Ways to meet infrastructure funding gap

Tax-free remittance of overseas dollars can provide financing for infrastructure building

ISLAMABAD: Mega projects – think large multibillion-dollar investments – can be hard to wrap your head around, especially when Pakistan is in the midst of an infrastructure building boom.

However, infrastructure programming is difficult for the public sector to get it right and mega projects like the new Islamabad airport are prone to cost overruns due to poor planning and execution.

Historically, proponents of large development projects are known to underestimate the initial project budget to get it approved, knowing that once work begins on a project, it is rarely halted. Project directors resort to “cooking” costs and benefits for getting their projects funded, resulting in “survival of the un-fittest.”

A typical cost overrun may be 90-100% of the initial project budget, which means that by the time a project is halfway through, there will be a need to arrange further financing in order to meet the cash flow requirement.

The financial situation, at present, is so grave that development projects under the Public Sector Development Programme (PSDP) have a total value of more than $90 billion but only $16 billion has been allocated in fiscal year 2016-17. This means that it will take more than six years to clear the current backlog of PSDP projects, not to mention the need for starting new projects.

As such, the financing gap for infrastructure projects is likely to stay, if not aggravate, in the near future unless private-sector participation is encouraged.

Finding funds

As most commercial banks focus only on short-term lending to big corporations besides investing in government securities, private players have a restrained capacity to raise long-term project finance. Although the banking sector advances have grown in 2016, only sectors such as food and textile have been major recipients of the debt financing.

Equity investments by the private sector have been limited only to highly lucrative commercial ventures such as telecom and oil pipeline projects.

An alternative to the financing for infrastructure projects could be through tax-free remittance of overseas dollars earned by Pakistani professionals and companies. The government can set up a special purpose vehicle (SPV) or an infrastructure fund that issues long-term bonds that are not backed by state guarantees.

The SPV may provide loans to finance qualified mega projects by selling coupon bonds with a 40-year maturity and paying a fixed interest rate of 9% to investors. Overseas Pakistani investors may be incentivised to buy the infrastructure bonds by being able to repatriate their overseas earnings tax-free for each dollar they invest.

A ratio of the amount invested in bonds to funds repatriated can be crunched by the designers of such an instrument. For example, a ratio of 1:5 means that by investing $1 in infrastructure bonds, they can bring $5 back to Pakistan tax-free.

Similarly, there is a shortage of Sukuk and Shariah-compliant infrastructure-backed financing assets in local and regional markets, and the number of investors looking for well-structured Islamic bonds as an alternative to government securities is increasing.

Such an instrument should be tradable and highly liquid. Proceeds from the issues should be then used to co-finance financially viable infrastructure projects with a sustainable revenue stream such as road tolls from motorway projects.

In the past, the federal government has experimented by establishing various SPVs such as the Infrastructure Project Development Facility (IPDF) and the Pakistan Development Fund (PDF) but these have failed to capitalise on that initial momentum.

There is a dire need to review the existing structure of PDF to make it more effective, but eventually the need of the hour is to develop a holistic legal framework for public-private partnership at the federal level to leverage co-financing from commercial sources.

The writer is a Cambridge graduate and is working as a management consultant

Published in The Express Tribune, November 28^th, 2016.

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