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News Analysis

What price do we pay?

Inam Ahmed
What future awaits the Padma bridge? What price do we have to pay now that neither the World Bank nor the ADB will release funds for the project over allegations of corruption? How costly will the funds from alternative sources be?
These are the questions that now exercise the public mind. The answer appears pretty challenging after we did a study of the financial implications based on what information is available. The figures we have arrived at are indicative in
gross terms and may not be precise.
According to the co-financing arrangement, if the lead financier, the World Bank in this case, withdraws funds, the co-financers will also follow suit. So the whole loan amount will now have to be generated from other sources. The government has of late been touting some Malaysian companies as the next financiers in line.
Now let's have a look at the financial implications.
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The World Bank was supposed to provide $1.2 billion at an interest rate of 0.75 percent to be repaid in 40 years with a 10 year grace period. If the normal loan amortization schedule applied, the government would have had to pay $249 million in interest in 40 years.
The ADB was supposed to provide $539 million as Ordinary Capital Resource (OCR) for a period of 34 years with a grace period of 7 years. The interest application on this amount was LIBOR (London Interbank Offer Rate) plus one percent. LIBOR is the rate at which London banks offer loans to each other and this is an international method of calculating loans to others too. Since the six monthly LIBOR rate is currently 0.75 percent, the ADB's rate for its $539 million was 1.75 percent. This means the government would have had to pay $226 million in interest to ADB.
The ADB also wanted to provide another $76 million as part of Asian Development Fund (ACF) for a period of 40 years with a grace period of 8 years. The interest rate here was 1 percent.
So the government would have to pay $246 million in interest to the ADB on these two counts.
J ICA's (Japan International Cooperation Agency) loan was $400
million at a very soft rate of 0.10 percent. It was to be repaid in 40 years with a grace period of 10 years. So the government would have had to pay $10 million to JICA. But that is not the whole story. Japan follows a very generous policy of converting the whole loan amount into grant once the loan is repaid. In other words, Japan's funding was virtually free.
Given these realities, had the Padma bridge project gone through, the government would have had to pay $505 million in interest in 40 years.
Now, the government has been saying that Malaysia is interested in the bridge. In the first place, Malaysia itself is facing a fund crunch as many of its infrastructure projects are on hold. It was reported that Malaysian consortiums will arrange funds from Dubai. It only means it will have to arrange funds at commercial rates. And what are the commercial rates?
Bangladesh Petroleum Corporation (BPC) recently arranged $200 million from three international banks and the best offer it could get was LIBOR plus 3.75 percent and that too with a sovereign guarantee. This is a best case situation and we can apply this to any commercial funds collected for the bridge.
The total amount that the WB, ADB and JICA
committed is $2,215 billion. So if the government gets this amount at commercial rates, the interest rate will come to 4.75 percent (one year rate for LIBOR is slightly over 1 percent). At that rate, the government will have to pay a whopping interest amount of $4,455 billion over 40 years! This is just double the principal amount we would get! The scene may change only if the Malaysian government provides concessionary funds of which we have not heard anything yet.
So now we can get a clear picture of the price we have to pay. If we could get the loans from the donors, the country would have had to pay $505 million. But if we have to get commercial loans, the interest amount would be $ 4.4 billion. This is exactly the price we have to pay for the alleged corruption of one minister, a few officials and some private citizens.
Not only that, the cancellation of the loan may have some long term impact on relations between Bangladesh and the World Bank. It was not only the government's single largest project, it was the bank's too in its 68 years of history. We are not even talking about our standing with other donors, business partners, present and potential investors.