Playing a pro-active role in the development of a bond market in Bangladesh
GuarantCo, a Private Infrastructure Development Group (PIDG) company, launched the findings of its Study of Bangladesh Bond Market (the Bond Study) at the Local Capital Market Infrastructure Financing Conference, co-hosted with the Dhaka Chamber of Commerce & Industry (DCCI), on 29th April 2019. The Conference was attended by Mr. AHM Mustafa Kamal, FCA, MP, Honourable Minister, Ministry of Finance, Government of Bangladesh and Mr. Salman F. Rahman, MP, Honourable Private Industry and Investment Adviser to the Prime Minister.
Bangladesh needs investment in excess of USD 600 billion from 2016 to 2040 in infrastructure sectors such as water, energy, telecoms, ports, airports, rail and road. However, current trends indicate that Bangladesh will only be able to meet around USD 400 billion investment in the infrastructure sectors thereby leaving a gap of at least USD 200 billion from 2016 to 2040 between required and current trend of infrastructure investment. The sectors which have biggest gaps are power followed by telecoms and water supply.
The Bond Study, funded by the Technical Assistance Facility, another PIDG company, was commissioned by GuarantCo to assess the challenges relating to an active bond market for infrastructure projects and to identify possible interventions that will enable the development of a vibrant bond market in Bangladesh.
The findings of the Bond Study will support stakeholders to focus their efforts on the developing debt capital as an effective source of financing infrastructure projects through a mix of measures including policy changes, awareness generation and introduction of financial products to mitigate potential risk for investors. In addition, a novel approach to financing infrastructure projects for Bangladesh will be to utilise Islamic finance instruments such as Sukuk bonds or using the Zakat fund for development of infrastructure in the country. Amidst the shortage of traditional financing for infrastructure projects in a country like Bangladesh, Islamic finance widens the avenues of sources of funds.
Interviews were conducted with representatives from private sector banks, non-bank financial institutions (NBFIs), asset managers, private equity funds, various regulatory institutions, government policy makers, industrialists, business executives and project developers.
The key issues that were highlighted were supply side constraints including in-market liquidity crunch, yields on government saving schemes and securities, along with banks and NBFIs facing challenges in maintaining depository ratios and difficulty in pooling funds. There is also a lack of availability of funds for the longer term which is not helped because of poor credit appraisal, preference for lending to operational assets and preference for shorter lending tenors (three to five years). Finally, multiple guarantees need to be sought to secure funding whilst time required to raise funds via the bond market is long.
Recommendations made in the Bond Study included awareness programmes, such as the Local Capital Market Infrastructure Financing Conference and workshops, for investors, regulatory institutions and issuers, reduction in transaction costs of bond issuances, financial and tax incentives for both issuers and investors, policies to attract non-resident Bangladeshi investments into the bond market and issue of corporate or project bonds that are well structured and marketed. Sustained efforts and involvement from multiple stakeholders are also required including design and implementation of benchmark indices, and promotion of secondary market, initiatives to strengthen the issuer base, course correction of interest rates/yields on government securities and savings scheme and policies to attract global pension funds, mutual and provident funds to invest in Bangladesh infrastructure space and introduction of regulations and policies for credit guarantee products.
Andrew Bainbridge, Chair of The Private Infrastructure Development Group, said: “Capital markets, especially bond markets, have been the dominant source of finance for infrastructure projects in mature and developed markets. With GuarantCo’s, a PIDG company, credit guarantee solutions, I hope that we will soon see pathfinder work in developing Bangladesh’s bond market as an important source of funding for infrastructure projects.”
Lasitha Perera, CEO of GuarantCo, said: “For a country to benefit from affordable and sustainable infrastructure it follows that the ability to finance that infrastructure in an affordable and sustainable way is also required. What we have learned over the past decade supporting the development of frontier capital markets is the necessity for “crowding in” domestic institutional capital, from investors such a pension and insurance funds, to provide long-term stable financing for the critical infrastructure necessary to enable a country’s development. This Bond Study is a key first step in a journey which we hope will see GuarantCo partnering with Bangladesh’s policy makers, regulatory institutions, financiers and sponsors to unlock the potential of the country’s capital markets to finance the infrastructure needed to enable its future growth and prosperity.”
Osama Taseer, President of Dhaka Chamber of Commerce & Industry (DCCI), said: “Capital market comprising both equity and debt instruments has huge potential to mobilise required long-term investments. However, the capital market in Bangladesh is underdeveloped and under-utilised and hovering below 18 percent of GDP, lagging behind other Asian countries. At the same time, a bond market is almost non-existent in Bangladesh. The conference and the Bond Study findings have made a significant contribution to demonstrate how long-term infrastructure financing can be successfully established through developing the bond market in Bangladesh.”