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Private sector money eludes infrastructure projects

August 14, 2017

During a visit to Washington in April this year, Finance Minister Ishaq Dar invited the Pakistani diaspora in the United States to invest in a development fund the government proposes to create for channelling private investment into the large commercially viable infrastructure projects in the country.

The government is also considering establishment of an infrastructure bank that will raise 60pc of its equity from the private sector.

While the development fund — to be set up in partnership with the Asian Development Bank — is meant to mostly undertake projects in the public sector, the infrastructure bank being negotiated with the International Finance Corporation (IFC) will facilitate private investment in large infrastructure schemes.

The idea behind the formation of these funds is to leverage the government’s limited financial resources to bring in private capital aimed at closing the enormous infrastructure gaps in the country.

In its quarterly Infrastructure Finance Review in March 2015, the State Bank of Pakistan (SBP) estimated that Pakistan needs to invest about 10pc of GDP until 2020 to close its infrastructure gaps.

The report said the infrastructure investment as a percentage of GDP currently averages 6pc.

Many blame the absence of private investors in infrastructure development for growing gaps in the country even after 70 years of its Independence.

“Governments worldwide have limited resources to create the kind of infrastructure we require for faster economic growth,” said an official who has worked for both the Planning Commission of Pakistan and the Board of Investment.

“The countries where private capital was facilitated to step in to fill in infrastructure gaps have attained a much faster rate of growth compared with those where the job was left for the public sector to perform.

“Private capital has played a vital role in the creation of physical infrastructure in developed countries unlike Pakistan where the entire burden is borne by the public sector, which has limited means to finance development of road, power, transport, logistics, water and other projects,” he said. “No wonder governments have to borrow money to fund infrastructure development.”

Indeed, it is hard to achieve fast, sustainable economic growth without creating modern infrastructure.

According to Lahore-based analyst Shahid Zia, logistical bottlenecks alone increase the cost of production of goods by 30pc.

“Poor or non-existent infrastructure is a major impediment to economic expansion as it prevents people from contributing to the economy,” he said. “For example, transport impediments are keeping a very large number of women homebound. Similarly, an energy deficit has reduced productivity and increased the cost of production.”

Everyone agrees that a massive opportunity exists for private investment in infrastructure as the gaps are widening.

Still, private investors shy away from undertaking such projects.

“Why have private investors not invested in infrastructure creation in the last 70 years? It’s a very valid question. But there is no easy explanation for this,” says Akber Sheikh, a businessman with interests in textiles and construction.

“The answer to this question perhaps lies in the government policies, regulatory framework and so on, which has always prevented the private sector’s involvement in such projects,” he said.

“If we look at India, almost three quarters of the total investment in infrastructure development comes from private companies and only one quarter from the public sector. The situation in Pakistan is quite the reverse. Here the private sector tends to invest only in projects where profit is guaranteed,” he added.

Another businessman, who doesn’t want to reveal his identity, pointed out that private investors’ involvement in infrastructure development is pinned on commercial gains.

“Unless, incentives are given to lure private sector investment in infrastructure and contracts are honoured by the government, no one will invest in such projects,” he said.

“Take the example of major coal and LNG power projects being set up under the China-Pakistan Economic Corridor (CPEC) in Punjab. The government wanted the private sector to invest in those projects but no one stepped up owing to growing inter-corporate debt in the power sector. Finally, the government had to do it from its own pocket,” he said.

“In a country where contracts are not honoured, policies are changed with a change in government and priority is given to politically motivated projects rather than commercially viable and bankable projects, you cannot expect private investors to bring their money in infrastructure creation.”

Syed Nabeel Hashmi, a manufacturer, believes that the private sector has not invested in building social and economic infrastructure because wealth creation in Pakistan is considered a crime.

“The tax and other authorities in Pakistan have a unique skill of making a criminal out of an investor and impeding his growth. How then can you expect businessmen to invest their money in infrastructure?” he wondered.

Published in Dawn, The Business and Finance Weekly, August 14th, 2017