SBP issues rules for infrastructure project financing

KARACHI: The State Bank of Pakistan (SBP) has issued prudential regulations aimed at helping financial institutions develop expertise for financing infrastructure projects in the country, the central bank said in a circular.

The regulations place emphasis on important features of infrastructure project finance which will facilitate the banks and development finance institutions (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. 

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.  Banks are encouraged to prepare their own structured lending schemes for the development of infrastructure project financing. 

“For this purpose, banks may commission their own studies to determine the potential in specific infrastructure projects,” the State Bank of Pakistan said. “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.”

The central bank has advised / DFIs to refer to relevant instructions issued by Islamic banking department of the SBP. Further, Islamic banking Institutions may convert conventional infrastructure project financing terms in context of Islamic banking practices wherever deemed necessary, the State Bank of Pakistan said.

The government is making all out efforts to provide state of the art infrastructure facilities across the country.  A number of renewable energy projects are being set up by the federal as well as the provincial governments. Similarly a number of highways and motorways are being built, which include both CPEC related and non CPEC related projects.

According to regulations, a thorough credit appraisal of an infrastructure project financing shall be carried out in order to identify and mitigate the project risks, and to ascertain that the project will function as per plans.

Assessment of the technical, financial and economic viability of the project shall also be carried out to determine adequacy of the project cash flows. Further, banks / development finance institutions would thoroughly review and assess the validity of assumptions on which cash flow projections have been made to repay project debt and meet its obligations under the financing agreement.

The banks / DFIs would obtain and evaluate detailed due diligence of the proposed project which may include reports from financial, technical, legal, insurance and environment advisors.

The financial feasibility, if required, may be endorsed by an auditing firm on the approved panel of the State Bank of Pakistan. The State Bank of Pakistan said banks may extend loans for the infrastructure projects up to a maximum period of 20 years, excluding grace period, if any. 

Banks, following Basel III requirements are encouraged to develop an in-house system for prudently managing interest rate risk and liquidity risk arising from locking their assets in long term project financing undertakings. 

Banks may either enter into a refinancing/sell-down financing arrangement with other banks or arrange consortium/syndicate to effectively match their assets and liabilities.