Bangladesh paying Indian LoC instalments with projects still incomplete

In the 15 years since the first Line of Credit (LoC) was signed with India in March 2010, approximately $770 million has been disbursed. With a third of the $1.34 billion loan package still undisbursed, Bangladesh has begun paying instalments as the five-year grace period has ended, despite two of the 15 projects under the first LoC remaining incomplete.

While the timing of the remaining disbursements is uncertain, Bangladesh must repay the first LoC loan by March 2032.

Under the first LoC agreement, Bangladesh has 20 years to repay the loan including a 5-year grace period with the first disbursement made in March 2012, two years after the signing.

It means, if the remaining $364 million is released today, Bangladesh would have only eight years to repay it.

This is how delays in disbursement are shortening the repayment timeline for all the three credit lines under which India pledged $7.3 billion in loans mainly for rail, road, electricity and land port infrastructures and procurements. 

So far $1.8 billion, or a fourth of the total pledged, has been disbursed from the three credit lines, with the loans disbursed from the last LoC to be cleared by May 2039.

Under these credit lines, India offers soft loans with only a 1% interest rate and a 0.5% commitment fee. But conditions are harder if compared with such bilateral soft loan deals with Japan and Korea, which have longer grace and repayment periods, according to officials at the Economic Relations Division (ERD).

ERD data shows the government has repaid $344 million for the first LoC, $19.235 million for the second, and $13.58 million for the third, with repayments still ongoing.

A review shows that 25 of 40 of the LoC projects remain incomplete due to various complexities. Development Project Proposals (DPPs) for eight projects are unprepared, and contractor appointments for others are pending. Additionally, some projects have been dropped from the LoC list due to delays.

Only the bus and truck procurement projects were completed on time. Infrastructure projects such as the Khulna to Darshana railway line and the Ashuganj inland container river port projects face delays due to required approvals from the EXIM Bank of India.

Project officials said implementation of LoC projects fell behind schedules for several reasons, causing funds to become trapped or disbursement delayed. 

Key factors contributing to these delays include the slow approval process from Indian authorities at various stages and the Indian-appointed contractors' negligence in implementation. Many projects have also faced setbacks due to a lack of preparation prior to initiation, as noted by project officials.

As per the conditions of Indian LoCs, only Indian contractors can take part in the tenders and 75% of materials will have to be sourced from India.

Officials cited the Kulaura-Shahbazpur rail link as an example of delays in the first LoC projects due to the Indian contractor's prolonged absence. Despite letters from the ERD, the Prime Minister's Office, and the Indian High Commission urging the contractor to resume work, progress remained minimal after the contractor eventually returned but was not fully engaged.

The Khulna to Mongla Port railway line project also faced a similar problem, they said.

Bangladesh's inability to prepare Development Project Proposals (DPPs) also contributed to the delays. Bangladesh is yet to prepare proposals for eight Indian loan projects involving $1.1 billion — three under the second LoC and five under the third LoC.

Additionally, complexities in land acquisition for certain projects and frequent changes in project directors — which are common issues in Bangladesh's development projects — are further hindering the disbursement of funds for many ongoing initiatives.

Officials and experts recommended high-level talks between the two countries as essential for resolving these issues and suggested the government shift from cluster project-based funding to single project funding under Indian LoCs.

 How LoC projects are faring

According to ERD data, two out of 15 projects under the first LoC remain incomplete, delaying the completion of the dual-gauge rail line in the Dhaka-Tongi section and the Tongi-Joydebpur section to June 2027. Bangladesh will have only five years to repay the funds released by India in 2027 for this project, which began in 2012. A similar situation applies to the Kulaura-Shahbazpur railway project.

The second LoC, signed on 9 March 2016, faces challenges as well. Five years have already passed in the 20-year repayment period, and 75% of the loan remains undisbursed, with only $522.207 million of the $2.081 billion released. 

This leaves Bangladesh with less than 15 years to repay the undisbursed $1.559 billion. 

Out of 12 projects under this LoC, only two — related to bus and truck purchases — have been completed. Seven are underway, while proposals for the remaining three are still pending.

For the third LoC, 87% of the loans are yet to be disbursed. Five years have passed since the first disbursement on 21 May 2019, with only $533.534 million released from $4,059.7 million. 

None of the eight initiated projects have been completed, as most are still in the contractor hiring phase, and five project proposals are yet to be prepared.

 High-level discussions are crucial

The ERD, the official agency to negotiate external funding, is seeking to resolve the problems to accelerate disbursement and make the best use of Indian credit lines.

In bilateral talks, Bangladesh officials repeatedly discussed the issues with their Indian counterparts and placed several proposals to resolve those so that the projects being implemented with Indian loans gather pace. 

One of the proposals is to step out of the practice of taking a cluster of projects under one loan agreement and having separate deals signed for each project. 

"If this happens, each project will have different conditions. This will help overcome problems relating to the release of funds, grace period and repayment schedules," said a senior ERD official, on condition of anonymity.

Another official thinks fluctuations in the interest rate of dollar loans might be a reason behind the slow pace of disbursement of Indian loans.  The Secured Overnight Financing Rate (SOFR) is now 4.4%, which was 5 % a few days ago. 

"India is lending us in dollars at a discount rate of 1%, while it has to arrange dollars at a higher rate," the official added.

Mustafa K Mujeri, former director general of the Bangladesh Institute of Development Studies (BIDS), told TBS, "Given the current status of Indian LoC, further delays in fund release are likely and extending the repayment period is essential. Otherwise, it will be challenging for us to utilise Indian debt effectively."

He told TBS that high-level discussions between the two countries are crucial for resolving these issues. 

"Despite annual meetings between the two countries regarding Indian LoC projects, these issues have persisted for years. Effective negotiations are necessary to expedite the withdrawal process," he said.

Mustafa K Mujeri emphasised the need to re-identify the problems and, if needed, amend various clauses of the Indian loan agreement. 

"Indian authorities and contractors involved in the implementation must also be held accountable for the delays. Additionally, action should be taken to address any issues within Bangladesh," he stated.

What do project officials say about implementation issues?

Project officials report that the Khulna-Darshana rail project, which started in 2018 under the second LoC, remains delayed due to the lack of a contractor. 

Project Director Monirul Islam Firozi told TBS that LoC requirements, including approvals from the Exim Bank of India, have slowed progress. So far, only the survey and design work are complete, and the tender document will be submitted this month. With the bank's approval, the tender process could take nine months before construction begins. 

Similar delays affect other projects like the Parbatipur-Kaunia dual gauge conversion, the Ashuganj river port, and the Bogura-Sirajganj rail line.

The Ashuganj Inland Container River Port project, initiated in 2018 to enhance maritime connectivity with India, has yet to complete its tendering process. 

According to ERD sources, India's loan for the Ashuganj project is $86.49 million, but project costs are rising due to delays, prompting an additional loan proposal of $25 million. 

Indian LoC projects tend to receive bids that exceed estimates, further delaying implementation.

The Tk22 crore Khulna-Mongla railway construction project under the first LoC has faced delays due to this issue. 

Initial tenders for the project's signalling and telecommunication package in July 2020 saw bids 33.82% above the estimate. In July 2021, bids rose to 57% over the estimate. Eventually, an open tender found a contractor who bid about Tk3.5 crore below the estimate.

Since the project's inception, the Indian contractor's work progress has been unsatisfactory, leading to complaints raised with the Indian High Commission.

Although the 70km rail line, which began in 2011 with a three-year deadline to connect to Mongla Port, is now unofficially completed after 15 years. 

"After a long delay, the project is now completed in terms of infrastructure, but the rail connection has not yet been established," Ramzan Ali, the project director, said.