Document of

The World Bank

FOR OMCIAL USE ONLY

Repor No. P-4018-BD

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

IN AN AMOUNT OF SDR 112.9 MILLION

TO THE PEOPLE'S REPUBLIC OF BANGLADESH

FOR A

SECOND GAS DEVELOPMENT PROJECT

April 11, 1985

dicumeut has a restrcted distibutio and may be used by recipiets osy in the performnce oftheir official dl Us c.temts aM cot odhwise be disclosed withou World aBk autbarizatin-

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CURRENCY EOUIVALENTS

The external value of the Bangladesh Taka (Tk) is fixed in relation to abasket of reference currencies, with the US dollar serving as interventioncurrency. On February 25, 1985 the official exchange rate was set atTk 26.47 buying and Tk 26.53 selling per US dollar. The rates shown belowhave been used throughout this report:

Currency unit - Taka (Tk)US$1.00 - Tk26.00Tk 1.00 - US$0.038

WEIGHTS AND MEASURES

1 barrel (bbl) - 0.159 cubic meters1 cubic foot (CF) - 0.028 cubic meters1 metric ton of

oil 0.85 specific gravity - 7.4 bbl1 kilometer (km) - 0.621 milesMCF - thousand standard cubic feetMNCF - million standard cubic feetTCF - trillion (1,000 billion) standard

cubic feettoe - tons of oil equivalent in heating

value

ABBREVIATIONS AND ACRONYMS

ADB - Asian Development BankADP - Annual Development ProgramCIDA - Canadian International Development AgencyCNG - Compressed Natural GasD&M - De(olyer and McNaughton (Urited States), consultantsICB - International Competitive BiddingLCB - Local Competitive BiddingLIE - Local International BiddingLPG - Liquefied Petroleum GnsLRMC - Long-Run Marginal CostODA - Overseas Development Administration (United Kingdom)Petrobangla - Bangladesh Oil and Gas CorporationPIU - Project Implemetation UnitTPA - Titas Franchise AreaUNDP - United Nations Development Programme

GLOSSARY OF TERMS

Appraisal Well - Well drilled to ascertain limits of area containingproven reserves.

Condensate - Vaporous fractions of hydrocarbon in a reservoirthat liquify during production.

Gas-Water Contact - Interface of gas zone and water zone in gasreservoir

Lithology - Physical characteristics of rock.

Pay Zone - Depth at which reservoir beds that yield oil or gasare found.

Reservoir Structure - Geological structure considered capable ofcontaining hydrocarbons.

Workover - Operations carried out to repair a producing well.

FISCAL YEAR

July 1 to June 30

FOR OMCIAL USE ONLY

BANGLADESH

SECOND GAS DEVELOPMENT PROJECT

DEVELOPMENT CREDIT AND PROJECT SUMMAR'

Borrower: People's Republic of Bangladesh

Beneficia-y: Bangladesh Oil and Gas Corporation(Petrobangla)

Amount: SDR112.9 million (US$110.0 million equivalent)

Terms: Standard

Relending Terms: The Government would onlend US$73.1 million of theproceeds of the credit to Petrobangla for a period of15 years, including a grace period of five years, at aninterest rate of 13% per annum for the developmentcomponent of the project. Petrobangla would bear theforeign exchange risk. US$33.0 million of the proceedsof the credit would be passed on to Petrobangla asequity for the field appraisal component of theproject. US$3.9 million would be passed on as equityto a new entity to finance pilot compressed natural gasapplications.

Project Description: The project's objectives are to support Petrobangla'sefforts to: (i) expand gas supplies in line withincremental demand expected over the medium term andproduce the country's first significant quantities ofcondensate available from the gas fields of Kailashtilaand Beani Bazar; (ii) initiate an appraisal program ofthe main gas fields to provide a preliminary basis fortheir long-term development; and (iii) strengthen itsmanagement capability, particularly in the areas offield management and production planning. The projectwould consist of: (a) a gas field appraisal anddevelopment component that would comprise the drillingof nine weLls, the workover of two existing wells, anda reservoir study for each producing field; (b) a gasinfrastructure component to bring the gas fields ofKailashtila, Bearxi Bazar, and Rashidpur intoproduction, involving the construction of anapproximately 117-mile long gas pipeline with thenecessary gas and condensate treatment facilities; and(c) pilot CNG applications; and (d) training and tech-nical assistance.

This document has a restricted distribution and may be used by recipients only in the performance |of their official duties- Its contents may not otherwise be disclosed without World Bank authorization.

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Risks: The project would face the usual risks associated withappraisal drilling. There is a risk that one or moreof the appraisal wells would not produce gas in commer-cial quantities because of the possible lack of con-tinuity in the reservoir; however, the main justifica-tion for the appraisal drilling program at this stageis to ascertain reservoir continuity as a basis forlonger-term commercial development of the fields. Therisk of a dry well should be viewed as the normal costto be carried in order to optimize reservoir drainageand maximize resource recovery.

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Estimated Project Cost: 1/

Local Foreign Total--------- (US$ million)-------

Field appraisal and development 11.3 48.7 60.0Infrastructure 20.1 60.7 80.8Consultancies and Training - 8.3 8.3

Total Base Cost 31.4 117.7 149.1

Physical Contingencies 4.7 17.7 22.4Price Contingencies 11.3 38.2 49.5

Total Project Cost 47.4 173.6 221.0

Interest During Construction 18.4 - 18.4

Total Financing Required 65.8 173.6 239.4

Fiziancing Plan:

Local Foreign Total--------- (US$ million)…-----

IDA 6.4 103.6 110.0CIDA (Canada) 4.2 31.7 35.9ODA (United Kingdom) 8.2 19.4 27.6The Netherlands 0.6 8.0 8.6UNDP - 10.9 10.9Government of Bangladesh 28.0 - 28.0

Total 47.4 173.6 221.0

Estimated Disbursements:

IDA Fiscal Year 1986 1987 1988 1989 1990----------- (US$ million)-----------------

Annual 8.0 24.8 38.5 32.4 6.3

Cumulative 8.0 32.8 71.3 103.7 110.0

Economic Rate of Return: n.a.

Appraisal Report: Bangladesh: Second Gas Development ProjectReport No. 5353-BD, dated April 5, 1985.

Map: IBRD 18571

1/ Including US$7.3 million equivalent of taxes and duties.

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOKMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDITTO THE PEOPLE'S REPUBLIC OF BANGLADESH FOR A

SECOND GAS DEVELOPMENT PROJECT

1. I submit the following report and recommendation for a proposeddevelopment credit to the People's Republic of Bangladesh for SDR112.9 mil-lion (US$110.0 million equivalent) on standard IDA terms to help finance aSecond Gas Development Project. The Government of Bangladesh would onlendUS$73.1 million of the proceeds of the credit to Petrobangla for a period of15 years, including a grace period of five years, at a rate of 13% per annumfor the development component of the project. Petrobangla would bear theforeign exchange risk. US$33.0 million proceeds of the credit would bepassed on to Petrobangla as equity for the field appraisal component of theproject. US$3.9 million would be passed on as equity to a new entity tofinance pilot compressed natural gas (CNG) applications. Parallel financingin the form of a grant in each case would be provided by Canada (CIDA) forabout US$35.9 million equivalent, by the United Kingdom (ODA) for aboutUS$27.6 million equivalent, by The Netherlands for about US$8.6 millionequivalent, and by UNDP for about US$10.9 million.

PART I - THE ECONOMY 1/

Introduction

2. An economic report entitled "Bangladesh: Economic and SocialDevelopment Prospects" (Report No. 5409-BD, dated April 2, 1985) has beendistributed to the Executive Directors.

3. Bangladesh, which became independent in 1972 under very difficultcircumstances, is a country with a very high population density andwidespread poverty (annual income per capita is about US$130). The economy,dominated by agriculture, remains highly vulnerdble to disruption by bothnatural and external factors. Although considerable progress has been madein terms of increased flood control, and extending the availabiLity ofirrigation and other inputs, foodgrain production remains heavily dependent

1/ Parts I and II of this report are substantially the same as Parts I andII of the President's Report for the Second Primary Education Projecr(Report No. 3976-BD) dated March 7, 1985.

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on weather conditions and falls short of domestic requirements. To meetminimum needs, the Government has to import foodgrains financed by aid orfrom its own resources. The uncertainties of foodgrain availability alsomake it necessary to maintain public foodgrain stocks, the financing of whichadds to the problems of fiscal management.

4. The economy is also characterized by low savings, which reflect thelow level of incomes, and by a large structural external payments gap.Domestic savings account for only a negligible part of investment (which hasaveraged about 16% of GDP in recent years). Export earnings cover less than30X of the import bill, with raw jute and jute goods accounting for about 60%of merchandise exports. The resource gap of about 15% of GDP is financed byworkers' remittances, which rose rapidly to more than 52 of GDP in FY83(before declining somewhat during the past two years) and by foreign assis-tance equivalent to about 10 of GDP per annum. The capacity to financeimports can be sharply affected by external factors that are beyond thecontrol of the Government; the effect of such adverse factors on the economyis amplified by the heavy dependence of budgetary revenues on import dutiesard sales taxes, which together account for about 60% of tax revenues.

Recent Economic Developments

5. In the late 1970s, Bangladesh enjoyed a period of political stabilityand economic consolidation and was able to plan for longer-term development.GDP growth of nearly 6% per annum from FY75 to FY80 was accompanied by risingpublic investment, financed by a substantial real increase in aiddisbursements. A combination of adverse domestic and external events afterFY80 disrupted the momentum of development. Between FY80 and FY82, theexternal terms of trade for Bangladesh fell by 30%, due to declining pricesfor jute and jute products, as well as to increases in import prices.External aid flows, which had been rising steadily up to FY80, declined inFY81 and in FY82 barely recovered to their FY80 level. Foreign exchangereserves declined to about US$120 million (equivalent to about two weeks'imports) by end-FY82. The deterioration in the terms of trade and stagnationof aid receipts in real terms had an adverse impact on public finances andforced the Government to impose severe cuts in domestic public investment inFY81 and FY82. At the same time, the rate of growth in GDP decreased fromabout 6% in FY81 to 1.4% in FY82, largely due to a decline in food cropproduction following a prolonged drought during FY82.

6. In response to these adverse developments, the Government took aseries of measures designed to stabilize the economy. In the FY83 Budget,growth of public expenditure was tightly restrained, new tax measures wereintroduced and a series of pricing adjustments were made to reduce subsidiesand improve the financial performance of public sector enterprises andutilities. Taken together, the tax, pricing, and subsidy-reduction measuresamounted to an impressive 2.3% of CDP. In FY83, the Government alsoannounced its New Industrial Policy designed to improve the efficiency ofpublic sector enterprises and provide an improved policy environment for theprivate sector. More than 100 public sector enterprises were subsequently

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denationalized, investment sanctioning procedures were streamlined and manyindustries freed from requiring investment sanctions. Imports were liberal-ized by increasing access to imports through a secondary exchange market andby eliminating some quantitative restrictions. By the end of FY83, thebalance of payments position had improved considerably, due to a recovery inthe terms of trade, an upsurge in workers' remittances, higher aid inflows,as well as increasing exports stimuLated by a substantial depreciation in theexchange rate. However, the reduction in the current account deficit, whichfell from 14.5% to 10.4% of GDP, was also due to the depressed level ofimports resulting from a continued slow rate of GDP growth, which recoveredto only about 2.7% in FY83. While more favorable weather conditions andincreased inputs led to a 3-4% growth in agriculture, most of the non-agricultural sectors remained depressed; value added in the manufacturingsector actually declined by 1-2%.

7. Economic performance remained mixed in FY84, with GDP growing at only3%, marginally above the previous year's performance. Agricultural produc-tion was significantly affected by late floods in autumn 1983, followed bydrought and early floods in spring 1984, which continued with exceptionalseverity through September 1984. The losses caused by the floods will alsoadversely affect crop prospects for FY85, although a part of the loss may becompensated for by higher yields in areas less affected. On the other hand,there has been a sharp recovery in the non-agricultural sectors, beginning inFY84 and continuing into FY85, partly stimulated by a significant expansionin domestic credit, but also supported in respect of the manufacturing sectorby the earlier liberalization of import policies and the rationalization ofinvestment sanctioning procedures.

8. Following the major domestic revenue effort made in FY83, theGovernment has sought to consolidate that effort in its FY84 and FY85Budgets, rather than to embark on major new initiatives. Further modest taxand pricing adjustments were made to increase recurrent revenues, but totalrevenues for FY84 were well short of the budget target as dutiable importsand aid disbursements fell considerably below expectation. In FY85, taxrevenues received a significant boost from the resurgence of importsassociated with the recovery of the non-industrial sectors. A substantialbudget deficit was avoided in FY84 by a significant shortfall in deveLopmentexpenditures compared with the budget estimate; a similar shortfall in theAnnual Development Program expenditures may occur during FY85. Such short-falls arise partly from overly ambitious development expenditure targets, butare also attributable to lower than expected disbursements of project aid asa result of implementation constraints.

9. Although domestic prices have remained reLatively stable despite thelarge increases in domestic liquidity, the rate of inflation is expected toincrease from about 12% in FY84 to about 14-15% in FY85. However, in January1985, the Government took a series of measures to limit the growth ofliquidity. The measures included increases in interest rates and quantita-tive restrictions on the growth of domestic credit. If these credit policiesare maintained in FY85 and FY86, the acceleration of inflation can be limitedand the pressures on domestic prices gradually reduced.

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10. The balance of payments and foreign exchange reserves positionimproved during FY84. Export earnings rose by 202, due to higher interna-tional prices for jute, jute products, and tea, as welL as a major boost innon-traditional exports, while imports remained close to the FY83 level sinceeconomic recovery was sLower than anticipated and aid-financed imports weredepressed by delays in project implementation. Even though workers' remit-tances began to decline in the second half of the fiscal year, the currentaccount deficit as a whole declined to 7.42 of GDP in FY84 from 10.4% inFY83, while gross foreign exchange reserves in March 1984 reached a peak ofUS$558 million, equivalent to about 3 months' imports. However, during FY85there has been a deterioration in the balance of payments. Part of thegrowing pressure on the balance of payments arises from the additionalfoodgrain imports necessitacei by the severe 1984 floods. Since immediateadditional food aid in response to the crisis was limited, the Government hadto purchase about 1.25 million tons of foodgrains, valued at close to US$250million, from its own resources. Non-food imports are also projected toincrease significantLy as a result of the strong recovery in the manufactur-ing sector stimulated by the rapid expansion in domestic credit. Workers'remittances have also declined further and although exports and aid disburse-ments are expected to increase over FY84 levels, a substantial drawdown ofreserves of over US$150 million is projected for FY85. The decline in reser-ves would have been even more marked if a substantial portion (about US$190million) of foodgrain imports had not been purchased on credit. This short-term borrowing will, however, add to the difficulty of managing the balanceof payments over the next three years when there wiLl also be substantialobligations for repurchases from the IMF.

External Debt

11. Since most of Bangladesh's borrowings have been on highly conces-sional terms, servicing external medium- and long-term debts has not been amajor problem. Nonetheless, the burden of servicing this concessional debt;_ rising steadily as debts incurred in the first years after independenceare increasingly falling due for repayment. Total service payments on exter-nal public medium- and long-term debt are expected to rise from about 13% ofexport earnings (goods, services, and workers' remittances) in FY84 to 14% inFY85 and a peak of 18% in FY87, gradually declining thereafter. However,when obligations to the IMF are included, the debt service ratio for FY85 isestimated at about 20%, rising to between 20-25% during FY86 and FY87. Thedebt service ratio is forecast to decline thereafter, as food debts arerepaid, to about 15-17% by FY90. The Bank Group's share of Bangladesh's debtservicing obligations will remain modest over this period, rising from 8.5%in FY84 to 8.9% in FY86. The Bank Group's share of total debt outstandingand disbursed is projected to increase from about 30% in FY84 to about 35% inFY86.

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Development Planning and Policy Issues

12. Although the Second Five Year Plan period (FY81-85) is drawing to aclose, the Government's development strategy continues to be largely based onthe priorities outlined in the Plan. The priority development objectivesare: (a) reducing population growth from the present rate of 2.6% per annum;(b) achieving foodgrain self-sufficiency, (c) eliminating mass illiteracy;and (d) accelerating domestic energy development. IDA has assisted theGovernment in preparing the Medium-Term Foodgrain Production Plan that aimsat increasing foodgrain production. With appropriate producer incentive,resources to provide needed inputs to farmers, and an expanded role for theprivate sector in the provision and servicing of modern agricultural .mple-ments and inputs, foodgrain self-sufficiency could be achieved by the end ofthe decade. Given Bangladesh's high illiteracy rate (74%), the Plan'semphasis on primary education is well founded; under the Plan the objectiveof achieving universal primary education has been adopted. P--ospects forachieving the objectives of educational expansion and improved foodgrainavailability would be improved by success in reducing the population growthrate; this will require more determined efforts than have been made thus far,especially with regard to birth control efforts which have suffered from poorimplementation and have had only limited success. The Government hasrecently taken steps to coordinate its birth control activities and tostrengthen training programs for field staff.

13. Early development of the country's energy resources, particularlynatural gas, is very important since imported petroleum at present preemptsabout three-quarters of merchandise export earnings. Since the requiredinvestments are likely to be capital-intensive and lumpy, they need to beproperly planned under a phased priority program. The Government is nowendeavoring, with Asian Development Bank (ADB)/United Nations DevelopmentProgramme (UNDP) assistance, to formulate an appropriate energy sectorinvestment program. The implementation of appropriate energy conservationmeasures and the setting of energy prices at economically efficient levelswill also be critical to the success of the energy development program.

14. There is an urgent need to address the growing problems of ruralpoverty and unemployment. Fifty percent of the rural population is function-ally landless, and the employment situation has deteriorated significantlysince the 1970s, with only 70% of new entrants to the labor force findinggainful employment. Increased foodgrain production alone will not suffice toresolve the unemployment and income problems, in view of the large projectedgrowth of the work force. Measures must be taken simultaneously, therefore,to develop other sectors, such as fisheries, livestock, forestry and non-foodgrain crops, and to strengthen the industrial sector -- especially small-scale and cottage industries -- so that incomes generated in one subsectorwill generate effective demand for the output of others.

15. As noted in paragraph 6, the Government's New Industrial Policy hasgiven a greater role to the private sector in industrial development,increased the incentives for export industries, and liberalized the importregime. However, there remains an urgent need to strengthen the developmentfinance institutions, whose financial structure has been undermined by an

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increasing problem of debt a--rears, and to rationalize industrial incentives.The Government is now examin.ng the future role of the development financeinstitutions in the light of recent consultants' studies. An ongoing programof IDA-financed studies is e;pected to lead to a program of action for therationalization of a broad range of trade and industrial policies.

16. The Government is now preparing its Third Five Year Plan (FY86-90).WhiLe the development priori:ies are not likely to change significantly fromthose incorporated into the Second Five Year Plan, the size of the futurepubLic investment program wi_l need to be set at a level consistent with areaListic assessment of prospective external and domestic financialresources. As external assistance will continue to be severely constrained,there is a clear need for a sustained and intensive domestic resource mobi-lization effort to raise tax revenues, increase the level of cost recovery,reduce subsidies, and improve the financial performance of publicenterprises. In the medium term, the tax base will have to be broadened toreduce its present dependence on import duties, thereby improving the elas-ticity of the tax system.

17. Realization of the Government's levelopment objectives will alsorequire significant improvements in development administration. There is acritical need to strengthen project implementation, streamline administrativeprocedures, and improve decision-making processes. Recognizing that localgovernment bodies can play an effective role in the development effort, theGovernment has decided to decentralize a number of planning and administra-tive functions to the upgraded Upazila (Sub-District) level. The implementa-tion and impact of this policy will need to be closely monitored.

PART II - BANK GROUP OPERATIONS IN BANGLADESH

18. Cumulative Bank Group commitments to Bangladesh total US$2,977.40million. This figure includes reactivation of eleven credits (US$154.41million) made to Pakistan before 1971 and a consoLidation loan (US$54.90million) and a consolidation credit (US$37.45 million) approved in 1975 tocover liabilities arising from projects completed prior to independence. Inaddition to these, the Bank has approved eighty new credits since Bangladeshbecame a member in 1972. In terms of total commitments, approximately 23.6Xof IDA lending has been for agriculture, irrigation and rural development;11.9% for industry; 10.6% for energy; 7.2% for transportation andtelecommunications; 7.7% for education and technical assistance; 2.2% forurban infrastructure; 1.6% for population control; and 35.2% for importsprogram support. Apart from increased emphasis on energy development, thecomposition of IDA lending over the next several years is not expected tochange markedly. On June 18, 1976, Bangladesh became a member of IFC andthree investments have been approved to date.

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19. IDA's country assistance strategy is designed to support theGovernment's priority development objectives set out in the Second Five YearPlan and summarized in paragraph 12 above. IDA's lending has emphasizedagriculture, with particular importance attached to increasing food produc-tion through augmenting the supply of essential inputs such as irrigationequipment, fertilizer and improved seeds, the development of extensionservices, research programs and rural cooperatives, the provision of agricul-tural credit, and the promotion of input and output pricing policies thatallow adequate incentives to farmers Lo increase production. IDA has alsosupported the Government's efforts to encourage greater private sector par-ticipation in the supply and distribution of agricultural inputs. IDA'slending program will place increasing emphasis on agricultural diversifica-tion through increased production of fish, livestock, and forestry products.

20. An inadequate supply of energy is one of the major constraints toeconomic growth in Bangladesh. IDA's lending for power and gas investmentsis designed to expand the use of natural gas in substitution for importedoil, promote conservation measures and more efficient energy use, andencourage further gas and oil exploration. IDA is alsc financing projects toexpand the country's rural electrification system and power generation andtransmission capabilities.

21. In the education sector, IDA's lending strategy focuses on twoareas -- primary education and skills development. Lending for primaryeducation supports the national goals of achieving universal primary educa-tion and reducing illiteracy, expanding access to education, and upgradingquality. Projects for vocational and technical education promote the train-ing of craftsmen, technicians, and engineers.

22. In order to alleviate the severe economic and social pressurescreated by the extremely high population density and the continuing popula-tion increase, IDA, together with other donors, is assisting the Governmentin implementing an accelerated family planning program. With Bangladesh'surban population expected to increase from about 16 to 18 million in 1985 tobetween 35 to 40 millior. by the year 2000, future IDA activities will alsohelp the Government to address the problem of providing low-cost shelter andinfrastructure services to the urban poor; IDA is already financing water andsanitation improvements in Chittagong and Dhaka.

23. To achieve a higher and sustained level of growth, provide productiveemployment for a rapidly growing work force, and improve the country's exter-nal trade and payments position on a sustained basis, industry wilL need toplay a more pivotAl role in the economy. IDA's lending program seeks toassist the Governnment in: (a) increasing efficiency in public secturenterprises; (b) reforming trade, industrial, and financial policies;(c) strengthening existing financial institutions; (d) establishing exportdevelopment Programs; and (e) promoting ruraL and small-scale industries.In addition 1 assistance under program credits (see paragraph 25), IDA hassupported projects to increase fertilizer production, rehabilitate the juteand textile industries, strengthen the development finance institutions, andpromote small-scale industries.

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24. In the transport sector, IDA has focused an the development of theinland water transport system because of the importance of river transport inthis deltaic country. The road network in 3angladesh is extensive, but theroads are in poor condition and are inadequately maintained. IDA's futurelending program will concentrate primarily on maintaining and upgradingexisting roads.

25. Because of the urgent need for sustained transfer of substantialfinancial resources, the assistance strategy for Bangladesh provides that asignificant proporcion of annual lending be in the form of program credits.In addition to providing much-needed foreign exchange and local counterpartfinancial support, annual program credits have provided a useful vehicle foraddressing a wide range of sectoral and macro-economic issues. Due toBangladesh's savings/investment gap, IDA credits for project financing con-tinue to cover all foreign exchange costs and a significant portion of localcurrency expenditures. Given the severe limits on external concessionaryassistance, IDA has emphasized the need for Government to mobilize moredomestic financial resources and to utilize these resources more efficiently.IDA is promoting Government policies to set public utility prices at economi-cally efficient levels, to mobilize domestic financial resources, and toimprove the efficiency of public sector institutions.

26. Project implementation is hampered not only by a shortage of domes-tic financial resources, but also by weak development institutions, limitedmanagerial capacity, and cumbersome bureaucratic procedures. IDA, in con-sultation with other donors, is engaged in a continuing dialogue with theGovernment on ways to improve project implementation. In support of broaderinstitutional reform, IDA is: (a) providing technical assistance for projectpreparation and implementation; (b) financing projects to train civil ser-vants and other managerial and technical personnel; and (c) encouraging theGovernment to introduce administrative reforms and improve staff salaries andincentives. Despite progress in implementing reforms, which includeadministrative reorganization and improvements in financial planning andbudgetary procedures, adequate institutional capabilities can be achievedonly over the long term. IDA chairs the annual Bangladesh Aid Group meetingwhich provides a forum for aid donor consultation and IDA's ResidentRepresentative chairs regularly schedulec donor meetings in Dhaka to exchangeviews on policy issues, project implementation, and aid coordination.

PART III

Introduction

27. In Bangladesh, per capita energy consumption, which is among thelowest in the world, is estimated at about 90 kilograms (kg) of oil equiv-alent annually, of which about 60% is derived from non-commercial sourcessuch as crop residues and animal wastes. Consumption of commercial energy isestimated at only 36 kg of oil equivalert per capita, about one-sixteenth of

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the corresponding world average and one-tenth of the average for low-incomecountries. While natural gas now accounts for 52% of total commercialprimary energy, the country continues to rely on a reLatively large levelof oil imports which absorb about 60% of the country's total export earnings.The main thrust of the Government's energy policy is to reduce dependence onoil imports by accelerating the development of domestic gas resources and byincreasing the economy's absorptive capacity for gas. There are, however,technological and economic limits to the substitution of natural gas forliquid hydrocarbons. Accordingly, the Government is also attempting tointensify the search for oil and has undertaken, partly with IDA'sassistance, a program of seismic surveys and geological studies as the basisof a promotional effort to attract participation by international oil com-panies and accelerate the pace of exploratory drilling.

Resource Endowment

28. Natural gas and limited hydropower are the only sources of commercialprimary energy available within the country. Some coal and peat depositshave been located, but are presently not considered economic to mine.Spurred by the promising prospects offered by the vast Bengal basin, thesearch for oil started as early as 1908, but has been unsuccessful. Oilexploration efforts, however, have led to the discovery of substantial reser-ves of natural gas. Thirteen gas fields, twelve onshore and one offshore,have been discovered, all located east of the Jamuna River which divides thecountry into eastern and western zones. Utilization of natural gas has beenconfined to the eastern zone. Exploration is continuing in the western zone,but results so far have been inconclusive.

29. About 60% of the total energy used in Bangladesh is supplied fromtraditional sources such as crop residue and animal wastes. The energyprovided by biomass sources is estimated to be about 5 million tons of oilequivalent (toe) annually. As in other developing economies, the level ofutilization of these forms of energy is high, but their end-use efficiency islow, typically 10-152. While in the future the relative share of biomassfuels within the overall energy balance will decline, Bangladesh does nothave the resources to sustain a major shift to commercial energy and thedemand for traditional sources will continue to increase with populationgrowth.

Electric Power

30. A key Government objective is to improve and expand the supply anddistribution of electricity. The expanded use of natural gas for the gener-ation of electricity is central to this effort. Bangladesh has a relativelysmaLl electric power generation and distribution system that is divided intotwo main grids covering the eastern and western zones, respectively. In theeastern zone, gas is available for power generation and substantial gas-basedcapacity additions are being planned. The western zone relies on importedfuel and diesel oil. The two grids have recently been linked by a 132 KVeast-west interconnector across the Jamuna River which permits the substitu-

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tion of oil-fueled generation in the west by gas-fueled generation from theeast. Overall, about 25Z of all hydrocarbons used in Bangladesh are con-verted into electric power.

Natural Gas

31. Gas Reserves. Estimates of proven, possible, and probable reservesfor the eastern gas fields were made recently by consultants (DeGolyer andMcNaughton [D&K] of the United States). Gas-in-place is estimated at about11 trillion cubic feet (TCF). Condensate reserves are estimated at 18 mil-lion barrels (bbl). Due to a combination of factors, gas reserve estimatesare characterized by the very low ratio of proven reserves (4.0 TCF) toprobable (9.8 TCF) and possible (9.6 TCF) reserves. In each of three fields(Beani Bazar, Kailashtila, and Kamta), only a single well has been drilled.In several others, the wells are very close together and do not penetrate allthe producing zones or fail to reach the gas-water contact. In aLl fields,except Beani Bazar, the configuration of the reservoirs is only sketchilyknown. Uncertainty regarding the level of existing reserves makes it impos-sible for the Government to formulate a long-term development strategy forthe sector. While estimates show abundant gas reserves in relation to cur-rent production levels (about 85 billion standard cubic feet [BCF] annually),they are not large when compared to the country's population and theanticipated level of demand, which is expected to claim all sustainableproduction from existing recoverable reserves by the late 1990s. There is,therefore, an urgent need to initiate a professionally-designed appraisalprogram to assess reserves. As a first step, detailed high-resolution seis-mic surveys of the major gas fields are being undertaken as a part of theIDA-financed Petroleum Exploration Promotion Project (Credit 1402-BD) (seeparagraph 40) to firm up the reservoir structure maps, provide a basis forlocating future wells to be drilled, and assist in identifying gas-watercontacts. A critical follow-up would be a program of appraisal drilling. Amore precise assessment of reserves is also required before decisions can bemade on the Government's proposed construction of a pipeline across theJamuna river (see paragraph 35).

32. Gas Production and Distribution. Six gas fields (Titas, Habiganj,Bakhrabad, Chhatak, Sylhet, and Kailashtila) are currently in production.Average daily output is about 250 million standard cubic feet (MMCF) of gasand 300 bbl of condensate. The existing production and distributionfacilities fall under three separate systems: (i) the Titas system coveringthe greater Dhaka area and supplied from the Titas and Habiganj gas fields;(ii) the Bakhrabad system covering the southeastern part of the country,including the Chittagong area, and supplied from the Bakhrabad gas field; and(iii) the Jalalabad system covering the Sylhet area and supplied from theChhatak, Sylhet, and Kailashtila gas fields. Cumulative production as of theend of June 1984 was about 0.6 TCF, most of which came from Titas, the onlyfield to be significantly exploited. Planned investments would result in theintegration of the three systems into one grid, allowing greater flexibilityin field management and increased reliability of supply.

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Gas Demand/Supply Outlook

33. Approximately two-thirds of future gas requirements are expected tooriginate from capacity additions in the power and fertilizer sectors. Peakdaily demand is expected to grow from 340 MMCF in 1983/4 to close to 1,000MMCF by 1992/93, i.e., at an average annual rate of 12 percent. With theslow development of industries in Chittagong, the growth in demand isexpected to originate mostly in the Titas Franchise Area (TFA), whichincludes Dhaka and the surrounding areas and constitutes the economic centerof the country. Existing capacity in the Bakhrabad and Jalalabad systems isexpected to remain sufficient to meet projected demand in their respectivefranchise area until the end of the decade. In sharp contrast, the scheduledprogram for drilling at Titas and Habiganj will barely meet demand in the TFAfor 1985 and Leaves unmet a large portion of projected demand for the follow-ing years. Peak daily demand in the TFA is expected to grow from about 290MMCF in 1983/84 to about 470 MMCF in 1987/88 and 700 MMCF in 1992/93.Petrobangla is counting on three additional supply sources to meet thisincremental demand beyond 1985: (i) a surplus from the Bakhrabad gas fieldto be transferred to TFA through a pipeline being constructed with AsianDevelopment Bank (ADB) financing; (ii) additional wells at Titas and Habiganjto be drilled with ADB financing and the proposed project (see paragraph 43);and (iii) gas from the eastern fields (Kailashtila, Beani Bazar andRashidpur) to be made available by a new North-South pipeline under theproposed project (see paragraph 44). While use of gas from the Bakhrabadfield is justified to overcome the current shortage in the TFA, it would benecessary, in order to safeguard future supplies to the Chittagong area, toprove reserves at Bakhrabad of at least 2.6 TCF prior to making arrangementsto transfer gas to TFA on a long-term basis (Section 4.04(b) of the ProjectAgreement). Pending evaluation of the Bakhrabad gas reserves, there would bea joint Government/IDA annual review of the supply/demand situation to ensurethat utilization of gas from Bakhrabad in the TFA remains within prudentlimits (Section 4.04(a) of the Project Agreement) so as to avoid prejudicingthe needs of industrial users in the Chittagong area.

34. Gas Utilization. Use of natural gas was initially confined to a.ertilizer plant and cement factory in the Sylhet district where two smallfields, Chhatak and Sylhet, were discovered during the 1950s. Gas productionwas stepped up following the discovery during the 1960s of considerablylarger gas reserves at Titas and other fields. Output has increased steadilyover the last decade, growing at an annual average of 14% from 29 BCF in1975/76 to 81 BCF (2.0 million toe) in 1983/84. Although fertilizer produc-tion and power generation account for the bulk of consumption, gas distribu-tion to private commercial and domestic consumers has been increasing. Gasdistribution networks have been, or will shortly be, installed in most urbanareas located near transmission lines. Distribution Lines servicing clustersof small industrial units (such as brick kilns and tea drying facilities)promise attractive benefits and have been given high priority by theGovernment.

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35. Efforts are underway to promote expanded and alternative gas uses tomaximize the absorptive capacity of the economy for natural gas. Technicalassistance will be provided under a Joint UMDP/Bank Energy Sector ManagementAssistance Program to review the economic viabiLity of distributing naturalgas to potential users in rural areas. The Government gives high priority tothe transfer of gas across the Jamuna River and has financed a study toascertain the feasibility of such a scheme. IDA has agreed in principle tosupport further analytical work on the economic viability of such aninvestment, which the Government now envisages would be coupled with a moreambitious road-bridge project. Alternative uses of natural gas and by-products such as liquefied petroleum gas (LPC) and compressed natural gas(CNG), are also being investigated. The feasibility of setting up a plant toextract LPG from natural gas is currently being studied under a Canadiantechnical assistance grant and a pilot study of CNG utilization in roadtransport is being financed by IDA under the Bakhrabad Gas DevelopmentProject (Credit 1091-BD) (see paragraph 40). Rail and river transport alsooffer attractive possibilities for the utilization of CNG. If appraisal ofthe gas fields and further exploration confirm the prospects of Bangladesh asa major gas producer, several export options also could be considered. A gasutilization study, undertaken as part of the Energy Efficiency and RefineryRehabilitation Project (Credit 1357-BD) (see paragraph 40), would analyze andcompare the various options available for efficient industrial uses ofnatural gas, especially those with export potential. Given the large amountof capical required, any export option would require support by privatefinancing. IFC is assisting in the preparation of two gas-based exportprojects in Chittagong (urea and methanol).

36. Pricing of Natural Gas. The price of natural gas is controlled bythe Government, with about 70Z of consumer prices being channeled directly tothe nationaL budget by way of excise duties. Gas pricing has been one of theprincipal policy ingredients of IDA's economic dialogue with the Government.The Government agrees that gas prices and excise duties should be fixed atlevels to ensure that: (i) sale prices are higher than the long-run marginalcost (LRMC) of natural gas after taking into account an allowance fordepletion; (ii) the revenues from gas operations are sufficient to cover theoperating expenses and debt service requirements of the entities producingand distributing the gas and contribute substantially towards futureinvestments; and (iii) gas tariffs mobilize resources for the economy.

37. Consultants appointed under the Bakhrabad Gas DeveLopment Project(Credit 1091-BD) have estimaced the LRMC of producing and transmittingnatural gas in the eastern zone for large consumers with high and stable loadfactors at Tk 15.7 per thousand standard cubic feet (MCF) for power andfertilizer and Tk 19.3/MCF for other industrial consumers (mid 1984 prices).LRMC for small users would be higher due to relatively high investments fordistribution networks and sharper peaking of demand. Estimates of the deple-tion premium vary widely, depending on the number of years expected to elapsebefore gas reserves are fully committed. The present high uncertaintiesabout reserve levels make it difficult to arrive at firm estimates and,hence, to frame a Long-term pricing policy on strictly economic assumptions.

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Assuming no additional reserves are identified, the depletion premium isestimated at Tk 13.6/MCF (US$0.52) and the average economic cost of supplyinggas to large consumers at Tk 29.8/MCF (US$1.15) compared to a price ofTk 16.3/MCF (US$0.63) at present. The depletion premium, however, may needto be adjusted to reflect the results of future exploration; tariff adjust-ments should also take into account the fact that sharp increases in gasprices could be disruptive to the economy. Accordingly, under the proposedproject the Government would: (i) increase the average price of natural gasby at least 20X by July 1, 1985 (as a condition of credit effectiveness);(ii) increase such price by at least 20% over the new price by July 1, 1986;and (iii) beginning FY88 and thereafter, make necessary adjustments to gasprices in accordance with a program to be dgreed with IDA based on the long-run marginal cost of extraction, transmission, and distribution plus deple-tion allowance (Sections 4.05 (a), (b), (c) and 6.01(f) of the DeveLopmentCredit Agreement). Based on the results of the proposed field appraisalprogram and of future gas exploration efforts, the Government would peri-odically review with IDA the level of the depletion premium to be used incalculating future gas prices (Section 4.06 of the Development CreditAgreement).

38. Sector Management. Under Presidential Order 27 of 1972, theBangladesh Oil and Gas Corporation (Petrobangla) was established as the statecompany entrusted with the exploration and production of oil, the import ofoil, the refining and marketing of petroleum products, and the exploration,production, transmission, and distribution of natural gas. In 1976, thefunctions relating to the import of crude oil and to the refining and market-ing of petroleum products were transferred to a newly-established statecompany, the Bangladesh Petroleum Corporation. The production, transmission,and distribution of natural gas are performed by five regional operatingcompanies under the supervision and control of Petrobangla. As part of theproposed project, the Government would undertake a major reorganization ofPetrobangla and its affiliated operating companies (see paragraph 47).

IDA's Role and Lending Strategy in the Petroleum Subsector

39. Within the petroleum subsector, IDA has focused its dialogue withGovernment on a number of key issues, including the need to appraise thediscovered gas fields to optimize their development, to attract privateinvestors for oil exploration, and to optimize the use of available energysources through appropriate energy pricing and conservation measures.Specifically, IDA's strategy is:

(i) to build up the capabiLity of COB to formulate adequate sectorpolicies, particularly with regard to gas pricing and to promotea more efficient operation of the public sector enterprisesthrough the provision of expert consultancies in managementand petroleum disciplines;

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(ii) to encourage the development of the subsector by introducingthe modern technology and field management procedures byencouraging alternative uses of natural gas in the agricultureand transport sectors so as to maximize the absorptive capacityof the economy for natural gas, and by supporting studies todevelop gas-based export industries; and

(iii) to support GOB's exploration efforts by financing criticalseismic surveys and geological studies and monitoring thesubsequent promotion of prospective acreage to the internationaloil industry.

40. The projects supported by IDA in the petroleum subsector havereflected this strategy. The objective of the Bakhrabad Gas DevelopmentProject (Credit 1091-BD), approved in 1980, was to make gas available toconsumers in the Chittagong area; it also included a pilot project designedto explore the potential for CNG utilization in road motor vehicles. Exceptfor the CNG pilot project component, the project has been completed and gasis being distributed to industries in the Chittagong area. The EnergyEfficiency and Refinery Rehabilitation Project (Credit 1357-BD), approved in1983, makes provision for a gas utilization study to examine the potentialfor gas use in export-oriented industries for which consultants have beenappointed. Rehabilitation of the refinery is underway and a study has beencarried out of means to improve its yield pattern. The Petroleum ExplorationPromotion Project (Credit 1402-BD), also approved in 1983, supports theGovernment's efforts to rekindle the interest of international oil companiesin petroleum exploration in Bangladesh. The project is progressing satisfac-torily and seismic surveys are being carried out. The proposed project wouldintroduce modern technology and relevant technical expertise to optimize thefuture development of the gas subsector. it would aLso include a majorinstitution-building effort designed to strengthen Pecrobangla's ability tomanage the subsector.

PART IV - THE PROJECT

41. The proposed project was appraised by a World Bank mission thatvisited Bangladesh in July 1984. A report entitled "Bangladesh - StaffAppraisal Report - Second Gas Development Project" No. 5353-BD, datedApril 5, 1985, is being distributed separately. Negotiations were held inFebruary/March 1985. The Government of Bangladesh delegation was led byMr. Shafiul Alam, Secretary, Petroleum and Mineral Resources Division.

Project Objectives and Description

42. The project would support Petrobangla's efforts to: (i) expand gassupplies in line with incremental demand expected over the medium term andproduce the country's first significant quantities of condensate;(ii) initiate an appraisal program of the main gas fields to provide a

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preliminary basis for their long-term deveLopment; and (iii) strengthen itsmanagement capability, particularly in the areas of field management andproduction planning. The project would consist of: (a) a gas field appraisaland development component; (b) a gas infrastructure component; (c) CNC pilotprojects; and (d) technical assistance and training.

Project Components

43. Gas Field Appraisal and Development. At present, since none of thegas fields has been properly appraised, recoverable reserves cannot be estab-lished accurately. Past field development methods consisted essentially ofdrilling clusters of wells around the original discovery well; as a result,it has not been possible to determine the continuity and properties of thereservoirs away from the discovery wells. Close monitoring of well perfor-mance and a rational appraisal program are required so that flow rates can beoptimized for each well, the recoverable reserves established, and therecovery potential of the fields maximized. The project would include thedrilling of two appraisal wells at Kailashtila and one at Beani Bazar and theworkover of two wells at Rashidpur which were drilled in the 1960s. Sixappraisal wells would also be drilled at the four main gas fields: one atTitas, one at Habiganj, two at Bakhrabad, and two at Rashidpur. A reservoirstudy would be undertaken for each field to provide the basic data needed toplan its future development. Where gas is found in economically produciblequantities, the appraisal wells would be completed as production wells. Toensure that future development wells are optimally located, Petrobangla wouldestablish a technical committee, with membership and terms of reference andwithin a time-frame acceptable to IDA, both to review all gas field develop-ment plans and to approve, in agreement with IDA, the location of all newwells to be drilled pursuant to such plans (Sections 4.05 and 4.06 of theProject Agreement).

44. Gas Infrastructure. The decision to build a North-South pipeline,approximately 117 miLes in length, from the Kailashtila gas field to the maingas transmission grid at Ashuganj via the Beani Bazar and Rashidpur gasfields would be confirmed following a review of the test results of theappraisal wells to be drilled at Kailashtila and Beani Bazar. The availablegeological evidence is sufficiently encouraging to warrant proceeding withthe design and engineering work for the infrastructural investment withoutawaiting the test results. However, disbuisements under the credit forexpenses incurred against infrastructure works would be subject to IDA'sapproval after satisfactory review of the test results of the appraisal wells(paragraph 3(b) of Schedule 1 to the Development Credit Agreement). Theproject would also provide for the design and installation of gas and conden-sate treatment facilities at Kailashtila, Beani Bazar, and Rashidpur and theconstruction of a condensate line, about ten miles long, from Beani Bazar toKailashtila. Although the bulk of the gas production resulting from theproject would be used by large industrial consumers, the project would alsoprovide distribution facilities to small local consumers located along thepipeline route and would provide telecommunication facilities and cathodicprotection for the pipeline.

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45. CNG Pilot Projects. A separate entity would be created by theGovernment to oversee CNG pilot projects and subsequent CNG applications,possibly for irrigation and for river and rail transport. Establishment ofthis enticy is a condition of disbursement of funds for this project com-ponent (paragraph 3(c) of Schedule 1 to the Development Credit Agreement).

46. Training and Technical Assistance. The project would include atraining component focusing on the areas where Petrobangla's weaknesses aremost critical--gas production, reservoir engineering and drilling management.Training would also be provided in natural gas engineering, pipeline con-struction and maintenance, communications, telemetering, and corrosionengineering. Depending on job classification and needs, the training wouldconsist of technical courses and assignments with companies abroad and on-the-job training. To help design, supervise, and manage the project,Petrobangla would appoint three teams of consultants for drilling management(approximately 170 man-months), reservoir engineering (approximately 160man-months), and infrastructure engineering (approximately 280 man-months).The terms of reference and conditions of employment of the drilling manage-ment and infrastructure engineering consultants would be subject to approvalby IDA and their selection and appointment would be a condition of crediteffectiveness (Section 6.01(e) of the Development Credit Agreement).

47. Reorganization of Petrobangla and Affiliates. Partly for historicalreasons, the subsector suffers from a fragmented organization which isresponsible for severe management weaknesses. As part of the proposedproject, the Government would implement a major reorganization of Petrobanglaand its operating affiliates with a view to streamlining responsibilities andenhancing the efficiency of subsector management. Petrobangla's explorationdivision would be reconstituted as a separate petroleum exploration anddrilling company. The five existing gas operating companies would bereplaced by two companies to be responsible for gas production, and gastransmission and distribution respectively. Provision would be made for thetransfer of commercial gas discoveries to the new gas production company atleast at cost (Section 4.03(b) of the Development Credit Agreement). Tocarry out the above reorganization, the Government would, by December 31,1985, submit to IDA a reorganization plan and a staffing plan for Petrobanglaand its five existing gas operating companies and implement such plans, inconsultation with IDA, by July 1, 1986 (Section 4.03(a) of the DevelopmentCredit Agreement). This proposed reorganization is expected to improve thecapability of ['etrobangla and its operating affiliates to develop effectivegas field management practices and to introduce procedures to manage theintegrated pipeline system proposed under Petrobangla's investment program.In addition, a new gas production department, satisfactory to IDA, would beestablished by July 1, 1986 for planning the future development of gas fieldsand optimizing flow rates at each producing well (Section 4.07 of the ProjectAgreement).

48. Companies' Finances. The financial viability of the new companyresponsible for gas production and the new company responsible for gas trans-mission and distribution would depend on two main factors: the level oflong-term indebtedness; and the margins allowed by the Government on gas

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sales. During negotiations it was agreed that: (i) the debt/equity ratio ofthe new gas production company would not exceed 60:40 and that of the new gastransmission and distribution company would not exceed 70:30 (Section 4.02(b)of the Project Agreement); (ii) the margins left to the two companies ontheir gas sales would be sufficient to assure that adequate internally gener-ated funds are available to meet their debt service requirements and currentexpenses, maintain an adequate working capital position, and finance areasonable proportion of their future investment programs (Section 4.02(d) ofthe Project Agreement); and (iii) the two companies would maintain theiraccounts receivable at not more than three months of gas sales (Section4.02(e) of the Project Agreement). FinanciaL projections indicate that, onthe basis of the planned gas price increases (see paragraph 37), the newcompanies would generate adequate profit levels and taxable incomes in allyears, except in the case of the new production company which would incur aloss in FY88 before revenue from condensate production starts accruing.Consolidated accounts, investment plans, and projected financial statementsfor each of the new companies would be submitted to IDA within 18 months oftheir incorporation. (Section 4.03 of the Project Agreement).

Project Implementation

49. Petrobangla would establish a special Project Implementation Unit(PIU) within its own organization. Separate project accounts for each com-ponent would be maintained by the PIU so that the assets being acquired aspart of the project (and the corresponding liabilities) could be transferredto the corresponding operating company upon completion of each component.The establishment of the PIU and the appointment of a Project Director andother key staff would be a condition of credit effectiveness (Section 6.01(d)of the Development Credit Agreement and paragraph I of Schedule 2 to theProject Agreement). No contract for works would be awarded for any of thedrilling, surface facilities, and pipeline components until the land orright-of-way required for the particular component has been acquired. Allkey decisions to be taken by Petrobangla with respect to the wells to bedeveloped under the project, including their location, target depth, anddrilling and preliminary completion programs, would be subject to priorreview by, and satisfaction of, IDA (paragraphs 3 and 4 of Schedule 2 to theProject Agreement).

Project Costs

50. The proposed project is estimated to cost an equivalent of US$221million, excluding interest during construction, but including duties andtaxes amounting to about US$7.3 million. Physical contingencies areestimated at 15Z of base cost estimates which are expressed in 1984 prices.Price contingencies are based on annual escalation rates of 8Z in 1985, 9% in1986, 1987 and 1988, and 7.5% in 1989 for foreign costs, and a straight 10%per annum for local costs.

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Financing Plan

51. IDA assisted the Government in putting together a satisfactoryfinancing plan for the project, in which bilateral aid funds play an impor-tant role. CIDA has aereed in principle to finance the drilling contract(including rig mobilization and drilling crew), the reservoir studies, andthe portion of the training program related to reservoir engineering and gasproduction management. ODA has agreed in principle to finance the surfacefacilities related Lo the Kailashtila gas field, the local distributioncomponent, the remaining portion of the training component (pipeline manage-ment and accounting), and technical assistance in accounting and managementinformation systems. The Netherlands has agreed in principle to finance thesurface facilities related to the Beani Bazar and Rashidpur gas fields. UNDPhas agreed in principle to finance the drilling management consultants andthe infrastructure engineering consultants. The cofinanciers have alsoindicated their willingness to consider financing local costs of the respec-tive packages to be funded by them except for certain ineligible costs suchas taxes and duties, land acquisition, and overhead. The financing plan is:

Local Foreign Total(US$ Million)

IDA 6.4 103.6 110.0CIDA (Canada) 4.2 31.7 35.9ODA (United Kingdom) 8.2 19.4 27.6The Netherlands 0.6 8.0 8.6UNDP -- 10.9 10.9Government of Bangladesh 28.0 -- 28.0

Total project costs 47.4 173.6 221.0

The IDA credit would cover about 51% of total project costs net of duties andtaxes. Aggregate external financing would cover 90% of total project costs,less taxes and duties. Approval of the Project Proforma 1/ by the Governmentwould be a condition of Credit effectiveness (Section 6.el(a) of theDevelopment Credit Agreement). The Government would also be required tofulfill all conditions precedent to the effectiveness of the funding agree-ments of the cofinanciers before the IDA credit is made effective (Section6.01(b) of the Development Credit Agreement).

52. Proceeds of the IDA credit (US$73.1 million) and the funds of theother cofinanciers (US$41.3 million) to be used for the foreign exchangecosts of the development component of the project (US$114.4) would be onlentto Petrobangla at a rate of 13% per annum for a period of 15 years, includinga grace period of five years. Petrobangla would bear the foreign exchange

1/ An internal Government document, the approval of which is a prerequi-site for the release of funds and the hiring of staff.

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risk. The onlending terms are in line with those applicable to industriallending in Bangladesh and would result in a positive real rate of interest.The local cost portion (US$37.1 million) of the development component of theproject and the costs of the field-appraisal component (US$65.6 million)would be passed on to Petrobangla as equity totalling US$102.7 million (IDA,US$33 million; Government, US$28.0 million; and other cofinanciers, US$41.7million). A condition of effectiveness would be that the Subsidiary LoanAgreement between Government and Petrobangla has been executed (Sections 3.01(b) and (d) and 6.01(c) of the Development Credit Agreement). US$3.9 millionwould be passed on as equity to the new CNG entity to finance CNG pilotprojects (Section 3.01(e) of the Development Credit Agreement).

Procurement

53. Four main single-responsibility contracts are envisaged under theproject for pipelaying, surface facilities (two contracts), and drilling.All goods and services financed from the proceeds of the IDA credit would beprocured under ICB in accordance with IDA's Procurement Guidelines with theexception of items of a specialized nature available from a limited number ofsuppliers such as well services and items costing less than US$100,000 equiv-alent and therefore not of sufficient value to attract wide internationalcompetition. Such items may be procured through limited international bid-ding (LIB) up to an aggregate of US$5.5 million (including US$500,000 for theCNG component). In addition, contracts for civil works under the CNG com-ponent will be awarded on the basis of local competitive bidding (LCB).Goods or equipment available from local manufacturers would be granted thenormal 152 preference or the equivalent of the customs duty, if less, in bidevaluation. Qualified domestic construction contractors would be granted a7.5% preference (Schedule I to the Project Agreement).

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Procurement Table /a(US$ miLlion)

Procurement MethodCo- Total

Project Component ICB financing /b Other /c N.A./d Cost

Gas Field Appraisal.and Development

Site Preparation - - 4.6 - 4.6

Rig Costs - 30.7 0.1 - 30.8

Well Services - - 19.8 - 19.8(19.5) (19.5)

Well Materials & Consumables 22.5 - 3.6 3.2 29.3(22.5) - ( 2.7) (25.2)

Drilling Supervision 4.3 - - - 4.3

Subtotal 26.8 30.7 28.1 3.2 88.8(22.5) ( - ) (22.2) ( - ) (44.7)

Infrastructure

Surface Facilities - 21.5 0.1 0.9 22.5

Pipe and Ancillary Equipment 28.2 - 3.8 2.9 34.9(28.2) (3.0) (31.2)

Pipelaying Contract 37.1 - 6.9 - 44.0(30.2) (30.2)

Distribution Lines - 11.7 0.1 0.3 12.1

Engineering 6.6 - - - 6.6

Subtotal 71.9 33.2 10.9 4.1 120.1(58.4) (- ) ( 3.0) (-) (61.4)

Consultancies & Training 3.1 8.2 0.8 - 12.1(3.1) - (0.8) - ( 3.9)

TOTAL 101.8 72.1 39.8 7.3 221.0( 84.0) ( - ) (26.0) ( - ) (110.0)

/a The figures in parentheses are the respective amounts to be financedfrom the proceeds of the IDA credit.

/b According to the procurement procedures of each cofinancier.7T Force account, LIB and LCB.7J Customs duties.

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Disbursement

54. Disbursement would take place over a period of five years.Disbursement for goods and equipment would be made against 100% of the for-eign expenditures of items directly imported, or 100% of the ex-factory costif manufactured locally, and 80% of total expenditures for items procuredlocally off-the-shelf. Disbursement for well services would be made against1002 of the foreign expenditures and 80% of the local expenditures. Exceptfor the CNG component, disbursement would be against 100% of foreign expendi-tures for civiL works; for the CNG component, it would be against 100% offoreign expenditures and 80% of local expenditures. IDA would finance 100%of all consultant services. In order to facilitate disbursement of the IDAcredit, a Special Project Account would be established in the Bangladesh Bankon terms and conditions satisfactory to IDA (Section 2.02(b) of theDevelopment Credit Agreement). The inLtial deposit into the SpeciaL Accountwould be US$5 million. Withdrawals from and subsequent replenishments of theSpecial Account would be made according to the provisions of ScheduLe 4 tothe Development Credit Agreement.

Accounts and Audits

55. Petrobangla and its operating companies are required by law toprepare full accounts of their financial position and the results of theiroperations. The companies also follow adequate internal control proceduresand are subject to two types of external audits: (a) external audit by afirm of chartered accountants, after which the balance sheet and profit andloss account of each entity are presented to the general meeting of thestockholders at least once during each calendar year; and (b) the Governmentcommercial audit submitted to the concerned Ministry of the Government.Petrobangla and its affiliated companies would supply IDA with copies oftheir financial statements, including the project accounts, duly audited bythe Comptroller and Auditor General, and of the independent corporateauditor's opinion, no later than nine months after the end of each fiscalyear (Section 4.01 of the Project Agreement). Similar provision would alsoapply for the new CNG entity (Section 4.01 of the Development CreditAgreement).

Environmental Impact and Safety

56. While drilling, production operations, and pipeline construction poseminimal hazards to the ecology, the proper handling of condensate and liquidwastes is a topic of concern. All condensate and other liquid products wouldbe kept in closed systems and all safety precautions taken according tonormal industry field practices. Although the water separated from thecondensate and gas flows may be saline, test data indicate that no specialdisposal measures are warranted. However, hydrocarbon liquids/waterseparators (fire traps) would be installed near storage facilities to avoidany mishap caused by the drainage of liquids. The gas pipeline would beburied and all drainage and other surface features restored after

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construction. Compensation would be made for any crop damage or loss of landresulting from the project. Although pipelines generally have a good safetyrecord, there is a danger that leaks could create fire hazards. These riskswould be minimized by strict adherence to internationally accepted safetycodes in design and installatic, application of cathodic protection on thepipelines, and the installation of a telecommunication system. The necessaryequipment would be Drovided as part of the project. Moreover, operationalstaff wOL'd be trained in safety and preventive maintenance and required toadhere to . strict schedule of safety drills.

Project Justification

57. The development component of the project would generate substantialadditional quantities of natural gas and condensate. On the basis of conser-vative estimates of future production levels, the project is expected toproduce about 0.9 TCF of gas and 8 million bbl of condensate over a twenty-year period (excluding any production from the appraisal wells at the maingas fields). Although additional gas supplies could be made available in theDhaka area at a lower investment cost by accelerating the development of theTitas, Habiganj, and/or Bakhrabad gas field, the proposed project representsthe most attractive supply option available because of the additional revenuefrom condensate (about US$20 million per annum) which would more than offsetthe additional cost in transmission infrastructure. There is no unambiguousmethod to evaluate the project benefits. Depending on the way gas sales arevalued, and indirectly on the price elasticity of gas consumption, estim.atesof the internal rate of return for the development component of the projectrange from 25% when gas is valued at its projected sale price to 90% when itis valued on the basis of the thermal equivalence of the assumed replacedsource of energy.

58. The benefits to be derived from the appraisal drilling program, whilenot easily quantifiable, would be tangible and of critical importance to thesector. The program would provide the basis for determining the optimaldeliverability of each field by assessing the production rates and number ofwells necessary to maximize the recovery potential. Moreover, each appraisalwell is expected to be completed as a producing well, thereby contributing tothe gas supply available to consumers.

Project Risks

59. The proposed project would involve the usual risks associated withappraisal drilling. The main risk is that possible discontinuities in reser-voir lithology could cause one or more of the appraisal wells not to producecommercial quantities of gas; however, the main reason the appraisal drillingprogram is required at this stage is to establish whether or not such discon-tinuities exist. The risk of a dry well should be viewed as the normal costto be carried in order to optimize reservoir drainage and maximize theultimate recovery of the fields.

-23-

PART V - LEGAL INSTRUMENTS AND AUTHORITY

60. The Development Credit Agreement between the People's Republic ofBangladesh and the Association, the Project Agreement between the Associationand Petrobangla and the Recommendation of the Committee provided for inArticle V, Section l(d) of the Articles of Agreement are being distributed tothe Executive Directors separately.

61. Special conditions of the credit are listed in Section III of AnnexIII. Additional conditions of effectiveness of the proposed credit include:(a) approval of the Project Proforma (Section 6.01(a) of the DevelopmentCredit Agreement); (b) fulfillment of all conditions precedent to the effec-tiveness of the Funding Agreements of the other financiers (Section 6.01(b)of the Development Credit Agreement); (c) execution of the Subsidiary LoanAgreement between the Government and Petrobangla (Section 6.01(c) of theDevelopment Credit Agreement); (d) establishment of the ProjectImplementation Unit and appointment of the Project Director and other keystaff (Section 6.01(d) of the Development Credit Agreement); (e) appointmentof drilling management and infrastructure engineering consultants (Section6.01(e) of the Development Credit Agreement); and (f) an average increase of20% in the price of natural gas by July 1, 1985 (Section 6.01(f) of theDevelopment Credit Agreement).

62. I am satisfied that the proposed credic would comply with theArticl.!s of Agreement of the Association.

PART VI - RECOMMENDATION

63. I recommend that the Executive Directors approve the proposed Credit.

A. W. ClausenPresident

Washington, D.C.April 11, 1985

-24-ANNEX I

T A B L E 36 Page 14NMLGDASH - tCOC7L INDICATORS IMTA SNRTWICRANO EEERItNCZ C0R1 (NVECIT AWAClR)

HNOT (HOYT RtCCT ISTIATO) lbREtCET Low INCOIC MIDDLE INCO1

isaotk iYJoLk- ETDziAmTE ASIA 6 PACIFIC ASIA 6 PACIFIC

AURA (TUNUANS EQ. O)TOTAL 144.0 144.0 144.0ACRICULTURAL 94.h 97.0 97.4

GIW PCAPtOA C(UES) 40.0 60.0 140.0 278.6 1091.2

(KILOGX M OIF OIL CQUIVALENT) 20.0 35.0 272.0 567.3

wvnAnou AND VITAL mTnncuPOPULATION.NID-YEAR (THOUSAN) 53491.0 68117.0 92859.0URIAN POPULATION (t OF TOTAL) 5.2 7.6 11.5 21.7 34.7

POPULATION PROJECTIONSPOPULATION IN YZAR 2000 (HELL) 156.7STATIONARY POPtULATION CMILL) 454.1POPULATION MOHENTIBI 1.9

POPULATION DENSITYPER SQ. cI. 371.5 473.0 629.6 166.6 261.9PER SQ. Kl. ACRI. LAND 565.3 702.S 931.0 345.5 1735.1

POPULATION AGE STRUCTURE CE)0-14 YRS 44.3 46.3 42.8 35.3 39.0

15-64 YRS 52.5 51.1 54.9 59.8 57.665 AND ABOVE 3.2 2.7 2.7 4.3 3.3

POPULATION CROWTHt RATE (t)TOTAL 1.9 2.4 2.6 1.9 2.3URBA 3.7 6.2 6.1 4.1 4.3

CRUDE BIRTH RATE (PER THOUS) 66.6 48.0 46.8 27.1 30.1CRUDE DEATH RATE (PER 71T0D1S) 22.. 20.9 16.9 10.1 9.5CROSS REPRODUCTION RATE 3.4 3.4 3.1 1.8 2.0

FAMILY PLANNINGACCEPTORS ANNUAL (THOUS) .. 373.0 1607.0USERS (Z OF IARRIED WNEN) .. *- 19.0 /C - S2.7

FOOD AN)D 3IITEINDEX OF FOOD PROD. PER CAPITA(1969-71-100) 106.0 101.0 94.0 112.8 123.0

PER CAPITA SUPPLY OFCALORIES CZ OF REQUIREMIENTS) 67.0 85.0 J4. ) 97.7 114.4PROTEINS (GRAMS PER DAY) 44.0 43.0 42.0 56.8 57.0

OF WHICH ANIMAL AND PULSE 9.0 9.0 7.0 /d 14.9 14.1

CHILD CACES 1-41 DEATH RATE 24.9 23.0 19.4 9.8 7.2

HEfALThLIFE EXPFCT. AT BIRTH (YEARS) 43.5 44.9 48.2 60.0 60.4INFANT NORT. RATE (PER THOUS) 159.0 150.3 133.3 83.8 66.3

ACCESS TO SAFE WATER (tPOP)TOTAL .. 45.0 53.0 /e 32.9 37.0URAN 13.0 15.0 7i 70.9 54.8RURAL .. 47.0 55.0 7; 22.1 26.4

ACCESS TO ENCRETA DISPOSAL(I OF POPULATION)

TOTAL -- 6.0 5.0 It 18.1 41.3URBAN .. .. 'o.o 7 72.8 47.4RURAL _ .. .. 4.6 33.3

POPULATION PER PHYSICIAN .. t430.0 10940.0 17 3484.2 7749.4POP. PER NURSING PERSON .. 76810.0 24450.0 4793.1 2460.4POP. PER HOSPITAL BEt

TOTAL .. 7020.0 lh 4240.0 /I 1066.5 1044.2URBAN .. 830.0 W 600.0 7? 298.0 651.2RURAL .. .. 23470.0 7;b 5993.4 2594.6

ADMISSIONS PER HOSPITAL ED .. .. .. .. 27.0

MOtnSCAVERACE SIZE OF HOUSEHOLD

TOTAL .. 5.9 tl 5.8URBAN .. 6.1 jj 6.1RURAL .. 5.9 1l 5.8

AVERAGE NO. OF PERSONS/ROO0TOTAL _ _URBA .. ...

RURAL .. ..

ACCESS TO ELECT. 2 OF DWELLINCS)TOTAL ._ 3_5URBAN .. ..RURAL .. ..

-25-ANNEX I

T A A LX 3A Page 2RANOLADESH - SOCIAL INDICATORS DATA SHEETAi-iGLsAEsH mREFRENCE GROUPS ( NTED AVEkACES) /a

HOST (HOST RECENS ESTIMATE) /bRECEN LOW INCOMIE MIDDLE INCOME

10ft1 AgL ISTIMAT AS L PACIFC ASIA S PACIFIC

ADJUSTED ENROLLMENT RATIOSPRDIMRY: TOTAL 47.0 52.0 62.0 97.4 102.0

HALE 66.0 68.0 76.0 110.5 105.9FEMALE 26.0 34.0 47.0 83.7 98.2

SECONIMYt TOTAL 3.0 19.0 15.0 35.9 46.0MALE 14.0 29.0 24.0 44.6 48.7FE4422 1.0 8.0 6.0 26.8 43.1

VOCATIONAL (2 OF SECOIDARY) 1.0 0.8 14.3 2.2 17.5

PUPIL-TEACHE RATIOPRIKARY .. 45.0 44.0 38.5 31.8SECOIDARY .. 26.0 21.0 18.7 23.5

ADULT LMRACY RATE (2) 21.6 23.0 /1 26.0 Id 53.4 72.9

coaortoPASSENGER CARS/IHOUSAND POP .. 0.4 0.4 0.9 i(2.1RADIO RECIIVERS/THWUSAND POP .. .. 3.0 112.1 113.6TV RECEIVERS/THOUSAND POP . .. 0.9 15.7 50.1NEWSPAPER ("DAILY GENERAL

INTEREST") CIRCULATIONPER THOUSAND POPULATION .. .. 4.7 a& 16.2 53.9

CINEMA ANNUAL ATTENDANCCAITA .. .. .. 3.6 3.4

-m w asCZTOTAL LABOR FORCE (THOUS1 19252.0 23611.0 33221.0

FEMALE (PERCENT) 15.2 16.6 17.3 33.3 33.5AGRICULTURE (CERCE) 87.0 10.0 74.0 69.6 52.2INDUSTRY (PERCENT) 3.0 3o0 2t1. 15.3 17.9

PARTICIPATIOH RArE (PERCENT)TOTAL 26.0 34.7 35.8 42.6 38.7HALE 53.7 55.9 57.1 54.7 50.9FEMAIE 11.4 11.9 13.1 29.8 26.6

ECM IC DEPENDENCY RATO 1.3 1.4 1.3 1.0 2.1

INCONI DIS7RIUYIOPERCENT OF PRIVATE INCOMERECEIVED NY

HICHEST 57 OF HOUSEHOLDS 18.3 fh .. 1 ., .. 22.2NICHEST 202 or HoUSEHmLS 44.5 7W 64.2 71 *- 48.0LOWEST 202 OF HOUSEHOLDS 6.9 S 5. 7 .. ** 6.4LOWEST 4010? HOUJSEHOtDS 17.9 7 19.6 /l .. . 15.5

POmRT mTARGET GRUSESTMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBU . .. 139.0 Id 133.9 188.6RURAL ., .. 111.07d 111.6 152.0

ESTIMATED RELATIVE POVERTY INCGELEVEL (USs PER CAPITA)

URBAN . ...... 177.9

RURAL . . . 164.6

ESTIMATED POP. BELOW ABSLUTrEPOVERTY I[ME LEVEL (2)

URBAN .. .. 86.0 /d 43.8 23.4RURAL .. .. 86.0 Id 51.7 37.7

NOT AVAILABLENOT APMICABLE

ON T E S

/I The group averages for each indicator are population-ueighted arithmetic means. Coverage of countries among theIndlcators depends on availability of data and Is not uniform.

/b Unless otherwisa noted. "Data for 1960" refer to ay year between 1959 and 1961; "Data f or 1970" between 1969 and1971; and data for 'Most Retent Estlate" between 198D and 1982.

/c 1983-84 data; /d 1977; Le 1976; /f 1975; /& 1979; /b 1972; /i 1978; jj 1973; /k 1963; /l 1967.

JUNE. 1984

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-27-

ECOUIIClT DIU1CA4T3

Population: 95.9 oilliea (Jauary 1983)CU? Per Capita: 036116 (193)

Amount(millian 0g3 Avarage Annual Increase (C) Bbare of CUD at Markat Prices (ZI

in current prices) (in C 1Mmtnt uRiCee) (in Crrsat pries.)lIdicator _ _83 mo n6-70- nFT80 n8a n60y FT70 n7s . rts2 n83

MATIOI ACCO0ICrees daastic product LI 10,640 4.0 -0.6 5.5 3.3 100.0 100.0 100.0 100.0 100.0 100.0

Agriculture La 5.139 3.1 -1.3 3.3 2.8 59.9 56.9 62.5 53.4 46.7 46.9Induatry j 1.448 7.9 -3.2 5.4 2.7 7.7 9.6 11.3 12.7 13.8 13.1Service. La 4.033 4.9 3.3 8.1 4.2 30.1 30.0 26.2 34.0 39.6 40.0

Consumption 10.438 4.4 -0.7 6.0 2.5 92.4 92.8 99.2 95.0 103.9 9L1Groes dometic invDet_ent 1,768 10.9 -10.9 2.0 0.1 6.9 11.3 8.1 16.7 13.8 16.6Exports of goode & afe 899 0.6 -11.7 3.4 10.6 L0.O 8.3 3.0 7.B 7.7 L4Imports of goode & Ufa 2465 L.B -12.0 6.1 -0.4 9.3 12.5 10.3 22.5 25.3 23.2

Cres national savings 691 26.5 -17.7 22.1 20.0 0.9 6.1 1.0 4.0 -1.0 6.5

Amout(million BE$ Comasition of NrechaDdis. Trade t2)

in current prices) (in currant nsrice)no4 n73 n7s rEU FTl 83 Y 84

ECUADISE TRADEerebandise exports 822 100.0 IOO 100.0 100.0 100.0 100.0Primary Lk 263 40.4 31.5 29.6 30.9 33.2 32.0lanufactures 559 39.6 68.5 70.6 69.1 66.8 68.0

Nerchandise ivports 2,353 10.O 100.0 100.0 1 0L00 100.0 100.0Wood 398 44.1 42.2 30.2 13.9 19.5 16.9Petroleum 355 3.2 11.1 16.2 21.7 19.7 15.1Kechinery & equipmet 608 13.8 11.5 23.0 26.1 29.5 25.8Otber 992 38.9 35.2 32.0 38.2 31.3 42.2

nT74 n75 FT76 nn7 nY78 nw79 rsso YTO nu8 FY8

PRICE AD TEStB OF TRADE IN1DICES (1972/73-100)GDP DefLator 140.6 240.7 183.1 177.2 203.6 216.8 252.7 267.3 295.9 331.4-change rate CTkI0SS) 7.9661 8.8759 14.8521 15.4S67 15.1215 15.2228 15.4777 16.3447 20.0400 23.7600

Export priee index 104.5 119.0 103.4 108.9 126.5 160.9 198.9 175.7 147.7 154.5Import price indez 144.9 187.8 180.2 178.2 168.7 208.9 234.9 263.9 259.9 237.4TeTs of trade index 72.1 63.4 57.4 61.1 75.0 77.0 86.7 66.6 56.8 65.1

As of GOP(at current urice.)

7175 nn7? 7180 '182 nF83

PUBLIC FINAIUCECurrent revenue 5.4 9.5 10.5 11.6 10.7Current expenditure 4.5 7.8 7.7 8.4 8.5Current surplus C.) or deficit (-) +0.9 +1.7 * 2.8 + 3.2 12.2Capital expenditure 3.1 9.5 13.3 12.4 11.8Foreign financing 2.4 6.0 8.2 8.0 11.4

7160-70 '70-75 n175-80 n180-83OrUn INDICATORS

GNP growtb rate (2) 4.2 -0.6 6.5 4.0CGP per capita growth rate (Z) 1.5 -3.0 4.0 1.6

n not amailablen not applicable

l At mrket pricre.lb Raw jute, tea, and fieheries.

Feb. 27, 1985

CUIIM 21 A o.s3. ImuLIme

n pillieg -M le 0 e 8tr5t 6ri23s)

at~~~~~~~~~~~Ata lii.. £m.isi

Net exprt- of oeder -1,09 -03 -470 -D55 -946 -1,630 -1.322 -1,946 -1,623 -1,531 -2.10Dxerts of Seos 344 372 405 490 610 722 711 626 6U 822 900lurt. of gOWS -1,403 -1.275 -875 -1,349 -1 556 -2.372 -2.533 -2,572 -2,309 -2.353 -3,000

not export. of *-rvices 21 - 7 -29 -32 -20 4 13 -70 -112 -33 -90Workers' remlttauce 35 29 s0 113 143 210 379 424 628 552 433

Currat seemet brlsaca -L,003 -U2 7J1 =M -31 435-1 428 -1.52 1E07 1012 -755

Direct private tmot ..IILS lon (met) 490 497 233 393 420 580 513 50 476 563 575Crsuta & gSrat-lU flown 382 245 265 394 551 592 504 687 709 697 840Other capital floes (mot) 274 e7 17 -39 -16 14 307 253 164 -82 49

Chanse in reserves (- - iocreae) -151 53 -81 25 -124 119 24 IU2 -242 -166 291

International remurus (Md of period) 266 213 294 269 393 271 249 10 350 516 225Bosoms a muths of imports of next year 2.5 2.9 2.6 2.1 2.0 1.3 1.2 0.6 1.8 2.1 1.0

Actual

GRSS DISINmmNTTotal greos diabmrsnsnts 519 563 268 435 477 630 562 548 549

Couceeinual 458 533 244 401 456 600 341 460 43Silateral 343 390 144 262 213 273 2S7 232 213IDA 112 128 86 BB 153 152 170 158 190Otbhr mltilaterel 3 13 14 51 91 176 04 70 . 80

son-ct cus.ion l 60 30 24 35 20 30 21 S1 67IListerial 45 16 6 2 3 17 2 7 28msan - - - - - - - - -Otbhr .ltilateral - 1 - - - - 1 31 12Private 15 13 18 32 17 13 19 42 26

1125 DIUSSUItSS 498 497 238 398 420 300 313 508 476

DUT OUTSUNDISCTotal out.tmndims and disbhrsed 1.355 1.797 2,053 2,371 2.951 3,216 3,615 3,979 4,470

Official 1.233 1.689 1.940 2,436 2,800 3.067 3,491 3,334 4,317IBM 55 35 53 53 55 55 53 53 53IDA 255 330 466 554 707 S59 1.027 I,181 1,366Ot-er 923 1,254 1.419 1.827 2.067 2.154 2,409 2.599 2.896

Private 122 108 113 135 142 149 124 145 153nndisbered debt ',019 948 1,016 1,335 1,659 1.719 2,104 2,619 2,773

MTS snzTOtal debt service 31 S8 59 69 95 94 91 X7 123AUortiaare 21 66 30 37 57 50 50 40 74Interest 10 22 28 32 38 43 42 47 49

IDID debt service 0 2 3 3 4 4 4 4 3IDA debt service 1 2 3 4 4 6 7 a a

Average interet rateOfficial 1.8 1.2 1.3 1.2 1.3 1.2 1.6 1.J 1.0Private 2.3 L9 7.2 6.2 6.1 6.9 10.5 8.6 A.6

Average iturityOfficial 35.1 42.9 3A6 38.5 36.? 34.2 35.1 35.5 39.5Private 15.3 11.3 11.0 9.5 14.8 19.2 7.7 11.7 12.9

BANK GROP MO5WQh (t)IBM DoD/total DO 4 3 3 2 2 2 2 1 1ID D diaburmemauts/total diaborsmeents 0 0 0 0 0 0 0 0 0DN D debt ervice/total debt series 0 2 6 5 A 4 1. a 3IDA DM/total DOD 19 21 23 22 24 27 28 30 31IU disberosmentetotal disbursmenets 22 23 32 20 32 24 30 29 35IDA debt serviceltotal d-bt serice 3 3 5 5 5 6 7 9 6

Tom VIRICIVRE AltJuneJila IU/ID IUING (At Juse 1983) 7BID IDA

Maturity structure of debt Outstaeding & Disbursed 54.9 1,365.8Raturitis. due within 5 yoer 15.1 Umdiebursed - 1,005.0HDaritise due witbin 10 years 29.4 Outstanding, incl. D disbursed 54.9 2,370.8

Interet structure of debtInteret due within I year 1.4

n- ot availabl

Februr 21, 1905

.' ~~~-29- ANNEX IIPage 1 of 4

THE STATUS OF BANK GROUP OPERATIONS IN BANGLADESH La

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30. 1984)

AmountsLoan or (less cancellations)Credit USS Million /bNumber Year Borrower Purpuse Bank IDA Undisbursed

One loan and 31 credits fully disbursed 54.90 1,079.15 -

527 1975 Bangladesh Ashuganj Fertilizer - 62.00 1.07542 1975 Bangladesh Barisal Irrigation - 21.00 3.27605 1976 Bangladesh Karnafuli Irrigation - 22.37 5.66631 1976 Bangladesh Rural Development - 16.00 5.54725 1977 Bangladesh Muhuri Irrigation - 21.00 8.83735 1977 Bangladesh Inland Water Transport II - 5.00 0.60787 1978 Bangladesh Foodgrain Storage II - 25.00 9.56825 1978 Bangladesh Small-Scale Industry II - 7.00 2.29828 1978 Bangladesh Agricultural Research - 6.00 0.45864 1978 Bangladesh Drainage & Flood Control - 19.00 11.36890 1979 Bangladesh Oxbow Lakes Fisheries - 6.00 2.74912 1979 Bangladesh Vocational Training - 25.00 13.23921 1979 Bangladesh Population & Family Health II - 32.00 17.12934 1979 Bangladesh Greater Khulna Power

Distribution - 28.00 9.87941 1979 Bangladesh Dacca Water Supply & Sewerage II - 22.00 2.83955 1979 Bangladesh Small-Scale Drainage &

Flood Control - 25.00 16.80964 1979 Bangladesh Highways II - 10.00 6.29990 1980 Bangladesh Low-Lift Pumps - 37.00 20.31

1001 1980 Bangladesh Chittagong Water Supply II - 20.00 11.561023 1980 Bangladesh Fertilizer Industry

Rehabilitation - 29.00 17.851032 1980 Bangladesh Jute Industry Rehabilitation - 20.00 12.391042 1980 Bangladesh Mangrove Afforestation - 11.00 6.251054 1980 Bangladesh Education IV (Primary Education) - 40.00 24.791065Lc 1980 Bangladesh Small-Scale Industry III - 35.00 19.201091/c 1981 Bangladesh Bakhrabad Gas Development - 85.00 9.431096/c 1981 Bangladesh Fertilizer Transport - 25.00 11.831117/c 1981 Bangladesh Bangladesh Shilpa Bank II - 50.00 23.821124kc 1981 Bangladesh Technical Assistance IV - 16.00 6.091140/c 1981 Bangladesh Hand Tubewells - 18.00 10.111147/k 1981 Bangladesh Agricultural Credit - 40.00 17.501184/c 1982 Bangladesh Drainage & Flood Control II - 27.00 21.921204/c 1982 Bangladesh Chittagong Urea Fertilizer - 15.00 12.79

-30-

ANNEX IIPage 2 of 4

A. Bank Loans and IDA Credits to Bansladesh (continued)

AmountsLoan or (less cancellations)Credit US$ Million /bNumber Year Borrower Purpose Bank IDA Undisbursed

1205/c 1982 Bangladesh Textile Industry Rehabilitation - 30.00 26.071215/c 1982 Bangladesh Extension & Research II - 27.00 19.991247/c 1982 Bangladesh Chittagong Port - 60.00 53.371254/c 1982 Bangladesh Ashuganj Thermal Pover - 92.00 79.441262/c 1982 Bangladesh Rural Electrification - 40.00 30.781287/c 1982 Bangladesh Deep Tubewells II - 68.00 51.551300/c 1983 Bangladesh Imports Program XI - 110.00 9.781301/c 1983 Bangladesh First Highway Project

(Supplemental) - 6.00 4.121318/C 1983 Bangladesh Business Management

Education & Training - 7.80 6.991321/c 1983 Bangladesh Telecommunications III - 35.00 32.271349/ 1983 Bangladesh Public Administration

(Training and Personnelmanagement) - 12.00 10.37

1357/c 1983 Bangladesh Energy Efficiency andRefinery Rehabilitation - 28.50 26.07

1384/c 1983 Bangladesh Rural Development II - 100.00 89.001396/C 1983 Bangladesh Agricultural Training II - 8.10 7.371399/c Id 1983 Bangladesh Sugar Rehabilitation and

Intensification - 20.00 18.151402/c le 1983 Bangladesh Petroleum Exploration Promotion - 23.00 21.381440/c /d 1984 Bangladesh Fifth Technical Assistance - 25.00 23.781455/c /f 1984 Bangladesh Second Agricultural Research - 24.50 24.501467/c kk 1984 Bangladesh Water Development Board - 41.50 41.501471/c /d 1'84 Bangladesh Import Program XII - 140.00 88.371477/c kk 1984 Bangladesh Textile Industry Rehab. II - 23.00 23.00F022/c LL 1984 Bangladesh Textile Industry Rehab. II - 22.00 22.001490/c /e 1984 Bangladesh Technical Education - 36.00 36.00

-31-ANNEX IIPage 3 of 4

A. Bank Loans and IDA Credits to Bangladesh (continued)

AmountsLoan or (less cancellations)Credit US$ Million /bNumber Year Borrower Purpose Bank IDA Undisbursed

1504-0Lj 1984 Bangladesh SAP - 725 BD - 10.00 10.001504-1L./f 1984 Bangladesh SAP 1023 BD - 5.00 5.001504-2/c/f 1984 Bangladesh SAP 1247 BD - 7.00 7.001504-3Icif 1984 Bangladesh SAP 1262 BD - 8.00 8.00

Total 54.90 22908.92 1,119.20of which repaid - 4.13 -

Total now outstanding 54.90 2,904.62Amount sold 0.00 0.00

Total nov held by Bank and IDA 54.90 2.904.62Total undisbur6ed 1.119.20 1.119.20

La The status of the projects listed in Part A is described in a separate report onall Bank/IDA financed projects in execution, which is updated twice yearly andcirculated to the Executive Directors on April 30 and October 31.

/b The original principal of credits under replenishments 1 to 3 has been increasedby the amount of the translation adjustment as a result of the devaluation ofthe United States dollar in 1972 and 1973.

/c Credits funded out of IDA's 6th Replenishment denominated in SDRs. Amountsof principal are calculated at the rate of exchange in effect at the time ofnegotiations; amounts undisbursed are calculated at the rate of exchange ineffect on September 30, 1984, and the US$ equivalent for fully disbursed creditsfunded out of IDA's 6th Replenishment is calculated at the rate of exchangein effect on the dates of disbursement.

4d Became effective on June 19, 1984.le Effective December 20, 1984./f Effective October 25, 1984.a. Not yet effective.

-32-

ANNEX IIPage 4 of 4

B. STATEMENT OF IFC INVESTMENTS (as of September 30. 1984) /a

Fiscal Amounts in US$ MillionYear ObliRor Type of Business Loan Equity Total

1969 Ka=naphuli Paper Mills Ltd. Pulp & Paper Products 5.60 0.63 6.23

1979 Highapeed Shipbuilding &Heavy Engineering Co., Ltd. Shipbuilding 1.20 0.36 1.56

1980 Industrial Promotion andDevelopment Company of DevelopmentBangladesh, Ltd. Finance Company 1.05 1.05

Total gross commitments 6.80 2.04 8.84less cancellations, terminations, repayments and sales 5.60 0.63 6.23

-Total now held by IFC 1.20 1.41 2.61

* Total undisbursed 0.65 -0.65

/a The folloviug IFC investment has been approved but not yet signed:

1982 Bata Shoe Co. Shoe Manufacturing(Bangladesh) Ltd. and Tannery 2.7 .5 3.2

i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ANNEX III-33- Page 1

BANCLADESH

SECOND GAS DEVELOPMENT PROJECT

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepare project:

Twenty-three months.

(b) Agency preparing the project:

Petrobangla.

(c) Date of first preparation mission by IDA and date offirst mission to consider the project:

March 1983; July 1983.

(d) Date of departure of appraisal mission:

June 1984.

(e) Date of completion of negotiations:

March 1985.

(f) Planned date of effectiveness:

September 1985.

Section II: Special IDA Implementation Action:

None.

Section III: Conditions of Effectiveness are:

(a) approval of the Project Proforma (paragraph 51);

(b) fulfillment of all conditions of effectiveness ofthe other financiers (paragraph 51);

(c) execution of the Subsidiary Loan Agreement(paragraph 52);

-34. ANNEX IIIPage 2

(d) establishment of the Project Implementation Unitand appointment of key staff (paragraph 49);

Ce) appointment of drilling management and infrastructureengineering consultants (paragraph 46); and

(f) an average increase of 20% in the price of natural gasby July 1, 1985 (paragraph 37).

Conditions of Disbursement are:

(a) for the Gas Infrastructure Development Component - satis-factory test resulto for the three new wells to be drilledat the Kailashtilla and Beani Bazar gas fields; and

(b) for the CNG Component - establishment of the new CNGentity.

Other Conditions are that:

(a) Government would reorganize Petrobangla and its operatingaffiliates by July 1, 1986 and submit an implementationplan and staffing plan, both satisfactory to IDA, byDecember 31, 1985 (paragraph 47);

(b) Government would increase the average price of natural gasby a further 20% by July 1, 1986, and beginning in FY88 andthereafter, adjust prices, in agreement with IDA, based onlong-run marginal costs pLus depletion premium (paragraph37);

(c) Petrobangla would ensure that following evaluation of theBakhrabad gas field, transfer of Bakhrabad gas to theTitas Franchise Area take place only if Bakhrabad reservesexceed 2.6 TCF (paragraph 33);

(d) Petrobangla would set up a technical committee to reviewgas field development plans and only undertake futuedevelopment well drilling at the gas fields coveredunder the project in agreement with IDA (paragraph43);

(e) Petrobangla would establish a new gas production(paragraph 47);

(f) Petrobangla would submit to IDA the consolidated accounts,investment plans, and projected financial statements of thetwo gas operating companies within 18 months of their

-35- ANNEX IIIPage 3

establishment (paragraph 48); and ensure that the gasproduction company maintain a debt equity ratio of 60:40and the gas distribution company of 70:30, that both com-panies generate adequate funds to cover debt, currentexpenses, working capital, and future investment, and thatboth companies maintain accounts receivable at no more thanthree months of gas sales iparagraph 48); and

(g) Petrobangla would forward to IDA its audited financialstatements and those of its operating affiliates withinnine months of the end of each fiscal year; the new CNCentity also would forward to IDA its audited financialstatements within nine months of the end of each fiscalyear (paragraph 55).

IBRD 18571At 9.

BANGLADESH

/1/ &, ..Nh` GAS TRANSMISSION SYSTEM

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