China trade talks run into supplier's credit glitch

Two major Chinese projects on supplier's credit have apparently fallen by the wayside as the Dhaka-Beijing trade talks during Prime Minister Khaleda Zia's recent visit to China came to an anti-climactic end.

The projects - 210MW Khulna thermal power plant and development of North Dhaka (East) Sewerage Treatment Plant - were expected to be finalised and three others revised or scrapped at the talks, sources on the Bangladesh delegation said.

Both the projects made their ways to the top under the "Supplier's Credit Processing Policy and Procedure" of the government.

When Khaleda left for China, the projects, already approved by the planning ministry and the Economic Relations Division (ERD), were awaiting the finance ministry clearance.

Among the three others, the Dhaka-Beijing talks were supposed to give a fresh direction to an over-inflated Pagla Water Treatment Project.

The Karnaphuli Paper Mills rehabilitation project was to be scrapped, with the government decided on the sell-out of the mills to private buyers.

The government has also decided to scrap the di-ammonium phosphate (DAP) fertiliser factory project although it signed an agreement with a Chinese company to set it up. The talks were to decide on a Dhaka request to divert the DAP fund for a different project.

These projects were incorporated into the agenda as a follow-up on several memoranda of understanding (MOUs) signed during Chinese Prime Minister Zhu Rongji's visit early last year.

At the economic and technical cooperation meeting in Beijing, Finance and Planning Minister M Saifur Rahman argued that all these projects should be renegotiated, as some of them were not favourable to Bangladesh. Saifur, who headed the Bangladesh delegation, was also extremely critical of supplier's credit.

The Chinese delegation, said the sources, was taken aback by Dhaka's position and wondered, if renegotiations were the solution, what the two countries had done in 11 months since Zhu's visit.

The meeting eventually ended inconclusively. According to sources, China has decided not to show interest in these projects.

The government's policy on supplier's credit discourages any project under such a financial arrangement. The World Bank and other donors have criticised supplier's credit of having scopes for wide range of corruption.

The policy only allows supplier's credit when the government has no alternative source of funding for a project that must be pursued.

However, the project ought to fulfil certain obligations - including clearance by the Planning Commission, the ERD and the finance ministry.

The sewerage treatment plant at Pagla and the power plant in Khulna were processed along these guidelines.

The Water and Sewerage Authority (WASA) has marked out the Pagla project as a priority scheme. A tender has been floated and three Chinese companies participated in it. The lowest bid was 10 per cent lower than the estimated project cost of around $108 million.

As the government did not find any alternative source of fund, the Planning Commission and the ERD cleared it several months ago.

The power plant at Khulna, cleared by the Executive Committee of the National Economic Council (ECNEC) in 2000, went through a more rigorous process.

Only one Chinese company, CMEC, submitted a turnkey proposal although 19 companies had participated in the international tender.

The CMEC proposal was negotiated and the project cost set at $129 million. The government had raised objections about the machinery of a standard Chinese plant and the Chinese company given Bangladesh the option to select machinery from any Chinese company.

The Planning Commission cleared the project in July but the finance division took some time as it weighed other options.

The government negotiated with the Chinese government for a switch from supplier's credit to soft loan. However, China declined.

At this point, the government started the process to clear the project. Accordingly, the ERD cleared the project on November 25 and it went to the finance division for final clearance prior to the PM's China visit.