MUNICIPAL BANKS FOR FINANCING LOCAL DEVELOPMENT PROJECTS

Implementation of many development projects will create employment opportunities

By MUHAMMAD BASHIR CHAUDHRY
May 29 - June 06, 2004

The World Bank Country Director has, according to press reports, assured the Nazim Karachi of all possible financial cooperation in the city's development projects. He was leading a delegation that attended a meeting, presided over by the Nazim, at the Civic Centre, Karachi on 7th April 2004. He said Karachi was a big city with a lot of problems for which comprehensive planning was required, particularly regarding water and sewerage, and assured of the World Bank's financial support in all development projects. The meeting, which discussed transport, water, sanitation and other development projects, was also attended by the DCO Karachi, the DG Mass Transit, the EDO Transport, the MD, KW&SB and others. The Nazim Karachi reportedly said at the meeting that the city government was trying to get its annual budget raised. Being a port city Karachi had a lot of importance. He said water leakages was a major problem of the city government as a lot of water was wasted in the leakages. The DDO for transport gave a detailed presentation on the urban transport schemes and said that to improve the traffic system a transportation plan was being formulated. The DCO Karachi and the MD of the KWSB spoke on water supply and sewerage schemes.

The response from Nazim Karachi to the funding offer from the World Bank for city projects might be decided in the light of alternate sources of funds including expected allocation from the government and the urgency for execution of selected projects. In the circumstances, one should not be surprised if the CDGK decides to avail the funding from the World Bank, which might be a better option than the existing practice of BOT financing for execution of development projects. BOT projects are generally costlier, are more difficult to negotiate and take more time for implementation. Moreover, the CDGK officers might not presently be adequately equipped for tackling the BOT process. If the BOT projects are negotiated poorly, at operational stage the users of the facilities are likely to be obliged to payment of exorbitantly high user charges or fees. In view of the above, the BOT financing might be considered only if other financing options have been exhausted. The situation prevailing with regard to availability of funds for execution of development projects in various cities and towns after Devolution of Power, as gathered from the press reports, is characterized by the following:

1. The Nazim Karachi while talking to journalists from top English daily on 5th April regarding the City District Government Karachi (CDGK) said that water and sewerage are the two main problems the city government is trying to address first. Lack of adequate financial resources is the major constraint in resolving Karachi's problems. There are limitations on increasing revenue through raising local taxes such as cess on road-users or port-users. In Sindh alone many districts are not self-sufficient. As far as Karachi is concerned the Union Councils (UCs) do not have means to levy taxes for development. Since CDGK could not afford to finance mega projects on its own, it decided to invite investors from outside who would collaborate on a BOT basis. One of those projects was the Mass Transit project. These days Rs 90,000 monthly are given to the UCs whose population is 70,000 on an average. It is difficult for the UCs to meet the requirements of development in its area. The Nazim Karachi has been quoted saying that hardly any development is taking place in the NWFP and in the northern part of Punjab. No development is taking place in Balochistan at all. In order to live and make a little earning, they come to Karachi. People from the interior of Sindh also trek to Karachi for their survival.

2. Due to past neglect, infrastructure in Karachi is in bad shape, the revamp and expansion of which needs large financial input. The Karachi Package approved by the federal government has helped but a lot more needs to be done. However, the funds flowing from the government are not sufficient for the development work. Moreover, these funds are sometimes delayed hampering the pace of development work. Moreover, a large portion of development funds is usually lost in the process of execution of projects. There are a number of reasons for that. Audit reports on different projects periodically released in the national press show rampant inefficiency, misuse or wastage.

3. The Saddar Town in Karachi according to press reports is passing through the worst financial crisis owing to the 'unjustified' curtailment of its monthly grant by the governments. The Town Nazim said that the town administration is facing a shortfall of at least Rs5 million every month, which has caused delays in the payment of salaries of the staffers. Besides, he said, following the non-payment of funds under different heads, the town administration is facing problems in maintaining pace of development works.

4. Under the Devolution of Power initiated by the present government, the transfer of functions, powers and resources to the city/district governments from the provincial government has been continuing for about three years. At times one feels there is sort of tug-of-war at different tiers of the government. Some of the government departments would offer reasons for retaining with them the important functions; powers for new appointments, transfers or promotions; and the control over development funds. There might be many localities in different towns and cities of the country that have yet to see development work in real sense for improving water supply, controlling unhygienic conditions created by solid/municipal waste, providing better health or education facilities. Reasons may include lack of clarity of functions, resources or inaptitude and inexperience. As there is no visible change in the environment or the quality of life, some people have already started having doubts on the new system of government.

5. Most local authorities and a few government departments in Pakistan, unlike other countries, are good at spending but not so well at raising funds, be it through taxes, fees or charges within their respective functional areas or by the raising of the loans. There might be lapses or weaknesses in the collection of water/sewerage/fire taxes, or the collection of rent on city/town properties. Many are perennially short of development resources and mostly are dependent on the government allocations.

6. The city or district governments to raise funds for executing urgent development projects, might explore raising of funds through levying more taxes, borrowing from local creditors, raising funds from the capital market and seeking help from the federal government, or seeking grants from local and international donors. Fearing political backlash cities and towns might not impose further taxes. Barring a few lucky classes or localities, most people are already taxed to capacity and new taxes might not yield the desired results. Loans and grants are the other alternatives and these might be used extensively. The CDGK is relatively in a better position because of the size of the Karachi City which is the financial centre and the gateway to Pakistan. The CDGK might also easily raise loans and grants from the International Financing Institutions (IFIs) for fully or partly financing water, sewerage or transport projects. Other cities, towns or union councils are considered not to be in such a happy position for raising loan or attracting grants from the IFIs for their development projects.

The government and the SBP might look into the situation that appears to be developing due to paucity of development funds with city/district governments and the BOT financing adopted by the CDGK and possibly by other city governments. Many cities and towns, due to paucity of funds, are not undertaking development projects. BOT financing practiced by many cities and towns has the potential for increasing country borrowing. The situation has to change for the better and our people living in these areas deserve better quality of life. The local authorities need loans with longer maturity but lower interest rates as most of the development projects would be justified more for social and environment considerations and less due to cash generation capability. The commercial banks normally would avoid financing such projects due to questions about creditworthiness of the cities and towns and the uncertainties about repayment. These cities and towns need to be exposed to consider issuing Term Finance Certificates or Municipal Bonds for mobilizing long term funds for development projects.

Development projects are needed more in areas such as waste management, sanitation, sewerage, drinking water, schools and health facilities. To help finance these priority projects, there is ample need for a specialized Pakistani institution. The World Bank has also promoted some of such institutions. Even in Pakistan the World Bank has assisted the Punjab Municipal Development Fund, but its impact so far appears limited. Presently, what we need is a full-fledged municipal bank providing all sort of financing and technical assistance to the local councils. With a view to avoid wastage of funds and for early completion of beneficial schemes, the governing process of the city/district governments has to be made open, fair and transparent and to be independently monitored. The municipal bank can assist the city/district councils by imposing conditionalities for compliance, monitoring physical progress and use of funds in the execution of development projects. Realizing the potential positive contribution to poverty alleviation, job creation and improvement in the quality of life of the people, the IFIs might also agree to strengthen the municipal bank by extending equity participation, credit lines and technical grants.

In Pakistan, the need for providing loans to the local authorities/municipalities was realized quite early. The charter of both the IDBP and the NDFC allowed provision of loans to the local authorities. It is another matter that the municipalities did not receive due attention in the past. Perhaps, industrial loaning had more glamour so both these institutions paid more attention to that. NDFC stands merged with the National Bank of Pakistan and the IDBP is being readied for privatization. These institutions as well as the four Joint Venture DFIs operating in the country might join the new municipal bank in extending assistance to the city and district governments, as the opportunities are enormous for many such institutions. The city/district government are in urgent need of funds, to satisfy which the municipal bank might have to be set up on fast track basis. To assist the stakeholders in this endeavour, some of the broad parameters are briefly touched below:

1. A new municipal bank on national basis may take more time to get organized and operational as compared to a provincial bank. Also, the bank organized on provincial basis might attract more participation by the stakeholders and the provincial/districts governments, with more harmony and cohesion among the prospective investors as well as the beneficiaries.

2. Largely the provincial and the district governments in association with the SBP might sponsor the municipal bank. The municipal bank might be a DFI licensed by the SBP for providing specialized services to the local authorities and their development agencies.

3. The core businesses of the municipal bank might include: (i) To finance viable projects on business considerations only; (ii) To appraise, approve and monitor the projects from local authorities using its own personnel or through outside consultants; (iii) To provide finance on secured basis and the municipal bank to have lien on the bank balances/government allocations of each local authority; (iv) The municipal bank to mobilize local and foreign financial resources including deposits from depositors and credit lines and technical grants from various institutions; (v) To train its own personnel as well as the personnel of the local authorities; (vi) The municipal banks to preferably finance socially desirable projects, with potential for revenue generating employment generation; (vii) The municipal bank to provide advisory services to the cities and towns in the mobilization of funds or in their overall operations; and (viii) The municipal bank to take actions considered incidental to facilitate the performance of its functions.

4. The municipal bank may not make its mark and achieve objectives unless it adopts merit, experience and commitment as the main criteria for recruitment at all levels. The officers and staff, once recruitment, shall have to be trained and retained through offering competitive salary and other package. Set up on sound lines and adequate paid-up capital, and managed conservatively, as per SBP guidelines, through dedicated and experienced experts, the municipal bank might have the potential to stand on its feet without any subsidy from any quarters.

The city/district government/local authorities need funds in amounts much in excess of their present resources or expected allocations. The municipal bank, while providing essential funds, might introduce discipline into existing operations of the local authorities, their tax collection and borrowings. It will, as part of its functions, be providing independent monitoring of the execution of development schemes. This should ensure transparency and better use of scarce resources. Early implementation of many development projects will create employment opportunities as well as improve the quality of life of the people all over the country.