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Project finance is defined slightly different by different authors. Esty (2004) defines it as:
“Project finance involves the creation of a legally independent project company financed with
equity from one or more sponsor firms and non-recourse debt for the purpose of investing in a
capital asset” (Esty, 2004 pp.25), while Finnery (2007) says: “Project finance is raising funds
on a limited-recourse or non-recourse basis to finance an economically separable capital
investment project in which the providers of the funds look primarily to the cash flow from the
project as the source of funds to service their loans and provide the return of and the return on
their equity invested in the project” (Finnery, 2007 pp.1). Finally, Yescombe (2002) defines it
in the following manner: “Project finance is a method of raising long-term debt financing for
major projects through “financial engineering”, based on lending against the cash flows
generated by the project alone; it depends on a detailed evaluation of a project’s construction,
operating and revenue risks and their allocation between investors, lenders and other parties
through contractual and other arrangements” (Yescombe, 2002 pp.1).
Project Finance Structure
Project financing can be done by:
1. A single bank, or
2. Through loan syndication(arranging loan from a number of banks/ financial institutions)
In both cases, credit appraisal remains identical with focus being the same: determining cash
flow generating capacity of the project. However, syndication is generally preferred when loan
size is large (e.g. say, exceeds Tk. 30.0 crore), and the borrower has strong operational and
financial track record so that it is possible to raise fund from the market.
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Project Financing in Bangladesh
A report noted that capital market intermediaries and insurance companies face significant
challenges, both in terms of financial health and technical capacity. Access to finance in
Bangladesh is tight and a study of firms nationwide suggested that more than 40 percent of
firms found access to finance to be a major or severe obstacle to business, a higher
percentage than the average for low and lower-income countries, and the highest in the
region after Pakistan.
In addition, 69 percent of lending has a maturity of less than three years. A little less than
half of the loans have maturity dates of one year. As a result, long-term financing is
typically procured through accumulated earnings, and firms tend to under-
invest. Companies often resort to financing long-term asset purchases with short-term
financing causing asset-liability mismatches and sub-optimal capital structures increasing
financial risk. Some companies rollover existing loans, which can be destabilizing to the
financial system. According to the ADB, the Private Equity industry (including venture
capital) in Bangladesh is still largely at a nascent stage with only about $150 to $200 million
committed capital from Bangladesh focused private equity and venture capital funds.
Prior to 2008, the majority of private equity activity had originated in a much more limited
way from the three major developmental finance agencies, namely, the International
Finance Corporation (IFC) (part of World Bank Group), the UK’s CDC Group (formerly
the Commonwealth Development Corporation) and the German Investment and
Development Corporation (DEG).
There were direct investments in the power and infrastructure sector, the financial sector,
and selectively in the textile sector. More recent examples of project finance listed in the
International Comparative Legal Guide include: A $210 million loan for setting up a 341
megawatt (MW) combined-cycle gas-fired power plant project near Bibiyana. The loan
was extended by the ADB, IFC, and the Islamic Development Bank. In the
telecommunication sector, Robi received a $99 million IFC loan to expand its 3G network
in Bangladesh. The loan has been received at LIBOR plus 2% with a tenor of seven years.
In the shipping sector, Summit Alliance Port Limited received $30.51 million
from Nederland’s Financierings-Maatschappij voor Ontwikkelingslanden N.V. and
Infrastructure Development Company Ltd. for the development of an inland container
depot, including the construction, operation and maintenance of a quay/container berth,
acquisition and installation of necessary cargo handling equipment, and acquisition of
The study goes on to explain that, given the relatively new status of private equity
investment in Bangladesh, corporations still largely view private equity as simply an
alternative source to debt financing rather than as a true partnership providing broader
benefits such as improved corporate governance, strategic direction, access to broader
ranges of financing, optimization of capital structure, market access and improved
valuation of businesses.
Multilateral Development Banks: The Commercial Service maintains Commercial Liaison
Offices in each of the main Multilateral Development Banks, including the Asian
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Development Bank and the World Bank. These institutions lend billions of dollars in
developing countries on projects aimed at accelerating economic growth and social
development by reducing poverty and inequality, improving health and education, and
advancing infrastructure development. The Commercial Liaison Offices help American
businesses learn how to get involved in bank-funded projects, and advocate on behalf of
American bidders. Learn more by contacting the Commercial Liaison Offices to the Asian
Development Bank and the World Bank.
Project Financing As Highly Political Issue
Finnerty (2007) writes: “Political risk involves the possibility that political authorities in the
host political jurisdiction might interfere with the timely development and/orlong-term
economic viability of the project” (Finnerty, 2007 pp.82). This means, that political risk is
considered any action by the host government that can affect the project negatively either by
postponing the capital inflows or by directly affecting the profitability of the project. This
definition is in line with Howell & Chaddick (1994) who states that “"Political risk" is the
possibility that political decisions, events, or conditions in a country, including those that might
be referred to as social, will affect the business environment such that investors will lose money
or have a reduced profit margin” (Howell & Chaddick, 1994 pp.71). There seems to be some
correlation between the use of project finance and the level of political risk in a country
according to the previous discussions. However, in order to test this relationship one must find
appropriate ways of measuring political risk. This is not an easy task. Many academics have
discussed what measures to use when testing the importance of political risk upon economic
growth or investment. This section will therefore try to establish which measures to use based
upon previous findings in the literature on which measures to use when reflecting the political
risk that an investor faces when investing domestic or foreign.
Main political issues working behind a project financing in Bangladesh are:
1. Democracy: The first category is democracy, which was used in the earliest literature as a
measure of political risk. The main reason given for the use of democracy as a determinant
of economic growth in Bangladesh have democracy and have been unsuccessful in
supporting growth. Democracy is often measured using the Gastil index for civil liberties
and political rights where the latter mainly concentrates on the election process and
whether these are subject to fair, competitive and clear procedure (Brunetti and Weder
1995). Brunetti (1997) finds that the explanatory power of democracy is very low in cross
country growth studies. A democracy may have unpredictable rules as can a state with
political stability (Brunetti and Weder, 1995) which is a risk to project financing in national
or international projects.
2. Government stability & Political Violence: The second category, Government stability,
refers to the number of or probability of changes in government, keeping in mind that the
changes must be fundamental and thus lead to possible change or reversal of the rules and
decisions set in place by the former government. This is theoretically thought to affect
growth and investment through the fact that less stability will lead investors to invest in
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short-term assets. These are more liquid and thus easier to divest in case the government
should change and make changes that affect the investment. This will lead to less
accumulation of physical capital and hence less growth (Feng, 2001). In Brunetti and
Weder’s article from 1995, it is concluded that “the political variables used in these studies
i.e. democracy and political instability, do adequately reflect the “investors problem””
(Brunetti and Weder, 1995 pp.125). This should be noted that, it is one of the major issue
for project financing in Bangladesh.
3. Policy Stability: A fourth option is to identify political risk as the uncertainty of policies. It
captures more of the issues relevant to an investor, as it is a proxy for the amount of
uncertainty that is created by government-controlled policies (Brunetti, 1997). This would
be the predictability and credibility of the rules created as it is measured as the volatility of
monetary and fiscal policies. In this instant, the results in the growth analysis’ seems more
clear towards a negative relationship meaning that higher volatility will lead to a lower
growth although the statistical significance frequently depends on the specifications of the
models when the specifications are richer (Brunetti, 1997). Feng (2001) measure of policy
uncertainty is measured as variability of government capacity. As Feng (2001) states in his
paper “The fluctuation of government capacity indicates that the government lacks
consistency in its power to get a job done. Uncertainty about government effectiveness can
be more adverse than the policy itself by deterring investors from committing their assets.
Given a bad policy with certainty about its execution the investor can still find ways to
make money” (Feng, 2001 pp.276).
4. Subjective perception of politics: The latest part of literature on cross-country growth
analysis’ that Brunetti (1997) have summarized, being category five, have focused on using
more subjective perceptions of politics. This is another political issue for project financing
5. Instability of Law & its Implementation: This is an important political issue of project
financing in Bangladesh. There are a lot instabilities in laws in Bangladesh especially for
the national & international projects which indicates risk to project financing.
After discussing above points, it is clear that project financing is a highly political issue in the
perspective of Bangladesh.
Loan Policy in Bangladesh: Funding of National & International Projects
Types of Bank in Bangladesh
Other Foreign banks
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Some types of loans in Bangladesh are:
Full Recourse Loan: A loan in which the lender can claim more than the collateral as
repayment in the event that the loan is enforced. Thus a full recourse loan places the
Sponsor’s assets at risk.
Nonrecourse Loan: A loan in which the lender cannot claim more than the collateral as
repayment in the event that the loan is enforced.
Limited Recourse Loan: A loan in which the lender can claim more than the collateral,
subject to some restrictions, as repayment in the event that the loan is enforced.
Continuous Loan: The loan Accounts in which transactions may be made within certain
limit and have an expiry date for full adjustment will be treated as Continuous Loans.
Examples are: CC, OD etc.
Demand Loan: The loans that become repayable on demand by the bank will be treated
as Demand Loans. If any contingent or any other liabilities are turned to forced loans
(i.e. without any prior approval as regular loan) those too will be treated as Demand
Loans. Such as: Forced LIM, PAD, FBP, and IBP etc.
Fixed Term Loan: The loans, which are repayable within a specific time period under
a specific repayment schedule will be treated as Fixed Term Loans.
Short-term Agricultural Credit will include the short-term credits as listed under the
Annual Credit Program issued by the Agricultural Credit Department of Bangladesh
Bank. Credits in the agricultural sector repayable within less than 12 months will also
be included herein. Short-term Micro-Credits will include any micro-credits for less
than Tk.50, 000/= and repayable within less than 12 months, be those termed in any
names such as Non-agricultural credit, Self-reliant Credit.
Loan Policies in Bangladesh (Bangladesh Bank & World Bank): Loan cycle of World Bank is
given below for financing different types of nation & international projects:
Preparation Comprises identification and concept review. This stage involves
identifying programs/projects that support the Country Partnership
Framework, the government agency responsible for preparation, key
stakeholders, and target beneficiaries. Following this stage, a concept note
is created; the design is determined; economic, technical, social, and
environmental feasibility are assessed; and potential risks and safeguard
issues are identified.
Appraisal Involves confirming the expected outcomes of the program/project;
reviewing economic, technical, environmental, social, and fiduciary
aspects; and agreeing on the institutional arrangements to implement the
program/project and timelines. The program/project appraisal document
and draft financing agreements are prepared.
Negotiation Involves resolution of any outstanding issues from the appraisal stage,
agreement on the procurement strategy and procurement plan for
Investment Project Financing (IPF), financing and disbursement
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arrangements (including disbursement letter for IPF), and terms and
Approval Involves review and approval of program/project and financing documents
by the Bank’s Board of Executive Directors or by the management.
Signing Involves signing of legal financing agreements by the Bank and client
Effectiveness Involves determination by Bank officials that predetermined and agreed
conditions have been met to begin disbursements.
and loan closing
Involves disbursements to borrowers based on valid withdrawal
applications for program financing and eligible expenditures related to
program/project activities up to the closing date. Refunds of ineligible
expenditures and unused advances, cancellations initiated by the Bank or
the client, final disbursements, and loan closure are handled at this stage.
Involves support to borrowers for debt service, by means of billing
statements after signing in certain cases and after effectiveness in all cases
(loans, credits, and guarantees). Debt service of charges by borrowers
starts once disbursements are made under the loan or credit. In certain
cases, debt service of charges begins after the signing date of the
agreement. Principal repayments start after the agreed grace period ends.
Applying borrowers’ debt service payments to dues and following up on
overdue cases, according to Bank policies and procedures, are the other
activities carried out at this stage.
Final maturity Represents the final repayment date as specified in the financing
Loan Policies in Bangladesh Bank:
Two Step Loan: The Two Step Loan (TSL) fund of JICA assisted FSPDSME project is
providing medium and long term loans to micro, small and medium enterprises for their
productive investment. The Operating Guidelines of the FSPDSME project allow providing
refinance or pre-finance of maximum 83% of the sub-loan or maximum 75% of the sub-
project. Additionally, the Operating Guidelines does not allow financing to women led
enterprise at preferential interest rates like other refinancing schemes of BB. It is, therefore,
observed that women entrepreneurs do not show much interest to take financing under this
project. In order to motivate women entrepreneurs in productive investments, the Steering
Committee of the project in its 5th meeting held on 06 January 2016 decided to allow
providing 100% refinance/ pre-finance at preferential interest rate [ bank rate + maximum
5% spread] in line with prevailing women entrepreneurship development strategy of BB.
The FSPDSME project was successfully closed on 31 March 2016. Refinancing and pre-
financing to participating financial institutions (PFIs), however, is being continued from
the revolving fund account of the project.
Loan Rescheduling: Bangladesh Bank recognizes that in some cases, a legitimate banking
practice may allow for the renewal of a continuous loan or line of credit. Occasionally, even
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a term loan is renewed or extended under unfortunate circumstances that are beyond the
control of the borrower and do not signify that the borrower's willingness or ability to repay
has deteriorated the loan. However, Bangladesh Bank is concerned that rescheduling (also
known as “prolongation” or “ever greening”) may sometimes result in an overstatement of
capital, when loans that have a low probability of repayment are carried at full value on
banks' balance sheets. Bangladesh Bank is hereby issuing this circular in order to
communicate its policy stance that rescheduling should be done only in limited
circumstances and under restrictions. Rescheduling differs from different types of loans.
Although loan classifications & policies are important parts of financing in Bangladesh for
projects, business, agriculture etc. but this is a reason for confliction, problems in banking