A Z M Anas
Bangladesh must tap domestic equity markets to finance new power plants in an effort to reduce reliance on foreign investors, whose purses have strained after the global recession, investment bankers say.
They say high investor demand and attractive valuations of listed electricity firms have provided a "powerful" case to explore innovative financing options like equities and bonds as it requires at least US$9.0 billion over five years to implement an ambitious power generation plan.
"This country has an extremely competitive environment to raise debt and equity," said Ifty Islam, managing partner of Asian Tiger Capital, an investment bank.
With capitalisation of US$35 billion, Dhaka stock exchange is among five top performing Asian capital markets this year, joining other frontier economies such as Pakistan, Vietnam and Sri Lanka.
Equities in the country are trading at 3.6 times book value, more expensive than China and India, Thomson Reuters data have showed.
Mr. Islam, previously the head of macro strategy and hedge fund research at Citigroup Inc. in London, said that Summit and Khulna Power, two listed private electricity producers, have higher price earnings than state-linked transmission and distribution companies and also banks and insurers, suggesting the capital markets will be "increasingly used in the future to raise equity."
With a market capitalisation of more than $1.0 billion, Summit Group trades at 79 price earnings (P/E) while the power sector companies such as Power Grid and DESCO trade at around 19 P/E, according to At Capital.
Set up in 1998, Summit is the country's first private electricity company and is now generating 330 MW, accounting for around 10 per cent of the grid power.
He added, even the new entrant, Khulna Power Company Ltd., is trading at 73 P/E.
Ali Reza Iftikhar, managing director of Eastern Bank Ltd., share similar optimism, saying the rapidly growing capital markets can provide the funds to boost power generation.
"Our capital markets are lucrative.
Structure projects--money is not a problem here," said Mr. Iftikhar, whose bank this month led a group of lenders to partially finance the purchase of new generation Boeing planes by Biman, the state carrier.
He said mobile operator Banglalink managed to haul in $101 million by issuing a privately placed corporate bond, breaking the previous record of $71 million raised by its rival Grameenphone through the initial public offerings.
"It shows investors are willing to invest," the head of the listed bank told the FE.
Traditionally, Bangladesh relies on foreign companies and lenders to finance its big power plants, but the global recession has clogged credit markets worldwide, making it difficult for the country to have access to private capital.
The Power Ministry has figured, Bangladesh will need an investment of US$9.0 billion to produce 9,426 MW of electricity by 2015, with almost one-third of the planned generation coming from independent power producers (IPPs).
Between 1997 and 2001, according to the World Bank data, private power producers added 1260 megawatts (mw) of electricity to the grid, but most of them have deserted the sector since 2002, leaving the nation to reel under severe outages that top 2000 mw a day.
The World Bank said power outages cost Bangladesh economy 2.0 per cent annual growth and 80 per cent of local enterprises view blackouts as a major hurdle.
The demand of electricity has been growing at 7.0 per cent since 1990, but supply has not matched with that, with production hovering below 4000 mw per day. About 53 per cent of the country's population are not connected to the national grid.
Mr. Islam, of AT Capital, noted Bangladesh should pursue a strategy to scale up domestic financing by tapping innovative options like corporate bond market, securitisation and directing insurance and pension funds to infrastructure assets.
Officials said the new sources of financing are becoming more compelling now than ever before as the government's budgetary allocation for the power sector continues to decrease.
While the annual development plan (ADP) has risen, averaging 5.0 per cent per year, the allocation for the power sector has whittled down since 2004.
ADP allocation for the power sector pared back to $386 million--or 11.6 per cent-- in 2009 after peaking at 16.3 per cent to $446 million in 2004, according to Finance Ministry figures.
Still, Mr. Islam from AT Capital saw it as "challenging" for Bangladesh to coax foreign financiers to bet on the country, where the history of large scale equity raising from the capital markets and syndicated bank lending remained limited.
He said Bangladesh's largest syndicated loans to date were $57 million, which indicate support from international investors is a must for large power plants.
Faisal Mobin Chowdhury, chief executive officer at Bangladesh unit of Pendekar Energy, said since foreign companies prefer low-cost lending with longer repayment, the government needs to secure funds from global financiers and multilateral agencies.
"That requires transparent bidding and adherence to strict deadline," said Mr. Chowdhury, whose company is running about 10-year-old Meghnaghat and Haripur plants. Two plants, which together produce 24 per cent of total generation, are the country's first IPPs built by American AES.
Independent strategist Kauser Bhuiyan, said it would be difficult to raise large scale funds as the domestic debt and equity markets don't have experience.
Also, he said, international investors and global lenders might not come forward with such a big amount, given the sovereign debt crisis in Greece and the financial woes in Italy, Spain and Portugal.
"Unfortunately, I don't see any quick fix to the vicious cycle of energy crisis and economic stagnation in the next five years," he said in an e-mailed response.
But Mr. Bhuiyan who had served with the Wall-Street company Bloomberg L.P., predicted that domestic investors would team up with foreign investors and lenders to participate in power projects.
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