Credit crunch: As banks turn their backs on private sector, US steps in

Published: September 26, 2012
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$80 million, earmarked by the Obama administration under the Kerry-Lugar-Brahman Act for the Pakistan Private Investment Initiative

$80 million, earmarked by the Obama administration under the Kerry-Lugar-Brahman Act for the Pakistan Private Investment Initiative

ISLAMABAD: 

Crowding-out of the private sector from credit channels due to reckless government borrowing has provided a unique public relations opportunity to the US. The US has said it will offer loans ranging from $500,000 to $5 million to small and medium sized business in Pakistan, to help the latter expand and create jobs.

In total, $80 million, earmarked by the Obama administration under the Kerry-Lugar-Brahman Act for the Pakistan Private Investment Initiative, will go towards providing cheaper financing and equity to small and medium enterprises (SMEs) in Pakistan.

“The United States Agency for International Development (USAID) will provide up to $24 million for an equity fund, and fund managers will be required to match the requested funding to take the size of each equity fund to at least $45 million,” said Theodore Heisler, the project manager and senior economic growth advisor to USAID.

Heisler said that co-investment was essential in bringing the size of each fund to a level where it can cover operating expenses. The US intends to create at least three funds, but is, as yet, noncommittal to the total number. US authorities are on the lookout for good fund managers, and the availability of quality managers will determine the numbers of the funds, officials have said. During the last fiscal year, the federal government borrowed Rs1.77 trillion to finance the budget deficit. The State Bank of Pakistan has already warned that due to increasing government borrowing, there is little credit available for the private sector to grow.

“Having access to finances is a challenge for SMEs, as there is little equity and debt available for the sector,” said Heisler. “The longer term goal is to help expand the market for private equity investment and provide money that is not available through banks and other international lending agencies,” he added. He said the real job growth potential lies in the SME sector, as the corporate and public sectors cannot create unlimited jobs.

Heisler said each fund will have a 10-12 year lifespan. Individual investment sizes will range from $500,000 to $5 million, but could vary depending upon requirements. The initiative has been modelled on the Polish American Enterprise Fund, which was started with $140 million and has now grown to a multi-billion dollar fund.

Heisler said the US is looking to create a private equity industry in line with global standards, as there is hardly any private equity investment fund in Pakistan. He said the other purpose was fetching foreign investment through co-investment, as investment in Pakistan is dwindling.

The US is currently looking for fund managers who have a successful history, and Heisler said that both local and international fund managers have expressed interest in the project.

To a question whether Pakistani fund managers have expressed reluctance due to doubts over long-term commitment issues with the US, the US embassy replied “we believe there will be substantial interest from local, regional and international investors”.

It further said that “the US government designed the Pakistan Private Investment Initiative after a year of research and consultations with numerous stakeholders, including the Pakistani private sector and regulatory authorities.” It added that USAID will structure the funding to ensure that it is sustainable.

The US has disbursed aid to Pakistan in billions of dollars over the years, but remains unable to win support at the grassroots level due to deep-seated mistrust between the two strategic allies. The investment initiative provides the US an opportunity to meet the needs of small and medium size businesses and fill a financing hole left by extensive government borrowing.

Published in The Express Tribune, September 26th, 2012.

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Reader Comments (7)

  • Sep 26, 2012 - 5:19AM

    I think this is a very good initiative. Pakistan really needs lots of venture investment firms with significant amount of risk capital to help entrepreneurs and SME sector grow and create badly needed jobs in the country.

    Recommend

  • sgrr
    Sep 26, 2012 - 11:01AM

    But how we Pakistani on one side trying to attack the counslates in Pakistan get a loan from the blasphemic US. Is it the ethics of Pakistanis?

    Recommend

  • S
    Sep 26, 2012 - 5:15PM

    Pathetic, we should reject it immidiately and all other aids.

    This is all base don interest, strictly forbidden in our religion. only way for our survival is to embrace Islam, embrace who we are.

    Recommend

  • Shahid Butt
    Sep 27, 2012 - 2:48AM

    @S:
    Please keep finance and religion separate.

    Recommend

  • Truth
    Sep 28, 2012 - 11:00AM

    White House always used taxpayers money to bribe corrupt regimes in the target countries. Now WH is trying to deceive those tax payers as if it were sincere in building a genuine relationship directly with the society, however, the money will again go to the deep pocketed elites as it always did.Recommend

  • Oct 2, 2012 - 8:54AM

    Rana: “The US has said it will offer loans ranging from $500,000 to $5 million to small and medium sized business in Pakistan, to help the latter expand and create jobs.”

    This makes no sense. VC and PE funds invest for equity rather than extend loans.

    http://www.riazhaq.com/2012/10/us-seeding-venture-capital-and-private.html

    Recommend

  • Oct 2, 2012 - 9:58AM

    Rana: “The US has said it will offer loans ranging from $500,000 to $5 million to small and medium sized business in Pakistan, to help the latter expand and create jobs.”

    It makes no sense. VC and PE funds invest for equity rather than extend loans. Recommend

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