AT Capital The Global Financial Crisis: Lessons Learnt in the Electricity Sector in Bangladesh Ifty Islam, Managing Partner ifty.islam@at-capital.com Asian Tiger Capital Partners, Feb 9,2011 www.at-capital.com
Key Themes The energy crisis is the single biggest constraint on Bangladesh prospects for increasing growth. It has been estimated that Bangladesh currently faces an energy deficit of around 2000MW, which has resulted in regular load-shedding and the need for greater usage of expensive diesel generators. This contrasts with the demand driven after-effects of the global crisis on developed economies where the credit crunch was driven by the supply side, namely banks with impaired balance sheets becoming increasingly risk-averse and tightening both the quantity and price of credit to borrowers. The Bangladesh economy proved to be one of the most resilient in the world to the fallout from the global crisis with GDP growth in FY 2008/9 only declining to 5.9% from 6.2% in FY 2007/8. But this is not the primary reason that the Global Crisis did not affect the energy sector in Bangladesh significantly. That was driven by the lack of significant new large scale energy projects and energy generation capacity addition for much of the previous 7 years. 1
Key Themes If Bangladesh had a large scale energy sector building programme in place, as it should have done over the 2007-2008 period, then it would undoubtedly have been badly affected by the global crisis. This is because the limited amount of domestic private sector financing capacity for large scale infrastructure projects would have made it reliant on international commercial bank as well as multilateral financing. In a recent presentation given in Energy Road Shows held in January 2010, in Singapore, the GoB stated that they plan to add 8,882 MW of generation capacity by FY2015 this represents an addition of 5,275MW in newly announced initiatives to the their existing plan of 3,547 MW. The GoB estimates that to develop the new initiatives of 5,275MW, this will require USD 7.1bn of investment. One of the key constraints is the domestic capacity for financing by the local commercial banks. It is true that Bangladesh Bank imposes Single Borrower Exposure Limits capping exposure to companies seeking finance, making a theoretical maximum syndication, if all the private commercial banks participated, of USD 600 mn to a single sponsor. However, in reality, the total amount available to a single sponsor is likely to be much smaller. 2
Key Themes Our analysis of the financing of larger energy projects reinforces the notion that overseas financing, both from multilateral agencies and international commercial banks and developers, will remain a dominant component of energy deals. A major challenge for Bangladesh is tapping domestic capital markets for infrastructure projects that have large local construction cost components. Being able to tap domestic capital markets would channel its high domestic savings of 30%, which represents a surplus over investment of around 5% of GDP, into needed and profitable infrastructure investments. To be able to finance infrastructure development, Bangladesh will have to embark on a strategy that aims at improving intermediation of domestic financial savings so that they are channeled to meet the specific requirements of infrastructure investment such as those relating to risk, tenor and scale. A first imperative for domestic capital market development is the accumulation of contractual savings pools, which channel savings towards securities, through institutional investors. The most important of such pools, from the point of view of investments in long-term instruments as required for infrastructure, are pension funds and life insurance funds. The rules governing such funds should permit them the flexibility to invest in corporate bonds and equities. 3
Energy Sector Financing Requirements
Present Power Situation Power Generation The generation capacity in Bangladesh is presently about 5,250MW. About 45% of the population presently has access to electricity. Present Power Generation Scenario Present Generation Capacity (Derated) (MW) : 5,250 Present Demand (MW) : 4,200 ~ 5,500 Present Available Generation (MW) : 3,800 ~ 4,300 Recent Maximum Generation (MW) : 4296 (Sept. 18, 09) Maximum Load Shedding in FY-09 (MW) : 1,270 (April 23, 09) Source: Generation Expansion Plan up to 2014, Power Division, MPEMR Distribution Power distribution is solely controlled by government entities. Transmission The Power Grid Company of Bangladesh (PGCB) is the only company responsible for power transmission. The main reason for high system loss is the inefficient transmission and distribution system of state owned companies. 5
Energy Sector Financing Requirements Investment Plan and Fund Requirements Power System Master Plan - 2006 (Base Case) In the face of the persistently growing supply gap, the GoB developed a Power System Master Plan (PSMP) in 2005. The PSMP estimated that Bangladesh will need over 22,000 MW of capacity in 2025. New Generation Plan up to 2015 GoB stated that they plan to add 8,882 MW of generation capacity by FY2015 this represents an addition of 5,275MW in newly announced initiatives to the their existing plan of 3,547 MW. Source: GoB, Power Division 6
Energy Sector Financing Requirements The estimated total investment cost over the next 5-6 years is around USD 7 billion for generation, USD 1 billion for transmission, and USD 1.5 billion for distribution, for a total investment of around USD 9.5 billion. Description Total Investment (USD mn) Equity (USD mn) Debt (USD mn) New Initiative 530 MW Rental Projects 424 106 (25%) 318 (75%) New Initiative 820 MW Public Sector Peaking Plan 1000 400 (40% from GoB) 600 (60%) Combined Cycle and Peaking Plants in Private Sector: 1325 MW 1500 375 (25%) 1125 (75%) Solar and Wind Projects: 110 MW 200 50 (25%) 150 (75%) 2600 MW Coal PPP 4000 1000 (25%) 3000 (75%) Total Generation 7124 1925 5175 Transmission 1000 Distribution 1500 Total Investment 9624 Source: GoB, Power Division 7
Funding Gap The total GoB allocation for Power sector in FY09-10 is about USD 442mn; GoB financing by itself will be inadequate given the total investment needed for the power generation sector. As a result, we need increased participation by multilateral agencies and the private sector. Forecast Funding Requirements 2010-2015 USD Million 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Total Forecasted ADP 4,420.3 4,420.3 4,420.3 4,420.3 4,420.3 4,420.3 26,521.7 ADP allocation for Power 530.4 623.2 660.6 700.2 742.2 786.7 4,043.3 Required Capacity Addition (MW) 1,282.0 970.0 950.0 2,300.0 2,020.0 1,300.0 8,822.0 Investment Required 1,730.7 1,309.5 1,282.5 3,105.0 2,727.0 1,755.0 11,909.7 GOB public project allocation 207.7 157.1 153.9 372.6 327.2 210.6 1,429.2 Private Sector Projects 1,523.0 1,152.4 1,128.6 2,732.4 2,399.8 1,544.4 10,480.5 Small Private Sector Projects 167.5 126.8 124.1 300.6 264.0 169.9 1,152.9 Large Private Sector Projects 1,355.5 1,025.6 1,004.5 2,431.8 2,135.8 1,374.5 9,327.7 Total Equity Funding for large projects 406.6 307.7 301.3 729.6 640.7 412.4 2,798.3 Total Debt Funding for large private projects 948.8 717.9 703.1 1,702.3 1,495.1 962.2 6,529.4 Debt Financing of Large Private Projects: International Commercial Finance 271.4 205.3 201.1 486.9 427.6 275.2 1,867.4 IFI Loan ( IFC, ADB) 271.4 205.3 201.1 486.9 427.6 275.2 1,867.4 IDCOL Funding 271.4 205.3 201.1 486.9 427.6 275.2 1,867.4 IPFF 67.4 51.0 49.9 120.9 106.1 68.3 463.6 Assumed Unfunded Amount 67.4 51.0 49.9 120.9 106.1 68.3 463.6 Funding Gap IFI Loan ( IFC, ADB) 271.4 205.3 201.1 486.9 427.6 275.2 1,867.4 IDCOL Funding 271.4 205.3 201.1 486.9 427.6 275.2 1,867.4 IPFF ( World Bank funded facility) 67.4 51.0 49.9 120.9 106.1 68.3 463.6 Funding Gap ( eg IDA) 67.4 51.0 49.9 120.9 106.1 68.3 463.6 677.5 512.6 502.0 1,215.4 1,067.5 687.0 4,662.0 Source: AT Capital Research 8
Project Financing in Bangladesh
Domestic Finance Sources for Power Projects Domestic Sources of Finance: Local Banks Infrastructure Development Company Limited (IDCOL} Investment Promotion and Financing Facility (IPFF) Capital Markets Domestic Infrastructure Funds Although some local currency financing can play a growing role in supporting energy generation, international funding sources will likely remain the major source of funding, at least for the larger projects. The capacity for domestic financing of IPPs in Bangladesh differs considerably depending on the size of the funding requirement. Power projects up to around USD 70-100mn can broadly be financed with domestic sources of finance. However, for projects exceeding this, a significant proportion of the financing will likely have to be sourced internationally, with IDCOL, IPFF and international banks with local offices providing offshore finance (i.e. HSBC, Standard Chartered, Citi NA) being the only substantial providers of foreign currency debt in Bangladesh. 10
Local Banks Relatively Small Loans Loan amounts are typically limited to relatively small sizes with limits imposed by Bangladesh Bank on single party exposure. Syndications and club financing are the favoured means to increase pooled finance, but it has been estimated that projects in excess of USD 70-100mn are difficult to finance locally. Borrower Amount in USD mn Amount in BDT mn Tenor (in years) Lead Arranger Total Participants Participants Biman Bangladesh Airlines 114.5 8,140.2 2 Eastern Bank 10 AB Bank, BRAC Bank, Dhaka Bank, IFIC Bank, Mutual Trust Bank, National Bank, Prime Bank, The City Bank and Premier Bank Summit Power Ltd. 57.1 4,059.8 n/a IIDFC 10 IDCOL, Bank Asia Limited, NCC Bank Limited, United Commercial Bank Limited, Mercantile Bank Limited, BIFC, SABINCO, and Uttara Finance Limited Axiata (BD) Ltd. 44.0 3,128.4 6 n/a n/a n/a Warid Telecom International Ltd. 43.3 3,078.6 6 n/a 22 n/a Shung Shing Power Ltd. 41.0 2,915.1 6 n/a n/a n/a Source: AT Capital Research 11
Local Bank Financing Capacity Constraints Banks Capacity of Local Banks' Single Borrower Exposure Paid up Capital in BDT mn Paid up Capital in USD mn Total Capital in BDT mn Total Capital in USD mn Exposure Limit in BDT mn 15% Exposure Limit in USD mn 15% A. State Owned Banks 1. Agrani Bank Ltd. 4,968.4 69.9 9,167.2 129.0 1,375.1 19.4 2. Janata Bank Ltd. 5,000.0 70.4 13,860.4 195.1 2,079.1 29.3 3. Rupali Bank Ltd. 1,250.0 17.6-5,581.8-78.6 n/m n/m 4. Sonali Bank Ltd. 9,000.0 126.7 30,475.4 428.9 4,571.3 64.3 B. Private Banks a) Private Banks (Excld. Islami Banks) 1. AB Bank Ltd. 3,205.3 45.1 13,044.8 183.6 1,956.7 27.5 2. National Bank Ltd. 4,412.1 62.1 13,676.6 192.5 2,051.5 28.9 3. City Bank Ltd. 3,927.8 55.3 7,812.0 110.0 1,171.8 16.5 4. IFIC Bank Ltd. 2,179.8 30.7 5,618.6 79.1 842.8 11.9 5. United Commercial Bank Ltd. 2,910.0 41.0 6,909.2 97.2 1,036.4 14.6 6. Pubali Bak Ltd. 4,968.6 69.9 11,755.1 165.4 1,763.3 24.8 7. Utara Bank Ltd. 2,396.0 33.7 8,863.3 124.7 1,329.5 18.7 8. Eastern Bank Ltd. 2,920.8 41.1 9,770.0 137.5 1,465.5 20.6 9. NCC Bank Ltd. 4,501.3 63.4 8,575.0 120.7 1,286.2 18.1 10. Prime Bank Ltd. 5,776.4 81.3 21,978.0 309.3 3,296.7 46.4 11. Southeast Bank Ltd. 6,930.8 97.5 16,029.4 225.6 2,404.4 33.8 12. Dhaka Bank Ltd. 2,659.6 37.4 5,884.9 82.8 882.7 12.4 13. Dutch Bangla Bank Ltd. 2,000.0 28.1 5,777.7 81.3 866.7 12.2 14. Mercantile Bank Ltd. 4,072.2 57.3 6,256.9 88.1 938.5 13.2 15. Standard Bank Ltd. 3,172.9 44.7 5,348.3 75.3 802.3 11.3 16. One Bank Ltd. 2,057.2 29.0 4,396.1 61.9 659.4 9.3 17. Bangladesh Commerce Bank Ltd. 920.0 12.9 1,018.7 14.3 152.8 2.2 18. Mutual Trust Bank Ltd. 2,119.6 29.8 4,176.5 58.8 626.5 8.8 19. Premier Bank Ltd. 2,915.0 41.0 5,138.8 72.3 770.8 10.8 20. Bank Asia Ltd. 3,002.7 42.3 6,864.9 96.6 1,029.7 14.5 21. Trust Bank Ltd. 2,217.6 31.2 4,739.3 66.7 710.9 10.0 22. Jamuna Bank Ltd. 2,973.5 41.9 4,435.4 62.4 665.3 9.4 23. BRAC Bank Ltd. 2,677.0 37.7 8,760.2 123.3 1,314.0 18.5 b) Islami Banks 1. Islami Bank Bangladesh Ltd. 7,413.1 104.3 22,609.8 318.2 3,391.5 47.7 2. ICB Islami Bank Ltd. 6,647.0 93.6-5,191.3-73.1 n/m n/m 3. Al-Arafah Islami bank Ltd. 4,677.3 65.8 3,948.8 55.6 592.3 8.3 4. Social islami Bank Ltd. 2,987.8 42.1 3,889.9 54.7 583.5 8.2 5. EXIM Bank litd. 6,832.3 96.2 10,787.5 151.8 1,618.1 22.8 6. First Security Islami Bank Ltd. 3,036.0 42.7 5,385.6 75.8 807.8 11.4 7. Shahajalal Islami Bank Ltd. 3,425.1 48.2 6,573.4 92.5 986.0 13.9 Total 44,029.1 619.7 12
Local Banks Cost of Finance and Limited Tenure Local commercial banks are largely limited to making loans with a maximum term of 5-7 years and generally require equity of 25 % - 35%. Currently, interest rates stand at about 12.5% (base rates of around 8% + margin of 4.5%). Importantly, beyond supply side issues, demand side factors - the impact of investor returns and competitive bid tariffs, suggest that sponsors will invariably opt for international finance sources at lower cost of finance and longer tenures. For example, assuming a minimum benchmark equity IRR of 25% those with an internationally financed package could illustratively bid at 4.375 cents per kwh, while locally financed on 6 year tenures could bid at 5.125 cents per KW hr - a 16.4% difference. This could be the difference between winning a bid and losing a bid. 13
IDCOL and IPFF IDCOL has funding available for long-term financing of IPPs. The Government has contributed an additional USD 350 million in local currency to IDCOL for project financing, and the Asian Development Bank (ADB) is currently conducting due diligence on making USD 165 million in funding available to IDCOL; this amount could be increased to USD 500mn. Importantly, the ADB made a direct infusion of USD 50 million into IDCOL without the requirement of a Ministry of Finance repayment guarantee. Bangladesh Bank will resume its re-financing facility under its IPFF Project. The World Bank signed a draft agreement with the Bangladesh Government on 20 March 2010, providing USD 257mn, USD 7mn of which is allocated for Technical Assistance (Financial Express, 25 March 2010). The proposed disbursement has yet to be finalised. 14
Capital Markets and PPP Capital Markets: The Bangladesh Capital Market remains at a relatively nascent stage in terms of offering a diversified range of financing products. There is a small, illiquid and poorly functioning corporate bond market, thus providing limited sources of debt finance. The stock market is well positioned to enable raising equity capital at attractive valuations for listed operators. For Greenfield projects sponsored by non-listed sponsors, there are precedents of Greenfield IPOs raising capital at par value. Relatively high trading valuations of listed energy operators from an exit perspective provide additional upside, beyond project economics for operators and investors alike, making investment in power projects in Bangladesh attractive. Domestic Infrastructure Funds/PPP There are currently no commercial domestic infrastructure funds. A PPP program announced in the 2009/10 Budget included a proposed government facility of Tk 1600 Crore (USD 310mn), which has yet to come into operation. Energy Ministry has proposed setting up a fund focused on financing power generation and exploration projects. 15
Risk Mitigation The majority of the risks associated with large IPP Projects are mitigated by the Project s contractual structure, including GOB guarantee, and various risk mitigation instruments provided by Multilateral Agencies that will likely be part of the security package. Bangladesh Government Guarantees : The current proposed drafts of the Implementation Agreement, Power Purchase Agreement and Gas Supply Agreement for Bibyana include a government guarantee. IDA/ADB Partial Risk Guarantee : IDA offers Partial Risk Guarantees that can support loan guarantees to private-sector projects in countries eligible for concessional lending from the IDA. PRGs can cover a range of risks relating to government performance Project Company Loans Commercial Lender Government Undertaking Guarantee GOB Indemnity Agreement World Bank Multilateral Investment Guarantee Agency ( MIGA ) : MIGA is part of the World Bank group and offers political risk insurance to international investors. 16
History of Power Financing in Bangladesh 2001-2002 There are limited precedents for the financing of large IPP projects in Bangladesh. The most recent projects are Haripur in 2001 and Meghnagat in 2002. Both projects had sponsor equity, large IFI, and commercial banking components. They are both indicative of the likely financing structure that would be appropriate for Bibyana. Haripur Haripur Power Project Meghnaghat Power Project Equity: USD mn Base sponsor equity 31.0 45.6% 17% Subordinated sponsor loan 37.0 54.4% 20% 68.0 100.0% 37% Debt: Commercial debt* 60.9 53.0% 33% IFC direct loan 40.0 34.8% 22% IFC syndicated loan 14.0 12.2% 8% 114.9 100.0% 63% Total 182.9 100% Key features: * guaranteed with IDA's USD 60.9mn PRG GOB Indemnity agreement with IDA US Libor rate + 2% 15 yr financing Source: AT Capital Research Source: AT Capital Research 17
Indicative Project Finance Structure for Large IPPs We detailed in our report an indicative funding structure for a 400 MW Gas Fired Plant, with total project cost of USD 400mn. Assuming that equity finances 20-30 percent of project cost and that maximum use is made of export credit, there remains a significant financing gap. Therefore, funds for long gestation private power projects can be mobilized only with significant support and comfort provided by multilateral development banks and export credit agencies. 400 MW Gas Indicative Structure Source: AT Capital Research 18
Indicative Project Finance Structure for Large IPPs Source: AT Capital Research 19
A Strategy to Increase Domestic Infrastructure Financing Capacity
A Strategy to Increase Domestic Infrastructure Financing Capacity One of the key lessons from the Impact of the Global Crisis on Developing Economies is the need to have a balance between international and local financing of energy projects. Bangladesh enjoys an annual savings surplus (Gross National Saving-Gross National Investment) of around 5% of GDP or $ 4.5 bn. A key challenge in solving Bangladesh s energy crisis is how best to channel this domestic private sector capital into infrastructure financing. Regional Investment and Savings Scenario Source: AT Capital Research 21
Issues to be resolved for Infrastructure Financing A growing number of developing countries have developed their securities markets and longterm savings institutions, allowing them to tap domestic markets for infrastructure finance, and we believe some lessons are relevant to Bangladesh. Some key issues to be resolved for Bangladesh include: Equity Financing Debt Financing Corporate Bond Market Securitization Insurance Companies and Pension Funds Infrastructure Project Assessment Capability Put Options / Exit Strategies Fiscal Incentives Diaspora Infrastructure Bond IPOs Infrastructure Development Funds 22
Conclusion
Conclusion The Bangladesh economy proved to be one of the most resilient in the world to the fallout from the global crisis with GDP growth in FY 2008/9 only declining to 5.9% from 6.2% in FY 2007/8. However, this is not the primary reason that the Global Crisis did not affect the energy sector in Bangladesh significantly. That was driven by the lack of significant new large scale energy projects and energy generation capacity addition for much of the previous 7 years. The recent GoB Energy Roadshows held in London, Singapore and New York in December 2009 and January 2010 underline their commitment to market energy opportunities in Bangladesh, reduce misinformation and also learn about, and in the future address and allay, concerns potential foreign players may have about participating in the energy sector. It is hoped that over the course of the next 6-9 months, winner that one of the major power projects awarded secures a sustainable financing package that will give greater comfort to other international energy players to seriously consider Bangladesh. We remain optimistic that over the next 12-18 months, completed GoB energy tenders can attract overseas multilateral and commercial funding. The resulting reduction in the supply-demand gap in power generation will have undoubtedly be the largest single stimulus to accelerating growth and thereby poverty alleviation in Bangladesh. 24