Money is no(t the main) problem

Posted in development, economics, institutions by jrahman on September 16, 2012

Money is no problem — I have heard multiple, and contradictory, stories about the context of the quote attributed to Ziaur Rahman.  I’m reminded of one particular story by the recent fracas about the Padma bridge — for those who came in late, here is a good primer.

Okay, there are multiple aspects of the Padma bridge scandal.  I am leaving the political aspects of the issue — enormous as they are — to others more knowledgeable than me.  Let me talk about the economics of the matter.

The Economist, in its story on the issue, saysBangladesh relies heavily on Western aid for a vast array of projects that otherwise would not exist. Without the Bank, there can be no bridge.

The implication is clear — money is the problem, no Bank funding, no bridge.  I don’t think this is quite right.

Firstly, much of the development budget in recent years have been financed domestically — I’ll do a separate post on this — so it just ain’t so that Bangladesh relies on foreign aid for ‘a vast array projects’.  Secondly, as Nofel Wahid — an upcoming Bangladeshi economist — explains here, the government has options such as ‘infrastructure bond’ to finance the bridge. Mr Wahid also shows here that self-financing the bridge won’t put much pressure on balance of payments or the exchange rate.

These explain pretty clearly that money really is no problem when it comes to building the bridge — I wish I had written those pieces myself.  The thing is, money isn’t the only thing that matters.  Consider the following from Wahid’s Forum piece:

A project of this size will undoubtedly require the implementation of lots of other side projects, such as dredging the river, river training, construction and maintenance etc. Does the government have the managerial capability to put all the little bit and pieces together?

Wahid goes on to argue that World Bank supervision will not necessarily guarantee that things will fall into pieces.  His conclusion:

There is no substitute for the government doing its job honestly and properly. No amount of donor paperwork and process of checks-and-balances will excuse the government from its duty to conduct due diligence.

I agree.  And we did it in the past.  In the late 1970s, international donors didn’t want to pay for a barrage over the river Teesta.  Ziaur Rahman defied the donors — at a time when Bangladesh was actually far more reliant on foreign aid and grants than it is today — and started building the barrage in 1979.  It was completed in 1984, with Bangladesh’s own money and technology.  If the barrage hasn’t delivered its full potential, it’s because of a lack of durable water sharing agreement with India, not because of a failure to implement the project at the micro level.

In one story I’ve heard, Zia is supposed to have quipped ‘money is no problem’ when it comes to building the barrage.  I have no idea if it is true.  But that’s not relevant for this post.  The relevant question is, if the Zia regime could build a barrage over the Teesta three decades ago with domestic finance and technology, then why should we doubt the current government’s ability to build a bridge over the Padma?

And yet, doubts I have a-plenty.  

Nothing I have seen in the past four years make me believe that this government has the capacity to pull off a major infrastructure project like this.  The issue here is not corruption as such.  Rather, the issue is debilitating injuries done to the state machinery that would be asked to implement a project like this.  Similar injuries were done by every elected government in the past, but the current government has made it an art form.  I am talking about the rampant doliokoron (appointing partisan hacks) and doling out of tenders on patronage considerations.  I am talking about ill-qualified engineers supervising crucial aspects of projects.  Compared with the corrosive effects of these, financial corruption such as bribery are rather insignificant.

And that’s why I think money is not the problem when it comes to building a bridge over the Padma.  The problem, dear reader, is this government.  Will a future government be any better when it comes to doliokoron?  I haven’t the foggiest clue.  

But can this government pull it off?

As Michelle Tanner would say:


12 Responses

Subscribe to comments with RSS.

  1. kgazi said, on September 16, 2012 at 2:03 pm

    All this IS corruption. Bad engineering, nepotism, tender-baji, doliokoron, desh-bikri, bribery, black-money whitening, all this have only one goal – financial misappropriation. Any action for the purpose of stealing (public) money is corruption. Corruption is not just bribery, the entire ‘industry’ of fleecing public money which our wonderful politicians engage in – is corruption.

    Can they build the bridge without World Bank money? – of course they can. But why the desperate FRENZY for WB money just 1 year before elections ? The answer is for 3 reasons:

    1) corruption, 2) corruption 3) corruption.

    Big projects with donor-money are politicians’ favorites – they provide the highest scope for stealing. Third world nations remain poor, and they never develop BECAUSE of these donor-funded huge ‘white elephant’ projects.

  2. fugstar said, on September 17, 2012 at 6:24 am

    The entirety of Bangladesh’s infrastructure needs a rethink, from how it interacts with the river/season system, to how it is funded (monsoonally adjust the ADP date and finance longer than annually).

    Glad you brought up the teesta project, there were a few phases, so it lasted well into ershad time. Longievity enabled by spatial nepotism. It is a lesson for those of us interested in nurturing, not destroying indigenous expertise.

    Those early years of the new bangladesh, after the war and famine, the mood was different. Even thought the water board was less well stocked I think that it was less corrupt. The leadership of Zia on Teesta ( and rohingya for that matter) and the misleadership of Hasina are quite diferent from one another. He faces resistance from board officials and the world bank, but he also commanded respect. The crazy one doesnt.

    I do not think that the awami league has the mojo to operate in a straight line.

    The scientific capabilities and tendering experiences from the jamna bridge are there, as are the able folks at CEGIS, IWM and the River Research Institutes. No doubt several feasability studies and options are sitting at Shethu Bhabhan.

    If we were able to raise unity of purpose we could do it, but this govt is good for nothing. with no trust and calibration, not many people will buy into this project, which could dramatically alter the geoeconomics of Bangladesh.

    In Ethiopia the govt is trying to whip up the bonds for the Renaissance Dam, the developmentors wont fund it. The people will buy into some kind of techno nationalism, and with israeli and other tech support they will have a go.

    [Insert bridgebuilding metaphors]

  3. Diganta said, on September 18, 2012 at 6:26 am

    Money is definitely the problem. Padma Bridge will cost a fraction of Bangladesh GDP and will definitely have high return on investment. Someone who earns $100 billion a year, can always “afford” something that costs 3-4 billion. But that would also mean that some other sector/project will starve, i.e. will get less investment. Developing countries generally doesn’t like that.

    Also, I didn’t understand the notion of zero interest loan (as mentioned in the link in your writing). If I hypothetically assume that there’s a scheme to get money at zero interest from the international market, it will automatically be oversubscribed and that would drive its interest rate upwards. This is because a lot of other countries will also need that zero-interest money to develop their own infrastructure.

    The attractiveness of WB loan is in its interest rates. I don’t think any other way Bangladesh Govt can fund this project at that cheap rate. Bangladesh borrows local money at 12% interest and all international funding organizations put the interest rate at above 6% which is multiple times of what WB had offered (< 1%). Moreover, a certain part of the project had to be carried on with Malaysian companies. If you compare the offers of Malaysia and WB, you'd see a difference of ~150 million a year in interest (assuming full 3 bn loan).

    So, its not the funding, it's just how cheap the funding is. It's like you have to shop for a loan for your house and you get two quotes of 0.75% and 6.5% financing. You can pay from your pocket too, but your investments are already making a 7% YoY return. Now, which one would you choose?

    • Diganta said, on September 18, 2012 at 6:27 am

      Sorry, my first line is “Money is definitely the problem.” – should be “not the problem.”

    • Nofel said, on September 23, 2012 at 6:06 pm

      Hi Diganta. Jyoti brought your comment to my attention. Zero coupon convertible bonds that I wrote about in my piece are basically an amalgamation of two types of financial securities: zero coupon bonds and shares.

      Zero coupon bonds are bonds that pay no annual interest, but provide a lump sum pay-off at maturity. Example: Lets say I am issuing 5-yr bonds in 2012 with a face value of Tk100 at a (simple interest) yield of 10%. That means an investor will pay me Tk90 in 2012 to buy the bonds, and I am liable to repay the investor Tk100 in 2017.

      If this was a zero coupon ‘convertible’ bond, what would happen is that instead of paying him Tk100 cash in 2017 I would give him Tk100 worth of shares. In the context of the Padma bridge, Bd govt bonds would convert to Padma Bridge company shares, which would pay dividends from profits earned through toll collection. The reason convertible bonds are attractive to investors is because there are no limits to their pay-off. Bonds are fixed income securities (in the example above the return is limited to 10%), whereas shares are not and can provide returns that are higher than 10%.

      Also, when bonds are oversubscribed, the price goes up but the interest rate goes down. Example: I am Apple and I want to issue 100 bonds at a yield of 10%. 150 people find that very attractive so they start bidding. Due to excess demand, the price of the bond naturally goes up and the interest rate or yield falls. Because there are more people than there are bonds going around, the die-hard apple investors are willing to receive less compensation (lower yield) to price competitors out of the market and get their hands on those limited bonds.

      Hope this answers your queries.

      • Diganta said, on September 23, 2012 at 8:03 pm

        That was the financial explanation. The first part is basically selling shares with a promise of returning the original amount. The second part is issuing a bond. In either case Govt has to convince international investors that despite all corruption, the bridge will be “profit-making venture”.

        What is the difference this project has in its favor that can lure international investors into investing in it, (which other projects could not)?

      • Nofel said, on September 23, 2012 at 8:33 pm

        A cynical, but no less pragmatic, answer would be that the Govt doesn’t really have to do much other than to pay a semi-decent commission to Goldman Sachs to issue these convertible bonds in the international market. Goldman cooked Greece’s books to help them get into the euro! Selling Bd govt bonds for them is like selling jomjom’er pani…

        The more technical answer to your question is – corruption and all other kinds of nefarious monkey business would be priced into the yield investors will demand. In market speak, it’s known as the sovereign risk premium.

      • Diganta said, on September 23, 2012 at 11:15 pm

        Again I would say that if it were so easy then the entire third world would have been behind it. I said third world and that’s part of the reason why Greece was sold … and Bangladesh (or even India) won’t. Last year Bangladesh treasury bonds @9.53 % interest rate brought home only BDT 3bn.

        Locally Bangladesh Govt offers even higher interest rate to get a paltry amount of money. Investment, as a whole, is all about sentiment and right now at least none is in mood to invest without collateral.

        To address the last point, I totally agree. The corruption risk is built into the interest rate … that’s one of the key reasons why Bangladesh isn’t getting a good deal at International market.

  4. Diganta said, on September 23, 2012 at 11:36 pm

    My comment is somehow gone!! But anyway, the sovereign risk premium for Bangladesh reflected in last bond auction when they collected BDT 3 bn @9.53% interest from market.
    The local FD certificates which helps Govt borrow from people also goes beyond 13% (post tax 9%). I am not sure how either of them would dramatically go to 0% and collect much more money than what they do right now.

  5. Diganta said, on September 24, 2012 at 11:40 pm

    I am just testing whether my comments are no longer coming.

  6. Diganta said, on September 25, 2012 at 12:04 am

    My comment is somehow gone!! But anyway, the sovereign risk premium for Bangladesh reflected in last bond auction when they collected BDT 3 bn @9.53% interest from market.
    The local FD certificates which helps Govt borrow from people also goes beyond 13% (post tax 9%). I am not sure how either of them would dramatically go to 0% and collect much more money than what they do right now.

  7. […] the Padma Bridge issue broke, a large number of pundits ranging from Abdul Ghaffar Chowdhury to Anu Muhammad […]

Comments are closed.

%d bloggers like this: