ICC Conference on Energy for Growth

Speech by Paul J. Heytens, Country Director of ADB's Bangladesh Resident Mission, at the ICC Conference on Energy for Growth, Dhaka, Bangladesh

Honorable State Minister Brig. General (Retd) Enamul Haque, Dr. Victor Fung, Chairman of the ICC, distinguished experts, business leaders, development partner representatives, Ladies and Gentlemen.

I am very pleased to participate in this Plenary Session of the ICC Conference on Energy for Growth, which is extremely timely and relevant in the present context of Bangladesh. The lack of adequate, reliable power supply and requisite energy security is rapidly becoming a major impediment to Bangladesh's economic and social development, and without concerted and immediate action, the growing energy demand-supply gap will become an increasingly binding constraint on the country's growth prospects that will not only make it impossible to reach the 8-9% annual growth needed for Bangladesh to become a middle income country by 2021, but could even make it difficult to maintain the current 6% annual growth rate.

Historically Bangladesh's power sector has not performed well. Common problems have included electricity pilferage with collusion from utility employees, failure to collect electricity bills, low staff morale, lack of staff incentives for better performance, chronic power shortages due to delays in making urgent investments in power generation plants, and frequent power outages due to lack of maintenance. Poor cost recovery has also discouraged urgently needed investments. The gas sector has done better, due to the commercial orientation of the public sector entities responsible for production and distribution. But those entities have often lacked the financial and technical capabilities to expand production to meet the rising demand.

Steady reforms have partly overcome this historical legacy. In particular, reforms have improved the commercial performance of the power sector, by cutting power distribution losses, improving bill collection, attracting private investments in a significant way to the power generation sector during the 1998-2002 period, and stabilizing the transmission system. The electrification rate has also increased from about 20% a few decades ago to over 40% presently. However, power shortages have risen due to lack of adequate investment in power generation since 2001. The gas sector has attracted private sector investment for upstream gas production and doubled capacity since 1999, but the country is again facing gas shortages due to the rapidly rising demand for gas and in the absence of adequate exploration and gas field development over the years.

Bangladesh is now faced with a daily power shortage of about 1,500 MW, which on many days is even higher, and a daily gas shortage of about 250 million cubic feet per day. The current situation calls for measures in the short-term to rapidly close the gas supply and power generation gaps that also lay the foundation for the long-term development of the sector, through better integration of power and gas policy, planning, and investment. In the ADB's dialogue we have highlighted the critical challenges in (i) determining the policy choices to meeting the growing energy demand, (ii) enhancing operational and financial efficiency in the sector, and (iii) strengthening government and regulatory capacity in the sector.

While enhanced generation from rental power plants is urgently needed in the near term, and entirely appropriate in the current circumstances, a concerted program to build new base load power plants and reinvigorate implementation of sector reforms must also begin immediately. In order to reduce the shortage in base load generation, adequate numbers of new power plants need to be commissioned very urgently. But for this to be a reality, the procurement process for constructing new power plants will have to become more efficient, and sector reforms will have to be accelerated. Power generation could be made more reliable and efficient by implementing the pipeline of public sector projects, of which there is a considerable backlog, including a number of projects supported by DPs.

The program for large Independent Power Producers (IPP) must also be reinvigorated and the successful experience of Meghnaghat I nearly a decade ago, which is still looked upon around the region as an example of best practice, must be replicated many times over in the coming years. For this to happen, more focused, efficient, transparent and competitive efforts are necessary to draw international investors back to Bangladesh to build and operate base load power generation plants. Investor feedback from the road shows could be a useful input for the market assessment as well as the lessons learned from the unsuccessful IPP bidding experience in recent years. Detailed PPP guidelines and operating mechanisms, including establishment of PPP cells in relevant line agencies, need to be approved and requisite capacity built in both the public and private sectors on PPP implementation.

The historic opportunity of developing cross-border trading of power also needs to be fully exploited. The recent initiative to establish power grid connectivity between western Bangladesh and eastern India that could initially result in the transfer to Bangladesh of 500 MW of power from India is very encouraging. We hope that this is just the beginning and dialogue and technical work needs to continue toward the development of additional power exchange infrastructure in the years ahead, including further exchanges with India as well as tapping into the vast power generation potential in Bhutan and Nepal.

On gas, supply bottlenecks could be eased by prioritizing supply to power plants with high efficiency. Because of the current gas crisis, selective existing gas-based power plants may be considered for conversion to dual fuel, including the recently commissioned Siddirganj peaking power plant. Exploration and production drilling could be accelerated by reforming the commercial basis of the industry to attract more private capital. For this to materialize, the terms governing international oil companies' participation will need to be reviewed in all areas, including onshore areas reserved for SOEs, to accelerate exploration and development.

Gas imports (by pipeline and through an LNG terminal) also need to be explored to diversify energy sources and secure longer-term supplies for power generation. Utilization of the country's large coal resources could also reduce the burden on natural gas as the primary input for power generation. This would best be pursued following a robust coal policy with comprehensive social and environmental safeguards, and clear incentives for private participation.

In addition, renewable energy development could be accelerated in both grid and off-grid areas, building on the success of the solar energy program, which has been particularly effective in providing off-grid areas with power for household use. Renewable energy has tremendous prospects for providing energy services to the more than half of the population who are still off the grid, while supplementing power resources in grid areas. Making the Sustainable Energy Development Agency fully functional would also facilitate investment in renewable energy.

On reform, although substantial reforms have been undertaken over the past 10 years, there is still a very long unfulfilled agenda. For example, further corporate and financial restructuring, reducing outstanding dues from the Government to the sector entities, progressive power tariff adjustments, and ensuring efficient management of corporatized power entities are critical to face the imminent challenges.

In addition, the Bangladesh Energy Regulatory Commission must be empowered to take the lead in making timely adjustments in gas and power prices and the financial restructuring plans of government agencies should be advanced. Price reform and financial restructuring needs to go beyond meeting only the operating cash needs of entities to also encompass infrastructure investment requirements. Institutional development is essential for urban distributors and rural electric cooperatives. Further restructuring of key sector entities such as the Bangladesh Power Development Board, Rural Electrification Board and Petrobangla is also required. More competitive compensation packages may also be needed to recruit and retain qualified professionals in key sector entities.

As the largest development partner in the energy sector, ADB has long been supporting the Government in its efforts to provide reliable electricity to the country, focusing on transmission, distribution, and construction of peaking power plants and helping the Government to carry out specific reforms, and is keen to assist Bangladesh in setting up more new plants and expanding transmission and distribution networks. ADB has also helped to develop major gas fields (Titas, Habiganj, and Bakhrabad), gas transmission systems, and most of the gas distribution networks across the eastern part of the country, among other activities, and just approved a new $300 million project last month aimed at gas production augmentation and further expansion of the transmission system (through compressor stations and loop lines) as well as expanding the gas network in the southwestern part of the country.

Over the next three years, ADB plans to provide another $900 million in financial support through its public sector window for the power and energy sectors. This is on top of the roughly $1 billion in support we are currently providing to help the Government through ongoing projects to develop 150 MW power plants in Khulna and Sirajganj, construct the National Load Despatch Center, establish the country's first high capacity 400 KV transmission line from Meghnaghat to Aminbazar, improve distribution systems in DPDC and DESCO, and expand the gas transmission network to Khulna, among other areas of support. ADB also stands ready to expand its assistance through its nonsovereign operations financing window and loan guarantee program, as well as through active engagement of our Private Sector Operations Department.

In closing, I sincerely hope that today's Conference will help to catalyze concerted action to address and resolve the current shortages and set Bangladesh firmly on a path of energy security and higher sustained growth.

Thank you.