aInfrastructure financing in Bangladesh

Mamun RashidPadma bridge financing debacle seemed to have impacted almost every concern in this country. I received a late night call from a close friend of my cadet college days, who has nothing to do with economics or business. He was possibly watching late night television news and asked me,- can we really implement a large project of national interest like Padma Bridge without World Bank or other development agency support? How far is the participation of a Malaysian firm in the Padma Bridge construction predictable? Or as such can any other private or commercial source be trusted and relied upon? What do we do with the financing of similar projects in future? For reaching fast the status of a middle income country with accelerated GDP growth, we need implementation of many large public interest infrastructure projects. The present government has very logically identified the development of infrastructure as one of its first and foremost objectives. This is an important area of the economy where investments have historically remained below potential because both local and foreign investors had been constrained by various types of inefficiencies, including, high level of corruption. Infrastructure development has many components, including, but not limited to, the development of the following items: (a) Power supply on a national scale; (b) National roads and highways; (c) International standard bridges; (d) Port capacity and operational efficiency; (e) Telecommunications or internet connectivity. While we all know what needs to be done, there has not been significant progress to date. What did go wrong? The impediments to infrastructure development have been many, but the major ones can be included in the following list: political whims, lack of committed leadership, corruption, access to finance; and capacity. While we can only speculate that lessons learned in the last several years have taught us better to avoid our succumbing to the first 3 items of the list given above, capacity, placed at the bottom of the list, is crucial in ensuring seamless execution, especially when we are desperately trying to implement some public interest projects. Access to financing: Infrastructure financing requires billions of dollars. Such financing will need commitment from the private sector, the public sector and the international development partners. The focus should be to encourage public-private partnership, both local and foreign, while ensuring the right fiscal and monetary incentives for all parties so that they remain committed and engaged. In this regard, it is crucial to engage experienced professional teams in the early planning stages of the financing structure. Financing considerations: The best option in a developing country like Bangladesh seems to the investment of bi-lateral or multi-lateral agencies in any project of public interests. However, if that is not happening and we are going through the other routes, there are various factors that are usually taken into account by the prospective financiers. Size is an important determinant in attracting foreign lendersinvestors. Banks and investors will be looking to participate in large transactions in order to justify the time and effort required for due diligence and other tasks. Off-taker is an important factor. A project may have strategic and economic importance but financiers may not be comfortable with the off-taker and remedies if the off-taker fails to meet its obligations. Lenders will prefer to see long term supply agreements for the tenor of the debt from credit-worthy suppliers and may require hedging to reduceeliminate price risk. Sponsor and construction contracts are vital as well. Strong sponsors with successful track record can mitigate a number of risks, particularly completion risks, if they provide such guarantee. The experience and cost advantage of EPC firms in the related industry, the country and with specific assets is important, as financiers will carefully analyze these aspects too. Most of these risks can be mitigated by multilateral or export credit agency's involvement. It is noteworthy that the existing Independent Power Plants (IPPs) in Bangladesh passed the tough screening of investors and lenders and are operating successfully. This should work as an instance for successful implementation of future projects. Financiers: There are several bi-lateral and multi-lateral development agencies that have been focusing on infrastructure development finance in Bangladesh. Among the successful IPPs, Meghnaghat Power was supported by Asian Development Bank (ADB) and the Infrastructure Development Company Limited (IDCOL), Haripur Power by FMO (the Dutch Government Agency), NEPC by Overseas Private Investment Corporation of the United States (OPIC), and Khulna Power Company Limited by International Finance Corporation of the World Bank (IFC). Additionally, IFC, ADB, NORFUND, DEG and EIB have played key roles in financing infrastructures - power, telecom and largest manufacturing setups in Bangladesh. ADB and IFC have both expressed an increased willingness to provide equity for power projects. We have also seen interest among export credit agencies like ECGD of UK, and Coface of France, Hermes of Germany is equally interested to work with their home country corporations for implementing projects in Bangladesh. Private equity firms also invest in infrastructure development. Power sector in Asia continues to be a target for global and regional investors. However equity investors are generally motivated by the GDP growth prospects, political stability, transparency in pricing regime, and credit quality of the major off-taker. In the present global financial scenario, Bangladesh should also look to Middle East and Asia to tap the Islamic liquidity pool for financing power infrastructure projects. Now that we have a respectable sovereign credit rating ,raising money from international or commercial sources, should be easier than the past. Local capital markets can also channel domestic liquidity to an extent if the transaction is structured properly. Bangladesh should seriously move to act as a participant in the global economic and financial network for implementation of infrastructure projects. We should lower our dependence on the development partners or they can be brought in where economic returns are higher than commercial returns (such as river training, land acquisition, land administration, resettlement) and commercial financiers may finance commercially viable activities. Donor agencies or development partners can also focus on capacity building among civil bureaucracy, for improving their understanding about the project economics and execution with precision. In a country like Bangladesh, where there is an acute shortage of power and other infrastructural facilities, ensuring transparency, execution support capability and corporate governance can do miracles in terms of bringing back investors focus and successful implementation of projects. Most important here is a proper project planning with technical and financing plan put in line in advance. (Mamun Rashid is a banker and economic analyst. E-mail: mamun1960@gmail.com)