Are Bangladesh’s efforts enough?

A general election is due in Bangladesh under the constitution before the end of January 2014. Whether Prime Minister Sheikh Hasina’s Awami League achieves the first re-election of a democratic government in the history of Bangladesh or not, the new government of 2014 will face many challenges, not least addressing the country’s crumbling infrastructure.

The government’s Power System Master Plan 2010 anticipates 20,000 megawatts (MW) of capacity before 2020 as against an installed capacity of approximately 8,500MW, and, in 2010, the Public Private Partnership Office was established under the Prime Minister’s Office in 2010 to develop and execute PPPs in the country – but this has had limited success to date. So what’s next?

Bangladesh’s IPP programme

Seasoned market observers will recall that Bangladesh has previously procured power under an Independent Power Project (IPP) model. Projects such as Haripur and Meghnaghat are remembered as paving the way for a growing IPP market when they were procured over 10 years ago. But since then, the IPP programme has faltered.

Previous governments rejected the Bangladesh Power Development Board’s (BPDB) recommendation of the tariff bid by a consortium for the Bibiyana project, and IPP developer Summit Group recently launched a claim for compensation against BPBD alleging failure to procure a Partial Risk Guarantee (PRG) from the International Development Association of $200 million as had been represented in the Request for Proposals (RFP) for the project. In all, not much progress by way of IPP procurement.

Success: The Ashuganj power projects

But there are areas in which the government has, with the support of its lenders, successfully (and quickly) procured new fleet capacity installation in Bangladesh. In December last year, Ashuganj Power Station Company Limited signed financings for two gas-fired combined cycle power projects, the 450MW (South) and 225MW projects, raising $420 million for the first, led by HSBC, and $193 million for the second, led by Standard Chartered Bank.

Both financings enjoyed substantial export credit and Multilateral Investment Guarantee Agency (MIGA) support and, importantly, employed a sovereign guarantee structure under which full government support of the financial liabilities of the company were provided. This structure may prove to be a model for the successful development of other urgent power projects in Bangladesh. It is also a structure that has been used around the region, not least in Indonesia, Sri Lanka and Vietnam, over the last few years (invariably with substantial bank support, particularly from HSBC).

Stalled: PPPs

Broader public procurement remains challenging. In the International Finance Corporation’s Doing Business Index 2013, Bangladesh ranks 129th out 185 economies for ease of doing business, and in 2012 the World Bank cancelled its credit for the $1.2 billion road-rail bridge crossing of the Padma River.

The legal framework and regulation for PPP projects remains limited. The 2013 draft PPP Law was only approved by the Cabinet Committee in June, although the PPP Office as recently as August issued Requests for Interest in a health PPP project, and there are several projects at various stages of procurement.

In June, the Finance Minister also named 17 large PPP projects with an estimated capital cost of $8.22 billion across the housing, port, rail, road and health sectors. While the government’s ambition is clear, there is a real question mark over the level of sponsor interest and international bank support given the amount of capital investment required.

Other announced PPP projects such as the Dhaka Elevated Expressway and the Gulistan-Jatrabari flyover have stalled. The suspicion – as is endemic in so many developing nations – is that a lack of capacity building, PPP expertise and procurement transparency causes delay, uncertainty and ultimately flawed bankability assessments.

In this sense, Bangladesh joins a long list of other south and south-east Asian countries that have attempted to utilise the PPP model as a means of accelerating investment in the national infrastructure deficit.

PPP plans: inching forward

The government is attempting to address the bureaucracy and inefficiencies that have plagued infrastructure development to date. Its efforts are commendable, although real progress might be considered nascent as yet. The government has put in place structures to provide and support a PPP framework. The PPP Office is responsible for identifying, developing, tendering and financing projects, while the Ministry of Finance’s PPP Unit is responsible for fiscal discipline and sustainability of PPP projects, and for managing contingent liability exposure.

Whether the PPP Unit and the PPP Office manage to kick-start the PPP programme remains to be seen, but there are clear efforts to provide a more transparent framework for the development and tendering of PPP projects.

International arbitration

In the international arena, the government is taking steps to promote the country as a seat for arbitration in international commercial contracts involving sovereign entities. Bangladesh is also a party to the New York Convention, so foreign arbitral awards will be recognised in and enforced by the Bangladeshi courts. However, in practice there are difficulties in enforcing arbitration awards in Bangladesh, particularly if a foreign party is seeking to enforce an award against an onshore entity. Other steps taken by the government to encourage foreign investment in power and infrastructure projects include generous tax exemptions and holidays.

The government may not yet be reaping many rewards from its progress to date, but its recognition of, and efforts to address, some of the issues concerning foreign investors are all moves towards a more appealing investment climate.

Raising finance: sovereign debt

The government could also follow Sri Lanka into the sovereign debt markets, but to do so may impact on some concessional financing from the International Development Association (IDA), the lending arm of the World Bank. These loans, with their low interest rates and generous repayment terms, are available only to countries without access to international capital markets.

While Sri Lanka’s experience of raising finance through its sovereign bond programme is attractive, Bangladesh must consider whether the launch of a well-structured foreign currency sovereign bond programme would outweigh the potential loss of its access to IDA loans.

Power, but not yet PPP

While the PPP sector remains a work in progress, investment specifically in the power sector does seem to be available. In November 2012, the government borrowed $1.6 billion from the Asian Development Bank, the European Investment Bank and the Islamic Development Bank for efficiency projects, to boost capacity by 700MW and to address transmission and distribution issues.

Politics and government

However Bangladesh proceeds in the next few months and years, it is unlikely that there will be much progress in either power or PPPs until resolution of the general election (and the broad acceptance of its result). But when the new government is formed, and receives its popular five-year mandate from the public, infrastructure and power will likely rise back to the top of the agenda.

Conclusion

As was proven last year in Bangladesh, and other countries in the region, a ‘fast-track’ approach that requires direct government support can bring long-term power solutions that are value for money and mitigate the need for the current interim solution of renting diesel and furnace oil-based power plants from the private sector.

A longer-term focus on modest, realistic projects that allow the PPP Office and BPBD to demonstrate their procurement skills by attracting multiple bidders with a transparent and timely process will be key.

Nick Merritt is a partner and head of infrastructure, mining and commodities (Asia), and Lily McMyn is an associate, Norton Rose Fulbright (Asia) LLP