Description

Introduction

This sector assistance program evaluation aims to provide a sector-level independent assessment of ADB's assistance to the energy sector in Bangladesh. The findings are intended to feed into the country assistance program evaluation and to provide inputs to ADB's future operations in the country's energy sector.

As the lead development partner in the energy sector, ADB has adopted a programmatic approach for its assistance, grouping its operations under seven broad thematic areas:

• promoting commercial orientation of power sector entities,
• promoting investments in power generation,
• removing transmission constraints,
• improving access to electricity,
• increasing gas production capacity and mobilizing investments to gas production,
• improving the gas transmission and distribution network, and
• improving the governance and regulatory framework of the energy sector.

During 1993–2008, ADB approved loans totaling $1,755.9 million ($1,211.9 million of ordinary capital resources, $539.0 million from the Asian Development Fund, and $5.0 million in grants) to the energy sector amounting to 29.6% of total ADB lending to Bangladesh. The power subsector had six public sector projects valued at $1,291.3 million, and one nonsovereign loan of $50.0 million. The gas subsector had three projects valued at $414.6 million. ADB also provided 19 advisory technical assistance grants valued at $10.4 million during this period.

Key findings

Overall, the strategic (top-down) assessment of ADB's energy sector assistance to Bangladesh is rated "successful" in terms of

• its high degree of relevance to country priorities and ADB energy sector strategies, selectivity and ownership, sequencing and continuity, and substantial contribution to achieving development outcomes;
• improved sector governance and operational performance of sector entities; and
• the highly commendable performance of ADB in ensuring project quality at entry, effective portfolio management, and its leadership role in coordinating development assistance to the sector.

The bottom-up assessment of ADB's lending and nonlending assistance to the seven thematic areas has been rated as "successful," except the one provided to promote investments in power generation, which is rated as "partially successful." The overall assessment of ADB energy sector assistance to Bangladesh is rated "successful."

The key findings of the evaluation are:

• ADB has played a significant and influential role in promoting the far-reaching power sector reform program implemented by the government.
• ADB's phased and gradualist approach to reform implementation has been successful in most cases.
• Power shortages have persisted throughout the evaluation period due to inadequate investments in base load power generation capacity.
• The corporatization of power generation and remaining distribution operations of state owned power utility has not resulted in the expected outcomes compared to the corporatization of power transmission and power distribution in Dhaka City.
• The policy of expecting the private sector to develop independent power producers (IPPs) for base load capacity has not proved successful due to various reasons ranging from poor investors climate for foreign investments, governance issues associated with solicitation of investments for power generation, uncertainties over gas supply, and lack of domestic private sector investors capable of investing in power generation projects.
• Bangladesh is heavily dependent on natural gas to meet its primary energy demand in power generation in industrial and residential sectors. Overdependency on natural gas is threatening the energy security of the country.
• The present policy of making the country’s gas resources available to users at a minimal price is unsustainable.

Lessons

ADB's extensive involvement in Bangladesh energy sector yields lessons that are useful for other ADB operations, including:

Programmatic lending for investments linked to agreed-upon medium term road map for sector reforms can achieve development impacts even in difficult environments.

Improved corporate governance, managerial autonomy, and performance-based incentives can lead to significant change in institutional performance even without a change in ownership and personnel.

Earlier success in attracting private foreign investments to power generation is not a guarantee for continued private sector investments in a country like Bangladesh with weak investment climate and underdeveloped domestic private sector.

The domestic private sector is capable of making investments in relatively capital-intensive new industries if appropriate incentives and policy regimes are established.

Recommendations

The evaluation recommends the following for ADB's consideration in strategic and institutional areas:

• ADB could proactively encourage the Government to address price subsidies in the energy sector. It could support the Government in undertaking a comprehensive energy pricing study through the newly created energy regulator to understand the linkages between natural gas pricing and electricity pricing, industrial competitiveness, fiscal impacts of price adjustment, impacts on consumer welfare, and energy efficiency improvements.
• Energy efficiency in power plants operated by Bangladesh Power Development Board is low, but there have been no concerted efforts by development partners to engage the development board in this regard. Hence, ADB could also explore opportunities to finance projects to improve end user energy efficiency.
• Development partners, including ADB, need to provide support for public sector power generation capacity additions to compliment the ongoing efforts to attract private investments subject to Government agreeing to commercialize the public sector power generation assets.
• Regional trading in electricity will enable Bangladesh to benefit from the hydropower resources in neighboring countries. ADB is ideally positioned to assume the role of honest broker in facilitating power transmission connectivity in Bangladesh and its neighboring countries.