Can Pakistan’s infrastructure spending spree help win the economic marathon?

[خره مينه لګته وي]

ISLAMABAD: Pakistan is aggressively pursuing infrastructure mega-projects at the moment – as are other countries which include the United States, China and Canada.

And why not? It sounds like a perfect strategy as governments take advantage of low-interest rates to finance lucrative megaprojects. During the 2008 global financial crisis, megaprojects stayed recession-proof; and have been since seen as a convenient policy lever to stimulate growth and fabricate aggregate demand.

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However, the infrastructure boom in Pakistan has increased its exposure to debt – one which could trigger a possible financial crisis in the future. The total public debt has risen by 35% since 2013 with an increase of 28% in foreign debt. Much of the borrowing is being done on the prospect of future revenues from China-Pakistan Economic Corridor (CPEC) projects, such as toll revenues from the use of motorways.

But what if megaproject planners have been overestimating benefits and underestimating costs of these infrastructure projects? The consequences for an “economy on steroids” could be an economic “Pearl Harbour” for Pakistan.

Relying on borrowing alone, even concessional loans, to finance megaprojects is not a good idea as the injection of stimulus puts the burden of debt on future generations, especially in a scenario where future project cash-flows are uncertain. It will eventually lead to a rise in tax rates, specifically indirect taxes, which is not at all a feasible option.

Moreover, if urban planning is done poorly and centrally, chances are that it might not have a positive fiscal multiplier. For example, China has been building “ghost cities” for decades that are still largely unpopulated. The northern city of Kangbashi is considered as an urban failure. Meanwhile, Japan’s billions of investments on building bridges prove that even maxing out on the nation’s credit card won’t jump-start a troubled economy.

There is an imperative need to move away from the centralised planning approach – with an aim to promote private-public partnerships (PPP) on a model such as EPC (engineer, procure and construct) contracts instead of pure debt-based financing. Economic activity spurred by the private sector will act as a catalyst to produce more jobs and will create a positive fiscal multiplier effect.

The government may engineer a fund belonging to the infrastructure asset class – which is a unique hybrid of debt, equity and real estate. The long-term nature of such a fund will match it to requirements of pension funds, insurance companies and sovereign wealth funds. These financial entities usually invest in infrastructure via a self-contained entity that offers infrastructure-related products and services.

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A typical infrastructure project company usually has a well-defined business purpose. For example, it could be a PPP motorway project that involves financing, construction and managing operations under a long-term concession agreement for a period of somewhat 30 years.

At present, there is a market gap to meet requirements of Shariah-compliant pension and insurance funds; so a Sukuk and Shariah-compliant infrastructure fund will attract a lot of investors’ attention. An infrastructure or development bank, backed by government guarantees, may also be established to act as a creditor for project finance that can obtain capital market finance on favourable terms and then issue bonds.

Unfortunately, infrastructure projects are often politicised. For instance, projects related to Rapid Mass Transit in Lahore including the Orange Line Metro Train project shows that how long-term megaprojects can by stymied by short-term political considerations.

This explains why institutional investors such as pension fund managers are reluctant to embrace infrastructure investment as they are aware of the fact that infrastructure investments are not free from political risk.

So, is megaproject building spree a trusted canoe to navigate treacherous economic times? Yes, but only if the government plays off the front foot by preparing a holistic policy roadmap to engage the private sector.

The writer is a Cambridge graduate and is working as a management consultant.



Published in The Express Tribune, March 27th, 2017.

 

[Furqan Sarwar]

Each and every article is only concerned with Pakistan Debt. Why you post such articles as this is only a single person's point of view.

Tell me why foreign investors are investing in Development and infrastructure projects if the benefits are just tall buildings shown to attract investors. Are they totally stupid?

 

[Chak Bamu]

No numbers. No solid analysis. Just rhetoric. Shame.

 

[Mangus Ortus Novem]

Negative prapoganda, not an analysis.

How can Pak achieve its full economic potential without major infrastructure investment?

Guess some don't wish to see Pak become a 3Trillion+ economy...

At 5% growth rate Pak economy will double in a decade... currently Pak is about 800billion economy if one takes into account black/unregulated economic activity.

This is growth rate at current energy output and infrastructure levels...

With more and more powerplants coming online and major infrastructure becoming operation.... the rate of GDP growth is going to go up only...

Given Pak's poor economic performace of last decades..Pak can sustain 7-9% growth rate for a couple of decades...

It is not difficult to do the math, is it? Even with conservatie growth rates Pak will surpass 3Trillion+ in a couple of decades...

Can you imagine with good governance and solid economic policy what kind of economic powerhouse Pak can become?

 

[VCheng]

A typical infrastructure project company usually has a well-defined business purpose.

That is true, but for companies. Governments usually undertake infrastructure projects based on wider national goals. The entire US Interstate system is a great example of this, as are many projects in China these days. The OP fails to take this into account.

 

[313ghazi]

Infrastructure is the backbone of all economic growth. In America Obama proposed building out of a recession, in the UK the opposition parties suggested the same. Pakistan has very little real infrastructure, by building more it gives people access to the bare basics.

I'll give you a simple example. About 5 years ago a new road was built a few KM's away from our village in AJK. The road was built through the mountains and passed through 3 small villages connecting two main roads. This road has reduced out journey time to Mirpur city by 30 minutes. The real benefit though is for the people of those three villages.

Those people are finally able to build villas instead of mud houses. A lot of them have money coming in from abroad but it was logistically impossible to get bricks and cement and steel to the places they lived. These same people can now buy cars and motorcycles. A bus has been setup on this route. The same people can now open small shops in their villages, because they will get passing traffic and they are able to get supplies to their shops. Up until 5 years ago these people would walk for kilometres to get to a road to catch a bus or other transport! They'd have to use donkeys to move goods. Today modern life has hit these three villages.

Driving along these roads was amazing, their animals were not yet used to cars and would get spooked and get out of the way. On the other roads which have been in place for decades, Animals consider themselves king! lol

The state can do so much, but it can't do everything. If the infratructure is in place, people need to setup businesses to take advantage of that. If CPEC will take goods from China to the world and the world to China, why cant it take Pakistani goods too? surely its up to Pakistani businessmen to make the goods to send to the markets on the routes. We will have failed as a nation if we end up as chai waley, pump attendants and manual workers in foreign factories dotted along CPEC routes. The state has a role to play, they need to provide guidance on how business can be setup and provide assistance in doing so. Development countries are full of state sponspored initiatives that help private people setup and run small and medium sized busineses until they are capable of doing it without their expertise.

 

[coffee_cup]

Negative prapoganda, not an analysis.

How can Pak achieve its full economic potential without major infrastructure investment?

Guess some don't wish to see Pak become a 3Trillion+ economy...

At 5% growth rate Pak economy will double in a decade... currently Pak is about 800billion economy if one takes into account black/unregulated economic activity.

This is growth rate at current energy output and infrastructure levels...

With more and more powerplants coming online and major infrastructure becoming operation.... the rate of GDP growth is going to go up only...

Given Pak's poor economic performace of last decades..Pak can sustain 7-9% growth rate for a couple of decades...

It is not difficult to do the math, is it? Even with conservatie growth rates Pak will surpass 3Trillion+ in a couple of decades...

Can you imagine with good governance and solid economic policy what kind of economic powerhouse Pak can become?

Just ignore them bro.

Tribune, DAWN and Geo are foreign NGO funded media on a mission.

They have already employed lot of will-sell-my-soul-to-the-highest-bidder type "Tarek Fatahs" aka fake "liberals" whose sole purpose of life is to find something negative in Pakistan.

You'll see a person or two very active on PDF as well. Funny thing about these sort of psychos is (if taking example from PDF), they spend all their time on PDF to whine about something negative that they have "discovered" in even a positive development in Pakistan. And they present it as if they are "genuinely" concerned, . Don't be deceived by these opportunists however!

You start asking yourself: Don't they have a day job? Why would someone spend all his time on PDF and screen all possible news sources to discover negative news? Ok, it would make sense if it IS their job, for which they are paid for. You never know...

 

[xyxmt]

I have said it many time before...Its stupid to build schools and hospitals in every village, but its wise to build them every 20th village and connect them all by road, those 20 villages now are able to share their economy and thrive while still having access to schools and hospital. good infra is a key to success, just study Chinese economic success

 

[Quibbler]

True. I too believe that infra spending is the way out of poverty in South asia. But Pakistans numbers even after Cpec are not enough. Vietnam indonesia are what you would call impressive.

 

[Sully3]

True. I too believe that infra spending is the way out of poverty in South asia. But Pakistans numbers even after Cpec are not enough. Vietnam indonesia are what you would call impressive.

has indonesia gone through a 15 years bloody foreign war being waged on its door step in afghanistan add to that has neighbours like India who misses no chance to export terrorism into pakistan.

so yes economy would be alot better in pakistan had the americans not decided to wage a 2 decade long war on our front door.

 

[Talwar e Pakistan]

Just look how China surged it's economic growth by investing massively in infrastructure beforehand. China transformed itself overnight; Pakistan is following the same plan.

 

[Sully3]

i always notice meeting people and seeing politicians on TV, whenever someone talks negatively about the metro buses, or the green line buses or any mass transit system being built in the country the ones that moan about it are the ones that are never going to use it.

its easy to look at the metro bus and say its a waste of money or corruption took place from the comfort of your own air conditioned car, ask the people who use it daily how much they appreciate it and then you get your answer as to why infrastructure is key to get your economy moving.

 

[Quibbler]

has indonesia gone through a 15 years bloody foreign war being waged on its door step in afghanistan add to that has neighbours like India who misses no chance to export terrorism into pakistan.

so yes economy would be alot better in pakistan had the americans not decided to wage a 2 decade long war on our front door.

Pakistan is paying for its own policies. If like Indonesia you had tried to not base your national identity on Islam, the afghan problem would have been less severe.

 

[313ghazi]

I have said it many time before...Its stupid to build schools and hospitals in every village, but its wise to build them every 20th village and connect them all by road, those 20 villages now are able to share their economy and thrive while still having access to schools and hospital. good infra is a key to success, just study Chinese economic success

Depends how far apart your 20 villages are, and how avialable transport is. My cousins used to walk an hour to get to school every day, thier children are glad they can get to school in 15 minutes. Of course had public transport been available my cousins could have gotten to school in 15 minutes too and there wouldn't have been a need to build a new school.

 

[Sully3]

Pakistan is paying for its own policies. If like Indonesia you had tried to not base your national identity on Islam, the afghan problem would have been less severe.

Yeah absolute BS, you are believing what the media feeds you.

you just contradicted yourself, if it was all about Islam that according to you pakistan based its national identity on then we would have sided with the afghans instead of USA back in 2001.