Uplift spending cut a setback to growth vision

Published May 23, 2016
Federal Minister for Planning, Development and Reforms Prof Ahsan Iqbal 
addressing the ‘Building for Tomorrow’ conference last week in Islamabad.
Federal Minister for Planning, Development and Reforms Prof Ahsan Iqbal addressing the ‘Building for Tomorrow’ conference last week in Islamabad.

THE federal government seems to have put a tight control on the overall development funding mainly because of the slower revenue collection in the first half of this fiscal year and stubborn expenditures on security operations and resettlement of internally displaced persons.

This is evident from the finance ministry’s operations during the July-March period of 2015-16 that put the country’s total development spending at around Rs624bn — less than half of the full year allocation of about Rs1.3tr. Of the Rs700bn federal allocations, the ministry released only Rs251bn for projects funded through the Public Sector Development Programme (PSDP).

Spending by the provincial governments was comparatively good. The ministry said the four provinces together spent Rs372bn in first nine months of this fiscal year against the stipulated amount of Rs600bn.

The development expenditures were presumably controlled to contain the fiscal deficit at 3.4pc for the July-March period and 4.3pc for the whole fiscal year. Presently around 8,000 projects worth over Rs4tr are being funded by the federal and provincial governments. Such a huge investment could trigger high economic growth for a long-run if implemented in an orderly manner with tight time schedule.

The problem with overall expenditure pattern is that all expenses, other than development — defence, debt servicing, salaries etc — become due on a specific date and have to be paid. Development is the only area where cuts are applied when revenue collections are lower.

The government has not been able to formulate a mechanism to keep up the implementation momentum of large projects with multi-year gestation period — with the usual no work in the first quarter, start ups in second and third quarter and full releases of funds in the last quarter or last month of the fiscal year — that ultimately compromises the quality of utilisation.

The slow utilisation of the PSDP funds continues to be a major problem. Earmarked investments fall short by the time the projects are completed, owing to delays, cost overruns and lopsided implementation.

There are always different reasons behind project delays and some of them quite genuine but faulty, delayed project preparation and lack of capacity at the level of contractors, executing agencies and consultants coupled with slow financial disbursements are some of the usual culprits. For example, Rs6bn interchange project in the downtown of the capital was delayed by a full year despite timely payments because of capacity problems with an influential contractor and weak controls by a consultant.

There is also a time lag on payments sanctioned by the Planning Commission and actual releases allowed by the Finance Division. According to the commission, the disbursements for development projects this year were being made slower than last year.

As of May 13, the commission had disbursed Rs474bn for development projects, accounting for only 67.7pc of the Rs700bn total allocation. In comparison, the disbursements had amounted to Rs383bn during same period last year, accounting for 73pc of the budgeted Rs525bn.

With this pace of releases, the government is likely to cut development spending by more than Rs75bn to contain fiscal deficit within limits. The government is facing problems selling another modern telecom licence that was anticipated to yield about Rs50bn this fiscal year.

Under the government’s approved disbursement mechanism, the PSDP should have consumed 85pc of total allocations by now. The mechanism required disbursement of 20pc each in first two quarters (40pc in first half of the year), followed by 30pc each in last two quarters (60pc in second half of the year).

Power sector stood out as the top consumer of PSDP funds as it utilised about Rs102bn so far, almost 90pc of Rs114bn allocation for the year.

The utilisation of funds in the road sector was strikingly slower than last year. Major road sector projects of the National Highway Authority — notwithstanding CPEC projects — consumed Rs74.7bn this year (47pc of full year share) against last year’s same period consumption of Rs76bn or 68pc of allocation.

The government disbursed about Rs42.2bn for development schemes in special areas like AJK, Gilgit-Baltistan and the tribal region that accounted for more than 98pc of Rs43bn allocation. Because of upcoming general elections, the development related disbursements for AJK stood at 104pc (Rs13.8bn) so far against an allocation of Rs13.3bn.

The government is unlikely to make full disbursements against the budgetary allocations which is in line with expectations of the IMF that the government curtail its overall development budget by Rs360bn (almost 24pc) of allocations to meet fiscal deficit target.

To improve things, the Planning Commission has in recent years decided to monitor projects on the basis of incremental capital output ratio (ICOR) in view of its inability to ensure project completion certificates as executing agencies take this responsibility casually. The good sign is that ICOR has maintained a declining trend that suggests better funding utilisations through mid-year shuffling of funds on the basis of performance.

Beginning with ICOR of 3.6pc in fiscal year 2013, the rate has come down to 3.2pc in fiscal year 2015 and is targeted to be at three for the current year. ICOR is the additional capital required to increase one unit of output through efficiency — a lower ICOR means greater efficiency.

Published in Dawn, Business & Finance weekly, March 23rd, 2016

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