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Infrastructure projects under PPP mode

January 13, 2013

Realising the benefits of public-private partnership mode for developing infrastructure, Pakistan, in early 1990s, formulated a policy and regulatory framework in the telecom and power sectors.

Unregulated sectors like transport and logistics, water supply, sanitation, solid waste management, real estate and social sectors including education, healthcare and housing have yet to benefit from such a framework. For this purpose, the government has since been working on developing /implementing a combination of policy reforms, institutional support, incentives and financing modalities.

The PPP modality involves the financing, development, operation and maintenance of infrastructure by the private sector. Instead of the public sector procuring a capital asset and providing a public service, the private sector creates the asset through a dedicated stand alone business (usually designed, financed, built, maintained and operated by the private sector) and then delivers a service to the public sector entity /consumer in return for payment that is linked to performance. A PPP project may include an equity joint venture between the government and the private sector.

In order to attract private investment in infrastructure, the federal government is in process of introducing a conducive and robust legal framework by enacting a comprehensive set of laws regulating the private sector's involvement in financing and operating infrastructure facilities.

This legal framework will be covered in the PPP bill which will address key legal provisions and offer legal protection to all stakeholders in PPP contracts. Due to the changes in PPP Policy 2010, ministry of finance directed Infrastructure Project Development Facility (IPDF) to accordingly amend and modify the draft law and in consonance with best international practices. IPDF has substantially completed the amendment and modification of the draft law.

IPDF is facilitating pilot PPP projects in priority sectors, notably municipal services, transport and logistics, mass urban public transportation and small scale energy projects (below 50 MW). It is also is developing a methodology for facilitating the financing of projects that are economically and socially justified but fall short of financial viability.

Such projects are to receive support from the Viability Gap Fund (VGF) in the form of outright subsidies and/or government guarantees. A VGF Company is envisaged to be constituted under the ministry of finance.

For capacity building, IPDF has been conducting workshops for the municipalities regarding PPP projects in various sectors, contracts there under, etc. The provincial governments of Sindh and Punjab have enacted laws for PPP infrastructure projects.

Currently, the following IPDF projects are at different stages of finalisation: Faisalabad Solid Waste Management Project; Lahore Southern Bypass from Motorway to Ferozepur Road of LDA; PIMS projects: Institute of Dentistry and Centre for Liver Diseases; Flyover/Railway Overhead Bridge at Habibabad of the National Highway (N-5); hostel facility at COMSATS, Islamabad; operating cargo and oil trains on Pakistan Railways track; CAA projects: Commercial Hub and Fuel Farm / Fuel Hydrant System; Faisalabad Slaughter House Project of CDGF; Islamabad Solid Waste Management Project ; IT Park Project of National University of Science and Technology; and Light Commercial Vehicles Project of Sindh Engineering.

Pakistan Railway has introduced Business Express under PPP arrangement. National Highway Authority has a few projects operating under the PPP modality while a few other projects are under process. Lahore-Islamabad Motorway was probably the first such project implemented long ago under somewhat similar arrangements.

The governments of Punjab and Sindh have also in hand some of the projects to be financed and implemented under PPP mode. However, there is no widespread initiation of infrastructure projects in various sectors under PPP mode due to a number of misgivings, constraints and shortcomings in the legal, policy or institutional framework.

The international financing institutions have helped in development of institutional/legal/policy framework but it is not clear why there is no funding to operationalise the Project Development Fund and the Viability Gap Fund. Perhaps, there is not enough of progress in the framework for risk allocation and allied matters. Also, there has been no line-up of foreign credit lines for financing the PPP-based infrastructure projects. Moreover, the PPP Bill is waiting to be enacted into a law. In view of the general elections a few months away, it is unlikely that such a bill will be processed and enacted by the Parliament before elections.

Other constraints for financing and implementation of PPP projects include: adverse risk perception of foreign investors; impression that the government work on ad hoc basis with few long-term economic policies; insufficient depth of capital market (existing longest debt maturities are 10-12 years while PPP projects have 15-25 years amortisation periods); and limited access to the private sector from local financial institutions.

Proper use has not been made of the existing expertise available especially due to development and financing of power generation projects in the private sector. For example, cooperation in this endeavour with the government’s Long Term Credit Fund being administered by the National Bank of Pakistan would have been particularly useful.