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Studies on the Impact of Foreign Direct Investment in the Power and

Energy Sector of Bangladesh

Research Paper (undergraduate), 2018

17 Pages, Grade: 15

R A Rasib Afridi (Author)

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Table of Contents
1. Abstract

2. Introduction

3. Literature Review

4. Objectives
4.1 Broad Objectives
4.2 Specific Objectives

5. Scope and Limitations

6. Methodology

7. Data and Analysis

7.1 Correlating the growth trend of Bangladesh with South-East Asian Countries
7.2 Hypothesis Testing – Energy Security
7.3 Impact of FDI on Economic Indices
7.4 Hypothesis Testing – Growth of GDP for FDI in power and energy sector

8. Conclusion

9. Bibliography

Table of Figures
Figure 1 Outlined Power Generation Capacity over the Years

Figure 2 GDP Per Capita Growth of South-East Asian Countries

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Figure 3 Investment in Energy Sector with Private Participation of South-East Asian Countries

Figure 4 Expected Power Generation Cost of Bangladesh

Figure 5 Expected Fuel Production Cost of Bangladesh

Figure 6 GDP per unit of Energy use of South-East Asian Countries

1. Abstract
Bangladesh is expected to be a developed country by 2050. It is still lagging in the power sector with 20% of the
population yet to see the lights of electricity. However, the growth over the past decade has been staggering in
this sector. It has seen a rise of around 12000 Megawatt power generation capacity from 2009. Bangladesh
Government has set an ambition to reach 60000 Megawatt capacity by 2041. This ambitious loft requires
heavy financial backing, FDI (Foreign Direct Investment) being the primary route. This study is aimed towards
understanding the possible impact that FDI will have on the Power and Energy Sector of Bangladesh, as well as
the subsequent shift in Bangladesh’s economic indices.

2. Introduction
The advent of Bangladesh is expected to tip the scales high enough becoming the 23rd largest economy in the
world. [28]

-PricewaterhousecoOPERS

The Power and Energy Sector of Bangladesh is developing at a rapid pace. Within the last decade, power
generation capacity of Bangladesh rose from 4942 Megawatt in 2009 [1] to 16,046 Megawatt in 2018 [2].
Electricity generation capacity for a day has also crossed 10,000 Megawatt for the first time this year. [1] This
bodes well to showcase the rising growth of the Power and Energy sector of Bangladesh. This development is
aligned with the development of the country as well. Bangladesh is marked as the 2nd fastest growing economy
in the world by IMF. [3] Bangladesh has a steady GDP growth, marked at 7.3% in 2017. [4] Prime Minister
Sheikh Hasina has envisioned an electricity generation capacity of 60000 Megawatt by 2041 and 100%
electrification of the country by 2021. [5]

This means the current generation capacity is expected to rise 4 times from the present capacity. A heavy
financial backing is required to make this vision possible, to which FDI is expected to play a major role. This
study will be geared towards studying the role of FDI in the development of Bangladesh Power Sector, and the
major change it will induce in the economic landscape of Bangladesh.

3. Literature Review
Mondal, Jakaria and Hasan in their paper - A Review on Primary and Sustainable Energy Scenario in
Bangladesh discussed on the present energy scenario as well as the energy security for future. [6] Power
Demand is rising at an exponential rate. Oil and Gas is mainly catering to this demand now. However, with
continuous usage and wastage of fossil fuels, questions arise over sustainable energy sources and how
Bangladesh will be tackling that in the coming future. This paper has discussed on the possibility of exploration
of alternative energy scopes like solar power, hydroelectricity, biomass etc. which has had limited impact overall
up to now.

Saiful and Khan in their paper A Review of Energy Sector of Bangladesh has discussed on the policies that
Bangladesh Government is going to undertake to ensure sustainable energy production. [7] This journal is
sequential to the initial one which explored on the opportunities of sustainable electricity. This article talked
about the steps Bangladesh will be adopting to ensure energy security in the advancement towards Vision 2041.
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While Hassan, Rahman, Khan, Malik and Ali in their paper Electricity Challenge for Sustainable Future in
Bangladesh discussed about the scope of energy diversity. [8] Bangladesh is dependent on fossil fuel for most of
its energy usage and is dependent on a mono-fuel generation route. Diversifying with LNG, LPG, Solar Power
and other renewable energy would boost the energy security prospects for the future, which was primarily
highlighted in this article.

Habib and Chungpaibulpatana in Electricity Generation Expansion Planning with Environmental Impact
Abatement: Case Study of Bangladesh primarily discussed over BAU (Business as Usual) scenario of the mills,
factories and industries with its emissions and effects on import scenario. [9] This paper discussed the energy
mix and highlighted the core parts of coal utilization necessity. Debnath, Mourshed and Chew on their
paper Modelling and Forecasting Energy Demand in Rural Households of Bangladesh talked about the impact
of electricity in the rural scenario. [10] This study delves into energy demand on rural context and on user-level
basis as well as a scope of need-gap analysis with a view to cover the detailed user end demand of energy.

4. Objectives
The primary objective of this macroeconomic paper is the study on FDI’s impact over Power and Energy sector
of Bangladesh. It has been further classified into Broad and specific objectives as follows:

4.1 Broad Objectives

1. To study the impact of FDI on Power and Energy Sector of Bangladesh to ensure energy security.
2. To find the subsequent shift in Economic Indices of Bangladesh.

4.2 Specific Objectives

1. Importance of FDI to reach Vision 2041 plan by Bangladesh Govt. of generating 60000 MW electricity
capacity.
2. To analyze if Bangladesh will ensure Energy Security by diversifying its Energy Mix enabled by this financial
backing.
3. Finding the trends of GDP per capita, GDP per unit of Energy use, fuel production and power generation
costs.
4. To analyze if Bangladesh will keep seeing rise in GDP by increasing its investment on Power and Energy
sector.

5. Scope and Limitations

This paper will be guided towards the relation of FDI and Power and Energy Sector of Bangladesh. Primarily, I
will be focusing on how Bangladesh will be looking to ensure Energy security for the long-term prospect of the
country. This includes Energy Diversity, Sustainable Energy Mix, captivating the increasing energy demand and
needs and the trends in indices related to Economy and Energy. All this will be in fact bounded by the
envisioned plans and possibility of the increase of Power Plants without factoring in the systematic risks at play
that may have direct/indirect impact over the growth of some power plants, for e.g. Rampal Power Plant,
Rooppur Nuclear Power Plant.

6. Methodology
At first, secondary data will be collected on Power and Energy sector of Bangladesh. The literature review is
done using some of the published reports. Trends and correlation charts will be produced by comparing
Bangladesh with 4 other South-East Asian countries – Vietnam, Malaysia, Indonesia and Singapore. The
first hypothesis is on Bangladesh’s expectancy to reach energy security by the help of FDI. The first hypothesis:

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Ho = Bangladesh will not reach energy security with FDI

HA = Bangladesh will reach energy security with FDI

Using Z-test and calculating the value and cutoff point using SPSS software, the score will be calculated to
know the rejection area. The hypothesis will be tested afterwards.

FDI will have impact in the Economic Indices of Bangladesh. The change in fuel production cost and power
generation cost will play major role in the Bangladesh’s economic context. GDP per unit of energy use will be
the focus in our second hypothesis. The second hypothesis:

Ho = GDP will not rise with FDI in Power and Energy Sector

HA = GDP will rise with FDI in Power and Energy Sector

Similarly, Z-test and excel will be used to test this hypothesis.

7. Data and Analysis

Bangladesh is expected to develop gradually as its GDP growth suggests. Its power sector is expected to see a
smooth sailing as well. State Minister of Power, Energy and Mineral Resources Nasrul Hamid addressed
a Growth Summit in London where he claimed the Power sector to be a very promising scope for investment.
[11] Bangladesh expects investment over 15 Billion USD over the next 5 years only in this sector. [12] This
is double the investment that Bangladesh has made in this sector over the last decade.

Bangladesh government has set the goal of reaching an electricity generation capacity of 60000 Megawatt by
2041, aligned with its Vision 2041. Power Cell Master Plan has indicated the goal to reach 100% electrification
in the country by 2021, installing an electricity generation capacity as high as 24000 Megawatt by then. [13]
This would require a steep rise of several power plants. Many of them have been outlined for development but
yet to come in power.

illustration not visible in this excerpt

Figure 1 Outlined Power Generation Capacity over the Years

7.1 Correlating the growth trend of Bangladesh with South-East Asian Countries
To analyze the growth and effect of Power generation capacity over the years it is necessary to correlate it with
other South-East Asian Countries. First, having a look over the growth of GDP per capita of 5 South-East Asian
countries from 1960 to present, including Vietnam, Indonesia, Malaysia and Thailand alongside Bangladesh.
The 5 developing South-East Asian country has been chosen alongside Bangladesh which has very recently
gained its developing status. [14]

illustration not visible in this excerpt

Figure 2 GDP Per Capita Growth of South-East Asian Countries

First understanding the GDP per capita, it is the gross domestic product divided by midyear population. GDP is
the sum of gross value added by all resident producers in the economy plus any product taxes and minus any
subsidies not included in the value of the products. It is calculated without making deductions for depreciation of
fabricated assets or for depletion and degradation of natural resources. [15] The Data in table figure are in
current U.S. dollars. Analyzing this trend indicates Bangladesh to be the least advancing country of the 5 with
Vietnam and Indonesia slightly closer. Malaysia took an upward trend and had carried with that boom in its
economy ever since.

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Now, to add to this correlation, the amount of investment in the power sector for these countries shall have to be
factored in as well. Government projects in the power and energy sector are heavily invested projects. Private
participation investment in power and energy sector involves the electricity, natural gas production, power
transmission and distribution arena. The data are in current U.S. dollars. [16]

illustration not visible in this excerpt

Figure 3 Investment in Energy Sector with Private Participation of South-East Asian Countries

This figure indicates Bangladesh is indeed a country having the least amount of investments in the Power and
Energy sector. Less than Malaysia and Indonesia whose combined population is lower than that of Bangladesh.
This poses question over scope and benefit over foreign investment on Bangladesh in this sector. But, private
participation does exist in this sector in Bangladesh and has garnered immense benefit over time for both
parties. Sembcorp of Singapore has invested on a 1400 MW power plant project at Matarbari, investing a total
of 390 Million US Dollars. [17] The 2400 MW Rooppur Nuclear Power Plant is backed by Russian
investment with 90% of the 12.65 Billion Dollars contract to be funded by a loan from Russian
Government. [18] Besides, the 1200 MW Matarbari project is one of the biggest project for Japanese
Development Agency JICA (Japan International Cooperation Agency). [19] India’s investment in Rampal Power
Plant [20], Chinese investment in Payra power plant [21], Germany’s Siemens AG building a 3,600 MW re-
gasification LNG-based combined cycle power plant over at Payra [22], Singapore’s Krisenergy’s onshore
hydrocarbon operations at Bangladesh [23] and seismic survey in deep sea blocks conducted by Korean
company Posco Daewoo [24] are notable investments and potential scopes of investment in this sector.
Also, global giants United States based company Chevron is involved in the supply of more than 50
percent gas in Bangladesh [25] and another US based company Excelerate energy is on course to produce the
first ever floating LNG terminal of Bangladesh over at Maheshkhali. [26]

All these investors mark Bangladesh as a promising arena to invest, especially in its Power and Energy sector. If
Bangladesh are set to become global giants by 2050, FDI will play a significant role. The investments in current
projects indicates the dependency of this sector towards FDI. But higher investment won’t ensure prosperity as
improper management of power plants would hurt Bangladesh’ energy security scope.

7.2 Hypothesis Testing – Energy Security

Starting with the first hypothesis, regarding the possibility of Bangladesh reaching energy security by help of
FDI. Here,

Ho = Bangladesh will not reach energy security with FDI

HA = Bangladesh will reach energy security with FDI

α = 95%. The hypothesis will be a one tailed test.

illustration not visible in this excerpt

Assumptions: Value assigned on its energy security scope

Gas = One. Can’t provide energy security. Will likely run out in the future, or at least will be scarce. [29]

Furnace Oil = One. Can’t provide energy security. [29]

Coal and Nuclear = Two. Can provide energy security up to 2081 at the very least. [29]

Diesel and Natural Gas = One. Can’t provide energy security. Finite resource, will last longer than fossil fuels.
[30]

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Bio Gas and Waste, Regional grid = Three. Can provide energy security. Since it will move towards a circular
economy.

Renewable Energy = Three. Will provide energy security with the most sustainable production.

LNG = Will provide sustainable energy production with exploration of deep sea ports and its proper utilization.

Calculation: Energy Security Value = Mix (%) of Energy Source * Assigned Value of Energy Security Scope

Now, µ = 1.16. It is the value to the Energy Diversification plan of the current scenario.

x̄ = 2.45. It is the score Bangladesh will reach with its energy diversification plan of 2041 with the help of FDI.

There are five scopes of plans of the Power Sector of Bangladesh, the standard deviation observed is 0.3 by the
different energy security value of each plans. Z-value will be calculated from it. The rejection value for Z will be
1.22 i.e. critical value of the test is 1.22.

Z-value = = = 9.61

So, the null hypothesis, Ho is rejected. FDI will help Bangladesh ensure Energy Security.

7.3 Impact of FDI on Economic Indices

The significance of this FDI on power and energy sector isn’t limited only to ensure energy security. It has far
reaching impacts in the economic context as well.

illustration not visible in this excerpt

Figure 5 Expected Power Generation Cost of Bangladesh

illustration not visible in this excerpt

Figure 4 Expected Fuel Production Cost of Bangladesh

First, I will be analyzing the future production cost for Fuel and Power Generation that will change because of
this shift towards Coal, Regional Grids and LNG.

Looking over at the fuel production cost it is observed that the prices will keep slashing for fuel production,
gradually over the years. The cost to produce a Kwh of fuel will reach as high as 14 US cents by 2040, doubling
its current value of just around 6. [13] Again, Power generation cost will be dropping too in the process. As the
graph shows, it will reach around 14 US cents by 2040 as the ratio of coal to all the energy sources keep getting
smaller. [13]

illustration not visible in this excerpt

Figure 6 GDP per unit of Energy use of South-East Asian Countries

Looking over at Bangladesh’s GDP per unit of Energy use in comparison to other South-East Asian countries, it
is noticed that Bangladesh is leading among the pack. This indicates Bangladesh has been producing more
output with less energy use and has been efficient in this usage. But with passage of time, this efficiency will be
harder to keep up with rapid growth of industries and economic zones. [27] Before going to my second
hypothesis, I would like to establish a few rationales which would further explain power sector investment’s
impact with Industrialization and in establishing Bangladesh as a developed country:

- LNG to cover energy needs of the Industrial Sector which contributes 30% of total GDP.
- Government of Bangladesh has targeted to develop 100 Economic Zones and has committed to provide
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uninterrupted Power and Gas supply in these economic Zones. [30]

- Promotion of co-generation in captive industries: Efficiency to increase from 20% to 60%
- Rise of employment opportunities. Job finding rate to rise. Unemployment rate to go down.

7.4 Hypothesis Testing – Growth of GDP for FDI in power and energy sector
Source: The World Bank, UNESCAP,Price Water Coopers [28] [27] [32]

illustration not visible in this excerpt

Based on the rationales above, the second hypothesis is formulated, analyzing if Bangladesh be able to grow
GDP substantially with FDI in power and energy sector. Here,

Ho = GDP will not rise with FDI in Power and Energy Sector

HA = GDP will rise with FDI in Power and Energy Sector

α = 95%. The hypothesis will be a one tailed test.

µ = 10.02. GDP per unit from 1990 to 2014.

x̄ = 32.5

The rejection value for Z will be 10.521 i.e. critical value of the test is 10.521. The standard deviation of the
test is around 1.65 over GDP per unit energy use from 2015 to 2050 taking a sample of 5 different years.

So, Z-value = = = 30.46

Therefore, the null hypothesis, Ho is rejected. Even at lower significance levels, the null hypothesis can’t be
rejected. So, GDP will rise over the years with increase in FDI in this sector.

8. Conclusion
Even though Bangladesh is sorely lagging in terms of development in the energy sector, there has been
staggering growth in this sector. The need for FDI is massive in the Power and Energy sector of Bangladesh. My
analysis proves that FDI will help Bangladesh ensure Energy Security. At the same time, it would help in the
economic development of the country. This paper remains limited on the basis that the energy sector will be
changing dynamically with FDI and will have far reaching impact on Bangladesh Economy in the long run.

9. Bibliography
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