Govt to procure four ocean-going vessels with Chinese loan

Bangladesh is all set to receive new loans from China to procure four ocean-going vessels, though with a scaled-back plan due to mounting costs.

The authorities initially planned to procure six vessels, but the high exchange rate of US dollar and inflated manufacturing cost prompted them to revise the project.

Over the course of the two-and-a-half-year negotiation period, the cost of vessels has surged by approximately 50 per cent, rendering the previously estimated budget adequate for the acquisition of merely four vessels.

China is providing a supplier credit of USD 235 million to facilitate the procurement plan. Bangladesh is expected to sign the commercial loan agreement by September this year.

The vessel construction contract would be awarded to China National Machinery Import and Export Corporation (CMC), an entity that finalised the design and dimension of the vessels in the negotiation phase, according to the Economic Relations Division (ERD) and the Bangladesh Shipping Corporation (BSC).

However, economists voiced concerns regarding the supplier credit and suggested that the government backtrack from the initiative to purchase vessels amid the ongoing dollar crisis.

The shipping corporation started negotiations for the loan with China in September 2020. Initially, there was a plan to procure three bulk vessels with a capacity of 80,000 deadweight tonnes (DWT) each and three crude oil tankers with a capacity of 114,000 DWT each.

The bargaining phase lasted for two and a half years. Meanwhile, China expressed their inability to sell six vessels at the initially estimated price, citing high-exchange rate of dollar and increased costs of vessel construction materials.

Later, the negotiations led to a modified commercial deal for procuring four vessels with the estimated price.

There was a significant 25 per cent rise in the dollar price from Tk 86 to Tk 109 during the last two and a half years, due to various issues, including the Russia-Ukraine war. Besides, the price of steels, including scraps, doubled during the period, further contributing to the overall cost escalation.

Ahsan H Mansur, executive director of Policy Research Institute (PRI), told Prothom Alo, “In a supplier credit, the lenders usually promise a higher number of products in the primary phase, but later cut it down at the end of bargaining phase in the pretext of inflated raw material prices. It is an old strategy.”

He also noted that there are allegations of 'satisfying' concerned government officials at different levels of price negotiation. Moreover, it is unnecessary to buy vessels with foreign currency amid the ongoing dollar-crisis.

The economist further suggested that the authorities should annul the agreement if China does not agree to sell six vessels at the price.

The shipping ministry submitted a project proposal to the planning commission on 28 December last year, after the extensive phase of price negotiations. The project, valued at Tk 26.2 billion, secured approval in April, with a substantial amount of Tk 24.86 billion being borrowed from China.

The loan will be disbursed in Chinese currency (RMB 1.6765 million) through the Exim Bank in China. The repayment period will be 15 years, while the grace period is four years. Here, the interest rate is 2.2 per cent.

Ashraful Amin, general manager (admin) of the shipping corporation, said the authorities had a plan to procure six vessels in total, but the manufacturing company agreed to provide four vessels at the given price, due to the high price of raw materials.

He also said it will require fresh negotiations to increase the loan amount. This is why the figure was kept unchanged and the authorities would procure the remaining two vessels under a separate China-funded project.

A thorough analysis of the project documents revealed that the cost of bulk vessels stood at Tk 7.8 billion each, though it was fixed at Tk 5.2 billion during initial negotiation. Similarly, the cost of a crude oil mother tanker has risen from USD 3.08 billion to USD 4.62 billion. Here, the price surged by around 50 per cent.

Unlike standard tender processes, the China-funded project does not allow competitive price bidding. As it is a supplier loan, the vessel construction contract will be directly awarded to China National Machinery Import and Export Corporation, after the commercial loan agreement. The four vessels would be manufactured and handed over to Bangladesh by 2026.

Economist Ahsan H Mansur said it is quite unnecessary to procure new vessels as ship rents dipped to one tenth. Besides, there are 93 ocean-going vessels operating under the private sector and the addition of four ships to the government fleet is unlikely to yield any substantial changes.

Currently, a total of 14 projects, including the elevated expressway, are being implemented with the Chinese loans. The cumulative loan from China will exceed USD 10 billion.

As China is providing the fund as supplier credit, the Chinese authorities retain the authority to select contractors for the project and the contractors fix the cost in the negotiation phase. As there is no scope for competitive bidding through a tender, it often gives rise to questions over the quality and pricing of the project.

However, the Chinese authority agreed to float a tender under the limited tendering method (LTM), with participation of only Chinese contractors.

Besides, the Chinese loans stipulate a shorter time frame for repayment, typically spanning between 10 to 15 years, excluding the grace period. A short time frame pushes up the amount of installments.

On the other hand, a noteworthy advantage of Chinese loans is its fixed interest rates. In the cases of loans from World Bank, Asian Development Bank, and other lenders, the interest rate fluctuates as per the Secured Overnight Financing Rate (SOFR).