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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
2 © 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
Clipping
3 © 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
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
4 © 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
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
5 © 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
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.
6 © 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
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.
7 © 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
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
8 © 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
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.
9 © 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
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.
10 © 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
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.
11 © 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
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.
12 © 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
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.
13 © 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
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.
14 © 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
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
15 © 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
― 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
16 © 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
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.
Challenges and Opportunities
There is lack of
information on
ownership of Gawadar
port and the
Infrastructure projects
Challenge
s
Any plan handle the
demographic changes
in Gawadar?
17 © 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
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?
Challenges and Opportunities
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
18 © 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
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.
Challenges and Opportunities
Opportunities
19 © 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
20 © 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
Thank You