By the end of this year, USAID and private companies Abraaj Group, JS Bank, and Indus Basin Holdings will launch three funds worth nearly $150 million in total to kickstart private investment in Pakistan.

The funds stem from a lesser-known “Kerry-Lugar” bill. The bill was also sponsored by then-Senators John Kerry and Richard Lugar, but it never passed Congress.

Senator Lugar initiated the bill in 2010, months after the $1.5 billion aid package famously known as KLB became law. Under this bill, part of the KLB funds would be used to create an ‘Enterprise Fund’ for investment in Pakistani businesses. The purpose was to grow those businesses and create jobs.

Five years later, KLB has expired but the second idea is about to become a reality.

When the bill did not pass, USAID adopted the idea as a programme called the Pakistan Private Investment Initiative (PPII). It took them two years to adapt the idea behind the legislation into an investment fund for Pakistan. The two years were spent waiving U.S. regulations that prohibit aid money from being used to generate business profits, and set up other aspects.

It has taken another two years for Abraaj, JS Bank, and Indus Basin to raise $24 million each to match the $24 million put in by USAID.

The result of PPII is three funds, worth nearly $50 million each. These funds will invest in small and medium-sized enterprises (SMEs) with revenues between $500,000 and $30 million and a high growth potential.

In return these funds will acquire shares in the business that will later be sold at a profit.

But in Pakistan, banks consider SMEs a risky proposition.

As a result, small businesses tend to stay small, while large companies keep growing because they can get loans.

The benefit of PPII is not just dollars. It has also pushed USAID’s partner banks to work with the State Bank and SECPto modify regulations and make Pakistan more friendly for international investment.

“The funds haven’t even started but already local regulations are changing and private equity is emerging as an industry,” says Saigol.

For example, it’s easy for investors to bring large investments into the country. But when investments are ready to be sold, the State Bank can put up hurdles.

“The oil, gas, and textiles sectors have worked these issues out. The financial companies need a similar push,” says Raza.

Improved corporate governance is another byproduct to be hoped for. The funds will only invest in companies that are audited, have one set of books, and pay taxes.

PPII is not just US government money but an equal financial partnership between USAID and Pakistani-led investment firms. And the latter will lead in determining investment strategy and decisions.

Published in Dawn, July 6th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play