Pakistan will need to overcome several challenges including macroeconomic, legal, regulatory, and coordination issues to embark swiftly towards the next set of projects planned under the China Pakistan Economic Corridor (CPEC), says United Nations Development Program (UNDP).
UNDP in its report “Development Advocate Pakistan (DAP) on Regional Connectivity and Corridors” stated that Pakistan’s ability to finance economic corridors through indigenous resources is constrained due to low levels of domestic resource mobilization. The capacity to raise taxes at federal and provincial levels remains low due to policy and administrative gaps.
The report stated that Pakistan’s recent efforts to implement projects under CPEC have met with decent success. The already completed energy projects contributed to additional capacities, particularly in the power and industrial sector.
A key result of CPEC’s early harvest interventions was improved energy supplies to Pakistan’s residential and industrial users. Constraints remain in transmission and distribution of power which will be a key focus for the future phase of CPEC. The overall supply chain in the energy sector will also require improvements to meet the needs of nine special economic zones.
The report further added that efforts related to physical connectivity can offer enhanced dividends if complimented with initiatives to negotiate market access for Pakistani exports and expedite trade facilitation reforms including, liberal visa policies, improved border area management and sharing of trade and transport data.
However, not all segments of the population gain equally in the process of implementing large infrastructure projects. It is, therefore, important to build social and environmental safeguards for those who would bear the adjustment costs of any adverse economic outcomes or increased competition from abroad.
The report noted that the provincial government’s capacity to increase taxes given that progressive tax bases such as land, urban property, agriculture, and services now fall under their domain, is also limited. Pakistan has committed under the International Monetary Fund’s (IMF) Extended Fund Facility, to support the capacity of federal and provincial tax administration and improve audit capacities, whilst strengthening efforts to better document the economy.
Raising government revenues through tax or non-tax sources is usually not easy when a country is witnessing low economic growth. It is, therefore, important now to look towards private financing.
The local private sector has indicated strong intent to invest in transport, oil and gas exploration, and information technology-all sectors are critical to raising an economic corridor. However, many have also informed regarding the need to expedite ‘ease of doing business’ reforms. Furthermore, initiatives that could strengthen public-private partnerships could go a long way in signaling the resolve of the government.
When it comes to innovative financing, the role of development partners will remain critical. However, most donors would like to see the strengthening of macroeconomic fundamentals and improved fiscal discipline. While the government has recently passed the Public Finance law, however, its implementation will be important to demonstrate that Pakistan’s budgetary spending is fair and transparent.
The report further added that several legal and regulatory issues prevent Pakistan to host large scale investments. This has prompted the government to initiate Pakistan Regulatory Modernisation Initiative (PRMI).
This is also aimed at addressing opacity in the federal and provincial tax regime. Accessing tax benefits allowed to Special Economic Zones (SEZs) could also take several months due to delays in approvals by regulatory bodies. Additionally, even in the mature industrial estates it is a time-consuming process and can take up to 8 to 12 months for the materialization of applications for utility connections.
The report noted that the issue of overlapping roles and responsibilities of various institutions continues to pose a challenge for the timely completion of public sector projects. Likewise, difficulties related to land acquisition, licenses and permits required by businesses, royalties of provincial governments, double taxation on some economic activities by both federal and provincial governments lead to reduced interest in SEZs. This was also true for other CPEC-related projects which require a coordinated effort from federal, provincial, and local administrations.
The Prime Minister constituted the National Development Council and CPEC Authority. However, in general, public infrastructure uplift requires institutions such as the Council of Common Interests (CCI) and National Economic Council (NEC) to function in a manner that encourages trade and other forms of economic activity which may or may not fall in the purview of the CPEC Authority.
Likewise, it is important to demonstrate to non-China investors that their assets and profits are also secure, and attention will be given in case of any business dispute. While CPEC Authority could act as a one-window for the Chinese projects, Pakistan’s Board of Investment (BOI) will need to assume that the same level of entitlement is in place for non-China investors.