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Infrastructure projects: financing through local debt securities
By IMRAN MALIK ARTICLE (April 05 2007): The President of Pakistan inaugurated on March 20, 2007 the Gwadar Port, which borders on Arabian Sea and lies in Balochistan, at about 533 km from Karachi. With this third deep-water port of the country, the government has realised the first key milestone of activating the most important tradecorridor connecting Central Asian States to the Arabian Sea. A new era has started for the development of Balochistan as roads, railways, bridges, etc and lot of other infrastructure in due course would be built for facilitating trade. The government has also been taking measures for facilitating early financing and building of important infrastructure projects in various other areas of the country with a view to reduce cost of doing business and enhancing our competitiveness in the world trade.
One
such measure is the establishment of the Infrastructure Project
Financing Facility (IPFF), which with an authorised capital of $1.0
billion, would help catalyse long term debt financing for infrastructure
through public-private partnership (PPP). It is felt that the IPFF shall
help mobilise local debt securities on the domestic capitals markets as
the Foreign Direct Investment and loans from the international financing
institutions (IFIs) alone would not be able to fully finance the cost of
immediately needed infrastructure projects.
Despite
efforts of the government for faster economic development, the country
is presently confronted with daunting circumstances. some of which
include: (i) Lack of institutional capability for financing
infrastructure projects; (ii) High trade deficit; (iii) High outflow of
foreign exchange associated with higher FDI inflows; (iii) Looming
energy shortages in the coming years; (iv) Lack of financial products or
productive investment avenues for remittances by the Pakistani
Expatriates; and (v) Debt servicing burden and creditors harsh
conditionalities. Besides techno-economic issues, these regional projects have geo-political and international legal ramifications. The financing of all such projects and handling of the allied activities would be a big challenge for the IPFF, even though it would be technically supported by the ADB. TRADE DEFICIT:
The
country experienced trade deficit of about US $12 billion during the
last year. The current year does not promise big cut in the trade
deficit from the previous year. To cover the coming trade deficit
without digging into its own reserves, the country might be obliged to
undertake a combination of measures such as diversion of the foreign
exchange remitted by the Pakistani expatriates, Foreign Direct
Investment (FDI) received from investors, privatisation proceeds of
public sector enterprises or loans raised from friendly governments or
institutions. This may not leave much for the financing of
infrastructure projects.
IMPENDING ENERGY SHORTAGE:
Pakistan is expecting serious load-shedding this summer. To avoid such a
situation, the country appears to be going all out to get new power
generation capacity installed, even based at high tariff or exorbitant
rent. According to one estimate, Pakistan will require an investment of
over $20 billion by 2010-20 13 for the planned mega power projects and
for the existing system's improvement. Easy liquidity could possibly be used for financing of important infrastructure projects. Moreover, it would to a large extent obviate issuance of Eurobonds or fresh foreign borrowings from costly sources or institutions for implementation of large infrastructure projects. DEBT SERVICING BURDEN AND LOAN CONDITIONALITIES: The infrastructure projects should normally be financed through our own resources. In practice, the resources allocated from annual budgets are small and major cost has been financed through loans from IFIs, Suppliers Credits and occasionally by issue of bonds abroad. Sometimes, loans are availed from foreign commercial banks at considerably high cost. Often procurement of goods and services is tied to the countries proving the loan funds. Such procurement is invariably at higher cost. The creditors sometime impose harsh conditionalities in addition to the usual loan terms. The nation is obliged to suffer embarrassment. CONCLUSION: The factors briefly discussed above establish that the traditional sources of finance for financing infrastructure projects might not be easily available in sufficient amounts for Pakistan to implement important projects on timely basis. In such a scenario, the country, while cautiously working with IFIs and foreign investors, might look to its people and mobilise their savings for financing major chunk of the foreign and local cost of essential infrastructure projects. Moreover, there is a limit to what can be safely borrowed and serviced along with interest on timely basis. Similarly, FDI has many benefits but involves repatriation of huge profits in foreign currency for considerably long periods. The authorities might consider reviewing the whole funding situation in the light of our prevailing circumstances and draw suitable plans for greater reliance on local savings.
SUGGESTED ACTION PLAN THE FOLLOWING ACTIONS ARE SUGGESTED FOR
CONSIDERATION: (b) Various Ministries, Departments, Public Sector Entities, City Governments and private corporate sector might be encouraged to consider issuing debt securities to finance large infrastructure projects while maintaining sound financial position and debt servicing capabilities. Designing of different debt securities- in Pak Rupees or US Dollars, etc with tenures ranging from 15 to 20 years may be taken in hand for the raising of sufficient funds for infrastructure projects. Depending upon the priorities of different sectors, the government might decide on tax incentives and other support to the issuers as well as the investors.
(c) The
SBP has issued guidelines to the banks and DFIs for the financing of
infrastructure projects. The banks and DFIs would be able to handle this
activity in due course provided they take appropriate measures,
including hiring and continually training of competent people. The
progress made so far might be assessed and they might be taken on board
for the issue of infrastructure bonds. (d) It is expected that IPFF and any other such organisation would be established on sound lines. Even with ADB help, it will require concerted efforts to develop a team of professionals who have sufficient expertise and capability to appraise infrastructure projects in diverse sectors, arrange or participate in their funding, negotiate and execute funding agreements and monitor procurement, physical progress and operation of such projects until final repayment of loans. (e) Public-Private Participation (PPP) has promise for financing, executing and operation of infrastructure schemes such as ports, bridges, toll roads, airports, etc provided all PPP deals are made in a transparent manner for mutual benefit and the tariffs are reasonable. There is, however, big potential of disputes on a number of cost / benefit sharing issues. When disputes crop up, incomplete projects are left to rot for a number of years until the disputes are resolved satisfactorily through costly process of arbitration. The federal and the provincial governments are urged to review / enact laws, rules and regulations for facilitating the formation and functioning of PPP for infrastructure development, financing, execution and operation. (The writer is President/CEO of First Credit and Investment Bank Limited. The article represents his personal views)
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