PUNJAB is working with a consortium of commercial banks to set up a joint venture- equity financing company- for undertaking mega infrastructure projects in urban centres under its public-private partnership initiative.
The provincial government is negotiating with the central bank and the commercial banks to evolve modalities for such a collaboration. The consortium of commercial banks will be the major partner in the proposed joint venture company, which is expected to be formed during the next few months.
Once this platform becomes available, the Punjab government intends to approach the Asian Development Bank (ADB) for a credit line or soft loan of $2 billion in the form of budgetary support to the province to be disbursed over a period of three years.
“The ADB has already opened its windows to us; once the proposed equity financing company is established, we’ll have a platform to approach the donor and obtain funds for mega infrastructure development projects,” officials say.
The equity fund will be used for the planned urban sector projects like Lahore Mass Transit Light Rail System, Lahore-Sialkot Motorway, etc.
The proposed company viewed by officials as a “big step forward towards the provincial government’s consistent efforts to create the necessary economic infrastructure in the province and to develop its urban centres into engines of growth, as well as to facilitate private sector by reducing infrastructure deficits in the province through the public private partnership development mode”.
Punjab has been employing at least two models – private sector led management and private sector led investment – of public-private partnership as an alternate mode for developing infrastructure in different parts, particularly in industrial clusters and large cities, as well as in the delivery of social services for the last three years.
Indeed, claim officials, the implementation of the public-private partnership mode has begun to produce the desired results, and spurred private investment in certain industrial and commercial activities.
Under the private sector led management model, the provincial government has set up companies like the Punjab Industrial Estates Development and Management Company and the Faisalabad Industrial Estates Development and Management Company.
Both the companies have been set up in the public sector under the Companies Ordinance 1984. However, their boards of directors/governors are primarily drawn from the private sector, with the government also having its representation on them.
The government is supporting these firms by providing access to land and interest-bearing loans for the acquisition of land. The government does not foot the cost of development for which funds are raised through pre-sale of plots. Both the companies have been given the task to develop new industrial estates and rehabilitate the old ones.
The PIEDMC is developing a new modern estate, Sundar Industrial Estate, near Lahore, which has drawn an overwhelming response from the private investors. Similarly, it is rehabilitating two major industrial estates in Lahore and Multan, replacing their existing and inefficient road, sewerage and other infrastructure.
Officials say the government has also a double exit strategy if and when it wants to withdraw itself from these companies.
“Both the companies have been given interest-bearing credit lines, and are required to return the loans to the government in a period of five years. That will be our first exit from these projects once they are completed. These companies, however, will continue to maintain all the industrial estates developed or rehabilitated, raising funds for this purpose by levying service charges on the industrial units,” elaborate officials.
If the government at any point in time wants to withdraw completely from these companies, it would privatize them on the same lines on which state units are disinvested. That will amount to the government’s second and final exit from them.
The other model – private sector led investment – involves government in the public-private partnership projects as equity partner with the private investors. Under this model, the provincial government uses state land or assets as its equity in a particular project, thus allowing the private investor(s) bring in capital and expertise.
“This enables the government access private capital and management capacity of the private sector without involving any cash outlay, as well as adds value to unproductive land and creates jobs – a major policy objective of launching such projects,” sources say.
The government has already signed joint venture agreements with some investors from the Gulf under this model. These include construction of a multi-million dollar shopping complex, a sports city, and a residential district for the rich in and around Lahore. A few projects are expected to be finalized in the coming few months.
The government also has an exit strategy for withdrawing from these projects by disinvesting its shares in the projects on their break-up value. “The JV partner in a particular project will have the first option to acquire the government’s share.
In case of refusal, the shares will be sold to other interested party or parties. However, the agreements provide that none of the two partners – the government and the investor – walks out of a project before seven years.”
Officials finalizing such agreements say that the government does determine the price of the land, which represents its equity participation in a particular project, according to the concept of residual value.
“Everything – right from the determination of land cost to structure cost to profitability of the project over the next 10 years, etc – is calculated before the agreement on a project of such a size is finalised and taken to the cabinet for approval.” The land, or the government’s equity in the project, usually amounts to 30 per cent of its total cost.
However, some people suspect that the agreements on the private investment led projects “exceedingly protect the interest of private investor”. Two factors have spawned these suspicions: Public knowledge about these agreements remains confined to the very basic information the government has deemed fit to reveal so far. Second, the manner in which details of the agreements are hidden from the public scrutiny goes against the principles of good governance.
Public fears about these agreements pertains to absence of a legislative framework despite the fact that a comprehensive law governing public-private partnership projects was drafted more than a year ago.
The proposed law’s enactment, officials admit, has been delayed because the Punjab government is awaiting the legislation of an umbrella law, as is the case in India, at the federal level on public-private partnership initiatives.
“Once the overarching federal law comes into place, we will also enact our provincial law,” the officials say.
In the absence of a law, insiders say they had to work hard to formulate an agreement protecting the interests of both the parties. “Once the law is put in place, it will become easier for us to say yes or no to a proposal,” they added.
While the official explanation on the delay in the enactment of a legislative framework covering the public private partnership initiatives may be “genuine”, one wonders what is stopping the government from baring details of the agreements already finalized for public scrutiny?
PUNJAB is working with a consortium of commercial banks to set up a joint venture- equity financing company- for undertaking mega infrastructure projects in urban centres under its public-private partnership initiative.
