DHAKA, June 2, 2000 --
The World Bank Group today announced approval by the International Finance Corporation of US$54.1 million debt financing and exposure for US$115 million of interest rate swaps, as well as a US$60.9 million Partial Risk Guarantee by the International Development Association for the Haripur Power Project in Bangladesh.
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Both IDA and IFC played a key role in catalyzing this important commercial financing package for a term of 15 years, which is the first long-term financing of its kind for the country.
"The project demonstrates how the Bank and IFC, working together, can effectively combine their respective strengths to catalyze private sector power investment,"
says
Vivek Talvadkar, Director, Power Department at IFC.
He added that the Haripur project would encourage development of further private infrastructure projects in Bangladesh, promote reform, and enable the government to conserve limited public resources for other priorities, such as education and healthcare.
The 360 megawatt gas-fired combined cycle power plant will be built, owned, and operated by, AES Haripur (Private) Limited, a wholly-owned subsidiary of the US-based AES Corporation.
"There is a widely held view among Bangladesh's development partners that the country needs to accelerate the pace of reforms in the power sector to realize the full economic benefits of projects like Haripur and attract future private sector investment and donor support,"
says
Alastair McKechnie, Sector Director, South Asia Energy Unit, World Bank
The
introduction of the Haripur power plant into the system in June 2001 will help alleviate the country's energy crunch, but implementation of power sector reforms are needed to meet the country's burgeoning demand for electricity.
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Power shortages and unreliable supply have become a major bottleneck to economic growth and poverty reduction. It is conservatively estimated that power shortages are reducing GDP growth by at least one percent a year. This project will help Bangladesh meet its demand for power in a cost-effective manner
since
the price of electricity is one of the lowest offered by a private producer internationally,"
says
S. Vijay Iyer, a Senior Financial Analyst in the South Asia Energy Unit.
The Haripur project is consistent with the Bank Group's strategy in the power sector, which aims to promote reform and private sector investment to improve the efficiency, quality, and access of electricity services. It contributes to the government's power sector reform program by establishing a systematic framework for preparing, evaluating, and processing private sector participation in generation projects, promoting commercial discipline, and paving the way for privatization of electricity distribution.
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This project is the second to make use of the IDA Partial Risk Guarantee under a pilot program
approved by the Board in 1997.
The Guarantee was crucial in mobilizing private sector financing from a group of major international banks for the project,"
says
Farida Mazhar, Principal Financial Officer in the Project Financing Guarantees Department.
The total project cost is estimated at about US$183 million. The project will be financed through a combination of equity and debt. Equity of about US$68 million will be provided by AES Corporation through its various subsidiaries. IFC's debt financing includes US$40 million for its own account and a syndicated loan of US$14.1 million for the account of participating international banks. In addition, IFC's Board approved an exposure for US$115 million interest rate swaps to hedge the floating rate financing into fixed rate.
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The IFC is the World Bank's private sector lending affiliate. The IDA is the World Bank's concessionary lending window. The IDA partial risk guarantee will provide coverage for loan default on scheduled debt service payments should the government fail to meet its payment obligations under the Implementation and Government Guarantee Agreements to the project company. Commercial risks, such as completion and operations risks and natural force majeure risks relating to the project will be borne by the sponsors and commercial lenders.
Partial Risk Guarantees
The partial risk guarantee became a mainstream instrument of the Bank in 1994. The program enables the Bank and IDA to use its credit enhancement to catalyze private capital for projects in developing countries, particularly large infrastructure projects which require extended maturities.
The guarantee provides support for a debt service default which results from the non-performance of specific contractual obligations undertaken by governments or their agencies as stipulated in project agreements. These obligations, supported by the Bank, vary by project sector and country and include:
·
maintaining the agreed regulatory framework, including tariff structures;
·
delivering inputs such as fuel;
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paying for outputs such as power;
·
compensating for project delays or interruptions; and
·
currency transfer and convertibility risks.
Partial risk guarantees can help extend the financing terms beyond the period for which the market would normally lend, often a critical consideration for infrastructure projects and help reduce financing costs.