Infrastructure development is critical for sustainable growth and development and enhanced productivity and competitiveness.
Pakistan has made significant progress in structuring and implementing infrastructure projects, but there are still deficits due to long-standing obstacles such as inadequate policy, institutions, funding, and infrastructure investment to GDP ratio of 2-3%, which falls short of the 10-11% needed to cover the country’s $124 billion infrastructure financing requirement from 2016 to 2040.
Fiscal constraints impede public investment and prevent commercial bank funds. Private investment in infrastructure necessitates sustainable and innovative finance, policy support, credit enhancement, and stability to mitigate project, country, and FX risks.
Infrastructure finance providers require sector and thematic knowledge to invest in green, climate-resilient, and sustainable infrastructure. They can encourage the transition of energy and industry and shift value chains towards renewable energy to achieve net zero targets for the country and corporations.
Infrastructure finance providers should have a long-term perspective to assess project viability and design suitable financing tools despite short-term macroeconomic risks. Unlocking long-term financing necessitates bold steps by key stakeholders in the financial system, such as resolving constraints.
Firstly, redirecting bank assets from treasury bills to release funds for infrastructure. As banks’ asset base mainly comprises short to medium-term deposits, there is a risk of an asset-liability mismatch, hindering long-term infrastructure lending. Banks must improve their capacity to evaluate limited recourse financing for infrastructure projects that typically lack collateral security.
Secondly, promoting an infrastructure bank or a finance company to mobilize long-term funding for infrastructure. In India, agencies such as the India Infrastructure Finance Company Limited (IIFCL) catalyzed a 3-fold increase in private capital flow to infrastructure projects, doubling investment in infrastructure. Well-equipped DFIs can attract investments from multilateral organizations and raise long-term loans from institutional investors.
Thirdly, capital markets have the potential to provide equity and debt to finance infrastructure. An effective yield curve and fixed-rate long-term bonds will enhance liquidity and tradability in longer-tenure instruments while also providing a hedge against interest rate risk. There is a need to release long-term institutional liquidity pre-empted by fiscal demands. Total financing through debt capital markets is only PKR 424 billion; moreover, investments raised through TFCs and Sukuk are concentrated within the energy (46%) and banking sectors (42%).
Finally, there is an urgent need to develop innovative instruments that are lacking in Pakistan’s financial markets Asset Backed Securitization and Securitization of future flow of receivables instruments plays a significant role in helping financial institutions to recycle their balance sheets to finance long-term loans. Legal reforms are needed for improved transparency, risk-based pricing, and the deepening of the markets. Financial institutions must also invest in human capital to capitalize on this opportunity.
The global green investment market is estimated will touch USD 1 trillion. In Pakistan WAPDA secured an inaugural green Eurobond raising USD500 million to finance green projects. Against this backdrop, it would be promising for investment banks to float green bonds and attract financing from dedicated green global funds such as GCF.
Karandaaz is playing a crucial role in developing Pakistan’s financial infrastructure by incubating innovative institutions like InfraZamin. It offers long-term guarantees to de-risk infrastructure projects, enabling financial institutions to provide long-term local currency financing and mitigate asset-liability mismatch and interest rate risk.
Public Private Partnerships (PPP) has the potential to leverage infrastructure finance in Pakistan, where federal and provincial PPP agencies have already been established. The share of PPPs in infrastructure development needs to increase to 20-30% with the help of MDBs.
So, to synthesize, Pakistan requires over USD 120 billion by 2040 to meet its infrastructure financing needs. Financial institutions and regulators must collaborate to build risk assessment capacity, develop capital markets, introduce innovative instruments, and establish dedicated financial institutions.
The development of infrastructure banks, public-private partnerships and blended finance vehicles like Karandaaz are recommended. PSX should continue to broaden and deepen capital markets.
Copyright Business Recorder, 2023