Leveraging PPP in developing modern ports in Bangladesh

Within five decades of its independence, Bangladesh has demonstrated impressive development performance, with multiple gains emanating from faster poverty reduction, robust economic growth, and sustained human development. The high share of manufactured goods in exports and rise in consumption has helped propel growth and created millions of jobs in recent years.

After a period of slowdown in trade due to Covid-induced shocks which saw Bangladesh's exports plummeting by 16.9 per cent from a record high of $40.53 Billion, Bangladesh now looks set to be on the path to recovery with exports climbing up to $38.75 Billion in FY21, and the International Monetary Fund (IMF) projects a GDP growth rate of 7.9 per cent in FY22. Bangladesh's next phase of growth trajectory, which would set the country on the path to accomplish its vision of becoming a 'Developed Country' by 2041 while meeting its SDG commitments, will require Bangladesh to enhance its connectivity to the international markets, and secure greater integration  into the Global Value Chain (GVC).

Recognising trade and in particular, exports, as the key driver of growth and jobs, Government of Bangladesh (GoB) has set an ambitious target for exports amounting to $51 billion in FY22, and is moving fast through the development of 100 economic zones in multiple commercial hubs around the country. Successful attainment of these targets will require improvement in human capital and making full use of the demographic dividend, improvement in competitiveness, significant increase in FDI and private investment, gradually moving to diverse, complex, and higher-value-added products and finally, development of facilitative trade and production support infrastructure.

MODERNISING PORT INFRASTRUCTURE WILL LAY THE FOUNDATION FOR GROWTH: Availability of infrastructure plays an important role in connectivity to markets and trade promotion while inadequacy in infrastructure hinders trade potential by increasing the cost of production/business. Continued improvements in trade infrastructure and logistics such as world-class ports and transportation empowered by the best technologies available to achieve competitive turnaround and clearance time can help increase Bangladesh's trade potential and improve the country's investment competitiveness. Improved infrastructure is estimated to have a potential impact of US$ 35.5 billion for Bangladesh by 2030, according to a UNESCAP study.

Chittagong Port is the national gateway and handles over 90 per cent of Bangladesh's exports and imports and about 98 per cent of container trade. It plays a vital role in the country's logistics chain and is an integral part of the sub-regional transport system connecting northeastern India, Bhutan, and Nepal to Europe, North America, and Southeast Asia. Container handling at Chittagong Port increased considerably in recent years, commensurate with the boom in garment exports and with gross domestic product (GDP) growth. Despite the pandemic, Chittagong port saw an impressive growth in traffic of 12 per cent, according to CPA. Container and vessel growth of around 3.1 and 9.72 per cent respectively kept the port occupied at capacity, with the demand growth trajectory expected to continue requiring expansion of handling facilities. Chittagong Port has the potential to play a larger role in intra-regional trade in the coming years, as North East Asia to Bangladesh trade is expected to upsize to vessels carrying upwards of 5000 TEUs. It is important to support the development of the port's capability to handle the larger vessels and growing trade volumes.

A range of factors including the capacity of port, efficient management and facilitating infrastructure development to move goods efficiently within and beyond the port will play a defining role and determine whether this potential is realised. The growing demand in Bangladesh's ports was mostly met through improved efficiencies in the use of port facilities, as additional port capacity increased marginally, at best.  Bangladesh has also recorded one of the longest vessel turn-around time in the South Asian region, which on average is around 7 days and goes up further due to seasonal peak container traffic (World Bank, 2016). Recognising the need to upgrade its ports with better and more modern facilities and increased handling capacity to support the expected growth in trade, enabled by the best technologies available, GoB has taken some bold and timely steps such as the Matarbari port project and the Bay Terminal project in Chittagong.

The Bay Terminal will be transformational as it would not only be supporting domestic cargo but also enable passage of regional cargo in the Bay of Bengal area, and help increase Chittagong port's handling capacity from current 3.1 million Twenty-foot Equivalent Units (TEUs), taking it close to the expected 5.6 million TEU containers by the year 2036, as forecasted in the Strategic Master Plan. The proposed Bay Terminal is also well positioned to handle larger vessels of above 5000 TEUs. In June 2019, the Cabinet Committee of Economic Affairs, gave in-principal approval to develop the Bay Terminal under Public Private Partnership (PPP) model.

PPPS CAN LEAD TO BETTER RESOURCE UTILISATION, EFFICIENT MANAGEMENT, AND CAPACITY ENHANCEMENT: The introduction of PPP model and inviting world class port developers and operators, such as Singapore's PSA International, will enable transfer of technology and knowledge through introduction of their globally acclaimed operational excellence and innovation. Through their extensive connections, global network of ports, supply chain orchestration capabilities, integrated cargo solutions with a range of value-added service, such international industry leaders can help support sectors with growth potential, all the while adhering to international Health, Safety, Security and Environmental (HSSE) standards.

Besides, there are several other benefits of using a PPP model for big infrastructure projects. Firstly, with investment coming in from external sources, it eases the burden on fiscal resources of GoB. Secondly, having a long-term commitment to such a large infrastructure project, a highly experienced global developer/operator would be able to prioritise quality of construction, while also being motivated to complete the development stage in a timely manner -- with maximum efficiency and superior management capabilities -- and achieve high levels of productivity since their investment interests and returns  are similarly aligned with that of the government. The benefits of the PPP model are well understood, but global best practices point to a number of important issues that require consideration for successful structuring and completion of PPP projects, particularly in the ports and logistics sector.

IMPORTANT CONSIDERATIONS FOR SUCCESSFUL PPP-LED DEVELOPMENT OF MODERN PORTS: Port competitiveness is ultimately determined by criteria such as port costs, handling efficiency, hinterland connectivity, and the quality of infrastructure and services, which are driven by multiple stakeholders including the operator, the infrastructure owner and government agencies. Given the goal is to build a partnership with global private operators to introduce capabilities to meet the above criteria through building and operating terminals under a PPP framework, it is important to have a proper allocation of the responsibilities and risks. Foreign investors and financiers alike are concerned about risk profiles of a project and the riskiness of their investment decisions. Designing an optimal risk-sharing protocol at the project development phase is at the crux of inviting bankability.

Bankability of a project is critical to enable investors to commit equity with some assurance of financial return and this in turn supports the arrangement of project finance which would provide the necessary financial resource to develop the project and potentially reduce the cost of capital.

Central to the success of such infrastructure projects would be defining a mutually beneficial partnership between the private and public sector stakeholders through an effective concession agreement. A robust concession agreement helps define the relationship between partners, identifies rights and responsibilities of each party and the risks being shared. International best practices call for the period of agreement to be longer than 30 years or more, to enable the investors a viable return. Global lessons also indicate that there must not be any limitations on the PPP investors with regard to delivering port and logistics services within the terminal with the freedom to conclude commercial agreements with users, including the freedom to determine berthing of vessels and ability to set tariffs through a clear and equitable tariff regulation. Such freedom will motivate operators to introduce innovative and efficient approaches in operating the port.

Outlining clear partnership principles is critical as various challenges may occur over the concession period, which is usually over a long-term horizon. Having this clearly defined and addressed in the concession agreements, and ways and means to resolve any differences that may emerge are critical factors to consider. Hence, it is thus essential to develop a relationship between public and private partners with a focus on resilience and transparency. Enhancing the capacity of relevant public institutions with regard to legal, financial structuring as well as negotiating skills are some of the critical elements of inking a successful PPP deal.

In order to achieve completion of such a grand initiative, which is inherently linked to facilitating public infrastructure such as breakwater, dredging of access channel and road and rail connectivity and other hinterland infrastructures, clear allocation of responsibilities is important for effective development and maintenance. With differing roles and incentives of various stakeholders, it is important to identify the incentives alongside various roles and dynamics while developing the concession agreement.

While having well managed, modern port facilities will enable efficient and smooth movement of cargo from vessels to Bangladesh, one cannot overemphasise the importance of road, rail and inland waterway transportation from the port to inland population centres or industrial zones. In this respect, it requires a Whole-Of-Government approach to involve all relevant ministries and authorities to develop clear plans for road, rail and inland waterway infrastructure to enable multimodal solutions to be developed in tandem with port infrastructure. An efficient and sustainable port and logistics ecosystem will require each component in the supply chain to be optimised.

Finally, regulatory support too is vital to ensure there is free competition inter port and intra port through reliable and consistent legal interpretation and enforceable legal outcomes. It is important to have a fair and consistent playing field within the port sector to make sure no in-built advantages exist for specific parties and all terminals are treated the same-- allowing ports to compete based on service levels in order to ensure sustainability for private operators to improve efficiency and productivity in the ports and logistics ecosystem. Lenders also have a role to play in warranting a robust financing structure and having realistic market expectations and projections, besides safeguarding transparency and proper environmental and social (E&S) standards to improve investment outcomes.

Dr. M. Masrur Reaz, Chairman, Policy Exchange. [email protected].

Hasnat Alam is an Economist.