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To Swallow or Not To Swallow

July 23, 2016

Two major power deals were almost finalized while the darkest café attack in Dhaka ceased all our attention : formal agreement on Rampal Power Plant and govt’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, that we never experienced before since independence.

Govt seems poised to go ahead with its big infrastructure and energy projects despite the odds. Well-being of people and development of the country are not the only criteria that led govt to kick off such big budget projects. We have seen considerable opposition to Rampal Power Plant, which will be realized with Indian EXIM bank’s credit of $ 1.6 billion, 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 $11.38 billion.

This analysis is not about technical details of these projects, which are very few. Rather it tries to probe the reasons behind govt’s penchant for such projects and why we need to be more careful about deals where the Russians are a party.

Rooppur Nuclear Power deal has already been marred by controversy, Atomstroyexport, assigned to build the plant, hired Goldenberg ,which was supposed to develop the site where the power plant will be built. But controversy broke out , as reported in the media, when Goldenberg left the place without paying the Bangladeshi sub-contractors.This controversy turned the whole project into a damp squib.

Moreover Russians have 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[1]. Initially Indians had signed a deal of $ 1.5 billion in 2004 and retrofitted Gorshkov was scheduled to be delivered by 2009. Later Russians increased the agreed cost by $1.2 billion, severely damaging Indo-Russian relations. India revised the deal, which finally became $ 2.35 billion and got retrofitted Gorshkov in 2014.

If a formidable friend like India had this kind of experience with the Russians, 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 the Russians since we have very little knowledge on these areas. Russians take full advantage of our ignorance about the true construction and operational cost. Spiralling up of this cost is stemming from this asymmetry of information. Russians are in a comfortable position in this negotiation. We not only lack the tech savvy experts, but never took any assistance from a third country that has the required know-how of nuclear technology and adept in negotiating such deals. So the risk emanating from asymmetry of information is that we may end up in swallowing a costly deal, which may not generate electricity at a cheaper price as envisioned when the idea was first broached.

One example of a bad deal in our country is Karnaphuli Fertilizer Company (KAFCO) deal[2]. KAFCO produces ammonia and granular urea using subsidized natural gas supplied by Government of Bangladesh. Defective machinery mothballed its operation for 5 years after its completion . It also witnessed 3 dozens of shutdown resulting from technical glitches. Moreover, the agreement contains clauses that require that GoB buy fertilizers from only 2 companies at international market price and the 2 companies receive commission of 2%-3% from each sale. Apart from asymmetry of information, commission and bribery played a crucial role in swallowing such a bad deal to Bangladesh as evident in the case of KAFCO.Clearly, corruption and commission are the main motivating forces that lead the govts in this part of the world to undertake big projects. According to the Corner House, a UK-based not-for -profit organization that works for environment and social justice, normal commission for such deal is around 2%-3% and is paid to domestic account of a local business magnet who is not part of decision-making process. A dubious commission ranges between 10%-20% and is usually received by a minister or official or is transferred to offshore accounts or secret trust [3].

In this light , the commission from the Rooppur Nuclear Power Plant deal is somewhere between $253 million ( for 2% commission) and $ 1.26 billion (for 10% commission). As for Rampal deal, the commission is $ 33.6 million if 2% normal commission is considered and $ 168 million if 10% dubious commission is taken into account. Back of the envelope conservative calculations of some of the ongoing projects are presented here[4].

Commission from Some Ongoing Projects

Commission from Some Ongoing Projects

Another factor that may cast shadow on projects being financed by foreign credit is the currency volatility. The Russians cited it as a reason for jacking up the initial cost in the case of Admiral Goshkov carrier deal. For an online news paper, economist MA Taslim wrote a brilliant analysis titled “Borrowing Overseas: Quo Vadis?” on the risks involved with overseas borrowing[5]. Mr Taslim argues ,in that in-depth analysis , 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 , GoB may accept an overpriced deal just like a reluctant boa that swallows an elephant. Public disclosure of this compromise may be greeted with brickbats. When all the quarters that brook no compromise in national interest jump down GoB’s throat, it may hide its face in a hat.

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Notes:

1. The cost overrun made a heavy dent in Indo-Russian relations and in the wake of this cost row India started to consider lowering its defense dependence on Russia. For more see the link.

2.The Corner House did a thorough analysis on Export Credit and its use as a possible source of corruption in a research paper titled “Underwriting Bribery: Export Credit Agencies and Corruption” by Susan Hawley. It was first published on 15 December , 2003, on the Corner House website. KAFCO deal was explained at length there. See the link.

3.The distinction between “legitimate commission”—which I termed “normal commission” in my analysis—and “dubious commission” was made by The Corner House research paper. For more see the link.

4.Table contains commissions originating from some ongoing projects that are being implemented with Export credit or Govt credit. Russia also approved $1 billion for Bangladesh to purchase Russian Arms. EXIM Bank of China will provide credit to build the Karnaphuli Tunnel.

5.The analysis “Borrowing Overseas: Quo Vadis?” was published on May 22, 2016, on bdnews24.co

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