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1- MICRO-FINANCING THROUGH MOBILE BANKING
2- TRADE OFF BETWEEN INDIGENOUS SAVINGS & FDI 
3-
IMPERATIVES OF PAKISTAN'S INFRASTRUCTURE FUND
4- ADB's FINANCIAL ASSISTANCE FOR PAKISTAN
5-
PETROLEUM PRICES
6- IRAQ SITUATION: CALL FOR OIL SUBSTITUTES.

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IMPERATIVES OF PAKISTAN'S INFRASTRUCTURE FUND

 

The PIF is expected to promote development of infrastructure in Pakistan

 

     By MUHAMMAD BASHIR CHAUDHRY
Feb 24 - Mar 02, 2003 
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The Minister of Commerce, during a talk with the top business newspaper a few days ago, reportedly stressed the need for setting up Pakistan's Infrastructure Fund (PIF), which might attract large foreign currency funds in official assistance from the multilateral agencies in addition to Rupee funds by the government of Pakistan. He was responding to a suggestion from the newspaper about setting up a strong base for development by building strong water, power and communications resources in the country. He added that we should develop a mechanism for prudent management of the fund, which should be outside the Pakistan Social Development Programme. He was of the opinion that we should spare this sector from taxes so that their rates remain stable. It would reduce the cost of export manufacturing as well as of products sold in the local market. The Minister discussed other important issues as well. However, this article is confined to the discussion of important points pertaining to the proposed PIF.

The PIF is expected to promote development of infrastructure in Pakistan and therefore the government may consider establishing such an institution on proper lines. Starting from scratch it is estimated to take about two years before the PIF is fully operative for financing of physical infrastructure projects. However, such a time schedule might not suit the elected government, which may wish to make the PIF fully operational much earlier. Luckily, there is a better option available to achieve the objectives of infrastructure development. The government already owns a special fund earlier set up for the induction of private sector in power generation and the Minister might be aware of its activities. The role and functions of this fund can be suitably adapted and enlarged to handle water projects, communications, physical infrastructure, etc. in addition to the power generation and energy related infrastructure projects. It is felt that the handling of the IPPs is relatively more complex. Due to this, the transformation of the existing fund into PIF might not that complex. An account of the initial activities/phases through which this existing fund passed, would help clarify actions required for making the proposed PIF a full-fledged institution for financing of infrastructure projects in Pakistan.

Pakistan's Private Sector Energy Development Fund (PSEDP) was set up in 1988 after considerable spadework by the government, which was assisted by the National Development Finance Corporation (NDFC) and actively supported by the World Bank and the USAID. Under an agreement with the government, the administration of PSEDF was entrusted to NDFC, which set up a special unit known as Private Energy Division (PED) for the IPPs financing. Largely the World Bank, EXIM Japan, and the USAID funded it. The governments of France, Italy and Peoples China also contributed in the fund. PSEDF materialized under the government's overall framework of induction of private sector in the power generation in Pakistan after it was concluded that the WAPDA alone could not finance the growing power requirements of the country. The framework, besides PSEDF, comprised three other units namely, Private Power Cell (PPC) in the Ministry of Water & Power, Wapda's PPO and the Coal Power Cell (CPC) in the Ministry of Petroleum. PPC has since been renamed as Private Power and Infrastructure Board (PPIB) while PSEDF is now known as Long Term Credit Fund (LTCF).

 

 

It is never easy to promote and finance an industrial development bank or a fund with similar functions. The establishment of a special fund for handling the IPPs is really complex. Development of the Charter of the fund including special features of its financing is critically important and is the first step. The parent ministry takes the initiative for the preparation of the Charter in consultation with other concerned ministries and departments. International financial institutions and the USAID are also consulted extensively for their international operations. These institutions are in a position to provide technical assistance grants for various purposes and also indicate tentative loans that might ultimately be routed through the fund the project financing purposes. These activities take time as there are many revisions before the Charter or any other such document is finally agreed with all stakeholders and departments. The Charter is then submitted for approval to the ECC / the Cabinet / the Parliament. Matters such as the induction of the private sector in power generation and the formulation of the PSEDF including its funding, its administration by the NDFC and the incentive framework, etc. were approved by the Executive Committee of the Cabinet (ECC). NDFC was selected for the assignment after a study of various institutions in the country.

The World Bank and other such financiers have their own procedures including initial study, detailed appraisal, field visits, negotiation of loan agreement, presentation to the Board, etc. before they finally commit the funding for any project or development of finance institution. Thereafter, the pre-conditions are required to be met before the funds could be utilized. When the funding is for a new institution, which the PSEDF was at that time, the pre-conditions also require preparation of documents such as draft loan agreements of the fund, policy guidelines, operational manuals, staffing, etc. to the full satisfaction of the creditors. Often, international consultants and advisors are prescribed for engagement to prepare the procedure manuals, draft agreements, impart training, etc. The appointment of the advisors/consultants and the funding for their services itself is a time-consuming process and needs careful handling. These activities also require extensive inter-action of the senior management with the advisors before the document is in the final draft or the assignment is actually initiated. Such draft documents are submitted to the government and the financiers for comments/approval. Further changes are often required before the document is finally agreed and approved. Bankable feasibility reports play an important role in the approval and funding of infrastructure projects. In the context of power plants based on different fuels, outline of feasibility reports were also developed and distributed to the prospective borrowers to help them get the feasibility reports prepared that cover all the requisite details and the experts doing the feasibility are also well reputed.

Staffing is critical for the success of any institution and the PED/PSEDF was no exception. Moreover, at that time there was a government ban on fresh recruitment. It was difficult to get properly trained officers for the job. Within NDFC, no divisional head was willing to part with the named experts for transfer to PED for working on private power projects. It took some time before the government allowed NDFC to place advertisement in the newspapers for making fresh recruitment for the purpose. Placement of proper advertisements, screening of applications, interviews, appointment and the actual joining of newly appointed for duty took considerable time. KESC and WAPDA were strict in the release of experts to join NDFC/PED. The next phase started with the orientation of the experts to the framework for private power, familiarity with the applicable guidelines, procedure manuals, donor conditions, etc. This was somewhat easy as the difficult phase of project finance on limited recourse basis had yet to come.

All loaning out of PSEDF were to be on limited recourse basis. This type of financing was not common in the country at that time. Almost all financing until then had been on full recourse basis and the project sponsors were also providing personal guarantee for the loan repayment. Under limited recourse, the creditors look at the cash flow from the project only and the sponsors are not responsible beyond what they actually contribute by way of equity contribution. There are no personal guarantees. There are a large number of inter-related agreements commonly known as Security Package. These agreements specify the relationships with the government including the government guarantees for performance of WAPDA and PSO, the two public sector entities respectively responsible for purchase of power and the delivery of fuel oil to the IPPs. Besides, there are agreements for construction, equity finance, relationship among major sponsors, insurance arrangements, operation and maintenance of the power plant, etc. Orientation and training for such financing was taken up in house. The officers were imparted on the job as well as formal training, within the country and abroad. The World Bank and the USAID were most helpful and so were the government of Pakistan and the management of NDFC. The officers were also trained in the determination of tariff through use of computers that were kindly provided by the USAID. The concepts of Build Operate Transfer (BOT) and Build, Own and Operate (BOO), frequently quoted in the country nowadays, were first used at that time in the context of financing of the Independent Power Projects (IPPs). The use of BOT and BOO financing techniques is becoming more popular recently particularly with departments/institutions with shortage of financial resources of their own. It is apprehended that these techniques are not very well understood by many. It is suggested that the public sector entities may be imparted extensive training before they handle the financing of infrastructure projects on BOT/BOO basis, particularly with foreign investors.

For all financing out of PSEDF, the Board of Directors of NDFC was the decision making body. There was an Energy Committee comprising heads of different divisions within NDFC including PED, for initial screening of the proposals. PED/NDFC could process only those projects that had been approved by the government by issuing the Letter of Intent (LOI). However, NDFC was not obligated to finance any project if it was not satisfied with the project viability. PED/PSEDF acted more like a development bank in the handling and financing of the IPPs. PED had its own financial and technical experts and could engage short-term consultants on specific issues. PED also sought help from other NDFC divisions for activities/functions for which there was not sufficient expertise in house. Long-term foreign technical and finance experts whose services were arranged through the USAID supported PED in its operations. The government particularly the Ministry of Finance and the Ministry of Water and Power were supportive of PED/NDFC. The foreign creditors were also appreciative of the expertise and competence developed in the PED/NDFC for the handling of the power projects.

PSEDF loans had maturity up to 23 years, with 8 years grace period. These loans were also junior to the commercial loans/export credits that had shorter maturity. PSEDF loans could generally cover up to 30% of the capital cost of the project. Characteristics of this financing facility were so designed as to enable the sponsors to raise funds from commercial sources more easily for the IPPs. PSEDF loans were availed by Hub Power Company and some of the other IPPs. PSEDF loans were also used for part financing the pipeline supplying fuel oil to the Hub Power. With merger of NDFC into National Bank of Pakistan (NBP) in November 2001, the administration of LTCF/PSEDF has also passed over to the NBP.

The description above of the actions required for setting up a new fund/institution on proper lines, may assist the government authorities in deciding the route for the setting up of Pakistan's Infrastructure Fund. If PIF is build up from ground zero, it might have to go through more or less phases as that for the PSEDF, originally administered by NDFC. In the circumstance, modification and development of LTCF/PSEDF into Pakistan's Infrastructure Fund appears a better alternative. LTCF is now with the NBP. The government may take management of the NBP into confidence and discuss the possibilities as the conversion and expansion of the LTCF into the PIF capable of handling and financing of all infrastructure projects. LTCF has been funded through foreign loans and therefore it would be proper to take into confidence the foreign creditors. In order to make the proposed PIF (formed through LTCF conversion) fully operational, the government may have to consider a number of steps, of which the two important ones are discussed below.

The first step might be the revision of LTCF Charter into PIF Charter. Main parameters such as corporate status, private and public ownership, management, head office location, special characteristics of the PIF loans, incentives framework, etc. need to be discussed in detail. These matters may be considered within the government and also reviewed with the international financing agencies, which would later be formally approached for credit lines to PIF. Concurrence on these broad parameters shall provide the basis for next phases of activities. The government/the NBP might need services of people with similar first hand experienced. The senior officers who handled all actions pertaining to the setting up of PSEDF are still around and might be willing to assist the government in developing PIF on sound footings. After the key personnel are in place, the second step could be the revision and updating of the LTCF guidelines and manuals for power projects in the light of actual past experience and the demands of the proposed PIF. Wherever required fresh set of documents might also be developed for certain infrastructure projects. This is easier said than done. However, the PIF could be made operational through a systematic approach to all requisite activities. Infrastructure projects often are capital intensive and must be handled carefully to conserve resources and to promote overall economic development and prosperity.