GOVERNMENT OF THE PEOPLE’S REPUBLIC OF BANGLADESH

VISION STATEMENT

POWER DIVISION

MINISTRY OF ENERGY AND MINERAL RESOURCES

Page 1 of 6

Vision Statement

To provide access to affordable and reliable electricity to all by the year 2020

Introduction: Access to electricity in Bangladesh is one of the lowest in the world— coverage today stands at less than 20% of the total population; consumption of power is also meager, only about 110 kWh per capita per annum. Shortage of power supply, at times very acute and unreliable, has constrained economic growth. The lost output is, according to some estimates, as high as one percent of the GDP. This is critical because the foregone economic growth could have taken Bangladesh beyond the threshold of 6-7% of GDP growth rate that many policymakers think could make a significant and sustained dent on poverty. Moreover, availability of power is one of the important prerequisites for attracting domestic and foreign investment in manufacturing industry and services; it significantly influences social and human development. Demand for access to power, which is the most popular in the rural area, aptly sums up its overall benefits. Thus, providing access to affordable and reliable electricity to the majority of the people of Bangladesh by 2020 is a fitting national goal to usher the next millenium. Fortunately for us, the gas resource of Bangladesh, one of the cleanest and efficient fuels for power generation, provides a special window of opportunity.

1. In operational term, the broad objective set out above calls for large addition to generation capacity over time, expansion of grid and distribution networks. The existing power sector master plan would thus have to be updated and, in some instances, redone incorporating the national goal. For example, to meet the projected demand, the generation capacity alone will have to be increased fivefold to a ballpark estimate of 15000MW. Alongside, the gas sector plan has to be designed and implemented in tandem. Availability of capital, particularly from external sources, would be critical in ensuring the stipulated growth and expansion. Conservative estimates of such capital needs for the next five years for power sector alone put them in the range of US$ 5 to 6 billions. Therefore, policies and practices that ensure such capital flows must be in place. Given the history of past FDI flows into Bangladesh, the best bet is a mix of concessional capital and FDI. Steady growth in foreign exchange earnings with exchange rate stability would determine the long-term viability of such large capital flows in and out of the country. (These require sound economic, financial and external sector policies and management that foster growth, particularly export earnings, ensure price  and exchange rate stability; these important issues are not discussed here since they are part of overall  macroeconomic management).

1. Ongoing Measures: In order to create appropriate and enabling conditions for improved public sector performance, attracting private and multilateral capital flows on a sustained basis and giving value for money to the customers, GOB has undertaken a series of reform measures. To set out the overall framework for the improved performance of this sector – the Energy Policy was prepared and adopted in 1996. The policy, among others, provides the broad guidelines for power sector reform including the evolving structure of the industry and its regulation. A separate organization termed as Power Cell was created to design, facilitate and monitor reform measures.

1. Presented below are some of the specific measures undertaken by GOB for each of the industry segment :

• To introduce competition, induct foreign private capital and more importantly, to increase power supply to alleviate the acute shortage—Private Power Generation Policy was developed and adopted in 1996. To implement the policy, detail security documents were prepared for solicitations and till now, through competitive bidding, 1158 MW of capacity has been contracted offering some of the lowest tariffs in the world and private projects totaling 1080MW are under negotiation. Policy has also been designed to promote small-scale generation in the private sector particularly to serve nongrid area, pockets of continued power shortage and provide opportunity for sale of excess power from captive generation to consumers in the neighboring areas. REB/PBS is nearing finalization of contracts for 3 (three) 10MW plants in the private sectors.

• A mixed sector power plant of initial capacity of 70MW with ownership divided among REB, PBS and eventually private sector is also under implementation.

(These results indicate successful design and implementation of reform measures in the generation segment of the power industry.)

• Recently, decision has been taken to corporatise one of the major publicly owned power generation centers at Ashuganj (578MW) and develop as a cost center another set of installations at Haripur (99MW). These measures will separate generation at these places from other operations, provide opportunity for improving performance through management autonomy, incentives and competition.
• To set out a level playing field for all stakeholders and ground rules for participation, draft legislation replacing the old laws and regulations has been prepared for setting up of a Regulatory Body. The draft has been designed to be consistent with our legal endowment and infrastructure and compatible with the socioeconomic context. In the meantime the government has adopted a well-specified power tariff formula and the tariffs have since been revised on that basis twice a year for the last two years.
• The transmission segment is in the process of unbundling and separation. Power Grid Company of Bangladesh has been set up in 1996 and made operational in stages. Unlike other parastals, this has been incorporated under the Companies Act of 1994; the recruitment policy and pay packages are more in line with private sector including the scope for hire and fire. While this is a new experiment in public domain and with a natural monopoly, it has been designed to facilitate the regulation of the industry, comfort and sustain the capital flows in the power sector and particularly in private power generation.
• The broad features of the emerging structure of the industry have also been generally agreed. To start with, a single buyer model may be adopted where the ‘Buyer’ purchases all the required power from the generators based on economic load dispatch and sells to different distribution companies.
• Several models and a host of measures are under implementation in the distribution part of electricity market, which is the weakest link in the industry with high system loss- technical and non-technical. Out of the integrated entity that PDB was from its inception in 1972, several organizational solutions are being tried to improve the performance of the distribution system. They are: (i) DESA, a separate distribution entity for Dhaka metropolitan area carved out from the PDB in 1991 covering nearly half of the country’s power market; (ii) DESCO, an independent power distribution company that was created out of DESA with a tenth of its customers in 1997; (iii) REB/PBS the main distributor of power in the rural areas starting from 1978 and (iv) PDB catering for distribution in other urban and rural areas. (While the REB model has worked reasonably well in extending access to power in the rural areas, DESA failed to show any marked improvement and DESCO is too recent to be adjudged.) Other measures being tried include: (i) outsourcing of the commercial services -like contracting out meter reading and billing to the private sector and the workers’ coop; (ii) area rationalization among PDB, DESA and REB; (iii) introduction of computerized billing and prepaid meters in selected areas; (iv) administrative actions like line snapping and criminal penalty; (v) declaring the services of the employees in the power as essential services under the relevant act. (Illegal and criminal activities of sections of employees remain the single most important problem leading to large scale power theft in PDB and DESA areas and thus endangering the financial and commercial viability of the entire industry.)

• Limited measures for demand management have been tried by reducing the shopping hours at night, restricting energy intensive uses at peak hours and promotional campaigns particularly aimed at motivating farmers to irrigate during the off peak hours (the success in meeting the irrigation needs of the farmers in the last three years during times of extreme power scarcity by shifting irrigation to off peak hours is a valuable experience in this regard). The final draft of the renewable energy policy is under preparation.

1. Way forward : The overarching guiding principles for the reform strategy for the future will be pragmatism based on the experiences gained from the ongoing measures, reliance on the empirical findings about the best practices and giving due consideration to the socioeconomic and governance context. The successful reforms should be rolled over and innovative solutions should be found for unresolved problems. The pace and sequence of the reform should be tailored to solve problems (may even be iterative at times) and deliver results rather than be driven by any fixed notion or paradigm. This would help mobilize support for the programs both within and outside the concerned organizations and thereby contribute to their success.

Given the above criteria, the broad and general features of reform agenda for the future are as follows:

• Highest in the agenda is to improve the commercial and financial performances of the distribution entities to reduce system loss in particular The ongoing measures need to be continuously reviewed, adjusted and modified to solve problems and achieve designated results. Management focus should start with the short-term measures that should be rolled over and integrated with the evolutionary process of the long run structure rather than start the other way round. Along the way, projects and programs should be put in place to reduce technical loss, expand the scope for demand management and explore the possibility of innovative solutions like remote reading, computer networking etc. These steps would ensure the viability of the industry, increase its attractiveness for investment and serve more customers with any given supply of electricity.
• Measures to improve efficiency and operations in the existing generation stations should be pursued along with the addition of more capacity in the private and public sectors. The growth in capacity should generally be based on least cost expansion path; a revolving master plan would be of critical importance. Separation of the existing public sector generation units through a corporatized national power generation entity will further pave the way for restructuring of power generation on commercial lines. Gas network expansion in the western Bangladesh—of which the first important project has already been implemented by taking gas across the Jamuna River along the Bangabandhu Bridge-

- should be undertaken with urgency to replace liquid fuel in the existing power stations and add new gas-based capacity. Projects and programs should be identified to implement the measures outlined above.

• Transmission system should be expanded in tandem with generation capacity expansion on one hand and growth of demand on the other. Network development, expansion and management should be designed and implemented in such a manner that it is capable of accessing the most efficient supply of power and transport it to customers the cheapest way. Resources, domestic and foreign have to arranged for these purposes.
• Measures for establishment of an effective and accountable regulatory regime would continue to be identified and implemented. To this end, legislation regarding Energy Regulatory Authority will be enacted. The details of the rules and regulations governing the industry would be worked out in consultation with all the stakeholders in an iterative process to ensure the establishment of the best working model. The industry structure, whose general features are already agreed upon, needs fine tuning to make it workable in the present context and also allow for gradual upgradation to a more stable form. These details are to be worked out.

• Balancing the interests of the consumers and the industry will guide the setting of tariffs. The process will progressively reflect the cost of supply of electricity at an adequate and improving level of efficiency. In designing the tariff structure and rates, issues such as the least cost development plan, efficient allocation of resources and legitimate and deserving socioeconomic considerations will be taken into account.
• Measures for improved demand management and energy efficiency will be designed and implemented.
• Concerns of the employees will be appropriately addressed through constructive dialogues and their views will be given due considerations.

1. To conclude, the ongoing measures need to be monitored, evaluated and consolidated to identify the future course including the need for their modifications and enlargement. Adoption of any new measures, their pace and sequence should be governed by pragmatism, usefulness and most importantly, by the goals set out at the beginning. Access to electricity is an empowerment that can unleash vast untapped potentials for economic growth and social change, particularly in rural Bangladesh. The government is determined to make that happen.

Note :-  A Policy Statement on Power Sector Reforms is annexed to this Statement.

Annexure of the Vision Statement.

GOVERNMENT OF THE PEOPLE’S REPUBLIC OF BANGLADESH

POLICY STATEMENT ON POWER SECTOR REFORMS

POWER DIVISION

MINISTRY OF ENERGY AND MINERAL RESOURCES

January 2000

DHAKA

POLICY STATEMENT ON

POWER SECTOR REFORMS

1. INTRODUCTION

1.1.        Electricity is a vital ingredient for both economic and social development. Adequate, reliable and reasonably priced supply of  electricity  is  an essential input for national development. Making electricity available to all the people of the country at affordable price can improve standard of living of the people and enhance the economic development of the  country.

1.2.        Access to electricity in Bangladesh is one of the lowest in the world, coverage today stands at less than 20% of the  total  population;  consumption of power is also meagre, only about 110 kWh per capita per annum. Shortage of power supply, at times very acute and unreliable, has constrained economic growth. The lost output is, according to some estimates, as high as one percent of the GDP. This is critical because the foregone economic growth could have taken Bangladesh beyond the threshold of 6-7% of GDP growth rate that many policy makers think could make a significant and sustained dent on poverty. Moreover, availability of power is one of the important prerequisites for attracting domestic and foreign investment in manufacturing industry and services; it significantly influences social and human development. Demand for access to power, which is the most popular in the rural area, aptly sums up its overall  benefits. Thus, providing access to affordable and reliable electricity to the people of Bangladesh by 2020 is a fitting national goal to usher the millennium. Fortunately, the gas resource of Bangladesh, one of  the  cleanest and efficient fuel for power generation, provides a special window of opportunity.

1.3.        Initially a vertically integrated utility named Bangladesh  Power Development Board (BPDB) was solely responsible for generation, transmission and distribution of  electricity throughout  the country. As a  first step of reform Rural Electrification Board (REB) was created in 1977  to expand and improve the distribution network in the rural areas through rural electric co-operatives (PBSs). This has  improved  the  electricity  supply in the rural areas significantly. Dhaka Electric Supply Authority (DESA) was created in 1990 for improvement of the performance of distribution system in greater Dhaka area. But desirable results could not    be achieved as DESA was created without addressing the fundamental institutional deficiencies. Though the problem is not solved but at least it is identified.

1.4.        The present installed generation capacity is 3600 MW. Ageing of the plants over the years has resulted in decline of capability to the existing level of about 2950 MW. The shortage of power supply has been partly relieved by high cost captive power generation of about 450 MW. 4.3  million  consumers are presently served with electricity which is estimated at 16%   of total population in 1998-99. Given the ambitious plan of GOB stated earlier, a vigorous program has to be launched to accelerate the pace of electrification in the country. In this context initial projection of required generation capacity is around 6700 MW in 2005. Conservative estimates of capital needs for the next five years for power sector alone put them in the range of US$ 5 to 6 billions.

1.5.        The purpose of this Policy Paper is to layout, within the framework of the Vision Statement a set of specific programs and measures which will not only establish financial viability of the sector but also restructure it to put it on a new and sound footing. These are designed to respond effectively to   the current demand for power and to maximize the long term development potential of the power sector in  Bangladesh.

1. REFORM ACTIVITIES IN RECENT YEARS

In order to create appropriate and enabling conditions for improved public sector performance, attracting private and multilateral capital flows on a sustained basis and giving value for money to the customers, Government has undertaken a series of reform measures. To set out the overall framework for the improved  performance of this sector, the National Energy Policy was prepared and adopted   in 1996. The policy, among others, provides the broad guidelines for power sector reform including the evolving structure of the industry and its regulation. A  separate organization termed as Power Cell was created under the Ministry of Energy and Mineral Resources in 1995 to design, facilitate, co-ordinate  and  monitor reform measures.

Presented below are some of the specific measures undertaken by the Government for each of the industry segment:

2.1.        To introduce competition, induct foreign private capital and more importantly, to increase power supply to alleviate the  acute  shortage,  Private Sector Power Generation Policy was developed and adopted  in  1996. To implement the policy, detail security documents were prepared    for solicitations and till now, through competitive bidding, 1158 MW of capacity has been contracted offering some of the lowest  tariffs  in  the world and private projects totalling 1080 MW are under  negotiation.

2.2.        Policy has also been designed to promote small-scale generation in the private sector particularly to serve non grid areas, pockets of continued power shortage and provide opportunity for sale of excess power from captive generation to consumers in the neighbouring areas. REB/PBS is nearing finalization of contracts for 3 (three)10 MW plants in the private sectors.

2.3.        A mixed sector power plant of initial capacity of 70 MW with ownership divided among REB, PBS and eventually private sector is also under implementation.

2.4.        Recently, decision has been taken to corporatize one of the major publicly owned power generation centers at Ashuganj (724 MW) and develop as a profit center another set of installations at Haripur (99 MW). These  measures will separate generation at these places from other operations, provide opportunity for improving performance through management autonomy, incentives and competition.

These results indicate successful  design  and implementation  of  reform measures in the generation segment of the power  industry.

2.5.        The transmission segment is in the process of unbundling and separation. Power Grid Company of Bangladesh (PGCB) has been set up in 1996 and made operational in stages. Unlike other parastatals, this has been incorporated under the Company Act of 1994; the recruitment policy and  pay packages are more in line with private sector including the scope for  hire and fire. While this is a new experiment in public domain and with a natural monopoly, it has been designed to facilitate the regulation of the industry, comfort and sustain the capital flows in the power sector and particularly in private power  generation.

2.6.        A distribution company named Dhaka Electric Supply Company Ltd. (DESCO) has been created in 1996 under the Companies Act, 1994 with public ownership. Distribution assets of Mirpur area from DESA has been handed over to DESCO about a year ago. After evaluation of its  performance future course of reforms will be designed and  implemented.

2.7.        To set out a level playing field for all stakeholders and ground rules for participation, draft legislation replacing the old laws and regulations has been prepared for setting up of a Regulatory Body. The draft has been designed to be consistent with our legal endowment and infrastructure and compatible with the socio economic context. This draft has been approved  in principle by the Government and it is expected that it will be enacted by the Parliament soon.

1. PRESENT CONFIGURATION OF POWER  SECTOR

The entities responsible for different functions of the sector are stated below  :

3.1.        GENERATION

• Bangladesh Power Development Board.
• Rural Electrification Board.
• Private Power Generation Companies.

3.2.        TRANSMISSION

• Bangladesh Power Development Board.
• Power Grid Company of Bangladesh Ltd.

3.3.        DISTRIBUTION

• Bangladesh Power Development Board.
• Dhaka Electric Supply Authority.
• Dhaka Electric Supply Company  Ltd.
• Rural Electrification Board through Rural Electric  Co-operatives.

1. KEY CONSTRAINTS

The key constraints affecting the performance of the power sector are as follows  :

4.1.        Acute scarcity of resources hinders financing the huge cost required for the development of the sector from the national  budget.

4.2.        High system losses in the sector, large amount of accounts receivable and existing tariff rates & structure affecting the financial viability of  the  utilities and attractiveness for investment, domestic and  foreign.

4.3.        Absence of clear organizational goals, adequate financial and commercial autonomy and lack of adequate  incentive.

4.4.        Lack of differentiation of responsibilities for generation, transmission and distribution of electricity is hindering segment  specific  corrective  measures.

4.5.        Lack of appropriate cost and asset accounting system by plants, absence of effective operational performance evaluation of the different areas of the system such as generation, transmission and  distribution.

1. GOVERNMENT’S VISION

5.1.        LONG TERM GOALS FOR THE POWER  SECTOR

a)            To make electricity available for all.

b)            To ensure reliable and quality supply of  electricity.

c)             To provide electricity at a reasonable  price.

5.2.        POWER SECTOR REFORMS

5.2.1.    OBJECTIVES

In order to realise the vision, the Government has set a number of objectives for the power sector reform. These include  :

a)            Bringing entire country under electricity service by the year 2020.

b)            Making the power sector financially viable and able to facilitate economic growth.

c)             Increasing the sector’s efficiency.

d)            Making the sector commercial.

e)            Improving the reliability and quality of electricity  supply.

f)             Using natural gas as the primary fuel for  electricity  generation and exploring the possibility for export of  power  to augment and diversify foreign exchange  earnings.

g)            Increasing private sector participation to mobilise  finance.

i)             Ensuring reasonable and affordable price for electricity by pursuing least cost options.

j)             Promoting competition among various entities.

5.2.2.    MAIN COMPONENTS

The Government is committed to the Power Sector Reforms and intends to achieve the aforesaid objectives within a reasonable span  of time. The main components of the proposed reforms program  are:

a)            Segregation        of        power        generation,        transmission        and distribution functions into separate  services.

b)            Corporatization and commercialisation of emerging power sector entities.

c)             Creation of a Regulatory  Commission.

d)            Private        sector        participation        in        power        generation        and distribution.

e)            Introduction of cost reflective tariff for financial viability of the utilities and promoting efficient use of  electricity.

f)             Development of demand management including energy efficiency measures to conserve  energy.

g)            Development of alternative/renewable energy  sources.

5.3.        REFORM STRATEGY

The overarching guiding principles for the reform strategy for the future   will be pragmatism based on the experiences gained from the ongoing measures, reliance on the empirical findings about the best practices and giving due consideration to the socio economic  and governance context.  The successful reforms should be rolled over and innovative solutions  should be found for unresolved problems. The pace and sequence of reform should be tailored to solve problems (may even be iterative at times) and deliver results rather than be driven by any fixed notion or paradigm. This would help mobilize support for the programs both within and outside the concerned organizations and thereby contribute to their  success.

5.3.1.    GENERATION

Measures to improve efficiency and operations in the existing generation stations should be pursued along with the  addition  of more capacity in the private and public  sectors.

5.3.1.1 EXISTING GENERATION

a)            Separating out all existing power generation units through a corporatized national  power  generation entity will pave the way for restructuring power generation on commercial lines.

b)            The power stations under construction and the future ones in the public sector would be configured as individual profit center and they may be incorporated  as independent generation companies, if deemed appropriate and necessary.

c)             Evaluation of performance of the  profit  centers  and the corporatized entities will form the basis for expansion, enlargement and design of future reform measures.

5.3.1.2 NEW GENERATION

New generation projects would be selected to enable the desired  security  of  supply  at  generation  level  to  be  met at

least cost. The Government would seek new generation capacity through a mix of sources i.e. both public and  private.

The growth in capacity should generally be based on least   cost expansion path; a revolving master plan would be of critical importance. Gas network expansion in the western Bangladesh, of which the first important project has already been implemented by taking gas across the Jamuna  river  along the Bangabandhu Bridge, should be undertaken with urgency to replace liquid fuel in the existing power stations and add new gas based capacity.

5.3.2.    TRANSMISSION

Transmission system should be expanded in tandem with generation capacity expansion on one hand and growth of demand on the other. Efficient network development, expansion and management capable of accessing the most efficient supply of power and transport it to customers should be designed and implemented. Resources,  domestic and foreign have to be arranged for these purposes. The transmission network will be owned, operated, planned and developed by a corporatized entity in the public  sector.

5.3.3.    SINGLE BUYER

The broad features of the emerging structure of the industry have   also been generally agreed. To start with, a single buyer model may be adopted where the Buyer purchases all the required power from  the generators based on economic load dispatch  and  sells  to different distribution companies.

Functions  of Single Buyer

a)            Planning of least cost generation expansion.

b)            Arrange establishment of private power generating stations as per generation expansion plan.

c)             Purchasing electricity from generators (both public  and private) and selling to distributors under Power Purchase and Power Sales Agreements  respectively.

d)            Power system operation including economic dispatch of generation.

The Single Buyer shall be a public sector entity. Initially BPDB will act as a Single Buyer till a suitable alternative organization is  setup.

5.3.4.    DISTRIBUTION

Highest in the agenda is to improve the commercial and financial performances of the distribution entities to reduce system loss in particular. The ongoing measures need to be continuously reviewed, adjusted and modified to solve problems and achieve designated results. Management focus should start with the short-term measures that should be rolled over and integrated with the evolutionary process of the long run structure rather than start the  other  way round. Along the way, projects and programs should be put in place  to reduce technical loss, expand the scope for demand management and explore the possibilities of innovative solutions like remote reading, computer networking,  dividing  BPDB’s  national distribution system into a number of profit center based on commercial lines etc. These steps would ensure the viability of the industry, increase its attractiveness for investment and serve more customers with any given supply of  electricity.

In this context the specific measures being considered to strengthen the distribution segment are as follows:

a)            Introduction of consumer voice and organizational accountability in the form of citizen/client  charter.

b)            The existing distribution system of BPDB and DESA to be transformed into a number of new corporatized entities to be incorporated under the Companies Act,  1994.

c)             Private capital and management participation in distribution companies.

d)            The rural electric co-operatives (PBSs) under the overall assistance, co-ordination, advice, supervision and monitoring of REB to continue functioning and additional PBSs to be formed as and when required.

e)            Frontier application of technologies such as remote reading, monitoring and control including accessing intranet  network.

5.3.5.    COMMERCIAL RELATIONS

After introduction of vertical separation among generation, transmission and distribution, commercial relations will be established. Generators will sell all their energy to the Single Buyer who in turn will sell it to the  distributors.

1. EMPLOYEES ISSUES

6.1.        The Government recognizes that for successful implementation of the  reform and restructuring of the power sector,  the  concerns  of  the employees of the sector are required to be appropriately  addressed.

6.2.        The employees will be involved in constructive dialogue of the reform program and their views will be given due consideration during the restructuring process.

6.3.        The Government shall ensure that the interests of the employees are protected during reform process as follows:

a)            The terms and conditions of the service applicable to them after restructuring shall not be less favourable than or inferior in terms of remuneration and monetary benefits to those applicable to them immediately before the restructuring.

b)            The employees shall have continuity of service in all  respects.

c)             All benefits of service accrued before restructuring shall be fully recognised and taken into account for all purposes including the payment of any and all terminal benefits.

1. TARIFF

The Tariff setting will be guided by the following  parameters:

a)            The tariff progressively reflect the cost of supply of electricity at an  adequate and improving level of efficiency.

b)            The factors which would encourage efficiency, economical use of the resources, good performance and optimum  investment.

c)             The interests of the consumers are safeguarded and at the same time the consumers pay for the use of electricity in a reasonable  manner.

d)            The electricity generation, transmission, distribution and supply are conducted on commercial principles.

e)            National power system plan.

f)             Differential tariff related to time of the day shall continue to be applicable   to motivate reducing non-essential usage during peak hours and facilitate efficient demand side management.

1. REGULATION OF THE POWER SECTOR

Measures for establishment of an effective and accountable regulatory regime would continue to be identified and implemented. To this end,  legislation