Calling All Fund Managers: Put Your Money in Pakistan

Most recent headlines about Pakistan -- violent protests on US consulates, Senators agitating to halt all foreign aid there, and the tragic factory fire that killed nearly 300 workers in Karachi – have likely undermined investor confidence in the market.  But one headline bucks the trend: the United States has just launched the Pakistan Private Investment Initiative (PPII), an attempt to overcome these very fears and attract much-needed private investment into the country.As emphasized in two recent CGD reports on the US development strategy in Pakistan (2011 and 2012), foreign assistance is only one piece of any development strategy.  Equally (if not more) important are efforts using non-aid tools to build and support a vibrant private sector which can create jobs, catalyze broad-based growth, and help address the economic vulnerability so often associated with political instability.The PPII is designed to expand access to capital for Pakistan’s small to medium sized enterprises.  USAID is recruiting professional fund managers to establish SME-focused private equity funds, incentivizing them with match funding of at least $80 million.  Managers can be for-profit or non-profit, Pakistani-run or internationally managed, and as long as they bring some of their own capital and commit to provide support and technical assistance to investees, they can throw their hat in the ring during this procurement phase.The design is smart.  It recognizes that over 90 percent of Pakistani firms are SMEs, making the sector a critical component of the economy.  It also addresses the problem that high public borrowing (which, with current rates around 12 percent, represents a low risk/high return opportunity for lenders) has crowded out private borrowing.  As a vehicle designed to provide not just equity capital but also technical assistance and management direction, the PPII could help improve borrowers’ track records in a country with a history of poor performing SME loans.  And a final element, perhaps easily overlooked, is that the PPII’s Annual Program Statement voices a commitment to “patient capital.”Patience.  Now there’s a term we don’t often hear in the Pakistani development context.In a country where long term development priorities often take the back seat to short term stabilization considerations and politics, this commitment to a longer term time horizon should be applauded.  So should the fact that the USAID funds can help unlock other sources of capital. By supporting investors interested in Pakistani SMEs, the PPII will bolster the underdeveloped private equity market which can, in turn, facilitate future investment.But for all that I like about this initiative, one big question remains: why does the announcement of an initiative to encourage private investment overseas not mention – you guessed it – the Overseas Private Investment Corporation?Individuals at CGD have (multiple times) encouraged a partnership between OPIC and USAID in Pakistan.  And in this specific case, the linkages are obvious: the PPII’s objective to increase SME access to capital is squarely in-line with OPIC’s mission to “mobilize private capital to help solve critical world challenges.”  Furthermore, USAID’s willingness to provide equity financing would complement OPIC’s traditional role in providing debt financing and/or risk insurance for investors.  One potential partnership is that when the PPII Investment Funds are established, OPIC could make its debt financing products available directly to the funds’ investee companies.  And there are surely other arrangements that could capitalize on OPIC’s significant experience, both with capital markets generally and Pakistan specifically (OPIC has invested $359 million in projects in Pakistan over the last decade).For the time being, both USAID and OPIC have stated that they are conceptually committed to working together when the time is right.  I’ll be watching with interest to see when that time comes.