Project Finance 2022

Last Updated September 23, 2022


Law and Practice


Ali Khan Law Associates was founded by barrister Ali Asgher Khan with the aim of providing a legal advisory services platform of international standing, where “dedication to excellence and a solution-oriented approach matters”. The firm currently operates in Karachi and Lahore, and remotely in Islamabad and Quetta, with a team of 11 lawyers. The projects team acts as the legal counsel for multiple major financial institutions, including multilateral/regional development banks, commercial banks, Islamic banks, corporate sponsors and various other participants in the infrastructure, energy and project finance sector. The firm provides clients with an end-to-end service that caters to their bespoke needs, which is evident through its involvement in all major project financing and PPP projects implemented in Pakistan, including water, power, mining, road and special economic zones projects.

In a typical project finance structure, a project sponsor is responsible for the overall success and delivery of the project. A project sponsor is, more often than not, a consortium of various parties including government agencies and private entities that form an SPV and acquire shares in the same for the purposes of a specific project.

However, it is worth highlighting that in project finance structures sponsors do not have sufficient funds to undertake the project and therefore use various financing vehicles to raise funds through obtaining debt. This is where the role of lenders comes in. Lenders are perhaps the most integral part of a project finance transaction, as they provide a substantial amount of the capital required to finance a project through provision of debt to project sponsors.

In Pakistan, lenders typically include national and international commercial and investment banks, multilateral/regional development banks, export credit agencies, national development banks and various other non-banking financial institutions.

The PPP regime in Pakistan is divided into federal and provincial regimes, each of which has its own legal framework and regulatory bodies. Both types of regime provide for:

  • the project delivery process;
  • the procurement process;
  • the financing and government support mechanisms; and
  • various other miscellaneous mechanisms, including those relating to dispute resolution and grievance redressal.

PPPs in Pakistan have generally been executed in public service sectors such as:

  • transport and logistics;
  • mass urban public transport;
  • local government services;
  • energy projects;
  • tourism projects;
  • industrial projects;
  • irrigation projects; and
  • social infrastructure.

Even though Pakistan's PPP market has relatively matured in the past decade and the implementation of PPPs in the above-mentioned sectors has drastically increased, there are still certain discernible limitations to the implementation of PPPs. Specifically, the capacity and efficient use of resources are key challenges faced in the successful implementation of PPP projects at the provincial level, including the limited capacity of governments to identify a pipeline of viable projects, develop these projects, and provide adequate guarantees and financing.

Additionally, Pakistan does not have adequate guidelines, checklists and model documents for various sectors, thereby discouraging investments from the private sector. The governments' aforementioned limited capacity, along with the lack of a clear framework for dispute resolution, conciliation and arbitration creates obstacles in the successful implementation of PPP projects.

A typical PPP structure can be extremely complex and involve numerous contractual arrangements between the government, sponsors, project operators, financiers, suppliers, contractors and various other third parties. Owing to the complex nature of project finance transactions, several issues must be considered when structuring such transactions, including:

  • the financial viability of the project through conducting a cost/benefit analysis and determining an expected return on investment;
  • identification and ring-fencing of risks vis-à-vis the parties involved;
  • assessment of the project's bankability;
  • the debt-to-equity ratio of the project;
  • availability of security package to attain financing; and
  • identification of government support, including grant of capital, revenue guarantees, land acquisition assistance and tax incentives.

Funding Techniques

With regard to the typical funding techniques available, it is worth noting that deals are generally structured on non-recourse/limited recourse financing or full recourse financing.

Non-recourse/limited funding

Under non-recourse financing, lenders can only be paid from the project company's revenues without demanding compensation from the equity investors, thereby ring-fencing the project company’s obligations from those of the equity investors and allowing debt to be collected from the cash flows of the project. However, funding under non-recourse/limited recourse financing is based on a security package that must be provided to the lenders prior to disbursement of financing.

Full recourse funding

Conversely, under full recourse financing, lenders provide loans directly to the parent company and/or the equity investors on the strength of its credit rating and balance sheet. Lenders thereby have full recourse to the balance sheets of the parent company and/or the equity investors themselves; however, the loan is generally unsecured (ie, not asset-backed).

According to a report by the Asian Development Bank (ADB), PPP initiatives skyrocketed in Pakistan between 1990 and 2019, thanks to support from the government of Pakistan. Pakistan has witnessed approximately 108 financially closed PPP projects, with a total investment of approximately USD28.4 billion in the past 30 years – specifically, in sectors such as roads, railways, energy, water and waste water, social and other infrastructure, and information and communications technology.

However, trends in recent years suggest that the sectors set to become active in the future include waste and water treatment facilities, development of special economic zones through PPPs, tourism, development of recreational facilities and the development of renewable energy (eg, waste-to-energy conversion and green hydrogen-based energy production).

Relevant Legislation

The following legislation (collectively “the Relevant Laws ”) governs the securitisation of financing:

  • the Companies Act 2017 (as amended from time to time) (“the Companies Act”);
  • the Financial Institutions (Secured Transactions Act) 2016 (as amended from time to time) (“the Secured Transactions Act”); and
  • the Transfer of Property Act 1882 (as amended from time to time) (TPA).

Assets Available as Collateral

Various assets are typically available as collateral to lenders, including:

  • immovable property of the company and/or the sponsors by way of mortgage;
  • machinery, equipment, vehicles and other movable property of the company and/or the sponsors by way of hypothecation;
  • bank accounts of the company by way of lien;
  • shares of the sponsors in the project company by way of share pledge; and
  • receivables under the agreement by way of project assignment.

Applicable Formalities and Perfection Requirements

Under the Relevant Laws, securities created over the above-mentioned assets must be registered for the purposes of perfection and enforcement. It is important to note that securities created by way of execution of agreements cannot be enforced unless otherwise registered and subsequently perfected in accordance with the Relevant Laws.

However, the applicable formalities for registration differ depending upon the nature of the security and the nature of the entity registering a security. Examples include the following requirements:

  • the instrument creating security over immovable property must be registered with the land registry where the mortgaged immovable property is situated;
  • the instrument creating security over a company’s movable property must be registered with the Securities and Exchange Commission of Pakistan (SECP); and
  • the instrument creating security over any legal entity’s property (except for a company’s property) must be registered with the registry established under the Secured Transactions Act.

The Relevant Laws in Pakistan allow the creation of a floating charge on all present and after-acquired movable property or a certain class of present and after-acquired movable property (including receivables or inventory) for the benefit of a secured creditor. The law prescribes that, pursuant to the creation of the charge, the movable property may be used in the ordinary course of its business until the crystallisation – in terms of the security agreement – of such charge into a fixed charge.

In Pakistan, the costs associated with executing agreements/letters in relation to the creation of collateral security interests and their subsequent registration must be borne by the borrower.

With regard to the execution of agreements/letters, the relevant provincial or federal stamp acts apply and requisite stamp duty is payable. With regard to the perfection of security, a nominal fee applies (eg, it costs PKR7,500 to register a company's security with the SECP).

The Relevant Law states that the security agreement executed in order to create security must entail a description of the collateral in a manner that reasonably allows its identification. In practice, a generic description is sufficient for the proposed movable assets to be secured via hypothecation; however, immovable properties and financial securities such as shares and bank accounts must be specifically described in the security agreements and relevant registration documents.

The applicable laws in Pakistan that govern the granting of security interests to creditors prescribe certain regulatory requirements vis-à-vis registration and perfection of a security interest. Be that as it may, there are no restrictions per se under Pakistan’s laws on grant of securities or guarantees.

Upon registration of securities by the parties, a public record is maintained by the land department, SECP or registry  containing the particulars of the charges registered under the Relevant Laws and is open to inspection by any person upon payment of prescribed fees.

Such registers may be searched using various criteria – for example, the registry created under the Secured Transactions Act is searchable through:

  • name of the entity;
  • where the entity is a natural person, either:
    1. National Identity Card number or National Identity Card for Overseas Pakistanis number (for citizens of Pakistan); or
    2. passport number (for foreign nationals);
  • unique registration number;
  • vehicle registration number; or
  • any other criteria prescribed by the regulations.

With regard to the procedure for releasing a security, it varies depending upon:

  • the nature of the security; and
  • the nature of the entity registering a security.

A security created under the Companies Act, for example, shall be released once the company intimates in the register that any mortgage or charge created and registered by it has been paid or satisfied in full within 30 days of such payment or satisfaction. Thereupon, the registrar shall – after obtaining evidence of payment or satisfaction of the charge on the security – enter in the register of charges a memorandum of:

  • satisfaction in whole or in part; or
  • the fact that part of the property or undertaking has been released from the charge.

However, under the Secured Transactions Act, a secured creditor must – in relation to a registered financing statement – file a termination statement (containing a unique registration number and the date on which the obligation was fulfilled) in the register within 15 working days of the payment or satisfaction in full of the obligation to which the registered financing statement relates. The termination statement shall be considered officially registered when a unique registration number or registration number (as applicable), date and time is assigned to it in the register and such statement will then become publicly searchable.

In case of syndicated financing, security may be enforced by the lenders (either directly, or through majority vote, or through the security agent) upon the occurrence of a default by the borrower in accordance with the provisions of the financing documents and security documents.

In the event of default and termination, security documents contractually provide that the lenders – without prejudice to their other rights and remedies in suits or other proceedings – have the right to take possession of, recover, sell, transfer or otherwise dispose of the secured property in order to repay the debt owed to them by the borrower.

Under the Financial Institutions (Recovery of Finances) Ordinance 2001 (“the Ordinance”), the lenders may file a suit against the borrower for the recovery of any amount written off, released or adjusted under the financing and security documents. Where the suit is filed by the lenders under the Ordinance for the recovery of any amount through the sale of any property that is mortgaged, pledged, hypothecated, assigned or otherwise charged – or that is the subject of any obligation in favour of the financial institution as security for finance – the courts may, during the pendency of the suit:

  • restrain the borrower and any other concerned person from transferring, alienating, parting possession with (or otherwise encumbering, charging, disposing or dealing with) the property in any manner;
  • attach such property;
  • transfer possession of such property to the financial institution; or
  • appoint one or more receivers of such property on such terms and conditions as it may deem fit.

The final decree passed by the courts shall provide for payment of the debt from the date of default and shall constitute and confer sufficient power and authority for the lenders to sell (or cause the sale of) the mortgaged, pledged or hypothecated property – together with transfer of marketable title – without any further order from the courts.

However, in the event the mortgage is an “English mortgage” (as defined in the TPA), the mortgagee shall have the power to sell the mortgaged property without the intervention of the court, subject to certain notification requirements.

The courts in Pakistan recognise a choice of foreign law as the governing law of the contract provided that the choice of law is bone fide and not contrary to the public policy of Pakistan. However, certain contracts may need to be governed by the laws of Pakistan to be effective – for example, concession contracts between private parties and government agencies under a PPP transaction and contracts for the creation of security over assets located in Pakistan – as they must be enforced in Pakistan. Generally, a choice of foreign law is combined with a choice of foreign jurisdiction or an arbitration clause in a contract and is upheld in Pakistani courts, as further detailed in 3.3 Judgments of Foreign Courts.

Court Judgments

A judgment by a foreign court may be enforceable in Pakistan provided that certain conditions are fulfilled. Section 13 of the Civil Procedure Code 1908 (CPC) states that a foreign judgment will be conclusive with regard to any matter when directly adjudicated upon between the same parties. However, a foreign judgment in relation to a contractual dispute can only be enforced in Pakistan if:

  • it is based on the merits;
  • it is in consonance with the laws of Pakistan;
  • it is in line with natural justice;
  • it has not been obtained by way of fraud and/or misrepresentation; and
  • it has been passed by a court of competent jurisdiction.

Furthermore, upon the production of any document purporting to be a certified copy of a foreign judgment, the court shall presume that such judgment was pronounced by a court of competent jurisdiction – unless the record shows to the contrary.

Arbitral Awards

An arbitral award is recognised and enforced under the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011 (“the Enforcement of Arbitral Awards Act‟). Section 6 of the Enforcement of Arbitral Awards Act states that a foreign arbitral award shall be:

  • recognised and enforced as a judgment or an order of a court in Pakistan; and
  • treated as binding for all purposes on the persons between whom it was made.

However, a foreign arbitral award shall not be recognised or enforced in Pakistan if it falls within the exclusionary clause of Article V of the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the Convention‟) – that is, if the following circumstances exist:

  • the parties lacked capacity to enter into the contract;
  • the agreement was not valid either:
    1. under the law to which the parties have subjected themselves to; or
    2. in the absence of any such agreement by the parties, under the law of the country where the award was made;
  • the party against whom the award was made was either not able to present their case or not given notice of the chosen arbitrator or of the arbitration;
  • the award covers instances that were beyond the scope of the arbitration agreement;
  • the composition of the arbitral authority/procedure was not in accordance with either:
    1. the agreement of the parties; or
    2. the arbitration law of the country where the arbitration took place; and
  • where the award has been set aside by a competent authority of the country where the award was made.

Additionally, the award may not be recognised if:

  • a competent authority of the country where the enforcement is sought finds that the subject matter of the award was not capable of settlement by arbitration under the law of that country; or
  • the recognition of the award would be against the public policy of that country.

The general principles concerning the governing law of the contract and the enforcement of a foreign court judgment  or a foreign arbitral award have been covered in 3.2 Foreign Law and 3.3 Judgments of Foreign Courts. However, certain matters may impact the foreign lender’s ability to enforce its rights under a loan or security agreement.

Firstly, investors deemed “alien enemies‟ – that is, any investor residing in a foreign country that is at war with or engaged in military operations against Pakistan – may only sue in the courts of Pakistan with the permission of the central government of Pakistan.

Secondly, the concept of “interest‟ or riba is banned under the laws of Pakistan. Therefore, any judgment passed in relation to the recovery of interest on financing shall not be enforceable in Pakistan unless such financing was provided by the lenders under Islamic modes of financing. 

By way of background, it is important to note that the foreign exchange policy and any matters pertaining to payments and dealings in foreign exchange and import/export of currency are formulated and regulated in accordance with the provisions of what shall be collectively referred to as “the Foreign Exchange Relevant Laws‟:

  • The Foreign Exchange Regulation Act 1947 (“the Foreign Exchange Act‟“); and
  • The Foreign Exchange Manual (“the Manual‟).

Therefore, any loans provided to a Pakistani borrower by a foreign lender are governed by the Foreign Exchange Relevant Laws.

Private Sector Borrowing from Lenders Abroad

PSB for project financing

Private sector borrowing (PSB) for project financing can be raised in order to meet capitalised costs of the projects, such as expenses relating to:

  • establishment of new projects;
  • import of plant and machinery;
  • modernisation or expansion of existing projects;
  • buying or acquiring patents/operating licenses/trademarks; and
  • procurement of technical expertise.

Eligibility of lenders

Private sector borrowing may be raised for the above-mentioned purposes from internationally recognised reputable foreign lenders such as:

  • foreign banks;
  • international capital markets;
  • multilateral financial institutions (eg, the International Finance Corporation or Asian Development Bank);
  • government-owned development financial institutions; and
  • export credit agencies.

However, borrowers may only obtain funding only from the foreign lending institutions/lenders that comply with the international standards – that is, the FATF guidelines for AML and CFT. Additionally, the maturity of loans obtained should not be less than three years and any funds generated under such loans are not allowed for onward lending or investment in capital market/real estate or acquiring a company (or a part thereof) in Pakistan.

Registration requirements

Furthermore, an authorised dealer (as listed in the Manual from time to time) must register all foreign currency loans by private sector borrowers, after ensuring that the terms and conditions of the underlying loan agreement comply with the relevant regulations of the category against which the loan is being registered.

Chapter 19 (Loans, Overdrafts and Guarantees) of the Manual states that securities may be issued as collateral against PSB from foreign lenders. Such securities may be created for movable or immovable property owned by the eligible borrowers or their sponsors, subject to compliance of Prudential Regulations of the State Bank of Pakistan (SBP) and other applicable instructions.

However, in case of pledge of shares, the securities offered to raise PSB from foreign lenders will be governed by the regulations contained in Chapter 20 (Securities) of the Manual and other relevant instructions issued by the SBP from time to time. Additionally, issuance of bank guarantees by the authorised dealers and corporate guarantees by sponsors in favour of foreign lenders is permitted for the loans registered with the authorised dealer.

What is Foreign Investment?

Foreign capital has been described under the Foreign Private Investment (Protection and Promotion) Act 1976 (FIPPA) as “investment made by a foreigner in an industrial undertaking in Pakistan”, which can be in the form of foreign exchange, machinery or any other form the federal government may approve. Furthermore, foreign private investment has been defined as “investment in foreign capital by a person who is not a citizen of Pakistan or who, being a citizen of Pakistan, is also the citizen of any other country or by a company incorporated outside Pakistan, but does not include investment by a foreign government or agency of foreign government”.

The Foreign Investment Regime

It is pertinent to note that Pakistan has an open foreign investment regime, with various protections afforded to foreign investors that are no less than the treatment to national investors. It is available to foreign investors in all sectors and activities except for restricted industries, which include arms and ammunition, high explosives, radioactive substances, securities, currency and mint, and consumable alcohol.

In this regard, the Board of Investment (BOI) is the apex agency to promote, encourage and facilitate foreign investment in Pakistan and the comprehensive foreign investment regime is reflected in the Investment Policy 2013 (“the Policy”), which consolidates the major requirements under several laws regarding foreign investment across all sectors.

The main laws regulating acquisition and investments by foreign nationals and investors are as follows:

  • the Foreign Exchange Act;
  • FIPPA;
  • the Protection of Economic Reforms Act 1992;
  • the Manual;
  • the Companies Act;
  • the Competition Act 2010;
  • the Securities Act 2015;
  • the Banking Companies Ordinance 1962;
  • ithe Special Economic Zones Act 2012;
  • the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations 2017; and
  • the Competition (Merger Control) Regulations 2016 (the Merger Control Regulations).

Chapter 14 (Commercial Remittances) of the Manual provides that dividends may be paid to non-resident shareholders by way of repatriation. However, such repatriation is subject to certain regulatory requirements. Each company incorporated under the laws of Pakistan that wishes to make remittance of dividends to its non-resident shareholders must obtain the approval of SBP and fulfil certain requirements, including:

  • designating an authorised dealer through whom it proposes to remit dividends to its non-resident shareholders (upon receipt of nomination of a bank from the company, SBP authorises the bank concerned to effect remittance of dividends – whether interim or final – to the non-resident shareholders of the company without its prior approval); 
  • submitting the relevant application concerning dividends due to all non-resident shareholders in the prescribed form;
  • submitting copies of financial statements of the company concerned;
  • submitting a certified true copy of the company’s shareholders’/directors’ statement declaring the dividend; and
  • where tax exemption is claimed by the company or any of the shareholders, submitting a certificate to this effect as produced from the competent tax authorities.

In addition, to the fulfilment of the above-mentioned regulatory requirements by the company, certain substantial and procedural requirements (as prescribed in the Manual) must be fulfilled by the authorised dealer prior to remittance of dividends to non-resident shareholders.

According to the Manual, project companies are permitted to maintain offshore foreign currency accounts but only during the construction and operation of the projects. Furthermore, offshore accounts may be opened by authorised dealers only.

Under the laws of Pakistan, there is no general requirement to register or file financing and project agreements with any government authority. The payment of stamp duty, as previously mentioned in 2.3 Registering Collateral Security Interests, is perhaps the only local formality that must be fulfilled while executing the financing and project agreements for such agreements to be admissible in a court of law.

However, any document creating or purporting to create security in favour of the lenders has specific registration requirements under the Relevant Laws and therefore must be registered with the relevant authority (as detailed in 2.1 Assets Available as Collateral to Lenders) for the purposes of perfection and enforcement of such security.

Ownership of Land

The Constitution of the Islamic Republic of Pakistan 1973 (“the Constitution”) states that every citizen of Pakistan shall have the right to acquire, hold and dispose of property in any part of Pakistan, subject to the Constitution and any reasonable restrictions imposed by law in the public interest. Therefore, persons who are not citizens of Pakistan are generally not permitted to own land in Pakistan except with the permission of the federal government (the Ministry of Interior, or MOI).

However, the restriction on non-citizens owning land is not absolute. Non-citizens may, in order to invest or undertake a project in Pakistan, incorporate a company with the SECP and own, lease or license land in Pakistan through the company by way of execution and registration of sale deed, lease and licence agreements (as applicable).

Licence of Natural Resources

Additionally, the Constitution states that the ownership of natural resources, lands, minerals and other things of value vests with the government of Pakistan. However, the right to use such natural resources may be granted to private parties by way of a licence. In providing such licence, each governmental department concerned applies its own procedures and criteria to determine the terms of award of such licence. Foreigners may obtain such licences in relation to natural resources by way of incorporation of a company with the SECP.

The concept of agency and trust is widely recognised, established and legislated upon in Pakistan. In a typical project financing arrangement, security is created under the security trust deed structure. This is a form of arrangement that creates a single security trust, specifically for use in syndicated finance, in which all the respective securities are held on trust by a security trustee for the benefit of a group of secured finance parties or lenders. The “trust” created within the security trust deed structure pertains to the “security interests” held by the trustee on behalf of the lenders and is generally captured through a security trust deed entered between the project company, the trustee, and the lenders.

However, owing to the complications that often arise during the establishment of a separate entity to hold the collateral in a syndicated loan agreement under a security trust structure, this trend has shifted and securities are now often structured on the “joint pari passu‟ basis – that is, on the basis that each lender keeps their respective right over the collateral and stays on equal footing with one another as they are granted equal rights or interests associated with the security.

With regard to competing security interests in Pakistan, it is important to note that subordination of loans may occur in the event of:

  • loans obtained on an asset via different transactions; and
  • loans obtained on an asset via one transaction.

Loans Obtained via Different Transactions

As a general practice, borrowers may incur financing either through a secured debt or through an unsecured debt. Unless otherwise agreed by the parties through a contractual arrangement, the loan owed under secured debt must be paid prior to the payment of the unsecured creditors' debts. Similarly, it is worth highlighting that any security created and/or registered earlier on will rank higher than security created and/or registered at a later date.

Loans Obtained via One Transaction

In the event a syndicate of lenders or various syndicates of lenders (such as mezzanine financiers, Islamic financiers and conventional financiers) provide financing for a single transaction, such syndicate or syndicates of lenders may either have an equal security interest or a competing security interest as captured by the relevant financing agreement (ie, the common terms agreement or the subordination agreement). Such contractual subordination is found in the Pakistani lending market when lenders legally agree on whose loans would be paid first.

In practice, the development of private sector projects and PPP projects via project financing transactions requires the project company to be incorporated in Pakistan. Given that the project company's bankruptcy remoteness is imperative, such project companies are typically organised as SPVs created for the express purpose of implementing a certain project. Such project companies are typically incorporated as a private limited company, owing to ease of regulatory and disclosure requirements.

However, a change in trend has been noticed whereby most project companies are now being incorporated as or converted to public limited companies (unlisted). This is due to the absence of shareholders' pre-emptory rights in such companies and subsequent ease of transfer of shares.   

Drawing inspiration from similar procedures provided in the US Code, the promulgation of the Corporate Rehabilitation Act 2018 (the Rehabilitation Act) has provided a court-driven legislative structure to rehabilitate financially constrained companies. The Rehabilitation Act makes it possible for companies having financial debts equal to or exceeding PKR 100,000,000 to apply to the court for rehabilitation.

The Rehabilitation Act enables the appointment of a mediator, who is an insolvency expert in the relevant field, by the court to prepare a plan of rehabilitation (“the Plan”). Once the court approves the Plan, it is then subsequently implemented by the court. One key feature of the Rehabilitation Act is that once proceedings for corporate restructuring are commenced, a moratorium is granted to the distressed company to preserve the assets of the company against any pending litigation or enforcement proceedings.

Additionally, the legislature has also introduced the Corporate Restructuring Companies Act 2016 (the Restructuring Companies Act) with the aim of establishing corporate restructuring companies to restructure and reorganise non-performing assets and companies that require corporate restructuring.

Once the process of insolvency is initiated in accordance with the Provincial Insolvency Act 1920, the liquidator takes either actual or constructive possession of the company's assets for subsequent distribution among the creditors. It is to be noted that the liquidator acts as the trustee for the creditors upon taking possession of the insolvent company’s assets and such custody does not impair the rights of the creditors in relation to secured assets. As a result, the secured creditors remain entitled to enforce their security in accordance with the applicable laws of Pakistan upon the insolvency of a company and such right remains unaffected following the initiation of the insolvency process.

As detailed in 5.4 Competing Security Interests, the rights of the secured creditors take precedence over unsecured creditors in accordance with the Companies Act. Additionally, under the Provincial Insolvency Act 1920, the secured creditor takes precedence over the unsecured creditors and the secured creditors may initiate bankruptcy proceedings following the borrower’s insolvency. The secured creditors may initiate bankruptcy proceedings in accordance with applicable laws and attain a decree from the court in their favour for the outstanding amounts due and payable to them.

Furthermore, although the security created in favour of the lenders ranks pari passu, there have been certain scenarios where a hierarchy of repayment is established within the lenders themselves. One such scenario is the distinction observed in transactions involving a “senior lender” who takes precedence among all the secured creditors of a borrower.

Upon the satisfaction of all the preferential claims owed to secured creditors, Section 390 of the Companies Act provides for the payment of certain amounts in the order of priority prescribed therein.

Depending on the nature of the financing facility extended by the creditors (ie, non-recourse, full recourse or limited recourse), the risks faced by lenders in case of insolvency of the borrower/security provider or guarantor may vary.

In case of the insolvency of either the borrower, the security provider or guarantor, the entity subject to such insolvency may become embroiled in insolvency/bankruptcy proceedings. In such case, pursuant to Pakistan’s laws, several actions may commence including the commencement of insolvency/bankruptcy proceedings, proceedings for enforcement of security, attachment of assets and winding up of the corporate body. 

Be that as it may, there are several risk mitigation mechanisms adopted within contractual arrangements, including:

  • the execution of direct agreements that allow for the lenders to step in and/or novate in case of insolvency, bankruptcy or a foreseeable event leading to the same;
  • contractual provisions providing for preferred rights of the creditors; and
  • the right to terminate the agreements and enforce termination provisions, which allows for a first claim on the secured assets.

Presently, the applicable laws of Pakistan do not foresee the exclusion of any entities from bankruptcy proceedings, as corporate bodies and natural persons are subject to insolvency or similar proceedings.

According to the Insurance Ordinance 2000 (“the Insurance Ordinance”), companies or other corporate bodies that were incorporated under any law currently in force in or outside Pakistan and carry out their business in Pakistan are permitted to take out business insurance in Pakistan. Therefore, foreign insurance companies that do not provide insurance for businesses in Pakistan are not permitted to take out business insurance in Pakistan.

Furthermore, insurance can only be obtained on “assets in Pakistan”. Section 33 (Assets and Liabilities in Pakistan) of the Insurance Ordinance states that the following shall be considered an asset in Pakistan:

  • an immovable property situated in Pakistan;
  • a movable property (other than money, debts or other actionable claims) that:
    1. is physically located in Pakistan;
    2. is owned by and in the possession of a person resident in Pakistan; and
    3. no person (other than the owner thereof) has any better right to possession thereof (whether by virtue of an encumbrance or otherwise) or is lawfully entitled to take it out of Pakistan or remove it from Pakistan;
  • money or a debt or an actionable claim denominated or payable only in PKR in Pakistan; or
  • money or a debt or an actionable claim denominated or payable in a currency other than PKR that:
    1. any person has a right to sue and recover through proceedings in Pakistan; or
    2. is required by law to be received in Pakistan by or is payable to a person resident in Pakistan.

Insurance policies over project assets are be payable to foreign creditors in accordance with the Manual, whereby insurance policies are issued to foreigners in PKR only. However, payment in foreign currency may be made with the prior approval of the SBP.

Premia on policies issued in PKR to non-residents can be collected by remittance from the country in which the policyholder is resident or from PKR held in their non-resident account. Premia on foreign currency policies issued to foreign national residents in Pakistan by insurance companies in Pakistan can be collected from funds available for remittance, PKR funds of the policyholder or through a remittance received from abroad. In the case of foreign nationals residing abroad, the premia can be collected only through a remittance from abroad.

Payments of principal, interest and other payments are made subject to withholding taxes under the taxation laws of Pakistan. However, precedents demonstrate that all such payments of principal, interest or other payments made under any finance document to lenders must be free or without deduction or withholding of any taxes.

If the project company is legally or otherwise barred from making or causing such payments to be made without deduction, the principal or the mark-up or the rent, profit or other amounts due under any of the finance documents shall be increased so that the lenders receive the full amount they would have received had such payments been made without such deduction.

A number of taxes apply to finance transactions depending upon the nature of the transaction. These include income tax, sales tax on services and stamp duty. Under the Constitution, taxes on income are within the exclusive domain of the federal government. The Federal Board of Revenue (FBR) is the revenue collection agency of the federal government. However, stamp duty is a provincial levy and the rates are revised from time to time by means of provincial legislation. The prescribed rates under the relevant provincial stamp schedule apply.

Pakistan has a set of provincial and federal usury laws. The rate and amount of interest shall in no event, contingency or circumstance exceed the maximum rate or amount limitation, if any, imposed by applicable law. Usury laws set a limit on the amount of interest that can be charged on a variety of loans, such as credit cards, personal loans or payday loans. These are typically regulated and enforced by the states and each state has a different approach to these laws, as well as altered “usury limits”. The fact that money cannot be lent at an interest rate in excess of a certain statutory maximum constitutes an usury limit.

These laws specifically target the practice of charging excessively high rates on loans by setting caps on the maximum amount of interest that can be levied, thereby limiting the amount of interest that can be charged. Such laws are precisely designed to protect consumers.

Project agreements typically comprise:

  • PPPs;
  • concession agreements;
  • licensing agreements;
  • power purchase agreements;
  • engineering, procurement and construction contracts; and
  • operation and maintenance contracts.

Pakistan has profoundly regulated project regimes, which is why it is challenging to compile a comprehensive list of such laws governing these project agreements. However, the Constitution, the Stamp Act 1899, the Securities Act 2015, Income Tax Ordinance 2001, the Foreign Exchange Regulation Act 1947 and the Companies Act 2017 are few commonly practised laws with regard to project related agreements.

In recent times, the number of participants in global project finance markets has increased noticeably, as a broader range of lenders and sponsors have become active players around the world.

Their capacity to fund large-scale projects and their historical experience in cross-border transactions made commercial banks the traditional source of financing. This means that significant projects are now financed using more sophisticated and complex financial and legal instruments, provided by a diverse set of public and private institutions.

It is difficult to provide an inclusive list of laws governing the financing agreements. However, the Constitution, the Stamp Act 1899, the Securities Act 2015, Income Tax Ordinance 2001, the Foreign Exchange Regulation Act 1947 and the Companies Act 2017 are some of the laws typically practised in relation to financing agreements.

In a project finance transaction, the following elements are governed by domestic laws:

  • establishment of an SPV to undertake the project;
  • attaining the permits and consents required to undertake the engineering, construction, operation and maintenance of the project;
  • repatriation of profits/revenues;
  • payment of dividends to shareholders;
  • issuance of equity;
  • matters vis-à-vis registration of foreign debt; and
  • registration and stamp requirements on project and financing documents.
Ali Khan Law Associates

Office 402
4th Floor
186-C Lane 3
DHA Phase 8 Zulfiqar and Al Murtaza Commercial Area
Phase 8 Defence Housing Authority

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Trends and Developments


Ali Khan Law Associates was founded by barrister Ali Asgher Khan with the aim of providing a legal advisory services platform of international standing, where “dedication to excellence and a solution-oriented approach matters”. The firm currently operates in Karachi and Lahore, and remotely in Islamabad and Quetta, with a team of 11 lawyers. The projects team acts as the legal counsel for multiple major financial institutions, including multilateral/regional development banks, commercial banks, Islamic banks, corporate sponsors and various other participants in the infrastructure, energy and project finance sector. The firm provides clients with an end-to-end service that caters to their bespoke needs, which is evident through its involvement in all major project financing and PPP projects implemented in Pakistan, including water, power, mining, road and special economic zones projects.


Infrastructure remains the pivotal element in a country’s social and economic development. The significance of infrastructure has increased in modern times, as it is a key contributor to social and economic stability and figures greatly in bringing foreign direct investment into a country.

Pakistan is a rapidly emerging economy and its growth rate in the past decade has been competitive within the Asia–Pacific region. Pakistan’s finance sector consists of roughly 41 banks, in addition to other major finance sector participants such as the National Savings Scheme, mutual funds, insurance companies and microfinance institutions.

The State Bank of Pakistan (SBP) regulates banks, development finance institutions and microfinance institutions, whereas the Securities and Exchange Commission of Pakistan (SECP) is the regulator for insurance companies, other non-banking financial institutions and private pension funds. The Pakistan Mercantile Exchange is the country’s future commodity exchange. Pakistan now has a single exchange system, following the merger of the exchanges in Karachi, Lahore and Islamabad in January 2017 into the Pakistan Stock Exchange.

Within Pakistan, banks are currently the major providers of commercial infrastructure financing. Financing of infrastructure projects through the capital markets has not developed as much lately. In addition, the financing sector within Pakistan has faced several risks and issues that have meant project financing in Pakistan is unable to reach its full potential. Such factors include:

  • the impact of the country’s circular debt;
  • the traditional approach of banks, with a preference for asset-backed corporate loans rather than cash flow-based project financing; and
  • significant construction risks and uncertainty concerning the ability of projects to generate sufficient revenues to service their debt.

To help address such gaps and risks, the SBP issued guidelines on infrastructure project financing and developed the structure for an SPV for infrastructure financing to enable the issuance of long-term bonds (eg, sharia-compliant sukuk bonds) in the local market.

Banks in Pakistan provide credit to projects via different modes, such as demand finance, term finance, running finance, letter of credit and bank guarantee.

The following general trends in project financing have been observed in the recent past.


As the cost of most infrastructure projects is huge, most major projects are now financed by a syndicate of banks. Here, one bank assumes the role of a lead transaction adviser and pools funds by forming a syndicate with other banks that are willing to take part in such projects. This approach has not only helped in risk pooling, it also provides banks with an opportunity to diversify their portfolio.

Provincial and Federal Financial Assistance for Infrastructure Projects

As part of the country’s focus on setting up PPP projects, the federal and provincial governments are putting in the effort to encourage private sector participation in development projects, particularly in the development of infrastructure and related services in Pakistan. The government offers project incentives such as Minimum Revenue Guarantees (MRGs) and Viability Gap Funds (VGFs) to improve investor confidence and reduce credit risks related to a project. Furthermore, grants in the form of indexation of tariff rates are provided as a further relief to predict project revenues and encourage project financing.

SBP Initiatives for Project Financing

The SBP established a dedicated Infrastructure and Housing Finance Department in 2006 to enhance the developing infrastructure sector's access to financial services by adopting international best practice and creating an enabling environment for new investors and lenders.¬¬In addition to the above, the SBP also established an infrastructure task force by roping in experts from financial and infrastructure sectors (including the power, roads, water and sanitation sectors). Their recommendations encompass a broad array of issues and propose measures for credit enhancement for different projects. The underlying aim is intensive private sector participation, along the lines of international best practices adopted by developed economies, in order to increase the availability of credit in sectors that are essential for the overall improvement of infrastructure in Pakistan.

Shift to Sharia-Compliant Financing

Pakistan is shifting to a sharia-compliant financing of projects. This will contribute towards reducing the public debt, which stands at 76.6% of the GDP as of 2018–19. Pakistan is also moving towards a Competitive Trading Bilateral Contract Market (CTBCM). Although the transition into the CTBCM model may turn out to be a problem for the green financing structure of project financing – particularly given the prevalent take-or-pay model in green financing – Pakistan’s capacity to produce renewable energy at lower cost and the increased maturity of production technologies should address this problem.

Banking and Financing Structures of PPP in Pakistan

PPPs have been trending in Pakistan for the past two decades. There has been a consistent need for PPP projects in Pakistan to cater to the country's underdeveloped infrastructure, while simultaneously availing a viable finance structure for such projects. PPP projects have significantly contributed to boosting Pakistan’s economy.

Project financing is either limited or non-recourse to the shareholders. Under non-recourse project finance, lenders are only paid from the revenues generated by the project company and not from the equity injected into a project by the investors. In full recourse or limited project finance, however, lenders provide a loan to the parent company directly on the basis of its credit rating and balance sheet.

Typically, in a PPP project, the most frequent types of lenders include:

  • local commercial and investment banks;
  • multilaterals/regional development banks;
  • foreign commercial and investment banks;
  • export credit agencies;
  • national development banks; and
  • Islamic financiers.

Islamic financing in Pakistan

The uniqueness of this type of project financing lies in the repudiation of interest, which is the lifeblood of conventional project financing methods. The increasing public debt of Pakistan and the serious stagflation has been important for transitioning to sharia-compliant financing. The excessive base rate of the central bank and high Karachi Interbank Offer Rates (KIBOR) have proven persuasive factors in the move towards Islamic financing, as has the Federal Shariat Court’s (the FSC) recent prohibition of riba (interest).

Although many commercial banks (eg, Meezan Bank) have completely shifted their operation to Islamic banking, the government has been unable to eliminate conventional banking entirely. However, it seems that Pakistan is on its way to making a shift to the alternative form of financing very soon.

Global projects and trends show that, despite the uncertainty and misunderstandings surrounding Islamic financing, Islamic financing practices are becoming increasingly better known and accepted. The benefits of Islamic financing include the partnership-based relationship between the project companies and the Islamic banks, in which the banks are obliged to oversee and monitor the health of projects more closely than their conventional banking counterparts.

Furthermore, this form of financing also contains an element of corporate social responsibility. The project company is required to pay compulsory alms equivalent to 2.5% of its annual revenue at the end of each financial year. 

Meezan Bank and Burj Solar Energy Private Limited (BSEPL) recently closed a PKR1 billion syndicated Islamic finance deal for BSEPL’s solar power plant. The project is the construction of a 7MW solar power plant that will generate 220 GWh solar units for 20 years. The project began its commercial operations in July 2022. The Meezan–Burj deal demonstrates that a hybrid financing structure, which is sharia-compliant as well as green, can be incorporated into Pakistan’s project financing ecosystem. 

Green financing in Pakistan

Green financing is essential for the financial viability of Pakistan in the project financing market. The execution of renewable energy power projects will help the country’s devaluing currency and negative balance of payments. By setting up renewable energy projects, Pakistan is effectively avoiding importing fossil fuels and other components of non-renewable energy that Pakistan’s natural resources are lacking. In addition, Pakistan does not have the technology necessary to produce such non-renewable energy. Hence, by avoiding import such non-renewable resources, Pakistan is also avoiding the continuing negative trend that has left a stern dent in its balance of payments.

Furthermore, the single-buyer electric power model and the take-or-pay form of contractual arrangement that currently exists in Pakistan help a project to predict its revenue, while simultaneously promoting investors’ confidence (thanks to the lesser credit risk) in the renewable projects that are being swiftly set up in the country. 

The transition into the CTBCM model may bring about change to the above-mentioned status of green financing. The sovereign guarantee by the government's Central Power Purchasing Agency (CPPA-G) to buy the power supply from independent power producers might no longer exist, which could adversely affect investors’ confidence in such green financing projects. Although the CTBCM model may bring with it a risk of lower rate of return and a higher credit risk, the ability of Pakistan to produce renewable energy at decreasing costs due to its increased maturity in non-renewable energy technologies shall make it well positioned to compete in the national and international markets. 

Foreign direct investments

Foreign direct investments are a significant contributor to the project financing ecosystem in Pakistan. The China–Pakistan Economic Corridor (CPEC) has provided Pakistan with a project financing mechanism in different sectors such as energy, trade, agriculture and education. The CPEC has helped to strengthen co-operation between both countries' commercial banks and financial institutions.

In the past five years, China has become the biggest source of foreign capital in Pakistan, with an annual growth rate of 18.8% in bilateral investment from its neighbours. The CPEC is greatly speeding up the process of industrialisation and urbanisation in Pakistan and helping it grow into a highly inclusive, globally competitive and prosperous country that is capable of providing its citizens with a high quality of life.

Regulatory Developments to Improve Access to Financing in Pakistan

The Prudential Regulations For Infrastructure Project Financing

The SBP has issued the Prudential Regulations for Infrastructure Project Financing (the “Regulations”). They are based on consultations with all internal and external stakeholders involved in project finance. The Regulations were issued to help banks and direct financial institutions (DFIs) to assess the cash flow-generating capacity of projects while at the same time assessing their technical feasibility.

The Regulations set out the matters of law in relation to collateral arrangements, security packages and project insurance. Furthermore, the Regulations have also set out regulatory compliance matters that banks and/or DFIs must ensure compliance with.

The Companies Act 2017

The enactment of the Companies Act 2017 changed the company law regime in Pakistan by introducing laws pertaining to the creation of security interests in the assets of companies registered in Pakistan.

Financial Institutions (Secured Transactions) Act 2016

The enactment of the Financial Institutions (Secured Transactions) Act 2016 brought forth a legal framework for the creation, perfection, priority and enforcement of security interests in movable property. It also allowed for the establishment of a secured transactions registry for security interests in the assets of unincorporated entities or individuals.

SBP refinancing schemes

It is worth noting that in order to attract investors and promote economic development, the SBP has introduced special schemes under its refinance window in the past decade. Such refinancing schemes aim to ensure adequate supply of financing to the value-added industries at competitive rates for the purpose of enhancing their production capacity and meeting working capital requirements. The main developments are:

  • an Export Finance Scheme (EFS) to ensure short-term credit availability for exporters; and
  • a Long-Term Financing Facility (LTFF) for encouraging export-led growth on a long-term basis.

In addition to the above, the SBP has also made it easier to obtain financing in certain sectors by introducing special medium- to long-term refinance facilities at subsidised rates, including schemes for renewable energy, the establishment of silos, warehouses and cold storages for storing agricultural produce, and the purchase of machinery for SMEs. The SBP's schemes have allowed for a conducive environment for project finance by streamlining the flow of credit to the private sector, which has resulted in drastic improvements in the investment climate of the country.

Specific Challenges

The challenges currently faced by Pakistan include the lack of financial and monetary framework for the effective transitioning into green financing and sharia-compliant financing.

In its recent judgment, the FSC declared interest/riba prohibited; therefore, all laws or provisions of law that contain the word “interest‟ in the context of banking are now prohibited in Pakistan. Following this, the FSC has directed the government to delete the word “interest‟ wherever it is used in the impugned provisions of law.

Furthermore, the federal and provincial governments have been directed by the FSC to complete the necessary legislative amendments in the impugned laws to bring them into conformity with the injunctions of Islam by 31 December 2022. It is pertinent to highlight that such laws will take effect prospectively.

Finally, the FSC has given a timeline of five years for the implementation of its plan to transform Pakistan into an equitable, asset-based, risk-sharing and interest-free economy.

In addition to the above-mentioned issues, Pakistan is facing severe challenges when it comes to bringing in more foreign direct investment, owing to political instability and the state of law and order within the country. This, coupled with other macroeconomic challenges, has been a persistent issue when attempting to establish and finance sustainable infrastructure projects.


As discussed, infrastructure projects are high-cost investments and vital to a country’s economic development and prosperity. Such projects may be funded publicly, privately or through PPP regimes and the method of financing may be conventional, Islamic or hybrid.

The country’s banking industry has progressed significantly during the past decade in terms of financing infrastructure projects and has gained considerable experience in sectors such as:

  • telecommunications;
  • power generation;
  • power transmission;
  • petroleum;
  • the extraction and distribution of liquefied petroleum gas;
  • oil and gas exploration and distribution; and
  • the construction of roads, bridges and highways.

This experience will be instrumental in undertaking similar projects in the near future.

Although Pakistan is confronting a variety of challenges, there are strong reasons to adopt a positive course of action. The huge potential of the country's infrastructure is in itself a highly motivating factor, as it encourages stakeholders to invest in and thereby develop the infrastructure for the benefit of the economy as well as their own business interests.

Ali Khan Law Associates

Office 402
4th Floor
186-C Lane 3
DHA Phase 8 Zulfiqar and Al Murtaza Commercial Area
Phase 8 Defence Housing Authority

Author Business Card

Law and Practice


Ali Khan Law Associates was founded by barrister Ali Asgher Khan with the aim of providing a legal advisory services platform of international standing, where “dedication to excellence and a solution-oriented approach matters”. The firm currently operates in Karachi and Lahore, and remotely in Islamabad and Quetta, with a team of 11 lawyers. The projects team acts as the legal counsel for multiple major financial institutions, including multilateral/regional development banks, commercial banks, Islamic banks, corporate sponsors and various other participants in the infrastructure, energy and project finance sector. The firm provides clients with an end-to-end service that caters to their bespoke needs, which is evident through its involvement in all major project financing and PPP projects implemented in Pakistan, including water, power, mining, road and special economic zones projects.

Trends and Development


Ali Khan Law Associates was founded by barrister Ali Asgher Khan with the aim of providing a legal advisory services platform of international standing, where “dedication to excellence and a solution-oriented approach matters”. The firm currently operates in Karachi and Lahore, and remotely in Islamabad and Quetta, with a team of 11 lawyers. The projects team acts as the legal counsel for multiple major financial institutions, including multilateral/regional development banks, commercial banks, Islamic banks, corporate sponsors and various other participants in the infrastructure, energy and project finance sector. The firm provides clients with an end-to-end service that caters to their bespoke needs, which is evident through its involvement in all major project financing and PPP projects implemented in Pakistan, including water, power, mining, road and special economic zones projects.

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