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To swallow or not to swallow

  • Published at 12:02 am August 23rd, 2016
To swallow or not to swallow

Two major power deals were almost finalised, while the darkest café attack in Dhaka ceased all our attention: The formal agreement on Rampal Power Plant and the government’s nod for the draft of Bangladesh-Russia Inter Governmental Credit deal of $11.38 billion for the Rooppur Nuclear Power plant.

We have been going through a turbulent period, compounded by political disagreement which we never experienced before since our independence.

The government seems poised to go ahead with its big infrastructure plans and energy projects despite the odds. The well-being of the people and the development of the country are not the only criteria that led the government to kick off such big-budget projects.

We have seen considerable opposition to the Rampal Power Plant, which will be made real with Indian EXIM bank’s credit of $1.6bn, yet very little opposition and protest have been observed when it comes to Rooppur Nuclear Power Plant, which will be built with Russian credit of $11.38bn.

The Rooppur Nuclear Power deal has already been marred by controversy.

Atomstroyexport is assigned to build the plant, hired by Goldenberg ,which was supposed to develop the site where the power plant will be built.

But controversy broke out in the media, when Goldenberg left the deal without paying the Bangladeshi sub-contractors; turning the whole project into a damp squib.

Moreover, Russia has a bad habit of escalating agreed project costs in the middle of project implementation.

Take for instance India’s procurement of Russian Aircraft carrier Admiral Gorshkov, which was inducted to Indian Navy as INS Vikramaditya.

Initially, India had signed a deal of $1.5bn in 2004 and a retrofitted Gorshkov was scheduled to be delivered by 2009.

Later, Russia increased the agreed cost by $1.2bn, severely damaging Indo-Russian relations. India revised the deal, which finally became $2.35bn and got retrofitted Gorshkov in 2014.

If a formidable friend like India had this kind of experience with Russia, imagine what awaits us.

From feasibility study to the construction of the power plant to its operation, and to take away the spent fuel, all will be done by Russia since we have very little knowledge regarding these areas.

Russia can take full advantage of our ignorance about the actual construction and operational cost, and they hold a position that is too dominant in this negotiation.

We not only lack the tech-savvy experts, but never took assistance from a third country that has the required know-how of nuclear technology and is adept in negotiating such deals.

So the risk emanating from this situation is that we may swallow a costly deal, which negates the purpose of the project, when the idea was first envisioned: Generating electricity at a cheaper price.

One example of a bad deal in our country is Karnaphuli Fertiliser Company (KAFCO) deal.

KAFCO produces ammonia and granular urea using subsidised natural gas supplied by the government of Bangladesh. Defective machinery mothballed its operation for five years after its completion.

It also witnessed three dozens of shutdowns, resulting from technical glitches.

Moreover, the agreement contains clauses that require Bangladesh to buy fertilisers from only two companies at international market price and that the two companies receive commission of two-three percent from each sale.

Russia can take full advantage of our ignorance about the actual construction and operational cost, and they hold a position that is too dominant in this negotiation

Apart from information asymmetry, commission and bribery played two crucial roles in making  Bangladesh swallow a bad deal in the case of KAFCO.

Clearly, corruption and commission are the main motivating forces that lead the governments in this part of the world to undertake big projects.

According to the Corner House, a UK-based not-for-profit organisation that works for environment and social justice, normal commission for such deal is around two-three percent and is paid to domestic accounts of a local business magnet, who is usually not part of the decision-making process.

A dubious commission ranges between 10-20% and is usually received by a minister, or is transferred to offshore accounts.

In light of such phenomenon, the commission from the Rooppur Nuclear Power Plant deal is somewhere between $253 million (for a two percent commission) and $1.26bn (for a 10% commission).

As for the Rampal deal, the commission is $33.6m, if the regular two percent commission is considered, and $168m, in case of a dubious 10% commission is taken into account.

Another factor that may cast shadow on projects being financed by foreign credit is the currency volatility.

Russia cited it as a reason for jacking up the initial cost in the case of Admiral Goshkov carrier deal.

For an online newspaper, economist MA Taslim wrote a brilliant analysis titled “Borrowing Overseas: Quo Vadis?” on the risks involved with overseas borrowing.

Taslim argues that projects financed by overseas borrowing face some risks if the deals are inked based on market exchange rate.

The total project cost may increase substantially at the end of project’s completion if there is volatility in the currency market.

In addition, in such cases interest payment may be several times higher than the usual payment. In this circumstance, the whole project may become futile.

Given the brewing tensions in Europe where Russia is deemed a threat, the risk of currency volatility looms large.

If Russia managed to make India agree to its renewed terms, imagine what Bangladesh’s stance will be in this kind of scenario.

In the face of Russian arm-twisting, the government of Bangladesh may have to accept an overpriced deal just like a reluctant boa that swallows an elephant. Public disclosure of such kind of compromise may be greeted with brickbats.

When all the quarters that brook no compromise in national interest jump down the government’s throat, it may hide its face in a hat.

Rezaul Hoque is a researcher.