Public and Private Financial Development Effectiveness in Bangladesh

Tuesday, 8 December 2015

Introduction :
Bangladesh has made significant economic and social advances in the last three decades or so fo its existence.  With  large population, the country has achieved a measure of food self-sufficiency; In the face of low per capita incomes and widespread illiteracy, it has made successful strides toward demographic transition and reduced its population growth rate from 2.5 percent per year in the early 1980s to less than 1.5 percent per year in 2005(Bangladesh Bureau of Statistics 2007b). In a number of other social indicators, such as infant morality, life expectancy, primary school enrollment, female enrollment in school and adult literacy, Bangladesh has made considerable improvements over the years.

The Development what it is :

According to the World Bank, as many as half of the world’s six billion inhabitants live on the equivalent of less than $2 per day, and about one-fourth of the world lives on the equivalent of less than $1.25 per day (Chen & Ravallion, 2008). Meanwhile, people in the 20 richest countries earn, on average, 39 times more than people living in the poorest 20 states (Milanovic, 2007).
At the same time, the extent of world poverty has declined significantly during recent years. For example, the World Bank estimates that from 1981-2005 the percentage of people living on less than $1 per day was halved, decreasing from 52 percent to 26 percent during this period (Chen & Ravallion, 2008).
These contrasting trends highlight both the problems and the progress associated with the process of “development.” On one hand, development has resulted in serious inequities between states, whereby large numbers of the world’s inhabitants are mired in poverty, especially in Africa, while inhabitants of the world’s richest countries live in both relative and absolute luxury. And yet, due to development trends, populations in poor countries are becoming wealthier over time—a process linked to globalization because countries in the developing world can raise their standards of living by integrating with highly developed states.
The term “development” in international parlance therefore encompasses the need and the means by which to provide better lives for people in poor countries. It includes not only economic growth, although that is crucial, but also human development—providing for health, nutrition, education, and a clean environment.

Public and private financing for development:

Public Finance for Development:
Public finance and development is to understand how a state moves from collecting a low level of public revenue of around 10% of national income towards collecting around 40%. In the process, tax bases are typically shifting from trade taxes and excises towards labor income and other broad bases, such as value added. To study this process is fundamentally a challenge of appreciating incentives and constraints. Incentives are shaped by political institutions, existing power structures, and societal demands that the state perform certain functions. Constraints are imposed by a society’s economic environment, social cleavages, and political interests. Over time, these constraints can be shifted and governments play a key role for such shifts. Governments might invest to improve the working of the economy and the efficiency of public goods provision. They may also try to create a sense of national identity and propose reforms to political institutions. Analyzing such issues requires a dynamic framework and our chapter has sketched one. We believe that the factors highlighted in this framework provide substance to Schumpeter’s insights about the centrality of taxation to understanding state development, namely:
 “The fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates, and from the use to which the results are put.” (Joseph Schumpeter, The Crisis of the Tax State, 1918)
 If developing states are to be able to support their citizens at a level now taken for granted by citizens in developed countries, this requires a series of investments, making the state more effective and responsive. Uncovering the preconditions for such investments to take place is a central task for research on public finance and development.

Private finance for development:
Achieving development goals will require the mobilization of resources from private sources, including FDI, bank loans, capital markets, and private transfers (e.g., remittances).For most developing countries, FDI is the preferred private financing modality given its potential to strengthen productivity and growth, and help diversify the economy. Although many developing economies have enjoyed increased access to international capital markets over the past decade, there is an increasing mismatch between available financing and investment needs. This is partly due to fragile market conditions in the wake of the global financial crisis, which constrain the availability of the type of long-term finance needed to support productivity-enhancing investment.
Accessing long-term finance for infrastructure is critical and will require greater attention to investment in
project preparation and policies and instruments that
can lower risk and strengthen the confidence of investors over a long-term horizon.

Innovative sources of finance:
Development partners are helping to develop new tools to help generate financing for development. The paper discusses a number of these: Pull mechanisms for development, which involve
ex-post economic incentives for innovation to solve a well-defined problem. By linking payments to the actual impact of an innovation, they can lay the foundations for a self-sustaining, competitive
market for the relevant product.
A number of African countries have adopted the resources-for-infrastructure (RfI) financing model to overcome limited capital market access and domestic capacity constraints. Under RfI, oil or mineral extraction rights are exchanged for turnkey infrastructure, complementing standard tax and royalty regimes. Diaspora resources (via diaspora bonds and remittance-backed bonds) could help finance infrastructure projects. The annual savings of developing country diasporas—US$400 billion by some estimates—represent a hitherto untapped source of financing for development.
Linking climate finance and development finance can enhance development impact by allowing the
fight against poverty to take climate effects into account and vice versa. Comprehensive carbon
pricing policies, the removal of inefficient fuel subsidies, and cap-and-trade schemes are promising 
options to mobilize larger and higher-return investments.

The role of the World Bank Group and regional development banks:

The World Bank Group and its regional counterparts can add value through a combination of technical expertise, prudent risk management policies, application of clear standards to project design, execution, and corporate governance, a long-term perspective, and cross-country experience. Multilateral development banks (MDB) can bring financing partners into specific deals, for example, in the form of syndications or through co-financing arrangements. Generally, the MDBs’ stamp of approval and role as an“ honest broker” in disputes can help to reassure investors and contribute to a project’s viability, which in turn reduces the cost of engagement, including to private investors. MDBs can also contribute to extending maturities of private flows to finance productive investments.

Public-Private Partnerships(PPP) in the People's Republic of Bangladesh :
In August 2010, the Government of Bangladesh issued the Policy and Strategy for Public Private Partnership (PPP) to facilitate the development of core sector public infrastructure and services vital for the people of Bangladesh. The PPP program is part of the Government's Vision 2021 goal to ensure a more rapid, inclusive growth trajectory, and to better meet the need for enhanced, high quality public services in a fiscally sustainable manner.

The recent socio economic success story of Bangladesh has been widely acknowledged locally and internationally. On the social front Bangladesh has made significant strides in meeting several of the UN Millennium Development Goals such as reducing income disparity ratio, attaining gender parity in education, reduction in infant mortality etc. In addition, Bangladesh has made remarkable progress in reducing the prevalence of underweight children, increasing enrolment at primary schools,lowering the maternal mortality ratio and improving immunization coverage. On the economic front it is one of the few countries to have demonstrated consistently strong GDP growth rate averaging over 6% over the last five years despite the general global slowdown. Over the same period per capita income has increased from $638 in 2009 to over $1000 in 2013. The foundation to this path of socio-economic growth, success and prosperity for Bangladesh has been set out in the Vision 2021; the Vision that sees Bangladesh progress to a middle income country by the year 2021. The strategy for implementing Vision 2021 identifies the need to increase investments in infrastructure from around 2% to 6% of GDP as one of the key requirements to achievement of the vision. Therefore, the government has identified and prioritised the Public Private Partnership (PPP) as one of the key initiatives to meet this investment priority and close the infrastructure gap. Bangladesh’s success has been built on the foundations of a very dynamic and vibrant private sector. The public sector has worked together with the private sector in different modalities in delivering infrastructure projects for nearly two decades. As such it is keen to build on this strength and forge a lasting partnership between the public and private sector for the accelerated development of our country. Through the PPP program the government intends to pursue opportunities that benefit the private sector through generating a profitable revenue stream one that delivers to its citizens much needed social and economic public infrastructure services and fulfil the commitment of government to meet its social obligations and development imperatives.
History of PPP Projects in Bangladesh A policy framework for PPPs was introduced in Bangladesh as early as the mid 1990’s with the Private Sector Power Generation Policy (PSPGP) 1996. This marked the launch of PPP projects in the power sector, with the 450MW Meghnaghat and 360MW Haripur Power Projects; two early success stories. The policy for encouraging partnerships with the private sector continued throughout the 2000’s with the introduction of PSIG 2004 (Private Sector Infrastructure Guidelines 2004). The Policy and Strategy for Public-Private Partnership (PPP), 2010 (PPP Policy 2010) has now been introduced (replacing the PSIG 2004) to update the policy framework and incorporate best international practice to further boost the use of the PPPs across multiple sectors and to provide a clear and transparent regulatory and procedural framework.


Public Private Partnerships (PPPs):  PPPs are co-operative ventures between the public and private sectors built on the expertise of each partner that best meets clearly defined public needs through appropriate allocation of resources, risks and rewards. The partnership is reinforced through legally binding arrangements, typically medium to long term, between the public and private sectors whereby services that traditionally have been provided by the public sector are delivered by the private sector, with clear agreement on shared objectives and allocation of risk for delivery of public infrastructure and/ or public services. PPPs do not include outsourcing of a simple function of a public service, turnkey construction contracts, which are categorized as public procurement projects; or the privatization of utilities where there is limited on-going role for public sector.

PPPs regulated in Bangladesh:
The Policy and Strategy for Public Private Partnership (PPP) 2010 and the Guidelines for Formulation, Appraisal and Approval of Large Projects, Medium Projects and Small Projects, 2010; all gazetted on August 2010 establish the PPP Policy Framework for Bangladesh. These documents are updated and supplemented from time to time by specific PPP guidelines providing further details (for e.g. the Guidelines for Viability Gap Financing 2012).

Sectors are covered by PPPs:

PPPs can be used for the delivery of public service projects in any social or economic infrastructure sector. Globally there are many successfully examples of PPPs in a wide range of sectors including Transport (e.g. Port, Airport, Highway, Railway, Bridge); Energy (e.g. Power Plants, Transmission Lines); Civil Accommodation (e.g. Economic Zones, Public Buildings, Convention Centers, Sports Facilities, Commercial Development, Residential Housing, Education Buildings); Health (e.g. Hospitals, Health Care, Dialysis and Diagnostics); Tourism and Hospitality; Water, Sewerage and Waste; IT infrastructure and Agriculture. In Bangladesh PPP projects have already been delivered or are being developed in many of the sectors listed above.
Benefits of PPPs:
PPP projects can deliver a solution that provides services to citizens, enables the government to meet its responsibility of provision of services while providing the requisite financial returns to the private sector. Hence well-structured PPP projects are widely acknowledged to deliver a ‘win-win solution’ that benefits all stakeholders.


Different contractual models for PPPs applied in Bangladesh:
A number of different contractual models of PPPs have been developed globally and are widely applied in projects. Each PPP model represents a different allocation of risk and responsibility between the public and private sector. These can differ in relation to size of investment by the private sector, the basis of the revenue stream, the responsibilities undertaken in relation to construction, operation, maintenance and service performance, ownership of asset and the length of the contract period. Where the public sector retains too much risk or it transfers most of it to the private sector than it falls outside the framework of a PPP. The range of contractual models that typically fall under the PPP framework is set out in the figure below. The PPP contractual model is determined on a case by case basis following the conclusion of the feasibility and market engagement study that will determine the optimum option to deliver the public sector objectives through a viable, bankable and sustainable project for the private sector.

Difference between Traditional Public Procurement and PPPs :
In traditional public procurement the focus is on the delivery of an asset, however, PPPs focus on the delivery of service outputs which require the construction, operation and on-going maintenance of assets. This conceptual difference means that the roles and responsibilities carried out by the public and private sector in traditional procurement and PPPs differ depending upon the specific contractual model that is being applied to the PPP. For example, in a BOT public sector retains responsibility for specifying the project scope, service requirements and standards. Public sector takes responsibility for providing land that is free from encumbrances and carrying out any linked projects (for e.g. relocation of utilities). Private sector takes responsibility for detailed design construction, financing, operation and maintenance of the asset. The revenue payment risk can be taken by the private sector, by the public sector or be shared between the parties.

Interested private sector investors participate in PPP projects: 
The public agency with the mandate for the PPP project has responsibility for the procurement and selection of a private sector investor. The procurement process to be used is detailed in the PPP policy framework, which mainly provides for the option of a single stage or a two stage open and competitive tender process. The two stage procurement starts with the Request for Qualification (RFQ) being issued to interested investors. An inter-ministerial committee evaluates the qualification submissions to select the pre-qualified bidders. This is followed by issuing the Request for Proposal (RFP) to the pre-qualified bidders. The same inter-ministerial committee will complete the evaluation to recommend the preferred bidder. On selection of the preferred bidder the public agency (supported by the PPP Office) will negotiate on issues specified in the RFP (if any), following which the legal vetting is completed on any non-standard contractual provisions. The public agency will seek final approval from the approving authority, before awarding the contract to the preferred bidder. In the single stage procurement the RFQ and the RFP Stage is combined into a single RFP stage; however the remaining steps remain unchanged. In both single and two stage procurement processes the public agency may issue a Request for Registration of Interest prior to the formal procurement launch. This is an optional stage designed to support the market engagement process, create awareness and help enhance the procurement documentation.
                                                 Figure:      GDP Growth of Bangladesh 2015

Effectiveness in Developping:
As development theory and empirical experience from developing countries suggest, external assistance can fill in for lacking resources by

  1. (a)    Augmenting limited domestic saving
  2. (b)   Providing the additional foreign exchange required to finance critical capital requirements and imports of raw materials and
  3. (c)    Assisting with the development of human capital and the promotin capacity.
However, as recent history indicates, frequently these potential benefits of external assistance have not been realized and instances of aid ineffectiveness appear to be as numerous as instances of aid effectiveness.
The three major contributor of Bangladesh are the World Bank, the Asian Development Bank(ADB) and the Government of Japan(GOJ).During 1971 to 2008 the country received about $48 billion of foreign aid with annual flow of aid that has ranged from about $10 billion to some $1.5 billion.

Bangladesh has made impressive improvement in the past decades or so in key social indicators such as fertility, life expectancy, school enrollment for girls and child immunization, which compare favorably with other low-income countries, including its South Asian neighbors. Bangladesh GDP growth rate 6.12 percent in 2015. Bangladesh aspires to become a middle-income country of the next decade if it can accelerate its pace growth to 7.5 percent.


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