How policy inconsistency drives foreign firms away from Bangladesh’s solar projects
Investors are also fearful of facing fresh challenges regarding the continuation of the work when a new government takes over
The new solar power projects floated by the interim government are riskier for investors as the tender conditions allow for payment delay or defaults alongside power purchase contract cancellation without enough compensation, experts and investors said on Saturday.
They also said the cancellation of previously issued letters of intent (LOI) for 37 renewable power projects is putting at risk the new plan for 4,952 MW solar power from 52 plants as it undermines confidence of global investors like Japanese Marubeni and French Total. Sensing an increasing country risk, international lenders are set to turn away, they opined in a roundtable "Financing Solar Power Projects: Challenges and Opportunity," organised by The Business Standard at its office on Saturday.
Speakers said such erratic policies are alarming for both global and local investors.
Adding to the woes, the tenders floated by the interim government for new solar projects were described as fraught with risks for investors. Provisions in the tenders reportedly allow delays or defaults in payments and even power purchase contract cancellations without adequate compensation.
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Such terms make the landscape more precarious for investors, who are now reconsidering their stakes in Bangladesh.
Investors are also fearful of facing fresh challenges regarding the continuation of the work when a new government takes over.
As Bangladesh grapples with increasing "country risk," international lenders are also stepping back. The withdrawal of global players like Marubeni and French energy giant Total could signal a significant setback for the country's renewable energy goals, investors warned.
Mostafa Moin, CEO of Doreen Power, said his company had a joint venture with Japanese Marubeni to build, own and operate a 100MW solar power plant at Mongla and the LoI cancellation at the eleventh hour resulted in the Japanese withdrawal from the JV last month. It took Marubeni and Total three to six years of effort to secure LoIs, stakeholders and experts said at the roundtable.
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Marubeni also took back its previous amount deposited for bank guarantee, abandoning the amounts it already had spent to prepare for the power purchase agreement with the Bangladesh Power Development Board (BPDB) and go live.
French Total also decided to do the same after the two LoIs for 250MW solar plants were cancelled.
Risk of legal challenge
Sakir Ahmed, adviser of international solar company Infraco Asia, said companies are yet to get the LoI cancellation letter from BPDB, reminding of the risk of legal challenges by investors. His company, like all others, invested years of efforts, money and hassles to procure land before being asked to participate in new tenders.
Nearly 30 companies seeing LoI cancellation have foreign investors and they got no fair answer to their question "how an LOI issued by the government can be cancelled," said Zahidul Alam, senior vice president of the Bangladesh Sustainable and Renewable Energy Association.
New plan will scare away investors
The new plan will deter any major international bank or the development financiers like the Asian Development Bank (ADB) or the International Finance Corporation from investments, said Dhaka Bank Managing Director Sheikh Mohammad Maroof, the banker behind highest local lending to the power generation sector.
Lenders are wary of BPDB's fragile balance sheet, as it is losing over Tk8,000 crore a year and accumulating enormous retained losses and negative equity. Only government guarantees have helped attract investors and lenders whose confidence is needed to be restored, he said.
According to him, local commercial banks cannot provide loans for more than 10 years, while power plants require loans of 12–15 years, which development financiers can offer. With the current weaker foreign currency regime, dollar loans for solar projects could help save significant fuel import bills in the coming years.
Policy Exchange Bangladesh Chairman M Masrur Reaz, in his keynote, said the power crisis cost Bangladesh more than $5 billion in lost apparel export orders in the first six months of 2024, alongside massive production losses in critical industries like steel.
"Gov can't opt out of LoIs"
However, Professor Mohammad Tamim, an energy expert, said, "If there is a legal obligation, the government cannot opt out of the LoIs."
The "Speedy Enhancement of Power and Energy Supply (Special Provision) Act 2010," which enabled negotiated power procurement agreements instead of open tendering, was not the cause of corruption in the power sector over the past 15 years, he added.
The good and bad deals for the state can be identified by the justification of the tariff, he opined, adding that despite a 10-20% higher project cost in solicited tenders, the country should opt for open tendering in the future.
The recent open tenders under the new plan, however, left room for the BPDB to defer payments to solar power generation companies with an abnormally low 1% annual interest. The government guarantee that previously came through an implementation agreement is also absent in the new tenders.
The new plan also includes a clause allowing the BPDB to terminate the 15-year power purchase contracts with just a 28-day notice.
A court verdict after the political changeover in August repealed two sections of the special act. It also called for the condoning of contracts, including the already initiated processes, steps, and actions, said Sakir Ahmed.
"We expected a revisit of cases, actions against bad deals, and fair treatment of good investors," he said, adding that foreign investors are dissatisfied with the developments, feeling they are being treated as part of the previous regime's wrongdoings.
BPDB seen as a risk
Local power entrepreneur Imran Karim, vice chairman of Confidence Group said, "Without guaranteed government support, how can investors trust BPDB, which is struggling with liabilities of nearly Tk40,000 crore?"
He sees a risk of non-participation in the tenders or extremely high tariffs being quoted by risk-taking companies in upcoming tenders. "Neither is an option for us, as we need to reduce power tariffs," said Karim.
Bangladesh, with the highest dependency on imported fuel for power generation among its peers, is also taxing most primary fuels and selling power to consumers at the cheapest rate, he said, suggesting reducing tax burdens and enabling a solar boom by supporting investors.
Projects floated under the new tenders will not pass global players' bankability tests, as investors and lenders are not assured that the government will actually support them, said legal expert Shahwar Nizam, managing director of DFDL, which provides legal services to large power projects.
"Foreigners are asking, 'What if BPDB goes bankrupt?'" he said, adding, "Addressing only bad deals is not impossible in the legal context."
Gov guarantee sought
ADB's Bangladesh Resident Mission Investment Officer Md Mehedi Hasan, a chartered financial analyst, said, "We finance apparel companies without government guarantees because we see the reputed, capable global buyers. BPDB, being the sole buyer of the generated power, is not that strong and needs government guarantees."
ADB, a champion in private infrastructure financing, wants to finance low-cost, feasible projects that can help reduce power tariffs, he said.
Ibvogt GmbH Deputy Director Imran Chowdhury said foreign solar power companies like his don't view Bangladesh as a key market because it demands too much capital investment for comparatively less power generated here.
Land procurement, involving several hundred owners, has resulted in maximum complexity and project cost hikes, and the government should assist companies by providing land.
Tariff could be less if given land
Professor Tamim said solar power tariffs could be reduced to 7-8 cents per unit from around 10 cents if competent firms are given hundreds of acres of land owned by government entities or projects.
He also spoke against the 16 cents per unit tariff given to Beximco's solar project.
Nuher L Khan, managing director of Joules Power, said BPDB's intentions do not seem positive, as it appears to be preparing to default on timely payments with the help of only 1% annual interest.
"With the general words crony and oligarchs being used against all companies, this will not help promote renewable power in Bangladesh," he said, adding it would instead force the continuation of huge fossil fuel import bills every year for power generation.
