Learning from experiences about infrastructure partnership projects abroad

A K M Nozmul Haque and Sadia Parvin concluding their two-part article Private sector now shares 53 per cent of the current power generation. These are a few successful examples of what the private sector in Bangladesh can do, even working under so much of business unfriendly situation prevailing in the country. The government launched the PPP initiative in fiscal 2009-10, allocating Tk 25 billion in the budget in a bid to involve the private sector in big infrastructure projects in power and energy sectors. The allocation for PPP in the current fiscal 2010-11 is Tk 30 billion against 23 projects. Despite the government's repeated commitments and efforts, not a single PPP project could, however, be undertaken in the last two fiscal years. In the recent time, a contract was awarded to Ital-Thai Company for the 26 km flyover for the Dhaka city. But it has now gone into limbo, because the contract awardees said they were unable to mobilise the required fund. This testifies only to the remarks made by the leaders of the IMF team which visited Bangladesh last month. PPP for the last two fiscal years totally proved itself to be in a fiasco. The allocations of Tk 25 billion in fiscal 2009-2010 and another Tk 30 billion in fiscal 2010-2011, were meaningless exercises. Economists are sceptical over private investment, in case transparency and profit-control-risk sharing are not clearly and adequately specified. The issue of profit-control-risk sharing in PPP needs to be made more transparent to attract private investors, whether domestic or foreign. If investors are not absolutely sure of their returns and joint venture projects are freed from bureaucratic mess-up, they will not come forward. The overall investment mobilisation process faces serious setback due to failure in making the PPP programmes effective. Many big infrastructure projects, which were to be implemented under the PPP, have now remained stuck up in files. Despite the failure to implement PPP projects earmarked for the last two fiscal years, the government has planned to implement 16 projects- 13 in the power sector and three in the housing sector under the PPP in fiscal 2011-12. In addition to the budgetary allocation, the government has provided Tk 16 billion to implement various projects in power, energy, roads and railway sectors. Of Tk 30 billion, the government has allocated Tk 1.0 billion for technical support while Tk 4.0 billion has been proposed under Viability Gap Fund for projects that are not commercially profitable but important for economic development and public services. Because of its failure so far to spend the PPP funds, the government has stressed upon the need for proper implementation of the PPP projects as the country lacked adequate infrastructure. The guideline for the PPP is not yet clear to potential investors. The members of the public, including the prospective investors, do not know clearly its terms and conditions and also its liabilities. So, they are not encouraged to take part in the programme. Nothing happened under the PPP in the last two years as such initiatives needed preparation and there were also some inertia. Without private participation, it would not be possible for the government alone to increase investment in infrastructure sector, and without the desired investment in the sector, the country's economy will not be able to achieve the expected growth. The PPP policy has a number of inconsistencies that might hamper proper execution of projects under its initiatives. According to the draft policy, a Public-Private Infrastructure Committee (PPICOM) will be working at the Prime Minister's Office, despite the fact that the Secretariat of the proposed committee, named 'PPP Cell' will be established in the Board of Investment (BOI). This will give rise to dual administration on a single purpose which will lead to dilly-dallying process, frustrating the prospective investors. More control will give more inefficiency and breed more corruption. Additionally, the PPP policy has proposed compulsory selection of every PPP project by the law ministry. This might frustrate prospective private investors and would not be palatable to them. The policy proposed establishment of Public-Private Infrastructure Committee PPICOM Secretariat Fund. But, the draft did not include the use of such fund. The Finance Ministry admitted that the government had failed to implement its budget commitment mainly because of bureaucratic red-tapism and lack of expertise. A PPP chief executive officer is yet to be appointed and not a single project could take off utilising funds that have already been allocated. The Finance Minister was reported by a section of the media to have admitted the government's failure. He, however, put the blame on what he called an "incompetent" bureaucracy. By nature, bureaucrats 'hamper' the pace of development and 'do not' encourage change. This sounds bitter, but it is the truth -- and is true, more or less around the globe. The Finance Minister's agony only corroborates the thesis in the book-Reinventing Government, mentioned earlier in this write-up. Businessmen also argue that mere budget allocation is not enough for PPP. It is essential to have a well-defined legal and institutional framework for the regulation and implementation of PPP projects. If the government cannot improve its administrative efficiency and capacity for negotiation, the public-private partnership concept will not succeed. Under the present circumstances prevailing in Bangladesh, it all appears that PPP, in fact, cannot work successfully. Against this scenario, the growth process in Malaysia was engineered by Private Participation Initiatives (PPI). Its economic progress and achievements over the past decades have been accomplished by a considerable amount of investment in physical infrastructure development. Complementing the high public expenditure was the large scale privatisation programmes that resulted in undertaking major infrastructure construction projects and provision of infrastructure services. Between 1990 - and 2005, a total of RM 150.3 billion was invested in infrastructure projects with private sector participation. Of that amount, 17.0 per cent were invested in telecommunications, 29.8 per cent in energy sector, 30.5 per cent in transport and 22.7 per cent in water and sewerage projects. The bulk of the private sector financing was provided by domestic bond market; other avenues are currently now being pursued through private financing initiatives (PFIs). The total value of the bonds issued by the infrastructure sector, amounting to RM 108.4 billion, represents a sizeable 72 per cent of the RM 150.3 billion invested in infrastructure in the private sector. From 1990-2005, out of the total funding in the infrastructure sector, the private sector participation accounted for 63 per cent of the total funding. The relatively low public sector spending on infrastructure development is due to a massive shift to the private sector and much of the success in Malaysia's private financing of infrastructure projects is due to the ability of the project promoters and developers to raise funds in the debt capital market. And to fund this massive financing, the policy planners there recognised the importance of developing the bond market to alleviate the currency and maturity mismatches in financing. The bond market is the major provider of funds for infrastructure financing. Their bond market is well framed and well structured where risk is stabilised and guarantees regular cash paybacks All terms of bonds match with the useful life of the project in order to do away with the maturity mismatch. To support this, the bonds are based on securitisations of future cash flows from the infrastructure projects. The concept of funding is based on financial composition that involves both equity and debt, structured in a way in which potential cash flow from the project are used to repay both internal and external sources of financing. Special Purpose of Vehicles (SPVs) is created for the purpose of the projects where assets, along with the revenue generating source are used to secure the projects' viability. Financial institutions such as investment banks, trustees, and rating agencies form part of the intermediary network that enables the relatively complex financing initiative to come together cohesively. According to the World Bank's Private Participation in Infrastructure (PPI) database, a total of 87 projects in Malaysia were listed between 1990 and 2005. Altogether there were 24 projects in energy, seven in telecommunications, 43 in transport and 13 in water and sewerage sectors. In Bangladesh, the securitisation of future cash flows of BRAC microfinance has been developed very successfully by the local experts. So, talent is available within the country. The government should tap it and funding as such for infrastructure should not pose much of a problem. The policy planners here must trust the strength of the domestic market; they should develop ingenuity in fund raising capability from the inside market, and the high-ups in the sector should avoid making contradicting remarks about the development of the capital market. Besides, lateral recruitment should be made for Bangladesh Bank with expertise on capital market, and its officials should learn from the Reserve Bank of India in this connection. Privatisation Malaysia was implemented by several methods like Sale; Lease; Management contract; Build; Build - Operate - Transfer (BOT); Build - Operate -Own (BOO); Build - Operate (BO); Build - Lease - Transfer (BLT); Land Development Land Swap; and Management Buy-Out. Either a single method or a combination of methods is chosen, depending on the merit of each case. In Bangladesh, the Jatrabari flyover construction, under BOT, has been contracted out, because the method is one of the favourites of the private operator. Even after the adverse situation faced during the previous government, the project is being very successfully put in place. The second Dhaka-Chittagong corridor under BOT, proposed to be built by a foreign company entirely financed by them, could not unfortunately see the light of the day for reasons not very much appreciated. The government now mulls for PPP option-BOT, BOO, BOOT- for deep sea-port, after failing to scout foreign fund. This is, perhaps, the right approach. According to media reports, the Chinese ambassador in Bangladesh observed recently that the Chinese companies would like to develop the deep-sea project in Bangladesh on BOT basis. We would suggest that the policy planners in Bangladesh should have a look at the Report on Infrastructure Financing and Bond Issuance in Malaysia (JBICI Research Paper No 34) released on April 2007, by the JBIC Institute, Japan Bank for International Cooperation. This is available in the relevant website. The contributors to this paper belong to the Research team of the Prime Finance and Investment Ltd: Opinions expressed here are their own and do not in any way reflect those of the organisation they work for. The writers can be contacted at e-mail: nozmul@hotmail.com