Examination Committee: Dr. Sundar Venkatesh (Chairman) Dr. Winai Wongsurawat (Co-chair) Dr. Yuosre Badir (Member) Dr. Yuosre Badir (Member) Presented by Rathin Kumar Paul PMBF Programme, AIT 2011-2012 1
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. 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
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
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 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
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 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
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 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
Risks in PPP projects Political Operational Regulatory Market Market Foreign Exchange Risks Price Payment Construction Interest Source : Standard & Poor 7
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 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
PPP Framework Public Private Pay Concession Fee � Viability Gap Funding Responsible for Financing, Negotiation & (VGF) implementing and Managing the PPP Advisory Council Contract Award project Cabinet Committee Issues Request For � Govt. Guarantee Proposal (RFP) Exposed to various risks : Office for PPP Political Risk Political Risk Calls Request For Calls Request For � Technical Assistance � Technical Assistance Line Ministry Line Ministry Quotation (RFQ) Regulatory Risks Finance division � Investment Promotion Feasibility Study Foreign Exchange Risk Planning Commission Financing Facility (IPFF) Interest Rate Risk Project Identification Construction Risk � Bangladesh Infrastructure Finance Operational Risk Fund (BIFF) Market Risk Payment Risk Source: Self Compilation (in light of PPP Policy) 9
Regional Comparisons (PPP Framework ) Bangladesh India Philippines � PPP Policy (2010) � PPP Policy (2006) � BOT Law (2003) � has dedicated PPP � has dedicated • has dedicated Office. PPP Office PPP Office � Has provision for � has provision for � has provision for financing financing guarantee against participation participation political risk even money back Conclusions : Bangladesh issued Private Sector Infrastructure Guidelines (PSIG) in 2004 . 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
Comparative analysis (Energy Sector) Number of projects in energy sector (2007-2011) 122 140 120 Bangladesh 100 India 80 Indonesia 60 18 18 40 40 12 12 The Philippines The Philippines 9 9 6 6 20 Thailand 0 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
Comparative analysis (Energy Sector) Project cost(mill USD) in energy sector (2007-2011) 6833 323 10296 Bangladesh 5468 India Indonesia Indonesia 94169 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 Source : the World Bank Thailand and Indonesia. 12
Comparative Analysis (Telecom Sector) Number of projects in telecom sector (2007-2011) 4 4.5 Bangladesh 4 3.5 India 3 2.5 2.5 Indonesia Indonesia 2 1 1 1.5 The 1 0 0 Philippines 0.5 Thailand 0 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 (2007-2011) 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
Comparative Analysis (Telecom Sector) Project cost (mill USD) in telecom sector (2007-2011) 1349 2396 4554 Bangladesh India 9334 Indonesia Indonesia The Philippines 46267 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
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