Learning and addressing PPP financing challenges in real-time: A story from Bangladesh

With the development of an internationally acknowledged foundation for public-private partnerships (PPPs), Bangladesh has built a project pipeline of $28 billion to realize the government’s vision of bringing about a transformational change to its infrastructure sector and delivering the quality and range of public services its citizens demand. While PPP contracts have been signed with private partners for 16 projects, the reality is most are struggling to secure financing within the specified timeline.

The government sought out a way to solve this potential blow to the program. Recognizing we needed to provide lenders with quick, easy access to project information—with the objective to shorten the timeframe for achieving financial close—the PPP Authority in Bangladesh launched its PPP Financing Partnership Program in 2016. Since launching, we’ve signed memoranda of understanding (MOUs) with 14 banking and non-banking financial institutions.

By signing the MOU, partner financial institutions receive the ability to obtain priority access to key project information, such as feasibility studies and draft tender documents, for their comments and suggestions to make the documents and the projects themselves more bankable. This gives our financing partners the chance to explore their sector-specific client base to understand current interest, experience, capacity, and constraints vis-à-vis the preliminary qualification criteria set in the draft tender documents. Partner organizations are also meant to provide indicative and conditional term sheets expressing their intent to finance a given PPP project, which would form part of the projects’ bid packages.

Through the PPP Financing Partnership Program, we want to establish awareness within the banking and finance industry and to encourage them to start considering PPP projects as prospective financing opportunities.

Interestingly, of our 14 partner organizations, 12 were mostly focused on traditional financing (six are commercial banks and the other six are non-banking financial institutions); the other two—Bangladesh Infrastructure Finance Fund Limited (BIFFL) andInfrastructure Development Company Limited (IDCOL)—were essentially created by the government of Bangladesh to provide long-term financing to infrastructure projects. So far, more than three years have passed and none of those 12 banking and non-banking financial institutions has taken part in financing PPPs. On the other hand, BIFFL and IDCOL have provided finance for four projects and we are in discussions to evaluate their prospects to finance more.

But clearly the lack of the other financial institutions’ participation pointed to challenges we needed to address head-on. In order to find out how to increase their involvement, we held meetings and workshops to discuss this together. We learned that obstacles from their end were the following:

• There’s limited familiarity and internal capacity to understand tender documents, as well as evaluate and structure deals due to their complexity and lack of familiarity with the PPP Law, procurement guidelines, Viability Gap Financing rules, and other policies.
   
• Their capital bases are reliant on short-term deposits. This means lending for tenors longer than 5–7 years is difficult, due to regulatory constraints.
   
• Local banks are unable to match interest rates that IPFF (Investment Promotion and Financing Facility)/BIFFL/IDCOL can offer.
   
• Issuing an indicative term sheet without including the profile of the winning bidder is unlikely to be useful for banking institutions, as they need to get approval from the board/credit committee for issuance of such document.
   
• Since, in these PPPs, land ownership is not transferred to the private partner, banks and non-banking financial institutions are unable to mortgage and create charge against the project land.
   
• Most of the banking institutions have regulatory constraints (such as single borrower limits), gearing constraints in the case of foreign currency lending, and also balance sheet constraints that come into play.
   

Understanding these issues was an important first step. Now, the government needs to be proactive to mitigate the flagged challenges. To maintain the momentum of our PPP program and accelerate financial close for individual projects, we’ve continued dialogues with relevant stakeholders from both public and private sectors. We’ve also held roundtable discussions with the banking community and policy makers. We expect these solutions to help us move forward:

• Knowledge-sharing sessions for partner organizations about key PPP concepts will form part of the capacity building program managed by the PPP Authority.
   
• Since the Bangladesh Economic Zone Authority and the Bangladesh Export Processing Zone Authority have done exceedingly well in implementing their projects, their land lease agreement template may be followed for PPP projects as well.
   
• Financing partners agreed to create a ‘collective/common term sheet’ reflecting general terms, range of credit terms, and other obligations to provide some comfort to prospective bidders. From there, final credit terms can be negotiated with the winning bidder through discussion—and ultimately memorialized in writing.
   

According to the country’s 7th Five Year Plan, Bangladesh needs to spend 6 percent of its GDP—nearly $15 billion—for investment in physical infrastructure and service sector per year to achieve the development goals set in Vision 2021 and Vision 2041. Of this, the share of PPP has been estimated at 1.8 percent of GDP­—or $4.5 billion—a year, which is 30 percent of total investment in the infrastructure and service sector.

As our project pipeline grows, we need to continue putting attention towards solving the financing puzzle for PPPs to maintain our ambitious timeline and further boost investors’ and citizens’ confidence in our program.
 

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