The faulty financing system is hindering execution of projects under the public private partnership (PPP), a system the government persuades for implementation of its development works.
Due to the procedural complications, the projects do not get required funds from banks and financial institutions, thus delaying their implementation, officials said.
The PPP authority recently sought the finance ministry's intervention to resolve the difficulties so that the PPP system can play a vital role in execution of the infrastructure development initiatives of the government.
In Bangladesh, PPP projects are implemented under newly formed special purpose vehicle (SPV) companies formed by the private investors, said officials.
Apart from the private investor's equity, the majority portion of required capital is delivered by the commercial banks, multilateral development banks, and various financial institutions.
In the PPP projects, the ratio of loan and equity stands at 70 per cent and 30 per cent or up to 80 per cent and 20 per cent. The PPP projects are financed by a 'project finance' system where loan providers only depend on 'cash flow' of the project as security of their credit.
Under this system, loan providers cannot take project companies' or their directors' personal property as collateral. Besides, the SPV companies do not have capacity to provide collateral since the ownership of project land remains to the government and there is no way to keep such land as mortgage.
In November 2016, some 15 banks and financial institutions signed memorandums of understanding with the PPP authority for financing PPP projects. Some more banks and financial institutions expressed interest in signing PPP financing partnerships.
However, signing of the partnership deals could not help remove the obstacles in providing loans under the 'project finance' system, according to Sultana Afroz, chief executive officer of PPP authority.
"Now the problem has emerged as major obstacles in executing projects under PPP," she wrote in a recent letter to the finance ministry seeking a solution.
She also wrote that the 'project finance' system in funding PPP projects found to be successful worldwide, but in Bangladesh projects face 'serious' problems in getting loans from banks and non-bank financial institutions.
"…internal policy directives and some traditional practices of banks and financial institutions are hindering financing PPP projects," wrote Ms Afroz.
Other complications she pointed out are: the differences between tenure of loans of PPP projects and credit providers, reluctance to provide loans without collateral, seeking personal collateral of shareholders of PPP projects, and failure to provide large loans by banks and financial institutions.
The PPP authority also identified two more legal obstacles in financing PPP projects.
The section 26 (A) (1) of the Bank Companies Act-1991 has put a limit on banks to provide loans up to 35 per cent of the total capital expenditure of a project. The PPP projects need large loans which the banks can't give if the rules are followed, according to Ms Afroz.
She also wrote that the provisioning requirement was very high in case of non-securitised loans, discouraging the lenders.
The PPP authority chief demanded removal of these barriers by amending the policy orders so that PPP projects can get adequate loans from the banks.
Ms Afroz requested the ministry to create a new loan facility to make available low cost, long term, and large sized loans for PPP projects; prepare new guidelines for promoting bond market and private equity for investing in the projects; and issuing long-term bonds from the government's pension fund and insurance funds for the PPP projects.
A senior Financial Institutions Division official told the FE that Senior Secretary of the division Ashadul Islam attended a workshop of the PPP authority as the chief guest early this year where the problems over project financing were discussed thoroughly.
"We are working on devising a mechanism to resolve the complications," he added.
syful-islam@outlook.com