Attracting private financing would require setting up bankable projects, which requires close coordination among developers, financiers, legal advisers, government agencies along with a conducive regulatory environment
The Covid-19 pandemic has generated much discussion on the state of healthcare infrastructure in the country. With less than 9 beds per 10,000 people and limited availability of ventilators, hospitals are ill-equipped to meet the demand for healthcare.
Both social infrastructure, such as schools and hospitals, and economic infrastructure which includes transport and energy, remain well below international standards. This is particularly problematic in the current context as shortfalls in infrastructure are associated with a higher vulnerability to biological threats.
The Global Health Security Index 2019 gives Bangladesh a rather meagre score of 16.7 out of 100 in terms of infrastructure adequacy, compared to the global average score of 49.
The World Economic Forum ranks Bangladesh 114th out of 141 countries in infrastructure, with its score deteriorating between 2018 and 2019. Businesses and foreign investors have long identified poor infrastructure as a major obstacle to foreign direct investment (FDI) and ease of doing business, and it continues to dampen the growth prospects of the country.
Infrastructure has been a central factor in the rapid economic development of various East Asian and Southeast Asian countries. This Asian experience has perhaps spurred Bangladesh into ramping up its infrastructure investment over the past decade.
The government often draws heavy criticism from civil society for undertaking mega-projects. However, the notion of investing in infrastructure to propel economic development is backed by empirical evidence.
Recent research from the Asian Infrastructure Investment Bank (AIIB) estimates that infrastructure growth in developing economies has a higher relative impact on per capita GDP growth compared to non-infrastructure capital.
The positive impacts of infrastructure are apparent – improved transport infrastructure connects individuals and communities to markets and better employment opportunities, while access to electricity not only enhances the standard of living but also raises productivity.
Unsurprisingly, the growth elasticity of infrastructure is higher in developing economies. One dollar invested in infrastructure yields a greater return to per capita GDP for developing economies relative to their developed counterparts. It thus makes sense for emerging markets to prioritise infrastructure development to reach higher growth trajectories.
The public investment in mega-projects has been one of the key factors behind Bangladesh's impressive economic growth for much of the last decade. Infrastructure investment as a share of GDP stood at 6.2 percent in 2017, which was slightly higher than that of India but well below the investment levels prevalent in Vietnam and China – two countries that have aggressively invested on infrastructure for great results.
The global average for infrastructure investment is around 5 percent of GDP, suggesting the need for aspiring economies to invest around 6 percent to 10 percent of GDP to address their existing infrastructure gaps.
Bangladesh has been aspiring for a double-digit growth in the coming years, and although growth projections need to be revised down to more realistic figures of around 7 percent given the COVID-19 pandemic, enhanced infrastructure investments would be crucial in resuming the growth momentum.
However, it is important to note that infrastructure investment in Bangladesh is largely financed by long-term loans from multilateral and bilateral development partners. Many of these loans have been concessional until now, but with per capita income rising and the prospective graduation from the least developed country (LDC) category, many development partners including the World Bank and JICA have already started to raise interest rates and reduce the repayment periods.
Aspirations for higher levels of infrastructure investment would require leveraging private sector financing, something that has been hard to come by so far. The domestic banking sector remains embroiled in the quagmire of non-performing loans and governance issues.
The pandemic will worsen the liquidity crunch, rendering the banking sector unable and unwilling to take the risk on long-term infrastructure projects. High-cost bank loans are also not conducive to project finance, and until the banking sector is ready to roll out suitable financing options, private sector financing would have to come from foreign banks or export credit agencies, development finance institutions and private-sector arms of development partners.
In recent years, the power sector has particularly witnessed some encouraging developments regarding foreign private sector financing. One project that stands out is the Sirajganj 414 MW combined cycle power plant, also referred to as Sirajganj-4, which began commercial operations in April 2019 through a public-private joint venture. Valued at $412 million, it represents the largest FDI towards power generation in Bangladesh.
The way the project finance has been structured, involving international syndicated loans and guarantees from development finance institutions, is also a first for the country. The project has been described as the 'first international style, best practices-type project' and is a crucial reference point for future infrastructure project financing.
Another more recent development is the financial closure of Summit's Gazipur II power plant with funds from a Japanese commercial bank. This is the first time an independent power producer (IPP) has received financing from an international commercial bank.
The challenge now is to build on these 'firsts' to streamline the flow of private financing towards infrastructure development. Attracting private financing would require setting up bankable projects, which requires close coordination among developers, financiers, legal advisers, government agencies along with a conducive regulatory environment.
The good lessons from the power sector also need to be applied towards structuring project finance in other areas of infrastructure. In transport, the Dhaka Elevated Expressway project only recently reached a financial close nine years after the project agreement was signed. The delay is largely attributed to the project developer failing to secure funds amidst issues of land acquisition and resettlement. Lessons from these experiences have to be harnessed so that future projects can readily attract financing.
The growing appetite from foreign investors to tap into the local market remains underutilised due to infrastructural constraints. Infrastructure investment continues to be largely financed by the government, and the government alone would not be able to meet the estimated $320 billion required between 2016 and 2030 to meet the country's infrastructure needs.
There is thus no other option but to stimulate private infrastructure financing. Global consulting firms often refer to Bangladesh's impressive economic growth despite a lack of reliable infrastructure. Imagine the growth levels that could be reached through a shift in infrastructure development characterized by increased private sector financing.
The author is a development professional and researcher. He can be reached at [email protected].