Report of Eco 484

Submitted by Rashadat Anowar Chowdhury 093-0101020

Submitted to Dr. M. Fouzul Kabir Khan

Department of Economics North South University

How Padma Multipurpose Bridge Should Be Funded?

The Padma Multipurpose Bridge is one of the top agenda among current affairs related to Bangladesh. It is regarded as a blessing to inhabitants of south-west region of the country as it will link northern and eastern part of the country to that region. According to Bangladesh Bridge Authority, the projects initial investment will be around US$ 2.97 billion and so far fund worth of around US$ 2.92 billion has been arranged by the authority. (Bangladesh Bridge Authority, 2012) Then the question rose, what method of financing should be chosen for this project as the economy of Bangladesh is small and project of such magnitude will have greater influence on the economy. For example, in recent years, government had implemented expansionary fiscal policy (providing subsidies) for quick rental power plants which eventually put the economy under pressure and forced internal borrowing rate and interest rate to soar as a result many banks faced liquidity crisis. (Economists against Padma bridge with local funds, 2012) Therefore, the process of financing this project is very much crucial for future economic situation of the country. Undoubtedly, this project is one of the biggest projects after the Jamuna Bridge and its financing has become an important fact as well. We will primarily discuss about two options for financing this project.

Donor Financing

Own Financing

As a least developed country (LDC), Bangladesh has many barriers to overcome for reaching the next level of development. Education, health, food and employment are the basic needs for human and every country should accommodate such facilities to its habitants. But LDCs struggle to provide these benefits due to lack of infrastructures and funds, as a result they fall behind from other countries in development. Thus, LDCs like Bangladesh always seeks for external funding from international organizations in order to develop its infrastructure as infrastructure plays crucial part for development of a country. Alike other LDCs, Bangladesh also faces tough task to accommodate enough capital to fund large development project such as building bridges or express roads without external funds. World Bank (WB), Asian Development Bank (ADB), Islamic Development Bank (IDB) and Japan International Cooperation Agency (JICA) have helped Bangladesh for developing and building infrastructure by providing financial support in past and using donor financing for The Padma Bridge project can ease the burden on government from self-financing the project. In contrary, own financing will allow the country to avoid the burden of paying interest and involvement of foreign bureaucrats from influencing decisions regarding the project. Besides taking loans from international organization or other countries do create pressure on economy as the government need to use a portion of its revenue to repay loans including their interest. If own financing process for this project is used then Bangladesh will be able to save those additional fund, which could have been used for paying interest as well as government will become less dependent on external financing for future projects.
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Donor Financing Option: Benefit and Cost

Donor financing is the most practiced process of financing large projects for countries with small economy like Bangladesh. Interest rate for funds provided by international organizations likes of WB, ADB, JICA and IDB are very low compared to commercial loan interest rate. Beside the payback period is long enough, which will allow the borrower to repay loans without putting any pressure on the economy. If we assume that World Bank did not canceled its proposed loan to Bangladesh government for the Padma Bridge project then the total foreign fund will be around US$ 2.64 billion and within the period of 40 years on average it is possible for Bangladesh to payback the full-amount of loan including interest using the bridge as revenue generator for itself as it had done some in case of Jamuna Bridge. (Bangladesh Bridge Authority, 2012)

Benefit
Implementing donor financing practice for the Padma Bridge project has huge benefits rather than costs. 1 Borrowing funds from international organizations not only allow the luxury of having soft loan but also help to draw attention of international media and foreign investors which in future bring more investment opportunity for project nearby area. 2If the Padma Bridge is funded by international organization then foreign investors will be assured enough for investment for establishing industry in project nearby area. Areas around the project are more likely to get affected by the development project as it opens door of vase opportunity and development as transportation system between the both river bank areas of bridge will be developed. 3In addition, foreign firms do not show any interest in projects, which are locally funded by government in emerging countries unless the project is financed by international organization. Involvements of foreign firms are also important for project of such magnitude and local firm may lack technological advantage and skilled labor to handle and execute this project. 4Another benefit offer by donor financing practice is that it allows government to continue the development program of education, health and food sector without obstructing their allocated fund. Government might need to cut-back fund assigned for such development program to undergo projects like Padma Bridge in order to reduce pressure on economy if it does not use donor financing.

Cost
Cost of donor financing is relatively small compared to its benefits. 1Soft loan has a very low interest rate but soft loans size are huge and interest payment amount are higher than normal loan. Uncertainty relative to projects is normal and Padma Bridge is no different. Expected cash inflows from Padma Bridge are uncertain as any environmental, economic or political event or shock may have adverse effect on the use of Padma Bridge. The loan amount for Padma Bridge project is expected to be paid through revenues generated by the bridge itself. Imposing fee for using the bridge is one way of generating revenue and it will also cover maintenance cost of the bridge as well. Portion of revenue will be used for repayment of interest and soft loan taken for the project. If interest is avoided then the additional amount which will be used for payment of interest and loan could be used for other development projects. 2Moreover, another problem related to donor financing is the local government will have less authority over the project and policies related to project as donors will use the advantage of funding the project by implementing and imposing policies and regulation related to the project in their favor even after the construction of the project completes.

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Own Financing Option: Benefit and Cost

Own financing is less practiced financial scheme for funding large development project by emerging economies such as Bangladesh. Bangladesh is currently going through a process of development as the government is trying to facilitate better education, health, food security and employment opportunity to its population. Significant portions of national budget are assigned for these development drives. For example, in national budget of fiscal year 2012-2013, the government allotted Tk. 21,408 crore for education sector which is almost 11 % of total budget (Muhith, 2012). Thus, if Bangladesh government wants to finance the Padma Bridge project by own financing then huge funding cut will be experienced by other development efforts.

Benefit
Own financing practice allows a country to exhibits the economic strength of funding its own development without any foreign aid. Bangladesh does not have any experience in financing large projects by itself but with proper management of fund and thorough execution of policies it is possible to achieve success. 1If own financing practice is initiated for the Padma Bridge project then the likely hood of seeking foreign aid for future project will reduce and government will be more confident to take bold decisions for undertaking more development projects. 2Soft loan does have a small interest rate but still interest is considered as cost of borrowing. Self-financing exempt cost of borrowing thus no additional cash outflow will occur regarding financing this project after project completion. 3Another benefit of self-financing scheme is it attracts investors for investment in the economy because self-financing shows that the economy is strong enough to supports its own growth and bright prospects of future growth. Emerging countries provide more opportunity then developed countries because the growth of emerging economies is much higher than developed economies. 4Own financing also gives the government authority to modify and execute policies it wants to use for the betterment of the economy and project without any interference of foreign affair. Government controls the whole project and can induce any rules, regulation or policies which will affect the project. 5Another good side of self-financing is that the government is not bound to employ a specific firm to manage the project, which is conditioned in donor financing. Government enjoys the full freedom of employing construction firm regardless from abroad or local.

Cost
The biggest problem faced by self-financing practice is increasing cost of project. 1Cost of such project is not always fixed and it increases as construction goes forward. Even, due to some adverse economic shock, government may need to reprioritize its fund allocated for the project and eventually it will obstruct regular project progression. 2The government is likely to face problem of not convincing an internationally renowned firm for undertaking the project. 3In emerging countries, internationally renowned firms do not operate their task unless projects are funded by WB, ADB and JICA. Though local firms can be used for the Padma Bridge project but the expertise, technology and skill need to successfully accomplice this project is lacked by local firm of Bangladesh. Last but not the least; Bangladesh government will need to undertake austerity measures to reduce the pressure of this project from the economy. Part of the austerity measures will be cut-backs of fund in educational, research and development, health and employment sector of the country for next 5 years or so.

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Electing an Option: Why Should We Opt For It?

The two financing option for the Padma Multipurpose Bridge project have their good and bad quality. If we associate these two options according to net social benefit criteria then donor financing scheme is more preferred than own financing scheme. The opportunity cost of own financing is much higher than donor financing scheme. If own financing is chosen then other development drives is more likely to face dilemma of going forward or even face a sudden halt. Education, health and employment development are integral part for building a stable and bright future for a nation but funds are also needed to support such development. Thus, overlooking developments of these sectors for the sack of building a multipurpose bridge demonstrates a higher opportunity cost of own financing project scheme. Soft loan provided for this project is around US$ 2.64 billion as stated earlier. The amount of interest on loan provided by WB, ADB, JICA and IDB are respectively US$ 249 million, US$ 246 million, US$ 10 million and US$ 54.60 million. Most of the loan period is 40 years except IDB is 20 years (ADB, 2010). Thus, the government has enough time to repay the loan and with steady growth in economy the country will be able to pay back the loan before its maturity as the project will trigger development on project nearby area. In addition, the Padma Bridge itself will provide a strong revenue stream through imposing toll rate for vehicles passing the bridge. According to ADBs financial analysis report, the government toll rate will increase annually allowing the bridge to generate huge amount of revenue in long run turning it as a repayment mechanism of its loan. Padma Bridge is likely to become a busy passage for countrys southwest region. With a high traffic scenario, analysts predicted that the bridge itself will be able to repay the loan in 17 years, which shows a financial internal rate of return (FIRR) of 7.9% in nominal terms. Even with a low traffic scenario, analysts predicted that it will take the bridge 19 years to repay the loan amount with a FIRR of 6.5% (ADB, 2010) JICAs feasibility study developed an econometric model, from which an elasticity of 0.55 was derived for district economic output with respect to district travel time to/from Dhaka. This means a 10% decline in travel time to/from Dhaka will lead to a 5.5% increase in district economic output. (JICA, 2005) Though it will be not possible to increase output if the government chooses own financing scheme because in order to increase output adequate education, hygienic heath facility, better employment opportunity and new industries are needed. Therefore, if the government do not choose donor financing then the social benefit people are expecting from this project will be zero due to lack of skilled human resource and infrastructure. In conclusion, donor financing scheme is the most preferred way for funding the Padma Multipurpose Bridge over self-financing scheme. This not only reduce the burden on the economy for allocating US$ 2.97 billion but also gives the luxury to focus on developing education, health, employment and industrial sector of the country to reach stable and strong economic stature. Since, Bangladesh is a small country with vast population, we should think practically rather than emotionally for taking important judgments for the betterment of the future of the nation. Maybe in near future, Bangladesh will be able to take itself to a new summit where it will act as a benefactor to other countries. But in present, its economy is not solid enough to undertake such project by using own financing but if Bangladesh does so, then a failure of this project will put the whole economy in a jeopardized situation.
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Bibliography Economists against Padma bridge with local funds. (2012, July 30). Retrieved from The Daily Star: http://www.thedailystar.net/newDesign/news-details.php?nid=244064 ADB. (2010). Financial Analyis (Padma Multipurpose Project). Bangladesh Bridge Authority. (2012, July 30). Project Cost as per RDPP. Retrieved from Bangladesh Bridge Authority: http://www.bba.gov.bd/index.php?option=com_content&view=article&id=93&Itemi d=128 JICA. (2005). The Feasilbility Study of Padma Bridge. Muhith, A. M. (2012). Budget Speech 2012-13.