Lending agency for PPP infrastructure projects
THE government has in principle agreed to establish a specialised financial institution to fund and develop infrastructure projects in the country.
“Equity (for the new entity) would be available from the government as well as local financial institutions (for example, banks and development finance institutions).
“Multilateral organisations are also expected to participate in the equity injection as well as (provide) long-term soft loans,” according to the latest Development Finance Review of the State Bank of Pakistan for June 2012.
The review underlines the crucial need for such an institution to support development and financing of infrastructure in public-private partnership (PPP) mode.
“Benefits from the recent successful international experiences would be drawn while setting up and running the (proposed) institution. Local and foreign investors would be interested in executing new projects when a specialised institution is available under the PPP setup,” it says in its special section on infrastructure development.
“The idea of setting up the Infrastructure Development and Financial Institution (IDFI) as discussed by the SBP report is not new,” claims a person who was part of the finance team of the Shaukat Aziz government.
“The previous government was working on the proposal but could not implement it because of worsening political conditions in the wake of the removal of the chief justice of the Supreme Court by Gen Pervez Musharraf,” he tells Dawn on the condition of anonymity.
He, however, appreciated the ‘revival’ of the proposal, saying many developing nations have created such specialised entities to provide commercial financing for infrastructure programmes in the PPP-mode.
He says the government has already established the Infrastructure Project Development Fund (IPDF) to develop legal and regulatory framework for improved project implementation and infrastructure development.
The fund, according to the SBP, does not have the mandate to support private sector projects and is yet to start functioning.
The IDFI will have commercial considerations so that it can “provide fair returns to its equity holders by targeting projects with high economic paybacks and earning a spread on its lending”, says the review.
“IDFI would also facilitate projects in infrastructure sectors not having precedence of private sector involvement and are in need of huge seed capital with long gestation period.
Though there is a huge potential in the entire infrastructure sector, it is proposed that the IDFI should initially focus on priority sectors including power, special economic zones, agriculture infrastructure (including warehouses, cool chain, etc.) and water purification. Other sectors like roads, railways and ports, etc, can be considered later.”
Chairman of the Constructors Association of Pakistan Akber Sheikh argues that development of modern infrastructure is a “must for rapid economic progress. The absence of infrastructure slows down pace of economic growth and hurts efforts to provide quality services to the people.”
He said the establishment of the IDFI will help private investors obtain finance for undertaking mega programmes in partnership with government.
Pakistan has immense infrastructure gaps as pointed out by several research reports in the recent past. Some estimate put the economic losses caused by inadequate and poor quality infrastructure at four to six per cent of GDP or $8-12 billion.
Power shortages are estimated by international lenders to cause losses of around two to three per cent of GDP or $4-6 billion every year. Lack of warehouses, farm-to-market roads, cool chain, etc., result in huge post-harvest losses to farmers. Logistical bottlenecks alone increase the cost of production of (industrial) goods by about 30 per cent, according to the SBP.
The SBP says the infrastructure services are characterised by unsymmetrical growth in relation to economic growth with banks lacking of the capacity and technical expertise for financing infrastructure programmes. Banks are also constrained by asset/liability mismatch as most deposits are of short tenor.
“Local banks need risk sharing mechanism for sustainable development in infrastructure sector which eventually reduces reliance on foreign currency funding to lower the risk of exchange rate exposure, which in turn will have positive impact on balance of payment.”
Therefore, there is a strong need for a specialised organisation to develop, evaluate and finance big infrastructure projects on a commercial basis.
“An economy can hardly survive without modern ports, efficient road and railway network, sufficient electricity, etc., let alone compete with rival countries in the global markets,” maintains Akber.
“The massive infrastructure gaps mean the demand for finance for undertaking new schemes is enormous. While the government has limited capacity and resources to spend on infrastructure development, private investors do not get financing
from banks for big projects.
The setting up of IDFI will help remove the credit gap for mega schemes for the private investors and reduce some burden on the government,” he says.
Infrastructure programmes have mainly been in the government domain, says the SBP review. “Successive governments have managed, financed, owned and operated these projects.
Given the budgetary pressures on the governments, and its inability to manage these schemes efficiently, the private sector is now being encouraged to play a bigger role in building and managing infrastructure.”
The government estimates that less than half of the infrastructure investments can be covered by the public funds under the Medium-Term Development Framework (MTDF). The rest of the investments are targeted to be attracted from the private
sector by providing a combination of policy reforms, institutional support, incentives and financing modalities.
“Public-private partnership for removing infrastructure gaps is the call of the day and can help unleash investments at sustainable rate,” insists Akber.
“The establishment of IDFI will help raise money for the new infrastructure schemes without burdening the government resources. Additionally, financing by the IDFI, which will involve public, private and international equity, for such infrastructural programmes will ensure that a change in government does not lead to scrapping of a project on political basis and will ensure continuation of policy,” he argues.