ISLAMABAD: Capital markets are a viable option to attract private investment to bridge the infrastructure financing gap and ensure sustainable infrastructure management, an official said.

Chairman of the Securities and Exchange Commission of Pakistan (SECP), Aamir Khan, during his keynote speech at a capacity building session on “Infrastructure Financing through Capital Markets”, said that in the world In development, one of the main concerns remains the limited spending capacity of governments to close the infrastructure financing gap.

Infrazamin Pakistan organized the session to enhance awareness and understanding among all stakeholders on the role and importance of capital markets.

Khan gave examples where sovereign and non-sovereign bonds have been issued to fund infrastructure projects, such as the Manila Metro Flood Management Project in the Philippines, the Mumbai Urban Transport Project in India or the expansion of the Izmir metro in Turkey.

All these projects have directly impacted and improved the lives of the masses, and also contributed to the development of their respective bond markets, he added.

In Pakistan, public and private infrastructure development has made some progress over the past decade. Consequently, significant investments have taken place in the road networks, urban transport and telecommunications sectors.

These advances have not only improved mobility and connectivity for the general public, but have also helped those at the bottom of the pyramid improve their livelihoods, he added.

He said it has also brought financial inclusion to the underserved and unserved, and created employment opportunities for the female population, while all of this has been achieved by investing a very small percentage of GDP.

It should be concerning that Pakistan’s infrastructure spending is among the lowest in the region and below investment needs by around 10% of GDP, considering past and future demands.

This problem is getting worse every year as infrastructure projects are financed either directly by the government or by commercial banks against government guarantees, the SECP chairman said.

He warned that given the limitation of funding from these sources, the investment gap will continue to grow, while urging all stakeholders to sit down together and map the obstacles the country faces in adopting financing alternatives through capital markets.

Khan believed that Pakistan’s capital markets offered an untapped opportunity and offered the most viable solution to bridge the gap in infrastructure financing needs.

It will also help address the country’s very low savings rate, a long-standing obstacle to the expansion of the economy, he said, adding that Pakistan Energy Sukuk’s Rs 200 billion transaction in 2020 testifies to the potential of capital. markets.

He mentioned that the SECP has simplified the process of issuing government debt securities and government-guaranteed debt securities; the market making framework has been revamped to manage liquidity and as a result 16 financial institutions are registered with the Pakistan Stock Exchange (PSX) as market makers.

In addition, the issuance of secured and unsecured debt securities was introduced, including GDS, through the execution of issuance agreements and the infrastructure fund, as a separate category of private funds, was authorized to invest up to 70% of its net assets in the infrastructure sector, it added

The SECP has published guidelines on green bonds, in order to enable the raising of funds to finance infrastructure projects that contribute positively to the environment.

He further explained that infrastructure mutual funds in an open-ended structure are now mandated to invest 70% of their net assets in the infrastructure space and that PPP-REIT schemes under the revamped REIT regulations, can now undertake the development, upgrading and maintenance of infrastructure. projects.

These measures are complementary to the 2016 SBP prudential regulations for infrastructure financing, which broadened the scope of infrastructure financing to include social, cultural and commercial infrastructure projects, he said.

Khan noted that the government has also introduced various reforms to facilitate private sector involvement in this area.

The formation of a dedicated public-private partnership (PPP) authority and the recent 2021 amendments to the Public-Private Partnership Authority Act have energized this space.

As a result, the regulatory process for developing and structuring infrastructure projects on a PPP basis has been streamlined, he said, adding that a number of megaprojects have been approved by the Public Partnership Authority- private, such as the Karachi, Sukkur-Hyderabad Circular Railway. Highway and Kharian-Rawalpindi highway.

Recent amendments to the Companies (Asset Backed Securitization) Rules 1999 have streamlined management and transfer of ownership issues.

This was the main obstacle to the use of SPVs for infrastructure financing. In addition, the adoption of ABS rules has been authorized for federal and provincial governments, to facilitate the issuance of structured debt securities and to raise funds in the capital market, he said.

The government has initiated the transformation of Pakistan Credit Guarantee Company into an NBFC structure. The SECP has already authorized the creation of the new entity, the National Credit Guarantee Company Limited (NCGC).

He informed that necessary changes have also been incorporated into NBFC regulations, allowing credit guarantee companies to take increased exposure to contingent liabilities up to 10 times their equity.

The NCGC will promote credit enhancement mechanisms in an efficient and timely manner, while supporting the development of the local bond market.

The SECP President highlighted areas where further action is needed, saying it is imperative that infra-financing instruments are structured in a way to attract investors. One such attraction is the provision of credit guarantees, in line with global debt issuances, while meeting the needs and preferences of local investors.

Improving the risk management structure in the design phase of the project is essential, he said, adding that given the long-term duration and complexities involved, particularly in the case of a PPP structure, a forward-looking approach should be implemented that clearly takes into account life-cycle oriented risk assessment.

He further stated that amendments could be introduced in the PPP law, to further improve the governance and risk management framework, and that the operationalization of a sustainability fund is essential to attract and incentivize the private sector to get involved in the development of social infrastructure.

Furthermore, the importance of the agricultural sector in terms of job creation, saving valuable foreign exchange and ensuring food security should not be overlooked.

Pakistan is a country vulnerable to climate change, therefore, the country must be aware of environmental sensitivities while attracting private capital, with an eye on sustainability, he said.

He highlighted an effort to work on the technical list of private infrastructure investment pools such as the Neelam Jhelum and Dassu hydropower projects.

Similarly, the government should consider using capital markets for all future government-guaranteed infrastructure projects.

He suggested that necessary tax concessions should also be introduced to encourage direct investment in infrastructure projects by retail and institutional investors.