Introduction:

The electricity supply industry in South Asia started with the commissioning of the first power station in the 1890s. Although a number on small stations were constructed over the next 20 years, these stations were isolated, catering to small distribution networks serving the major urban centers.

The first effort to structure a legal framework for the industry came in 1910 with the enactment of the Indian Electricity Act, 1910. This Act sought to regulate the business of industry still based on the old concept of isolated privately owned distribution networks fed by small generation stations & essentially defined the rights & obligations of the supplier and the consumer.

In 1947, at the time of independence of India & Pakistan, the installed generating capacity in the then East Pakistan was only 21 MW. Electricity was available to only a small elite in the district and sub-divisional headquarters. The distribution networks in these cities were isolated and were fed by coal fired steam power plants or diesel generation. In an effort to expeditiously augment generation capacity to feed a development economy, the then Government of Pakistan issued and ordinance in 1959 creating the East Pakistan Water and Power Development Authority (EWAPDA). The Ordinance essentially provided for the Governments takeover of all generation, Transmission and distribution facilities from the private sector, thereby creating a total Government monopoly in the sector. During 1960 to 1970 the generation capacity of the then East Pakistan rose from 88MW to 475 MW, supplied largely by natural gas and oil fired, steam power and hydro plants. The networks of Dhaka and Chittagong and then been interconnected albeit with weak 132 KV links.

Shortly after the creation of an independent Bangladesh, in 1972, the first Government of Bangladesh, in an effort to speed up the investment in the sector issued an Ordinance creating the Bangladesh Power Development Board (BPDB) as the successor organization of the power side of EWAPDA. The Ordinance recognized the divergence of energy related issues in development. During 1972 to 1995, BPDB has increased the generating capacity in the country to 2818 MW, and the length of its 230 and 132 KV transmission networks to 419 KM and 2469 KM. For the first time in December 1982, the eastern and western halves of the country were electrically connected through the commissioning of double circuit 230 KV transmission line across the Jamuna riever energized at 132 KV between Ishurdi and Tongi called the first East-West Interconnector. Generation sources were diversified to include a 230 MW hydropower station at Kaptai on the Karnaphuli river and natural gas and imported fuel based, open and combined cycle power plants at different locations of Eastern and Western part of the country. The distribution networks of all major towns and cities had been linked through 230 KV and 132 KV inter-ties.

In order to intensify the pace of rural electrification, the Government issued as ordinance in 1977 establishing the Rural Electrification Board (REB), a semi-autonomous agency charged with the responsibility of planning, developing, financing and construction of rural distribution networks, promoting the establishment of Rural Electric Cooperatives (Palli Bidyut Samities), handing over the constructed rural networks to them, assisting the PBSs to operate and maintain the rural networks and monitoring their financial performance. The REB has so far constructed over 46,000 Km of distribution lines and provided over 950,000 consumers connections in the rural areas (As on June, 95).

In 1990, another ordinance was issued, which was subsequently enacted as an Act transferring the 132 kv, 33 kv Transmission and distribution system in the Greater Dhaka Area including the Metropolitan City to a newly created Government agency called the Dhaka Electric supply Authority (DESA). This was done to lessen the administrative burden on BPDB,s management by relieving it of the burden of managing about 50 percent of the energy distribution in the entire country.

 

The Reform Process

Although several ordinances amending the Electricity Act, 1910 had been promulgated, none of them addressed issues involving the commercial nature of the sector, which continued to be treated as an extension of the Government providing social goods for the people. From 1986 onwards, the commercial performance of the BPDB deteriorated and during 1991, BPDB,s average gross systems loss was about 42 percent and accounts receivables in excess of 6.5 months of billing. This performance was not found reasonable to the covenants agreed by the Government and BPDB with the Asian Development Bank and the World Bank. These two institutions along with the Overseas Economic Co-operation Fund, Japan, Overseas Development Administration, U. K., Kredltanstalt fur Wlederaufbau, Germany and the United States Agency for International Development, decided not to provide any financial assistance to the sector until BPDB and DESA improved their performance to agreed levels. Consequently it considered restructuring the Power sector as a sustainable long-term solution to its problems.

With the economy performing very well during 1992-95, the demand for electricity grew substantially. Constrained by the paucity of its resources, the Government decided to allow private sector participation in the power sector. However, it was quickly realized that private capital, whether domestic or foreign, would not come into a sector, which was not financially viable and was not technically, organizationally and legally structured in a way conducive to attract it. Faced with a grim possibility of serious electricity shortages during the next few years and to enable the sector to be financially self-sustaining and also attract private capital, the cabinet approved in principle, the inter-ministerial committee report named "Power Sector Reforms in Bangladesh (PSRB)" , in September 1994.

In the meanwhile, the performance of BPDB and DESA have slowly but steadily improved, although they are by no means near international levels of performance. In view of this Improvement and the restructuring effort announced by the Government, the development partners have agreed to resume funding to the sector based on the principle of "Reforms Fundina Linkaaes" i.e. every project funded by these partners would have components addressing the reforms decided upon by the Government. The first such project was the Rural Electrification Project of the ADB which was approved by the ADB,s Board on 30 May, 1995. This project resulted in the creation of the first independent generating company, incorporated under the companies Act 1994 in the power sector, with private sector capital from five Palli Biddut Samities. The project also developed model commercial transactions between the generator and the purchaser and the generator and the fuel supplier. This project is being followed up by likely financing of projects by the OECF (Haripur Extension) and kfw (Comilla-Chittagong Transmission Line).

The next candidate project of the reform process is the proposed Ninth Power Project financed by the ADB. This project comprises of four components.

1. Transmission lines and substation capacity associated with the first 600 MW development stage of the Meghnaghat combined Cycle Power Project.
2. Construction of National Control Centre and associated communication network.
3. Construction of new and reinforcement of 132 kv, 33 kv, 11 kv and 0.4 kv distribution lines and transformation capacity in Dhaka City.
4. Engineering of the West Zone Combined Cycle Power Project and the East Zone Open Cycle peaking Power Project.

As part of the "Reforms-Funding" linkage agreed between the development partners and the Government, the implementation of Part (C) of the Project has been linked to redefining the franchise area of DESA and handing over of distribution networks outside Metropolitan Dhaka City to PBS,s under REB, and formation of a corporatized Dhaka Electric Supply company (DESCO) which will initially take over part of the distribution network of DESA and ultimately take over all its assets. The formation of this company is seen as an essential step towards " corporatization and commercialization" of the sector and to reduce the excessive inefficiently in the distribution network in the capital. This Proiect Proforma seeks the Government's approval for (i) part (b) of the ADB's proposed Ninth Power and Tenth Power Projects as detailed herein: ii The creation of the Dhaka Electric Su I Com an and iii Rationalization of the boundaries between DESA/DESCO and the PBSs.

 

THE PROJECT

DESCORIPTION OF THE PROJECT (FOR OVERALL DESA)

A. Description of the Project (for DESA area only)

• Land Development
• Civil works
• 132 kv overhead line
• 132 kv U/G cable
• 33 kv O/H line
• 33 kv U/G line
• Construction of 132/33/11 KV S/S Construction of 32/11 KV S/S
• 11 KV O/H line
• 11/0.4 KV O/H line
• 400 V O/H line
• 11 KV UIG cable
• Pole Mounted S/S
• L T Meters (Single Phase)
• L T Meters (Three Phase)
• HT Meters (Three Phase) TransportNehicle (Different type)
• 10.85 Acres 17253.00 m2
• 31.00 Ckt. km. 15.00 Ckt. km. 43.00 Ckt. km. 71.50 Ckt. km. 8.00 Nos.
• 16.00 Nos.
• 150.00 Ckt. km. 500.00 Ckt. km. 600.00 Ckt. km. 400.00 Ckt. km. 3,000 Nos.
• 2,00,000 Nos. 34,000 Nos. 1 ,000 Nos. 48 Nos.

Note: Description of the project and overall cost has been included in the project concept paper of Greater Dhaka Power Distribution Project, Phase IV.

Project Implementation Schedule

Implementation schedule for part of the project planned to be finance by the ADB and ODA is as follows:

Project Schedule Activities GOB,s approval of PCP Approval of PP for Greater Dhaka Power Distribution Project, Phase-IV by ECNEC Establishment of DESCO Appointment of DESCO Board of Directors Appointment of DESCO's first MD And full time Directors Approval of loan by ADB (9th Power Project) Approval of loan by ADB (10th Power Project) Completion of construction Key Dates June 1996 October 1996 December 1996 December 1996 June 1997 January 1997 January 2000 June 2006

The project schedule, in the form of a bar chart is given at annexure, It can be seen that the project will be completed in June 2006. However, this is subject to the key dates being kept and timely securing of donors assistance for the entire project.

 

PROJECT JUSTIFICATION

The power demand within Greater Dhaka has been met by supply & installation of equipment procured under GDPDP in different phases. Greater Dhaka Power Distribution Project, Phase-1 commenced in 1976 on a total project cost of Tk. 158.86 core of which all Foreign Exchange was funded by ODA as grand.

Facilities developed under Phase -1 became overloaded and a system study was undertaken in 1981-82 on the future load growth of Greater Dhaka area up to 1990, which identified the further reinforcement/expansion of the system. On the basis of this study, Greater Dhaka Power Distribution Project Phase-II was designed and implemented. This phase of the project work was completed by 1990-91 on joint financing by overseas Development Administration (ODA) & Asian Development Bank (ADB) for a sum of Tk. 376.42 core.

To cater the demand due to incremental load of the above areas up to 1993, a further study was imperative and prepared in July 1987 for taking up the Phase-III of Project. The project started in 1990-91, and is under implementation. This was completed by December 1997. This project was financed jointly by ODA for a sum of 63.20 million Pound Sterling and ADB for a sum of 101.73 million US$. The total cost of the project Phase III is Tk. 1018.44 crore.

The cater the incremental demand of Electricity which may be of 1297.63 MW up to 2000 AD, continuation of the Greater Dhaka Power Distribution Project is essential. Therefore, concept paper of Greater Dhaka Power Distribution Project, Phase IV with an estimated cost of US$ 350 million has been prepared. This was approved in October 1996 by the ECNEC.

NEED FOR UTILIZING POWER GENERATED BY THE MEGHNAGHAT POWER PROJECT

BPDB has undertaken a 300 Mw Combined Cycle Power Generation Project under Meghnaghat Power Company at Sonargaon, Narayanganj. The Power to be Generated by the proposed Meghnaghat Power Project will be transmitted either at Haripur or at Rampura 230 kV S/S through new transmission line(s) and will accordingly feed into the DESA electrical network. (Refer to recently concluded Power System Master Plan, funded by an ADB Technical Assistance grant).

Although distribution planning was not in the scope of the PSMP report, the proposed lines and substations had been mentioned in phases as part of the least cost expansion option.

 

The Executing Agency Need For Creating DESCO

Creation of Dhaka Electric Supply Company is a part of the reforms being initiated by the Government.

Due to paucity of financial resources with the Government, there is an urgent need to induct private sector participation in the power sector. This participation will not be forthcoming unless the financial inflow to the sector enables the sector to earn a positive return. Since cash inflows to the sector come only from distribution agencies. There is an urgent need to improve their efficiencies, if private sector investments are to be attracted in any part of the power system. The Dhaka area is the largest single distribution territory consuming about 50 percent of the total electricity sold in Bangladesh. DESA, which is the distribution agency for the Dhaka area has a poor performance record with respect to system losses and accounts receivables. Although the performance has improved considerable since 1992 on account of intensive monitoring, there is a limit to the gains that can be made and it is felt that further progress can be achieved on a sustainable basis only if there is a change in the business environment, both external and internal to the organization, which will enable introduction of more sophisticated control and management systems, and also organizational accountability.

The current organizational arrangements including management structure, employee compensation, delegation of authority, conduct, discipline and appeal rules and promotion policies are based on the civil service rules and arrangements which is not well suited to the functioning of a commercially oriented sector such as the power sector. It is therefore necessary to create new organization with its own rules and regulation that is more suited to the new business environment that is now being created in the power sector.

The new company (DESCO) is being created as a public sector company, incorporated under the Companies Act 1994 as a subsidiary of DESA. However, in the future, shares of the company will be offered to the private sector, other power sector entities and the general public to make the DESCO's management more responsive to its consumers.

 

Structure Of The DESCO

DESCO incorporated under the Companies Act 1994 with its own Memorandum and Articles of Association. The company as a whole owned by Government of Bangladesh and DESA representing government by acquiring 100% shares. DESCO managed by a part time Board of Directors appointed by its shareholders, they are responsible for policy decisions. The Board of Directors appointed managing Director and two full time Directors and they were also members of the Board Directors after appointment. The organizational of the company is as follows:

• The Chairman DESA being the Board of Directors on his nominee till such time DESA owns the majority of the shares in DESCO.
• The Managing Director acts as the Chief Executive Officer of the company and responsible for overall management of the company.
• The Director (Technical) responsible for development planning supply demand management and operation and maintenance of the system.
• The Director (Finance) responsible for all financial matters and commercial operations of the company.

 

Start Upto The DESCO

DESCO was constituted to provide uninterrupted & stable power supply, better consumer service, improve system loss & C.!. ratio and accordingly DESCO starting its operational activity since September 24, 1998 by taking over of Mirpur area from DESA. Following are the initial activity of DESCO which includes:

1.  Operation & Maintenance of Sub-Stations & Lines;
2.  Commercial functions i.e. billing, consumer accounting, disconnection & re-connection of consumers, testing & installation of consumer meters etc.; and
3.  Planning, Design and installation of Sub-stations & lines etc.

The service territory of DESCO is as follows where the above services provided:

1st Phase:

Mirpur area bounded by Rokeya Sarani and low lying area in between Mirpur and Cantonment in the East, Agargaon road in the South, Mirpur Road and Turag river in the West and low lying areas in the North. The proposed area is shown in the enclosed map. The area covered under the 151 phase was taken over by DESCO on September 24, 1998 from DESA.

2nd Phase:

Gulshan Circle including Mirpur Area bounded by Balu River in the east, Turag River in the west and Turag and Balu River in the Nort and Mirpur Road, Agargaon Road, Rokeya Sarani, Progoti Sarani, New Airport Road, Maymenshing Road, Mohakhali Jeel, Rampura Jheel connected with Balu River in the South (Map enclosed). The additional area covered under the 2nd phase was taken over by DESCO on April 09, 2003 from DESA.

DESCO recruited its employees through open advertisement. The qualification and experience requirement were fix up according to the requirement for performing their duties and responsibilities against the respective post. Mainly those who have sufficient experience in the field of utility organization are selected on a merit basis. They were employed on long-term contracted basis under the DESCO's service rules approved by its Board of Directors.

 

Project Financing

It is suggested that DESCO initially be financed on a debt equity ratio of 50:50. This conservative leveraging has been suggested since DESCO being a new organization handling a fairly complex project in a not-so-successful area in the power sector. Hence investor confidence is likely to be low. However, as DESCO demonstrates its capabilities in project execution and operations, this confidence level will increase and then the leveraging of capital may be made less conservative. The Government provided the first infusion of equity of DESA in DESCO from its Annual Development Budget 1996-97.

Out of the total Project cost of Taka 126.06 crores, the foreign exchange portion amounts to Taka 80.60 crores (65%) and the local cost portion Taka 45.45 crores (35%). The Asian Development Bank financed under the Loan No. 1505-BAN (SF): Ninth Power Project (DESCO Component for Mirpur area) in first phase and under the Loan No. 1731-BAN (OCR) they were again financed for Dhaka Power System Upgrade Project: Tenth Power Project Loan for Gulshan area. Local costs, which would constitute about 30% (thirty percent) of the total project cost will be met from the equity part of DESCQ's finances. Arrangement will be made for arranging funding for remaining part of the project from other donors.

 

Principle Of Tariff Setting

Being a commercial organization, DESCO will have to charge for electricity it distributes on a "cost plus performance based return" principle to cover its capital costs, operation costs as well as to target a post tax return of 15 percent on its equity. It is therefore proposed that, till the recommendations of the tariff study to be conducted with world Bank financing are available, DESCO charge a " cost - plus-fixed- return" tariff from its consumers.

Calculation of DESCO's tariff during 1997-2001 will be based on the estimated costs of the assets initially to be transferred to it by DESA, the Ninth Power Project cost and any other doners share However, these calculations, will be for illustrative purposes only and the actual tariffs will be based on the costs actually incurred and the foreign exchange value of the Taka as computed each year.

 

RATIONALIZATION OF DESA &DESCO'S BOUNDARIES

The present boundary of DESA were defined vide Gazette Notification, Saturday June 23, 1990 (Act No. 36, 1990) as " Act for creation of Dhaka Electric Supply Authority". DESA's service boundaries are "Greater Dhaka Area" which means all the municipal areas and industrial areas and any adjacent areas declared by the Government through gazette notification of the districts of Dhaka, Narayanganj, Munshiganj, Manikgonj, Gazipur and Narshindi.

Thus DESA areas also include the rural areas of Greater Dhaka Districts and the pockets within the distribution areas of the PBSs such as Savar, Narsingdi, Manikgonj, Gazipur, Kaliganj etc. The servicing of the rural areas and isolated urban pockets is considerably affecting the performance of DESA both from a system loss point of view and from the view of operational expenses and service quality. Servicing areas which are separated from the city by natural barriers such as the Burigonga, Turag, Balu, Sitalakhya and Dhaleshawari river also increases the cost and decreases service quality.

Apart form affecting the performance of DESA, the present boundaries also prevent adjacent PBS's to plan and develop their systems in an integrated manner, thereby taking advantage of better load mix, consumption density etc. The isolated pockets are forcing DESA and the PBS's to duplicate supply arrangements that could otherwise have been unified and economized, thereby leading to avoidable loss to the country.

In order to overcome the above problems, it is proposed that DESA/DESCO's boundaries to be rationalized to include only the contiguous metropolitan area bounded by Buriganga, Dhaleswari, Turag, Balu and Sitalakhya rivers (See attached map). The rationalization plan and the implications thereof and have been discussed with the Asian Development Bank (ADB), the possibility of funding the rehabilitation of the distribution network handed over the PBS's. ADB has supported rationalization of the service area of DESA and limited expansion shall be submitted as a separate Project, Proforma by the REB. The assets in the areas to be handed over by DESA shall be valued as has been done in the past for such assets transferred by DESA and BPDB to the PBS's.

1. The East Pakistan Water and Power Development Authority Ordinance, 1959.
2. Presidential Ordinance of 1972 creating the Bangladesh Power Development Board