Document of.

The World Bank

FOR OFFICIAL USE ONLY

Report No. 6778-BD

STAFF APPRAISIt REPORT

BANGLADESH

JINDUSTRIAL ENERGY EFFICIENCY PROJECT

May 25, 1988

Industry and Energy DivisionCountry Department 1Asia Region

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

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

Currency Unit - Taka (TK) US$ 3 TK 31.0

WEIGHTS AND MEASURES

1 barrel (bbl) = 42 US gallons1 Ton of crude oil (0.85 sp.gr.) = 7.4 barrel1 metric ton (ton.t) = 1,000 kilograms or 2,205 pounds1 kilocalorie (kcal) = 3.968 British Thermal Units (BTU)

= 4.1868 kilojoules (KJ)1 ton of oil equivalent (toe) = 10,200 Mcal = 41 million BTU

= 42.7 x 106 KJ1 Megawatt (MW) = 1,000 kilowatts (103 kW)1 Gigawatt-hour (GWh) = 1 million kilowatt-hours (106 ktIfH)

= 307 toe (at 27.52 thermalconversion efficiency)

1 standard cubic feet (scf) ofnatural gas = 1,036 BTU

ABEREVIATIONS AND ACRONYMS

ADP - Annual Development ProgramBCIC - Bangladesh Chemical Industries CorporationBPC - Bangladesh Petroleum CorporationBPDB - Bangladesh Power Development BoardDPEC - Department Project Evaluation CommitteeECCG - Energy Conversation Coordination GroupECNEC - Executive Committee of the National Economic CouncilEliU - Energy Monitoring UnitGOB - Government of BangladeshLRMC - long run marginal costmcf - thousand standard cubic feetMEMR - Ministry of Energy and Mineral Resourcesmmtoe - million tons of oil equivalentNCB - Natio.aalized Commercial BankODA - Overseas Development Administration (a British aid agency)PSE - Public Sector Enterprisescfd - standard cubic feet per daySPEC - Special Projects Evaluation CommitteeTAPP - technical assistance project proformatcf - trillion cubic feet

FISCAL YEARS

Government: July 1 to June 30Agrani Bank: January 1 to Decembei 31

FOR OFFCIAL USE ONLY

BANGLADESH

INDUSTRIAL ENERGY EFFICIENCY PROJECT

credit and Project Summary

Borrower: People's Republic of Bangladesh (GOB)

Beneficiariest Enterprises and Agrani Bank

Amountt SDR 8.3 million (US$11.4 million equivalent)

Termss Standard

Onlending Terms: (a) US$11.3 million equivalent to enterprises for upto 10 years including a grace period of up to 3years. The GOB will onlend to enterprisesthrough Agrani Bank, which will administer thefunds on behalf of the GOB, for a fee. Theinitial onlending rate wili be 14.5? p.a

(b) US$0.1 million equivaler' to Agrani Bank fortechnical assistance. The GOB will onlend toAgrani Bank at cost for up to 10 years includinga grace period of up to 3 years.

ProjectDescriptions The project aims tot (a) reduce energy consumption per

unit of output in economically and financially viableindustrial and power plants, thereby reinforcing theoverall industrial sector objectives of higherefficiency and increased competitiveness; and(b) promote development of appropriate policies,technologies and institutional framework to furtherstrengthen the country's energy rationalizationprogram. The Project consists of two components: (a)a line of credit for financing about 50 energyconservation subprojects; and (b) technical assistancefor furl.-her strengthening of EMU and improvingappraisal capability of Agrani Bank for energyconservation subprojects.

This document has a restricted distribution and may be used by recipients only in the performanceof their omcial duties. Its contents may not otherwise be dislosed without World Bank authorization.

- ii -

Pr:oject Benefitsand Riskss The energy conservation investments are expected to

have high financial and economic returns, and in totalwould save about 119,000 tons of oil equivalent (toe)of energy corresponding to about US$8.3 million perannum at full operation. Over its economic life, theProject would generate a net foreign exchange savingof about US$11.1 million in net present value using a12Z discount rate. The Project would also strengthenlocal capabilities in assessing and implementingenergy rationalization measures. Project risks arerelated mainly to slow demand, institutionalweaknesses and poor subloan repayments. The risk ofslow build-up of demand is, however, mitigated by alarge pipeline of identified subprojects, small creditsize, and conservatively estimated six-year projectimplementation period. Technical assistance is beingprovided to address the institutional weaknesses.Strict financial and economic eligibility criteriawould be set to minimize the risk of subloan paymentdefaults.

Estimated Costs

Local Foregin Total--- US$ million---

Energy Conservation Investments 4.8 /a 8.0 12.8Technical Assist'nce 0.3 0.5 0.8

Base Cost Estimates 5.1 8.5 13.6

Price Contingency 0.5 0.9 1.4

Total Project Cost 5.6 9.4 15.0

/a Includes US$0.6 million equivalent in duties and taxes.

Financing Plan: Local Foreign Total-------US$ million---------

IDA 2.5 8.9 11.4ODA 0.1 0.5 0.6EMU 0.1 - 0.1Enterprises 2.8 - 2.8Agrani Bank 0.1 - 0.l

Total 5.6 9.4 15.0

- iii -

Estimated Disbursements: IDA Fiscal Year

89 90 91 92 93 94 95------------…S$ million …

Annual: 0.5 1.9 3.4 3.2 1.7 0.5 0.2Cumulative 0.5 2.4 5.8 9.0 10.7 11.2 11.4

Economic Rate of Return: 43% (average)

BANGIADESH

INDUSTRIAL ENERGY EFFICIENCY PROJECT

TABLE OF CONTENTS

Page Nlo

I. INTRODUCTION ............................................. . ....... 1

II. THE S E= SECTOR ........................................ 2

A. Resource Endowment ................................... 2B. Energy Development Strategy and Planning ............. 2C. Energy Supply and Consumption ........................ 3D. EL.ergy Prices. 5E. Energy Sector Institutional Framework ................ 7F. Energy Monitoring Unit ............... ............... 7G. Energy Conservation Coordination Group ............... 9

III. ENERGY CONSERVATION IN INDUsb.Y .......................... 9

A. Industrial Sector Structure .......................... 9B. Energy Consumption by Industry ....................... 11C. Potential for Energy Conservation .................... 12D. Energy Savings Measures ........................... 16.

IV. 1THE3 PRO ............................................. 15

A. Project Objectives and Scope ......................... 15B. IDA's Role and Rationale for Involvement ............. 15C. Project Description .................................. 16

1. Institution Strengthening Component .............. 162. Energy Conservation Investment Component ......... 173. Effective Demand for Investments ................. 17

D. Environmental Aspects .. 18

This report was prepared by Ms. K. Okaido (mission leader), Messrs.K Pearson and S. Thiyagarajan (Industry Department) and S. Venkataraman(Consultant) based on an appraisal mission in February/March 1987.Mr. S. Malik (Resident Mission in Bangladesh) also participated in theappraisal mission. This report includes the work of a preappraisal missionto Bangladesh in April/May 1986 led by V. K. Goel.

- vi

TABLE OF CONTENTS (Continued)

V. CAPITAL COST. FINAN,.ING PLAN. PRO,CUREMENT ANDDISBURSEMENTS ., 19

A. Capital Cost Estimates ................ 19B. Financing Plan ....................................... 20C. On-lending Arrangements .21D. Procurement ................ ,.,.,.,.,.. 24E. Allocation and Disbursement of IDA Credit .25

VI. PROJECT IMPLEMENTATION AND MNITQRING .26

A. Project Implementation ............................... 26B. Subproject Evaluation and Approval Procedures .27C. Cost Recovery .28D. Reporting and Auditing Requirements .28

VII. PROJECT BENEFITS AND RISKS .29

A. Project Benefits .................. ............ 29B. Project Risks .................. 31

VIII. AGREEMENTS AND RECOMMENDATIONS .. 31

ANNEXES

2-1 Current Financial and Economic Prices of Energy Products2.2 Energy Sector Institutions (Organization Chart)

3-1 Energy Consumption by Industry for FY853-2 List of Audited Plants

4-1 Consulting Services RequirementsW-2 Proposed Training Program

5-1 Estimated Project Cost5-2 Brief Description of Agrani Bank5-3 Proposed Allocation and Estimated Disbursement Schedule for IDA

Credit

7-1 Economic Analysis for the Project7-2 Estimated Foreign Exchange Savings

Selected Documents and Data Available in the Project File

BANGLADESH

INDUSTRIAL ENERGY EFFICIENCY PROJECT

I. INTRODUCTION

1.1 The Government of the People's Republic oi Bangladesh (the Govern-ment, GOB) has requested an IDA Credit of US$11.4 million equivalent tofinance the Industrial Energy Efficiency Project (the Project). The Projectaims to (i) improve energy use efficiency by reducing energy consumption perunit of output, thereby reinforcing the overall industrial sector objectivesof higher efficiency and increased competitiveness; and (ii) strengthen theinstitutional set-up for the development vf the country's energy rationaliza-tion program.

1.2 Pangladesh's energy policy aims to reduce the country's dependence onoil imports by accelerating the development and use of domestic natural gasresources, and by improving energy use efficiency through conservationmeasures and appropriate pricing of energy resources. As part of the energyrationalization program, the Government is implementing an inter-fuel substi-tution program to replace imported petroleum products with domesticallyproduced natural gas in the industrial and power sectors. On the energy useefficiency, the IDA-financed Industrial Energy Efficiency and Refinery Rehab-ilitation Project (the First Energy Efficiency Project, Credit 1357-BD) hasassisted in the development of a national energy conservation program through,among others, the establishment of the Energy Monitoring Unit (EMU) responsi-ble for energy conservation activities, and the carrying out of energy audits1 46 industrial and power plants.

1.3 Continuing with the efforts initiated under the First EnergyEfficiency Project, the proposed Project would support the national energyconservation program through two complementary components: (a) a line ofcredit to support energy conservation investments in about 50 industrial andpower generation plants; and (b) technical assistance to further strengthenthe technical capabilities of EMU and the project appraisal and supervisior.capabilities of Agrani Bank, the proposed financial agent for the Project.The Project would also serve as a vehicle for continuing IDA's dialogue withthe GOB on its energy rationalization program, including policy framework,institutional arrangements and project selection and evaluation procedures.

1.4 Total project cost is estimated at US$15.0 million, with US$9.4million or 63X in foreign exchange. The proposed IDA Credit of UJS$11.4million will cover 76% of the total financing requirement including the entireforeign exchange needs. Overseas Development Administration (ODA), a Britishaid agency, will provide US$0.6 n.lJlion in grant to finance technical assist-ance to EMU. The remaining financing requirement will be provided by theenterprises (US$2.8 million), EMU (US$O.1 million) and Agrani Bank (US$0.1million). The Project would save about 119,000 toe of energy annually, valuedat about US$8.8 million, to the Bangladesh industry.

-2-

II. THE ENERGY SECTOR

A. Resource Endowment

2.1 Bangladesh's commercially exploitable energy resources consist ofsubstantial reserves of natural gas, limited hydro-pjaer potential and a largebase of traditional fuels, in the form of crop residues, animal dung and wood.Natural gas is the main source of commercial energy, accounting for over 502of total supply. Estimated recoverable reserves of gas are about 10 trillioncubic feet (tcf) (244 million toe), sufficient to meet the forecast demand foranother 20 years. Moreover, the prospects are good for increasing thereserves with the implementation of comprehensive exploration and appraisalprograms. In addition, in Its efforts to reduce dependence on imported energyand to supplement the domestic supply cf gas, GOB has undertaken, with IDAassistance, a program of seismic surveys and geological studies to be used inthe preparation of promotional packages aimed at attracting international oilcompanies to undertake exploration for oil.

2.2 Hydropower potential is estimated at about 1,500 GWh/year, of which1,000 GWh/year has been developed. The exploitation of the remaining poten-tial would flood prime agricultural land and require the relocation of about30,000 people: consequently its development is not economic in view of thehigh costs involved.

2.3 Several thick seams of coal have been recently discovered at minea,ledepths in the Barapukuria area in the west zone. If their exploitation isproven economic, it would have a profound impact on the future development anduse of domestic and imported energy in Bangladesh. GOB is currently seekingbilateral assistance to determine the economic viability of the reserves.

2.4 Traditional fuels play a crucial role in meeting Bangladesh's overallenergy needs; however, their supply is diminishing. As a result, the outlookfor Bangladesh is one of continuing dependence on rapidly dwindling fuelwoodsupplies and increased reliance on natural gas and imported liquid fuels. Tomeet future energy needs, the strategy calls for the more efficient use offuels.

B. Eneray Development Strategy and Planning

2.5 The Second Five Year Plan (7Y81-85) emphasized the accelerated devel-opment of natural gas as a potential substitute for imported oil and petroleumproducts which absorbed over 202 of the country's total export earnings in the1970's. As a result, natural gas production almost doubled during thisperiod. However, shortages of both foreign and local resources, caused pri-marily by the underpricing of energy and the absence of a coordinated plan forchannelling foreign assistance to priority investments, impeded the achieve-ment of the Plan targets. There was a 40Y shortfall in meeting the gas supplytarget because of delays in commissioning fertilizer and large power plants.As a result, there were shortages of power, some of which were met by theinstallation of highly inefficient combustion turbines, and surplus supply ofgas.

-3-

2.6 In recognition of the importance of improving the supply of energy tomeet the forecast demand, GOB has accorded high priority to the energy sectorin the Third Five Year Plan (TFYP) (PY86-90). The principal objectives ofTFYP are to: (1) accelerate the development of domestic natural gas resourcesto reduce the country's dependence on imported oil; (ii) improve energy useefficiency through conservation measures and appropriate pricing of energyresources; (iii) meet the demand for energy at least cost to the economy;(iv) improve the reliability and quality of power supply, and reduce systemlosses; (v) improve the financial performance of energy sector entities; and(vi) encourage the participation of the private sector in exploration for gasand oil. Moreover, to underscore its commitment to the development of thesector, GOB allocated Tk 56 billion (US$1.8 billion equivalent) for invest-ments in energy under TFYP. The share of energy accounts for 22Z of the totalplan allocation, compared with about 12Z under the Second Five Year Plan, andis exceeded only by the allocation to the agricultural sector.

2.7 To achieve these objectives, a comprehensive strategy for addressingthe main issues in the sector must be formulated and implemented. This strat-egy would have to address three main areast resource development and invest-ment; energy pricing and demand management; and institutional setting. Theseissues are being addressed in the proposed Energy Sector Credit. This Projectwill address issues of demand management and institutional weaknesses, in linewith the recommendation of Bangladesh's energy assessment, prepared in 1982and updated in 1984 under the joint World Bank/UNDP Energy Assessment Program,that energy conservation be given priority.

C. Energy Supply and Consumption

2.8 The estimated per capita commercial energy consumption in Bangladeshof about 42 kilograms of oil equivalent (kgoe) p.a. is among tha lowest in theworld (about one-fourteenth of the corresponding world average and one-ninthof the average for low-income countries). Per capita non-commercial energyconsumption, accounted for by traditional biomass sources such as fuelwood,crop residues, straw, rice husk, jute sticks, and animal wastes, is estimatedat 60 kgoe per year. While traditional biomass energy forms are expected toremain the predominant energy source, particularly in the rural areas, theirconsumption grew at less than 1Z p.a. during PY78-85. Accelerated developmentof gas supplies, on the other hand, has led to the rapid growth in commercialenergy utilization of 5.42 p.a. during the same period.

2.9 Bangladesh's commercial energy balance by type of energy, source ofsupply and sectoral consumption is summarized in the following table:

-4-

Table 2.1 - Commercial Energy Supply and Consumption

Supply FY80 FY85'000 toe 2 '000 toe Z

Primary ProductionNatural Gas 1,146 36 2,390 56Hydroelectricity 205 6 234 5Petroleum Products - - 22 -Subtotal 1,351 42 2,646 61

Net ImportsCrude Oil and Petroleum Products 1,746 55 1,588 37Coal 159 5 66 2Subtotal 1,905 60 1,654 39

Change in Stock (56) (2) 5 -

Total Supply 3,200 100 4,305 100Less: Sector Use and

Transformation Losses /a (795) (25) (1,376) 68

ConsumptionResidential/Commercial 624 26 700 24Transport 468 19 47t 16IndustrialFertilizer 471 20 790 27Othe: Industries 742 31 791 27

Other 100 4 177 6

Total Consumption 2,405 100 2L929 100

Sources Statistical Yearbook of Bangladesh 1986.

/a The energy sector's own consumption and losses in conversion and trans-mission at 25%-322 of gross energy supply are high. The problem of highelectricity distribution and transmission losses is being addressed underthe IDA-financed Power Transmission and Distribution Project(Cr. 1648-BD).

2.)O Supply. In FY85, domestic sources accounted for 612 of the totalenergy supply, and imports 39Z. As indicated above (para 2.1), natural gas isthe primary source of commercial energy in Bangladesh. Its production grew at15.82 p.a. during FY80-85 reaching about 260 million standard cubic feet perday (sefd) in FY85. Natural gas provided about 922 of the energy supply fromdomestic sources in PY85. Gas is mostly consumed for power generation (422)and fertilizer production (342), while other industrial (142), domestic (72)and commercial (32) uses are also expanding steadily. Hydropower provided theremaining 82 of domestic energy source. Petroleum products accounted for 952of imported energy with coal accounting for the remaining 5X.

-5-

2.11 With ini-reased gas availability and the GOb's pricing policies, thecountry's import dependence in the energy sector has been significantlyreduced during the past 5 years from about 602 in FY80 to 392 in FY85. Theshare of natural gas in the total commercial energy supply grew from 36Z inFY80 to 562 in Fy85. Conversely, the share of crude oil and petroleum pro-ducts declined from 552 in FY80 to 372 in FY85, although it is still adominant source of energy in the transportation sector. Despite this declinein the relative importance of petroleum products and the global decline inpetroleum prices, petroleum imports continue to make substantial claims on thecountry's limited foreign exchange earnings. In FY85, net oil imrortsamounted to about US$346 million, equivalent to 352 of the colntry's totalexport earnings.

2.12 Consumption. Between FY80 and FY85 the demand for commercial energygrew at 42 p.a. Industry is the single largest user of energy and its energyconsumption grew at a slirhtly higher rate of 5.42 p.a. due to the largeincrease in the natural gas consumption by the fertilizer subsector, with thecommissioning of the Ashuganj project in 1983. The rest of the industrystayed at about the same energy use level. The increase in industry's sharein commercial energy consumption from 512 in FY80 to 542 in FY85 was offset bydeclines in the residential, commercial and transport sectors. If commercialenergy consumption is to grow at a similar rate as in the FY80-85 period,Bangladesh would require large investments in the energy sector or have toincrease imports to meet its future needs. Efforts will have to be madetherefore to improve energy use efficiency and thereby reduce energy consump-tion in order to promote the country's development and improve the balance ofpayrents situation.

D. Energy Prices

2.13 Current financial and economic prices of different energy products inBangladesh are presented in Annex 2-1 and summarized belows

Table 2.2 - Current Energy Prices

Retail Price /a Economic Price lbPetroleum Products Tk/lt US$/t US$/t

Gasoline 13.20 572 199Kerosene 6.87 274 175Diesel 6.90 256 164Fuel Oil 4.70 163 111

Natural Gas Tk/mcf US$/mcf US$/mcf

Power 24.82 0.80 0.96Fertilizer 24.82 0.80 0.89Other Industry 52.14 1.68 1.57

Electricity Tk/KWh USJ/KWh /c US¢/KWh

IndustrialJute/Textile (11 kv) 2.50 9.0 9.1Other (LV) 3.10 10.3 8.2

/a Current prices effective since September 1987./b Economic prices are border prices for petroleum products and long run

marginal cost for natural gas and electricity estimated by IDA staff.

The prices of biomass-derived fuels are determined in the market place. Theprices of all commercial energy are set by the GOB. Natural gas andelectricity have differential prices for different classes of consumers, butother energy products have uniform prices for all classes of consumersthroughout the country. Petroleum product prices in Bangladesh have alwaysbeen high. As shown in the Table above, retail petroleum product pricessubstantially exceed their economic (border) prices. Among various petroleumproducts, gasoline price is the highest relative to respective economicprices. On the other hand, gas prices, particularly for bulk users (power andfertilizer), remain well below (about 55Z) the long run marginal cost (LRHC)of supply. Electricity tariffs, particularly for residential and commercialusers, are low at about 602 of LRHC.

2.14 Energy prices should be set at least at their economic levels, bothto encourage investment in the development of domestic energy resources and toimprove energy use efficiency. Energy pricing has been one of the principalissues in IDA's dialogue with the GOB under the various energy sectorprojects. As part of the agreement under the Second Gas Development Project(Credit 1586-BD), gas prices have been raised several times. The GOB hasfurther undertaken to adjust the gas prices beginning July 1987, based on theLRMC of sup!.y including an appropriate depletion allowance. Electricitytariffs have also been increased several times during the past few years. Aproposed Energy Sector Credit would, inter alia, further address the energy

-7-

price issue, focussing initially on natural gas and power prices. Both thelevels and structure of tariffs will be reviewed to ensure that an adequateshare oi future energy sector investment needs are met from internal cashgeneration and that the tariff structure reflects more closely the long-runeconomic cost of supply to different consumer groups.

2.15 With regard to petroleum products, the Government's policy is tomaintain retail prices stable despite fluctuations in international petroleumproduct prices. Bangladesh Petroleum Corporation (BPC) provides a bufferbetween international and domestic prices, and absorbs the price fluctuationsthrough its transfer prices. The losses which BPC accumulated when inter-national prices were higher than BPC's transfer prices during the early 1980sare now being offset by profits made by maintaining transfer prices unadjustedto the low international prices. The GOB would ascertain that internationaloil prices are stabilizea and examine all implications (including the effecton government revenues) before it decides to adjust retail prices to thecurrent low price levels.

E. Energy Sector Institutional Framework

2.16 Responsibility for energy policy and program for commercial fuels isshared between the Ministry of Energy and Mineral Resources (MEMR) and Plan-ning Commission. MEMR is primarily concerned with energy development andutilization, while the Planning Commission is concerned with coordination,integrated energy planning and policy ma:king (Annex 2-2). Non-commercialfuels are under the responsibility of the Ministry of Agriculture, and theMinistry of Local Government, Rural Development and Cooperatives. On theoperational side, responsibilities for commercial energy resources are vestedin the following public sector entities under MEMRs (i) Bangladesh PetroleumCorporation (BPC) for import of crude oil and refined products, and refiningand marketing of petroleum products; (ii) Bangladesh Oil and Gas Corporation(Petrobangla) for exploration, production, transmission and distribution ofnatural gas; (iii) Bangladesh Power Development Board (BPDB) for generation,transmission and distribution of electric power; (iv) Rural ElectrificationBoard for distribution of electricity in rural areas through a system ofcooperatives; (v) Bangladesh Petroleum Institute for research and training inthe petroleum sector; and (vi) Energy Monitoring Unit (EMU) for policy coor-dination, planning, promotion and monitoring of energy conservation program(para 2.17).

F. Energy Monitoring Unit

2.17 Recognizing the importance of energy conservation for Bangladesh,IDA, through the energy efficiency component of the Energy Efficiency andRefinery Rehabilitation Project, supported the GOB's efforts in the develop-ment of a national energy conservation program for the industrial and powersectors. The program included establishment of institutional framework forenergy conservation and carrying out of energy audits in major energy consum-ing enterprises. As part of these efforts, the Energy Monitoring Unit (EMU)was set up within MEMR in January 1983. The primary objective of EMU is todevelop, initiate and carry out the national energy conservation program inorder to improve energy use efficiency in the industrial and power sectors.

-8-

2.18 EMU's main responsibilities include policy coordination, planning,promotion, provision of technical assistance and training and monitoring ofenergy conservation activities throughout the country, such as tot (i) act asa coordinating agency for all activities designed to improve energy use effi-ciency; (ii) formulate policies and programs for energy conservation; (iii)carry out energy audits of major energy-using industries to identify theirenergy savings potential; (iv) appraise measures for capturing the identifiedsavings and provide assistance in implementing those measures; (v) organizeand conduct promotional seminars to increase aw'areness of the industry andgovernment officials about the benefits of energy conservation; (vi) develop alibrary of technical literature on energy conservation; (vii) establish andpublicize standards and targets for improving energy use by industry/products;and (viii) make analysis, by subsector, on energy savings potential to providea basis for policy formulation by the Government for long-term energy conser-vation program.

2.19 EMU's performance under the First Energy Efficiency Project has beenmixed. To develop and supplement in-house expertise in carrying out thefunctions indicated above, EMU engaged the services of foreign consultants.With their assistance and that of local firms which worked in collaborationwith the foreign consultants, EMU has successfully prepared a national energyconservation program and carried out energy audits (para 3.9). It has alsoconducted a limited number of promotional seminars for the jute, textile andsugar industries.

2.20 EMU's institutional development, however, has been less than planneddue to a number of constraints. As a project entity, EMU continues to remainon the development budget with a temporary tenure and has not become a regularagency under Bangladesh's revenue budget. In the absence of long-term careerprospects, it has failed, in many cases, to attract high-caliber staff. Therewere initial delays in the appointment of its Director and other staff membersand for some periods the post of Director was vacant. However, in June 1986,an experienced and well-qualified professional took over as EMU's Director.Assurance was obtained from GOB during negotiations that a Director of EMUwith appropriate qualifications would be maintained. To enhance EMU'sinstitutional development, GOB has provided for the transfer of EMU from thedevelopment budget to the revenue budget in the proposed Government budget forFY1988/89. Thp transfer, effective July 1, 1988 will be a condition of crediteffectiveness for the Project. The proposed Project will also address otherissues relating to EMU's institutional weaknesses (para 4.5).

2.21 At present, EMU has 40 staff, including 15 professionals, although itis authorized to have 56 staff including 17 professionals. The number ofsupport staff has been reduced during the last 12 months from 34 to 25. EMU'ssize will be kept small at about the current level of 40 staff. Its capabil-ities in the area of promotion, policy/program analysis and data managementwill be strengthened mainly through reassignment/training. To keep the sizeof its staff small and to provide quality service, EMU would seek outsideconsultant assistance in carrying out some of its major activities, parti-cularly training, promotion and technical assistance in the implementation ofenergy conservation measures (para 4.6).

G. Energy Conservation Coordinat'on Group (ECCG)

2.22 To provide guidance to EMU and to ensure coordination and cooperationof concerned ministries and agencies, ECCG was also formed, under the Chair-manship of the Secretary of MEMR. The membership of ECCG includes seniorofficials responsible for the industry and/or energy sectcrs in the PlanningCommission, Ministry of Industries, BPDB and public sector corporationsresponsible for chemicals, jute, steel, textile and sugar industries. AgraniBank, a proposed financial agent under the Project (para 5.8), will also berepresented in the ECCG. ECCG has not been very effective mainly because themembera were very often represented by lower level officials with less author-ity to speak for the agency they represented. Assurance was obtained from GOBduring negotiationts that members themselves will be required to participate inthe ECCG on a regular basis.

III. ENERGY CONSERVATION IN INDUSTRY

A. Industrial Sector Structure

3.1 Bangladesh's manufacturing sector is quite small, accounting only forabout 12X of GDP and 8X of total employment. The modern manufacturing sector,consisting of public sector and large-scale private units, generates 582 ofvalue added but employs only 182 of the manufacturing labor force. Small andcottage industries account for most of the employment (822) in the sector andthe remaining 422 of total value added. The public sector's share in industryhas declined continuously since mid-1975 and currently constitutes about 402of total fixed assets (about 160 enterprises) in the modern manufacturingsector, compared to about 902 (about 800 enterprises) in 1972. This shift isa result of the GOB policies to encourage a more active role by the privatesector in industrial development. Public sector enterprises (PSEs) play asignificant role in the chemicals, iron and steel, cement, pulp and paper andsugar subsectors. The private sector is more active in food processing(except for sugar), beverages, leather products, pharmaceuticals and light-engineering industries. Textile/jute and tea industries are in both publicand private sectors.

3.2 During the FY80-85 period, the manufacturing sector grew at anaverage rate of 10.92 p.a. The following table shows contribution of differ-ent subsectors to manufacturing value added in FY80 and 85.

-10-

Table 3.1 - Sectoral Structure of Manufacturing Sector

Value AddedSubsector FY80 FY85

Million Tk 2 Million Tk 2

Food, beverage, tobacco 3,040 23.3 4,991 22.8Textiles/jute 5,331 40.8 7,292 33.3Pulp and paper 238 1.8 666 3.0Chemicals fertilizer 2,236 17.1 4,419 20.2Non-metallicmineral products /a 306 2.4 401 1.8

Metals/metal products 731 5.6 967 4.4Other 1,179 9.0 3,187 14.5TOTAL 13,061 100.0 21,923 100.0

Source: Statistical Yearbook of Bangladesh 1986.

/a Includes cement, bricks and ceramics.

3.3 Textiles/jute remained as the most important subsector, althoughits share in the industrial value added declined from 412 in PY80 to 332 inFY8S. Value-added in this subsector is divided roughly between jute andcotton manufacturing. The cotton textile industry is important in substi-tuting imports and providing over one million jobs, about half of all themanufacturing employm.ent. The jute subsector is important because of itsexport earnings; in FY5S, jute exports earned about US$416 million in for-eign exchange, or about 422 of total merchandise exports. Jute millsprovide about 302 of total manufacturing employment in medium- to large-scale mills. Both textiles and jute industries, particularly in the publicsector, face serious sectoral issues of autonomy, high costs due toover-staffing, excess capacity, production inefficiency and high debts,foreign competition in the case of textiles and low prices in the case ofjute, etc.

3.4 The food beverage and tobacco subsector is also important, contri-buting in FY85 about 23S to the value added. The important industriesunder the food subsector are rice milling, sugar and tea, all of whichexcept sugar and some tea growers are in the private sector and growing ata moderate rate. The sugar industry, however, is facing problems relatedto cane availability and low production efficiency.

3.5 The chemical subsector had the fastest growth during FY80-85mainly due to expansion in fertilizer industry, which nearly doubled thevalue added during the period. Making use of the large and low costnatural gas resource, Bangladesh now produces all its nitrogenous fertil-izer requirements for the fast growing agricultural sector, substitutingfertilizer imports. The fertilizer industry is important in generatingsignificant foreign exchange savings estimated at over US$100 million peryear and will in addition have potential for exports in future. This sub-sector is relatively well managed and profitable.

-11-

B. Energy Consumption bv Industry

3.6 As indicated, industry is the single largest user of energy inBangladesh. In FY85, industry consumed 1,581 toe (62X) of commercialenergy and 953 toe (382) of traditional biomass energy, concentratedlargely in the fertilizers, pulp and paper, food, cement and bricks sub-sectors. Annex 3-1 gives details of energy consumption by variousindustrial subsectors in FY85. Fertilizer was the most energy intensiveindustrial subsector in FY85, accounting for about 402 of commercial energyconsumption in industry. Food and agricultural products accounted for 15Z,non-metallic mineral products 10?, pulp and paper 102, jute 62, andtextiles 52. The rice and sugar industries are the largest users of tradi-tional biomass energy, representing about 802 of the total biomass energyconsumption in industry.

3.7 Commercial energy consumption in industry by source in FY80 andFY85 is shown in the following table:

Table 3.2 - Commercial Energy Consumption in Industry by Source

FY80 FY85'000 toe z '000 toe I

Natural Gas 644 53 1,115 70Petroleum Products 337 28 249 16Coal 158 13 66 4Purchased Electricity /a 73 6 151 10TOTAL 1,v12 100 1,581 100

Sources Statistical Yearbook of Bangladesh 1986.

/a Converted at 307 toe/GWh, assuming 27.52 thermal conversion efficiency.

3.8 Natural gas plays an increasingly important role as industrialenergy source. In FY80, natural gas--including the gas used as feedstockin the fertilizer sector, accounted for 532, and petroleum products for282, of commercial energy consumption in industry. In FY85, however,petroleum products consumption declined sharply to 162 of total commercialenergy use by industry while the share of natural gas increased to 702.Electricity production is also increasingly based on natural gas;electricity generated from natural gas increased from 65? of the totalthermal electricity in FY80 to 782 in FY85. In the Eastern Zone wherenatural gas is available, electricity is generated predominantly based onnatural gas. In the Western Zone, however, most of the electricity isgenerated from petroleum products since there is no natural gas supply orhydropower potential in the area.

-12-

C. Potential for Energy Conservation

3.9 Even at Bangladesh's low level of commercial energy consumption(about 42 kgoe per capita), there is substantial scope for improving energyuse efficiency, particularly for the small number of large industrial andpower units where the bulk of the consumption is concentrated. Asindicated earlier, EMU has carried out energy audits during 1986 in 42energy-using industrial enterprises in the fertilizer, pulp and paper,cement, sugar, textile, jute, food, steel, and nonmetallic mineralssubsectors; and in four power plants. The number of plants audited andtheir energy consumption in FY85 by subsector is presented in the tablebelow.

Table 3.3 - Energy Consumption in Audited Plants (FY85)

Number of Coverage ofAudited Energy Subsector Energy

Industry Plants Consumption Consumption'000 toe Z (Z)

Public SectorFood & Agricultural Products 8 25 2.2 3Jute 4 39 3.5 34Textiles 5 14 1.3 16Pulp and Paper 4 130 11.7 83Fertilizers 4 777 70.1 100Nonmetallic Mineral Products 2 42 3.8 10Steel and Metal Products 1 44 4.0 66

28 1,071 96.7 44

Private SectorFood and Agriculture Products 7 4 0.4Textiles 1 16 1.4 7Nonmetallic Mineral Products 5 16 1.4 4Others 1 1 0.1 1

14 37 3.3 2

Sub-total Industry 42 1,108 100.0 41

Power Plants (Public Sector) 4 684 67Total 46 1,792 48

/a Includes both commercial and traditional biomass energy.

3.10 The plants audited accounted for about 41Z and 67Z of total energyconsumption in the industrial and power sectors respectively in FY85. Froman energy consumption perspective, the industry can be divided into twogroupst (i) sectors with a small number of plants each consuming large

-13-

quantities of energy; and (ii) sectors with a relatively large number ofplants consuming small quantities of energy. The first group includesfertilizer, pulp and paper, steel, cement, glass, and power plants, whichtogether account for over 80Z of total commercial energy consumption byindustry and power subsectors. All of the major facilities in these sixsubsectors were audited. The second group includes sugar, textiles,bricks jute, rice, tea, and others. For this group, less than 10 of thetotal nwmber of plants were audited. Thirty-two or 702 of the auditedplants are public sector enterprises in fertilizer, power, steel, pulp andpaper, textile, jute, sugar, cement, and glass, subsectors. The remaining14 plants in textiles, tea, rice, bricks, and ceramics are in the privatesector (Annex 3-2).

3.11 The following table shows estimated energy savings potential inthe industrial sector, including both commercial and traditional sources ofenergy, based on the energy audits carried out, as described above.

Table 3.4 - Energy Savings Potential /a

SavingsPotential as

Total Energy Energy Savings Potential I of TotalConsumption Conservation Cogeneration Total Consumption

-'----------------o000 toe…------------------ (Z)

Food and agricul-tural products 947.5 85.3 11.9 97.2 10.3

Jute 114.7 8.2 53.2 61.4 53.5Textiles 88.0 7.3 39.1 46.4 52.7Pulp and Paper 156.6 28.3 2.1 30.4 19.4Fertilizers 777.3 71.4 - 71.4 9.2Nonmetallicmineral products 434.2 45.2 - 45.2 10.4

Steel and metalproducts 66.3 10.1 - 10.1 15.2

Others 98.2 25.7 14.3 40.0 40.7total Industry 2,682.8 281.5 120.6 402.1 15.0

Power 1,019.9 41.9 - 41.9 4.1

TOTAL 3,702.7 323.4 120.6 444.0 12.0

2 of Total 100.0 8.7 3.3 12.0

/a Based on FY85 levels of energy consumption.

The potential for energy savings in industry at the FY85 energy consumptionlevel was estimated at about 323,400 toe p.a. including about 41,900 toep.A. in power plants. About 602 of this potential would be achieved from

-14-

commercial energy conservation and the remaining 40Z through savings ontraditional biomass energy sources such as bagasse, rice husk, fuelwood,etc. In addition, cogeneration measures have potential energy savings ofabout 120,600 toe p.a. Since EMU's consultants completed a large number ofenergy audits primarily in the public sector, EMU would in the future shiftits emphasis from energy audits to implementation of identified conserva-tion measures, although it will continue to carry out energy audits withits own resources, on a limited basis, in subsectors left uncovered,particularly in the private sector.

D. Energy Savings Measures

3.12 The energy efficiency improvement measures identified by energyaudits fall into three broad categories:

(a) Housekeeping/quick-fix type of measures, including operation andmaintenance improvement programs. These are the major types ofenergy saving measures requiring small investments, capable ofrapid implementation and having short (usually less than one year)payback periods. The measures typically include repairs orreplacement of insulation, steam traps, pumps, valves, instrumen-tation, etc. These are to be implemented in an early stage of theenergy conservation program. Costs are low ranging betweenUS$1,000 and US$30,000, with an average of about US$5,000.

(b) Combustion control/retrofit measures. These measures range fromuse of portable analyzers to adoption of sophisticated automaticcontrols with in-line analyzers (justified only for the largerfacilities). Other retrofit techniques include condensaterecovery, air preheaters, economizers, etc. These measures havelarge potential in industries with boilers, kilns and processheaters. Costs are moderate ranging from US$5,000 to US$0.8million, with an average of about US$50,000.

(c) Industry-specific process improvements. These are based oncapital-intensive technologies with long implementation periodswhich in most cases may not be justified at today's energy prices.Typical examples are conversion of wet to dry process in cementmanufacturing and increasing the stages of evaporation in sugarmills.

The proposed Project would support mainly measures in housekeeping/quickfix and retrofit/combustion control categories described in (a) and (b)above.

3.13 In addition to the above energy-saving measures, two otheroptions, fuel substitution and cogeneration technology, have also beenconsidered. Fuel substitution generally does not involve energy savingsbecause the energy input to the process remains about the same while thefuel is replaced by a more economic one. In cogeneration technology, bothenergy saving and fuel switching take place. It carries a significant

-15-

energy saving potential in Bangladesh--about 120,600 toe p.a., or about 5Zof total energy consumed by industry. Cogeneration permits simultaneousproduction of electricity and thermal energy, thus achieving a combinedefficiency higher than in utility po_er stations. This is due to the factthat much of the energy lost in condensers and stacks in utility powersystems can be recovered as process heat for use in industrial facilities.In addition to improved efficiency and related financial and economicbenefits, cogeneration in Bangladesh, by allowing captive power generation,would permit a significant improvement in the reliability of electricitysupply to industrial plants. This improvement will allow a substantialreduction in down time, thus reducing production costs and increasingoutput. Cogeneration has already been adopted by most of the fertilizerand pulp/paper plants. Significant potential has been identified in thejute, textiles, and food industries. However, cogeneration requiresrelatively larger investments. A cogeneration scheme is often developedfor more than one plant because it requires a minimum level of power demandof about 2 MW to be economical. It thus requires a longer lead time todeal with technical and institutional issues and is therefore normallyimplemented in the second stage of an energy conservation program. TheProject would therefore support only a pilot cogeneration program todemonstrate its benefits and resolve related issues.

IV. THE PROJECT

A. ProJect Objectives and Scope

4.1 The proposed Project will assist Bangladesh in reducing energyconsumption per unit of output in economically and financially viableindustrial and power enterprises and thereby reinforcing the overall indus-trial sector objectives of higher efficiency and increased competitiveness.It will also promote development of appropriate policies, technologies andinstitutional framework to further strengthen the country's energy ration-alization program. The Project would consist of the following twocomponentss

(a) Institution Strengthening Component - technical assistance toenhance capabilities of EMU and project appraisal capability ofAgrani Bank; and

(b) Investment Component - a line of credit to finance energyconservation investments in selected industrial enterprises andpower plants.

B. IDA's Role and Rationale for Involvement

4.2 The most important measure to induce energy conservation ingeneral is to set energy prices at levels that reflect long-term economicopportunity costs. Petroleum products prices in Bangladesh are well abovethe international price levels. Issues of natural gas and power prices are

-16-

being addressed under the proposed Energy Sector Credit. However, tocomplement the pricing policy, a promotional campaign is needed to increasepublic awareness of the potential benefits of energy conservation. Thereis also a need for training of local personnel to increase their technicalexpertise in energy conservation investments because these investments arecomplex, typically consisting of a large number of discrete additions/modi-fications to existing facilities, and are therefore.not easily identifiableby non-specialists. They also require intensive studies and in many casesinnovative technology. In the absence of these programs, energy conserva-tion has received only limited attention in the past inspite of the signi-ficant potential estimated above (para 3.11).

4.3 Under the proposed Project, IDA will assist in developing a set ofcomprehensive measures including promotion, training, and technical andfinancial assistance necessary for the implementation of energy conserva-tion measures, as well as further development of the national energyconservation program, including policies and strategies, institutionalarrangements and project selection and evaluation. Energy conservation isimportant to Bangladesh because: (i) it reduces waste of scarce resourcesand decreases petroleum imports for the country; and (ii) reduction inenergy consumption per unit of output improves efficiency and competitive-ness of the enterprises. Also, reduction in energy demand per unit ofoutput will alleviate energy-related constraints in the country's futureexpansion. The plants also derive general improvements in productivitythrough better housekeeping, maintenance and introduction of better know-how and technology associated with the energy conservation measures.

4.4 The proposed project involves two sectors, namely, industry andenergy, and is consistent with IDA's strategy in Bangladesh in thesesectors. In industry, it complements the policy to improve the efficiencyand competitiveness of the industry. In energy, the Project supports thestrategy of improving energy use efficiency. The Project would also be avehicle for continuing IDA's dialogue with the GOB on the policies andstrategies for its energy rationalization program.

C. Project Description

1. Institutional Strengthening Component

4.5 The Project will provide financing for EMU to: (a) carry outpromotional activities; (b) carry out a training program for EMU and AgraniBank staff, energy managers and operational/maintenance personnel ofenterprises, and staff of technical institutes and local consulting organi-zations; (c) provide technical assistance to enterprises in the implementa-tion of energy conservation measures; (d) prepare studies and a data baseto support the national energy conservation program. The project will alsoprovide financing to Agrani Bank for strengthening project appraisalcapability, especially in the financial and economic analyses of energyconservation investments.

-17-

4.6 To supplement EMU's expertise and at the same time assist EMU indeveloping its own capabilities so that it would be able to undertake theseactivities on its own in the long run, services of foreign and localconsultants will be obtained on a short term basis in the area of trainingand promotion, data analysJs and processing, and energy conservationproject implementation including cogeneration. In all, about 16 manmonthsof foreign and 11 manmonths of local consultancy is proposed for EMU(Annex 4-1). A senior economist will be hired on the EMU staff to work, incollaboration with the Government, on the formulation of a policy,legislative, regularity and incentive framework necessary to encourageenergy conservation. In addition to the on-the-job training, EMU willorganize, with the assistance of foreign consultants, formal training(within the country and abroad) of EMU and Agrani Bank staff as well asenergy managers of the industrial enterprises and staff of technical andconsulting organizations, to improve their technical and managerialcapabilities in the energy conservation (Annex 4-2). Under the Third SmallScale Industry Project (Credit 1065-BD), Agrani Bank has gained experiencein the appraisal of small and medium-sized subprojects, although its loanrecovery performance has been poor, reflecting a pervasive problem inBangladesh's financial sector (part 5.5). In order to strengthen furtherits project appraisal and superviiion capabilities in energy conservationinvestment, in particular in economiic analysis, Agrani Bank will have 6manmonths of foreign consulting sera ces. "hese foreign consultants willintroduce, among others, use of border prices for project inputs andoutputs and help improve quality of economic and financial rate of returnanalysis.

2. Energy Conservation Investment Component

4.7 The Project will provide a line of credit to finance energyconservation investments in the industrial and power sectors. The line ofcredit will enable implementation of about 50 energy conservation sub-projects, in particular those identified by energy audits conducted underthe first Energy Efficiency Project. The subprojects will primarily be forhousekeeping, quick-fix, combustion control and retrofit measures(para 3.12). These would involve installation of equipment and materialsfor insulation, heat exchangers, economizers, waste heat recovery, processmonitoring and control, repairs and maintenance, etc., and to a limitedextent for fuel substitution. These measures would also wake the existingtechnology/machinery more efficient. The Project will also finance onepilot project in cogeneration to demonstrate its benefits and resolverelated issues (para 3.13).

3. Effective Demand for Investments

4.8 As indicated (para 3.9), during energy audits, 46 energyconservation subprojects were identified (Annex 3-2). Thep'. projects arefor large- and medium-sized industrial and power plants primarily in thepublic sector where energy consumption is concentrated (para 3.10). Theinvestment required for these subprojects inc'uding cogeneration wasestimated at US$16.1 million in November 1987 prices. In addition, theconsultants who carried out the audits estimated that the investmentrequirement for unaudited plants, which are primarily in the privatesector, would be about US$5 million. The potential demand for energyconservation investments would therefore be about US$21.1 million.

-18-

4.9 Most of the plants audited expressed strong interest in implement-ing identified energy conservation measures. For very small investments,some firms (e.g. in ceramics) have already started implementing recommendedmeasures with their own funds. The proposed Project would only supportenergy conservation investments in plants whose long-term economic andfinancial viability can be demonstrated. For example, long-term economicviability of the steel and sugar industries is in questiotn. Sectors suchas jute and textiles, although economicAlly important for the country, areexperiencing sectoral problems (para 3.3). Therefore, unless an overallsectoral restructuring program is developed and carried out, energy conser-vation measures in these sectors will not be very effective. Some enter-prises are also facing financial difficulties and many are in default inpaying their obligations to the banking sector.

4.10 The mission reviewed all the potential subprojects in the light ofthe above considerations, and found some of them unsuitable for financingbecause (a) the long-term economic viability of the enterprise or thesubsector was questionable (e.g. steel and sugar mills); (b) some sectors(e.g. jute, textiles) are experiencing broader sectoral problems; and (c)poor creditworthiness of some of the enterprises will not allow them toparticipate in the program. Based on these considerations, the effectivedemand for investments in the audited plants has been estimated at about70X of the potential demand. for unaudited plants, due to the greateruncertainty, the effective demand has been estimated at 302 of thepotential demand. Based on these ratios, the investment requirement forthe subprojects to be supported under the Project has been conservativelyestimated at US$12.8 million in November 1987 prices.

4.11 Subproject Ripeline. For the energy conservation measures, ninepublic sector enterprises in the fertilizer, glass and power plants arelikely to be supported under the Project. About US$4 million (about 35? ofthe Credit amount) would be provided to finance these investments. Inaddition, a cogeneration project for a private complex of threejute/textile mills is expected to be supported. This subproject was iden-tified during IDA's appraisal. EMU's preappraisal in March 1987 andfurther review jointly by IDA and EMU in June 1987 indicated the Pro4ect'stechnical and economic viability. About US$3 million (about 26? of theCredit amount) would be provided to finance this subproject. It isexpected that about 25-30 subprojects will be from the audited plants. Theremaining 20-25 would be from other plants, mostly in the private sectorwhere measures can be implemented because of similarities in theirprocesses with the audited plants.

D. Environmental Aspects

4.12 Experience has shown that energy conservation projects in generalare either environmentally neutral or have a positive impact by decreasingeffluent discharges. No environmental issues are thus expected under theproposed Project. Assurances will be obtained that all subprojects will bedesigned, implemented and operated with due regard to appropriate safetyand environmental standards satisfactory to IDA.

-19-

V. CAPITAL COST, FINANCING PLAN, PROCUREMENT AND DISBURSEMENT

A. Capital Cost Estimates

5.1 Total financing requirement of the Project, including pricecontingencies, is estimated at US$15.0 million, of which US$9.4 million or632 will be in foreign exchange, as presented in Annex 5-1 and summarizedin the following table:

Capital Cost Estimates

US$ million Equivalent I of TotalLocal Foreign Total Base Cost

Energy Conservation Investment /a

Equipment, Materials & Spares Lb 2.3 7.3 9.6 70.6Licensing & Engineering 1.2 0.7 1.9 14.0Civil Works & Construction 1.3 - 1.3 9.5

Subtotal 4.8 8.0 12.8 94.1

Technical Assistance

Training 0.0 0.2 0.2 1.5Consultancy 0.1 0.3 0.4 3.0Administrative Expenses /c 0.2 - 0.2 1.4

Subtotal 0.3 0.5 0.8 5.9

Total Base Cost 5.1 8.5 13.6 100.0

Price Contingency (11Z) 0.5 0.9 1.4

Total Financing Required (rounded) 5.6 9.4 15.0

Z of Total 37.4 62.6 100.0

/a Estimated on the basis of already identified subprojects.

lb Includes US$0.6 million in duties and taxes.

/c Includes local transport, office equipment, facilities and supplies,and general and administrative expenses related to technical assistancecomponent.

-20-

5.2 The base cost estimates are in November 1987 prices. stimates ofthe energy conservation investment component are based on the a.ilysis of46 subprojects identified by audits and reviewed by the mission. Capitalcosts of individual subprojects will be established on a case-by-case basisas the subprojects are appraised. Estimates of the technical assistancecomponent are based on 16 manmonths of foreign and 11 manmonths of localconsulting for EMU, 6 manmonthe of foreign consulting for Agrani (Annex4-1) and the formal training program as detailed in Annex 4-2. Pricecontingencies for local costs are 102 in FY88, 92 in FY89 and FY90, and 82in each year thereafter. Price contingencies for foreign costs are 5.62for FY88, 5.42 for FY89, -0.32 in FY90 and 1.75? in each year thereafter.

B. Pro' ct Financing Plan

5.3 The proposed IDA Credit of US$11.4 million would meet 76? of thet tal financing requirements of the Project. Under the energy conservationinvestment component, IDA will contribute US$11.3 million (80?) and thebeneficiary enterprises, the remaining US$2.8 million (20?). For the tech-nical assistance component, IDA will provide US$0.1 million (112) forAgrani Bank and Overseas Development Administration (ODA), a British aidagency, will provide US$0.6 million (67?) in grant for EMU. EMU, throughtheir allocated annual budget, and Agrani Bank will contribute the remain-ing US$0.2 million (222) to finance administrative expenses associated withtechnical assistance component. The financing plan for the Project issummarized below:

Financing Plan

Local Foreign Total 2- US$ million equivalent ----

Energy Conservation Investments

IDA 2.5 8.8 11.3 75.3Enterprises 2.8 - 2.8 18.7

Subtotal 5.3 8.8 14.1 94.0

Technical Assistance

IDA - 0.1 0.1 0.7ODA 0.1 0.5 0.6 4.0EMH 0.1 - 0.1 0.7Agrani Bank 0.1 - 0.1 0.6

Subtotal 0.3 0.6 0.9 6.0

Total Project Cost 5.6 9.4 15.0 100.0

-21-

C. On-lending Arrangements

5.4 The proposed IDA Credit of US$11.4 million equivalent will beextended to GOB at IDA's standard terms. For the institution strengtheningcomponent, the GOB will onlend US$0.1 million equivalent to Agrani Bank tofinance consulting services at cost, i.e. IDA terms except that therepayment term would be 10 years including a grace period of up to 3 years.For the energy conservation investment component, the GOB will onlendUS$11.3 million equivalent to enterprises through an agency arrangementwith Agrani Bank.

5.5 Rationale for Agency Arrangement. Because Bangladesh's financialsystem is experiencing severe loan recovery and other problems, an agencyarrangement rather than on-lending through a financial intermediary will beused for the Project on an interim basis until financial sector reforms areinitiated and Agrani Bank's collection performance under an on-going SmallScale Industry Project improves. During the late 1970s and early 19809,institutional credit was expanded very rapidly in Bangladesh to financeboth agriculture and industry without commensurate development of thenationalized commercial banks and other public financial institutions,which have been characterized by weak management, deficient internal proce-dures, inadequate capital and limited autonomy. Much of the expandedlending followed Government directives without adequate credit analysis.The banks emphasized disbursements rather than recoveries, accounting andcollection systems were weak, and loan recoveries fell to very low levels.Widespread failure to repay debt, exacerbated by Government signals seemingto condone default, has created a crisis in the financial aector whichthreatened the viability of several institutions. The Government respondedto the crisis by establishing a commission which recommended bankingreforms in mid-1986, initiating measures which significantly increasedagricultural and industrial credit recoveries during late 1986/87 andseeking assistance from the IMF and IDA.

5.6 Reasonable progress has been made since late 1986 toward solvingthese issues. The report of the Government's Commission on Money, Bankingand Credit has been finalized. A Bank green cover financial sector reporton Bangldesh has been prepared, which would provide the basis for acomprehensive financial sector reform program tc be supported under aproposed Financial Sector Credit (FSC) in FY89. A series of legal andadministrative changes have been implemented, such as denying new credit todefaulters, barring them from holding local office; taking over largeprojects; and passing a new loan recovery law. These and other measures,partially supported by the 13th Imports Program Credit (IPC-13) and theproposed Industrial Sector Credit ISC), have led to significant increasesin debt recoveries. During the first half of FY87 agricultural creditrecoveries increased about 35Z, and industrial term loan collections morethan doubled compared to the same period during the previous years.

-22-

5.7 One component of the proposed financial sector reform program isreclassification of loans, adequate provisions for bad and doubtful debtand recapitalization of the nationalized commercial banks. Without thesere'orms, which will take several years, it would be difficult to ascertainthe creditworthiness of Agrani Bank or any other nationalized commercialbank (NCB). It would be inappropriate to use any of these financial insti-tutions as full intermediaries taking credit risk before their collectionratios improve further, their portfolio qualities are made transparent andadequate recapitalization is carried out.

5.8 Until the financial sector reform process is initiated, analternative arrangement is necessary to enable public and private sectorsubprojects proposed for support under the Project to be appraised effi-ciently on behalf of the Government. Since it is Government policy toshift industry towards a more market-oriented system supported by theproposed ISC, it is also important that individual subprojects be reviewedon their merits and approved in accordance with appropriate appraisalprocedures rather than through Government directives. Agrani Bank willtherefore act as an agency to review, approve and supervise subprojects andadminister Credit funds on behalf of GOB. Agrani Bank, Bangladesh's thirdlargest commercial bank, was selected as the agent because it is thebiggest lender to private industry, has performed relatively better thanother commercial banks in terms of loan recovery, profitability and manage-ment, and has experience in the appraisal of small- and medium-sizedprojects under the IDA-supported Third Small-Scale Industry Project (para4.6).

5.9 The Government employed a similar agency arrangement withBangladesh Shilpa Bank (BSB) under the Second Textile Industry Rehabilita-tion Project (Credit No. 1477-BD), but it did not function well. Theproposed arrangement is expected to operate satisfactorily because(i) Agrani Bank's performance is much better than BSB's; (ii) the qualityof approved subprojects will be enhanced through technical assistance toimprove Agrani Bank's project appraisal capability and through prior reviewby IDA of about 75Z of subprojects (in terms of amounts) (para 6.6); and(iii) subloan recovery will be encouraged by designing Agrani's fee struc-ture so that about 70Z of its income as agency will be tied to itscollections (para 5.12).

5.10 Under this arrangement, Agrani Bank will pass the credit fundsonto the subborrowers, without taking credit risk, and manage the subloanson behalf of the GOB, for a fee. Agrani Bank will carry out, as the GOB'sagent, the financial/economic evaluation based on EMU's technical reviewand approve subprojects (para 6.5). This onlending arrangement will be inplace for a minimum of three years. The agency arrangement would bereviewed within the initial three years to determine whether Agrani Bankcould act as a financial intermediary, taking credit risk associated with aregular line of credit. If deemed creditwoirthy, then GOB will transfer allthe subloans to Agrani Bank, which would carry the credit risk, underonlending terms satisfactory to IDA and t.. be agreed at that time. A briefdescription of Agrani Bank is presented sn Annex 5-2.

-23-

5.11 The initial onlending rate to enterprises will be 14.5Z per annum.This rate compares to the prevailing commercial rate for industrial termloans of 10.0 p.a. to 13.52 p.a. and takes into account that GOB wouldassume the risk of foreign exchange fluctuations. This rate will bepositive in real terms, compared to current and expected domestic inflationrates. The spreads between some lending and borrowing rates in Bangladeshare currently inappropriate; reform of the structure as well as the levelsof interest rates will be pursued through the proposed Financial SectorCredit. The onlending rate will be reviewed annually, and if there is anyadjustment in the base lending rates in the future, the applicableonlending rates for this Project would be adjusted to reflect such a changeat the time of annual review. Subloans to beneficiary enterprises willhave a maximum maturity of 10 years, including a grace period of up to 3years. Most subloan repayment periods are, however, expected to rangebetween 5-7 years including the grace period.

5.12 Agrani Bank will charge enterprises a one time appraisal fee of 1?of the subloan amount to cover its processing costs. Agrani Bank's feesfor administering the funds for the GOB are designed to cover its adminis-trative costs and provide adequate incentives to recover subloanss the GOBwill pay Agrani Bank (i) a management fee of 1? p.a. of the outstandingsubloans to cover its supervision costs; and (ii) 5 of the amountcollected (principal and interest but excluding interest accrued onarrears) to provide a positive incentive for loan recovery. This feestructure will give Agrani a spread equivalent to approxlmately 32 p.a.interest (at 1002 collection).

5.13 The total cost of borrowing to sub-borrowers would thus be the14.5I p.a. interest plus a 1% one time appraisal fee for Agrani's economicand financial review and another 12 one time fee for EMU's technicalappraisal (para 6.5). The 6.52 spread between the onlending rate (14.5?p.a.) and the normal Bank lending rate (about 82 p.a.) would be shared byGOB (3.5?), to cover the credit and foreign exchange risks, and Agrani Bank(3?), for administering the Credit. The detailed fee structure was agreedduring negotiations and an agency agreement has been signed between AgraniBank and the Government, under terms and conditions satisfactory to IDA.

-24-

D. Procurement

5.14 Procurement arrangements for the Project are summarized belowt

Table 5.1 - Procurement Arrangement

Procurement Method ProjectICB LIB /a Other Cost-------------(US$ million)----------

Energy Conservation InvestmentsEquipment and materials 5.1 /b 4.3 1.6 11.0 /c

(5.1) (3.8) (1.4) (10.3)

Engineering and licenses - - 2.1 2.1_ _ (1.0) (1.0)

Civil works, construction - - 1.0 1.0and commissioning - - -

5.1 4.3 4.7 14.1(5.1) (3.8' (2.4) (11.3)

Technical AssistanceTraining and consultancy - - 0.7 0.7

_ _ (0.1) (0.1)

Administrative expenses - - 0.2 0.2

4.3 5.6 15.0TOTAL (5.1) (3.8) (2.5) (11.4)

Note: Figures in parentheses are the amounts to be financed from IDA Credit.

/a Limited international bidding.

/b Includes erection and comm4ssioning costs associated with equipmentpackages, totalling about US$0.4 million.

/c Includes duties and taxes of US$0.6 million (not financed by IDA) andinternational freight, and insurance of US$0.9 million (financed by IDA).

5.15 Proceeds of the IDA Credit will be used only to finance eligibleexpenditures that are required for the Project. All equipment and servicesto be financed from the IDA Credit will be from sources eligible under IDAguidelines. Packages of equipment and materials exceeding US$300,000financed by the IDA Credit will generally be procured through InternationalCompetitive Bidding (ICB) procedures, carried out by the enterprises under

-25-

IDA's supervision, using procedures consistent with IDA's procurementguidelines. Exceptions to ICB will be for (i) equipment proprietary to theprocess design; and (ii) items for which the supply is critical for effi-cient project implementation. Small items under contracts each with anestimated value of less than US$300,000 (in the aggregate less than US$3.8million) may be procured through limited international bidding (LIB) basedon quotations from at least three qualified suppliers. Contract of lessthan US$10,000 in value may be procured through enterprises' normal pro-curement procedures. Equipment and materials financed by IDA throughprocedures other than ICB are not expected to exceed Us$5.0 millionequivalent in aggregate. All bidding packages for equipment and materialexceeding US$500,000 will be subject to IDA's prior review. About 502, invalue, of all contracts are expected to be subject to IDA's prior review.The proceeds of subloans will not be used to cover expenditures incurredmore than 90 days prior to (a) Agrani's approval of a subloan below thefree limit of US$100,000 (para 6.6); and (b) receipt by IDA of the requestfor subproject approval in the case of sub'oans above the free limit.Contracts for consultancy services financed by IDA will be awarded inaccordance with IDA's guidelines on the use of consultants.

E. Allocation and Disbursement of IDA Credit

5.16 IDA Credit Allocation. The proposed allocation of the IDA Creditis summarized in Annex 5-2. The proceeds of the Credit will cover (i) forenergy conservation subprojects, 80% of the amounts disbursed by the enter-prises for equipment, materials and civil works; and (ii) 1002 of consult-ing services for Agrani Bank.

5.17 Disbursement Schedule. The Project is conservatively assumed tobe completed by June 30, 1994. IDA Credit will be fully disbursed byDecember 31, 1994, in accordance with the estimated disbursement schedulepresented in Annex 5-3. Disbursements would be made over a six-yearperiod, based on the standard profile derived from past IDA experience withsimilar projects. A Special Account in the amount of US$1.0 million equiv-alent would be established in Bangladesh Bank for the Project and all IDA-finauced expenditures will be paid thereunder. Contracts for equipment,materials and civil works for more than the equivalent of US$50,000 wouldbe fullv documented (copy of contract, purchase order, bill/invoice,evidence of payment and shipment/delivery as appropriate). Disbursementsagainst contracts for less than US$50,000 equivalent will be made on state-ments of expenditures, certified by Agrani Bank. Disbursements againstconsultants' services contracts would be supported by the consultant's billand evidence of payment if applicable. The relevant supporting documenta-tion would be retained by Agrani Bank and made available to IDA representa-tives for review upon request. Such documentation would be auditedannually by independent auditors acceptable to the Association.

-26-

VI. PROJECT IMPLEMENTATION AND MONITORING

A. Project Implementation

6.1 MEMR, through EMU, will be responsible for the implementation ofthe Project and technical review of subprojects. ECCG will provideinter-agency coordination. Agrani Bank will be responsible foreconomic/financial review and approval of energy conservation subprojectsand channelling the funds to sub-borrowers.

6.2 Institution Strengthening Component. Foreign consultants whoworked under the first Energy Efficiency Project have formulated the workplan for EMU including training program. During the first three years ofthe Project, foreign consultants will assist EMU in the areas of (a) promo-tional campaign, (b) training, and (c) implementation of energy conserva-tion measures. In addition, local consultants will assist in the estab-lishment of energy data base and its analysis. During the first six monthsof the Project, foreign consultants will assist Agrani Bank in the finan-cial and economic appraisal of energy conservation projects. Appointmentof these consultants required during the first year of the work program isa condition of credit effectiveness. IDA will also assist Agrani inreviewing the first six subprojects and those above US$l00,OO. EMU now hasa capable managem.ent team, Director and two senior technical managers, on apermanent basis. Under this management, EM! has completed thedocumentation necessary to process the transfer of EMU from the developmentbudget to revenue budget (para 2.20). It has also prepared TechnicalAssistance Project Proforma (TAPP) for the technical assistance componentof the Project which has been approved by the Special Evaluation Committee(SPEC) of GOB. It has also prepared a detailed work program, based on thework plan formulated by foreign consultants mentioned above, includingaction plan for promotion, training and staffing requirement.

6.3 Eneray Conservation Investment Component. Most of the subprojectsare small and consist of modifications to existing facilities. The imple-mentation of these subprojects including procurement can therefore besatisfactorily carried out by the enterprises using their own staff orlocal organizations for design and construction work, and assistance fromvendors for the installation of imported equipment.

6.4 The Implementation Period. The average implementation period fora subproject is estimated to be 24 months. IDA funds are expected to becommitted over three years to subprojects approved by Agrani Bank and/orsubmitted to IDA approval before December 31, 1991. It is expected thatabout half of the subprojects will be completed by June 30, 1992, and therest by December 31, 1993, to give an overall implementation period of 5years for the Project. However, capital cost estimates, financing plan,disbursement schedule, estimates of project benefits, and the closing dateare based on completion of the Project by December 31, 1994 with a 6-yearimplementation period in accordance with IDA's past experience with similarprojects. Agrani Bank, together with EMU, will review project implementa-tion arrangement of each subproject during subproject appraisal and willprovide close supervision and monitoring during their implementation.

-27-

B. Subproject Eval!ation and Approval Procedures

6.5 Subproject Evaluation. The subprojects will be prepared by theenterprises themselves with assistance, as necessary, from EMU and domesticconsulting institutes. As a financial agent to the GOB (para S.5), AgraniBank will carry out appraisal of subprojects, including financial andeconomic evaluation. The mission discussed and agreed with Agrani Bank onthe methodology of such evaluation. Agrani Bank will be encouraged toensure quality of subprojects through good project appraisal as it isexpected to act as financial intermediary and after three years assume fullcredit risk for subloans. In the appraisal of subprojects, EMU will assistAgrani Bank in carrying out technical evaluation of subprojects for a one-time fee of 1X of the subloan amount, which would be borne by sub-borrowers. EMU's approval of subprojects on technical grounds will be aprecondition of Agrani's appraisal. EMU will in this manner play anadvisory role for Agrani Bank who will be the final approval authority forthe subloans. In addition to reviewing the merits of a subproject, thefinancial and economic viability of the enterprise itself will also bereviewed by Agrani. The following eligibility criter_a have been agreed:(a) the subproject should be aimed at direct energy saving or fuelsubstitution; (b) it should have an economic rate of return of at least182; (c) economic and financial analysis of enterprises' current and futureoperations should clearly establish their economic and financial viability;(d) the enterprise should not be in arrears in its payment of outstandingloans with the banking sector.

6.6 Subproject Approval Procedures. As indicated (para 6.5), AgraniBank will have the approval authority for energy conservation subprojects.All the private sector subprojects will be approved by Agrani Bank only.Most of the public sector subprojects will in addition be approved by theDepartment Project Evaluation Committee (DPEC) of MEMR based on the AgraniBank's appraisal reports, and forwarded to the Planning Commission forinclusion in the Annual Development Program. Only those public sectorsubprojects exceeding Tk 20 million (about US$650,00 equivalent) will besubject to the normal government approval process, involving PlanningCommission review and approval of a Project Proforma (PP). Under theProject, this procedure is expected to apply to only four subprojects. IDAwill review the first six subprojects irrespective of their size and allsubprojects above US$100,000 prior to Agrani Bank's approval. About 252 ofthe subprojects by number and 752 by amounts are thus expected to bereviewed by IDA prior to final approval.

6.7 For authorization to make withdrawals from the Credit, Agrani Bankwill be required tc submit to IDA (a) a summary description of the benefi-ciary and technical, economic and financial analysis of subprojects satis-factory to IDA; (b) a list of goods and services to be financed under IDACredit; (c) the method of procurement of the goods and services; and (d)terms and conditions of the subloan, including the amortization schedule.

-28-

6.8 Maximum and Minimum Subloan Size. Some 50 subprojects areexpected to be financed under the Project, most of them are small with onlyabout five expected to be in excess of US$500,000 (mainly in fertilizerplants) among energy conservation subprojects; a majority of subloans areexpected to be below US$50,000. Maximum subloan limit will be US$3.5million, and minimum, US$10,000.

C. Cost Recovery

6.9 Unlike in other countries where energy audits are carried outagainst a fee, under the first Energy Efficiency Project, the GOB met thecost of such audits. In the long-run, EMU would, however, need to meet atleast part of the cost from its own resources. EMU will, therefore, chargefor some of its services such as training, energy audits in a gradualmanner; 20? beginning FY89 and increasing to 100? over a 5-year period.For providing technical evaluation of subprojects, EMU will receive a onetime fee of 1? of the subloan amount which will be charged to the sub-borrowers. Provision of other services at the GOB's cost is justifiedsince EMU's activities are in the national interest and economic benefitswould far exceed the financial costs.

D. Reporting and Auditing Requirements

6.10 EMU will be required to submit to IDA quarterly progress reportswithin two months after the end of each quarter and a completion reportwithin six months after the Credit closing date. In addition, Agrani Bankwill be required to submit to IDA, within two months after the end of eachquarter, a quarterly project progress report including procurement statuson the energy conservation subprojects under implementation. Agrani Bankwould also prepare a completion report on each of the subprojects aboveUS$100,000 within six months after their completion; such reports will bemade available to IDA for review during supervision missions.

6.11 Agrani Bank will keep separate project accounts, and provide toIDA, within nine months after the end of each fiscal year, the projectaccounts, including withdrawals from the special account and withdrawalsmade on the basis of statements of expenditure, audited by independentauditors acceptable to IDA in accordance with appropriate accounting prin-ciples consistently applied. Enterprises receiving subloans under IDACredit would submit to Agrani Bank within four months after the end of eachfiscal year, reports on their overall annual financial results andposition. Agrani Bank will ensure that the funds are used only for theintended purpose.

-29-

VII. PROJECT BENEFITS AND RTSKS

A. Proiect Benefits

7.1 The proposed Project will contribute to the Government's objectiveof improving energy use efficiency in the industrial and power sectors. Itwill help improve competitiveness of Bangladesh industries by reducingenergy costs and generate foreign exchange savings by substituting energyimports. The institution strengthening component will help improve EHU'stechnical capabilities in promotion, implementation and monitoring inenergy conservation activities, and strengthen its role in the nationalenergy rationalization program. Agrani Bank's project appraisal procedureswill be improved through strict eligibility criteria applied forsubprojects selection. Improvement in project appraisal methodology underthe technical assistance component will help reinforce the soundness of theinvestment decision-making process in Bangladesh.

7.2 The IDA Credit would make foreign exchange available for thefinancing of about 50 energy saving subprojects. Analysis of pre-identified subprojects (excluding cogeneration) under the proposed Projectindicates that an average of 10 toe savings would be conservativelyexpected for every US$1,000 investment. The benefits would essentially bederived from direct energy savings in fuel oil, natural gas and power,waste heat recovery and further utilization of biomass and recycled wastematerials. In 1994, when all subprojects financed under the Credit areexpected to be in full operation, energy savings are estimates to totalabout 119,000 toe p.a. valued roughly at US$8.5 million in constantNovember 1987 dollars based on projected economic prices of energy. Thisrepresents nearly 302 of the total potential energy savings in industry.In addition to the energy savings, the plants in many cases would derivesubstantial non-energy savings through general productivity improvementsassociated with energy conservation measures.

7.3 The economic analysis for pre-identified potential subprojects in46 audited plants is summarized in Annex 3-2. All costs and benefits areexpressed in November 1987 prices. Each subproject is assumed to beimplemented over two years with an economic life of 7-12 years aftercompletion. Economic capita. costs were derived after eliminating taxesand import duties, from the estimated base capital costs. Economic pricesfor energy resources are based on international prices for petroleum pro-ducts and LRMC for natural gas and power. The base case economic analysisused an average crude oil price, FOB Singapore, of US$15lbbl. Price offuel oil was derived from the crude oil price assuming constant product tocrude oil price ratio of 0.8 and subtracting transport costs of US$7/tonbetween Bangladesh border and Singapore since currently Bangladesh is a netexporter of fuel oil. The economic value of natural gas and power wasbased on LRMC estimated by IDA staff. The price of fuel oil, natural gasand power were assumed to remain constant (in real terms) during theProject life.

7.4 The base case economic rates of return (ERRs) for potential sub-projects are expected to range between 18? and over 1002 (Annex 3-2).Assuming that 118,000 toe p.a. energy saving is expected from subprojects

-30-

to be financed under the Project, and based on the total base Project costof US$13.6 million equivalent including cost of the institution strengthen-ing component less tax and duties (US$0.6 million equivalent), the overallERR for the Project is expected to be 432, as shown in Annex 7-1. The netpresent value of the net benefits attributable to the Project, assuming a122 opportunity cost of capital, is estimated at about US$17 million. Thisreflects characteristics associated with energy conservation projects ofhigh economic benefits derived from relatively small investments. The netpresent value of foreign exchange savings after foreign debt service, alsoassuming a 122 opportunity cost of capital, is estimated at about US$11million in November 1986 prices (Annex 7-2).

7.5 Sensitivity analysis was carried out for different prices of crudeoil, gas and power, which summarized in the following table.

Sensitivity Analysis

BaseCase Changes ERR NPV

(2) (US$ million)

Base Case - - 42.6 16.9

Sensitivity Analysis

Fuel Oil (US$/bbl) 10.96 -252 40.8 15.7+252 44.5 18.3

Natural Gas (US$/mcf)For Fertilizer 1.14 -25% 46.5 19.7

Other Industries 1.75 +252 38.4 14.1

Power (US$/Kwh) 7.34 -252 45.6 19.1+252 39.4 14.7

Combination of all the negative changes above 33.0 10.6

Results of the sensitivity tests to lower energy savings and differentenergy prices indicate that the Project will remain economically viableunder any reasonable change in the energy prices. Under the agreedeligibility criteria for subprojects, no subproject will be eligible forfinancing unless it is estimated to have an ERR of at least 182 (para 6.5).

-31-

B. Proiect Risks

7.6 The technical risks of the Project are considered moderate sinceinvestments would be of small size, consist of mostly modification/improve-ment of existing facilities, and be based on commercially proven technolo-gies. The Project risks are limited mainly to (a) slow demand forinvestments because of lack of awareness on the part of enterprises andtheir poor financial position, (b) institutional weaknesses; and (c) sub-loan repayments. These risks would, however, be mitigated by the followingconsiderationss the size of the Credit is kept sufficiently small to haveabout 60% of the Project, in terms of amount, already identified andreviewed by IDA. The risk of slow demand has also been minimized by aconservative estimate of six year implementation period. Technical assist-ance is being provided to EMU and, to a limited extent, to Agrani Bank toaddress institutional weaknesses. Application of strict financial andeconomic eligibility criteria should minimize the risk of default onsubloan repayments.

VIII. AGREEMENTS AND RECOMMENDATIONS

Agreements

8.1 During neogitations i.t was agreed that as conditions of crediteffectiveness the Government would:

(a) execute a financing agreement with ODA for technical assistance toEMU (para 5.3);

(b) transfer EMU, effective July 1, 1988, from the development budgetto the revenue budget (para 2.20); and

(c) cause EMU and Agrani Bank to appoint consultants (para 6.2).

8.2 During negotiations the Government agreed tot

(a) ensure the continued employment of a suitably qualified directorfor EMU (para 2.20);

(b) ensure regular participation by members in ECCG meetings (para2.22);

(c) adopt the agreed subproject approval procedures (para 6.6):

(d) cause EMS to introduce arrangements for recovery of costs relatedto energy audits and training (para 6.9); aad

(e) cause Agrani Bank to:

(i) disburse only against eligible subloan expenditures (para5.16);

-32.

(ii) follow agreed criteria for subproject evaluation (para 6.5);

(iii) follow agreed criteria for subproject approval (para 6.6);and

(iv) apply a maximum limit on subloans of US$3.5 million (para6.8).

Recommendation

8.3 With the above agreements the proposed project is suitable for anIDA credit of SDR 8.3 million (US$11.4 million equivalent) on standard IDAterms to the Government of Bangladesh.

ANNEX 2-1

-33-

BANGLADESH - INDUSTRIAL ENERGY EFFICIENCY PROJECT

CURRENT FINANCIAL AND ECONOMIC PRICES OF ENERGY PRODUCTS

FinancialFinancial Prices a/ Economic Prices b/ as X ofTk/Lt US$/ton cl Tk/Lt US$/ton c/ Economic

Petroleum ProductsGasoline 13.20 586 4.48 199 294Kerosene/Jet Fuel 6.87 280 4.29 175 1coDiesel 6.90 263 4.29 164 160Fuel Oil 4.70 163 3.21 111 147

Tk/mcf US$/mcf TK/mcf US$/mcf

Natural GasBulktFertilizer 24.82 0.80 29.10 0.96 83Power 24.82 0.80 26.99 0.89 90

Industrial 52.14 1.68 47.80 1.57 107Commercial 65.39 2.15 54.50 1.79 120Domestic 44.88 1.48 67.30 2.21 67

Tk/iWh USc/kWh Tk/kWh USc/kWh

ElectricityResidential 1.00-2.75 3.3-9.0 4.52 14.9 22-61Commercial 2.20-2.95 7.2-9.7 4.29 14.1 51-69Shops

IndustrialJute/Textile 2.50 8.0 2.82 9.1 88Other (LV) 3.10 10.0 2.54 8.2 122

Tklton US$/ton Tk/ton US$/ton

CoalSteam Coal 2,100 69 2,100 69 100Hard Coke 5,575 183 5,575 183 100

La Current prices effective since September 1987./b Economic prices are border prices for petroleum products and coal, and

long-run marginal cost of natural gas and electricity, estimated by IDAstaff.

ANNEX 2-2

-34-

I ii

1~~ X

j W 4~~~~~~~~~~

I~

RANGLADESH - INDUSTRIAL ENERGY EFFICIENCY PROJECT

Hnerav Consumntion by Industry for FYSSa,

(Qo00 toe)

Natural Petroleum Purchased bl Com. Energy Tradltlwoal

Gas Products Coal Electricity Subtotal Fuels (biomass) Total

Food and Agrlculture Products 23.1 70.4 - 193.3 286.8 743.2 l 1,030.0

Jute 20.8 16.2 - 80.7 117.7 12.9_1 130.6

Textile 28.7 8.3 - 54.5 91.3 3M7t' 95.2

Pulp and Paper 34.1 138.8 - 27.1 200.0 17.l1f 217.1

FortlIlsers 780.5 2.9 - 7.0 790.4 - 790.4

XNn-Metallic Mneral Products 121.5 2S.6 57.2 7.1 211.4 168. 4 379.8

Steel and Metal Products 18.9 56.2 9.9 15.2 100.2 0.3 100.7

Other 92-7 28-4 _ 102.1 222 2 7.5 229.7

Total Industry 1.119.3 346-8 67-1 487.0 2,020.2 953.3 2.973.5

Thermal Power (Net) 963.2 268.0 - _1231.2 - 1-231.2

Total Industry and Power 2,082.5 614.S 67.1 487.0 3,231.4 953.3 4.204.7

li Estimated by EM. Industry consumption figures are about 302 higher than those Indicated in paras. 2.9 and 3.7 of the text.

kI Electricity converted at the rate of 307 toelGWh, assuming 27.32 thwrmal converslon efficiency.

£1 Bagasse, rice husk and firewood.

d/ Jute dust and firewood.

el Firewood.

£/ 8lack liquor.

NME: Totals in this table do not Include energy consumption for small scale and cottage industrles.

-36-i MANNEX 3-2

RANeLADESU - INDusTRIAL ENERGY EFFIClECYP°OJBCLIST OP AUDITEDLIANTS

IfnergY Conservation Protectl iEtuJted Pro ect Cost Annual

Foreign Knorgy Not Annual Payback

Public Sector Interorlm Setor Sotl ExJhauo use Emrs StySavirs /a ER Peroj

(T mll.) (TX oll.) (too) (toe) (Tk mll.) (X) (TK mil

1. S. C. Fort. FaC.-Fenehuganj Fortilisor 16.0 4.7 141,902 17,541 23.94 0100 0.7

2. TSP Fertilier-ChittagSong Fortiliser 112.0 87.4 8,217 1,677 lb 42.05 Lk 24 2.7

3. Urea Fert. Fat-Ohorashal Fertillslr 25.6 18.7 268,487 13,553 18.51 e100 1.4

4. Ea FertLiLser Compny Fertilizer 70.0 44.5 357,974 26,623 44.60 90 1.5

S. tarnaphull Papor Will Pulp S Paper 7.7 3.1 46,444 3,859 8.11 71 0.8

6. Khulaa Nevsprint Mill Pulp & Paper 44.3 21.6 44,441 5,125 13.15 47 2.6

7. North Bengal Paper Mill Pulp 6 Paper 3.6 2.1 18,240 328 0.84 21 4.2

8. Sylhet Pulp and Paper Mill Pulp & Paper 6.1 1.4 20,630 2,627 5.52 61 1.0

9. Chundeeeherra Tea Estato Tea 1.5 - 800 178 0.62 62 2.7

10. Jagadishpur Toa Estato /e Tea 0.3 0.3 161 75 0.16 17 1.9

11. Mad-hpore Tea Estate Tea 1.5 - 800 178 0.62 62 2.7

12. Patrakols Tea Estat, Tea 1.5 - 800 178 0.62 62 2.7

13. Premnagar Tea Estate Tea 1.5 - 800 178 0.62 62 2.7

i4. Adamjee Jute Mill Jute 2.2 0.7 19,998 1.763 3.71 100 0.5

15. Crescent Jute Mill Jute 1.8 0.3 8,595 321 0.82 50 2.2

16. Baanladesh Jute Mill lo Jute 3.2 1.6 3,S06 391 0.82 17 4.2

17. Amin Jute Mill Jute 5.1 1.5 6,960 766 2.93 0100 1.6

18. Ashusanj Power Station Power 1.6 0.6 227,949 7.055 9.63 100 0.1

19. Ghorashal Power Station Pover 1.1 0.7 204,359 12,879 17.58 clOo 0.1

20. Ehulna Power Station Power 4.3 0.9 132,433 982 2.52 65 1.9

21. Siddhirganj Pover Statlon Power 2.6 1.5 119,414 199 0.51 18 5.2

22. Chhatak Cement Cement S Class 0.4 0.2 27,229 407 0.86 0100 0.5

23. !smania Clasa Cemant 4 class 0.1 - 15.247 468 1.01 0100 0.0

24 Dhaka Vegetablo Oil Food ProcesiLng 0.4 0.1 3,371 258 0.54 72 0.7

25. Mobarakganj Sugar Mill Sugar 2.0 0.9 11,396 1,054 2.27 0100 0.8

26. Zeal Bangla Sugar Mill Sugar 1.4 0.3 5,647 1,042 2.19 0l00 0.6

27. Chittaranjan Cotton Mill Textile 2.9 0.7 3.727 1.300 4.00 0100 0.7

28. Luxmi Narayan Cotton Mill Textile 1.5 0.6 2,713 799 1.68 83 0.8

29. Maghna Textile Mill Textile 0.4 - 1,173 66 0.14 40 2.5

30. OlympLa Textile Mill Textile 0.6 0.2 3,770 499 1.28 0100 0.4

31. Zeenat Textile Mill Textile 0.2 0.1 2.125 190 0.49 ¢100 0.4

32. Chittagong Steel Mill Steel 1 44.230 5.489 14.03 100 0.1

Total Publie Sector 325.0 194.7 1.753.438 108.058 194.12

Private Sector Enterorlses

1. Barsoora Tea gstate Tea 1.5 - 800 178 0.62 62 2.7

2. Dauracherra Tea Estate Tea 0.4 - 472 101 0.36 O100 1.4

3. Daundi Tea Estate Tea 0.3 - 276 105 0.22 32 1.4

4. HamidLa Tea Estate Tea 1.5 - 800 178 0.62 62 2.7

5. Maulivi Tea Estate Toe 1.5 - 800 178 0.62 62 2.7

6. Rajahat Tea Estate Tea 1.7 - 2,049 948 1.90 24 1.1

7. Chittagong BrLek Bricks 1 Ceramics 3.5 1.9 4,711 707 2.90 100 1.1

8. Conforce Briek Bricks & Ceramics 0.3 - 4,226 398 0.84 clO0 0.4

9. Haji Brick Bricks & Ceramics 0.0 - 885 28 0.06 0100 0.4

10. Mirpur Ceramic Bricks & Ceramics 2.1 1.1 2,938 897 1.89 61 1.0

11. Peoples Ceramic Bricks & Ceramics 0.9 0.2 3.057 274 0.58 38 1.4

12. Bangladesh Oxygen Chemical 0.6 - 1,285 38 0.24 56 2.4

13. Shavo Rice Mill Food Processing 5 38 76 016 24 3.6

Total Private Sector 148 2 22,684 4*106 11.01

Total Public S Private Sector 339 197.9 1 726.12 112.164 205.13

Coxeneration Project

Private Sector Enterorlse

1. A. K. Khan Group Textile/Jute 1549 8 llO4 8.771 3,968 39.63 22 4.1Total Energy Conservation aNd

Cogeneration Measures 4946 3 1.784.893 1J6 132 244.76

/a Non-energy savings or incremental operating costs attributable to energy conservation projects are not included.

lb Mostly fuel switching measures, which do not save energy but replace vith more economical anergy.

le Sub-projects vlth ERR of less than 181 vill not be eligible for financing under the Project.

_37_ ANNEX 4-1

BANGLADESH - INDUSTRIAL ENERMY EFFICIENCY PROJECT

CONSJLTINC SERVICESA. 2l2

Year I Year 2 Year 3 TotalTypes of Services Foreiin Local Foreii Local Foreistn Lal Foreln Losal

-N-------------------------- Man-month ------------------------

1. Training Instructor

ln Special Projects 2 - 1 - - 3

Promotion Specialist 2 - 2 - - - 4

MIS/Data Bank - 2 - - - - 2

Technlcal Experts

- Combustion Controll

Retrofitting 2 2 2 2 - - 4 4- CogeneratIon 2 2 2 2 - 2 4 6- Other _ _ 1 _ 1

Total _ _ 7 _4 1 a 11

2. Estimate Cost: For Rn Local Total-------- US dollars-------

Fee $12,000 x 16 man-months - 192,000 - 192,000Per Diem $60 x 480 days a - 28,800 28,800

Travel $2,000 x 6 tLmes a 32.000 - 32 000

224.000 28.800 252.800

Local Consultants

Fee $2,000 x 11 man-months a - 22 000 22 000

Total Base Cost a 224,000 50,800 274,800Price Escalation 22 400 5.080 27.480

Total Consulting Services to EMU a 246.400 5S880 302.280

B. Arani Bank

1. Requirements: Six man-months of foreign consultants to train Agrani staff in the economic appraisal

of energy conservation projects.

2. Estimated Cost:

Fee $12,000 x 6 nan-months a 72,000 - 72,000Per diem $60 x 180 days a - 10,800 10,800Travel $2,000 x 2 times - 4.000 - 4.000

Total Base Cost 76,000 10,800 86,800

Price Escalation (11) 8,360 8.360 1 190 9I550

Total ConsultLig Services to Agrani 84.360 11 990 96.350

C. Total Consultinn Services 364 080 872910 451,990

Annex 4-2

-38-

BANGLADESH - INDUSTRIAL ENERGY EFFICIENCY PROJECTPROPOSED TRAININO PROGRAM

Number of Partic"'sntsInstitution and Course Agr ni Estimated Cost s/

Name of Course Location Duration EMU Sank Industry Total '000 row Tk

Utility and lndustry TVA 8 weeko 2 1 - 8 so -Energy Conservation Tennessee, USA

LDC Energy Manager UP/3EU 6 weeks 4 1 8 18 130 -Progrm/PRACTICOM Phillippines

Industry Energy 9IDC, Bangladesh 2 weeks 4 2 109 17T6S/ - 526Conservation - Level I

Industrial Energy BMDC, Bangladesh I/ 1 week a 2 52 69 d/ - 120Conservatlon - Level It

Project Engineerlng SU, Bangladesh ! 2 weeks 7 2 - 7

Total: 28 8 168 109 160 646

Total--US '000 Equivalent--

ease Cost 160.0 20.9 100.9Price Esealotion (11w) 17.6 2.8 19.9Total Coast 177R§ 2E 20"

a/ Exeludes cost of consultants used as instructors Included In the cost of consulting services.S/ 26 participants per class moxiumt 8 classs given in Year 1, 2 and 2 In Year S.c; Prerequisites: Level followed by 8 to 12 months experience as Energy Manager/Coordinatora/ 15 psrtlclpant* per class maximum: 1 class given In Year 1, 2 In Year 2 and 1 In Year 3

/ To be conducted by foreign consultant(s)

ANNEX 5-1

-39-

BANGLADESH - INDUSTRIAL ENERGY EFPICIEN PROJECTEstimated Project Cost La

Local Foreign Total 8 of Total--US$ million equivalent-- Base Cost

Energy Conservation Invetment

Equipment, Materials & Spares 1.53 7.13 8.66 64.4Freight, Insurance & Handling 0.54 0.17 0.71 5.2Duties and Taxes 0.55 - 0.55 4.1Licensing & Engineering 1.23 0.67 1.90 14.1Civil Works & Construction 0.95 - .95 7.0

Subtotal 4.80 712.77 L2 1Z

Technical Assistance

Training 0.02 0.16 0.18 1.4Consultancy 0.08 0.33 0.41 3.0Administrative Expenses -- -X.0.15 1.1

Subtotal Q50.49 07 5

Total Base Cost 5. 8.46 13.51 100.0

Price Contingency 0.56 0.93 1.49

Total Financing Required 5.61 9.39 15.00

% of Total 37.4 62.6 100.0

/a Base cost estimate expressed in November 1987 prices.tb Estimated on the basis of already identified subprojects.L/ Includes local transport, office equipment, facilities and supplies, and

general and administrative expenses relating to technical assistancecomponent, estimated at about 25% of the costs for training and consultancy.

ANNEX 5-2Page 1 of 3

-40-

BANGLADESH - INDUSTRIAL ENERGY EFFICIENCY PROJECT

Brief Description of Agrani Bank

1. Agrani Bank is the third largest commercial bank in Bangladesh.It was established in March 1972 through the merger of Habid Bank Ltd. andCommerce Bank. It provides a wide range of commercial banking servicesincluding deposit taking, lending to productive activities and foreignexchange transactions. As of end 1986, it had total assets of Tk 26.4billion (US$857 million equivalent) and a network of 827 branches. Amongnationalized commercial banks (NCBs), Agrani is the biggest lender toprivate industry with outstanding advances as of December 1986 at Tk 15.2billion (US$494 million equivalent), corresponding to about 75% of itstotal loan portfolio. Term loans to small industries granted under theIDA-financed Third Small Scale Industry Project (Credit 1065-BD) amountedto TK 166.3 million (US$5.4 million equivalent).

2. Agrani Bank is a relatively better performer among NCBs. Itstotal revenues in 1986 were Tk 2.3 billion (US$75 million equivalent) andnet income Tk 278 million (US$9.0 million equivalent). Its gross incomeand profits grew at 31% p.a. and 32% p.a. respectively during 1981-86. Itscollection performance is also generally better than other NCBs; its annualcollection ratio improved from 38.8% in the fiscal year ended in June 1986to 43.9% in FY87. Agrani has gained experience under the Third Small-ScaleIndustry Project in using good appraisal standards and procedures. Incomestatements and balance sheets of Agrani Bank for 1981-86 are presented inAttachment 1 and 2.

3. Agrani Bank has a total staff of about 11,196 including 3,951officers, 4,897 clerical and 2,348 support staff as of December 31, 1986.The Board of Directors is responsible for its policy formulation. TheManaging Director, Chief Executive Officer, is accountable to the Board.Under the proposed Project, Agrani Bank, as GOB's financial agent, will beresponsible for review, approval and supervision of energy conservationsubprojects. The Industrial Development and Finance Department (IDFD) atthe headquarters, which handles all industrial term lending operations with18 officers, including 4 engineers and 12 financial analysts andeconomists, will be responsible for such review/supervision. Itscapabilities in this area will be strengthened through training andprovision of foreign consultants (6 man-months). As part of the trainingprogram, Agrani expects to send about 8 IDFD staff to foreign and localtraining courses in energy conservation.

ANNEX 5-2Page 2 of 3

-41-

BANGLADESH - INDUSTRIAL ENERGY EFFICIENCY PRO4E.

Agrani Bank - Income Statement (1981-86)(million Taka)

1981 1982 1983 1984 1985 1986

Income

Interest Earned 465.7 571.2 771.8 1,169.0 1,730.2 2,058.0

Commissions Earned 120.3 104.0 136.8 145.4 203.2 185.6

Other Income 10.5 14.1 22.7 41.1 72.4 85.4

Total Income 596.5 689.3 931.3 1.355.5 2,005.8 2,329.0

ExDenditures

Interest Expenses 306.2 385.4 546.9 875.0 1,235.8 1,529.4

Admin. Expenses 202.5 193.5 235.7 270.1 397.6 466.9

Other Expenses 19.7 21.4 29.9-I ALI 54.8

Total Exuenditure 528.4 600.3 812.5 1.184.6 1.682.6 2.051.1

Net Profit before Tax §8A 89.0 118.8 17Q.9 323.2 277.9

Net Profit/Income (%) 11.4 12.9 12.8 12.6 16.1 1.9

ANNEX 5-2

-42- Page 3 of 3

BANGLADESH - INDUSTRIAL ENERGY EFFICIENCY PROJECT

Agrani Bank - Balance Sheets (1981-86)(million Taka)

Assets

Cash and Deposits 921.7 1,164.4 1,167.9 2,087.2 2,402.1 1,918.1

Loans & Advances 7,036.7 7,546.2 10,681.7 16,780.0 18,474.8 18,368.1

Investments 1,150.2 1,273.6 2,293.4 3,126.5 3,406.1 4,735.1

Fixed Assets (Net) 47.8 46.4 47.2 91.3 118.8 131.4

Other Assets 352.0 368.9 515.6 1,000.1 1,360.2 1,267.2

total Assets 9.509.3 10.339.5 14.705.8 23.085.1 25.762.0 26.419.2

Liabilities & Equirt

'Liabilities:

Deposits 5,713.6 7,065.7 10,266.4 14,413.0 17,423.0 19,667.7

Borrowings 849.0 388.2 686.0 2,719.2 1,927.3 2,219.6

Other Liabilities 2.864.2 2.862.6 3,665.6 i§55_.l 6.275.5 4,439L9

Total Liabilities 9.426.8 10.316.5 14.618.0 22.988.1 25.625.8 26.318.2

Equity:

Paid-in Capital 30.0 30.0 30.0 35.0 35.0 35.0

Reserves 52.5 54.0 57.8 62.0 101.2 66.7

Total Eguity 82. 83. 8787. 136.2 101.7

Total Liabilitiesand EgLty 9.509.3 10.399.5 l14705.8 23.085.1 25.'62.0 26.419.9

Annex 5-3

-43-

BANGLADESH - INDUSTRIAL ENERGY EFFICIENCY PROJECT

Proposed IDA Credit Allocation

Category US$ million Eligible Expenditures

A. Institution Strengthening Component 0.10 1002 of consultingservices to Agrani

Bank

B. Energy Conservation Investment 11.34 802 of the amountsComponent disbursed by the

enterprises forapproved subprojects

Total Credit 11.44

Estimated Disbursement Schedule For IDA Credit

DisbursementDuring Cumulative Cumulative

Year Semester Disbursements Disbursments-------- US$ million -------- --- (X) ----

1989January - June 0.23 0.00 2July - December 0.23 0.46 4

1990 January - June 0.68 1.14 10July - December 1.26 2.40 21

1991 January - June 1.60 4.00 35July - December 1.83 5.83 51

1992 January - June 1.72 7.55 66July - December 1.49 9.04 79

1993January - June 1.03 10.07 88July - December 0.68 10.75 94

1994January - June .23 10.98 96July - December .23 11.21 98

1994January - June 0.12 11.33 99July - December 0.11 11.44 100

Total 11.44

ANNEX 7-1-44-

BANGLADESH - INDUSTRIAL ENERGY EFFICIENCY PROJECT

Economic Analysis for tne Pro1ect

(in thousands of November 1986 USS)

19 19,9 1991 1992 1993 1994 1995 1996 1997

Incremental Benefits - - 353 1,852 4,499 6,969 8,292 8,821 8,821

Incremental Costs

Operating - - (29) (152) (370) (572) (681) (725) (725)

Capital 5 (2.203) (3.888) (3.629) (1.944) (778) - -

Net denefits (518) (2,203) (3,564) (1,929) 2,185 5,619 7,611 8,097 8,097

1997 1998 1999 2000 2001 2002 2003 2004

Incremental Benefits 8,821 8,821 8,821 8,468 6,969 4,322 1,852 529

lncremntal Costs

Operating (725) (725) (725) (696) (572) (355) (152) (43)

Capital _

Net Benefits 8,097 8,097 8,097 7,773 6,396 3,967 1,700 486

Economic Rate of Return - 42.61

Present Value of Net Benefits

Discounted

at 122 - US$16.9 million

ANMEX 7-2

-45-

BANGLADESH - INDUSTRIAL ENERGY EFFICIENCY PROJECTForeign Excohanse Savinas

(US$000 in November 1987 prices)

1989 1990 1991 1992 1993 1994 1995 1996 1t97

OutflowsForeign Capital Expenditures 348 1,428 2,585 2,359 1,235 483 - -

Debt Service on IDA Credit

Service Charges 55 52 57 64 71 75 75 74 72Prinnipal - - - - - - - - -

Total Outflows 402 1,481 2.642 2.423 1.307 558 75 74 72

Outflows

IDA Credit Disbursement 444 1,826 3,304 3,015 1,579 617 - - -

Energy SavLngs 110 578 1,403 2,173 2,585 2,750 2,750 2,750 2,750

Total Inflows 554 2,403 4.706 5,187 4.164 3.367 2.750 2,750 2.750

Foreign Exchange Savings 152 922 2.064 2.764 2.857 2.809 2.675 2.676 2.678

1997 1998 1999 2000 2001 2002 2003 2004

Outflows

Capital Expenditures - - - - - - - -

Debt Service on IDA CreditService Charges 70 67 65 62 59 57 54 52

Principal 94 184 18C 175 172 168 164 9.648

Total Outflows 164 251 244 237 231 224 218 9.700

Inflows

IDA Credit Disbursement - - - - - - - -

Energy Savings 2.750 L2750 2.750 2.640 2,173 1.348 578 165

Total Inflows 2.750 2,750 2.750 2.640 2.173 1.348 578 165

Net Foreign Exchange Savings 2,586 2.499 2.506 2.403 1.942 1.123 360 (9.535)

Present Value of Net Foreign

Exchange Savings, Discounted

12X = US$11.1 Million