Final Project

PPP Projects in Bangladesh: Considering the Government

Perspective
Waled Mahmud

Introduction
Provision for sustainable and quality infrastructure is a prerequisite for rapid
economic development and requires huge sustained investment. The Bangladesh
economy needs huge investment in infrastructure development. Government alone
is not capable to provide these funds. Government of Bangladesh has embraced
private participation in infrastructure development of the country.

Infrastructure Problem where PPP may participate

(What is the infrastructure problem that the PPP is trying to solve?)
Bangladesh is a country of a thousand rivers, large and small, and most of its
territory is regularly flooded during the monsoon season. This fact makes it
extremely difficult and expensive to build modern transportation and
communication networks. The situation is further complicated by the fact that the
Bangladeshi government has limited resources not only for building
new infrastructure but also for maintaining the existing one. From the colonial era
Bangladesh inherited underdeveloped and unevenly distributed infrastructure and
transportation networks. Poor and inefficient infrastructure undermined the
economic development in the country, and only recently has the government been
able to address the problem systematically and channel investments towards
expanding its highways, railroads, seaports, and airports. More recently, with
international assistance the government has also started to modernize its
infrastructure.
According to the CIA World Factbook, Bangladesh is served by a network of 201,182
kilometers (125,014 miles) of primary and secondary roads, but only around 10
percent of them, or 19,112 kilometers (11,876 miles) are paved. Bangladesh has a
railway system of about 2,745 kilometers (1,706 miles), of which only 923
kilometers (573.5 miles) is a broad gauge (1.676 meter gauge) and the remaining
1,822 kilometers (1,132 miles) is narrow gauge (1.000 meter gauge), 1

1 http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/BangladeshINFRASTRUCTURE-POWER-AND-COMMUNICATIONS.html

Electricity crisis is the burning question in Bangladesh now. Our main source of
electricity product is the natural gas which is shortage and is going to run out. Some
power stations are furnace controlled and some others are oil dependent. This sort
of power stations is more expensive and they are not atmospheric friendly. 2
The average maximum demand for electricity was 3970 MW in 2007 which has
increased to 4833 MW in 2011 (May, 2011) with an average increasing rate of 216
MW per annum. The estimated average demand for electricity is stand at 5696 MW
by 2015. On the other hand, the average generation was 3378 MW in 2007 which
has increased to 4103 MW in 2011 (May, 2011) with an annual average increasing
rate of 181 MW. Continuation of this rate indicates that the average generation
would be 4828 MW till 2015 which is far away from the vision of 11500 MW
generations by 2015.

Relationship between GDP and Generation of Electricity

A decreasing rate of electricity generation has resulted in the lower GDP growth.
The current GDP growth of 6.66 percent might be the result of comparatively higher
growth rate of electricity generation (6.19 percent). The average GDP between 2007
and 2011 was 6.22 percent whereas the average generation of electricity was 3378
MW. Under the business as usual scenario, if an arbitrary calculation is made, it is
observed that 603 MW generation of electricity might be required for the growth of
one percent GDP.

Causes of Electricity Crisis

Although the government has taken several initiatives for reducing the crisis of
electricity, yet the crisis persists. This is mainly due to the problems associated with
high gas dependency, improper privatization policy, lack of satisfactory and timely
implementation of allocated money, political reasons and over population. The
demand of electricity is increasing day by day. For economic emancipation and in
order to meet the Millennium Development Goals, the electricity growth that is
generating more electricity, building more transmission/ distribution capacity,
bringing more area/ population under electricity coverage and ensuring more
efficient management of these are the essential issues. According to the power
sector growth in the country, the country needs new 400 MW power each year to
meet the growing demands. Building of this particular infrastructure require large
amount of capital and is encountering increasing difficulties to finance the required
capacity either through the government budget or even by the international
development agencies and financing organizations. But the government of
Bangladesh is unable to provide the finance to set up new power plants according to
2 http://electricityproblemandsolution.blogspot.com/2011/07/electricity-problem-inbangladesh-and.html

the growing demand. That is why in 1996 the Government of Bangladesh (GOB) has
decided to build power plants in private sectors and Independent Power Producers
(IPPs) launched their business in Bangladesh.
Public-Private-Partnership is relatively a new concept for Bangladesh. During its first
forty years, the country has gone through nationalization followed by vigorous
privatization. With taking power by the new government that believes in Change,
time has come to try the third dimension, the Public-Private-Partnership. To reflect
the aspirations of the people, the present government has committed to raise the
GDP growth rate to 8% by 2021 to uplift the countrys economic for achieving as the
middle income range country in the world. (Vision 2021, Bangladesh Awami
League). To achieve this goal, investment in GDP needs to be as high as 35%-40%.
Currently this figure hovers around 24%-25% (Position Paper of the Ministry of
Finance, Bangladesh) which ironically is lower than the national savings ratio
implying nothing but idle capacity. To attain and sustain 8% growth rate it requires
additional US $28 billion from 2009-2014 (Position Paper of the Ministry of Finance,
Bangladesh). The government is not in a position to mobilize these gigantic
additional resources internally. Therefore, the ruling government is heavily attracted
the private sector to be involved with the infrastructure development of the country.
With this end in view, the government of Bangladesh has formulated the PublicPrivate Partnership (PPP) budget in 2009-2010 fiscal as a new alternative, an
alternative which is first of its kind in Bangladesh. Presently, a total of 13 PPP
projects are financed by Infrastructure Development Limited (IDCOL) in power and
energy sector.
Budget Allocation on Power and Energy Sector by the Government FY 2015-16
The national budget for 2015-2016 financial year, has proposed allocation of Total
Tk 18,540-crore for the Power Division and the Energy and Mineral Resources
Division. The proposed allocation is about 6% of the total allocation .3

Arena of PPP services and its affordability

(What services are to be provided and are these services affordable?)
Under the PPP approaches, the ruling government has specifically encouraging
participation of private sector on some of the specific infrastructure related fields
where the private sectors are found willing for required investment. The specific
fields are the Power and Energy, Renewable Energy, Port and Communication, Telecommunication Technology and Information Technology. The ruling government has
already developed the Private Sector Power Generation Policy of Bangladesh, which
is prepared under the Ministry of Energy and Mineral Resources of the Government
3 http://www.en.banglanews24.com/fullnews/bn/111543.html

of the Peoples Republic of Bangladesh in October 1996 with a Revised version in

November 2004. It is an indicator of the seriousness of the government and also the
private sector to contribute in the infrastructure development of the country.
Bangladesh government has provided detail guidelines for the private sector to be
involved and contributed on infrastructure development of the country. Presently,
under PPP projects different private sector has already started contributing through
various projects. It can be expected the private sector has involved with those
projects that services are affordable by the investors and also feasible for all the
stakeholders. The government approved specific eligible sectors 4 for PPP are
mentioned below:
Power
Telecommunications
Information and Communication Technology
Ports
Social Infrastructure
Gas and Gas related Infrastructure
Water Supply
Toll Roads and Bridges
Shipyards and Shipbuilding
Hotel and Tourism
Mass Transportation Systems
Environmental Services
Infrastructure Backward Linkage Industries

Favorable Criteria for the Private Sector Participation on

PPP
(What are the reasons that the private sector would want to participate?)
The government of Bangladesh has established the Infrastructure Development
Company Limited (IDCOL) to provide adequate intensive to the private sector for
participating on the infrastructure development activities. Through IDCAL, the
government has developed and revised the national policy to ensure easy and
effective engagement through PPP in the country by the private sector. The
government has already developed the national policy document in 1996 and
already revised in 204 based on the demand of the privates sector and other
stakeholders. The present clear policy document has already created positive
environment for the private sector to be participate through PPP projects.
Another major reason is of developing specific landing terms and convictions for the
people. Under the Infrastructure window, IDCOL provides long-term BDT and USD
loans to viable private-sector owned projects that fall within the Eligible Sectors. Key
indicative lending terms are as follows:
4 http://idcol.org/home/i_eligibility

Particulars

USD Loan

BDT Loan

Single
Borrower/Group
Exposure

Maximum USD 60 million or equivalent BDT

Single Project
Exposure

Maximum 50% of the Total Project Cost

Tenure

Maximum of 15 (fifteen)
years including Grace
Period

Maximum of 15 (fifteen)
years including Grace
Period

Grace Period

Maximum of 3 (three) years

Maximum of 3 (three)
years

Interest Rate

Market Rate

Market Rate

Moreover, IDCOL has also kept provision of considering concessionary financing

support to projects with significant positive contribution towards environmental
conservation and pollution control i.e. solid waste management, effluent treatment
plants, battery recycling plants etc.
More interestingly, the government has also established the Advisory Department to
provide adequate guidance to the private sector. The Advisory Department is
responsible for two major aspects i.e. training & capacity building and corporate
advisory services on infrastructure and renewable energy financing.
Under training and capacity building, IDCOL organizes regular training programs on
Project Finance, Financial Modeling, Renewable Energy Finance, and Public Private
Partnership etc. IDCOL also offers tailored training programs to various
organizations as per their specific needs.
The corporate advisory services include but not limited to project due diligence
support to banks/financial institutions, advisory support on new product
development, policy formulation support to government, project feasibility analysis,
bid document preparation support to the private sector, program replication and
policy structuring support to cross border agencies etc.

Risk Allocation Pattern

(How should these risks be allocated? Consider the country context in judging the
risks and who should take them.)
Three components have to be used as a measurement of investor protection.
Investor profile is determined by many factors (i) contract viability of contract or
expropriation risk (ii) Delays in making payment (iii) profit repatriation etc. In project
finance financial claims may be called that type of contract that gives the
opportunity to claim to cash flows of the project by shareholders and creditors.
Legal system is supposed to be a guard that protects Contract viability. Contract
laws refer to negotiated arrangements and company, bankruptcy and securities law
prescribe the rights of corporate insiders and outsider investors. If legal rights are
strong and efficiently enforced by regulators courts investors are more willing to
finance in projects. In contrast when the legal system does not protect outside
investors availability of external finance is weakened. (Bekaert et al, 2007)
All investment projects have to face different kinds of risks. Infrastructure projects
are considered more risky in many respects. That acts as a constraint factor towards
private financing. Unlike other cases a special purpose company is created to
implement infrastructure projects on the basis of concessionary contract. Financing
is done by the financing organizations based on revenues stream. Financing
organizations look on revenue stream much and scrutinize the issues which might
affect the revenue stream. The revenue stream is very much important to ensure
debt service obligations. Lenders look in to the revenue stream and try to asses all
the risks associated with the revenue. It is absolutely same in the case of
Bangladesh. Different types of risk allocation are mentioned below by considering
the situation of Bangladesh.5

Construction risk
It is one of the major risks as considering the Bangladesh situation especially power
and road construction projects. Generally construction risk refers to delay in
construction and as a result project may suffer cost overrun. Construction risk is
minimized in many ways. In assessing construction risk sponsors quality is
considered. Whether the sponsors have got previous experience in implementing
similar projects and have construction contractor having background of engineering,
procurement and construction. A well managed project facilitates the project
sponsors to shift a part of the construction risk to the contractor. Risk mitigation by
way of imposing penalties for delay in construction and low performance is common
5 Rathin K P, 2012. RISK MITIGATION IN PPPs: LESSONS FROM BANGLADESH
EXPERIENCE. Thailand: Asian Institute of Technology School of Management,
Thailand.

in case of construction risk mitigation. The whole risk cannot be eliminated entirely.
Residual risks would be borne by investors

Interest rate
Risk Infrastructure project is normally capital intensive. Generally all infrastructure
projects have got high duration of payback period. Thus changes in interest rate
over the period of project life may cause adverse effect on financial terms of the
project. Because of capital intensity interest cost poses a lion share of project cost.
Thus good care is taken to minimize interest rate risk by the sponsors. But it may
vary from market to market and host country situation. In financial market there are
so many options for interest rate hedging. But in many markets interest rate
hedging options are that much available. And government organizations may not
permit to avail this sort of hedging many times. So investors may have to borne the
interest rate risk and thus may act as a discouraging factor towards foreign
participation in infrastructure.

Market risk
Market risks refer to non viability of market condition in reality. Demand projection is
crucial for assessing market risk. In certain situations investors may demand a
purchase guarantee from the purchaser. For example in case of power project
investors may seek a purchase guarantee in advance to manage market risk. In
case of toll project investors may seek a confirmation from the government
regarding number of vehicle movement on the road. That is number of projected
traffic may be adequate for project viability but there might be lots of uncertainty. In
those cases financial projections sometimes allow for downside possibilities.

Foreign exchange risk

In case of infrastructure development project foreign exchange risk is one of the
most crucial risks. Since infrastructure project is capital intensive and many a times
it is not possible to finance the project from the domestic financial market in full.
Then project sponsors may take foreign currency denominated loan to finance the
project. And in case of foreign investors may wish to repatriate its earnings
converting in to foreign currency from domestic currency. It is not unlikely that
domestic currency exchange rate with foreign currency will not remain same over
the period of project life. So it considers two types of foreign exchange risk in case
of infrastructure development project financing. The first one is related to
convertibility and second one is related to exchange rate. Foreign investors always
need the guarantee from the host government that anytime investors can convert
its earning in domestic currency to desired foreign currency. The second one is
exchange rate risk.

Payment risk
Degree of payment risk varies from sector to sector. For example in a toll road
project the user is supposed to pay directly to the project entity in exchange of
using the road. In case of power project sponsors might have to handle payment
risk as the power projects supply electricity to the public sector entity. Then the
sponsors may seek government guarantee in addition to contract with the public
entity.

Regulatory risk
During the entire project life cycle project entity needs to cross different regulatory
regimes and regulatory authorities. Thus project entity may be affected by adverse
regulatory act. It may happen because of tariff re fixation. Government may agree
at a price at the starting of the project and during the project journey the price
might perceived to be high by the regulatory authority. In case of many project
problems may be created by environment activist group. In the name of public
interest some group may go for public litigation. Thus project cost may go up. For
these reason private investors always try to seek government assurance regarding
regulatory risk. There are two types of things might happen. Government may
provide assurance or may agree with the project sponsors to let them accommodate
regulatory cost towards pricing of infrastructure. Investors feel protected if there is
independent regulatory authority to handle dispute. Investors also seek for credible
legal framework to mitigate regulatory risk. Generally, regulatory risks vary from
country to country. If investors are assured about transparent policy and legal
framework then investors are encouraged to take investment decision. This does
not happen overnight. Until and unless the perception is built within investors
community regulatory risks remain as a bottleneck in attracting foreign investment
in infrastructure.

Political risk
Infrastructure is a factor on which public interest is surmountable. Since public
interest is there political issues are there with infrastructure. In developing countries
especially infrastructure is thought to be public goods. So commercial terms of
infrastructure projects might be interrupted many cases. Degree of political risk
may vary across the globe. In one extreme license can be cancelled and in another
extreme project might be nationalized. Political risk might be mitigated to the some
extent by the assistance from international agencies like MIGA. Investors may go in
to agreement with other international agencies like the World Bank to protect itself
from political risk. But all these arrangement might increase project cost and can be
reflected in infrastructure price.