AFRICA’S largest hydropower dam was recently completed in Ethiopia. The Renaissance Dam cost $5 billion, or seven per cent of Ethiopia’s GDP. It was funded by private donations and bonds aimed at locals, Ethiopian diaspora and international institutions. The Chinese financed the hydropower infrastructure. Despite domestic success in crowd funding, contribution of the Ethiopian diaspora was met with scepticism.
The proposed Diamer-Bhasha dam, if successfully built from donations, will be a case study in two respects. First, it will show how common citizens can rise to build social equity in economic development. Second, it will write a new chapter in public-sector finance.
The idea of private, voluntary donations to fund infrastructure is motivational. On balance, it is an immense social experiment. It calls the public to the fore in nation building, with hard cash, and lay a social claim to an economic infrastructure of existential importance. It can provide a source of pride and be a defining moment in Pakistan’s history of nationalism.
But large sums as those needed for building infrastructure is first a matter of finance, before a matter of history, sociology or nation building. It begins with a financial plan, identifying all sources of funding until project completion, and ends with a financial close of legally binding agreements with all financiers.
There is an alternative to donations.
In case of donations, all principles of prudent public-sector financial management still apply. Notwithstanding transparent collection, accounting and audit, if the amount is not raised from donations, such other sources as project financiers, multilateral agencies or government bond issues will be tapped. A private partner may also be considered under a public-private arrangement. Financial management prerequisites are thus even more critical. This must be well known to officials.
But there is an alternative to donations: inviting common citizens, as well as investors, to own the dam. With the right legal structure, the dam can be ringfenced into a legal entity. The special purpose vehicle could raise construction capital by issuing certificates of ownership of the asset (sukuk) in small denominations in local or foreign currency. Sukuk holders would essentially own the dam, with the caveat that no profits may be distributed until commercial viability owing to a long construction period.
Once the dam generates power and revenues, payouts to sukuk holders would materialise, although this would not be guaranteed. This is what makes the rights of sukuk holders different from bond holders, who are promised fixed returns or given financial guarantees in case of default.
Unfortunately, true-form sukuk structures are rare. Governments in distress looking to plug budgetary shortages use sukuk to raise urgent money by securitising existing assets such as utilities and real estate. True, national laws often prohibit sale of public lands and assets to locals, let alone foreign investors. But where governments are willing, they receive pushback from nationalists alleging privatisation of sensitive assets. So, ownership is never truly transferred to sukuk holders, and they receive fixed returns, like bond holders, albeit camouflaged in contract clauses. To be fair, investors have also not been interested in anything without bond-like features. They demand fixed returns and guaranteed repayments. Sukuk issuance thus becomes a way of selling the family silver and keeping it too.
But such over-expediency has harmed governments. They do themselves a disfavour by not viewing sukuk as an instrument of development, ie raising fresh money to build infrastructure where none existed. There is nothing religious, or otherwise, about the financial instrument. Investors are essentially joint owners of an asset (rather than owners of a company as are shareholders). They only get rewarded under a predetermined formula if the asset generates profit. If listed on an exchange, investors can even sell their sukuk at a market price.
Issuing sukuk for the dam meets many aims. First, Pakistan could show that a true model of development finance has arrived by structuring true-form sukuk, for exactly what they are most suitable for — construction of long-term infrastructure. Second, once sizable capital is raised, it could be relied on to tap other sources, as is common in international finance. Third, sukuk proceeds would remain off the government’s balance sheet and not increase its debt burden. Fourth, the model could be replicated to build urgently needed infrastructure in healthcare, education and municipal services.
Those donating billions would enjoy an added layer of national pride, by becoming collective owners of a national asset — its lifeline no less — knowing that they will not see financial returns for some time. But they would not be donating billions for a profit either.
The writer works at a multilateral development bank, advising on social and economic infrastructure.
Published in Dawn, September 27th, 2018