Bangladesh Institute of Bank Management

Mirpur-2, Dhaka

Certified Expert in Credit Management (CECM)

(10th Intake_2nd Batch: Online Module)

Assignment-III
Infrastructure Project Financing by Banks: Necessity
and Right Approach to Follow

Name of Participant : Mithun Chowdhury

Participant’s Serial No. : 25

Participant’s ID No. :
Name of Affiliated Institute : The Premier Bank Limited
Cell Phone Number : 01739342797
Email Address : mithun.barrett200@gmail.com

Date of Submission: September 28, 2022

 Introduction

Infrastructure Project Financing means the incurrence of indebtedness relating to the exploration,
development, expansion, renovation, upgrade or other modification or construction of
infrastructure like road, power, telecom etc. pursuant to which the providers of such indebtedness
or any trustee or other intermediary on their behalf or beneficiaries designated by any such
provider, trustee or other intermediary are granted security over one or more qualifying assets
relating to such project for repayment of principal, premium and interest or any other amount in
respect of such indebtedness. Bangladesh has goal of having the status of middle-income country
by 2024 & developed country by 2041. Developing countries like Bangladesh needs investment
in infrastructures like power sectors, transportation sectors, telecom sectors etc. to continue with
the rapid growth it achieves in 21st century. Infrastructures like road, bridge, telecom, power,
railways play major role & have influence on countries economic health in long term. This
infrastructure projects needs large amount of investment. Bangladesh Government and
multilateral/bilateral development financial institutions like World Bank, ADB & joint venture
with other countries through the financial institution of that country usually funded the
infrastructure projects in Bangladesh, on the contrary only 2.6% of financing on infrastructure
has contributed by the Banking sector of Bangladesh and as per tradition in Bangladesh, banking
sector is used to & prefer structures of corporate financing while investing on infrastructure
project as collateral security and corporate guarantee are readily available. But the role of
banking sector may influence and plays crucial part to accelerate the development process if they
have more participation in financing on infrastructure development. The concept of project
financing was first introduced in Bangladesh during 1970s and impact has been observed during
mid 90’s when Private Sector Power Generation Policy was enacted in 1996, later “The policy
and Strategy for Public-Private Partnership in 2010 and enact of PPP Law in 2015 which
replaces the other policy.
Banks have a major obstacle while financing on projects due to the exposure limit of single
borrower is 15 % of the capital of the banks set by the Bangladesh Bank. Commercial banks
operated in Bangladesh also face difficulties while lending on infrastructure projects to match
their sources of fund with lending and to ease the bottlenecks, banks need some policy/regulatory
supports in separate classification/provision criteria, special incentives etc. I have discussed
below the necessity and right approach of infrastructure project finance.
Project Financing: Project financing is the funding (financing) of long-term infrastructure,
industrial projects and public services using a non-recourse or limited recourse financial
structure. The debt and equity used to finance the project are paid back from the cash flow
generated by the project. It is a loan structure that relies primarily on the project’s cash flow for
repayment, with the project’s assets. Rights and interests held as secondary collateral.

Structure of Project Finance:

Table 1: Typical Structure of Project Finance: Parties and Agreements

Special Purpose Vehicle: It is as separate legal entity floated by the sponsors of the project. The
project finance obtained is directed exclusively only towards this SPV. The SPV acts as a
corporate veil between the lenders and the parent company preventing seepage of credit and
attachment of property between the two parties.
Shareholders/Sponsors: The project financing sponsors or developers are the groups that
coordinate and usually control the other groups and make an equity investment in a corporation
or other organization that owns the project.
Debt Financiers: Lender is often a finance company or group of financial institutions.
Suppliers: This party signs long-term arrangement with the project company to provide
(electricity, raw materials, etc.) to the project like the feedstock supplier will provide energy.
Purchasers: Purchasers are bound via an off-take agreement to mandatorily purchase a certain
minimum quantity produce from the selling party.
Contractor: Contractors are necessary for executing a contract. They are key suppliers &
perform crucial functions such as design and build, operations and maintenance, etc.
Operator: SPV appoints an efficient and reputed operator having proven track record through
(O &M) contract for agreed upon remuneration.

Project Finance Models

Public Private Partnership (PPP) Models: PPP enable the government to supply additional
infrastructure at a lower initial cost by signing contracting agreements with the private parties. 
PPPs have a history of being delivered on time and within budget. At the same time, the long-
term operating life of the infrastructure assets can allow the government to sign long-term
operating and maintenance agreements with the private sector.  This enables the private parties to
earn their return over a longer period, which should theoretically reduce costs.  PPPs aim to
increase service delivery by allowing the private party to take on risk and management
responsibility, often with the private party’s revenue stream being linked to performance. 
Sometimes in a PPP, the government or the public party will share part of the revenue with the
private party to align incentives, all in a bid to develop large public infrastructure utilizing
private funding. Some of the models of PPP are Lease-Build Operate, Design-Build-Operate
(DBO), Build-Transfer-Operate (BTO), Build-Operate-Transfer (BOT), Build-Own-Operate-
Transfer (BOOT), Built-Own-Operate (BOO), Buy-Build-Operate (BBO), Wraparound Addition
(WA), Rehabilitate Operate Transfer (ROT) etc.
Methods of Sourcing Finance: Take-Out Finance, Bond Finance, Securitization, Viability Gap
Funding (VGF), Infrastructure SPV.

Principle advantages and disadvantages of Project financing

Advantages: The typical project financing involves a loan to enable the sponsor to construct a
project where the loan is completely ‘non-recourse’ to the sponsor. The sponsor has no
obligation to make payments on the project loan if revenues generated by the project is
insufficient to cover the principal and interest payments on the loan. In a project financing, the
sponsor typically seeks to finance the cost of development and construction of the project on a
highly leveraged basis. Frequently, such costs are financed using 80 to 100 percent debt. High
leverage in a non-recourse project financing permits a sponsor to put less in funds at risk, permits
a sponsor to finance the project without diluting its equity investment in the project and, in
certain circumstances, also may permit reductions in the cost of capital by substituting lower-
cost, tax-deductible interest for higher-cost, taxable returns on equity.
Disadvantages: Project financings are extremely complex. It may take much longer period to
structure, negotiate and document a project financing than a traditional financing, and the legal
fees and related costs associated with a project financing can be very high. Because the risks
assumed by lenders may be greater in a non-recourse project financing than in a more traditional
financing, the cost of capital may be greater than with a traditional financing.

Infrastructure Projects Financing in Bangladesh

Now a days project financing model has used in Bangladesh frequently. Infrastructure like
BIRDEM & KAFCO was the very first example of Project Financing in Bangladesh during
1970s & 1980s but the rapid financing was first seen during mid of the 1990s with the enactment
of Private Sector Power Generation Policy in 1996. Since then, significant number of power
plant are built. In this regard government formed a specialized financial institution named
Infrastructure Development Company Limited (IDCOL) in 1997.
Table 2: Infrastructure Projects Financing: Sector wise Number of Projects and Amount of
Investment (1993-2020)
Bank’s Exposure in Infrastructure Project Financing in Bangladesh: Commercial Banks &
NBFI of Bangladesh typically shows less interest to involve themselves in Infrastructure Project
Financing. Though 76.27 percentage of the respondent banks (survey conducted by BIBM) have
exposure in infrastructure projects Several foreign commercial banks, specialized banks & some
new banks have no exposure.

Project Financing Approach

For countries like Bangladesh project financing approaches are more suitable for infrastructure
financing as the strength of financial, technical, management and other relevant aspects of the
concerned project are being considered as the precondition. It can pay of its debt obligation with
the own cash flow comfortably and lenders too have control over the free cash flow. Some issues
are required to be contemplated by the stakeholders to make the project financing approach more
acceptable and workable.
Certainty of Revenue Stream: After the starting of operations, it must be ensured that the
actual revenue has exactly match with the revenue forecasted to lenders & investors.
Sources of Local Finance: Public and private equity, government grants and debt finances in the
form of commercial loans, bridge loan, bonds, debentures and subordinate loans are the
dominant sources of finance in projects.
Bank’s Finance: Banks have lack of comfort in case of financing in long term project with long
term moratorium period. In this case, two options can work. First, bank can generate long-term
funds for financing infrastructure projects through issuing longer term bonds targeting public or /
and private placement market or, banks can finance for short tenure covering construction period
plus a few more years and sponsors or SPV of the project can repay the money to banks through
issuing bonds after starting business operations when project is completed. Additionally, banks
might be allowed to get some advantages in classification and provisioning norms in case of
infrastructure financing.
Vibrant Capital Market and Other Potential Avenues : In project financing it is necessary to
have vibrant capital market with equity, quasi equity and bond instruments. Pension funds and
provident funds of government and private enterprises, premium of insurance companies to
invest in bond market is necessary
Foreign Currency Loans: Loans in foreign currency may required for project financing. Issuing
sovereign bonds or having external credit line from financial institutions like ADB, OPEC funds,
ECA back funds, DEG, FMO, CDC etc. may helpful.
Dearth of Skilled Manpower: Financial institutions should create a group of skilled & capable
manpower by different types of training, workshop, seminars arranged by BIBM in association with
Bangladesh Bank, BIDA & World Bank.
Claim on Assets of Project: Banks should have control on the cash flows of the project to ensure the
repayment of their loans before allocation of fund to sponsors.
Claim on Assets of Project: Bank must ensure complete control on all assets of the project by
create comprehensive floating and fixed charges. Restrictive covenants may also be applied.
Rules and Regulations: Project should have required approvals from the government and local
authorities, bank must ensure that. Banks too will ensure that no alteration on project has made
without the consent of bank
Financial and Fiscal Support, Incentives and Guarantees : Government can support projects
by creating project development funds, viability gap funding and guarantee funds, providing
long-term funding support and offering fiscal incentives.