Reforming the federal development programme

One of the most important tools available in the hands of a federal government to support economic growth is the development expenditure it undertakes through the Public Sector Development Program (PSDP). Hundreds of billions of rupees of hard-earned money of taxpayers is spent by the government for this development programme. What this money is spent on, how effectively it is utilised, and how it is financed can make a very significant impact on the development path of a country. The PTI government with its commitment to reform has addressed all the three aspects.

Let’s first look at what the development expenditure is being spent on and how it has changed since the PTI government has been formed. Pakistan has huge needs for infrastructure development, and infrastructure is expensive to build. Therefore, if we are not creative about financing infrastructure, it consumes the bulk of the development budget available. Hence, one of the key interventions required developing innovative financial instruments for financing infrastructure development. Details of the innovation carried out are given later in the article. This has allowed us to reduce the share of development budget being spent on infrastructure — from 56% that was allocated five years back to 40% for this year’s PSDP.

The fiscal space thus released is being spent on key areas which are critical to long-term growth but have seen huge underinvestment by successive governments. Wherever you go in Pakistan, people are worried about supply of water both for agriculture as well as human needs. The share of the PSDP allocated to water-related projects has been increased by two and a half fold — from 4% to 10%. These projects include large dams like Diamer-Bhasha, smaller dams, canals and development of command area for these canals.

We have traditionally underinvested in the social sectors like health and education, besides neglecting the environment. In addition, the development effort has been unequally distributed with many parts of the country still having extremely low levels of human development scores. The PTI manifesto at its core commits to creating a society where state resources are used for all and not just a few. Hence these investments are vital for giving equal opportunity to all segments of society and all regions of the country — in line with the PTI manifesto that emphasises ‘Do Nahi Aik Pakistan’. The share of expenditure in these sectors has been increased from 23% to 31% of PSDP. Higher Education Commission’s development budget has been more than doubled, health expenditures increased manifold, and environmental protection has seen allocations grow more than tenfold.

While the main engine of growth in a modern economy is the private sector, the state still plays a vital role by making investments which increase the competitiveness of the economy, particularly the productive sectors. Once again successive governments have failed to make the necessary facilitative investments in industry, agriculture, information technology, and science & technology. The share of these sectors has also been increased two and half times — from 2% to 5%.

Now we come to the part about how innovative financial structures are being used to finance large infrastructure projects. For a long time now, governments have been struggling to use the public-private partnership structure to finance infrastructure projects and were unable to make any headway. In 2007 an Infrastructure Project Development Fund (IPDF) was created which did not deliver much. In 2017 a new public-private partnership authority was created and the IPDF was merged into this new entity. However, no project could be delivered by this new entity under the previous administration.

The PTI government has revamped the Public Private Partnership Authority Act, with a fulltime CEO in place and the planning minister personally chairing the authority’s board of directors. Last Friday, the board gave the go-ahead to NHA to sign the first contract using transaction structure approved by the Public Private Partnership Authority board. This innovative transaction structure uses financing in the form of capital and operational viability gap funding. This allows a small upfront injection of funds by the government to get very large infrastructure projects started. The Sialkot-Kharian Motorway, approved under this structure, has a total cost of Rs27.8 billion and a viability gap fund injection of only Rs4 billion during the project execution phase. So every rupee of PSDP spending in this phase is resulting in seven rupees of total development spending. Another unique feature of the structure is the quasi equity nature of the viability gap funding, which will make NHA eligible for sharing the potential profits of the project after the first eight years of operations.

Finally we come to the quality of development expenditure and how effectively it is being utilised. The PSDP, over the years, has been mired in poor execution of projects causing delays, overruns and corruption. To deal with these problems, a number of major changes have been made to the system of development spending oversight and coordination. One outcome of these measures is that the year just ended saw the entire PSDP budget being utilised for the first time in a decade. Otherwise every year tens of billions of rupees of precious development budget were left unutilised, slowing down the much-needed development works.

Three key steps have been taken to revamp the monitoring and evaluation function of development spending. First step is to strengthen institutional capacity of this wing of the Planning Commission. Second major step is the use of technology to monitor projects and not be reliant totally on low frequency, often inaccurate field reports. For this purpose, an agreement has been signed with SUPARCO to use a satellite-based monitoring system for tracking project progress. Third important ingredient is to use specialised firms for project monitoring through outsourced contracts to monitor key projects. By introducing the use of technology-based surveillance and outsourcing to specialists, not only will effective monitoring of projects improve but a greater transparency of the development expenditures will be created.

The combined impact of the three broad thrusts of reform outlined above — i.e. spending focused on sectors which create maximum impact; improving the quality of the oversight system to ensure money is spent more efficiently and honestly; using innovation to leverage taxpayer money to achieve development expenditures much greater than the government financing deployed — will result in development outcomes which meet the needs of the nation better than ever before.

Published in The Express Tribune, September 3^rd, 2021.

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