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![Mitigating Risks for Matarbari DSP: Drawing Insights from Hambantota Port [Part 2]](https://lightcastlepartners.com/wp-content/uploads/2024/07/IMG_0612-1024x682-1.jpg)
While Matarbari DSP may be the first deep sea port in Bangladesh, it is, however, not the first in the South Asian region. There are other deep sea ports in South Asia across Singapore, Malaysia, and India including one infamous deep sea port in Srilanka’s southern province of Hambantota, serving as a cautionary tale for other nations embarking on a similar path of such scale of development.
Since Matarbari DSP promises outstanding contributions to the country’s economic growth, it is important to analyze lessons learned from the Hambantota port case and carefully consider all feasibility aspects to ensure its smooth development and ultimate success.
After being devastated by a tsunami in 2004, the coastal town of Hambantota needed reconstruction. Following the end of the civil war in 2009, Sri Lanka went through a difficult stage and faced economic isolation brought about by various sanctions. In a bid to accelerate post-conflict development, the Srilankan government undertook a series of ambitious projects including the construction of an international airport, a cricket stadium, and the development of the Hambantota port carried out entirely with Chinese financing.
In 2006, a feasibility study of the port by a Danish consulting firm took quite an optimistic view and showed that by 2040, the port would handle nearly 20 million TEUs, roughly as much as the world’s fifth busiest port in 2015. However, the study failed to consider that Sri Lanka’s main port, the Port of Colombo, could expand to carry 35 million TEU by 2040.
Despite criticisms and warnings over its economic viability, the project was pursued with the first phase of the Hambantota Port being built through a USD 307 million loan from the Exim Bank of China at 6.3% interest [1] – a very high interest rate by all standards. The fact that there were no competing offers for the port, suggests that other potential lenders did not see rewards commensurate with the project’s risks.
After the construction of the Hambantota port, it was expected to absorb a considerable share of the trade within the South Asian region. On the contrary, the port attracted only 34 ships in 2012, and by 2016, the port was operating at a loss, with USD 11.81 million in revenue and incurred expenses of USD 10 million [1]. Myopic strategic planning and the proximity of the more established Port of Colombo diminished Hambantota’s ability to attract substantial maritime traffic, leading to underutilization and financial underperformance.
As debt obligations mounted, Sri Lanka ultimately had to relinquish majority ownership of the port to China in a 99-year lease agreement in December 2017, underscoring the perils of overreliance on singular funding sources and unchecked optimism in development endeavors.
When comparing the Hambantota port with the Matarbari one, it is important to note that, from the very beginning, Hambantota port was at a disadvantage due to its proximity to the Port of Colombo. Undergoing expansion at the time, the Colombo port was not even at full capacity, when Hambantota was planned. Most shipping companies were already using the Colombo route, obviating Hambantota’s construction.
On the other hand, Bangladesh’s major port in Chittagong currently faces capacity constraints despite being expanded six times already. The trade volume through Bangladesh’s ports amounts to approximately USD 60 billion annually with ship arrivals increasing by over 11% each year [2]. However, due to insufficient port dimensions and inadequate depth, larger vessels are unable to berth making trade heavily reliant on transshipment via other deep-sea ports in Asia.
These challenges increasingly highlight the necessity of a deep sea port in Bangladesh. Moreover, export volume from Bangladesh amounted to USD 64.2 billion in 2022, whereas Sri Lanka’s exports totaled only USD 14.8 billion [3]. Sri Lanka’s economy relies heavily on tourism while Bangladesh’s economy is significantly supported by manufacturing industry contributions, with a diverse array of export products fueling demand for port facilities.
| Year 2022 | Bangladesh | Sri Lanka |
| Export Rank | 52 | 89 |
| Total Exports (USD) | 64.2 bn | 14.8 bn |
| Total GDP (USD | 460 bn | 74.4 bn |
| GDP Growth % ( 2012-2022) | 245% | 5.62% |
Source: Observatory of Economic Complexity
In fact, not only to handle the current trade volume, the construction of the port is expected to further attract additional international trade, necessitating other infrastructural development to manage this surplus pressure. According to the World Bank, upgrading land ports has also become essential to support the projected quadrupling of trade following the completion of the Matarbari Deep Sea Port and other mega projects like the Bay Terminal and Patenga Container Terminal. [5]
Furthermore, unlike Hambantota, which lacked competing offers, Bangladesh has attracted interest from a number of economic powerhouses such as China, Japan, and India from the project’s early stages. Initially, India, China, and the Netherlands were involved in the competition, but after extensive negotiations, Japan took on responsibility for the mega project considering the opportunity as a strategic location comparing its future potential to the Port of Colombo and the Port of Singapore in terms of water depths.
Japan, Bangladesh’s largest development partner, has significantly contributed over four decades to the country’s development. The loan terms for Matarbari DSP include a 1.6% interest rate for construction over a 30-year repayment period and a 10-year grace period [4]. This appears to be more favorable than the staggering 6.3% interest rate with a repayment period of 15-20 years agreed upon in the case of the Hambantota port.
Cases like that of Hambantota port demonstrate one crucial message: large-scale development projects backed by foreign financing may appear attractive, however, diversifying funding sources and evaluating loan terms impartially is non-negotiable.
Although the Government of Bangladesh and Chittagong Port Authority are contributing to the investment in Matarbari, the lion’s share is still being shouldered by JICA. Bangladesh, like any other nation, must prioritize strategic planning and vigilance to avoid the pitfalls of over-reliance on a single source of financing to safeguard its diplomatic standing.
Furthermore, to ensure that the deep sea port’s benefits truly reach its optimum potential, some critical operational bottlenecks must be addressed. Despite digitization efforts by incorporating the ASYCUDA system developed by UNCTAD, import clearance at Chittagong port takes about 11.5 days and export clearance takes 5 days.
Simplifying customs processes is essential to improve Bangladesh’s logistics sector, which suffers from congestion, unreliable operations, governance issues, and limited digitalization. According to the World Bank, Bangladesh’s Business Climate Index indicates that cross-border trade facilitation is the poorest performer, scoring 49.43 out of 100 [5]. Additional trade barriers include complex regulations and poor road connectivity, driving up costs. South Asia, including Bangladesh, entails high protective tariffs and nontariff barriers, due to which the Trade Restrictiveness Index characterizes the region as the most protectionist globally.
To address all these issues, firstly digitization of customs processes remains crucial. For example, if implemented, interoperable interface links between port and customs IT systems need to be established. This will ensure seamless coordination and data exchange among stakeholders bringing greater efficiency to the entire system. Bangladesh needs to shift to paperless trading like that of Singapore and Colombo to elevate itself to global standards.
Moreover, it is important to upgrade the tariff structure to align with international standards and identify where current duties exceed the bound rates set by WTO agreements to encourage greater cross-border trade.
Improving access to trade information and promoting transparency by publishing customs procedures, tariff schedules, and trade-related regulations should be another area of focus. This will ensure predictability and compliance with customs requirements.
In other words, to complement large infrastructural projects like the Matarbari DSP, improving overall trade facilitation measures is imperative. It includes streamlining customs processes, reducing trade barriers, and enhancing cross-border trade efficiency. Only then mega investments like these will be viable and prove to be a true game-changer for the economy.
This article is orginally published on Invest Bangladesh’s website
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