IN the coming months, low GDP growth and consequent low rise in tax revenue as well as higher debt servicing will limit the much-needed costly revamp and expansion of state-owned entities. The Privatisation Commission and the finance ministry therefore seek strategic public-private partnership in these entities.

The initiative implies private sector’s acquiring substantial (not majority) holding in these enterprises and taking over their management. Back in the 1980s, the British government began privatising strategic state enterprises by retaining a ‘golden’ (40 per cent) share in them; it worked because investors believed in the commitments of the state, and Britain had an independent judiciary and credible judicial traditions.

To the 21st century private sector, this ownership style (though highly advisable for strategic enterprises) may appear strategically and administratively suffocating unless backed by a clearly defined managerial mandate that allows the private sector freedom to take steps for increasing productivity, efficiency, and return on assets, but without dealing unfairly with the entity’s workers or the buyers of its output.

Giving private sector owners such mandates isn’t enough; the mandates must impose on these owner-managers a fair and practical commitment to fulfilling the enterprises’ social responsibility, and directors representing the state on the boards of these entities must be smart enough to verify the implementation of these mandates in letter and spirit.

Privatising strategic entities along these lines is expedient if the state retains at least 40 per cent ownership, and no less than 15 per cent shares form the floating stock i.e. are held by minority shareholders, and the strategic private sector investor (the enterprise manager) is barred from acquiring shares in excess of its strategic minority holding agreed at the time of privatisation.

As pressure mounts for cutting fiscal deficit, there would be larger cuts in the PSDP but plugging the gaps in infrastructure can’t be delayed if the economy has to withstand the intensified pressure for cutting the cost of doing business, courtesy the recession. Public-private partnerships are now imperative, but success in materialising their benefits lies in the parameters of the legislation that defines the managerial mandates for the private sector partners, and independence of judiciary to assure them upholding of their rights.

Pakistan must go for such partnerships and invite the private sector to join hands by undertaking projects on BOT basis. However, turning this proposition into a viable alternative could be tough due to the resource crunch that is already reducing private sector credit. Public-private partnerships will involve diverting scarce credit to infrastructure development, which may be to the detriment of the private sector.

Financial services sector faces the resource crunch due to its lack of vision; it encouraged consumption and consequent blocking of substantial financial resources in assets yielding low or zero economic returns (automobiles, household gadgetry and housing). The damaging side effect was rapid escalation in demand for support services (fuel and electricity) that progressively fell short of the rapidly increasing demand.

As early as 2004, analysts suggested that the post-9/11 inflows should be invested, either via long-term public borrowing or through public-private partnership wherein private sector financed the projects on BOT basis in projects that plugged infrastructure gaps. Had the advice been heeded, those precious inflows would have gone into optimal economic return yielding investment.

The recession is slowing the flow back of resources into the financial system for re-deployment in new investment, private or public. Faced with a resource shortfall, the financial sector only sluggishly began innovating sufficiently attractive saving products; this effort will get people back into the habit of saving (rather than consuming and speculating), but with a time lag.

This is the first stumbling block, but one that is not insurmountable given the creative abilities of the financial sector players. Indications are that bank deposits are going up, though slowly, as people opt for longer term saving due to the attractions offered on medium-term deposits. What is still lacking is requisite focus on beefing up small savings block that can make the difference by serving as a stable funding base.

The other more complex problem is building-up capacity for infrastructure financing among banks. There is no indication that for this sufficient capability resides in Pakistan’s banking sector. In this setting, an indigenous workable solution could have been that, as financiers, commercial banks joined hands with NBFIs for project selection, costing, planning and progress monitoring.

Shaukat Aziz regime downgraded the role of NBFIs on the logic that commercial banks had the capacity for project financing that rendered the NBFIs (unfortunately, all state-owned) unnecessary. True, NBFIs did become loss-making entities but closing them down without verifying that the banking sector had developed the requisite financing capability, was a grave error.

The solution was a revamp of the NBFIs to align their capabilities with the changed market realities because, as a developing country, for years to come, Pakistan will require sound infrastructure financing capability. Given the fact that foreign resources may be hard to come by for years, we will have to rely on domestic resources and sound project financing capability; the sooner we develop both the better.

Banks must reach an understanding with the state on project selection whereby they finance projects that offer maximum spin-offs – raise activity in other sectors – imperative for generating optimal economic returns to raise tax revenues and bolster state capacity for repaying the banks and taking over the projects.

Infrastructure projects will require huge resource outlay necessitating syndications, and macroeconomic analytical capacity for selecting projects with spin-offs. No less important is the capacity for assessing project feasibilities and scrutinising the initial cost estimates and probabilities of subsequent cost escalation to contain the final cost of the project within economically feasible parameters.

Banks will have to devise transparent tendering procedures to attract the best contractors that have the capacity to economise on construction costs using technologies that minimise waste. Banks must also devise sound methodologies for on- and off-site monitoring of fund use by experts with requisite technical and financial qualifications and demonstrated project-monitoring experience.

Last but not least, banks must build larger bases of medium-term deposits – that’s the raw material they will need for funding medium-term project finance, assuming they can quickly build the technical capacity for infrastructure project financing.