XX Month 2017 FOR APPROVAL OF PARA. 1

To: Takehiko Nakao President

Through: W. Zhang

Vice President (Operations 1) From: Hun Kim

Director General

Subject: Additional Cofinancing — Proposed Administration of Grant for L2769-BAN: Power System Efficiency Improvement Project

A. Recommendation

1. We seek your approval to administer a grant not exceeding the equivalent of $24,000,000 to Bangladesh for the additional cofinancing of the Power System Efficiency Improvement Project, with $22.22 million to be provided by the Strategic Climate Fund (SCF), and $1.78 million by ADB administered fund (to be confirmed).1 B. The Ongoing Project

2. The project was approved by ADB on 11 August 2011 for $300 million from ADB’s ordinary capital resources to finance a part of the project. A collaborative co-financing facility of $200 million from the Islamic Development Bank (IDB) was also provided to finance part of the project. The loan agreement was signed on 4 January 2012 and became effective on 3 October 2012. The project is expected be completed by 31 December 2019 with two-year extension from the original completion date 31 December 2017. 3. The impact of the project will be increased provision of better access to electricity. The outcome will be increased generating capacity. The project comprises two parts with five outputs. Part A comprises one output: an inside-the-fence supply-side energy efficiency upgrade at an existing power generation facility; obsolete gas-fired generation units will be replaced with a state-of-the art combined cycle gas turbine plant which will double the energy output without increasing gas consumption. Part B comprises solar power development with four outputs: (i) a 7.4 megawatt (MW) solar photovoltaic (PV) power system at Kaptai; (ii) a 4.2 MW hybrid mini-grid on Hatiya Island; (ii) supply, installation and commissioning of solar street lighting systems in eight city corporations; and (iv) off-grid solar irrigation (see paragraph 5).2

1 Under the Scaling up Renewable Energy Program in Low-Income Countries (SREP, a sub-fund of the SCF). 2 The 4.2 MW hybrid mini-grid on Hatiya Island component in the Loan 2769 is to be cancelled per request by GOB. The cancellation and request for extension is processed on a separate memo by BRM.

Memorandum

South Asia Department

Office of the Director General

2

4. The Ashuganj Power Station Company (APSC) is the executing agency (EA) for Part A. Bangladesh Power Development Board (BPDB) is the EA for Part B (i) and (ii). The Power Division under the Ministry of Power, Energy, and Mineral Resources is the EA for Part B (iii). The Bangladesh Rural Electrification Board (BREB) is the EA for Part B (iv). Implementation will be undertaken and supervised by a project management unit (PMU) within each executing agency. 5. Loan Implementation status. As of 19 April 2017, the awarded contracts for the loan amounted to US$185.70 million (62% of the loan amount) and disbursements amounted to US$146.12 million (48.71% of the loan amount). Out of five works contracts, (i) “Turnkey contract for Ashuganj 450 MW Power Plant (North)” was awarded on 1 December 2013, (ii) Civil works contract under Part B(i)(a) was awarded on 7 February 2017 and (iii) Turnkey contract under Part B(iii): supply, installation & commissioning of Solar PV LED street lighting systems (SSLS) and LED based street lighting systems (LSLS) in 8 city corporations has been signed on 26 April 2017. No-objection to Financial Bid Evaluation Report (FBER) for Part B(i)(b) Kaptai Solar PV Plant was issued on 17 April 2017 and expected to be awarded by May 2017. Kaptai contract has taken longer than anticipated because re-bidding was necessary. Out of four consultancy services, two consultancy service contracts namely “Project Implementation Consultancy Services for Ashuganj 450 MW (North)” was awarded on 1 Dec 2012; “Project Implementation Consultancy Services for part B(i) and Part B(ii) were awarded on 22 April 2013. C. The Additional Cofinancing

1. Rationale

5. Lack of access to modern energy services is an important indicator of poverty and the state of social development. The Government of Bangladesh (GOB) has undertaken a major program to address power shortages, and aims to raise electricity coverage from 47% of households in 2009 to 76% in 2016, with a yearly per-capita electricity usage reaching about 321 kWh 3 . Consistent with the sector needs and recognizing that a key sector challenge for sustainable development is providing secure and high-quality electricity services for all, the government has initiated the 500 MWp Solar Development Program4. 6. About 80% of the population earns their livelihood by farming. Rice constitutes over 90% of the country’s total food grain production and about 77% of irrigated land areas are irrigated with ground water. According to statistics from the BREB, Bangladesh Power Development Board (BPDB), and the Sustainable and Renewable Energy Development Agency (SREDA), local farmers rely on some 266,000 electrically powered water pumps to irrigate 1.7 million hectares. During peak growing season, another 1.3 million diesel-run pumps are operated to irrigate another 3.4 million hectares consuming about 0.9 million tons of diesel per year, while emitting more than 31 million tons of CO2 per year.5 GOB has set a capacity target for solar PV pumps of 545 MW by 2021. 7. The Economics Relations Division of the Ministry of Finance, on behalf of the Power Division of the Ministry of Power, Energy, and Mineral Resources requested ADB to include a

3 ADB 2015. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s

Republic of Bangladesh for the SASEC Second Bangladesh-India Electrical Grid Interconnection project. 4 SREDA 2015. 500 MWP Solar Development Program. 28 September 2015.

http://www.sreda.gov.bd/index.php/sustainable-energy/renewable-energy/500-MWp-solar-development-program. The Program includes 340 MWp of PV irrigation pumps; rural PV mini grids; solar parks; PV roof tops; and 160 MWp of PV in social centers.

5 Emission assumption: 3,188 kg C02 equivalent per ton of diesel fuel (World Bank estimates).

3

Solar Photovoltaic Pumping Systems for Agricultural Irrigation subproject under the ongoing project on 30 November 2014 [Attachment 4]. The off-grid solar irrigation output B(iv) was added to the project through a minor change in scope approved on 1 July 2015. This change in scope was introduced so that cofinancing from the SCF could be mobilized as described in the Scaling Up Renewable Energy Program Country Investment Plan (SREP IP) for Bangladesh. 6 The indicative financing plan for output B(iv) is $20 million loan from ADB, $22.22 million grant from SCF, $1.78 million from ADB administered fund, $0.075 million counterpart funds from the GOB, and $3.31 million equity from community. 8. Output B(iv) is consistent with the objectives and scope of the original loan for increasing use of renewable energy. The solar irrigation output will provide more secure access to energy services for agriculture and aquaculture in areas beyond the “last mile” of the electricity grid. Solar irrigation will directly replace diesel pumps and reduce dependence on fuel imports while reducing emissions of conventional pollutants and greenhouse gases. The use of solar irrigation systems instead of diesel pumps will reduce exposure of vulnerable rural communities to emissions of particulate matter with diameter of 2.5 microns or less (PM2.5), which is one of the most harmful of conventional pollutant emissions with respect to human health. 9. Compared to conventional diesel motor based pumping, PV pumping provides the lowest life-cycle cost option in rural areas, while its application range is constantly increasing due to price decreases and improvements in pumping technologies; however, upfront costs are still higher for solar irrigation systems than for diesel pumping sets. The major advantages and key aspects of expanding solar irrigation are: (i) the use of solar PV eliminates air, noise, and soil pollution through avoided fuel and lubricating oil spills (ii) the operation is independent of fuel availability and price volatility issues; (iii) solar PV is the only practical option in non-electrified areas where logistics make it too expensive or impractical to supply diesel fuel on a regular basis; and (iv) the PV systems can run automatically and require little O&M (e.g., PV pumps can store energy in tanks, which feeds water by gravity). 10. Although costs for solar power systems continue to decline, upfront capital costs present a major barrier to farmers; the inherent viability gap points to the need for concessional financing. Replacing diesel pumps with solar irrigation systems is economically viable based on avoided fuel costs and avoided negative ecological and public health impacts. However, with current fuel prices [global market prices and local subsidized prices] the switch from diesel to solar is not financially viable for farmers in areas which lack grid-supplied electricity. Further, there are no policy and financial instruments to monetize the economic benefits and deliver up-front financing for deployment. Therefore, concessional financing is needed in the near term to buy down the capital costs. The financial viability gap will be covered through partial grant financing for individual solar irrigation systems; competitive bulk procurement will be utilized to buy down the delivered system prices.7

2. Impact, Outcome, and Outputs

11. The impact, outcome, and outputs of the overall project with additional cofinancing will remain the same as in the ongoing project. One of the outcome indicators regarding CO2 emissions reduction will be changed to reflect an additional reduction of 2,160 tons annually

6 Bangladesh was invited to submit an expression of interest (EOI) for SREP consideration in 2014. The SREP IP

preparation began in early 2015; the IP was endorsed by the SREP Sub-committee in November 2015. 7 Bulk procurement also has an advantage in terms of deploying standardized systems and securing after-market

support from suppliers.

4

against a reduction of 25,000 tons under the ongoing project part B, while other indicators will remain unchanged. Revised DMF is presented in Attachment 1.

3. Cofinancing

12. The GOB has requested additional cofinancing in the form of a $24 million grant, consisting of $22.22 million grant from the Strategic Climate Fund8 to be administered by ADB and $1.78 million from other ADB administered trust fund, to help finance output B(iv) of the project. The revised investment and financing plans are in Tables 1 and 2. Revised Contract and Disbursement S-curve for ADB-administered Funds is in Attachment 2.

Table 1: Revised Investment Plan ($ million)

Item Amount

a

A. Base Costb

1. Part A: Improved generating efficiency 397.00

2. Part B: Increased use of renewable energy

i. Kaptai 7.4 MW grid-connected solar photovoltaic system 10.37

ii. Hatiya wind–solar–diesel off-grid plant 16.30

iii. Solar photovoltaic-powered LED street lighting 17.31

iv. Solar powered irrigation 47.39

Subtotal (A) 488.37

B. Contingenciesc

88.32

C. Financing Charges during Implementationd

31.88

Total (A+B+C) 608.57

LED = light-emitting diode, MW = megawatt. a Includes taxes and duties of $14.7 million to be financed from government resources. b In mid-2010 prices. c Physical contingencies computed at 8% of base costs. Price contingencies for investment in Bangladesh computed as per ADB. 2005. Financial Management and Analysis of Projects. Manila. d Includes interest and commitment charges. Interest during construction to be paid by executing agencies for the domestic loan is 3%, for the ADB loan based on LIBOR with 25-year tenure including 5-year grace period and, for IDB financing LIBOR+105 basis points with 20-year tenure including 5-year grace period. Sources: Asian Development Bank, Ashuganj Power Station Company, Bangladesh Power Development Board, Bangladesh Rural Electrification Board

8 See footnote 1.

5

Table 2: Revised Financing Plan Current a Additional Cofinancing Total

Amount Share of Amount Share of Amount Share of Source ($ million) Total (%) ($ million) Total (%) ($ million) Total (%)

Asian Development Bank Ordinary capital resources (loan) a 300 52 0 0 300 49

Cofinanciers Islamic Development Bank (loan) b 200 34 0 0 200 33 Strategic Climate Fund (grant) c 0 0 22.22 81 22.22 4 Other d 0 0 1.78 6 1.78 0.3

Government of Bangladesh 81.18 14 0.075 0.3 81.26 13 Communities e 0 0 3.31 12 3.31 1 Total 561.18 100 27.39 100 608.57 100

a Refers to the original amount. b Administered by the Asian Development Bank. c Under the Scaling Up Renewable Energy Program in Low-Income Countries. Administered by ADB. d SREP (in case additional grant funding becomes available) or other funding source(s) administered by the Asian

Development Bank. e Equity contributions from solar irrigation system buyer/consumer(s). Not administered by the Asian Development

Bank. Source: Asian Development Bank estimates.

13. The proposed subproject is consistent with objectives and the scope of the loan aiming at increasing use of renewable energy. The subproject will help reduce the dependence of the country on imported diesel fuel, while reducing pollution. ADB will support BREB with a mitigation plan to avoid any potential delays in procurement and implementation as needed. The project team conducted necessary environmental, social, economic, and technical due diligence and concluded that the subproject (i) will not have significant environmental and social impacts; all those impacts are localized and can be mitigated appropriately; the social categorization is expected to be C and the environmental categorization B; (ii) will be economically feasible and its effect on the economic feasibility of the overall project will be negligible; and; (iii) it is technically sound, as available photovoltaic pumping technologies are mature and affordable, widely available, and proven more effective than conventional diesel pumps in terms of productivity, maintainability, and no fuel cost. 14. The implementation arrangements will follow the arrangements of the ongoing project. BREB is the executing agency for output B(iv). Goods, equipment, and civil works financed by ADB will be procured in accordance with ADB's Procurement Guidelines (2015, as amended from time to time). ADB loan-funded consultants will be recruited following ADB’s Guidelines on the Use of Consultants (2013, as amended from time to time). The executing agency will establish a project management unit for project preparation, implementation, monitoring, and reporting to ADB and the government. The Power Division of the Ministry of Power, Energy and Mineral Resources will be responsible for overall coordination of the project. The executing agency will provide counterpart support in the form of remuneration of counterpart staff, contribution to national taxes and duties, civil works, and other in-kind contributions. Fund flow diagram is attached in Attachment 3. D. Staff Views

6

15. The proposed additional cofinancing has been reviewed and supported by the Controller’s Department, Economic Research and Regional Cooperation Department, the Office of Cofinancing Operations, the Office of the General Counsel, Operations Services and Financial Management Department, and the Sustainable Development and Climate Change Department. cc: Directors General, ERCD; OSFMD; SDCC; Head, OCO; Controller; Assistant General

Counsel, OGC; Directors, EREA; OCO; OSP1; SDCD; SDGG; SDES; SARC; C. Ang, OGC; K. Nam, EREA; R. Barba, SAOD-PR; R. Shaheen, OSFM; V. Sefesi, CTLA-LGFC; B. Mirbabaev, OCO; S. Shafiq, SAOD; C. Ellermann, SDCD; SAOD-PR team; SAOD-QAE team

Attachments: 1. Revised Design and Monitoring Framework

2. Revised Contract and Disbursement S-curve 3. Fund flow diagram 4. MOF Letter Fund Reallocation from ADB Loan 2769

11 Attachment 1 REVISED DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets and Indicators

with Baselines

Data Sources and Reporting Mechanisms

Assumptions

and Risks

Impact Increased provision of better access to electricity

Demand-supply gap eliminated by 2016 (2011 baseline: demand supply gap of 30%)

BPDB annual report

Assumption Government emphasis on energy sector development to continue

Risk Inadequate gas supplies for electricity generation

Outcome Increased electricity generating capacity

Total installed generation capacity increased to 5,909 MW by 2016 (2011 baseline: installed generation capacity of 5,719MW)

Annual reports of APSC, BPDB, and Power Division

Assumptions Improved regulatory environment

Outputs Improved energy efficiency

Increased renewable energy use

Successful completion of construction of Ashuganj combined cycle power plant of 450MW and associated 1km transmission line by Dec 2016

Successful installation of 33,000 LED- based street-lighting by Mar 2016

Employment for local labor in O&M of streetlights (target: minimum of 25% of employees are women)

A gender-sensitive user education program implemented for the safe and efficient use of electricity in household by Dec 2012 (pilot target group: up to 1,000 women on Hatiya Island)

Reduction in CO2 emissions by 300,000 tons annually against the baseline. (baseline: annual emissions of 44 million tons in 2016 and 65 million tons in 2020- Power Sector Master Plan 2010)

Successful installation of Kaptai solar power plant of 7.4MW, installation of off- grid wind (1MW)-solar(1MW)-diesel (5.5MW) hybrid power plant at Hatiya Island and installation of solar photovoltaic-powered LED street lighting (33,000 systems) by Dec 2016, installation of 2000 units solar irrigation systems

Annual reports of APSC

Annual reports of Power Division

Annual reports of Power Division

Annual reports of BPDB

Annual reports of APSC

Annual reports of BPDB and Power Division

Assumptions Timely availability of counterpart funds from the government

12 Attachment 2

Design Summary

Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms

Assumptions and Risks

Capacity developed in the EAs and surrounding communities

Employment of local labor in O&M of Kaptai solar power plant and wind power plant on Hatiya Island (target: minimum of 25% employed are women)

Reduction in CO2 emissions by 25,000 tons annually against the baseline (baseline: annual emissions of 44 million tons in 2016 and 65 million tons in 2020- JICA Power Sector Master Plan, 2010), with additional CO2 emission reduction of 2,160 ton per year from the solar irrigation systems

Implementation consultants successfully employed for all the project components by March 2012

Minimum of 25 people trained on O&M of Ashuganj power plant by June 2017

Minimum of 25 people trained on O&M of the grid-connected solar plant (a minimum of 25% women) by June 2013

Minimum of 20 people trained on O&M of solar–wind off-grid plant (at least 25% of the trainees being women) by June 2013

Successful completion of at least one training program for the executing agency on community involvement and information dissemination among beneficiaries by Dec 2012

Successful implementation of the project gender action plan for technical training and energy-related livelihood activities targeting women by Dec 2013

Annual Reports of BPDB and BREB

Annual Reports of BPDB and Power Division

Annual Reports of APSC

Annual Reports of APSC

Annual Reports of BPDB

Annual Reports of BPDB

Annual Reports of APSC, BPDB and Power Division

Annual Reports of APSC, BPDB and Power Division

Local community have adequate human resources to build local capacity for O&M of off- grid wind–solar power plants

Attachment 1 1

Other Activities with Milestones 1. Improved energy efficiency 1.1 Acquisition of land along the transmission line route completed by

March 2012 1.2 Clearing sites for transmission line and generation plant and payment of

compensation completed by June 2012 1.3 Construction of generation plant, transmission line, and switching

station, August 2012–October 2014 1.4 Implementation of environment management plan from January 2012

2. Increased renewable energy use 2.1 Acquisition of land on Hatiya Island completed by December 2012 2.2 Site clearance and compensation completed by June 2013 2.3 Design and installation of plants at Kaptai and Hatiya and streetlights in

the six cities, June 2013–December 2016 2.4 Design and installation of 2000 units solar irrigation systems October

2017– June 2019

3. Capacity development 3.1 Identification of specific areas of training completed by December 2013 3.2 Selection of trainees, December 2011–December 2016 3.3 Conducting awareness and training programs, December 2012–

December 2016 3.4 Staff orientation on community involvement, December 2012–

December 2014 3.5 Implementation of gender action plan, December 2011–December

2016

4. Project Management 4.1 Recruitment of implementation consultants by March 2012 4.2 Procurement of consulting services for training in part A by Dec 2012 4.3 Procurement of consulting services for training in part B by Dec 2013 4.4 First review mission by June 2012 and follow-up missions every 6

months

Inputs Loan

ADB: $300 million

Amount Item ($ million)

Part A 205.00 Part B 95.00

Government:

$81.26 million

Amount Item ($ million)

Part A 67.50 Part B 13.75

IDB: $200 million

Amount Item ($ million)

Part A 200.00

SCF-SREP: $22.22 million

Amount Item ($ million)

Part B 22.22 million

Other Funds: 1.78 million

Amount Item ($ million)

Part B 1.78 million

Equity: $3.31 million

Amount Item ($ million)

Part B $3.31

ADB = Asian Development Bank, APSC = Ashuganj Power Station Company, BREB= Bangladesh Rural Electrification

Board, BPDB = Bangladesh Power, CO2 = carbon dioxide Development Board, IDB = Islamic Development Bank, JICA = Japan International Cooperation Agency, LED = light-emitting diode, O&M = operation and maintenance.

2 Attachment 2

REVISED CONTRACT AND DISBURSEMENT S-CURVE FOR ADB-ADMINISTERED FUNDS

0%

20%

40%

60%

80%

100%

120%

2011 2012 2013 2014 2015 2016 2017 2018 2019

Contract awards % Disbursement %

3 Attachment 3

FUND FLOW DIAGRAM

Attachment 4 4