US power company AES suspended construction work of the 360 MW Haripur power project yesterday as project financing has become uncertain, sources concerned said.

Following the government decision to begin unsolicited negotiations with Japanese c’ompany Marubeni for the second phase of the 450 MW Megh-nagbat power plant, the World Bank has stopped its support for AES's finances for Haripur project. AES was negotiating for a loan from WB’s sister concern IFC.

As a result, the US company that began construction work of Haripur project in April with its own funds decided to suspend the activities there.

Quoting AES officials, the sources said the project's EPC contractor has suspended all its international and Bangladeshi sub-contractors and has decided to 'demobilise' staff from October 15.

WB informed AES and the

government recently that it would no longer provide risk guarantee to Haripur project since by pursuing the Marubeni scheme, the government had violated the covenants agreed with the bank, on which the risk guarantee was 'anchored'. Haripur project would not be financed by the IFC without WB's Partial Risk Guarantee (PRG). the source said.

According to a source dose to AES. the company has reluctantly suspended construction work at Haripur since it is left with no other choice. "AES has already spent about 25 million US dollars on the project and without the certainty of financing AES management is unwilling to spend one more dollar on it.” he said.

Suspension of the construction work would mean an indefinite delay of the project. The orders for major equipment will automatically stand cancelled if AES and its EPC con-tractor fail to- make timely payment to the manufacturers. This may also lead to legal battles between the government and the AES. sources pointed out.

In April. AES informed the government that though it could not complete "financial closure of the project", it has started construction work. It .added that the decision was based on the government's confirmation to the WB that it would go for certain reforms and abide by the covenants of the Indemnity Agreement for Haripur project so that WB provides the Partial Risk Guarantee.

The government had earlier agreed with the WB on certain principles to follow in the power sector. The Finance Minister in a letter on April 21 told WB. in relation to the Government's programme for the development of the sector, it intends to continue its present policy of transparent bidding Process for future Independent ower Projects and will adopt prudent criteria including (a) Least cost in relation to the energy sector development programme; (b) competitive bid ding; (c) review of fiscal and financial burden; and (d) balance of payments implications."

In a subsequent letter to the ERD on May 24. WB wrote, "on the basis of assurances contained in the Minister's letter, we have notified AES of our willingness to proceed with the PRG.

Following the decision favouring Marubeni. WB said the government has violated the agreement because (I) there has been no prior consultation with WB as was agreed. (II) the project was not awarded on a competitive basis. (HI) BPDB does not meet the Financial Af-

fordability criteria — a debt coverage ratio of 1:2 which was agreedoy GOB (Government of Bangladesh) and the Bank as a threshold established to prevent the financial collapse of PDB/GOB.

In response to the WB letter, the Finance Minister wrote back on September 23. that he had personally gone through the question of the country's Kwer demand projection and was satisfied that the Marubeni Second Phase was necessary, and that he wasalso satisfied that the foreign exchange liability was reasonable for the GOB to take this additional payment liability. The Finance Minister was silent on the Issue of 'competitive bidding", least cost' and PDB's affordability'.

The other AES scheme — 450 MW Meghnaghat project — is also feared to be affected by Ihe Marubeni decision.