ECONOMIC AND FINANCIAL ANALYSIS A. Financial Analysis
1. The financial analysis reviews the financial position of the Bangladesh Infrastructure Finance Fund Limited (BIFFL) in relation to the proposed $50 million Asian Development Bank (ADB) loan to BIFFL, which will be onlent to private sector companies to support infrastructure investments. According to the base-case assessment as well as scenario analysis, BIFFL is well-capitalized; it has strong asset quality, modest but consistent positive earnings, a good liquidity position, and moderate risk profile. BIFFL has experienced rapid portfolio growth, which is expected to continue, although there is a need to diversify its funding sources and strengthen risk management. The analysis confirmed that the demand for ADB funding is justified. Historical track records of similar types of projects in the country have shown good economic rates of return. All future pipeline projects will be evaluated during the subproject approval process to ensure adequate economic and financial returns. The involvement of ADB’s Office of Public–Private Partnership further strengthens the design and execution of each pipeline project.
2. Institutional overview. BIFFL is a nonbank financial institution fully owned by the Government of Bangladesh, with a focus on infrastructure development. This includes public initiatives taken by government agencies such as the Bangladesh Economic Zones Authority, the Roads and Highways Department, and public–private partnership (PPP) projects implemented by the private sector. Since its incorporation in March 2011, BIFFL has experienced rapid growth. Selected financial highlights from BIFFL’s audited financial statements are shown in Table 1.
Table 1: Bangladesh Infrastructure Finance Fund Limited Financial Highlights, FY2015– FY2018
(Tk million)
Item 2015 2016 2017 2018
Total loans and advances 4,315 7,687 10,515 16,978
Total assets 24,953 24,327 25,618 30,149
Paid-up capital 19,400 20,100 20,590 21,080
Net income 1,002 773 804 828
Nonperforming loan ratio (%) 0 0 0 0.03
Return on equity (%) 4.80 3.57 3.60 3.60
Return on assets (%) 4.22 2.97 3.22 3.14
Debt–equity ratio (%) 3.51 0.02 0.02 10.55
FY = fiscal year.
Source: Bangladesh Infrastructure Finance Fund Limitedfinancial statements.
3. BIFFL’s loan portfolio has grown rapidly while capital adequacy has been maintained. During 2015–2018, BIFFL’s loan portfolio compound annual growth rate was 41.38%. Total asset size grew from Tk24.95 billion ($295.2 million) to Tk30.15 billion ($356.7 million). Its capital adequacy ratio is high at 177.06% and its asset quality is very good, with nonperforming loans (NPLs) accounting for only 0.03% of the portfolio. Its liquidity position is also strong. BIFFL is not exposed to foreign exchange risks and its earnings are moderate but growing steadily.
1. Capital, Asset Quality, Earnings, Liquidity, and Sensitivity to Market Risk Analysis1
4. Capital. BIFFL has adequate capital with a capital adequacy ratio at 177.06%, well above Bangladesh Bank’s required capital ratio of 10.00% for financial institutions (Table 2). Further its tier 1–capital has grown from Tk21.34 billion ($252.71 million) in 2015 to Tk23.32 billion ($276.23 million) in 2018, resulting in a healthy tier 1–risk weighted assets ratio of 175.68%. Thus, BIFFL remains well-capitalized to absorb potential shocks. Paid-up capital comprises 89.68% of BIFFL’s overall capital. Retained earnings comprise 2.87% of BIFFL’s capital, which has improved because of increased net income during FY2016–FY2018.
5. Asset quality. BIFFL has maintained good asset quality. By the end of 2018, gross NPLs to gross loans were 0.03%, which is much lower than the average level of 11.90% for the finance sector in Bangladesh. As of July 2019, the only scheduled loan in BIFFL’s portfolio was resolved with full recovery. To ensure adequate coverage for potential write-offs of bad loans, BIFFL maintains loan loss reserves of Tk433.6 million against the outstanding NPLs of Tk5.1 million.
Table 2: Bangladesh Infrastructure Finance Fund Limited Capital Adequacy and Asset Quality, FY2014–FY2018
(%)
Ratio 2014 2015 2016 2017 2018
Capital adequacy ratio 130.24 112.48 276.71 149.69 177.06 Tier 1 capital ratio 130.02 112.25 275.42 148.81 175.68
Paid-up capital growth 0 21.25 3.61 2.44 2.38
Net income growth (4.45) 2.77 -22.84 3.97 3.01
( ) = negative, FY = fiscal year.
Source: Bangladesh Infrastructure Finance Fund Limited financial statements.
6. BIFFL’s NPL recognition falls under the purview of Bangladesh Bank. Loans are categorized as NPLs once they have defaulted after 6–12 months for loans with a tenor of less than 5 years, and after 12–18 months for loans with a tenor of more than 5 years. On a collective basis, a general provision of 0.25%–5.00% under different categories of unclassified loans is to be maintained. For NPLs, specific provisions range from 5% to 100%, depending on the classification.
7. Because of its mandate, BIFFL’s portfolio has a concentrated exposure to infrastructure. This is mitigated by its lending cap, subproject eligibility, criteria, and diversified subsector portfolio. First, BIFFL restricts lending to up to 40% of the total project cost or $100 million, whichever is lower, limiting potential losses from a single project to 35.57% of its total capital. Second, the sponsor is required to commit equity of at least 20% of the total project cost. BIFFL seeks to diversify into different subsectors. Its largest subsector concentration—transport (TK5.7 billion )—accounts for 34% of the loan portfolio or 24% of the tier 1 capital. Lastly, BIFFL continues to hold additional capital beyond the regulatory minimum to mitigate concentration risk.
1
CAELS stands for capital, asset quality, earnings, liquidity and sensitivity to market risk. It is a deviation of a common industry framework, the CAMELS analysis. The “M” in CAMELS stands for management. The management component of the analysis was omitted, as the financial management assessment substantially addresses these issues.
8. Earnings. BIFFL’s earnings are sustainable and have been improving (Table 3). The earnings growth comes from greater interest income driven by the growing loan portfolio and wider interest margins. Net income increased from TK804.1 million in 2017 to TK828.3 million in 2018. Operating income reached TK2.0 billion, a 21% increase from previous year. BIFFL’s return on assets, at 3.14%, outperformed the industry average.
Table 3: Bangladesh Infrastructure Finance Fund Earnings, FY2015–FY2018 (%)
Ratio 2015 2016 2017 2018
Net income growth 2.77 (22.84) 3.97 3.01
Total assets growth 10.67 -2.51 5.31 17.69
Net interest margin 8.56 6.87 7.20 7.99
Return on assets 4.22 2.97 3.22 3.14
Dividend payout 9.98 15.52 18.65 0
( ) = negative.
Source: Bangladesh Infrastructure Finance Fund Limited.
9. Liquidity. BIFFL’s liquidity position is strong, with current ratio at 1.84. BIFFL has heavy reliance on government equity infusion, resulting to concentration in the source of funds. However, this may change as BIFFL takes on loans from Japan International Cooperation Agency and ADB. IDCOL’s operations generate sufficient fund to meeting interest expenses. In FY2018, the reported earnings before interest, tax, depreciation and amortization (EBIDA) was TK1.9 billion, while the interest expense was TK32.4 million.
10. Sensitivity to risks. BIFFL is exposed to market, credit, and operational risks. For market risk, BIFFL is subject to limited interest rates and no foreign exchange risks. So far, its operations have mostly been funded by its equities and, to a lesser degree, long-term financing; its interest rate exposure is therefore limited. As BIFFL expands its sources of funding, it may become more exposed to interest rate risks from maturity mismatches between its assets and liabilities, which is why long-term funding is very critical to its sustainable operations. BIFFL has no foreign exchange risk exposure as its funding and lending are all in local currencies. BIFFL is most exposed to credit risk through its lending to private sector infrastructure projects, which has so far been effectively mitigated by its credit risk management processes and lending policies, as evidenced by its low NPL ratio. Furthermore, BIFFL’s strong capital base provides adequate support against potential losses from these risk exposures. The attached technical assistance will provide targeted trainings and capacity building to improve its treasury and risk management to ensure a more prudent and sustainable lending operation.
2. Financial Projections
11. Base-case projections. BIFFL’s financial projections for 2019–2024 anticipate strong loan growth at an average annual rate of 20% (Table 4). The projections are aligned with historical trends and include ADB’s proposed loan.
Table 4: Financial Projections, 2019–2024 (Tk million)
Item 2019 2020 2021 2022 2023 2024
Net customer loans 18,980 22,740 27,251 32,671 39,162 46,929
Earning assetsa 8,354 7,391 6,499 5,671 4,899 4,345 Other assets 4,744 8,683 11,537 13,602 13,987 12,007 Total assets 32,078 38,815 42,287 51,944 58,048 63,281 Borrowingsb 3,392 8,234 12,794 17,529 21,610 24,968 Non-interest-bearing liabilities 4,365 4,365 4,365 4,365 4,365 4,365 Common stock 21,542 22,405 23,269 24,133 24,996 25,860 Retained earnings 1,172 2,161 3,168 4,183 5,298 6,520 Other equity 1,608 1,648 1,691 1,734 1,778 1,568
Total liabilities and equity 32,078 38,815 42,287 51,944 58,048 63,281
Net income 972 989 1,007 1,015 1,114 1,222
Net interest margin (%)c 7.17 6.92 6.40 5.76 5.59 5.38 Debt–equity ratio (%) 13.95 31.41 45.49 58.33 67.38 73.55 ADB = Asian Development Bank, BIFFL = Bangladesh Infrastructure Finance Fund Limited.
a Comprising interest-bearing deposits and available-for-sale securities.
b Includes ADB, World Bank, Bangladesh Bank refinancing, and local interbank and Japan International Cooperation
Agency loans.
c Net interest margin = net interest income / average earning assets
Note: The key assumptions are (i) 20% annual loan growth rate, (ii) capital infusions and borrowings based on BIFFL’s 5-year projected capital plan, (iii) interest income based on assumed blended rate, (iv) ADB cost of borrowing based on Bangladesh Bank rate and Government of Bangladesh and Ministry of Finance spreads disclosed by BIFFL, (v) loan loss reserves based on BIFFL’s 5-year projected nonperforming loan provisioning, (vi) 3-year average of 2.99% of general and administrative expenses, and (vii) average 45% tax rate. These assumptions are aligned with historical records during FY2015–FY2018 and BIFFL’s 5-year plan.
Source: ADB.
3. Scenario Analysis
12. Sensitivity analyses were used to assess BIFFL’s ability to withstand financial shocks. Two scenarios were evaluated to cover the impact of (i) a shrinking interest margin and (ii) an increasing NPL level. The result of the scenario analysis indicates that BIFFL can sustain its operations even under severe external factor shocks.
13. The first scenario examined how much the net interest margin would have to decrease to result in losses. It is concluded that from its level of 7.99% as of the end of 2018, BIFFL’s net interest margin would have to drop to 3.62% before a loss is incurred.
14. The second scenario examined the impact of rising NPL levels on income and capital adequacy. From its level of 0.03% as of the end of 2018, BIFFL’s NPL ratio would have to increase to 16.31% before a loss is incurred. Under that scenario, the resulting tier 1 ratio would be 93.90%, which is still well above the minimum requirement.
B. Demand Analysis
15. The market demand for PPP should be viewed against the backdrop of Bangladesh’s sizable infrastructure financing need. Because of fiscal constraints, the government expects PPPs to bridge the infrastructure funding gap of at least 1.8% of gross domestic product, or around $5 billion dollars per year. As of February 2020, the PPP Authority had a pipeline of 72 projects with an estimate investment value of $22.7 billion at different stages of development. Most of the PPP projects are in the transport sector, energy sector, and social infrastructure sector that includes health care, economic zones, and tourism. With no other long-term funding sources available, IDCOL and BIFFL combined only provided around $3 billion in financing, including leveraged private sector funds and support from development partners, which indicates significant future growth potential.
16. BIFFL is building a promising PPP subproject pipeline, supported by the PPP Authority and ADB OPPP. This pipeline currently includes two subprojects that are expected to close in 2020 and 2021.2 Given this, the demand for funds from emerging PPP subprojects could
potentially increase to hundreds of millions of dollars, far exceeding the proposed $50 million loan to BIFFL. In such a case, ADB additional financing could be considered.
17. Because of the coronavirus disease pandemic, the government has come under increasing fiscal pressure. In FY2020, the budget deficit is expected to widen to 5.5% of gross domestic product because of a sharp reduction in revenue and increasing expenditure on health care, social protection, and economic stimulus. The tight fiscal conditions are expected to worsen in FY2021, and budgetary priorities will focus on public health, food security, and social protection. Per World Bank estimate, fixed capital investment by the government is expected to decline from $8.4 billion in FY2019 to $5.7 billion in FY2020 and $4.5 billion in FY2021. In this context, PPP will take on more significance in complementing public financing to support infrastructure development. Further, considering the impact of the pandemic, spending on health care is expected to increase and a major portion of that is expected to be funded by the private sector, potentially through PPPs.
C. Economic Analysis
18. The economic benefits of the project are threefold. First, the project provides long-term funding to critical infrastructure projects that will directly impact economic development. Second, the project will support the rollout the country’s PPP plan by financing the first few large PPP infrastructure projects. Successful implementation of the PPP strategy will be conducive to leveraging private sector investments and channeling more foreign direct investments into long-term infrastructure projects in Bangladesh. Third, the project will help to strengthen BIFFL’s capacity, so it can become more effective and sustainable in supporting future infrastructure PPP projects.
19. Long-term funding for infrastructure projects. Two major pipeline projects currently considered are in the road subsector, which is also a high priority area for the government’s PPP initiative. Long-term funding for large infrastructure projects in the road subsector is very limited and ADB has become the lead financier in this subsector. The modal share of road transport is over 70% for passenger traffic and 60% for freight, where limited road capacity, deteriorated road conditions, and the mixture of slow- and fast-moving traffic have long plagued the subsector. The
2 Two subprojects are the Dhaka bypass ($412 million) and the Rampuria–Amulia–Demra road ($88
situation is further exacerbated by the rapid growth of traffic—traffic grew annually at a rate of 8.4% for passengers and 8.2% for freight during 2000–2010 and has remained at a similar growth rate ever since. The number of vehicles has increased at an annual average rate of more than 10% since 2003. Poor road conditions also contribute to severe road safety issues in Bangladesh. According to estimates by the World Health Organization, the actual number of fatalities may be around 20,000 per year. The annual national loss related to road casualties is estimated to be about Tk50 billion (about $715 million).
20. Road construction figured prominently in the government’s 7th Five Year Plan (2016– 2020) with highlights on expanding strategic corridors, improving existing roads, increasing private sector participation, and reforming the PPP strategy.
21. In Bangladesh, ADB has had significant operations in road construction, maintenance, and improvement with a good track record. Based on the review of all three ADB road projects completed since 2009, ADB projects in the road subsector have generated very high economic returns, ranging from 17.5% to 28.6% (Table 5). This is a testament to the acute demand for road subsector investments and strong relevance of continued ADB involvement in this area. Based on preliminary feasibility studies, the two road projects considered under this project will deliver similar substantial economic impacts, though the detailed economic analysis will be conducted during the subproject review process when all the information becomes available.
Table 5: Asian Development Bank Road Projects during 2009–2013
Loan No. Project
Completion Year ADB Funding EIRR (%) 1789-90 Road Maintenance and Improvement Project 2009 $94 million 28.6 1920 Road Network Improvement and Maintenance
Project
2011 $65 million 20.1 2021 Road Network Improvement and Maintenance
Project II
2013 $126 million 17.5 EIRR = economic internal rate of return.
Source: Asian Development Bank.
22. Facilitate public–private partnership strategy rollout. To mobilize private sector resources to address the infrastructure investment gap, the government has mainstreamed PPP into the economic planning process. PPP policy, law, viability gap fund guidelines, and procurement guidelines have been developed and promulgated. PPP toolkits and templates of legal agreements are being developed, with a goal of accelerating infrastructure development while minimizing the financing and operational burden for the government.
23. As a case in point, the Dhaka bypass, which is the first subproject under consideration, will be one of the first large-scale PPP infrastructure projects in the country. The 48-kilometer project will add a four-lane tollway and a two-lane service road to the strategic corridor for freight movement linking the manufacturing center in the north of Dhaka with the center of shipping activity at the port of Chittagong in the south. The Dhaka bypass road is currently the only effective bypass road for heavy freight movement around the city of Dhaka.
24. The total subproject cost is estimated at $412.3 million, but under the PPP model, as a result of competitive bidding, the government will only need to invest in the viability gap funding of $28.3 million—less than 7% of the total project cost. The rest of the funding will be provided by private sector equity and debt investments, most of which are from foreign direct investments. The financing and operational burden for the government will be significantly reduced, and a balanced risk–benefit sharing is also conducive to higher quality and timely completion of the
project. As the first access-controlled expressway in the country, the subproject will bring in an established infrastructure developer, operator, and financier, and will pioneer new business models and new technologies in the country.
25. Strengthening the Bangladesh Infrastructure Finance Fund Limited. The project will have a positive economic impact by addressing institutional capacity constraints for infrastructure finance. Nonbank financial institutions such as BIFFL and IDCOL play a crucial role in infrastructure financing by channeling long-term funding from international financial institutions and government sources into infrastructure projects developed by the private sector. There is limited availability of long-term infrastructure funding for the private sector in Bangladesh. The capital market is underdeveloped, and commercial banks are constrained by exposure limits, asset–liability structures, and lately their own asset quality issues.
26. BIFFL is mandated to support PPP infrastructure projects. Compared to IDCOL, which has well-established operations and long experience working with international financial institutions, BIFFL is still underleveraged. It lacks experience delivering large-scale PPP infrastructure projects, and only recently began to work with international financial institutions such as the Japan International Cooperation Agency. The ADB loan will provide BIFFL the needed financial capacity to offer long-term financing to PPP infrastructure projects and gain necessary experience in project appraisal and structuring. The attached technical assistance will strengthen BIFFL’s institutional capacity in financing PPP projects, risk management, treasury operations, and safeguard compliance. Through this project, BIFFL will be on track to develop its technical and financial capacities to expand its lending operations in PPP infrastructure subprojects in a more efficient and sustainable manner.
