PSIREN

"Evaluation Validation Report: Ninth Power Project (Bangladesh)", Independent Evaluation Department, ADB, May 2009 http://www.adb.org/Documents/Reports/Validation/BAN/in160-09.pdf

EXCERPTS:
ADB has been the lead institutional development agency in the power sector in Bangladesh since 1973.
During 1989–1994, ADB did not provide any assistance to the power sector in Bangladesh. In 1992, ADB initiated a coordination meeting which involved the Government of Bangladesh, ADB, and other institutional development agencies, to discuss power sector reform issues. That meeting produced an agreement among the development agencies to extend external assistance only for projects with links to reform. Eventually, there was a change in the Government’s stance on reforms. In September 1994, it adopted a policy paper titled Power Sector Reforms in Bangladesh (policy paper 1994), resulting in the formulation and approval of a comprehensive reform program for the power sector.
 
At the time of appraisal, the power sector in Bangladesh was organized under the Ministry of Energy and
Mineral Resources. Through the Ministry, the Government wholly owned and controlled (a) Bangladesh
Power Development Board (BPDB), (b) Dhaka Electricity Supply Authority (DESA), and (c) Rural
Electrification Board (REB).

•   BPDB was responsible for all generation and transmission in the country, as well as power distribution in district towns, municipalities, and some rural areas.

• DESA was responsible for distribution in Dhaka and surrounding areas.
• REB was responsible for organizing, initially funding, and monitoring the rural electric cooperatives (PBS) responsible for distribution in most of the rural areas of Bangladesh.

Objectives of the 9th Power Project were to (a) enable evacuation of the power generated from the Meghnaghat build-own-operate-transfer Project; (b) improve the utilization of existing system assets through optimized load dispatch; (c) commence the unbundling of BPDB into separate generation,
transmission, and distribution entities; and the corporatization of the transmission segment; (d) create a
corporatized distribution entity for the Dhaka area; and (e) prepare projects for possible financing by
private sector developers and ADB. [Creation of an independent energy regulatory authority was not
specifically identified under objectives in the RRP but was one of the project objectives.]
The power sector reforms were designed to improve the financial and operational performance of the sector through unbundling of BPDB, to change the business culture, create an independent energy regulator, and increase private participation in the sector. The physical investment aimed to improve power supply in and around Dhaka by enhancing transmission and distribution facilities, thereby accelerating development of industrial and commercial sectors of the economy.
 
When Dhaka Electric Supply Company (DESCO) was incorporated in 1996, the objective was for it to take over all DESA’s assets gradually; DESA remained as an operating entity. The Power Grid Company of Bangladesh (PGCB) was also created in 1996.
 
DESCO had a substantial local cost overrun caused by (a) high taxes and duties on
imported goods, (b) importation of additional goods for distribution system improvement,
(c) importation of extra meters for additional new connections and replacement of faulty meters,
and (d) higher cost for interest during construction.
 
Funds were provided for the government-approved severance compensation package for BPDB staff that joined the new institutions.  $8.32 million was provided to compensate BPDB staff joining PGCB.
 
ADB loan was effective on July 1997, with an original closing date of 31 July 2001.  Loan closing was extended three times, with final closing on 12 July 2004. The reasons included: (a) delays in the appointment of PGCB management, (b) delays in handing over of project assets by BPDB to PGCB because of stiff resistance from the BPDB workers’ union, (c) court cases by landowners over a number of tower locations, (d) teething problems in DESCO—the entire management was dismissed in January 2000 for poor performance, and (e) DESA took excessive time for bid evaluation. As a statutory body, DESA had to follow the Government’s contract approval process. In some cases, this required approval by the Cabinet Committee on Government Purchases, which was time-consuming. All of these reasons indicate a lack of governance.
 
Conditions and Covenants - A total of 63 conditions and covenants were associated with the loan and they were mostly complied with. Of the 63 covenants, two were only partially complied with, regarding setting of tariffs and maintaining financial targets; and one covenant on project insurance was not complied with. Key covenants of the Project that were complied with include the following:
 

1. PGCB and DESCO were incorporated in 1996.
2. The boards of directors of PGCB and DESCO were appointed according to the conditions in the loan documents, i.e., at least 25% part-time members must be from the private sector, representing consumer and professional interests.
3. PGCB and DESCO have full operational freedom regarding implementation of projects; operation and maintenance (O&M); and in carrying out their administrative, financial, and commercial responsibilities.
4. DESCO and PGCB introduced market-oriented pay structures and service conditions that are different from the Government’s system.
5. PGCB and DESCO were sufficiently staffed, both technical and nontechnical, for smooth operation of the entities.
6. Ownership, as well as O&M, of all the designated transmission assets was transferred by BPDB and DESA to PGCB, including the load dispatch function.
7. DESA’s boundary was redefined, with assets outside the redefined DESA area handed over to eight PBSs, leaving only the core Dhaka metropolitan area under DESA.
8. A formula for semiannual adjustments to the electricity tariffs, enabling variations in fuel cost and exchange rate fluctuations to be addressed automatically, was adopted and became effective 1 March 1997. However, delays in the establishment of the Bangladesh Energy Regulatory Commission (BERC) have stalled the automatic adjustments since September 2003. BERC was established in April 2004; it became responsible for setting tariffs and is expected to implement the automatic tariff formula.

The Borrower showed commitment to reform the power sector by (i) timely unbundling of BPDB into PGCB and DESCO; (ii) amending the DESA Act in 1998 for rationalization of DESA’s boundary with REB;
(iii) making the boards of directors of PGCB and DESCO fully autonomous in deciding financial and
administrative matters; and (iv) allowing PGCB and DESCO to introduce market-oriented pay structures
and commercially oriented service conditions for operating on a commercial basis. However, the
Government’s efforts toward establishing BERC had stalled tariff adjustment since September 2003 so
that the EAs could not meet some financial performance targets in the loan covenants. Following the
creation of BERC in 2004, it is expected that the regulation of tariffs will be de-linked from political
influences, and the longer-term objectives of creating development opportunities for public and private
sector entities will be pursued. Although PGCB and DESCO were new companies, they were reasonably
well staffed.
 
Power reforms, particularly through the high performance standards set by PGCB and DESCO, have provided proper maintenance of the power system, restructured tariffs, established effective billing and collection, reduced losses, and enhanced financial performance in the sector.
 
Preliminary Assessment of Sustainability - The materials and equipment incorporated in the Project are of high quality, robust, and appropriate for their intended purpose in the power system. The physical components of the Project are sustainable with proper O&M. There is agreement with the Government that the EAs shall perform their obligations and have the autonomy to establish tariffs on a full cost recovery basis. Therefore, the power sector should have the financial means to sustain the project components. PGCB and DESCO, the two new entities in the power sector, have proven their ability to minimize downtime through timely maintenance of assets; and have become profitable organizations, generating sufficient cash flow to maintain the system.
 
Although PGCB and DESCO are new organizations, their employees have acquired sufficient experience
while working for BPDB and REB. PGCB and DESCO are also receiving regular training on corporate
management at home and abroad.
 
The continuing poor performance of DESA at completion of the Project and the earlier less than satisfactory performance of the Government (with respect to establishing BERC and implementation of the tariff adjustment formula), raise some concern regarding the sustainability of the power sector at an acceptable level of performance. DESA has enough experience in O&M. DESA has been corporatized under the new name, Dhaka Power Distribution Company (DPDC). With this corporatization and the model performance of the new companies, it is expected that the performance of DPDC will improve in the near future.
 
The Project Completion Report (PCR) reported that project impacts on the environment have been minimal. There were no serious social issues reported. Appropriate severance packages were provided for staff being transferred from the old to the new companies.
 
Overall Assessment - All of the objectives of the Project have been successfully achieved. Through the policy reforms, a new effective and efficient model has been adopted for the power sector, with corporatized independent operating companies, an independent tariff regulator, and a move toward privatization. The recent sale of about 25% of the shares of DESCO and PGCB in the capital market was a positive step by the Government to attract the private sector to the transmission and distribution segments of the power industry. However, the achievements are mixed considering (i) the performance of DESA (now DPDC) to date, (ii) the need for further progress on system losses, and (iii) achieving financial performance (as embodied in the loan covenants)—although these conditions are expected to improve in the future. The Project is assessed “highly relevant”, “effective”, “efficient”, and “likely” to be sustainable. As a result, the overall performance of the Project is rated “successful”, the same rating as the PCR.
 
A gradual approach to reform is most appropriate for a complex, integrated power sector, such as in Bangladesh. This allows time to change prevailing mindsets; to build consensus, trust, and ownership among stakeholders; and demonstrate the tangible benefits of reform. Linking external assistance to reforms is a strong motivator for reform.
 
Recommendations –

1. Significant improvements in Bangladesh’s power sector have been achieved in recent years, especially after the formation of DESCO and PGCB. Given the significant investments to increase capacity and improve reliability, M&E of the investments should be carried out regularly. This monitoring could take place during the annual country portfolio review, and during further project processing.
2. With the gradual increase of market share by independent power producers, and the need for massive investment to sustain projected demand growth, the Government should respect and support the autonomy of the corporate entities that have been formed, which is the foundation of power sector reform.
3. To facilitate private sector participation in power sector development, similar projects to the model created under this Project, focusing on balanced development of all segments of the sector, should be developed in future.
4. Future ADB assistance for the power sector should accelerate implementation of the Government’s continuing sector reform program.
5. Power tariffs should be reviewed regularly, following the adopted pricing policy, with periodic adjustment for fuel price increases and currency fluctuations, to enable all power sector entities to meet financial requirements.
6. Financial restructuring of BPDB and DESA, as a part of corporatization of these entities, is essential to make these companies sustainable.

 
Lessons from the PCR
1. Overdependence on consultants for project implementation minimizes initiatives of EAs’ staff for implementing projects. On the other hand, technology transfer is an essential part of development. Thus, there is a need, in project formulation, to balance the use of consultants with the capabilities of the EA.
2. Fewer approval steps for procurement helps with timely implementation of projects. The full
financial authority exercised by PGCB and DESCO helped accelerate project implementation.
3. A gradual approach to reform is most appropriate for a complex, integrated power sector, such as in Bangladesh. This allows time to change prevailing mindsets; to build consensus, trust, and
ownership among stakeholders; and demonstrate the tangible benefits of reform.
 
Lessons presented by this Validation
4. Linking external assistance to reforms is a strong motivator for reform.