Public-private partnership key for infrastructure projects

KARACHI: Economic experts believe creation of development institutions in public-private partnerships for infrastructure and long-term project financing can accelerate economic growth in the country, official sources report.

However, they say that the will of the government and support of the State Bank of Pakistan (SBP) are essential for the formation and smooth running of such institutions. There is a need to have a lending institution in a public-private partnership form, which could finance long-term infrastructure projects such as roads, railway and ports as other than the big five, local banks are reluctant to undertake long term payback ventures, experts said.

Similarly, the burden of the public sector development programmes would be reduced to some extent. A case study incorporated in the SBP’s Development Finance Review that was issued recently also hinted that the government is planning to create an Infrastructure Development and Financing Institution (IDFI). This is expected to finance infrastructure projects and work on advisory, initiation, implementation and monitoring of various critical projects.

The case study further said that for the infrastructure projects, equity would be available from the government as well as local financial institutions – including banks and development finance institutions.

Multilateral organisations are also expected to participate in equity injections as well as long-term soft loans. Local and foreign investors would be interested in taking up new infrastructure projects when a specialised institution is available under a public-private partnership set-up, it said.

It is proposed that the IDFI will initially focus on priority sectors including power, special economic zones, and agriculture infrastructure including warehouses, cold chains and water purification. Other sectors can be considered later on subject to capacity enhancement.

According to media reports, Pakistan Railways signed a public-private partnership agreement with Shalimar Group last month to manage an overnight Lahore-Karachi passenger service.

Six and seven years ago, two institutions, namely infrastructure project development fund (IPDF) and infrastructure project financing facility (IPFF) were established by the Ministry of Finance but to date the IPDF has not undertaken any major project and its financing arm, the IPFF, is still not functional.

A leading economist, who has been associated with the planning commission, said on condition of anonymity that the IPDF was formed with the aim of developing a legal and regulatory framework for improved project implementation and infrastructure development. The fund was also responsible for making a policy framework for public private partnership projects.

“The fund initially had started working in principle and carried out some projects, however, the IPDF was ineffective with the change of government,” he said. The new government sacked the team of experts and other staff members for political reasons. Resultantly, the projects were delayed for years, he said.

“The IPDF was also supposed to issue bonds to fulfill the financing needs of the infrastructure project market,” he added.

According to the SBP review, Pakistan loses about four to six percent of its GDP (approximately six billion dollars) due to insufficient infrastructure. Logistical bottlenecks increase the cost of production of goods by about 30 percent.

“Along with limited fiscal space, there are huge gaps in public sector capacity to build and operate infrastructure,” it stated.

According to the review, given the budgetary pressures on the government, and an inability to manage these projects efficiently, the government is now encouraging the private sector to play a greater role in building and managing infrastructure projects.

The government estimated that less than half of the infrastructure investment can only be covered by public funds under the last Medium Term Development Framework (MTDF). The rest of the investment has to be attracted from the private sector by providing a combination of policy reforms, incentives and financing modalities.

The review said that aside from power generation, Pakistan has not yet developed policy frameworks for progressive public private partnership in infrastructure sectors.

“It would be useful to review the evolving international scenario of public private partnership in infrastructure to identify guidelines for creating sustainable interest of private investors, operators and financiers,” it added. The review mentioned that banks are constrained by asset/liability mismatch. Local banks need risk sharing mechanism for sustainable development in the infrastructure sector which eventually reduces reliance on foreign currency funding to lower the risk of exchange rate exposure which in turn will have a positive impact on balance of payment.

The IDFI will have commercial considerations as it should provide fair returns to its equity holders by targeting projects with high economic paybacks and earning a spread on its lending.

Cumulative disbursements to infrastructure sectors saw a rise of 7.8 percent in April-June 2012, mainly driven by power generation, petroleum and telecom sectors. About Rs111 billion have been sanctioned by banks and development finance institutions for nine new infrastructure projects.

Non-performing loans of the banks increased from Rs13.3 billion to Rs17.5 billion, recording a rise of over 30 percent during the period under review.

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