INFRASTRUCTURE PROJECT FINANCE (IPF) GUIDELINES AND REGULATIONS

Infrastructure, Housing & SME Finance Department

Revision in Guidelines Infrastructure Finance Task Force Facilitation in establishment of IDFI Capacity Building Consultative Group Infrastructure Finance Review

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Project &

Structured Finance

Infrastructure Financing – SBP Efforts

INFRASTRUCTURE DEVELOPMENT AND FINANCING INSTITUTION (IDFI)

Need Asset / Liability mismatch in banks/DFIs as most of the deposits are of short tenor. Sustainable development in infrastructure sector, banks/DFIs need risk sharing

mechanism. Reduced reliance on foreign currency funding decreases the risk of exchange rate

exposure and has positive impact on Balance of Payments Unsymmetrical infrastructure growth in relation to economic growth

IDFI will perform a broad array of activities:• Project Development – need identification, conceptualization, pre-feasibility reports,

commercial viability aspects, identification of potential investors• Use of innovative structural / financial techniques to enhance project viability• Evaluate infrastructure projects for potential investment• Project Finance – equity participation, loan syndication, other services• Facilitate access to Viability Gap Fund• Tariff and other advisory services• Facilitate co-ordination of project sponsors with relevant ministries and government

departments• Performance Monitoring• May help government in PPP policy formulation

Primary focus will be on:Power SectorSpecial Economic ZonesAgricultural Infrastructure including warehousing,

cold chains etc.

Other sectors like road, railway and port etc. would also be considered later on subject to capacity enhancement

Long term funding mechanism to develop a financial climate conducive to large scale infrastructure projects

INFRASTRUCTURE DEVELOPMENT AND FINANCING INSTITUTION (IDFI)

IDFI Scope and Structure

• Proposed IDFI to be established as a special DFI with suggested Equity Distribution as follows:- Banks/DFIs - 25%- GoP or government organizations - 25%- Multilateral Agencies - 50%

• The company will issue long term papers/Bonds/Sukuk to generate funds from local market and also seek funded and guarantee lines from international MLAs to support/finance infrastructure projects in Pakistan. By issuing bonds/Sukuk, it would help develop capital market.

SBP Guidelines/Regulatory Framework - History Relaxation in Prudential Regulations for Infrastructure Project Financing (IPF) vide BPD Circular

No.25 dated July 04, 2003 (http://www.sbp.org.pk/bpd/2003/C25.htm). Debt equity relaxed to 80:20 for the Infrastructure projects “Concession Agreement/License/Right of Way” issued by Government accepted as a collateral

Guidelines For Infrastructure Project Financing (IPF) shared for consultation purposes vide BPD Circular No.25 of July 23, 2005 (http://www.sbp.org.pk/bpd/2005/C23.htm)

Updated IPF Guidelines in August 31, 2010 vide No. IHFD/11 /191/ 2010. The salient features of the revised guidelines:- Includes the requirement for establishing a mechanism for generating feasibility reports and

assessing risk mitigation means in the development, construction, start-up and operation stages of the project.

Banks and DFIs to establish a proper process for the continuous monitoring of project implementation to ensure proper utilization of the credit while relevant bank accounts will be subject to audit by the SBP.

Banks and DFIs encouraged to accept Concession Agreement/Licence issued by a government agency as collateral.

The institutions to ensure adequate insurance coverage against all potential risks applicable to the project.

At no point shall the bank’s exposure to the risk exceed the bank’s equity, and the exposure availed by any borrower shall also not exceed 10 times the borrower’s equity.

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SBP Guidelines – Areas Covered

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Part-A: DEFINITIONSPart-B: GUIDELINES

G.1: Credit AppraisalG.1.1 : Minimum Information RequirementsG.1.2 : Assessment of Infrastructure ProjectsG.1.3 : Monitoring of Infrastructure Projects

G.2: Collateral Arrangements, Security Package And Project Insurance G.2.1 : Acceptance of Concession/License as CollateralG.2.2 : Security PackageG.2.3 : Project Insurance

G.3: Regulatory ComplianceG.3.1 : Exposure LimitG.3.2 : Debt-EquityG.3.3 : Funding of Infrastructure ProjectsG.3.4 : Provisioning Requirements

Part-C : AnnexesAnnex A - IPF: Checklist for Minimum Information RequirementsAnnex B - IPF: Provisioning Requirements

SBP Guidelines- What is an Infrastructure?

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Infrastructure Project means one of the followings: a) A road, including toll road, fly over, bridge project.b) A mass transit, urban bus, urban rail project.c) A rail-bed, stations system, rail freight, passenger services project.d) A telecommunication local services, long distance and value added project.e) A power generation project.f) A power transmission or distribution project by laying a network of new

transmission or distribution lines.g) A natural gas exploration and distribution project.h) An LPG extraction, distribution and marketing project.i) An LPG import terminal, distribution and marketing project.j) An LNG (Liquefied Natural Gas) terminal, distribution and marketing project.k) A water supply, irrigation, water treatment system, sanitation and sewerage

system or solid waste management system project.l) A dam, barrage, canal project.m) A primary and secondary irrigation, tertiary (on-farm) irrigation project.n) A port, channel dredging, shipping, inland waterway, container terminals

project.o) An airport.p) A petroleum extraction, refinery, pipeline project.q) Any other infrastructure project of similar nature, notified by SBP.

SBP Guidelines- Credit Appraisal

G.1.1: Minimum Information Requirementsi. Project Descriptionii. Capital Investmentiii. Project Schedulesiv. Environmental Impactv. Financingvi. Legal Documentation

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G.1 – CREDIT APPRAISAL

SBP Guidelines –G.1 (contd . . .)

G 1.2 : Assessment of Infrastructure Projects– Development Phase – should be preferably funded through

equity – Construction & Start-up Phase – Assessment of physical and

financial completion of infrastructure projects. Some important tools used for completion risk mitigation are:

Project Funds Agreement Financial Completion Agreement Insurance

[Ongoing construction period monitoring through:i. Technical advisor, via milestone certifications and site visits

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ii. Keeping the financial model live during the construction period; and

iii. Monitoring of project accounts for disbursements and payments of project expenses]

– Operation Phase – Entails monitoring of:i. Assignment of project receivables and damagesii. Continuous presence of valid security arrangementiii. Debt repayment and project’s escrow accountsiv. Financial covenants for debt repaymentv. Technical monitoring during operations and

construction phases

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SBP Guidelines –G.1 (contd . . .)

G.1.3 : Monitoring of Infrastructure Projects

Monitoring for assignment of Project Receivables and

Payments for Damages.

Monitoring for ensuring enforcement of Security

Projects escrow accounts for Monitoring of Repayment of Debt.

Financial Covenants for Repayment of Debt.

Technical Monitoring during Development and Operation

Phase.

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SBP Guidelines –G.1 (contd . . .)

SBP Guidelines- G.2

G.2.1: Acceptance of Concession/license as collateral –

encumbrance free, assignable, transferable in the event of default

G.2.2: Security Package –

– Primary Security – first charge over project receivables and

accounts

– Secondary Security – standard security package of the lenders

including hypothecation, mortgage, insurance assignment, share

pledge, assignment over rights under all project documents etc

G.2.3: Project Insurances - construction all risks, third party liability,

marine, accidental, loss of profit, terrorism insurance etc.

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G.2 – COLLATERAL ARRANGEMENT, SECURITY PACKAGE & PROJECT INSURANCE

SBP Guidelines- G.3

G.3.1: Exposure Limit – per party exposure (as per regulation R-1 of

Corporate Banking PRs), total bank exposure to project finance assets (not to

exceed the bank’s equity) fund and non-fund based exposures

G.3.3: Funding of Infrastructure Projects – – Loan duration – up to 20 years (excluding grace period)

– Asset Liability Management – interest rate and liquidity risk management

– Arrangement of Long-term Funding – churning more IPF assets using

securitization

G.3.4:Classification and Provisioning Requirements – Annex

IV of R814

G.3 – REGULATORY COMPLIANCE

IPF Guidelines - Minimum Information Requirements

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IPF: Checklist For Minimum Information Requirements

1. Project Description

• Description of Product/ Service, Capacity of Project, Proposed ownership structure and sponsor

information

• Legal status of project and status of government approvals (including government’s and/or local

authorities’ attitude toward the Project, exemptions/advantages to be enjoyed by the Project, licenses

and permissions required, and proposed measures/actions that could affect the Project).

• Project’s anticipated economic contributions (e.g. in the generation of foreign exchange, employment,

technology transfer etc.)

2. Capital Investment

Project site, Legal agreements for land use rights, Civil works and buildings, Major and auxiliary equipment,

Project Management, Pre-operating requirements and costs, Contingencies (physical) and escalations

(financial), Initial working capital requirements, Contracting and purchasing procedures to be used,

Local/foreign manpower and technical expertise required at the planning stage.

3. Project Schedules

Construction, startup, operations, Expenditures, Funding (including timing of funds needed during

project implementation), Regulatory compliance

IPF Guidelines- Minimum Information Requirements (Cntd..)

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4. Environment Impact

(Description of environment impact, Health and safety issues)

5.Financing

Total cost of project (including details on major items of fixed assets and working capital) Background statement on all sponsors and participants, showing their financial or other

interest in the project construction, operations, and marketing

Capital structureProposed debt/equity structure, Equity (Shareholder structure, Long term plans (stay private/go public, Quasi-equity (subordinated debt), Debt (Long-term debt/working capital loan, Domestic/foreign, Desired terms and conditions, Funding sources already identified), Overrun/standby arrangements

Financial Projections(Projected financial statements including cash flows , Clear statement of all assumptions , Sensitivity analyses under different scenarios like interest rate risk etc., Net Present Value (NPV), Internal Rate of Return (IRR) and payback period of the project).

6.Legal DocumentationJoint venture agreements (if applicable), Articles of association, Government approval documents/concession/business license, Land certificate/red line map, Mortgages, if any, Loan agreements, Major contracts including (EPC Contract, Off-take agreements , Supply agreements , Technical assistance agreement , Operation and Maintenance agreement , Insurance Policies)

PR R-1: Limit on Exposure to a Single Person/Group

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1. The total outstanding exposure (fund based and non-fund based) by a bank/DFI to any single person shall not at any point in time exceed 30% of the bank’s/DFI’s equity as disclosed in the latest audited financial statements, subject to the condition that the maximum outstanding against fund based exposure does not exceed 20% of the bank’s/DFI’s equity.

2. The total outstanding exposure (fund based and non-fund based) by a bank/DFI to any group shall not exceed 50% of the bank’s/DFI’s equity as disclosed in the latest audited financial statements, subject to the condition that the maximum outstanding against fund based exposure does not exceed 35% of the bank’s/DFI’s equity.

3. Limit on exposure (as a % of equity as disclosed in the latest audited financial statements) to a single person/Group effective from 31-12-2009 and onward would be as under:

4. The group will cover both corporate entities as well as SMEs, in cases where such entities are owned by the same group.

PR R-1: Limit on Exposure to a Single Person/Group

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5. For the purpose of this regulation banks/DFIs are required to follow the guidelines given at Annexure-I.

Effective Date For Single Person For Group

Total O/S (Fund & Non Fund

Based) exposure limit

Fund based O/S Limit

Total O/S (Fund & Non Fund

Based) exposure limit

Fund based O/S Limit

31-12-2009 30 20 45 35

31-12-2010 30 20 40 35

31-12-2011 30 20 35 30

31-12-2012 30 20 30 25

31-12-2013 25 25 25 25

Annexure I Pertaining to R-1

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In arriving at exposure under Regulation R-1:A. 100% of the deposits placed with lending bank/DFI, under perfected lien and in the

same currency, as that of the loan, shall be excluded.B. 90% of the following shall be deducted;

1. deposits placed with the lending bank/DFI, under perfected lien, in a currency other than that of the loan;

2. deposits with another bank/DFI under perfected lien;3. encashment value of Federal Investment Bonds, Pakistan Investment Bonds,

Treasury Bills and National Saving Scheme securities, lodged by the borrower as collateral; and

4. Pak. Rupee equivalent of face value of Special US Dollar Bonds converted at inter-bank rate, lodged by the borrower as collateral.

C. 85% of the unconditional financial guarantees accepted as collateral and payable on demand by banks/DFIs, rated at least ‘A’ or equivalent by a credit rating agency on the approved panel of State Bank of Pakistan, Standard & Poors, Moody, Fitch Ibca or Japan Credit Rating Agency (JCRA) shall be deducted. Similar weightage to guarantees issued by the International Finance Corporation (IFC), Commonwealth Development Corporation (CDC) Deutsche Investions and ntwicklungsgesellschaft nbH (DEG), Netherland Financierings Maatschappijvoor Ontwikklelingslanden N.V (FMO) and Asian Development Bank (ADB) shall also apply.

Annexure I Pertaining to R-1

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In arriving at exposure under Regulation R-1:D. 50% of listed Term Finance Certificates held as security with duly marked

lien shall be deducted. The TFCs to qualify for this purpose should have been rated at least ‘A’ or equivalent by a credit rating agency on the approved panel of State Bank of Pakistan.

E. Weightage of 50% shall be given to;i) documentary credits (except Standby Letter of Credits where 100% exposure would be counted) opened by banks/DFIs;ii) guarantees/bonds other than financial guarantees; iii) underwriting commitments.

F. The following different weight ages will be applicable to exposure taken against commercial banks/DFIs in respect of placements;1. 10% weight age on exposure to banks/DFIs with ‘AAA’ rating.2. 25% weightage on exposure to banks/DFIs rated ‘A' and above.3. 50% weightage on exposure to banks /DFIs rated ‘BBB’ and above.

The banks/DFIs shall, however, ensure that the overall limit for each financial institution in respect of inter-bank placements is invariably approved by their Board of Directors.

Annexure I Pertaining to R-1 (CTD..)

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2. For the purpose of this regulation, exposure shall not include the following:1. Loans and advances (including bills purchased and discounted) given to

the Federal Government or any of their agencies under the commodity operations program of the Federal Government, or guaranteed by the Federal Government.

2. Obligations under letters of credit and letters of guarantee to the extent of cash margin held by the bank/DFI.

3. Letters of credit, which do not create any obligation on the part of the bank/DFI (no liability L/C) to make payments on account of imports.

4. Letters of credit opened on behalf of Federal Government where payment is guaranteed by State Bank of Pakistan/Federal Government.

5. Facilities provided to commercial banks/DFIs through REPO transactions with underlying SLR eligible securities.

6. Pre-shipment/post-shipment credit provided to finance exports of goods covered by letter of credit/firm contracts including financing provided from the bank’s /DFI’s own resources.

7. Letters of credit established for the import of plant and machinery.

PR: R-8 Annex IV (Classification & Provisioning)

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Classification Determinant Treatment of Income Provisions to be Made

Substandard

Where markup/ interest or principal is overdue by 90 days or more from the due date.

Unrealized mark-up /interest to be kept in Memorandum Account and not to be credited to Income Account except when realized in cash. Unrealized mark up/interest already taken to income account to be reversed and kept in Memorandum Account.

Provision of 25% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law and 40% of the Forced Sale Value (FSV) of pledged stocks and mortgaged residential, commercial and industrial properties (see Note 2 below).

Doubtful Where markup/ interest or principal is overdue by 180 days or more from the due date.

As above Provision of 50% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law and 40% of the Forced Sale Value (FSV) of pledged stocks and mortgaged residential, commercial and industrial properties (see Note 2 below).

Loss a) Where markup/ interest or principal is overdue by one year or more from the due date

b) Where Trade Bills (Import/Export or Inland Bills) are not paid/adjusted within 180 days of the due date.

As above

As above

Provision of 100% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law and 40% of the Forced Sale Value (FSV) of pledged stocks and mortgaged residential commercial and industrial properties (see Note 2 below). Benefit of FSV against NPLs shall not be available after 3 years from the date of classification of the Loan/Advance. However, the 40% benefit of FSV of land (open plot and separate valuation of land if building is constructed) shall be available for 4 years from the date of classification of loan. As above.

Notes :1. Classified loans/advances that have been guaranteed by the Government would not require provisioning, however, mark up/interest on such accounts

to be taken to Memorandum Account instead of Income Account.2. FSV shall be determined in accordance with the guidelines contained in Annexure-V to these Regulations.

FAQs: (CLASSIFICATION AND PROVISIONING FOR ASSETS)

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1. Can a rescheduled/restructured loan be reported as non-performing in the CIB reports submitted to the State Bank of Pakistan? No, such loans may not be reported as non-performing to the SBP. They should be reported as restructured/ rescheduled.

2. Can a loan be de-classified after its restructuring/rescheduling? A loan cannot be declassified right after rescheduling/restructuring, unless the terms and conditions are fully met for a period of minimum one year (excluding grace period, if any), and at least 10% of the outstanding amount is recovered in cash. However, the condition of one year retention period, prescribed above, will be waived in case the borrower adjusts at least 50% of the total restructured loan amount (principal + mark-up) in cash, either at the time of restructuring agreement or later-on.

3. Can a bank/DFI reverse the provision already held against restructured/rescheduled account before or after its declassification? In case of restructured/rescheduled accounts, the bank/DFI may reverse the provision already held to the extent of cash recovery, subject to the condition that the remaining outstanding should be provided to the extent as required by the category of classification in which the restructured/rescheduled loan actually appeared, till the time of declassification of the loan account. After declassification of the restructured/ rescheduled account as per criteria laid down in Para 3 of Regulation R-8, the bank/DFI may reverse the available provision up to 100% of its value if the bank/DFI deems such reversal advisable. The advisability of an outright reversal of available provision at the time of declassification of a restructured account, is necessary to be seen by the bank/DFI, so that at a later stage, when a declassified account is again classified in the old category due to non-compliance of the terms by the borrower, then a significant amount of provisions may be required, resultantly causing a big dent in the profitability of the bank for that year. Thus, the banks/DFIs may find it advisable to go for reversal of the available provisions in parts.

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4. Can a bank/DFI reverse the unrealized mark-up lying in Suspense Account, accrued on a restructured/rescheduled account before or after declassification? A bank/DFI cannot reverse the unrealized mark-up lying in Suspense Account accrued on a restructured/rescheduled account till its declassification, except the portion of suspended mark-up which is realized by the bank/DFI in cash. Whereas, after declassification of the restructured/rescheduled account, the suspended mark-up may be reversed by the bank/DFI, provided at least 50% of the total suspended mark-up is recovered by the bank/DFI.

5. How a loan may be declassified? A loan may be declassified in the following two ways:

If the bank has received overdue principal and mark-up on a restructured/rescheduled account, then such loan will be declassified after meeting all conditions as stipulated in Para 3 of Regulation R-8 of PRs for Corporate and Commercial Banking. If the account is not a restructured/rescheduled one, then recovery of 100% overdue principal and mark-up may justify its declassification.

6. What is the valuation process for the purpose of assessing the FSV of the eligible securities for provisioning benefit?

The banks/DFIs will be required to get a Full Scope Valuation once in three years. After the Full Scope Valuation, the banks/DFIs will get two ‘Desktop Valuations’ in the next two years.

7. Is there any restriction on the valuers in respect of the number of valuations undertaken by them?

Yes, evaluators on the panel of Pakistan Banks Association (PBA) will be eligible to conduct only two Full Scope valuations of a company consecutively; as such the companies being evaluated will be required to change its evaluator after two consecutive Full Scope valuations.

FAQs: (CLASSIFICATION AND PROVISIONING FOR ASSETS) CTD…..

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8. Will a fresh finance, allowed to a company at the time of restructuring/rescheduling of an old loan, also be classified in the category as the old restructured/rescheduled loan appears?

The fresh loan may be monitored separately and will be subject to classification on the strength of its own specific terms and conditions.

9. Which assets can be taken for provisioning benefit while calculating the amount of required provision against classified loans?

For the purpose of provisioning benefit, the banks/DFIs may consider (i) liquid assets (at its full value without any discounting/adjustment factors), (ii) pledged goods (at its FSV after applying adjustment factors on the valuation which should not be older than one year), (iii) land and building (at its FSV after applying adjustment factors), and (iv) plant and machinery (at its FSV after applying both adjustment and discounting factors). Whereas, the hypothecated goods and fixed assets with 2nd charge will not be allowed for provisioning benefit.

10. What is Desktop valuation? Define it. Desk top valuation is “an Interim Brief Review of Full-scope Evaluation, so that any significant change in the

factors, on which the full-scope valuation was based, is accounted for and brought to the notice of the lending bank.”

11. Is the Desktop valuation also required to be done from a PBA-approved evaluator? When the loan amount exceeds 10% of the banks/DFIs’ equity, the Desk-top valuation will be done by the

same evaluator, who had conducted the full-scope evaluation, and must be on the approved panel of the PBA; whereas, for loans below this threshold, Desktop evaluation may be done by the banks themselves.

12. If the evaluators are not allowed to enter the premises for conducting full scope evaluation, then such evaluation may qualify for provisioning benefit?

In cases where evaluators are not allowed by the borrowers to enter in their premises, the full-scope evaluation, conducted as such, will not be accepted for provisioning benefit.

FAQs: (CLASSIFICATION AND PROVISIONING FOR ASSETS) CTD…..

FAQs: REGULATION R-1 (PER PARTY/GROUP LIMIT)

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1. Is any weightage available while taking exposure on NBFCs, while calculating per party/group exposure limit under Regulation R-1 (Annexure-1), as is available in the case of exposure taken on banks/DFIs?

No weightage is available against exposure taken on the NBFCs under Regulation R-1, as such; the exposure will be taken at its entire value for the purpose of Regulation R-1.

2. Does the per party limit under R-1 apply on interbank placement with banks and DFIs?

Yes, the interbank placement is also subject to per party limits under Regulation R-1. However, the calculation of per party limit in such cases will be subject to the following weightages, as explained in Para F of annexure-1: (i) 10% weightage on exposure to banks / DFIs with ‘AAA’ rating. (ii) 25% weightage on exposure to banks / DFIs rated ‘A' and above. (iii) 50% weightage on exposure to banks / DFIs rated ‘BBB’ and above.

3. Does the group limit cover exposure on Corporate and SMEs, owned by the same group, or, exposure taken on them is calculated separately?

Yes, the group exposure will be calculated by taking financing facilities given to both Corporate and SMEs owned by the same group.

FAQs: REGULATION R-1 (PER PARTY/GROUP LIMIT)

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4. Does revaluation reserve also include revaluation of assets other than fixed assets for the purpose of calculating per party/group limit of the bank/DFI?

No, revaluation reserves will not include appreciation on account of other than fixed assets for the purpose of calculating per party/group limit.

5. Do all Liquid Assets qualify for certain weightages while calculating the per party exposure limit under ‘Annexure-1’ of Regulation R-1?

No, there are some instruments/securities which have been classified as liquid assets but do not qualify for any weightage while calculating the per party limit under Annexure-1 which includes COIs issued by NBFCs, NIT Units, shares of listed companies and certificates of asset management companies etc. It may, however, be noted that the restriction in respect of these liquid assets is for calculation of per party limit only, thus, their status as liquid assets will remain intact in respect of other regulations.

6. Whether the facilities extended under the Long term Financing Facilities for export oriented projects (LTF-EOP) is exempted from per party limit under Regulation R-1?

Yes, the facilities under LTF-EOP Scheme are exempted from the per party limit under R-1.

7. Does SBLC enjoy any weightage as normal LCs while calculating per party limit under R-1?

No. Since SBLC is a type of financial guarantee, no weightage is allowed while calculating the per party limit.

List of abbreviations used

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SPV Special Purpose VehicleSECP Securities & Exchange Commission of PakistanBPD Banking Policy Department, State Bank of Pakistan - Now Banking Policy and Regulation DepartmentSBP State Bank of PakistanDFI Development Finance InstitutionLPG Liquefied Petroleum GasLNG Liquefied Natural GasIPF Infrastructure Project FinanceNIT National Investment TrustCOI Certificate of InvestmentNBFC Non-banking Financial CompanyTFC Term Finance CertificatePFA Project Funds AgreementLOU Letter of UnderstandingMOU Memorandum of UnderstandingFCA Financial Completion AgreementEPC Engineering, Procurement and ConstructionO & M Operation and MaintenanceCAR Contractor’s All RiskALM Asset Liability ManagementNPV Net Present Value

THANK YOU

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