Proposed Power Sector Development Policy Credit
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Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 43669-BD INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT Public Disclosure Authorized FOR A PROPOSED POWER SECTOR DEVELOPMENT POLICY CREDIT IN THE AMOUNT OF SDR 73.7 MILLION (US$120 MILLION EQUIVALENT) TO THE PEOPLE’S REPUBLIC OF BANGLADESH Public Disclosure Authorized May 14, 2008 Public Disclosure Authorized Sustainable Development Department South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Bangladesh - GOVERNMENT FISCAL YEAR July 1 –June 30 CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 30, 2008) Currency Unit US$1.00 = 68.67 Bangladeshi Takas WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AAA Advisory and Analytical Activities ACC Anti-Corruption Commission ADB Asian Development Bank ADP Annual Development Program AMR Automated Meter Reading APSCL Ashuganj Power Station Company Limited ATC Agreement on Textiles and Clothing BB Bangladesh Bank BERC Bangladesh Energy Regulatory Commission BPDB Bangladesh Power Development Board CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment CFL Compact Fluorescent Lamp CTG Caretaker Government DESA Dhaka Electric Supply Authority DESCO Dhaka Electricity Supply Company DFID Department for International Development (UK) DPC Development Policy Credit DPDC Dhaka Power Distribution Company DSA Development Service Agreement DSC Development Support Credit EGCB Electricity Generation Company of Bangladesh FRP Financial Restructuring Plan FRRP Financial Recovery and Restructuring Plan GDP Gross Domestic Product GFS Government Finance Statistics GNP Gross National Product GWh Gigawatt hour HIPC Heavily Indebted Poor Countries IBRD International Bank for Reconstruction and Development ICA Investment Climate Assessment IDA International Development Association IEG Independent Evaluation Group IFC International Finance Corporation IFRS International Financial Reporting Standards IMF International Monetary Fund IPP Independent Power Producer ISO Independent System Operator JBIC Japan Bank for International Cooperation JSAN Joint Staff Assessment Note ii kWh Kilowatt hour LCG Local Consultative Group LDP Letter of Development Policy LGED Local Government Engineering Department MDGs Millennium Development Goals MDTF Multi-Donor Trust Fund MOE Ministry of Education MOF Ministry of Finance MOH Ministry of Health MPEMR Ministry of Power, Energy and Mineral Resources MTBF Medium Term Budgetary Framework MTEF Medium-Term Expenditure Framework MW Megawatt NEP National Energy Policy NRECA National Rural Electric Cooperative Association NWPGC North West Power Generation Company NWZPDC North West Zone Power Distribution Company OPCS Operations Policy and Country Services PBS Palli Bidyut Samities or Rural Electric Cooperatives PC Power Cell PEFA Public Expenditure and Financial Accountability PER Public Expenditure Review PFMIP Public Financial Management Improvement Program PGCB Power Grid Company of Bangladesh PHRD Japan Policy and Human Resources Development Trust Fund PPA Public Procurement Act 2006 PPRP Public Procurement Reform Project PRG Partial Risk Guarantee PRS Poverty Reduction Strategy PRSC Poverty Reduction Support Credit PSDTA Power Sector Development Technical Assistance Project PTA Performance Target Achievement REB Rural Electrification Board RERED Rural Electrification and Renewable Energy Development Project ROSC Report on the Observance of Standards and Codes RPCL Rural Power Company Ltd. SDR Special Drawing Rights SEDA Sustainable Energy Development Agency SEU Sustainable Energy Unit SOE State-owned Enterprises SPPP Siddhirganj Peaking Power Project SZPDP South Zone Power Distribution Project TA Technical Assistance TOE Table of Equipment TSC Transitional Support Credit UNDP United Nations Development Program USAID United States Agency for International Development WZPDC West Zone Power Distribution Company Vice President: Praful Patel Country Director: Xian Zhu Sector Manager: Salman Zaheer Task Team Leader: Alan Townsend iii BANGLADESH POWER SECTOR DEVELOPMENT POLICY CREDIT TABLE OF CONTENTS I. INTRODUCTION .................................................................................................................................. 1 II. COUNTRY CONTEXT ......................................................................................................................... 5 RECENT ECONOMIC AND POLITICAL DEVELOPMENTS IN BANGLADESH................................. 5 BANGLADESH’S POVERTY REDUCTION STRATEGY: AN UPDATE ............................................... 8 III. THE GOVERNMENT’S POWER SECTOR REFORM PROGRAM ......................................... 9 IV. THE PROPOSED OPERATION.................................................................................................... 11 OPERATION DESCRIPTION ................................................................................................................... 11 POLICY AREAS ........................................................................................................................................ 12 V. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ......................................................... 19 LINK TO CAS ............................................................................................................................................ 19 COLLABORATION WITH THE IMF AND OTHER DONORS .............................................................. 19 RELATIONSHIP TO OTHER BANK OPERATIONS .............................................................................. 19 LESSONS LEARNED ................................................................................................................................ 20 ANALYTICAL UNDERPINNINGS.......................................................................................................... 21 VI. OPERATION IMPLEMENTATION............................................................................................. 22 POVERTY AND SOCIAL IMPACT.......................................................................................................... 22 ENVIRONMENTAL ASPECTS ................................................................................................................ 23 IMPLEMENTATION, MONITORING AND EVALUATION ................................................................. 25 ADMINISTRATION, PROCUREMENT, DISBURSEMENT AND AUDITING..................................... 27 BENEFITS, RISKS AND RISK MITIGATION......................................................................................... 29 ANNEXES ANNEX 1: LETTER OF DEVELOPMENT POLICY …………………………………………………31 ANNEX 2: POWER SECTOR POLICY MATRIX…………………………………………………….35 ANNEX 3: BANGLADESH’S POWER SECTOR REFORM ROAD MAP…………………………..36 ANNEX 5: INVESTMENT CLIMATE AND THE POWER SECTOR……………………………….56 ANNEX 5: COUNTRY AT A GLANCE ……………………………………………………………...59 This Credit was prepared by an IDA team consisting of Alan Townsend (TTL), Raihan Elahi, M. Iqbal, Sudeshna Banerjee, Fabio Pittaluga, Sameer Akbar, Zafrul Islam, Suraiya Zannath, Sandeep Mahajan, Dan Biller, Tatiana Nenova, Shaukat Javed, Boonsri Kim, and Md. Abul Fayez Khan. iv CREDIT AND PROGRAM SUMMARY PEOPLE’S REPUBLIC OF BANGLADESH POWER SECTOR DEVELOPMENT POLICY CREDIT Borrower People’s Republic of Bangladesh Implementing (i) Ministry of Finance; and (ii) Ministry of Power, Energy and Mineral Agencies Resources Amount SDR 73.7-million (US$120 million equivalent) Terms Standard IDA terms; 40-year maturity including a 10-year grace period Tranching A single tranche Credit of about SDR 73.7 million (US$120 million equivalent) would be made available upon credit effectiveness. Development This single tranche development policy credit supports a subset of the Objectives and Government’s program of power sector reform. The policy actions Description supported by the Credit cover the areas of: (i) financial stability and restructuring, (ii) private investment in generation (iii), regulatory reform and institutional strengthening, (iv) corporate governance of state-owned enterprises in the sector, and (v) transparent and accountable commercialization of energy services, and (vi) rural electrification strategy and institutional development. The development objective is the enhancement of governance and accountability, and of financial stability, in the sector leading to better and more sustainable service provision. Benefits • Enhanced quality, transparency and efficiency of power generation contracting processes leading to increased private investment on competitive terms • Enhanced governance of corporatized service providers, including through improved metering, billing and collection systems • Accelerated development of regulatory capacity by strengthening the operations of the Bangladesh Energy Regulatory Commission • Reduction of commercial losses Risks • Change in Government leading to change in policy • Macro-fiscal deterioration that complicates energy pricing adjustments • Inadequate investor interest to meet Bangladesh’s power sector needs on affordable terms • Labor strife that blocks governance reform, especially in the context of the corporatization process • Service delivery problems, linked to both inadequate generation and natural gas shortages, that damage the credibility and legitimacy of the