Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 53960-BD

PROJECT PAPER

FOR A PROPOSED ADDITIONAL CREDIT

IN THE AMOUNT OF SDR 167.7 MILLION (US$257 MILLION EQUIVALENT)

TO THE

THE PEOPLES REPUBLIC OF BANGLADESH

FOR THE

INVESTMENT PROMOTION AND FINANCING FACILITY PROJECT

April 1, 2010 Finance and Private Sector Development Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective as of February 28, 2010)

Currency Unit = Bangladesh Taka (Tk)

SDR 1 = US$ 1.53258 US$ 1 = Tk 69.125

BANGLADESH – GOVERNMENT FISCAL YEAR

July 1 – June 30

ABBREVIATIONS AND ACRONYMS ADP Annual Development Plan ICB International Competitive Bidding BB Bangladesh Bank IDA International Development Association BIWTA Bangladesh Inland Water Transport Authority IDCOL Infrastructure Development Company

Limited BOI Board of Investment IFC International Finance Corporation BOO Build, Own, Operate IIFC Infrastructure Investment Facilitation Center BOOT Build, Own, Operate, Transfer IPFF Investment Promotion and Financing Facility BOT Build, Operate, Transfer IPP Independent Power Producer BPDB Bangladesh Power Development Board IUFR Interim Unaudited Financial Reports BTTB Bangladesh Telegraph and Telephone Board KPI Key Performance Indicator CAS Country Assistance Strategy M&E Monitoring and Evaluation CBSP Central Bank Strengthening Project MW Mega Watts CEPZ Chittagong Export Processing Zone NBFI Non Bank Financial Institutions CPA Chittagong Port Authority NGO Non Governmental Organization DEPZ Dhaka Export Processing Zone PAD Project Appraisal Document DESCO Dhaka Electricity Supply Company PFI Participating Financial Institution DFI Development Finance Institution PICOM Private Infrastructure Committee DOE Department of Environment PPP Public-Private Partnerships EIA Environmental Impact Assessment PSIDP Private Sector Infrastructure Development

Project ESIA Environment and Social Assessment PSIG Private Sector Infrastructure Guidelines ESMF Environmental and Social Management

Framework RAP Resettlement Action Plan

ERC Energy Regulatory Commission RAPSS Remote Area Power Supply Systems FIDP Financial Institutions Development Project REB Rural Electrification Board FIL Financial Intermediary Loan SBD Standard Bidding Documents FM Financial Management SDR Special Drawing Rights GDP Gross Domestic Product SDR Special Drawing Rights GOB Government of Bangladesh SDR Special Drawing Rights IBRD International Bank for Reconstruction and

Development SDR Special Drawing Rights

ICA Investment Climate Assessment TA Technical assistance

Vice President: Isabel M. Guerrero

Country Director: Ellen Goldstein Sector Director: Ernesto May Sector Manager: Ivan Rossignol Task Team Leader: Tatiana Nenova and AKM Abdullah

Additional Financing for

Investment Promotion and Financing Facility Project

TABLE OF CONTENTS

PROJECT PAPER DATA SHEET

I. INTRODUCTION 1 II. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING 1

Sector Issues and Relevance to Additional Financing Background on IPFF Project Rationale for Additional Financing

III. PROPOSED CHANGES 5 IV. CONSISTENCY WITH COUNTRY ASSISTANCE STRATEGY 7 V. APPRAISAL OF PROJECT ACTIVITIES 8

Economic and Financial Analysis of the Lending Program Operational Policy 8.30 Compliance Financial Management Procurement Technical Institutional Safeguards Governance and Anti-corruption

VI. EXPECTED OUTCOMES 17 VII. BENEFITS AND RISKS 17 VIII. FINANCIAL TERMS & CONDITIONS FOR THE ADDITIONAL FINANCING 19

ANNEXES

Annex A – Project description by component A1 Annex B – Summary: Feasibility Studies on the Renewable Energy Sector A4 Annex C – Summary: Feasibility Study on PPP Opportunities in Water Treatment A12 Annex D – Summary: Feasibility Studies on the Infrastructure Requirements of Planned

Economic Zones A20 Annex E – Summary: Feasibility Studies on the Transport Sector A29 Annex F – Summary of IPFF Implementation Arrangements and Lessons Learned A33 Annex G – Results Framework and Monitoring A37

PROJECT DATA SHEET

Date: April 1, 2010 Team Leader: Tatiana Nenova / AKM Abdullah Country: Bangladesh Project Name: Investment Promotion and

Sector Manager: Ivan Rossignol Country Director: Ellen Goldstein

Financing Facility Project Project ID: P117542

Environmental category: FI

Borrower: People’s Republic of Bangladesh Implementing Agency: Bangladesh Bank (BB)

Estimated disbursements (Bank FY/US$m)FY 10 11 12 13 14 Annual 40 50 60 60 47 Cumulative 40 90 150 210 257 Expected effectiveness date: May 30, 2010 Current Closing Date: December 31, 2011 Revised closing date: December 31, 2014

Does the project depart from the CAS in content or other significant respects? Ref. PAD I.C.

[ ]Yes [ X] No

Does the project require any exceptions from Bank policies? Ref. PAD IV.G. Have these been approved by Bank management?

[ ]Yes [ X] No N/A

Is approval for any policy exception sought from the Board? [ ]Yes [ X ] No Does the project include any critical risks rated “substantial” or “high”? Ref. PAD III.E.

[ X]Yes [ ] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD IV.G.

[X] Yes [ ] No

Project development objective/ outcome The objectives of this additional financing for the project are to: (i) supplement the resources of the Bangladesh financial markets to provide long term finance for infrastructure and other investment projects beyond the capacity of local financial institutions; and (ii) scale up the financing of public-private partnership (PPP) ventures in infrastructure already started in the project. Does the scaled-up or restructured project trigger any new safeguard policies The project triggers Environmental Assessment (OP/BP 4.01), Involuntary Resettlement (OP/BP 4.12), Indigenous Peoples (OP/BP 4.10), and may trigger Physical Cultural Resources (OP/BP 4.11) [TBD].

Project Financing Data [] Loan [ X ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing ($m.): 257.00 Proposed terms: US dollar-denominated IDA credit, 40 year maturity, 10 years grace period.

Financing Plan (US $m) Source Local Foreign Total

Borrower 50.00 0.00 50.00 International Development Association 0.00 257.00 257.00 Total: 50.00 257.00 307.00

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The Investment Promotion and Financing Facility Project Additional Financing

I. Introduction

1. This Project Paper seeks approval of the Executive Directors to provide an additional credit in the amount of US$ 257 million to Bangladesh Investment Promotion and Financing Facility (IPFF) Project, Credit No. 4169-BD. 2. The proposed additional financing Credit would continue to build on the positive impacts made through implementation of the ongoing IPFF project in the areas of (i) expansion of long term financing for infrastructure sectors in Bangladesh; (ii) demonstration of the economic and business case for Public-Private Partnerships (PPPs) in infrastructure; (iii) capacity building of government agencies and other stakeholders on PPPs, towards building a national PPP pipeline and framework. 3. The lending component of US$ 47.50 million in the IPFF project has added to 178 MW of electricity generation capacity to the national grid and two special economic zones: Dhaka Export Processing Zone (DEPZ) and Chittagong Export Processing Zone (CEPZ). This accounts for around 5 percent increase in the national electricity generation capacity. The technical assistance (TA) component of IPFF equivalent to US$ 2.50 million has been contributing to enhance knowledge and understanding on PPP among the public sector agencies as well as private sector financiers and entrepreneurs. Around 30 percent of the TA budget has been utilized for a series of PPP trainings and workshops, arranged at home and abroad, where representatives from government, local financial institutions, and private sector entrepreneurs attended. More importantly, successful implementation of IPFF project has contributed, to a great extent, to the momentum for the ongoing PPP initiative of the government that provides for creation of an infrastructure investment fund and establishing a PPP cell to leverage private sector resources for infrastructure. 4. The proposed operation will support Bangladesh Bank (BB), the implementing agency, to expand the scope of funding for the financing of PPP ventures in a wide range of infrastructure sectors, scaling up the current successful experience in the power sector. The proposed operation is expected to increase additional financing of infrastructure by over US$400 million, leveraging about 100 percent private resources. It is expected to increase infrastructure supply in the power sector – renewable energy and energy savings - as well as bridges, ports, container terminals, water treatment plants, waste disposal projects, and others. The increased provision of infrastructure will create (or help maintain) jobs during the economic slowdown, and remove bottlenecks in economic growth caused by existing infrastructure shortages. The proposed amount of US$257 million equivalent is divided into US$7 million for capacity building (technical assistance) and US$250 million for the lending pipeline. The description of both project components is provided in Annex A. The IFC has been involved in the preparation of the additional financing, both on the advisory and investment sides.

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II. Background and Rationale for Additional Financing

Sector Issues and Relevance to Additional Financing

5. In 2009, the GOB announced PPPs as a priority area to boost growth up to 8 percent, and allocated considerable funding for PPP development in the 2009-10 Annual Development Plan. GOB further issued a PPP Strategy Paper, and created a PPP Cell under the Prime Minister’s Office (within Board of Investment), to implement the PPP framework and agenda in the country. The target investment by FY2013-14 is $28 billion, mostly raised from the private sector. 6. The PPP framework in Bangladesh remains inadequate to handle a scaled-up PPP pipeline. PPP champions within the government include the Private Infrastructure Committee (PICOM) housed in the Board of Investment (BOI), the Planning Commission, and the new PPP Cell, which is still at a formative stage. The Private Sector Investment Guidelines (PSIG) 2004 comprises the existing policy framework for private infrastructure, but ignores key PPP aspects, and requires revisions and modernization. 7. IPFF has supported GOB efforts in this regard, engaging with all relevant stakeholders. At this juncture, the revision of the Bangladesh PPP framework will involve a gestation period before it starts operating in full swing. Given the budget and growth projections quoted above, in the short and medium term the needs are such as to leave ample space for complementing resources and efforts by all active players in the arena. The lessons learned from initial IPFF implementation need to be consolidated through continued IDA support, so that the instruments of infrastructure financing through PPP is well internalized within the relevant government agencies/wings such as Ministry of Finance, BOI, and other line ministries. Leveraging private sector resources through an enhanced IDA support for medium-sized projects would be a very significant preceding step for attracting resources and TA for large infrastructure projects in the days ahead. Moreover, during this transition period, IPFF could be capable of supporting the PPP framework formation process with advisory services and technical assistance. Project Implementation Record and Project Performance

8. Historically, the private sector in Bangladesh has not moved into PPP ventures in infrastructure because of two constraints: (i) the absence of a PPP framework including PPP supportive agencies and (ii) absence of market dynamics, including pricing and allocation mechanisms, in the area of infrastructure PPPs. The financial institutions have stayed away from long term financing and from infrastructure financing, as market has not been able to address their risk-return paradigm for long term financing. In this backdrop, the IPFF project, in operation since 2006, came up with the development objective to accelerate private sector-led growth by providing term finance for infrastructure development and by promoting domestic infrastructure finance capacity. IPFF has “crowded in” private sector investment into an area which has historically been dominated by donor and government funding. The IPFF TA component (US$2.5 million) supports the PPP framework development process and key institutions, while the IPFF credit line component (US$47.5 million IDA + $10 million GOB) demonstrates PPP viability directly through learning by doing and imitation of success. 9. IPFF relies extensively on the market mechanism for the structuring and funding of PPP deals. IPFF considers only fully structured deals, as implemented by the private sponsor, and feeds its long term funding through eligible financial institutions, who on-lend to qualifying PPP projects on market terms. The approach allows private sector promoters access to the same

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opportunities on a competitive basis. The market-determined nature of interest rates ensures that the concessional element of development partner funding is retained by the government to the greatest extent possible. The equity contribution of the sponsor and the debt share of the funding local financial institution ensured market-based incentives for all parties in selecting only commercially viable PPP transactions, and ensuring their successful implementation. 10. So far, IPFF has turned US$64.16 million1 (IDA + GOB) into an approximately 5 percent increase in the total power generation capacity in Bangladesh, adding 178 MW to the power grid in a rapid, privately funded, and more efficient manner. Even as early as in the third year, the IPFF Project Development Objectives have already been achieved fully (Table 1). In the process of adding much-needed electrical capacity to a power-starved country, the PPPs have been structured according to high environmental and procurement standards, which by now the private sector and participating financial institutions have adopted and are following smoothly. 11. The increase in national power capacity has been accompanied by IPFF’s catalytic role in deepening the Bangladesh financial sector and rallying domestic funds for infrastructure investment, to the extent possible with an amount of US$ 47.5 million. By turning $57.5 million into infrastructure projects amounting to $120 million, IPFF funds have leveraged total PPP investment in infrastructure by around 100 percent. 12. IPFF has also provided a demonstration effect and a PPP framework to PPP investments outside of the IPFF pipeline. Non IPFF PPPs include seven independent power plants, three captive power plants, and seven other infrastructure projects under the PSIG. Additional impact has been achieved via IPFF’s training for participating financial institutions, which have become familiarized with PPP project processing and financing and with the PSIG.

Table 1. Project Performance on Project Development Objectives PDO/KPI Indicators Baseline

Value Progress To Date

Target Value

PDO: Increase in private sector participation in infrastructure as measured by the increase in the number of projects developed as Public Private Partnerships (PPP).

3 19 8

KPI: Value of investments realized using IPFF $0 $64.162 $50m KPI: Number of PFIs using the IPFF 0 6 3 KPI: Percent PFIs maintaining Bangladesh Bank eligibility criteria 0% 100% 100% KPI: Improved PPP capacity of government and financial institutions (number of PPPs using PICOM guidelines)

0 7 8

KPI: Percentage of deals using DOE environmental assessments 0% 100% 100% KPI: Percentage of projects reviewed on behalf of BB 0% 100% 100% KPI: PFI staff trained on PPPs 0 425 20

World Bank ISR, November 2009.

13. IPFF has provided support to PPP champions within the government, including PICOM, BB, and the Planning Commission. Institutional advancement of PPPs in Bangladesh has been slow, as the natural champion, PICOM, has shown limited absorption capacity and has enjoyed weak support at the highest levels. This inertia has seen somewhat offset by the newly-professed priority for PPPs in the GOB in 2009, the adoption of a new business plan by the PICOM Board in May 2009, and the appointment of key staff in July 2009. BOI has further appointed a

1 Monetary amounts in this report are in US Dollars. 2 Including power plants at DEPZ and CEPZ for which partial disbursement has to be made from the proposed additional financing as and when it is approved.

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permanent secretary and allocated office space for PICOM, though further efforts are needed to properly resource PICOM. Close coordination with the Ministry of Finance has been maintained throughout the IPFF implementation. IPFF has delivered training programs to government and private sector stakeholders on PPP-related matters, including the Bangladesh Private Sector Infrastructure Guidelines, procurement, Tender Preparation Aspects, and Basics of the PPP Environment. IPFF training of local financial institutions has helped the sector adopt deal structuring and financing as a mainstream line of business. Key decision-makers are increasingly convinced that long term funding of private sponsors of infrastructure deals is a viable and profitable proposition. In a complementing effort, IPFF has been engaged with the Bangladesh Better Business Forum, and has helped formally adopt the new Government Policy on Power Wheeling between private sector entities using the national grid. Rationale for Additional Financing 14. The IPFF project has exhausted the credit line component (in the amount of $47.5 million IDA+ $10 million GOB) in its third year of operation, and considerable excess demand exists.3 The initial funds have been used exclusively in the power sector as a matter of national priority, with considerable success in popularizing PPPs and demonstrating their viability to potential project sponsors. However, other infrastructure sectors have not been exposed to a similar boost in infrastructure financing, and remain unfamiliar with the PPP framework, including transport, waste management, water treatment, economic zones development. The potential is considerable. The GOB estimate for the overall investment in infrastructure needed up to 2014 is $28 billion, some of which is expected to come from private sources. Given the extent of demand for infrastructure in the country, the most effective way to leverage IDA funds is to use it as a tool of increasing long term financing among the local stakeholders so that over time the market dynamics find its way towards a platform for funding the large scale infrastructure projects as envisioned by the government. Given the context, the positive externalities generated by the initial outlay of $47.5 million (which has been proved to be a successful piloting of PPP model in the country) needs to be continued with a scaled up operation diversified to sectors other than power only.

Particulars US$ A. DISBURSED : Five small power plants having production capacity of 99 MW altogether

35.18

A. Total Disbursed 35.18 B. TO BE DISBURSED : 35 MW DEPZ 44 MW CEPZ 10 MW Desh SPP

13.33 15.65 4.05

B. Total to be Disbursed 33.03 C. Total 178 MW Power Plant (A+B) 68.21 D. Total allocation as per TPP 57.50 E. More required (D-C) (10.71)

3 Specifically, the project has disbursed $45.5 million as of Feb 28, 2010, or 91%, virtually exhausting the entire credit line component amount. The sum total of the above amounts is $68.21 million. The project’s total funding, including GoB funds, amounts to $57.50 million. The funding shortfall is $10.71 million. The project provides for retroactive financing in the amount of $15 million, to cover the above shortfall.

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15. The rationale for PPP support to infrastructure projects in Bangladesh can be summarized as follows:

- Promotion of private-sector participation and partnerships is needed, as international experience has shown that the primary responsibility for the initial development of PPPs continues to rest with government. The government and line ministries need technical assistance in proactively assessing and promoting PPP-eligible projects.

- The need for government intervention in infrastructure finance is clear in light of the pressing social and economic requirement for infrastructure investment in Bangladesh and the limited capacity of the financial markets. Over time, as the private sector participants and the market mechanism for PPP financing matures, there is still a government role in enabling the market. In the design of the IPFF, care has been taken to ensure that the government intervention does not involve explicit subsidies and that the intervention leads to a market-based solution in the long term.

- An underdeveloped financial sector exists even for projects requiring financing in taka. The single project lending capacity of even the largest of the private-sector banks is limited, as is their expertise in funding PPP transactions. A development-partner-supported facility is best placed to develop capacity to appraise infrastructure projects and assume credit risk while facilitating the participation of local financial institutions.

- Lack of long-term finance cripples the ability of the system to support infrastructure. The ability of banks to extend term credit (beyond five years) is extremely limited because of their dependence on short-term deposits and the low level of the development of capital markets in the country. Long-term International Development Association (IDA) funds may be seen as acting as an interim substitute for contractual savings and collective investment schemes that are yet to develop in Bangladesh.

- The long-term nature of infrastructure projects spans several governments and carries the risk of rescission of government cooperation for even the most economically sound PPP project. Development partners’ roles in PPP financing can help mitigate this risk.

- Spill-over effects of the global economic downturn have resulted in a dried-up foreign and some commercial investors’ appetite for infrastructure financing. There is a clear mandate for donors to step in, leveraging as much private participation as possible.

III. Proposed Changes for Additional Financing

16. The objectives and the components of the parent project (component 1-credit line; component 2-TA) will not be changed. The additional financing will expand the set of sectors where PPPs are being promoted beyond the current IPFF involvement in small and captive power plants, to other infrastructure sectors such as transport, water treatment, waste management, services for economic zones, and others, as already provided for in the original project PAD. The Credit Line Component is being scaled up by US$250 million. The scope of PPP projects to be financed is expanded to include also larger infrastructure PPPs, which requires a thorough re-working of the environmental and social framework. The maximal permissible IDA share of funding is increased from 56 percent to 60 percent, in view of the aftershocks of the global financial crisis on private sector liquidity, as well as the element of market-opening for PPPs in sectors other than power. In the same token, the US dollar loan pricing for the on-lending phase is decreased from 0.5 to 0.3 per cent above the relevant interbank rate for floating rate loans, and from 0.25 to 0.2 per cent above the relevant swap rate for fixed rate loans. The remaining aspects

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of the pricing mechanism and other terms and conditions as laid out in the PAD remain unchanged.

17. The increased amount of the credit line – an additional US$250 million, is backed up by a careful estimated expected demand for infrastructure funding as sponsored by the private sector with a horizon of 5 years. A crude reality check with project experience to date shows that it is feasible to disburse the full credit line amount in 4-5 years, at the rate of about US$50 million per year. Consistent with this, the IPFF has committed US$64.16 million starting in September 2008. As the project is currently rolling and up to speed, such rates of disbursement are very feasible in the coming 5 years. As PPP has gained priority with GOB, a more significant pipeline has been shaping up and there is a wider selection to draw from, extending beyond power into several sectors including energy saving equipment, waste management, water treatment, and transport. The list of immediately foreseeable projects for the next 12 months (2010) is in Table 2 and the expected overall pipeline for the coming 5 years is in Table 3.

Table 2. Pipeline for December 2009-November 2010 Project Name Location Estimated investment $ mn Small DEPZ Power Plant -35MW Dhaka $ 13.33 Small CEPZ Power Plant -44MW Chittagong $ 15.65 New Mooring Container Terminal Chittagong Port $ 50.00 Expected Total IPPF funding $78.98 million

Table 3. Existing Pipeline for IPFF Funding, next 5 years Project Name Location Estimated investment $ mn Energy Saving Equipment Major Cities $ 25.0 Environment /water treatment Dhaka, Chittagong $ 35.0 Waste Disposal Facility Metropolitan Cities $ 25.0 Economic zones Across Bangladesh $ 10.0 Transport Sector Chittagong Port $ 55.0 Energy / Power Sector Across Bangladesh $100.0 Expected Total IPPF funding $250.0 million

Per Table 3, the total amount of infrastructure funding suggests an additional IDA investment requirement of $250 million. This assumes the expectation of rallying private funding of at least $167 million, or a 60-40 ratio of IDA to private funding. Discussions with the financial sector post-global crisis conclude that the local financial sector is capable of assuring a liquidity of $167 million for infrastructure investment purposes. Each sector is discussed in detail below. To compose the expected overall pipeline up to 2014, each sector was overviewed based on the detailed feasibility studies summarized in Annexes B-E:

A broad-based, preliminary analysis of energy efficiency opportunities in Bangladesh conducted jointly by the World Bank and GTZ in 2009 has found that the growing energy supply-demand gap in Bangladesh could be partially bridged by several promising and replicable energy efficiency measures across various sectors. Potential investment in this sector is estimated at US$99 million in the short term (see Table 2). The expected IPFF investment in the sector is $25 million (Annex B sums up the feasibility study).

In the case of water treatment, estimated potential demand for the garments sector alone amounts to $575 million investment in common water effluent plants. Given low enforcement outside of economic zones, however, most industries do not ensure their access to an operational water treatment plant, resulting in a conservative estimate of expected IPFF investment of US$35 million in Table 2 (Annex C sums up the feasibility study).

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Waste management, including thrash collection in the six large cities, economic zone waste projects, and bio-power plants in several locations across Bangladesh, has an estimated demand potential of US$50 million, with an expected IPFF investment of $25 million.

Feasibility studies on the infrastructure services required by economic zones (currently in the planning stages) suggest needs amounting to US$142.9 million, including power, water, waste, and access roads services as well as an IT zone, with an expected IPFF investment of $10 million in Table 2 (Annex D sums up the feasibility studies).

PPP opportunities in the transport sector include the new mooring container terminal which is just in the award stage ($165 million), as well as a number of other, much less likely candidates for funding adding up to $250 million. The expected IPFF investment amounts to $55 million). The summary of the transport feasibility study is presented in Annex E.

The potential demand for the power sector underlies an annual shortage of 1500 MW, which translates into a required investment of US$1-2 billion, pending on the scale of power plants constructed. Of that IPFF has only planned to invest up to at most US$100 million (Table 2), as the project is diversifying away from power.

18. The TA component will be expanded to US$7 million. There is a strong underlying operational link between IPFF and the proposed PPP Cell, underpinning the TA component. As PPP gained priority in GOB’s agenda, and with the creation of the new PPP Cell, capacity building efforts for government agencies as well as the private and financial sector would need to be stepped up. Regular PPP training courses would continue to be offered in the 6 major cities, for all private business sectors, in cooperation with the Chambers of Commerce and other business associations. The new PPP Cell would require resource and capacity assistance, on their work with feasibility analysis and deal structuring. The GOB plan for the formation of an Infrastructure Investment Fund would require extensive support as well. In addition, IPFF will require increased capacity for handling a larger pipeline, as each PPP funded under IPFF faces its separate technical, financial, governance, and safeguards review. The component will maintain a continuous management of the PPP pipeline for IPFF, to minimize risk and gear up projects for IPFF financing. This involves pipeline-building work with government agencies, line ministries, the Planning Commission, PICOM, and the new PPP cell. It will further entail project preparation assistance and advisory services for screening and preparing PPP candidate projects. The technical assistance funding will also work toward developing project sponsorship among the private sector, through workshops, demonstration effect, and learning of PPP-related issues. Finally, the component will work with the private sector to identify specific project sponsors, and conduct sector market assessments / feasibility studies.

19. The time frame for the project is expected to be three years from the closing date of the parent project, with an expected closing date of December 31, 2014. The closing date of the parent project will not be extended. IV. Consistency with Country Assistance Strategy 20. IPFF-promoted infrastructure investment stimulates economic growth directly by boosting national investment, and indirectly via its job-creation effect. It further removes bottlenecks to the business environment, such as power shortages or the scarcity of serviced land for business and industry. Investment in infrastructure further deepens financial markets, extending the term of financing available toward longer-term instruments. The IPFF feeds directly into the CAS pillar of improving investment climate, as the Bangladesh ICA 2008 found that the chief barrier to

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better investment climate in Bangladesh was poor infrastructure. The IPFF is also closely connected with the CAS pillar of poverty alleviation, via both the growth and employment effects provoked by increased infrastructure investment. V. Appraisal of Project Activities Economic and Financial Analysis of the Lending Program

21. The ultimate economic benefits of this credit will be derived from the increased growth from additional investment, new jobs created, and improved investment climate via more available infrastructure. The promotion of public-private partnerships and a solid PPP framework in Bangladesh will equip the country for long-term economic growth, supported by adequate power, transport, and other infrastructure provision. 22. Financial markets will deepen. Access to term finance leads to superior outcomes in the provision of infrastructure services. Longer-term financing will allow project promoters to be more competitive in their tenders under this program and will also encourage successful participants to invest in more expensive and more reliable equipment, which will be more economically efficient in the longer term (and better serve Bangladesh’s needs). Financing through the existing financial institutions is further constrained by the inability of financial institutions to lend at fixed interest rates. Infrastructure projects, once in commercial operation, typically reflect an “annuity” of stable and predictable net cash flows (after covering variable costs such as fuel). Infrastructure promoters are assisted in making competitive tenders by the availability of fixed-rate finance that matches the fixed-rate nature of project income and removes the need to include a margin to accommodate interest rate uncertainty. In addition to the direct economic benefits of the project there are additional gains generated through the enhanced technical capacity developed among financial institutions, the promotion of long term finance markets as well as the liberalization of regulations constraining financial intermediation. Operational Policy 8.30 Compliance

23. Conformity with OP 8.30 was assessed as part of the parent project, and re-assessed per the additional financing proposal, concluding that IPFF continues to abide by the OP8.30 stipulations. The original justification for this intervention was found reinforced given the current economic conditions and the ability of the system to support infrastructure development. Project objectives were judged consistent with the objectives of FIL defined in OP 8.30, IFC involvement was considered adequate, as was the policy framework. IPFF has enjoyed the availability of sound PFIs and a strict selection process, which has been critical for the success of the project. IDA funds will be used for financing of goods and services which is consistent with the provisions of OP 8.30. In terms of on-lending rates, PFIs will negotiate and determine the lending rate for the money they would lend and the same will also apply to the part co-financed by GOB. The lending could be in Taka (local currency) or in US dollars, but so far has de facto been 100 percent in Taka. Broadly, these arrangements are consistent with OP 8.30 which calls for market lending rates. Monitoring has been found adequate, as carried out by BB standardized monitoring reports. Financial management

24. There are no outstanding fiduciary or safeguard issues. The project is currently rated satisfactory in FM. IPFF has been submitting accurate and timely IUFRs to the Bank. To simplify

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the report generation system, the project was upgraded to maintaining a separate set of books of accounts to serve as a basis for IUFRs. The latest audit (for FY 08-09) was cleared and on time.

25. Both the implementing agency, Bangladesh Bank (BB), and the Infrastructure Investment Facilitation Center (IIFC), which provides technical advisory support to Bangladesh Bank under a technical service agreement, have extensive experience in Bank procurement and financial management practices. BB has played a leading role in the FIDP, PSIDP, and CBSP projects, and IIFC has supported successfully IPFF in the past three years. The BB coordination unit is composed of permanent staff having experience in many World Bank funded projects. One of the executive directors of Bangladesh Bank acts as project director, and is the authorized signatory for making payment for eligible project expenditure and for replenishment request to World Bank. IDA funds are channeled through a dedicated special account at Bangladesh Bank. Bangladesh Bank consolidates financial information and provides interim un-audited financial report in an agreed form to the Bank no later than 45 days after end of each quarter. The annual audit is carried out on a consolidated financial report. The Comptroller and Auditor General conducts the annual audit. Audit report must reach the Bank within six months of the end of each fiscal year. Withdrawal of funds from the Credit has been upgraded to report-based. BB has developed eligibility criteria for participating financial institutions which are responsible to disburse funds to approved private investors for infrastructure investment projects. The eligibility criteria are based on financial status, quality of management, internal controls and systems.

26. FM risk is considered moderate. The project Operations Manual reflects the financial management policies and control procedures applicable to the project. BB is familiar with the requirements. The Central Bank Strengthening Project has supported BB in establishing an internal audit department that directly reports to the Governor and carries out audit by an internationally affiliated firm in full compliance with international auditing standards. Project reporting to the Bank has been accurate and timely, skills were found adequate, and an upgraded FM system was recently installed that will further enhance FM performance and internal controls.

27. Disbursement arrangements: The Additional Financing will use a separate designated account in US dollars to be established at the central bank of Bangladesh (BB). The disbursement method will continue to be report based. The format of the Interim Unaudited Financial Reports (IUFRs) that are prepared for the original credit will continue to be used for the Additional Financing as well. Hence, IUFRs will be prepared for the exiting project and Additional Financing separately and will be submitted to IDA within 45 days from the end of each quarter. In addition, in line with country financing parameters for Bangladesh, IDA will also financed taxes.

Category Amount of the Credit Allocated (US$ Equivalent)

Percentage of Expenditures to be Financed

(1) Investment Loans US$250,000,000 60% (2) Others (goods, consultants’

services, training, and operating costs)

US$7,000,000 100%

Procurement 28. IPFF is rated satisfactory in procurement. Disbursement is on par for goods, but has encountered delays in the past 12 months for services. The procurement plan was restructured to address the issue, and this is showing results.

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29. Procurement for the proposed additional financing would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 (Revised October 2006); and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 (Revised October 2006), and the provisions stipulated in the Financing Agreement. Within the overall context of Bank’s Guidelines, local procurement of goods, works, and services (for which the shortlist entirely comprised of national consultants) will follow the Government's Public Procurement Act 2006- (goods: < US$300,000 per contract, works: <US$5,000,000 per contract, and consulting services- firms: <US$200,000 per contract and individual consultant- < US$50,000 per contract), with the following exceptions applicable for the purpose of national competitive bidding (goods and works):

(a) post bidding negotiations shall not be allowed with the lowest evaluated or any other bidder;

(b) bids should be submitted and opened in public in one location immediately after the deadline for submission;

(c) rebidding shall not be carried out, except with the Association’s prior agreement; (d) lottery in award of contracts shall not be allowed; (e) bidders’ qualification / experience requirement shall be mandatory; (f) bids shall not be invited on the basis of percentage above or below the estimated cost and

contract award shall be based on the lowest evaluated bid price of compliant bid from eligible and qualified bidder; and

(g) single stage two envelope procurement system shall not be allowed.

In case of any conflicts between Bank Guidelines and the Government's Public Procurement Act 2006 or ambiguous/ confusing interpretation in between, the Bank Guidelines shall prevail.

30. In addition to procurement of equipment/goods and selection of Consultants’ services and training, the project will also select PPP sponsors obtaining financing from the facility and procure goods, works and services by these PPP sponsors. The following procurement methods are permissible within the overall context of The Bank’s Procurement Guidelines:

A government executing agency selecting the PPP sponsor under a concession, BOT or similar arrangement.

Under rare specific circumstances it might be impossible or impractical to use a competitive process such as in the case of expansion of an existing investment project operated by incumbent concessionaires or entrepreneurs. In this case, the procurement capacity of the PPP sponsor is specifically assessed by IDA, and the procedures are required to result in fair competition, economy, efficiency and transparency.

A private infrastructure service provider approaches a PFI to obtain financing for an investment project that is not under a concession, BOT or similar arrangement, but in which a public interest can be demonstrated. This could apply only in rare cases where concessionaire/entrepreneur has not been selected by public tender, but where the government allows unlimited entry into the market through an open licensing process, subject only to fulfillment of technical quality requirements.

For procurement activities by BB only (and not for investment projects), all local procurement of goods/ equipment (less than US$300,000) and services (less than $200,000) for which the shortlist entirely comprises of national consultant, will follow Bangladesh Government’s Public Procurement Act 2006, following the provisions stipulated in the Financing Agreement.

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31. The investment projects to be financed out under the facility cannot be listed in the procurement plan up front and each investment project is incorporated into the plan immediately after approval for financing from the facility. The projects funded from the initial IPFF will be incorporated in the procurement plan, but generally new investment packages will make into the plan only when Bank has accepted for financing it. There is a functional procurement plan, and is updated annually always covering the next 18 months of project implementation. The plan is furnished to IDA for its review and approval. Procurement of equipment/goods and selection of consultants is undertaken only in accordance with the plan approved by IDA except investment projects and related additional services for appraising such investment projects. 32. For compliance with the Bank’s procurement procedures, IDA carries out sample post review of contracts that are below its prior review threshold including downstream procurement actions carried out by incumbent concessionaires / entrepreneurs and contracts implemented by IIFC in relation to loan application review, environmental impact assessment etc. Such review (ex-post) of contracts below the threshold constitutes a minimum sample of about 10 percent of the contracts. In addition to this, Government carries out independent procurement review (procurement audit) of BB and IIFC by an external consultant (generally a Chartered Accountant firm with international affiliation). IDA monitors the compliance with the requirements of Bank’s different procurement methods and performance standards on a continuous basis. As part of the project’s supervision reviews / mid-term review, a comprehensive assessment of procurement performance is also carried out. Based on the review, consultation with the Government, IDA may revise the prior review threshold including the procurement and selection methods. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the implementing agency has recommended semi-annual supervision missions to visit the field to carry out post-review of procurement actions. 33. Capacity of Bangladesh Bank and IIFC to carry out procurement activities is adequate. The relevant department at BB is staffed by a project director, a joint director, four deputy directors and two assistant directors. The plan is to accommodate 2-3 additional assistant directors / additional deputy directors with experience in IDA projects. The procurement function is staffed by a deputy director who has experience with prior IDA projects, with support from procurement unit of BB. BB, with technical assistance from IIFC, carries out procurement of individual consultants for project appraisal as well as environmental impact assessment under the project on behalf of Bangladesh Bank. For the purpose of professionally handling procurement of external consultants by IIFC, the firm has a regular procurement specialist under its payroll. 34. Given the nature of the Project, based on the procurement capacity assessment and the need for improvement, the procurement-associated risk is moderate. Risk mitigation measures include procurement training and adequate staffing and resources. The project is structured to minimize funds-flow risk by maximally relying on the market mechanism. The great majority of deals are expected to be small PPPs where PFIs and private sponsors undertake efficiency costing and investment decisions based on the profit motive, and government procurement is not involved in the process. Instead, the point of government involvement is between BB and the PFIs which are regulated entities whose selection criteria are transparent and where mis-procurement risks are minimized / not present. If IPFF participated in a large infrastructure project, the respective bank sector colleagues are expected to lead the process with all relevant procurement procedures per Bank rules, as IPFF will take a minority stake per its role in promoting private participation in infrastructure. The Operations Manual defines procurement thresholds and elaborates in detail the steps and applicable documents, acceptable to the Bank. Procurement training has been stepped up, on a continuous basis, as has the supervision effort on part of the Bank team. Both BB and IIFC have extensive experience in Bank procurement and financial management practices. The

12

IPFF funding susceptible to procurement delays, based on past experience, is consultant procurement, and amounts to about 2 percent of project funds, so the risk of disbursement delays is small. Technical 35. The technical merits of the project have been thoroughly examined over a course of general reviews through the preparation process, supplemented by specialized “Technical Reviews” reflecting the innovative nature of the project. These reviews have allowed the project design to benefit from contributions from experts in the field of infrastructure (in South Asia and other regions), as well as private sector development, financial sector development and procurement. An extensive assessment has been provided with regards to the conformity with the Bank’s Operational Policy 8.30 covering financial intermediation loans. 36. The project has a firm empirical basis in that its overall design is drawn from the findings of the World Bank’s Investment Climate Assessment and the joint Bank/Fund Financial Sector Assessment, both carried out in 2007-8. The project also draws directly from the technical experience of team members involved in both the FIDP and PSIDP projects. Institutional 37. Implementation arrangements (Annex F). The IPFF funding mechanism adds transparent levels of control and market-based incentives to existing PPP arrangements. The proposed structure operates under Bangladesh Bank oversight with existing regulated local financial institutions, which participate on the basis of a single eligibility standard open for all institutions, creating a level playing field. Funds (in BDT or US dollars) are allocated to infrastructure projects endorsed by government with credit risk assumed by the participating financial institutions (PFIs). The private sector sponsors operate under incentive-based contractual arrangements designed to align their interests with those of GOB. Over the IPFF operation period, BB has built upon its capacity to oversee PPP lending by eligible financial institutions. Sub-loans to PFIs are assessed by the project sponsor for environment, financial, and technical feasibility and standards, and subsequently approved by BB, subject to IDA “No Objection”. PFIs decide whether to fund a project following a detailed soundness and profitability assessment, and subsequently monitor project implementation and collect payments from borrowers. This structure has also addressed governance and control issues around PPPs, meeting the need for market pricing, transparency of process, safeguards standards, and competitiveness, while still giving adequate incentives to promote engagement by the private sector. IIFC acts as a technical advisor to BB on the credit line, and as the coordinating agency for the technical assistance component. 38. Projects are supported on market terms and require at least 25 percent sponsor equity component and a further minimum amount of third party funding equal to at least 15 percent of the total project cost (i.e. 20 percent of debt financing). PFI have been required to co-invest to reinforce alignment of their interests and the PPP objectives. While project promoters face market interest rates as determined by the PFIs, BB onlends to PFIs at a margin over the marketable

13

government borrowing instrument with maturity closest to the interest resetting mechanism of the loan.4 39. Lessons learned include the importance of establishing a system of checks and balances to promote good commercial judgment while protecting public sector interests, by following tried and tested principles developed in the field of investment management in designing the implementation mechanism. It was important, in the context of Bangladesh, to stimulate PPPs without creating a complex overhead institutional structure for PPPs, instead allowing organic development of PPP framework. IPFF created minimal institutional overhead, and was targeted to be maximally compatible with market conditions and incentives. A second lesson was to involve local private financial and entrepreneurial institutions from the outset to assure a design that suits the needs and capacity of the Bangladesh economy. Thirdly, IPFF is maximally market-based, as multiple participants promote competition for funds that generates market-based pricing. Fourth, there has been an emphasis on transparency, protected by clear contractual arrangements, via the separation between resource-control and resource-allocation. Fifth, the structure is flexible, as contractual arrangements with participating financial institutions allow the facility to easily respond to changing circumstances or failure of any participant to perform without institutional reform or retrenchment of incumbent staff. The open architecture allows for innovation, evolution, and easy entry and exit of parties. Such flexibility and market orientation could only function with adequate checks and balances, as was assured by the effective regulatory oversight from Bangladesh Bank and the application of strict criteria for financial institution participation. 40. Implementation capacity requires strengthening, given the scaling up of the project. The project and the implementing agency (BB) and its technical support agency (IIFC) has a strong track record of successful project implementation in the past, which given a level of comfort for the future. Bangladesh Bank and IIFC have improved their preparation and expertise even further after 3 years of IPFF operation. In view of the enlarged project scope, BB will further increase its procurement capacity via the TA component. Most banks and some other financial institutions in Bangladesh are already involved in IPFF, so they have solid experience and reliable performance. To improve PPP coordination and institutional strength, IPFF has incorporated further the Planning Commission and the new PPP Cell formed under the Ministry of Finance, within the purview of the TA component. On the supervision side, the team is being beefed up in the areas of FM, procurement, environment, social safeguards, as well as technical expertise from several relevant sectors including power, transport, water and environment. Specifically, safeguards capacity will be considerably enhanced, on the ground and within the supervision team. Bank infrastructure experts from the relevant sector will be involved up-front in reviewing sub-projects in their disciplines. 41. Supervision strategy. Current supervision has been adequate. However, with the expanded project scale and the inclusion of new sectors, the project team will need adequate resources to

4 Margins are as follows: 1) 0.25% above the same maturity government bond rate for a fixed rate bullet loan (as in, 10-year loan matched to 10-year maturity bond); 2) 0.25% above the equivalent maturity government bond rate or a fixed rate amortizing loan (as in a 10-year amortizing loan with an average life of five years would be set against the five year government bond); 2) 0.50 per cent above the interest rate of the Treasury Bill maturing closest to the interest rest date of the loan for a floating rate loan (so a 10-year annual reset loan is matched against the 1-year T-bill). The grace period and amortization schedule is matched to the on-lending contract of the PFIs. Interest rates for the Government securities used as reference rates for Taka Facility Loans are disclosed on the Bangladesh Bank webpage. Dollar loans are made at 0.50 per cent above the relevant interbank rate for floating rate loans (interest rates resetting every 12 months or less) and 0.25 per cent above the relevant swap rate for fixed rate loans, as determined by the International Swaps and Derivatives Association (ISDAFIX).

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implement careful and dedicated technical support, with the support of safeguards, FM, and procurement experts, as well as technical experts with sectoral expertise. The implementation support effort will be focused on outcomes, and clear and detailed aide-memoires will be produced and follow-up by the Borrower will be ensured. Further, project locations and sites will be visited on an ongoing basis, to conduct physical inspection, with the participation of safeguards, FM, and procurement experts, as well as technical experts with sectoral expertise. The team will prepare a supervision plan and work across departments to assure adequate dedicated time for the sector experts. The supervision resources will also be enhanced. 42. Nevertheless, the implementation risk of the scaled-up project was judged substantial. This is not least because of political economy risks. Though GOB has declared a very supportive attitude to PPPs and the IPFF agenda in particular, risks remain in several aspects. First, the success of IPFF in the power sector could only be replicated in other sectors provided adequate support in government regulations (non-adverse regulations) in those sectors as well. Second, governance risks due to inappropriate project sponsors, or divergence of views between the agency awarding the deal and the implementing sponsor, as well as contractual issues, can arise. Risk-mitigation measures include the following. IPFF has been strongly ring-fenced with standard World Bank procedures and processes, and has functioned well in the past 3 years. The governance risk is more relevant in mega-projects where the government’s role is considerable, and in which IPFF is not likely involved. Further governance mitigation measures are listed in the risk identification worksheet. The IPFF extensive reliance on the market mechanism is a risk-mitigation measure in itself. The private sector participants operate under incentive-based contractual arrangements designed to align their interests with those of GOB. The IPFF mechanism further adds transparent levels of control to the PPP process. 43. The weak in-country technical expertise is mitigated in several ways. First, a number of leading financial institutions are represented in Bangladesh. Second, an increasing number of Bangladeshis with substantive experience in leading international markets have returned to assume key positions in local financial institutions. It should finally be underlined that IPFF has contained a significant capacity-building component. The project has a simple structure of two components, over 97 percent of the funding is focused on a simple credit line. The project relies on a single leading agency – BB, though other agencies are also involved, including BOI, Planning Commission, Ministry of Finance. Coordination and involvement of all agencies have been adequate. There is little staff turnover. Monitoring capacity and internal oversight systems of BB over participating financial institutions and the project as a whole have been strong, as a bank regulator. BB has led the project over the past 3 years with robust implementation capacity, including in M&E, and by now seasoned experience of PPP lending management. This experience is distilled into a BB operations manual. However, complexity is increased due to entry into infrastructure sectors other than power. To address this, IPFF will require increased capacity for handling a larger pipeline in various sectors. BB (the project implementing agency) and IIFC (the technical support agency) can build o the past three years’ experience with IPFF, while BOI and the Planning Commission (and the new PPP cell when that is created) will require active capacity building efforts. In response, the IPFF includes an increased capacity building funding allocation of $7 million. The in-house capacity will also be beefed up with sector experts in power, transport, and environment. 44. Retroactive financing. The project may include retroactive financing which will meet the Bank’s procurement guidelines. Agreement will be reached with the Government at negotiations on retroactive financing of $15 million towards the credit line component of the project. The date for retroactive financing is November 1, 2009. The retroactive financing is necessitated so as to

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avoid a gap in the functioning of the credit line, in view of outstanding applications.5 Maintaining momentum in PPP funding is of the essence. Safeguards

45. As required for Financial Intermediary (FI) operations, an Environmental and Social Management Framework (ESMF) has been agreed to support the process of environmental review, clearance and monitoring of investment projects to be financed by IPFF. The parent project ESMF was thoroughly re-worked to incorporate the larger projects allowed under the additional financing. In particular, it is possible that at least some of the projects are Category “A” projects or projects involving land acquisition, resettlement, or indigenous peoples. Exact project locations and footprints are currently not known, the approach to ensure mitigation of impacts and risk management is the compilation of an Environmental and Social Management Framework that will ensure compliance with World Bank policies. Once the specific sub-project locations and footprints are known in the course of the project implementation, appropriate due-diligence with regards to the specific sub-project will be carried out. This will include an Environmental and Social Impact Assessment on the basis on which specific Environmental and Social Management Plans will be formulated, as required. However, in view of the limited capacity in the area for the purposes of the IPFF, all investment projects under the IPFF will be subject to prior review and approval of ESIAs by the World Bank. At the same time, a program of capacity building for Bangladesh Bank and the FIs implementing sub-projects will be put in place (possibly with IFC’s Environmental and Social Department) to ensure that, over time, capacity to conduct due diligence on social and environmental aspects of infrastructure projects on PPP basis is built. It is to be noted that, IPFF does not support investment projects that (i) include activities on the IFC/MIGA exclusion list and (ii) activities inside protected areas.

46. The new ESMF screens all investments based on the significance of impact using World Bank policies. Sub-projects involving coal are excluded from the project scope. Projects involving significant environment impact, land acquisition, resettlement, or indigenous peoples will prepare appropriate plans in compliance with World Bank policy criteria. Under the parent IPFF operation, the only subprojects that were considered were those that did not involve significant environment impacts, land acquisition, resettlement, or indigenous peoples. All such sub projects carried out an EA and prepared an Environmental Management and Monitoring Plan as needed to address salient environmental and social risks, and were properly reviewed and cleared by the Bank Safeguards team. The new ESMF will allow IIFC to screen the sub projects into A, B and C category based on associated environment and social risks, and undertake appropriate level of environment and social due diligence. The Bank safeguards review for all category ‘A’ type sub projects will be done at three levels – first by the IIFC safeguards specialists followed by field based Bank safeguards specialists and the Regional Safeguards Adviser based in Washington DC. The category ‘B’ and ‘C’ type sub projects will be reviewed and cleared at two levels – first by the IIFC safeguards specialists followed by field based Bank safeguards specialist. IIFC will make necessary institutional and personnel arrangements to

5 The undisbursed credit line balance for the project is $12.32 million (the disbursed amount stands at $35.18 million out of a total of $47.5 IDA funding). In addition, GOB has contributed project funding in the amount of $10 million towards the credit line component, none of which has been used. Thus, total remaining funds for PPP financing stands at $22.32 million. IPFF has received pending applications totaling $33.03 million, for three small power plants, which are expected to be approved by December 2009. The approval will exhaust the full extent of the total project lending component, and will require an additional $10.7 million.

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ensure proper implementation and supervision. IIFC also coordinates the environmental impact assessment activities that form part of the technical assistance component of the project.

47. National ESIA capacity is insufficient for the purposes of the IPFF, and therefore all investment projects under the IPFF are subject to prior review and approval of ESIAs by the World Bank. The safeguards documents including the ESMF and the EAs for the first years’ sub-projects have been disclosed 120 days before the Board date. The EAs and RAPs (as required) for other sub-projects will be prepared using ESMF in time before the bidding process is completed, and will be publically disclosed to generally allow 120 days. In addition, IPFF does not support investment projects that (i) include activities on the IFC/MIGA exclusion list, or (ii) include activities inside protected areas. To assist in the preparation of investment proposals eligible for financing under the IPFF, the Project includes provision initially for IIFC to contract ESIA services on behalf of project promoters. In addition, to ensure that adequate institutional capacity is in place for implementation of the ESMF, the Project includes technical assistance for the establishment of a safeguards function within IIFC. At the same time, a program of capacity building for Bangladesh Bank and the FIs implementing sub-projects will be put in place to ensure that, over time, capacity to conduct due diligence on social and environmental aspects of infrastructure projects on PPP basis is built. This capacity building program could take place jointly with IFC Environmental and Social Department. Governance and Anti-Corruption 48. Bangladesh has a challenging environment with regard to governance and anti-corruption issues. It is widely acknowledged that there is significant risk of corruption, particularly with public institutions where large scale procurement is involved. The parent IPFF project’s implementing agency is Bangladesh Bank, the central bank. GOB and specifically BB and BOI are committed to promoting PPP arrangements in the country. PICOM suffers from weak absorption capacity, which has prevented it from playing as strong a role in forging the national PPP framework as it would be expected to do. As a result, the IPFF team has involved the Planning Commission and the new PPP Cell, into the country’s efforts in strengthening the national PPP framework. The governance of participating financial institutions is also monitored on a regular basis by Bangladesh bank, the central bank. 49. Governance risks stem from the PPP sponsors, who cannot be known in advance, and whose review is executed case by case. Core PPP risks of non-strict adhesion to procurement procedure and post transaction misconduct have been managed in the project as it is, adequately so as of 2006. The safeguards issue / reputational risk is the only one changing due to scaling up and bigger projects, and in response the project has thoroughly re-worked the ESMF. Other governance risks (procurement, FM, government commitment) are outlined above and in the Risk Worksheet. For larger projects which contain a PPP element, the IPFF mechanism has retained full capacity to choose whether to participate or not, based on a series of safeguards tests as well as governance concerns, after detailed evaluation of the project structure, sponsors, financiers, and the governance arrangements for contract award. This is backed by the double gate-keeper mechanism of both Bangladesh Bank approval and IDA “No Objection”, which is required for every project IPFF funds. The implementation and governance risks have been mitigated, also using the experience of the parent project, via detailed scrutiny and requirements for transparency of each sub-project by the supervision team. Specifically, each sub-project is subjected to a three-level examination by 1) IIFC, the technical advisor to Bangladesh Bank; 2) Bangladesh Bank, and 3) the supervision team. Within each examination, the focus is on several specific areas: technical aspects (with detailed input by sector specialists both on the Bangladesh implementing and the

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supervision sides), financial aspects of the transaction, environmental and social aspects of the transaction (again with participation of relevant experts on both sides); procurement aspects; background checks by the team on project sponsors, their corporate links, board of director composition, associated businesses, supporting financing entity / consortium, details of structuring of the transaction, and other aspects of relevance. Further disclosures could be required as part of this process, in the interest of full transparency and good governance. 50. Private provision of infrastructure services challenges many well-established and powerful interests in Bangladesh. In some cases these interests are close to the decision-making process required for PPP, even in the entities entrusted to bring about private sector involvement. While the close involvement of IDA will always act as some antidote to regressive elements, the key agent for change in the project is the empowerment of private sector entrepreneurs and the creation of a vested interest, through their investment, to counter those obstacles. It is a key prerequisite, therefore, that the private sector involvement be of parties whose integrity is beyond reproach and who can challenge even the most powerful vested interests with impunity. The Government's Anti-Corruption Program 2006-2008 has focused on governance improvements in the regulatory sphere and among government and private entities. The Bank is also conducting a Judicial Reform project. High court reforms have granted independence to the Court, and lower courts are being reformed as well. IDA will not provide finance for investment projects in the infrastructure sector that do not meet appropriate governance standards. Sub-loans to Participating Financial Intermediaries (PFIs) are assessed by the project sponsor for environment, financial, and technical feasibility and standards, and subsequently approved by BB, subject to IDA “No Objection”. This structure has also addressed governance and control issues around PPPs, meeting the need for market pricing, transparency of process, safeguards standards, and competitiveness, while still giving adequate incentives to promote engagement by the private sector. VI. Expected Outcomes 51. The project’s outcome indicators are similar to those of the parent project. However, the target values have been set at levels that recognize the scaled-up version of the additional financing. The framework for results monitoring for the scaled-up project activities is presented in Annex G. Bangladesh Bank will have primary responsibility for monitoring and evaluation (M&E). Bangladesh Bank will provide the Bank with interim financial progress reports, information on progress on key entity performance indicators, audited financial statements (within six months of the end of each financial year), and such other information as the Bank may reasonably require. These arrangements are working in a satisfactory manner under the ongoing parent project and will continue under the proposed additional financing. VII. Benefits and Risks 52. Benefits include, at a general level, the IPFF impact on the development of the financial system in Bangladesh, as well as the positive impact of investment in infrastructure on growth. More specifically, IPFF has turned US$64.16 million into a 5 percent increase in the total power capacity in Bangladesh. It is expected that the additional financing will similarly increase infrastructure provision in other sectors including transport, water treatment, waste, energy

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savings. The project will galvanize US$167 million in domestic funds for investment in infrastructure, leveraging private funding at 67 percent. The ultimate economic benefits of this credit will be derived from the contribution to the broader Bangladeshi economy derived from the infrastructure projects which are developed utilizing finance and technical assistance from the facility. In addition to new infrastructure services, benefits will include the creation of jobs, increased investment, and higher economic growth. Longer-term financing will allow project promoters to be more competitive in their tenders under this program and will also encourage successful participants to invest in more expensive and more reliable equipment, which will be more economically efficient in the longer term (and better serve Bangladesh’s needs). In addition to the direct economic benefits of the project there are additional gains generated through the enhanced technical capacity developed among financial institutions, the promotion of long term finance markets as well as the liberalization of regulations constraining financial intermediation. Financial markets will also deepen and broaden from the lending maturity extension at the long-term end. It is further anticipated that the provision of Environment Impact Assessments to be financed under the project will improve the environmental standards of infrastructure projects in Bangladesh, with commensurate gains for society and the broader economy. 53. The risks which have been identified are listed below. Implementation risks and mitigation measures are discussed in paragraphs 40-41 above, FM –paragraph 25, procurement –paragraph 32, environment and social – paragraphs 43-44, and governance – paragraphs 47-88. Investment projects do not materialize. A strong pipeline of potential infrastructure projects was identified before committing to this undertaking. This was a lesson learned from earlier infrastructure funds in the region. In addition, the size of the facility has been initially kept small to avoid underutilization. The project crowds out local financial markets. The emphasis is on the avoidance of “crowding out” and on acting as a catalyst for commercial funding, with small amounts of seed money. This is why IPFF is diversifying away from power, where the catalyst role has been somewhat performed, into other sectors where PPPs are not yet used by the market. The IPFF funding mechanism adds transparency and market-based incentives to the existing methodology for the allocation of public funds to infrastructure projects, as per the OP8.30 review. The proposed structure operates on the basis of a single eligibility standard open for all financial institutions, creating a level playing field. Excessive exposure to the power sector. The IPFF project is also structured around a diversification strategy for PPP investments, focusing away from the power sector and on other sectors including waste management, water treatment, energy saving equipment, environmental projects including carbon financing, container terminals, land ports and bridges. Further, all sub-projects have minimized the risk of insufficient gas supply via supplemental GOB guarantees. Credit Risk. Funds are allocated to infrastructure projects endorsed by government with credit risk assumed by local financial institutions. Projects are supported on market terms and require at least a 30 percent sponsor equity participation. Participating Financial Intermediaries have been required to co-invest 20 percent of debt financing (i.e. 14 percent of total project cost) to reinforce alignment of their interests and the PPP objectives. Project promoters face market interest rates. Participating Financial Intermediaries are selected subject to transparent and stringent eligibility criteria as agreed with the Bank, and as applied by BB, who is an experienced supervisor and is best placed to judge Participating Financial Intermediaries quality and soundness. Design risks. The Project has shown in its past operation experience that this design risk can be mitigated successfully by appropriate mechanisms. Specifically, this Project is being managed by financial sector staff, with the necessary participation of infrastructure staff and safeguards experts with the intention of addressing concerns raised by the IEG. Drawing on the recommendations of the reviews by IEG and QAG, the proposed Project includes a thorough and

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upfront OP 8.30 review. The findings of the review are mainstreamed into the Project’s design and implementation arrangements, and full compliance with OP8.30 is ensured. Additionally, IEG identified risk factors for lines of credit such as high cancellation rates, benefits of technical assistance, and lessons in the municipal infrastructure, FSD and PSD sectors, have been closely examined and all relevant lessons have been factored-in. VIII. Financial Terms and Conditions for Additional Financing 54. The proposed credit will be on standard IDA terms, with a maturity of 40 years, including a grace period of 10 years. The credit will continue to require a technical agreement between Bangladesh Bank and IIFC or any suitably qualified body, as well as eligibility agreements between Bangladesh Bank and participating financial institutions. Before the Board Date, the additional staffing on the GoB side should be in place. The ESIAs for the first two projects in the pipeline are ready ahead of negotiations.

A1

Annex A: Project description by component

The proposed credit would be on IDA terms, with a maturity of 40 years, including a grace period of 10 years. The project would make available partial debt financing through private-sector financial intermediaries for eligible, government-sponsored infrastructure projects to be developed by the private sector. The project would also seek to assist the GOB in facilitating new infrastructure projects with a potential for private-sector participation. Component 1: Infrastructure Development Lending Component ($250 million) This component will replenish the funding mechanism that adds transparent levels of control and market-based incentives to the existing methodology for allocating public funds to priority infrastructure projects identified by the GOB and developed on the basis of PPP. While IDA funds will be available in Special Drawing Rights, it is envisaged that on-lending under the project will be in taka or US dollars to match the revenues of the underlying infrastructure investment projects. The IPFF structure does not create any new licensed financial institutions but rather operates under the oversight of Bangladesh Bank with existing regulated local financial institutions. Funds are allocated to local financial institutions for onlending to private-sector infrastructure projects selected by the GOB. Financing is administered by Bangladesh Bank. The private-sector infrastructure promoters operate under incentive-based contractual arrangements designed to align their interests with those of the GOB. Subloans to participating financial institutions (PFIs) for investment projects eligible for financing are approved by the Bangladesh Bank as agent of the GOB subject to IDA “No Objection.” criteria. Projects are supported on market terms and require at least a 25 percent equity component from the private infrastructure promoter and a further minimum of 15 percent of third-party funding, which may come from the PFIs. The PFIs are required to co-invest as well as assume all credit risk to reinforce alignment of their interests and those of the GOB. Syndication among PFIs and with nonparticipating institutions is permitted, but the PFIs are responsible for credit administration and recovery. Participation under the IPFF is open to all financial institutions that meet the Bangladesh Bank eligibility criteria. The selection of participating financial institutions from among local financial institutions licensed by and in good standing with Bangladesh Bank has been carried out by the bank on a transparent basis, Additional criteria have been determined by the Bangladesh Bank on the basis of managerial and technical strength, financial capacity, and so forth. IDA provides its “No Objection” status for the selected PFIs on the basis of eligibility under IDA Operation Policy 8.30, “Financial Intermediary Lending.” The interest rate for funds available under the facility is market determined, using a process that references the risk-free rate (typically government bonds) for financings of a comparable maturity and interest period. Subloans made to promoters of infrastructure projects are at market rates determined by the participating financial institutions. The project-implementation responsibilities of Bangladesh Bank, as the agent of the GOB, are purely administrative—approvals are based on transparent checklists of technical criteria, not on the basis of judgment—and thus do not impinge upon the role of bank as regulator. Subject to GOB (Ministry of Finance) approval, the proposed amount of GOB contribution is $50 million made available towards component 1 (the credit line), eligible for local expenditures only. Component 2: Technical Assistance Component ($7 million) The technical assistance component assists the GOB by developing the capacity of the Bangladesh Bank, Board if Investment (PICOM), and the Planning Commission to work with PPP framework, management, and implementation guidelines, as well as with financial markets. More broadly, the technical assistance components help these stakeholders foster policy, regulatory, and institutional reforms and building capacity to manage PPP processes.

A2

Table A1: Summary of IPFF Project Activities

Plant Description Location Total PPP cost (US$ mln)

IPFF-funded (IDA +GOB) (US$ mln)

Capacity Implementation Status

Doreen Power Generation Systems Ltd. PFI: NCC Bank Ltd

Tangail $16.00 US$ 8.20 22 MW

Operational and supplying power to national grid

Doreen Power Generation Systems Ltd. PFI: NCC Bank Ltd

Narshingdi $16.00 US$ 8.20 22 MW

Operational and supplying power to national grid

Doreen Power Generation Systems Ltd. PFI: NCC Bank Ltd

Feni $16.00 US$ 8.20 22 MW

Operational and supplying power to national grid

Doreen Power House and Technologies Ltd. PFI: Dhaka Bank and IIDFC

Mohipal, Feni

$4.50 US$ 2.62 11 MW

Operational and supplying power to national grid

Regent Power Ltd. PFI: Eastern Bank Ltd and Uttara Finance Ltd.

Barabkunda, Chittagong

$15.82 US$ 7.96 22 MW

Operational and supplying power to national grid

Malancha Holdings Ltd PFI: Dutch Bangla Bank Ltd.

Dhaka EPZ $22.54 US$ 13.33 35 MW

Operational and supplying power to national grid

Malancha Holdings Ltd PFI: Dhaka Bank Ltd and IDLC Finance Ltd

Chittagong EPZ

$29.20 US$ 15.65 44 MW

Operational and supplying power to national grid

Total Pipeline US$ 120.0 US$ 64.16 178 MW

Summary of other performance aspects

11 PFIs have signed up and carefully maintain the eligibility status for project implementation. The 11 PFIs remain compliant to eligibility criteria as regularly assessed by BB. A complete list of the PFIs includes: Dhaka Bank Ltd., Dutch-Bangla Bank Ltd., Eastern Bank Ltd., National Credit & Commerce Bank Ltd., IDLC Finance Ltd., International Leasing & Financial Services Ltd., Prime Finance & Investment Ltd., United Leasing Company Ltd., Uttara Finance &

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Investment Ltd., GSP Finance Company (Bangladesh) Ltd., and Industrial & Infrastructure Development Finance Company Ltd.

Table A2. Summary of the On-Lending Component (US$ in million)

Particulars US$ A. DISBURSED : Five small power plants having production capacity of 99 MW altogether

35.18

A. Total Disbursed 35.18 B. TO BE DISBURSED : 35 MW DEPZ 44 MW CEPZ 10 MW Desh SPP

13.33 15.65 4.05

B. Total to be Disbursed 33.03 C. Total 178 MW Power Plant (A+B) 68.21 D. Total allocation as per TPP 57.50 E. More required (D-C) (10.71)

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Annex B: Summary: Feasibility Study on Energy Efficiency Opportunities 6 Energy efficiency is becoming a priority to help meet excessive growth in energy demand. By all accounts, energy efficiency programs have always represented a win-win-win option by providing positive returns to the government, energy consumers and the environment. Such programs can: conserve natural resources; reduce the environmental pollution and carbon footprint of the energy sector; reduce a country’s dependence on fossil fuels thus enhancing its energy security; ease infrastructure bottlenecks and impacts of temporary power shortfalls; and improve industrial and commercial competitiveness through reduced operating costs. In terms of project economics, energy efficiency options are seen as “no regrets” policies, since their net financial cost can be negative, i.e., the measures are justified purely based on high financial returns. Energy conservation involves avoiding wastage of energy and adopting methods to save (conserve) energy without affecting productivity and comfort. Energy conservation does not always imply using more efficient technology but avoiding wastage through rational use of energy, often triggered by rational pricing (without subsidies) and innovative tariff mechanisms. Despite the promising benefits of energy efficiency, achieving significant and sustained efficiency gains has proved a daunting challenge in all countries and Bangladesh is no different. The major constraints to increased energy efficiency financing and implementation are inherently institutional in nature. When regulations are missing, or institutions cannot enforce or govern energy efficiency regulations, the impact is often detrimental. If financial institutions are not geared to lending for energy efficiency, which are not asset-based deals and pose higher risk perceptions, it becomes a major barrier as end-users (residential consumer, industries, etc.) do not have the incentives to invest, which generally costs more initially but pays back over time (life cycle cost basis). Finally, lack of information about energy efficiency and awareness amongst various stakeholders leads to market failure in EE sector. Solar power is not new but its increasing utilization is mostly rooted in the off-grid areas. To date more than 300,000 solar home systems are operating in the country. The urban consumer market for renewable based energy utilization as an alternative power source is now believed to be ready. It is possible that the usage of solar power could be scaled up and diversified in the urban areas as well where the power consumption is higher and demand is increasing due to insecure grid supply. Being a new technology it is very important to identify the possible applications of renewable energy (RE) to provide energy solution to the user. Out of many existing RE options, this feasibility study considers only the most prospective strategies in the case of Bangladesh, namely, solar powered security lighting, solar water heating, solar water pumping and industrial solar dryers. There exists noteworthy potential in the rooftop grid-tied solar photovoltaic power system, solar street and signal lighting, BIPV, biogas, wind power, wind-PV hybrid power, PV-biogas hybrid power, biomass gasifier that needs to be explored in the future according to its suitability for Bangladesh.

Electricity Sector. The following represent an illustrative list of possible energy efficiency and DSM measures, primarily for the electricity sector, in the Bangladesh context:

(i) Increased use of energy efficient lighting (fluorescent tubelights, CFLs, LEDs, reflectors)

(ii) Commercial space cooling energy efficiency improvements (iii) Power generation heat rate improvements

6 Bangladesh Roadmap for Energy Efficiency Improvements and Demand Side Management, World Bank, 2009.

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(iv) Controlling motor load using power factor improvement and cyclo-converter (v) Introduction of low energy architecture and building designs (vi) Use of automatic energy conservation devices (room occupancy sensors, thermostat

controls, etc.) (vii) Water pumping energy efficiency improvements. (viii) Improved operation and maintenance of industrial processes (ix) Efficient refrigerators (x) Motor energy efficiency (and replacement of rewound motors with new ones)

The above list is not meant to be exhaustive, and more options can be identified. Among the above options, replacement of conventional fluorescent tube lights with new energy saving types (T5), appropriate use of reflector in lighting systems, expanding the use of more efficient small, medium and large motors, improving the efficiency of commercial space cooling, and power generation heat rate improvement have been considered. The choice is mainly based on two factors – the potential and data availability for these options. Experience in other countries indicate that an effective and energy efficient selection of lighting, motor controls, cooling and heating systems in urban households, industrial and commercial installations can help save significant amounts of energy and address peak load problems. Large Industries are mostly publicly owned. Fertilizer is the second largest gas user after the power sector. In 2006-07, the fertilizer sector consumed 20 percent of the natural gas. Except for one, all the fertilizer factories in Bangladesh are more than 20 years old. Replacing these old plants with modern efficient ones can increase the production 1.5 times to 2 times, and reduce the energy intensity of production. The other large industries where significant potential exists for energy efficiency are sugar, pulp and paper, the Chattak Cement Factory, the TSP fertilizer factory, and the bricks and ceramic BISF plant. This feasibility study considers only sugar cogeneration, but there are significant potential in the sugar mill itself. All the public sector sugar mills are so old that building new efficient ones are the only solutions. The Pulp and Paper industry was not investigated because there are only two large public sector mills in operation. Similarly, TSP and BISF are the only factories in their respective categories. Medium sized industries are mostly in the private sector. There are many groups of industries, but the energy intensive ones are brick kilns, steel making from scrap, steel-rerolling mills, clinker grinding mills, ceramic and glass industries, and pulp and paper. The most significant industry in this category is the highly inefficient and polluting coal-burning brick kilns. The reason this feasibility study did not deal with this industry is that there already are at least 3 serious and well funded on-going interventions. Under the medium sized industry category, steel rerolling mills have been selected for this study because the energy saving potential is large, and the energy efficiency improvement technology is readily identifiable. SME Sector. The main barriers to energy efficiency implementation in the SME sector are that the opportunities are smaller in size, and are dispersed resulting in higher transaction costs. Furthermore, SME owners lack both technical skills and financial strengths to undertake energy efficiency investments. Hence, some form of bundling activity at the industry cluster level by a third party (an ESCO or even the industry association) is required. The normal approach is to conduct energy audits, followed by simple housekeeping, and finally implementing energy efficiency technologies. In some cases, one or two major pieces of equipment can be replaced with new ones. Some important SMEs with energy efficiency improvement potential in Bangladesh are light engineering (welding, bending fitting, etc.), foundry, plastic forming and recycling, textile, and paper and board. The following cross-cutting technologies have been identified as potential opportunities to save both electricity and gas: medium and large sized

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motors, industrial boilers, cogeneration, air conditioning and refrigeration, lights and fans, and rainwater harvesting. Efficiency improvement of motors in any country will have a significant impact on energy consumption because of its extensive use in all sectors. In this report three interventions directly or indirectly deal with motors. High efficiency motors cost more than standard motors, but save more energy in the long run and are cost-effective on a lifecycle cost comparison basis. Standardization of motors through minimum energy performance standards (MEPS) and energy efficiency labeling can have a big impact in shifting the stock of motors from standard efficiency to high efficiency motors and variable speed motors. Increased awareness can also play a big role because the various options and their savings are unknown to users of motors, as emphasis is always on the initial cost rather than the lifecycle cost of this equipment. Boiler is another gas-burning technology extensively used in industries and large commercial establishments. Whereas the international norm for efficiency is at least 85 percent, boilers in Bangladesh are operating at around 70 percent on an average. Boiler efficiency improvement is therefore an attractive, cost-effective option. Cogeneration is in essence also a boiler option because the vented flue gas is passed through a waste-heat boiler to recover the heat. Cogeneration is a thermodynamically efficient use of fuel because in separate production of electricity some energy must be rejected as waste heat, but in cogeneration this thermal energy is put to good use, as useful heat. In Bangladesh, cogeneration has huge prospects because more than 1000 MW of captive generation is there in the industry sector, where waste heat is not tapped. Air-conditioning and refrigeration are employed across many sectors, industries, commercial establishments, and residential households. This is a slightly difficult option for EE because the retrofit is not easy to perform, but a well organized effort could be undertaken to capture the energy savings, particularly in case of new construction. The above analysis provides a long list of options after a thorough study of the various sectors where significant quantities of energy get consumed. From that list the feasibility study has identified nineteen (19) most prospective options, based on expert judgment of their energy saving potential. The 19 options are presented in the table with their respective investment amounts, and discussed below in detail. The discussion below emphasizes further investment potential that is tens of times larger than the initial conservative estimate considered in the final table. 1. Utilizing Pressure Reduction in Natural Gas Supply for Power Production. The

estimated potential is based on data from 6 gas fields and 2 distribution companies. If all 18 producing gas fields of Bangladesh and 4 distribution companies are incorporated, the power production potential could double. New gas fields as they come into production will add additional power potential. From wellhead gas stream: Potential of 9 MW from 6-8 locations in the 6 gas fields. From downstream locations: 27 MW from 23 RMS and CGS. BPDB in collaboration with the gas companies can take up these ventures. GTCL or the gas producing companies can also produce the power and sell to BPDB adding extra revenue.

2. Replacement Combined Cycle Gas Turbines (CCGT) for Baseload Power Generation.

All gas-fired steam thermal plants under BPDB can be phased out gradually by CCGTs built either in the public or in the private sector. Further 4 plants can be targeted for rehabilitation. This project can be implemented in one of the three ways (i) By BPDB, (ii) Public-Private

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Partnership, or (iii) As an IPP. BPDB may find it difficult to develop and implement such a large project, therefore, a PPP or pure private project approach may be easier to implement.

3. State-of-the-art or Aero-derivative Gas Turbines as Peaking Plants, to replace the

Haripur [99 MW; 1987] and Shajibazar [57 MW; 1969] gas turbine power plants. A further 4 plants of total 215 MW capacity can be targeted. All GTs owned by BPDB that are more than 20 years old can be replaced. This project must be implemented by BPDB because private sector will not be interested to operate a peaking power plant unless a suitable buyback tariff is guaranteed. Electricity Generation Company of Bangladesh (EGCB) is going to operate two peaking plants (one ADB financed, and one IDA financed). This may prove to be a successful model for financing peaking plants, especially the high efficiency aero-derivative turbines.

4. Improved Natural Gas Cook Stoves. Titas has 1.35 million households connected to its

system. Taking one fourth of that number in the first phase for the replacement of the old stove at a cost of $20/stove, the total investment requirement will be $6.67 million. Awareness Campaign assumes an initial cost of $5 million, and $1.5 million for the next 4 years. All utility companies (distributing) will be the implementing agency for the project. The project covers all franchise areas of the four distribution companies - up to 4 million stoves.

5. Metering Household and Commercial Gas Water Heating Usage. The project size is

5,000 customers (20-gallon heaters = 1000; 100-gallon heaters = 4,000), for a total investment of $0.625 million. Unless gas water heaters are phased out or energy bills increase to the point where users opt to use electric or solar heaters instead, it will continue to grow with the urban population, up to a potential of 12,000 units. Gas utility companies can accomplish this type of projects through third party contractors. Gas Utility meter readers will be deployed.

6. Commercial and Industrial Fluorescent Lights Re-lamping Program. The total

investment of 175 units of new generation T5 30W electronic ballast 4-ft fluorescent lamps, amounts to $2.625 million ($15,000 per unit). This is relevant for commercial establishments, manufacturing industries, educational institutions, hotels, hospitals, showrooms, household, billboards and indeed any place where fluorescent lamps (FL) are used. Apart from the 175 units, there is further potential for 3000 garments factories each having an average of 1200 FLs; 1500 knitting factories – each 800 FLs; and 2000 other establishments – each 500 FLs. Projects like these are best implemented by Energy Service Companies (ESCO) if one were created (this cost can be absorbed by the project). Another possibility is to engage the utility company or government agency to undertake bulk procurement of T-5s and provision for distribution and installation, including a possible replacement program.

7. Fluorescent Lamp Reflectors. The proposed replacement program will retrofit improved

reflectors in 175 medium sized factories each having on average 2000 FLs (total 350,000 FLs). For reflectors costing $6, the total investment is $1.68 million (assuming 80 percent of existing FLs fitted with improved reflectors and 20 percent of FLs removed from service). Project implementation through an ESCO is expected to cost another $200,000, for a total project investment of $1.88 million. Commercial establishments, manufacturing industries, educational institutions, showrooms, household, and indeed anywhere FLs are used can introduce reflectors to improve the indoor light-Lux quality. A total estimate of further potential investment comprises 3000 garment factories each having an average of 2500 FLs;

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1500 knitting factories each having an average of 1500 FLs; plus large commercial buildings, universities; hospitals, etc.

8. Ceiling Fan Replacement Program. A total of 500,000 energy efficient 56˝ ceiling fans

(each at $30) will amount to $15 million. There is no firm estimate of ceiling fans in the country. With almost one million large size ceiling fans estimated for large textile factories alone, the total number of ceiling fans of all types could be tens of millions of units if smaller fans are included. This would require survey work. Although the initial project assumes 500 units of garment factories with 1000 fans each, 1000 additional units can be added to the project at a later stage. Such a replacement program could be offered and supported by either a government program or through the electric utility or even through third party ESCOs. Because the units are very similar it should be possible to undertake bulk procurement to bring down the incremental cost and ensure high quality of the replacement equipment. One possibility is a Buyback arrangement for energy inefficient old device with new energy efficient device, with factories repaying the investment through savings on their electricity bills. Another approach might be a special revolving fund set up under a development or commercial bank catering to the textile industry. Finally, government or utilities could offer some subsidy to consumers.

9. Passive Cooling of Commercial Buildings. 200 commercial buildings are considered for the retrofit project. The cavity wall investment for 200 buildings would be $8.0 million. For the external louver the investment for 200 buildings would be $11.8 million.7 All commercial/industrial establishments, educational institutions, markets, hospitals, banks, office buildings that use space cooling are eligible for this project. The total potential is probably half the total number of large buildings. Not all buildings can be brought under the purview of this project, but 1000 can be targeted. The best and quickest way to implement such measures is to incorporate them in the building code. Before such regulation comes into effect, an ESCO can be formed to take up this project.

10. Solar Powered Security lighting in Urban Buildings. This project will install Solar PV

security lights in 5000 households and 1000 commercial buildings. Since commercial buildings require 5 times more security lights, the total number of installations would be 10,000. Cost of each installation is $1,250. For 10,000 units the total investment would be $12.5 million. It should be noted that the batteries would need replacement every 4-5 years. Therefore, another $7.5 million would be required for battery replacement over the 20 year life of the project. Initial Investment: $12.5 million; total over 20 years: $20 million. The further potential for this investment covers all large buildings in urban areas, or 200,000 households and 5,000 commercial buildings. GOB is very keen to promote solar electricity, and has earmarked more than $30 million for renewable energy projects. Projects like these are best implemented by ESCO whose cost could be borne by GOB.

11. Solar Water Heaters (SWH) to replace Gas and Electric Heaters in Cities. Additional

investment for SWH over gas heater is $500/per SWH installation, for a total investment (200 40-gallon SWHs) of $100,000. Additional investment for SWH over electric heater is $600/per SWH installation, for a total investment (200 40-gallon SWHs) of $120,000. The potential market is commercial operations throughout the country and selected urban households in Dhaka and Chittagong - at the initial stage, 10,000 commercial operations and

7 The cavity wall will cost $18,900, alternate external louver/aluminum panels/ solar reflective glass will cost $37,800. Cost of repairing insulation, plugging leakages, AC tuning and miscellaneous expenses are assumed to be $1000/floor; for 21 floors cost is $21,000. Total Cost: For Cavity Wall Case = $39,900/building; For External Louver Case = $58,800.

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5,000 households. SWH systems can only be promoted by taking energy cost to a level where the long term savings can justify high initial investment. It is also a lifestyle option that requires awareness and information campaign to motivate people. At one stage, regulatory intervention will also be required especially for commercial operations. The utilities may offer some incentives through partial cost sharing in switching existing systems because it is going to be a win-win situation for both utilities and consumers. It is relatively small investment and the utilities can earmark a certain amount for this purpose in their budget. The utilities should undertake the initiative with a major media campaign.

12. Retrofitting Urea Fertilizer Plants to Improve Energy Use. A retrofit project that will replace some of the old equipment at Zia Fertilizer Company Ltd. is envisaged. The estimates of investment for each unit are ammonia plant: $10.5 million; urea plant: $8 million; utility plant: $7 million; electrical equipment, instrumentation and machinery maintenance: $5 million; supervision and miscellaneous expenses: $2 million. The urea plant can be rehabilitated for $32.5 million or built new for $500 million. Three urea-ammonia fertilizer plants can be phased out immediately, and over time the other three urea-ammonia plants would need to be replaced. 3 urea plants can undergo rehabilitation, and 3 urea plants need to be replaced with new plants. The retrofit project can only be implemented by BCIC, which has good experience. The new urea plants can be constructed as PPPs.

13. Bagasse Cogeneration at North Bengal Sugar Mills (NBSM). This is a 6MW extraction

cum condensing turbine cogeneration facility at NBSM (2MW consumed in the mill; 4 MW exported to the grid). The estimates for major components are high pressure boiler ($2.5 million), steam turbine and generator ($3.5 million), electrical equipment plus electricity export facility ($0.75 million), construction and miscellaneous expenses ($0.25 million), for a total investment of $7 million. Bagasse Cogeneration can be implemented in all the mills under BSFIC. The private mills are not suitable because of their smaller size. A further 14 projects can be implemented. This project can be implemented by BSFIC or via a PPP.

14. Steel Mill Furnace Rehabilitation for Energy Efficiency. A project that will retrofit 50

steel re-rolling mills. The investment required to retrofit a typical mill is $50,000 (recuperator with all piping - $20,000; insulation - $10,000; measuring equipment and controllers – $20,000). The total investment is $2.5 million. It is estimated that 25 percent of mills will undergo modernization on their own, while 25 percent will choose not to convert, or half of the mills have market potential. A further 100 mills of total annual capacity of 0.75 million tons of steel can be targeted. This can be done as a PPP.

15. Industrial Boiler Retrofits for Energy Efficiency. This project will install 40 large boilers

of varying capacity8 in Titas franchise to attain 8 percent incremental efficiency. Equipment costs include economizer ($4,500-$15,000); air pre-heater ($6,000); automatic blowdown system ($3,000). The total investment for 40 boilers is $1.2 million for equipment, accessories and associated costs. These 40 boilers are a representative sample of the Titas franchise area, which has over 900 boilers of similar capacity and efficiency distribution. Including all 4 distribution companies will double the total number of boilers. If 60 percent of total boilers have room for improvement through techniques considered in this project, the market is 944 boilers.9 The project can be implemented by the gas utility company in

8 3 boilers of 10+ tons capacity, 12 boilers of 5-10 tons capacity, 12 of 2-5 tons, and 13 of 1-2 tons (total 40). 9 The number of boilers in the Titas franchise area is 10+ ton = 81; 5-10 ton = 266; 2-5 ton = 387; 1-2 ton = 210.

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collaboration with industrial customers or their representative bodies like BGMEA, BKMEA, or third party ESCOs.

16. Variable speed drive (and Cyclo Convertors) for commercial and industrial motors. The

current study assumes 500 motors of 7.5 kW size in the re-rolling mills and 500 motors of 25 kW size in the CNG stations. The prices of cyclo-converters (CC) vary from $1100 to $2000 in the 5 to 30 kW range. In the present study, the costs of a 7.5 kW CC in re-rolling mills and a 25 kW CC in CNG stations have been estimated to be $1200 and $1600 respectively. Total project investment (1000 motors in re-rolling mills and CNG stations) is $1.4 million. All single speed heavy motor (10 hp and above) is suitable for the retrofit. The industry sector alone has a potential of lowering power load by 100 MW; including commercial and residential sectors, the potential can easily exceed 150 MW. 50000 existing heavy motors in the commercial and industrial sectors could be retrofitted with VSDs or CCs. New motors can also be targeted. This could be done via PPPs.

17. Cogeneration in Industries with Captive Generators. This will install 100 cogeneration facilities in industries having at least 1 MW gas-fired generator. The estimates of investment for each item are waste-heat boiler ($0.2 million); housing for boiler ($0.05 million); accessories ($0.05 million); steam piping and insulation ($0.05 million), for a cost of $0.35 million per installation and total cost of $35 million. Cogeneration can be implemented in approximately 50 percent of the 600 industries where there is captive generation – 300 to 400 cogeneration plants can be set up. A CDM project with solid support from the BOI, MoEPMR and MoEF can push this project forward, on a PPP or private basis.

18. Replacement of Diesel/Electric Pumps with Solar Irrigation Pumps. Given limited

experience with solar pumping in Bangladesh, a pilot project is suggested. In principle, solar irrigation can replace all low lift and shallow pumps immediately. In the future even deep water pumps can be replaced. But there are many uncertainties in the technology and its application. Therefore, the true potential can only be gauged after a well designed pilot project is run. The pilot project would install 100 solar irrigation pumps in different regions of Bangladesh under a range of operating conditions. Per-installation investment is $4,500 (2 kW-peak solar panels: $3000; accessories: $ 400; submersible pump: $800; other expenses: $300; investment for one installation: $4500). The total investment for 100 units is $0.45 million. Shallow diesel pumps: 100,000 pumps all over the country, but mainly in the north and north-west. A government organization or PPP can promote this project.

19. Replacement of Electric Dryer by Solar Dryer. A project that will install solar drying

systems in 50 food industries is envisaged. The cost to build a 300 sq. ft. dryer including insulated duct-cum-blower to circulate the hot air and air filtering system would be $8000 with a yearly maintenance cost of $300. The total investment for 50 Solar Dryers: $0.40 million. The maximum potential for this project is difficult to estimate. Assuming suppressed demand, i.e., industries shifting from crude sun drying to fossil fuel based drying, about half of the food and agriculture industry can be targeted. The scope of the project in other sectors has not been ascertained. The ultimate potential is about 1000 industries including those that presently use sun drying. This could be a PPP or private investment.

In summary, the overall investment potential in the energy efficiency sector though PPPs and private investment is $99.4 million, and via public investment a further $355.93 million, for a total of $455.33 mission. These figures have conservatively considered only a very small share of the overall market potential. Taking the PPP and private investment only, and applying an

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uncertainty discount factor of 25 percent under the assumption that a quarter of the projects will not materialize in the short run, we have an estimate of potential investment in the energy efficiency sector of $25 million. Table B1. Summary of Investment, Energy Savings and CO2 Reduction Potential Option Investment

(Million US$)

Project Life (Year)

Energy Saving per Year

CO2 Reduction

(Ton/year) Power from Gas Pressure (1.25MW) 1.6 20 10 GWh 7,000CCGT (175 MW) 140 20 6.9 BCF 384,000Aero-derivative Turbine (135 MW) * 34 20 1 BCF 56,000Cook Stove (324,000 units) 6.67 10 0.88 BCF 49,000Gas Metering (5,000 meters) 0.63 N/A N/A N/AT8-to-T5 (350,000 lamps) † 2.89 10 15.3 GWh 10,600Improved Reflectors (280,000 units) 1.88 10 11.8 GWh 8,200Ceiling fan (500,000 fans) † 15.3 15 46.8 GWh 32,700Passive Cooling (200 buildings) 8 15 31.4 GWh 22,000Solar Security Light (10,000 systems) 20 20 2 GWh 1,400Solar Water Heaters (200 units) * 0.10 20 0.0082 BCF 460Urea Fertilizer Retrofit (1 plant) 32.5 10 7 BCF 390,000Sugar Cogeneration (1 plant) 7 20 24.3 GWh 17,000Steel Re-rolling Mills (50 mills) 2.5 15 0.353 BCF 19,000Industrial Boiler (40 units) † 1.44 10 0.27 BCF 15,000VSD for Motors (1,000 units) † 1.54 15 9.25 GWh 6500Industrial Cogeneration (100 units) † 37.6 20 3.6 BCF 200,000Solar Irrigation (100 pumps) {diesel} 0.45 20 0.10 ML 270 Solar Dryer (50 units) 0.4 15 1.5 GWh 1,050

† For these options a project implementation cost has been added to the initial investment * For these options incremental investment (project cost – baseline cost) has been shown

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Annex C: Summary: Feasibility Study on PPP Opportunities in Water Treatment10 The Dhaka watershed area is in considerably polluted state from densely-situated industrial clusters which either do not use water treatment plants or under-use them due to operation failure. The watershed of Dhaka covers an area of approximately 1,500 square kilometers, covering Dhaka Metropolitan Area, Dhaka-Narayanganj-Demra project area, Narayanganj, and some areas in Tangail, Gazipur, Manikganj and Narayanganj districts. The river system in the Dhaka watershed includes the Dhaleswari, Kaliganga, Turag, Tongi Khal, Buriganga, Balu, Bangshi and Lakhya Rivers. The industries in these areas are leather, textiles, and chemicals (Table C1).

Table C1: Industrial Areas in and around Dhaka City Cluster Name Type of

Industry Number of Industries

Total Wastewater Discharge (m3/day)

Total BOD load (kg/day)

Discharge into

Hazaribagh Leather 136 15,800 17,600 Turag Tongi BSCIC Textiles 13 4,300 4,400 Tongi Khal Fatulla Textiles 6 3,400 3,850 Buriganga Kanchpur Textiles 9 4,300 3,480 Lakhya Tejgaon Textiles,

Chemical 16 27

3,350 535

1,960 475

Begunbari Khal

Tarabo Textiles 14 1,150 1,475 Lakhya

About 22,000 industrial concerns have been identified in Greater Dhaka. Some are classified in the heaviest environment-impact categories according to the DoE environmental Guidelines for Industries (1997), and require special consideration for environmental impact mitigations – textile, garments & jute; paper, pulp & wood; dyeing, painting & printing; metallurgy; plastics; tanneries & shoe-making; chemicals; pharmaceuticals; construction-related, etc. Yet most discharge their wastes untreated into the sewerage system or the peripheral river system directly.

The water quality of all the five rivers around Dhaka, including the Balu and the Lakhya, is deteriorating rapidly due to pollution from industrial and municipal sources, and the situation turns particularly alarming during the dry season. The only sewage treatment plant in Dhaka watershed is located at Pagla. It has a capacity of treating 0.12 million cubic meters of sewage from domestic sources. Unfortunately, due to non-functioning of some parts of the collection system, it receives only 25-30 percent of design sewage flow. There is no Common Effluent Treatment Plant in the Dhaka watershed for treatment of industrial effluents. However, many medium to large industries have treatment plants but on most cases these treatment plants are not being operated on regular basis. The few-and-far-between government water treatment plants in existence cannot cope with the tempo of pollution generation.11 The only sewage treatment plant in Dhaka watershed is located at Pagla. It has a capacity of treating 0.12 million cubic meters of sewage from domestic sources. Unfortunately, due to non-functioning of some parts of the collection system, it receives only 25-30 percent of design sewage flow. There is no Common Effluent Treatment Plant in the Dhaka watershed for treatment of industrial effluents. However, many medium to large industries have treatment plants but on most cases these treatment plants are not being operated on regular basis. To take the example of the textile dyeing industry, major

10 Summarized from “Industrial Environmental Compliance and Pollution Control in Greater Dhaka - Phase I”, Water Modeling (IWM) Bangladesh, commissioned by the World Bank. May 2007. 11 The pre-feasibility study on ‘Study To Investigate Alternate Location of The Intake of Sayedabad Water Treatment Plan’ conducted by IWM in 2004 states that “Due to the deteriorating quality of the raw water coming through its intake structure at Sarulia, the Sayedabad water treatment plant is facing significant problems in treating water during the dry season.”

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environmental problems include high water consumption and wastewater discharges. Wastewater from dyeing industries contains high biochemical and chemical oxygen demand, total dissolved and suspended solids, and color. The wastewater is discharged into the environment without any treatment or only after primary treatment. Even after primary treatment, the effluent pollutants are much higher than those permitted by Bangladesh National Standards. A recent survey measured the environmental impact of industry in Greater Dhaka12, finding that only 12 percent of industries comply with the environmental standard of biochemical oxygen demand; the concentration of total dissolved solids was found up to 8 times higher than norm (though 81 percent of outfits were within norm); 38 percent of outfits exceeded the standard for concentration of total suspended solid; total ammonia concentration was found at places up to 100 times higher than norm (though 62 percent of outfits were within limit), and chromium and lead were found in excessive quantities in 19 percent of locations (Table C2). This considerably contributes to the pollution of the Dhaka urban watershed, but DoE has not fully enforced its existing wastewater disposal regulations.

Table C2: Test Results of Industrial Wastewater Samples (DPM, 2006)

Indicator

Environmental Quality Standards (Textile)

Actual values

Min Max Average

pH 6.5-9 4.5 10.2 7.6

BOD (mg/l) 150.0 9750.0 518.2 50.0

COD (mg/l) 200.0 18540.0 958.8 200.0

NH3-N (mg/l) 50.0 385.8 19.2 -

NH4-N (mg/l) 0.0 99.2 4.0 -

Ammonia (mg/l) 5.0 485.0 23.1 5.0

TSS (mg/l) 150.0 705.0 149.2 150.0

TDS (mg/l) 2100.0 17207.0 2108.2 2100.0

PO4 (mg/l) 8.0 11.5 2.0 -

Cr (mg/l) 0.5 0.5 0.2 0.5

Pb (mg/l) 0.1 0.7 0.4 0.1

Hg (µg/l) 0.01 0.0 0.0 0.0

Oil & Grease (mg/l) 10.0 2.5 0.7 10.0 The major source of water supply to Dhaka city is sourced 83 percent from deep tubewells and the balance from the water treatment plants situated at Saidabad, Chandnighat and two smaller units in Narayanganj. The remand remains high, however, in spite of DWASA response. Sufficient water is available in the peripheral rivers for meeting the demand up to 2025. The main problem in exploiting this source is increasingly deteriorating water quality due to indiscriminate discharge of untreated municipal wastewater and industrial effluent. If no measures are undertaken for pollution control in the Dhaka watershed, then the peripheral rivers as sources for water supply to Dhaka city would not be sustainable. The need for environment actions, including water treatment, is paramount to the welfare of over 10 million Greater Dhaka residents.13 12 DPM (Development Planning & Management) Consultants, et al, May 2006; Feasibility Study on Alternative Intake for Saidabad Water Treatment Plant, Final Report; Dhaka Water Supply & Sewerage Authority (DWASA), Government of Bangladesh. 13 Draft Final Report of “Resource Assessment and Monitoring of surface Water Sources for Dhaka City” IWM (2006).

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Pollution prevention and control can be profitable, which goes hand in hand with increases in productivity, quality improvement and compliance with regulations. Cleaner Technology should be promoted more aggressively through demonstration projects and information dissemination in order to enhance the level of awareness among the industries in order to reduce the pollution load to the environment. Mitigation measures should be in force to minimize water consumption and thereby reducing wastewater quantity. Importance is also need to be given to the creation of employee awareness, adoption of cleaner production processes and providing improved wastewater treatment systems. A sustainable PPP solution of the industrial water pollution problem has been suggested in a recent study of nine industrial cluster areas within the Dhaka watershed (described in Box C1).14 The study identifies six hotspots in the Dhaka watershed for special monitoring and action.

- Chandnighat Water Treatment Plant (CWTP) intake on Buriganga River at Chandnighat; nearly 39 million litres are withdrawn from this intake everyday for Dhaka city water supply;

- Saidabad Water Treatment Plant (SWTP) intake on Lakhya River at Sarulia; nearly 225 million litres are withdrawn from this intake everyday for Dhaka city water supply; Bangladesh government has decided to extend the SWTP capacity to 450 mlpd (million litre per day);

- Rupganj located on the right bank of Lakhya River where an alternative intake of the SWTP has been proposed in a feasibility study conducted by DWASA (DPM, 2006);

- Rekabi Bazar located at the confluence of the Dhaleswari and Lakhya Rivers. The pollutant load from the entire Dhaka watershed is flushed through this location to Meghna River;

- Hemayetpur, where the relocation of Hazaribagh Tanneries is proposed; - Gazipur, where the water quality in the Turag River is in severe stress due to discharge

from the industrial cluster of Gazipur. Incentives for establishing and running effluent treatment plants, developing environmental management plans for all existing industries and introducing pollution charges for pollutant discharges could be effective interventions at the policy level. For industries having combined physico-chemical and biological effluent treatment plant, the weaker waste stream could be directly sent to the cheaper-to-operate biological effluent treatment plant. In planning effluent treatment plant construction, technical and financial viability analysis should be conducted to determine the appropriate design and cost involved, and select the most appropriate option between individual and common facilities. One option is to use individual physico-chemical and/ or biological treatment plants. Savings might be realized via individual physico-chemical treatment plant followed by a common effluent treatment plant (e.g., based on activated sludge process, wastewater pond/ lagoon system). There could be multiple common treatment plants serving industries located in a particular area within a cluster (as an alternative to constructing of costly conveyance system for transportation of wastewater). Yet a third option is to have a common treatment plant consisting of physico-chemical and biological treatment process for all industries within the cluster (possibly with some pre-treatment, e.g., screening, oil and grease traps). Depending on the locations of industries within the cluster, multiple CETPs may be considered for a particular cluster, each serving industries located in a particular area within a cluster (as an alternative to constructing of costly conveyance system for transportation of wastewater).

14 Tongi, Hazaribagh, Tejgaon, Tarabo, Narayanganj within Dhaka City, and Savar, Gazipur, the Dhaka Export Processing Zone, and Ghorashal outside of Dhaka City.

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Box C1. Description of the pollution levels and effect in 9 industrial clusters around Dhaka The Hazaribagh tannery cluster is the biggest tannery cluster in Bangladesh, handling about 85% of the country’s total production of hides/skin. It is located on the bank of the river Buriganga, in the western part of Dhaka city. There are about 185 tanneries in this cluster. Most of these are small to medium and about 20 to 30 can be categorized as large. During peak season (4-months starting from the Eid-ul Azha), at most 100 tanneries become operational, while during lean season only about 40 to 45 tanneries operate. On average, about 74,000 tons of raw hides/skins are processed in this tannery cluster. At present the combined maximum wastewater flow from the tanneries amount to 21,600 m3/day. The Hazaribagh industrial cluster is a mixed residential/ industrial area. The total size of this area is about 25 hectares.

The leather industry, important for exports, has raised serious environmental concerns and awareness recently. DoE has categorized it as more hazardous than textile, pharmaceutical, fertilizer and paper industries. About 240 tons (400 tons during peak season) of raw hides is processed every day, which generates a huge volume of effluents. There is no separate drains for rainwater which gets mixed with up with the process water. No tannery has got any system for treatment of effluent generated. There is also not much space available in many units for treatment or pre-treatment of effluent. Open space is scarce, the fleshing and in some tanneries even raw hides/skin trimmings are dumped into the sewerage canals indiscriminately. The tanneries are discharging untreated wastewater through open drains to Buriganga river. The chrome tanning process used is not sufficiently controlled, resulting in considerable discharge of tanning salt as well. No organized system of chrome recovery and reuse of direct recycling of liquor is practiced. Chrome shavings are dumped in big piles close to the embankment of river Buriganga. Chrome savings are also incinerated in the open land at the dumping sites to dispose them off.

General water management concepts are yet to take roots in the leather industry. On an average the wastewater generated per ton of raw hide is very high at 54 m3. At the discharge point, after being diluted by household wastewater/ rainwater, the pollutant characteristics of composite wastewater are hundreds of times higher than standards suggest. The estimated total solid waste production is 260 tons/day, if which 67 tons per day are reused in some cottage industries for production of glue and low-cost leather products. Some of the leftovers are collected by Dhaka City Corporation along with household or other wastes. The wastewater also produces 61,000 tons/year of sludge which eventually finds its way to the nearby canal and river causing siltation. As a result, the Buriganga River which flows near Hazaribagh is one of the most polluted rivers in Bangladesh. Besides the tannery industries, many other industrial, chemical, food processing, sanitary sewage, lubricants from launch/marine vessels etc. are polluting this river. There is an intake facility of Chandnighat Water Treatment Plant, just at the downstream of the Hazaribagh disposal point. The situation becomes very grave especially during dry season when the flow in the river reduces to its minimum. So, the pollution generated by the tannery industries of Hazaribagh has created a serious concern.

GOB has decided to relocate the cluster 15 km away, to Hemayetpur, Savar (beside the Dhaleswari river). About 200 hectares of land has been acquired for this proposed tannery cluster. There are provisions for a common effluent treatment plant of 20,000 m3/day capacity. There will also be 3 central chrome recovery plant and a solid waste dumping yards. There are provisions for on-site pre-treatment facilities such as grit chamber, lime sedimentation tank etc. There will be separate drainage systems for rainwater and tannery effluent. Separate collection systems will be developed for chrome waste and common effluent treatment plant influent. For the industrial water needs a water treatment plant will also be constructed. Given the time-span of the relocation, the medium-term could use a common effluent treatment plant, which in the longer term can be used by DWASA as a sewage treatment plant to serve the adjacent area. Other viable measures include cleaner technology in medium and large industries, chrome recovery on reuse plant, compulsory chrome management, and enhancement of reuse of solid wastes related industries (glue manufacturing; weaving mats/cheap carpets; bio gas; fertilizer; poultry feed; hand-made leather products, etc).

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Box C1, continued.

Tejgaon industrial cluster is located within the central part of Dhaka city, covering an area of about 2.5 km2. About 129 different types of industries are operating in this cluster. Different types of textile industries, e.g., dying, printing, composite, or washing, constitute the largest number followed by steel mills. The effluent from the Tejgaon industrial cluster makes its way to the Saidabad surface water treatment plant, contributing adversely to the raw water quality at the intake point of the largest surface water treatment plant of Dhaka city. Given the high land prices in the area, there is little viability in planning water treatment plans. A set of policy interventions could instead include incentives for relocating the polluting industries, developing environmental management plans for all existing industries and introducing pollution charges.

The Tarabo industrial cluster is located on the bank of the Lakhya River stretching from the Kanchpur Bridge to Rupganj ferry ghat and covering an area of about 5 km2. There are about 21 major industries in the cluster, including 9 dyeing industries, 7 textile mills, 2 paper mills, 1 garment industry, 1 jute mill and 1 oil mill. Industrial effluents from this cluster are primarily discharged into the Lakhya River. Industrial effluent discharged into the Lakhya River is of particular concern because the raw water intake point of the Saidabad water treatment plant is located on the bank of the Lakhya River, about 9 km downstream of the Rupganj ferry ghat. Major industries (textile, chemical, glucose) would have to establish physico-chemical and/or biological treatment processes, preferably common effluent treatment plants when similar industries are located in close proximity.

Tongi industrial cluster is located to the east of the Dhaka city, covering an area of about 22.3 km2. Varieties of industries are located in this cluster. There are about 219 industries operating in this area, dominated by 83 garments industries and about 44 different types of textile-dyeing, cotton, knitting and spinning industries. Although the pollutant concentrations of the wastewater from this cluster is relatively high (e.g., compared to the Tejgaon cluster), the measured wastewater flow rates are very low. As a result, the calculated waste load from this cluster is relatively low. Two common effluent treatment plants should be planned – one at the outfall from BSCIC industrial estate and other on the western side.

The Narayanganj industrial cluster is located along right bank of the Lakhya river from Demra ferry ghat to Narayanganj city including the DND area, and covers a large area of about 87.4 km2. Shyampur industrial area and Fatullah BSCIC industrial area are also located within this cluster. There are about 47 major industries in the cluster, including 20 dyeing and textile mills, 11 salt industries, 5 jute mills, 4 garment factories, 3 oil mills, 2 paper mills and 1 condensed milk factory. Industrial effluents of this cluster are discharged into the Buriganga, Dhaleshwari and Lakhya rivers. This area requires a comprehensive intervention for addressing the sewage disposal, storm water drainage and industrial effluent disposal issue. On the other hand, bigger industries, e.g., some of the paper mills and dyeing factories located within this cluster should, by industry, benefit from combined physico-chemical and biological effluent treatment plants.

The Savar industrial cluster is located along both sides of the Dhaka-Aricha highway from Hemayetpur bus stand to Savar bus stand, covering an area of about 9 km2. There are about 191 industries operating in this area, dominated by 82 garments industries and about 42 different types of textile-dyeing, cotton, knitting and spinning industries. Industries in Savar cluster are located in a haphazard way. The major polluters are the textile dyeing and washing industries. Most of the industries are without any treatment facilities. Some industries have treatment plants but they are not operated regularly. Industrial effluents of this cluster are mainly discharged into the Bangshi River and Karnatoli khal. Among the 9 industrial clusters covered in this study, Savar is the least polluting cluster with respect to almost all the parameters considered in this study. The strategy in this cluster would be similar to Tarabo Cluster. All industries should have effluent treatment plants for pre-treatment of effluent. The pre-treated effluent would pass into a common effluent treatment plant for biological treatment before discharge into Bangshi River.

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For industries that do not have effluent treatment plants, the weaker stream may be discharged to the municipal sewerage system, if it exists, while the stronger stream could be stored in ponds or lagoons within or adjacent to the industry during the dry season. Such storage should be of adequate design, provided sufficient area is available. For small industrial units which use less process water can contain its entire wastewater during the dry period that is considered critical for water pollution. Slowly discharging this wastewater having less pollution load into the storm drainage system during the wet season would greatly reduce its impact on the receiving water bodies and the environment in general. Major industries would, however, need to establish physico-chemical and/or biological treatment processes, preferably common treatment plants (when similar industries are located in close proximity. The exact type of biological treatment e.g., stabilization lagoons, trickling filters or fixed film processes, or activated sludge process, will depend on other important factors such as availability of adequate space, energy consumption, desired level of effluent quality and most importantly the unit costs of treatment. Depending on the quality of wastewater from individual industries, some pre-treatment may be needed at individual industry level, before the wastewater

Box C1, continued.

The Gazipur industrial cluster covers a relatively larger area of about 168 km2. The major industries are located at Board Bazar, Rajendrapur, Vhawal, Konabari BSCIC and Kashimpur industrial area. Varieties of industries are situated in this cluster. There are about 553 industries of which 282 garments industries and 113 textile-dyeing-cotton-washing industries dominating in this cluster. Industrial effluent from this cluster is discharged into the Turag and Balu Rivers. Around 94 percent of organic pollution load of this cluster appears to be coming through the Kashimpur outfall, special attention should be given for pollution control and prevention for industries discharging through this outfall on a priority basis.

The DEPZ cluster comprises the DEPZ, DEPZ (extended), Ashulia and Jirabo areas, covering an area of about 36 km2. Garments (100 separate outfits) and textiles (34 outfits) related industries dominate this cluster. The industrial effluents of this cluster are eventually discharged into the Bangshi River through two major khals, namely the Nolam Kunda khal and the Sokundi khal. Among the 9 industrial clusters covered in this study, the DEPZ cluster is the most polluting cluster in terms of total suspended solids and sulfate loads, and ranks fourth most polluting in terms of BOD load, and sixth in terms of ammonia load. The Bangshi River has very feeble freshwater flow in the dry months, inadequate to assimilate, dilute or flush the large load of pollutants. Further industrial expansion in the area should be stopped. All industries should establish appropriate effluent treatment plans. A common effluent treatment plant on the banks of Bangshi River should immediately be implemented for secondary treatment of pre-treated effluents from the industries.

The Ghorashal cluster is located along the left bank of the Lakhya River at Palash and Ghorashal, covering an area of about 14 km2. The industrial effluents of this cluster are discharged into the Lakhya River. The Ghorashal fertilizer factory and a number of paper mills (Capital paper mill and Leena paper mill) are the main industries of this cluster. The outfalls from this cluster are detrimental as they also add to the pollution of the intake water for the Saidabad water treatment plant. Technical interventions for this cluster may include individual effluent treatment plants for the large paper mills as well as installation of appropriate wastewater treatment system for removal of ammonia from the wastewater of Ghorashal fertilizer factory. Air stripping process may be considered as an option for such treatment.

Source: “Industrial Environmental Compliance and Pollution Control in Greater Dhaka - Phase I”, Water Modeling (IWM) Bangladesh, commissioned by the World Bank. May 2007

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is sent to the common treatment plant. Technical intervention options (except treatment), such as use of alternative raw materials; changing processes within the industry, and recovery of process chemicals; segregation and separate disposal of stronger and weaker waste streams, etc. are also applicable to majority of the industries in the clusters. A back of the envelope calculation of the magnitude of investment involved is as follows. The nine clusters require about 23 common treatment plants (see Box C1 – this is very conservative and focused on the short term, considering there are 6,547 garment firms in existence, and cost-effective allocation would suggest grouping about 100 firms to a common effluent plant, or 70 plants for the garments industry alone). Even focusing on the most pressing needs, there are 41locations of effluent outfalls coming out of the nine clusters identified in the Dhaka watershed which carry the highest combined flow of domestic and industrial effluent, and require priority in being addressed. Each treatment plant is set up at the cost of about $25 million (again, this is very conservative – current installation costs in Bangladesh are double that - Table C3). The resulting investment needed, in the very short term of 1-2 years, and under very conservative assumptions, is $575 million.

Table C3: Installation and Running Costs of ETPs in Bangladesh Capacity

(m3/month) Installation cost

(Tk.) Running cost**

(Tk./month) Running cost**

(Tk./m3) Normal range 20,000 4,000,000

6,000,000 400,000 800,000

20 - 40

Possible range 20,000 3,000,000 12,000,000

300,000 3,000,000

15 – 150

Source: SEI, BCAS and DFID (2005a) A more detailed approach is undertaken by the IWM study commissioned by the World Bank on which this annex is based. The study identified 6 scenarios for basic and most needed water treatment actions, and compute the cost of each option (Table C4). The cost calculation mainly covers the cost of effluent treatment plants. Costs of treatment facilities at the industry level and for collection system have not been computed because of lack of data. The average cost of the scenarios is $68 million, and the median is $58 million.

This project paper assumes an even more conservative figure of $35 million, given the probabilities of delay and administrative complications. Considerable risks include the weak enforcement of DoE rules and therefore reluctance of the private sector to undertake water treatment actions, as well as poor capacity and technical difficulties. Risk mitigation measures in this respect is the extensive work GOB and donors are undertaking on environment issues in the water treatment area.

Table C4: Estimated Costs of Required Treatment Facilities for Six Scenarios Scenario Observations Capital

Cost (US$) O&M Cost (US$) In 20 years

Scenario-1a: reduction of BOD5 concentration in industrial effluent to EQS of 50 mg/l

This scenario has demonstrated marginal improvement of water quality in Turag-Buriganga River as a whole and at Chandnighat in particular.

34,000,000 500,000,000

Scenario-1b: reduction of BOD5 concentration in both domestic and industrial effluent to EQS of 50 mg/l

The scenario shows a marked improvement in Turag-Buriganga River. The DO level rises from below 1 mg/l to 2 – 3 mg/l at Chandnighat. On the other hand the DO level in Lakhya rises above 3 mg/l.

45,000,000 600,000,000

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Scenario Observations Capital Cost (US$)

O&M Cost (US$) In 20 years

Scenario 2: attain minimum DO level of 4 mg/l at Sarulia and Chandnighat.

Improvement of river water quality at Chandnighat, Sarulia and other hotspots to DO level of 4 mg/l or above would require different effluent discharge quality standards. This standard varies from 10 – 50 mg/l of BOD5. This means that different discharge standard would require to be enforced at different locations. This might be impractical in the present context. Moreover, high efficiency treatment systems to treat effluent to BOD5 to as low as 10 mg/l might be unsustainable in Bangladesh context keeping in view of significant requirement of energy, operational, maintenance, and chemical inputs.

58,000,000 621,000,000

Scenario 3: same as scenario 2 but meeting river water quality standards at the hotspots of Rupganj, Rekabi Bazar and Hemayetpur

58,000,000 621,000,000

Scenario 4: same as scenario 3 but meeting river water quality standards at Gazipur

61,900,000 730,000,000

Scenario 5: Source control-adopting cleaner production approach and treatment of effluent at the industries.

Industry effluent treatment in CETPs after source control Domestic wastewater treatment at outfalls

20,600,000

366,300,000

Scenario 6a: attain DO level between 1 – 3 mg/l throughout the watershed

Effluent treatment efficiency of various levels would result in different water quality in rivers. For example: a) BOD5 of 40 - 60 mg/l would result DO level between 1 – 3 mg/l b) BOD5 of 25 - 30 mg/l would result DO level between 3 – 4 mg/l c) BOD5 of 5 - 10 mg/l would result DO level above 4 mg/l To achieve the various treatment efficiencies different treatment trains would be applicable. A discussion on these treatment trains have been presented in the previous section.

18,000,000 530,000,000

Scenario 6b: attain DO level between 3 – 4 mg/l throughout the watershed

146,500,000 762,000,000

Scenario 6c: attain DO level above 4 mg/l throughout the watershed

169,000,000 668,000,000

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Annex D: Feasibility Studies on the Infrastructure Requirements of Planned Economic Zones Over the last 25 years, export processing zones in Bangladesh have been a significant success in attracting investment and contributing to exports. These zones are the first initiatives using the concept of industrial clustering for promoting exports from the country. They are provided with special fiscal incentives, but the outputs from the zones are primarily restricted to exports. There are 8 such zones in the country, with two new proposals at Feni and Meghna and a proposed expansion at Comilla. Two more zones are in the planning stages – the Narsinghdi and the Kaliakoir IT zones. In the course of time, the impact of export processing zones on the local economy gradually declined due to the export-only restriction of zone usage, low linkages and multiplier effects with the local economy, and lack of sufficient funding for continued growth. Therefore, the government is contemplating the “next generation” concept of industrial clustering, i.e. economic zones, that will promote (a) public-private-partnerships and (b) linkages to the local economy by allowing local sales from these industrial clusters. The government is planning, in the near-term, the development of four zones, to be set up under the World Bank Private Sector Development Support Project (Table D1).  

Table D1. Zones considered for near-term development by the Bangladesh Government

  The heightened emphasis on PPPs in the 2009-10 budget has provoked policymakers to expand the set of PPP uses, including their role in export-processing and economic zones. Per existing Bangladesh regulations, the public sector can target establishment of new export-processing zones or expansion of existing ones, development of economic zones, construction of off-site infrastructure, capacity building and institutional development for the zones, whereas the private sector can step in the establishment of private export-processing zones, as well as (components of) economic zones, including infrastructure provision. In the case of public export-processing zones, such as Comilla and Chittagong, the role of PPPs is not explicitly recognized in the regulations, but the respective zone authority, BEPZA, has the right to outsource certain operations at its discretion. Individual EPZs do not have much discretion to make investment and policy decisions. In the case of economic zones, proposed regulations provide for PPP development of the entire zone or components thereof. In the former case, the approach involves a government agency performing the upfront development of the zones, consisting of preparatory activities like undertaking the feasibility study, project identification and preparation, land acquisition,

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preparation and development of master plans, obtaining consents and approvals. The agency then transfers the further development and management / operation of the zone (“downstream development”) to the private sector under a PPP arrangement. Downstream development and operation includes internal zone development, as well as delineating and standardizing plots for the units. This may also include development of specific infrastructure, social or residential components. In the operations phase, the zone developer is to operate and maintain the EZ, by attracting industrial units to set up industries within the zone. Yet another implementation option is for the government to outsource the management and operation of an existing government owned zone to a private entity for achieving better efficiencies in service delivery to the zone’s industrial units. In terms of the implementation of entire economic zones through PPPs, public and private sector functions are listed in Table D2. The model is further elaborated in the context of the proposed Kaliakoir Hi-tech Park, with step-by-step activities and responsibilities (see below). 

Table D2 Delineation of responsibilities in Entire Zone PPP Public Sector Private Sector Land acquisition Developing of Master Plan of the zone Guideline for developing the zone

Developing plots of land as per the Master Plan and the guidelines provided by Government Authority

Defining terms and conditions defining the interrelationship between private and the public sector Preparation of information memorandum on the zone and the market Development of off-site infrastructure Environmental clearance of the zone from DOE and from donors (if required) Regulation of the zone activities by BEZA Receiving license for Zone to be developed from BEZA

Internal development of roads, drainage and standardized industrial floor spaces. Marketing to the potential entrepreneurs for setting units in the zones Environmental and social impact mitigation Reporting to BEZA Payment of royalties and license fees to the Government, if any

 In the case of PPP implementation of zone components (as opposed to the entire zone), the public sector generally remains responsible for development and overall management of all zone activities, but offers discrete components of the zone (such as providing utilities or essential services) to the private sector. Such components could include providing utilities or essential services (power supply, central effluent treatment plant, common facility centre etc.). Some of the major types of component PPPs represent various concession arrangements including power generation and/or distribution, central effluent treatment plant, water supply (distribution and operation), gas distribution system, telecommunication and ICT, private security services, and waste management (Box D1). As component PPP projects may not initially have much demand due to zones not operating at full capacity, some government intervention may be needed to make such projects viable for private sector involvement.

 

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Box D1 – considerations in component PPPs – power, water treatment, water supply, gas COMPONENT PPP 1: POWER GENERATION AND SUPPLY Before installing the power plant, demand forecasting of power and its daily use behavior (the projected load curve) is very important. On the basis of such demand, the power plant capacity is to be determined, keeping provisions for expansion to meet future demand. The zone developer can buy bulk power from the private power generator through long term power purchase agreements. Any new economic zone will initially start with zero power demand, with the demand gradually increasing as the zone development progresses and tenants come into the zone. With low power requirements in the initial period, power plant installation may not be financially feasible for private participants. By the time the tenancy rate of the zone reaches 50 - 60 per cent, installation of a power plant would be more feasible with provisions for future capacity expansion. All power requirements of the site at that period of time, including the reserve needed during scheduled and unscheduled maintenance, is to be taken into account while sizing the power generation system. Alternatively, a power company could be permitted to sell surplus power to outside buyers. For such outside sales, the power company would need to take a license from the Bangladesh Energy Regulatory Commission as well as enter into a power transmission and power selling agreement. Phase wise expansion of power plant capacity along with surplus power sales provision to outside customers is particularly important in designing the PPP for power generation and supply to the zones. Considering the realities as mentioned above, a long-term concession with fiscal and other incentives could attract private investors in power generation and supply PPPs. COMPONENT PPP 2: CENTRAL EFFLUENT TREATMENT PLANT A central effluent treatment plant is key to meeting environmental standards. The installation costs of a treatment plant can vary significantly depending on factors such as the quality and source of the equipment (e.g. pumps and air blowers), land area and dimensions of construction, the quality and quantity of wastewater to be treated and the quality of the required output. Additionally, the operating costs of a treatment plant also depend on quality and quantity of inputs such as chemicals and energy, the method of treatment and the efficiency of plant management. Like PPPs in power generation, the installation of a central effluent treatment plant may not be initially feasible in new zones due to limited demand and may require government intervention. However, treatment plants can be initiated with a smaller configuration with provision for future expansion. A long-term concession could be designed to invite investors in this particular project. COMPONENT PPP 3: WATER SUPPLY AND SANITATION The zone developer may also engage a separate company to develop the water supply and sanitation system depending on the tenants’ demand for water. The cost of installing deep tube wells, pipelines and other accessories including the margin for the developer could be recovered through a charge on water usage. The capital cost of installation along with operation and maintenance cost is to be determined separately. At the outset, the internal demand may be insufficient to recover its costs, and may require government intervention. However, the water supply and sanitation system could provide services to the customers outside the zone until the internal demand is sufficient. Once the internal demand increases, the water supply company could concentrate on providing services to the zone tenants. A long-term concession may be provided for such services. COMPONENT PPP 4: GAS DISTRIBUTION SYSTEM In export-processing zones, regional gas distribution companies supply high-pressure gas up to the regulating and metering station, which is usually located either within or near the zone. From the station, the pressure is lowered and distributed to the rest of the zone. The gas distribution company lays out the internal grid based on the master plan provided by BEPZA. Each individual unit needs to apply directly to the gas distribution company for gas connection and each unit is separately billed by the distribution company. This is a purely public sector arrangement. Under a PPP arrangement, a private investor may be engaged to build the internal gas grid from the regulating and metering station and provide connections to the individual units. The private investor may be responsible for payment of bulk supply charges as monitored by the RMS and collecting gas billed to the individual units. The gas selling price to the units should include bulk purchase price, cost recovery and some margin for the private investor. The PPP contract may be termed gas supply and management contract. Source: Price Waterhouse Coopers Feasibility Study of PPP uses in economic / export-processing zones 2009

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The construction of off-site infrastructure is normally the responsibility of the relevant executing agency of the government. However, these usually take time and may delay the triggering of new economic zones. Therefore, the PPP may be packaged in such a manner that if some approach road is needed, the responsibility of constructing the road may be shifted to the private developer as against proper compensation and/or incentive scheme. In such instances, the design of the physical zone project will include a financial model addressing the internal rate of return issue for different levels of public and private sector involvement, both in terms of hard money and risks. Based on such analysis, project configurations and responsibilities of each party should be designed so that the private sector can be attracted. To address the initial low demand for power, effluent treatment and other services, a minimum initial investment is necessary from public sources to kick-start the zone operation. In such situations, government incentives can be devised to compensate for idle periods immediately following the discrete (and bulky) increases in service capacity, up to a point when the load demand for the service reaches a viable break-even point. Alternatively, the government could allow the sale of any surplus capacity of PPP services to users outside the economic zone. It should be noted that this will involve sale to the domestic tariff area. Considering the current power shortages faced by the nation, this option will be particularly attractive to private power generators. In Bangladesh specifically, the government plans involve an expansion of Comilla (a public export-processing zone) and the creation of a new public export-processing zone in Meghna, under the responsibility of BEPZA. The policymakers also intend to encourage private economic zone development such as the proposed Kaliakoir Hi-tech Park. On the other hand, the Narsingdi Hi-Tech Park project is yet to come under any of the formats upon government decision, requiring an assessment of how the site will be developed, given a choice of each possible regulatory regime. Figure D1. BEPZA –Led Model

      

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Figure D2. Private Developer–Led Model

  The Comilla expansion and Meghna development can use component PPPs in zone development and operations such as outsourcing the operations and management of the zone. Existing BEPZA procedures for capital expenditures will remain as per existing norms as will the existing role of BEPZA. The government will have the responsibility of developing any separate off-site infrastructure, required for the zone expansion. BEPZA can alternatively either lead the entire process, possibly outsourcing the operations and management contract only, or it can remain as owner and regulator, engaging a zone developer who would be responsible for construction, investment, marketing as well as operations. In that case, land-related costs would have to be carved out and funded by BEPZA, to make the project viable for the private developer. This model is designed so that the master developer obtains a lease over the land for the concession period, through a PPP-concession agreement and a lease agreement signed by BEPZA and the master developer special-purpose vehicle. The developer in turn pays a lease rent to BEPZA but this is unlikely to be sufficient to recover the cost of investment. The private developer would be allowed to run in a commercial manner with its own corporate governance, human resource management, business plan and procurement guidelines, as well as the power to set prices at par with market-oriented rates. Comilla is strategically located close to the border with the Indian state of Tripura and about 4 km from the Dhaka-Chittagong National Highway, roughly halfway between Dhaka and Chittagong. An existing export-processing zone (Comilla Phase 1) of 272 acres was established here in 1999. The proposed Comilla Phase 2 will be contiguous to the existing zone, on 475 acres of land. Well connected to the largest port in the country in Chittagong and the largest market in Dhaka, the zone has attracted (mainly textile) investments of over $70 million, generating exports of $227 million annually and employing over 8000 people. These parameters still compare poorly with the investment effectiveness of the Dhaka and Chittagong export-processing zones, however, justifying the Comilla zone extension. Potential demand for the zone area is presented in Figure D3. Prior to 2013, then, infrastructure and logistics would have to be completed for the zone, using PPPs per government preference. Feasibility analysis shows the zone to be fully occupied (and therefore break even) by 2019.

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Figure D3. Projected Demand for Comilla Phase 2

  Based on the detailed design and assessment of various project components, a snapshot of the estimated PPP investments required amounts to $27.8 million (Table D3). The proposed infrastructure development schedule foresees a construction time frame of 2 years with commercial operations starting in 2013. Table D3. Snapshot of estimated project cost at Comilla (other than land acquisition costs) Infrastructure item Construction cost Power plants, with a capacity of 31MVA $21 million Road works including drain, culvert, etc $8.3 million Effluent treatment and solid waste treatment $6.6 million Sewage network including STP, water supply including WTP $4.1 million Total Comilla Zone $40 million Meghna economic processing zone is located in the Munshiganj district (pop 1.3 million), around midway between Dhaka and Comilla, adjacent to the Dhaka-Chittagong highway, on a land parcel spanning approximately 600 acres. Currently the site of poorly connected. It is linked to Zia International Airport at Dhaka, some 40 km away, and to Narayanganj River port, some 20 km away. Within the site, most locations are only accessible by boat currently. Accessibility to Munshiganj is also an issue as there is no connecting road/bridge, and only a ferry is used. The Munshiganj district presents an opportunity to harness a latent potential for development of industries including RMG / textile, agro-processed food, leather products and footwear, light engineering, and pharmaceuticals. There exists a large untapped base of semi skilled and unskilled manpower. The industrial area of the zone is expected to fully lease out by the year 2022 (Figure D4). The development is envisaged to happen over two phases. Considering the current status of the site and the activities to be carried out for the proposed development, it has been proposed that the commercial operations at the zone could start by 2013, given preparatory works are completed by 2012. The second development phase, adding further infrastructure as demand rises, will complete by 2017.

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Figure D4. Area Offtake at Meghna EPZ

   The infrastructure works phasing proposed involves most of the works being carried out during phase 1, including 72 percent of the road works, 55 percent of the sewage work, 53 percent of the water supply, 70 percent of the electric works, and 50 percent of the gas power plant works. The on-site infrastructure was designed considering the facility to be developed in phases, for optimum project implementation & financial returns. Normative estimation of the demand for utilities etc yielded a total cost estimate of $52.3 million (Table D4). Table D4. Snapshot of estimated project cost at Meghna (other than land acquisition costs) Infrastructure item Construction cost Gas power Plant - (39MWA) $26 million Road works (Traffic Volume 12300 PCU/day) $13 million Effluent treatment (generation 2MLD) and solid waste treatment (generation 69.4 TPD)

$8 million

Sewage network (generation 2.5 MLD), water supply (9.84 MLD) $6.3 million Total Meghna Zone $53.3 million The Kaliakoir Hi-tech Park, located 40 km north of Dhaka, is a long pending government proposal to set up an industrial zone catering to Hi-tech industries in Bangladesh. The zone covers a total land area of 262 acres, all of which has been acquired. Further, a boundary wall has been completed and certain preliminary expenditure on roads and administrative buildings has been incurred. The zone is well connected to Dhaka via a railway line, and via highway, including to the Zia International Airport at Dhaka. The zone is designed to build upon Bangladesh’s comparative advantage in data services, basic outsourcing, as well as some hardware assembly in view of cheap labor, and very high IT industry growth rates recently, albeit from a small base. Development of the Kaliakoir Hi-Tech Park basically involves three components: IT space and hi-tech manufacturing area development, social infrastructure development, and a university and school. This project is being undertaken by the Bangladesh Computer Council, an agency of the Ministry of Science and Information Technology, under the economic zone regime, for which legislation is still in the formative stage and a regulatory authority is yet to be created. One

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option, to avoid the delay associated with using the economic zone regime, is to adopt a government-led strategy, with public and donor funding and the Bangladesh Computer Council as the executing agency, owner and developer. The components lending themselves to PPP arrangements include construction, operations and management and marketing works. Alternatively, the zone could be developed under PICOM jurisdiction via a special-purpose vehicle and relying entirely on PPP arrangements. The special purpose vehicle would be formed by the participating private sector, selected through bidding process, and the Bangladesh Computer Council, and will be in charge of developing and operating the various facets of the park. The recommended option is the PPP route with a 26 percent government shareholding. This model assumes that the government will give the entire zone development to a single private party (the Park Investor), with conditionalities being placed on developing the land based on government specifications. The obligations of both the parties would be controlled by a concession agreement detailing the duties and responsibilities of each of the parties; a shareholders agreement specifying the ownership details of the two parties in the special purpose vehicle created to develop and operate the park; and a land lease agreement specifying the lease of the land to the special purpose vehicle. This model avoids large financial obligations of the government related to the development of the zone and managing the retail sale/lease of the facilities. The government and the Bangladesh Computer Council are expected to arrange the provision of utilities (e.g. telephone cable, gas pipeline, and electricity supply grid) up to the periphery of the project by requesting relevant government agencies, leaving the zone bounds to the developer. The special purpose vehicle will prepare detailed concepts and layouts; arrange financing; obtain appropriate governmental approvals; prepare detailed design; develop infrastructure within the park area viz. roads, electricity supply, water, sewerage, telephone, gas, IT networks etc; promote the park; prepare plots of land for selling to different categories of entrepreneurs; and manage the administration of the park area. In this model, though the private sector takes the risk of retailing the plots and building spaces, they are given freedom to choose the detailed design of the development. However, the government will prescribe the minimum facilities through its land lease agreement, concession agreement and shareholders agreement, which are needed for the Hi-tech Park, as well as the nature of the businesses that will be allowed to be provided land within the zone. The demand for the Kaliakoir zone location is projected on average at 12 years to full occupancy. The set-up costs are projected to be incurred in two phases, by 2012 and 2019, respectively. Based on the detailed design and assessment of various project components, the estimated project costs amount to $21.1 million (Table D5). Table D5. Snapshot of estimated project cost at Kaliakoir (other than land acquisition costs) Infrastructure item Construction cost Power $2 million Road works (Traffic Volume 12300 PCU/day) $7 million Effluent treatment (generation 2MLD) and solid waste treatment (generation 69.4 TPD)

$8 million

Sewage network (generation 2.5 MLD), water supply (9.84 MLD) $4.1 million Total Kaliakoir Zone $21.1 million In deciding the structuring of PPP arrangements, it was noted that a minimum stake of 10-26 percent would be preferable from the government’s point of view, to maintain the desired direction of the project. On the other hand, budget constraints limit the extent of feasible

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government involvement. Further, the government does not have substantial experience in projects of this kind. This can be mitigated by outsourcing some combination of contracting out the engineering, procurement and construction; operation and management; and marketing. Investor interest in PPPs is uncertain in present market conditions, but could be induced via transfers of zone land / rights. Lenders would more comfortably participate in a project with larger private sector share, and have expressed the need for IPFF-type longer-term funding in order to do so. In terms of regulatory regime, the most conductive route would be to go under PICOM’s jurisdiction, per the feasibility study conducted by Price Waterhouse Coopers in 2009. The Narsingdi site is located within Dhaka’s semi-urban periphery (within 50 km of the city) and there are very few industries in the surrounding areas. The river Meghna is located about 1-2 km from the site towards the east. The zone is yet to be classified in terms of special zone regime, but the most practical and timely route would be to assign BEPZA, using component PPP arrangements. The land has already been identified by the government. The following industries were identified as having potential for being included in the proposed zone: textile/RMG; agro-processed food; leather and footwear; and light engineering. The demand for infrastructure services and utilities is estimated at a total cost of $28.5 million (Table D6). This site is in least advanced planning stage. Table D6. Snapshot of estimated project cost at Narsingdi Infrastructure item Construction cost Power Plant - (33MWA) $22 million Effluent treatment (generation 1.8MLD) and solid waste treatment (generation 70 TPD)

$6.5 million

Total Narsingdi Zone $28.5 million The total projected investment demand for the special zones planned for the near term is computed below, under back-of-the envelope political economy assumptions. The Comilla site is perceived as advanced as well as likely to happen with least amount of delay, given also BEPZA’s experience, and is attached a probability of 0 percent within the coming 5 years. The Meghna site if probable, but works have not started yet; whereas the Kaliakoir site works have started, but delays have proved exorbitant due to the lack of experience and capacity of the zone manager and owner, the Bangladesh Computer Council. For those reasons, both zones are assigned a probability of 50 percent of investment materializing within the coming 5 years. Finally, Narshingdi is both farthest from having completed its planning process, and under an undecided legal zone regime, and we assign 20 percent probability of any infrastructure works in the coming 5 years. These very basic and crude assumptions yield an approximate estimate of $50 million for demand for PPP funding by private sponsors in the area of economic zones (Table D7). Table D7. Estimated expected demand for PPP funding for special zone areas, 2010-2013 Infrastructure item Construction cost Power Plant $71 million Road works $28.3 million Effluent treatment and solid waste treatment $29.1 million Sewage network and water supply $14.5 million Total All Planned Zones $142.9 million The expected investment, given delays and procedural complications, is estimated at $10 million, in the coming 5 years.

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Annex E: Summary: Feasibility Study on the Transport Sector

The overall growth rates in the transport sector have been rapid, exceeding GDP growth (6.6 percent for passengers and 6.1 percent for freight). Road transport has grown most rapidly. Rail has lost market share and, moreover, rail freight traffic has fallen in absolute terms. Rapid urbanization combined with poor management of urban traffic, has resulted in congestion, severe air pollution and a lack of safety for all urban road users.

The road network expanded from some 7,500 kilometres in the 1970s to over 15,000 km in the mid-1990s. Maintenance resources did not keep pace and in Bangladesh roads deteriorate rapidly if they do not have regular maintenance. Even on main roads, traffic flows are low. Outside Greater Dhaka, the flows of four wheel vehicles are always less than 10,000 vehicles per day. However, congestion is often a problem due to the number of rickshaws, road works, poor road etc. Truck and bus services are almost entirely in the private sector. Fare regulation is relaxed.

Most of Bangladesh Railway’s (BR’s) passenger revenues come from inter-city services. There are effectively no urban commuter services. BR’s freight traffic has been largely dependent on a few low value commodities (food-grains, cement, stone, etc). More recently BR has succeeded in expanding its container service between Chittagong Port and the Inland Clearance Depot in Dhaka. BR has been making substantial losses, although its recent success in reducing manpower shows a capacity to tackle modernization. BR lacks capital to purchase modern rolling stock, but opportunities may exist for efficient private operators.

Investment Priorities

In the public sector, the Five Year Plan includes the following major projects: Bridges at Bhairab, Paksey and Rupsha. These projects have, or are likely to get,

funding from donors or agencies; Dhaka Eastern Bypass, which was planned in 1997 as a toll road. There has been

debate between the Government and the World Bank about the urban strategy implications of this project, and further studies are likely which would delay it;

Flyovers at major intersections in Dhaka. Two flyovers are included in the Dhaka Urban Transport Project (DUTP) which is funded by the World Bank;

A rail served Inland Container Depot (ICD) and the improvement of railway workshops. BR has improved the existing ICD at Dhaka with the help of a loan from Chittagong Port Authority.

Public-private partnerships in the transport sector have been mainly concerned with short-term franchise activities. Beximco has commissioned a study of an “Alternative Dhaka Bypass,” a lower cost solution than the Dhaka Eastern Bypass. This study concludes that about half of the investment cost would have to be provided as grant, with the private sector financing the remainder. Bangladesh investors are also known to be interested in toll concessions in return for undertaking road maintenance, as well as investment in roads infrastructure to create serviced land.

The short and long term opportunities for PPP in the transport sector are summarised below.

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Table E1. List of Some Important Mega Projects Sector Project Name Estimated

Cost In Billion US$

Model of PPP

Initiative Land Transport

1. Construction of Dhaka-Chittagong Access Control Highway

3.02 BOOT

2. Construction of Dhaka City Elevated Railway

2.80 BOOT

3. Construction of Dhaka City Underground Railway

3.10 BOOT/BOT

4. Construction of Dhaka City Elevated Expressway

1.23 BOOT/BOT

5. Construction of Dhaka-Narayanganj-Gazipur-Dhaka Elevated Expressway

1.90 BOOT/BOT

Land Transport 7. Bus Rapid Transit (BRT) 8. Articulated Bus Service 9. Bus Route Franchise – (BRF)

0.45 BOO

Water Transport

10. Construction of Chittagong Deep Sea Port

BOOT/BOT

Transport (smaller projects)

11. New Mooring Container Terminal - Chittagong

0.165 PPP

12. Mongla Port Jetty 0.025 PPP 13. 5 Land Ports (2nd round) 0.025 PPP 14. Inland Container Depot, Kamlapur 0.025 PPP 15. Rail equipment and track 0.1 PPP 16. Alternative or additional Chittagong

port development options 0.19 PPP

Total (excluding the construction of Chittagong Deep Sea Port)

13.03

The lager projects listed above will require long deal structuring periods, and are not highly likely in the short term of the next 5 years. The potential IPFF share of the remaining (smaller) projects are as follows: $92.4 million (New Mooring Container Terminal), $14 million (Mongla Port Jetty), and $14 million (5 Land Ports). The proposed projects are located across Bangladesh. Available information on the locations and salient features of some potential projects which could make up the IPFF pipeline are given below.

(i) New Mooring Container Terminal: Government of Bangladesh, as part of its port reform and modernization strategy to increase efficiency and reduce costs to the port users, has adopted the policy to operate terminals through the private sector. It is therefore decided that the New Mooring Container Terminal at Chittagong will be operated by a private Terminal Operator for a certain period of time, as mentioned in Commercial Terms and Conditions, for operation and management of the Terminal, along with supply of required cargo handling and other equipment on SOT basis. The pre-qualification process of the short listed investors is currently underway.

(ii) Mongla Port Jetty: The project is intended to facilitate berthing of ships and cargo handling at Mongla Port. It is envisaged that on completion of the jetties on Build-Operate-Transfer (BOT)

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basis, the volume of import and export through this port will increase, generate more revenues and create employment opportunities. Overall it will have a positive impact on the economy.

(iii) 5 Land Ports (2nd Round): There are 5 land ports to be provided to the private sector on BOT basis. These land ports are: Tamabil Land Port, Burimari Land Port, Akhaura Land Port, Haluaghat Land Port and Bhomra land Port. The pre-qualification of the second round land ports have been completed and the short listed investors will be issued tender documents soon.

(iv) New Inland Container Depot / Kamlapur expansion ($30-50m): Additional ICD capacity is bound to be needed near Dhaka as traffic is growing fast. Kamlapur may be too close to city centre. Kamlapur redevelopment considered as well, which would be costed at $15 million.

(v) Upgrading rail equipment and track – potential investment of up to $500 million. Options for further contracting out and/or leasing of trains are explored as well.

(vi) Alternative or additional Chittagong port development options (up to $190m): Review after port policy determined and SSA proposal negotiated. Details to be developed, using existing Mott MacDonald ports study as basis.

Other, more long-term projects with less explored potential and without firm figures on investment amount, are listed below. The projects are ranked in ascending order, based on a total score of each project with Good =1, Average =2 and Bad = 3. The top three projects are the Banga Bandhu Bridge, Bhairab Bridge and Nalka-Hatikamrul-Bonpara (N-H-B) Road (Table E2). The expected investments in the smaller projects of the transport sector amount to $530 million. The remaining pipeline has a total estimated investment of up to over $10 billion, of which IPFF exposure would maximally go to $250 million amount of $250. Of these projects, we consider the viable expected pipeline for IPFF to amount to $55 million in the coming 5 years.

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Table E2. Project Ranking

Status Project Completion DateConstruction Standard Transport Policy Traffic Land Acquistion Competition

Project Preparation Support Total

C Banga Bandhu Bridge 1 1 1 1 1 1 1 2 9

O Bhairab Bridge (Syed Nazrul Islam) 2 1 1 1 1 1 1 1 9

O Nalka-Hatikamrul-Bonpara Road 2 1 1 1 1 1 1 1 9

O Chittagong Port Access Road 2 1 1 1 1 2 2 1 11

C 1st Buriganga Bridge 1 2 1 1 1 1 2 2 11

C Meghna and Meghna – Gumpti Bridges 1 2 1 1 1 1 2 2 11

O Paksey Bridge 2 1 1 1 1 1 2 2 11

O Rupsha Bridge and Khulna Bypass 2 1 1 2 1 1 2 2 12

O Jamuna Bridge Access Road 2 1 1 1 1 2 2 2 12

O Dhaka Sylhet Road 2 1 1 1 1 2 2 2 12

O South-West Road Network Dev.Project 2 1 1 1 1 2 2 2 12

O Doarike-Shikerpur Bridge 2 1 2 2 1 1 2 2 13

O Gapkhan Bridge 2 1 2 2 1 1 2 2 13

O Sylhet-Tamabil-Jaflong Road 2 1 2 2 1 2 2 2 14

P Padma Bridge at Mawa 3 3 1 1 3 1 2 2 16

P Arial Khan Bridge 3 3 1 1 3 1 2 2 16

P Dhaka Eastern Bypass 3 3 1 1 3 3 2 2 18

P Dinajpur – Tetulia Road 3 3 1 2 3 2 3 2 19

P Dhaka-Chittagong Road Dualling 3 3 1 1 3 3 3 2 19

P Sylhet-Mymensingh Road 3 3 2 2 3 2 3 2 20

Good Average Bad

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Annex F: Summary of IPFF Implementation Arrangements and Lessons Learned

The starting point for the facility design has been to seek a commercial culture through significant private sector participation, strong corporate governance and management, and a clear strategy for funding sustainability beyond the IDA project timeline so as to be a catalyst for financial market innovation, primarily for infrastructure finance. To this end, the participation of local private financial and entrepreneurial institutions has been sought from the outset to assure a design that suits the needs and capacity of the Bangladesh economy. Multiple participants are allowed under the project so that competition for funds generates market-based pricing. Contractual arrangements with local financial institutions allow for flexible engagement so the facility can easily respond to changing circumstances or failure of any participant to perform. Effective regulatory oversight from Bangladesh Bank and the application of strict criteria for financial institution participation are essential to the project design. Bangladesh Bank (BB) is the IPFF implementing agency, as well as oversees IIFC activities. BB also reassesses regularly the eligibility criteria for Participating Financial Institutions (PFIs). IIFC is the technical support agency for IPFF, PFIs, and end investors in infrastructure. IDA funds are channeled through a dedicated special account at Bangladesh Bank, which in turn releases those to participating eligible PFIs who present a viable PPP project which conforms to predetermined technical, financial, and safeguard criteria for investment project eligibility, as laid out in the operational Directives developed by BB. The figure below summarizes IPFF implementing arrangements. The PFIs are responsible for the detailed assessments of the soundness and profitability of potential infrastructure projects. PFIs also monitor implementation of the infrastructure projects and are responsible for collecting payments from borrowers. PFIs make significant capital investment in the loans to the investment projects. Private sector promoters procure a Letter of Intent from Government on the proposed PPP, or a proposal for a private infrastructure project eligible for IPFF financing.

(b) The private sector promoter shall provide evidence of ability to provide an equity contribution to the development of the proposed investment project for a minimum of 30 percent of the total investment project cost.

(c) The promoter shall have received a credit approval for the investment project from a PFI

(d) The promoter shall have obtained appropriate clearance form the Department of the Environment

A PFI, or consortium of PFIs, wishing to access financing under the Facility, shall follow the following procedures:

(a) Demonstrate as required to Bangladesh Bank that the private sector promoter has followed all required steps as identified above.

(b) Provide evidence to the satisfaction of Bangladesh Bank that all PFIs participating in the financing remain in conformity with the eligibility criteria for project participation (as detailed in Operational Directives to be developed by Bangladesh Bank.)

(c) Show evidence of capacity to finance 20 percent of the total loan amount through resources other than drawing upon the facility (which may be from own resources or other sources, including financial institutions not participating in the Facility)

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(d) demonstrate to the satisfaction of Bangladesh Bank that all PFIs participating in the financing remain in conformity with all Bangladesh Bank regulations, including those relating to capital adequacy, single borrower exposure, and provisioning. Selection of PFIs. Bangladesh Bank has the responsibility for selecting the PFIs, deciding whether to finance the loan proposals submitted by the PFIs, based on a list of pre-determined criteria and providing capacity building to financial institutions in infrastructure finance and related themes. Bangladesh Bank has developed eligibility criteria for the selection of PFIs under FIDP and uses these criteria to select PFIs under IPFF. An operations manual has been formally adopted by Bangladesh Bank, spelling out the eligibility criteria for PFIs, the approval process and the criteria for investment project eligibility. IDA assesses the eligibility of financial institutions selected by Bangladesh Bank based on the O.P. 8.30 criteria and provides a No Objection.

Approval of financing proposals. Once a PFI has taken the decision to finance an infrastructure project, the PFI forwards the loan file to Bangladesh Bank for approval of the requested IPFF co-financing (maximum 80 percent of the debt). IIFC or another suitably qualified body provides technical assistance to Bangladesh Bank during this review process. It should be highlighted that Bangladesh Bank does not take a commercial / credit decision when reviewing the proposal. Rather Bangladesh Bank, with support from IIFC or another suitably qualified body, reviews whether the investment projects to be financed meets pre-defined criteria: acceptable procurement, sufficient equity participation (minimum 25 percent), completion of EIA, etc. Once Bangladesh Bank has ensured that the investment project complies with the eligibility criteria, it forwards the loan application to IDA for no-objection. After both Bangladesh Bank and IDA have cleared the loan application, the Bangladesh Bank disburses the required amount (by installments) from the project account on behalf of GOB. Eligible investment projects are considered for financing by Bangladesh Bank on a first come, first serve basis.

Capacity building to the industry. Following the positive experience of FIDP and IPFF, capacity building to financial institutions is also provided under IPFF additional financing. Bangladesh Bank organizes workshops (with inputs from local and international consultants) on themes such as project finance, loan syndication, mortgaged based securitization, bond issue and capital market. Bangladesh Bank also provides to participating financial institutions opportunities for training abroad or in-country (with the understanding that expenses associated with offshore training should be borne by the concerned PFIs).

Monitoring. Bangladesh Bank is responsible for the monitoring of the project. Over the life of the project, the Bangladesh Bank shall keep Government and the World Bank apprised as to the continuing compliance by PFIs of the eligibility criteria, the progress of investment projects, indicators of impact of the project on private sector participation in infrastructure development, and emerging issues relating to these areas. As Implementing Agency, Bangladesh Bank is also responsible for ensuring that the projects financed under the IPFF maintain the requisite environmental and other safeguard standards. Certain of these activities are delegated to IIFC under the Technical Services Agreement, or any other suitably qualified body (subject to clearance by Finance Division and IDA “No Objection”).

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Figure F1: Mechanisms of the IPFF facility

Role of IIFC. The role of IIFC as coordinating agency for the technical assistance component providing support to Government for public private partnerships will be initially maintained. Under the oversight of the Economic Relations Division of the Ministry of Finance (although project resources will be directed by Bangladesh Bank as implementing agency), IIFC carries out its own procurement as far as practical. Under the project, IIFC havs four main areas of

The promoter applies for funding to a participating financial institution (PFI)

GOB BB IIFC/ Technical Adviser

PICOM/ PPP Cell

FI PFI PFI

Promoter

(with 30 % equity)

Flow of funds

Technical assistance

Application for funds

The PFI may syndicate the loan with PFI and non-PFI.20% of the debt must come from (P)FIs’ own funds.

GOB: Government of Bangladesh

BB: Bangladesh Bank

IIFC: Infrastructure Investment Facilitation Center

IDA

SDR

Taka or US$

Taka or US$

Key agreements governing IPFF

Between GOB and IDA: Financing Agreement Between GOB and BB: Administration Agreement Between BB and IIFC: Technical Service

Agreement Between IIFC and PICOM: Technical Service

Agreement Between BB and the PFIs: Master Facility

Agreement

PFI forwards loan application to BB to obtain partial funding of the project (max. 80% of the debt)

IIFC provides technical assistance to PICOM and BB and provides EIA of investment projects

EIA

IIFC reviews eligibility of the investment project for financing under IPFF (for BB) & value for money

BB also provides capacity building to financial institutions

IDA reviews PFI selection & eligibility under OP8.30 and procurement of investment

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responsibility; it (i) provides assistance to the Private Infrastructure Committee (PICOM) and the PPP Cell for implementation of the Private Sector Infrastructure Guidelines (PSIG); (ii) helps Bangladesh Bank in the eligibility review of infrastructure projects submitted for IPFF financing; (iii) manages on behalf of Bangladesh Bank the selection and supervision of consultants to carry out environmental impact assessments for infrastructure projects; and (iv) assesses the training needs and arranging all offshore and local training/workshops under the project. IIFC Assistance to PICOM. The support provided to PICOM and the PPP Cell is based on the Technical Services Agreement concluded between BB and IIFC. The Agreement covers assistance by IIFC, or another suitably qualified body, in the implementation of the Private Sector Infrastructure Guidelines broadly along the following themes: awareness creation, capacity building, policy and regulatory support, project pipeline monitoring and evaluation, preparation of standard contract documentation, and assistance to ministries and sectoral agencies for implementation of the guidelines.

IIFC Assistance to Bangladesh Bank. IIFC, or another suitably qualified body, assists BB in the technical review of projects submitted by PFIs for IPFF financing. The main objective of this assistance is to ensure that projects submitted by PFIs to BB fulfill the eligibility criteria for accessing of IPFF financing. IIFC reviews inter alia, the selection process of the investor/operator, the conformity of financing and concession agreements, the principal technical features and the key environmental approvals. Furthermore, IIFC provides assistance to BB for training needs assessment and arranges all local and offshore training programs under the project.

IIFC’s Role in Environmental Impact Assessments. The completion of an EIA that meets DoE and World Bank requirements is required as a condition for eligibility for financing under the IPFF. Project promoters may request IIFC to provide requisite consultant services for the completion of an EIA, subject to availability of resources on a first-come-first-serve basis. These services may provided before a project promoter applies for IPFF funding to prevent any later delays in financial closing. IIFC manages the consultant selection and supervision of the environmental advisers. Project promoters receiving EIA services from IIFC but which do not apply for financing under the IPFF or are deemed ineligible will be required to reimburse the cost of such assessment.15

Relationships between entities involved in IPFF

The relationships between Government of Bangladesh, Bangladesh Bank, the participating financial institutions (PFIs), IIFC and PICOM will all be governed by agreements and the coordinating role assigned to BB as implementing agency. IPFF has build on the implementation mechanisms developed for FIDP which have proved effective (GOB/BB: Administration Agreement; BB/IIFC: Technical Services Agreement; BB/PFIs: Master Facility Agreement).

15 It is contemplated that in extenuating circumstances the cost of the EIA may be shared with promoters who apply for IPFF funding but do not qualify.

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Annex G: Results Framework and Monitoring

PDO Outcome Indicators Use of Outcome Information

To accelerate private sector-led growth through providing term finance for infrastructure development and promoting domestic infrastructure finance capacity

Private sector participation in infrastructure increases (as measured by the increase in number of PPPs).

YR 1 to 5: Used as basis for maintaining dialogue with government and private sector.

YR 3: Strategic review of progress.

If progress is lacking, identification of targeted actions to remove bottlenecks.

Intermediate Results

One per Component

Results Indicators for Each Component Use of Results Monitoring

Component One: Increase of private investment for infrastructure in the form of commercial equity and debt financing

Component One: 1. US$ 250 million worth of private sector

infrastructure investments are realized using the IPFF; including contribution from PFIs, Government and project sponsors.

2. At least 10 domestic financial institutions use the IPFF.

3. PFIs maintain eligibility criteria

4. The project results in 100 MW of additional electricity added to the national capacity

Component One: YR 1 to 5: Used as basis for maintaining dialogue with government and private sector.

YR 3: Strategic review of progress.

If progress is lacking, identification of targeted actions to improve performance (such as increased promotion of the IPFF among potential infrastructure promoters or opening of the IPFF to all private sector investments, instead of a focus on infrastructure).

Component Two: Improved capacity of the Government and local financial institutions to promote and implement PPP in infrastructure

Component Two: 1. Effective support provided to government

in the promotion and implementation of PPPs, as measured by the number of PPPs that follow PICOM guidelines.

2. Environmental assessments are undertaken for all infrastructure projects financed under the facility in coordination with the DOE.

3. Effective guidance provided to Bangladesh Bank regarding investment project eligibility, as measured by percentage of projects reviewed.

4. The capacity of financial institutions participating in the IPFF to undertake financial analysis of infrastructure projects is strengthened, as measured by the number of staff trained.

Component Two: YR 1 to 5: Used as basis for maintaining dialogue with Government and private sector.

YR 3: Strategic review of progress.

Refocus of technical assistance if need be.

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Arrangements for Results Monitoring

Target Values Data Collection and Reporting

Outcome Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports

Data Collection Instruments

Responsibility for Data Collection

Private sector participation in infrastructure increases (as measured by the number of PPPs)

2005 - 2009, 4.4 PPPs per year

4 4 5 5 5 Yearly Annual reports from IIFC IIFC

Results Indicators for Each Component

Component One: 1. US$ 250 million worth of private sector

infrastructure investments are realized using the IPFF; including contribution from PFI, Government and project sponsors.

2. At least 10 domestic financial institutions use the IPFF (cumulative figure).

3. PFIs maintain eligibility criteria 4. The project results in 100 MW of

additional electricity added to the national capacity

Baseline = $63 million Baseline = 6 100% n.a. (0 MW)

40 10 100% 20 MW

50 10 100% 40 MW

60 10 100% 60 MW

60 10 100% 80 MW

40 10 100% 100 MW

biannual biannual Quarterly binannual

IIFC reports Bangladesh Bank reports Bangladesh Bank reports Bangladesh Bank reports

IIFC Bangladesh Bank Bangladesh Bank Bangladesh Bank

Component Two : 1. Effective support provided to the

government in the promotion and implementation of PPPs, as measured by the number of PPPs that follow PICOM guidelines.

2. Environmental assessments are undertaken for all infrastructure projects financed under the facility in coordination with the DOE.

3. Effective guidance provided to Bangladesh Bank regarding investment project eligibility, as measured by percentage of projects reviewed.

4. The capacity of financial institutions participating in IPFF to undertake financial analysis of infrastructure projects is strengthened, as measured by the number of staff trained.

2005 - 2009, 1.4 PPP per year Baseline= 100% Baseline= 100% 61

2 100% 100% 20

3 100% 100% 20

3 100% 100% 20

3 100% 100% 20

4 100% 100% 20

Yearly Quarterly Yearly Yearly

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