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A paper on

Public Private Partnership: Present Status and Challenges

ABSTRACT

The changing role Government in recent decades brings ample of new concept. Among them public
private partnership is unique in nature because of its participatory concept of both public and private
sector. Bangladesh has great potential and PPP can enhance the economic activities to achieve the
expected growth. It was started with enormous expectation but the shinning star remains at the end of
the path. Typically center-right government more concern about PPP. Government recently unveiled the
proposed guideline but it’s not without question. Economic factors stated in favor of PPP initiatives
while some influencing factors delay the implementation. Potential partners confirm participation but
observe government activities regarding PPP. It is being said, the country has still a long way to go to
meet its huge infrastructure requirements.

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1.01 Objectives of the study

The objectives of this term paper are

 To understand the concept of PPP and applicable form.

 To gain an understanding on issues those are important for developing PPP.
 To identify the prevailing status and challenges for implementation.

1.02 Statement of the Problem

The main problems of PPP are follows:

 In Bangladesh, PPP has lunched before formulating any strong legal framework.
 Absence of proactive human resource to coop with changes in administration.
 PPP initiatives aren’t well planed or organize.

1.03 Methodology of the Study

Data have been collected from both primary and secondary sources to prepare this report.

The source of primary data is:

 Personal interview of related persons of PPP.
The secondary data were collected from:
 Study of the related materials of PPP
 Publications of concern agencies
 Web materials

1.04 Limitation of the study

Due to the scarce resources and shortage of time at the disposal of the researcher the study has been
limited to secondary sources. The relevant agencies could not furnish us the necessary data. Moreover
PPP is very new concept for our economy. Therefore the result should be viewed keeping the limitation
in mind.

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2. Literature Review

2.01 Prelude
Public Private Partnership is a contractual agreement formed between a public agency and private
sector entity. Its main objective is to allows greater private sector participation in the delivery of services
and also allows the public agencies to tap private sector technical, management and financial resources
to achieve certain public agency objectives such as greater cost and schedule certainty, supplementing
in-house staff, Innovative technology applications, specialized expertise or access to private capital. The
core principle of PPPs lies in the risk allocation between the two parties. A well designed PPP
redistributes the risk to the party that is best suited to manage it and to do it with the least cost.

The emergence and proliferation of PPP schemes in Bangladesh raises the questions regarding the
success or failure in the attraction of investments in the form of public-private partnerships, the
determinants and extent of private sector participation. Therefore, this paper aims at providing readers
with some background information with regard to types and determinants of PPP, as well as present
status, opportunities and challenges ahead.

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2.02 Types of Public Private Partnership

This section contains a short overview of the main types of PPP ranging from the least modes of private
sector involvement to the most complex forms of PPP implying greater risk transfers from the public to
the private party.

Schemes Modalities
The private party procures, operates and maintains an asset for a
Service contracts short period of time. The public sector bears financial and
management risk.

The private sector operates and manages a public owned asset.

Operation and management
Revenues for the private party are linked to targets. The public
contracts sector bears financial and investment risks

Leasing-type contracts The private sector buys or leases an existing asset from the
 Buy-build-operate government, renovates, modernizes, and/or expands it, and then
 Lease-develop-operate operates the asset, again with no obligation to ownership back to
 Wrap-around addition the government.

Build-operate-transfer
 Build-own-operate- The private sector designs and builds an asset, operates it, and then
transfer transfers it to the government when the operating contract ends or
 Build-rent-own-transfer at some other pre-specified time. The private partner may
 Build-lease-operate- subsequently rent or lease the asset from the government.
transfer
 Build-transfer-operate
Design-Build-Finance-
Operate The private sector designs, builds, owns, develops, operates and
 Build-own-operate manages an asset with no obligation to transfer ownership to the
 Build-develop-operate government. These are variants of design-build-finance operate
 Design-construct-manage- (DBFO) schemes.
finance
Source: Elaboration on IMF (2004) and European Commission (2003)

In our subcontinent area we find some of these models in practices. The most frequently used terms are

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BOOT, BOT, BOO and BLO. The recent trend in Bangladesh is to use the Build-own-operate model. It was
followed to build recent small scale power plants.

Based on the analysis by IMF using the World Bank’s Private Participation in Infrastructure (PPI)
database the determinants of PPP can be divided into four groups

Public finance and state budget

In general, PPP is more likely to be initiated in a country where government has a heavy debt burden,
large state budget deficits and therefore, has to cut public expenditures. On the contrary, countries with
large sources of exogenous revenues available and soft budget constraints have less reason and need
for opening state activities to the private sector.

Macroeconomic conditions

Governments with a credible, predictable macroeconomic policy engendering economic growth based
on low inflation and stable exchange rates are more successful in the development of Public Private
Partnership as a means of financing public infrastructure. Since infrastructure projects usually require
substantial investments, the private sector will engage in PPP only when generating revenues over the
time period are sufficient. Therefore, stable macroeconomic conditions are of crucial importance as an
indication of adequate tariff regimes and project profitability.

Market size

Market size is an influential determinant of private sector participation in PPP as demand and
purchasing power is essential for cost recovery. In general it can be noticed that the bigger the market,
the more likely private entity engagement in PPP.

Institutions

PPP tend to be more common in politically stable countries with strong and effective institutions and
legal code protecting investors’ rights.

In addition, successful previous PPP experiences positively affect the incentive of private participation in
Public Private Partnership.

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The nature of public infrastructures, capital intensity, required technology, and risk sharing between the
public and private partners govern the extent of private participation in PPP projects. Table 2 provides
an overview of infrastructure services depending on appropriateness and attractiveness for PPP. Since
the private sector is guided by profit motives PPP may not be suitable for sectors where public safety is
the major concern, operating is expensive, marketability of services is low. Accordingly, the most
optimal area for private sector participation is engaged in infrastructure, water and waste, roads,
bridges and tunnels, telecommunications.

Probably No Yes May Be

Police Infrastructure Railway networks

Defense Tourism Air traffic control

Prisons Tele communication Sea Ports

ICT

Health

Expectations about the distribution of PPP by sector.

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2.03 Experiences of PPP in other Countries

Chile

Chile’s experience with PPPs has been successful, and a significant portion of the sizable
infrastructure gap identified a decade ago has been filled.7 Since 1994, the government has
engaged the private sector in 36 PPP projects with a total value of US$5.5 billion.8 The projects
contracted thus far comprise 24 transport projects, nine airports, two prisons, and a reservoir.
Over 20 of these projects are already in the operational phase.
Chile’s success with PPPs has been underpinned by: a solid institutional framework; well-
developed procedures to identify, evaluate and tender projects; efforts to ensure adequate
sharing of risks between the public and private sectors; and reforms to ensure the availability of
private financing for projects. Nevertheless, the implementation of the PPP program has not
been without problems. There have been a fairly large number of contract renegotiations; the
government has accumulated significant exposure to PPPs; and the accounting and reporting of
this exposure can be improved.
A track record of institutional stability and respect of contracts, together with a solid legal
framework, have been essential for the development of PPPs. Crucial elements of the legal
framework governing PPPs are the well-defined nature of PPP contracts, a clear description of
each party’s rights and obligations, and an effective mechanism for conflict resolution. The legal
framework has facilitated the availability of private financing for PPPs by dispelling expropriation
fears and providing protection of creditor rights. The government’s ability to terminate PPP
contracts is limited, and creditors’ rights are secured in case of termination, since they have first
lien on the proceeds from rebidding the project.

Ireland

The PPP program in Ireland began in 1998. However, cooperation between the public and
private sectors in providing public services is not new, there having been a long history of
hospitals and schools being set up and run by religious orders, while toll roads have been
operated by the private sector for a number of years.10 A decision to pursue the PPP approach
was taken in early 1998, prompted by an emerging infrastructure deficit, support from the Irish
Business and Employers Confederation and the Construction Industry Federation, and a
recommendation of the National Economic and Social Council. PPPs were then formally
incorporated into public expenditure planning in the context of the National Development Plan
2000-06 (NDP), which was launched in December 1999.
Infrastructure inadequacies are a key obstacle to sustained economic growth. After a decade of
relatively slow expansion, economic activity picked up in the 1990s, and from 1995 Ireland was
among the fastest growing OECD economies. Increasing any country’s stock of infrastructure in

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line with an extremely rapid pace of growth is difficult, and Ireland’s real GDP rose by a
cumulative 40 percent over the four years to 1998. As a consequence, an infrastructure deficit
became increasingly evident during the second half of the 1990s. Recognition of the need for
major investment to address this deficit, and a determination to ensure the efficiency of
investment, led to adoption of the PPP approach.
Implementation of the PPP program was initially quite cautious. In June 1999, the government
announced that the program would commence with eight pilot projects for schools, public
transport, roads, and waste management. However, the NDP contained an ambitious target for
PPP investment, and ministerial statements during the first half of 2000 made the political
commitment to the PPP program clear.

Mexico

Since the mid-1990s, a growing number of public investment projects have been financed under
the PIDIREGAS scheme. This scheme was established to increase investment in areas
traditionally or legally restricted to the private sector, at a time when the government was
facing limited public financing availability. PIDIREGAS projects are restricted to strategic sectors
(i.e., sectors of government monopoly), are contracted by public entities but financed by the
private sector, and their expected cash flow must be sufficient to at least cover the resulting
debt service. So far, projects have been undertaken in the oil and electricity sectors under one
of two PIDIREGAS modalities: direct projects and conditioned projects.

Direct PIDIREGAS projects involve a contractual commitment by a public entity to purchase upon
completion a specified asset that has been built by a private contractor. In principle, financing
during the construction phase of direct PIDIREGAS projects should be provided by the private
sector contractor. Upon completion, the public entity purchases the asset with long-term
financing that it has to mobilize. In some projects, long-term financing is mobilized by the
private contractor and taken over by the public entity when ownership of the asset is
transferred. In the oil sector, the public sector oil company PEMEX has provided most of the
initial financing for its projects. As a vehicle for the mobilization of the needed resources, PEMEX
created a trust fund (the PEMEX Master Trust) which issues debt that is then on-lent to private
sector contractors. Once the project is completed and transferred to the public sector, PEMEX
assumes the servicing of the debt.

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3. Present Status

3.01 Why Invest in Bangladesh?

Bangladesh is a winning combination with its competitive market, business-friendly environment and
cost structure that can give you the best returns.

Low-cost workforce
Bangladesh offers a well-educated, highly adaptive and industrious workforce with the lowest wages
and salaries in the region. 57.3% of the population is under 25, providing a youthful group for
recruitment. The country has consistently developed a skilled workforce catering to investors needs.
English is widely spoken, making communication easy.

Strategic location
Bangladesh is strategically located next to India, China and ASEAN markets. As the South Asian Free
Trade Area (SAFTA) comes into force, investors in Bangladesh will enjoy duty-free access to India and
other member countries.

Strong local market and growth

Bangladesh has proved to be an attractive investment location with its 144 million populations and
consistent economic growth leading to strong and growing domestic demand.

Low cost of energy

Energy prices in Bangladesh are the most competitive in the region. Transportation on green
compressed natural gas is less than 20% of the diesel price.

Proven export competitiveness

Bangladesh enjoys tariff-free access to the European Union, Canada, Australia and Japan. In Europe,
Bangladesh enjoys 60% of the market share and is the top manufacturing exporter amongst 50 least
developed countries.

Competitive incentives
Bangladesh offers the most liberal FDI regime in South Asia, allowing 100% foreign equity with
unrestricted exit policy, easy remittance of royalty and repatriation of profits and incomes.

Export processing zones

Bangladesh offers export-oriented industrial enclaves with infrastructural facilities and logistical support
for foreign investors. The country is also developing its core infrastructures, including roads, highways,
surface transport and port facilities for a better business environment.

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3.02 Area of Investment

A. Power

With demand for power at around 5,600 MW against an average supply of 3,800 MW, there remains a
consistent gap of 1,800MW. Only 35 percent of the population has access to electricity. Consequently
opportunities abound.

Increasing the country’s power generation to 8,000 MW by 2015 with requirements of around $10
billion is the starting point. Coal-based small power plants, which would need around $2 billion from
joint-venture partners and debt financing, should also be considered. Particularly, to reduce
dependence on gas-based power generation in the backdrop of potential depletion of gas reserves by
2015, the coal-based plants present strong possibilities. LNG (liquefied natural gas) terminals should also
be explored.

On the policy front, the government has already announced public private partnership (PPP) policy,
which will replace the existing Bangladesh Private Sector Infrastructure Guidelines (BPSIG). Bangladesh
Public-Private Partnership Policy and Guidelines is expected to incorporate provisions for special fiscal
incentives and hence, be more investment-friendly.

Projected electricity demand and supply (year wise)

Projected data 2009 2010 2011 2012 2013 2014 2015

Projected demand (MW) 5,566 5,808 6,298 6,832 7,709 8,699 9,812
Capacity retired (MW) - 48 - - 448 378 -
Projected supply (MW)
4,289 4,956 5,177 7,029 8,326 9,545 11,625
(excluding quick rental)
Projected supply (MW)
4,289 5,109 6,363 8,683 9,764 10,527 12,601
(including quick rental)
Shortage/surplus (MW)
-1,277 -852 -1,121 197 617 846 1,813
(excluding quick rental)
Shortage/surplus (MW)
-1,277 -699 65 1,851 2,055 1,822 2,789
(including quick rental)

Source: Power and Energy Sector Development Roadmap (June 2010), Ministry of Finance.

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Fiscal incentives for private power companies

A number of fiscal incentives are provided to the private power companies. Some of them are as
follows:

 Exemption from corporate income tax for a period of 15 years.

 Allowed to import plant and equipment and spare parts up to a maximum of ten percent (10%)
of the original value of total plant and equipment within a period of twelve (12) years of
commercial operation without payment of customs duties, VAT and any other surcharges as well
as import permit fee except for indigenously produced equipment manufactured according to
international standards.
 Repatriation of equity along with dividends allowed freely.
 Exemption from income tax for foreign lenders to such companies.
 The foreign investors will be free to enter into joint ventures but this is optional and not
mandatory.

As the power sector is a capital-intensive industry, huge investments are required in order to generate
addition to the capacity. Competing demands on the government resources and declining levels of
external assistance from multilateral and bilateral donor agencies constrained the potential for public
investment in the power sector.

Investments Required in the Generation & Transmision During Planning

Horizon
1200

Foreign
1000
Figures in US$ Million

Local
Total
800

600

400

200

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

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B. Health care

The demand for health care services is rising rapidly because of increasing purchasing power of the
growing middle- and upper-middle classes, increasing life expectancy, declining mortality and rising
incidence of chronic and treatable diseases.

In response to these factors, private, premium-priced hospitals with international standard facilities,
such as Apollo, United, Square, Popular, are now very popular. The registration of 200,000 patients with
Apollo Hospitals Dhaka since 2005 is a testament to this popularity.

Further, considering that the Bangladeshis spend nearly $200 million abroad for treatment, there is
enough space to grow. Foreign investors can also play a bigger role in improving the health care
standards by setting up world-class nurses/technicians training institutes.

C. Education

Increasingly we see a large number of undergraduates and graduates aspiring towards higher education
abroad. Local private universities have also grown rapidly in response to demand, despite the high
premiums charged. Consequently, opportunities to establish campuses of renowned business schools,
affiliations with private universities, especially reasonably priced secondary and higher secondary
institutions, also abound.

D. Business Process Outsourcing

Outsourcing of services is increasingly popular as it allows organizations to focus on core competencies

and capitalize on specialist knowledge in respective functions. While Bangladesh is still at the nascent
phase, it must start pitching for Business Processing Outsourcing (BPO), primarily offshore outsourcing,
now. Statistics shows that the global “addressable” BPO market is worth $122-$154 billion, of which $10
billion+ is travel/hospitality, $10 billion telecoms, and $20 billion+ is finance, accounting and human
resource. This is a huge market to tap as only 8 percent of that capacity was utilized as of 2006.

Though Bangladesh is comparatively new to this field, there is a huge potential in call centers, data entry
facilities, and such sectors that can be served with low to medium level of skilled resources. The pie is
big and growing — it is up to us to partner with neighboring countries and investors and capture a slice.

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E. Pharmaceuticals

Pharmaceuticals have gradually evolved from an import-based industry to a self-manufacturing one

exporting to 70 countries with a market size of over $750 million. Foreign investments — either in the
form of joint ventures with Bangladeshi companies or other partnerships whereby research and
development is run in laboratories in India with complementing manufacturing plants in Bangladesh —
should be welcomed. These companies, such as Sun Pharmaceuticals of India, can utilize the
competitively priced labor in Bangladesh and use cost advantages to capture the export market.

Since Bangladesh has received exemption from Trade Related Intellectual Property Rights till 2016,
manufacturers’ ability to continue to produce pharmaceuticals products till the expiry of the exemption
period increases the incentives greatly.

F. Infrastructural Development

To attain a sustained growth rate of 8-10 percent per annum over the next decade, Bangladesh will have
to raise its investment rate closes to levels attained by India and China today, i.e. 37-40 percent of GDP.
For that to happen the infrastructure investment has to be taken at least to 8% of GDP as against 4%
now. The challenge lies not only in mobilizing sufficient resources to finance that investment but also to
develop effective institutional arrangements to implement large infrastructure projects.

Comparative Infrastructure Investment in US $ billion

South Asia
Sector Bangladesh India China Vietnam
Average
Energy 1 34 7 36 3
Telecom 4 43 10 15 2
Transport 0 19 3 42 1

Water and
0 0.26 0.04 7 0.21
sewerage
Total 5 96 21 100 6

Source: Private Participation in Infrastructure Projects Database, The World Bank Group 2009.

But for economic development it is important for Bangladesh to invest more and more in this sector.
Government allocates huge amount of money but it’s not sufficient enough. Infrastructure in

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Bangladesh ranks among the worst in the world, securing only the 126th position in 133 nations, while
India, Sri Lanka and Pakistan secure the position of 49, 73 and 101 respectively according to the Global
Competitiveness Report 2009-10.

The basic reasons behind this are the government’s reliance on ADP-based public sector investment
program which has declined steadily in relation to GDP in recent years and the government’s failure to
attract private investment in the infrastructure sector.

Source: Ministry of Finance.

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3.03 Scope of PPP in Bangladesh

In the new millennium Bangladesh achieved growth rate over 6 percent. It decline due to impact of the
global economic downturn. Lack of investment in infrastructure, especially energy and power, port and
communication has been identified as root cause behind slow growth. In order to achieve 8-10 percent
growth, rate of investment needs to increase from 24-25 percent of GDP to 35-40 percent of GDP. A lot
of resources are required to raise rate of investment to 35-40 percent of GDP. It is challenging for the
government to arrange such huge resources. Moreover, due to current global economic downturn, the
prospect of receiving foreign assistance has diminished. Resource mobilization is not the only challenge
for the government. It is also imperative to ascertain whether the government has skilled manpower
and required institutional framework to implement mega infrastructure projects.

In order to attain higher GDP growth, investment in infrastructure, especially in power and energy, port,
transport and communication, drinking water supply, waste management, education, and health has
been prioritized. Preliminary assessment of the required investment to boost growth rate has been
prepared till 2014. The estimate assumes that desired investment will be achieved from 2009•]2014
with participation of the private sector and target growth rate has been set in line with the
government’s Election Manifesto. According to the estimate, from FY10 till FY14, there will be USD 28
billion investment deficit (Table 1). The government is determined to raise GDP growth to 8 percent by
augmenting investment by mobilizing private sector’s resources, expertise and experience through the
PPP initiative.

Required Investment for Attaining Target Growth Rate and Investment Deficit in USD:

2009-2010 2010-2011 2011-2012 2012-2013 2013-2014

GDP Growth (percent) 6.0 6.8 7.5 8.0 8.0
Required Investment
24.59 30.63 37.18 43.82 49.69
(Billion)
Investment (% of GDP) 24.0 27.02 29.25 30.40 30.40
Required Investment 23.55 27.10 31.36 35.54 40.29
Investment Deficit (Billion) 1.04 3.53 5.82 8.27 4.40

According to the preliminary estimate, there is USD 1.04 billion investment deficit in FY
2009-2010. In order to attract the said amount of investment through the PPP initiative, the
Government has decided to give a big push to provide incentives to the private sector. As such the
government has allocated significant amount of money for the PPP and policy guide for the purpose.

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Government is going to approve the Multi Modal Transport Policy where there is a clear cut directives to
encourage and facilitate private sector to invest in the infrastructure sectors in a bigger way.
In recent years Bangladesh manage positive trends in investment both public and private sectors.
Instead of world recession we cope with the situation because of low involvement RMG products,
steady flow of remittance and cheap labor cost. The private sector has been playing a very significant
role in the economic development of Bangladesh. The share of private investment in the national
economy recorded at 19.55 percent of GDP in FY2008-09 which was recorded at 13.58 percent of GDP in
FY1995-96.

Source: Ministry of Finance

Source: Ministry of Finance

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The gap between allocation and expenditure represent that failure of implementation of projects and
mismanagement of projects. Hence the importance of private involvement on this sector unfolds.
Another important aspect is capital market. Bangladesh has got two stock exchanges namely Dhaka
Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). The market is however characterized by the
two major constraints- The Market is predominantly equity- centric and Supply of securities with strong
fundamentals is extremely limited.

DSE Main board as on September 2009:

Type BDT mn USD mn

Total Market Capitalization of All Companies Shares 1,045,222 15,135

Total Market Capitalization of All Mutual Funds 23,711 343

Total Market Capitalization of All Debentures 576 8

Total Market Capitalization of All Govt. T-Bonds 310,763 4,500

Total Market Capitalization of All Corporate Bonds 2,720 39

Total Market Capitalization of All Listed Securities 1,382,991 20,026

Dhaka Stock Exchange manages 22 % of the GDP while infrastructural market capitalization was 15% in
2009. Infrastructure fund can be tapped from the Market by Issuing equity or debt of infrastructure
projects or Issuing Dedicated Infrastructure Mutual Fund. Bangladesh Economy now growing at a rate of
6-7% will soon cross $100 Billion. Market Capitalization will reach at least 25% of the GDP as the investor
desire to capital market is growing fast. Infrastructure capitalization reaching 20% of market cap an
additional USD 2.5bn fund can be tapped from capital Market by 2012.

The Dhaka Stock Exchange (DSE) Chief hinted recently that the capital market might be able to generate
an ambitious fund worth Tk 20 billion for the PPP projects. There is also a need to attract global
infrastructure funds to participate in the country's PPP projects.

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It is found that about 80% of the country’s total financial savings is invested in the Banking system as
deposits. Debt market almost entirely comprised of non liquid and non traded Government Securities.
There is absence of Corporate Bond market. Meanwhile insurance industry can’t attract significant
financial savings or playing a meaningful role in investment. Even Pension scheme not funded. For the
reason, investment is lower than savings which is totally harmful for economy like ours.

Source: Ministry of Finance

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3.04 Benefits of PPP

Government and Taxpayers

Improve service delivery by allowing both sectors to do what they do best. Government’s core business
is to set policy and serve the public. It is better positioned to do that when the private sector takes
responsibility for non-core functions such as operating and maintaining buildings.

Improve cost-effectiveness. By taking advantage of private sector innovation, experience and flexibility,
P3s can often deliver services more cost-effectively than traditional approaches. The resulting savings
can then be used to fund other needed services.

Increase investment in infrastructure. Investments in hospitals, schools, highways and other public
assets have traditionally been funded by the Govt. and in many cases, have added to levels of overall
debt. PPP can reduce government’s capital costs, helping to bridge the gap between the need for
infrastructure and financial capacity.

Reduce public sector risk by transferring to the private partner those risks that can be better managed
by the private partner. For example, a company that specializes in operating buildings may be better
positioned than the government to manage risks associated with the changing demands of commercial
real estate.

Deliver capital projects faster, making use of the private partner’s increased flexibility and access to
resources.

Improve budget certainty. Transferring risk to the private sector can reduce the potential for
government cost overruns from unforeseen circumstances during project development or service
delivery. Services are provided at a predictable cost, as set out in contract agreements.

Make better use of assets. Private sector partners are motivated to use facilities fully, and to make the
most of commercial opportunities to maximize returns on their investments. This can result in higher
levels of service, greater accessibility, and reduced occupancy costs for the public sector.

Private Sector

PPP give the private sector access to secure, long-term investment opportunities. Private partners can
generate business with the relative certainty and security of a government contract. Payment is
provided through a contracted fee for service or through the collection of user fees – and the revenue
stream may be secure for as long as 50 years or more. Private sector partners can profit from PPP by
achieving efficiencies, based on their managerial, technical, financial and innovation capabilities.

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3.05 Partners in PPP

Public and private sectors work together on the basis of shared objectives, strategies and agreed criteria
regarding assessing process and outcome; the partners also cooperate in developing common objectives
and strategies and criteria for assessment of activities.

Public Sector Partners

 National government
 District administration
 Municipal authorities
 Local government bodies
 Para-statal corporations
 State universities and research organizations

Private Sector Partners

 Commercial for-profit enterprises

 Development-focused voluntary non-governmental organizations (NGOs)
 Cooperative societies
 Community-based organizations
 Religious organizations
 Professional organizations
 Trade unions
 Research and academic institutions
 Households

In which sectors are PPP is a valid option?

So far, PPPs have been successfully employed to provide road and railway infrastructure, waste and
water management, healthcare and school buildings. Possible trends in European PPPs are related to
their potential expansion to different sectors. However, it remains to be seen if PPPs are really capable
of ensuring value for money in areas closely linked to the core competences of the public sector, such as
clinical services, education or prison facilities.

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4. Findings

4.01 Development of PPP in Bangladesh

The government adopted a private sector power generation policy to promote private
1996
sector participation named IPP policy’1996.

Infrastructure Development Company ltd (IDCOL) was established in order to promote

private sector investment in infrastructure development under Economic Relation
Division. Similarly, Infrastructure Investment Facilitation Center (IIFC) was established
1997
to assist relevant ministries, divisions or agencies with formulation of project proposal
and screening as well as to provide technical assistance.

Bangladesh Private Sector Infrastructure Guidelines (PSIG), which forms the basis of
the current PPP, was issued in order to boost individual investment in the development
2004
and maintenance of infrastructure.

A 5 year term Investment Promotion and Financing Facility (IPFF) with BDT 4.18 billion
(equivalent to USD 60 million) was set up in Bangladesh Bank to finance government
2007 approved PPP based infrastructure development projects to be implemented by the
private sector.

For the vary first time Government allocates Tk.2100 crore under the loan or equity
head to increase financing opportunity for projects under PPP initiative, Under the PPP
initiative, private investors who cannot determine service price or consumer charge on
2009 full cost recovery basis, for those projects Tk.300 crore is allocated as subsidy under
PPP Viability Gap Funding and Tk.100 crore as assistance and grants for providing
technical assistance to PPP projects.

Government allocated Tk.3000 crore for PPP initiative where separate company named
2010 Bangladesh Infrastructure Investment Fund (BIIF) will be establish to enhance PPP with
a capital of Tk.1600 crore.

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4.02 Legal Framework of PPP

The Bangladesh Private Sector Infrastructure Guidelines (PSIG) issued by the Cabinet Division in 2004
was the guideline for implementation of projects under the PPP. This has not been issued under any law
passed by the national parliament. As a result, there were doubts and lack of clarity regarding the
consistency between Public Procurement Regulation 2003 and the private sector project development;
approval and financing that are to be implemented under the jurisdiction of PSIG 2004. Later the Public
Procurement Act (PPA) 2006 was enacted by the national parliament. Public Procurement Act 2006
through section 66, which incorporated concessions agreement related provision, extended the
government’s legal jurisdiction to formulate independent PPP guidelines.

In the Public Procurement Rules (PPR) promulgated by the government in 2008, rule 129 incorporates
various PPP related models. In this regard as of now: PPA 2006’s section 66 and PPR 2008’s rule 129 may
form the legal basis for project implementation and contract execution under the PPP initiative.
Therefore under the present framework infrastructure development activities by the private sector
under PPP initiative can be continued.

At present, projects under the PPP initiative are being financed through IDCOL and IPFF by the
government. IDCOL is a company established under the Companies Act. On the other hand IPFF is a 5
year term project. Since IDCOL was established under the Companies Act, through it necessary
resources can be arranged for financing large scale projects. However, due to failure to formulate
appropriate project proposals by ministries, divisions or agencies no initiatives were undertaken to
arrange large funds through IDCOL. In addition, there is lack of clarity and hesitation regarding how the
government will finance infrastructure development through the PPP initiative.

4.03 Review of Private Sector Infrastructure Guideline 2004

PICOM is very large in scope and is not appropriate for formulating and implementing PPP projects.
PICOM is responsible for project processing, expediting, monitoring, supervision and expansion
activities. The present framework is inadequate for providing incentives and encouragement for project
development. For projects being implemented under present PSIG 2004, a number of committees have
been set up at the relevant ministries, divisions or agencies, for project identification, preparation of pre
feasibility study, recommendation, process of receiving approval from relevant authorities, floatation of
tender and work allocation etc. Other than these there is no institutional framework to communicate
and coordinate activities between different committees. These tasks are not executed from a specific
location but from different sections, branches or wings of ministries. As a result, coordination and
continuity cannot be maintained. Project approval process is neither organized nor logical. A model
template or model contract would help expedite the project approval process. Above all, a dedicated
office is required to reinforce PPP initiatives and to execute PPP budget.

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4.04 Public Private Partnership Guideline’2010

In august 01, 2010 Government on Bangladesh announced the Public Private Partnership Guideline. It
will replace the previous guideline of 2004. The key features of guideline are

A separate office will be formulated under Prime Minister’ Office to coordinate all the activities
of PPP and the office directly report to the Prime Minister.
The Prime Minister will appoint a CEO for the office with necessary experience required to
enhance the activities.
An Advisory Committee will be formed chair by Prime Minister while Minister of Finance,
president of FBCCI.
PPP project will categorize on the basis of time duration and projected capital.
ECNEC will sanction the project more than Tk.250 crore which have the duration of more than
52 weeks.
Ministry of Finance will approve the project amount of Tk.250-50 crore where the duration of 42
weeks.
The relevant ministry, division or department can approved the project amount of less than
Tk.50 crore.
Separate company named Bangladesh Infrastructure Investment Fund (BIIF) will establish to
enhance PPP with a capital of Tk.1600 crore. It can raise fund through capital market by specific
infrastructure bonds and shares in local and foreign markets.
Viability Gap Funding can be used if commercial viability of project is in question but important
in aspect of economical and societal factor.
No Initial Public Offer can be placed before commercial operation of the project.
Under the Public-Private Partnership (PPP) guideline, private investors will have the flexibility to
place any 'unsolicited' proposal before a ministry and get approval of their projects without any
tender.
The priority sectors under the PPP projects include power generation, transmission, distribution
and services, exploration, production, transmission, and distribution of oil, gas, coal and other
mineral resources, oil refinery, and production of liquefied petroleum gas (LPG) and production
of fertilizer.
In the physical infrastructure sector, the government will place emphasis on airports, mass-
transit, highways, bridges, flyovers and roads.
In the public work projects, the government's priorities range from water supply and sewerage
to effluent treatment plants and dredging of rivers.
In the social infrastructure, health, education, human resource development, research and
development, and cultural facilities, e-service delivery will be given priority.

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4.05 Agencies in Operation of PPP

Four Government organizations are involved in the project implementation by the private sector under
the PPP initiative. So far the direct assistance of these organizations have enabled implementation of 27
projects of which 18 projects are in the power and energy sector, 6 projects in telecommunication
sector, 2 projects in the port infrastructure sector and 1 project in the information technology sector.

Infrastructure Development Company ltd (IDCOL)

Through this government sponsored company PPP project finance and financial intermediation are
conducted. Till date, BDT 13 billion has been financed by IDCOL in 22 projects implemented under PPP.
It’s under the direct supervision of Economic Relation Division.

Investment Promotion and Financing Facility (IPFF)

This project financed 5 power sector projects under the PPP initiative, generating 178 megawatt power.
Three projects have started power generation on a commercial basis and have added 99 megawatt of
power to the national grid. The remaining two projects are at the final implementation stage. The total
expenditure in the 5 aforementioned projects was BDT 8.67 billion of which IPFF financed BDT
4.41billion (51% of total expenditure).

Infrastructure Investment Facilitation Center (IIFC)

It’s also government sponsored company which is responsible for providing expert assistance to relevant
ministries, divisions or agencies regarding project development, project formulation, project design,
technical, engineering, implementation and monitoring related issues for projects sanctioned by PPP
initiative. Till now, IIFC has been under contract to design 30, provide technical 9 supports to 8 and
consultancy support to 16 PPP projects. Almost all the projects implemented under PPP have taken IIFC
support.

Board of Investment (BOI)

An 11-member Private Infrastructure Committee (PICOM) was constituted with the Principal Secretary
as the Chairman of the committee. PICOM aims to facilitate initiation of private infrastructure projects
and to assist line Ministries in achieving successful private sector projects. PICOM coordinates and
monitors the channeling of resources, strengths and capabilities of private and public sector for the
benefit of the nation through implementation of Private Infrastructure Projects.
PPP cell is formed in focus to conduct necessary adjustment of existing legal framework, structural
framework of PPP projects, and project proposal template under BOI. It is expected to play a catalyst's
role in coordinating the activities of the government ministries, donor agencies.

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4.06 List of Important Mega Projects

Sector Project Estimated Cost

(USD billion)

Dhaka-Chittagong access control highway 3.02

Sky-train encompassing the Dhaka metropolis 2.80

Transportation Dhaka city subway 3.10

Dhaka city elevated expressway 1.23

Dhaka-Narayanganj-Gazipur-Dhaka elevated expressway 1.90

Four coal, diesel or gas fired power plants capable of

Power and Energy 1.80
producing 450 megawatts electricity in different parts of
the country.

Water transport Deep sea port in Chittagong 13.85

Health care provider for a specific area (a few districts) -

Health
Setting up cancer and/or other hospitals -

Setting up quality secondary schools -

Setting up dormitories, health centers, auditoriums, -

Education gymnasiums in public universities
Development, expansion or improvement of present -
Degree colleges
Setting up research institutions or research foundations -
dedicated to the institution

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Tax Incentives to Investors

Government plans to provide multiple fiscal and non-fiscal incentives to private investors for
undertaking PPP projects in priority sectors. To attract private investment mainly three types of tax
incentives are being discussed. One of them is on investment that is at the financing stage and the other
two are at infrastructure construction and management or operating stage. Tax exemption will be given
or minimum tax rate will be imposed on the amount invested by various individuals, financial
institutions and joint ventures for PPP project implementation. Import tax benefit (lowest rate) will be
granted to capital items under PPP initiative and profit from operating/managing will be taxed at the
lowest rate for a specific time period.

4.07 Risk Factors Associated With PPP

Type Particulars

delay in project clearance

Construction risk contractor default

environmental damage

insufficient demand
Market risk
impractical user levies

inflation

Finance risk change in interest rates

change in exchange rates

termination of contract

Operation risk technology risk

labor risk

changes in law

Legal risk insolvency of developer/service provider

change in security structure

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4.08 Factor Influencing the Slow Implementation of PPP

Although PPP started with great potential but slow rate of implementation create disappointment
among the concern people. Academician pointed PPP as the stimulation factor for boost up our
economy. But various factors influenced the implementation of PPP.

Controlling authority

The issue of controlling authority that has slowed down the PPP initiatives soon after it was launched.
The finance ministry did earlier much of the spadework for the PPP but the cabinet later selected the
Board of Investment to do PPP-related work. The PPP Policy and Guidelines, prepared recently by the
Prime Minister's Office (PMO), has suggested the creation of separate office under direct supervision of
the Prime Minister and a secretariat will be the PP cell-under the BOI. Experts and officials concerned
have, however, opposed the proposal, stating that establishment of two offices at two different places
would amount to creation of dual administration.

Presence of Different Agencies

There are several agencies engaged in PPP initiatives with various tasks. This also creates ambiguity on
implementation. Ministry of Finance did much of the paperwork while PM office took the controlling
authority. Again Ministry of Legal Affairs will approve of legal matters of the PPP projects. IDCOL and IIFC
are under the administration of Economic Relation Division and IPFF is a project of Bangladesh Bank. BOI
has also an important roll to play with PECOM and PPP cell. Another separate company named
Bangladesh Infrastructure Investment Fund (BIIF) will establish to enhance PPP investments.

Bureaucracy

Government allocates Tk.3000 crore in the national budget for the current fiscal for a few projects that
were expected to be implemented under PPP. However, it is not money but the bureaucratic tangle over
the issue about its implementation authority that largely caused all the delay and led to the consequent
non-utilization of the fund meant for PPP initiatives. The finance minister, who had blamed the
bureaucracy's built-in resistance to change for the failure in initiating projects under PPP.

Policy Continuation

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Large infrastructure projects need a relatively longer period of time for implementation. The required
time to implement the projects may go beyond the tenure of a government. If there is a change of
government through the periodic electoral cycle, uncertainty may arise over the implementation of PPP
projects if the next government is not favorably disposed towards their continuation. Typically center-
right government more concern about PPP. This has happened to a number of projects in some
developing countries. Thus, some large projects were suddenly abandoned after spending a large
amount of state fund.

Financial Factors

Cost, price and financial factors are very crucial for implementation of PPP project. It need balance
between asset and liabilities with cash flows. Private sector invests only those projects from which they
can gain profit financial gains, there are projects where economic benefits are more considerable than
financial outcomes. Commercial Banks of Bangladesh are very conservative; they usually carry out short
term liabilities where infrastructure loans are deserved 10-12. Countries like Bangladesh mostly rely on
foreign debt and equity due to weak of local capital market and domestic banking loans. In this
circumstance, Multilateral Development Bank and Bi-literal Bank such as Asian Development Bank,
World Bank can provide wealthy support due to their repayment tenure is relatively longer with less
interest rat. Participation of these organization not only provide encourage other investors foreign and
domestic banks but also enables to get govt. guarantees against Confiscation, Expropriation,
Nationalization and Deprivation (CEND).

Indemnity

the proposal made in PPP policy and guidelines to grant indemnity to any member of the PP advisory
council or any member of the PPICOM or any official or employee or any consultant of PIPCOM
secretariat for causing loss to any person by his or her work done in 'good faith', has raised some
questions. The reason for granting this 'indemnity' could be the 'fear-psychosis' that was created by the
thoughtless pursuit of anti-corruption drive during the last caretaker government. That drive led to the
slowing down of policy decisions, at the bureaucratic level, relating to even spending funds under ADP.
Again it may show the way to unwanted situations and widespread corruption.

Existing Projects

Another factor that influences the implementation is how the ongoing projects under the PPP approach
will be integrated with the newly developed legal and institutional framework. Future management of
64 projects are being implemented under IDCOL, Investment Promotion and Financing Facility (IPFF) and

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IIFC is better to be addressed in the new PPP framework. An additional point is the policy contrast with
ADB. The question is will it be used deliberately as an alternative mechanism to ease pressure on the
ADP as an instrument to deliver energy, infrastructure, and social services.

Debt vs. Equity Contrast

In PPP financing, there is an ongoing debate about whether the method should be equity or debt based.
It is observed that the equity route has not been very successful anywhere. Equity will work only if urban
infrastructure investments can generate genuine third-party sales as in case of telecom and power.
Prospects of raising equity for city roads and waste water treatment are limited. These require long term
debt and the returns are low. Nor can one take advantage of listing the shares as the equity base is low.
The revenue comes from multiple sources like fees, taxes and so on and therefore becomes quite risky
for the investor.

On the other hand, international experience in both developed and developing countries shows that the
debt route has worked much better for city-based projects. The Government mostly relay on capital and
financial market. But these sectors didn’t demonstrate warm response.

Donor Agencies

Donor agencies give emphasis on bi lateral action plan among member countries. Bangladesh needs a
long term sustainable power and infrastructure development while they advocate to collaboration with
other countries. One of common suggestion they made is import Power from Nepal due to cheap hydro
power. But the fact is Nepal herself facing a huge problem of power generation. Recently they disclose a
mega plan where they take preparation to produce 2000mw power within next 5 years. So it’s
impossible for them to export power. These agencies are also responsible for slow rate of
implementation of PPP initiatives.

Legal Framework

The legal framework will lay down obligation to private sector partners, keep provision for cost recovery
and address the issues of compensation and redress mechanism. Action will be required to establish a
comprehensive policy and regulatory framework for competitive and transparent bidding, sharing risks
and rewards and dispute settlement mechanism.

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5. Recommendation

 Create the institutional framework.

 Formulate policy framework, incentive packages, mechanism for implementation the PPP
projects.
 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.
 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.
 Adopt measures to build trust and confidence of investors
 Create broader political consensus on needs and imperatives especially for large PPP projects
with longer implementation periods
 Adopt project implementation within a flexible framework covering BOO, BOT and BOOT as
necessary.

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6. Conclusion

A heavy reliance is placed on private-public participation by the Government and concern people. It is
intended to utilize the idle money of the private sector in big infrastructure projects. But potential
private sector partners will look for good return on their money but infrastructure projects may not
offer the best return in the short run.

International experience shows that the institutional arrangement for implementation is the key. In
developed countries, specialized PPP units to facilitate and manage infrastructure investments have
existed for years. Such units have recently begun to proliferate in the developing world. There is no
unique formula to develop a sound PPP framework. Private sponsors in PPP ventures have a natural
tendency to press for deals that effectively privatize the profits while socializing the losses. To guard
against such risks, the PPP unit needs to be staffed with technically sound and experienced negotiators.
The Government of Bangladesh will have to be extremely cautious in setting up an outfit for PPP
projects. The potential investors must not use PPP projects as a conduit to access public investment
without performing and fulfilling their obligations. While the PPP has the potential to play a pioneering
role in building country's infrastructure network, a broader partnership between the government and
the private sector in policy formulation and implementation can also help overcome slow policy
implementation. That being said, the country has still a long way to go to meet its huge infrastructure
requirements.

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Reference
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