RECENTLY, the Planning Commission (PC) was handed a paltry Rs280bn for the annual development plan 2011-12. With fiscal space closing in year after year, the federal government’s allocated spending on infrastructure and social services is now down to Rs1,500 per Pakistani.

With the list of development projects earlier sent by the ministries in hand, and less than a fortnight to go before the budget announcement, the PC got to work with a simple formula: 171 projects on which less than 30 per cent of the work had been completed were to be abandoned. However, projects nearing completion were to receive funding. Most of these development projects are for water storage and irrigation, hydropower and grid improvement. Of course, little in the way of new projects could be accommodated.

I haven’t seen the list of the 171 projects to be abandoned or the list of those to receive funding. But I know that with a bit of imagination and commercial savvy, a good number of projects in both lists can be structured for private investment, in modes such as BOT (Build-Operate-Transfer) or one of its many variants. That would greatly reduce the public-funding component of each project. What it would take is the detailed design and PC1 for a project — like a toll road — being converted to an investor-grade feasibility study and for a bankable concession agreement prepared by experienced legal experts.

Such a finished product can then be pitched to investors through what investment bankers refer to as ‘transaction advisory’.

This involves investor road shows in financial capitals to generate investor interest, followed by procuring a winning bidder through a transparent international tendering process. Consulting, legal and transaction advisory services can be purchased for a fee typically amounting to two and a half per cent of the project cost plus a small retainer.

The head of an international development agency recently asked my view for the best way in which Pakistan could be assisted. “Just finance the retainer and success fee,” was my response. “This way, your couple of million dollars would help us raise $100m in project funding from private sponsors, capital markets as well as from hedge funds, eximbanks and sovereign wealth funds.” However, it’s no good making an approach to these institutions without proper homework and unless project documentation of a very high standard has been prepared.

All this would mean a lot of work by the originating line ministries. At this time each year, clerks in these ministries populate a pro forma with topline project information updating last year’s figures and making any required clerical adjustments in the form of adding and deleting from the list of projects. Instead of simply signing the dotted line at the bottom of this spreadsheet, senior bureaucrats would now have to spend time and intellectual effort to understand the projects in depth and then classify these into three groups: those that are commercially feasible in private mode, those that are marginally feasible and the remaining i.e. that are unfeasible in commercial mode.

Next, they would have to take the ones in the first category, then perhaps unbundle monolithic service models, identify where the revenue streams can be created and guide them through the above investor-feasibility process. The second category would be more difficult and require the ministries to calculate the viability gap which refers to the amount of subsidy the government will plug into the project’s revenue stream each year until it is financially viable for the investor. In fact, multilateral lenders could be more responsive if approached to finance the viability gap, as opposed to funding an entire project. Once they are given bankable project documents and en-cashable government guarantees, private sponsors can easily mobilise financial commitments and bring the project to the next stage referred to as ‘financial close’.

It is time to think outside the box. Instead, the ministries appear to have chosen the easy path of least resistance and parked all projects at the door of the PC requesting public funding, of which there is very little. So little in fact that at the present rate of accumulated ‘throw forward’, which refers to the nearly $150bn infrastructure projects awaiting funding, we have muddled into a 27-year-long tunnel just to clear the present backlog and during this time no additional project can be initiated.

Conversely, Rs280bn, together with savvy financial structuring and matched with private money, can arguably be leveraged into Rs1tr. This can begin wiping out the ‘throw forward’. Repeated year after year, the timeline to clear the backlog of current projects can be reduced from 27 years to perhaps 12 which lands us in 2023, in an alternate future — a country with world-class transportation and civic infrastructure, cheaper energy from indigenous sources, a completed Diamer-Bhasha and all its children in school.

As a first step, instead of putting up the list to the PM, it may be best if the PC were to refer it back to the line ministries asking that from this year and every year following as many projects be identified, then structured for private investment and only then submitted to the PC for minimal public component. If they look around, one of the world’s best legislative and institutional framework for public private partnership has been given to them already. The provinces with their Rs433bn should follow suit.

Copyright © 2011 – Dawn Media Group

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