FRRP Final Report Summary

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Final Report - SummaryAugust 2006

Power Cell

Power Division Ministry of Power,

Energy and Mineral Resources,

Governmentof Peoples Republic of Bangladesh

PowerSector DevelopmentTechnical AssistanceProject

(IDA Credit# 3913-BD and Grant#H092-92)

Power Sector Financial RestructuringandRecoveryPlan

in association with

HB Consultants& Pathmark Ltd


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Table of Contents

1. Introduction......................................................................................................... 1

2. Developmentof the PowerSector and ReformProcess............................................. 1

3. Financial Situationof the ExistingSector Entities..................................................... 3

4. Financial Restructuringof the BalanceSheets......................................................... 4

4.1 Recommended Measures.....................................................................5

4.2 Results.................................................................................................. 7

5. Financial RecoveryPlan........................................................................................ 8

5.1 Performance Improvement ...................................................................8

5.2 Tariff Rationalization and Adjustment....................................................9

5.3 Improvement of Corporate Governance..............................................10

5.4 Market Governance.............................................................................10

5.5 Commercialization...............................................................................11

6. Financial Projections.......................................................................................... 12

6.1 Tariff Calculations................................................................................12

6.2 Results of the Financial Projections for Alternative Scenarios.............13

6.3 Impact on Government Budget............................................................16

7. Time-boundActionPlan for Financial Restructuringand Recoveryof the PowerSector

.................................................................................................................... 17

899.001 / 137717292.doc i

Sarweystrae 370191 Stuttgart GermanyPhone: + 49 - 7 11 - 89 95 - 0Fax: + 49 - 7 11 - 89 95 - 715

Please contact: Dr. Andreas Korn

Extension: 440e-mail: [email protected]
mailto:[email protected]:[email protected]


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1. Introduction

In response to the unsatisfactory financial situation of the power sector ofBangladesh, the World Bank commissioned Fichtner in August 2005 with the

preparation of a financial restructuring and recovery plan for the entire powersector of Bangladesh. The objective of this project is to define, in co-operationwith the Ministry of Energy and the sector entities, a realistic plan to restore thesector's financial viability and creditworthiness within a reasonable timeframe.

This report summarizes the contents of the Draft Final Report prepared for theproject.

2. Development of the Power Sector and Reform Process

Bangladeshs power sector is still dominated by public enterprises and the

Ministry of Power, Energy and Mineral Resources (MPEMR). The MPEMR isresponsible for policy-making and regulation, oversees the sector operations andis involved in important decisions.

Power generation is still mostly in the hand of Bangladesh Power DevelopmentBoard (BPDB), although in the meantime six Independent Power Producers(IPPs) sell electricity to BPDB through long-term government-guaranteed PowerPurchase Agreements (PPAs). The Ashuganj Power Station Company Limited(APSC), a wholly owned subsidiary of BPDB, has been founded in 2003 andoperates now as a private company.

The transmission activity has been spun off from BPDB and Dhaka Electric

Supply Authority (DESA) to Power Grid Company of Bangladesh (PGCB). PGCB,founded in 1996 as a wholly owned subsidiary of BPDB, is now responsible forthe dispatch and the operation and maintenance of most of the high voltagetransmission grid in Bangladesh.

The power distribution is split between several companies:

Electricity supplies in the Greater Dhaka area is undertaken by DESA and

Dhaka Electric Supply Company (DESCO). DESA was formed as Authority in1990. Several supply areas have been spun off from DESA and transferred toDESCO.

DESCO has been corporatized in 1996 as a wholly owned subsidiary of

DESA. It started commercial operations in 1998. Electricity supply in urban areas outside of Dhaka is covered by BPDB. Until

recently this comprised four distribution zones: West, North-west, Central,South.

West Zone Power Distribution Company (WZPDC), incorporated in 2003,

took over the electricity supply in the area of five towns around Khulna in April2005.

Electricity supply in rural areas is performed through 70 consumer co-

operatives (PBSs) which are co-ordinated and monitored by the RuralElectrification Board (REB).

The power sector of Bangladesh is currently undergoing a reform, based on theprogram laid down in the Governments Vision and Policy Statement of 2000 andother policy papers. Most relevant is the Three-Year Road Map which sets out

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the time-bound action plan of the reform process for the period from 2006 to2008. The major activities are the following:

BPDB will be converted into a holding company for the entire power sector.

The Government shares in DESA and DESA's shares in DESCO will betransferred to the BPDB holding.

The existing power generation stations are to be converted into profit centers

and later into separate companies under the ownership of the BPDB holding.

The new generation company Electricity Generation Company of Bangladesh

(EGCB) will finalize the construction of the gas turbine plants and sell thepower to the Single Buyer.

New generation will be established through a mix of private and public

sources.

Transmission will continue to be operated by PGCB as a system operator and

wheeler of electricity.

The BPDB distribution will be converted into three distribution companies,

owned by the BPDB Holding (North-West Zone, Central Zone, South Zone).

DESA will be corporatized.

BPDB will continue to operate as the Single Buyer, until a Single Buyer will be

established as an independent entity.

The single-buyer market has been nominated as the preliminary market structureof the Bangladesh Power Sector. It forms a good basis to move towardsincreasingly competitive forms when the power market has matured.

The envisaged structure of the Bangladesh power sector is depicted in Figure 1.

West

Zone

PDC

Transmission Operator

PGCB

DESA -

CO DESCO

Tariffs

CentralZone

PDCREB

BPDB -generators

EGCB APSC

Wheeling Charges

PurchaseAgreements

Retail Customers (urban area)

IPPs

North

West

ZPDC

SPPs CPPs

South

Zone

PDC

Eligible

Customers

Single Buyer /

Market Operator

Retail Customer PBSs

DISTRIBUTION

Network

Direct

Contracts

Electricity Flows Monetary Flows

Wheeling Charges

Figure 1: Envisaged Structure of the Bangladesh Power Market

The financial restructuring and recovery plan is elaborated in-line with the power

sector restructuring policy of the Government of Bangladesh and considers thefuture market participants.

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The review of the power market structure leads to the following conclusions:

The commercial principles at the interfaces between the various existing (and

future) sector entities are not yet established properly. This concerns in

particular the high voltage network, parts of which are still owned andoperated by DESA.

The metering arrangements may have to be reconsidered. The metering

installations for billing purposes may not yet accurately reflect theapportionment of usage between the various entities.

Commercial agreements governing the interfaces between the future market

participants are not yet in place in a number of areas, such as PPAs withBPDB power stations, Bulk Supply Agreements for all distribution companies,Transmission Use of System Agreement and Transmission ConnectionAgreements, Distribution Use of System Agreements and DistributionConnection Agreements.

The establishment at least of the major commercial arrangements between

the Single Buyer and the BPDB generators, the Single Buyer and thedistribution companies and PGCB and the distribution companies should beestablished even prior to the corporatization of those entities.

3. Financial Situation of the Existing Sector Entities

The analysis of the operational and financial performance of the sector entitiesshows that the whole power sector is suffering from a shortage of liquidity, whichis a result of the high technical and non-technical losses. They result from anumber of reasons:

technical losses mainly occur in the distribution systems and are due to

undersized and overloaded equipment, outdated design of the networks andpoor network maintenance;

the end-use customer meters are mostly very old and are not maintained and

calibrated on a regular basis;

non-technical losses result from illegal connections and theft of electricity;

low billing ratio of registered customers;

low collection ratios due to non-payment of customers, whereas a major

problem area is related to government and autonomous/semi governmentinstitutions;

false meter reading which is mostly a result of collusion between customers

and the meter readers; and poor internal controls such as metering within the distribution system to

identify high loss areas

BPDB is illiquid. In Financial Year (FY) 2004/05 the revenues did not cover itsoperating expenses and hence it is not in a position to service its debt and payfor wheeling services.

BPDB in its function as the single seller of electricity is suffering from the fact,that DESA as the largest single electricity customer from BPDB is not in theposition to pay the full amount of electricity bills. In addition to that BPBD is

squeezed between rising generating cost and fixed bulk supply tariffs to thedistribution companies, which do not allow them to pass on cost increases due toinflation, fuel cost and exchange rate devaluation. The lack of cash flow does not

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only lead to a lack of maintenance in BPDBs distribution networks, it also affectsthe efficiency of power generation. Overhauls and major maintenance ofgenerating units are performed irregularly. This, as well as the complexprocurement procedures, resulted in long lead times for the procurement of therelevant materials and spare parts.

DESA is bankrupt and illiquid. Its capital reserves are negative. The company'smajor problem is related to the high system losses and the low billing andcollection ratios. Due to the lack of cash flow DESA does not serve its debtservice payments to the Government of Bangladesh (GOB) and it is not able topay for the electricity purchased from BPDB.

When DESCO started its operations, the key concept of the new company was tooutsource major parts of its field operations. This approach proved to besuccessful: in the supply areas taken over from DESA, DESCO's billing andcollection ratios improved considerably and the company's distribution margin is

the highest of all distribution companies.

PGCB is the company in the Bangladesh power sector which is closest tooperating on a commercial basis. Nevertheless PGCB is not in the position toearn sufficient cash flow to adequately contribute to investment financing from itsown resources. The company also seems to be undercapitalized with an equityportion of only 23%.

The corporatization of the WZPDC has already shown some performanceimprovements in terms of loss reduction and increased collection ratio, although itis too early to judge whether this short term success will be sustainable under thegiven circumstances.

The comparison between the corporatized sector entities DESCO, PGCB,WZPDC and and public utilities BPDB and DESA shows that significantperformance improvements could be achieved under the corporatized entities.

4. Financial Restructuring of the Balance Sheets

The key findings of the financial analysis confirm that the balance sheets of mostof the established sector entities need to be restructured to ensure financiallyviable operation in the future.

Financial restructuring is aimed at improving the financial position and the long-term viability of the existing and future power sector entities in Bangladesh:

(i) The established sector entities like BPDB and DESA need to be relievedof historic liabilities which cannot be paid off from existing resources orfuture revenue, and

(ii) the emerging power sector entities need to start their operations from afinancially viable and sustainable basis.

Accordingly, the restructuring exercise was carried out in two steps: first, thebalance sheets of the existing entities were restructured, and second, therestructured balance sheet of BPDB was split into several balance sheets for the

companies created in the unbundling process of BPDB: two generationcompanies, three distribution companies and the Single Buyer.

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4.1 Recommended Measures

Addressing the major problems identified in the balance sheet analysis, thefinancial restructuring involves the following measures:

(a) Clear accounts receivable of end-use customers by:

writing-off non-collectible accounts receivable from private end-use

customers; and

building up of provisions for balances of private end-use customers

receivables in excess of three months billing.

writing-off balances of Government and Semi Governmentcustomers in excess of three months;

As a basis for the write-off / set-off or addition to bad debt it will be necessaryto

reconcile the commercial operation statistics and financialaccounting which significantly different figures on the accounts receivablefrom end-use customers;

adjust the financial statements of the companies accordingly; and

evaluate receivables from private end-use customer and write-offreceivables which cannot be recovered.

(b) Reduce inter-company accounts resulting from bulk energy supply andwheeling services to a level of three months billing

Reconcile the balances for inter-company accounts of all power

sector entities (with the exception of the accounts between BGDB -DESCO and PGCB - DESCO).

Correct the balances between the companies in the relevantcompanies balance sheet; and

Establish procedures to avoid future discrepancies in accountsreceivable.

(c) Clear other inter-company accounts

Identify inter-company accounts related to accounts receivablepassed on to successor companies in the context of transfers of assetsand write them off in the balanced sheets;

Identify inter-company accounts related to previous asset transferbetween BPDB and REB and write them off.

(d) Clarify unresolved issues from previous and ongoing asset transfers

The Government needs to transfer the subsidiary loan agreements

related to the previous asset transfers to the companies which have takenover the old assets on the basis of the financial year 2005. This requirescorrections and adjustments in the loan balances of the concernedcompanies (BPDB, PGCB, DESA and DESCO).

The GoB loans related to the asset transfer should be formalizedunder one loan agreement.

The Government should engage a consultant to clarify the transfervalue of the assets for the Gulshan supply area from DESA to DESCO.

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Common policies and schemes with respect to future assettransfers (DESA - PGCB transfer of the 132 kV transmission aroundDhaka, DESA - DESCO Tongi supply area) have to be established on thelevel of the GoB to avoid confusion and insecurity. This also applies to the

future spin-off of new companies (generation and distribution) from BPDB.

(e) Determine unrecorded pensions and gratuities

The unrecorded pension and gratuity liabilities of BPDB and DESA

need to be identified and determined.

GoB should initiate actuarial / audit work on this subject.

DESA and BPDB need to make provisions for the unfunded andunrecorded pension and gratuity obligations in their balance sheets.

(f) Clarify other Balance Sheet items

GoB should engage a consultant to deal with a number of other accounting

issues that could be resolved in the context of the financial restructuring ofthe balance sheets:

overstatement of asset values in DESAs books;

write-off of transmission assets in BPDBs books;

transfer of work in progress on transmission in BPDBs books and

transfer of the related suppliers credit to PGCB; and

clarification of intra-company clearing accounts and write offbalances which cannot be clarified.

(g) Relieve entities of debt burden from foreign Loans and GoB loans

A proportion of debt : equity of 60% : 40% is considered as sustainable forthe successor companies. Consequently the following principles are appliedto reduce the long-term debt involved in the power sector entities:

the balance of the outstanding foreign loans is retained by theentities;

unpaid debt service liabilities are transferred to local loans; and

the local loans (including the debt service liabilities) are transferred

to equity to achieve the target debt : equity ration of 60 : 40.

The following measures need to be taken:

GoB needs to establish (reconcile) the loan balances for foreign

and local loans as well as for the unpaid debt service liabilities with allpower sector entities directly.

Loan balances for outstanding foreign loans from donor agenciesshould be transferred to one subsidiary loan agreement with slightlyrelaxed lending terms (5% interest, 15 years repayment). This will relaxcash flow constraints of the power sector entities in future and will enablethem to pay interest and principal of the loan balances in time.

A similar arrangement (one loan agreement with relaxed lendingterms) needs to be established for the loans provided by GoB forinvestment financing.

GoB should agree in general to this principle so that it can be applied for futurespin-offs of generation and distribution companies from BPDB.

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The recommended measures for financial restructuring of the balance sheetsrequires preparatory works to clarify and prepare the data basis. The balancesheets of the Financial Year 2005/06 should be taken as the basis. TheGovernment should appoint a consultant / accountant to undertake the work.

4.2 Results

The financial restructuring has been applied across all sector entities, includingPGCB and DESCO.

In total the overall long-term and short-term liabilities of the power sector entitieshave been reduced from TK 256.1 billion to TK 185.2 billion by TK 70.9 billion(27.7%). The reduction of the long-term liabilities alone covers TK 40.1 billion(21.8%). Financial restructuring has improved the current and the quick ratio formost of the companies.

before after before after before after before after before after before after before after

(billion TK)

GOB Loans 22.4 52.4 1.6 3.9 6.7 20.1 1.5 1.0 2.0 3.2 0.3 4.0 34.6 84.6

Foreing Loans 23.8 25.3 24.5 18.3 7.1 6.1 4.2 3.5 1.9 1.8 14.5 5.0 76.1 60.0

Current Portion 4.9 2.3 1.2 1.8 0.8 0.6 0.0 0.2 0.0 0.1 0.0 0.4 7.0 5.3

DSL Principal 24.3 0.0 0.0 0.0 2.6 0.0 0.0 0.0 1.7 0.0 0.0 0.0 28.7 0.0

DSL Interest 33.0 0.0 0.9 0.0 8.5 0.0 0.6 0.0 2.4 0.0 0.0 0.0 45.4 0.0

Payables 11.3 9.9 0.4 0.4 31.4 3.3 1.8 1.8 0.6 0.6 0.0 0.0 45.6 16.1

Other liablities 12.2 12.1 0.5 0.4 3.9 5.1 0.4 0.4 1.3 0.9 0.5 0.3 18.8 19.2

Total 132.0 102.0 29.2 24.9 61.1 35.2 8.5 6.8 9.9 6.6 15.4 9.7 256.1 185.2

D ebt : equity ratio 59 60 80 60 1,547 60 76 60 65 60 93 60

current ratio 0.99 1.56 2.48 2.43 0.41 1.48 2.33 2.27 0.96 2.73 5.23 2.21

quick ratio 0.91 1.53 2.27 2.19 0.42 2.14 1.91 2.29 0.89 4.10 3.52 1.27

WZPDC

restructuring

APSC

restructuring

Total

restructuring

BPDB

restructuring

PGCB

restructuring

DESA

restructuring

DESCO

restructuring

Table 1: Impact of the financial restructuring on the power sector entities

The financial restructuring measures also have an impact on the Governmentbudget. The Government is the sole shareholder of BPDB and DESA which inturn are shareholders for the remaining power sector entities and the largestdebtor since it provides all loans in local currency and on-lends all foreign loansunder subsidiary loan agreements. The financial position of the Government

against all power sector entities before and after financial restructuring can beseen in Table 2. It shows that the equity position decreased slightly from TK 64.5billion to 61.5 billion and Governments long term debt decreased sharply from TK191.7 billion to TK 149.9 billion.

Currently the power sector affects the Government budget negatively: the GOBsupports investments of the utilities with equity and loans, has contingentliabilities from guarantees for suppliers credits and payments to IPPs, while itreceives little or no debt service payment on foreign and GOB loans from theutilities. The financial restructuring measures offer significant advantages to theGovernment at a low risk. Restructuring involves no Government expenses in theshort run and offers the chance to achieve commercial operation of the utilities.

The latter will reduce requirement for investment support, ensure debt servicepayment for foreign and local loans, and allow tax and dividend payments in thelong run.

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before after before after before after before after before after before after before after

Equity

Paid in Capital 77.1 58.8 0.0 0.0 11.3 2.7 0.0 0.0 0.0 0.0 0.0 0.0 88.5 61.5

Revaluation Reserve 55.7 0.0 0.0 0.0 6.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 61.7 0.0Retained Earnings -53.6 0.0 0.0 0.0 -32.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -85.7 0.0

Loans

GOB Loans 22.4 52.4 1.6 3.9 6.7 20.1 1.5 1.0 2.0 3.2 0.3 4.0 34.6 84.6

Foreing Loans (SLA) 23.8 25.3 24.5 18.3 7.1 6.1 4.2 3.5 1.9 1.8 14.5 5.0 76.1 60.0

Current Portion 4.9 2.3 1.2 1.5 0.8 0.6 0.0 0.2 0.0 0.1 0.0 0.7 7.0 5.4

DSL

Principal 24.3 0.0 0.0 0.0 2.6 0.0 0.0 0.0 1.7 0.0 0.0 0.0 28.7 0.0

Interest 33.0 0.0 0.9 0.0 8.5 0.0 0.6 0.0 2.4 0.0 0.0 0.0 45.4 0.0

Total 187.8 138.7 28.2 23.7 11.0 29.5 6.3 4.7 8.0 5.1 14.9 9.7 256.1 211.4

Total

restructuring

BPDB

restructuring

PGCB

restructuring

DESA

restructuring

DESCO

restructuring

WZPDC

restructuring

APSC

restructuring

Table 2: Impact of financial restructuring on the financial position of theGovernment

5. Financial Recovery Plan

The financial restructuring of the balance sheets will lead to a sustainablefinancial viability of the sector entities only when followed by a financial recoveryprogram. While financial restructuring measures aim at relieving sector entities ofhistoric burdens, financial recovery measures have the objective to improve theirearnings situation.

The financial recovery of the power sector relies directly on three pillars:

financial restructuring of the balance sheets

performance improvement; and tariff increase.

Therefore the financial recovery plan needs to consist of a series of measures.To achieve long term sustainability, these measures have to be supported by

improvement of corporate governance and corporate culture

establishment of market governance, and

establishment of a feasible market structure with clear interfaces.

5.1 Performance Improvement

Since the earnings of a company depend on the revenues on the one hand andthe costs on the other hand, the key measures for financial recovery must aim at(i) reducing the cost of supply and/or (ii) increasing the revenues.

The major reason for the high electricity supply costs in Bangladesh are the hightechnical losses in the distribution system. Measures to reduce the cost of supplymust therefore address this issue. Technical losses are due to undersized andoverloaded equipment, outdated design of the networks and poor networkmaintenance. Most of the end-use customer meters are very old and are notmaintained and calibrated on a regular basis. Reduction of technical losses thusrequires investment in the reconfiguration of the network and adequate

equipment, but there are also low cost measures available, such as theintroduction of scheduled maintenance, improvement of maintenance and defectdetection, and immediate repair of defects.

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Low revenues are also a result of high losses, but for the revenue aspect, non-technical losses are more important. These losses result from illegal connectionsand theft of electricity, a low billing ratio of registered customers, low collectionratios, false meter readings, and poor internal controls. These are to a largeextent organizational problems, which can be tackled by the distributioncompanies at relatively low cost. Potential measures to reduce electricity theftinclude controlling (metering) the connections within high problem areas,identifying and removing illegal connections, detecting and rectifying tamperedmeters and meter bypasses.

Measures to improve billing and collection include prevention of collusionbetween meter readers and customers, electronic bill processing, distributing billswithin one week following meter reading. The distribution companies should alsoco-operate with the banks for reconciliation of collected and billed amount, anddisconnect all non-paying customers. Positive impacts can also be expected from

improving customer relations management, customer complaints management,introduction of customer service centers for bill-related queries and fastestablishment of new connections and reconnection of disconnected customers.

A significant contribution to the successful implementation of such measures isrelated to the training and education of the employees as well as theestablishment of procedures to improve work routines and processes, e.g.through quality circles. Such measures are already exercised in DESCO withsome success.

5.2 Tariff Rationalization and Adjustment

The above measures concern efficiency improvements which aim at increasingthe share of electricity sales which are billed and paid for. The most importantmeasure for revenue enhancement, however, is the adjustment of tariffs to acost-covering level.

(a) End-user tariffs need to be increased to cost-covering level.The current tariff level is not adequate for cost recovery in the whole electricitysupply chain under the present conditions. An immediate tariff increase to cost-covering level would not be socially and politically acceptable. Thus, the cost-recovering tariffs will have to be introduced gradually. During the transitionperiod, the sector entities require reliable subsidy payments from the government

budget. Without support, either by subsidies from the state budget or by at least atemporary increase of the tariffs in form of a surcharge on end-user tariffs, thefinancial recovery of the sector will not be achievable.

(b) The distortions in the end-user tariffs need to be removed.The current distortion in the tariff structure for end customers affects theeconomic viability of the power sector entities. The high cross-subsidies fromcommercial consumers to residential consumers need to be removed.

(c) Bulk supply tariffs need to be increased and distortions removed.The current bulk supply tariffs are too low to cover the generation costs. Thepresent situation does not allow BPDB to pass-through cost increases via thebulk supply tariff. This will not be sustainable for a Single Buyer market andhinder financial recovery of the power sector entities. Bulk supply tariffs need tobe adjusted to inflation, fuel cost increases and changes in the exchange rate,

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either via a price adjustment formula, regular price reviews or ad hoc priceadjustments.The PBSs pay a lower bulk supply tariff than the distribution companies. Thisform of cross subsidy on the bulk supply level needs to be reconsidered.

(d) The uniform end-user tariffs across Bangladesh need to bereconsidered.

The combination of uniform end-user tariffs, uniform bulk supply tariffs anddiffering costs of distribution (due to differing load densities and customer mix inthe various supply areas) lead to a situation where distribution companies with ahigh load density and favorable customer mix are financially better off thancompanies with a low load density and an unfavorable customer mix. To avoidsuch disproportion it will either be required

to create a balance based on the bulk supply tariffs: distribution companies

with potential for higher earnings pay a higher bulk tariff rate than the other this solution is applied for the financial projections; or

to abandon the idea of uniform national tariffs and allow distributioncompanies to determine their own tariff level.

5.3 Improvement of Corporate Governance

As stated by DESCO and PGCB, which have already been corporatized, thechanges of the corporate governance and company culture are seen as themajor benefits of the corporatization. The creation of truly independent corporategovernance is a prerequisite to the success of the financial restructuring andrecovery plan and the creation of a financially viable power sector. A change incorporate governance of the power sector enterprises needs to be based on thefollowing elements:

establishment of truly independent companies free from political

interference operating under the Companies Act;

clear definition of the purpose of the company and its core operating

principles;

clear definition of the responsibilities of the owner, board of directors and

management;

transparent rules for the appointment (and dismissal) of the members of the

board of directors and the management;

control of management over staffing decisions;

regular preparation and publication of business plans;

regular external monitoring and auditing of performance (under the

Regulator's rules and jurisdiction); and

creation of internal control procedures and performance monitoring.

The Three-Year Roadmap with its milestones for unbundling of the power sectorand the corporatization of the new sector entities sets an ambitious framework inthat respect.

5.4 Market Governance

The design and the functioning of the power market must be determined in anappropriate set of market rules. In Bangladesh, the future structure and

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functioning of the power sector has not yet been determined policy statementsand the updated Three-Year Roadmap are not clear about the details of theSingle Buyer Market. These uncertainties faced by the sector participants maywell jeopardize the creation of the appropriate commercial framework.

The market rules should in the first place be designed for the envisaged SingleBuyer Market but also allow for the development of the market in a number ofinterim stages to a fully competitive multiple power market.

A next step would be the creation of a Market Operator function to supervise andenforce the market rules and to operate the market. This Market Operatorfunction moves beyond the Single Buyer function as it is presently discussed. Allinter-company transactions in the power sector will be handled by the MarketOperator starting with meter reading and ending with the supervision of the fundtransfer in accordance with a pre-determined settlement calendar. This willimprove the financial discipline in the market and result in efficiency

improvements and cost reductions for the sector entities. Advantages for theentities include a constant and secure cash flow, appropriate financial planning,improvement of management decision making, appropriate long-term planning ofmajor maintenance and overhaul and reduced requirements of working capital.

The Market Operator will not be able to cover non-payment out of its ownresources. Prudential support from the market participants is required in form ofa valid and binding and not subordinated obligation to pay to theMarket Operator the amount relating to the obligations of the marketparticipant.

5.5 Commercialization

A further prerequisite for the financial recovery of the sector is the establishmentof the commercial interfaces between the various existing and future sectorentities as a sound framework for their commercial operation. Commercializationmeans the clear definition of the technical and commercial linkages between thefuture power sector entities. Commercial interfaces have already been created ina number of areas, but this process is by far not completed.

The Power Purchase Agreements for the BPDB-owned power stations need tobe established this can be done prior to the corporatization of the generationsegment as the power stations are presently operating as Special Business Units

with some limited autonomy. These PPAs could be similar to the existing onebetween BPDB and APSCL, but need some improvements. E.g., the currentpayment mechanism of the PPAs does not provide incentives for high timeavailability of the power units, and the tariffs cannot be adjusted to exchange ratefluctuations. The methodology of reference tariff determination should besanctioned by the Regulator and included in the PPA.

Commercial arrangements need to be put in place for the wheeling of electricitythrough the distribution networks. Currently this concerns only the bulk supply tothe rural electricity cooperatives at the 11 kV level, but will be relevant for anysmall and captive power producers which may be created under an open accessregime.

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6. Financial Projections

Financial Projections are prepared for the entities in the envisaged future powersector, in order to assess the financial impact of the recommendations for

financial restructuring and recovery. For this purpose an Integrated FinancialModel was developed. The model consolidates the projections of balance sheets,income statements and cash flows of all sector entities, simulates the financialperformance of the entities under various assumptions, and calculates relevantfinancial performance indicators over the next 10 years. The starting balancesheets in the model reflect the restructuring measures, such as conversion ofdebt to equity, write-off of bad debts etc. The projections of the financialstatements consider financial recovery measures, such as loss reduction,efficiency improvements and tariff adjustments.

The Financial Model is used to:(i) calculate the required tariffs at the interfaces in the power sector, such as

the bulk generation tariffs of the generation companies spun off from the

BPDB generation;

the bulk supply tariffs to be paid by distribution companies to the Single

Buyer; and

the average retail tariff (considering uniform national tariffs for end-use

consumers);(ii) analyze the impact of different tariff adjustment scenarios on the financial

situation of the power sector entities; and(iii) determine subsidy requirements for the power sector to maintain its financial

viability during the transition period.

6.1 Tariff Calculations

As shown in Figure 2 the average end-use customer tariff needs to be increasedfrom TK/kWh 3.43 by some TK/kWh 1.22 (or 35.6%) to TK/kWh 4.65 to achievecost recovery across the power sector in the first projection period. In thefollowing years up to 2012 a further increase to TK/kWh 5.81 is projected.

3.43

4.654.94 5.15

5.40 5.545.73 5.81 5.69 5.66 5.43

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

TK/kWh

Average End-use CustomerTariff (nominal)

Average End-use CustomerTariff (real)

Figure 2: Development of average end-usecustomer tariffs in nominal and real

(2005) terms between 2005 and 2015

After that the tariff willdecrease slightlytowards the end of theprojection period.

In real terms thismeans that - followingits first increase - theaverage end-useconsumer tariff will notincrease any furtherand after a certainperiod of stability it willdecrease again to alevel comparable to thepresent 2005 averagetariff.

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The bulk supply tariff needs to increase from currently TK/kWh 1.89 by 22% toTK/kWh 2.3 in real terms in 2007 in order to achieve cost recovery (see Figure 3).

1.89

2.412.62 2.71

2.85 2.97

3.153.28 3.26 3.31 3.21

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

TK/kWh

Bulk Supply Tariff (nominal terms) Bulk Supply Tariff (real terms)

Figure 3: Development of the average bulk supplytariff in nominal and real (2005) terms

It will stay at this leveluntil 2012 anddecrease thereafter toTK/kWh 1.97 in 2015.In nominal terms thebulk supply tariff isprojected to increaseto TK/kWh 3.31 in2014, before itdecreases.

As stated in Section5.2(d) above, the

current tariff regime ofuniform bulk supplytariffs and uniform

end-user tariffs puts some distribution companies at a disadvantage. In thefinancial projections it is assumed that the Single Buyer charges each distributioncompany a different bulk supply tariff. This is set in such a way that afterdeducting the bulk purchase payments to the Single Buyer from their revenues,the distribution companies have sufficient funds left to cover all their costs.

Such differentiated bulk supply tariffs not only provide an opportunity to balancedifferences in cost structures, but also to subsidize the distribution companies aslong as the uniform end-user tariff is below the cost-covering level. In this case

the bulk supply tariff of all distribution companies is reduced by the amount thedifference between actual and cost-covering end-user tariff (adjusted for thedistribution losses).

6.2 Results of the Financial Projections for Alternative Scenarios

The financial projections are prepared for three alternative tariff scenarios:

Scenario Full Cost Recovering Tariff: Starting in FY 2005/06 the end-use

customer tariffs are increased to a level allowing the full recovery of all cost of

power generation, transmission and distribution including a return on net fixedassets of 10%, which in accordance with financial covenants of World Bankand ADB is considered to be commercially reasonable.

Scenario Business as Usual: The end-use customer tariffs are increased only

in line with inflation; i.e. they remain at the present level in real terms.

Scenario Cost Recovering Tariff achieved in 2010: The present tariff level is

adjusted linearly so that cost recovery is achieved in the year 2010.

Under the assumptions of the Full Cost Recovering TariffScenario, the powersector in its entirety will be in the position to achieve a highly satisfactory financialperformance, as shown in Table 3. With few exceptions, the financial ratios areexpected to fulfill the required level during the whole projection period. Theambitious investment programs that are envisaged to improve the sectorperformance can be implemented provided that the required financing is secured

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through international donor agencies or through government loans atconcessional loan terms of 5%.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Profit related ratiosNet Income 3,507 4,599 6,359 7,257 8,006 10,517 11,695 12,120 12,495 12,812

Operating Ratio 0.79 0.78 0.76 0.77 0.77 0.76 0.77 0.79 0.80 0.81

Post Tax Return on Equity 7.26% 8.93% 11.28% 12.05% 12.38% 15.05% 15.45% 15.06% 14.71% 14.33%

Rate of Return on Net Fixed Assets 4.33% 4.64% 4.91% 4.84% 4.69% 5.26% 5.49% 5.59% 5.69% 5.77%

Cash Flow related Ratio

Internal Cash Flow 1,729 4,511 7,745 10,754 9,526 8,723 11,013 6,887 9,484 3,418

Debt Service Coverage Ratio 1.55 1.48 1.54 1.63 1.46 1.52 1.57 1.52 1.53 1.41

Self Financing Ratio 66.3% 32.4% 21.8% 20.8% 29.0% 38.4% 58.1% 87.0% 94.0% 104.0%

Balance Sheet Ratios

Debt : (Debt + Equity) 62% 67% 70% 71% 71% 70% 68% 67% 65% 64%

Current Portion 1.48 1.34 1.36 1.34 1.25 1.32 1.38 1.37 1.35 1.19

Quick Ratio 1.03 0.91 1.00 1.11 1.16 1.23 1.28 1.28 1.26 1.10

Cash at Bank 13,194 8,922 9,123 12,568 14,332 16,770 21,023 22,125 24,971 19,971

Financial Performance 'Consolidated Power Sector' Tariff Scenario Full Cost Recovery

Table 3: Financial performance ratios for the consolidated power sectorunder Tariff Scenario Full Cost Recovery

Under the assumptions of the Business As Usual Tariff Scenario the financialperformance of the power sector will not be sustainable. Without adequate tariffincreases, the power sector will be illiquid within a very short period of time andface a situation similar to the present one, see Table 4. The efforts of thefinancial restructuring of the balance sheets will be wasted.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Profit related ratios

Net Income -6,378 -7,460 -7,937 -10,388 -11,510 -11,680 -11,421 -6,808 -2,555 3,878

Operating Ratio 0.93 0.92 0.89 0.90 0.89 0.88 0.87 0.85 0.83 0.81

Post Tax Return on Equity -5.81% -7.36% -8.20% -13.55% -19.07% -22.61% -31.49% -21.97% 55.46% 459.42%

Rate of Return on Net Fixed Assets -3.27% -3.16% -2.50% -3.09% -3.10% -2.36% -2.01% -0.67% 0.56% 2.50%


Internal Cash Flow -5,906 -7,197 -6,215 -5,976 -9,150 -12,213 -12,087 -12,211 -5,474 -5,018




Debt : (Debt + Equity) 64% 72% 79% 84% 88% 91% 95% 98% 99% 99%

Current Portion 1.17 0.77 0.63 0.48 0.35 0.31 0.29 0.27 0.27 0.26

Quick Ratio 0.72 0.44 0.40 0.35 0.30 0.27 0.25 0.24 0.24 0.23

Cash at Bank 5,559 -9,172 -18,006 -26,265 -39,146 -53,505 -68,761 -83,620 -92,437 -102,372

Financial Performance 'Consolidated Power Sector' Tariff Scenario Business as Usual

Table 4: Financial performance ratios for the consolidated power sectorunder Tariff Scenario Business as Usual

The impact of the Tariff Scenario Cost Recovery achieved in 2010 is shown inTable 5. The higher tariff increases compared to the Business as Usual Scenariohave a positive impact on the financial performance of the sector. However, it willnot be sufficient to achieve financial sustainability. In the early years of theprojection period there is a requirement for additional funding from externalresources, which could be either borrowed capital from banks or operatingsubsidies from the Government of Bangladesh covering the shortfall in revenuescaused by the tariffs which are not cost recovering.

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Profit related ratios

Net Income -4,461 -2,675 837 3,341 7,042 9,598 10,801 11,261 11,689 12,043

Operating Ratio 0.90 0.87 0.82 0.80 0.77 0.76 0.77 0.79 0.80 0.81

Post Tax Return on Equity -3.47% -0.94% 4.38% 8.10% 14.09% 17.32% 17.67% 17.11% 16.55% 15.88%

Rate of Return on Net Fixed Assets -1.97% -0.43% 1.56% 2.56% 4.17% 4.83% 5.09% 5.21% 5.34% 5.44%


Internal Cash Flow -4,373 -2,906 1,973 6,913 8,771 8,453 9,781 6,235 9,325 4,008




Debt : (Debt + Equity) 64% 70% 75% 77% 76% 75% 73% 72% 70% 69%

Current Portion 1.23 0.91 0.91 0.91 0.91 1.05 1.13 1.15 1.17 1.05

Quick Ratio 0.78 0.53 0.59 0.68 0.83 0.95 1.04 1.06 1.08 0.96

Cash at Bank 7,091 -3,776 -4,488 -920 3,042 7,193 11,885 13,619 17,695 13,939

Financial Performance 'Consolidated Power Sector' Tariff Scenario Cost Covering Tariff in 2010

Table 5: Financial performance ratios for the consolidated power sector

under Tariff Scenario Cost Recovering Tariff in 2010

The scenario analysis leads to the conclusion that the increase of the end-usecustomer tariffs is a pre-requisite for the financial recovery of the power sector.The improvement of the sector performance and efficiency together with theproposed financial restructuring measures will not lead to sufficient costreductions to allow the sector entities to improve their financial situation in theshort term.

It therefore can be concluded that - despite all efforts to improve efficiency andperformance - the distribution companies will not be in the position to collect

sufficient money to pay for their operating expenses and their debt service. Inconsequence the upstream segments of the power sector (generation anddistribution) will not receive sufficient money, which in turn will lead to acontinuation of the maintenance backlog in the generation segment and in delaysof investment necessary for the enhancement and improvement of the system.Consequently an increase of the retail tariff is required as a precondition for thefinancial recovery of the power sector.

It is finally a decision to be taken by the Government to what extent a tariffincrease can be enforced in Bangladesh given the present quality of supply. Thefinancial projections show that even a gradual increase of tariffs with the objectiveto achieve full cost recovery in 2010 (or at any other time) will create serious

problems to the distribution companies.

Under this circumstances the distribution companies are tied up between thenecessity to operate on a commercial and financially viable basis and the tariffsetting from the Government considering political objectives. On the other hand,Government has established tariff-setting principles in September 2003 whichindicate, that

end-use customer tariffs need to recover all reasonable cost (on the level of

each customer class); and

that should the Government decide to subsidize tariff groups or customer

classes; it will do so from its own budget.

Consequently the state budget should subsidize the difference between costcovering tariff and the actual tariff level. The following Table 6 shows the funding

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gap required covering the difference between revenue requirements and therevenues achieved from sales.1.

DESA 49,834 4,215 9,989 18,250

DESCO 19,101 1,824 4,308 7,822

WZPDC 13,847 1,319 3,090 5,580

SZ 9,236 872 2,043 3,688

NZ 12,838 1,170 2,742 4,951

CZ 28,188 2,661 6,236 11,261

Total shortfall in funding 133,045 12,061 28,408 51,552

Cost recovering tariff achieved in yearin 2012

Funding Gap under Tariff Scenario in million TK

Business as usual in 2008 in 2010

Table 6: Funding Gap for different transition periods to achieve full cost

recovering tariffs

Any form of subsidy should however not uphold inefficiencies in the power sectorand therefore it will be necessary to establish a transparent mechanism todetermine this subsidies and to feed them to the power sector. It is commonpractice that the subsidy requirements should to be established on a buildingcase that considers short, medium to long term performance and efficiencytargets and that applies only to a predetermined transition period.

The subsidies should be fed into the system via the Single Buyer (which will mostlikely remain in state ownership) and passed on to the distribution companies

through the Bulk Supply Tariff, so that the subsidies will not be paid directly to thedistribution companies. The Single Buyer will pass them on to the distributioncompanies via a reduced Bulk Supply Tariff.

6.3 Impact on Government Budget

Only when end-user tariffs are increased to full cost recovery level immediately inFY 2005/06, the sector entities do not have to be supported by the Governmentvia subsidies.

Assuming that the tariffs remain at their current level and are only increased in

line with inflation (Business As Usual Scenario), subsidy requirements areprojected to increase from TK 11 billion FY 2005/06 to almost TK 20 billion in FY2010/11, before they decrease.

When tariffs are increased to reach cost recovery level in 2010, subsidies of TK 9billion are required in FY 2005/06, decreasing to TK 4 billion in 2008/09. Nofurther subsidies would be required thereafter.

While subsidies are required for the power sector in the absence of cost-coveringtariffs, the power sector entities also contribute positively to the Governmentbudget. The financial restructuring and recovery measures are expected to

1 ) We have added two scenarios to show the funding gap if cost recovering tariffsare achieved in 2008 and 2012 in addition to the tariff scenarios used for financialprojection analysis

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enable the sector entities to service their debts, pay taxes on their income andeven pay dividends, once their financial situation has stabilized. All cash flowsbetween the Government and the sector entities are summarized in Table 7.Projections of loan disbursements and debt service, taxes and dividends aresimilar for all tariff scenarios, while the subsidy requirements depend on the tariffscenario.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Subsidies paid - Full Cost Recovery 0 0 0 0 0 0 0 0 0 0

Subsidies paid - Business as Usual -11,082 -13,091 -14,662 -17,233 -18,048 -19,524 -18,843 -13,022 -7,715 0

Subsidies paid - Cost Recovery in 2010 -9,189 -8,444 -6,361 -4,414 0 0 0 0 0 0

Loans disbursed -22,526 -51,342 -49,734 -47,081 -27,424 -20,570 -21,020 -17,276 -19,577 -23,544

thereof: foreign loans: -15,492 -35,052 -37,196 -37,461 -24,699 -18,876 -19,655 -16,333 -18,518 -22,501

Debt service received 16,482 20,062 23,299 25,318 31,148 34,756 36,179 38,247 39,171 42,189

Tax received 2,884 3,584 4,525 5,127 5,571 7,127 7,890 8,206 8,484 8,733

Dividends received 0 1,171 667 912 1,580 1,582 1,896 5,838 3,625 6,564

Net receipts (payments)

Full Cost Recovery -3,160 -26,525 -21,242 -15,723 10,874 22,895 24,945 35,015 31,702 33,942

Business as Usual -14,242 -39,617 -35,904 -32,956 -7,173 3,370 6,102 21,993 23,987 33,942

Cost Recovery in 2010 -12,349 -34,970 -27,603 -20,138 10,874 22,895 24,945 35,015 31,702 33,942

Total Impact on Government Budget in millionTaka

Table 7: Total impact on Government budget

As stated above, financial support for the power sector during a transitionalphase is necessary to improve the financial position of the power sector entities,which otherwise will suffer if tariffs are not increased adequately. The table aboveshows that - even in the Business as Usual tariff scenario - the financial supportrequirement never exceeds the debt service payment for the foreign and localloans from the sector entities to the Government. Therefore it might be possibleto restructure the loan repayment schedules during the transition period in suchway, that they help to improve the cash flow situation of the companies e.g. by

providing respective grace periods for the Government loans to overcome thecash flow shortfall in the power sector. This basically means that the Governmentcould use its revenues from debt service payment to provide the requiredfinancial support.

7. Time-bound Action Plan for Financial Restructuring and Recovery of

the Power Sector

Financial restructuring is the pre-requisite for the financial recovery and thereforehas to be the first step in a time-bound action plan. For this reason the time-bound action plan has been split into a short-term and a long-term action plan.

The major work related to the short-term action plan is to resolve the basic issuesthat are related to the preparation of the restructured balance sheets of theinvolved power sector entities, as set out in Section 4.1. The financialrestructuring exercise requires a clear data basis to be performed successfully.We have drawn up a time frame (see Figure 4) that we belief is realistic to initiateand conduct the above mentioned activities. It shows that the financialrestructuring exercise can be finalized during the second quarter of the 2007 sothat the results can be realized in the balance sheets for the FY 2006/07.

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QIII Q IV Q I Q II Q III Q IV

Agreement on principles for financial restructuring

Appointment of Consultants

Terms of Reference

Request for Tender

Tender Evaluation

Award

Consulting Services

Accounts Receivable

Inter-company Accounts

Asset transfers (unsettled issues / methodology)

Determine pension and gratuity obligations

Reconciliation of Loan Balances

Reconciliation of Debt Service Liabilities

Other Balance Sheet issues

Approval of Results

Preparation of formalized loan agreements

Determine transfer of local loans to equitySign formalized loan agreements

Finalization of restructured balance sheets

2006 2007

Figure 4: Short Term Action Plan for the financial restructuring

The financial restructuring represents only the starting point of the financialrecovery process of the power sector. To avoid that the financial breathing spacethat the utilities receive through the financial restructuring is just used up withoutthe achievement of performance and efficiency improvements, they should enterinto a performance target agreement with the Government. Of course theperformance target need to comprise long term objectives with a clear timeframe,when they have to be achieved and the definition of interim targets on an annualbasis. On the other hand the Government should commit itself to a number oftargets as well.

The targets need to be differentiated between the various companies accordingto their present financial and operational status. It is obvious that PGCB andDESCO already operating at commercial levels have already achieved a goodlevel of operational efficiency and therefore will require different treatment thenBPDB and DESA.

This could comprise as major obligations performance parameters for the

companies related to improvement in billing / collection performance:

billing / collection ratio of close to 100%;

collection / import ratio of above 87%;

outstanding customer debt (accounts receivable to stay below three

months with the objective to reduce the equivalent debtor days to 60days within four to five years and to 45 days on the long run;

reduction of technical losses of the distribution companies:

to 12% with respect to BPDB and DESA within a period of 10 years

with interim steps to be achieved on annual basis;

to 10% for DESCO within a period of 10 years; technical losses of PGCB not to exceed the existing 3.5% and the long

term target to reduce transmission losses to 3%;

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financial performance targets

DSCR of 1.3;

Self financing ratio of 30% within a period of up to five years (for

BPDB and DESA);

target return on net fixed assets of 10% and on equity of 15% (for

BPDB and DESA) within a period of 10 years;

timely and complete payment of financial obligations to the Government

(debt service payment);

punctual payment for electricity purchase to the Single Buyer (within a

period of 45 days upon receipt of the invoice; and

improvement of customer service parameter.

Government obligations

agree on the principles for financial restructuring;

increase of tariffs (or financial support for insufficient tariff increases);

rationalization of bulk supply tariffs and end customer tariffs; and

punctual payment of electricity bills of Government and Semi Government

customers.

Additionally the following should be initiated during the initial period of thefinancial restructuring activities:

Review of the operational and managerial experience of DESCO including

documentation of the management information system, review ofperformance, role of autonomy to management, measures and technology for

theft detection. Assessment of existing HR practices and commercial processes in BPDB to

assist in making a Governance Improvement Action plan.

Initiate a dialogue with consumer groups to understand their perception of

quality of supply and customer service and perform a correspondingcustomer survey with high value industrial and commercial customers.

Develop lessons learnt from the first 15 months of experience of WZPDC to

strategies, which can be used for the spin off of further distribution companiesfrom BPDB.

The overall long term action plan provides indicative milestones for the financial

restructuring and recovery as summarized below. For purposes of completenessit shows as well the key milestones from the short-term action plan.

The long-term action plan is designed to tie into the objectives and timeframe ofthe three years roadmap.

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No. Outcome Actions Date Responsibility

1 Agreement of theGovernment of Bangladesh

on the principles applied forfinancial restructuring

The cornerstones of the

financial restructuring need tobe determined by theGovernment and the relevantapprovals from relatedMinistries and if necessary theParliament

Third quarter2006

Ministry ofFinance /

Ministry ofPower, Energyand MineralResources

2 Appointment of Consultantsand auditors to prepare andconduct financialrestructuring

Consultants to

reconcile outstanding GOB

loan balances,

reconcile foreign loan

balances and related debtservice liabilities with GOB

undertake audit of

unrecoverable amount ofaccounts receivable

reconcile the differences

between the billing recordsin the Operational Statisticsof the companies and theaccounting records

audit and reconcile the inter-

company accounts of allsector utilities

prepare the resolution of

unresolved issues related to

previous asset transfers resolve other outstanding

balance sheet items

clarify and determine

unfunded pensionobligations and gratuities

Third quarter2006

MOF, MEPMR,Power Cell

3 Finalize financialrestructuring work

The financial restructuring must

be included in the financialstatements for the financialyear 2005/06

secondquarter /2007

Consultants,auditors, MOF,BPDB, PGCB,DESA, DESCO,APSCL,WZPDC

4 Achieve agreement withGOB on the conversion ofloan amounts to equity

Determine the amount of debtto be converted to equity as toachieve a debt : equityproportion of 60% to 40%

secondquarter 2006

MOF, allutilities,MPEMR, PowerCell andParliament ifrequired

5 Formalization of loanagreements for GOB loans

combination of all outstanding

GOB loans with DESCO andPGCB into one loan agreementfor each company with uniformlending terms

end FY2006/07

Consultants,auditors, MOF,BPDB, PGCB,DESA, DESCO,APSCL,WZPDC

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Formalize future GOB loans

under corresponding lendingagreements directly with theborrowing utility using uniform

lending terms6 Presentation of fixed assets

in DESA's balance sheet Prepare an asset register

which includes theidentification and verification ofexisting assets

2006/07 DESA

7 Revaluation of fixed assetsacross the sector

Agree on a uniform

methodology for assetrevaluation

2006 GOB

Revalue assets of all sector

entities according to themethodology

Incorporate the new asset

values in the balance sheets

2006/07 BPDB, PGCB,DESA, DESCO,WZPDC, APSC

8 Tariff rationalization andadjustment

Conduct a tariff study with the

objective to design andformulate a suitable tariffstrategy for the sector

2006/07 BERC

Implement the

recommendations of the tariffstudy

2006/07 BERC,all utilities

9 Tariff Methodology Complete tariff methodology 2006 BERC

10 Performance improvement Implement Performance Target

Achievement schemeaccording to 3-Year Road Map

(collections, CG ratio, arrears)

continuous Power Cell,utilities

11 Loss reduction Implement measures according

to 3-Year Road Map:

Installation of system

metering for establishingcommercial arrangementsamong the sector entities

PTA (system loss)

continuous Power Cell,utilities

12 Improvement of corporategovernance and corporateculture

Development of a

comprehensive MIS schemeaccording to 3-Year Road Map

December2007

Power Cell

Management efficiency

improvement

continuous all utilities

Establish PTAs for all utilities continuous all utilities

Conversion of BPDB into a

Holding

November2006

BPDB

Corporatize DESA December2007

DESA

Corporatize South Zone PDC September2007

SZPDC

Corporatize Central Zone PDC December2007

CZPDC

Corporatize North West Zone

PDC

December2007

NZPDC

Corporatization of PowerPlants 2008 BPDB

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13 Establishment of marketgovernance

Establish Single Buyer within

BPDB

2006/07 Power Cell,BPDB

Prepare a comprehensive set

of rules (Market Rules) for thefunctioning of the Single BuyerMarket

2007 BERC

Enhance the function of the

Single Buyer to the function ofa Market Operator governingand supervising thecommercial behavior of themarket participants

2007/08 Power Cell /MPEMR

Establish the Market Operator

as company which isindependent from the marketparticipants (not part of BPDB

holding)

2008 Power Cell /MPEMR

14 Establishment of commercialinterfaces

Establish commercial

interfaces in form ofagreements between thesector entities already now,before unbundling andcorporatization of the sectorentities and establish transferprices

2006/07

Improve commercial

management of sector entitiesprior to corporatization

continuous all utilities

Establish standard agreements

for SPPs and CPPs withstandardized tariffs (based onmarginal cost) for lowtransaction cost and quickimplementation

2006/07 BERC/ Power Cell / MPEMR

Establish an open access

regime for SPPs and CPPs

2007 BERC / Power Cell / PGCB

Establish wheeling charges for

the use of distribution systemsfor eligible customers andPBSs

2006/07 BERC / Power Cell / BPDB

Documents

FRRP Final Report Summary