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Is China the answer to bridging infrastructure gap?

M. Shahidul Islam
BANGLADESH'S infrastructure deficit is well documented. The country, along with Nepal and Mongolia, has one of the worst infrastructure facilities in Asia. This has been documented by Asian Development Bank (ADB) in its publication on Infrastructure for a Seamless Asia. Most South Asian countries do not fare well in infrastructure provisions when compared with East and Southeast Asia. In fact, there is a dazzling difference between the two regions as far as infrastructure provisions are concerned. Some estimates suggest that India and Bangladesh need $1 trillion and $35 billion of infrastructure investment respectively in the next five years.
As Bangladesh urbanizes rapidly the demand and supply gap of the country's infrastructure increases fast. To address its infrastructure deficit in the area of transport, highways, port, multi-purpose bridges, dams, energy grids, water & sanitation services, among others, the government channels domestic resources as well as seeks external assistance, particularly from multilateral agencies such as the World Bank and ADB. The government also works with some financially and technologically advanced countries, such as Japan and China, to address the country's infrastructure bottlenecks. A number of large projects have also been implemented with external funds, loans and other assistance.
Despite these efforts, the infrastructure gap remains wide, not because the government allocated very little resources for the infrastructure sector. The investment rate - measured by the ratio of gross fixed capital formation to GDP- has increased over the years. However, the rate is not enough to cope with the rapid rise in demand for infrastructure and urban utility services. China's gross fixed capital formation, for instance, is about 47 percent of its GDP, compared to India's 30 percent and Bangladesh's 27 percent.
Inadequate domestic funds, underdeveloped financial system, particularly the equity market, and governance deficits are primarily responsible for Bangladesh's poor infrastructure. In recent years, the government sought increasing help from multilateral agencies to narrow the infrastructure gap. Drawing of cheap funds (with about 1 per cent interest and higher maturity time) from these development partners is probably the best available option as far as infrastructure financing is concerned.
However, owing to governance deficit the government is facing increasing difficulties in accessing these development partners' funds. The withdrawal of the WB and other partners' from the Padma Bridge project on corruption charges is a classic example as to how Bangladesh's governance deficit costs its infrastructure development. Similarly, being unable to draw large funds from multilateral agencies for base-load power plant development, the government is increasingly relying on high cost solution to the power problem, generating a significant share of electricity by rental power plants. Owing to these problems, the country has been consistent in missing investment targets set by the five year plans.
In its latest move, the government has sought China's help to address the country's infrastructure problem. A recent Daily Star report indicates that the government has requested the Chinese authorities to channel $8.6 billion to finance 14 infrastructure projects involving building the Ganges barrage, a high speed train between Comilla and Dhaka and a rail bridge over Jamuna, among others. In fact, in recent years, Chinese loans and investment in Bangladesh has increased substantially and Beijing is keen to develop the latter's key infrastructure projects, investing billions.
This is in fact not unique in the case of Bangladesh. China which has developed a dazzling infrastructure at home is increasingly building infrastructure from Southeast Asia, Central Asia, South
Asia and Africa to Latin America. China which holds the world's largest foreign exchange reserves (about $3.8 trillion) is investing a part of reserves in infrastructure and other development projects aiming at diversifying its reserve assets, creating markets and increasing its influence around the world.
Moreover, unlike the WB and ADB, it is relatively easier to deal with Beijing on infrastructure financing as issues such as good governance is not a prerequisite to access the Chinese funds. In fact, China has become a critical economic partner of Africa thanks to its large investment in the continent. Moreover, it is the low cost supplier of infrastructure provisions.
Connecting history with the future, in its latest move, Beijing is planning to develop a 'silk route economic belt' in the Central Asia and a 'sea silk route' in Southeast Asia and perhaps linking South Asia as well as developing deep sea port and other maritime infrastructure. In fact, China has already built a number of deep sea ports in South Asia and other regions, including Pakistan and Sri Lanka. Some analysts, nevertheless, see this move as Beijing's response to the United States' so-called 'Asia Pivot', an increasing American presence in the Asia-Pacific region in the coming decades.
That said, in the case of Bangladesh, China sees that financial returns of infrastructure investment could be positive given the former's market size and economic potential. Moreover, Beijing's infrastructure development in Bangladesh has multiple objectives. First, given its higher wage cost China intends to develop several industrial parks and key infrastructure in Bangladesh so that goods produced in those parks could be catered to the demand of Chinese consumers with low transportation cost. Second, to ensure its energy security and access to the Bay of Bengal, Beijing intends to develop a deep sea port in Sonadia, Cox's Bazar. Third, it would like to see Chittagong becoming a major connectivity and industrial hub of the region so that the city is increasingly integrated with China's landlocked western provinces, particularly Yunnan, by developing Chittagong-Kunming road and railway links through Myanmar.
However, the successive governments in Bangladesh have been hesitant to engage with Beijing in key infrastructure projects, particularly on deep sea port and connectivity that have both economic and geo-political implications. New Delhi, in particular, raises its concern over Beijing's massive infrastructure investment in the region. Nevertheless, the concern has subsided to some extent of late as both Beijing and New Delhi have agreed to develop an economic corridor under the aegis of the BCIM economic corridor. Given the economic and political opening up of Myanmar, Chittagong could lose its strategic importance to Naypyidaw if there is a further delay in deep-sea port development. This project should also be implemented on a priority basis.
This time around, particularly following the controversial elections of 5th January, the Awami League government seems quite serious in bridging the country's growing infrastructure provisions and in doing so it would like to partner with China given the latter's expertise and financial strength as well as the limitations of other financing options. Nonetheless, at this stage the government has prioritized the projects that are geo-politically less sensitive. From Beijing's point of view, it may not be the first best option regarding its infrastructure objectives in Bangladesh. However, it is also an opportunity to involve with multiple infrastructure projects that could foster market and increase Chinese influence in Bangladesh.
To sum-up, over two decades of economic and political reforms of Bangladesh, mostly led by donors and development partners, the country has made little dent in improving its governance quality, which is now becoming an increasing constraint to drawing infrastructure funds and other long term investment in the country. As a second best option, Bangladesh could still improve its infrastructure by employing China's cheap finance and technology. However, in this infrastructure paradigm shift the success will depend not so much on governance but geo-politics.
The writer is a Research Fellow at the Institute of Governance Studies (IGS), Brae University and member of China Study Group.
E-mail: imonsg@gmail.com