Can infrastructure bonds help Pakistan

Debt financing has been on Pakistan’s card ever since it came into being. Though it is not unusual for countries under financial strains to borrow, however, unlike Pakistan for many it has never been a destination, instead a sojourn soon to be traded by investment opportunities. Lately, Pakistan government has been thinking of introducing infrastructure bonds to build the much needed dilapidated infrastructure of the country that has wreaked havoc with the economy of Pakistan. When the relentless flood water shattered the lives and assets of more than 1.6 million families all across Pakistan it had a massive impact on the infrastructure of the country.
The damages caused to infrastructure, agriculture and other properties amounted close to $10 billion. On 20 august 2011 President Asif Ali Zardari directed his financial team once again to develop a work plan to float Infrastructure bonds so that a sizable equity could be raised to manage the massive infrastructural projects required if the country has to progress in actual term. On somewhat similar lines the former governor State Bank of Pakistan, Saleem Raza, proposed in 2009, to have “infrastructure development bank and Mortgage Refinance Company’ under public-private partnership for the growth and development of infrastructure and housing sector in the country. For three consecutive years the government of Pakistan, one way or the other, have been mussing over the development and improvement of Pakistan’s infrastructure through debt financing without giving it any real punch.
Many developed countries such as America and India has had infrastructure bond floated to generate capital for the development of municipal projects. In the wake of the global financial crisis when big economies were stewing under stimulus and bail package deals, America issued a taxable Build America Bond with a subsidy option from the federal government equal to 35 per cent of the total coupon interest paid to investors. BAB was floated with an aim to finance capital projects that would stimulate economy and provide jobs to the construction workers displaced by housing market collapse. India launched its tax-saving infrastructure bonds in 2010 to raise resources to bill its capital projects.
So far, though Government of Pakistan has not outlined any details for its proposed infrastructure bonds, however, it remains pertinent to ask, is there a market for such bonds? Can Pakistan government create financial discipline to minimise or control leakages? Answering these queries Dr. Salman Shah former finance Minister Pakistan said “Pakistan is not going to gain any benefit from such ventures, it is akin to borrowing, which government of Pakistan has been doing excessively over the years. Infrastructure bonds would cause further expansion in the fiscal deficit. At the downside it would crowd out the private sector from core economic activities. As far as the viability of these bonds is concerned, of course, having a sovereign guaranty, investors would be lured to it. And keeping with the precedence, banks would be investing heavily in these bonds as well. The best option, therefore, for government is to go for public private partnership to capital infrastructure projects. There have been a lot of institutional building done in years bygone to finance and manage infrastructural needs of the country, such as the Infrastructure Project Development Facility, and then we have Infrastructure Project Finance Facilities. In fact it’s time that the government of Pakistan come out of Public Sector Development Program (PSDP) and get into Public Private Partnership arrangements. Saying all that, the government of Pakistan having a long history of corruption, maladjustments, mismanagement and incompetence behind it, would hardly be able to make any good use of the capital collected under the banner of so called “Infrastructure Bonds.”
Personal interest and political expeditions had kept Pakistan from growing through development and nation building. Market volatility is one thing that an investor never wants to even dream of. Though it is rare for Markets to behave constant, volatility in developed economies is shock observant in a way that financial regulations and economic policies are seldom given to change. Studying Pakistan’s economic history brings one to three junctures similar in nature happening at different time frame with similar economic results. These happened to be the military rules spanning over close to 29 years. Pakistan has been found growing economically under the military rules, not so much owing to the power of uniform than to the persistent pursuance of economic policies. The democratic era on the contrary, having sketchy presence, failed to consistently follow economic policies resulting in a volatile market a bane to investment. The fall out of this flimsy economic decision making have been, a half-baked infrastructural formation ridden with corruption and slow processes. In 64 years of independence infrastructure building, a pre requisite to development has remained an unimportant priority for the government. Without going into messy details the story of few important institutions would give the feel of the actual situation.
Only recently Dr Samar Mubarakmand, Member Planning Commission of Pakistan on Science and Technology while giving briefing to the National Assembly Standing Committee on Petroleum and Natural Resources said that the energy crisis in Pakistan has caused it an estimated loss of Rs230 billion annually, besides eliminating 0.4 million jobs annually. Not a single unit of electricity on practical grounds has been added to the national grid over twenty years. In 1990’s the development of Independent Power Plant Programme with high per unit cost did not only fleece the common man but opened WAPDA to more financial losses because of purchasing power from private producers at a higher price than its average cost of production. According to World Bank, Pakistan Peak demand is more than 14,000 MW while the total capacity is 19,500 MV which is not sufficient due to variation in water availability. The sense of complacency that prevailed on our leaders after building Terbala and Mangla damn still does not make sense to a commoner. The irony is that the fuel mix for power sector which was used to be 70 per cent hydro and 30 per cent thermal, keeping the cost of electricity at the lowest has been reversed and presently almost 70 per cent electricity is produced through the thermal system and 30 per cent from hydro. Not a single dam worth mentioning has been added. Even Bhasha dam is still cutting its teeth with investors. Kalabaagh dam has its ashes buried under the tomb of political expeditions. The Pak-Iran pipe line is yet to start with no investors to deliver the baby. Almost 90 per cent of the industries have closed their operations in Pakistan due to the energy crisis. Instead of finding new gas reserves, the entire stock has been stocked into CNG setup, which is about to be axed too so that industries and power generation companies can run to sustain economic stability. The shortfall of gas would cross 950 million cubic feet per day by end of December this year.
Owing to its corrupt management and unscrupulous government decisions, Pakistan railways is laden with the financial losses to the tune of Rs26 billion during fiscal year 2011.due to lack of track maintenance and deteriorative locomotives. Railway had added only a few hundred kilometres of new railway tracks to the network left behind by the British in 1947. Pakistan’s flag carrier PIA losses have increased by Rs23.6 billion. In 2008, the airline’s accumulated losses stood at Rs73 billion, which by March 2011 soared to Rs96.6 billion. Pakistan steel mills is incurring losses of Rs1 billion monthly. According to official figures the company is working at only 31 per cent of its capacity. A Woodrow Wilson Centre report titled ‘Running on Empty’ 2009 warned that “Pakistan’s water situation is “extremely precarious” and that the South Asian nation could face widespread shortages within 25 years. Last year’s floods exposed the government’s neglect of infrastructure, including dams, “one of the big manifestations of the water management policy failures.” A flood damage report prepared by the Asian Development Bank (ADB) and World Bank says the country’s water supply and sanitation services “fail on three accounts – quality, access, and sustainability of services.” Piped water supply is frequently intermittent and not potable; only 35 per cent of the population has access, at best for 3-6 hours a day in all but the largest cities. Sewerage services are inadequate with most households not connected to a system; 33 per cent of rural inhabitants don’t have access to a toilet.”
Owing to this abnormal situation Pakistan is running into fiscal deficit of close to 6 per cent of GDP. Sixty per cent of Pakistan’s budget is used in debt financing. There were times when Pakistan has had a good amount of foreign capital flowing into the country especially during Musharaf’s tenure when foreign aid was showered onto Pakistan from around the world as an acknowledgment for becoming frontline partner on War on Terror. The issue however has little to do with the availability of resource; it is more to do with the intentions and spirit of nationalism. If today Pakistan Government decides to be honest, in the sense that for one full year it decides to spend holistically the tax money of the people on nation building, one can bet that, the following year there would be a windfall of tax revenue. A country that houses one of the largest populations of philanthropists of the world and where remittances are soaring each new day, the ideology of nation building cannot remain a far cry; it only needs few scrupulous steps toward development. Rising remittances shows that people living abroad still believe Pakistan to be a safer country than others. Once the going gets smooth after the initial sacrifices of the governing bodies, there would be room not only for infrastructure bonds but for diaspora bonds as well, to channelise the patriotic and nationalistic feeling of Pakistani immigrants. Finally, as has been increasingly advised to Pakistan government, it should privatise its sick assets like Pakistan Railways, PIA and Pakistan Steel Mills without delay to prevent further losses to the taxpayers.