Bank Loans on Fixed Terms
C. Bank Loans on Fixed Terms
147. The alternative to taking up bond financing will be to seek long-term bank loans. Such facilities may, however be very difficult to get the banks to accept. The pricing mechanism of bank loans will be so that the risk margin will go up exponentially over the lifetime of the loan. At the same time, it can be expected that the basic interest rate will go up progressively.
148. At this point in time, the financial market in Bangladesh is not very liquid and well- functioning, and future interest rates are not found in the market. One month rate of interbank rates are currently as follows:
34 ADB. South Asia Working Paper Series No 23, February 2014, p. 40.
149. Compared with the effective interest rates published by Bangladesh Bank, it seems to be a reasonable estimation that a normal margin will be approximately 10% per year for 1- month loans. This is a high margin by international standards and high margins are certainly
a problem, particularly for long-term borrowing. At an effective rate of interest of 17%, the debt will be doubled in less than 5 years.
150. “Regulatory uncertainties coupled with politically motivated contract awards have put infrastructure projects in the high-risk category in Bangladesh. 35 ” Therefore, it is likely that
margins for such PPP projects will be on the high end. If there is a need for a 30-year committed loan at a fixed rate of interest and margin, the request is likely to be considered unrealistic.
151. Financing with much shorter tenure (e.g., 10 years) could be considered, and then let the financing thereafter be rolled over on new terms. However, it is not necessarily attractive to obtain the financing on such terms, and the refinancing risk will have to be taken over by the government, as the risk is obviously not under the control of the PPP supplier.
152. Accordingly, normal calculations over the optimal capital structure do not give any meaning, as the parameters are obviously affected by actions of a purely political nature and cannot be projected by information available in the financial market. Therefore, some way other than long-term fixed borrowing in the private financial market is needed.
153. The first priority shall be to seek as much financing as possible from multilateral banks like ADB or other banks in the World Bank Group. Also, banks outside the World Bank Group may be approached, like Nordic Investment Bank and other development banks.
154. For that part which cannot be financed by loan capital from multilateral banks, short- term financing must be sought from Bangladesh-based banks. This will eventually affect the payment model, as the interest and margin payments will be a variable cost that will have to
be picked up by the sponsor.
155. Further, if the lending from multilateral banks comes only in foreign currency, then the currency exchange risk will also have to be picked up by the government.
156. These two financial risks —the interest rate and the currency exchange risk—are significant and volatile. The burden must be borne by the party that is best qualified to affect and/or to bear them. The PPP supplier has neither the means nor the opportunity to bear these financial risks. Therefore, they must rest with the Government of Bangladesh.
157. Having to bear these risks should not be counted against the PPP concept. Every alternative solution or procurement method will involve exactly the same risks no matter how higher education is financed.