In accordance with ADB’s public communications policy (PCP, 2005), this extended annual review report excludes information referred to in paragraph 126 of the PCP.

Project Number: 31909 Loan Numbers: 1793, GU1793, and CF39 March 2008

Loans and Political Risk Guarantee Bangladesh: Meghnaghat Power Project

Extended Annual Review Report

CURRENCY EQUIVALENTS

Currency Unit – taka (Tk)

At Appraisal At Project Completion (10 October 2000) (26 November 2002)

Tk1.00 = $0.0186 $0.0173 $1.00 = Tk53.75 Tk57.85

ABBREVIATIONS

ADB – Asian Development Bank BOO – build-own-operate BPDB – Bangladesh Power Development Board CFS – complementary financing scheme DESA – Dhaka Electricity Supply Authority DESCO – Dhaka Electric Supply Company DSCR – debt service coverage ratio DOE – Department of Environment EIA – environmental impact assessment EIRR – economic internal rate of return EPC – engineering, procurement, and constructions FIRR – financial internal rate of return GSA – gas supply agreement IOP – initial operations period IPP – independent power producer ISO – International Organization for Standardization MPL – Meghnaghat Power Limited O&M – operation and maintenance PGCB – Power Grid Company of Bangladesh PRG – political risk guarantee PPP – public–private partnership

WEIGHTS AND MEASURES

GWh (gigawatt-hour) – 1,000,000 kWh kg (kilogram) – 1,000 grams km (kilometer) – 1,000 meters kWh (kilowatt-hour) – 1,000 watt-hours kV (kilovolt) – 1,000 volts MW (megawatt) – 1,000,000 watts

NOTES

(i) The fiscal year (FY) of the Government ends on 31 December. FY before a

calendar year denotes the year in which the fiscal year ends, e.g., FY2007 ends on 31 December 2007.

(ii) In this report, “$” refers to US dollars.

Vice President L. Jin, Operations 1 Director General R. Bestani, Private Sector Operations Department (PSOD) Director M. Barrow, Infrastructure Finance Division 1, PSOD Team leader M. Elerud, Senior Investment Specialist (Infrastructure), PSOD Team member L. Afable-Limqueco, Senior Operations Assistant, PSOD

CONTENTS

Page

BASIC DATA iMAP EXECUTIVE SUMMARY iii

I. THE PROJECT 1

A. Project Background 1 B. Key Project Features 2 C. Progress Highlights 3

II. EVALUATION 4 A. Project Rationale and Objectives 4 B. Development Impacts and Outcomes 4 C. ADB Investment Profitability 10 D. ADB Work Quality 10 E. ADB Additionality 13 F. Overall Evaluation 14

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 15 A. Project Issues 15 B. Lessons and Recommendations 15 C. Issues to Monitor 15

APPENDIXES 1. Basic Data: Investment Summary 172. Private Sector Development Checklist: Infrastructure 193. Bangladesh’s Power Sector 234. Environmental, Social, Health, and Safety Performance 27

BASIC DATA

Meghnaghat Power Limited (Loan Nos. 1793, GU1793, CF39 - Bangladesh)

Key Project Data

As per ADB Loan Documents ($ million)

Actual ($ million)

Total Project Cost 300.0 295.0 Total Equity 80.0 75.0 Total Debt 220.0 220.0 Asian Development Bank Financial Assistance – Direct Loan 50.0 50.0 – Complementary Financing Scheme 20.0 20.0 – Political Risk Guarantee 70.0 70.0 Key Dates Expected Actual Concept Clearance Approval 2 May 1997 2 May 1997 Board Approval December 2000 5 December 2000 Loan Agreement 11 April 2001 11 April 2001 Loan Effectiveness 11 April 2001 11 April 2001 First Disbursement October 2001 25 October 2001 Commercial Operations Date 31 January 2003 26 November 2002 Loan Closing 11 April 2004 11 April 2004 Months (Effectiveness to Commercial Operations Date)

21 19

Internal Rates of Return Appraisal XARR Financial Internal Rate of Return 11.4% 14.5% Economic Internal Rate of Return 26.9% 38.3% Project Administration and Monitoring No. Missions No. Person-Days Due Diligence 6 12 Loan Negotiations 3 19 Project Administration 1 1 Annual Review Missions 1 4 Extended Annual Review Mission 1 6

B A N G L A D E S H

MEGHNAGHAT POWER PROJECT

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230 kV Overhead Line Planned Thermal Power Plant Planned

132 kV Overhead Line Existing Thermal Power Plant Planned ADB Project

132 kV Overhead Line Under Construction Hydropower Plant Existing

132 kV Overhead Line Planned Substation Existing

132 kV Overhead Line Planned ADB Project Substation Planned

132 kV U/G Cable Line Existing Gas Field

132 kV U/G Cable Line Planned ADB Project River

132 kV U/G Cable Line Under Construction International Boundary

230 kV U/G Cable Line Planned ADB Project Boundaries are not necessarily authoritative.

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EXECUTIVE SUMMARY On 5 December 2000, the Board of Directors of the Asian Development Bank (ADB) approved a direct loan of $50 million and a loan of $20 million under ADB’s complementary financing scheme (CFS) for the Meghnaghat Power Project (the Project). Two weeks later, the ADB Board approved a political risk guarantee (PRG) of $70 million for the Project. The Government of Bangladesh agreed to indemnify and reimburse ADB for all amounts paid by ADB under the guarantee agreement. The funds, sourced from ADB’s ordinary capital resources, were to be used to construct and operate a 450-megawatt (MW), combined-cycle, gas-fired power station southeast of Dhaka. This extended annual review report assesses ADB’s support to help develop the Project. ADB initiated the extended annual review by sending out its standard questionnaire to the project company, Meghnaghat Power Limited (MPL). Its first evaluation of the Project was based on information gathered from legal and ADB Board documents, progress reports, audited financial statements, annual review reports, and related operation and business reports. On 14–15 May 2007, ADB fielded a mission to broaden the review and gather relevant information from key management staff of MPL.

MPL, one of the first major independent private sector power producers in Bangladesh, was established under a 22-year build-operate-own (BOO) arrangement with the Government. The BOO company, MPL, developed and operates the Project. The Project was constructed over 22 months at a cost of $295 million, below the budgeted 23 months and $300 million. MPL entered into a 22-year power purchase agreement with Bangladesh Power Development Board (BPDB) as buyer of electricity produced under the Project, and a gas supply agreement (GSA) with Titas Gas Transmission Company Ltd. to source natural gas from an underground steel pipeline in the same area of the Project. From the start of commercial operation on 26 November 2002 until the end of September 2007, MPL supplied about 14,875 gigawatt-hours of electricity to BPDP.

The evaluation of MPL is based on four main criteria: (i) development impact, (ii)

profitability of ADB’s investment, (iii) quality of ADB’s work, and (iv) ADB’s additionality. The results of this analysis are then aggregated to derive an overall rating for the Project.

The development impact of MPL is rated “excellent”. It was evaluated in four categories:

(i) private sector development; (ii) business success; (iii) contribution to economic development (economic sustainability); and (iv) environment, social, health, and safety performance. The main categories and subcategories were rated according to the June 2007 guidelines for the preparation of extended annual review reports for private sector investment operations. The contribution to private sector development is rated “excellent”. Through its involvement in MPL, ADB was a catalyst in enabling private finance for power generation. MPL is one of the first major private sector independent power producers (IPPs) to succeed in Bangladesh. In addition to cost-effective and reliable power, MPL was one of the IPPs to introduce private capital and private sector management to power generation. The contractual structure and legal documentation could be used as basis for future IPP projects. The smooth operation of MPL could create demonstration and catalytic effects for future private sector participation in the power sector.

In terms of business success, MPL is rated “satisfactory”. MPL’s operations involve the

transfer of technology and best practices in power plant operation. MPL’s financial performance until FY2005 exceeded appraisal targets. Although this was not the case in FY2006, because of major maintenance of the two gas turbine units during the fourth quarter, MPL is back on track to exceed its financial targets for 2007.

iv

MPL’s economic contribution, as well as its environmental, social, health, and safety

performance, is rated “excellent”. MPL received International Organization for Standardization 14001 certification for environment management standards, and Occupational Health and Safety Assessment Series 18001 certification for occupational health and safety management system. With these certifications, MPL is subject to external audit ensuring that international standards are met all times. MPL has had an excellent safety record, operating for 1,494 days (in 2006) without any incidents resulting in lost time, and a satisfactory environment record.

The investment outcome of MPL is rated “satisfactory” as interest payments were made

on time. Since project approval, Bangladesh country risks have improved significantly. Meanwhile, ADB’s quality of work was rated “excellent” based on the following criteria: (i) screening, appraisal, and structuring; (ii) monitoring and supervision; and (iii) ADB’s role and contribution. By providing a direct loan, CFS, and PRG, ADB catalyzed commercial financing. ADB’s involvement through its public and private operations, as well as its long-term participation in the development of the power sector in Bangladesh, also boosted the confidence of the project sponsors to invest in MPL as one of the first major IPPs.

Overall, MPL is rated “highly successful”. MPL met its primary development objectives

by (i) providing additional reliable base load capacity through a least-cost expansion program, with due consideration for environmental and social impacts, to mitigate the forecast power shortage in Bangladesh; (ii) reducing poverty through the promotion of faster economic growth, thereby creating better development opportunities for the poor and improving human development; (iii) serving as a model for other IPPs, particularly in project selection, screening, and document preparation; (iv) attracting private sector investors to the power sector as one of the first major private sector IPPs successfully implemented in Bangladesh; and (v) playing an instrumental role in raising domestic and international commercial funds.

The main variations from the projections in the Report and Recommendation of the President were (i) lower project cost, (ii) shorter implementation period, (iii) lower dispatch factors due to seasonal variations, and (iv) higher gas take-or-pay charges because of overestimated dispatch factors.

The main lessons drawn from the Project were as follows: (i) The clear definitions of scope in prequalification and request-for-proposal

documents, combined with transparent international bidding, were essential to the success of the Project. This helped to attract highly qualified sponsors to bid and commercial financial institutions to support the project.

(ii) Early in the process, it is important to identify the demand, and specify the appropriate capacity, fuel source, technology, site, transmission, and potential infrastructure.

(iii) A well-coordinated plan is needed early in the process.

ADB can draw on the experiences and lessons from MPL as one of the successful examples for future involvement in the power sector.

I. THE PROJECT

A. Project Background

1. The Meghnaghat Power Project (the Project) involved the construction and operation of a gas-fired, combined-cycle power plant in southeast Dhaka, on the northern bank of the Meghna River in Meghnaghat, Bangladesh. It was completed at a cost of $295 million, financed by $220 million in debt and $75 million in equity. On 5 December 2000, the Board of Directors of the Asian Development Bank (ADB) approved a direct loan of $50 million and a loan of $20 million under ADB’s complementary financing scheme (CFS). Two weeks later, the Board approved a political risk guarantee (PRG)1 of $70 million for the Project.2 The Government of Bangladesh agreed to indemnify and reimburse ADB for all amounts paid by ADB under the guarantee agreement. Several financial institutions and commercial banks cofinanced the Project with senior loans of $20 million and subordinated loans of $60 million. 2. The Project was designed to add base load capacity to help solve Bangladesh’s power shortages. Gas-fired power plants generated about 88% of the total energy in 1999, with the remaining 12% coming from hydropower, diesel, and furnace oil. During project inception, only 18% of the population of 140 million had access to electricity. Despite having installed capacity of 3,411 megawatts (MW) in 1999, Bangladesh’s available peak generation was only 2,449 MW. In 1999, about 3.5 million households were connected to public supply systems. About 25% of urban households and 10% of rural households have formal connections to the grid (many urban households are connected through other connected consumers). The country’s annual per capita electricity consumption of 70 kilowatt-hours was one of the lowest in the world. While the demand for electricity has currently been growing at 8% annually, low plant utilization, inadequate investment, and high distribution losses have resulted in significant load shedding.3 Load shedding in 1999 reached a high of 774 MW, with a total duration of 1,690 hours in 335 days. The erratic power supply has increased the unwillingness of consumers to pay their electricity bills, which has led to shortages of funds for maintenance, aggravating the situation. The ADB-financed power system master plan study in 1995 projected electricity demand to increase annually by about 8% through 2025, and that peak demand will reach 17,900 MW. An estimated at $10.2 billion will be needed to expand capacity. Bangladesh Power Development Board (BPDB), the state-owned utility under the Ministry of Energy and Mineral Resources, is responsible for planning, construction, and operation of power generation and transmission. However, it does not have the capacity to finance these substantial investments. Therefore, the Government invited the private sector to participate in the development of base load power generation capacity. 3. The developer as well as the terms and conditions for project development were selected through international competitive and transparent bidding.4 AES Corporation initially

1 ADB, 2001. Review of the Partial Risk Guarantee of the Asian Development Bank. Manila. The PRG approved for

this project refers to the proposed Partial Risk Guarantee, however, to comply with para 64 of the said review paper the guarantee facility ADB provided was renamed to Political Risk Guarantee.

2 ADB. 2000. Report and Recommendation of the President to the Board of Directors on Proposed Loans to AES Meghnaghat Limited and a Proposed Partial Risk Guarantee for the Meghnaghat Power Project in the People’s Republic of Bangladesh. Manila.

3 Cutting off the electric current on certain lines when the demand becomes greater than the supply. 4 The process was done in three stages and took more than 2 years to complete. Of 137 firms that requested

prequalification documents, 20 submitted qualification statements. These 20 were reviewed in detail, taking into account their ability to raise financing, their experience, and their personnel qualification. This exercise yielded five prequalified firms, which were recommended for bidding. The bidding was done in a two-envelope system: a technical bid and a price bid. For this purpose, ADB’s technical assistance assisted BPDB in implementing the Project.

2

developed the Project through a special purpose company, AES Meghnaghat Limited. BPDP was responsible for site preparation, including filling the site with about 2 million cubic meters of materials dredged from the Meghna River, and construction of the access road. These activities were completed in 2000. In July 2002, the Department of Environment (DOE) provided the environmental clearance for commercial operation. After 22 months of construction, commissioning, and testing, the plant began commercial operations in November 2002. In December 2003, Globeleq Ltd., a subsidiary of CDC Group plc (owned by the Government of the United Kingdom), bought 100% equity interest in MPL from AES. Right after the sale, the name AES Meghnaghat Limited was changed to Meghnaghat Power Limited (MPL). In December 2005, Islamic Development Bank Infrastructure Fund LP bought a 24% equity holding in Globeleq. On 21 November 2007, Pendekar Energy (L) Ltd., a private limited company incorporated in Labuan, Malaysia on 31 October 2005, bought all assets of Globeleq, including the Project and other power plants in Bangaldesh, Egypt, Pakistan, and Sri Lanka. Pendekar is 55% owned by Tanjong Energy Holdings Sdn Bhd and 45% owned by Aljomaih Automotive Company Limited, The change in ownership structure resulted in no major shifts in the Project’s corporate goals and objectives. B. Key Project Features

4. The Project is on a 25.09-ha site about 22 kilometers southeast of Dhaka, on the northern bank of the Meghna River, Meghnaghat, Narayanganj, Bangladesh. MPL was formed to build, own, and operate a 450 MW, gas-fired, combined-cycle power plant consisting of two gas turbine generators, two heat recovery steam generators, and one steam turbine generator. The power plant is exclusively powered by indigenous natural gas, which is supplied by Titas Gas Transmission Company Ltd., as stipulated in the gas supply agreement (GSA). The natural gas is supplied through Titas’ 20-inch Bhakrabad–Dewra pipeline with a 500-meter spur pipeline connecting to the project site. As freshwater is available at the site, water for cooling purposes is abstracted from the Meghna River via a submerged intake structure. After its use, the cooling water is released back into the Meghna River via a discharge channel. The power station includes full effluent treatment, fire control systems, waste management facilities, and other systems required to maintain daily operations. The gas price is passed through under the power purchase agreement (PPA) to BPDB, which pays a tariff incorporating a fuel charge. 5. Under the PPA, all the generated electricity is to be delivered to the BPDB grid via an on-site 230-kilovolt (kV) substation and three 230-kV transmission lines for 22 years from its commercial operation date, 26 November 2002, on a take-or-pay basis. The build-own-operate (BOO) contract provides the terms and conditions under which MPL has the exclusive right to design, finance, insure, construct, own, operate, and maintain the power plant. The terms and conditions include the Government guarantee of the payment obligations of BPDB under the PPA, and the performance of the fuel supplier under the GSA, and the lessor under the land lease agreement. The contract also obliges the Government to make available foreign exchange for the Project’s debt service, as well as for the guarantee to compensate MPL in the event of a political force majeure or a change in law resulting in a delay in project implementation or a decrease in plant operating capacity. 6. The initial planning was to develop three new private sector power stations at the site (Meghnaghat I, II, and III). The Government acquired the 109 hectares required for these three projects, which BPDP prepared. However, only Meghnaghat I (the Project) has been built, and it has been operational for 5 years. Reportedly, previous tenders for the two other projects have been or are about to be canceled. The Government plans to launch a new tender process for Meghnaghat III soon.

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C. Progress Highlights

7. MPL was established as an independent power producer (IPP) under a fixed-price, date-certain, turnkey engineering, procurement, and construction (EPC) contract.5 The EPC contract was awarded to Hyundai Engineering and Construction Co. Ltd. of the Republic of Korea through international competitive bidding. After the Project’s construction, MPL had a gas turbine maintenance contract with Ansaldo from Italy. MPL in 2006 entered into a Long Term Parts Management Agreement with Siemens Germany. Construction took 22 months and was completed on schedule on 26 November 2002. Of the projects that were evaluated in depth, MPL’s was the only one that did not experience delays. Public sector loan projects were delayed on average 3.5 years. The MPL plant has been described as “the least-cost IPP in Asia”.6 While the PPA for the plant allows for a 38-day annual outage for major inspections and operation and maintenance (O&M), no outages are allowed during March–May. The MPL management is comfortable with such restrictions and does not expect to have any problems meeting them. 8. The Project was constructed at a cost of $295 million, about $5 million below budget. MPL passed the performance tests and received a takeover certificate, which was issued to the EPC contractor on 28 January 2003. Project’s commercial availability through January to October 2007 was high at 99.5%. The 2007 load factor through October was in line with budget expectations at 88.21%, while the heat rate was better than the budget target, which is expected to result in below-budget fuel costs. From the start of commercial operations until the end of September 2007, MPL had supplied about 14,875 gigawatt-hours of electricity to BPDB. 9. MPL had scheduled major maintenance for the first gas turbine in August 2006 and for the second gas turbine in January 2007. However, major maintenance for both turbines was done in October to December 2006. The second turbine suffered a ground fault relay in mid-September 2006 and was unable to generate electricity. In a July 2005 inspection of the unit, the manufacturer, Alstom, did not find any indication of a fault. MPL delayed vital preventative maintenance on first gas turbine at the request of the Bangladesh authorities and in recognition of the need for reliable power. Any further delay would have increased the risk that the first turbine would experience a fault similar to the second one, causing the power supply situation in the country to deteriorate further. Therefore, Alstom made all major repairs to both gas turbines in October to December 2006, and they have been operating satisfactorily since. Because of these major maintenance activities, the plant’s availability was only 50% in November 2006 with a capacity factor of 46.96%. Following the repair and maintenance works on the two turbines, the progress reports noted an improved availability factor of 100% in January 2007 and 99.79% in February 2007 and net plant capacity of 90.18% in January 2007 and 93.03% and February 2007. With the completion of major scheduled maintenance outages for both gas turbines in late 2006, the MPL plant is about 3 years away from its next significant scheduled outage for the gas turbines. A steam turbine major inspection along with minor inspection of gas turbines are scheduled for the beginning of 2008. 10. Due to the major maintenance and repairs of the two gas turbines, the plant availability in 2006 was at its lowest at 78.1%. The plant availability during a normal year is assumed as 94%, and 90% for those years when major maintenance of a gas turbine occurs. The overall average availability projected through 2023 is 93.1%. The projection for availability is slightly higher than the industry average for this technology, which is about 92%, with the best

5 The EPC contract provides liquidated damages for late completion, excessive heat rate, and lower-than-rated net

capacity, and is secured under a performance bond. 6 The mission was not able to confirm the accuracy of this.

4

performers achieving 94% or better. The average availability since the plant began commercial operations has been 90.5%. The average availability up to the rescheduled outage in October 2006 was 94.1%. The average availability is above the contracted requirement in the PPA of 90% in a year when major maintenance occurs. The confirmed heat rate at EPC performance test was 7,795 kilojoules per kilowatt-hour against EPC guaranteed heat rate of 7,844 kilojoules per kilowatt-hour. For the fourth contract year (2005–2006), the plant had net generation of 450.4 MW as compared with the EPC guarantee of 450 MW. 11. The plant is controlled through a modern software package and computerized controls. All control functions that affect the availability of the generating units are duplicated and available at several control levels to ensure adequate backup of all control functions. Further, all significant operating parameters of the generating units are monitored, including vibration and temperatures. 12. A key conclusion derived from the extended review of project implementation and operation is that ADB supported a technically sound project. The Project is being implemented with satisfactory-to-good quality, addressing the needs of the Bangladesh power sector. MPL generally has met the physical objectives identified at appraisal, broadly within the budget. The O&M of the Project is exemplary. Overall, the Project has helped to broaden access to a competitively priced and highly reliable power supply in Bangladesh.

II. EVALUATION

A. Project Rationale and Objectives

13. The Project achieved the development rationale and objectives set out in the report and recommendation of the President (RRP) by:

(i) providing additional reliable base load capacity through a least-cost expansion program, with due consideration for environmental and social impacts, to mitigate the forecast power shortages in Bangladesh;

(ii) reducing poverty through the promotion of faster economic growth, thereby creating better development opportunities for the poor and improving human development;

(iii) serving as a role model for other IPPs, particularly in project selection, screening, and document preparation;

(iv) attracting private sector investors to the power sector as one of the first major private sector IPPs successfully implemented in Bangladesh; and

(v) playing an instrumental role in raising domestic and international commercial funds.

14. The evaluation of MPL, a nonsovereign operations project, is based on four criteria: (i) development impact, (ii) profitability of ADB’s investment, (iii) quality of ADB’s work, and (iv) ADB’s additionality. The criteria are discussed in the following sections. B. Development Impacts and Outcomes

15. The main categories and subcategories were rated according to the June 2007 guidelines for the preparation of extended annual review reports for private sector investment operations.

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1. Private Sector Development

16. The assessment of private sector development impacts classified as beyond company impacts and direct company impacts is in paras. 17–23. The detailed assessment of individual indicators is in the private sector development impact checklist in Appendix 2.

a. Beyond Company Impacts

17. MPL is one of the first major private sector IPPs to succeed in Bangladesh. The success of MPL has clearly demonstrated the effectiveness of the private sector in building and operating infrastructure, advocating corporate governance and transparency, and promoting professional work ethics. IPPs are providing an increasing share of the power supply in Bangladesh, and now account for about 38% of total generation. All new base load power supply is envisaged to come from IPPs. In promoting faster growth led by the private sector, ADB helped the Government to accelerate policy reform and create equal opportunities for participants. ADB emphasized providing assistance to relieve infrastructure and financial bottlenecks for the private sector. MPL, one of the key components of the Government’s efforts to promote foreign investment, is in line with the country operational strategy and the partnership agreement on poverty reduction between ADB and the Government. The Project also complies with ADB's strategy for the energy sector and private sector operations in Bangladesh. 18. As the Government realized that the investment requirements for the power sector would exceed the resources available in the public sector and could crowd out investment in other key sectors, it decided in 1994 to invite private sector participation in generation. In 1996, the Government introduced a private sector generation policy. The Government attempted to streamline its administrative and commercial procedures, and the private sector responded favorably. As a result, starting in the late 1990s, Bangladesh has been successful in attracting private sector investors. Through its involvement in MPL, ADB was a catalyst in enabling private finance for power generation. In recent years, the private sector has undertaken most generation projects for grid supplies. MPL has been operating successfully in the private sector and reliably producing power at reasonable cost to BPDB. 19. In addition to providing cost-effective and reliable power, MPL—along with the other IPPs—introduced private capital and private sector management to power generation. Private capital reduces the demand on the budgets of Government partners. Private sector management provides benchmarks for the efficient operation of power stations in Bangladesh, and establishes standards for BPDB stations to aim for in the future. Moreover, the new investors show signs of being prepared to invest further in the sector. These developments indicate that private power generation is now widely accepted in Bangladesh, and is attracting foreign and local investors. 20. Overall, ADB’s involvement and investment in the power sector led to positive institutional developments, particularly over the 8 years since ADB became the coordinating development partner for the sector. The unbundling of the sector was partially accomplished, private generation is now an accepted feature of the power market, and new institutions are achieving good results. The growth of the IPPs increases competition among public and private power producers by gradually eroding the monopoly of BPDB in power generation. The investment opportunities in the Bangladesh power sector are promising for the private sector. The Government has taken steps to create an environment conducive to private sector involvement through appropriate policies, and power sector reforms and restructuring.

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b. Company Impacts

21. The Project involves a significant transfer of knowledge as a result of the foreign direct investment. To the extent possible, the Project hires local people. The management positions held by Bangladeshis are largely in plant O&M. At the start of operations, five of MPL’s 75 employees were expatriates who had the broad technical experience and managerial skills needed to lead the initial project organization. MPL had implemented a localization plan to promote competent local staff to replace some expatriate staff in middle management positions. After the initial year of operation in 2002, the number of staff gradually decreased to 59 and several contractual staff with one expatriate as the general manager. Currently, there is no expatriate employees working for MPL. Expatriates left because of the successful transfer of technical expertise and managerial skills to local staff and the reduced workload. The XARR Mission observed that the plant is operated and maintained to the highest standards7 with minimal staffing. MPL is an excellent example of disciplined operating standards providing dependable and efficient generation in the Bangladesh power sector. It provides a successful example of the IPP concept in generation. MPL uses modern technology for power plant operations. In 2006, a new computerized maintenance management system was implemented to provide more reliable and efficient maintenance of the plant. The Project is technically effective and sustainable for the expected 22-year life of the generating units. This sustainability is predicated on the design quality of the generating units, and MPL’s commitment to sound O&M practices. The company organizes regular training for its employees in various areas, including operation, safety management, finance, English language, and computer programs. Monthly technical training programs are organized for O&M personnel. 22. In terms of corporate governance and sound operating systems, MPL has obtained International Organization for Standardization 14001 certification for environment management standards, and Occupational Health and Safety Assessment Series 18001 certification for its occupational health and safety management system. MPL constructed and is operating the power station in an environmentally responsible manner, complying with all applicable environmental laws, regulations, and guidelines. MPL adopted an environmental policy that states the principles and intentions of the company as part of its overall environmental performance. Such principles and intentions were communicated to employees, customers, and community members along with their individual environmental responsibilities. MPL developed training programs to ensure power station staff receive training appropriate for implementing the emergency response plan; health, safety, and environmental procedures; and the plant O&M program. MPL maintains safe and healthy working conditions, and protects the environment, equipment, and systems of work for its staff, visitors, and neighbors. During the plant visit, members of the Extended Annual Review Mission were required to attend a 30-minute presentation on environmental, health, and safety awareness before they were allowed to tour the plant. 23. The overall rating of the Project in terms of contribution to private sector development is “excellent”. 7 The plant design includes multiple layers of backup controls to ensure high availability. Plant control is state of the

art with computerized generation control and a complete monitoring system of all significant data. All major equipment instruction and maintenance manuals are on hand. A complete set of spares, including spare turbine blades, are maintained and stored properly. All personnel in the plant area wore safety gear.

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2. Contribution to Economic Development

24. Bangladesh has made remarkable progress on economic growth through a larger supply of electricity. About 38% of the population now has access to electricity, compared with 18% before MPL’s inception. Installed power generation capacity has increased to 5,275 MW (as of May 2007) from 3,411 MW in 1999 before MPL’s inception. With a population of 150 million (as of September 2007), the country is densely populated. MPL was included as part of the least-cost generation and reliable source of electricity for Bangladesh. MPL was awarded through competitive bidding to ensure the lowest tariff. MPL has added reliable base load capacity, which is especially valuable during the dry season when the output from hydropower plants (representing 10% of the energy sector) is low. 25. The Project provides the capacity required to improve the supply and availability to poor households. The benefits of electrification to the poor include savings, higher quality of life, better status of women and children, and more reliable irrigation systems. The country’s economy is predominantly agricultural. Expanded use of electricity in irrigation has increased agricultural productivity. The larger supply of electricity has helped businesses and small commercial centers to grow, and has boosted shop sales by allowing longer business hours. Electrification of public facilities, such as dispensaries, schools, offices, and places of worship, improved services. Furthermore, MPL has employed local skilled labor. Given MPL’s role as a base load power plant and the strong demand for electricity, its output is considered incremental. Because measuring the willingness of consumers to pay is difficult without survey data, the long-run marginal cost was used as a supply side proxy to capture consumer willingness to pay and to estimate MPL’s economic benefits. The Project’s economic sustainability is rated “excellent”.8 26. Since the introduction of the private sector generation policy, IPPs have added 1,290 MW in new capacity (seven plants) and now account for about 38% of national power generation. Despite this additional installed capacity, Bangladesh is suffering from a power shortage of up to 1,500 MW during peak hours. Over the past 10 years, electricity consumption in Bangladesh grew at an average compound rate of 8.1% per year, and demand for electricity is expected to grow at an annual rate of about 8.0% for the next 10 years. The ADB-financed power system master plan update concluded that 17,900 MW in additional capacity would be necessary through 2025, of which 3,500 MW would be needed by 2010.9 The investment requirement for generation is estimated at $10.2 billion for modest economic growth. With faster economic growth expected, the actual investment requirement will be much higher. With Government support, the investment opportunities in Bangladesh power sector are promising for the private sector.

3. Environment, Social, Health, and Safety Performance

27. ADB classified the Project as environment category A. On 11–12 December 2007, the Regional and Sustainable Development Department led an ADB Safeguard Review Mission of the Project, which examined MPL’s compliance with environmental commitments (covenants in the Loan Agreement and implementation of the environmental action plan), and any outstanding safeguard issues. The Mission found the MPL’s compliance with the environmental commitments to be satisfactory. No major outstanding environmental issue was found. The Mission commended the project management for the environmental performance of the plant.

8 According to the draft OED guidelines, an “excellent” rating will be assigned if the EIRR is at least 20%. 9 ADB. 2004. Technical Assistance to the People’s Republic of Bangladesh for Preparing the Power Sector

Development Program II. Manila (TA4379-BAN, approved on 23 September).

8

28. MPL conducts environmental monitoring consistent with the environmental impact assessment (EIA),10 and submits a monthly report to DOE. A health, safety, and environment committee was created to monitor environmental performance. Annual monitoring reports on environment, social, health, and safety performance have been submitted to ADB since 2003. 29. The environmental action plan recommended in the EIA has been followed scrupulously. The latest report (for 2006) describes full compliance with host-country environmental requirements, as well as with World Bank and ADB environmental guidelines. Average emissions (into air and water) and ambient noise levels are well below applicable national and World Bank limits, and in the past 2 years discrete exceedances have been rare. Waste management and hazardous materials handling and storage follow international good practices.11 The plant site is clean and tidy, with no obvious sign of past contamination. An emergency response plan (including for oil and chemical spills) has been developed, and response readiness is regularly tested. The Project has progressively strengthened its in-house monitoring capacity. 12 MPL received International Organization for Standardization 14001 certification (environment), and Occupational Health and Safety Assessment Series 18001 certification (occupational health and safety). As such, MPL is subject to annual external audits. 30. The Project’s performance in terms of nitrogen oxide (NOx) emissions is very good due to the use of dry low-NOx gas turbines, good maintenance, and high load factor. For 2007, however, monthly ambient air quality measurements for NOx at the four corners of the site show that, while the values are below the DOE standard for an industrial zone,13 background levels are higher than those estimated in the EIA. Such degradation of ambient air quality is probably caused by external factors and not the Project. After plant construction,14 a major general development has taken place adjacent to the plant and traffic on the Dhaka–Chittagong highway has increased, raising the level of ambient air pollution. In the same air shed, the brick kilns mushrooming around the project site on both sides of the road are another major air pollution source, specifically along the Dhaka–Chittagong highway. The brick kilns, which primarily use firewood as fuel, emit ashes that are causing premature clogging of MPL’s gas turbine air intake filters. The unprecedented level of air pollution has shortened the period for fine filter replacement to 6 months from the original plant design frequency of 24 months. Replacing a set of fine filters for both the gas turbines of the plant costs about $70,000. Cement factories along the northern bank of the Meghna River and edible-oil refineries adjacent to the MPL plant are also contributing significantly to air pollution around the power plant that is much worse than was anticipated in the EIA. To address the situation, the EPC contractor has modified the design of the air intake filter house by adding two additional Italian-made pre-filter stages (one of them washable). The XARR Mission recommended that MPL follow up with relevant authorities on this issue to update or adopt appropriate mitigation and monitoring measures. 10 Prepared by ESG International, in September 2000 in accordance with the scope and format under the World

Bank’s guidelines (1998) and ADB’s environmental guidelines for thermal power stations (1993). The EIA report was submitted to DOE. The summary EIA was circulated to ADB’s Board of Directors in August 1997.

11 For instance, (i) waste segregation and reuse; (ii) final waste disposal only by DOE-approved contractors; and (iii) chemicals, solvents, and oils stored separately, and storage areas covered and designed with secondary containment.

12 The plant is now equipped with real-time monitoring of air emissions (including nitrogen oxide concentrations in stack), and pH and temperature of water discharge. Sampling and testing in the on-site laboratory of 17 parameters at the exit of the effluents treatment plant is carried out weekly. Noise monitoring at the closest receptors is also carried out weekly. Data collected are used to produce monthly monitoring reports to DOE. DOE’s environmental clearance has to be renewed annually. Latest renewal was in September 2007.

13 The 24-hour average NOx concentrations in ambient air are generally between 40 and 60 microgram per cubic meter (µg/m3) for 2007. DOE standard is 100 µg/m3.

14 Construction started on 24 January 2001 and was completed on 25 November 2002. Commercial operation started on 26 November 2002.

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31. The plant operated 1,494 days without employee staff lost time accidents, and 382 days (in 2006) without contractor staff lost time accidents. To prevent spills, all hazardous chemicals, solvents, and oil are stored with secondary containment. Spill kits have been procured for handling of chemicals and oil spills. High-noise zones in the workplace are identified, and all personnel and plant visitors are required to wear a hearing protection device in those zones. Regular in-house inspections of the workplace, firefighting system, emergency equipment, and heavy equipment are being conducted. A regular safety training program, which includes but is not limited to spill management training, is carried out for all the plant staff. An annual health checkup program is in place for all staff. A safety manual has been finalized and the guidelines therein were implemented, and an emergency response plan has been developed. 32. The power plant site covers 25.09 ha of which the core plant occupies about 4.85 ha, the switchyard 1.61 ha, and the housing complex 3.23 ha. The rest of the land is a dense plantation. Because the site is sandy, the plants have grown less than expected. No noticeable morphological change of the river in the vicinity of the power plant site has been reported. Further, no harm to the river has been observed as a result of construction and operation of the power plant. The quality of the discharge cooling water from the once-through cooling system of the power plant is unchanged other than an increase in temperature not exceeding 2 degrees Celsius. This confirms compliance with the World Bank guidelines. The fuel quality has not declined below the minimum specified in the GSA. The fuel quality has been found to be very consistent, as confirmed in the monthly analysis performed for gas billing. 33. The land acquisition and resettlement process has been completed in accordance with ADB’s standards, and no more activities were needed before the start of construction. MPL had paid compensation and met other social requirements in accordance with the resettlement plan for the families relocated because of the Project. 34. MPL promoted job creation during construction and operation. MPL employed 3,000 workers at the peak of construction. In 2006, MPL engaged about 100 people from the local community as temporary semiskilled and unskilled laborers during its major maintenance outages. During the Mission, MPL employed 59 local staff, including all senior management positions. Local people worked as O&M helpers and in other positions. English language training was provided, and people were hired for day-to-day O&M and other activities of the plant. MPL also hired local contractors and suppliers for various services and supplies for day-to-day operation of the plant. The participation of the local community in O&M of the power plant has directly and indirectly benefited the local economy. 35. At the community level, MPL has started implementing a hospital project,15 to which $900,000 has been allocated. The Meghnaghat Islampur School,16 another social responsibility program of MPL, is estimated to cost about $14,000. On 16 October 2006, MPL donated $100,000 to Ahsania Mission Cancer Hospital in Dhaka. In addition, small-scale social programs are conducted regularly to help the underprivileged neighborhood around MPL. These projects support improvements in, among others, the education, disaster preparedness, livelihood, and communication of the nearby community. The social responsibility programs for 2007 were (i) the scholarship program for outstanding students of the plant community; (ii) best teacher’s 15 Land purchase and registration for the hospital project has been completed and groundbreaking was on 12 July

2006. The Diabetic Association of Bangladesh (DAB) will operate the 50-bed hospital to be located between the Haripur and Meghnaghat power plants. The Association purchased the land for the hospital, and the sponsor (as committed in the EIA Report) will finance the construction and purchase of equipment and furniture for the hospital. The target completion of the project was December 2007.

16 Construction of this school will start as soon as the local people have turned over the land.

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award; (iii) health and hygiene awareness program for the elderly; (iv) skills development workshops on poultry, fisheries, handicrafts, and woodcrafts for unemployed youth; (v) plantation or sapling distribution program; (vi) computer training for the local community school where the project sponsor already donated a few computers; (vii) tailoring training institute; and (viii) donation to a local women’s university library and information technology training. 36. Overall, MPL has prioritized its environmental, health, and safety performance. In terms of social impact, MPL has helped to improve the electrification rate in Bangladesh, created jobs, and engaged in community support programs. As such, the Project’s environmental, social, health, and safety performance is rated "excellent". C. ADB Investment Profitability

37. The interest rate margin charged on ADB’s direct loan was benchmarked against that of another private power project in Bangladesh (the Haripur project). The pricing for the ADB loan reflects the risks associated with the Project, in comparison with recent market benchmarks. The PRG pricing17 and fees were very competitive. In the absence of the PRG,18 in which ADB acts as the guarantor of record, the commercial cofinancing would not materialize. 38. Demand risk is low based on the current shortage and high annual growth of demand. The take-or-pay obligation of the buyer under the PPA, which is guaranteed by the Government, further mitigates the demand risk. The payment performance of the buyer (BPDB), which is discussed in para. 45, recently was resolved. Therefore, the buyer’s credit risk has been satisfactory so far. Although a limited risk will remain throughout the Project, this risk might increase if BPDB makes major commitments to more new IPPs without higher tariffs, and better billing and collection of the entire power sector system (BPDB and the distribution entities). Moreover, with regard to O&M of the Project, MPL has the necessary engineering and operational human resources to sustain the investments financed by ADB. 39. The payment record of BPDB has improved markedly. BPDB's monthly payments to MPL were delayed from November 2005 to December 2006 for an average of 71 days, but they were fully paid up by May 2007. The only significant outstanding claim from BPDB is for interest on late payments. MPL’s managing director and BPDB are addressing this issue through dialogue. Besides two delayed payments due to technical issues (para. 29), MPL has regularly and promptly serviced its principal and interest to the lenders. Final repayment is scheduled on 15 September 2016. 40. ADB’s investment profitability is rated "satisfactory". D. ADB Work Quality

41. The quality of ADB’s work is assessed as "excellent" in three categories: (i) screening, appraisal, and structuring; (ii) monitoring and supervision; and (iii) ADB’s role and contribution. As a direct lender and provider of PRG, ADB played an important role in mobilizing commercial financing. Commercial banks had been hesitant to lend on an uncovered basis because of the

17 Pricing of the PRG facility is currently 200 basis points over the London interbank offered rate (LIBOR) for tranche

A and 225 basis points over LIBOR for tranche B. 18 The terms and conditions of the PRG for the Project are consistent with the 1995 Guarantee Policy and also reflect

the improvements recommended in ADB. 2000. Review of the Partial Risk Guarantee of the Asian Development Bank. Manila (working paper dated 4 July). The PRG is also consistent with the principles set out in ADB. 2000. Partial Credit Guarantee Charges. Manila (dated 22 March).

11

market conditions, political situation, and lack of track record for IPP projects in Bangladesh at that time.

1. Screening, Appraisal, and Structuring

42. ADB took the lead in the due diligence process that covered key project issues, including the competitiveness of the project tariff and financial sustainability of the buyer. 43. The Project was structured as a typical project finance transaction. It was executed under a 22-year BOO implementation agreement between the Government and the sponsor, and a PPA with BPDB. Under the PPA, BPDB is commited to a take or pay obligation, which is guaranteed by the Government. The minimum continuous load of the plant can be 25% of its dependable capacity (450 MW), but with approximately plant load factor of 85%, MPL will recover its full capacity and variable costs, as well as generate a return on equity. ADB conceptualized and developed the Project as part of its public sector assistance to the energy sector. Because international competitive bidding was used in the Project, the bid standardized a tariff, which is one of the lowest in the world and has set a new benchmark for the industry in Bangladesh and the rest of Asia. ADB’s Board of Directors approved MPL on 5 December 2000. Financial closure was on 11 April 2001, and the first disbursement was on 25 October 2001. 44. The ADB PRG19 covers loan default by MPL on scheduled debt service payments of principal and interest of the ADB guaranteed loan resulting from the Government's failure to meet payment obligations under the implementation agreement and the Government guarantee with respect to the project agreements. The coverage of the ADB PRG enhanced the confidence of commercial banks participating in the transaction. The participation of ADB as one of the cofinanciers also boosted the confidence of the private sector sponsors, given ADB's long-term involvement and continual policy dialogue with the Government in the development of the power sector. 45. ADB’s Mission comprised Private Sector Operations Department (PSOD) staff with extensive public sector experience in the power sector and an intimate knowledge of the Government agencies involved in the Project. Their knowledge and contacts enabled ADB to contribute much to the quality of the Project and to effective internal administration. 46. ADB’s performance in terms of screening, appraisal, and structuring is rated "excellent".

2. Monitoring and Supervision

47. ADB has been closely monitoring project implementation. The common terms agreement enumerates the reporting covenants of MPL, which include the submission of (i) annual forecasts; (ii) financial statements, including those of the sponsor and BPDB; (iii) O&M reports and programs; (iv) operating budgets and reports; (v) health, safety, and environment reports; and (vi) insurance documentation. The agreement specifies the timing for submission of these reports. MPL has complied with all reporting requirements in a timely manner. 48. In addition, MPL has met financial covenants. ADB has been prompt in consenting to waivers and requests for any amendments to existing agreements, subject to a thorough review of the requests. 19 The ADB PRG covers the risk of failure by the Government to honor its payment obligations that arise in

connection with (i) expropriation or nationalization of all or part of the project; (ii) foreign exchange restrictions (currency inconvertibility and non-transferability); (iii) change in law; and (iv) payment defaults of BPDB in relation to the PPA and payment defaults by Tita Gas in relation to the GSA.

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49. In 2006, monthly payments from the buyer, BPDB, to MPL were delayed for an average of 71 days. However, with ADB’s participation, this issue was resolved and BPDB was fully paid up in May 2007. PSOD coordinated with the Southeast Asia Department to follow up on compliance with covenants relating to BPDB’s financial performance under the finance agreements. Following Board approval in December 2000 and the start of commercial operations in November 2002, PSOD fielded three missions. The first mission was in October 2005 for an annual review, the second in May 2007 for the extended annual review,20 and the third in August 2007 for the Globeleq sale transaction. The first two missions included site visits for physical inspection of the plant’s operations. These also involved meetings with MPL management and some government agencies, such as the Ministry of Energy and Mineral Resources, to assess the development outcome of the Project and progress in the development of the power sector in Bangladesh. 50. ADB’s performance in terms of monitoring and supervision is rated "excellent".

3. ADB’s Role and Contribution

51. MPL supported the Government’s efforts to promote foreign investment. It was also consistent with ADB’s operational strategy for Bangladesh, which is to reduce poverty, and the partnership agreement on poverty reduction between ADB and the Government.21 Through its involvement in MPL, ADB was a catalyst in enabling private finance for generation. MPL is operating successfully in the private sector and reliably producing power at a competitive cost to BPDB. In addition to cost-effective and reliable power, MPL and other IPPs introduced private capital and private sector management to the power development partners. Private sector management provides manning and operations benchmarks for the efficient management of power stations in Bangladesh, and establishes standards for BPDB stations to aim for in the future. Moreover, the new investors show signs of being prepared to invest further in the sector. AES Corporation,22 which was the leading investor in MPL, subsequently invested in Haripur Power Limited. MPL and Haripur are being managed in parallel by a single senior management team. These developments indicate that private power generation is now widely accepted in Bangladesh, and is attracting foreign and local investors. 52. ADB also took the lead in supporting reforms in the power sector by conducting an extensive policy dialogue with the Government, and by providing funding as well as technical assistance (TA). The TA helped review the electricity legislation, prepare a power system master plan, and upgrade the financial management of BPDB and Dhaka Electric Supply Authority (DESA). The Project complies with ADB’s strategy for the energy sector and private sector operations in Bangladesh. At Board approval, MPL was a good example of ADB’s new private sector development in action. The Project is the first private sector power project awarded on a fully competitive basis in Bangladesh and served as a model for other IPPs. ADB assisted the Government in promoting private sector development in the power sector through TA and loans. Such assistance included financing of a master plan for the power sector, the Project’s feasibility study and detailed engineering, preparation of the tender documents for international competitive bidding, and assistance in selecting the winning bidder. As part of internal coordination and division of responsibilities within ADB, PSOD took responsibility for processing the Project following its award to the initial sponsor, AES. Therefore, ADB’s role and contribution to the Project is rated "excellent". 20 Formerly called project completion report mission. 21 Guides ADB’s medium-term operations to support the Government’s medium-term priorities through pro-poor

growth, social development, and good governance. 22 A subsidiary of the American power company Allegheny Energy Services.

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E. ADB Additionality

53. ADB’s support to MPL was vital as the Government was unable to finance such a large investment from its own resources, and foreign and local currency funding was critically short. ADB and other financing institutions filled the financing gap, which was instrumental in opening up the power sector in Bangladesh to private financing. ADB’s loan increased investor and commercial lender confidence in MPL and the Project, and helped mobilize long-term cofinancing from other financial institutions and commercial banks. As a provider of PRG, ADB enhanced the protection to commercial lenders in addition to the counter-guarantee from the Government. Moreover, ADB has been a long-term partner of the Government in developing the power sector. During project inception, ADB’s public sector operations provided TA to develop a plan for power sector reform that recommended (i) unbundling BPDB and corporatizing BPDB and DESA, (ii) establishing tariff regulation for the power market, and (iii) creating a competitive power market. The complementarities between ADB’s public and private sector operations promote confidence among project sponsors and financiers, and ensure that the evolving regulatory and institutional framework will be on track. Without ADB assistance, the financial closure of the Project would not have been finalized on a timely basis or appropriate financing terms because of the perceived high country risks and lack of precedent for large-scale BOO IPPs in the country. 54. ADB’s involvement in the power sector led to positive institutional developments, particularly over the 8 years since ADB became the coordinating development partner for the sector. The sector was partially unbundled, private generation is now an accepted feature of the power market, new institutions were set up that are achieving good results, responsibilities were transferred from ineffective to more-effective institutions, some performance improvements were achieved in the main utilities, and capacity has been built within the local power sector. The ability to offer loans and TA, subject to certain conditions, gave ADB leverage that it generally used to good effect. Through ADB’s dialogue with the Government, BPDB updated its payment obligations, which had been delayed several times in 2006 (para. 55), and remains up to date. BPDB continues to honor the terms of the PPA, so that the Government guarantee on MPL is not called. 55. ADB will remain involved in the development of the power sector in Bangladesh. In August 2005, the ADB Board approved the TA to Bangladesh for the corporatization of the BPDB.23 In June 2007, ADB approved the proposed loan for the sustainable power sector development program. Moreover, PSOD is coordinating with the Southeast Asia Department to explore other potential large-scale power projects that could be structured as public–private partnerships (PPPs). The current country partnership strategy continues to support private sector investments and PPP financing to meet infrastructure requirements. ADB’s financial assistance was crucial for the successful financial closure and timely realization of the Project. ADB’s involvement and supervision of the Project has helped to ensure that the operation meets international standards, and complies with environmental and social safeguard requirements. Further, the successful implementation of MPL provides lessons and technical expertise for future development of other IPPs. Therefore, ADB’s additionality is rated "excellent".

23 ADB. 2005. Technical Assistance to the People’s Republic of Bangladesh for the Corporatization of the

Bangladesh Power Development Board, Manila (TA 4626-BAN, for $800,000, approved on 11 August 2005, and completed in October 2006).

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F. Overall Evaluation

56. Overall, the Project is rated "highly successful". The ratings are summarized in the table below. The Project is a fine example of opening up the power sector for private investments, as envisaged in the private sector development strategy, and demonstrates the effectiveness of PPPs. The success of MPL has clearly demonstrated the effectiveness of the private sector in building and operating infrastructure, advocating corporate governance and transparency, and promoting professional work ethics. This was one of the first major IPPs awarded in Bangladesh on a fully competitive basis, and it is being used by the Government as a model. MPL is one of the best operating, best maintained, and most reliable power plants in Bangladesh. It has by far the lowest unit costs among all IPPs in the country, and is among the least expensive even when compared with older plants. It has become a benchmark in the industry not only in Bangladesh, but in Asia. The plant also has been Bangladesh’s most energy efficient, as it introduced state-of-the art, gas-fired, combined-cycle technology to the country. Further, it has an outstanding environmental and safety record since starting operation. In terms of social impact, MPL has helped to improve the electrification rate in Bangladesh, created jobs, and engaged in community support programs. 57. Operationally, the sponsor has experienced no material gas supply problems and no material dispatch problems, and has recently cleared default payments. Moreover, after 3 years of successful operation, AES sold the company at an increased value after changing its strategy in favor of domestic operations. The ownership of the MPL was transferred twice due to change of business strategies by its previous owners. 58. As a company, MPL's financial performance has been satisfactory and met the sponsor’s expectations. MPL demonstrated the best technology in power plant operations and best practices in environmental, social, health, and safety management. The foreign sponsors have transferred technology and expertise to local employees through training. 59. ADB has played an important role by providing a direct loan, CFS, and a PRG to catalyze financing from commercial lenders. ADB's involvement built confidence among the project sponsors and confinanciers, which led to successful project execution. The Government, sponsors, and lenders view the Project as successful and suggest that it could be used as a model for future development of other IPP projects in Bangladesh.

Evaluation of the Meghnaghat Power Limited Project

Indicator/Rating Excellent Satisfactory Partly

Satisfactory Unsatisfactory Development Impacts √ ADB Investment Profitability √

ADB Work Quality √ ADB Additionality √ √

Highly Successful Successful Partly

Successful Unsuccessful Overall Rating √

ADB = Asian Development Bank.

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III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS

A. Project Issues

60. The actual performance varied from the assumptions in the RRP as follows: (i) The project cost was lower than the RRP estimate by almost 2% because of

savings from unutilized contingencies, as well as savings in project implementation and management costs due to transparent and efficient international bidding.

(ii) Dispatch factors were lower than the original RRP estimates, which did not take into account seasonal factors. As a result, energy charges were also lower than the original projections.

(iii) Due to overestimated dispatch factors, gas take-or-pay charges were higher than the original projections. However, these charges did not affect MPL’s financial results as they were passed through and reflected in the supplemental charge component of the tariffs.

B. Lessons and Recommendations

61. The clear definitions of scope in prequalification and request-for-proposal documents, combined with transparent international bidding, were essential to the success of the Project. This helped to attract highly qualified sponsors to bid and commercial financial institutions to support the project. 62. Early in the process, it is important to identify the demand; specify the appropriate capacity, fuel source, technology, site, transmission, and potential infrastructure; and have a coordinated plan. 63. The initial operations period (IOP) can be important to the bidding outcome, especially if the bids are close. If more simplicity in evaluation is desired, an alternative scheme could be used that scores the tariff only during commercial operations. The tariff to be charged during the IOP then can be addressed in the PPA. However, the IOP is often sufficiently important to the power purchaser that giving bidders incentives for efficient operations and favorable tariff pricing during this stage can remain part of the bid scoring. C. Issues to Monitor

64. BPDB’s capacity to pay MPL and other power companies for the power supplied based on consumer tariff adjustments and collection rates among the distribution companies need to be monitored closely monitored. 65. The independence of the Energy Regulatory Commission is essential for the long-term, transparent regulation of the sector. 66. The continued progress of sector reforms agreed upon by the Government and other major aid agencies involved in the power sector need to be monitored as well. 67. MPL’s performance in terms of NOx emissions is very good. However, monthly ambient air quality measurements for NOx in 2007 show that, while the values are below the DOE standard for an industrial zone, NOx background levels are higher than those estimated in the EIA. Such degradation of ambient air quality is probably due to external factors (e.g., proximity of the Dhaka–Chittagong highway, development of several brick kilns and other industrial

16

activities, and the activity of dredging boats in the Meghna River) and not the Project. The XARR Mission recommended that MPL follow up closely with relevant authorities (e.g., DOE and BPDB), particularly if the decision is made to build Meghnaghat II and III, to ensure that existing or new activities adopt appropriate mitigation and monitoring measures.

Appendix 1

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BASIC DATA Investment Summary

A. Investment Identification 1. Country Bangladesh 2. Investment Number/Loan Number 7165 / 1793 Political Risk Guarantee Number GU1793 Complementary Financing Scheme Number CF39

3. Type of Business Conventional Energy Generation 4. Project Title Meghnaghat Power Project 5. Investee Company/Borrower Pendekar Energy (L) Limited 6. Amount of Approved ADB Assistance – Direct Loan $50.0 million – Political Risk Guarantee $70.0 million – Complementary Financing Scheme $20.0 million

7. Project Completion Report Number 1017 ADB = Asian Development Bank. B. Investment Data

1. Concept Clearance Approval 2 May 1997 2. Board Approval – Loan and CFS 5 December 2000 – Political Risk Guarantee 19 December 2000

3. Signing of Legal Documents – Loan Agreement 11 April 2001 – Political Risk Guarantee Agreement 11 April 2001

4. Loan Effectiveness – In Loan Agreement – Actual 11 April 2001 – Number of Extensions 0

5. Loan Closing (End of Availability Period) – In Loan Agreement 11 April 2004 – Actual 13 February 2003 – Number of Extensions 0

6. Terms of Loan Direct Loan – Maturity 15 years – Grace Period 2 years

Appendix 1

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7. Disbursements a. Senior Loan – Dates Initial Disbursement Final Disbursement Time Interval 25 October 2001 13 February 2003 841 days Effective Date Amended Closing Date Time Interval 11 April 2001 30 June 2003 1,175 days – Amount Disbursed $50,000,000.00 b. ADB Political Risk Guarantee Covered Loan – Dates Initial Disbursement Final Disbursement Time Interval 25 October 2001 13 February 2003 842 days Effective Date Original Closing Date Time Interval 11 April 2001 11 April 2004 1,095 days – Amount Disbursed $70,000,000.00 8. Loan Repayment Senior Loan – Initial Repayment Date 15 September 2003 – Final Repayment Date 15 September 2016 9. CFS – Initial Repayment Date 15 September 2003 – Final Repayment Date 15 September 2010 10. PRG – Initial Repayment Date 15 September 2003 – Final Repayment Date 15 September 2015

CFS = complementary financing scheme, LIBOR = London interbank offered rate, PRG = political risk guarantee. C. Data on ADB Missions

Name of Mission Date No. of

Person-Days No. of

Persons Specialization of Members

Due Diligence 12–20 Feb 1999 45

5 Senior Investment Officer Senior Environmental Specialist Cofinancing Officer Investment Officer Investment Officer

Appraisal 7–8 Aug 2000 2 1 Investment Officer Due Diligence/ Term Sheet Negotiation

12–14 Feb 2001 15 3 Senior Investment Officer Investment Officer Legal Counsel

Loan Negotiation 20–21 Mar 2001 4 2 Senior Investment Officer Cofinancing Specialist

Loan Negotiation 26–29 Mar 2001 8 2 Senior Investment Officer Legal Counsel

Annual Review 15–17 Nov 2005 6 2 Senior Investment Specialist Senior Operations Assistant

Extended Annual Review 12–14 May 2007 6 2 Senior Investment Specialist Senior Operations Assistant

Project Administration 7 Aug 2007 1 1 Senior Investment Specialist Sources: Asian Development Bank mission authorization requests and back-to-office reports.

Appendix 2

19

PRIVATE SECTOR DEVELOPMENT CHECKLIST: INFRASTRUCTURE

Impact of the Project Ratings

Impact to Date

Potential Future Impact (Sustainability) and

Risk to Its Realization Combined

Ratinga Justification/Annotations

A. Beyond Company Impact Ratingb Ratingc Riskd 1. Private Sector Expansion Contribution by a pioneering or high-profile project that facilitates or paves the way for more private participation in the sector and economy

Excellent Excellent Low Excellent Because the Project used international competitive bidding, the bid standardized a tariff, which is one of the lowest in the world. It also has set a new benchmark for the industry in Bangladesh and the rest of Asia. MPL was one of the first major IPP projects in Bangladesh. At the time of approval, the existing IPP projects were smaller. MPL has been operating satisfactorily. All relevant parties, including BPDB and Titas Gas, have honored their obligations under the contractual agreements. The successful development and operation of MPL paves the way for private sector participation in future IPPs. The Government has initiated other large-scale power projects that will utilize indigenous gas and potentially involve private sector participation. MPL’s project sponsors are exploring the development of other projects in Bangladesh.

2. Competition Contribution of new competition pressure on public and/or other sector players to raise efficiency, and improve access and service levels in the industry

Satisfactory Satisfactory Low Satisfactory BPDB plants currently are not competing with MPL. However, MPL has regular meetings with BPDB staff to discuss operating issues, and to share knowledge and practices in power plant operation.

20 Appendix 2

Impact of the Project Ratings

Impact to Date

Potential Future Impact (Sustainability) and

Risk to Its Realization Combined

Ratinga Justification/Annotations

3. Innovation Demonstration of efficient new products and services, including in areas such as marketing, distribution, tariffs, production, and technology, and in ways to cover or contain cost and manage demand

Excellent Excellent Low Excellent The operating practices as well as health and safety procedures are at par with international standards of the project sponsors. MPL applies modern technology in power plant operations.

4. Links Relative to investments, contribution of the Project of notable upstream or downstream links to business clients, consumers, suppliers, key industries, etc., in support of growth.

Excellent Excellent Low Excellent MPL sets general high international standards for private business operations and human resource management.

5. Catalytic Element Contribution by pioneering and/or catalytic finance, mobilizing or inducing more local or foreign market financing and/or foreign direct investment in the sector

Excellent Excellent Low Excellent ADB’s lead role in due diligence and involvement in the transaction provided comfort and attracted private sector interest. As a PRG provider, ADB also catalyzed commercial financing. The successful operation of MPL creates a demonstration and catalytic effect for more private sector participation in the sector.

6. Affected Laws, Frameworks, Regulation Contribution to better laws and sector regulation for PPPs, concessions, joint ventures, and BOT and BOOT projects; and to liberalization of markets as applicable for better sector efficiency

Excellent Excellent Modest Excellent Meghnagat Project forced a streamlining of administrative and commercial procedures by the Government.

Appendix 2

21

Impact of the Project Ratings

Impact to Date

Potential Future Impact (Sustainability) and

Risk to Its Realization Combined

Ratinga Justification/Annotations

B. Company Impact With Wider Potential 1. Expertise Contribution Contribution to new strategic, managerial, and operational skills with actual or potential wider replication in the sector and industry

Excellent Excellent Low Excellent MPL is an excellent example of disciplined operating standards providing dependable and efficient generation in the Bangladesh power sector. Intensive on-the-job and classroom training, as well as the promotion of local staff for middle and senior management positions, has had considerable positive impact. Right after construction, MPL implemented its localization plan. By early 2007, all expatriates left due to the successful transfer of technical expertise and training of local staff.

2. Demonstration of New Standards As seen in affected new ways to operate the business and compete, and in reached investee performance against relevant best industry benchmarks and standards

Excellent Excellent Low Excellent MPL uses modern technology for power plant operations. In 2006, a new computerized maintenance management system was implemented to provide more reliable and efficient maintenance of the plant. In addition, MPL is certified ISO 14001 (environment) and OHSAS 18001 (occupational Health and Safety), and, as such, subject to annual external audits.

3. Improved Governance As evident in standards set in corporate governance; stakeholder relations; environmental, social, health, and safety (ESHS) fields; and/or in good energy conservation standards, etc.

Excellent Excellent Low Excellent The success of MPL has clearly demonstrated the effectiveness of the private sector in building and operating infrastructure, advocating corporate governance and transparency, and promoting professional work ethics.

22 Appendix 2

Impact of the Project Ratings

Impact to Date

Potential Future Impact (Sustainability) and

Risk to Its Realization Combined

Ratinga Justification/Annotations

C. Overall Private Sector Development Rating The rating (excellent, satisfactory, partly satisfactory, or unsatisfactory) is not an arithmetic mean of the individual indicator ratings, and does not have fixed weights. Actual impact (positive or negative), potential future impact, and the risk to its realization need to be considered.

Excellent Excellent Low Excellent The success of MPL has clearly demonstrated the effectiveness of the private sector in building and operating infrastructure, advocating corporate governance and transparency, and promoting professional work ethics. This is one of the first major IPP projects awarded in Bangladesh on a fully competitive basis, and it is being used by the Government as a model. MPL is one of the best operating, best maintained, and most reliable power plants in Bangladesh. It has by far the lowest unit costs among all IPPs in the country, and is among the least expensive even when compared with older plants. It has become a benchmark not only in Bangladesh, but across Asia. The plant also has been Bangladesh’s most energy efficient, as it introduced state-of-the art, gas-fired, combined-cycle technology into the country. It has an outstanding environmental and safety record since starting operations. In terms of social impact, MPL has contributed to improving the electrification rate in Bangladesh, created jobs, and engaged in community support programs.

ADB = Asian Development Bank, BPDB = Bangladesh Power Development Board, IPP = independent power producer, ISO = International Organization for Standardization, MPL = Meghnaghat Power Limited, OHSAS = Occupational Health and Safety Assessment Series. a The combined rating should weigh future impact and risk to its sustainable realization. b Excellent, satisfactory, partly satisfactory, and unsatisfactory. c Rating scale as in a. d Risk rating scale: high, medium, modest, and low. Source: Asian Development Bank.

Appendix 3

23

BANGLADESH’S POWER SECTOR

A. Institutional Framework and Reform Overview 1. The power sector in Bangladesh began operations immediately after independence in 1972 with creation of the Bangladesh Power Development Board (BPDB), following the restructuring of East Pakistan Water and Power Development Authority, as the sole utility responsible for generation, transmission, and distribution. In 1977, the Rural Electrification Board (REB) was created to undertake electrification in rural Bangladesh. Since its creation, BPDB’s commercial performance has been weak. To address this weakness, the Government split BPDB’s operations in 1991 and created a new distribution entity, the Dhaka Electric Supply Authority (DESA). DESA was given responsibility for power distribution in the Greater Dhaka area. However, as all of DESA’s assets and personnel were transferred from BPDB without any changes in business culture, the power sector continued to fail commercially. Recognizing the need to improve the sector’s performance, the Government, in consultation with the major development partners,1 adopted a policy paper in 1994 entitled Power Sector Reforms in Bangladesh (PSRB). 2 The PSRB outlined the reforms to gradually remove constraints in the sector by (i) separating sector regulation and operation; (ii) creating autonomy and commercial orientation among sector entities; (iii) unbundling generation, transmission, and distribution; and (iv) increasing private sector participation. In 2000, the Government issued its Vision and Policy Statement for Power Sector Reforms that clarified details of the structural changes in generation, transmission, and distribution along with the principles of corporatization and commercialization. In 2006, the Government issued a 3-year plan for power sector reforms to undertake further organizational restructuring toward improving corporate governance and promoting commercialization. 2. As a result of implementing the reform policy, several new public sector entities have been established and made operational. These include the Power Grid Company of Bangladesh Limited (PGCB), the Dhaka Electric Supply Company Limited (DESCO), the West Zone Power Distribution Company Limited (WZPDC), the Ashuganj Power Station Company Limited (APSC), and the Electricity Generation Company of Bangladesh Limited (EGCB). In addition, private sector independent power producers (IPPs), including the Rural Power Company Limited (RPC), have been established and started operation. PGCB has taken over all BPDB’s transmission assets and most of DESA’s transmission assets. DESCO has secured DESA’s distribution assets in the Mirpur and Gulshan Circles of Dhaka. WZPDC has taken over BPDB’s distribution assets in the west, while APSC has taken over the generation assets in the Ashuganj Power Station. Moreover, 70 palli bidyut samity (rural electric cooperatives)—organized, initially funded, and monitored by REB—are in charge of power distribution in most rural areas. DESA’s area outside Dhaka city was transferred to eight palli bidyut samity. In 2005, the Dhaka Power Distribution Company Limited (DPDC) was established to take over the distribution assets of DESA, and North West Zone Power Distribution Company Limited (NWZPDC) was established to take over BPDB’s northwest zone power distribution network. The Bangladesh Energy Regulatory Commission (BERC) was established in April 2004 as an independent regulatory body under the Bangladesh Energy Regulatory Commission Act, 2003 to regulate energy businesses, including the power sector. The Government, through the Power Division of the Ministry of Power, Energy and Mineral Resources (MPEMR), wholly owns and supervises BPDB, DESA, and REB. Figure A3 illustrates the power sector reform

1 Asian Development Bank, Department of International Development of the United Kingdom, Japan Bank of International Cooperation, Kreditanstalt fur Wiederaufbau of Germany, United States Agency for International Development and World Bank.

2 Inter-ministerial committee report. 1994. Power Sector Reforms in Bangladesh. Bangladesh.

Appendix 3

24

overview. B. Generation Potential and Expansion Plans 3. While the Jamuna–Padma–Meghna river system has abundant water flows, the flat terrain limits hydropower potential. Coal reserves, which are located in the northwest, are deep beneath the surface and difficult to develop. One potential mine with a limited output of about 1 million tons per year is being developed with external assistance to feed 250 megawatts (MW) of power plants. The review feasibility of developing another coal mine in the northwest is being studied. The country's entire proven recoverable reserves of oil (including condensate) are estimated at 59 million barrels. Although Bangladesh has had some successes in small-scale development of renewable resources, these are peripheral to the issue of generating bulk electricity for the main grid. However, Bangladesh is well endowed with natural gas, which is the only significant source of commercial energy in Bangladesh. Gas accounts for about 85% of the power generation capacity in the country is gas based, followed by imported fuel at10%, and hydropower at 5%. Gas-fired power plants generated about 90% of the total energy in FY2005. Gas reserves and production are considered adequate to serve the existing power plants, and additional reserves probably could be developed to serve the needs of power plants projected until 2025. 4. Over the past 10 years, electricity consumption in Bangladesh grew at an average compound annual rate of 8.1%, and it is expected that demand for electricity will grow at an annual rate of about 8.0% for the next 10 years. The Asian Development Bank (ADB)-funded power system master plan update concluded that 17,900 MW in additional capacity would be necessary through 2025, of which 3,500 MW would be needed by 2010.3 Figure A3 shows the projected annual and cumulative capacity additions from 2005 through 2025.

3 ADB. 2004. Technical Assistance to the People’s Republic of Bangladesh for Preparing the Power Sector

Development Program II. Manila (TA 4379-BAN, approved on 23 September).

MW = megawatt Sources: Power sector entities.

Figure A3: Planned Generation Capacity Additions Through 2025

Appendix 3

25

C. Transmission System Expansion

5. The transmission system within Bangladesh is the responsibility of PGCB, which was established by separating BPDB’s transmission assets and began operations in 1996. The highest voltage level of PGCB’s transmission system is 230 kilovolt (kV), with transmission lines structured as a 230 kV loop around Dhaka with radial extension to the western part of Bangladesh and the southern region in the Chittagong area. The 132 kV system extends radially from Dhaka to the central and southern regions. Similarly, the northern and western regions in the western part of the country are interconnected through 132 kV lines. Currently, PGCB owns 1,436 circuit-kilometers (km) of 230 kV transmission lines and 4,868 circuit-km of 132 kV transmission lines, with transmission capacity of 3,925 megavolt-amperes (MVA). 6. The power system master plan update’s least-cost expansion plan concluded that additional transmission capacity of 4,875 MVA of 230/132 kV transformers will be required by 2010 and another 4,650 MVA by 2015, along with corresponding transmission lines. While PGCB has mobilized investment capital through various measures, including issuing corporate bonds and off-loading its stock, as approved by the Government, the proposed investment support from ADB will be critical to this goal. D. Distribution Operations 7. Power distribution systems need to be expanded in tandem with the generation and transmission capacity expansions to enable delivery of power to consumers. Several entities are involved in the power distribution business in Bangladesh. DESA 4 and DESCO are covering Dhaka areas, while power base stations cover most rural areas and BPDB primarily covers urban areas outside Dhaka. WZPDC has taken over BPDB’s distribution networks in the western parts of the country, while NWZPDC has taken them over in the northwest. E. Share and Performance of Power Sector Entities 8. While BPDB in FY2000 produced more than 90% of the total net generation, it accounted for 47.8% in FY2005. Over the same period, IPPs' (including RPC) share of total net generation increased from 8.4% to 38.2%. REB accounted for 34.3% of distribution in FY2005, followed by BPDB with 29.5%, DESA with 25.2%, and DESCO with 9.1%. PGCB is wholly responsible for transmission. Table A3 indicates the shares of the different power sector entities in generation and distribution.

Table A3: Shares of Power Sector Entities

FY2000 FY2005 Item GWh % GWh % BPDB 13,495 91.54 10,234 47.80 ASPC 0 0.00 2,989 13.96 Generation EGCB 0 0.00 0 0.00

RPC 161 1.09 608 2.84 IPPs 1,087 7.37 7,577a 35.40 Total 14,743 100.00 21,408 100.00 BPDB 5,592 39.92 5,993 29.46 REB 3,162 22.52 6,985 34.33

4 Dhaka Power Distribution Company Limited will take over DESA’s operations.

Appendix 3

26

FY2000 FY2005 Item GWh % GWh % Distributionb DESA 4,075 33.59 5,135 25.24

DESCO 550 3.93 1,843 9.06 WZPDC 0 0.00 389 1.91c Total 14,099 100.00 20,345 100.00 ASPC = Ashuganj Power Station Company Limited, BPDB = Bangladesh Power Development Board, EGCB = Electricity Generation Company Limited, DESA = Dhaka Electric Supply Authority, DESCO = Dhaka Electric Supply Company Limited, FY = fiscal year, GWh = gigawatt-hour, IPP = independent power producer, REB = Rural Electrification Board, RPC = Rural Power Company Limited, WZPDC = West Zone Power Distribution Company Limited. a Includes 246 GWh generated by small private power plants sold to REB grid directly. b Based on import by entities. c Based on 3 months of imports (April–June 2005). Sources: Power sector entities reports.

Appendix 4

27

ENVIRONMENTAL, SOCIAL, HEALTH, AND SAFETY PERFORMANCE

A. Environmental

1. The Asian Development Bank (ADB) classified the Project as environment category A. ESG International prepared the environmental impact assessment (EIA) in September 2000 in accordance with the World Bank’s guidelines (1998) for scope and format and ADB’s environmental guidelines for thermal power stations (1993). The EIA report was submitted to the Department of Environment of Bangladesh. The summary EIA was circulated to ADB’s Board of Directors in August 1997.

2. Meghnaghat Power Limited (MPL) has successfully completed the final audit for International Organization for Standardization (ISO) 14001 and Occupational Health and Safety Advisory Services (OHSAS) 18001 certification by Bureau Veritas Certification, and was recommended for the certification by the auditors on 30 June 2006. Also in 2006, MPL renewed the environmental clearance certificate from the Department of Environment without any comment on the ongoing monitoring program and the findings of test and analysis reports.

3. Annual reports have been submitted to ADB regularly since 2003. The latest annual monitoring report (for 1 January 2006 to 31 December 2006) describes full compliance with host-country environmental requirements, as well as World Bank and ADB environmental guidelines.

4. The MPL activities recorded in 2006 that are relevant to environmental performance are summarized in tables A4.1 and A4.2.

Table A4.1: Projects Activities Relevant to Environmental Performance Parameter Unit Value Generation Capacity MW 457 (Gross)/450 (Net) Operation Started 26 November 2002 Electricity Generated (Gross) MWh 2,801,815 Electricity Generated (Net) MWh 2,712,148 Capacity Factor % 68.80% Fuel Consumed MSCF 21,717,440 Generation Type Combined Cycle Stack Height Meter 60 Availability % 77.93% Net Heat Rate Btu/kWh 7,607

Btu/kWh = British thermal unit per kilowatt hour, MW = megawatt, MWh = megawatt hour. Source: Meghnaghat Power Limited Annual Monitoring Report 2006.

Table A4.2: Environmental Discharge in 2006

Item Year to Date Number of exceedances (air/effluent/spill) 0/0/0 NOx – X ppm/limit Y ppm 8.9 Quantity of NOx emission, tons 360.88 Quantity of effluent, m3 58,467.2 Quantity of sludge, m3 21.6 Quantity of oily waste, m3 2.8

m3 = cubic meter; ppm = parts per million. Source: Meghnaghat Power Limited Annual Monitoring Report 2006. 5. As described in the summary EIA, the combustion of fossil fuels for power generation inevitably results in the emission of gaseous pollutants to the atmosphere. The pollutants of

Appendix 4

28

potential concern are sulfur dioxide (SO2), nitrogen oxide (NOx), carbon oxide, and carbon dioxide. With natural gas being the primary fuel, NOx emissions are the only stack emissions of significant interest during normal operation, and they are measured continuously. In general, gas-fired, combined-cycle gas turbines are regarded as being more environmentally benign than a comparably sized conventional steam plant. For instance, they have significantly lower cooling water requirements, and do not require the disposal of large quantities of combustion wastes. With MPL, low NOx burners are installed on the turbines to reduce NOx emissions from the engines to levels well below the applicable standards of the Department of Energy and guidelines of the World Bank and ADB. SO2 emissions depend on the sulfur content of the gas, which is typically extremely low for gas and considered insignificant compared to coal- and oil-fired plants. The emission rates for NOx and SO2 during normal gas operations are within Bangladesh regulations and ADB and Word Bank guidelines.

6. For MPL, 2006 was a good operating year with respect to health, safety, and environment. The plant’s overall environmental performance of different monitoring items, such as stack emission quality, ambient air quality, liquid effluent and waste water, noise, and solid waste, was well within the applicable standards of the Department of Environment and the guidelines of the World Bank and ADB.

7. An online stack emission monitoring system is used to monitor stack emissions. The monitoring system is automatically calibrated periodically using calibration gases, which are continuously connected with the system. The monitored data is continually shown on the monitors in the control room of the power plant. Monitored data for the previous 6 months are archived in a hard drive. Total emission quantity for a particular period can be derived using software from the emission rate data. A summary of monitored data in 2006 is provided in Figure A4, which was sourced from the MPL annual monitoring report 2006.

8. Ambient air quality monitoring involves the continuous monitoring of ground-level NOX at four sites in the Meghnaghat area since February 2003. Diffusion tubes, procured from Harwell Laboratories of United Kingdom, were installed at the same four sites where baseline study was carried out for ground-level NOX concentration. Exposed tubes are replaced with new ones every month and sent to Harwell laboratories for analysis. The results of the monitored ambient air are in Tables A4.3 and A4.4.

0

10

20

30 40

50

60

Jan-06 Mar-06 Apr-06

Month

0

5

10

15

20

25

30

NO

x (PP

M)

NOx Tons NOx ppm

NO

x (T

ON

)

Figure A4: Monthly NOx Emission Comparison for 2006 of MPL

Feb-06 May-06 Jun-06 Jul-06 Aug-06 Nov-06 Dec-06Oct-06 Sep-06

Source: Meghnaghat Power Limited.

Appendix 4

29

Table A4.3: Ambient Air Data for 2006

Item Unit World Bank Guideline

DOE Guideline Compliance

Particulate Matter (<19μm) - Annual Mean - Max 24 Hour Average

50 150

500

Yes

μg/m3

100 150

150

Yes

DOE = Department of Energy; μg/m3 = microgram per cubic meter. Source: Meghnaghat Power Limited annual monitoring report 2006.

Table A4.4: Test Results of Ambient Air (Average data: January–December 2006)

Ambient Pollutant (NOx) Concentration

Sample Location μg μg/m3 Ppb

Ganganagar 1.07 12.92 6.72 Bhabanipur 1.37 16.25 8.43 Aminpur 2.06 24.83 12.90 Dudhghata 2.04 23.70 12.30

NOx = Nitrogen Oxide; Ppb = parts per billion; μg/m3 = microgram per cubic meter. Source: Meghnaghat Power Limited annual monitoring report 2006. 9. Brick kilns mushrooming around the power plant site, specifically along both sides of the Dhaka–Chittagong highway, are the primary environmental pollution concern. The kilns, which primarily use firewood as fuel, emit ashes that are causing premature clogging of the gas turbine air intake filters of the power plant. Unprecedented levels of air pollution, primarily caused by such emissions, have shortened the period for fine filter replacement to 6 months from the original plant design frequency of 24 months. Replacement of a set of fine filters for both gas turbines of the plant costs about $70,000. Cement factories along the northern bank of the Meghna River and edible-oil refineries adjacent to the power plant are also contributing significantly to air pollution around the power plant that is much worse than anticipated in the EIA. This unpredicted level of air pollution is increasing the operating costs of the plant, as well as reducing the availability of the plant. To address the situation, the engineering, procurement and construction contractor has modified the design of the air intake filter house by adding two additional Italian-made pre-filter stages (one of them washable).

10. Total quantity of effluent discharged in 2006 was 58,467.2 cubic meters. The summary test report on the effluent discharge is in Table A4.5.

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Table A4.5: Test Results of Effluent Discharge (January–December 2006)

Parameter

Unit

World Bank Guideline

DOE Guideline

Measured Value

Compliance

pH 6 to 9 7.22 Yes BOD5 at 250C mg/l 50 ─ 12.26 Yes COD mg/l 50 200 31.7 Yes Oil and grease 10 5.62 Yes TSS 50 36.47 Yes Temperature at the edge of designated missing zone

0C Maximum 30C above ambient temperature Yes

Residual chlorine, Cl2 mg/l 0.2 ─ 0 Yes Turbidity NTU ─ ─ 11.56 Yes Zinc, Zn mg/l 1.0 5.0 0.13 Yes TDS mg/l ─ 2100 375.86 Yes Copper, Cu mg/l 0.5 0.5 0.02 Yes Total iron as Fe mg/l 1.0 2 0.29 Yes

BOD5 = biological oxygen demand consumed in five days; COD = chemical oxygen demand; DOE = Department of Energy; mg/l = milligram per liter; NTU = nephelometric turbidity units; pH = measure of acidity or alkalinity of solid or liquid material; TDS = total dissolved solids; TSS = total suspended solids. Source: Meghnaghat Power Limited annual monitoring report 2006. 11. In daytime monitoring, average ambient noise was 54.0 decibels (db), while nighttime monitoring produced an average of 46.1 db during 2006 (Table A4.6). Monitoring was done using a noise-monitoring device on 1 hour equivalent (Leq) basis with all the new industries in the vicinity. One hour Leq was measured at two locations near the most sensitive receptacles for the power plant.

Table A4.6: Test Results of Ambient Noise (January–December 2006)

dB (A) = decibel acoustic; DOE = Department of Energy; m= meter. Source: Meghnaghat Power Limited Annual Monitoring Report 2006. 12. A sample of the generated sludge cake was sent for analysis to the soil science laboratory of the only agricultural university of the country at Mymensingh. After chemical and organic analysis of the sample, the soil scientists recommended the sludge generated from the plant operation to be used for vegetation and landfill. Sludge cakes generated from the effluent

Item

Unit

World Bank Environment Guidelines

DOE Guideline

Result of

Monitoring

Compliance Residential

Daytime Nighttime

55 45

50 40

Commercial Daytime Nighttime

65 55

70 60

Industrial Daytime Nighttime

dB(A)

75 70

75 70

54.0 (Day)

and

46.1 (Night)

Yes, considering the power plant site to be a mixed

zone

Distance from the Site Boundary to the Closest Noise Receptors

m 25

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31

treatment plants are now used for vegetation and top soiling inside the power plant site. The effluent treatment plants generated 21.6 cubic meters of sludge during 2006. A summary of monitored solid and liquid waste compliance is in Table A4.7.

Table A4.7: Solid and Waste Monitoring Data (January–December 2006)

Item

World Bank Guideline

DOE Guideline

Project Company’s Operation

Compliance

Recycle of Material

Recycle where possible. If recycling is not practical, waste must be disposed of in an environmentally acceptable manner and in compliance with local laws and regulation.

No specific guideline available.

All waste is handled and disposed off by contractors approved by local environmental authority for industrial waste handling.

Yes

Disposal of hazardous materials, oils, solvents, etc.

All hazardous materials, process residues, solvents, oils, and sludge from raw water, process water, and domestic sewage treatment systems must be disposed of in a manner to prevent the contamination of soil, groundwater, and surface water.

No specific guideline available.

All waste is handled and disposed off by contractors approved by local environmental authority for industrial waste handling.

Yes

DOE = Department of Energy. Source: Meghnaghat Power Limited annual monitoring report 2006. 13. The power plant site covers 25.09 ha, of which the core plant occupies about 4.88 ha, the switchyard 1.62 ha, and the housing complex 3.24 ha. The rest of the land is a dense plantation. Because the site is sandy, the plants have grown less than expected. No noticeable morphological change of the river in the vicinity of the power plant site has been reported. Further, no harm to the river has been observed as a result of construction and operation of the power plant. The quality of the discharge cooling water from the once-through cooling system of the power plant is unchanged other than an increase in temperature not exceeding 2 degrees Celsius. This confirms compliance with the World Bank guidelines. The fuel quality has not declined below the minimum specified in the gas supply agreement. The fuel quality has been found to be very consistent, as confirmed in the monthly analysis performed for gas billing.

14. In 2006, MPL identified a number of permit and reporting issues that were addressed, including two minor spills. The final disposal pond and chemical waste water ponds were cleaned. ADB will continue monitoring MPL’s annual environmental review, which is done not only from a timeline standpoint, but also from a compliance and quality standpoint. MPL’s goal

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32

is to increase the environmental awareness of their people, and to continue to improve the guidelines set in ISO 14001. ADB will ensure that MPL works towards 100% compliance on all environmental laws, regulations, permits, standards, etc., along with corporate compliance.

15. To remain in compliance, MPL shall prepare and send bimonthly reports to the Department of Environment and ensure that its environmental license is renewed every year. MPL looks forward to the revision of environmental laws and their applicability to the company to ensure continued compliance. Many tests that were performed by outside laboratories were performed in house, which gives MPL faster results and allows it to take necessary actions immediately.

16. Since the plant's inception, MPL has not received any formal complaints or claims from neighbors in the local communities or any other stakeholders concerning the plant’s environmental performance. MPL maintains an open and healthy relationship with nearby community members. The company’s environmental and social responsibility task force held formal and informal meetings from time to time with community neighbors on different issues.

B. Social, Health, and Safety

17. In 2006, the plant operated 1,494 days without employee staff lost time accidents and 382 days without contractor staff lost time accidents. To prevent spills, all hazardous chemicals, solvents, and oil are stored with secondary containment. Spill kits have been procured for handling chemicals and oil spills. All high-noise zones in the workplace High-noise zones in the workplace are identified, and all personnel and plant visitors are required to wear a hearing protection device in those zones. Regular in-house inspections of the workplace, firefighting system, emergency equipment, and heavy equipment are being conducted. A regular safety training program, which includes but is not limited to spill management training, is carried out for all the plant staff. An annual health checkup program is in place for all staff. A safety manual has been finalized and the guidelines therein were implemented, and an emergency response plan has been developed. All safety and environmental incident data are recorded.

18. The land acquisition and resettlement process has been completed in accordance with ADB standards, and no more activities are needed before construction begins. MPL has paid compensation and met other social requirements in accordance with the resettlement plan of the families relocated because of the Project.

19. MPL promoted job creation during construction and operation. MPL employed 3,000 workers at the peak of construction. In 2006, MPL engaged about 100 people from the local community as temporary semiskilled and unskilled labors during its major maintenance outages. During the Mission, MPL employed 59 local staff, including all senior management positions. Local people worked as operation and maintenance (O&M) helpers and in other positions. English language training was provided, and people were hired for day-to-day O&M and other activities of the plant. MPL also hired local contractors and suppliers for various services and supplies for day-to-day operation of the plant. The participation of the local community in O&M of the power plant has directly and indirectly benefited the local economy.

20. At the community level, MPL has started implementing a hospital project, to which $900,000 has been allocated. Land purchase and registration has been completed, and groundbreaking was on 12 July 2006. The Diabetic Association of Bangladesh will operate the 50-bed hospital to be located between the Haripur and Meghnaghat power plants. The association purchased the land for the hospital, and the sponsor will finance construction and

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purchase of equipment and furniture for the hospital. The project was targeted for completion in December 2007.

21. The Meghnaghat Islampur School, another social responsibility program of MPL, is estimated to cost about $14,000. Construction of this school will start as soon as the local people have turned over the land for construction.

22. On 16 October 2006, MPL donated $100,000 to Ahsania Mission Cancer Hospital in Dhaka. In addition, small-scale social programs are conducted regularly to help the underprivileged neighborhood around MPL. These projects support the nearby community in improving their education, disaster preparedness, livelihood, communication, and more.

23. The social responsibility programs for 2007 were (i) the scholarship program for outstanding students of the plant community; (ii) best teacher’s award; (iii) health and hygiene awareness program for the elderly; (iv) skills development workshops on poultry, fisheries, handicrafts, and woodcrafts for unemployed youth; (v) plantation or sapling distribution program; (vi) computer training for the local community school where the project sponsor already donated a few computers; (vii) tailoring training institute; and (viii) donation to a local women’s university library and information technology training.