Task force favours infrastructure bonds, warns of risks from G2G loans from India, China

Bangladesh's growing dependence on Government-to-Government (G2G) loans, particularly from India and China, is putting its infrastructure financing at risk, warns a recent task force report. 

 The report highlights the fact that while G2G loans offer relatively low interest rates and extended grace periods, they are increasingly influenced by shifting geopolitical dynamics, which may complicate long-term infrastructure development plans. 

To ensure sustainable financing for large-scale projects, the task force recommended several initiatives, such as introducing infrastructure bonds as an alternative funding mechanism and revising existing G2G framework agreements. 

Besides, by implementing a strong regulatory framework and offering clear investment incentives, Bangladesh could create an environment that attracts both domestic and international investors, according to the task force.

The report, "Task Force Report on Re-strategising the Economy and Mobilising Resources for Equitable and Sustainable Development", was handed over by Planning Adviser Wahiduddin Mahmud to Chief Adviser Muhammad Yunus on Thursday. 

Geopolitical influence

The report emphasises that Bangladesh's reliance on G2G loans from India and China exposes the country to external political pressures. While these loans often come with favourable terms, they also include strategic conditions that go beyond financial considerations. 

One significant concern raised is the influence that geopolitics can have on the disbursement of funds, which can lead to uncertainty in project execution.

India's Lines of Credit (LoCs) have been instrumental in funding Bangladesh's infrastructure projects. However, the task force notes that strict procurement conditions, such as the stipulation that 75% of project materials and services must be sourced from India, limit Bangladesh's ability to negotiate better prices or choose higher-quality alternatives. 

Additionally, the report points to a slow disbursement of funds, with only $1.5 billion of India's total LoC commitments had been disbursed, reflecting a utilisation rate of just 19%.

Similarly, projects financed by China often suffer from conflicts of interest, the report claims. Chinese firms typically handle feasibility studies, design and construction, leading to reduced transparency and potential cost inflation.

Conflict of interest 

The task force further points to the conflict of interest inherent in many G2G projects, where the funding country controls multiple aspects of a project. 

For instance, Japan-funded projects like the Jamuna Railway Bridge and the Third Terminal at Hazrat Shahjalal International Airport saw all major contracts awarded to Japanese firms. Similarly, the Chinese-funded Karnaphuli Tunnel project was managed entirely by Chinese entities.

The report suggests that such practices lead to inflated costs and reduced competition, ultimately increasing the financial burden on Bangladesh. The lack of open bidding processes in these projects, combined with the significant foreign control over execution, has caused many projects to exceed their initial cost estimates.

Reforming G2G financing

The task force recommended revising existing G2G framework agreements to reduce resource leakages and improve governance. 

It also urges Bangladesh to eliminate restrictive conditions, such as mandatory use of donor-country materials and labour, which have led to inefficiencies and higher costs. Simplifying the approval processes is also highlighted as a way to prevent delays and cost overruns.

Besides, the task force stresses the need to reduce reliance on bilateral funding arrangements, which are vulnerable to geopolitical manoeuvring. 

The task force also recommends strengthening the Public-Private Partnership Authority to improve project structuring, risk-sharing and negotiation capabilities. 

Standardising PPP project documents and agreements is essential to enhance transparency and investor confidence, according to the report.

Infrastructure bonds as funding solution

The report proposes that Bangladesh adopt infrastructure bond models backed by strong regulatory frameworks and clear investment incentives as an alternative funding mechanism to reduce Bangladesh's reliance on G2G loans. 

Infrastructure bonds are debt instruments issued by governments, financial institutions or corporations to raise funds for critical projects such as roads, power plants and airports. They are considered low-risk investments, offering fixed returns and government backing, making them an attractive option for investors.

The task force suggests leveraging public-private partnerships to mobilise long-term capital and offering government support, including tax incentives, to attract investors. 

The report draws on successful examples from other countries, such as in India, where the Infrastructure Finance Company Limited (IIFCL) and tax-free infrastructure bonds have been used to support major projects, while China's Special Purpose Bonds (SPBs) have funded urban development and transportation projects.

Malaysia's Sukuk Bonds, based on Islamic principles, have been used to finance large-scale projects, while Indonesia has similarly attracted investors through its Infrastructure Sukuk. 

Vietnam has also leveraged government-backed infrastructure bonds, combined with PPPs, to enhance the financial sustainability of its infrastructure development.