In the pre 1977 era, there were hardly any major infrastructure development projects of major significance to trigger rapid economic development in Sri Lanka. We were living in a period of virtual closed economy.
Political parties in our country were only interested in coming to power and strengthening their respective parties neglecting the development of the economy of our mother Lanka. Since independence, the major political parties took turn and governed the country totally forgetting the good governance concept. Most leaders were and are developing political dynasties in our country which prevented the professionals and other leaders with rapid development vision from governing and taking the country forward.
The very same political parties created tensions among communities and inherited the country with loads of socio economic problems as well. Regional development was not carried out in a productive and coordinated manner to solve the unemployment problem in rural areas. As a result, the crime rates went up at alarming levels.
The post 1977 era saw a total open economy thereby increasing bilateral trade with a large number of countries. However, this paved the way for two major setbacks for the country and our economy. Firstly, the import of agricultural produce without restrictions affected the local farmers, especially in the north and east.
In these regions, the drop in personal incomes was a major factor for youth unrest in late seventees which ultimately led to calls for separatism. Secondly, all our local industries were affected financially due to their inability to match the imported prices. As a result, many corporations such as steel, fertilizer, oils and fats, cement, plywood, sugar a nd paper had to reduce their levels of activity and headed for total closure or sell offs.
Organisations such as paddy marketing board, cooperative wholesale establishment and many others also started slipping in financial stability. To add to the woes successive ruling political parties forcibly increased the staff cadres of above organisations with their party supporters, with a great majority of them being misfits.
Thus, the funds which could have been allocated to improve our infrastructure were busted on spending for imports of food/beverage and non essential goods and also for the payment of emoluments for excess staff at governmental organisations. In addition, colossal sums were spent as war expenditure for over 27 years. Import substitution industries were not given prominence either.
Countries like Thailand, South Korea, Hong Kong, Malaysia, Singapore, Taiwan and Philippines became asian tigers by rapidly developing their infrastructure, especially the road network and power generation at low costs. The above countries obtained outright grants and soft loans in abundance on very concessionary terms.
The ASEAN became the business hub of the entire Asia. Foreign direct investments poured into above countries continuously for many years. India started their economic boom after 1995 after liberalising its economy on a phased basis protecting their own industries.
Although the South Asian Association for regional cooperation was mooted in 1985,the region as a whole could not progress much, due to escalating populations, high crime rates, corruption in government agencies, natural disasters, political power struggles and mistrust among member countries. Infrastructure development was greatly neglected by us, even though funds were available at nominal rates of interest, in late seventees and early eightees.
We could have developed road and rail networks to the deep south, north and the east from Colombo many decades back. But, we were sitting ducks with the attitude of “easy day to day living”. Except for the major hydropower projects and the developments at the Colombo port, our infrastructure projects could not proceed due to the commencement of north east hostilities and adverse publicity for the country.
War expenditure escalated every year and this dried up funds for infrastructure development. The budgets presented every November in parliament became merely decorative paper documents and the country ran substantial continuous budget deficits annually.
The main constraints for our infrastructure development are the cost of finance and the sources of procuring same. As we are unable to carry out our infrastructure development projects financed by domestic sources or from our finance reserves, we are compelled to look for external sources of finance.
Take the simple case of any commercial organization where the diversification/development drives are financed with borrowed bank finance, such organisations must comply with high productivity, innovative marketing coupled with rigid cost control measures in order to meet debt servicing and debt repayment.
Such organisations employ highly qualified and experienced finance personnel to be responsible for managing the overall financial platform. In this scenario a country is required to employ much more efficient professionals to manage the country finances. IFAS(international financial accounting standards) be brought in as far as possible in the preparation of accounts of state institutions.
The annual external audits should be carried out by a locally based international accountancy firm and presented to parliament within 6 months from the end of the financial year. To support the external auditors, the staff of the government audit department need to conduct monthly internal audits and submit their monthly internal audit reports within 3 weeks from the end of a month to the parliament for the COPE to take immediate action if required.
By this way irregularities and malpractices will be detected early and there will be huge savings. Quarterly draft financial accounts should be submitted by every state institution within 60 days from the end of a quarter as in the case of quoted companies. Annual budget deficits will come down every year to healthy levels by resorting to above practices.
The main objects of infrastructure development are enumerated below.
1. To assist local and foreign investors to set up business ventures
2. To further ease traffic congestion and make way for convenient and speedy transport modes
3. To provide general public of day to day public conveniences at an affordable cost
4. To raise the level of domestic savings
5. To raise productivity standards of the country
6. To assist in transportation of agricultural, commercial and industrial produce and materials
7. To meet the ever increasing energy needs of the country
8. To lower levels of unemployment, and to ensure an uninterrupted supply of public requirements on a daily basis.
9. To raise government revenue to meet recurrent and capital expenditure
10. To make a country more compatible to international economic benchmarks
11. To raise the overall standard of living of the residents of a country including the vital aspects of health and literacy levels.
12. To raise the annual per capita income of the country and reduce the trade current account deficit.
13.To augment the foreign reserves of the country.
14. To protect the security of the country from hostile forces both internal and external
15. To plan for effective population increase management
If you consider a private company, the company has to acquire fixed assets in order to raise the Income levels of the company, to meet competition and also to provide additional employment. Similarly, for an expansion of economic activities, a government needs to improve and enhance infrastructure activities.
Utilisation of residents of an area for area infrastructure development is of paramount importance as the ultimate beneficiaries would be the residents themselves. The motto of “help us to help you” is ideally suitable for this type of public participation.
For example, laying of new rail tracks or the development of access roads to villages or to build a reservoir could be easily accomplished by the use of manpower and materials available in the areas rather than recruiting permanent workers to railway department and road development authority.
A reasonable wage, meals and refreshments at work, incentives would come in handy to motivate residents to carry out the work and also to look after the vital aspect of maintenance as well. In a nutshell, the residents of the area will become quality ensurers and custodians of such projects in the long term. The relevant government authorities could retrench a majority of permanent employees and utilize stakeholders for their tasks.
Eliminate rural poverty alleviation
This process will eliminate rural poverty alleviation as well. A sense of belonging in the minds of public would arise from this type of projects. This process will also depoliticise the rural villages. The present political system will not ensure smooth execution of infrastructure projects with politically organized protests, picketing and sit down campaigns.
This drawback need be remedied in the proposed constitutional changes. What we need is practical measures which would benefit masses of the country rather than political parties numbering over 100.Politics has now become a profitable business. We do not need provincial councils and nearly 5,000 grassroot level politicians who are so corrupt and no foreign or local investor will have a peaceful environment due to their interference.
New infrastructure development laws
A set of new infrastructure development laws be also enacted making the state and the beneficiaries becoming stakeholders. Identification of priority infrastructure development projects both at rural & urban level is a pre requisite. Foreign investors join the financing of infrastructure projects on BOO(build operate and own) and BOT(build operate and transfer)basis. Further, in addition to the foreign investors foreign donors provide soft and commercial loans for infrastructure projects. Way back in 1978,the British government led by Margaret Thatcher provided an outright grant of 100 million sterling pounds to finance the Victoria dam project. Outright grants are quite rare now as all countries of the world are having problems of their own and the money raised from their tax payers and their own reserves are needed to be put into for their own country requirements. Thorough evaluations, technical and environmental reports are now called for by providers of soft loans also coupled with an array of conditions laid down by the loan providers.
Key areas of infrastructure development in any country are energy, transport, ports, aviation, dams, bridges, educational institutions, roads, inland waterways, wastewater, public parks and recreation, solid waste, drinking water, hazardous waste, levies.
Main goals for innovative financing of in frastructure projects
1. Support high quality and priority investments which provide value for money for the public and improve economic productivity, sustainability and quality of life which would secure urban planning and policy outcomes for regions.
2. Sharing of cost of project equitably between the direct beneficiaries and the general public at large with a focus on value sharing and moving towards cost reflective pricing.
3. Optimising of the impact of public investment in infrastructure through public/private partnerships and the prudent use of innovative financing by leveraging major projects to secure urban and rural planning.
4. Match the capacity constraints of similar projects at different locations.
5. Matching of donor requirements and conditions for release of funds.
6. Equitable risk allocation between all parties.
7. Minimising the level of public subsidy needed to complete the project and maintain in the long term.
8. Environmental reports to match contemporary global standards.
The creation of an infrastructure fund is vital for our country. This fund should have been established immediately after the new government took office in 1977, with the opening up of the economy and the fund should have been managed by the private sector. This would have easily reduced the public burden on taxes for development and would have also avoided huge foreign debt burdens on the country.
Infrastructure can be defined as the basic physical systems of a business or a nation vital for the economic prosperity and development. Projects related to infrastructure improvements may be funded publicly, privately or through public-private partnerships.
Developing a successful PPP (private public partnership)program is a complex undertaking and involves a number of key challenges for developing countries. Such engagements demand high capacity and skill levels from the public sector authorities, and requires a holistic approach in terms of setting economic fundamentals right, having the appropriate legal and regulatory framework, as well as maintaining political commitments in a sustained manner. Project structuring itself requires experienced and innovative transaction advisers.
Recently many new infrastructure financing schemes have been popping up around the world as a result of experimentation with innovative approaches to long term financing. This trend creates a wealth of new experiences and lessons that will undoubtedly help infrastructure industry evolve and mature, and transmit those lessons along the market maturing curve.
One of the prominent trends is renewed interest in attracting institutional investors-pension funds and insurance companies in particular, to add more liquidity into the market. However, the reality is that these new players demand even more sophistication from project structuring, than traditional investors.
Governments in emerging markets and developing countries are increasingly recognising the need to create practical incentives in the market to drive infrastructure development.
Much action is underway in some countries with new models and approaches continuing to emerge. But with a variety of different financing models now available, governments need to focus on identifying the right mix of incentives and approaches to tailor them to their unique situations in an integrated manner.
(The writer is a senior finance professional and could be reached via [email protected])
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