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The challenge of PPP for infrastructure financing

Published: Friday, May 29, 2015

FE-PRI EAU Special

Posted : 29 May, 2015 00:00:00


The challenge of PPP for infrastructure financing

Naureen Khan

The challenge of PPP for infrastructure financing

Public Private Partnerships (PPPs) are service or business ventures that are funded, managed, and operated through a partnership between the government and one or more private sector entities. In the national budget of fiscal year (FY) 2014-15, the government had ambitiously proposed substantial policy and institutional reforms; however, implementation of these reforms requires considerable background preparatory work. But the required focus and strong early attention to challenges arising fell short of expectations. One crucial reform that was proposed in the last budget was the emphasis on PPP for infrastructure financing.

Currently, there are significant capacity constraints in the public sector whereas in the private sector, there exists substantial technical competence and required capacities. While the PPP framework maintains public accountability of service provision, it also enhances the role of the private sector in government initiatives, relaxes government’s resource constraint, and ensures greater efficiency and better management resulting in improved service delivery.

The government could also obtain technical assistance from donors who will likely be very much willing to support the implementation of these far-reaching reforms. This form of resource mobilisation does not come as a surprise especially since the lack of investment in infrastructure, particularly energy and power, port and communication has been identified as the root cause behind sluggish growth.

If the policy and institutional reform to increase PPP for infrastructure financing as strategised by the Budget Speech of the Finance Minister is implemented well, it will have a substantial positive effect on long-term development.

The current infrastructure needs of Bangladesh are fairly substantial.  The focus on infrastructure continues from the first budget of this government in FY2009 and has still remained a highly significant issue as the infrastructure deficit still remains serious. Evidence suggests that good progress has been made in the power sector however, in other areas, the record is mixed.

Despite past progress, there is a widening gap in the demand for, and supply of, physical infrastructure. Therefore, while the resource needs are evidently vast, the existing ability of the government to finance the required investment in infrastructure is highly limited.  In light of this gap, the government has been seeking to encourage infrastructure investment through PPP.

The strategy for PPP financing of infrastructure has been on the cards for a while but the implementation record to date is rather poor.  This is, however, not a reflection on the Bangladesh economy but more a depiction of the scope of the government with regard to resource allocation.  While political uncertainties are a problem, Bangladesh still remains an attractive destination for private investment.  What is lacking is a well-thought-out implementation strategy for PPP.

Regional experience suggests that PPP has been successful in providing infrastructure financing in order to speed up infrastructural development. In India, the PPP mode of infrastructure delivery was launched a decade ago and has been accepted as an efficient and effective methodology. Indonesia emphasized more on financial and technical aspects while Malaysia on political and social motivations. Thailand achieved infrastructural development through PPP in many sectors notably in power, electricity, telecom, and transport services.

Globally, many developed countries set up specialised PPP units to facilitate and manage large infrastructure projects such as public institutions to support PPP development. Therefore, international experience shows that securing PPP financing for large infrastructure projects requires a managing entity that is equipped with seasoned and competent technical staff that have the knowledge and experience in developing, negotiating and supervising these projects.

Additionally, a proper legal framework providing internationally attractive guidelines and incentive policies is also required.  In this regard, Bangladesh is lacking on both requirements. PPP cannot be managed as a part of the day-to-day bureaucracy.  Without these essential reforms, the ambitious 11 billion dollar plus PPP projects identified in the Budget will not materialise.

The government needs to move quickly on this. Currently, there is considerable capacity in Bangladesh outside the government who can help develop a good PPP policy and support its implementation. There is no unique formula for developing a sound PPP framework; however, there needs to be clear policy and legal frameworks in place for PPPs that ensure the right balance between public and private interests.

Public–private partnerships (PPPs) provide an important top-up for infrastructure funding, but are not a panacea. Improving the transparency, regulatory framework, and governance of PPP projects, together with the addition of political risk guarantees, can increase the attractiveness of this asset class. Furthermore, support from multilateral development banks and international coordination for cross-border projects can help ensure success in PPPs.

Moving forward, the government initially needs to create the institutional framework for PPP. A legal basis should exist for project implementation and contract execution. There should be a scope for independent operation and management outside the purview of public procurement.

A mechanism for transparency and accountability should also be installed. Additionally, there needs to be clarity on fiscal incentives, life-cycle, financing requirements and modalities. It is also imperative to involve negotiators with technical knowledge and experience in project design, financing, and management in PPP operations. Finally, a bridge between public and private sector interests should be created using incentives such as tax incentives and other financial instruments. Therefore, the Finance Minister should take a lead role on the facilitation of this process.

As mentioned before, Bangladesh remains an attractive destination for private investment but an effective premeditated implementation strategy for PPP is necessary to mobilise this strategy in order to achieve desired economic objectives by the government. There can be initial hiccups in PPP as with any new initiative, but prompt action would deliver desired outputs. For successful implementation of PPP projects, political support is critical.

Finally, there is no unique model or mechanism of implementing PPP. Therefore, the government needs to explore collaborative modalities and partnership based approaches best suited to the specific context of infrastructural development in Bangladesh.  

[(The writer is Senior Research Associate, Policy Research Institute.  The Financial Express (FE)-PRI Economic Analysis Unit (EAU)]