Capex Waning in Gov’t Budgets

EghtesadOnline: Government expenditure on civil development projects has been on the decline during March 2010-19.

News ID: ۷۴۹۶۲۹

05 February 2020

Such capital expenditures accounted for 25% of the government’s general budget in the fiscal 2010-11 compared with 12.8% in the current year’s budget, a report by the research arm of the Iranian Parliament reads.

The capital expenditure to operating expenses ratio also declined from 45% in the fiscal 1997-98 to 14% in the current fiscal year (March 2019-20), Financial Tribune reported.

Data provided by Majlis Research Center also show that on average 93% of projected figures for operating budget have been materialized over the past 24 years compared with 66% of the projected capital expenditure.

The report noted that the capital expenditure projected in the budget bill for the next fiscal year (March 2020-21) is 704 trillion rials ($5.25 billion), registering a 5.2% growth compared with the current year’s budget law.

Notably, the private sector invested over 450 trillion rials ($3.35 billion) in development projects from Sept. 23, 2015, to March 20, 2018. The private investment stood at 40 trillion rials ($298.5 million) in the fiscal 2018-19. Private investors have not participated in any development projects from March 2019 to date, according to the report.

As per the budget bill for the next fiscal year, the Ministry of Roads and Urban Development will account for the lion’s share of Capex in government’s general budget with 117 trillion rials ($873.1 million).

The shares of Energy Ministry will be 80 trillion rials ($597 million), Information and Communication Technologies Ministry 32 trillion rials ($238.8 million), Education Ministry 31 trillion rials ($231.34 million), Agriculture Ministry  25 trillion rials ($186.56 million), Interior Ministry and Health Ministry at 19 trillion rials (141.79 million) each, Science Ministry 18 trillion rials ($134.32 million), Justice Ministry 16 trillion rials ($119.4 million) and the Industries Ministry 15 trillion rials ($111.94 million).

Victim of Budget Deficits

Successive budget deficits in Iran have taken a toll on development projects, leading to underinvestment and abandonment of many such projects.

Figures published by the Central Bank of Iran show the budget earmarked for the development sector has never been fully allocated in the past few years, as the government failed to materialize the revenues it predicted.

“The main reason for the government’s failure in providing resources for development is that it fails to achieve its target revenues,” economic expert Mohammad Taqi Fayyazi told the Persian weekly Tejarat-e Farda.

In fact, the government only met 58%, 68% and 39% of its projected development spending during March 2015-16, 2014-15 and 2013-14 respectively, latest available data show.

“Resource allocations are based on priorities. And the priorities include salaries and wages of state employees and buying back issued bonds and paying their interests … What little remains goes to development projects,” Fayyazi said.

The government has a majority stake in Iran’s economy, bringing about low productivity and high costs. A large portion of the revenues are allocated for the expenses of ministries, their affiliated companies and organizations in the budget. And the administration is unable to reduce most of this.

“Every budget bill has fixed and flexible parts,” Fayyazi said. “A smaller and more agile government means the inevitable section of the budget, including salaries and costs, is small and the flexible part is larger.”

Fayyazi said Iran’s budget faced problems following the reduction in oil price and shrinking crude exports as a result of sanctions.

“This is while lowering the costs at that point was impossible. The only way out was to cut the resources allotted to the infrastructure sector,” he said.

Low infrastructure spending compounds the lingering recession in Iran’s construction sector. For years, steel, cement and other construction industries have suffered a prolonged slowdown resulting from a drop in demand.

“Some 75% of Iran’s development budget are associated with construction,” Fayyazi said. “If the development resources are allocated, the construction sector will thrive.”

He noted that due to limited cash, the government has failed to pay its liabilities to contractors whose influence on the economy has been shrinking in the past few years.

Plan to Draw on PPP Next Year

A report released in late 2019 suggested about 80,000 civil projects have remained incomplete at various stages of development in Iran. Insufficient budgetary allocation over the past few years has resulted in a slow injection of credit into these projects, prolonging the time and cost of their completion.

Statistics suggest that in view of the current budgetary allocations, 65% of the government’s development projects won’t be finished sooner than 12 years, the Persian-language daily Iran reported.

To tackle this issue, the government has proposed public-private partnership plans for the fiscal 2020-21 (starting March 20).

As per the budget bill for the next fiscal year, a total of 1,431 development projects at the provincial level and 302 at the national level are expected to be completed with the involvement of private or cooperatives sectors.

National-level development projects need 1,040 trillion rials ($7.76 billion) while provincial ones require an estimated 86.77 trillion rials ($647.53 million).

The provinces of Mazandaran and Kermanshah offer the largest number of public-private partnership agreements with 180 and 131 unfinished projects, respectively, whereas Qom and Ardabil will have the fewest number with three and five.

Projects proposed in Kermanshah and Yazd need to attract the biggest funds while those in Qom and Ilam are in need of the smallest amount compared with those of other provinces.

The PPP deals are to be implemented in a wide range of fields, including sports (537 projects), tourism (295), agriculture (156) and culture & arts (119).

The biggest volume of projected investments will be in the fields of sports with 14,630 billion rials ($107.17 million), agriculture with 12,310 billion rials ($91.86 million) and tourism with 12,160 billion rials ($90.74 million).

All Oil Revenues to Go to Development Projects

According to Mohammad Baqer Nobakht, the head of Plan and Budget Organization, all revenues gained from oil sales will be spent on development projects as of the next fiscal year (March 2020-21).

Oil revenues are resources generated from selling the country’s capital assets and should be spent on possessing capital assets, such as development projects. Therefore, all revenues from oil sales will be allocated to the development sector as per structural reforms in the next year’s budget," he said.

Noting that current spending levels from oil revenues will be cut to zero in the next year’s budget, the official said, "New projects have been initiated before the completion of old ones. The disproportionate rise in the number of development projects will be avoided, as per the reforms suggested in next year’s budget.”

In the budget bill submitted by President Hassan Rouhani to parliament on Dec. 8, the government has projected that its oil and oil products revenues will stand at 482,986 billion rials ($3.6 billion at market exchange rate of 134,000 rials per dollar and $11.49 at the government’s subsidized rates of 42,000 rials per dollar) next year.