Bangladesh : Strengthening the Capacity of Infrastructure Development Company Limited

Finance / Infrastructure finance and investment funds

Rapid economic growth has increased the demand for energy, transportation, and urban development. However, infrastructure deficit remains a bottleneck and prevents the economy from reaching its full potential. Public-sector-driven infrastructure development is constrained by resource availability with the budget deficit, rising to 5.6% in 2020. Moreover, the coronavirus disease (COVID-19) pandemic has resulted in increasing fiscal pressure. The government has highlighted PPP as an important tool to mobilize private sector resources into infrastructure investments to supplement public investment and to achieve better value-for-money.

As part of its efforts to mainstream PPP, the government set up IDCOL in 1997 to address long-term funding challenges of infrastructure projects, especially in PPP projects. Since then, it has become the leading domestic financial institution in catalyzing long-term funding and promoting private sector in investment in infrastructure projects. By December 2020, its outstanding loan and advances was at Taka (Tk) 79.1 billion, rising from Tk41.0 billion in 2016. Its shareholder equity grew to Tk9.2 billion from Tk6.0 billion in 2016. It is one of the few financial institutions that have the technical and managerial capacity to appraise, structure and execute infrastructure project financing in Bangladesh.

ADB has had a long-term engagement with IDCOL. Through Public Private Infrastructure Development Facility (PPIDF), PPDIF2 and Tranche 1 of PPIDF3, ADB provided $535 million project financing. With the support of two ADB TAs, IDCOL has developed a PPP policy framework, set up a dedicated risk management unit led by senior officers, established a corporate recovery unit, formulated a corporate strategy with a focus on infrastructure investment and advisory services, strengthened ICT capacity and compliances, and developed a capable social and environmental safeguard team. Currently, IDCOL is led by a strong 8-person Board including independent directors and staffed with experienced executives and professionals. With its rapid growth in operations and enhanced capacities, IDCOL is ready to take major steps to become more effective in achieving its missions, with ADB's support.

First, IDCOL remains a state-owned institution, relying on multilateral loans, guaranteed by the government. As of December 2019, the outstanding amount of multilateral loans stood at Tk75.5 billion (ADB's share is 39%). With its growing operations and stronger capacity, IDCOL is considering diversifying its funding sources gradually. Funds can be raised in the capital market, either through a combination of domestic and international bond issuances, potentially a green bond issuance, partially guaranteed by ADB or through an offshore-taka linked bond. Tapping the capital markets will help IDCOL improve its long-term financial sustainability and adopt good practices in project appraisal, risk management, and corporate governance. Furthermore, IDCOL will be encouraged to adopt global Green Bond framework in its investment.

Second, IDCOL needs to strengthen its capital base to ensure long-term sustainability and to support its expanding operations. One of the options is to bring on board a strategic partner, possibly an international infrastructure financing company or a development financial institution. This will not only strengthen IDCOL's capital base, but also provide IDCOL access to international project appraisal systems and processes, management know-how, improved risk management and corporate governance practices. This will also establish a good precedence in the reform of the State-Owned Enterprises in Bangladesh.

Third, as a leading infrastructure finance company, IDCOL is expected to take the lead in supporting the country's agenda for a low carbon and climate resilient economy and developing new sectors with its financing and advisory services. So far, IDCOL's main role has been limited to being a financier of infrastructure projects including some renewable energy and energy efficiency projects, but more needs to be done. Bangladesh is highly susceptible to the impacts of climate change. Ranked 7th in the Global Climate Risk Index, the country is most vulnerable to extreme weather conditions and climate change. The government has committed to reducing greenhouse gas emissions by 21.85% below, business-as-usual, in the industrial sectors by 2030 of which, 6.73% reduction is targeted as unconditional using only domestic resources and remaining 15.12% is targeted with a condition to receive sufficient and appropriate assistance from the global community. IDCOL shall play a bigger role to spearhead emerging areas of green technology to support climate change adaptation projects.

Transformations in all these areas, require advanced expertise and introduction of best practices in capital market, climate financing and green technology. Experiences gained through the process will be beneficial not only for IDCOL but for the country. A technical assistance addressing these areas was requested by the government, and the outline of the TA was agreed on during the fact-finding mission for the processing of the Third Public-Private Infrastructure Development Facility-Tranche 2.

The TA is closely aligned with ADB's Strategy 2030 and will contribute to achieving the following operational priorities: (i) Operational Priority (OP) 2 of Gender Equality and Women's Empowerment (by strengthening IDCOL's gender inclusive project implementation capacity); (ii) OP3 of Tackling Climate Change, Building Climate & Disaster Resilience & Enhancing Environmental Sustainability (by developing new sectors or subsectors for climate financing); and (iii) OP6 of Strengthening Governance and Institutional Capacity (by strengthening IDCOL's capital and financing structure, and risk management and operation capacities

Financial institutions supporting PPP infrastructure and climate finance strengthened

Capacity of IDCOL to support infrastructure investments, and climate financing enhanced

A medium-term resource diversification plan supporting the implementation of the corporate strategy developed.

IDCOL's capacity for financing potential new areas of climate finance and social infrastructure expanded.

IDCOL's operation control and management enhanced.