Karachi Stock Exchange (KSE) Managing Director Nadeem Naqvi on Saturday said the government can generate nearly $4 billion from the sale of part of government stakes in Public Sector Enterprises, which can be used as seed capital for new infrastructure projects.
He was addressing the Corporate Pakistan Business Professionals Conference organised by Institute of Cost and Management Accountants of Pakistan. Nadeem said $2 billion can also be generated through raising equity for specific projects from the capital market. He said based on a 70:30 debt-equity ratio, $14 billion debt can be generated with potential available funding of $20 billion or (Rs 2.2 trillion).
This is substantial funding to kick-start core development projects in the medium-term (within 2-5 years). While the capital market can serve as funding source for large long-term projects noted above, it also has a role to play for private sector small and medium industries.
The stock exchanges and the SECP are finalising the regulatory framework for SME segment at the exchanges where companies with paid-up capital of Rs 25 million can be listed on the bourses, as against current minimum requirement of Rs 250 million. "To safeguard the interests of investors, initially only 'eligible investors' would be allowed to invest in the SME segment where, "eligible investors' will be defined as entities with a certain minimum liquid financial net worth," Naqvi said.
He said the GoP can generate funds through capital markets by offering 10 percent stakes to general public of Parco, Lahore Electric Supply Company, Government Holding Private Limited and State Life Insurance Co-operation. He said funds can also be generated through offering stakes of Joint Venture Investment Companies - Saudi Pak, Pak-Kuwait, Pak-Brunei, Pak-China, Pak-Oman, Pak-Libya and Pak-Iran.
While discussing the role of capital markets, the KSE MD said that despite limitations, Pakistan's capital market has played an important role in enabling the public and private sectors to access long-term funding. In last 10 years, Naqvi said the total amount of equity capital and debt raised has been over Rs 630 billion, of which over Rs 120 billion were raised by the government in privatisation through public offerings.
If the debt capital market is seriously developed there is no reason an enormous amount of savings (both domestic and international) can not be tapped for infrastructure and industrial development by the public and private sectors. Development of capital market has been found to be closely linked to the stage of economic development.
Naqvi said in an era gone by, long-term financing for the industry used to come from public sector Development Finance Institutions (DFIs) such as NDFC, PICIC, IDBP and Bankers Equity who received long-term funding from multilateral agencies and lent long-term to industry. He said poor governance and losses led to closure of these DFIs. Despite their operating weaknesses these DFIs did play an important role in the industrial development of Pakistan from 1960s to early 80s.
"It was hoped that a new set of DFIs could fill the void, so we had government-to-government joint venture investment companies such as Pak-Kuwait Investment Company, Saudi-Pak, Pak-Brunei, Pak-Iran, Pak-China and Pak-Oman. Unfortunately, with a few exceptions, the JV investment companies failed to fill the void of providing significant long-term project finance globally also, infrastructure and long-term finance has moved from national DFIs to capital markets in last two decades," Naqvi added.
He said in Pakistan, absence of a liquid private sector debt market has meant that there are limited resources available for both the public and private sectors to access long-term capital needed for sustainable economic growth. Talking about the sources of long-term debt, Naqvi said there are several tested long-term sources of debt, which includes infrastructure bonds with underlying assets as primary collateral, local currency global bonds with supranational (eg IFC) credit rating, diaspora bonds with special incentives for overseas Pakistanis, provincial, municipal revenue bonds with special tax exemptions and steady cash flow stream, global infrastructure securities had market capitalisation of $1.1 trillion at the end of 2012.
It is estimated that the demand for infrastructure funding in emerging markets will be $1.0 trillion annually until 2030. Naqvi said infrastructure bonds are of particular interest to suppliers of long-term capital (global pension funds, insurance companies) because such bonds provide creation of long-term underlying assets essential to support economic growth, infrastructure generally generates steady cash flows and above average yields adding that infrastructure projects have limited competition and usually high barriers to entry.
Naqvi said as financial professionals, we have a special responsibility of thinking out-of-the-box in structuring financial transactions beyond the conventional banking boundaries. "We can play a crucial role in guiding our clients - both borrowers as well as investors - in how to avail the opportunities in capital markets for achieving most efficient financing and investment strategies where risks are well understood and appropriately managed.
"If we discharge our fiduciary duty in a responsible manner, we can shorten the timeline of bringing the undocumented sector into the official economy and play our part in actualising the enormous economic potential of Pakistan," the KSE MD concluded. Lahore Stock Exchange Chairman Salman Shah and President of ICMA Pakistan, Ziaul Mustafa Awan also spoke on the occasion.