The Second Public-Private Infrastructure Development Facility (PPIDF II or the Project). PPIDF II builds on the efforts of Public-Private Infrastructure Development Facility (PPIDF I) in helping address the infrastructure deficiencies in Bangladesh by providing long-term debt financing and catalyzing private sector participation through Infrastructure Development Company Limited (IDCOL). This will support poverty reduction through enhanced investment, economic growth, and increase in employment opportunities. The design of the Project serves to attract commercial financing for infrastructure projects, thereby reducing the pressure on the public budget. An additional objective of the Project is to help provide the rural population and small to medium enterprises in off-grid areas with access to environment-friendly electricity.
The financing modalities of the Project. PPIDF II comprises two components, namely: (i) component 1 which uses the proceeds from the ordinary capital resources (OCR) sovereign loan of $100 million to provide IDCOL with long-term additional resources for the financing of medium to large-sized private sector-led infrastructure projects with a total project cost of minimum $10 million; and (ii) component 2 which routes the proceeds from the sovereign Asian Development Fund (ADF) loan of $10 million through IDCOL for the further expansion of its successful (Solar Home System (SHS) program which has so far provided financing of more than 2 million SHS (at appraisal) through a microfinance-based, direct sales program in rural off-grid areas to provide households and small businesses with a renewable source of energy. Component 1 will provide funding directly to subborrowers in form of providing long-term loans to infrastructure project while Component 2 will channel funding from IDCOL through participating organizations (POs) to the end-user which are typically households in off-grid areas.
|Project Rationale and Linkage to Country/Regional Strategy
Bangladesh has achieved substantial economic growth over the last 15 years. From 1996 to 2009, the gross domestic product (GDP) increased at a compounded annual growth rate of 5.6%. During FY2012, the Bangladesh economy has continued to grow at 6.3%, which can mainly be credited to the growth in the manufacturing and agricultural sectors, although growth has slightly slowed from 6.7% in the previous year.
Deficient infrastructure. Underinvestment in infrastructure causes serious constraints in power, gas, ports, railways, and roads and prevents Bangladesh from achieving its full growth potential. Many years of underinvestment have taken a toll and resulted in poor access to basic infrastructure for a large part of Bangladesh's population, particularly the economically-disadvantaged and those in rural areas. The deficient infrastructure situation and the absence of deep-rooted regional integration restrict investment including foreign direct investments in Bangladesh.
Bangladesh suffers from a chronic shortage of energy which adversely impacts the economy. Gas, the main source of energy, is insufficient to meet the current demand. Power supply is 28% short of demand. Energy shortages are undermining the country's competitiveness causing an annual estimated loss of 2% of GDP. The situation is not expected to improve in the short term as gas production is expected to decline from 2019. Securing new sources of energy locally or abroad (e.g. coal, liquid natural gas) will take time because of the need for policy decisions largely related to setting energy tariffs at market levels. Energy efficiency measures can, to some extent, provide a cost-effective response to energy shortages.
The public sector is the dominant provider of infrastructure. As it is the case in most of South Asia, the public sector has been the main provider of basic infrastructure in Bangladesh. However, public financing alone will not be able to generate the investments needed to provide the required level of infrastructure facilities. At present, most public service providers show weak financial performance and inadequate investment. Recognizing the need for creating an enabling environment for attracting private investments on a sustained basis, the Government has taken a number of actions, such as: (i) the introduction in 2009/2010 of a PPP budget and a Policy and Strategy for PPP in 2010 and (ii) enabling arrangements for bridging the enormous deficit in infrastructure financing especially for long-term funds, for instance, through the establishment of the Bangladesh Infrastructure Finance Fund Limited, a long-term capital funding vehicle that seeks to raise debt capital markets funding from retail and institutional investors to support construction and take-out financing for PPP projects.
Underdeveloped capital markets impede the availability of infrastructure financing. Private investors in Bangladesh, however, face the challenge to source long-term financing required for infrastructure domestically. Bangladesh's capital markets, including long-term corporate debt market, remain underdeveloped. So far, the volume of funding sourced from the local debt and equity market for private investment expenditure in Bangladesh has been quite small and private sector sponsors still rely more on banks and internal resources than on market borrowings, indicating weakness in debt markets. Commercial banks in Bangladesh are facing maturity mismatches in their asset and liability management as they rely on short-term deposits as their financial source, and this prevents them from providing long-term financing for infrastructure projects. Currently, the Infrastructure Development Company Limited (IDCOL) is the only financial institution in Bangladesh that has the ability to provide dollar financing with long tenor.
Opportunities. ADB's country partnership strategy 2011-2015 for Bangladesh emphasizes the need for support of private sector-led infrastructure development. This is in line with Bangladesh's Sixth Five-Year Plan for 2011-2015, which focuses on accelerating the growth rate of the economy and reducing poverty by substantially boosting private sector investment and developing infrastructure. In particular, it emphasizes the need to triple infrastructure development, from 2% to 6% of GDP, with substantial participation of the private sector through PPPs. Moreover, the objectives of the Project are in line with ADB's Financial Sector Operational Plan, which prioritizes capital market development for infrastructure finance and financial inclusion.