PUNJAB BOARD OF INVESTMENT & TRADE

CONCEPT PAPER PROJECT DEVELOPMENT COMPANY

DRAFT

OCTOBER 2009

[Project Development Company] PBIT INTRODUCTION

A state depends heavily on the revenue streams to manage state operations. Major part of these revenues comes through taxes and inflow of direct foreign & Local Investment as a result of efficient business and trade conducted by private sector in the state. To understand the Investment Behavior we can make use of following model.

Q2 Low Risk Hi Return Q1 Low Risk Low Return

Q3 Hi Risk Hi Return Q4 Hi Risk Low Return

The important inferences of this model are 1. Ideal investment decisions usually reside in Q2 2. Government investments decisions take place only in Q2 and Q1( public interest), and do not move in Q3 and Q4 3. In contrast Private sector investment decisions tends to be in Q2 to Q3 because of its inherent risk taking nature In the times when economic activity is booming, and wide gaps between supply and demand exists due to higher consumption rates of consumer markets, private sector remains motivated to invest further in the production and trade capacities even in Q3 arena, because of sound macroeconomic indicators. Government gets good revenues in result and spends it in public sector welfare projects. This is also termed as Normal course of business and governance in a state.

NORMAL COURSE OF BUSINESS In normal course of business & Governance, different roles and responsibilities are adapted by various stake holders. Government usually adapts a role of facilitator and regulator to promote the right business environments for the current and future businesses existing in a state. Government play role of a regulator to ensure intelligent and investment friendly policy enforcements to motivate the private sector to run their current businesses smoothly and also to motivate

[Project Development Company] PBIT investment in new ventures (Q3) to further enhance the GDP of State. Government also adapt the role of facilitator by allowing establishment of trade bodies and council, and fine tune its economic and other processes in light of its interaction through trade bodies or through direct interaction with the businesses. As a result of such policies, Private investors assume the role of ensuring efficient operations of current businesses, and also invest heavily in new investments, despite being high risk ventures. Banking and financial institutions also look at the positive macro and micro economic figures, and provide financing at lower interest rates for the new ventures and existing expansion, since they also enjoy good liquidity and surplus funds with them as a result of positive economic activities world over.

ABNORMAL BUSINESS ENVIRONMENTS Abnormal business environments take place once the world is suffering through high recessionary periods, which results into lower consumption of goods by consumer markets. Businesses suffer huge losses and to curtail these losses, and further cut down on their production and employment figures. Increases unemployment reduces potential consumer market and an inward downward economic spiral is generated leading to severe economic difficulties and stoppage of businesses as well. Due to this activity, liquidity of financial institutions dries out and risk of doing business increases many folds. Financial institutions lending capacities for new investment are impaired and their preference changes from high risk high return businesses to Low return low risk businesses. In such a scenario private sector looses interest into new ventures or green field projects (Q3 arena) due to very high hurdle rate. It will be very interesting to note that new ventures and Greenfield projects are always essential for the continuity of business profits and keep the country economy on a positive track. Such projects bring new technology and required capacity and are like fresh blood. If any economy does not get such fresh breaths, then it cannot compete in the international business in positive economic environments (once recession is over) as well, due to obsolescence and quality issues.

CALL OF THE DAY Presently the world is passing through a recessionary period, and Pakistan is facing more severe economic difficulties due to other factors added like terrorism and war in the region. In such scenario, private sector will hardly take any new initiative and is busy in their survival efforts for the current businesses. Private sector also hesitates to get into such high risk ventures ( Q3 & Q4) because of exorbitantly high financial costs which make the investment proposals non feasible. Due to above mentioned factors foreign investors also hesitate to invest in a region with more complexities, where as they always have an option of investment in more peaceful regions.

[Project Development Company] PBIT In such circumstances and to stop negative downward spiral; Government has to adapt a different role to ensure economic stability of the state and adapt innovative strategies to enhance business revenues. Enhanced business revenues increase Government revenues and its capacity to invest in public welfare and state operations. One of the innovative strategies to keep earning spiral positive and upward in recessionary periods is to establish new Green field projects (Q3 arena) under a Project Development Company and then sell these projects to private sector after mitigating the high risk into low risk profile. This will provide the required boost to the economy of the country and at the same time it maintains the cutting edge of Country economic profile.

PRO CON ANALYSIS OF THE PROPOSAL Through new business establishments, and new technology investments, revenue of the businesses increases, and in return Government tax revenue enhances. More employment is generated, thus consumer market capacity to buy enhances, and business activity grows. By establishing green field projects in root of value chain, Government saves huge outflow of foreign exchange, which in return ease out state difficulties for balance of payment issues and enhances foreign reserves by utilizing the local resources Once world economy turns positive, Government can earn substantial financial profits by selling these companies to private sector

COMPETITIVE ADVANTAGES GOVERNMENT ENJOYS DURING RECESSIONARY PERIODS Establishment of new Greenfield projects is more feasible and beneficial for the Government than the private sector. The main reasons are Government can arrange funds at much lower financial costs than the private sector investors. Project being undertaken by Government carries a sense of sovereign guarantee as well for the financial institutions , so risk premium is minimized, and loans can be arranged on a long term basis Government already possess vast areas of suitable lands, thus cost of doing project is reduced reasonably, cost of land being a major part of total cost. Government owned infrastructure and utility facilities provide easy initial survival of Green field project, which is one of the most crucial parameter

[Project Development Company] PBIT Government can acquire latest technologies and know how much easier and at lower price than the private sector by collaborating and leveraging its bilateral relationships with other Countries, thus can leverage it into best interest of the country. Italian Mango pulping plant is one live example of this sort. Government has the power to legislate and thus can ensure a very good market for the products of green field project, by utilizing tools of tariffs and duties on imports. By investment in the base raw material industries, Government can obtain double benefits o Good earnings from new venture because of production of raw material for state industrial base o Save outflow of precious foreign exchange to import such raw materials from abroad. A small example is of HDPE and LDPE used in packaging industry. At this time 100% is imported from abroad which causes reasonable foreign exchange outflows. If Government establish an HDPE / LDPE plant in Pakistan, and creates a price differential, Government will reap very good profitability and at the same time will utilize that part of foreign exchange at somewhere else more useful.

Side by side there are certain disadvantages as well for Public sector organizations which have been learned by the world in the past years. Major factors are Bureaucratic culture of organization which limits the timely business decision making Professional business management resource is not available with the Government. Resources trained in Public Administration are not the best option to manage business operations of these companies. A typical lethargy and inefficiency built in the Public sector system poisons the capability and initiative in a business organization which is very essential for growth of the Company Political and personal influences on public sector management force them to go for suboptimal decision making which harms the productivity of the business set up

WAY FORWARD Deliberating the discussions in foregoing paragraphs, there is a need to find out a solution, which can address the challenges of today, which overcomes the disadvantages, mentioned and can reap all the benefits foreseen. Punjab Board of investment & Trade have come up with an innovative solution for such purpose which is called as Project Development Company.

[Project Development Company] PBIT CONCLUSION

An outline concept of Project Development Company is presented here which has all the merits to become a recipe to the present economic situation and can be a base for the fast trek economic development in the province of Punjab. Salient features of this concept are highlighted below, which can be further refined and fine tuned after deliberations at different levels and among different stake holders. Government of Punjab (GOP) should establish a Project Development Company ( PDC) which should be augmented with Best available Private sector management and technical resources at market price PDC should be provided with a seed equity of US $ 100 million along with a complete autonomy of decision making supervised by a very professional board composed of renowned business men of the country PDC should be provided with Sovereign support to obtain Low cost loans from National and international financial institutions PDC should be mandated to establish new ventures in Q3 area which strictly meet the pre defined criteria and operate them on professional grounds with complete responsibility of P &L PDC is to identify the major areas which are very essential for the economical growth of the province ( production of such base raw materials which are at present being imported from abroad and private sector is hesitant to invest being in Q3 arena. Such project must qualify the Double advantage criteria for the Government as explained above For each project selected, 40:60 equity debt ratio be established. Equity be put in by Government and debt be arranged at lower rates by PDC with the help of the Government from financial institutions Possible areas can be base chemicals production, base High density poly ethylene, Low density polyethylene, base engineering goods , machinery parts, electronics chips, circuitries, hardware industry, large scale growing, poultry breeding, semen development, cattle breeding, basic steel manufacturing, resin and plastic manufacturing, wood and straw pulping , bleaching chemicals, development of minerals into a ready to use raw materials ( provided it fit into above narrated criteria) Management of Company must have powers to make necessary decision making and should move to establish a green field facility. Following should be responsibility of the Company without any interference from any quarter. o Selection of technology and sight. o Selection of team o Basic & Detailed engineering

[Project Development Company] PBIT o Procurement of equipment o Construction / erection, commissioning and start up of the plant. o Quality of the product at par with the imported quality o Branding and marketing / sale of the Product o Profitability and going concern o the company o Timely completion of the project and its operation After two quarters of profitable financial reporting, Company should launch its first IPO (Initial Public offering) at a base price + premium. This income should be used to pay off the part of the debt to further improve the profitability figures of the Project. In about two years, Company should be well established, and must report profit streams regularly, which will enhance the share value in stock market. After two years, keeping in view the macro and micro economic factors, PDC should sell its shares in the stock market or to a prospective Private investor at a very good premium, and management of project is handed over to the new shareholders holding 51% shareholding. Profits and proceeds of sale of the project should be utilized by PDC to establish more green field High risk High return projects, and equity should keep revolving and growing with each transaction.