The China-Pakistan Economic Corridor and the mega project focus of the current government have brought infrastructure development into the forefront of media and public discourse.
Justifiably, Pakistan faces a stern infrastructure challenge going forward. At the moment, there is an average 5,000MW power shortage with an obsolete transmission system while the country has the lowest kilometre per capita of metalled roads in the region at 0.0014km.
Without overlooking the great rural urban divide, our biggest city still lacks a proper mass transit system while our social infrastructure is also dilapidated.
Indigenous investment-led growth is more sustainable as it does not impact our foreign reserves
For perspective, we have one of the highest rates of out of school children in the world and the ones who go to public schools are generally not equipped to become self sufficient.
On top of that Pakistan has a burgeoning population with almost two thirds of it less than 30 years of age, which means that the country has to not only plan and execute projects for the current shortfalls but also develop capacity for the upcoming demand in the next few decades.
Each megawatt of thermal electricity will cost around $1.25-$1.5m (with the cheapest upfront cost and shortest set up time) while each kilometre of a dual carriageway would cost at least $1.3m. Keeping these numbers in perspective there will be a need of at least tens of billions of US dollars in the next few years to fulfil the infrastructure gap that the country faces.
The question that comes to mind is whether we are developing sustainable sources of infrastructure investment in our country or not.
During my recent research, I was looking at international infrastructure funds that focus on South Asia. Even though I was able to find hundreds of funds that focus on India, I was only able to find two funds that specifically mention Pakistan as an investment destination.
However, both funds have links to ex-Pakistani ministers so it is not a surprise that Pakistan is mentioned as a possible destination.
In comparison even Sri Lanka has dedicated international funds to target its infrastructure needs.
The question is: how are we branding ourselves for international investors, and more importantly, are we developing our private sector players in a way so as to attract investment in the infrastructure sector?
Research has shown that indigenous investment-led growth is more sustainable as it does not impact our foreign reserves through reverse remittance in lieu of debt repayments and profit repatriation by foreign investors.
There are only three mutual funds in the country’s mutual fund universe that specifically target the infrastructure market; they mainly focus on the energy sector.
In fact, two of the three funds were recently launched, in 2016, and the combined AUM of the three funds is just over Rs3bn, which will translate into not even $30m.
The 2016 launch of the two funds shows that the mutual fund industry is warming up to infrastructure funding but again the question is: are the regulators and the financial authorities willing and planning to provide incentives and a platform for the growth of indigenous funds for infrastructure?
The development of products for infrastructure investment will not only shore up local infrastructure but also provide investors with a distinct investment class.
Moreover, Pakistan can also develop a market for pension funds to invest in infrastructure investment products in a structured manner as has successfully happened in North America and Australia.
The cash flow streams of pension funds match that of infrastructure investment as both are long term in nature.
In California, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System have commitments of over $5bn in infrastructure assets.
Canadian pension funds are among the most active investors in infrastructure with some investors having a portfolio allocation for equity infrastructure of 10pc or more.
Similarly, Australian pension funds (super-annuation funds) started investing in infrastructure more than a decade ago and some have above 10pc equity investment of their total portfolio in infrastructure.
South Korean pension funds are even investing in infrastructure assets overseas.
In Pakistan, both government and private institutions have billions of dollar equivalent assets in pension funds but they are invested in either government bonds or/and bank accounts with only a risk perspective in mind.
However, there is no denying the fact that because of their nature and the pensioners’ investment mandate, the investment of pension funds in infrastructure assets should be highly regulated and dynamically monitored. This brings us to the state institutions that need to play a pivotal role in developing the infrastructure finance market.
The SECP and the Pakistan Stock Exchange also have extremely important roles to play in developing a sustainable financial market and products.
Listing infrastructure securities will lead to a more open, competitive and transparent market, which shall entice more investment into the sector.
On the whole, the ministry of finance along with other finance sector players need to come up with a sustainable investment plan to cater for diverse and equitable infrastructure development.
—The writer is a consultant with the World Bank group
Published in Dawn, Business & Finance weekly, March 6th, 2017
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