Financial houses shy about PPP

The government wants their money for its projects but they are shying away as they consider the projects unattractive.

Domestic funding for public-private partnership development projects have thus become hard to come by as banks and financial institutions are reluctant to finance such projects considered risky by them.

So the Public Private Partnership (PPP) Authority has hit a major stumbling block in realising its PPP projects as only a single domestic financial institution has stepped in to finance a project out of the 14 the PPP Authority had roped in five years back.

The deals were penned with the banks and non-bank financial institutions to ensure domestic funding for PPP projects. Only the Bangladesh Infrastructure Finance Fund Limited (BIFFL) has so far come forward.

It has been five years since the Public Private Partnership (PPP) Authority struck deals with 14 banks and non-bank financial institutions to ensure domestic funding for PPP projects, but only the Bangladesh Infrastructure Finance Fund Limited (BIFFL) has so far come forward to finance a single project.

Other financial institutions have stayed away from such projects for various reasons, including collateral-related problems, putting a damper on the PPP projects, according to a letter sent by the PPP Authority to the finance ministry in June this year.

The government has till date finalised 79 projects, involving $29 billion, to be implemented under the PPP mechanism since the PPP concept in infrastructure development with the private sector's involvement was pitched from the fiscal 2009-10.

Investment deals to the tune of Tk24,080 crore have so far been signed for six ongoing PPP projects. Of the amount, Tk8,181 crore are coming from the government coffer, while the lone domestic financial institution, BIFFL, provided only Tk1,075 crore in the Dhaka bypass expressway project. The remaining funds will come from foreign sources.

The remaining 13 banks and non-bank financial institutions have not provided a single penny to any projects, said Sultana Afroz, chief executive officer of the PPP Authority, in the letter.

The memoranda of understanding signed with them in 2016 failed to remove barriers to the funding for PPP projects, she added.

Banks are not interested in lending without collateral. But there is no scope to put up government land as collateral for bank loans for PPP projects. The banks often require personal guarantees from project directors for such loans, which is not realistic as well.

Sultana also mentioned other barriers to funding for such projects, like the reluctance of banks to provide long-term loans with short-term deposits and the single borrower exposure limit.

Bankers say collateral-related issues apart, the major problems in financing PPP projects are long delays in project implementation and repeated extension of project tenures.

Besides, financial institutions are reluctant to finance such projects because of a lack of good relations with the local private companies that are implementing these projects, they add.

Seeking anonymity, the chief executive officer of a bank said, "We finance various projects in the private sector for a period of five-seven years. In that case, banks have control over the borrower organisations. But many government and private firms are involved with the implementation of PPP projects, which take 15-20 years for completion and banks have no control over them."

Long-term lending to unregulated institutions is very risky for banks and non-bank financial institutions.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank that has a contract with the PPP Authority, told The Business Standard that it is not possible for commercial banks to finance the government's infrastructure development projects. It is necessary to ensure institutional funding for PPP projects by overcoming implementation delays.

There will be a need for government guarantees to ensure financing from banks, he added.

While placing the budget for FY10, the then Finance Minister Abul Maal Abdul Muhith expected to get Tk1.96 lakh crore through the PPP mechanism in the next five years. But his high ambitions were dashed for failure to attract the private sector. A decade later, the current finance minister AHM Mustafa Kamal has also admitted it.

"It is true that we have not been able to take the PPP concept well yet. Nevertheless, we have started our work and it needs time to start anything jointly," he told reporters after a cabinet meeting on public procurement last week.

Sultana, in the letter, requested the finance ministry to give specific instructions to banks and non-bank financial institutions to finance PPP projects.

The local financial institutions' reluctance to provide funds is the main obstacle to the implementation of the PPP projects, she observed.

The PPP CEO proposed amending the law to allow the investment of any amount, even the entire project cost if necessary, as a loan in such projects.

Besides, the PPP Authority also demanded low interest loans and the opportunity to invest pension or insurance funds in PPP projects through the issuance of long-term bonds.

Economists and analysts say financial institutions will show interest in financing under the PPP model if the government formulates profit-making projects and presents those properly before them.

Foreign investment will come too if good projects are designed and risks are shared, they add.

They think that the government and the PPP Authority have weaknesses in doing so.

They have also suggested long-term financing from local or foreign bond markets after implementing projects with short-term loans from financial institutions for open letters of credit.

In the letter, the PPP Authority said a private partner under a PPP project forms a company and operates it. Equities and loans availed in the form of project finance are the capital of such a company. Loans can often exceed 80% of their equities, which is much higher than the acceptable level of 35% of financial institutions.

"Project financing for PPP projects is effectively managed worldwide, but project companies in Bangladesh are facing serious difficulties in obtaining loans in this manner from commercial banks and other financial institutions, which is hindering the funding for such projects," the letter said.

Citing collateral-related issues, the letter said banks cannot take the assets of the project companies or its directors as a guarantee for the loans. Besides, companies that are formed to implement the works do not have the assets to be put up as bank collateral. Since project sites are government property, those cannot be put as collateral against the bank financing.

"Only considering the cash flows to the projects, local banks do not want to lay out the loans since they are not used to collateral-free lending. They do not want to accept that the project-implementing companies do not have any assets of their own and government land under the project cannot be mortgaged. Banks often want the personal properties of the company shareholders as guarantee to the loans, which is inconsistent with the conventional project financing," noted the letter.

In the letter, the PPP Authority sought to introduce "modern and new banking" to facilitate public-private projects.

The authority requested low-cost long-term loans, and that the single borrowing ceiling be raised. Besides, the authority advocated for new guidelines to flourish the bond market and private equity.

The PPP office sought investments from pension funds or insurance funds by floating long-term bonds. It recommended a refinancing scheme for the projects or stimulus for the financial institutions.

According to the PPP Authority, the country's infrastructure sector needs $12.5 billion investments per year to achieve the developed Bangladesh status by 2041. To attain the target, the PPP projects will alone require $3.8 billion per year as Bangladesh will have to invest an additional 5.5% in the infrastructure sector every year to achieve the SDGs.

Under the public-private partnership so far, two dialysis centres have been set up at National Institute of Kidney Diseases and Urology in Dhaka, and Chattogram Medical College Hospital.

Besides, construction of Dhaka Elevated Expressway, Mirpur township, two jetties at Mongla Port, Jhilmil apartment project at Keraniganj and Dhaka Bypass Road are underway. Most of the projects are way past the construction deadlines and now are limping, thanks to the funding crunch.

Infrastructure development experts said a number of countries such as the United Kingdom, Australia, Canada, Turkey, Brazil, South Africa, Japan, Thailand and Malaysia and neighbouring India have logged significant infrastructural progress riding on public-private collaboration.

In India, 1,103 PPP projects worth about $274 billion are now going on as private companies are now operating the Delhi and Mumbai airports on the build, own and operate model.

Ahsan H Mansur, executive director of Policy Research Institute (PRI), said PPP projects should not solely rely on local bank loans, rather those must opt for foreign funding too.

Referring to the Tk5,000 crore Bangladesh Infrastructural Investment Fund, he said banks could lay out two-three years financing such as LC opening for the public-private projects.

"The long-term financing would be required once the project is completed. For that financing, government guaranteed bonds could be floated in the local market, or in the international market by the IFC or the World Bank."

The PRI executive director said PPP projects can avail foreign funding, but those need proper project design and risk sharing first. "The government and the PPP Authority are lagging behind in this regard."

Former lead economist at the World Bank (WB) Bangladesh office Dr Zahid Hussain said initiatives were taken to amend the law on mortgaging immovable property to sort out the bank financing issues, but it has not been completed.

"Until the law is amended, the collateral-related issues will not be settled," he said.

Dr Zahid Hussain opposed withdrawing the single-borrower exposure limit as he feared the private sector could exploit the move. He rather suggested selection loan arrangements for large amounts of financing.

He echoed Ahsan H Mansur on emphasising foreign financing, and underscored profitable project designing.

"If the private companies can avail foreign financing, what is wrong with the PPP project? In this case, the government and the PPP Authority must overcome their weaknesses," he concluded.