Questions raised about the green bond mechanism

Islamabad:

Finance Minister Muhammad Aurangzeb has raised concerns over the Water and Power Development Authority’s (Wapda) green bond mechanism, which lacks provisions to mitigate the government’s liabilities and its fallout.

The finance minister said the same mechanism, created for Wapda’s green bond, was being used for the Pakistan Social Impact Bond (PSIB) to be floated to generate funding for the National Vocational and Technical Training Commission (NAVTTC). The Economic Coordination Committee (ECC) has reached agreement that raising debt through PSIB without a solid business plan would not be an appropriate course of action. At a recent ECC meeting, the Federal Department of Education and Training emphasized that the floating PSIB proposal was developed using an outcomes-based approach to improve NAVTTC’s footprint.

ECC members criticized the proposal for lacking a viable business plan and failing to provide details on joint venture strategies, takeover arrangements and other aspects of the commercial market. The finance minister asked about creating unfunded liabilities, similar to Wapda’s green bond, without providing the government with mechanisms to mitigate the liabilities or their consequences.

It was suggested that instead of pursuing small investments, large companies could participate through a strategic consortium and other similar arrangements. The ECC appreciated the idea of ​​exploring capital markets to bridge the financing gap instead of relying solely on bank loans. The Federal Ministry of Education briefed the forum on the NAVTTC, established in 2006, which was tasked with leading the national technical and vocational training programme.

Its mandate includes providing the necessary support to federal units to produce a market-driven workforce that meets industrial and self-employment needs, while exporting skilled labor to regional and international markets. The commission, in collaboration with public and private sector actors and international development partners, plays a critical role in the economic and social development of Pakistan.

Given the rapidly changing technological landscape and the need to drive economic growth, it is imperative that the NAVTTC mobilize additional resources to produce a high-quality workforce. This requires using global best practices in collaboration with development actors and reducing reliance on public funding. Countries such as the UK, India, Vietnam and Turkey have successfully issued Skill Impact Bonds (SIBs). For example, India has attracted over $600 million in foreign direct investment through SIBs in the education and public health sectors. The ministry said PSIB represented a significant shift from traditional funding models, moving from supply-based training to demand-based training requirements and from input-based to output-based approaches.

Venture capitalists provide seed capital and receive returns based on the achievement of pre-defined, measurable social outcomes verified by a third party. In the pilot phase, NAVTTC, with the help of a bank as a venture investor, planned to issue PSIBs worth Rs 1 billion, backed by the government guarantee.

This guarantee will be provided by the Finance Department, subject to approval by the CySEC. The Finance Directorate will also approve the terms and conditions of the PSIB. The additional funding will be used for highly employable technical and vocational education and training (TVET) interventions targeting both the domestic and international labor market. The ministry explained that the PSIB offered a strategic solution to the funding challenges of the education and training sector by leveraging private capital for skills and vocational training. This approach reduces the financial burden on government, reallocates public resources to other critical needs, and enhances the scale and quality of TVET programs.

Building on the global success of SIBs, PSIB aims to provide sustainable and scalable solutions for skill development in Pakistan, aligned with the country’s economic and social goals. The initiative seeks to create a skilled workforce, boost national growth, reduce unemployment and break the cycle of poverty. The apex committee of the Special Investment Facilitation Council (SIFC) had already approved the government guarantee for the funding of Rs 1 billion in its meeting held on February 7, 2024. The Finance Directorate also considered and recommended the proposal to introduce PSIB for sustainable skill development and professional training for further necessary actions.

The Federal Ministry of Education has asked the ECC to approve the provision of a government guarantee of Rs 1 billion to NAVTTC for the initial launch of PSIB. This will serve as a foundation for attracting private investment in the ICT sector. The ECC considered an abstract titled “Approval of Government Guarantee of Rs 1 Billion for Issuance of Pakistan Social Impact Bond”. He deferred the decision and asked the Federal Ministry of Education to prepare a robust business plan to address all aspects, including the joint venture strategy, receiving arrangements and cash flows.