Amir Jamil Abbasi - 14 March 2017 - ICAP CFO Conference€¦ · energy projects). These energy...

1 © 2017 KPMG Taseer Hadi & Co., a Partnership firm registered in Pakistan and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss

entity. All rights reserved.

Document Classification: KPMG Confidential

KPMG Taseer Hadi & Co.

Chartered Accountants

Amir Jamil Abbasi

- 14 March 2017

https://kpmgbrandcentral.brandwizard.net/app/asset/asset_search.aspx?catid=756&libid=2




Clipping




Agenda An overview of the CPEC Project

Current Scenario of CPEC

Financial services perspective

Future scenario – Project Financing

Future Scenario – Treasury and FX operations

Future Scenario – Regulatory Impacts

Future Scenario – People

Role of Professional Services Firms

CPEC – Challenges and Opportunities




An overview of the CPEC project China has embarked on a massive ONE BELT AND

ONE ROAD project targeting to bring 65 countries and

significant world population in Europe, Asia, the Middle

East and Africa closer to each other.

This project was launched by Chinese President Xi

Jinping in 2013. The project has two components

— One Belt relates to development of land routes.

— One Road includes Maritime Silk Road




An overview of the CPEC project China Pakistan Economic Corridor part of China’s “One belt

one Road Project”(OBOR) (Current CPEC projects

estimated outlay is US$ 51 billion)

— Infrastructure Development - Network of transportation along three routes

(eastern, central and western) passing across all four provinces of the

country. (including Mass transit systems and rail network improvement)

— Development of Gawadar Port and Gawadar airport (estimated allocation

for infrastructure, industrial zones and Gawadar port are US$ 15 billion)

— Special industrial and economic zones.

— A series of energy projects (estimated US$ 35 billion is allocated for 19

energy projects). These energy projects have also been made part of CPEC.

— There are 3 Phases of CPEC: first phase is early harvest program which

would run from 2015 to 2023. Infrastructure projects would be part of Phase

II to be completed by 2025 and Phase III is expected to be completed by

2030.




Current Scenario of CPEC Work on Phase I has commenced. Based on current

info during the Phase-I all projects either equity based

or debt based are to be financed by Chinese

investors or Chinese banks.

The local banks in the Phase-I have limited

involvement partly related to certain Pak Rupee

components of few projects and are more involved in

financing infrastructure development and local

private sector capacity expansion.

The business projects currently continue to be

negotiated and discussed between the two

Governments with limited involvement of the local

private sector.




Financial services perspective One of the Pakistani banks is opening a branch in Urumqi

(Xinjiang Province) in China with an approx. staff of 19-20

people.

A handful of commercial banks have established

representative offices in China whereas few other banks

have started the process for arranging approvals for opening

representative offices.

The Pakistani banks through their offices in China are involved

in following major business activities:

— Guarantees

— Trade financing activities

— Trade support project financing

— Marketing customers for trade business and deposit




Financial services perspective Banks have started to designate few of their branches in

Pakistan as designated CPEC branches, Chinese desks

have been created and certain Chinese nationals have

also been employed for facilitation. These branches have

also arranged to have their names inscribed in Chinese

language.

ICBC is has already started its operations in Pakistan.

Further another Chinese bank is in the process of

obtaining regulatory approvals for commencing operations

in Pakistan.




Future scenario – Project Financing Pakistani banks are confident of their potential share in the

development projects under CPEC particularly in Phase II .

Islamic Banks are also gearing themselves to grab the opportunity to

channelise their excess liquidity into innovative Islamic financing

products.

Islamic banks consider their scope to be international and regional in

nature with respect to CPEC as 50% of the 60 countries covered by

OBOR are Islamic Countries.

Major component of financing will come from Chinese banks however

certain projects will still be financed by Pakistani banks.

Spillover effect of CPEC projects will result in investments in cement,

steel, contracting, hospitality, etc. and banks will have opportunities of

financing such projects.




Future scenario – Project Financing Growth might require larger banking syndicates including

collaboration with Chinese banks and increased presence

of Chinese and expansion of other foreign banks operating

in Pakistan.

Banks would need to strengthen project finance, credit

appraisal and advisory teams for CPEC.

Banks need to increase focus on SME sector to enable the

local businessmen to work to their potential.

Approximately US$ 35 billion of projects will be insured

locally and internationally. Large sized local insurance

companies likely to benefit through additional insurance

premium.




Future Scenario – Treasury and FX operations Need to develop products for Forex and Interest rate

management.

New products especially derivatives would need to be

introduced.

Financing in foreign currencies will involve separate risks and

limitations. Foreign outflows to Chinese firms for returns on

equity, principal and Investment would need to be managed.

Investment of Chinese in Pakistan Stock Exchange (PSX) and

Pakistani Corporate Sector.




Future Scenario – Regulatory Impacts Banks would need to assess whether they are

adequately capitalized to meet the financing needs of CPEC related projects that would be funded domestically. The regulator may also prescribe enhanced capital requirement in such circumstances.

Additional regulatory compliances may need to be introduced.

Need for Arbitration and Alternate dispute resolution mechanisms.

Considering the global outlook our regulators would need to align our reporting framework with globally accepted framework.

Focus on increased financial integration and inclusion.




Future Scenario - People Specialized expertise would be needed

Management of language and cultural barriers would

become important.

The work force would become more diverse leading to

new cultural and social challenges. Further attention

would also need to be given to provincial sensitivities.

There is a lack of transparency in respect to

expectations that CPEC projects would be managed by

Chinese skilled and specialized persons. This aspect

needs clarification.




Role of Professional Services Firms Professional services firms have a global outreach

and these can provide support in respect of:

— Insights

— Expertise in specialized areas

— Implementation and control of systems required

— Support on mergers and acquisition transactions

— Keep in check the new system risks that would result

due to increased economic activity




― Perception of deprivation of smaller

provinces if the promised and perceived

benefits of CPEC to the population are not

realized.

― Need for connectivity between local

communities and nearby economic zones

to benefit the local population.

It is not clear how Pakistan will

benefit in respect of revenues,

transportation cess etc. An estimate

in press was quoted for

transportation Cess of around USD

70 billion (appears unbelievable) ,

there is lack of transparency in this

area.

China has completed the economic

and environmental feasibilities

however we have limited insight of

such feasibilities conducted by

Pakistan. Environmental Impact

assessment?

Lack of transparency in respect of

borrowing cost on loans and rate of

return on equity projects financed by

Chinese investors. (News reports

indicate high rate of returns agreed

for CPEC).

Challenges and Opportunities

Challenge

s




The Chinese debt and even

equity component of CPEC

will pose challenges to the

economy and balance of

payments position in the long

to medium run.

Cultural and

linguistic issues

would need to be

addressed. Will an equitable

participation by

Chinese and local

investor be

maintained.


There is lack of

information on

ownership of Gawadar

port and the

Infrastructure projects

Challenge

s

Any plan handle the

demographic changes

in Gawadar?




If the Pakistani banks

grab the opportunity

proactively then CPEC

can be a major driver of

their growth and

profitability in the

medium to long term.

Increased presence of

Chinese Banks and expansion

of foreign banks operating in

the Country and opportunities

for Pakistani banks including

Islamic Banks to enter

Chinese FS Market – Potential

for collaboration

Potential to generate

significant revenues

for Government and

Banking Sector?


Opportunities

CPEC has the potential

to change the economic

geography of Pakistan –

It is a potential game

changer for the country.

Infrastructure development

would result in a boost for

private sector and industry

and would benefit various

segments to ― Cement,

Construction, tourism etc

Minimize Electricity

deficiency to zero and

potential for

significant new

employment

opportunities




Development of various

economic zones and

industrial parks.

As per estimate local currency financing

needs for CPEC related projects would be

Rs 580 –Rs 780 billion whereas another

Rs 550 billion would be required for

second phase spill over projects.

Potential to further leverage

technology and digital

transformation considering

increased Chinese investment.

Enhanced security due

to mutual defense co-

operation with China.


Opportunities







Thank You

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Amir Jamil Abbasi - 14 March 2017 - ICAP CFO Conference€¦ · energy projects). These energy...

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