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AT Capital

The Global Financial Crisis: Lessons Learnt in the Electricity Sector

in Bangladesh

Ifty Islam, Managing [email protected]

Asian Tiger Capital Partners, Feb 9,2011

www.at-capital.com

1Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com

Key Themes

• The energy crisis is the single biggest constraint on Bangladesh prospects for increasing

growth. It has been estimated that Bangladesh currently faces an energy deficit of around

2000MW, which has resulted in regular load-shedding and the need for greater usage of

expensive diesel generators.

• This contrasts with the demand driven after-effects of the global crisis on developed economies

where the credit crunch was driven by the supply side, namely banks with impaired balance

sheets becoming increasingly risk-averse and tightening both the quantity and price of credit to

borrowers.

• The Bangladesh economy proved to be one of the most resilient in the world to the fallout from

the global crisis with GDP growth in FY 2008/9 only declining to 5.9% from 6.2% in FY 2007/8.

• But this is not the primary reason that the Global Crisis did not affect the energy sector in

Bangladesh significantly. That was driven by the lack of significant new large scale energy

projects and energy generation capacity addition for much of the previous 7 years.


Key Themes

• If Bangladesh had a large scale energy sector building programme in place, as it should have

done over the 2007-2008 period, then it would undoubtedly have been badly affected by the

global crisis. This is because the limited amount of domestic private sector financing capacity

for large scale infrastructure projects would have made it reliant on international commercial

bank as well as multilateral financing.

• In a recent presentation given in Energy Road Shows held in January 2010, in Singapore, the

GoB stated that they plan to add 8,882 MW of generation capacity by FY2015 – this represents

an addition of 5,275MW in newly announced initiatives to the their existing plan of 3,547 MW.

The GoB estimates that to develop the new initiatives of 5,275MW, this will require USD 7.1bn

of investment.

• One of the key constraints is the domestic capacity for financing by the local commercial banks.

It is true that Bangladesh Bank imposes Single Borrower Exposure Limits capping exposure to

companies seeking finance, making a theoretical maximum syndication, if all the private

commercial banks participated, of USD 600 mn to a single sponsor. However, in reality, the

total amount available to a single sponsor is likely to be much smaller.


Key Themes

• Our analysis of the financing of larger energy projects reinforces the notion that overseas

financing, both from multilateral agencies and international commercial banks and developers,

will remain a dominant component of energy deals.

• A major challenge for Bangladesh is tapping domestic capital markets for infrastructure projects

that have large local construction cost components. Being able to tap domestic capital markets

would channel its high domestic savings of 30%, which represents a surplus over investment of

around 5% of GDP, into needed and profitable infrastructure investments.

• To be able to finance infrastructure development, Bangladesh will have to embark on a strategy

that aims at improving intermediation of domestic financial savings so that they are channeled

to meet the specific requirements of infrastructure investment such as those relating to risk,

tenor and scale.

• A first imperative for domestic capital market development is the accumulation of contractual

savings pools, which channel savings towards securities, through institutional investors. The

most important of such pools, from the point of view of investments in long-term instruments as

required for infrastructure, are pension funds and life insurance funds. The rules governing

such funds should permit them the flexibility to invest in corporate bonds and equities.

Energy Sector Financing Requirements


Present Power Situation

• Distribution

– Power distribution is solely controlled by government entities.

• Transmission

– The Power Grid Company of Bangladesh (PGCB) is the only company responsible for

power transmission.

– The main reason for high system loss is the inefficient transmission and distribution

system of state owned companies.

• Power Generation

– The generation capacity in Bangladesh is presently about 5,250MW.

– About 45% of the population presently has access to electricity.

Present Generation Capacity (Derated) (MW) : 5,250

Present Demand (MW) : 4,200 ~ 5,500

Present Available Generation (MW) : 3,800 ~ 4,300

Recent Maximum Generation (MW) : 4296 (Sept. 18, 09)

Maximum Load Shedding in FY-09 (MW) : 1,270 (April 23, 09)

Present Power Generation Scenario

Source: Generation Expansion Plan up to 2014, Power Division, MPEMR



Investment Plan and Fund Requirements

• In the face of the persistently growing supply gap,

the GoB developed a Power System Master Plan

(PSMP) in 2005 . The PSMP estimated that

Bangladesh will need over 22,000 MW of capacity in

2025 .

• GoB stated that they plan to add 8,882 MW of

generation capacity by FY2015 – this represents an

addition of 5,275MW in newly announced initiatives

to the their existing plan of 3,547 MW.

Power System Master Plan - 2006 (Base Case)

New Generation Plan up to 2015

Source: GoB, Power Division



• The estimated total investment cost over the next 5-6 years is around USD 7 billion for

generation, USD 1 billion for transmission, and USD 1.5 billion for distribution, for a total

investment of around USD 9.5 billion.

Description Total Investment (USD mn) Equity (USD mn) Debt (USD mn)

New Initiative 530 MW Rental Projects 424 106 (25%) 318 (75%)

New Initiative 820 MW Public Sector Peaking Plan 1000 400 (40% from GoB) 600 (60%)

Combined Cycle and Peaking Plants in Private Sector: 1325 MW 1500 375 (25%) 1125 (75%)

Solar and Wind Projects: 110 MW 200 50 (25%) 150 (75%)

2600 MW Coal PPP 4000 1000 (25%) 3000 (75%)

Total Generation 7124 1925 5175

Transmission 1000

Distribution 1500

Total Investment 9624

Source: GoB, Power Division


Funding Gap

• The total GoB allocation for Power sector in FY09-10 is about USD 442mn; GoB financing

by itself will be inadequate given the total investment needed for the power generation

sector. As a result, we need increased participation by multilateral agencies and the

private sector.

USD Million 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Total

Forecasted ADP 4,420.3 4,420.3 4,420.3 4,420.3 4,420.3 4,420.3 26,521.7

ADP allocation for Power 530.4 623.2 660.6 700.2 742.2 786.7 4,043.3

Required Capacity Addition (MW) 1,282.0 970.0 950.0 2,300.0 2,020.0 1,300.0 8,822.0

Investment Required 1,730.7 1,309.5 1,282.5 3,105.0 2,727.0 1,755.0 11,909.7

GOB public project allocation 207.7 157.1 153.9 372.6 327.2 210.6 1,429.2

Private Sector Projects 1,523.0 1,152.4 1,128.6 2,732.4 2,399.8 1,544.4 10,480.5

Small Private Sector Projects 167.5 126.8 124.1 300.6 264.0 169.9 1,152.9

Large Private Sector Projects 1,355.5 1,025.6 1,004.5 2,431.8 2,135.8 1,374.5 9,327.7

Total Equity Funding for large projects 406.6 307.7 301.3 729.6 640.7 412.4 2,798.3

Total Debt Funding for large private projects 948.8 717.9 703.1 1,702.3 1,495.1 962.2 6,529.4

Debt Financing of Large Private Projects:

International Commercial Finance 271.4 205.3 201.1 486.9 427.6 275.2 1,867.4

IFI Loan ( IFC, ADB) 271.4 205.3 201.1 486.9 427.6 275.2 1,867.4

IDCOL Funding 271.4 205.3 201.1 486.9 427.6 275.2 1,867.4

IPFF 67.4 51.0 49.9 120.9 106.1 68.3 463.6

Assumed Unfunded Amount 67.4 51.0 49.9 120.9 106.1 68.3 463.6

Funding Gap

IFI Loan ( IFC, ADB) 271.4 205.3 201.1 486.9 427.6 275.2 1,867.4

IDCOL Funding 271.4 205.3 201.1 486.9 427.6 275.2 1,867.4

IPFF ( World Bank funded facility) 67.4 51.0 49.9 120.9 106.1 68.3 463.6

Funding Gap ( eg IDA) 67.4 51.0 49.9 120.9 106.1 68.3 463.6

677.5 512.6 502.0 1,215.4 1,067.5 687.0 4,662.0

Forecast Funding Requirements 2010-2015

Source: AT Capital Research

Project Financing in Bangladesh


Domestic Finance Sources for Power Projects

• Domestic Sources of Finance:

– Local Banks

– Infrastructure Development Company Limited (IDCOL}

– Investment Promotion and Financing Facility (IPFF)

– Capital Markets

– Domestic Infrastructure Funds

• Although some local currency financing can play a growing role in supporting energy

generation, international funding sources will likely remain the major source of funding, at

least for the larger projects.

• The capacity for domestic financing of IPPs in Bangladesh differs considerably depending on

the size of the funding requirement. Power projects up to around USD 70-100mn can

broadly be financed with domestic sources of finance.

• However, for projects exceeding this, a significant proportion of the financing will likely have

to be sourced internationally, with IDCOL, IPFF and international banks with local offices

providing offshore finance (i.e. HSBC, Standard Chartered, Citi NA) being the only

substantial providers of foreign currency debt in Bangladesh.


Local Banks – Relatively Small Loans

• Loan amounts are typically limited to relatively small sizes with limits imposed by

Bangladesh Bank on single party exposure. Syndications and club financing are the

favoured means to increase pooled finance, but it has been estimated that projects in excess

of USD 70-100mn are difficult to finance locally.


BorrowerAmount in

USD mn

Amount in

BDT mn

Tenor

(in years)

Lead

Arranger

Total

ParticipantsParticipants

Biman Bangladesh Airlines 114.5 8,140.2 2 Eastern Bank 10

AB Bank, BRAC Bank, Dhaka Bank, IFIC Bank,

Mutual Trust Bank, National Bank, Prime

Bank, The City Bank and Premier Bank

Summit Power Ltd. 57.1 4,059.8 n/a IIDFC 10

IDCOL, Bank Asia Limited, NCC Bank Limited,

United Commercial Bank Limited,

Mercantile Bank Limited, BIFC, SABINCO,

and Uttara Finance LimitedAxiata (BD) Ltd. 44.0 3,128.4 6 n/a n/a n/a

Warid Telecom International Ltd. 43.3 3,078.6 6 n/a 22 n/a

Shung Shing Power Ltd. 41.0 2,915.1 6 n/a n/a n/a


Local Bank Financing Capacity Constraints

Banks

Paid up Capital

in BDT mn

Paid up Capital

in USD mn

Total Capital in

BDT mn

Total Capital in

USD mn

Exposure Limit

in BDT mn

15%

Exposure Limit

in USD mn

15%

A. State Owned Banks1. Agrani Bank Ltd. 4,968.4 69.9 9,167.2 129.0 1,375.1 19.42. Janata Bank Ltd. 5,000.0 70.4 13,860.4 195.1 2,079.1 29.33. Rupali Bank Ltd. 1,250.0 17.6 -5,581.8 -78.6 n/m n/m4. Sonali Bank Ltd. 9,000.0 126.7 30,475.4 428.9 4,571.3 64.3B. Private Banksa) Private Banks (Excld. Islami Banks)1. AB Bank Ltd. 3,205.3 45.1 13,044.8 183.6 1,956.7 27.52. National Bank Ltd. 4,412.1 62.1 13,676.6 192.5 2,051.5 28.93. City Bank Ltd. 3,927.8 55.3 7,812.0 110.0 1,171.8 16.54. IFIC Bank Ltd. 2,179.8 30.7 5,618.6 79.1 842.8 11.95. United Commercial Bank Ltd. 2,910.0 41.0 6,909.2 97.2 1,036.4 14.66. Pubali Bak Ltd. 4,968.6 69.9 11,755.1 165.4 1,763.3 24.87. Utara Bank Ltd. 2,396.0 33.7 8,863.3 124.7 1,329.5 18.78. Eastern Bank Ltd. 2,920.8 41.1 9,770.0 137.5 1,465.5 20.69. NCC Bank Ltd. 4,501.3 63.4 8,575.0 120.7 1,286.2 18.110. Prime Bank Ltd. 5,776.4 81.3 21,978.0 309.3 3,296.7 46.411. Southeast Bank Ltd. 6,930.8 97.5 16,029.4 225.6 2,404.4 33.812. Dhaka Bank Ltd. 2,659.6 37.4 5,884.9 82.8 882.7 12.413. Dutch Bangla Bank Ltd. 2,000.0 28.1 5,777.7 81.3 866.7 12.214. Mercantile Bank Ltd. 4,072.2 57.3 6,256.9 88.1 938.5 13.215. Standard Bank Ltd. 3,172.9 44.7 5,348.3 75.3 802.3 11.316. One Bank Ltd. 2,057.2 29.0 4,396.1 61.9 659.4 9.317. Bangladesh Commerce Bank Ltd. 920.0 12.9 1,018.7 14.3 152.8 2.218. Mutual Trust Bank Ltd. 2,119.6 29.8 4,176.5 58.8 626.5 8.819. Premier Bank Ltd. 2,915.0 41.0 5,138.8 72.3 770.8 10.820. Bank Asia Ltd. 3,002.7 42.3 6,864.9 96.6 1,029.7 14.521. Trust Bank Ltd. 2,217.6 31.2 4,739.3 66.7 710.9 10.022. Jamuna Bank Ltd. 2,973.5 41.9 4,435.4 62.4 665.3 9.423. BRAC Bank Ltd. 2,677.0 37.7 8,760.2 123.3 1,314.0 18.5b) Islami Banks1. Islami Bank Bangladesh Ltd. 7,413.1 104.3 22,609.8 318.2 3,391.5 47.72. ICB Islami Bank Ltd. 6,647.0 93.6 -5,191.3 -73.1 n/m n/m3. Al-Arafah Islami bank Ltd. 4,677.3 65.8 3,948.8 55.6 592.3 8.34. Social islami Bank Ltd. 2,987.8 42.1 3,889.9 54.7 583.5 8.25. EXIM Bank lItd. 6,832.3 96.2 10,787.5 151.8 1,618.1 22.86. First Security Islami Bank Ltd. 3,036.0 42.7 5,385.6 75.8 807.8 11.47. Shahajalal Islami Bank Ltd. 3,425.1 48.2 6,573.4 92.5 986.0 13.9Total 44,029.1 619.7

Capacity of Local Banks' Single Borrower Exposure


Local Banks – Cost of Finance and Limited Tenure

• Local commercial banks are largely limited to making loans with a maximum term of 5-7 years and

generally require equity of 25 % - 35%. Currently, interest rates stand at about 12.5% (base rates of

around 8% + margin of 4.5%).

• Importantly, beyond supply side issues, demand side factors - the impact of investor returns and

competitive bid tariffs, suggest that sponsors will invariably opt for international finance sources at lower

cost of finance and longer tenures.

• For example, assuming a minimum benchmark equity IRR of 25% those with an internationally financed

package could illustratively bid at 4.375 cents per kWh, while locally financed on 6 year tenures could bid

at 5.125 cents per KW hr - a 16.4% difference. This could be the difference between winning a bid and

losing a bid.


IDCOL and IPFF

• IDCOL has funding available for long-term financing of IPPs. The Government has

contributed an additional USD 350 million in local currency to IDCOL for project financing,

and the Asian Development Bank (ADB) is currently conducting due diligence on making

USD 165 million in funding available to IDCOL; this amount could be increased to USD

500mn. Importantly, the ADB made a direct infusion of USD 50 million into IDCOL without

the requirement of a Ministry of Finance repayment guarantee.

• Bangladesh Bank will resume its re-financing facility under its IPFF Project. The World Bank

signed a draft agreement with the Bangladesh Government on 20 March 2010, providing

USD 257mn, USD 7mn of which is allocated for Technical Assistance (Financial Express, 25

March 2010). The proposed disbursement has yet to be finalised.


Capital Markets and PPP

Capital Markets:

• The Bangladesh Capital Market remains at a relatively nascent stage in terms of offering a

diversified range of financing products. There is a small, illiquid and poorly functioning

corporate bond market, thus providing limited sources of debt finance.

• The stock market is well positioned to enable raising equity capital at attractive valuations for

listed operators. For Greenfield projects sponsored by non-listed sponsors, there are

precedents of Greenfield IPOs raising capital at par value.

• Relatively high trading valuations of listed energy operators from an exit perspective provide

additional upside, beyond project economics for operators and investors alike, making

investment in power projects in Bangladesh attractive.

Domestic Infrastructure Funds/PPP

• There are currently no commercial domestic infrastructure funds. A PPP program announced in

the 2009/10 Budget included a proposed government facility of Tk 1600 Crore (USD 310mn),

which has yet to come into operation.

• Energy Ministry has proposed setting up a fund focused on financing power generation and

exploration projects.


Risk Mitigation

• The majority of the risks associated with large IPP Projects are mitigated by the Project’s

contractual structure, including GOB guarantee, and various risk mitigation instruments provided

by Multilateral Agencies that will likely be part of the security package.

• Bangladesh Government Guarantees : The current proposed drafts of the Implementation

Agreement, Power Purchase Agreement and Gas Supply Agreement for Bibyana include a

government guarantee.

• IDA/ADB Partial Risk Guarantee : IDA offers Partial Risk Guarantees that can support loan

guarantees to private-sector projects in countries eligible for concessional lending from the IDA.

PRGs can cover a range of risks relating to government performance

Government

Undertaking Guarantee

Indemnity Agreement

LoansProject Company

Commercial Lender

World BankGOB

• Multilateral Investment Guarantee Agency (“MIGA”) : MIGA is part of the World Bank

group and offers political risk insurance to international investors.


History of Power Financing in Bangladesh 2001-2002

• There are limited precedents for the financing of large IPP projects in Bangladesh.

• The most recent projects are Haripur in 2001 and Meghnagat in 2002.

– Both projects had sponsor equity, large IFI, and commercial banking components.

– They are both indicative of the likely financing structure that would be appropriate for

Bibyana.

Equity: USD mn

Base sponsor equity 31.0 45.6% 17%

Subordinated sponsor loan 37.0 54.4% 20%

68.0 100.0% 37%

Debt:

Commercial debt* 60.9 53.0% 33%

IFC direct loan 40.0 34.8% 22%

IFC syndicated loan 14.0 12.2% 8%

114.9 100.0% 63%

Total 182.9 100%

Key features: * guaranteed with IDA's USD 60.9mn PRGGOB Indemnity agreement with IDAUS Libor rate + 2%15 yr financing

Haripur

Haripur Power Project Meghnaghat Power Project

Source: AT Capital Research Source: AT Capital Research


Indicative Project Finance Structure for Large IPPs

• We detailed in our report an indicative funding structure for a 400 MW Gas Fired Plant, with

total project cost of USD 400mn.

• Assuming that equity finances 20-30 percent of project cost and that maximum use is made

of export credit, there remains a significant financing gap.

• Therefore, funds for long gestation private power projects can be mobilized only with

significant support and comfort provided by multilateral development banks and export

credit agencies.

400 MW Gas – Indicative Structure



Indicative Project Finance Structure for Large IPPs


A Strategy to Increase Domestic Infrastructure Financing Capacity


A Strategy to Increase Domestic Infrastructure Financing Capacity

• One of the key lessons from the Impact of the Global Crisis on Developing Economies is the

need to have a balance between international and local financing of energy projects.

• Bangladesh enjoys an annual savings surplus (Gross National Saving-Gross National

Investment) of around 5% of GDP or $ 4.5 bn. A key challenge in solving Bangladesh’s

energy crisis is how best to channel this domestic private sector capital into infrastructure

financing.

Regional Investment and Savings Scenario



Issues to be resolved for Infrastructure Financing

• A growing number of developing countries have developed their securities markets and long-

term savings institutions, allowing them to tap domestic markets for infrastructure finance,

and we believe some lessons are relevant to Bangladesh.

• Some key issues to be resolved for Bangladesh include:

Equity Financing

Debt Financing

Corporate Bond Market

Securitization

Insurance Companies and Pension Funds

Infrastructure Project Assessment Capability

Put Options / Exit Strategies

Fiscal Incentives

Diaspora Infrastructure Bond

IPOs

Infrastructure Development Funds

Conclusion


Conclusion

• The Bangladesh economy proved to be one of the most resilient in the world to the fallout from the

global crisis with GDP growth in FY 2008/9 only declining to 5.9% from 6.2% in FY 2007/8.

However, this is not the primary reason that the Global Crisis did not affect the energy sector in

Bangladesh significantly. That was driven by the lack of significant new large scale energy projects

and energy generation capacity addition for much of the previous 7 years.

• The recent GoB Energy Roadshows held in London, Singapore and New York in December 2009

and January 2010 underline their commitment to market energy opportunities in Bangladesh,

reduce misinformation and also learn about, and in the future address and allay, concerns

potential foreign players may have about participating in the energy sector.

• It is hoped that over the course of the next 6-9 months, winner that one of the major power projects

awarded secures a sustainable financing package that will give greater comfort to other

international energy players to seriously consider Bangladesh.

• We remain optimistic that over the next 12-18 months, completed GoB energy tenders can attract

overseas multilateral and commercial funding. The resulting reduction in the supply-demand gap in

power generation will have undoubtedly be the largest single stimulus to accelerating growth and

thereby poverty alleviation in Bangladesh.

Documents

AT Capital - esmap.org Global Financial Crisis... · AT Capital The Global Financial ... • In a recent presentation given in Energy Road Shows held in January 2010, ... Warid Telecom