KESC Fifth Power (Sector Loan) Project (Loan 925-PAK).Pf

7/31/2019 KESC Fifth Power (Sector Loan) Project (Loan 925-PAK).Pf

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ASIAN DEVELOPMENT BANK PPA: PAK 17003

PROJECT PERFORMANCE AUDIT REPORT

ON THE

KESC FIFTH POWER (SECTOR LOAN) PROJECT(Loan 925-PAK)

IN

PAKISTAN


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CURRENCY EQUIVALENTS

Currency Unit Pakistan Rupees (PRe/PRs)

At Appraisal At Project Completion At Operations Evaluation

(August 1987) (November 1998) (May 2001)PRe1.00 = $0.0544 $0.0213 $0.0161$1.00 = PRs18.396 PRs47.000 PRs62.000

ABBREVIATIONS

ADB Asian Development BankCADPAD computer-assisted distribution planning and designDFID Department for International DevelopmentEA Executing AgencyEIRR economic internal rate of returnFIRR financial internal rate of returnIPP independent power producerJ EXIM Export-Import Bank of JapanKESC Karachi Electric Supply CorporationOEM Operations Evaluation Mission

PCR project completion reportPDP power development programPPAR project performance audit reportPPTA project preparatory technical assistanceSCADA supervisory control and data acquisitionTA technical assistanceTOR terms of referenceWAPDA Water and Power Development Authority

WEIGHTS AND MEASURES

GWh (gigawatt-hour) 1,000 megawatt-hourskV (kilovolt) 1,000 voltskVA (kilovolt-ampere) 1,000 volt-ampereskm kilometerkWh (kilowatt-hour) unit of electrical energy

MVA megavolt-ampereMVAR (megavolt-ampere reactive) 1,000,000 units of reactive powerMW (megawatt) 1,000,000 wattsMWh (megawatt-hour) 1,000 kilowatt-hoursV voltVA (volt-ampere) unit of apparent power


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BASIC DATAKESC Fifth Power (Sector Loan) Project (Loan 925-PAK)

Project Preparation/Institution Building

TA No. TA Name Type Person-Months

Amount($)

ApprovalDate

411-PAK Power Development and Tariff Study ADTA 25 350,000 27 Aug 1981835-PAK Tariff Study on WAPDA/KESC

IntegrationADTA 27 475,000 18 Dec 1986

869-PAK Karachi Electric Supply CorporationPower Expansion

PPTA 4 75,000 6 Apr 1987

Key Project Data ($ million)

As per ADB

Loan Documents ActualTotal Project Cost 389.8 277.4Foreign Exchange Cost 189.5 142.6Local Currency Cost 200.3 134.8

ADB Loan Amount/Utilization 100.01 98.4ADB Loan Amount/Cancellation 1.6Amount of Cofinancing 112.2 85.2

Key Dates Expected Actual

Fact-Finding 23-Apr-6 May 1987Appraisal 19-29 Aug 1987Loan Negotiations 9-14 Nov 1987Board Approval Dec 1987 24 Nov 1988Loan Agreement Jan 1988 21 Dec 1988Loan Effectiveness 21 Mar 1989 5 Feb 1990First Disbursement 5 Nov 1990Project Completion 31 Dec 1991 31 Sep 1997

Loan Closing 31 Dec 1992 31 Dec 1997Months (effectiveness to completion) 33 92

Key Performance Indicators (%) Appraisal2 PCR2 PPAR3Financial Internal Rate of Return for sector 11.1 4.5 16.5->50Economic Internal Rate of Return for sector 12.7 5.7 23.7->50

Borrower Government of the Islamic Republic of Pakistan

Executing Agency Karachi Electric Supply Corporation


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Mission Data

Type of Mission No. of Missions No. of Person-Days

Fact-Finding 1 36Appraisal 1 50Project Administration

Inception 1 12Consultation 3 26Review 6 37Special Review 3 43Loan Administration 1 7

Power Sector 1 1Project Completion 1 27

Operations Evaluation4 1 20


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CONTENTS

Page

BASIC DATA ii

EXECUTIVE SUMMARY iii

SYSTEM NETWORK vii

I. BACKGROUND 1

A. Rationale 1B. Formulation 1C. Purpose and Outputs 2D. Cost, Financing, and Executing Arrangements 2E. Completion and Self-Evaluation 2F. Operations Evaluation 3

II. PLANNING AND IMPLEMENTATION PERFORMANCE 4

A. Formulation and Design 4

B. Achievement of Outputs 4C. Cost and Scheduling 5D. Procurement and Construction 5E. Organization and Management 6

III. ACHIEVEMENT OF PROJECT PURPOSE 6

A. Operational Performance 6B. Performance of the Operating Entity 8C. Financial and Economic Reevaluation 10D. Sustainability 11

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS 12

A. Socioeconomic Impact 12B. Environmental Impact 12C. Impact on Institutions and Policy 12

V. OVERALL ASSESSMENT 13

A. Relevance 13B. Efficacy 14C. Efficiency 14D Sustainability 14


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EXECUTIVE SUMMARY

At project formulation, there was an urgent need for investment in the transmission anddistribution systems of the Karachi Electric Supply Corporation (KESC). The network had notkept pace with generation expansion, was heavily overloaded, and prone to power failures.

Transmission and distribution losses were around 18 percent, and future growth in demand forelectricity threatened to increase loss levels in the absence of expanding transmission capacityand upgrading the existing distribution network.

The Asian Development Bank (ADB) formulated the Project as a sector loan to financepart of a three-year time-slice of KESCs power development program for the period FY1989-1993. The purpose was to develop the transmission and distribution systems to absorb newgeneration from Bin Qasim, and to address problems of system losses, load management, anddistribution efficiency. ADBs loan was expected to play a catalytic role in mobilizing funding

needed for the Project and KESCs overall development program. The project scope included(i) upgrading and expansion of transmission lines and substation capacity, (ii) rehabilitation andexpansion of the distribution system, (iii) upgrading of the system control and protectionfacilities, and (iv) consulting services for project implementation and to assist withcomputerization of KESCs technical and financial operations. Selection and formulation ofspecific subproject proposals for implementation were part of the implementation consultantsterms of reference. Subproject proposals were subject to ADB approval.

Appraisal was completed in August 1987. A decision at loan negotiations in November1987 to defer further loan processing until KESCs financial position was stronger meant thatADBs loan was not approved until 24 November 1988. The Project was completed inDecember 1997 with an overall delay of six years. The delay was caused by (i) the need forKESC to comply with key financial covenants before the loan could be declared effective;(ii) suspension of ADBs loan from March 1991 to October 1992 because of a deterioration inKESCs accounts receivable; and (iii) the need to update subproject proposals, which movedthe physical start for the transmission component to July 1993.

The final project cost of $277.4 million was 29 percent lower than the appraisal estimateof $389.8 million. Total disbursements under ADBs loan in various currencies equivalent to$100 million amounted to $98.4 million (35 percent of the total project cost). An undisbursedbalance of $1.6 million was canceled. Savings on the appraised project cost were induced by adecision to reduce the project scope, particularly with regard to distribution, and defer somecomponents to ADBs KESC Sixth Power (Sector Loan) Project. ADBs loan financed 69 percentof the foreign exchange costs compared with an estimated 53 percent at appraisal. The balanceof foreign expenditure was financed by the Export-Import Bank of Japan. The local currency

portion of $134.8 million was financed by the Government of Pakistan.

Overall investment expenditure on KESCs power development program wasPRs17.2 billion during FY1989-1993, and PRs36.8 billion during FY1994-1998. Investmentexpenditure was largely to expand generation at Bin Qasim. Total expenditure under the Projectwas PRs9.4 billion, or 17.4 percent of KESCs total investment expenditure for the extendedprogram period FY1989 1998 Of the PRs9 4 billion 71 percent was spent on transmission


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The decision to downsize the scope of the distribution component meant the Project wasinsufficient in scale to achieve an overall improvement in KESCs operating efficiency andfinancial position. KESCs transmission and distribution losses increased from 18 percent inFY1987 to 34.3 percent in FY1998 and caused KESCs profit performance to move from weakto negative. A first year loss of PRs0.5 billion was reported in FY1996. By FY1998, KESC

became financially insolvent. Transmission and distribution losses continued to increase, and byFY2000 reached 40.2 percent, with an associated net loss of PRs12.8 billion. Contributing to thedecline in KESCs financial performance was the rising cost of fuel and power purchases, andincreasing loan interest. Escalating nontechnical losses estimated at over 40 percent oftransmission and distribution losses, also contributed to KESCs overall financial deterioration,as did a problematic environment affecting revenue collection.

The negative aspects associated with implementation delays, the failure to reduceKESCs overall transmission and distribution losses, and the subsequent financial insolvency of

KESC tend to overshadow successful achievements at the subproject level. The positive impactof the Project was the completion of the transmission component to meet the availability ofadditional generation from Bin Qasim, without which power shortages would have been worse,and transmission losses higher. Subprojects for distribution rehabilitation, although insufficient inaggregate to meet sector targets and reduce overall KESCs transmission and distributionlosses, were individually successful. Distribution expansion targets were also met and helpedspur economic growth.

Of the five evaluation criteria applied to judging the success of this Project, the rationalefor the Project remains highly relevant. On the criterion for efficacy, the Project succeeded in itsprime purpose to develop transmission to absorb new generation from Bin Qasim, but failed toeffect an overall reduction in system losses. Because of the dominance and primaryachievement of the transmission component, an assessment rating of at least partly efficaciousis warranted. The financial and economic rates of return attest to the individual viability ofsubprojects, but not to their overall impact to improve the operational efficiency of KESC. TheProject is, therefore, assessed partly efficient. The sustainability of the transmission benefits isassessed likely, while the sustainability of distribution subprojects is assessed less likely in the

absence of investment in upgrading to match load growth. Institutional and other developmentimpacts were negligible in terms of strengthening KESCs computer-based managementsystems, but under the broader socioeconomic aims of reducing load shedding and expandingdistribution coverage, achievement was significant. New connections, for example, wereincreased by 74 percent from 0.8 million in FY1987 to 1.4 million in FY1998. Taking theseevaluation judgments into account, the Projects overall rating is partly successful.

KESCs recovery from financial insolvency is dependent on restructuring toward a more

commercial and competitive orientation, external funding support including equity, and policychanges relating to the tariff setting and revenue collection from government departments andpublic sector enterprises. The operational viability of subprojects is dependent on improved loadcontrol facilities, staff training in technical skills, and enhancing technical efficiencies in thedistribution network. Continued government attention, together with investment support, is alsorequired to reduce nontechnical losses, which are currently estimated to be around 18 percent.


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(ii) Policy Reforms. Reflective of the differential between the tariff paid byconsumers and the net tariff to KESC, electricity revenues paid to theGovernment exceed the revenues of KESC and are currently aroundPRs28 billion ($450 million equivalent) per annum. The surcharge paid to thefederal and Sind governments is in effect a monopoly rent, but at the cost of

lower investment and reduced availability of electricity in the Karachi areapossibly by as much as 40 percent. The situation poses a policy dilemma ofcontinuing to support a monopoly structure, which suppresses expansion andthereby reduces the benefits of electricity to households and businesses thatwould otherwise prevail. Perpetuating support to a system that extracts highmonopoly rents but leaves insufficient revenue to meet operating expendituresand provide a normal return on investment is also a governance issue. A closerlook at restructuring is warranted. With the right balance on incentives, bothpower expansion and overall tax revenues to government can be larger than is

the case at present. Future policy reforms affecting electricity surcharges need tobear in mind investment requirements so that revenue flows sustain and expanddevelopment.

(iii) Privatization. Privatization of KESC is unlikely before mid-2002, and may notresult in a full divestment of the Governments holding. The present managementpractice is to support only essential investment in the interim period up toprivatization. In this regard, the lessons of the Project are of paramount

importance. The present level of technical losses of around 22 percent willescalate without adequate attention to upgrading the distribution system.Continuing expansion by way of new connections without upgrading existingoverloaded distribution facilities will also further exacerbate power outages.Urgent attention to and continued investment in upgrading the distributionnetwork prior to privatization are, therefore, recommended.

The key lessons derived from the Project are (i) the critical importance of scale andtiming for upgrading distribution systems to improve overall system efficiencies; (ii) the need for

ADB to be more circumspect in appraising sector loan objectives and the likelihood of achievingthem, particularly where target achievements depend on the availability of local funding and thecapability of the power utility; and (iii) the need to replace KESCs nonfunctional and obsoletecomputer system for identifying and selecting distribution feeders for upgrading in order toreduce distribution losses.

For follow-up, ADB is encouraged to take into account lessons identified and ensure thatfuture sector loan projects are reviewed bearing in mind that the impact of changes in project

scope can be critical for the achievement of project purpose. The Government should takeimmediate measures aimed at (i) providing KESC with support for upgrading the distributionsystem so as to contain and reduce technical losses until privatization; (ii) developing policiesbacked with financial support, which clarify how KESC will meet the demand for newconnections in the interim period; and (iii) restructuring the electricity tariff so that the operationsof KESC are financially sustainable. KESC should (i) continue to develop effective recoverymechanisms for dealing with nontechnical losses outstanding customer accounts errant staff


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I. BACKGROUND

A. Rationale

1. The Asian Development Banks (ADBs) loan complemented a sector loan approved inDecember 1986 to the Water and Power Development Authority (WAPDA),6 and was intendedto help mobilize funding to meet investment requirements of the Karachi Electric SupplyCorporation (KESC). Increased generation capacity of 630 megawatts (MW) to meet theforecast demand for electricity was planned from Bin Qasim (formerly Pipri) by 1992. UnderKESCs overall five-year power development program (PDP) FY1989-1993, a further increase ingeneration from Bin Qasim of 210 MW and West Wharf of 200 MW was also planned. To meetthis increase, an expansion in transmission capacity was needed to carry the additional power

to distribution load centers. Reinforcement of the existing transmission system; upgrading ofKESCs power management system to more effectively deal with load fluctuations; and theupgrading, relocating of transformers, and installation of capacitors on the distribution networkwere also necessary to contain the potential for future increased losses.7

B. Formulation

2. The Project was formulated to help meet the foreign exchange costs of a three-yeartime-slice, FY1989-1991, under KESCs five-year PDP.8 System requirements were initiallystudied under ADB technical assistance (TA) in 1982,9 and reviewed under Canadianassistance in 1986. Recommendations for upgrading KESCs transmission and distributionfacilities to satisfy demand requirements through 1992 were made under ADB projectpreparatory technical assistance (PPTA).10 Fact-finding was completed in May, and appraisal in

August 1987. At loan negotiations in November 1987, it was decided to defer further processinguntil KESCs financial position strengthened. Such strengthening, to enable compliance with

ADBs financial covenants, was achieved through changes to the fuel adjustment charge,reduction in accounts receivables from seven to three months, and a 29 percent increase in thebase tariff (para. 29). An ADB mission to update and reaffirm ADBs appraisal was completed inSeptember 1988, and ADBs loan in currencies totaling $100 million equivalent was approvedon 24 November 198811 in support of a total project investment of $389.8 million. ADBs loanwas made in coordination with major aid agencies.12 The Borrower was the Government ofPakistan, and the proceeds were relent to KESC under a subsidiary loan agreement.


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C. Purpose and Outputs

3. The overall purpose of the Project was to develop the transmission and distributionsystems of KESC to meet increased generation from Bin Qasim, and address problems ofsystem losses, load management, and system efficiency attributable to deficiencies intransmission and distribution. ADBs loan was expected to play a catalytic role in mobilizing thebalance of donor and commercial funding needed for the Project and KESCs overalldevelopment program. The project outputs included (i) expansion and augmentation oftransmission lines and substation capacity, (ii) expansion and rehabilitation of the distributionsystem, and (iii) upgrading of the system control and protection facilities. Selection of specificsubproject proposals for implementation were made part of the implementation consultants

terms of reference, and subject to ADB approval. Details of the PPTA consultantsrecommendations for expanding and upgrading KESCs transmission and distribution facilities,which are the basis of subproject proposals, are provided in Appendixes 8 and 9 of ADBsappraisal report. Further details of the Projects outputs and expected impacts are provided in

Appendixes 1 and 2.

D. Cost, Financing, and Executing Arrangements

4. The estimated total project cost at appraisal was $389.8 million equivalent, with a foreignexchange component of $189.5 million. ADBs loan was to be used to finance 53 percent of theforeign exchange costs. Of the $89.5 million balance in foreign exchange cost, $12.2 millionwas expected to be financed by the Department for International Development (DFID) of theUnited Kingdom, $22.9 million by the Government, and $54.4 million by the Export-Import Bankof Japan (J EXIM). The local currency cost of $200.3 million equivalent was to be funded byKESC for $154.7 million, and J EXIM for $45.6 million. ADBs loan was drawn from its ordinary

capital resources to the Islamic Republic of Pakistan, and relent as a subsidiary loan to KESCwith provision for interest at 11 percent per annum (inclusive of a foreign exchange risk fee) anda repayment period of 25 years (including a grace period of four years).13 KESC was theappointed Executing Agency (EA). An existing team of qualified full-time staff headed by aproject manager, which had worked well under ADBs earlier loans,14 was given theresponsibility for implementation of the Project.

E. Completion and Self-Evaluation

5. ADBs project completion mission inspected the Project in November 1998 and rated itpartly successful. Rehabilitation and expansion of KESCs transmission and distribution systemswere found implemented as envisaged, though with reduced scope and delays. The benefits ofthe Project were judged sustainable, but the delays in project implementation were such that the


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no financial accounts or analysis of accounts was presented in the project completion report(PCR), and that KESC was unable to comply with ADBs financial covenants. Because theProject was implemented and operational at loan closing, no follow-up actions wererecommended. Attention was drawn to the need to recognize in power projects that where theachievement of project objectives is a direct function of the level of inputs, the implications of

reducing the project scope should be carefully assessed. Continuation of the sector loanapproach was recommended for similar projects in ADBs other developing member countries.

6. The PCR assessment reliably evaluated the Projects implementation performance andthe impact of delays on achieving technical efficiency improvements. However, for a sector loan,KESCs performance and policy reforms should have been evaluated as well.16

7. Factors affecting KESCs declining financial performance were reflected in the PCRsFIRR recalculation although KESCs insolvency position was not mentioned. The recalculated

EIRR of 5.7 percent was within ADBs then benchmark range of 4-10 percent for rating a projectpartly successful. Because the recalculation excluded KESCs investment in additionalgeneration capacity for Bin Qasim units 3 and 4, and was based on projections after FY1998 forpower generation that did not pertain to KESCs development program, the EIRR wasoverestimated. If recalculated with these adjustments, the EIRR would have been negative andwould have caused the Project to be rated unsuccessful. In this regard, the PCR rating wasmisleading.

F. Operations Evaluation

8. This project performance audit report (PPAR) reviews the findings of the PCR andpresents the findings of the Operations Evaluation Mission (OEM) that visited the project areaduring 21 May-1 June 2001. Special attention is given to assessing the achievement of purpose;attainment of project and sector goals and intended developments from the Project; operationalperformance of KESC; and adequacy of design for meeting load expansion requirements, and

avoiding and reducing system losses. Related to these aspects are planning issues for theintended privatization of KESC and environmental consequences of the Projects operations.The PPAR is based on the findings of the OEM taking into account a review of the PCR, theappraisal report and material in ADB files, two years of additional actual operational data,KESCs responses to OEMs questionnaire, and follow-up discussions with ADB staff, KESCssenior officials, representatives of other government agencies, electricity consumers,implementation consultants, and local equipment manufacturers. The assessment rating isbased on ADBs four-category assessment rating system.17 Copies of the draft PPAR were

provided to the Government, KESC, and ADB staff concerned for review, and their commentswere considered in finalizing the PPAR.


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II. PLANNING AND IMPLEMENTATION PERFORMANCE

A. Formulation and Design

9. KESCs PDP covering FY1989-1993 formed part of the national Governments SeventhFive-Year Plan (1989-1993) for sustaining economic growth. The Projects rationale (para. 1)reflected (i) investment requirements for power transmission and distribution to Karachi and itsenvirons, (ii) the need to sustain investment expenditure on distribution upgrading, and(iii) ADBs assistance strategy for improving operational efficiencies and mobilizing cofinancingto meet investment needs.

10. The Project was structured from KESCs PDP to meet 49 percent of the total plannedinvestment for the three-year time-slice FY1989-1991 (para. 2). The outputs were set againstspecific requirements for expanding and upgrading KESCs transmission and distributionsystems, and were defined as a subset of KESCs PDP. Formulation and identification of projectoutputs were prepared on a least-cost basis. The OEM reviewed the feasibility and appraisalestimates for the PDP and Project, and found the technical solutions, system controls, andequipment specified appropriate for the projected load growth (Appendix 3).

B. Achievement of Outputs

11. Appendix 1 compares the actual outputs under the Project with what was envisaged atloan approval. The outputs from expanding transmission capacity, reinforcement of 220-kilovolt(kV) transmission, and installation of capacitor banks were by and large achieved. Outputs forrehabilitating and expanding the distribution system were substantially smaller than envisaged,reflecting a cutback in available funding and a change to meet distribution expansion at the

expense of upgrading the existing distribution network (Table 1).18

Outputs for upgradingKESCs system control and protection were substantially deferred.

Table 1: Distribution Expansion and Rehabilitationa

Item Approved Actual

11 kV Distribution Reinforcement 487 km 566 km0.4 kV Overhead/Underground Lines 1,500 km 766 km11/0.4 kV Transformer Capacity 922.5 MVA 439.5 MVACapacitor Installation 260 MVAR Nil

km = kilometer, kV = kilovolt, MVA = megavolt-ampere, MVAR = megavolt-ampere reactive.a

Comparative details for other project components are shown in Appendix 1


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by 33 percent. The nonspecific nature of details for the project scope also accounts for some ofthe cost variations.19 Total disbursements under the ADB loan amounted to $98.4 millionequivalent (35 percent of the total project cost). An undisbursed balance of $1.6 millionequivalent was canceled. ADBs loan financed 69 percent of the foreign exchange costs,compared with 53 percent envisaged at appraisal. ADBs funding was largely applied to the

transmission component. The balance of foreign expenditure was financed by J EXIM. The localcurrency portion of $134.8 million was financed by the Government. Anticipated cofinancingfrom DFID (para. 4), which was intended for upgrading KESCs system control and protection,did not materialize. The appraisal costs are compared with actual costs in Appendix 4.

13. The Project was deemed substantially complete in December 1997, six years later thanenvisaged at appraisal. There were three extensions on the loan closing date from31 December 1992 to 31 December 1997. Implementation was slowed by (i) the need for KESCto comply with key financial covenants before the loan could be declared effective in February

1990; (ii) suspension of ADBs loan from March 1991 to October 1992 because of adeterioration in KESCs accounts receivable position; and (iii) the need to update, after loansuspension, final subproject proposals for the transmission component, which extended thephysical start to July 1993. A comparison of the actual implementation schedule with theappraisal schedule is shown in Appendix 5.

D. Procurement and Construction

14. Procurement was envisaged at appraisal to be undertaken in accordance with ADBsGuidelines for Procurement. Other than for distribution, contracts were to be awarded on thebasis of supply, delivery, installation, and commissioning. For distribution components of theProject, contracts were to be on the basis of supply and delivery only, with KESC responsiblefor installation and commissioning. Summary details of contract awards are provided in

Appendix 2 of ADBs PCR.

15. KESC reported that the international and domestic contractors and suppliers for the

Project performed satisfactorily. Equipment and materials complied with KESCs specificationsand had no significant defects. All equipment inspected at the subproject sites visited by theOEM was functioning satisfactorily.

16. Nevertheless, OEMs engineering inspection revealed that the design and quality of workundertaken by KESC for the distribution rehabilitation and expansion component were generallysubstandard. With appropriate design and quality, including proper connection practices, thereduction of technical losses by 4-5 percent through upgrading low-voltage lines and

replacement and relocation of transformers could have been increased by an additional 1-2percent. The installation of three-phase capacitor banks, if carried out, would have reducedtechnical losses by another 2 percent. KESCs method of design and construction of distributionlines, particularly for 400 volts (V) and 230 V, has still to catch up with accepted internationalpractice.


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consultants period of assignment under several amendments until project completion.Performance of the consultants, whose activities were restricted to transmission, was of a highorder. Engineering and progress reports were submitted promptly, and supervisoryresponsibilities over contractor activities and advisory assistance to KESC were dischargedeffectively. The supervisory responsibilities of the consultants and their contribution to

institutional strengthening through improving technical efficiencies, employee skills, andcomputer systems were considered by KESC appropriate and helpful.20

18. ADB provided adequate monitoring during project implementation with one inceptionmission, nine review missions (including three special review missions), three consultationmissions, one power sector mission, and one project completion mission. Coordination andprogress meetings were held during review missions with the Ministry of Foreign Affairs, KESC,and consultants to solve problems and minimize delays.

19. ADBs loan and project agreements included covenants relevant to improving KESCsoperational performance and accountability. These included requirements for the following:(i) ensuring that the Project was managed by a project group, headed by a project managerfrom within KESC; (ii) all subprojects to be selected in accordance with criteria agreed with

ADB; (iii) completing TA 835-PAK for a tariff study to integrate the tariff structures of KESC andWAPDA; (iv) reducing transmission and distribution losses to 15.5 percent by FY1995;(v) phasing out subsidies and complying with financial covenants; and (vi) submitting quarterlyprogress reports for execution of the Project. KESCs compliance with loan covenants is

summarized in Appendix 5 of the PCR. All covenants had been complied with at projectcompletion, except those relating to transmission and distribution losses and financialperformance (paras. 24 and 27).


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III. ACHIEVEMENT OF PROJECT PURPOSE

A. Operational Performance

20. Operational performance is measured in terms of the Projects achievements relative toexpectations at appraisal and changes in scope to (i) help meet the incremental demand forpower between FY1992 and FY1998, (ii) expand transmission to relieve overloadedsubtransmission systems and reduce load shedding, (iii) expand distribution and improvedistribution voltage levels and system reliability, and (iv) reduce system losses. The adequacy ofmaintenance is also reviewed. Indicators of KESCs technical and financial performance are

summarized in Appendix 6.

21. KESCs installed generation capacity was projected at appraisal to increase to1,920 MW by FY1992, and its energy sales to 6,283 gigawatt-hours (GWh). The actual installedcapacity was 1,738 MW, or 91 percent of the target. Actual sales were 5,492 GWh or 87 percentof the forecast.21 Generation capacity was increased by a further 200 MW in FY1998 and oldunits retired to leave a total installed capacity of 1,756 MW. No further additions have beeninstalled since 1998.

22. The transmission reinforcement and expansion helped reduce transmission losses andthe frequency of load shedding, and increase energy available for sales. However, insufficientattention to upgrading the distribution network in the face of growing load demand and a surgein nontechnical losses resulted in KESCs overall transmission and distribution losses almostdoubling (Table 2).

Table 2: Operational Performance Indicators

Indicator

Before Project

(FY1987)

Projected

(FY1992)

After Project

(FY1998)

Installed Capacity (MW) 1,008 1,920 1,756Energy Sales (GWh) 4,130 6,283 6,489

Customers Served (000) 823 1,145 1,435

System Voltage across 11 kV Lines (kV) 9.0-11.0 10.5-11.0 10.5-11.0aDistribution Voltage across Low-VoltageLines (V)

170/180 220 210/220

Transmission and Distribution Losses (%) 17.9 16.5 34.3

kV = kilovolt, GWh = gigawatt-hour, MW = megawatt, V = volt.a

Ideally, the measured voltage across 11 kV lines should be 11 kV +/- 0.55 kV to reduce transmission lossesto less than 2.5 percent.

23. For the distribution subprojects, rehabilitation and reinforcement improved feedervoltages from around 9 kV to 11 kV and helped offset overloading in low-voltage distribution.Th i t ll ti f dditi l f d f id b t ti d d th il bilit f l t i it


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24. The Project was expected to reduce KESCs overall transmission and distribution lossesfrom 17.9 percent in FY1987 to 16.5 percent by FY1992, and to 15.5 percent by FY1995. Actuallosses, which also include nontechnical losses, increased to 26 percent by FY1992, and to34 percent by FY1998.24 Several reasons explain this: (i) delays in rehabilitation of thedistribution network, which as a result, accentuated the impact of ongoing load growth;

(ii) reduced investment in distribution rehabilitation; (iii) canceling the installation of capacitors inthe distribution system; (iv) poor design, construction, and connection practices; and (v) anincrease in nontechnical losses.25 The net effect was that the final project scope asimplemented, was insufficient to achieve the project targets set for KESCs overall system.

Appendix 3 discusses further the operational and technical performance of the Project and theKESC system.

25. Maintenance was not addressed at appraisal. The OEM observed from subproject sitesand substations visited that maintenance for distribution operations generally failed to follow

accepted international practice and was affected by shortages of equipment, particularly meters,fuses, transformers, and connectors. Discussions with KESC revealed the lack of a systematicapproach to maintenance.

B. Performance of the Operating Entity

26. At appraisal (FY1987 being the last available full-year accounts), KESCs financialperformance was considered unsatisfactory, due largely to factors beyond its control. KESCreported an operating profit after depreciation and interest of PRs340 million, or 8.7 percent oftotal revenues.Liquidity was affected by a dividend provision of 85 percent of profit before tax, ahigh level of arrears from provincial government agencies, and a reluctance by the federalGovernment to approve tariff increases. Prior to approval of ADBs loan, the Governmentintroduced several measures to restore financial viability. These included (i) reductions in theprice of natural gas and fuel oil for generation, (ii) a revision of loan terms on government debt,(iii) implementation of recommendations to integrate the tariff structures of KESC and WAPDA,

and (iv) a holiday period on dividend payments.

27. The main indicators of KESCs financial performance are summarized in Table 3 (seealso Appendix 6). KESCs PDP for FY1989-1993 projected (i) a total investment ofPRs23.4 billion, (ii) an increase in total operating revenue by 22 percent a year in nominalterms, (iii) an increase in operating profit before depreciation and interest by 20.8 percent perannum, (iv) a debt service ratio ranging from 1.8 to 3.1, and (v) a rate of return on historicalassets increasing from 10 to 14.5 percent. Actual total PDP investment expenditurewhich,because of delays, did not include funding under the Project of PRs5.3 billionwasPRs17.2 billion, or 74 percent of that planned.26 Actual operating revenue increased at16.8 percent per annum, and gross operating profit in FY1993 was PRs3.1 billion comparedwith PRs5.7 billion forecast. Except for FY1991, KESCs debt service ratio remained untilFY1996 slightly above the loan covenanted level of at least 1.3, but not near as high asprojected at 3.1 for FY1993. Because of a switch in accounting practice to value assets on acurrent basis the OEM could not monitor the rate of return on historical assets


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financial cost of its operations and debt servicing. By FY1998, KESC was financially insolvent.ADBs financial covenants to ensure (i) a current ratio of not less than 1, (ii) a debt service ratioof at least 1.3 times net revenues, and (iii) a self-financing ratio of at least 0.25 from FY1991were not complied with.

Table 3. Financial Performance of KESC(PRs billion)

Fiscal Year Ending 1987 1991 1993 1995 1997 1998 1999 2000

Gross Revenue 3.9 7.3 9.9 12.7 16.3 22.5 23.8 26.0Fuel Costs 1.4 2.7 4.5 5.3 11.0 11.7 9.3 13.9Other Operating Expenditure 0.9 1.5 2.1 3.3 6.5 10.4 14.3 15.1Gross Operating Profit

a1.7 2.9 3.1 3.7 (1.7) 0.0 (0.4) (4.0)

Profit Before Tax 0.3 0.7 0.6 0.2 (6.8) (6.9) (7.4) (12.8)

Appropriationsb 0.3 0.9 0.1 0.1 (1.2) (1.2) 0.1 0.1

Net Fixed Assets 10.5 20.8 21.1 23.8 27.0 43.3 45.0 43.8Long-Term Loans 6.5 14.1 12.3 23.0 38.0 42.5 53.2 51.1Total Assets 13.2 28.0 30.2 40.9 59.5 67.1 69.6 66.2

Performance IndicatorsCurrent Ratio

c1.3 0.9 0.8 1.4 0.8 0.7 1.0 0.5

Debt Service Ratiod

1.3 1.0 1.5 1.3 (0.5) (0.1) (0.4) (0.7)Self-Financing Ratioe 0.2 .. .. 0.2


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Bin Qasim 3, 4, 5, and West Wharf 1 and all rehabilitation and expansion works in transmissionand distribution. The benefits included all incremental energy revenue up to FY1995, which wasthereafter held constant through FY2015. Associated operation and maintenance expenditures,including fuel costs, were estimated up to FY1993 and thereafter held constant through FY2015.The base case EIRR of 12.7 percent and FIRR of 11.1 percent were sensitive to variations inenergy sales, tariffs, fuel prices, and capital costs.28

31. The PCR extended the completion year of the Project and repeated the approachadopted at appraisal, taking into account actual costs and revenues from FY1991 to FY1998.29The PCRs lower FIRR of 4.5 percent largely reflects differences in scheduling, accountabilityfor capital invested,30 and incremental sales.31 The lower EIRR of 5.7 percent arises because ofthe same factors.32

32. Reestimates of the time-slice calculations based on all investment additions from FY1987

to FY1998 are less than zero (FIRR) and 1.6 percent (EIRR). However, because of the reducedproject scope to address system losses and subsequent insufficiency of investment in distributionupgrading to achieve an overall reduction in system losses for KESC, the time-slice approach isnot an appropriate methodology for assessing the financial and economic viability of the Project.Estimates for typical individual subprojects visited by the OEM, which range from 16.5 percentto more than 50 percent for the FIRR, and from 23.7 percent to more than 50 percent for theEIRR, attest to the viability of the subprojects. Comparison of the subproject estimates with thetime-slice estimates calculated at appraisal and in the PCR is shown in Table 4. Appendix 7provides details of the methodology, assumptions, sensitivity, and workings underlying the FIRRand EIRR calculations.

Table 4: FIRR and EIRR Estimates(percent)

Item Appraisal PCR PPARa

FIRR 11.1 4.5 16.5->50

EIRR 12.7 5.7 23.7->50

EIRR = economic internal rate of return, FIRR = financial internal rate of return,PCR = project completion report, PPAR = project performance audit report.a

For individual subprojects.

D. Sustainability

33. The sustainability of reduced transmission losses, improved voltage reliability, andreduced outages depends on generation sufficiency and optimal load management. Generationsufficiency to meet load growth has been achieved through power purchases from IPPs andWAPDA. The transmission line capacity developed under the Project is sufficient to meet the


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load growth for several years. However, transformer capacity is near maximum on mostdistribution feeders, and higher transformer capacities will be needed to meet peak demand andavoid transformer failures with attendant load shedding. Capacitors on 11 kV circuits areneeded to counter reactive power loads and reduce technical losses in distribution. Assumingthat future power purchases match load growth requirements and that the appropriateinvestments are made in load management and distribution upgrading, the technical benefits ofthe Project are sustainable. However, it is very uncertain that the needed investment indistribution upgrading and system control facilities will be available. KESCs own investmentcapacity is severely constrained by its financial insolvency, and although KESC is currentlysubject to restructuring, funding for upgrading is not included. While privatization under therestructuring program is planned for June 2002, there is likely to be considerable delay. In theinterim period to privatization, which may not result in full divestment of the Governmentsholding (para. 57), only minimum investment is being undertaken. This is insufficient to counterincreasing losses with ever-higher power demand. Without further investment for distribution

upgrading, the sustainability of the Project will be compromised.

34. Although the sustainability of KESCs investments is very uncertain, the Governmentappears committed to sustaining efforts for a recovery of nontechnical losses. KESCs initiativeswith pilot projects for monitoring and metering all consumers have met with promising success.Other initiatives for recovery through technical solutions, including improved cabling that cannotbe tapped, are being pursued. Provisional capital cost estimate for reducing nontechnical lossesto an international level is around $130 million,33 and it will take two or three years to fullyimplement these initiatives.

35. Parallel to the urgent need to reduce transmission and distribution losses and restoreinvestment to a viable level, there is a need to adjust electricity tariffs so that the revenueavailable to KESC is in line with its long-run average costs. KESCs institutional capacitydepends on a continuing commitment to enhancing operational efficiencies through moreeffective management of information and technical systems.


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IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS

A. Socioeconomic Impact

36. The project components, which were part of the Governments Seventh Five-Year Planto reduce power shortages, were premised on the need to eliminate the potential for futureincreased technical losses, avoid load shedding, and meet forecast power demand. Nomeasure of the socioeconomic factors was evaluated at appraisal or during implementation.Electrification of new areas formed part of the power demand projection, but the Projects

emphasis was to improve the supply system to better cope with anticipated aggregate demandrather than expand the system to allow new connections.

37. Notwithstanding the Projects limited social objectives, connections under KESCs PDPincreased by an average of 5.2 percent per annum, from 0.8 million in FY1987 to 1.4 million inFY1998. This rate exceeds the average growth rate of the workforce, and indicates the extent towhich expansion of electrification is meeting social demand.

38. Construction works are estimated to have employed more than 3,000 people and to

have helped build resource capacity in technological, construction, and management skills.Wages and salaries, together with local procurement of materials, amounted to an estimatedPRs2.8 billion. The new and expanded grid stations created permanent positions forapproximately 40 technical and 120 nontechnical staff. KESC employed some 12,000 personsin FY2001.

39. The Project was gender neutral, yielding no particular social or economic benefit towomen through its implementation.

B. Environmental Impact

40. The appraisal did not specifically address environmental aspects. During the OEMs visitto selected project sites, no adverse environmental impacts of any significance were observed.The transmission lines were at or above minimum height clearances and were constructed, inthe main, across clear areas. The substations were fenced off and noise from transformers was

not audible outside the substation fence boundaries. Personnel safety measures againstaccidental high-voltage electrocution were incorporated into all new substation and transmissionline designs.

C. Impact on Institutions and Policy


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tariffs became increasingly difficult. Even so, adjustments were made in excess of cost inflation(para. 29).

42. Using project funding to meet distribution expansion requirements at the expense ofupgrading the existing network undermined the Projects financial institutional strengtheningaims. Computerization was intended to enhance technical planning and load management, andimprove billing, accounting, and management information systems. The computerizationcomponent was, however, deferred to ADBs KESC Sixth Power (Sector Loan) Project and latercanceled because of KESCs funding constraints. Recommendations were prepared by theimplementation consultants for adoption of SCADA and CADPAD programs,34 and the provisionof computer hardware for load forecasting, transmission and distribution planning, and systemmonitoring. Again as a result of funding constraints, the implementation of recommendationswas deferred. The consequence of not modernizing operational load control systems has leftKESC with obsolete, nonfunctioning, and inefficient manual systems, so that weaknesses in

distribution evident at appraisal essentially remain.

43. The Appraisal Mission found that KESC had the capacity and capability to implement thedistribution components of the Project without any assistance by consultants. This turned outnot to be the case. The Project required an annual quantum of distribution work more than fourtimes that previously undertaken by KESC. As time was of the essence for achieving distributionefficiencies that would benefit KESCs overall system, the appointment of distributionconsultants was essential. The consultants help would have resulted in more efficient use ofKESCs resources and would have strengthened its capacity to manage the larger amount ofcontracting inputs required. The negative consequence of not appointing distribution consultantsled to the failure to implement subprojects as planned, and equipment and materials intendedfor distribution upgrading (to reduce technical losses) being used instead to meet distributionexpansion.

44. The Project introduced new materials and equipment, but KESC staff were not familiarwith their use or able to gain this knowledge.35 ADBs close coordination with other aid agenciesand financing institutions was an influencing factor in their participation in KESCs PDP (footnote

7), but ADBs review and consultation missions appear to have been largely in relation toprogress on project implementation and concern for adherence to loan covenants, rather thanpolicy reforms. The recent restructuring program supported by ADB reflects the urgent need forpolicy reforms related to ownership, tariffs, and IPPs to restore the financial viability of thepower sector.36


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V. OVERALL ASSESSMENT

A. Relevance

45. The Projects rationale to support the Governments Seventh Five-Year Plan to meetinvestment requirements for power transmission and distribution to Karachi and its environs wasconsistent with ADBs assistance strategy for improving operational efficiencies and mobilizingcofinancing to meet investment needs in the power sector. Without the Project, KESCstransmission system would have been insufficient to evacuate new generation from Bin Qasim

to load centers. Technical losses would also have been higher and extensive overloading wouldhave resulted. Voltage reliability across the low-voltage lines would have remained poor andcaused consumer appliances and electric motors designed for 220 V to burn out. Higheroperating costs would also have resulted. The rationale for the Project, at appraisal andcurrently, is assessed highly relevant.

B. Efficacy

46. Project implementation followed arrangements envisaged at appraisal except for delays,reductions in scope, and a variation in project purpose relating to the distribution component.

Actual achievements under the Project were mixed. The Project increased transmissioncapacity to carry more than 1,000 MW of new generation to meet expanding demandrequirements, and reduced transmission losses across KESCs total system. However, thereduced investment in distribution rehabilitation made it impossible to reduce KESCs overallsystem losses in the face of growing load demand. KESCs financial performance improved in

line with forecasts up to FY1990, but thereafter followed a deteriorating path as system losses,the cost of fuel and power purchases, and interest costs mounted. Sales revenues did not keeppace with operating, administration, and debt-servicing expenditure so that ADBs financialcovenants, which aimed at enhancing KESCs self-financing capacity, could not be met.Measures aimed at institutional strengthening and computerizing KESCs load management anddistribution planning, billing, accounting, and personnel management systems were cancelledfor lack of local funds so that weaknesses identified at appraisal essentially remain. On balance,the Project is assessed partly efficacious in terms of achieving its stated purpose and targets.

C. Efficiency

47. The FIRR/EIRR estimates for rehabilitation of three 11 kV feeders and investment intransmission range from 16.5 percent to over 50 percent and are indicative of the viability of


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D. Sustainability

48. KESCs operations, of which the Project is a small part, are not sustainable without amajor restructuring and measures that include a substantial infusion of equity capital, reducingsystem losses, improving administrative efficiencies, enhancing the skills of technical staff,reducing indirect taxes on the electricity tariff, and introducing workable regulatory policies foradjusting electricity tariffs. Although the current economic environment for restructuring is weak,a total collapse of KESC is unlikely, particularly with the continuing financial support under ADBLoans 1807-PAK/1808-PAK(SF) for energy sector restructuring (footnote 31). Transmissioncapacity is sufficient and the project benefits of transmission are largely dependent onoperational attendance, for which minimum maintenance servicing is required, and sufficienttrained personnel are available. The sustainability of distribution benefits is unlikely without astronger emphasis on investment in distribution upgrading. Overall, the sustainability of project

benefits is mixed with sustainability of the transmission component assessed as likely, and thatfor the distribution component less likely.

E. Institutional Development and Other Impacts

49. The envisaged improvements in the computer-based management systems of KESCwere not achieved. The Project partly achieved its socioeconomic aim of reducing load

shedding and blackouts, improving distribution voltage in load centers, and expandingdistribution coverage. While it was not an intended purpose of the Project to meet distributionexpansion requirements, downstream benefits from electricity sales to about 600,000 newconnections can be assumed to have helped spur economic growth. Overall, institutional andother impact benefits of the Project are assessed less than moderate.

F. Overall Project Rating

50. The Project was technically well designed at appraisal and appropriate for achieving itspurpose. Success was impaired by implementation delays, the nonavailability of local funding, aproblematic environment affecting revenue collection, and a decision to downsize the scope ofthe distribution and load management components. This decision on the distribution componentmeant that the Project was insufficient in scale to achieve targeted sector objectives.37

51. The negative aspects associated with implementation delays, the failure to reduceKESCs overall transmission and distribution losses, and the subsequent financial insolvency of

KESC tend to overshadow successful achievements at the subproject level. The positive impactof the Project was the completion of the transmission component to meet the availability ofadditional generation from Bin Qasim, without which power shortages would have been worse,and transmission losses higher. Subprojects for distribution rehabilitation, although insufficient inaggregate to meet sector targets to reduce KESCs overall transmission and distribution losses,were individually successful and attest to the collective viability of the Project. Distribution


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is warranted. The FIRRs and EIRRs attest to the individual viability of subprojects, but not theircollective impact to improve the overall operational efficiency of KESC. The Project is, therefore,assessed partly efficient. The sustainability of the transmission benefits is assessed likely whilethe sustainability of distribution subprojects is assessed less likely in the absence of investmentin upgrading to match load growth. Institutional and other development impacts were negligiblein terms of strengthening KESCs computer-based management systems. Under the broadersocioeconomic aims of reducing load shedding and expanding distribution coverage, theachievement was significant, and the impact is assessed moderate. Based on these evaluation

judgments, the Projects overall rating is partly successful.

G. Assessment of ADB and Borrower Performance

53. ADBs overall performance is assessed partly satisfactory. The technical feasibility of theProject was reviewed, and project design was consistent with least-cost developmentconsiderations. Commitments for cofinancing from J EXIM were influenced by ADBsparticipation, but there was no catalytic impact outside of the Project for KESCs widerinvestment program. Procurement and contracting were carried out in accordance withcompetitive bidding procedures and with appropriate supervision. Monitoring through reviewmissions was adequate. Detracting from ADBs performance was (i) an error of judgment madeat appraisal pertaining to KESCs capacity to implement the Project as a sector loan and withoutassistance by consultants for the distribution components (para. 43), and (ii) not fully addressing

the technical implications of approving changes in project scope for achieving the overall projectpurpose.

54. The Borrowers performance is assessed as unsatisfactory. Contrary to obligationsunder the Loan Agreement, KESCs institutional and financial performance has deteriorated.Revenues in the form of surcharges on the electricity tariff have been exacted at the expense ofallowing KESC to be financially insolvent. Despite the many concerns prior to loan approval andloan effectiveness, and during the 18-month loan suspension, the precariousness of KESCs

financial position appears to have been underestimated, and commitment from the Borrowerseems to have been lacking.


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VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS

A. Key Issues for the Future

1. Surcharge on KESC Electricity Tariffs

55. Consumer affordability and KESCs financial performance are negatively affected by theactual tariff paid by consumers, which is twice KESCs reported average revenue tariff. Thedifference is made up of a surcharge paid to the Government. As affordability of the actual tariffpaid by consumers is a cause of political resistance against increasing tariffs, the issue of what

is an appropriate level of surcharging needs to be urgently addressed. This is particularly so inlight of KESCs insolvency and the severe constraints imposed on KESCs self-financingcapacity by the low net revenue tariff available to KESC.38

2. Policy Reforms

56. Reflective of the differential between the tariff paid by consumers and the net tariff toKESC, electricity revenues paid to the Government exceed the revenue of KESC and arecurrently around PRs28 billion ($450 million equivalent) per annum. The surcharge paid to the

federal and Sind governments is in effect a monopoly rent, but at the cost of lower investmentand reduced availability of electricity in the Karachi areapossibly by as much as 40 percent.The situation poses a policy dilemma of continuing to support a monopoly structure, whichsuppresses expansion and thereby reduces the benefits of electricity to households andbusinesses that would otherwise prevail. Perpetuating support to a system that extracts highmonopoly rents but leaves insufficient revenue to meet operating expenditures and provide anormal return on investment is also a governance issue. A closer look at restructuring iswarranted. With the right balance on incentives, both power expansion and overall tax revenues

to government can be larger than is the case at present. Future policy reforms affectingelectricity surcharges need to bear in mind investment requirements so that revenue flowssustain and expand development.

3. Privatization and Need for Continued Upgrading of Distribution

57. Privatization of KESC cannot be effected before mid-2002, and may not result in a fulldivestment of the Governments holding. The present management practice is to support onlyessential investment in the interim period up to privatization. In this regard, the lessons of the

Project are of paramount importance. The present level of technical losses of around 24 percentwill escalate without adequate attention to upgrading the distribution system. Continuingexpansion by way of new connections without upgrading existing overloaded distributionfacilities will exacerbate power outages. Urgent attention to and continued upgrading of thedistribution system are, therefore, recommended. To effect this upgrading, a decision relating tousing existing materials in store for expansion and upgrading is needed (footnote 13). The


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B. Lessons Identified

58. The key lessons derived from the Project are (i) the critical importance of scale andtiming for upgrading distribution systems to improve overall system efficiencies (paras. 11, 22,and 24); (ii) the need for ADB to be more circumspect in appraising sector loan objectives and

the likelihood of achieving them, particularly where target achievements depend on theavailability of local funding and the capability of the power utility (paras. 11 and 43); and (iii) theneed to replace KESCs nonfunctional and obsolete CADPAD system for identifying andselecting distribution feeders for upgrading, in order to reduce distribution losses (para. 42).

C. Follow-Up Actions

59. ADB should take into account the lessons identified and ensure future power sector loanprojects are reviewed with an understanding that the impact of changes in project scope can becritical to the achievement of project purpose.

60. The Government should take urgent measures aimed at (i) restructuring the electricitytariff so that the operations of KESC are financially sustainable (para. 56), (ii) providing KESCwith support for upgrading its distribution system so as to contain technical losses untilprivatization (para. 57), and (iii) developing policies backed with financial support which clarify

how KESC will meet the demand for new connections in the interim period without jeopardizingtechnical efficiency (para. 57).

61. KESC should (i) initiate as soon as possible a request for funding to install capacitors onits low-voltage feeders (para. 16); (ii) take immediate steps to improve the technical skills of itsstaff to meet upgrading, servicing, and connection standards (paras. 16 and 25, and footnote30); (iii) continue to develop effective recovery mechanisms for dealing with nontechnicallosses, outstanding customer accounts, errant staff, and contractors (para. 34); and (iv) in

consultation with the Government, take steps as soon as possible to contain further increases indistribution losses (para. 57).


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APPENDIXES

Number Title Page Cited on(page, para.)

1 Approved and Actual Project Scope 19 2, 3

2 Purpose, Targets, and Actual Outcomes 21 2, 3

3 Technical Review and Recommendations 23 4, 10

4 Project Cost 27 5, 12

5 Implementation Schedule 28 5, 13

6 KESCs Key Performance Indicators 29 6, 20

7 Financial and Economic Performance of the Project 30 10, 32

A di 1 1


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Appendix 1, page 1

APPROVED AND ACTUAL PROJECT SCOPE

Item Approved Actual

Part A: Transmission Reinforcement and Expansion (see also subtargets Appendix 2)

New Grid Stations 7 a 4 b

Extension of Existing Grid Stations 5 c 14 d

Additional Transmission Lines and Connections 8 e 13 f

Connection of Grid Substations 8 g 4 h

Reinforcement of Transmission 220 kV 2 Substations i 2 Substations j

Reinforcement of Transmission 132 kV 4 k 2 l

Capacitor Banks of 4 MVAR each 50 94 m

Part B: System Control and Protection Upgrading

Installation of Signaling Equipment 2 Substations Completed

Upgrading of Protection System Signaling 19 Lines Completedn

Improvement of Telecommunications Repeaters 5 Lines

Telephone System

Data Speed 600 Baud

Completed n

Completed o

Deferred p

Standardization of RTU Data Upgrade 34 Substations Deferred p

Upgrading of Load Despatch Center New LDC

Connection to WAPDA

Deferred p

Deferred p

Part C: Distribution Rehabilitation and Expansion

11 kV Distribution Reinforcement 487 km 566 km

0.4 kV Low Voltage Distribution Rehabilitationand Expansion q

-0.4 kV Overhead and Underground Lines

-11/0.4 kV Transformers Capacity

1,500 km

922.5 MVA

766 km

439.5 MVA

Capacitor Installation 260 MVAR Deferred r

Computer Hardware and Software Completed s

Part D: Consulting Services

C lti S i f C t i ti C l t d

Appendix 1 page 2


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Appendix 1, page 2

Footnotesa 66 kV and 132 kV at West Wharf, 132 kV at Mauripur North, Deh Kharkharo, Site II, Korangi East, and Deh Surjani.

Total transformer capacity 280 MVA.b 132 kV at Surjani, Malir, Queens Road, and Lyari. Total transformer capacity 160 MVA.c

At Gulshan, Balouch Colony, Hub Chowki, Defence, and Civil Centre. Total transformer capacity 260 MVA.d

At Gulshan, Hub Chowki, Defence, Civil Centre, Civil Aviation Authority (CAA), Dhabej, Export Processing Zone,Landhi, Liquatabad, Orangi Town, Baldia, Clifton, Garden East, and Jacob Line. Total transformer capacity 800 MVA.

eCovering 132 kV links: West Wharf-Queens Road; West Wharf-Garden East; Korangi East-Korangi Town; Gizri-Queens Road; and looping in at Site II; Mauripur North, Deh Kharkharo, and Deh Surjani. Total 28.8 kilometers (km)cable, 34 km overhead.

fCovering 132 kV links Korangi West-Korangi South, Valika-North Karachi, Pipri West-Landhi, Korangi West-Gizri-Queens Road, Lyari-Site, Garden East-Jacob Line, Site II-Liquatabad, Site GT-Site, Malir-CAA and looping in atUniversity Road, Surjani, Korangi South, Korangi West. Total 44.7 km cable, 31.2 km overhead.

g 132 kV line feeder additions at Queens Road, Gizri, Korangi Town, Langhi, and modifications to four other stations.h

For sites with existing 132 kV switchgear, line feeder additions at Gulshan, Jacob Lines, Valika, and Site. Also circuitbreakers added on 132 kV cabled tee to Malir, at the transmission line tee point.

iInvolving 220 kV connection Baldia-West Wharf (22.3 km of double circuit), installation of 1 x 250 MVA interconnectingtransformers at Baldia and West Wharf, and associated 132 kV switchgear at Baldia and West Wharf.

jInvolving 220 kV connections Landhi-Korangi Thermal Power Supply (KTPS), KTPS-Queens Road and looping inKorangi West (total 34.5 km of double circuit), installation of 1 x 250 MVA interconnector transformer at Baldia and 2 x250 MVA interconnector transformers Queens Road, and associated 132 kV switchgear at Baldia and Queens Road.

kInvolving installation of 132 kV lines between Gulshan-Korangi Development Authority (KDA) (11.5 km), Baldia-Valika(11.8 km), and Landhi-Pipri West (17 km) and 66 kV looping from Gadap to Malir.

l

132 kV Landhi-Pipri West (17 km) and 132 kV looping CAA to Malir.m 376 MVAR added at grid substations following decision not to add on 11 kV feeders.n

Extensive power line carrier and protection signaling equipment addition completed at all substations.o

Telephone access to all substations added through power line carriers.p

Loans 1314-PAK/1315-PAK(SF): KESC Sixth Power (Sector Loan) Project, for $200 million, approved on22 September 1994.

qThe two components 0.4 kV rehabilitation and distribution expansion are summed here as no distinction is drawn byKESC as to where equipment was applied. At appraisal, rehabilitation included 1,000 km lines and 322.5 MVAtransformer capacity and expansion, 500 km lines, and 600 MVA transformer capacity.

rAddition of distribution capacitors was indefinitely deferred.

s

Computer-assisted distribution planning and design software purchased and training completed, now obsolete.Specification for other computerization completed.t

At appraisal, the scope included also advice and assistance during distribution implementation, but this was laterdeleted.


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PURPOSE, TARGETS, AND ACTUAL OUTCOMESaOverall Donor-Assisted Program/Project

Purpose/Scope Targets Actual Outcomes and Impact

1. Sector

Expand power generation capacity through existing andnew plants

Increase generation capacity by 830 megawatts (MW) by FY1993 630 MW added200 MW at West Wharf deferred210 MW at Bin Qasim 6commissioned in FY1998

Reinforce and expand transmission capacity Expand the Karachi network in pace with load growth Completed

Capacity for full generationdispatch installed

Improve system reliability and power distributionefficiency through rehabilitation and reinforcement ofexisting transmission and distribution systems

Eliminate load shedding and reduce system losses to 15.5 percentby FY1995

Not achieved. Losses were31.1 percent by FY1995 and34.3 percent by FY1998Load shedding common in FY1997

2. Project

Augment and expand the Karachi Electric SupplyCorporations (KESCs) transmission and distributioncapacity to meet the anticipated growth in powerrequirements through the end of FY1991, and for a three-year time-slice of KESCs power development plan forFY1989-1993

Part A: Transmission Reinforcement and Expansion

Install 50 capacitor banks of 4 megavolt-ampere reactive (MVAR)each at 11 kilovolt (kV) grid stations

Construct and reinforce transmission involving 44.6 kilometers (km) of 220 kV lines 120.1 km of 132 kV lines 5 km of 66 kV lines 7 new substations 5 existing substations

94 x 4 MVAR capacitor banksinstalled

Constructed: 62.9 km 220 kV 155.9 km 132 kV 4 new substations Extended 15 substations

Part B: Distribution Rehabilitation and Expansion Rehabilitate 500 11 kV feeders (487 km) Rehabilitate 0.4 kV feeders (1,000 km) and extension for new load

(500 km) Rehabilitate 0.4 kV network with addition of 322 megavolt-ampere

(MVA) transformer capacity and add 600 MVA for load growth Install an additional 260 MVAR of 11 kV capacitors

566 km 11 kV feeders Total rehabilitation and

extension 0.4 kV, 766 km Added transformer capacity

439.5 MVA No distribution capacitors added

a Although similarity in format exists, this comparison is not intended to represent a logical framework. A logical framework was not prepared for the Project at appraisal.

Appendix2,page

1


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Appendix 3, page 1

TECHNICAL REVIEW AND RECOMMENDATIONS

A. Transmission Rehabilitation and Expansion

1. The objective was to transmit the planned increase of 630 megawatts (MW) from 3 x 210MW generators at Bin Qasim (units 3, 4, 5) to the load centers in Karachi. The package ofmeasures proposed to transport the power from Bin Qasim included seven new grid stations,expansion of five existing grid stations, additional transmission lines, reinforcement of thetransmission network to 220 kilovolts (kV), expansion of the existing 132 kV network, andinstallation of 50 capacitor banks of 4 megavolt-amperes reactive (MVAR) each on the 11 kVnetwork.1

2. Transmission lines inspected by the Operations Evaluation Mission included new andrefurbished 132 kV circuits and new 220 kV circuits. While some were built on lattice towers,most used monopoles (sectored steel poles), which were more suitable for the narrow urbancorridor requirements. The transmission lines were built to accepted design and constructionstandards, although the use of copper conductor should be reviewed. All-aluminum alloyconductor is used elsewhere in similar corrosive atmospheres with good results.

3. The 220 kV gas-insulated switchgear substation visited featured double 220 kV bus and

two 250 megavolt-amperes (MVA) 220 kV/132 kV interconnecting transformers. The design andconstruction complies with accepted standards. Provision has been made for local computercontrol and remote control and monitoring, but implementation of the related communicationsand system control and data acquisition (SCADA) facilities was deferred.2 Operation of thesubstation and overall transmission system efficiency would be improved by the addition of aSCADA system.

4. Two 132 kV/11 kV grid substations were inspected. The first was a new substation

featuring an indoor design with conventional equipment. This is a good solution for avoidingpollution problems while maintaining low cost. The main and transfer 132 kV bus system isconservatively designed. Removal of the transfer bus and use of a three-switch mesharrangement would have provided a more cost-effective solution. At the second substation,4 MVAR 11 kV capacitor banks had been added for reactive compensation. One of these wasoutdoors in direct sunlight and rated only to 40oC. The method of installation should beamended for future additions.

5. In all transmission substations visited, power and interconnecting transformers had no oil

bunding or separation facilities. These are needed to mitigate the environmental effects of oilspillage. Also, transformers should be located in fire-resistant vaults to minimize damage in theevent of a transformer fire. The one substation seen with barriers between transformers usedconcrete construction. This can be easily damaged by heat and rendered ineffective. Firebarriers should be of metal or refectory brick construction.


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Appendix 3, page 2

B. Distribution Rehabilitation and Expansion

6. This project component aimed at reducing the high technical energy losses in the

distribution network, and improving voltage and reliability. To achieve these objectives, the needfor a computerized load flow and feeder optimization program was identified. Feeders withreactive loadings were to be upgraded with short capacitors to counter the inductive voltagelosses caused by fans, air conditioners, and fluorescent lighting. The installation of shortcapacitors was a key design feature. For the secondary 0.4 kV lines, the need for extensivereconditioning and transformers was envisaged. Envisaged modifications included replacingphase cable with heavier cable, adding distribution transformers and relocating these to eventhe load between phase wires, and installing metering equipment.

7. The consultants of the Karachi Electric Supply Corporation (KESC) formulated thedistribution subprojects, completed the procurement process, and then had no furtherinvolvement with the distribution work. While the Project was completed in 1997, much of thedistribution component was not implemented. As of May 2001, approximately 32 percent($30 million) of the distribution materials purchased had not been used and were held in KESCsstores system (Table A3.1). The main reasons for incomplete implementation are (i) the localauthorities have restricted road excavation for cable laying, (ii) KESC is reluctant to installfurther copper conductor given high levels of theft, and (iii) KESC staff do not have the

knowledge required to use some of the materials.

Table A3.1: Remaining Distribution Equipment Stock Levels, May 2001a

ItemQuantity

Remaining inStock

Percentage ofProcurement

ApproximateValueb

($000)

Poles for 11 kV, 0.4 kV 10,734 47 4,973Copper Conductor 4,287 km 44 13,2000.4 kV Cable 51.6 km 23 1,44011 kV Cable 63.1 km 17 1,89611 kV Ring Main Units 55 22 1,05411 kV Vacuum CircuitBreaker Panels

132 26 3,739

Ground Rods/Clamps 23,400 sets 88 1,118

Other Items 3,130

Total 32 30,548

km = kilometer, kV = kilovolt.a

Source: KESC submission to the Operations Evaluation Mission.b

In 1996 dollars when procured


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Appendix 3, page 3

9. Generally, the overhead construction is substandard. This is particularly so for thejointing and connection of conductors, as connections are made by twisting or splicing the wires.Twisted connections are mechanically weak and often result in high resistance joints. These

heat when load is applied, increasing technical loss, and frequently fail, resulting in feederoutages. While KESC has many conductor joints and connectors in stores, staff are not familiarwith their use, and the need for training is evident.

10. Load imbalance is a significant problem for KESC to address. With the present vertical0.4 kV construction, the lowest phase is always highest loaded due mostly to ease of access forboth legal and illegal connection. This leads to overloading of equipment and higher losses thanfor a balanced system. Use of aerial bundled conductor would assist load balancing andreduction of losses, as would regular reviews of loading and connections.

11. Pole-mounted substations are generally well built, but there are several ways KESCcould improve their design and construction. For example, 11 kV cables should be securelyfastened to the poles by cable supports, rather than the full weight of cable applied to thetermination. The practice of leaving cable retermination loops at the feet of poles should beabandoned, as these are likely to introduce cable faults in the future. Those loops seen wereexposed to the sun and the bending radius used is well below the recommended minimum.Low-voltage cables should be secured to avoid the radiators, the hottest part of a transformer.

Low-voltage switch boxes should be redesigned to ensure that they can be securely closed.

12. Indoor substations viewed were generally of good design. They are spacious and allowaccess for working and equipment replacement. However, 400-volt (V) switchboards, of open-framed design, are considered to be hazardous and oversized. Use of type-tested metal-cladswitchboards is recommended. Solid links used in fuseholders, while providing ability to meetoverloads, provide no protection for 400 V cables. Cable faults generally result in transformertripping and where transformer protection relays have been removed by theft or vandalism in

feeder tripping. KESC should ensure that all cables are correctly fused to reduce outages andequipment damage.

13. Maintenance of all distribution transformers, and pole-mounted substations, appearsinadequate. The transformers are generally highly loaded and burn out at the very high rate of12 percent of the total population per year. KESC should increase load monitoring andpreventive maintenance to achieve lower overall operating and maintenance costs throughreductions in transformer rebuilds and feeder faults.

C. Power Factor Correction

14. The power factor of distribution system loads was to have been improved under theProject through the addition of 260 MVAR of 11 kV capacitors. KESC installed some distributioncapacitors but discontinued this when various technical problems were experienced. Instead,94 banks of 4 MVAR capacitors were installed only in grid substations This resulted in a

A di 3 4


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Appendix 3, page 4

Table A3.2: Installed Capacity of KESC, 1987-2000

Fiscal Year Megawatts (MW)

1988 1,1081989 1,1081990 1,3181991 1,7381992 1,7381993 1,7381994 1,7381995 1,7381996 1,7381997 1,550a1998 1,7561999 1,7562000 1,750

a Reduced capacity due to the retirement of 2 x 33 MW units and 1 x 66 MW unit.Source: Karachi Electric Supply Corporation (KESC).

Appendix 4


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Project Component

Expansion and Augmentation 24.79 6.30 31.09 37.57 3.44 41.01

Extension of Grid Substations 5.86 1.87 7.73 24.63 2.60 27.23

Additional Lines 29.17 3.04 32.21 21.92 10.87 32.79Connection of T/L to Substations 4.71 0.89 5.60 10.07 1.59 11.66

Reinforcement 20.17 6.94 27.11 0.00 0.00 0.00Reactive Power Compensation 3.75 1.60 5.35 0.00 0.00 0.00

Subtotal (A) 88.45 20.64 109.09 94.19 18.50 112.69

System Control and Protection Upgrading

Load Despatch Centers and Computer Equipment 4.25 1.01 5.26 0.00 0.00 0.00Protection Equipment and Telecom Improvements 6.71 0.40 7.11 0.00 0.00 0.00

Subtotal (B) 10.96 1.41 12.37 0.00 0.00 0.00

11 kV Reinforcement and Rehabilitation 14.48 6.39 20.87 )0.4 kV Rehabilitation 8.38 9.67 18.05 ) 44.21 40.99 85.20

Capacitor Installation 2.62 1.10 3.72 )Distribution Expansion 23.23 29.45 52.68 )

Computer Equipment and Systems 0.31 0.31 0.28 0.00 0.28

Subtotal (C) 49.02 46.61 95.63 44.49 40.99 85.48

Consulting Services 3.00 1.00 4.00 3.96 1.80 5.76

Taxes and Duties 75.96 75.96 0.00 47.32 47.32

Physical and Price Contingencies 16.67 23.10 39.77 0.00 0.00 0.00

Interest During Construction 21.40 31.54 52.94 0.00 26.18 26.18

Total 189.50 200.26 389.76 142.64 134.79 277.43

= no provision, KESC = Karachi Electric Supply Corporation, kV = kilovolt, T/L = transmission line.

Transmission Reinforcement and Expansion

Distribution Rehabilitation and Expansion

($ million)

TotalAppraisalEstimate

ForeignForeign

Exchange CostCurrency Cost Exchange Currency

PROJECT COST

Local TotalActual

Local


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1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

Appraisal schedule

Actual schedule

IMPLEMENTATION SCHEDULE

Loan suspended for

further award of

contracts

Load

Dispatch

Center

deferred to

Sixth Loan

Contract for

transmission

awarded

Final

contracts for

distribution

awarded

Loan

approval

Loaneffectiveness

Consultants

appointed

Loan

approval

Consultants

appointed

Loan

effectiveness Installation

started Commissioning


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Appendix 7 page 1


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Appendix 7, page 1

FINANCIAL AND ECONOMIC PERFORMANCE OF THE PROJECT

A. Methodology of Appraisal Report

1. The financial internal rate of return (FIRR) and economic internal rate of return (EIRR)for the Project were calculated based on all investment additions (planned and underconstruction) for the time-slice FY1987-1992.1 The investments included a planned increase ingeneration of 830 megawatts (MW) at Bin Qasim 3, 4, 5, and West Wharf 1 not funded underthe Project, and all transmission and distribution expansion. The time-slice considered allderived incremental energy revenue up to FY1995 after which incremental revenue was heldconstant through FY2015. Operation and maintenance (O&M) expenditures, including fuelcosts, were projected up to FY1993 and thereafter held constant through FY2015. Projectionsfor incremental energy sales were based on the load forecast of the Karachi Electric SupplyCorporation (KESC) for FY1988-1993. Transmission and distribution losses were projected todecline from 18 percent in FY1987 to 17 percent in FY1992 and to 15.5 percent in FY1995.

2. The FIRR calculation included direct taxes and duties on capital items, which the EIRRexcluded. O&M costs were calculated as a fixed percentage (1 percent of incrementalgeneration and 1.5 percent of incremental transmission and distribution) of capital costs net oftaxes and duties. Fuel costs were calculated separately from O&M based on FY1987 fuel prices

and projections to FY2000 by the World Bank.2

All benefits and costs were valued in financialterms, excluding financial charges, depreciation, and taxes, and in terms of the projectedincremental sales for KESC at a tariff level of PRs1.14/kilowatt-hour (kWh) in FY1991 rising toPRs1.31/kWh in FY1995, and thereafter held constant. The EIRR was determined by valuing allcosts and benefits in economic terms. Capital, fuel, and O&M costs were adjusted to removetaxes and duties. Local currency expenditures were observed to be mostly nontradables andexpressed in border price terms by applying a standard conversion factor of 0.9. Theincremental energy benefits were valued based on consumers willingness to pay (PRs1.6/kWh)and converted to border prices by applying the standard conversion factor of 0.9.3 The FIRRobtained was 11.1 percent and the EIRR 12.7 percent.

B. Methodology of the PCR

3. The time-slice reestimates of the FIRR and EIRR, for the project completion report(PCR) followed the same approach as at appraisal, but used a different time-slice periodbecause of the delays in project implementation, namely FY1991-1998. Actual informationrelating to capital expenditure, operating costs, incremental sales, and tariffs up to FY1998 was

used, and thereafter projected. Differences between estimates were largely explained by

Appendix 7, page 2


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Appendix 7, page 2

underlying differences in schedule, capital invested, and incremental sales. The most significantdifferences were the assumptions for imputing incremental sales and economic pricing.4

C. Methodology of the PPAR

4. The time-slice approach to evaluating the financial and economic viability of a project isappropriate only to the extent that the project represents a major incremental investment andthat the benefits and operating costs associated with the project cannot be readily separatedfrom operating activities of the rest of the system. Several factors suggest that the time-sliceapproach was not an appropriate methodology for this sector loan: (i) the project investmentrepresented only 17 percent of KESCs total capital investment during FY1989-1998;5 (ii) thesub-investments, except for the 220 kilovolt transmission reinforcement, had an isolated impacton the total system; and (iii) delays in implementation in the face of growing load demand meantthat efficiency improvements from the Project were outweighed by system losses generatedelsewhere in KESCs system. Under such circumstances, it is better to evaluate individualproject components and assess their impact on avoiding or reducing energy losses.

5. The Operations Evaluation Mission calculated individual subproject FIRRs and EIRRsfor subprojects that it visited, using material and labor cost data provided by the Water andPower Development Authority (WAPDA) for postevaluation in 1999 of Loan 824-PAK: WAPDA

Tenth Power (Sector Loan) Project. Details of the calculations are prepared on a best estimatebasis for the cost of cable/conductor and rehabilitated transformers, and engineering estimatesfor load and energy savings. The results are summarized in Table A7.1, alongside the time-sliceestimates at appraisal and project completion. The project performance audit report (PPAR)results are considered indicative of the viability of components implemented under the Project.

Table A7.1: Comparison of FIRR and EIRR Estimates(percent)

Item Appraisal PCR PPAR

FIRR 11.1 4.5 16.5->50EIRR 12.7 5.7 23.7->50

EIRR = economic internal rate of return, FIRR = financial internal rate ofreturn, PCR = project completion report, PPAR = project performance auditreport.

6. Table 7.2 provides details of the FIRR and EIRR estimates for individual subprojectsvisited at Rustan, Mohammadi, Malir, and North Karachi by the Operations Evaluation Mission.

Appendix 7, page 3


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pp , p g

Table A7.2: Results of FIRR and EIRR Estimates for Subprojects

(Visited by the Operations Evaluation Mission)

Rehabilitation FIRR (%) EIRR (%)

11 kV feeder, Rustana 16.5 23.7

11 kV feeder, Mohammadib 22.7 32.0

11 kV feeder, Overhead at Malirc > 50 >50

132/220 kV Transmissiond 27.2

= not calculated, EIRR = economic internal rate of return, FIRR = financial internal rate ofreturn, kV = kilovolt.a

Involved addition of a 3.2 kilometers (km) underground cable and reduction of overloading ofthree existing feeders by redistributing load.

b Involved addition of a 3

KESC Fifth Power (Sector Loan) Project (Loan 925-PAK).Pf

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