Building Public Private Partnership in Bangladesh

1. Building Public Private Partnership in Bangladesh Mustafa K. Mujeri

2. Concept and rationale • Service or a business venture funded, managed, and operated through a partnership between government and one or more private sector entities • Rationale: Model with enhanced role of private sector in government initiative relaxes government’s resource constraint, ensures greater efficiency and better management resulting in improved service delivery while maintaining public accountability of service provision

3. PPP variants • Simple form: Government provides capital for investment, while operations run jointly with private sector or under contract. It could be other way round as well. • Contract: private party assumes financial, technical, and operational responsibilities and risk in venture. • Infrastructure: Pay contracted price for services that is financed, built, managed, and maintained by private sector enterprise

4. PPP variants (contd.) • Social enterprises: unite public sector’s commitment to social goods with private sector’s expertise in product development and marketing • Different approaches to PPP based on activity and country characteristics

5. Alternative modes of operation • Cost of using service borne by users (e.g. toll roads) • Capital investment by private partners, cost of providing service borne (wholly or partly) by government • Public contribution in kind (transfer of existing assets) • Government provides subsidy (one time grant) for creating public good (infrastructure) • Government provides revenue subsidies (tax breaks or guaranteed annual revenue for a fixed period)

6. Implementation options • One option: form a consortium, called ‘Special Purpose Vehicle’ (SPV) to plan, construct, maintain, and operate. Government holds an equity share in SPV. SPV signs contract with government and with subcontractors to build and maintain facility • For infrastructure, complex arrangements and contracts needed to guarantee and secure cash flows

7. Issues and problems • Infrastructure projects: PPPs entail higher costs than under standard models (mainly due to higher rate of return demanded by private investors although income risk is borne by public sector) • Low quality of PPP schemes relative to standard model of public procurement • One reason: central assessment focus on ‘value for money’ • The issue is whether guidelines designed are appropriate and correctly applied

8. Regional experience • India: PPP mode of infrastructure delivery launched a decade ago; accepted as an efficient and effective methodology • Indonesia: Emphasis on financial and technical aspects; Malaysia: political and social motivations; Singapore: value for money; Thailand: infrastructure in many sectors notably in power, electricity, telecom, and transport services

9. Regional experience (contd.) • Developed countries: set up specialized PPP units to facilitate and manage large infrastructure projects. Establish public institutions to support PPP development • Lessons: no unique formula for developing a sound PPP framework. Needs clear policy and legal frameworks for PPP that ensure right balance between public and private interests

10. PPP in Bangladesh • Experience of IDCOL established in 1997 under ERD: few small private investments in infrastructure projects • No integrated policy for execution of PPP projects; needs a new phase of PPP implementation • Revisit past operations and other experiences to identify what works and what does not

11. PPP in Bangladesh (contd.) • Infrastructure Investment Facilitation Center (IIFC) to assist in preparing proposal and screening; Bangladesh Private Sector Infrastructure Guidelines (PSIG) 2004 forms basis of current PPP; Five year Investment Promotion and Financing Facility (IPFF) in BB in 2007 to finance approved PPP infrastructure projects; policy for private participation in power sector in 2008: indecisive about size, institutional framework, organizational structure, and implementation modalities

12. Way forward: general prerequisites • Fast growing economy with dynamic and healthy financial system • Stable policy environment, robust legal and business support systems, institutions guaranteeing rule of law • Large and growing domestic market • Sound economic fundamentals • Steady economic reform regime • Regulatory framework rewarding entrepreneurship and risk taking

13. Way forward: specific issues • Create the institutional framework • New window: legal basis for project implementation and contract execution, devise ways for independent operation and management outside the purview of public procurement, install mechanism for accountability, design and planning • Formulate policy framework, incentive packages, mechanism for implementation • Ensure competitive bidding to meet transparency, accountability, and creditworthiness of projects • Bring clarity on fiscal incentives, life-cycle, financing requirements and modalities, project management and operation

14. Way forward: specific issues (contd.) • Involve negotiators with technical knowledge and experience in project design, financing, and management in PPP operations • Create bridge between public and private sector interests using incentives and financial instruments • Adopt flexible models and approaches of private participation along with collaborative innovative partnership based processes

15. Implementing FY10 budget initiative • Tk. 25 billion for PPP projects: government partnership in equity and loan assistance to different projects • Identify projects that are sound, viable, and somewhat easy to implement • Adopt some guidelines: for power and energy infrastructure, private partner may invest up to 70-75 percent of entire investment; for health, education and social sectors, government may contribute major part of total investment

16. FY10 budget initiative (contd.) • PSIG 2004 guidelines not backed by law; To start, PPR 2008 (Rule 129) and PPA 2006 (Section 66) may provide legal basis for PPP initiative • Adopt project implementation within a flexible framework covering BOO, BOT and BOOT as necessary • Initially, negotiate PPPs as one-off deals with aim to install a systematic program in phases • Finalize detailed action plan on how to proceed in a time bound manner; streamline processes, regulations, requirements, legal/policy hurdles

17. FY10 budget initiative (contd.) • Enact new act to develop comprehensive legal and institutional framework for administration, monitoring, professionalism and accountability • Create legal framework for pooling of funds from various sources (banks, insurance companies, pension funds, etc) as government can only provide equity or loans to infrastructure related funds at present through IDCOL • Establish a PPP cell to move forward • Prepare guidelines for TA and viability gap funds

18. FY10 budget initiative (contd.) • Remove weaknesses and limitations of Private Infrastructure Committee (PICOM) under PSIG 2004 in terms of its size, scope, and other institutional and organizational framework and structure • Set up a dedicated unit for PPP budget formulation and implementation • Adopt measures to build trust and confidence of investors; simplify legal and regulatory frameworks; streamline decision making process; remove implementation constraints; ensure procedures of accountability • Create broader political consensus on needs and imperatives especially for large PPP projects with longer implementation periods

19. Risk factors • Remove perception that public money diverted through PPP to meet private ends • Three factors important to highlight in PPP operations: transparency, consultation with stakeholders, sound regulatory framework

20. Conclusions • 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 • There is no unique model or mechanism of implementing PPP: explore collaborative modalities and partnership based approaches best suited to specific contexts

21. Thank you