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1 Government of Bangladesh / ADB ADB TA 4626-BAN: Corporatization of Bangladesh Power Development Board Final Report Main Document 21 July 2008 Government of Bangladesh / ADB 1/8/08 Government of Bangladesh / ADB ADB TA 4626-BAN: Corporatization of Bangladesh Power Development Board Final Report Main Document 21 July 2008 PA Knowledge Limited 2008 PA Consulting Group Level 4 369 Queen St Auckland 1010 New Zealand Tel: +64 9 306 8895 Fax: +64 9 306 8896 Prepared by: PA Consulting Group in association with HB Consultants Version: i Government of Bangladesh / ADB 1/8/08 FOREWORD This report represents the work conducted by PA Consulting Group in association with HB Consultants Ltd under ADB TA 4626-BAN: Corporatization of Bangladesh Power Development Board.

2 The PA team included Mike Crosetti (Team Leader/Corporate Restructuring & Governance Expert), Bernard Ivory (Financial Expert), Ed Hourihan (Commercial Expert), Ashit Ranjan (Human Resources Expert), Bruce Wickes (MIS Expert), and Nihad Kabir (Legal Expert). The HB team included Shawkat Ali Ferdousi (Corporate Restructuring & Governance Expert), Kazi Mostafa Alam (Financial Expert), Zakir Hossain (Human Resources Expert), Syed Arifuzzaman (MIS Expert), and Sheikh Fazle Noor Taposh (Legal Expert). The team submitted a Draft Final Report in November, 2007. That report consolidated the analysis, findings and recommendations of the consultants since the inception of the project in March, 2006.

3 The project continued for longer than the 12 months originally anticipated due to the numerous changes that took place in Bangladesh over this period, at one point resulting in a six month suspension of project activities. The Government of Bangladesh provided comments on that report in January, 2008. This report addresses those comments as well as comments received separately from ADB. The consultants gratefully acknowledge the guidance and support of the counterpart team from the Ministry of Power, Energy and Mineral Resources (MPEMR) and Bangladesh Power Development Board (BPDB) and its subsidiaries, in particular Dr. Fouzul Kabir Khan, Secretary (Power), MPEMR, and Mr.

4 Delwar Hossain, Director (System Planning), as well as Mr. Pil-Bae Song of the Asian Development Bank and Mr. ANM Rizwan. ii Government of Bangladesh / ADB 1/8/08 ABBREVIATIONS ADP Annual Development Plan AGC Automatic Generation Control AoA Articles of Association APSCL Ashuganj Power Station Company Limited BAS Bangladesh Accounting Standards BB Bangladesh Bank BERC Bangladesh Energy Regulatory Commission BoD Board of Directors BOI Board of Investment BPDB Bangladesh Power Development Board BSTI Bangladesh Standards Testing Institute BTTB Bangladesh Telegraph and Telephone Board BWDB Bangladesh Water Development Board CCIE Chief Controller of Import and Export CE Chief Engineer CEO Chief Executive Officer CFO

5 Chief Financial Officer CI Controller of Insurance CIFE Chief Inspector of Factories and Establishment DESA Dhaka Electric Supply Authority DESCO Dhaka Electric Supply Company Limited DFSCD Department of Fire Service & Civil Defence DOE Department of Environment DOEXP Department of Explosives DPDC Dhaka Power Distribution Company Limited EGCB Electricity Generation Company of Bangladesh Limited EP WAPDA East Pakistan Water and Power Development Authority EPMS Employee Performance Management System ERP Enterprise Resource Planning FERA Foreign Exchange Regulation Act 1947 FFU Fund Facilitation Unit FMU Financial Management Upgrade FRRP Financial Restructuring and Recovery Plan FY Financial Year GM General Manager GOB Government of Bangladesh GPS Ghorasal Power Station G,T&D Generation, transmission and distribution HO Head Office HPSP Health and Population Sector Program IDCOL Infrastructure Development Company Limited IPPs Independent Power Producers IVVR Identification, Verification, Valuation.

6 Recording iii Government of Bangladesh / IWTA Inland Water Transport Authority KPIs Key Performance Indicators kV kilo Volt kWh kilo watt-hours MD Managing Director MIS Management Information System MOA Memorandum of Association MOC Ministry of Commerce MOF Ministry of Finance MOHA Ministry of Home Affairs MPEMR Ministry of Power, Energy and Mineral Resources MVA mega Volt-Ampere MW megawatts NBR National Board of Revenue NLDC National Load Dispatch Center NWPGC North West Power Generation Company Limited NWZPDCL North West Zone Power Distribution Company Limited O&M Operation and Maintenance P&L Profit and Loss PBS Palli Bidyut Samiti PC Planning Commission PDB Power Development Board (same as BPDB above)

7 PGCB Power Grid Company of Bangladesh Limited PKSF Palli Karma Sahayak Foundation PO Presidential Order POA Power of Attorney PPAs Power Purchase Agreements PSIFP Power Sector Investment Funding Program PSRB Power Sector Reforms in Bangladesh RAJUK Rajdhani Unnayan Kartripakkha RCE Revenue to Current Expenditure REB Rural Electrification Board RJSC Registrar of Joint Stock Companies and Firms RLIF Revenue Loss Impact Factor RPCL Rural Power Company Limited RTC Regional Training Center RTM Registrar of Trade Marks SAIDI System Average Interruption Duration Index SAIFI System Average Interruption Frequency Index SBC Sadharan Bima Corporation SCADA Supervisory Control and Data Acquisition SEC Securities and Exchange Commission SMU Systems Management Unit SWM Sector Wide Management TQM Total Quality Management VRS Voluntary Retirement Scheme iv Government of Bangladesh / WASA Water and Sewerage Supply Authority WDB Water Development Board WZPDCL West Zone Power Distribution Company Limited ZRS Zonal Repairing Shop v Government of Bangladesh / ADB 1/8/08 EXECUTIVE SUMMARY Background & Objectives Despite economic growth averaging some annually over the past 10 years.

8 Bangladesh continues to face daunting problems in the power sector, notably: An electrification ratio of less than 40%. Extensive load shedding. Load shedding sometimes approaches 1,000 MW, equivalent to about 25% of total de-rated generation capacity in the country. The electrification ratio can be improved by extending rural electrification, and load shedding can be reduced by adding and rehabilitating generation capacity, and where necessary, upgrading transmission and distribution capacity. However, these actions require capital investment, which is not available in sufficient quantities to make major progress in addressing these problems.

9 The lack of capital investment is a symptom of more fundamental problems within the sector. Specifically, tariffs and Government subsidies are inadequate to recover the cost of supply, and the overall cost of supply itself is high due to excessive losses and other inefficiencies. The current situation is summarized in Exhibit Exhibit : Fundamental Problems in the Bangladesh Power Sector Through the 1994 Power Sector Reforms in Bangladesh , the 2000 Vision and Policy Statement, and the 2005 Power Sector Reform Roadmap, the Government of Bangladesh has defined a comprehensive approach to addressing these problems. As part of this approach, the Government has embarked on corporatization of the operating units of the Bangladesh Power Development Board (BPDB).

10 The Government s corporatization effort aims to expand the autonomy of these units to operate on commercial and technical grounds while simultaneously introducing mechanisms to hold these companies accountable for their performance. Experience with unbundling and corporatization of BPDB operating units has demonstrated positive results such as lower losses and higher collections. Losses & Other InefficienciesInadequate Tariffs & SubsidiesInsufficient Capital FundingLow AccessPoor ReliabilityRoot CausesSymptomConsequencesElectrification ratio < 40%Extensive load shedding due to estimated peak time shortfall of some 1,000 MWT&D losses are 23% of total net generation.