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Interest in the public private partnerships (PPP) has increased in recent years as governments across the world look to alternative procurement methods to address their growing infrastructure gaps. It has been a recurring theme in the Government of Bangladesh's (GoB) five-year plan documents and has been touted to help in meeting financing needs. The country has introduced a regulatory framework through the PPP Act 2015, and enhanced institutional capabilities through PPP Authority. It also has a financing structure in place through the PPP unit under the Ministry of Finance, together with financial institutions such as Infrastructure Development Company Limited (IDCOL) and Bangladesh Infrastructure Finance Fund Limited (BIFFL). All of this would suggest that the key fundamentals are in place for an enabling PPP environment. However, apart from a few notable infrastructure projects (excluding power generation), PPP in Bangladesh remains relatively subdued.
The common reasons identified in various reports include political uncertainty, corruption, contract enforcement issues and others. While these are ever present issues, it did not deter companies such as Telenor and AES Corporation from investing in telecom and power sectors respectively. According to a perception survey conducted by A.T. Kearney, a management consulting firm, investors cited the "availability of quality investment targets" as the first prerequisite for investment in emerging market and developing countries. Therefore, it is crucial to identify the reasons behind the dearth of investment from the perspective of investors.
Consultation meetings held by Keystone Business Support Company Limited with various private sector investors and finance professionals revealed some key reasons behind the problems.
PUBLIC-PRIVATE PRIORITY DIFFERENCES: There is a clear lack of alignment in project choices between the public and private sectors. Private sector investors expressed their discontent over lack of private sector participation in baggage operations in airports, city traffic management, port sector operation and others. This shows private investors want to focus on small-scale "easy win" projects which are economically essential and commercially viable. In their view, these projects would set the benchmark for implementing other large-scale infrastructure projects. However, GoB has been focusing on mega projects with a majority investment in roads & highways and power sector. These priority differences need to be resolved through effective engagement in project planning stage.
REVENUE MODELS: Apart from power generation, infrastructure sectors do not have benchmark revenue models. One reason for this might be that GoB power purchase agreements provide guaranteed returns to private investors, which might not be possible for other sectors. In the absence of an off-taker it is important to accurately forecast market demand and revenue generation to attract investor interest. A good case study highlighting this would be that of the Bangkok Sky train (BTS) project. It faced severe problems and near bankruptcy due to poor forecasts and needed a change in its revenue model to return to profitability.
FINANCING: Apart from development finance institutions such as the IDCOL and BIFFL, it is difficult to obtain long term financing for large projects. This acts as a major constraint for private sponsors as debt is the larger financing component. Bangladesh's financial sector can be characterised by an over reliance on the banking sector troubled by non-performing assets, underdeveloped equity and non-vibrant bond markets. Local commercial banks cannot fund long term infrastructure projects as their deposits are short-term and creates asset-liability mismatch. Similarly, international banks have concerns about long-term risk exposures and lack of hedging measures. Infrastructure companies are not interested in obtaining long term financing from capital markets due to lack of breadth and depth of equity market, non-existence of market yield curve to price bonds and high costs (both transaction and taxation) behind issuing bonds.
LAND ACQUISITION: Given the heavy requirement for land and stringent laws, delays in land acquisition and other related environment and forest clearance prevents private sector investors from moving towards PPP infrastructure projects. Lack of effective dispute resolution mechanism for resettlement also adds to delays. For example, in 2012, several Indian PPP roads & highways failed to attract any bidder as they were deemed to be commercially non-viable due to land acquisition issues. Investors in Bangladesh generally face a similar situation.
WAY FORWARD: Given these impediments, some mitigation measures are suggested based on international best practices.
n A recent suggestion by the Dhaka Chamber of Commerce and Industries regarding the formation of a National Infrastructure Development & Monitoring Advisory Authority might provide the platform for a transparent and productive public-private consultation to align project priorities. On the other hand, South Korea has established a Public and Private Infrastructure Investment Management Centre. In addition to feasibility studies and value for money tests, it sponsors research in priority areas for project selection. Similar practices can be followed in Bangladesh.
n In the BTS project, public authority changed the revenue model and shared the demand risk by underwriting a minimum level of usage. In such a case, the private investor benefited from a minimum revenue guarantee protecting it from lower than expected returns. Such lessons can be drawn by the Dhaka Transport Coordination Authority in implementing the Mass Rapid Transit or Metro Rail project.
n In order to increase financing in the short run, development partners can assist by issuing credit guarantees to local commercial banks. This may be used to cover the "tail-end" repayments due on long-term loans. However, bond market development is crucial to avail private investment in infrastructure projects.
n GoB can follow Indian Roads & Highways PPP structure, whereby the Government of India secures the land beforehand. Indonesia's example of establishing a dedicated office on land acquisition in PPP projects would also be beneficial to lead project-level work, expedite dispute settlement through arbitration and ensure timely availability of land.
The writer is a Senior Associate at Keystone Business Support Company Limited.