|Project Rationale and Linkage to Country/Regional Strategy
The Government of Sindh (GoS), through the government of Pakistan (GoP), has requested the Asian Development Bank's (ADB) assistance to expand and improve PPPs in Sindh. The proposed Enhancing PPPs in Pakistan (Provincial Support) project (project) was included in the Country Operations Business Plan for 2015 -2017. Under the project, ADB will support the GoS to develop a more financially sustainable and fiscally responsible PPP project portfolio.
The infrastructure and social service needs of Sindh, the second largest province of Pakistan by population (23%) and third largest by land area (18%), exceed the provincial public resources available. Conventional public procurement faces cost and time overruns and difficulties funding maintenance costs. Private sector generally has the ability to deliver infrastructure investments and services more efficiently and sustainably. To meet the pressing needs of infrastructure for the province, public sector investments must be augmented by private sector participation and private capital.
To address the significant infrastructure requirements in an efficient, cost-effective manner, and to enable further private participation in delivering infrastructure services, GoS initiated a PPP reform agenda in 2009. Supported by ADB's Sindh Growth and Rural Revitalization Program (SGARRP), GoS introduced legal, regulatory, institutional, and financial frameworks for provincial PPPs. The Sindh PPP Act 2010 was followed by PPP guidelines and procurement rules. A PPP Policy Board, led by the Chief Minister, was established to provide overall guidance. A PPP Unit was established within the Sindh Finance Department (FD) to help PPP nodes in sector departments to identify and develop projects suitable for a PPP modality within the province's Annual Development Plan (ADP). A project development facility (PDF) under the Sindh Planning and Development Department (P&DD) and a viability gap fund (VGF) under FD were established and seeded with program proceeds to support transaction advisory services and to increase project affordability.
Sindh's structured approach produced early results. The first concession for a toll dual-carriageway between Hyderabad and Mirpurkhas was awarded in 2010. The road was constructed and started generating revenue by end-2012. The positive demonstration effect of the first PPP project and the continued commitment to PPPs among policy makers and technical staff have generated further public and private sector interest in PPPs. A robust pipeline has emerged, including projects in agriculture, food, energy, health, transport, works and services.
Of the 44 PPP projects in the development pipeline, two are currently operational, one is under construction and three are in negotiations stages. However, as the technical and institutional capacity is still developing, some PPP projects that are not fully bankable have been included in the pipeline. As the PPP portfolio and contingent liabilities grow, it will be important to prioritize prudent project selection and fiscal risk management. There will be added value in (i) linking PPP project identification to the province's development plan; and (ii) carefully considering core and non-core revenue generation, potential and manageable risks when selecting PPP projects.
The VGF was established in 2010 to support service affordability for the typical consumer, while improving the commercial attractiveness of the project. The VGF was designed to support tariff affordability as an in-place subsidy against future usage. However, the fund has been used to (i) finance equity and quasi-equity injections in the PPP projects to ensure financial close and contingent liability commitments of PPP projects; and (ii) cash-collateralize GoS backstop commitments for minimum revenue guarantees and annuity payments against debt and equity. To attract private sector investors and financiers at the beginning of the process, the VGF was used to fully collateralize the government's payment obligations. Such practices that deviated from international norms for VGF utilization have exhausted the fund. In the process, risks such as the financing risk have also been assumed by GoS. Risk sharing among public and private partners for the projects which have achieved financial close or are at an advanced stage of negotiations has been highly skewed in favor of private sector concessionaires. This has led to an inefficient use of liquidity, with $120 million of the VGF used for three projects from 2010 to 2014. In addition, institutional and monitoring mechanisms to manage future fiscal risks arising from growing contingent liabilities have not yet been fully developed.
The last five years of policy dialogue and technical collaboration between ADB and GoS has helped create a stronger environment for PPPs in Sindh. As the PPP pipeline expands certain institutional capacity and financial support systems warrant early attention. The capacity of the PPP nodes to actively participate in the selection, development, monitoring and reporting on PPP projects remains limited. The PDF amount has to be increased to accommodate more projects and complex project design by engaging experienced transaction advisors. PDF was designed to recover costs of transaction advisory services from the concessionaire that wins the project bid. This cost recovery function should be exercised to ensure the revolving nature of the fund.
The benefits to Sindh from PPPs can be further enhanced with: (i) a robust PPP pipeline development framework, with PPP project selection embedded in the provincial annual development planning; (ii) more equitable risk allocation among parties; (iii) a rigorous risk management system; and (iv) improved financial management of the VGF. PPP portfolio development, informed by economic assessment and financial viability, can better address Sindh's infrastructure and public service constraints. There is also scope to strengthen line departments' capacity to assess non-solicited proposals, identify, develop and manage PPP projects. This will enable limited provincial resources to be used more efficiently, generate greater social and financial value, and promote economic growth in Sindh.
The proposed project will support the development goals of GoP and GoS for sustainable infrastructure provision through PPPs. It is closely aligned with Midterm Review of Strategy 2020, which lists PPPs as a key driver of change, and with the development priorities identified in the Interim Country Partnerships Strategy 2014-2015. ADB has partnered with GoS to develop the PPP framework under a program cluster, SGARRP, in 2009. The project's design builds on the achievements of SGARRP; it uses the lessons learned during program implementation and the recommendations from the Country Assistance Program Evaluation for Pakistan.