- -~~ FO I£NSFRAFSTRUCTURE 30072 _w I ,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C ! A , *_+E l' II '4'X"<_ Private Solutions for Infrastructure in Bangladesh June 2003 World Bank and Public-Private Infrastructure Advisory Facility (PPIAF) I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Policy-making, Planning, and Regulation ............................... 63 Recommendations ............................... 64 6. Transportation Overview .............................. 69 Issues Affecting Private Investment .............................. 70 Regional Integration ............................... 71 7. Roads .73 Market Structure: Public- and Private- Sector Roles .74 Performance ................................................................... 75 Intemational Experience .77 Issues .78 Recommendations .79 8. Railways .83 Market Structure: Public- and Private-sector Roles .83 Performance .84 Policy-making, Planning and Regulation ............................................... 86 Issues ........................................................................ 86 Recommendations ....................................... 88 9. Ports and Inland Waterways ..................................... 91 Market Structure: Public- and Private-sector Roles ...................................... 92 Performance ....................................... 92 Private-sector Initiatives ....................................... 93 Policy-making, Planning and Regulation ....................................... 93 Issues ... ............................. ...... .... 95 Recommendations ............................................................... 97 10. AirTransportation ............................................. 101 Market Structure: Public- and Private-sector Roles ..................................... 101 Performance .................................................................. 102 Policy-making, Planning and Regulation ............................. 104 Issues and Recommendations ............................ 105 Part Ill. Selected Cross-sectoral Issues I 1. Business Climate and Local Finance .................................. 107 Business and Legal Environment ..................................107 Mobilizing Local Finance ................................. 108 Recommendations for Developing Local Financial Markets .............................. 110 Appendix 1. Telecommunications Facts and Figures ........................... 113 Appendix 2. Power ............................................ 115 References ............................................ 117 - iv - Acknowledgments Private Solutions for Infrastructure in Bangladesh is is based on a series of background papers prepared one of a series of Country Framework Reports aimed by CPCS Transcom and on comments and at improving a country's environment for private sector collaborations by Tenzin Norbhu involvement in infrastructure. Prepared at the request (telecommunications), Salman Zaheer (energy), Ian of the governments concerned, Country Framework Alexander and Marc Heitner (natural gas), Khawaja Reports have three main objectives: Minnatullah and Ede Jorge ljjasz-Vasquez (water and sanitation), and Binyam Reja (transportation). * To describe and assess the current status and Comments were also received from Shamsuddin performance of key infrastructure sectors. Ahmad, Khurshid Alam, Rajesh Pradhan, and Zahed * To describe and assess the policy, regulatory, and Khan. institutional environment for involving the private The report is organized as follows: sector in those areas. * To assist policymakers in framing future reform and * Chapter 1 presents an overview of the challenges development strategies and potential private and opportunities relating to infrastructure in investors in assessing investment opportunities. Bangladesh. * Chapters 2 through 10 review the status of and This report was prepared with support from the propose reforms for the telecommunications, Public-Private Infrastructure Advisory Facility (PPIAF) power, natural gas, water, and sanitation sectors, and the World Bank. The PPIAF is a multi-donor as well as the country's roads, railways, ports, and technical assistance facility that seeks to help airports. developing countries improve the quality of their * Chapter 11 analyzes selected issues that are infrastructure through private involvement. For more common across the various sectors and that affect information about the facility, see the organization's the expansion of private-sector involvement in Web site at http://www.ppiaf.org. infrastructure. Clive Harris and Esperanza Lasagabaster led the team that prepared this Country Framework Report. It Acronyms and Abbreviations ADB Asian Development Bank DWASA Dhaka Water and Sewerage Authority DWMB Dock Workers Management Board BCF Billion Cubic Feet BDT Taka (currency of Bangladesh) E&P Exploration and Production BIWTA Bangladesh Inland Water Transport ECNEC Executive Committee of the National Authority Economic Council BIWTC Bangladesh Inland Water Transport ERC Energy Regulatory Commission Corporation ERCA Energy Regulatory Commission Act BOI Board of Investment BOO Build-Own-Operate FDI Foreign Direct Investment BOT Build-Operate-Transfer FY Fiscal Year BPDB Bangladesh Power Development Board FYP Five-year Plan BR Bangladesh Railway BTRC Bangladesh Telecommunication GDP Gross Domestic Product Regulatory Commission GOB Government of Bangladesh BTTB Bangladesh Telegraph and Telephone GTCL Gas Transmission Company Ltd. Board HCU Hydrocarbon Unit CAAB Civil Aviation Authority of Bangladesh CBOs Community-Based Organizations IBRD International Bank for Reconstruction and CIDA Canadian International Development Development Agency ICD Inland Container Depot CNG Compressed Natural Gas IDA International Development Agency CPA Chittagong Port Authority IDC Institutional Development Component CSE Chittagong Stock Exchange IDCOL Infrastructure Development Company CWASA Chittagong Water and Sewerage Authority Limited IIFC Infrastructure Investment Facilitation DESA Dhaka Electricity Supply Authority Center DESCO Dhaka Electricity Supply Company Ltd. ILD International Long Distance DfID-UK Department for International Development IOC International Oil Company - United Kingdom IPP Independent Power Producer DPHE Department of Public Health Engineering ISP Internet Service Provider DSE Dhaka Stock Exchange IT Information Technology DSK Dushtha Shasthya Kendra ITU International Telecommunication Union - vi - I Acronyms and Abbreviations I PSP Private-Sector Participation JBIC Japanese Bank of International Cooperation RAPPS Remote Area Power Supply Systems JICA Japan International Cooperation Agency REB Rural Electrification Board JMBA Jamuna Multipurpose Bridge Authority RHD Roads and Highways Department ROT Rehabilitate Operate and Transfer LGD Local Government Division RPGCL Rupantarita Prakritik Gas Company LGED Local Government Engineering Limited Department SEC Securities and Exchange Commission MCT Multipurpose Community Telecenter SOEs State Owned Enterprises MCF Million Cubic Feet MEMR Ministry of Energy and Mineral Resources TCF Trillion Cubic Feet MLGRDC Ministry of Local Government, Rural T&D Transmission and Distribution Development and Cooperatives TEU Twenty Foot Equivalent Unit MMCFD Million Cubic Feet per Day TGTDCL Titas Gas Transmission and Distribution MOPT Ministry of Post and Telecommunications Company Ltd. MOS Ministry of Shipping MPA Mongla Port Authority UNCTAD United Nations Conference on Trade and MW Megawatt Development UPI Unit for Policy Implementation NCB Nationalized Commercial Bank USO Universal Service Obligations NGO Non-Government Organization NH National Highway VMS Voice Message Services NLD National Long Distance VOIP Voice Over Internet Protocol NTP-1998 National Telecommunications Policy 1998 VSAT Very Small Aperture Terminal OC Operating Companies WLL Wireless in Local Loop O&M Operate and Maintain PBS Palli Bidyut Samity PCD Petroleum Concessions Department PCO Public Call Office PDB Power Development Board PGCB Power Grid Company of Bangladesh Ltd. PPA Power Purchase Agreement PPIAF Public-Private Infrastructure Advisory Facility PSC Production Sharing Contract PSO Public Service Obligation -vii- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I improve infrastructure performance and help reach largely unresponsive to their needs. Bangladesh also the ambitious coverage targets set by the GOB. sees low levels of coverage (see table 1). Even within the South Asia region, service providers' performance Increasing access to infrastructure services and is largely below par. The country is further behind its improving their quality will be important factors main competitors in keys sectors such as ready-made in reducing poverty levels. garments. For example, China has around 24 telephone mainlines per 100 people-a level of Infrastructure services are critical to reducing poverty coverage about 30 times that achieved in Bangladesh. and achieving the Millennium Development Goals National averages also mask critical differences in (MDGs) in Bangladesh. Improved water and sanitation access to services between urban and rural areas. services, for example, reduce child mortality from Although 60 percent of urban households have an waterborne diseases. electricity connection, only 22 percent of rural households do. Voices of the Poor found that poor people viewed bet- Most public-sector service providers show weak ter roads, transportation, communications, energy, financial performance and inadequate water, and sanitation services to be alTost as impor- investment. tant as health and education services. The financial performance of most public-sector service providers is weak because user prices do not Unreliable public-sector services have imposed cover costs and operations are inefficient, especially significant costs and hindered the growth of the in collecting payments from consumers. As a result, country's economy. Power shortages reduce industrial rather than being able to generate funds for future output by an estimated US$1 billion per year and GDP investment, these enterprises drain public resources. growth by 0.5 percent per year. Congestion in the This problem is particularly severe in the electricity, nation's ports costs the country in foregone exports. water, and railway service systems. Concern exists that with the end of the Multi-Fiber Despite some encouraging increases during the Arrangement in December 2004, Bangladesh will be last 2 years, electricity prices charged to households unable to maintain its market share of textile exports. still cover only about 60 percent of estimated long-run Improving the country's transport system, along with other actions, will Table 1. Coverage of Infrastructure Services in Bangladesh be essential to reducing product Percent with Percent with delivery times. Telephone mainlines access to access to per 100 people electriciry piped water Bangladesh lags behind much of the Soth Asa regon in Bangladesh 0.79 31 42 the South Asia region in Ida39m08 India 3.94 70 86 extending infrastructure services Ne1 134 is 81 to its citizens. Pakistan 2.9 55 70 Sri Lanka 4.4 55 58 Most consumers in Bangladesh Note: In the water sector, figures given are for Dhaka. Deihi. Kachmandu. Kar3chi and receive infrastructure services from Colombo. public-sector entities that are Sources:Telephones-International Telecommunication Union. Electricity-World Bank inefficient, poorly managed, and Water-Asian Development Bank -x- Executive Summary I The private sector has contributed substantially marginal costs (LRMC). The tariffs imposed by the to extending infrastructure services to meet Water and Sewerage Authorities of Dhaka (DWASA), uncovered demands. which remain among the lowest in the world, also fail to cover operational costs, and the country's railways In the telecommunications sector, the four private lose an amount equivalent to 25 percent of the annual cellular operators now exceed the public-sector investment funds provided by the government. provider in numbers of subscribers. Together, these Public utilities' performance has been better in four companies now have around 1 million relation to telecommunications, natural gas, and the subscribers, compared to 605,000 subscribers on the operation of the country's ports. The better BTTB network. Innovative approaches like Grameen performance of the Bangladesh Telegraph and Telecom's Village Phone program have made phone Telephone Board (BTTB), Petrobangla, and the port service available in rural areas. authorities largely reflects market power rather than In the water and sanitation sector, a privately efficiency, and even in these cases investment has financed handpump program unique in the region had been inadequate. BTTB typically retains only about 50 provided nearly the vast majority of rural households percent of its surplus for investment, transferring the with access to groundwater. The handpump program rest back to the government budget. As a sought to reduce the use of contaminated consequence, ambitious expansion targets have not surfacewater; however, arsenic contamination of the been met. aquifers tapped by many of these handpumps means that alternative safe sources now must be sought. Government support for infrastructure has not Apart from the handpump system, efforts to extend targeted improving service access for poor people. water and sanitation services to underserved areas include water vending in Dhaka, the efforts by The GOB has provided much of the investment capital nongovernmental organizations (NGOs) such as for infrastructure development. On average, Dushtha Shasthya Kendra (DSK) to extend formal allocations for energy and infrastructure under the water services to urban slum areas, and the provision government's Annual Development Plan have of credits by microfinance institutions for the increased in recent years, while allocations for health development of water systems in rural and semi-urban and education have stagnated (Newbery 2001). areas. No systematic evaluation has been made of the In the power sector, Independent Power Plants incidence of benefit by income class in Bangladesh, (IPPs) supplied 22 percent of net generation in fiscal but it is unlikely that the existing subsidies for 2002. This percentage further increased with the infrastructure services serve the country's poor Meghnaghat plant operating in combined cycle mode people. Only around 12 percent of the poorest quintile since November 2002. The most recent IPP tenders of households has electricity connections (Newbery for Haripur and Meghnaghat have attracted some of 2001). By contrast, nearly all of the households in the the most competitive bids worldwide. top two quintiles of income distribution have electricity Some of these private-sector interventions have connections. The subsidized tariffs enjoyed by helped extend provision of services and have been residential consumers appear to represent benefits admired in the region. But overall, Bangladesh has that go mainly to the upper and middle classes. been less able to attract investment in private infrastructure projects than other South Asian countries. -xi - I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I A Largely Stalled Reform Bangladesh will require sustained reforms to pricing and delivery of services. Private-sector provision of infrastructure services offers numerous opportunities Bangladesh has introduced some policy, regulatory, for innovation, customer responsiveness, efficiency, and management reforms in the infrastructure sectors. and accountability. Policy measures can both set the Changes have been most noticeable in the conditions for the sustainable expansion of services telecommunications sector, where competition now and facilitate the entry of private-sector providers. exists between the incumbent BTTB and new cellular Reforms will involve a reallocation of resources. entrants, and where a sector regulator was recently They will be achieved only if broadly supported. established. Most new power generation has been Consensus-building will entail reaching out to the funded with private capital. Some progress has been public, explaining the gains to be obtained by the made in reducing losses, and recent price increases country at large, and minimizing the hardships that for electricity have helped to improve the financial reforms will likely impose on specific social groups. position of this sector. Given the scope of some of the changes required, In most other areas progress has stalled. and given some of the difficulties already encountered Bangladesh lags behind its neighbors in South Asia in in carrying out reforms, the GOB must articulate short- efforts to reform the infrastructure sectors. This term and medium-term programs to address the key situation is worrisome, as the region as a whole has issues affecting the infrastructure sectors. At present seen halting efforts at reform in the face of resistance fewer strategic investors are likely to be interested in from vested interests who stand to lose from reform. acquiring water, power, and telecommunications Users of services would have to pay the costs of operations in developing countries. However, supply, and employees of service providers would lose investors have always regarded the policy and opportunities for rent-seeking. Employees also are regulatory risks in Bangladesh as high and requiring concerned about potential job losses. More generally, substantial mitigation, so the country's challenge in although reform efforts have been discussed in attracting investors may not be substantially greater. sectors such as gas, electricity, and water for some Commercializing operations in these sectors with time, relatively few changes have been made. Even in reforms that cover both pricing and payment discipline telecommunications, where a progressive policy has will help to reduce the perceived risks. been adopted, the slow rate of change has thwarted Bangladesh faces a challenging reform agenda. efforts to reach ambitious expansion goals. The country should begin by focusing on steps that can be taken in the next 1 to 3 years. Broadly, these Necessary Policy Changes steps are: * Introducing private-sector provision of services in The current state of infrastructure services threatens priority areas. the country's ability to achieve the targets laid out in * Experimenting with new approaches to providing the Interim Poverty Reduction Strategy. Bangladesh services in rural areas. can no longer afford to postpone reforms in * Carrying out basic reforms in the governance and infrastructure. Without reforms, the gap in service corporate structures of existing public service provision between Bangladesh and its neighboring providers. countries will continue widening, and opportunities for * Introducing and facilitating competition, including accelerating growth will dwindle, Expanding the competition to provide service to new consumers quality and quantity of infrastructure services in and, where possible, existing customers. -xii- I Executive Summary * Pricing key services, such as water and electricity, in a way that more closely reflects the costs of service provision. 1. http://www.worldbarnk.org/poverty/voices. * Developing a consensus that favors reforms and addressing the concerns of those groups who will be negatively affected by these necessary changes. * Improving the overall business climate. These steps are interlinked. Indeed, reforms in all areas will be necessary to facilitate sustainable service delivery through the private sector and substantially improve the country's situation. Detailed policy recommendations for each infrastructure sector are provided in chapters 2 through 10. -xiii- Part 1. Overview I1 Infrastructure in Bangladesh: Challenges and Opportunities During the next 10 years, Bangladesh will face major challenges in expanding the coverage of key infrastructure services as it seeks to provide modern energy, telecommunications, and transportation services and safe water. The country's current levels of coverage are among the lowest in the South Asia region. One major challenge will be mobilizing the financial resources to effect the necessary changes. Prices for critical infrastructure services, particularly electricity and water, are below the costs of provision. The operational inefficiency of the main publicly owned infrastructure service providers exacerbates the situation.' Private management and capital can substantially expand infrastructure services in Bangladesh. The private sector has already made important contributions in some sectors. However, this potential is only likely to be fully realized if the country undertakes substantive reforms which in any case are essential regardless of whether services are provided privately, or continue to be provided publicly. The Imperative for Reform Bangladesh has relied to some extent on subsidized financing from multilateral and bilateral To meet the challenge of greater coverage, the donors for the development of national infrastructure. Government of Bangladesh (GOB) will have to carry However, frustration at the slow pace of reforms has out policy changes that affect the pricing of led many of these donors to withdraw or to reduce infrastructure services and the governance and levels of support. operations of these sectors. Undertaking reforms will Private management and capital can substantially make more financing available for reaching presently expand the coverage and quality of infrastructure unserved rural and poorer areas. However, the country faces an increasingly difficult fiscal situation and has limited tax resources. Unless revenues from Bangladesh's level of tax revenue relative to GDP is user charges for infrastructure services provide an under 10 percent, one of the lowest in the world increasing proportion of costs, ac-celerated coverage (World Bank 2001). Public enterprises have increas- can be achieved only by reducing government ingly contributed to the deterioration in the country's expenditures in other areas, such as human fiscal position: the consolidated deficit for public expendiures i otherareas,such a human enterprises rose from 0.9 percent of GDP in fiscal development, or by allowing the quality of current 1999 to 3 percent of GDP in fiscal 2001. infrastructure services to deteriorate. _ I- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I services in Bangladesh. Indeed, the private sector has Power shortages reduce industrial output by an already made major contributions in different ways in estimated US$1 billion per year and GDP growth by telecommunications and water supply, and to a lesser 0.5 percent per year. Congestion in the nation's ports extent electricity. However, this potential is only likely leads to higher shipping costs, reducing the country's to be fully realized if the country undertakes competitiveness. With the end of the Multi-Fiber substantive reforms which in any case are essential Arrangement in December 2004, Bangladesh may be regardless of whether services are provided privately, unable to maintain its market share of textile exports. or continue to be provided publicly. Improving the country's transport system, along with This chapter reviews the present status of other actions, will be essential to reducing product infrastructure provision in terms of coverage, delivery times. efficiency of provision, the financial performance of the Maintaining and increasing the growth rates that main service providers, and the social and economic Bangladesh realized in the 1990s will be important if costs imposed by poor infrastructure services. It then poverty reduction is to accelerate. The national Interim assesses the largely limited reform steps taken to Poverty Reduction Strategy under preparation aims at date, and proposes the main areas in which action a 7 percent growth rate. An important target is halving should be taken by the GOB of Bangladesh. the incidence of poverty by 2015. The current state of infrastructure services will likely hinder the Improving the quality and quantity of achievement of these goals. infrastructure services will be important for The poor rank access to infrastructure as one of reducing poverty. their most important needs and as a critical input into moving out of poverty.3 Voices of the Poor found that Infrastructure services are critical to poverty reduction poor people considered better roads, transportation, and the achievement of the Millennium Development communications, energy, and water and sanitation Goals (MDGs) in Bangladesh. Access to modern and services almost as important as health and education improved infrastructure services also can directly services. In Bangladesh, studies have shown that per- improve health and education outcomes. Improved capita expenditures average 6 percent higher in water and sanitation services reduce child mortality communities with electricity and 12 percent higher in from waterborne diseases.2 They also support better communities with telephones. education and health outcomes, for example by Reliable basic infrastructure services help small allowing more time for children to seek education and farmers market their crops, encourage the by improving access to health services. development of non-farm income opportunities for the Efficient and reliable infrastructure services are poor, and are associated with greater activity by credit essential for economic growth and have a major providers, including microfinance institutions.4 impact on the investment climate. Unreliable public- sector service provision has imposed substantial costs Bangladesh has developed some successful on the Bangladeshi economy and hindered growth. approaches to providing infrastructure service. Several of the approaches Bangladesh has developed for providing infrastructure services are admired by The impact of poor infrastructure provision is often magnified for small firms. In South Asia, most small other countries in the South Asia region. These firms tie up a significant amount of their capital in self- approaches include: generation capabilities.This practice is almost unheard of among countries in EastAsia (World Bank, 2001). * Sustaining the efficiency of the rural power cooperatives, Palli Bidyut Samities (PBS), in -2- I Infrastructure in Bangladesh: Challenges and Opportunities I collecting bills and maintaining low levels of system Table 1.1. Coverage of Infrastructure loss relative to much of the region. Services in Bangladesh * Constructing independent power projects on Telephone Percent with Percent with schedule, at the lowest costs in the region, and free mainlines per access to access to of major controversy as in India and Pakistan; o00 people electricity piped water * Extending telecommunications services to rural Bangladesh 0.79 31 42 areas through the Grameen Telecom village phone India 3.94 70 86 program and more generally through the rapid Nepal 1.34 15 81 growth of private cellular operators, which now Pakistan 2.9 55 70 serve almost 1 million consumers, compared to the SriLanka 4.4 55 58 600,000 main lines provided by the Bangladesh Note: In the water sector, figures given are for Dhaka, Delhi, Telegraph and Telephone Board (BTTB). Kathmandu, Karachi and Colombo. * Providing the vast majority of rural households with Sources: Telephones-International Telecommunication Union; access to groundwater through a unique, privately Electricity-World Bank;Water-Asian Development Bank. financed handpump program.5 National averages mask important differences in access to services between urban and rural areas in These successful initiatives share some common power and telecommunications. Although 60 percent features, such as effective governance of service of urban households have an electricity connection, providers, either through private management and only 22 percent of rural households do.5 In ownership or genuine consumer ownership. telecommunications, Bangladesh has been much less Competition also has played a role in some of these aggressive than India has in rolling out Public Call initiatives. Offices (PCOs). India has around one million PCOs in Despite the success of these programs, most total, of which an estimated 40 percent are in villages, consumers in Bangladesh still receive services from meaning that 80 percent of India's villages have poorly managed and relatively unresponsive public- PCOs, In contrast, only about 30 percent of villages in sector entities. As a result, Bangladesh sees low Bangladesh have telephone access. Even in urban levels of efficiency and coverage of infrastructure areas, many people in slum areas have trouble getting services. Even within the South Asia region, official connections for water and electricity. Instead performance is by and large below par. they pay more for unofficial connections provided by local criminals and racketeers. Bangladesh lags behind much of the region in extending modern infrastructure services to its Service is often unreliable and of a poor quality. citizens. Systematic data on the quality of services provided in Bangladesh lags behind other countries in the South Bangladesh is not readily available. However, Asia region in terms of providing access to modern information is available on the quality of provision in infrastructure services (Table 1.1). The country is some cases, as are consumers' opinions of service further behind competitor nations in key sectors, such quality. A recent World Bank report, Bangladesh: as textiles. For example, China's telecommunications Urban Service Delivery, found that depending on sector provides about 24 telephone mainlines per 100 location, between 2 and 12 percent of electricity people, or about 30 times the levels achieved by customers (8 percent in Dhaka) are satisfied. The Bangladesh. Power consumption in Bangladesh is people surveyed also mentioned that obtaining an only around 8lkWh, compared to over 76OkWh in electricity connection in a reasonable time generally China. requires paying substantially more than the official fee; -3- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Box 1.1. Will Raising WaterTariffs in subsidy received by the consumer increases Bangladesh Hurt the Poor? (Brocklehurst et al. 2002). Most slum areas do not It is often argued that raising water tariffs hurts poor receive official DWASA supply, and residential tariffs people.This argument often has little merit in coun- are half of cost in DWASA. tries such as Bangladesh, however, where service cov- Given Bangladesh's fiscal position and pressing erage in urban areas is low and largely confined to the needs for expenditures on health and education, middle and upper classes, and where service in the increased resources for accelerated expansion cannot rural areas and slums is privately provided. Low tariffs come from budgetary funds. Instead, they will have to contribute to the need for operating subsidies from . .' the government to compensate for the utilities' finan- come fromiuersfees, more efficnt pration o f cial losses and hinder investments in new capacity service providers, and more rational pricing policies. expansion. Low tariffs on water consumption thus result in subsidies to the middle and upper classes at Private-sector contributions toward meeting the direct expense of service coverage expansion for uncovered demands for infrastructure services the poor. have been substantial. Lack of access to publicly provided services means that poor people end up paying much higher per-unit In telecommunications, private cellular operators now prices to private vendors. Slum dwellers in Dhaka were paying as high as BDTI per bucket of 20 liters have mre cries than B does Togthe, the or BDT5O per cubic meter-roughly 10 times the four private companies reach about 1 million rate charged to DWASA residential consumers.After subscribers, compared to 605,000 BTTB subscribers. Dushtha Shasthya Kendra (DSK) interventions, water Innovative approaches like Grameen Telecom's costs of water have fallen to BDT37 per cubic meter Village Phone program have made phone service but remain at 7 times DWASA rates. available in rural areas. Source: World Bank staff. In the water and sanitation sector a number of efforts have been made to extend services to areas that lack them. Examples include the long-standing, infrastructure services in Bangladesh do not go to privately financed handpump program; water vending serve the country's poor people. More generally, as in Dhaka; efforts by non-government organizations worldwide experience has shown, public-sector (NGOs) such as DSK to extend formal water services service provision has not benefited the poor (Clarke to urban slum areas; and the provision of credits by and Wallsten 2001). In Bangladesh only about 12 microfinance institutions for the development of water percent of the poorest quintile of households are systems in rural and semi-urban areas. estimated to have electricity connections (Newbery In the power sector, independent power producers 2001). However, nearly all of the households in the top (IPPs) now supply more than 25 percent of net two quintiles of income distribution in the country have generation. This percentage is expected to increase electricity connections. The subsidized tariffs enjoyed with the commissioning of the 450 MW Meghnaghat by residential consumers thus represent benefits that plant in 2003. Although no detailed information is go mainly to the upper and middle classes, despite the available, it is estimated that about 2 percent of the recent restructuring of electricity tariffs. Although the population receives supply from solar home systems lowest-priced block has been reduced from 300kWh and off-grid diesel generators. per month to lOOkWh per month, the 100 to 300 kWh Private-sector interventions have helped to extend block remains subsidized. services to some populations who were not receiving DWASA has a flat-rate tariff for domestic coverage from the public sector. But overall, consumers. As consumption increases, the total compared to several of its neighbors in South Asia, - 6- I Infrastructure in Bangladesh: Challenges and Opportunities I Figure 1.3. Per-Capita Investment in Infrastructure Bangladesh has been less able to attract investment Projects with Private Participation, 1990-2001 in private infrastructure projects. From 1990 to 2001 US$ the country saw considerably less investment per 80 capita in infrastructure projects with private 70- participation (Figure 1.3). 60 - 40- A Largely Stalled Reform 30 - 20- Agenda 10 0 Bangladesh has introduced some policy and Bangladesh India Pakistan Sri Lanka regulatory reforms as well as management reforms in Source: World Bank staff. the infrastructure sectors. Changes have been most noticeable in the telecommunications sector, where competition now exists between the incumbent BTTB policy was adopted, change has been slow, and and new cellular entrants, and where a sector ambitious service expansion targets have not been regulator was recently established. In the power realized. sector, most new generation has been funded with One perceived constraint to private-sector private capital. Some progress has been made on participation in infrastructure and utility services in reducing losses, with some semi-urban feeders being Bangladesh has been lack of access to medium-term transferred from BPDB to Rural Electrification Board and long-term debt financing. Restriction to short-term (REB) management. A significant reduction in losses credit has created uncertainty and has been seen to has occurred in the area of Dhaka under Dhaka increase financing costs. Consequently, the GOB in Electricity Supply Company Ltd. (DESCO), with a conjunction with the World Bank, established the private management contract in place. Recent price Private Sector Infrastructure Development Project. increases for electricity have also helped to improve This project included a lending facility of more than slightly the financial position of the sector. US$200 million, which was to be channeled through a In most other areas, however, reforms have stalled. newly established organization, Infrastructure Bangladesh lags behind its neighbors in South Asia in Development Company Ltd. (IDCol). IDCol could efforts to reform the infrastructure sectors. This provide long-term debt financing at market rates. The situation is worrisome because the region as a whole project also included a technical support center, the has seen halting efforts at reform in the face of Infrastructure Investment Facilitation Center (IIFC), resistance from vested interests. Such vested which was designed to facilitate transactions and interests, such as users of services who would have to provide advice on creating the right environment for pay the costs of supply, employees of service private-sector participation. Additional significant providers who would lose opportunities for rent- donor support over an initial 5-year period was seeking or who are concerned about possible job provided to IIFC by the Department for International losses, and others who benefit from corruption and Development (DFID) and the Canadian International rent-seeking, stand to lose from reform. More Development Agency (CIDA). generally, although reform efforts have been After an initial positive impact, with IDCol providing discussed in sectors such as gas, electricity and water financing for the Meghnaghat power generation for some time, relatively few changes have occurred. project, the project pipeline dried up. Despite efforts by Even in telecommunications, where a progressive IDCol, some projects, like a major telecommunications -7 - I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I program, were delayed while others, like the proposed commercial operations than those of Petrobangla. container terminal at Patenga, were caught in legal Pakistan has a functioning regulatory body for this actions. IIFC has continued to seek appropriate sector. private-sector projects, such as the Khanpur port project, and has also been involved in innovative actions like Remote Area Power Supply Systems Ports (RAPSS). Given the absence of overall policy reforms, Sri Lanka and India have developed privately financed however, these two institutions are having but limited terminals that compete alongside the existing impact. government-operated terminals. Bangladesh lags behind other countries in the South Asia region in the telecommunications, Necessary Policy Changes electricity, and natural gas sectors, and in the performance of its ports. The current state of infrastructure services threatens the achievement of the targets laid out in the Interim Poverty Reduction Strategy. Bangladesh can no longer afford to postpone reforms in infrastructure. Bangladesh was the last country in the region to set Without such reforms, the gap in service provision up a regulatory agency covering telecommunications. between Bangladesh and its neighboring countries will It is the only country to see major constraints on continue widening while growth opportunities dwindle. interconnection capacity between the incumbent Expanding the quality and quantity of infrastructure provider and new entrants. Sri Lanka and India, which services delivered in Bangladesh will require had aggressively promoted reform, have greatly sustained reforms to both pricing and service expanded coverage and reduced prices as efficiency. Private-sector service provision on both a competition for consumers has spread. In contrast, large scale and a small scale offers opportunities for BTTB's prices for new connections are among the innovation, customer responsiveness, efficiency, and highest in the world. accountability. Ultimately, Bangladesh will benefit from Electricity: Bangladesh still lacks a national policy measures that set the conditions for the regulatory agency for electricity, although this sustainable expansion of services and facilitate the deficiency may soon be addressed. India and entry of private providers. Pakistan have well-established regulatory bodies, and Because reforms will involve a reallocation of Sri Lanka is presently developing a multi-sector resources, they will be achieved only if they are regulatory agency that will cover electricity as well broadly supported. Consensus building will entail other infrastructure sectors. India has privatized reaching out to the public, explaining the gains to be distribution in two states, and other states are obtained by the country at large, and minimizing the attempting to follow this lead. Pakistan is also looking hardships that reforms likely will impose on specific to privatize distribution in two major urban centers. social groups. Efforts to introduce new sector legislation in Given the magnitude of some of the changes Bangladesh have stalled. required, and given some of the difficulties so far encountered in carrying out reforms, the GOB must Natural Gas lay out both short-term and medium term programs to address the key issues affecting the infrastructure Substantial private ownership of gas distribution sectors. Bangladesh is doing this at a time when fewer companies in Pakistan and India has resulted in more strategic investors are likely to be interested in -8- I Infrastructure in Bangladesh: Challenges and Opportunities I acquiring water, power, and telecommunications These represent the minimal program required to companies operating in developing countries. accelerate the development of infrastructure in Arguably, however, the challenge Bangladesh faces in Bangladesh. More substantial and rapid reforms attracting investors has not increased greatly because would bring increased benefits, but given the slow the policy and regulatory risks in the country have pace of reforms to date, the proposed program always been regarded as being high and requiring represents an ambitious goal. Failing to move forward substantial mitigation. Beginning to operate these with these reforms will continue to hamper the sectors on a commercial basis, covering both pricing development of infrastructure in the country. and payment discipline, will help to reduce the perceived risk. Priorities for private-sector Chapters 2 through 10 include detailed policy participation recommendations for each infrastructure sector. Here we present an overview of the main areas in which the The GOB is already considering facilitating limited GOB should implement reforms, focusing primarily on entry of private operators in rural areas in the power steps that can be taken during the next 1 to 3 years. and drinking water sectors, the latter in conjunction Broadly, these steps involve: with NGOs active in this field. The government should also invite private-sector * Introducing private-sector provision of services in companies to offer telecommunications services other priority areas. than cellular. In the ports sector, new entities can be * Experimenting with new approaches to providing created that will compete with the two port authorities. services in rural areas. In the near term, the government also should take * Carrying out basic reforms in the governance and the following actions: corporate structures of existing public service providers. * Privatize the distribution of natural gas within the * Introducing and facilitating competition, including country while developing a credible regulatory competition to provide service to new consumers framework and cost-covering tariffs (see chapter and, where possible, existing customers. 4). * Encouraging competition for government funds, * Institute private financing and management of part particularly those targeted for subsidizing the or all of the gas transmission network, requiring expansion of services to unserved areas. vertical separation of existing assets and the * Pricing key services, such as water and electricity, establishment of a credible regulatory framework in a way that more closely reflects the costs of (see chapter 4). service provision. * Privatize urban systems in the power sector, * Developing a consensus that favors reforms and starting with operations in Dhaka, again within a addressing the concerns of those groups who will sound and credible regulatory framework (see be negatively affected by these necessary chapter 3). changes. * Contract out cargo and other services at the * Improving the overall business climate. Chittagong and Mongla ports (see chapter 10). * Invite private-sector participation in rail services, These steps are interlinked. Acting in one area including equipment, terminals and depots (chapter without acting in the others is unlikely to substantially 9). improve the situation. -9- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I distribution, with outside, non-government directors These represent the areas where there is probably on the board (see chapter 3). the greatest potential for private-sector participation, * Continuing to transfer feeders to the REB, which for example natural gas, and the greatest need, for has a better track record of bill collection than example urban electrical power given little BPDB and DESA (see chapter 3). improvement in recent years in public-sector * Unbundling Petrobangla into separate companies performance. Privatization need not mean that the charged with production, transmission, and assets are sold; rather, it means that the private sector distribution, and providing these companies with provides much of the financing and has full greater management autonomy, including management control. A range of public-private independent directors and managers (see chapter partnerships can be considered, including 4). arrangements that involve some government funding, * Restructuring the Chittagong Port Authority (CPA) such as subsidies to private companies to accomplish and Mongla Port Authority (MPA) as landlord ports, identified social goals. with a clear separation between management and Later on, the GOB might move to privatize BTTB overall oversight (chapter 9). and additional enterprises in the power and gas * Corporatizing Bangladesh Railways and giving it sectors. Private-sector provision of water and the authority to contract with private sector entities sanitation services in smaller towns also could be for service delivery (chapter 8). explored through lease or concession structures. Carrying out basic reforms in The benefits of corporatization should not be overestimated. However, corporatization per se does governance and operations not guarantee improved performance. If it is to While not a long-term substitute for more fundamental succeed, corporatization must be backed by a reforms, the government should undertake reforms in genuine commitment to allowing entities considerable the governance and operations of existing service operating independence from the government. providers. Such changes should cover the basic Although they represent powerful reforms, these steps organizational structure of some entities, enhancing should not be regarded as substitutes for deeper their operational autonomy and improving their bill- change, such as private participation. collecting efficiency. These reforms should also clarify In the energy sector, sector governance can be financial flows between these service providers and improved by creating an independent regulatory the government. The most important steps in carrying agency. As well as implementing the tariff frameworks out these reforms would be: for the gas and electricity sectors, this agency could have a role in monitoring and reporting on the * Making the BTTB a corporation, establishing it as a performance of public and private entities operating in public limited company with an independent board the sector. In India, although regulatory bodies have of directors (see chapter 2). not been able to impose operational improvements in * Implementing anti-theft legislation in the power the poorly run state power companies, the regulatory sector, and enforcing payment of bills by process has greatly increased awareness of the consumers (see chapter 3).8 companies' poor performance and the extent of * Unbundling the existing power-sector companies financial losses and theft in the sector. into public limited companies concerned with the The telecommunications sector needs a level separate functions of generation, transmission, and playing field for competition to develop and flourish. -10- I Infrastructure in Bangladesh: Challenges and Opportunities I Accordingly, the sector's regulatory body must be competitive bidding approach based on tariffs rather strengthened and permitted to operate independently. than following uniform national rates. Promoting competition in providing Encouraging competition for services government funds The telecommunications sector already sees active Current GOB support to the infrastructure sector is competition for new connections, but additional substantial, but much of this support effectively props competition could be introduced in providing services, up inefficient public-sector service providers. On the including long distance and international services. basis of present evidence, little support goes to the One key constraint that must be addressed is BTTB's extension of services to the country's poor people. inadequate provision for interconnection. It would Relatively little transparency exists in the financial seem appropriate to invest initially in interconnection relationship between the government and some service rather than in a new government-owned cellular providers, such as Petrobangla and BTTB. These service provider. Existing policy restrictions that limit entities generate surpluses, but the surpluses go in entry into the sector should be replaced with a part to pay back debt incurred by the government. transparent licensing program that facilitates new The GOB should consider initiatives allowing for- operations and competition. BTTB's planned entry into profit private operators or NGOs to compete for the cellular arena also causes concern, given its government funds that target expansion to new dominance in providing other telecommunications service areas. One such example is the planned services. If BTTB enters this market, it should do so RAPSS program in the power sector. Under this through a separate entity, and the Bangladesh program the government will provide subsidies on a Telecommunications Regulatory Commission (BTRC) competitive basis for the least subsidy required. This should ensure that BTTB cannot favor its subsidiary. type of approach is also being considered in piloting India and Sri Lanka have enjoyed some success in the private provision of small-scale piped water allowing private-sector entrants into the ports sector to facilities in rural and semi-urban areas. It should also provide competition for existing government owned be considered for the telecommunications sector. service providers. This strategy has offered Where needed, a universal service fund to subsidize consumers with more choices, allowed the entry of the roll-out of the telecommunications network in rural more efficient operators, and given the government- areas could be employed, rather than sole-sourcing owned operators greater incentives for improving the effort to BTTB as at present.9 efficiency. This strategy should be pursued in Bangladesh. Competition to serve existing demand will likely g Pr g onal bring lesser benefits in other sectors. In the water and Setting prices to reflect the costs of providing services power sectors, competition for new connections will be important to the success of reform efforts, should be emphasized. Streamlined procedures are particularly in the gas, power and water sectors. To necessary for allowing entry of private-sector service some extent, rebalancing prices could increase providers. The government should also consider revenues with protection still being afforded to some allowing market determination of prices for supply in categories of consumers, for example those who areas that are not presently served or under consume less. immediate consideration for service by existing In the gas sector, the government should move service providers. Prices could be set using a toward establishing a transparent tariff framework in - I I - I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH of service plus a redundancy payment ranging from 13 to 27 percent, depending on length of service. 11. For information on the cost of a starting business and international comparisons, see http://rru. worldbank.org/doingbusiness. 12. The study involves a survey of 1001 firms with more than 10 employees in the following sectors: garments; chemicals and pharmaceuticals; electronics; food and food processing; leather and leather products; and textiles. -14- Part I. Sectoral Review Telecommunications Policy Objectives: Expand teledensity to 3.3 percent by 2005 from the present levels of 0.8 percent; establish a competitive framework for providing services; increase private-sector participation in the sector; and develop a world-class telecommunications system for furthering information technology (IT) development. * Private-sector Participation: Private ownership and operation of several companies providing cellular, radio-paging, Internet, data, and video-text services, and perhaps soon limited fixed-line services. * Key Issues: Delays in carrying out National Telecommunications Policy (1998); restructuring of the Bangladesh Telegraph and Telephone Board (BTTB); lack of interconnection capacity between BTTB and private cellular companies; liberalization of international long-distance services; rebalancing of tariffs; and obstacles to universal access. Bangladesh was one of the first countries in South Bangladesh's NTP-1998 recognizes the power of Asia to allow private participation in its competition in promoting improved sector telecommunications sector. Initial licenses were performance. The government's delay in fully issued in 1989 and private provision of services implementing the policy has, however, limited the commenced in 1993. Since then, however, the pace of entry of private-sector entities and delayed investment reforms has been slow, and the country has fallen in the sector. As a result, the availability and quality of behind most of its neighbors with regard to telecommunications services in Bangladesh lags performance in this sector. international and regional benchmarks. An important The Telegraph Act of 1885 and the Wireless Act of objective of the national policy, establishment of an 1933 were the only governing tools for this sector until autonomous telecommunications regulatory the government adopted its National commission was achieved recently with the creation of Telecommunications Policy in 1998 (NTP-1998). The the Bangladesh Telecommunications Regulatory Telecommunications Act of 2001 repealed the Commission (BTRC). Telegraph Act and the Wireless Act. -15- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I added about 700,000 subscribers. Grameen's * The public mobile business being subject to the success reflects the high level of demand for same regulation by BTRC as other cellular telecommunications services, even in rural areas, and operators. the company's successful move to lease capacity on * BTTB not providing preferential interconnection to the fiber-optic network of Bangladesh Railways. the public mobile company. Grameen used the leased capacity to establish a * BTTB's fixed operation not cross-subsidizing the network covering a large part of the country. The other public mobile operation in any way. three cellular companies-City Cell, AK Tel, and Sheba Telecom-have added approximately 258,000 Empirical evidence shows that incumbents owning customers. AK Tel has ambitious expansion plans for a mobile operator leads to slower growth in the 2003 and expects to grow its market share from the market. Competition measured by mobile operators current 13 percent to approximately 30 percent. not owned by the incumbent is positively correlated All of the private-sector service providers have with increases in the per capita number of mainlines, faced a severe constraint to further service expansion payphones, and connection capacity, and with in BTTB's unwillingness to provide the necessary decreases in the price of local calls (Wallsten 2001). interconnection facilities. BTTB's unwillingness is rooted in the inadequacy of its network. Recently Rural services however, the cellular operators have agreed to fund approximately US$2 million in transit-switching Rural services are limited in Bangladesh. At present equipment in BTTB's network to improve the two fixed-line operators provide only about 26,000 interconnection capacity. All the cellular operators rural mainlines. Telecommunications services have interconnection agreements with each other. provided by cellular companies are inaccessible to Grameen has leased excess capacity on its most of the rural population. However, some cellular Bangladesh Railways fiber-optic network and can operators like Grameen Telecom have initiated a provide domestic long-distance services to its Village Phone program to bring connectivity to the subscribers and those of other mobile operators when rural areas. Today the program provides services in making mobile-to-mobile subscriber calls. These 20,000 of Bangla-desh's 68,000 villages. agreements have in effect created national long- Limited access to telecommunications in rural distance competition to BTTB. areas is greatly exacerbated by the very high cost of BTTB also has a license to provide cellular the connection charges, which make service services but has not yet commenced providing unaffordable for a large proportion of the population. cellular service. The granting of the license was In November 2002, BTTB reduced the cost of conditioned on BTTB mobilizing its own funds for connection from US$353 to US$171. Table 2.3 this operation and on the business being run benchmarks access costs in Bangladesh to those of as a separate subsidiary. In February 2003, the other countries in the region (International Executive Committee of the National Economic Telecommunication Union 2001). Council (ECNEC) recommended that mobile India, which has experienced similar problems in services be provided by a new government providing telecommunications services to rural areas, company. has introduced the Public Call Office (PCO) as an No matter which government agency provides alternative (see box 2.1). Implementation of specific mobile services, doing so will require a significant policy initiatives stated in India's National allocation of scarce public resources. Moreover, Telecommunications Policy of 1994 and 1999 resulted public-sector entry into the mobile market will have to in the successful use of PCOs to provide India's be conducted in a way that preserves competition. citizens with affordable access to telecommunications. Such an approach must include: India required all cellular service providers to meet -18- I Telecommunications I Table 2.3. Cost of Access Residential Business Residential Business Nonetheless, current capacity All amounts cost of cost of monthly monthly cannot meet demand, even though in US$ connection connection rental rental high international tariffs suppress Bangladesh 171 171 3 3 demand and a significant volume of China .. 3 4 potential traffic is siphoned off by India 18 18 6 6 VSAT operators. Appendix 1 Indonesia 35 53 3 5 provides some further details on Malaysia 13 13 5 9 international service as well as on Nepal 28 28 2 2 data and Internet services. Pakistan 83 83 5 5 Sri Lanka 175 175 3 5 Other telecommunications Source:World Bank staff. services In 2001, GOB declared its policy rural obligations as specified in their licenses and the thrust on IT by announcing a series of fiscal state-owned incumbents-Bharat Sanchar Nigam incentives, including the dropping of all customs duty Limited and Mahanagar Telecom Nigam Limited- on IT equipment. However, little meaningful action aggressively recruited access resellers to operate the was taken to improve the performance of the PCOs. telecommunications sector that provides the essential Other countries also have adopted innovative infrastructure plafform for the IT industry. schemes to encourage private-sector participation in providing access in rural areas. For example, Nepal has plans to license a rural operator to provide services in the Eastern Development of the Region. Box 2.1. From Teledensity toTele-reach? The license will be awarded to the operator that bids for the lowest minimum capital subsidy to provide rural ITU has acknowledged that teledensity-the number services. Many Latin American countries, including of telephone lines per 100 people-may not be rele- Chile, Columbia, the Dominican Republic, Guatemala, vant as a policy parameter in a country like Chile,Columbia, theDominicanRepublic,Guatemaa, Bangladesh. Instead, ITU suggests, it is much more and Peru have also extended subsidies to private important to focus on tele-reach or tele-access, or the operators willing to enter rural areas. These subsidies percentage of the population with access to a tele- have been bid out competitively to ensure that costs phone. India provides a good example.With a tele- are kept as low as possible. Some countries provide density of about 4, India has embraced the policy of up-front subsidies, while others pay once services are putting priority on public telephones, particularly in delivered, contingent on performance (see box 2.2). rural areas. As a result, about 70 percent of India's The GOB could also consider designing and population now has telephone access, thanks to a network of almost I million public call offices implementing such schemes within an appropriate (PCOs). More than 400,000 PCOs are located in vil- institutional and regulatory framework. lages. Many of the PCOs in urban and rural areas also function as Internet kiosks. In contrast, Bangladesh has only a little over 4,000 PCOs (I PCO per 32,000 International service people, compared to India's I PCO per 1,000 peo- With its current monopoly over international long- ple). In Bangladesh, more than 70 percent of the pop- distance services, BTTB owns and operates three ulation has no access to a telephone international gateway exchanges and four satellite Source: World Bank staff. earth stations for international connections. - 19- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Box 2.4. Reform Experiences in the Region each of these concerns and offers a SriLanka perspective on what the realistic * Private telecommunications investments increased 25 percent annual- result of increased private-sector ly, with more than US$2.9 billion invested in Sri Lanka by the operat- participation might be. ing companies between 1996 and 2000. Other developing countries have * The number of new jobs created jumped from about 700 in 1996 to shared some of the same concerns, more than 3,500 in 2000. but instead of holding back they * During the past 4 years, fixed-access telephony grew at more than 25 acted positively and aggressively by percent per year while mobile service providers' growth surpassed 50 introducing reform action plans that percent per year. tackled the government's needs and India those of the private sector (see box * The network is growingmnnually at an average rate of approximately 2.5). The main winner in these 22 percent for basic services and more than 100 percent for cellular situations was the general public, and Inernet services. which benefited from expanded and * Lines added to basic services during the last 5 years are one and a half better-quality services while tariffs times that of the last 5 decades. dropped. A recent World Bank study * Access to a public phone is available in 86 percent of all villages. points out that "more than 90 * Foreign direct investment in the telecommunications sector exceeded US$18 billion between 1993 and 2001. developing countries opened their * National long distance charges have dropped by more than 60 percent, telecommunications sector to cellular airtime charges are down by 90 percent, and international call private participation during 1990-98, charges are falling. with investment commitments * Telecommunications infrastructure has provided one of the key foun- totaling US$214 billion." dations for India's IT industry, which generated more than US$10 bil- What should be the GOB's lion in fiscal 2002. ultimate goal for the country's Source:World Bank staff. telecommunications sector? Privatization of the system and networks to the extent that it can be sector and the significant economic multiplier effect it achieved. To this end, the first step in the process can potentially generate, Bangladesh should initiate should be corporatization and commercialization of efforts to accelerate reform in the sector. The NTP- BTTB, with a goal of eventual privatization. However 1998 and the Telecommunications Act of 2001 have that alone will not solve all of the existing problems. provided a basic framework to move forward, but the country needs to develop a stronger will to do so. The GOB has some fundamental concerns about Restructuring of BTTB expanded private participation in telecommunications. The government has rightly recognized the need to Among these concerns are the perceived loss of restructure BTTB into a public limited company. This revenue to the government if privatization occurs; restructuring will allow a clear separation between the inadequate servicing of rural, uneconomic areas organization's policy-making and operating functions. without government intervention; strong potential for It will provide BTTB with the autonomy and incentive labor unrest in conjunction with any discussion of to productively invest its profits back into building its BTTB downsizing or private-sector takeover; and loss network, while also improving its operational of funds from customs duties if IT is adopted and more productivity. Restructuring should lead to the fully integrated into the system. Table 2.6 addresses unbundling of various BTTB services, thereby helping - 22 - I Telecommunications Table 2.6. Translating Threats into Opportunities GOB concern Probable results GOB cannot afford to privatize BTTB because it With the opening up of all telecommunication services to needs the revenue. competition and the eventual privatization of BTTB, the market will likely grow several times.Through increased taxes, GOB can expect to earn several times more than it currently receives from BTTB. BTTB has a social obligation to serve rural areas. This obligation is not well served by charging rural customers arbitrarily high connection fees that have no cost-of-service basis and are perhaps among the highest in the world. Doing so just chokes the growth of the market. Privatization of BTTB is not feasible without With full competition, the.telecommunications market, and support from its labor union. consequently, the job market for telecommunications workers, will expand significantly, as has been seen in some of Bangladesh's regional neighbors. Zero custom duty on telecommunications Telecommunication services provide the basic foundation for IT equipment. services. Moreover, any revenue loss from zero duty on telecommunications equipment will likely be more than offset by revenues gained from a new telecom service tax. SourceWorld Bank staff. BOX 2.5 Restructuring Experiences in Sri incentives to become consumer oriented and Lanka and India quickly expand services to meet unmet demand. Sri Lanka India * The Sri Lanka Telecommunications Act (1992) provid- Following the Telecommunications Policy of 1999, the ed for the conversion of the government department government restructured the Department of supplying telecommunications services into a govern- Telecommunications (DOT), creating a separate ment-owned corporation. Department of Telecom Services (DTS) and leaving * The incumbent organization was transformed into a the policy-making function with DOT. public limited company in 1996, before partial privati- Later, because of resistance from senior management, zation in 1997. the Department of Telecommunication Operations * Lessons learned: (DTO) was spun off from the DTS to formulate a - A government corporation can operate more effi- corporatization strategy. ciently than a department to satisfy demand and * In October 2000 DTO was corporatized with the improve service. establishment of the new Bharat Sanchar Nigam Ltd. - The performance of a public enterprise remains (BSNL), with approximately 400,000 employees. hampered by public salary scales, investment BSNL was granted financial support to compensate approvals, and procurement procedures. for the cost of socially desirable projects. - Only full privatization, together with suitable reg- Source: World Bank staff. ulation, provides the necessary autonomy and -23- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I to ensure a more level playing field. It is critical that BTRC should be allowed to operate in a manner restructuring occurs before BTTB enters the mobile that gives its decisions legitimacy with all operators in market. the sector. The GOB's next steps should be to identify the best option for BTTB's restructuring and then define a clear Political Independence timeframe within which to carry out its plan. The regulatory authority must be at arm's length from Restructuring will involve, among other things: regulated firms to avoid conflicts of interest. It must also be at arm's length from political authorities to * making the required legislative and legal changes; reduce the influence of political pressures. * valuing and allocating assets and liabilities, including settlement of arrears; Financial Independence * moving toward commercial financial accounting, The regulatory body should be exempt from restrictive including cost accounting; civil service salary rules and budgetary processes. * incorporating BTTB as well as its mobile subsidiary and any other subsidiaries; Open Process * carrying out a full audit of BTTB and of the opening BTRC must design transparent regulatory processes balance sheets of any corporatized entity or that allow interested parties to put forward their views entities; and and to challenge and be challenged by others. * drafting of new competition-friendly licenses for BTTB and its subsidiaries. Transparency BTRC should demonstrate that its decisions are BTRC's operational capacity and based on observable data sources and replicable regulatory agenda formulas. As a recently established institution, BTRC faces the Accountability twin challenges of creating a regulatory environment Decisions by BTRC should be reasoned and justified that favors competition while it builds its own capacity. by reference to defined criteria, such as a list of Creating a strong institutional capacity will involve regulatory objectives or guidelines, so that they can be addressing human resources, finance, and effectively challenged. infrastructure issues, as well as defining regulatory processes. BTRC will require assistance for capacity Broader Representative View building. In this respect, it can be helped by examining The board of the BTRC is made up of commissioners the experiences of recently created regulatory who are telecommunications professionals but who agencies in neighboring countries that have faced the have no prior experience as regulators. They are all challenge of regulating a largely unreformed former civil servants, and three are former BTTB government-owned incumbent. chairmen or members. In future, the government Because BTRC has scarce resources, it must should seek to establish a more diverse board maintain a strong focus on those issues that are most membership that includes commissioners familiar with critical for long-term sustainable sector development: economics, the private sector, and consumer interconnection, licensing, tariff reform, and spectrum perspectives, and with expertise in IT. Such diversity management. While focusing on the long-term issues, will enhance the BTRC's professionalism and BTRC must maintain its obligation to address other independence. In the interim, the BTRC should issues that its stakeholders consider high priority institute a mechanism that would allow for the matters. Such issues include VOIP and liberalization establishment of advisory councils to provide advice of the international gateway. on a wide range of market and consumer issues. -24- I Telecommunications I WTO Regulatory Reference Paper to ensure that the regime does not deter ISPs from In implementing a regulatory agenda, BTRC should be providing nationwide services. The regime should guided by the principles of equity and transparency attempt to provide a balance of incentives and articulated in the WTO Regulatory Reference Paper. obligations that will allow operators to extend viable services. Optimizing and rationalizing spectrum management Interconnection No reliable database of spectrum licenses is currently Establishment of a competition-friendly available. Existing information on frequency interconnection regime must be a high-priority effort. assignments is incomplete and largely unstructured, The network must be expanded as quickly as which results in delays in assignments that inhibit possible. Also, to ensure optimal use of national private-sector investment. A rational spectrum- resources, existing excess capacities in the fiber-optic management system that would optimize the use of a networks of the Bangladesh Power Development valuable national resource is essential for an orderly Board, Power Grid Corporation of Bangladesh, Gas telecommunications market. This need is becoming Transmission Company Limited and other government more urgent given BTRC's plans to introduce further organizations should be made available to all current competition in a number of wireless services. and future telecommunications service providers in an BTRC must develop this database immediately, alternate broadband network, on a mutually before a rational system of spectrum allocation can be acceptable cost-sharing basis. designed. Next, BTRC should engage the private sector to handle spectrum management and control Encouraging competition in basic operations. BTRC recently signed an agreement with telecommunications services the Infrastructure Investment Facilitation Center (IIFC) to conduct the tendering process for outsourcing BTTB has failed to meet pent-up demand for basic these operations. A model is being developed, and the telecommunication services, so the market should be activity is well on its way. opened to competition. In country after country, competition has been observed to be the key to a successful telecommunications revolution. A half- Rebalancing tariffs hearted attempt was made about a year ago to The connection fees and tariffs being charged by the introduce private-sector participation in basic services BTTB are not based on cost. Unfortunately, BTRC's through a 300,000 WorldTel deal on a build-own- authority to regulate BTTB's tariffs has been operate (BOO) basis, but the attempt stalled. constrained by a ruling allowing BTTB to continue with BTRC, through the IIFC, will study potential private- its existing tariff-setting practices for the next 3 years. sector participation in public switched telephone Tariff reform should be one of the BTRC's primary networks (PSTNs) with a view to extend tele-reach concerns once it assumes responsibility for BTTB's and teledensity to selected areas through a process of tariffs. franchising to private operators. Following the study, the BTRC, assisted by the IIFC, will tender the process to engage the private sector in identified market areas. BTRC has to establish a fair and transparent licensing regime that encourages growth in the sector. The licensing framework must be made more rational, including fee structures for ISP licenses in particular, -25- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH Introducing VOIP and Internet telephony Given the limited number of fixed lines, Bangladesh can benefit from China's experience in using Internet-based technologies like VOIP and IP telephony to increase connectivity. It is worthwhile to examine whether China's successful experiment to increase connectivity at a phenomenal rate can be replicated in Bangladesh. This is a low-cost option that can be rolled out very quickly.1 Improvement in tele-reach In this information age, a significant increase in tele- reach in the shortest possible time is absolutely essential. Appropriate universal access policies and programs must be established and implemented as Table 2.7. Telecommunications Action Plan soon as possible. * Establish a competition-friendly interconnection regime. * Increase tele-reach through privately owned and operated Roadmap for action PCOs and other means. Short term: * Declare VOIP to be legal. Tables 2.7 and 2.8 presents a Moderate * Restructure BTTB. summary of the analysis of the competition (up * Build capacity within BTRC to develop a credible telecommunications sector and a to I year) regulatory framework. detailed action plan to carry out * Liberalize the international long-distance services market. reforms. * Outsource a rational spectrum-management system for BTRC. Notes * Bid out a license for an alternate broadband network that should build on existing capacities in the country, and 1.udies Infoon IPtlony a n srie f case provide network services to all telecommunications and studies on IP telephony in China and IT service providers. several other countries is available at * Follow China's landmark example and bid out a license the ITU Web site: www.itu.org. Medium term: for an IP telephony network, initially to serve rural areas. Enhanced * Bid out new licenses for local and national and competition international long-distance service operators in urban (I to 3 years) areas who may use VOIP and other technologies. * Establish a domesticVSAT hub and domestic Internet exchanges. * Comply with the World Trade Organization Regulatory Reference Paper. * Put into operation a universal service obligations (USOl fund. Source:World Bank staff. -26- I Telecommunications Table 2.8. The Telecommunications Sector at a Glance Essential immediate policy actions Current situation The BTTB must first be restructured into a public limited * Extremely low tele-reach and teledensity and, company as the first step. consequently, significant economic cost to the nation in The BRTC must be alowed to act as an autonomous and terms~ ~ ~ ~~~~~~~ ~h Bof must beP allwe tomctaslnoutnomusan terms of lost GDP and employment, independent regulatory body with responsibilities for leading * GOB lacks funds for necessary investment to improve the development of a competitive telecommunications sector. connectivity. connectivity.___________________________________________ It must be given the authority to: Broad policy option available * Issue licenses (unhampered) to new private sector The existing approach has failed. Where Bangladesh was operators in telecommunications services, including among the first countries in South Asia to allow private-sector providers of network services and cheaper IP telephony participation in the telecommunications industry, it has services. become the least advanced country in that area. GOB has no * Unbundle the various telecom services provided by the option therefore but to revisit its approach and turn to the dominant operator (BTTB), to ensure fair competition private sector for their active participation in rectifying the among all operators. situation. An enabling environment for full private sector * Put in place appropriate interconnection agreements participation (PSP) must be put in place immediately. among operators, based on a cost-sharing principle. Basic premises for a policy approach * Put in place an appropriate cost-based tariff regime that allows industry to adequately maintain existing networks * The nation's interest is being threatened by the existing and systems while increasing capacity as needed. structure, management, and policies of BTTB. * Follow a rational spectrum-management system. * Competition in the telecommunications sector is Expected long-term results imperative. It has proven to be the key success factor for most of Bangladesh's Asian neighbors. * Emergence of a vibrant, fiercely competitive, and * The existing tariff structure is inappropriate and must be innovative telecommunications sector. revised. * Development of an effective telecommunications platform * An appropriate action plan to optimize the use of existing for GOB's thrust on information technology plans. infrastructure resources must be put in place. * Large gains for consumers and the economy. Source:World Bank staff. -27- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Table 3.2. Electricity Consumption (million kWh) to about BDT38,860 million Fiscal 2002 HH. Comm. nd. Irrig. Other Total (US$670 million). (US$670 million).BPDB 1,892 474 2,090 96 184 4,736 Despite this growth, access to BDE 1,892 474 2,09 9 718 4,073 . . . ~~~~~DESA 1,691 159 1,507 1 71l 4,070 electricity and per capita usage REB 1,660 219 1,649 357 10 3,895 remain low relative to the Total 5,208 853 5,247 454 905 12,701 performance of some neighboring countries (table 3.1). About 80 Source:World Bank staff percent of the urban population has access to electricity, but with varying levels of reliability within public utilities, are usually referred to the and service quality. Cabinet of Ministers. Of Bangladesh's predominantly rural population The MEMR oversees sector operations and makes (about 80 percent of the population), only 20 percent important decisions such as large procurement is connected to the national grid. Approximately decisions, tendering and investor selection for another 2 percent relies on off-grid electricity, derived construction and operation of independent power mainly from small diesel generators and solar home plants, fuel policy, financing, and transfer of senior systems. Households and industry consume 41 staff and other personnel matters. Under this percent and 47 percent of supply, respectively, with structure, the state bears virtually all market, tariff, and commercial, irrigation and other customers making up payment risks for the sector, either directly through its the balance. Table 3.2 summarizes consumption sovereign guarantees or indirectly through ownership during 2001-02 for households, commercial users, of sector enterprises. Except in its relationship with industry, irrigation, and other users. Independent Power Producers (IPPs), the state also bears all of the technical risks. A Power Cell under MEMR was established in Institutional framework 1996 to help the government with policy-making, tariff State enterprises and the Ministry of Energy and formulation, and sector reform. The Power Cell is not Mineral Resources (MEMR) dominate the sector. The a permanent body, which hinders its ability to attract MEMR is responsible for policy-making and regulation. and retain staff. However, politically sensitive decisions, such as tariff setting, restructuring, and even organizational changes Power Generation Total installed capacity amounts to 4,232 MW, with the Table 3.1. Bangladesh's Electricity Access and BPDB being the dominant supply entity. In fiscal 2002, Usage Compared with Neighboring BPDB accounted for about 83 percent of total Countries generation. During the same period, private sources- rapidly growing since 1999-accounted for 17 percent Country population Per capita usage of total generation. Five IPPs now sell electricity to with access (percent) (kWh per year) BPDB through long-term, government-guaranteed Bangladesh 31 108 Power Purchase Agreements (PPAs).1 State-owned Cambodia 10 30 Petrobangla supplies natural gas, the fuel used in India 70 384 generating more than 80 percent of the country's Nepal I15 47 eetia oe Pakistan 55 337 electrical power. Sri Lanka 55 244 Source:World Development Indicators 2001. -30- I Power I Power Transmission Rural Power Distribution The Power Grid Corporation of Bangladesh (PGCB) is The REB coordinates and facilitates the development now fully responsible for high voltage transmission as of distribution systems in rural areas. Rural distribution well as dispatch, having taken over all transmission systems are owned, operated, and maintained by a and dispatch assets from BPDB and DESA. Created collection of consumer cooperatives called Palli Bidyut in 1996 under the Companies Act, PGCB is one of two Samitis (PBS). At present Bangladesh has 67 PBSs. state-owned power enterprises designed to be The REB approves the tariffs set by each PBS, with its insulated from political pressure. BPDB holds the objective being that average rates permit the PBSs to state's shares in PGCB, thus maintaining a dominant at least cover costs for operation, maintenance, influence over its activities. depreciation, and financing. To ensure affordability of a basic level of consumption, cross-subsidies are Urban Power Distribution permitted between consumer categories. The REB Also a government-controlled body, DESA was also negotiates prices for PBS supply purchases from established in 1991 to distribute electricity in greater BPDB, DESA, and-occasionally-small IPPs. The Dhaka by separating associated assets from BPDB. REB also owns 27 percent of the Rural Power DESA now accounts for 46 percent of end-use Corporation, with the remaining 73 percent owned by electricity sales. As an experiment, in 1999 a small nine PBSs. area serving about 8 percent of demand was hived off and the Dhaka Electric Supply Company (DESCO) was established to manage billing and collections in Recent Policy Directions and this area. DESCO has improved billings and Performance collections over the last 4 years, reducing system losses from 46 percent to 23 percent and increasing The Electricity Act of 1910 is the primary legislation that collections from a low level to almost 90 percent.2 governs this sector, but since 1995 a series of policy Additional service zones were transferred to DESCO statements have been issued to guide its development. in early 2003 and DESCO is now responsible for These policy statements are: distribution in North Dhaka. Eventually DESA itself is expected to be corporatized as a holding company * Inter-ministerial Committee Report on Power with two to three additional distribution companies Sector Reform, 1994. under it. * Private Sector Power Generation Policy, 1996. BPDB handles electricity distribution in all urban * Policy Guidelines for Small Power Plants (SPPs) areas other than Dhaka, representing about 37 with private sector participation, 1998. percent of total demand. BPDB is transferring small * Vision and Policy Statements on Power Sector semi-urban load areas (less than 3 MW) to the REB. Reforms, 2000. It recently separated distribution areas covering five * Three-Year Sector Reform Road Map and Interim towns centered around Khulna into a new Western Pricing Framework (May 2003). Zone served by the Western Zone Distribution Corporation. The new distribution corporation will The Vision and Policy Statements and 3-Year Road begin commercial operation when its rehabilitation is Map are the dominant instruments guiding sector completed in a few years under an Asian reforms. They articulate goals that include: Development Bank (ADB)-financed project. -31- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I * Bringing the entire country under electricity service number of distribution and generation companies, the by the year 2020. interface between future distribution companies and * Making the power sector financially viable and PBS, timing for departure from the single buyer model, enhancing its efficiency. and the future role of BPDB. * Improving the reliability of electricity supply. Several donors and financial institutions, including * Using natural gas as the primary fuel for power the World Bank and ADB, have been assisting various generation. governments over the last 6 to 8 years to update the * Exploring prospects for exporting electricity to Electricity Act of 1910. In August 2002, the augment and diversify foreign exchange earnings. government decided to merge the reform legislation * Increasing private-sector participation to mobilize proposed for the electricity and gas sectors into a finance. single proposal, the Energy Regulatory Commission * Promoting competition among entities. Act (ERCA). Passed by Parliament in March 2003, ERCA establishes a combined energy regulator and Figure 3.1 depicts the new structure that has been provides it with the authority to issue licenses, ensure envisaged for the power sector. Various aspects of this compliance with license conditions, and set tariffs.3 structure are still being debated, including the optimal Figure 3.1. Target Power Sector Structure, Phase I _ :] _ Small Private Generation I PPs ~ gr private power self- plants (SPPs) generation Power purchase Power Grid Company agreements of Bangladesh (PGCB) Transmission Transmission _ Single-buyer r services _ ISO services Bulk supply tariffs Private concessions Distribution in rural areas area (RAPSS) Source: World Bank staff. -32- I Power I Recent performance dollar and payments in foreign exchange to be With available capacity now at almost 3,800 MW with onerous in the current regulatory environment. For the 450 MW Meghnaghat plant operating in combined example, in fiscal 2002, IPPs generated 22 percent of cycle mode since November 2002, the sector has net total generation, but they also accounted for sufficient capacity to meet at least base load demand roughly 31 percent of BPDB's total operating from connected customers- reducing the load- expenses. With BPDB's revenues in local currency, no shedding problems of a few years back. However, automatic adjustment of tariffs for changes in supply distribution systems need to be upgraded. Peak costs outside its control, high system losses, debt demand still exceeds supply, and BPDB faces service, and nonpayment by end-users, BPDB's net problems with poor reliability of its power plants, losses amounted to about US$110 million in fiscal largely because of design flaws and limited cash-flow 2002. Such losses severely constrain the utility's for proper maintenance. ability to commit to new power purchase agreements. As a result, BPDB is in favor of a departure from Power Generation the current IPP model toward one in which The IPPs, with cash-flow secured by their power construction and rehabilitation of power plants would purchase agreements and efficient operations, offer a be done through joint ventures between BPDB and promising example of what can be achieved to private partners. However, it is difficult to see how this improve power generation with sound management, approach would make projects cheaper, unless it an appropriate contractual framework, and modern essentially involved taxpayers bearing a larger share technology. of the costs of these IPPs. A better alternative would The two most recent IPP tenders (1998-99) for be to ensure that tariffs increase to reflect rises in the combined cycle gas turbine (CCGT) plants at Haripur cost of competitively-procured generation. and Meghnaghat were well-designed and competitively bid. They attracted some of the most Transmission and Dispatch competitive bids worldwide, with average life-cycle The PGCB board is made up of non-government and tariffs around 2.73 to 2.98 U.S. cents per kilowatt hour private-sector representatives.4 Recruited at a gas price of US$2.4 per gigajoule. By contrast, competitively for a 5-year term, PGCB's management earlier tenders, such as simple cycle plants at Khulna, has done a commendable job of puHting in place Baghabari, Haripur, and Mymensingh, followed more credible business plans and transparent accounting limited bidding routes that may have contributed to systems and human resource policies. Resistance by their relatively high costs-for example, about 5 to 7 BPDB's labor unions, however, has challenged U.S. cents per kilowatt hour for gas-based operations. PGCB's ability to adhere to a merit-based system for Recent IPPs have been constructed in record time, contracting operational staff. As a result, the entity has typically within 3 years from financial closing and in even relied almost entirely on BPDB's transmission workers less time for barge-mounted plants. They also have seconded to PGCB. This situation also reflects staff maintained a high level of reliability. reluctance to separate from the parent organization Actual IPP generation costs also have been lower until funding for pension plans has been developed. than the numbers initially tendered because the gas The ADB is to finance these pension schemes and tariff has been smaller than originally expected. Unit facilitate the transfer of operational staff. costs for the two CCGT plants have also fallen (by PGCB's board support has allowed it to adhere to about 100 percent) as they have transitioned from commercial principles and helped to insulate the simple cycle operation to combined cycle operation. company from the political influences faced by other On the downside, BPDB (the single buyer) is state-owned enterprises. The company estimates that finding the indexation of purchase prices to the US its tariff margin of BDTO.18/kWh (U.S. cents 0.3/kWh) - 33 - I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Need for additional investments Table 3.5. New Capacity Under Total capital requirements for generation, Construction or Planned transmission, and distribution were estimated in 1995 Year BPDB IPPs at about US$6.6 billion (in constant 1995 prices) for the period 1996 to 2015. Roughly US$1.0 billion of this 2002 a 450 MW plan has already been carried out with the 2003 210 MW construction of about 1,500 MW of generation 2Un0dfi0d - 450 MW capacity and expansion of the transmission and rural distribution networks. a. As of October 2002. t b. Some of this capacity could be provided by IPPs. If properly maintained, current capacity is sufficient Source: World Bank staff. to meet present (connected) demand. However, peak demand is expected to increase by at least 300 MW per year, which will require annual investments of transmission network; and (iv) expansion of new US$150 million. An equal amount will be necessary generation capacity based on least-cost principles. for transmission and distribution facilities. Table 3.5 indicates new capacity now under construction or Overstaffing planned. Investments will need to be carefully sequenced so With about 40,000 employees in the sector (23,000 in that they are made concurrently with (i) reductions in BPDB alone), bringing the skill mix and staffing levels technical and non-technical losses; (ii) expansion in to more optimal levels will be an important objective of grids and off-grid coverage in rural areas; (iii) sector restructuring. upgrades in PGCB's dispatch and load-management infrastructure and cost-effective extensions of its Inefficiencies in urban distribution The 2000 Vision Statement Table 3.4. Reforms to Date identifies the distribution system as Increase in generating Generating capacity has doubled since the the 'weakest link in the industry." capacity early 1990s. Important problems in urban distribution and their probable Improvements in reducing Average systems losses have improved from causes are shown in table 3.6. systems loss 40 percent to 30 percent over the past Although the reliability of urban decade. (Of this improvement, about 5 supply needs improving, connected percent represents self-consumption of the urban households enjoy a highly power plants.) subsidized benefit that is still Commercializing the sector's PGCB and DESCO were established as unavailable to 70 percent of the state-owned enterprises corporations. population. Consequently, their tariffs should be raised to cover Introduced private-sector Five privately operated generation hcilities costs, with subsidies targeted at low participation through IPPs with 1,260 MW capacity have been income customers or definition of a introduced since 1998. lower life-line block of 30 to 50 kWh per household per month so Two tariff adjustments during An average 8 percent increase in January and that poor households can afford 2002 a 5 percent increase in August. basic service. Inefficiency and Source: World Bank staff. underpricing mean that the shortfall -36- I Power I Limited coverage and high distribution in the return on BPDB and DESA assets has on costs in rural areas average been about 1.6 percent of GDP. Despite the DESCO experience, corporatization The expansion of services to rural areas merits and private management are not yet proven as a way special attention. Capital costs per customer for grid to improve distribution performance. However, some and off-grid electricity connection are higher than encouraging improvements have occurred over the those in urban areas because of low population last 4 years, with system losses falling from 46 percent density and limited demand, as constrained by low to 23 percent, collection rates increasing to almost 90 economic activity. About 59 percent of the rural percent, and almost full payment for the purchase of population of Bangladesh is estimated to be living power and other operating costs. below the poverty line, compared with about 50 percent of the population in urban Table 3.6. Urban Distribution System Problems and Likely areas. Causes The GOB, together with various Problem Causes development partners, is financing innovative schemes to expand Ineffective * Lower public-sector wages and limited performance- electricity coverage in rural areas. management related incentives Approaches include extension of the * Strong labor unions main power line and development of self-contained systems. The High technical * Undersized and overloaded equipment innovative Remote Area Power losses * System design shortcomings Supply S ems APSS)Phas . Incomig powerqualitySupply Systems (RAPSS) has Inoormaingtpowernqualiy begun to build on the largely * Poor maintenance community-owned, grid-based rural High non-technical - Illegal connections and tampered meters electrification program by losses * High commercial risk customers (slums, other illegal encouraging private providers to constructions) either build, own, and operate * Poor internal controls, such as system metering isolated systems or develop grid * No bills issued, sometimes with collusion between extensions. An authorization for customers and meter readers developing the transactions for the first four areas was recently Poor collections * Payment requests not followed up on awarded. * Service not cut off if bill unpaid Inadequate . Revenues insufficient for investment Need for tariff reform capacity * Limited access to affordable financing Analysis by the World Bank Poor reliability or * System design indicates that the early fiscal 2002 service quality . Revenues insufficient for proper maintenance tariffs of both BPDB and DESA were * Demand exceeds capacity well below their respective costs of service, recognizing that these costs Poor financial * Distorted tariffs and high household life-line. are inflated due to inefficient and condition * High cross-subsidies; perverse incentives for collusion corrupt practices. between customers and meter readers Based on fiscal 2002 data, the Source: World Bank staff. most critical tariff issues include: -37- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I * Who should pay the high costs of inefficiency, theft, * expansion of supply through well-tendered IPPs; and corruption-customers or taxpayers? * expansion of rural access on a promising * BPDB sales to DESA and the REB are below its institutional foundation; wholesale cost of electricity. * reduction in system losses; and * Severe cross-subsidies exist between industry and * improvement in collections. households (as shown in table 3.3). Recent policy statements by the GOB and passage BPDB sales to the REB and DESA were priced at of the ERCA are also encouraging developments. US cents 3.4/kWh (BDT1 .96/kWh), or less than its However, the performance of the sector also has been average power cost of US cents 3.8/kWh deficient in many areas. The following set of (BDT2.22/kWh). Failing to tie prices to costs resulted recommendations aim at (i) increasing efficiency in the in a loss of around US$40m for BPDB. The power sector and eliminating financial losses-by adjusting cost, however, should drop in fiscal 2003, with the tariffs, improving collections and reducing supply combined cycle operation of the 450 MW Meghnaghat costs; (ii) expanding coverage to unserved areas; and plant. (iii) improving targeting of fiscal support, primarily to DESA purchased electricity at US cents 3.40/kWh soften capital costs for expanding coverage. (BDT1.96/kWh) from BPDB, transferred 23 percent of These recommendations recognize that achieving it to the REB, and billed only 67.5 percent of the the government's goals will require greater private- balance at an average tariff of about US cents sector participation in the power sector within the 5.40/kWh (BDT3.13/kWh). Despite this margin, DESA context of an appropriate legal and regulatory was unable to cover the cost of purchased electricity framework. Public funds, including shrinking loans because of its high system losses. from development partners, will be insufficient to meet Clearly, theft reduction, tariff rebalancing, and to a the large sectoral investments requirements (about lesser extent, improved collections remain higher US$300 million to US$350 million annually). priorities than having end-users pay more for supply As has been shown in other developing countries, inefficiencies and corruption. However, a temporary private investors can help turn around the tariff surcharge may be necessary to cover transitional performance of distribution companies, and private inefficiencies until investments and structural reforms companies with proven track records should be invited improve supply performance. Such a surcharge could to participate in the sector. For private funds to be also be necessary to cover debt service. BPDB's secured, tariffs will need to cover costs. Finally, a accumulated liabilities in fiscal 2001 already stood at competent and independent regulator together with an US$2 billion (BDT118 billion), of which half-about 1.7 unbundled market structure, can protect consumers years of sales- were current. from monopoly power of suppliers and* insulate investors from politicization of commercial aspects. Actions to be initiated within the next 6 months are the creation of an empowered reform team to design Successes have been identified in several areas of the reform program and supervise the way it is carried the Bangladeshi power sector. These successes out, and appointment, through a transparent process, include: of members and staff of a regulatory commission for the sector. -38- I Power I Create an appropriate regulatory agency customers, such as large industries or bulk consumers, and generators; and Now that ERCA has been passed with provisions to * beginning to put in place the institutional and create and empower an independent regulatory body, technical architecture to complete the unbundling. the key challenges in creating an appropriate regulatory agency involve: The GOB's intention to make BPDB the holding * drafting appropriate rules of appointment and company for all state assets, and to transform it into a compensation for the first three commissioners, corporation under the Companies Act, must be carried (including the chairperson) and following these out with a clear understanding that this is a transitional rules in the selection process; arrangement to nurture the unbundled enterprises to * providing the commissioners with high-quality maturity and privatization (where appropriate). The consultants to prepare the priority work program, GOB should also ensure that conflicts of interest are help contract key staff, and begin preparing priority mitigated. For example BPDB should not remain the regulations; and owner of generation plants as well as the system * providing full GOB support to bring sector planner and purchaser of power from state and private enterprises under the regulatory authority of the power plants. Specific mitigative measures should be Energy Regulatory Commission (ERC). spelled out in the Articles of Association of the holding company. Global and regional experience in South Asia shows the enormous difficulty regulators face in Improve governance of public establishing their authority over state-owned enterprises enterprises. The risk of political interference in state-owned Unbundle existing sector enterprises enterprises will likely remain high, and corporatization by itself may not succeed in improving commercial As articulated in the Vision Statement (2000) and performance. The government, however, could Road Map (2003), the GOB should accelerate the explore various corporatization models for the separation of power generation, transmission, and unbundled sector enterprises as an interim step to distribution functions. To this end, the most critical privatization, when country and global market steps are: conditions permit. Transparent governance would provide the public and policy-makers with a better o defining the number of electricity distribution understanding of the rationale for private-sector companies (EDCs) and generation companies that participation and help manage stakeholder would be cost-effective in Bangladesh, and expectations. Elements of better governance may identifying benchmarks to enhance performance include: and competition among entities in the short to medium term; articles of association that clearly define the * defining technical and commercial linkages purpose of the corporation, its core operating between these entities and rural PBSs and other principles, and the division of responsibilities sector entities; among the owner (the GOB), board of directors, * developing a transition path from the single buyer and management; model to direct contracting between eligible * audit committees established at the board level that would appoint, in a transparent manner, qualified -39- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I firms to periodically review the corporation's and contracting in bulk or by opting for interruptible accounts, internal controls and procedures, and supply; performance; * remove all political influence in operational and * independent monitoring, evaluation and reporting investment decisions. of enterprise performance, possibly under the * adjust tariffs to cover the full cost of service to each jurisdiction of the Energy Regulatory Commission customer category; and (ERC); and * ensure full payment by public sector entities. * regular publication of business plans and actual performance outcomes as evaluated by Enhance private-sector participation independent audit firms and the ERC. Table 3.7 provides some comparative data on private- Any program for improving governance in the area of sector participation (PSP) in the power sector in distribution will have to: Bangladesh, Pakistan, and India. Bangladesh has been as successful as the other two countries at * provide managers with greater control over staffing attracting the private sector into power generation decisions, salaries, and performance incentives, (and at better prices), but can benefit from India's and and permit termination without compensation for Pakistan's PSP experiences in distribution and corrupt practices; transmission. * enforce anti-theft legislation that includes penalties of fines and jail time as well as disconnection for Commercialize urban electricity non-payment; distribution * offer incentives for customers to organize themselves to reduce payment risks or supply A high-priority objective should be to rapidly costs, for example by forming slum associations commercialize urban electricity services, recognizing Table 3.7. Comparative Experiences in Power Sector PSP Distribution Transmission Generation Grid Off-grid Existing IPPs Bangladesh None to date Mandates for None None Five transactions first pilots given completed India Transactions - 2 transactions Transactions A few transactions completed in underway of the Build- completed in some completed several states, e.g., Operate-Transfer type states, e.g. Orissa Delhi and Orissa Pakistan One transaction None None; in the mid- One transaction Numerous underway and a 1 990s, a contract of completed in the transactions mandate for the Build-Operate- 1990s (KotAddu). completed in the another in place Transfer type was New mandate 1 990s canceled before awarded for project completion. Jamshoro. Source: World Bank staff. -40- I Power I that already-connected urban consumers enjoy primarily on PBS for grid extension. A competitive benefits that are not available to the majority of the bidding process will define any subsidies that may be population living in rural areas. needed to leverage private investment. Any subsidies If properly contracted and supported, private-sector will be provided to the private operator on achieving entities can help solve the single biggest problem specified coverage and service targets. The facing the power sector-high non-technical losses government is also considering grid expansion and non-collection of revenues. There is a lack of through RAPPs. confidence that anything less than ownership change Periodic reviews of tariff policies for rural can solve this problem in a sustained manner. Well- electrification will be necessary, allowing the structured privatization transactions will help attract development of flexible, demand-driven models that qualified operators over the next 2 to 3 years, possibly are based on self-regulation and ensuring that any in collaboration with reputable local firms. The GOB tariff support is comparable to other government- will need to demonstrate its commitment to enforcing supported schemes. the law and to meeting contractual obligations. Failed transactions in India (Uttar Pradesh and Orissa) and Georgia and successful transactions elsewhere have r g highlighted the importance of government Financially secure distribution companies, supported commitment. by modern and transparent system operations The GOB's preference for concessioning out small covering dispatch, contracting, and financial distribution areas-five for Dhaka city alone, with settlements, will reduce investment risks in the capital- about 100,000 customers per company-raises intensive generation business. More liberal export several considerations for future development. If other policies will also allow investors to allocate some urban areas follow this model, the government will investment risks to foreign consumers, thus alleviating need to ensure that it can effectively manage these direct or contingent liabilities of the GOB. public-private partnerships, and recognize that all The GOB is considering modifications to the IPP distribution companies must become financially model by introducing joint ventures between BPDP secure. Concessioning small distribution areas may and the private sector. These changes would also compromise economies of scale and raise accommodate the government's desire to protect transaction costs, increasing distribution tariff margins BPDB and end-users from foreign exchange risks. or reliance on budget subsidies. However, it is difficult to see how this approach can be Alternatively, an economically efficient number of taken without transferring risks from electricity users to distribution companies could be prepared for taxpayers. The policy of using private financing for privatization. Under this approach, corporatization IPPs should be maintained, and greater efforts should under public ownership could be an intermediate step be made to improve the overall financial sustainability toward privatization. The GOB should explore this of the sector. This approach would be more efficient alternative during the preparation of the concessions. than public investments in power generation. Creating a strong energy regulator will mitigate the perception Expand rural electricity distribution that IPPs are overly protected at the expense of consumers and taxpayers. As envisaged under the IDA-funded Rural Recognizing that most electricity will be purchased Electrification and Renewable Energy Project, the and sold by a state-owned single buyer for the next REB will facilitate expansion of off-grid electricity few years, the government or the future regulator services through RAPSS while continuing to rely should further streamline procedures to ensure least- -41- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I cost and transparent contracting. Increasingly, The following generally accepted principles should contracts should be based on outputs like capacity be considered when adjusting user charges: and quality of power rather than on inputs like type of fuel. Doing this will require strengthening the planning * Tariffs should cover reasonable and prudently capacity of the system operator and its independence incurred costs, with the average tariff for each (especially from ownership in generation plants), and customer category sufficient to cover supply costs developing market-based risk-allocation systems. for that category. * Time-of-use charges should be introduced where Create a financial rehabilitation plan and feasible so that customers have incentives to carry out tariff reform manage their demand. c Subsidies, if any are necessary, should be provided With easy access to competitively priced natural gas, directly, first to consumers and second to suppliers, Bangladesh is well-positioned to generate electricity at rather than built into the tariff structure. costs of less than US cents 3.0/kWh to US cents * Cross-subsidies, if any are necessary, should be 4.0/kWh without sovereign guarantees, provided the managed within the category to be subsidized, thus risk-adjusted cost of private capital can be reduced limiting the extent of price distortions. through structural reforms and financial discipline. a Procedures should be put in place to allow for Sovereign guarantees could be needed, however, regular adjustment of tariffs to reflect changes in until investors gain confidence in sector reforms. externally generated costs, such as fuel or The current average tariff, based on actual billings exchange rates. in fiscal 2002, is about US cents 5.2/kWh (BDT3.0/kWh). This amount is not too far removed As a first step, urban household tariffs should be from the full cost of efficient supply. However, in the made more consistent with rural household tariffs. The short to medium term, until technical and financial subsidized life-line level of less than 100 kWh per efficiency are raised to industry norms, some form of month can be reduced, as can the number of blocks, support-either through a tariff surcharge or explicit from five to two or three, simplifying billing and budget subsidies-will be required to meet continuing reducing collusion between suppliers and consumers. shortfalls. Prices for consumption above 100 kWh per month This type of financial support should be explicitly should be set at or above the average cost of low- linked to pre-agreed performance targets and voltage supply. supported by reforms at the enterprise level. It also Tariff discounts and flexible service quality could be should be linked to the establishment of credible and offered to consumers who organize themselves in a independent mechanisms to monitor and publicize manner that reduces supply costs or payment risks. performance, and to debt and arrears restructuring, For example, residents of multistory apartments or with restructured liabilities being serviced by the tariff slum dwellers could be charged lower tariffs if they surcharge or budget subsidy. Early preparation and contract for services in bulk, which would reduce public discussion of a sector financial restructuring metering and billing costs for the distribution company, and recovery plan would help the GOB, consumers, facilitate disconnection for non-payment, and reduce taxpayers and development partners to determine payment risks. which costs would be borne by customers and taxpayers, and which would be borne, to a limited extent, by donors. -42- I Power Notes 1. The IPPs account for 810 MW of capacity, including 6. Collection to gross generation ratio increased to 70 140 MW from the public-private Rural Power Corporation percent in fiscal 2002 from 65 percent in fiscal 2001 and 60 (RPC) plant at Mymensingh, with another 490 MW to be percent in fiscal 1995. commissioned in 2002-03. Of this capacity, Meghnaghat 7. According to Bangladesh Urban Service will offer 450 MW (AES) of capacity and Baghabari 40 MW, Delivery-A Score Card (2002), depending on in addition to the existing 90 MW of capacity (Westmont). location, only 2 to 12 percent of consumers (8 percent in 2. DESA holds the state's shares in DESCO, but some Dhaka) are satisfied with their service. Obtaining an local private firms have been contracted to handle operation electricity connection generally requires paying an amount and maintenance, meter reading, and billing. substantially above the official fee; and customer grievance 3. ERCA will also cover regulation of the downstream procedures are generally ineffective. petroleum market, at least until sufficient competition allows 8. Bangladesh's tariffs are comparable to those in the sector to be regulated by market forces. countries like India but higher than those in Europe and the 4. The Boards of BPDB and PGCB share the same United States of America, where retail competition has chairman. driven down prices. 5. The proposed dispatch system would link a National Dispatch Center to an Energy Management System (EMS) and Supervisory Control and Data Acquisition (SCADA) System through various communications networks, including an optical fiber cable network. -43- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH Figure 4.1. Gas Sector Structure Ministry of Energy and Mineral Resources lOCs under Petrobangla production _ sharing contract - - _ P, troie.Tm Conce*ors (pscI Deprtment Ex.ploraanon Producuon Transmion Trasnwission and distnbution Gas liquids and produiJon * Bangladesh Gas * Gas transmission * Ttas Gas Transmission and Distribution and * Bangladesh Fields Co Ltd Co Ltd (GTCL) Company Ltd ITGTDCLI comprtzssed Perroleum IBGFCLI * Bakhrabad Gas Systems Ltd. (BGSL) natural gas Exploraron * Sythet Gas Fields * Jaailabad Gas Transm,ss-on and 0 Rupantara Company (BAPEX) Ltd (SGFL) Distributon Company Ltd JDTDCL) Prakr4 * Western Gas Supply Company Ltd Gas Co Ltd. (WESGASi iRPGCLI Source: World Bank staff. Department of Petrobangla. This unit also regulates 2002). Urban consumers reported a high degree of and administers E&P activity through the supervision satisfaction compared with other essential services. of foreign oil companies. At present two lOCs- UNOCAL and Shell-are producing gas under PSCs. Table 4.1 Achievement of Five-Year Plan Separately, UNOCAL, Shell, and two additional lOCs also are engaged in exploration PSCs.2 Targets However, over the past 3 years, new exploration Target Achievement activity has stopped while the companies await the Items (1997-2002) (to May 2001) GOB's decision on gas exports to India. Proven gas Exploration 3,000 line-km - reserves are more than sufficient to meet domestic surveys (public) market requirements in the foreseeable future. Exploration surveys 4,000 line-km 6,000 line-km (private) Performance Exploration wells 7 In its five-year plan for 1997-2002, the GOB set a (public) number of targets for upstream and downstream Exploration wells 15 to 20 12 operations through Petrobangla and private lOCs. The (private) targets and achievements to May 2001 are Development wells 13 to 15 II summarized in table 4.1. (public) Petrobangla's performance in upstream activities Development wells 13 20 has been dismal. In particular, it did not undertake any (private) geophysical surveys or drill a single exploratory well. The private lOCs performed better. Petrobangla Transmission line 375 km 349 km affiliates involved in gas distribution have achieved Distribution line 2,000 km 2,443 km satisfactory performance according to a recent survey Custom,r connections 140,000 275,617 on the delivery of essential services (World Bank Source: World Bank staff. -46- I Natural Gas I Figure 4.2. Index of Average Gas Production Table 4.2. Cost Recovery in 2001 (US$ per million cubic feet) BCF lOCs 400 * Petrobangla User group Charge LRMC 327 End users $i.25 to $1.42 $1.71 300 282 30 In Power generation $ 1.05 to $1.16 $1.55 m m IN ~~~295 Source: World Bank staff. 261 281 270 261 200 remained well below the long-run marginal cost 100 (LMRC) according to government data (table 4.2). Underpricing of at least 17 percent was occurring for o _ _ _ end-users and more significant underpricing was 1997 1998 1999 2000 2001 taking place for power generation. Inadequate tariffs and the obligation to purchase Source: World Bank staff, gas from the lOCs at a price linked to the price of fuel oil have contributed to Petrobangla's dismal financial Under the circumstances, the full incremental performance. The GOB also strips the OCs of production target since 1997 has been met by the practically all of their cash reserves through lOCs (figure 4.2). Petrobangla's production has compulsory dividends. As a result, Petrobangla is remained quite flat over the period, while IOC unable to operate and maintain its facilities in production has increased, from nothing in 1997 to 78 accordance with international norms and has not been billion cubic feet in 2001 (out of a total of 373 billion able to carry out new investments. Moreover, cubic feet). In 2001 IOC output represented 21 Petrobangla has fallen behind in its payments to lOCs percent of total production. for gas supplies. In spite of increases in the consumer gas tariffs Petrobangla's overall system loss is roughly 7 during the past 5 years, the average price for natural percent, a situation that exacerbates the tariff gas has declined in real (US$) terms (figure 4.3). A problem. Considering that there is practically no loss more significant problem with gas tariffs is that they do in the large bulk consuming sectors (power and not allow full cost recovery. The price of gas in 2001 fertilizer) that account for some 75 percent of gas Figure 4.3. Prices Charged for Natural Gas Table 4.3. Comparative Characteristics of 1997 = 100 Gas Companies in South Asia 140 140 % Customers Sales 130 BDT per million cubic feet % Company ('000) (mmscm) $ per million cubic feet -- Petrobangla (Bangladesh) 1,144 10,178 u I2 Sui Northern (Pakistan) 1,900 8,262 L 110108% 17% Su; Southern (Pakistan) 1,500 6,029 100% iOOYoSS Gas Authority of India (GAIL) n.a. 22,265 100 .. 997% 9% 97% Gujarat Gas Company Ltd. (India)a 110 336 Mahanagar Gas Ltd. (India)a 100 153 90 1997 1998 1999 2000 2001 a. Gujarat Gas Company Ltd. and Mahanagar Gas Ltd. are both state- level companies in India. Source: World Bank staff. Source:World Bank staff. -47- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I consumption, the loss in the general industry, * Appointment of separate national working commercial and residential markets is of the order of committees to study Bangladesh's gas reserves 25 to 30 percent. This percentage is far too high; it and the potential market for gas. should be in the order of 2 to 3 percent, which would result in an overall system loss of about 1 percent. A The committees have recommended limited export 1 percent overall loss would be comparable to of natural gas to generate foreign exchange and moderately good performance for this sector as seen enable payments due under earlier contracts, with the elsewhere in the region. understanding that exploration activities would then Petrobangla also suffers from a high-and still resume. rising-level of accounts receivable, mostly Table 4.4 provides a breakdown of projected gas representing amounts receivable from public-sector demand by principal consuming sectors-except for customers such as the Bangladesh Power compressed natural gas (CNG) for vehicle Development Board (BPDB) and BCIC. carburetion-based on the GOB's draft sixth five-year At an operational level, how do the sale plan, covering 2002 to 2007. The draft five-year plan characteristics of Petrobangla compare to other gas also contains an estimate of future gas supply, companies in the region? Table 4.3 provides summarized in table 4.5. Comparing the two tables, a some comparative information. The relatively high surplus is estimated throughout the forecast period, power-generation demand for gas in Bangladesh- amounting to 223 billion cubic feet in 2003 but about 50 percent of total sales-helps explain the high declining to 67 billion cubic feet in 2007. This sales relative to the number of consumers when assessment may well be optimistic given that compared to gas companies in Pakistan and India. shortages are already anticipated in 2004, largely because of insufficient investments in development drilling and gas infrastructure. Policy-making, Planning, and The core policy-related issues of the unofficial sixth Regulation five-year plan are: o Significant continued PSP in E&P through private Ultimate responsibility for the gas sector rests with the sharing contracts. MEMR. It should be noted that in both the previous * PSP in the construction of transmission pipelines, administration and the current one, the prime minister particularly in the Western zone, under joint of Bangladesh also has assumed the duties of energy minister. The new government has not formally communicated its policy Table 4.4. Gas Demand Forecast, by Sector objectives for the gas sector, but it has taken a number of important Avemrge a demand Rate of decisions, including: (mmcfd for fiscal year ending June 30)igrowth * Two gas tariff adjustments over Category 2003 2004 2005 2006 2007 percent p.a the past year. Power 573 602 646 691 753 7.1 * Consolidation of the high- Fertilizer 235 255 255 290 290 5.4 pressure gas grid currently Industry 238 250 262 278 300 6.0 owned and operated by three Commercial 17 18 19 21 24 9.0 OCs into a single, common Domestic 134 142 150 159 169 6.0 carrier. Total 1,197 1,267 1,332 1,439 1,536 6.4 Source:World Bank staff. -48- I Natural Gas Table 4.5. Projected Gas Supply Capacity No formal provisions have been Gas production capacity established for economic regulation (mmcfd for fiscal year ending June 30) in the sector. Consumer gas tariffs Production companies 2003 2004 2005 2006 2007 are controlled by the GOB but no BGFCL, SGFL, and BAPEX 1,140 1,225 1,261 1,298 1,293 predefined adjustment mechanism Shell and UNOCAL (PSC) 280 310 310 310 310 or formula is followed. Tariffs are Total 1,420 1,535 1,571 1,608 1,603 modified on an ad hoc basis from Source:World Bank stff. time to time based on financial and other considerations. Producer gas tariffs to be paid to the lOCs for production-sharing venture with Gas Transmission Company Ltd. contracts by Petrobangla are established (GTCL). contractually. * Significant new investment in distribution lines to Until June 2002 the GOB was considering passage serve CNG refueling stations with requisite of separate regulatory acts for the electricity and gas pressure (see box 4.1). sectors. At that time it was decided to move to a * Encouragement of local and foreign private unified energy regulator and subsequent work focused investment in all phases of the CNG vehicular on drafting such a bill. This culminated in the passage fueling business. * Preparation of the necessary framework to attract local and foreign private investment to the Box 4.1. CNG forVehicular Use development of marginal or abandoned gas fields. The Petrobangla Planning Division Forecast (in the The Plan made no reference to private sector GOB's draft sixth five-year plan) did not incorporate involvement in distribution. any assumptions regarding the consumption of natu- The main regulating body for upstream- ral gas in the form of CNG for vehicular carburetion. A recent study assumed a discrete CNG vehicle con- exploration and production IS Petrobangla, acting version program and estimated the amount of natural through its Petroleum Concessions Department. The gas consumption this would entail (Lucas et al. 2002). Concessions Department monitors the performance of The Lucas report assumed the following vehicle IOCs under production sharing contracts. MEMR conversions per year to CNG over the forecast peri- recently established a Hydrocarbon Unit to conduct od: petroleum resource assessments, formulate national . 40 minibuses; depletion policy, act as technical advisor in production . 28 large buses; sharing contracts, and manage a national database of . 3,125 taxis, cars and jeeps; and upstream petroleum information. In the future, the . 8,250 autorickshaws. Hydrocarbon Unit may be entrusted with management of upstream activities including promotion, Even with this ambitious program, the total cumu- o t a tm , lative CNG consumption by the year 2007 was esti- contracting, and monitoring of lOCs. mated at only 4 billion cubic feet, or roughly 0.7 per- Health, safety, and environmental issues are not cent of the total gas consumption forecast for that regulated in either the upstream or the downstream. year. The Inspectorate of Explosives within MEMR bears Source: World Bank staff. some responsibilities in this area, but they mainly pertain to hazardous liquids. -49- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I of a new law in March 2003 establishing a Regulatory while the balance is free. The gas in turn is sold by the Commission for the Energy Sector. Once the Transmission and Distribution (T&D) companies on commission is functioning it will take responsibility for Petrobangla's behalf, and Petrobangla compensates tariff issues in the transmission and distribution the T&D companies for their efforts. The T&D segments of the gas sector. companies also buy gas from the producing OC, transmit it, distribute it, and sell it at prices set by the GOB. In addition, as stated above, the GOB levies Issues high up-front taxation of 55 percent of sale revenues. The GOB must resolve several issues in order to A more transparent pricing and taxation framework is promote PSP in natural gas, safeguard the public necessary, under which: (i) separate taxes would be interests, meet the targets set out in the most recent levied on production, transmission, and distribution; five-year plan, and improve financial performance in (ii) the T&D OCs would buy gas directly from the lOCs the sector. and continue to buy gas from the producing OC; (iii) the margins for transmission and distribution would be Improve Petrobangla's financial known; and (iv) gas utilization taxes would be levied condition as warranted at the retail level such that final prices would not exceed the equivalent value of competing The financial position of Petrobangla and its OCs is fuels on a netback value. The proposed pricing precarious. About 55 percent of Petrobangla's framework would offer certainty to consumers and revenue is paid to GOB as excise duties, income investors, helping ensure that Petrobangla recovers taxes, and compulsory dividends. This requirement the cost of gas and attains its financial objectives. deprives Petrobangla of the resources necessary to The GOB or the proposed regulator should operate, maintain, and develop its activities in a incorporate financial objectives in the T&D tariff, such rational fashion. Moreover, Petrobangla's main client, that companies can recover gas purchase and the BPDB, is also functioning at a loss and operating costs as well as financing costs for existing accumulating considerable arrears to Petrobangla. assets and any proposed investments. Doing this Last, Petrobangla is being asked to provide funding would also wean Petrobangla from its dependence on for development of projects outside its normal scope the government to finance its investment program, an of activities, such as a coal mine. appropriate strategy given the commercial nature of As long as Petrobangla remains in the public the gas business. Concerns about Petrobangla's sector, it will not be able to operate on a sound ability to raise financing from the markets might financial basis. This situation has adverse prompt some consideration of meeting further ramifications, both for maintaining operations and investment costs through the tariff. meeting investment requirements. Poor supply quality Such policies would reduce pressure on the GOB and gas shortages both are likely to ensue. budget and contribute to the financial autonomy of Petrobangla and its affiliates. Rationalize gas pricing Encourage operational autonomy and and taxation As a holding company, Petrobangla presently receives clarify lines of authority gas from the lOCs consistent with the provisions of the The boards of Petrobangla and its OCs are composed production-sharing contracts. The contractors' share exclusively of civil servants for whom the commercial of the profit gas is sold at prices linked to fuel oil prices aspects of the gas business are not a priority. These -50- I Natural Gas I directors are not independent. They often lack specific through a well-staffed independent Energy Regulatory knowledge of the gas industry and experience in Commission (ERC) that has the requisite unequivocal management, engineering or finance. Last, even if the powers to determine prices, and whose orders cannot boards were properly composed, instructions are be overruled at the political level. The regulator's given to managers from time to time which are only approval will also be required for major investment subsequently ratified through formal channels. projects, thus ensuring that only high priority projects are given the go-ahead. Once established, the new Energy Regulatory Commission should start to help Consider exporting gas address this issue, but without further revisions the The issue of gas exports has raised considerable provisions in the ERCA may not be sufficient to grant debate in Bangladesh. With gas reserves in the investors the necessary comfort. An initial test of the vicinity of 16 trillion cubic feet-equivalent to some 40 Commission's robustness will be the way in which it is years of production at current levels- Bangladesh established once the first commissioners are could favorably consider exporting gas. Many selected-a process that is currently underway. exporting countries have lower equivalent reserves than Bangladesh. Although some analysis of the expected demand growth in Bangladesh should be Restructure Petrobangla considered, it appears that exports are feasible. It is At present two Petrobangla OCs are involved in important to recognize in this context that risk capital upstream activities; three OCs are involved in T&D; for exploration will only become available once the one is in transmission; and one (BAPEX) is in industry has the requisite level of confidence that, exploration. With a view to improving governance and should they find gas, commensurate outlets will be ultimately privatizing the sector, new independent available. At present this is not the case. companies must be created, each focusing on a single To facilitate the development of consensus about segment of the business. These new companies must gas exports, it will be important to prepare gas export operate at arm's length from each other. Such a transactions in a highly transparent manner so that the restructuring will be critical if the sector is to operate public knows that all citizens will benefit from such on a competitive basis and be privatized at some point projects. in the future, and the change will involve taking the The GOB should also take steps to ensure it has following steps: the tools, knowledge, and expertise to negotiate gas export ventures. Technical assistance would be * Converting the two producing OCs into fully fledged required to undertake feasibility studies, examine E&P companies by transferring BAPEX staff to the various options, and help the GOB negotiate two OCs. agreements that reflect international practice in this * Consolidating the transmission system into one area. company operating as a common carrier (as recently announced). Develop an inviting institutional and * Creating distribution companies. regulatory framework * Dismantling BAPEX such that some of its skills are transferred to the producing OCs and some to To enable PSP in gas transmission and distribution, it contractors providing services to the industry. is essential to develop a framework that will give * Maintaining direct ownership of all new companies comfort to investors, particularly regarding the pricing by the GOB so that each company is fully of services rendered. This can best be ensured dedicated to furthering its own interests and upon -51- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Privatizing the natural gas sector, however, does not * Creating distinct distribution companies out of imply that the GOB will no longer have a role to play current OCs. in the sector. Rather, the GOB will be free to focus on * Establishing a framework that encourages PSP in policy and regulatory matters to ensure that the gas processing and CNG distribution. genuine social and economic interests of Bangladesh * Deciding on exports to India and developing a are fully addressed-a function that cannot be framework for private-sector investment in such a addressed effectively as long as the government also project. owns and operates the gas system. The main steps that must be taken to facilitate Table 4.7 summarizes specific short-, medium-, and private-sector investment include: long-term steps for a natural gas action plan. * Passing legislation that creates an effective and Notes independent ERC that has the requisite power to make and enforce its decisions. 1. This chapter does not include the most recent * Converting producing OCs into fully fledged E&P changes carried out by the Government of Bangladesh companies. (GOB) to improve governance and autonomy of * Consolidating the transmission system into a Petrobangla. single, common carrier. Table 4.7. Natural Gas Action Plan Short-term steps Expand private initiatives (I year) * Expand direct distribution of CNG to stations in Dhaka. * Carefully study the current pricing structure to develop a fair and equitable sharing among companies, consumers and the government while reflecting alternative fuel costs. Adjustments may need to be phased in over 3 years. * Establish an independent regulatory authority to ensure equitable and fair treatment of all private companies. * Change procedures and corporate governance arrangements to allow them to function as fully commercial entities. Medium-term steps Improve efficiency through contracting and concessioning (I to 3 years) * Strengthen the Hydrocarbon Unit of MEMR to assume the functions of promoting, supervising and administering private sharing contracts. * Examine the logistics and legal impediments to export gas to India with a view to developing this market over the next 5 years. Long-term steps Full concessioning and private investment: (3 or more years) Consider privatization of all or parts of Petrobangla through concessions or the sale of specific assets to outside investors. Open the exploration, gas production, distribution, and sales market to both domestic and international companies on a competitive basis with existing companies. Source: World Bank staff. -54- I Natural Gas i 2. Tullow Oil PLC acts as operator, Block 9 (with Chevron, Texaco, and BAPEX) and Okland Oil acts as operator, Blocks 17 and 18 (with Tullow and Rexwood). -55 - I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I handpumps are now widespread throughout the Issues Affecting Private country, with an average of one handpump tube well Investment serving 105 people. However, the presence of arsenic in groundwater Currently urban water supply and sanitation services from shallow aquifers threatens to undo the benefit from no significant on-going or planned remarkable success of the handpump tube wells. An private-sector investment. All investment is being estimated 30 million to 40 million people in undertaken by the public sector. The government's Bangladesh are drinking water with arsenic levels Five-Year Plan for 1997-2002 included an annual surpassing 50 micrograms per liter. This amount expenditure of approximately US$92 million per year exceeds the standard for safe cooking or drinking for development in the sector. Complete details of water but is still useable for cleaning and bathing. The actual expenditure are not yet available, but it appears arsenic problem effectively reduces the percentage of to have exceeded the planned target by about 25 population with access to safe potable water from 97 percent, at an average US$117 million per year. percent to less than 75 percent. Table 5.3 gives an indication of the increasing investments and subsidies the government has Sanitation committed to water and sanitation services. Piped sewerage is available to less than 50 percent of Future investment needs are even greater. For the the population in Dhaka. Chittagong and the present unserved population in Dhaka alone pourashavas have no piped wastewater systems. Use investments will amount to US$336 million (US$120 x of sanitary latrines in the rural areas is about 40 2,800,000), while for other urban areas an additional percent, which is considered high in South Asia. US$1.92 billion (U$120 x 16,000,000) will be required. In order to keep pace with urban population growth of about 5.5 percent per year, additional annual investment of US$160 million (US$120 x 5.5 x 24,000,000) will be required. The cost of providing piped sewerage will be approximately double that for piped water supply. Investment Table 5.3. Annual Capital Investments in Water Supply and needs for the rural sector over the Sanitation medium to long term of 5 to 10 years will exceed US$500 million, (1997 prices) Service levels depending on the pace of investment needed to deal with the BDT US$ Water arsenic crisis. In total, over the next Years (millions) (millions) supply Sanitation 5 to 10 years, the sector will need 1973-78 24 0.5 25% 2% about US$2.5 billion to provide 1978-80 54 1.1 - - water-supply access alone and 1980-85 104 2.1 46% 6% nearly US$4 billion if drainage and 1985-90 140 2.8 - - sewerage are added. 1990-95 1,885 38.0 79% 35% 1995-97 (2 years) 2,851 57.0 - - 1997-2002 (plan period) 4,609 92.0 - - Source: Infrastructure Investment Facilitation Center. Water Supply and Sanitation Sector Paper. -62- I Water Supply and Sanitation Low-cost recovery and high operational inefficiencies By contrast, commercial users were paying tariffs as high as BDT15 per cubic meter. Tariffs between The government does not have the resources to fill commercial and residential consumers will have to be unmet demand and future needs in the country's realigned and the latter will have to increase rapidly sprawling urban centers. To finance significantly. The data in table 5.2 underscores the investments, the government's policy states that water disproportionately low levels prevailing in Dhaka as should be supplied "at cost," supposedly meaning full compared to major cities in neighboring countries. cost recovery. At present the policy is only an Just as importantly, water suppliers will have to indication of the direction the government would like to radically improve their operations, maintenance, and take, as it is unlikely that the government will be able financial management systems. Introducing a well-run to attain this objective in the near future. financial and billing service will be a priority, because DWASA has increased tariffs since 1997 (except in consumers should be prepared to cover costs but 2001), but the size of each increase has typically been should not be expected to pay for suppliers' high 5 percent or less. In mid-2002 tariffs charged to levels of operational inefficiency. For example, 42 residential users were still BDT4.5 per cubic meter percent of the water treated by DWASA does not versus an approximate marginal cost of BDT11 per reach its customers or is received through illegal cubic meter. connections. Box 5.1. Will Raising WaterTariffs in Policy-making, Planning, and Bangladesh Hurt the Country's Poor People? Regulation It is often argued that raising water tariffs hurts the Overall policy development, planning, and investment poor. This argument often has little merit in countries identification is the responsibility of the LGD under the such as Bangladesh, however, where urban service Ministry of Local Government, Rural Development and coverage is low and largely confined to the middle and Cooperatives (MLGRDC). MLGRDC coordinates with upper classes and service in rural areas and slums is privately provided. Low tariffs create a need for oper- the various executive agencies in the sector as ating subsidies from the government to compensate summarized in table 5.1. Presently no distinct bodies for utilities' financial losses and hinder investments in are tasked with regulating the sector. new capacity expansion.Water consumption ends up The National Policy for Safe Water Supply and subsidized for the middle and upper classes at the Sanitation in 1998 set ambitious physical direct expense of service coverage expansion for the infrastructure targets for the sector, encouraged a poor. Poor people's lack of access to public services major shift in the role of the public sector agencies means that they wind up paying much higher per-unit from providers to facilitators, and fostered private prices to private vendors. Slum dwellers in Dhaka involvement in urban water supply through build- were paying prices as high as BDT I per 20-liter buck- oprt-anfrBO)adohearngm ts et or BDT50 per cubic meter-roughly 10 times the operate-transfer (BOT), and other arrangements. rate charged by DWASA to residential consumers. The government's ambitious long-term physical Following DSK interventions, water costs have fallen infrastructure targets are as follows: to BDT37 per cubic meter but remain at seven times DWASA rates. ' Rural: Ensure sufficient coverage for 50 users per Source: World Bank staff. tube well, one latrine per household, and one pond per village. -63- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Urban: Ensure access to safe drinking water in policy and corporate planning matters, was required each household, easy access to a sanitary latrine, through appropriate rules and regulations but was and access to liquid and solid waste disposal. delayed because of lack of coordination by the parent ministry. Although the act provided for greater It is important to compare the government's target management autonomy from the government, in for rural coverage with the current average level of practice all parties-the government, DWASA board, service of about 2.5 households per private or shared and DWASA management-have sought increased handpump. The larger number of households in the authority. There are indications, for example, that the government's new criteria would mean potentially long board is not respecting the division between its collection times per household that might translate responsibility for interpreting sector policy and into reduced use of safe water. management's responsibility for day-to-day operation. To date no guidelines have been issued for the implementation of the 1998 National Policy. Both the Recommendations regulatory and service delivery functions remain with the same departments and agencies. No serious Having potable water supply and sanitation is vital to attempts have been made to unbundle these Bangladesh in both social and economic terms. The functions, nor has the government demonstrated public sector does not have the resources necessary to serious homegrown interest in establishing an maintain the existing network, improve service quality, appropriate regulatory framework to encourage and satisfy unmet demands. Operational and private-sector participation. Efforts to implement investment costs will have to be recovered from existing regulatory powers to improve the delivery of consumers who make use of the service through cost- water supply, tariff setting, and recovery of user covering charges. Additional support to the highly charges also are weak. The highly unionized labor inefficient public bodies will not help the sector force continues to hold back reform. improve its performance, while scarce public The WASA Act (1996) was well-intentioned and resources will likely be misused. Accessing costly sought greater commercialization within DWASA, but supplier credits as funding from multilateral institutions efforts to carry out its intent have been disappointing. dries up in the distorted policy environment will only CWASA effectively continues to operate under the increase the burden of external debt payments while WASA ordinance of 1983. The 1996 act contained the bringing limited social and economic returns. following provisions: Against these challenges, a multi-track reform approach is necessary. Reforms must focus, on the * Greater autonomy for DWASA through increased one hand on adjusting cost-recovery charges and financial, operational, and administrative powers. exerting greater financial and commercial discipline on * Establishment of a board with majority of the public bodies, and on the other hand, on creating a members from the private sector. more favorable legal and regulatory environment for * Recruitment of a professional chief executive. inviting greater private-sector and NGO participation in * Introduction of management accountability by the medium and long term. requiring DWASA to meet operational and performance targets. Align user fees to cost-recovery goals Further delineation of the provisions of the act, The present situation of high operational losses and especially regarding the role of DWASA's board on residential tariffs set well below full cost leaves the -64- Water Supply and Sanitation I DWASA, CWASA, and other public operators in an More rational user fees will be a prerequisite for extremely weak financial position. Funding is attracting large-scale PSP to the urban areas. insufficient to maintain the current distribution system, let alone allow for much-needed investments in new Introduce management performance capacity. Public operators must rely on the strained contracts government budget, while commercial users are forced to pay fees above marginal costs to subsidize DWASA, CWASA and other public operators suffer residential consumers. from a lack of commercial orientation and a surfeit of Reforming user fees for residential consumers, government influence. In conjunction with a new raises particularly sensitive issues. It has been argued regime for user fees, corporatization and management that cost-recovery user fees would deprive the poor of contracts may instill greater financial discipline and a basic social good. Present policies have resulted in improve service delivery. The recent disappointing large subsidies to public operators that primarily serve attempt to enhance DWASA's commercial the middle and upper classes, however, leaving the performance indicates that such arrangements will not slums and fringe urban areas where poor people live work unless: unserved. As a result, poor people pay much higher prices to private vendors or suffer from health * Government influence is reduced. problems. * Management of service providers is both The government needs to develop a medium-term empowered and held accountable. plan to realign user fees for commercial and o Clear performance criteria are established, such as residential users and bring the latter closer to marginal water quality, loss reduction, and target collection costs. Stronger measures should be undertaken to rates. enhance the operational performance of public providers and rein in system losses as consumers Business plans and actual performance outcomes cannot be taxed for the current high level of should be regularly published. Performance data inefficiency. should be based on the assessment of independent At the same time, it is critical to improve the auditors selected in a transparent manner. Bonus commercial performance of the urban water utilities. fees, directly linked to improvements in technical and As a first step, collection of tariffs should increase as a precondition to improving the financial sustainability of the operations. Tariff increases will be useless Box 5.2. Setting a Life-line without commensurate increases in collections. To overcome strong political opposition to tariff Some countries, such as Colombia, have used residen- increases for residential consumers, the government tial areas as a simple proxy to target utility subsidies; may want to consider a minimal, essential other countries, like Chile, have used their more consumption leehtwudsophisticated social welfare systems to apply means- consumption level that would be subject to a lower tested mechanisms. Countries with high poverty rates tariff. Such a life-line approach would require full and inadequate utility coverage have focused on sub- metering to each household to be effective. Alternative sidizing coverage expansion rather than consumption, consumption subsidies for the poor can be explored a model that might be more appropriate to (see text box). Regardless of the approach used, the Bangladesh's social circumstances. subsidies should be transparent, well-targeted, and Source:World Bank staff. easy to carry out and monitor. -65- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I financial performance, could be paid to the private instruments. They will improve operational efficiency, operators of the water utilities. Management contract but they will not, by themselves, bring much-needed should also include clear incentives for defining financial resources to the sector-and the risk of optimal investment plans designed to extend and renewed political influence will remain. improve services to the population with a cost- Attracting large-scale private financing and effective approach that reduces the financial management expertise will require alternative resources needed to provide safe services to the arrangements like BOT contracts, concessions, and urban population. (Chapter 3 provides a more potentially even full divestiture. These types of long- extensive discussion of various measures to help term contracts demand a clear legal and regulatory improve governance of public enterprises and mitigate framework that defines the roles, responsibilities, and political influence.) risks of each party. The regulatory structure will need DWASA and CWASA are complex agencies. New to allow for adjustments to user fees that are fair to management contracts should encourage the both investors and customers. Private investors will participation of international operators that have need to rest assured not only that fees will cover the expertise in administering such large-scale agencies. long-run costs of an efficiently run firm but also that Furthermore, the local private sector will have the they will be adjusted as costs rise because of external opportunity to learn state-of-the-art technical and conditions. Accomplishing all this will entail the commercial approaches that can be later replicated in establishment of an independent supervisory agency other urban areas. that will help insulate user fees from political factors. Under some circumstances, performance-based Alternatively, supervisory responsibilities could be management contracts may be extended to design- assigned to an agency in another sector, such as the build-operate (DBO) contracts. Where substantial projected supervisory agency for the power sector. expansion and investment needs coincide, as they do in many medium-size cities, DBO contracts may bring Address critical water supply and together the necessary construction and utility sanitation issues facing rural areas operations expertise. Infrastructure financing may have to continue to The arsenic contamination problem is threatening to come from the government or from concessional undo the great success of the last couple of sources until the regulatory framework is in place to decades-extending access to safe drinking water to support more advanced private-sector contracts. The 97 percent of the rural population. Alternative delivery private sector will not be interested even in limited mechanisms to the shallow tube wells must be performance-based management contracts if the developed. One possible alternative is small-scale government fails to show its commitment to a serious piped-water networks that tap into sources of safe turnaround in the sector. This commitment should start water (or, when necessary, make use of centrally with the approval of a new policy for user charges and organized water treatment facilities). other measures establishing penalties for illegal A village piped-water supply network would be connections. more complicated to operate and maintain. It would need to be economically designed to achieve low Develop a clear PSP Policy within a operational costs at the level of service that each household is willing and able to pay, and it would need sound regulatory framework to be run in a financially viable manner. All these Corporatization and performance management conditions point to the private sector as a potential contracts are useful short- and medium-term partner in the solution of the arsenic crisis and the -66- I Water Supply and Sanitation I expansion of piped-water services to rural towns and applying this approach to supply safe drinking water to villages. PSP can bring speed and efficiency to the shift more areas of the country. to piped-water supply and potentially bring additional By far most of the people in rural areas continue to financing. It would be in the interest of private-sector use unsanitary latrines-if they have them at all. At 1 entities to ensure sustainability of the systems and percent growth per year since 1993, coverage provide adequate levels of service to their customers. expansion will still leave 45 percent of the rural In an estimated 50,000 villages, more than 40 population without adequate sanitation in 2015. percent of the handpump wells are contaminated with Accelerating coverage growth is the most critical arsenic. Initial estimates indicate that the resources policy issue for sanitation. If the growth rate is doubled needed to replace these wells with safe piped water to 2 percent, 70 percent of households could be can be as high as US$2.45 billion. The effort will reached by 2015. require multiple sources of financing because the Many NGOs have experienced remarkable fiscal burden associated with the necessary high success in promoting sanitation. Several villages have levels of grant financing will be difficult for the even attained total sanitation coverage without any government to absorb, particularly in a short period of external subsidy. The magnitude of the national time. A transparent and targeted subsidy policy is challenge may seem to dwarf these projects, but the needed to ensure that the poorer members of rural key lesson from these small-scale successes is that communities are served by the piped systems (at a progress is possible. With proper adaptation of the service level with an affordable operational and lessons from the small pilots, it will be possible to maintenance cost). At the same time, the effort must reach or even surpass 70 percent coverage by 2015. support the mobilization of funds from other sources, such as private capital or loans from the financial Notes sector. A financial approach that brings together different 1. Secondary, medium, and small towns can be sources of financing, including grants, concessional categorized as follows: 4 city corporations; 58 district-level loans, private equity, and commercial loans, can lead municipal towns; 199 Upazila-level municipal towns, and to tariffs that are affordable to rural households of 261 Upazila centers. different income levels. As new technologies are considered, it will be important to ensure that the new delivery systems will be responsive to rural consumers. Bangladesh's experience with rural cooperatives managed by the Rural Electricity Board (REB) and with major NGO activities in areas as diverse as educational services and microcredit, suggests that the country has capable local organizations. The piped-water systems introduced in the Bogra area by the Rural Development Academy (RDA) indicate the potential of such systems. The valuable experience of NGOs currently operating piped systems can be used in 67 I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH Table 6.1. Division of Transportation Sector Modal Shares Passengers Freight Distribution Distribution Billion Inland Billion Inland Year passenger-km Roads Rails waterways ton-km Roads Rails waterways 1985 35 65% 20% 15% 4.8 48% 17% 35% 1989 57 68% 17% 15% 6.3 59% 11% 30% 1993 66 75% 12% 13% 9.0 61% 7% 32% 1998 72 73% 13% 14% 10.0 63% 7% 30% Source: Planning Commission, Bangladesh Integrated Transport System Study Uune 1998). fund maintenance of existing facilities as well as fund The current drafting of a land transport policy will sufficient capacity expansion to meet rising demand. aim to assist decision makers in (i) determining Private sector transportation services have long appropriate land transport expenditure levels; (ii) been available, particularly using the roads and providing legal and regulatory requirements, and a waterways. However, until 1999 no private investment framework for institutional development; and (iii) had occurred in transportation infrastructure. Over the clearly identifying private and public roles in land past 3 years this situation has changed. The transport. government of Bangladesh (GOB) has begun to appreciate the viability of private investment in certain circumstances. For example, the Bangladesh Inland Issues Affecting Private Water Transport Authority (BIWTA) has invited private Investment investors to develop a container terminal in Narayanganj. Operation and maintenance of the Attracting private-sector investment in transportation Jamuna River Bridge is in the hands of a private projects can be complicated by issues relating to: consortium, and Bangladesh Railway (BR) has encouraged private investment in passenger train * institutional inertia; operations. These success stories have had a * regulation; common, key feature. In each case, private-sector * regional integration; and interests and resources were fitted with a project that * trans-Asia linkage. has a revenue stream and a cost base that allows profitable operations. Institutional Inertia In the road mode, operation and maintenance of the Jamuna River Bridge is in the hands of a private The strong hierarchical structure of transportation consortium. Bangladesh Railway has encouraged departments leads to senior management instability. private investment in passenger train operations. The senior bureaucrat often holds his or her position The key element of these success stories is fitting for less than a year. Given their brief tenure, even the private sector with a project that has a revenue reform-minded senior managers are unlikely to stream and a cost base that allows profitable achieve significant change during their terms at the operations. top. Lower-level managers can delay decisions until the reformer retires and is replaced by a less reform- -70 - I Transportation Overview ! focused administrator. Strongly vested interests within become a motivation to renegotiate or otherwise government departments mute initiatives and modify the terms of their contracts. entangle proposed changes in paperwork. Fundamental issues, such as the appropriate split Significant opportunities for private-sector of commercial risk across the public and private participation (PSP) are present in all transportation sector, are typically reopened when unexpected modes, but particularly in seaports, inland water economic downturns lead to the renegotiation of terminals, airports, and railway operations. concession agreements. Beyond macroeconomic Opportunities also present themselves for specific risks, any concession program faces some risk of investments in limited-access roads and toll bridges. policy reversion from the changing political For the country to benefit from these opportunities, environment. In this atmosphere, private-sector strong central government direction is needed. investment may seem too risky. Designing a regulatory system that can withstand changing Regulation circumstances must be a part of the GOB's reform agenda to promote PSP in the transportation sector. The degree of need for regulation in the transportation sector varies from subsector to subsector. All Regional Integration transportation modes continue to need regulation to ensure public safety, and it is probably best that this The issue of regional integration in transportation has need continue to be addressed by the appropriate line been widely debated. At present, Bangladesh ministries. With regard to commercial regulation, prohibits the movement of foreign trucks and rail however-particularly when the private sector wagons on Bangladeshi territory. All foreign cargo is engages in long-term concessioning-an alternative transshipped, at designated border stations, to approach is necessary. In this setting, the issue of a Bangladeshi trucks or domestic rail wagons for credible, independent regulator emerges. Such a transportation onward. Despite continued dialogue regulator must be free of undue political interference among concerned countries, very little progress has or potential conflicts of interest, particularly if the been made toward a mutually beneficial solution. government chooses to retain some operations in Little capital investment is needed to secure transit competition with the private sector. The latter issue traffic, which makes it an attractive option to pursue for may develop, for example, in the port sector or with private investment. Limitations on transit traffic the Civil Aviation Authority. development include capacity constraints on the BR, Designing a transparent and effective regulatory the need to transship broad-gauge traffic to meter framework for long-term transportation concessions gauge in order to reach the northeast, and limited will be a challenging task. The long-term nature of the highway capacity. Road traffic would need to be contracts, together with ambiguous distinctions bonded; thus, only sealed vehicles or containers between public and private risk and changing would be viable. macroeconomic and political environments make Recent technical assistance funding from the Asian transportation concessions especially difficult. Development Bank (ADB) to assist with setting up an Transportation concessions worldwide have integrated regional rail system has been suspended experienced problems with traffic projections, in part pending GOB agreement on corporatization of because of unanticipated macroeconomic slowdowns. Bangladesh Railways. Such complications often trigger regulatory disputes, The seven states in northeast India are linked to particularly if concessionaires' financial hardships the rest of India by a narrow land corridor. Trade from these "seven sisters" represents potential traffic for the -71- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I port of Chittagong. The distance from Agartala in The southern corridor of the Trans-Asian Railway is Assam to Calcutta, the nearest Indian seaport, is more one of three Asia-Europe rail land bridges studied by than 1,400 kilometers (km). By comparison, the UNESCAP as part of the Asian Land Transport distance between Agartala and Chittagong is less Infrastructure Development (ALTID) project, which than 400 km. Limited traffic does move by water was endorsed by the 48th UNESCAP Commission between Calcutta, Narayanganj, and Karimganj, and Session in Beijing in April 1992. This southern corridor by a combination of barge and truck routes linking extends from Turkey through Iran to include Pakistan, Calcutta, Narayanganj, Sherpur, and Karimganj. India, Bangladesh, China, Myanmar, and Thailand. Movement of Nepalese goods through Bangladesh Despite considerable interest from India and by road or rail is governed by a bilateral transit Bangladesh, the ALTID initiative is affected by the agreement between the two countries. Bangladesh ongoing bilateral transit concerns plaguing the and Nepal are separated by approximately 76 km of neighbors. Indian territory.2 The current transit agreement Chapters 7, 8, 9, and 10 of this country framework between Nepal and India provides for Nepalese trucks report deal with each of Bangladesh's transportation to move on Indian roads from a point in eastern Nepal sectors: Roads, Air Transportation, Railways, Ports, to the Banglabanda border station in Bangladesh. and Inland Waterways. Each chapter looks at the There the goods are inspected by the Bangladesh conditions and problems that are specific to the mode Customs authorities and transshipped to Bangladesh- of transport being discussed and identifies registered trucks for movement to Mongla port or, opportunities for increased private-sector participation occasionally, to Chittagong port. Transshipment of and government action. goods to and from Bangladesh trucks creates significant delays and inefficiencies that could be Notes easily overcome, particularly as Nepalese traffic represents a potential market that is desperately 1. Transit Agreement between the Government of the needed to revitalize Mongla port. People's Republic of Bangladesh and His Majesty's Government of Nepal, signed April 2, 1976 and renewed Trans-Asian railway and Asian highway automatically every 5 years unless otherwise agreed. 2. This figure is cited by the Nepalese Deputy Chief of initiatives Mission in Dhaka. Bangladeshi sources report that the The United Nations Economic and Social Commission transit distance through India is only 56 kilometers, for Asia and the Pacific (UNESCAP) is actively including 3 kilometers from the Indian border post of involved in promoting the expansion and development Phulbari to Banglabanda in Bangladesh. of the Asian Highway and Trans-Asian Railway as a part of an integrated sea, land, and air transportation system to facilitate regional and international trade and tourism. The proposed railway and highway networks will cross Bangladesh en route to destinations in West Asia, Southeast Asia, and North Asia. -72- Roads Policy Objectives: Expand capacity and quality of the national and state highways network. Private-sector Participation: Minimal private-sector participation with involvement to date only in some toll collection; build-operate-transfer projects and operate-and-maintain concessions under consideration. Key Issues: Structuring of privately financed deals and operations and maintenance must be seriously addressed. In Bangladesh, as in most developing countries, the Development of the sector is inhibited by several national road and highway network is the impediments. One obstacle concerns the severe lack transportation mode used most intensively by of quality road-building materials in Bangladesh, passengers and for movement of goods. which has resulted in poor quality road construction The unique topographic and demographic and maintenance. Recurrent flooding, high intensity conditions in Bangladesh are instrumental in the rainfall, and a high incidence of tropical cyclones continuous growth in the road transport subsector, further challenge the construction and maintenance of particularly in the rural areas. Much of the countryside a reliable road system. is a flat flood plain, and rural population density is The roads subsector also remains subject to high. As a result, an unusually large number of small outdated regulations, primarily through the Toll Act of rural roads have developed to connect remote villages 1851 and the Highway Act of 1925. Legislative with arterial roads and the national highway system. initiatives to improve this situation are underway, but Road transportation has flourished, recording an none has yet been approved. These initiatives include average annual growth rate of 6.2 percent for the New Highway Act (now pending approval and passengers and 6.3 percent for freight from 1985 to publication); a set of highway rules (gazetted but not 1997. Within the transportation sector road yet fully put in place); a Motor Vehicle Ordinance transportation's modal share also increased, from 65 (drafted); and a National Land Transport Policy Paper percent to 73 percent and 48 percent to 63 percent (being drafted). respectively, mainly at the expense of the railways. -73- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I sector capacity within Bangladesh to eventually Box 7.1. Pitfalls of Toll Road Experience undertake more aspects of road development and in Thailand operation. * Inflated traffic projections * Limited legal or regulatory framework Issues * Unclear rate-adjustment mechanism * No standard agreements or regulations Although significant obstacles hinder the construction, * Overlapping responsibilities among agencies operation, and maintenance of roads in Bangladesh, significant and measurable success has occurred in Outcome: Multiple projects suspended, court cases recent years in upgrading and rehabilitating major roads pending, low rates of return, fractured and incomplete through the national road network. The major issues facing the roads sector are relatively few, but they are Source:World Bank staff. significant in magnitude. taxes on fuel prices. The funds collected from fuel levies can be deposited into a commercially managed Funding needs for road maintenance road fund dedicated solely to road maintenance. The government continually under-funds routine and Currently direct charges collected from road users go periodic maintenance of the road network. RHD to a general revenue fund in the GOB. In Bangladesh estimates that its road network alone has a estimates are that less than 40 percent of money maintenance backlog of US$480 million (Ministry of collected from road users is spent on the maintenance Communications, 2001). Finding available resources of roads. Equally as important, a substantial amount of and the institutional commitment to adequately revenue that should be collected is not. maintain roads will be a major challenge. On the negative side, dedicated road funds limit the During the past decade, the maintenance backlog government's range of policy options: money set aside has steadily decreased because of a number of for the road system can be used only on the road donor-supported maintenance projects. Similar donor- system. China has examined creation of a road fund, supported projects would have to continue for another but reluctance to raise fuel taxes significantly has decade, however, before the backlog could be delayed any action. Likewise, Indonesia has studied reduced to manageable proportions. No assurance the option of a road fund for more than 10 years, but exists that such assistance will continue. In recent as yet has not acted on the recommendations. years RHD has greatly increased its annual expenditure on road development, at an average rate R of 15 to 20 percent a year. RHD has significantly oad equipment pools increased the capacity of its road network, but funds Both RHD and LGED make government road devoted to maintenance have not kept pace. During equipment available for private hire at rental costs the same period, maintenance funds increased only at averaging 50 percent below commercial rates. For a rate of 3 to 4 percent a year. contractors to pre-qualify to tender for contracts with Establishing a road fund is frequently suggested as RHD and LGED, it is mandatory that they have an appropriate mechanism to provide funding for sufficient equipment available from their own sustainable road maintenance. The theory behind a resources to undertake a particular project. Private road fund is to bring the roads sector into the contractors often turn to RHD or LGED for equipment marketplace and operate roads on a fee-for-service rentals, at the subsidized rental rates, covering 10 to 15 basis. The most appropriate mechanism is by percent of the required fleet. Contractors that are able incorporating a direct charge through duties, tolls, or to rent the equipment are then shortlisted, creating an - 78 - Roads I uneven playing field among private-sector contractors Recommendations who must compete for public assets to win a tender. Although the GOB has advocated PSP in the roads Training needs and human resource sector, little concrete effort has been made to prepare an environment to attract private- sector interest. Several actions must be taken to Serious deficiencies remain apparent in the skills mix, reposition the roads sector to attract PSP and adequacy of staffing, and general motivation of investment. personnel in both road organizations. The predominant skills available among staff in RHD and Create an environment conducive LGED are in traditional highway engineering disciplines like soil mechanics, hydrology and to PSP drainage, bridge and structural design, mechanical The new Highway Act will provide a basis for opening equipment repair, and rehabilitation. Nonetheless up the roads sector to private-sector participation. given the sheer size and complexity of the road Similarly, the new Land Transport Policy constitutes a program managed by the two organizations, even in step in the right direction by offering policy on these areas the available pool of skilled staff is transport expenditure levels, regulatory and insufficient. institutional requirements, and guidance as to the More worrisome is the severe lack of available staff roles of private- and public-sector entities. The GOB with skills in project, financial, and resource needs to pass the Highway Act, finalize the Land management; in project planning and budget- Transport Policy, create model agreements and ing; in environmental engineering with applications to documents, and develop a fully transparent legal and roads; and in procurement and contract management. regulatory framework for PSP. In-house trainers also are needed To this end a cabinet-level document that to handle necessary training in both organizations. coherently sets out PSP policy in the roads sector is required. This policy should: Need for creative financing options * Link the road-transport issues of revenue Contracting out routine and periodic highway and road generation and investment with the government's maintenance to the private sector is a viable strategy. overriding strategy to promote economic Work could be based on performance specifications, development and reduce poverty. rather than payment per line item of work * Define the role of each governmental agency, accomplished. Such a program would probably have particularly between competing sectors and to begin in a small way, on a trial basis, to ensure that between agencies within the same sector. the performance concept is understood and is capable * Establish and define those areas and conditions of being used within the Bangladesh system. where private investment is encouraged and set Establishing tolling of high-volume roads can only out guidelines to be followed. be carried out within the context of a controlled-access motorway or expressway or at natural barriers like large bridge crossings or tunnels. It will be many years Identify PSP options before significant high-volume controlled-access The GOB must examine PDP alternatives seriously, roads will be able to function in Bangladesh. including the introduction of O&M concessions and options such as the various forms of BOT and tolling -79- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I in high-volume roads as leverage for new the authority of an independent chairman. The development. The review of O&M concessions now independence of the fund is critical to avoid the under consideration should be accelerated and government raiding the fund. Using modern road approved. maintenance management systems to allocate funds, the corporation would then seek out PSPs to carry out much of the required road maintenance activities. Divest equipment Consultants have been hired under the IDC-3 project To pre-qualify to tender for contracts with RHD and to design such a road fund. LGED, contractors must demonstrate that they have sufficient equipment available from their own Strengthen technical and managerial resources to undertake a particular project. .. Contractors who do not have the equipment should be capality allowed to rent from the government at market rates. To meet the most important human resource needs of Because the government should ultimately ease itself RHD and LGED, training in engineering disciplines out of the equipment market, it should make no new need not be emphasized. Rather, training should be purchases. The same is true of government-owned concentrated in planning, programming, budget ferries. Ultimately, complete divestiture to the private control, environmental aspects of highway operations, sector should be pursued. and so forth. Table 7.3 outlines the primary short-, medium-, and Establish a road*fund long-term steps involved in this action plan. To rectify the maintenance backlog RHD needs to refocus its financial and human resources to the task of road maintenance. LGED faces the same maintenance backlog as RHD and should concentrate its resources to the task of road maintenance in order to further encourage rural development. Funds are urgently required for on-going maintenance of the country's more than 220,000 km of roads. The GOB should study options for financing the maintenance and management of all road assets in Bangladesh and investigate the possibility of establishing a road fund based on user charges. The system of charges would need to be applicable to conditions in Bangladesh. The fund should be managed by an autonomous corporation, with a board representing both the private and public sector, under -80- I Roads Table 7.3. Action Plan Short-term steps * Approve and enact the new Highway Act. * Actively participate in the formulation of a new Land Transport policy in line with the draft document prepared by IDC-3. * Approve plans to establish operations and maintenance concessions for: Bhairab Bridge (DFID); Bonpara-Hatkamrul (IBRD); and the Rupsha Bridge and Khulna Bypass IJICA). * Raise equipment rental rates to commercial levels and stop procuring new equipment. * Approve privatization of RHD ferry operations and establish a plan and implementation time line for private-sector takeover of operations and maintenance of ALL RHD ferry operations. Medium-term steps * Divest equipment pools and workshops of RHD and LGED to the private sector. * Establish a strategic planning framework and long-term plan for the sector. * Prepare model concession agreements for BOT, O&M, and so forth. * Provide a well-drafted and transparent legal and regulatory framework that includes: (i) Formalized, competitive, and transparent bidding procedures (ii) Adequate dispute-resolution procedures. Long-term steps * Encourage active and vibrant private-sector participation in building. maintaining. and operating highways. Source: World Bank staff. -81- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH deficit, which factors in operating Figure 8.5. Total Railway Deficit (BDT billions) subsidies plus investments, is shown in figure 8.5. . 8 - Since independence the railway 7 - has been a high consumer of 6 * Operating loss (BR) a Investment government resources, out of s proportion with its share of the 4 - transport market. Over the past 5 3 years alone, the accumulated 2 government investment in the I railway including operating losses 0 plus capital expenditure has been 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 US$500 million (about BDT30 Fiscal year billion). Source: World Bank staff. government subsidies, but to hold even its present Policy-making, Planning and market share, it must also achieve dramatic increases Regulation in efficiency. Accomplishing this will inevitably demand improved service and offer new opportunities for The Ministry of Communications is responsible for private-sector involvement. railway transport policy. Legally BR is directed to act commercially and is free to set freight tariffs, to sign Regional integration private freight contracts, and to exercise full authority to add and cancel trains and services. In practice, The opening of the Jamuna Bridge and the extension however, BR does not exercise any significant of the broad gauge system to Dhaka allows rail traffic commercial power. It is reluctant to direct more to move efficiently between Dhaka and points in India. resources to profitable freight services and even more Four border points are open for rail traffic with India: reluctant to press for required increases in passenger Darsana, Rohanpur, and Radhikapur in the west and tariffs for fear of public and political backlash. Shabazpur in the northeast near Assam. The northern links to Nepal and Bhutan are not open. Improved Issues integration and the development of transit traffic is limited by institutional and policy barriers. The highest priority for BR is to demonstrate that it has a contributing role to play in the future transportation system of Bangladesh and that it can hold its market Restructurng of Bangladesh Railways share. BR has embarked upon a comprehensive Railway Recovery Program supported by the Asian Development Bank (ADB) to increase efficiency and Competition reduce cost. The reform program includes creation of BR has not yet faced competition from modern high- a new corporate entity for BR. capacity trucks, but this is only a matter of time. The This initiative is meeting strong resistance from railway does face competition from modern buses, railway staff and management, primarily because of a however, and it is not doing well, especially in upper- long-standing preference to maintain class passenger services. BR must increase its tariffs public-service staff conditions. However, the Ministry to compensatory levels or continue to rely on has now produced a draft Railway Act. The act is - 86 - I Railways I being reviewed by the ADB as a possible precursor to successful. In the short to medium term, potential reinstating the suspended technical assistance and options for private involvement in BR activity must be pending loan agreements. The draft act is seen as a simple and pragmatic. Possible options include: positive indication of the Ministry's renewed commitment to structural change in BR. * Construction of new lines and provision of equipment in the Joydebpur-Narayanganj (Dhaka) corridor. Labor redundancy * Commercialization of BR's non-core real estate The overwhelming negative consequence of radical assets. restructuring is labor reduction. BR was relatively * Concessioning of branch lines in the northwest. successful in reducing its staff to the current level of * Renewal of 18 Air-Conditioned (AC) coaches and 37,000 through a golden handshake incentive plan. five power cars under a rehabilitate, operate, and However further reductions to the more reasonable transfer (ROT) contract. future target of around 20,000 workers will impose a * BOT procurement and operation of 30 new AC heavy burden on many families and communities. passenger coaches to provide two pairs of AC Other successful railway retrenchment programs, trains. such as those in South Africa and Brazil, have relied on training, coordination with other labor support agencies, commitment to enterprise development, and Box 8.1. Brazil: Federal Railways Concessioning and community development support Staff Retrenchment Program (see box 8.1). These or similar Before concessioning the Brazil Federal Railways (RFFSA) to the private approaches will certainly be needed sector in 1997-98, the Government of Brazil adopted an elaborate staff in Bangladesh if BR is to achieve its rationalization program to streamline operations and minimize the social goal. impact of the change. After a detailed assessment, the Brazilian govern- ment set a goal of reducing RFFSA employment from about 42,000 per- Options for private-sector sons to 20,000 persons. Staff reductions would be achieved through three programs: incentives for early retirement, incentives for voluntary separa- participation tion among employees ineligible for early retirement, and-only if neces- sary-involuntary separation.As many as 11,771 workers participated in Private-sector participation (PSP) the early retirement program, compared with the government's initial opportunities in BR include potential projection of 5,000 workers. unitary concessioning of the whole The voluntary separation program, which targeted workers ineligible of BR; selected concessioning of for early retirement, offered payments ranging from 4 months to 12 individual services or lines; months of salary, depending on tenure, together with training and out- increased contracting out of placement services. RFFSA ultimately had to lay off 385 workers involun- services; and joint venture tarily to meet its staff reduction targets, but those workers also received operations. The successful fiber- compensation packages.A survey conducted in 1998-1999 found that 57 percent of the separated employees were working. Of these workers, 57 optic telecommunications joint percent had their own businesses.Among survey respondents, 33 percent venture can be used as a guide to were no longer in the labor force and 10 percent were unemployed. At developing future private-public the time of the survey, the unemployment rate in Brazil surpassed 10 per- partnerships with BR. cent, so a 10 percent unemployment rate among former RFFSA employ- Radical change to BR has been ees is encouraging. resisted for many years, however, Source: World Bank (2002). and complex options will not be _ ___ -87- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Increase operational efficiency While acceptable to BR staff, none of these projects addresses the fundamental issues of BR must increase its operational efficiency in terms of improving BR's financial position and improving traffic units per employee by at least 100 percent over efficiency to maintain traffic. More significant structural the next 3 to 5 years. This increase will bring the changes remain necessary. railway's performance about even with the current performance of Pakistan's railway and about 60 Recommendations percent of India's. Accomplishing this level of improvement will require: BR has the potential to provide cost-effective and efficient service to passengers and freight but only * Complete staff commitment to the new targets. BR with a strong and sustained commitment to must act in a commercially responsible way and commercial efficiency. World experience has shown reduce or eliminate non-commercial services, that transport operators are inefficient instruments adjust tariffs to market levels, and build up its through which to administer social policy. Given the profitable services. coincident pressures of growing competition and the * Prompt installation of a traffic-costing system to heavy need for capital investment to provide rational reflect the commercial emphasis of operations with and commercially responsible service, there appear to greater focus on freight traffic (containers) and be no options other than to dramatically increase the reduced focus on unprofitable passenger traffic. role of the private sector in the provision of railway * Aggressive use of outside contracting and private service in Bangladesh. investment and partnerships in terminals, freight Core constituencies, including ministry staff, labor consolidation, and new equipment. unions, BR staff, and passengers, have expressed little support for change. However, reforms are ever Create a separate corporation more pressing as the GOB cannot continue to finance the hefty BR deficits and as BR continues to suffer Although some short-term changes can be introduced from donor fatigue. The German and Canadian to improve the railway's operations, the GOB will have governments, longtime supporters of BR, have to address deep structural issues in the longer term if withdrawn support and ADB support has been offered BR is to become an efficient organization. The pending commitment to structural change in BR. creation of a corporate entity with the legal right to The GOB should focus on changing the regulations further concession any part of its service is an that impede development of regional traffic; facilitating essential first step from which other structural changes private sector participation; developing a can then follow. comprehensive plan for handling staff redundancy and its social impact; and deciding with the BR on a fair Establish a performance agreement and responsible level for payments of those public- service obligations deemed to be in the public interest Traffic rationalization should be accompanied by a but not commercially viable. Table 8.11 summarizes the performance agreement between BR and the GOB to short-, medium-, and long-term steps the GOB can clearly specify their roles and responsibilities, take to improve railway performance. including financial responsibilities toward public- service obligations. The installation of a full traffic- costing system will provide both BR and the GOB with hard numbers they need to develop a meaningful performance agreement. -88- I Railways Table 8.1. Railway Action Plan Short-term steps (I year) Corporatize and commercialize: * Create a BR corporation separate from the GOB. * Open BR lines to international equipment from India, Nepal and Bhutan. * Implement a full traffic-costing system. * Draft and sign a performance agreement between BR and GOB and commit to dramatic efficiency improvement by cost based market pricing, contracting out services, forming joint ventures and opening operations to private investment. Medium-term steps (I to Improve efficiency through contracting and concessioning: 3 years) Encourage private investment in terminals, unit trains, contract maintenance (shops and infrastructure), and depots; * Aggressively target new profitable traffic and reduce unprofitable service. * Enter into full concessions for specific services (terminals, train operations, freight forwarding, ticketing, and so on). * Implement performance agreement with GOB. * Develop an action plan to minimize the social consequences of staff reduction. Long-term steps (3 years Full concessioning and private railway operations: and over) Use experience from medium term efforts to agree on a concessioning model, either horizontally structured with open access or a unitary, vertically integrated structure. * Draft necessary legislation for full privatization of BR including establishment of regulatory authority if needed. * Draft staff reduction action plan and establish effective outplacement and staff redundancy payment structure. * Concession core railway operations and dispose of non-core assets. Source: World Bank staff. Cultivate private-sector partnerships further working experience in drafting and negotiating In the medium term, widespread commitment to concessions. partnership with private-sector entities will highlight the benefits of this approach and diminish resistance to privatization. This approach will emphasize: Full, system-wide concessioning The GOB's long-term plans should include * Private ownership of equipment such as unit trains, concessioning railway operations to private investors and of terminals and depots. to develop, maintain, and operate the railway on a * Contracted maintenance and operations services, long-term, 20-plus year basis. The major issues in which will create a body of capable companies and accomplishing this goal are fair and adequate staff outside BR who understand and are treatment for existing staff; retention of the option for committed to efficient railway service. the government to expand the railway infrastructure; and willingness to pay the railway a transparent Granting of full concessions for specific services subsidy for second-class passengers. Land, and physical operations will give BR and the GOB equipment, and facilities not required by the railway operators should be retained and sold by the GOB. -89- iI i i I i I Ii I i I 9 | Ports and Inland Waterways Policy Objectives: Expand port capacity through new projects; increase existing port efficiency; tap the transportation potential of the inland waterways system; secure private financing for activities in the sector. Private-sector Participation: Limited involvement in Chittagong and Mongla ports; extensive involvement in inland waterways. Key Issues: Productivity and investments in port capacity are needed so that Bangladesh can maintain rapid export growth in an increasingly competitive global market and effectively compete in the aftermath of the Multi-Fiber Arrangement; inland transportation bottlenecks complicate port expansion; resistance to private-sector participation by various interests, which discourages private investment. Bangladesh has only two gateway ports, the The Ports Act of 1908 and Port Rules of 1966 make Chittagong Port Authority (CPA) and the Mongla Port up the principal legislation governing the port Authority (MPA). In 2000 these two ports together subsector. There have been no updates of these acts, handled about 20 million tonnes of cargo, of which 87 but recently the government of Bangladesh (GOB) percent were imports. Chittagong, the larger of the two issued several port policy statements and guidelines ports, handles more than 80 percent of total sea-borne that focused on increasing private-sector participation traffic and 25 percent of container traffic, representing (PSP). These policy statements and guidelines are not approximately 490,500 twenty-foot equivalent units, or binding, however, and attitudes toward PSP vary TEUs. By 2017 forecasts project that this container according to the agency and personalities involved. traffic will increase by 300 per-cent, For example, there is general reluctance to introduce to an amount well in excess of the port's enhanced PSP at the Chittagong port, but similar capacity. resistance is not evident at the Mongla port. The average annual growth rate for all traffic in the Bangladesh also has 3,600 km of navigable 1990s was about 6 percent per year, with container waterways in the dry season, and almost 6,000 km in traffic growing at about 19 percent per year. Traffic the rainy season. The system consists of eleven major growth at Mongla, on the other hand, is currently inland river ports that transport passengers as well as constrained by poor inland transportation links. substantial cargoes (about 5.6 million tonnes). -91 - I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Market Structure: Public- and With the exception of a number of small and Private-sector Roles possibly illegal ghats, no privately operated ports exist on the inland waterways system. The private sector The Ministry of Shipping (MOS) is responsible for both does, however, provide labor services for loading and the seaports and the inland waterways. The two unloading cargoes at BIWTA port facilities. Cargo seaports, Chittagong and Mongla, are operated handling concessions are let through an annual public through autonomous port authorities-the CPA and auction process. the MPA-with the chairmen being senior naval BIWTA and BIWTC have a measure of officers. independence, but operating and capital expenditures Limited private-sector involvement exists in the must be approved by the Ministry of Finance and provision of stevedoring and other cargo-handling staffing is subject to the authority of the Ministry of services at Chittagong and Mongla ports, and in Establishment. providing ancillary services such as equipment maintenance. Stevedoring companies are required to Performance recruit their workers from the Dock Workers Management Board (DWMB) at both Chittagong and Neither Chittagong nor Mongla has ship-to-shore Mongla ports. In addition, independent foreign and gantry cranes and productivity is very low. All Bangladeshi operators provide container shipping on containers are moved by ships' gear. Ship waiting time behalf of a variety of mainline carriers on a slot charter is significant. Vessels arriving at the outer anchorage basis serving the two major hubs of Singapore and typically wait 3 to 4 days before gaining access to a Colombo. berth. Productivity at the container terminal in Ports on the inland waterways system are owned Chittagong port is about 100 to 105 lifts per berth per and operated by the Bangladesh Inland Waters day, well below the productivity factors suggested by Transport Authority (BIWTA), which also maintains UNCTAD of 230 lifts per day with ships' gear. As a and conserves the waterways, provides pilotage, aids result, turnaround time for ships is high, at 5 to 6 days, navigation, regulates private passenger services, and rather than the average of 1 day in more efficient provides hydrographic and other services. The ports. Bangladesh Inland Waters Transport Corporation Some containers are carried by rail from (BIWTC) provides ferries across rivers and between Chittagong port to an Inland Container Depot at the mainland and offshore islands, and offers cargo Kamalapur in Dhaka. Because of customs regulation and passenger services within the inland waters and lack of transport capacity, however, more than 80 system. Its total complement of equipment includes percent of containerized cargoes are stuffed or 179 commercial and 52 auxiliary vessels, of which 30 destuffed in port and transported inland in small vessels have been chartered to private operators. trucks. This practice further decreases the efficiency However, the great majority of vessels-including a of container movement for both imports and exports. fleet of passenger launches-are privately owned and Port tariffs have not increased in 15 years, but CPA operated. The passenger launches vary in size. Some is in good financial condition and can expect of the vessels are rated to carry more than 400 continued traffic and revenue growth because it has a passengers. virtual monopoly. CPA's capital reserves are also healthy, but this partially reflects cutbacks in spending The inland waters system is the most popular long- on capital improvements, equipment replacement, or distance transportation method for the poorest even equipment maintenance. Even though the port is members of the population. Affordability issues may not experiencing financial losses, its inefficiencies still require subsidization of inland ports. represent a cost to the economy of Bangladesh. The -92- I Ports and Inland Waterways I long waiting times and foregone trade opportunities Still, the tariff increases do not reflect the rise in costs have an economic cost. over the past two decades. MPA has enjoyed modest net profits over the past Although profitable, BIWTC also receives 10 years, totaling approximately US$3.7 million government subsidies of US$90,000 (BDT5 million) (BDT200 million) each year but without recent growth. per year to operate ferry services to the country's Unlike CPA, Mongla's net profit is largely due to offshore islands. interest income, without which the port operates at a loss. Private-sector Initiatives In 2001 MPA and CPA each experienced a significant drop in profits of about 90 percent. MPA's The GOB has initialed a Build-Operate-Own (BOT) drop in profits may have been due at least in part to agreement with Stevedoring Services of America the government's removal of responsibility for the (Bangladesh), to develop a US$250 million container Benapole dry port from MPA. Benapole had previously terminal at Patenga Point in Chittagong. However, a represented a major source of income to MPA. The court injunction was issued against the signing of the change, although detrimental to the financial position final agreement. of Mongla port, was logical because Benapole's dry Construction of the container terminal at the new port had little logistical connection with the activities at moorings site in Chittagong port appears to be moving Mongla. forward. The CPA also has approached IIFC to Neither CPA nor MPA receives any government facilitate the preparation of bidding documents for subsidies. Both ports are financially self-sufficient and operation of this new terminal on landlord principle. in a strong cash position. The GOB also intends to offer a BOT for private- Tariff levels at CPA and MPA are high compared sector development of an inland water container with other ports in the region and globally. Tariffs are terminal at Narayanganj, about 10 km from Dhaka. also highly complex, to the point that even port The terminal will handle containers transported along officials have difficulty fully understanding them. the inland waterways between Dhaka and the CPA and MPA enjoy a measure of independence, Chittagong and Mongla ports. Bid documents are now but operating and capital expenditures for both ports in development, and a call for prequalification of require Ministry of Finance approval, and staff matters bidders is imminent. are subject to the authority of the Ministry of In the case of Mongla, a business plan is being Establishment. It appears that the Ministry of Shipping prepared that addresses issues concerning the has little to do with the budgetary or personnel appropriate future PSP level in the development and process at the ports. operation of that port. BIWTA has lost money in the last 5 years. These losses reflect public policy requirements to keep travel costs on the inland waterway system as low as Policy-making, Planning and possible. The policy is intended to assist poor people, Regulation who rely on this system for long-distance travel. To compensate for these losses, the GOB provides The Ports Act of 1908 and Port Rules of 1966 subsidies to BIWTA to meet capital and recurrent constitute the core legislative and regulatory costs. This poor performance has resulted in framework for this sector, but neither piece of continuous government support in the form of equity legislation provides any basis for private-sector injections, debt, and debt-equity conversions. In early participation in the country's seaports or inland 2002 BIWTA significantly raised some of its tariffs. waterways. -93- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Existing port policies in Bangladesh are not private sector should be the primary developer within contained in any one code or document. Port policy ports, and the government should only become appears to be in a state of evolution, and several involved in projects that are deemed to be in the public documents have been prepared by the Ministry of interest, but that have drawn no interest from the Shipping (table 9.1). Many of the recommendations in private sector. Indicating participation by private- these documents have yet to be carried out and sector entities would be required in projects submitted attitudes toward private-sector involvement in port in the Ministry's annual estimates. The draft policy activities vary according to the government agency also proposes restructuring the port authorities in line and personalities involved. with the more commercial landlord model. Under this Should the Private Sector Participation Policy for model a government-appointed board would employ a the Shipping Sector of Bangladesh become a binding port manager-a significant change from the current document, however, carrying out its recommendations model under which the board chairman is the chief will actively encourage private-sector participation in executive, and the board members are senior the ports and inland waterways. The proposed draft department heads. The reorganized authorities could policy addresses both increased private-sector be made subject to performance contracts with the contributions to port development and operation and GOB. the future structure and administration of the port authorities. The basic thrust of the policy is that the Table 9.1. National Port Policies Policy Year Impact Privatization of ports 1999 The recommendations of this document have sometimes-but not always-been taken into consideration so this document cannot be considered binding in all instances. National Policy for Ports, Ocean 1999 This document reflects Bangladesh's port reform strategy and Shipping, and Inland Water Transport deals with all areas for which the ministry is responsible. (Drafts I and 2) Guidelines for Private Sector 2000 Because of lack of privatization initiatives to date, it is impossible Participation in Port Development to test whether or not these guidelines are considered binding. National Shipping Policy 2000 Although this document encourages PSP, it does not commit the port authorities to such a course, and there is no legislation providing specifically for GOB undertakings to transfer their operations to private-sector investors. Private Sector Participation Policy for On-going With the assistance of the Infrastructure Investment Facilitation the Shipping Sector of Bangladesh Center (IIFC), a committee of the Ministry of Shipping has (Draft) prepared a draft. Source: World Bank staff. -94- Ports and Inland Waterways I Issues CPA's inefficiency is widely recognized but little has been done to rectify the problems. Moreover, even The two biggest issues that must be addressed as the with rapidly increasing traffic, facility development has GOB considers future development of the CPA, MPA, been inadequate. A rule of thumb in the port industry and inland waterway ports are growing demand and is that expansion plans should begin when demand the need for restructuring. Labor issues, the need for reaches 60 percent of capacity. On this basis, intermodal connections, and passenger safety also development of at least one new container terminal at need to be addressed. Chittagong should be well advanced by this time. Growing demand for port services Need for restructuring Demand for port services in Bangladesh will continue No separation of the development, operating, and to increase. Current capacity at Chittagong port will regulatory roles of the port authorities currently exists. not satisfy the growing demand; CPA is already This serious organizational flaw introduces conflicts of working above its capacity, creating considerable interest and confusion in managing these distinct congestion and delays at the port. Mongla port has no activities. Their regulatory role impedes the port direct transportation links with the rest of the country, authorities' ability to function as fully commercialized so carriers have been discouraged from calling at the entities, while their operational roles tend to port. A road linking the two ports is under construction, compromise their impartiality as regulators. and there are moves to establish an inland water Current thought in the port industry is that there is transportation system for containers travelling a need for regulatory bodies to be established, between Mongla and Dhaka. independent of operating organizations. A more Although a rail link to Mongla port is unlikely to be practical solution may be for the port authorities to installed soon, railroad access would render the port remove themselves completely from direct more attractive. Draft problems along the channel of responsibility for certain commercial activities, such as the Pussur River limit the size of vessels that can ship services and cargo handling. By allowing the access Mongla, and the long river transit further private sector to take over these kinds of activities the inhibits traffic. The latter problem is somewhat offset port authorities will be better able to carry out by the long waiting times for berth access at regulatory functions in these areas. In effect, this Chittagong, at least for as long as such problems approach would transform the CPA and MPA into continue at the larger port. On the positive side, MPA landlord ports. has a significant amount of land that can be developed Activities such as the determination of port tariffs for new facilities. and other matters that could present conflicts of Congestion in the ports is exacerbated by the interest could be assigned to an independent current practice of providing priority berthing privileges regulator, or perhaps to a national port council, always to Bangladeshi-flagged ships. Normal industry on the basis that flexibility and expediency in decision- practice is to treat all vessels equitably. Foreign making are essential in dealing with industries as vessels, which carry approximately 85 percent of all dynamic and volatile as international trade and container cargo, must wait longer for access to shipping. container berths because of this rule. Anticipating long However there is very little interest, particularly at waits, most freight lines use their least efficient CPA, to engage in the privatization of existing vessels to service Bangladesh, thereby adding to the facilities. The India and Sri Lanka model of private- inadequacy and high cost of the system. sector development of all new container terminals (in 95- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I close proximity to existing facilities) is likely to be more Box 9.1. Regional Private Initiatives in close the Port Sector politically attractive. The situation is similar with respect to the Inland Experience elsewhere in South Asia with regard to Waterways. The operational and regulatory roles of improvements in port performance can be instruc- BIWTA are not separated. Considering the extent to tive. Private operators have developed new terminals which these bodies are involved in operational in India, Pakistan, Myanmar, and Sri Lanka, all generat- activities, this lack of separation presents a significant ing significant increases in productivity levels. For organizational flaw that makes the waterborne example, handling productivity rates at private facili- transportation system vulnerable to conflicts of ties in Bangkok and Colombo are 35 and 38 moves interest. per berth per hour, respectively. When private terminals have been established adjacent to publicly operated terminals, the public Labor issues operations also have shown moderate productivity improvements, as in Sri Lanka. The unions in the ports of Bangladesh are strong and, Sounre: World Bank staff. at Chittagong in particular, they are aggressive in defending their rights. The unions oppose privatization and the development of new container facilities that would reduce the demand for labor. Labor opposition Dhaka and Chittagong port. However, both rail and led to the recent cancellation of a planned Asian road capacity are limited by chronic equipment Development Bank (ADB) port efficiency study. shortages. Furthermore, lack of capacity and Overstaffing and lack of management control over adherence to customs regulations mean that 80 the workforce is a major problem. On a daily basis, percent of containers are stuffed and destuffed at the Chittagong port employs 18,400 people to handle ports. Thus, the most significant advantage of cargo. This is five times the number of people that containerization-its suitability for intermodal should normally be required for a port with operations-is lost. Such activities also result in Chittagong's throughput. Current labor hiring practices increased pilferage at the ports. at the ports must also be addressed. Private stevedoring companies currently are required to Pa recruit their workers from the DWMB, which is headed g Y by the Chairman of CPA. A perennial problem in the inland waterway passenger Rationalization of the port sector will require major sector is the sinking of vessels with inevitable loss of changes in labor practices. Inevitably, this will mean a life. In most cases, overloading of vessels has been a reduction in the number of jobs. At Mongla, the DWMB major contributing factor. Official inquiries into sinkings has reduced staff by approximately 1,600 jobs, indicate an urgent need for improved supervision of targeting labor that accepted "golden handshake" launches on the part of BIWTA and the Department of deals. A total of US$700,000 (BDT40 million) was Shipping. These agencies also must ensure that no allocated in the budget for the retrenchment of staff. unauthorized changes take place in the design or configuration of passenger vessels. Connection with other modes of Benefits can be gained from the following transportation recommendations, but only if the GOB and the agencies responsible for this sector approach these Bangladesh Railways (BR) operates the daily reforms with consistent resolve. container rail service between Kamalapur ICD in -96- I Ports and Inland Waterways Recommendations eventually increases, its export competitiveness. Table 9.2 presents an action plan that represents a Reform is urgently needed to encourage PSP to meet roadmap for the future. the growing demand for services. Although the port system is not incurring financial losses, it is imposing Encourage private investment a heavy cost on the economy in terms of foregone trade opportunities. Moreover, the approaching end of The present inadequate container terminal capacity at the Multi-Fiber Arrangement is increasing concerns CPA and MPA significantly reduces the about how to maintain the current international competitiveness of Bangladeshi exports and the cost position of Bangladesh's ready-made garment of imports. The GOB should find a resolution to the exports. As quotas are removed for key competitors development of the Patenga container terminal and like China, an efficient port system will be one of the should continue with CPA's plans to develop the New critical pillars to ensure that Bangladesh retains, and Moorings container terminal. Table 9.2. Action Plan Short-term steps Proceed with development of the Khanpur Inland Container Terminal project as a BOT development * Encourage and advocate private investment in the Patenga and New Moorings ContainerTerminal Projects. * Finalize and adopt the Private Sector Participation Policy for the Port Sector. * Review and modernize customs procedures to encourage inland movement of containers. * Develop and implement a marketing strategy and action plan for Chittagong and Mongla Ports. * Implement change management and privatization sensitization programs for port labor. Medium-term steps * Corporatize Chittagong and Mongla ports as fully independent entities. * Adopt the landlord model for operation for both port authorities. * Prepare a labor profile including skills mix and requirements and develop staff retention and redundancy programs. * Replace the present DWMB-based hiring system with more modern practices for hiring dock labor. * Restructure BIWTA along the landlord model, with operations of terminals and all new developments being transferred to the private sector and leaving BIWTA as a regulating body. * Turn BIWTCs loss-making passenger and cargo services over to the private sector. Long-term steps * Transfer all cargo handling operations to the private sector through leasing of existing and new terminals, including Kamalpur ICD. * Adopt a policy whereby the development and operation of new terminals will be carried out by the private sector. * Encourage the exploitation of the extensive inland waterway system for the efficient movement of containerized traffic. Source: World Bank staff. -97- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I Facilitate necessary staf-fing adjustments The GOB must also complete and issue a clear and comprehensive policy governing the inclusion of Both port authorities should reduce their staffing to private developers and operators in the ports sector. normal levels comparable to other ports in the region. Other operations presently carried out by the port Reductions in staffing should be carried out over a authorities, such as tug services, provision of number of years, and workers should, as much as equipment, and warehousing, as well as all non-core possible, be encouraged to leave employment activities, should be transferred to the private sector. voluntarily through inducements such as "golden Other activities, such as maintenance, engineering, handshakes" or other incentive programs. A common design, and security should be contracted out. The international guideline for staff sizing of landlord ports future role of the port authorities should be in planning is an average of one employee for every 100,000 and regulation, with the possible exception of the tonnes of cargo handled (Fourgeaud 2000). regulation of tariffs. To regain management control of the workforce The GOB should consider inviting PSP in BIWTC's and to support the privatization of cargo-handling ferry services, provided proper safeguards are put in operations, the GOB should replace the present place to ensure continuity of service. This effort might DWMB hiring system with direct hiring of workers from involve small subsidies for ferries serving the offshore a labor pool by the employers under conditions agreed islands. In this context, concessions bids should be on in collective bargaining between representatives of the the basis of the lowest required subsidy. ports' employers and the workers. Initiate marketing and education Restructuring BIWTA campaigns Although the private sector dominates the operation of The CPA and MPA should increase their marketing inland water vessels, BIWTA provides activity. At present, neither port makes any effort to and operates all public inland water ports and attract shipping lines or other users. Increasing terminals. marketing efforts will lead to inter-port competition and The government should restructure BIWTA to better service for the port user. Such efforts can bear address its functions as port authority and enabler of positive results only if they are part of a broader plan inland waterways navigation. BIWTA should continue to enhance port performance. to have oversight responsibility for dredging of channels, hydrographic services, and placing and maintenance of navigational aids, but these functions, Allow for autonomous arrangements and possibly pilotage, should be contracted out to the Considering the flexibility that is required in today's private sector. BIWTA also should continue to be port industry, the government should grant CPA and responsible for inland waters vessels classification MPA greater autonomy to execute contracts, subject and conservancy services. At minimum the ports to approval of annual business plans by the administration division-where most revenue would government and the rulings of an independent be derived-should be self supporting. In the long regulator. term the organization's objective should be to become The government should adopt the landlord model completely self sufficient. in operating CPA and MPA. This change will entail privatizing existing commercial activities, such as ship services and cargo handling, and leaving the CPA and MPA to carry out regulatory functions in these areas. -98- I Ports and Inland Waterways Notes 1. Bangladesh ready-made garment exports increased from US$0.64 billion in 1990 to US$4.86 billion in 2001 and now constitute the country's most important export. -99- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I sector interest in the venture. The main reasons for administrative entity, the Ministry of Civil Aviation and the lack of interest included very low existing air traffic, Tourism. the GOB's restrictive policy toward future operations, The independent roles of Biman Air, CAAB, and the and the expectation that the GOB would impose Ministry are further clouded because the Minister is artificially high aircraft fuel costs on potential new the chairman of Biman Air and the chairman of the airline operators. CAAB sits on the board of Biman Air. Furthermore, by These two attempts by the GOB to encourage custom the chairman of the CAAB and the senior private investment in air transportation were both member of the board also are officers of the destined to fail, primarily because of the government's Bangladesh Air Force and seconded to their roles at unwillingness or inability to liberalize its protective the CAAB. policies. During the search for a strategic partner for The CAAB is the designated government agency Biman Air, the GOB was unwilling to give up the notion responsible for regulation of the country's air that a minority stockholder with limited rights would be transportation system, air traffic control, and air safety interested in investing in a government corporation. within the borders of Bangladesh. CAAB also is The search may have progressed better had the GOB responsible for all airport planning, aggressively stated from the beginning that it sought construction, maintenance, and operations of airports. to establish a new public limited corporation ®oint Such widespread powers allow the agency to venture) to operate the airline. Similarly, during the dominate the regulatory and operational aspects of air search for a private operator for Chittagong Airport, transportation in the country. CAAB is in the business the government remained preoccupied with of running all air transportation facilities, as well as protectionism. Its policy was to protect Biman Air's air being the regulator and enforcer of all codes and route structure and the inflated price of aircraft fuel. regulations. The venture would have been much better served had the government offered appropriate incentives to Issues and Recommendations make Chittagong Airport a profitable undertaking, attracting outside operators to manage this new Separate CAAB's regulatory and US$100 million facility. operational functions Consideration must be given to first defining and then Policy-making, Planning and separating CAAB's regulatory and operational Regulation responsibilities in the air transportation system. When an organization that is clearly involved in operations Globally private-sector entities increasingly are also is responsible for regulation, the situation assuming responsibility for airport infrastructure inevitably leads to conflicts of interest. Such conflicts development and management and the provision of can easily result in mismanagement and safety issues, airport services. These changes are occurring within a both on the ground and in the air. regulatory framework provided by governmental civil Once its regulatory and operational functions are aviation authorities. Likewise, privatization of state- separated, CAAB must be reconstituted as a new owned airlines has become a worldwide trend. In government organization. CAAB should retain only Bangladesh, however, CAAB continues to dominate regulatory and enforcement functions and the GOB the air-transportation industry and the government's should proceed to privatize the remaining airport wholly owned airline, Biman Air. The country's air- operational functions. Clearly, CAAB would be most transportation system also is concentrated under one receptive to divesting its operational responsibilities in -104- I Air Transportation I order to concentrate its energies solely on regulatory reasonable strategy Biman Air can pursue to survive and safety issues. Unfortunately, inertia at the is full integration with another international air carrier. ministerial level is preventing the necessary The GOB should immediately review its policy on reorganization and divestiture. The key will be to take divesting only a minority share of Biman Air in its the initial step of commissioning an independent study search for a strategic partner. The Ministry of Civil to lay out the details, framework, and time line for Aviation and Tourism must be willing to transform CAAB's reorganization. Although the agency would Biman Air into a public limited corporation, give up participate willingly, the initiative for taking this first governmental control of the airline, and allow Biman step must come from the cabinet level. Table 10.3 Air to freely seek a strategic partner under the best depicts how these functions could be distributed after commercial terms available in the marketplace. this major reorganization. Address the high cost of aircraft fuel Reassess the strategic partnership for Biman Air The GOB's policy of tightly controlling the importation, distribution, and sale of aircraft fuel results in the cost Biman Air must improve both its management and its of jet fuel in Bangladesh being two to three times the level of service to compete successfully in the global cost of fuel in Singapore or Thailand. Although the airline marketplace. Currently the airline has an aging government is trying to encourage private companies fleet, little access to international passenger networks, to enter the air transportation business in Bangladesh, limited information technology (IT) resources, an it also supports policies that make the operation of jet increasingly dissatisfied customer base, and few aircraft uneconomical. To encourage private-sector opportunities to increase its revenue. The only participation in airline operation-and to ensure creation of a level playing field, particularly Table 10.3. Distribution of Functions by Organization following Reorganization Organization Operational services Traffic handling Commercial responsible and facilities services and facilities activities Civil Aviation Authority of * Air traffic control Bangladesh * Police and security operations * Fire and emergency services Biman Bangladesh Airlines * Passenger handling Other GOB agency * Customs and immigration Private sector * Maintenance (buildings, * Aircraft parking ramps * Shops (including duty- pavement, aircraft) * Baggage and freight free shops) * Operations of other facilities handling * Restaurants * Hangers * Car parking * Fuelling services Catering Source: World Bank staff. -105- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I with regard to the other modes of transportation devised, the policy should be proclaimed from the in Bangladesh-the GOB should immediately review highest level of government. An action plan that the cost of aircraft fuel purchased by includes a time line for accomplishing the various carriers. steps, should accompany the policy statement. Table 10.4 summarizes important elements of such an Prepare a policy for private-sector action plan. Obvious elements of this declared policy should be that the government agrees to stop subsidizing Biman Air's operations and agrees to Despite the lack of a clear and coherent policy permit domestic air tariffs to be controlled by the statement encouraging private sector participation marketplace. (PSP) in the air transportation industry, domestic private airline operators have emerged to provide services to the public. To further encourage similar private initiatives, the government should prepare a policy for PSP in the air transportation sector. Once Table 10.4. AirTransportation Action Plan Short-term steps Determine optimum divestiture/privatization plan for Biman Air * Commercialize Biman Air based on financial concept of cost recovery * Review cost of air fuel, charges applied to industry; prepare plan for revision of tariffs * Separate regulatory and operational functions of CAAB Medium-term steps Implement privatization options recommended for Biman Air Prepare PSP policy to include: - End of subsidy to airline - Tariff reform Long-term steps * Carry out the policies that have been developed Source: World Bank staff. -106- Part 111. Selected Cross-sectoral Issues I1 I1 Business Climate and Local Finance Several reforms and liberalization policies have been environment for private investment. The most carried out in the last decade in many economic important constraints are summarized below. sectors to enhance Bangladesh's competitiveness. The government of Bangladesh (GOB) also has The extent of corruption and the instituted legal reforms to encourage foreign investment. With a few exceptions, the country places regulatory burden no restrictions on foreign direct investment. The As underscored in a World Bank study on governance, Foreign Private Investment (Promotion and Protection) corruption plagues the delivery of public services, Act of 1980 provides for: whether the context be obtaining a business license, registering a property, or importing goods (World Bank * Non-discriminatory treatment between foreign and 2002). Private firms also complain of red tape and a local investment. multitude of permissions that they must obtain in order * Protection of foreign investment from expropriation to start and operate a business. For example, starting by the state a business takes a minimum of seven steps.2 * Guaranteed repatriation of proceeds from sales of In 1989 the Investment Board was established with shares and profits. the mandate of providing one-stop services to * No limitation on equity participation (100 percent investors. Even so, foreign investors often had to foreign equity is allowed). move from one ministry to another to obtain necessary permissions. Under new leadership, the Investment Business and Legal Environment Board has made progress recently in promoting investment opportunities in Bangladesh. Bangladesh is a member of the Multilateral Investment Guarantee Agency (MIGA) and the Overseas Private . . . Investment Corporation (OPIC), entities that offer The judicial system guarantees to foreign investment.' The operation of the courts is also perceived as being Despite some liberalization reforms, significant slow and of poor quality. Potential investors have challenges remain to improve the business raised concerns about the courts' ability to enforce laws in an unbiased and independent manner. -107- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH Labor issues The Infrastructure Development Company Ltd. Low labor costs in Bangladesh make the country an (IDCol) can also facilitate financing of infrastructure attractive investment site. Unfortunately, frequent projects in the short term. However, it cannot hartals, or general strikes, cause temporary substitute for efforts to enhance the mobilization of shutdowns of the country and contribute to losses in local savings and long-term development of local productivity. Improving the Investment Climate in financial markets. Bangladesh (2003) further analyzes constraints faced by the private sector.3 Local financial markets Mobilizing Local Finance Bangladesh's financial markets are small and dominated by the banking system (table 11.1). At the The capacity to mobilize local finance constrains end of 2001, banking system assets reached about private-sector participation in infrastructure BDT1.1 trillion, or 47 percent of gross domestic development. In the medium term, the largest product (GDP). National commercial banks and greenfield projects will have to rely on a mix of local specialized development banks held 58 percent of the and foreign finance. Local finance has played a role in system's assets, and private banks held the remaining smaller projects. It will need to play an even greater share. Lending is primarily short term and is role to foster service coverage expansion, particularly constrained by short-term deposit mobilization. Only in rural and urban areas not yet reached by public- about 20 percent of deposits have maturities of 1 year sector providers. Service expansion will demand a or longer. With maturities on most deposits under 1 more efficient financial system, especially greater year, banks are constrained in their ability to become development of the embryonic capital market. Growth involved in long-term finance. in the capital market will open new possibilities for Lending rates are high. Inefficient financial financing more complex and larger-sized transactions. intermediation, a high level of non-performing loans, Table I 1.1. Bangladesh: Financial System Structure Total assets Number of institutions (end-December) (Dec. 2001) Percent 1998 1999 2000 2001 BDT millions of GDPa Banks 39 49 49 51 1,276,517 46.8 State-owned 9 9 9 9 742,247 27.2 Nationalized commercial banks 4 4 4 4 591,527 21.7 Specialized development banks 5 5 5 5 150,720 5.5 Private commercial banks 30 40 40 42 534,270 19.6 Insurance companies 32 32 62 62 35,790 1.3 Finance companies 19 22 26 26 18,763 0.7 Microfinance institutions n.a. n.a. 586 624 37,882 1.4 Securities markets n.a. n.a. n.a. n.a. 65,520 2.4 a. Based on gross domestic product for 2001-02. Sources: Bangladesh Bank; Department of insurance (Ministry of Commerce); Securities and Exchange Commission; and Credit Development Forum. -108- I Business Climate and Local Finance I corruption and a legal and judicial framework favoring only 1.3 percent of GDP. Private pension and debtors all contribute to the high lending rates. In provident funds, primarily sponsored by employers, addition, National Savings Certificates offer an also offer limited coverage, but no data is available on artificially high interest rate and drive up funding their size or performance because they are costs.4 unsupervised. State banks and public enterprises Although finance companies have been licensed probably hold the largest pension plans.5 only since 1995, they have rapidly grown in number. In Institutional investors generally have allocated a 2001 there were 26 finance companies operating in large share of their portfolios to the artificially priced Bangladesh (table 11.1). Their activities remain National Savings Certificates. To the extent that these minimal within the overall market, at roughly 0.7 investments have been allocated to poorly performing percent of GDP; but these entities are searching for projects like inefficient infrastructure projects, they new business niches in the financial market. The have resulted in a misallocation of scarce national microfinance sector has expanded rapidly during the savings and crowded out long-term private finance. last 15 years to attain the highest market penetration Figure 11.1 depicts the vicious cycle of inefficient in the world. Four microfinance institutions (MFIs)- intermediation of savings and low capital ASA, BRAC, Grameen Bank, and Proshika- development. As of mid-2002, only individual dominate this market. investors will be able to acquire new National Savings Certificates. Still, the paucity of alternative instruments Capital markets persists.6 The capital markets in Bangladesh are How are private infrastructure projects underdeveloped. The combined market capitalization financed? of the two stock exchanges-Dhaka Stock Exchange and Chittagong Exchange-reaches only about 2.4 At present the financial markets are unable to percent of GDP. Securities traded on the two stock contribute substantially to infrastructure financing exchanges are still cleared and settled manually. Work except for smaller projects. Besides internal funds, is ongoing at the Central Depository Bangladesh Limited to implement an automated service that will initially function in parallel but will eventually replace Figure I 1.1. Vicious Cycle in Capital Development current materialized arrangements. In time, productive Pubj1 automation should contribute toward market ve,ctor investn,,,5 * development. r v Presently no secondary market exists, even for government debt. Efforts are underway to develop a v ; corporate bond market for collateralized loan and 0 lease obligations to be issued by banks and finance > companies. Trading in bonds could begin in 2003. 3 5 L S. Institutional investors 4, Institutional investors, a potentially important source of demand for long-term debt, are also just beginning to E Of develop. Insurance companies have a limited market penetration. Insurance company assets represent Source:World Bank staff. -109- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH I private infrastructure projects have obtained some of these accounting standards is necessary to ensure funding from banks, finance companies, and MFIs. that financial information is reliable and to give For example, as of 1998 five MFIs-ASA, BRAC, investors greater market confidence. BURO, Grameen Bank, and SSS-had disbursed A coherent public debt management system should US$36 million for water supply projects and US$13 be established, and the development of a secondary million for sanitation projects. MFIs have also been public debt market should be facilitated. The GOB involved in small-scale rural electricity projects. should issue an information circular encouraging In the country's few large-scale private projects, secondary market trading. Such a circular will help to such as those in the gas sector, foreign equity overcome the market's perception that trading in financing has become a dominant funding source. government securities is not allowed. The circular also IDCol was established to overcome some of the local should explain the GOB's regulations for conducting finance constraints. IDCol has received funding from such transactions. multilateral institutions to lend long term at market A liquid secondary market debt could reduce the rates. For example, IDCol supported the financing of cost of public debt and help create a reference yield the Meghnaghat power generation project. But IDCol's curve for pricing private fixed-income securities. project pipeline nearly dried up as projects were Securitization can be an important vehicle for delayed or tangled in legal action. infrastructure financing. Therefore, the GOB should promote the legal and regulatory framework that will facilitate these transactions. Recommendations for The development of institutional investors, Developing Local Financial particularly insurance and provident funds, will boost Markets the demand for long-term financing instruments. The regulatory amendments issued in July 2002 allowing Important reforms are necessary to facilitate the greater investment freedom on private securities were deepening of local capital markets so that they can a positive step. They must be complemented with a play a role in financing private-sector participation in strengthening of supervision to avoid malfeasance. infrastructure projects, initially small- and medium-size Private provident funds, largely governed by the projects and eventually more complex projects. To that Trust Act of 1882, need to come under a proper end, several steps are recommended. regulatory and supervisory framework to ensure the Bangladesh has a basic legal framework within sound intermediation of long-term savings and to which capital markets can operate, but enforcement is encourage their further growth. weak. The country's Securities and Exchange Commission, which is responsible for the transparent -Notes and orderly functioning of securities markets, is seriously understaffed. To effectively carry out its 1. MIGA, a member of the World Bank Group, provides mandate, the institution needs more resources and investment guarantees against losses arising from the risks strengthened enforcement powers. of currency transfer, expropriation, and war and civil International accounting standards are being disturbances. MIGA only guarantees new investment, adopted in Bangladesh. Most of the standards that are privatization, and financial restructuring. OPIC, an agency relevant for the financial system should be in place of the United States government, promotes greater soon. However, more stringent and forceful adoption -110- I Business Climate and Local Finance I investment interest for its members by providing loan 6. The market remains distorted, and banks mobilizing financial and investment insurance to foreign investors. deposits must still compete with National Savings 2. Additional information on the cost of a starting a Certificates. business and international comparisons are available at this 7. Private provident funds must register with the National Web site: http://rru.worldbank.org/doingbusiness. Board of Revenue for tax purposes but they are not subject 3. The study involves a survey of 1001 firms with more to any supervision concerning their financial performance. than 10 employees in the following sectors: garments; chemicals and pharmaceuticals; electronics; food and food processing; leather and leather products; and textiles. 4. Performance across the system varies widely, with private commercial banks depicting a much healthier profile. Some private banks are earning substantial returns on equity and returns on assets as they benefit from the inefficiencies of the large national commercial banks. 5. State enterprises suffering financial distress are not properly funding these plans. _ 111 - I t I i I I i i i ii I I i i i Appendix 1. Telecommunications Facts and Figures Telecommunications facts and figures of interest users for leased circuits, and 20 to 30 users for dial-up include information on international services, data and service as of March 2001. A new Digital Data Network Internet services, electricity service reliability, and using digital subscriber line (DSL) and Integrated overall performance within the sector. Services Digital Network (ISDN) technologies has been commissioned for software developers, but International Services again BTTB has not marketed it actively. BTTB has made the Digital Data Network available to public- Currently the number of international circuits is sector banks and multinational companies operating inadequate. BTTB projects that some 1,500 circuits in Bangladesh, but again with no marketing effort. will be added during the next five years. The satellite Many private-sector ISPs are in operation. The earth stations have expansion capability but no total number of Internet subscribers at the end of equipment is available to install for providing March 2001 was about 200,000, according to industry dedicated high-speed links to Internet service estimates. This number had been growing at a rate of providers (ISPs) for users with heavy data almost 100 percent per month in 1999. In 2000-2001, communications needs. A Memorandum of however, many of these companies were hesitant to Understanding (MOU) for the construction of a 3,200 market their services aggressively or to set ambitious kilometer undersea fiber-optic cable has been signed. targets given overall lack of connectivity. When commissioned, the undersea cable system is supposed to link Bangladesh with Singapore and Reliability of Electricity beyond, and it is expected to greatly relieve the present bottleneck in international traffic. Success of The status of the country's infrastructure for delivering this project is now doubtful, however, because the electricity is extremely unreliable at the moment. This foreign company involved in laying the cable is in situation directly affects the telecommunications financial trouble. sector, particularly in non-urban areas. Liberalization of the power and telecommunications sectors will Data and Internet Services likely occur simultaneously, at least in areas that now receive no service or inadequate service. BTTB has introduced both X.25 and X.28 public packet switched data services in eight cities. However, BTTB's lack of marketing initiatives have resulted in underutilization of capacity. There were only about 60 - 113- I PRIVATE SOLUTIONS FOR INFRASTRUCTURE IN BANGLADESH Performance Figure 1. 1. Telecommunications Productivity Figure 1.1 compares Bangladesh with other Asian Bangladesh countries in terms of the number of Fixed Line Pakistan Telephones per Employee in 1999. Nepal This figure shows that Bangladesh, at BTTB, has Sri Lanka the lowest employee productivity as compared to its India Asian neighbors. Indonesia Figure 1.2 illustrates the relationship between Thailand teledensity and per-capita gross domestic product CMina (GDP.) This figure suggests that the cost of failing to Philippines provide access to telephones will be very high for Bangladesh in terms of the country's economic 0 50 100 IS0 200 250 prosperity. Source: International Telecommunication Union, Geneva. Figure 1.2. DoesTelecommunications Boost Economic Prosperity? Per Capita GDP and Teledensity,Year 2000 US$ 4,000 45 3,500 ~ 40 ni 3,000 - | _ Per Capita GDP Teledensity 35 o 30 2,500 25 ~ 2,000 20 c 1,500 1,000 500~~~~~~~~~~~~~~~~~~~1 0~~~ Source: International Telecommunication Union, Geneva. -114- Appendix 2. Power Key Performance Indicators, Bangladesh Power Sector, Public-sector Organizations Item Units 1991 1992 1993 1994 1995 1996 1997 1998 Power Development Board (PDB) Peakdemand MW 1,640 1,672 1,823 1,875 1,970 2,087 2,114 2,136 Electricity production GWh 7,826 8,394 8,700 9,221 10,166 10,833 11,243 12,194 Purchases from IPPs GWh Sales to direct customers GWh 4,295 3.160 2,915 3.022 3,220 3,363 3,361 3,482 Sales to DESA GWh 2,263 3,356 3,696 4,162 4,551 4,962 5,417 Sales to REB GWh 575 598 635 729 988 1,082 1,1 24 1,273 Losses GWh 2,946 2,372 1,793 1,774 1,795 1,837 1,796 2,018 Losses as % of production % 37.6% 28.3% 20.6% 19.2% 17.7% 17.0% 16.0% 16.5% Number of employees 23,515.00 23,988.00 24,379.00 24,462.00 24,455.00 Number of customers 1,223,954 903,001 952,609 1,025,849 1,075,734 1,156,672 1,210,132 1,293,663 Average tariff BDT/kwh 2.32 2 1.9 1.89 1.87 1.87 1.96 2.07 Collection of accounts % Net income or loss crore taka -59 -425. Total sales 4,870 6,021 6,906 7,447 8,370 8,996 9,447 10.172 Sales by customer kwh 3978.9 6667.8 7249.6 7259.4 7780.7 7777.5 7806.6 7862.9 Sales by employee gwh/employee 0.3 0.3 0.4 0.4 0D4 Dhaka Electricity Supply Authority and Dhaka Electricity Supply Company Ltd. (DESA and DESCO) Peakdemand MW 525 550 630 750 825 976 1,017 1.1 IS Electricity purchases GWh 2,260 3,356 3.696 4,162 4.551 4,936 5,419 Sales GWh 1,456 2,309 2,538 2,914 3,210 3,589 3,908 Losses GWh 803 1,047 1,158 1,249 1,341 1,347 1,511 % 35.5% 31.2% 31.3% 30.0% 29.5% 27.3% 27.9% Number of employees thousands 4,560 Number of customers thousands 426,878 454,811 504,236 549,557 587,033 633,91 1 Average tariff taka/kWh 2.38 2.35 2.24 2.21 2.41 2.41 Collection of accounts % 83.5 78.4 88.0 83.6 81 79.4 Net income or loss US$ Sales by customer kWh 5409 5580 5779 5841 6114 6165 Rural Electricity Board (REB) Peak demand MW 520 422 Electricity purchases GWh 575 685 774 907 1,199 1,381 1,449 1,724 Sales GWh 480 576 652 765 1,016 1, 1 72 1220 1,434 Source: World Bank staff. -115- i i I i References ADB (Asian Development Bank) 2002. Aide Memoire of . 2000. Privatization Strategy Report on Biman Fact Finding Mission for Proposed Dhaka Clean Bangladesh Airlines. Fuel Project. . 2000. 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