Nov 04 - 10, 2002

The President inaugurated the Faisalabad-Lahore dual carriageway project at Khurrianwala about 14km from Faisalabad on 4th of October 2002. Speaking at the inaugural ceremony, he reportedly said the carriageway would be constructed on a Built Operate Transfer (BOT) basis at a cost of Rs4 billion. Underlining the importance of communication infrastructure, he said that roads play an important role in catalyzing the socio-economic uplift, particularly in neglected areas. The President appreciated the contribution of Punjab in improving its road infrastructure with the active co-operation of private sector and said that other provinces should also replicate this project to bring a qualitative as well as quantitative improvement in their road network.


On 4th October 2002, the Department of Communications & Works, Punjab had, jointly with Pakistan-Kuwait Investment Company and AMZ Securities, organized at Lahore, a seminar on 'Commercial Financing of Infrastructure Projects'. The topic is very relevant to the present conditions in the country. The Governor Punjab, the Governor SBP and a number of other bankers and experts spoke on the occasion. The points gathered from the press reports, attributed to the Governor Punjab on financing of infrastructure projects and are summarized below:

- The vision of the present government is to modernize infrastructure of the country. Punjab has allocated only Rs20 billion for the development projects. Finding this amount insufficient, the government was inviting the private sector to come forward and help out the government in upgrading the facilities to the common man besides making money out of their investments.

- The planning of projects in progress was carried out on scientific basis. The traffic flow on the Lahore-Faisalabad road was critically examined before the project was finalized. All the projects carried out by the present government were dealt transparently and on merit, he added.

- The government was also having an eye on public's capacity to pay for the facilities provided to them.

- The Punjab government would just act as policymaker and facilitator in obtaining commercial financing for the private sector.

- The bankers need to come out of short-term financing attitude and go for long-term financing on different projects.

- The federal government is requested to also give an incentive of 10-year tax-free period to private sector investing in infrastructure projects.

- Commercial financing of infrastructure projects would save the government limited money it has, which could be diverted to health and education sectors.

The Governor SBP was the Guest of Honour. Speaking on the occasion, he said that a deliberate policy of reducing country's indebtedness was being pursued to make the national economy stronger and more resilient and that both the federal and provincial governments need to avoid more borrowing in line with this policy. With respect to the financing of infrastructure projects, the points attributed to him in the press reports include the following:

- All the stakeholders of a particular sector / project should be involved in deliberations and all the possible risks be assessed before actual launch of a project.

- Financial structure of the infrastructure projects should be very flexible. Lahore-Faisalabad carriageway was passing through the industrial hubs so it could return its cost. There might be projects in some less developed areas, which could not yield this much.

- One formula should not apply to all projects, as requirements of a project vary from another, thus each project should be planned on the basis of its requirement and merit. No project should be launched without proper financial scrutiny.

- As a precaution, an optimistic scenario must not be assumed about projects before their launch. The consumers were still paying the price for the adoption of such approach in case of IPPs in the past as Wapda had to pay capacity charges to the IPPs.

- The Punjab Road Infrastructure Company could raise the funds required for the projects by launching Term Finance Certificates (TFCs). The Punjab Government should exploit all the ways including the expanding stock market for raising capital for the road project.

- The Punjab Government should also set up a separate regulatory authority for the road infrastructure projects being developed through BOT mode to help the consumers / users who should not face any problem in terms of toll.

- Tariff or toll should be affordable for the users.

- The Punjab government should not rely on commercial banks for the financing of the projects, as these banks were not able to finance these mega schemes individually. There can be syndicated lending by consortium of the commercial banks.

- The federal government and all the provinces are closely monitoring the Faisalabad-Lahore Motorway Project being built by private sector on BOT basis. Success of BOT would solve a lot of problems in the improvement of basic infrastructure of the country.

- There is need of an Independent Regularity Authority (IRA) to over see privately financed ventures and to protect the consumers' rights, he said.


Resources constraints and the urge to provide facilities to the common people are the main reasons as to why the provincial governments, development authorities, private investors and City District Governments are considering BOT financing options for construction of various infrastructure projects. Under BOT mode of finance, the financiers would recoup their investment with profit through user charges / toll tax from the users of project facilities for concession period that may extend up to 30 years. In case the charges are exorbitant, there might be hue and cry / protests by general public, to the embarrassment and discomfort of the government of the day. Disputes might turn ugly into legal cases with international implications.

A number of other infrastructure projects are in line to be financed under BOT mode, such as: (1) Liquid cargo terminal at Port Qasim in the private sector; (2) Electro-magnetic train project of City District Government Karachi; (3) Light Rail Transit system project of the government of Punjab; and (4) Public Swimming Pools / Sports Entertainment Areas of the Parks and Horticulture Authority, Lahore, Punjab. For some of these projects MOUs have already been signed while the others are not yet so advanced.


The provincial or city district governments, opting for BOT mode of finance, presumably have not fully explored the alternate sources of finance available for implementing badly needed infrastructure projects. About BOT financing option it is generally said that it is costlier to finance, difficult to negotiate and takes longer gestation period to realize the project. The provincial and district governments as well as other authorities undertaking construction of infrastructure projects must carefully note the points made by the Governor SBP in the seminar and are listed above. This paper is an attempt to expound on some of the points and suggests ways and means for consideration in case the provincial government or other institutions finally decide to go for BOT financing option for implementing infrastructure projects

International financing institutions: The provincial and city district governments might like to explore credits from the World Bank, IFC or ADB for financing construction of important highways or other important physical infrastructure projects. Funding from these institutions would be relatively cheaper. Once the highways or other infrastructure projects are ready, user charges / toll rights may be auctioned off in a transparent manner on yearly basis. Through this approach, the users are expected to pay reasonable toll tax. These institutions might impose certain conditions for reforms in specified areas.

The State Bank of Pakistan credit lines: The SBP might consider making credit lines available to the existing commercial banks and DFIs to offer loans to the public sector authorities for implementing infrastructure development projects.

Municipal banks are the ideal place to raise finances for implementation of physical infrastructure projects within the limits of the City District governments. Until we have a proper Municipal Bank, the commercial banks and DFIs can fill the financing gap. No doubt, the banks would want to see the feasibility of the project and other allied matters in some detail. This may not be to the liking of the district or provincial governments but there is a positive side to it as well. The government will become aware of its shortcomings in particular areas and take measures for improvement. This will facilitate the fund raising process for all time to come. The banks are expected to advance construction credits, provided the projected cash flow shows adequate debt servicing capability.

Issue of government Bonds or TFCs: Provincial government bonds or municipal bonds or Term Finance Certificates (TFCs) are other options for mobilizing funds for financing infrastructure projects. These authorities are expected to take the lead in the issuance of such debt securities. Financial advisory services companies could assist the governments in this regard. The issuers of medium and long-term debt securities are required to get themselves rated by rating agencies such as PACRA and JCR-VIS in Pakistan. These securities shall also require to be listed on the Stock Exchanges. The federal government may be approached to allow income tax exemption on the securities; with a view to make them attractive to the investors and to mobilize funds at relatively less cost.


The business groups / investors who are offering the government to construct certain highways under BOT arrangements, are looking for highly profitable opportunities. They will be spending the money upfront, two or more years before the toll tax collection would start. However, in order to bind the government to the agreed arrangements, they would require execution of a number of inter-related agreements and would seek a number of guarantees and concessions. Their efforts would be to pass to the government even those risks that purely belong to them. In order to arrive at arrangements that are reasonable to both parties, it would be a long time before the lawyers and advisors complete the negotiations. This process is relatively lengthy and it costs money all the time.

In most cases, the persons making the proposals are promoters and their efforts are to conclude agreements heavily tilted in their favour. Being private parties they can hire the best people that is usually not the case with the government. After the agreements are signed, they might sell major part of their interest to the long-term investors or the bankers, who might buy due to attractiveness of the arrangements. The investors and the bankers also continue efforts to improve their position further to their advantage by one pretext or the other.


The provincial and the district governments might consider BOT funding if funds cannot be mobilized through other sources. Further, they must be clear on policy options and must have experienced and competent personnel to handle the negotiations. The points attributed to the Governor Punjab and the Governor SBP and listed earlier may be carefully considered. Before actually going for BOT type financing, the provincial governments and other authorities may also consider important aspects as suggested below:

Special teams comprising experienced specialists in law, financing and engineering may be constituted. Before actually inviting proposals for financing infrastructure projects, all the team members must thoroughly study the pros and cons of BOT financing techniques. Team members may be exposed to formal training as well as made familiar with the existing projects so financed. If possible, project documents and agreements may be studied and discussed. Particular attention might be given to project parameters such as capital cost, financing, loans and other securities, financial incentives and concessions, sharing of the risks, guarantees, the pre-conditions for various actions or disbursements, the tariff and its basis, etc.

The government has to carefully select the projects for BOT financing. General public has to pay the toll tax for a long time. How will the public react to the level of the toll tax and what are the socio-economic and political fallouts? It will be good if public objections are invited to the project and its financing and levy of toll tax on the users. A federal or provincial Regulatory Authority might be established to decide on reasonable toll or user charges.

The BOT financiers may, to satisfy their bankers, seek details on the government policies, authorities and finances. They may ask concessions and guarantees to be provided to the local and foreign banks. The government might decide if it will be prudent to disclose the details and also to provide concessions and guarantees.

The government should not agree on terms or concessions that it cannot deliver within the specified time. The ownership of the project should always stay with the government. The financiers to have the concession to collect the toll tax from the users for the concession period that may not be excessive. The financiers may normally not be allowed to commercialize any of the facilities or opportunities that emerge due to implementation of the project.

Project alignment, acquisition of additional land and displacement of population are also important issues and must to be provided for carefully. If all this work has been done in-house, it would be advisable to have it vetted from reputed and experienced consultants. In many cases, it is preferable to engage experienced independent consultants for the entire job, their selection to be through open and transparent tendering. Large infrastructure projects generally require federal government approval, which may be obtained in good time.

It may be made known to all counter parties that capital cost will be properly audited be the external auditors as well as by the government commercial auditors. It will be prudent if the preliminary and pre-production costs are capped or fixed as a ratio of total project cost say at 2 %.

The toll tax to be collected from the users of the facility will largely be determined on the basis of the capital cost, gestation period, anticipated return on investment based on the perceived risks, concession period and expected life of the project, anticipated inflation, operating cost of the toll collection, income tax level or exemption, projected number of users of the facility, type of vehicles and a host of other factors. The government authorities to carefully scrutinize all these areas and monitor properly during construction and operation.

Some times land or part of the land needed for the infrastructure project is not already owned or possessed by the government. Acquiring of land may be costly and time consuming particularly if location is in densely populated areas or with high market value. Land acquisition has big potential for pilferage of funds or payment of unfair compensation. Differences over compensation may lead to court cases and the project might be delayed. All these may be included in estimating time for handing over project land for execution and overall completion of the project.

Time is critical for all activities to be met by the counter parties. Private sector may possibly perform better than the government authorities. Delay may cause cost over-runs and benefits from the project may not be available in the time frame originally envisaged. The private financiers may ask for compensation if delay is attributed to the government. The government may make arrangements to avoid such embarrassing situations. Regular monitoring of the physical progress and compliance with the contract terms would help implement the projects, without serious problems.