The Financial Express

Bidder-funded projects on rise in BD

Experts term such funding risky

| Updated: July 05, 2019 16:42:40

Picture used for illustrative purpose only — Collected Picture used for illustrative purpose only — Collected

The number of bidder-funded projects is rising in the country, mostly in the power sector, as the authorities concerned treat such funding as a cheap source to implement big projects.

However, experts opine that there are many risks in executing such projects with foreign bidders' fund, as these include higher borrowing cost.

They also said if the size of such a project is big, it will subsequently create pressure on the country's foreign exchange reserve.

In this fiscal year (FY), 2019-20, four such projects are included in the list of annual development projects.

These projects are: Khulna 330-MW dual-fuel combined cycle power plant (CCPP) project, Ghorashal-3 repairing project, Ghorashal Polash Urea fertiliser project, and Construction of Bibiyana-III 400-MW CCPP project.

In the bidder-funded projects the bidders concerned arrange financers, either from their countries or from other international sources, to meet project financing. It is almost similar to export credit agency (ECA) funding.

Under the system, the bidders provide 85 per cent of the project fund, while the government and the Bangladesh Power Development Board (BPDB) invest the remaining 15 per cent.

The rates of interest of these funding usually range between six months London Inter-Bank Offered Rate (LIBOR) plus 2.36 to 3.35 per cent. The average repayment period is 15 years with three years grace period.

On the other hand, an ECA is an institution that offers finance for international export operations and other activities of domestic companies.

They provide loans and insurance facilities to the companies to help eliminate the uncertainty of exporting to other countries. Such funding began in the country a few years back.

Meanwhile, the experts say that the participants of bidder-funded projects take insurance coverage from their respective countries, depriving the state-owned Sadharan Bima Corporation (SBC).

Insurance is part of such kind of funding, and as per the country's law, such projects will be insured by the SBC.

They also opine that the time and cost of these bidder-funded projects usually overrun. So such projects can emerge as a burden in terms of debt servicing in the long term.

Professor Mohammad Tamim, an energy sector expert and pro-vice chancellor of the Brac University, told the FE that the rates of interest of these projects are usually high.

"To my mind 5.0 per cent interest rate is okay. But their interest rates will be higher, between 6.0 per cent 7.0 per cent."

"If the sizes are bigger, these projects will create pressure on the foreign exchange reserve," added Mr. Tamim, who served as a special assistant to the chief adviser of the last caretaker government.

Dr. Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh (PRI), told the FE that bidder financing is not a good funding option, as the bidders may control the power plant projects.

"They may later increase project cost, and the increased payment will be borne by the government."

Thus the government's burden ultimately increases, if there are cost adjustments in later period on the ground of delay in project implementation, Dr. Mansur further said.

The government encourages such financing to reduce the BPDB's financial involvement, and provides sovereign guarantees for these projects as well, he added.

On the other hand, the officials concerned said they have to spend much time to complete financial deal signing process with the bidders of such projects.

Engineer Jyotirmaya Halder, project director (PD) of Khulna 330-MW dual fuel CCPP project, told the FE, "We've spent more than two years to secure finance for the project."

He said the total project cost is US$ 281 million with a loan repayment period of 15 years. The government has paid Tk 10 billion and the BPDB has paid Tk 5.45 billion, which totals 15 per cent of the project cost.

"The project work began in May, and we expect to begin power generation from the plant by October 2020," he added.

On the other hand, Md. Mustafizur Rahman, PD of Bibiyana-III 400-MW CCPP project, which is an ECA-funded one, told the FE that he does not see any risk in such kind of financing.

The power plant project is being implementing by Marubeni of Japan, and is funded by two financial institutions of that country.

"The project will come to an end in December," added the PD, who began the project in 2015.

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