A comprehensive set of guidelines and policies were set by the Ministry of Energy and Mineral Resources of Bangladesh Government in 1996 and revised in 2004. The Power System Master Plan (PSMP) in the guidelines projects an addition of 300 MW of generation capacity every year. But to achieve the target a substantial volume of investment is needed which the public sector alone cannot provide. So the government of Bangladesh (GoB) amended its industrial policy to enable private investment in the power sector and adopted the recommendations prepared by a high level Inter-Ministerial Working Group for restructuring the power sector and promoting private sector participation in the generation of electricity.

The Government is strongly committed to attracting private investment for installing new power generation capacity on a build-own-operate (BOO) basis. The guideline also states in detail what the modality for implementation of private power projects will be. As part of this the government agreed to set up one window operation, the Power Cell, MEMR, to facilitate the development of private sector power projects, which is required to articulate and promote the private power policy of GoB and solicit and evaluate proposals, negotiate and process award of contracts, and finalize various agreements related to these projects. The Power Cell would also represent GoB interests in private power projects.

Steps Taken So Far

In spite of all the good things in the guidelines, in 2008, the country is still suffering from acute shortage of electricity. Currently, there are 77 plants in operation generating an average of 3412.96 MW of electricity daily against a demand for 4311MW per day. This shows almost 900MW deficit per day and load shedding of more than 765MW per day (based on Government's May 2008 report).

According to the Government's Program for Enhancing Power Generation Capacity up to December 2008 and beyond, new power generation capacity expected to be added by December 2008 is 570 MW, with the public sector producing 240 MW and public-private partnership producing 330 MW. Government sources expect by June 2008 new power generation capacity to be added will be 370 MW (Public sector: 60 MW and Public-private partnership: 310 MW).

By December 2008, the Government hopes, 570 MW (Public sector: 240 MW and Public-private partnership: 330 MW) new power generation capacity will be added, which means a total of 1133 MW will be added to the generation capacity by December 2008. Again, The Government expects to sign contracts for 2820 MW of new power generation capacity by December 2008, with the public sector producing 1470 MW and Public-private partnership producing 1350 MW.

Projects which will remain in the pipeline after December 2008 are expected to generate 2310 MW (Public sector: 1410 MW and Public-private partnership: 900 MW). However, the Government says availability of gas/coal may turn out to be the key

constraining factor in development of power plants in the future. So immediate exploration of new gas and mining of coal deposits will be essential to implement the above power generation program.

Policy Guideline for Small Power Plants (SPP) in the Private Sector

The Government of Bangladesh (GoB) has decided to allow private sector investors to establish Small Power Plants (SPP), on a fast track basis, for generation of electricity for their own use and for selling the surplus to other users. The plant size could be in the order of 10 MW, which could be built up in stages, as necessary, and depending on the potential market and load growth. However, if required, permission may be accorded by the government for setting up higher size plants. The SPPs will be developed on a Build-Own-Operate basis.

2. Plant Location & Type

The SPPs can be located in any part of Bangladesh. The type of plant is open and the sponsor will be allowed to select a plant of any configuration provided the electrical characteristics of the plant match that of the power system in Bangladesh.

3. Fuel Supply

Where available, a subsidiary of Petrobangla may supply natural gas to

the sponsor on a commercial basis. The price of gas to be charged shall be the same as applicable for supply of gas for captive power generation which may be changed from time to time by the Government or the Energy Regulatory Commission. The sponsor may be required to pay additional costs to the fuel supplier if the SPP is far from the gas supply reticulation. Alternatively, the sponsor may arrange his own fuel.

4. Power Offtake

It will be the responsibility of the sponsor to find customers for electricity. Sponsors will have direct contract with the customers for the sale of electricity on terms mutually agreed upon. The distribution system required for the supply of electricity to the contracted customers may be built by the sponsors themselves or they can use the existing transmission and distribution systems, if there is adequate capacity. The sponsor will be required to pay a wheeling charge to the owner of transmission /distribution facilities. The wheeling charges and other terms and conditions will be mutually agreed upon by the sponsor and the owner of the transmission /distribution facilities.

5. Price Regulation

In areas covered by BPDB/DESA/REB, the tariff announced by GoB from time to time shall apply. In other areas GoB will not regulate the price of electricity; it shall be negotiated between the sponsor and the consumers.

6. License Requirement

As per Electricity Act, 1910, the Sponsors will be required to obtain licenses from the GoB. The SPP will need to comply with all laws of Bangladesh including Environmental Standards.

7. GoB Support

GoB support will be provided on the "First Come First Served" basis. Necessary advice and other assistance will be provided by the Power Cell for the establishment of SPPs. The address of Power Cell, Ministry of Energy and Mineral Resources is given below:

Director, Private Power

Power Cell

Ministry of Energy & Mineral Resources

Govt. of the People's Republic of Bangladesh

BTMC Bhaban (8th Level)

7-9 Kawran Bazar, Dhaka-1215.

Telephone : 880-2-822440/9130914-18

Fax : 880-2-9121673, 880-2-8118941

E-Mail : dgpcmemr@citechco.net

8. Fiscal Incentives and Benefits

The sponsors under this policy including the Captive Independent Power Producer and the sponsors of Captive Power Generation who will set up power plants within a period of three years from the date of its statutory notification under this policy will enjoy the "Fiscal Incentives" and "Other Facilities and Incentives for Foreign Investors" provided under Section 5.0 and 6.0 respectively of the "Private Sector Power Generation Policy of Bangladesh" and any subsequent amendments made there under.

9. The Government will have no obligation to purchase power from the plants installed under this policy.

Private Sector Power Generation Policy of Bangladesh

Ministry of Energy and Mineral Resources, Government of the People's Republic of Bangladesh

October 1996 Dhaka

Fiscal Incentives

1. The private power companies shall be exempt from corporate income tax for a period of 15 years.

2. The companies will be allowed to import plant and equipment and spare parts for up to a maximum of ten percent (10%) of the original value of total plant and equipment within a period of twelve (12) years of Commercial operation without payment of customs duties, VAT (Value Added Tax) and any other surcharges as well as import permit fee except for indigenously produced equipment manufactured according to international standards.

3. Repatriation of equity along with dividends will be allowed freely.

4. There will be exemption from income tax in Bangladesh for foreign lenders to such companies.

5. The foreign investors will be free to enter into joint ventures but this is optional and not mandatory.

6. The companies will be exempted from the requirements of obtaining insurance / reinsurance only from the National Insurance Company namely Sadharan Bima Corporation (SBC).

Private power companies will be allowed to buy insurance of their choice as per requirements of the lenders and the utilities.

7. The Instruments and Deed required to be registered under local regulations will be exempted from stamp duty payments.

8. Power generation has been declared as an industry and the companies are eligible for all other concessions which are available to industrial projects.

9. The private parties may raise local and foreign finance in accordance with regulations applicable to industrial projects as defined by the Board of Investment (BOI).

10. Local engineering and manufacturing companies shall be encouraged to provide indigenously manufactured equipment of international standards to private power plants.

Other Facilities and Incentives for Foreign Investors

The following facilities and incentives would be provided to private power producers.

1. Tax exemption on royalties, technical know-how and technical assistance fees and facilities for their repatriation

2. Tax exemption on interest on foreign loans

3. Tax exemption on capital gains from transfer of shares by the investing company

4. Avoidance of double taxation in case of foreign investors on the basis of bilateral agreements

5. Exemption of income tax for up to three years for the expatriate personnel employed under the approved industry

6. Remittance of up to 50% of the salaries of the foreigners employed in Bangladesh and facilities for repatriation of their savings and retirement benefits at the time of their return

7. No restrictions on issuance of work permits to project related foreign nationals and employees

8. Facilities for repatriation of invested capital profits and dividends

9. Provision of transfer of shares held by foreign shareholders to local shareholders / investors

10. TAKA, the national currency, would be convertible for international payments in the current account

11. Re-investment of remittable dividends to be treated as new foreign investment

12. Foreign owned companies duly registered in Bangladesh will be on the same footing as locally owned companies with regard to borrowing facilities.

Some Important Information for Investors

A. General information

(i) As per Electricity Duty Act 1935 investors have to pay duty to the government (present rate Tk. 0.15 per unit) for each unit of electricity sold.

(ii) The investor will have to take environmental clearance from Department of Environment (DOE) before commencing.

(iii) The investor will be given a licence as per provision of the Electricity Act 1910. All the provision of the Electricity Act will be applicable to the licensee (small power producer).

(iv)The Government may, if in its opinion the public interest so requires, revoke the licence or amend or alter the terms and conditions of the licence as per provisions of the Electricity Act, Rules and Regulations.

B. Information regarding use of existing distribution system of PDB/ DESA/PBS by the Small Power Producers:

The following guidelines (provisional) should be followed by the Small Private Power Producers to utilize the existing distribution system of BPDB/DESA/PBS for the purpose of distribution of electricity generated from Small Private Power Plants.

(i) Technical Guideline

(a) Companies shall obtain the consent from BPDB/DESA/PBS for using existing distribution system of any utility mentioned above.

(b) If any company needs to use the 33 kV or 11 kV line of BPDB/DESA/PBS, the company shall get connection in the 33/11 kV sub-station through breakers not through tapping in 33 kV or 11 kV lines.

(c) The company shall construct the distribution line from the generation point to the sub-station of BPDB/DESA/PBS of the same voltage level and maintenance of the line will be their own responsibility.

(d) 33 kV or 11 kV feeder dedicated for the company shall be disconnected from the national grid system.

(e) BPDB/DESA/PBS will generally operate and maintain the distribution line dedicated for the company but the company may use the line through lease on payment by mutual agreement between the parties. If leased, the company shall be responsible for operating and maintaining the above distribution system.

(ii) Commercial Guideline

(a) The company shall bear all responsibility of its customers for the identified area of the distribution line.

(b) The company shall pay a mutually agreed wheeling charge to BPDB/DESA/PBS for using existing distribution system of the respective utility.