Pakistan asked to complete PPP transaction for Lahore project

Faisalabad: Asian Development Bank has asked the Government to complete Public-Private Partnership (PPP) transaction for Private Sector Concession by October 2009, while ADB multi-tranche financing facility loan will be approved for public sector investment by December 2008 for Lahore Rapid Mass Transit System Project.

According to official sources, the Government understands that developing the Lahore RMTS with a PPP would provide an opportunity to improve the overall efficiency of the system. A PPP provides the Government with an opportunity to efficiently allocate risks between the Government and specialised private firms.

This means that risks will be controlled and influenced by the party that is best placed to control and influence these risks.

A PPP, however, would not make sense for the Government or private sector if either party were bearing risks that are better handled by the other. This means that a well-structured PPP is essential to achieve the objectives expected from a PPP.

ADB experts citing examples of key issues that need to be resolved as part of structuring a PPP transaction, include the following:

(i) Public versus private funding. The passenger fares that the Government plans to charge for the green line will not cover the full cost of building, operating, and maintaining the line. The Government will need to subsidise a portion of the capital costs. What portion would be funded by the Government, where would these funds come from, and how would these funds be paid are key issues to be resolved.

(ii) Ridership risk. While the Government should bear part of the ridership risk, the private operator should also have incentives to maximise ridership. Thus the private operator should bear a portion of the ridership risk. What portion and under what terms are key issues to be resolved.

Prior to consideration of ADB project financing, ADB should update project reports mentioned. Engagement of a transaction advisor is required to formulate financial structuring, undertake detailed due diligence, and package the Lahore RMTS to attract private capital and management.

The transaction advisor, in close consultation with ADB and the Government, will help prepare and launch a PPP transaction for the green line. ADB is willing, in principle, to partly finance the public-sector-financed portion of the Project under the multi-tranche financing facility modality.

ADB experts disclosed that the transaction advisory work will be carried out in three phases: preparation, implementation, and negotiation. During the preparation phase, the transaction advisor will carry out technical and legal due diligence, design the detailed structure and terms of the transaction, market the transaction with potential investors, and develop prequalification and bidding documents as well as the necessary contracts.

During implementation, the transaction advisor will assist the Government in obtaining any approvals and permits required, pre-qualifying potential investors, carrying out the bidding process, evaluating proposals, awarding the contract, and holding negotiations with lenders. During the negotiation, the transaction advisor will support the Government and winning bidder reach financial closure.