A leading banker and economic analyst, Mamun Rashid, has lectured on Public-Private Partnership (PPP) at Public Administration Training Center (PATC), worked very closely with some PPP projects in Bangladesh; reviewed some PPP projects and policy regimes in the region, and PPP authority in Bangladesh.
In conversation with The Business Standard, he discusses in detail what is holding back PPP in Bangladesh, how to strengthen it and what could be done right to increase private investment.
Finance Minister AHM Mustafa Kamal said last year that Bangladesh couldn't sell the idea of PPP properly. What are our crises with the PPP?
Over the past few decades, Bangladesh has had impressive, sustained gross domestic product (GDP) growth. From fiscal years 2011 to 2015, GDP grew at 6.3 percent, culminating in Bangladesh graduating to lower-middle-income country status in July 2015.
The initial phase of the 7th Five Year Plan (7th FYP) for FY 2016-2020 also saw significant expansion of Bangladesh's economy with the GDP growth rate averaging 7.4 percent. The global Covid-19 Pandemic slowed this growth by 0.5 percent, as of 2020. However, it is expected post-2021 Bangladesh will bounce back strongly to the previous levels of economic growth.
The 8th Five Year Plan (8th FYP) covering the 2021-2025 period is targeting an ambitious GDP growth rate of more than 8 percent. The decades of economic growth have also resulted in a fundamental structural shift to an urban and industrial economy. There has thus been a resultant increase in the demand for industrial infrastructure, including power, water and sanitation, and transportation.
To sustain the 8th FYP ambitious target of greater than 8 percent GDP growth, there will need to be significant investment in enabling infrastructure, particularly around creating reliable supply chains, increasing, and improving access to markets and basic services, while increasing productivity and maintaining competitiveness.
It is estimated that approximately $608 billion of investment is required by 2040 across the major infrastructure sectors of power, water, telecom, and transportation and logistics (including ports, airports, railways and roads) in order to not only meet projected demand but also support economic growth.
The Government of Bangladesh's (GoB) budget allocations for physical infrastructure stood at approximately $14.1 billion in 2018, which pushed public debt to around 34 percent of GDP. The GoB thus recognises the importance of enhanced private sector investment in these industrial infrastructure sectors in order to meet the financing gap.
The 8th FYP envisions a strategic shift in financing moving away from ADB allocations to PPP-type financing. The estimate is PPP funding of between 1 percent to 1.5 percent of GDP will be mobilised for infrastructure development.
Currently, Bangladesh has a pipeline of over 80 projects in the PPP model, of which six projects have started construction work. These projects range across sectors such as transportation, tourism, healthcare and housing.
However, there are some key challenges that PPPs in Bangladesh face. Very broadly, these issues include:
- There is a need for significant capacity building in government departments to design, procure and monitor PPP projects.
- Although significant institutional strengthening has happened in several sectors, there are still a few gaps that can deter international bidders from participating in the PPP projects.
- Risk allocation frameworks need to be reviewed across PPP projects and contextualised to sector maturity in the country.
- Issues linked to land acquisition and access to finance require the critical attention of GoB.
It is important to note that while there is abundant capital globally, it will typically seek low-risk projects.
Globally there is an increasing trend towards "brownfield PPP" i.e., asset monetisation. Asset monetisation is the process by which governments create new sources of revenue for themselves and their entities by unlocking the economic value of unutilised or underutilised public assets.
A public asset can be any property owned by a public body, roads, airports, railways, stations, pipelines, transmission lines, etc. "Brownfield PPP" projects work through offering public infrastructure to the institutional investors or private sector through structured mechanisms.
Thus, with "brownfield PPP" projects becoming more and more prevalent, it is important that "greenfield PPP" projects (which Bangladesh is moving towards) be extremely well structured to attract investors.
We have heard again and again that PPP initiatives struggle to attract private investment. What could be done to increase private investment?
Over the recent years, the GoB has embarked on a systematic effort to build a PPP framework to mobilise private sector capital. It has developed a PPP law and associated guidelines on procurement, unsolicited proposals (USPs), viability gap funding and standard PPP forms.
It also established a PPP Authority and several long-term financing institutions. However, while there has been some success in attracting private sector finance into the power sector, this has not yet resulted in a steady flow of bankable investments across other infrastructure sectors, such as transport and water.
Indeed, given the importance of improving intra-country and regional connectivity and reducing congestion in Dhaka, mobilising private sector finance into the transport sector is a particular focus of the government.
Innovative approaches need to be adopted for the identification of PPP projects in order to promote projects and shift to a resilient and inclusive development model. For conceptualising and executing PPP projects, a major push on capacity-building across departments and ministries are required.
For PPP projects in the country, support from multilateral agencies can be a beneficial option to leverage global learning and expertise in PPPs. Engaging more with global and domestic investors by creating a bouquet of PPP projects in each sector can help develop long term partnership models.
What are the major problems that our PPP projects face that result in the delay in implementing the projects?
The capability of Bangladesh to take on PPP projects can be looked at through six lenses.
PPP Law and Policy Support: Given that the emergence of the PPP dates back to 2010, Bangladesh has by and large a robust set of relevant policies, legislation, and regulations in place in relation to the PPP. The PPPA is also working on building both manpower and technical capacity to ensure seamless implementation of the PPP projects.
Public Sector Capacity, Experience and Funding assistance: While the Public sector has developed capabilities in terms of evaluating PPP projects across the sectors and despite a track record of almost a decade, the country has not seen many operational PPP projects.
Standard processes and documents help in increasing the level of interest from the international private investors. However, this essential standardisation of the project documents and PPP agreements has not yet been achieved. In general, most infrastructure projects are funded by government allocations and bilateral or multilateral loans.
Although the provision for VGF (viability gap financing) exists in PPP law, it is only applicable to BOT (build, operate and transfer) projects with a limit of 30 percent of the project cost. This results in the VGF being applicable for a narrowed scope of projects.
Implementation Mechanism: In general, the role of the Government in land acquisition is still very limited. Foreign entities cannot own land in Bangladesh, as no special regulation for land clearance exists in the case of PPPs. Therefore, historically, land acquisition has caused significant delays in project execution.
Market capacity and private participation in each sector: The power generation sector has seen the highest participation, dominated by a few large business groups. In the last few years, healthcare sector growth has been fueled by private sector investment, which is evident by the fact that over 60 percent of the available hospital beds are funded by the private sector.
While many of the energy generation projects have received payment guarantees under PPAs, guarantees are not provided for other sectors, which increases the risk of the potential investors, cooling interest.
Access to finance for PPP: Most infrastructure projects are financed through budgetary allocation and MDBs (multilateral development banks). For debt funding, the tenure offered by the banks in Bangladesh tends to be far too short to meet the need of capital-intensive large infrastructure PPP projects.
The Bangladesh capital market is underdeveloped, the stock market has been stagnant for years and there is no vibrant secondary market for bonds in the country. Thus, all of these factors greatly hinder the availability of finance for PPP projects.
Roles of Public & Private Sectors: In sectors like industrial infrastructure/economic zones, the GoB is both the developer and a regulator. This results in the private sector not being able to compete with the Bangladesh Economic Zones Authority (BEZA) on the developed land lease prices as the private sector players do not have access to funds at lower rates compared to BEZA.
As such, the GoB may need to mitigate the demand risks for PPP investors to make PPP projects they are looking for investment in, viable. Alternatively, the GoB can look at mitigating the financial risks by moving towards other mechanisms such as hybrid models.
If PPP projects' behaviour, in terms of project completion and implementation, echo the direct government-funded projects, why PPP at all?
A properly implemented PPP project will have benefits beyond the project itself. Thus, an effective PPP project will:
- Serve as an invaluable conduit in introducing private sector technology and innovation in providing better public services through improved operational efficiency
- Lead to developing domestic private sector capabilities through joint ventures with large international firms, as well as subcontracting opportunities for domestic firms in areas such as civil works, electrical works, facilities management, security services, cleaning services, maintenance services
- Expose SOEs and the government to higher levels of private sector participation (especially international) and thus it is vital to structure PPPs in a way to ensure transfer of skills leading to national champions who in turn will push their own operations to adhere to international best practises
- Ensure budgetary certainty by setting present and the future costs of infrastructure projects over time
- Supplement limited public sector capacities to meet the growing demand for infrastructure development
- Create long-term value-for-money through appropriate risk transfer to the private sector over the life of the project – from design/construction to operations/ maintenance.
What are the potential sectors to work on in the future?
Of the $608 billion investment required, it is estimated that $417 billion of investment can potentially be undertaken in the period 2016-2040, leaving a gap of $192 billion.
Amongst the total estimated investment gap, power, telecom, water, and rail would aggregate to $100 billion, $41 billion, $40 billion and $10 billion respectively. In addition, $30 billion in the power sector and $11 billion in the water sector would be required to achieve the SDG targets by 2030.
In terms of annual requirements, it is estimated that $10 billion would be required in the power sector, $4 billion in the telecom sector and $3.3 billion in the water sector between 2016 and 2040. On top of this, $2 billion in the power sector and $0.7 billion in the water sector would be required to fulfil the SDG targets.
However, based on the current trends in investment, it is expected that the actual amount would be much less in all three sectors; in the power sector, it is feared to be below $4 billion. Only the investment trend in the road sector is in line with the investment requirement, standing at $5.6 billion annually.
The 8th five-year plan targets raising private investment volume to 27.4 percent of the GDP by FY2025, by wooing foreign direct investment. Are we on the right path to improve the investment climate in terms of domestic and foreign private investment?
In the past few years, Bangladesh has made significant progress in reducing some constraints on investment. Regulatory reforms in conjunction with industrial infrastructure investments will do much in the future to ease the current challenges and constraints.
That being said, the current state of inadequate infrastructure, limited financing instruments, bureaucratic delays, lax enforcement of labour laws and corruption, results in both foreign and domestic investment being lower than ideal. While it is important to note that there have been significant government efforts to improve the business environment in recent years, significant implementation of these efforts is yet to materialise.
A few systemic issues, such as slow adoption of alternative dispute resolution mechanisms and glacial judicial processes impede the enforcement of contracts and the resolution of business disputes. In addition, complex permissions, registration, and licensing requirements (dealing with multiple different government agencies), as well as insufficiently-transparent information sources tend to drive away potential investors further.
Though there is a lot to be done to improve the investment climate of Bangladesh, we must see this as an opportunity to improve, grow and rise to meet the challenges of the future. All in all, things are moving in the right direction but significantly more implementation efforts are needed.