Pakistan – Guidelines for Infrastructure Project Financing (IPF)
Infrastructure is the backbone for economic growth and development in a country. Availability of infrastructure improves investment climate leading to job creation, export competitiveness and uplifting of living standards.
Pakistan faces acute lack of infrastructure facilities; energy, communication networks, water & sanitation, educational institutions and recreational facilities are some major infrastructure areas requiring urgent attention. Government of Pakistan is making all out efforts to provide state of the art infrastructure facilities across the country.
Several renewable energy projects are being set up by the Federal as well as the Provincial Governments. Similarly, several highways and motorways are being built, which include both CPEC related and non-CPEC-related projects.
Financial resources in infrastructure projects constitute a major component of the whole resource envelope. This is true universally including developed as well as developing nations.
State Bank of Pakistan recognizing the importance of infrastructure financing in the country, issued Infrastructure Project Financing (IPF) Guidelines in 2005. These guidelines were then updated in 2010.
To promote infrastructure financing in Pakistan, the SBP is now issuing Prudential Regulations (PRs) for Infrastructure Project Financing. These regulations have been developed based on broad based internal as well as external stakeholders’ consultations.
These PRs for IPF draw strength from financial sector’s experiences and SBP’s forward looking approach in this area. These Prudential Regulations place emphasis on important features of infrastructure project finance which will facilitate the banks and DFIs to assess the cash flow generating capacity of the projects like the requirement of technical feasibility, comprehensive risk assessment, project insurance, technical monitoring of the project during loan tenure and requirement of supply and off-take agreements.
It is hoped that these features of the Regulations will help banks and DFIs to develop expertise for financing of infrastructure projects, essentially by evaluating the intrinsic cash flow generating ability of these projects. It is also pertinent to mention here that these Regulations do take in to account environmental impact of infrastructure projects.
The banks/DFIs are advised to consider environmental externalities in infrastructure projects along with other technical, legal and regulatory aspects.
Banks/DFIs are encouraged to prepare their own structured lending schemes for the development of IPF. For this purpose, banks/DFIs may commission their own studies to determine the potential in specific infrastructure projects.
Besides conventional infrastructure financing, banks/DFIs are also encouraged to adopt Islamic mode of banking to develop infrastructure products as it is very conducive to infrastructure financing. In developing Islamic financing products for infrastructure, the banks/DFIs should refer to relevant instructions issued by Islamic Banking Department of SBP.
Furthermore, Islamic Banking Institutions may convert conventional IPF terms in context of Islamic banking practices wherever deemed necessary. The IPF Prudential Regulations do not supersede other directives and instructions issued by SBP from time to time in respect of areas not covered here.
The IPF Prudential Regulations cover issues relating to risk management of infrastructure project financing only. However, the relevant sections covering categories viz. corporate governance (G), anti money laundering (M), and operations (O), as mentioned in Prudential Regulations for Corporate/Commercial Banking shall be applied, wherever applicable. Any deviation or non-compliance shall attract punitive action under the relevant provisions of the Banking Companies Ordinance, 1962.