Banks’ renewed interest in project financing

Whatever banks have done in project financing over the last three years has prompted them to take further steps in 2017.

And, as the economy looks set to grow at a 5pc plus rate and as new CPEC-related projects keep coming up, banks are getting ready for big lending.

“This means we’re going to see a sort of industrial revival taking place in coming years. I hope project financing is going to remain robust in 2017 and beyond,” says a senior official of the Pakistan Banks Association.

So far bank financing has not only gone into financing traditional balances, modernisation and rehabilitation of manufacturing facilities but also into Greenfield projects, top bankers say.

Consortium loaning is expected to expand as more of the big-ticket, CPEC-related projects come up. The China-Pakistan Investment Initiative — a support lobby cobbled together with Chinese and Pakistani investment advisories and companies — will now pave the way for further collaboration. And, that will increase business for Pakistani banks.

“So this year is going to be a big year for the banking industry as far as project financing is concerned,” says a senior executive of the Pakistan Banks Association. “The recent up-scaling of Pakistan’s projected economic growth rate for this and the next fiscal year by the World Bank (WB) also hinges primarily on infrastructural development due to take place in the country.” The WB has re-projected a 5.2pc GDP growth for FY17, up from its earlier estimate of 5pc.

In 2016, banks’ project financing increased in infrastructure and energy as is evident from different types of borrowers.

Loans to mining and quarrying, for example, increased by Rs7bn between November 2015 and November 2016; owing more to the Thar coal project and less because of routine borrowing. Similarly part of the Rs58bn credit that went to electricity, gas and water supply companies during this period also included project financing of coal and wind-fired projects in Sindh and solar power project in Punjab. The same is true, of course in part, for the Rs23bn lending to the construction sector.

In the third quarter of 2016, Habib Bank entered into a financing agreement of Rs10.4bn with the National Transmission and Dispatch Company (NTDC) for construction of a double circuit 500KV transmission line between Port Qasim and Matiari; for evacuation of 1320MW power from the under construction coal-fired power plant at the port.

And in 2015, NBP, UBL, Bank Alfalah and Askari Bank financed another, 50MW wind energy project in Sindh. In that project foreign funding was also involved. “Now, after the approval of a $75m ADB loan (in late 2016) for supporting establishment of the largest wind energy farm in Sindh, local banks that have already financed such projects are going for further lending in this area,” says a senior executive of one of these banks.

Three years ago, two wind-energy projects of 50MW each were financed in Sindh by a consortium of banks comprising NBP, Faysal Bank and UBL and NBP, ABL and Meezan Bank. Financing then went into two other Sindh-based wind energy projects of 10MW each.

In addition to banks’ financing going to, or being arranged for, wind and solar energy projects within or outside the ambit of the CPEC, a number of hydro power and coal-fired energy projects are already using, or have booked, bank loans but disbursement of money is yet to start. These include three coal-fired power plants, all in Sindh and the famous Quaid-e-Azam solar energy farm in Punjab.

Banks have also lent heavily in recent years to food, chemical and agricultural storage and transport sectors, helping them in business expansion and in undertaking balancing, modernisation and rehabilitation schemes, senior bankers say.

They say that after the introduction of prudential regulations for infrastructure financing in 2017, that covers almost all its sub-sectors, banks will find it easier to focus on project financing.

Published inDawn, Business & Finance weekly, January 16th, 2017