Padma Bridge Construction: World Bank a Review of Current Situation Essay Sample
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Padma Bridge Construction: World Bank a Review of Current Situation Essay Sample
Bangladesh as a developing nation should seriously move to act as a participant in the global economic and financial network for implementation of infrastructure projects. We should increase our focus on long-run development projects where economic returns are higher than commercial returns (such as river training, land acquisition, land administration and resettlement) and commercial financiers may finance commercially viable activities. Padma Bridge is a continuation of the commitment towards such long-run focus associating our development partners.
The concept is in a country like Bangladesh, where there is an acute shortage of power and other infrastructural facilities, ensuring transparency, execution support capability and corporate governance can do miracles, in terms of drawing investors focus and ensuring successful implementation of projects. Donor agencies or development partners can also focus on capacity building among civil bureaucracy, for improving their understanding about the project economics and execution with precision. The burning question igniting confusion, consideration or consolidation of various feelings and thoughts is yet to be resolved. Multi-facet variables as monetary, fiscal or even sovereignty or self-esteem of the country are scrutinized to identify the appropriate option.
Project cost of Padma Bridge is estimated to be US$3.00 billion. Funding for the project is provided by the Asian Development Bank (US$615 m[), the World Bank ($1.5 billion), Japan International Cooperation Agency ($415 m), Islamic Development Bank ($140 m). The government also signed another $14.84 million agreement with the IDB for the implementation of the water-supply and sanitation project in cyclone-prone coastal areas, and Abu Dhabi Development Group ($30 m).Of the total amount, the government will provide Tk 50 million while the rest will come in the form of project aid. The Bangladesh Bridge Authority (BBA) invited the pre-qualification tender for the project in April 2010. Construction of the bridge was expected to commence by early 2011 and be ready for major completion in 2013(and complete all sections by late 2015).
The proposed Padma Multipurpose Bridge Project will provide direct connectivity between the central and southwestern part of the country through a fixed link on the Padma River at Mawa-Janjira points. The bridge will contribute significantly towards facilitating the social, economic and industrial development of this relatively underdeveloped region with a population of over 30 million. The area of influence of the direct benefit of the project is about 44,000 km2 or 29% of the total area of Bangladesh. Therefore, the project is viewed as very important infrastructure towards improving the transportation network and regional economic development of the country. The bridge has provisions for rail, gas, electric line and fibre optic cable for future expansion. The project will be co-financed by the government of Bangladesh, the World Bank, the Asian Development Bank, the Japan International Cooperation Agency (JICA) and the Islamic Development Bank. The Bangladesh Bridge Authority is the executing agency of the project. Communications Minister Obaidul Quader confirmed that the government is going to sign a memorandum of understanding (MoU) with Malaysia on February 21 to construct Padma multi-purpose bridge.
Once the MoU is signed, the loan interest and other issues will be finalised through negotiation, the minister said while talking to reporters at Roads and Highways office in the capital. The Malaysian government on January 30 formally offered financing for the construction of Padma bridge project, which has been welcomed by Bangladesh government. Malaysian official news agency Bernama reported on Saturday that a consortium comprising experienced Malaysian construction companies will be set up to undertake the $2.19 billion (RM 6.6 billion) Padma multi-purpose bridge project after the Bangladesh government accepts Malaysia’s technical and financial proposals on the project. Construction of the 6.15 km bridge became uncertain when the World Bank suspended a $1.2 billion loan last year alleging corruption in the pre-bidding process. On 29 June 2012, World Bank cancelled its $1.2 billion loan.
Possible sources of funding other than World Bank:
After the Government of Bangladesh and the World Bank having been failed to reconcile their differences on alleged corruption in the proposed Padma Bridge, the Government is baffled by this decision but yet stubborn not to compromise with its optimism to build the bridge, this time, with own finance requiring no support from the World Bank. The considerations are as follows: * Sheikh Hasina in a speech in parliament on 8 July appealed to nationalist sentiment for Padma by invoking memories of the 1971 war of liberation. Hasina’s government has laid out ambitious plans to mobilize resources, including levying surcharges and issuing sovereign bonds worth at least $750m. The prime minister said she had already told different ministries to slash development projects and divert the money to fund the $2.9bn Padma Multipurpose Bridge – a key election pledge. The Government had lately estimated the construction cost of the bridge on a year-to-year basis. According to the estimate, Tk 3,197 crore will be needed in the current fiscal year, Tk 7,868 crore in 2013-14, Tk 7,786 crore in 2014-15 and Tk 3,785 crore in 2015-16 to complete the project.
Citing the allocation of Tk 55,000 crore in the ADP for this fiscal year, Hasina said she had already discussed the matter with some ministries, and they had said they would not take their entire allocations in the current year’s budget.“It is possible to save Tk 24,000 crore from the ADP. For this, we will have to be economical and may have to cut some development work under different ministries. But again, construction of the Padma bridge is also development work and will generate employment for many,” she said. The prime minister also said the government had earmarked Tk 1,500 crore for infrastructure development and Tk 3,000 crore in the public-private partnership fund. Besides, a certain amount of money had been allocated for the Padma bridge in the budget.The government had also decided to issue sovereign bonds to collect $750 million.Besides, her government might levy a surcharge as was done for the construction of the Jamuna bridge. “We will also welcome any foreign investment in this project,” she added. Giving a breakdown of the Padma bridge costs, Hasina said Tk 15,000 crore would be spent for construction of the main portion of the bridge;
Tk 7,200 crore for river training; Tk 1,281 crore for building Jajira approach road; and Tk 310 crore for Mawa approach road.She said her government had already spent Tk 1, 500 crore on land acquisition and rehabilitation purposes. Analysts say the strategy is a risky one. The government can’t really divert donor-funded money without imposing severe austerity Diverting development funds to the bridge project could affect sectors such as health and education, undermining social achievements and delaying growth. Moreover a drop in aid flows in last year, in part because of donor concerns over corruption in the Padma bridge project, led to a widening of the budget deficit. The ballooning deficit pushed the government to borrow heavily from the central bank and commercial banks, sparking double-digit inflation and crowding out private investment. *According to Finance Minister AMA Muhith, there is an option to form a new consortium comprising ADB, JICA and IDB In case of failure of forming the said consortium, Malaysian offer to build the bridge on the Public-Private Partnership (PPP) basis would be examined. Building the bridge with own financing is our last option as per Muhit. Still He said the government was continuing efforts to persuade the WB to reconsider its decision on the Padma bridge funding.
* According to economist Abul Barakat,the government can raise funds from domestic sources four times higher than the estimated cost for the construction of Padma bridge, More than Tk 98,000 crore can be raised from 14 possible sources, including migrant workers and non-resident Bangladeshis (NRBs), to build the 6.15 kilometre-bridge, said Abul Barkat, president of Bangladesh Economic Association. He proposed keeping aside 1.25 percent of the country’s foreign exchange reserve each year to complete the construction of the bridge in the next four years. He also suggested boosting remittance inflows through formal channels by plugging in the existing loopholes to prevent inflows through informal ways or hundi. Another way to attract foreign currencies from the NRBs is to float bonds at an interest rate higher than the savings rate offered by banks in advanced economies. Another way to attract foreign currencies from the NRBs is to float bonds at an interest rate higher than the savings rate offered by banks in advanced economies.
These foreign sources may enable the government to raise funds equivalent to Tk 9,275 crore, Barkat spoke at a seminar on ‘Padma bridge on own finance’ at the BEA, The rest of the funds can be collected from domestic sources that include floating pension funds, Padma bridge bond, allowing investment of undisclosed money and channelling unutilised funds under the annual development program (ADP). Other possible ways are increasing tax on tobacco products, strengthening drives to bring more rich people under the tax net, austerity measures in government expenditures, floating initial public offerings and imposing levy and surcharges, He said the number of people who pay Tk 1 crore as taxes is only 46 now, but their actual number will be 50,000.He said it is possible to start the construction work now, but emphasis should be given in collecting funds from interest-free sources.
He also proposed forming a public limited company to encourage establishment of local industries to make machinery and raw materials for the construction of the bridge. He said the weighted average cost of capital to build the bridge by taking finance from multilateral lenders led by World Bank will be 2.16 percent. The weighted average cost of capital will be 7.63 percent in case of own funds.”But if we consider the conditionality’s imposed by the World Bank on macroeconomic policies, the weighted average cost of capital will be much higher for taking its loans,” said Barkat. Citing cash flow analysis, he said the construction cost for the bridge could be recovered in 30 years. *There has been also a proposal to make available BDT 50 billion by Bangladesh Insurance Association (BIA) However, There is also the possibility of a combination of sovereign bond, Padma bridge surcharge, bilateral/multi-lateral aid or low interest-bearing loans may help the government to go up to a large extent. In conclusion the government is exploring 1) issuance of sovereign bond, 2) NRB bond, 3) levying a surcharge on the interest income, 4) exploring with other bilateral or multi-lateral agencies and 5) of course, putting up a review appeal with the World Bank itself, to finance the bridge with tremendous growth-impacting potentials.
The Malaysia option, which is also not very clear associated with many infrastructure projects in Bangladesh like KAFCO, Meghna Bridge, Jamuna Bridge, Bhairab Bridge and many others. This may entail serious pressure on public exchequer and may not be ‘too attractive’ to positively impact the ‘internal rate of return’. Given a repeatedly satisfactory ‘sovereign credit rating’, raising up to USD 1.0 billion funds through sovereign bonds, , should not be an issue and in every possibility could be competitively priced. Having a good visibility with regard to wage-earners bond, investment bond or premium bond, it is not very sure to raise a respectable amount of money through NRB (Non-resident Bangladeshis) bonds. The media reports say that the government is exploring 1) issuance of sovereign bond, 2) NRB bond, 3) levying a surcharge on the interest income, 4) exploring with other bilateral or multi-lateral agencies and 5) of course, putting up a review appeal with the World Bank itself, to finance the bridge with tremendous growth-impacting potentials.
Risks involved in other financing:
Such a large infrastructure needs huge money at lower cost. But the question is whether the so-called concessionary loans are really as cheap as claimed by many experts. The answer is no. Are they significantly cheaper than the loans taken from domestic sources? The answer is: not always. For any kind of domestic borrowing, interest is the only cost. If it is agreed upon in the contract instead of keeping it floating, the borrower is not subject to any other cost. The macroeconomic instability, volatile domestic as well as international money and capital market will not have any implication on the cost of borrowing, i.e., the interest expense. But for any kind of foreign currency denominated borrowing, the borrower is exposed to two kinds of costs. One is the agreed interest, which, if agreed upon in the contract will remain fixed. The second is the foreign exchange cost. For example, if the foreign currency appreciates between the time of borrowing and repayment, the borrower has to effectively pay this appreciated amount in addition to the agreed interest to the lender. So far the low cost of external borrowing, as argued by many in print and electronic media, is justified by the low interest rate (service charge) and high maturity period of the loan given by multilateral donors.
Specifically, many economists highlight the fact that in case of the World Bank, the interest rate is only 0.75 per cent, which is very low by any standard, and failed to fathom or deliberately hide the fact that this is not all, there are some other costs attached to it as well. For example, there has been no mention that the cost of borrowing arising from the currency appreciation can be very high too depending on the domestic as well as global economic environment at the time of repayment. Consider the following example. In January 2009, the exchange rate of US dollar vis-à-vis Taka was about 68.90. Suppose, the Government of Bangladesh borrowed 1.0 US dollar from an external source at an interest rate of 0.75 per cent in January 2009, which has to be repaid in January 2012. Keeping it simple, in January 2012, the government has to repay 1.0225 US dollar to the lender (principal plus the total interest of 0.0225). The exchange rate of US dollar vis-à-vis Taka in January 2012 was about 84.45 (source: Bangladesh Bank). The value of repayment on January 2012 will be about 86.35 Taka, meaning that total cost of this borrowing of 1.0 US dollar (which was equal to 68.90 Taka) is 17.45 Taka.
Out of this 17.45 taka, 1.9 is the interest expense and 15.55 is the cost of appreciation of dollar. In case of the above example, the average annual cost of concessionary external borrowing is about 8.44 per cent, not 0.75 per cent as claimed. This may or may not be lower than cost of domestic borrowing. The domestic borrowing will be cheaper than the concessionary external borrowing as long as the agreed interest (on domestic borrowing) is less than 8.44 per cent, and vice versa. Cost of external borrowing will be even higher if it is borrowed by issuing bond at a commercial rate. For example, if instead of borrowing at a concessionary rate, government borrows by issuing sovereign bond at a commercial rate, say at an interest rate of 8.0 per cent, annual cost of borrowing in that case will be more than 17.3 per cent. The second argument in favour of the concessionary external financing is its long maturity period and large number of installments to repay the loan, which can be translated as a long time gap between the loan received and repaid.
The logic here is very simple. Actual value of 100 taka repaid after 10 years from today is not equal to the actual value of 100 taka received right today. If interest is the only cost of borrowing, a long time gap between loan received and repaid favours the borrower as actual value of the money he repays declines with the increase in this time gap. But this is not true in case of dollar-denominated external borrowing. Because, in that case the cost of borrowing arising from the dollar appreciation also increases with the increase in the time gap. Therefore, the benefit of long time gap is not quite obvious in case of external financing. It could be positive or negative depending on the amount of dollar appreciation. For example, the exchange rate of US Dollar vis-à-vis Taka in January 2009, 2010, 2011 and 2012 was 68.90, 69.17, 71.15 and 84.45 respectively (source: Bangladesh Bank). In addition to the agreed interest, government has to pay 69.17 taka, 71.15 taka, and 84.45 Taka for every dollar borrowed in January 2009 with a maturity period of 1, 2 and 3 years respectively.
It means cost of borrowing as a result of dollar appreciation will increase from 0.27 taka to 16.55 taka if the maturity period of the loan increases from 1 year to 3 year! However, this is not to deny that external borrowing could be cheaper than domestic borrowing, but that comparison should not be based on the agreed interest rate only. If external borrowing is US dollar denominated, depending on the extent of dollar appreciation, actual cost of external borrowing could be even higher than the cost of domestic borrowing. So the claim that cost of concessionary borrowing from donors is indisputably lower than the cost of domestic borrowing is disputable and misleading. Finally, cost comparison is not the only criterion to choose the source of borrowing. Both external and domestic borrowings have their merits and demerits. Especially, domestic borrowing has more direct and significant implications for the money market and incentive structure of the economy, which must be weighed in making a decision where to borrow from.
The economics of ‘Bangladesh Diaspora’ and non-resident Indian (NRIs) are totally different. Non-Resident Bangladeshis (NRBs) will take many more years to get into the shoes of a NRI. Even we can not be very hopeful about a ‘Pakistan scenario’ (where many NRPs from the Middle East came forward to help the government while there was serious dearth of foreign exchange) to happen in Bangladesh. Let’s not spend too much time on this. Securitization of the receivables of Jamuna and Meghna bridges or T&T receivables from abroad and, more importantly, inward remittance receivables could also be the options, but these could also be quite time consuming. Levying a surcharge on the interest income could be a choice, as we have not forgotten about the ‘Jamuna bridge surcharge’ levied during Ershad regime. However, looking at the depositors already charged with too many levies that also may backfire, unless the government can really launch a passionate drive around this. Utilizing a portion of the ‘foreign exchange reserve’ can never — I repeat ‘can never’ — be an option. Let’s forget about this.
However, a combination of sovereign bond, Padma bridge surcharge, bilateral/multi-lateral aid or low interest-bearing loans may help the government to go up to a large extent. Even to do this, we need to really strengthen the acumen and sagacity of our civil bureaucracy, regulators and, most importantly, people responsible for implementation of the project. Our civil bureaucracy is yet to appreciate any project implementation, where they can not pass on the buck to foreign institutions, consultants or the contractors. Many of them may freak out too, if left alone.