Like other developing countries, Pakistan has been a consistent recipient of foreign loans and assistance in the form of project and programme loans and grants for social and economic development objectives through budgetary and balance-of-payments support.
Programme loans are generally sought for achieving broad development and economic objectives like reforms while project loans are secured for specific projects and services when domestic resources are insufficient. However, such resources are helpful only when they are effectively utilised. Otherwise, they lead to debt accumulation and higher servicing cost ie a debt trap.
Pakistan’s performance in the utilisation of both project and programme loans has been far from satisfactory. No wonder the debt-to-GDP ratio has gone beyond 90 per cent and is growing. The debt servicing cost in the first quarter of the current fiscal year has jumped by almost 30pc to Rs742 billion from a year ago even though Pakistan was among the poor nations that recently secured G20 debt suspension after Covid-19.
Total funds committed by creditors (other than China) for projects were $3.4bn. But more than $3bn, or 89pc, could not be disbursed
Most of project and programme loans from multilateral agencies in recent decades have been focused on reforming the taxation and energy sectors. Yet both sectors have struggled to show desired results owing to inherent governance problems at all tiers of government. The $6bn IMF programme remains practically suspended since early this year owing to negligible progress on these reforms.
In recent weeks, a review of all projects funded by Asian Development Bank (ADB), World Bank, Islamic Development Bank (IDB), Japan, France, Germany and the United States (other than China-Pakistan Economic Corridor or CPEC) in the power sector showed miserable performance.
For example, eight of the 14 key projects in the power sector have become ‘problematic’ or ‘partially satisfactory’. Total funds committed by foreign lending agencies and bilateral creditors (other than China) for these projects stood at $3.42bn. But more than $3bn, almost 89pc, could not be disbursed due to slow progress by the authorities concerned.
Some of the projects have become white elephants. Disbursements for some of these projects stood at about 0.2pc and the country is paying commitment charges at 2pc. This happens despite the fact that Pakistan direly needs foreign inflows to support its balance-of-payments.
This shows that the sector is not only a major source of financial bleeding on the federal budget and a burden on consumers with the rising circular debt and electricity rates also but foreign assistance committed by lending agencies is not being utilised to address those challenges.
Progress on six projects (out of 14) involving $883 million foreign funding is ‘satisfactory’ even though total disbursements for them stood at $126m and about $742m was still outstanding. Two projects having $86m foreign funding are ‘partially satisfactory’. Disbursements for these projects stood at $42m and $44m is outstanding. Six projects involving about $2.45bn are described as ‘problematic’ with a total disbursement of $205m. The undisbursed chunk is $2.24bn.
About 63pc share ($2.14bn) in the portfolio pertained to National Transmission and Despatch Company (NTDC) and was found to be the centre of the problem. Most of its projects were behind schedule by 18-20 months. A couple of projects in the generation and distribution sector have also been delayed by 40-60 months.
Almost all the five energy sector projects of the federal government funded by ADB with $1.7bn loans for improvement in the transmission and distribution sector are facing serious implementation problems. The size of ADB-funded projects is $ 6.6bn under a three-year business operation plan. Four of the five projects in the energy sector have been described ‘at risk’ owing to various bottlenecks like manpower issues, land acquisition problems and bidding and operational and management challenges. They have been showing slow to no progress.
This ultimately leads to cost escalations and unnecessary delays. The problematic projects included $688m Jamshoro Power Generation Project of 660MW, $544m Power Transmission Enhancement Investment Programme tranche two and three and $400m Power Distribution Enhancement Investment Programme (advance metering project) for Islamabad and Lahore electric supply companies. All these projects are crucial for the reduction in transmission and distribution losses and improvement in the cost recovery of electricity sold.
As part of such reviews, the World Bank also expressed concerns about a number of slow-moving projects and asked the federal and provincial executing agencies to remove bottlenecks on an urgent basis to make effective and full utilisation of funds.
The World Bank’s ongoing portfolio in Pakistan is worth $10.4bn for 52 projects. The World Bank’s financing for federal development projects amounts to $6bn. The bank also is providing $1.9bn to Punjab, $1.9bn to Sindh, $0.4bn to Khyber Pakhtunkhwa and $0.2bn to Balochistan.
A majority of the World Bank–funded projects are described as ‘at risk’ due to slow progress, land acquisition or management–related issues. The federal government’s projects were also showing a mix trend.
On the other hand, ADB has commended the overall satisfactory performance of project implementation in Sindh as three of the four projects were on track. These included $294m Karachi Bus Transit Red Line project, $167m Sindh Provincial Road Improvement (324km) project and $75m Sindh Secondary Education Improvement project. However, another $120m Supporting Public Private Partnership Investment in Sindh is ‘at risk’ of cancellation unless corrected.
In Khyber Pakhtunkhwa’s $919m active portfolio, only the $37m FATA Water Resources Development project is on track while the remaining six projects are either in ‘at risk’ or ‘need attention’ categories.
The performance of ADB-funded projects in Punjab is a mixed bag of success and failure. Out of eight projects worth $968m, four with an overwhelming loan portfolio of $682m are in trouble or ‘at risk’ while the remaining four smaller projects with a total cost of $286m are on track. The situation in Balochistan is no better. There only two ADB-funded projects — Naulong Multipurpose Development and Balochistan Urban Development — with $115m loans were put in the ‘standby’ category.
Published in Dawn, The Business and Finance Weekly, November 9th, 2020