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Kamrul Islam, Roll: ZR-96

Chapter 5
Project Evaluation
5.1 Project rationale and objectives
The Project achieved the development rationale and objectives set out in the report and
recommendation of the President (RRP) by:
(i) Providing additional reliable base load capacity through a least-cost expansion program, with
due consideration for environmental and social impacts, to mitigate the forecast power shortages
in Bangladesh;
(ii) reducing poverty through the promotion of faster economic growth, thereby creating better
development opportunities for the poor and improving human development;
(iii) Serving as a role model for other IPPs, particularly in project selection, screening, and
document preparation;
(iv) attracting private sector investors to the power sector as one of the first major private sector
IPPs successfully implemented in Bangladesh; and
(v) Playing an instrumental role in raising domestic and international commercial funds.

5.2 Criteria for evaluation:

The evaluation of MPL, a no sovereign operations project, is based on four criteria:
(i)Development impact,
(ii) Profitability of ADBs investment,
(iii) Quality of ADBs work, and
(iv) ADBs additionally.
The criteria are discussed in the following sections.

(i)Developments impacts and outcomes:

The main categories and subcategories were rated according to the June 2007 guidelines for the
preparation of extended annual review reports for private sector investment operations.

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1. Private Sector Development:

The assessment of private sector development impacts classified as beyond company impacts and
direct company impacts is in paras.
A. Beyond Company Impacts:
MPL is one of the first major private sector IPPs to succeed in Bangladesh. The success of MPL
has clearly demonstrated the effectiveness of the private sector in building and operating
infrastructure, advocating corporate governance and transparency, and promoting professional
work ethics. IPPs are providing an increasing share of the power supply in Bangladesh, and now
account for about 38% of total generation. All new base load power supply is envisaged to come
from IPPs. In promoting faster growth led by the private sector, ADB helped the Government to
accelerate policy reform and create equal opportunities for participants. ADB emphasized
providing assistance to relieve infrastructure and financial bottlenecks for the private sector. MPL,
one of the key components of the Governments efforts to promote foreign investment, is in line
with the country operational strategy and the partnership agreement on poverty reduction between
ADB and the Government. The Project also complies with ADB's strategy for the energy sector
and private sector operations in Bangladesh.
As the Government realized that the investment requirements for the power sector would exceed
the resources available in the public sector and could crowd out investment in other key sectors, it
decided in 1994 to invite private sector participation in generation. In 1996, the Government
introduced a private sector generation policy. The Government attempted to streamline its
administrative and commercial procedures, and the private sector responded favorably. As a result,
starting in the late 1990s, Bangladesh has been successful in attracting private sector investors.
Through its involvement in MPL, ADB was a catalyst in enabling private finance for power
generation. In recent years, the private sector has undertaken most generation projects for grid
supplies. MPL has been operating successfully in the private sector and reliably producing power
at reasonable cost to BPDB.
In addition to providing cost-effective and reliable power, MPLalong with the other IPPs
introduced private capital and private sector management to power generation. Private capital
reduces the demand on the budgets of Government partners. Private sector management provides
benchmarks for the efficient operation of power stations in Bangladesh, and establishes standards
for BPDB stations to aim for in the future. Moreover, the new investors show signs of being
prepared to invest further in the sector. These developments indicate that private power generation
is now widely accepted in Bangladesh, and is attracting foreign and local investors.
Overall, ADBs involvement and investment in the power sector led to positive institutional
developments, particularly over the 8 years since ADB became the coordinating development
partner for the sector. The unbundling of the sector was partially accomplished, private generation

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is now an accepted feature of the power market, and new institutions are achieving good results.
The growth of the IPPs increases competition among public and private power producers by
gradually eroding the monopoly of BPDB in power generation. The investment opportunities in
the Bangladesh power sector are promising for the private sector. The Government has taken steps
to create an environment conducive to private sector involvement through appropriate policies,
and power sector reforms and restructuring.
B. Company Impacts:
The Project involves a significant transfer of knowledge as a result of the foreign direct investment.
To the extent possible, the Project hires local people. The management positions held by
Bangladeshis are largely in plant O&M. At the start of operations, five of MPLs 75 employees
were expatriates who had the broad technical experience and managerial skills needed to lead the
initial project organization. MPL had implemented a localization plan to promote competent local
staff to replace some expatriate staff in middle management positions. After the initial year of
operation in 2002, the number of staff gradually decreased to 59 and several contractual staff with
one expatriate as the general manager. Currently, there is no expatriate employees working for
MPL. Expatriates left because of the successful transfer of technical expertise and managerial
skills to local staff and the reduced workload. The XARR Mission observed that the plant is
operated and maintained to the highest standards with minimal staffing. MPL is an excellent
example of disciplined operating standards providing dependable and efficient generation in the
Bangladesh power sector. It provides a successful example of the IPP concept in generation. MPL
uses modern technology for power plant operations. In 2006, a new computerized maintenance
management system was implemented to provide more reliable and efficient maintenance of the
plant. The Project is technically effective and sustainable for the expected 22-year life of the
generating units. This sustainability is predicated on the design quality of the generating units, and
MPLs commitment to sound O&M practices. The company organizes regular training for its
employees in various areas, including operation, safety management, finance, English language,
and computer programs. Monthly technical training programs are organized for O&M personnel.
In terms of corporate governance and sound operating systems, MPL has obtained International
Organization for Standardization 14001 certification for environment management standards, and
Occupational Health and Safety Assessment Series 18001 certification for its occupational health
and safety management system. MPL constructed and is operating the power station in an
environmentally responsible manner, complying with all applicable environmental laws,
regulations, and guidelines. MPL adopted an environmental policy that states the principles and
intentions of the company as part of its overall environmental performance. Such principles and
intentions were communicated to employees, customers, and community members along with their
individual environmental responsibilities. MPL developed training programs to ensure power
station staff receive training appropriate for implementing the emergency response plan; health,
safety, and environmental procedures; and the plant O&M program. MPL maintains safe and

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healthy working conditions, and protects the environment, equipment, and systems of work for its
staff, visitors, and neighbors. During the plant visit, members of the Extended Annual Review
Mission were required to attend a 30-minute presentation on environmental, health, and safety
awareness before they were allowed to tour the plant.
The overall rating of the Project in terms of contribution to private sector development is

(ii)ADB investment profitability:

The interest rate margin charged on ADBs direct loan was benchmarked against that of another
private power project in Bangladesh (the Haripur project). The pricing for the ADB loan reflects
the risks associated with the Project, in comparison with recent market benchmarks. The PRG
pricing17 and fees were very competitive. In the absence of the PRG, 18 in which ADB acts as the
guarantor of record, the commercial cofinancing would not materialize.
Demand risk is low based on the current shortage and high annual growth of demand. The takeor-pay obligation of the buyer under the PPA, which is guaranteed by the Government, further
mitigates the demand risk. The payment performance of the buyer (BPDB), which is discussed in
para. 45, recently was resolved. Therefore, the buyers credit risk has been satisfactory so far.
Although a limited risk will remain throughout the Project, this risk might increase if BPDB makes
major commitments to more new IPPs without higher tariffs, and better billing and collection of
the entire power sector system (BPDB and the distribution entities). Moreover, with regard to
O&M of the Project, MPL has the necessary engineering and operational human resources to
sustain the investments financed by ADB.
The payment record of BPDB has improved markedly. BPDB's monthly payments to MPL were
delayed from November 2005 to December 2006 for an average of 71 days, but they were fully
paid up by May 2007. The only significant outstanding claim from BPDB is for interest on late
payments. MPLs managing director and BPDB are addressing this issue through dialogue.
Besides two delayed payments due to technical issues (para. 29), MPL has regularly and promptly
serviced its principal and interest to the lenders. Final repayment is scheduled on 15 September
ADBs investment profitability is rated "satisfactory".

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(iii)ADB work quality:

The quality of ADBs work is assessed as "excellent" in three categories:
(i) Screening, appraisal, and structuring;
(ii) Monitoring and supervision; and
(iii) ADBs role and contribution.
As a direct lender and provider of PRG, ADB played an important role in mobilizing commercial
financing. Commercial banks had been hesitant to lend on an uncovered basis because of the
market conditions, political situation, and lack of track record for IPP projects in Bangladesh at
that time.

1. Screening, Appraisal, and Structuring:

ADB took the lead in the due diligence process that covered key project issues, including the
competitiveness of the project tariff and financial sustainability of the buyer.
The Project was structured as a typical project finance transaction. It was executed under a 22-year
BOO implementation agreement between the Government and the sponsor, and a PPA with BPDB.
Under the PPA, BPDB is committed to a take or pay obligation, which is guaranteed by the
Government. The minimum continuous load of the plant can be 25% of its dependable capacity
(450 MW), but with approximately plant load factor of 85%, MPL will recover its full capacity
and variable costs, as well as generate a return on equity. ADB conceptualized and developed the
Project as part of its public sector assistance to the energy sector. Because international competitive
bidding was used in the Project, the bid standardized a tariff, which is one of the lowest in the
world and has set a new benchmark for the industry in Bangladesh and the rest of Asia. ADBs
Board of Directors approved MPL on 5 December 2000. Financial closure was on 11 April 2001,
and the first disbursement was on 25 October 2001. 44. The ADB PRG19 covers loan default by
MPL on scheduled debt service payments of principal and interest of the ADB guaranteed loan
resulting from the Government's failure to meet payment obligations under the implementation
agreement and the Government guarantee with respect to the project agreements. The coverage of
the ADB PRG enhanced the confidence of commercial banks participating in the transaction. The
participation of ADB as one of the cofinanciers also boosted the confidence of the private sector
sponsors, given ADB's long-term involvement and continual policy dialogue with the Government
in the development of the power sector.
ADBs Mission comprised Private Sector Operations Department (PSOD) staff with extensive
public sector experience in the power sector and an intimate knowledge of the Government

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agencies involved in the Project. Their knowledge and contacts enabled ADB to contribute much
to the quality of the Project and to effective internal administration.
ADBs performance in terms of screening, appraisal, and structuring is rated "excellent".

2. Monitoring and Supervision:

ADB has been closely monitoring project implementation. The common terms agreement
enumerates the reporting covenants of MPL, which include the submission of
(i) Annual forecasts;
(ii) Financial statements, including those of the sponsor and BPDB;
(iii) O&M reports and programs;
(iv) Operating budgets and reports;
(v) Health, safety, and environment reports; and
(vi) Insurance documentation. The agreement specifies the timing for submission of these reports.
MPL has complied with all reporting requirements in a timely manner.
In addition, MPL has met financial covenants. ADB has been prompt in consenting to waivers and
requests for any amendments to existing agreements, subject to a thorough review of the requests.
In 2006, monthly payments from the buyer, BPDB, to MPL were delayed for an average of 71
days. However, with ADBs participation, this issue was resolved and BPDB was fully paid up in
May 2007. PSOD coordinated with the Southeast Asia Department to follow up on compliance
with covenants relating to BPDBs financial performance under the finance agreements. Following
Board approval in December 2000 and the start of commercial operations in November 2002,
PSOD fielded three missions. The first mission was in October 2005 for an annual review, the
second in May 2007 for the extended annual review and the third in August 2007 for the Globeleq
sale transaction. The first two missions included site visits for physical inspection of the plants
operations. These also involved meetings with MPL management and some government agencies,
such as the Ministry of Energy and Mineral Resources, to assess the development outcome of the
Project and progress in the development of the power sector in Bangladesh. ADBs performance
in terms of monitoring and supervision is rated "excellent".

3. ADBs Role and Contribution:

MPL supported the Governments efforts to promote foreign investment. It was also consistent
with ADBs operational strategy for Bangladesh, which is to reduce poverty, and the partnership

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agreement on poverty reduction between ADB and the Government. Through its involvement in
MPL, ADB was a catalyst in enabling private finance for generation. MPL is operating
successfully in the private sector and reliably producing power at a competitive cost to BPDB. In
addition to cost-effective and reliable power, MPL and other IPPs introduced private capital and
private sector management to the power development partners. Private sector management
provides manning and operations benchmarks for the efficient management of power stations in
Bangladesh, and establishes standards for BPDB stations to aim for in the future. Moreover, the
new investors show signs of being prepared to invest further in the sector. AES Corporation, which
was the leading investor in MPL, subsequently invested in Haripur Power Limited. MPL and
Haripur are being managed in parallel by a single senior management team. These developments
indicate that private power generation is now widely accepted in Bangladesh, and is attracting
foreign and local investors.
ADB also took the lead in supporting reforms in the power sector by conducting an extensive
policy dialogue with the Government, and by providing funding as well as technical assistance
(TA). The TA helped review the electricity legislation, prepare a power system master plan, and
upgrade the financial management of BPDB and Dhaka Electric Supply Authority (DESA). The
Project complies with ADBs strategy for the energy sector and private sector operations in
Bangladesh. At Board approval, MPL was a good example of ADBs new private sector
development in action. The Project is the first private sector power project awarded on a fully
competitive basis in Bangladesh and served as a model for other IPPs. ADB assisted the
Government in promoting private sector development in the power sector through TA and loans.
Such assistance included financing of a master plan for the power sector, the Projects feasibility
study and detailed engineering, preparation of the tender documents for international competitive
bidding, and assistance in selecting the winning bidder. As part of internal coordination and
division of responsibilities within ADB, PSOD took responsibility for processing the Project
following its award to the initial sponsor, AES. Therefore, ADBs role and contribution to the
Project is rated "excellent".

(iv)ADB aditionality:
ADBs support to MPL was vital as the Government was unable to finance such a large investment
from its own resources, and foreign and local currency funding was critically short. ADB and other
financing institutions filled the financing gap, which was instrumental in opening up the power
sector in Bangladesh to private financing. ADBs loan increased investor and commercial lender
confidence in MPL and the Project, and helped mobilize long-term cofinancing from other
financial institutions and commercial banks. As a provider of PRG, ADB enhanced the protection
to commercial lenders in addition to the counter-guarantee from the Government. Moreover, ADB
has been a long-term partner of the Government in developing the power sector. During project

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inception, ADBs public sector operations provided TA to develop a plan for power sector reform
that recommended
(i)Unbundling BPDB and corporatizing BPDB and DESA,
(ii) Establishing tariff regulation for the power market, and
(iii) Creating a competitive power market.
The complementarities between ADBs public and private sector operations promote confidence
among project sponsors and financiers, and ensure that the evolving regulatory and institutional
framework will be on track. Without ADB assistance, the financial closure of the Project would
not have been finalized on a timely basis or appropriate financing terms because of the perceived
high country risks and lack of precedent for large-scale BOO IPPs in the country.
ADBs involvement in the power sector led to positive institutional developments, particularly
over the 8 years since ADB became the coordinating development partner for the sector. The sector
was partially unbundled, private generation is now an accepted feature of the power market, new
institutions were set up that are achieving good results, responsibilities were transferred from
ineffective to more-effective institutions, some performance improvements were achieved in the
main utilities, and capacity has been built within the local power sector. The ability to offer loans
and TA, subject to certain conditions, gave ADB leverage that it generally used to good effect.
Through ADBs dialogue with the Government, BPDB updated its payment obligations, which
had been delayed several times in 2006, and remains up to date. BPDB continues to honor the
terms of the PPA, so that the Government guarantee on MPL is not called.
ADB will remain involved in the development of the power sector in Bangladesh. In August 2005,
the ADB Board approved the TA to Bangladesh for the corporatization of the BPDB. In June 2007,
ADB approved the proposed loan for the sustainable power sector development program.
Moreover, PSOD is coordinating with the Southeast Asia Department to explore other potential
large-scale power projects that could be structured as publicprivate partnerships (PPPs). The
current country partnership strategy continues to support private sector investments and PPP
financing to meet infrastructure requirements. ADBs financial assistance was crucial for the
successful financial closure and timely realization of the Project. ADBs involvement and
supervision of the Project has helped to ensure that the operation meets international standards,
and complies with environmental and social safeguard requirements. Further, the successful
implementation of MPL provides lessons and technical expertise for future development of other
IPPs. Therefore, ADBs additionality is rated "excellent".

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5.3 Overall evaluation

Overall, the Project is rated "highly successful". The ratings are summarized in the table below.
The Project is a fine example of opening up the power sector for private investments, as envisaged
in the private sector development strategy, and demonstrates the effectiveness of PPPs. The
success of MPL has clearly demonstrated the effectiveness of the private sector in building and
operating infrastructure, advocating corporate governance and transparency, and promoting
professional work ethics. This was one of the first major IPPs awarded in Bangladesh on a fully
competitive basis, and it is being used by the Government as a model. MPL is one of the best
operating, best maintained, and most reliable power plants in Bangladesh. It has by far the lowest
unit costs among all IPPs in the country, and is among the least expensive even when compared
with older plants. It has become a benchmark in the industry not only in Bangladesh, but in Asia.
The plant also has been Bangladeshs most energy efficient, as it introduced state-of-the art, gasfired, combined-cycle technology to the country. Further, it has an outstanding environmental and
safety record since starting operation. In terms of social impact, MPL has helped to improve the
electrification rate in Bangladesh, created jobs, and engaged in community support programs.
Operationally, the sponsor has experienced no material gas supply problems and no material
dispatch problems, and has recently cleared default payments. Moreover, after 3 years of
successful operation, AES sold the company at an increased value after changing its strategy in
favor of domestic operations. The ownership of the MPL was transferred twice due to change of
business strategies by its previous owners.
As a company, MPL's financial performance has been satisfactory and met the sponsors
expectations. MPL demonstrated the best technology in power plant operations and best practices
in environmental, social, health, and safety management. The foreign sponsors have transferred
technology and expertise to local employees through training.
ADB has played an important role by providing a direct loan, CFS, and a PRG to catalyze financing
from commercial lenders. ADB's involvement built confidence among the project sponsors and
confinanciers, which led to successful project execution. The Government, sponsors, and lenders
view the Project as successful and suggest that it could be used as a model for future development
of other IPP projects in Bangladesh.