Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No: 21529-BD

IMPLEMENTATION COMPLETION REPORT (27200) Public Disclosure Authorized ON A CREDIT

IN THE AMOUNT OF SDR 83.4 MILLION (US$ 120.8 MILLION EQUIVALENT)

TO THE GOVERNMENT OF BANGLADESH

FOR GAS INFRASTRUCTURE DEVELOPMENT PROJECT Public Disclosure Authorized

January 31, 2001

Energy Sector Unit South Asia Region

Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

(Exchange Rate Effective )

Currency Unit = Bangladesh Taka (Tk) Exchange Rate = US$ 1.00 = Tk 40.25 at Project Appraisal US$ 1.00 = Tk 51.00 at Project Closing

FISCAL YEAR July - June

ABBREVIATIONS AND ACRONYMS

A-B Ashuganj-Bakhrabad DFID Department for International Development, UK ERR Economic Rate of Return ESMS Environment & Safety Management Systems GTCL Gas Transmission Company Limited IDA International Development Association IOC International Oil Company MMCFD Million Cubic Feet Per Day MSIP Management Systems Improvement Program OCs Operating Companies PSC Production Sharing Contract SGFL Sylhet Gas Fields Limited SCADA Supervisory Control and Data Acquisition TA Technical Assistance T&D Transmission & Distribution

Vice President: Mieko Nishimizu Country Director: Frederick T. Temple Sector Director: Alastair J. McKechnie Task Team Leader: A.S.M. Bashirul Hug FOR OFFICIAL USE ONLY

BANGLADESH GAS INFRASTRUCTURE DEVELOPMENT PROJECT (Cr. 2720-BD) IMPLEMENTATION COMPLETION REPORT

CONTENTS

Page No. 1. Project Data 1 2. Principal Perfornance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry I 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 8 6. Sustainability 9 7. Bank and Borrower Performance 9 8. Lessons Learned 11 9. Partner Comments 12 10. Additional Information 12 Annex 1. Key Performance Indicators/Log Frame Matrix 13 Annex 2. Project Costs and Financing 15 Annex 3. Economic Costs and Benefits 17 Annex 4. Bank Inputs 18 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 20 Annex 6. Ratings of Bank and Boffower Performance 21 Annex 7. List of Supporting Documents 22 Annex 7A. Implementation Completion Mission: Aide Memoire 23 Annex 7B. Borrower's Evaluation 27 Annex 7C. Borrower's Comments on Bank's Implementation Completion Report 37 Annex 7D. Status of Compliance with Covenants 41 Annex 7E. Financial Tables of GTCL and SGFL 45

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

Preface

This is the Implementation Completion Report (ICR) for the Gas Infrastructure Development Project (GIDP) in Bangladesh, for which Cr.2720-BD in the amount of SDR 83.4 million (US$ 120.80 million equivalent) was approved on May 24, 1995, and made effective on June 24, 1995.

The Credit was closed on the original closing date of June 30, 2000. A total of SDR 48.87 equivalent to US$ 67.92 million was disbursed. On March 27, 2000, a saving of SDR 29.0 million was cancelled and another SDR 5.53 million (equivalent to US$ 7.05 million) was cancelled upon Credit closing. Cofmnancing for the project was provided by Department for International Development (DFID), UK.

The ICR was prepared by A.S.M. Bashirul Huq, Senior Energy Specialist, and reviewed by Messrs. Frederick T. Temple, Country Director; Alastair J. McKechnie, Sector Director and Marc L. Heitner, Lead Energy Specialist (SASEG). The ICR is based on the findings of the Implementation Completion Mission, as well as documentation in the project files. The Borrower contributed to preparation of the ICR by providing its own evaluation and by commenting on the draft ICR. The draft ICR was also sent to DFID which chose not to comment on the report.

Project ID: P009533 Project Name: Gas Infrastructure Development Team Leader: A. S. M. Bashirul Huq TL Unit: SASEG ICR Type: Core ICR Report Date: January 31, 2001

1. Project Data

Name: Gas Infrastructure Development L/C/TFNumber: 27200 Country/Department: BANGLADESH Region: South Asia Regional Office Sector/subsector: GP - Oil & Gas Transportation

KEY DATES Original Revised/Actual PCD: 07/10/92 Efftctive: 08/22/95 06/22/95 Appraisal: 04/30/93 MTR: 12/03/97 Approval: 05/09/95 Closing: 06/30/2000 06/30/2000

Borrower/lImplementingAgency: Govemment of BangladeshlPETROBANGLA, GTCL, SGFL Other Partners: Deparment for International Development (DFID), UK

STAFF Current At Appraisal Vice President: Mieko Nishimizu D. Joseph Wood Country Manager: Frederick Thomas Temple Pierre Landell-Mills Sector Manager: Alastair J. Mckechnie Per Ljung Team Leader at ICR: Marc Heitner ICR Primary Author: A.S.M. Bashirul Huq

2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Otutcome: U Sustainability: UN Institutional Development Impact: N Bank Performance: U Borrower Performance: U

QAG (if available) ICR Quality at Entry: U Project at Risk at Any Time: Yes

3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 OriginalObjective:

The objectives of the project were to: (a) alleviate the worsening gas supply shortages through partially financing the sector's priority investments; (b) assist in implementing further reforms to improve the enabling environment for private sector participation in the sector; and (c) develop the gas sector entities' institutional capabilities particularly in the areas of operations and maintenance; safety; environmental protection; and accounting and financial management.

The project aimed at increasing gas supply through the public sector and strengthening the capability of the concerned Government entities. Hence, the design of the project was consistent with the Borrower's priorities. With respect to facilitating private sector involvement, there was no component (or particular conditionality) attached to the fulfillment of that objective except for providing technical assistance for operationalization of the newly created Gas Transmission Company Limited (GTCL) to enable its functioning as the common carrier of gas. Furthermore, Production Sharing Contracts (PSCs) were signed with two International Oil Companies (IOCs) before the project went to Board, and this was regarded as an indication of the Borrower's commitment to attract private investments in petroleum exploration and production. The project was relatively straightforward to execute, and did not entail significant reforms, so that the risks were relatively low.

3.2 Revised Objective:

The original objectives remained unchanged throughout the project life.

3.3 OriginalComponents:

To achieve the project objectives, the original project components included: (a) a 58-km, 30-inch diameter gas pipeline from Ashuganj to Bakhrabad; (b) a Supervisory Control and Data Acquisition (SCADA) and pipeline telecommunication system for the entire transmission trunkline from Kailashtilla to Chittagong and integration with existing facilities; (c) three production wells at Rashidpur gas field; (d) a gas processing plant to purify gas from the new wells; and (e) technical assistance components consisting of: (i) project implementation support through consultancy and management services to prepare designs and bid documents, assist in bid evaluation and provide construction supervision/management for the components listed in items (a), (b), (c) and (d) above; (ii) institution building assistance through consultancy and management services to develop managerial and technical capabilities of Gas Transmission Company Limited (GTCL), establish a group-wide environmental and safety management system, strengthen reservoir management capability, and improve Petrobangla group's management systems; and (iii) training of Petrobangla staff in key aspects of gas sector operations.

3.4 Revised Components:

There were no major changes in project scope. The Credit also supported the preparation of the Second Round of exploration licensing - this involved arranging a promotional effort to the oil industry, and training of Petrobangla staff and assisting in the evaluation of the offers of oil companies. This was compatible with the project objectives of promoting an enabling environment for private sector participation, and therefore, did not require Board approval.

3.5 Quality at Entry:

In order to create an enabling environment for private sector participation, a number of conditions would have to be fulfilled, including: (i) passage of appropriate legislation; (ii) transfer of responsibility of petroleum policy, and management of the resource base from Petrobangla to the State; (iii) preparation of a framework for timely revision of gas tariff; and (iv) operationalization of the newly created GTCL. Such measures cannot be achieved without extensive discussions with the stakeholders, an assessment of their reservations, and addressing those effectively. By following such an approach, there would have been wider ownership for the reform measures, and the chances for success would have improved correspondingly. Project preparation took a long time as negotiations were linked to the signature of a number of PSCs with IOCs. Other measures were not provided for as the Borrower indicated that these would materially affect its leverage in negotiating exploration concessions with IOCs.

Furthermore, the financial covenants followed the old practice of ensuring the financial solvency of individual subsidiaries of Petrobangla. Thus, the Bank to a large extent covenanted transfer prices within the Petrobangla group. Such an approach would not ensure that Petrobangla would be operating in a financially sound manner, specifically, the activities of Petrobangla as well as the two Transmission and Distribution Companies were subjected to loose targets. As a result, the Bank could do little when it realized that the Petrobangla Group as a whole was operating at a loss, largely because of the reluctance of the Government to adjust tariffs as agreed during negotiations.

Based on the above, the project is rated "Unsatisfactory at Entry".

4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective:

Alleviate Gas Supply Shortages

The A-B pipeline was constructed with the purpose of bringing excess gas from the large gas fields in the Northeast part of Bangladesh to the Southeast. The 58-km 30-inch pipeline was constructed and commissioned in April 1997. Meanwhile, a PSC for an offshore block in Southeast Bangladesh was signed in 1995 with an IOC. The PSC contractor announced a commercial discovery (Sangu) in June 1997, which started to produce in June 1998 at the rate of 60 MMCFD, gradually increasing to 160 MMCFD. As a result, the need to bring natural gas from the Northeast fields to the Southeast market largely disappeared (except for emergency situations). Consequently, gas flows in the A-B pipeline over the past two years has averaged less than 100 MMCFD, against a design capacity of 450 MMCFD. It is anticipated that only in 2004 will the A-B pipeline operate at about 50-75 percent of its design capacity, once large IPPs at Haripur (360 MW) and Meghnaghat (2 x 450 MW each) are commissioned. It should be stressed that the discovery of the Sangu field could not be anticipated when the Project was under preparation. Another component of the Project aimed at alleviating gas shortages consisted in the drilling and completion of three wells at the existing Rashidpur field, together with a treatment plant with a capacity of 90 MMCFD. While the investment was executed and completed over 1998-2000, the additional wells could not be put into full production on account of pipeline constraints and absence of commensurate demand. As a matter of fact, the current capacity of the N-S system is 350 MMCFD, of which about 100 MMCFD was committed in 1999 to ship the output of a gas field currently operated by an IOC at Jalalabad, and the balance to ship gas from Petrobangla properties. As a result, the Rashidpur wells are put into production only occasionally. Presently these three wells are producing only 45 MMCFD. Nevertheless, Petrobangla has arranged to have the N-S pipeline expanded (completion is expected in June 2001). It is anticipated that the Rashidpur wells will start full production around 2002. Again, this situation could not be anticipated during project preparation.

The Supervisory Control and Data Acquisition (SCADA) component of the project is at risk of completion as the contractor has gone into receivership. Furthermore, for the SCADA system to be used effectively, all the high-pressure transmission pipelines currently operated by three T&D companies ought to be transferred to GTCL, the common carrier. However, transfer of pipelines to GTCL is currently at a standstill largely because of resistance of the unions and lack of Borrower commitment. Thus, it remains to be established whether Bangladesh will receive the full benefits of this component.

- 3 - In all, Bangladesh was able to overcome the gas shortage which prevailed in the early 1990s through the rapid development of gas reserves by foreign oil companies. As a result, the Bank-financed components of the Project, while useful in the long term, were developed prematurely. Under the circumstances, the outcome of this component is rated "Unsatisfactory".

Improve Enabling Environment for Private Sector

The Project had an objective of creation of an enabling environment for private sector involvement, but did not include any covenant to this end. The only component that addressed private sector involvement was the twinning arrangement for GTCL which was envisaged to be the common carrier of gas to ensure level playing field for private and public companies. However, one important condition would have been a time bound transfer plan of transmission lines from the three T&D companies to GTCL to make it fully operational, but there was no such condition. When it became clear in 1997 that there would be significant savings under the Credit, the Government requested the Bank to finance construction of a pipeline to the Westem region by way of the Jamuna Bridge (then under construction). The Bank agreed to favorably consider this request provided that two transmission pipelines be transferred from two T&D companies to the transmission company. Such action would have significantly contributed to the creation of a single transmission system operating as a common carrier. While appreciative of the Bank's position, the Borrower could not implement these reforms, largely on account of labor opposition. The pipeline was ultimately built with Petrobangla/Govemment resources.

In 1996, the Bank was requested to assist the Government in the execution of an exploration promotion program, which, while not specifically included in the description of the Project, was within its objectives. As a result, during 1997, US$ 0.5 million were used to package the program, execute the promotional effort, and evaluate the bids. The program attracted significant interest from the international oil industry as 37 bids were received for 12 out of 15 blocks in the offering. Bid evaluation was completed in December 1997. Notwithstanding repeated reminders from the Bank, the authorities did not award exploration contract for the subsequent two years, and by Credit Closing (June 2000) only one PSC had been signed under the second round.

Under the circumstances, and given the fact that little progress was made in the essential areas required for private sector participation as anticipated at appraisal (higher autonomy for the Petrobangla Operating Companies (OCs); appointment of outside directors; appropriate tariffs; establishment of commercial relationships; preparation of OCs for privatization; passage of law enabling sector regulation, among others), the outcome in relation to the enabling environment for private sector participation is rated "Unsatisfactory".

Develop Institutional Capabilities

The project included the strengthening of the gas transmission company GTCL through a twinning contract, as well as Management Systems Improvement Program (MSIP), and Environment and Safety Management System (ESMS) for the Petrobangla group. These were implemented successfully.

On the other hand, the implementation of two components was frustrated by bureaucratic delays; one was cancelled and the other was only partially implemented. Notwithstanding considerable preparatory work by Petrobangla and the local authorities, a sizeable training program (300 man-months of training both in Bangladesh and abroad) was aborted in early 2000 when it became clear that the closing date would not be extended. Regarding the strategic Reservoir Management Assistance program, which aimed at developing

- 4 - domestic capabilities in assessing gas reserves and managing gas reservoirs, negotiations with the selected contractor lasted over a year. As a result of this, a considerably reduced program was implemented which contributed little to upgrading local skills and did not result in the provision of the essential software and hardware together with the skills to operate them. In all, the outcome of the institution building component is rated "Unsatisfactory".

Financial Objectives and Compliance with Covenants

While not formally an objective of the Project, ensuring the financial viability of Petrobangla's OCs was covenanted under the Credit, requiring the achievement of specified goals. Throughout the execution of the Project, its beneficiaries - (Petrobangla, GTCL and SGFL) failed to comply with at least some of the financial covenants. In particular, the submission of audited accounts was repeatedly late, and revenue targets as well as collection targets were not met. Taking also into account the significant financial impact on Petrobangla of transactions with foreign oil companies, the financial condition of Petrobangla group is currently precarious. In FY99, the auditors had four qualifications on the accounts. Petrobangla advised that remedial measures were being taken.

4.2 Outputs by components:

A-B Pipeline

The 58-km 30-inch diameter A-B pipeline was constructed on time under a turnkey contract, and with a considerable cost saving (actual cost of US$ 55 million against US$ 63 million estimated at appraisal). As explained above (section 4.1), gas flows in the pipeline are considerably below appraisal estimates. The output of this component, under the circumstances, is "Unsatisfactory".

SCADA and Pipeline Telecommunications System

Implementation of a Supervisory Control and Data Acquisition (SCADA) system for high pressure gas transmission line (financed by DFID) is incomplete as the contractor went into receivership before completing its contractual obligation. Some 80 percent of the physical works were completed; the telecommunication system in the Bakhrabad-Comilla section is functioning properly while mechanical problems in the Comilla-Chittagong section are yet to be addressed. Only 17 sites out of a total 70 have been brought under the Central Control. DFID is negotiating with a sub-contractor for completion of the remaining work. Transfer of high-pressure transmission pipelines from T&D companies to GTCL is on hold because of the opposition of labor unions (see section 4.1), and Borrower's lack of commitment. Unless such a transfer takes place, full benefit cannot be reaped from a telecommunication network for the whole gas trunk-line. The output of this component is "Unsatisfactory".

Drilling of Three Wells at Rashidpur

The three wells at Rashidpur and the gas treatment plant were completed in October 1999 (about 4 months late) at a cost of US$ 16.7 million (against an appraisal estimate of US$ 24.3 million). As explained above (section 4.1), the wells are not producing to full capacity on account of pipeline constraints. The output of this component, under the circumstances, is "Unsatisfactory".

Gas Processing Plant at Rashidpur

The gas processing plant at Rashidpur was successfully completed under a US$ 11.8 million turnkey

- 5 - contract. The component had a total cost of US$ 14.7 million against an appraisal estimate of US$ 23.9 million. The plant is not operating at its full capacity at present as the three wells at Rashidpur are producing only part of its capacity (section 4.1), hence the output of this component, under the circumstances, is "Unsatisfactory".

Technical Assistance

(i) Project Implementation Support

Consulting services under the technical assistance component of the Project were completed satisfactorily for preparing designs and bid documents, assisting in bid evaluation and providing construction supervision/management for the above physical components.

(ii) Institution Building

Assistance to GTCL: The twinning contract for developing GTCL's managerial and technical services was completed satisfactorily. Some 20 GTCL staff worked with the contractor and participated in the training/technology transfer covering, inter alia, measurement, Cathodic Protection, O&M, pipeline design. GTCL officials greatly benefited by the transfer of knowledge and experience of the expatriate consultant. The output of this component is "Highly Satisfactory".

Environment and Safety Management Program: An Environmental and Safety Management Division was established in Petrobangla with appropriate staff. Its main function is to increase awareness to safety throughout Petrobangla. Similar cells were also established in the OCs for monitoring the environment and safety aspects of their operation. A "Safety Week" is now observed each year and includes a parade in Dhaka to foster public awareness of gas safety issues. The output of this component is considered "Satisfactory".

Reservoir Management: The Reservoir Management Cell as envisaged by the Reservoir Management Assistance Program has been established. However, due to a combination of: (i) delays in the appointment of the consultants; (ii) subsequent delays in the transfer of petrophysical data; and (iii) the poor condition of data tapes, staff were not trained, and reservoir studies carried out were incomplete. The output of this component is, therefore, "Unsatisfactory".

Improvement of Group Management System: Management System Improvement Program (MSIP), financed by DFID, aimed at improving the financial system of Petrobangla resulted in the introduction of uniform codes of accounts, preparation of a Corporate Accounting Manual for the Petrobangla group, and preparation of a consolidated group accounts. Installation of computerized systems for accounting and management information systems in each OC and at Petrobangla is currently on-going and is expected to be fully completed by June 2001. The output of this component is rated "Satisfactory".

(iii) Training

It was anticipated at appraisal that a very significant (300 m/m) training program would be carried out covering all the areas of operations of an oil company, from drilling to gas transmission systems management. Training was to be provided both in Bangladesh and abroad. Petrobangla changed training strategies during project implementation, and the authorities required more than a

- 6 - year to approve the program. By January 2000, the selection of training institutions was not completed. Given the proximity to the closing date, and notwithstanding requests to extend the Credit, this component had to be cancelled. The output of this component is thus rated "Highly Unsatisfactory".

With hindsight, Project design fails to provide incentives to improve the operating environment for private sector participation. In contrast, the institution building component was well designed, but lacked ownership. Elaborate performance indicators were agreed at negotiations, but were not quantified, and therefore monitoring of these indicators was discontinued during project implementation.

4.3 Net Present Value/Economic rate of return:

The ex-post economic rate of return of the Project was established on the basis of the methodology used at Project appraisal. The Project components were part of the priority investment program of the sector so that the benefits are not separable from those of other components in the investment program. Therefore, a cost-benefit analysis was carried out for the total sector investment program over 1995-2000. For this purpose, the total investment expenditure for the said period along with the corresponding operating and maintenance costs, was evaluated against the resulting economic benefits. In terms of incremental gas sales, the rate of return is 20 percent. Using the intemational oil price as a proxy for economic benefit, the rate of return is 37 percent. The appraisal estimates for the economic rate of return were 23 percent based on incremental gas tariff, and 33 percent based on fuel oil price parity. The higher rate of return at project closure based on fuel oil parity is due to the significant increase in the international price of fuel oil.

4.4 Financialrate of return:

A financial rate of return was not computed at appraisal. Accordingly, no financial rate of return has been calculated for this ICR.

4.5 Institutionaldevelopment impact:

Expectations at appraisal were that the project would result in Petrobangla gradually becoming an organization being run along commercial lines; providing, for instance, that the subsidiaries would operate along private company laws, gas tariffs would be adjusted to attain certain targets, and that decision making would be decentralized, each subsidiary becoming an independent, self financing entity. At the sectoral level, it was anticipated that an action program (leading to privatization) would be formulated, a regulatory framework established, and rational tariff policies introduced. Over the past five years however, while attempts were made to reform the gas sector, results were minimal: (i) the Petrobangla Group and the State maintain their tight control over the operating companies; (ii) the financial condition of the Petrobangla group, deteriorated, and currently it operates at a loss; and (iii) a Gas Law has been drafted but is being processed at a slow pace - it is yet to be submitted to Parliament. On the other hand, the onset of gas production by IOCs over 1998-99 on the basis of long term take or pay contracts (they now account for about 20 percent of gas production approximately), has encouraged commercialization of Petrobangla and its OCs, but much remains to be done. In all, the institutional impact of the Project has been minimal.

-7 - 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency:

There were no significant factors affecting the project which were outside government or implementing agencies' control.

5.2 Factorsgenerally siubject to government control:

Project implementation was affected adversely by bureaucratic delays: (i) the consultancy contract for the reservoir management study had to be amended to enable Petrobangla to pay income tax on revenue earned by the consultant's staff in Bangladesh - the change had to be approved by the Government and some 14 months were required from selection of the consultant to signing of contract; and (ii) approval of TAPP for implementing the training program was held up for eight months. Given that the closing date was not extended, the first phase of the consultant assignment for reservoir management assistance was carried out incompletely, and the training component was not implemented altogether.

Tariffs are controlled by Government, and it was agreed with the Bank that these would be revised to enable OCs to achieve financial targets. Nevertheless, throughout the project implementation period, beneficiary companies failed to meet their financial objectives. As a matter of fact, following a tariff revision in May 1994, tariffs were only revised again in December 1998 (by 15 percent), but the increase did not suffice to cover inflation in the interim, and the devaluation of Taka. In US$ terms, tariffs following the 1998 adjustment were lower than those prevailing at the time the Project was initiated. Furthermore, given that Petrobangla buys gas from IOCs at prices linked to international oil prices, and sells at much lower prices expressed in Taka, and that Petrobangla is heavily taxed, Petrobangla currently operates at a loss. On the whole, Petrobangla's financial condition deteriorated during the Project implementation as tariff adjustments have largely been subject to political considerations.

5.3 Factorsgenerally subject to implementing agency control:

The Project coincided with the signing of PSCs with IOCs selected under the First Round, and the bidding and negotiations for the Second Round (which attracted significant industry interest). Under those agreements, Petrobangla acted as partner, regulator, gas buyer and administrator of the national petroleum data base (in most of the countries, some of these duties are under the State's purview). This strained the institutional capacity of Petrobangla to the limit, all the more so since talented staff left the entity for jobs with IOCs. As a result, the institutional capacity of Petrobangla declined, which explains some of the shortcomings in Project execution.

5.4 Costs andfinancing:

Significant cost reductions in construction of Ashuganj-Bakhrabad pipeline, gas processing plant at Rashidpur as well as the development of the Rashidpur gas field resulted in a savings of SDR 30.3 million (US$ 41.9 million) under the Credit. Furthermore, the incomplete implementation of the TA component resulted in a saving of SDR 4.0 million. An amount of SDR 29.0 million (US$ 38.8 million) was cancelled on March 27, 2000, and an undisbursed balance of SDR 5.53 million was cancelled at Credit closing.

- 8 - 6. Sustainability 6.1 Rationalefor sustainabilityrating:

Regarding the investment component, Petrobangla and its affiliates are capable of operating the pipeline and gas treatment plant, and no major difficulties should be anticipated in this respect. On the other hand, the ability of Petrobangla to meet its investment requirements to prevent gas shortages in the future is severely limited. Given the desire of the Government and Petrobangla to maintain the gas sector under public ownership, it is unlikely, at least in the short term, that necessary structural changes will be made to create an environment for enhanced private sector participation. Under the circumstances, the Project's sustainability is rated "Unlikely".

6.2 Transition arrangementto regular operations:

The investment components of the project constitute in effect relatively small additions to existing activities, so that no significant technical issues should be anticipated in this respect. Nevertheless, given the financial constraints of the Petrobangla group, it remains to be seen whether Petrobangla will be able to maintain the facilities in accordance with industry best practices. Areas of concem in this respect include gas well maintenance and workover, reservoir management, treatment plant maintenance and pipeline operations.

7. Bank and Borrower Performance Bank 7.1 Lending:

* The Project objectives were appropriate at the time the Project was designed, and are still relevant at present. Alleviation of gas shortages was an important objective given the devastating impact of gas shortages on the economy (particularly the power and fertilizer industries). Creatingan enabling environment for private sector participationis critical if the Bangladesh gas sector is to attract capital, skills and technology commensurate with the huge potential of the gas sector for the Bangladesh economy. Unfortunately, there were no elements in the design of the Project, or covenanted under the Credit, to foster this objective. And enhancing the institutionalcapabilities of Petrobangla and affiliates was also a priority given the fast pace at which the international oil industry develops. Remediation offinancial weaknesses in Petrobangla was an important objective embedded in Project design. Except for the first objective, the degree of commitment of the Borrower to address the other objectives has proven marginal and problematic. The Bank relied on the conditionality attached by another donor to address major policy issues in the gas sector, a strategy that proved ineffective. The risks were incompletely assessed at appraisal as the possibility of the two investment components being rendered premature given the onset of commercial production from IOCs, was not addressed. Monitoring indicators were well defined but not quantified at appraisal, thus could not be used as intended to follow up on progress. In all, particularly given that this was the fourth Credit for a sector which failed to meet expectations under earlier IDA Credits, the Bank's performance at appraisal can be rated as "Unsatisfactory".

-9- 7.2 Supervision:

* The Project Task Team Leader has been changed four times during the project period. The project was regularly supervised by IDA staff and consultants, with a total of 9 missions including one mid-term review. In addition, resident mission staff was constantly in close contact with the implementing agencies and key Government officials. Key decisions made during project supervision were related to restructuring of the project to respond to the Government's request to finance the Western Zone pipeline under the Credit provided that action be taken to: (i) cause compliance with the financial covenants; (ii) initiate the consolidation of the transmission system into one company operating as a common carrier; and (iii) standard Bank conditions related to the financing of projects (social assessment, environmental assessment, procurement, disbursement etc.). The conditions were acknowledged by the authorities but never complied with, so that the considerable savings under the Credit were cancelled;

* Over 1996-97, IDA agreed to finance under the Credit technical assistance to support the Government' s efforts to attract oil industry investment (the "Second Round"). While the promotional effort was very successful (37 bids from 12 companies on the 15 blocks offered), by June 2000, only one contract was awarded (recommendations on the award of exploration acreage were submitted in December 1997); and

* In early 2000, notwithstanding the fact that two TA components were at risk (reservoir management, training program), the Bank decided not to extend the closing date beyond June 30, 2000, given particularly that the financial targets were not complied with, and that the lack of progress on the TA components was attributable solely to factors under the control of the Borrower.

Thus, with limited leverage, the Bank tried to facilitate private sector entry into the gas sector, an important objective under the Credit, but results on the ground were modest at best. Furthermore, throughout the life of the Project, Bank missions repeatedly underscored the need to act on tariffs, and accelerate the implementation of the TA Component, but little was achieved. Under the circumstances, the performance of the Bank at supervision is rated "Satisfactory".

7.3 Overall Bankperformance:

The design of the Project was not consistent with its objectives, particularly with respect to the creation of an environment conducive to private participation in the gas sector. Furthermore, lessons from previous Projects were not fully drawn - for instance, had the procurement of the reservoir management consultant and the training contractor been initiated prior to Project effectiveness, these components would have been implemented as intended at appraisal. Efforts to correct matters during supervision proved unsuccessful. Lastly, given that the two major investment components proved premature, that the institution building objective was attained only partially, and that the financial condition of Petrobangla deteriorated during the period, the impact of the Credit on the sector has been marginal. The Bank's overall performance is, therefore, rated "Unsatisfactory".

- 10- Borrower 7.4 Preparation:

Petrobangla prepared the project based on its investment program which was designed to meet anticipated gas demand. The development of the Rashidpur field, as well as the A-B pipeline were designed to meet the anticipated gas shortage in the Southeast - it was not expected at the time that private oil companies would start producing in the Northeast (thus holding up the onset of production in Rashidpur), as well as the Southeast (thus reducing the flow in the A-B pipeline). The need for a Supervisory Control and Data Acquisition (SCADA) in a gas system can hardly be over emphasized, and the inclusion of a SCADA for the gas transmission system was a right and timely step. The technical assistance components were well formulated and consistent with priorities. The Borrower and Petrobangla's performance in project preparation are rated "Satisfactory".

7.5 Government implementation performance:

Achievement of the Project objectives was adversely affected by: (i) long delays in the procurement process, particularly for services; (ii) insufficient commitment to attain the corporate financial targets for Petrobangla and its OCs. particularly with respect to tariffs; and (iii) lack of political will to address the deep systemic issues in the sector, particularly regarding the enhancement of the role of the private sector. As a result, physical objectives have been attained, but institutional performance remains below par. Under the circumstances, the performance of the Government is rated "Unsatisfactory".

7.6 Imiplementing Agency:

The project was implemented by three agencies, viz., Petrobangla (holding), and its operating companies GTCL and SGFL. Petrobangla dealt with the implementation of the four major technical assistance components: (i) ESMS, (ii) MSIP, (iii) Reservoir Management Assistance, and (iv) Training. GTCL was responsible for construction of: (i) A-B pipeline; and (ii) SCADA and a technical assistance component of Twinning. SGFL, as a beneficiary of the project, was entrusted with the drilling and the gas treatment plant at Rashidpur. Although the technical assistance components were not all implemented satisfactorily, implementation of the investment components was satisfactory. Hence, performance of the implementation agencies is rated "Satisfactory".

7.7 Overall Borrowerperformance:

Because of lack of commitment and ownership of this project, there were lack of initiatives and delays in taking decisions particularly at the Government level. This had adverse ramifications on the Project; for instance, a Committee set up in February 1998 to study the rationalization of the transmission network is still to make its recommendations known. Furthermore, the implementation of the training and reservoir management components was frustrated primarily by bureaucratic delays. The financial condition of Petrobangla remains precarious. On the whole, the performance of the Borrower was "Unsatisfactory".

8. Lessons Learned Advance Procurement Action

Preparations for the A-B pipeline, development drilling at Rashidpur and gas treatment plant were initiated prior to Bank approval of the Credit and hence these components were implemented in a timely fashion.

- 11 - On the other hand, procurement of the TA components started late, and in the case of the training component, differences surfaced regarding the training strategy during Project implementation. An important lesson as a result is that implementation of soft components ought to be initiated at an early stage of the Project cycle.

Commitment to Reforms

While the Project had as an objective of creating an enabling environment for private sector participation, this objective was not supported by specific actions or undertakings of the authorities. The sole provision was that consultations would take place on an action program prepared by consultants, under the sponsorship of another financier. Efforts made by supervision missions to support restructuring and reforms proved unsuccessful, given the lack of leverage. Considering the lack of consensus on reforms, more preparatory activities should have been carried out prior to Credit approval, and irreversible action (such as enactment of appropriate legislation) taken prior to effectiveness.

Financial Framework

Designing financial covenants for individual affiliates does not necessarily imply that the sector's financial condition is sound - the covenants in many cases related to transfer prices whose financial significance is limited. Consideration should have been given to designing financial targets applicable to Petrobangla on a consolidated basis - this would have required that Petrobangla prepares consolidated accounts. Furthermore, given the history of compliance with covenants, the Bank should require that tariff policies be adopted by Government, following which tariff adjustments would take place automatically, for instance through indexation. This would spare the bureaucratic travails of tariff adjustments at the Cabinet level.

9. Partner Comments (a) Borrower/implementingagency:

The Borrower comments were received which appear at Annex 7B. While the Borrower has generally complimented the Bank for its seriousness and helpful attitude towards implementation of the project, it has been critical of the Bank for delay in approval of procurement/evaluation. The Borrower was frustrated by the Bank's refusal to grant an extension of the Credit closing to enable completion of the two small but important technical assistance components (reservoir management and training). The grounds for not extending the Credit are in section 7.2.

(b) Cofinanciers:

No comments were received from DFID. (c) Otherpartners (NGOs/privatesector):

Not applicable as no such organization was directly involved in design and implementation of the project.

10. Additional Information

- 12 - Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome/Impact Indicators:

Indicator/Mlatrix Projected in last PSR I Actual/Latest Estimate Alleviation of the Partially achieved. A-B pipeline is Same as before. worsening gas supply not fully utilized, and the three shortages. wells drilled under the project are not producing due to capacity constraints in North-South pipeline.

Assisting GOB in Partially achieved. Award of blocks. Negotiation on block nine is at implementing further under Bank supported Second final stage. reforms to improve the Round Bidding has been slow. enabling environment for PSCs have been signed for only two private participation in the blocks and initialed for three gas sector of Bangladesh. blocks. Negotiation on the remaining blocks is continuing.

Development of the sector The twinning and ESMS have been The strategic Reservoir entities' institutional completed successfully. Management component was capabilities. only partially implemented while training program was not implemented at all.

Output Indicators:

Indicator/MNatrix Projected in last PSR Actual/Latest Estimate

Construction of a 57-km The pipeline was constructed Gas flow through this pipeline 30-inch pipeline from successfully in April 1997. is only around 50 MMCFD. Ashugani to Bakhrabad by GTCL.

Completion of drilling and Wells 5, 6 and 7 were successfully Same as before. putting into production of drilled resulting in an increase in three wells at Rashidpur gas SGFL's production capacity by 90 field. MMCFD. However, these wells cannot be put into production due to capacity constraints in North-South pipeline.

Construction of a gas The gas processing plant was processing plant at successfully completed under a Rashidpur. turnkey contract with a Chinese company.

- 13- lndicator[Nlatrix Projected in last PSR Actual/Latest Estimate

Installation of a Supervisory Only 80 percent of the physical Completion of this component Control and Data work have been completed so far. is uncertain. Acquisition (SCADA) This component is at risk of system for the gas completion as the contractor transmission network of Granger Telecom has left the site Bangladesh. before fulfilling its contractual obligation.

Operationalization of The twinning contract has been GTCL with the transfer of completed successfully. knowledge and hands-on experience under a twinning arrangement with a foreign gas company.

Implementation of a This component has been completed Draft report is yet to be group-wide Environmental successfully. Draft final report on finalized. and Safety Management ESMS guidelines has been System (ESMS) and submitted in May 2000. An development of adequate Environment and Safety Division in safety standards and Petrobangla and an Environment environmental protection and Safety Cell in each OC have rules for its operations. been set up.

Institutional strengthening This component has been only This component is left of the Reservoir partially implemented due to delays incomplete. Management unit at in appointment of consultant. Petrobangla through Petrobangla is considering the comprehensive reservoir option of financing from its own management study. resources to implement this important component.

Improvement of accounting Cofinanced by DFID, this Installation of computer and financial policies and component is progressing systems at all sites almost procedures and satisfactorily and is expected to be complete. Data input is management information fully implemented by December continuing. Project expected to system 2000. be fully implemented by June 2001.

Training of Petrobangla Training program could not be This component remains staff in geophysics, geology, implemented due to bureaucratic unimplemented. well drilling, well bottlenecks in approval of TAPP completion, gas treatment and selection of training institution. processes, gas transmission system management, and safety engineering.

- 14 - Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent) Appraisal ActuallLatest Percentage of Estimate Estimate Appraisal Project Cost By Component US$ million US$ million Ashuganj-Bakhrabad Gas Pipeline 63.30 55.01 87 SCADA and Telecom System 23.20 29.48 127 Emergency Response Equipment 2.00 0.37 19 Development of Three Wells 24.30 16.70 69 Gas Processing Plant 23.90 14.68 61 Technical Assistance 24.90 18.63 75

Total Baseline Cost 161.60 134.87

Total Project Costs 161.60 134.87 Interest during construction 10.10 Total Financing Required 171.70 134.87 Actual/Latest Estimates include Interest During Construction

Project Costs by Procurement Arrangements (Appraisal Estimate)

Expenditure Category Procurem nt Method Total Cost IB NCB Other N.B.F.

Ashuganj-Bakhrabad Gas Pipeline 63.3 63.3 (55.9) (55.9) SCADA and Telecom System (23.2) 23.2 (0.0) (0.0) Emergency Response Equipment 2 2.0 (1.9) (1.9) Development of Three Wells 12.7 1.8 9.8 24.3 (12.3) (1.3) (9) (22.6) Gas Processing Plant 23.9 23.9 (22.5) (22.5) Technical Assistance & Training 17.9 7 24.9 1(17.91 (0.01) (17.911 Total 101.9 1.8 27.7 30.2 161.6 (92.6) (1.3) (26.9) (0.0) (120.

- 15- Project Costs by Procurement Arrangements (Actual/Latest Estimates)

Expenditure Category ICB it Othod Total Cost [CB NCB.. Otttr N.B.F.

Ashuganj-Bakhrabad Gas Pipeline 55.0 55.0 (34.1) (34.1) Gas Processing Plant 14.7 14.7 (11.6) (11.6) SCADA and Telecom System 29.5 29.5 (0.0) Emergency Response Equipment 0.4 0.4 (0.4) (0.4) Development of Three Wells 16.7 16.7 (12.8) (12.8) Technical Assistance & Training 6.7 3.3 8.6 18.6 (6.1) (3.0) (9.1 Total 93.4 0.0 3.3 38.1 134.81

___ (64. (0.0) (3.0 (0.0) (67.9W

Project Financing by C mponent (in US$ million equiv alent) r ~~~~~~~~~~~~~~~~~~~~~~Percentageof Appraisal Component Appraisal Estimate Actual/Latest Estimate ID- Go't. CoF. IDA Go%[. CoF. IDA Goat. CoF. Ashuganj-Bakhrabad Gas 55.90 7.40 34.07 20.93 60.9 282.8 Pipeline SCADA and Telecom 23.20 5.23 24.25 104.5 System Emergency Response 1.90 0.10 0.37 19.5 0.0 Equipment Development of Three 22.60 1.70 12.29 4.42 54.4 260.0 Wells Gas Processing Plant 22.50 1.40 11.26 3.42 50.0 0.0 Technical Assistance 17.90 0.00 7.00 9.06 1.76 7.78 50.6 0.0 111.1 Total Cost by Components 120.80 10.60 30.20 67.90 34.90 32.00 56.2 329.2 106.0

- 16- *' I guug@g2g ii'~ E9 888o8 I

.8 _ °¢g S8 C | | E | | | M | | | | | | m | X~~~~~~~~~~I

. _Esp N N N N N N N, N

'I-EEES E|f|fK Co gg gg ggg

8 ~~ ~ ~ 0( N N N N N N N N N N N N Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation

11/92 1 PROC I ECON 1 PGM I PGM 6 CONS I FNA I EGR

02/93 1 EGR I FNA

Appraisal/Negotiation

09/93 1 PGM 2 ECON I FNA 2 EGR 2 CONS I PROC

06/93 1 EGR I PROC

12/93 1 ECON 3 EGR I PGM I CONS

04/94 1 CONS

06/94 1 PGM I EGR I CONS

Supervision S S 09/95 1 FNA I PGO

04/96 1 FNA S S I PGO I OPA

- 18 - 10/96 1 FNA S S I OPA I PGO

06/97 1 FNA S S 1 OPA 2 EGR I PGO

10/97 1 FNA S S I ECO 1 OPA 3 EGR

05/98 2 EGR S S I CONS

03/99 1 EGR S S 2 PGM I FNA

12/99 1 PGM S U 1 EGR I FNA I DISB

ICR 08/00 1 PGM S U I FNA I DISB

EGR Engineer FNA Financial Analyst PGM Program Manager PROC Procurement Specialist DISB Disbursement

(b) Staff:

Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ (,000) Identification/Preparation 119.8 326.3 Appraisal/Negotiation 195.8 634.1 Supervision 220.9 431.1 ICR 23.52 26.6 Total 560.02 1418.1

- 19- Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating (Z Macro policies O H OSUOM O N * NA Z Sector Policies O H OSUOM * N O NA F Physical O H OSUOM * N O NA N Financial O H OSUOM * N O NA F InstitutionalDevelopment 0 H O SU O M * N 0 NA OEnvironmental O H *SUOM O N O NA

Social N Poverty Reduction O H OSUOM O N * NA Z Gender OH OSUOM O N * NA O Other (Pleasespecify) O H OSUOM O N O NA F Private sector development 0 H O SU O M * N 0 NA F Public sector management 0 H O SU O M 0 N 0 NA O Other (Please specify) O H OSUOM O N O NA

- 20 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Z Lending OHS OS *U OHU ? Supervision OHS IDS OU OHU N Overall OHS Os * u O HU

6.2 Borrowerperformance Rating

I Preparation OHS *s Ou O HU • Government implementation performance O HS O s * U 0 HU • Implementation agency performance O HS * s 0 U 0 HU Z Overall OHS OS * u O HU

- 21 - Annex 7. List of Supporting Documents

Annex 7A: Implementation Completion Mission: Aide Memoire Annex 7B: Borrower's Evaluation Annex 7C: Borrower's Comments on Bank's Implementation Completion Report Annex 7D: Status of Compliance with Covenants Annex 7E: Financial Tables of GTCL and SGFL

- 22 - Annex 7A. Implementation Completion Mission (August 2-10, 2000)

Aide Memoire

An implementation completion mission for the Gas Infrastructure Development Project (GIDP, Cr.2720- BD) was carried out from August 2 to 10, 2000 by Messrs. A.S.M. Bashirul Huq (Senior Energy Specialist), Mohammad Sayeed (Disbursement Officer) and K.M. Zubair Sadeque (Consultant). This Aide Memoire summarizes the findings and recommendations of the mission, and is subject to review and confirmation by IDA management. The mission would like to express its sincere appreciation to Chairman and other officials of Petrobangla; Managing Director and other officials of Gas Transmission Company Ltd (GTCL); and the project personnel of Sylhet Gas Fields Limited (SGFL) for their cooperation and productive discussions during its visit.

A. PROJECT IMPLEMENTATION

Overall Implementation Status

A credit of SDR 83.4 million (US$ 120.8 million equivalent) was approved by the Bank on May 9, 1995 for GIDP. The Development Credit Agreement (DCA) and the Project Agreements (PA) were signed on May 24, 1995 and the Credit was declared effective on June 22, 1995. Total financing required for the project was US$ 171.7 million. Along with the IDA credit, Department for International Development (DFID) - the former Overseas Development Association (ODA), UK, supported the Project with a US$ 26.9 million equivalent grant. The balance of the financing was to be provided by the Government of Bangladesh (GOB). The final cost estimate of the project is provided at Annex 1. The project included five main components:

(a) Gas supply - a 58-km 30-inch diameter pipeline from Ashuganj to Bakhrabad;

(b) Gas production - three production wells at Rashidpur Gas Field;

(c) Gas Processing Plant to purify gas from the new wells;

(d) Grid Control - a Supervisory Control and Data Acquisition (SCADA) and pipeline telecommunication system for the entire transmission trunkline from Kailashtilla to Chittagong and integration with existing facilities; and

(e) Technical Assistance consisting of:

(i) project implementation support through consulting services to prepare designs and bid documents, assist in bid evaluation and provide construction supervision/management for the components listed in (a), (b), (c) and (d) above; (ii) institution building assistance through consultancy and management services to develop GTCL's managerial and technical capabilities, establish a group-wide environmental and safety management system, strengthen reservoir management and improve Petrobangla group's management information systems; and (iii) training of Petrobangla staff in key aspects of gas sector operations.

All components of physical work included in the project, except the SCADA, have been completed. The Ashuganj-Bakhrabad (A-B) pipeline was successfully constructed and has been in operation since May

23 1997. However, gas flow through the pipeline is very low at present because of capacity constraints in the up-stream North-South pipeline. Drilling of Wells 5, 6 and 7 and a gas processing plant at Rashidpur have been completed with success resulting in an addition of 90MMCFD capacity to SGFL's production capability. However, due to capacity constraints in North-South pipeline, these wells cannot be put into production. The mission was informed by GTCL that they have awarded a contract to a China- Bangladesh joint venture company (Daquin-Summit) for the construction of a 54-km 30-inch loopline along the Habiganj-Ashuganj section of the North-South pipeline at a very competitive cost of about US$23 million. This section of the loopline is expected to be completed by early FY2001. Once this loopline is completed, it will remove the capacity constraints in the North-South pipeline.

There appears to be a serious problem in completion of SCADA. The contractor, Granger Telecom of UK, selected in accordance with DFHD guidelines, became bankrupt before completing its contractual obligation, and has left the site. Completion of this component is now uncertain - only 17 out of 70 points of communication have been connected. DFID is negotiating with a subcontractor to complete the remaining works. During discussions with the mission, GTCL officials expressed their concern that if the component is not implemented in full, they will not have the capability to accurately monitor and control all transmission parameters throughout the transmission network, which is of prime importance in operating an open-access gas transmission network.

The technical assistance components have not been completed satisfactorily - in particular the Training component remained unimplemented and the Reservoir Management Assistance component was only partially implemented. With respect to training, this has been the result of bureaucratic bottlenecks in granting necessary approvals - it took over 8 months for obtaining Government approval. Furthermore, selection of training institute was considerably delayed which ultimately caused this very important capacity building component to be left unimplemented. Appointment of consultant for the reservoir management assistance program was delayed by over a year due to disagreements over tax obligations. The contract with the consultant was finally signed in April 1999 and the consultants commenced work in June 1999. The consultant is currently working against an advance payment. The borrower will have to look for alternative sources of financing for completing this work.

The credit closed on its original closing date of June 30, 2000. Significant savings in the project components resulted in a cancellation of SDR 29.0 mnillion equivalent on March 27, 2000. Although agreed in principle by the Bank, Borrower's proposal for support of the Gas Transmission to West Zone by restructuring of the project for utilization of the savings could not be implemented because of non- fulfillment of the conditions precedent to restructuring (namely transfer of transmission pipelines to GTCL and compliance of the beneficiaries with the financial covenants). Further, GOB's request for extension of the closing date to enable the beneficiaries to implement the two important technical assistance components, viz., the Reservoir Management Assistance and Training, was not conceded inter alia in view of lack of commitment to redress the financial condition of Petrobangla.

Second Round Bidding

In order to encourage private sector participation in the gas sector, the Bank supported GOB's pre-bid Round Table Conferences with International Oil Companies (IOCs) in March-April 1997 in London and Houston. As 8 blocks in the country were already under contract, the remaining 15 blocks were offered for bids in a second round. The offering was well received as 37 bids were made for 12 blocks by 12 companies of 11 countries. The Bank also supported Petrobangla by financing a consultant to assist in the evaluation of bids, which was completed in December 1997. However, no blocks were awarded for two years; only recently, PSC for block 7 was concluded with UNOCAL; for blocks 5 and 10 were initialed with Shell; and for blocks 20 and 21 were initialed with Maersk. Negotiations for the remaining blocks are still continuing. Under the agreement with UNOCAL, work will not start unless gas market is

24 available and the contract will automatically terminate if no market is found within 5 years. The PSC initialed with Shell requires them to carry out geological and geophysical (G&G) surveys, but actual exploration will depend on gas market availability. There is no such condition in PSC with Maersk but they will also wait and see if gas market is available after carrying out surveys in the first two years.

Disbursement

As of August 21, 2000 SDR 48.19 million (equivalent to US$67.04 million) have been disbursed under the Credit. The Closing Date for the Credit was June 30, 2000. In accordance with IDA procedures, withdrawal applications against eligible expenditures incurred prior to the closing date will be considered until October 31, 2000. Under the Credit, US$2,000,000 has been disbursed as advance to the Special Account. Of this amount, US$ 977,438.31 remains to be adjusted/refunded to IDA. Unless this amount is adjusted/refunded, no application for direct payment from the Credit account will be entertained. Since time is running out, the mission urges the authorities to complete formalities for refund/adjustment of US$977,438.31 at the earliest - this will enable submission of direct payment applications against eligible expenditures ahead of October 31, 2000. The disbursement profile appears at Annex 2.

B. FINANCIAL ASPECTS

Audit

There have been serious delays in submission of the audited accounts of Petrobangla and two other beneficiaries of the credit, GTCL and SGFL. The Bank had stressed many times the importance of timely submission of audited accounts with limited results. The FY99 audited accounts of GTCL were submitted in June 2000 and those of SGFL in May 2000. Petrobangla's audited accounts for FY99 were submitted only in August 2000, i.e. 7 months late. Major financial issues linked to the transfer of transmission pipelines to GTCL and to the absence of a financial framework for the treatment of IOC gas which have resulted in delays in closing of books of GTCL and Petrobangla respectively. SGFL, on the other hand, did not have any apparent reason for delaying the submission of its audited accounts.

Compliance with Financial Covenants

A detailed statement of compliance with covenants is provided at Annex 3 and the financial statements of GTCL and SGFL appear at Annex 4. GTCL agreed to earn an 8 percent Rate of Return (ROR) on Assets in FY99 and 10 percent thereafter - GTCL earned only 5.4 percent in FY99 and 6.1 percent in FY2000 (based on provisional accounts). Accounts receivable were not to exceed 3 months of sales equivalent - GTCL's accounts receivables were 4.6 and 4.9 months equivalent in FY99 and FY2000 respectively. GTCL's Debt:equity ratio stands at 69:31 against a covenanted target of 60:40. GTCL is therefore non-compliant with all the three financial covenants. SGFL, failed to comply with accounts receivable covenant in FY99 and FY2000. The Bank has urged the authorities for a long time to adjust gas tariffs to enable GTCL comply with the financial covenants; gas tariff were increased by 15 percent in December 1998 and a further similar increase has been announced effective September 1, 2000. However these adjustments were designed to address the losses arising from transactions with IOCs so that they did not necessarily benefit GTCL and SGFL. It is to be noted that even the most recent adjustment will not suffice to cover the deficit so that Petrobangla will continue to incur losses on IOC gas.

25 Operations Plan

The mission discussed with the borrower the necessity for an Operations Plan for the operational phase of the project. While certain components have been completed (A-B Pipeline, three production wells and surface facilities at Rashidpur), the satisfactory achievement of others is now uncertain (SCADA Telecom, Training and Reservoir Management). The beneficiaries need to prepare a plan as to how to implement those components given the fact that the IDA credit has already closed. The plan should indicate the proposed arrangements for future operation of the project components and the performance indicators to be used to monitor future operation and development impact. The operations plan ought to be submitted to IDA by September 15, 2000.

Implementation Completion Report

An Implementation Completion Report (ICR) will be prepared for the project in accordance with IDA guidelines. The authorities are to prepare an Evaluation Report on the Project which will be integrated in the ICR. A letter was sent to the borrower on June 26, 2000 with a request to complete its part of the Evaluation Report by mid-September 2000. The mission discussed the information required for the report, and Petrobangla confirmed that it will do its utmost to prepare its evaluation on a timely basis.

List of Annexes

Annex 1 Project Cost Estimate - modified to Annex 7A of ICR Annex 2 Disbursement Profile - omitted from ICR Annex 3 Status of Compliance with Covenants - modified to Annex 7D of ICR Annex 4 Financial Tables- modified to Annex 7E of ICR

26 Annex 7B. Borrower's Evaluation

A. Introduction

A credit of SDR 83.4 million (US$ 120.8 million) was approved by the Bank on 09 May 1995 for Gas Infrastructure Development Project (GIDP, IDA Credit 2720-BD). The Development Credit Agreement (DCA) and the Project Agreement (PA) for the project were signed on 24 May 1995 and the Credit was declared effective on 22 June 1995. Along with the IDA Credit, Department for International Development (DFID)-the former Overseas Development Association (ODA) of UK, supported the project with a US$ 26.9 million equivalent grant. The closing date of the credit was 30 June 2000.

B. Project Objectives

The objectives of the project as stated in the Staff Appraisal Report were:

(i) to alleviate worsening gas supply shortages through partially financing the sector's priority investments; (ii) to assist GOB in implementing further reforms to improve the enabling environment for private sector participation in the sector; and (iii) to develop the sector entities' institutional capabilities, particularly in the areas of operations and maintenance, safety, environmental protection and accounting and financial management.

C. Project Components

In order to achieve the above objectives the modified/revised project works included the following components: For Gas Transmission Co. Ltd. (GTCL):

(i) Construction of a 58 km, 30-inch diameter high-pressure cross-country gas pipeline from Ashuganj to Bakhrabad; (ii) Establishment of a Supervisory Control and Data Acquisition (SCADA) and pipeline telecommunication system for the entire transmission trunk line from Kailashtilla to Chittagong; and (iii) Provision of technical assistance to GTCL for the preparation of designs and bid documents, and assistance in bid evaluation and construction supervision and the development of GTCL's institutional capabilities.

For Sylhet Gas Fields Co. Ltd. (SGFL):

(i) Development of three productions wells at Rashidpur gas field; (ii) Construction of a gas dehydration plant to purify gas from the new wells; and (iii) Provision of technical assistance to SGFL for the preparation of designs and bid documents, and assistance in bid evaluation and construction supervision. For Petrobangla: The provision of institution-building assistance to the Petrobangla group for:

27 (i) the establishment of an environmental and safety management system; (ii) the upgrading of the group's accounting systems and management information systems; (iii) strengthen reservoir management; and (iv) staff training in gas sector operations.

D. Project Design

Ashuganj-Bakhrabad Pipeline: To transport gas from the northern fields of Rashidpur, Habiganj and Kailashtilla to the gas-deficient southeastern region, construction of 58-km 30-inch A-B pipeline was needed on an urgent basis because of depletion of production of Bakhrabad field, the main source for supplying gas to the Chittagong zone. The A-B pipeline was to link North-South and Bakhrabad- Chittagong pipelines. It was to have an initial flow of 200 MMCFD. The large diameter was chosen considering future increase in the line's capacity (up to 1000 MMCFD) through compression, which is expected to be required at a later stage. To prevent pipeline floating during the monsoon season, concrete weight coating was applied to the entire length of the pipeline.

SCADA and Telecommunication System: Under Second Gas Development Project (SGDP) financed by IDA, there was a provision for installing a complete SCADA and Telecommunication system on the North-South pipeline along with a load dispatch center. But due to delays in pipeline construction and subsequent credit closing, the SCADA could not be installed. The existing gas transmission and distribution networks have been operating independently with microwave radio links supplemented by telephone facilities and are dependent on voice-communication only. After completion of the A-B pipeline, which runs from Kailashtilla in the northwest to Chittagong in the southeast, requires a complete SCADA system with dispatch center and telecommunication link. This would allow accurate monitoring and control of all transmission parameters such as gas flows at supply and offtake points, current line pressures throughout the network, movement of gas and condensate volumes, and quality of gas being supplied to the system by the producing companies. Furthermore, the SCADA would provide pipeline integrity monitoring, leak detection and alarm, metering values of gas and condensate at each of the inlet and outlet points, open-closed status of all main-line and station valves, direct digital data transmission and voice communication. To allow data transmission, the microwave analog radio system of the Bakhrabad-Chittagong pipeline needed to be upgraded (digitized) to match the new system.

Development of Rashidpur Gas Field: The Rashidpur gas field located about 80-km northeast of Ashuganj was discovered in 1960. In 1989, two appraisal wells (later completed as production wells) were drilled and workover of two existing wells was carried out under the SGDP financed by IDA. To meet the impending gas supply shortfall, development of Rashidpur field was one of the three primary sources for capacity addition (the other two being Habiganj and Kailashtilla). After a careful field-by- field review, taking into account reserve, gas availability, infrastructure requirements, and construction lead time this component was included in the project. The three wells drilled at Rashidpur would, produce 622 BCF of gas and 149,000 tons of condensate over a 20-year period, as well as data to firm up reserve estimation for the field. A single-train, 90 MMCFD capacity silica gel plant was included in the project to dehydrate and process gas from the new wells.

Technical Assistance provided under the Project

Project Implementation Support: In view of the current limitations of SGFL and GTCL, project engineering and implementation support consultancy services were provided by resident experts. These experts assisted in preparation of component specifications, engineering design and bidding documents, bid evaluation, contract execution and construction supervision. Altogether, some 300 consultant-months

28 of expatriate consultants' services was provided over the project implementation period. To ensure transfer of know-how through active participation in the above tasks, terms of reference for the above consultancies included counterpart-training requirements.

Twinning (GTCL): To assist the newly formed GTCL in establishing appropriate organization structure and management systems and building up its capability commensurate with the operation of a modem gas utility, broad-based technical and management support was required. The project financed a twinning arrangement between GTCL and a mature foreign gas operating entity. It was intended that the twinning partner identify itself fully with the needs of GTCL and provide GTCL with continuing services, advice and experienced personnel over a number of years to the point where GTCL can independently and efficiently carry out its operations. To enhance the effectiveness of twinning in the transfer of managerial and technical skills and systems, the proposed twinning anticipated a direct operational involvement of the foreign partner through placing a team of expatriate personnel into line management positions who together with GTCL' s top management, had joint responsibility for overseeing day-to-day operations and implementation of systems, procedures and practices.

Environmental and Safety Management System: Given that the Petrobangla group had no well-defined safety engineering standards and environmental regulation, nor did it have an adequate institutional framework and capability to properly administer the safety and environmental aspects of its operations, technical assistance was provided to help it (a) develop adequate safety standards and environmental protection rules for its entire operations, and (b) implement a group-wide environmental and safety management system.

Management System Improvement Program: To improve the timeliness and accuracy of financial reporting for better operational control and planning, a Management System Improvement Program (MSIP) was included in the project. The MSIP provided for the group-wide implementation of (i) improvements in accounting and financial policies and procedures, (ii) improvements in the management information systems; (iii) a program of computerization; and (iv) a related program of staff training.

Reservoir Management Assistance: This component had an objective of developing a reservoir management system in Petrobangla and its Operating Companies comprising of consulatncy services, procurement of equipment/facilities, field studies and training.

Training Program: To develop the technical and management capabilities of Petrobangla and its Operating Companies personnel in order to improve the operational and efficiency and overall performance of the gas sector, a program providing for a total of 300 man-month of training program in the field of exploration, well drilling & completion, gas processes, gas transmission, project management functional management etc was included in the project.

E. Project Implementation

Ashuganj-Bakhrabad pipeline: The construction of 58 km long 30 inch diameter Ashuganj-Bakhrabad pipeline was completed and was commissioned on 09 May 1997. Gas is flowing through this pipeline.

GTCL Twinning: For operationalisation of GTCL as a commercially viable national gas transmission company, the Consultant of the project had commenced project works from June 1996 and thus project was completed in June 1999 successfully. Some 20 professionals of GTCL worked with consultant and participated in the training/ technology transfer covering, inte ralia, Measurement, Cathodic Protection, Operation and Maintenance, Pipeline Design which would be very useful for the company's operation and maintenance work. After completion of the twinning program assignment completion report was provided to IDA in May 1999.

29 Drilling Component: The drilling of three wells (RP # 5, 6 & 7) at Rashidpur Gas Field has been successfully completed. The consultant submitted the completion report of wells Rashidpur nos. 5, 6 & 7 of the project. Accordingly, drilling & third party services crews were released for their respective de- mobilization.

Surface Facilities: The Turnkey EPC contractor started the construction work of 90 MMSCFD Silica gel gas processing plant and Gathering line at Rashidpur gas Field on January 1999. After completion of the mechanical installation, the plant had been Pre-commissioned with effect from 31 December 1999. During Pre-commission certain defects/deficiencies had been observed. The contractor rectified all the major defects and repeated Pre-commissioning run from 19 March 2000 to 26 March 2000 as per Terms and Conditions of the contract. The contractor conducted uninterrupted 7 days Commissioning and Acceptance Test successfully and handed over the plant to SGFL on 10 April 2000.

SCADA and Telecommunication: Contract agreement was signed on 21 May 1998 with the contractor and was effected from 30 June 1998. The works accomplished by the contractor within June 2000 are mentioned below:

* Foundation of ACC/MCC (2 nos.), Foundation of Tower (5 nos.), RTU (60 nos.) and Monopole Bases (45 nos.), Refurbishment of existing Radio Rooms (9 nos.) completed; * 60 nos. RTU Installed and 27 nos. energized; * Instrumentation work completed 66 Nos. out of 70 Nos.; * Replacement of Microwave Radio Equipment, Installation of Telemetry Equipment, VHF Trunking, Antennas, Feeder Cables in Southern Leg (comprising 9 stations) completed. All Civil Works for MCC, ACC, New Radio Rooms (7 nos.), Generator Building; • Commissioning and establishment of the Digital Microwave Links from MCC to Chittagong i.e. Southern leg; * Microwave Tower erection (5 nos.) and fixing of Antennas, Feeder Cables in Northern Leg completed; * Installations of Air Coolers at MCC and ACC; and * Interface of Master Trunking Switch (MTX) at MCC with Regional Trunking Switch at Demra and Comilla.

Pre-Commissioning and Commissioning Activities

* 13 Nos. RTUs pre-commissioned; * Upgradation of Mobile Hand-held radios from Factory configuration to Site Configuration; and * Telemetry radio and link test of core RTUs with MCC.

This project is being implemented out of DFID grant and was scheduled for completion by December 1999, followed by two years Operation and Maintenance (O&M) support and training. Up to June 2000, over 80 percent of the physical work of the project has been completed but due to financial insolvency of the Main Contractor and their dispute with main Sub-Contractor, there exists a stalemate towards completion of the project. In order to secure investment already made and make the system operational, DFID's intervention to overcome the current impasse has already been sought. Following the departure of contractor's personnel, meanwhile, the Performance Guarantee (PG) has been encashed amounting to GBP 1,537,160.00 (10 percent of contract price) and was deposited to the GTCL's account on 13th August 2000 and subsequently Termination Letter was issued to the contractor on 17 August 2000 as per suggestions given by the consultant and DFID. Alternative arrangement is being examined to complete the remaining works by engaging the main sub-contractor under agreed terms to be approved by GOB and DFID.

30 Environment and Safety Management System: Consultancy contract was signed with the consultant on 8 May 1996. Consultants' works of the project commenced from 18 January 1997 and completed on 30 June 2000. The works performed under the project are as follows:

* All the man-month for foreign specialists as well as the Local Consultants stipulated in the contract have been utilized fully;

* The foreign training of 31 persons out of 32 persons have been made and 1 (one) person could not attend the training course due to illness;

* Supply of Project equipment/material under foreign purchase made only about 20 percent and for local purchase made up to 98 percent in terms of value;

* The Consultants have already submitted the Final Draft Report and it is now under review by Petrobangla and its subsidiary companies, Department of Environment (DOE) and the Directorate of Explosives. It is expected to get the Final Report from the consultants by October 2000 after incorporation of the comments/opinion from the beneficiaries if there is any; and

* The Training Courses conducted both in Local & in Foreign are stated below:

Fields No. of Duration Trainees Overseas Study /Overseas Training

* Study Course on Environmental science 2 1 Year * Environmental Impact Assessment, Data Acquisition & 4 8 Weeks Development of Monitoring and Mitigation Plan. * Safety and Environmental Management, Audits & Emergency 4 12 Weeks Planning & Emergency Response. * Risk Management, Hazop Study and Process Safety Management 4 10 Weeks * Ground Water and waste Management 4 4Weeks * Land Management 2 4 Weeks * Corrosion control and Cathodic Protection Management, Routine Test Procedures and Trouble Shooting Technique. 4 8 Weeks

In-Country Training

* Introduction to Environmental Aspects of Gas Sector 15 3 Weeks * Environmental Planning and Auditing Program 15 4 Weeks * Environmental Consideration on Gas Production Technology 6 3 Weeks * Transmission & Distribution Pipeline Technology 8 3 Weeks * Drilling & Production Engineering 5 3 Weeks * Safety Assessment, Hazop Study and Risk Analysis 10 4 Weeks * Computer Courses on Data Acquisition & Management 6 4 Weeks

Overseas Study Tours

* Project and Program Management on Environment and Safety Issues 4 4 Weeks * Attend Seminar Symposium & Congress on Environment and Safety 4 2 Weeks Related on Oil & Gas Safety.

31 Management system Improvement Program: This component was financed by the co-financier DFID (erstwhile ODA). A consultancy contract was signed on October 1995. Thereafter consultants made an assessment of current accounting and financial systems of all the companies under Petrobangla and submitted their reports in due course. Based on the assessment, a corporate accounting manual was prepared, cost centers for all the companies were identified, key performance indicators were established, corporate internal audit manual was developed and methods for reclassifying the fixed assets along with the uniform method and rate of depreciation were identified. Besides, organizational structure of Petroleum Concession Division along with role description of PSC team and training needs were ascertained; against which four week training course on PSC was conducted by the consultant. A number of training courses on MSIP Awareness, new charts of accounts, reclassification of fixed assets, fixed asset management, financial system acceptance and users training were conducted locally.

Award of Contact was signed on 8t November, 1998 with the preferred supplier for supply and installation of computer based financial system for Petrobangla group. The contractor was mobilized on time. The supply and installation of the system in 14 sites of 7 companies have been progressing and expected to be completed by October 2000. It is expected that the residual works of the project may be completed in all respect within the closing date of the project, i.e. 31 t December 2000.

Reservoir Management : This TA project started in January 1996. Engagement of consultant took a long time both due to various delays made by the World Bank system and also in the process of revising the TAPP and negotiating with the consultant. Contract was signed on 13 April 1999 for a total duration of 24 months and IDA concurrence on the signed contract was received on 9 June 1999. The consultant started works from 16 June 1999 and submitted the Draft Inception Report to Petrobangla on 27 October 1999, which was approved on 15 December 1999 by Petrobangla and IDA. Parts of the project works completed within June 2000(loan closing date) are as follows:

* About 17 man-months consultancy services have been utilized; * Preparations of bidding document for procurement of equipment, hardware, software and training have been completed; * Production & field data collection of some fields have been completed; * About 75 percent of primary evaluation works on Habiganj and Bakhrabad gas fields have been completed; and * Evaluation of bids for Data Recovery from Sticky Seismic and Log Tape has been completed.

In order to complete the remaining work under this component, one-year extension of loan closing was sought to IDA. Though IDA review mission recommended to extend the credit closing date for the 'reservoir management' component by one year up to 30 June 2001, the World Bank in its letter of 06 February 2000 has informed of its inability to do so. This implies a serious impediment in implementing this 'core project' with IDA finance after 30 June 2000.

Training Program: A comprehensive training manual was prepared by the Bangladesh University of Engineering and Technology (BUET) that took about a year. According to that manual, a TAPP comprising of training for 315 personnel of 410 man-month (both local and foreign) was prepared on February 1998 which was approved by the Government on 19 November 1998. A press notice for short- listing of internationally reputed training institutions was published in the four national dailies as well as UNDB publication. Within the deadline for submission of proposal i.e. 21 December 1998, 34 numbers of proposals were received. The evaluation was completed by 12 April 1999 and 6 (six) top ranked training institutions were short-listed which were approved by the Petrobangla Board and the World Bank. The Request For Proposal (RFP) was sent to the short listed bidders on 16 September 1999. Out of 6 short- listed firms, 5 firms submitted their technical and financial proposal within the bid submission deadline i.e. 24 October 1999. Evaluation of technical proposals was completed and was approved by both

32 Petrobangla Board and the World Bank. While approving the Technical Evaluation Report it was decided by the Petrobangla Board that because of shortage of time, closing date of IDA credit should be extended for one year and that should be confirmed by the World Bank before opening of Financial Bids. Petrobangla requested the World Bank for extension of loan closing date for one year. But the World Bank in its letter of 06 February 2000 informed Petrobangla that they are unable to extend loan closing date, though Supervision Mission of IDA recommended for extension of loan closing date. Thus the project remains unimplemented.

F. Operational Experience

A-B Pipeline: Overall operation experience of this component is satisfactory. Since the commissioning, A-B Pipeline is running smoothly and all the installations associated with the pipeline are working satisfactorily and no technical difficulties arose during operation. The objective of the project was partially fulfilled i.e. supplying of gas to the Chittagong zone was possible with sufficient amount for a few years. With starting production of Sangu gas field and also of Saldanadi and Meghna gas field and due to limitation of North-South pipeline, A-B pipeline is now flowed through reduced rate. But this situation will be changed when construction of Habiganj-Ashuganj transmission pipeline of 54 Km, 30" dia (a portion of Rashidpur-Ashuganj loop line of 82 Km, 30" dia) which include the provision for upgradation of Ashuganj RMS, will be completed. Then supply of gas at Ashuganj point will be increased substantially and thereby gas will flow through the Ashuganj-Bakhrabad pipeline at a higher rate for supplying gas to the AES-Haripur and AES-Meghnaghat power plants being implemented under Independent Power Policy.

Development of Rashidpur Gas Field: Drilling of three new wells was completed satisfactorily at Rashidpur gas fields, which increases the gas production capacity of SGFL. M A silicagel process plant of 90 MMCFD capacity was also completed satisfactorily though during commissioning some problems were encountered and were removed. With the completion of drilling of 3 wells and associated surface facilities, the Rashidpur field is ready for production of about 90 MMCFD. But at present excess gas could not be supplied due to pressure matching problem of North-South Pipeline which is being operated at its design capacity. On completion of Habiganj-Ashuganj pipeline, it will be possible to carry entire gas of Rashidpur field to Ashuganj to feed A-B Pipeline. Moreover, installation of a 500 bbl per day capacity Condensate fractionation Plant is being implemented at Rashidpur in order to produce petroleum products by fractionating the condensate to be produced from wells drilled in this field under the credit.

Twinning: After completing the project, the guideline, manual and recommendations made by the consultant is being followed by the GTCL and the company is operating efficiently and independently.

Reservoir management: Since the project is partially completed and subsequent IDA's non-agreement to extend the loan closing, an altemate source of funding is being examined to complete the remaining works of this vital component.

MSIP: All financial and accounting systems of Petrobangla & its companies are now being integrated under computer systems installed under this TA component financed by DFID. The system is functioning properly and are relevant in fulfilling the objective of this component.

ESMS: All safety issues are now looked into through the newly formed Environment and Safety Division of Petrobangla in coordination with all Operating Companies. Moreover, gas safety rules are being prepared with the help of experience gained through the project and recommendations/suggestions prepared/made by the consultant. The in-depth exposure to environmental and safety issues is drawing benefits to Petrobangla and its companies.

33 Training Program: The fate of this important component for institutional building of gas sector is now in a stage of uncertainty. Although the World Bank pointed out several times about its importance, no eclectic approach was observed from them for funding. On the other hand, no alternate source of financing could be arranged as yet.

G. Evaluation of Borrowers own Performance

Land acquisition and Right of way is a necessary element for implementing project like pipeline construction, drilling and surface facilities. Resistance/obstacle from landowners were experienced in land acquisition, therefore, it needs to have legal bindings and support so that easy land acquisition is possible. However, the problems of land acquisition for construction of A-B Pipeline were reduced to a substantial level by involving the local-level administration that included the Union and Thana Parishad (the base-level socio-political units). Public Consultative Commnittee was formed to listen to the lands- owner and to convince them about the national importance of the project. Due considerations were given to their lawful demand for compensation. Non-government organizations, those had been working in rural areas, were also involved. The involvement of the non-government organizations showed good results.

At the project preparation stage such as preparation of PCP, PP, TAPP and approval thereof by proper authority, it was experienced that sometimes it took longer time than scheduled. Also faulty preparation of PPITAPP required further revision thereof, which ultimately causes delay of the project implementation. Efficiency of a Project Manager also influences the performance of the project. Although the government monitoring process specified the maximum allowable time limits at all relevant levels for processing of any proposal, still there remains the inherent delay tendency that are sometimes unavoidable.

Physical works of the project sometimes are affected due to delay in engagement of consultants and contractor, which affect project implementation of the project. Performance of consultant and contractor also affect the overall implementation of the project.

Natural calamities like flood, rain, storm etc. also affect the project implementation and so systematic planning and foresigtness should be applied in during project design and drawing-up of implementation schedule to avoid such calamities. Logistic supports are another important factor in the implementation of the project. It requires good planning in tendering, procurement, evaluation and shipment. Delays in the approval of procurement and customs clearance also affect the timely completion of the project.

Performance of the Contractor and Consultant affected the completion of SCADA component. Consultant and Contractor were appointed with due approval of DFID. But due to financial insolvency of the Contractor and subsequent abandonment of the work by them caused a stalemate of project and completion of outstanding works are still uncertain. Arrangements are being made for proper maintenance of the sophisticated equipment/instrument already installed by the Contractor prior to the termination of contract with the Contractor and completion of the remaining works. But action to protect the already installed equipment and completion of remaining works by separate arrangement may involve additional fund. As such, the engagement of Consultants and the Contractors for specialized work should be done carefully.

Engagement of consultant for ESMS component was delayed due to getting approval from government authorities and also from IDA and subsequent delays in placement of consultant and selection of training institution which causes delay in execution of the project. Moreover, revision of TAPP were required two times for incorporating RPA provision and consultant's income tax which were not included in the original TAPP. Revision of TAPP also affects the implementation of the project.

34 No single entity is absolutely responsible for the failure to complete the Reservoir Management component within the loan validity. All levels involved at IDA, Borrower and the executing agency had laps at different stages and at different point of time. Engagement of consultant was delayed by more than one year due to procedure of World Bank and also from borrower side. Approval of TAPP took longer time. To resolve the taxation problem of consultant it was further delayed and revision of TAPP were needed.

Regarding failure of training program component it was observed that BUET took a longer time to prepare comprehensive training manual which could have been avoided had Petrobangla assessed its own training rather than giving it to BUET. Appointment of Project Manager and providing of logistic supports were delayed. About 8 months required for approval of TAPP that caused further delay.

H. Evaluation of Performance of Bank and Co-financier

During the course of the project implementation, a good and effective bond of relationship has been established between the World Bank and Petrobangla and its companies. Over the time the mutual understanding has been strengthened and cordial working relationship has been developed between the sides. It is expected that this relation will continue in future and World Bank is urged to continue to extend their assistance in further development of gas sector.

Out of total credit equivalent to US$ 120.8 million for all components of the Project, only about US$ 67.04 million has been disbursed by the Bank leaving a significant amount of savings, which otherwise signifies over-estimation at the time of Project Appraisal.

All the components financed by IDA have been completed satisfactorily except Reservoir Management and Training component. Since the consultant was engaged for 24 months with necessary approval from IDA for Reservoir Management Study, IDA's reluctant to support the completion the project prompts to believe that IDA failed to recognize that the Reservoir Management Study is the vital component for Petrobangla and the Government.

In any aided project some covenants was imposed by the donor prior to or during implementation of the project. Though some of these covenant are necessary for the benefit of the sector but some times it is difficult to fulfill it properly because of the social, economic and political reasons prevailed in the country. The World Bank has given assurance on mid 1997 to allocate funds from savings of the A-B pipeline to Gas Supply to Western Zone through restructuring of GIDP with fulfilling the pre-condition, i.e. (i) all high pressure transmission pipelines to be handed over to GTCL, and (ii) increase of gas tariff. Accordingly the Bakhrabad-Demra pipeline was handed over to GTCL and gas price was also increased at 15 percent with effect from December 1998. But finally restructuring of GIDP was not done by the World Bank.

In some areas, World Bank took long time for their concurrence/approval regarding approval of bid document, bid evaluation, appointment of consultant and contractor which affects overall implementation of the project.

As co-financier, DFID financed SCADA and MSIP components of the Project. DFID had a catalytic role for successful implementation of both the components. The termination of Contract following abandonment of the works by the contractor was initiated by GTCL in accordance with the advice of DFID and the Consultant. Repeated intervention of DFID for contractor's payments to overcome their financial crisis could not ultimately bring meaningful conclusion with the contractor, who has abandoned the project even after completion of about 80 per cent works. Now GTCL is moving hard for completing the remaining works and protection of already installed equipment by engaging another contractor. In

35 this situation GTCL is working along its consultant for a solution by engaging the main Sub-contractor as suggested by DFID for completion of the remaining works.

I. Operation Plans

Component of GIDP Present Operational Status Future Operational Plan

Ashuganj-Bakhrabad The pipeline is being utilized at a partial Full capacity utilization is dependent on Pipeline capacity (only to carry 20-30 MMSCFD). construction of Rashidpur-Ashuganj Loop line, part of which is now being constructed (Habiganj- Ashuganj 30"x 54-km Pipeline) that will provide scope to flow more gas by A-B Pipeline.

Twinning (GTCL) GTCL is functioning satisfactorily. At All other major transmission line will be Present North-South Pipeline, transferred to GTCL gradually after reviewing Bakhrabad-Demra Pipeline, Elengla- and assessing the technical and financial impact Baghabari Pipeline over Bangabandhu for such transfer. Jamuna Bridge is operated by GTCL.

Drilling and Surface The wells are producing and process The production from the wells drilled will provide facilities at plant is operating satisfactorily to feed data base to form the basis for resource Rashidpur Gas Field gas to North-South Pipeline built under assessment as well as supplying gas to load Second Gas Development Project. centers. Condensate produced at the field is now sold to oil marketing companies under BPC and a fractionation plant is now being installed to produce MS, HSD and SKO.

SCADA- Only about 80 per cent works is Efforts are underway to complete the work within Telecommunication completed and the Contractor has next couple of months by engaging another abandoned the project. All measures have contractor (preferably the Sub-Contractor) as been taken including encashment of suggested by DFID, the co-financier. Performance Guarantee. Environment and All Safety issues relating to the gas This is a continued process and will be followed Safety Management sector is being looked upon by ESD of in future as is being followed at present by Systems (ESMS) Petrobangla with coordinates of its OCs. Petrobangla and its companies.

Management System All project activities is supposed to be The Software and the Hardware installed by the Improvement completed by December 2000. On Contractor and the operating personnel are being Program (MSIP) completion of the project it is expected trained, the program would be continued with that all accounting and financial upgradation from time to time as needed. statement/reports will be produced in timely and accurately for itself and in a consolidated form for the group companies by using computer system.

Reservoir This component of the Project is partially The results of the Study will be utilized and Management Study complete and altemate funding is now resource management database will be created, being searched since the closing of the which is considered as prime important for credit was not extended for another year. operating gas fields.

Training Program The whole exercise for engagement of Alternate sources of finance will be explored for reputed intemational training institutions completion of the program. could not be made meaningful because of non-extension of credit closing.

36 Annex 7C. Borrower's Comments and Observations on Bank's ICR

These comments and observations are made on the part of the Implementation Completion Report (ICR) prepared by the World Bank (WB) on the Gas Infrastructure Development Project (GIDP), implemented by Petrobangla and its companies. While examining the various sections of the ICR, it is observed that the performance ratings assigned to different activities are based on information/analysis, not necessarily relevant to the implementation of project components. The ICR has been organized by providing the Principal Performance Ratings followed by discussions, information and analysis at various sections. A consolidated statement of the stated Performance Ratings is annexed with comments, wherever applicable, and in addition important sections' highlights are given in the subsequent paragraphs.

Original Project Objectives: Out of the three, one objective has been recorded and identified to be important and references of which have been made to many places in the text. The said objective relates to the implementation of the reforms to improve the enabling environment for private sector participation in the sector. The project components do not contain any such provisions and no program/allocations were also made except inclusion, at a later stage, a small amount for engagement of consultants for assisting evaluation of offers of the Second Round of exploration licensing. As such references to the non-fulfillment and/or implications for attaining success in respect of outcome of the project implementation should be omitted.

Alleviation of Gas Supply Shortage: This was one of the major objectives of the project. In achieving this objective, programs included (a) construction of a 58-km 30-inch transmission pipeline, (b) drilling and completion of three wells at Rashidpur gas field, and (c) installation of a gas process plant at Rashidpur gas field. All these three components have been implemented successfully with substantial savings as against the cost estimates prepared during appraisal. While the implementing authorities deserve compliment for successful completion of these components, the ICR is very critical about the final outcome of these components. The statement ".... Rashidpurwells are not currently under production" is not based on facts. Gas is being producing from these wells and processed at the process plant installed under the project. WB also opined that the A-B pipeline is operating at a partial capacity. Based on these observations, the ICR reads "In all, Bangladesh was able to overcome the gas shortage which prevailed in the early 1990's through the rapiddevelopment of gas reserves by foreign oil companies. As a result, the Bank-financed components of the Project, while useful in the long term, were developed prematurely. Underthe circumstances, the outcome of this component is ratedunsatisfactory". Indeed such rating is based on inadequate information. For understanding it may be noted that (a) the presence of IOCs and commercial finds of gas in Sangu and Jalalabad prior to the stage of undertaking the project could not be predicted for reasons of inherent uncertainties in exploration, (b) A-B pipeline supplies gas to Chittagong at present in addition to the gas supply from Sangu, and (c) A-B pipeline will shortly be source for supplying gas resulting from the project under reference to major power plants being installed in Haripur and Meghnaghat areas. As such the Bank's rating needs to be corrected as "Satisfactory" and facts should be recorded accordingly.

Improve Enabling Environment for Private Sector: As stated earlier, no provisions were included in the project components for creating enabling environment for private sector participation. The reference to the proposal for utilization of significant savings under the credit for pipeline construction to supply gas to the western region on completion of Bangabandhu Jamuna Bridge and imposition of certain conditions, at a later date, in the name of reforms seems not to be directly related to the Project implementation. It may be mentioned that had the proposed pipeline not been constructed from the government's own resources then supply of gas to power plants (including private sector power plant) on the other bank of Jamuna would not be possible. In fact the Bank missed a golden opportunity of providing assistance to a component like the gas supply to western zone through the Bangabandhu Bridge

37 which would open new areas for gas utilization especially in the private sector. As such, the statement "Under the circumstances, and given that little progress was made in the essential areas requiresfor private sectorparticipation ...... is rated "Highly Unsatisfactory"is not relevant in the context of the project scope and project implementation, which calls for appropriately re-phrasing the entire section.

Develop Institutional Capabilities: There were five activities viz. (a) Strengthening of GTCL through a twinning program, (b) Management System Improvement Program -MSIP, (c) Environment and Safety Management System-ESMS, (d) Local & Foreign training, and (e) Reservoir Management Assistance program. Out of these five activities, first three have been implemented successfully. The Reservoir Management Assistance program could not be completed because of non-extension of the credit closing by the Bank when the consultant was fielded on approval of the WB and spent substantial man-month in the process. Only training program could not be implemented because of the same reason of non- extension of credit closing date although selection of training institution was finalized after travelling through a long-way. As such, the rating for this component may be reconsidered and revised as P'artially satisfactory' instead of rating it 'Unsatisfactory'.

Output of A-B Pipeline: As stated in (3) above that the output of the A-B pipeline deserves to be rated as satisfactory since this pipeline is also a source for supplying gas to Titas Franchise areas including Power Plants being installed in Haripur and Meghnaghat region under IPPs.

Output of SCADA and Telecommunication System: Since this component is still under implementation and DFID (the financing authority) is actively working with GTCL, it appears to be premature for rating as unsuccessful based on delay in transferring of high pressure transmission pipeline to GTCL although major trunk-pipelines are under their control. In the meantime, Petrobangla Board has approved the transfer of Ashuganj-Elenga high-pressure transmission pipeline to GTCL.

Drilling of Three Wells and Installation of Gas Processing Plant at Rashidpur: The statement "the wells are not currently producing on account of pipeline constraints"is not based on facts. As explained above (Paragraph-3), the opinion needs to be reconsidered and revised. It may be noted that the production and processing of gas from this field had opened the scope for installation of a Condensate fractionation plant to get MS, HSD etc.

Factor generally subject to implementing agency control: The observations made do not relate to project execution. The general flow of skilled and unskilled manpower is a global trend. Moreover, companies under Petrobangla do have experience of nearly four decades of drilling of wells, operations and maintenance of gas fields. As such the statement "... since talented staff left the entity for jobs with lOCs. This in effect, further reduced the institutionalcapacity of Petrobanglato deal with the contractual arrangementthe Project entails, and explains some of the shortcomings in Project execution." appears not based on the actual position. In fact, none of the Project components suffered due to the absence of staff as stated.

Costs and financing: Huge savings of US$ 36.9 million against the appraisal estimate of US$ 171.7 million indicates over estimation, which should not be explained as the outcome of early initiation of the procurement process and the award of turnkey contracts through transparent ICBs. It should be the over estimation at the appraisal stage.

Sustainability: When it is stated that "Petrobanglaand its affiliates are capable of operating the pipeline and produce/treatnatural gas, so that no major difficulties should be anticipated in this respect", then the rating of Project's sustainability as "Highly Unlikely" seems to be not well judged. The physical infrastructure developed under the project is becoming even inadequate to meet the gas demand indeed. Petrobangla and its companies are adequately experienced for the operation of gas wells, maintenance &

38 work-over, and operation & maintenance of process plants and pipelines. Therefore, it is not rationale to doubt the capability for smooth operation and maintenance of the facilities built under the Project. However, creation of enabling environment for private sector participation and strengthening financial conditions of Petrobangla and its companies may be looked into separately and should not form the basis for rating Project's sustainability. Moreover, these were not considered at the time of project design/formulation/appraisal. So any cautionary signal to that effect will be encouraging for the sector as a whole, not in an isolated manner.

Bank's Supervision mission: Fielding of missions from time to time during Project implementation is always considered helpful and necessary. But the recommendations of supervision missions, in many vital issues of the Project, did not yield any results as because of the missions were not considered and accepted by the Bank. If the Bank could have paid any importance to the recommendations of supervision missions, then two TA components, i.e. Reservoir Management and Training, would have received Bank's consideration by way of extending the credit closing for completion of these two important components. As such, a reference to supervision mission's suggestions and recommnendations for reforms prior to restructuring of Project only should not have been taken into consideration in isolation. Such approach by the IDA headquarter indicates parochial attitude of the authority concerned.

Based on the above comments and observations, it is suggested that the ICR prepared by the Bank as presented now should be reviewed in the light of the comments prior to finalization of the same.

39 GIDP-ICR PERFORMANCE RATING VIS-A-VIS COMMENTS AND OBSERVATIONS OF PETROBANGLA

Rating by World Comments and Observations Areas considered Bank shown in ICR by Petrobangla

1. Quality at Entry Unsatisfactory No comment 2. Alleviate Gas Supply Shortage Unsatisfactory 5| .' 3. Improve Enabling Environment for Private Highly Unsatisfactory There was no such component in the project. Sector As such rating does not apply (Ref. Text s O _ ~~~~~~~~~~~~~~~~~Paragraph-4) 4. Financial Objectives and Compliance with Showed concern No comment Covenants

5. A-B Pipeline Unsatisfactory Satisfactory. This pipeline is now considered as a major source for gas supply to power plants being installed under IPPs in Titas _- areas. e 6. SCADA Telecommunication Highly Unsatisfactory This component is yet to complete. The 0 stated reasons should not be the ground to - ______declare Unsatisfactory. c 7. Drilling of Three Wells at Rashidpur Unsatisfactory Satisfactory, since these wells are producing D _ gas. 8. Gas Processing Plant at Rashidpur Unsatisfactory Satisfactory, since process plant is now in 0S ______operation. O 9. Technical Assistance: 9.1 Project Implementation Support Satisfactory No comment 9.2 Institution Building: e - Assistance to GTCL Highly Satisfactory No comment A) - Environment and Safety Satisfactory No comment Management Program - Reservoir Management Highly Unsatisfactory Not agreed. Text Paragraph-5 may be seen. - Improvement of Group Satisfactory No comment Management System (MSIP)

______9.3 Training Highly Unsatisfactory Text Paragraph-5 may be seen. I Sustainability: 0. 10.1 Project's Sustainability Highly Inadequate reasons cited cannot form the c Unlikely basis for such rating. 10.2 Transition arrangement Showed Not factual since Petrobangla & its CO to regular operations concern companies have experiences of nearly four- decades. (Ref. Text Paragraph-l I) I Bank: ) 1. 11.1I Lending Unsatisfactory No comment 11.2 Supervision Satisfactory Text Paragraph- 12 may be seen. 11.3 Overall Bank Performance Unsatisfactory No comment c I Borrower: 3 2. o 12.1 Preparation Satisfactory No comment o 12.2 Government Implementation Unsatisfactory No comment Performance 12.3 Implementation Agency Satisfactory No comment 12.4 Overall Borrower Unsatisfactory No comment Performance

40 Annex 7D. Status of Compliance with Covenants

Agreement Section Covenant Status Original Revised Description of Covenant Comments Type Fulfill Date Fulfill Date

DCA 3.04(a) 5 CP Ongoing Each year the Borrower to fumish to IDA the findings and The Financial Action Plan submitted by recommendations of an annual review of (i) Project GOB on June 1999 was not progress, (ii) financial performance of GTCL and SGFL, implemented. The recent tariff increase (iii) implementation of the gas sector's Priority Investment of 15 percent effective from September Program (PIP), and (iv) progress made in carrying out 2000 is not adequate to cover the losses reforms in the sector. due to purchase of gas from the International Oil Companies (lOCs).

DCA 3.04(d) 9 C 03/31/97 10/97 The Borrower to carry out comprehensive mid-term review. Done DCA 4.01(b)(i) 1 C 12/31/00 The Borrower to have records and accounts audited each Audited accounts for FY00 not yet due. 4.01(b)(ii) I (FYOO) fiscal year for all expenditures made on the basis of statements of expenditures (SOE) , and the special account by independent auditors acceptable to IDA, and furnish the audit six months after end of each fiscal year along with a separate opinion by auditors. DCA 4.02 (a) 2 C Ongoing The Borrower to ensure that the gas operating companies The price deficit fund created for making have sufficient internally generated funds to meet operating payment to lOCs is not sufficient to pay expenses and debt service requirements, maintain an the lOCs. adequate working capital position, and with the exception of GTCL, self-finance a minimum of 20-30% of their respective investment programs.

DCA 4.02 (b) 2 Soon Ongoing The Borrower to review with IDA prior to the start of the A 15% tariff increase was effective from fiscal year the margins allowed to the gas operating September 1, 2000 although decision on companies for the fiscal year. margin of gas companies is yet to be taken.

DCA 4.03 2 CP Ongoing The Borrower to review with IDA prior to the start of the There is a Five Year Plan for the Energy fiscal year the gas sector's PIP and its implementation in the Sector. current fiscal year, as well as the implementation plan for the three succeeding fiscal years.

DCA 4.04 2 Soon 12/31/95 The Borrower to carry out a joint review with IDA and The final report has been submitted to other donors of GOB's action program for strengthening the MEMR for formal approval. GOB's institutional and regulatory frameworks for the formal approval is still awaited. Action petroleum/gas sector. on regulatory framework is underway.

41 Agreement Section Covenant Status Original Revised Description of Covenant | Comments Type Fulfill Date Fulfill Date _ __ _

DCA 4.05 2 NC Ongoing - The Borrower to carry out a program, satisfactory to IDA, Arrears were unacceptably high and no to clear public sector consumers' arrears for gas and special recovery drive has been taken to condensate supplied by the gas operating companies. date. Project 2.06(a) 10 C 10/01/95 05/5/96 Prepare and furnish to IDA proposals for twinning GASCOR completed its assignment and (GTCL) arrangements between GTCL and established foreign gas submitted its final report in May, 1999. company providing for sustained technical and managerial support from such company to GTCL over a number of years. Project 2.06 (b) 10 C 11/30/95 06/6/96 Enter into such arrangements with said company as shall GASCOR contract has been (GTCL) have been agreed upon. implemented successfully.

Project 3.03 13 C 12/31/95 - GTCL shall take out and maintain with responsible insurers, All assets are insured with the State (GTCL) or make other provision satisfactory to IDA, insurance General Insurance Corporation. against such risks and in such amounts as shall be consistent with appropriate practice. Project 4.01(b)(i) I CD 12/31/00 GTCL to have its records, accounts and financial statements Audited Accounts for FY00 not yet due. (GTCL) 4.01(b)(ii) (FY00) audited for each fiscal year by independent auditors and to submit to IDA these audited reports within six months after the end of each fiscal year. Project 4.02(a) 2 NC Ongoing GTCL to earn an annual return on the average current value GTCL's ROR for FY99 is 5.4%. (GTCL) of GTCL's net fixed assets in operation of not less than: 4% Provisional figures for FY2000 show an in FY95, 6% in FY96, 6% in FY97, 7% in FY98, 8% in ROR of 6.1%. FY99, and 10% thereafter. Project 4.02(b)&(c) 2 NC Ongoing Before the beginning of each FY, GTCL shall, on the basis Unless GTCL's wheeling charges are (GTCL) of forecasts prepared, review whether it would meet the revised, it's financial conditions are not requirements set forth above, in respect of such fiscal year going to improve. GTCL also needs to and the next following fiscal year and fumish IDA the take special recovery drive to bring down results of such a review upon its completion. If such review its arrears. shows the requirements set would not be met, promptly take all necessary measures to meet requirements. Project 4.03 2 NC Ongoing GTCL shall maintain its accounts receivable at a level not As of June 30, 2000, the accounts (GTCL) exceeding the equivalent of three months' billings. receivable is equivalent to 4.9 months.

42 Agreement Section Covenant Status Original Revised Description of Covenant Comments T Type Fulfill Date Fulfill _j _ _ _ _ ] _ Date

Project 4.04 2 NC Ongoing GTCL shall not incur any debt, commencing FY95 if after At the end of FY2000, this stands at (GTCL) the incurrance of such debt, the ratio of debt to equity shall 69:31 which improved from 74:26 of be greater than 60 to 40. FY98.

Project 3.03 13 C Ongoing SGFL shall take out and maintain with responsible insurers, All assets are insured with the state (SGFL) or make other provision satisfactory to IDA, insurance general insurance corporation. against such risks and in such amounts as shall be consistent with appropriate practice.

Project 4.01 (b)(i) 1 CD 12/31/00 SGFL to have its records, accounts and financial statements Audited Accounts for FY00 not yet due. (SGFL) FY00 audited for each fiscal year by independent auditors and fumish to IDA its annual audited reports within six months of the end of each fiscal year.

Project 4.02(a) 2 C Ongoing SGFL to eam, for each of its fixed years, commencing SGFL's ROR for FY99 is 16.2% and (SGFL) FY95 an annual rate of return of not less than 15% on the 18.4% in FY2000 (based on provisional average current value of SGFL's net fixed assets in figures). operation.

Project 4.02(b)(c) 2 C Ongoing Before the beginning to each FY, SGFL shall, on the basis SGFL is likely to continue to comply (SGFL) of forecasts prepared, review whether it would meet the with ROR covenant in FY2001. requirements set forth above, in respect of such fiscal year However, its accounts receivable is and the next following year and furnish IDA the results of unacceptably high and special recovery such a review upon its completion. If such review shows drive is needed to bring down arrears. the requirements set would not be met, promptly take all necessary measures to meet requirements.

Project 4.03 2 NC Ongoing SGFL to maintain its accounts receivable from the sale of As of June 30, 2000, accounts receivable (SFGL) gas and condensates at a level not exceeding the equivalent stands at 5.8 months of sales equivalent. of three months' billings.

Project 4.04 2 C Ongoing SGFL shall not incur any debt, commencing FY95 if after At the end of FY 2000, the D/E ratio is (SFGL) the incurrence of such debt, the ratio of debt to equity shall 30:70. be greater than 70 to 30.

Project 2.06 10 NC 10/01/95 Petrobangla to: (Petrobangla) - implement detailed training program for Petrobangla Training Program could not be staff, implemented due to delays in approval of TAPP and selection of training institute.

43 Agreement Section Covenant Status Original Revised Description of Covenant 1 Comments Type Fulfill Date Fulfill

2.06 10 C 10/31/95 - commence a program for the development and With the help of Martech Int. implementation of a group-wide environmental and Environment Services, (USA), the safety management system; program has been implemented successfully.

2.06 10 C 10/31/95 - implement a program for upgrading the Petrobangla Work is at final stage of completion. group's accounting systems and management information systems.

Project 3.03 13 C Ongoing Petrobangla shall take into account and maintain with Petrobangla has the necessary insurance (Petrobangla) responsible insurers, or make other provision satisfactory to coverage for all its major assets. IDA, insurance against such risks and in such amounts as shall be consistent with appropriate practice.

Project 4.01(b)(i) 1 CD 12/31/00 Petrobangla to have its records and accounts and financial Audited Accounts for FY00 not yet due. (Petrobangla) (FY00) statements audited for each fiscal year by independent auditors and furnish to IDA certified copies of its annual audited financial statements within six months after the end of each fiscal year.

Key Covenant types: Status: 1. Accounts/audit CD Complied with after delay 2. Financial performance/generate revenue from beneficiaries NC Not complied with 3. Flow and utilization of project funds SOON Compliance expected in reasonably short time 4. Counterpart funding CP Complied with partially 5. Management aspects of the project or executing agency NYD Not yet due 6. Environmental covenants 7. Involuntary resettlement 8. Indigenous people 9. Monitoring, review and reporting 10. Project implementation not covered by categories 1-9. 11. Sectoral or cross-sectoral budgetary or other resource allocation 12. Sectoral or cross-sectoral policy/regulatory/institutional action 13. Other

44 Annex 7E. Gas Transmission Company Limited Income Statement (in Tk million)

For Fiscal Year Ending June 30 1995 1996 1997 1998 1999 2000 Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Provisional Operating Revenues: Gaswheeled(bcf) 69 57 81 66 100 64 135 99 156 115 124 Wheeling Charges (Tk./mcf) 6.2 6.2 6.8 6.2 7.5 6.2 8.6 6.2 9.4 6.2 6.2 Condensate wheeled (M.Lit) - 11 36 54 42 90 Wheeling Charges (Tk./Litre) 0.50 0.50 0.50 0.50 0.50 0.50 Total Operating Revenue 431 355 553 414 754 415 1,163 646 1,478 750 815

Operating Expenses: Salaries &Wages 8 3 9 7 10 9 12 20 13 27 33 Maintenance 0 28 2 28 2 42 12 48 4 3 Administration 15 27 17 15 18 36 22 47 24 41 24 Depreciation 164 173 164 186 218 186 296 239 362 304 304 Other 2 - 2 - 2 - 3 - 3 - - Total Operating Expenses 189 204 219 210 276 234 373 317 449 375 364

Operating Income 243 150 334 204 478 181 790 328 1,029 375 451 Non-Operating Income 2 4 2 2 16 4

Interest Charges 271 217 261 217 300 204 389 308 457 395 303 Foreign Exchange Losses 49 - 50 128 57 148 100 269 120 268 283

Income beforeTax (77) (65) 23 (138) 121 (169) 301 (247) 452 (272) (131) Provision of Additional Expenses - I - 6 - 15 - 23 - - Loss Carried Forward (52) (129) (106)

Income Tax - - 4 - 122 - 182 - -

Net Income (77) (65) 22 (138) 111 (169) 164 (247) 247 (272) (131)

Contribution to Development Fund 28 - 35 38 47 29 67 26 83 12 149 Prior Year's Adjustments 15 13 16 (3.9)

Retum on Net Fixed Assets (%) 4.1% 2.8% 6.0% 3.9% 7.1% 3.6% 7.6% 5.5% 8.3% 5.4% 6.1%

45 Annex 7E. Gas Transmission Company Limited Balance Sheet (in Tk million)

For Fiscal Year Ended June 30 FY19! 1995 1996 1997 1998 1999 2000 Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Provisional Fixed Assets Gross Fixed Assets in Use 5,606 5,700 5,606 5,699 8,296 5,550 9,516 7,769 11,607 9,060 9,111 Less Accu. Depreciation 236 225 399 414 617 586 912 816 1 274 1.456 l.760 Net Fixed Assets 5,370 5,475 5,207 5,285 7,680 4,964 8,603 6,953 10,332 7,604 7,351

Capital Work-in-Progress 375 47 2,262 942 1,080 2,180 2,101 531 1,387 2,036 2,737

Current Assets Cash& Bank Balance 78 295 180 417 175 271 240 299 290 294 299 Accounts Receivable (trade) 108 69 138 111 189 116 291 145 370 290 331 Other Accounts Receivable 184 174 95 142 316 895 Inventories 82 - 82 0 136 213 160 521 202 195 244 Advances &Prepayments 2 2 11 177 15 77 30 438 24 115 360 Total Current Assets 269 550 410 880 514 771 720 1,545 886 1,210 2,129

TOTAL ASSETS 6,014 6,072 7,879 7,107 9,274 7,915 11,424 9,029 12,605 10,850 12,216

Equity GOB Equity &Grants 2,352 2,176 2,895 2,251 3,313 2,333 3,848 2,668 4,163 3,750 4,037 Retained Earnings (129) (119) (106) (256) 4 (420) 169 (654) 416 (910) (1,045) Contribution to Development Fund 28 - 63 38 110 67 176 92 259 104 254 Total Equity 2,251 2,057 2,852 2,033 3,427 1,980 4,193 2,106 4,838 2,944 3,246

LongTermDebt 3,321 3,141 4,292 4,212 4,982 5,234 6,225 5,988 6,873 6,661 7,292

Current Liabilities Bank Overdraft 25 300 400 450 300 Accounts Payable 3 13 18 43 25 156 49 153 41 302 838 Interest Payable 68 862 65 820 75 545 97 553 114 713 599 Income Tax Payable - - - - I - 30 - 46 - - Staff Profit Sharing Fund - - I - 6 - 15 - 23 - Current Portion of LTD 346 - 351 - 358 - 365 229 371 229 241 Total Cufrent Liabilities 442 875 736 863 865 701 1,007 935 895 1,244 1,677

TOTAL EQUITIES AND LIABILITIES 6,014 6,073 7,880 7,107 9,274 7,915 11,424 9,029 12,605 10,849 12,216

Current Ratio (times) 0.6 0.6 0.6 1.0 0.6 1.1 0.7 1.7 1.0 1.0 1.3 Debt as a %of Debt &Equity 59.6% 60.4% 60.1% 67.4% 59.2% 72.5% 59.8% 74.0% 58.7% 69.3% 69.2% Accounts Receivable (months) 2.3 3.2 3.4 2.7 4.6 4.9

46 Annex 7E. Gas Transmission Company Limited Fund Flow Statement (in Tk million)

4 For Fiscal Year Ending June 30 FY19 1995 1996 1997 1998 1999 2000 Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Provisional Sources Internal Sources: Op. Income 243 150 334 204 478 181 790 328 1,029 375 451 Depreciation 164 173 164 186 218 186 296 239 362 304 304 Non-Operating Income - 2 - 4 - 2 - 2 - 16 4 Contribution to Development Fund 28 - 35 38 47 29 67 26 S3 12 149 Intemal Cash Generation 434 326 533 431 742 398 1,152 594 1,474 707 909

GOB Equity & Grants 109 1,058 543 76 418 82 535 334 315 378 287 Prior Year's Adjustments 15 13 16 (4) Borrowings 255 84 1,268 952 975 840 1,498 999 881 673 631

Total Sources 799 1,468 2,344 1,459 2,135 1,335 3,185 1,941 2,669 1,774 1,824

Applications

Capital Expenditure 365 1,021 1,811 862 1,393 983 2,140 403 1,258 1,766 701 Interest During Construction 10 5 72 45 100 135 91 98 100 58 164 Total Investment 375 1,026 1,883 907 1,493 1,118 2,231 501 1,358 1,824 865

Debt Service Principal - - 346 - 351 - 358 525 365 229 229 Interest 271 217 261 217 300 204 389 308 457 406 713 Total Debt Service 271 217 607 217 651 204 747 833 822 635 942

Income Tax - - - - 4 - 122 - 182 - Workers' PPF - - I - 6 - 15 - 23 Dividend - - - - - 9 - - -

Change in Working Capital: Cash Less Bank Overdraft (4) 291 102 117 (5) (211) 65 96 50 (35) 5 Non-Cash 158 (67) (249) 220 (15) 200 6 511 234 (640) 378

Total Applications 799 1,467 2,344 1,461 2,135 1,320 3,185 1,941 2,669 1,784 2,190

LongTermDebtServiceCoverage 1.6 1.5 0.9 2.0 1.1 2.0 1.4 0.7 1.5 1.1 1.0

4 7 Annex 7L Sylhet Umited (SGFL) Income Statements (in Tk million)

For Fiscal Year ending June 30 1995 1996 1997 1998 1999 2000

Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Provisional Average Revenue/MCF (Tk) 35.34 36.51 37.42 36.56 39.62 36.64 42.34 35.42 44.83 38.68 38.72 Average Revenue/MCF (US$) 0.88 0.91 0.91 0.89 0.93 0.86 0.94 0.79 0.94 0.81 0.77 Volume of Sales: Gas(bcf) 49.6 39.1 67.9 45.7 76.7 50.2 102.9 63.8 118.3 65 68 Condensate (million litre) 39.0 10.1 11.1 20.3 10.4 47.5 14.6 59.8 17.1 60 62 Gas Liquids (million litres) 118.4 13.6 161.9 7.9 214.1 12.4 244.6 14 34 Sales Revenue: Gas 1,753 1,428 2,541 1,671 3,039 1,839 4,357 2,260 5,303 2,511 2,651 Condensate/liquids 504 288 700 449 933 564 1.297 815 1.55 811 1.072 Total Gross Revenue 2,257 1,716 3,241 2,119 3,972 2,403 5,654 3,075 6,853 3,322 3,723 Excise: Gas 1,444 1,184 2,076 1,386 2,463 1,526 3,469 1,864 4,185 2,107 2,200 Other Products 55 38 16 49 15 150 21 182 24 111 168 Total Excise Duty 1,498 1,222 2,092 1,435 2,478 1,676 3,489 2,045 4,209 2,218 2,369 Net Revenue 759 494 1,149 684 1,495 727 2,165 1,030 2,644 1,104 1,354 Other Income 20 22 20 27 20 36 20 33 20 47 49 Operating Expenses Salaries & Wages 33 24 37 26 40 44 44 52 49 34 60 Maintenance 27 7 46 7 46 11 50 18 72 38 28 Administration 40 42 44 54 48 68 53 83 59 84 95 Depreciation 164 129 272 277 281 301 345 312 439 314 319 Other 13 2 14 14 15 47 17 71 19 65 65 Total Operating Expenses 277 204 413 378 431 471 509 535 637 536 567 Operating Income 502 312 756 333 1,084 293 1,676 528 2,027 615 836 Interest Charges 148 51 258 56 257 51 307 46 517 41 36 Losses from Foreign Exchange 3 7 57 32 56 49 85 41 141 25 35 Income Before Tax 351 254 442 245 771 193 1,284 440 1,368 549 766 Provision of Additional Expenses 18 13 22 13 39 10 64 22 68 27 38 IncomeTax 142 97 178 95 311 73 518 167 552 209 291

Net Income 192 145 241 138 421 110 701 251 747 313 437 Contribution to Development Fund 19 20 28 18 34 23 50 29 61 16 - Prior Year's Adjustments - 23 (87) 118 162 - Return on Net Fixed Assets 13.4% i O.G6 7% 14.5% 16.2% 18.4% 4 8 Annex 7E. Sylhet Gas Fields Limited (SGFL) Balance Sheet (in Tk million)

For Fiscal Year ended June 30 1995 1996 1997 1998 1999 2000 Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Provisional Assets Fixed Assets Gross Fixed Assets in use 4,633 2,952 4,633 4,574 4,986 4,866 7,212 4,855 12,733 5,720 6,913 Less: Accu. Depreciation 305 495 537 766 777 1.114 1.082 1.352 1.481 1.613 1.931 Net Fixed Assets 4,328 2,458 4,096 3,807 4,208 3,753 6,130 3,503 11,252 4,107 4,981 Capital Work-in-Progress 212 517 1,405 550 3,471 556 4,606 606 38 449 151 Deferred Charges 350 61 310 - 270 - 230 - 190 - - Current Assets Cashand Bank Balances 693 546 660 729 474 563 313 738 899 852 1,243 Accounts Receivable (trade) 190 433 287 563 374 858 541 1,386 661 1,440 1,794 Accounts Receivable (intra group) (620) 93 72 47 36 42 Advances, Deposits and Prepayments 139 254 139 183 150 274 216 323 382 390 560 Stores and Spares 20 106 114 190 226 155 307 405 77 283 396 Total Current Assets 1,042 719 1,200 1,756 1,223 1,922 1,377 2,899 2,019 3,001 4,035 TOTAL ASSETS 5,932 3,754 7,010 6,114 9,172 6,231 12,342 7,008 13,498 7,557 9,168 Ecuity

GOB Equity 1,447 1,419 1,447 3,582 1,447 3,592 1,447 3,614 1,447 3,647 4,209 Retained Earnings 689 591 931 691 1,351 597 2,053 771 2,800 977 1,413 Contribution to Development Fund 19 20 47 38 82 62 131 91 192 107 107 Total Equity 2,155 2,030 2,425 4,312 2,879 4,250 3,630 4,477 4,439 4,731 5,730 Long Term Debt 3,350 955 4,076 898 5,628 925 7,885 1,134 8,259 1,539 2,388 Current Liabilities Accounts Payable 13 12 48 22 147 200 211 141 85 126 198 Excise Duty Payable 348 439 379 826 632 518 Interest Payable 37 - 65 146 64 107 77 54 129 11 Income Tax Payable 35 386 45 275 78 348 130 337 138 378 291 Staff Profit Sharing 18 13 22 13 39 10 64 22 68 27 38 Others 9 11 14 16 20 5 Current Portion of LTD 325 - 331 - 338 - 345 380 92 Total Current Liabilities 427 768 510 905 665 1,056 826 1,397 801 1,286 1,050 TOTAL EQUITY AND LIABILITIES 5,931 3,753 7,011 6,114 9,172 6,231 12,342 7,007 13,498 7,557 9,168 Current Ratio (times) 2.4 0.9 2.4 1.9 1.8 1.8 1.7 2.1 2.5 2.3 3.8 Debt as %of Debt and Equity 60.9% 32.0% 62.7% 17.2% 66.2% 17.9% 68.5% 20.2% 65.0% 24.6% 29.4% Accounts Receivable (months) 3.0 3.2 4.3 5.4 5.2 5.8

49 Annex 7E. Sylhet Gas Fields Limited (SGFL) Fund Flow Statement (In Tk Million)

For Fiscal Year ending June 30

1995 1996 1997 1998 1999 2000

Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Budgeted Sources

836 Operating Income 502 312 756 333 1,084 293 1,676 528 2,027 615 Depreciation 164 129 272 277 281 301 345 312 439 314 319 Contribution to Development Fund 19 20 28 18 34 23 50 29 61 16 - Internal Cash Generation 685 462 1,056 628 1.398 617 2,070 868 2,527 946 1,155

GOB Equity &Grants 1,296 - - 2,164 - 9 - 22 - 33 Prior Year's Adjustments - 23 (87) 118 162 -

Borrowings 3,182 23 998 115 1,817 87 2,474 242 574 406 849

Total Sources 5,163 485 2,055 2,930 3,215 627 4,544 1,251 3,101 1,547 2,003

Avolications

Capital Expenditure 4,523 83 1,137 1,655 2,256 290 3,067 109 765 864 1,193 IDC 6 53 147 251 150

Debt Service Principal 13 75 325 56 331 56 338 67 345 92 89 - Interest 148 51 258 56 257 51 307 46 517 - 89 TotalDebtService 161 126 583 112 587 107 645 114 862 92

291 IncomeTax 142 97 178 95 311 73 518 167 552 209 38 Staff Profit Sharing 18 13 22 13 39 10 64 22 68 27 Contribution to National Exchequer 20 18 23 29 16 -

Increase in Working Capital Cash Less Bank Overdraft 158 177 (33) 183 (185) (166) (162) 176 587 114 120 99 Non-Cash 156 (104) 115 718 61 180 161 460 115 99

Total Application 5,163 411 2,055 2,793 3,215 517 4,545 1,077 3,101 1,421 1,831

Self Financing Ratio 532.8% -12.2% 113.8% 270.3% 87.3% 81.0% Debt Service Coverage Ratio 3.3 3.7 1.5 5.6 1.8 5.8 2.3 7.6 2.2 10.3 12.9

50