Earlier in the year, the Planning Minister Mustafa Kamal in a moment of, rhetorical flourish, questioned whether Finance Minister Muhith’s efforts to deliver infrastructure projects through publicprivate partnerships, or PPPs, were a cow or a goat. Bangladeshi political rhetoric can be funny at times, but also misleading. On this occasion, Minister Kamal’s rhetorical barb may have completely missed the mark.
The PPP Office, which is tasked with delivering PPP projects, is housed under the prime minister’s office (PMO). So logically, not all of the blame for failing to deliver PPP projects falls on the finance minister or his Ministry.
The planning minister may have inadvertently fired his rhetorical guns at the prime minister, while aiming for the finance minister. But his comment does raise a critical question.
Who is in charge of delivering PPPs? Who is the cowboy in the cabinet guiding that herd of cattle you would otherwise call a PPP project pipeline?
And it is a big pipeline too, with more than 30 projects worth between $12-13bn.
The PPP Office was established under the PMO in 2010 to ensure that the bully pulpit of the PMO could be effectively leveraged to get projects moving through the bureaucracy. But a skilled leadership team needed at the PPP Office to vet projects and facilitate coordination between different ministries was not put in place until 2012.
In Bangladesh, bureaucrats are oddly bureaucratic about strengthening the bureaucracy, especially when headhunting for specialist roles. It is hardly a surprise that it took two years to hire the right team for the PPP Office. And even then, questions can be asked about whether the PPP Office has the resources it needs at its disposal.
Fast forward to the end of 2014 and it would appear that the PPP Office has finally turned a corner. The government is gearing up to sign its first PPP contract with a private sector company to establish kidney dialysis centres at the National Institute of Kidney Diseases and Urology (in Dhaka) and the Chittagong Medical College Hospital.
The government’s decision to deliver health-related social infrastructure as its first PPP project is a curious one. Social infrastructure PPP projects can be quite complex and sophisticated, or at least that has been the experience in developed economies.
But in the Bangladeshi experience the opposite may be true. A social infrastructure PPP project is probably easier because of what it does not require–land acquisition.
Land acquisition in Bangladesh can only be described as, in the words of Winston Churchill: a riddle, wrapped in a mystery, inside an enigma. Acquiring land to build a bridge or a road requires coordination between the ministries of planning, land, transport, LGRD and environment, to name just a few. Whole of government coordination between different ministries can be hard enough as it is, but when it involves one ministry transferring public land to another, or a ministry having to buy privately-held land, the process can be shockingly complex.
In comparison, contracting a private sector operator to set up and run a kidney dialysis centre within a public hospital is probably a much simpler process. Moreover, the government has long been accustomed to relying on private stakeholders to successfully deliver social services.
If you think about Bangladesh’s major developmental gains in family planning, microcredit, lowering maternal and child mortality rates, or promoting gender equality in primary education, private NGOs have been intrinsically involved in delivering services that made those gains possible. The same cannot be said about private sector involvement in delivering physical infrastructure.
It may have taken five years for the PPP Office to deliver its first project, but it showed good judgement in picking a health project to get off the mark and put a run on the board. Perhaps the planning minister should take a second look and reconsider his views on PPPs.
More importantly, the minister should ask–can we build physical infrastructure through PPPs? The answer is yes, and the process is already underway with a number of physical infrastructure projects in the PPP pipeline.
Notwithstanding process-related delays around land acquisition or tendering, it will be genuinely harder for us to deliver physical infrastructure PPPs unless we accept a fundamental truth about infrastructure.
Good, nation-building infrastructure is valuable, but not cheap.
You cannot build valuable infrastructure by just relying on concessional loans from donors at low interest rates. Good infrastructure costs money, and it is the government’s responsibility to undertake proper cost-benefit analysis to determine projects that are truly beneficial and add value-for-money.
International investors will want to know the risk of doing business with the Bangladesh government before it decides to put its money into Bangladesh. Issuing sovereign bonds has its downsides, but the price signals it sends to international investors on sovereign risk far outweigh the costs.
There is however more to attracting private sector financing for infrastructure than just rolling out the red carpet for international investors. Most of the funds we need for infrastructure investment will have to come from Bangladeshi private investors, not foreigners.
That is a second fundamental truth the government has to accept.
By not choosing to source some of the funds for the Padma Bridge from local investors, the government has missed a golden opportunity to establish an infrastructure financing market in Bangladesh.
Make no mistake, the Padma Bridge will be financed locally, but in the worst possible way.
It will be financed through the budget, with budget deficits covered through bank borrowing. It is akin to the government asking the Bangladesh Bank to hold a gun to the heads of banks and forcing them to buy government bonds. That is traditionally how the government has financed its Annual Development Budget.
Interestingly, the World Bank is reportedly going to restart lending money to the government for budgetary support, after a five-year break in its budgetary support program for Bangladesh. This new World Bank program, if initiated, will effectively become a back-door, indirect channel for partially financing the Padma Bridge.
So maybe the banks won’t be extorted afterall!
A better alternative would have been for the government to issue infrastructure bonds in the local market and allowing those bonds to be traded publicly.
It would have given small, retail investors greater investment choice in terms of whether to invest in shares in the stock market or in bonds on a secondary bond market. It would have provided greater investment choice for institutional investors, such as banks, sitting on large sums of cash with nowhere to invest, even as the investment environment has improved since last year’s political turmoil.
That last point may sound like a contradiction to what I said earlier about extorting banks, but it is not. It is tempting to think that it is not unreasonable for the government to shake down the banks for a bit of money when there is so much excess liquidity in the banking system. But that is a false choice.
A market-based financing mechanism where retail and institutional investors have greater investment choice, and where the lending instruments are priced properly based on investor perceptions of market risk and return, is a fundamental necessity for developing a vibrant and liquid infrastructure financing market.
You can’t do PPPs without an infrastructure financing market. It just doesn’t work!
The government’s decision to source Padma Bridge funds locally was a monumental one. Even if this bridge is indirectly financed by the World Bank, the die has been cast for this project from a political economy perspective. As far as popular opinion is concerned, this is a project where the government decided to goit-alone. And if the project is successfully delivered, the boost it will give to our national psyche will be invaluable.
How after making that hard-nosed political judgement the government screwed up the relatively easier financing policy decision is bemusing, to say the least. It is hard to say whether this was an error of omission or commission by the finance minister and his ministry, but it points to our biggest policy governance deficit.
The role of a modern ministry of finance (MoF) is to do more than just manage the budget or make fiscal policy. As a central policy agency, a modern MoF has to be at the forefront of driving policy and regulatory reforms for not only supporting economic growth, but to also promote productivity gains. Our finance ministry has to see its job as being a crusader for reforms.
Some of the lowest-hanging fruit we can pick to lift productivity lies in reforming our malfunctioning and inefficient financial system. And yet, nowhere has the finance ministry been more obstructive and timid in its approach than on the subject of financial sector policy reforms.
This unwillingness to push for reforms is most glaring on the subject of corporate governance failures and corruption in state-owned banks. The finance minister is on record as saying that politicisation of bank boards has led to banking scams. Yet, MoF has repeatedly resisted efforts to empower the Bangladesh Bank to supervise and regulate the boards of state-owned banks, like they would private sector banks.
Surprisingly enough, the boldest policy reform idea to resolve problems in the banking sector came from the most unlikeliest source – the parliamentary committee on finance in the last Parliament. In a report published last year the Committee recommended that the state-owned banks should be merged into one (bad) bank and gradually spun-off and privatised.
This idea of creating a “bad” bank and slowly disposing off its troubled assets has a proven track record. This formula has been successfully applied in many other economies to resolve banking crises. Most notably, the UK government is following a similar rule book after taking over the failing Royal Bank of Scotland (RBS) during the global financial crisis.
Before the global financial crisis, RBS was the second-largest bank in the UK and the fifth largest in the world. RBS’ systemic importance to the UK economy is similar to Sonali Bank’s importance to the Bangladeshi economy, and the UK government’s handling of RBS is a case study on what the Bangladeshi government needs to do to fix problems in its stateowned banking sector.
It is obvious that the last parliamentary committee on finance had done its homework on banking crises. Interestingly, the Committee was then-chaired by the current planning minister, Mustafa Kamal.
Minister Kamal has continued advocating for this “bad bank” policy position, with news outlets reporting his robust exchanges with the Finance Minister in government policy meetings arguing for reforms and privatisation of stateowned banks.
In the world of Bangladeshi politics as we know it, it is not hard to imagine that many would see the Planning Minister’s policy position as an example of self-interested crony capitalism, given his business background.
May be there is a grain of truth to it, maybe there isn’t; either way, it would be hard to prove. But I would venture a guess and say that if the planning minister was asked about what motivates his policy position, he would be the first to say that he relies on his business instincts and experience.
And what is so wrong about that! If anything, we should celebrate a policymaker drawing on his or her business insights to push for government policy reforms.
The planning minister’s articulation may leave a lot to be desired, he may not have a coherent technical understanding of PPPs, as the Finance Minister claims. But between his business instincts and his call for reforms, I think the planning minister has a better grasp of the kind of ‘public private partnership’ we need in our policymaking than Finance Minister Muhith with his byzantine policy positions and reform obstructionism.
Perhaps the planning minister should be the cowboy.
