Document of

The World Bank

FOR OFFICIAL USE ONLY

4/Z /z 9 I - iReport No. P-4549-BD

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

IN AN AMOUNT OF SDR 137 MILLION

TO THE PEOPLE'S REPUBLIC OF BANGLADESH

FOR AN

ENERGY SECTOR ADJUSTMENT CREDIT

MARCH 22, 1989

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

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CURRENCY EQUIVALENTS

The external value of the Bangladesh Taka (Tk) is fixed in relation to abasket of reference currencies, with the US Dollar serving as theintervention currency. The official exchange rate on January 1, 1989 wasTk 32.27 per US Dollar.

WEIGHTS AND MEASURES

Kg KilogramkW Kilowatt (= 1.341 horsepower)Mw Megawatt (thousand kilowatts)MVA = Megavolt-ampere (thousand kilovolt amperes)kWh = Kilowatt hour (- 860.42 kilocalories)GVh = Gigawatt hour (million kilowatt hours)kV _ Kilovolt (thousand volts)km Kilometer (0.6214 mills)bbl Barrel (0.159 cubic meters)(m3)bcf 2 Billion cubic feet (1 cubic foot - 0.0Z8 m3)tcf Trillion (1,000 billion) cubic feetbtu British Thermal Unit (0.252 kilocalories;

FISCAL YEAR

July 1 to June 30

ABBREVIATIONS AND ACRONYMS

ADB - Asian Development BankADP - Annual Development ProgrammeBGFCL - Bangladesh Gas Fields Company LimitedBGSL - Bakhrabad Gas System LimitedBOGMC - Bangladesh Oil, Gas and Minerals CorporationBPC - Bangladesh Petroleum CorporationBPDB - Bangladesh Power Development BoardCIDA - Canadian International Development AgencyDESA - Dhaka Electricity Supply AuthorityEKL - Eastern Refinery LimitedGDP - Gross Domestic ProductIPC - Imports Program CreditJGTDC - Jalalabad Gas Transmission and Distribution CompanyKfW - Kreditanstalt fuer Wiederaufbau (Federal Republic of Germany)LPG - Liquified Petroleum GasNGO - Non-Governmental OrganizationODA - Overseas Development Administration (United Kingdom)OECF - Overseas Economic Cooperation Fund (Japan)PBS - Palli Bidyut Samity (Rural Electrification Cooperative)PFP - Policy Framework PaperPIP - Priority Investment ProgramREB - Rural Electrification BoardSAF - Structural Adjustment FacilitySFYP - Second Five-Year PlanSGFL - Sylhet Gas Fields LimitedTFYP - Third Five-Year PlanTGTDC - Titas Gas Transmission and Distribution Company LimitedTOR - Terms of ReferenceUNDP - United Nations Development ProgrammeUNDTCD - United Nations Department for Technical Cooperation and DevelopmentUSAID - Urited States Agency for International Development

FOR OMCIL USE ONLY

BANGLADESH

ENERGY SECTOR ADJUSTMENT CREDIT

Table of Contents

Page Nos.

CREDIT SUMMARY

Is THE ECONOMY ............... I........................ 1Background .......................................... IRecent Economic Developments ... ........................ ..... 2Development Strategy and Medium Term Prospects ........O..... 3Financing Needs and Prospects ... ...... ...... ............ 6

II. BANK GROUP OPERATIONS AND STRATEGY IN BANGLADESH ............... 7

III. ENERGY SECTOR ........... ..... o....o...** 10Energy Resources ............. . ........... .. ......... ... 10Energy Consumption and Demand .............................. 11Sector lnstitutions i...... ... ...... **.......* 12Private Sector Participation in the Energy Sector .......... 13Government's Energy Sector Strategy ................... 13IDA's Energy Sector Assistance Strategy .................... 14

IV. ADJUSTMENT STRATEGYs DEVELOPMENT OF THE ENERGY SECTOR ..... ..... 16A. Energy Sector and the Macroeconomy ......................... 16B. Energy Resource Development and Investment ................. 16

Priority Investment Program ............................. 17Long-Term Least Cost Development Plans .................. 16

C. Energy Pricing and Demand Management ....................... 21Energy Prices ...................................................... 22Energy Conservation ...... *...... ** *.**...* .... .. ...... 25

D. Institutional Performance and Development .................. 26Reform of BPDB .......................... ... .. .. *. ... ..... . 26Reduction of Power System Losses ........................ 27Reorganization of the Gas Subsector ..................... 28Accounts Receivable and Payable ......................... 29Traditional Energy ...................................... 30

V. THE CREDIT *. ot .**....... se .... ***....... ....... 31Background ......................................................... 31Procurement and Disbursement ............................... 32Tranching ......................................................... 33Cofinacing .. *....................................... ..... 33Benefits and Risks *......... . ............................... 33

VI. COLLABORATION WITH THE IMF *......................... ... 33

VIZ. RECOMMENDATION ....... 34

This documnt ha a restrid disibution and may be ued by rdpits only in the pWformn eof their official duties. Its contents may not otherwise be disclosed without World Bank authodzain.

Annex I * conomic IndicatorsAnnex II s Status of Bank group Operations ix lngladeshAnnex III % Supplementary Data SheetAnnex IV I Government's Letter of Sectoral PolicyAnnex V I Development Policy KatrirAnnex VI t Priority Investment Program and FinzancIg Plan

BANGLADESH

NERGY SECTOR ADJUSTNENT CREDIT

Credit Summary

Borrower I People's Republic of Bangladesh

Amount I SOR 137 million (US$175 million equivalent)

Terms a Standard, with 40 years maturity

Purpose s The credit would provide foreign exchange tofinance general imports. The credit would supportthe Governments reform program in the energysector, as ouclined in the Government's Letter ofSectoral Policy (Annex IV), from the Government toIDA, and assist in the lmplementation of theGovernment's priority investment program for theperiod FY89-91. The reform program consists of anumber of significant improvements in the areas of:resource development and investment; energy pricingand demand management; and institutionalperformance and development.

Disbursements s The proposed credit would be available fordisbursement In two tranchest SDR 58.71 mil'ion(US$75 million equivalent) upon crediteffectiveness and the remaining =DI 78.29 million(US$100 million equivalent) subject to theGvoernment meeting the specific conditions listedIn Annex V. It Is expected that creditdisbursements of about US$115 million equivalentwould take place in MY90 and US$60 millionequivalent in PY91.

Cofinancina I The Govermnent of the Federal Republic of Germanyproposes to provide, through parallel financingunder terms and conditions similar to those for theproposed project, a grant of DU 26 million tofinance general imports. further, the Governmentof Japan has indicated that following Boardapproval it would consider the provision ofsupplementary financing for the proposed credit.

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Benefits a The proposed credit would make a major contributionto the achievement of Bangladesh's objectives forthe energy sector development. The credit'spreparation has assisted the Government inundertaking a program of sector-wide reformsurgently needed to improve the sector's performanceand net contribution to the Budget. Consequently,the major benefits would includes a more efficientallocation of resources; improved investmentplanning; improved financial viability of energysector entities; the mobilization of additionalresources for the Budget; and the removal ofinstitutional constraints to the energy sector'sefficient development.

Risks s The major risk of the proposed Energy SectorAdjustment Credit is that political events mayimpede implementation of the reform program.However, to date the Government has demonstrated astrong commitment to a gradual rationalization ofenergy sector policies and, in many cases, hissuccessfully implemented measures involvingpolitically difficult decisions.

INTERNASTIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECO)N ENDATION OP THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED ENERGY SECTOR ADJUSTMENT CREDIT

TO THE PEOPLE'S REPUBLIC OF BANGLADESH

1. I submit the following report and recummendation for a proposedEnergy Sector Adjustment Credit to the People's Republic of Bangladesh forSDR 137 million (US$175 million equivalent), on standard IDA terms with40 years maturity, to provide foreign exchange for financing generalimports. The credit would support the Government in implementing policyand institutional reforms in the energy sector.

PART I: THE ECONOMY

2. A Country Economic Report, 'Bangladesh2 Recent EconomicDevelopments and Short-term Prospects (Report No. 7596-BD, dated March 13,1989), was distributed to the Executive Directors on March 17, 1989.

Background

3. Bangladesh has a very high population density, limited naturalresources and widespread poverty. Annual per capita income is only aboutUS$160 (1986); its continued high rate of population growth remains a majorconstraint on development.

4. Agriculture is the mainstay of the economy, accounting for almosthalf of the Gross Domestic Product (GDP) and exports, and three-quarters ofemployment. Foodgrain production, which accounts for two-thirds of agri-culture, remains vulnerable to natural disasters, and the country continuesto require annual foodgrain imports of about one-tenth of total consump-tion. Moreover, agriculture has not been able to fully absorb the rapidlygrowing labor force nor generate adequate foreign exchange earnings.Therefore, growth in industry, which accounts for about 10 of GDP, andexpansion in labor-intensive exports have become important for achievingemployment and balance of payments objectives. However, the Bangladeshlabor force's lack of skills and education and poor health and nutritionimpede this transition. The adult literacy rate is only about 29Z, and percapita public expenditure on education is among the lowest In the world.Other constraints on industrial development include weak infrastructure(power, transportation), inefficient public enterprises, restrictive tradepolicies and a weak domestic financial system.

5. The economy is also characterized by a very low savings rate,which in part reflects the low level of incomes, and by a large structuralpayme:'s gap. Remittances account for half of national savings, which inturn finance about half of total investment in the economy. Exportearnings cover only about 402 of the import bill, although non-traditionalexports have grown rapidly in recent years. The capacity to finance

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imports can be severely affected by external factors (such as falling juteprices) largely beyond the Government's control. Inadequate growth indomestic resources also seriously constrains the financing of key publicsector investments as well as the operation and maintenance of existingassets.

6. Despite these constraints and repeated disruptions caused bynatural disasters, Bangladesh has made significant progress in the 19809.Notably, policies designed to strengthen the agricultural, industrial andexport sectors have been adopted, permitting the economy to grow by aboutd' per year during the Second Five-Year Plan (SPYP) (MYOl-85). Foodgrainproduction growth averaged 3.01 per year during the same period, despiteadverse weather conditions. Industrial output, which stagnated in theearly 19809, rebounded in the same period. led by import substitution inthe chemicals sector and export-oriented, labor-intensive activities. Non-traditional exports have grown on average by over 202 per year in the1980s, and development of domestic comercial energy supplies, especiallynatural gas, has increased rapidly, enabling relatively high growth in thepower and fertilizer sectors and significant import substitution ofpetroleum products.

Recent Economic Developments

7. The Government has continued to make progress during nr86-88towards creating a stable and undistorted economic environment. Itsadjustment efforts are being supported by the International Monetary Fund(IMF) under a third year Structural Adjustment Facility drawing for FY89(Part VI of this report).. Macroeconomic management has been generallycautious. Monetary expinsion has been brought under control, and inresponse to prudent demand management, the balance of payments and budgetdeficits have been brought down to manageable levels, external reserveshave improved to the equivalent of over three months' imports and thesnnual rate of inflation Is now about 102. The official exchange rate hasbeen adjusted frequently in small steps to mprove and maintain competi-tiveness. In addition, the authorities have sipificantly expanded theshare of transactions conducted at the (free) secondary market rate, whilethe gap between the official and secondary exchange rates was narrowed from15S in FY85 to 22 in November 1988. Although the country's budgetary andfinancial position has strengthened considerably, public expenditures,particularly for investment and operations and maintenance, need to besubstantially increased to meet pressing development needs.

8. Although deposit interest rates have declined in real terms inrecent years, they are still positive and are for the most part sufficientto encourage savings. However, there is a need to increase the flexibilityof lending rates' structure to ensure an adequate flow of credit and thefinancial viability of lending institutions. Agriculture pricing policiesare generally more realistic than in many other countries; announcedsupport prices to farmers generally reflect international prices, althoughsupport prices have not been consistently made fully effective throughadequate domestic procurement. Finally, trade and Industrial policies(tariffs, quotas, restrictions and licenses) have been Improved markedlysince 1982, but especially in the last three years. However, theseimprovements are only the early steps in a phased program, and distortionsin the trade system, especially those brought about by high and variabletariffs and quantitative restrictions, are still excessive.

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9. the last few years have also witnessed some disappointments.Overall real GDP growth averaged only 31 in M7 and FY88. well below theThird Five-Year Plan (TMYP) (FY86-90) goal of 5.4Z and is expected to beonly 1.22 in FY89. Disastrous floods, insufficient attention to short-termeconomic management, and political uncertainties contributed to the slow-down In economic growth. Growth momentum in the agricultural sector hasslowed down since the add-eighties, in part due to floods, but also due toa slowdown in the lmplementation of minor irrigation programs, reducedcredit availabllity as a result of measures necessary to collect overdues,and institutional problems. In view of this slowdown, the Governmentrecently initiated a major review of the agriculture sector with UNDPassistance, to identify problems and correctiv measures. Manufacturinggrowth has averaged less than 3S over the past two years, largelyreflecting low income generation in the economy and insufficient demnud forindustrial goods. Domestic resource mobilization is still inadequate andneeds to be improved significantly. Resulting shortages of local counter-part funds for development projects, as well as deficiencies in projectplanning and preparation, have also contributed to continuing difficultiesin project implementation. As a consequence, public investment hasdeclined in real terms and has not provided the stimulus needed toresuscitate the economy in view of the recessionary pressures brought on bythe recent floods.

Development Strategy and Medium Term Prospects

10. The alleviation of poverty remains the cornerstone of theGovernment's development strategy. In the first ten years of Independence(1972-1981), the proportion of the population in extreme poverty (thoseunable to afford enough food to live a reasonably active life) rose from43S to 50. Real wages fell, and the quality of the diet worsened. Since1982, this deterioration appears to have been arrested. More food was madeavailable to lower income groups, partly through the rapid expansion ofFood for Work and Vulnerable Group Development programs, and real agricul-tural wages rose, recovering to their pre-Independence levels in 1986 forthe first time. The incidence of poverty appeared to have declinedslightly during FYOl-86, although the absolute number of poor had continuedto increase and the magnitude of poverty remained overwhelming. However,in the last two years, the stagnation of the economy and direct andindirect consequences of major natural disasters appear to have reversedthe improving trend observed in the early eighties.

11. Bangladesh needs to revive and accelerate the momentum of economicgrowth and development as soon as possible. The economic stagnation of thelast two years makes this need even more imperative than before. Withoutsignificant acceleration of economic growth it will not be possible to makeeven modest strides In alleviating extrem poverty and improving the livingstandards of the vast majority of the population. The Government fullyrecogn ses this need; and its most recent Policy Framework Paper (PiP),prepared in consultation with the IMF and the Bank, articulates a macro-economic framework (summarized In Table 1) and requisite policy reforms toachieve such a goal. The PFP recognizes that, to accelerate economicgrowth and development it will be essential to significantly improveeconomic performance in the key productive sectors--agriculture andindustry--(to generate incomes, employment and export earnings) which havebeen lagging in recent years; at the same time, it also recognizes that

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Table 1 REY ECONOMIC PROJECTIONS : FY88-PY91

PY88 FY89 FY90 FY91Estimate ---- Proiectionb------

GDP growth rate 3.0 a/ 2.0 a/ 5.8 4.8GDP deflator b/ 9.8 11.5 8.0 7.0Consumer prices bl 11.4 11.5 8.0 7.0GDP per capita growth rate -0.7 -0.5 3.3 2.3Consumption per capita growth rate

Gross investment/GDP 12.0 a/ 12.8 a/ 13.5 14.2Domestic savings/GDP 2.2 1.3 3.4 4.0National savings/GDP 6.3 5.2 7.0 7.4Marginal national savings ratePublic investment/GDP cl 5.9 6.4 6.9 7.4Public savings/GDP cl 0.6 - 0.9 1.1Private investment/GDP c/ 6.1 6.4 6.6 6.8Private savings/GDP cl 1.5 1.3 2.5 2.9Ratio of publiciprivate investment

Government revenue/GDP 8.8 9.2 9.5 9.8Government expenditure/GDP 16.3 16.8 17.2 17.5Deficit (-)/GDP -7.3 -7.6 -7.7 -7.7

Export growth rate 14.6 2.5 14.9 11.4Non-traditional export growth rate 32.5 6.5 21.7 18.5Exports/GDP 6.3 6.1 6.4 6.5Non-traditional exports/GDP 3.3 3.3 3.7 4.0Import growth rate 14.0 15.5 1.9 10.9Imports/GDP 15.3 16.6 15.4 15.7Current account (in US$ million) -1,111 -1,575 -1,472 -1,689Current account/GDP -5.7 -7.6 -6.5 -6.8

Aid disbursements (in US$ million) 1,641 1,677 1,707 1,908Aid disbursementsITD? 8.4 8.1 7.5 7.7Debt service (in US$ million) 526 568 652 703Debt service ratio d/ 22.6 23.8 25.1 25.1Debt service/GDP 2.7 2.7 2.8 2.8

al The Policy Framework Paper estimated growth in FY88 at 3.92, but this isnow revised to 1.82 on the basis of BBS data; simllar, for FY89. 22 isthe upper range of the CZM estimate of 1-22. More recent estimates arealso lower for investment and savings ratios.

b/ Percentage increase in annual average price level.c/ ovwing to data limitations, operating surpluses and deficits of public

enterprises are included in private savings, while a portion of publicenterprises' investments (what which is channeled tarough the AnnualDevelopment Plan is included in public sector investment.

d/ Debt service as a percentage of receipts from exports of goods andservices; and private transfers.

Source: Bangladesht Policy Framework Paper, 1988189-1990/91.November 14, 1988.

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special efforts through targeted programs would be needed to improve theconditions of the extremely poor who might not directly benefit from thegrowth process. The PFP outlines broad directions of policy refonms andinvestment and resource needs (both domestic and external) over the nextthree years to achieve these objectives. While it will be virtuallyImpossible to attain these goals without substantial additional resources,significant mprovements In the mobilization, management and utilization ofthe limited available resources by the Government will also be needed.

12. The Government's Third Five-Year Plan (CFYP) for FY86-90 and itsPFP for FY89-91 as well as the Bank's recent Country Economic Memorandaidentify policy, institutional and resource requirements for supportingsuch a strategy. Of utmost importance in this regard ares (a) continuedcommitment to adjustment and to further improvements In economic policiesin key areas and the institutional framework; and (b) increased resources,both domestic and external, in order to finance investment and other expen-ditures in support of the strategy without undermining macroeconomicstability.

13. Aside from the energy sector policy improvements agreed under theproposed credit, key policy improvements necessary to Implement theGovernment's development strategy include the following3

(a) In agriculture, continued provision of price incentives, Inputdelivery, credit support (with timely recoveries), and complemen-tary investments in water control, research and extension servicesto promote foodgrain production.

(b) In industrn and trade, measures to improve further the environmentfor private sector initiatives are essential to promote industrialgrowth and exports. These include: (i) continued flexibility inexchange rate management, provision of adequate export financingand incentives and improved access to imported inputs at competi-tive terms; (it) further trade liberalization by reducing quanti-tative restrictions and rationalizing tariffs; (iii) strengtheningfinancial institutions (while restoring credit discipline) toencourage exports, promote private investment in the industrialsector and ensure the efficiency and competitiveness of suchinvestments; and (iv) reform of public manufacturing enterprisesto increase their commercial orientation by increasing tleirautonomy, strengthening their management and, in selected areae,privatizing them.

(c) In public expenditures, Ci) in view of increased demands forrehabilitation and for implementation of ongoing programs in theface of limited domestic resources and absorption capacity, areordering of priorities in the public expenditure program isessential. Such reordering should place emphasis on priorityrehabilitation needs, operations and maintenance, developmentprojects, increased allocations of Taka resources for highpriority projects in productive sectors and human resourcedevelopment, and financing incremental recurrent costs of socialsector programs; (Hi) at the same time, efforts should be made toreduce implementation bottlenecks (e.g., procurement, technicalassistance) and streamline bureaucratic procedures to Improve theutilization of foreign resources.

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(d) Increased domestic resource mobilization to facilitate speedierimplementation of the public expenditure program. This willinclude (i) tax reforms to improve revenue elasticity (as well asallocative efficiency and equity) of the tax system over themedium term; (ii) increased cost recovery through appropriatepricing of goods and services and effective revenue collections bypublic enterprises, and enforcement of their debt serviceobligations to increase non-tax resources; and (Wii) improvedfinancial discipline through effective loan recovery inagriculture and industry.

(e) Human resource development is a critical component of the develop-ment strategy to increase productivity and improve the quality oflife by reducing infant mortality and adult morbidity using

- nutrition, health services, education, population planning andspecial projects for vulnerable groups, including women. Whilethere have been improvements in recent years in some of theseareas, a greater commitment in terms of incree4ed provision offinancial and administrative resources and designing effectivestrategies to reach the poor is needed.

Financing Needs and Prospects

14. Achieving the goals of higher growth and enhanced human resourcedevelopment will require increased foreign aid flows (Table 1). Totaldisbursements of US$5.3 billion are likely to be required during 1Y89-91.This compares with disbursements of US$4.5 billion in the most recent threeyears (FY86-88), representing a real increase of about 122 for the periodas a whole. Over half of the increased flows could come from improvedimplementation performance of the large existing undisbursed project aidpipeline (currently over US$4.6 billion), with little real increase inproject aid commitment levels (currently about US$1.1 billion per year).Food aid will also continue to be required at about its present level ofUS$300 million per year to help bridge the gap between domestic productionand effective demand, and to provide for Food for Work and Vulnerable GroupDevelopment programs. Finally, commitments of quick disbursing program aidwill need to rise by about 52 per year in real terms. Over US$1.8 billionof disbursements of this form of aid will be required over the three-yearperiod.

15. With improved effortLs to implement policy reforms and with carefulaid coordination, almost two-thirds of Bangladesh's need for quickdisbursing aid is expected to be available from bilateral and other multi-lateral donors. IDA would need to finance the remaining one-third, a totalof about US$600-700 million during the three-year period. In addition tothe preposed Energy Sector Adjustment Credit, IDA's program tentativelyincludes quick disbursing credits to support policy adjustments and insti-tutional strengthening in the financial, industry, and agriculture sectors,and a structural adjustment operation.

16. This level of borrowing is not expected to place excessive strainon Bangladesh's debt servicing capacity. While the debt service ratio(including obligations to the DMh) rose from 16S in FY84 to 281 in FY87 dueprimarily to repayments of commercial food loans necessitated by frequentfloods and to repurchase obligations to the ThY, the ratio fell to 221 inFY88. It is projected to fall further to below 202 in the 19909. IDA,, asof the end of 1987, accounted for 302 of Bangladesh's total long-term debtoutstanding and disbursed and llS of its total long-term debt service.

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PART II : BANK GROUP OPERATIONS IN BANGLhDESH

17. Cumulative Bank Group codmitments to Bangladesh totalledUS$4,108.5 million equivalent, net of cancellations as of September 30,1988 (Annex II}. This figure includes reactivation of eleven credits(US$154.4 million) made to Pakistan before 1971, as vell as a consolidationloan (US$54.9 million) and a consolidation credit (US$37.5 million)approved in 1975 to cover liabilities arising from projects completed priorto Independence. The Bank Group has approved 116 credits and one loansince Bangladesh became a member in 1972. Of the total IDA'coamitments,approximately 222 have been for agriculture, irrigation and ruraldevelopment, 142 for power and energy, 9S for industry, 72 for educationand technical assistance, 91 for transportation and telecommunications, 32for population and health, 32 for urban Infrastructure, and 332 for importsprogram support. Since Bangladesh became a member of IPC in 1976, fiveinvestments have been approved.

18. The Bank chairs the annual Bangladesh Aid Group meeting whichprovides a forum for donor consultation, and the Bank's Resident Represen-tative chairs regularly scheduled donor meetings in Dhaka to exchange viewson policy issues, project implementation and aid coordination. In November1986, the Bank chaired a special meeting of donors and Government represen-tatives, hosted by the Federal Republic of Germany, to review programs toassist the rural poor in Bangladesh; a special meeting on agriculture isplanned for early April 1989 in Dhaka.

19. IDA's lending program for FY89-93 is expected to averageUS$600-700 million a year. In FY89 total commitments are planned at aboutUS$600 million for six operations; in FY90 the program is expected tocommit about US$630 million for nine operations. Three of the operationsplanned during these two years would be for fast disbursing sector andstructural adjustment credits. Assessment of the rehabilitationrequirements resulting from the 1987 and 1988 floods is nearly completed;establishment of prioritiet for the rehabilitation work and developmentprogram is an important next step. IDA is working with the Government onthese efforts and has taken steps to amend credit agreements for ongoingprojects which were approved last year to assist in rehabilitationfollowing the 1987 floods, so that the proceeds may be used for emergencyworks needed as a result of this year's floods as well. IDA is alsopreparing a proposed Third Flood Rehabilitation credit for FY89.

20. IDA's country assistance strategy is designed to support theGovernment's development priorities and objectives, as well as its overallstrategy for achieving them. Given the predominant position of agriculturein the economy and its direct impact on the incomes and consumption levelsof the poor. IDA's lending has emphasized agriculture, with particularimportance attached to increasing food production by augmenting the supplyof essential inputs such as irrigation equipment, fertilizer and improvedseeds, the development of extension services, research programs and ruralcooperatives, the provision of agricultural credit and the promotion ofinput and output pricing policies that provide better production incentivesto farmers. IDA has also supported the Government's efforts to encouragegreater private sector participation in the supply and distribution ofagricultural inputs. Finally. IDA's lending program has promoted agricul-tural diversification through increased production of fish and forestryproducts.

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21. IDA's assistance to Bangladesh's industrial sector is intended toenhance the sector's capacity to contribute to a higher, sustained level ofeconomic growth, provide productive employment for a rapidly growing workforce and improve the country's external trade and payments position on asustained basis. IDA has assisted Bangladesh's industrial sector throughprogram credits as well as specific projects to increase fertilizer produc-tion, rehabilitate the jute and textile industries, strengthen developmentfinance institutions and promote small-scale industries. The FY87Industrial Sector Credit (Cr.1816-BD) constituted the first of a stries ofpolicy-based credits intended to support industrial and trade policyreforms, export promotion efforts, enhancement of public enterpriseefficiency and financial sector reforms. The credit provided a policyframework for future industrial credits and specific industrial investmentprojects.

22. IDA's lending in the energy sector has been designed to expand theuse of natural gas as a substitute for imported oil, rationalize the supplyof petroleum products, promote conservation and more efficient energy useand encourage further gas and oil exploration. IDA is also financingprojects to expand the country's power generation and transmission capa-bilities and rural electrification system. Recognizing the criticalshortage of traditional fuels, IDA is financing investments in forestry toincrease the supply of fuelvood.

23. In the transport sector, IDA has supported projects to improve theinland water transport system, expand the country's sea port facilities andupgrade key sections of the road network, as well as a multi-modal projectto enhance fertilizer handling and distribution operations. Bangladesh'sroad network is extensive, but the roads are in poor condition and inade-quately maintained. IDA's future transport lending will concentrateprimarily on supporting the Government's programs to rehabilitate deter-iorated roads by improving maintenance standards, techniques and expendi-ture levels, and strengthen overall investment planning. Subject toverification of its economic feasibility and affordability (the feasibilitystudy is expected to be completed this fiscal year), IDA may also supportconstruction of the first bridge over the Jamuna (Brabmaputra) River,providing a permanent transport and power link between the northwest andeastern regions.

24. Facing an estimated adult literacy rate of only 29%, IDA's lendingstrategy in education focuses on primary education and skills development.Lending for primary education supports the national goals of achievinguniversel primary education, reducing illiteracy, expanding access toeducation and upgrading quality. Projects for vocational and technicaleducation promote the training of craftsmen, technicians and engineers.

25. To help alleviate the severe economic and social pressures createdby the extremely high population density and the continuing populationincrease, IDA and other donors are assisting the Government in implementingaccelerated family planning and maternal and child health care programs.With Bangladesh's urban population expected to increase from about 16-18million in 1985 to between 35-40 million by the year 2000, IDA is alreadyfinancing water and sanitation improvements in Dhaka and Chittagong, aswell as projects intended to help the Government address the problem ofproviding low-cost shelter and infrastructure services to the urban poor.

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26. Because of the need for sustained transfer of substantial finan-cial resources, a significant portion of IDA's lending to Bangladesh hasbeen in the form of fast disbursing annual program credits. Programcredits have also provided a useful vehicle for addressing a wide range ofsectoral and macroeconomic policy issues. Bangladesh will continue to needsubstantial fast disbursing foreign exchange resources, on highly conces-sional terms, because of the large structural imbalances between thecca_ ry's export earnings and import requirements, and its domestic savingsrate and investment needs. To assist Bangladesh in addressing these struc-tural problems, IDA plans a series of fast disbursing sector adjustmentcredits in energy, finance, industry, agriculture, and public enterprises.IDA also intends to provide support to strengthen fiscal management,through a planned structural adjustment operation in FY91, which wouldcombine improvements in public expenditure management, resource mobili-zation and possibly operational aspects of public enterprises.

27. Project implementation is hampered not only by a shortage ofdomestic financial resources, but also by poorly trained staff of Imple-menting agencies, limited managerial capacity and cumbersome bureaucraticprocedures. IDA, in consultation with other donors, is engaged in acontinuing dialogue with the Government on ways to improve project imole-mentation and disbursements. During the past year, for example, -'nP-financed studies on project aid and commodity aid utilization in Bangla shwere completed; these were discussed in specially convened donor meetiagsin Dhaka, and it was agreed to form smaller working groups of interesteddonors to meet with the Government and prepare specific action programsbased on the report's recommendations. IDA intends to work closely withthe Government to identify an appropriate package of measures to improveproject performance which might be supported under the planned structuraladjustment credit. In support of broader institutional reform, IDA is alsoproviding technical assistance for project preparation and implementation,financing projects to train civil servants and other managerial andtechnical personnel, and encouraging the Government to introduce admini-strative reforms and improve the structure and management of the civilservice.

28. In late FY88 IDA learned that the Government had not been imple-menting the subsidiary loan agreements' onlending terms and conditions forcommercial entities (including energy sector entities) under ongoing IDAcredits, ADB loans and loans from various bilateral donors. For IDAcredits, Government has required entities, with few exceptions, to makeinterest payments and repayments of principal on the same terms as theGovernment repayments to IDA, rather than in accordance with the subsidiary'oan agreements. It is estimated that total accumulated arrears of energysector entit'es under IDA credits, as of June 30, 1988 was US$86.9 millionequivalent. With IDA's agreement, the Government has adopted the followingaction plan to address this issue for IDA credits. Beginning with theirFY89 accounts, all entities were instructed to record in their financialstatements payments of interest and principal in accordance with the termsand conditions of the subsidiary loan agreements, and would be Incompliance with the subsidiary loan agreements. Further, with regard tothe accumulated arrears of energy sector entities under the varioussubsidiary loan agreements, the Government has decided that all of the

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arrears as of June 30, 1988 will be converted into equity, and it villfully implement this decision by June 30, 1989. For the outstandingarrears under the subsidiary loan agreements for non energy sectorentities, the Government has decided to either convert them into equity orto reschedule repayments depending upon the financial circumstances of eachentity. The Government will finalize its decision for each entity by June30, 1989 and implement it immediately thereafter. Future compliance withthe terms and conditions of the subsidiary loan agreements vill bemonitored closely by supervision missions.

PART III : ENERGY SECTOR

Energy Resources

29. Bangladesh's commercially exploitable energy resources consist ofsubstantial reserves of relatively low cost natural gas, limited hydro-power potential and a large base of traditional fuels, in the form of cropresidues, animal dung and wood. Natural gas is the main source of conmmer-cial energy, accounting for about 60? of supply in FY87 compared to 36Z inFY80. Gas output increased steadily over the last decade, growing from 29billion cubic feet (bcf) in FY76 to about 120 bcf in FY87, an annual growthrate of 13.8?. As a result of the substitution of gas for petroleumproducts, Bangladesh has been able to reduce petroleum imports; in FY87they claimed about 132 of the country's foreign exchange earnings, comparedto 54? during FY82-86. Estimated recoverable reserves of gas, all locatedin the east zone, are about 10 trillion cubic feet (tcf), sufficient tomeet expected demand for 20 years, and prospects are good for increasingthe reserves in the near term with a more intensified field appraisalprogram and in the longer term with the implementation of a comprehensiveexploration program, both offshore and onshore. The Government hasaccorded high priority to the development of these reserves, and under theproposed credit (para. 59) it would review the gas exploration and develop-ment program annually with IDA.

30. Oil has been discovered recently in the Sylhet gas field area, butthe size of the reserves has not been determined and it is too early toassess the significance of the discovery. Hence, sizable imports of petro-leum products, in addition to imports of crude processed domestically, areexpected to continue. In its efforts to reduce dependence on importedenergy and to supplement the domestic gas supply, the Government hascompleted, with IDA's assistance under the Petroleum Exploration PromotionProject (Cr.1402-BD), a program of seismic surveys and geological studiesto be used in the preparation of promotional packages aimed at attractinginternational oil companies to undertake petroleum exploration (para. 54).

31. Bangladesh's total hydropower potential is estimated at about1,500 Gigawatt hours (GMh)Iyear, of which 1,050 GVhlyear has been developedwith the installation of 330 KW capacity on the Karnafuli river at Kaptai(near Chittagong). The remaining potential is located at two other siteswhose development would flood prime agricultural land and require the relo-cation of about 30,000 people. In view of the high cost involved andpotential social impact, its development is not economic at this time.

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32. Several thick seams of coal have been discovered at mineabledepths in the Barapukuria area in the west zone. The Government hasobtained bilateral assistance to assess the technical and economic feasi-bility of mining this coal (para. 60). If its exploitation proveseconomic, it could have a profound impact on the future development and useof domestic and imported energy in Bangladesh, as well as possibly theexport of energy.

33. Traditional fuels play a crucial role in meeting Bangladesh'soverall energy requirements. However, biomass supplies on a per capitabasis are continually diminishing, and increases in forest-based fuelvoodor a major shift to commercial fuels are not viable options to meet thesupply gap due to high population density and low income levels. Thedecline in the relative contribution of traditional fuels to the country'senergy supply increases the importance of action being taken by theGovernment to improve biomass recovery and conversion efficiency, e.g., incooking stoves, charcoal kilns and other wood-burning equipment. Due toinsufficient data on household energy demand and the absence of an adequategovernmental institutional framework. these issues have not been addressedcomprehensively. To focus more attention on this subject, Government hasrecently assigned responsibility for overall coordination of traditionalenergy assessments to the Planning Commission's Energy and IndustryDivision. Further, under the proposed credit Government will undertake aninterfuel substitution study to: (i) assess the micro and macroeconomicimpacts of substitution of commercial for traditional fuels; and (ii) form-ulate a least cost strategy for meeting commercial energy needs.

Energy Consumption and Demand

34. Bangladesh's annual per capita energy consumption is estimated atabout 100 kilograms (kg) of oil equivalent, among the lowest in the world.Traditional fuels, such as crop residues, animal dung and wood, supplyabout 601 of total energy requirements. Per capita annual consumption ofcommercial energy is estimated to be only 42 kg of oil equivalent. InFY86, commercial energy consumption was about 4.2 million tons of oilequivalent, of which natural gas accounted for 58Z, petroleum 391, hydro-power 1Z, ard coal 21. The bulk of gas consumption is in power generation(42Z) and fertilizer production (341); however, other industrial, commer-cial and domestic uses are expanding steadily. There is considerableinefficiency in the use of commercial energy and hence substantial scopefor improving energy efficiency, particularly in industry and petroleumrefining. There are also substantial losses in the transmission anddistribution of electric power and, until FY88, frequent and costly poweroutages.

35. Based on projected GDP growth rates, planned industrial develop-ment, and extension of supplies to new consumers, the demand for commercialenergy is projected to grow relatively quickly in the 19908. Total elec-tricity sales, which increased at about 141 a year during FY8O-87, areestimated to grow at 131 a year during FY90-2000. However, sales ofnatural gas, which increased by about 162 a year during FY81-88, areprojected to increase by only about 102 a year during FY89-2000. Thisslowing of the growth rate occurs because the existing recoverable gas

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reserves of 10 tcf will be fully committed by about the year 2000. Thelarge investment requirements to meet the projected growth rates emphasizethe importance of the Government adopting appropriate energy pricingpolicies to minimize investment requirements and to mobilize resources forthe investment program. Further, it is important for the Government toformulate and adopt appropriate long term investment plans to ensure thatthe energy sector's investment plan is least cost and reflects the balanceddevelopment of the various subsectors.

Sector Institutions

36. The principal institutions responsible for energy sector policyares (i) the Planning Commission, which is responsible for approving allinvestment schemes costing more than Tk 5.0 million (US$0.16 million), and(ii) the Xinistry of Energy and Mineral Resources, which is responsible foroverseeing the operations of the four publicly-owned energy sector entitieswhich produce, transport and deliver most of the commercial energy inBangladesh. The energy sector entities ares

(a) Bangladesh Power Development Board (BPDB)--responsible for elec-tricity generation, transmission and distribution (except in thoseareas which are under the control of the Rural ElectrificationBoard);

(b) Rural Electrification Board (REB)--responsible for construction ofrural electrification schemes and organizing prospective consumersinto semi-autonomous cooperatives called Palli Bidyut Samities(PBSs). The PBSs are responsible for the purchase of electricityfrom BPDB and its distribution to their consumers;

(c) Bangladesh Oil, Gas and Minerals Corporation (BOGMC)--responsiblefor the exploration, production and delivery of natural gas, andthe exploration and development of oil and solid minerals,including coal. The functions relating to natural gas areperformed by five regional operating companies under BOGMC'scontrol. Gas is produced by Bangladesh Gas Fields Company Limited(BGFCL), Bakhrabad Gas System Limited (BGSL), and Sylhet GasFields Limited (SGFL), and is transmitted and distributed by BGSL,Titas Gas Transmission and Distribution Company Limited (TGTDC)and Jalalabad Gas Transmission and Distribution Company (JGTDC)land

(d) Bangladesh Petroleum Corporation (BPC)--responsible for purchasingcrude oil and the refining and marketing of petroleum products.The refining operation is carried out by Eastern Refinery Limited(ERL), a subsidiary of BPC and the only refinery in Bangladesh.Liquified petroleum gas (LPG) is bottled and sold to privatemarketing companies by LPG Limited, another subsidiary of BPC.Marketing of petroleum products and LPG is carried out by threeother BPC subsidiaries, Jamuna Oil Company, Maghna Oil Company andBurmah Eastern.

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Private Sector Participation in the Energy Sector

37. Although the energy sector, except for traditional energy, isdominated by public sector entities, the private sector's role and impor-tance are steadily increasing. Traditionally, the retailing of mostpetroleum products has been undertaken by the private sector, which alsoplays a major role in their transportation. However, the functions of LPGtransportation, storage and retailing have been undertaken by the publicsector. The Government is now actively p -ing private sector partici-pation in these activities through a pilut program under the RefineryModification and LPG Recovery and Distribution Project (Cr.1749-BD). It isalso seeking to increase private sector involvement in petroleumexploration through promotional packages aimed at attracting internationaloil companies to undertake exploration. The packages are scheduled to bepresented to the oil industry by June 30, 1989.

Government's Energy Sector Strate8y

38. In recognition of gas's pivotal role, the Government has focusedits energy strategy on accelerating its development as a substitute forimported crude and petroleum products. The strategy is aimed at bothreducing Bangladesh's dependence on oil imports and substituting commercialfor traditional energy, partly through rural electrification and throughusing kerosene and LPG instead of fuelwood for cooking.

39. In the SFYP shortages of both foreign and local resources, thelatter of which was exacerbated by the failure of energy sector enter-prises, especially BPDB, to achieve self-financing targets, impeded tLeachievement of most of the SFYP targets for the energy sector. The largestshortfall was in the power subsector; between FY81 and FY85, only 55 ofthe planned generating capacity was commissioned, together with 701 ofplanned distribution lines. In the petroleum subsector the shortfalls Inmeeting construction targets were small, with over 901 of planned gasproduction wells and transmission pipelines being developed. However,there was a 40? shortfall in meeting the planned gas supply target, princi-pally because of lower than projected demand for gas by power and Indus-trial consumers as a result of delayed commissioning of gas using power andfertilizer plants. Severe electricity shortages ushered in the TFm inFY86. The measures taken to address these shortages, including the instal-lation of additional liquid-fuelled gas turbine capacity and increasedgeneration by oil-fired capacity in the west zone, led to a short-ternmincrease in dependence on imported petroleum products and caused theinvestment program to deviate from least cost.

40. Recognizing the importance of improving energy supplies to meetprojected energy demand, especially from industry and agriculture, theGovernment accorded high priority to the energy sector's development In theTFYP. Its principal objectives are to: (a) accelerate the development ofdomestic natural gas resources to reduce the country's dependence onimported oil; (b) adjust energy prices to promote the efficient ndeconomic use of energy, taking into account social objectives; tc) meet thedemand for energy at least cost to the economy; (d) improve power supplyreliability and quality, and reduce system losses; te) Improve energy

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sector entities' financial performance and mobilize the resources requiredto meet the country's development goals; and (f) encourage private sectorparticipation in the energy sector's development, particularly in oil andgas exploration. In keeping vith these objectives, TFYP allocated Taka61,750 million (US$1,910 million) at 1984185 prices for the energy sector'sdevelopment, about 16? of the total TFYP allocation, compared to about 122under the SFYP; only agriculture has a larger sector allocation.

41. The Government has so far been unable to translate the energystrategy articulated in its Five Year Plans into a consistent, unambiguousset of implementation policies. As a result, several anomalies remain.For example, electricity tariffs have remained below the economic costs ofsupply, and gas prices are substantially below the prices of substitutefuels. These low prices deny potential resources to both the Government'sBudget and sector entities, and lead to the wasteful use of resources.Planning weaknesses and an inadequate supply of local funds have contri-buted to the poor performance in meeting sectoral investment targets. Inthe SFYP, the need to reduce investment plans due to fund shortages wasachieved by slowing the implementation of most energy projects rather thanconcentrating available resources on a smaller number of high priorityprojects. The rectification of this and other planning deficienciesrequires the formulation of rolling priority investment programs for theenergy sector based on projected available resources. However, whileimproved planning and reformed energy prices would assist in meeting plantargets, they need to be complemented by improved capability to implementinvestment and resource mobilization decisions. Implementation capabilityhas been substantially hampered by institutional weaknesses at both thegovernmental and energy sector entity levels. Particularly important weak-nesses which are wasting resources and constraining energy sector perfor-mance concern BPDB, gas subsector entities, and public sector-wide impedi-ments to the approval of projects and award of contracts.

IDA's Energy Sector Assistance Strategy

42. IDA's energy sector dialogue with the Government has focused onthe need for the Government to: (a) strengthen investment planning to meetforecast energy demand at least cost, (b) improve sectoral institutions'performance and provide training, (c) improve energy sector entities'financial performance, (d) optimize the use of available energy resourcesthrough appropriate energy pricing and conservation measures, (e) appraisediscovered gas fields and optimize their development, and (f) enhance theprivate sectors' role and attract private capital to intensify oil explora-tion. To support the implementation of the Government's energy strategy,IDA has provided 12 project-specific credits amounting to US$608 millionequivalent, representing about 19? of IDA resources commltted to Bangladeshsince 1979. Lending in the power and petroleum subsectors has beendesigned to expand the use of natural gas as a substitute for imported oil,rationalize the country's supply of petroleum products, promote conser-vation and more efficient energy use, and encourage further gas and oilexploration. IDA is financing projects to expand the country's powergeneration, transmission and distribution capabilities, and rural electri-fication systems, as well as investments in forestry to increase the supplyof fuelwood.

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43. Although there has been some progress on the various subsectorissues, and project implementation has been fairly effective once initialdelays caused by the project approval process were overcome, much remainsto be done on a sectoral basis. While individual projects supported by IDAwere selected on a least cost basis, the various agencies' overall inv,est-ment programs have not been optimal or integrated into a sectoral invest-ment program that could be implemented with available resources. Progressin relating energy prices to the economic costs of supply has been slow anduneven. Although petroleum product prices substantially exceed economiccosts, until FY89 the average gas price was below the economic cost ofsupply, which continues to be the case for electricity. IDA has addressedboth broad and narrow institutional issues through its past projectlending, ranging from the appropriate organization of the gas subsector toimproved resource mobilization by sector entities through the reduction ofaccounts receivable. Nevertheless, severe institutional weaknesses remain,and further improvement in the performance of sector entities is criticalfor the sector's efficient development and operation.

44. The proposed credit would initiate an energy sector lendingapproach by addressing issues in three key areas: resource development andinvestment, energy pricing and demand management, and institutional perfor-mance and development. The proposed credit would assist the Government inundertaking a program of sector-wide policy reforms urgently needed toimprove the sector's performance and enhance its net contribution to theBudget. In doing so, it would establish a policy framework for futureproject lending in the sector, and facilitate such lending by restrictingproposed agreements to those which are project specific. However, sincethe reforms supported under this credit are considered essential, futureproject lending for the sector would be contingent on agreement and imple-mentation of this credit's key components. A second proposed Energy SectorAdjustment Credit in FY93 would enable IDA to continue this more broadlybased policy dialogue.

45. More than 20 agencies have been involved in assisting investmentin Bangladesh's energy sector, including Asian Development Bank (ADB),Overseas Development Administration, United Kingdom (ODA), CanadianInternational Development Agency (CIDA), Kreditanstalt fuer Wiederaufbau,Federal Republic of Germany (KfW), Overseas Economic Cooperation Fund,Japan (OECF), United States Agency for International Development (USAID)and United Nations Development Programme (UNDP). ADB has been particularlyactive in the energy sector through its involvement with the BangladeshEnergy Planning Study, which was completed in mid-1987, and a number oflending operations covering all major energy subsectors. In the past,however, donor activities were insufficiently coordinated. During prepara-tion of the proposed credit, the Government requested IDA to take the leadin coordinating donor participation in the sector. Subsequently, two coor-dination meetings were held in Dhaka, one during the preappraisal and thesecond during the appraisal of the proposed credit. With Government'sconcurrence, IDA plans to hold such meetings on a regular basis in thefuture. ADB and ODA have also been directly associated with thepreparation of the proposed credit, and OEC0 participated in the appraisalmission in an observer capacity.

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PART TV s ADJUSTMENT STRATEGYa DEVELOMfENT OF THE ENERGY SECTOR

A. Energy Sector and the Macroeconomy

46. The proposed credit would play an important role in theGovernment's overall macroeconomic adjustment plan. As discussed inPart I, the Government needs to mobilize additional domestic resources andto strengthen the balance of payments. The credit would assist in resourcemobilization through the reform of energy prices and actions to improvecost recovery. It would assist in strengthening the balance of payments byminimizing investment requirements through the formulation and implemen-tation of both short-term and long-term least cost investment programs;ensuring that energy prices do not encourage uneconomic consumption andenergy imports; and by further enhancing substitution of indigenous naturalgas for petroleum imports. Further, although the TFYP is nearly two yearsfrom completion, it is unlikely that plan targets will be met because ofslippages in key projects caused by local resource shortages and persistentinstitutional weaknesses. If shortfalls in achieving these targets are tobe minimized, then a comprehensive strategy for addressing the main sectorissues must be formulated and implemented. This strategy should addressthree main areas: resource development and investment, energy pricing anddemand management, and institutional performance and development.

B. Energy Resource Development and Investment

47. The development of primary and secondary energy resources hasprogressed in a piecemeal fashion, dictated primarily by the availabilityof financial resources and aid-ia-kind. Shortages of local resources,exacerbated by institutional inefficiencies and the maintenance of energyprices at levels substantially below those required to finance an adequatepercentage of sector entities' investment programs, have resulted in slip-pages in project implementation, cost overruns and changes in the contentand scope of investment programs. In recognition of these shortcoming., inFY83 the Government began to distinguish core and non-core projects andgave priority to core projects (defined as projects bein; implemented orfor which firm commitments had been secured from donors, with a quota onthe number of such projects in each sector) in the release of funds underthe Annual Development Programme (ADP). However, the definition of coreprojects, which emphasizes projects which are underway, has meant that theyare not necessarily projects comprising least cost programs or the priorityprojects whose implementation is critical for achieving plan targets.Further, in FY87 the Government relaxed its ADP fund release procedures togive priority to approved projects irrespective of whether they are core ornon-core.

48. The continued reduction of the country's dependence on importedenergy through the economic use of gas and more efficient use of existingfacilities and infrastructure requires the formulation of a long-term leastcost investment plan for each subsector and their integration into a long-term plan for the energy sector. This plan would allow for the identifi-cation and timely preparation of high priority projects and indicate theresources needed for their implementation. However, in view oi the time

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required to complete and approve subsector plans, a two-pronged approachwas developed under the proposed credit. The first covered the identifi-cation of a rolling three year priority investment program (VIP) forenergy, initially for the period FY88-90, representing the front-end of thelong-term plan. The second covered the preparation and ratification of thelong-term plans, which was expected to take about two years. The long termplans would serve as the umbrella for the identification and preparation ofprojects for the Fourth Five Year Plan.

Priority Investment Program

49. Long-term development plans for the energy subsectors, which wouldprovide the basis for the energy sector's integrated development, need tobe complemented by three year rolling priority investment programs (PIP).The PIP's prime purpose would be to assist the Government in minimizing theshortfalls in achieving energy sector targets set in its five year plans,beginning with the TFYP. Each PIP would be based on integrated targets forthe energy sector, the availability of financial resources and the imple-mentation capabilities of the agencies involved. All ongoing and newprojects would be ranked in terms of their expected rates of return andselected in a descending order to ensure that, when aggregated within andacross subsectors, they met the revised demand forecasts at least cost.The projects would then be matched with projected 'tvAncial resources in aniterative fashion until available funds were exhauqted.

50. In FY88 the Government prepared an agreed PIP for FY88-90 and thesources for its financing. It comprised the high priority projects crucialfor achieving revised targets for the remainder of the TFYP and was used inthe Government's TPYP mid-term review in early 1988. Government has alsoagreed that PIPs would be prepared, and agreed with IDA, for nY89-91,FY9O-92 and FY91-93 and that prior to the beginning of each fiscal yearimplementation of the PIP for the current year would be reviewed with IDAto ascertain the extent of compliance in terms of deviation of actual andplanned expenditures in foreign exchange and local currency, both overalland for each project, and actual and agreed allocations under the ADP.Implementation of the PIP for FY88-90 was reviewed with IDA in July 1988.The review confirmed that the PIP had been implemented satisfactorily, withoverall actual expenditure on energy sector projects being 952 of theexpenditure agreed under the PIP, and expenditure in the petroleum andpower subsectors being 982 and 94Z, respectively, of the agreedexpenditures.

51. A PIP for FY89-91 has been agreed (Annex VI) and the release ofthe second tranche would be subject to its satisfactory implementation andagreement on the PIP for FY90-92. Total planned expenditure under theFY89-91 PIP is US$1,223 million equivalent, comprising US$823 millionforeign costs and US$400 million local costs. The subsectoral allocationis about 80? for power and 20S for petroleum. The power subsector'sinvestment balance (31? for generation projects, 262 for transmission, 36Sfor distribution, and 72 miscellaneous) reflects, compared to GOBBPDBI'searlier plans, a relative decrease in resources for generation projects andan increase for transmission and distribution projects. Given BPDB'uexisting excess generating capacity and need to renovate and extend distri-bution systems, this is an appropriate investment balance. The PIPfinancing plan is about US$400 million equivalent self-financing by sectorentities and from GOB, and about US$823 million from donors (Annex VI).

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Long-Term Least Cost Development Plans

52. Power. The power subsector accounts for nearly 702 of totalenergy investment and about 171 of total public investment. Consequently,the resolution of outstanding issues adversely affecting its efficientdevelopment would contribute significantly to the achievement of long-termenergy objectives. Thus the transmission system's development has notmatched properly the growth of generating capacity, and as a result thesystem will be unable to transport to the demand centres all of the addi-tional energy associated with generating capacity to be commissioned inFY87-90. In FY87, with financing from the UNDP and USAID, IDA collaboratedwith Argonne National Laboratories (U.S.) in the preparation of an interimleast cost power generation expansion plan which was used in the formu-lation of marginal cost based tariffs under the power tariff study(para. 71) to ensure consistency between least cost investment plans andeconomic pricing. However, the plan needed to be updated and integratedwith a least cost development plan for transmission to ensure the efficientand economic generation and transport of power. In early 1987 BPDBappointed consultants, under financing from UNDP and vith ADS as theexecuting agency, to prepare such a plan in the context of preparing afeasibility study for a proposed central thermal power project. TheGovernment had agreed to review with IDA by April 30, 1989 the long-termleast cost development plan for generation and transmission. Theconsultants submitted their draft final report in October 1988. The reportwas reviewed by IDA and ADB in January 1989, and was found to besatisfactory.

53. Technical losses in the distribution systems are high, deprivingBPDB of badly needed resources. Although individual projects have beendeveloped on the basis of least cost options formulated for specific townsand areas, under the auspices of IDA, ADB, ODA and other donors, distri-bution has suffered from the absence of a comprehensive national plan.BPDB, with the assistance of consultants, financed by UNDP and executed bythe United Nations Department for Technical Cooperation and Development(UNDTCD) under the Power Transmission and Distribution Project(Cr.1648-BD), is preparing a plan for the optimal development andrenovation of the distribution network. The plan is scheduled forcompletion in July 1989. It will be reviewed by IDA, and funding for therenovation program required to reduce system-wide technical losses isincluded in the proposed PY90 Power Distribution and RehabilitationProject. The generation, transmission and distribution plans wouldultimately have to be integrated to provide the backbone for the powersubsector's development and to serve as a basis for the coordinatedparticipation of donors and multilateral agencies in the subsector. Theintegration and implementation of the long-term plans for generation,transmission and distribution would be the subject of agreements to besought under subsequent IDA supported power projects.

54. Petroleum Products. The Government has focused its energy policyon reducing oil imports and promoting a high rate of penetration of gasthroughout the economy. The substitution of liquid fuels by gas is limitedby technical factors to about 602 of the sector's needs, and thus sizeableimports of petroleum products and oil to be processed at the refinery areexpected to continue. Accordingly, the Government is attempting to inten-

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sify the search for oil. The priority need has been to stimulate Inter-national oil companies' interest in exploration through an active promotionprogram. The Petroleum Exploration Promotion Project (Cr.1402-BD)addressed this issue, and promotional presentations to the oil industry arescheduled to occur by June 30, 1989. However, actions taken under thatcredit have meant that some of its policy objectives are already beingachieved, even before the general promotion occurs. In addition to Shellwhich is already exploring for oil in Bangladesh, two international oilcompanies have recentlV signed exploration agreements with the Government.Therefore no further action is required under the proposed creditconcerning the development of an oil exploration program.

55. One of the issues identified by the 1982 Joint UNDP/lorld Bankreport 'Bangladesh: Issues and Options in the Energy Sector' was theinefficient operation of ERL. The refinery's level of energy consumptionwas excessive, and its product mix was not consistent with the mix ofproducts demanded. IDA provided financing, under the Energy Efficiency andRefinery Rehabilitation Project (Cr.1357-BD), to rehabilitate the refineryand improve its energy efficiency. The credit also included techno-economic studies for further refinery improvements, which are beingsupported under the Refinery Modification and LPG Recovery and DistributionProject (Cr.1749-BD). The project includes the installation of secondaryconversion facilities at the refinery to improve yields of middle distil-lates and reduce yields of fuel oil, and the establishment of a revisedmode of remuneration for ERL based on a toll processing fee to replace thecost-plus guaranteed rate of return system (para. 63). These measures willimprove ERL's cost efficiency and enhance its flexibility to better matchrefinery output with demand patterns. Since the implementation of thesemeasures has been satisfactory, no action is required concerning therefinery at this time.

56. The petroleum products supply situation in Bangladesh is changingwith continued growth in gas substitution, increased availability of middledistillates as a result of the refinery modification, and a possiblegreater contribution and geographic penetration of LPG, for which the pilotphase is being supported under the Refinery Modification and LPG Recoveryand Distribution Project (Cr.1749-BD). Given these supply changes, it isimportant to ensure that the infrastructure for the transport, storage anddistribution of petroleum products is both least cost and matches theemerging supply situation. A short diagnostic study, carried out by IDA,showed that existing facilities and institutional arrangements are adequateto meet the projected demand in the medium-term (three to five years) andthat there does not appear to be any significant uneconomic duplication offacilities. Consequently, no action is required at this time concerningthe infrastructure for petroleum product storage and distribution.

57. Gas. Natural gas is Bangladesh's major indigenous source ofprimary energy, and the gas subsector, which accounts for nearly 30Z oftotal investment in the energy sector is, in essence, the backbone of thesector. The Government has achieved considerable success in promoting theexploration and development of gas reserves and in developing the infra-structure needed for the delivery of gas to final consumers. TheGovernment's success, however, in promoting a higher rate of penetration by

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gas throughout the economy has been constrained by delays in project imple-mentation in the major gas-consuming sectors, especially in the powersubsector. For example, although over 902 of planned gas production wellsand transmission pipelines were developed in the SFYP period, outRut of gasfell about 402 short of planned targets.

58. The power and gas subsectors' development should be integrated toensure that the Five-Year Development Plans achieve their objectives andBangladesh continues to reduce its dependence on imported petroleumproducts. The long-term strategy for the gas subsector should take intoaccount the current situation, where the continued high productivity ofindividual wells in the producing fields, coupled with the relatively slowgrowth in gas demand, indicate that output from existing production wellsand the successful appraisal wells of the Second Gas Development Project(Cr.1586-BD) will supply the estimated gas demand up to 1993. Conse-quently, there is no need to drill safe development wells within the provenareas of known fields, and a long-term appraisal program should be plannedso that incremental demand beyond 1993 can be supplied from successfulappraisal wells. This strategy can be adopted because of the high qualityof the seismic surveys carried out under the Petroleum ExplorationPromotion Project (Cr.1402-BD) which has reduced the risk involved indrilling appraisal wells to increase known reserves and, at the same time,provide the incremental production required to meet the growth in demandwith an acceptable safety margin.

59. Against this background, a long-term strategic plan for the gassubsector should be developed which would address two principal areas, asfollows:

(a) in the area of appraisal and development, an appraisal drillingprogram should be formulated based on the field structures deter-mined from the detailed seismic results. Lower risk appraisalwells would be drilled to firm up data on field reserves while, atthe same time, ensuring that production from these wells wassufficient to meet projected demand with a reasonable safetymargin. In the longer term, appraisal wells should be drilled toascertain the overall magnitude of gas reserves. The results ofsuch an appraisal drilling program could alter the long-termsubsector development plans by proving up sufficient reserves tomake export andlor gas liquification projects feasible; and

(b) in the area of transmission and distribution, the gas infra-structure should be integrated into a.n efficiently managed system.A National Gas Grid Study, to 3&,ntify investments and institu-tional requirements for an integrated gas grid, was recentlycompleted with financing under the Energy Efficiency and RefineryRehabilitation Project (Cr.1357-BD). The results of the studywould be an input to IDA's proposed Third Gas Development Project(FY91).

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Government has agreed a set of priority activities to achieve the aboveobjectives, namely continual appraisal and development of the eastern gasfields, limited exploration with increased participation of internationaloil companies, and development of an integrated transmission system forinclusion in a long-term investment plan. Further, the Government hasagreed to review with IDA, by April 30 of each year beginning April 1989,the detailed exploration and development program for the next fiscal year,and the tentative program for the following four years. IDA reviewed theFY90-94 ;rogram in February 1989 and found it to be satisfactory.

60. Coal. According to recent estimates, proven gas reserves would befully committed by about the year 2000. Although the prospects for thediscovery of new gas reserves are good, it is important that Bangladeshdiversifies its energy resource base, particularly of indigenous resources.Two possible resources are peat and coal. Although peat resources havebeen identified in Bangladesh, and several studies completed, it appearsunlikely that these resources would constitute a fuel source in the fore-seeable future because of their location relative to the Ganges river floodplain. However, recent work by the Geological Survey of Bangladesh in theBarapukuria area of Dinajpur district has located several thick coal seamsup to 41 meters thick at depths of less than 200 meters. Although it ispremature to make any assumptions about the development of the Barapukuriacoal, preliminary indications are that it merits careful evaluation as apotentially economic energy source in the west zone. Accordingly, theGovernment has formulated a phased program to evaluate the Barapukuria coaldeposits and determine their technical, economic and financial viability.Consultants financed by ODA (UK) were mobilized in December 1987 to carryout the feasibility study. The Government has agreed to review with IDAthe interim reports and the completed study within two months following itscompletion. The interim reports were reviewed in mid-1988, and amendmentswere made based on IDA's recommendations.

C. Energy Pricing and Demand Management

61. The Government has included economic efficiency, resource mobili-zation and equity as key energy pricing policy objectives. These objec-tives, however, have not been achieved mainly becsuse the level andstructure of energy prices, particularly of gas and electricity, have notreflected their economic costs of supply. Hence, energy prices have notpromoted efficient gas and electricity use and fell short in providing theresources needed by energy sector entities and the Budget. Prices werealso inequitable because of distortions in the relative prices of competingfuels. For example, in late 1986 household fuel prices ranged from aboutUS$1.6/million British thermal units (btu) for natural gas, to aboutUS$3.1/million btu for fuelvood, and to about US$6.3/million btu forkerosene. In addition there was a four and half-fold difference in theborder price of fuel oil and the price of natural gas used for electricitygeneration. For Government to achieve its stated energy pricing policyobjectives, energy prices needed to be adjusted to reflect economic costsof supply and generate funds for both the supply entities and the Budget.Revised energy prices should also be more equitable by reducing crosssubsidization, such as that between industrial and domestic consumers ofelectricity.

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Energy Prices

62. Petroleum Products. Since 1980, tue weighted average consumerprices of petroleum products have declined in real terms. However,following the fall in the oil prices in 1986 and the maintenance ofdomestic prices by the Government at their level prior to the softening ofthe world oil market, the weighted average domestic price in mid-1988 wasat about 1652 of the weighted average border price. Petroleum productprices are expected to provide gross revenues to the budget in PY89 ofabout Tk 3,800 million, about 62 of projected overall revenue.

63. Refinery Remuneration. EEL is a wholly owned subsidiary of BPC,which is responsible for setting petroleum product retail prices in accordwith the Government's policies. Until FY86, BPC reimbursed ERL for all itsprocessing costs, plus a 152 return on its paid-up capital, net of taxes.This mode of remuneration did not provide any incentive for the refinery tobe efficient. In FY87 under the Refinery Modification and LPG Recovery andDistribution Project (Cr.1749-BD) the Government established a tollprocessing fee for compensating ERL based on product yield, refiningcomplexity, and a reasonable return on the investment, together with yieldnorms and a system of bonuses and penalties. Therefore, no action isneeded under the proposed credit on the method of remunerating EML.

64. Although, in principle, BPC's petroleum product prices to thethree marketing companies are determined on a cost-plus basis, in practiceBPC's prices have not always reflected changes in border prices. Duringthe early eighties some of BPC's prices were below border prices, resultingin financial losses. In FY87, however, the Government took advantage ofthe fall in oil prices to strengthen BPC's financial position and mobilizesubstantial resources for the exchequer. Given the Government's acuteresource needs and present forecasts for world oil prices, no changes arerequired in BPC's prices to the marketing companies at this time. However,a pricing principle is required to ensure that domestic prices alwaysexceed border prices and thereby protect BPC's financial viability, whilealso mobilizing substantial resources for the Budget. To achieve this theGovernment has agreed a pricing formula which would ensure that theweighted average domestic petroleum product prices, net of distribution,marketing and other handling costs, always exceed border prices by at least15Z. Further, it has also agreed that the weighted average retail price ofpetroleum products would not be reduced below levels existing in mid-1987.

65. The Government sets the level and structure of retail petroleumproduct prices on the basis of BPC's prices to the marketing companies plusa mark-up to cover distribution, marketing and other costs, and an advalorem excise duty. The present retail price structure does not reflecTborder prices; for example, in October 1988, gasoline prices and dieselprices exceeded cif prices by about 2002 and 1152, respectively. TheGovernment has recently reviewed with IDA the impact of present prices ar.dother charges associated with petroleum products on petroleum productconsumption patterns, choice of end-use technologies and the Government'sresource mobilization efforts. There was no evidence that the presentprice structure was causing significant distortions to resource allocation,and thus the Government proposes to retain the present high prices. Inview of the Government's need to mobilize resources and the stimulus ofhigh energy prices to conservation, no action is required under theproposed credit regarding retail petroleum product prices.

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66. Natural Gas. Under the Second Gas Development Project(Cr.1586-BD), the Government accepted the principle of pricing natural gasfor consumers at levels at least equal to the estimated economic costs ofsupply, including a depletion premium, to promote the efficient andeconomic use of gas and enable the entities producing and distributing gasto be financially viable and mobilize resources for the Government. Inaccordance with that agreement the average price of gas was increased by202 on July 1, 1985 and 20Z on July 1, 1986. Following those increases,although prices paid by large industries, commercial, tea estates and brickconsumers exceeded the estimated economic costs of supply, the prices paidby power, fertilizer, residential and small industrial consumers remainedbelow those costs, and the average price of gas was only about 80S of theeconomic cost of supply.

67. In FY87 IDA reviewed the likely impact of substantial increases inthe gas price to power and fertilizer consumers. The review showed thatsubstantial increases in the gas price paid by the power subsector over thenext few years would have relatively little effect on the average powertariff rate. This was because existing oil-fired generating capacitywould, to a large extent, be replaced by new gas-fired generating capacitywhich, in the absence of an increase in gas prices, would reduce BPDB'sannual fuel costs. The review indicated that if the price of gas to powerconsumers was increased by 502 during FY88-89, then BPDB's total fuel costsin FY89 would be only about 15S higher than in FY86, despite a projected56? increase in generation.

68. In contrast to the power subsector, the review suggested thatalthough substantial increases in the gas price to fertilizer plants wouldhave serious adverse effects on their financial viability, farmgatefertilizer prices would be unaffected. Under existing agreements betweenthe Government and IDA and other donors, fertilizer farmgats prices havebeen uncoupled from ex-plant costs. Farmgate prices are based on three-year average international prices plus local distribution costs. As forex-plant pricing of fertilizers, the Government has agreed that priceswould be set to give a 10 rate of return on revalued assets at efficientproduction levels. However, the agreements on ex-plant prices are notbeing met, partly reflecting the fact that the Bank Group no longerconsiders this financial pricing system to be appropriate for fertilizerplants. Instead, a shift to economic pricing linked to a moving average ofworld prices would be more appropriate.

69. Under the proposed credit the Government agreed to increase theaverage gas price to achieve, as a first step, equality with the ecoromiccost of supply for each consumer group and, thereafter, to reduce the gapbetween the price of gas and that of substitute fuele to mobilize resourcesfor the Budget. In July 1987 the Government increased the average gasprice by 25? (with above average increases of 30S to power, fertilizer andcommercial consumers, and by 25? to metered domestic consumers), and by afurther 15? effective July 1, 1988. Following those increases the averagegas price (Tk 39.2/mcf) in FY89 is slightly above the estimated economiccost of supply, including a depletion premium (Tk 38.2/mcf). Further, thegas price for electricity generation is now about 502 of the price of fueloil (para. 61).

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Under the Second Gas Development Project (Cr.1586-BD), theGovernment agreed to the principle of gas companies self-financing areasonable proportion of their annual investment programs. However, themargins on gas prices received by companies are relatively low and are amajor cause of their weak financial position. The additional revenuegenerated by past increases in gas prices has been divided approximately90? to the Government and 102 to the gas companies. Consequently themargin on gas prices received by the gas companies has been inadequate toallow them to be financially viable and to self-finance a reasonableproportion of their investment programs. Preliminary estimates for FY88indicate that the gas companies made a financial loss and had a smallnegative rate of return on total capital employed. Gas company marginsneed to be increased to rectify this situation, and ensure that thecompanies are able to cover their operating costs, including depreciation,and finance a reasonable proportion of their investment programs. In thefew cases where the companies were able to generate profits, they werecaptured by the Government in the form of dividends. To address thisissue, Government has agreed that the margin on gas prices received by thenew gas companies to be established under the reorganized gas subsector(para. 81) would be set at a level to allow each company to cover itscosts, including depreciation, and allow it to cover at least 102 of itsannual investment program from internally generated funds in FY90, 20? inFY91, 30? in FY92 and 40Z in FY93 and thereafter, and that no gas companywould declare a dividend until the target has been achieved. The achieve-ment of the FY90 target would require that 80X of the revenue to begenerated by the proposed gas price increase would be retained by the gascompanies.

71. Electricity. During FYSO-88 BPDB's tariff rates were increased byabout 1902 in nominal terms and 422 in real terms, representing annualaverage increases of about 14.5Z and 4.5Z respectively. However, despitethese increases, only about 10 of BPDB's investment program was financedfrom internal funds and, in FY86, average revenue for BPDB and REB was onlyabout 55S of the estimated economic cost of supply. Further, -he tariffstructure did not adequately reflect the economic costs of supply. Thesedeficiencies were highlighted in the FY87 tariff study by Coopers andLybrand Associates Ltd. (U.K.), for which IDA was the executing agency.The study showed that the existing tariffs were deficient in a number ofimportant respects, including: excessive number of tariff categories; ratesfor many consumer categories below economic costs of supply; significantcross subsidization between some consumer groups; and little incentive toavoid consumption during the system peak period. These deficienciespointed to the need to change tariff structures and increase tariff levels.

72. Under the Second Rural Electrification Project (Cr.1633-BD) andthe Power Transmission and Distribution Project (Cr.1648-BD), theGovernment agreed to implement, in phases, beginning December 31, 1986 orlater date as agreed with IDA, revised tariffs satisfactory to IDA based onthe tariff study's recommendation and to set tariff levels to meet agreedfinancial criteria. In conformity with that agreement, the Governmentincreased BPDB's bulk supply tariff rate for supplies to PBSs by 202 onMay 1, 1987, increased its average tariff rate by about 17? on August 1,1987, and by a further 2.5X effective July 1, 1988 because of the increased

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price of gas. BPDB's average revenue is now about 702 of estimatedeconomic costs of supply. The Government has agreed a phased program toreform power tariff structures based on the tariff study's reconendations.The first stage reform, which was implemented in August 1987, included: (i)a reduction in the number of tariff categories by half to nine; (ii) aphased program to introduce time-of-day bulk supply tariffs for 33-kVconsumers; (iii) a phased program to introduce a time-of-day tariff for11-kV consumers; (iv) introduction of an optional time-of-day tariff forlarge low voltage consumers; and (v) the reduction of the size of thesubsidized first block for residential consumers from 100 kWh/month to 70kWh/month and of the second block from 400 kWh/month to 200 kWhImonth. Theagreed initial reform of PBS tariffs in August 1987 included: (i) theintroduction of a new tariff category for high voltage consumers with astructure similar to that of the bulk supply tariff; (ii) the introductionof a time-of-day tariff for large low voltage consumers, includingirrigation, and (iii) the replacement of the single rate tariff forresidential consumers by a three block increasing tariff, with the sameblocks as those set in BPDB's equivalent tariff. The Government has agreedthat implementation of further tariff increases from July 1, 1989 to complywith existing financial covenants and continued implementation of agreedreforms to tariff structures would be conditions of second tranche release.The reforms would include further reductions in the sizes of the first andsecond blocks for supplies to residential consumers to 0-50 kWh/month and51-185 kWh/month respectively, and discontinuing the practice of basingdemand charges on connected load for industrial and commercial consumerswith connected loads above 20 kW and introducing charges based on recordedmaximum demand. The average monthly consumption of BPDB's residentialconsumers is about 100 kWh; about 222 of residential consumers (accountingfor about 4S of sales) use less than 50 kWh/month. Thus, the tariffrestructuring for residential consumers protects small consumers whileminimizing the subsidy to large consumers.

Energy Conservation

73. Energy consumption per unit of industrial output is significantlyhigher in Bangladesh than for similar processes under similar conditionselsewhere. The development of an energy conservation program for theindustrial and power sectors was supported under the Energy Efficiency andRefinery Rehabilitation Project (Cr.1357-BD). The Energy Monitoring Unit(flU) set up under that project carried out about 50 energy audits andprepared a draft energy conservation program for the industrial and powersectors. The energy audits identified substantial scope (12-1SZ) forimproving energy use efficiency in the industrial and power sectors, whichwould save about 323,000 tons of oil equivalent a year. The FY89Industrial Energy Efficiency Project (Cr.1942-BD) is designed, based onthose audits, to reduce the annual consumption of comercial energy by theindustrial and power sectors by 5-6S a year. Consequently, no action isrequired under the proposed credit concerning energy conservation.

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D. Institutional Performance and Develogment

74 hlle it is Important that reforms are made concernlng energypricing and investment, these reforms will only enable Bangladesh to makethe most efficient use of its limited resources If they are supported by aprogram of institutional reform and development. Four publicly-ownedentities, PPDB, REB. BOGOM, BPC, and their subsidiaries, are responsiblefor the production, transport and delivery of commercial energy InBangladesh. According to their statutes these are autonaous bodies thatoperate under the auspices of the Ministry of Energy and Mineral tesources.In practice, however, the Government maintains tight control of the indivi-dual entities' daily operations, financing, investment and recruitmentdecisions ?he Planning Commiss-on is responsible for the Integration ofenergy plans and investment Into the macroeconomlc plans and approval ofprojects. However, delays by the Planning Commission in approving projectsand sanctioning expenditure for equipment, materials, and manpower causesdelays in project implementation, resulting in cost overruns, slippages andshortages of key personnel. Under the Thirteenth Imports Program Credit(Cr.1655-BD) (IPC-13) the Government undertook to have the draft ProjectProforma 1/ reviewed by the Project Evaluation Committee beforenegotiations for IDA Credits and to obtain final approval by the ExecutiveCommittee of the National EconomLc Council before credit signing. Althoughthese changes have helped to clarify procedures they have not significantlyaccelerated project processing. The wider issue concerning the role andfunctions of the Planning Commission is being addressed under an on-goingPublic Expenditure Review (FY89), the recommendations of which are expectedto be pursued under the proposed structural adjustment operation (Y91).Consequently, no action in these areas is proposed under this credit.

75. Institutional weaknesses in energy sector entities, especiallyBPDB and BOGMC, lead to serious lnefficiencies in the energy sector'soperation, maintenance, and management. Power subsector system losses,technical and non-technical, were about 462 in October 1987, more thandouble the level of a well-designed and operated power system; BPDB'scollection of billings has been inadequate and was only 81S In FY68. Theperformance of the BOGMC Group in implementing gas development projects hasbeen uneven. Some projects have suffered from the lack of centralisedproject authority. More generally, insufficient delegation of responsi-bility to project managers, frequent changes in top management, and lengthyprocurement procedures have delayed some projects' implementation.Finally, the absence of a lead institution to plan, set priorities, andoversee a program to increase the supply and efficient use of traditionalenergy has impeded that subsector's development.

Reform of BPDB

76. BPDB is a statutory government entity which was formed in 1972with responsibility for planning, construction and operation of powergeneration, transmission and distribution facilities throughout Bangladeshexcept in areas served by REB. BPDB's performance has been consistentlyweak, as manifested by unreliable and poor quality electricity supply, veryhigh system losses, low manpower productiLvity, inadequate financial and

1/ An internal government document, the approval of which is aprerequisite for the release of funds from the ADP and the hiring ofstaff.

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accounting management, high accounts receivable, low self-financing levels,and ineffectual planning. The major causes of BPDB's poor performance arethe unclear definition of the responsibilities of the chairman and boardmembers, who also comprise BPDB's top management, excessive centralizationof responsibility and particularly insufficient delegation of respon-sibility to key staff in the distribution function, and lack of autonomywith Government intervention occurring regularly on day-to-day matters.Contributory causes of the unsatisfactory performance have been instabilityin top management (e.g., ten different chairmen over a period of 14 years),lack of an appropriate incentive system to reward good performance bymanagement and staff, and considerable overstaffing, particularly of thedistribution function.

77. IDA and ADB have addressed some of these institutional issuesthrough past project lending. Some progress has been made, particularly inthe areas of improved distribution accounting systems, initiation of stepsto computerize billing, and the establishment of special task forces toaddress high system losses; however, much remains to be done. To determinethe priorities for restructuring BPDB, under the proposed credit theGovernment obtained financing from ODA (UK) for a diagnostic organi-zational, financial and management study of BPDB. Terms of reference (TOR)for the study, which were agreed by the Government, IDA, ADB and ODA,required the consultants to identify the factors impeding BPDB's efficientoperation and development, develop proposals to address these factors,Including the possible reduction of BPDB's distribution function throughthe establishment of separate distribution companies in large metropolitanareas, and formulate a dated implementation program. The consultants' keyrecommendation was that BPDB's distribution function should be decen-tralized to strengthen the interface between BPDB and its consumers with aview to controlling system losses and accounts receivable. Further, theconsultants recommended that: the generation and transmission functionsshould be separated within BPDB; planning should be reorganized and maderesponsible for corporate planning and power system planning and analysis;and the roles of BPDB's finance and personnelladministration departmentsshould be strengthened. These recommendations were agreed in principle byGovernment and donors in early 1988. In November 1988 Cabinet approvedBPDB's reorganization on the foregoing basis and agreed that DhakaElectricity Supply Authority (DESA) would be established as a separateentity effective July 1, 1990. Government has agreed that DESA's perfor-mance would be assessed during FY91-PY93 and additional boards would becreated if its performance is significantly better than that of distri-bution regions which remain within BPDB. The Government has also agreedthat implementation of the key steps in the dated action program to reformBPDB would be a condition of second tranche release.

Reduction of Power System Losses

78. System losses have been and are a major cause of BPDB's weakoperational and financial performance, with losses of 33-43? of grossgeneration in FY80-88 and a peak level of 461 in October 1987. Analysisindicates that the FY88 level of losses comprised 20? technical losses,including 6? used by power stations, and 23? non-technical losses.Technical losses are primarily caused by improperly planned and overloaded

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distribution systems, while improper billing, illegal connections andincorrect metering are the main causes of non-technical losses. During theSecond Five Year Plan, BPDB lost an estimated Taka 2,680 million (US$82million) because of non-payment for electricity, much of which was attri-butable to large industrial consumers who represent less than 12 ofconsumers but about 45 of billed amounts.

79. The major effects of the inordinately high system losses are thats(i) BPDB loses substantial revenues (e.g., in FY88 the reduction of lossesby one percentage point and their conversion into sales would haveincreased BPDB's revenue by about US$3 million or 1.5Z of its FY88operating revenue); and (ii) higher tariff increases are required toachieve agreed financial targets (the reduction of losses from 302 to 28Xin FY90 would reduce the tariff increase required to meet BPDB's FY90financial target from about 12.5Z to about 9.52). Under the PowerTransmission and Distribution Project (Cr.1648-BD), BPDB appointed UNDP-financed consultants, with the United Nations Department of TechnicalCooperation for Development (UNDTCD) as executing agency, to address theproblem of losses (para. 53). BPDB also agreed to implement the consul-tants' agreed recommendations in a timely manner, with the expectation ofreducing losses to about 32Z in FY88. However, formulation of a datedaction program was delayed, first because of the late appointment of theconsultants and, second, because in January 1988 UNDTCD terminated theconsultants' contract due to poor performance. In August 1988 a newconsultant was appointed to complete the assignment by August 1989.Possible funding for the renovation program to be recommended by theconsultants to reduce rystem wide technical losses would be consideredunder the proposed FY90 Power Distribution and Rehabilitation Project. Inview of the adverse impact of high system losses on BPDB's financialviability, the financing of its investment program, and on future tariffincreases, the Government agreed to implement a short-term program, whichwas revised in February 1988 in consultation with ADB and ODA, to reducenon-technical losses, and to reduce gross losses to an average of 352 overa period of three months before Board presentation and to 322 for secondtranche release, also over three months. Moreover, once target levels oflosses have been achieved, the Government has agreed to report and reviewwith IDA the cause of any monthly increase in losses above that figure.Gross losses were reduced to an average of 35Z during June-December 1988,and were 342 in December 1988 (net of power station consumption, losseswere 28X).

Reoaranization of the Gas Subsector

80. Partly for historical reasons, the gas subsector has suffered fromfragmented organization. The Government has been aware of the need tostreamline the sector's organizational structure to improve its operatingperformance and planned to undertake a major reorganization of B06KC andits operating affiliates.

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81. A diagnostic study of BOGMC's organizational and managerial weak-nesses and of the Government's reorganization plans was carried out by IDAwith the assistance of an international management consultant in the courseof appraising the Second Gas Development Project (Cr.1586-8D). The studyrecommended the consolidation of all drilling activities within a singleentity while maintaining a strong centralized project implementation capa-bility within BOGMC. To prepare a program for the proposed reorganization,the Government subsequently requested assistance from ODA (UK) to financeconsultants. The Government agreed under Cr.1586-BD that the gas subsectorshould be reorganized, satisfactory to IDA, by July 1, 1986. The delayedappointment of consultants (Coopers and Lybrand Associates Ltd. wereappointed in August 1986 and mobilized in November 1986), necessitated anew timetable. The consultants submitted their final report, includingtheir main recommendations for the reorganization and an implementationprogram, in April 1987.

82. The Government has agreed both the principles for the gas sub-sector's reorganization based on the study's recommendations and a datedimplementation program. Under the reorganization all operationalactivities currently carried out by BOGMC are being divested and reor-ganized, together with those of the existing companies (i.e., BGPCL, SGFL,TGTDC, JGTDC and BGSL), under a new set of operationally independentoperating companies (OCs). BOGMC will operate as a holding company,holding equity in the OCs on behalf of the Government and be responsiblefor investment planning and monitoring as well as sector policy formu-lation. The OCs placed under BOGMC's control will include a nationalexploration and drilling (E&D) company with separate explorationldrillingand petroleum services divisions, a centralized production company anational transmission company which will be established prior to thecommissioning of the planned north-south pipeline and integration of thenational gas grid, initially three regional distribution companies, acompressed natural gas company, and, following the initiation of a signifi-cant minerals project, establishment of a company responsible for solidminerals exploration and development. In the interim BOGMC would beresponsible for solid minerals exploration and development. The OCs'Boards of Directors would include BOGMC representatives but no Governmentrepresentatives, Government's con; rol would be exercised through BOGHC'sown Board.

83. The revised BOGMC Ordinance to establish lOGMC as a holdingcompany was approved by Parliament in February 1989. All of the newoperating companies, with the exception of the E&D company, had beenlegally established by early 1989, and the E&D company will be legallyestablished through the registration of its Articles of Association withthe Registrar of Companies, by May 31, 1989. The Board members of BOGMCand the OCs will be appointed by July 31, 1989.

Accounts Receivable and Payable

84. In addition to relatively low and poorly structured tariffs, inthe past energy sector entities in Bangladesh accumulated excessive amountsof arrears, which caused liquidity strains and made it difficult for themto pay bills on time and achieve satisfactory levels of financial perfor-mance. Although there is scope for further reduction some improvements inbillings and collections have occurred in recent years and the overall

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level of receivables has declined. Based on unaudited data, as of the endof the first quarter of FY89 the total receivables for BPC, BOGMC and BPDBwas estimated at Tk 9.6 billion (US$291 million). This was equivalent toabout 25 months of sales revenues for BPC, 4.5 months for BOGMN and 5months for BPDB. Of the total amount, about Tk 3.7 billion (402) was duefrom BPDB to BPC. The size of BPC's accounts receivable was addressedunder the Refinery Modification and LPG Recovery and Distribution Project(Cr.1749-BD), wherein the Government agreed that BPC and its subsidiarieswould provide credit for only 45 days and that BPDB would reduce theamounts owed to BPC and its subsidiaries for petroleum products purchasedup to June 30, 1986, by paying at least Tk 50 million per month until suchamounts are fully paid. BPC and BPDB have complied with this agreement.and during the six months ending October 1988, BPC reduced its accountsreceivable from BPDB by nearly 102. Under the Second Gas DevelopmentProject (Cr.1586-BD), it was agreed that BGSL would maintain its accountsreceivable at no more than 3 months of gas sales. However, in January 198'its accounts receivable were 3.7 months of gas sales.

85. Under the Power Transmission and Distribution Project (Cr.1648-BD)it was agreed that BPDB's accounts receivable should not exceed the 3.5preceding months' sales by June 30, 1989 and thereafter. However, itsaccounts receivable increased from Tk 2,666 million (US$86 million) atJune 30, 1986 to Tk 3,176 million (US$103 million) at January 31, 1987(equivalent to about 6.2 preceding months' billings). In view of thisdeterioration, the Government agreed intermediate targets for BPDB, namelyreduction of its total accounts receivable to the equivalent of 4.5 months'billings before Board presentation, and to 4.0 months' billings beforecredit effectiveness. Further, Government also agreed that for both Boardpresentation and credit effectiveness, all other energy sector entitieswould be in compliance with existing agreements for accounts receivable.BPDB's accounts receivable were reduced to the equivalent of 4.5 months'billings in December 1988, in which month BGSL's receivables were reducedto the equivalent of three months' gas sales. The conditions of secondtranche release pertaining to accounts receivable are: the reduction ofBPDB's accounts receivable to the equivalent of 3.5 months' billings;continued compliance by all other energy sector entities with existingagreements on accounts receivable; and completion of the aging of accountsreceivable which BPDB initiated in early 1987 to assist the Government informulating and implementing a policy for writing off bad debts.

Traditional Energy

86. There has been growing evidence in Bangladesh of dwindling biomasssupplies, on which the majority of the population depends, and a resultingincrease in the substitution of commercial for traditional fuels. Theefficient development of the energy sector requires the planning authori-ties to (i) assess both the microeconomic and macroeconomic impacts of thissubstitution, including the rate, location, magnitude and balance of pay-ments impacts; and (ii) formulate a least cost strategy for meeting thegrowth in camercial energy demand as well as an action program forimproving traditional energy end-use efficiencies. The Government has

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agreed that an inter-fuel substitution study should be undertaken under thejoint World Bank/UNDP Energy Sector Management Assistance Program toaddress these issues. The study, which is planned to commence by mid-1989,would focus on the peri-urban areas and the rural poor. The Government hasagreed to review with IDA the results of the study and jointly prepare animplementation program, including a financing plan.

PART V s THE CREDIT

Background

87. The proposed credit is the second sector adjustment operation In arevised lending strategy for Bangladesh, in which a mix of sector andstructural adjustment credits will be used to achieve broad policy andInstitutional reforms while transferring quick-disbursing resources to beused primarily to finance general imports. The revised strategy focuses onkey issues which have sector-wide implications and thus can be more effec-tively addressed under sector adjustment credits than more narrowly definedproject operations. The first operation under the new strategy, theIndustrial Sector Credit, was presented to the Board in June 1987; itsmajor objective was to achieve higher rates of industrial growth to meetdomestic demand, expand exports anC create employment outside ofagriculture.

88. In the energy sector, although some progress has been made viaprojects operations in addressing key sector issues, much still remains tobe done. The reform of the energy sector will be a long-term process inwhich continued IDA support can play a useful role. The proposed EnergySector Adjustment Credit provides a comprehensive long-term framework forpolicy actions and, therefore, would be the basis for IDA's lending forspecific energy investments. In addition, the policy framework wouldfacilitate donor coordination (para. 45). This approach, a sector creditin support of an agreed long-term policy framework, followed by lending forspecific investments, has substantially enhanced IDA's dialogue with theGovernment, fostering intensive and focused discussions on issues which cutacross energy subsectors and which otherwise would have been treatsd, if atall, in a piecemeal and less coordinated fashion through project lending.

89. The proposed credit would be the first IDA credit supporting the6overnment of Bangladesh's program of policy and institutional adjustmentsin the energy sector. The program's development and the reforms to besupported under the proposed credit are described in Part IV of thisreport. A timetable of key events relating to the credit and its specialconditions are listed in Annexes III and V. The proposed credit wasappraised in March 1987. Technical discussions and negotiations took placein Washington from July 22, 1987 to July 30, 1987. The Government ofBangladesh was represented by a delegation led by Mr. Shafiul Alam, thenSecretary of Energy. However, because of the long delay in meeting thecredit's Board presentation conditions, the draft legal documents, particu-larly dated covenants, were updated in February 1989.

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Procurement and Disbursement

90. The proposed credit of US$175 million equivalent would financeabout 2.81 of Bangladesh's total merchandise imports and about 5.12 of thegross capital inflows over the disbursement period, fourth quarter of FY89to second quarter FY91. In view of Bangladesh's need for quick disbursingprogram aid (para. 14), the funds to be provided under the proposed creditwould be used to finance imports of any goods other than those specified ina shortlist of ineligible items. Imports directly financed from othersources would not be eligible for IDA financing. Not more than 25Z of theproceeds of the credit would be used to finance the import of any commodityor group of commodities falling within a single two-digit Division of theStandard International Trade Classification tSITC), Revision 2.Disbursements will be fully documented except in respect of small contractsfor less than US$50,000 equivalent which would be on certified Statement ofExpenditures (SOEs) vith the relevant support documentation retained byBangladesh Bank and made available for review by IDA representatives duringsupervision missions. Credit withdrawals based on SOEs would be auditedannually by independent auditors acceptable to the Association.

91. Procurement would be limited to goods from countries eligibleunder the Bank's Guidelines for Procurement. Both public and privatesector imports would be eligible for financing. Except for proprietaryitems, all import orders costing the equivalent of US$2,000,000 or morewould be procured under contracts awarded after International CompetitiveBidding; IDA would review procurement decisions after such contracts havebeen signed and prior to the first payment in respect of such contractsfrom the special account to be established by Bangladesh Bank for thecredit. Non-proprietary items costing less than US$2,000,000 equivalentcould be procured through normal procurement procedures for such purchases,which generally include the invitation of quotations from no fever thanthree suppliers. Contracts for commonly traded commodities may be awardedon the basis of price quotations available from organized internationalcommodity markets. Contracts for proprietary items or equipment, subjectto domestic standardization regulations endorsed by IDA, could be let on anegotiated basis, but the award of such contracts would be subject to priorapproval by IDA if individual contract value exceeds US$200,000 equivalent,up to an overall ceiling of US$10,000,000 equivalent. IDA would conduct apost disbursement review of all contracts signed with values exceedingUS$500,000 equivalent, and would conduct similar reviews of all othercontracts on a random basis.

92. Disbursements would be made against 1002 of the foreign exchangecosts of eligible imports on the basis of fully documented withdrawalapplications prepared by Bangladesh Bank. It is expected that the proposedcredit would be fully disbursed in about 18 months. A special account ofUS$30 million equivalent would be established in the Bangladesh Bank forthe proposed credit for the purpose of prefinancing all eligible items. Inorder to support the Government's policy of liberalizing its foreignexchange market system, the credit's proceeds would be used to financeexpenditures through the secondary foreign exchange market.

-33-

Tranchina

93. The credit's proceeds would be eligible for withdrawal in twotranches. The first tranche of SDR 58.71 million would be available forwithdrawal when the proposed credit becomes effective. The second tranche,of SDR 78.29 million, would be available subject to IDA being satisfied,following a review by December 31, 1989, that the Government is followingsound energy sector policies, including meeting the agreed conditions forsecond tranche release (Annex V).

Cofinancing

94. The Government of the Federal Republic of Germany proposes toprovide, through parallel financing under terms and conditions similar tothose for the proposed credit, a grant of DM 26 million to finance generalimports. Further, the Government of Japan has indicated that followingapproval by the Board, it would consider the provision of supplementaryfinancing for the proposed credit.

Benefits and Risks

95. The proposed credit would make a major contribution to theachievement of Bangladesh's objectives for the energy sector development.The credit's preparation has assisted the Government in undertaking aprogram of sector-wide reforms urgently needed to improve the sector'sperformance and net contribution to the Budget. Consequently, the majorbenefits would include: a more efficient allocation of resources; improvedinvestment planning; improved financial viability of energy sectorentities; the mobilization of additional resources for the Budget; and theremoval of institutional constraints to the efficient development of theenergy sector.

96. The major risk of the proposed Energy Sector Adjustment Credit isthat political events may impede implementation of the reform program.However, to date the Government has demonstrated a strong commitment to agradual rationalization of energy sector policies and, in many cases, hassuccessfully implemented measures involving politically difficultdecisions.

PART VI : COLLABORATION WITH THE IMF

97. The IMF has provided assistance to the Government of Bangladeshthrough a series of Standby and Compensatory Finance Facility (CFu)Arrangements in the early to mid-eighties and three annual arrangementsunder the Structural Adjustment Facility (SAF) since 1987. A third yearSAF was approved by the IMF Board on February 6, 1987; and SDR 57.5 millionwas disbursed pursuant to the first annual arrangement under the Facility.Subsequently, the IMP Board approved and disbursed SDR 86.3 million onNovember 23, 1987 and SDR 38.8 million in mid November 1988, under thesecond and third year arrangements, respectively. This brings the totaldisbursements under the three SAP arrangements to SDR 183 million.

-34-

98. Following the floods in the sumer of 1988, the IMF approvedspecial emergency assistance to Bangladesh in November 1988, and an amountof SDR 71.9 million was disbursed. It is estimated that the total Fundcredit to Bangladesh outstanding at the end of 1988 amounted to approxi-mately SDR 600 million, or 2082 of the quota.

99. IMP resources have been made available to support comprehensiveadjustment policies initiated by the Government in 1985, which were subse-quently developed into a medium-term structural adjustment program withBank and Fund assistance. Macroeconomic management improved substantiallyin FY86 and FY87; and has broadly continued in FY88 in line vith thatenvisaged under the program; (although there have been some slippages,notably with regard to the revenue effort and inflation targets, in partdue to disruptions caused by recent floods). As a result, external andbudgetary deficits have been reduced to manageable levels. In FY87, theGovernment initiated serious efforts to restore discipline in the domesticfinancial markets. Under the medium-term program supported by the SAP, theGovernment will endeavor to raise the annual GDP growth rate to at least 5Swith increased focus on alleviating poverty, reduce inflation to 7Z by theend of the three-year period and limit the external current account deficitto about 71 of GDP. To achieve these objectives, the Government willattempt to increase investment (both public and private) to levels consis-tent with macroeconomic stability, raise domestic savings to finance suchincreases in investment, and improve resource allocation. Accordingly,reforms are envisaged in tax policy and administration and the financialmanagement of public enterprises; public expenditure management; reform ofthe financial sector, including further strengthening of loan recoveryefforts in the agricultural and industrial sectors; and trade andindustrial policies.

100. Bank-Fund collaboration in the policy dialogue with Government hasbeen close. IDA's objectives under its policy based lending, such asIPC-13 (Cr.1655-BD) and the Industrial Sector Credit (Cr.1816-BD), havebeen coordinated with DMF programs under the Standby Arrangement and incor-porated in the SAP program. Bank and Fund staff have joiutly prepared thePolicy Framework Papers (PFPs) under the SAW each year, with active Bankstaff participation in IMF missions. IMP staff have also participated inIDA missions on tax policy and financial policy, and assisted in thepreparation of reports on these subjects.

PART VII : RECOMMENDATION

101. I am satisfied that the proposed credit would comply with theArticles of Agreement of the Association and reconmmend that the ExecutiveDirectors approve the proposed credit.

Barber B. ConablePresident

Washington, D.C.March 22, 1989

-35.. ANNEX IPage I. of 3

FAC 1 or 3014-lw POPUlulis (sUs.) 1*619O? psi capita 1 A 08 140

*A. amx oa Grs$ Domestic Ptoda.g 8. aGuitb vstas(1 pa MOM)(1gm cugrven Pei"e datsv) (rnm oinmt pric dat)

1165 1973 1160 1985 1906 118 1965-73 1973.40 I98-84 1LOU 198

Gro0s Omnul Podhuct a.p. 10. 0. 0.0 100.,0 1.00.0 100.0 0.0 5.? 3.7 4.9 4.0P41 hz~~ir.ct Tam. ~ 3.1 L.4 S.? S 2 5.5 5.6.. .

ftt Inirect IMMIS52.8 57.9 50.3 '9.9 46.9 47.3 0.4 3.4' 2.7 4.0O 0.1rauAaTz 10.7 10.1 14.9 1'..) 14.3 13.5 -4.1 11.9 4. 2. 72

(of aAiab ~ndactur1ng) .4 6.4 9,9 8 3 8 1 1.5 -1.9 13.3 2.1 1.8 6.4Bayloas ~~~~~~34.5 32.0 34.5 3S.9 38.8 39.2 1.5 7.4 4.7 7.1 7.4

Rasmaros Balms ~~~~-3.7 1.0 -12.9 -10 2 -9.4 -9.3 . .

tapors of GWS 9.7 6.0 5.7 6 2 5.9 5.5 -1.3 6.6 4.0 17.6 10.4?u.zt of GM 13.4 5.0 18.6 3- 15.3 14.8 -3.9 14.8 2.3 -13.0 12.6

Total zeiqasatures 103.7 99.0 112.9 110.2 109.4 109.3 -0.3 6.7 3.5 1.3 4.8

Total COe.MUMPia 92.2 90.1 97.9 97 7 97.4 97.8 0.2 6.3 3.5 1.6 5.5PWrist. COMAsuPeCs 83.2 66.0 91.5 90.6 89.8 a 89.8 . .

Genaral cowmma 9.1 4.0 6.4 7.1 7.7 8.0.. .

0Gros Dinmatie bauwsft 11.5 8.9 15.1 12. 5 11.8 I1. -5.4 10.5 3.6 -.0.6 1.0Fixed Znw.stmt .. . . 12.5 11.8 11.5 . .

aroe" 00atL* Sa-Iap 5.0 9.9 2.1 2.3 2.4 2.2 .. . 55 34.8 -23.1Vet Factor 1um 0.1 0.3 0.1 -0.6 -0.8 -0.7 . .

Bat OnyMM Tmanfers . 0.6 1.6 3.0 3.8 4.2 .. ..

agos" nagioml SayLap. 10.8 3.9 4.7 5.4 5.7 .. . 23 391 -. 2

Zn bitLims of LOla 1965 1973 1960 198 198" 1987(at ionstant 118 pricas) --- -- --

Gros Dh"lsti Product 135 133 198 238 250 240 3 5.? 3.7 4.9 4.0capacxy to rozg 13 11 11 17 15 16 -' 7 3.8 7.2 -11.3 9.3TsurMs Of Trad. Adjustmen 6 3 0 3 -1 -1.. .

Gr4 omaeDistic Income 141 136 198 242 249 259 -0.3 5.5 3.9 3.0 3.9Gros Vatima ProdaaCt 135 134 198 237 248 258 0.0 5.7 3.6 4.7 4.2Gross National Icmemo 141 137 198 240 247 257 -0.3 5.5 3.7 2.8 4.1

a 100) - - ---- -;----Znf1atimn tatea'a" ..--C. PCLOricelofc 110s18 "1 1985 1166 1967 196-73 1973-80 1980-86 1166 1967

conAsnsu Prio"cms( 64) 100.0 143.8 157.8 175.0 192.4 212.4 8.1 14.5 11.4 9.9 10.4AWhlasal. Pinces (WI 63) 100.0 128.2 148.9 174.5 182.3 197.3 . 12.9 11.2 4.5 8.2rmcLSg& 00P Deftor 100.0 130.8 M 15. 75.0 184.9 207.5 7.3 13.4 11.2 5.6 12.2?opLLict Kapmmilzis Dan1. 100.0 116.1 153.7 170.6 185.2 205.9 7.7 13.8 10.7 8.6 11.2

0. Ocher loficators: 1960-73 1973-80 1980-8

Growth nstss(% pa&.):POPA1t1im 2.7 2.4 2.6Labor ForceGross ifatI. ZaW4= P.C. -3.0 3.0 1.1Privat e Cmsuqrie P.C.

Zopoxe Elastiecit:lqorts (GM$1)/I 01(op) -145.9 2.6 0.7

KaqinaL aVbIA" Xates:an"s MatIinaL SaVing -12.6 11.5

ronss DaMatic Savins -274.2 -16.5 3.5

Mm (part" aversees):

Shame of Total 1965 1973 1980 :484LaorIrese nt - --- --

Agriculture 83.7 79.4 74.8rahntw ~~~4.8 5.2 6.0

Service 11.4 15.3 19.2Tota 99.9 99.9 100.0

-36- ANNEX IPage 2 of 3

mmme - somm nzc&w

VAC I OF S

Vblu_ h9d (S9100O) Vlus at O t:Flt (wilm MS$)

E. Se,t iIA ZOa JIM 196 LOU 196 16 197 18 1963 1986 1OU 196 19 l ?

X.OAM.Y 100 116.3 96.3 7S.6 116.9 113.9 1" 110 U? 11 14 106X.wQD.FSM 100 231.9 323.6 322.6 396.6 383.3 87 72 7 113 136x.,a.AmIs 100 112.7 12.5W 96 67.6 16 66 so 85 70 61 135X.IW.FA 100 128.2 128.2 108.8 124.8 8.5 33 46 69 33 30

,uatx *. *.. s. . . . . . . . . .P*uaL 100O 1S1.3 121.6 12.4 1268 161 ".9 392 401 663 .36 688 669Tota zootF 100 121.5 127.5 120.9 134.9 160.8 722 68? G1 93 619 1074

V. t _a~g ?aSt

Feet 100 75 76 100 5 69 95.7 716 473 8 60? 36? 62fuel and ng 100 91.2 83.4 91.9 139.6 104.1 303 411 355 35 359 230Oth _ .. .. .. . .. .. SOWS

Capita Sad 100 117.6 109.6 113.3 1:3.9 14. 5465, 655 599 616 691 1003Stal Tqna CW 100 n.8 102 117.6 107 118.6 2372 226 2333 2667 2366 260

0. IS of Sgai (1986100) 1980 196 1966 1985 1986 1987

1Seathd. Price iSa 100.0 78.3 88.1 107.0 86.1 92.5Ibde. taporti. I.d 100.0 100.9 97.3 95.1 93.1 93.1Scd. Tem of Trade 100.0 7.6 90.6 112.6 90.3 99.3

35 .L1mw (at curQent pries):

B. ueau* of 1pauta 1960 19" 19t6 18 1986 1987

taport. of Coo" IQS U S9 1033 1162 1063 13013bwAa se C) 2 66 1S1 936 6S9 1076war tar serices 163 213 Z 228 224 227

Impra of coo" as 236 2465 236 2866 28 26Ser.b:Lae (V) 2372 2309 2353 2647 2366 2620Net-y.tar Se.i.. 173 56 190 217 223 256

_laumae BablWe -160 -1566 -1510 -1702 -15" -1576

lWt arer I=MM 16 -169 -64 -90 -126 -. 22(lngmt per am 6? 6i 74 91 108 133

Not Clrrant Trawfau 210 628 62 47? S6 731(Amace tr Ltte s) 19? 576 527 3" 497 617

OAQznt A.mt kline -1436 -07 -947 -1324 -1086 -966

LterATam Capttal 1.11.w 1275 272 1176 1267 1115 1338Diretinwaj 0 0 0 0 2 2O tffcL Capital Gums 592 720 708 701 963 57Not LT LO_ (MS data) 668 676 37 *68 U3 733Othe LT hn1 (lt) i5 78 34 79 -663 -56

Toel Other Item (t01) -43 36 U1 -10 97 -169et1 SEn TaO Cti4ta 11 -30 161 -S to -100

capust nm. 3.3.1. 0 0 0 0 0 0braze a OLealme -34 66 -37 -5 87 -69

_apsa UI let 1aserwe 204 -200 -355 77 -128 -203oneCrdit fraic the b1 21 4? 19 -7 -28 134Othet R AS.gw Chow" 18 -247 -376 84 -100 -337

AS Sam of 00PtUmourc alsi' -13.0 -12.9 -10. -10 6 -10.0 -9.0

Sava PaYinr 0.6 0.6 O.5 0 6 0.7 0.8OUmM lOcJUS 1ala1g. -11.2 -9.1 -6.8 -8 2 -7.0 -5.5

lbaeh Itemaleawe 1ML. add (al. US$) 300 526 390 3117 09 83leswe iI=. Cod4 (0l. US4) 331 6S6 60 316 430 869Offs"l X-ta (/tlS1 0 15.68 23.76 24.93 26 30 29 89 10 63Zair nlff.X- t-t 1960 100.00 94.10 106.37 10? o0 i 01 89.700go ( 1W of OtUTm u8) 1U 12160 16026 160)7 0 419 17603

_ ~~~~~~~~~~~~~~~~~~~............................................................ -_ ---..... - --- .___.._._.. __.. . _ ___........-

-37- ALMEX IPage 3 of 3

WAzAD= IA4WUVU- Z@OC DCAIU

MX 3 (w 3_,,,,,,__.~~~~~~~~~~~~~~- - --- --- ----- - - -- -- -.... -. __ -..... -_ -..--------- _

Shards of CDP (2) Growth RAte

.. _ - - - -..-.... -.. ._ _

O.mc Receips 8.8 8.8 6.2 6.6 9.2 9.0 13.5 25.6 17.7 14.3Q=Mn Ixpui±tueA 5.5 6.6 6.6 6.7 7.5 7.2 20.9 20.3 24.? 6.9Curn Bu . 3.3 2.2 1.6 1.9 1.7 1.8 - - - -

Capital R-epta - - - - _ _ _ .

Capitl apuAi.uwe 14.2 13.) 10.6 9.4 9 0 9.9 12.2 11.0 12.3 21.3°Ual Deficit -10.7 -11.2 -9.2 -1 5 -7.3 -8.1 - - - -

Offical Captal CrWa t 8.8 9.8 8.0 6.9 6.6 7.4 14.6 2.9 9.9 26.9Eatamal Borrowing (Vat) Dowustc NRnBank Flnuing 0.4 1.2 - 0.8 0 7 0.2 - - - -

gtBak Financing 1.5 0.2 1.2 -0.2 -0.2 0.5 - - - -

lkt Disbursemnts fuSS milllons) Debt Ou 4tUdig * DiSbuZsed (8U lOUlm)J. lateral C ittal nlw, Debt ----- ------ ------------------------ ------

ad Debt BuIrdu Rti. 198O 1963 1964 1965 1986 1987 1960 1963 194 196 16 1967

Public & Publily Cow. LT 646 474 437 468 813 733 3549 4866 5123 5978 2n72 6S

Official C"aCogs 636 426 409 474 759 735 3491 4742 4979 5630 7063 8632ihLtatezal 305 253 331 423 513 456 1385 2097 2386 2899 3529 423S

of th DIIID 0 0 0 -1 -1 -1 55 55 50 55 61 70of wich IDA 156 196 241 283 342 332 926 1459 161? 2021 2450 2966

Bilateral 351 173 78 52 246 279 2106 2645 29 2932 3534 4398

Pritvue a csirs 12 48 27 -7 55 -2 56 124 144 148 209 U9Supplrs s 36 s0 -3 52 7 24 76 105 104 156 166FV1iaia u*.a. 7 12 -2 -4 2 -9 35 *8 39 44 52 53

Priwage Nes-gwmted 0 0 0 0 0 0 0 0 0 0 0Total LT 668 474 437 468 813 733 3549 4866 5123 5978 72 8651

VUCWedi 94 51 -60 23 -10 43 269 "41 36 424 461 51Net cat-Tm Capta 11 -30 16 -s 10 -100 212 170 133 135 125 74ToItliacl. D &xtS 774 494 538 '85 613 676 4030 5477 5613 6556 789 9506

d IDA Rati 196O 1963 1964 1985 1966 1987

Shae of Tot&l IA-Ter DM Notes:1. I as 2 of Total 1.55 1.13 0.97 0.92 0.64 0.792. IDA as I of Total 26.09 29.9 32.4 33.81 33.66 33.73 Data on Econmc i2 ceatos tables3 -IRD..3DA as d of Total 27.64 31.11 33.7n 34.72 34.53 34.52 should follow the defintitons a

the concepts of the Standard Tables adShae of LT Debt Seive Standard Attacets. The indicators1. BRD as of Total 3.96 3." 1.62 1.44 1.82 1.55 should include deat throLZh the moat2. DA a I of Total 7.07 7.36 9.20 10.06 10.39 10.73 rcetly coplered Calendar year (or3. nW*1DA a 2 of Total 11.03 11.00 11.02 11.50 12.21 12.28 filscal yer in the case of fscsl yea

countries). Staff estimates WAy be tsd000-to4asta lRatios Jf final or preliminary actual are not

yet avaLlable. The us of estmates wA1. Low-Teo Debt/flpors 302.38 326.19 316.92 377.46 461.33 453.16 preliminary fIgurs should be )ndIcated2. Dl Cg.dilporc 22.92 29.57 22.03 26.74 29.26 29.77 by:3. g ert-TmDehtlaport 18.06 11.40 8.23 8.52 7.93 3.784. LT+.W.4 D000/firta 343.35 367.16 347.18 412.73 498.52 486.71 * - estimated data

p - peimilnary data

C DP-te-0 Ratios

1. Lon-Te DebtICP 27.75 40.08 36.53 37.28 47.04 50.262. WfU Cgedt/OP 2.10 3.63 2.54 2.64 2.98 3.303. Umie-Ter DebetIGP 1.6" 1.40 0.95 0 84 0.81 0.424. LT+Dlt+ST D0M/G 31.51 45.11 40.02 *0 76 50.83 54.00

Debt service IZaw.s

1. Public & GurUSeed Lt 6.63 9.02 10.55 1: ZE :7 09 ;6.552. Privee LT 0.00 0.00 0.00 0 :0 0 00 0.001. Total. LWT_S Debt Service 8.63 9.02 10.55 I .3 1:7 09 16 554. DV b _ . cah.5. Taret only o ST Debt6. tal (LTS+nv+ iT.)

--- ___ --------- ____. - --------- ,,___,,, -_,-----_

-38- ANMVPo9 Xw I

ENERGY SECTOR ADJUSTMENT CREDIT

THE STATUS OF BAW GROUP OPERATIONS IN AGLAUDESH o/

A. Statement of Bank Loans and IDA Credit. (as of September a0. 1988)

Amount6Loan or (lowo cancellations)Credit U$11 Million blNumber Year Borrower Purposes ltak IDA Undistbr d

One Loan and 67 Credits fully disbured 54.90 2,250.98 -

1001 1060 BD Chittagong Water Supply It - 20.00 0.17114 1982 SD Drainage & Flood Control U1 - 27.00 9.061215 1982 OD Extens on & Resoerch II - 27.00 14.901247 1962 SD Chittagong Port - 60.00 59.641264 10O2 BD Ashunganj Thernal Power - 92.00 12.881252 1982 B0 Rural Electrtfic ation - 40.00 9.881287 1962 sD Deep Tubwell IIs - 44.17 25.071816 1968SBD Business Management Education A Training - 7.80 8.881821 1908 B0 Telecommunications III - 85.00 21.851849 1988 BD Public Administration (Tralning and

Personnel Managment) - 12.00 6.831U57 1968 SD Energy Efficlency and Rfin ery

RehabilItati on - 28.50 10.111s84 19t8 BD Rural Development I - 78.45 02.25l80s 1988 B0 Agricultural Training II - 0.10 5.411399 1988 SD Sugar Rehbtilitation and In_teification - 11.64 6.061402 1968 OD Petroleum Exploration PromotIon - 28.00 9.841440 1984 SD Fifth Technical Assistance - 25.00 25.841455 1004 BD Second Agricultural Resorch - 24.C0 27.871407 1964 BD Water Development Board - 41.50 41.141477 104 BD Textile Industry Rehabilitation SI - 28.00 20.18P022 1964 B0 Textile Industry Rehabilitation II - 22.00 2S.801490 1984 BD Technival Education - 86.00 19.981574 1986 BD Second Primary Education - 76.00 56.641C86 1985 B0 Second Gas Development - 110.00 180.J1191 1986 SD Third Flood Control A Drainag - 48.00 64.291688 1986 SD Rural Electrific'tion II - 79.00 84.071684 1986 BD Second Forestry Project - 28.00 2C.91646 1006 SD Power Trans. A Distribution - C6.00 60.021649 1986 SD Population A Family Health III - 7t.00 81.90165I 19806 D Shrimp Culture - 22.00 22.481784 1966 SD Dhoke WASA III - 80.00 80.181749 1987 60 Refinery Modifteition A LPG

Recovery A Distribution - 47.00 46.0?1784 1067 3D Fourth Flood Control A Drainage - 20.00 19.48116 1987 B0 Industrial Sector - 190.00 2S.691827 1987 BD Road Rehabilitation Maintennce - 102.00 09.201870 1988 sD 2nd Smal I Scale Flood Control - 81.60 79.021676 1988 SD 2nd Flood Rehabilitation - 26.00 16.741980 bl 1988 BD Urban DevelopmenO - 47.60 44.891940E 1986 SD RuraL Roads & Markets l provemnt - 62.80 55.071942 kl 1989 8D Industrial Enrgy Ef lcioney 11.40 10.71

Total 54.00 4,058.62 1,859.60-F-JNICH HAS BEEN REPAID 6.88 80.10 -

TOTAL NOW OUTSTANDIN W ,02S.02 -AUNT SOD - - -

TOTAL NOW HELD BY SANK AND ID 48.52 4.028.52TOTAL UNDISSURSED -. 85.60

IDA sixth seventh and elghth replenishment. redits denominated In SOR.The prlncipal amounts are shown In U.S. dollars euivalent at negotiations as swn In thePrslident's Reports. The undlrsed amount. are calculated at the rate of exchang onSepteme so, 1968~ Not yet effective.

-39-

r t or 2

S. Statement of IFC nvest mnt. (tn of Soptk er 80. 19in)

USSm IllI eonUaiesburee

Belec Inl.Fiecal Typ of Total Particip.nta UndlebtredYear Obligor uaiaee Equity Loae Total by IFC Portlon 2FC Portlon

1969 Kannaphuli Paper Millo Ltd. Pulp A Paper 0." 5.0 6.21(This Leon was concelled in 1969/70)

1979 High speed Shipbuilding &HNtvy Engineering Co., Ltd. Shipbuliding 0.80 1.20 1.60 - - -2ndub ttl Proootlon andfot.lope.nt Company ofBnogladeh, Ltd. OFC 1.06 - 1.05 1.06 - -

1980 Induetrial Developmnt Money aLeaing Co., of Bangladeeh Capital(IDLC) Larket 0.17 8.02 8.19 2.67 o.7 0.07

19165/66 sat Sho Co.(Sangladedh) Ltd. Shoe 0.61 4.45 4.96 # .72-

ToUtl 2.72 14.27 16.99 7.44 0.07 0.07

-40-

ANNEX III

BANGLADESH

ENERGY SECTOR ADJUSTMENT CREDIT

Supplementary Data Sheet

Section I s Timetable of Key Events

Preparation Mission May 1986Pre-appraisal Mission December 1986Appraisal Mission March 1987Negotiations July 1987Date of Effectiveness (Planned) June 1989

Section II : Special IDA Implementation Actions

None

Section III: Special Condition

It is proposed that the proceeds of the credit beeligible for withdrawal in two tranches. The firsttrmnche of SDR 58.70 million (US$75 million equivalent)would be released when the proposed credit becomeseffective. The second tranche of 8DR 78.30 million(US$100 million equivalent) would be released, subjectto IDA being satisfied, following a review by December31, 1989, that the Government is following sound energysector policies as well as meeting the specificconditions listed in Section IV.

-41- ANNEX IVPage 1 of 11

MIsuy of PlanningGw_mn 1 60o eOm PopWs Repbric of oaa

Dhaka

INISErQ a N0 ....RD/.IAr.I.YV/P-23/ .. J.aabauerv--6,j"989s

Dear Mr.Conable:

LITTER OF SECTORAL POLICY

Despite structural constraints and repeated disruptionscaused by natural disasters, Bangladesh has made significantprogress in several areas. Policies toward agricultural,industrial and export sectors have been strengthened,permittingthe economy to grow at about 3.8% per annum during theeighties. Growth of foodgrain production averaged 2.7% per yearduring the same period; this was faster than that in the 1970'sand was above the population growth rate. Industrial outputrebounded after a period of stagnation in the early eighties -led by efficient import substitution and export-oriented labour-intensive activities. Non-traditional exports have grown onaverage by over 20% per year in the 198Os. Development ofdomestic commercial energy supplies, especially natural gas, alsoincreased rapidly,enabling relatively high growth in the powerand fertilizer sectors and significant impurt substitution ofpetroleum products. In recent years,significant progress hasalso been made toward creating a more stable and undistortedeconomic environment. Monetary expansion has been brought undercontrol , the current account of the balance of payments and thebudget deficits have been reduced to manageable and sustainablelevels, and serious efforts have been initiated beginning in FY87to restore discipline to the domestic financial system.

2. The energy sector plays a key role in the developmentof Bangladesh. Given its severe resource limitations andpersistent balance of payments constraints, the country needs anefficient energy sector to promote economic growth, reduceforeign exchange outlays on energy imports and mobilizeresources for sector entities and the Government budget. TheGovernment has focussed its energy strategy on accelerating thedevelopment of natural gas, particularly substituting gas forimported oil in electricity generation and replacing fertilizerimports with domestically produced gas-based fertilizer. TheSecond Five Year Plan followed this strategy for the energysector, but shortages of both foreign and local resources impededachievement of sectoral Plan targets.

3. In recognition of the importance of improving the supplyof energy to meet the increased needs of agriculture andindustry, the Government accorded high priority in the Third FiveYear Plan (TFYP) (FY86-90) to the development of the energysector. Its principal objectives are to: (a) accelerate thedevelopment of domestic natural gas resources to reduce thecountry's dependence on imported oil; (b) adjust energy prices topromote its effi._ient and economic use, taking into accountsocial objectives; (c) meet energy demand at least cost to the

-42- ANNEX IVPage 2 of 11

MInsWy of PlanningG.vg,nmss of h. PeOpleS Repubrlc of Baowiged

a no ......... 2 D ia.

economy; (d) improve reliability and quality of power supply,and reduce system losses; (e) improve financial performance ofenergy sector entities and mobilize resources required to meetBangladesh's development goals; and (f) encourage private sectorparticipation in the development of the energy sector, especiallyin exploration for oil and gas. In keeping with these objectives,Tk.61,750 million (1984/85 prices) were allocated in the TFYP fordevelopment of the energy sector. Energy accounts for about 16%of the total Plan allocation compared with about 12% under theSecond Five Year Plan, and is exceeded only by the allocation tothe agricultural sector.

3nerity Dovelosment

4. Bangladesh's commercially exploitable energy resourcesconsist of considerable reserves of natural gas and limitedhydropower potential. In addition, Bangladesh has a fastdeclining supply of traditional fuels, in the form of cropresidues, animal dung and wood. Natural gas is the main source ofcommercial energy, accounting for over 58* of supply. Gas outputmore than tripled over the last decade, growing from 29 billioncubic feet (bcf) in FY76 to about 146 bcf in FY88. The bulk ofgas consumption is in power generation and fertilizer production:however,other industrial, commercial and domestic uses a eexpanding steadily. The country's estimated reserves of natur Igas are sufficient to meet the expected demand for about 20 yea*and prospects are good for increasing these reserves with a mornintensified exploration and appraisal program. Moreover, in itseffort to reduce dependence on imported energy and to supplementthe domestic supply of gas, the Government has completed withIDA's assistance, aDong others, a program of seismic surveys andgeological studies to be used in the preparation of promotionalpackages aimed at attracting international oil companies toexplore for oil in Bangladesh.

5. Bangladesh's hydropower potential is estimated at about1,500 GVh/year, of which 1060 GWh/year has been developed. Allexisting development is on the Karnafuli river at Baptai. Theremaining potential is located at two other sites on Sangu andMatamuhuri whose development would flood prime agricultural landand require the relocation of about 30,000 people. Consequently,development of these sites is not presently economic in view ofthe high costs and potential social impact involved. Recently,thick seams of coal have been discovered at mineable depths inthe Barapukuria area in the west zone. The Government ,with thehelp of consultants financed through bilateral assistance, isundertaking a study to assess the technical and economicfeasibililty of mining this coal.

6. Traditional fuels play a crucial role in meetingBangladesh's energy needs. However, their supplies, on a percapita basis, are continuously diminishing, and an increase inforest-based fuelwood is not feasible due to the high population

-43- ANNEX VPage 3 of 11

Minisfp -- Plnningt Government of the PsopIdX Repblic of ab"

.. . ad* O ct...........3

density and land constraints. The outlook is for reduceddependence on by-products of agricultural activities and fuelwoodsupplies. Given this situation, the Government ts focusingattention on the more efficient use of traditional fuels and hasprepared a project for financing by external assistance.

7. Recognizing its need to improve the efficient use ofenergy, the Government has set up an Energy Monitoring Unit (EMU)which has carried out about 50 energy audits to date and hasprepared a draft energy conservation program for the industrialand power subsectors. Although the energy audits have identifiedsubstantial scope ( 12-15X) for improving energy use efficiencyin the industrial and power subsectors, the EMU has yet to becomeeffective in promoting energy conservation. Under IDA'sindustrial Energy Efficiency Project, the Government expects tofinance energy conservation investments in selected industrialand power enterprises which should lead to commercial energysavings of 5-6% a year in the sectors concerned . Institutionalstrengthening of the EMU and of financial intermediaries is alsoplanned.

A. Resource Develop-ment and investment

8. The development of 8argladesh's primary and secondaryenergy resources has progressed in a manner largely dependent onavailability of financial resources including externalassistance. Local currency resource shortages have resulted inslippages in project implementation, cost overruns and changes inthe content and scope of investment programs. In recognition ofthese shortcomings, beginning in FY83 the Governmentdistinguished core and non-core projects with priority beinggiven to core projects in the release of funds under the AnnualDevelopment Program (ADP). The continued reduction of thecountry's dependence on imported energy requires the formulationof a long-term least cost investment plan for each subsector andtheir integration into a long-term plan for the overall energysector. This plan would allow for the identification and timelypreparation of high priority projects, and would indicate theresources needed for their implementation. Moreover, given thetime required to complete and approve the subsector plans, theGovernment plans to pursue a two-pronged approach. The firstwould cover the preparation and approval of the long-term plan,which is expected to take about two years. The second would coverthe identification of a Priority Investment Program (PIP) forenergy for the period FY89-91, which would represent the front-end of the long-term plan.

Lont-Teru Least Cost Developmeat Plane

9. Power : The power subsector accounts for about 70% of totalinvestment in energy and about 17% of total public investment.Hence, the resolution of outstanding issues adversely affecting

-44- ANNEX IVPage 4 of 11

Minishy of PlInkinGovemet of the PeopleWs Republic of Bangtad*

MINISdTR e.b..NO....... 4 Oa . .

its efficient development would contribute significantly toimproved energy planning and resource use in Bangladesh.Technical losses in the distribution systems are high, deprivingthe Bangladesh Power Development Board (BPDB) of badly neededresources that could be reinjected into the sector. To rectifythis situation, the Government is developing a master plan forthe rehabilitation and expansion of the low voltage distributionnetwork. The existing least cost development plan for generationneeds to be refined, updated and integrated with a least costdevelopment plan for transmission to ensure the efficient andeconomic generation and evacuation of power. The generation,transmission and distribution plans should then be integrated toprovide the backbone for the development of the power subsectorand to serve as a basis for the coordinated participation ofdonors and multilateral agencies in the subsector. In thiscontext, the Government undertook a study funded by UNDP torecommend the location and size of a large thermal power plant onthe basis of a least cost solution for generation. Consultantswere mobilized in February 1987, and the drart Final report wassubmitted to BPDB in October,1988. The findings of the study willbe reviewed with IDA by April 1989 or soon thereafter, dependingon the time of completion of the study.

10. Oil : The Government has focussed its energy policy onreducing oil imports and promoting a higher rate of penetrationof gas throughout the economy. This effort has been successful toa considerable extent: natural gas supplied 36% of Bangladesh'scommercial energy needs in FY80 and 56% in FY86 at the start ofthe Third five Year Plan. The scope for further substitution ofliquid fuels by gas is being explored at this stage. However, inthe foreseeable future, imports of petroleum products and crudeoil to be processed at the refinery are expected to continue atthe existing level. Accordingly, the Government is trying tointensify the search for oil by stimulating the interest ofinternational oil companies in exploration through an activepromotion program (promotional presentations to the oil industryare scheduled for early 1989). The discovery of oil at Haripur inDecember 1986 should help in this, even though the quantityinvolved is modest.

11. In the past, the operation of Eastern Refinery Limited(8RL),Bangladesh's only refinery, has been at a sub-optimal levelof efficiency with excessively high energy consumption and aproduct mix not fully consistent with demand. The Governmentbegan in 1983 to implement a program to rehabilitate ERL andimprove its efficiency. These efforts are being continued, withIDA's support, under the Refinery Modification and LPG Recoveryand Distribution Project, which includes installation ofsecondary conversion facilities to increase middle distillate andreduce fuel oil yields. In the interest of enhancing BRL'sautonomy and financial accountability, a revised mode of

-45- ANNEX 1VPage 5 of 11

Mintsty of PlanningGovwrnment of the People's Republic of BanglWadh

* * = b~~~~~~~~~~~~~~haka

0 0. No ..... 5 .. ..

remuneration for ERL based on a toll processing fee has alsobeen introduced. While distribution of petroleum products remainsin the domain of the public sector, retail sales are handled byprivate outlets and the Government is actively pursuing privatesector participation in LPG storage and distribution through apilot program under the Refinery Modification Project financed byIDA.

12. Gas : The gas subsector in Bangladesh accounts forabout 30% of total annual investment in the energy sector and isin essence the sector's backbone. The Government has achievedconsiderable success in promoting the exploration anddevelopment of gas reserves and in developing the infrastructurefor the delivery of gas to final consumers. However, the extentof the Government's success in promoting a higher rate of gasutilization throughout the economy has been constrained by delaysin project implementation in the major gas consuming sectors,especially power and fertilizer. The development of the power andgas subsectors and other major gas-consuming sectors should becoordinated to ensure that the Five Year development Plansachieve their objectives and Bangladesh continues to reduce itsdependence on imported oil. With this objective in mind, thegovernment is formulating a long-term strategy for the efficientdevelopment of the gas subsector which addresses two principalareas, as follows :

(a) aDDraisal and develoDment: an appraisal drilling programis being formulated based on detailed seismic results.Low risk appraisal wells will be drilled to firm up dataon field reserves while, at the same time, ensuring thatproduction from these wells is sufficient to meetprojected demand with a reasonable safety margin. In thelonger term, further appraisal wells will be drilled toascertain the overall magnitude of gas reserves; and

(b) transmission and distribution: the country's gasinfrastructure network needs to be integrated into anefficiently managed system. To achieve this goal, theGovernment commissioned a National Gas Grid Study,financed by IDA under Credit 1357-BD, to identifyinvestments and institutional requirements for anintegrated gas grid. The study has been completed anddraft final report has been submitted.

The Government's long-term plan for the subsector will bedetailed in the form of a five-year gas exploration, appraisal,and development program. The Government intends to discussreview and update the plan from time to time, as necessary, inconsultation with IDA and other donors.

-46- ANNEX IV

Page 6 of 11

Minishy of PlanningSover_ m_t of the Peoples Rpublk of Bangladesh

* ~~~~~~~~~~~~~~~~Dhaka

a 0. meN 6 o.

13. Coal : Although prospects for the discovery of additionalgas reserves are good, the Government considers it important thatthe potential of indigenous fuel resources other than natural gasbe evaluated. Recent work by the Bangladesh Geological Survey inthe Barapukuria area of Dinajpur district in the west zone haslocated several thick zones at depths less than 130 meters .Withthe assistance of consultants financed by ODA , the Government iscarrying out a geological evaluation of the Barapukuria coaldeposits, to be followed by a study to determine the technical,financial and economic feasibililty of producing coal at thislocation. The consultants for the first phase have submittedtheir report recently. The work for the second phase should startsoon. The Government intends to review with IDA the results ofthe various phases and the completed study.

Priority Investment Proaram

14. The long-term development plan-; for the energysubsectors outlined above would provide the basis for thesector's integrated development. These would require about twoyears to complete and initiate implementation. In the interim,the Government has outlined a Priority Investment Plan (PIP)which comprises the high priority projects for the remaining twoyears of the TFYP and the first year of the Fourth Five Year Plan.The Government will take necessary steps to ensure that adequateresources are allocated to implement these high priorityprojects. The indicative PIP for FY89-91, in current prices, islikely to be of an amount of Tk.40.25 billion, to be dividedamong the subsectors as follows : Power - Tk.32.20 billion; andOil,Gas & Natural Resources - Tk. 8.05 billion. To finance itsFY89-91 PIP, the Government intends to contribute Tk.lC.1lbillion from ADP, including internally generated funds by theEnergy Sector entities and the remaining Tk.25.10 billion willbe in the form of external loans and grants. It is understoodthat the size of the PIP depends, among others, on theavailability of resources. Subject to this,the implementation ofthe PIP will be monitored in detail and updated annually; thefirst annual review with IDA occurred in July 1988 with the nextreview planned for April,1989.

B. Rnermv Pricing and Resource Mobilization

15. Economic efficiency, resource mobilization and equity arekey objectives of the Government's energy pricing policy.However, these objectives have not always been achieved, mainlybecause the level and structure of energy prices, particularly ofgas and electricity, did not reflect their economic costs ofsupply. Moreover, distortions in the relative prices ofcoapeting fuels also made prices inequitable. The Government,therefore, has begun to restructure gas and electricity tariffsand adjust average tariff rates to bring them more into line with

ANNEX IVPage 7 of 11

MInisfr of Planning[t_]}~~~~~~~~~~~~o _f d npWs Rbulic of 1a f

Oba&a

a O .. 7 Da............ .

its declared policy objectives. In the case of petroleumproducts, the Government took advantage of the 1986 fall in oilprices to strengthen the financial position of the BangladeshPetroleum Corporation (8PC) and to mobilize resources for theGovernment budget. Petroleum products provided net revenues tothe budget in FY88 of about Tk. 4.93 billion, or about 9.6% ofthe Government's overall revenue.

Petroleum Products

16. The Government revised the mode of remunerating ERL inearly 1987 to encourage greater cost efficiency in the refinery.The new system consists of BPC paying a toll processing fee toERL, based on product yield, refining complexity and a reasonablereturn on investment, together with yield norms and a system ofbonuses and penalties. BPC's petroleum product prices to thethree marketing companies are determined, in principle, on acost-plus basis. In practice, however, BPC's prices have notalways reflected changes in import prices, resulting in financiallosses for BPC in the early 1980s. The level and structure ofretail petroleum product prices are set, in turn, on the basis ofprices charged by BPC to the marketing companies plus a margin tocover distribution. marketing and other costs, and an ad valoremcustom and excise duty. Having taken advantage of the fall inoil prices in recent years, retail prices are now well aboveborder prices, although the relative pricing structure differssignificantly from that of import prices. The Government hasreviewed with IDA the present prices and other charges associatedwith petroleum products, and their impact on petroleum productconsumption, choice of end-use technologies and the Government'sresource mobilization efforts. The review showed that there wasno evidence that the present structure was causing significantdistortions to the allocation of resources. Therefore, as partof the Government's plans to retain the present prices in aneffort to mobilize additional domestic resources as well as toencourage energy conservation, it has adopted a pricingprinciple to ensure that 8PC's weighted average transfer prices(including excise duty) exceed border prices by at least 15X.

Natural Gas

17. Gas prices were increased by 20% on July 1, 1985 and 20%in July 1, 1986. Although these increases brought the pricespaid by large industries, tea estates, commercial and brickconsumers above the present economic costs of supply, the pricespaid by power, fertilizer, residential and small industrialconsumers (whicb together account for over 80 of consumption)remain significantly below the economic costs of supply.Moreover, the prices paid for gas by all consumers remainsignificantly below the prices of substitute fuels. In order tobring gas prices into line with its overall energy pricing policyand mobilize resources for the sector entities and the budget,

-48-ANNEX IVPage 8 of 11

MInleby of planning( _ e "G.v.ma O " pl"s RepubiC of ntesh

a o ............. 8

the Government has been implementing a program of annual gasprice increase designed to achieve, in a phased program, equalitywith the estimated economic costs of supply, including adepletion premium and to capture a portion of the economic rentMeasured by the difference between the price of gas and that ofsubstitute fuels. Accordingly, the price of gas was increased onJuly 1, 1987, by 30S for power, fertilizer and commercialconsumers and by 25% for residential consumers. A furtherincrease of 15% was introduced on July 1, 1988; which made theaverage price of gas equal to the economic cost of supply. TheGovernment will review with IDA annually its further program ofgas price adjustments.

18. Gas prices received by companies responsible for gasproduction, transmission and distribution, net of excise dutiesand taxes, are relatively low and are a major cause of their weakfinancial position. Preliminary estimates for FY87 and FY88indicate that gas companies will make a financia:l loss and have anegative rate of return on total capital employed. To rectifythis situation, and ensure that companies' earnings can beapplied to investment, the Government plans to increase themargin on gas prices received by the gas companies to allow eachof them to finance at least 10X of their annual investmentprogram from internally generated funds in FY90, 20S in FY91, 30Sin FY92, and 40S in FY93 and thereafter. The dividend policy ofthe gas companies will be linked with the above goals.

Electricity

19. In the period 1980-87 tariff rates were increased by127S. However, despite these increases, only 15% of BPDB'sinvestment program was financed from internal funds and tariffsremained below the economic costs of supply. The Government isrestructuring and revising tariffs to reflect the economic costsof supply on the basis of the recommendations of the power tariffstudy. A new, simplified tariff for BPDB was introduced onAugust 1, 1987. It has reduced the number of categories from 18to 10; introduced new 2-rate time-of-day tariffs for 33-kv and11-kv consumers and an optional time-of-day tariff for large lowvoltage consumers; and greatly reduced the sizes of thesubsidized blocks of energy for residential consumers. Further,BPDD's average tariff rate was increased by 15S effective August1, 1987. The Government intends to adjust the tariff furtherfrom July 1, 1989 to give a rate of return of 4* on BPDB'srevalued assets for FY90. In addition, the bulk supply tariffrate of supplies to P8Ss was increased by 20% effective May 1,1987. This restructuring of the tariff will assist in demandmanagement and raise additional revenue for BPDR, while at thesame time enable small 'esidential consumers to meet their basisrequirements for electricity at relatively low prices. Tariffsfor supplies in rural areas by PBSs were restructured effectiveJuly 1, 1987, to include a new tariff category for high voltage

-49- ANNEX IVPage 9 of 11

Minlsfty of Planning{t} 0Govewnment of the People's Republic of Banglah

* * ~~~~~~~~~~~Dh.ka

MINISNTER 9a Q me .... . .. Db..

consumers, a time-of-day tariff for large low voltage consumersand a three block increasing tariff for residential consumers.PBSs average tariff levels were increased about 25% on July 1,1987 and from July 1, 1989, will be increased in accordance withthe financial agreements with IDA under Credit 1633-BD.

C. Institutional Issues

20. Four Government owned entities, namely BPDB, RuralElectrification Board (REB), Bangladesh Oil, Gas and MineralCorporation (BOGMC), BPC and their subsidiaries, are responsiblefor production, transportation and delivery of commercial energyin Bangladesh. These are autonomous bodies operating under theauspices of the Ministry of Energy and Mineral Resources and theGovernment oversees the entities' overall operations and theirfinancing and investment decisions. Institutional weaknesses,especially in BPDB, have been responsible for inefficiencies inthe sector's operation, maintenance and management.

Reform of BPDB

21. In an effort to improve its performance, the Governmentplans to restructure BPDB and in FY88 undertook a diagnosticorganizational, financial and management study financed by ODA(UK). The study identified the factors impeding the efficientoperation and development of BPDB and formulated proposals toaddress the issues. The Government has decided, as a first steptowards reorganization of BPDB, to set up a separate ElectricityAuthority for Dhaka and to delegate more financial andadministrative authority to the Zonal Chief Engineers. Toimplement this decision, a Steering Committee has been formed anda dated and monitorable program to reform BPDB is being drawn upby the Government.

Reorganixation of BOGMC

22. The Government also intends to streamline theorganizational structure of the gas and mineral subsector toimprove its operating performance by undertaking a reorganizationof BOGMC and its operating entities. The main features ofthe reorganization are as follows : all operational activitiescurrently carried out by BOGMC, except mines and minerals, willbe delegated to a new set of operationally independent companies.These new operating companies include exploration and drilling,oil and gas production, CNG and three regional companies for gastransmission and distribution. BOGMC's functions except formines and minerals, would become those of a holding companyresponsible for planning, monitoring and sector policyformulation. The exploration and drilling company should havetwo separate divlsions : one for exploration and the other for

-50- ANNEX IVPage 10 of 11

AMinufy .f PlanningGovenawt of the PopWs Repblc of Ba"lad,

a M .......--...... 10 Dam ...---------..---

drilling/petroleum services; each division will maintain separatefinancial accounts. The composition of BOGMC's Board ofDirectors will be modified to include external representation.The Government has adopted a timetable for the proposedreorganization which calls for implementation of key reforms bymid-1989.

Reduction of Power BZstea Losses

23. At present, about 16% of electricity supply does notgenerate revenue for BPDB because of such factors as impropermetering, illegal connections and inadequate billing procedures.Most of these non-technical losses are attributable to industrialconsumers, who represent less than IS of consumers but accountfor 45S of billed amounts. System losses are being studied byconsultants appointed under a technical assistan-e project fundedby UNDP. The consultants are expected to develop by mid-1989, adated action program to remedy each of the spi-cific causes ofsystem losses. In view of the adverse impai t on the powersubsector's development program caused by the erosion offinancial resources resulting from high system losses, theGovernment will implement a program to reduce gross system lossesin accordance with targets to be recommended by the consultantsand discussed with IDA. As an interim measure, the Governmenthas initiated a number of actions to reduce gross system losseato not exceeding 32% by mid-1989.

Accounts Receivable

24. The Government is concerned about thte serious anddeteriorating accounts receivable position of energy sectorentities. Based on unaudited data for mid-1988 for BPC, BOGMC,BPDB and REB, accounts receivable by energy sector entitiestotalled Tk. 9171 million. Of this total, Tk. 3539.1 million(38.5%) was due from BPDB to BPC and BOGMC, Tk. 2403.4 million(26.2%) from the private sector to BPC, BPDB and PBSs and Tk.2135.8 million (23.3%) from other Government entities to BPDB andBOGNC. Regarding accounts receivable by BPC, the Governmentintroduced a new system from July 1, 1987, under which BPC andits subsidiaries provide credit for only 45 days and chargeinterest at commercial bank rates on billings paid after 30 days.BPDB is reducing its arrears to BPC and its subsidiaries forpetroleum products by paying at least Tk. 50 million per monthuntil such amounts are fully paid. In addition, the Governmentwill ensure that the gas companies maintain their accountsreceivable at no more than three months of gas sales.

25. The Government is particularly concerned about BPD8'saccounts receivable, which amounted to Tk. 3469.5 million as ofend-October, 1988 and was equivalent to about 5 months' billings.The Governwentts intention was that BPDB's accounts receivables

-51- ANNEX IVPage 11 of 11

MInI*y of plonofriGveomimn of lb. POpWS Repubb of Baook"es

wm~D o. ,N ,.. ...... .

F ~~~~~~~~~~~~~11

should not exceed 4.5 months by December 31, 1988 and 3.5 monthsby June 30. 1989 and thereafter. To bring down accountsreceivable to an acceptable level, the Government has introducedin November 1988 an incentive scheme to remit interest/surcharge,to encourage payment of arrears by installments. It is hopedthat accounts receivables will show improvement if the customerstake advantage of the concession and pay off arrears. TheGovernment will also ensure that the accounts receivable of allother energy sector entities are in conformity with existingagreement with IDA, failing which the Government will enquireinto the causes for failure and initiate necessary steps toimprove the situation.

New and Renetwable Anergy

26. The Government has recently set up a basic institutionalframework concerning new and renewable energy. The Energy andIndustry Division of the Planning Commission has been givenprimary responsibility for planning and providing policyguidance. The Ministry of Energy and Mineral Resources will beresponsible for coordination of project activities in the new andrenewable energy subsector. Potential projects are beingidentified under different Government agencies for possiblefinancing by international donors.

27. There has been growing evidence in Bangladesh ofdwindling biomass supplies, on which the majority of thepopulation depends, and a resulting increase in the substitutionof commercial for traditional fuels. In this connection, theGovernment intends to request the World Bank to undertake, underthe Joint World Bank/UNDP Energy Sector Management AssistanceProgram, an inter-fuel Substitution Study in order to assessmicroeconomic and macroeconomic impacts of fuel substitution, andformulate a least-cost strategy for meeting the growth incommercial energy demand. The Government intends to review theresults of this study with IDA upon completion and expects thatit will provide a useful input into the preparation of the FourthFive Year Plan.

8 ncere-Y~

(A.I. KEANDK8E)Air Vice Marshal (Rtd.)

MinisterMinistry of Planning

Government of the People'sRepublic of Bangladesh.

Mr. Barber B. ConablePresidentThe World Bank.

DiloY SECTOP DJISTUMWT CRIT

Sbselo_ t*,a ata SheetDeaelomevnt Policty mtelx

Isoues Actions Agroed and Tahon Condition of Credit Effectlene- e______________________ and Tr ech. RIleose

1. Inveatmnnt In the power sub ctor In February 1907, eoutlanto worn mobi II.d toboae bee dictated prS erily by prepar long-term least Cost development plensthe Imediate availability of for g_neration and trn_mission. Duringfinaecil resources ond not negotiations Government greed to review withaccording to the require_mt of a IDA, by April 80, 1909, the long-term le t coatlontoerm least cost plon. development plan for g_nration ond trnsmission

snd thereafter Implment the plan tahing Intoccount IDA. comomnta. Tb. coneultantt' draftfinal report wen submitted In October I9M. Itbhn bees reviewed by IDA and found to besatisfactory.

2. Hood to ensre and promote the Durlngr negoetino Governmet agred: (1) a *et Preparation and *ubmiselon to IDA for Itsefficient develop mt of the ge of priority activitie for Inclwelon in the ga review by July $5 190o of a long-term fset

subeector. subsecttore long-term Investment plons; snd (11) coat developmsnt plan for the go *ubsectorto review with IDA, by April 80 each year, the would bo a condition of second trench. reloooe dsta led oxplorntlon and developmet progroa forthe next f I scl y r and tentative progrm forthe following four yrrO. Tho progran forFY90-94 was rviewed by IDA In Februory 19J9 endfound to be *otifoctory.

3. Absence of a systemtic program to In December 19t7, In conformity with a Ooerdovaluste coal esoure and gr_ t tlon condition, conultante wedetermine the technical, financial *ppTolntidfunded by ODA (UK), to carry out asad economic feasibility of col eosiblility study of the BSraphurlo coalproduction. depo_Ita to determine their technical, economic

and financial viability. During negotiationsGovernment oareed to revie with IDA the lnterlnreport end comple4td study within two monthsfollowiog Its completlen. Tho Interi reportwas reviewed In May 19S8, ond the explorationreoort In October 198t.

4. th investent pion for the energy During noegtllons Government agreed en a Satifatoetry lsplaeontation of the PIP for FY69sector for the Third Flv Year priority lnveOtont program (PIP) foer FYW-FYOO (moneng that actual expenditure on the totalPlon cannot be Implemented given whicb could be lmplementd with avallable finan- PIP ond for each subsector Is et least VS Ofprojected financial rsources. cial resources nd the Implementation cape- the agred planned expenditure) and *gremmsnt o w

bilitloe of *eorgy sector entitieo. Further, on the PIP fotr FYSO-"Y2 would be conditions of ¢ Government agred to the prepration of PIP* for second tranche rele so.FY4991, FY9OOn and FYOI-9O. In July 1900, IDA revlewd tho lmplomnetion of the FY8 PIP, Which wa satistactry, and sub_equntlyGovornmnt agreed the PIP for fY89-91 which Isbeing Implemented.

Reeve Actions Agree oen Taken Cowitleo of Credt Effectiveese___ iand Trench. R.l1 -

. T avera" price of ps has been During .t)tl orwa dated As increeg of the bverege gee price by tbelow the econmie cost of supply, progrza gef prie lcr_ to acie, * Ies6t1 effective July 1, 190, would be oincluding * depletion pri um, end fre tp, e lty Iteted econmic condition of second tronche releas.failed to cpture e_colc cot of y to prorlvely clos" thrent meaurd by the difference g bet e p d that ofbeween gee priee and prices of su btitute fuels; ad t the s ties tosubstitute petroleuw product. restructure ge t riffs to rflect te ecomomic

coa of ospplying diffte nt csmr groups.Th vr9 price of ga*o m incra Wd by 25effectie July1 190Tas a condition of,imqAigfdons, and by 15X effectivo July 1, 1961,r1Iii*ew *verae 1 ncreso for poer,fertilI Ir and rslidentiol consumrs.

6 e co _nsle are unable to During negotiations Governt _ greed that theoperate Inde_pendntly of marolg on Sao price receivd by ge cmp anioGovernment budget trenfore and to would be set at * level that would cover theirdischarg their operational costa, Including dsprecietlon, and allow echresponeibilitien efficlently. coepny to cover at lest lO0 of Its annual

Investment proorfm In FY90, 205 In FY01, U0S InFY02 and 405 In FY9J and theroefter, and that nogas compeny would declare dividend until thetarget hs bee achieved.

7. Pet financial losso of ePC and Durlng noeotietlon Government agreds (1) thatthe flIlure to mobil reo re" the weighted ovorgoo price of petroleu productsfor the Budoet throuoh petroleum wold not be reduced below *Id-1987 levels; edproduct prices. (11) a pricing ftrmul to ensur thot woeigted

averoge domestl petroleuo product prices, netof distribution , marketing and other hondlingcosts, always exceed hbrder pries by at lestis1.

S. Fallure of slectricity tariffs to As conditione of 8nrd ro nt tleon, the I-pleentation of tariff Incrrese fre July 1,reflect ecutely the conomic Govoernmnt Incrod th bulk-supply tariff rate 1989 to comply with existing finsncialcoot f supply *nd 8PDB solf- charged by OPM to P8S trm Th 0.96/kuk to Th covenents for _O and P85 and the contindfinancing level hes bee too low. 1.14/kWh effective Way 1, 1907, nd increased implementation of agreed r form to tariff

B eo average tariff et. by 171 effective structures, Including further reduction In theAugust 1, 1987. Further, _6's end PB0 sixes of the subsidized blocks to retdenttaltariff structures were eford ffective consumers, would be conditlons of scondAugut 1, 1067 to better reflect the economic tranche rl. *costa of supplying different consumer groups.

9. InedequaO prformanc of aO. Consultant., finaned by OOA (UX), have corried Implemntation of the hey aO p In the datedout an institutional study of OPD buosd on action program to reform EOM *04ud be aterms of reference agreed with IDA, ADO, and condition of second trench, releas.0DA. Ouring negotiation. Govrnmnt agred toreorm OM based on the consu4tnto recomesm-datlons, a agreed with IDA, ADO nd ODA. inNovember 10 Cabinet approved the rorgpnl_tation of SOM, including establish mnt of Obake

Electricity Supply Authority as a nw dis*tri-bution entity offective July 1, 1990.

Zeema ACtima Agreed eNd Tahoe Coiditio moef Credit £ffectlvemaaWs Tre h_ 1 Ibl_.

10. _mmmi e l... to u11s. mgprP um m..sta _we mabllla I.reolr lm laductic of No" peta 1o0se to so em_ I fowl"$ totemtiellow to eel. the ea of.. 111111.o teehia_el NW euseime b_1_ 1 : 14 bee *odition of oseamdor _ -_e~ NW am%* of reawrow. a 0 balwteM e lesse ad to re_ammad treech. release.

_progrle htoe tce r ee Icome. the

p Ng o maetue i t Fabisep aIM cithegrematof ZP A S M NW A. The Initial

i.plmmtt7e J m teproWram redea ginlewrneIre 461. otear is~to so3 daring,

_ _mooeeor am to _.oritp with a o LinIsml!o ceedltlen.

used tb atrwams i. the1-U.Mbe 16.comautAtawe ebIliedto Further Implementtion of major VW oub trOw _orumeiti.m of am ad Its prp * r_ aergf e tlem stupof NW ma it., reforee, Incleding leg a eteblehmuntof amauhedilaie.. Subsidlarie. ThFer final repor am OAhitted epee cempse ad apint* en o hof

la April 16. Durtin aegatiatima O nvermst 0600, amid be a cdiltlom of second trnch._gred a dae NW muttorable ectia Progr_ rot .

for th e gao uhacor' reergnisetlo. baoed emthe orgalustieel sthly's recemnd"loo..Cebim ot pproved the re.rgauiaetm in JOlYam. In c.f,mity with a e left

o"il9ta Om "a mtaboldism S *widildT666Ktomn xma aoll.iod

53. £ceIV*o ecemat roelevabl*oef During nagetietema bioronmat agreed a dated Ieductiom of smog aoemat receiveble to the_eear m enties and "cties peramto rdc NM* *ce_nta equIvalent of 4.0 ameth.' blIlg amid he UW

porticelO.|y of am. re"Swobte-to tm oqpivalumt et 4.5 month' coaditite of cedit offectvema. Duductie ofpep billIngs before 3.erdnrmmtetiee end the ali PU11 acoen'te relvbl-o too 8.5 Meatha'other e_argp eeeF _1IT45~Td he inbtilling togather with tiplemetetoesof

_11ce with acceunte receiveblo egremante. errangmante Ieti teor to SPA for ib illna ecceante r_mi lo 1ware redud f_ rem 0.4 gIv bf _cd r l a writig df

maths' billinp i a 11 ? to 4.1 t.' boetud oempoln of il1billings in Deb 163. 1_S.'. receveble hmt itim with account_Uwe reda to * t' pa * We min Dsmbw rg , maid be eooditle of15. Furth , oilcm FM C No bhe rcd t ree.lpimmating eatlefectoerly *a _a petm for thecelletlee of bills for dalvolee of petroleum-to

18. M1onac ap11i., em whichb Oh avormA Negroed that eO _teor-feelmajority of th poplloe sebatiteiem otud to _e bet the micro andapand, Ore dwindling, with a IMP"en " ot wO the dhtitlet

Utltg lcre In th tlol for tditoal enry maid beaehetitutiem of ceinerciel for undere Under the J t011 World _ekAW WRAPtraditioml feel. r_.

w 011

(to SS(. 3hL1O0)PIeacv IstrnNSmOP - Ptt utCTw0JttIStIPl *#tZ....................... .... v .OF .... IIlLUA "P so FT 90 FT~~~~~~

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......................................... ...... .............................................................................................................

I =a tuMi 1* 9- a"S-go 5t40 *3 12Xt5 3 21132 1451 7 a 99*02202 0 0 0 7t4 2S 49?M USPM"it -6 a 9099075*951 63 4 11579 27 62 226 29 10 I5O no 0 0 a 132 51 5101S3 *_ il * *i,ts 9 192 IM It Sit III 32S 444 97 40 w t200 Soo 250 450 54? *190 13I Om_"A ft - a *912-95 56 1540 2123 ist DI 91 *24 293 r 4 *00 420 520 7,0o no 6 54 , 5

C*OF t-Sltatmid) 19* M U 13 94 *W0 4 29 24 20 a 29 10 S is 54 54 0M * Su3lot 9C91111-92 519 1424 *92 29 0 29 37 16 22 40 26 ie tao 460 520 2*7 75 US

7 1011om I . A *905.6or1lye25 9 I' *7 201 5 4 9 * 0 0 0 0 0 5 4 9a AM ta I *I95901553220716 0 0 0 a 0 * 0 0 022076096075166us........................................... 40 ........ ...... ...... ...... ...... ...... ...... ...... .....t4t tloft

1l meJ la 18 mt tilFJt 44s Om " tt ittN

(IN U. inn1110111 .nmwwm . moo uuMINNIE.......................... ..... am cm t go. ISO,& AZtn "a w nZnXto Iwo...........................

................... ................... ................... ................... ...................Z _ zt __* " inei"** ~~~~~~=t . wat ftrp low La" fo Sam LO ftii *n0 Xtotl we To tal in fagl *oe Law IOWA. loa WGWW fit" F"Mbff AM "W m a mi 63W 1 *9 4?5 so so0 t 9 0 . r 9* twa tw is at~~~~~~~~~ lol ta. toa d tap lid la- 1-2st Atap. lid l#9a ttpO lab La t2os lai *20 t"° n°aid Ss

* saw .ast s laro Sm otn. *909a ) "W"W 2 S *296 a 93 6r5 as in0 M 3 10 32 Mo 0 S S is US in2eo 1t inr id m *956993 75499tgr s 36 07 392 tOS 22S 0 01 2S S 20 2 t9 122 2 S S69tO

46 =6111c p~eaidroSsl=ra111*0990 US 53 GU5 ye 40 4? 5 45 W 10 so de a 0 0 15 a ISOb.attg allla aSgs tl W& "Woo M as 2444 t it tt 243 6 to S 20 20 40 0 0 0 3 U U0

U ilit aa*6d 4.. oGn s tO 1111-92 423n 2414 3554 lt 329 II0 215 M i2n m 42 UO 40 s50 7# 91t3?lsraIh woh GM prnhl. *M elect 19931-92 M6 *39 2*16 49 so a 40 d0 US 20 so W0 30 so a 910 us M3n 94w. otf but go feld (s. 1t tJ-90i99 116 20D ? 0 t? o 3t 40 20 20 40 0 0 0 30 so0 a9 "v. o ltat. GM field on. 9 a*U) "WOO- 2*4 M5 90. 15* 448 S 5 so we U Sao 43 209 M5 0 0 0 45 so 312

Itl lb Too "Me GMelatr*kao nt jaet* "W" 24 99543 20 0 20 5 O t20 6 t6 22 r t2 t9 tO lt StIIcmPeMe 11110-1 in SO522 S *5 *4 0 *4 2 40 47 I s5 52 2 S S 51 4 5 M54a 26a 1 trlsl ,tt_scale L plow *011-91 0t 9 24 M95 1 5 *4 10 30 40 is 35 44 It 54 G0 33 19 132is btZ mh(M. *3 ts 1 D Pn tW-904 * 4 20 20 40 20 24 44 0 0 0 40 44 m616 Ol Al O boartion 1FV) 901-92 *1*4 2445 309 *15 M8 460 15 220 M3 127 242 349 U* 204 404 ME No5 1** goav. of 11 tSort so ild (U. t 1911S-4019 I 200 3*1 I? 0 I? 5 ye is 0 0 0 0 0 0 5 16 1516 2 a at So Ostr i Grstr oJatw tF 1190,-90 92 34 *28 5 0 5 o to is 6 1* so s *2 19 f8 33 SiI? I l0ragoom sttrilmoion Project 1091*-92 IM3 199 322 5 0 5 So 250 240 30 250 260 200 M6 SOD 840 I10 13601a6 Smlitrntlea 5.pOcaus-nofft3 196090 355 364 759 864 27* 45 72 *00 172 97 79 *74 0 0 0 to9 fit 34*9 soancary CawerStan punt as IIIL 1900-9f 501 854 *356 7 0 7 4 30 54 2* 54 16 *60 300 400 IRS 316 5*t20 tlt Stwup. Irans. UalDstaributionPlmt *96990 *2S *53 210 0 0 0 Is 30 45 20 s0 70 90 so *10 *25 me0 265ZS Gow.ot CoaItPstItr.10isr. of at,ralsas*1991-92 16S 540 70 0 0 a 0 0 0 *0 40 so *55 5so 655 *45 540 70so* l*0* 67M 14090 229 2240 306 s218 633 *640 2243 hS leU 2406 940 24NO 3406 2330 sr2t 6059cm total S712 93540 SOMS2 1001? 24422 34439 2655 ?52 t *036 476 6411 ntn7 SA4 11160 103 t31t5 27096 401Ofts: as lb& Projact Pt,o*em tot 8OS'. Petrolt telnhnial Oevelopmt project is being cleared witt the PIC.be) Wtgtlve ur1vs on the spoil oer colst seunlate projects _r cost elovstrs, we projected to wcsw.3S5SUSWflSflSUS-fltsCt * ls t3**sfl~t5fls=CC2..SS............ n: l .tflflWsllm.zt......

*t. S t*tUSSSf *#*StC3SSRfl8SWR*S:

Os.t

(in TX. NittiON).Mae stcloil 1w .... ;. ;;........................ !r:.IILL JW 1988 VT so fv 90 FT 91 At t 9

............... "O't .. ................... ................... ................... ..................DEvatopwas mm totot Locat f at Local Foron. Total Local FOM. TOW LOCOI FOrOn. Total LW41 fWV- tOtOt....................... .................... ................................................................. ........................

Tlk.pls wan.vas U4 JZXISO M) 19M." lOff 4381 S4$I IOSZ 4363 S05 10 13 n SS 0 SS 0 0 0 0 10 632 1 Sydro PIS ton.fts."SQ1150 NW) fW-90 660 2418 30? 40 2293 2776 160 125 M Is 0 Is a 0 0 Its la$ mI amew tkffftt P111 EXIT1.100 4010 M) 1990-91 1430 ZW 3011 M 23W 3139 240 0 240 2so 0 250 220 0 220 710 o 'no4 SidArpa) Gm turbiro (SX33M) 1969-90 38S ISS4 1938 23S USA, 1686 120 100 2n 30 0 30 0 0 0 ISO lot ISOS AshkWMJ lbwmt Pow Stn. latn. 05050 N01910-90 M 2250 3023 36? 2229 2S75 120 22 142 2SO 0 250 0 0 8 370 22 3926 cram PIOlp emmatiom" M) 1940-90 29? 1023 IM 2?I 1023 1243 0 30 0 30 0 0 0 14 0 74? NOWN am Turbim(20 IIM) 190-90 112 412 S24 72 3SS 430 3t SS 97 a 0 a 0 0 a 40 SS Os8 4bornal thwmt PIS Extn. 115010 NM) 1902-" Z"S sm 56M S 124 129 40 400 "O tOO SOO 600 $50 680 1030 4" ISO 20709 $Abet C.C.461 60 MIST-30 OW) "92-" ?22 1920 2642 0 0 0 1 1 2 30 190 220 150 850 tOOO 181 1041 1222to onowbwi G.T.flw MM) "91-92 3U 1121 IS04 0 0 0 2 a 2 120 620 740 ISO 49? 64? 2n ITT? 1309" Cbitt , , I� ml PIS (112100M) M-94 2S49 ZW $218 0 a 0 0 0 0 50 150 200 200 S30 nO 2SO 680 M12 Gbwa"t tbwmt P/S Extn. 06(210 M) 1994-95 180 3211? SM 0 0 0 0 0 0 0 0 0 40 160 200 40 160 20013 neetwOW lkwml Pill Pkwo lt?9300NW) 1994-93 6803 10570 I?Sn 0 0 0 0 0 0 so SO 100 100 200 SW ISO M 4MI ftripur Ccabined Cycl* 15.1.09 M) 1992-" S16 1110 1626 0 0 0 0 0 0 0 0 0 10 to 20 10 10 20IS **"di-SGidpw-IhskwgM 132 ILV 1989-90 130 MY 4S? 62 s 64 14 129 142 S4 196 2so 0 0 0 68 1124 "216 4aptaf-MarstAs, 132 kV 1909-90 US 361 S46 16S 361 S26 n a n 0 0 0 0 0 0 20 0 20I? Upprod.loot-10"t lnteften. to 230 kV 190-90 119 TOS a" 98 166 2" 60 4" S44 21 S4 is a 0 0 III 536 6%91: Aupmastion of Existing grid SIS t9W-90 346 442 78? I?? 19? 31`3 20 It? 19? 148 68 21? 0 0 0 169 245 4141 Daftmi-Cox ftm 132 Irv t989-90 243 22? 471 32 0 32 a 200 206 m 27 231 0 0 0 211 22? 43920 - sbwnol 230 kv 1989-90 ift 269 4" 139 256 3% 2 13 Is 33 0 33 0 0 0 3S Is 4621 8:wM*r4b2..r-Cb.1.xk 13Z kV 1989-90 S3 188 241 a 3 il a 96 I% ST 90 127 0 0 0 45 tss 230 LA22 0. ml --fort Nwisal 132 kV 1999-90 101 2S2 31A r 3 11 12 IS2 W 62 91 179 0 0 0 94 249 363

laniffI132 kV 1989-90 I" 0 M 6 0 6 30 0 30 108 0 108 0 a 0 ise 0 13824 AdmWI-CorAtte 230 kV t991_92 SS2 vn isn 13 0 13 32 AN 432 100 4M SW ZW ISO S" 332 "O t2W2S Ileari fromMosion Lines 132 kV 1991-92 762 902 IM 26 20 46 40 200 240 ISO m 4" ISO 350 SOO 340 a" 119026 4horsul-Sidifir") 230 kV M-92 SiS 1016 IS30 0 0 0 0 0 0 30 100 130 2m SW roo 730 600 L"2? aMrpw-amitMi 132 kV IM-93 101 163 264 0 0 0 0 0 0 2 10 12 a 32 40 10 42 S228 bd. ant-Vat tncorcovmtw 230 kV IM-94 uw MD 3soo 0 0 0 0 0 0 32 95 12? 80 M 36S 112 300 49229 Cmille-Chittemm 2W kV 1992-93 396 S97 "S 0 0 0 a 0 0 0 0 0 30 120 ISO 30 120 ISO30 Alshimpenj - Jastpur 132 kV 1992-91 M 126 2S2 0 0 0 0 a 0 0 0 0 s 20 2s s 20 2531 ormter 9640 obw II 1990-91 1337 242? 3764 619 1174 IOSS 136 680 816 200 573 M 322 0 322 6SB 1255 191132 ~ or CbittspM Phow II IM-91 69? 1710 2"? 356 1096 USS 40 300 340 3M 250 SSO 222 62 284 S62 612 10453 U Tom Distr. Schome 1991-92 IISS tZ48 2406 It? 12? 244 " 250 314 20 300 SOO 300 4M 100 S" 9SO ISU34 14 -_ tow Oistr. 1991-92 Sol se? 1394 23 2 2S 29 250 279 ?O ISO 420 120 250 3M M aso 1069is Pow$ Distry Project fast to" Phne 11 1991-92 MY 310 2"? 61`1 150 921 IN 60 239 230 100 130 300 100 400 70 260 96936 Pam Clatt. Project Wst low Phow 11 1991-92 1570 496 2068 ?9? ISO 968 179 188 366 230 100 330 "D loo 4M 109 SW 1096ST Wftter Sbfts Omw III 1906-95 3292 4?" 9036 0 0 0 39 A 113 SO 150 200 100 203 300 169 424 613is S6 secandwy low vistc. 1994-913 1794 IS91 sses 0 0 0 1 0 1 to so 60 SO 2m 2so 61 2SO 31139 greater Wwtne Pbno It 1904-95 are 10?3 1950 0 a 0 0 0 0 Is So 65 60 2is US is WS 34040 Cromer itojsloAi Pbm II IM-94 SIB 633 ISSO 0 0 0 0 0 a is so 6S 60 215 zrs 15 26S 344741 9 Sftwdery lwn Diott. Schow 1994-9S 739 6A 1414 0 0 0 0 0 0 0 0 0 20 30 SO 20 SO so42 Systm Loss Mod. gdww 1991-92 4" 92S 141S 65 43 106 80 200 2SO 80 2" 330 100 M 3SO 260 IM 96043 Pos mm Pow omiap. SCbew 1990-91 6? t9S 262 1 0 1 8 se so 100 ISO ? se 65 6s 19? 261" Pr*-Striened ftle Ofg,(Aricha) 1988-69 121 62 183 el so 131 40 12 52 0 0 a 0 0 0 40 12 S?45 WM Coffputerisation Program 1989-90 43 56 I 3 4 12 St 63 32 0 32 0 0 0 44 Si 9646 Nwdo o of Central tmd " Mr. 1991-92 191 372 $63 0 0 0 0 0 0 0 0 0 20 100 120 20 too IN4? fthob. of Pt$ am from. system 1994-95 686 1600 2296 0 0 0 0 0 0 0 0 0 30 M 3SO 30 sm ISO

...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ......SUB folAt 4 3 IOMO3 66-V 18032 247" 1921 4671 "95 34SI SM BUT M" 60M IO= 91?6 1682? 26003

-57-ANNEX VIPage 3 of 3

BANGLADESH

PRIORITY INVE TMENT PROGRAM

FINANCING PIAN

(TX. MILLION)

POWER SECTOR FY 89 FY 90 FY 91 TOTAL FOR FYS 89/90/91__...*............ ..................... ........................................... .... _.... ...... ...... ........ .............

L F T L F T L F T L F T

BPOS 1821 673 6495 3451 5270 8721 3904 6884 10788 9176 16827 26003Fin.Plan.: GOB/SF 1821 3451 3904 9176

Donors 4673 5270 6884 16827

REB 401 1245 1646 550 1498 2048 700 1808 2508 1651 4550 6201fSn.Ptan.: C00/SF 401 550 700 1651

Donors 1245 1498 1808 4550

NATURAL RES. SECTOR

SOWIC/BPC 633 1610 2243 765 1643 2408 940 2468 3408 2338 5721 8059Fin.Ptan.: GO8/SF 633 765 940 2338

Donors 1610 1643 2468 5721

33333s 333333 3333 3 8333 333- *3 =33 3 33=== ====== 3=3333

TOTAL INVESTMENT 2855 7528 10383 4766 8411 13177 5544 11160 16703 13165 27098 402633==33= 333333 I=3333 3a3333 33333 a3=_-=a 3333333=3== ===5:S 2========-= 33 =====

TOTAL INVESTMENT (PIP) IN US S EQUVALENT a Tk.32.925 = US S 1 400 823 1223

SLMYARY FINANCING PLAN

Fin.Plan.: GOB/SF 2855 4766 5544 13165Donors 7528 8411 11160 27098

In US S Eq. 87 229 145 255 168 339 400 823 1223

33333333333333333333333333333338333333333333- -- -333333332333333333333C33333333333333 =_==