Govt Okays to pledge major airports, highways to raise loans
Aftab Ahmed
Islamabad: The PTI government has approved a plan to pledge the M-1 and M-3 motorways, the Islamabad Expressway, and the international airports of Islamabad, Lahore, and Multan to generate $3.5 billion in loans in Pakistan through issuing bonds.
Pakistan is already trapped in loans and the government is going to pledge all major airports, and motorways to seek further debt through the issuance of domestic and international bonds.
Finance Ministry identifies assets to seeks debt
The Federal Cabinet authorized the Finance Division to identify underlying asset choices for Sukuk issuances at its meeting on January 26, 2021, to seek debt. The objective is to raise loans in Pakistan.
As a result, the Finance Division identified the M-1 and M-3 Motorways, the Islamabad Expressway, and the Islamabad and Multan International Airports as potential assets to pledge for the issuance of domestic and international Ijara Sukuk bonds to add more burden on Pakistan.
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The Finance Division informed the Cabinet that, in order to support the Government’s budgetary priorities and to strengthen the Islamic banking industry in the country, the Finance Division intended to pursue its domestic and international Ijara Sukuk programs.
Sukuk are Shariah-compliant borrowing instruments that used an underlying asset to pay returns on investment as a lease rather than interest. The transactions in the case of ljara Sukuk were structured using actual assets.
The Finance Division completed 32 domestic and four overseas Ijara Sukuk transactions totaling PKR 1,573 billion and US$ 3.6 billion, respectively.
In addition, to settle power sector debts, the government issued two ‘Energy Sukuk’ worth PKR 200 billion each in March 2019 and May 2020. It issued these Sukuk bonds in exchange for the assets of government-owned power-producing and distribution enterprises.
Previous Assets Pledged to raise loans
The past governments had used the following resources were used for domestic Ijara Sukuk:
The M1 motorway
M2 Motorway
The M3 Motorway
Karachi Jinnah International Airport
The Musharraf government used M2 Motorway for international Ijara Sukuk in January 2005 and afterward divided into three sections used beginning in December 2014. The Islamabad-Chakwal section of the M2 Motorway was unencumbered.
The M1 and M3 Motorways were already unencumbered, while the Islamabad-Chakwal section of the M2 Motorway was unencumbered. In addition, the status of Jinnah International Airport, Karachi.
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Following approval from the Federal Cabinet in its meeting on March 31, 2020, the government of Pakistan Tehreek-e-Insaf (PTI) launched an Rs. 756 billion domestic Ijara Sukuk scheme by leveraging the unencumbered property of Jinnah International Airport (JIA), Karachi to seek loans. With the issuing of domestic Ijara Sukuk at Rs. 636 billion and the structuring of Islamic Naya Pakistan Certificates (INPCs) worth around Rs. 59 billion, the asset was entirely utilized.
As the JIA in Karachi was about to exhaust, there was an urgent need to find fresh unencumbered assets to support the continued issuance of Ijara Sukuk in both domestic and foreign capital markets.
The continuation of domestic Sukuk issuance will also allow the government to reach its aim of having 10% Shariah-compliant instruments in domestic securities by the end of FY23 (Medium-Term Debt Management Strategy 2019/20-2022/23). This was at 3.8 percent by the end of December 2020.
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The Ministry of Finance has requested that the Communications Division/National Housing Authority (NHA) and the Aviation Division/Civil Aviation Authority (CAA) issue the appropriate approvals to use these assets for seekings loans through Ijara Sukuk issuances.
There has been no response from the Aviation Division/CAA regarding loans in Pakistan. While pledging its cooperation, the Ministry of Communications requested the Finance Division to consider providing NHA with an acceptable “asset utilization charge”.
The requirement for extra resources in the amount of Rs. 1.2 trillion and US$ 3.5 billion finance ministry indicated in next year’s domestic and external financial strategy. As a result, the Finance Division would prefer to engage in Sukuk transactions as often as possible, as this would help gain better pricing as compared to other ways of generating domestic and external resources such as T-bills, PIBs, and traditional Eurobonds.
As a result, it was critical that all selected assets be ready to launch domestic and international Sukuk programs early next year.
The finance ministry requested Federal Cabinet to authorize to use of the following assets without compensation or fee. It will obtain necessary NOCs from relevant entities and provincial governments.
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Once the assets were made available to the Finance Division, their valuation would be adjusted.
- Parts of the Allama Iqbal International Airport in Lahore that is not in use.
Islamabad International Airport is the second largest airport in Pakistan.
Multan International Airport; and unfettered parts of major highways and motorways.
The Finance Ministry will carry out all transactions to seek loans in Pakistan only once the Ministry of Law and Justice and the Office of the Attorney General of Pakistan had cleared the necessary paperwork (in case of international Sukuk). Finance Ministry sets each issue’s size, tenor, and rental rate by the market response at the time of issuance.
The suggestions were subject to the approval of the Federal Cabinet.
During the discussion, while endorsing the suggestions, the Minister for Aviation noted that engagement with the Aviation Division/CAA regarding airports should have taken place. The Finance Minister agreed and apologized for the blunder.
The Cabinet approved the proposal ‘Issuance of Domestic and International Ijara Sukuk Against Unencumbered Assets of the Government’.
