Financing Public Infrastructure Using Sovereign Sukuk

By Salman Ahmed Shaikh

Abstract

Markets fail in the provision of public goods. Public goods are non-rival and non-exclusive. This creates the problem of free riding. Hence, public goods and infrastructure is often provided by governments. As discussed in endogenous growth models, the public infrastructure and capital goods can enable the private sector’s production processes to experience increasing returns to scale. This can result in permanent source of economic growth in an economy. Given that public infrastructure is important for economic growth, the issue is how the government of Pakistan can mobilize enough resources to improve the public infrastructure and expand it. We argue that by way of sovereign Sukuk financing, it can achieve sufficient funds through which the public infrastructure can be provided in urban centers. The rationale for financing sovereign Sukuk rests on the fact that public infrastructure development leads to positive externalities. Provision of public infrastructure is circularly related to investment, tax base and tax collection. Improvement in public infrastructure induces investment in the economy that can help in increasing the tax base with the entry of firms and increase in employment creation. As a result, increase in tax base can boost the government’s capacity to service sovereign Sukuk effectively. This can also help in reducing i) urban congestion, ii) urban crimes, iii) reduce prices of real estate, iv) widen the urban centers, v) generate employment in new urban centers, vi) facilitate closer migration to wide choice of urban centers, vii) create new growth nodes and production zones and viii) reduce ethnical conflicts that arise from ethnical diversity in congested urban centers.