Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No: 3423 1-BD

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

Public Disclosure Authorized IN THE AMOUNT OF SDR 34.9 MILLION ($US50 MILLION EQUIVALENT)

TO THE

PEOPLE'S REPUBLIC OF BANGLADESH FOR AN

INVESTMENT PROMOTION AND FINANCING FACILITY PROJECT

April 4, 2006 Public Disclosure Authorized

Finance and Private Sector Development South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized CURRENCY EQUIVALENTS

(Exchange Rate Effective February 28,2006)

Currency Unit = Taka Taka67.70 = US$1 US$1.43559 = SDRl

FISCAL YEAR July 1 - June 30

ABBREVIATIONS AND ACRONYMS

ADP Annual Development Plan AKFED/IPS Aga Khan Fund for Economic Development / Industrial Promotion Services BIWTA Bangladesh Inland Water Transport Authority BO1 Board of Investment BOO Build, Own, Operate BOOT Build, Own, Operate, Transfer BOT Build, Operate, Transfer BPDB Bangladesh Power Development Board BTTB Bangladesh Telegraph and Telephone Board CAS Country Assistance Strategy CCEA Cabinet Committee on Economic Affairs CIDA Canadian International Development Agency CPA Chittagong Port Authority CSE Chittagong Stock Exchange DESCO Dhaka Electricity Supply Company DFI Development Finance Institution DOE Department of Environment DSE Dhaka Stock Exchange DSK Dushtha Shasthya Kendra EIA Environmental Impact Assessment EMP Environment Management Plan ERC Energy Regulatory Commission FIDP Financial Institutions Development Project FIL Financial Intermediary Loan GDP Gross Domestic Product GOB Government of Bangladesh IBRD International Bank for Reconstruction and Development ICA Investment Climate Assessment ICB International Competitive Bidding IDA International Development Association IDCOL Infrastructure Development Company Limited IFC International Finance Corporation IIFC Infrastructure Investment Facilitation Center IPFF Investment Promotion and Financing Facility IPO Initial Public Offering IPP Independent Power Producer M&E Monitoring and Evaluation MDGs Millennium Development Goals MFA Multi-Fiber Arrangement MIGA Multilateral Investment Guaranty Agency MoU Memorandum of Understanding MW Mega Watts NBFI Non Bank Financial Institutions NCB Nationalized Commercial Bank NGO Non Governmental Organization NPL Non Performing Loan OECD Organisation for Economic Co-operation and Development p.a. per annum PFI Participating Financial Institution PICOM Private Infrastructure Committee PPA Power Purchase Agreements PPP Public-Private Partnerships PSIDP Private Sector Infrastructure Development Project PSIG Private Sector Infrastructure Guidelines RAP Resettlement Action Plan RAPSS Remote Area Power Supply Systems REB Rural Electrification Board SBD Standard Bidding Documents SDR Special Drawing Rights SEC Securities and Exchange Commission SOE State-Owned Enterprise TEU Twenty-Foot Equivalent Unit UNCTAD United Nations Conference on Trade and Development

Vice President: Praful Pate1 Country ManagedDirector: Christine Wallich Sector Director: Barbara Kafka Sector Manager Simon Bell Task Team Leader: Christopher Juan Costaiii FOR OFFICIAL USE ONLY This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

PEOPLE'S REPUBLIC OF BANGLADESH

INVESTMENT PROMOTION AND FINANCING FACILITY

PROJECT APPRAISAL DOCUMENT

SOUTH ASIA REGION

FINANCE AND PRIVATE SECTOR DEVELOPMENT UNIT

Date: April 6, 2006 Team Leader: Christopher Juan Costain Country Director: Christine I.Wallich Sectors: General finance sector (60%);General Sector ManagedDirector: Simon C. Bell energy sector (1O%);Other industry (1O%);General transportation sector (1O%);General water, sanitation and flood protection sector (10%) Themes: Infrastructure services for private sector development (P) Project ID: PO89382 Environmental screening category: Financial Intermediary Assessment Lending Instrument: Financial Intermediary Safeguard screening category: Requires Loan framework

For Loans/Credits/Others: Total Bank financing (US$m.): 50.00 Proposed terms: Financing Plan (US$m) Source I Local 1 Foreign 1 Total I BORROWEWRECIPIENT 10.00 0.00 10.00 INTERNATIONAL DEVELOPMENT 0.00 50.00 50.00 ASSOCIATION BORROWING COUNTRY'S FIN. 45.20 0.00 45.20 INTERMEDIARY/IES Total: 55.2 50.00 105.20

Borrower: People's Republic of Bangladesh

Responsible Agency: Bangladesh Bank Bangladesh Bank Head Office Motijheel C/A, Dhaka 1000 Tel: 880-2-71201 07 Fax: 880-2-9566212 FY 06 07 08 09 10 11 12 0 0 Annual 0.00 5.00 10.00 10.00 10.00 10.00 5.00 0.00 0.00 Cumulative 0.00 5.00 15.00 25.00 35.00 45.00 50.00 0.00 0.00

Expected effectiveness date: August 3 1 2006 Expected closing date: December 3 1, 20 11 loes the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Re$ PAD A.3 loes the project require any exceptions from Bank policies? Re$ PAD D. 7 3ave these been approved by Bank management? :s approval for any policy exception sought from the Board? [ ]Yes [XINO Ioes the project include any critical risks rated "substantial" or "high"? [XIYes [ ]No Ref: PAD (2.5 Does the project meet the Regional criteria for readiness for implementation? ~~~ rvlvpQLLXJ IbL1 L J iYiv Re$ PAD D. 7 Project development objective Re$ PAD B.2, Teclznical Annex 3

The proposed project will make available partial debt financing through private sector financial intermediaries for eligible, government-endorsed infrastructure projects to be developed by the private sector. Projects developed solely by the private sector but identified by Government to be in the public interests, such as captive power plants, will also be eligible for financing. The project will also seek to assist the Government of Bangladesh in facilitating new infrastructure projects with potential for private sector participation and in developing the capacity ofthe financial sector for the ongoing provision of infrastructure finance. The developmental goals of the proposed project reflect key priorities identified by the World Bank Bangladesh Country Assistance Strategy (CAS), namely (i)to accelerate private-sector led growth; (ii)to support an integrated approach to rural development; and (iii)to strengthen government and build institutions.

Project description [one-sentence summary of each component] Re$ PAD B.3.4 Teclznical Annex 4 The proposed project would consist oftwo components, a lending component and a technical assistance component.

Lending Instrument: The project will make available long term finance in Taka to qualifying financial intermediaries for onlending to eligible, government-sponsored infrastructure projects to be developed by the private sector.

Technical Assistance Component: Technical Assistance activities will include: (a) Capacity building for Bangladesh Bank for the development of infrastructure finance capacity amongst the local market participants and within Bangladesh Bank for the oversight ofthis sector (b) support for the promotion ofprivate financing ofinfrastructure within the government framework and (c) technical assistance to project promoters in the execution of environmental impact assessments.

Which safeguard policies are triggered, if any? Ref: PAD 0.6, Technical Annex 10 Environmental Assessment (OP/BP/GP 4.0 1)

Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation: None

Loadcredit effectiveness: None

Covenants applicable to project implementation: 1. For the purposes of the Project, the GOB shall, no later than the last day ofeach Fiscal Year, make available on an annual basis, from its own resources, an amount equivalent to 20 percent of the amount disbursed by IDA for each such Fiscal Year.

2. Participating FIs will submit annual audit reports to BB and IDA within four months of the end ofthe year.

BANGLADESH Bangladesh Investment Promotion and Financing Facility

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE ...... 1 1. Country and sector issues...... 1 2 . Rationale for Bank involvement...... 6 3. Higher-level objectives to which the project contributes ...... 8 B. PROJECT DESCRIPTION...... 9 1. Lending instrument ...... 9 2 . [IfApplicable] Program objective and phases ...... 9 3. Project development objective and key indicators ...... 9 4 . Project components ...... 10 5 . Lessons learned and reflected in the project design ...... 14 6 . Alternatives considered and reasons for rejection...... 15 C. IMPLEMENTATION ...... 16 1. Partnership arrangements ...... 16 2 . Institutional and implementation arrangements ...... 16 3. Monitoring and evaluation of outcomes/results ...... 24 4 . Sustainability...... 24 5 . Critical risks and possible controversial aspects ...... 24 6. Loadcredit conditions and covenants...... 28 D. APPRAISAL SUMMARY ...... 28 1. Economic and financial analyses ...... 28 2 . Technical...... 29 3 . Fiduciary ...... 29 4 . Social ...... 29 5 . Environment ...... 30 6 . Safeguard policies ...... 30 7 . Policy exceptions and readiness ...... 31 Annex 1: Country and Sector or Program Background...... 32 Annex 2: Major Related Projects Financed by the Bank and other Agencies ...... 41 Annex 3: Results Framework and Monitoring ...... 44 Annex 4: Detailed Project Description...... 47 Annex 5: Project Costs ...... 56 Annex 6: Implementation Arrangements ...... 57 Annex 7: Financial Management and Disbursement Arrangements ...... 63 Annex 8: Procurement Arrangements ...... 69 Annex 9: Economic and Financial Analysis ...... 78 Annex 10: Safeguard Policy Issues ...... 86 Annex 11: Project Preparation and Supervision ...... 90 Annex 12: Documents in the Project File ...... 91 Annex 13: Statement of Loans and Credits ...... 93 Annex 14: Country at a Glance ...... 95 Annex 15: Map (IBRD 33368) ...... 97 A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

The 2003 Investment Climate Assessment (ICA) conducted in Bangladesh by the World Bank identified lack of access to finance, cost of finance, and poor infrastructure as being three of the primary obstacles to private sector development in Bangladesh. The proposed project seeks to address these major hurdles by providing financial support from the International Development Association (IDA), the private sector, the Government of Bangladesh (GOB), and potentially the International Finance Corporation (IFC) and other lenders and development partners. The project also seeks to provide technical assistance to support the governmental process in developing public-private partnerships (PPPs). The development goals of the proposed project also reflect key priorities identified by the World Bank Bangladesh Country Assistance Strategy (CAS), namely to accelerate private sector-led growth, to support an integrated approach to rural development, and to strengthen government and build institutions.

1.1. Weak financial sector The 2003 Financial Sector Assessment of Bangladesh has highlighted the constraint to growth represented by Bangladesh’s financial markets, particularly the extent to which the modest financial markets are dominated by, and dependent upon, the relatively underdeveloped banking system (tables 1 & 4). At year end 2004, banking system assets reached about Taka 2.1 trillion (US$3 1.9 billion), or 63 percent of gross domestic product (GDP). Nationalized commercial banks (NCBs) and specialized development banks held 50 percent of the system’s assets, national private banks held 41 percent, and foreign banks held the remaining 9 percent. Lending is primarily short term and is constrained by short-term deposit mobilization. Only about 20 percent of deposits have maturities of 1 year or longer. Given their reliance on short-term deposits, banks are constrained in their ability to become involved in long-term finance. Lending rates are high as a result of inefficient financial intermediation, a high level of nonperforming loans, weak governance, and a legal and judicial framework not conducive to debt recovery. In addition, National Savings Certificates offer an artificially high interest rate and drive up funding costs.

Capital markets in Bangladesh are similarly undeveloped and cannot effectively meet the financing needs of the infrastructure sector. The combined market capitalization ofthe two stock exchanges, Dhaka Stock Exchange and Chittagong Exchange, reached only about 5.84 percent of GDP in 2004. The Government of Bangladesh has recently undertaken a series of measures to address the shortcomings in the financial sector. Supported by the World Bank, the Government has initiated a process to restructure and ultimately privatize the four major NCBs and to improve standards of governance and operations within the private banking sector. The Government has also undertaken a major initiative to improve the oversight and market operations ofthe Bangladesh Bank and the SEC. These initiatives have yielded significant results in the governance and competitiveness of the banking sector (where the private banks’ share of deposits has risen to 52 percent in 2004 from 41 percent in 2001 while the net NPL ratio for the entire sector has fallen from 16.8 percent to 9.8 percent over the same period). A secondary market for government debt is now being developed, but is still some way from resembling a vibrant market. A review has recently been initiated to explore the opportunities for reform in the

1 contractual savings sector and particularly to explore prospects for linking the National Savings Scheme with the broader financial markets. Efforts are underway to develop a corporate bond market for collateralized loan and lease obligations to be issued by banks and finance companies. However, these initiatives suffered a reversal in the summer of 2005 when the favorable tax treatment of zero coupon bonds was removed, retroactively affecting existing securitization transactions. Despite this setback, the corporate and government bond market overall has undoubtedly improved over recent years . However, the scale of local market initiatives is insufficient to meet the needs of the infrastructure sector. For instance, a bond issue of Taka 1 billion (US$15.2 million) would be large for the domestic financial market, but a single 450 MW power project requires approximately US$300 million in debt and equity financing.

The institutional investor sector, a potentially important source of demand for long-term debt, is also just beginning to develop. Insurance companies have limited market penetration. Insurance company assets represent only 1.3 percent of GDP. Private pension and provident funds, primarily sponsored by employers, also offer limited coverage, but no data are available on their size or performance because they are unregulated. State banks and public enterprises probably hold the largest pension plans. Historically, institutional investors have allocated a large share of their portfolios to the National Savings Certificates because of their high, administered interest rates. However, since mid-2002 this instrument has been restricted to individual investors, dramatically increasing potential demand for long-term investment opportunities such as those provided by infrastructure projects. Nonetheless, at present the financial markets are unable to contribute substantially to infrastructure financing except for small projects without external (or government) support.

2 Table 1 Bangladesh: Financial System Comparative Data (2004)

Bangladesh Indonesia India Nepal Pakistan Philippines Malaysia

Ratings B+ I POS; BB BB+ I STA: BB-ISTA, A-JSTA, n.a n.a n.a S&P I POS BB+ I STA BB+ISTA A+ISTA Baa3 lBa2 n.a B2 iB2 JPOS n.a B2 /B2 IPOS BllBl iNEG A3 /A3 ISTA Moody’s ISTA Banking Industry Private credit to GDP (%) 30.0 23.6 37.0 27.7 29.9 29.7 130.7 Domestic credit by banking sector 40.7 48.8 59.9 28.3 40.1 54.0 134.3 to GDP (%) M2 to GDP (%) 39.1 43.2 61.4 36.9 45.2 53.0 96.8 Liquid liability to GDP (%) 42.0 44.9 66.1 39.1 50.3 55.5 122.2 Net interest margin (%) 1.87 3.43 3.41 3.69 2.88 2.52 1.98 Overhead costs to T.A (%) 2.32 3.20 2.18 2.66 2.21 2.65 1.31 Loan-deposit ratio (%) 69.6 57.9 60.0 45.8 54.6 59.4 63.1 Capital and Insurance Markets Number of Companies listed 262 335 4,763 125 661 235 1,020 Stock market capitalization to GDP 5.8 28.4 56.1 8.6 30.2 33.5 161.3 (%I Stock market total value traded to 1.6 10.7 54.8 0.4 76.9 4.2 50.8 GDP (%) Stock market turnover ratio (%) 36.1 43.1 113.7 5.5 324.1 14.0 33.4 Life Insurance premiums to GDP 0.37 0.63 2.1 1 0.32 0.24 0.84 3.14 (%) Non-life Insurance premiums to 0.19 0.68 0.52 0.52 0.36 0.62 2.08 GDP (%) Credit information Existence of credit bureau Yes Yes Yes Yes Yes Yes Yes Rating Agency Yes Yes Yes No Yes Yes Yes Governance Index -0.96 -0.74 -0.26 -0.95 -1.03 -0.41 0.38

Sources: SIMA, Banscope, World Bank and Central Bank websites 1.2. Infrastructure deficiency as a constraint to growth

Bangladesh continues to rank amongst those countries most requiring improvement in infrastructure services. Increasing access to infrastructure services and improving their quality will be important factors in reducing poverty levels. Infrastructure services are critical to reducing poverty and achieving the Millennium Development Goals (MDGs) in Bangladesh. Erratic public sector services have imposed significant costs and hindered the growth of the country’s economy. Power shortages reduce industrial output by an estimated US$l billion per year and GDP growth by 0.5 percent per year. Congestion in the nation’s ports costs the country in forgone exports and impedes the ability of entrepreneurs to access imported inputs rapidly, Concern exists that, with the end ofthe Multi-Fiber Arrangement in December 2004, Bangladesh will be unable to maintain its market share ofgarment exports. Improving the country’s transport system, along with other actions, is essential to reducing product delivery times.

Business executives surveyed for the 2004 Global Competitiveness Report ranked Bangladesh lower for quality of infrastructure than all other developing countries in East and South Asia. Of the 102 developin and industrial countries in the sample, Bangladesh ranked 90th, (India ranked 70th, Pakistan 68‘,a and China 55th). Evidence from the World Bank’s Investment Climate Assessment suggests that access to reliable electricity was the most frequent complaint among large firms (73 percent of Bangladeshi firms identified electricity as a major or severe constraint,

3 versus 39 percent in Pakistan and 24 percent in China). Because of frequent power outages and surges, 72 percent of formal firms own a power generator, which costs 50 percent more than using grid electricity. Apparently 3.3 percent of all sales are lost as a result of power outages

Most consumers in Bangladesh receive infrastructure services from public sector entities that are inefficient, poorly managed, and largely unresponsive to their needs. The absence of good infrastructure is felt particularly by the economically disadvantaged and those in rural settings. A 2000 study, “Voices of the Poor” found that poor people in Bangladesh viewed better roads, transportation, communications, energy, water, and sanitation services to be almost as important as health and education services. National averages also mask critical differences in access to services between urban and rural areas. Although 60 percent of urban households have an electricity connection, only 22 percent of rural households do. The vast majority of rural enterprises do not have access to fixed-line phone service, with only 1.5 percent of firms reporting access to a phone. In rural areas, power outages and surges pose even more significant costs to enterprises, with only 1.8 percent of the roughly 3 million rural enterprises owning a , generator. Lack of access to electricity imposes even higher costs in rural areas, with 69 percent of enterprises reporting no access at all. Poor road conditions and lack of transportation to markets are particularly constraining for rural entrepreneurs, with 63 percent and 42 percent, respectively, of the small enterprises surveyed reporting these as a major or severe problem. According to the Investment Climate Assessment, only 19 percent of survey respondents said that transport imposed no obstacles to doing business.

1.3. Private provision of infrastructure can contribute substantially to extending infrastructure services

At present, most public sector service providers show weak financial performance and inadequate investment. In the past, Bangladesh has been able to rely to some extent on subsidized financing from multilateral and bilateral donors for the development of its national infrastructure. However, development partner initiatives with government have not always produced sustainable reforms. Private sector provision ofinfrastructure services offers numerous opportunities for innovation, customer responsiveness, and efficiency. The private sector in Bangladesh has already made important contributions in some sectors, such as telecommunications, power, and water and sanitation. In telecommunications, private cellular operators now have more subscribers than the Bangladesh Telegraph and Telephone Board (BTTB). Together, the four private companies reach about million subscribers, compared to 1 million BTTB subscribers. Innovative approaches like Grameen Telecom’s Village Phone program have made phone service available in rural areas. In the water and sanitation sector, a number of efforts have been made to extend services to areas that lack them. Examples include the long-standing, privately financed hand pump program; water vending in Dhaka; efforts by nongovernmental organizations (NGOs) such as Dushtha Shasthya Kendra (DSK) to extend formal water services to urban slum areas; and the provision of credits by microfinance institutions for the development of water systems in rural and semi-urban areas. In the power sector, independent power producers (IPPs) supply more than 25 percent of net generation. Although no detailed information is available, it is estimated that about 2 percent of the population receives its power supply from solar home systems and off-grid diesel generators.

4 Some of these private sector interventions have helped extend provision of services and have been admired in the region. However, during the next 10 years, Bangladesh will face major challenges in expanding the coverage ofkey infrastructure services as it seeks to provide modern energy, telecommunications, transportation services, and safe water. The country’s current levels of coverage are among the lowest in the South Asia region. One major challenge facing the Government ofBangladesh will be to mobilize the financial resources to undertake the necessary changes, particularly as the country faces an increasingly difficult fiscal situation and has limited tax resources. Private management and capital can substantially expand the coverage and quality of infrastructure services in Bangladesh.

Private sector interventions have helped to extend services to some populations who were not receiving coverage from the public sector. But overall, compared to several of its neighbors in South Asia, Bangladesh has been less able to attract investment in private infrastructure projects. From 1990 to 2001, the country saw considerably less investment per capita in infrastructure projects with private participation (figure 1). Recent price increases for electricity have also helped to improve slightly the financial position of the sector, but Bangladesh continues to lag behind its neighbors in South Asia in efforts to reform the infrastructure sectors (and the reform agenda in the region as a whole is seen to be vulnerable to resistance from vested interests).

Figures 1: Per Capita Investment in Infrastructure Projects with Private Participation (1990-2001)

70 60 50

30 20 10 0 Bangladesh India Pakistan Sri Lanka

Source: World Bank staff,

Current GOB support to the infrastructure sector is substantial, but much of this support effectively props up inefficient public sector service providers. On the basis ofpresent evidence, little support goes to the extension of services to the country’s poor people. Relatively little transparency exists in the financial relationship between the government and some service providers, such as Petrobangla and BTTB. These entities generate surpluses, but the surpluses go in part to pay back debt incurred by the government. Initiatives allowing for-profit private operators to compete for government funds that target expansion to new service areas, as envisaged under the proposed project, are one mechanism for addressing this deficiency.

1.4. The growing role of investment funds for infrastructure development

Investment funds have become an increasingly common vehicle for the mobilization of term finance for infrastructure projects; funds of this type now total more than US$lO billion in emerging markets and are increasingly well represented in South Asia (with local funds common

5 in India and international funds such as ActisiGlobeleq and AKFED/IPS active in Bangladesh). In developed markets, funds of this type are extremely large, and the best known promoter of infrastructure funds (Macquairie Bank of Australia) had arranged funds for around US$36 billion. This growth has been in part the result of the greater role of the private sector in the provision of infrastructure, which has increased the need for private sector finance (or, conversely, has led to a reduced role in direct government funding of projects, at least in OECD markets).

The increased prevalence of the fund approach has also been supported by the evolution of the contractual and collective investment schemes that represent substantial pools of long-term risk capital, better suited to the long-term, fixed-rate nature of infrastructure assets. Banks alone are not well suited for the purpose, given their reliance on short-term deposits and the limited capital they have to absorb risk. Even in developed markets, the ability ofbanks to finance infrastructure assets is enabled by their access to long-term debt markets. Generally, the most important contribution of banks in project finance is in the complex structuring of transactions through the construction phase and up to the commencement of operations. Banks are also well suited to manage restructurings and renegotiations when projects fall short of expectations. Infrastructure projects that are “mature” and have stabilized revenue flows typically represent sound investments, in developed markets long term investors, such as pension funds, provide term finance to banks to support infrastructure finance activities.

2. Rationale for Bank involvement

The key rationale for IDA support is founded upon the following needs:

a) Limited foreign exchange reserves. As of October 2005, Bangladesh foreign exchange reserves stood at only approximately US$2.8 billion. These reserves represented about 2.5 months of imports and, compounded by a current account deficit of around 1 percent of GDP, are inadequate in the face of Bangladesh’s foreign currency investment needs. Under its present power policy, Bangladesh plans to install around 1,000 MW of generating capacity per annum, the cost ofwhich will be in the region ofUS$600 million, at least 60 percent ofwhich will be in foreign currency.

b) Underdeveloped financial sector. Notwithstanding various initiatives undertaken by the Government of Bangladesh and the Development Partners,’ the financial sector in Bangladesh remains underdeveloped, even for projects requiring financing in Taka. As of December 2004, the assets of foreign and domestic banks totaled only Taka 1,047 billion (US$15.9 billion), while the total capital of these banks was only Taka 65 billion (US$988 million). Long-term financing needs ofinfrastructure projects are not being met by commercial banks in Bangladesh; the ability of the NCBs to provide credit is constrained under the terms of their Memorandum of Understanding (MoU) with Bangladesh Bank, which limits credit growth to 5 percent per annum. The single project lending capacity of even the largest of the private sector banks, perceived to hold the greatest capacity for project evaluation and prudent lending, is only around Taka 720 million (US$10.9 million), and that of most financial institutions is substantially below

* See Annex 2, Major Related Projects Financed by the Bank and Other Agencies

6 this level. The NCBs have somewhat greater capacity, but lack adequate credit appraisal ability, in addition to the regulatory constraint on their new lending. Although The Government of Bangladesh and Bangladesh Bank have an initiative underway to improve management and ultimately privatize the NCBs, some time will be required before adequate standards of governance are in place. In light of these circumstances, there is a significant role for a development partner-supported facility to develop capacity to appraise infrastructure projects and assume credit risk while facilitating the participation oflocal financial institutions and building capacity for a longer-term sustainable domestic infrastructure finance capacity. c) Lack oflong-term finance. The ability ofbanks to extend term credit (beyond five years) is extremely limited because oftheir dependence on short-term deposits. Even in the most developed economies, the ability of the banking sector to provide project financing is facilitated only by the ability ofbanks to obtain long-term debt in the capital markets, as well as a substantial allocation of capital. The ability of an IDA-supported entity to offer financing for terms of up to 20 years is extremely important. The IDA may be seen as acting as an interim substitute for contractual savings and collective investment schemes that are yet to develop in Bangladesh. Bangladesh is the only country in South Asia not to have a retirement savings scheme. Life insurance, while growing, remains extremely modest at 0.28 percent of GDP (1.77 percent in India and 0.53 percent in Sri Lanka). While the government’s decision to establish the tariffs for the small power generation plants in Taka is supported by powerful arguments, it has the additional effect of increasing reliance upon the domestic financial markets or government support. The use of local funding has undeniable advantages in that it avoids the need for government guarantees, which would undoubtedly be required to tap overseas commercial sources of finance. At the same time, this exacerbates the challenge of obtaining long-term funds. d) Need for Government Intervention in Finance. In light of the pressing social and economic requirement for infrastructure investment in Bangladesh and the limited capacity ofthe financial markets, there is a strong case for a government intervention, as envisaged for the proposed project, on a temporary basis with commensurate capacity building to address market deficiencies. In the design ofthe IPFF, care has been taken to ensure that the government intervention does not involve explicit subsidies and that the intervention is market based. e) Long-term nature of infrastructure projects. Infrastructure projects as PPPs require investment over an extended period, which invariably covers more than one government. Any major infrastructure initiative requires at least the tacit support of government and private sector investors. Hence, the risk that a change of government may lead to the rescission of government cooperation for even the most economically sound project is significant. Many private sector promoters of infrastructure projects have placed emphasis on the role of development partners in the development of infrastructure projects given that the engagement of institutions such as IDA transcends political boundaries.

7 f) Promotion of PPPs. Line ministries need support in identifying and promoting initial PPPs. International experience has shown that the primary responsibility for initial development of PPPs continues to rest with government. As such, the government and line ministries need technical assistance in proactively assessing PPP-eligible projects to form part ofthe Private Infrastructure Project List (PPL), for which the custodian is the Private Infrastructure Committee (PICOM). Such assistance would help government agencies decide whether to pursue a project as public investment or to offer it to the private sector for investment and operation. In addition, such technical assistance is required to assist PICOM and the Board of Investment in working with the relevant line ministries for the evaluation of unsolicited proposals for infrastructure projects. The Investment Promotion and Financing Facility (IPFF) as contemplated is primarily a financial sector project, and the technical assistance outlined for the development of the infrastructure sector has been limited to support for IIFC, or another suitably qualified body, in the role of an effective conduit among the financial sector, government, and prospective private sector promoters ofinfrastructure projects.

3. Higher-level objectives to which the project contributes

The Bangladesh Poverty Reduction Strategy Paper (PRSP), entitled “Unlocking the Potential - National Strategy for Accelerated Poverty Reduction,” is built on the policy triangle ofpro-poor economic growth, human development, and governance.

The World Bank has chosen to align its Country Assistance Strategy with the PRSP focusing on two pillars (but with governance as its core focus): improving the investment climate and empowering the poor. The CAS Upstream Review Document highlights that faster growth and poverty reduction are prevented by low levels of investment, both domestic and foreign, and consequent low productivity. The Review Document identifies the root of this as a weak investment climate manifested in an unsatisfactory regulatory framework, poor and capricious revenue administration, poor infrastructure, and a shallow and ineffective financial sector, all of which increase the cost of doing business and reduce competitiveness. IPFF will therefore support the overall Bank strategy in addressing some of the identified key bottlenecks, namely, weak infrastructure and the ineffective financial sector.

8 B. PROJECT DESCRIPTION

1. Lending instrument

The proposed credit will be on standard IDA terms, with a maturity of 40 years, including a grace period of 10 years. The project will make available partial debt financing through local financial intermediaries for eligible, government-sponsored infrastructure projects to be developed by the private sector. Projects developed solely by the private sector but identified by Government to be in the public interests, such as captive power plants, will also be eligible for financing. The project will also seek to assist the Government of Bangladesh in facilitating new infrastructure projects with potential for private sector participation.

The financing component will be provided through the IPFF, to be established with the IDA credit. Loans made to various participating financial institutions (PFIs) will be on maturities of up to 20 years, including grace periods of a maximum of 10 years, and will be denominated in Taka, although funding may be advance in U.S. dollars if required. To avoid crowding out, the IPFF will only extend loans beyond a maturity ofseven years.

The facility will be overseen by Bangladesh Bank but will not be reflected on the Bangladesh Bank balance sheet.

2. [If Applicable] Program objective and phases

Not applicable

3. Project development objective and key indicators (See Annex 3)

3.1. Project development objective

To accelerate private sector-led growth by providing term finance for infrastructure development and promoting domestic infrastructure finance capacity, the project aims to:

a) supplement the resources ofthe Bangladesh financial markets to provide term finance, in Taka and foreign currency, for infrastructure and other investment projects beyond the capacity oflocal financial institutions . b) promote the role of private sector entrepreneurs in the development of capital projects, especially infrastructure..

An important development mechanism of the proposed facility is to promote sustainable infrastructure development by “crowding in” private sector investment into an area which has historically been dominated by donor funding and characterized by an absence of allocation mechanisms through market pricing. The approach is to allow private sector promoters access to the same opportunities on a competitive basis. It is intended that the private sector will bid down

9 and minimize the amount of subsidy required through market practices and greater competition. The market-determined nature of interest rates will ensure that the concessional element of development partner funding is retained by the government to the greatest extent possible.

3.2. Key indicators

The key indicators for the project will be the extent to which private sector participation in infrastructure increases, particularly that financed through by local institutions, as measured by the increase in the number ofprojects developed as Public Private Partnerships (PPP).

4. Project components

Component 1: Infrastructure Development Lending Component (US$47.5 million2)

This component aims to develop a funding mechanism that adds transparent levels ofcontrol and market-based incentives to the existing methodology for allocating public funds to priority infrastructure projects identified by the government and developed on the basis of PPP. The amount initially allocated for IDA support reflects the pilot nature ofthe operation and the need to ensure utilization. The approach could be augmented by Additional Financing to meet market demand. While IDA funds will be available in Special Drawing Rights (SDRs,) it is envisaged that on-lending under the project will be in Taka or U.S. dollars to match the revenues of the underlying infrastructure investment projects. While Government’s priority is infrastructure finance, the facility could in principle support other eligible investments for which term finance is not available in domestic markets.

The proposed structure will not create any new licensed financial institutions but will rather operate under the oversight of Bangladesh Bank with existing regulated local financial institutions (reflecting the arrangements of FIDP). Funds will be allocated to local financial institutions for onlending to private sector infrastructure projects selected by the government. Financing will come from the government but will be administered by Bangladesh Bank. The private sector infrastructure promoters will operate under incentive-based contractual arrangements designed to align their interests with those of the GOB. Sub-loans to PFIs for investment projects eligible for financing from the facility will be approved by the Bangladesh Bank as agent ofGOB subject to IDA “No Objection”. Projects will be supported on market terms and will require at least a 30 percent equity component from the private infrastructure promoter and a further minimum of 14 percent ofthird-party funding, which may come from the PFIs. The PFIs are required to co-invest as well as assume all credit risk to reinforce alignment oftheir interests and those of the government. Syndication amongst PFIs and with non participating institutions will be permitted but the PFIs will be responsible for credit administration and recovery. Participation under the facility will be open to all financial institutions that meet qualification criteria to be determined by Bangladesh Bank. It is envisaged that competition between participating financial institutions will operate in favor of both the GOB and the private promoters ofinfrastructure projects.

~ ’ Not reflecting GOB and private sector contributions.

10 The selection of participating financial institutions shall be carried out in the first instance by Bangladesh Bank on a transparent basis. Eligibility will be restricted to local financial institutions licensed by and in good standing with Bangladesh Bank. Additional criteria have been determined by Bangladesh Bank on the basis of managerial and technical strength, financial capacity, and so forth. IDA will provide its “No Objection” for the selected PFIs on the basis of eligibility under IDA Operation Policy 8 -30, “Financial Intermediary Lending”. The interest rate for funds available under the facility will be market-determined, using a process that references the risk free rate (typically Government bonds) for financings of a comparable maturity and interest period. Sub- loans made to promoters of infrastructure projects will be at market determined rates to be determined by the participating financial institutions.

The role of Bangladesh Bank is essentially that of agent of the GOB. While Bangladesh Bank will administer the project implementation process, the responsibilities will be essentially administrative. Approvals provided by Bangladesh Bank will be on the basis ofthe fulfillment of technical criteria contained in a checklist, not on the basis of judgment. In this manner, the operation of the facility will not impinge upon the role of Bangladesh Bank as regulator.

The Government has undertaken to make available for the purposes of the project an amount equivalent to 20 percent of the amount disbursed by IDA The GOB contribution will be in Taka and will not influence the reserve position of Bangladesh. Financing made available by Government will be available on the basis of co-financing with resources to be lent under the IDA credit. however, Government contribution will be available only for local expenditures.

A robust pipeline of project^.^ The IPFF is not designed to rely on a portfolio of transactions that are ready to be submitted for financing, but is a market-based financing facility that will be demand-driven. The use of IPFF resources will thus depend on the speed with which infrastructure projects under preparation reach the financing stage, alternative financing sources available, and the credit quality of these projects vis-a-vis IPFF requirements. In order to get a clearer picture of this market and ascertain that demand for IPFF resources exists, potential projects have been reviewed that are likely to come to fruition over the next few years and that might approach IPFF for financing. These projects are principally in the power and transport sectors. The proposed project is not tied to any of these sectors, however, and the assessment undertaken relates primarily to the financing needs for these initiatives to come to fruition.

, Table 1: Pipeline of Private Infrastructure Projects in Bangladesh as ofJanuary 2006 I Years in Time to Size/ Total Cost Projects ‘IFCCommercial Number j Approval Role Capacity ’($ million) Pipeline Operation 1 Small Power Plants (10 to 30 MW) 0.5 No No 1.5years 10 20MW 120 ’ Remote Area Power Supply I Systems (RAPSS) 2 No Yes 8months 4 5 10MW Power Plant at Chittagong 1.5 No Yes year , , 1 10MW 6 1 ~xportProcessing Zone (CEPZ) 4 1 5 MW Power Plant at Chittagong 1 0.25 1 Yes No 1 1.5 years 1 5MW 4

See further details in Annex 4.

11 Port 1 ~ New Grid Connection costs of 5 existing Captive Power Plants No No 6months 5 3 (CPP) New Mooring Container Terminal 1 million Yes ~ Yes 1.5 years 1 145 at Chittagong Port TEUs Inland Container Terminal at 2 Not yet Yes 2.5 years 1 ' 100,000TEUs 3o ' Khanpur Land Ports (already signed

8 agreements with government 2 Yes 1 Yes ~ 2 years 6 authority) I ~4 I Land Ports (to be tendered as 2 Yes Yes 2.5 years 7 11 Round2) I 10 Mongla Port Jetty 1 No No 3 years 1 20 11 Gulistan-Jatrabari Flyover 2 Yes No 3 years 1 108 12 New Mobile Phone Network 1 No Yes ' 1 year 1 150 13 PSTN Fixed Line providers 2 No Yes 1 year 5 173 Optic Fibre Cable ofPGCB of 1 No Yes 6months 1 1 l4Dhaka-Chittagong (phase I) Optic Fibre Cable ofPGCB for No No 1.5 years 1 NA l5entire Grid Network (phase 11) I 16 Khan Jahan Ali AirportatKhulna ~ 1 , Not yet ' No 3 years 1 20 Indicative Total Cost I 802

Component 2: Technical Assistance Component (US$2.5 million) The project will seek to assist the Government of Bangladesh in facilitating new infrastructure projects with potential for private sector participation; the Technical Assistance component is designed to support ancillary activities required for the successful operation of the facility. The technical assistance component will assist Bangladesh Bank in the implementation of the project by developing capacity in the financial markets, and, more broadly, will enhance the long-term sustainability of private infrastructure finance by supporting GOB, initially through IIFC, in further developing the framework for PPPs in infrastructure; fostering policy, regulatory, and institutional reforms; building capacity to manage PPP processes; and implementing the Private Sector Infrastructure Guidelines.

This component includes the following: a Technical assistance for Bangladesh Bank and market participants. Technical assistance will be provided to Bangladesh Bank for capacity building for the development of infrastructure finance capacity amongst the local market participants and within Bangladesh Bank for the oversight of this sector (and the project). As reviewing loan proposals is not a core activity of Bangladesh Bank, technical assistance will also be provided to Bangladesh Bank through a consultancy to assess infrastructure projects and to review the financing proposals, it is envisaged that such services would be provided by IIFC or another suitably qualified body. Such technical assistance will facilitate Bangladesh Bank's approval of infrastructure financing

12 proposals. Support will also be given under this component for training and dissemination activities that allow market participants to promote infrastructure finance. b) IIFC support to PICOM for policy and regulatory reform. Financial support will be provided for IIFC to continue its operations to promote private financing of infrastructure within the government framework (and so providing the link between the financial sector and line ministries of Government). The project will support PPPs by continuing the operations of IIFC or another suitably qualified body to provide the critical public policy support functions of policy development, information sharing, and capacity building. The project will also seek to strengthen the policy and regulatory frameworks for enhanced private sector participation. Within its institutional mandate, the IIFC provides project identification services and ancillary transaction advisory services (such as overseeing the contract bidding processes) for line ministries and government agencies. IIFC acts in the first instance as a provider of technical assistance to the GOB.

IIFC acts as a small central facilitation and advocacy unit to provide support for policy development and capacity building within the line ministries. This includes, inter alia, assistance to the government in developing an appropriate policy, regulatory, and institutional framework for the major infrastructure sectors, with an emphasis on private sector involvement in the development, operation, and maintenance of these facilities. IIFC also provides support in designing and managing capacity-building programs, especially with regard to the respective agencies’ role in policy making for private participation and as overseers of private Build, Operate, TransfedBuild, Own, Operate (BOTIBOO) and other forms of PPP contracts. The project will also support initiatives such as the design of institution-strengtheningprograms that focus on regulation in general, and promotion of regulatory reforms aimed at attracting more private investment in infrastructure.

IIFC has responsibility solely to the GOB, in particular to PICOM and the Board of Investments and on a contractual basis under the project to Bangladesh Bank according to the terms of the Technical Services Agreement. The performance measurements for IIFC will be determined and monitored by IDA as part of periodic project supervision in consultation with PICOM.

c) Support for environmental assessments. To improve the standard of project preparation in Bangladesh, funds under the technical assistance component may be used to supervise and manage the preparation of Environmental Impact Assessments (EIA) to assure the quality required by the GOB (and for eligibility for World Bank Group funding). This assignment is typically the responsibility ofa project promoter but there is a strong argument for providing this as a public good to ensure a consistent standard and to take advantage ofreturns to scale.

The Department of Environment is responsible for providing environmental clearances according to the requirements of the Environmental Conservation Act and Rules of 1995 and 1997. The capacity of the DOE to fulfill this function is being strengthened through long-term technical assistance from the Canadian International Development Agency (CIDA).

To reduce risks to investors and promote adherence to national and World Bank requirements, IIFC or another suitably qualified body will coordinate and oversee the provision of social and

13 environment assessment services to project sponsors. The safeguards activities will include the following:

a) Screening of investment concepts against the IFC / Multilateral Investment Guaranty Agency exclusion list to ensure that no activities on the exclusion list are financed (see Annex 10) b) Determination of appropriate safeguard categories under both DOE and World Bank classifications c) Contracting for and reviewing environmental and social impact assessments as required by DOE and the World Bank d) Submitting draft impact assessments for environmental Category A projects and projects with significant adverse social impacts for review and “No Objection” by the World Bank, before seeking clearance from DOE e) Obtaining environmental clearance for all proposed investments from DOE f, Providing the World Bank with annual monitoring reports summarizing all investments, their safeguard category, and impact assessment/Environment Management Plan (EMP) status.

Though the project will facilitate the role of the project sponsors through this subcomponent, sponsors will jointly with the financing providers retain the ultimate responsibility for ensuring that safeguards are met. The assistance in environmental assessment and management should serve to increase interest in infrastructure project development in Bangladesh. At the same time, economies of scale can be expected from channeling environmental assessments through IIFC or another suitably qualified body.

5. Lessons learned and reflected in the project design

The IDA has two recent projects that are related to the proposed project, the Financial Institutions Development Project, which addresses shortfalls in the finance system and is rated “Satisfactory,” and the Private Sector Infrastructure Development Project (PSIDP), which is rated “Moderately Unsatisfactory.” The IPFF will seek to complement and support the achievements of the FIDP and draw upon some of the successful elements of that project, Similarly, the proposed project will take into account the lessons learned from PSIDP.

5.1. Financial Institution Development Project The objective of the FIDP is to promote the development of nonbank financial institutions (NBFIs) in particular and investment financing in general on a sustainable basis, contributing to improvements in the quality of intermediation, and the speed and efficiency ofindustrial growth in Bangladesh. The role of the FIDP is to support expansion of NBFIs, which include some of the sounder and more efficient financial institutions, pending the restructuring of the predominantly state-controlled commercial banking sector. The project promotes the development ofNBFIs in order to provide alternative opportunities for savers and increase on a sustainable basis the supply of term funds for competitive projects that generate growth and employment.

The FIDP, has closed in February 2006, is fully disbursed. The project has played a material role in facilitating a dramatic enhancement in the government debt market in Bangladesh, which has

14 developed from a market with limited maturities and literally no secondary trading to an active market with regular auctions for debt out to 10 years. The FIDP has also supported the development of an institutional, legal, and tax environment amenable to the issuance of securitized debt. The first securitized bond issue in Bangladesh was issued under this project in November 2004.

Key lessons from FIDP. A key factor of success for FIDP has been the strong support it has enjoyed from Bangladesh Bank, which has shown itself to be a consistent agent for reform unconstrained by vested interest. The process, which has allowed the downstream procurement undertaken by the participating NBFIs to be conducted on the basis of economically efficient commercial practice, is also seen as being key to success in the context of a private sector environment.

5.2. Private Sector Infrastructure Development Project Under the PSIDP, an SDR 168.60 million credit was established to provide long-term debt for private sector infrastructure projects. The PSIDP was signed in November 1997 and is now rated “Moderately Unsatisfactory.” The project was restructured in March 2005 to reallocate most funding (US$154 million) to flood relief, while a further US$3.5 million was allocated to IIFC to promote private infrastructure. PSIDP has thus far disbursed SDR 101.52 million, and SDR 67.08 million remain undisbursed.

Key lessons from PSDIP and infrastructure funds. Assessments of infrastructure funds sponsored by the World Bank in South Asia4 indicated that these funds were hampered by governance and control issues that emanated from attempts to establish a body that was independent of government and transparent in its actions but at the same time ultimately responsible for public funds. Second, assessments showed that it has proven to be a material challenge to follow the IDA’Sprocurement requirements. Third, it has been a challenge for the government agencies to act as commercially oriented entities so as to be perceived as proactive in marketing their services and responsive to market needs (for example, in responding to market conditions and credit risk in terms of price determination for on-lending terms). Finally, the pipeline ofprojects identified at inception has not been realized as anticipated.

6. Alternatives considered and reasons for rejection

Several options for overcoming the capital and single borrower constraints of financial institutions have been considered. One option was for Bangladesh Bank to provide a waiver from the single borrower limit and capital allocation for IPFF credit. This approach has been rejected on the basis that it exposes financial institutions to excessive risk and will establish a poor precedent. Another approach will be the creation of a take-out facility or structure under which IPFF financing is routed to participating financial institutions in a form that protects their capital adequacy position (such as through an equity fund), direct assumption of credit risk by government or through securitization. In the short term it is believed to be more practical that the IPFF rely upon syndication to allow the credit risk to spread amongst the financial sector, particularly as this approach is favoured by GOB. Over the longer term this approach may limit the scale of activities and could have an adverse effect on the market nature of pricing for credit

Also in Pakistan and Sri Lanka.

15 under the facility (with a greater amount ofthe concessional nature of IDA funding resting with the participating financial institutions); given the limited scale ofthe project in its initial “pilot” form, these limitations are unlikely to be material. It may be practical to revisit the arrangement at mid-term review to determine if a more complex approach, such as securitization, may be justified.

Alternative fund mechanisms have also been considered, as highlighted by table 2; IPFF took into account the lessons from PSIDP (described in section 5) and built upon international best practices, such as the Emerging Africa Infrastructure Fund.

Table 2: Possible Fund Mechanisms

Recipient of Risk Bearer Source of Funds Fund Allocation Interest Rates Funds Government Donors IPFF Private Private Market & Private & Private PSIDP Government Donors Government Agent Private Administered Emerging Donors Donors Private Private Market Africaa & Private & Private

C. IMPLEMENTATION

1. Partnership arrangements

Partnership Arrangements. The IFC has been involved in the evaluation and development of the IPFF from the outset and has contributed significantly to the project design and the evaluation of alternatives. The IFC is now exploring opportunities to support the Government’s private infrastructure promotion programme through possible financial support to participating financial institutions or directly to selected sponsors of private infrastructure projects. The IFC may also be able to provide advisory services to Government or to private sector intermediaries in the development and financing ofthe private provision of infrastructure. The proposed project structure is also open to additional financing from other development partners at the facility level or financial market participants and the investment project level.

The IFC has nine active projects in Bangladesh, with US$141.9 million invested. IFC investments in Bangladesh are in a range of sectors, including power, telecommunications, cement, and the financial markets sector (leasing, development financial institutions, and housing finance). The IFC has two outstanding active projects in the infrastructure sector: Khulna Power Project, and International Communications Technologies Bangladesh Project (see Annex 2).

The proposed project structure is also open to additional financing from other development partners at the facility level or financial market participants and the investment project level.

2. Institutional and implementation arrangements

2.1. Private sector participation in infrastructure

16 The starting point for the facility design has been to seek a commercial culture through significant private sector participation, strong corporate governance and management, and a clear strategy for funding sustainability beyond the IDA project timeline so as to be a catalyst for financial market innovation, primarily for infrastructure finance. To this end, the participation of local private financial and entrepreneurial institutions has been sought from the outset to assure a design that suits the needs and capacity of the Bangladesh economy. Multiple participants are allowed under the project so that competition for funds generates market-based pricing. Contractual arrangements with local financial institutions allow for flexible engagement so the facility can easily respond to changing circumstances or failure of any participant to perform. Effective regulatory oversight from Bangladesh Bank and the application of strict criteria for financial institution participation are essential to the project design.

There is no shortage of entrepreneurial dynamism in Bangladesh. A number of leading business houses have established a strong reputation for good conduct and sound business strategy, and the project intends to make use of their experience to overcome bureaucracy and vested interests. Without exception, these businesspeople have seen the potential of their companies suffer because of inadequate infrastructure and provision of publicly managed services. To date, however, these business leaders have not been provided an opportunity to lend their business acumen to the allocation ofpublic and donor resources in support ofpublic-private partnerships. These entrepreneurs are experienced in managing the governmental bureaucratic process and identifying the bottlenecks to successful project development. As they have a record of fair practice and are free of vested interest and obligations, they are able to recognize the actions required to move a project forward and demand that appropriate steps be taken. The transparency oversight that is provided by an IDA project will add weight to the impetus for change that these entrepreneurs can bring to bear.

2.2. Private Sector Infrastructure Guidelines (PSIG)

To enhance private infrastructure development, the government issued the Private Sector Infrastructure Guidelines (the Guidelines) in October 2004. Following the model of the Philippine interministerial council, the Guidelines created a national Private Infrastructure Committee (PICOM) under the Prime Minister’s Office for the facilitation and promotion of private infrastructure projects. Projects initiated by private sponsors or line ministries require government approval to be listed as a Private Infrastructure Project. Based on PICOM’s analysis and recommendation, the Cabinet Committee on Economic Affairs (CCEA) approves the project, following which PICOM oversees its implementation by the executing agency. In the project development process, PICOM is assisted by the Major Terms and Conditions Commission in preparing the Request for Proposals and by the Pre-qualification and Tender Evaluation Committee in evaluating project proposals that have been received. In the implementation of the Guidelines, the Board of Investment (BOI) acts as PICOM secretariat. IIFC, which has drafted the Guidelines, has been appointed by PICOM as its technical advisor for a two-year period. Under current arrangements, IIFC can be contracted as transaction advisor by the executing agency or the private sponsor. However, though arrangements might be established to avoid potential conflict of interest while advising private sector clients, this scenario would leave a vacuum in terms of advisory services to the government. The PSIG establish a framework for the private provision of infrastructure but are not statutory. The

17 Guidelines are followed for some, but not all, infrastructure projects promoted by GOB for private participation. The IPFF makes use of PSIG as a background document but will follow GOB practice for each proposed investment opportunity. While the PSIG carry illustrative approaches for issues such as procurement, environmental and social safeguards, all investments to be financed under the IPFF will be required to conform to relevant World Bank requirements.

2.3. Project implementation arrangements

Bangladesh Bank will act as the implementing agency for the overall project and will oversee the financial intermediation component. Bangladesh Bank will also have the responsibility to oversee IIFC activities under the project. However, IIFC’s support under the project to PICOM will be overseen by BOI. IDA funds will be channeled through a dedicated special account at Bangladesh Bank and will be reflected in GOB accounts. According to demand, these funds will flow to final borrowers (Investment Projects). It is the desire of Bangladesh Bank to focus its activities on its core activities as a central bank (monetary policy and financial sector stability), and thus the incremental administrative responsibilities of Bangladesh Bank, over and above the existing responsibilities for regulatory oversight ofPFIs, will be minimal. Bangladesh Bank involvement will be limited to operation of the special account, approval of financing requests following technical rather than judgmental criteria (and in any case pursuant to the IDA “No Objection” and appropriate review of a technical consultant provided under the project) and the regulation and supervision of the participating financial institutions (which would in any case fall within Bangladesh Bank responsibilities).

Criteria for investment project eligibility for financing under the project shall be contained in the Operational Directives to be developed by Bangladesh Bank. Broadly the project will follow the guidance of the Private Sector Infrastructure Guidelines issued by the Prime Minister’s Office in October 2004. Under these guidelines “Infrastructure” means projects that the private sector cannot undertake for investing, without a contractual agreement with, or a License from, a Governmental Authority. The eligible sectors are also taken from the PSIG (and are reflected in Annex 6). It is anticipated that certain other investments, such as captive power plants, may be eligible for finance, subject to prior consent of IDA. Any amendments to these criteria shall be with the consent ofIDA.

18 The figure below summarizes IPFF implementing arrangements

Figure 2: Mechanisms of the proposed facility

IDA reviews PFI selection & eligibility under OP8.30 and procurement of investment

- - - IIFC provides GOB I, BB IIFC ----- technical assistance 4 to PICOM and BB and provides EIA of

I I BB also provides us$ capacity building to financial institutions I PFI forwards loan application to BB to obtain

The PFI may syndicate the loan with I PFI and non-PFI.ZO% of the debt must I (with 30 % come from (P)FIs’ own funds. I______------_--- equity) The promoter applies for funding to a participating financial institution (PFI)

Key agreements governing IPFF

d Flow of funds Between GOBand IDA: Financing Agreement Between GOBand BB: Administration Agreement ,, , ...... b Technical assistance Between BB and IIFC: Technical Service Agreement Between IIFC and PICOM: Technical Service - - - -+ Application for funds Agreement Between BB and the PFIs: Master Facility GOB:Government of Bangladesh Agreement BB: Bangladesh Bank IIFC: Infrastructure Investment Facilitation Center PFI: Participating Financial Institution PICOM: Private Infrastructure Committee EIA: Environment Impact Assessment

19 The detailed assessments of the soundness and profitability of potential infrastructure projects will be undertaken by participating financial institutions. Following such assessment, the participating financial institutions will decide whether or not to finance the proposed projects. These financial institutions will also monitor implementation of the infrastructure projects and be responsible for collecting payments from borrowers. It is anticipated that the participating financial institutions will make significant capital investment in the loans to the investment projects.

A private sector promoter wishing to access financing under the Facility, shall follow the following procedures:

(a) The private sector promoter shall have received a Letter ofIntent from Government in connection with a government-sponsored infrastructure investment project or shall have prepared a proposal for a private infrastructure project of a type identified by Government as eligible for financing under the Facility (e.g. a captive power plant) (b) The private sector promoter shall provide evidence ofability to provide an equity contribution to the development ofthe proposed investment project for a minimum of30% ofthe total investment project cost. (c) The promoter shall have received a credit approval for the investment project from a PFI (d) The promoter shall have obtained appropriate clearance form the Department ofthe Environment

A PFI, or consortium of PFIs, wishing to access financing under the Facility, shall follow the following procedures:

(a) Demonstrate as required to Bangladesh Bank that the private sector promoter has followed all required steps as identified above. (b) Provide evidence to the satisfaction of Bangladesh Bank that all PFIs participating in the financing remain in conformity with the eligibility criteria for project participation (as detailed in Operational Directives to be developed by Bangladesh Bank.) (c) Show evidence ofcapacity to finance 20% ofthe total loan amount through resources other than drawing upon the facility (which may be from own resources or other sources, including financial institutions not participating in the Facility) (d) demonstrate to the satisfaction ofBangladesh Bank that all PFIs participating in the financing will remain in conformity with all Bangladesh Bank regulations, including those relating to capital adequacy, single borrower exposure, and provisioning.

Selection of PFIs. Bangladesh Bank will have the responsibility for seIecting the PFIs, deciding whether to finance the loan proposals submitted by the PFIs, based on a list of pre-determined criteria and providing capacity building to financial institutions in infrastructure finance and related themes., Bangladesh Bank has developed eligibility criteria for the selection of PFIs under FIDP and will use similar criteria to select PFIs under IPFF. A statement of operational policies and procedures relating to the project and consistent with the World Bank OP8.30 guidelines will be formally adopted by Bangladesh Bank prior to project effectiveness. It is anticipated that some PFIs may be common to both projects. An important difference with FIDP

20 is that IPFF is open to both bank and non bank financial institutions. IDA will assess the eligibility of financial institutions selected by Bangladesh Bank based on the O.P. 8.30 criteria and will provide a No Objection. A number of prospective PFIs have expressed interest in principle in participating in the project and Bangladesh Bank has expressed confidence that a sufficient number will be deemed eligible.

Approval of financing proposals. Once a PFI has taken the decision to finance an infrastructure project, the PFI will forward the loan file to Bangladesh Bank for approval of the requested IPFF co-financing (maximum 80% of the debt). IIFC or another suitably qualified body. will provide technical assistance to Bangladesh Bank during this review process. It should be highlighted that Bangladesh Bank will not take a commercial / credit decision when reviewing the proposal, Rather Bangladesh Bank, with support from IIFC or another suitably qualified body., will review whether the investment projects to be financed meets pre-defined criteria: acceptable procurement, sufficient equity participation (minimum 30%), completion of EIA, etc. The Operational Directives for infrastructure financing facilities detailing lending and disbursement procedure (to be drafted by Bangladesh Bank) will spell out Bangladesh Bank approval process and the criteria for investment project eligibility. These IPFF directives will be based on the FIDP directives with regards to PFI approval, the eligibility of investment projects for finance will also reflect Government policy as to the private provision of infrastructure. Once Bangladesh Bank has ensured that the investment project complies with the eligibility criteria, it will forward the loan application to IDA for no-objection. After both Bangladesh Bank and IDA have cleared the loan application, the Bangladesh Bank will disburse the required amount (by installments) from the project account on behalf of GOB. Eligible investment projects will be considered for financing by Bangladesh Bank on a first come, first serve basis. However, eligible power sector projects will be given special emphasis.

Capacity building to the industry. Following the positive experience of FIDP, capacity building to financial institutions will also be provided under IPFF. Bangladesh Bank will organize workshops (with inputs from local and international consultants) on themes such as project finance, loan syndication, mortgaged based securitization, bond issue and capital market. Bangladesh Bank will also provide to participating financial institutions opportunities for training abroad or in-country (with the understanding that expenses associated with offshore training should be borne by the concerned PFIs).

Monitoring. Bangladesh Bank will be responsible for the monitoring ofthe project. Over the life of the project, the Bangladesh Bank shall keep Government and the World Bank apprised as to the continuing compliance by PFIs of the eligibility criteria, the progress of investment projects, indicators of impact of the project on private sector participation in infrastructure development, and emerging issues relating to these areas. As Implementing Agency, Bangladesh Bank will also be responsible for ensuring that the projects financed under the IPFF maintain the requisite environmental and other safeguard standards, it is understood that certain ofthese activities shall be delegated to IIFC under the Technical Services Agreement, or any other suitably qualified body (subject to clearance by Finance Division and IDA “No Objection”). A preliminary draft template for project monitoring is attached in Annex 3.

Role of IIFC. It is envisioned under the recommended “central facilitation unit” model that the role of IIFC as coordinating agency for the technical assistance component providing support to

21 Government for public private partnership will be initially maintained. Under the oversight ofthe Economic Relations Division of the Ministry of Finance (although project resources will be directed by Bangladesh Bank as implementing agency), IIFC will carry out its own procurement as far as practical. Under the project, IIFC will have four main areas of responsibility; it will (i) provide assistance to the Private Infrastructure Committee (PICOM) for implementation of the Private Sector Infrastructure Guidelines (PSIG); (ii)help Bangladesh Bank in the eligibility review of infrastructure projects submitted for IPFF financing; (iii)manage on behalf of Bangladesh Bank the selection and supervision of consultants to carry out environmental impact assessments for infrastructure projects; and (iv) assessing the training needs and arranging all offshore and local training/workshops under the project.

IIFC Assistance to PICOM. The support provided to PICOM will be based on a Technical Services Agreement concluded between BO1 (as PICOM Secretariat) and IIFC on June 23,2005. The Agreement covers assistance to PICOM in the implementation of the Private Sector Infrastructure Guidelines broadly along the following themes: awareness creation, capacity building, policy and regulatory support, project pipeline monitoring and evaluation, preparation of standard contract documentation, and assistance to ministries and sectoral agencies for implementation of the guidelines.

IIFC Assistance to Bangladesh Bank. IIFC, or another suitably qualified body, will assist BB in the technical review of projects submitted by PFIs for IPFF financing. The main objective of this assistance is to ensure that projects submitted by PFIs to BB fulfill the eligibility criteria for accessing of IPFF financing. IIFC will review inter alia, the selection process of the investor/operator, the conformity offinancing and concession agreements, the principal technical features and the key environmental approvals. Furthermore, IIFC will provide assistance to BB for training needs assessment and will arrange all local and offshore training programmes under the project.

IIFC’s Role in Environmental Impact Assessments. The completion of an EIA that meets DOEand World Bank requirements will be required as a condition for eligibility for financing under the IPFF. Project promoters may request IIFC to provide requisite consultant services for the completion of an EIA, subject to availability of resources on a first-come-first-serve basis. These services may provided before a project promoter applies for IPFF funding to prevent any later delays in financial closing. IIFC will manage the consultant selection and supervision ofthe environmental advisers. Project promoters receiving EIA services from IIFC but which do not apply for financing under the IPFF or are deemed ineligible will be required to reimburse the cost ofsuch as~essment.~

Relationships between entities involved in IPFF

The relationships between Government of Bangladesh, Bangladesh Bank, the participating financial institutions (PFIs), IIFC and PICOM will all be governed by agreements. IPFF will build on the implementation mechanisms developed for FIDP which have proved effective

5 It is contemplated that in extenuating circumstances the cost of the EIA may be shared with promoters who apply for IPFF funding but do not qualify.

22 (GOB/BB: Administration Agreement; BBIIIFC: Technical Services Agreement, IIFC/PICOM: Technical Services Agreement, BB/PFIs: Master Facility Agreement).6

Financial Sector Deepening and World Bank Operations Policy 8.30

World Bank operating procedures provide certain guidance as for the design and implementation of Bank credits which involve the onlending of funds provided by the World Bank, as intended under the proposed project. Broadly, these guidelines are intended to ensure that Bank credit does not lead to the distortion of incentives for market participants in the allocation of credit, or to inefficient subsidies or allocation of capital. The guidelines also provide for eligibility criteria so that only viable institutions may benefit from financial support under the credit. Many financial institutions in Bangladesh which are prospective candidates for financing under the IPFF have already been assessed for eligibility under OP8.30 through their participation in the FIDP project. During the appraisal the project team commenced the process of updating the OP8.30 assessment for institutions which have provided an indication of interest in participating in the IPFF. This process of evaluation will continue through the project preparation period and the project will remain open to the inclusion of further qualified institutions throughout the project life. A summary of the criteria utilized for this assessment is included in Annex 9 broadly, the assessment seeks to determine eligibility based upon the following criteria:

adequate profitability, capital, and portfolio quality, as confirmed by financial statements prepared and audited in accordance with accounting and auditing principles acceptable to the Bank acceptable levels ofloan collections appropriate capacity, including staffing, for carrying out investment project appraisal (including environmental assessment) and for supervising investment project implementation capacity to mobilize domestic resources adequate managerial autonomy and commercially oriented governance (particularly relevant when state-owned or state-controlled financial institutions are involved) appropriate prudential policies, administrative structure, and business procedures.

In principle both private and state owned financial institutions would be eligible to participate, however, the requirement that all institutions demonstrate that they operate on a commercial basis with management autonomy typically represents a major challenge for state financial institutions. New and existing financial institutions that do not meet all the eligibility criteria for being intermediaries may participate in a Bank FIL if they agree to an institutional development plan that includes a set of time-bound monitorable performance indicators and provides for a midterm review of progress. When a FIL includes such financial institutions, the size and complexity of the FIL are commensurate with the financial institution’s implementation capacity; and the FIL may include an institution-building component that the borrower may pass on in the form of grants. Such financial institutions’ continued participation in the FIL is subject

It is noted that the agreement between PICOM and IIFC may extend beyond activities related to the IPFF.

23 to their satisfactory implementation oftheir institutional development plans; when progress is not satisfactory, the Bank considers appropriate remedial actions, including suspension.

3. Monitoring and evaluation of outcomes/results

The indicators developed in the Results Framework (see Annex 3) will be monitored biannually. Bangladesh Bank will have primary responsibility for monitoring and evaluation (M&E). In the first year of the project, implementation of the Private Sector Infrastructure Guidelines will be closely monitored in order to identify potential bottlenecks early on. Identified bottlenecks will be discussed with the Ministry ofFinance. The target is to approve two infrastructure projects by Mid-Term Review. If this target is not achieved, there will be a need to review PFF approach and potentially to target all private sector investments, not only private sector investments in infrastructure.

4. Sus tainability

Sustainability has been at the core of the project design. The focus has been to seek a clear strategy for funding sustainability beyond the IDA project timeline and to be a catalyst for financial market innovation. The project will support policy-based reforms as well as capacity building of financial institutions and private sector promoters to ensure sustainable improvements in the financing of infrastructure and long-term investment. Furthermore, the project aims to demonstrate to the private sector as a whole that it is possible to develop infrastructure projects on a for-profit basis.

5. Critical risks and possible controversial aspects

5.1. Key potential risks and ways to mitigate them are as follows:

a) Lack of government ownership. Ownership of the project concept on the part of the Government of Bangladesh is essential. Vested interests related to the selection and funding of infrastructure projects will not welcome the introduction of more transparent and competitive processes. Bangladesh Bank has agreed to act as government sponsor, given the clear need for a progressive participant in the financial markets to promote term finance (including for infrastructure).

b) Vested interests are insurmountable. Private provision of infrastructure services challenges many well-established and powerful interests in Bangladesh. In some cases these interests are close to the decision-making process required for PPP, even in the entities entrusted to bring about private sector involvement. While the close involvement ofIDA will always act as some antidote to regressive elements, the key agent for change in the project is the empowerment of private sector entrepreneurs and the creation of a vested interest, through their investment, to counter those obstacles . It is a key prerequisite, therefore, that the private sector involvement be ofparties whose integrity is beyond reproach and who can challenge even the most powerful vested interests with impunity.

24 c) Investment projects do not materialize. A strong pipeline of potential infrastructure projects was identified before committing to this undertaking. This was a lesson learned from earlier infrastructure funds in the region. In addition, the size of the facility has been initially kept small to avoid underutilization.

d) The project crowds out local financial markets. The initiative would not mobilize resources other than those from donors or participants in the domestic financial markets. Investment by local partners would be encouraged, but not through portfolio investment of third par tie^.^ Regional financial institutions would also be welcomed. Emphasis will be on the avoidance of“crowding out” and rather acting as a catalyst for commercial funding.

e) There is insufficient technical expertise in Bangladesh. This does not appear to be a significant risk for several reasons. First, a number of leading financial institutions are represented in Bangladesh. Second, an increasing number of Bangladeshis with substantive experience in leading international markets have returned to assume key positions in local financial institutions. It should finally be underlined that FIDP has contained a significant capacity-building component.

f) Private sector financial institutions do not participate, and infrastructure promoters do not invest, Various financial institutions and entrepreneurs have already expressed a strong interest in the project. One financial institution has independently developed an approach comparable to that of the IPFF that identifies a role for IDA similar to that envisaged under the proposed project.

g) Erosion of governance standards in the financial sector. Important improvements have been made in terms of governance standards in the financial sector. However, there is a need to ensure that such standards are maintained and enhanced. Although the project is intended to support local financial institutions and take advantage of their capacity to select economically and commercially viable financing opportunities, IDA will not provide finance for investment projects in the infrastructure sector that do not meet appropriate governance standards.

’ Such investment would be discouraged so as to simplify the process ofregulatory oversight and to avoid investors seeking recourse from government on the basis that the infrastructure investments are under a government program.

25 Table 3: Risks and Mitigation Measures

Risks Risk Mitigation Measures Risks Rating with Mitigation Lack of government Bangladesh Bank has indicated its M Dwnership willingness to act as government snonsor Vested interests are Empowerment ofprivate sector S insurmountable entrepreneurs and creation of an incentive, through their investment, to counter the obstacles that may be encountered Investment projects do not A strong pipeline of potential M materialize infrastructure projects has been identified. The size of the facility has been initially kept small to avoid underutilization The project crowds out local Emphasis will be on acting as a N financial markets catalyst for commercial funding There is insufficient technical A number ofleading financial N expertise in Bangladesh. institutions are represented in Bangladesh. Bangladeshis with substantive experience in leading international markets have returned to assume key positions in local financial institutions Private sector financial Various financial institutions and M institutions and entrepreneurs infrastructure promoters have do not invest. already expressed a strong interest in the moiect Erosion of standards in the IDA will not provide finance for S financial sector investment projects in the infrastructure sector that do not meet appropriate governance standards

Risk ratings: H (high risk); S (substantial risk); M (modest risk); N (negligible or low risk).

26 5.2. Controversial aspects

Bangladesh Bank as a promoter and regulator. Under the selected approach, Bangladesh Bank will have the roles of both promoter and regulator. While measures have been taken to minimize Bangladesh Bank’s promoter role (see section on project implementation), a potential conflict ofinterest remains.

Financial viability versus economic efficiency. The project focuses on the need for support in the field ofterm finance (particularly for infrastructure) and the viability ofthe proposed Facility approach to meet such need. The project does focus on the economic viability of the infrastructure projects proposed for financing, as well as the governance processes associated with the investment projects proposed for financing and the fairness of the relevant PPP contracts. The project does not seek to guide the course of the Government’s broader infrastructure development programme (e.g. large power plants versus small plants, road versus rail etc.). As a result, projects that are financially and economically viable in themselves, but are the product of a broader policy which may not be economically optimal could potentially be funded under IPFF. While IPFF supports the development ofthe Bangladesh financial sector, the underlying themes of infrastructure policy and governance will remain important considerations for prospective IDA support.

Financing Amount. The World Bank has indicated that financing under the proposed credit will be available according to the pipeline of eligible projects and the absorptive capacity of the qualified local financial institutions. Analysis conducted at project appraisal would suggest that an initial credit amount of $50 million would be appropriate. There is a consensus in Bangladesh that the amount of the IDA contribution remains too low given the pressing infrastructure needs of the country. The project team acknowledges these concerns; however, it is also noted that finance is seldom the binding constraint to the private provision of infrastructure. Experience in Bangladesh and other countries would suggest that issues such as inappropriate procurement practices and project selection can also constrain the flow of funds. The relatively modest capacity of the financial sector in Bangladesh (both in terms of finance capacity as well as technical capability) are also likely to hamper project disbursement. It is noted that World Bank procedures now allow for Supplementary Financing which is a streamlined mechanism for increasing the amount of funding available under an existing project. Retroactive financing may also be made available ifGovernment should wish. It is noted that under the FIDP, a short period was allowed between the maturity date of the subloans financed under the project and the repayment requirement to Bangladesh Bank.

Cofinancing by Government. The proposed IDA support for the IPFF is in the form of a credit, and therefore represents full commitment and ownership on the part of the Government of Bangladesh. It is proposed that the Government of Bangladesh should make a contribution from Budget to act as cofinancing for the IPFF. .The Government of Bangladesh has undertaken to make available to Bangladesh Bank for the purposes of the project an amount equivalent to 20 percent ofthe amount disbursed by IDA. The contribution of Government shall be made at least annually and no later than the last day of the fiscal year in relation to the disbursement by IDA for that year. These funds, to be administered by Bangladesh Bank, would also be available to meet any residual financing requirements under the FIDP, although it is the intention of Government that such financing should be phased out. Financing made available from

27 Government will be available on the basis of co-financing with resources to be lent under the IDA credit; however, the contribution by Government will be available only for local expenditures (and will not influence the reserves position ofBangladesh).

Cofinancing by the Private Sector It is anticipated that for each infrastructure investment project to be financed under the IPFF, the private sector promoter would be required to make an equity contribution of at least 30% of the investment project (to include the cost of EIA).' It is also anticipated that participating financial institutions would be required to contribute an amount equivalent to 25 per cent of the combined IDA and Government contribution under the IPFF9. It is also possible that other financial institutions, not receiving funds under the project may assume this co-financing commitment. The proposed project structure is also open to additional financing from other development partners at the facility level or financial market participants and the investment project level.

6. Loadcredit conditions and covenants

Dated Covenants

1. For the purposes of the Project, the GOB shall, no later than the last day of each Fiscal Year, make available on an annual basis, from its own resources, an amount equivalent to 20 percent ofthe amount disbursed by IDA for each such Fiscal Year.

2. Participating FIs will submit annual audit reports to BB and IDA within four months of the end ofthe year.

D. APPRAISAL SUMMARY

1. Economic and financial analyses

Given the character of this operation, a quantitative economic and financial analysis would not be the appropriate tool to assess the full significance of this project beyond the broad macroeconomic analysis provided in Section A 1.2. The ultimate economic benefits of this credit will be derived from the contribution to the broader Bangladeshi economy derived from the infrastructure projects which are developed utilizing finance and technical assistance from the facility.

Access to term finance leads to superior outcomes in the provision of infrastructure services. Longer-term financing will allow project promoters to be more competitive in their tenders under this program and will also encourage successful participants to invest in more expensive and more reliable equipment, which will be more economically efficient in the longer term (and better serve Bangladesh's needs). Financing through the existing financial institutions is further

* i.e. Out of the balance 70%, PFIs (alone or through syndication) will finance 20% and 80% will be from IPFF so the total ratio will be sponsor 30%, PFIs 14% & IPFF 56%). As an example, for an investment project cost of 100, a minimum 30 must come from project sponsors, of the residual 70, a minimum of 14 must come from PFI own resources and the remaining 56 through the IPFF.

28 constrained by the inability of financial institutions to lend at fixed interest rates. Infrastructure projects, once in commercial operation, typically reflect an “annuity” of stable and predictable net cash flows (after covering variable costs such as fuel). Infrastructure promoters are assisted in making competitive tenders by the availability of fixed-rate finance that matches the fixed-rate nature ofproject income and removes the need to include a margin to accommodate interest rate uncertainty.

In addition to the direct economic benefits of the project there are additional gains generated through the enhanced technical capacity developed among financial institutions, the promotion of long term finance markets as well as the liberalization of regulations constraining financial intermediation. It is further anticipated that the provision of Environment Impact Assessments to be financed under the project will improve the environmental standards of infrastructure projects in Bangladesh, with commensurate gains for society and the broader economy.

2. Technical

The technical merits of the project have been thoroughly examined over a course of general reviews through the preparation process, supplemented by specialized “Technical Reviews” reflecting the innovative nature of the project. These reviews have allowed the project design to benefit from contributions from experts in the field of infrastructure (in South Asia and other regions), as well as private sector development, financial sector development and procurement. As part of the Quality Enhancement Review and extensive assessment has been provided with regards to the conformity with the Bank’s Operational Policy 8.30 covering financial intermediation loans.

The project has a firm empirical basis in that its overall design is drawn from the findings ofthe World Bank’s Investment Climate Assessment and the joint Bank/Fund Financial Sector Assessment, both carried out in 2003. The project also draws directly from the technical experience of team members involved in both the FIDP and PSIDP projects.

3. Fiduciary

Procurement and financial management assessment was carried out during the project appraisal. . Both the implementing agency, Bangladesh Bank, and the IIFC, the other government agency directly involved in project implementation have extensive experience in Bank procurement and financial management practices through their leading roles in the FIDP and PSIDP projects. . The on-going Central Bank Strengthening Project has supported the Bangladesh Bank in establishing an internal audit department directly reporting to the Governor and carrying out audit by internationally affiliated firm in full compliance with international standards ofauditing.

From fiduciary view point, there is low risk affecting the project. This is because a large portion ($47.5m) of the credit proceeds will be utilized to directly support infrastructure financing facility that meets pre-determined criteria at various stages ofthe investment project cycle.

4. Social

29 Improving the provision of infrastructure in Bangladesh will make an important contribution to living standards and the provision of services in health, education, water, sanitation and power. It is envisaged that the infrastructure projects to be financed under the facility will be modest in size and largely on land already owned by government and/or utilized for industrial purposes. Investments which require involuntary resettlement as defined under World Bank Operational Policy 4.12 will not be eligible for financing under the IPFF.

5. Environmental Management Framework

As required for Financial Intermediary (FI) operations, an Environmental Management Framework (EMF) has been agreed to support the process of environmental review, clearance and monitoring of investment projects to be financed by IPFF. The provisions of the EMF and associated legal commitments are detailed in Annex 10.

Based on the Country Environmental Analysis recently completed for Bangladesh, it was agreed that national EA capacity is insufficient for the purposes of the IPFF. Consequently all investment projects under the IPFF are subject to prior review and approval ofEAs by the World Bank. In addition, IPFF will not support investment projects that (i)include activities on the IFC/MIGA exclusion list, (ii)entail involuntary resettlement as defined under World Bank OP 4.12, or (iii)include activities inside protected areas.

To assist in the preparation of investment proposals eligible for financing under the IPFF, the Project includes provision initially for IIFC to contract EA services on behalf of project promoters. In addition, to ensure that adequate institutional capacity is in place for implementation of the EMF, the Project includes technical assistance for the establishment of a safeguards function within IIFC.

6. Safeguard policies

Financial safeguards. The project is specifically designed to preclude the creation of state- controlled “balance sheet” lending entities (such as Development Finance Institutions). To the extent that funds are mobilized from financial and other sources, these shall be project-specific and not provided to a financial intermediary. In addition, the project is developed in accordance with O.P. 8.30, as described in Section B. 4, Component 1, Selection ofFinancial Institutions.

Environmental and Social Safeguards. The project will adopt a framework approach to environmental and social assessment, based on the World Bank Group’s environmental and social safeguards framework. The social impact of this project, in terms of generating employment and improving incomes, is expected to be significantly positive. Monitoring the social impact ofthe project will be built into the project design.

Safeguard Policies Triggered by the Project Yes No Enviroi-imental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [I [XI

30 Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI [I Forests (OP/BP 4.36) [I [XI Safety ofDams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI

7. Policy exceptions and readiness

No policy exceptions are envisaged.

Readiness [XI 1, Financial Management and Procurement arrangements are in place for BB and IIFC. [XI 2. Project Management staff and consultants have been identified [XI 3. The procurements documents for the first year's activities are complete and ready for the start ofproject implementation. [XI 4. M&E institutional obligations spelled out; M&E capacity will be available within BB; indicators specified; base line data will be collected by BB [XI 5 The following items are lacking and are discussed under loan conditions satisfactory quality [NONE]

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas.

31 Annex 1: Country and Sector or Program Background BANGLADESH: Bangladesh Investment Promotion and Financing Facility

1. Countrv Economic Background

Bangladesh’s reform efforts since the early 1990s have resulted in significant economic and social improvements, with steady GDP growth and manageable inflation. Real GDP growth accelerated to an average of about 5 percent, from 4 percent in the 1980s. This performance was underpinned by rising agricultural and non-farm rural output and a rapid expansion in exports of ready-made garments.

Robust GDP growth, together with improved access to education and healthcare, has allowed Bangladesh to make good progress toward meeting some of the MDGs. During the 1990s, poverty indicators improved, malnutrition declined, and gender equality was enhanced. Enrollment and completion rates for primary school rose sharply, and adult literacy rates improved. Significant progress was made in reducing child malnutrition, maternal mortality, and rural poverty.

Despite these achievements, Bangladesh still remains among the poorest countries in the region, requiring much faster economic growth if the MDGs are to be met by 2015. Four key structural impediments to growth are physical infrastructure bottlenecks; inadequate human capital investment; a relatively restrictive trade regime that has an anti-export bias; and the high cost of doing business that has been accentuated by poor economic governance. These problems have discouraged private investment, especially foreign direct investment (FDI), and led to inefficient allocation of public resources, reflected in part by the poor financial conditions of the nationalized commercial banks (NCBs) and the large state-owned enterprises (SOEs).

Bangladesh’s revenue to GDP ratio and tax base remain among the lowest in the world. As a result, public investment for infrastructure and human capital development has been inadequate compared to that of most countries in the region. The budget relies heavily on trade taxes and the development surcharge on energy products, contributing to high production costs for domestic firms and to the weak financial position of energy sector SOEs.

While the role of public banks has waned as private banks have grown, poor lending practices and inefficiency continue in the NCBs. This has exerted a drag on growth and generated sizable contingent fiscal liabilities for the government. Though some progress has been achieved in improving lending practices, many loans are still disbursed with little commercial merit and minimal subsequent oversight. A legacy of mismanagement and political interference has resulted in a large stock ofnonperforming loans (NPLs) in the NCBs.

32 Table 4: Performance Indicators in the Banking System (2002 - 2004)

2002 2003 2004 Classijied loans (% of total loans) 28 22 18 Domestic Banks 30 24 18 Nationalized Commercial Banks 34 29 25 Specialized Development Banks 56 47 43 Private Domestic Banks 17 12 9 Foreign Banks 3 3 2

Total classified loans Substandard 9 10 7 Doubtful 5 9 7 Bad 86 81 86

Loan market shares (% of total loans) Domestic Banks 94 93 93 Nationalized Commercial and Development Banks 55 51 47 Private Domestic Banks 39 42 46 Foreign Banks 6 7 7

Actual provisioning in % of requiredprovisioning Nationalized Commercial Banks 31 7 7 Private Domestic Banks 82 75 83 Foreign Banks 127 126 124

Source: IMF Country Report, July 2005, Statistical Appendix.

Recent developments Supportive macroeconomic policies have facilitated economic expansion. Real GDP growth is estimated at 5.4 percent in FY05 (ending June 30), reflecting a deceleration from 6.3 percent recorded in FY04 due to the impact of devastating floods last July. The floods damaged major crops, particularly rice. This, together with an upswing in global oil and commodity prices, contributed to a surge in inflation in late 2004 (7-8 percent in October-December), though inflation has moderated to 6.2 percent in March 2005 and is estimated at an annual average of 6.5 percent in FY05.

As in the previous two years, the fiscal stance has been prudent, with the overall budget deficit estimated at 3.5 percent of GDP in FY05 (from 3.2 percent in FY04), reflecting a slippage in revenue mobilization and higher than projected level of expenditure due to flood relief efforts. The external position strengthened in 2003-04, but pressures emerged at the beginning of 2005. Export earnings have moderated since November 2004, reflecting mainly a sharp decline in prices associated with the elimination of MFA quotas on January 1, 2005. Imports have grown rapidly as a result of higher oil and commodity prices, an increase in food imports, and stronger demand for investment goods. Since floating the exchange rate in May 2003, the Taka has depreciated by 9 percent and 5 percent in nominal and real effective terms.

33 Figure 3: Key Macroeconomic Indicators (1995-2005)

I 20 70

18 60 16 14 50 12 40 5 2 10 8 30 $ 6 20 4 10 2 0 0 FY95 FY96 FY97 FY98 FY99 FYOO FYOI FY02 FY03 FY04 FY05 +GDP growth YO (at FY96 constant market price) --PI inflation Yo (base FY96 = 100) Growth of broad money (M2) Yo Takaldollar interbank exchange rate (period average)

Source: National Accounts (BBS) and Bangladesh Bank

Monetary policy has been supportive of growth, but an accommodative stance in early 2005 contributed to pressures on the exchange market. Reflecting in part lending to the agricultural sector for flood rehabilitation and strong demand for credit in a low interest rate environment, reserve money growth accelerated since late 2004, while growth of private sector credit and broad money also increased sharply. A decline in real interest rates led to a slowdown in the net sales of treasury securities by Bangladesh Bank, with many banks holding treasury securities only up to the limit under the Statutory Liquidity Requirement. However, Bangladesh Bank has restricted conditions considerably since early 2005, with bank’s cash reserve requirement raised from 4 percent to 4.5 percent in March and again to 5 percent in October 2005. Treasury bill rates have also risen by 2.6 percentage points.

Good progress has been made in strengthening the banking system. Bangladesh Bank has raised minimum capital requirements, taken steps to reduce insider lending, and improved the institutional framework for the prudential supervision of the financial system. As part of NCB reform, Rupali Bank has been brought to the point of divestment and management teams have been put in place for Sonali and Agrani, and the contract for Janata Bank was signed recently. With these new management teams, plans to improve operational and lending practices, internal controls, and governance of these institutions are currently under review by Bangladesh Bank and the government.

2. Bangladesh financial sector

The financial system of Bangladesh consists of Bangladesh Bank as the central bank, 4 NCBs, 5 government-owned specialized banks, 30 domestic private banks, 10 foreign banks, and 28 nonbank financial institutions. The financial system also embraces insurance companies, stock exchanges, and cooperative banks.

34 The commercial banking system dominates Bangladesh's financial sector, with a limited role for nonbank financial institutions and the capital market. The banking sector alone accounts for a substantial share of assets of the financial system. The banking system is dominated by the four NCBs, which together controlled more than 54 percent of deposits and operated 3,388 branches (54 percent of the total) as of December 31, 2004. Of the five specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit needs of the agricultural sector, another two (Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangtha) are targeting the industrial sector and the fifth (Bank of Small Industries and Commerce) provides SME credit.

Twenty-eight non-bank financial institutions are now operating in Bangladesh. Of these institutions, one is government-owned, 15 are local private banks, and the other 12 are established under joint ventures with foreign participation. The total amount of loan and lease of these institutions is estimated at Taka 31.6 billion (US$ 514.7 million) as on 30 June 2005.

The capital market, an important ingredient of the financial system, plays an increasing role in the economy of the country. The Securities and Exchange Commission (SEC) exercises powers under the Securities and Exchange Commission Act 1993. It regulates institutions engaged in capital market activities. Bangladesh Bank exercises powers under the Financial Institutions Act of 1993 and regulates institutions engaged in financing activities, including leasing companies and venture capital companies. The SEC has issued licenses to 27 institutions to act in the capital market. Of these, 19 institutions are Merchant Banks and Portfolio Managers, 7 are Issue Managers, and one acts as Issue Manager and Underwriter.

There are two stock exchanges (the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE)) that deal in the secondary capital market. The DSE was established as a public limited company in April 1954, and the CSE was established in April 1995. As of 30 June 2004, the total numbers of enlisted securities with DSE and CSE were 267 and 195, respectively.

Finan cia1 Sector Reform. Supported by a series of IDA credits (most recently the Enterprise Growth and Bank Modernization Project), the government has maintained financial sector reforms as a priority in its economic reform program. In recent years it has continued to implement measures to bring about dynamism and efficiency in the banking sector in Bangladesh and at the Bangladesh Bank (assisted by IDA through the Central Bank Strengthening Project with special focus on automation ofits operations and enhanced banking supervision). A primary component ofthe reform initiative has been to contain losses and strengthen management in the NCBs; however, a series ofmeasures have also been taken to improve the banking sector as a whole and the governance ofprivate sector banks in particular. In 2003 all NCBs were required to enter into a Memorandum ofUnderstanding with the Bangladesh Bank under which net new lending has been limited to 5 percent of their net loan portfolios at the end ofFY03 (and then only to creditworthy borrowers). Significant progress has been made in strengthening management of NCBs. A new management team has been placed within Agrani, as well as management advisors in Sonali and Janata. Each bank has developed interim business plans that include time-bound processes with interim milestones for achieving full compliance with all prudential regulations.

35 A sales advisor has been appointed for Rupali bank, and, after overcoming certain obstacles, Government is now optimistic as to its ability to identify a buyer by the third quarter of 2006.

Broader financial sector reform actions have included the introduction of stricter prudential regulations relating to capital adequacy requirements, loan classification and provisioning guidelines, and single/group exposure limits, an increase in capital adequacy ratio from 8 percent of risk-weighted assets to 9 percent (with a minimum capital ofTaka 1 billion), imposition of penalties on private banks that do not comply with prudential regulations; strict monitoring ofthe operations ofbanks with a weak CAMEL rating; and enhancement ofthe accounting disclosure requirements by banks in line with international standards and improvement in the legal framework. Risk management guidelines on major risk areas covering credit, market and operational risks have been issued as well as prudential guidelines for consumers and small business lending. A series of measures to improve corporate governance have been introduced and a large number of private bank directors and chairpersons have lost their directorships for loan default, insider lending practices and other violations. Fit and proper tests for appointing new bank directors and Managing Directors have been tightened and several Managing Directors ofbanks have been removed since 2000.

Finance Sector Reform Measures 2002-04 e Stringent loan rescheduling conditions introduced, e Limitation on dividend payout introduced, e Strict measures enforced on loan loss provisioning, e Loan write-off guidelines issued, e Effective use ofCredit Information Bureau, e Large loan limitation (single party exposure) introduced, e Total oflarge loans by banks linked to bank’s NPL ratio, e Money Loan Courts Act revamped in 2003, e Corporate Governance measures substantially enhanced,, e Early Warning System introduced.

Finance Sector Governance Measures 2002-04 0 Fit and Proper test for CEOs ofbanks tightened, 0 Fit and Proper test for bank directors introduced, 0 Provision of independent directors representing depositors’ interests, 0 Maximum number ofdirectors for banks reduced to 13, 0 Limiting directorship ofbanks to six years or two terms, 0 Only one director allowed from each shareholding family, 0 Instructions issued to constitute Audit Committee of each bank’s Board to assist in financial reporting, audit, and internal control, 0 Much enhanced annual financial disclosures required including publication in newspapers and ensuring availability for public view in bank branches, 0 Risk Management Guidelines introduced.

Source: Bangladesh Bank, 2005

36 Interest rates Under the new interest rate policy that became effective in January 1990, all deposit rates are decontrolled. Lending rates are all freely determined by the market, except for exports. Banks are therefore free to fix their deposit and lending rates; however, Bangladesh Bank has been encouraging the banks to reduce highest lending rate to a single-digit rate. Bangladesh Bank revised the bank rate downward from 6 percent to 5 percent in November 2003. Banks are allowed to differentiate interest rates by 3 percentage points, considering comparative risks involved among borrowers in the same lending category.

The weighted average deposit rate, lending rate, and spread ofthe banks came down to 5.6, 10.9, and 5.3 percent, respectively, in June 2005, from 6.5, 13.2, and 6.6 percent as ofDecember 2002. Bangladesh Bank predicts that this trend is likely to continue and will result in better operational performance ofthe banks in terms ofrecovery and profitability.

37 Figure 4: Lending, Deposit, and Real lnterest Rates (1980-2004)

20.00

15.00

10.00

5.00

0.00

-5.00

-10.00

1 -Deposit interest rate (%) Lending interest rate (YO) Real interest rate (%)

Source: Global Development Finance 2005

3. Key challenges in infrastructure

Infrastructure is a critical feature of a country's growth dynamics, and in Bangladesh the quality of services appears to be relatively poor. Business executives surveyed for the Global Competitiveness Report 2003/04 ranked Bangladesh lower on this trait than all other developing countries in East and South Asia (World Economic Forum 2004). Of the 102 developing and industrial countries in the sample, Bangladesh ranked 90th, whereas Philippines ranked 89th, India ranked 70th, Pakistan 68th, China 55thsand Malaysia 12th.'0

Figure 5. Rankings of Bangladesh and Comparator Countries by Overall Quality of Infrastructure

Malaysia

China

Pakistan

India

Philippines

Bangladesh

I 0 20 40 60 80 100

Source: World Economic Forum 2004.

~ loWorld Economic Forum, Table 5 .O 1.

38 Evidence from firm-level investment climate surveys confirms that the quality of infrastructure services is a significant problem in Bangladesh, with electricity the biggest concern. Asked to rate the extent to which telecommunications, electricity, and transport hampered enterprise operations and growth in their country, only 4 percent of enterprises in Bangladesh reported that electricity posed no obstacle (figure 6).

Figure 6: Share of Firms in Bangladesh and Comparator Countries Reporting That Infrastructure Is No Obstacle to Business Operations

60

50

40 CI $ 30 al n 20

10

0 I Bangladesh China Pakistan Telecommunication Transport Electricity

Electricity was a smaller concern in China, where 37 percent of enterprises reported that it was no obstacle, and in Pakistan, where 21 percent considered it no obstacle. Generating capacity remains low: while Bangladesh had about 0.03 kilowatts of capacity per capita in 2001, India had 0.1, Pakistan 0.12, and China 0.21. A quantitative measure ofthe bottleneck posed by lack of reliability of the power grid is given by enterprise estimates of the share of sales lost due to power outages. On this measure, China is the best (0.2 percent), significantly better than Bangladesh (3.3 percent), which in turn is better than Pakistan (5.4 percent) and Philippines (8.6 percent). The better figure relative to Pakistan likely reflects the preponderance of own- generators in Bangladesh. While 71.5 percent of enterprises reported having a generator in Bangladesh, only 68.5 percent did in India, 41.8 percent in Pakistan, 32.3 percent in Philippines, 22.6 percent in Malaysia, and 17 percent in China. These back-up systems impose significant costs on enterprises, with firms reporting paying nearly 50 percent more for own-generator use than for grid-based electricity.

Enhanced availability of infrastructure finance has gained in importance in light ofthe challenge for Bangladesh to maintain its market share of garment exports after the January 2005 expiration of the Multi-Fiber Arrangement. Improving the country's transport system, along with other actions, will be essential to reducing product delivery times. Bangladesh lags far behind the countries that are its main competitors in ready-made garments, with Bangladesh's 19 percent of enterprises reporting that transport poses no obstacle to business operations comparing unfavorably with 44 percent reporting the same in China and 47 percent in Pakistan. Ban ladesh (at 62nd) ranks lower than Pakistan (49'h), China (37'h), India (20th) and Malaysia (lSti ) with respect to quality of railroad development, and also Bangladesh (at 88th) ranks lower than Philippines (83'h), India (69'h), Pakistan (59'h), China (54'h), and Malaysia (7'h) in a ranking on

39 quality of port facilities and inland waterways.” Bangladesh’s poor ranking in ports is driven primarily by Chittagong port, which handles nearly 85 percent of the country’s trade merchandise, but is plagued by labor problems, poor management, and lack of equipment. The container terminal handles only 100-105 lifts per berth a day, well below the UNCTAD productivity standard of230 lifts a day. Ship turnaround time is 5-6 days, significantly above the one-day standard ofmore efficient ports.

Although telecommunications appear to hamper enterprise operations and growth much less in Bangladesh than power and transport, it also constrains enterprises more in Bangladesh than comparator countries, with 4 percent ofenterprises reporting that they pose no obstacle versus 2 1 percent in Pakistan and 37 percent in China. Quantitative fixed-line and mobile teledensity numbers corroborate this picture. In 2002, Bangladesh only had 0.51 fixed lines per 100 inhabitants, versus 2.50 for Pakistan and 3.98 for India, and 16.69 in China, 4.17 for Philippines, and 19.04 for Ma1aysia.l2 With respect to cellular telephony in 2002, Bangladesh’s 0.81 mobile phones per 100 inhabitants, although surpassing fixed-line teledensity, also lags Pakistan’s 0.85, India’s 1.22, as well as China’s 16.09, Philippines’ 19.13, and Malaysia’s 37.68. Getting initial connection to a fixed-line service, of critical importance for new enterprises wanting to establish a presence both through direct calls and the Internet, also takes significantly longer in Bangladesh than in comparator countries: enterprises obtaining a new fixed-line connection in the previous 2 years reported an average wait of 130 days in Bangladesh versus 42 in Pakistan and 16 in China. These responses suggest that the poor quality of infrastructure is a serious problem for enterprises in Bangladesh. A 2000 study, Voices of the Poor, found that poor people in Bangladesh viewed better roads, transportation, communications, energy, water, and sanitation services to be almost as important as health and education services.

Table 5. Coverage of Infrastructure Services in Bangladesh

Telephone mainlines Percent with access Percent with access per 100 people to electricity to piped water Bangladesh 0.79 31 42 Indiu 3.94 70 86 Nepal 1.34 15 81 Pakistan 2.9 55 70 Sri Lanka 4.4 5.5 58

‘I World Economic Forum, Tables 5.02 and 5.03. ’’ International Telecommunications Union, World Telecommunication Indicators, December 2003.

40 Annex 2: Major Related Projects Financed by the Bank and other Agencies BANGLADESH: Bangladesh Investment Promotion and Financing Facility

IPFF is related to three active World Bank projects.

Enterprise Growth and Bank Modernisation Project (2004-2009, Satisfactory) The objectives of the project are: a) to trigger employment generation through private sector enterprise growth and urgently needed reforms within the SOEs and b) to help Bangladesh implement its banking sector reform program aimed at achieving a competitive private banking system by a staged withdrawal through corporatization leading to divestment of a substantial shareholding in Rupali, Agrani, and Janata, and to divestment of a minority shareholding in Sonali. The enterprise growth component focuses on containing future losses within the SOEs sector by privatization or closure of some of the loss-making manufacturing SOEs, turning into productive uses the abandoned assets of the SOEs that have been closed and are now lying idle, and providing finance to the missing middle between micro enterprises and medium-size enterprises. The Bank Modernization component starts the resolution process within the four NCBs to pave the way for eventual divestment.

Financial Institution Development Project (1999-2006, Satisfactory) The objective of the FIDP is to promote the development of nonbank financial institutions (NBFIs), in particular, and investment financing, in general, on a sustainable basis contributing to improvements in the quality of intermediation, and the speed and efficiency of industrial growth in Bangladesh. The role of the FIDP is to support expansion of NBFIs that represent the sounder and more efficient part of the financial sector, pending the restructuring of the predominantly state-controlled commercial banking sector. The project promotes the development ofNBFIs in order to provide alternative opportunities for savers and increase on a sustainable basis the supply of term funds for competitive projects that generate growth and employment.

The FIDP consists of two components a US$1.5 million Resource Mobilization TA component to address external factors that delay or constrain resource mobilization from the market. Supported activities are intended to streamline regulations for market-traded instruments to facilitate bond and security issues, and create a level playing field for individual investors between market-traded instruments and government saving schemes. The project also supports development of market-oriented mechanisms for raising funds through strengthening government treasury bond markets. The US$58 million (IDA US$47m) lending component is largely dedicated towards supporting a Credit, Bridge, and Standby Facility (CBSF) to encourage the development of term financing by the more efficient and healthy part ofthe financial system. The CBSF provides funding to financial institutions through a variety ofmechanisms designed to encourage and enhance their own capacity to mobilize medium-term resources from the local market.

The FIDP is now fully disbursed and closed in February 2006. The project has played a material role in facilitating a dramatic enhancement in the government debt market in Bangladesh, which has developed from a market with limited maturities and literally no secondary trading to an active market with regular auctions for debt out to 10 years. The FIDP has also supported the

41 development of an institutional, legal, and tax environment amenable to the issuance of securitized debt. The first securitized bond issue in Bangladesh was issued under this project in November 2004. The FIDP is providing the platform for the proposed securitization of toll revenues from Jamuna Bridge.

Private Sector Infrastructure Development Project (1997-2007, Moderately Unsatisfactory) Under the PSIDP, a US$225 million fund was established to provide long-term debt for private sector infrastructure projects. The PSIDP was signed in November 1997 and is now rated “Moderately Unsatisfactory.” Through this facility, administered by the Infrastructure Development Company Limited (IDCOL), a government agency, the Government ofBangladesh has made senior and subordinate loans totaling US$SO million to the AES Meghnaghat 450 MW power project. In parallel to IDCOL, PSIDP established the Infrastructure Investment Facilitation Center (IIFC), to provide Technical Assistance to government infrastructure agencies and line ministries for promoting private sector participation, at a policy level and to promote specific transactions. The project was restructured in March 2005 to reallocate most funding (US$154 million) to flood relief, while US$3.5 million was allocated to IIFC to promote private infrastructure.

IFC has two active related projects, described below.

Khulna Power Project, 1998. The project consists of a 110 MW power plant to be developed under a build, own, operate scheme. The electricity produced is sold to the Bangladesh Power Development Board, the national utility, on the basis of a 15-year power purchase agreement. The total cost of the project is US$lOS million; the IFC provided a US$23.5 million A loan, a US$37 million B loan, and an equity investment ofUS$3.3 million.

International Communications Technologies - Bangladesh Project (ICT-B), 1995. The project partners are Bangladesh Rural Telecom Authority (BRTA) and International Communication Technologies, from the USA. ICT-B is a Bangladeshi joint venture company owned by BRTA (50 percent) and ICT-World Telecommunications (50 percent), a special- purpose company set up by ICT. ICT-B owns the network and BRTA operates it at its actual cost. The total project cost is US$104.4 million. IFC investment consisted of a A loan for US$15 million, a B loan for US$10 million, and an equity investment for US$0.25 million and further equity ofup to US$6 million ofprivate placement.

ADB has two recent related projects:

Capital market development program loan (Loan 1580-BAN) The SDR58.6 million ($80 million) Capital Market Development Program (CMDP) loan from the Special Fund resources of Asian Development Bank (ADB) to the People’s Republic ofBangladesh was approved on 20 November 1997. The Program aimed at enhancing market capacity and developing a fair, transparent, and efficient domestic capital market, to attract larger amounts ofinvestment capital, which can augment capital resources provided through the banking system and improve efficiency in allocating resources. The Program was to be implemented over a period of about 3 years. The project comprised (i)a policy reform program designed to create a policy

42 environment conducive to capital market development and (ii)technical assistance (TA) to improve governance and address capacity-building requirements ofkey institutions operating in the capital market. The CMDP was designed to achieve the following outputs: (i)stronger market regulation and supervision, (ii)improved capital market infrastructure, (iii)modern capital market support facilities, (iv) increased supply of securities in the capital market, and (v) increased institutional demand for securities. Three TA grants under the Program were (i) Capacity Building of Securities and Exchange Commission and Stock Exchanges (TA 2913), (ii) Institutional Strengthening ofthe Privatization Board (TA 29 14), and (iii)Insurance Industry and Pension and Provident Fund Reforms (TA 2915).

Improvement of Capital Market and Insurance Governance TA Loan (Loan BAN 36197- 01) The US $ 3 million loan is scheduled to be approved in 2006. The Project will improve governance practices in the capital market and the insurance sector. The TA Loan has two parts. Part 1 will enhance the governance and capacity ofthe capital market, and Part 2 will enhance the governance and capacity ofthe insurance sector. Part 1 will be targeted at the regulator, stock exchanges, market practitioners, and investors. Part 2 will support Government-led reforms currently being pursued in the insurance sector.

Summary table

Start Amount in Agency Project title Enddate date Private Sector Infrastructure Development IDA 1997 2007 225 ---J---Proiect IDA Financial Institutions Development Project 1999 2006 46.9 Enterprise Growth and Bank IDA 2004 2009 250 Modernization Project IFC Khulna Power Project 1998 30.5 International CommunicationsCorn IFC 1995 31.3 Technologies - BL=-Bangladesh Project- --J ___ ADB Capital market development program loan 1997 80

Improvement ofCapital MarketnKn~l,--+ andnnrl ADB 2006 3 Insurance Governance TAT Loan

43 Annex 3: Results Framework and Monitoring BANGLADESH: Bangladesh Investment Promotion and Financing Facility

Results Framework PDO Outcome Indicators Use of Outcome Information I To accelerate private Private sector participation in YR 1 to 5: Used as basis for maintaining sector-led growth infrastructure increases (as measured dialogue with government and private through providing term by the increase in number ofPPPs). sector. finance for infrastructure development and YR 3: Strategic review ofprogress. promoting domestic If progress is lacking, identification of infrastructure finance targeted actions to remove bottlenecks.

Results Indicators for Each Use of Results Monitoring Component Component One: Component One: Increase of private investment 1. US$50 million worth of YR 1 to 5: Used as basis for maintaining for infrastructure in the form private sector infrastructure dialogue with government and private investments are realized using the sector. IPFF; including contribution from PFIs, Government and project YR 1: By end ofyear 1, at least 1 private sponsors. sector investments in infrastructure has been undertaken. If this target is not 2. At least 3 domestic financial achieved, assess and address underlying institutions use the IPFF. reasons.

3. PFIs maintain eligibility YR 3: Strategic review ofprogress. criteria If progress is lacking, identification of targeted actions to improve performance (such as increased promotion of the IPFF among potential infrastructure promoters or opening of the IPFF to all private sector investments, instead of a focus on infrastructure).

44 Component Two: Component Two: Component Two: Improved capacity of the 1.Effective support** provided- to YR 1 to 5: Used as basis for maintaining and localgovernment in the promotion and dialogue with Government and private financial institutions to implementation ofPPPs, as sector. promote and implement PPP in infrastructure measured by the number ofPPPs that follow PICOM guidelines. YR 1: Assess whether there is a need to clarify the role of IIFC to avoid potential conflicts of interest (if the IIFC advises both the government 2.Environmental assessments are and the private sector). undertaken for all infrastructure projects financed under the facility YR 3: Strategic review ofprogress. in coordination with the DOE. Refocus of technical assistance if need be. 3 .Effective guidance provided to Bangladesh Bank regarding investment project eligibility, as measured by percentage ofprojects reviewed.

4.The capacity of financial institutions participating in the IPFF to undertake financial analysis of infrastructure projects is strengthened, as measured by the number of staff trained.

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Yw 0 x' 0s 0s 0 8 N m W2N 0?- z E 8 2 0 0 3 sL + N 3 2 s s S' 0 0 vi 323 z 0- M Annex 4: Detailed Project Description BANGLADESH: Bangladesh Investment Promotion and Financing Facility

1. Proiect Components

Component 1: Infrastructure Development Lending Component (US$47.5 million) This component aims to develop a funding mechanism that adds transparent levels of control and market- based incentives to the existing methodology for the allocation of public funds to priority infrastructure projects identified by government and developed on the basis of public private partnership. The amount initially allocated for IDA support reflects the pilot nature of the operation and the need to ensure utilization; the approach could be augmented through Additional Financing to meet market demand. While IDA funds would be available in SDRs it is envisaged that onlending under the project would be Takas or Dollars to match the revenues ofthe underlying infrastructure investment projects.

The proposed structure would not create any new licensed financial institutions but would rather operate under Bangladesh Bank oversight with existing regulated local financial institutions (reflecting the arrangements ofFIDP). Funds would be allocated to infrastructure projects endorsed by government with credit risk assumed by local financial institutions. The private sector participants would operate under incentive-based contractual arrangements designed to align their interests with those of GOB, Sub-loans to PFIs for investment projects eligible for financing from the facility would be approved by the Bangladesh Bank, as agent of GOB, subject to IDA “No Objection”. Projects would be supported on market terms and would require at least 30% sponsor equity component and a further minimum amount of third party funding equal to at least 14% ofthe total project cost (i.e. 20% of debt financing). Participating financial institutions will be required to co-invest to reinforce alignment of their interests and those of Government and will be remunerated on the basis of success. Bangladesh Bank will act as the executing agency for the overall project.

Participation under the facility would be open on the basis of a level playing field for all financial institutions which meet qualification criteria to be determined by Bangladesh Bank. It is envisaged that competition between participating financial institutions will operate in favour of both the Government of Bangladesh and the private promoters ofinfrastructure projects.

The goal of the IPFF is to promote sustainable infrastructure development by “crowding in” private sector investment into an area that has historically been dominated by donor funding and characterized by an absence of allocation mechanisms using market pricing. No new licensed entities will be established under the project, and the facility will be open to all existing financial institutions according to criteria to be established in consultation with Bangladesh Bank.

The facility seeks to help participating institutions extend finance for longer tenures for small projects, on the basis that extremely large projects are better supported through stand-alone IDA projects. This approach also allows for a small initial project size, to be complemented by supplemental credits as required, and so avoids having substantial IDA commitments remain unused.

The core objectives of the structure are to establish mechanisms to address the governance and control issues of allocation of public funds to private enterprise, so as to meet the need for market pricing, transparency of process, and competitiveness, while still giving adequate incentives to promote engagement by the private sector. To achieve this, the IPFF follows tried and tested principles developed

47 in the field of investment management to establish a system of checks and balances to promote good commercial judgment while protecting public sector interests.

The starting point for the facility design has been to seek a commercial culture through significant private sector participation, strong corporate governance and management, and a clear strategy for funding sustainability beyond the IDA project timeline so as to be a catalyst for financial market innovation. To this end, the participation of local private financial and entrepreneurial institutions has been sought from the outset to assure a design that suits the needs and capacity of the Bangladesh economy. Multiple participants are allowed under the project so that competition for funds generates market-based pricing. Contractual arrangements with participating financial institutions allow for flexible engagement so the facility can easily respond to changing circumstances or failure of any participant to perform without institutional reform or retrenchment of incumbent staff. Effective regulatory oversight from Bangladesh Bank and the application of strict criteria for financial institution participation are essential to the project design.

Facility mechanisms. The following mechanisms for accessing financing under the facility are proposed (as illustrated by figure 2 above):

a) A private sector promoter is selected to undertake a government-sponsored infrastructure investment project on the basis ofa PPP (for example, a land port or a small power plant). b) The promoter approaches a participating financial institution to finance the investment project. c) The selected participating financial institution conducts due diligence on the proposed investment project. d) Ifsatisfied with the proposed project, the participating financial institution decides to cofinance the project and determines the applicable interest rate. e) The financial institution then approaches Bangladesh Bank with the proposed project and requests cofinancing under the IPFF. f) The technical advisor appointed by Bangladesh Bank reviews the proposed investment project and provides its advice also to IDA. On the basis of its own assessment for adherence to project objectives, the credit agreement, and government policies, IDA will also review on the basis of “No Objection.” g) On behalf of the GOB, Bangladesh Bank provides the requested funding to the participating financial institution in local currency or U.S. dollars, as required. In parallel, the financial institution provides its share of the financing to the project. h) The GOB draws down the IDA credit in respect of the financing provided to the participating financial institution and forwards this amount to Bangladesh Bank. The foreign currency is credited to the foreign exchange reserves (except to the extent that these are required to finance import ofequipment). i) The financial institution collects the repayments from the project and reimburses Bangladesh Bank on behalf of the government, according to the terms of the financing contract.

Interest Rates

The interest rate on Facility Loans shall be standardized across participating financial institutions. The grace period and amortization schedule shall match that of subloans extended by participating financial institutions.

48 Facility Loan interest rates shall be on the basis of a margin over the marketable government borrowing instrument with maturity closest to the interest resetting mechanism of the loan. The interest rate for a fixed rate bullet loan shall be set at 0.25 per cent above the equivalent maturity government bond rate. The interest rate for a fixed rate amortizing loan shall be set at 0.25 per cent above the rate of the government bond having a maturity closest to the average life of the loan. The interest for a floating rate loan shall be set at 0.50 per cent above the interest rate ofthe Treasury Bill maturing closest to the interest rest date ofthe loan. As such, the interest rate for a ten year fixed rate bullet loan would be set against the ten year government bond rate, the rate for a fixed rate ten year amortizing loan with an average life of five years would be set against the five year government bond, the rate for a seven year loan with an annual interest reset would be against the one year Treasury Bill. Interest rates for the Government securities to be used as reference rates for Taka Facility Loans will be as disclosed on the Bangladesh Bank webpage.

For any Facility Loans made to participating financial institutions in Dollars, or other foreign currency, the interest rate will be 0.50 per cent above the relevant interbank rate for floating rate loans (interest rates resetting every 12 months or less) and 0.25 per cent above the relevant swap rate for fixed rate loans, as determined by the International Swaps and Derivatives Association (ISDAFIX).

Guiding tenets for the operation ofthe facility are as follows:

a. Competition for resources. At each level, that of financing vehicle or infrastructure project promoter, there should be contestability. Key functions can be provided by multiple parties simultaneously.

b. Involvement ofPrivate Sector from outset. Extensive consultations have been undertaken with financial sector participants, and prospective infrastructure promoters to ensure that the facility design is appropriate for Bangladesh.

c. Transparency protected by clear contractual arrangements. A separation is established between those controlling resources and those allocating resources. This relationship is governed by contracts which are open to public scrutiny.

d. Flexibility which allows for a number of outcomes. Rather than being hard wired for a certain outcome which is heavily constrained by institutional design and may well be inappropriate for changing circumstances, the design is one which lends itself to a range ofpublic private partnership arrangements.

e. An open architecture which allows for variation and easy entry and exit of parties. Responsibilities are shared amongst multiple parties governed by contracts which may be terminated. The structure allows for innovation and evolution over time, ideally towards a solely private sector outcome.

Component 2: Technical Assistance Component (US$2.5 million) The technical assistance component is designed to assist Bangladesh Bank in the implementation of the proposed project and, more broadly, to enhance the long-term sustainability of private infrastructure finance by supporting GOB, initially through IIFC, in further developing the framework for PPPs in

49 infrastructure; fostering policy, regulatory, and institutional reforms; building capacity to manage PPP processes; and implementing the Private Sector Infrastructure Guidelines.

This component includes the following: a) Technical assistance for Bangladesh Bank and market participants

Technical assistance will be provided to Bangladesh Bank through a consultancy to assess infrastructure projects; it is envisaged that such services would be provided by IIFC or another suitably qualified body. Such technical assistance will facilitate Bangladesh Bank’s approval ofinfrastructure financing proposals, As reviewing loan proposals is not a core activity of Bangladesh Bank, a qualified professional will be retained to review the financing proposals. Support will also be given under this component for training and dissemination activities that allow market participants to promote infrastructure finance.

b) IIFC support to PICOM for policv and regulatory reform

The project will support PPPs by continuing the operations of IIFC to provide the critical public policy support functions ofpolicy development, information sharing, and capacity building. The project will also seek to strengthen the policy and regulatory frameworks for enhanced private sector participation. Within its institutional mandate, the IIFC provides project identification services and ancillary transaction advisory services (such as overseeing the contract bidding processes) for line ministries and government agencies, IIFC acts in the first instance as a provider of technical assistance to the GOB. While IIFC offers direct advisory services to PICOM, it is envisaged that the degree of interface with line ministries will be determined by the ministries and may be limited to acting as a procurer of consulting services rather than as a provider of services. BO1 will approve invoices for services provided to PICOM and forward to Bangladesh Bank with their certification, Bangladesh Bank will make payment on the basis of BO1 certification. i

IIFC acts as a small central facilitation and advocacy unit that would help provide support for policy development and capacity building within the line ministries. This includes, inter alia, assistance to the government in developing an appropriate policy, regulatory, and institutional framework for the major infrastructure sectors, with an emphasis on private sector involvement in the development, operation, and maintenance of these facilities. IIFC also provides support in designing and managing capacity-building programs (for example in the Land Ports Authority and the Bangladesh Inland Water Transport Authority), especially with regard to the respective agencies’ role in policy making for private participation and as overseers of private Build, Operate, TransfedBuild, Own, Operate (BOT/BOO) and other forms of PPP contracts. The project could also support initiatives such as the design of institution- strengthening programs that focus on regulation in general, and promotion ofregulatory reforms aimed at attracting more private investment in infrastructure.

It is an important principle that IIFC has responsibility solely to the GOB, in particular to PICOM and the Board of Investments and on a contractual basis under the project to Bangladesh Bank according to the terms ofthe Technical Services Agreement. The performance measurements for IIFC will be determined and monitored by IDA as part of periodic project supervision in consultation with PICOM.

c) Support for environmental assessments

To improve the standard of project preparation in Bangladesh, funds under the technical assistance component may be used to supervise and manage the preparation of Environmental Impact Assessments (EIA) to assure the quality required by the GOB (and for eligibility for World Bank Group funding).

50 The Department of Environment is responsible for providing environmental clearances according to the requirements of the Environmental Conservation Act and Rules of 1995 and 1997. The capacity of the DOE to fulfill this function is being strengthened through long-term technical assistance from the Canadian International Development Agency (CIDA).

To reduce risks to investors and promote adherence to national and World Bank requirements, IIFC, or another suitably qualified body, will coordinate and oversee the provision of social and environment assessment services to project sponsors. The safeguards activities will include the following:

a) Screening of investment concepts against the IFC / Multilateral Investment Guaranty Agency (MIGA) exclusion list to ensure that no activities on the exclusion list are financed b) Determination of appropriate safeguard categories under both DOE and World Bank classifications c) Contracting for and reviewing environmental and social impact assessments as required by DOE and the World Bank d) Submitting draft impact assessments for environmental Category A projects and projects with significant adverse social impacts for review and “No Objection’’ by the World Bank, before seeking clearance from DOE e) Obtaining environmental clearance for all proposed investments from DOE f) Providing the World Bank with annual monitoring reports summarizing all investments, their safeguard category, and impact assessment/Environment Management Plan (EMP) status.

Decisions on the financing of investment projects will be made by the participating financial institutions responsible for the financing component of the project. These participating financial institutions will have due diligence responsibilities for environmental and social safeguards as follow^'^:

a) Ensuring that required clearances of environmental and social impact assessments have been obtained from DOE and the World Bank b) Ensuring that any EMPs cleared by the DOE or World Bank are incorporated in the loan agreemendinvestment contract documentation c) Providing the World Bank with annual reporting of all investments supported, their safeguard category and clearances, and any environmental or social commitments (such as EMPs) that have been incorporated in investment contracts.

To build the necessary capacity to implement this approach to environmental and social safeguards management, the project will support the following:

a) Establishment ofa safeguard function within IIFC, or any other suitably qualified body capable of: 0 screening investment proposals against World Bank and DOE safeguards requirements 0 preparing Terms of Reference for environmental and social impact assessments sufficient to meet national and World Bank requirements 0 contracting and reviewing the quality of such assessments 0 interacting with the DOE and the World Bank to obtain necessary safeguard clearances b) Establishment of safeguards, due diligence processes, and capacity within the participating financial institutions.

l3The participating financial institutions will be supported in this task by IIFC. Investments requiring resettlement will not be eligible for financing under the IPFF.

51 Though the project will facilitate the role of the project sponsors through this subcomponent, sponsors and financing providers will jointly retain the ultimate responsibility for ensuring that safeguards are met. The assistance in environmental assessment and management should serve to increase interest in infrastructure project development in Bangladesh. At the same time, economies of scale can be expected from channeling environmental assessments through IIFC, or another suitably qualified body.

2. Potential project pipeline

Background. The IPFF is not designed to rely on a portfolio oftransactions that are ready to be submitted for financing, but is a market-based financing facility that will be demand-driven. The use of IPFF resources will thus depend on the speed with which infrastructure projects under preparation reach the financing stage, alternative financing sources available, and the credit quality of these projects vis-a-vis IPFF requirements. It is therefore not possible to define with any degree of precision the projects that IPFF is likely to finance during its implementation period. However, the facility has been conceived in an environment in which suitable long-term local currency financing is virtually not available, and long-term foreign currency financing, while available in certain cases, carries foreign exchange risk and results in a currency mismatch between revenues and debt service obligations for most infrastructure projects. The IPFF should therefore be an attractive financing source for infrastructure and should be taken up in the existing market.

In order to get a clearer picture of this market and ascertain that demand for IPFF resources exists, potential projects have been reviewed that are projected to reach financial closure over the next three years and that might approach IPFF for financing. Projects reviewed are principally in the power, transport and telecommunications sectors. The proposed facility is not tied to any of these sectors however and, in principle, projects from all priority sectors listed in the Private Sector Infrastructure Guidelines would be considered. The assessment undertaken does not include certain large projects for which financing will most likely be arranged on a stand-alone basis and for which IPFF could at best provide a small contribution. Among those would be for example the independent power plants Meghnagat I1and Siraj ganj or the second Dhaka-Chittagong National Highway project.

Procurement mxxss. For infrastructure projects to have access to IPFF funding, it will need to be established that the procurement process is acceptable to the World Bank. For concessions, BOO contracts or other forms of PPPs, this would mean that (i)the investor has been selected through a competitive and transparent process acceptable to the Bank, or (ii)works and equipment will have to be procured through competitive processes acceptable to the Bank, i.e. in general through ICB. If the project is not a PPP (e.g. captive power facilities), local procurement methods ensuring economy and efficiency may be satisfactory. Detailed procurement arrangements are outlined in Annex 8.

Environmental assessment. The completion of an environmental impact assessment that meets DOE requirements will be a condition for eligibility for financing under the IPFF. Project sponsors may request IIFC to provide requisite consultant services for the completion of an EM, subject to availability of IPFF resources on a first-come-first-serve basis. IIFC, or another suitably qualified body, will manage the consultant selection and supervision of the environmental advisers.

Power sector.

In 1996 GOB introduced a policy to enable private investment in the power sector. Under this policy, new capacity of 1290 MW (a total of 7 plants) has so far been established through private independent power plants (IPP) and another 1590 MW are planned to be established in the near future. IPPs thus represent about 26% of total generating capacity of 4,920 MW. While electricity generation capacity has been growing at 7% p.a. over the past 10 years, it is far from sufficient to serve the majority of the population

52 (only 35% have access) and has constrained economic growth in general. Insufficient supply and growing demand are creating increasing electricity shortages resulting in daily load shedding. GOB estimates that an additional 12,845 MW capacity will be needed by 2020 to satisfy the energy demand of the country, assuming a 7% growth rate.

Small Power Plants. While a series of new public plants and large PPs are planned in the near future, they will take some time to come on stream. Therefore GOB has decided to remedy the situation in the short term by procurement of 10 small power plants of 10-30 MW capacity to be built and operated on a BOO basis. Of these plants, 4 will conclude power purchase agreements with BPDB, and six with REB. The 10 plants will have a capacity ofabout 200 MW and total costs could range around US$ 120 million. The implementing agency, Power Cell, has called for pre-qualification and has prepared a draft bid package for tendering. The time required between the issuance of the pre-qualification notice and commencement of commercial operations is estimated at approximately 18 months. In August, 2005, the GOB had already invited offers for 23 small power plants. While this tender was subsequently cancelled due to a lack ofclarity in the tender documentation 229 firms or consortia had submitted their expressions of interest. The response demonstrates keen interest on the part of investors and operators, and also indicates a substantial demand for taka funding if contracts for all these plants are concluded.

Remote Area Power Supplv Svstems. Based on a 2001 memorandum of understanding between GOB, IFC and IIFC, the latter has carried out feasibility studies for four sites out of 28 identified that could be suitable for privately financed and operated remote power supply systems. Two ofthese sites are off-grid and two on-grid. The on-grid sites (Hatibanda and Patgram upazilas in Lalmonirhat district) appear commercially viable, while the off-grid sites (Kutubdia and Sandwip Islands) would require subsidies that could be provided through funds reallocated from PSIDP. Investment costs are estimated at a total ofUS$ 5 million. Four potential investors have been pre-qualified for the on-grid locations, the draft bid package has been approved and invitations for bidding were expected to be issued in December, 2005.

Power Plants at Chittagong Export Processing Zone and Chittagong Port Authoritv. The Export Processing Zones Authority wants to entrust construction and operation of a 10 MW power plant at the Chittagong Export Processing Zone to a private investor by competitive tender. Investment cost is estimated at US$ 6 million. A feasibility study and commercial fkamework have been prepared by IIFC, to be followed shortly by a bidding process to select a private investor. The Port Authority intends to bid out on a BOO basis the construction and operation of a 5 MW power plant, estimated at US$ 3.5 million, to a private investor by competitive tender. The invitation for tender is expected to be issued in early 2006.

New Grid Connection Investments of Existing Captive Power Plants. GOB has just received a draft of a captive power policy prepared by a consulting firm. After review and revisions it is intended to approve the policy promptly under which surplus capacity of existing captive power plants would be allowed to be sold to the grid. An exact evaluation of investment and financing requirements has not been carried out. An initial rough estimate of US$ 2.5 million is likely to increase once the new policy has been approved and is in effect.

Transport

New Mooring Container Terminal at Chittagonn Port. Container traffic at Chittagong Port is projected to increase from 765,000 TEUs in 2004-2005 to about 1,600,000 TEUs in 2016-2017. In order to reduce congestion and improve performance of container operations, Chittagong Port Authority (CPA) started in February 2004 construction of a new terminal exclusively for container handling and wants to entrust operation ofthe terminal to a private partner through competitive bidding for a concession. The terminal’s capacity will be 1 million TEUs p.a. Infrastructure development work has been commissioned and

53 financed directly by CPA. The private operator’s responsibility is to procure all new container handling equipment, raise all necessary financing, and manage, operate and maintain the facilities. Total cost for the private sector project is estimated at about US$ 160 million. A feasibility study, being prepared by IIFC, is 90% completed and draft bidding documents are currently being reviewed. It is planned to carry out the bidding process and select the operator by June 2006. This project could be a potential candidate for IPFF financing.

Inland Container Terminal at Khanpur. Another project to reduce congestion at Chittagong Port is the establishment of an inland container terminal at a site owned by BIWTA at Khanpur on the river Sitalakhya in Narayanganj District. The terminal will have a capacity of about 100,000 TEUs p.a. which has been derived from an analysis of container traffic to and from Dhaka through Chittagong Port, and the comparative advantage of the inland container terminal over other modes of transport, specifically by truck. Total cost of the project is estimated at about US$ 30 million. A competitive bidding process was recently conducted for a 30 year concession, under which the private operator would be responsible for all construction work, and for operation and maintenance. Tariffs would be set freely in accordance with market parameters. IIFC has acted as adviser of BIWTA for project development. The tender process resulted in only one bid, but negotiations could not be successfully completed. It is therefore currently not clear whether and when the project will be re-tendered.

Land Ports. The Bangladesh Land Port Authority is responsible for facilitating exports and imports by road between Bangladesh and neighboring countries. It operates, and will continue to do so, the important land port ofBenapole. To improve logistics at other border crossings, the Authority is now in the process of contracting private sector operators for 12 additional land ports under 25-year concessions. This process, on which IIFC has been advising, has been divided into three rounds: four ports, seven ports, and one port amounting to US$ 6 million, 11 million and 2 million investment respectively. For the first round of four ports, operators have been selected, following a competitive bidding process. The contracts have been awarded and the major terms and conditions committee is reviewing the concession agreement. For round two, feasibility studies and draft concession agreements have been prepared.

Mongla Port Jetp. At Mongla port, there is a half-finished jetty. The port authority intends to concession completion of construction and operation to a private investor through competitive bidding. The port authority has approached IIFC for advice, but has not contracted with it yet. Total investment requirements are estimated at US$ 20 million.

Khan Jahan Ali Airport at Khulna. The Civil Aviation authority wishes to explore the potential for private sector participation in management and upgrading of Khulna airport. The project is at a very early stage and further studies are required to decide whether it is suitable for private sector participation and which concept should be pursued. Investment costs are tentatively estimated at US$ 12 million.

Gulistan-Jatrabari Flvover. This is a 7 km toll road project within Dhaka at estimated cost of about US$ 105 million. An investor/operator has been competitively selected, but the project has not reached financial closure yet.

Telecommunications

The telecommunications sector in Bangladesh has until five years ago been underdeveloped and fraught with inefficiencies of the incumbent and at that time dominant state-owned fixed line service provider BTTB. The subsequent opening of the sector to private investors and operators, the gradual introduction of reforms, and the creation of a regulatory agency have created a dynamic market environment. This has

54 resulted in a virtual explosion ofmarket penetration from less than 1% in 2001 to about 5.6%, equivalent to about 8 million subscribers. There are now five mobile telephone companies competing in a fast growing market, in which BTTB has barely been able to increase its client base, and has thus declined in importance over just five years from the dominant incumbent to a participant with only around 12% market share.

In addition, GOB recently granted licenses for additional private fixed line service providers and competitively selected another new mobile phone provider. Further development of the market is expected from the use or installation of fiber optic networks in the country. Grameen, one ofthe existing mobile providers, is already leasing the fiber optic network of the railways and the Power Grid Company of Bangladesh has organized a competitive bidding process for a private operator that will be allowed to use its fiber optic capacity between Dhaka and Chittagong. In addition to investments in the various ventures mentioned above, the existing mobile phone operators intend to expand their services for which further investments are needed. The telecommunications market is thus, like in many other countries, the most dynamic infrastructure sector with substantial investment and financing needs. Some ofthe projects mentioned above are listed separately below. IIFC has been advising on all of them.

New Mobile Phone Network. GOB just concluded the competitive bidding process for a new, i.e. sixth private mobile phone provider. Two companies submitted offers, the evaluation has been completed, but the award has not yet been published. Investment costs over the total rollout period are estimated at US$ 150 million. Commencement of operations is required 9 months after the license has been granted and complete rollout needs to be achieved within 36 months.

PSTN Fixed Line Providers. Through an open licensing process GOB granted 17 licenses to different private operators of which five have commenced operations, albeit only at the initial stages. Investment costs and financing needs have not been determined in detail but could be as high as US$ 250 million over the next few years.

Optic Fiber Cable of PGCB Dhaka-Chittanong. PGCB is close to receiving bids for a competitive tender that it organized to lease its fiber optic lines between Dhaka and Chittagong to a private telecommunications provider. The initial investment is estimated at only US$ 3 million, but additional investment will be required for drop and intake infrastructure of signals, and for further transmission to customers. Subsequently, in a second phase the entire grid network ofPGCB could be offered for lease to private telecommunications providers with much more substantial investment and financing needs.

55 Annex 5: Project Costs BANGLADESH: Bangladesh Investment Promotion and Financing Facility

Local Foreign Total Project Cost by Component or Activity us us us $million a $million $million Component One: Infrastructure Financing Facility 55.2 47.50 102.7 Component Two: Capacity Building 2.5 2.5 Total Baseline Cost 105.2 Physical Contingencies 0.0 Price Contingencies 0.0 Total Project Costsb 105.2 Interest during construction Front-End Fee Total Financing Required 105.2 a Includes contribution for Government, PFIs and Sponsors The Capacity Building component of the total project cost is $2.5 million is not net of taxes, The current applicable tax rate is around 14.5%, which would be equivalent to 0.725% of the project costs. The Bank justifies 100% financing for the Capacity Building component as the tax constitutes an insignificant share ofthe project cost.

56 Annex 6: Implementation Arrangements BANGLADESH: Bangladesh Investment Promotion and Financing Facility

Organization Responsible for the Project.

The Bangladesh Bank will be the sole IPFF implementing agency and will be responsible for overall implementation, coordination and supervision ofproject activities and will oversee the financial intermediation component. IIFC, or another suitably qualified body, will provide technical support to Bangladesh Bank in reviewing project proposal for activities relating to infrastructure sub- projects. IIFC will independently execute certain activities as per the Technical Services Agreement. Bangladesh Bank will also have the responsibility to oversee IIFC activities under the project. However, IIFC’s support to PICOM will be overseen by BOI. The Bangladesh Bank unit dedicated to this task shall be built upon the team responsible for the administration ofthe FIDP. IDA funds will be channeled through a dedicated special account at Bangladesh Bank and will be reflected in GOB accounts. According to demand, these funds will flow to final borrowers (investment projects). It is the desire ofBangladesh Bank to focus its activities on its core activities as a central bank (monetary policy and financial sector stability), and thus the administrative responsibilities ofBangladesh Bank will be minimal, with its involvement limited to operation of the special account, approval offinancing requests following technical rather than judgmental criteria (and in any case pursuant to the IDA “No Objection” and appropriate review of a technical consultant provided under the project) and the regulation and supervision ofthe participating financial institutions.

Management of the Project would be as follows:

(I)Implementation The Executive Director nominated by Bangladesh Bank will be the Project Director. She/he will monitor implementation ofthe project components and will draw upon the assistance ofthe following when required: Joint Secretary Banking, Joint Secretary ERD, BO1and chief executive ofIIFC (or any other suitably qualified body).

(11) Policy and Overall Coordination A project steering committee headed by the Secretary of Finance and representatives ofERD, the Finance Division and BO1will meet periodically to decide on policy and major implementation aspects ofthe project. The Project Director will act as Secretary ofthe Committee.

Administrative Arrangements for Project Implementation. (I)Procurement. The Executive Director nominated by Bangladesh Bank will be responsible for procurement of goods, consultant services and training for project component 11. Financial Intermediaries will procure goods and services financed under the IPFF and consultants for their institutions under project component 11.

(11) Financial Management and Reporting Arrangements. BB will maintain a computerized financial management, accounting, disbursement and reporting system for the project in accordance with generally accepted accounting principles and practices. The accounts and records will be capable ofdisclosing a true and fair view ofthe financial position and of

57 facilitating progress monitoring. To facilitate this BB will engage a full-time Accounts and Audit Expert (AAE) external to BB, reporting to the Project director, and supervising an Accounts Officer and the Unit's support staff. They will prepare quarterly and annual accounts and generate quarterly reports, to ensure consistency with IDA'Srequirements under OP/BO 10.02. Annual financial statements will be audited by Foreign Aided Project Audit Directorate. Internal controls will include a separate Project Audit Committee, proper segregation of functional responsibilities, signing ofchecks after clearance by the AAE, verification ofprocurement proposals, monthly reconciliation ofbank accounts, and regular detailed reporting.

Participating FIs will submit annual audit reports to BB and IDA within four months ofthe end ofthe year.

A special account will be opened with BB. Disbursements will be made by BB on a reimbursement basis directly from the Special Account.

Selection of PFIs. Bangladesh Bank will have the responsibility for selecting the PFIs, deciding whether to finance the loan proposals submitted by the PFIs, based on a list of pre-determined criteria and providing capacity building to financial institutions in infrastructure finance and related themes. Bangladesh Bank has developed eligibility criteria for the selection of PFIs under FIDP and will use similar criteria to select PFIs under IPFF. A statement of operational policies and procedures relating to the project and consistent with the World Bank OP8.30 guidelines will be formally adopted by Bangladesh Bank prior to project effectiveness. It is anticipated that some PFIs may be common to both projects. An important difference with FIDP is that IPFF is open to both bank and non bank financial institutions. IDA will assess the eligibility of financial institutions selected by Bangladesh Bank based on the O.P. 8.30 criteria and will provide a No Objection. A number of prospective PFIs have expressed interest in principle in participating in the project and Bangladesh Bank has expressed confidence that a sufficient number will be deemed eligible.

Approval of financing proposals. Once a PFI has taken the decision to finance an infrastructure project, the PFI will forward the loan file to Bangladesh Bank for approval of the requested IPFF co-financing (maximum 80% of the debt). IIFC, or another suitably qualified body, will provide technical assistance to Bangladesh Bank during this review process. It should be highlighted that Bangladesh Bank will not take a commercial / credit decision when reviewing the proposal. Rather Bangladesh Bank, with support from IIFC or any other suitably qualified body, will review whether the investment projects to be financed meets pre-defined criteria: acceptable procurement, sufficient equity participation (minimum 30%), completion of EIA, etc. The Operational Directives for infrastructure financing facilities detailing lending and disbursement procedure (to be drafted by Bangladesh Bank) will spell out Bangladesh Bank approval process and the criteria for investment project eligibility. These IPFF directives will be based on the FIDP directives with regards to PFI approval; the eligibility of investment projects for finance will also reflect Government policy as to the private provision of infrastructure. Once Bangladesh Bank has ensured that the investment project complies with the eligibility criteria, it will forward the loan application to IDA for no-objection. After both Bangladesh Bank and IDA have cleared the loan application, the Bangladesh Bank will disburse the required amount (by installments) from the project account on be-half of GOB. Eligible investment projects will be

58 considered for financing by Bangladesh Bank on a first come, first served basis. However, eligible power sector projects will be given special emphasis.

Capacity building to the industry. Following the positive experience of FIDP, capacity building to financial institutions will also be provided under IPFF. Bangladesh Bank will organize workshops (with inputs from local and international consultants) on themes such as project finance, loan syndication, mortgaged based securitization, bond issue and capital market. Bangladesh Bank will also provide to participating financial institutions opportunities for training abroad or in-country (with the understanding that expenses associated with offshore training should be borne by the concerned PFIs).

Financial Sector Deepening and World Bank Operations Policy 8.30

World Bank operating procedures provide certain guidance as for the design and implementation of Bank credits which involve the onlending of funds provided by the World Bank, as intended under the proposed project. Broadly, these guidelines are intended to ensure that Bank credit does not lead to the distortion of incentives for market participants in the allocation of credit, or to inefficient subsidies or allocation of capital. The guidelines also provide for eligibility criteria so that only viable institutions may benefit from financial support under the credit. Many financial institutions in Bangladesh which are prospective candidates for financing under the IPFF have already been assessed for eligibility under OP8.30 through their participation in the FIDP project. During the appraisal the project team commenced the process of updating the OP8.30 assessment for institutions which have provided an indication of interest in participating in the IPFF. This process of evaluation will continue through the project preparation period and the project will remain open to the inclusion of further qualified institutions throughout the project life. An example ofthe questionnaire utilized for this assessment is included in Annex 9; broadly, the assessment seeks to determine eligibility based upon the following criteria:

g) adequate profitability, capital, and portfolio quality, as confirmed by financial statements prepared and audited in accordance with accounting and auditing principles acceptable to the Bank h) acceptable levels of loan collections i) appropriate capacity, including staffing, for carrying out investment project appraisal (including environmental assessment) and for supervising investment project implementation j) capacity to mobilize domestic resources k) adequate managerial autonomy and commercially oriented governance (particularly relevant when state-owned or state-controlled financial institutions are involved) 1) appropriate prudential policies, administrative structure, and business procedures.

In principle, both private and state owned financial institutions would be eligible to participate, however, the requirement that all institutions demonstrate that they operate on a commercial basis with management autonomy typically represents a major challenge for state financial institutions. New and existing financial institutions that do not meet all the eligibility criteria for

59 being intermediaries may participate in a Bank FIL if they agree to an institutional development plan that includes a set of time-bound monitorable performance indicators and provides for a midterm review of progress. When a FIL includes such financial institutions, the size and complexity of the FIL are commensurate with the financial institution’s implementation capacity; and the FIL may include an institution-building component that the borrower may pass on in the form of grants. Such financial institutions’ continued participation in the FIL is subject to their satisfactory implementation oftheir institutional development plans; when progress is not satisfactory, the Bank considers appropriate remedial actions, including suspension.

Relationships between entities involved in IPFF

The relationships between Government ofBangladesh, Bangladesh Bank, the participating financial institutions (PFIs), IIFC and PICOM will all be governed by agreements. PFF will build on the implementation mechanisms developed for FIDP which have proved effective (GOB/BB: Administration Agreement; BBIIIFC: Technical Services Agreement, IIFC/PICOM: Technical Services Agreement, BB/PFIs: Master Facility Agreement)

Role of IIFC. It is envisioned under the recommended “central facilitation unit” model that the role of IIFC as coordinating agency for the technical assistance component providing support to Government for public private partnership will be maintained under the oversight of the Economic Relations Division of the Ministry of Finance (although project resources will be directed by Bangladesh Bank as implementing agency, IIFC will carry out its own procurement as far as practical). Under the project, IIFC will have four main areas ofresponsibility; it will (i) provide assistance to the Private Infrastructure Committee (PICOM) for implementation of the Private Sector Infrastructure Guidelines (PSIG); (ii)help Bangladesh Bank in the eligibility review of infrastructure projects submitted for IPFF financing; (iii)manage on behalf of Bangladesh Bank the selection and supervision of consultants to carry out environmental impact assessments for infrastructure projects; and (iv) assessing the training needs and arrange all offshore and local training/workshops under the Project.

IIFC Assistance to Bangladesh Bank. IIFC, or another suitably qualified body, will assist BB in the technical review of projects submitted by PFIs for IPFF financing. The main objective of this assistance is to ensure that projects submitted by PFIs to BB fulfill the eligibility criteria for accessing of IPFF financing. IIFC will review inter alia, the selection process of the investor/operator, the conformity of financing and concession agreements, the principal technical features and the key environmental approvals. Furthermore, IIFC, or another suitably qualified body, will provide assistance to BB for training needs assessment and will arrange all local and offshore training programmes under the project.

IIFC’s Role in Environmental Impact Assessments. The completion of an EIA that meets DOEand World Bank requirements will be required as a condition for eligibility for financing under the IPFF. Project promoters may request IIFC, or another suitably qualified body, to provide requisite consultant services for the completion of an EIA, subject to availability of resources on a first-come-first-served basis. These services may be provided before a project promoter applies for IPFF funding to prevent any later delays in financial closing. IIFC will manage the consultant selection and supervision of the environmental advisers. Project

60 promoters receiving EIA services from IIFC but which do not apply for financing under the IPFF or are deemed ineligible will be required to reimburse the cost of such asse~sment.’~

Selection of Investment projects

Criteria for investment project eligibility for financing under the project shall be contained in the Operational Directives to be developed by Bangladesh Bank. Broadly the project will follow the guidance ofthe Private Sector Infrastructure Guidelines issued by the Prime Minister’s Office in October 2004. Under these guidelines “Infrastructure” means projects that the private sector cannot undertake for investing, without a contractual agreement with, or a License from, a Governmental Authority. The eligible sectors are also taken from the PSIG (and are reflected in Annex 6). It is anticipated that certain other investments, such as captive power plants, may be eligible for finance, subject to prior consent of IDA. Any amendments to ‘these criteria shall be with the consent ofIDA.

Eligible Sectors Infrastructure Projects from the power sector will be special emphasis, however under the Guidelines, infrastructure projects from the following sectors or sub sectors may be implemented as Private Infrastructure Projects:

(a) power generation, transmission, distribution and services; (b) port development (sea, river and land) including inland container terminals, inland container depot and other services;

(c) environmental, industrial and solid waste management projects (d) highways and expressways including mass-transit, bridges, tunnels, flyovers, interchanges, city roads, bus terminals, commercial car parking, etc.;

(e) airports, terminals and related aviation facilities; (0 water supply and distribution, sewerage and drainage; (g) industrial estates and parks development.;

Monitoring and evaluation arrangements

Supervision. The World Bank will devote an estimated 20 staff weeks per year for supervision through 201 1. During the first two years, supervision will focus primarily on performance of the Bangladesh Bank in managing the facility, procurement, and financial matters, as well as in capacity building in the financial sector by Bangladesh Bank and the promotion of the private provision of infrastructure by IIFC or any other suitably qualified body. During the following years, supervision will primarily focus on progress in the disbursement of funds under the facility and the performance ofPFIs and infrastructure promoters to this end.

l4It is contemplated that in extenuating circumstances the cost of the EIA may be shared with promoters who apply for IPFF funding but do not qualify.

61 Monitoring. Overall project monitoring is based on benchmarks and performance indicators confirmed at Appraisal and Negotiation (Annex 3). Monitoring will be coordinated by Bangladesh Bank against the agreed set ofactivities, which will be periodically reviewed to see their effectiveness against performance standards and implementation schedules. Progress reports will be prepared by Bangladesh Bank every six months, commencing in December 2006, and submitted to the World Bank within 45 days thereafter and will contain (a) semi-annual reports with key data on utilization and status ofthe IPFF; and (b) semi-annual assessments of the progress ofthe technical assistance sub-component.

Bangladesh Bank will be required to ensure that the PFIs will (a) verify the status ofinvestment projects supported under the IPFF by on-site inspection at least semiannually; and (b) prepare investment loan portfolio management and progress reports covering outstanding loans under the credit to be submitted to BB and IDA within thirty days ofeach semester end.

Nolater than six months after the closing date ofthe project, the GOB will prepare and furnish to the World Bank a report on the execution ofthe project, its costs and the benefits derived and to be derived from it.

Reviews, In addition to continuous supervision by the World Bank staff, reviews by the World Bank, together with GOB and the other involved parties to assess progress in implementing the IPFF will be carried out on a regular basis every six months. Bangladesh Bank will be responsible for: (i)preparation ofthe necessary documentation for the reviews; and (ii)planning ofreview meetings.

Mid-term review. A mid-term review will be carried out no later than December 2008 by the World Bank, together with the GOB and the other involved parties. Prior to the mid-term review, the Government of Bangladesh will contract a consultant to review and assess the progress of implementation and prepare the necessary documentation for the review. The review will evaluate progress in reaching project and program objectives and identify measures needed to reach the agreed objectives.

62 Annex 7: Financial Management and Disbursement Arrangements BANGLADESH: Bangladesh Investment Promotion and Financing Facility

Executive Summary:

0 Bangladesh Bank which is the implementing agency for the project has undergone many reforms over the last few years. Preparation of financial statements in accordance with international accounting standards and audit ofthe accounts by internationally reputed audit firm in full compliance with international standards on auditing, a full fledged internal audit department and recruitment ofprofessional staff are a few note worthy financial management improvement in the Bangladesh Bank. The coordination unit which will be responsible for monitoring and supervision during the project implementation in the Bangladesh Bank is composed ofpermanent staff having experience in many World Bank funded projects. 0 Investment Facilitation Center (IIFC), or another suitably qualified body, will provide technical support to Bangladesh Bank in the eligibility review ofinfrastructure projects submitted for IPFF financing and manage on behalf ofBangladesh Bank the selection and supervision ofconsultants to carry out environmental impact assessments for infrastructure projects. 0 All payments related to consultancy services will be paid directly by Bangladesh Bank as per terms and conditions ofthe contracts to be signed with the consultants. Though IIFC is a registered company by guarantee under the Companies Act 1994 and has statutory reporting and auditing obligation, the technical support agreement between Bangladesh Bank and IIFC will dictate further the terms and conditions including deliverables by IIFC. 0 The Bangladesh Bank has developed eligibility criteria for participating financial institutions (PFIs) which will be responsible to disburse funds to approved private investors for infrastructure investment projects. The eligibility criteria for PFIs are based on their financial status, quality ofmanagement, internal controls and systems. 0 IDA funds will be channeled through a dedicated special account at Bangladesh Bank. The executive director ofBangladesh Bank will act as project director. The project director or an alternative official will be the authorized signatory for making payment for eligible project expenditure and for replenishment request to World Bank. 0 Bangladesh Bank will consolidate financial information and provide interim un-audited financial report in an agreed form to the Bank no later than 45 days after end ofeach quarter. 0 The annual audit will be carried out on a consolidated financial report. The Comptroller and Auditor General will conduct the annual audit. Audit report will reach the Bank within six months ofthe end of each fiscal year. 0 Transaction based disbursement method will be applicable for withdrawal offunds from the Credit. 0 Disbursement arrangements and procedures to be followed for withdrawal ofloan proceeds and reporting on the use of credit proceeds are outlined in the Disbursement Letter. 0 With the transfer offinance staff from on-going project to the new by credit effectiveness and following the same financial management procedures except areas where new

63 arrangements is agreed, the current financial management arrangements is adequate for the project.

Summary of Project Description:

0 The US $50 million worth credit is to provide support for partial debt financing through local financial intermediaries for eligible, government-endorsed infrastructure projects to be developed by the private sector. Projects developed solely by the private sector but identified by Government such as captive power plants will also be eligible for financing. The project will also assist the Government ofBangladesh in facilitating new infrastructure projects for private sector participation and in developing capacity ofthe financial sector for ongoing infrastructure finance.

Country Issues

The Country Financial Accountability Assessment (CFAA) which was endorsed by the GOB in 2001 highlighted certain weaknesses in the financial management system ofthe financial and private sector. The Government has achieved reasonable progress in the implementation ofthe reform measures in the financial sector which is being implemented with the Bank and IMF’s assistance. The on-going Central Bank Strengthening Project has supported the Bangladesh Bank in establishing an internal audit department directly reporting to the Governor and carrying out audit by internationally affiliated firm in full compliance with international standards on auditing. The Government under the World Bank supported Economic Management Technical Assistance project is implementing a number of activities aimed at improving overall private sector accounting and auditing practices and standards. The overall financial management system in the Bangladesh Bank has improved in recent years which are evident from successful implementation of a number ofprojects funded by the World Bank.

Risk Analysis and mitigation:

0 From the financial management perspective, there is low risk affecting the project. This is because a large portion ($47.5m) ofthe credit proceeds will be utilized to directly support infrastructure financing facility that meets pre-determined criteria at various stages ofinvestment project cycle. As a part ofthis process, IIFC or any other suitably qualified body will help the Bangladesh Bank in the eligibility review ofinfrastructure projects submitted for IPFF financing and manage on behalf ofBangladesh Bank the selection and supervision of consultants to carry out environmental impact assessments for infrastructure projects. 0 For infrastructure investment projects, the risk of using project funds either by PFIs or private investors for purpose not intended and any potential risk of non-compliance with contractual agreement are substantially reduced by the provision of (i)debt equity ratio between PFIs and private investors (ii)selection of PFIs on pre-determined criteria developed by the Bangladesh Bank (iii)contractual agreement indicating modus operandi ofthe approved loan (iv) joint review by Bangladesh Bank and IDA for clearance and no objection before final approval and (v) disbursement ofapproved loan in installments .

64 Strengths:

0 The project will have the following strengths in the area offinancial management. (i)The Bangladesh Bank being the sole implementing agency has exposure to the World Bank’s financial management polices and procedures. The existing Bangladesh Bank staff who have been working in the Financial Institutional Development Project (FIDP) will be transferred to the new project and; (ii)The project will have adequate financial management arrangements at project start up as accounting, reporting, financial rules and auditing practices ofthe previous project will be applied for the new project.

Weaknesses and Action Plan:

0 A key weakness is the payment process for overhead cost ofIIFC. IIFC will be charging the project for the services rendered to Bangladesh Bank. There is a concern that such payment from Bangladesh Bank may take a long time if there is no predefined milestone in the Technical Services Agreement. 0 It has been agreed that IIFC will submit payment request to Bangladesh Bank for the overhead cost and Bangladesh Bank will pay IIFC against defined milestones. It has also been agreed that the Technical Services Agreement between IIFC and Bangladesh Bank will clearly indicate the terms ofpayment, reporting obligation and the coordination mechanism.

Implementing Entity:

0 The Bangladesh Bank will be the sole IPFF implementing agency and will be responsible for overall implementation, coordination and supervision ofproject activities. 0 IIFC , or another suitably qualified body, will act as Technical Support Advisor for activities relating to infrastructure investment project for which IIFC will provide technical support to Bangladesh Bank in reviewing project proposal. IIFC will independently execute the activities as per the Technical Services Agreement.

Accounting Polices and Procedures:

0 The accounting policies and procedures ofthe project will be governed by the existing Project Accounting Manual ofthe Ministry ofFinance. All project related transactions i.e. all sources (IDA and GOB) will be accounted for separately in the Bangladesh Bank following double-entry bookkeeping principles and on a cash basis. The software used for FIDP will be customized to meet project specific needs and will be installed in the project once the credit becomes effective. 0 The key project accounting functions for which Bangladesh Bank will be responsible are as follows: (i)Budget preparation and monitoring; (ii)Payments for eligible project expenditure; (iii)Maintenance ofbooks and bank accounts; (iv) Cash flow management (v) Financial Reporting to GOB, World Bank and other stakeholders; (vi) Preparation of Withdrawal Application to claim funds from the World Bank and (vii) Assistance to external auditor and ensuring appropriate follow up of audit ,

65 Funds Flow and Disbursement arrangements:

For utilization of IDA’S share of eligible expenditure, Bangladesh Bank will open a dollar special deposit account (DOSA Account) under terms and conditions acceptable to IDA. The designated Bangladesh Bank Executive Director and in hidher absence an alternative official will be the authorized persons for issuing checks or payment advices, making payment requests to MOF for counterpart funds and replenishment requests to IDA. Bangladesh Bank will be responsible for transferring IDA funds to eligible PFIs who will lend the fund to approved private investors. The overhead costs of IIFC (recognized as operating cost) will be disbursed by the Bangladesh Bank as per terms and conditions of the Technical Services Agreement to be made between Bangladesh Bank and IIFC. IIFC will be eligible for operating cost starting from April 0 1,2007 when current funding for operating cost from on going PSIDP project will come to an end. For payment relating to consultants hired under the project, Bangladesh Bank will pay directly as per the terms and conditions of the approved contracts to be signed with the consultants. Transaction based disbursement procedures will be applicable for withdrawal of funds from the Credit. Disbursement under the Credit will be made as indicated in Table 6, which indicates the percentage offinancing for different categories of expenditures of the project. It is expected that IDA funds will be disbursed over a period of five years.

Table 6: Allocation of Credit Proceeds Expenditure Category Amount in US $ Million Financing Percentage I (1) Investment Loans 47.5 100 (2) Others (goods consultants’ services, training 2.5 100 and operating costs)

Use of Statement of Expenditures (SOEs)

IDA will require full documentation for all prior review cases where contracts exceed the equivalent of: (a) US $300,000 for goods and works; (b) US $100,000 for services with firms; and (c) US $50,000 for individuals. Expenditures below the above threshold and all expenditures under Operating Costs and training will be claimed on SOEs. During the initial supervision by IDA, the mission will closely review the SOE claims to ensure that the funds are utilized for the intended purposes. Any deviations noticed during such reviews will be noted for remedy and improvements.

Special Account:

66 The authorized allocation to the Special Account will be limited to 3-4 months estimated expenditures of IDA’Sshare of the proposed project. The authorized allocation will be limited to US $ 5, million for DOSA account. At the start ofthe project, the initial deposit will be limited to US $5. million equivalent . Ifthere is any expected large payment, such payment can be made through direct payment (from IDA, directly to the payee), without going through the Special Account.

Internal Controls:

0 Government’s existing financial power, authority and payment responsibility outlined in the project Accounting Manual will be followed. The approval limit and authority laid down in the manual will be applicable for the project. 0 The number ofstaff who will be transferred from FIDP is adequate for the proposed project, There is clear segregation of duties and jobs are well defined.

Financial Reporting and Monitoring:

0 Bangladesh Bank will be responsible for consolidating financial information, maintaining supporting papers and preparing Financial Statements on a monthly basis. 0 The same set ofFinancial Monitoring Reports (FMRs) used in the FIDP will be further customized to meet project specific needs. The FMRs will include: (i)Financial Statements (Sources and Uses of Funds, Uses offunds by project activity, Special Account Reconciliation Statement); 0 The above un-audited interim financial report will be submitted to the World Bank Dhaka Office no later than 45 days after the end of each calendar quarter. 0 Bangladesh Bank will ensure by complying with Project Accounting Manual that all project financial information is provided periodically to the CAO ofthe MOF. This is to ensure that project funds routed through Special Account is reflected in the Govt. accounts as well as in the consolidated financial management reports.

Staffing:

0 Bangladesh Bank has adequate and experienced staff having previous experience in IDA projects. Staff who worked in the FIDP will continue in the proposed project. These staff will be in place once the project becomes effective. In case ofstaff turnover, the agencies will ensure placement ofnew staff from Bangladesh Bank so that financial management activities continue without intemption.

External Audit:

0 The consolidated project financial Statements which will be prepared by the Bangladesh Bank will be audited by the Comptroller and Auditor General (C&AG). The C & AG is considered as independent auditor and acceptable to the Bank. Audit reports ofthe on-going projects currently implemented by the Bangladesh Bank have been received timely. Though qualified opinion expressed in audit reports, there were no major audit findings from IDA’S

67 view point. Audit objections requiring follow up action for settlement have regularly been monitored. 0 Audit report ofthe project will be submitted to the Bank within six months ofthe end of each fiscal year. The following audit reports will be monitored in the Audit Report Compliance System (ARCS)

Implementing Agency Audit Auditors Bangladesh Bank Project Financial C&AG S tatements/S A I

SuDervision Plan:

The initial supervision focus will be on a sampling basis for the review of expenditure below prior review threshold, payment process between IIFC and BB against defined milestones and monitoring progress ofagreed actions during negotiations.

68 Annex 8: Procurement Arrangements BANGLADESH: Bangladesh Investment Promotion and Financing Facility

A. Overview of Major Procurement Activities Related to the Project:

Summary

The total value of the project is approximately US$ 100 million, of which an IDA credit will finance approximately US$ 50 million. The project will largely involve providing loans through the implementing agency, Bangladesh Bank (BB), to participating financial intermediaries (PFIs) for on- lending to eligible, government-endorsed infrastructure investment projects to be developed by the private sector.

Rules and Guidelines

Selection of concessionaires / entrepreneurs under BOT, concessions or similar arrangement and Procurement of goods/equipment and works would follow procedures outlined in the Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits, May 2004” (Procurement Guidelines). Consulting Services and training obtained through international advertisement (dgMarket / UNDB Online) will follow Bank’s “Guidelines: Selection and Employment of Consultants by World Bank Borrowers, May 2004” (Consultants Guidelines). All local procurement of goods/equipment and works (less than US$300,000)’and services (less than US$ 200,000) for which the shortlist entirely comprises of national consultants, will follow Bangladesh Government’s “Public Procurement Regulations 2003” (PPR 2003), following the provisions stipulated in the Financing Agreement.

The following types ofprocurement activities pertain to the project:

1. Selection ofconcessionaire/entrepreneur ofinfrastructure investment projects obtaining financing from the facility, and procurement ofgoods, works and services by these concessionaire/entrepreneur; 2. Procurement ofequipment/goods by Bangladesh Bank and IIFC; and 3. Selection of Consultants’ services and training by BB and IIFC

1. Selection of entrepreneur / concessionaire of infrastructure investment projects obtaining financing from the facility, and procurement of goods and works by these entrepreneurs / concessionaires:

The following four cases will apply:

0 A government executing agency (e.g. Ministry ofCommunications, REB, BPDB, etc) selects an concessionaire/entrepreneur competitively under a concession, BOT or similar arrangement. In this case, the process will follow the general principles laid out in Section 3.13 (a) ofthe Procurement Guidelines.

0 A government executing agency (e.g. Ministry ofCommunications, REB, BPDB, etc) selects an concessionaire/entrepreneur under a concession, BOT or similar arrangement, but not under ICB procedures acceptable by The Bank. In such cases, for procurement ofgoods, works and services by the concessionaire/entrepreneur required for the investment project and financed by The Bank, shall be done in congruence with Section 3.13 (b) ofProcurement Guidelines.

69 0 Only under rare specific circumstances where a competitive process is not possible or practical such as in the case of expansion of an existing investment project operated by incumbent concessionaires or entrepreneurs, provisions of Section 3.13(a) and 3.13(b) ofthe Procurement Guidelines would apply subject to the following: (i)the incumbent concessionaire/entrepreneur shall be a private company or a government-owned company satisfying the requirements ofparagraph 1,8(c) of the Procurement Guidelines; (ii)procurement capacity of the concessionaire/entrepreneur is assessed to be at the level acceptable to the Association; (iii)the procurement procedures of the concessionaire/entrepreneur results in fair competition, economy, efficiency and transparency; and (iv) no preference is given to contractors belonging to the concessionaire/entrepreneurs’ shareholders.

0 A private infrastructure service provider approaches a PFI to obtain financing for an investment project that is not under a concession, BOT or similar arrangement, but in which a public interest can be demonstrated. This could apply only in rare cases where concessionaire/entrepreneur has not been selected by public tender, but where the government allows unlimited entry into the market through an open licensing process, subject only to fulfillment of technical quality requirements. As the case may be, funds ofthe facility may be provided to the eligible PFI to be re-lent to the concessionaire/ entrepreneur in accordance with the provisions ofparagraph 3.12 of the Procurement Guidelines, by which infrastructure concessionaire/entrepreneur could undertake procurement in accordance with established private sector or commercial practices, acceptable to the Bank.

2. Procurement of equipment/goods by BB and IIFC

Procurement of equipmentlgoods will be generally carried out by the implementing agency BB for its own purposes. Most of such goods are small value packages and are unlikely to attract foreign bidders, and as such this procurement component will not involve international competitive bidding.

(i) National Competitive Bidding (NCB): Equipment/goods contracts estimated to cost less than US$ 300,000 equivalent per contract may be procured using NCB. This includes vehicles, computers, office equipment etc.. (ii)National Shopping (NS): Goods ofvery small contracts or individual purchases ofoff-the-shelf items may be procured, through prudent shopping procedures, in packages with an estimated value less than US$ 3,000 (Bangladesh Tk. 200,000) equivalent per contract. This includes some office equipment, stationeries and supplies.

3. Consultants’ Services and Training for BB and IIFC

Selection of consultants will be carried out by BB for its own purposes (about US$ 755 thousand) and to support IIFC (a maximum of about US$ 800 thousand) in its assistance to PICOM and in the implementation of environmental impact assessments (EM) for prospective infrastructure investment projects financed by the facility. Assignments include: a. BB: chartered accountant, financial analyst, training and software and MIS development consultants; b. IIFC: Developing business plans, event management, capacity building, policy and regulatory support, loan application review and EMconsultants.

70 (1) Quality and Cost-Based Selection (QCBS): Services through firms estimated to cost US$ 300,000 equivalent or more per contract will be procured following QCBS. (ii)QCBS /Fixed Budget Selection (FBS): Services through firms estimated to cost less than US$ 300,000 equivalent per contract may be procured following either QCBS or FBS. This includes software and MIS development. (iii)FBS / Least Cost Selection (LCS): Services through firms estimated to cost less than US$ 100,000 equivalent per contract may be procured following FBSILCS. Contracts may include annual procurement audit. (iv) Consultants’ Qualification (CQ,: Services through firms estimated to cost less than US$ 50,000 equivalent per contract may be procured following CQ. (v) Single Source Selection (SSS): Specific consultants’ services through firms, satisfying Consultants Guidelines (Paragraph 3.8-3.11) may be procured following SSS. (vi) Individual Consultants (IC): Services for assignments for which teams of personnel are not required and the experience and qualification of the individual are the paramount requirement will be procured through individuals in accordance with Section V of the Consultants Guidelines when the estimated cost is US$ 50,000 or more per contract and in accordance with PPR 2003 when the estimated cost is < US$ 50,000 per contract. Individuals will be selected on the basis of their qualifications for the assignment. Contracts may include for BB chartered accountant, financial analyst, training and development consultants etc., and under IIFC responsibility, capacity building, EL4 etc.

Most training of individuals and staff members concerning capacity strengthening of BB will be implemented through direct contracting.

Procurement and Selection Planning: The investment projects to be financed out under the facility cannot be listed in the procurement plan up front and each investment project will be incorporated into the plan immediately after approval for financing from the facility. The draft procurement plan for goods (for BB) and selection plan for consultants (for BB and IIFC) has been prepared by BB and IIFC. The plan will cover initial 18 months of the project with a provision for adjustments during this period and will be updated annually always covering the next 18 months of project implementation. The proposed plan will be furnished to IDA for its review and approval. Procurement ofequipment/goods and selection of consultants will be undertaken only in accordance with the plan approved by IDA except investment projects and related additional services for appraising such investment projects.

Use of Standard Documents: For ICB Procurement of Goods or Works under investment projects financed by the facility, the use of IDA’S Standard Bidding Documents is mandatory. For NCB procurement of goods, BB will use Government’s standard bidding documents based on PPR 2003 and acceptable to IDA. For selection of international consulting firms and individual international consultants, the Bank’s Standard Request for Proposals (RFP), including standard contract form will be used; for local consultants Government’s procedure laid out in PPR 2003 will apply including its documentation. Depending on the type of procurement, the Bank’s or Government’s Standard Bid / Proposal Evaluation Form will be followed for submission of evaluation reports.

Prior Review Thresholds:

Investment Projects: IDA will carry out prior review of all investment projects, regardless of value, including complete documentation regarding the process of selection of an entrepreneur, or the goods or works procured by the entrepreneur, as the case may be.

71 Equipment / Goods: During the initial 18 months of the Project, IDA will carry out prior review of the following contracts: all contracts estimated to cost US$300,000 equivalent or more and the first one contract regardless of the value and method. After 18 months, the above thresholds will be reviewed / redefined in the revised procurement plan, if necessary.

Consultants Services: IDA’S prior review will be required for consultants’ services contracts estimated to cost US$ 100,000 equivalent or more for firms and US$50,000 equivalent or more for individuals. All single-source contracts will be subject to prior review by IDA.

Post Review/ Procurement Audit: For compliance with the Bank’s procurement procedures, IDA will carry out sample post review of contracts that are below its prior review threshold including downstream procurement actions carried out by incumbent concessionaires / entrepreneurs and contracts implemented by IIFC in relation to loan application review, environmental impact assessment etc. Such review (ex-post) of contracts below the threshold will constitute a minimum sample of about 10 percent of the contracts. In addition to this, Government will carry out independent procurement review (procurement audit) of BB and IIFC by an external consultant (generally, a Chartered Accountant firm with international affiliation).

Review of Procurement Performance: IDA will monitor the compliance with the requirements of Bank’s different procurement methods and performance standards on a continuous basis. As part of the project’s supervision reviews / mid-term review, a comprehensive assessment of procurement performance will also be carried out. Based on the review, consultation with the Government, IDA may revise the prior review threshold including the procurement and selection methods.

B. Assessment of the agency’s capacity to implement procurement

Procurement Environment: The Country Procurement Assessment Report (CPAR), broadly accepted by the Government in February 200 1, identified inadequate public procurement practices as major impediment affecting Project implementation in Bangladesh. Procurement deficiencies include: absence of a sound legal framework, protracted bureaucratic procedures allowing multi-point rent seeking, lack of critical mass of professionals to manage public procurement, inordinate delays in completing the procurement process and ineffective contract administration and absence of mechanisms for ensuring transparency and accountability in public procurement.

Procurement Reform Actions: Following the CPAR recommendations, the Government with IDA’S support is implementing the Public Procurement Reform Project (PPRP). As part of the reform under PPRP, the Government has established a Central Procurement Technical Unit (CPTU) with adequate staffing funded from own resources, issued Public Procurement Regulations 2003 (PPR) in October 2003 and implementation procedures in March 2004, and prepared standard bidding documents, Public Procurement Processing and Approval Procedure (PPPAP) and Delegation of Financial Powers (DoFP). The PPR, among others, take into account the multilateral development banks’ principles of harmonization of requirements for local procurement in borrowing countries. Concurrently, in order to build procurement management capacity under the overall umbrella of CPTU, ILO, Turin in co- ordination with Bangladesh Institute of Administration and Management (BIAM) and Bangladesh Institute of Management (BIM) has developed a critical mass of about 30 local procurement trainers and started training in October 2003 of about 1,600 public and private sector staff, to be conducted in phases till June 2006. All these actions are contributing positively in changing / improving the procurement environment in Bangladesh.

72 Implementing Agency: Procurement activities will be carried out by Bangladesh Bank and by IIFC. The relevant department at BB is staffed by a project director, a general manager, a deputy general manager, four deputy directors and two assistant directors. The procurement function is staffed by a deputy director who was responsible for procurement activities under this BB unit’s preceding project with IDA, namely Financial Institutions Development Project (FIDP), with support from procurement unit of BB. IIFC will carry out important activities including procurement of individual consultants for project appraisal as well as environmental impact assessment under the project on behalf of Bangladesh Bank. For the purpose of professionally handling procurement of external consultants by IIFC, the firm has a regular procurement specialist under its payroll.

An assessment of the capacity of the implementing agency, as well as IIFC to implement procurement actions for the project has been carried out by IDA during January 2006. The assessment reviewed the organizational structure for implementing the project and the interaction between the implementing agency’s staff responsible for procurement, IIFC’s staff responsible for procurement and the ministry’s relevant central unit for administration and finance.

Given the nature of the Project, based on the procurement capacity assessment and the need for improvement, the procurement-associated risk is average. BB team envisages that a training on procurement topics relevant to this project be given at the early stage of the project. Currently there is no need for hiring a procurement consultant at this instant but should BB face difficulty in procurement- related issues, a consultant can be hired during the course ofthe project in order to build BB’s capacity,

Procurement Actions:

Given the time constraint and the requirement for fast track processing of this credit; to mitigate procurement associated risks, strengthen procurement management capacity/accountability, as project preparation moves on, the following procurement-related actions have been agreed with the Borrower and suggested for improvement ofborrower performance:

The implementing agency BB, as well as IIFC, has identified upfront and designated at least one procurement person from BB and IIFC who will deal with the procurement matters of the respective party (i.e. procurement planning, advance procurement actions, and all subsequent procurement matters under the Project) for the entire project period. BB shall guarantee that the designated procurement counterpart remains in the project team for a significant period in order to streamline the procurement processes to be monitored under this project. BB and IIFC have prepared draft procurement and selection plan for the project. These are given at the end ofthis annex. According to Government ofBangladesh’ Public Procurement Processing and Approval Procedures (PPPAP), in order to review and evaluate bids, proposals and, BB will form a committee with at least five members, including procurement, financial, and technical experts. Two members ofthe committee shall be from outside the agency with professional procurement expertise and they should fulfill the technical qualification requirement stipulated in clause 3.3 ofPPPAP. In the case of reviewing the selection ofentrepreneurs / concessionaires for determining eligibility of financing under the facility, the same committee may be involved in overseeing the loan application review, as well as the EIA report, in collaboration with IIFC and/or IIFC-appointed external consultants for the specific project, whatever the case may be. BB, as part of their capacity building program, will send two or three concerned staff to undertake training being organized by CPTU/IMED. This will be done as soon as possible, and by no later than two months from the date of credit effectiveness ofthe facility.

73 Frequency of Procurement Supervision

In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the implementing agency has recommended semi-annual supervision missions to visit the field to carry out post-review ofprocurement actions.

Table 7: Project Cost by Procurement Arrangements

Notes: 1. Figures in parentheses are amounts to be financed by the IDA Credit. Excludes contingencies. 2. Includes (i)consulting services to be procured following: quality- and cost-based selection, selection under fixed-budget, least cost selection, selection based on consultants' qualification, single-source selection, and individual consultants' methods; and (ii)training cost including capacity building of BB staff through direct contracting.

C. Details of the Procurement Arrangements

Table 8: Consultant Selection Arrangements (Including Training)

Notes: a. Selection methods of some packages may change upon prior approval ofthe Bank. b. This may go up to 1.67 million based on requirements during project supervision period.

Table 9: Thresholds for Procurement Methods and Prior Review

Expenditure Contract Value Contracts subject to Procurement Method Following I Category (threshold), US$ Prior Review irrespective of All contracts, including Investment Projects ICB PG value selection process

First one contract < 300,000 NCB PPR irrespective of value

74 < 3,000 NS PPR Post Review >= 300,000 QCB S CG All contracts < 300,000 but >= QCBS / FBS CG All contracts 200,000 All contracts of US$ < 200,000 QCBS / FBS CG / PPR 100,000 or more < 100,000 FBSiLCS CG / PPR Post Review

I 1 I , I I IC- Qualifications, >= 50,000 CG All contracts references IC- Qualifications, < 50,000 PPR Post Review references I I I sss I CG/PPR I ~llcontracts I

Note: PG Procurement Guidelines May 2004 CG Consultant Guidelines May 2004 PPR Bangladesh Public Procurement Regulations 2003 ICB International Competitive Bidding NCB National Competitive BiddingiTendering NS National Shopping I Request for Quotations QCBS Quality and Cost-based Selection FBS Fixed Budget Selection LCS Least Cost Selection CQ Selection Based on Consultants' Qualifications IC Individual Consultants sss Single Source Selection

D. Procurement Plan:

1. Investment Projects

There is no procurement plan for this component yet. This will be developed as investment projects will be considered for financing from the facility.

2. Goods, Works, and Non-consulting Services

List of goods packages to be procured by BB (Indicative):

Quantity/ Estimated I Procedure/ Prior Indicative 'Ontact Name of Contract (Brief Package Number/ actual Cost Review Date of Description) method Number Lot (USD'OOO) (Yes/No) Delivery Computer Hardware with G1 Accessories (PC, Laptop, Scanner, Lot 14.20 NCB No CD writer, UPS etc.) * 06.09.06

75 Laser Printer (Black & White and Lot 3.91 NCB KO G2 Color) and Toner Cartridge 03.09.06 Heavy Duty Photocopier with Toner G3 Cartridge and Fax Machine with Lot 11.66 NCB No 04.01.07 compatible voltage stabilizer

G4 Sound System for conference room 1 set 9.09 NCB NO 04.02.07 1 G5 I Multi Media Projector with Screen I 1 set I 1.82 1 NS 1 No I 22.10.06 I Server and networking peripherals G6 1 set 3.03 NS No 23.05.07 for LAN I G7 1 Accounting software I 1 I 10.00 I NCB I No i 04.11.07 1 Computer Hardware with Lot 11.36 NCB No 04.09.08 G8 Accessories (PC, Laptop, UPS etc.)* G9 Stationery and Supplies Lot 3.03 NS No 22.07.06 I G10 I Stationery and Supplies I Lot I 3.03 I NS I No I 22.07.07 I 1 G11 1 Stationerv and Sumlies I Lot I 3.03 1 NS I No I 22.07.08 I 1 G12 I Stationerv & Sumlies I Lot I 3.03 I NS 1 No 1 22m G13 Stationery & Supplies Lot 3.03 NS No 22.07.10 G14 Vehicle (4 wheel drive) 1 37.88 NCB Yes 06.09.06

2. Consultant Services

a. List of consultant services packages to be procured by BB (Indicative):

Estimated Cost Procedure ~ Name of Contract (Brief Quantity/ /Contract Price Review Date of Description) Numbed ~ (USD,OOO) ~ method ~ Number 1 Two Individual Local Ind. s1 120 SM 90.9 1 30.06.1 1 Financial Analyst Consultant

Individual Local consultants Ind. s2 50 SM 75.76 Yes ~ 30.06.11 for Accounts and Audit Consultant 1 Individual Local consultants Ind. S3 for trainingiworkshop for 15 SM 22.73 01.11.10 Consultant the market participants Individual External consultants for Ind. s4 12 SM 123.64 12.10.10 traininglworkshop for the Consultant market participants Software and MIS +I s5 1 30.30 QCBS Development L01.10.07

b. List of consultant services packages to be procured by IIFC (Indicative):

Estimated Contact Prior Indicative Name of Contract Quantity/ Cost /Contract Procedure Package Review Date of (Brief Description) Number/ Price method Number (Yes/No) Completion (USD'OOO)

76 Develop brochures, leaflets on PSIG and s1 PPP projects and 11 SM 30.5 CQS No prepare CDs and other communication module Event management to s2 arrange awareness 25 SM 40 LCS No creation workshops Develop training modules, conduct training and revise and s3 13 SM 61 QCBS No finalize training modules after conducting trainings Assess the financial viability and eligibility of infrastructure projects s4 15 SM 52.5 QCBS No forwarded by PFI to Bangladesh Bank for financing Screen investment proposals against WB and DOE safeguards, prepare TOR for s5 21 SM 195 CQS No environmental and social impact assessments and review quality ofEIA

Technical support for policy S6 12 SM 36 IC development

Strengthen the policy and s7 regulatory frameworks for 1 SM 25 IC private infrastructure projects

77 Annex 9: Economic and Financial Analysis

BANGLADESH: Bangladesh Investment Promotion and Financing Facility

The ultimate economic benefits ofthis credit will be derived from the contribution to the broader Bangladeshi economy derived from the infrastructure projects which are developed utilizing finance and technical assistance from the facility. Access to term finance leads to superior outcomes in the provision of infrastructure services. Longer-term financing will allow project promoters to be more competitive in their tenders under this program and will also encourage successful participants to invest in more expensive and more reliable equipment, which will be more economically efficient in the longer term (and better serve Bangladesh’s needs). Financing through the existing financial institutions is further constrained by the inability of financial institutions to lend at fixed interest rates. Infrastructure projects, once in commercial operation, typically reflect an “annuity” of stable and predictable net cash flows (after covering variable costs such as fuel). Infrastructure promoters are assisted in making competitive tenders by the availability of fixed-rate finance that matches the fixed-rate nature of project income and removes the need to include a margin to accommodate interest rate uncertainty.

In addition to the direct economic benefits of the project there are additional gains generated through the enhanced technical capacity developed among financial institutions, the promotion of long term finance markets as well as the liberalization of regulations constraining financial intermediation. It is further anticipated that the provision of Environment Impact Assessments to be financed under the project will improve the environmental standards of infrastructure projects in Bangladesh, with commensurate gains for society and the broader economy.

Eligibility criteria for participatinp financial institutions

Notes: (1) An application for joining IPFF should include the following documents: - Full set of worked-out criteria based on’ the latest year-end / half-yearly audited accounts - Detail workings in support ofthe results such as calculations, schedules, etc. - Other documents as specified below. (2) The workings have to be certified by the auditors. (3) Accounts should be completed using the Finance Method ofaccounting (IAS 17). (4) To determine eligibility of FIs under IPFF, BB/IIFC will consider the totality of the eligibility criteria in a manner that will establish acceptable quality of a) management, b) profitable and sustainable operations, c) appropriate capacity (including staffing for carrying out investment project appraisal with environmental assessment and for supervising investment project implementation). Under special circumstances post-funding monitoring may be done, d) capacity to mobilize domestic resources, e) adequate managerial autonomy and commercially oriented governance (particularly relevant when state-owned or state-controlled FIs are involved),

78 Qappropriate prudential policies, administrative structure and business procedures and , g) sound financial position. (5) IIFC in consultation with IDA & BB may waive compliance with a particular eligibility criterion in exceptional cases. However, in those cases, the FI would have to show improvement. (6) Foreign Banks and Multinational Companies, those operating in Bangladesh, will not be eligible to apply for 100% credit under the proposed project. However they can participate in syndication funding up to 49% ofthe total exposure of single credit. (7) This eligible criterion for the proposed IPFF has been prepared in line with the criteria mentioned in OP 8-30.

CRITERION 1 Compliance with relevant and prudential regulations ofBangladesh

The FI must hold a valid license from Bangladesh Bank to operate as a bank or NBFI. In case of institutions also operating as a merchant bank, must have a valid license from SEC.

Please include company details such as - 0 Date of incorporation 0 Date ofreceiving License from BB / other regulatory bodies 0 Date of commencement ofbusiness 0 Legal status (Private / Public) 0 Date of IPO, listing on stock exchange 0 List of directors along with shareholdings

CRITERION 2 Adequacy of provisions

Requirement: 0 The FI has to compare the amount of provision required by BB regulations and the amount ofprovision made by the FI.

Noted Points: 0 The FI has to show the breakdown of the above two amounts, that is, how they were calculated. 0 The portfolio amount, on which the provision calculations are based, should be consistent with the portfolio amount used elsewhere - compare criteria 9 & 14. If there is a difference among the portfolio figures used in these three criteria, explanation and supporting calculations should be provided.

Portfolio Calculation:

The total portfolio amount should include the following (if applicable) - 0 Lease receivables (including the current portion and not net ofprovision amount) 0 Term finance (including the current portion and not net ofprovision amount)

0 Short-term finances 0 Equity investments 0 Receivables against bill discounting

79 0 Advances against lease finance and term finance

0 Others

CRITERION 3 Positive rate ofreal return

Defined as: [net earning, after tax for the period / average stockholders’ equity) x 100 1 + the inflation rate [in decimal form]

Noted Points: 0 The average stockholders’ equity calculation should exclude any dividend amount paid or proposed to be paid within 6 months of year-end. 0 This criterion needs to show the real rate ofreturn. The year-end inflation rate to be used is provided in BB publications, such as Economic Trend.

CRITERION 4 Capital adequacy ratio

Applicable for banks only. The commercial banks must show the detail calculation of risk- weighted assets and breakdown of total capital. IPFF expects the minimum capital adequacy ratio to be 9%.

CRITERION 5 Debt / Equity Ratio

IPFF expects the ratio to be maximum of 10 times for FIs operating for at least 5 years and 5 times for FIs operating for less than 5 years (but not less than 3 years).

Debt / equity ratio = monetary liabilities at the end ofa period Shareholders’ equity at the end ofthe same period

Monetary liabilities would include all the outstanding components including the current portions.The maximum debt / equity ratio under Bank projects would not normally exceed 10 times, with a lower ceiling of FIs with a relatively shorter track record.

Noted Points: 0 The FIs has to consider the lease advances, lease deposits, term deposits as liabilities. 0 Non-monetary liabilities such as deferred liabilities should be excluded. 0 Current liabilities such as payable and accrued expenses should not be included.

CRITERION 6 Comparison between the weighted average life ofmonetary liabilities with weighted average life ofcredits

IPFF expects that the weighted average life ofmonetary liabilities should at least be longer than the weighted average life of credits.

Noted Points:

80 The FIs have to show the comparison between weighted average life of monetary liabilities and weighted average life of credits. Monetary liabilities should include all long and short-term sources of funds such as bank loans - including funds from the call-money market, deposits, advances, overdraft, etc. (but not shareholders’ equity). Non-monetary liabilities should not be included. Credits should include total credit, advance and investment portfolio. The calculation should be based on actual term of the lease / loan / credit line and principal outstanding amount of lease / loan / credit line. In case ofdeterioration of the situation compared to the previous year, the FIs would have to provide explanation and specify the mitigating factors.

Mismatched foreign currency position

Only applicable for FIs dealing in foreign currency. The “long” and “short” foreign currency position at the end of the period should not exceed the stated ratio in relation to stockholders’ equity at the end of the same period. The “long” and “short” position should be computed for both the total foreign currency position and the cross currency positions, and the resulting ratios should not exceed 5% ofcapital.

Noted Point: 0 The IPFF will accept calculations using total equity, but this should not include proposed/paid dividends as per criterion 3.

Collection ratio

IPFF expects ratio to be minimum of 80%.

Computed as: Total cash collections from on balance sheet term credits for a period Total receivables from on balance sheet credits for the same period

“Total cash collections” (a) include current cash collection, Le. (i)cash collections from receivables due during the period, and (ii)cash collections on past due receivables, (b) but exclude rescheduling.

“Total receivables” exclude term credits, which are in litigation.

Noted Points: 0 The FIs should show detail calculation regarding derivation of the key figures. 0 The FIs should use the actual figures rather than the figures provided in the annual accounts - which are sometimes different due to various accounting treatments that might be applied. In the event that the figures differ, an explanation should be provided. 0 The FI should consider the opening & closing accounts receivable and repayments against those during the year.

81 Portfolio infection ratio & Portfolio delinquency status

IPFF expects the portfolio infection ratio to be not greater than 20%.

Computed as: On balance sheet term credit portfolio affected by arrears at the end ofa period Total on balance sheet term credit portfolio at the end ofthe same period

The word “arrears” is defined to mean unpaid interest, principal or loadlease payments ofmore than 90 days.

Noted Points: 0 A loan / lease is to be considered infected if any payment is overdue for three months or more. 0 Total infected portfolio amount consists of total principal outstanding plus the overdue amounts - not just the overdue installments. 0 The FI would have to show product-wise breakdown of the portfolio amount (such as lease finance, term loan, etc.). 0 Short-term lending and equity investments would be deducted from the total portfolio amount for this calculation. The amount deducted should be shown so that the IPFF can reconcile the portfolio figure in criterion 9 with the figures provided for criteria 2 & 14.

The FI would also provide a list of loans / leases with overdue rental / installment for 30 days and more, showing the following information.

0 Original loan / lease amount 0 Execution date (not date of signing the agreement)

0 Loan / lease term 0 Installments due 0 Installments outstanding

0 Total overdue amount

0 Principal amount outstanding

Debt service cover ratio

Not applicable for commercial banks. IPFF expects the ratio to be minimum of 1.25 times.

Computed as:

Earnings before tax & interest + non-cash expenses + cash collections from on balance sheet term credits Interest expenses + principal payments associated with on balance sheet term credits

Noted Points: 0 Include principal payment for all credit sources, including term deposits. Under current BB regulations NBFI term deposits cannot be less than one year and therefore they should be considered as term funding. Where there is a strong case to suggest that a

82 certain percentage/volume of term deposits are always rolled for a further period this can be specified in a separate explanatory note. Interest payment, in gross figure, for all credit sources should be considered.

CRITERION 7 Single borrower exposure (as % ofcapital)

IPFF expects the highest single borrower exposure to be less than 35% of capital for banks and to be less than 30% of capital for NBFIs.

Noted Points: The FIwould have to provide the top-ten list of exposures. Exposure is defined to include both on and off balance sheet exposure. For leases, consider net lease receivable / unrealized principal amount as exposure, not gross receivable. Cash securities could be deducted to calculate net exposure, however the FI would need to specify both gross and net exposures in the assessment. In case of exposure higher than 35%/30% of equity, the FI would have to submit the NOC from Department of Offsite Supervision, Bangladesh Bank.

CRITERION 8 Business group borrower exposure (as % of capital)

IPFF expects the highest group borrower exposure to be less than 35% ofcapital for banks and to be less than 30% ofcapital for NBFIs.

“Business Group” is defined to include all interlocking investments, directorships and office positions.

Noted Points: a All points of criterion 11, as above. a Ifan FIhas business transactions with at least two concerns of the same group, the group name would be listed under this criterion. But if they have business with only one company, even if the company is the member of a group, it should not be included in the group list, but only in the single borrower list under criterion 11. The definition ofa “group” is: i) Two or more companies where one director or shareholder controls 50% or more shares ofeach company; or ii) Where a person, firm, corporation, company or group of companies exercises control or influence over another company, then bothla11 are considered a group, In case of exposure higher than 35%/30% of equity, the FI would have to submit the NOC from Department of Offsite Supervision, Bangladesh Bank.

Insider lending ratio (as % ofcapital)

IPFF expects the ratio to be less than 25% ofcapital.

Noted Points:

83 0 The auditors’ would have to certify that BB definition of ‘insider lending’ has been followed. 0 The FI would provide the list of clients under ‘insider lending’. 0 The FI would have to confirm that the loans / leases are on a standard commercial basis. This means they are not on concessionary terms e.g. in relation to interest rates, fees, tenors, amortization & repayment, collateral requirements, etc. If the loans / leases are not on a standard commercial basis, the FIwould have to specify the concessionary terms and explain the reason.

Industry / sub-sector exposure (as % oftotal portfolio)

IPFF expects highest exposure in a single industry / sub-sector not to be higher than 35% of total portfolio.

Noted Points:

0 Total exposure in all sectors should match with the total portfolio amount used earlier. Compare with criteria 3 & 9. 0 The FI could classify the sectors as per the company policy. However when a FI shows two or more sectors separately, where the IPFF believes them to be closely related, the IPFF may combine them.

Three years’ financial accounts with clean auditor’s opinion without implied / hidden qualifications

“Hidden or implicit” qualifications are comments in the notes to the financial statements, which are material and would have a significantly adverse impact on the financial performance and or financial position, iffully considered, but are not explicitly mentioned in the official opinion of the auditors.

CRITERION 9 Policy documents to establish professional and sound management

0 Resource diversification and mobilization (external funding) plan for the next year 0 FI’s procedures for - - Credit approval - Risk management - Collection & monitoring - Asset - liability management - Mobilize domestic resources - Internal audit & control - Marketing visits / Inspections - Annual review of credit

0 FI’s policies for - Single / group / sector exposure limit - Insider lending - Insurance of funded assets - DOE clearance

84 - CIB 0 Management Information System: Small write-up

The self-assessment must confirm an FI is meeting its commitments under this criterion and the IPFF may, in its discussion with a FI, make further enquiries, as it deems necessary.

Noted Points: 0 FIs must comment on the status ofeach ofthese topics including - - How management addresses each of these issues; - Any significant plans in these areas for the coming year; and - What has been achieved in these areas in the year under review 0 FIs must provide a copy oftheir current Corporate Strategy Statement 0 FIs must comment on capacity, including staffing, for carrying out investment project appraisal (including environmental assessment) and for supervising investment project implementation.

CRITERION 10 FIs loan approval procedures include certification of appropriate Department ofEnvironment clearance

IPFF funding is not available to an FI unless the necessary documents are submitted to evidence DOE certification. However the FI is also to ensure that all lending (whether it is funded by the IPFF or not) meets with this requirement. The self-assessment should describe how the FI’s procedures achieve verification of required DOE clearance. FIs must also specify who is responsible for Environmental Compliance.

CRITERION 11 Annual external auditors’ certification as to compliance with quantitative eligibility criteria

The participating financial intermediaries (FI) have to submit their eligibility assessment based on the current year-end accounts every year within the period specified by IPFF.

85 Annex 10: Safeguard Policy Issues BANGLADESH: Bangladesh Investment Promotion and Financing Facility Environmental Management Framework

1. Background

The Investment Promotion and Financing Facility Project (IPFF) is a Financial Intermediary (FI) operation, for which the Bank requires that each investment project be screened for potential environmental and social impacts, and subjected to appropriate Environmental Assessment (EA). Before approving an investment project, the FI must verify that the investment project meets national environmental requirements and is consistent with applicable environmental policies of the World Bank. The system to support this process of environmental review and clearance is defined through this Environmental Management Framework (EMF).

2. National Environmental Assessment Capacity

A Country Environmental Analysis was recently completed for Bangladesh, which identified a number of shortcomings in national EA arrangements. EA is required under the Environmental Conservation Act (1995) and Environmental Conservation Rules (1 997), which also identify the Department ofthe Environment (DOE)as the authority responsible for providing environmental clearances. The effectiveness of this process is severely constrained, however, by a lack of transparency and consultation, as well as the extremely limited resources of the DOE. While efforts are underway to strengthen the capacity of the DOE,both through Technical Assistance provided by CIDA and through inclusion ofthese concerns in the Bank’s DPL dialogue, it was agreed that national EA capacity is insufficient for the purposes of the IPFF. Consequently all investment projects under the IPFF are subject to prior review and approval for EA purposes by the Bank.

3. Excluded Investment projects

Recognizing the limited national capacity to manage environmental and social risks, and the requirements of World Bank policies, the following agreements have been reached regarding investment project types ineligible for support under the IPFF:

0 No activities on the IFC/MIGA exclusion list will be financed; a No investments entailing involuntary resettlement as defined under World Bank OP 4.12 will be financed; a No investments inside protected areas will be financed.

4. Procedures for EnvironmentalAssessment and Clearance in the IPFF

The primary requirement of the EMF is that financing agreements between Bangladesh Bank (BB) and Participating Financial Institutions (PFIs) will only be signed once environmental clearance for the proposed investment being considered has been received from both the DOE and the World Bank. Responsibility for ensuring these clearances are in place will rest with

86 Bangladesh Bank who intends to delegate this function to the Infrastructure Investment Facilitation Center (IIFC) by way ofa Technical Services Agreement.

Responsibility for conducting an EA that meets the requirements of the DOEand World Bank will rest with the Project Promoter. Two important difference between national and World Bank EA requirements are (i)the need to consult potentially affected people and publicly disclose the EA report, as required by the Bank’s policy on EA, OP 4.01, and (ii)the need to identify adverse impacts on indigenous people as defined by the Bank’s policy on Indigenous Peoples, OD 4.20. Before seeking the World Bank’s clearance, IIFC will confirm that the EA report has been made publicly available as required by Bank guidelines, that a public consultation has been conducted and adequately documented, and that any potential impacts on indigenous people have been identified..

5. Implementation of Environmental Management Plans

EA reports cleared by DOEand the World Bank will include Environmental Management Plans (EMPs) designed to avoid or mitigate the identified environmental risks. Financing Agreement between BB and PFIs will include the stipulation that loan agreements and investment contract documentation must require implementation of the EMPs, as reviewed and cleared by DOEand the World Bank.

IIFC will conduct or contract inspections to review implementation of agreed EMPs. These inspections will consist at the minimum of three site visits, occurring at the start, mid-point and completion of construction. IIFC will provide reports of these inspections to (i)the project promoter, (ii)the executing agency of the Government, (iii)the PFI, (iv) BB, and (v) the World Bank. In addition, World Bank supervision missions will include visits to project sites to review EMP implementation.

6. Technical Assistance and Capacity Building for EMF Implementation

To assist in the preparation of investment proposals eligible for financing under the IPFF, the Project includes provision initially for IIFC to contract EA services on behalf of project promoters. IIFC will publicize both the availability of these services, and the EA requirements to be met in order to be eligible for IPFF financing. It will not be a requirement of IPFF financing, however, that EAs are prepared by consultants contracted by IIFC.

To ensure that adequate institutional capacity is in place for implementation of the EMF, the IPFF Project includes technical assistance for the establishment of a safeguards oversight function under the direction ofa qualified officer to enable IIFC to:

i). Screen investment proposals against DOEand World Bank environmental and social safeguards requirements; ii). Prepare TORSfor EIAs sufficient to meet national and World Bank requirements; iii). Contract EIA services; iv). Review EIAs; v). Interact with DOEand the World Bank to obtain environmental clearances; and,

87 vi), Conduct or contract site inspections to review implementation ofagreed EMPs.

7. Legal Commitments for Implementation of the EMF

To clarify accountability for implementation of the EMF, relevant commitments are specified in the Credit Agreement (between BB and the World Bank), the Technical Services Agreement (between BB and IIFC, to be cleared by Finance Division and subject to IDA “No Objection”), and the template Financing Agreement (between BB and PFIs), as indicated below.

Credit Agreement

The Credit Agreement between BB and the World Bank includes the following agreements:

i). BB will sign an agreement with IIFC including the commitments regarding the EMF indicated under the Technical Services Agreement section below; ii). No activities on the IFC/MIGA exclusion list will be financed; iii). No investments entailing involuntary resettlement as defined under World Bank OP 4.12 will be financed; iv). No investments inside protected areas will be financed; v). Financing Agreements between BB and PFIs will only be signed once environmental clearance for the investment being considered has been received from the DOEand World Bank; vi). Financing Agreements with PFIs will include environmental management clauses as described in the section on Financing Agreements below.

Technical Service Agreement

The Technical Service Agreement between BB and IIFC (subject to clearance by Finance Division and IDA “No Objection”) includes the following agreements:

i). IIFC will assist in the preparation ofInitial Environmental Evaluations as required by DOE,if such assistance is requested by Government Bodies preparing projects for prospective Public Private Partnerships; ii). IIFC will provide support for the preparation ofEAs as requested by prospective promoters ofinfrastructure projects, if such assistance is requested. Whether or not IIFC assistance is provided, EAs must be completed to a standard acceptable to the DOEand the World Bank; iii). IIFC will confirm that the DOE’Senvironmental clearance has been provided before seeking the World Bank’s clearance ofinvestment project EAs; iv) . IIFC will confirm that stakeholders and potentially affected people have been consulted through the EA process as required by World Bank OP 4.01, and that this is documented in the EA report. IIFC will also confirm that the EA report has been made publicly available as required by OP 4.01; VI. IIFC will abide by World Bank OD 4.20 where impacts on indigenous people occur within the area ofinfluence ofinvestment projects.

88 vi). IIFC will review investment project EAs, and will forward investment project EA reports with IIFC’s comments to the World Bank for clearance; vii). IIFC will conduct inspections to review implementation of agreed EMPs. These inspections will consist at the minimum of three site visits, occurring at the start, mid- point and completion of construction; viii). IIFC will provide BB and the World Bank with annual monitoring reports summarizing all investments financed or under consideration, including (a) their categorization under both the Environmental Conservation Act (1995) and World Bank OP 4.01, (b) the status of EIA preparation, (c) the status of environmental clearances by DOEand World Bank, and (d) compliance with agreed EMPs.

Financing Agreement

The template Financing Agreement between BB and PFIs includes the stipulation that loan agreements and investment contract documentation will require implementation of EMPs as reviewed and cleared by DOEand the World Bank.

89 Annex 11 : Project Preparation and Supervision BANGLADESH: Bangladesh Investment Promotion and Financing Facility

Planned Actual PCN review 07/08/2004 07/08/2004 Initial PID to PIC 09/10/2004 08/03/2004 Initial ISDS to PIC 09/10/2004 09/01/2004 Appraisal 12/01 /2005 12/05/2005 Negotiations 02/01/2006 03/22/2006 Board/RVP approval 05/02/2006 Planned date ofeffectiveness 8/3 1/2006 Planned date ofmid-term review 12/3 1/2008 Planned closing date 12/31/2011

Key institutions responsible for preparation ofthe project:

0 Ministry ofFinance

0 Bangladesh Bank 0 Infrastructure Investment Facilitation Center (IIFC)

Bank staff and consultants who worked on the project included:

Name Title Unit ~ Juan Costain Lead Financial Sector Specialist (TTL) SASFP Mark Andrew Dutz Sr. Private Sector Development Specialist SASFP Stephan K.L. von Klaudy Lead Infrastructure Specialist IEF Patricia H. de Baquero Sr. Procurement Specialist OPCPR Shamsuddin Ahmad Sr. Financial Sector Specialist SASFP Paul Martin Sr. Environmental Specialist SASES Astrid Manroth Financial Sector Specialist AFTFS Guillemette Jaffi-h Young Professional SASFP Weenarin Lulitanonda Young Professional BCFBD Kishor Uprety Sr. Counsel LEGMS Zafrul Islam Sr. Procurement Specialist SARPS Marghoob Bin Hussein Procurement Analyst SARPS Suraiya Zannath Sr. Financial Management Specialist SARFM Shanthi Divakaran Consultant SASFP Bridget Rosalind Rosario Program Assistant SACBD Joya Ziaun Nahar Program Assistant SACBD

Bank funds expended to date on project preparation: Bank resources: US$202,156 1. Trust funds: US$ 0 2. Total: US$236,602 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$ 5,000 2. Estimated annual supervision cost: US$ 100,000

90 Annex 12: Documents in the Project File BANGLADESH: Bangladesh Investment Promotion and Financing Facility

Project Concept Note 06/3 0/2004 Integrated Safeguards Datasheet (concept stage) 08/04/2004 Project Information Document (concept stage) 06/30/2004 BTOR - Mission to Bangladesh 08/04/2004 Approved Minutes ofProject Concept Review Meeting 07/23/2004 Integrated Safeguards Datasheet (appraisal stage) 11/14/2005 Project Information Document (appraisal stage) 10/3 1/2005 Aide Memoire Pre-Appraisal Mission 09/08/2005 Approved Minutes of Quality Enhancement Review 11/08/2005 Approved Minutes of Decision Meeting 11/29/2005 Aide Memoire Appraisal Mission 12/15/2005 Agreed Minutes ofNegotiations 03/23/2006

Unlocking the Potential, National Strategy for Accelerated Poverty Reduction, General Economics Division Planning Commission, Government of the People’s Republic of Bangladesh, December, 2004

October 1996 Private Sector Power, Generation Policy, Ministry of Energy and Mineral Resources

Private Infrastructure Committee (PICOM) Guidelines, Prime Ministers Office, July 2004

Bangladesh Bank Annual Report 2004/2005 Bangladesh Bank Quarterly April - June 2005

Bangladesh Securities and Exchange Commission Annual Report 2003/2004 Bangladesh Securities and Exchange Commission Quarterly Review Jan. - Mar. 2005

Bangladesh: 2005 Article IV Consultation, Third Review, Poverty Reduction and Growth Facility, IMF, July 2005 Country Report No. 051242, Bangladesh: Selected Issues, IMF, July 2005 Country Report No 05/243, Bangladesh: Statistical Appendix, IMF, July 2005

Private Solutions for Infrastructure in Bangladesh, PPIAF, June 2003

Country Assistance Strategy, World Bank, February 2001 Improving the Investment Climate in Bangladesh, Investment Climate Assessment, Bangladesh Enterprise Institute and World Bank, June 2003 Bangladesh Growth and Export Competitiveness, May 2005, World Bank Financial Sector Assessment, Bangladesh, IMF / World Bank, June 2003

Program Completion Report, Capital Market Development Program Loan, Bangladesh, ADB, August 2 003

91 Project Appraisal Document, Financial Institutions Development Project, Bangladesh, World Bank, August 1999 Project Appraisal Document, Private Sector Infrastructure Development Project, Bangladesh, World Bank, October, 1997

92 Annex 13: Statement of Loans and Credits BANGLADESH: Bangladesh Investment Promotion and Financing Facility

Difference between expected and actual Original Amount in US$ Millions disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d PO77789 2005 Education Sector Dev. Support Credit 0.00 100.00 0.00 0.00 0.00 99.98 0.00 0.00 PO74966 2004 Primary Education Development Program 0.00 150.00 0.00 0.00 0.00 150.00 0.48 0.00 II PO78707 2004 Power Sector Development TA 0.00 7.10 0.00 0.00 0.00 15.68 1.34 0.00 PO81969 2004 Enterprise Growth & Bank Modernization 0.00 250.00 0.00 0.00 0.00 180.34 -70.85 0.00 PO86791 2004 Reaching Out of School Children Project 0.00 0.00 0.00 0.00 0.00 51.66 0.27 0.00 PO86661 2004 iBD - Water Supply Program Project 0.00 0.00 0.00 0.00 0.00 40.50 0.00 0.00 PO83890 2004 Economic Management TA Program 0.00 0.00 0.00 0.00 0.00 20.25 0.00 0.00 (EMTAP) PO53578 2003 Social Investment Program Project 0.00 18.24 0.00 0.00 0.00 17.63 2.47 0.00 PO62916 2003 Central Bank Strengthening Project 0.00 37.00 0.00 0.00 0.00 37.05 22.65 0.00 PO71435 2003 Rural Transport Improvement Project 0.00 190.00 0.00 0.00 0.00 191.11 8.10 0.00 PO81849 2003 BD: Telecommunications Technical 0.00 9.12 0.00 0.00 0.00 9.62 0.23 0.00 Assist. PO750 16 2002 Public Procurement Reform Project 0.00 4.50 0.00 0.00 0.00 2.70 1.37 0.00 PO7473 1 2002 Financial Services for the Poorest 0.00 5.00 0.00 0.00 0.00 4.41 2.25 0.00 PO74040 2002 Renewable Energy Development 0.00 0.00 0.00 8.20 0.00 5.65 1.40 0.00 PO71794 2002 Rural Elect. Renewable Energy Dev. 0.00 190.98 0.00 0.00 0.00 176.92 89.40 0.00 PO44876 2002 Female Secondary School Assis. II 0.00 120.90 0.00 0.00 0.00 93.81 24.54 0.00 PO57833 2001 Air Quality Management Project 0.00 4.71 0.00 0.00 0.00 3.33 3.67 0.00 PO59143 200 1 Microfinance II 0.00 151.00 0.00 0.00 0.00 21.80 1.79 0.00 PO69933 200 1 HIV/AIDS Prevention 0.00 40.00 0.00 0.00 21.98 14.93 30.24 -0.25 PO448 10 2001 Legal &Judicial Capacity Building 0.00 30.60 0.00 0.00 0.04 24.89 13.31 0.00 PO50752 2001 Post-Literacy & Continuing Education 0.00 53.30 0.00 0.00 0.00 42.93 20.77 -0.08 PO49587 2000 Aquatic Biodiversity Conservation 0.00 0.00 0.00 5.00 1.25 1.02 4.82 3.11 PO09468 2000 Fourth Fisheries 0.00 28.00 0.00 5.00 8.25 10.76 18.15 5.06 PO50751 2000 National Nutrition Program 0.00 92.00 0.00 0.00 24.02 41.11 58.77 15.55 PO448 1 1 2000 Financial Institutions Development 0.00 46.90 0.00 0.00 0.00 7.51 24.99 0.00 PO09524 1999 Dhaka Urban Transport 0.00 177.00 0.00 0.00 64.89 35.45 99.28 0.25 PO41887 1999 Municipal Services 0.00 138.60 0.00 0.00 0.00 81.63 40.75 0.00 PO37294 1999 Third Road Rehabilitation & Maintenance 0.00 273.00 0.00 0.00 0.00 84.64 73.70 33.02 PO50745 1999 Arsenic Mitigation Water Supply 0.00 32.40 0.00 0.00 4.35 15.01 17.69 0.00 PO44789 1998 BD Private Sector Infrastructure Dev 0.00 235.00 0.00 0.00 0.00 152.05 148.59 6.67 PO37857 1998 Health and Population Program- 0.00 250.00 0.00 0.00 0.78 46.48 48.82 0.00 Total: 0.00 2,635.35 0.00 18.20 125.56 1,680.85 688.99 63.33

93 BANGLADESH STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions ofUS Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2001 BRAC Bank 0.00 1.63 0.00 0.00 0.00 0.00 0.00 0.00 1997 DBH 2.33 0.65 0.00 0.00 2.33 0.65 0.00 0.00 1991 Dynamic Textile 1.86 0.00 0.00 1.48 1.86 0.00 0.00 1.48 I998 Grameen Phone 6.67 0.00 0.00 0.00 6.67 0.00 0.00 0.00 2004 GrameenPhone Ltd 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1985 IDLC 0.00 0.15 0.00 0.00 0.00 0.15 0.00 0.00 1998 IPDC 5.63 0.00 0.00 0.00 5.63 0.00 0.00 0.00 I998 Khulna 13.87 0.00 0.00 16.79 13.87 0.00 0.00 16.79 I998/00 Lafarge/Surma 0.00 0.00 0.00 15.00 0.00 0.00 0.00 0.00 2003 RAK Ceramics 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00 2000 Scancem 8.57 0.00 0.00 0.00 8.57 0.00 0.00 0.00 2000 United Leasing 5.00 0.00 0.00 0.00 4.71 0.00 0.00 0.00 Total portfolio: 85.93 2.43 0.00 33.27 55.64 0.80 0.00 18.27

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2001 Dhaka Westin 0.01 0.00 0.00 0.00 1998 Khulna 0.00 0.00 0.00 0.00 2000 USPCL 0.00 0.00 0.00 0.00 Total pending commitment: 0.01 0.00 0.00 0.00

94 Annex 14: Country at a Glance BANGLADESH: Bangladesh Investment Promotion and Financing Facility

POVERTY and SOCIAL South LOW- Bangladesh Asia income Development diamond' 2002 Population, m id-year (miiiions) 05.7 1,401 2,495 Life expectancy GNI per capita (Atlas method, US$) 380 460 430 GNI (Atlas method, US$ billions) 511 640 1,072 - Average annual growth, 1996-02 Population (%) 17 18 1.9 Labor force (%) 2.8 2.3 2.3 GNI Gross per primary Most recent estimate (latest year available, 1990-02) capita - -enrollment Poverty (%of populatio n belo wnafional po vertyiine) 34 Urban population (%of totalpopulation) 26 28 30 Life expectancyat birth (years) 62 63 59 I Infant mortality (per I000 live births) 52 71 81 Child malnutrition (%of children under5) 48 Access to improved water source Access to an improved water source (%ofpopulation) 97 84 76 Illiteracy (%ofpopulation age ?5+) 59 44 37 Gross primaryenrollment (%ofschool-age population) DO 97 95 Bangladesh Male 1)O D8 D3 Low-income group Female D1 89 87

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 E c o no m ic rat io s' GDP (US$ billions) 18.1 317 47.0 47.6 Gross domestic investmentiGDP n.8 17.3 23.1 23.1 Trade Exports of goods and seNices/GDP 5.2 7.6 15.4 14.3 Gross domestic savings/GDP P.5 u.9 18.0 13.2 Gross national savingsiGDP n.9 19.3 22.4 23.4 T Current account baianceiGDP -4.9 -0.4 -17 0.5 Interest payments/GDP 0.3 0.5 0.3 0.3 Total debt/GDP 27.9 42.8 32.4 35.6 Total debt service/exports 77.7 13.2 7.3 7.7 Present value of debt/GDP 20.7 Present value of debt/exports D5.4 Indebtedness 1982-92 1992-02 2001 2002 2002-00 (average annual gro wih) Bangladesh GDP 3.8 5.0 5.3 4.4 GDP percapita 1.3 3.2 3.5 2.6 __ Low-income aroun

STRUCTURE of the ECONOMY 1982 1992 2001 2002 Growth of investment and GDP (%) (%of GDP) Agriculture 31.2 29.4 24.1 22.7 15 Industry 211 22.5 25.9 26.4 10 Manufacturing 13.7 u.9 15.6 15.9 5 Services 47.7 48.1 50.0 50.9 0 Private consumption 88.4 83.0 78.5 76 6 General government consumption 4.5 4.5 4.5 5 .O Imports of goods and services 15.9 P.3 215 B.0 - GDI -GDP - 1982-92 1992.02 2001 2002 (average annuaigrowih) Agriculture 2.2 3.4 3.1 0.0 20

Industry 6 .O 7.1 7.4 6.5 10 Manufacturing 5.6 6.6 6.7 5.5 Services 3.7 4.8 5.5 5.4 0 Private consumption 3.0 3.7 4.8 -0.1 .IO General government Consumption 2.7 4.5 4.5 19.2 Gross domestic investment 6.3 9.6 5.8 8.2 ~ Exports -Imports Imports of goods and services 2.3 9.4 11.2 -11.2 -

95 Bangladesh

PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Inflation (Oh) Domestic prices I (%change) Consumer prices 4.5 16 1.9 Implicit GDP deflator 9.7 3.0 16 3.2 Government finance (%of GDP, includes current gfanfS) Current revenue 8.3 9.0 n.1 j 97 88 99 00 01 02 Current budget balance 19 14 2.1 I GDPdeilator -CPI Overall surplus/deficit -9.6 -4.5 -5.0 -4.6

TRADE 1982 1992 2001 2002 Export and import levels (US$ mill.) (US$ millions) 1,986 6,476 5,929 Total exports (fob) l,n- 0""___ Rawjute XI6 67 61 Leather and leather products a9 254 207 8 000 Manufactures 1,593 5,766 5,367 6 000 Total imports (cif) 3,526 9,363 7,697 4 000 Food 265 380 437 Fuel and energy 68 848 723 2 000 Capital goods 1,289 2,400 2,6R 0 96 97 98 99 00 01 02 Export price index (895=X)O) 86 It? 115 Import price index (S95=X)O) n7 P9 136 OExports slmports Terms of trade (895=M0) 81 87 138 i

BALANCE of PAYMENTS 1982 1992 2001 2002 t Current account balance to GDP (Oh) (US$ millions) I Exports of goods and services 840 2,468 7,235 6,794 I Imports of goods and services 2,759 3,932 n,n3 9,061 Resource balance -1,sa -1,464 -2,868 -2,267 Net income -97 -89 -264 -38 Net current transfers la1 1,435 2,36 2,826 Current account balance -895 - 118 -8 6 240 Financing items (net) 387 635 490 35 Changes in net reserves 508 -5 I7 326 -275 Memo: Reserves including gold (US$ millions) 1,600 1,307 1,583 Conversion rate (DEC. local/US$) 20.0 37.7 54.0 57.4

EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ miiiions) Composition of 2002 debt (US$ mill.) Total debt outstanding and disbursed 5,054 U,561 15,26 R,Om IB RD 55 60 l7 U 494 A 13 IDA 1,270 4,534 6,439 7,063 F 565

Total debt service 220 552 671 722 IBRD 3 7 7 7 IDA 9 52 143 156 B 7063 Composition of net resource flows Official grants 759 357 287 413 Official creditors 739 623 48 220 Private creditors 21 -a 230 85 Foreign direct investment 7 4 174 65 Portfolio equity 0 6 0 -6 World Bank program Commitments 571 353 296 479 A - IBRD E- Bilateral Disbursements 186 323 3P 301 B - IDA D - Other mitilateral F - Private Principal repayments 0 24 99 1P C-IMF G-Short-term

96 IBRD 33368 To Gangtok 88°E89°E90BHUTAN °E91°E BANGLADESH

DISTRICT CAPITALS DIVISION CAPITALS To Dispur Panchagar NATIONAL CAPITAL

To PPANCHAGARANCHAGAR RIVERS Patna BANGLADESH

LALMONIRHALALMONIRHAT MAIN ROADS 26°N Thakurgaon NILPHAMARI RAILROADS THAKURGAON Nilphamari Lalmonirhat T DISTRICT BOUNDARIES Kurigram Rangpur DIVISION BOUNDARIES To KURIGRAM Katihar RANGPUR Dinajpur INTERNATIONAL BOUNDARIES DINAJPUR To Goalpara

To INDIA Katihar Gaibandha To 92°E To Dispur Dispur GAIBANDHA

JOYPURHAJOYPURHATT SERPUR Sunamganj Joypurhat SYLHET 25°N 25°N NAOGAON Serpur NETROKONA Jamalpur SUNAMGANJ Sylhet Naogaon BOGRA Bogra JAMALPUR Netrokona RAJSHAHI Mymensingh SYLHET NOWNOWABGANJABGANJ To

J Silchar a MYMENSINGH Nowabganj mmuna

u

n RAJSHAHI a DHAKA Kishorganj MOULMOULVIVI BAZAR Serajganj HABIGANJ Moulvi Bazar G Rajshahi Natore KISHORGANJ an SERAJGANJ TTANGAILANGAIL ges NATORENATORE Habiganj TangailTangail

GAZIPUR PPABNAABNA

Pabna Gazipur NARSINGDI a 24°N n 24°N Narsingdi h g INDIA e Brahmanbaria Manikanj DHAKA INDIA KUSHTIA Kushtia M BRAHMAN BARIA Meherpur MANIKGANJ Rajbari NARANARAYNGANJYNGANJ MEHERPUR Chuadanga RAJBARI DHAKA Naraynganj Faridpur CHUADANGA COMILLA Jhenaidah Magura MUNSHIGANJ G Munshiganj JHENAIDAH FFARIDPURARIDPUR ange MAGURA s Comilla

To SARIASARIATPURTPUR CHANDPUR Calcutta Sariatpur Narail Jessore Madaripur Chandpur Khagrachhari MADARIPUR NARAIL JESSORE GOPGOPALGANJALGANJ KHAGRACHHARI 23°N Gopalganj Feni 23°N KHULNA LUXMIPUR Luxmipur NOAKHALI FENI Khulna BARISAL Noakhali RANGAMARANGAMATITI Satkhira KHULNA PEROJPUR Jhalukathi Barisal Bhola CHITTCHITTAGONGAGONG Bagerhat JHALUKAJHALUKATHITHI Rangamati To SASATKHIRATKHIRA KarKarnalinali Calcutta BAGERHABAGERHATT Perojpur ReserReservoirvoir BARISAL CHITTCHITTAGONGAGONG Patuakhali BHOLA l t a PPATUAKHALIATUAKHALI Chittagong D e Barguna g e s Bandarban G a n BARGUNA 22°N 22°N e s Mt. Mowdok a n s n g (957 m) a r b G a d e BANDARBAN S u n t h o f COXCOX’S’S t h s BAZAR M o u Cox's Bazar 0 10 20 30 40 50 Kilometers Bay of Bengal 0 10 20 30 40 50 Miles MYANMAR This map was produced by the Map Design Unit of The World Bank. 21°N The boundaries, colors, denominations and any other information 21°N shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. To 89°E90°E91°E92°E Sittwe

SEPTEMBER 2004