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

But in reality………..

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