India agrees to sit over relaxing LoC terms at last

In the face of strong demands from Bangladesh, India has agreed to negotiate and modify the terms of Indian loans for the first time.

One of the proposals was to waive the obligation to purchase 75% of goods from India – an issue of prolonged contention from the Bangladesh side – under the Indian Line of Credit (LoC) scheme.

Officials of the Economic Relations Divisions (ERD) said the decision was taken at a high-level meeting on the Indian LoC project on Tuesday in the presence of ERD Secretary Sharifa Khan, Additional Secretary of the Ministry of External Affairs of India Prabhat Kumar and High Commissioner Pranay Verma led the respective sides.

Currently, joint ventures are only done between Indian contractors.

Besides, the Indian lender has also agreed to discuss project-based grace period facilities instead of LoC-based ones.

The matter will be further deliberated between technical committees of the two countries before it is finalised.

The ERD officials said since the first LoC agreement in 2010, Bangladesh has been asking that the condition of sourcing 75% of all necessary goods and services from India under the loan schemes be changed.

The clause has led Bangladesh to face many complications in implementation work. In the case of many projects, India reduced the amount to 65%. Bangladesh pointed out that such a condition did not exist in other bilateral or multilateral cooperation agency projects.

Due to this, Bangladesh has demanded to remove the obligations in all projects, allowing Bangladesh to procure from where needed.

Meanwhile, Bangladesh also called for a change in the grace period benefits, asking that those be project-based instead of LoC-based.

Grace period for projects

Officials of the ERD said India, for the first time, has assured project-based grace period facility.

The Indian authorities said the final decision would be taken in the LoC technical committee meeting.

As per the terms of the Framework Agreement with India, the calculation of the entire debt period starts immediately after the disbursement of any project in the LoC package. An LoC package can have 15 projects under it.

Once a project has started, the grace period kicks in, even for projects yet to be implemented.

Bangladesh got a grace facility on only 40% of the first LoC loan. The same is the case with the second and third LoC.

Data from the ERD shows that the first LoC loan agreement worth $862 million with India was signed on 7 August 2010. The first LoC was released on 29 March 2012 through a scheme to purchase buses from India.

As a result, the first LoC grace period facility was till 29 March 2017.

At the same time, the implementation of the Kulaura to Shahbazpur railway line rehabilitation project, also under the LoC, could not be started due to delays in preparing the project proposal and approvals. Despite this, the project could not avail of any grace period.

The slow-moving project is still under implementation.

Joint venture for contractors

According to the LoC agreement, only Indian contractors can participate in Indian loan projects, ERD officials said.

Often, the contractors bid much higher than what could have been gotten as they enjoy a virtual monopoly in the tender process.

For example, Indian contractors offered higher bids than seen in an open tender for the “Signaling and Telecommunication Infrastructure” package of the Khulna-Mongla railway construction project.

Later, the government decided not to implement this package on Indian debt.

ERD officials said if there is an opportunity for joint ventures, this complexity, alongside project costs, will be reduced.

Several projects have been excluded from the Indian loan list due to the same complications. Some other projects will also be dropped.

Although in the list earlier, the establishment of Sheikh Hasina Medical College and Hospital and a nursing college in Jamalpur, along with the construction of 500-bed hospitals in Jashore, Cox’s Bazar, Pabna and Noakhali, were also withdrawn from Indian loans by the government.

Besides, the Chattogram Port Authority has said the Bay Terminal construction project would also not be implemented with Indian loans.

18.20% LOC loans disbursed over 13 years

The ERD officials said India has so far disbursed a little over $1.34 billion of the $7.362 billion of LoC loans, 18.2% of the total debt.

However, Indian debt relief has increased recently, reaching $172.86 million in the current fiscal year’s first seven months (July-January).

The maximum loan waiver was $142 million in the 2020-21 financial year.

The first LoC contract for $862 million was signed in August 2010.

The second LoC loan agreement was signed in March 2016 for $2 billion.

The third LoC worth $4.5 billion was signed in March 2017.