Risks involved in suppliers' credit
Sunday, 5 December 2010
The finance ministry, according to a report published in this paper a couple of days back, is considering a proposal for implementation of a good number of large development projects with suppliers' credit which is almost equivalent to the current foreign exchange reserve of the country. The projects selected for the purpose include both important and unimportant ones and a few that were earlier slated for implementation under the much-touted public-private partnership initiative. The finance ministry did reportedly write early last month to the planning ministry explaining the need for taking suppliers' credit to meet the resource mismatch in relation to the implementation of 'priority and important' projects in next three years. The planning minister, along with the members of the planning commission, reviewed last Thursday a 'position paper' on projects. But no decision was taken. Instead, the planning ministry has decided to seek suggestions from ministries concerned about projects to be placed under the suppliers' credit.
Hard loans are generally taken for projects against which the government fails to line up soft loans from either multilateral or bilateral donors since the former involve relatively high interest rates and shorter repayment periods. In addition to interest rate and repayment issues, there are also a few downsides of the suppliers' credit. In most cases, the countries offering such credits make the procurement under the same tied, meaning that the recipient countries have to procure goods and services from the sources of funding. Such conditions do tend to create the scope for dumping of low quality good and services by the lenders. Such issues involving a good number of projects implemented with the help of suppliers' credit did surface in the country. This led earlier to the formulation of a guideline on suppliers' credit. The guideline allows a government agency to opt for this kind of credit only if the government does not have enough money or fails to mobilize soft loans for priority development projects.
Besides, another important element of the suppliers' credit -- the scope for financial irregularities -- is otherwise strong. Men in authority, at times, suggest taking of this type of credit being assured of handsome pay-offs by unscrupulous lenders whose main purpose is to earn higher profit with minimum risks and dump low-quality goods and services. The government, as was reported in a section of the media, is in a hurry to start implementation of large and medium projects, mainly in the power and communications sectors. Along with efforts for mobilizing funds from domestic investors and soft loans from bilateral and multilateral lenders for the same, it is getting prepared for the hard-term suppliers' credit.
There is no denying that the country does need early implementation of some of the projects placed on the list sent by the ministry of finance to the planning commission for review. But the government should first make serious efforts to line up funds from traditional sources, both domestic and external. Moreover, the government's enthusiasm about PPP initiative, is, apparently, not as strong at the moment as it was a few months back. It could be because of lack of adequate response from the private sector. But the fact remains that the government cannot wait indefinitely for soft loans or domestic funds and it would have to show some results against scores of promises it has made to the people. But while doing so, it must not create the scope for entry of inferior quality goods and services. If the circumstances compel the authorities to go for suppliers' credit, they must try to get the best deals, in terms of rate of interest and quality of goods and services.
Hard loans are generally taken for projects against which the government fails to line up soft loans from either multilateral or bilateral donors since the former involve relatively high interest rates and shorter repayment periods. In addition to interest rate and repayment issues, there are also a few downsides of the suppliers' credit. In most cases, the countries offering such credits make the procurement under the same tied, meaning that the recipient countries have to procure goods and services from the sources of funding. Such conditions do tend to create the scope for dumping of low quality good and services by the lenders. Such issues involving a good number of projects implemented with the help of suppliers' credit did surface in the country. This led earlier to the formulation of a guideline on suppliers' credit. The guideline allows a government agency to opt for this kind of credit only if the government does not have enough money or fails to mobilize soft loans for priority development projects.
Besides, another important element of the suppliers' credit -- the scope for financial irregularities -- is otherwise strong. Men in authority, at times, suggest taking of this type of credit being assured of handsome pay-offs by unscrupulous lenders whose main purpose is to earn higher profit with minimum risks and dump low-quality goods and services. The government, as was reported in a section of the media, is in a hurry to start implementation of large and medium projects, mainly in the power and communications sectors. Along with efforts for mobilizing funds from domestic investors and soft loans from bilateral and multilateral lenders for the same, it is getting prepared for the hard-term suppliers' credit.
There is no denying that the country does need early implementation of some of the projects placed on the list sent by the ministry of finance to the planning commission for review. But the government should first make serious efforts to line up funds from traditional sources, both domestic and external. Moreover, the government's enthusiasm about PPP initiative, is, apparently, not as strong at the moment as it was a few months back. It could be because of lack of adequate response from the private sector. But the fact remains that the government cannot wait indefinitely for soft loans or domestic funds and it would have to show some results against scores of promises it has made to the people. But while doing so, it must not create the scope for entry of inferior quality goods and services. If the circumstances compel the authorities to go for suppliers' credit, they must try to get the best deals, in terms of rate of interest and quality of goods and services.