Chapter-01: Introduction

1.1 Introduction: The promising solutions to the environmental problems associated with fossil fuels lies in the development and use of Renewable Energy Sources (RES). RES may be obtained from solar radiation, wind power, waves, heat from earth’s core as well as animal and plant wastes. They also provide diversity of energy supply given that they are products of nature and there is no issue of reserves being depleted. Furthermore, its expansion offers economic opportunities such as regional development and job opportunities.

However, the numerous benefits of RES are often ignored as investors have declined project financing Renewable Energy Power Projects (REP) due to the high level of perceived risks associated with them. Capital for project financing energy projects can be raised through a combination of debt and equity investment.

In contrast to fossil fuels that were formed more than 300 million years ago, renewable energy comes from sources that are constantly replenished. For example, the power of resources such as the sun and the wind do not diminish over time. Renewable resources makes it possible to reduce our dependence on foreign oil, increase the security of our energy supply, mitigate environmental impacts, and provide economic development opportunities in rural areas.

There are many commercially proven renewable energy technologies which can help reduce the amount of money spent on energy consumption and create additional revenues through the sale of power to the electricity grid. These technologies can be used on a small-scale to support operations on the farm or they can be large enough to provide power for an entire community.

Project finance has intrigued me ever since I was introduced to it while working as an intern at Infrastructure Development Company Limited (IDCOL).I got more interested about the uniqueness of project financing whenever I came to know that IDCOL is financing without any security other than the project itself. Project financing may be defined as the raising of funds to finance an economically separable capital investment project in which the providers of the funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return of and a return on their equity invested in the project (John D. Finnerty, 1996). Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors. Standard & Poor's defines a project company as a group of agreements and contracts between lenders, project sponsors, and other interested parties that creates a form of business organization that will issue a finite amount of debt on inception; will operate in a focused line of business; and will ask that lenders look only to a specific asset to generate cash flow as the sole source of principal and interest payments and collateral. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks or other lending institutions that provide loans to the operation. The loans are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the

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general assets or creditworthiness of the project sponsors. Project finance is only possible when the project is capable of producing enough cash to cover all operating and debt-servicing expenses over the whole tenor of the debt.

Project financing typically includes the following basic features:1. An agreement by financially responsible parties to complete the project and, toward that end, to make available to the project all funds necessary to achieve completion.2. An agreement by financially responsible parties (typically taking the form of a contract for the purchase of project output) that, when project completion occurs and operations commence, the project will have available sufficient cash to enable it to meet all its operating expenses and debt service requirements.3. Assurances by financially responsible parties that, in the event a disruption in operation occurs and funds are required to restore the project to operating condition, the necessary funds will be made available through insurance recoveries, advances against future deliveries, or some other means.

Project financing should be distinguished from conventional direct financing, or what may be termed financing on a firm's general credit. In connection with a conventional direct financing, lenders to the firm look to the firm's entire asset portfolio to generate the cash flow to service their loans. The assets and their financing are integrated into the firm's asset and liability portfolios. Often, such loans are not secured by any pledge of collateral. The critical distinguishing feature of a project financing is that the project is a distinct legal entity; project assets, project-related contracts, and project cash flow are segregated to a substantial degree from the sponsoring entity. The financing structure is designed to allocate financial returns and risks more efficiently than a conventional financing structure. In a project financing, the sponsors provide, at most, limited recourse to cash flows from, their other assets that are not part of the project. Also, they typically pledge the project assets, but none of their other assets, to secure the project loans.

1.2 Statement of the Problem: Unlimited access to energy sources is essential for modern development. Especially, for a developing country like Bangladesh, having a sustained energy supply is a prerequisite for economic growth. To alleviate poverty in the face of limited resources and high population density, Bangladesh requires a sustainable economic growth model where renewable energy sources are used properly. Bangladesh has the opportunity to meet its future power demands and thus economic growth through renewable energy. Using renewable energy appropriately may improve rural people’s quality of life and provide income-generating opportunities that redress social inequities and environmental damage in Bangladesh. To achieve this objective proper channel of financing in renewable energy is extremely necessary. There has been always a big question whether the financing in this sector is adequate or not, to what extent the availability of project financing in renewable energy there is and whether the covenants of loan or financing are logical and bearable or not.

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1.3 Objectives of the Study: The size and economic potential of the renewable energy resources in Bangladesh are yet to be determined and the capacity of renewable energy development is presently low. Among others one of the objectives of the study is to explore the extent to which renewable energy technologies (RETs), such as solar home systems (SHS) and biogas digesters, can provide reliable and affordable energy services in the rural regions of Bangladesh. The paper’s another objective is finding out how renewable energies are different from conventional energy projects and what impact this has on their financing needs and ability to attract finance. It describes the various types of financing instruments needed for RE plant development and explains the barriers and financing gaps that today make it difficult to raise capital for RE. The main objectives of this study are as follows:

Assessing the current scenario of renewable energy project financing in Bangladesh. Comparing the Incentives in Renewable Energy Policies over the countries Measuring the impact of renewable energy projects towards the society. Defining the structures of project finance transactions in Bangladesh. Unveiling the factors that limit the project finance of renewable energy projects. Assessing the Renewable Energy Potential in Bangladesh. Evaluating the Role of IDCOL in renewable energy project financing in Bangladesh. Overall evaluation of Project Financing in Bangladesh.

Critically evaluating the renewable energy project financing, making some recommendations are also the objective of this study to foster the growth of Renewable Energy Project Financing in Bangladesh.

1.4 Rationale of the Study: Energy is a basic need of human society and has rightly been termed by many as the „life-blood‟ which keeps human civilization progressing. Without adequate access to modern energy, poor countries can be trapped in a vicious circle of poverty, social instability and underdevelopment (World Energy Council 1999). One such energy starved country is Bangladesh. In 2003, Bangladesh’s energy consumption per capita was only 157 kilograms of oil equivalent (Kgoe) which is one-tenth of the world’s energy consumption per capita (Hussain et al. 2007). Bangladesh’s endowment of conventional energy resources is neither adequate nor varied, as a result of which it suffers from an acute energy crisis and crippling power shortages. However, Bangladesh is endowed with relatively abundant renewable energy resources such as solar and biogas energy. Without proper financing the growth of this eco-friendly renewable energy is impossible in countries like Bangladesh.

As a developing country, Bangladesh is facing intimidating energy challenges that are merely likely to worsen over the next few years. Furthermore, over 50% of Bangladesh's inhabitants live without electricity. Because it is expensive, village areas are generally not supplied by grid-connected electricity. These issues really bring the necessity of finding some other ways to improve this situation. That is why this study has been done.

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1.5 Methodology: It is a desk research which has involved the collection of previous research reports, newspapers and journal content also collection, collation and synthesis of existing project reports of governmental and nongovernmental organizations interventions relating to renewable energy infrastructure of Bangladesh. Here a real project of IDCOL is taken to analyze the process of project financing in details. Beside of this, to get the real scenario of renewable energy project financing several discussions was conducted with the officials of IDCOL.

1.6 Limitation of the Study: Although this study is carefully prepared, I am still aware of its limitations and shortcomings. Some of the limitations are as follows:

Lack of proper knowledge on project financing and renewable energy as I am not an expert in these fields.

Lack of available prior research studies on the topic. Could not get access to the confidential information of IDCOL. As a result there might be

lacking of right or biased information. Lacking of real world experience as it was totally a desk research.

1.7 Literature Review:The finance literature on the subject of project financing is still in its formative stages. Careful analyses of the true benefits of project financing have only recently begun to appear. Shah and Thakor (1987) were among the first to provide a carefully thought-out analysis of the rationale for project financing. They explained why project financing seems most appropriate for very large, high-risk projects. Unfortunately, their analysis was based on only two projects. Chen, Kensinger, and Martin (1989) observed that project financing is widely used for medium-size, low-risk projects, such as cogeneration facilities. They documented that project financing has become the dominant method of financing independent electric power generating facilities, including cogeneration projects developed for several Fortune 500 companies. At best, then, Shah and Thakor's theory appears incomplete.

Mao (1982) noted that in order for a project to secure financing as a separate economic entity, the relationships among the participants must be spelled out in detailed contracts.' Worenklein (1981) addressed the project's requirement for "sources of credit support" in the form of contracts to purchase output from the project and/or to supply the necessary inputs at controlled cost. The project's sponsors typically do not guarantee repayment of the project's debt, so creditworthy parties must provide credit support through such contractual undertakings.

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Chapter-02: Renewable energy in Bangladesh

Electrification is a constitutional commitment of Bangladesh government. Despite this only 30% of the entire population has access to electricity. Rural electrification Board (REB) provides electricity to only a certain portion of more than 80% of population living in rural areas. Rural electrification is primarily done through grid-expansion and in many remote areas of the country electrification through conventional means is not economically viable. Bangladesh, geographically being closest to the equator, is recipient of immense amount of solar energy almost entire year. Solar energy thus presents an enormous potential for Bangladesh to be utilized as an alternative to fossil fuel for production of energy.

Renewable energy is energy that is replenished by nature and comes from natural resources, including the sun, tides, rain, wind, and geothermal sources. It is “captured” and distributed via a number of technologies, including wind turbines, hydroelectric power stations, photovoltaic and heat engines, ethanol fuel plants, and geothermal heat pumps, among others (Michael Waldhier, May 2010). Renewable energy effectively utilizes natural resources such as sunlight, wind, tides and geothermal heat, which are naturally replenished. Renewable energy technologies range from solar power, wind power, and hydroelectricity to biomass and biofuels. About 13 percent of world’s primary energy comes from renewable, with most of this coming from traditional biomass like wood-burning. Hydropower is the next largest source, providing about 2-3%, and modern technologies like geothermal, wind, solar, and marine energy together produce less than 1% of total world energy demand.

Renewable energy is a relatively new concept in Bangladesh. However, successful implementation of renewable energy technology such as solar home system indicates that with mass promotion, public awareness, private sector participation, and necessary financial and government assistance, renewable energy sector is poised for long term sustainability in Bangladesh. Renewable energy sources presently used in Bangladesh include solar, wind, hydro, biogas and biomass. Of these solar has, so far, proven to be most popular and accessible in Bangladesh. Total yearly amount of solar radiation available on surface of Bangladesh is about 2.4x10 14 kWh while at present electricity generation is 2.0 x 10 10 kWh. So, solar radiation available is almost 10000 times the present electricity generation of Bangladesh. If 1/1000 th part of Bangladesh is used to produce electricity from solar with 10% efficiency, same amount of electricity may be generated as produced right now.

In rural areas of Bangladesh standalone solar home systems (SHS) are being used for basic electrification purpose in absence of conventional grid electrification. About 180,000 households are using SHS in Bangladesh which amounts to 0.60% of the country’s entire population. Infrastructure Development Company Limited (IDCOL), with assistance from different local non government organizations (NGOs) and micro finance institutions (MFIs), has been instrumental in promotion and commercialization of SHS in Bangladesh.

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2.1Energy Indicators of Bangladesh:2.1Energy Indicators of Bangladesh:

Total energy consumption :16.6 million tones oil equivalent Per capita energy consumption :171 kg oil equivalentEnergy related CO2 emission :42.74 mmt Per capital CO2 emission :0.3 mt Energy consumption : Conventional energy (54%), Biomass(46%)Conventional energy consumption

: Natural gas: 1850-1900 MMscfd (April 2009) Oil: 3.5 MT (2008) Coal: 3.8 MT (2008)

Access to electricity : 45%Per capital electricity consumption

: 145 kWh annum

Source: http://data.un.org/CountryProfile.aspx?crName=Bangladesh#Environment

Conventional energy consumption (2007)Oil (thousand barrels per day) 91Natural gas (billion cubic feet) 554Coal (million Short Tons) 0.8Source: nationmaster (www.nationmaster.com/bangladesh

Sources of energy consumption-2007-http://www.nationmaster.com/red/country/bg-bangladesh/ene-energy&b_define=1

Fig: Percentage of usage of Conventional and Biomass energy

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Graph: Demand Supply Gap in Five Years

Year Demand-Supply Gap (MW)2009 17772010 14272011 18432012 18532013 14852014 1763

Source: http://www.economywatch.com/economic-statistics/country/Bangladesh/ Assumptions Demand-Supply Gap (Load Shedding) is increasing. By the year 2014 this gap will be around 1750 MW Gas supply uncertainty to 1620 MW projects under process may lead to more than 3000 MW load shedding in the year 20142.2 Role played by the government: The Government of Bangladesh is so generous towards the financing of renewable energy project and to foster the growth of renewable energy in Bangladesh.

Renewable Energy Policy has been adopted by the Government of Bangladesh on 18 December 2008.

The policy has set a target of generating 5% of the total electricity from renewable sources by 2015 and 10% by 2020.

A focal point called Sustainable Energy Development Agency (SEDA) will coordinate activities related to the development of renewable energy technologies and financing mechanisms.

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For electricity less than 5 MW generated from renewable energy projects may be purchased by power utilities or any consumer.

All renewable energy equipments and related raw materials will be exempt from 15% VAT and companies will be exempt from corporate income tax for a period of 5 years;

Private sector participation including joint venture initiatives in renewable energy development will be encouraged and promoted;

An incentive tariff has been proposed for electricity generated from renewable sources which may be 10% higher than the highest purchase price of electricity.

Bangladesh Bank, the Central Bank, has launched a revolving fund of BDT 2 billion for refinancing renewable energy projects i.e. solar energy, biogas and effluent treatment plants through commercials at concessionary terms and conditions.

2.3 Comparison of Incentives in Renewable Energy Policies over the countries:Incentives in RE Policy of

BangladeshIncentives in RE Policy of Other

CountriesProposed Incentives

for RE Policy of Bangladesh

Institutional Arrangement – Sustainable Energy Development Agency (SEDA) shall be established VAT Exemption – All renewable energy equipments and related raw materials in producing renewable energy equipments will be exempted from charging 15% VAT.Micro-credit Support System – In addition to commercial lending, a network of micro-credit support system will be established especially in rural and remote areas to provide financial support for purchases of renewable energy equipment. Corporate Income Tax Exemption – Renewable energy project investors both in public and private sectors shall be exempted from corporate income tax for a period of 5 years. Feed–in–Tariff – An incentive tariff may be considered for electricity generated from renewable energy sources which may be 10% higher than the highest purchase price of electricity by the utility from private generators.

FranceFeed–in–Tariff: 28.8 BDT/kWhConstruction bonus: 24 BDT/kWh in the mainland France.Germany The basic rate of payment for solar generated electricity is 43.87 BDT/kWhIf the plant is attached to or integrated on top of a building, the fee is 50-55 BDT/kWh United Kingdom Currently, price of electricity from Renewable Obligation is 37.29 BDT/kWhUnited States Production tax credit (PTC) benefit: 2.37 BDT/ kWh generation Investment tax credit (ITC): 30% for the solar systems buyers Grant: up to 30% of the property’s value. IndiaDirect taxes - 100 per cent depreciation in the first year of installation of the projectExemption/reduction in excise dutyExemption from Central Sales Tax and customs duty concessions on the import of material, components and equipment used in RE projects

Investment subsidies or rebates

Sales tax exemptions – at the point of sale

Production tax credit – tax credits per kWh generation

Net metering – for grid connected systems

Feed–in–Tariff – more incentive tariff is required

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Chapter-03: Role of IDCOL in renewable energy project financing in Bangladesh:

Infrastructure Development Company Limited (IDCOL) was established on 14 May 1997 as a joint initiative of the Government of Bangladesh (GoB) and the World Bank. The Company was licensed by the Bangladesh Bank as a Non Bank Financial Institution (NBFI) on 5 January 1998. Since its inception, IDCOL is playing a major role in bridging the financing gap for developing medium and large-scale infrastructure as well as renewable energy projects in Bangladesh. Through its participation in financing of infrastructure projects, IDCOL expects to serve as a catalyst in mobilizing private debt and equity financing. In renewable energy projects, however, IDCOL provides subsidy, soft financing and necessary technical support to the private sector with an objective to energize rural Bangladesh in a sustainable manner.

Renewable energy is a relatively new concept in Bangladesh. In 2002, IDCOL, with support from the World Bank and Global Environmental Facility (GEF), started implementing the first comprehensive renewable energy program in Bangladesh by disseminating solar home systems in the off-grid rural areas. In 2006, with support from SNV, Netherlands and KfW, Germany, IDCOL undertook a nationwide program on domestic biogas. Lately, IDCOL started promoting new and emerging renewable energy technologies by financing several pilot projects i.e. biomass gasification based power plant, electricity from biogas, solar irrigation pumps etc. Today, IDCOL has emerged as the largest promoter and financier in the renewable energy sector of Bangladesh.

IDCOL’S INVESTMENT PORTFOLIO

Sector wise loan disbursement as of 30 June 2009

Power, 52.8%

Renewable Energy, 31.9%

Telecommunication, 14.1%ICT, 0.4%

Gas, 0.2% Ports, 0.6%

Source: Investment department, IDCOL

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Key Achievement (The Punch- line)

3.1 IDCOL’s role in power sector of Bangladesh: Until August 2009, IDCOL financed a total of USD 103 million in traditional power projects financing a total generation capacity of 725.35 MW. The USD 80 million loan channeled by IDCOL to the 450-MW Meghnaghat Power Plan, sourced from the World Bank, is the largest private sector financing in Bangladesh.

3.1.1 Telecommunication and IT Projects financed by IDCOL: IDCOL financed network expansion projects of telecommunication operators, broadband a wireless access network project, nationwide telecommunication transmission network project, VSAT hub station project, international gateway services network, and several other IT projects. Total loan amounts in these projects were BDT 2,500 million.

3.1.2 IDCOL’S Solar Home System (SHS) Program: IDCOL undertook its solar program in January 2003 with the support from International Development Association (IDA) and Global Environmental Facility (GEF) to fulfill basic electricity requirements in the rural areas of Bangladesh. Under the program, IDCOL intended to provide both grant and refinancing to 50,000 solar home systems (SHS) over a period of five-and-half years [January 2003 - June 2008].

SHS is a convenient mode of supplying power for small electrical loads such as lights, radio/cassette players and black and white TV. Although available for limited number of hours in a day the supply is reliable and the system can be managed with a little training. The main components of an SHS are a solar panel, a battery and a charge controller.

The program is being implemented through several Partner Organizations (POs) selected from NGOs/MFIs/Private Companies. So far thirteen POs namely: Grameen Shakti, BRAC Foundation, COAST Trust, TMSS, SRIZONY Bangladesh, CMES, IDF, Shubashati, SINGER Bangladesh, UBOMUS, DORP, BRIDGE and PMUK have signed Participation Agreements (PA) with IDCOL to participate in the solar program. The role of the PO is to select the project areas and potential customers, extend loans, install the systems and provide maintenance support. IDCOL provides grants and refinance, sets technical specification for solar equipment, develops publicity materials, provides training, and monitors PO’s performance.

Grant is provided to lower costs of SHS and to build institutional capacity of the POs. IDCOL’s principal objective is the commercialization of SHS. Therefore, it has adopted a policy of reducing grant with the progress of the project. IDCOL also offers soft loans of 10-year maturity with 2-year grace period at 6% interest per annum to its POs. Usually, IDCOL does not require

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any collateral or security for the loan, except for a lien created on the project accounts. IDCOL conducts physical verification of the SHSs installed. It releases grants and refinance amounts only if the inspection result is satisfactory.

IDCOL has achieved the target installation of 50,000 SHSs in August 2005, three years ahead of the project completion period and US$ 2 million below the estimated costs. Following the success of IDCOL’s solar program, the World Bank has extended further support for financing of additional 60,000 SHSs. KfW has also signed a Finance and Program Agreement to provide EUR 16.5 million as grant to government to be used for further expansion of the program. To mitigate the gap between IDA and KfW financing, GTZ has agreed to provide grant financing for 28,000 SHSs. In total, IDCOL will finance 198,000 SHSs by 2009. Up to 30 June 2006, a total of 76,607 SHSs have been installed under the program. Division wise SHS installations up to 30 June 2006 are shown below:

Division No of Installations

Division

No of Installations

Division

No of Installations

Barisal 11,385 Khulna 14,500 Rajshahi

9,886

Chittagong

18,085 Dhaka 13,303 Sylhet 9,447

Total 76,607

Source: Investment department, IDCOL

Two committees namely Operations Committee (OC) and Technical Standards Committee (TSC), coordinate various aspects of implementation of the program. OC consisting of representatives from POs and IDCOL officials meets once in every month to look after the operational aspects of the solar program. TSC determines technical standards for equipment to be financed, review the product credentials submitted by dealers, and approve the eligible equipment. IDCOL also conducts training program to build awareness among the staff of the POs’ and the consumers.

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Technical Standards Committee

Operations Committee

Household

IDCOL

MFIs

Suppliers

Seeks Approval

Provides Approval

Supplies Equipment

Sell systems & channel

Grant A

Seeks Grant & Refinancing

Provide Grant A, B & Refinancing

Seek operations

related solutions

Provide solutions

Pays for Equipment

Downpayment & monthly installments

Fig: IDCOL Solar Programme – At a Glance

The program has brought in positive changes in the economy of the rural people. Now customers are using SHS in the advantage of their income generating activities. Students are also getting benefits through extended hour of studies at night. In addition, the use of TV and radio has enhanced rural people’s access to the outer world. A good number of job opportunities, both for skilled and unskilled manpower, have been created. Till March 2006, some 1,000 new jobs have been created by the program. The program also has a positive impact on our local manufacturing industry. Except for the PV module, other components of SHS are now produced locally.

3.1.3 National Domestic Biogas and Manure Program: IDCOL is implementing National Domestic Biogas and Manure Programme (NDBMP) with support from GoB, SNV Netherlands and KfW. Under the project a total of 60,000 domestic sized biogas plants will be financed during 2006-2009 all over Bangladesh. The overall objective of the NDBMP is to further develop and disseminate domestic biogas plants in rural areas with the ultimate goal to establish a sustainable and commercial biogas sector in Bangladesh.

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Gas produced through these plants is used for cooking purposes and lighting of rural households. In addition, the slurry, by-product of biogas plants, being a very good organic fertilizer is used to maintain soil fertility and increase crop production. The slurry is also used as fish feed.

IDCOL is implementing this programme through partner organizations (PO) including private companies, NGOs, Micro finance institute (MFIs). There are 4 types of POs: (a) Construction Partner Organizations (CPOs), (b) Lending Partner Organizations (LPOs), (c) Lending and Construction partner Organizations (LCPOs) and (d) Manufacturing Partner Organization (MPOs). At present 19 POs are implementing NDBMP.

IDCOL provides Taka 9,000 as investment subsidy to the biogas households who install biogas plants as per the specifications and standard set by IDCOL/SNV. IDCOL is also providing refinance covering 80% of the LPOs and LCPOs loan to households at 6% interest rate and 7 year tenor with 1 year grace period. Total project cost is estimated as EUR 23.61 million and will be borne by individual households, SNV, KfW and GOB.

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Chapter-4: Importance and limitations of REP financing

4.1 Importance of Project Financing For Rep: •For REP, neither the developer nor the purchasers can self finance. Majorities are not sufficiently capitalized and do not have enough track record to attempt corporate balance sheet financing.•The public sector which has invested a considerable amount of tax payers’ money in the technology through Research and Development (R&D) is typically not appropriate as the source of finance. The funds that are available are also not adequate for such large scale deployment efforts.•In the private sector the traditional form of energy finance which is venture capital, is too expensive to use for financing the REP.•Developers may not want to solely bear risks associated with the project. •Since it is an off balance sheet loan, small sized developers would be free to pursue several projects at the same time with limited negative balance sheet impacts.

4.2 Factors limiting project finance of rep:♦ Many projects are perceived by the financial community to have high resource and technology risks. These real and perceived risks result in financing that is more costly than that available to more traditional sources.♦ Since RE technology is relatively new, financial institutions lack experience in evaluating risks associated with REPP. Furthermore, rapidly changing technology and a shortage of RE technology engineers means that lenders do not have the technical know how to assess and monitor many REPs.♦ The renewable industry and RE projects are small compared to traditional power plants. Lenders are usually not interested in small transactions. Even where finance is available, the transaction costs are much higher for smaller REP because many of the same financing and documentation processes must be followed irrespective of the size of the project.♦ REPP can only operate when their resources are available. The intermittent nature of RES means they generate less cash flow than fossil fuel fired plants. This provides lower margins for project financing and puts pressure on costs associated with overhead and maintenance costs. The process of arranging financing is time consuming.

4.3 Need for Renewable Energy4.3 Need for Renewable Energy To ensure energy security

– 70% of Bangladesh's total commercial energy is provided by natural gas and the remainder almost entirely provided by imported oil, hydropower and coal.

– These sources are likely to be depleted by 2020. To reduce negative environmental consequences

– Climatic change will eventually cause increase in sea level- one meter sea level rise will inundate more than 15 percent of Bangladesh, displacing more than 13 million people and cut into the crucial rice crop.

To supplement Government’s view on:

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– Electricity for all by 2020.– Government has set a target to meet 5% of total power demand by 2015 and 10%

of total power demand by 2020 from renewable energy sources. To reach out to off-grid areas where grid electricity is not available:

– More than two third of the nearly 15 million households of Bangladesh lack access to electricity

– Two approaches might be followed to provide electricity to off-grid areas: • Individual or household options for dispersed population• Community or private sector initiatives involving mini-grids for

distributed supply of power

4.4 Renewable Energy 4.4 Renewable Energy PotentialPotential of Bangladesh of Bangladesh:: Solar energy

– Being located near the Equator, the country is recipient of sufficient sunshine round the year

– SHS can be easily installed and maintained with little training– 6 million solar home systems in off-grid areas – 330 MW of electricity– 2 hundred thousand solar irrigation pumps – 1000 MW of electricity– Solar mini grid– Solar thermal power plant

Biogas– Cattle population is about 24.19 million (1996) yielding about 242 million kg of

cattle wastes per day with a potential for construction of 3.46 million 2.4 m3 biogas plant.

– Moreover, using poultry droppings alone, domestic sized plants are technically feasible in 80,000 poultry farms

Chapter-05: Introduction to Project Finance

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5.1 What Is Project Finance? The basic premise of project finance is that lenders loan money for the development of a project solely based on the specific project’s risks and future cash flows. As such, project finance is a method of financing in which the lenders to a project have either no recourse or only limited recourse to the parent company that develops or “sponsors” the project (the “Sponsor”). Non-recourse refers to the lenders’ inability to access the capital or assets of the Sponsor to repay the debt incurred by the special purpose entity that owns the project (the “Project Company”). In cases where project financings are limited recourse as opposed to truly non-recourse, the Sponsor’s capital may be at risk only for specific purposes and in specific (limited) amounts set forth in the project financing documentation.

Project financing has been used in various ways for many years, but in the 1970s and 1980s it emerged as a leading way of financing large infrastructure projects that might otherwise be too expensive or speculative for any one individual investor to carry on its corporate balance sheet. Project financing has been particularly important to project development in emerging markets, with participants often relying on guarantees, long-term off-take or purchase agreements, or other contractual relationships with the host sovereign or its commercial appendages to ensure the long-term viability of individual projects. These were typically backstopped by multilateral lending agencies that mitigated some of the “political” risks to which the project lenders (and, sometimes, equity investors) were exposed.

5.2 What Underpins Project Finance? As a general (if not universal) rule, lenders will not forgo recourse to a project’s Sponsor unless there is a projected revenue stream from the project that can be secured for purposes of ensuring repayment of the loans. In the case of large wind and solar power projects, this revenue is typically generated from a power purchase agreement (“PPA”) with the local utility, under which the project may be able to utilize the creditworthiness of the utility to reduce its borrowing costs. While the wind power market has matured significantly in the past five years, leading to the successful project financing of “merchant” projects in the absence of long-term PPAs, Solar Projects are generally not yet able to be project financed in such a manner. In merchant power projects, lenders are able to receive assurance of the project’s ability to repay its debt by focusing on commodity hedging, collateral values, and the income to be produced based on historical and forward-looking power price curves and fully developed markets. In non-power generation contexts, the project’s revenue stream may be a long-term operating agreement (e.g., in the case of toll roads), a capacity purchase agreement (e.g., in the case of transmission lines), a production sharing agreement (e.g., in the case of oil field development), or a series of short-term and spot sales into commodity markets (e.g., in the case of biofuels projects).

While project finance lenders clearly prefer a long-term contract that ensures a relatively consistent and guaranteed revenue stream (including assured margins over the cost of inputs), in the context of some industries, lenders have determined that sufficient revenues to support the project’s debt are of a high enough probability that they will provide debt financing without a long-term off-take agreement. Solar Projects, due to their peak period production, high marginal

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costs, and lack of demonstrated merchant capabilities, are not at this time viewed as “project financeable” without PPAs that cover all or substantially all of their output. Solar Projects’ lack of merchant viability is exacerbated by the fact that the southwest United States (the region most appropriate for utility-scale solar power development) does not have a mature merchant power market that functions in the absence of long-term bilateral sales agreements. The dependence of large-scale solar projects on the PPA model is not expected to change in the short to intermediate term.

5.3 When to Project Finance? One of the primary benefits of project financing is that the debt is held at the level of the Project Company and not on the corporate books of the Sponsor. When modeling projects and projected income, the internal rate of return of Sponsors and other project-level equity investors can increase dramatically once a project is fully leveraged. Sponsors are frequently able to recover development costs at the closing of the project financing and put their money into other projects. Another benefit of project financing is the protection of key Sponsor assets, such as intellectual property, key personnel, and investments in other projects and other assets, in the case of the Project Company’s bankruptcy, debt default, or foreclosure. Moreover, project financing allows for a wide variety of tax structuring opportunities, particularly in the context of monetizing tax incentives. On the other hand, project financing is document-intensive, time-consuming, and expensive to consummate. It is not atypical that administrative and closing costs, when factoring in lenders, consultants, and attorneys fees for all parties, equal several percentage points of the amount of the loan commitment. Moreover, project financing imposes significant operating restrictions on each Project Company, including its ability to make equity distributions to the Sponsor prior to the payment of operating expenses, debt service, and a percentage “sweep” of additional cash flow. The result is that the decision of whether to reinvest cash flow in the project does not rest solely with the Sponsor.

Given the pros and cons of project finance, the most relevant initial inquiry for an investor or developer may be when is project financing possible or most appropriate? The following questions should be useful in determining if project financing is a realistic opportunity for any given company:

Is there an individual project or group of projects of a sufficient size to make either a standalone or portfolio project financing worthwhile?

Will there be a revenue stream from the project large enough to support a highly leveraged debt financing? This is a prerequisite for project financing.

Will the receipt of revenue be enforceable under contractual rights against a creditworthy party? This is not necessarily a prerequisite for all project financings, but the absence of a contract, or questionable creditworthiness of the purchaser, will prompt lender skepticism and necessitate thorough due diligence regarding future revenue projections.

Will there be physical assets sufficient to ensure lender repayment in case of foreclosure? Lenders will want to know that even if the Project Company’s projected revenue stream does not materialize, they will be able to foreclose on the project’s assets sufficient in value to “make themselves whole,” either by selling the project outright or operating it until the debt is repaid.

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Is there a significant level of technology risk? While in many project financings, technology may be relatively new or cutting edge, project finance lenders almost never want to be the first to finance an untested technology. Demonstrated successful use in some context will often be necessary to secure project financing.

Does the project have contractual relationships with reputable companies for services key to the success of the project or the technology it employs? Lenders will be less likely to lend to a project the success of which depends solely on a few talented individuals who may depart, leaving the project unable to meet its potential.

Is the Sponsor ultimately willing to “risk the project”? In other words, once project financing is completed, the Sponsor loses the ability to determine how the vast majority of the project’s revenue is spent. In the event a project becomes uneconomic and unable to service its debt, the only option besides refinancing the debt may be to turn over the project to the lenders (voluntarily or involuntarily), with the corresponding loss of the Sponsor’s investment in the project.

Is the Sponsor looking for a quick exit? Once project-financed, divestiture opportunities are complicated by the requirement of lender consent, and potential purchasers will be thoroughly examined by lenders for development and operational expertise as well as creditworthiness.

Are Sponsors willing to grant rights of high-level oversight regarding the project’s development and operation to project finance lenders? In many cases the interests of the Sponsor and the lenders will be aligned, and lenders will tend to defer to the Sponsor’s developmental expertise. On the other hand, lenders must be viewed as additional project partners, with veto rights over many significant decisions.

5.4 Project Financing Versus Direct Financing?Project financing should be compared to direct financing on the sponsor's general credit, when deciding how best to finance a project whose characteristics would make it suitable for project financing. It is important to appreciate that just because project financing might be arranged does not mean that the project should be financed in this manner.

The below figure compares direct financing by the sponsor and project financing, on the basis of several criteria.

Criterion Direct Financing Project Financing

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Organization Large businesses are usually organized in corporate form.

Cash flows from different assets and businesses are commingled.

The project can be organized as a partnership or limited liability company to utilize more efficiently the tax benefits of ownership.

Project-related assets and cash flows are segregated from the sponsor's other activities.

Control and monitoring

Control is vested primarily in management.

Board of directors monitors corporate performance on behalf of the shareholders.

Limited direct monitoring is done by investors.

Management remains in control but is subject to closer monitoring than in a typical corporation.

Segregation of assets and cash flows facilitates greater accountability to investors.

Contractual arrangements governing the debt and equity investments contain covenants and other provisions that facilitate monitoring.

Allocation of risk

Creditors have full recourse to the project sponsor.

Risks are diversified across the sponsor's portfolio of assets.

Certain risks can be transferred to others by purchasing insurance, engaging in hedging activities, and so on.

Creditors typically have limited recourse-and in some cases, no recourse-to the project sponsors.

Creditors' financial exposure is project specific, although supplemental credit support arrangements can at least partially offset this risk exposure. Contractual arrangements redistribute project-related risks.

Project risks can be allocated among the parties who are best able to bear them.

Financial flexibility

Financing can typically be arranged quickly.

Financing arrangements are highly structured and very time-consuming.

structure of debt

Creditors look to the sponsor's entire asset portfolio for their debt service.

Creditors look to a specific asset or pool of assets for their debt service.

Bankruptcy Lenders have the benefit of the sponsor's entire asset portfolio.

The debt is generally not repayable from the proceeds of other unrelated projects.

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23

Project Finance Corporate Finance

ConcessionContract

Project Company(SPV)

Lenders

Government

Loan Re-paymentSponsor

1

Sponsor2

Sponsor3

UsersTariffs

Services

ConcessionContract

Private Company

Lenders

Government

Loan Re-payment

Tariffs

Investment

SPV

Users

Services

Fig: Difference between Project and corporate finance

5.5 Participants of a project finance:Sponsor:

Developer of the project Project sponsor(s) may consist of an individual but more often is organized as a company Sponsors must demonstrate previous track record and experience in managing the project Sponsors Insist on long term predictable cash flows.

Project Company: Separate entity from sponsors Sponsor(s) generally form a special purpose vehicle ("SPV") to own and operate the

project. This SPV is known as Project Company Sponsor members are required to make capital investments in the SPV according to the

terms of their share holders’ agreement Lenders give loans to the SPV, not to the sponsors

Construction Contractor: Construction contractor is the entity that builds the project under an engineering

procurement and construction contract ("EPC"). EPC contracts are generally fixed price – fixed term. Lenders prefer a single EPC contract because it gives them a single-point responsible

party for all activities. EPC contractor is subject to penalty payment for underperformance.

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Contractor’s involvement is short term in nature. Higher (and earlier) profitability.

Lenders:1. Multilateral and Bilateral Agencies

The World Bank, EBRD, ADB, African Development Bank etc. International Finance Corporation Regional development banks, etc.

2. Commercial Lenders3. Export Credit Agencies

US Export Import Bank ("US Exim") Export Credit Guarantee Department of the United Kingdom ("ECGD") Export Credit Agency of France ("COFACE") Export Credit Agency of Germany ("KfW").

4. Bond Markets 5. Insurance Companies

Off-taker: The entity that is the single purchaser of the project output More than one off-taker is very uncommon Some Project Financed deals do not have off-takers, e.g.

toll road container port mass transport system, etc.

Suppliers

OfftakersGovernment

ProjectManagers Engineers

Operators Sponsors

Contractors

Local Partners

InsurersEquityInvestors

MezzanineInvestors

Banks

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The off-take agreement guarantees purchase of project output The payments due under the off-take agreement constitute a major element in

determining the finance-ability of the project.

Operator: Responsible for the operation and maintenance of the project in exchange of fee Operator is subject to penalty payment for underperformance Project company can also be an operator

Input Supplier: Responsible for delivery of inputs to the project Input supply agreement may be entered into Take or pay contract Supplier is also subject to penalty payment for underperformance

5.6 Structures of project finance transactions:Despite the complexity inherent in the nature of the financing, some contend that every project financing can be fitted into the same basic structure and essentially has the same components. One proponent of such thinking is Thomas H. Pyle, Managing Director of the Princeton Pacific Group and project finance lecturer with the Euromoney Institute of Finance.

Pyle calls this prototypical structure “the project finance angel.” The halo of the angel is the government; the project sponsor is the head; the contractor and operator serve as wings; the project company is the body; the supplier and customer represent the arms; and, the banks are the angel’s feet. The outspread arms and the body together also symbolize the project’s throughput - the tollable commodity that creates the cashflow. The following diagrams illustrate the transfiguration of the angel into a power plant. Of course, as transactions become more complex,

it is necessary to modify the basic structure.

The Project Angel

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Chapter-06: IDCOL for project financing

6.1 Eligibility to get IDCOL loan for projects:

IDCOL will lend up to a maximum of 40 percent of the total project cost to private sector sponsored infrastructure projects in Bangladesh that meet the following eligibility criteria:

Priority: Projects should be an integral part of the GOB's priority plan for the relevant sector/sub-sector.

Ownership: The project must be majority-owned by the private sector parties. Private sector parties must hold at least 51% of the project's equity and be significantly involved in its management for a period of at least 10 years, or the life of the IDCOL loan, whichever is longer;

Viability: The sponsors should have a proven track record of successfully developing, financing and operating similar infrastructure projects in countries at a similar level of development in Bangladesh;

Equity: To ensure sponsor's commitment to the project, equity should represent not less than 20% of the total project cost;

Technology: The technology proposed for a project should have a successful track record in countries at a similar level of economic and technological development and infrastructure support in Bangladesh;

Procurement: IDCOL, generally, will finance GOB solicited projects. In those cases where the solicited project satisfies IDA Procurement Guidelines (the Guidelines), the sponsors will be allowed to follow their own procurement processes for downstream purchases. In the case of unsolicited projects, or solicited projects that do not conform to the Guidelines, IDCOL is required to satisfy itself that the "downstream procurement" for the engineering, procurement and construction (EPC) services required to build the facility equipment and/or works that are an integral part of such facility, are made in accordance with the provisions of the Guidelines. In the latter case, IDCOL's loan support will be limited to the value of the "downstream procurement" made following such Guidelines;

Limited Recourse: Projects should be financially viable on their own with robust and predictable cash flows;

Environment and Social Framework: Projects should meet GOB and IDCOL environmental and social assessment criteria; and

Economic Rate of Return: The economic rate of return of the project should be at least 12 percent.

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6.2 Terms & Conditions of IDCOL for project financing:

Interest rates

IDCOL participates in a project's financing plan with either fixed or floating rate. IDCOL prices its loans in reference to London Inter-Bank Offered Rate (LIBOR), a US dollar denominated interest rate index that is prevalent in the Euro-markets. Under current pricing, all loans are priced at a variable rate equal to the prevailing US dollar three-month LIBOR plus a margin set once each year with reference to current market conditions. Currently, the margins for senior and subordinated loans are 350 basis points and 400 basis points, respectively. For loans denominated in BDT, IDCOL sets interest rates with reference to two years Govt. Treasury Bill plus 400 basis points. Each year, IDCOL Board reviews the company's lending terms and conditions. In case of syndicated financing IDCOL's interest rate may match with that of other lenders providing similar loans.As a prudent lender, IDCOL desires and at times may require the borrowers to enter into an interest rate hedge arrangement to prevent potential project cash flow shortages should LIBOR increase dramatically. Such a hedge may be arranged in the financial markets by borrowers or by IDCOL itself. IDCOL provides soft loan in case of rural infrastructure having development impact. In that case IDCOL’s interest rate may vary from 6% to 9.5% p.a.

Currencies

In cases of IDCOL's US Dollar funding resources, it generally prefers to lend in that currency if borrowers generate their revenue in that currency or have an appropriate revenue contract denominated in local currency with an embedded hedge i.e., indexed to US dollars. IDCOL may also finance projects that do not generate hard currency or whose tariffs do not have indexation provision, provided that the projects sponsors agree to create a currency depreciation reserve.Repayment schedule for IDCOL loan is semi annually / quarterly and will be set forth in US dollar. However, repayment in local currency is permitted provided that repayment is made in equivalent Bangladesh Taka (BDT) converted at the rate of exchange prevailing at the time of repayment. However, IDCOL extends credit in BDT if a project does not have a revenue contract, generates only local currency and is perceived to have high development impact.

Tenor

Loan tenor depends on the nature of the specific project and the life of the assets financed. Within this constraint, the final maturity of a senior loan may be for up to 15 years while that for a subordinated loan may be up to 23 years. The final maturity of a local currency loan is expected to be between 5 and 10 years depending upon the specific attributes of the project.

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Repayment

Repayment is normally in equal semi annually / quarterly installments of principal and interest with a suitable grace period on repayment of principal. A maximum grace period of 4 years and 8 years, respectively for senior and subordinated loan is permitted and the construction period of the project will be part of the allowed grace period. Depending upon project needs, the borrower has the option of using its equity resources to fund the interest due during construction or, otherwise, co-financing these amounts with draw downs forthcoming from debt commitments. In the latter case, interest on the loan will be payable from the Commercial Operations Date.

Security

IDCOL requires appropriate security for its loans that include inter alia: • Pledge of shares in the project company and creation of a voting trust permitting lenders to vote the shares of the company in times of distress; • Direct agreements with key project participants that allow lenders to "step in" and take over the project when it is in trouble, without affecting the legality and validity of project agreements; • First priority legal mortgage on all immovable assets as well as first priority hypothecation on all movable assets of the project company; • Assignment of project company rights under all project agreements; • Assignment to the extent possible of all contractors' and manufacturers' warranties; • Completion guarantee and other similar support from sponsors; and • First loss payee on insurance policies on project assets or interruption against natural force majeure as well as for business interruption or delayed start-up. • Lien on project accounts.

6.3 IDCOL Project Cycle:

Loan application

The sponsor(s) will be required to provide certain specific financial and technical information. A formal application must be submitted to IDCOL by the sponsor(s) containing required information including, for this purpose, a feasibility study acceptable to IDCOL. The feasibility study would be reviewed by IDCOL to ensure that it satisfies its requirements and those of concerned parties. After an initial clearance-in-principle, a non-binding Preliminary Letter of Support (PLS), including a draft Term Sheet and Loan Agreement would be issued to the sponsor/borrower.

AppraisalIDCOL carries out its own independent appraisal of the economic, technical and financial viability of each project and ensures that the investment is in line with national policies and priority development programmes of the GOB. During the appraisal, IDCOL also verifies compliance with environmental protection and procurement regulations.

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IDCOL treats any information received in the course of its operations as confidential.

Approval

Following a careful examination of the final appraisal report, the Board of Directors of IDCOL will make final decision on the application.

Effectiveness of the loan from IDCOL will be subject to all other financing for the concerned Project being irrevocably committed and effective.

MonitoringIDCOL loan contracts provide for monitoring of implementation progress and expenditure. After completion, a report is drawn up, which includes a comparison of actual with initial estimates.

Loan processing procedure along with Due Diligence process flow

Projects financed by IDCOL are typically funded on a limited recourse basis. The stages through which IDCOL provides approval for a project are described below and summarised in the following figure titled IDCOL's Project Cycle:

Step 1. Once approached by a potential sponsor/borrower(s), the Executive Director and Chief Executive Officer (“CEO-IDCOL”) and/or other senior officials of the Company will meet with the sponsor/borrower(s) to discuss the general terms and conditions of IDCOL loans as well as the eligibility criteria and loan process.

Step 2. The project cycle will begin with the receipt of a completed loan application along with a non-refundable application fee1 applicable for the project. Sponsors requiring foreign currency loans are required to pay the application fee in US dollars; whereas domestic sponsors may pay this amount in local currency. Upon receipt, the IDCOL staff will review the application to ensure that all necessary information in the loan application has been included and that all required documentation has been submitted.

For projects eligible for financing under Private Sector Infrastructure Development Project (PSIDP), the Sponsor's ability or willingness to meet eligibility criteria such as IDA procurement policy will have to be firmly established during steps 2-3. In cases where information or documentation is missing, IDCOL will contact the Sponsor to complete the application.

1

27

IDCOL’s Project Cycle

Step 3. In case of projects eligible for financing, IDCOL officials conduct a procurement review for the project as per the relevant procurement guidelines.

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In case of a solicited project eligible for financing under PSIDP, it must follow the IDA Guidelines. Where the project is unsolicited, the Sponsor's agreement to conduct a "downstream" ICB tender for the procurement of EPC services and works and/or equipment will have to be secured. Then, CEO's comments and the procurement review will be submitted to IDA for their clearance.

Step 4. Once all other information has been received, IDCOL will begin its preliminary project appraisal. In this step, IDCOL will analyse the information and documentation submitted by the Sponsor and prepare a preliminary project appraisal for review by the CEO-IDCOL prior to its presentation to the IDCOL Board of Directors. The purpose of this step is to (i) assist the Board in making a decision whether or not to proceed further with the project; ii) identify any weak spots in the project; and (iii) initiate discussions of potential risk mitigation measures with the Sponsors.

Step 5. Upon obtaining approval from the IDCOL Board, IDCOL will prepare an indicative draft term sheet.

In case of projects eligible for financing under PSIDP, CEO-IDCOL will review the term sheet, seek the views of IDA and the Company's legal counsel and then, submit it to the IDCOL Board of Directors for approval.

Step 6. IDCOL will issue a Preliminary Letter of Support (“PLS”) to the Sponsor along with a copy of the indicative draft term sheet. CEO-IDCOL will request from the Sponsors copies of all signed project documents as they become available.

In case of PSIDP projects, issuance of the PLS will be subject to the Board approval, receipt of procurement clearance from IDA, and receipt of the first part of the Project Examination Fee of 0.0625 percent of the financial assistance being sought (but not exceeding $25,000). If the project was subject to a formal solicitation, CEO-IDCOL will request procurement clearance from IDA.

Step 7. For PSIDP projects, after receipt of the signed project documents, IDCOL will prepare an engagement and indemnification letter which will be sent to the Sponsors, with a request for the second half of the Project Examination Fee of 0.1875 percent of financial assistance sought. If the project was an unsolicited proposal, the engagement letter and indicative draft term sheet must limit IDCOL financing to no more than a) 100 percent of the cost of any portion of goods and services which is subsequently tendered using IDA guidelines or b) 40% of project cost, whichever is lower.

Step 8. CEO-IDCOL will request a letter ("Information Letter") from the Sponsor updating the information provided in the original project proposal and discussing any changes and/or recent developments. In addition, IDCOL will seek Board approval of any appointment by the lending syndicate of lenders' legal counsel and technical advisors.

Step 9. IDCOL will prepare the Terms of Reference (“TOR”) for appraising the project eligible for financing under PSIDP and commission necessary short-term technical advisers (“STTA”) in

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consultation with CEO-IDCOL. With receipt of the Information Letter, engagement and indemnification letters and applicable fee, CEO-IDCOL will seek approval from the Board to initiate the formal project appraisal process.

Step 10. From time to time, IDCOL will participate in lenders’ meetings for the purpose of reviewing the work of technical advisors and legal counsel as well as drafting common term sheets.

Step 11. IDCOL officials (The STTAs, with the assistance of IDCOL officials, in case of projects under PSIDP) will prepare the project appraisal report for submission to the CEO-IDCOL for his review and comments.

Step 12. Based on lenders’ meetings and on the recommendations of the project appraisal report, IDCOL will prepare a final draft loan term sheet, consistent with the lenders' common terms sheet and any additional understandings that may exist with Sponsors, for review by the CEO-IDCOL (and for comment from IDA for PSIDP projects.)

Step 13. Once the final draft term sheet has been prepared, a copy will be submitted along with the completed project appraisal report to the Credit Committee of the IDCOL Board for approval.

Step 14. Once approval of the IDCOL’s Credit Committee is obtained, IDCOL will submit recommendation of the Credit Committee to the Board of Directors for approval. Following approval of loan terms by the Board, IDCOL will issue a loan sanction letter to the sponsor. Subsequently, IDCOL will sign the loan agreements with the Sponsor, collect the other relevant fees applicable for the project and close the loan sanctioning process

In case of projects eligible for financing under PSIDP, approval of project is subject to IDA’s “no objection.”

Chapter-07: Case study Analysis of a renewable energy project of IDCOL: PGEL 100 kW Solar Mini Grid at Sandip Island

The proposed project involves setting up of a 100-kW solar photovoltaic (PV) based micro-grid by PUROBI Green Energy Limited (PGEL) at Sandip island, Chittagong. A 40-kW diesel

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generator will be integrated into the proposed power plant in order to ensure adequate power supply during periods of low solar radiation.Once completed, the Project is expected to supply electricity to adjacent 390 shops, 5 health centers and 5 schools.

7.1 The ProjectThis chapter provides an overview of the project, rationale of the project, procurement of machineries, implementation status, management team, project cost, and financing plan.

7.1.1 Project Description

The proposed project involves setting up of a 100-kW solar photovoltaic (PV) based micro-grid by PUROBI Green Energy Limited (PGEL) at Sandip island, Chittagong. A 40-kW diesel generator will be integrated into the proposed power plant in order to ensure adequate power supply during periods of low solar radiation. PGEL is a consortium of four NGOs namely Bangladesh Rural Integrated Development Grub-Street Economy (BRIDGE), Integrated Development Foundation (IDF), Upokolio Bidyut and Mohila Unnoyon Samity (UBOMOUS) and Rural Energy and Development Initiative (REDI). Once completed, the Project is expected to supply electricity to adjacent 390 shops, 5 health centers and 5 schools.

Expected commercial operation date of the Project is within the first week of June 2012. The following table presents key project information:

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Particulars

Plant capacity 100-kW

Location Sandip Island, Chittagong

Project land area 8700 sq. ft.

Design SMA Technologies AG

Major equipmentSolar Modules (poly crystalline), batteries (48V, 18000 AH), grid tie, SI inverter, backup diesel generator

Equipment Manufacturers

Solar Modules: KYOCERA, Japan (Assembled in China) Battery: RIMSO Battery, Grid Inverter: SMA Solar Technology AG of Germany

Engineering, Procurement and Construction (EPC) contractor

Asantys Systems

O&M contractor Prokousoli Sangshad Limited (PSL)

Table: Key Project Information7.1.2 Rationale of the Project

Expanding rural electrification is the key to the prosperity and development of rural areas as well as to fulfill the GOB’s vision of ensuring access to affordable and reliable electricity for all by 2020. It is well recognized that energy demand in our rural areas is increasing and supply of fossil fuel at subsidized prices is becoming an ongoing challenge for the government. Moreover, providing power without intensifying the effect of climate change is a priority for Bangladesh. There is also increased emphasis on increasing the energy conversion efficiency and promoting the use of alternate energy sources.

The island of Sandip is located in the south-eastern part of the country with an area of 700 square kilometers. This island is a habitat to a population of 300,000 who are detached from Chittagong mainland by a channel of about 75 kilometers. Because of its position and inaccessibility there is no possibility of grid electrification service in this area in the distant future. However, the island has a dynamic population with various public and private service offerings providing support to the general public including educational institutions, health service centers, small and medium enterprises, etc. Despite shortage of reliable and consistent supply of electricity, use and

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willingness of use of various loads have been found in this region i.e. computers, printers, scanners, photocopy machine, refrigerators, color television, etc.

At present, the electricity demand of general shops in the markets of Sandip are served by diesel micro-grid run by several diesel generator operators who provide services for about 5 to 8 hours per day. Besides, several diesel generators are used by several shop owners for captive consumption. Average tariff rate being charged to the customers by the diesel operators currently range between BDT 53 per kWh and BDT 60 per kWh.

The proposed Project envisages supplying reliable and consistent supply of quality electricity to the local commercial shops, health centers and schools at an affordable, reasonable and competitive price to encourage income generating activities more than before and enhance standard of living of the local people.7.1.3 Procurement of MachineryThe Sponsors are in the process of finalizing a contract with Asantys Systems which will be responsible for supplying the required machineries and accessories and installing the grid. The solar modules will be procured from KYOCERA and inverter, sunny Web box and battery fuse will be procured from SMA Solar Technology AG of Germany. Batteries will be procured locally from RIMSO Battery.Moreover, PSL will provide O&M services and training to the management of the Project during the first one year of operation.7.1.4 Implementation StatusPGEL has been registered as a private limited company with Registrar of Joint Stock Companies of Bangladesh. As discussed above, the Sponsors have finalized their choices of technologies and equipment. The proposed Project land has already been identified which is owned by UBOMOUS, one of the Sponsors. Once the Project gets approval for the required grant and financing, UBOMOUS will duly transfer the ownership of the Project land to the proposed Project Company and will enter into an equipment supply contract with Asantys Systems.A detailed implementation plan showing the phase wise implementation of the Project activities is provided in Annexure I.7.1.5 Management TeamThe Project management team of the Project Company will be formed after the formation of the Company. The experience and expertise of the NGOs in the microfinance and renewable energy businesses will be harnessed while formation of the Project management team by transferring experienced and knowledgeable personnel to the proposed Project Company.

7.1.6 Project CostTotal cost of the proposed Project has been estimated to be BDT 55.37 million. Breakdown of total cost is shown below:

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Table 7.1: Budgeted Project Cost

ParticularsAmount(BDT)

Amount(BDT) % of Project costs

Land and Land Development 1,260,000 2.28%Civil Construction 2,400,000 4.33%Equipment -Solar Modules (100 kW) 21,000,000 -Grid Tie, SI Inverter 6,375,000 -Backup Diesel Generator – 40 kW 500,000 -Accessories 500,000 -Batteries – 48 V, 18000 Ah 11,161,700

39,536,700 71.41%Transportation 725,000 1.31%Distribution & Others -Distribution Line (5 km) 1,050,000 -AC Household Meters 1,000,000 -Control Room, Structure & Others 800,000

2,850,000 5.15%Import Duty & Clearance Cost 956,250 1.73%Technical Assistance 2,866,200 5.18%Contingency 4,772,795 8.61%TOTAL PROJECT COST 55,366,945 100.00%

7.1.7 Financing PlanThe Project is proposed to be financed with a mix of debt, equity and GEF grant fund:

Table 2.4: Financing Plan

Amount(in million BDT) %

Debt 16.61 30%Grant 27.69 50%Equity 11.07 20%Total 55.37 100%

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7.2: The Sponsor

This chapter discusses about the sponsors of the Project, in particular its ability to provide financial support ensuring the completion and subsequent operation of the Project. Within this context, the chapter includes - corporate history and financial analysis of the sponsors, ownership structure of the Project company, background and experiences of the owners, net worth analysis of the owners and comments on sponsors' Credit Information Bureau (“CIB”) Report.

7.2.1 The Project Company

PGEL has been registered as a private limited company with Registrar of Joint Stock Companies of Bangladesh on 17 December 2009 with an authorized capital BDT 20 million and paid up capital of BDT 10 million.

7.2.2 Shareholding Structure

The proposed shareholding structure PGEL is shown below.

Table 3.1: Proposed shareholding Structure

No Name of the Shareholders Number of Shares %1 BRIDGE 50 252 IDF 50 253 UBOMOUS 50 254 REDI 50 25

TOTAL 2,000 100.00%

7.2.3 Credit Information Bureau report

Credit Information Bureau ("CIB") report describing the status of the sponsors with other banks/financial institutions is expected to be collected soon. However, clean CIB report on the sponsor will be a condition precedent for disbursement of loan.

7.3: Technical Aspects

This chapter includes overview of technology used, plant design, technical review of major plant equipment and comments from kfW consultant.

7.3.1 Project Overview

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7.3.1.1 Proposed Process and Technology

The proposed Project is to electricity production through solar micro-grid. The full technology will be supplied by Asantys Systems on a turnkey basis. 7.3.1.2 Electricity Generation through Solar Micro-grid

Technology

The size of the solar micro-grid project under consideration is 100 kW accompanied by 40 kW Diesel. The solar micro-grid is given in Figure 1, which is a combined operation of several sub-systems.

The Solar PV modules are the main power generation system that is operational during daytime. About 60 kW of the PV modules will be directly connected to 6 Sunny mini central (SMC with MPPT) inverters which will convert from DC to AC power at 220V and supply to the micro-grid distribution line at all times. Three phase configuration of the AC distribution line will be configured through the Multi-cluster box, which is the interface for all connectors and control. The unused portion of the power in the distribution line will be stored into the batteries through 12 bidirectional inverters called Sunny Islands in 4 clusters. During daytime additional 40 kW PV power will be stored into the same battery bank through DC battery chargers (SIC40 with MPPT). When the grid power is not available, mainly during evening hours the plant will use power from the battery bank. During the worst season of solar radiation, and on cloudy days, backup power will be provided by the 40kW Diesel generators.

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Figure: Solar Micro Grid Layout using Four Cluster Sunny Island

Major Equipment:List of major Equipment

Equipment Supplier Country of Origin

Photovoltaic Module KyoceraKYOCERA, Japan (Assembled in China)

Inverter SMA Solar Technology AG GermanyBattery RIMSO BangladeshGrid Inverter SMA Solar Technology AG GermanySunny Web box & Battery Fuse SMA Solar Technology AG GermanyPhotovoltaic (PV) Module:

The PV Module is polycrystalline and highly efficient. There will be 500 nos. of 200Wp PV Modules. The PV Module is expected to be procured from Kyocera.

The major features of the proposed PV module model KC200GH-2P are as follows:

Particulars Model KC200GH-2PMaximum Power (Pmax) 200Wp (+10%/-5%)Maximum Power Voltage (Vmp) 26.3V

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Maximum Power Current (Imp) 7.61AOpen Circuit Voltage (Voc) 32.9VShort Circuit Current (Isc) 8.21A

7.4 Market AnalysisThis chapter provides a detailed analysis of the existing electricity consumption pattern of electricity market of Sandip. Plant output, demand analysis, load distribution plan, electricity tariff and revenue projection have also been discussed in this chapter.7.4.1 Plant OutputAccording to the Assessment Report of PSE AG, electricity generated by an 80-kW solar mini-grid at the project site would be able to meet 88,100 kWh of energy demand. Accordingly, proposed 100 kW plant will satisfy 110,125 kWh demand. The total electricity generation of the Project has been targeted to be 137,977 kWh per year. Therefore, the remaining 27,852 kWh will be provided by a diesel generator. 7.4.2 Demand Analysis and Pricing7.4.2.1 Consumer Composition:The Project plans to supply electricity to several areas adjacent to the project site namely Enam Nahar Market, Malekmunsir Bazar, Khontarhat, Panditerhat, and Boktarhat. Three categories of potential customers have been identified for supplying electricity in these areas as mentioned in the following table:

5.1: Potential customer compositionCustomer Total number of

potential customers

Total number of targeted

customersSmall shops 478 390Health care 5 5Schools 5 5

7.4.2.2 Load Consumption Pattern:According to a survey conducted by the Sponsor in the proposed target market areas, the daily electricity demand of those areas is more than 400 kWh per day. However, the Project expects to provide electricity only to the adjacent small shops, health care and schools, satisfying requirements for about 378 kWh per day. Proposed load distribution of the Project has been summarized in the following table:

Table: Proposed load distribution of the Project

Service Type 

Appliance Type 

Appliance per Consumer Daily Power Usage

%

Actual Load

(kWh)

No. of Consumers

 

Total load

(kWh)

Hrs. No.Capacity

(W)a. Small Shops

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Basic

CFL Lamp 4 3 18 100% 0.216 390 84.24Ceiling Fan 13 1 40 50% 0.26 390 101.4Black & White TV 8 1 25 100% 0.2 100 20Refrigerator 24 1 80 50% 0.96 20 19.2

Equipment

Computer 14 1 100 100% 1.4 50 70Scanner 5 1 60 20% 0.06 20 1.2Laser Printer 2 1 200 20% 0.08 20 1.6Color Printer 8 1 100 20% 0.16 20 3.2Laminating Machine 4 1 400 10% 0.16 5 0.8Soldering Iron 9 1 200 100% 1.8 20 36

b. Health Centers 

BasicCFL Lamp 4 3 18 100% 0.216 5 1.08Ceiling Fan 13 2 40 50% 0.52 5 2.6

Equipment X-Ray Machine 0 1   20% 0 0 0ECG Machine 0 1   20% 0 0 0

c. Schools 

BasicCFL Lamp 4 20 18 100% 1.44 5 7.2Ceiling Fan 13 10 40 50% 2.6 5 13

EquipmentComputer 8 5 100 50% 2 5 10Printer 13 5 100 20% 1.3 5 6.5

Total daily consumption (kWh) 378.02Total yearly consumption (kWh) 137,977

Source: Investment department, IDCOL

The load consumption in different hours of the day has been assumed to appear according to the following table:Servi

ce Type

Appliance Type AM PM Total

load in kWhHours of the

day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

a. Small ShopsBasic CL 21.1 21.1 21.1 21.1 84.2

CF 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 101.4TV 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 20.0RT 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 19.2

Equipment

CR 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 70.0SR 0.2 0.2 0.2 0.2 0.2 1.2LP 0.8 0.8 1.6CP 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 3.2LM 0.2 0.2 0.2 0.2 0.8SI 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 36.0

Sub-total 337.6b. Health CentersBasic CL 0.3 0.3 0.3 0.3 1.1

CF 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 2.6

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Sub-total 3.7c. Schools

Basic CL 1.8 1.8 1.8 1.8   7.2CF 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0   13.0

Equipment

CR 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3   10.0PR 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5   6.5

Sub-total 36.7

Total Load per day 378

Source: Investment department, IDCOL

*CFL Lamp=CL, Ceiling Fan=CF, Black & White TV=TV, Refrigerator=RT, Computer=CR, Scanner=SR, Laser Printer=LP, Color Printer=CP, Laminating Machine=LM, Soldering Iron=SI, Printer=PR.

Graph 5.1: Daily load profile of the proposed Project[

7.4.2.3 PricingThe pricing will be done in three categories: one time connection fee, monthly line rent and regular tariff. The connection fee and line rent will vary depending on the category of consumers. The following table represents the proposed pricing structure of the Project:

5.3: Pricing structure of the ProjectCustomer Type Small shops Health Center School

One Time Connection Fee (BDT) 4,000 6,000 6000Monthly Line Rent (BDT) 100 100 100Tariff (BDT per kWh) 27Effective Tariff(BDT per kWh)

30.53

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7.5: Financial Analysis

This chapter focuses on the financial analysis of the proposed project. Key parameters examined in the analysis include: (a) project cost, (b) debt plan, (c) sponsors’ equity support commitments, (d) grant percentage determination, (d) financial statement analysis, and (e) sensitivity analysis regarding debt service coverage ratio (“DSCR”) and other key variables.

7.5.1 Project Cost and Financing Plan

7.5.1.1Budgeted Project Cost

Budgeted project cost is BDT 55.37 million, break down of which is given below.

Table 7.1: Budgeted Project Cost

ParticularsAmount(BDT)

Amount(BDT)

% of Project costs

Land and Land Development 1,260,000 2.28%Civil Construction 2,400,000 4.33%Equipment -Solar Modules (100 kW) 21,000,000 -Grid Tie, SI Inverter 6,375,000 -Backup Diesel Generator – 40 kW 500,000 -Accessories 500,000 -Batteries – 48 V, 18000 Ah 11,161,700

39,536,700 71.41%Transportation 725,000 1.31%Distribution & Others -Distribution Line (5 km) 1,050,000

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-AC Household Meters 1,000,000 -Control Room, Structure & Others 800,000

2,850,000 5.15%Import Duty & Clearance Cost 956,250 1.73%Technical Assistance 2,866,200 5.18%Contingency 4,772,795 8.61%TOTAL PROJECT COST 55,366,945 100.00%

Capital expenditure including land, land development, plant, machinery, and equipment and other assets account for 84% of the total project cost.

Machinery and equipment worth BDT 34 million is 71% of the total capital expenditure.

7.5.1.2 Financing Plan

The Project is proposed to be financed with a mix of debt, equity and grant fundTable 7.2: Project Financing Plan

Amount(in million BDT)

%

Debt 16.61 30%Grant 27.69 50%Equity 11.07 20%Total 55.37 100%

Determination of grant percentage is discussed in Section 6.1.2.3.

7.5.1.2 Debt PlanThe key components of debt plan are shown in table below.

Table 7.3 Project Debt Facilities

FacilityAmount(BDT million)

Interest Rate Tenor Grace Repayment

Term loan 16.61 6% p.a.10 years

2 yearsAnnuity; In 16 (sixteen) semi-annual installments

Table 7.4 Debt Repayment Schedule

Facility Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6Yr 7

Yr 8

Yr 9 Yr 10

Term loan

- - 10% 11% 11% 12% 13% 14% 14% 15%

7.5.1.3 Equity Plan

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The sponsors will inject BDT 11.07 million in the Project as equity. The sponsors will provide 0.20 acre of land to the Project worth of BDT 0.9 million (valuation to be conducted) and invest BDT 2.8 million for land development and civil construction. Sponsors’ net worth analysis has been discussed in chapter 3 shows that the Sponsors have adequate net worth to provide BDT 7.37 million remaining equity support to the Project. It also ensures that the sponsors are able to source further equity in the Project in case of cost overrun.

As already mentioned three of four shareholders of the Project Company are Partner Organizations of IDCOL under its solar energy program. They are successful in implementation of the program and are regularly servicing the debt. This also illustrates their financial capability.

7.5.1.4 Grant Percentage DeterminationAs mentioned above, the project will be financed though a mix of debt, equity and grant. The grant amount was determined based on the effect of the grant percentage on the debt service coverage ratio (DSCR) of the sponsor which is the ratio of cash available for debt service in a particular period to debt service requirement for that period. The following table illustrates sponsor’s DSCR at different mix of debt and grant.

Table 6.5: Grant Percentage DeterminationDebt and Grant Mix Minimum DSCR

Option I 40% debt and 40% grant 0.96xOption II 35% debt and 45% grant 1.10xOption III 30% debt and 50% grant 1.28x

Minimum DSCR requirement for the Project is 1.2x. The DSCR exceeds in the case of Option III i.e. 30% debt and 50% grant. Therefore, 50% grant has been proposed for the Project.

7.6.2 Financial ProjectionThe Project’s projected financial statements have been generated based on a set of revenue, expense and other relevant assumptions. These are summarized below.

7.6.2.1 Revenue AssumptionsThe proposed Project has two major sources of revenue:

Connection Fee

Sale of electricity; and

Line rent

7.6.2.1.1 Connection Fee:

Out of 400 customers, the Project Company will acquire 70% in year 1 and remaining 30% in year 2. It will charge a connection fee for meeting the expenses to be incurred while providing connection to the customers.

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7.6.2.1.2 Sale of electricity :

Daily consumption required by the customers in the proposed project area has been discussed in detail in the previous chapter i.e. in the Market analysis. The analysis showed that daily load requirement of 400 potential customers is 378 kWh. Accordingly, yearly load demand is 137,977 kWh.

PSE AG has conducted technical assessment of the proposed Project considering installation of an 80 kW plant in the Project area which has been discussed in Chapter IV. Their study has shown that an 80 kW plant in the Project area will generate approx. 110,000 kWh of energy per year (which also includes energy losses in the inverters) and will be able to meet 88,100 kWh of energy demand. Hence, proposed 100 kW plant will be able to meet 110,125 kWh of energy demand. The remaining 27,852 kWh of energy demand will be met by a 40 kW diesel generator.

7.6.2.1.3 Line Rent:

The Project Company will charge a fixed amount of line rent per month on each customer.

7.6.2.2 Pricing Assumptions

Electricity tariff for the first year would be BDT 27 per kWh and line rent would be BDT 100 per connection per month. Pricing of each category of revenue components have been assumed to increase by 5% a year after every three years of operation.

The following table shows the year-to-year electricity tariff and line rent during the loan life i.e. first ten years of operation:

Table 6.6: Pricing Assumptions

Facility Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6Yr 7

Yr 8

Yr 9 Yr 10

Connection Fee (BDT/connection)

6000 6000

Electricity tariff (BDT/kWh)

27.0 27.0 27.0 28.4 28.4 28.4 29.8 29.8 29.8 31.3

Line rent (BDT/per month)

100 100 100 105 105 105 110 110 110 116

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7.6.2.3 Revenue Composition of the Project

-500,000

1,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,0004,500,0005,000,000

Taka

1 2 3 4 5 6 7 8 9 10Year

Revenue from sale of Electricity Line Rent Connection Fee

Figure 6.1: Revenue composition of the Project

From the figure it can be seen that connection fee is more than the revenue from sale of electricity in the first year of operation. This is due to the fact that the Project Company will acquire customers in the first two years of its operation and 70% of the customers will be connected in the first year. Moreover, the Project will run for only six months in the first year. From the second year, sale of electricity becomes the main revenue source. Line rent comprises a small portion of the revenue.

7.6.2.4 Operating Expenses AssumptionExpenses of the Project include the following:

Utility Salary and allowances General and administrative expenses Insurance cost

7.6.2.4.1 Utility expenses: Diesel and lubricating oil will be required to run the diesel generator. Pricing and requirement of these are as follows:

Table 6.7: Utility ExpensesPrice per Liter

(BDT)Consumption per kWh (Liter/kWh)

Cost per kWh

Diesel 45 0.20 9.00Lubricating oil 250 0.0003 0.08

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A general 5% cost escalation has been considered in each of these cost items.7.6.2.4.2 Salary and Allowances:

Table 6.8: Salary and Allowances

Designation Number Gross Salary per Month

Yearly Salary & Bonus

Manager 1 10,000 130,000Accountant 1 8,000 96,000Lineman / Electrician 2 6,000 72,000Guard 2 4,000 48,000

346,000A 5% yearly increment has been considered for each of the employees.7.6.2.4.3 General and administrative expenses:This category includes conveyance, postage, printing & stationary, entertainment, telephone, internet and others. A general 5% cost escalation has been considered in each of these cost items. General and administrative expenses in the first year of operation are as follows:

Table 7.9: General and Administrative Expenses Item BDTConveyance 3,000Postage 1,000Printing & Stationary 6,000Entertainment 1,000Telephone/Mobile Bill 3,000Internet 2,000Others 12,000

28,0007.6.2.4.4 Insurance:It has been assumed to be 0.25% of capital costs per annum and this is a fixed amount.

7.6.2.5 Depreciation & Amortization AssumptionThe following table shows the depreciation and amortization rates for different categories of assets:

Table 6.10: Depreciation and Amortization

Depreciation No of years RatePlant, Machinery & Equipment 20 5%Building and Civil Construction 20 5%Battery 7 14%AmortizationTechnical assistance 5 20%

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Battery accounts for 22% of the project cost though its life is only 7 years. Therefore, it has to be replaced at least twice during the project cost.

7.6.2.6 Tax & Dividend AssumptionThe project is expected to enjoy tax holiday. Therefore, no tax provisions have been made in the model. After the loan life, 50% of the net profit has been considered to be distributed as dividends in the model.

7.6.3 Key Financial IndicatorsKey indicators of the Project are presented in the following table:

Table 7.11: Project’s Key Results Ratio Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10

DSCR 3.41 4.12 1.28 1.35 1.34 1.32 1.39 1.38 1.36 1.44

Average 1.84

Minimum 1.28Average ROE 5.08%IRR 10.27%NPV BDT 23,229,468The indicators represented in Table 6.11 express that the project has good cash flow.

7.6.4 Sensitivity AnalysisSensitivity analysis has been done along a number of scenarios:

1. Increase in operating expenses2. Reduction in tariff3. Reduction in electricity generation

Table 6.12: Sensitivity Analysis

CaseDSCR

Average MinimumBase case 1.84 1.28Operation expenses increased by 30% 1.71 1.19Tariff reduced by 15% 1.57 1.07Electricity generation reduced by 30% 1.64 1.12

The above table shows that the Project is expected to have satisfactory DSCR in the base case and apparently, it will be able to service the debt obligations even in much adverse scenarios.

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7.6.5Pro-forma financial statementsThe Projects’ pro-forma financial statements and ratio analysis are attached in the Annexure II.

Chapter-08: Findings and ConclusionA Critical Evaluation of Project Financing in Bangladesh by IDCOL:

To evaluate the whole project financing program of IDCOL, the following ways can be discussed:

8.1 Project Selection – Regional Imbalance: As IDCOL’s share is totally owned by the government of Bangladesh, making a positive contribution towards the society is the main objective of IDCOL rather than only making profit. That is why IDCOL mainly invest in the off grid areas of the country and logically these off grid areas are the most under developed portions of the country. IDCOL finance projects throughout the country where it finds it necessary so there is no regional imbalance in renewable energy project

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financing of IDCOL.

Source: Ahammed & Taufiq, 2008

Division wise SHS installations up to 30 June 2006 are shown below:

Division No of Installations

Division

No of Installations

Division

No of Installations

Barisal 11,385 Khulna 14,500 Rajshahi

9,886

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Chittagong

18,085 Dhaka 13,303 Sylhet 9,447

Total 76,607

Source: Investment department, IDCOL

8.2 Negative/positive Impacts of Projects: To find the impacts of the project we have to compare these projects with the other alternatives. As the IDCOL financed projects are mainly in the off grid areas, oil, petroleum etc are main source of energy in these areas. These sources of energy are known as “fossil fuels” and they are composed of hydrocarbons and are formed by nature over eons. These sources emit a huge amount of carbon to the nature and might become the cause of natural disaster. Moreover, once these fossil fuels are combusted, they cannot be replenished or renewed. Apart from this, these provide energy via combustion and, in the process release toxic emissions into the atmosphere, harming humans, animals as well as plant life and thus distort the overall ecological balance on Earth. In fact, each stage in the exploration, extraction, processing, transportation and consumption of fossil fuels is harmful for humans and ecosystems. Furthermore, the large fluctuations in prices of the fossil fuels over the years have made these sources beyond the capacity of the poor people of Bangladesh.

Here to overcome these scenarios, the renewable energy projects are working well. This is because, unlike the non-renewable fossil fuels, renewable energy sources capture their energy from existing flows of energy, i.e. sunshine, wind, flowing water, biological processes, and geothermal heat flows which are constantly and naturally being replenished. Thus, unlike the non-renewable fossil fuels, renewable energies are not diminished by consumption. Therefore they are providing a reliable and sustainable supply of energy almost indefinitely.

Moreover, the use of renewable energies produce minimal emissions and their increased share in the mainstream energy system, provides a much cleaner energy system compared to fossil fuels, which emit harmful gases like carbon dioxide into the atmosphere, via combustion, thus polluting the environment. The latter fuels are currently emitting an increasing amount of Greenhouse Gases like carbon dioxide, nitrogen oxides, sulfur oxides and un burnt methane into the atmosphere, via combustion, which is the root cause of the much-spoken global warming, sea-level rise and climate change.

In contrast to fossil fuel energy, renewable energies can be derived domestically from local sources. This aspect is especially beneficial to Bangladesh to pursue locally applicable energy strategies, more or less independent of the national network. It also enhances the access to energy supplies in small, isolated rural areas and helps the rural poor to attain a higher quality of life by providing better community health and educational services. This results in potential economic, ecological, social, and security benefits for the rural poor.

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Nothing has all the merits. This renewable energy projects might cause some problems as well. For example for the solar energy project the batteries need to be changed after a certain time frame. If they are not disposed properly, it might cause serious hazards for the nature.

Lastly here I should mention that through the renewable energy project financing of IDCOL thousands of employment opportunities have been created that will make a positive contribution to Bangladesh where a huge portion of the people is unemployed.

8.3 Financing Problems: It can be easily understood from the following table that the financing or disbursement process is so lengthy and troublesome. If any party fails to disburse the amount in time then the whole process will be delayed and in some cases will be destroyed. IDCOL faces these problems time to time. For example if IDA does not disbursement the loan in time, IDCOL will fail to finance the partner organization. Thus the consumer will not be able to construct the energy plant or consume. These might happen due to:

o Non-compliance of the terms and conditions set by the upper level by the lower lover agency.

o Inefficiency of the designated officials, etc.

Fig: The process of disbursement

8.4 Summary of Major Findings: Here are the summaries of major findings:

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All the renewable energy projects financing of IDCOL are funded by international financial institution or development agencies. IDCOL is mainly working as the intermediary in these cases.

IDCOL’s principal objective is the commercialization of SHS. Therefore, it has adopted a policy of reducing grant with the progress of the project. So in future it may be impractical for the poor people to grab the benefit and this project might loss its attractiveness.

IDCOL does not require any collateral or security for the loan, except for a lien created on the project accounts. This makes it possible for anyone without security to take the opportunity of financing.

IDCOL follows a very rigorous process in giving loan and subsidy; this sometimes makes the process of financing lengthy.

IDCOL is implementing its programme through partner organizations (PO) including private companies, NGOs, Micro finance institute (MFIs). That’s makes the process lengthy. Further studies can be done on whether these intermediaries or IDCOL itself can fiancé directly to make the process easy.

Developers do not bear risks associated with the project, thus it seems too risky for the household to implement the projects.

Since RE technology is relatively new, financial institutions lack experience in evaluating risks associated with REPP. Furthermore, rapidly changing technology and a shortage of RE technology engineers means that lenders do not have the technical know how to assess and monitor many REPs.

The renewable industry and RE projects are small compared to traditional power plants. Lenders are usually not interested in small transactions. Even where finance is available, the transaction costs are much higher for smaller REP because many of the same financing and documentation processes must be followed irrespective of the size of the project.

REPP can only operate when their resources are available. The intermittent nature of RES means they generate less cash flow than fossil fuel fired plants. This provides lower margins for project financing and puts pressure on costs associated with overhead and maintenance costs.

8.5 Recommendations to foster the growth of Renewable Energy Project Financing: Based on my little knowledge and observations I have some recommendations to offer:

Funding is available, but with conditions. So tough conditions on financing needs to be removed.

Tap into local capital markets besides International Development agencies for funding.

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Design regulations that encourage foreign investment. Strengthen legal system to permit enforcement of contracts. Support companies that ensure reliable access to energy, provide local

income generation, and improve living standards Help project developers fill the gaps along the finance continuum. This

can be in the form of support for feasibility and due-diligence work, as well as for business planning.

Build effective financing partnerships with the private sector on a risk-sharing basis. This is necessary as long as the renewable energy industry continues to rely on government and public funding

Develop risk management tools to support RE infrastructure and institutional capacity

Design and market tailored products, jointly with RE sector. Increase awareness of the threats of climate change and other

environmental impacts of energy production and use to make people interested in renewable energy.

Introduce tax incentives and leasing structures that improve the financials of RE projects for corporate sponsors.

Improve the creation and sharing of information on RE plants to help financiers better understand and manage project risks and decrease risk perceptions.

Have coherent and consistent policies in place to create genuine incentives for investors.

8.6 Conclusion: The expansion of renewable energy in the Bangladesh continues to increase rapidly. A number of market factors contribute to this growth, including:

i. Public policies that provide economic subsidies to renewable energy investments,ii. Changes in market conditions, e.g., higher and more volatile natural gas (and associated

peak power) prices, that have led to an increase in the relative economic attractiveness of wind and solar compared to more traditional fossil fuel-based generation,

iii. Significant reductions in capital costs over time.

Project financing renewable energy continues to be a daunting challenge in all regions of the world. On the other hand, however, the renewable energy sector appears to be a bright spot in the current crisis-plagued energy-sector investment environment, which is marked by turmoil, uncertainty, and extreme risk aversion. Social, environmental, and energy-security concerns, coupled with improved renewable energy technologies, are increasing the momentum for support for renewable energy. The challenge is to introduce the right policy frameworks and financial tools to enable RE to achieve its market potential. This is particularly crucial in developing countries like Bangladesh, where investment is endangered by geo-political, economic, and regulatory risks and where the lack of developed financial markets and products leaves the risks resting solely on the shoulders of the lender or investor.

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A free market does not function according to rules of social responsibility and therefore needs to work within certain boundaries that serve social and environmental, as well as economic goals. Policymakers have a social responsibility to set those boundaries. Legislators and regulators have it in their control to shift the future energy portfolio if they choose to decrease demand by improving energy efficiency and to push energy generation towards renewable energy.

Both academic and popular literature on project finance is scarce. However, the growing number of projects being financed throughout the world is rapidly providing a stockpile of case studies for further research. These projects’ successes and failures will also generate additional questions about the contemporary application of this time-honored financing technique.

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