Developing Bond Market for Infrastructure

Mamun Rashid

9th June, 2019 10:52:47 printer

Developing Bond Market for Infrastructure

Bangladesh is one of the emerging economies of the world with a GDP of USD 250 billion (approx.). Although it is a small country in terms of area, we have a large population of more than 165 million. Our GDP is growing at a rate over 7 per cent. We have a high demand for infrastructure, across different sectors such as power and energy, transport, urban and social, to support its growing economy, urbanisation and large population. The government aims to achieve the status of a ‘middle-income economy’ by 2021 and that of a ‘high-income economy’ by 2041. Infrastructure development and upgradation will play a crucial role in achieving this aim.

Current snapshot of our infrastructure project pipeline

Bangladesh needs investment over USD 600 billion from 2016 to 2040 in infrastructure sectors such as water, energy, telecoms, ports, airports, rail and road. However, the present trends indicate that Bangladesh will be able to ensure only around USD 400 billion investment in the infrastructure sector which leaves an investment gap of at least USD 200 billion. Among these sectors power, telecoms and water supply have biggest gaps.

The infrastructure project pipeline in Bangladesh indicates that the country aims to invest around USD 112 billion, of which transport and energy sector make up about 91 per cent.

Supply of funds for infrastructure investment

Traditionally the infrastructure projects in our country have been funded through budgetary allocations by the Government of Bangladesh and multilaterals and bilateral agencies. The World Bank has invested around USD 12 billion in Bangladesh (active projects) with a further USD 2.5 billion under consideration. The government plans to invest around USD 17 billion in next two years in energy and transport projects.

Some of the key issues surrounding supply of funds for financing infrastructure projects are supply side constraints including in-market liquidity crunch, yields on government saving schemes and securities, along with banks and NBFIs facing challenges in maintaining depository ratios and difficulty in pooling funds. There is also a lack of availability of funds for the longer term. The situation is not getting better because of poor credit appraisal, preference for lending to operational assets and preference for shorter lending tenures (three to five years). Infrastructure sector needs long tenure debts (20-30 years) which commercial banks are not very interested in. The exposure of commercial banks in the infrastructure space has been low, only around USD 7 billion outstanding in 2017-18 towards transport and construction sectors. The state owned commercial banks, which traditionally had higher exposure to infrastructure sectors, have been ailing due to increase in non-performing assets (approx. 30 per cent) and an extremely low capital adequacy ratio (around 6 compared to the minimum 10).

While Islamic financing is gaining popularity for equipment financing - sale and lease back, hire purchase, and commodity financing, there’s yet to be any significant development for infrastructure financing. There are 33 non-banking financial institutions which have no products dedicated to infrastructure financing.

Bangladesh bond market: Context and Challenges

Our bond market is small and incipient relative to the overall infrastructure investment in the country. The government issued bonds and treasury papers dominate the bond market. On the other hand, corporate issued products are almost non-existent.

There are 279 sovereign bond issues, cumulative volume of around 1,307 billion units, compared to 2 corporate issues, with one cumulative issue of 300 million units (USD denominated bonds) and the  issue of 3 billion units (Taka denominated bond). The market does not have the depth as businesses are wary of issuing bonds and resort to banks to meet their financing needs.

Moreover, bond subscribers suffer from issues like lower demand for corporate bonds, low investor base, lack of awareness among the investors etc. High yielding government securities and restrictive guidelines make corporate bonds less lucrative. Domestic investors are unable to invest in corporate bonds due to the restrictive guidelines and lack of professional fund management. The bond market also significantly lacks the presence of international investors. Lack of investor education programmes and adverse perception by the market participants deter participation in the bond market. However, our stock market is a small one and heavily equity driven. There is an imminent need to deepen and diversify the activities in the country's capital market. Besides, disclosure of accounting information to the public by the companies are poor in quality.

Overall, inadequate market regulations coupled with high issuance costs, lack of action against the market manipulators, structural constraints of the capital market make the situation worse for market intermediaries. Development of bond markets will primarily depend upon liquidity of the bonds as well as proper collateralisation and securitisation of related instruments. For liquidity crisis to be averted, a strong coordination among bond market, banking sector and capital market needs to be established.

Way forward to a well-developed bond market

For a bond market to function well, we need to determine demand and supply of finances for infrastructure projects first. Consequently, investors’ expectations against actual offerings in current market should be identified. A road map for the bond market, awareness programmes for investors, regulatory institutions and issuers, reduction in transaction costs of bond issuances, financial and tax incentives for both issuers and investors can make significant contributions to long-term infrastructure financing through developing the bond market in Bangladesh.


Mamun Rashid is a partner at PwC Bangladesh. The write up is the excerpt of a position paper.