.

As the return on investments in the industrialised states is much lowerthan in emerging markets and the growth momentum in Asia including Pakistan is likely to continue, the global investors cannot afford to miss the emerging opportunity for lucrative returns.

And despite the global credit crunch, there is plenty of money in the business world , both at home and abroad to finance viable public- private partnered projects.

Given political stability and continuity in policies Myrell Lynch says Pakistan’s domestic demand should continue to ensure flows in the form of foreign equity and debts –sufficient to finance account deficits, maintain foreign exchange reserves and keep the exchange rate stable.