In developing world, one of the pivotal concerns remains the finite spending capability of governments to bridge the infrastructure financing gap. It is for this reason that attracting private investment is critical in ensuring the sustainable management of infrastructure, said the SECP Chairman Aamir Khan.
Khan was delivering keynote address at a Capacity Building Session for “Financing Infrastructure via Capital Markets, organized by the Infrazamin Pakistan to enhance outreach and understanding among all stakeholders about the role and importance of capital markets.
Aamir gave examples where both sovereign and non-sovereign bonds have been issued to finance infrastructure projects, such as Metro Manila Flood Management project in the Philippines, Mumbai urban transport project in India, or Izmir metro expansion project in Turkey. All of these projects have directly impacted and improved the lives of the masses, and have also contributed to the development of their respective bond markets, he added.
In Pakistan, public and private infrastructure development has made some progress over the last decade. Consequently, significant investments have taken place in road networks, urban transportation and telecommunication sectors. This progress has not only improved the mobility and connectivity of the general public, but has also helped those at the bottom of the pyramid to improve their livelihoods. Furthermore, he explained to participants, it has also brought financial inclusion to the under and un-served, and created employment opportunities for the female population. And all of this has been achieved by investing a very small percentage of GDP.
It should be a matter of concern for all of us that Pakistan’s infrastructure spending is one of the lowest in the region and well below investment requirements of 8-10 % of GDP, when we consider past and future demands. And the problem gets exacerbated every year, as the infrastructure projects are financed either directly by the government or by commercial banks against government guarantees. Given the limitation of financing from these sources, the investment gap shall continue to grow. Accordingly, all stakeholders need to sit together and map the obstacles that we face in adopting financing alternatives through the capital markets.
The SECP Chairman expressed his firm believe that Pakistan’s capital markets provide an untapped opportunity, and offer the most viable solution in bridging the gap in infrastructure financing needs that I touched upon. It will also help address the very low savings rate in the country, a long-standing obstacle in the expansion of the economy. The PKR 200 billion transaction of Pakistan Energy Sukuk in 2020, is a testament to the potential of capital markets. This significantly reduced the government’s cost of borrowing, and allowed investors other than banks to participate directly.
Over the last two and half year, SECP, has introduced various enabling provisions in the regulatory space. He mention that the SECP has simplified the process for issuance of Govt debt securities and Govt guaranteed debt securities; the market making framework has been revamped to address liquidity, and as a result, 16 financial institutions are registered with PSX as Market Makers; Origination of secured and unsecured debt securities, including GDS, through execution of issuance agreements has been introduced;
Infrastructure fund, as a separate category of private fund, has been allowed to invest upto 70% of its net assets into infrastructure sector. Moreover, the SECP has issued guidelines on Green Bonds, to enable raising of funds to finance infrastructure projects that contribute positively to the environment.
He further explained that infrastructure mutual funds, in open-end structure, are now mandated to invest 70% of their net assets into the infrastructure space; and PPP-REIT Schemes under the revamped REIT regulations, can now undertake development, upgradation and maintenance of infrastructure projects.
These measures, khan said, are complimentary to the 2016 SBP Prudential Regulations for infrastructure financing, that expanded the scope of infrastructure financing to include social, cultural and commercial infrastructure projects.
The Government of Pakistan on its part, has also introduced various reforms to facilitate involvement of private sector in this domain. The formation of a dedicated Public Private Partnership Authority, and recent 2021 amendments in the Public Private Partnership Authority Act, have energized this space. As a result, the regulatory process for developing and structuring infrastructure projects on a PPP basis has been streamlined. Consequently, a number of mega projects have been approved by the Public Private Partnership Authority, such as Karachi Circular Railway, Sukkur-Hyderabad Motorway and Kharian-Rawalpindi Motorway.
In addition, Aamir said, the recent amendments in the Companies (Asset Backed Securitization) Rules 1999, have streamlined matters relating to management and transfer of property. Historically, this was the major hurdle in the way of using SPVs for infrastructure financing. Furthermore, adoption of the ABS Rules has been allowed for federal and provincial governments, to facilitate issuance of structured debt securities and raise funds through the capital market.
And lastly, the government has initiated transformation of Pakistan Credit Guarantee Company, into an NBFC structure. SECP has already granted permission for creation of the new entity, the National Credit Guarantee Company Limited. Moreover, necessary amendments have also been incorporated in the NBFC Regulations, allowing credit guarantee companies to take enhanced exposure in contingent liabilities upto 10 times of their equity. The NCGC shall promote credit enhancement mechanism in an efficient and timely manner, while at the same time support development of the local bond market.
Having covered the current situation, the challenges, and measures introduced to address them thus far, the SEC chairman pointed out the areas where further actions are required.
Firstly, he said, it is imperative that infra-financing instruments are structured in a manner that appeal to investors. One such attraction is the provision of credit guarantees, in line with debt issuances globally, while meeting the local investors’ needs and preferences.
Secondly, improvements in risk management structure in project design phase is vital. Given the long-term duration, and complexities involved, especially in case of a PPP structure, a forward-looking approach needs to be implemented, that clearly accounts for life-cycle-oriented risk assessment. Thirdly, amendments may be introduced in the PPP law, to further improve the governance and risk management framework. Fourthly, operationalization of a Viability Gap Fund is critical to attract and incentivize private sector involvement in social infrastructure development, he concluded.
Also, the importance of the agriculture sector in terms of generating employment, saving precious foreign exchange and ensuring food security must not be overlooked. When looking at the infrastructure needs, efforts must be focused towards diverting infrastructure financing to this sector. Pakistan is country that is vulnerable to climate change. Therefore, we must be mindful of environmental sensitivities while attracting private capital, with an eye on sustainability.
He stressed for an effort to work for technical listing of privately placed infrastructure investment pools such as Neelam Jhelum and Dassu Hydroelectric projects. On similar lines, the GoP must consider using capital markets for all future government guaranteed infrastructure projects.
Finally, he suggested, necessary tax concessions must also be introduced to incentivize direct investments into infrastructure projects by retail and institutional investors. He concluded that using capital markets is the only viable option for meeting the country’s infrastructure financing needs.
