What to rethink about projects
Rethinking projects is always a good idea, more so during the budget preparation season such as now. Thus, when the Indian External Affairs Minister says countries should not build empty ports, who can disagree? Such projects should not be built irrespective of how they are financed – hard loans, concessional loans or even grants.
The most important rethinking needed is the linkage between project output and the expected development outcomes as well as the linkage between project inputs and project outputs. Are these optimised? Finance is not the only consideration in choosing a project. Projects use scarce resources – land, labour and so on – even when financing is either free or highly concessional.
By the same token, we should not be discarding viable projects because the source of financing is a discomfort for some inside or outside the country. What is important is not to be misled by the stated terms and conditions of financing. These may appear generous on the surface, but the devil may be in the details of procurement where the concessions given on the financing side are far outweighed by the stringent rules that severely limit options to obtain project inputs through a fair and transparent competitive process.
There indeed are cases where countries have fallen into financial difficulties because of indiscriminate use of external financing for projects that are not economically viable. A most notorious recent case is Sri Lanka's Hambantota port. Sri Lanka struggled to pay back, and the rest is history riddled with both myths and realities. Sri Lanka used the money obtained from the leasing of the Hambantota port to largely cover the balance of payment gaps resulting from the soaring debt servicing cost. The Sri Lankan government is still obliged to pay over $100 million every year as loan repayments pertaining to the Hambantota port project. The lease money was not used to pay back the loan against the port.
The Sri Lankan experience illustrates the criticality of prudent macro-fiscal management, continuity of structural reforms and good governance. No country should put itself in a position to service debt by leasing national assets. Leasing out Hambantota port was more of a reflection of the external sector crisis stemming from the reduction of trade, persistent trade and budget deficits, and the middle-income trap resulting from disruption in structural reforms and corruption in public financial management.
By the time the Sri Lankan government entered into the lease agreement, the debt servicing cost pertaining to the loans obtained from China Exim bank to construct the port amounted to less than 5% of Sri Lanka's total foreign debt repayments. However, the loan payback period was not long, which resulted in higher loan instalments after the completion of the grace period. Operation of Hambantota port did not generate sufficient revenue to match the debt obligations pertaining to the loans obtained for the project. It is hard to believe these could not be foreseen at the time of taking on the project.
Our Foreign Minister has a point when he says, "We need more funding from our development partners, and that unfortunately comes with a lot of strings attached…Today, our largest loans are from the World Bank and the IMF and the ADB, but also, we are trying to get some funding from others because the need for development process is very high. Is there an easy way out?"
Let's face it. No funding comes without strings. There indeed is no free lunch. We must meander our way through by rigorously examining the "strings" from the point of view of our national interest. This means feasibility studies must be done rigorously and its findings taken seriously. If the economic viability of the project is held up as the make-or-break factor in taking from whoever comes forward with a "basket of money", the risk of derailment into bankrupt projects is minimised. What is important is to make sure that the basket does not come with another basket of commercial terms, not necessarily noticed at the time, that takes away much more than the original basket gives.
The questions that are pertinent in this respect is whether the financing agreement allows, preferably open, bidding process free from any incompetence and graft, institutional or otherwise, on both sides. Can we manage the risk well? Given the persistence of fiscal and current account deficits, by borrowing from aggressive lenders, do we risk falling into a vicious cycle when debt repayments come due? We certainly do not want to see ourselves in a position such as Sri Lanka where the government's debt repayment constitutes 83% of total revenues.
Bangladesh is still far from such a disastrous situation but that is no reason for complacency if we learn anything from Sri Lanka's experience. The Achilles Heel in our case is prioritisation in project selection and time and cost overruns in implementation. If these remain unaddressed, debt distress will only be a matter of time.
