Report No. PIC5480 Project Name Bangladesh-Private Sector ... Infrastructure Development Project Region South Asia Sector Private Sector Development Project ID BDPE44789 Borrower Government Of Bangladesh Implementing Agencies For Project Financing - Infrastructure Development Company Limited (IDCOL) For Project Development & Facilitation Infrastructure Investment Facilitation Center (IIFC) Addresses: Chief Executive Officer, IDCOL Regd. Office - c\o Juris Counsel 9, Mohakali CA (9th floor) Dhaka 1212 (Ph: 8802 871960; Fax:8802 872871) IIFC (to be established) Contact: Mr. C.M.Mohsin Additional Secretary, ERD Government of Bangladesh Dhaka. (Ph: 8802 811971; Fax: 8802 811660) Project Appraisal June 1997 (Completed) Project Board Date October 9, 1997 (Proposed) BACKGROUND 1. Bangladesh has one of the lowest infrastructure indicators in the world, such as 14 percent of households having access to power and only 16 kilometers of paved roads per 100 square kilometers of land. Besides depriving a large part of the country's population access to basic services, poor infrastructure stifles economic output, makes exports less competitive and domestic production expensive. It is estimated that sustaining reasonable economic growth requires gross investment of nearly 20 percent of GDP per annum, of which the historical average is 25 percent in energy and infrastructure. Against the US$ 1.75 billion per annum of investment that this share implies, present Annual Development Plan (ADP) allocations, not actual expenditures, for the energy and infrastructure sectors are nearly half. Against the backdrop of the declining trend in availability of donor fund flows, this creates a compelling scenario for the Government of Bangladesh (GOB) to maximize other non-donor and commercial sources of capital funding. However, in view of the constraints imposed by the limited capacity of domestic capital markets, poor state of infrastructure utilities, an ill-defined policy, legal and regulatory framework, and the chronic sickness of the financial sector, it is a formidable challenge to target private investment for infrastructure development. A beginning can be made by promoting initiatives that address these constraints and infuse some confidence in the private sector to view the country's investment potential more favorably. OBJECTIVES 2. Against this background, the Private sector Infrastructure Development Project (PSIDP) seeks to promote the development of a modern and efficient infrastructure system in Bangladesh, with the significant participation of the private sector in the financing, construction and operation of infrastructure facilities. This broad objective translates into the following specific goals: (i) promoting development and facilitating implementation of privately sponsored infrastructure projects, (ii) providing mechanisms for mobilizing commercial equity and debt financing for infrastructure projects, and (iii) creating an appropriate framework for the sustained and efficient operation of private infrastructure projects. PROJECT DESCRIPTION 3. The PSIDP will establish a Private Sector Infrastructure Development Fund (PSIDF) to provide limited long term debt financing to selected energy and infrastructure sub-projects. Technical assistance will be made available to GOB for transaction development and facilitation, capacity building, institutional development and for conducting feasibility studies, sub-project procurement and undertake sectoral reform initiatives. The IDCOL and the IIFC will be the institutional windows for implementing these components respectively. PSIDP assistance will cover power generation and transmission, gas and gas related infrastructure, toll roads, water supply, urban environmental services, ports, telecommunications, and other basic infrastructure. Components (US$M) Project Finance Lending - provision 225.00 of long-term subordinated debt for sub-projects. Technical Assistance - for institutional 21.00 development, advisory services, strengthening GOB capacity, sub-project development and promotion. (includes cofinancing from CIDA and DfID-UK) Total 246.00 PROJECT BENEFITS AND RISKS 4. The key benefits are an increased flow of foreign investment, reduced need for public investment for infrastructure development, increased efficiency in the construction and operation of - 2 - infrastructure, enhanced Government capacity to tackle policy, regulatory and project related issues and significant employment generation. Besides, the project will contribute to addition of at least 800 MW of thermal power generation capacity in the private sector, development of private port facility, faster development of toll roads and water supply facilities. 5. The principal risks are maintaining a high degree of GOB commitment to project goals, ability to overcome resistance from entrenched interests against private sector role in infrastructure and the sustained, efficient operation of new institutions being set up for the project. The response of the private sector has so far been very positive, but this would change adversely if macroeconomic or political stability of Bangladesh is eroded. These risks are to be mitigated through the strong policy and sector development work in the project, emphasis on maintaining a high degree of Government commitment. Furthermore, since the project promotes creation of new assets, it would take a gradualist approach to private sector participation in different infrastructure activities. IMPLEMENTATION 6. The project financing would be administered by IDCOL as an agent on behalf of GOB. It will primarily on-lend the IDA credit with certain limits and stipulations as defined below, to eligible, privately sponsored infrastructure sub-projects. For the purpose of conducting its project finance business, IDCOL will contract the services of an internationally reputed firm or consortium to provide all types of advisory services. Since the objective of the project is to maximize project financing from commercial market sources, terms of IDCOL lending have been determined appropriately. Also, IDCOL will keep its debt in potential sub-projects to a minimum and would operate on an absolute ceiling of 40 percent of total project cost (including financing costs). Loans shall carry maturities of upto 23 years and a maximum grace period of 8 years. Interest on the loan would either be on a variable basis (6 month US$ LIBOR plus a premium of 350 basis points) or a fixed basis (US$ fixed to variable swap rate for the appropriate maturity and a premium of 350 basis points). These are starting terms and are subject to periodic review. Furthermore, terms would be determined on a case by case basis, taking into account the risk factors and the potential for market financing. On the project development side, the IIFC as an agency of the Government, will establish an appropriate interface for private and public sector to forge partnerships and enable development of sectoral frameworks and transactions. It will be a reservoir of expertise available to GOB line agencies for development, marketing and contracting of viable projects for private sector participation. SUSTAINABILITY 7. The efficient operation of the project will be ensured by adequate supervision, advice and support, in the form of professional experts made available through TA resources. The basic -3 - idea is to promote a few key transactions covering all infrastructure sectors over the next 5-6 years, so that these serve as vehicles to establish the appropriate framework in each sector for sustained development and operation of future projects. The provision of long term debt is also intended to cater to present market constraints, leading to the ultimate objective of developing a framework whereby private financing would be available without the additional comfort of World Bank or GOB support. LESSONS LEARNED 8. Similar operations in Asia, notably in Pakistan and India, have been successful in leveraging substantial non-government guaranteed funding for infrastructure development. Best practice lessons from these projects have been applied, as well as certain weaknesses in these operations have been avoided, especially on the institutional side. Care has been taken to base the project on a realistic pipeline of sub-projects. The project has taken into account the presence of visible government commitment, manifest in its up-front policy and transaction work in the energy sector. ENVIRONMENTAL AND SOCIAL ASPECTS 9. Since the project will support large infrastructure projects, it has been rated Environmental Category A. Since the final sub- projects are not known at this stage, a clear framework for addressing all environment and social aspects likely to arise under the project has been prepared. The project has set a new standard by preparing a comprehensive environment and social assessment framework for potential sub-projects. GOB prepared the Environment and Social Framework document (ESF) by engaging the services of a leading NGO in Bangladesh. Following satisfactory consultations with other NGOs in Bangladesh, the ESF has been approved by the Bank and made available at the PIC. All sub-projects to be developed and financed under this project have to conform to the ESF guidelines. PROGRAM OBJECTIVE CATEGORIES The project will increase the general access to more adequate and efficient infrastructure services. It will therefore have some poverty alleviation impact by accelerating economic growth and providing better services to improve the quality of life. It will also promote private sector development and environmentally sustainable infrastructure development in the country. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 - 4- Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending August 15, 1997. - 5-