• Tuesday, December 23, 2014

Freedom in the air

Banks await $20b opportunity to invest in power

StanChart analyses demand for loans in power sector

Md Fazlur Rahman

Bangladesh's power sector opened opportunities for private banks to lend between $10 billion and $20 billion by 2030, as the country struggles to narrow the gap between demand and supply of electricty.

The government plans to produce 39,000 megawatts of electricity by 2030 against estimated demand of 34,000MW at the time to fulfil its ambitious plan of taking power to all by 2021.

Plugging the energy gap will require $60 billion of additional investment up to 2030, Standard Chartered Bank said in an analysis.

“The government will not be able to fund this solely, which lends significant room for private-sector involvement,” it said.

Despite the government's substantial spending for the power and energy sector, the power sector needs increased private participation -- either from domestic or foreign sources, according to the analysis.

The share of private-sector financing in power projects will increase to 58 percent by 2016, according to the Power Development Board.

StanChart said previous large independent power producer projects had a debt component of around 60-70 percent, with the rest coming from equity financing.

Over time, as Bangladesh moves up the income ladder, a larger part of the debt financing is likely to come from bank lending, as the country is likely to become less eligible for multilateral concessional debt, the bank said.

"We think banks could provide up to a maximum of 50 percent of project financing over the medium to long term. If we assume a 60 percent private-sector share over the medium term, this suggests that $40 billion of the additional investment required for power projects up to 2030 must come from private sources," it said.

On this basis, the analysis sees minimum potential for bank financing of power projects until 2030 at $10 billion and maximum potential at $20 billion.

Private commercial banks have already stepped in.

Recently, StanChart raised $190 million from international lenders for a 335-megawatt electricity plant of Summit Meghnaghat Power Company Ltd in a single largest funding for any private power company in the country. The British bank itself has contributed $40 million to the fund.

Investing in energy capacity is likely to have a positive effect on growth. The $60 billion of investment has the capacity to raise nominal GDP by $50 billion by 2030, the bank said. The analysis also pointed to the failure of timely implementation of the project.

Between 2010 and 2013, only 50 percent of planned electricity generation was added to the grid.

"Timely project implementation will be crucial for achieving the power generation targets. Inefficiencies in project implementation need to be resolved at the earliest."

The analysis also touched upon the coal issue.

According the government's energy master plan, coal's share of electricity generation should increase from 3 percent currently to 20 percent by 2020, 30 percent by 2025 and 50 percent by 2030.

The government has drafted several coal policies, but there is no consensus on the issue yet, depriving the country of tapping its vast reserves of high quality coal.

"Political will and consensus building will be required to push forward domestic coal extraction – not easy when the issue of food security in a high-inflation country is at stake," according to the analysis.

"However, given that energy security is a top government priority, we are optimistic that clarity on the national coal policy will be forthcoming sooner rather than later."

Electricity shortage has high economic costs. The World Bank estimates that load shedding represents a loss of 0.5 percent in GDP and a $1 billion loss in terms of industrial output a year.

There are also financial and environmental costs of owning generators to compensate for power outages, StanChart said.

 

Published: 12:00 am Wednesday, July 23, 2014

Last modified: 1:10 am Wednesday, July 23, 2014

TAGS: Bangladesh government Electricity private banks Bangladesh's power sector

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