‘Price volatility should be factored in while designing dev projects’

Bangladesh's mega projects are already expensive and their deadlines get revised constantly, resulting in cost escalation. The Ukraine war-led hikes in construction raw materials costs have only worsened the crises as contractors seem unwilling to continue in the prevailing price schedule of the government.

In conversation with The Business Standard, economist Professor Mustafizur Rahman, Distinguished Fellow of Centre for Policy Dialogue, talks about the growing challenges of managing megaprojects in Bangladesh, analyses why the present cost escalation and delays are not unprecedented and instead a weakness within broader governance, and advises on how to improve the negotiation and reviewing capacity in the current situation.

A recent TBS report revealed that the Roads and Highways Department had floated tenders for three projects seven months ago, but no contractor bid for those because of hikes in construction material prices. The contractors instead asked the government to revise the price schedule. Our mega project implementation costs are already too high and get revised constantly. What do the new realities mean for Bangladesh and how do we manage the current situation? 

The huge amount of money that is being invested in Bangladesh's infrastructure is crucial for the economy and important for stimulating trade and investment. But managing the infrastructure projects has now turned into a big challenge. We are seeing that project implementations are increasingly getting delayed for various reasons. As a result, the economic rate of return (ROR), internal rate of return, and financial rate of return of these projects are reduced. 

If we consider the project implementation of the roads, our per kilometre cost is two to three times higher than other countries. It is sometimes claimed that we import materials, that ours' is a riverine country and hence requires culverts, etc to be built; land acquisition costs a lot here. But even if we factor in all these, our construction costs per kilometre are higher than that of many countries. 

Photo: Mumit M/TBS

Now if I look at the question from a management perspective, the cost of construction materials increases at various times anyways. The market is volatile at present because of the increase in fuel, gas and other essentials' prices. While floating tenders, there is a necessity to factor in the rising costs of construction materials. 

If costs are set for a prolonged period, there will be difficulties in designing a pragmatic cost. If the bidding follows a given price schedule, it may get delayed in implementation, and consequently, the cost may increase midway etc. The concerned ministries should be careful of market volatility so that costs of materials are reflected in the bidding. 

But at the same time, we also have to monitor that rising prices are logically reflected, so that questions of revisions are not raised after the tender is complete. The professional capacity of reviewing, like being able to assess how much cost escalation can be allowed, also has to be improved. 

Various dimensions and complexities of the projects are now increasing. Reviewing them only through the government or ministry's capacity, may not always be viable. So for technical and financial reviews, both strengthening the capacity of concerned agencies of the government and engaging independent professionals with expertise are important. 

And that should be an ongoing process given the current volatility, especially considering the current Ukraine-Russia war. 

But again if we cannot manage broader governance issues well, like frequent cost escalation, delays, and cost escalating in the backdrop of delay, we will not be able to get the returns we expect.

International partners like the JICA have also asked the government to raise the contract prices. In this situation, how can the government enhance its negotiation ability?

For various projects with our development partners, we obviously have to strengthen our negotiation capacity for interest rate maturity period, grace period, project value, etc.  

For that, as I said, we have to develop professionalism. The institutes have to change their curricula if necessary, or we need to build new institutes because we didn't manage such big projects before. 

Also, we need to increase our capacity to align the project price in the light of market price. Foreign aid, whether they come from JICA, ADB or World Bank, we will need it. While negotiating, national interest has to be prioritised and we also have to keep in mind the market realities; both have to be done with professionalism. Otherwise, our development partners will lose interest to enter here.

Moreover, we are now a blended economy – accessing concessional and non-concessional loans. But in a few years, we will enter the non-blend phase. At that time, we will need superior negotiation capacity for terms and conditions, interest rates, maturity period, grace period, etc. The more we become a non-concessional, non-blend country - to become a middle-income country - the more we will have to skill up our negotiation capacity. 

Prices have shot up in recent weeks largely due to the Ukraine war. And there is always the probability that the war may continue for a long time. How should we prepare for such a period of crisis?

If the shadow of war gets prolonged, our import substitution strategy has to be strengthened. 

Once we used to import cement from abroad. But now we are producing it ourselves. We are producing steel. Our domestic market price is less than the global price, and more competitive. 

So in regards to stimulating domestic investment, and bringing in FDI for special economic zones, a major part of the economic zone should be domestic market-oriented investments along with export-oriented investment.

We have to incentivise import substitution based products. A dollar saved is a dollar earned. Instead of only focusing on exports, we have to focus on the emerging demands of the domestic market, a large part of which being infrastructure-induced demands. 

Thousands of construction workers' livelihoods could be in jeopardy as a result of the potential fallout of these mega projects getting stalled. On the other hand, the soaring prices of essentials pose a morbid challenge to blue collar professionals. What can the authorities do to ease the pressure on these people? 

No, I don't agree with the notion that just because the contractors are not working, we have to back overpriced projects to create downstream employment. The collective economy doesn't work like this. Many are graduating and entering the workforce – you have to create employment for them, obviously. But doing that inefficiently, or for a particular sector, will not bring the optimal result. 

Obviously, we have to create economy-wide opportunities for blue collar professionals. But that we will have to do by increasing industrialisation and service sectors.