Punjab plans to spend Rs752 billion on development this year. A growing share of it is meant to come through partnerships with private investors.
Departments have been told to prepare at least 30 per cent of new schemes as public-private partnerships (PPPs). The idea is sound. Private firms can build and run roads, water systems and urban services while the province shares the risk.
One problem sits underneath the plan. A project of this kind needs a loan that runs 25 to 30 years. Commercial banks in Pakistan lend for ten years at best, and with the policy rate at 11.5 per cent they have little reason to go further. A good project can be ready, approved and still unfunded.
Imagine that Punjab set up a dedicated long-term infrastructure fund. The province would put in capital once, add funding from development partners, and lend to private projects for long periods. Bangladesh set up IDCOL in 1997 and India set up IIFCL in 2006 on this logic. Both are government-owned and both lend for infrastructure that banks avoid.
State-owned lenders have a mixed record, so the practical question is under what conditions such a fund would work. A simulation helps. Run a Punjab fund forward for fifteen years across 10,000 possible futures, each with its own path for interest rates, the exchange rate, the supply of ready projects, loan defaults and political pressure to lend. Five designs can be compared, from a thinly funded fund with weak controls to a well-capitalised and carefully governed one.
The results are encouraging for the right design. A fund with about Rs100 billion of capital, strong project preparation, an independent board, a credit rating and a loan book kept free of political lending would help finance roughly Rs1.1 trillion of investment in today’s prices. That is about nine rupees of projects for every rupee the government puts in, and the fund stays financially sound in 95 per cent of the simulated futures. A fund that mixes in political lending and weak loan appraisal stays sound in only 18-49 per cent of them.
Three lessons stand out. First, projects matter more than money. When the supply of ready projects is cut in half, lending falls by 47 per cent. When capital is doubled from Rs100 billion to Rs200 billion, lending rises by only 7.0 per cent. Punjab’s PPP authority has started building a pipeline, with new project concepts approved and road schemes at the bidding stage, and the new PPP law creates dedicated units inside departments. The fund will lend only as fast as those units produce bankable projects. Capital that sits idle earns little and costs the public a great deal.
Second, governance decides whether the fund survives. Research on Pakistan’s banks shows the danger. A well-known study by Asim Ijaz Khwaja and Atif Mian, covering more than 90,000 firms, found that politically connected firms borrowed 45 per cent more from government banks and defaulted 50 per cent more often. Private banks showed no such pattern. In the simulations, a fund that drifts into political lending keeps lending at a steady pace for years while its capital quietly wears away. By the time the damage shows, it is hard to repair.
Third, a moderate amount of capital is enough. Between Rs75 billion and Rs150 billion gives a high chance of staying sound. Anything above that adds cost without adding lending.
One more point deserves honesty. Even the best design is not free. Measured against what the public money could earn elsewhere, it costs the exchequer around Rs18 billion in present value. That cost buys long-term infrastructure that would otherwise go unfinanced, and the province can weigh it against the alternatives. The accounting also needs care. The fiscal framework agreed with the federal government and the IMF should settle how an equity injection is counted before any money moves.
So what should the province do? Five steps follow from the evidence.
One, build the pipeline first. Expand the project development support in the PPP authority and train the departmental PPP units before the fund lends its first rupee.
Two, protect the loan book. Write into the law that the fund will make no politically directed or subsidised loans. If a project needs a subsidy, pay it openly from the budget through the existing viability gap facility.
Three, give the fund proper institutions: an independent board, professional managers, a credit committee that can say no, published accounts and a credit rating within three years.
Four, invest the capital in one instalment, and only after the pipeline, the governance and the fiscal checks are in place. And, five, borrow carefully. Use hedged or rupee-denominated funding from development partners, raise borrowing gradually, and review the fund’s performance after three and five years.
Punjab already has a PPP law, a growing list of projects and a political commitment to private partnership. Long-term finance is the missing piece. The institution’s quality will decide the outcome.
A fund that lends on merit can give the province decades of finance for roads, water and cities. A fund that lends on connections will repeat an old story. Punjab should build the first kind.
The writer is the head of the Governance and Reforms Unit at the Sustainable Development Policy Institute (SDPI), Islamabad.
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