Red tape, bidding complexity major hurdles for PPP projects: Study

BB study suggests appropriate mix of financing to ensure fund availability and confirmation of required return and exit scope for investors, lenders

A study on public-private partnership (PPP) projects in Bangladesh has blamed complexity in bidding and awarding of projects, land acquisition and bureaucratic red tape for the problems plaguing such projects. These obstacles should be removed to attract and retain entrepreneurs in PPP projects as well as to expedite implementation of such projects, the report recommended. The Bangladesh Bank (BB) released the report on Thursday.
The BB also suggested an appropriate mix of financing to ensure the availability of funds on time at a rational cost for PPP projects on the one hand and confirmation of the required return, safeguarding of the funds, liquidity of the instruments, and exit opportunities for the investors and lenders on the other hand as being critical for the financial success of any PPP project.
According to the study, conducted between 1997 and 2015, a total of 47 infrastructure projects has been implemented under PPP with a total investment of USD 5,742 million, having a compound annual growth rate (CAGR) of 8.50 per cent of the number of projects and CAGR of 10.60 per cent of the amount of investment.
The power and energy sector dominates, both in terms of number of projects (72.34 per cent of the total number of projects) and the amount of investment (67.60 per cent of total investment) while the ports and roads and bridges sectors have the lowest number of projects (two projects in each sector). Again, the waste management sector has the lowest amount of investment (only 0.23 per cent of total investment).
In Bangladesh, PPP projects are financed through equity of sponsors, borrowing from banks and financial institutions, funds from the Investment Promotion and Financing Facility (IPFF) administered by BB, and loans from government-owned non-bank financial institutions (NBFIs) like Infrastructure Development Company Limited (IDCOL) and Bangladesh Infrastructure Finance Fund Limited (BIFFL), and support from the PPP Technical Assistance Financing (PPPTAF).
In addition, the government also provides financial support by offering grants and subsidies as part of the viability gap funding (VGF).
As Bangladesh is passing through a stage of growth of implementation of PPP projects and is mostly engaged in small projects, current sources of financing may apparently look reasonable enough. However, large projects—mostly in the pipeline in the areas of highways and expressways, port development, power generation, etc.—would require a huge amount of funds from multiple sources.
In examining the sources of financing of PPP projects undertaken in Bangladesh, it was found that most of the funding for PPP projects came from debt sources (60.76 per cent) followed by equity (35.37 per cent), and the least portion (3.87 per cent) came from the government, VGF and donor funds, the report revealed.
The average equity financing in all PPP projects is above 30 per cent. Local debt constitutes 53.58 per cent and foreign debt 46.42 per cent.
Among local sources of debt, commercial banks provided 69.67 per cent, government-sponsored organisations (IDCOL, Bangladesh Investment Promotion and Financing Facility Project [IPFF] and BIFFL)
27.88 per cent while NBFIs accounted for the remainder 2.45 per cent.
Of the loans supplied by commercial banks, private commercial banks provided 53 per cent, state-owned commercial banks (SOCBs) 43 per cent and foreign commercial banks (FCBs) 4 per cent.
Among the foreign sources of debt, China Development Bank (CDB) provided more than 50 per cent, followed by the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group (15.27 per cent); the Asian Development Bank (ADB) guaranteed foreign loans (12.66 per cent), the Netherlands Development Finance Company (FMO) and Deutsche Investitions- und Entwicklungsgesellschaft (DEG) loans (9.50 per cent), EFC loans (7.49 per cent) and foreign commercial banks’ loans (1.58 per cent) respectively. The average concession period of PPP projects is three times more than the loan tenure. The average lending rate to PPP projects is 14.40 per cent.
In terms of geographical distribution, more than 55 per cent of total PPP projects have been established in Dhaka division, followed by Chittagong division (with 28 per cent).
Three government organizations—namely IDCOL, IPFF and BIFFL—extended a total of USD 406.54 million in PPP projects with IDCOL accounting for the lion’s share (57 per cent) followed by IPFF (39 per cent). The remainder was by BIFFL. Moreover, the PPP Office has identified 44 projects for implementation under the PPP mechanism within the next few years.

 

Red tape, bidding complexity major hurdles for PPP projects: Study

BB study suggests appropriate mix of financing to ensure fund availability and confirmation of required return and exit scope for investors, lenders

A study on public-private partnership (PPP) projects in Bangladesh has blamed complexity in bidding and awarding of projects, land acquisition and bureaucratic red tape for the problems plaguing such projects. These obstacles should be removed to attract and retain entrepreneurs in PPP projects as well as to expedite implementation of such projects, the report recommended. The Bangladesh Bank (BB) released the report on Thursday. The BB also suggested an appropriate mix of financing to ensure the availability of funds on time at a rational cost for PPP projects on the one hand and confirmation of the required return, safeguarding of the funds, liquidity of the instruments, and exit opportunities for the investors and lenders on the other hand as being critical for the financial success of any PPP project. According to the study, conducted between 1997 and 2015, a total of 47 infrastructure projects has been implemented under PPP with a total investment of USD 5,742 million, having a compound annual growth rate (CAGR) of 8.50 per cent of the number of projects and CAGR of 10.60 per cent of the amount of investment. The power and energy sector dominates, both in terms of number of projects (72.34 per cent of the total number of projects) and the amount of investment (67.60 per cent of total investment) while the ports and roads and bridges sectors have the lowest number of projects (two projects in each sector). Again, the waste management sector has the lowest amount of investment (only 0.23 per cent of total investment). In Bangladesh, PPP projects are financed through equity of sponsors, borrowing from banks and financial institutions, funds from the Investment Promotion and Financing Facility (IPFF) administered by BB, and loans from government-owned non-bank financial institutions (NBFIs) like Infrastructure Development Company Limited (IDCOL) and Bangladesh Infrastructure Finance Fund Limited (BIFFL), and support from the PPP Technical Assistance Financing (PPPTAF). In addition, the government also provides financial support by offering grants and subsidies as part of the viability gap funding (VGF). As Bangladesh is passing through a stage of growth of implementation of PPP projects and is mostly engaged in small projects, current sources of financing may apparently look reasonable enough. However, large projectsmostly in the pipeline in the areas of highways and expressways, port development, power generation, etc.would require a huge amount of funds from multiple sources. In examining the sources of financing of PPP projects undertaken in Bangladesh, it was found that most of the funding for PPP projects came from debt sources (60.76 per cent) followed by equity (35.37 per cent), and the least portion (3.87 per cent) came from the government, VGF and donor funds, the report revealed. The average equity financing in all PPP projects is above 30 per cent. Local debt constitutes 53.58 per cent and foreign debt 46.42 per cent. Among local sources of debt, commercial banks provided 69.67 per cent, government-sponsored organisations (IDCOL, Bangladesh Investment Promotion and Financing Facility Project [IPFF] and BIFFL) 27.88 per cent while NBFIs accounted for the remainder 2.45 per cent. Of the loans supplied by commercial banks, private commercial banks provided 53 per cent, state-owned commercial banks (SOCBs) 43 per cent and foreign commercial banks (FCBs) 4 per cent. Among the foreign sources of debt, China Development Bank (CDB) provided more than 50 per cent, followed by the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group (15.27 per cent); the Asian Development Bank (ADB) guaranteed foreign loans (12.66 per cent), the Netherlands Development Finance Company (FMO) and Deutsche Investitions- und Entwicklungsgesellschaft (DEG) loans (9.50 per cent), EFC loans (7.49 per cent) and foreign commercial banks loans (1.58 per cent) respectively. The average concession period of PPP projects is three times more than the loan tenure. The average lending rate to PPP projects is 14.40 per cent. In terms of geographical distribution, more than 55 per cent of total PPP projects have been established in Dhaka division, followed by Chittagong division (with 28 per cent). Three government organizationsnamely IDCOL, IPFF and BIFFLextended a total of USD 406.54 million in PPP projects with IDCOL accounting for the lions share (57 per cent) followed by IPFF (39 per cent). The remainder was by BIFFL. Moreover, the PPP Office has identified 44 projects for implementation under the PPP mechanism within the next few years.