ISLAMABAD: The capital markets are a viable option for attracting private investments to bridge the infrastructure financing gap and ensuring the sustainable management of infrastructure, an official said.
Securities and Exchange Commission of Pakistan (SECP) Chairman Aamir Khan while delivering keynote address at a capacity building session for “Financing Infrastructure via Capital Markets”, said that in the developing world, one of the pivotal concerns remains the finite spending capability of governments to bridge the infrastructure financing gap.
Infrazamin Pakistan organised the session to enhance outreach and understanding among all stakeholders about the role and importance of the capital markets.
Khan 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, he added.
He said it has also brought financial inclusion to the under and un-served, and created employment opportunities for the female population, while all of this has been achieved by investing a very small percentage of GDP.
It should be a matter of concern that Pakistan’s infrastructure spending is one of the lowest in the region and below investment requirements of around 10 per cent of the GDP, when the past and future demands are considered.
This problem gets exacerbated every year, as the infrastructure projects are financed either directly by the government or by the commercial banks against government guarantees, the SECP chairman said.
He warned that given the limitation of financing from these sources, the investment gap will continue to grow, while urging all stakeholders to sit together and map the obstacles that the country faces in adopting financing alternatives through the capital markets.
Khan believed that Pakistan’s capital markets provide an untapped opportunity, and offer the most viable solution in bridging the gap in infrastructure financing needs.
It will also help address the very low savings rate in the country, a long-standing obstacle in the expansion of the economy, he said, adding that the Rs200 billion transaction of Pakistan Energy Sukuk in 2020, is a testament to the potential of capital markets.
He mentioned that the SECP has simplified the process for issuance of government debt securities and government guaranteed debt securities; the market making framework has been revamped to address liquidity, and as a result, 16 financial institutions are registered with the Pakistan Stock Exchange (PSX) as Market Makers.
Additionally, origination of secured and unsecured debt securities has been introduced, including GDS, through execution of issuance agreements and infrastructure fund, as a separate category of private fund, has been allowed to invest upto 70 per cent of its net assets into infrastructure sector, he added
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 the infrastructure mutual funds in open-end structure are now mandated to invest 70 per cent 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 are complementary to the 2016 SBP prudential regulations for infrastructure financing, that expanded the scope of infrastructure financing to include social, cultural and commercial infrastructure projects, he said
Khan noted that the government has also introduced various reforms to facilitate the involvement of the private sector in this domain.
The formation of a dedicated Public Private Partnership (PPP) Authority, and recent 2021 amendments in the Public Private Partnership Authority Act, have energised this space.
As a result, the regulatory process for developing and structuring infrastructure projects on a PPP basis has been streamlined, he said, adding that 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.
The recent amendments in the Companies (Asset Backed Securitisation) Rules 1999, have streamlined matters relating to management and transfer of property.
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, he said.
The government has initiated transformation of Pakistan Credit Guarantee Company, into an NBFC structure. The SECP has already granted permission for creation of the new entity, the National Credit Guarantee Company Limited (NCGC).
He informed that 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 will promote credit enhancement mechanisms in an efficient and timely manner, while at the same time support development of the local bond market.
The SECP chairman pointed out the areas where further actions are required, saying that it is imperative that infra-financing instruments are structured in a manner that appeals 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.
The improvements in risk management structure in project design phase is vital, he said, adding that 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.
He further said that amendments may be introduced in the PPP law, to further improve the governance and risk management framework, and operationalisation of a Viability Gap Fund is critical to attract and incentivise the private sector involvement in social infrastructure development.
Also, the importance of the agriculture sector in terms of generating employment, saving precious foreign exchange and ensuring food security must not be overlooked.
Pakistan is a country that is vulnerable to climate change, therefore, the country must be mindful of environmental sensitivities while attracting private capital, with an eye on sustainability, he said.
He stressed 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 government must consider using capital markets for all future government guaranteed infrastructure projects.
He suggested that necessary tax concessions must also be introduced to incentivise direct investments into infrastructure projects by retail and institutional investors.
