By: Shahid Ahmed Khan, Managing Partner Anjum Asim Shahid Rahman

1. Supporting Development Public Private Partnership Institute of Chartered Accountants of Pakistan ICAP Building Islamabad • By: • Shahid Ahmed Khan, • Managing Partner • Anjum Asim Shahid Rahman 17 May 2010 Islamabad, Pakistan Anjum Asim Shahid Rahman

2. PRESENTATION ROADMAP • Presentation Objective • What is Public Private Partnership • Financing in PPP Transactions • Policy and regulation for PPP’s in Pakistan • Supporting Pakistanis development through Public Private Partnership • Q&A Anjum Asim Shahid Rahman

3. PRESENTATION OBJECTIVE “TO DEFINE THE CONCEPT OF PUBLIC PRIVATE PARTNERSHIP AND THE WAYS BY WHICH CAN CREATE A MEANINGFUL IMPACT ON DEVELOPMENT IN PAKISTAN” Anjum Asim Shahid Rahman

4. WHAT IS PUBLIC PRIVATE PARTNERSHIP? Anjum Asim Shahid Rahman

5. DEFINITION OF PPP THE ARRANGEMENT IN WHICH PRIVATE SECTOR SUPPLIES “INFRASTRUCTURE ASSETS AND SERVICES” TRADITIONALLY PROVIDED BY THE GOVERNMENT (THROUGH USING EXTERNAL FINANCING ARRANGED BY THE PRIVATE SECTOR) Anjum Asim Shahid Rahman

6. HISTORIC PROSPECTIVE • Nationalization leading to concentration of business in the hands of the government • Privatization and divestiture launched due to the weakening of the public sector ability to conduct business- this was the first step in the PPP arrangement. • The realization that public sector is still involved in provision of service especially utilities and regulated sectors led to the introduction of the “ Build & Own” based regime- the second tier in development of the PPP framework. This further led to the regulatory bodies, concession based arrangements and limited recourse financing. • Subsequent realization that many of the sectors such as social sectors and those which were not regulated continued to remain outside the scope of development through the prevailing regime of private participation – Therefore scope of Public Private Participation extended to cover lesser unregulated sectors such as health , education, water, sewage, solid waste management , urban transport, and roads through and all embracing concept of Public Private Partnership Anjum Asim Shahid Rahman

7. DEFINING PPP • There are two parties- Public & Private and in this the public sector includes public sector of other countries as well multi laterals and bi laterals • Typical commitment of each are as follows: • Public Sector provides • Enabling framework and • Commitment to purchase output • Private Sector provides • Financing • Performance • Method of service delivery that involves the private sector in the provision of traditionally “public” services • Emphasize service or capability that public sector requires instead of assets used to provide them • Performance-based contracting in which the private sector accepts a level of performance risk • PPP arrangements are typically long-term in nature Anjum Asim Shahid Rahman

8. KEY ADVANTAGES OF PPP • Deliver value to the public through: • Lower Cost • Higher levels of service • Reduced Risk • Deliver value for money through synergies from combining private sector skills • Creates long-term approach to provision of public services • Quality of service maintained over life of project • Flexibility of approach to allow consideration for all types of infrastructure and services • Pricing and timing certainty - international benchmarks on average state • Only 24% of PPPs late vs. 73% for Public projects • Only 22% of PPPs over budget vs. 73% of public projects • These risks borne largely by private sector Anjum Asim Shahid Rahman

9. WHEN ARE PPPs EFFECTIVE? Larger Projects Scope for innovation Service rather than just assets Clear boundaries Private sector expertise When? Suitable Risk allocation Public sector procurement skills New scheme or significant upgrade Low technology risk Performance can be measured Anjum Asim Shahid Rahman

10. MAJOR TYPES OF PPP • Privatization / Divestiture of public sector assets: Partial or complete sale of Government ownership to private sector • Concession based regimes: ( right to us government assets is contracted to private sector under a concession – based contractual arrangement defining sharing of risks and rewards • Operation and Maintenance Contract (O & M) - Contract O&M of business on a fee basis • Lease- Develop- Operate (LDO) – Long lease of asset in which development and operation by private sector • Licensing Arrangement – Such as telecom, radio, TV • Build- Own- Operate- Transfer (BOOT) – Examples are IPP’s Roads • Build- Own- Operate (BOO) • Design - Build – Finance - Own – Operate (DBFOO) • Public – Private Partnership • Social Private Partnership • Public Private Product Development Partnership • Public Public Partnership • Promoting private participation Anjum Asim Shahid Rahman

11. FINANCING IN PPP TRANSACTIONS Anjum Asim Shahid Rahman

12. PRINCIPALS OF FINANCING PPP TRANSACTION Concession Based PPP: • Senior Debt arranged by commercial banks • Equity injected by private sector over construction period • Greenfield project usually cover single asset • Long term concession agreement is made with host government • Regular payments from user agency against supply of service on availability basis Anjum Asim Shahid Rahman

13. TYPICAL PPP FINANCING TRANSACTION STRUCTURE Grantor Grantor Agreement PPP (BOT) Contract Sponsors Equity Commercial Bank Lenders Concessionaire SPV Loan Agreement Turnkey Construction Contract Operating Contracts Construction Contractor Operator Operator Agreement Contractor Agreement

14. SO WHAT ARE FINANCING AGENCIES LOOKING FOR • Acceptable gearing levels (dependent on risk) • Adequate cover ratios • ADSCR: Annual Debt Service Cover Ratio: = Net cash flow available for debt service (i.e. revenues – O&M costs and taxes) in the next year / debt service falling due within next year • LLCR: Loan Life Cover Ratio: = NPV of net cash flow available for debt service during the loan period / amount of loan • PLCR: Project Life Cover Ratio: = NPV of net cash flow available for debt service during the PPP Contract period / amount of loan • Secure repayment stream • Hedging for any open exchange or interest rate risk • Security package that is enforceable • Sponsors with expertise and financial strength • Experienced and capable contractor(s) • Experienced and capable operator(s) • Strong support from Government • Mitigation of key risks (e.g. technological, environmental) Anjum Asim Shahid Rahman

15. POLICY & REGULATION FOR PPP IN PAKISTAN Anjum Asim Shahid Rahman

16. Pakistan’s Experience with PPP Policy • In the 1990s, Pakistan put in place PPP policies pertaining to the Telecom and Energy sectors • Subsequently sector specific PPP policy has been developed for: Railways, Power and Highways • These sectors have benefited greatly from the policy and regulatory frameworks, with private national and international investment burgeoning in these sectors • Power policy provided confidence to the investors • PPP Policy provides regulatory and operational framework for other (un-regulated) sectors such as transport, water supply, sanitation, healthcare, education Anjum Asim Shahid Rahman

17. PPP Policy 2007 • Approved in Nov 2007 by ECC of the Cabinet • Policy in line with deregulation & liberalization reforms of Government • Sectors covered under PPP 2007 policy: Transport & Logistics, Mass Urban Transport, Municipal Services, Small Scale Energy Projects • Institutional structure comprising the Task Force, IPDF, Viability Gap Fund (VGF) • Infrastructure development described through a structured PPP Project life cycle • Policy does not infringe on Provincial & Local Govt. autonomy: Provinces may develop their own legislation laying out their arrangements for procuring PPP projects- Sindh & Punjab now have their own PPP acts. • Establishment of a facilitation unit at the Federal level: IPDF to act as market maker and facilitation unit for PPP projects • Provides eligibility criteria for federal assistance through VGF • Defines procedure for submission and evaluation of unsolicited proposals to promote innovation while maintaining competitive bidding and selection • Provision of monitoring and evaluation mechanism for government to provide requisite administrative, institutional support to PPP projects Anjum Asim Shahid Rahman

18. Issues Amended in 2009 Policy • Roles of the public and private sectors clearly defined in a PPP arrangement • Role of public institutions explicitly given • Comprehensive Financial Framework: in addition to VGF, Project Development Fund (PDF), Infrastructure Development and Financial Institution (IDFI) and Risk Management Framework introduced • Comprehensive Legal Framework introduced into the policy • Risk framework; comprising the identification, allocation and mitigation of project risk is likewise added Anjum Asim Shahid Rahman

19. OBJECTIVE OF THE PRESENT POLICY • Protect the interests of all stakeholders (users, private party, Government) • Provide a comprehensive guideline to develop and implement infrastructure projects transparently under PPP modality • Create an enabling economic environment to encourage private investment • Sets up efficient and transparent institutional arrangements for identification and development of projects • Provide risk management framework • Provides mechanisms for various funding options available to pertinent infrastructure projects Anjum Asim Shahid Rahman

20. PREVAILING PPP FRAMEWORK OF PAKISTAN • Presently lead managed by Ministry of Finance (MoF) . Implementation of Federal level without infringing on Provincial and Local Governments • Policy & regulation being finalized, based on international best practices with enactment of PPP law in process expected to be completed by end of 2010. Present Policy covers Transport, Municipal Service and Small Scale Energy Projects. • Comprehensive Financial , Legal and Risk Framework defined • Framework implementation through various institutions under the MoF: • Infrastructure Project Development Facility (IPDF): generate, support and facilitate PPP projects including transaction structuring, feasibilities, implementation etc. • Infrastructure Project Development Facility (IPDF): provides long term, rupee based financing facility for the higher risk PPP Projects. • Guarantee Funds (GF): systematic mechanism for providing guarantees to infrastructure PPP projects and enabling the GOP to effectively manage fiscal risk (under implementation ) • Viability Gap Funding (“VGF”): funded through government and donor funding to provide support funding for PPP projects that pass the test of economic viability but fail the financial feasibility test. Funding will be capital or revenue contributions to make the project output affordable for the institutions or the end users – this is under implementation Anjum Asim Shahid Rahman

21. Risk Management Unit Comm. Banks IDFI Financially Feasible Project Project Financing PSDP Financially Non- Feasible Project Flow Funds Flow Project Finalized Financial & Institutional Framework Monitor Contingent Liabilities Credit Enhancement IPDF IPDF LM’s IPDF PC PPP Stage I: Project Inception PDF LM Stage IV: Financial Close Stage II: Project Feasibility Assessment SOE’ Stage III : Project Structuring VGF Anjum Asim Shahid Rahman

22. Legal and Regulatory Framework • The GoP is in process of introducing a robust legal framework; the ‘PPP Law which will: • Establish the function of the Federal Government and responsibilities of the implementing agencies • Provide legal protection to all stakeholders • Develop clear legal framework for PPP investment consistent with existing national and international regulatory practices • Until the passage of the PPP Law, all PPP projects will be governed by contract law (concession agreements and other related agreements), utilizing IPDF’s Standardized Provisions • Also PPP law being revised so as to structure it as a over arching facility also connecting with provincial regulations on the same subject • Guidelines available as standardized documents include (a) Project Inception Guidelines, (b) Project Feasibility and Preparation Guidelines, ( c) Procurement Guidelines for PPP Projects, (d) Viability Gap Fund Guidelines (e) Risk Management Framework (f) Standardized Contracts (user-based and annuity based) Anjum Asim Shahid Rahman

23. EXAMPLES OF SUCESSFUL PPP’S

24. EXAMPLES OF FAILED PPP’S • Some lessons learnt :– • Lack of clear framework • Lack of regulatory framework • Lack of commitment at the top • Lack of clear direction on implementation • Lack of financing and adequate risk coverage facility

25. SUPPORTING PAKISTANS DEVELOPMENT THROUGH PUBLIC PRIVATE PARTNERSHIP Anjum Asim Shahid Rahman

26. AREA’S OF DEVELOPMENT IMPACTED BY PPP There are various impediments in the process of development faced by Pakistan today. However most of it has to do with lack of • resources including our ability to generate resources, • our ability to use resources efficiently and with transparency and • a system which can best ensure the timely receipt of donor funding With the above in mind our two greatest challenges which can be overcome by the induction of PPP as a means of affective participation are • The lack of an acceptable framework which can encourage donors to provide committed funding which presently is the main source of funding for Pakistan- donors collectively highlighted that using PPP would possible enable them to make the funding more effectively and timely as it covered many of the gaps in the present system. • The lack of funding for infrastructure development which over the next 5 years is estimated at around USD 110 billion- this could be better supported by involving execution through a PPP based initiative which could help to Therefore In addressing the above, what collectively emerged was the use of Public Private Partnership could provide the solution for addressing both the above. Anjum Asim Shahid Rahman

27. NEED FOR PPP - DONORS CONFERENCE OF AUGUST 2009 ISTANBUL & JANUARY 2010 IN DUBAI Istanbul Donors conference – Aug 2009 Enabling Support by FoDP countries and donors through participation of the Private Sector (of Pakistan and the friends) involving initiatives such as PPP which ensures better implementation, greater impact and benefit to all under a fully transparent and participative process. Dubai PPP conference – Jan 2010 Donors organized a conference for facilitating investment through PPP held in Dubai in January 2010, in which over 500 opportunities in which investment on PPP basis could be enabled with the support of donor funding to be carried out not as direct funding to the government but as a means of leveraging greater investment in various sectors. Anjum Asim Shahid Rahman

28. DEVELOPMENT USING DONOR FUNDING FOR DIFFERENT PPP OPTIONS • PPP options to support investment from bilateral and multi lateral for development , as follows: - • 1. PROJECT BASED FINANCING SUPPORT FOR PPP PROJECTS • 2. INVESTMENT SUPPORT FOR DEVELOPMENT FINANCING INSTITUTIONS • 3. INCENTIVIZING / PROMOTING PRIVATE SECTOR PARTICIPATION Anjum Asim Shahid Rahman

29. PROJECT BASED FINANCING SUPPORT FOR PPP PROJECTS PROVISION OF EQUITY AND DEBT FINANCING FOR PPP PROJECTS – Financing can be made available on soft terms for use for specific infrastructure projects undertaken by private sector. Such financing can either be project specific, sector specific or even area specific. For example financing facility placed with financial intermediary (selected by donor) for disbursement of financing support for Bhasha Dam construction (Project Specific), Mineral Development projects (sector specific) or Baluchistan Based Projects (area specific). In each of these the private sector is the implementer through use of such funds and funding is provided through above financing facility representing public sector participation. Anjum Asim Shahid Rahman

30. PROJECT BASED FINANCING SUPPORT FOR PPP PROJECTS TIED FUNDING FOR PRIVATE PARTICIPATION IN PROJECTS: - Project Specific Funding can be tied up with implementation support (supply of good and services) to be provided by the donor countries private sector players involving supply of technology, equipment and implementation contracting. For example funding provided for specific project identified for implementation by contractor of the donor country. PROVISION OF FUNDING TO REPLACE GOP SHARE IN PPP TRANSACTION – Funding can be made available for enabling the public sector participation in a PPP transaction through which the GoP participation is supported through donor intervention. For example the Cool Chain project for implementation of food preservation infrastructure requires government support in some form – one possibility is for government to provide equipment. This can in turn be provided through donor support replacing GoP cost for such commitment . Anjum Asim Shahid Rahman

31. INVESTMENT SUPPORT FOR DEVELOPMENT FINANCING INSTITUTIONS CSF VENTURE CAPITAL FUND (VCF) ALTERNATE ENERGY DEVELOPMENT FUND (AEDB) INFRASTRUCTURE PROJECT FINANCING FUND (IPFF) VIABILITY GAP FUND (VGF) GUARANTEE FUND (GF) Anjum Asim Shahid Rahman

32. PPP TRANSACTION SUPPORT FUNDS These include the following which have already been defined earlier in the definition of the PPP framework INFRASTRUCTURE PROJECT FINANCING FUND (IPFF) VIABILITY GAP FUND (VGF) GUARANTEE FUND (GF) Financing for the above could be provided and included in the funding package under consideration for each of the above institutions Anjum Asim Shahid Rahman

33. INCENTIVIZING / PROMOTING PRIVATE SECTOR PARTICIPATION FINANCING OF INVESTMENT CONSIDERATIONS/STUDIES: Setting up of new funding or subsidizing existing facilities for funding which can be used for studies to undertake investment in Pakistan through financing project feasibility study, market studies, partnering J.V arrangements etc. for example such facility through OPIC or EU can be incentivized for Pakistan based investment. PROVISION OF RISK COVER FOR BUSINESS / INVESTMENT IN PAKISTAN: Provision of subsidized preferential rate and process risk coverage facility available through various risk agencies to cover business and country risk for investment and contract execution in Pakistan including coverage by OPIC, HERMES, COFAS at a country level coverage through etc. Anjum Asim Shahid Rahman

34. POSSIBLE AVENUES FOR INVESTMENT UNDER PPP • Power • Alternate and renewable energy • Oil and gas • Agriculture • Transport, Communication and Logistics • Municipal Services / Mass Urban Public Transport • Education • Health Anjum Asim Shahid Rahman

35. PAKISTAN’S GREATEST NEED – DEVELOPING ITS INFRASTRUCTURE Anjum Asim Shahid Rahman

36. ENERGY PROJECTS FOR PUBLIC PRIVATE PARTNERSHIP Anjum Asim Shahid Rahman

37. ENERGY PROJECTS FOR PUBLIC PRIVATE PARTNERSHIP Anjum Asim Shahid Rahman

38. ENERGY PROJECTS FOR PUBLIC PRIVATE PARTNERSHIP Anjum Asim Shahid Rahman

39. Investment Opportunities in Fuels • Oil Sector: • Exploration and Production, Refineries, Pipelines, Distribution • Gas Sector: • Exploration, Compression, Transportation, Distribution, Storage • Coal Mining: • Exploration, Extraction, Gasification, Integrated Power Generation *Large Untapped Potential in Coal, Gas & Oil. ** Single largest untapped coal reserve of 175.5 billion tons in Thar, Province of Sindh Source: Pakistan Energy Yearbook

40. Investment Opportunities in Energy • Hydel: • Water Storage / Irrigation Network • Conjunctive Hydro Power Generation • Run of the River • Low Head Hydels • Integrated CBM/Coal & Power Generation Project • Renewable Energy Generation • PPP on BOO & BOOT basis • Incentivized Packages for Investment with Security / Protection Arrangements

41. Doubling 300 Replacement 700 Rehabilitation 500 New tracks 800 High speed train 1650 (Karachi-Peshawar) Regional linkages 5-10,000 Replacement of obsolete signaling system 8. Proc / manu of HD wagons 3,500 Proc / manu of DE locos 150 Overhauling of locos 27 Proc of DE multi train sets Workshop, plant & machinery procurement Procurement of mechanized track maintenance machinery Railways Investment Proposals Track Kilometers • Private train sector operation under excess policy • Private train operation • Cargo development handling & development • Privatization of PR manufacturing facilities • Outsourcing of repair / maintenance of tracks, rolling stock and services

42. TRANSPORT, COMMUNICATION AND LOGISTICS’ PROJECTS Anjum Asim Shahid Rahman

43. TRANSPORT, COMMUNICATION AND LOGISTICS’ PROJECTS Anjum Asim Shahid Rahman

44. Airport Infrastructure • Major airports: Karachi, Lahore & Islamabad • Secondary airports: Peshawar, Quetta, Multan, Faisalabad, Sialkot & Sukkur • Several regional airports • Air craft movements at airports (000) 197,486 • Passengers handled (million) 141.2 • Cargo (million tonnes) 31.6 • Mail (million tonnes) 5.3 • Investment Opportunities: • New airports / upgrading of existing airports • Cargo terminals / villages • Outsourced operations, facilities and services • MOB for aircrafts at Karachi

45. Ports & Shipping • Main ports: Karachi, Qasim and Gawadar • Port entries: 3372 vessels with registered tonnage of 50 million tonnes • Cargo handled 64.8 million tonnes • Cargo in containers 5.9 million tonnes Investment opportunities • Cargo villages & industrial parks • Container terminals • Outsourced operations, facilities and services • KPT enclave • Miscellaneous supporting infrastructure

46. Investment Opportunities in Agriculture • HORTICULTURE INVESTMENTS • Production • Hybrid seed & plant material • Vegetables under green houses / plastic tunnels • Herbs & flori culture • Processing • Dehydrated fruits & vegetables • Juices, concentrates & pulps • Canning & frozen packaging • Tomato paste • Essential oils • Infrastructure • Cool chain systems • Export houses • Packaging technology • Farm equipment / machinery & pressurized irrigation systems • Commercial production of olives, edible oil seeds, tea, herbs and cut flowers • Certified seed incl. hybrid/BT seeds & Nursery Production • Silos/Warehouse Storages (30-35 million tonnes) • Absence of wholesale markets and commodity exchanges

47. Investment Opportunities in Livestock • LIVESTOCK INVESTMENTS • Commercial dairy farming • Dedicated livestock farms and calf fattening for halal meat production • Sheep goat rearing for Hajj • Camel breeding farms • Veterinary & lab services • Feed mills & fodder prod. • Silage facilities • Cool chains • Livestock product export $ 457 m (3.2%) • 5 years avg. livestock growth 4.6% • 3rd largest milk producer • Only 3-4% milk processing • Demand increasing • Milk 12-13% • Red meat 2-5% • Poultry meat 14-15% Source: Economic Survey 2008-09

48. Fisheries Investment Opportunities • INVESTMENT POTENTIAL • Coastal and inland aquaculture • Hatcheries & fish breeding farms • Exploitation of cold water fisheries • Market & other infrastructure • Promotion in domestic market • Upgrading of Karachi/Korangi fish harbors & fishing fleet • New fish harbors at Pasni & Gawadar • Value addition and fish processing with compliance on international quality & health standards SALIENT FEATURES • Share in GDP 1% • Production 565,000 tons (60% marine captured) • Consumption per capita 1.8 kg per year • Exports $ 160-200 million • Export potential in value added form $ 1 billion • Coastline 1,146 km’s • Inland water bodies 4.5% of the total area

49. Investment Opportunities in Health • INVESTMENT POTENTIAL • State of the art private sector tertiary hospitals and transplant facilities • Private wings in public sector hospitals • Trauma, burns and reconstructive surgery infrastructure and services • Dental health infrastructure • Medical education & training • JV’s on education and training of public health managers, nurses, paramedics & other auxiliaries • State of the art diagnostics facilities • Vaccine production & Vaccinology center • Pharmaceutical manufacturing including generics • Contraceptive manufacture HEALTH OVERVIEW • Health care spending is US $ 3 billion annually with US $ 2 billion in out of pocket payments • Primary health indicators unsatisfactory • High burden of infectious diseases resulting from poor sanitation and unsafe water 12% • High burden of communicable and non-communicable diseases • Inadequate public sector hospital infrastructure and human resources • 70% health care in private domain albeit few standard quality health facilities Liberal package for investment in health facilities under PPP available including land within public sector health facilities and elsewhere on discounted rates

50. Investment Opportunities in Education • INVESTMENT POTENTIAL • To pursue the objectives of the development of a knowledge based society in which competence exists to be internationally competitive, priority areas identified for PPP include: • State of art universities and colleges • Centers of excellence for natural & social sciences Infrastructure for demand driven vocational and technical training • Establishment of campuses of foreign universities in Pakistan • JV’s with public or private sector in upgrading existing higher education institutions or setting up new ones • Publication of quality textbooks and other printed material SALIENT FEATURES • Literacy rate 56%,female 42% & urban 71% • Net primary enrollment rate 55% & female 52% • Participation rate is skewed against the remoter provinces and areas • Enrollment in universities and colleges is 1.3 m i.e. 5% of the 29 m person between 17-23 years of age • Education is not demand based with professional education & technical/ vocational training opportunities limited • Public sector infrastructure for education and its quality is limited • Mushrooming private sector schools and professional education institutions