Lahore March 23, 1940 was the dateline of fateful
event which changed the course of history in the sub-continent. On
that epoch making event, Muslims from all corners of India had
assembled at Manto Park where they unanimously resolved for launching
a movement for a separate homeland for the Muslims of India. That
place where the history making Lahore Resolution was adopted is today
called as "Minar-e-Pakistan."
While reporting the event of Lahore Resolution, the
Hindu Press described it as the "Pakistan Resolution"
obviously to unleash feelings of hatred among the British rulers as
well as Hindu population against the Muslims, that malign intention,
however, gave a spark to the struggle for Pakistan.
The event proved a turning point in the history of
this part of the world, and after seven years, the Muslims embarked
upon the destination of Pakistan under the dynamic leadership of
Quaid-e-Azam Mohammad Ali Jinnah, the father of the nation. Pakistan
came into being on August 14, 1947 and since then March 23 has become
a day of reckoning.
On this occasion, people of Pakistan pay homage to
the unparallel sacrifices of the freedom fighters who gave their lives
in the hope for peace and prosperity for their future generations.
This year too, Pakistan Day was observed in a usual
manner yet the overall atmosphere was slightly different on the eve of
the historic occasion.
There was a crucial one-day match between India and
Pakistan on March 24 the last match of a 5 match series at Gaddafi
Stadium Lahore. The visiting Indian team, however, won the series by
3-2 after an easy sailing in the last match. A large number of cricket
fans who had attached great hopes disappointed with what they called
the walk over offered to the visiting team to win the series. Some of
the cricket fans were of the opinion that the way the home team
offered victory to the visitors seems to be the part of the cricket
diplomacy which is being described as a bridging factor between the
It is said that the leaders of India and Pakistan
have come to the conclusion after bitter experiences of 55 years which
include three full fledged wars, that the lot of the poverty ridden
people could be changed only by resolving the key issues between the
In fact, the persistently tense situation between
India and Pakistan took a U turn after the SAARC summit held on
January 1, 2004 when the Head of the States of all the member
countries of SAARC met in Islamabad. That was the beginning of a chain
of events including signing of Free Trade Agreement, normalization of
air link, restoration of rail and road transport between India and
Pakistan, frequent exchange of trade, political and social delegations
and now there are signs of opening of Indian visa office in Karachi,
opening of Khokrapar-Monabao border as well as grant of Most Favored
Nation (MFN) to India.
There is a visible change in harsh and rigged
instance of the Indian leadership which instead of calling Kashmir as
an integral part of India is now talking in an accommodating tune.
They are now talking in terms of "give and take" to resolve
the dispute of Kashmir.
There is no second opinion that India has gained a
strong economic position in this region and that country is now aiming
to attain a bit economic power in this region. However, the Indian
leadership perhaps has realized that the target of becoming an
economic super power in this part of the world could be hard to
achieve unless the political issues like Kashmir dispute were resolved
to carry out the strategic plan to become an economic power in this
region. By and large, India has sorted out its border issues with
China and now seems on its way to solve the Kashmir issue.
The situation is so far so good. No doubt, if the
two countries reach to an amicable solution of the Kashmir dispute
which should also be acceptable to the Kashmiri people, it would be
yet another landmark and a turning point in the history of the entire
WAIVER OF ECONOMIC SANCTIONS
The waiver of defense and economic sanctions from
Pakistan was yet another big event of the year. The United States
relaxed the defense and economic restrictions imposed on Pakistan
after the change of government in Pakistan in 1999. President Bush
announced the decision to lift the restrictions from Pakistan. It is
said that relaxation would enhance market accessibility for Pakistan
The designation of Pakistan as a non-NATO ally is
also a significant event. It is being taken as a preamble for opening
doors for Pakistan for its re-entry into the club of Commonwealth in
Sheikh Yassin, the founder and spiritual leader of
the Hamas Resistance Movement, was killed in an Israeli missile attack
on March 22 while he was leaving Gaza Mosque after offering morning
prayers. The assassination of Hamas leader is an effort on the part of
the Israel to weaken the resistance being offered by Hamas. Killing of
people by using state force indicates failure of wisdom on the part of
Israel. Instead of weakening the movement, it may add fuel to the fire
to the problem. The targeted assassination of Sheikh Yassin was
condemned worldwide. In fact the unbridled use of force by Israel who
seems to be allowed to operate in a free for all fashion, calls for
effective measures by the world forces who claims to be the champions
of human rights.
Despite the fact that the price inflation has
adversely eroded the purchase power of the common man, the economic
indicators are showing robust growth especially in the macro economic
fundamentals during the current financial year. The macro economic
stability also reflects in the impressive GDP growth rate which is
said to exceed the projected target of 5.3 percent, the per capita
income is reported to have taken a quantum jump from $450 to $600. It
is for the first time that the large-scale manufacturing sector has
attained a growth rate in double digit while the revenue targets have
already been achieved in the first 9 months of the financial year.
If all these figures are taken as true, it is,
however, regrettable that the economic growth and progress is not
reflected in the living standard of the people, contrary to that the
price inflation especially in the prices of essential items like
flour, meat, milk, electricity, transportation charges altogether
having an adverse impact on the daily life of the people.
The official quarters, on the other hand, however
claims that the steps being taken by the government for poverty
reduction have started showing positive signs. The officials have
identified long-term investment in development economic infrastructure
as key to accelerating economic growth and directly benefiting the
poor by creating employment, stimulating the micro economy and
generating growth potential for small and medium businesses.
Dilating upon the theme of long-term investment in
infrastructure development as a tool to achieve the targets of poverty
alleviation plans of the government, Dr. Ishrat Hussain, Governor
State Bank of Pakistan elaborates that in context of a developing
country like Pakistan, the rationale of encouraging Infrastructure
Project Financing is to bridge the investment gap in infrastructure
sector by inviting private investment for commercially viable
It is estimated that the annual requirements for
capital investment in this sector would be about $2.5-3.0 billion. The
government is not in a position to provide such large amount. At best
it can afford to spend about $1.5 billion keeping the fiscal targets
intact. Thus private sector will have to come up with an equal amount
every year. In this connection, the respective roles of private sector
business concerns (both domestic as well as international), the
banking system and capital markets have to be carefully delineated.
Such an arrangement would not only help in kick-starting economic
activities in the country but would also provide the fiscal-space to
the Government for diverting scarce public funds to other pressing
demands such as for social sector services. Therefore, financing of
infrastructure projects in the private sector would have dual impact
on poverty alleviation i.e. (a)
additional investment would lead to more job creation and higher
economic growth by relieving congestions and shortages and
facilitating quicker movement of goods and services. (b)
Freeing up of fiscal resources from assuming full financing
responsibilities of infrastructure would enable the government to
undertake direct measures to address the needs of poverty stricken
regions and population of the country in a more meaningful way.
As the rising population and rising incomes in
Pakistan result in higher demand for infrastructure facilities the
lumpy nature and up-front large investment requirements have created a
chronic imbalance between the demand and supply. The supply of
infrastructure services has lagged behind the burgeoning demand
creating rationing, inefficiency and higher costs for the businesses.
As the fiscal deficit has to be contained, the past
track record of public sector institutions in providing these services
efficiently and in cost effective ways has been woefully inadequate,
the financial sector has ample liquidity and the learning experience
of Pakistan in private sector involvement in these projects has been
quite illuminating it is essential to rethink the new contours of
financing for infrastructure projects. Sustainable provision of
infrastructure facilities has to be commercially oriented, an approach
that can lead not only to the strengthening of operations and
improvements in efficiency, but also opens up access to private
finance. Private funding with no recourse to the "sovereign"
introduces important market discipline, controlling costs, providing
revenues and allocating risks. At the same time, private involvement
calls for a strong and reliable regulatory framework, which remains a
key challenge in many developing countries.
Dr. Ishrat Hussain, in a recent paper on the
subject says that while the potential for private involvement varies
across sectors (being greater for example in telecommunications and
power than in roads), there is significant scope for expansion in all
There are three levels at which infrastructure can
become commercially oriented viz:
1. At the
very basic level, authorities can begin to operate the public sector
in a manner, which reflects more closely the ways the private sector
operates. This means paying close attention to revenues, costs and
market demands. It also involves creating a governance structure,
which provides clear goals, makes management responsible for
performance and allows them independence to carry out their tasks.
This may also involve bringing in a private sector partner on an
advisory basis. District governments and Union councils are best
suited to carry out such projects.
2. At second
level governments can seek the limited entry of new private providers
through various forms of public/private partnerships, which refers to
co-operation between public and private sector interests in completion
of a project. This approach involves more active private sector
participation, usually as an operator. Potential areas include power
transmission company, Backbone Company for telecommunications, water
supply and sanitation, toll roads, municipal services, ports and
airports. The basis for this involvement is usually some type of
governments can opt for full privatization of some public services
such as telecommunications, gas and oil pipelines, container
terminals, port cargo handling, airport commercial services, thermal
power generation and distribution companies etc.
INFRASTRUCTURE PROJECT FINANCING BY PRIVATE SECTOR
So far Pakistan has had only a limited success in
attracting private investment in the infrastructure projects, which
has remained limited to only highly marketable commercial undertakings
such as Power Generation, Oil pipelines, LPG extraction and marketing,
cellular telephone networks, and Container Terminals at Ports. In this
connection, it is important to note that unlike many other developing
countries of Latin America and Far East Asia, Pakistan had not been
able to reap benefits from the first wave of private sector
participation in infrastructure projects. The major inhibiting factors
has been clear division of responsibilities between policy and
ownership by the government tilting the balance in favor of
government-owned enterprises, lack of adequate regulatory framework,
weak capacity and coordination among the government agencies, poorly
structured concession and contractual arrangements, macroeconomic
uncertainty, heightened political risk, poor governance and high
WHAT IS BEING DONE TO RELAX THESE CONSTRAINTS IN
Macroeconomic uncertainty has been minimized to a
large extent as there is a perceptible continuity of policies,
consistency and predictability in the decision making process.
Privatization of state owned utilities would further remove a major
source of uncertainty faced by potential competitors. Governance has
improved during the last four years and a level playing field is
afforded to all potential and existing investors. Transparency in
award of contracts and privatization transactions has become the
hallmark in recent years. Policy-making and operations have been
separated in case of oil and gas and power sectors.
Independent quasi-judicial regulatory agencies such
as NEPRA, PTA, OGRA, SECP have been established to provide the
supporting regulatory framework and lay down a well defined procedure
for price determination and price changes. Financial sector and
capital market reforms have been successfully carried out resulting in
lowering of interest rates structure, tightening of spreads and
availability of financing for long term.
Experience from the Private Sector Energy
Development Fund — has provided insights as to how avoid mistakes in
structuring finances for infrastructure.
A yield curve and benchmark for 15-20 years
financing have been developed by introducing PIBs of the same tenor.
Contractual savings in form of Provident Fund, Pension funds are
available in large amounts for investment in long-term instruments.
Foreign exchange availability is no longer a major stumbling block in
converting rupee financing for acquisition of imported machinery and
Political and geopolitical risks do still prevail
but the overall country risk has been lowered as evident from the
recent successful strategic re-entry of Pakistan in international
Therefore, in accelerating transition from pure
public to risk sharing between public and private sectors innovative
and diverse financing techniques have to be developed.
a) In order
to facilitate private sector sponsorship of infrastructure projects,
the state bank has already allowed Banks/DFIs to accept
"Concession Agreement/License/Right of Way" issued by
Government to consider as a collateral for infrastructure project
financing, in the overall collateral arrangements worked out with the
Pakistan's "Sovereign rating" has improved in recent years,
joint venture Infrastructure Funds between international private fund
managers and Pakistani financial institutions can be set up under the
present regulatory framework.
majority of Pakistani bankers are still occupied with antiquated ways
of doing business i.e. for them the Prime Security of a Project is
'marketability of collateral in case of default', besides 'reputation
of sponsors'. This is a consequence of financial underdevelopment and
lack of competition due to following the policies of 'financial
repression' in the past. Financial Sector Reforms instituted in recent
years have been able to assert the importance of evaluating 'intrinsic
cash flow generating ability of the project' in undertaking project
lending. However, development of expertise in Project Evaluation can
only be realized overtime in medium to long run. In order to undertake
cash flow based lending, commercial banks/DFIs are being encouraged by
SBP to make their lending judgments on the basis of sectoral and sub-sectoral
studies and other data regarding volume of expected use and future
cash projections of infrastructure projects.
Information Sharing: The private sector can be facilitated by
providing data on demand and information related to various potential
infrastructure projects so that private investors, businesses, bankers
and capital markets can plan their future investment decisions in
accordance with the Cost and Benefits Analysis (CBA) of these
a "Selective Approach": As regards envisaging market based
financing system for various revenue generating Infrastructure
Projects relating to Transport, Water, Sanitation and Sewerage, etc.
it is important to follow a "selective approach". For
example, initially, following Infrastructure Projects related to
Transport Sector may be selected for private participation as these
projects have solid project economics:
with high traffic level of 15,000 vehicles per day.
Road transport services in big cities.
Bridges and bypasses around big cities.
In this connection, the Federal, Provincial,
City/District Governments need to conduct a 'demand survey' with
respect to the following key areas:
— to identify the nature and magnitude of the
financing gap; instruments.
— the appropriateness of the fund as an instrument to support
private investment and the timing of the fund;
— the design of instruments;
— the Infrastructure Financing Facilities (IFFs) funding
— the staffing levels and skill mix needed to manage those
Infrastructure Financing Facilities (IFFs): Governments can encourage
private sector investors to undertake funding of infrastructure
projects by establishing transitional institutional arrangements i.e.
Infrastructure Financing Facilities (IFFs), in the form of grants,
soft loans, guarantees or partial guarantees. In Pakistan this has
been a controversial issue because of the experience with the
Independent Power Projects (IPPs) financed under the World Bank
assisted Private Sector Energy Fund.
It is therefore imperative that we learn the right
lessons from this experience otherwise this can lead to inaction or
avoidance of private sector involvement for wrong reasons.
EXPERIENCE WITH PRIVATE SECTOR ENERGY FUND
The experience of Private Sector Energy Development
Fund in Pakistan suggests that the IFFs should not transfer commercial
risk to the government as the latter do not have any control over the
management of that risk. Similarly, while the government shared in the
downside risks of a project, it was unable to take advantage of an
upside potential. Moreover, direct funding instruments may be
successful in attracting equity investment but they may reduce project
sponsors' incentives to manage risk adequately particularly if it is
provided on an unconditional basis. The mixture of direct funding,
subsidies, tax exemptions and guaranteed pricing may even tempt
project sponsors to be less prudent, take excessive risks while
capturing upside and leave the downside to the government. The burden
sharing was therefore too skewed in favor of the project sponsors.
There are still unresolved issues in the
structuring of financing under the circumstances where there is a
single supplier of inputs and a single buyer of output.
The bargaining powers of the two parties are uneven
and a private sponsor may not take the plunge in an aura of
uncertainty about the future cash flows and profitability.
Event risk under such a situation is highly
pronounced and there is no satisfactory way either to price this risk
or to hedge against this risk. A proper pricing leads to unaffordable
tariffs thus reducing the attractiveness of the project itself. A
sub-optimal pricing exposes the private sponsors to unacceptable risk.
Event risk took place in case of Pakistan when Benazir government that
had concluded the agreements with the IPPs was replaced by Nawaz
Sharif Government in 1997 and the entire process came to a virtual
halt. Reputation risk of both Pakistan as a sovereign and those of the
private sponsors suffered immensely. The consequences of this loss of
reputation for both the parties were quite difficult to manage. The
lesson to be drawn is that government legal guarantees counter
guaranteed by the IFIs do not always provide comfort or satisfactory
mitigation against event risk and reputation loss.
Thus a fairer and even handed agreement with equal
burden sharing between the sovereign and private sponsors has much
better chance of success than perceptively loaded agreements in favor
of one or the other parties.
ROLE OF INTERNATIONAL FINANCIAL INSTITUTIONS (IFIS):
IFIs collaboration with the private sector can take
a wide variety of forms.
There is no obvious limitation on the financial
structure of interventions, which can range from straight equity to
quasi-equity instruments and debt, underwriting and guarantees.
Intervention can also take the form of introducing financial
instruments to capital markets, for instance through IFIs treasury
departments. Nevertheless, it is important and useful to consider
particular sectoral challenges. An active presence and support of IFIs
can help financing of infrastructure projects in the followings ways:
OF FINANCIAL MARKETS: It is
immaterial whether the vehicle for IFIs impact is a candy factory or
the national power grid, as experience has shown that cooperation of
IFIs with foreign and local investors in the general industrial and
services sectors can have far-reaching benefits in terms of the
functioning of markets, market-oriented behaviors and institutions. To
'multinational financial institutions' cooperation of IFIs would
provide an umbrella of political comfort derived from their long-term
relationships with governments and their preferred creditor status. To
local banks the cooperation of IFIs would provide much needed
medium-term capital, besides helping in institutional development.
BUILDING: As regards provision
of sustainable long-term funds, Pakistan is planning to reform social
security systems, and in particular involving the private sector in
providing income security to old age. Pension reforms will introduce
privately managed individual retirement accounts. Successful reform
depends on the existence of a solid private pension fund management
sector on capital markets that fulfill some basic conditions
(regarding liquidity, depth, and diversity of instruments), and on
reliable regulation. In working with the private sector (in addition
to providing advice at the policy level) IFIs can support such reforms
by strengthening the institutional basis for their implementation and
thus increasing public confidence in them.
further area where IFIs can play an important role is in promoting the
availability of equity. Equity is widely sought after in developing
economies for large capital intensive infrastructure projects. IFIs
are well placed to participate in funds and help attract institutional
investors, such as international pension funds and mutual funds, into
these countries. In this way they can also help to strengthen nascent
capital markets. By being early in the game and showing good
management and professionalism, they can provide a strong
(IV) DEVELOPING FINANCING STRUCTURES: IFIs
can also help develop financing structures that are simple,
cost-efficient and can be easily replicated so as to encourage private
sector, besides envisaging a system for risk allocation and
mitigation. IFIs may not only share the general project risk with
private partners (through equity or non-recourse debt), but may also
assume those risks that they are well placed to mitigate.
These tend to include general economic and
political risks and risks arising from shifts in regulatory regimes.
Difficulties involved in structuring and
implementing infrastructure projects must not be underestimated. Such
a dispensation not only requires strong political backing, but also
demands enactment of specific legislation or the introduction of the
necessary regulatory environment. Moreover, most of the infrastructure
projects have a complex project design, wherein certain costs tend to
be front-loaded. Therefore, presence of multitude of political,
regulatory and commercial elements make infrastructure project
financing a complex process for the private sector, thereby creating
scope for valuable contributions by the IFIs for
facilitating/streamlining the aforementioned process.