Document of The World Bank

Public Disclosure Authorized

Document of

The World Bank FOR OFFICIAL USE ONLY

Public Disclosure Authorized

Public Disclosure Authorized

Public Disclosure Authorized

ReportNo. 10700

PROJECT COMPLETIONREPORT

BANGLADESH

ENERGY SECTOR ADJUSTMENTCREDIT (CREDIT 1999-BD)

JUNE 5, 1992

Industry and Energy OperationsDivision Country Department I Asia Region

and may be used by recipientsonly in the performanceof distribution hasa restricted This document their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCYEOUIVALENTS Currency Unit Tk 1.00 -

USS1.00

_

Taka (Tk) USS 0.0310 (as of January 1, 1989) USS 0.0279 (as of July 1, 1991) 32.27 (as of January 1, 1989) 35.79 (as of July 1, 1991)

WE7GLTS AND MHASURES kV kWh btu

-

-

Rilovolt (Thousand 'tults) Kilowatt hour (- 860.42 Kilocalortie) British Thermal Unit (- 0252 Kilooalories)

ABBREVIATIONS AND ACRONYMS ADB APPI B5 BESWG BCFCL BOSL BOCMC

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BPC BPDB BST DESA DCA ERL ESAP ESAC ESSPW ESU GDP GOB IPC ICTDC KfW LPG LRMC HiS EMHR OC ODA ORGC PBS

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PCR piP PSMP REB lOR SAP SEM SoCL SITC SLA SOe vks T& TGTDC UNDP USAID

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-

-

_ -

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,

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Asian Development Bank Action Plan for Performance Improvem.nv Bangladesh Bank Bangladesh Energy Sector Working Group Bangladesh Gas Fieids Company Limited Bakhrabad Gas Systems Limited Bangladesh Oil, Gas and Minerals Corporatiou (renamed Petrobangla in 1989) Bangladeh Petroleum Corporation Bangladesh Power Devclopment Board Bulk Supply Tariff Dhaka Electric Supply Authority Development Credit Agreement Eastern Refinery Limited Extended Structural Adjustment Facility Energy Sector Adjustment Credit Energy Sector ManagementAssistance Program Electric Supply Unit Gross Domestic Product Government of Bangladesh Import Program Credit Jalalabod Gas Transmissionand Distribution Company Kreditanstalt fur Wiederaufbau (3ermany) Liquefied Petroleum Gas (or bottled gas) Long-Run Marginal Cost Management InformationSystem Hinistry of Energy and Mineral Rzeourceo Operating Company Overseas DevelopmentAdministration (UK) Overseas Economic CooperationFund (Japan) Rural ElectrificationCooperative (Palli Bidyut Samity) Project Completion Report Priority InvestmentProgram Power Sysctm Master Plan Rural glectrificacionBoard Rate of Return Structural AdjustmentFacility Secondary Exchange Harket Sylbet Gas Fields Limited Standard InternationalTrade Classification SubsidiaryLoan ASreement Statement of Expenditure Staff Weeks Technical Assistance Titas Gas Transmisaion and Distribution Company United Nations Development Programme United States Agency for International Development

REFERENCE TO OTHER IDA CREDITS Credit go

Fitcal TYear

1091 1402 1586 1633 1648 1749

1981 1984 1985 1986 1986 1987

1816 1942 1999 2016 2129 2152 2263

1987 1988 1989 1989 1990 1990 1991

Proiect Nam Bekhrabad Gas Development Project (Bakhrabad Gas) Petroleum Exploration Promotion (Petroleum Exploration) Second Gas Development (Second Gas) Rural ElectrificationII (RE-I) Power Trarsmiseion& Distribution (Power Trans/Diet) Refinery Modification & LPG Recovery & Distribution (RefineryModification) Industrial Sector Credit (ISC) Industrial Energy Efficiency (Energy Efficiency) Energy Sector Adjustment Credit (ESAC) Pover Distribution (16 Towns) Rural ElectrificationIII (RE-Ill) Financial Sector AdjuscmentCredit (FSC) LPC Transport and Distribution (LPC)

FISCALYE July,

to June 30

THEWORLD BANK Washington,D.C.20433 U.S.A.

FOROFMCIALUSEONLY

Office of Difectoi.Central Operaitts Evaluation

June 5, 1992

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT:

Project CompletionReport on Bangladesh Energy Sector Adjustment Credit (Credit l999-BD)

Attached, for information,is a copy of a report entitled "Bangladesh Energy Sector Adjustment Credit (Credit 1999-BD)" prepared by the South Asia Regional Office with Part II of the report contributedby the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time.

Attachment

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

FOR OFFICIALUSE ONLY PRgl CT CMpLETToN REPOR;T BANGLADESH -NERGY SECTOR ADJUSTnENT CREDIT 1999-BD) (C.EDI

Table of Coriteals Preface Evaluation Sulary

PART 1: A.

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PaAe No. . l

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PROJECTREVIEWFROM THE BANK'S PERSPECTIVE . 0

s .

Country Context.

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. . . ... Backg.vound . . Recent Economic Develo)pments . BankGroup Strategy . . . . .

B. Energy Sector Adjustment Credit

1

3

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Origin and Objectives...

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Resultsof Key Actions under the ESAC

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5

7 . 9

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10 ..

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11. 12

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Performanceand Development . Institutional

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. BPDB's Performance. Petrobangla's Perfotmance..

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.. OverallEvaluation Experience Implementation

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20 22

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24

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24

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Audit . Use of CreditProceeds,Procurement,Disbursement, .

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C. Main LessonsLearned .... . . . . . . . . .

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13 16

19 19

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ESAC Objectives and Conditionality.. Performance of the Government and IDA......

Cofinancing Suppor: for the ESAC

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5 6 .

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Other Aspects of the Credit.

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4

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Long-term Least-cost Development Plans...

EnergyPricingand DemandManagement ... Electricity

. 4

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EnergyResourceDevelopmentand Investment . PriorityInvestmentProgram..

Natural Gas PetroluumProducts

1.

26

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.......

27

PART IiZ PROJECTREVIEWFROM THE BORROWER'SPERSPECTIVE

PARTI.l:

30

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..... . . . . . . . . . . . . . . . . . . Pover Subsector .32 . . Subsector Resources Natural

STATISTICALINFORMATION Table 1: Annex 1:

Basic Data Sheet . . . .. ESAC Conditions and Actions Taken .

Attachment: Cofinanciers' Comments..

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34 35

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55

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

PPOJECT COMPLETION REPORT BAUlGLAiESH

ENERGY SECTOR ADJUSTMENT CREDIT (CREDIT 1999-BD) PREFACE This is the Project CompletionReport (PCR) for the Energy Sector Adjustment Credit (ESAC) in Bangladesh, for which Credit 1999-BD in the amount of SDR 137.0 million was approved on April 11; 1989; this was supplementedby an amount of SDR 1.8 million, from Bangladesh'sallocation of the FY90 IDA Reflows, approved in October 1989. The Credit was fully disbursed and closed on July 3, 1990. In addition to indirect cofinancing support in the form of technical assistance provided by UNDP and various bilateral donors during ESAC preparation and implementation,KfW and OECF have respectivelydecided to provide, through parallel financing under terms and conditionssimilar to those for the ESAC, a grant of DM 26 million and a loan of Yen 3.8 billion to finance general imports. Neither agreement was signed prior to IDA's approval of the second (and final) tranche release. Due to the subsequentdeteriorationin the power subsector'sperformance, the release of funds under both agreementswas withheld pending Government action to address the subsector's problems and improvementsin the subsector's performance. The PCR was jointly prepared by the Industry and Energy Operations Division, Country Department 1, Asia Regional Office (Preface,Evaluation Summary, Parts I and III) and the Borrower (Part II). Cofinanciersprovided comments on the PCR (Attachment). Preparation of this PCR is based, inter alIa, on the President's Report (No. P-4549-BD) prepared for Credit approval, President'sMemorandum to the Board (No. IDA/R90-91)prepared at the time of tILesecond tranche release, reports, Development Credit Agreement, mission aide memoires, supervisi:.± correspondencebetween the Bank and the Borrower, and internal Bank memoranda.

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ii -

PROJECT COMPLETIONREPORT BANGLADESH ENtERGYSECTOR ADJUSTMENTCREDIT (CREDIT 1299-BD)

EVALUATIONS%HMARY Ob iectives i. The Governmentof Bangladesh(GOB)accordedhigh priorityto the energy sector'sdevelopmentin its Third Five Year Plan (FY86-90). Given its severe resourcelimitationsand persistentbalanceof paymentsconstraints,Bangladesh needs an efficientenergy sector to promoteeconomicgrowth, reduce foreign exchangeoutlayson energy importsand mobilizeresourcesfor sector entitiesand the Budget (para. 10). The primary objectivesof the Energy SectorAdjustment Credit (ESAC)were to assist GOB in the extensionand refinementof its energy policy and to strengthensector institutions.Effortswere focusedin three areas: (a) energy resourcedevelopmentand investment,(b) energy pricing and demand management,and (c) institutional performanceand development(para. 12). ImplementationExperience ii. Implementationof the ESAC was mixed--satisfactory progresswas made in investmentplanningand energy pricing,while progress in institutional strengtheningwas disappointing.During Credit preparationand negotiation, GOB's BangladeshEnergy Sector WorkingGroup (BESWG)performedquite well in taking an integratedapproachto developingand beginningto implementan energy sector reform program. IDA's large multi-sectoralESAC team worked closelywith the BESWG and other donors in preparingthe program. However,Board presentation of the ESAC was delayedmore than one and a half years becauseof GOB's difficultyin meeting the Board presentationconditions,particularlythose concerningthe energy sector entities'financialperformance. In this period, GOB's attentionshiftedto individualconditionsunder the Credit and the actions needed to bring GOB into compliance;this attitudetended to prevail throughout Credit implementation.IDA staff continuedto provide considerableassistanceto the sector entitiesin implementingthe reform program,throughESAC missionsand in conjunctionwith other power and petroleummissions. iii. Since the second tranchewas r2leasedin June 1990, GOB has generally followedthroughwith the investmentplanningand energy priuing reforms; progresson the institutionalfront, however,has not been sustained, particularlyin the case of the BangladeshPower DevelopmentBoard (BPDB),due in large part to a lack of governmentand implementingentity commitment. IDA has continuedto follow up actions initiatedunder the ESAC in the context of sector work and traditionalinvestmentprojects;new lendingfor power has been suspendedpending GOB's taking concreteactionsto addressBPDB's problems. Donor coordinationthroughoutthe processhas been excellent,beginningwith IDAchaired coordinationmeetingsduring the preappraisal/appraisal missions. (paras.49-51, 55-60) Results iv. The ESAC has assistedGOB in the extensionand refinementof its energy policy, thus helping tc facilitateGOB's overalladjustmenteffort and to establisha policy frameworkfor furtherlending for specificenergy investments (paras.52-53).

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4il

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InvestmentPlannina. Each year since FY88, GOB has prepared,reviewed v. and implementeda three-yearrollingp=iority investmentprogram (PIP) IDA with for t..ec.nergysector, togetherwith a financingplan; annual review of the PIP has become a regular featureof IDA's involvementin the sector. Long-term -cosC development plans *havsbeen prepared for the power and gas subsectors. lea& The iinal report of the feasibilitystudy for the Barapukuriacoal deposithas been completed;althoughthe report is stillui:derreview, it appearsthat de-elopmentof the deposit is unlikelyte be viable for the foreseeablefuture. (paras.14-23) Energv Pricing. Pricingpolicy reforms implementedunder the ESAC have vi. had a considerableimpact on the economicefficiency,resourcemobilizationand equity concernsraised during Creditpreparation. During 1987-90gas prices were increasedon averageby about 16Z p.a. In nominal terms, as against 9Z p.a. re now at/above domesticinflation. Gas prices for all consumergroups -. presentlyavailableestimatesof the economiccost of supply (includinga depletionpremium). Over the same period,the average tariff rate of BPDB has been increasedabout 91 p.a. on averageand that of the rural electrification cooperatives(PBSs) about _3Z p.a. Average revenuesfrom electricitysalesnow reflect 65-70C of the estimatedlong-runmarginalcost of supplyingpower. In addition,the programto reformpower tariff structuresagreed under the ESAC has been successfullyimplemented,particularlyin BPDB's case. Because of its excessivesystem losses,poor collectionsand high accountsreceivable,however, BPDB remainsunable to achievean adequaterate of raturn or to self-financea reasonableportion of its investmentprogram. A system of individualPerformance Agreementshas been developedfor monitoringthe performanceof operatingPBSs. GOB respondedpromptlyto the Gulf crisiswith a cumulativeincreasein petroleum product prices of about 85X betweenAugust and October 1990; GOB's presentplans are to ma4.ntainthe high prices for resourcemobilizationpurposes. (paras.24-32) reform and InstitutionalStrengthening.Under the ESAC, institutional vii. developmentprogramswere agreed for two of the main energy sector entities,with a view to enhancingtheir planning,management,operationalefficiencyand was financialviability. The primarythrust of the BPDB reorganization interface the strengthen to function of BPDB's distribution decentralization between BPDB and its consumersto better control system losses and accounts receivableand improvecollections. Thus far, actions to reorganizeBPDB havo but few been limitedmainly to the formalitiesnece,saryfor implementation, operationalchangeshave actuallybeen effected. For example,Dhaka Electric Supply Authoritycommencedoperationon October 1, 1991 (more than a year behind schedule)but many key actionspertainingto its full commercialoperation, includingGOB's sanctioningof its organizationalstructure,are still outstanding;and BPDB's financialperformance,althoughpreviouslyreportedas improving,continuesto be dismal (systemlosses 411 for FY91 and accounts receivable6.3 months' billingsin June 1991) (paras.34-41). In the case of the gas subsector,the structureof the BangladeshOil, Gas and MineralsCorporation has been changed,making it a h.ldingcompany;but furtheradjustmeatsare necessaryto operationalizethe change and achieve the objectiveof operational independenceand commercialoperationsfor its operatingcompanies. On the increasedthe gas companies'share of financialfront, GOB has significant'y self-financea reasonableportion of to thjm of some enabling revenues, sales ratios and accountsreceivable their investmentprograms;excessivedebt:Iequity well above 3 months continueto be problemsfor several of the companies (paras.42-48). Sustainability viii. The ESAC has helped to bring about a more coordinatedand integrated IDA staff, approachto the energy sector'sdevelopmentin Bangladesh--among

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iv

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between IDA and other donors and, to a lesser extent,within GOD. This alone of the ESAC's achievements. In most shouldhrlp to ensure the sustainability areas, follow-upactionshave been identifiedin the contextof ongoing and future sector work and lendingoperations(traditionalprojectsin the near term will and possiblysactor investmentcreditsin the longer term); follow-through be importantin maximizingthe benefitsof the ESAC. In the institutional atrengtheningarea, the ESAC has fallen faL short of its objectives. Progress will continueto se3low and resultsunsustainaoleunless the full commitmentof entititsto the proposedreformsis obtainedand the GOB and the implemtenting am?loyeeeare equally convincedof the benefita. generalpublic and corncerned Findingsand Lessons Learned isc.

learnedunder the ESAC (paraa.67-74) include: The main findings/lessons entity commitmentwas a constraint * InsufCicientgovernment/implementing component. on all asw cts of the ESAC's institutionalstrengthening Thorougheffortsare needed from the beginningto build and test commitmentat both the politicaland technicallevels,such that the entitiesown, understandand accept the proposes Government/implementing plans, can educatethe public and concerned reforms/implementation employeesaccordingly,and are willing to bring in the requisite technicalassistanceto operationalizethe reform objectives. _ Use of a lendinginstrumentwith a longer disbursementtimeframe(e.g.,a adjustmentoperation,sector investmentcredit or slow-disbursing combination)might have been better suited to the nature of reforms sought under the ESAC; allocationof at least a part of the Credit investmentsmight have led to greatersectoral proceedsto energy-related commitment. * Action plans are an importantmeans for effectinginstitutionalchange in

Bangladeshas well as other developingcountries. However,they require and attentionto detail in design and close monitoringof implementation, thereforetend to be highly staff-intensive. * Retaininga formalworking group (e.g., the BESWG) throughoutCredit implementationmight have helped GOB to maintainits momentum for the energy sector reform programand thus improvedthe effectivenessof implementation.IDA's having a task manager for the petroleumsubsector might have resultedin more effectiveimplementatinnof gas subsector reforms.

* GOB's and IDA's monitoringof the use of Credit proceeds,including procurementunder the ESAC, was inadequate;this has resultedin the identificationof severalmeasuresto be taken under ongoing/future adjustmentoperationsto ensure GOB's/IDA'scompliancewith Bank procedures(paras.61-64). Post-disbursement reviews should be a regular part of tranche releasemissions. * The ESAC has been successfulin helping to establisha policy framework as a basis for IDA's lendingfor specificenergy investments. Although this has not meant that investmentoperationsgo aheadwithout any it has meant they have a common starting policy-relatedconditionality, point, agreed with GOB, from which to build furtherconditionality. * The ESAC has been an effectivevehicle for enhancingdonor coordination in the energy sector.

PROIECT COMPLETION FROQ BANGLADESH ENERGY SECTOR ADJUSTMENT CREDIT (CREDIT l999-BD) PART I: PROJECT hEVIEW FROM THE BANKR'SPERSPECTIVE A. Country Context Background 1. Bangladesh is one of the poorest countries in the world, w:itha percapita income of about US$180. Its limited stock of natural resoure-^ large 780 population (estimatedat 113 million in 1990, with an average densitpersons per square kilometer), and a continued high population growth rate (2.4X p.a.) have contributed to widespread poverty. In addition, Bangladesh is prone to a range of natural disasters. In the past four years, the country has been ravaged by two major floods and two cyclones. 2. The Bangladesh economy is characterizedby a number of structural constraintswhich policymakershave tried to address over the past two decades: * The economy is heavily dependent on agriculture (mainly foodgrainsand

jute) for nearly half of GDP a>' three-quartersof employment. health and nutrition * Bangladesh'slabor force lacks the educatioa., necessary to make the transitionto faster industrialand export growth. * The economy is characterizedby a low rate of national savings and a

large

structural

* Other constraints prises,

external include

payments gap. poor infrastructure,

inefficient

public

enter-

and a weak public administrationand domestic financial system.

Recent Economic Developments 3. Despite these constraintson development,Bangladeshmade significant economic progress in the early to mid-1980s. The Government of Bangladesh (GOB) carried out a series of stabilizationprograms to correct macroeconomic

imbalances that emerged following the second oil shock. Although the programs were successful, gross investmentdeclinad substantiallyover this period, partly because public investmentprojects in most sectors were substantially underfunded and implementationwas adversely affected. At the same time, the insolvent, reflectinga rapid expansion financial sector became irncreasingly of private sector credit and very poor loan recovery performance. Finally, the performance of public enterprises deterioratedrapidly after FY82, due

program and limited autonomy given largely to a slowdown in the privatization to enterprises to adjust their output prices or control labor costs through limitingwage adjustments and reducing the staffing of lower skilled workers.

-2To address the;.eand other structuralproblems, GOB undertook a program 4. of structural reform that was supported by a three-yearStructural Adjustment Facility (SAF) covering the period FY87-89 as well as by IDA adjustment lending (in the industry and energy sectors). The structural reform program was successful in maintainingmacroeconomicbalances and increasing internationalreserves to an all-time high. However, real GDP growth during Fi87-89 averaged only 3X annuallywhile the share of investment in GDP fell further. This relatively slow e".oaomicgrowth was in part attributable to two floods and a cyclone which ravaged Bangladesh during FY88-89 and affected both the rice and jute crops. In addition, overly cautious fiscal management led to unnecessarilylarge cutbacks in public investment in both FY88 and FY89, exacerbatingthe depressive effects of the floods on the economy. On the positive side, GOB began implementingpolicies (particularly liberalizing minor irrigationequipment distribution)which benefitted agricultural production. 5. In FY90, aided by good weather, GDP grew by about 5.8%. Despite this recovery, clear signs of a potentially serious deteriorationin the macroeconomic situation emerged in early FY90. The fiscal and monetary situation weakened significantlyas GOB swung from an overly conservativeto a highly expansionary stance. The expansionarypressures, coincidingwith the economic recovery and an appreciationof the taka in real terms, also led to a surge in imports. Consequently,foreign exchange reserves fell sharply to the equivalent of only 1.5 months of imports. 6. Recognizing this deterioration,GOB initiated a short-termprogram in March 1990 to stabilize the economic situation by tightening fiscal and monetary policy and resuming the policy of flexible exchange rate management. The short-term stabilizationprogram paved the way for GOB to successfully negotiate an Extended SAF (ESAF) program in May 1990 with the IMF and a with IDA; the second Financial Sector Adjustment Credit (FSC/Cr.2152-BD) tranche of the Energy Sector Adjustment Credit (ESAC/Cr.1999-BD)was subsequently released in June 1990. In addition to its macroeconomicaspects, key elements of the structural reform program to stimulate economic growth were (a) public expenditurerationalization,including prioritizationof the public investmentprogram; (b) tax reform, including the introductionof a valueadded tax; (c) financial sector reform; and (d) trade liberalization. 7. A mid-term donor review of GOB's economic performance in November 1990 concluded that GOB had made substantialprogress in stabilizing the short-term macroeconomicsituation and had initiated a number of important sectoral reforms. Under the stabilizationprogram, the budget was strengthenedby revenue and expendituremeasures, and the deficit contained to the original target. Credit growth was curtailez-signif4 cantly, and quantitativecredit targets were achieved. Flexible exchange rate management allowed export competitivenessto recover to essentially the level prevailing in November 1988. The external current account deficit was contained and gross official reserves increased. Sound policy reforms were being pursued in agriculture, industry and the financial sector (supportedby various IDA projects/adjustment operations). Substantialprogress was made in preparing for the introduction of a value-added tax, and needed price adjustments in many of the public enterpriseswere implemented. A number of important issues, however, remained outstanding. While the FY91 budget was generally more realistic in terms of revenue and expenditureprospects and included several important provisions to contain public sector wage increases and restrain subsidies, GOB

-3was only beginning to come to grips with the difficult task of establishing clear expenditure priorities and formulatinga real'!tic and sound public investmentprogram. GOB also needed to intensify its efforts in the areas of privatization,public enterprise reforms, and local resource mobilization. 8. Early into the ESAF program, Bangladesh'seconomy was severely afiected by the Gulf crisis. In addition to a higher import bill for oil and petroleum products, Bangladesh lost substantialworker remittances from Iraq and Kuwait as well as export markets for jute and tea, and incurred costs in repatriating and rehabilitatingworkers returning from the Gulf. GOB's response to the Gulf crisis was prompt, in terms of both increasing domastic petroleum prices and taking measures to restrain current expenditures. It has also followed tight monetary policies in keeping with the original ESAF program targets and has taken discretionaryfiscal measures to meet the revenue shortfall while continuingwith its structural reforma. In April 1991, Bangladashwas struck by a massive cyclone which killed an v.Lficially estimated 139rOOO people and severely damaged the largest city, Chittagong. As a result o' additional cyclone-relatedrelief expendituresas well as some related revenue shortfalls, the targets for the first year ESAF program, which otherwise were basically on track, could not be fully achieved. Subsequently,a second year ESAF program was approved by the IMF in September 1991. Bank GrouR Strategv 9. Bangladesh's large structural imbalance between export earnings and import requirementsand its low level of domestic savings means that Bangladesh has needed, and will continue to need, a substantialamount of fastdisbursing program assistance. In view of this, IDA provided a series of annual Import Program Credi s (IPCs) between 1972 and 1986 in addition to its traditional project lending. In an effort to acceleratepolicy reform and bring the lending strategy into line with Bank-wide policies on adjustment, IDA revised its strategy for Bangladesh in 1986 and replaced the IPCs with a mix of sector and structuraladjustment operations. The sector operations were intended to provide a sectoral "umbrella"under which investmentprojects would proceed, with project conditionalitylimited mainly to implementation issues; the proceeds of the adjustmentoperationswere expected to be used primarily to finance general imports. While important progress has been made in introducinga first round of policy reforms in key areas under the first three adjustment operations for the industrial (FY87: Cr.1816-BD),energy (FY89: Cr.1999-BD) and financial (FY90: Cr.2152-BD) sectors, the pace of reform has turned out to be slower and more difficult than originally expected. For example, Board presentationof the ESAC was delayed more than one and a half years pending GOB's meeting the Board presentationconditions; this also led to delays in processing energy investmentprojects. For the future therefore, it is plann--.to place greater emphasis on policy reform where possible in the context wf traditionalproject operations and sector investment credits, and to use the fast-disbursingadjustmentoperations needed for balance-of-paymentssupport to promote better fiscal management (througha Public Resource Management Adjustment Credit addressing issues in public expendituremanagement, resource mobilizationand foreign aid utilization) aid continuingreforms in trade and investmentpolicy and in finance.

-4-

Binerfy

Sector Adiustment Credit

Origin and Obiectives 10. The energy sector has played, and continues to play, a key role in Bangladesh'sdevelopment. Given its severe resource limitations and persistent balance of payments constraints,the country needs an efficient energy sector -:opromote economic growth, reduce foreign exchange outlays on energy imports and mobilize resources for sector entities and GOB's budget. While GOB had focused its energy strategy in the Second Five Year Plan (FY8185) on acceleratingthe development of natural gae, its primary commercial energy resource, for use in power generation and fertilizerproduction, shortages of both foreign and local resources had impeded the achievement of Plan targets. Recognizing tnis, GOB had accorded high priority in the Third Five Year Plan (FY86-90)to the sector's development,its principal objectives (as reiterated in GOB's Letter of Sectoral Policy for the ESAC) being to: (a) accelerate the development of domestic natural gas resources to reduce the country's dependence on imported oil; (b) adjust energy prices to promote its efficient and economic use, taking into account social objectives; (c) meet energy demand at least cost to the economy; (d) improve reliability and quality of power supply, and reduce system losses; (e) improve energy aector entities' financial performance and mobilize resources required to meet Bangladesh'sdevelopment goals; and (f) encourage private sector participation in the energy sector's development,especially in exploration for oil and gas. At about the same time, IDA was in the process of revising its lending strategy for Bangladeshand offered to assist GOB, through a fast-disbursing sector adjustment operation, in formulating an integrated energy policy and strengtheningthe organizationalarrangementsrequired for its implementation. 11. GOB formed the BangladeshEnergy SecGtorWorking Group (BESWG) to work with a multi-sectoralIDA team in developinga policy framework for the ESAC and requested IDA to take the lead in coordinatinedonor participationin the sector. The preparation of the ESAC provided a usefvl forum for both GOB and the donors to take a more coordinated and integrated approach to the energy sector's development. A number of studies, carried out u-nderearlier projects and in the course of preparing the ESAC, provided the basis for defining the policy framework and actions to be taken under the ESAC; these included formal studies such as the UNDP-financedpower sector tariff study (1986) and ODAfinanced reorganizationstudies for the Bangladesh Oil, GeG and Minerals Corporation (BOGMC--renamedPetrobangl.a during 1989 reorganization)(1986-87) and for the Bangladesh Power Development Board (BPDB) (1987-88),and informal studies such as those on natural gas and petroleum products pricing (1986) carried out by IDA's consultants. During implementationof the ESAC, followup assistancewas also provided, for example, in implementingthe recommendationsof the BPDB reorganizationstudy (again ODA-financed),and further assistancewas provided for additionalstudies (e.g., UNDP-financed update of the power investmentprogram, ODA-financedfeasibility study of the Barapukuria coal mine and USAID-financedpricing impact study for rural consumers of electricity in Bangladesh). Even for the studies that it did not directly undertake itself, IDA played an importan' role in identifying issues requiring further examination,drafting terms of reference, supporting implementationand discussing results. Formal preparation of the ESAC began in May 1986; it was appraised in March 1987 and negotiated in July 1987.

-5 However* Board presentationwas delayed urtil April 1989 because of GOB's difficulty in meeting the Board presentationconditions,particularly those concerning the financial performance of the energy sector entities. 12. The ESAC's objectivQs, as defined in the Development Credit Agreement (DCA), were to assist GOB in the extension and refinementof its energy policy and to strengthen energy sector institutions. GOB's energy sector reform program was outlined in its Letter of Sectoral Policy. Three areas of issues were identified as the focus of these efforts--energyresource development and investment,energy pricing and demand manaaement, and institutional performanci and deveLopment. Reforms in these areas were also expected to help facilitateGOB's overall adjustment effort. The policy framework established under the ESAC was further intended to form the basis for IDA's lending for specific energy investments. Results of Key Actions under the ESAC 13. The main actions under the ESAC were taken in the course of preparing the adjustirant program (i.e., before Board presentation)and as conditions of second tranche release. The results are summarized,respectively,in the President'sRep"rt prepared for Credit approval and in the President's Memorandum to the Board prepared at the time of the second tranche release. Annex 1 in Part III of the present report also gives a summary assessment of the progress in implementingthe ESAC's specific conditions. The sections below give an overview of the actions/results/evaluation in each of the three main areas through June 1991. Satisfactoryprogress has been made under the ESAC in the areas of investmentplanning and energy pricing, although progress in the institutionalarea has been disappointing. Energy Resource Develonment and Investment 14. During preparation of the ESAC, it became evident that the development of energy resources over the years in Bangladeshhad progressed in a somewhat piecemeal fashion, dictated primarily by the availabilityof financial resources and aid-in-kind. Shortages of local resources,exacerbated by institutionalinefficienciesand energy prices below the levels required to finance an adequate share of sector entities' in-estmentprograms, resulted in frequent slippages in project implementation,cost overruns and changes in the content and scope of investmentprograms. Recognizing these difficulties,GOB had introducedthe concept of a core investmentprogram in FY83, but the selection criteria pertained more to the availabilityof funding than to whether the project was part of the least-costprogram and of high priority in the sector's overall development plan. A primary objective of the ESAC, therefore,was to promote the integratedand least-costdevelopment of the energy sector, through (a) preparation of long-term development plans, supported by (b) three-year rolling priority investmentprograms (PIPs). Annual review of the PIP, togetherwith its financing plan, has become a regular feature of IDA's involvementin the Bangladesh energy sector; in addition, it has provided a useful model which was followed in the broader economy-widecontext of prioritizingthe public investment program in FY91. Long-term developmentplans have also been developed for each of the subsectors. What is still lacking, however, is the development of a truly integrated approach to planning the sector's development,a role which may be most appropriatelytaken on by the Ministry of Energy and Mineral Resources

(MEMR);moreover, the entities themselvesneed to take a more responsible role in the planning process instead of leaving it to IDA and the other donors. 15. Priority InvestmentProgram. The development of three-year rolling priority investmentprograms under the ESAC were intended to complement the long-term development plans for the energy subsectorswhich, in turn, would provide the basis for the energy sector's integrated development. That is, the PIPs were to help focus Bangladesh'slimited financial resources and implementationcapabilitiesof the concerned energy sector entities on those projects of highest priority in meeting the energy sector's overall development objectives. The three-yeartimeframe of the PIPs, with annual .. eviews, was also expected to help GOB in planning the allocation of its scarce resources over the medium-term (insteadof the one-year horizon of the Annual Development Program) while recognizingthat the plans, particularly in the outer years, are subject to change. IDA staff worked closely with the various energy sector entities (includingBPDB, Rural ElectrificationBoard-REB, Petrobangla,BangladeshPetroleum Corporation--BPC,MEMR and Planning Commission) in preparing the first PIP for the energy sector (for FY88-90) and its financing plan; such assistancehas continued up to the present time. In fact, the most recent PIP for the energy sector (for FY91-93) was reviewed in the context of the economy-wideeffort to prioritize Bangladesh'spublic investmentprogram carried out as part of GOB's structural reform program agreed under the Nay 1990 ESAF (para. 6). 16. Over the period of the ESAC, the size of the energy sector PIP has decreased from Tk 43.2 billion for FY88-90 to Tk 39.5 billion for FY90-92, reflecting in part the country's macroeconomicsituation and budgetary constraints. GOB's submission of an economy-widepriority investmentprogram in January 1991, however, cut the sector's allocation even further to Tk 35.7 billion for FY91-93, as against an indicativefigure of Tk 48.4 billion estimated by IDA staff to be required to support adequate growth in energy supplies and the economy. Although GOB has now agreed to the sector's need for additionalresources, the details of the program are still being discussed with the concerned energy sector entities (primarilyBPDB and Petrobangla). As for year-to-year implementationof the energy sector PIP under the ESAC, actual expendituresamounted to 90% or more of the planned expenditures for the power and petroleum subsectors individuallyand collectively in FY88 and FY89. While the power subsector data for FY90 was not available at the time of writing the Project Completion Report (PCR), actual expendituresfor petroleum fell to 78Z of planned expendituresin FY90; if the northeastern gas fields and integrated transmissionsystem are to be developed in accord with the country's growing demand for natural gas, Petrobangla'sinvestment requirementsin the near-medium term will be substantiallyhigher than in recent years. 17. The overall implementationof this component of the ESAC can be considered to be quite successfuland well worth following up under future lending operations (both in energy and other sectors). It may be noted, however, that the entities themselvesneed to take a more responsible role in the planning process--i.e.,they need to own the PIP--rather than relying upon IDA and the other donors to establish the priorities. Moreover, MEMR could play a crucial coordinatingrole, both among the various energy sector entities and between the energy sector as a whole and the Planning Commission. Since annual review of the PIP is now a regular feature of IDA's involvement

- 7 in the B%ngladesh energy sector (para. 14), it should also be possible to make progress on these issues over time. 18. Long-term Least-costDevelopment Plans. With the power subsector accounting for nearly 702 of total energy investmentand about 17X of total public investment, integratedplanning of the subsector's investments to assist its efficient development could have a significant impact on GOB's ability to achieve its long-term energy objectives. Under UNDP And USAID funding, an interim least-costpower generation expansion plan i.adbeen prepared in 1986 in connectionwith the power sector tariff study (para. 25); however, it needed to be refined, updated and integratedwith a least-cost developmentplan for transmissionto ensure the efficient generation and evacuationof power. In early 1987, the Bangladesh Power Development Board appointed UNDP-financedconsultantsto develop such a plan in the context of preparing a feasibility study for a proposed central thermal power project. As agreed under the ESAC, the plan was completed and reviewed by IDA in early 1989. Since then, BPDB's system loss reduction consultants (para. 38) have completed a plan for the optimal expansion and reinforcementof the distribu-i.ion network. Within the next one-two years, ADB plans to grantfinance an updating of BPDB's 1985-2005 Power System Master Plan (PSMP) which would provide an opportunity to develop a fully integrated plan, including generation, transmissionand distribution,for the subsector. While BPDB has some in-house capabilitiesin transmissionand distributionplanning, they rely on consultants for their generationexpansion plans; further training of BPDB staff in these areas should be considered for inclusion in the PSMP updating. In an effort to improve the integration of power and gas subsector planning, GOB may consider formation of a coordinatinggroup with Petrobangla along the lines of the joint MEMR/BPDB/REBpower subsector engineering and planning group, set up during preparation of IDA's Rural ElectrificationIII Project (RE-III/Cr.2129-BD). 19. Natural gas is Bangladesh'sprimary indigenoussource of commercial energy, effectivelymaking the gas subsector,which accounts for nearly 30% of total energy investments,the backbone of the energy sector. Gas development in Bangladesh began in earnest after Independence;substitutionof natural gas for oil imports has been a primary objective of GOB's energy strategy since the Second Five-Year Plan (FY81-85). By the mid-1980s, a number of studies pertaining to the subsector's developmentwere underway or planned, including a Hydrocarbon Habitat Study, Gas-based Projects Feasibility Study and National Gas Grid Study. Following detailed seismic surveys, an appraisal drilling program was planned under IDA's Second Gas Development Project (Second Gas/Cr.1586-BD)for the country's major gas fields in the latter half of the 1980. to firm up reserve estimates. By the 1987 ESAC appraisal, it was clear that a long-term strategywas required to map out a least-costplan for the subsector's integrated development. Petrobangla subsequently agreed a set of priority activitieswhich are regularly reviewed during IDA petroleum missions; the rolling three-year PIP is drawn from these activities. Following completion of the appraisal drilling program in 1990 (including development drilling in the northeasterngas fields), the key elements of Petrobangla'spresent developmentprogram include: completion of the associated surface facilities for the northeasterngas fields and the northsouth pipeline linking the fields with Ashuganj in the early 1990.; constructionof the Ashuganj to Bakhrabad and Titas pipeline (thus completing the linkage of the northeastern fields with today's main producing fields to the south and with demand centers in the Brahmaputra Basin, Greater Dhaka area

- 8 wells in the and Chittagong), drilling of further appraisal/production northeasterngas fields and other known fields, and development of associated surface facilitiesby the mid-1990s; and initiation of exploration drilling for new gas fields in the latter-1990s. In June/July 1989, GOB carried out a promotion campaign (under IDA's Petroleum Exploration Promotion Project/Cr.1402-BD)aimed at attracting internationaloil companies to undertake petroleum exploration in Bangladesh; although the closing date for submissionof offers has passed (January 15, 1991) and the likelihood is that future discoverieswill be gas rather than oil, Petrobangla is still arrangementswith a few discussing possible exploration/exploitation interestedcompanies. 20. Three gas subsector issues requiring close attention in IDA's future energy sector dialogue include: (a) given the power subsector's dependence on the gas subsector for supplying its future power plants, closer integration of their developmentprograms togetherwith GOB's provision of adequate financial resources for gas as well as power are essential to ensure Petrobangla's infrastructureinvestmentsare technically consistent and able to keep pace with BPDB's generation expansion plans; (b) BPDB's poor financial performance and operational inefficienciesimpact the Petrobangla group of companies in so far as BPDB is a major gas consumer accounting for a significantportion of the gas companies' receivables (about 35%), and its high peak demand (which translates into a high peak for gas) has implicationsfor gas well production levels and investment requirements;and (c) gas subsector planning necessarily involves risks, particularlyon the supply side (e.g., more rapid production declines or lower reserves than anticipated),which means Petrobangla should have the capabilityand responsibilityto re-optimize eas network investments as the supply base and demand forecasts change. These issues will continue to be addressed under IDA's ongoing Gas Subsector Review as well as under its proposed Power Rehabilitation(FY92) and Gas InfrastructureDevelopment (FY93) Projects. 21. GOB's efforts to promote a high rate of penetration of gas throughout the economy have clearly been successful;gas consumptionhas tripled over the 1980s, with gas now accounting for about 60% of commercial energy supply. As a result, the share of imported crude oil and petroleum Products has fallen from about 20% of merchandise imports in the early 1980s to about 8% today. This may decline even further once the northeastern gas fields come into full production since they have substantialnatural gas liquids which can serve as the basis for expanded use of liquefied petroleum gas (LPG) as a substitute for imported kerosene and traditional fuels. IDA's recently approved LPG Transport and DistributionProject (LPG/Cr.2263-BD)will support development of the downstream facilitiesfor the LPG from these fields including facilitatingprivate sector involvement. With the substitutionof liquid fuels by natural gas limited by technical factors, Bangladesh's refinery (EasternRefinery Limited--ERL)will need to continue to process sizable imports of crude oil and petroleum products. Installationof secondary conversion facilitiesat ERL among other efficiency measures, supported under IDA's Refinery Modification and LPG Recovery and Distribution Project should help to enhance its flexibility to (RefineryModification/Cr.1749-BD), better match refinery output with changing demand patterns and to increase its cost efficiency. GOB will need to continue to monitor the ability of botiLERL and the existing petroleum products delivery network to adapt to changes in petroleum product demand.

- 9 22. With its primary indigenouscommercial energy resource (natural gas) limited to date to the east zone, the prospect of a potentially economic energy resource in the form of coal in the west zone warranted careful evaluation. During preparation of the ESAC, therefore,GOB formulated a phased program to evaluate,with the assistance of ODA-financedconsultants, the Barapukuria coal deposit discoveredby the Geological Survey of Bangladesh in the west zone and to determine its technical, economic and financial viability. The consultants completed the prefeasibilitystudy in October 1988 and the feasibility study in October 1990; the results were presented to GOB and the donors in November 1990. While large proven reserves of good quality coal have been confirmed,recovery is expected to be limited to only about 1OZ of the reserves and to be technically difficult and costly. Although the final report is still under review, it would appear that developing the coal deposit is unlikely to be viable for the foreseeable future. In addition to other coal and peat depositswhich bave yet to be explored/evaluated,GOB is also considering the possibility of methane gas (seamgas)recovery from coal deposits in the west zone. 23. With growing evidence in Bangladesh of dwindling biomass supplies, on which the majority of the population depends, and a resulting increase in the substitutionof commercial for traditional fuels, the need for an interfuel substitutionstudy focusing on the peri-urban areas and the rural poor was identified during preparation of the ESAC. Funding for the study was expected to be provided from bilateral sources under the World Bank/UNDP Energy Sector Management Assistance Program (ESHAP). While IDA prepared a draft terms of reference for the study and held preliminary discussionswith GOB in 1988-89, funding for the study failed to materialize. Hence, the study has not been undertaken to date. As part of the country-programmingexercise now underway for the reorganizedESMAP, a more focused study on the development of a leastcost fuels supply strategy is being considered for discussionwith GOB. It is also important that end-use efficienciesof traditional energy be improved; in this connection, IDA's LPG Project, in addition to providing LFG as a substitute fuel, includes a technical assistancecomponent directed toward improving conversionefficiency in cooking stoves. Energy Pricing and Demand Management 24. GOB's key energy pricing policy objectives include economic efficiency, resource mobilization (for the entities and the Bvdget) and equity. These objectives, however, have not been achieved in the past mainly because the level and structure of energy prices, particularly of natural gas and electricity,did not reflect their economic costs of supply. Moreover, distortions in the relative prices of competing fuels made prices inequitable. For example, when the ESAC was appraised in FY87, gas prices for certain consumer categorieswere significantlybelow their long-runmarginal costs, while significant cross-subsidizationbetween industrial and domestic consumers was built into the power tariff structure. Further, the price structures/levelsfailed to discourage consumption during peak periods. Finally, as a result of the low margins received on sales, the gas companies were unable to self-financea reasonable proportion of their investment programs and their overall fintncial viability was at risk. The pricing policy reforms implementedunder the ESAC, both during the Credit's preparation and as conditions of second tranche release, have made considerableprogress in addressingthese concerns. These will be followed up under proposed IDA investment lending operations. In the case of natural gas

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in particular, the gas subsector's rapid development in recent years (in terms, e.g., of estimated reserves, preser.ceof natural gas liquids and need for an integrated transmissionnetwork at least in the east zone) means that it is time to update the economic cost of supply and the level/structureof prices withia view to ensuring the key objectives are met; this will be done during preparation of IDA's proposed Gas InfrastructureDevelopment Project (FY93). While no direct action on energy conservationwas taken under the ESAC, inefficiencyin commercial energy use, particularly in industry, petroleum refining and power supply, is being addressed through various IDAfinanced projects, including Refinery Modification,Industrial Energy Efficieu.cy(Cr.1942-BD),Power Distribution (16 Towns) (Cr.2016-BD)and the proposed Power RehabilitationProject (FY92). 25. Electricity. During 1980-85 electricitytariff rates had been increased by 127%, representingaverage annual increases of about 18% in nominal terms and 5% in real terms. Despite these increases,however, the tariffs continued to fall short of GOB's energy pricing objectives. That is, the average tariff rate as of June 1986 was about 55% of the estimated economic cost of supply (i.e., long-runmarginal cost--LRMC);the prevailing tariff structurewas inconsistentwith that dictated by marginal cost pricing, hence rates for many consumer categorieswere below LRMC and there was significant crosssubsidizationbetween some consumer groups; consumers were given little incentive to avoid consumption during the system peak period; and revenue from electricity sales was lower thar.required to make the power subsector entities financiallyviable and enable t!temto self-financea reasonable proportion of their investmentprograms. The recommendationsof the UNDP-financedpower sector tariff study, carried out under IDA's Rural ElectrificationII (RE-II/ Cr.1633-BD) and Power Transmissionand Distribution (Power Trans/Dist/ Cr.1648-BD) Projects and completed in August 1986, addressed these shortcomingsthrough changes in the structure and level of tariffs. 26. During the ESAC negotiations,a phased program to reform electricity tariff structures based on the study's recommendationswas agreed, including (a) in the case of BPDB tariffs, reduction in the number of tariff categories, introductionof time-of-daytariffs and demand charges based on recorded maximum demand for 33-kV, 11-kV and large low voltage consumers, and reduction in the size of the subsidizedblocks for residential consumers; and (b) in the case of PBS (rural electrificationcooperative)tariffs, introduction of timeof-day tariffs for large consumers and replacement of the subsidized singlerate for residential consumers by a structure similar to that for BPDB's residential consumers. It was further agreed tnat annual adjustments in tariff levels would be made to ensure existing financial covenants were met (for BPDB, to achieve an adequate rate of return on its revalued assets, and for the PBSs, to cover their operating expenses and interest and an adequate proportion of their investmentprograms). 27. During 1987-90 BPDB's average tariff rate was increased about 41Z, or about 9% p.a., and that of the PBSs about 61%, or about 13% p.a., in nominal terms, as against domestic inflation of about 9% p.a. over the same period. Average revenues from electricity sales now reflect 65-70% of the estimated LRMC. In addition, the program to reform tariff structureshas been successfully implemented,particularlyin the case of BPDB. BPDB's tariff rates for supplies to industt.al, commercialand large residential consumers exceed LRMC; the number of units available to residential consumers at heavily subsidized rates has been reduced; and with the exception of the PBSs,

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incentives to reduce consumption during the system peak (e.g., time-of-day tariffs) have been introduced for BPDB's major non-residentialconsumers. 28. Despite BPDB's average tariff rate being among the highest in the Region, at about US$ 0.066/kWh, and initial indications that BPDB had been able to achieve a rate of return in line with its financial covenants during FY89-90 (Part III, Annex 1), it now appears that BPDB continues to be unable to meet its financial covenants. However, the reason is not the level of the tariff but rather the excessive system losses, poor collections and high accct'ntsreceivable discussed in paras. 38-41 below; until these issues are resolved, BPDB will be unable to achieve a reasonablerate of return or to self-financea reasonableproportion of its investmentprogram. In the case of the PBSs, for which the average tariff rate is US$ 0.082/kWh, a USAIDfinanced study completed in 1988 concluded that while the rural electrificationprogram as a whole should be financiallyviable, individual PBSs' financial performance could be expected to vary widely depending on consumer mix and density; this had indeed been observed with several PBSs being unable to meet their financial targets. In much the same way as each DBS sets its own tariff rates with the approval of the Rural Electrification Board, therefore, it was agreed under IDA's RE-III Project that REB would astablish a system of individualPerformanceAgreements for monitoring the performance of operating PBSs; the system has just completed its first year of operation. Further restructuringof electricitytariffs in the near term should focus on effecting improved load management and efficient use of the system. An updating of the 1986 tariff study may be considered once BPDB's financial crises are resolved and the Power System Master Plan (para. 18) has been updated. 29. Natural Gas. Under IDA's Second Gas Project, GOB accepted the principle of pricing natural gas based on the economic cost of supply including a depletion premium. By end-1986, however, despite annual increases since 1980 resulting in gas prices more than two and a half times their 1980 levels, the average gas price was only about 80% of the estimated economic cost of supply and prices paid by power, fertilizer, residentialand small industrial consumers, accounting for more than 80% of consumption,remained below their economic costs. Under the ESAC, GOB extended its agreement to increase gas prices to achieve, as a first step, equality with the economic cost of supply to each consumer group and, thereafter,to reduce the gap between the prices of gas and substitute fuels to mobilize resources for the Budget; a program of tariff adjustments to meet, as a minimum, the first of these objectives by the time of the second tranche release was also agreed. In line with this, during 1987-90 gas prices were increased on average by about 80Z, or about 162 p.a., as against 9% p.a. domestic inflation,bringing gas prices for all consumer groups to/above the economic cost of supply (based on presently available estimates of economic costs). 30. With the gas subsector'srapid developmentin recent years and changes in certain consumer groups' gas consumptionpatterns, there is now a need to update th3 economic cost of supply, including the depletion premium, and to consider further adjustments in the structure as well as the level of gas tariffs with a view to economic efficiency and equity. Enhanced resource mobilization for the gas companies and for the Budget also continue to be important objectives. As part of the ongoing preparations for IDA's proposed Gas InfractructureDevelopment Project, the economic cost of gas supply is being updated taking into account the revised gas supply base resulting from

- 12 the recently completed round of appraisal drilling under Second Gas, as well as Petrobangla'srecent and planned infrastructureinvestments. The need for further reforms in the level and structure of transfer and retail prices is also being asseseed, not only for dry gas, but also for natural gas liquids which are expected to significantlyaugment the capital requirements and sales revenues of Bangladesh'shydrocarbon subsector (reservoirstudies for the newly appraised wells indicatemuch higher condensate fractions than originally estimated). These gas pricing reforms may include: (a) introduction of explicit capacity as well as commodity charges for some consumer categories, among other measures to differentiateamong consumers in terms of the relative costs they impose on the system; (b) reallocationof revenues among the gas companies taking into account the cost of an integrated grid and the accompanyingseparation of the transmissionand distribution functions, among other adjustments in the gas price build-up to ensure the future financial viability of the individualgas companies; and (c) potential for augmentingthe subsector's contributionto Budget. 31. Petroleum Products. The weighted average domestic price of petroleum products in Bangladesh in December 1986 was about 1501 of the weighted average border price. In the early 1980s, tileBangladeshPetroleum Corporation (which is responsible for procurement of crude oil/petroleumproducts, distribution of petroleum products and setting of petroleum product retail prices in accord with GOB policies) had incurred financial losses when some of its prices were below border prices. Hence, when world oil prices fell in the mid-1980s, domestic prices were retained at relatively high levels to strengthenBPC's financial position and to mobilize resources for the Budget. In line with this policy, under the ESAC GOB agreed a pricing formula which would ensure that the weighted average domestic petroleum product prices, net of distribution, marketing and other handling costs, would always exceed border prices by at least 15x; it also agreed not to reduce the weighted average retail price of petroleum products below levels existing in FY87. 32. Except for a brief period in early 1990, GOB has followed these principles and, in fact, respondedvery promptly to the Gulf crisis in late 1990 with a cumulative increase in petroleum product prices of about 85% between August and October 1990 as well as with direct conservationmeasures. These adjustments have also brought the relative pricing structure of domestic prices closer to that of border prices. (The ESAC had not addressed this explicitly since a review of the impact of prices and other charges associated with petroleum products on petroleum product consumption patterns, choice of end-use technologiesand GOB's resourcemobilization efforts, carried out during the ESAC's preparation,had shown no evidence that the structure was causing significant distortions to resource allocation.) Al,thoughworld oil prices have now generally returned to pre-Gulf crisis levels, GOB's present plans are to maintain the high prices for purposes of resource mobilization. In line with the work being done on gas pricing during preparation of the Gas InfrastructureDevelopment Project (para. 30), GOB may consider broadening the base for resourcemobilization from the energy sector over the longer-termby further increases in gas prices. One further issue, which the ESAC did not address and which may require GOB's attention, is the impact of the high level of the customs/exciseduties on BPC's financial position and the adequacy of for BPC's marketing the GOB-regulatedmark-ups for distribution/handling companies and the private sector. With domestic consumption of LPG on the rise, GOB's application of sound pricing policies for LPG is being addressed under IDA's recently approved LPG Project.

- 13 InstitutionalPerformance and Development 33. While the achievements of the energy pricing and investment planning reforms outlined above are significant,Bangladesh'sability to optimize the use of its limited resources is also affected by the efficiencyand effectivenessof its sector entities. Four publicly-ownedentities, BPDB, REB, BOGMCI, BPC and their subsidiaries,are responsible for the production, .transportand delivery of commercialenergy in Bangladesh. Institutional weaknesses ir.the energy sector entities, especially in BPDB and BOGMC, have led to serious inefficienciesin the sector's operation and managsment in the past. For example, BPDB's technical and non-technicalpower system losses have been inordinatelyhigh and its collectionof billings seriously inadequate; as a result, BPDB has had to generate nearly two kWh of electricity for every one kWh on which it collects cash revenue. BOGMC's weak management, overlapping functions and uneven implementationperformance have also needed to be improved. Under the ESAC, an institutionalreform and developmentprogram was agreed with a view to enhancing the planning, management, operational efficiencyand financiulviability of BPDB and BOGMC; reduction of the main energy seccor entities' accounts receivablewas a further important aspect of the Credit. While diagnostic studies have been completed for both entities and the needed reforms/timetablefor implementationagreed, actual implementationhas been slower than expected and the impact on performance less than anticipated. In the case of BPDB, while the new Government has reconfirmed its commitment to the reform program, repeated delays in its implementationhave resulted in the suspension of disbursementsunder IDA's Power Distribution (16 Towns) Project, and further lending by IDA and other major donors has been suspended pending concrete actions by GOB to address the power sector's financial problems. 34. BPDB's Performance. Satisfactoryimplementationof the BPDB reorganization (or Action Plan for PerformanceImprovement--APPI)was one of the key elements of GOB's energy sector reform program under the ESAC. Although one of the largest public sector entities in Bangladesh, BPDB's performance had been consistentlyweak, as manifested by unreliable and poor quality electricity supply, very high system losses, low manpower productivity,inadequate financial and accountingmanagement, high accounts receivable, low self-financinglevels and ineffectualplanning. The major causes had been identifiedas GOB's interventionin BPDB's daily operations, unclear definition of the Chairman's and Board Members' responsibilities, excessive centralizationof responsibilityand particularly insufficient delegation of responsibilityto key staff in the distribution function, lack of an appropriate incentive system to reward good performance by management and staff, and powerful trade unions. While IDA and ADB had addressed some of these institutionalissues under previous lending operations and some progress had been made, much remained to be done, and during the preparation of the ESAC, GOB agreed to invite consultants (under ODA-financing)to carry out a diagnostic study to determine the priorities for restructuringBPDB. 35. The key recommendationof the 1987 study was that BPDB's distribution function should be decentralizedto strengthenthe interface between BPDB and its consumers to better control system losses and accounts receivable and 1 Renamed Petrobangla at the time of its reorganizationin 1989.

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improve collections;other recommendationspertained to organizationalchanges and restructuringwithin BPDB and to generally strengtheningits overall operation, particularlyin the areas of planning, finance, management information and personnel systems. These recommendationswere agreed in principle by GOB, BPDB and major donors in early 1988. In November 1988 Cabinet approved the recommendedreorganization,including the establishment of Dnaka Electric Supply Authority (DESA) as a separate entity to handle distributionin the Greater Dhaka area effective July 1, 1990. In January 1989 during negotiations for IDA's 16 Towns Project, a dated action program to implement the reorganizationwas agreed, including the appointment of ODAfinanced consultants to assist BPDB in the implementationphase. Satisfactory of the program was a covenant under the ESAC. imple&aentation 36. Implementationof the dated action program has been fraught with delays, beginning with a nine-monthdelay in the appointment of the implementation consultants. As a first step toward decentralizingthe distributionfunction, in June 1989 BPDB delegated administrative,financial and commercialpowers to its five zonal engineers to improve accountabilityand performance of each distributionzone. Over the next one and a half years, the BPDB ordinance was amended; DESA was established,its Chairman and Board Members appointed, and its office opened; and numerous working papers were completed pertaining to all aspects of DESA's separation/startof commercial operations and BPDB's reorganization. Necessary action by the BPDB and DESA Boards, APPI Steering Committee and GOB in reviewing the working papers and in taking decisions, however, was often slow in coming, and implementationbegan to fall behind schedule. Moreover, the actual start of DESA's commercial operation faced heavy resistanceby the BPDB unions which culminated in the closing of the DESA office in December 1990 during the overthrow of the previous Government. At the request of ODA, in late April 1991 the new Government reconfirmed its commitment to the principles of the reorganization,including setting up DESA, and took various actions to strengthenBPDB's management and execution of the APPI. Nevertheless,a further five months lapsed before GOB and BPDB were able to take the necessary actions to enable DESA to commence commercial operation (October 1, 1991). And even now, a number of key actions, including GOB's sanctioning of the DESA organizationalst:ucture and the transfer of assets/liabilitiesfrom BPDB to DESA, remain to be completed before DESA can be considered fully operational. Because of the repeated delays in DESA's start-up, ODA withdrew the 37. implementationconsultantsat end-July 1991 (when their work was originally scheduled to be completed),and IDA suspended disbursementsunder the 16 Towns Project in September 1991 (DESA's commercial operation by July 1, 1990 is a covenant in the DCA and Project Agreement;new lending for power by IDA and other major donors had already been suspended because of BPDB's financial problems (para. 41]). ODA has indicated that once DESA begins operation and ODA receives a request from GOB to resume the assistance, they will consider reinstating the implementationconsultants on an extended appointment to assist in completing the key aspects of the reorganization. The success of the reorganization,however, deFends upon the full commitment and involvement of GOB, BPDB and DESA in implementingthe changes. The major donors for power in Bangladesh have, from the beginning, considered the BPDB reorganizationto be essential to improving its performance;moreover, DESA's creation is seen as a first step, with a view to creating additional boards if DESA's performance is significantlybetter than that of the distributionregions remainingwithin BPDB. GOB's completing the key steps for DESA's commercial

_ 15 operation as detailed in an action plan agreed in August 1991 is a prerequisite for IDA's lifting the suspensionon the 16 Towns Project; continuing implementationof the overall reform program will be followed up during processing of IDA's proposed Power RehabilitationProject (FY92). 38. During preparation of the ESAC, BPDB's inordinatelyhigh gower system losses and accounts receivablewere highlighted as two aspects of its financial performancewarranting particular attention. BPDB's performance in these areas under the ESAC was partly responsible for the 2O-month lag between negotiations and Board presentationand the 6-month lag between second tranche review and release (BPDB's gross system losses for FY87 were 38Z and for FY88 422, while its accounts receivable remained above 5 months'billings for these two years). High system losses cause BPDB to lose substar&tial revenu-s, with the result that higher tariff increases are required to meet financial targets agreed with donors and BPDB remains heavily dependent on GOB to finance its investmentprogram. High accounts receivableweaken BPDB's cash position and its ability to keep current on its payables (e.g., fuel bills, customs duties and debt service). Neither issue was new to BPDB or to IDA at the time of the ESAC, and both had been addressed under IDA's Power Trans/Dist Project (system losses through a UNDP-financedconsultancy to assist BPDB in identifyingmeans to reduce both non-technicaland technical losses; accounts receivablethrough a dated covenant requiring BPDB to reduce its receivables to 3 months) as well as under earlier lending operationsby IDA and other donors. 39. The approach taken under the ESAC was to assist BPDB through agreeing emergency action programs designed to achieve intermediatetargets while developing longer-termaction plans directed toward more sustainable improvements in performance. In the case of system losses, the emergency program mainly addressed non-technicallosses and included establishmentof a loss monitoring unit in BPDB, more adequate staffing of commerial operations, incGntives to staff to control losses, appointment of magistrates/policeto apprehend consumers stealing electricity,replacing consumer-installedmeters, and calibrating/sealingmeters. The longer-term plan agreed in early 1990 addressed techuical as well as non-technicallosses and was based on the recommendationsof the UNDP-financedconsultants. In the case of accounts receivable, attention was directed toward clearing the accounts receivableof government departments,municipalitiesand autonomouscorporations,aging of accounts and writing off of old/inactiveaccounts, and improved billing. In April 1990 during negotiationsfor IDA's proposed Power Rehabilitation Project, in an effort to minimize BPBD's future accumulationof arrears, an action plan to improve revenue collection from both public and private consumers was agreed. Implementationof the longer-termplans are also closely linked to BPDB's ongoing ADB-financedprogram to computerize billing. 40. BPDB's performance in carrying out the action plans, while slow at first, appeared to be satisfactory. According to its statistics on commercial operations, BPDB also managed, after some delays as noted above and in Part III, Annex 1, to bring down its gross system losses to 28% and accounts receivable to 3.5 months' billings by the time of the second tranche release (June 1990, based on mid-FY90 data). However, after the tranche was released, the trends reversed, and both system losses and accounts receivablebegan to rise sharply. It now appears that the figures showing improved performance were incorrect. After the President'sMemorandum recommendingthe second tranche be released had been distributedto IDA's Board in late May 1990, informationwas receivedwhich indicated considerablediscrepanciesbetween

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BPDB's audited financial statementsand monthly commercial operations statistics for FY89 (e.g., sales reported in the audited accounts were 86% of those in the commercialstatistics and accounts receivablewere 1402). It was decided at the time not to withdraw the recommendationto release the tranche since deficiencieswere known to exist in the transfer of data from the field to operations and from there to finance, and the commercial statistics had been a consistent and apparently reliable basis for monitoring BPDB's performance in the past. IDA requested BPDB to reconcile the differences between the audited accounts and commercialstatisticsby September 1990. However, BPDB was unable to do so, and after discussionswith IDA in November 1990, it became clear that the data submittedwere not accurate. In March 1991 BPDB revised its statistics on commercialoperations for FY90. The result was 39% system losses for FY90 and accounts receivableof 4.1 months' billings at year-end; the figures for FY91 are worse, 412 and 6.3 months' respectively. 41. Given the overall deteriorationin BPDB's performance and apparent unreliabilityof its accountingdata, in October 1990 IDA and ADB jointly proposed a comprehensivetechnical assistance (TA) package to strengthen the financial management of BPDB and DESA over the next three-fouryears, including (a) appointment of qualified/experiencedfinancialmanagers; (b) consultancy to implement appropriate accounting, internal control and financial planning/budgetingsystems; (c) engagementof an internationally recognized audit firm; and (d) managerial developmenttraining. The proposed TA would complementthe ongoing effort to reorganizeBPDB by going beyond development of the basic levels of systems and practices to detailed implementationof improvementsin financial management and accounting, and should provide an integrated framework for carrying out the related action plans/computerizationactivities. Effecting sustainable improvementsin the power subsector's performance through such a TA program, however, will require a clear government commitment to BPDB and DESA management to give its full political backing to obtaining acceptable levels of accountabilityand discipline among their staff. In a letter to IDA in July 1991, the new Government outlined a number of legal and administrativeactions it had taken/plannedto take in the coming months, including establishingvarious task forces/fraudsquads, introducingperformance verification audits for high tension consumers and shifting employees among electric supply units. While these measures are a promising start, attention also needs to be directed toward eliminating fraud by BPDB employees as well as cinsumers, and effective corrupt employees and mechanisms put in place for prosecuting/punishing consumers (as well as incentive systems for rewarding employees'good performance). New lending for po.er by IDA and other major donors has been suspended pending GOB's/BPDB's/DESA'sinitiatingimplementationof the above and achieving quantitativeimprovementsin the power sector's performance on a sustained basis. 2. BOGMC's fraRmented organization,as 42. Petrobangla'sPerformance demonstratedby overlapping responsibilitiesamong the various operating companies (OCs), inadequatecentral planning and performance monitoring capabilities,and resultingweaknesses in operational efficiency, had been identifiedas a key institutionalissue during preparation of IDA's Second Gas Project. GOB had also recognized the need to streamlineBOGMC's organiza-

2 Renamed from BOGMC at the time of the 1989 reorganization.

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tional structure; and following a diagnostic study to identifymeasures for improving BOGMC's organizationaland managerial functions carried out by IDA (with the assistanceof an internationalmanagement consultant) during the appraisal of Second Gas, GOB had agreed to implement a reorganizationplan satisfactoryto IDA by July 1, 1986. In the interim, GOB requested ODA to grant finance a follow-up study to prepare a more detaile, implementationplan cove?ing the restructuringof the companies as well as the establishmernt of accounting,management information (MIS) and other monitoring systems, including training. Following delays in appointing/mobilizingthe consultants, the interim report was completed in January 1987 and the final report in June 1987; the reform program, agreed in principle during the ESAC appraisal,wa.,to be carried out in two sequentialphases, namely the "CompaniesPlan" and the more complex "Systems Plan", with additional support from ODA. The overall structure and dated implementationplan for the BOGMC re*rganizationwere agreed durtng the ESAC negotiations. 43. The primary objective of the reorganizationwas to divest BOGMC of all operational activities and to reorganize them, togetherwith those of the existing OCs, under a new set of operationallyindependentOCs organized along functional (rather than geographic) lines. BOGMC would then operate as a holding company, holding equity in the OCs on GOB's behalf and being responsible for investmentplanning and monitoring as well as sector policy formulation. Following further delays (due in part to GOB's need to seek Cabinet approval of the reorganizationproposalwhich was not anticipated at the time of negotiations),the basic elements of the reorganization(i.e., the Companies Plan) were implementedby July 1989 and BOGMC was renamed Petrobangla. However, implementationof the Systems Plan, including carrying out complex inter-companytransfers associatedwith the OCs' restructuringand accounting/MISsystem reforms, has fallen far behind schedule, largely because of GOB's unwillingnessto accept the extent of technical assistanceproposed by ODA based on the June 1987 report's recommendations. It may also be noted that IDA staff gave insufficientattention to this matter under the ESAC-i.e., while the specifics of the Companies Plan were detailed in the Minutes of Negotiations,only the start date of the TA for the Systems Plan was included in the dated implementationplan, and in the twenty months between negotiations and Board presentation,this was changed to a review by December 31, 1989 (i.e., once the OCs were operational)of the OCs' accounting systems with a view to determiningtheir need for further assistance in streamlining the systems; unfortunately,the assessmentof the situationmade at the time of the ESAC second tranche review mission was quite cursory and subsequently proved to be rather optimistic. 44. The result is that although Petrobanglahas been legally restructared and the correspondinginter-companytransfers made, important elements of the reorganizationhave yet to be completed for it to meet its objectives. The Petrobangla group of companies is having to cope with accounting/HISsystems which need updating and computerizationto meet the requirementdof the new structure; the staff also need to be trained in the new systems. As part of the preparation of IDA's proposed Gas InfrastructureDevelopment Project (FY93), the 1987 Systems Plan is being updated and grant financing sought; ensuring satisfactoryimplementationof the revamped Plan will be an important objective of the Project. In Jutne1991 (some two years behind schedule),GOB released its equity holdings in Petrobangla'sOCs; Petrobangla is now in the process of registering the shares with the Registrar of Companies and substitutingGOB representationon the OCs' Boards. These steps are essential

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if Petrobangla is to operate as a proper holding company and the OCs are to operate on a commercial basis independentof direct government involvement. In addition, with the development of the overall gas system in the east zone now well underway, Petrobangla im actively proceedingwith the formation of a National Gas TransmissionCompany. Further restructuringissues, such as the fov-mationof a single national gas production company, are being considered in the context of IDA's ongoing Gas Subsector Review. 45. During preparation of IDA's Second Gas Project, it had been recognlied that the financialviability of the gas operatine companies would depend on three main factors--themargins on gas sales allowed to the companies by GOB, the level of their long-term indebtednc s, and their ability to collect receivables. It had accordingly been agreed during Credit negotiations that: (a) the margins on gas sales would be such as to enable the gas companies to cover their current expenditure,debt service and working capital requirements, and finance a reasonableproportion of their future investmentprogram; (b) the debt/equity ratios of the gas production and transmission/distribution companieswould not exceed 60/40 and 70/30, respectively;and (c) the gas companieswould maintain their accounts receivable at not more than three months of gas sales. With the reorganizationimminent, the covenants were to apply to the reorganized gas companies; as noted above, however, the reorganizationhad not yet taken place at the time of preparing the ESAC. Preliminary estimates for FY87 indicated that the gas companies (on a consolidatedbasis) would make a financial loss and have a small negative rate of return on total capital employed; moreover, when the companies had been able to generate profits in the past, they had typically been captured by GOB in the form of dividends. Thus, GOB was still taking out of the gas companies more than 75% of the gas sales revenue in the form of excise duties, taxes and dividends, leaving them few reso_rceswith which to carry out their operations let alone self-financea portion of their investmentprograms. Their overall receivables situationwas also poor (over 5 months of sales), thus weakening their cash position. In an effort to ensure increasedmargins for the gas companies, assist their financial viability and improve financial discipline in the subsector, it was therefore decided to strengthenthe existing revenue covenant under the ESAC by fixing specific annual contributionsto investment for the gas companies (beginningwith a minimum of 10% in the first year of operation of the newly organized companies, increasing to 40% by the fourth year) and by not allowing the companies to declare dividends until the targets had been met. The impact on GOB's overall budgetary resources of allowing the gas companies to retain a greater portion of their revenues would be neutral because GOB's contributionto the gas companies' investment could be reduced by a like amount. 46. Over the period of the ESAC, GOB has significantlyincreased the share of the revenues which the gas companies are allowed to retain, from a historical level of 10% of the additionalrevenuer generated by the annual gas price increases, to ':O%in FY88 and FY89, 40% in FY90, and 1OOZ in FY91. As a result, in FY91 the gas companieswill be left with about 37% of the revenue from gas sales. Nevertheless,the accounts for FY90 (the first year of operation of the new companies)and forecasts for FY91 show that only three of the five gas companieswere able to comply with the self-financingtargets (10% for FY90 and 20Z for FY91). (None of the companies declared dividends in FY90.) As noted in para. 30, one of the issues being addressed during preparation of the proposed Gas InfrastructureDevelopment Project is the level and structure of future gas prices given the rapid development of the

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gas subsector and gas consumption in recent years; this analysiswill also consider the adequacy of margins for individualgas companies, taking into account their different cost structures. This will be of particular importance once the ongoing gas field developmentand pipeline work under the Second Gas Project have been completed and transferred to the concerned companies (these are presently under the Project ImplementationUnit in Petrobangla). 47. Excessive debt/equity ratios and hence high debt servicing requirements have also precluded the gas companies from meeting their self-financing targets; on y two of the gas companiesmet the debt/equity covenant under IDA's SeconuiGas Project in FY90 and FY91l In conjunctionwith IDA's recent approval of the extension of the closing date of Cr.1586-BD for Second Gas, GOB has agreed in principle to convert a portion of the long-term debt to 3. equity for the most critically affected gas companies (BGFCL, BGSL, TGTDC) This will be followed up, togetherwith GOB's funding policies for the gas companies and other capitalizationissues (includingrevaluationof assets), during preparation of the Gas InfrastructureDevelopmentProject. 48. As for the gas companies'accounts receivable,GOB has complied with the letter but not the spirit of the covenant under the Second Gas Project (repeatedunder the ESAC). That is, as noted in Part III, Annex 1, although the accounts receivable of the gas companieswere brought into line with the covenanted three months of gas sales through crash collections programs at key points in the Credit processing cycle (e.g., Board presentation and tranche release), the levels have not been sustained. Information as of end-March 1991 indicates that only two of the companies (BGSL and BGFCL) are in compliance,the accounts receivable of the other companies being in the range of 3.7-5.0 months' sales. With some 70% of the receivables due from government agencies (includingpublic sector corporations),GOB agreed with IDA in early June 1991 an action program designed to bring the gas companies into complianceby end-July 1991; informationreceived to date indicates that GOB is implementingthe action program albeit somewhat more slowly than planned. Longer term measures to ensure sustained compliancewill be discussed during preparation of the Gas InfrastructureDevelopment Project. Overall Evaluation ImplementationExDerience 49. Formal preparat4.on of the ESAC began in May 1986; it was appraised in March 1987 and negotiated in July 1987. However, Board presentationwas delayed until April 1989 because of GOB's difficulty in meeting the Board presentationconditions, particularlythose concerning the energy sector entities' financial performance; in the interim, it was also discovered that GOB had not been implementingthe subsidiaryloan agreements' (SLAs') onlending terms and conditionsfor commercialentities under ongoing IDA credits, ADB loans and grants/loansfrom various bilateral donors. The SLA issue was satisfactorilyresolved for IDA credits before Board presentation, and the Credit was declared effective in June 1989. 3 Respectively,Bangladesh Gas Fields Company Limited, Bakhrabad Gas Systems Limited, Titas Gas Transmission anadDistributionCompany.

- 20 50. The second (and final) tranche review mission took place in December 1989 as planned. Although progress in implementingseveral important areas of GOB's energy sector reform program (e.g., electricity tariffs, power system losses and Petrobangla reorganization)appeared to be satisfactory, performance fell short of agreed targets in other areas, including agreement on the FY90-92 PIP for energy, natural gas and petroleum product price adjustments,BPDB reorganizationand energy sector entities' accounts receivable. In addition, the country's de;erioratingmacroeconomicmanagement had become a matter of concern. By mid-April 1990, GOB had made substantial progresA in complying with the outstanding tranche release conditions; and in early May, agreement was reached among GOB, IMF and IDA on the Policy Framework Paper for FY91-93. In addition, GOB agreed to increase gas prices (.ncludingprices to fertilizermanufacturers)in July 1990 as part of its FY91 Budget package and to allow the gas companies to retain the full amount of the increase. Accordingly,given Bangladesh'scritical foreign exchange situation, IDA's Board waived a conditionwhich required the gas price increase be actually implementedbefore second tranche release, and approved the tranche release in June. The tranche was fully disbursed and the Credit closed on July 3, 1990. 51. GOB subsequentlyfollowed through with the explicit actions agreed as part of the second tranche release, including the gas price increase on July 1, 1990; at the same time, it increased electricity tariffs and acted promptly in adjusting petroleum product prices in response to the Gulf crisis. Annual review of the three-year rolling PIP has become a regular feature of IDA's involvement in the Bangladesh energy sector; in addition, the formulation of a priority investmentpzogram for energy has provided a useful model followed in GOB's recent effort to develop a prioritized countrywide public investment program for FY91-93. Progress on the institutionalfront, however, has not been sustained,particularly in the case of BPDB--implementationof the BPDB reorganizationhas encountered significantdelays because of a lack of government and implementingentity commitment,and BPDB's financial situation has deterioratedto crisis levels (in fact, it now appears that the data showing improvementsunder the ESAC were incorrect). Implementationof the Petrobangla reorganizationhas also encountered difficulties. ESAC Obiectives and Conditionality 52. The ESAC has assisted GOB in the extension and refinement of its energy policy as outlined in its Letter of Sectoral Policy and in implementingthis policy. As noted above, however, actions pertaining to investmentplanning and pricing policy have been more effective than those directed toward institutionalstrengthening. The differencemay in part be the degree of government commitmentrequired and the relative ease with which the actions can be monitored by IDA. While price increases are nearly always politically difficult and the populace is likely to protest to some extent, the changes required under the ESAC were not too extreme, GOB is accustomed to dealing with price adjustments,and they are relativelyeasy for IDA and IMF to monitor. As for the investmentplanning actions, these were mostly of a technical assistancenature; even so, the entities themselves need to take a more responsible role in the planning process instead of leaving it to IDA and other donors. On the institutionalfront, progress has been very slow-institutionalchanges in an entity such as BPDB, where the management is weak, the unions strong and the changes to be effected substantial,require considerable commitmentby GOB and BPDB management if they are to move beyond

- 21 deciding to effect the reorganizationon paper to actually implementingthe changes. The commitment to reorganizeBPDB and improve its financial performancewas not there; given the 20-month lapse between ESAC negotiations and Board presentation,IDA staff should have recognized this and pressed GOB harder on this point. GOB is also only now following through its commitment to reduce direct government involvementin Petrobangla'sOCs; IDA staff should have monitored this more closely. 53. The ESAC has been successful in helping to establish a policy framework as a basis for IDA lending for specific energy investments. Although this has not meant that investmentoperationsgo ahead without any policy-related conditionality(in fact, delays in presenting the ESAC to IDA's Board delayed the processing of the 16 Towns Project and was partly responsible for IDA's proposed Petroleum Technical DevelopmentProject ultimately being dropped), it has meant they have a common starting point, agreed with GOB, from which to build further conditionality. Thus, the ESAC has helped to bring about a more coordinated and integratedapproach to the sector's development--amongIDA staff, between IDA and other donors, and to a lesser extent, within GOB. As for facilitatingGOB's overall adjustmenteffort, adjustments in energy prices and actions to improve cost recovery and financial performance of sector entities under the ESAC have supported GOB's domestic resource mobilization efforts; and substitutionof indigenousnatural gas for imported oil, pricing policies to discourage uneconomic consumptionand energy imports, and formulationof a least-cost investmentprogram have supported GOB's efforts to strengthen its balance of payments. 54. The main actions under the ESAC were taken in the course of preparing the adjustment program (i.e., before Board presentation)and as conditions of second tranche release. Annex 1 in Part III gives a summary assessment of the progress in implementingthe ESAC's specific conditions. There were fifteen conditions of negotiations/Boardpresentation/Crediteffectiveness (3/11/1, respectively),eleven conditions of second tranche release and nine dated covenants/otherconditions. Board presentationwas held up for some twenty months pending GOB's meeting the Board presentationconditions, the main constraints being the energy sector entities' financial situation and progress in the BPDB and Petrobangla reorganizations. As for the second tranche release, data submitted by GOB within four months of the tranche review mission showed it to be in compliance or substantiallyin compliancewith nine of the tranche release conditionsand eight of the dated covenants/other conditions (and in partial compliancewith the two remaining tranche release conditions and not in compliancewith the remaining dated covenant). However, it now appears that BPDB was, in fact, not in compliancewith three of the tranche release conditions (rate of return, system losses, accounts receivable),and is still not in compliancewith these and is in partial compliancewith the covenant on the BPDB reorganization. Moreover, recent data provided by Petrobangla'sgas companies indicate sustainabilityof compliance is a problem for the gas companies'accounts receivable; achievement of the gas companies' self-financingtargets and implementationof the Petrobangla reorganizationhave also not been fully satisfactory. Given the present state of knowledge, it appears that the second tranche should not have been released.

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Performance of the Governmentand IDA The Government'sPerformanceunder the ESAC has been mixed. During 55. Credit preparation and negotiation,there was a sense of interest and cooperation. The BangladeshEnergy Sector Working Group performed quite well in taking an integratedapproach to developing and beginning to implement an energy sector reform program. During the twenty months between negotiations and Board presentation,however, attention shifted to individualconditions under the Credit and the actions needed to bring GOB into compliancewith them. While discussionswith GOB were often protracted, there still seemed to be a conscious effort to carry through with the operation with a view to improving the energy sector's performance. The second tranche review mission came just six months after Credit effectiveness(eight months after Board) and found GOB in compliancewith only about half of the tranche release conditions. Over the next four months, GOB made a considerableeffort to bring itself into compliance,the country's pressing need for balance-ofpayments support being a driving force. In retrospect, it appears that this was che primary motivation, and that at least on the institutionalside, the previous Government lacked the requisite commitment to effect the institutionalchanges and financial improvementswhich had been agreed for BPDB and the Petrobangla group of companies. Moreover, GOB was careless in verif-ing the reliability of the data provided by the implementingagencies, at least in the case of BPDB, and therefore transmitted erroneous data to IDA in support of the tranche release conditions. Loss of momentum in the lapsed period between negotiationsand Board presentation,as well as relatively frequent changes in senior governmentappointmentsover the life of the ESAC, may also have contributed to the poor performance on the institutionalfront. 56. While the new Government seems to recognize the seriousnessof these issues and the need for change, it has asked for time for the political situation to settle and is only now beginning to initiate some of the necessary actions. In the meantime, disbursementsunder IDA's 16 Towns Project and new lending by IDA and other major donors for the power subsector have been suspended, and the extension of the Credit closing date for IDA's Second Gas Project was made contingenton GOB's taking certain key actions with regard to the gas subsector. GOB should also be encouraged to take a more integratedapproach to investmentplanning for gas and power, perhaps through formation of an engineering/planninggroup involving MEMR, Petrobangla and BPDB. The shortcomingsin GOB's monitoring of the use of Credit proceeds, including procurement under the Credit and timely preparation of satisfactory audit reports, are discussed in paras. 61-62 and 64 below. 57. As for IDA's performanceunder the ESAC, a large multi-sectoralteam was and considerable assembled for the Credit's preparation/appraisal/negotiation, reform program. sector energy the *reparing time was spent with GOB (BESWG) in the results of as well as policy energy This included reviewing GOB's existing identifying projects; numerous studies/actionscarried out under earlier issues requiring further examinationduring ESAC preparation and implementation;carrying out such work or assisting in the drafting of terms support/discussionof results for technical of reference/implementation assistance financedby other donors; and drawing up an energy sector policy agenda which identifiedthe main issues facing its developmentand outlined the actions to be taken togetherwith a timetable for implementation. IDA staff also worked closely with the various energy sector entities in preparing a priority investmentprogram and financing plan for the sector for FY88-90,

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and in drawing up action plans to reduce system losses and accounts receivable and implement the BPDB and Petrobangle reorganizations. IDA staff continued to provide this type of assistance throughout the twenty months between negotiations and Board presentationand at the time of the second tranche review mission, and are continuing to provide it up to the present. Throughout the process, there was close coordinationwith the main donors for energy in Bangladesh. Two formal coodinationmeetings were held in Dhaka, one during the preappraisaland the second during the appraisal of the ESAC; meetings were also held with individual donors/smallgroups of donors as necessary. The result is much closer coordinationamong the donors in the energy sector today. 58. In the twenty months between negotiations and Board presentation, discussionswith GOB were generally carried out in conjunctionwith other power and petroleum missions (one "post-negotiations"mission was carried out in July 1988). In addition to IDA's somewhat losing its integrated approach to the ESAC during this period, there was an increased tendency to give more attention to the power issues, attributablein part to the perception that the power subsector's performancewas considerablyworse than that of the petroleum subsector and to the change in staffing for the petroleum subsector during the Bank's 1987 reorganization(the task manager and power staff remained the same). This tendency persisted to some extent through the second tranche review mission and may have indirectly contributed,for example, to GOB's failure to follow through on its commitmentsunder the Petrobangla reorganization. Having a deputy task manager responsible for the petroleum subsector might have been helpful. Alternatively,it might have been desirable to have split the Credit into two operations, one for power and one for petroleum (this may also have made it more manageable from GOB's perspective);however, the advantage of the integratedapproach would then have been lost. 59. While there were a large number of conditionsunder the ESAC end the Credit was quite heavily front-end loaded, considerableassistancewas provided to GOB during the preparatory stages including extensive use of action plans to guide GOB in meeting the targets. This appeared to make the conditionalityreasonablymanageable in the early stages of the Credit. Nevertheless,based on the ESAC's somewhat disappointingfinal results, particularlywith respect to BPDB's performance, it may be concluded that it would have been more effective to take a more focussed approach, concentrating for example on BPDB's system losses as a first step. Without GOB's and BPDB's commitment to address the issue, however, this would not have been any more effective. It may also be noted that during supervision,the energy sector entities themselves expressed frustration (even resentment) that the Credit proceeds were for general imports rather than targeted for the energy sector (this had been decided by GOB early in the Credit's processing);this too may have affected the entities' commitment to fulfill the ESAC conditions. While it is planned to follow up the policy reforms initiated under the ESAC in the context of traditional project operations (e.g., the recently approved LPG Project and the proposed Power Rehabilitation (FY921 and Gas Infrastructure Development (FY93] Projects), sector investmentcredits are also under considerationfor the longer term (e.g., proposed Power Sector Investment and Petroleum Sector Development Projects (FY94-95]).

- 24 4 for the ESAC through Board presentationwere 233 60. Total staff inputs staffweeks (swks), including 43 swks for negotiations/post-negotiations (detailsare in Part III, Table 1); this compares with an average of 120 swks/project (averagedacross all types of lending operations) for Bangladesh over the last three years. The 190 swks required for preparation/appraisalof the ESAC can be attributedto the large multi-sectoralteam needed to prepare the project (the first of its kind in the sector) and the extensive assistance IDA provided to GOB during the preparatory stages. The 43 swks for negotiations/post-negotiations is due to the 20-month lapse between negotiations and Board presentation,and the need for IDA staff to continuouslymonitor GOB's progress in meeting the Board presentationconditions and to assist GOB in its efforts to do so, as well as to do a certain amount of re-negotiationof the conditionalityunder the Credit during this period. As for supervision,staff inputs over the life of the Credit were 32 swks, of which 27 swks were in FY90; this compareswith a yearly supervision coefficientof about 10 swks/projectfor Bangladesh over the last three years. Only one supervision mission was carried out in FY90 for the ESAC, the purpose being to review GOB's progress in carrying out its energy sector reform program prior to the second tranche release. The relativelyhigh supervisiontime can be attributedto the multi-sectoralnature of the mission and the large number of conditions/complexissues associatedwith the second tranche release. In fact, the supervisionstaffweeks are probably understated in that ESAC conditionaliiywas frequently supervisedinformallywith other projects, both ongoing and under preparation, in the sector. A notable shortcoming of IDA's supervisionwas in the monitoring of the use of Credit proceeds including procurement (paras. 61-62); at the minimum, a post-disbursementreview of purchases under the first tranche should have been carried out before recommendingrelease of the second tranche. The participationof Resident Mission staff in preparation (34 swks undiscounted)and supervision (12 swks undiscounted)of the ESAC5 was important in following up understandings reached during the relatively short missions of Headquarters staff to Dhaka and in maintaining contact with GOB.

Other Aspects of the Credit Use of Credit Proceeds. Procurament,Disbursementand Audit 61. Restrictionson the use of Credit proceeds under the ESAC followed those of previous adjustment operations for Bangladesh (IndustrialSector Credit-ISC/Cr.1816-BDand recent IPCs). Schedule 1 to the Development Credit Agreement specified inter alia that Credit proceeds were to be used to finance any imports of goods other than those included in a shortlist of ineligible items, that not more than 25% of the proceedswere to be used to finance the import of any commodity/groupof commodities falling within a single two-digit Division of the Standard InternationalTrade Classification (SITC, Revision 2), and that proceeds were to be used to finance axpendituresthrough the secondary exchange market (SEM) to support GOB's policy of liberalizingits foreign exchange market system. About 94% of the Credit proceeds were used by Unless indicated otherwise,staffweek measures include local higher level staff and local consultants discounted at 4:1 ratio.

4

5 21 swks and 9 swks, respectively,including local higher level staff and local consultants discounted at 4:1 ratio.

-

25 -

the public sector mainly for imports of crude oil, petroleum products and food, and only about 6% were used by the private sector for spare parts and general materials/equipment. Bangladesh Bank (BB) issued a foreign exchange circular (F.E. Circular No. 48, dated December 10, 1989, later modified by F.E. Circular No. 13, dated April 2, 1990) notifying private sector industries of the availabilityof the funds through the SEM and of procedures for their use, nearly six months after the Credit was declared effective; earlier issuance of the notice, e.g. by Credit effectiveness,might have facilitated greater private sector use of Credit proceeds. The SITC ceilings under the Credit were violated in that about 72% of the proceeds were used to finance crude oil and petroleum productswhich come under a single SITC Division (Division 33); neither BB nor IDA had a satisfactorymonitoring system in place to prevent this occurring (para. 62). 62. Procurement requirementsunder the ESAC were essentially the same as under the ISC, but were considerablymore lenient than under the IPCs in terms of contract limits and review procedures. Procurement procedures/monitoring requirementswere clearly indicated in Schedule 3 to the DCA and in the President's Report. About 94% of the Credit proceeds were disbursed against some thirty contracts, each over US$ 2 million, for commodity purchases (includingcrude oil, petroleum products, rice and soybean oil). The remainder was disbursed against contracts below US$ 2 million, including a small amount (about US$ 500,000) in the form of Statements of Expenditures (SOEs). During preparation of the PCR, IDA staff (Washingtonand the Resident Mission) carried out a post-disbursementreview in which all procurement documents submitted in support of withdrawal applicationsunder the Credit were reviewed to ensure that Drima facie they were in line with the Bank's Procurement Guidelines as amended in the DCA. The documentationsubmitted by GOB was found to be generally satisfactoryand to support the proposed withdrawals, although some minor inconsistencieswere noted and bid invitations/evaluations were generally not included in the supporting documentation. However, the ex-post review showed that BB's and IDA's monitoring of procurement during project implementationwas inadequate, and proceduresneed to be put in place for ongoing/futureadjustment operations to ensure that BB and IDA monitor SITC aggregationsand use of the SEM, BB submits all supportingdocumentationwith its withdrawal applications,and IDA carries out prior-disbursementreviews of large contracts (e.g., US$ 5 million under the Financial Sector Adjustment Credit). In addition, post-disbursement reviews should be carried out as part of tranche release reviews. 63. The Credit was available for disbursementin two tranches: the first tranche of SDR 58.7 million (US$ 75.0 million equivalent) upon Credit effectiveness,and the second of SDR 78.3 million (US$ 100.0 million equivalent) subject to IDA being satisfied, following a review by December 31, 1989, that GOB was following sound energy policies including meeting the agreed conditions for second tranche release as detailed in Schedule 1 to the DCA (see also Part III, Annex 1). The original Credit amount (SDR 137.0 million) was supplementedby Bangladesh'sallocationof the FY90 IDA Reflows; the additional SDR 1.8 million (US$ 2.3 mill-'.on equivalent),approved by IDA's Board in October 1989, was disbursed as part of the first tranche. The Credit was declared effective on June 5, 1989, and US$ 30.0 million equivalentwas disbursed to the Special Account; the first tranche was fully disbursed on May 23, 1990. Although the release of the second tranche was delayed by abot1t four months (June 15, 1990) pending GOB's compliancewith tranche release conditions, the Credit proceeds were fully disbursed by July 3, 1990, some

26 -

eighteenmonths ahead of the closing date. GOB had submitted withdrawal applicationsfor the full arnountof the second tranche well in advance of its approval; hence, the Special Account was not utilized for the second tranche. Expected and actual annual disbursementsare shown in Part III, Table 1. 64. In accordancewith Section 4.01 of the DCA, annual audits of the project records/accountswere required to be submitted to IDA within six months of the end of the fiscal year concerned. The first audit report (prepared by GOB's Directorate of Audit, Foreign Aided Projects) was received in late April 1991. While the audit report ostensiblycovered the full amount of the Credit, it was unacceptabledue to a number of deficiencies--forexample, the overall certificationwas given as an unqualified opinion and yet the audit report failed to comment on several importantaspects includingwhether Credit proceeds were used as intended, procurementprocedureswere followed and any covenants were violated (e.g., SITC ceilings); the opinion on the Special Account was incomplete, and there was no separate opinion on SOEs; and there were several inaccuraciesin the report. GOB has been informed of these deficienciesand agreed to submit a revised/completeaudit report for the Credit to IDA by October 31, 1991.6 While both GOB and IDA overlooked the due date for the first audit report (December 31, 1989), attributable in part to the fact that the only disbursementin FY89 was the initial deposit for the Special Account in late June, power sector missions reminded GOB regularly of subsequent audit reports in their Aide Memoires beginning in July 1990. The poor quality of the audit report raises the question whether IDA should consider developinZtechnical assistanceto strengthen GOB's audit capabilities. Cofinancing Support for the ESAC 65. Cofinancing support for the ESAC has been both indirect and direct. As noted in para. 11, substantial technical assistancewas provided during preparation of the ESAC and in implementingthe reform program by UNDP and various bilateral donors includingODA and USAID. In addition, KfW and OECF have respectivelydecided c provide, through parallel financing under terms and conditions similar to thase for the ESAC, a grant of DM 26 million (about US$ 15 million equivalent)and r loan of Yen 3.8 billion (about US$ 27 million equivalent) to finance general imports. For various reasons, not all of which were related to the energy sector reform program itself, both donors drew up their respective agreementswith GOB only relativelyrecently. While OECF's agreement was signed in October 1990, the funds have yet to be released; signature of KfW's agreement is pending satisfactoryresolution of the SLA issue (para. 49) with respect to KfW's earlier projects. Following a joint IDA/ADB power sector mission to Dhaka in November 1990, during which the deterioratingfinancial situation of BPDB was discussedwith GOB and various donors (includingKfW and OECF), the release of funds under these agreements has been held up pending GOB's taking concrete actions to address the power sector's financial problems and the sector's beginning to show improved performance. Comments on the PCR from KfW and OECF are included in the Attachment.

6 The revised audit report has subsequentlybeen received and is under review.

- 27 C. Main Lessons Learned 66. The above assessment of the ESAC has highlighted lessons in six areas relating to: (a) government commitment; (b) type of lending instrument; (c) Credit conditionalityand use of action plans; (d) implementationand coordination arrangements (both for policy issues and for use of Credit proceeds/procurement);(e) complementaritywith other investments and programs; and (f) enhancing donor coordination. Government Commitment 67. Insufficient governmentand implementingentity commitmentwas a constraint on all aspects of the ESAC's institutionalstrengtheningcomponent. In the case of Petrobangla,GOB was unwilling to relinguish its direct involvement in the gas companies'operations and to provide the technical assistance required to operationalizethe agreed reform objectives. In the case of BPDB, BPDB's commitment to its reorganizationwas weak at best, and IDA (and possibly GOB) underestimatedthe political difficulty of effecting the reforms (i.e., the strength of the labor unions); it is now clear that without GOB's active political backing and solid commitment of BPDB management, it will not be possible to implement the reorganizationnor will it be possible to address BPDB's system losses and collectionsproblems. Commitment has also been lacking in GOB's efforts to address the accounts receivableproblems of the energy sector entities, the primary emphasis being on meeting the required targets rather than implementingmeasures to improve collections;hence improvementsin the level of accounts receivable have not been sustained. Thorough efforts are needed from the very beginning to build and test commitment at both the political and technical levels in the Government and implementingentities, such that they own, understand, accept and act on the proposed reforms and implementationplans. Government and entity management should, in turn, educate the public and the concerned employees and provide further reassurancesthroughout the process. Once the necessary decisions are in place, implementationmust be done as quickly as possible and with the requisite technical assistance. Tyne of Lending Instrument 68. Consistent with IDA's strategy for Bangladesh at the time and with GOB's need for balance-of-paymentssupport, it was decided early in the ESAC's processing that it would be a fast-disbursingadjustment operation and the Credit proceeds would be used to finance general imports. Given the nature of the reforms being sought, particularly in the institutionalstrengthening area, it might have been preferable to have used a slow-disbursingadjustment operation, sector investment credit, or some combination thereof which would have had a longer disbursementtimeframe. Greater commitment on the part of the concerned energy sector entities might also have been forthcoming if at least a part of the Credit proceeds had been used to support energy-related investments. Based on implementationexperienceunder the ESAC, it is planned to follow up the initiated reforms in the context of traditional project operations in the near term and possibly sector investment credits over the longer term.

- 28 Credit Conditionalityand Use of Action Plans 69. The conditionsunder the ESAC included the achievement of specific targets (pertaining,e.g., to energy prices, system losses and accounts receivable),implementationof agreed action plans (pertaining,e.g., to the Petrobangla and BPDB reorganizations),and provision of investmentplans, results of studies, etc. to IDA for review and subsequent implementation; action plans were also used to guide GOB in meeting some of the covenanted targets. GOB's performance in implementingthe more straightforward conditions relating to energy pricing and investmentplanning was good, while its performance in implementingthe more complicated institutionalreforms was poor, particularly in BPDB's case. As noted above, government and implementingentity commitmentwas a major factor in the poor performance on the institutionalfront. At the same time, the design of the action plans/Creditconditionalityand weaknesses in IDA's monitoring may also have been contributing factors. In the case of Petrobangla,for example, IDA should have pressed for GOB's agreement up-front on the use of consultants to work with entity management and staff in implementingthe reform program, anid the action plan should have included implementationof key actions under the Systems Plan. In some cases, the need to achieve specific targets under the Credit overshadowed--fromIDA's perspective as well as that of GOB--longer term efforts to address the cause of the problem, thereby precluding the sustainabilityof improvements(e.g., insufficientattention has been focused on the collectionsproblem in the energy sector as contrastedwith the sector's excessive accounts receivable). In the case of BPDB, earlier recognition of the political difficultyof the proposed reform program might have led to a more focused approach, probably concentratingon BPDB's system losses as a first step, which might have been more effective. Use of carefully designed and closely monitored action plans neverthelessremains the primary instrumentby which institutionalchange can be effected in Bangladesh; this will require intensive supervisionby IDA staff. Implementationand CoordinationArrangements 70. During Credit preparation and negotiation,GOB's Bangladesh Energy Sector Working Group, comprised of senior officers from the participating ministries and energy sector entities and chaired by the Secretary MEMR, performed quite well in taking an integratedapproach to developing and beginning to implement an energy sector reform program. In the twenty months between negotiationsand Board presentation,however, attention shifted to individual conditionsunder the Credit and the actions needed to bring GOB into compliancewith them. It was this attitude that largely prevailed throughout Credit implementation. Retaining a formal working group, such as the BESWG, throughoutimplementationmight have helped to sustain the momentum for the reform program and thus improved the effectivenessof its implementation. On IDA's side, having a deputy task manager for the petroleum subsector might have resulted in more effective implementationof the gas subsector reforms. 71. GOB's and IDA's monitoring of the use of Credit proceeds, including procurement under the Credit, fell notably short of standard Bank requirements for adjustment operations (the attention of both sides being mainly directed toward monitoring implementationof the energy sector reform program). The post-disbursementreview carried out by IDA staff during preparation of the PCR showed that for ongoing/futureadjustment operations in Bangladesh,

- 29 procedures need to be put into place to ensure that BangladeshBank and IDA monitor SITC aggregationsand use of the SEM, BB submits all supporting documentation(includingin particularbid inv_tations/evaluations) with its withdrawal applications,and IDA carries out prior-disbursementreviews of large contracts (e.g., US$ 5 million under the FSC). It is also proposed that post-disbursementreviews be made a regular pert of tranche release reviews. Complementaritvwith Other Investmentsand Programs 72. The ESAC has been successfulin helping to establish a policy framework as a basis for IDA's lending for specific energy investments. Although this has not meant that iuivestment operationsgo ahead without any policy-related conditionality (in fact, delays in presenting the ESAC to IDA's Board delayed the processing !-itraditionalenergy projects), it has meant they have a common startin& point, which has already been agreed with GOB, from which to build further conditionality. In fact, given the ESAC's short disbursement period (twelvemonths between Credit effectivenessand closing), future credits will have to be used to follow up the actions initiated under the ESAC. Thus, the ESAC has helped to bring about a more coordinated and integrated approach to the sector's development--amongIDA staff, between IDA and other donors, and to a lesser extent, within GOB. In addition, the development of a three-year rolling energy sector PIP has )rovided a useful model followed in GOB's recent effort to prioritize its entire public investment program. Enhancing Donor Coordination 73. The ESAC proved to be an effective vehicle for enhancing donor coordinationin the energy sector, particularlyin the power subsector. This began during Credit preparation and has continued to the present. Frequent consultationsbetween IDA staff and the other major donors in the sector, as well as the formal donor coordinationmeetings held during the preappraisal and appraisal missions, have contributed to this process. 74. Other lessons drawn from the ESAC include: (a) BB's earlier issuance, e.g., by Credit effectiveness,of its foreign exchange circular, notifying the private sector of the availabilityof the funds and of procedures for their use, might have facilitatedgreater private sector use of Credic proceeds; (b) the need for a Special Account under future credits may be reconsideredas the Credit proceeds were primarily used to reimburse GOB for past expenditures on eligible imports; and (c) the poor quality of the audit report for the ESAC raises the questionwhether IDA should consider developing technical assistance to strengthen GOB's audit capabilities.

- 30 PROJECT COMPLETION REPORT BANGLADESH ENERGY SECTOR ADJUSTMENT CREDIT (CREDIT 1999-BD) PART II:

PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE

The Government'scontributionto the PCR was prepared by MEMR in two parts, one for the power subsector and one for the natural resources subsector. The text below is as received from the Borrower; its contents are not attributable to IDA. Power Subsector The following objectiveswere addressed to under Energy Sector Adjustment Credit (ESAC) financedby IDA: (a) energy resource development and investment; (b) energy pricing and demand management; and (c) institutionalperformance and development. These were in tune with the objectivesas enunciatedin GOB's Third Five Year Plan (TFYP) namely as: (a) to acceleratethe development of domestic natural gas resources to reduce the country's dependence on imported oil; (b) to adjust energy prices to promote its efficiency and economic use, taking into account social objectives; (c) to meet energy demand at least cost to the economy; (d) to improve reliability and quality of power supply and reduce system losses; (e) to improve energy sector entities financial performance and mobilize resources required to meet Bangladesh'sdevelopmentgoals; and (f) to encourage private sector participationin the encrgy sector's development, especially in exploration for oil and gas. Energy Resource Development and Investment. In energy sector, investment in power sub-sector is more capital intensive and demand of electrical power rises more rapidly than other energy sector demands. The gestation periods for power station project5 are rather longer specially in the context of Bangladeshwhere external assistanceis a sine-qua-nonfor their establishment. The same for transmissionand distributionprojects is also considerablethough not as longer as the case of power stations. Under the circumstances,the 3 year PIP addressed by ESAC augurs well for identificationof essential programme for project implementationduring this time frame. The thread is to be picked up during the time horizon of subsequent tolling programme. This planning philosophy is giving important signal in allocation of GOB's scarce local resources. The long term investmentplan is to be conceived of and developed in the light of experiences gained during 3 year PIP. The development of long term investment plan is equally important like 3 years PIP especially in the power sector as explained earlier. Quality of 3 year PIP depends on the formulation of a viable long term plan covering at least 10 years. BPDB made a long term Power System Master Plan (PSMP) in 1985 covering a period up to 2005. This needs updating as quickly as possible so that it can generate essential informations for preparation of more realistic 3 years PIPs. It can, therefore,be said that the concept of PIP as conceived of by ESAC, augurs well for the development of long term investmentplan for power sub-sector.

- 31 Enerav Pricing and Demand Management. Power tariff has been significantlyraised during 1985-90 period though national economic growth was not achieved so much. Though the tariff is yet to reach LRMC-based position, it may not be justified to increase tariff so rapidly. The rate of return target could be achieved even with the existing tariff provided the BPDB management is strengthened,system loss reduced and accounts receivable improved. ESAC has addressed these issues very seriously and quite adequately though remedial measures are yet to be implemented. Political situations and natural disasters like floods and cyclones occurring during ESAC implementationperiod are also to be kept in view. Demand management through tariff mechanism in a developing country like Bangladesh is not the only way out. Commercial ahops and industriesnot running ir.three shifts can be asked to avoid consumptionof electricity during evening peak hour. Irrigation pumps can work during off peak hours. In the present socio economic conditions of Bangladesh demand management through pricing only becomes difficult in attaining the goals of the commercial operation. InstitutionalStrengthening. Major reorganizationalsteps have been recommended by ESAC for strengtheningof planning, management efficiency and financial viability of power sector entities. This reorganizationalissues preparatoryworks leading to implementationof the actual reorganizaticnbased on a dated action plan were not adequate and wisely prepared for such a sensitive issue. Union influence should have been considered in designing reorganizationalsteps and procedures. Major political change in the country took place during ESAC implementationwhen firm steps by Government at times were not feasible in true perspective. But it is correct to say that identificationof steps suggested by ESAC to improve financial and structural positions of the energy sector entities are in right direction and necessary. Measures suggested by ESAC for institutionalstrengtheningare no doubt, aimed at bringing about substantial improvementin this field but call for good deal of persuasion to convince the labour leaders of their salutary effects on management as a whole. Findings and Lessons Learned. GOB is fully committed to BPDB's reorganization,reduction of system loss and improvementof accounts receivable. Constitutionof a steering committee at the Ministry level with Additional Secretary as the convener to monitor implementationof APPI programme, constitutionof a supervisorysystem loss task force with JS(P)1 as convener and special drive for the realizationof arrear dues from the consumers are indicativeof GOB's commitmentin this respect. There is such (sic) room for improvementin the Government machinery in Bangladesh. Coordinated actions are very often necessary by various Ministries like Finance, Planning and ImplementingMinistries. Such coordinationif improved can help to avoid delay in implementation. Task manager approach with high level counterpart in the Government may help.

1 Joint Secretary (Power).

-

32

-

Natural Resources Subsector Comments on relevant sections of PCR. : Sectionsvi & vii

: No comment

Page 7 to 13

: Sections 19 to 33

: No comment

Page 16 to 17

: Sections 42 to 43

: No comment

Evaluation Summary Part I

Section 44

: Regarding subsidiary company Board formation,Petrobangla has al:eady initiated action. As for formation of a transmission company, this will be reviewed in due time.2

Sections 45 to 48

: No comment

Part III Annex

-

1

: A.

Energy Resource Development and Investment Section 2

: Consultants have found extraction of coal from Barapukuria to be technically feasible despite overlain water logging and thickness of coal seam. With normal cost parameters as are used in the PP3 the project is also financiallyviable.

B. Energy Pricing and Demand Management Sections 2 to 64

: No comment

C. InstitutionalPerformance and Development Sections 3, 5, 6b5

: No comment

2 Initiation of formation of OCs' Boards has been reflected in the final draft of Part I (para. 44), along with the fact that Petrobangla is now actively proceedingwith the formation of a National Gas TransmissionCompany. 3 Project Proforma. 4

Cross-referenceshould be Sections 2 to 4.

5 Cross reference should be Sections 3, 4b, c.

- 33 -

PART III: STATISTICAL INFORHATION

- 34 -

TABLE 1

PROJECT COMPLETIONREPORT BANGLADESH ENERGYSECTOR ADJUSTMENTCREDIT (CREDIT 1999-BD) BASICDATASHEET Amount (USSMillion) As of 06/30/91 Oiuinai Credit No. 1999-BD

177.3 Ia

Disbursd

Cancelled

179.45 /b

0

Orfiinal Date InitiatingMemoandum L"tterof SectoralPolicy Negotiations Bord Approval Crdiit Agreement Effectivens Crcdit Closing ActualCompletion

Repaid

Outatandien

0

199.74

ActualDate

02/12/87 09/29/S7 07/22V87 04/11/89 04126/89

02/12/87 01/19/89 07/22/87 c 04/11/89 04/26/89

06/27189 12/31/91

06/05/89

07/03/90 07/03/90

CUMULATIVECREDITDISURSEMENT FY89 0.00 30.00

(1) Plnnd d/a (1i) Actual (ii) (i) as % of (i)

FY90 117.30 147.56 125.80

FY91 60.00 1.89 3.15

MISSIONDATA/d

Montb.Yc r May 1986 December1986 March19S7 July 1988 December1989

Peprtion Preppmrai Appai Post-egotiations supervison

No. of Weeks 2 2.1 2.2 2.5 2.2

No. of Perona 12 9 10 7 7

Dateof Revo 11/14/S6 /c 041091S7 07/29/88 01/11/90

STAFFWEEKS If

ProjectPreparation/Appralal Negotiations/Post-ncgotiationa Supervision Projct CompletionReport Total

FY86

FY87

FY88

FY89

58.6

131.9 1.0

21.6

20.2 1.1

58.6

132.9

21.6

FY90

27.0 27.0

FY91

Total

3.9 10.8 14 7

190.5 42.8 32.0 10.8 276.1

FOLLOW-ONADJUSTMENT OPERATIONS It is plaied to foliowup the policyrmformsinitiatedundertbheZSJC In thecontextof traditionalprojectoperationsin the nearterm (e.g., the recently approvedLPOProject and proposedPower Rchabilitation[FY921and (hs Infstructure Development[FY93]Projects)and posibly setor investment creditsoverte longerterm (e.g.. proposd PowerSectorInvestmentand PetroleumSectorDevelopmentProjects[PY94-95f). /a The originalCreditamount,USS175.0millon equivalent.was supplemented by sgbladesbiallocationof the FY90 IDAreflows.US$2.3million equivalot. lb Differencesbetwecnthe disburnedand originalamountof the Ctedit are due to changesin SDR to USSvaluation. /c AmendedMinu?s of Ncgotiationsdated 03/07/89. /d Includecoily maininissions. Additionalmisions carriedout withother power/petrolcum minions throughoutESACprepation and supervision. /a Initiatingmemorandumwaspreparedfollowingmission. /f Includeslocal higher level stff and local cenulrtantsdiscountedat 41 ratio.

PROJECT COMPLETION REPORT BAUNLADESH ENERGY SECTOR ADJUSTHENT CREDIT I(REDIT 1999-BD) ESAC CONDITIONSAND ACTIONSTAKEN A. Policy 1.

Area

Re'.

1/

Condition

2J

EneraY Resource Develoonent and Investment

Action

TakenICurrent

Status

J

Development of long-term least-cost development plans. a. for BPDB

1, 6

Borrower to prepare and furnish to IDA, not later than April 30, 1989, a long-term least-cost development plan for power generation and transmission and, thereafter, to carry out such plan taking into account IDA's coments.

in 1986, with financing from UNDPand USAID, IDA collaborated with Argonne National Laboratories (U.S.) in preparing an interim least cost power generation expansion plan for use in formulating marginal cost bascd tariffs under the power tariff study (policy area B.1.) to ensure consistency between least-cost investment plans arnd economic pricing. However, the plan needed to be updated and integrated with a teast-cost development plan for transmission to ensure the efficient and economic delivery of the generared power. in February 1987 BPDB appointed consultants, under UNDP-financing (with ADS as the executing agency), to prepare such a pLan in the context of preparing a feasibility study for a proposed central thermal power project. The consultants suibmitted their draft final report in October 1988. IDA and ADS reviewed the report in January 1989 and found it to be satisfactory. covenant status at time of second tranche release (June 1990): in compliance. In looking to the future, a full-scate review and updating of the 20-year Power System Master Plan, completed in early 1985, is now in order. The UNDP-financed system loss reduction consultants, assisting BPDB in preparing a plan for the optimal development and renovation of its distribution network, completed their work in June 1990 (policy area C.2.). Hence, a fully integrated plan, including generation, transmission and distribution, could be developed to provide the backbone for the power subsector;s development and the coordinated participation of donors in the procebs. The study could also reassess such issues as the place of coal and nuclear power in the least-cost program and the use ot combined cycle and conventional steam units in the further development of the system. ADS interds to grant-finance the updating of BPOB's Power System Master Plan within the next 1-2 years; IDA will also be closely invotved in reviewing/discussing the results.

X.

0

w v

b.

for BOGNC

2. Assessment of feasibiLity/ viability of exptoitation of Barapukuriacoal deposits.

1, 6

Borrower to (i) prepare and furnish to IDA, not taterthanJuly31, 1989,a tong-term teast-cost devetopment plan for the gas subsector and, thereafter, to carry out suchplan taking intoaccountIDA's comments; and (ii) by April30 of eachyear, commencing not later thanApril30, 1989and endingApril30, 1992, reviewwith IDA the detailedexploration and development program for the succeeding fiscalyearand the tentative programfor the subsequent four fiscatyears.

By the mid-1980s, a numberof studies pertaining to the subsector's developmentwere underwayor planned, including a Hydrocarbon Habitat Study. Gas-basedProjects Feasibitity Study and NationaL Gas Grid Study; following detailedseismicsurveys, an appraisal drilling programwas also ptanmedfor the country's major gas fieLdsto helpfirmup reserve estimates. The subsector's development, nevertheless, had been somewhat piecemeat, and by the timeof the 1987 ESACappraisal, it was clearthata Long-term strategy was required to mapout a teast-cost plan for the integrated developmentof the subsector.Petrobangla prepared sucha plan and reviewedit with IDA in March1989,the priority activities of the planbeingthe continual appraisal and development of the easterngas fields,limited exploration with increased participation of international oil coppanies, and development of an Integrated transmission systemfor inclusion in the longterm investment plan. At the same time,IDA reviewedPetrobangla's FY90-94exploration anddevelopment program with particular attention to the FY90program. IDA staffregularly reviewtheseprograms with Petrobangla duringIDApetroteum missions.Covenantstatusat timeof secordtrancherelease(Jurne 1990): in compliance.

1, 3

Appointment of consultants to undertake feasibitity studyof the earapukuria coal deposits.

The Geological Surveyof Bangladesh had located severalthickcoalseamsat depthsof lessthan200 meters in the Barapukuria areaof the Dinjapur Districtin the westzoneof Ban>.adesh.Duringpreparation of the ESAC,GOB formulated a phasedprogramto evatuatethedepositsand to determine theirtechnical, economic and financiat viability.The consultants (financed by ODA) to carryout the firstphaseof the feasibility studywereappointedin December1987. Covenantstatusat timeof Boardpresentation (April1989):in compliance.

6

Borroderto Ci) carry out,oith the assistanceof consultants, an evaluation of the Barapukuria coal deposits to determine theirtechnical, economic and financial viability; (ii)furnish to and reviewwith IDA the consultant's interim reports on the study within six weeks of theirsubmission; and (iii)reviewwith IDA the consultant's draftfinalreportof the studywithineight weeksof its submission.

The consultant's prefeasibility report was completed in October 1988. Itspreliminary fundings estimated totalpotentially mineableresources to be 265milliontons,withan averageheatvalueof 11,400btulpound. Following a reviewof the reportby GOB,ODA and IDA,it was decidedto proceedto a fulltechno-economic feasibility studyin June1989. Covenantstatusat timeof secondtranchereview(June1990):in compliance.

The appraisal drilling programunder Cr.15B6-BDwas completed in 1990, the main findings being that the reservesin the northeastern gas fieldsare largerand containmorenaturalgas liquidsthanoriginally estimated.The key elements of Petrobangla's presentdevetopment progra.inctude comptetion of the associated surfacefacitities for the northeastern gas fietdsand the north-south pipetinetinkingthe fieldswith Ashuganjin the earty1990s;construction of theAshuganjto Bakhrabad and Titaspipetine, drillingof furtherappraisal/production wettsin the northeastern gas fietdsand otherknownfietds, and development of associated surfacefacilities by the mid-1990s; and initiation of exploration drittingfor new gas fieldsin the latter-19cjs. Thisand the exploration/devetopment programare reviewed 1-2 timesa yearduringIDA petroleum missions.Petrobangla is alsocontinuing to discusspossible expLoration/expLoitation arrangements with a few interested international oit companies as a resuttof the 1989petroleum exploration promotion campaign(carried out underCr.1402-BD).The tong-term devetopment of the gas subsector, including the earlydevelopment of the fieldsrich in naturatgas tiquids, is being addressed underIDA'songoingGas Subsector Review. Presentcovenantstatus:in cozrpLiance.

The consultants submitted theirdraftfinalreportin October1990and presented theirfindings in a meeting (attended by GOB,ODA, IDAand otherdonors)in Dhaka in November1990. The final report was submitted in lateMarch1991. IDA'scomments basedon a preliminary reviewof the draftfinatreporthavebeen informally communicated to GOB. Whilethe studyhas confirmed largeprovenreserves of goodqualitycoal, miningthe reserves willbe technicaLly difficutt and costtyand recoverytimitedto about10X of the reserves becauseof the thickness (30-40meters)and depth(100-400 metersunderthe surface) of the main seamand nature of the overburden (100 metersof water-logged overburden). Atthoughthe reportis stilt underreview,it wouldappearthatdevelopment of the Bara,ukuria depositis unlikelyto be viablefor the foreseeable future. Presentcovenantstatus:in compliance. X

0 0

3.

Preparation/ implementation of priority investment program for energy sector.

1. 2

Submission to IDA of the Goverument's proposed FY88-90PIP for energy, including a financing plan, for discussion during negotiations.

A primary objective of the ESACwas to promote the integrated and least-cost developmentof the energy sector, through: (i) preparation of long-term developmentplans (policy area A.1.), supported by (ii) threeyear rolling priority investment programs. The PIPs were to be based on integrated targets for the energy sector, availability of financial resources ard implementation capabilities of the entities concerned; each year, shortly before the anwual budget exercise, the PIPs were to be updated and rolled forward a year. During preparation of the ESAC,IDA staff worked closely with the various energy sector entities (including BPDB,REB, Petrobangla, BPC, MEKR and Planning Commission) in preparing the first PIP (for FY88-90) and sources for its financing. It comprised the high priority projectscrucialfor achieving the revised targets for the remainder of the Third Five Year Plan (FY86-90). GOB'sproposed FY8B-90PIP, together with its financing plan,was discussed and agreed(withsomemodifications) duringthe ESACnegotiations. It was furtheragreedthatsatisfactory implementation of the PIP for any one yearwouldrequireactual expenditures by the energysectorentities on the projectsincludedin the PIP for that year to amountto at least85X of the plannedexpenditures for thatyear. Covenantstatusat timeof negotiations (July1987): in compliance.

3

Agreement on FY89-91 PIP for energytogether with its financing plan.

ImpLementation of the firstyearof the FYo8-90PIP was reviewed during a comprehensivepost-negotiations missionin July 1988. Imptementation was foundto be generally satisfactory, with overallexpenditure on the energysectorprojectsin FY88being94X of thatagreeduiderthe PIP and expenditure in the powerand petroleum subsectors being93X and982, respectivety, of the agreedlevels. Priorto Boardpresentation, agreement was also reachedon the PIP for FY89-91, together with its financing plan. In linewithGOB's generalreduction in itsdevelopmentprogram in FY89, the FY89-91PIP was only about 93X of the FY88-90PIP. while the floodsin 1987and 1988contributed to thistrend,it alsoreflected taOS's overlycautiousfiscal managementduring this period; this issue wasbeing addressed in our macro-economic dialoguewithGOB. Covenant status at time of Board presentation (April 1989): in compliance.

5

The agreed FY89PIP for energyto have been implementedin a manner satisfactory to IDAand agreement to have been reachedon the PIP for FY90-92.

implementation of the FY89PIP was reviewed duringthe second tranche review mission In December1989 and was foundto be generally satisfactory; actual expenditure as a percentage of agreed planned expenditure was 982 for the overall energy sector and 1002 and 902, respectively, for the power and petroleum subsectors. ' In lookingat individual entities, REB'sactualexpenditure in FY89was only672 of its plannedexpenditure, but withthe problems responsible for the shortfall resolved, it was expectedthe FY90targets would be met. In the case of BPDB,whileactualexpenditure exceededthatplannedby 8X, allocations betweenmajor expenditure categories did not always follow the agreed plan (e.g., increased expenditure on generation projectswas accompanied by a substantial reduction in expenditure on transmission projects, although expenditure on distribution projectswas in linewiththe agreedplan). GOB submitted its FY90-92PIP for the energysector,together with its financing plan,in March1990. Plannedexpenditure underthe FY90-92 PIP wasabout the sameas underthe previously agreed FY89-91PIP due to Bangladesh's macro-economic difficulties and budgetary constraints.Havingswungfroman overlyconservative to highlyexpansionary stancein earlyFY90,Goa had had to initiatein March1990a short-term programto stabilize the economic situation by tightening fiscaland monetary policy. whilethe FY90PIP was satisfactory, the FY91-92PIP required somechangesin the allocation of resources amongexpenditure categories (e.g.,generation and transmission) for BPDBand in the level of resources for Petrobangla. Thesewere discussed with GOB during subsequent power and petroleum subsector missions and in the courseof the countrywide prioritization exercise carriedout by GOB/IDAin FY91(see para.below). Covenantstatusat timeof secondtranche release (June 1990): substantial compliance.

IP ,

0C > t1ft

0l

6

Borrowerto (i) by April30 of eachyear, commencing not later thanApril30, 1989and endingApril30, 1992, reviewwith IDA irplementation of the PIP for energy for the currentfiscatyearand prepare/furnish to IDA the PIP, including the sourcesof finance thereof, for thesubsequentthreefiscal years;and (ii) thereafter,timelycarryout suchprogramsas agreed with IDA.

Annualreviewof the three-year rottingPIP has becomea regularfeatureof IDA'sinvolvement in the Bangladesh energysector. In addition, it has provideda usefulmodelwhichwas followedin the broader enonomy-wide contextof prioritizing the publicinvestment programin FY91(publicexpenditure rationalization, including prioritization of the publicinvestment program,was one of the key elements of GOB'sstructural reformprogramagreedunderthe May 1990ESAF). In the FY91-93energysectorPIP submitted to IDAby GOB in January1991in conjunction with the aboveprioritization exercise, the levelof resources allocated to BPDB (particularly for transmission) and Petrobangla was significantly belowthatwhichwas needed to support adequate growth in energy supplies and the economy, and those resources which were available werespreadovertoo many projects, resulting in under-funding of priority projectsand delaysin theircompletion.Moreover, the mix of localand foreignresources in the investment programin the outer yearsappearedimbalanced giventhe extentof donorinvolvement in the sectorand problems with the availability of domesticfundsin the past. IDAstaff,in turn,preparedan indicative programreflecting theseand othercommentson GOB'sprogram.AlthoughGOB has now agreedto the sector's need for additional resources, thedetailsof the programare stillbeingdiscussed withthe energysectorentities concerned. At the timeof writingthe PCR,complete data was not available on the implementation of the FY90PIP for the energysector(theemerging financial and institutional issuesin the powersector,discussed under policyareasB.1.,C.1, C.3.and C.4.,overshadowed IDAstaff'smonitoring of the FY90PIP iiplementation). Giventhe country's deteriorating macro-economic situation beginning in earlyFY90,however,the shortfall in expenditure for the petroleun subsector (actualexpenditure was 78X of thatplanned)was not surprising. WhilePetrobangla has managedlow levelsof investment in the pastby allocating resources to highpriority projects, investment levelswillneedto be substantially increased if the northeastern gas fieldsand integrated transmission systemare to be developedin accordwith the growingdemandfor gas,particularly for powergeneration and fertilizer production.Presentcovenantstatus:partialcompliance. It has alsobeen notedthat IDAstaff'smonitoring of thisdatedcovenant has not beenstrictlyin accord withthe textof the covenant.That is, in April1990,implementation of the FY90PIP and GOB'sproposed FY91-93PIP shouldhavebeen reviewed; sincethiscoincided with the timeof the secondtranchereview,IDA Li staffreviewed GOB'sperformance withrespectto the secondtranchereleasecondition (whichcalledfor ao reviewof the FY89PIP and FY90-92PIP, respectively). Following fromthis,in April1991,the FY92-94PIP I for the energysectorshouldhavebeen reviewed when,in fact,the countrywide exercise of reviewing the FY91-93PIP was stillunderway.Consideration may be givenunderfutureprojectsto reviewing the threeyearrollingPIP in accordance withexperience underthe ESACas thisappearsmorepracticable and yet it stillrequiresthe entities/GOB to plan investments/sources of financing at leasttwo yearsintothe future. The tablesbelowshow the three-year rollingPIPs agreedunderthe ESACand the actualimplementation of the energysectorPIPsduringFY88-90.

OQ

rDXI .0

o I-

Programs ApreedPriorityInvestment (TotalCost in MillionTaka) FY91-93 a/ IDA_jc GnB b/

FY88-90

FY89-91

FY90-92

BPDB-generation -transmission -distribution -other -subtotat

12,180 5,388 11,283 1.591 30,442

8,115 6,664 9,38, 1.837 26,003

12,610 4.650 6,609 1.086 24,955

9,917 4,361 5,406 1.390 21,074

10,700 6,400 6,800 1.900 25,800

REB Subtotal

3.879 34,321

6.201 32,204

7.912 '2,867

6.560 27,634

6.550 32,350

7,563 1.330 8,893

6,915 1144 8,059

5,770 852 6,622

6,704 1.370 8,074

na #/ na 16,060

Petroleu: Petrobangla BPC Subtotal Total

40.263

4.1

35.708

39.489

48.410

and are in constantprices(FY91); assistance g/ FY91-93includestechnical other years exclude TA and are in current prices. to IDA in January 1991 in coniunction with the countrywide bI GOBproposal submitted review of its public irwastment program. 1/ IDA's indicative program for energy as given in Bangladesh: ManagingPublic Resources for Niaher Growth, April 19, 1991. Report No. 9379-BD. yI Not available. [lMementation of Priority Investment Programs (Total Cost in Million Taka)

poser: BPOB-generation -transmission -distribution -other -subtotal

FY90

FY89

FY88 Agreed

Actual

Actua Actual

Agreed

4,568 1,329 1,575 352 7,824

5,042 506 1,576 242 7,366

1.490 2,096 2,468 4M1 6,495

3,839 732 2,364 105 7.040

3,010 1,073 2,010 353 6,446

na na na na na

1.146 8,970

975 8,341

8,141

1.646 1.105 8,145

2.400 8,846

na na

Petroleum: Petrobangla BPC Subtotal

2,013 210 2,223

1,942 235 2,177

1,992 251 2,243

na no 2,012

1,740 152 1,892

Total

11.193

REB Subtotal

10518

10384

10157

10738

na na 1,477 na

o

B. PolicyArea 1. Rationalizationt.estructuring of electricity tariffs to reflect economic costs of supplying different consumer groups and annual increases as necessary to meet entity financial targets.

Ref!j/ 1, 3

Condition lmpLementation of the restructuring of BPDB's tariffs as agreed during ESAC negotiations.

Energv Pricing and Demand Nanagement ActionTaken/Current StatusI/

UnderCr.1633-BD and Cr.1648-BD, GOB agreedto carryout a powertariffstudy(financed by UNDP)takinginto ccnsideration the long-run marginal costof supplying electricity and otherfinancial considerations and to begin to implement the agreed recommendationsof the study by end-December1986. The study was completed in August 1986. During negotiations for the ESAC,a program to reform power tariff structure_ based on the study's recommendationswas agreed, including jn the case of BPDBtariffs: ti) reduction in the nmber of tariff categories; (ii)phased introduction of two-part time-of-day tariffs for 33-kV and 11-kV consumers and optional two-part time-of-day tariffs for large low voltage consumers; (iii)phasedreduction in the sizeof the subsidized firstand secondblocksfor residential consumers; and (iv)phasedreplacement of demandcharges based on connected load with demandcharges based on recorded maximumdemandfor33-kVand II-kVconsumers and for selectedlargelowvoltageconsumers(agricultural and small industrial); and in the caseof PBS tariffs: (i) introduction of two-parttime-of-day tariffsfor irrigation, generalpowerservices and high voltage consumers; and (ii) replacement of the subsidized singLe-rate tarifffor residential consumersby a three-block increasing tariff with the sameblocks as those set for BPDB'sresidential consumers. BPDB#sbulk supply tariff (BST) to PgSswas increased 20X from May 1, 1987. and PBStariffs were restructured in accordance with the agreed reform program from July 1, 1987. The first stage reform for BPDOB tariffs was implementedfrom August 1, 1987and Included reduction in the numier of tariff categories from18 to 10, Introduction of time-of-day tariffsfor 33-kV,11-kVand Largelowvoltageconsumers, and reduction in the size of the subsidized first block for residential consrmers from 100 kWh/monthto 70 kWh/month and of the second block from 400 kWh/month to 200 kWh/month. In January 1988, GOBamendedthe August1987tariffso thatthe two-part time-of-day ratewouldnot be applied to PBSs; it alsobecame evidentthat introduction of time-of-day metering for PBSconsuimerswas making little, if any, progress. g WhileIDA agreedthe peak/off-peak BST rateswerehigh relativeto the flatBST rate,it continued to press for an appropriate two-parttime-of-day tarifffor salesto PBSsto improveloadmanagement and for the PBSs to passon thesecoststo theirlargeconsumers throughtime-of-day tariffsor othereffective load management measuresto encourage off-peak use of power. Furtherreformsto BPDB'stariffs, including introduction of demandchargesbasedon recorded maximumdemandand furtherreduction in the sizeof subsidized blocksfor residential consumers, were to be ifplemented fromJuty 1, 1988; due in part to detays in installing new time-of-day meterswithdemandregisters (underthe systemlossreduction program), the targetdate for implementation was deferredto July 1, 1989. Covenant statusat timeof Boardpresentation (April1989): substantial compliance.

5

Borrowerto have implemented agreed reformsto electricity tariff structures in accordance with the program of such reforms agreed with IDA.

In line with the agreed tariff reform programfor BPDB,demandcharges based on recorded maximumdemandwere introduced from July 1, 1989 for 33-kV (except PBSs)and 11-kv consumersaccounting for about 40X of comsurptlon; demandchargesbasedan connected loadcontinued to be leviedfor all otherconsumers (except PBSs). As for the three-block tariff for residential consumers(which was to have beenchanged to 0-50 kWhimonth,51-185 kWh/monthand 186 + kWh/month fromJuly 1, 1989), a revised tariff structure was Introduced from July 1, 1989 which in effect: (i) abolished the previous initial block; (ii) extended the range of the second block to 0-20ti kWhfmonth;(ill) capped the previous the third block for all consuption above 200 kWh/month at 600 kWh/month; and (iv) introduced a new thirdblockof 601 + kWh/monthat a rate substantially abovethe estimated LRHCof supply. Although the revised tariff included somedesirable features, including the introduction of a new third block which is consistent with GOB'sequity and efficiency objectives, it failedto aedress the issue of reducing below 200 kWh/monththe nmiber of heavily subsidized units. It was therefore agreed that before recommendingto IDA'sBoard the release of the second tranche, GOBwould write to IDA confirming that the July 1990 tariff adjustments would include the reduction of the firstblock in the residential tariff to 0-175 kWh/month;a telex to this effect was received in March 1990. Covenant status at time of second tranche release (June 1990): substantial compliance. o

0o

6

Borrowerto carryout a program, agreedwith IDA, of reforms to electricity tariff structures.

BPDB'sthree-btock residential tariffwas adjusted as agreedfromJuty 1, 1990(i.e.,the threeblocks became0-175kWh/n,onth, 176-600kWh/month and 600 * kWh/month); this brought the size of the heavily subsidized portion downto 175 kWh/monthin tine with the reform program recorded in the agreed minutes of negotiations as amendedin March 1989. it maybe noted, however, that the PBSs'threebtockresidentiaL tariffsare stilt, 0-100kWh/month, 101-200 kWh/month and 201 + kWh/month and thatthe first two blocksare stittheavilysubsidized; the December1989secondtranchereviewmissionfailedto note thisshortcoming becauseitsattention was directedtowardBPDB'sresidentiaL consumers whichaccountformore than90% of residential consumption.As for furtherrestructuring of BPDBand PBS tariffsin the future,improvedload managementwi;tbe increasingly important in viewof rapidlygrowingdemandagainsta constrained investment program.Theseissueswittcontinueto be addressed both in ongoingprojects(e.g.,under Cr.2129-BD, REB has initiated a programto introduce improvedtoadmanagement measuresfor targeconsumers, including time-of-day tariffs) and in preparing furtherinvestment operations; it is alsorecommended that the 1986tariffstudybe updatedonce the criticat financiat issuesfacingSPDBhavebeen resolved and the updatingof the PowerSystemMasterPlanhas beencompleted.Presentcovenant status:substantiat compliance.

Increase in BPDB's averagetariffrateof at teast15% no later thanSeptember 1, 1987.

UnderCr. 1648-BD,it was agreedthatBPDBshouldearna rateof return(ROR)on its revatued assetsof 5% in FY86,7.5% in FY87,8.5% in FY88,9% in FY89and 10% in FY90and thereafter.During1980-85tariffrates had been increased by 127%,representing averageannualincreases of about18% in nominaltermsand 5% in real terms. Whitea tariffincrease of about10% shouldhavebeen implemented by July1, 1986(12%by January1, 1987)to enableBPDBto meetits targeted ROR for FY87,GOB explained duringpreparation of the ESACthat under the new parliamentary system such tariff increases had to be included in the Budget before the startof the fiscalyear concerned.It was therefore agreedthata tariffincrease of about15%would be implementedfrom Juty 1, 1987. Given potitical unrest in May/June 1987 during the Budgetdiscussions, it was agreedthatthe announcement/implementationof the increase could be deferred to September1, 1987. GOB implemented a 17%increase in BPDB'saverage tariff rate, together with the restructuring noted above, with effectfromAugust1, 1987. Covenantstatusat the time:in compliance.

3

Implementation of adequaterevenue increasing/cost reducing actions, including tariff increases, to ensure BPDBwitl earna rate of returnof at least 2% on Its revalued assetsin FY89.

Duringthe July1987negotiations for the ESAC,GOB pressedstrongly for a reduction in the ROR targets agreedunderCr. 1648-BDsincetheyfeltthe targetswouldinvolveexcessive tariffincreases.However, I basedon a set of assumptions agreedwithBPOB,staffestimates at the time indicated that8PDB'saverage tariffratewouldhave to be increased by about10% witheffectfromJuly 1, 1988to achievethe targeted 9% ROR in FY89. It was therefore agreedto retainthe previously agreedROR targets.Neverthetess, by June 1988,it was clearthatSPOB wouldbe unableto complywith the covenantfor the foreseeable future;due primarity to higherthanprojected operating expensesand systemlosses,BPDB'sROR had fallenfar shortof the targetin FY86-88, and it was estimated thata 50% tariffincrease wouldbe required to meet the 9% ROR targetin FY89. Two factorswereconsidered in reducing thesetargets: (i) the targetratesof returnon revalued assetsfor BPDBwere generally higherthan thoseagreedunderBankGroupassisted powerprojects (8% returnon revalued assetswas morecommon);and (ii)unusually largetariffincreases at the timewould undermine BPDB'songoingeffortsto reduceits systemlossesand accountsreceivabte.Duringthe January 1989negotiations for Cr. 2016-BD,it was agreedto amendthe covenantset,i- a targetROR of 8% by FY93 with intermediate targets(2% in FY89,4% in FY90,6% in FY91and 7% in Fi9%)oasedon feasibletariff increases.Projections at the timeshowedthatthe 3% increase in the Averagetariffrateimplemented from July 1, 1988 (tooffsetthe gas priceincrease), together withthe dect.ningtrendin systemlossesachieved over the firstsix monthsof FY89,wouldbe sufficien-, to achievethe 2% ROR in FY89. Covenant statusat timeof Boardpresentation (April1989/lat-'t dataavailable December1988):in compliance.

5

BPDBto have increased its averagetariffrate witheffectfromJuly 1, 1989to enableit to earna rateof return on the averagecurrent net valueof itsfixed assetsin operation of at least4% in FY90.

GOB increased BPDB'saveragetariffrateI baout7.5%with effectfromJuly1, 1989. Basedon staff estimates doneat the timeof the secondtranchereviewmissionand reconfirmed duringnegotiations for IDA'sproposed PowerRehabilitation Project,thisadjustment, togetherwith3 furtherreduction in system lossesto about30% for the year(whichlookedachievable basedon BPDB'sperformance throughmid-FY90), was expectedto giveBPDBan ROR of about4.1% in FY',. Covenantstatusat timie of secondtrancherelease(June Id 1990/latest dataavailable January1990):in comp :ance. DI

1, 3

a. in case of BPDB to achieve an adequate rate of return on revalued assets.

X

GOB increased BPDB'saveragetariffrateby anothe 'X. witheffectfrom July1, 1990,bringingit to Tk Ili> 2.35/kwh; assuming 28% systemlosses(as targetedm4,he agreedlong-term actionplanto reducelosses),it F' was estimated thatthiswouldgiveBPDBan ROR of justover5% in FY91 (as againsta 6% targetunder 0 Cr.2016-BD).It now appears,however,thattheseROR werenot achieved.WhenBPDB'sFY89auditreportwas

receivedin June 1990, significant differences were identified betweenBPDB'smonthlycommercial operations statistics (whichha aeenused by IDAand otherdonorsto monitorBPDB'sperformance on a regularbasis) and its audited financial statements for FY89; for example, sales reported in the auditedaccounts were86X of thosein the commercial statistics and accounts receivable 140X. Since deficiencies were knomnto exist in the transfer of data from the field to operations and from there to finance, and since the commercial statistics had been a consistent and apparently reliable basis for monitoring SPDB'sperformance in the past, IDA requested BPDB to reconcile the discrepancies between the two sets of accounts. WhenBPDBuas unable to do so, afterdiscussions with IDA in November1990,it becameclearthat the data submitted were not accurate; in March 1991 BPDB revised its statistics on commercial operations for FY90. Using the revised figures for systems losses (39% for FY90/41% for FY91) and assuming the other variables remain as previously estimated, BPDB's ROR would fall below 2X in FY90 and FY91. The primary issue appears to be a widespread breakdown in accountability and discipline among BPDB's staff, resulting in BPDB's dismal financial performance as welt as a lack of reliabte data by which to measure its performance. As a result, as discussed in more detait in the text of the PCR (para. 41, Part I) and later in this Annex (policy area C.2., fourth para.), further lending by IDA and other donors is pending GOB's taking concrete actions to address these issues. With power tariffs in Bangladeshalready among the highest in the Region, resolution of the corruptionproblem is the first priority in improvingSPOD's financialperformance. b. in case of PBSs to enable them to cover operating expenses and interest and an adequate proportion of investment.

1, 2

Increase in PBS's average tariff rate of at least 15K from July 1, 1987.

Under Cr.1633-BD,financial performancetargets had been agreed for the PBSs caLting for each PBS to take atl necessary measures (includingadjustmentof the structure/levelof its retaiL tariffs) to ensure: (i) the average price per kWh sold by the PBS is not less than that soLd by BPDB; (ii) as of the PBS's sixth year of operation,gross revenues cover operatingexpenses and interest;and (iii) as of the PBS's seventh year of operation, internaL funds cover at least 20X of investment. Pending completionof the power tariff study, it was further agreed under Cr.1633-8Dthat BPDB's BST rate for supplies to PBSs would be calculated based on a methodologysatisfactory to IDA and the rate adjusted accordinglyfrom Juty 1, 1986. Although this adjustment was not implemented in 1986, during preparation of the ESAC, it was agreed that a 20X increase would be effected from July 1, 1987 and that PBS retail tariffs would be increased 15K on average at the same time. In fact, BPDB's BST rate was increased 20K from May 1, 1987 and PBS retail tariffs 25K (together with the restructuring noted above) from July 1, 1987. Covenant status at time of negotiations (July 1987): in compliance.

4.a

ODa 0 t'3 o0

5

2.

Annual increases in naturalgas pricesas necessary, as a first step, to achieve equality with economic costs of supply for each consumer group end, thereafter,

1, 2

EachPBS to have increaseditsaverage tariffratewitheffect from July 1, 1989to ensure(i) the average price per kWhsold by such PBS shallnot be lessthan the average price per kWhsold by BPDB;(ii) as of the sixth year of operation of a PBS, gross revenues from all sources related to such PBS'soperations within such fiscalyearshall be sufficient to meet its electricity purchases, administrativeexpenses, depreciation and interestexpenses; and (iii)as of the seventh year of operation of a PBS, funds produced from internal sources in each fiscal year shallbe equivalent to not lessthan20X of the anrual average of such PBS's capital expenditures incurred, or expected to be incurred, during such fiscal year and the preceding and next followingfiscatyears.

In linewith the adjustments made in BPDB'saveragetariffrateand its BST rate for suppliesto PBSs,PBS retailtariffswere increased on averagesome3X effective July1, 1988and another11X effective July1, 1989,bringingthe averagePBS rateto Tk 2.60/kWh as comparedto BPDB'saverageof Tk 2.16/kWhin FY90. Duringnegotiations for the ESAC,it was notedthatUSAIDplanredto financecorsultants to undertake a pricingimpactstudyfor ruralconsumers of electricity in Bangladesh, and that,amongotherthings,it was expected the study would recommend revised financial targets for the P8Ss. The study was completed in 1988. Its main conclusion was that although the rural electrification programas a whole should be financiatly viable,individual PBSs'financial performance couldbe expectedto varywidelydepending on consumer mix and density; hence, individual PerformanceAgreementswoutd be a more reasonable basis for monitoring performance than woutd a uniform set of financial targets.DuringtheMarch1990 negotiations for Cr.2129BOD,therefore, it was agreed thatREB wouldestablish a systemof annual PerformanceAgreementsto set and monitorspecificannual operating and financial performance targets for individual operating PBSs. By the time of the ESACsecond tranche release, proposed performance targets for operating PBSshad been revieved and found satisfactory by IDA. REBsubsequently executed these PerformanceAgreementswith the operating PBSs,thuscompleting full implementation of the system. Although it was noted at the time of negotiations for the ESAC that the financial targetsfor the PBSsmay need to be revisedfollowing completion of the USAIDstudy, the legal documents for the ESACwere never thus amended. Legally, therefore, covenant status at timeof secondtrancherelease(June1990)was partialcompliance; with the appropriate amendment, however,the covenantstatuswouldhavebeenin compliance.

Increase in the price of gas to power, fertilizerand residential consumers of about30X from July 1, 1987.

Under Cr. 1586-BD,GOBaccepted the principle of pricing natural gas based on the long-run marginal cost of extraction, transmission and distribution plEs a depletion premium. Despite successive 20X increases in the averagegas pricein FY86and FY87, however, the prices paid by power, fertilizer, residential and smalt industrial consumers remainedbelowthe economic cost of supplyand the averagegas pricewas ontyabout801 of the economic cost of supply. Under the ESAC,GOBextended its agreement to increase gas prices: Ii) to achieve,as a firststep,equalitywiththe economiccostof supply(including a depletion premium) for each consumergroup; and {ii) thereafter, to reduce the gap between the price of gas and that of substitute fuels to mobilizeresaxrces for the Budget. Duringpreparation of the ESAC,a program of tariff adjustments designed to achieve, as a minimm, the first of these objectives by the time of the second tranche retease was prepared. In line with this, GOBincreased the average gas price by 25X effective Juty 1, 1987, with above average increases of 301 to power, fertilizer and commercial consumersand by 25X to residential consumers. Covenant status at time of negotiations (July 1987): substantial compliance.

Effective July1, 1991,PBS retailtariffswere increased another13X,bringingthe averagePBS rateto Tk 2.94/kWh as comparedto BPDB'saverageof Tk 2.35/kWh.REB has preparedits firstreporton the performance of the individual PBSsagainsttheirrespective performance targets(Performance Agreements); thiswillbe discussed duringthe next supervision mission(Fall1991).

4.

.

to reduce

-'

gap between priceof gas 0

and thatof substitute fuelsin orderto mobilize resources for the Budget. 5

An increasein the priceof gas to power, fertilizer, small industrial and residentiaLconsumers of at least15X to have taken ptacewitheffectfrom July 1, 1989.

A further15X increase for all consumer groupsexceptresidential consumers was implemented effective July 1, 1988. Following this,the averagegas pricewas slightlyabovethe estimated economiccostof supplybut certainconsumergroups(namely, power,fertilizer, smallindustrial arndresidential consumers) stitl remainedbelowtheireconomiccostof suppty. The revisedtariffintroduced fromJuly 1, 1989 increased pricesto power,smatlindustrial, residential and commercial consumers by about16X,17X,16Z and 13X, respectively, givingan overallweightedaverageincrease of about10X. Whilethisbroughtgas priceson averageand for all consumer groups,otherthanfertilizer manufacturers, to at leastthe economic costof supply,gas pricesto fertilizer manufacturers stillremained about10% belowthe economic cost. A waiver on thiscondition was requested (ardwas granted)fromIDA'sBoardat the timethe secondtrancherelease was recommended based on the progress which had been madein gas price adjustments under the ESACand GOB's commitment, as confirmed in a March1990 tetex to IDP,to increase gas prices 151 on average effective July 1, 1990 (i.e., as part of its FY91Budget package), including a 151 increase for fertilizer manufacturers. Covenant status at time of second tranche release (June 1990): partial compliance. Gas prices were increased 151 for all consuter categories from July 1, 1990. Based on presently available estimates of the economic cost of supply, including a depletion premium, this brought gas prices for all consuaer groups up to/above the economiccost. As for the future, sas prices should continue to be increased annually because of inflation and the depletion premiumto gradually close the gap betweenthe price of natural gas and that of substitute fuels and to mobilize resources for the Budget. Moreover, given the rapid developmentof the gas subsector in recent years (e.g.. change in estimated reserves, presence of natural gas liquids and need for an integrated transmission network at least in the east zone) and changesr in gas consumption patterns by certain consumergroups (e.g., power has a high peak demandfor gas), there is a need to update the economiccost of supply, including the depletion premium, and the level/structure of priceswitha viewto ensuringsoundenergypricingpoliciesare sustained.Thiswill be doneduringthe preparation of IDA'sproposedGas Infrastructure Development Project(FY93).

3.

Increase margin on gas price received by gas companies to cover costs and an adequate proportion of investment.

1

NA

;

Under Cr. 1586-BD, GOohad agreed to the principte of the gas companiesself-financinrg a reasonable proportion of their future investment requirements. Nevertheless, preliminary estimates for FY87indicated the gas companies (on a consolidated basis) would make a financiat loss and woutd have a smalL negative rate of return on totat capital employed. Moreover, in the few cases in the past where companieswere able to generate profits, they had been captured by GOBin.the form of dividends. Under the ESAC,therefore, monitorable self-financing targets were agreed for the new gas companies(scheduted to begin operations in Juty 1989) with a view to ensuring thatGOBwould increase sufficiently the margins on gas prices received by the companies to enable them to meet these targets and would require the gas companies to declare dividends only after the targets had been met.

H 0

6

Borrowerto ensure(i) the marginon gas prices(netof excise duties)received by the gas companies willbe set at a levelsufficientto enableeach gas companyto finance itsoperating and administration costs (including taxes, interest expensesand amortization of principat on debt)and at least 10%of its investment program from internatly generated funds in FY90, 20%in FY91, 30%in FY92and 40% in FY93and thereafter; and (ii) the gas companieswilt not dectare a dividend until their respective targets have been achieved.

In FY88and FY89,GOB increased the gas companies' shareof theadditionaL revenues generated by the amnual gas price increases froman averageof about10% in the pastto 201. With the marginsfor the gas companies stiltinadequate, the gas companies continued to dependheavilyon GOB atlocations to financetheir investments and had difficulty in financing theirincremental workingcapitalrequirements. By mid-1989, the gas subsector had undergone a significant reorganization (policyareaC.3.). Effective July1, 1989, GOB increased gas pricesby about10X on average,reserving 60Z of the gas priceincrease for the Budget, thus leaving401 for the gas companiesin FY90. Duringthe December19892SACsecondtranchereview mission,preliminary financial projections preparedfor the largestproduction (BGFCL)and transmission/distribution (TGTDC)companies indicatethatneithercompanywouldbe ableto achievethe 10% self-financing targetfor FY90. Furtheranatysislooking aheadto FY91indicated that the20X selffinancing targetmay be achievable provided alt additional revenues resulting fromthe proposed15X average gas price increase (poticyareaB.2.,secordpara.)wereretainedby the gas colp.nies; thisanalysis aLso assumedthatcapitatrestructuring may be necessary for someof the gas companies, suchas BGFCL,oncethe transferof assetsand liabitities in connection withthe reorganization was compteted.GOB confirmed in March 1990 that the fult 15% gas price increase, to be implementedwith effect from July 1, 1990, woutd be retained by the gas companies. Covenant status at time of second tranche release wasconsidered to be not in compliance. However, the FY90audited accounts have subsequently shown that, at the time of the second tranche release, SGFL,TGTDC and JGTDCwere in compliance, white BGFCLand BGSLdid not compty. No dividends were declared by any of the gas companies in FY90. Covenantstatus at time of second tranche release (June 1990): partial compliance. As for FY91, GOBimptementedthe 15%gas price increase from Juty 1, 1990, passing on the futtamount of the increase to the gas companies (30% to production, 55%to transmission/distribution and 15%to exploration/dritting). Forecasts for FY91 indicate that even with the increased margins, SGFLand BGSLare unlikely to be in compliance with the 20%self-financing covenant.Analysisof the earnings and financial performance of the gas companiescontinues to indicate three principle weaknesses: lack of adequate margins avaitable to the gas companiies,excessive debt f nancing and poor cotlection performance. These issues are being addressed in connection with the recently approved extension of the ctosing date of Cr. 1586-BDand preparation of the proposed Gas Infrastructure DevelopmentProject. Present covenant status: partial compliance.

4S Ln

It has also been noted that the formulation of the gas companies' RevenueCovenantunder .he ESACdoes not follow that of the Bank's Standard Cash Generation Covenant in that it does not take into account the companies' need for working capitat. The table betowdemonstrates the differences in gerformance of the gas companies in FY90-91as measured by the two covenants. Under the Gas Infrastructure DevelopmentProject, it wilt be proposed to inctude working capitat in the calculation (which will also be consistent with the original covenant under Cr. 1556-SD). ESACCovenant

c

Bank's Standard Covenant

FY90 (10%)

FY91 (20%)

iTarget)

FY90 (10%)

2.0 47.6 r -101.1 23.1 c 165.1 c

36.7 c 10.6 -88.0 27.8 c 12B.3 c

BGFCL SGFL BGSL TGTDC JGTDC

27.4 c -194.2 2.5 -31.9 -38.8

FY91 (20%) -79.5 40.0 c -16.9 19.6 c 86.3 c

In compliance with covenant. tD

xD

0

CD

X4

4. Naintain weighted average retailprice of petroleum products at/above levelprevailingin FY87 and ensurethat BPC's weighted average transfer price (including exciseduty) exceeds c.i.f. import price.

1

6

NA

Borrowerto Ci) ensure the weightedaverage retailpriceof petroleum productsare not reducedbelowFY87 levels;and (ii)iaplementa pricing mechanism whichensures BPC'sweightedaverage transferpricefor petroleum products, includlhg exciseduty, exceedsthe weighted averagec.i.f.import priceby at least15X.

EasternRefinery Limitedis a wholly-owned subsidiary of Bangladesh Petroleut Corporation, which is responsible for procurement of crude oil and petroleum productsand distribution of petroleum products as weltas settingof petroleun productretailpricesin accordwithGOB'spolicies.UnderCr. 1749-BD, GOB established a toll-processing fee wherebyBPCcompensates ERL basedon productyield,refining complexity and a reasonable returnon investment, together with yieldnormsand a systemof bonusesand penalties. BPC'spetroleum productpricesto the threemarketing companies(alsoBPC subsidiaries) are to be determined, in turn,on a cost-plus basis,and the level/structure of retailpriceson the basisof BPC's pricesto the marketing companies plusa mark-upto coverdistribution, marketing and otherhandling costs and an ad valoremexciseduty. In theearly1980s,someof BPC'spriceswerebelowborderprices,resulting in financial losses. In the mid-1980s, despitea sharpdrop in worldoil prices,GOB maintained retail pricesat relatively high levetsin orderto strengthen BPC'sfinancial positionand mobilize substantial resources for theBudget. Hence,in FY87the weightedaveragedomesticpriceof petroleum products was about150%of the weightedaverageborderprice. Witha viewto protecting BPC'sfinancial viability while alsomobitizing resources for the Budget,the following petroleumn productpricingprinciple was agreed duringnegotiations for the ESAC:ii) BPC'sweighted averagetransfer price(including exciseduty)would exceedthe weighted averageborderpriceby at least15%;and (ii)the weightedaverageretailpricewould not be reducedbelowthatexistingin FY87.

In linewith the above,petroleum productpricesweremaintained at FY87 levelsuntilJanuary1, 1990when gasolinepriceswere reducedby about40% (pricereduction was announcedin December1989). WhileGOB's purposein thusreducinggasoline prices--to promotetocalrefinery upgrading of significant naphtha I surpluses (otherwise exportedat volatileprices)and domestic use of locallyproducedgasoline to 4o substitute for imported dieselin transport--was valid,it failedto addressrelatedissues/remedies (e.g., 0' increasein dieselprice,taxingof dieselengines, etc.)required to ensurea moreefficient demand/supplyI balancefor petroleun productswhitealsobeingfiscally neutrit. Theshort-term Budgetimrpact of the price reduction was especia'ly important becauseof the projected shortfall in GOB'sbudgetary revenues for FY90. In an effortto bringGOB intocompliance with thecovenantard at thesame timeensurerevenueneutrality, the December1989ESACsecondtranchereviewmissionrecommended an offsetting priceincrease in petroleut products(e.g.,50 paisa/liter increase in dieselprice). GOB subsequently increased the priceof alt petroleun productsby about40 paisa/liter, effective April15, 1990,raisingthe weightedaveragetra,nsfer priceto about36% aboveborderpricesand the weightedaverageretailpriceto about4% abovethe FY87 level. Covenantstatusat timeof secondtrancherelease(June1990):in compliance. GOB responded promptlyto the Gulf crisiswith twosuccessiveincreases in petroleum. productpriceson September1 and October4, 1990,for an overallincrease of about85% on averagesincetheApril1990 increase.Directconservation measures werealso introduced (e.g.,BPDBcurtailed its oil consumption throughloadshedding duringthesystempeak). Whileworldoil priceshavegenerally returned to pre-Gulf crisislevels,GOB has maintained itspetroleum prouuctpricesat the October1990 levelsbecauseof its need to mobilizeresources for theBudget. However,the economy-wide implications of thisdecisionhaveyet to be fullyassessed.Presentcovenant status:in compliance.

lb 011 I0 tsJ

0

C. PolicyArea 1.

Reorganization/strengthening of BPOB to inprove its operational performance and development.

!nstitutional

Performanceand Development

Ref. y

Condition 1/

Actionfaken/Current StatusJ

1, 3

Agreementon a reform program for 8POBand a dated timetable for its implementation.

Under ODAfinancing GOBinvited consultants starting in July 1987 to conduct a diagnostic organizational, financial and managementstudy of BPDB to determine priorities for its restructuring. The study's key recommendationwas that BPDB'sdistribution function should be decentralized to strengthen the interface between BPDBand its consumersto better control system losses and accounts receivable and laprove collections; other recommendationspertained to organizational changesand restructuring -ithin BPDBand to generatly strengthening its overall operation particularly in the areas of planning, finance and administration. These recomnendationswere agreed in principle by GOB,BPDB,IDA, ADBand ODA in early 1988. In November1988Cabinet approved the recommended reorganization, including the establishment of Dhaka Electric Supply Authority as a rew/separate distribution entity effective July 1, 1990. In January 1989 during negotiations for Cr. 2016-8D, a dated action program to implement the reorganization was agreed, including the appointment of WOA-financedconsuttants to assist BPD8 in the implementation phase. Covenant status at time of Board presentation (Aprit 1989): in comptiance.

6

Borrower to carry out the datedaction programagreedwith IDA for the reform of BPDB.

As a firststeptowarddecentratizing the distribution function, in June 1989BPDBdetegated administrative, fi.anciat and commercial powers to its five zonat engineers to inprove accountabitity and performance of eachdistribution zone. Duringthe December1989ESAC secondtranchereviewmission, however,it was determined that imptementation of the remaining aspects of the agreed programhad fatlenseriously behind schedule due in part to late appointment of the consultants; it was therefore agreed that certain key actions would need to be completed before release of the tranche could be recomaended. GOBmade satisfactory progressin this respectduringMarch-April 1990:DESA was established and its key staff appointed, BPDB'sordinance was amended,a preliminary report on the metering requirements/bulk supply tariff structure for electricity supplies to DESAwas prepared, and the inplementation consultants assembled I in Dhaka. Moreover, a revised dated action program teading to coomerciat operation of DESAby January 31, 4r 1991 was agreed in April 1990during negotiations for IDA's proposed Power Rehabititation Project. Covenant 4 status at time of second tranche retease (June1990): in compliance. I Whilethe consultants together with BPDB/DESA staff prepared the various working papers more or tess in tine with the agreed program in the early months of FY91, necessary action by the BPDBand DESABoards, the Steering Comittee and GOBwas often stow in coming, and implemer'tation began to fatl behind schedule. This was exacerbated by the repeated threats of the SPDB unions to strike if DESAwas formed, culminating in the closing of the DESAoffice by the unions in earty Decemtber 1990 during the overthrow of the previous Goverrment.Fotlowing a reviewvisitin lateMarch1991(thebulkof the consultant's workwas to be cotpleted by 4nd-Aprit), ODA requested writtenconfirmation fromthe rew Government that it was committed to the principles of the reorganization, inctuding start-up of DESA'scomnerciat operation on a specified date, and that BPOBwould cooperate fully with the implementation. GOBconfirmed its coffmitment in late April and took various actions tp strengthen BPOB'smanagementand execution of the reorganization. Nevertheless, in the face of continuing pressure from the BPDBunions, GOB/BPDB repeatedly failed to take the necessary actions to enable DESAto commence commercial operation. As a result, in accordance with earlier correspondence with GOB,WDA withdrew the implementation consultants at the erd of July (when their work was originally scheduled to be completed), and IDA suspendeddisbursements under Cr. 2016-BDeffective Septebter 4. DESAfinally began commercial operation on October 1, 1991, although a nmzber of key actions, including GOB'ssanctioning of the DESAorganizational structure, remain to be completed.IDA'stiftingof the suspension is contingent, interalia,on GOB'scompteting these key steps as detaited in an action ptan leadingto DESA'scommercial operation prepared and agreed with GOBin August 1991. ODA has atso indicated thatonceDESAbeginscommerciat operation and uponreceiptof a requestfromGOB,oDA will consider reinstating the implementation consultants on an extended appointment to assistin completing the key aspectsof the reorganization. Continuing implementation of the reorganization willbe monitored in 0 conjunction with the furtherprocessing of IDA'sproposedPowerRehabilitation Project(FY92). Present oi covenantstatus:partialcompliance.

0

2.

Reduction of power system tosses to reduce waste of resources.

1

NA

Over the past decade, BPDOB has madenumerousefforts, assisted by multilateral and bilateral donors, to reduce system losses. Under the provisions of Cr. 1648-BO,BPDB appointed in November1986UNDP-financed consultants (i) to address the problem of non-technicat losses by improving its consumeraccounting including appropriate metering/billing; and (ii) to prepare investment pLans and guidelines for expanding/reinforcing the overloaded distribution systemto reducetechnical losses.Duringnegotiations for the ESAC,GOBand BPDBagreed to implement an emergencyprogram to reduce non-technicat losses. in February 1988 this progrem was extended in consultation with IDA, ADB and ODA;the revised program included establishment of a separate loss monitoring unit headed by a general manager, more adequate staffing of BPDB'sconmercial operations, incentives Xo BPDB'sstaff to controllosses,appointment of magistrates and policeassistance to apprehend peoplestealing electricity, replacing consumer-installed high and Low voltagemeterswithnew BRDBmeters,calibration of metersforothercategories of consumers and adequate sealingof all meters.

3

Reduction of BPDB's grcsssystemlossesto an averagenot exceeding 35% for a periodof at least threemonths.

Aftera slow start,BPDBimplemented the lossreduction programconsistently and, froma peak of 46X in October1987,reducedsystemlosses to an average of 35X duringJune-December 1988(34X in December1988) accordingto BPOB'smonthlystatistics on commercial operations.Covenantstatusat timeof Board presentation (April1989/latest dataavailable December1988):in compliance.

5

Gross system losses of BPDB to havebeen reduced to an average of 32X duringthe preceding three months.

Accordingto BPDB'smonthlystatistics on commercial operations, systemlossescontinued to declinesteadily during1989 reaching 27X in January1990(28%on averageduringNovember1989-January 1990). In additionin early1990,in accordance witha covenant underCr. 2016-BDand as reconfirmed duringnegotiations for IDA's proposedPowerRehabilitation Project,a long-term actionplanto reducebothnon-technical and technical losses in BPDB'sdistribution system was agreedbasedon the recommendationsof the lNDP-financed consultants. Covenantstatus at time of second tranche release (June 1990/latest data available January 1990): in compliance. I In the period February-May1990, BPDB'ssystem losses increased steadily reaching 43X according to BPDB's co monthly statistics on commercial operations; the agreed long-term action plan had a target of no more than I 30D for FY90. Possible causes of the increased losses identified at the time included the beginning of activities to implement the BPDBreorganization, including the establishment of DESAwhichmet with considerable resistance fromthe BPOBunions,as wellas the evolvingpolitical situation in the country. In fact,it now appearsthatthe earlierimproving trendin systemlossesreportedin BPDB'smonthly statistics on commercial operations was not correct,as BPDBwas unableto reconcile satisfactorily the significant differences discovered between the auditedaccountsand commercial statistics for FY89(policy area B.1.a., fourth para.). In March 1991BPDO revised its statistics on commercial operations for FY90, showing 391 system losses for the year (401 for November1989-January 1990, the period considered for the second tranche release). The situation deteriorated further in FY91 to 41X system losses for the year. As discussed in more detail in the text of the PCR(para. 41, Part 1), prerequisites for IDA's proceeding with the proposed Power Rehabilitation Project and other new lending for BPDBprojects include: (i) clear demonstration of the govermnent's political commitmentto support BPDB(and DESA)managementin addressing the widespread breakdownin accountability and discipline amongtheirstaff;(ii)GOB approval/initiation of implementation of comprehensivetechnical assistance packagesproposed by IDA/AD8to strengthen BPDB's(and DESA's) financial management over the next3-4 years;and (iii) GOB's/BPDB's (DESA's) concerted effortto carry out the agreed action plans designed to reduce system losses and improve revenue collection over the medium/long term as well as additional emergencymeasuresto reduce system losses and accounts receivable in the near term. Further support for the sector from other donors is also unlikely to be forthcoming until GOBtakes concrete actions to address BPDB's(and DESA's) performance problems.

0

0

10 I

3. Reorganizationof BOGMCon functionat linesto strengthen gas subsector entities.

1

NA

Duringthe appraisal of Cr.1586-BD, a diagnostic studyto identify measuresfor streamlining BOGMC's organizational structure and improving its operational efficiency was carriedout by IDAwith the assistance of an international management consultant.Recognizing the need for reform,GOB agreedduringCredit negotiations to submita reorganization plan forBOGMCto IDAby December1, 1985for implementation by July 1, 1986. In the interim, GOB requested ODA to grantfinancea follow-up studyto preparea moredetailed implementation plancoveringthe restructuring of thecompanies as well as the establishment of accounting, managementinformation and othermonitoring systems,including training.Due to the delayedappointment and mobilization of the consultants, the studystartedin November1986,the interimreportwas completed in January and the finalreportin June 1987. The reformprogram, agreedin principle duringthe ESAC appraisal, was to be carriedout in two sequential phases,namelythe "Companies Plan"and the morecomplex "SystemsPlan",withadditional supportfromODA. The primaryobjective of the reorganization was that BOGMCwouldbe divested of all operational activities and thesewouldbe reorganized, together with thoseof the existingoperating companies, undera new set of operationally independent OCs organized along functional (ratherthangeographic) lines. BOGMCwouLdthenoperateas a holdingcompany,holdingequityin the OCs on behalfof GOB and beingresponsible for investment planningand monitoring as wellas sector policyformulation.

3

Agreement on the reorganization of BOGMC and implementation of the firststeps.

The overallstructure and datedimplementation planfor the BOGMCreorganization wereagreedduringtheESAC negotiations; a technical assistance contract withsuitableconsultants to assistin the implementation, particularly with the accounting issues,was to be enteredintoby end-1987(PhaseII of ODA assistance) and the legalaspectsand Board/managerial appointments completed by mid-1988.Subsequent to the ESAC negotiations, GOB determined tlF-t the reorganization proposal had to be submitted to Cabinetfor approval; in the courseof this,GOB requested and IDAagreedto somechangesin .heset of new OCs to be established (e.g.,responsibility for solidmineralsexploration/devetopment wouldremainwithBOGMC,pendinginitiation.> of a significant minerals project;and the transmission function wouldremaincombinedwiththe distribution functionand be regionalized as oart of threegas transmission/distribution OCs,pendingcommissioning of the north-south pipeline and integration of the national gas grid). As a result,the schedule for implementing the basicelements of the reorganization (i.e.,the Companies Plan)was delayedabouta year. In accordance with the revisedschedule, at the timeof the ESAC Boardpresentation, the BOGMCordinance had been appropriately amendedand all of theOCs (withthe exception of exploration and drilling(SAPEXI) had been legallyestablished and theirmanagersappointed.As for the TA, a fundamental difference arose betweenGOB and ODA regarding the termsof reference and extentof assistance required by BOGMCin implementing the reorganization; in an effortto breakthe impass,it was agreedto changethe ESAC condition to a reviewby December31, 1989of the OCs'accounting systemswitha view to determining their need for furtherassistance in streamlining the systems(i.e.,carryingout the SystemsPlan)oncethe OCs wereoperational.A pointwhichwas incorrectly notedin the President's Reportis thatat the timeof Boardpresentation therewas only one gas production company;in fact,therewere(andstillare)two production companies.Formation of a singleproduction companyis beingaddressedin the contextof IDA's ongoingGas Subsector Review. It may also be notedthatwith the development of the overallgas systeau. n the east zonenow well underway, Petrobangla* is activelyproceeding withthe establishment of a Nationat Gas Transmission Company.(*BOGMCwas renamedPetrobangla in 1989at the timeof the reorganization.) Covenantstatusat timeof Boardpresentation (April1989):substantial compliance.

5

Key reformsof the gas subsectorto havebeen carriedout in accordance with the datedactionplan agreedwith IDA.

With the legalestablishment of BAPEX,appointment of its key managers and appointment of the Boardsof Petrobangla and allOCs, GOB had essentially completed the actionsagreedunderthedatedimplementation plan for the BOGMCreorganization by end-July1989. In the President's Memorandum to the Boardpreparedat the time of secondtrancherelease,it was notedthatthe divisionof assetsand liabilities was expectedto be completed duringFY90,to be followed by computerization of the Petrobangla complexand implementation of new accounting policies and procedures duringFY91. Hence,covenantstatusat the timeof secondtranche releasewas considered to be in compliance.In fact,it was onlypartialcompliance in thatGOB representatives werestillpresenton the Boardsof theOCs (theagreement with IDA was that theOCs'Boards wouldincludePetrobangla and companyrepresentatives but no GOB representatives; GOB'scontrolwouldbe OQZ exercised throughPetrobangla's BoardwhichwouldincludeGOB representatives). Moreover, GOB stillheld (D r equityin the OCs (contrary to the agreement thatPetrobangla wouldholdequityin the OCs on behalfof g-X GOB). Thus,GOB had not allowedPetrobangla to operateas a properholdingcompany,nor had it allowedthe Ln OCs to operateon a conmiercial basisindependent of directgovernment involvement. As a prerequisite to o IDA's extenc'ing the closing date of Cr. 1586-80, GOBreleased its equity in the OCsin June 1991. 0

Petrobangla is now in the processof registering the shareswiththe Registrar of Companies and substituting GOO representation on the OCs'Boards. Covenantstatusat timeof secondtrancherelease(June1990): partialcompliance. 6

Borrowerto carryout the datedactionplan agreedwith IDA for the reorganization of the gas subsector.

In the periodsincethe secondtrancherelease, althoughthe inter-company transfers of assets/liabitities associated with theOCs' restructuring haveby now beencompleted, the necessary changesin the accounting, MIS and othermonitoring systemsand associated training haveyet to be introduced--i.e., implementation of the SystemsPlanhas fattenconsiderably behindschedule.Whilethismay be attributed in largepartto GOB'sunwilLingness to acceptthe extentof technicat assistance proposed by ODA basedon the June1987 report'srecommendations, it is aLsodue to IDA staff'sfailureto give sufficient attention to thisaspect of the reformprogrambothin negotiations and duringsupervision of the ESAC. At one point,it was planned that imptementation of thiscomponent wouldbe monitored urderIDA'sproposedPetroleum Technical Devetopnent Project;however,the proposed Projectwas droppedfromIDA'slendingprogramin mid-1989at GOO'srequest.Sincethen,the TA for the SystemsPlanhad not beenactivelypursued.Now,as partof the preparation of IDA'sproposed Gas Infrastructure Devetopment Project(FY93),the 1987SystemsPlan is being updatedand grantfinancing sought;ensuringsatisfactory implementation of the revamped Planwillbe an important objective of the Project. Presentcovenantstatus:partialcompliance.

4. Reduction of accounts receivable by energy sector entitiesto improve financial viabitity. a. BPDB

1

NA

UnderCr. 1648-BD, it had beenagreedthatBPDB'saccounts receivable shoutdnot exceed3 months'bitlings un by June 30, 1988. In January1987SPOB'saccountsreceivable were equivalent to 6.2 months'billings and 0 remainedabove5 months,bitlings duringFY88. Underthe ESAC,intermediate targetsof 4.5 months'bittings I beforeBoardpresentation and 4.0 months'bittingsbeforeCrediteffectiveness wereagreedalongwithan actionprogramto helpBPDB in meetingthesetargets.Duringnegotiations for Cr. 2016-BD,the finaltarget was retaxedto 3.5 months'bittingsby June30, 1989.

3

Reduction of BPDB's accountsreceivable to the equivalent of 4.5 months'bittings.

According to BPDB'smonthlystatistics on commercial operations, BPDB'saccountsreceivable werebrought down fromsome5 months'billingsduringmost of 1988to 4.2 months'bittingsin December1988. Covenant statusat timeof Boardpresentation (April1989/tatest data avaitabte December1988):in compliance.

4

BPDB'saccounts receivable to havebeen reducedto the equivatentof no more than4 months'biltings.

According to BPDB'smonthlystatistics on commercial operations, BPDB'saccountsreceivabte werebrought down to 3.9 months'billingsin February 1989and remained at 4.0-4.1months'biltingsuntilJune1989when theywere reducedto 3.4 months'biltings.Covenant statusat timeof Crediteffectiveness (June 1989/tatest avaitable data February1989):in comptiance.

5

BPDB'saccounts receivabte to have been reduced to the equivalent of no more than3.5 months' billings.

With its accountsreceivable on the riseagainby the timeof the December1989ESAC secordtranchereview, GOB/BPDBagreedto implement an actionplandirectedtowardclearingthe outstanding dues of various govermnent departments, municipalities and autonomouscorporations. As a result, a retroactive adjustment was made to the September 1989accountsin itsmonthlystatistics on commercial operations, reducing its accountsreceivable from4.0 months'bitlingsin August1989to 3.5 months'billingsin September 1989. According to its commercial operations statistics, accountsreceivable werethenmaintained at more-or-less this levelthroughJanuary1990. In additionin an effortto minimizeBPDB'sfutureaccumulation of -'D arrears,a datedactionplan to improverevenuecolLection frombothpubLicand privateconsumers was agreedlb in Aprii1990duringnegotiations for IDA's proposedPowerRehabititation Project. Covenant statusat time ro r5 of secondtrancherelease(June1990/latest data available January1990):in comptiance. In subsequent issuesof its monthlystatistics on commercial operations, BPDBrevised the accounts receivable figureforDecember1989and January1990to, respectively, 3.9 and 4.0 months'billings,

o _?

explaining thatthe difference of 0.5 months'bitlings was an estimateof the benefittheyhad expectedto receivefroma penaltywaiverprogramlaunchedin May-June1990. In fact,the totalbenefitwas aboutone months' bitlings but under standard accounting procedures should not be recorded untilit had been realized (i.e.,in June 1990). In the period February-May1990, BPDB'saccountsreceivable increased steadily, reaching5.3 months'billings according to BPDB'smonthlystatistics on cowmerciat operations.As in the case of power system tosses, it now appearsthatthe earlieraccountsreceivabte figureswerenot correct; and in March 1991, SPDOreviseditsstatistics on commercial operations for FY90, showing accounts receivable to be in the rangeof 3.8-4.7months'biltingsin FY90 (witha figureof 4.4 months'bittingsin January 1990, the month considered for the secondtrancheretease). The situation deteriorated further in FY91with BPDB'saccounts receivabte risingfrom4.4 months' billings in July 1990 to 6.3 months' billings in June 1991. These issues are being addressed as noted above (policy area C.2., fourth para.). 5

Arrangements, satisfactory to IDA, to have been implemented for biLlingBPDB's consumers, aging its accountsreceivable, formulating a policy for writingoff and, thereafter, writingoff BPDB'sbad debt.

Although BPDBhas taken a numberof actions to improve its consumerbilting including instatlation of meters, hiring of quatified accountants and updating of consumertedgers under its system toss reduction program,bitlingof registered consumers by the timeof the secondtranchereleasereviewmissionshowed onlymarginalimprovements withabout93% of registered consumers beingbilled. Duringpreparation of the ESAC,it was learnedthatBPDBhad on its bookssomereceivables thatdatedbackto the early1970sand numerousaccountsthatwereno longeractive;in early1987therefore SPDB initiated an aginganalysisof its accountsreceivable.By the December1989secondtranchereviewmission,the aginganalysis had been completed for all hightensionconsumers and low tensionindustrial consumers whichaccountfor about65% of energysales;underCr. 2016-BD,it had beenagreedthatthe aginganalysisfor the domestic and commercial consumers (about1 million)accounting for the remaining 35% of saleswouldbe completed by June30, 1990. This agingof accounts/updating of ledgershas resulted in SPDO'seffectively writingoff in FY89about3.3 monthsof receivables whichcorresponded to bad debts. WhileGOB has endorsed this action, the adjustments have yet to be confirmed by independent auditors.Covenantstatusat timeof secondtrancherelease(June 1990): substantial comptiance. During the second hatf of FY90, bitting showedsome improvementreaching about 95%of registered consumers, and cotlections for FY90reached about 92%of the amountbilled as comparedwith 79%for Fr89; however, the aging analysis has fallen behind schedute. Urder ADB's Sixth Power Project, BPDB is in theprocessof instatting two mainframe computers for computerizing the bitting systems for Dhakaand Chittagong; in addition under Cr. 2016-80, 25 desk-top computers are being provided for automating bitting-retated activities at 25 major electric supply units (ESUs). However,progress in ccmputerization has been slow due to inadequate staffing and resistance by the BPDBunions. Themain thrusts of the action plan to improve revenue collection agreed in April 1990 during negotiations for IDA's proposed Power Rehabilitation Project inctude: (i) completing consumerdatabase updating and achieving 100% bitting; (ii) reducing bitting tag and improving efficiency of biltingand cotLection throughcomputerization of billingfunction for Dhaka, rhittagong and 25 majorESUJs; (iii)vigorously implementing soundcreditand disconnection policiesand collection arrangements withgovernment support; (iv)strengthening revenue accounting and internal and externalauditing; and (v) improving consumerservicethroughestablishing a consumer servicecellfor each ESU. Implementation of thisis closelylinkedto the systemlossreduction actionplan,SPDB computerization p-ogramand BPDBreorganization. The comprehensive TA packagesproposed by IDA/ADSto strengthen BPDB'. (and DESA's) financial management include assistance in implementing improved accounting and internal control procedures and would provide an integrated framework for theseactivities.

b. Gas Companies

1

MA

Under Cr. 1091-BDand Cr. 1586-BD, it had been agreed that the accounts receivable of the gas companies (Bakhrabad Gas Systems Limited under Cr. 1091-BDand the new gas companiesunder Cr. 1586-BD)woutd be maintained at not more than3 months'gas sates. In January1987,BGSL'saccounts receivable were equivatent to 3.7 monthsof gas sales(thenew gas companies had not yet beenestablished, so the covenant did not apply). Duringnegotiations for the ESAC,GOB agreedthatthe accountsreceivable of eachgas companywouldbe reducedto the equivalent of no more than3 months'gas salesin accordance with existing covenants. Al

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3

Reduction of the accounts receivable of each gas companyto the equivalent of 3 months of gas sales in accordance with existingagreiments with IDA.

SGSL'saudited accounts for FY88showed its accounts receivable at 3.6 months of gas sates. By December 1988, BGSLreported it had reduced its accounts receivable to 3.0 months' sates. Since the new gas companieswere scheduled to begin operation only in July 1989, the covenant applied only to BGSL. Covenant status at time of Board presentation (April 1989/latest data available December1988): in compliance.

The accountsreceivable of each gas companyto have been reducedto the equivalent of no more than3 months' billings.

At the time of theDecember1989secondtranchereviewmission,whileBGSL'saccountsreceivable were reported to be slightlybetow3 months'gas sates,the accounts receivable of the otherfourgas companies werewell abovethe covenanted 3 months;the figuresas of September 30, 1989(latestdataavailable at time of mission)wereBGFCL--7.0 months,SGFL--4.9 months,TGTDC--4.5 months,JGTDC--3.9 monthsand BGSL--2.9 monthsof gas sales. Following a seriesof actions,agreedduringthe mission, aimedfirstly, at settling accounts(receivable and payable) amongenergysectorentities and secondly, at implementing more vigorously existingdisconnection policiesfor defaulting consumers, GOB reported thatall but one of the gas companies CTGTDC)wereable to reducetheiraccountsreceivable to 3 months'gas satesor lessby end-February 1990 (BGSL--2.4 months,BGFCL,SGFL and JGTDC--3.0 monthseach,and TGTDC--3.7 months). In addition, GOB confirmedin March1990thatnecessary measureswouldbe takento r4.duce furtherthe gas companies' accounts receivable in subsequent months. Covenantstatusat timeof secondtrancherelease(June1990/latest data availabLe February 1990): substantial compliance. The audited accounts to June 30, 1990, received subsequent to the second tranche release, indicate that the gas companies have been unable to sustain the collection ratios reported by GOBin March 1990. These accounts and more recent information show the following (months of gas sales):

June 30, 1990 March 31, 1991

BGSL

BGFCL

SGFL

3.1 2.1

6.3 2.4

5.4 4.4

JGTDC 3.9 5.0

TGTDC 4.9 3.7

Latestinformation indicates thatonlyBGSL and PGFCLare in compliance.As of March31, 1991,aboutTk 1,635 million or 73% of the receivables of the gas companies were reportedly due from goverument agencies. Accordingly, to bring the receivables in each gas companybelow the covenanted 3 months' sales tevel by endJuly 1991 and as a condition for the extension of the closing date of Cr. 1586-BD,G08 confirmed in May/June 1991that:(i) Ministryof Financewillpromptly settle debts of governmentdepartments owed to the gas companies; (ii)MEMRwillconcurrently settledebtsof energysectoragencies; and (iii)atl other receivables designated by Petrobangla as government corporations (e.g.,SCIC,BPDB,BJMC)willbe collected by the gas companiesunder the sameprocedures and regulations accorded to commercialcustomers. Furthermore, Petrobangla agreed that all uncollectible non-governmentconsumerreceivables in each gas companywill be written off or covered by provision after due legal process. Information received to date indicates that GOBis taking the necessary measuresto follow-up the above comaitmentsalbeit somewhatmore slowly than planned. c. BPC

1

NA

With BPC's accounts receivable at 75 days of sales as of June 30, 1985 and with somecustomers such as BPDB in defaultfor 10 monthsto BPC'smarketing subsidiaries, it was agreedurnder Cr. 1749-BDthat:(i) BPC wouldintroduce a systemfromJanuary1, 1987whereby BPCand its subsidiaries would provide credit for a maximumof 45 days and would levy interest on amounts outstanding beyond 30 days from the billing date; and (ii) BPDBwould reduce the amounts owed to BPC's subsidiaries for petroleum products purchased up to June 30, 1986by payingat leastTk 50 million per monthuntilsuchamountsare fullypaid. Duringpreparation of the ESAC, it was learned that aLthough a noticeestablishing the system had been issued, the system was _ not yet being fully imptementedand BPDB,for example, was continuing to accumulatearrears. During negotiations for theESAC,it was agreed that: (i) the system agreed under Cr. 1749-B9would be amendedto 0 r4 levyinterestbeginning on day 31 of the creditperiod(instead of on day 1); (ii)the systemwouldbe fullyi.X implemented fromJuly1, 1987;and (iii)the firstcallon BPDB'smonthlypaymentsto BPC'ssubsidiaries IF wouldbe for the Tk 50 million to discharge its accumulated arrears (where arrears are defined as amounts o outstanding for more than 45 days) and the remainder would be used for current obligations.

(

C)

3

Satisfactory implementation of BPC's system, agreed with IDA, for collection of billsfor petroteum productdeliveries.

The system was implementedas agreed from July 1, 1987. For all customers other than BPC's marketing subsidiaries, BPDBand Biman, payment for petroleum product deliveries is on a cash basis. For those customers for which credit is exterded, it is limited to 45 days from the billing date, and interest is charged beginning on day 31 of the credit period. BPC's audited accounts show that in the period beteen Juty1, 1987and Jure30, 1989,itsaccountsreceivable wereredched from 112 days of sates to 91 days, and Ohoseof itsthreesubsidiaries from87 days of salesto 65 days. The improvement in BPC'ssubsidiaries' receivables refLects the progressive reduction in BPDB'sarrearsfromTk 2,701millionat end-FY87 to Tk 2,275millionat end-FY89.Covenantstatusat timeof Boardpresentation (April1989):in coupliance.

5

BPC to have beenoperatinga system, satisfactory to IDA, for collection of bills for petroteum product deLiveries; and Borrowerto have caused BPDB to reduce its arrearsto BPC's subsidiaries for petroleum products by not less Tk 50 million per monthuntilsuch amountshavebeen fully paid.

Throughout FY90,BPCccntinued to implement satisfactorily the systemagreedfor the collection of billsfor petroleum productdeliveries.FY90figuresindicate furtherimprovement in BPC'saccountsreceivable to 85 daysof salesand in thoseof itssubsidiaries to 55 daysof sales. As for BPDB'spayingBPC'ssubsidiaries the requisite Tk 50 millionper month,over the periodJuly 1, 1987to June30, 1990,BPDB'smonthty paymentsaveragedTk 100miLlion. By erd-FY9O, BPDBhad reducedits arrearsto Tk 1,669mittion. Covenant statusat timeof secondtrancheretease(June1990):in compliance. Throughout FY91, BPChas continued to implement the systemagreedfor the collection of bills for petroleum productdeliveries, and BPDB to pay off its arrears.As of June 1991,BPDB'sarrearsare reported to be Tk 1,147million; a furtherfavorable factorfor the reduction of BPOB'sarrearshas been its reducedpurchases of petroleum products sinceFY89. It may be noted,however, that BPC's cotlection system apparently fails to specifyhow settlement of interest is to be made. Presently, BPDBowes about Tk 450 millionfor interest (BimanaboutTk 50 million); BPOBis disputing the chargeand refusesto pay. It may alsobe notedthat BPC'ssubsidiaries' receivables couldhavebeenfurtherreducedif Bimanhad beenrequiredto fotlowa similarcourseof actionas BPDB;Biman'sarrearsto BPC'ssubsidiaries haveremainedat the Tk 160 mitlion levelsinceend-FY87.Both of theseissueswillbe followed up in the courseof supervising Cr. 1749-BD.

O'

0

Sh 0

1/ Referencecodesare as follows: I - Action takendcwingproject preparation. 2

Condition of rnegotiation (invitation to negotiate dated June19, 1987and supplemntal telex dated July 6, 1987). 3 - Condition of Boardpresentation (pare. 24 of agreedminues of negotiations dated July 30. 1987andagreedanwduentsto agreements recorded in the abovedated March7, 1989;additioial conditiors indicated in Mr. Asanlranas July 29, 1988letter to Secretary, External ResourcesDivision). 4 - Condition of Credit effectiveness (Section 6.01 of Development Credit Agreement). 5 Condition of secondtranche release (para. 2 of Schedule1 to DCA). 6 - Other coenmat tader ESAC (Schedule4 to DCA). IA - not applicable. M /

Reflects actions through end-Juie 1991Were available.

a

10

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55

ATTACHMENT Page 1 of 2

PROJECT COMPLETION REPORT BANGLADESH ENERGY SECTOR ADJUSTMENT CREDIT (CREDIT 1999-BD)

COFINANCIERS'COMMENTS

Kreditstanstaltfur Wiederaufbau (Germany) The following comments on the draft PCR were received from KfW: After reviewing the draft PCR on the captioned Project, we are impressed with the thorough analysis and conclusions ("lessons learned"),as well as the candid and unmistakablelanguage of the report. We are satisfied to note that no softening of IDA's position on future aid to Bangladesh'senergy sector is envisaged. For a minor amendment of para. 65 (and page i), may we suggest inclusion of KfW's condition for signing the Financing Agreement, which in the draft PCR appears as a rather technicalmatter; satisfactorysolution of BPDB's overdue payments to the Government of principal and interest covenanted in previous 1 Conditions for releasing the first and electricity subsector projects. second portions are: -

reduction of accounts receivableto 4 and 3.5 monthly sales, respectively; decrease in the gross system losses to 35% and 32%, respectively.

We may add that during the bilateral government negotiationsheld in end July no progress was recorded as regards BPDB's debt service obligation. Our contributionto ESAC, thus, remains pending. Again, we appreciate your sending us the draft PCR, and we are looking forward to continued fruitful cooperationwith you. Overseas Economic CooperationFund (Japan) The following comments on the draft PCR were received from OECF: I have received comments from OECF Tokyo regarding the draft Project CompletionReport (PCR) for subject credit. I do apologize for OECF's delayed response to your kind invitationto comment on the draft PCR. OECF's comments are as follows:

1 This change has been incorporatedin para. 65.

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ATTACHM4NT Page 2 of 2 1. Paragraph 65 implies that OECF'e cofinancing represents indirect support for the ESAC.2 However, as is clear from paragraph 54, IDA' release of the second tranche was premature. OECP, by declining to release its cofinancing until the Government achieves compliancewith second tranche release conditions, is directly supporting the restoration and completion of the program* 2. Since the program is indeed ongoing, important conditionalityremains unfulfilled,and the cofinanciershave not completed their disbursements,it might be more appropriate to finalize the PCR at a later date.3 Thank you for the opportunity to comment on the draft PCR. We look forward to continued cooperationand communicationwith the Bank regarding developments in the energy sector of Bangladesh.

2 Para. 65 has been changed to make it clear that OECF's support is considered "direct" cofinancingsupport. 3 Although disbursementsunder OECF's and KfW's financing for general imports based on conditions similar to the ESAC are yet to be completed, IDA's Credit for the ESAC has been fully disbursed and the Credit closed. Since there are no direct linkages between the three funding sources, it is appropriate for IDA to finalize its PCR at this time.