Taka devaluation puts strain on projects; govt in talks with Japan to adjust terms to keep them affordable

The cost of two metro rail projects -- Mass Rapid Transit (MRT)-1 and MRT-5 -- is projected to rise sharply, mainly due to the taka's devaluation against the dollar. This has raised doubts about their financial viability under Bangladesh's current financial arrangement with Japan.

When the two projects, funded by the Japan International Cooperation Agency (JICA), were approved in 2019, their costs were estimated at Tk 95,000 crore. Since then, the taka has lost over 40 percent of its value against the dollar, meaning the costs will be revised up significantly.

Japan's consultant has given a revised cost, which has jumped significantly from the original. We are now trying to reduce this revised cost.

— Salehuddin Ahmed Finance Adviser

According to an estimate by a consultant appointed by Japan, the total cost is now expected to double.

"Japan's consultant has given a revised cost, which has jumped significantly from the original. We are now trying to reduce this revised cost," Finance Adviser Salehuddin Ahmed told The Daily Star last week following his recent visit to Japan.

The ballooning costs highlight the strain Bangladesh's weakening currency is placing on large infrastructure schemes, particularly those reliant on foreign loans. While Japan remains Dhaka's largest development partner, officials say the government may have to explore alternative financiers if Tokyo is unwilling to adjust terms to keep the metro projects affordable.

"If the cost is too high, we will have second thoughts. Then, we will think about alternatives," Salehuddin said.

JICA is also financing MRT Line-6, which has yet to be completed, though its major portion from Uttara to Motijheel is already in operation.

An indication of the possible rise in costs came from bidders' proposals for implementing one of the 12 packages under the 31.24 km MRT-1 line, which will connect Dhaka airport with Kamalapur.

An official associated with MRT-1 recently informed Dhaka Mass Transit Company Limited (DMTCL) -- the implementing authority for metro rail projects -- that the cost of Japan's funding package would rise to Tk 75,649 crore from Tk 39,450 crore, while the entire project was initially estimated at Tk 53,977 crore.

The official noted that it is not possible to calculate the costs of all packages at this moment, as the tender process has yet to be completed.

Referring to the reasons behind the cost hike, the project director said that at the time of the initial estimate, the exchange rate was Tk 84.5 per dollar, which now stands at about Tk 120. An escalation in land acquisition costs was cited as another reason.

Besides, rising inflation has driven up construction material costs and local and international labour wages, transport and logistics expenses have also increased.

The cost increase will be similar for the 20km MRT-5 line that will link Hemayetpur with Bhatara via Gabtoli, Mirpur, and Gulshan.

The project, divided into 10 packages, was initially approved at Tk 41,261 crore. However, the latest estimate shows it will require Tk 15,527 crore to implement just one package, which was originally calculated at Tk 3,968 crore.

Officials at the planning ministry and DMTCL said the costs of all the packages would see similar hikes, making the projects too costly for Bangladesh to afford.

They added that the costs of the two projects, approved during the tenure of the previous government, were much higher than those of similar projects in many other countries. Negotiations are underway with the Japanese authorities to rein in costs.

During his visit to Japan from August 23 to September 5, the finance adviser held talks with Japan's finance and trade ministers and also with JICA officials. They told him that the costs of Japan-funded projects are higher than those financed by other countries due to their high quality of work.

"It is true that their quality of work is high… But we must ensure that the projects don't become a burden for us," Salehuddin told this newspaper.

 "We told them that we will review the costs with the help of our experts. JICA may also do the same," he added.

Seeking anonymity, a ministry official told The Daily Star that a team of experts and high officials, led by the Chief Adviser's Special Assistant Sheikh Moinuddin, has been tasked with reviewing the costs of the projects.

The team is expected to submit its report soon, the official added.