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AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009 www.at-capital.com Infrastructure Financing Through Capital Market

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Page 1: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

AT Capital

Md. Minhaz Zia, CFA

PartnerAsian Tiger Capital Partners, October 2009

www.at-capital.com

Infrastructure Financing Through Capital Market

Page 2: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

2Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Topic

Infrastructure Investment: An Overview

Financing at Greenfield Stage

Financing Through Capital Market

Page 3: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

3Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Infrastructure Investment: an overview

Page 4: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

4Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Infrastructure defined

Infrastructure is the basic physical structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function. The term typically refers to the technical structures that support a society, such as roads, water supply, sewers, power grids, telecommunications, and so forth.

  Infrastructure Range

Transportation   Road and highway   Railways   Canals   lighthouses   Seaports   Airports

Water management   Drinking water supply   Sewage   Drainage   irrigation systems   flood control systems  

Communications   Telephone/Mobile Networks   Cable television networks   Internet backbone   Communication satellites

Energy   Electric power network   Natural gas pipelines   Petroleum pipelines   heating systems

Geophysical monitoring   Meteorological monitoring   Seismometer networks   Remote sensing satellites

Waste management   waste landfills   waste incinerators

Page 5: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

5Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Infrastructure Investment Characteristics

Infrastructure Investment Characteristics:

Capital Intensive   Long Gestation   Complex structure involving multiple and often unique risk     Limited recourse ( Investors paid from the revenue of project)   Requires Government Concession

Page 6: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

6Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Infrastructure Status of BD

• Infrastructure in Bangladesh ranks among the worst in the world, securing only the 126th position in 133 nations, according to the Global Competitiveness Report 2009-10

South Asian nations Ranking in Global Competitiveness Report 2009-10

India 49

Srilanka 79

Pakistan 101

Bangladesh 126

Source: Global Competitiveness Report, WEF 2009

GCR shows ‘more than 80 percent businessmen said infrastructure remained largely underdeveloped in 2008’

Page 7: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

7Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Comparative Infrastructure Indicators

Comparative Infrastructure Indicators, 2007

Indicators Bangladesh India South AsiaAverage

China Vietnam East Asia and Pacific

Average

Access to electricity (% of population) 20 43 29 99 76 63

Electric power consumption (kwh per capita) 147 380 210 987 374 1230

Improved water source (% pop with access) 74 86 76 77 85 75

Improved sanitation facilities (% pop with access) 39 33 53 44 61 60

Source: Private participation in infrastructure Projects database. The World Bank Group 2009

Page 8: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

8Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Why Infrastructure Investment has long been ‘Poor’

Two Basic Reasons-

(i) The government’s reliance on ADP-based public sector investment program which has declined steadily in relation to GDP in recent years; and

(ii) The government’s failure to attract private investment in the infrastructure sector.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0 6.35.7

3.2 3.4

(% o

f GD

P)

Trend in ADP (2000-09)

Source: Ministry of Finance, GOB

Page 9: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

9Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

‘Poor’ ADP implementation is leveraging the Inefficiency

The key factors contributing to the unsatisfactory implementation of the ADP are:

Complex procurement policy; 

Inadequate capacity of the implementing agencies; and 

A lack of proper monitoring of the agencies implementing the ADP.

Source: Ministry of Finance, GOB

Page 10: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

10Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

International Experience is ‘Different’

International experience with infrastructure funding is very different from Bangladesh. Most emerging economies have successfully tapped private sector funding for infrastructure investment

Comparative Infrastructure Investment in US $ billion

BY Sector Bangladesh IndiaSouth Asia

AverageChina Vietnam

Energy 1 34 7 36 3

Telecom 4 43 10 15 2

Transport 0 19 3 42 1

Water and sewerage

0 0.26 0.04 7 0.21

Total 5 96 21 100 6

Source: Private Participation in Infrastructure Projects Database , The World Bank Group 2009.

Investment Commitments to Infrastructure with Private Participation in Emerging Markets 2003-2007 (US$B)

Page 11: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

11Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Bangladesh Case:

To attain a sustained growth rate of 8-10 percent per annum over the next decade, Bangladesh will have to raise its investment rate closes to levels attained by India and China today, i.e. 37-40 percent of GDP. For that to happen the infrastructure investment has to be taken at least to 8% of GDP as against 4% now. The challenge lies not only in mobilizing sufficient resources to finance that investment but also to develop effective institutional arrangements to implement large infrastructure projects

Source: Asian Development Bank Source: Ministry of Finance, GOB

Page 12: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

12Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Infrastructure Financing: Macro Bottlenecks

Inefficient intermediation process

Poor investment quality

Limited capacity of public financing

Unavailability of risk capital

Concentration of risk

No Sovereign Rating

Page 13: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

13Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Broad Infrastructure Strategy

Improving intermediation of domestic financial savings so that they are channeled to meet the specific requirements of infrastructure investment such as those relating to risk, tenor and scale.

Distributing financial risk more widely and efficiently across the domestic financial system and abroad, to avoid excessive concentration.

Making infrastructure financing--especially in sectors where it has not been traditionally forthcoming--relatively more attractive for a wide spectrum of investor/ financier classes by providing more liberal regulatory regimes for infrastructure vis-à-vis non-infrastructure sectors and in some cases, offering well-designed fiscal incentives.

Achieving all the above through a facilitating (rather than directive) framework for each class of financing institution, while ensuring that accelerated investment in infrastructure does not jeopardize fiscal discipline, financial stability and external viability.

Page 14: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

14Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Spectrum for Infrastructure financing

GOB owned and GOB operated(GOB only)

     Public        

     Sector

 Private  

  Sector

GOB owned and privately operated

GOB & Private jointly owned and privately Operated (PPP)

Privately owned and privately operated

Initial Investment can be in innovative financing solution like PPP (Public-Private Partnership).

Page 15: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

15Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Financing at Greenfield Stage

Page 16: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

16Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Infrastructure project financing at Greenfield stage

Worldwide Infrastructure projects at Greenfield stage are usually financed through

Sponsors Equity/ Quasi Equity

Commercial Bank Lending

Private Placement of Bond with Institutions

Only at a mature stage it is taken to the capital market to-

Bring liquidity in the market and

Broaden the investor base.

Page 17: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

17Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Institutional & Structural Constraints

Imbalanced Distribution of Savings

About 80% of the country’s total financial savings is invested in the Banking system as

deposits.

Debt market almost entirely comprised of non liquid and non traded Government Securities.

Virtually non existent Corporate Bond market.

Investment in Equity Market still low.

Insurance industry not attracting significant financial savings nor playing a meaningful role in

investment.

Pension scheme not funded.

Page 18: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

18Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Institutional & Structural Constraints (contd.)

.. And Poor channeling of saving surplus

Banking system with present surplus liquidity of about Taka 30 Billion have very low appetite to Infrastructure investment.

This is due to---

The maturity mismatch between the asset and liability is the key constraint of commercial bank

lending on a high scale.

The risk appetite of the commercial Bank is different from that required in huge infrastructure

investment.

The exposure limit and norms may prevent banks from infrastructure investment

Absence of any debt swap market to take care of exposure problem

Absence of risk transfer mechanism (ie. Securitzation) in the system

Page 19: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

19Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Institutional constraints

Major impediments towards development of bond market in Bangladesh

Government’s inconsistent initiative and policy support for development of Bond market

Default Culture in Corporate Bond

Poor and lengthy legal enforcement

Unaccountable Trustee

High risk free interest rate

Absence of proper benchmark and yield curve

Absence of large institutional Investors

Lack of liquidity and secondary trading (No Market Maker)

Page 20: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

20Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Measure needed to be taken for liquidity of the Private Placement

Allowing REPO transactions on corporate bonds in the interbank REPO

Market through a specialized clearing and settlement platform

Private Placement should be confined only to Qualified Institutional Buyer

(QIBs)

Develop an OTC Market for Trading in Privately Placed Debt Securities

Page 21: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

21Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Financing Through Capital Market

Page 22: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

22Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Financing Through Capital Market

Bangladesh has got two stock exchanges namely Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE).

The market is however characterized by the following two major constraints-

•  The Market is predominantly equity- centric •  Supply of securities with strong fundamentals is extremely limited.

DSE Main board as on September 2009:

  BDT mn USD mnTotal Market Capitalisation of All Companies Shares 1,045,222 15,135

Total Market Capitalisation of All Mutual Funds 23,711 343

Total Market Capitalisation of All Debentures 576 8

Total Market Capitalisation of All Govt. T-Bonds 310,763 4,500Total Market Capitalisation of All Corporate Bonds 2,720 39

Total Market Capitalisation of All Listed Securities 1,382,991 20,026

Page 23: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

23Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Regional Market Capitalisation as % of GDP

Dhaka Stock Exchange is 22 % of the GDP in 2009 while Bombay Stock Exchange is 54.5% of GDP

Page 24: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

24Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Infrastructure capitalisation in Regional Stock Markets

With current offer price for GrameenPhone the market cap of infrastructure ratio will go to 15%

Page 25: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

25Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Infrastructure Fund from Capital Market

Bangladesh Economy growing at a rate of 6-7% will soon cross $100 Billion

Market Capitalization will reach at least 25% of the GDP as the investor appetite to capital market

is growing fast.

Infrastructure capitalization reaching 20% of market cap an additional USD 2.5bn fund can be

tapped from capital Market by 2012.

Infrastructure fund can be tapped from the Market by-

- Issuing equity or debt of infrastructure projects

- Enhancing participation of plain vanilla mutual fund in infrastructure related issues.

- Issuing Dedicated Infrastructure Mutual Fund

Page 26: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

26Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Policy issues

Revenue from the infrastructure project can be securitized.

Cap of investment up to maximum 25% for mutual fund in non listed securities should be relaxed if the funds are invested in non listed infrastructure projects .

Existing IPO quota of 10% for the general mutual fund and dedicated mutual fund can be enhanced for infrastructure related issues.

Mutual funds can also be incentivized through lower tax against income generated from infrastructure issues The lock in rule for infrastructure related issue should be relaxed for investor to make an early exit. Insurance companies should by regulatory requirement be asked to hold a certain proportion of their assets in infrastructure investment.

They should be allowed to hold a substantial part of their portfolio in the securities of the non listed infrastructure companies.

Pension scheme should be funded

SEC should broaden the scope of the foreign investors in the existing rules and enact necessary new rules to ensure spontaneous participation of foreign investors in listed Infrastructure Bond.

Page 27: AT Capital Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009  Infrastructure Financing Through Capital Market

27Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Thank You