Focusing alternative sources of financing for power Sector dev


Md Moallam Hossain

It is difficult to finance the required capacity either Government budget or even by the international development agencies and financing organizations. Power generation is a capital-intensive process and a major share of capital investment involves import of capital machineries. 

The required huge imports exert downward pressure on the balance of payments. Since Bangladesh graduated to the status of lower-middle-income country (LMIC), the facilities available on concessional aid for it will be shrinking. Now it has been placed as a 'Gap Country' under which it will get loans both concessional and hard terms. Despite all these, we have to proceed maintaining an effective growth of our economy.

Ministry of Power, Energy and Mineral Resources bears overall responsibility for the power sector in Bangladesh. Consumption of commercial energy per head in Bangladesh is one of the lowest in Asia. Currently per capita electricity generation is 510 Kwh. About 94% of total population receiving Electricity. Installed generation capacity 22,059 MW.  Actual daily generation 8,000-12,893MW, Daily demand +10,000MW. According to the PSMP 2016 the estimated demand for power would be 19,034 MW in 2021 and 41,890 MW in 2030. 

The country needs 1500-2000 MW additional power each year. Accordingly, the generation targets were set 24,000 MW by 2021, 40,000 MW by 2030 & 60,000 MW by 2041 to meet the future demand of electricity. Building of this particular infrastructure require, large amount of capital. About US$ 17 billion invested during 2009 to 2018 on improving power generation. US$ 150 billion investment will be required for new generation by 2041. 

US$ 31 billion would be required for transmission network and US$ 35 billion would be required for distribution network by 2041. Average US$ 9 billion would be required per year.

Key challenges for power sector in Bangladesh are around $56-70 billion investments required to cover future power sector growth till 2030, Current power mix dependent on expensive oil sources, Costly mix creates pressure on end-tariffs and leads to financial deficit in the system and public utilities suffer from low returns, which doesn’t allow to build -up equity for new investment.        

Below is the summary of all possible sources of finance for power sector in Bangladesh:

Choosing the Alternatives:

Commercial Banks facility is restricted by central banks regulations as well as cost is highest among all sources.  Public finance is the best source but resources are scare so best time to look for alternative.  Foreign Direct Investment is required but till date investment received is very limited and fund mismanagement is new concern for this source.

Development Partners provides loan at a concessional rate but they choose among alternatives and getting loan from development partners is time consuming and uncertain. Capital through public offerings but public offering is not feasible as less people will be attracted by lengthy and uncertain return.

Most important alternative for current perspective is Export Credit Agency (ECA) Facility. In this source bidder introduces possible lenders to project executing agencies and costs like development partners funds. So this source is the best alternative in current economic as well social prospects of Bangladesh. 

Challenges: 

As Bangladesh is currently enjoying the extended credit facility (ECF) of IMF so IMF put Cap in taking non-concessional credit from foreign markets. The strings attached to the extended credit facility (ECF) of the International Monetary Fund (IMF) have emerged as major hurdles to borrowing funds.

Debt Service Liability (DSL) obligation will create a huge pressure on balance of payment. Which may jeopardize the economic stability of this country. 

Terms and conditions of ECA credit facility is complex. Mostly tagged with LIBOR requires hedging arrangement.  Unless proper knowledge and effective negotiation capacity it may become burden for the country. 

Proper monitoring is required regarding investment of such funds otherwise one may take the opportunity of interest rate gap.  Irregular and insufficient fuel (gas/oil) may hamper electricity generation which in term will make it difficult to DSL payment    

Opportunities: 

Since Bangladesh commercial bank’s lending rate is much higher than other countries foreign banks/ECA look this market lucrative to invest.

Bangladesh's external borrowing is still below 2.0 per cent of the Gross Domestic Product (GDP) and the debt-servicing cost of the non-concessional borrowings is still below 10 per cent of the annual export earnings. The country can borrow more money at lower interest rate from Foreign Market.

In infrastructure development country needs huge investment and almost in foreign currency; hence ECA finance will obviously relief the BOP pressure. It will also help to increase foreign currency reserve level high. 

ECA facility in power sector will relief government and government may spend more money in other essential sectors (eg:  Health, Education, Communications etc.).

Lower cost sources of financing such as Government, MDBs and ECAs should be preferred for funding public utilities projects. Alternative sources of funding (e.g. international bank loans, corporate bonds) can also be considered, but higher costs of financing need to be justified. Equity should be ideally sourced from retained earnings. However, build-up of sufficient retained earnings is problematic if returns on assets are low and, as is the case for some of the generation of utilities, the company scale is too small relative to the size of the investment. Thus, equity can be sourced alternatively from Government (as the lowest cost source). Since the Government budget is limited, alternative sources such as   joint ventures or privatization of existing generation sources can be considered. Joint-venture projects bring the benefit of easier securing debt financing, since private partners are mostly responsible for securing debt funding. However, higher returns on equity are required. Privatization could be considered to raise fresh capital for investment.

Md Moallam Hossain, FCMA

Head of Accounts & Finance

Bangladesh China Power Company Limited

Payra 1320 MW Thermal Power Plant Project