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ISLAMABAD: Minister for Aviation Ghulam Sarwar Khan has reportedly lodged a protest with Finance Minister Shaukat Tarin for not taking his Ministry on board on the proposal to pledge the country’s major airports whereas Communication Ministry has sought assets’ utilization fee, well informed sources told Business Recorder.

This situation was witnessed during a discussion during the Federal Cabinet meeting held on June 22, 2021 on a summary of Finance Ministry regarding issuance of domestic and international Ijara Sukuk against unencumbered assets of the government.

According to the Finance Ministry, in next year's domestic and external financing plan, the need for raising additional resources to the tune of Rs 1.2 trillion and US$ 3.5 billion had been proposed.

The sources said that Finance Division argued that it would prefer to undertake Sukuk transactions as much as possible, as this would help in obtaining better pricing compared to other avenues of raising domestic and external resources like T-bills, PIBs or conventional Eurobonds. Therefore, it was essential that all identified assets were readied for early launch of domestic and international Sukuk programmes next year.

The Finance Division briefed the Cabinet that to support the government's budgetary position and promote Islamic banking industry in the country, Finance Division intended to take forward its domestic and International Ijara Sukuk programmes. Sukuks are Shariah-compliant borrowing instruments structured to pay returns on investment as rent instead of interest by utilizing an underlying asset.

In case of Ijara Sukuk, tangible assets were utilized to structure the transactions. The Finance Division had undertaken 32 domestic and 4 international Ijara Sukuk transactions amounting to Rs 1.573 trillion and US$ 3.6 billion, respectively. Further, the Government issued two 'Energy Sukuk' of Rs 200 billion each in March 2019 and May 2020 respectively to settle power sector arrears. These Sukuk were issued against assets of selected government-owned power generation and distribution companies.

The following assets had been utilized for domestic Ijara Suxuk in the past: (i) M1 Motorway; (ii) M2 Motorway; (iii) M3 Motorway; and (iv) Jinnah International Airport, Karachi.

For international Ijara Sukuk, M2 Motorway was utilized in January 2005, and later on, it was divided into three sections, which were utilized from December 2014 onwards. The Islamabad-Chakwal section of M2 Motorway was unencumbered.

The M1 and M3 Motorways were already unencumbered, while Islamabad-Chakwal section of M2 Motorway was unencumbered.

It was further noted that after approval of the Federal Cabinet in its meeting on March 31, 2020, the government initiated a domestic Ijara Sukuk programme of Rs 756 billion by utilizing the unencumbered land of Jinnah International Airport (JIA), Karachi. The asset was almost fully utilized with: (i) issuance of domestic Ijara Sukuk worth Rs. 636 billion; and (ii) structuring of Islamic Naya Pakistan Certificates (INPCs) of around Rs. 59 billion.

As JIA, Karachi was set to be exhausted there was an urgent need to identify new unencumbered assets to ensure uninterrupted issuance of Ijara Sukuk in the domestic as well as international capital markets. The continuity in issuance of domestic Sukuk would also enable the government to meet its target of having 19 percent Shariah-compliant instruments, in domestic securities by the end of FY23 (Medium-Term Debt Management Strategy 2019/20-2022/23). At end-December 2020, this was at 3.8 percent.

The Federal Cabinet, in its meeting on January 26, 2021, directed the Finance Division to identify options of underlying assets for Sukuk issuances. Finance Division accordingly identified M-1 and M-3 Motorways, Islamabad Expressway, and Islamabad and Multan International Airports and requested the Ministry of Communications/NHA and the Aviation Division/Civil Aviation Authority (CAA) to grant necessary permissions to utilize these assets for Ijara Sukuk issuances.

According to sources, Aviation Division/CAA has not yet responded. The Ministry of Communications, while assuring its cooperation, had asked Finance Division to consider compensating NHA with appropriate 'asset utilization fee' for its assets, which was totally unprecedented.

In view of the urgent requirement to continue the Government's domestic and international Sukuk programmes and the issuance of Islamic NPCs, the Federal Cabinet was requested to permit Finance Division to utilize the following assets without any conditionality in terms of compensation or fee, and for the purpose, necessary NOCs would be sought from entities/provincial governments concerned. Valuation of the assets would be updated once these were made available to the Finance Division: (i) unencumbered portions of Allama Iqbal International Airport, Lahore, Islamabad International Airport and Multan International Airport; and (ii) unencumbered portions of major motorways and highways under ownership of NHA.

Approval of the Federal Cabinet was also solicited under Rule 16(1) (d) of the Rules of Business, 1973 for issuance of domestic and international ljara Sukuk, once unencumbered assets were made available to the Finance Division.

The Cabinet was also assured that all transactions would be undertaken after clearance of documents from the Ministry of Law & Justice and the Office of the Attorney General for Pakistan (in case of international Sukuk). The size, tenor and rental rate of each issuance would be determined based on the market response received at the time of issuance.

During a discussion, while endorsing the proposals, Minister for Aviation observed that with respect to airports, consultation with Aviation Division/CAA should have been done. Minister for Finance agreed and “regretted the oversight.”


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