Published in BDnews24 on 19 December 2010.
This piece analyses the origins of the power crisis and steps being taken to resolve it.
While our politics is consumed by petty personal vendetta, the electricity crisis continues to pose as the biggest risk to our economy. How did we get here? And what is the government doing about it? Let’s explore these questions with some numbers.
Chart 1 shows electricity production since the mid-1990s. Here, ‘Gross Generation’ is what is produced at the power plants, while ‘Individual Power Production’ is what comes out of private generators.
If Gross Generation continues at a healthy pace, electricity is added to the national grid. Private generators are needed when the power plants adding to the national grid fail to do their job. As is clear from the Chart, Gross Generation slumped between 2000 and 2003, when Individual Power Production took off.
Chart 1: Electricity production
In the 1990s, Gross Generation grew by more than 6 percent a year — faster than the economic growth recorded in that decade. Then something happened in late 2000, in the last year of the last Awami League government — Gross Generation slumped. That slump worsened in the first two years of the last BNP government. In October 2003, when Gross Generation hit its nadir; our power plants were producing the same level of electricity they generated five years earlier!
Things improved thereafter, and for the remainder of BNP’s term, Gross Generation grew by 7.5 percent a year — faster than economic growth, but not fast enough to catch up for the slump years. The October 2001 level of production wasn’t reached until August 2005. The November 2000 peak wasn’t crossed until November 2005. Had the 1990s growth rate had been maintained, Gross Generation would have been well over 20 percent higher than the actual in January 2007.
At least the BNP government did start a turnaround. During the two years of the 1/11 regime, Gross Generation grew by only two percent. Anyone blaming BNP for ‘not adding anything to the national grid’ should spare some wrath for the good gentlemen who ran the show in 2007 and 2008.
Thus, when AL took over power again in January 2009, there was a massive electricity deficit. Had the 1990s growth rate continued, by the time AL had returned to power, Gross Generation would have been nearly 30 per cent higher than the actual. The incoming government was aware of this. And to its credit, it has repeatedly promised, with quantifiable targets, to end the crisis before it faces re-election. It has tried measures to curb consumption, including through unconventional measures like daylight saving. It has tried to attract foreign investment to boost production.
What has been the result?
In its first year in office, the government presided over a 2.5 percent growth in Gross Generation, much slower than the nearly 6 percent economic growth. It is safe to assume that there hasn’t been a radical acceleration of Gross Generation in 2010.
Of course, regardless of what had come under past governments the AL is in power now, and it ‘owns’ the electricity problem. Yes, this government has been dealt a rotten hand by its predecessors. But an impatient public is unlikely to listen kindly about the past governments’ failures. The government has taken two significant steps in recent months to resolve the crisis. Both are fraught with danger.
The rental power plants policy might seem an appropriate short-term measure. But these plants are costly. A recent World Bank report provides some numbers.
The government, through PDB, sells each kWh of power to the consumers at Tk 2.68. Each kWh will be bought from the new suppliers at Tk 8-14. The difference between the price government receives from the consumer and the one it pays to the producer will obviously have to be filled by the taxpayer. The Bank estimates that this could be between 32 billion and 72 billion taka in 2010-11.
There is more. These new plants use diesel and furnace oil, and BPC will probably subsidise the producers. This could cost between Tk 5 and 13 billion. And the more electricity is produced, the larger the bill is.
To put these numbers in context, Bangladesh’s GDP is about Tk 7300 billion. That is, the bank estimates that the fiscal cost of these recent agreements could be as much as 1 percent or more of GDP.
Two questions need to be answered.
First, can we afford it? In 2010-11, the Bank assesses that Bangladesh has the fiscal space needed, barring there is no unforeseen shock (such as natural disasters or food price hikes).
Second, are we getting a good deal? A simple way of thinking whether it’s worth getting the electricity at these prices is to look at the acceleration in economic growth that this extra power is likely to generate. If 1 percent of GDP fiscal cost accelerates economic growth by more than 1 percentage point, then this is a good deal. As it happens, the budget projects a GDP growth of 6.7 percent in the current fiscal year, up from last year’s 6 percent.
Does this mean the taxpayers are getting a bad deal? Not necessarily. The relevant counterfactual here is ‘what would happen sans extra electricity’? That is, it is entirely plausible to believe that a failure to generate extra electricity would have resulted in a significant growth slowdown.
Further, there may well be benefits that don’t show up in this year’s GDP growth figures. Sending a signal to potential garment sector export clients that steps are being taken to assure uninterrupted supply to electricity to factories will likely result in clients not switching to competitions such as Vietnam. Further, there are likely gains to human wellbeing — health, reduced mortality and morbidity — that may not show up in GDP growth numbers.
Even if electricity generated is ‘worth it’ in the simple analysis, there is still an issue of fiscal sustainability. Electricity is still either ‘too cheap’ compared to the cost of production, or ‘too expensive’ compared to the price paid by the consumers. Perhaps, electricity is mis-priced at the household level? If this is the case, the government needs to take tough decisions to cut subsidies. If prices are rationalised, they will lead to a more sustainable growth in demand, and lessen the crisis.
Of course, it could also be the case that the government is paying too much to the producers. Very worryingly, we are being barred to explore this possibility through a de facto indemnity act that stops any form of accountability regarding investment in the electricity sector. The Energy Fast Supply Enhancement (Special Provision) Act 2010 has been passed by the Parliament, providing immunity to stakeholders in the power and energy sector ‘acting in good faith’.
The law, which will remain effective for two years, gives the government unbridled power, and our history is replete with unbridled power leading to untrammelled abuse. With this, the government has effectively played the last role of the die. If the electricity situation doesn’t improve in 2011, the repercussions may be ugly.
 The report, titled ‘Bangladesh Economic Update November 2010’ is available here: http://www.worldbank.org.bd/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/BANGLADESHEXTN/0,,contentMDK:22752838~pagePK:141137~piPK:141127~theSitePK:295760,00.html