Govt to issue first green Sukuk to raise Rs52 billion for hydropower projects

Islamabad has decided to issue sustainable asset-backed Sukuk bonds to develop the infrastructure for three clean energy projects. According to reports, the federal government needs to generate Rs 52 billion to complete all three projects.

These bonds are the first of their kind, as previous securities were not linked to projects solely focused on sustainable development. Moreover, the introduction of the Islamic Sukuk scheme may encourage higher levels of savings in the economy. This is because many people refuse to save funds by parking them in conventional banks or purchasing interest-yielding bonds.

For reference, Sukuk are Islamic financial certificates that allow Sukuk holders to receive a portion of the profit generated from a project. According to reports, these sukuk bonds are to be issued as per the recently approved Sustainable Investment Sukuk Framework.

The federal cabinet approved the framework earlier in April to attract greater sums of funds for domestic projects. This demand for loans comes despite Pakistan receiving $12.5 billion in foreign loans during the first nine months of fiscal year (FY) 2024-25.

Key officials from the Ministry of Finance (MoF) claim that the initial Sukuk issuance may be in the ballpark of Rs30 billion. The MoF intended to finance the construction of three hydropower projects, namely the Shagarthang hydropower project and Nai Gaj and Garuk Dams.

Construction efforts on the aforementioned hydropower projects are underway. However, reports reveal that the federal government has fallen short of funds, leaving lawmakers with the task of gathering over Rs50 billion for the projects to become operational.

The reason behind the shortfall of funds lies in cost overruns linked to the three hydropower projects. Data from reports indicates that the cost of completing the Garuk Dam ballooned to Rs28 billion, leaving the government Rs5 billion short to finalise the project.

Similarly, the Nai Gaj Dam and Shagarthang hydropower projects remain incomplete, as Islamabad requires Rs 22 billion and Rs 25 billion, respectively, to make both projects operational.  These issues arose largely as a result of cost overruns and an increase in the scope of the initially approved project.

While the Water and Power Development Authority (WAPDA) issued Sukuk bonds in 2021 to raise funds for an extension to Tarbela Dam, these bonds are reportedly the first ‘green Sukuk’ bonds Islamabad has issued.