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.
COMMERCIAL FINANCING OF INFRASTRUCTURE PROJECTS
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
- 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
- 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
- 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.
WHY BOT FINANCING
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
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.
ALTERNATE SOURCES OF FINANCE
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
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
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.
BOT FINANCING ARRANGEMENTS
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
SUGGESTED PRECAUTIONS IN BOT FINANCING
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
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
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.