Beware of “too much optimism” for megaprojects
June 1, 2022
DHAKA – Geo-strategic factors such as its geographical location between South Asia and Southeast Asia, sustained economic growth, relative political stability, availability of cheap labor and a large market consumption have made Bangladesh an attractive investment center for many regional and international players. Taking advantage of this, the government of Bangladesh has considered a number of mega-projects to kick its economy into high gear. Three of these projects are funded by China. Japan is financing the Dhaka Mass Rapid Transit (rail metro) and Matarbari Deep Sea Port projects and contributing to the Jamuna Railway Bridge and Hazrat Shahjalal International Airport Terminal 3 projects, while Russia and India each fund one project.
In April, the Prime Minister said that 2022 and 2023 would be very important years for Bangladesh in terms of infrastructure development. The Padma Bridge, which is expected to contribute 1.2% to GDP, she said, is expected to be inaugurated in less than a month. The Dhaka Metro will be opened on the 14 km Uttara-Agargaon route by the end of the year, bringing a “revolutionary change” to Dhaka’s transport system. The Karnaphuli River Tunnel at Chattogram, the country’s first undersea tunnel, is expected to open in October. And the first unit of the Rooppur nuclear power plant (1,200 MW), the largest development project in the country’s history, is expected to be commissioned by the end of 2023.
While this is all good news, the recent financial meltdown in Sri Lanka should give us food for thought.
Experts have provided a range of reasons such as cronyism, dictatorial rule, family politics, lack of economic diversification and excessive foreign borrowing for what is happening in Sri Lanka. But another factor that has recently been discussed is the issue of endemic over-optimism. Due to the tremendous performance of the Sri Lankan economy after the war, “political complacency and irrational exuberance led to investments in popular big-budget projects”, which ignored underlying macroeconomic vulnerabilities. According to Dr. Niaz Asadullah, professor of economics at the University of Malaya and Monash University in Malaysia, who is also a policy advisor on food and agriculture to the Malaysian government.
Does Bangladesh face similar risks? Maybe not, if he can overcome the various challenges to his ambition, such as maintaining economic diplomacy among major infrastructure donors, avoiding debt traps, ensuring project transparency and construction timelines, and evenly distribute economic development across the country.
One important but often overlooked thing is that design and implementation errors delay the revenue generation phase of megaprojects. For example, the 55 km Dhaka-Mawa-Bhanga highway is the most expensive highway in the country and the world, where more than Tk 200 crore was spent per kilometer. But since the toll plaza is not yet ready, the highway is still not able to generate the expected revenue. Perhaps because of this loss of revenue, even before applying the previously set toll rates for the highway, the government is already planning to increase toll rates, which will drive up transportation costs.
If we look at the RNPP project, it was initially supposed to start producing 1,200 MW of electricity in 2021 and 2,400 MW by 2022. However, even though the first reactor has been installed, no transmission line of electricity has not yet been designed or built, and so even if the reactor is ready, it will not be able to go into production and the government will have to pay capacity charges against the idle plant. The same thing happened with the Rampal power plant.
These are just a few examples of how public spending is not yielding the promised economic benefits. Since development projects in Bangladesh tend to go through several phases of revision, leading to increased costs and delays, when juxtaposed against the initial projection of expected results, the majority of them do not achieve not their goals. Ultimately, the burden falls on the end consumers, who are deprived of the timely delivery of services, while the cost of services to be provided by the project increases.
The repayment of the loans we have taken out for these projects is also becoming more problematic. According to prominent economist Debapriya Bhattacharya, Bangladesh’s debt situation could become somewhat tricky in 2024-2025 if the government fails to increase its revenue base now, as the repayment schedule for many of the expensive loans would begin. then. The composition of Bangladesh’s foreign lending has already begun to change, with concessional loans from multilateral lenders being replaced by more expensive bilateral loans – with higher interest rates and shorter grace periods – due to the exit from the low-income countries. Therefore, it is essential that the government does not waste these foreign loans and finds a way to increase the tax to GDP ratio, which has proven to be a Herculean task so far.
Another factor that should not be overlooked is that, because fast-track megaprojects take up a large part of the budget allocation reserved for the annual development program (ADP) – for example, in the financial year 2021-22, 10 of these projects have taken up nearly a third of the Tk 225,324 crore ADP – the Planning Commission cannot provide sufficient funds for many other small, medium and large projects by their own admission. The resulting opportunity cost is by no means negligible and adds up over time.
Ultimately, it is not guaranteed that Bangladesh will benefit greatly from the megaprojects currently underway. In fact, if we continue on our current trajectory, they even have the potential to do more harm than good. This is why the government should avoid falling into the trap of being too optimistic about them. Instead, it should strive to develop the capacity to implement all of these projects on time and within their initial budgetary requirements.