Bangladesh has to pay millions of dollars in commitment fees due to long delays in implementing foreign-funded development projects. This fee is payable on undiscounted amounts from lenders.

A commitment fee is a charge from a lender to a borrower to open a line of credit or secure a future loan.

For example, the Asian Development Bank (ADB) approved $300 million in 2011 for the Power System Efficiency Improvement Project, which was scheduled to end in 2017. But the project has been extended four times till December this year. The six-year project has now been running for 13 years.

As a result, Bangladesh will have to pay a commitment fee of 0.94 percent of the loan size or $2.73 million, ADB said in a recent evaluation report.

Besides, the cost of borrowing has increased by 3 percent due to factors such as inflation and exchange rate fluctuations resulting in project delays. As a result, the amount of actual loans decreased to 291.87 million dollars, ADB said.

How project delays increase costs
ADB’s report cited a number of projects where costs increased due to longer project implementation. For example, in 2012, ADB approved $160 million for the Greater Dhaka Sustainable Urban Transport project. The project was supposed to be completed in 2017.

However, the project was extended by five years till 2022. Total spending increased by 94 percent to $494 million. As a result, ADB had to increase the loan to 260 million dollars to meet the additional costs.

The ADB report cites underestimation of construction costs, changes in project structure and design mid-way through implementation, delays in land acquisition and relocation of utilities, slowness of contractors and the impact of Covid-19 among the reasons for the delay and cost overruns.

Another project called Dhaka Environmentally Sustainable Water Supply was approved in 2013 for $250 million. That too is late.

The project completion date has been extended from June 2020 to June 2023. As a result, the contract cost of Package 1, scheduled for completion in May 2022, increased by 24 percent.

Now the project is expected to be completed by August 2025. This would cost an additional $39.7 million, and increase the cost of the original contract by 36.7 percent.

11.56 million to AIIB and 5.76 million to World Bank
The Asian Infrastructure Investment Bank (AIIB) started investing in Bangladesh’s power sector in 2016 with a 165 million project. AIIB’s total funding for four projects in the first three years was $445 million. So far the bank has financed 3.85 billion dollars in 23 projects.

Of this, 11 projects worth $2.05 billion have been completed. 1.76 billion dollars have been allocated for 11 ongoing projects.

AIIB charges a commitment fee ranging from 0.25 percent to 0.50 percent. Bangladesh has so far paid $11.56 million in fees to the bank.

Bangladesh also typically has to pay a 0.5 percent commitment fee for World Bank Scale-Up Facility (SUF) loans. This market-based loan was taken for the first time in the financial year 2017-18.

So far, Bangladesh has signed an agreement with the World Bank for a total of 9 SUF loans worth $2.39 billion. So far Bangladesh has paid commitment fee of 5.76 million dollars.

Source: TBS