Examination Committee: Dr. Sundar Venkatesh (Chairman) Dr. Winai Wongsurawat (Co-chair) Dr. Yuosre Badir (Member)

Transcription

1 Examination Committee: Dr. Sundar Venkatesh (Chairman) Dr. Winai Wongsurawat (Co-chair) Dr. Yuosre Badir (Member) Presented by Rathin Kumar Paul PMBF Programme, AIT

2 Introduction Provision for sustainable and quality infrastructure is a prerequisite for rapid economic development and requires huge sustained investment. This investment is supposed to be supported by technological innovation, skilled workforce and excellent project management. Governments alone cannot bring together all these elements. This has led the concept of Public-Private Partnerships (PPP). This is in fact a source of mutual benefit for both public and private sector. PPPs facilitate bringing in private capital and experience. It also involves transfer of valuable public assets and foregoing future revenues in the form of concessions. 2

3 Objectives of the Research to conduct a comprehensive analysis of some existing PPP frameworks to analyze law and practice of investor protection in the context of PPPs in Bangladesh to analyze selected PPPs in Bangladesh and draw conclusions for recommendations 3

4 Background of the Research The Bangladesh economy needs huge investment in infrastructure development. Government (GOB) has realized that it is unable to meet this needed investment alone. GOB has embraced PPP policy to facilitate private participation in infrastructure development Investors are likely to invest in that environment where they feel protected regarding their investment and return thereof. Governments conduct project negotiations with the sponsors, it is the lenders behind the scenes who set risk mitigation standards and determine whether projects are financeable. 4

5 Literature Review (Determinants of investor protection) Institutional Quality or Measure for General Investors protection: i) Degree of Corruption ii) quality of bureaucracy and iii) law and order situation determine the general investors protection (Bekaert at al, 2007 and LLSV,1998) Profile of the investors : When legal rights are strong and efficiently enforced by regulators courts investors are more willing to invest in projects. In contrast when the legal system does not protect investors availability of external finance is weakened. This can be measured by three factors i.e. (i) contract viability (ii) delays in making payment and (iii) profit repatriation (Bekaert at al,2007) Quality of Enforcement : If there is a strong system dedicated towards enforcement that might be a viable substitute for weak laws. An active and efficiently functioning court could come to rescue of investors harmed by the management. Quality enforcement system depends on the efficiency of judicial system (LLSV, 1998) 5

6 Literature Review (How and what kind Risk arises in case of PPP) In case of infrastructure project a special purpose company is created and this special purpose entity is supposed to execute the projects according to concession agreement Sponsors are responsible for financing the project Project financing is done on a nonre-course basis. Here lenders are not supposed to have recourse to the sponsor company but look solely to the revenue stream of the project available to meet debt service obligations. The risks associated with the revenue stream are therefore scrutinized. Here Equity investors may be willing to accept higher levels of risk in return for higher expected returns on their equity, but lenders typically have a lower tolerance for risk and a greater need for risk mitigation mechanisms. (Montek S.Ahlowalia, 2009) 6

7 Risks in PPP projects Political Regulatory Operational Foreign Exchange Risks Market Payment Price Interest Construction Source : Standard & Poor 7

8 Existing PPP Framework in Bangladesh PPP framework refers to legal procedures which guides identification, formulation, appraisal and approval of PPP projects In 2004 government of Bangladesh (GOB) issued Private Sector Infrastructure Guidelines (PSIG) to guide PPP projects in Bangladesh In 2010 GOB replaced PSIG with the Policy and Strategy for Public-Private Partnership, 2010 to make it more comprehensive The next pp slide describes the existing PPP framework in Bangladesh 8

9 PPP Framework Public Pay Concession Fee Private PPP Advisory Council Cabinet Committee Office for PPP Negotiation & Contract Award Issues Request For Proposal (RFP) Viability Gap Funding (VGF) Govt. Guarantee Responsible for Financing, implementing and Managing the project Exposed to various risks : Line Ministry Finance division Planning Commission Calls Request For Quotation (RFQ) Feasibility Study Project Identification Technical Assistance Investment Promotion Financing Facility (IPFF) Political Risk Regulatory Risks Foreign Exchange Risk Interest Rate Risk Bangladesh Infrastructure Finance Fund (BIFF) Construction Risk Operational Risk Market Risk Payment Risk Source: Self Compilation (in light of PPP Policy) 9

10 Regional Comparisons (PPP Framework) Bangladesh India Philippines PPP Policy (2010) PPP Policy (2006) BOT Law (2003) has dedicated PPP Office. Has provision for financing participation has dedicated PPP Office has provision for financing participation has dedicated PPP Office has provision for guarantee against political risk even money back Conclusions : Bangladesh issued Private Sector Infrastructure Guidelines (PSIG) in Later in 2010 it took comprehensive PPP policy. Bangladesh should not be considered as late entrant in formulating PPP policy in comparison with India and Philippines 10

11 Comparative analysis (Energy Sector) Number of projects in energy sector ( ) Bangladesh India Indonesia The Philippines Thailand Bangladesh India Indonesia The Philippines Thailand Conclusion: India implemented the highest number of projects in energy sector while the Philippines was in the second position. Though Bangladesh was in third position among the countries size of investment was very little in comparison with other countries. One reason for this might be that Bangladesh implemented small power projects in comparison with Thailand and Indonesia. Bangladesh implemented projects with lowest average project cost. Source: the World Bank 11

12 Comparative analysis (Energy Sector) Project cost(mill USD) in energy sector ( ) Bangladesh India Indonesia The Philippines Thailand Conclusion: India implemented the projects in energy sector during 2007 to 2011 with an investment of 94,169 million USD from private participation. During the same tenure the Philippines facilitated an investment of 10,296 million USD in energy sector. Though number of projects implemented in Bangladesh was higher than that of Thailand and Indonesia amount of investment was negligible in case of Bangladesh in comparison with Thailand and Indonesia. Source : the World Bank 12

13 Comparative Analysis (Telecom Sector) Number of projects in telecom sector ( ) Bangladesh India Indonesia The Philippines Thailand Bangladesh India Indonesia The Philippines Thailand Conclusion: India implemented the highest number of projects in telecom sector while the Philippines and Bangladesh implemented one project each in telecom sector. During this period ( ) both Thailand and Indonesia implemented no project in telecom sector with private participation. But it was found that there were investment in Thailand and Indonesia in telecom sector. One reason might be that projects were taken before 2007 and extension of existing projects was taken place. There were 4 other projects in telecom sector before 2007 in Bangladesh. So number of projects was not many in comparison with energy sector. Source: the World Bank 13

14 Comparative Analysis (Telecom Sector) Project cost (mill USD) in telecom sector ( ) Bangladesh India Indonesia The Philippines Thailand Conclusion: India implemented the projects in telecom sector during the 2007 to 2011 with an investment of 46,267 million USD from private participation. During the same tenure Indonesia facilitated an investment of 9,334 million USD in telecom sector. Though the number of project implemented in Bangladesh and in the Philippines was same the amount of investment in Bangladesh was less than one third of investment in the Philippines. Project size might be one of the reason. Source : the World Bank 14

15 Comparative Analysis (Transport Sector) Number of projects in transport sector ( ) Bangladesh India Indonesia The Philippines Thailand Conclusion: India implemented the highest number of projects in transport sector while there were no projects implemented in Thailand and Bangladesh during the period of 2007 to 2011 in transport sector. Indonesia and the Philippines implemented six projects each in transport sector with private participation. Transport sector comprises airport, roads, railroads and seaport. Transport sector projects are different in nature. Though in PPP policy these sectors are identified for PPP investment, it takes time and major policy decision. This might be one of the reason that there were no PPP project ready for inviting private sector in transport sector. Bangladesh India Indonesia The Philippines Thailand Source : the World Bank 15

16 Comparative Analysis (Transport Sector) Project cost (mill USD) in transport sector ( ) Bangladesh India Indonesia The Philippines Thailand Conclusion: India implemented the projects in transport sector during 2007 to 2011 with an investment of 40,275 million USD with private participation. During the same tenure Indonesia facilitated an investment of 1,360 million USD in transport sector. The Philippines was in the third position considering total investment of 754 million USD in transport sector. Both Bangladesh and Thailand had no investment from private sector during this period in transport sector. During this period Bangladesh failed to implement any project in transport sector. There is at least one project in transport sector in Bangladesh under implementation. Source : the World Bank 16

17 Comparative analysis (Water & Sewerage Sector) Number of projects in Water and Sewerage sector ( ) Bangladesh India Indonesia The Philippines 0 Thailand Bangladesh India Indonesia The Philippines Thailand Conclusion: India implemented the highest number of projects in water and sewerage sector while there were no projects in water and sewerage sector implemented in Thailand and Bangladesh during the period of 2007 to Indonesia and the Philippines implemented one project each in water and sewerage sector with private participation during the same period. Bangladesh is comparatively new in PPP. Creation of PPP project Source : the World Bank 17

18 Comparative Analysis (Water & Sewerage Sector) Project cost (mill USD) in water and sewerage sector ( ) Bangladesh India Indonesia The Philippines Thailand Conclusion: India implemented the projects in water and sewerage sector during the 2007 to 2011 with an investment of 242 million USD with private participation. During the same tenure the Philippines facilitated an investment of 27 million USD in water sector. Indonesia was in third position considering the investment of 20 million USD in water sector. Both Bangladesh and Thailand had no investment from private sector during this period in water sector. Source : the World Bank 18

19 Case Study : 1 Bibiyana MW Gas-Fired Combined Cycle Power Project Contract winning company: Summit Industrial and Mercantile Corporation and its partner GE Energy, LLC, USA Contract type & term : Build, Own and Operate (BOO) basis The Power Purchase Agreement (PPA) term was 22 years. Expected Operation Date : by May 2014 Estimated project cost : BDT billion (USD 300 m) Debt: Equity Ratio : 75:25 19

20 Bibiyana MW Gas-Fired Combined Cycle Power Project Risk Mitigation measures: 22 year off take power purchase agreement (PPA) with the government entity. Government was providing land for the power plant and transmission line on lease. A 22-year long gas supply agreement (GSA) Provision for inflation adjustment periodically in case of both power and gas price. Power purchase is backed by government guarantee. 20

21 Risk Mitigation (at a glance) Bibiyana MW Gas-Fired Combined Cycle Power Project RISK MITIGATED NOT MITIGATED CONCLUSIONS Political Risk Available data shows Regulatory Risk that in case of Bibiyana project most of the Foreign Exchange Risk risks are mitigated via Interest Rate Risk government guarantee Construction Risk and contract clause. There are some risks Operational Risk still now to which the Market Risk project is exposed. Payment Risk Price Risk 21

22 Case Study : 2 CEPZ Water Treatment Project Contract winning company: D Tech Water Treatment Plant Contract type & term : Build, Own and Operate (BOO) basis The Water Purchase Agreement term was 30 years. Expected Operation Date : by May 2012 Estimated project cost : BDT 220 million (USD 2.90 m) Debt: Equity Ratio : 70:30 22

23 Risk Mitigation measures: Case Study : 2 CEPZ Water Treatment Project 30 year off take water purchase agreement with the government entity. BEPZA was providing land for the water treatment plant on lease. A 30-year long electricity supply agreement Provision for inflation adjustment periodically in case of both water and electricity price. Water supply agreement is backed by BEPZA s guarantee. 23

24 Risk Mitigation (at a glance) CEPZ Water Treatment Project RISK MITIGATED NOT MITIGATED CONCLUSIONs Political Risk Except political Regulatory Risk risk, regulatory risk foreign exchange Foreign Exchange Risk risk, interest rate Interest Rate Risk risk all other risks Construction Risk are found to be mitigated to the Operational Risk some extent in case Market Risk of CEPZ power Payment Risk project. Price Risk 24

25 Case Study : 3 Dhaka Elevated Expressway Project Contract winning company: Ital Thai Contract type & term : Build, Operate and Transfer (BOT) basis 25 years including the construction period. Expected Operation Date : by May 2014 Estimated project cost : BDT billion (USD 1.24 billion ) Debt: Equity Ratio : 80:20 25

26 Dhaka Elevated Expressway Project (Risk Mitigation) Guaranteed Traffic Transactions : GOB guarantees a traffic level of 13,500 per day during operation period. Revenue Sharing : A ceiling of traffic transaction of 80,000 vehicles per day. If this ceiling exceeds then the GOB will get 25% of the revenue Viability Gap Funding (VGF): A total of USD million (BDT billion) as VGF in three tranches to the project company through budget allocation as an initiative to make the project viable Repatriation of Foreign Exchange allowed to convert its earnings in to foreign currency able to repatriate 26

27 Dhaka Elevated Expressway Project Financing Party Step-in Right : In the event of default by the project company, the financing party will have the right to step in for the purpose of operates, maintain and sell or assign the project asset to recover the debt. Guarantee of non-competition: A guarantee of not implement or develop, establish, construct, manage or operate any new road parallel facility adjacent to the project area or permit any person to do so which would adversely affect traffic flow or revenue streams of the project for the first 12 years of operation of the project 27

28 Risk Mitigation (at a glance) Dhaka Elevated Expressway Project RISK MITIGATED NOT MITIGATED CONCLUSIONs Political Risk Except political Regulatory Risk risk, regulatory risk all other risks are Foreign Exchange Risk found to be Interest Rate Risk Financing closure was extended mitigated to the Construction Risk some extent in case of Dhaka Elevated Operational Risk Project. Market Risk Payment Risk 28

29 Case Study : 4 Jatrabari Gulistan Flyover project Contract winning company: Belhasa Accom Engineering Ltd (A joint venture between local Accom Engineering and UAE based Belhasa Engineering Ltd.) Contract type & term : Build, Own, Operate and Transfer (BOOT) basis 24 years excluding the construction period. Expected Operation Date : by May 2013 Estimated project cost : BDT 2.57 billion (USD 177 million ) 29

30 Jatrabari Gulistan Flyover project Guaranteed Traffic Transactions : DCC guarantees a traffic level of 43,283 per day during operation period. In case any shortfall of traffic on the flyover there is scope for extension of concession period. Revenue Sharing : If the number of vehicles is more than 65,581 then 40% of the revenue earned from excess vehicles will go to DCC. Profit Repatriation Guarantee : Government gave guarantee for profit and capital repatriation by joint venture company. 30

31 Risk Mitigation (at a glance) Jatrabari Gulistan Flyover project RISK MITIGATED NOT MITIGATED CONCLUSIONs Political Risk In case of Jatrabari Regulatory Risk flyover project except political risk, Foreign Exchange Risk regulatory risk and Construction Risk foreign exchange risk all other risks Operational Risk are found to be Market Risk mitigated to the Payment Risk some extent. 31

32 Risk Mitigation (Summary) Risk Project Name Bibiyana Power Project CEPZ Water Treatment Project Dhaka Elevated Expressway Gulistan Jatrabari Flyover Political Risk Regulatory Risk Foreign Exchange Risk Interest Rate Risk Construction Risk Operational Risk Market Risk Payment Risk Price Risk Conclusion: Here red box refers to not mitigated, green box refers to mitigated and yellow box refers to awaiting for mitigation plan. In spite of exposure to some risks (political, regulatory and foreign exchange) investors are implementing those projects. Here the risks might be perceived as low or risk mitigation measures might be perceived as expensive in comparison with loss due to risks to the investors. 32

33 Conclusions Identification of risks and taking mitigation steps is very crucial for PPP projects from the investors perspective Investors are implementing different projects in spite of their exposure to political, regulatory and foreign exchange risks in Bangladesh. The projects which were considered as case study analysis were found having greater public interest. When public interest toward a project increases political risks and regulatory risks might be perceived as low. 33

34 Recommendations Creating good example in PPP: Government should provide all sorts of cooperation in implementation of on going projects with a view to create good impression about government s pledge about PPP. Pursuing stable economic policy: Investors prefers stability in economic condition of the country in which they are investing. So government should pursue stable economic policy both in case of macro and micro scenario. Capacity Building in Public sector: PPP is comparatively a new concept in Bangladesh. In case of infrastructure development through PPP it is very important to identify concerned risks in implementing a specific project. Ensure free flow of information: To ensure fair competition among the investors government should ensure free flow of information. Government should ensure all relevant information publicly available. Developing Capital Market: In case of infrastructure development through PPP private parties are responsible for financing the project. For infrastructure development long term financing is required. Commercial banks are unable to provide long term fund due to maturity mismatch. So development of capital market is very crucial. 34

35 THANK YOU! 35