PPP initiative needs a shot in the arm

The Bangladesh Institute of Bank Management (BIBM) has rightly identified in a study that a number of factors like opaqueness in the process of selecting projects, unusual cost and corruption as key impediments to implementation of Public-Private Partnership (PPP) projects. Other barriers include non-completion of projects within the stipulated time, inadequate feasibility study, lack of monitoring on the part of the government and poor capacity.
The government approved the PPP Act this year after going through a process of scrutiny as part of the Vision 2021 goal to ensure a more rapid, inclusive growth trajectory, and to better meet the need for enhanced, high quality public infrastructure services in a sustainable manner.
The Five Year Plan (FY 2016-FY 2020) of the government includes targets such as gross domestic product (GDP) growth acceleration, employment generation and rapid poverty reduction. The government identified PPP as a mechanism which will play a significant role in achieving the targets of 7th Five-Year Plan and the Vision 2021 goal of Bangladesh becoming a middle-income country by 2021 and a developed country by 2041.
The government wants to build the country on strong bilateral relationships with other governments to develop and upgrade large public infrastructure assets to support the growing economy in a sustainable manner and deliver essential public services. The policy provides the framework for engagement and modality for delivery of the PPP projects to be undertaken through G2G partnership whereby the implementation will be carried out with the support of other governments and executed through their state-owned or private sector entities.
There is no denying that the government had enacted the law to provide legal framework for creation of PPPs by involving the private sector participation along with the public sector and attracting local and foreign investments to ensure extensive investments in different sectors, according to the draft guidelines.
In line with Section 16 of the Act, which permits the government to provide financing to PPP projects, the government has decided to subsidise economically viable PPP projects that may not be financially viable. The government will make such projects financially viable as per a budget line. This budget line would be known as the VGP.
The objective of VGF is to make the commercially non-viable infrastructure projects attractive to private investors through PPP arrangements, to minimise the cost or maximise the value for money (VFM) of infrastructure projects to the government and to undertake the projects more effectively under close supervision of the government.
VGF is applicable to only PPP projects including those projects being taken up under the rules for national priority projects and policy for implementing such projects through government-to-government arrangement. Maximum 30 per cent of the total estimated capital cost will be provided as capital grant in the form of VGF. Besides, maximum 30 per cent of the total estimated project cost will be provided as annuity in the form of VGF.
Earlier, the government had amended the private-sector infrastructure guidelines under the name of policy and strategy for public-private partnership 2010 to encourage PPP investment in the country as the model is widely popular across the globe.
All but one of the projects approved by the cabinet committee under public-private partnership failed to make progress despite operation of the PPP office since long, prompting moves for remodelling its modus operandi. Analysts believe government attempts so far for accelerating the model have failed to gain momentum as the government is not taking risk, as in the power projects. They said the authorities need to take risks initially by providing guarantees on the profitability of investment made in this field for longer terms.
It was found that many government agencies had caused problems when they saw expected returns on investments. In some instances, they suddenly raised land prices leaving the private parties in frustration. Many private entities, on the other hand, feel shy to invest when they see low 'internal rate of return' (IRR), a key indicator for investment. If the IRR becomes low, say 10 per cent, the private parties feel discouraged in making investment as there are more opportunities to derive much by investing such amount of money.
Another guideline, which has been framed on national priority projects, is expected to give a boost to the PPP development model. The government has so far been successful in branding its power plants in attracting local and foreign investors. But in the cases of the PPP, the government didn't take such steps. It must share risks with the PPP projects, say analysts. Guarantees on profit must be ensured otherwise the investors will not come here.
The country lacks expertise in properly exercising the financial affairs applied for the private entities. There is no bond market to take funds on long terms. Under the PPP model, government agencies are committed to providing lands with existing structures. Private parties develop the project with their own funds or through loans, equity supports or grants.
Although PPP is a big part of the economy, there is a lack of corporate governance in the projects. Statistics show unsatisfactory success rate for PPP is due to the fact that the concept is still in its early stage of implementation as project results spanned from 15 to 100 years. PPP would not be successful without a vibrant public sector and unless the government took more ownership.
Analysts say more reforms are needed in PPP guidelines because a lot of time was spent in learning corporate governance. The institutions of PPP were shallow and there was no more than 50 per cent implementation of the projects due to lack of synchronisation and coordination between the public and private sector. Universal fund, bond creation and mix of loan and equity were needed to help the projects and lessons ought to be learnt from the successful implementation of mega projects in India, Sri Lanka and Malaysia.
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