Capital market can be funding source for private sector to enter power distribution

Power distribution has been operating under state-owned companies since the very beginning. However, these companies that we are seeing now are the results of advisory services of different donor organisations and the state's own pragmatism, and the main targets behind it were to bring financial checks and balances.

Accountability has already been ensured by the state through incorporation of power distribution companies like Desco, DPDC, etc. The electricity generation sector also used to be run by an authority that always had a lack of financial accountability.

Shifting of power generation to private sectors and supply to the distribution companies, however, have made the companies' profit and bonus issues clear and how companies are paying their debts.

And now, new areas are opening up in the power sector as the state is discussing with other foreign investors to invest in power distribution under the G-to-G method. They have already identified some areas for the private sector power distribution, like Purbachal and Uttara 12 sector.

The main obstacle to this initiative is finance, whether that be local or foreign.

Before entering power distribution, the private sector must consider whether it is possible to make profits from this space. Secondly, can it be done with lower costs?

If return on investment or profit is ensured, then only the private sector will come in power distribution. Otherwise, they will not come because the private sector is profit driven.

Another important issue is that this sector needs patient capital.

Here, the capital market is the source of this patient capital because the investors get the money in two ways — dividends and capital gains.

Investors will not source this patient investment if the capital market is not buoyant. And cheap capital will not be sourced if the middle class do not pour money into the capital market. 

The middle class has played a pivotal role in Bangladesh's growth. But for the next phase of development, efficiency will be required, which is not possible for the state entities. Therefore, the state will have to ensure less competition with the stock market and banks so that the private sector can get this liquidity to invest in the distribution sector.

Furthermore, when you want to develop a distribution line, first you need to develop a backbone. For example, if we look at the network distribution of Grameenphone, we will see first it has developed its backbone and gradually rolled out the new sites.

Methodology of payment is also required to be identified to deploy financial feasibility of such projects by the private sector. The state has to ensure the availability or capacity payment of the investments. Full capacity payment may not be required, but the backbone might need a capacity payment. When an investor deploys the money, he needs a return on this capital investment as a minimum outcome.

Another important issue for awarding power supply to the private sector is to select the right sponsor. Otherwise, the project will not be implemented if a defaulter or wrong sponsor company is selected for the project.

Coordination between the public and private sector is also a key driving force to materialise such a plan.

Updating the relevant policy is also important because laws framed in the 1980s would not be relevant in 2023. Pragmatic thinking is needed here. Consumers will get the uninterrupted and efficient electricity supply if the distribution system is given to the private sector through a PPP (public private partnership) model.

Confidence is a large contractor in power transmission and distribution because we have many production based industries — we are manufacturing transformers, electric poles, and towers. We have had a significant stake in the development of power transmission and distribution sectors in the last 13 years. Our skill set in equipment production and line development is an important issue in distribution services. If we are asked to provide this service, we would be able to do that even at 10% less cost which would be a savings source for the state.

South Korea and Japan could be the best selection for technology. Energypac is also another competent company in the power transmission and distribution sector.

So, in a nutshell, patient capital, right technology provider, guarantee of investment returns and the right sponsor are the key factors to attract private entrepreneurs to power distribution.

The author is the vice chairman of Confidence Group and former president of Bangladesh Independent Power Producers' Association (BIPPA)