Padma Bridge Financing

Submitted to Dr. Mohammed Farashuddin Course Instructor Managerial Economics (E501) IBA, University of Dhaka

Submitted by Abid Al Reza Roll: 05 Batch: 48d

Institute of Business Administration University of Dhaka

Date: November 18, 2013

November 18, 2013

Dr. Mohammed Farashuddin Course Instructor Managerial Economics (E501) IBA, University of Dhaka

Dear Sir,

Re: Submission of Term Paper

With due respect it is my pleasure to present the term paper entitled Padma Bridge Financing as part of my course requirement. The term paper was extremely interesting to work at as it gave me the opportunity to have a detailed perception of the financing plan for the Padma Bridge. The report mainly revolves around different financing options for Padma Bridge. I personally collected data from different online sources. There were detailed descriptions about different financing options regarding the Padma Bridge project. I tried to portray the main theme and important data in this report. I would like to take this opportunity to thank you for helping me immensely in every possible way to get the term paper prepared. I have completed this term paper with my utmost sincerity and hope that you will appreciate this endeavor. However, if any explaining is required, I would be available to answer any question for clarification.

Sincerely,

Abid Al Reza Roll: 05 Batch: 48d

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Contents
1. 2. Introduction: ................................................................................................................................... 1 1.1. 2.1. 2.2. 3. 4. 5. 6. Project Components: .............................................................................................................. 1 World Bank Financing: ............................................................................................................ 2 Asian Development Bank (ADB) Financing: ............................................................................ 4 Project Financing: ........................................................................................................................... 2

The Conspiracy Allegation and Consequences: .............................................................................. 5 Padma Bridge Construction with local Fund: ................................................................................. 6 Conclusion: ..................................................................................................................................... 7 Reference: ....................................................................................................................................... a

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Executive Summery
Padma Bridge has been a demand of the people of Bangladesh for a long time. This bridge will connect the south-west region with the northern and eastern region of our country with the shortest and convenient t possible way. It will be an initial step for the economic and social development of the country on an elevated scale. But unfortunately there was a huge uncertainty regarding the financing possibilities of this bridge. In the initial phase of this project funding was sought from foreign donors, which would have been a better choice. But due to corruption allegations by World Bank, both World Bank and Asian development bank stepped down from their commitment of $1.2 billion and $615 million respectively. They were the funding source of about one third of the required total budget of $2.915 billion. And this made the project an uncertain one. But the government of Bangladesh coped with the situation very tactfully, they expressed their intention to build the bridge with own resources. The details of this own financing plan was not revealed but several parliament members especially the finance minister gave insights of the financial plan time to time. The government has stated the project but it is the initial phase only. Now it is a matter of time to see that, how efficiently this project is finished and what will be the outcome of this project?

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1. Introduction:
The Padma Bridge is the road-rail bridge to be constructed across the Padma River connecting Louhajong, Munshiganj with Shariatpur and Madaripur. It will link the south-west region with the northern and eastern region of our country. Upon completion this bridge will be the first fixed river crossing for road traffic and the largest river in Bangladesh. The Padma River separates the South-west region from the capital city and requires time consuming ferry crossings to major destinations. Usually ferries and to a lesser extent launches and manuallyoperated boats are used for passenger transport and freight across the river. These services involve long waiting hours due to insufficient capacity; moreover they are prone to suspension or cancellation due to flood, fog and adverse weather conditions. Also there are complains about lack of necessary facilities in the terminals. The Padma Bridge project is a remedy to these problems, which will cut the distance from the southwest region to Dhaka by 100Km resulting in easier and less time consuming physical transportation. The proposed bridge plans to build a multipurpose crossing with additional utilities like rail, telephone, gas and power lines across the Padma. This bridge will greatly facilitate social, economic and industrial development of the under privileged part of our country. In a feasibility study it was estimated that the project will increase the GDP by 1.2% and that of South-West Region by 2.3%. (Islam, August 8-10, 2010)

1.1. Project Components:

Among the project components main bridge is by far the prime component of the project covering about 50% of the project cost. The main components of the Padma Multi-Purpose Bridge Project consist of: A 6.15 km long two-level steel truss main bridge with a width of 18.10 m (four-lane divided highway on top and single track rail on the bottom deck). The Approach Road to the bridge consisting of a 12.4 km four-lane divided highway and includes five minor bridges of 150-270m length over local waterways, 21 drainage box culvert and 8 local road underpasses. Transition structures that include the Approach Viaduct at Mawa length of 721.250 meter and 756.788 meter for the northbound and southbound carriageways respectively. The length of the Approach Viaduct at Janjira is 873.250 meter and 797.315 meter for the northbound and southbound carriageways respectively. Bridge End Facilities on both sides of the river that includes Toll Plazas and Service Areas. Access roads totaling about 8.9 km and 14.5 km of service road. Four Resettlement villages (two on the Mawa side and two on the Janjira side).

2. Project Financing:
The project cost is estimated to be approximately 2.915 Billion US dollars (World Bank, 2011). According to the plan, the project was to be co-financed by the government of Bangladesh, the World Bank, the Asian Development Bank, the Japan International Cooperation Agency (JICA) and the Islamic Development Bank. The Bangladesh Bridge Authority is the executing agency of the project. The committed amount by different financers was as below, Source Borrower (BBA& Government of Bangladesh) IDA Asian Development Bank-ADF Asian Development Bank-OCR Japan International Cooperation (JICA) Islamic Development Bank Total Total (US$ Million) 560 1200 76 539 400 140 2915

2.1. World Bank Financing:

Out of the total cost requirement of $2.915 billion, World Bank wanted to provide $1.2 billion via the International Development Agency. The project financing was approved on 24th February, 2011. The commitment was for several specific sectors. These sectors are, Sectors % of World Bank Financing Rural and Inter-Urban Roads and Highways 53 Flood protection 27 Health 9 Other social services 9 Public administration- Transportation 2 Source: http://www.worldbank.org/projects/P111017/bangladesh-padma-multipurpose-bridge-project?lang=en World Bank intended to use Specific Investment Loan (SIL) as loan instrument and they wanted to provide $300 million in local currency and the other $900 million in foreign currency. The estimated disbursement plan of the credit was as following, Financial 2011 2012 2013 2014 2015 2016 Year Annual 50 250 350 300 200 50 Cumulative 50 300 650 950 1150 1200 Source: http://www.worldbank.org/projects/P111017/bangladesh-padma-multipurpose-bridge-project?lang=en

The detailed project cost by components and financing arrangements was as per the below table, Component A. Main Bridge A1 Main Bridge Facilities and Viaducts A2 Construction Yards A3 Approach Roads and facilities A3.1 Mawa Side A3.2 janjira Side Sub-total A B. River Training Works C. Implementation of SAP and EMP C1. Social Action Plan (SAP) C2.Environmental Management Plan Sub-Total C D. Consultancies for Supervision D1 Construction supervision and PM support D2 M&E and supervision of EMP and SDAP Sub-total D E. Project Management, TA, Training E1 PM support and audits E2 BBA strength, TA, POE, training E3 Strategic studies Sub-total E Total Project Cost Interest/service Charge during Project Refinancing of PPF Advance Total US$ Million 500 57.5 35 35 570 275 206.3 18.7 225 65 7 72 7 14 5 26 1,168.00 29 3 1,200.00

Source: http://www.worldbank.org/projects/P111017/bangladesh-padma-multipurpose-bridge-project?lang=en According to the agreement with World Bank, BBA was the financially autonomous entity of this project, which was liable to pay all debt services and was in charge of collecting tolls from the bridge as its revenue. The service and commitment charge during the project period was only US$29 million which was included in the total $1.2 billion. That means the World Bank was going to pay $1.171 billion as credit and the service charge of the original credit was 0.75% approximately (World Bank, 2011). Bangladesh Bridge Authority had to pay the credit after the completion of the project because it would have income by then from the tolls and charges from the bridge. The Bangladesh government would not have to begin payment for 10 years, and it would have 40 years to pay off the loan (World Bank, 2011). For effective implementation of the project, it was proposed that the service and commitment charges on the IDA credit during the period be financed from the proceeds of IDA Credit. Also the charges for the ADB loan would be capitalized, while similar charges for JICA credit (which are very small) would be paid by BBA.

With the commitment of the credit, World Bank wanted the Government and BBA to meet some conditions related with the project. These conditions were placed for the BBA to maintain financial sustainability and for the government of Bangladesh to avoid serious fiscal burden in the future. The main condition demanded by the World Bank was to increase the tolls for different Vehicles for Jamuna Bridge to be increased by not less than 40% of the current rate before completion of the Padma Bridge project, which will a reasonable step for the high toll on Padma Bridge in the future. This was demanded because according to the study World Bank estimated that the BBA will suffer a negative cash flow or deficit of a significant amount in the future. So, it will face a hard time to repay its debt to the financers. And also due to the high risk associated with the project, World Bank demanded for the BBA to maintain $15 million emergency fund during the project period and which needed to rise to a level of $50 million after the completion of the project (World Bank, 2011).

2.2. Asian Development Bank (ADB) Financing:

Asian Development Bank wanted to finance a gross amount of 615 million of US dollar in the Padma Bridge project. $539 million was to be financed from ordinary capital resources of ADB and the other $76 million from Asian Development Fund resources. The project was approved by ADB on 25th November, 2010. Amongst the total $615 million, $525 million was to be supplied in foreign currency and the other $90 million in local currency. The detailed Project Cost by Components and Financing Arrangements between ADB and BBA was as following, Component A. Main Bridge A1 Main Bridge Facilities and Viaducts A2 Construction Yards A3 Approach Roads and facilities A3.1 Mawa Side A3.2 janjira Side Sub-total A B. River Training Works C. Implemetation of SAP and EMP C1. Social Action Plan (SAP) C2.Environmental Management Plan Sub-Total C D. Consultancies for Supervision D1 Construction supervision and PM support D2 M&E and supervision of EMP and SDAP Sub-total D E. Project Management, TA, Training 65 7 72 206.3 18.7 225 US$ Million 500 57.5 35 35 570 275

E1 PM support and audits E2 BBA strength, TA, POE, training E3 Strategic studies Sub-total E Total Project Cost Interest/service Charge during Project Refinanicng of PPF Advance

7 14 5 26 1,168.00 29 3

Total 1,200.00 Source: http://www.worldbank.org/projects/P111017/bangladesh-padma-multipurpose-bridge-project?lang=en As per loan agreement of $539 million between government of Bangladesh and ADB, Interest and other charges on the Loan are payable semiannually on 15 May and 15 November in each year starting from 2018 to 2037. The interest amount was $63.5 million, which was included in the total $539 million (Asian Development Bank, 2011).

3. The Conspiracy Allegation and Consequences:

From the beginning, the World Bank classified its investment in Bangladesh has high risk and expressed concern over a weak governance environment. As such, the project involved numerous measures to prevent corruption in its Governance and Accountability Action Plan. Despite, or as a result of these measures, the World Banks detected some evidence of corruption in the procurement process. There are two corruption allegations in the Padma Bridge case: one regarding the primary contract to construct the bridge and another regarding the appointment of a consultant firm to oversee the construction. On 21st September, 2011 the World Bank gave the government a report from the Integrity VicePresidency of the Bank alleging that SAHCO, a firm named for and connected to then communications minister Syed Abul Hossain, had sought to coerce companies to use it as an intermediary to secure the main bridge contract. The report is believed to contain allegations by eleven confidential witnesses against the company. In February 2012, Bangladeshs Anti-Corruption Commission (ACC) completed its own investigation into the allegations and concluded that there had been no wrong doing. Also in September 2011, Canadas national police forces anti-corruption division raided Canadian based SNC-Lavalins offices in September 2011. In April, 2012 two SNC-Lavalin executives were charged under Canadas Corruption of Foreign Public Officials Act for allegedly attempting to bribe Bangladeshi officials in their bid for the consultancy contract for the Padma Bridge (World Bank, 2012). The WB submitted a report on these allegations to the Bangladeshi government in April, 2012. The ACC investigation into these allegations is still ongoing. On light of these allegations, the World Bank insisted on several conditions in order to fund the project. These include the following: Place all public officials suspected of corruption on leave.

Appoint a special investigations team within the ACC to investigate the allegations. Agree to provide a WB panel with full access to the investigation. Provide financiers greater oversight of the project procurement process.

The Bangladesh government did order the necessary investigations and consented to greater oversight, but it did not suspend the alleged officials nor agree to provide the WB panel with access to the ACC investigation. After months of negotiations, the World Bank decided to cancel the loan on June 29, 2012 (World Bank, 2012). As World Bank discontinues its fund for Padma Bridge, on February, 2012 ADB also expressed that they also will be unable to proceed with the funding of Padma Bridge for the sake of their anticorruption standards (Asian Development Bank, 2012). And in the same month JICA also pulled its funds saying that they were unable to continue their commitment under the existent framework.

4. Padma Bridge Construction with local Fund:

After World Bank decided to step down from its commitment of financing, the government of Bangladesh decided to run the project with its own resources. They withdrew the requests for donor financing and started planning on this project. The intension of constructing Padma Bridge with own resources was first expressed by our Prime Minister Sheikh Hasina on 8th July, 2012. In her address, she gave a brief outline of the plan for collecting funds for the project. According to the plan, government will cut its allocation in annual development plan (ADP) and channel this money in the Padma Bridge project. Also they will issue sovereign bonds to collect funds. Also it was mentioned that government may levy a surcharge as was done for the construction of the Jamuna Bridge (Liton & Hasan, 2012). Later in February 2013, Finance Minister AMA Muhith disclosed the financing plan. According to him it will take a total of US$2.97 billion funds to complete the bridge (The Daily Star, 2013). The government will allocate Tk 50 billion from each of its Annual Development Programs (ADP) for the next five years continuously to arrange local funds for the bridge. And the foreign currency requirement of $1.8 billion will arranged by issuing sovereign bonds and foreign grants. And the construction process will start in the current fiscal tear (The Financial Express, 2013). Later it was revealed that, India will provide a grant of $200 million as foreign currency for the project and the remaining $1.6 billion of foreign currency requirement will be arranged by floating country bonds with 15 years maturity and an interest rate of 6% (Mian, 2013). Initially the finance minister mentioned that the government may use foreign currency reserve, but later government may have withdrawn from this option because there was reference about using the foreign currency reserve in the financing plan. As per progress of the project, BBA has signed a Tk 133.49 crore contract with Bangladesh Army for supervision consultancy work of two approach roads and two service areas of the Padma Bridge. One each approach road and the service area will be constructed at both end of the bridge at a cost

of about Tk 1,642 crore. A Bangladesh-Malaysian joint venture company is constructing the approach road and service area at Janjira point of the bridge project under a Tk 1,098-crore agreement. Another tender of about Tk 440 crore has been finalized for building the other approach road and service area at Mawa point of the project (The Daily Star, 2013). And the tender for the construction of the main bridge was deferred to 3rd December, 2013. In the meantime, China offered $2.4 billion and Malaysia offered $2.3 billion funding for the Padma Bridge project separately. But both offers were rejected by the government.

5. Conclusion:
Padma Bridge is essentially the upmost important requirement for the economic and social development of Bangladesh. But its financing issue has created a lot of confusion and debate. The corruption allegation by World Bank and its subsequent withdrawal from financing commitment created an uncertainty about the project. But Bangladesh government took a risky decision to continue the project with its local resources. Though donor financing especially World Bank and Asian Development Financing would have be the best option but own financing is not a worst choice regarding the present conditions. It is definitely a better decision rather than discontinuing the project. Definitely own financing decision will hamper development in other sectors but Padma Bridge holds the upmost priority.

6. Reference:
Asian Development Bank. (2011, June 6). Loan Agreement for Padma Multipurpose Bridge Project between the People's Republic of Bangladesh and Asian Development Bank. Retrieved November 12, 2013, from Asian Development Bank web site: http://www.adb.org/projects/documents/loan-agreement-padma-multipurpose-bridgeproject-between-peoples-republic-banglad Asian Development Bank. (2012, February). ADB Statement on the Padma Multipurpose Bridge Project. Retrieved November 12, 2013, from Asian Development Bank Web site: http://www.adb.org/projects/documents/adb-statement-padma-multipurpose-bridgeproject Islam, M. R. (August 8-10, 2010). General and design features of Padma Multipurpose Bridge. IABSEJSCE Joint Conference on Advances in Bridge Engineering-II, (pp. 144-157). Dhaka, Bangladesh. Liton, S., & Hasan, R. (2012, July 9). Padma bridge with own funds. Retrieved November 18, 2013, from The Daily star: http://archive.thedailystar.net/newDesign/newsdetails.php?nid=241334 Mian, M. J. (2013, May 7). The Daily Star. Retrieved November 18, 2013, from Padma bridge: The financing aspect: http://www.thedailystar.net/beta2/news/padma-bridge-the-financingcycloid/ Sabet, D. (September,2012). Understanding the Padma Bridge Controversy. Dhaka: Center for Enterprise Society, University of Liberal Arts Bangladesh. The Daily Star. (2013, October 14). The Daily Star. Retrieved November 18, 2013, from Padma Bridge: Army gets supervision job: http://www.thedailystar.net/beta2/news/army-getssupervision-job-2/ The Financial Express. (2013, February 25). The Financial Express. Retrieved November 18, 2013, from Plan to build Padma Bridge with local funds: http://www.thefinancialexpressbd.com/index.php?ref=MjBfMDJfMjVfMTNfMV8xXzE2MTI2MA== World Bank. (2011, January 24). Bangladesh - Padma Multipurpose Bridge Project. Retrieved November 11, 2013, from World Bank Web site: http://documents.worldbank.org/curated/en/2011/01/13720556/bangladesh-padmamultipurpose-bridge-project World Bank. (2012, June 06). World Bank Statement on Padma Bridge. Retrieved November 12, 2013, from World Bank website: http://www.worldbank.org/en/news/pressrelease/2012/06/29/world-bank-statement-padma-bridge