The political economy of energy

Forrest Cookson examines the country's energy crisis and the serious consequences for development

It is widely understood that Bangladesh faces a major energy crisis with serious consequences for development. The implications of a ten year slowdown of the economy are dire. In 2006 all the evidence pointed to a continuing rapid expansion of the economy probably reaching 7%. But apart from the short term adjustments, consequences of the January 11 actions, the lagging performance of the energy sector will force the economy to slow sharply over the next decade.

While it is too late to completely recover from this tragedy, there are actions that will make a major difference for the Bangladeshi people. If there was no energy crisis after a decade the average Bangladesh household would be about 60% better off; the median family 30% richer. (Assuming continuation of 7% growth.)

But the actual outcome is likely to be that the average household is only 40% better off and the median household 15%. This is a real disaster for the bottom 25% of the population who will see their chance of rising out of poverty lost.

The sources of the energy crisis are several: Placing reliance for energy supply on SOEs that were unable to perform due to continuous interference by the political authorities; the remarkable belief in the Bangladesh government that efficiency, prices, and economics do not matter in the energy sector; the disparate attitudes of the donor community which sent all kinds of diverse signals; a consistent and pervasive failure to develop Bangladesh's human resources in the energy area; a dislike for foreign investors; naïve attitudes towards the potential of sustainable energy; and most important a complete failure of the political leadership to face up to the issues and a continuous willingness to delay, to seek personal benefits, and a refusal to lead the society. Instead, into this leadership vacuum has stepped a noisy group of leftists, who preach a discredited ideology, to ensure failure of the energy sector.

Four examples:
- In a prior column in The Daily Star, I described the failure to follow policies that would insure the development of the natural gas and coal needed to fire the power sector. Combined with an unwillingness to make aggressive decisions we have a full blown decade-long energy crisis before us.

-The handling of the Barapukuria coal mine and power station are another example; looking back at this folly one has to wonder why Bangladesh has ended up with the most expensive coal in the world and consequently very high cost electricity. Rather than hide behind lame excuses the mine should charge the power plant the real cost of the coal -- i.e. operating costs, 10% return on the capital cost of the project, depreciation costs of the equipment, a depletion allowance for use of the coal, short term maintenance, and mining company overheads. Let the power plant purchase the coal at its real cost. It will work out at more than $100 per metric ton. Then let the power plant sell the electricity to PDB for its true cost -- coal cost plus the capital costs of the plant plus the other operating costs. At least everyone would understand the real situation. The managers of the mine and the power plant could then work to become more efficient, to reduce costs, to maintain their plant and equipment properly. Now, no one knows what anything costs. Of course there are many people who do not want the true costs to emerge. But this example illustrates the core problem of the energy sector.

-The Bangladesh Petroleum Corporation operates a monopoly over imports of petroleum products, the bureaucracy having successfully torpedoed an effort by the first BNP government to free up this market. But as government controls the sales prices of their products, the BPC is bankrupt and sinks deeper and deeper into debt. The company cannot manage its affairs, cannot work to lower costs, cannot raise its efficiency as there are no performance standards to hold management responsible to achieve. The government should make continuing grants equal to the subsidy that is given to users of BPC products. Let us all know exactly how much this organisation is subsidised. Once that is done, the management of BPC can be held accountable for their performance.

-The Power Development Board is my last example. This organisation needs to be held accountable. To do so the subsidy to the public forced by the government must be explicit and paid regularly. It is the same as the BPC; the management of PDB cannot be held accountable when they are asked to run a bankrupt organisation without clear understanding of how the subsidies are to be covered. These guys are in a hopeless position. How does one expect them to perform when their main customers are other SOEs that do not pay? The real situation would then become clear. Prices of electricity are too low and the distribution companies have failed to collect much of what should be paid. PDB cannot pay the gas companies from which they buy gas or the IPPs (Independent Power Plants) that are selling them electricity. If you think about this it is ridiculous. How can any organisation operate in such chaos?

In all of this confusion no one knows the real costs of anything. There is no way to hold managers accountable or to assess their performance. There is no reason to become efficient -- no one will know and if they did it would not help one's compensation or career. The first reason for the energy crisis is the unwillingness over the past 16 years of democratic rule to face up to what was going on. But now the poor and the rich will pay the price. Reality always comes through!

But this is not the end of the troubles. Bangladeshi intellectuals, journalists, and much of civil society sing the song of taking responsibility, of self-reliance, of formulating policy by Bangladeshis. But in the energy sector there has been a total failure to take hold of the issues and face them. Let me give four more examples:

Energy planning has not been based on a national master plan that analyses the problems and opportunities. In the 1980s some work was done, but since then nothing. The next level of energy planning is based on two master plans produced by consultants, one for power and one for the gas sector. These donor supported studies were well executed. But …the ministries and corporations did not use these projects to develop their own skills; just as serious as the failure to develop human skills such plans are based on assumptions that are not really approved by the government.

Two assumptions are critical: what is the crude oil price and what is the growth rate of the economy. Both of the studies assumed the oil price was $30 a barrel; this meant that gas-fired plants were found to be more economic than coal-fired ones. Granted, there are assumptions here about the connection between the natural gas price and the oil price but these are not unreasonable. Either the government agreed with the $30 assumption or it was just made by the consultants. To plan the energy sector on $30 oil price, however, is an assumption that must be made by the Bangladesh government not the consultants!

In other words, the key assumption about the energy sector is buried in these master plan studies, has not been discussed publicly, and yet has enormous implications for the directions of energy policy. If those who demand that Bangladesh take control of its own key policies would stop talking and do the real work of studying the issues we would make more progress.

Public or private sector? Another key planning issue with which the government refuses to deal clearly is whether the energy sector should be developed by private or public enterprises? Here there is no clear direction. Yet the evidence is overwhelming that the private sector is more efficient and can be held accountable while the public sector cannot. None of the energy SOEs has been successful; why would one want to continue down a road that has brought failure and misery for the people? But whatever the direction there should be a clear well marked path -- at present there is no such direction.

How fast will the economy grow? The government should impose its own target growth rate on the energy planning, not pass this choice to the consultants. The master plans are built on a low growth rate assumption. If one follows these plans it will indeed lead to a low growth rate. Unlike other sectors of the economy, if one does not provide the energy the economy will slow down to consume the amount that you do supply. The full extent of the energy problem is only understood when the articulated national objective of rapid 7% GDP growth is built into the analysis. The government should have told the consultants what the assumption should be; what do the energy experts know about macroeconomics or the growth policy of the government?

Renewable energy. Solar and wind based energy are important prospective sources of energy. But the costs are still far above hydrocarbon based energy and cannot play a significant role in solving the energy crisis that now envelopes the society. The energy planners are good at keeping their eye on the ball which is coal and gas energy; but civil society loves the renewable energy technology and distracts everyone from the real problems. In pushing renewable energy concepts the problems of pricing, accountability, production of electricity, and adoption of realistic and competitive technologies are forgotten. The hard issues are pushed aside to pursue dreams that will not solve the problem.

But there are still more problems in the energy sector: One group that has caused enormous confusion is the donors. These folks are well meaning but they are also competitive within their own organisations. The competitiveness within their organisations results in their aggressive pushing of projects; sometimes this is in the interest of Bangladesh and sometimes not. Although there is a lot of talk about coordination and listening to the strategy of the government, there is little sign of this in the energy sector. This is enhanced as the government does not speak with one voice. In addition, there are real differences of view. The most serious differences are with respect to the private-public issue.

A reasonable man may conclude from experience that the SOEs in the energy sectors cannot work well. The government however wants to develop the energy sector through SOEs, not using the private sector. Consider the plight of a World Bank officer working on the project. This person has to go to his board and say what? Well he can say: "The government wants this but I do not think it will work." Will the board approve the project? Bangladesh is an IDA country so the funds are coming from the taxpayers of the developed countries. These taxpayers want their funds to be used to help Bangladesh to develop. They will not go along with the idea that a project should Be followed that the World Bank Experts feel will not work just because the Bangladesh government wants it. The donors do not think that the SOEs in the energy sector can do their job. The government resists the pressure for using the private sector, so the energy funding from the World Bank and the ADB is not very great. The difference in view is absolutely fundamental.

Closely related is the role of the private foreign investors. Bangladesh can avoid using private foreign investment but then economic growth will be much smaller. To raise the investment/GDP ratio to 30% will require $4 billion per annum of foreign investment. There is a lot of macroeconomic nonsense being spread about that Bangladesh has the resources to develop without the donors and foreign private investors. This is simply not true and the numbers do not support this notion. The private foreign investors bring technology, marketing skills, and financing skills that are in short supply. If there is rapid growth it is not the capital that matters but these skills and the examples that they set. In the energy sector the large investments required call for foreign private investment, otherwise these energy investments are not going to take place. The donors will not finance these, the Bangladesh government does not have the resources, nor does the private sector. The stalling around on the Tata proposals and the Asia Energy proposal illustrate the difficulties.

There are three points to make about the donors:
Some donors are content with the SOE approach so long as it is their companies that supply the equipment and does the construction work. The Japanese, Russian and Chinese governments seem prepared to finance energy projects through supplier credits. However this has not worked very well. Many projects have proven difficult to get going with the government and the donor blaming each other. Some projects have been implemented but poor planning resulted in bad performance blaming the foreign contractor. The Tongi peaking plant is an example: The variable gas pressure, failure to enforce environmental emission rules in surrounding factories and the attempts to use the plant as a base load plant led to a very poor performance; if there was a private company responsible for operating the plant these issues would not have occurred. This option will be limited in the future. China might be prepared to finance a large amount of the energy sector but given the way their efforts have been treated and the unbalanced criticism of what they have financed I would be surprised if this source will finance much in the energy sector.

The ADB and World Bank seem to be in a competition to get power projects financed as IPPs. The IPP path whether large or small is surely the right way to go. But the available gas is very limited. To do a large project means getting your hands on some of this gas. If the reserves are now about 8 TCF, then this must be reduced by about 5 TCF for the current usage rates over the lifetime of the existing plants, private users of gas, and fertiliser factories. That leaves about 3 TCF available; this will only provide a fraction of the electrical energy that is needed and a limited number of projects can be implemented. Hence ambitious donor officers are fighting to get their projects advanced.

The scheduled large IPPs will use all of the gas that is available. It is the Bangladesh government that should be making the decisions as to the IPPs to do and the order in which they are to be implemented. The decision to construct a power project near the Bibiyana gas field ignored the previous decisions government had made. In this case we see that the requirements of the poorest part of Bangladesh in the western part of the country have been ignored. It is a puzzle to locate the first plant so far from the load centres as the cost of moving energy on transmission lines is significantly higher than in a pipeline. But competition to be first between the two banks explains this very well.

Apart from China, Russia and Japan the bilateral donors have concentrated on policy issues and encouraged small renewable energy projects. That is what their resources would support. The United States has done a little work on regional cooperation and on policy issues but not much has come from any of this. Three of the largest economies in the world -- the US, India, and Germany are essentially out of financing the energy business in Bangladesh [except for Chevron's own gas operations.] This is very odd.

In my view the Bangladesh government should get control of the energy sector financing; establish its own priorities -- a decision that needs to be made by the advisory council -- and then stick to it. There are many dimensions to the energy sector. The situation is so desperate that for better of worse the caretaker government has to act to establish strategies and priorities and enlist donor support. Recent relationships between donors and government were unfortunate. But the caretaker government is acting in Bangladesh's interests and surely the donors can do more.

Taking control
Lastly, four areas to be addressed in taking control of the situation:

Private-public roles: This issue should be settled by caretaker government so that everyone knows the roles. Once done then this sets up the future framework for investment. No doubt there will be a lot of disagreement but governments have to decide and in the energy sector this is truly urgent.

SOEs: The pricing and financial condition of the SOEs should not be left unresolved. The caretaker government has the courage and skills to deal with these problems. Without resolution the underlying chaos that the caretaker inherited will continue. The regulatory authority should be given the authority and instructed to deal with the pricing issues and bankrupt condition of the SOEs. There is widespread support for the regulatory commission; if they can cut theirs teeth on solving the pricing problems in the next year it will help the future of the sector tremendously.

Gas and coal: Government should make the decisions about gas and coal that need to be made. These decisions need to be made as soon as possible. Exploration for more gas and development of the coal resources are matters that cannot wait. Delay in these decisions will only extend the energy crisis.

Manpower: Perhaps most painful to me is the failure to develop the manpower in the energy sector. If the available resources and opportunities had been used in the past fifteen years the manpower situation would be much better. Indeed many persons that were trained on returning were not employed. The manpower policies of the energy SOEs seem to be to discourage technical accomplishment and to reward those who are untrained. The manpower policies of the energy SOEs are the clearest indicator that the future belongs to the private sector. Of everything that has gone wrong in the energy sector this is the greatest scandal. We need over the next fifteen years many energy engineers, financial experts, and managers. I hope the caretaker government can take the necessary actions to achieve this.

Forrest Cookson is an economist.

Photos: AFP