Infrastructure financing gap

On the 14th of March 2023, InfraZamin Pakistan hosted the country’s first-ever summit on infrastructure titled “Building for Impact” in Karachi, featuring international speakers and representatives from numerous public and private institutions.

A key area of focus of the conference was to explore the most viable avenues of financing that are required for infrastructure projects in Pakistan.

In a panel discussion on “Developing Private Sector Markets to Finance Long Term Projects”, I had outlined the evolution of the banking industry, citing the absence of public sector specialized institutions since the 90s; and that vacuum was later filled by International Financial Institutions/Banks who have had thriving project financing teams on the ground, and could also leverage their international connections to acquire the best examples to replicate from similar markets like Pakistan.

Following the departure of the International Financial Institutions/Banks, the burden of financing infrastructure projects fell on domestic commercial banks who lacked the expertise and balance sheet structure, as there is a serious problem as far as the asset-liability mismatch is concerned; as only 1.2% of the total deposits are beyond 5 years while the need for financing is at least 10/15 years.

If we forecast a 10-year GDP for Pakistan, the requirement for infrastructure financing is around PKR 5 trillion a year, which is obviously not possible through the current funding pot of term deposits and required substantial improvement in treasury management to be equal to this mammoth task of outstanding infrastructure financing.

I must admit that the banks have not done enough in the arena of infrastructure financing, and will not be able to do so going into the future either, unless there is a real shake-up in the framework, and a robust incentive structure is put in place.

Regarding the importance of building an entire ecosystem around financing infrastructure projects, there’s a need to get all stakeholders on board. The starting point for that is to get the asset class right, following which the liabilities will be stretched on a term basis, and we can attract that funding from pension funds, insurance companies, etc.

With respect to shifting the mindset of the banking industry towards supporting longer-term financing (15-20 years) projects, the oversized role of the dominant borrower is a big competition. The Investment to Deposit Ratio (IDR) of the banks is 65/70%, which leaves very limited room for private sector lending and that space is squeezing fast with the growing need of the government to borrow for its fiscal needs.

Therefore, until the infrastructure asset class is made more attractive than the government paper, the banks may never come through and aggressively fund the infrastructure projects. Further, the revisions to the tax framework, a more robust public-private partnership mechanism, a more aggressive insurance system, more active institutions like InfraZamin, and the availability of blended financing opportunities are incumbent on the government’s ability to enact these important policy measures.

The banks shall be open towards blended finance, as it will not only bring in inevitable expertise to the table but also bring in the much-needed inherent risk-sharing mechanism. The headwinds against the adoption of blended financing techniques are basically a lack of understanding regarding this product, and there is also a lack of motivation to go through an unconventional financing structure.

The environment of today is hardly conducive towards taking on any ‘incremental’ risk. Most commercial bankers, by virtue of their professional training, and DNA, are unable to see beyond 3-5 years, while infrastructure financing and project financing require longer-term funding, and that’s where specialized institutions come into play, the DFI’s (Development Financial Institutions), may even specialize further such as one DFI may focus on Climate Financing, which is a very specialized area, whilst the other on power infrastructure or maybe Communications as it’s done in international financial institutions.

To raise the receptivity of the banking sector towards blended finance, the government must make the effort to dispel the lack of awareness, and shake up the regulatory framework; therefore, a major shift is required in the groundwork, the policy, and the real actions on the ground to make it work in this domain.

Taking advantage of this discussion and the role of the public sector in this arena, I would like to dispel the impression that “all involvement” of the public sector is “bad in business”. This is entirely unfair to assume as there’re certain areas where the engagement of the public sector is very much an acceptable norm and a must need due to the nature of the business, albeit in a handoff-ish fashion, and perhaps in a well-proven private-public framework. Infrastructure financing globally is done via the private sector only with support from the governments.

The ideal example of that is the Private Infrastructure Development Group (PIDG), which is an innovative finance organization funded by the governments of the UK, the Netherlands, Switzerland, Australia, Sweden, Germany, and the IFC.

The function words here are: it’s all funded by the government/ public sector one way or the other. PIDG is the ultimate sponsor of InfraZamin Pakistan. Therefore, we in Pakistan shall not stay away from reaching out to the governments for collaboration to put a robust infrastructure financing framework.

Copyright Business Recorder, 2023