Bangladesh project exposes India EXIM Bank to high risk

According to the report released by the Institute for Energy Economics and Financial Analysis (IEEFA) on Friday the Bangladesh-India Maitree project could effectively end up in a financial mess.

The Coal based power plant proposed to be built near the city of Khulna, close to the Sundarbans mangrove forest, is a joint venture between India and Bangladeshs state owned entities. The project is heavily subsidized, exposes investors, taxpayers and consumers to high risk and is a potential stranded asset in the making.

We examined the Rampal coal power project on parameters such as funding, investment, cost of production, supply of fuel as well as risk due to extreme weather events. The project fails on aRampal powerplantll fronts as well as exposes investors to a significant risk, said Jai Sharda, Managing Partner, Equitorials and the author of the report.

NTPC, which is majority-owned by the Indian state, is building the plant together with the Bangladesh Power Development Board (BPDB), forming a 50:50 joint venture called the Bangladesh-India Friendship Power Company (BIFPCL). The New entity formed, BIFPCL, would invest 30% equity (US$546m) and the Indian government would facilitate 70% debt (US$1.6bn) via India EXIM bank.

The project will produce electricity that will cost 32% more than the average electricity costs in Bangladesh, despite multiple subsidies from Bangladesh and India, as well as assuming an average plant load factor (PLF) of 80%. The average PLF for coal-fired power plants in China, U.S. and India are in the range of 50-60%, while in Bangladesh in 2014-15 the average PLF rate was 63.9%.There is nothing in the Rampal project to suggest it will buck these trends.

First, a below-market-rate loan by Indian EXIM Bank represents a US$988m subsidy effectively paid by Indian taxpayers to Bangladeshi consumers. Second, the Bangladesh government is proposing a 15-year income tax exemption for the plant, an exemption worth US$936m. Third, Bangladesh would be granting an effective annual US$26m subsidy by conducting maintenance dredging to assure coal delivery to the plant.

Subsidies for the Rampal project poses a massive burden on Indian taxpayers due to which other projects may suffer, said Sharda.

EXIM Bank relies heavily on foreign currency borrowings in international markets, foreign currency borrowings being 41.5% of total borrowings in FY2015. However, international markets are increasingly less inclined to fund projects or entities involving coal power plants.

The Norwegian Government Pension Funds Council of Ethics excluded NTPC from its investment universe because of its sponsorship of the Rampal project. There is no reason to believe that similar action will not be taken by other investment funds against EXIM Bank said Tim Buckley, Director of Energy Finance studies, Australasia for IEEFA.

The project contradicts the principles of sustainable development by the continued government-subsidised funding of coal-fired power plants, especially when competitively costed and low carbon alternatives are available. A number of multilateral banks and export credit agencies in countries that are members of the Organisation for Economic Co-operation and Development (OECD) have already pledged to restrict funding for coal plants and related activities. This leaves the Indian EXIM Bank at risk that when the proposed 12-year loan matures, the bank would be unable to find other international financial institutions willing to undertake the refinancing of Rampal, leaving EXIM with a very significant stranded loan.

The proposed project is in the Ganges tidal floodplain in the southwest of Bangladesh. The site is 14kms north of the highly sensitive Sundarbans mangrove forest, a UNESCO world heritage site and home to the endangered Bengal tigers.

Building a massive coal power plant near the Sundarbans would spell out disaster for the ecologically sensitive area supporting unique biodiversity. Coal imported to fuel the plant would be imported to Akram Point, which is located within the Sundarbans. Transhipment to smaller covered barges would occur and the coal then taken up the Passur River to the Rampal project site, making a total of 400-500 barge trips per year directly through the Sundarbans. BIFPCL would need to conduct dredging and widening of a 36-kilometre stretch of the Passur River to make the river navigable between Akram Point and the project site.

Exposure to Rampal project is a clear violation of the Equator principles which puts at risk EXIM Banks ability to raise competitively priced borrowings in the international markets. said Buckley.

The location of the Rampal project in the Wind risk zone of Bangladesh represents a significant financial risk to the project, since the plant would be extremely vulnerable to storm surges and, therefore, to outages and damage. The lack of a foolproof plan to counter even a normal storm surge, is glaring, as are the seemingly empirical and unscientific decisions around site development.

We believe that Bangladesh would be better served in building energy security through system diversity while leveraging Indias very successful solar mission if India promoted an alternative solar solution. This would promote Indian exports and boost the Governments ambitious Make-in-India program by supporting Bangladeshs renewable-energy program. It would be far faster for BHEL (Bharat Heavy Electricals Limited) to install a series of utility scale solar plants in Bangladesh, rather than developing an outdated technology, polluting coal-fired power plant, Sharda concluded.