public private partnerships in pakistan with a focus on sindh by mujtaba shahneel, cfa former...
TRANSCRIPT
Public Private Partnerships in Pakistan with a focus on Sindh
By Mujtaba Shahneel, CFAFormer Director General
PPP Unit, Finance DepartmentGovernment of Sindh
Pakistan
April 2015
Pakistan Snap-shot
Area 803,940 km2 GDP (US$ b) 200
Population 200 m GDP / capita (US $) 1386
Pop. Growth Rate 1.80% Ex. rate PKR/$ 101.8
Labour Force 151.4 m Inflation 8.6%
Literacy 60% Pop < 30 yrs age 130 m
GDP Growth 4.14%
Source: Pakistan Economic Survey 2013-14
China
India
Iran
Paki
stan
Key Statistics Strategic Location
Middle-East
GDP Break up GDP Growth
2010 2011 2012 2013 20140.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2.6%
3.6%3.8% 3.7%
4.1%
Agriculture21%
Services58%
Industrial21%
Central Asia
Untapped Potential
Source: Pakistan Economic Survey 2013-14
6th largest emerging
market
On current trajectory, Pakistan is likely to be the 4th largest country by population by 2050. One of only ten countries with population of +100m and GDP of +US$100b
Growing consumerism
Growing per capital income levels and urbanization with an exceptionally young demographic (100m < 30 yrs) is driving consumer lifestyles
Large natural resource base
Rich in natural resources including hydrocarbon reserves & minerals resources as well as a large stock of highly fertile agriculture land & hydel power potential
Natural Trade Corridor Access to regional markets including Central Asia, China, Afghanistan, GCC, India and Iran
Fragmented industries
Substantial scope to improve scale economies and reduce inefficiencies through consolidation as most businesses operating with sub-optimal capacities
Developed regulatory
environment
Well developed regulatory environment with strong execution. Runner-up reformer in the South Asian Region (after Maldives) according to the Report of the World Bank and IFC
Liberal investment
environment
All economic sectors open to foreign investors with up to 100% foreign equity allowed. Repatriation of capital, profits, royalty, technical & franchise fee allowed
Large labor pool Pakistan is a major exporter of semi-skilled and skilled labor
Infrastructure Bottle-necks
Source: Pakistan Economic Survey 2013-14 and Pakistan Energy Report
On average around 5000MW shortfall in the system Reduction in GDP growth by around 3% Some major cities facing 12hours of load-shedding Inefficient fuel mix leading to unsustainable subsidies 30-35% line losses
Per capita road km – 0.0014 Lowest in the region Logistics of agricultural and industrial produce are severely affected
Infrastructure Bottle-necks
Source: Pakistan Economic Survey 2013-14 and Pakistan Energy Report
Transport No railway based intra-city facility Karachi is the largest city(population 23.5 m) in the World with no proper mass transit system Education 60% literacy rate; which includes people who can hardly read and write Increasing pressure due to large youth pool Health Failure to eradicate polio leading to travel restrictions Highest infant mortality rate in the region
Why PPPs?
Source: Business Recorder and PPP Unit, Sindh
Bureaucratic system – Capacity constraintsSame system as was in place during the colonial timesTraining based on Administrative tasks lack of specializationArchaic system still based on paper files and registers lacking
detailed back ground analysis
Lack of resources – Cashflow constraintsWar on TerrorHigh public debt ( 60% of GDP) In case of short-falls the 1st cut is directed at the development
budget
PPP Map
Source: PPP Unit, Sindh
Federal GovernmentInfrastructure Project Development Facility established in 2006
Punjab ProvincePPP Cell established in 2008
PPP Act in 2011 amended in 2014Urban Unit also looks after PPP projects in
the major cities
Balochistan Province (No institutional set up exists)
Sindh Province PPP Unit established in 2008
PPP Act enacted in 2010
Khyber Pakhtoon Khaw Province(No institutional set up exists)
Sector Agencies or Nodes to lead the transaction
Envisaged Federal PPP Program
Source: PPP Unit, Sindh
Strengths:• Substantial ground work already done – can tit
the ground running• Framework & Guidelines Prepared• Draft Law prepared• Some capacity developed over time• Relatively more market recognition / Awareness• Better idea of project pipeline
Weakness:• Key Components of Framework never
operationalized• Law, VGF, PDF, RMF• Lack of understanding and acceptability of PPPs
in Public Sector• Credit Worthiness of Off Takers (local
governments, WAPDA etc.)• Difficulty in getting quality projects –Turf issues
Opportunities:• Opportunity to use PPPs to attract much needed
capital investment• Focus on common man issues – Provision of
services • Development of local financial markets• Development of local advisory and operational
expertise
Threats:• Lack of support from the highest levels and the
bureaucracy• Jurisdictional issues • Tradition of ad-hocism – no institutionalized
structured approach• Lack of cohesive approach at the Government
level
PPP Experience in SummaryFederal Sindh Punjab
Focal pointInfrastructure Project Development Facility
PPP Unit PPP Cell
Housed Finance Division Finance Dept P&D Dept
Framework IPDF Guide-linesSindh PPP Act 2010
Punjab PPP Act 2014
Procurement PEPRASPRRA 2010 Chapter IV
Chapter 14-20 of the PPP Act
Chairman Minister Finance Chief Minister Minister P&D
No. of projects signed
None Nine (9) None
Risk Management
NonePlanned to be through VGF Co.
Finance Dept
PPP at the Federal LevelP
PIB
/AE
DB
Nat
ion
al H
ighw
ay
Au
thor
ity
Min
istr
y of
Por
t &
Sh
ipp
ing
1994 Power Policy – HUBCo, KAPCo. 2002 Power Policy – Liberty Power, Atlas Power Renewable Energy Policy – Metro Power, FWE
Lakpas Tunnel Lahore-Faisalabad Road Revamp of M-9(Islamabad Lahore Motorway)
Port Qasim Pakistan International Container Terminal Fauji Akbar Portia Terminal
Sindh: History of PPPs
Source: PPP Unit, Sindh
Sindh PPP Act was passed in 2010 First PPP Act in Pakistan Provides legal cover to the Institutional Framework (PPP Policy Board, PPP Unit, PPP Projects and departmental PPP nodes) Regulates the contractual relationship between public and private sectors including force majeure scenarios1 Guide-lines & Rules PPP Rules to help manage day to day functions of the initiative PDF Guide-lines to govern Project Development Facility fund VGF Guide-lines to govern Viability Gap Fund Chapter IV of Sindh Public Procurement Rules dedicated to PPPs PPP Nodes & Unit Nodes or Pseudo-nodes have been formed in Energy, Works, Education, Health and Transport PPPU is a mixture of Public and Private sector employees with the tilt moving towards private sector personnel in the last three years
Sindh: Institutional Framework
Source: Sindh PPP Act 2010, Sindh PDF Guide-lines
13
App
rova
l of P
roje
cts,
Pol
icie
s &
Pro
cedu
res
PPP
Uni
t
Departmental PPP Nodes for initial project inception
and implementation
Transaction Advisors for
Technical, Financial, Economic, Legal &
Environmental Analysis
PPP Policy BoardChief Minister- Chairman
Minister Finance – Vice Chairman
Chief Secretary
Minister Law
Minister/Advisor P&D
Concerned Minister
ACS (Dev)
Finance Secretary – Sec. to Board
Concerned Secretary
Director General
Three private members
Two MPAs
Any other specialist nominated
Sindh: Projects Executed
Source: PPP Unit, Sindh
Project Sector Costs (US $ mn) Stage Year
Hyderabad Mirpurkhas Dual Carriageway
Highway 80 Operations 2009
Jhirk Mulla Katiar Bridge Project
Highway 50Constructio
n2012
NICH Security & Fire SafetyHealth & Security
1 Operations 2012
Sindh Nooriabad Power Energy 150Constructio
n2013
Education Management Organization
Education NA Operations 2014
Karachi Thatta Dual Carriageway
Highway 100Financial
Close2015
Inter City Buses & Terminals
Transport 20Financial
Close2015
BRTS Yellow Line Transport 200Financial
Close2015
Health Management Organization
Health NAHanding
Over2015
Sindh: Projects Pipe-Line
Source: PPP Unit, Sindh
Project Sector Expected Size (US $ mn) Stage
Hyderabad TMK Dual Carriageway
Highway 50Transaction Structuring
Link Road - Katoar Highway 40Transaction Structuring
Solar Farms Energy 200 Bidding
BRTS Blue Line Transport 700Unsolicited
proposal
Bus Ops & ITS for BRTS Green line
Transport 40Transaction Structuring
Modern Grain Silos Food 18 Bidding
Livestock Tagging Livestock NA Feasibility
Livestock Farms Livestock NA Feasibility
Run of the River power Energy 40 Feasibility
Dates Market, Khairpur Agriculture 50Transaction Structuring
Mango Processing Unit Agriculture 10 Feasibility
Case study: Hyderabad Mirpurkhas Dual Carriageway
Agency Works & Services Dept, Govt of Sindh
Sponsor Deokjae Construction Company, Korea
Sector Road Sector
Policy Sindh PPP Act 2010
ScopeConstruction of 60km dual carriageway from Hyderabad to Mirpurkhas
ModelMinimum Revenue Guarantee upto 10% Interest Swap over 10% interest rateSoft loan at blended interest rate of 5%
Return 17% Pak Rupee
Hedge None
CoverageForce Majeure (partial cover), Political Risks and Change in Law
Case study: Hub Power Company
Agency Govt of Pakistan through PPIB
Sponsor International Power(UK), Xenel
Sector Power Generation
Policy Power Policy 1994
Scope 1200 MW RFO based plant
ModelAnnuity payment structure= Debt payment + Operations & Maintenance + ROE
Return 15% US $ based return
Hedge US Inflation and currency depreciation
Coverage Force Majeure, Political Risks & Change in Law
PPP Issues Lack of PPP market and capacity
No standardized documents and history except for energy sector and to some extent road sector
Even consultants are not fully trained on the PPP models
Political risksGoP recalled several concessions under the 1994
power policy ; e.g Recalling HUBCo’s tariffPolitical instability & War on Terror
Legal risksSeveral corporate deals have been struck down by
the courts mainly on the procurement issue ; e.g . Steel Mills Privatization, JJVL et al
PPP Issues
Circular Debt issueGovt of Pakistan has delayed payments to the
Independent Power Producers which has led to liquidity crunch in the financial markets & erosion of confidence in Government’s ability to repay
Lack of Developed Financial MarketsPlain Vanilla Structures with no room for innovationVolatile interest rates with high interest rates
historicallyNo long term loans (maximum loan of 12 years)Lack of long term investment funds while pension
funds are largely barred from investing in equities/projects