Honesty = Success, Dishonesty = Failure An

overview of power sector unbundling in Bangladesh

(1996-2006)

Sharier Khan runs a critical eye over the power

sector operations of the past ten years and compares
the performance of the AL and BNP governments.

When Bangladesh was born in 1971, the

impoverished nation's economy was entirely
dependent on agriculture. There was almost no
industrial activity. A country of 70 million people
consumed only 183 megawatts of power.
Photo: Amirul Rajiv
But by 1990 the country was slowly advancing in
diversifying its economic activities. When democracy was restored in 1991 the country's power
demand rose to 1,500 megawatts, and it still had 300 mw surplus power. Till this time, the capital
intensive power plants were built under loans, grants and even barter trade agreement with donors
and friendly nations.

Democracy changed everything in the power sector. The demand for power suddenly started rising
while lack of funds, primarily, contributed to lack of supply growth. Besides, at the policy-making
level there was a lack of understanding of the importance of the power sector to the economy.
Between 1991 and 1996, a couple of power projects, such as the Raozan 210 mw plant, were
implemented. But their quality was very poor because of built-in corruption in the deals.

As the first democratic government in two decades, the BNP failed to add adequate new power plants
by the time it left power. The country was facing perennial power crisis when the second democratic
government of the Awami League came to power in 1996.

However, the BNP government had done some ground-work on reforming the power sector. It
framed a 20-year Power Sector Master Plan (PSMP) that would later act as the road-map for the
sector's development, and also initiated the process to involve the private sector in power generation
and drafted a private power policy.

When the new government came to power in 1996, the power scenario was grim. The government,
for the first time, attached high importance to addressing the situation as fast as possible. Given the
odds, this political commitment made this government the most successful in the power sector in the
history of the country -- though that success is not fully free of controversy.

Because of this commitment the country succeeded in securing private power deals through open
international tender, totaling more than 1,100 mw, without a single re-tender or any allegation of bid
manipulation.

Of them, agreements on two major projects gave Bangladesh one of the lowest power tariffs in the
world. Above all, it has proved that open tender and transparency work. In contrast, the next BNP
government failed to lead in the power sector and surrendered to corruption, proving that bid
manipulation and opaqueness fail to generate anything for the nation.

Era of Private Power

Phase I (1996-2001)
Faced with a bleak power scenario the government, in late 1996, opted for the comparatively
 How corruption can affect
the best deal

expensive private sector barge-mount plants as a short-term but quick While the AES deal was free
solution. Side by side, it initiated the long-term solution: bigger land- from any allegation of
based and cost-effective power plants. The government also came up corruption, the government
with a Private Power Policy that was drafted during the previous mishandled Meghnaghat's 100
government's tenure. The government planned to add a 1,300 mw hectare site development,
private power within the next five years. which is a huge contract of Tk
150 crore.
At the same time, the government was also implementing some
public sector power projects under the controversial supplier's credit This contract was awarded to
scheme. a Chinese company by blatant
bid manipulation and re-
PDB floated the first tender for barge-mount plants in five areas of tendering because the local
the country in late 1996, and as many as 39 companies expressed agent of that company was a
interest. ruling party parliamentarian.
This favouritism and
PDB signed its first deal for a 114 mw plant in Khulna in mid-97. corruption delivered a badly
Within a few more months it signed three more deals. These deals developed site, much behind
would add more than 400 mw power to the national grid within 10 schedule. AES, upon
months of the agreement. inspecting the site, refused to
accept the land.
The first 114 mw barge-mount power plant, US company Wartsila-
led Khulna Power Company Ltd, was commissioned in October 1998 As the ruling party
-- several months behind schedule. Two other companies, NEPC and parliamentarian had paid
Westmont, commissioned their plants in 1999, many months behind bribes, allegedly, of as much
schedule. A fourth barge-mounted deal fell flat. as Tk 20 crore to a section of
PDB and power ministry
Barge-mount schemes are not very cost effective as they charge officials and some policy-
around 5.2 cents per unit of power -- which is much higher than that makers, PDB pressured the
of the large land-based power plants. This tariff is, again, set on the AES to accept the land. This
condition that the barge-mounted plants be given tax-free imported feud created such a deadlock
fuel oil (in contrast, PDB run barge-mount plants do not get tax-free that the fate of the project was
fuel oil). The government has also agreed to supply these barge- uncertain for months in 2000.
mount plants with cheap natural gas in the near future. When this
supply starts (the government would bear the gas pipeline cost), the AES, on the other hand,
power tariff will slip down to 4.6 cents. threatened to suspend
construction of its other power
Former PDB Chairman Nuruddin M Kamal has explained to the project -- the Haripur 360 mw
press that the barge-mount projects were delayed because of the scheme -- and had gained the
government's inexperience in conducting negotiations with private World Bank's support.
parties, and also the inefficiency of the private companies in ensuring
project finance within the agreed schedule. The project was already
running 146 days behind
Success Case Study I: schedule when finally the
Meghnaghat 450 mw Prime Minister's Office
The first land-based private power project pursued was the 450 mw intervened and asked the
Meghnaghat power plant. This project of PDB, pushed by the Asian power ministry to resolve it as
Development Bank (ADB) with a 10 per cent equity, started moving a priority issue. PDB
forward from January 1997 through pre-selection of five competent ultimately paid a penalty of
power companies through open tender. $4.5 million to AES to
undertake remedial works on
US company AES was the lowest bidder in the Meghnaghat project the land site.
as it proposed a "levelized" (or average) 22-year power tariff of 2.79
cents; a price much below PDB's own power generation rate, and one The AES Meghnaghat
of the lowest rates in the world. scheme, itself, stands as a
shining example of how sheer
political will can present
Bangladesh with the best of
any deal, while at the same
The Meghnaghat project came into operation from October 2002, eight months ahead of schedule.

Success Case Study II:

Haripur 360 mw
While the government assigned the PDB with the Meghnaghat scheme, it assigned the Power Cell to
spearhead another major private power scheme -- the Haripur 360 mw plant. The idea behind
involving the Power Cell was to create a sense of competition among two government agencies. The
idea clicked quite well.

The Power Cell floated the tender for the 360 mw Haripur project in early 1997. Through
competitive bidding, US company AES again won the bid by offering a levelized power tariff of 2.72
cents.

The Power Cell dealt with this project without much trouble because there was no issue of free
electricity like that of the Meghnaghat scheme. Plus, there was no corruption regarding the land site
development.

This Power Purchase Agreement (PPA) and other agreements of this project were signed in late
1998, and the site was inaugurated on May 1999. By May 2001, the Haripur plant started partial
power production, and went into full production later that year. This scheme gave the country the
cheapest ever power.

Era of Private Power

Phase II (2001-2006)
After the October 2001 elections, the new BNP-led alliance government's policy regarding power
sector changed drastically. The government stopped most activities regarding private power, and
hardly pursued public sector power projects.

In the next five years, the government repeatedly demonstrated that whatever power project it would
pursue would only go to the parties which are either close to the ruling party, or have paid a
handsome bribe to a certain young but very powerful politician. As a result, the government failed to
deliver in the sector.

The new government came in the context of a good power supply scenario where demand and supply
had little gap. The previous government had left the country with the following projects:

* AES Meghnaghat 450 mw (commissioned in October 2002)

* AES Haripur 360 mw (already commissioned)

* KPCL 114 mw barge-mount plant, Khulna (already commissioned)

* NEPC Haripur 100 mw barge-mount (already commissioned)

* Westmont Baghabari 100 mw (already commission)

* RPCL Mymensingh-1 and 2 140 mw (already commissioned)

This comfortable situation apparently made the government so relaxed that it forgot that demand was
sharply rising every year, and that efforts to increase power generation should be a continuous
process. Instead, the government succumbed to the ploys of a section of unscrupulous bureaucrats
and experts, and an emerging young leader of the ruling party, who started taking hefty
"commissions" for project approval.
Within 100 days of coming to power, the new government published
a white paper on the corruption of the immediate past Awami
League government. Consequently it suspended all power project
related activities.

Then the government floated the second re-tender for the 80 mw Photo: Amirul Rajiv
Tongi peaking power plant project to be financed by PDB. An unfit Chinese company named Harbin
was chosen as the lowest bidder as it was being backed by the young politician. The company was
supposed to install and commission the plant in 2004 -- but brought it online on test in May 2005,
and started commercial operations in September.

However, the Tongi plant turned out to be a grossly flawed project. The plant is highly unreliable and
it tripped more than 75 times between May 2005 and May 2006. Internal investigations revealed,
literally, hundreds of flaws in the machinery and sub-standard equipment.

The Tongi plant is the only project the BNP-led alliance government could present to the country
during its five year regime.

Initially perceiving the Tongi plant deal as a grand success the young leader of the alternative
powerhouse of the government intervened with all other power projects in the pipeline and started
awarding power projects on the basis of the political affiliation of the contractors or their ability to
offer "commissions."

For instance, the government abruptly cancelled the Sirajganj 450 mw private power bid in early
2004. The bid was being awarded to the local Summit Power group that was previously involved
with the KPCL 114 mw barge-mount power project. The Summit bid was approved by the cabinet's
purchase committee, and the company had ensured finances from the Asian Development Bank and
the World Bank when the Prime Minister's Office (PMO) arbitrarily cancelled the bid. The reason for
this cancellation is that the chief of the Summit group is the brother of a parliamentarian in the
opposition. If the bid had been okayed, this plant would have started partial power generation from
2006.

Instead, the government went ahead and awarded two other public sector power projects to Harbin,
violating various rules and regulations. The physical works of these plants could not start till August.
The other public sector power project is the 250 mw coal-fired power plant in Barapukuria at an
inflated cost of 260 million dollars under a Chinese supplier's credit. The beneficiary of this project,
which has been over-priced by at least $100 million, is the brother of a 4-party alliance MP.

In private power, the government awarded the Meghnaghat-2 450 mw power project to Orion-
Belhasa consortium in severe violation of rules and regulation. The government was also busy
bending rules to award the Meghnaghat-3 450 mw power project to an inexperienced and unknown
consortium named Cadogan-Manning on the basis of unsolicited negotiation.

Other than these bids, the government allowed the Rural Power Company Ltd (RPCL) -- a company
of the Rural Electrification Board (REB) with shares held by various rural power cooperatives -- to
install a 70 mw third phase combined cycle power plant in Mymensingh at a staggering cost of $120
million.

In contrast, the PDB Shahjibazar 70 mw plant in the late nineties required only $30 million, and the
450 mw AES Meghnaghat plant needed less than $200 million (minus the cost of various supporting
infrastructure needed for the first phase of the plant there).

In public forums, the state minister for power spoke against private power saying that it was
"draining out" money from the country.
 How Tk 10 lakh bribe can
lead to Tk 175 crore project
cost hike
The six private power units were annually charging the nation Tk
2,000 crore for power supply. Of them, the KPCL in Khulna operates The history of the Tongi
on subsidized petroleum. This subsidy cost Tk 50 crore to 60 crore a project tender itself is a prime
month. example of corruption. The
first tender for Tongi project
However, minus the oil-fired plant, the price of power from the was floated in 2000 and a
remaining plants -- which includes two barge-mount units -- was Malaysian company TNB was
lower or even with the average power cost of the PDB. selected as the lowest bidder.
TNB asked for a price of
On an average, the price of IPP power stands at Tk 2.4 per kilowatt around Tk 185 crores ($31.5
hour. A World Bank study in 2001 pointed out that load-shedding of million), which is almost half
that time robbed the nation of half a percent of GDP. In other words, of the Tk 360 crore cost taken
the price of not having the electricity is much higher than the price by Harbin.
paid to the IPPs.
When the TNB was
Finally, in 2005, the government started realizing that all was not negotiating the project, a
well in the power sector. Though such realization should have put the senior assistant secretary of
highest emphasis on undertaking the right projects through a fair the power ministry asked for
process, the government continued to allow the vested interest groups Tk 10 lakh bribe. The
to dominate decisions. company was taken aback,
and it wrote a letter to the
This becomes evident from the late 2005 bid to award as many as 45 government saying that it
skid-mount and barge-mount power projects in 45 areas of the could not provide such
country. This was a mindless plan that came out of the PMO -- not amount of money. TNB also
the PDB or the power ministry -- as skid or barge-mount plants are said that every time its
costlier, and setting up 45 plants require setting up 45 costly power executives came to
and gas inter-connections at the plant sites. Bangladesh they had to bring
expensive gifts for officials.
The actual objective of this scheme was awarding projects to
different 4-party alliance MPs and party loyalists -- not to address the Despite submission of such an
country's power problem. But this scheme crash-landed in the same official letter nobody was
way the crash program of 2000 fell flat under severe donor objection. punished. When TNB refused
Ultimately, the government settled for awarding only three projects to bribe, the power ministry
totaling 150 mw capacity -- all of which went to party loyalists, not started stalling the project. At
genuine power builders. These projects are still pending with the one point, the Malaysian
power ministry. company's bid validity expired
on June 30, 2001. The tender
While the government miserably failed in power generation sector fell flat. The second tender
due to corruption, it however opted for another wrong decision to was floated immediately after
expand rural electrification network under the REB at an the new government came to
unbelievable pace. This move was driven partially by the greed of power. But it fell flat for
electricity pole sellers, and partially by ruling party MPs trying to unknown reasons.
impress their constituency without giving actual substance.

As a result, REB's power demand in four years grew to 2000 mw -- which is double its 2001
demand. The 2001 consumer base of 1.5 crore increased to 3 crore. Against such a high demand, the
government could supply only 500 mw power -- making rural consumers so angry that there had
been unrest in the northern region, specially in Kansat. The unrest in Kansat left many dead, and
such an incident clearly tells us how wrong the government had been in pursuing its power policy.

With load-shedding level reaching an unbelievable 2,000 mw plus in early 2006, public anger against
the government's handling of the power scenario led the government to change the state minister for
power. In reality, the state minister for power actually did not make any decisions as the vested
interest lobby had made the PMO the supreme authority in the affairs of the power sector. Such a
conflict of executive powers failed to add anything positive to the power sector. The new state
minister for power tried to exert his power, over-riding the PMO directives, but this only brought him
into major conflict with the upper tier of the government.

The presence of the vested interest quarter, or the alternative powerhouse of the government, in
executive decisions is also evident from the fact that in four years the government changed eight
chairmen in PDB, and eight secretaries in the power ministry.

Almost all the competent experts of PDB and the Power Cell, including those who had acquired
negotiation skills from the past IPPs, have left their jobs or lost their appropriate desks. They have
been replaced by incompetent and inappropriate men with the mandate to tamper bids by finding out
loopholes or gray areas in the policy, rules, and regulations so that projects can be awarded to
incompetent parties.

The power sector chronicle of 1996 to 2006 period clearly shows that corruption has been the key
reason for the 2001 government's failure in the power sector, and transparency was the key reason for
the 1996 government's success in the same area.

Failure Case Study I:

Tongi 80 mw
The Tongi 80 mw peaking power project of the PDB was awarded to Chinese company Harbin at a
cost of Tk 360 crore. Harbin had no past experience of designing and installing power plants on its
own. It was selected by questionably shelving a lower bid offer of Indian company Bhel. Harbin's
local agent admitted, to this writer, paying bribe to a section of PDB and power ministry officials,
and a "handsome bribe" to the alternative powerhouse for getting this deal.

The plant tripped a total of more than 80 rounds between May 2005 and June 2006. Of this, builder's
fault is attributed to 45 rounds of shutdowns for 2231 hours. The prime minister inaugurated its
commercial operation on September 3, 2005 and the plant had tripped within a few hours.

Due to these frequent shutdowns due to builder's faults, PDB had to swallow a loss of Tk 43 crore
between May 2005 and June 2006. Other than builder's fault, the plant also suffered another 1,000
hours of shutdown due to low gas pressure, or lack of gas.

The builder's faults include installation of sub-standard equipment like gas booster compressor
(GBC) and gas compressor, air compressor, mist eliminator motor, gas relief valve and different
types of filters etc.

These faulty machinery were installed in connivance with some PDB high officials who were in
charge of inspection of the machinery. PDB's internal investigation pin-pointed the corrupt officials
-- but nothing has been done against them.

Failure Case Study II:

Meghnaghat-3
When the government had not even pre-qualified any bidder for the Meghnaghat-2 project, it secretly
started considering an unsolicited proposal from an unknown US-Irish joint venture Cadogan-
Manning (CMG) in August 2004.

The PPR 2003 clearly bars any kind of unsolicited deals. Soon after the CMG submitted its proposal,
the implementing authority Power Cell said that the CMG proposal was not following any process
and it lacked a plan. In addition its unsolicited proposal violated the Private Power Generation Policy
of Bangladesh.

But as this company was backed by the young leaders of the alternative powerhouse, the Power Cell
saw arbitrary removal of its competent technical director and managing director who were resisting
the deal. Then the power secretary was replaced with a junior officer -- who was promoted twice on
the same day -- to do this job.

By August 2006, the power ministry had prepared a proposal to be submitted to the cabinet purchase
committee to legitimize the unsolicited deal.

CMG had never undertaken any power project before. Though the project was to be awarded to
CMG, it would not have any equity in the project. As per the CMG proposal, the project would be
financed 100 percent by Stone & Youngberg and Eagle Financial Group, US. Such financing violates
the country's Private Sector Power Generation Policy that demands that the contractor have
minimum 20 percent stake in the project.

CMG offered a 20 years levelized tariff of 2.78 cents per kilowatt hour which appeared to be one
cent lower than the AES Meghnaghat project. But the CMG power tariff did not include the price of
gas to be consumed by the plant for power generation. The Meghnaghat-1 power tariff included the
gas price.

On April 25, 2005, the parliamentary standing committee on energy and power ministry asked the
ministry to cancel the opaque process with CMG as it was hurting the image of the government, and
to float an international tender. Interestingly, under pressure from the alternative powerhouse of the
government, the standing committee in its next meeting changed its position on this matter.

In May, a rights group served the government with a legal notice demanding cancellation of the
process to award any contract based on the unsolicited proposal of CMG. The notice said that the
private power policy clearly states that bidder pre-qualification shall be made through advertisements
in the national and international press, making it evidently clear that the policy gives no scope for
unsolicited bids.

Power industry operators say that even if this deal is awarded to CMG, brushing aside all opposition,
there is hardly any possibility of implementation of the project.

Failure Case Study III:

RPCL Mymensingh-3
The Rural Power Company Ltd (RPCL), a company formed by the Rural Electrification Board
(REB) in the late nineties with majority shares held by various Palli Bidyut Samities (PBSs),
undertook the Mymensingh-3 70 mw power project in 2004 at an unbelievable cost of $120 million.

This cost is four times higher than the Shahjibazar 70 mw power plant built by PDB in 2001. The
only difference between the two plants was that the Shahjibazar plant was simple cycle and the
Mymensingh phase 3 plant is a combined cycle one.

Even the engineering and procurement contract for the AES 450 mw plant was comparatively lower
than this plant. AES spent $170 million for its plant, which is nearly seven times bigger than the
$120 million dollar Mymensingh-3 plant.

The construction of this project was awarded to German company Siemens. The project's consultant,
Lahmeyer International Polly Power Services Limited (LIPPS), Bangladesh, originates from
Germany, but its shares are entirely owned by a group of Bangladeshis led by one Captain Reza, now
wanted in several cases -- including subversion -- for attempting to destroy the Mymensingh plant.

When the project was awarded to Siemens, the majority shareholder of LIPPS was also the unofficial
local agent of Siemens. Using undue influence and bribes, LIPPS virtually ran the RPCL board.

Since LIPPS called the shots, the RPCL appointed it as consultant without holding any open tender.
LIPPS had been involved in consultancy of both the previous two units of the Mymensingh plants,
and were arbitrarily awarded the operation and maintenance (O&M) contract for the previous plants
at an annual cost at least $6 million higher than that paid by PDB for similar jobs.

As corruption reigned supreme, Captain Reza -- who kept the higher authorities and a section of the
press happy for many years by regularly paying them with monthly bribe -- went out of control in
2005. He tried to acquire the government shares of RPCL by influencing the RPCL board, and the
follow-up tussle with the government led to his ouster from the Mymensingh plant. Captain Reza,
and the others of LIPPS, forcibly shut down the plant and damaged the properties before escaping
from the site in 2005. LIPPS and its executives were sued, and all the contracts with LIPPS were
terminated.

This stalled the progress of the

Mymensingh-3 project, while Captain
Reza fled to Singapore to avoid arrest
and trial. Instead of being punished,
Reza filed an international case in
Singapore and has reportedly won it --
asking Bangladesh to pay him crores
for terminating his contract.

Meanwhile, Siemens failed to

implement the project in December
2005, and it could not finish it in
December 2006.

Earlier in 2004, because of LIPPS

resistance to allow German donor
agency KfW to conduct an audit into
the books of RPCL, the government
lost 20 million Euro untied grant ear-
marked for this project, and another 40
million Euro for another power
project.

Skid-mount and barge-mount

projects
The perfect example of undermining
of professionalism, and emphasizing
nepotism, is the alliance government's
signing of six skid-mount or barge-
mount power projects totaling 160 mw
power generation capacity. All of these
contracts went to inexperienced sons
and relatives of powerful policy-
makers, at rental terms favouring them
at the cost of the nation.

These deals were signed in recent

months following more than one year
of controversy. Initially in 2005, the
government wanted to award 45 such
deals to parliamentarians, ministers,
and their sons and nephews. But that
bid was foiled following warnings
from the World Bank. This shows that
though the power scenario was grim and the government had to do something sincerely to overcome
the situation, the policy-makers were all hell-bent on making deals for personal benefits.

Accordingly all of the six deals went to friends and relatives of the BNP leaders.

PDB had opposed signing of any of these deals, saying that the 15-year costly rental terms would
force it to incur hundreds of crores loss each year. According to one calculation, PDB will incur a
loss of more than Tk 3,000 crore over a 15 year period by purchasing rental power at a higher rate
and selling the same at a lower rate.

This analysis was based on hundreds of reports that this correspondent filed in The Daily Star from
1992. Defenders of corrupt people often strongly argue that fair practices cannot always be achieved
because of hindrances posed by opposing bidders.

But the truth is that when there is fair play opposing bidders do not create any hindrance. This has
been proved in executing the private power schemes during the Awami League regime. It also proves
that honesty is not weak as a policy, it is the most effective policy that we have ever had.

Sharier Khan is City Editor, The Daily Star.