ISLAMABAD: Shortly before the end of its term, the caretaker administration approved a roughly 30% increase in costs for “ongoing contracts” related to hundreds of development projects that were funded by the federal government’s Public Sector Development Programme (PSDP).
Due to schedule and expense overruns, the nation’s vast development portfolio has consistently resulted in recurrent adjustments to financial costs in addition to lost opportunity costs.
Estimates from the International Monetary Fund (IMF) for the fiscal year 2022–2023 show that there were roughly 1,153 development projects in the government PSDP portfolio, which had a total value of Rs10.32 trillion. This comprises 244 new projects with an estimated total cost of Rs2.26 trillion, in addition to the 909 ongoing projects valued at Rs7.96 trillion.
The meager amount of Rs727.5 billion was allotted in the 2022–2023 budget against such a significant undertaking. It is understandable why the IMF calculated that, at this rate of execution, a project would take, on average, 14.1 years to complete—and that’s assuming no new projects were initiated during that period.
Reasons for decision-making included inflation, a sluggish pace of construction, and the departure of contractors; only applicable to projects signed before September 2022
Given the nation’s expanding population and politicians’ propensity to garner support primarily through government-funded development projects, such a concept seems unthinkable.
Moreover, provincial programs—which often encompass almost twice the scope of the federal scheme and adhere to federal precedents regarding rate revisions—are not included in these estimates.
Revision of Ecnec costs
According to well-informed sources, the Executive Committee of the National Economic Council (Ecnec), chaired by Dr. Shamshad Akhtar, the interim finance minister at the time, approved a rise in the cost of escalation for contracts of current projects one day prior to the elections on February 8. The increase was justified by the threat of inflation, namely an increase in the price of building supplies.
It was stated that cost overruns had caused several contractors to stop working on large-scale infrastructure projects, while others had slowed down or quit entirely.
The summary titled “Criteria and Procedure for Incorporation of Price Adjustment provisions in the on-going contracts, August 2022 (Amended June 2023-Modified Jan 2024)” was submitted by the Ministry of Planning, Development, and Special Initiatives on February 7, 2024. The executive committee of the Ecnec reviewed and approved the proposal, according to the meeting minutes.
The ruling states that the “minimum weightage of adjustable cost elements revised from nil to 3pc” and the “fixed vs. adjustable cost ratio” are set at 30:70 percent. In general, “projects whose contracts had been signed before September 2022” would be subject to this cost escalation, and “part of works executed after January 1, 2021” are now eligible for the price adjustment.
Consequently, an order issued by the planning commission in response to the Ecnec judgment emphasized that the revised document titled “Standard Procedure and Formula Price Adjustment — amended June 2023” will not be effective on contracts signed after September 30, 2022.
It clarified that discrepancies in pricing computations will be addressed by relevant forums such the Ecnec, Departmental Development Working Party, and Central Development Working Party.
The Pakistan Engineering Council and the Ministry of Science and Technology have also been requested by the commission to update their technical codes, and all development projects will now be processed using the updated rates.
PSDP approach annoys IMF
In a recent technical evaluation, the IMF criticized Pakistan’s strategy to development and its poor implementation, stating that it was difficult to determine how the cost of large projects varied over time.
“Modest under-execution of the PSDP in recent years has called into doubt the viability of PSDP budgets as well as multi-year estimates. The federal and local administrations all follow a similar protocol, it stated.
A little more than half of the PDSP was allocated to social infrastructure (health, education, and so forth) at the federal level, with the remainder going toward economic infrastructure (transport, water, electricity, etc.).
The entire cost of projects receiving federal or outside funding is disclosed by the PSDP. The IMF pointed out that this expense does not, however, have a yearly breakdown over the medium run. It stated that the way things are now set up makes it impossible for line ministries to schedule the execution of a practical multi-year capital program.
Inadequate data regarding the development of big project costs may account for situations in which significant cost overruns have only been discovered after the fact in the past. In project performance audits, the Pakistani auditor general (AGP) has found multiple such occurrences. A recent example is the Golen Gol Hydropower Project, which was originally projected to cost Rs7 billion but ultimately came to cost Rs30 billion.
