Major purpose of this report is to analysis Prospects in Power Sector in Banking Perspective, here focus on the organizational structure, products and services and strategy of Standard Chartered Bank. Other discussion are analyze the power sector in Bangladesh in terms of different stakeholders and demand supply scenario and assess future prospects in power sector in terms of financing needs. Also briefly discuss on prospects of different products and associated risk and return from the perspective of the banking industry.
- To describe the organizational structure, products and services and strategy of Standard Chartered Bank.
- To analyze the power sector in Bangladesh in terms of different stakeholders and demand – supply scenario.
- To assess future prospects in power sector in terms of financing needs.
- To assess prospects of different products and associated risk and return from the perspective of the banking industry.
The organization part of the report was mostly descriptive whereas the project part was exploratory. Both primary and secondary sources had been used to gather mostly qualitative information about the industry.
Both internal and external people were interviewed to get a comprehensive picture of the industry. Financial Controllers and managers of IPPs, particularly of Summit Power Limited, Khulna Power Company Limited and Meghnaghat Power Company were interviewed. Financial Controller of Power Grid Company Limited has been also interviewed to learn about the government concerns in the sector.
For the organization part, much information has been collected from different published articles, journals, brochures, web sites and previous internship report. Previous reports and journals relevant to the banking industry, other published reports, newspapers, relevant SCB paper and published documents were the source of secondary and tertiary information.
STANDARD CHARTERED BANK
The Standard Chartered Bank PLC is an international banking group that is incorporated in the UK, with its headquarters in London. The group focuses its activities in Asia, Africa and the Middle East and its operation is segmented under six regions: LTK & Europe, Middle East and South Asia (MESA), South East Asia, and the Americas.
Globally, the key resources of SCB include:
- A network of over 600 offices in 48 countries
- A staff of about 25,000 people managing assets of around 47 billion pounds
- Standard Chartered Bank’s international businesses in Personal Banking, Corporate Banking and Standard Chartered Markets are its special strengths
The global strategies of Standard Chartered Bank are:
- To build and grow strong businesses in East and South East Asia – the Asia Pacific Region
- To enhance historical position in the MESA region
- To concentrate operations in the OECD in those activities that support Standard Chartered Bank’s remarkable franchise in newly industrialized and emerging markets
Standard Chartered Bank has a history of about 150 years. The name “Standard stems from the two original banks from which it was founded – the “Chartered Bank” of India, Australia and China and the “Standard Bank” of British South Africa. A Royal Charter granted by Queen Victoria of England established the “Chartered Bank” in 1853. Another Scot, John Paterson in 1862, founded the “Standard Bank”.
The two banks expanded and prospered with time and decided to merge in 1969. On January 30, 1970 the new shares of the Standard and Chartered Banking Group Limited were listed in the London Stock Exchange. Queen Elizabeth II opened headquarters of the Standard Chartered Bank PLC on March 20, 1986. Becoming stronger after the merger, Standard Chartered Bank embarked upon serious expansion in Europe and the United States, The Standard Chartered Merchant Bank was built up from a number of acquisitions made during the 1990s. In the last thirty years, Standard Chartered Bank has experienced continuous growth, which led to its becoming one of the top 100 listed banks in the world. It was also judged the best bank in the Asia-Pacific region in 1993 and 1994 for its rate and excellent service.
In August 2000 Standard Chartered Bank as its strategy to grow acquired the ‘Grindlays’ part from ANZ. Buying Grindlays from ANZ now propels it from number five to number one among international banks in India, with some choice extra footholds in the Middle East.
At 1.3bn U.S dollars, it is hard to complaint hat Standard Chartered has overpaid. The financial ease is less compelling for ANZ shareholders, as there are advantages to getting out of a strategically peripheral business. This acquisition of Grindlays Bank has added 6000 employees and 4 countries to Standard Chartered’s existing network of 27,000 employees and 570 offices in 50 countries.
The end result is that Standard Chartered, which went into the 1997 Asian Crisis with strong business in Hong Kong, Singapore and Malaysia, emerges with additional core markets in India and Thailand.
The deal has made Standard Chartered the largest foreign bank by assets in India, Pakistan and Bangladesh and the second largest in Sri Lanka and the United Arab Emirates. The bank had been seeking to expand in the region since the end of the Asian economic crisis, and has finally become successful in its expansion. The primary goal of the integration is to combine the best of both companies.
AFTER THE ACQUISITION
This acquisition has made Standard Chartered/Standard Chartered Grindlays bank the largest foreign bank in this country.
An integration team from Standard Chartered Bank in London is to come time to time in Dhaka to settle the process of the acquisition of the ANZ Grindlays Bank. The team comprising of officials from both Standard Chartered and Grindlays are working on staff and branch rationalization. But the whole process will take about one and a half years and meanwhile both the banks will continue to work as legal entities. Though there may not be many changes at the lower and mid-levels of the banks, there may be some changes and redundancies in the higher level. But those who will have to leave will get a handsome compensation package.
The integration was comprehensive and is being managed as a distinct process. Meanwhile, the business is kept going to provide uninterrupted customer service and to deliver the desired results.
Standard Chartered Bank after acquiring Grindlays expects to relocate its own and acquired branches upon regulatory consent. There are places where both SCB and SCGB have branches and there are other places with perceived demand for branches, but the Bangladesh Bank does not want to give permission for opening any new ones. SCB, known for its technological edge is the forerunner in automated teller machines, telebanking, treasury and lately corporate banking solutions. Grindlays is the market leader in credit cards, corporate advisory services and personal banking.
ACTIVITIES OF STANDARD CHARTERED BANK
- Corporate Banking Group
Standard Chartered Bank offers it local customer’s wide variety of financial services. All the accounts of corporate clients, which mainly comprise the top local and multinational companies operating in Bangladesh, are assigned to Relationship managers who maintain regular and close contact to cater top their needs.
The objective of this department is to maintain a thorough knowledge of the clients’ business and to develop positive relations with them. This is maintained through interactions to offer timely advice in a n increasingly competitive business environment. The expertise of the Institutional Banking and Treasury groups is also available whenever required. The unique Offshore Banking Unit (OBU) in Savar provides a full range of facilities to overseas investors. The Corporate Banking Group in Bangladesh has displayed a spirit of community involvement by working with NGOs to underwrite soft loans. Standard Chartered offers its corporate customers a wide variety of lending needs that are catered with skilled and responsive attention. They provide project finance and investment consultancy, syndicated loans, bonds and guarantees and local and international treasury products.
- Trade finance
The trade finance of standard Chartered bank takes care of the commercial activity related issues, particularly those related to import and export finance services. Some of the services are:
- Trade finance facilities including counseling, confirming export L/C and issuing of import L/Cs, backed by its international branch and correspondent loan network.
- Bond and Guarantees
- Project finance opportunities for import substitution and export oriented projects
The foreign exchange and money market operation of the Standard Chartered Bank in the world is extensive. Exotic currencies happen to be one of its special areas of strength. A 24-hr service is provided to customers in Bangladesh through the Bank’s network of dealing centers placed in the principal areas of the world. The Bank’s treasury specializes in offering solutions to those who wish to manage interest rate and currency exposure s that result from trade, investment and financing activities of other dynamic economies of the region.
- Institutional Banking Group
The IBG of Standard Chartered Bank offers a wide variety of products and services to banks and financial institutions. It has global links with leading bank institutions and agency arrangements through its network of offices in 40 countries. The Bank offers a full range of clearing, payment collection and import-export handling services. The bank offers foreign missions, voluntary organizations, consultants, airlines, shipping lines and their personnel, the following services: Current accounts in both Taka and other major foreign currencies and Convertible Taka accounts.
- Consumer Banking
Superior retail banking services comprising of a wide range of deposit and loan products are offered by Standard Chartered Bank to its individual customers. The consumer banking division constantly faces challenges and meets them by developing new products and services to fulfill the specific requirements of local TU. The Bank offers a 24-hour service in Bangladesh through its Money-link ATM Network and Phone-link Phone banking Services.
- Custodial services: The Equitor
Headquartered in Singapore, Standard Chartered equitor fulfils the groups’ strategic commitment to the provision of custodial service in Asia. The equitor’s customers are primarily foreign global custodians and broker/dealers requiring cross-border information as well as sub-custodian services. Standard Chartered Bank, Bangladesh is responsible for the planning in Bangladesh, but the overall management of the custody business is based in Equitor’s international business strategy.
Operations are the part of the support division that helps to run the businesses of the bank in a smooth and controlled manner. Since it helps mainly in processing the works of the business units, any mistakes made can be easily detected and on time. Following are the main functions of the operations department:
Central operations deals with the closing and opening of accounts and other payment and account related processing of the Personal Banking division. Treasury operations help to deal with the processing works of the treasury division. Loan Administration Unit (LAU) deals with the processing of the Corporate Banking division. Operations also have a department that deals with internal projects that arises from the need to deal with certain problems or to make certain changes. Following are some examples of projects being dealt with presently:
Finance, Administration and Risk Management
The support department performs the following activities:
- Administration, audit and back office operation
- Taking care of taxation and financial control of the Bank
- Keeping track of overall credit operation
Information Technology Center
This department is instrumental in the running of all the computerized operations of the bank. They help in the implementation and generation of computerized reports. Another duty of the department is to maintain communication with the rest of the world.
Human Resource Department
This department manages recruitment, training and career progression plan. Standard Chartered Bank highlights the importance of developing its people to create a culture of customer service, innovation, teamwork and professional excellence.
Legal and compliance
In the UK, Standard Chartered Bank is regulated by the Bank of England, while in Bangladesh local banking laws regulate it and rules set by the Ministry of Finance and Bangladesh Bank. The local restriction involves a licence from Bangladesh Bank to operate banking business in Bangladesh. Standard Chartered Bank complies by the rules and regulations seriously. It also encourages its staff to conform to an internal culture of ethical behavior and sensitivities to the culture and religion of the country. There is a mandatory training on Company Code of Conduct for all staff members.
Some of the key areas that the Legal & Compliance department has to take care of are: any kind of legal issues, to advise the CEO regarding all matters and the management on legal and regulatory issues, correspond regulatory compliance issues to MESA Regional Head of Compliance, and supervise internal control (e.g. internal audit).
This department deals with advertising, public relations, promotions, partial marketing which involves disseminating new products and services to customers and above all ensuring service quality.
The credit department approves the loans of Corporate Banking division. The approval is mainly based on the risk analysis of the corporate clients done by the Corporate Banking division.
Broadly there are two types of services provided by the SCB
- Business or Corporate Financial Services
- Retail or Consumer Financial Services
But these two services can be classified further by the following ways:
|Banking Services of Standard Chartered Bank|
|Correspondent Banking||Inter Bank Transaction|
|Phone Banking||Operation of Accounts over Phone|
SWOT ANALYSIS OF STANDARD CHARTERED BANK
The SWOT analysis comprises of the organization’s internal strength and weakness and external opportunities and threats. SWOT analysis gives an organization an insight of what they can do in future and how they can compete with their existing competitors.
- For more than 55 years in Bangladesh, SCB is known to bear the Banking Experience that provides it the strength of being the market leader in the foreign banking sector. Unlike any other multinational bank in Bangladesh, the long-term success of SCB is attributed to this strength of SCB whereas the long-term success of a bank heavily depends on its reputation while dealing with very sensitive commodity like money.
- The first bank in Bangladesh to issue Money link (ATM) card is SCB. By grabbing the opportunity that exists in the market SCB, as the market leader, showed the most substantial corporate strength among the foreign banks.
- SCB has a bulk of qualified, experienced and dedicated human resources.
- SCB is the only one among the foreign banks that has been able to utilize its extensive marketing efforts in order to capture a wide customer base at a very short time.
- SCB’s dedication is supreme in providing the best phone banking services in town. It is also keen to provide unmatched and instant 24 hour banking service and has recently opened the Call Centre at Lotus Kamal Tower in Nikunjo, Dhaka.
- In order to exude innovativeness and creativeness, SCB tries its best to come up with customers’ banking problems and solve them. Another recent step taken by them is starting the Evening Banking service, which will be open from 6 pm to 8 pm in the evening. The customer, who has to keep his transactions stopped for 18 hours until the next banking hour arrives, will be benefited, as this will reduce the lag and hassle associated with it.
- Banks, who is offering better prospects, now enjoys customers switching to them as SCB offers low deposit rates and has set the minimum balances too high. Furthermore, long waiting cues, moderate customer service, non-functioning ATM machines and outrageously high charges lead to SCB being noted for these weaknesses as well. As a result, a large amount of customers have ceased transactions with the bank. Many customers’ accounts have become overdrawn due to fees that have been charged by the bank’s computer system for as long as three years because they have either simply not cared to close their accounts, or thought that they have been closed automatically.
- The banking industry is now experiencing the contractual employment fever that has started up and SCB has also fallen prey to it. Self-interest of the employees are actually hindering their performance because SCB is employing individuals from other agencies and giving them tough targets to reach and thereby not giving them the full benefits of a permanent employee. For example, many accounts are opened by Direct Sales Executives by luring customers with loans, which they ultimately do not receive, and also opening accounts for customers who can hardly maintain the account and do not even pay the minimum opening amount. Even though SCB is getting benefited in the short run, the implications are long run losses.
- During the last 10 years the banking industry has become considerably monopolistic and hence SCB is starting to lose its market share to its rivals due to low barriers to entry, and the local banks’ increasing aggressiveness
- SCB is also facing problem in its system of collection and disbursement of cash. Many customers do not bear the proper knowledge as to the process of depositing and withdrawing money. The bank does not take many steps to assist them either. The system of withdrawal and deposit may be new and different from the system the customers have come across at local bank. Many of these customers or people they send to the bank on their behalf, are not educated and hence they face difficulty in the system of deposit or withdrawal. For instance, since the system of deposit is not that vivid, customer often drop the counterfoil of the deposit slip with the main copy into the slip box. Consequently, in many such cases it happened that a smart clerk picked up both the papers and took the money. Then there were no documents left for the bank or the customer to prove that he/she deposited the money.
- Because the way SCB makes charges to accounts cannot be properly explained, many customers believe and complain about the unethical banking of SCB.
- While dealing with its customers- especially in Consumer Banking, SCB emphasizes more on short-term profits than focusing on the maintenance of a long-term healthy relationship with them. This suffering of SCB from myopia- i.e. shortsightedness leads it to pursue strategies in such a myopic manner, and so in the long run, it may undergo severe losses. Another weakness of the bank that can be sighted as well is Poor coordination and communication between the head office and branches. As the head office undertakes many projects, the activities are hampered due to some activities of the branches. Even after the head office’s carefully thought out action plan for a project, they still face problems in executing because the branches are not well aware of such a project and therefore, their actions do not comply with what is required for the ultimate success of the project.
- Standard Chartered Bank was approved of the permission to start Islami Banking from The Government of Bangladesh. The bank now has a whole new prospect opening up and also the opportunity to introduce a wide array of Islami Banking products. It also has the prospect of expanding its customer base. The country’s growing population is gradually and increasingly learning to adapt to and use the banking service. As the bulk of our population is middle class, and Muslim, different types of Islami Banking products will have a very large and easily pregnable market.
- SCB has rigorous credit screening policy and it is over conservative. By freeing their credit screening policy a little, they may be able to pursue many opportunist business ventures. SCB also has a good consumer base that maintains several accounts at once. SCB has the opportunity to keep these customers by reducing its current fees and charges and positioning attractively in middle class segment.
- More Branches around Dhaka specially and all over Bangladesh will enable SCB to capture more market share, and hold a stronger competition against local banks.
- By offering more attractive interest rates, and lowering the minimum balances eligible for interest, the bank can attract a lot of the old customers who have strewn away to other banks as well as new customers.
- Increased competition by other foreign banks is a threat to SCB. At present HSBC and CITI Corp are posing significant threats to SCB regarding retail and business banking respectively. Furthermore, the new comers in private sector such as Prime Bank, Dutch Bangla Bank, EXIM Bank, BRAC Bank, Southeast Bank, Mercantile Bank, Social Investment Bank, Islami Bank and Bank Asia are also coming up with very competitive products. With customers shifting to these banks, SCB’s profits, as well as market share is falling, and it faces the threat of being wiped out by competition.
- In today’s economy, substantial amount of savings is remaining idle. Currently foreign direct investment in the country is very low. These economic situations of the country indicate political threats.
OVERVIEW OF THE POWER SECTOR IN BANGLADESH
The power sector of Bangladesh has come a long way since 1947 when there was only 21MW of generation capacity no transmission system. Over the last decade it became the most talked about sector in Bangladesh. World Bank had stopped lending to this sector at the beginning of the 90s, which led to the acute electricity shortage of the late 90s. The government undertook many reforms in power, from opening up the power sector to private investors in 1996 to corporatizating the state-owned entities to rationalizing the power tariff structure. The critical debate of gas export also hinges greatly on the energy needs of the power sector.
Total population of the country is around 140 Mio and only 38% of this population has access to electricity. Total installed capacity of the country is 4,710 MW with production capacity of 4,120 MW. In 2004, country’s peak demand was estimated as 3,952 MW. Per capita consumption is 93 KWH/year against per capita generation of 158 KWH/year.
Following table represents the present status of different stages of the industry:
Power Sector at a Glance (Up to June 2005)
|Maximum Available Generation Capacity|
|(a) BPDB||3,735 MW|
|(b) IPP & Mixed Sector||1,290 MW|
|Total Available Generation||5,025 MW|
|Total Committed Generation||3,075 MW|
|Peak Demand in MW (2005)||4500 MW|
|Transmission Line||4,038 MW|
|Capacity of Grid Sub-station||4,150 MVA|
|Distribution Line (33 KV, 1 KV & 0.4 KV)||2,42,832 KM|
|Total no. of Consumers||8.84 Million|
|Total no. of Village Electrified||47,848|
|Per Capita Generation||158 KWH|
|System Loss (T & D)||23.8%|
Source: Power division, MPEMR
DEMAND & SUPPLY SCENARIO
|Year||Forecasted Net Peak Load||% increase|
|Source: Nexant Report on Power Sector Master Plan Update|
Rapid industrialization & congested urbanization are causing increased demand for power. Demand for electricity is directly correlated to GDP growth and is expected to grow 1.5 times of the growth of GDP (as a thumb rule). In last decade, GDP grew around @ 5% p.a. The 2005 Gas sector Development Master Plan forecasted electricity demand up to 2025. Based on the forecast the net peak load, year-by-year, is shown in Table
Based upon the Reference Forecast, the anticipated peak demand would be about 5,368 MW in FY2007 and 9,907 MW in FY2015. Year-wise demand forecast is given below:
Regional: Demand for Power is concentrated in Dhaka region (47%). Hence, plants located around Dhaka would reduce transmission costs and system losses. Dhaka is also relatively easy to access from the eastern part of the Bangladesh, where most of the gas fields are placed. The present generation system consists of multiple plants around Dhaka which is about 61% of the total national generation capacity. Khulna and Chittagong is the next peak demand area.
Seasonal: Demand for power shows a seasonality pattern. The demand is peak during the dry season (February to June) when the agriculture sector demands rise for irrigation purpose. Besides, water pumps for household and industrial uses consume more electricity as the demand for water rises in this season.
Sector wise: Industrial sector is the largest consumer (44%) of country’s electricity generation followed by domestic consumption (43%) which is mainly concentrated in Dhaka area. Demand in irrigation sector goes up during the dry season (Feb-June).
Table: Energy Generation in FY 2005-2006
|Unit||Q1 06||Q2 06||Total (June-December 2005)|
|Gross Generation, BPDB||GWH||4045.96||3528.12||7574.08|
|Net Generation, BPDB||GWH||3817.79||3291.39||7109.18|
|Net Generation, IPP||GWH||2139.335||2006.94||4146.28|
|Total Net Generation||GWH||5957.13||5298.33||11255.45|
BPDB’s sales to different utility companies are shown in the table below:
|Sales in FY 2006 (GWh)|
|Q1 06||Q2 06||TOTAL (half-year)||%|
Although according to BPDB sources, maximum generation capacity of electricity of the country is 5,025 MW, however the average generation ranges between 3300 to 4000 MW, leaving a shortfall of 500 to 1200MW. The Table below shows the generation capacity by region:
|Existing Plants (No.)||23||11||4||4||16||58|
|% of National Total||61%||8%||15%||6%||10%||100%|
The Government has developed short-term (up to 2007), medium-term (up to 2012) and long-term (up to 2020) development plans. The plans have been developed based on techno-economic analysis and least-cost option. These plans include balanced development in generation, transmission and distribution system to achieve desired level of reliability of supply. A summary of the development plan is given below:
|POWER SYSTEM DEVELOPMENT PLAN UPTO 2020|
|1.||Installed Capacity, MW||6.441||9,666||17,765|
|2.||Peak Demand, MW||5,368||7,887||14,600|
|3.||Net Generation, MKWh||26,651||39,157||76,545|
|4.||Transmission Line, Km||4,898||7,180||8,396|
|5.||Capacity of Grid S/S, MVA|
|(a) 230/132 KV||5,950||11,575||19,075|
|(b) 132/33 KV||9,642||17,920||27,367|
|6.||Distribution Line, Km||2,66,375||3,45,530||4,77,558|
|7.||No. of Consumers, million||9.03||12.75||20.76|
|8.||No. of Village Electrified||52,071||69,571||84,000|
|9.||per Capita Generation, kWh||190||260||450|
|10.||Access to Electricity||47%||65%||100%|
|11.||Investment Requirement, (billion Tk)||115||307||575|
Source: Power Division, MEMR
Coal-based power plant investments: The development of coal-based power is still at an early stage in the country. There are seven proven sites of coal reserves of which the Barapukuria and Phulbaria coal mines are being developed. The Barapukuria coal mine development has been awarded to a Chinese company CMC. The company has developed two coal-based power units, each having a capacity of 125 MW, under a supplier’s credit of more than $250 million and are expected to consume an annual 750,000 tonnes of coal. The first 125MW unit is currently undergoing trial production. The second unit has been contributing 125MW power to the national grid since February 2006.
Apart from that, the other coal mine of the country in Phulbari has been awarded for development to London-based Asia Energy Company (AEC). The expected total coal production is about 216 million tones, and the mine is expected to supply 3 million tones of coal annually for a period of 60 years. AEC is expected to start production starting from 2007. AEC has also proposed to establish a 500 MW (250 +250MW) coal-based power plant costing about US$450 to US$500 million, consuming about 1.5 million tonnes of coal annually.
MEMR: The power sector of Bangladesh is regulated by Ministry of Energy & Mineral Resources (MEMR) of Government of Bangladesh (GOB). MEMR deals with all sorts of energy including electricity, oil, gas, coal and imported fuel. The Power Division of MEMR looks after various issues relating to the power sector. The Office of the Electric Advisor and Chief Electric Inspector, Power Division, MEMR issues license for bulk supply to the IPPs.
Planning Commission: Planning Commission of GOB of Bangladesh is responsible of long term planning macro level planning of the power sector of Bangladesh.
Power sector can be divided into three stages: Generation, Transmission and Distribution of power. As a thumb rule for the Power Sector Investment, for every dollar invested in the power sector, 40-45 cents should go for generation, 15 cents to transmission and 45-40 cents to distribution.
Stage-1: Power Generation:
Generation Planning is the most important part of the power system and the reliability of the whole power system depends largely on the reliability of power generating system. The generation in the system should be such that it can meet the demand at all times under the outage of normal maintenance and forced outage.
Bangladesh Power Development Board:
Bangladesh Power Development Board (BPDB) is the nucleus of the power sector of Bangladesh. BPDB has the authority for planning construction and operation of power generation and transmission facilities throughout Bangladesh. It controls 74% generation capacity (3,420 MW) of the country and also responsible for Transmission (this is gradually being shifted to PGCB). BPDB is responsible for Distribution of power in metropolises other than Dhaka and greater Dhaka and in rural areas where there is no network of REB. BPDB is also actively involved in the PSMP.
The power plants under BPDB are: Karnaphuli Hydro Electric, Siddhirganj, Ashuganj, Haripur, Ghorashal, Raozan, Baghbari, Shahjibazar, etc. Out of these, Ghorashal has the highest installed capacity.
The purpose of power transmission system is to determine the type and timing of new transmission facilities that will be required to transmit power from the new generating plants to the main load centres at least cost with an acceptable level of reliability. Apart from BPDB, Dhaka Electric Supply Authority (DESA) and Power Grid Company of Bangladesh Limited (PGCB) are involved in power transmission throughout the country.
Power Grid Company of Bangladesh Limited (PGCB):
As part of reform in power sector, a company (100% state owned) called Power Grid Company of Bangladesh Ltd was formed in 1996, as a public limited company to own and operate the country’s transmission system and also ensure further development to the system. At present 63% of transmission assets of BPDB has been transferred to PGCB. In course of time, all transmission assets of BPDB will be transferred to Power Grid Company Limited.
The objective of distribution planning is to cater the growing demand for electricity in terms of increasing growth rate and high load density can be satisfied in an optimum way.
Distribution of the generated power catering the demand of power across Bangladesh is a huge task. Bangladesh Power Development Board (BPDB) is responsible for distribution of electricity in most of the areas in Bangladesh except Dhaka Metropolitan City and its adjoining areas and some of the rural areas. Responsibility of distribution in and around Dhaka Metropolitan area lies with Dhaka Electric Supply Authority (DESA) and Dhaka Electric Supply Company (DESCO) and the remaining countryside to Rural Electrification Board (REB). Presently BPDB’s distribution network is comprising of 33 kV, 11 kV and 11/.4 kV lines.
Despite the rapid increase in the expansion of the rural energy network, enabling some 350,000-400,000 additional households to be connected each year, an estimated 10 million rural households in Bangladesh lack access to electricity. The absence of reliable power remains a significant barrier to economic development and lasting poverty reduction in Bangladesh. Throughout its 23 years history, REB has performed exceedingly well and has risen to the challenges that have faced the establishment and continued development of this program.
Rural Electrification Board (REB):
REB is a statutory Government organization, created in late 1970’s through an ordinance by GOB, primarily responsible for implementing countrywide rural electrification. REB is charged with the responsibility to provide financial support, technical oversight and long-term direction to the rural electrification program in Bangladesh. REB carries out its operation through a large number of co-operatives called Palli Bidyut Samities (PBS). It is also involved in generating power in a smaller scale. REB selected 3 (three) sites, namely Dhaka PBS-1, Narsingdi PBS-1 and Comilla PBS-1 for implementing its 1st phase of Small Scale Power Generation as Pilot Project. Guaranteed Net Plant Capacity of each of the power station is 11 MW. Power generation at Dhaka PBS-1 has already been commission on February 2001.
REB has sponsored the foundation of 67 PBSs connecting nearly 3 (three) million electric services, representing slightly over 30% of the rural population of Bangladesh. The power supply crisis it now faces represents a serious challenge to the rural electric program, and correspondingly REB is taking steps to prepare itself to provide technical leadership to overcome the obstacles, this crisis has placed before the program. The Rural Electrification Board and the 67 village co-operatives together constitute a successful experiment in providing rural services based on public participation and autonomous management.
PBS: A PBS is owned by the Member-Consumers and the affairs and business is managed by a Board of Directors elected by the Member-Consumers on the basis of one Member one vote. REB and a PBS sign an annual performance target each year to ensure achievement of goals that is to ensure proper power distribution in a given rural area. The PBSs buy power from BPDB or DESA (DESA in turn buys power from BPDB) and supply to consumers located in rural areas.
Palli Bidyut Samitys are co-operative associations comprised of the subscribers of the samity and monitored by REB. Dhaka Palli Bidyut Samity (DPBS) is the largest PBS. Dhaka PBS started it’s commercial operation on 2nd June 1980 and covers 683 villages and energize 2,823 k.m. of lines. DPBS’s collection rate is 97% and system loss is approx. 9%. Major financial highlights of DPBS during July 1999- June 2000 are as follows:
Pricing of Power:
The pricing of power largely varies among the IPP’s, REB and BPDB. The Barge mounted power plants sell power to BPDB @ USD 0.45 cents per Kw. On the other hand other IPP’s sell power @ US$ 0.27-0.28 cents per Kw to BPDB. BPDB sells this power directly to consumers as well as through REB @ varying rates. REB purchases power through PBSs from BPDB and DESA @ BDT 2.05 per Kw and BDT 2.12 per Kw respectively. REB sells this power through PBSs to consumer segments like agriculture, industry and household @ varying rates between BDT 2.50-2.78 per Kw.
PROBLEMS FACED IN THE POWER SECTOR
The Bangladesh power sector faces several key problems:
- Load shedding and voltage variation: The state-owned Bangladesh Power Development Board (BPDB), which controls nearly three-fourths of the total generation capacity in Bangladesh, has resorted to load shedding as a means to reconcile demand to the available capacity. Load shedding is a significant constraint on growth of the economy, which, according to a CPD study, caused a loss of Tk 6,850 crore in 2004 or roughly 2% of GDP. According to various sources load shedding is likely to hover around 1000 to 1500 MW in summer of 2006. This has been largely due to inconsistent gas supply and poor maintenance and obsoletion of generators. Some generators are older than 20 years and require overhauling. In March 2006, Power Division has sought an emergency fund of Tk 1.35 billion for the repair and overhauling 13 power plants which could improve the situation by adding between 400MW and 500MW of power to the national grid, in addition to Tk 1.10 billion earmarked in the national budget in the fiscal 2005-2006 for repair and maintenance purpose. In recent times, some oil-based in the north and southwestern region power plants also suffered due to shortage of oil supply The PDB needs a daily oil supply of Tk 1.5 crore to Tk 2 crore to run its oil-fired power plants in these regions. Oil supply disruption may threaten production of various power plants in these regions having a combined capacity of 353 MW.
- Operating Inefficiency: The power sector does not fare well in terms of operating efficiency. For example, Bangladesh requires considerably more employees per customer served than is the case in many countries. Operating inefficiency also occurs due to high mismatch between and cost and pricing. In many cases, the government is alleged to be opting for high cost suppliers or technology. For example, the recent selection of bids for three skid-mounted power plants with a combined capacity of 140 MW will incur huge losses for BPDB as it will have to procure power at a price ranging from Tk 3.10 to Tk 12 per unit. Besides, procedural delay often causes projects costs to be revised upwards by large amounts. At the consumers end, the government has to subsidize the power projects by offering them at much lower price.
- System loss: System loss occurs both for technical reasons and for reasons of inefficiency and corruption in administration. Exact figures of loss are unknown but, at approximately 20 per cent, the net country-wide system loss is probably among the highest in the developing world.
- Unadjusted tariff structures and ineffective billing procedures: The policymakers have been unable to establish tariff structures and billing procedures that enable the power sector to be financially self-supporting. The resulting losses require subsidies from government or donor agencies that divert revenue away from other important programmes, such as education and public health. This problem has afflicted the power sector entities to varying degrees.
- Bottlenecks for SPPs: Although there is a policy allowing for small-scale private power generation in the country, the independent investors have been facing may hurdles in obtaining license from Bangladesh Energy Regulatory Commision (BERC). Interested private investors are required to apply to BERC in the prescribed forms and provide some vital information and documents about their projects. These include the feasibility study report of the project, land ownership or procurement documents, fuel supplier’s letter, letter of intent of the buyer, plant factor and plant capacity document, managerial experience and background certificate and the environmental clearance certificate. BERC will then study and scrutinise the documents before issuing the license to an investor. But BERC is alleged of not having expertise to carry out such a major and important job. BERC has no permanent staff to run its regular functions. Although BERC in February 2006 submitted an organogram containing a list of 142 staff to the Energy Ministry seeking an approval to recruit the manpower, but the ministry is yet to approve the organogram that has virtually kept the BERC non-functional to work as a watchdog body. Industry insiders remain to be sceptical about the implementation of such small power plants within the given time. Besides, the existing government approval procedure for a public purchase worth above Tk 25 crore appears as big barrier to implementing the small power projects. Under the existing rule, if any government utility like PDB, DESA or REB, wants to buy electricity from private power producer, it has to invite tender to select a bidder which is a time-consuming process. After the evaluation of technical and financial offer of a bidder, the utility needs approval of their regulating ministry and also some other ministries and departments like Finance Ministry, Planning Ministry, Land Ministry before entering into a deal to purchase anything worth above Tk 25 crore. Finally, the deal has to be approved by the Cabinet Purchase Committee and the Prime Minister’s Office. Normally, such purchase deal needs more than one and half years’ time to get the government’s final nod. Enforcing such rules for IPPs and Small Power Producers (SPPs) makes them impossible to implement any project within the stipulated time.
MAJOR REFORMS AND POLICIES
- Bangladesh Power Development Board (BPDB) be converted into a holding company under companies Act
- The existing generating stations of BPDB be converted into a number of corporatized entity under BPDB holding company
Direct Foreign Investment will be encouraged
- New power plants be setup under Own financing, Commercial Bank loan and fund collection from Stock Exchange alongside IPPs.
- PGCB will remain responsible for transmission business in the whole of Bangladesh.
- Bangladesh Power Development Board (BPDB) distribution segment be converted into a number of subsidiary companies under BPDB Holding Company
- Segregation of power generation, transmission and distribution functions into separate services. Corporatization and commercialization of emerging power sector entities.
Encouraging more private participation
- Government also realized the huge investment requirement in power generation, transmission and distribution. This investment definitely required the support of the development partners and also active participation of the private sector. The government (BPDB) has already installed capacity of 1290 MW from IPPs and has gotten into contracts for a further 660 MW which are expected to be commissioned by 2007.
- Most of the reforms of the power sector is donor driven. An internal audit published in June 2003 said that BPDB incurred a loss of BDT 400 billion. This report has stirred some media attention towards the prescription of the donors for rescuing the power sector. There is a growing voice that believe that the tariff “rationalization” prescribed by the donors are ill planned and detrimental to BPDB.
- In the cabinet meeting held on 4 December 2005, it was decided that new policy would be to establish 20 SPP through independent tender.
- The government is likely to allow foreign investors to set up small power plants to overcome the current electricity generation problem in the country and reduce the burden on public sector investment. However, the foreign firms would have to participate as associates of any local firm under joint venture where the local firm is the dominating partner with at least 51 percent share of the JV.
ENHANCING THE FINANCIAL HEALTH OF SECTOR ENTITIES
According to an ADB report, the Government and power sector entities in Bangladesh have taken evident steps to enhance the financial health of the sector entities. The two major companies of the power sector, PGCB and DESCO, in particular have undertaken a number of reform measures to improve their financial position, such as (i) a change in billing procedures for wheeling charge from asset-based billing to energy-based billing, (ii) load balancing among different transformers, (iii) the expansion of computerized billing systems, and (iv) upgrading their power supply systems. PGCB and DESCO have now become financially sustainable companies and have yielded a net profit before tax of Tk117 million and Tk338 million respectively in FY2004. The overall system losses of the power sector entities were substantially reduced from 34.9% in FY1998 to 26.4% in FY2005. In the same period, average revenue collections against billings were also much improved from 85.6% to 95.8%. By taking different measures the outstanding bills owed by the Government’s autonomous and semi-autonomous bodies as of 30 December 2005 were reduced from about Tk6.8 billion in June 2002 to about Tk2.33 billion. However the outstanding bills of DESA remain alarmingly high at Tk 35 billion.
PGCB received a positive response from commercial banks regarding the possibility of raising funds through the issuance of bonds. On 30 March 2004, the Government gave its approval for PGCB to issue, in one or more tranches, 7–10 year tax-free bonds worth up to Tk2 billion. PGCB decided to issue the bonds in four tranches of Tk500 million each.
Apart from that, DESCO and PGCB have decided to offload 25% share in the market by May 15, 2006. DESCO will offload a total of 3.2 million shares while PGCB will offload 9.1 million shares. The shares will be listed directly with both Dhaka Stock Exchange and Chittagong Stock Exchange simultaneously. Ten percent will be offloaded in the first month to avoid possible devaluation of the shares.
The Bangladesh government has taken a policy of ‘electricity for all by 2020’ which would significantly improve literacy rate, healthcare and women empowerment. To achieve this goal it would require huge amount of investment in the power sector. Thus this might bring in huge amount of foreign investments in the form of joint ventures as well as bring dominance of local players.
PROSPECTS OF CORPORATE BANKING PRODUCTS
Corporate Banking provides cash management, custody and trade finance services through their strong market networks in Asia, Africa, the Middle East and Latin America. They provide a bridge to these markets for clients from the U.S and Europe. The services provided are integrated, superior cross-border and local services that enable efficient transaction processing, with reliable financial information. These services are offered to the corporate customers and invariably the clients in the power sector. Appropriateness of these products to the sector varies with the needs of the organizations.
CASH MANAGEMENT SERVICE
The cash management service provides total solutions to improve cash flows. Standard Chartered is highly recognized as a leading cash management supplier across the emerging markets. Cash Management Services cover local and cross border payments, collections, information management, account services and liquidity management for both corporate and institutional customers.
With Standard Chartered’s Cash Management Services, customers always know where their money is. Customers can manage their company’s total financial position right from their desktop computer. They will also be able to take advantage of SCB’s outstanding range of payment, collection, liquidity and investment services and receive reports detailing when and where cash has been moving.
- Account services
Account Services offer clients a wide range of account management solutions to ease the hassles of day-to-day banking.
- Payment services
Depending on your business requirements, Standard Chartered can offer you various payment services:
- International Payment Services
- National Payment Services
- Regional Straight Through Services
These eliminate wasted time spent settling payment and checking your payment status while maintaining full control over your cash resources.
- Collection systems
Spending time going to the branch, completing the deposit forms, queuing up for a teller, checking your statements to find out when funds have arrived, and reconciling net proceeds against deposits: all of these activities consume energy better spent on more productive activities.
Standard Chartered’s Collection Services can assist you in collecting your local and foreign currency funds faster and more efficiently.
- National Collection System
This improves a company’s liquidity by shortening the collection cycle. It makes funds available quickly through the extensive local presence and in-depth knowledge of financial clearing systems worldwide. It addresses the need for greater liquidity, easier reconciliation and greater control over local currency receivables. In addition, it keeps one updated with the latest clearing and depositing information.
- Clearing Services
With increasing business globalization, your banking network may not have sufficient reach. You may not want to put in the extra infrastructure or resources to expand your network but still want to ensure your clients’ transactions are serviced efficiently. Clearing is one of the important services in which your bank would need support to facilitate your clients’ smooth international trade and cross-border transactions.
- TRADE SERVICES
Standard Chartered possesses 140 years of experience in Trade Finance. SCB’s broad international customer base, professional insight and knowledge of the risks and rewards of international trade earned the bank a unique position in the industry. The bank offers world-class support across the worldwide buyer chain to minimize overall cost, maximize buyer base, and shorten administrative processes. Most of the companies take these facilities.
To enable customers to capture global opportunities, it has a presence in over 40 countries, in addition to the extensive network of overseas banking partners and correspondents. Standard Chartered has a wide array of financing tools to ease your cash flow burden and help you grow your business.
- Receivables Services
It gives you the financial security to explore new markets overseas or grow your business locally, reducing your risk and cost.
- Import Services
Instead of paying for your imports immediately, Standard Chartered is able to offer you import financing, to finance a drawing under an Import Letter of Credit or Import Bill for Collection, giving you time for the goods to be cleared and resold.
- Export Services
Do you need extra cash for manufacturing or purchasing the goods to fulfill your export order? Do you want to turn the goods into cash as soon as you have them shipped out? Standard Chartered offers you the opportunity to obtain pre-shipment and post-shipment financing. You can now trade with the added confidence of our financial help.
Standard Chartered Custody and Clearing Services’ combination of local market expertise, with the security offered by being an integral part of one of the world’s leading international banks has garnered an impressive client base which includes leading North American, European and Asian institutions.
Standard Chartered keeps its custody and clearing clients regularly informed of developments relating to securities market infrastructure and custody in Asia through a market information website. This information is available to clients with a registered login name and password. Clients are offered a customized and comprehensive range of products and services, which include:
- Custodial services
- Brokerage, clearing and settlement services
- Securities lending
- Foreign Exchange
- Transfer agent for institutional debt and equity offerings
- Delivery, receipt, settlement, registration and physical safe custody of securities
To support the local and international business, Standard Chartered offers various services to help with:
- Loan Structure and Syndication
- Loan facilities
Loan Structure and Syndication
Our leadership in loan syndication stems from ability to forge strong relationships not only with borrowers but also with bank investors. Because we understand our syndicate partners’ asset criteria, we help borrowers meet substantial financing needs by enabling them to reach the banks most interested in lending to their particular industry, geographic location and structure through syndicated debt offerings. Our syndication capabilities are complemented by our own capital strength and by industry teams who bring specialized knowledge to the structure of a transaction.
To enhance the ability to meet financial obligations and operate effectively, SCB offers assistance in the form of working capital loans, overdrafts, term loans (including real estate loans and other secured debt), backstops and revolvers. SCB works closely with clients to understand the dynamics of the business so that the bank can anticipate and serve short-term and long-term funding needs in the most efficient manner, drawing from the full range of global resources and capabilities.
Modern banking operations touch almost every sphere of economic activity. Bank credit is a catalyst for bringing about economic development. Without adequate finance there can be no growth or maintenance of a stable output. There are some standard loan facilities provided by the corporate division of Standard Chartered. These are:
- Seasonal Loan
- Term Loan
- Permanent Working Capital Loan (Asset-based Lending)
A seasonal loan is generally defined as a short term, self-liquidating loan. Which means that the funds advanced on a short-term basis are repaid in full when the assets purchased by the funds are converted to cash. Overdraft, Import Loan, Export Loan, L/C (Machinery), L/C (Raw Materials) , Guarantees etc. are seasonal loans provided by the local corporate division to different customers.
An overdraft facility is a revolving borrowing facility repayable on demand, made available concerning a current account. Where permitted by law, a customer can overdraw his current account when any entry is debited to the account for more than the available credit balance on overdraw. Once the limit is utilized, interest will be charged on outstanding utilization on a daily basis.
Overdrafts are flexible for borrowing intended to finance day to day cash flow requirements generated to normal business activity. They are not intended for the financing of long term borrowing requirements for which more appropriate credit lines are available.
Overdraft facilities are uncommitted. The bank has the right to cancel the facility and demand repayment without prior written notice to the customer. The typical tenor of an overdraft is one day. However, the Bank may agree to make overdraft facilities available for longer periods (maximum one year), with annual review/renewal and subject to the Bank’s discretion to suspend/cancel the facility.
Letter of Credit (LC)
When any company needs to import raw materials from abroad then L/C is required. Because they are unknown to foreign supplier. The Importer Company must open L/C in any bank. Then the bank will contact with other bank, which is situated in supplier country. When the bank give financial guarantees to foreign bank through L/C application the foreign bank supplier will send raw material within a time period. Our bank will charge a specific amount for L/C, which is non-funded financing.
L/C is not only for import but also for local transaction. When any company collect raw material from local supplier on credit then L/C is required.
Revolving Loan (RL)
Revolving Loan is a contract between a borrower and Standard Chartered Bank (SCB) whereby SCB provides the borrower with a certain amount of currency, for a period more than one year and up to 5 years.
SCB gives the facility of loan to buy the raw material or other trade related products at a specific interest rate. When a manufacturing company does not have the working capital to bear the operating cost, they can collect this money from SCB at a specific interest rate to be repaid after 90/120/150 days. And it will be treated as Revolving Loan.
Loan Against Trust Receipt (LATR)
Advances allowed for retirement of shipping documents and release of goods imported through L/C falls under this head. The goods are handed over to the importer under trust with the arrangement that sale proceeds should be deposited to liquidate the advances within import and known as post- import finance and falls under the category “Commercial Lending”.
According to the contract act 1872, Guarantee can be defined as a contract to perform the promise or discharge of liability of a third person in case of his default. The person in respite, of whose default the guarantee is given is called principal debtor and the person to whom the guarantee is given is called the creditor. It is an irrevocable undertaking to pay in case of certain eventually/ contingency.
A term loan is generally defined as a loan whose repayment term exceeds the operating cycle of the business. The borrower usually repays the loan in periodic payments from the cash profits of the business whereas a seasonal loan is repaid in full at the end of the seasonal asset conversion cycle.
Term loan may be extended for a variety of reasons. The bank most commonly associates term loan with a purchase of property, plant and equipment. In fact, it can be considered as property plant and equipment, and as assets that are converted to cash over a long period of time, not just in a season or a single production cycle. That conversion. In turn takes place in the form of the assets’ contribution to production, sales and the resulting cash generation of the company.
Term loan is also used to finance changes in ownership when the division of a company is sold to new owners in a leverage buyout or one company is acquired by the other.
Permanent Working Capital Loan (Asset-based Lending)
Permanent working capital financing, frequently referred to as asset-based lending, is a substitute of owner’s equity. As the term implies, near-term repayment of principal is not anticipated. Like the owner, the lender or debt investor looks to a required rate of return on permanently invested funds. This type of financing arises in most instances for commercial lenders, because the borrower is rapidly growing or is a startup with a small equity base. Because of its ‘permanent’ nature and strong suspicion, a repayment of principal is far in the future, the asset-based loan facility carries a certain degree of risk. The defining characteristics of permanent working capital financing are the borrower’s inability to repay in the near term. Lenders may also provide permanent or asset-based working capital loans to the following types of firms:
- High growth companies whose rapid increase in sales ties up cash in the form of increasing debtors and stock
- Startup companies with no record of repayment capability
These two classes of borrowers may well progress from permanent capital status to term or seasonal loan status as their growth in sales slows, in the first instance, and as their repayment capabilities are proven over time, in the second instance.
Web Bank: Web Bank, the Internet Banking service for Standard Chartered’s Wholesale Bank clients, combines convenience and security in an easy to use system, making it one of the most comprehensive Internet banking platforms available in the market today. Through Web Bank, you have access to Cash Management, Custody and Continuous Linked Settlement solutions as well as trade, lending & FX Information that leverages on Standard Chartered’s extensive international network.
Cash management services are the basic services the bank can provide to the IPPs and Government concerns. PDB, REB, DESA, DESCO and PGCB needs customized collection services for collecting the bills from the customers easily. SCB has to develop the relationship with other national banks necessary to provide this service to these organizations. Infrastructural improvement is not possible for a foreign bank because of the bar on the number of branches. Similar to the NCS operations, a dedicated unit has to be developed to collect bills from consumers as it is done with the large corporate customers such as GrameenPhone, BATB etc.
OD facility is given to all the customers. LATR facilities are tied to the L/C facilities. Most of the IPPs has to use the facilities of L/C for importing spare parts for maintenance purpose. Revolving loan is used to meet office administration and expenses. Term-loans have a good prospect as several new power plants are likely and financing them with term loan or syndication is attractive.
RISKS & RETURNS
CASE STUDY: SUMMIT POWER LTD
Summit Power Limited (SPL) has successfully established three 11 MW power plants for sale of electricity to Rural Electrification Board (REB) under Build, Own and Operate (BOO) basis at Savar, Narsingdi and Comilla sites for supply of electricity to Dhaka Palli Bidyut Samity (PBS)-1, Narsingdi PBS-1 and Comilla PBS-1 respectively. SPL is generating electricity from March 2001 and selling the same to REB at an agreed tariff under a Power Purchase Agreement (PPA). REB is a statutory body constituted by the Rural Electrification Board Ordinance 1977 with the mandate to provide electricity to the rural areas of Bangladesh through cooperative development under its guidance. It purchases bulk electricity from a statutory body, Power Development Board. REB’s charter also allows generating electricity for distribution. Recently REB is promoting power generation in Private Sector with an aim to purchase the same for distribution through PBS’s.
The project is situated on land leased from REB for a period of 17 years through separate Land Lease Agreement (LLA). The PPA and LLA is further strengthened and assured through an Implementation Agreement (IA) with GOB. The IA also provides and ensures fiscal incentives, which among others are exemption of all duties on imported plant & machinery, exemption of corporate tax for the tenure of the contract i.e. 15 years; exemption of import tax on imported spare parts up to 10% of the project cost and exemption of various levies and taxes.
During establishment of the company, the project concept envisaged expansion. To that end the land allotted was more than that required for an 11 MW power plant and the land leased by REB was suitable for at least 30 MW power project. The experience gathered by the management during established of initial 11 MW project has been applied for formulating new strategy in tariff determination and operation of the future projects. Accordingly management took the strategy of negotiating with REB for the revised Power Purchase Agreement (PPA) and other project documents for easy operation, maintenance and better return of the expansion project. Accordingly the Rural Electrification Board (REB) and Summit Power have initialed the agreements to expand the capacity of its Narsingdi and Comilla sites by another 18 MW and 10 MW respectively.
|Interest on term loan:|
|Standard Chartered Bank||46,723,850||50,215,067|
|Dhaka Bank Limited||0||5,062,586|
|Dutch Bangla Bank Limited||0||6,114,601|
|Southeast Bank Limited||0||2,444,154|
|Bank Asia Limited||0||2,164,047|
|IPDC of Bangladesh Limited||2,323,250||2,328,382|
|Other bank charges and commission:|
|Bank guarantee commission||32,465||80,953|
|Operation bond commission||1,051,533||336,662|
|Insurance bond commission||511,615||780,419|
|Loan arrangement fee (SCB)||1,000,000|
RISK FACTORS AND MITIGANTS
As with all investments, investors should be aware that there are some risks associated with an investment in the Company. The investors should carefully consider the following risks in addition to the information contained in the prospectus for evaluating the offer and taking decision whether to invest in shares of the company.
- Limited tenure of the present Power Purchase Agreement (PPA)
The tenure of the present PPA between the Company and the Rural Electrification Board (REB) is limited to 15 (fifteen) years from the date of commercial operation i.e. till September 30, 2018. There is a provision in the PPA for enhancement of the project life. Further, the management has initialled expansion plan another 28 MW power plants. The new PPA to be signed between the Company and the REB will be valid for 15(fifteen) years from the date of commercial operation of the expansion project i.e. expectedly up to year 2021. The PPA has provision for further extension.
- Risk associated with single party exposure
The REB is the single buyer who purchases total electricity generated by the Company. The Company’s ability to service its both existing and future debt obligations rest on the REB’s ability to meet the tariff payments under the PPA. The Palli Biddut Samities (PBSs) on behalf of the REB have established Stand by Letter of Credit (SBLC) equivalent to 2(two) months revenue to replenish any normal payment disruption. REB has been constituted by the Government under Rural Electrification Board Ordinance, 1977 to distribute electricity in rural area of Bangladesh. The Ministry of Power, Energy and Mineral Resources has signed an Implementation Agreement (IA) with the Company guarantying payment against power supply to REB in case of default of payment by REB. Therefore, the agreement signed by the Government through Ministry of Power, Energy and Mineral Resources is considered to be Government guarantee to protect the Company from single party risk exposure.
- Risk associated with tariff of electricity
The REB is the single buyer who purchases total electricity generated by the Company. In these circumstances usually it is the buyer who may dominate the tariff value of the electricity generated by the Company. The REB and the Company have agreed to a Reference Tariff, expressed in Tk/KWh, for each Agreement Year as adjusted and indexed from time to time in accordance with the PPA and the said Reference Tariff is used to calculate the Tariff in Effect for any Billing Month during the Term of the Agreement.
- Risk associated with supply of raw materials
The main raw material for generating electricity is natural gas. Any interruption of supplies of natural gas to the power plants will hamper the generation of electricity, the only product of the Company. The REB has been supplying gas to the Company since 2001 under condition of PPA without any interruption. The REB has the contract with Titas Gas and Bakhrabad Gas to provide gas to the Company. If the REB fails to supply the required gas it will pay 75% of capacity payment, which is guaranteed by the Government of Bangladesh through Implementation Agreement. It is worth noting that Bangladesh has gas stock of 15.32 trillion cubic feet in the 22 gas fields and presently the country is collecting 1.31 billion cubic feet gas per day. Moreover government gives preference to power sector as gas user.
- Risk associated with supply of spare parts
The power plants are dependent on timely supply of spare parts for smooth operation purpose. Any disruption in supply flow of spares parts will put an adverse impact on power generation. The company has signed a Spare Parts Support Agreement (SPSA) with Caterpillar dealer in Bangladesh for supply of spares necessary for operation. The company is maintains sufficient spares parts inventory for smooth operation of plants.
- Risk associated with changes in ownership
Within short span of time the ownership of the Company has seen a lot of changes. Frequent changes in ownership may affect the Company’s decision making process and ultimately the profitability. The ownership of the company was changed during the initial operational stages of the Company, which in fact improved profitability. Ownership of Summit Industrial & Mercantile Corporation (Pvt.) Ltd., the major shareholder of Summit Power Limited, has been continuing from the beginning and is likely to remain in the future.
- Risk of currency devaluation
The company has only US$ 533,333 foreign currency loan, which has been mitigated through indexation of foreign currency in the power tariff formulation.
- Risk of disruption due to Force Majeure
Force Majeure events are circumstances in which a delay in the performance of any obligation under the PPA is beyond the reasonable control, and occurs without the faults or negligence, of the parties concerned. If the Company is affected by a Force Majeure event after commencement of commercial operation, the REB will only pay capacity components and energy components to the Company, to the extent that the unit is available. However, financial loss due to unavailability of the plant after a Force Majeure event will be mitigated by the Company’s insurance policy. If REB is affected by a Force Majeure event after commercial operation, it will pay the Company its debt servicing costs less insurance proceeds and / or any available capacity component and energy component received by the company during the Force Majeure period. In case of Political Force Majeure event or change in law, the REB will pay the Company, to the extent that the unit is available and the Government of Bangladesh will pay required amount to cover the capacity component up to 75%.
RECOMMENDATIONS & CONCLUSION
The risks associated with the sector differ from IPPs and Government concerns such as PGCB. When it is PDB, REB or PBDB the risks are more related to business risk. But when it is an IPP, more infrastructural risks are strong influences in decision making.
Now the country is in a huge deficit of power which will last till the next decade as the demand will rise at a high rate while the supply growth will stay far behind as the old generators will have to be shut down. The new additions of capacity will have to be equipped with adequate maintenance system for longevity.
For the banking industry, the sector looks promising as the demand for electricity will be increasing for the next couple of decades. The sector will see huge growth if the regulatory bodies and politicization of tenders do not hinder the fast growth.
The avenues for revenue earning for the banks are not huge as the scope is very limited in case of the IPPs. It is narrower in case of government concerns. Apart from some services such as collection of bills and long term loans, banking industry cannot offer much to them. To provide collection services for PDB, DESA, DESCO or REB Standard Chartered Bank needs huge network and development of operational facilities to cater to these organizations’ needs. On the other hand, apart from the above mentioned services, L/Cs and revolving loans for working capital financing is possible in case of IPPs. Syndication loan arrangement for the term loans for establishing the generators is now a well accepted means of revenue earning for the banks.
Since Bangladesh bank has imposed a ceiling of 10% funded on the paid up capital and 35% funded and non-funded on the same on large loans, banks are more interested in giving syndication loans. Nevertheless, the needs of these IPPs and other concerns are so huge for the foreign let alone the local banks for even giving a minimum amount of loan without exceeding the cap. Thus new avenues such as preferential share purchase are to be explored by the banks to grow with these IPPs and government concerns operating in power sector.