Bangladesh: Meghnaghat Power Project [Loan 1793]

Background

The project aimed to help address Bangladesh's power shortages, and improve the country's extremely low rate of access to electricity. Prior to the project, the country's annual per capita electricity consumption of 70 kilowatt-hours was one of the lowest in the world. Further, while the demand for electricity had been growing at 8% annually, the low plant utilization, inadequate investment, and high distribution losses were causing significant load shedding.

In December 2000, ADB approved a direct loan of $50 million and a complementary financing scheme loan of $20 million for the project under a nonsovereign operation. ADB also approved a political risk guarantee of $70 million for the project. Several financial institutions and commercial banks cofinanced the project with senior loans of $20 million and subordinated loans of $60 million.

The project was developed under a build-own-operate (BOO) arrangement with the government. Meghnaghat Power Limited was an independent power producer that developed and operates the 450 megawatt combined-cycle gas-fired power plant. It stands on a 25.09-hectare site, 22 kilometers south of Dhaka on the northern bank of the Meghna River that supplies cooling water to the plant. The BOO concession was awarded to the AES Corporation of the United States. The project company signed an implementation agreement with the government for the BOO arrangement, and a power purchase agreement and a land lease agreement with the Bangladesh Power Development Board. The project was completed ahead of schedule in November 2002 at a cost of $289.6 million. The project financing scheme included $220 million debt finance and $75 million equity.

Key Findings

The project has demonstrated how to plan, prepare, and implement a successful power plant privately owned and operated by an independent power producer in Bangladesh.

The project is rated successful - commercially viable, financially profitable, environmentally sound, and well-managed. It has provided a significant and much-needed addition to the country's generation capacity that has helped serve the growing demand of existing and new subscribers. ADB's participation and support were extensive, well-formulated, and critical to this success. Arguably, the major disappointment has been the authorities' inability to build on the project example by implementing subsequent projects using a similar approach. Because of this inability, the load shedding and supply problems that were a major reason for undertaking the project in the first place have reemerged and are now hindering Bangladesh's economic performance.

Lessons

ADB's approach in promoting energy sector master plans and assistance to project design has underpinned the success of the project. To get the trust of international investors, the project should be designed and implemented in a transparent and foreseeable way. The experience of the project shows that there are opportunities for scaling up the level of ADB's advisory capacity to improve the quality of public-private partnership (PPP) designs prior to committing ADB funding. In addition, institutionalizing the experience of PPP implementation through the support of capacity development is important to maintain the PPP as a viable procurement option to the government.

ADB may consider undertaking a value-for-money assessment as a PPP operation procedure that forms part of project appraisals. The justification of PPP projects should be reviewed from a perspective of enhanced efficiency of infrastructure procurement as well as of improved access to private finance. As PPP takes on a larger share in infrastructure development, the greater the impacts of PPP projects are on the government fiscal management. One of the features of PPP procurement is its long-term contract and hence the impact of the procurement decision lasts for a long period of time. Value-for-money assessment is a device to assess if PPP is a better option than traditional procurement from a taxpayer's perspective in terms of a whole-of-life cost of a project.

Development impacts as well as risk mitigation should be regarded as an equally important factor in private sector operations as in sovereign operations. Under Strategy 2020, ADB will promote a larger role for the private sector in financing infrastructure. With the emphasis on PPP and private sector engagement, the development impacts of ADB operations should be strengthened. During the screening process for nonsovereign operations, the development impacts should be considered as important as risk mitigation or profitability of the project. In doing so, the economic appraisal of a project should take the full economic costs of the project in the analysis.

Recommendations

Bangladesh Power Development Board's capacity to pay Meghnaghat Power Limited and other power companies for the power supplied based on consumer tariff adjustments and collection rates among the distribution companies need to be monitored closely.

In instances where the implementation of independent power producer projects is delayed or cancelled repeatedly, it is recommended that the government exert efforts to implement comprehensive reform in the legal and institutional frameworks to promote PPP, including legislating a PPP law. In addition, the government needs to ensure transparency in the bidding process, making it free from political influence so as to regain the confidence of developers after repeated failure of tenders. The successful bidding of the project shows that collaboration with multilaterals is an effective approach.