Report No. PID7295 Project Name Bangladesh-Haripur 360 MW Combined Cycle(@) Power Plant Region South Asia Sector Energy-Electric Power Project ID BDGU65131 Proposed IDA Support Partial Risk Guarantee (PRG) Project Sponsor Haripur Private Limited Contact person: Mr. H. Jaisinghani, Country Director IDB Bhaban, 5hFI., E/8-A Begum Rokeya Sharani Sher-e-Bangla Nagar Dhaka-1207 Tel: 880-2-913-2361 Fax: 880-2-913-2359 Government Implementing Agencies Bangladesh Power Development Board WAPDA Building Motijheel C/A Dhaka-1000 Fax: 880-2-9564765 Titas Gas Transmission & Distribution Co. Ltd. 105, Kazi Nazrul Islam Avenue Kawran Bazar C/A Dhaka-1215 Fax: 880-2-813-031 Government contact Point Mr. C. M. Mohsin Additional Secretary Economic Relations Division Ministry of Finance Ministry of Finance Sher-e-Bangla Nagar Dhaka Tel: 880-2-811-971 Fax: 880-2-811-660 Environment Category A Date this PID Revised March 20, 2000 Appraisal Date March, 1999 Projected Board Date May, 2000 Country and Sector Background: 1. The Bank/IDA has been providing assistance to the Government of Bangladesh over the past few years to expand private participation in the energy sector. In the power sub-sector, Bank/IDA has provided significant support in establishing new institutional arrangements within the Ministry of Energy and Mineral Resources, such as the Power Cell (1995), with the objective of preparing and implementing sector reforms, formulating a Private Power Policy (1996), and managing the process of establishing Independent Power Producers (IPPs). 2. Bangladesh's electricity generation system comprises an aggregate nominal capacity of 3,100 MW, with an available capacity of 2,400 MW (1998). Eighty five percent of the power generation in Bangladesh is based on indigenous natural gas, whilst imported liquid fuels are used for 9 percent and hydro-generation for 6 percent. The electricity demand has been growing at 7-10 percent per annum over the last few years and the inability of generation plants to meet system demand has been a persistent feature over the last decade. The result has been a rising capacity shortfall, from about 150 MW in 1992 to a maximum unserved demand of 600-700 MW in the last two years. Annual unserved energy for these two years is estimated at about 500 GWh. The proposed Haripur Project would help Bangladesh to overcome the power shortages and realize significant savings by displacing more costly generation plants. 3. There is a significant potential for demand growth in the electricity sector of Bangladesh, as only 15 percent of the population has access to electricity. However, financial and institutional weaknesses have constrained growth and prevented adequate investments. The poor financial condition of the sector is attributable to a combination of low tariffs, high losses and low level of bills recovery. The sector is dominated by the state-owned Bangladesh Power Development Board (BPDB), a generation, transmission and distribution utility that is gradually being reformed through unbundling and private sector participation. IDA, in collaboration with other donors, is actively seeking to promote power sector reforms and is considering an Adaptable Program Loan for this purpose. 4. The proposed IDA operation would be set against the context of a relatively stable macroeconomic framework in recent years, and a favorable external debt situation. During the last three years, Bangladesh has enjoyed high economic growth (around 5.5 percent), inflation has been limited to around 5 percent; the external current account deficit and the fiscal deficit have been contained at about 2 percent and 3.5 percent of GDP respectively. Bangladesh's outstanding external long-term debt at the end of 1997 corresponded to 3 8.6 percent the country's FY98 GDP, putting Bangladesh in the category of a moderately indebted country. Annual foreign debt service in FY98 was limited to 9.5 percent of total exports of goods and services. Project Description 5. The proposed Haripur Power Project is a 360 MW gas turbine plant to be built, owned and operated (BOO) by the private sector as an IPP. The Project has been identified as part of the least-cost expansion plan for the power sector and is deemed to be critical in meeting Bangladesh's power demand in the period immediately following year 2000. Following a competitive bidding process, AES was selected as project sponsor on the basis of a bid price of US02.73/ kWh (on a levelized tariff basis). 6. Haripur is intended to deliver base load power to the national grid, with BPDB as the purchaser of power under a long term contract. The plant will operate on domestic natural gas, utilizing a single gas turbine generator unit, coupled to a single heat recovery boiler. Steam from the -2 - recovery boiler will be used to power a condensing steam turbine. The gas and steam turbines will run in combined cycle mode with a high degree of efficiency. 7. The project site is located along the river Sita Lakhya near the villages of Haripur and Kuripara in the Narayangonj district, approximately 11 km south-east of Dhaka. The power plant will occupy approximately 9 acres of government land at this site, which is currently being used for local agricultural purposes. There are no residences located on the site. The off-site structures comprise a short access road, a 230 kV transmission line from the existing substation at Haripur village to the outgoing terminal at the power plant (a distance of approximately 1 km) and a 20" steel pipeline from the existing natural gas grid to the power plant (a distance of approximately 1.5km), and also a gas flow regulating and metering station adjacent to the gas pipeline. 8 The Sponsor of the Project is AES Corporation of Arlington, Virginia. AES is the world's largest independent power developer/producer, and owns and operates a large number of power plants worldwide. A special purpose company, AF-S Haripur Private Limited (the Project Company), has been established by the Sponsor under the laws of Bangladesh. AES was selected through a competitive bidding process managed by the Power Cell within the Ministry of Energy and Mineral Resources. Project Implementation 9. Under the terms of the agreements negotiated between the Government and the Project Company, the plant should commence commercial operations by March 2001. There are also contractual provisions for reaching financial closure by April 1999. The construction period would thus be approximately two years. The Project Company is currently in the process of retaining an engineering, procurement & construction contractor. Project Objectives and Benefits 10. The Project will lead to substantial economic benefits to Bangladesh by: (i) eliminating unserved energy demand of about 500 GWh per annum, thereby sustaining long-term economic growth and poverty alleviation; and (ii) bring about cost savings by displacing older, less efficient public sector generation plants (these savings estimated at US$28 million annually for the first few years of operation, the exact level of long-ten-n savings will depend on the actual development of demand and supply of power). The Project will also save foreign exchange for the country, since some of the existing base-load plants to be displaced by Haripur run on imported fuel oil. Lessons Learned - Project Sustainability 11. Learning from the experience with IPPs in other countries, adequate safeguards would be sought to ensure that the Project would be insured against sectoral and macroeconomic risks. Since the Haripur Project is one of several IPPs committed to by the Government, it is anticipated that some form of shield against future contracting of IPPs in excess of demand would be in place. This would also translate into a mechanism for monitoring foreign exchange liabilities for debt service payments resulting from the -3 - undertakings given by Government to the IPPS. Furthermore, to ensure economic dispatch of generation, it is envisaged that the Government would take necessary action to equalize gas prices for supply to state- owned plants and private IPPS. Proposed Financing 12. The Project is intended to be financed by the Sponsor, IFC and commercial lenders on the basis of a security structure supported by government guarantees (public-private partnership). The total project cost of approximately US$183 million is expected to be partly covered by debt financing of US$111 million, consisting of an IFC 'A' loan of about US$40 million, an IFC 'B' loan of at least US$ I4 million and a commercial bank facility of up to US$61 million backed by an IDA Partial Risk Guarantee. The remaining financing requirement of approximately US$68 million would be covered by Sponsor equity. 13. The security structure for the financing includes a set of contractual agreements that define the rights and obligations of the different participants in the Project. The package includes the following main Project Agreements, which were all entered into by the Project Company and executed on September 17, 1998: an Implementation Agreement (IA) with the Ministry of Energy, a 22-year Power Purchase Agreement (PPA) with BPDB, a 22-year Gas Supply Agreement (GSA) with Titas Gas Transmission and Distribution Company Ltd., and a Land Lease Agreement with the Ministry of Industries. These Agreements are supported by a Government Guarantee. Risk Sharing under the IDA Guarantee 14. The private sector (Sponsor and commercial lenders) would assume commercial risks in the form of financing risk (financial closure), project construction and design risks (cost overruns, delays, power output quality) as well as operation & maintenance (plant availability) risks. The IDA PRG would guarantee the commercial lenders against loan default by the Project Company on scheduled foreign debt service payments of both principal and interest, if such default results from the government agencies' failure to meet its payment obligations under the Project Agreements. The government obligations to be backstopped by the PRG could involve coverage for the following principal categories of risks: a Breach of contract by government agencies under the terms of the M PPA and GSA; a Political force majeure events, including expropriation; a Convertibility and transferability of foreign exchange; a Changes in law; a Natural force majeure events relating to Government obligations. Environmental & Social Aspects 15. The Haripur Project has been classified as category 'A' under the Bank's environmental guidelines. The Sponsor's consultant has completed a detailed Environmental Impact Assessment (EIA), including a Social Impact Assessment (SIA), in accordance with Bank/IDA, IFC and Government requirements. In addition to the power plant as such, the impacts from the off-site structures - i.e. access road, transmission line and gas pipeline - - 4 - are also covered 'Hi the ELA/SIA. Since Haripur will use natural gas, the projected emission rates at full operating load are expected to be below IFC/World Bank emission guidelines, and no major impact on the ambient air from the thermal plume is anticipated. To the extent that Haripur will displace existing, older and less efficient plants that run on fossil fuel, the Project may reduce total air emissions from power generation in Bangladesh. The construction and operation of the proposed power plant is not expected to require any unique or complex mitigation measures. 16. There is some involuntary resettlement of families associated-with the Project. The power plant site is uninhabited and no resettlement is expected for the construction and operation of the transmission line. However, five joint families, each comprising at least two generations of adults, will have to be relocated due to the construction of the access road, and 17 houses in Kuripara village are required to be removed/relocated due to the construction of the gas pipeline and its adjacent regulating and metering station. Perhaps another five houses outside the village could be partially affected, depending on the actual routing of the gas pipeline. The implementing agencies will be responsible for drawing up a Resettlement Action Plan in conformity with World Bank guidelines, and for implementing all measures that are necessary to mitigate the environmental and social impacts from construction and operation of the power plant and the off-site structures. 17. The EIA/SIA has been reviewed and provisionally cleared by IDA. An important component of IDA's due diligence and appraisal process will be to verify that adequate safeguards have been built into the Project's implementation plan, to ensure that World Bank guidelines on environmental and social standards will be met. Rationale for IDA Involvement 18. Given the current shortfall of long term credit for "emerging markets", the proposed IDA PRG is considered critical to the financing of the Project. The PRG would catalyze commercial financing that would otherwise not be available to Bangladesh, and at the same time provide for risk sharing with the commercial lenders. The amount covered by the PRG has to be backed by an equal amount of IDA funds. There would be an additional leverage effect in that the PRG would help mobilize commercial finance by vying up IDA resources for 15 years, whereas normal IDA credits tie up resources for up to 40 years. IDA, and ultimately the Government of Bangladesh by virtue of its counter- guarantee under an Indemnity Agreement to be signed with IDA, would only assume risks relating to the performance of government agencies as provided for in the Project Agreements. Since the PRG would cover obligations that the Government is already committed to by the Project Agreements, IDA's involvement would not create any additional liabilities for the Government. 19. The IDA PRG is required at this transitional stage in order to bring a very competitively priced power producer into Bangladesh. The proposed guarantee operation would thereby, in a limited but significant way, contribute to IDA's reform dialogue with the Government by highlighting IPP related issues, including the need to monitor contingent liabilities and foreign exchange implications from such projects. Furthermore, the preparation, negotiation and agreement on the PRG would also help in capacity building within relevant government institutions that have an agenda for promoting private sector projects, thereby helping them to become more - 5 - effective counterparts in the structuring and negotiation of project financing for private sector projects. 20. The proposed strategy for IDA assistance is consistent with the 1998 Bank- Group Country Assistance Strategy for Bangladesh (CAS), which explicitly mentions the IDA guarantee as a potential instrument to attract private investment and to facilitate private participation in new infrastructure projects. The present operation is also consonant with the CAS emphasis on reforms and commercialization of the power and gas sectors. Bank/IDA Contact Points: The InfoShop The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Mr. S. Vijay lyer, Task Manager The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-4441, 458-7372 Fax No.: (202) 522-2427 Note: This is information on an involving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending March 24, 2000. - 6-