Closing the infrastructure gap

Pakistan should be spending at least 15 per cent of its growing GDP on building infrastructure


Shahid Javed Burki April 05, 2015
The writer is a former caretaker finance minister and served as vice-president at the World Bank

A recent report by the State Bank of Pakistan (SBP) provides some interesting insights into the condition of physical infrastructure in Pakistan. Like most other South Asian countries, Pakistan has also developed a large gap in what is available to the economy by way of infrastructure and what is required to help the country move forward. The State Bank focuses much of its attention on the amount of resources the country — the state and the private sector — spends on building infrastructure and how much should be committed in the years to come.

The bank believes that the countries at Pakistan’s state of development should spend 10 per cent of their Gross Domestic Product (GDP) on infrastructure. It is not clear how this number was arrived at. Development institutions such as the World Bank believe that transforming economies such as Pakistan should spend on the development of infrastructure between two and a 2.5 times the preferred rate of growth. There is consensus among experts that the Pakistani economy needs to grow by at least seven per cent a year to provide productive employment to all new entrants into the work force. If these conclusions are correct, Pakistan should be spending at least 15 per cent of its growing GDP on building infrastructure.

Pakistan has fallen short of that goal. Translating these numbers into dollars, the suggestion is that the country should be providing at least $25 billion a year for infrastructure, instead of a third of that amount spent currently. Looking forward, the gap will be about $250 billion over a period of 10 years. This is more than $100 billion higher than what the SBP says the country should be spending.

No matter how the investment requirement is calculated, the resulting gap will be impossible to close unless some serious attempt is made to increase the amount of resources committed for this purpose. The bank advises that the private sector should be encouraged to move in and work with the government to increase the pace of infrastructural development. For some time now development experts have been focusing on what they call private-public partnership, or PPP, as the most appropriate way of significantly increasing investment in the economy. This is the case in particular for a country such as Pakistan that does not save enough and collect enough as taxes to finance a large public sector development programme. At least twice in its turbulent economic history, Pakistan placed heavy emphasis on the private sector to help with economic development. The first occasion was under the stewardship of former president Ayub Khan, the country’s first military leader. The second time was in the 1990s, a brief democratic interlude between military rules. It is instructive to draw some lessons from these experiences to plan for the future.

The most important lesson from the period of Ayub Khan was that for the private sector to occupy the commanding heights of the economy, the state must act as a Sherpa while private entrepreneurs are climbing up the mountain. In the 1960s, the country’s economic policies were laid down systematically and carefully by the powerful Planning Commission. I once had a conversation with Ayub Khan years after he had left office. I told him that his years in office were the golden era for the Pakistani economy. This was the time when the country’s per capita income overtook that of India. In most development circles, Pakistan at that time was cited as the model that other countries would do well to follow. One important aspect of this model was the state’s guiding hand for the private sector. I asked the former president what in his view was the most important contribution he had made to develop the economy. He didn’t think long to answer the question. “I was an institution builder,” he responded. “The Planning Commission was the most important institution I helped to build.”

In retrospect, it can be argued — as I have done in my own work on Pakistan — that the controls established by the Ayub Khan government were excessive and somewhat onerous. The economy could have functioned even more efficiently had the government relaxed its control over the private sector. The second time the private sector was put on the economy’s commanding height was during the first administration of former prime minister Benazir Bhutto. During her tenure, private entrepreneurs were invited to invest in the power sector. Helped by the World Bank’s International Finance Corporation, the government promised handsome rewards to the private sector to invest in electricity generation. The response was electric. Within six years of the institution of this policy, the country had a surplus of energy, contemplating sale to India. That now seems a distant past.

However, that approach to solving the energy problem left two unhappy legacies. It increased Pakistan’s dependence on imported fuel that became the major source of electricity generation. And the promised payments to the independent power producers created the basis for what has come to be called circular debt.

This leads me to emphasise the obvious conclusion in seeking the cooperation of the private sector in closing the infrastructure gap: in designing policies, the government must keep in mind the ‘social good’ while providing incentives to private entrepreneurs. For the power sector, guidelines should be developed that will move the sector towards using the abundant domestic resources for generation while improving efficiency in distribution and transmission. 

Published in The Express Tribune, April 6th,  2015.

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COMMENTS (2)

Ghulam Mohey-ud-din | 8 years ago | Reply I agree with Dr. Burki that Investment in infrastructure is not only important for the Economic Growth but also for the creation of jobs, increased access to markets and improved services. Pakistan needs a sustained and stable increase investment in infrastructure for the coming decades.
sameer | 8 years ago | Reply Well, Pakistan govt. has opted to spend $6 Billion on Chinese Submarines over anything else like infrastructure or education!!! This will send wrong message to all those who are providing economic assistance to Pakistan.
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