Document of The World Bank Report No: 17022-BD PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 168.6 MILLION TO THE PEOPLE'S REPUBLIC OF BANGLADESH FORA PRIVATE SECTOR INFRASTRUCTURE DEVELOPMENT PROJECT October 7, 1997 Energy Sector Management Unit South Asia Region CURRENCY EQUIVALENTS (Exchange Rate September 1997) Currency Unit US$1 - Taka 43.650 US$1.394080 - SDRI Fiscal Year July I to June 30 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AAA - Agency and Administration Agreement ADB - Asian Development Bank ADP - Annual Development Plan BOO/BOT - Build-Own-Operate/Build-Operate-Transfer BPDB - Bangladesh Power Development Board CAS - Country Assistance Strategy CEO - Chief Executive Officer CIDA - Canadian International Development Agency DCA - Development Credit Agreement DfID-UK - British Department for International Development DWASA - Dhaka Water and Sanitation Authority ERD - Economic Relations Division ERR - Economic Rates of Return ESF - Environmental and Social Framework GDP - Gross Domestic Product GIDP - Gas Infrastructure Development Project GOB - Government of Bangladesh IA - Investment Advisory IAA - Investment Advisory Agreement IASP - Investment Advisory Services Provider ICB - International Competitive Bidding IDA - International Development Association IDCOL - Infrastructure Development Company Ltd. IFC - International Finance Corporation IIFC - Infrastructure Investment Facilitation Center LDCs - Least Developed Countries LIB - Limited International Bidding MIGA - Multilateral Investment Guarantee Agency MOF - Ministry of Finance ODs - Operational Directives PERs - Public Expenditure Reviews PSIDF - Private Sector Infrastructure Development Fund PSIDP - Private Sector Infrstructure Development Project RA - Resident Advisor RE - Rural Electrification SDR - Special Drawing Rights TA - Technical Assistance TORs - Terms of Reference Vice President: Mieko Nishimizu Country Director: Pierre Landell-Mills Sector Manager: Alastair McKechnie Task Team Leader: S. Vijay Iyer BANGLADESH PRIVATE SECTOR INFRASTRUCTURE DEVELOPMENT PROJECT TABLE OF CONTENTS PROJECT FINANCING DATA ........................................1 BLOCK 1: PROJECT DESCRIPTION .........................................2 1. Project development objectives .2 2. Project description .3 3. Project components .4 4. Key performance indicators .4 5. Project benefits .4 6. Institutional and implementation arrangements .5 BLOCK 2: PROJECT RATIONALE ........................... 11 7. Sector-related CAS goals supported by the project .11 8. Main sector issues and Government strategy .11 9. Sector issues to be addressed by the project and strategic choices .13 10. Project alternatives considered and reasons for rejection .14 11. Lessons learned and reflected in the project desig .15 12. Indications of borrower commitment and ownership .15 13. Value added of Bank support .16 BLOCK 3: SUMMARY PROJECT ASSESSMENT ..................................... 16 14. Economic assessment .16 15. Technical assessment .18 16. Financial structuring .18 17. Institutional assessment .20 18. Environmental and social assessment .20 19. Procurement arrangements .21 20. Disbursements .23 21. Sustainability .24 22. Critical risks .24 23. Possible controversial aspects .26 BLOCK 4: MAIN LOAN CONDITIONS ........................................ 26 24. Effectiveness conditions ....................................... 26 25. Key Implementation Covenants ....................................... 27 BLOCK 5: COMPLIANCE WITH BANK POLICIES ................. ...................... 27 ANNEXES: 1. Project Design Summary .28 2. Performance Monitoring Indicator .32 3. Flow of Funds .33 4. Sector-wise Summary ad Sub-project Pipeline .45 5. Environmental and Social Framework Summary .51 6. Bank Group Operations in Bangladesh .57 7. Bangladesh at a Glance .59 8. Project Processing Budget and Schedule .61 9. Documents in the Project File .62 MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF BANGLADESH FOR A PRIVATE SECTOR INFRASTRUCTURE DEVELOPMENT PROJECT 1. I submit for your approval a proposed development credit to the Government of Bangladesh for SDR 168.6 million (US$ 235 million equivalent) to help finance a Private Sector Infrastructure Development Project. The proposed credit would be on standard IDA terms, with a maturity of 40 years including a grace period of 10 years. The project would make available partial debt financing for eligible, privately sponsored, infrastructure projects and assist the Government of Bangladesh to identify and develop new infrastructure projects with a potential for private sector participation. The financing component would be operated from a Private Sector Infrastructure Development Fund (PSIDF) to be established with the IDA credit. Loans made to various private sector sponsors of infrastructure projects would be on maturities of up to 23 years, including grace periods of up to 8 years, and would be denominated in US dollars. The private sector sponsor will carry the foreign exchange risk. The two options for interest rates are initially: (a) Variable - 6 month US$ LIBOR plus a premium of 3.50 percent. (b) Fixed - based on the term of the loan and the appropriate US$ swap rate, plus a premium of 3.50 percent. 2. Recommendation. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the International Development Association. I recommend that the Executive Directors approve it. James D. Wolfensohn President Washington, D. C. October 7, 1997 Vice President - MiekoNishimizu Country Director - Pierre Landell-Mills Sector Manager - Alastair McKechnie Task Team Leader - S. V. Iyer International Development Association South Asia Region Project Appraisal Document Bangladesh: Private Sector Infrastructure Development Project Date: October 7, 1997 [ I Draft [X] Final Task Manager: S.V.Iyer Country Director: Pierre Landell-Mills Project ID: BD-PE-44789 Sector: Energy and Infrastructure Lending Instrument: Specific Investment Loan PTI: [ I Yes [XI No Project Financing Data I] Loan [X] Credit [ I Guarantee [ I Other For Loans/Credits/Others: Amount (US$m/SDRm): US$ 235 million (SDR 168.6 million) ...............~~~~ ~~~~............................................................................................................................................................................................................ Proposed Terms: [XI Multicurrency [ I Single currency Grace period (years): 10.years [ Standard [X] Fixed [ LIBOR-based Variable Years to maturity: 40 years Commitment fee: n.a. Service charge: 0.75% .................................................................................................................................................................................................................................................. Financing plan (US$m): Source Local Forein Total Co-financiers 11.0 i 1.0 (UK DflD - US$7.5m, CIDA - US$3.5 m) IDA - 235.0 235.0 Private Sector Financing 80.0 560.0 640.0 Total 80.0 806.0 886.0 Borrower: People's Republic of Bangladesh Guarantor: N.A. Responsible agencies: Infrastructure Development Company Ltd. (IDCOL) Private Sector Sponsors of various infrastructure projects Ministry of Finance (MOF) - Economic Relations Division (ERD) Infrastructure line ministries and agencies Estimated disbursement 1998 1999 2000 2001 2002 2003 (Bank FY/US$M) Annual 10.00 60.00 80.00 50.00 25.00 10.00 Cumulative 10.00 70.00 150.00 200.00 225.00 235.00 For Guarantees: N.A. Expected effectiveness date: Closing date: January 1, 1998 December 31, 2002 2 BLOCK 1: PROJECT DESCRI3PTION 1. Proiect Backzround and Obiectives Bangladesh has one of the lowest level of infrastructure indicators among developing countries. A mere 14 percent of households have access to electricity, there are just 2 telephone lines per 1000 people, nearly 60 percent of the population lacks access to safe drinking water and only 16 kilometers of paved roads are available for every 100 square kilometers of land area.' A large part of the country's population is thus deprived of access to basic services necessary for minimum quality of life standards. Furthermore, poor infrastructure stifles economic output, renders exports less competitive and makes domestic production of goods disproportionately expensive. In order to promote sustained economic growth, gross investment levels need to rise from the present 14 percent of GDP to nearly 20 percent of GDP per annum, or to nearly US$ 7 billion annually. Nearly 25 percent of new investment has to be directed towards infrastructure development in order to fuel and sustain a decent level of economic growth. This implies a minimum requirement of nearly US$ 1.75 billion per annum, against which present Annual Development Plan (ADP) allocations (not actual expenditures) for infrastructure are less than a billion dollars, leaving a large investment deficit of US$750 million annually. Traditional sources of investment financing, both from government's fiscal resources and overseas development assistance are inadequate, and are in fact declining. In this scenario, Bangladesh faces an uphill challenge to meet its ongoing infrastructure investment needs.2 Private participation offers significant potential to hasten the pace of infrastructure development, expand access and deliver efficient services. It would serve to attract commercial finance, thereby reducing the pressure on public investment. Bilateral and multilateral lending agencies also emphasize market oriented funding strategies for projects that can generate revenues and be implemented by the private sector. Private participation would also bring benefits in terms of new technology and increased efficiencies. For all these reasons, the Government of Bangladesh (GOB) has articulated a strong commitment to accelerate infrastructure development through private participation. This project seeks to support Bangladesh in its bid to develop a modem and efficient infrastructure system. with the significant participation of the private sector in the financing, construction and operation of infrastructure facilities. This is a challenging task in view of Bangladesh's track record to date in attracting private investment. Presently foreign private investment inflows - mostly equity - are less than US$100 million annually. Domestic capital markets are underdeveloped and too narrow to provide equity or debt financing in excess of US$ 10 million for any one transaction. Besides, project developers and commercial financiers are cautious about committing infrastructure related investments to Bangladesh. While its macro-economic stability, policy orientation and the evident potential in the energy sector draw favorable responses; the poor management and creditworthiness of public sector utilities, lack of adequate legal and regulatory framework, slow procurement processes and transparency concerns are cited as major impediments. These constraints seriously limit the market's appetite for investment, especially in terms of making longer term commercial debt available for projects in Bangladesh.3 Hence, special mechanisms to address financing constraints and render the sector and transaction regimes more attractive and efficient are needed in order to attract private investments on the scale required to implement large infrastructure projects. I Bangladesh- An Agenda for Action: World Bank Report, June 1996. 2Bangladesh - Public Expenditure Review: World Bank, 1996. 3These observations are substantiated by the findings of the more formal South Asia Barriers study, a draft report of which is now available. 3 2. Proiect Description (see Annex 1 for Project Design Summary) The Private Sector Infrastructure Development Project (PSIDP) is proposed as the vehicle for delivering assistance to GOB for: (i) proactively developing and marketing sound sub-projects for private investment; (ii) establishing speedy, competitive and transparent procurement processes for realizing private sector participation in such sub-projects; (iii) providing appropriate mechanisms for reasonable risk sharing and mobilizing commercial investment in the form of equity and debt financing for infrastructure sub-projects; and (iv) creating suitable legal and regulatory structures in the various infrastructure sub-sectors for the sustained and efficient operation of private infrastructure facilities.4 As instruments, it proposes to employ a mix of technical assistance (TA), lending, and advisory services. Technical assistance (TA) is being made available to identify and develop viable project transactions, promote efficient, transparent and international competitive bidding processes and formulate suitable contractual arrangements to cater for the absence of legal and regulatory frameworks in some sub-sectors. Initial projects in each sub-sector would facilitate the formulation of a sectoral framework and establish a degree of confidence in the Government's policies and strategies. TA under the project would help in translating this initial momentum into a sound legal and regulatory framework for the sustained development and operation of private sector projects over the medium term. Several sub-projects in the gas and electricity sectors are at various stages of development. Some of these transactions are likely to be finalized within the next year. The key constraint to these sub-projects being implemented is the lack of long term debt financing, which is necessary to ensure financial viability, given their large size, long economic life and payback periods. These are priority projects designed to address crippling energy deficiencies, and PSIDP support is perceived as critical to overcoming financing constraints and facilitating their implementation (see section on sub-project pipeline, page 12-13). The PSIDP therefore, proposes to provide long term debt financing from IDA resources by establishing the Private Sector Infrastructure Development Fund (PSIDF). This facility will work in tandem with equity sponsors, commercial and institutional lenders to help mobilize capital financing for eligible sub-projects. It is expected to play a catalytic role by being able to provide the extent of debt required by sub-project transactions to meet financing shortfalls that remain after the full complement of equity and debt has been realized from market based sources. Such debt financing will operate on a maximum ceiling of 40 percent of total project cost. However, in order to maximize its leverage and provide a greater degree of comfort to potential lenders, PSIDF debt would be offered for longer terms and will be subordinated to other commercial and institutional credits. In Pakistan, this form of debt financing through Bank funds for the first few private sector power projects has been successful in generating investor confidence and has helped to mobilize nearly three times as much funding in the form of non-government guaranteed debt from commercial and institutional sources. The project will potentially cover sub-projects in power generation and transmission, gas and gas related infrastructure, toll roads, water supply, urban environmental services, ports, telecommunications, and other projects for the development of basic infrastructure. The initial transactions are expected to be in power generation (as independent power producers -IPPs), gas pipeline and transmission sub-projects and telecommunications. Transactions in the ports, water supply and highway sub-sectors are perceived to carry greater risks and will therefore, involve longer lead times and more substantial development work. TA will be made available to assist transaction development and facilitation. The PSIDP will also complement Bank and donor driven initiatives designed to address policy, institutional and regulatory deficiencies in different sub- sectors. It is also meant to work in partnership with other Bank group institutions and instruments, such as IFC's 'A' and 'B' loans and MIGA guarantees, to achieve maximum leverage for IDA funds in each project. 4 Henceforth in the document, 'project' refers to the main IDA credit project - the PSIDP, and 'sub-project' refers to projects developed by GOB for private sector investment/operation or potential candidates for PSIDF financing. 4 3. Proiect comoonents Components Category Cost Incl. % of Total Contingencies _____ ____ ____ ____ ____ ____ ____ ____ ____ ____(UJS$M ) Project Finance ComDonent - provision of subordinated debt for privately sponsored infrastructure Lending 225.00 91.5% projects Proiect Finance Comwionent - TA for establishing TA 7.00 2.8% project executing agency for on-lending activity. Project Development Process - TA to strengthen GOB TA 14.00 5.7% capacity to realize private sector investment in infrastructure projects. (including US$ 11 million in cofinancing) Total 246.00 100.0% 4. Key Performance Indicators The agreed performance indicators are described in Annex 2. The indicators are structured on the following basis: (i) overall increase in the country's infrastructure capacity at the beginning and at the end of the project; (ii) increase in the share of private ownership and operation of infrastructure assets; (iii) amount of non- guaranteed debt finance mobilized for infrastructure projects; (iv) number of infrastructure projects identified and developed for private sector participation; and (v) establishment of processes and frameworks for promoting such participation. 5. Project Benefits Beneficiaries: (i) the people of Bangladesh, who will have increased access to more adequate and efficient infrastructure services; (ii) GOB, which will benefit through addition of infrastructure development resources and introduction of private sector efficiency and management culture in the infrastructure sectors; and (iii) private sector investors, both local and foreign, who will receive financial, institutional and policy related comfort for investment in new infrastructure projects in the country. Macro benefits: (i) Reduced need for public investment in infrastructure development, thus enabling GOB to deploy more funds to meet poverty alleviation and social development objectives; (ii) rapid development of a modem and efficient infrastructure system in Bangladesh through the financial, technical and managerial resources of the private sector; (iii) increased flow of foreign investment into new infrastructure projects; (iv) enhanced Govemnment capacity to tackle the policy, regulatory and project related issues in the different infiastructure sectors; and (v) significant employment generation in the construction and operation of new infrastructure projects. Project benefits: (i) Addition of at least 800 MW of thermal power generation capacity in the private sector; (ii) enhancement in available gas transmission infrastructure; (iii) development of sub-projects to enhance port capacity, establish new toll highways and augment water supply; (iv) developing policies, strengthening regulations and building appropriate capacity in Government to select, develop and market soundly structured projects for private participation; (v) establish government capacity for promoting environmentally sustainable and socially acceptable implementation arrangements for privately sponsored infrastructure projects. 5 6. Institutional and imDplementation arran2eements A. Implementation period: 5 years - November 1, 1997 to December 31, 2002 B. Implementation Arrangements: The project has two components - project financing and sub-project transaction development. The financing component is designed to provide support for sub-projects that meet eligibility criteria for PSIDF funding and where the sub-project sponsors have reached the limit of mobilizing market based financing. The PSIDF will be operated by an independent commercial institution, the Infrastructure Development Company Limited (IDCOL). IDCOL will partner other institutional and commercial lenders to mobilize the volume of finance required for eligible sub-project transactions. Transaction development, on the other hand is a government-led function and involves initiatives by project agencies, line ministries and parastatals. The coordinating institution for sub-project transaction development is proposed to be the Infrastructure Investment Facilitation Center (IIFC). The IIFC will be established during project implementation. The diagram below represents the respective activities that constitute these two components and the responsible institutions. Private Project Development and Financing..... DEVELOPMENT FINANCING IIFC and GOB Agencies IDCOL and other financial institutions IDENTIFICATION MARKET _ / ~~~~ASSESSMENT FEASIBILITY APPRAISAL STRUCTURING PROJECT ~STRUCTURING PROMOTION PIPELINE CLOSING MARKETNGVG DISBURSEMENT PROCUREMENT CONSTRUCTION CONTRACTING OPERATION PERMITTING REPA YMENT REGULATION (i) Arrangements for implementing the projectfinance component (a) The project finance component aims to ensure that soundly structured, economic priority sub-projects, which have received or are in the process of receiving GOB approvals and concessions, are able to mobilize adequate debt financing. IDA credit, channeled through GOB, would be made available to such sub-projects, provided they meet eligibility criteria laid down in the project agreements and with due regard to the principle of IDA credit being the "lending of last resort." The credit process and all aspects of sub-project financing will be managed by a special purpose project finance company called the Infrastructure Development Company Limited (IDCOL). IDCOL has been incorporated as a government owned Company under the Bangladesh Companies' Act, 1994 and is registered to function as a non-banking financial institution under the Bangladesh Financial Institutions Act. As an agent of GOB, its sole function is to administer the PSIDF and on-lend funds to eligible, privately sponsored infrastructure sub-projects. It is expected that such sub-projects would be structured as build-operate-own (BOO) or build-operate-transfer (BOT) projects (or variations thereof) and financed on a limited recourse basis. 6 (b) IDCOL has been structured as an autonomous, commercial entity. As per Company law, it will be governed by a Board of Directors, consisting of seven shareholder members, of which three are private sector representatives and three others are public sector nominees. The seventh member of the Board - the Chief Executive Officer (CEO) - will be a professional manager and is to be selected through global advertisement. IDCOL's administration of PSIDF on behalf of GOB is an agency arrangement and will be governed by an Agency and Administration Agreement (AAA), entered into between the two parties. To ensure that IDCOL manages PSIDF on commercial principles, it has been exempted from the operation of public sector rules and regulations, such as those governing employment, remuneration and procurement of services. (c) In order to conduct its operations, IDCOL will engage high quality Investment Advisory (IA) services. The Investment Advisory Services Provider (IASP) will be an internationally reputed and experienced firm, or consortium, with significant project financing skills and experience.5 The IASP is being engaged through international competitive solicitation, conducted under IDA procurement guidelines. This process has been launched with the publication of a global advertisement for inviting expressions of interest. The IASP, under the overall directions of the IDCOL Board, would be responsible for identifying potential sub-projects that require support, processing interest from and interfacing with potential sub-project sponsors, conducting sub-project appraisals, preparing analysis and recommendations for the IDCOL Board and IDA, implementing decisions in respect of specific proposals and negotiating and finalizing all legal arrangements with sub-project borrowers and other financial participants in the transaction. In addition, the IASP will be responsible for preparing and managing the loan disbursement schedule, monitoring implementation of projects diligently as a prudent lender would, and maintaining appropriate liaison with other lenders. In this context, the IASP would be guided by the World Bank's standards on financial management and project monitoring. The governance of the IA services contract would be through an Investment Advisory Agreement (IAA) to be entered into between IDCOL and the IASP. The IASP's work would be led by its Resident Advisor (RA), whose qualifications and experience will be significant factor in the procurement of the IA services. Sub-project processing by IDCOL and its interface with IDA and GOB is described in the Operations Manual attached in Annex 3. (d) IDCOL's Operations Manual requires that transactions be professionally and competitively procured, under clearly established, transparent and internationally solicited procurement processes. Unsolicited proposals would be entertained only in cases where competitive selection is not possible or is inappropriate. A good beginning in this regard has been made by the process established and conducted for two major electricity generation projects - Haripur and Meghanaghat (see project pipeline in Annex 4). Similar arrangements would be encouraged for the other sub-sectors. In the case of unsolicited sub-projects, extra care and caution will be exercised by IDCOL, under strict IDA supervision. IDA Credit based financing in such transactions will be deployed only against approved procurement, made in line with the Bank's guidelines and standards. As a further safeguard, IDA credit proceeds under subloans would be disbursed directly to suppliers against authorized expenditures, cleared by procurement as per defined thresholds. Appropriate special accounts for administering TA and building reserves for repayment of IDA obligations are being established as per standard practice. These arrangements are described in the Development Credit Agreement (DCA) between IDA and GOB and the Project Agreement between IDA and IDCOL. Once sub-projects are cleared for lending by IDA and approved by IDCOL, standard sub-loan documentation would be executed between the sub-project borrower and IDCOL. Disbursement advices on behalf of the borrower to IDA under the sub-loan agreement would be issued by IDCOL. Standard IDA disbursement procedures shall apply. It will likely be a professional consulting or investment banking firmn, a project finance company or a consortium with different types of ftrms. The key attributes would be an ability to evaluate the commercial viability of potential sub-projects and manage the lending function. Since it is a multisectoral initiative, the IASP should have access to a range of professionals for all sectors covered under PSIDP. 7 (e) The IDA credit to GOB is denominated in SDRs as per standard practice. Subloans from IDCOL would be denominated in US$, on the prevailing rates on the date of disbursement between US$ and the currency of disbursement. Payments of interest and repayments of principal by the borrowers would be made in Taka equivalents of the appropriate dollar amount on the date of repayment. Thus, the foreign exchange risk would rest with the sub-project borrowers. IDCOL will maintain the accounts of each borrower in US dollars and transmit the equivalent Taka credits (repayments of principal and interest) to an account in the Bangladesh Bank, called the 'Repayment Account.' The Repayment Account will be operated by IDCOL and credits to this account will be used to: (i) set aside a reserve for repayment of IDA obligations; (ii) support operating expenses of IDCOL, if so required; and (iii) on-lend to new sub-projects in the future. This arrangement will ensure that the PSIDF works on a sustained basis to continue as an investment resource and that the repayment proceeds from initial subloans do not become part of the GOB budget. (f) In terms of status, IDCOL has been incorporated and has started functioning. The procurement process for the engagement of the IASP has been approved by the Bank and has been initiated with the publication of an international advertisement. The process to recruit a full time CEO for IDCOL has also been launched. IDCOL will utilize IDA TA of US$7 million for establishment expenses and meeting IASP's costs for the first four years of the project. Though the IASP contract will be ultimately funded entirely from interest income and fees charged to sub-borrowers, the proceeds of TA may be deployed for meeting the cost of IA services during the initial period, and shall subsequently be repaid through income earned from fees, etc., charged to sub- borrowers. IDCOL will be financially independent after the first four years, and at no time during those four years, or later, is it likely to require GOB budgetary support for its operational expenditures. (For a detailed discussion of implementation arrangements, IDCOL's capacity, governance and operational quality control issues and financial arrangements, please refer sections 16 and 17, Block 3, on "Project Assessment" and IDCOL Operations Manual at Annex 3.) (ii) Arrangements for implementing the TA for sub-project development (a) Bangladesh needs assistance to establish sound policy and regulatory frameworks and develop sub-projects transactions economically and efficiently, so that private participation can be realized and sustained. TA under this component will be jointly provided by IDA, DflD (formerly ODA) and CIDA (co-financiers). The TA will be available to GOB infrastructure agencies and line ministries for promoting private sector participation, both at a policy level and to promote specific transactions. This would enable both government and private sector to minimize transaction costs and secure infrastructure development at least cost. Assistance is required by line agencies and ministries prior to transactions, for establishing proper framework and policies, identifying viable sub-projects and carrying out pre-feasibility studies. During transactions, assistance is required for conducting competitive and transparent procurement processes, marketing sub-projects to encourage good competition among quality sponsors and managing the entire process of structuring, documentation, bidding to negotiations and concession awards. After award, both the private sector developer and the public sector counterpart agency need help to ensure timely construction and to respectively operate and regulate the project as per various project agreements. At present, most government agencies or parastatals in Bangladesh lack the capacity to carry out these activities effectively. This is sought to be overcome by establishing a core advisory services unit - the Infrastructure Investment Facilitation Center (IIFC) - to provide continuous assistance on all transaction aspects described above. 8 (b) The IIFC will have basically five functions; advocating policy and strategies; providing advice and support to line agencies for transaction development; making available resources for transaction development; interfacing with private sector developers and facilitating infonnation needs, training and knowledge development for both the public and private sectors. It is not intended to encroach on the technical and contracting functions of line agencies, but to support their efforts by providing high quality professional expertise, where required. It would play a coordinating role in addressing cross-sectoral issues of policy and process development, such as formulation of appropriate BOO/BOT framework for Bangladesh. The IIFC would also facilitate implementation of approved sub-projects, such as by enabling project sponsors to interface with relevant agencies and secure timely clearances. Though the IIFC is not required for first few transactions which are already developed, it is viewed as being necessary in the longer term, both to establish an efficient window for public-private sector interface and to develop a reservoir of expertise and knowledge and to sustain the private infrastructure program. (c) The IIFC is in the process of being established. A round table was organized in Dhaka on September 9 and 10 to discuss and build consensus on the organization, structure and functions of the proposed IIFC. Leading representatives from government, private sector, parastatals, financial institutions, donor agencies, as well as key political opinion makers participated in the event. The recommendations of the round table are now under GOB's consideration. The consensus has been in favor of establishing a high profile small unit, to be jointly owned and managed by the public and private sectors, equipped suitably to work with various govermnent agencies and promote efficient partnership with the private sector. The electricity sector in Bangladesh has successfully developed IPPs through the Power Cell, an IIFC-like organization set up exclusively for that sub-sector. The IIFC would begin by taking the positive aspects of the Power Cell experience and applying it to cover other sub- sectors. (d) TA resources under the project are described below. Application and management of TA resources would be coordinated by the IIFC, in consultation with the Government and various (donors. Standard Special Account procedures would apply for IDA's TA administration. A. Sources of Funds ( in US$000) International Development Association (IDA) $3000 British Department for International Development (DfiD-UK) $7500 Canadian International Development Agency (CIDA) $3500 9 B. Uses of Funds (in US$000) Activity 1 2 3 4 5 Total Legal/Policy Framework Preparation 300 300 600 ration Suort ong Term Advisory Services 1000 1000 1000 1000 1000 5000 Equipment 300 300 raining and Institutional Capability 200 200 150 150 50 750 uild-up Marketing and Promotions 100 200 200 200 150 850 Project Preparation Funds for FS, Solicitation Documents, Short-Term 1300 1800 1800 800 800 6500 Advisers Total 3200 3500 3150 2150 2000 14000 (iii) Project coordination and oversight From the preparation stage itself, the emphasis in this project has been on securing the fuill participation of stakeholders, such as concerned agencies of the government, private sector and various development partners in coordinating project activities. A Project Finance Workshop held in September 1996 was instrumental in building consensus and articulating the commitment of various players to project objectives and design elements. The effort would be to continue such consensus building into the operative phase of the project by involving various work units within the Bank, IFC and MIGA, the co-financiers - DfID-UK and CIDA, other development partners - CDC, ADB and OECF, private sector trade and business organizations, and concerned govermment agencies. At the government level, project coordination vests with the Ministry of Finance, Economic Relations Division (ERD). (iv) Accounting,fnancial reporting and auditing arrangements The accounting and financial reporting arrangements for the financing component of the project will be established with IDCOL, details of which are available in Annex 3, Operations Manual for IDCOL. These provisions include: (a) preparation of quarterly reports by IDCOL and submission to IDA, co-financiers and GOB; (b) annual audits of IDCOL and the Repayment Account in Bangladesh Bank by independent and internationally reputed auditors, reports of which would be reviewed by IDA, co-financiers and GOB; and (c) annual audits of IDCOL by independent auditors and as necessary, by the Auditor General and for the Special accounts in Bangladesh Bank, as per standard practice adopted for all IDA projects in Bangladesh. (vi) Monitoring and Evaluation arrangements Since the project is multi-sectoral in scope and comprises both lending and wide ranging technical assistance, the monitoring and evaluation arrangements reflect this complexity. This also implies a higher degree of supervision resources to be committed. This will vary with the pace at which sub-projects are developed and financed, but the expectation is that it would be in the range of 20 staff weeks per annum. 10 (a) Evaluation of IDCOL's lending quality - will be carried out during regular supervision missions, twice annually. The Evaluation team will include IDA project team members and representatives from GOB and the co- financiers. Evaluations will assess the impact of the lending in terms of sub-project quality, costs, compliance with operational and financial criteria and the degree of leverage achieved in terms of private investment dollars realized for each dollar of IDCOL lending. This will include regular performance audits of IDCOL and these performance audits would review the compliance of operational guidelines in selecting and approving sub-project loans. (b) Monitoring effectiveness of TA to IIFC and line ministries - To be evaluated during the supervision missions. Considering the nature of IDA's role here, monitoring and supervision on an ongoing basis will be done by the Bangladesh Dhaka Office (BDO) and the concerned sector units in the South Asia Region (SAR). For instance, in the matter of advice to the Ministry of Shipping on conducting feasibility studies for a port development project, the monitoring role will be met by South Asia Infrastructure Sector Unit (SASIN) and BDO, with the participation of interested donors, such as DfID-UK. In essence, the institutional partnership and the concept of having a multi-sectoral project team would be continued from the preparation phase into the implementation phase. (c) Monitoring compliance with IDA's environmental and social guidelines - The project overall is judged to have moderate to high risk on the environmental and land acquisition, resettlement and social front. As a result, it is rated "A" for environmental assessment purposes. An Environmental and Social Framework (ESF) has been prepared by GOB (approved by IDA) to provide a process within IDCOL to identify risks early on and advise private sponsors to take appropriate measures to mitigate these in line with GOB and IDA standards. The actual risk would vary from project to project. For example, a telecom project will have low risks; a gas-fired power plant moderate risks; and a highway or port project is expected to have high risks. The scope of the environmental and social assessment will be based on the results of the upfront environmental and social screening process to be undertaken by IDCOL at the initial stages of entertaining a funding proposal. It is IDCOL's primary responsibility to ensure compliance with the standards and guidelines laid down in the ESF. IDCOL will be equipped to meet this responsibility through the provision of a Corporate Consultant on Enviromnent and Social Compliance, who shall be an integral part of the contract package of the IASP. IDA will back-stop IDCOL's due diligence. The table below describes the IDCOL-IDA interface in this regard. The ESF also provides for external independent monitoring of environmental and social compliance issues. Environmental and Social Assessment Milestone Output to be submitted to IDA Screening Initial screening report Finalization of terms of reference for ESR6 Terms of Reference Review of ESR ESR reviewed by IDCOL Translation of agreements into instruments Lenders Agreement along with other Agreements Monitoring Compliance report Environmental and Social Audit Audit compliance report 6 ESR - Environmental and Social Review. 11 BLOCK 2: PROJECT RATIONALE 7. Sector-related CASgoals supported by theproject. The latest CAS document (Report No. 14998-BD) was issued on September 26, 1995, and was updated in November 1996. The project supports the following CAS objectives: (a) Promoting dynamic private sector participation in infrastructure. (b) Improving energy supplies and efficiency. (c) Improving and expanding infrastructure in energy, transport, water, urban services and ports. (d) Redefining public sector role in infrastructure and improving the policy and regulatory environment. 8. Main sector issues and Government strategy (a) Readinessforprivate sectorparticipation: An assessment of readiness of the various sub-sectors towards private sector participation has been completed. There is high degree of readiness in the energy sector, relatively less so in telecommunications and only a preliminary state of readiness exists in other sub-sectors. The general assessment is that the momentum generated by private participation initiatives in the energy sector can translate into similar initiatives in the other sub-sectors over the next 2-3 years. On the transactions side, at least one potential sub-project is under development in almost every sub-sector and these initial transactions can serve as the leading edge for implementing required changes in sub-sectors. GOB has exhibited a strong willingness to bring about such changes and pursue viable transactions vigorously. Experience from other countries demonstrates that the impetus created by a transaction approach can lead to sustained efficiency gains, provided that it is quickly followed by a sectoral strategy of reforms and privatization. The following matrix illustrates the degree of readiness on policy and transaction aspects. Details of the principal sectoral and institutional issues relevant to the project are explained in Annex 4. Sector Readiness for private sector varticivation Sectoral Aspects Transaction Aspects Power Consensus has been reached on a comprehensive Transaction regime is well developed, with clear reform program for the sector; unbundling and policy framework, institutional mechanism (Power commercializing of utilities and creation of a Cell) to contract sub-projects, sound contracting culture of accountability, and establishing arrangements with pre-approved documentation regulatory mechanisms. The reform vehicles and a clear, well supported, transparent and would be ADB 's IX Power project and IDA 's competitive process. Two projects (Haripur and Power Development project. Meghananghat) are at an award stage and one other project is in the final bid stage. Negotiations on 4 barge projects are underway. Gas Private participation in gas production is Transaction regime is well developed. An already present. Bank and ADB are jointly international competitive bidding process for developing reform options, especially to address award of drilling concessions is underway. Gas industry structure, pricing and regulatory issues. infrastructure, such as pipelines and downstream A Bank funded Energy Issues Study is underway. facilities are likely candidates for PSIDP. 12 Sectoral Aspects Transaction Aspects Telecoms Private participation in some categories of Individual transactions from private operators services present. Work towards developing a new possible. New BOO/BOT projects are in the early - Telecom law and sector regulation for a stage of development. Transaction framework will competitive, multi-operator environment is develop with the first sub-project. currently underway. Supported by the IDA Telecom sector regulatory support project. Transportation Readiness for private participation low. There is Individual transactions not ready. One major a culture ofprivate operation of inland sub-project in each sub-sector is being developed, transportation, but assets owned by public in the pre-feasibility stage at present. Defining sector. There is no policy or legalframework the sub-project and contracting under BOO/BOT and amendments to laws or new laws may be type structure would require TA support. necessary. Several IDA and other donor funded Minimum 2-3 years required to bring first investment projects are ongoing and under transaction to market. preparation, but real impetus will come from the first transactions in roads and ports. Water and other State of readiness low. Basic strategic issues Some transactions identified, but will require sectors being addressed. Reform issues under substantial development work. Potentialfor bulk formulation and are proposed to be addressed water supply projects and urban waste through IDA project under preparation. management type of projects is very high. (b) Sub-project pipeline: The firmness of the sub-project pipeline varies by sector. It is well advanced in electricity generation and gas infrastructure, less so in telecoms and fairly preliminary in transportation and water. The following table lists the various sub-projects and their status, and the assessed probability of becoming PSIDP transactions. (For detailed description, see Annex 4) 1. Haripur 360 MW gas combined cycle, BOO project. High probability of IDCOL funding - US$40-80 Power Final price bids under evaluation following million. Due diligence to commence November 1997, ICB. fund commitments possible in early 1998. 2. Meghanaghat 450 MW gas combined cycle, BOO project. High probability of IDCOL funding - nearly US$ 80 Power Final price bids under evaluation following million. Due diligence to commence November 1997, ICB. fund commitments possible in early 1998. 3. Khulna Barge 100 MW, gas fired barge mounted power IFC playing lead role in arranging finance. Only Mounted Power plant. Sponsor already selected through ICB medium probability of IDCOL funding. Participation (Consortium led by Wartsila NSD). from IDCOL likely to be limited to less than US$20 Agreements initialed - final negotiations in million, if sponsor (and IFC) unable to mobilize progress. High priority for GOB. sufficient commercial debt. 4. Chittagong 100 MW, gas fired barge mounted power EFC playing lead role in arranging finance. Only Barge Mounted plant. Sponsor already selected through ICB medium probability of IDCOL funds. Participation Power (Consortium led by Smith Cogeneration). from IDCOL likely to be limited to less than US$20 Agreements initialed - final negotiations in million, if sponsor (and IFC) unable to mobilize progress. High priority for GOB. sufficient commercial debt. 13 Note: Both barge power plants are on a tight time schedule - sponsors are required to deliver power within the next 12 months. IDCOLfinancing wouldfacilitate meeting this time schedule and will help to ensure that environmental issues are adequately addressed. 5. Baghabari 100 MW, gas fired power plant. Medium to high probability. Approximate level - US$ Power Prequalification on ICB completed. Final 20 million. IDCOL appraisal may start in January price bids due Nov. 16, 1997. 1998. 6. Western Area Development of gas field, pipeline and 200- Unocal has sought IDCOL financing for pipeline. Integrated 300 MW gas fired power plant at Khulna. Medium probability sub-project for IDCOL. Energy Project Unsolicited project proposed by Unocal Preliminary appraisal may commence soon, and if Corporation. Negotiations ongoing to found feasible, detailed appraisal will start January finalize project parameters and gas wheeling 1998. tariff. 7. 300,000 line Basic telecom project for Dhaka. Concept High probability that IDCOL support will be needed. Telecom BOT approved, pre-feasibility starts November PSIDP TA to be employed to develop proposal and Project 1997. ensure ICB process. 8. Dhaka Bulk 50 million gallons/day facility, for supply to High probability that IDCOL support will be needed. Water Supply Dhaka Water Supply Authority. Concept PSIDP TA to be employed to develop proposal and Project approved, pre-feasibility may start Jan. ensure ICB process. 1998. 9. Container 250,000 TEU container port. Proposal Development likely to take 2-3 years. High probability Terminal, delayed for resolution of basic issues. Pre- that IDCOL support will be needed. PSIDP TA to be Chittagong feasibility to start thereafter. employed to develop proposal, ensure ICB process and address environmental and land issues. 10. Dhaka 40 km long tolled bypass around Dhaka city. Uncertain and low probability. Basic structuring Bypass Road Pre-feasibility completed and options issues not resolved. Development time likely to exceed Project presented to GOB. Decisions awaited. 3 years. The PSIDP needs to be established immediately, because of the advanced stage of sub-projects 1 to 4 and the seriousness of the power shortages, which are extracting a heavy toll on the economy. 9. Sector issues to be addressed by the project and strategic choices (a) Sectors to be supported: Besides creating an enabling environment for private sector participation in all major infrastructure sectors, PSIDP will support the following initiatives under other proposed and ongoing IDA projects: a) Restructuring and reforms in the gas and power sectors. b) Introduction of a sound tariff policy for power and gas, with appropriate regulation. c) Promotion of specific policies and laws if necessary, for private participation in traditionally public infrastructure areas, such as roads, ports and telecommunications, urban services and water supply. (b) Strategic positioning: The project has strategically chosen to play a predominantly catalytic role. There is a need for providing greater comfort to potential private sector participants in an untested market like Bangladesh. The project therefore provides for subordination of PSIDP loans to other forms of commercial debt. The long maturity and the subordination feature make this financing very attractive. Therefore, it is necessary to ensure that sufficient up-front due diligence on a case-by-case basis is carried out to deploy PSIDP lending as a catalytic means to maximize leverage effect and thereby operate the fund on the principle of last resort lending. The project 14 proposes to do this through ex-ante assessment of debt-finance constraints in specific sub-projects. IDCOL would take this assessment into account and limit commitment to the amount perceived as the financing gap in a transaction. For example, an upfront assessment by IDCOL of the extent of support required for the Meghnaghat and Haripur power generation sub-projects led to placing a cap of US$80 million to each sub-project, which amounts to nearly 20-25 percent of project cost in each case. The balance is to be mobilized by the sponsors from market based sources. IDCOL shall encourage sponsors to seek prior participation of institutional lenders such as IFC, ADB's private sector window, CDC, export credit agencies and commercial financial institutions before committing any PSIDP resources to a sub-project. Particularly with regard to IFC and MIGA, PSIDP will play a complementaxy financing role. Incentives to the Investment Advisor of IDCOL are structured to reward increased leverage of IDCOL funding and success in attracting debt financing from IFC etc. so that debt which does not require governnent guarantees is maximized. (c) Size of Credit: The credit size is based on an assessment of the sub-project pipeline and applicability of principles outlined in (b) above. It is expected that over the next 2 years, two to three electricity generation projects would absorb nearly US$150 million. Besides these, PSIDP support to the tune of US$20-30 million is considered necessary for the financial closure of the first barge mounted power projects in Bangladesh, negotiations for which are ongoing between GOB and successful bidders. IFC, which is likely to support the two barge projects, shares this view and is likely to play a key role in arranging the financing. A further US$40-50 million may be needed to attract private sector interest in other sectors, notably telecommunications and gas infrastructure. Accordingly, a total lending component of US$225 million has been provided. Together with TA component of US$10 million; of which $7 million would go towards TA for IDCOL and $3 million towards supporting IIFC initiatives, the total credit amount is proposed to be US$ 235 million. (d) Project Timing: The PSIDP is strategically timed. The timing of its preparation coincided with the opening up of the electricity, gas and telecoms sectors in Bangladesh. Project effectiveness is timed to match the need for financing of the first few transactions in the energy sector. The TA component of the PSIDP will be able to capitalize on the momentum generated as a result of the energy sector transactions and will provide timely support to GOB and its agencies for promoting similar initiatives in other sub-sectors. 10. Project alternatives considered and reasons for rejection (a) VVhile it is evident that private funding cannot entirely substitute for public investmnent in infrastructure development, one possible alternative is to continue with "business-as-usual" public funding even for those projects that can be done on a commercial basis. Such projects would then absorb a large complement of shrinking overseas donor assistance, crowding out public investment in non-commercial projects, such as rural infrastructure, health and education. Besides the declining availability of donor resources, the alternative of public investment was rejected in view of the slow pace of public sector project implementation and GOB's desire to realize increased efficiencies and newer technologies through private participation. (b) Employing other financial instruments, besides lending. As per assessments conducted, it has been found that long term loans are the only product feasible at this stage, given the inexperience with infrastructure project finance and the rather limited maturity of capital markets in Bangladesh. However, the project intends to explore other financial products in relation to infrastructure projects at the mid-term review stage. Notably, take-out of largely sponsor supported construction financing as long term debt by the facility could be considered. The PSIDP design is flexible enough to operate in tandem with IDA partial risk guarantees, in the event that these become approved Bank instruments in the near future. In fact, PSIDP would then be able to enhance the leverage of its available funding substantially. 15 (c) The alternative of using existing public sector financing institutions over creating a new Company (IDCOL) was rejected in view of the poor state of such institutions in Bangladesh, their lack of expertise and experience in international project finance and limits set by Bangladesh Bank on capital adequacy and lending to any one sector or project. Furthermore, GOB's preference was to keep this operation out of the purview of traditional public sector institutions and government procedures, and to establish a new culture of commercial decision making. 11. Lessons learned and reflected in the project design This is the first project of its kind in Bangladesh. The basic nature of the PSIDP makes it riskier than other more conventional IDA projects. The project team has therefore, taken note of positive and negative aspects of similar initiatives launched in Pakistan, India, Jamaica and Sri Lanka and quality assessments thereof. The project team has carefully studied and suitably employed these lessons in designing and finalizing project parameters. The project has also met with and taken note of the experience of various investment promotion agencies in East Asia - the Philippines, Singapore, Malaysia and Korea. Some key experiences incorporated in the design: (a) In Sri Lanka, sub-project development and promotion initiatives were the subject of another project, rather than become integrated as a part of the PSIDP. This has not proved successful due to lack of synergy between the development and financing aspects of the PSIDP. The Bangladesh project has therefore, chosen to provide for parallel development of both transaction facilitation and project financing, and provide support for both. (b) Efficient project implementation is often constrained by lack of adequate managerial capabilities in government agencies. In this project, GOB's role in sub-project implementation will be limited to granting required concessions and permits, as it will be the responsibility of private investors to finance and implement these sub-projects. Lack of capacity in the appraisal and financing area would be addressed by IDCOL and the provision of high quality IA services. Transaction development and facilitation will be aided by IIFC's expertise. (This follows from the experience of the CCPAP-BOT Center in Philippines). (c) Flow of private capital for infrastructure projects is constrained by country risk perceptions and lack of project financing track record. The provision of Bank financing in the form of subordinated debt and its presence as a stakeholder in the sector gives the necessary comfort for private developers and quality commercial lenders to participate in project financing. The lending element of the project provides a degree of "political risk insurance" to investors, even though it is not formally structured in that fashion. (d) An efficient, fair, clean and transparent project procurement process, which encourages international standards and competition is a must for sustained private infrastructure investments and project development. This project will provide GOB and its agencies with the means to develop and implement such processes. This approach will reduce transaction costs, build confidence, ensure clean and bankable deals and secure the most economic terms for the country and its people. The example set by the Power Cell and the procurement process for the power projects are good models to adopt in other sectors as well. 12. Indications of borrower commitment and ownership (a) GOB took the initiative to apply for this credit and has requested its speedy processing. All required approvals and actions from GOB have been granted in time, and in some cases, ahead of time. 16 (b) To build consensus for this project and disseminate international experience, GOB took the lead and organized a "Project Finance" workshop in Dhaka for relevant government agencies. Most of the donor agencies and several international financial institutions also participated. A follow up round table was also organized by GOB in September 1997. In these workshops, GOB has reached out to secure the private sector's involvement in fashioning objectives and strategies. (c) The Government has already incorporated IDCOL and established its office. This is a very strong indication of commitment, as normally such institutional arrangements are established only after the project is formally approved by the Bank. (d) Concrete sub-projects identified and developed in the gas and power sectors, and at least one potential sub- project for private participation identified or under development in other sub-sectors. (e) Continuous high-level attention by GOB to project issues and decisions. 13. Value added of Bank support (a) Transplanting relevant global and regional experience to Bangladesh. (b) Creating a climate for investment interest in Bangladesh, which given the high risk perception associated with the country, would have been very difficult without the Bank's presence. In the process, a large number of high quality international firms have begun considering investment opportunities in Bangladesh. (c) Building GOB's capacity to prepare and globally market large infrastructure projects. (d) Bringing additional investment resources through an increased flow of private, non-guaranteed commercial capital. (e) Promoting private sector participation as a complimentary feature of the reformn program in the power and gas sectors. (f) Instrumental in promoting the BOO/BOT concept for transportation and port sectors and providing assistance for framing suitable policies. (g) Assisting GOB to build capacity and skills in the emerging area of international project finance and facilitating the preparation and conduct of competitive solicitation processes. (h) Promoting international standards on environmental and social risk mitigation in infrastructure projects. BLOCK 3: SUMMARY PROJECT ASSESSMENTS 14. Economic Assessment (a) Economic analysis for individual sub-projects has not been done, since these are not at a stage where sponsors are identified and projects are formally awarded by GOB. The two initial transactions likely to be funded from the PSIDP - the 360 MW Haripur and 450 MW Meghanaghat gas to power combined cycle projects - are least cost economic choices. A Power Sector Master Plan study carried out by Acres International in August 1995 on behalf of GOB, has established that natural gas, combined cycle technology is economically the most efficient and least cost option for Bangladesh. The report has further identified these two sub-projects as part 17 of the least cost expansion plan. The economic results are robust and economic rates of return are in excess of 12 percent under various sensitivity scenarios.7 More detailed economic analysis for each candidate sub- project will be required to be submitted by the sponsors and would be reviewed by IDCOL during sub-project appraisal to assure economic viability. Consistent with Bank practice in South Asia (and Bangladesh), the minimum acceptable economic rate of return for a sub-project to be eligible for financing under PSIDP would be 12 percent. Further, through regular monitoring and as part of periodic economic work, such as in relation to the Public Expenditure Reviews (PER), economic viability of selected sub-projects and least cost solutions in each sector would be ensured. (see para e. below) (b) On a more general plane, since there are severe bottlenecks in infrastructure provision in Bangladesh, there is little doubt that infrastructure sub-projects generally would have high economic rates of return (ERR). For example in the power sector, due to the high economic cost imposed by power shortages, willingness to pay for reliable power is estimated to be 4 times the tariff, nearly 16-20 US cents per Kwh. Furthermore, given the comparatively higher efficiency of private thermal power plants vis-a-vis the public sector thermal plants of BPDB, a project undertaken in the private sector is very likely to generate a higher rate of return than one in the public sector. The average thermal plant factor of BPDB operated plants in 1996 was 55-60 percent, due to forced outages. In the private sector, a much higher availability is expected, and in fact the Haripur IPP is required to give a guarantee for 85 percent plant operation factor. Further, construction periods in public sector generation projects are longer due to slower government procurement procedures and funding constraints. This factor also adds to the comparatively higher rates of return of private sector plants. The situation is similar in the other sectors and is in line with international experience that private sector construction and operation of infrastructure assets is consistently more efficient and achieves higher rates of return than assets owned and operated in the public sector. (c) Compared to a typical public sector project, a PSIDP supported private sector infrastructure project considerably limits the direct exposure of GOB. It would be less than 40 percent of the total cost, as against a full 100 percent exposure in public sector projects. Furthermore, since equity is typically limited to 20-25 percent of capital cost in projects implemented on a limited recourse, BOO/BOT basis, they are highly leveraged with debt to equity ratios of 4:1. This degree of leverage will lead to a larger complement of non- guaranteed, commercial debt flows into Bangladesh. At US$225.million, the PSIDP is equivalent to about 7-8 percent of the ADP. If it leverages other resources on a 1:3 basis, it can succeed in attracting nearly US$675 million dollars in investment, which is 22-24 percent of the ADP. In terms of easing GOB's fiscal burden, it will thus translate into an estimated annual support of 4-5 percent of ADP over the five year period of the project. (d) Thus in terms of macroeconomic impact, a successful PSIDP would bring some relief to GOB in resource mobilization for infrastructure investment. Since over the five year life of the project, the total expected inward investment is less than three percent of annual GDP, negative impacts, if any, on the balance of payments would be minimal. Assuming that rapid improvement in infrastructure provision would generally benefit the economy through higher productivity and increased exports, such small impacts appear manageable. Additionally, there is a high probability that private sector investment would hasten potential energy (gas) exports from Bangladesh, leading actually to a large positive impact on balance of payments. 7 Power System Master Plan - Bangladesh; Main Report, Volume 1. Acres International Limited, August 1995. 18 (e) IDCOL has the primary responsibility of ensuring that all private sector sponsored sub-projects considered eligible to receive PSIDP funding satisfy economic efficiency criteria and are part of the least cost investment strategy in the concerned sub-sector. The following additional safeguards shall apply: (i) Assessment of PSIDP projects will feature regularly in Bank dialogue on specific sectors to check consistency with the macroeconomic framework and sector strategy. (ii) Sub-project acceptance cut off ERR would be strictly applied (minimum 12 percent), and would be reflected in the operational manuals of IDCOL as part of economic eligibility criteria. 15. TechnicalAssessment Technical quality of sub-projects accepted for financing by IDCOL will be ensured in two ways. Firstly, in the sub-project preparation and contracting phase, GOB and the relevant project agencies, such as Ministry of Energy would have access to technical assistance under the PSIDP to conduct feasibility studies, prepare and implement sound solicitation processes and retain professional expertise to advise on negotiation and contract documentation. Secondly, at IDCOL, the IASP retained to advise it would carry out appropriate due diligence, in association with other international financiers, to ensure that technically sound design and proven equipment/services are employed by project sponsors. To this end, IDCOL will require independent engineering assessments and technical reviews before accepting the sub-project sponsor's proposals. 16. Financial Structuring (a) Lending Terms. On behalf of GOB, IDCOL will onlend the IDA credit to sub-borrowers in available foreign currency, denominating the loan in equivalent US dollars on the date of disbursement. Loans will carry a maximum maturity of 23 years, including a grace period of up to 8 years. Maturities and grace periods will be determined on a case-by-case basis taking into account the nature of the sub-project. Interest during construction would be capitalized and form part of the financing provided by IDCOL to sub-projects. Borrowers would be offered a choice between variable and fixed-rate options at the time of negotiating the loan. The variable interest rate would be set initially at 6 month US$ LIBOR+350 basis points. The fixed interest rate would be based initially on the term of the loan, the appropriate swap rate between US$ floating and fixed interest rates and a premium of 350 basis points. (b) Rationale for terms. The long maturity and grace periods are considered necessary to match the longer life of infrastructure assets and to provide for a uniform level of debt service during the concession period. However, the 23 year maturity and 8 year grace are ceilings, and actual terms would be determined on a case-by-case basis. For example, the 23-year maturity would not apply for a 15-year BOT concession. Terms would be influenced by the expected cash flow, construction period, and expected economic life of the assets of each sub-project. Maturity and grace terms would be blended with those of commercial debt, including IFC and export credits, to arrive at acceptable average maturities for the overall loan package. The interest rate of 350 basis points (bp) above LIBOR is an initial rate based on prevailing market conditions. It has been determined by computing approximate subordination and maturity premiums to an indicative rate of LIBOR + 200-250 bp, at which most commercial lenders perceive loans of upto 7-10 years maturity to Bangladesh may be available. This is also consistent with the interest rates on commercial loans to the KAFCO fertilizer project, which is the only instance of a limited-recourse transaction in Bangladesh. It is not possible to precisely define the interest rate for long term loans of this nature in Bangladesh as there is presently no market for this tenor of debt. Accordingly, the proposed rate of 350 bp above 19 LIBOR would be used as a starting point and would be reviewed annually as market conditions change and new facts on market benchmarks surface. Given the fact that PSIDP terms for each sub-project would be offered uniformly to all bidders to a sub-project, any implied subsidy through the interest rate or the maturity would be passed on to the Government and the consumers through the competitively bid tariff or on the price per unit of service negotiated on a cost plus basis. Since interest rates, as well as proposed maturities for specific sub-projects should be sensitive to market signals, the proposed annual review of terms and conditions of IDCOL loans is of critical importance and would be undertaken diligently. Also, based on initial project experience, the mid-term review would consider downward revision of the 40 percent of project cost ceiling for IDCOL participation in sub- projects. This would be consistent with the fact that PSIDP support should be phased out as capital markets mature and investor confidence in Bangladesh grows with time. (c) Foreign Exchange Risk. Foreign exchange risk implications arise primarily from the transactions occurring between IDCOL and the sub-borrower. The sub-project revenue streams will most likely be in local currency, whereas the debt service to IDCOL will be in US$ (taka-dollar equivalent). In typical project finance transactions, the sub-borrower project company would be able to mitigate a part of the risk arising from this situation through currency devaluation pass-throughs in the off-take agreements. It is expected that in the case of this project, sub-borrowers would mitigate the exchange-rate risks, especially during construction, through hedging and/or exchange rate insurance, and in the operating phase through appropriate pass-through provisions. Thus, ultimately the exchange rate risk would be priced into the user charge or tariff of the output from the sub-project. The GOB will typically carry the SDR-US$ risk. The large spread between lending rates to sub-borrowers and the IDA lending rate and reserves in the Repayment Account would act as adequate insurance for this rather modest risk. (d) Fees. IDCOL's charges and fees have been determrined in line with standard practice in project finance. The schedule is as follows: (i) One time Application Fee of US$5,000 ( one time, non-refundable, payable in US$) (ii) Project Examination Fee of 0.25 percent of the financial assistance - a portion payable at the time of initial application. (iii) All cost/fees and reasonable level of expenses for the Investment Advisor and consultants, appointed by IDCOL for appraisal, due diligence and costs incurred in connection with travel and visits in relation with negotiations, meetings, monitoring etc. (iv) Documentation fee of 0.25 percent of the loan amount, payable at the time of execution of loan documents. (v) Commitment Charges at the rate of 0.75 percent per annum payable quarterly, and calculated on unutilised amounts of the financial assistance effective 60 days from the date of Facility Agreement. (vi) Monitoring Fee of 0.25 percent per annum payable quarterly, on the financial assistance, disbursed and outstanding. (All co-financiers fees and charges as applicable, such as ECAs insurance premium, charged at cost) (e) Interest Spread Income and its Deployment. Credits from IDA to GOB carry a service charge of 0.75 percent per annum and a term of 40 years with ten years grace. However, proceeds from the Credit are to be loaned by IDCOL at significantly higher rates, with maturities upto 23 years. The difference between the funding and on- lending terms will result in cash surplus in the Repayment Account over time. Subject to certain assumptions, such as full commitment of IDA loan in the first three years and disbursements by the end of five years, an initial corpus of US$225 million would lead to accumulated interest and retained principal spreads of over US$ 100 20 million in year 10. This accumulated surplus in the Repayment Account would be available for future on-lending. In addition to future lending, distributions from the spread income would cover: (i) repayments of IDA credit for this project; (ii) operating expenses for IDCOL; and (iii) creation of reserves to cover losses to GOB arising out of sub-project defaults or adverse SDR-US$ currency fluctuations. These distributions will be subject to IDA concurrence during annual reviews. 17. InstitutionalAssessment IDCOL was incorporated on May 14, 1997 and has started functioning. It is presently reviewing the Agency and Administration Agreement and the Investment Advisory Agreement, and has prepared the first edition of its Operations Manual and Information Brochure. It has also commenced preliminary examination of potential sub- projects. It is on course to meet the Project Effectiveness milestones of selecting a full time CEO and the firm or consortium to provide IA services. The procurement process for these selections has been launched as per schedule. IDCOL's role as a lender will continue only as long as the international capital markets are still unable to meet Bangladesh's requirements for long term finance for infrastructure projects. During the projects Implementation Completion Review, GOB and IDA will carry out an assessment of IDCOL, to determine whether it should continue as is, or be merged with a private or public financial institution. The latter option would be realistic, since financial sector reforms being undertaken through IDA projects are likely to create more commercial and creditworthy institutions. In that case, a strong rationale would emerge for merging IDCOL with a well performing financial institution as its project finance division. On the technical assistance side, basic understandings have been reached on establishing the IIFC and government decisions are expected to be taken prior to declaring the project effective. 18. Environmental and SocialAssessment (a) The project overall is judged to have moderate to high environmental and social risks. As a result, the project has been rated "A" for environmental assessment purposes, and the Environmental and Social Framnework (ESF) was prepared to provide a process within IDCOL to identify environmental and social issues upstream and advise the private sponsor to take appropriate measures to meet GOB and IDA standards. The ESF has been prepared by a leading Bangladesh NGO, has been subsequently discussed with other NGO representatives in Bangladesh and has received IDA approval. The Executive Summary of the ESF was circulated to the IDA Board on June 27, 1997 (Annex 5). The ESF lays down the policies and procedures that would be followed for sub- projects to be financed under the credit and the process for environmental clearances that would need to be met for each sub-project. An EA satisfactory to IDA would be required to enable the loan application from the sub- borrower to IDCOL to proceed. Likewise, all sub-projects that entail acquisition of private property (legally owned or customarily used) will be required to assess their impact on people living in the affected areas. This impact assessment will be carried out as an integral part of the EA. When applicable, it would meet the requirements for involuntary resettlement as set out in the Bank's Operational Directives (OD 4.30). The provisions of the ESF have been incorporated in the business process of the IDCOL through its operational manual. As discussed earlier, IDCOL capacity to carry out due diligence on environmental and social issues will be ensured as a part of the IASP contract. IDCOL is accountable for sub-projects complying with the environmental and social due diligence standards outlined in the ESF. 21 (b) While a potential pipeline of sub-projects exists, no project sponsors have yet been selected for any specific sub-project.8 For the Haripur and Meghnaghat power projects, GOB will identify the sponsors based on the results of the international competitive processes now underway. Short-listed bidders for these two projects are reputable international firms familiar with Bank enviromnent and social standards. Furthermore, all bidders have consulted in advance with the Bank and IDCOL regarding requirements on environmental and social aspects, and it is reasonable to assume that they have factored costs for compliance in their bids. The sponsor, once selected, would have a specified period of time to finalize project financing. If the sponsors wish to access IDCOL financing, they will have to prepare an Environmental and Social Impact Assessment (ESA) and mitigation plans, following the terms and conditions laid down in the ESF. Satisfactory review and acceptance of this report by IDCOL and IDA is mandatory and condition precedent for IDCOL financing to be made available. 19. Procurement Arrangements (a) Under PSIDP, the preferred mode of procurement for awarding of sub-projects is international competitive bidding, carried out as per World Bank procurement guidelines. For such solicited proposals, the investor or project sponsor would be selected under International Competitive Bidding (ICB) or Limited International Bidding (LIB) procedures acceptable to IDA under rule 3.13 (a) of the Procurement Guidelines. Sponsors selected in this manner shall be free to procure the goods, works and services required for the facility from eligible IDA members, using their own procedures. (b) However, some projects, such as complex transportation systems and gas pipelines linking new gas find areas are likely to be developed on an unsolicited basis. In the case of unsolicited proposals, when the sponsors are determined not to have been selected on a competitive basis, the goods, works or services required for the sub- project and to be financed by IDA shall be procured in accordance with ICB or LIB procedures in accordance with the Bank's procurement procedures, subject to the exception referred to below in paras (iii) and (iv). Goods, works and services financed from the proceeds of loans and mixed credits made by another multilateral agency or a cofinancing government would be procured in accordance with the procurement rules and procedures of the bilateral agency or the multilateral co-financiers. (c) Under limited recourse financing, lenders generally insist that sub-project companies have access to standby financing to meet any unanticipated financial obligations, and that it is available for deployment as needed rather than being tied to specific procurement packages. Standbys are provided by the major equity holders and both senior and subordinated lenders. They are drawn down on a paripassu basis irrespective of the cause of the cost overrun. If the standby commitments of different lenders were earmarked for different project components, the" law of averages" would not apply and the total amount of standbys would have to be increased to provide risk protection and which would increase overall project financing costs. Furthermore, if cost overruns occurred and IDCOL (and IDA) did not participate equally in the standby facilities, the conmmercial lenders would have to finance a higher percentage of the project. They would increase the risk premium incorporated in their interest rate, so the overall cost of the project would go up, and its viability would decrease. 8 The exception is the barge mounted plants where sponsors have been selected by GOB. However, no formal involvement of IDCOL has transpired as yet since the sponsors are still exploring whether such funding will be required. The financing initiative is being led by IFC, and if IDCOL/IDA do get involved, it will only be after a full due diligence on environmental aspects is conducted and found satisfactory by IDCOL and IDA. 22 (d) Consequently, the provision of standby facilities and the pan passu draw down of these facilities are essential to ensure the overall economy of the project. Failure to do so would invariably lead to greater difficulties in mobilizing the total financing and in incurring a higher cost of the sub-projects financed through IDCOL. The standby financing provided by IDA would be disbursed against goods, works and related services. Some of these funds might be disbursed against the same items that are covered under the sub-project's base financing and which shall have been procured strictly under the Bank's procurement rules. However, because of the pooled nature of the standbys, part of the standby financing might cover cost increases on items that have not been procured following the Bank's guidelines. It is proposed that the proceeds of the proposed IDA credit be used for such goods and works so long as certain safeguards are applied. These safeguards are that the disbursements be for contracts that have been awarded: (a) in accordance with sound commercial practices; (b) with due attention to economy and efficiency; and (c) in accordance with the Bank's eligibility requirements. In addition, such disbursements would not be made against goods and services provided by a sub-project sponsor or shareholder. As a general rule, the maximum percentage of IDA funds eligible for standbys for any sub-project would not exceed 20 percent. (e) Proceeds from the proposed credit would also be used to finance insurance that is procured competitively off- shore. This follows limited recourse project finance practices which place major emphasis on the identification, allocation and mitigation of risks in a transparent manner. In order to ensure that the potential proceeds of any claims would be available to the lenders and that the cover is adequate, the commercial banks typically insist that the owner procures all the insurance for the construction phase (rather than relying on the insurance cover normally obtained by contractors and suppliers). To obtain the lowest possible price, insurance financed under the proposed credit would be procured through LIB from firms that have the highest rating.9 (f) Procurement by IDCOL and Line Agencies - Consultants would be selected in accordance with World Bank's Guidelines for the Use of Consultants. Contract packages for equipment and materials costing less than US$50,000 could be procured through local shopping with an aggregate of not more than US$250,000. Contracts with consulting firms estimated to cost more than US$100,000 and contracts with individual consultants costing more than US$50,000 would be subject to prior review. Summary of Procurement Arrangements for IDA Component (US$M (Indicative) ICB LIB LCB Other Total Indicative Project(s) 150 30 15 30 225 TA 7 3 10 Total 157 30 15 33 235 9 Companies should have a Best's Insurance Reports rating of at least "A" or equivalent, have an Insurance Solvency International Limited rating of at least "A" or equivalent, or receive the highest financial condition rating of any other independent insurer rating organization that issues ratings on not less than five hundred (500) insurers. 23 20. Disbursements (a) Prior to the disbursement of any IDA funds for a sub-project, IDA would review and approve the following documents: (i) the appraisal report prepared by IDCOL to ensure that the sub-project is technically sound, and economically and financially viable; (ii) procurement documentation to ensure that IDA's guidelines have been followed; (iii) environmental and social assessment, and its applicability to the resettlement action plan; and (iv) key documents in the security package with special emphasis given to the IDCOL sub-loan agreement. (b) IDCOL would be the lender of last resort. Depending on the availability of other financing, IDCOL's contribution would vary from case-to-case, but would not exceed a total of 40 percent of sub-project cost. Thus, disbursement percentages would also vary, depending on the contract packaging of the sub-project and IDCOL's share of the financing. The proceeds of the credit would be disbursed as follows: (i) sub-projects competitively awarded after international solicitation: * 100 percent of Engineering, Procurement and Construction (EPC) or Turnkey contract payments, determined on a case-by-case basis; * 100 percent of foreign expenditures (c.i.f cost) and local expenditures (ex-factory cost) for ancillary equivalent and materials (not included in the EPC contract), determined on a case-by-case basis; and * 100 percent of interest during construction and other charges accrued on the amounts of the sub- loans financed out of the proceeds of the credit. (ii) eligible contracts on other sub-projects: * 100 percent of foreign expenditures and 85 percent of local expenditures for works, determined on a case-by-case basis; * 100 percent of foreign expenditures (c.i.f cost) and local expenditures (ex-factory cost) for equipment and materials, determined on a case-by-case basis; * 100 percent of foreign expenditures on off-shore insurance, determined on a case-by-case basis; and * 100 percent of interest during construction and other charges accrued on the amnounts of the sub- loans financed out of the proceeds of the credit. (iii) technical assistance and institutional strengthening: * 100 percent of expenditures on consultant services and training in the first three years and 70 percent thereafter; * 100 percent of foreign expenditure (c.i.f. costs) and local expenditures (ex-factory cost) for equipment and materials; and * 70 percent of other items procured locally. (c) The disbursement of funds by the co-financiers would be in accordance with their respective guidelines. Disbursement would be fully documented, except for expenditures under contracts for goods costing less than US$50,000 equivalent procured for the use of consultants, for contracts with consulting firns estimated to cost less than US$100,000 equivalent and contracts with individual consultants estimated to cost less than US$50,000. Such disbursements would be made against statements of expenditures (SOE), the documentation for which would not be submitted to IDA but retained by IDCOL for inspection by the supervision missions. The standard 24 procedures for auditing SOEs would apply. The initial deposit in the Special Accounts would be equivalent to four months of expected expenditures or about US$400,000. The indicative disbursement schedule has been projected to cover a six-year period. The estimated disbursement profile takes into consideration typical sub-projects and the indicative composition of the portfolio to be financed from the proposed credit. The cut-off date for new loan commitments financed under the credit from IDCOL would be June 30, 2002 and the closing date of the Credit would be December 31, 2002. Disbursement (Indicative) (US$ millions) Fiscal Year 1998 1999 2000 2001 2002 2003 Total TA 3 2 2 2 1 0 10 Project 7 58 78 48 24 10 225 otal 10 60 80 50 25 1a0 235 21. Sustainability The sustainability of IDCOL would be ensured by establishing it as a strong, professionally managed and financially independent institution. It will also receive adequate technical assistance in the formative years for capacity building. The functional sustainability will be ensured through the Agency and Administration Agreement between IIDCOL and GOB on the one hand, and the back-to-back Credit and Project Agreements between IDA/GOB and IDA/IDCOL respectively. IDCOL's professionalism and commercial culture would be ensured through the IASP, which will bring highly specialized project finance expertise to Bangladesh and IDCOL. The sustainability of the IIFC would be ensured by providing technical assistance for capacity building and enabling it to assist sub-project development work in the line agencies and ministries. IIFC's manager and staff would receive adequate training inputs and enrich their expertise through coordinating programs with similar institutions in Philippines, Malaysia, Singapore, UK and Canada. 22. Critical Risks (see fourth column of Annex 1) Project outputs to development objectives Risk Risk Rating Risk Minimization Measures 1. IDCOL's capacity to perform as per moderate (i) Appropriate agreements regarding commercial commercial principles and deliver results orientation and autonomy reached with GOB, (ii) on a sustained basis. Substantial private sector representation on the IDCOL Board, (iii) Quality international professionals made available under the Investment Advisory contract for managing IDCOL's activities. 2. GOB unable to overcome line ministry low in energy Line ministry officials ancd trade unions are averse to and trade union resistance towards private and privatization of existing assets. However, sector participation. telecommuni- opposition to creation of new assets (which is the 25 cation sectors, objective of the project) in the private sector is not moderate in evident. GOB's ability to carry out fundamental other sectors. reforms has an impact on the sustainability of private participation. Hence, measures to compliment sector reform efforts are built in and the proposed IIFC will play an advocacy role. Project components to outputs 1. Failure of first few transactions to low to (i) Sound structuring of sub-projects with rigorous proceed quickly moderate financial and technical analysis, exploring private sector interest, international competitive bidding processes and well conceived security arrangements. (ii) Adequate resources for conducting the process professionally, adopting best industry standards. (iii) Incentives to the IASP for achieving faster financial closure on deals and maintain effective implementation monitoring. 2. Transactions delayed in implementation low to (i) Ownership of sub-project issues which are the due to lack of support by line ministries moderate main cause for lack of support will be addressed in and project agencies. the IIFC governance and decision making structure. (ii) Project Development Units would be within line ministries, but high profile IIFC leadership will help overcome stress points. Overall project risk rating Risk Risk Rating Risk Minimization Measures 1. Macroeconomic risks - decline in moderate Project cannot address this, but can provide early macroeconomic fundamentals, adversely warning of possible adverse impacts from sub- affecting investment attractiveness. projects to be financed under the PSIDP. 2. Decline in GOB commitment to private low to Varies by sector, is low in energy and sector participation in infrastructure moderate telecommunication sectors and moderate in others. development However, the strength of the GOB commitment and the fact that investment compulsions exist, reduce this risk substantially. Additionally, the project proposes to maintain a close linkage with the sector reform dialogue and compliment the broader reform agenda in each sector. 3. Environmental and Social Risks low in (i) Well defined roles and responsibilities, clear telecoms, guidelines and processes established and institutional moderate in capacity in IDCOL to implement compliance gas/power requirements. generation, (ii) Strong checks and balances through internal and high in other external monitoring provisions and IDA back-up and projects. supervision. 26 4. Slow down or lack of success in moderate to The Bank and other leading donors have a fairly financial sector reforms, and/or capital high well developed agenda to address financial sector markets fail to develop to the point where deficiencies, especially capital markets development private financing of infrastructure projects and banking sector reforms. Hence, by the time can be market-led. PSIDP closes, Bangladesh is likely to have a credit rating strong enough to let capital markets dictate private resource mobilization. The PSIDP does not directly address capital market development, but would maintain a close linkage with such efforts to ensure that it compliments the overall direction of Bank and GOB efforts in the financial sector. 23. Possible Controversial Aspects 1. The extent of funding (maximum of 40 percent of sub- Though providing 40 percent of sub-project cost as project cost) from the project being too high. loan may not be necessary for power generation projects, it may be necessary for road and environment type of projects, which have lower revenue earning capacity in early years. The limit of 40 percent is thus a general ceiling . The limit for each sub-project would be determined on a case by case basis, with due regard to minimizing PSIDF involvement and the fact that it is 'lending of last resort'. This will also be ensured by providing incentives to the IASP for leveraging other sources of financing to sub-project transactions. 2. The project support, especially on financing from Though chances of conflict on loan decisions are IDCOL being sought for questionable or controversial minimal, the sub-project finance process provides transactions, where transparency of procurement is at issue. several points of interface between IDA and IDCOL (Also includes the possibility of IDCOL and IDA difference fairly early on in the appraisal stages, so that of opinion on lending decisions) inappropriate or questionable transactions would be precluded from proceeding further. BLOCK 4: MAIN LOAN CONDITIONS 24. Effectiveness Conditions (a) IDCOL to select IASP satisfactory to IDA. (b) IDCOL to select full time Chief Executive Officer. (c) GOB and IDCOL to enter into the Agency and Administration Agreement, acceptable to IDA. (d) Meet all conditions precedent to the effectiveness of the co-financing agreements. In addition, as is normally the case, GOB's legal opinion on the Credit, Project and Agency and Administration Agreements would be required. 27 25. Key Implementation Covenants Project Implementation Covenants (a) Brochure: Government of Bangladesh will make available, through the IIFC, a brochure describing the policy and procedures for private sector participation in selected subsectors of energy and infrastructure. Among other things, the brochure will describe the contractual framework and institutional mechanism for implementing privately sponsored infrastructure projects in Bangladesh. The Brochure will be suitably updated periodically to reflect changes in policies, procedures and project opportunities. (b) On IIFC: GOB will prepare and furnish to IDA for review and approval by February 1, 1998 a report on the modalities of establishing the IIFC; including inter-alia, organization and staffing, terms of reference, and business plan for the next three years. After IDA's approval (and of co-financiers as may apply), GOB shall proceed to operationalize the IIFC by appointing key personnel, establishing its office and preparing detailed proposals for engaging various technical advisory services. (c) On IDCOL: IDCOL will prepare and submit for IDA's approval the Operations Manual, approved Agency and Administration Agreement and Investment Advisory Agreement. The Operations Manual will be suitably updated periodically to reflect changes and new guidelines and procedures. The IDCOL, through appropriate provisions in the Operations Manual, shall ensure that its financial and accounting standards meet the requirements of the World Bank and that periodic audits are conducted as per the provisions contained in the Project Agreement. In terms of sub-projects, IDCOL will follow the process laid down in the Operations Manual and the Project Agreement, especially the stages at which IDA approval or review is required. (d) Monitoring and Evaluation: Continuous monitoring of Project Performance Indicators and preparation of the mid-term review report by September 30, 1999. BLOCK 5: COMPLIANCE WITH BANK POLICIES [X] This project complies with all applicable Bank policies'. Task Manager: . . Iyer Se#or Manager: Alastair cKechnie Annex I Project Design Summary Narrative Summary Key Performance Indicators Monitonng and Supervision Critical Assumptions and Risks CAS Objective 1. Provide access to adequate and Measures on access, coverage and These measures are monitored on a 1. Assumptions: (i) GOB efficient infrastructure services. efficiency of basic infrastructure regular basis and as a part of the commitment to undertaking critical services - power (such as HHs with CAS Process. Project will utilize sector reforms in the infrastructure electricity, frequency of power data from such periodic sectors; (ii) macro-economic outages, TEUs handled at port, assessments. fuindamentals remain stable. thereby number of telephones per 1000 providing comfort for large volume population, bulk output of filtered flows of foreign, private capital into water etc.) the country. 2. Promote dynamic private sector Private vs. public At present, in all sectors covered by 2. Risks: (i) Political instability and participation in provision of ownership/operation of this project, basic infrastructure resultant dilution of focus on co infrastructure. infrastructure assets at the assets are owned and operated by reforming critical infrastructure beginning and close of project. the public sector. Project sectors resulting in failure of monitoring would keep track of sufficient private sector interest in introduction of private sector into sectors from materializing; and (ii) these areas. See Annex 2 for political considerations forcc measures. government to withdraw from undertaking critical reforms. 3. Developing appropriate policies Status of fundamental reforms by Continuing Bank-GOB and regulations for private sector sectors and establishment of interactions/dialogue on sectoral participation. suitable policies and regulations. reforms and project supervision. M . 0 Narrative Summary Key Performance Indicators Monitoring and Supervision Critical Assumptions and Risks Project Development Obiectives (Development Objectives to CAS I. Enable flow of private investment 1. Incremental investment resources 1. Actual figures on investment of Objective) in the form of commercial equity (defined as non-donor and non- this nature to be collected and 1. Assumptions: (i) GOB continues and debt financing for infrastructure GOB guaranteed equity and debt reviewed by Bank supervision to be strongly committed to projects. flows) realized for infrastructure missions. expanding infrastructure provision projects. and inviting private sector investment in new infrastructure 2. Enhance GOB's capacity to 2. Number of project ideas 2. (i) Actual numbers of projects projects; (ii) macro-economic attract and realize private sector identified developed and marketed developed and marketed by sector to fundamentals remain stable. thereby interest and investment in by sector; framework for private be collected and reviewed by Bank providing comfort for large volume infrastructure projects. participation by sector and feedback supervision missions; (ii) Status of flows of foreign, private capital into from GOB agencies, development policies and institutional/regulatory the country. partners and private sector on arrangements would be reviewed effectiveness of arrangements put in jointly with GOB, development 2. Risks: (i) Political instability and place by the project. partners and the private sector resultant dilution of focus on through round-table discussions, expanding infrastructure and seminars. investments and private sector participation; (ii) Sufficient level of private sector interest in sectors other than energy fails to materialize; and (iii) first few projects fail to take-off due to country, sector or stake-holder failures (D ( 0 Fh Narrative Summary Key Performance Indicators Monitoring and Supervision Critical Assumptions and Risks Proiect Outputs For outputs I and 2 For outputs I through 4 (Outputs to Development 1. Private investment of at least (i) Number and magnitude of Objectives) USS 400 million over the project private sector BOO/BOT type of Actual data to be collected by Bank implementation period in creation projects implemented and financed supervision missions and reviewed 1. AssumDtions: (i) IDCOL is able of new infrastructure assets in through PSIDP. (ii) Amount and jointly with GOB, development to function in accordance with Bangladesh. sources of private and non- partners and the private sector established commercial principles; 2. Private sector investment in and government guaranteed investments through round-table discussions, (ii) IDCOL funding as detcrmined operation of infrastructure assets - realized. (iii) Number of loan and seminars. in the project, is sufficient to at the very least- two power applications received, processed and leverage other forms of financing. generation plants, one each of decided by the Infrastructure (iii) Line ministries and agencies telecommunication transportation Development Company (IDCOL). are willing participants in and water supply projects. (total 5 promoting implementation of new projects) For outputs 3 and 4 projects by the private sector, and 3. Establishment of a project (i) Timely establishment and (iv) GOB/Bank/private sector are o development and facilitation agency functioning of the Infrastructure jointly able to maintain for GOB to promote private sector Investment Facilitation Center understandings reached on their interest in infrastructure and (IIFC) and other Project respective roles. strengthening of line ministries and Development Units (PDUs) by infrastructure agencies to deal with sector. (ii) Policies for encouraging 2. Risks: (i) Changes in the private sector BOO/BOT type of private sector participation (like the government prompt changes in the project development process. Private Power Policy document) degree of IDCOL's autonomy and 4. Overall framework in each issued by GOB ministries. (iii) ability to deliver project outputs: sector, in the form of policies and Number of infrastructure projects and (ii) GOB is unable to overcomc regulations, to promote public- identified, developed and marketed line ministry and trade union private sector partnership in by each line ministry/agency (iv) resistance to private sector infrastructure provision. Number of participants trained in participation in specific proiccts, project finance and related such as port operations. transaction development areas. (iv) D promotion activities undertaken, Q ss such as roadshows, investment X seminars etc. .___Lo 0 Narrative Summary Key Performance Indicators Monitoring and Supervision Critical Assumptions and Risks Project Outputs For outputs I and 2 For outDuts I through 4 (Outputs to Development 1. Private investment of at least (i) Number and magnitude of Objectives) USS 400 million over the project private sector BOO/BOT type of Actual data to be collected by Bank implementation period in creation projects implemented and financed supervision missions and reviewed 1. Assumptions: (i) IDCOL is able of new infrastructure assets in through PSIDP. (ii) Amount and jointly with GOB, development to function in accordance with Bangladesh. sources of private and non- partners and the private sector established commercial principles; 2. Private sector investment in and government guaranteed investments through round-table discussions, (ii) IDCOL funding as determined operation of infrastructure assets - realized. (iii) Number of loan and seminars. in the project, is sufficient to at the very least - two power applications received, processed and leverage other forms of financing; generation plants, one each of decided by the Infrastructure (iii) Line ministries and agencies telecommunication transportation Development Company (IDCOL). are willing participants in and water supply projects. (total 5 promoting implementation of new projects) For outputs 3 and 4 projects by the private sector, and 3. Establishment of a project (i) Timely establishment and (iv) GOB/Bank/private sector are development and facilitation agency functioning of the Infrastructure jointly able to maintain for GOB to promote private sector Investment Facilitation Center understandings reached on their interest in infrastructure and (IIFC) and other Project respective roles. strengthening of line ministries and Development Units (PDUs) by infrastructure agencies to deal with sector. (ii) Policies for encouraging 2. Risks: (i) Changes in the private sector BOO/BOT type of private sector participation (like the government prompt changes in the project development process. Private Power Policy document) degree of IDCOL's autonomy and 4. Overall framework in each issued by GOB ministries. (iii) ability to deliver project outputs; sector, in the form of policies and Number of infrastructure projects and (ii) GOB is unable to ovcrcomc regulations, to promote public- identified, developed and marketed line ministry and trade union private sector partnership in by each line ministry/agency (iv) resistance to private sector infrastructure provision. Number of participants trained in participation in specific projects. project finance and related such as port operations. transaction development areas. (iv) (D(D promotion activities undertaken, 4 such as roadshows, investment o I seminars etc. __ 32 Annex 2 BANGLADESH Performance Monitoring Indicators Enem 1. Generation capacity in private 0 700-800 MW under 700 MW operating sector construction 2. Gas pipelines in private sector 0 100 kms under 100 kms or more construction operating Other sectors 3. Project identified and developed for private sector participation: (i) identified and/or 2 5 10 feasibility stage; (ii) under procurement 0 2 3 (iii) under implementation 0 0 2 Other outputs 4. General BOT/BOO framework 0 Completed Under operation in place 5. GOB approved standard 0 Completed In use security agreements for projects in other sectors (non-energy) 6. Promotion/road shows by IIFC 0 At least 2 At least 5 for attracting infrastructure investment 7. Non-GOB guaranteed debt 0 At least US$ 350 million At least US$ 350 finance in infrastructure projects committed million realized and a further US$ 250 million equivalent committed 8. IDCOL financing 0 At least US$ 200 million US$ 225 million committed disbursed 33 Annex 3 SUMMARY OF OPERATIONS MANUAL INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED (IDCOL) The purpose of the manual is to establish guidelines for the administration of IDCOL, including appraisal of investment projects, loan processing and monitoring by IDCOL. The contents of the manual are as follows:- Section I General Guidelines Section II Terms and Conditions of Loan: Section m Environment and Social Compliance Section IV Procurement Section V Financial Management Section VI Application Form Annexes 1. Environmental and Social Framework (ESF) 2. Investment Advisory Services Provider Agreement* Note - This is a summary of the full Draft Operations Manual, a copy of which is available in the project documents. 34 Annex 3 Page 2 of 12 DEFINITIONS "Association" means International Development Association (IDA) "Agency and Administration Agreement " means the agreement between GOB and IDCOL. "Investment Enterprise" means an enterprise to which IDCOL proposes to make or has made a loan "Investment Project" means a specific development project in selected sub-sectors of the infrastructure sector to be carried out by an Investment Enterprise utilizing the proceeds of a loan. "LIBOR " means the London interbank offered Rate for six month deposit in United States dollars "Operations Manual " means the operations manual of IDCOL which sets out the guidelines for appraisal, approval and supervision of Investment Projects " Project Agreement " means the agreement between IDA and IDCOL. "Repayment Account" means a Taka account with Bangladesh Bank into which the principal amount of loans and interest thereon received in Taka from Investment Enterprises will be deposited and utilized in accordance with section 2.02 O of the DCA. "Special Accounts" means US Dollar deposit accounts maintained with Bangladesh Bank for deposits and payments in accordance with schedule 6 of the DCA. ABBREVIATIONS AND ACRONYMS AAA Agency and Administration Agreement (between GOB and IDCOL) DCA Development Credit Agreement (between GOB and IDA) ESF Environmental and Social Framework IAA Investment Advisory Agreement IASP Investment Advisory Services Provider IDA International Development Association IDCOL Infrastructure Development Company Limited IIFC Infrastructure Investment Facilitation Centre LIBOR London InterBank Offered Rate LOA Letter of Award PA Project Agreement (between IDA and IDCOL) PLA Preliminary Letter of Acceptance PSIDP Private Sector Infrastructure Development Project RA Resident Adviser of IASP SP Security Package 35 Annex 3 Page 3 of 12 Infrastructure Developnmet Conmpan Limited (IIDCOL! 1. Objective - The Government of Bangladesh (GOB) has established IDCOL as a wholly owned public limited company to secure private sector participation (both local and foreign) in infrastructure development activities. The Private Sector Infrastructure Development Fund ( PSIDF or the "Fund"), has been established from resources extended to the GOB by the International Development Association ( IDA) of the World Bank and by other donors. IDCOL has been authorized by GOB to manage the "Fund" in accordance with the objectives of and understandings reached with IDA under the Private Sector Infrastructure Development Project (PSIDP). 2. Function - IDCOL seeks to mobilize private sector resources and management capabilities to develop modern and efficient infrastructure services in Bangladesh. IDCOL will provide long term subordinated loans to commercially viable infrastructure projects in the private sector in conjunction with commercial sources of funds. 3. Catalytic Role - In addition to their own equity contributions, sufficient to meet prescribed minimum limits, Investment Enterprises and investors would resort to other financing sources, such as commercial banks, for the remainder of the Investment Project cost. The participation in financing by IDCOL is expected to act as a catalyst for attracting private debt financing in infrastructure projects. This would result from the comfort available to banks and financial institutions from GOB (and indirectly, World Bank) participation in the project. The PSIDP lending with longer grace periods and maturities will enhance the internal financial rates of return of economically sound, but commercially risky projects and improve debt service cover ratios and generally make market financing more feasible. 4. Institutional Capacity - In order for IDCOL to conduct its financing operations on commercial basis an Investment Advisory Services Provider (IASP) has been engaged through an international bidding process conforming with IDA procurement guidelines. The IASP will act on behalf of IDCOL to process applications received from Investment Enterprises of infrastructure projects in Bangladesh, conduct appraisal and due diligence on such proposals, provide appropriate analysis and recommendations for making loan decisions and negotiate and finalize various documentation with Investment Enterprises, co-financiers and other stakeholders. The IASP will also provide a Corporate Consultant for advice to and review issues related to environment, land acquisition, resettlement and other social issues arising in Investment Projects. The IASP will also be responsible for disbursement of IDCOL funds and the supervision and monitoring of investment projects' implementation. In the initial phase, the IASP will be responsible for defining and establishing various operational guidelines for IDCOL and preparing the ground for its sustained good performance in financing private infrastructure projects. 5. Investrnent Policies and Eligibility Criteria - IDCOL lending would be administered on the basis of the following policies and criteria. a) Eligible Sectors - will provide long term subordinated debt financing to viable infrastructure projects in the private sector for:- * Power Generation and Transmission * Gas and gas related infrastructure * Toll Roads 36 Annex 3 Page 4 of 12 * Water Supply * Urban Environmental services (Waste Management and drainage) * Ports * Telecommunication * Other projects for the development of infrastructure as may be approved by the authorities concerned ( GOB and IDA ) b) Eligible rjcts - IDCOL will finance new projects; extension, modernization and replacement of existing assets, cost overruns and contingencies as approved in the respective Investment Project profiles, subject to ceilings imposed by IDA requirements, consultant and technical services, if procured as per respective guidelines, interest and other charges accrued on IDCOL loans during construction period and insurance premia to the extent allowed by financing obtained from IDCOL in the allocation of the Investment Projects cash flows for debt servicing. It is expected that Investment Projects would be generally structured Build -Own - Operate (BOO) or Build-Own-Transfer (BOT) basis or other variations of such mechanisms. c) Lending Principle - The fund resources will be subject to the rules and regulations of IDA and other donors, as may be participating. IDCOL's intention is to provide, as a "last resort lender", only as much financing as is required to meet the financing 'gap' after the full complement of equity and debt from market and institutional sources are realized. Depending on the availability of other financing , IDCOL's contribution would vary from case to case, but would not exceed a total of 40 percent of Investment Project cost. d) Procurement - To receive IDCOL support, investment projects must be competitively procured under international, competitive bidding process by the concerned agency or ministry of the Government. The procurement would be subject to IDA review for compliance with World Bank procurement guidelines. Investment Projects received as unsolicited proposals would be entertained only in cases where competitive selection is not possible or is judged to be inappropriate. e) Lending Limits - IDCOL's exposure in any single Investment Project shall not exceed 40% of the total Investment Project cost ( to include all development and financial costs as determined at the time of financial closing, when the entire financing package for the Investment Project's implementation including its equity is fully and irrevocably commnitted). Preference will , however, be given to Investment Projects requiring financial assistance to a lesser degree of the Investment Project cost. Every attempt should be made to maximize non-IDCOL, non GOB guaranteed debt financing in the package. Investment Enterprise's equity investment shall not be less than 20% of the total Investment Project cost as determined at the time of financial closing. The balance of the Investment Project cost will require to be arranged by the Investrnent Enterprises through loans and other credits without any GOB guarantees. f) Eligibility Criteria - IDCOL will make fmancing decisions after the evaluation of each proposed Investment Project has been carried out to establish the following: * Priority: The investment is an integral part of GOB's priority plan for the relevant sub-sector and is consistent with the policy framework and agreed sub-sector development plan with IDA. The 37 Annex 3 Page 5 of 12 technology proposed for a Investment Project should have a track record of demonstrated success in countries at a similar level of technological development and infrastructure support, as in Bangladesh. * Viability: Investment Enterprises should possess proven capability to develop, finance and operate the infrastructure projects in countries at a similar level of development as Bangladesh. To ensure commitment, sponsors' equity would need to represent at least 20 percent of the Investment Project cost with the main sponsors holding a minimum of 40 percent of the equity for at least five years after start up of commercial operations. * Limited Recourse Financing: Private investors and lenders should not require sovereign guarantees for financing. Lenders should rely on the security package, projected future cash flows from the Investment Project and the value of the assets for comfort. The debt financing must include some portion of non-recourse commercial senior debt as IDCOL will not cover more than 40 percent of the total Investment Project cost. * Economic rate of Return: The economic rate of return should be at least 12 percent. * Equity: Equity to the extent of at least 20% of the total Investment Project cost must be provided by the Investment Enterprise * Environmental and Social Assessment Criteria: Investment Projects should meet IDCOL's environmental and social assessment criteria, backed by IDA's environmental and social review, as described in the Environmental and Social Framework Document. * Procurement: Investment Projects should meet IDA's requirements of having been procured on an international competitive bidding basis. Where an unsolicited project is to be entertained, IDCOL will secure prior review from IDA as to why a competitive solicitation was not possible or is inappropriate in the case. 6. Appraisal Process - As GOB is making very large sums of money available to assist private sector sponsors to finance large infrastructure projects, it is important to ensure that the process is conducted properly and efficiently. In addition to the Security Package outlined in Section II, the following guidelines have been established: a) The Investment Projects considered by IDCOL for financing would have already been evaluated by the Government during the Investment project development process. Thus such Investment Projects, when they come to IDCOL, would have received or be under consideration for receiving Government approval for implementation. IDCOL will make a determination on the Investment Project's suitability for financing, particularly the extent to which it would be able to mobilize sufficient debt financing from market based sources. IDCOL financing will be generally deployed as "last resort lending" in line with IDA's principles. b) The Board of IDCOL includes both public and private sector representatives, in order to realize synergy from private sector entrepreneurship and commercial orientation, and public sector experience and influence. c) As international and domestic commercial lending institutions will be providing equal or larger share of the total debt financing of the Investment Projects, it is expected that they will carry out their own appraisal of the project proposal. Where it is appropriate, IDCOL may jointly participate with one or more commercial lending institutions in the appraisal process. In any case, each proposal will be subject to a thorough professional appraisal by the IASP. All reconmmendations of the IASP will be independently evaluated by the IDCOL Board before approval. Also, project proposals will be reviewed by IDA at different stages. Detailed process is attached. 38 Annex 3 Page 6 of 12 7. Fund Resources: Initially an amount of US $ 232 million will be made available by GOB from IDA Credit. Of this, an amount of US $ 7 million has been earmarked for technical assistance to IDCOL and the balance of US $ 225 million will be available for Investment Project financing. Other multilateral and bilateral financing may be forthcoming to increase the total availability of funds through EDCOL. Repayments of principal and interest from borrowers will be available for further on-lending to the extent not immediately required for servicing by GOB of debts of IDA and other co-fmanciers. 8. Terms And Conditions of IDCOL Financing - IDCOL resources comprise initially loans/grants from the donor agencies to the GOB that are on-lent by IDCOL for the development of infrastructure projects. Commercial loans and/or export credits for the purpose of implementation of the Investment Project shall have priority over the financing obtained from EDCOL in the allocation of the Investment Projects funds/cash flows for debt servicing and/or meeting obligations arising in the event of liquidation. Loans shall be made on terms whereby IDCOL shall obtain, by written contract with the Investment Enterprise or by other appropriate legal means, rights adequate to protect the interests of IDCOL including the right to: (a) require the Investment Enterprise to carry out and operate the Investment Project with due diligence and efficiency and in accordance with sound technical, fmancial and managerial standards and to maintain adequate records; (b) require that the goods and services to be financed out of the proceeds of the loan shall be procured in accordance with provisions of the loan agreement and ensure that such goods and services are used exclusively for the Investment Project. (c) inspect such goods and the Investment Project sites, works, plants and construction, the operation of the Investment Project and any relevant records and documents by IDCOL , its RA and its appointed agents. (d) require that the Investment Enterprise shall take out and maintain with responsible insurers such insurance, against such risks and in such amounts, as shall be consistent with sound business practice. (e) obtain all such information as IDCOL shall reasonably request relating to the foregoing and to the administration, operation and financial condition of the Investment Enterprise and, (f) suspend or terminate the right of the Investment Enterprise to the use of the proceeds of the loan upon failure by such Investment Enterprise to perform its obligations under its contract with IDCOL. The principal securities for a loan from the IDCOL to the Investment Enterprise in respect of the proposed Investment Project could include, as appropriate, the following: Part A The Investment Projects would be undertaken on a build-own-operate(BOO) or on a build-operate-transfer(BOT) model and are to be financed on a limited recourse basis in order to promote private investment in Bangladesh. Under this arrangement, the Investment Enterprises (or their contractors) will assume full completion and operational risks, but the lenders will look primarily to the expected cash flow of the Investment 39 Annex 3 Page 7 of 12 Projects for security. The cash flow, in turn, is dependent upon the strength of the agreements comprising the Security Package(SP). The parties of the Security Package are the following; i) Government of Bangladesh ii) Investment Enterprises iii) The concerned Government project agency iv) Regulatory authority ,where applicable. v) Supply Company (fuel if a Power project, bulk water if a water project etc.) vi) Operator vii) Lenders. Including IDCOL viii) Contractors for goods and services, engineering, procurement and construction (EPC) ix) Trustees x) Escrow Agents xi) Insurers General Security Package will consist of the following agreements and other documents as relevant. i) Implementation Agreement ( or concession agreement) ii) Purchase Agreement for purchase of goods and services of the Investnent Project iii) Supply Agreement iv) Construction Agreement v) Operation and Maintenance Agreement vi) Shareholders Agreement vii) Escrow Agreement viii) Land Agreement ix) Trust Deed x) Insurance xi) Loan Agreement xii) Inter - creditor Agreement PART B i) Mortgage on all immovable properties, existing and future; ii) floating charges on all business undertakings and other assets and properties; iii) hypothecation of all properties; including book debts and receivable; iv) pledge of Investment Enterprise's shares(75 % of shares) in the Investment Enterprise; v) execution of escrow agreements and assignment of escrow accounts; vi) assignment of revenue earnings of the Investment Project, and vii) assignment of insurance policies. 9. Terrs of the Loan - The loan agreement between IDCOL , and the Investment Enterprise for the execution of the Investment Project and other terms and conditions as specified by the co- financiers and/or the IDCOL. These may typically include: 40 Annex 3 Page 8 of 12 a) IDCOL and other lenders' approval to be obtained before any significant (to be specified in the agreement) share holding in the Investment Enterprise changes hands; b) the terms and conditions contained in the agreements forming the security package and other agreements entered into by the Investment Enterprise to be acceptable to IDCOL; c) IDCOL and other lenders' prior approval to any significant changes in the Operation and Maintenance Agreement and/or other agreements forming the Security Package for the Investment Project; d) Provision of insurance satisfactory to IDCOL and other lenders and e) The Investment Enterprises will employ consultants and advisors, with qualification and experience satisfactory to IDCOL and IDA, for the Investment Project as required. 10. Interest Rate and Repayment Schedule - IDCOL will offer both Fixed and Floating Rate of interest. a) Floating Rate of interest will be US Dollar, LIBOR ( 6 month) plus a premium of 350 basis points. b) Fixed rate of interest will be based on the term of the loan and the appropriate US Dollar swap rate, between floating and fixed interest rates, plus a premium of 350 basis points. c) Repayment period of up to 23 years, including grace period of maximum 8 years d) Default rate will be 300 basis points over the rate mentioned in (a) above. e) Repayment of principal and interest will be in semi annual installments and calculated in the foreign currency in which the loan is given, but repayment by the borrower will be made to IDCOL in Bangladesh Taka (BDT) equivalent amount converted at the rate of exchange prevailing on the day of payment. This will result in the borrower carrying the exchange risk. 11. Fees and Charges - The basis of fees and charges shall be fixed for each loan and will generally be consistent with standard project finance transactions conducted by commercial banks. 12. Disbursement Conditions - IDCOL will follow the normal industry practice for lenders to disburse loans pari-pasu as per agreed disbursement schedule which should meet stagewise funding requirements of the Investment Project and as provided under the Inter Creditor Agreement. Disbursement of funds to the Investment Enterprise will not be effected unless: a) the borrower has made firm and irrevocable commitments for meeting the balance of foreign and local currency requirements of the Investment Project, the terms and conditions of which are acceptable to IDCOL, IDA and the concerned co-financiers b) the borrower has executed an Implementation or Concession Agreement with GOB under terms and conditions acceptable to IDCOL, IDA and the concerned co- financiers; c) a Turnkey Contractor or Equipment Supply and Construction Contract, as the case may be, Operation and Maintenance Agreement, and other agreement forming part of the Security Package have been executed under terms and conditions acceptable to IDCOL, IDA and the concerned co-financiers; 41 Annex 3 Page 9 of 12 d) the borrower has , in the case of a thermal power project executed a Fuel Supply Agreement with a supplier under terms and conditions acceptable to IDCOL, IDA and the concerned co-financiers; e) the borrower has executed a Power Purchase Agreement (PPA) or any other form of sales and services agreement under terms and conditions acceptable to IDCOL, IDA and the concerned co-financiers. f) the borrower has paid all the appropriate fees and charges. g) carries insurance as per agreed terms and conditions. 13. Environmental and Social Compliance - GOB has prepared an ESF, which has been adopted by IDCOL, and has been ratified by IDA. It is based on three principles; (a) enhance the quality of life and environment in and around project locations; (b) prevent adverse environmental and social impacts; and (c) mitigate possible adverse environmental and social impacts. The ESF outlines policies and procedures that IDCOL will be required to adopt and implement to ensure that Investment Projects meet the environmental and social guidelines and standards prescribed in the ESF. The ESF incorporates measures for environmental and social risk identification, assessment, allocation and management during different stages of the project cycle as part of the Environmental and Social Assessment Process. The provisions of the ESF require that IDCOL appoint a Corporate Consultant to assist the IDCOL with the due diligence requirements of the ESF. The Corporate Consultant is expected to be part of the services provided by the IASP. Each Investment Enterprise applying for a loan will be required to furnish evidence satisfactory to IDCOL and IDA showing that an Investment Project in respect of which an application has been made would comply with the standards set out in the ESF, such evidence to include an environmental impact assessment and, where applicable, a resettlement plan for displaced populations for such Investment Project based on principles and procedures satisfactory to IDA. 14. Financial Management - IDCOL shall maintain proper books of accounts, records and documents as are required under the Companies Act, 1994 and as are necessary for an efficient, transparent commercial organization. They shall be capable of disclosing a true and fair view of the financial state of the institution. IDCOL shall establish procedures and records adequate to monitor progress of each Investment Project and to enable compliance with sound accounting practices. In order to monitor progress of Investment Projects and IDCOL's activities, quarterly Financial Management Reports, including Sources and Application of Funds statement, Special Account and Repayment Account information, Contract and other procurement information, Investment Project progress information ( indicators inputs, outputs etc., with explanation of variances) shall be prepared and submitted to IDA. 15. Audit and Reporting - IDCOL shall, at each AGM appoint an auditor or auditors to hold office from the conclusion of the meeting until the next AGM. The auditor(s) so appointed must be member of the Institute of Chartered Accountants in Bangladesh holding practicing certificate and their duties shall be in accordance with the provisions of the Companies Act, 1994. Each year IDCOL shall prepare a Balance Sheet and Income and Expenditure Account (Accounts) in accordance with the provisions of the Companies Act, 1994 and along with the Auditor's Report and the Directors' Report (Annual Report) thereon place before the Annual General Meeting (AGM) for approval by the shareholders. A copy of the Annual Report and Accounts shall be sent to each and every shareholder and a copy shall be filed with the Registrar. IDCOL shall furnish to IDA as soon as available but in any case not later than six months after the end of each year, (a) audited and certified copies of its financial statements, (b) the report of the auditors, and (c) such other information concerning 42 Annex 3 Page 10 of 12 records, accounts and financial statements as well as the audit thereof as IDA shall from time to time reasonably request. IDA or other co-financiers with prior consultation with IDCOL may appoint auditors to carry out Compliance Audit to ensure that the terms, conditions and other requirements of IDA and other Funding Agencies funding have been duly complied with. As IDCOL is a wholly owned Government company , IDCOL may be subject to Commercial Audit by the office of the Comptroller and Auditor General (C&AG) of Bangladesh. 16. Budgeting - IDCOL shall prepare and submit to IDA by 31 May of each year a business plan and budget for the succeeding year for approval by the IDA. The business plan should be designed to ensure the continued achievement of IDCOL's objectives and afford IDA a reasonable opportunity to exchange views with IDCOL on the said plan. addition to its own accounting books and records separate account shall be maintained by IDCOL in respect of the 'Repayment Account" maintained with Bangladesh Bank in accordance with the terms of the Development Credit Agreement (DCA ). These accounts will reflect all transactions relating to:- Receipts: a) funds, if any, received directly by GOB from IDA and other agencies b) interest realized on loans to Infrastructure Development Projects c) surplus arising from IDCOL operation account, if any d) repayment of principal amount of loans advanced to Investment Projects e) repayment of principal amount of Technical Assistance to IDCOL f) miscellaneous receipts, if any. Disbursements: a) Loan drawdowns to Investment Projects b) repayment of service charge to IDA and other Agencies c) repayment of principal amount to IDA and other Agencies d) payments to IDCOL to cover operational deficits, if any. 43 Annex 3 PageIIof12 Attachment to Annex 3 Application and Appraisal Process The following process provides an overview of how Investment Project proposals will be handled by IDCOL and interface points with IDA. * Identification of Investment Project by IDCOL, either on application by sponsor or through intimation from GOB/Line Agency/IIFC/Power Cell etc. * IDCOL will make a preliminary assessment of such interest in consultation with IDA, to review consistency with both GOB's national priorities and relevant sub-sector policies. If they are found to be so, the CEO of IDCOL will ask the RA to pursue the proposal with the sponsors for obtaining more detailed information. * If the RA finds that the proposal will meet or is in a position to meet technical, economic, financial, procurement and environmental criteria of IDCOL and relevant national and IDA standards, he/she will ask the Investment Enterprise to make an application in IDCOL's prescribed form. RA shall also provide necessary advice to the Investment Enterprise on various requirements, standards to be met etc. - The Resident Advisor (RA) shall prepare a review report on the application and submit it to both IDA and the IDCOL Board (through the CEO). - Based on RA's report and IDA's comments, IDCOL Board will take a go/no go decision. * If it is a "go" decision, RA will complete proposal initiation formalities, such as conducting preliminary examination of application, preparing appraisal terms of reference, get processing fee deposited etc. Simultaneously, IDCOL will issue a Preliminary Letter of Acceptance (PLA) to the Investment Enterprise including a draft Term Sheet and Loan Agreement. * The CEO will arrange for all the documents relating to Investment Projects to be placed before the Board for the issue of necessary instructions to the RA to undertake the process of formal appraisal and due diligence. * For initiating the appraisal of the application, RA will require the Investment Enterprise to submit, an Investment Project Information Document prepared in terms of the PLA, by consultants satisfactory to IDCOL, IDA, co-financiers and GOB. The RA will also obtain any relevant information from the concerned GOB agency and other government parties to the project. The scope of the detailed Investment Project Information Document shall make reference to each of the following - suitability of site; availability of inputs; appropriateness of, and proven experience with, the technology offered; Investment Project design and its technical viability; arrangements for detailed engineering; cost estimates; construction and procurement arrangements; arrangements for operation and maintenance; arrangements for compliance with environmental and resettlement standards; financial viability and repayment capability of the project and the Investment Enterprise; proposed financial structure and its terms and conditions, including the contractual arrangements to be made thereof; and the corporate structure, managerial capability and creditworthiness of the sponsors of the Investment Enterprise. * RA will proceed to clear terms of reference with IDCOL Board, and if it is the first Investment Project of its type in the sector, with IDA as well. * Meanwhile the Investment Enterprise may proceed to sign necessary agreements with the GOB/Line Agency and submit a copy to IDCOL. At the same time it will convey the acceptance of the PLA and deposit the necessary fees. * Based on approved TORs, RA will begin formal appraisal and may participate with other lenders in conducting due diligence. 44 Annex 3 Page 12 of 12 * Concurrently during the appraisal process, RA will keep IDA informed about progress, and in particular seek IDA inputs on the extent to which the Investment Project proposals meet or are likely to meet procurement, environmental and social impact/mitigation standards laid down under the ESF. * Final appraisal report with recommended terms and conditions and security package to be submitted by RA to IDA/co- financiers for clearance and review of the IDCOL Board. * The CEO after due scrutiny shall place the report and term sheets along with the recommendations of the RA before the Board of IDCOL for its approval. * Following approvals and clearance by IDA and on IDCOL Board's approval, instructions will be issued to the RA to commence financial negotiations with the financiers, Investment Enterprises and IDCOL with a view to finalizing the loan terms and conditions. * RA will conclude final agreements and process for signing by IDCOL's CEO in time for financial closure. Effectiveness of a loan from IDCOL to an Investment Enterprise will be subject to all other financing, for the concerned Investment Project being irrevocably committed and effective. * Final authorization of project commitments in US $ and equivalent SDRs to be notified to IDA. * RA will prepare for IDCOL's approval a disbursement schedule, standby agreements and request disbursement from IDA on a periodic basis as per agreed schedule. * RA shall monitor Investment Project progress as per agreed indicators and send periodic reports to the IDCOL Board and IDA. 45 X Annex 4 Page I of 6 Bangladesh - Private Sector Infrastructure Development Project Reform and Private Participation Status of Energy and Infrastructure Sectors A. Sector wise status 1. Power Sector: The key constraints in realizing efficiency objectives are inadequate generation capacity, inefficiency of the transmission and distribution networks, inappropriate pricing regimes, poor collections and inefficient management and the lack of effective regulation. While some policies, such as the Private Power Policy and the National Energy Policy have been formulated, the principal initiatives with regard to pricing reforms, efficiency improvements, sector restructuring and creation of regulatory structures are being addressed through a comprehensive reform program. GOB and donor agencies active in the energy sector have reached broad consensus on a plan of action to implement the reform program. Though some differences of opinion amongst stakeholders still exist, there is clearly a sense of urgency and resolve in the Government's approach towards tackling fundamental issues in the sector. In terms of instruments, the ADB's Ninth Power Project (recently approved by the ADB Board) and IDA's Power Development Project (FY99) will be the leading vehicles for the reform program. The PSIDP will provide the support for the private power program, both through financing for individual transactions and as TA for establishing appropriate process parameters, sound documentation and a culture of competitive bidding. The key issues in the sector from the standpoint of the PSIDP are the characteristics of the transaction regime and the ability of GOB to address the poor creditworthiness of the power purchasing utility - the Bangladesh Power Development Board (BPDB). 2. On the first issue, GOB announced the Private Power Policy in October 1996, providing a package of incentives and defining the institutional and project approval process for Independent Power Projects (IPPs). The implementation is vested with the Power Cell (PC) established under the MEMR. Bids for two large projects, the Haripur (360 MW) and Meghanaghat (450 MW) are close to being finalized and a third, Baghabahari (100 MW) is in the price bidding stage. The PC, as well as the process for project.procurement is supported by TA from the Bank and the ADB, and has been conducted in an open, clean and transparent fashion. In all three projects, top international power development firms are bidding, and for the Haripur and Meghanaghat projects, IDCOL has issued preliminary support letters based on a joint IDCOL/World Bank assessment of the potential debt financing gap in these two projects. The assessment took into account available sources of financing (IFC, ADB, bilaterals, commercial lenders, ECAs etc.), their respective appetite for lending to projects in Bangladesh and the Bank's concern for being the lender of last resort, before determining the support required at between 20-25 percent of the total project cost. The sound institutional arrangements and the competitive bidding process established in the sector have generated a very favorable response from the private sector, and the competition has generated lowest possible tariffs and assures that the transactions will be clean and transparent. 3. On the second issue, there is a risk that BPDB will not be able to pay for the contracted private power. Given the fact that they have high losses and a poor record of tariff collections, there is a compelling urgency to rectify the situation. There are two mitigating factors; firstly, private generation will enter the system in a phased manner over the next 4-5 years, providing sufficient time to adjust and improve the tariff regime, Secondly, consensus on sector reforms has been reached and tangible progress is anticipated over the next two years. Both the Bank and 46 Annex 4 Page 2 of 6 the ADB are accelerating proposed assistance to improve the transmission and distribution systems and implement the reform program. Despite these measures, the risk is real and needs be continuously monitored to provide early warning of looming defaults. PSIDP supervision will appropriately take this into account. 4. Gas Sector: There are five production sharing contracts between Petrobangla and different international oil/gas companies. In addition, nearly 30 international oil and gas companies have bid for 23 gas exploration blocks in response to an ICB solicitation undertaken by Petrobangla with Bank assistance. The bid process was preceded by promotion and information road shows in Houston and London earlier this year. The main strategic issues in the gas sector are related to industry restructuring, gas pricing policies for increased efficiency and uniformity, operation and ownership of Petrobangla and its subsidiary operating companies and lack of proper regulation. The Bank is assisting GOB to develop strategic options to address these issues under an ongoing technical assistance initiative (Energy Issues and Options Studvy. The study will eventually translate into a plan of action for sector reforms and restructuring. A Hydrocarbon Unit (HU), similar in form and function to the Power Cell, is being established in the MEMR, with financial assistance from Norway, to interface with private sector investors and act as a "One-window" institution for privately sponsored gas projects. 5. Transportation: In the ports sector, Bank executed TA is available for developing a new container terminal in Chittagong, to be privately financed and operated on a BOT basis. Preliminary feasibility studies have been completed and detailed feasibility studies are to be launched shortly. However, the issue of location of the new terminal has not been resolved. GOB had proposed a site outside the existing port, but the Bank has emphasized that considerable economic savings can be realized by locating it in the existing port and transferring operations of the port to private sector operators. This is a part of the larger dialogue on port sector reforms and efficiency improvements initiated with GOB. The Government has indicated that the poor performance of the existing Chittagong port provides a compelling reason to open up the sector to private sector participation. However, the key issues are likely to be resistance from workers' unions in the ports and GOB's willingness to free up the tariff regime for private operators. These and other issues are being addressed under the Port Development Master Plan, which is being formulated under IDA's TA-VI project. 6. In the roads and highways sector, IDA is providing TA for the development of the Dhaka bypass road sub-project. Linked to the development of the Jamuna bridge, this important road is necessary to relieve severe traffic congestion in Dhaka. Initial feasibility has been completed and the work can go onto the next stage once crucial decisions by GOB regarding the proposed alignments can be finalized. It is also proposed to develop a suitable feasibility study for the Jessore-Banapole transportation corridor. Meanwhile, the Bank is pursuing strategic reform issues through the Dhaka Urban Transport Project. the Road Rehabilitation and Management Projec and related ongoing and new transportation projects. 7. Telecommunications Sector: In the telecom sector, TA to develop a new policv framework is underway. An IDA project (Telecom Regulatory Support Project) aimed at strengthening the regulatory framework and increasing private participation in the sector is also under preparation and is expected to be finalized by end FY98. These two initiatives will lay the foundation for the longer term sustainability of private operations already introduced into the 47 Annex 4 Page 3 of 6 sector last year through the deregulation of rural fixed wireless telephone systems and cellular phone operations. A 300,000 line BOT project has been recommended for development as part of the PSIDP framework and pre-feasibility studies are to be launched under TA from PSIDP, once it becomes effective. 8. Water and Urban Services Sector: A strategic framework is being developed for private participation in the Water sector, and the Dhaka Water and Sanitation Authority (DWASA), is exploring the development of a bulk water treatment and supply facility for Dhaka on a BOT basis. PSIDP TA will be made available to develop these initiatives. B. Relevant Bank and other donor operations (a) Ongoing Bank Projects Gas Infrastructure Development Project (GIDP), Credit 2020-BD - The project supports expansion and improvement of gas infrastructure and operational systems. Besides investments in construction of gas pipelines, it provides TA for improved supervision of pipeline operations, consultancy for drilling and surface facilities, environmental and safety management practices and reservoir management. DflD-UK cofinancing under the project will assist in the setting up a SCADA system. Power Development (1 6-towns! Project. Credit 2016-BD - Basically addresses the issue of loss reduction and distribution quality, besides limited capital investments for the repair and rehabilitation of old hydroelectric power plants and extension of the distribution system . Rural Electrification 3 (RE 3)Pr_iect. Credit 2129-BD - The project supports REB in establishment of five new rural electricity cooperatives (Palli Bidyut Samities, PBSs), rationalization of distribution lines taken over from BPDB and DESA and limited transmission and distribution network improvements. (b) New Bank Projects Dhaka Water Supply - IV Project - The project will expand the water supply system of Dhaka, and includes the construction of a 50 MGD water treatment plant. Preparation of a Port Master Plan under TA-VI - this is expected to be completed during the second half of 1998, and will address all the key sector development issues. Telecom Regulatora Support Project - will seek to establish technical and regulatory standards for the sustained management of a multi-operator telecom sector in Bangladesh and help to create a conducive framework for private sector participation. Private Sector Support Project - is expected to improve, inter-alia, the legal framework for FDI and the business laws in general. It will also strengthen public sector support institutions like the Board of Investments (BOI), and the National Board of Revenue (NBR), which will have a positive impact in improving the investment environment in Bangladesh in general, and for implementation of private infrastructure projects in particular. (c) Other Donor Projects ADB's Third Natural Gas Project - Drilling of a number of wells at Titas and Habiganj Gas Fields and construction of gas transmission and distribution pipelines, KfW's Electrical Transmission Line project - Supports BPDB's construction of a transmission line from Comila to Chittagong. C. Sub-project pipeline (see next page) PSIDP Sub-Projtct Pipelline Sub project Brief Description Status Probability and timing of IDCOL financing 1. Haripur 360 MW combined cycle, gas project, Final price bids under evaluation. High probability of IDCOL funding to the tune of Power BOO, 22 years, supply power to Preliminary letter of award to successful US$40-80 million, depending on whether IDA Bangladesh Power Development Board bidder likely to be issued shortly. partial risk guarantee also becomes available. (BPDB), gas supply from Petrobangla. Sponsor has 10 months to develop project IDCOL will have to commence due diligence with ICB solicitation conducted by Power Cell and reach financial closure other potential lenders in November 1997, with World Bank technical assistance. commitment of funds may be as early as March Expected total cost - US$ 250 million. 1998. IFC A and B loans and MIGA political risk __ __ _ __ _ __ _ __ __ _ __ _ __ _ I______________________ cover also part of financing. 2. Meghanag- 450 MW combined cycle, gas project, Final price bids under evaluation. US$ 80 million IDCOL funding. IDCOL appraisal hat Power BOO, 22 years, supply power to Preliminary letter of award to successful and due diligence, along with other lenders to start X Bangladesh Power Development Board, bidder likely to be issued by November in December 1997, commitment of finds may be as gas supply from Petrobangla. ICB 1997. Sponsor has 8 months to develop early as March 1998. ADB A and B loans also part solicitation conducted by BPDB with proposal and reach financial closure of financing. ADB technical assistance. Expected total cost - US$ 300 million. 3. 100 MW, dual fired (oil and gas) barge Sponsor already selected through IFC is likely to play lead role in arranging finance. Khulna Barge mounted power plant, in an area of competitive bidding process (Consortium Medium probability of IDCOL funds. Participation Mounted chronic power deficiency. 15 year led by Wartsila NSD). Power purchase from IDCOL likely to be limited to less than US$20 Power concession. and Implementation agreements initialed million, if sponsor (and IFC) unable to mobilize Expected total cost - US$ 100 million. - final negotiations in progress. sufficient commercial debt. 4. Chittagong 100 MW, gas fired barge mounted power I Sponsor already selected through T IFC is likely to play lead role in arranging fnanice. t > Barge plant, in an area of high power demand. competitive bidding process (Consortium Medium probability of IDCOL funds. Participation Mounted 15 year concession. led by Smith Cogeneration). Power from IDCOL likely to be limited to less ithan IIJS$20 (D (D Power Expected total cost - US$ 100 million. purchase and Implementation agreements million, if sponsor (and IFC) unable to mobilize X initialed - final negotiations in progress. sufficient commercial debt. Note: Both barge mounted power plants are on a very tight time schedule - sponsors are required to deliver power within the next 12 mnonths. IDCOL H financing would certainlyfacilitate meeting this time schedule. Sub project Brief Description Status Probability and timing of IDCOL financing 5. Baghabari 100 MW, gas fired power plant, located Prequalification of sponsors through an Medium to high probability that IDCOl, support to Power on the western side of the Jamuna river. ICB process is complete. Final price bids the project will be needed. Approximate level of Expected total cost - US$ 100 million. from short listed bidders due by funding in the range of US$ 20 million. November 16, 1997. ICB conducted by Appraisal and due diligence to start January 1998. Power Cell, under World Bank technical assistance. 6. Three parts - development of the Negotiations between GOB and Unocal Unocal has sought IDCOL assistance for financinig Western Area Shabazpur gas field, 140 km long are ongoing to finalize project the pipeline. Medium probability that the project Integrated pipeline to Khulna and 200-300 MW gas parameters, especially pipeline tariff for would meet qualifying criteria for funding. Energy Project fired power plant at Khulna. Unsolicited wheeling gas. Preliminary due diligence to commence soon, arid if project proposed by Unocal Corporation. found feasible, detailed appraisal will start January Unocal has already signed the Production 1998. Sharing Contract with Petrobangla to develop the Shahbazpur gas field. In the first phase, the pipeline is being developed as a BOT project, whereby Petrobangla will ship gas through and pay a wheeling charge to Unocal. Expected total cost - US$ 800 million. Basic telecom project for Dhaka and Concept approved and World Bank High probability that IDCOL support will be 300,000 line surrounding areas. appointed consultant to start work in needed. PSIDP TA will be required to develop Telecom BOT Expected total cost - not estimated. November 1997 to design and structure proposal fully. Project the project on BOT basis for ICB. __b 4 DJ 8. 50 million gallons a day bulk water Preliminary feasibility and structuring High probability that IDCOL support will be D (D Dhaka Bulk supply facility to supply treated water to work to begin January 1998 under a needed. PSIDP TA will be required to develop (X Water Supply the Dhaka Water Supply Authority. World Bank assisted TA program. proposal fully. o Project Expected total cost - not estimated. h Sub project Brief Description Status Probability and timing of IDCOL financing 9. Container New facility to add 250,000 TEU Preliminary feasibility and structuring Though high probability that IDCOL support will Terminal, container handling capacity. Proposal is work can begin only after fundamental be needed, development is likely to take 2-3 years. Chittagong delayed due to non-resolution of siting sector issues are resolved. assuming that sector issues are resolved. PSII)P TA issues and privatization of existing port will be required t develop proposal fully. operations in Chittagong. Expected total cost - not estimated. 10. Dhaka 40 km long tolled bypass for diverting As per the pre-feasibility study, traffic Uncertain and low probability. Basic structuring Bypass Road heavy, commercial traffic outside Dhaka volumes are not sufficient to sustain a issues not resolved. Development lead time is Project city limits. A Bank supported pre- purely private sector ownership and likely to exceed 3 years, unless GOB moves quickly o feasibility report has proposed two operation. Would have to be structured to make decisions and resolve fundamental issues. alternative alignments. GOB decision on on a partnership basis and may require alignment and other issues pending. substantial government support. Expected total cost - depends on alignment, US$ 200-300 million. (D (D x 0 ah 51 Annex 5 Page 1 of 6 Annex 5 Intemational Bank for Reconstruction and Development SecM97-559 FROM: Vice President and Secretary BANGLADESH PRIVATE SECTOR INFRASTRUCTURE DEVELOPMENT PROJECT Environmental and Social Framework Summary 1. Attached is the executive summary of the Environment and Social Frameworrk (ESF) for the Private Sector Infrastructure Development Project. The proposed project comprises financing to develop a modem and efficient infrastructure system in Bangladesh, with significant participation of the private sector in the financing, construction and operation of infrastructure facilities. 2. The ESF was prepared by the Borrower, and circulation of the summary does not signify evaluation or endorsement by the Bank. The ESF is subject to review and possible change during the appraisal process. 3. Questions may be referred to Mr. Vijay Iyer (ext. 84441). The full Environment and Social Framework is available from the Public Information Center. Distribution: Executive Directors and Alternates President's Executive Committee Senior Management, Bank, IFC and MIGA 52 Annex 5 Pag,e 2 of 6 EXECUTIVE SUMMIARY 1. Infrastructure Development Company Limited (IDCOL), Bangladesh, has been established by the Government of Bangladesh (GOB) as a Company under the Companies Act to facilitate private investment in infrastructure development. Using credit made available to the Government of Bangladesh by the Intemational Development Agency (IDA), IDCOL will provide part financial support to private investors in the power, gas, telecommunications, port, water, waste management and the highway sector. Private project sponsors are expected to raise at least 60 percent of the required financing in the form of equity and commercial debt. 2. The Environmental and Social Framework (ESF) has been designed by GOB to provide IDCOL with an overall framework to guide the identification, preparation, appraisal and implementation of environmental and social concerns at the project and at the organizational level. The ESF reflects the environmental and social guidelines and standards of IDA, since such guidelines and standards for infrastructure projects in Bangladesh are yet to be developed, 3. The ESF was prepared, on behalf of the GOB, by the Bangladesh Centre for Advanced Studies, a leading non-governmental organization active in environmental and social issues. The report was prepared with desk research on legal and institutional framework, analysis of priority issues in the infrastructure sector, requirements of the operational directives of the World Bank Group, and best practice lessons from countries such as India and Sri Lanka. There have been discussions with NGOs and other interested parties during the preparation of this report. Environmental and Social Policy of IDCOL 4. The environmental and social policy of IDCOL is enshrined in three cardinal principles: (a) Enhance the quality of life and environment in and around project locations; (b) Prevent adverse environmental and social impacts; and (c) Mitigate possible adverse environmental and social impacts. Environmental and Social Assessment Process 5. The Environmental and Social Assessment for IDCOL has been designed taking the following factors into consideration: (a) The legal and institutional setting, and the requirements of the Govemment of Bangladesh agencies; (b) Major environmental and social issues that could be expected in projects to be financed by IDCOL; 53 Annex 5 Page 3 of 6 (c) IDCOL's project cycle; (d) Requirements of the World Bank's Operational Directives: (i) OD 4.01 on Environmental Assessment; (ii) OD 4.30 on Involuntary Resettlement; and (iii) OD 4.20 on Indigenous People The Environmental and Social Assessment Process is outlined in Table 1. These procedures will dovetail with the project cycle of EDCOL. Once the details of the IDCOL project cycle have been fully developed, the Environmental and Social Assessment Process will need more definition. The ESF should be viewed as a dynamic document that should be periodically reviewed to ensure that it reflects changes in business practices of IDCOL and the external environment. Table 1 Summary of the Environmental and Social Assessment Process for I})COL IDCOL Pro ject Cvcle Responsibility Decision/Product EnvironmentaltSocial Screening IDCOLUProject Sponsor * Environmental screening and social screening as part of Project Initial Screening Report * Decision to proceed or otherwise Environmental Project Sponsor/ Consultant * Scope of Coverage of Environmnental and /Social Scoping Social Assessment Report (ESR) Finalization of Terms of Reference Project * Terms of Reference for appointment of for ESR studies Sponsor/Consultant/Concurrence consultant with IDA Appointment of consultants Project Sponsor Consultants Appointed for ESR studies ESR Study Project Sponsor through Draft Environmental and Social Assessment Consultant Report , including - Environmental Management Plan - Resettlement Action Plan - Indigenous Peoples Development Plan Review OF ESR IDCOLIIDA/GOB/ * clearance by Government agencies Project Sponsor * Concurrence by IDA * Agreement on ESR actions Translation of Agreements into Project Sponsor/IDCOL/ * Concession Agreement legal Instruments GOB * Shareholders Agreement * Construction Agreement * O&M Agreement * Lenders Agreement Project Monitoring IDCOL, Proiect Sponsor Periodic Monitoring Reports Periodic Environmental and Social IDCOL/Consultant Environment and Social Audit Report Audit . 54 Annex 5 Page 4 of 6 6. A social impact and entitlement framework- for IDCOL-financed projects is outlined in Table 2. Table 2 Social Impact and Entitlement Framework for IDCOL-financed Projects. Type of Issue/Impact Entitlement Entitlement Options Responsibility Beneficiaryv l Loss of Land Govt./Project (a) Homestead (i) Titleholder (i) equiv. area of land or cash comp. at replacement Sponsor (i) with valid title, or cost CCL (amended to include a 50% premium) + customary or usufruct cash grant to cover the difference between the CCL rights and the cost of equivalent replacement land subject to a minimum of 100 sq.m. (ii) squatters (Uthulis) (ii) Family (ii) developed plot as per Govt. norms on public/private land (b) Agricultural land (i) with valid title, or (i) Titleholder (i) alternate land of equiv. prod potential or cash customary or usufruct payrment at replacement. CCL( amended to include rights a 50% premium) + a cash grant to cover the difference between the CCL and the cost of equivalent replacement land. (ii) tenants, (ii) Individual (ii) local std. for minimum economic land holding or sharecropper, leasehold, cash payment for min. economic, landholding encroaches (c) Commercial! Industrial/Institutional (i) with valid title ,or (i) Titleholder (i) equiv. land or cash at replacement value. CCL customary or usufruct (amended to include a 50% premium + a cash grant rights to cover the difference between the compensation and replacement cost. (ii) tenant, leaseholder (ii) Unit (ii) equiv. leased land, reimbursement for unexpired lease, transition allow. equiv. to 3 month (iii) squatter (iii) Unit (iii) equiv. land and transition allowance equiv. to 3 months 2. Loss of Structure Govt./ Project (a) House Sponsor (i) with valid title, or (i) Family (i) structure of equiv. standard or cash comp. at customary or usufruct replacement value. CCL (amended to include a 50% rights premium); a transfer and house construction grant of Tk. 7,000. (ii) tenant, leaseholder (ii) Family (ii) transition allow. to re-establish residence (iii) squatter, pavement (iii) Family (iii) basic dwelling unit as per govt. norms or cash dwellers payment for basic dwelling unit (b) Commercial/Industrial! Institutional (i) with valid title, or (i) Unit (i) structure of equiv. std or cash comp. at replacement customarv or usufruct value; CCL (amnended to include a 50% premium); a rights cash grant of 15% of the compensation towards dismantling and removal costs; an additional reconstruction grant of Tk. 25 per sq. ft. of floor area of the building. (ii) tenant, leaseholder (ii) Unit (ii) reasonable transition allowance equiv. to 3 months 55 Annex 5 Page 3 of 6 Type of Issue/limpact Entitlement Entitlement Options I Responsibility Bencficiarn I_l (iii) squatters, pavement (III) unIt (ii) basic unit as per zoI. norms o cash p3'1C11 for dwellers basic unit 3. Loss of livelihood/trade/ Project Spc-sor occupation a. Wage employment (i) azriculture/ (i) Individual (i) emploNment in reconstructed enterprise or package commercialU for re-employment or starting a business and industrial/institutional transition allow equiv. to 3 months 4. Loss of access to common Govt./Project resources and facilities Sponsor a. Rural common property HHI (a) replacement CPRs/arnenities or providing min. resource community govt. std b. Urban civic amenities EH/! (b) access to equiv. amenities/services communitv _ 5. Loss of crops (a) Standing Crops Project Sponsor (i) vith valid title Family (i,ii,iii) cash compensation equiv. to one year income (ii) Tenant/Lessee Family (CCL) (iii) Encroachers/squatters Family (b) Perennial Crops (i) with valid title Family (i, ii, iii) cash compensation equiv. to residual income (ii) Tenant/Lessee Family (CCL amended to include 50% premium) (iii) Encroachers/squatters Familv 6. Losses during transition of Govtn.Project de placed Sponsor persons/establishments (a) Shifting/Transport Family/Unit (a) provision of transport or cash equiv. (b) Maintenance Family/Unit (b) cash payment for 3 months (c) Construction Family/Unit (c) cash payment for materials and labor or provision of materials (reconstruction grant of Taka 25 per sq.ft of floor area) 7. Losses to Host communities (a) Amenities/Services Community Restore losses/improve facilities, reconstruction grant Govt./Project of Tk-. 25 per sq. ft for the floor area as a result of Sponsor resettlement or amenities/services equiv. to those provided to PAPs 7. The ESF framework incorporates measures for environmental and social risk identification, assessment, allocation and management during different stages of the project cycle as part of the Environmental and Social Assessment Process. IDCOL - IDA Interface 8. In order to ensure that IDCOL's infrastructure projects are in conformity with IDA's OD requirements and business practices, it shall submit the following documents for IDA review. Table 3 outlines the institutional interface matrix. IDA concurrence to the outputs generated at each stage will be obtained prior to proceeding to the next stage. 56 Annex 5 Pa2e 6 of 6 Table 3 IDCOL-IDA Interface Environmental and Social Assessment Output to be submitted to IDA Milestone Screening Initial screening report Finalization of terms of reference for ESR Terms of Reference Review of ESR - ESR reviewed by IDCOL Translation of agreements into instruments Lenders Agreement along with other _ Agreements Monitoring Compliance report Environmental and Social Audit Audit compliance report Organizational Support 9. IDCOL shall establish an institutional structure capable of implementing the provisions of the ESF. IDCOL shall: (a) Integrate the Environmental and Social Assessment process with the IDCOL project cycle; (b) Ensure that the Investment Advisor's Unit, established in IDCOL, has the capability to undertake the tasks outlined in the ESF; and (c) Appoint consultants, as necessary, to undertake special assignments with respect to environmental and social issues. 10. In order to facilitate the conduct of these tasks: (a) IDCOL's Investment Advisor will be the operational manager with overall responsibility for implementing the provisions of this ESF; (b) IDCOL will initially engage consultants for implementing the different stages of the Environmental and Social Assessment process -- for the purpose of reviewing the ESR, IDCOL will retain a corporate consultant to advise on environmental and social issues; and (c) Increase awareness among all departments /staff of IDCOL regarding the importance of addressing environmental and social issues through integration with the project cycle. 57 Annex 6 Page 1 of 2 Status of Bank Group Operations in Bangladesh IBRD Loans and IDA Credits in the Operations Portfolio (As of June 30, 1997) Difference between Original amount in USS millions expected Project Loan or Fiscal and actual ID Credit No. Year Borrower Purpose IBRD IDA Cancellations Undisbursed disbursements' Number of Closed Loans/Credits: 158 Active Loans BD-PE-9553 C25674 1997 GOB JUTE SECTOR ADJ CREDIT 2.90 2.79 0.00 BD-PE-9518 C29270 1997 GOB 2ND RURAL RDS & MRKT 133.00 120.84 1.78 BD-PE-9482 C29260 1997 GOB/DWASA DHAKA WATER/SAN. TV 80.30 71.1 0.09 BD-PE-40985 C29220 1997 GOB POVERTY ALLEVIATION 105.00 92.01 2.12 BD-PE-9560 C28220 1996 GOB NON-FOR.MAL EDUCATION 10.50 9.17 0.49 BD-PE-9484 C28150 1996 GOB AG. RES. MANAGEMENT 50.00 44.20 15.06 BD-PE-9545 C27910 1996 GOB RIVERBANK PROTECTIO 121.90 76.42 33.30 BD-PE-9549 C27830 1996 GOB COASTAL EMBANKMENT R 53.00 3926 19.95 BD-PE-9496 C27350 1995 GOB NUTRMITON 59.80 54.3i 5.26 BD-PE-9533 C27200 1995 GOB GAS INFRASTRUCTURE 120.80 84.23 26.92 BD-PE-9465 C26380 1994 GOB 2ND ROAD REHAB & NAI 146.80 46.88 -25.65 BD-PE-9509 C25690 1994 GOB JAMUNA BRIDGE 200.00 46.19 8.S2 BD-PE-9555 C24690 1993 GOB FENIALE SECONDARY SCH 68.00 44.66 6.13 BD-PE-9470 C23970 1992 GOB FOREST RESOURCES MGM 49.60 24.23 10.05 BD-PE-9559 C23930 1992 GOB TECIHNICAL ASSISTANCE 25.00 9.90 3.68 BD-PE-9454 C23400 1992 GOB PRIVATE SEC IND'L CR 25.50 15.42 15.07 BD-PE-9529 C22590 1991 GOB POP. & HEALTH IV 180.00 45.16 35.18 BD-PE-9544 C22460 1991 GOB NATL MINOR IRRIGATI 54.00 50.87 0.98 50.38 BD-PE-9516 C22330 1991 GOB AGRIC.SUPPORTSERVI 35.00 1I.52 17.15 BD-PE-9540 C22320 1991 GOB INLAND WATER TRANSP 45.00 32.83 23.12 BD-PE-9542 C21290 1990 GOB RURAL ELECTRIF. III 105.00 26.24 14.62 BD-PE-9461 C20990 1990 GOB BWDB SYSTEM REHAB. 53.90 29.86 7.24 33.63 BD-PE-9506 C20160 1989 GOB POWER DIST. (16 TOWN) S7.00 20.75 16.21 BD-PE-9467 C 19300 1988 GOB URB.AN DEV. 1 47.60 16.95 8.73 25.07 TOTAL 0.00 1859.60 97.68 942.06 338.93 Active Loans Closed Loans Total Total disbursed (IBRD and IDA) 811.51 4912.28 5723.79 Of which repaid 0.00 300.52 300.52 Total now held by IBRD and IDA 1761.92 4567.35 6329.27 Amount sold 0.00 0.37 0.37 Ot'which repaid 0.00 0.37 0.37 Total undisbursed 942.05 204.99 1147.04 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. Note: Disbursement data are updated at the end of the first week of the month. 5 8 Annex 6 Page 2 of 2 Bangladesh - Statement of IFC Investments Committed and Disbursed Portfolio As of June 30, 1997 (In USS Millions) Committed Disbursed IFC IFC FYApproval Compaorr Loan Equitv Quasi Parric Loan Equity Ouasi Partic 1980 IPDC 0.00 1.05 0.00 0.00 0.00 1.05 0.00 0.00 1983/85 Bata Shoe BD 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1985/95 IDLC 0.00 0.15 0.00 0.00 0.00 0.15 0.00 0.00 1991 Dvnamic Textile 2.18 0.00 0.00 1.75 2.18 0.00 0.00 1.75 Total Portfolio: 2.18 1.20 0.00 1.75 2.18 1.20 0.00 1.75 Approvals Pending Commitnent Loan Equity Quasi Partic 1996 ICT-B 15.00 0.00 0.00 10.00 1996 ICT-W -0.00 0.38 0.00 0.00 1997 BLCL 3.50 0.45 0.00 3.50 1997 DBEH 2.50 0.69 0.00 0.00 1997 JALALABAD 0.00 15.00 0.00 0.00 1997 SCANCEMI 11.00 1.25 0.00 0.00 1997 WATERGARDEN 6.00 0.00 0.00 0.00 Total Pending Commitment: 38.00 17.77 0.00 13.50 5 9 Annex 7 Page 1 of 2 Bangladesh at a glance 8115197 POVERTY and SOCIAL SoUth Low- Bangladesh - A- i income Development diamond' Population mid-1996 (nmions) 121.6 1,264 3,229 GNP per capita 1996 (US$) 260 380 500 Life expectancy GNP 1996 (billons US$) 31.6 481 1,601 Average annual growth, 1990-96 Population (96) 1.6: 1.9 1.7 GNP Gross Labor force (96) 2.1 2.1 1.7 prmary per pmr Most recent estimate (latest year available since 1989) capita enrollment Poverty: headcount index (% of populafton) 48 Urban population (% oftotalpopulaton) - 18 26 29 Life expectancy at birth (years) 58 61 63 Infant mortality (per 1,000 lve birts) 77 75 69 Access to safe water Child malnutrilion (X of children under 5) 67 Access to safe water (% f population) 96 63 53 Illiteracy (6 ofpopuation age 15+) 62 50 34 Bangbdesh Gross primary enrollment(% of school-age populatfon) 92 98 105 Male 98 110 112 Low-income group Female 86 87 98 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1998 1996 Economic ratios GDP (billions US$) 14.3 15.7 29.1 32.1 Gross domestic investmenttGDP 6.1 12.9 16.6 17.0 Openness of economy Exports of goods and services/GDP 2.9 7.4 14.2 14.3 Gross domestic savings/GDP 0.9 2.0 8.3 7.1 Gross national savings/GDP 4.9 9.6 13.1 11.9 Current account balance/GDP -4.3 -3.9 -3.5 -5.1 Interestpayments/GDP 0.1 0.6 0.6 0.6 Savings i Investment Total debt/GDP 13.0 43.9 56.2 53.2 Total debt service/exports 23.4 22.5 13,3 11.6 Present value of debt/GDP . .. 31.4 Present value of debttexports .. .. 166.7 Indebtedness 1976-86 1986-96 1996 1996 1997-6 (average annual growth) Bangladesh GDP 5.0 4.2 4.4 5.3 6.0 GNP per capita 2.4 2.4 2.8 3.2 7.3 Low-income group Exports of goods and services 6.0 15.0 34.6 11.4 7.7 STRUCTURE of the ECONOMY ('A of GDP) 1976 1986 1995 1996 Growth rates of output and investment (%) Agrculture 62.0 41.8 30.9 30.0 30 Industry 11.6 16.0 17.6 17.7 20 Manufacturing 7.0 9.9 9.6 9.6 Services 26.4 42.3 51.5 52.4 10 Private consumption 95.9 90.6 77.9 79.1 90 91 92 93 94 95 90 General government consumption 3.2 7.3 13.7 13.7 Imports of goods and services 8.1 18.3 22.5 23.9 -GDi GDP 1976-S5 1986-96 1996 1996 (average annual growth) Growth rates of exports and imports (%) Agriculture 3.5 1.8 -1.0 3.7 so Industry 4.7 6.5 8.4 5.3 Manufacturing 2.9 5.9 8.6 5.3 25 Services 6.8 5.2 6.9 6.5 Private consumption .. 1.4 0.6 5.2 0 General govemment consumption .. 3.9 5.3 7.2 f 93 94 96 Gross domestic investment 8.4 7.9 28.2 10.9 .2I Imports of goods and services 7.9 7.0 37.7 16.2 Exports Imports Gross national product 4.9 4.3 4.4 4.7 P - o Note: 1996 data are preliminary estimates. Figures in italics are for years other than those specified. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 60 Annex 7 Page 2 of 2 Bangladesh PRICES and GOVERNMENT FINANCE 1975 1988 1998 1996 Domdsc prics Inflation (%) (% change) 10 Consumer prices 21.9 10.7 5.2 4.1 ImplicitGDPdeflator .. 11.1 8.7 5.6 s Govemment finance (% of GDP) o Current revenue 8.5 12.1 11.5 90 91 92 93 94 95 90 Currentbudgetbalance .. 1.3 3.3 2.8 -GDPdef. -C--CPI Overall surplus/defcit .. .. -.8 -5.7 TRADE 1975 1985 1995 1996 (mill1ons US8) Export and import levels (mill. USS) Total exports (fob) ., 940 3,473 3,882 7.500 T Leather .. 70 202 213 Frozen food .. 87 299 315 Jute goods .. 358 319 330 900o Garments , 116 1,980 2,548 Total imports (cif) .. 2,647 5,834 8,881 2 H UI fi0 Food .. 607 478 586 Fuel and energy .. 359 383 458 Capa goods . 691 1,688 1,918 0 Export price index (1987=100) .. 74 186 194 90 91 92 93 94 9S go Import price index (1987=100) .. 104 127 130 oExports EImports Terms of trade (1987=100) .. 71 146 150 BALANCE of PAYMENTS 1975 1986 1995 1996 (millions US$) Current account balance to GDP ratio (%) Exports of goods and services 427 1,162 4,130 4,508 o Imports of goods and services 1,459 2,864 6,545 7,614 9o 91 92 93 94 95 9g Resource balance -1,033 -1,702 -2,415 -3,106 Net income -6 -90 -41 -6 Net current transfers 417 1,178 1,426 1,475 4 Current account balance, beforeofficial capital transfers -621 -613 -1,030 -1,637 ^ Financing ftems (net) 666 536 1,304 575 Changes in net reserves -45 77 -274 1,062 -8 Memo: Reserves induding gold (mill. US$) 148 356 3,070 2,018 Conversion rate (ocal/USs) 8.9 26.0 40.2 40.8 EXTERNAL DEBT and RESOURCE FLOWS 1975 1985 1995 1990 (millions US$) Composition of total debt, 1995 (mill. USS) Total debt outstanding and disbursed 1,861 6,874 16,370 17,070 F G A IBRD 55 55 55 46 F 2 A6 IDA 295 2,021 5,638 5,713 244 206 Total debt service 105 356 729 687 B IBRD 0 3 8 8 5638 IDA 2 22 83 92 E Composition of net resource flows Offcial grants 315 472 890 678 Official creditors 576 563 849 766 Private creditors -3 -3 -72 -25 C Foreign direct investment 0 0 2 622 Portfolio equity 0 0 67 -14 4072 World Bank program Commitments 205 398 356 168 A - IBRD E - Bilateral Disbursements 91 288 197 278 | - IDA D - Other multilateral F - Private Principal repayments 0 6 46 55 C - IMF G - Short-term Netflows 91 282 151 223 _ 1 Interest payments 1 20 46 45 Net transfers 90 262 105 178 Development Economics. 1996 extemal debt and resource ilows data are staff estimates (preliminary). 8115197 61 Annex 8 Page 1 of 1 Private Sector Infrastructure Development Project Project Processing Budget and Schedule A. Project Budget (US$000) Planned (in US$) Actual (in US$) (At final IEPS stage) (until 09/30/97) Bank budget only 350,000 215,200 Trust Funds 300,000 182,100 Total 650,000 397,300 B. Project Schedule Time taken to prepare the project (months) 36 months 25 months First Bank mission (identification) 12/05/95 12/05/95 Appraisal mission departure 03/15/97 06/28/97 Negotiations 09/15/97 07/29/97 Planned Date of Effectiveness 07/15/98 01/01/98 C. Prepared by: Economic Relations Division, Ministry of Finance D. Preparation assistance: Japanese PHRD Trust Fund, New Zealand Trust Funds, Canadian International Development Agency UK - Department of International Development E. Bank staff who worked on the Staff Speciality project included: Pierre Landell-Mills Country Director, Bangladesh Alastair McKechnie Sector Manager, Energy Marilou Uy Sector Manager, Private Sector Dev, S. V. Iyer (TTL) Project Finance Per Ljung Energy, Infrastructure and Project Finance Peter Kyle Senior Legal Counsel, Private Sector Ramesh Ramankutty Environment Maninder Gill Social and Resettlement A.S.M. Bashirul Huq Energy Pedro Correia da Silva Country Lawyer Owaise Saadat Private Sector Development and Finance Arun Banerjee Economist Ismail Mobarek Ports Thampil Pankaj Highways John Sachs Financial Analyst Janice Williams-Palenzuela Operations Analyst Anna Goodman Project Assistant Khalid Siraj (Peer Review) Financial Sector Suman Babbar (Peer Review) Co-financing 62 Annex 9 Page 1 of 1 Private Sector Infrastructure Development Project Documents in the Project File A. Project Implementation Plan Report 1. Operations Manual 2. Information Brochure 3. Brochure on Private Sector Participation 4. Environment and Social Framework 5. Infrastructure Investment Facilitation Center (IIFC) Reports 6. Report on sub-project assessment 7. Technical Assistance 8. Procurement for Investment Advisory Services B. Bank Staff Assessments 1. Qualitative macro-economic assessments 2. Proforma micro-economic analysis 3. IDCOL Appraisal Report, including financial analysis 4. Organization and structure options for IDCOL 5. Sub-project pipeline and sector assessment 6. Procurement issues for Haripur and Meghnaghat sub-projects 7. Project Appraisal Document C. Other 1. Development Credit Agreement 2. Project Agreement 3. Memorandum and Articles of Association for IDCOL 4. Agency and Administration Agreement 5. Investment Advisory Agreement 6. Paper on Risks 7. Perception of Investors and Lenders towards Bangladesh Infrastructure 8. Barriers to Greater Private Sector Investment in Infrastructure in South Asia 9. Case studies on various sub-projects 10. Concession Agreements and other security agreements for IPPs