The 360 megawatt Haripur power station is a, gas fired combined-cycle facility located south of Dhaka. The plant comprises a gas turbine of 230 MW capacity, and a steam turbine of 130 MW. This configuration, combined with a strong track record of performance, makes Haripur Power Limited (HPL), the owner of the power plant, one of the most efficient producers in Bangladesh. Power from HPL was provided to BPDB at a cost of about Tk 1.2/kWh in the contract year ending Nov. 30, 2006, making the plant one of the lowest cost plants in the entire Bangladeshi power sector. HPL is 76% owned by Globeleq, a UK-based independent power producer (IPP); and 24% owned by IDBIF (the Islamic Development Bank Infrastructure Fund). Haripur output is purchased by the Bangladesh Power Development Board and is a critical component of BPDB supply portfolio. The plant has also been operated at a “best practice” level in terms of environmental performance and has been awarded ISO 14001 certification. Haripur came into commercial operation in late 2001 and has proven to be one of the most reliable power stations in Bangladesh, matched only by the 450 MW IPP at Meghnaghat, which is also owned by Globeleq. As part of the financing of the Haripur facility, the Government of Bangladesh provided a repayment guarantee to commercial lenders to the project, covering $61-million of debt. The GOB guarantee protects these lenders by ensuring that they will be paid if, because of Government actions, project cash flows are inadequate to enable HPL to service its debt. The World Bank provided a partial risk guarantee (PRG) to back-stop the GOB obligations to the lenders. The PRG ensures that the lenders will be paid back in the event of default since ultimately they have recourse to the World Bank. The Haripur Power Project is now under severe financial stress due to several factors. Most importantly, BPDB’s costs for acquiring bulk power have been increasing, due to inefficient operations in BPDB’s generation business, and due to price changes in foreign exchange and oil markets that have not been passed through to BPDB customers. The company, operating as a single buyer in the sector, therefore has been purchasing bulk energy at average costs of, as of March 2007, Tk 2.6 per kWh, but selling it at an average cost of only Tk 2.1/kWh (and, before the tariff increase of March 1, 2007, the bulk selling rate was only around Tk 1.9/kWh). This structural reality in BPDB’s bulk power business means that, even if the company otherwise operated with best-practice efficiency, it would lose about Tk 10-billion on an annual basis due to losses in the bulk supply business. BPDB has other operational issues, however, and so is projected to lose over Tk 12-billion on an operating basis this financial year (ending June 30, 2007). Because of these huge operating losses, BPDB has been increasingly short of cash with which to service its contractual obligations; to IPPs alone, as of February 2007, BPDB owed about Tk 5.5-billion; average days late across the portfolio of IPP contracts ran to over 75 days, and some contracts had invoices that were more than 100 days outstanding. This situation affects Globeleq’s other businesses in Bangladesh, the Meghnaghat and NEPC power plants, as well; cumulatively, across these three businesses, BPDB owes Globeleq over 3-billion taka. The financial strain on the project has cascading effects in the sector. Because Globeleq is paid late, it in turn pays Titas Gas late for gas supply; ultimately this constrains Petrobangla’s ability to pay international oil companies in a timely fashion for gas produced under production sharing agreements. Liquidity issues at BPDB also increase the risk that BPDB will default on its contractual obligations to the IPPs. This could lead not only to at least temporary shutdown of one or more IPPs, but would also send an extremely negative message to the global power generation development market at a time when Bangladesh is trying to develop multiple, new IPPs in an effort to close the 2000 MW supply gap that has developed in the past three years. The World Bank has advised Government that the financial stability of BPDB is critical, at this juncture, to the prospects for sector financial and operational recovery. The World Bank recognizes that it would be difficult to increase power prices in the short-term, given that an adjustment has just taken effect as of March 1, 2007. The Bank has therefore recommended that, in addition to steps on the part of Government to better manage demand on the network and to address theft and non-payment, Government should ensure BPDB liquidity through support from the budget. This support should come as an integral part of the overall power sector financial recovery plan, which calls for a phased, multi-year program of performance improvement and commercial discipline, balance sheet re-engineering, and tariff adjustment. Developed with assistance from the World Bank, Government’s comprehensive plan outlines the pathway to a future of good service, at fair prices. Crucially, it also provides the financial integrity and stability that BPDN will require if it is to be able to afford new generation capacity. The World Bank has recommended that tariff adjustments, to be undertaken over time, should be complemented by a targeted social protection scheme to ensure that vulnerable households are not adversely affected. The Bank has noted that current household energy prices are heavily subsidized but that about 80% of the subsidy benefit is captured by better-off Bangladeshi households, mostly in the larger cities. Additionally, 62% of households do not receive grid electricity service at all; these households comprise the vast majority of Bangladesh’s poor. Most of the 38% of the households that are connected are served by rural electric cooperatives – roughly 6-million, out of the 8.5-million total customers in the country, are served by the PBS’s. On average, these rural consumers are poorer than their urban counterparts; receive worse service, in some cases only a few hours of power per day; and yet have a better payment record. These inequities should be addressed going forward. Finally, the Bank has noted that the Bangladesh Energy Regulatory Commission has not been allowed to develop as an institution; the BERC has great potential to be a champion of consumer rights and sustainable electricity service, if it is adequately supported by Government – but without political interference.
ABOUT PARTIAL RISK GUARANTEES
Partial risk guarantees are provided in cases where there is a compelling logic to attract commercial debt to a project undertaking. Power projects have been ideal candidates for private investment and, with guarantees and without, have a proven ability to attract limited recourse debt. Financing some infrastructure deals in the private sector is an excellent strategy for countries such as Bangladesh, since this approach greatly expands the sources of capital available to finance development. But because power and other infrastructure projects are big, lumpy investments, the projects are quite risky, especially during the period when they are paying off the debt incurred to finance the initial capital cost. The World Bank’s partial risk guarantee provides a comfort level to lenders such that lower interest rates and longer tenors (loan repayment periods) may be offered to private sector project sponsors. In many cases, without a support instrument like the PRG, no foreign commercial debt for infrastructure projects would be available at all.
Haripur (and Meghnaghat) stand today as two of the most successful IPP projects, not just in Bangladesh, but in the entire world, in terms of the cost of their power, their reliability, and their environmental performance. The plants are excellent examples of the way in which well-structured public-private partnerships can contribute to development in Bangladesh. March 29, 2007
Contacts:
Rezwan-ul-Alam (8802) 815-9015, Ext 4242, E-mail: salam3@worldbank.org
for more information on the World Bank in Bangladesh, please visit : www.worldbank.org.bd & www.worldbank.org
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