8 bijoy

Md. Kamrul Islam, Roll: ZR-96

Chapter 5

Project Evaluation

5.1 Project rationale and objectives

The Project achieved the development rationale and objectives set out in the report and

recommendation of the President (RRP) by:

(i) Providing additional reliable base load capacity through a least-cost expansion program, with

due consideration for environmental and social impacts, to mitigate the forecast power shortages

in Bangladesh;

(ii) reducing poverty through the promotion of faster economic growth, thereby creating better

development opportunities for the poor and improving human development;

(iii) Serving as a role model for other IPPs, particularly in project selection, screening, and

document preparation;

(iv) attracting private sector investors to the power sector as one of the first major private sector

IPPs successfully implemented in Bangladesh; and

(v) Playing an instrumental role in raising domestic and international commercial funds.

5.2 Criteria for evaluation:

The evaluation of MPL, a no sovereign operations project, is based on four criteria:

(i)Development impact,

(ii) Profitability of ADB’s investment,

(iii) Quality of ADB’s work, and

(iv) ADB’s additionally.

The criteria are discussed in the following sections.

(i)Developments impacts and outcomes:

The main categories and subcategories were rated according to the June 2007 guidelines for the

preparation of extended annual review reports for private sector investment operations.


1. Private Sector Development:

The assessment of private sector development impacts classified as beyond company impacts and

direct company impacts is in paras.

A. Beyond Company Impacts:

MPL is one of the first major private sector IPPs to succeed in Bangladesh. The success of MPL

has clearly demonstrated the effectiveness of the private sector in building and operating

infrastructure, advocating corporate governance and transparency, and promoting professional

work ethics. IPPs are providing an increasing share of the power supply in Bangladesh, and now

account for about 38% of total generation. All new base load power supply is envisaged to come

from IPPs. In promoting faster growth led by the private sector, ADB helped the Government to

accelerate policy reform and create equal opportunities for participants. ADB emphasized

providing assistance to relieve infrastructure and financial bottlenecks for the private sector. MPL,

one of the key components of the Government’s efforts to promote foreign investment, is in line

with the country operational strategy and the partnership agreement on poverty reduction between

ADB and the Government. The Project also complies with ADB's strategy for the energy sector

and private sector operations in Bangladesh.

As the Government realized that the investment requirements for the power sector would exceed

the resources available in the public sector and could crowd out investment in other key sectors, it

decided in 1994 to invite private sector participation in generation. In 1996, the Government

introduced a private sector generation policy. The Government attempted to streamline its

administrative and commercial procedures, and the private sector responded favorably. As a result,

starting in the late 1990s, Bangladesh has been successful in attracting private sector investors.

Through its involvement in MPL, ADB was a catalyst in enabling private finance for power

generation. In recent years, the private sector has undertaken most generation projects for grid

supplies. MPL has been operating successfully in the private sector and reliably producing power

at reasonable cost to BPDB.

In addition to providing cost-effective and reliable power, MPL—along with the other IPPs—

introduced private capital and private sector management to power generation. Private capital

reduces the demand on the budgets of Government partners. Private sector management provides

benchmarks for the efficient operation of power stations in Bangladesh, and establishes standards

for BPDB stations to aim for in the future. Moreover, the new investors show signs of being

prepared to invest further in the sector. These developments indicate that private power generation

is now widely accepted in Bangladesh, and is attracting foreign and local investors.

Overall, ADB’s involvement and investment in the power sector led to positive institutional

developments, particularly over the 8 years since ADB became the coordinating development

partner for the sector. The unbundling of the sector was partially accomplished, private generation


is now an accepted feature of the power market, and new institutions are achieving good results.

The growth of the IPPs increases competition among public and private power producers by

gradually eroding the monopoly of BPDB in power generation. The investment opportunities in

the Bangladesh power sector are promising for the private sector. The Government has taken steps

to create an environment conducive to private sector involvement through appropriate policies,

and power sector reforms and restructuring.

B. Company Impacts:

The Project involves a significant transfer of knowledge as a result of the foreign direct investment.

To the extent possible, the Project hires local people. The management positions held by

Bangladeshis are largely in plant O&M. At the start of operations, five of MPL’s 75 employees

were expatriates who had the broad technical experience and managerial skills needed to lead the

initial project organization. MPL had implemented a localization plan to promote competent local

staff to replace some expatriate staff in middle management positions. After the initial year of

operation in 2002, the number of staff gradually decreased to 59 and several contractual staff with

one expatriate as the general manager. Currently, there is no expatriate employees working for

MPL. Expatriates left because of the successful transfer of technical expertise and managerial

skills to local staff and the reduced workload. The XARR Mission observed that the plant is

operated and maintained to the highest standards with minimal staffing. MPL is an excellent

example of disciplined operating standards providing dependable and efficient generation in the

Bangladesh power sector. It provides a successful example of the IPP concept in generation. MPL

uses modern technology for power plant operations. In 2006, a new computerized maintenance

management system was implemented to provide more reliable and efficient maintenance of the

plant. The Project is technically effective and sustainable for the expected 22-year life of the

generating units. This sustainability is predicated on the design quality of the generating units, and

MPL’s commitment to sound O&M practices. The company organizes regular training for its

employees in various areas, including operation, safety management, finance, English language,

and computer programs. Monthly technical training programs are organized for O&M personnel.

In terms of corporate governance and sound operating systems, MPL has obtained International

Organization for Standardization 14001 certification for environment management standards, and

Occupational Health and Safety Assessment Series 18001 certification for its occupational health

and safety management system. MPL constructed and is operating the power station in an

environmentally responsible manner, complying with all applicable environmental laws,

regulations, and guidelines. MPL adopted an environmental policy that states the principles and

intentions of the company as part of its overall environmental performance. Such principles and

intentions were communicated to employees, customers, and community members along with their

individual environmental responsibilities. MPL developed training programs to ensure power

station staff receive training appropriate for implementing the emergency response plan; health,

safety, and environmental procedures; and the plant O&M program. MPL maintains safe and


healthy working conditions, and protects the environment, equipment, and systems of work for its

staff, visitors, and neighbors. During the plant visit, members of the Extended Annual Review

Mission were required to attend a 30-minute presentation on environmental, health, and safety

awareness before they were allowed to tour the plant.

The overall rating of the Project in terms of contribution to private sector development is

“excellent”.

(ii)ADB investment profitability:

The interest rate margin charged on ADB’s direct loan was benchmarked against that of another

private power project in Bangladesh (the Haripur project). The pricing for the ADB loan reflects

the risks associated with the Project, in comparison with recent market benchmarks. The PRG

pricing17 and fees were very competitive. In the absence of the PRG, 18 in which ADB acts as the

guarantor of record, the commercial cofinancing would not materialize.

Demand risk is low based on the current shortage and high annual growth of demand. The take-

or-pay obligation of the buyer under the PPA, which is guaranteed by the Government, further

mitigates the demand risk. The payment performance of the buyer (BPDB), which is discussed in

para. 45, recently was resolved. Therefore, the buyer’s credit risk has been satisfactory so far.

Although a limited risk will remain throughout the Project, this risk might increase if BPDB makes

major commitments to more new IPPs without higher tariffs, and better billing and collection of

the entire power sector system (BPDB and the distribution entities). Moreover, with regard to

O&M of the Project, MPL has the necessary engineering and operational human resources to

sustain the investments financed by ADB.

The payment record of BPDB has improved markedly. BPDB's monthly payments to MPL were

delayed from November 2005 to December 2006 for an average of 71 days, but they were fully

paid up by May 2007. The only significant outstanding claim from BPDB is for interest on late

payments. MPL’s managing director and BPDB are addressing this issue through dialogue.

Besides two delayed payments due to technical issues (para. 29), MPL has regularly and promptly

serviced its principal and interest to the lenders. Final repayment is scheduled on 15 September

2016.

ADB’s investment profitability is rated "satisfactory".


(iii)ADB work quality:

The quality of ADB’s work is assessed as "excellent" in three categories:

(i) Screening, appraisal, and structuring;

(ii) Monitoring and supervision; and

(iii) ADB’s role and contribution.

As a direct lender and provider of PRG, ADB played an important role in mobilizing commercial

financing. Commercial banks had been hesitant to lend on an uncovered basis because of the

market conditions, political situation, and lack of track record for IPP projects in Bangladesh at

that time.

1. Screening, Appraisal, and Structuring:

ADB took the lead in the due diligence process that covered key project issues, including the

competitiveness of the project tariff and financial sustainability of the buyer.

The Project was structured as a typical project finance transaction. It was executed under a 22-year

BOO implementation agreement between the Government and the sponsor, and a PPA with BPDB.

Under the PPA, BPDB is committed to a take or pay obligation, which is guaranteed by the

Government. The minimum continuous load of the plant can be 25% of its dependable capacity

(450 MW), but with approximately plant load factor of 85%, MPL will recover its full capacity

and variable costs, as well as generate a return on equity. ADB conceptualized and developed the

Project as part of its public sector assistance to the energy sector. Because international competitive

bidding was used in the Project, the bid standardized a tariff, which is one of the lowest in the

world and has set a new benchmark for the industry in Bangladesh and the rest of Asia. ADB’s

Board of Directors approved MPL on 5 December 2000. Financial closure was on 11 April 2001,

and the first disbursement was on 25 October 2001. 44. The ADB PRG19 covers loan default by

MPL on scheduled debt service payments of principal and interest of the ADB guaranteed loan

resulting from the Government's failure to meet payment obligations under the implementation

agreement and the Government guarantee with respect to the project agreements. The coverage of

the ADB PRG enhanced the confidence of commercial banks participating in the transaction. The

participation of ADB as one of the cofinanciers also boosted the confidence of the private sector

sponsors, given ADB's long-term involvement and continual policy dialogue with the Government

in the development of the power sector.

ADB’s Mission comprised Private Sector Operations Department (PSOD) staff with extensive

public sector experience in the power sector and an intimate knowledge of the Government


agencies involved in the Project. Their knowledge and contacts enabled ADB to contribute much

to the quality of the Project and to effective internal administration.

ADB’s performance in terms of screening, appraisal, and structuring is rated "excellent".

2. Monitoring and Supervision:

ADB has been closely monitoring project implementation. The common terms agreement

enumerates the reporting covenants of MPL, which include the submission of

(i) Annual forecasts;

(ii) Financial statements, including those of the sponsor and BPDB;

(iii) O&M reports and programs;

(iv) Operating budgets and reports;

(v) Health, safety, and environment reports; and

(vi) Insurance documentation. The agreement specifies the timing for submission of these reports.

MPL has complied with all reporting requirements in a timely manner.

In addition, MPL has met financial covenants. ADB has been prompt in consenting to waivers and

requests for any amendments to existing agreements, subject to a thorough review of the requests.

In 2006, monthly payments from the buyer, BPDB, to MPL were delayed for an average of 71

days. However, with ADB’s participation, this issue was resolved and BPDB was fully paid up in

May 2007. PSOD coordinated with the Southeast Asia Department to follow up on compliance

with covenants relating to BPDB’s financial performance under the finance agreements. Following

Board approval in December 2000 and the start of commercial operations in November 2002,

PSOD fielded three missions. The first mission was in October 2005 for an annual review, the

second in May 2007 for the extended annual review and the third in August 2007 for the Globeleq

sale transaction. The first two missions included site visits for physical inspection of the plant’s

operations. These also involved meetings with MPL management and some government agencies,

such as the Ministry of Energy and Mineral Resources, to assess the development outcome of the

Project and progress in the development of the power sector in Bangladesh. ADB’s performance

in terms of monitoring and supervision is rated "excellent".

3. ADB’s Role and Contribution:

MPL supported the Government’s efforts to promote foreign investment. It was also consistent

with ADB’s operational strategy for Bangladesh, which is to reduce poverty, and the partnership


agreement on poverty reduction between ADB and the Government. Through its involvement in

MPL, ADB was a catalyst in enabling private finance for generation. MPL is operating

successfully in the private sector and reliably producing power at a competitive cost to BPDB. In

addition to cost-effective and reliable power, MPL and other IPPs introduced private capital and

private sector management to the power development partners. Private sector management

provides manning and operations benchmarks for the efficient management of power stations in

Bangladesh, and establishes standards for BPDB stations to aim for in the future. Moreover, the

new investors show signs of being prepared to invest further in the sector. AES Corporation, which

was the leading investor in MPL, subsequently invested in Haripur Power Limited. MPL and

Haripur are being managed in parallel by a single senior management team. These developments

indicate that private power generation is now widely accepted in Bangladesh, and is attracting

foreign and local investors.

ADB also took the lead in supporting reforms in the power sector by conducting an extensive

policy dialogue with the Government, and by providing funding as well as technical assistance

(TA). The TA helped review the electricity legislation, prepare a power system master plan, and

upgrade the financial management of BPDB and Dhaka Electric Supply Authority (DESA). The

Project complies with ADB’s strategy for the energy sector and private sector operations in

Bangladesh. At Board approval, MPL was a good example of ADB’s new private sector

development in action. The Project is the first private sector power project awarded on a fully

competitive basis in Bangladesh and served as a model for other IPPs. ADB assisted the

Government in promoting private sector development in the power sector through TA and loans.

Such assistance included financing of a master plan for the power sector, the Project’s feasibility

study and detailed engineering, preparation of the tender documents for international competitive

bidding, and assistance in selecting the winning bidder. As part of internal coordination and

division of responsibilities within ADB, PSOD took responsibility for processing the Project

following its award to the initial sponsor, AES. Therefore, ADB’s role and contribution to the

Project is rated "excellent".

(iv)ADB aditionality:

ADB’s support to MPL was vital as the Government was unable to finance such a large investment

from its own resources, and foreign and local currency funding was critically short. ADB and other

financing institutions filled the financing gap, which was instrumental in opening up the power

sector in Bangladesh to private financing. ADB’s loan increased investor and commercial lender

confidence in MPL and the Project, and helped mobilize long-term cofinancing from other

financial institutions and commercial banks. As a provider of PRG, ADB enhanced the protection

to commercial lenders in addition to the counter-guarantee from the Government. Moreover, ADB

has been a long-term partner of the Government in developing the power sector. During project


inception, ADB’s public sector operations provided TA to develop a plan for power sector reform

that recommended

(i)Unbundling BPDB and corporatizing BPDB and DESA,

(ii) Establishing tariff regulation for the power market, and

(iii) Creating a competitive power market.

The complementarities between ADB’s public and private sector operations promote confidence

among project sponsors and financiers, and ensure that the evolving regulatory and institutional

framework will be on track. Without ADB assistance, the financial closure of the Project would

not have been finalized on a timely basis or appropriate financing terms because of the perceived

high country risks and lack of precedent for large-scale BOO IPPs in the country.

ADB’s involvement in the power sector led to positive institutional developments, particularly

over the 8 years since ADB became the coordinating development partner for the sector. The sector

was partially unbundled, private generation is now an accepted feature of the power market, new

institutions were set up that are achieving good results, responsibilities were transferred from

ineffective to more-effective institutions, some performance improvements were achieved in the

main utilities, and capacity has been built within the local power sector. The ability to offer loans

and TA, subject to certain conditions, gave ADB leverage that it generally used to good effect.

Through ADB’s dialogue with the Government, BPDB updated its payment obligations, which

had been delayed several times in 2006, and remains up to date. BPDB continues to honor the

terms of the PPA, so that the Government guarantee on MPL is not called.

ADB will remain involved in the development of the power sector in Bangladesh. In August 2005,

the ADB Board approved the TA to Bangladesh for the corporatization of the BPDB. In June 2007,

ADB approved the proposed loan for the sustainable power sector development program.

Moreover, PSOD is coordinating with the Southeast Asia Department to explore other potential

large-scale power projects that could be structured as public–private partnerships (PPPs). The

current country partnership strategy continues to support private sector investments and PPP

financing to meet infrastructure requirements. ADB’s financial assistance was crucial for the

successful financial closure and timely realization of the Project. ADB’s involvement and

supervision of the Project has helped to ensure that the operation meets international standards,

and complies with environmental and social safeguard requirements. Further, the successful

implementation of MPL provides lessons and technical expertise for future development of other

IPPs. Therefore, ADB’s additionality is rated "excellent".


5.3 Overall evaluation

Overall, the Project is rated "highly successful". The ratings are summarized in the table below.

The Project is a fine example of opening up the power sector for private investments, as envisaged

in the private sector development strategy, and demonstrates the effectiveness of PPPs. The

success of MPL has clearly demonstrated the effectiveness of the private sector in building and

operating infrastructure, advocating corporate governance and transparency, and promoting

professional work ethics. This was one of the first major IPPs awarded in Bangladesh on a fully

competitive basis, and it is being used by the Government as a model. MPL is one of the best

operating, best maintained, and most reliable power plants in Bangladesh. It has by far the lowest

unit costs among all IPPs in the country, and is among the least expensive even when compared

with older plants. It has become a benchmark in the industry not only in Bangladesh, but in Asia.

The plant also has been Bangladesh’s most energy efficient, as it introduced state-of-the art, gas-

fired, combined-cycle technology to the country. Further, it has an outstanding environmental and

safety record since starting operation. In terms of social impact, MPL has helped to improve the

electrification rate in Bangladesh, created jobs, and engaged in community support programs.

Operationally, the sponsor has experienced no material gas supply problems and no material

dispatch problems, and has recently cleared default payments. Moreover, after 3 years of

successful operation, AES sold the company at an increased value after changing its strategy in

favor of domestic operations. The ownership of the MPL was transferred twice due to change of

business strategies by its previous owners.

As a company, MPL's financial performance has been satisfactory and met the sponsor’s

expectations. MPL demonstrated the best technology in power plant operations and best practices

in environmental, social, health, and safety management. The foreign sponsors have transferred

technology and expertise to local employees through training.

ADB has played an important role by providing a direct loan, CFS, and a PRG to catalyze financing

from commercial lenders. ADB's involvement built confidence among the project sponsors and

confinanciers, which led to successful project execution. The Government, sponsors, and lenders

view the Project as successful and suggest that it could be used as a model for future development

of other IPP projects in Bangladesh.

8 bijoy

Documents