Pakistan: Power Transmission Enhancement Investment ...

Completion Report

Project Number: 37192-033 Loan Numbers: 2396 September 2017

Pakistan: Power Transmission Enhancement

Investment Program – Tranche 2 This document is being disclosed to the public in accordance with ADB's Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency Unit – Pakistan rupee/s (PRe/PRs)

At Appraisal At Project Completion (25 October 2007) (22 August 2016)

PRs1.00 = $0.0165 $0.0095 $1.00 = PRs60.63 PRs104.75

ABBREVIATIONS

ADB – Asian Development Bank ADF – Asian Development Fund CPPA-G – Central Power Purchasing Agency (Guarantee) DMF – design and monitoring framework EAD – Economic Affairs Division EAF – environmental assessment framework EIA – environmental impact assessment EIRR – economic internal rate of return FFA – framework financing agreement FIRR – financial internal rate of return GDP – gross domestic product HVDC – high voltage direct current ICB – international competitive bidding IEE – initial environmental examination IPP – independent power producer LAR – land acquisition and resettlement LIBOR – London interbank offered rate MFF – multitranche financing facility MOF – Ministry of Finance MOWP – Ministry of Water and Power NCB – national competitive bidding NEPRA – National Electric Power Regulatory Authority NPCC – National Power Control Center NTDC – National Transmission and Despatch Company OCR – ordinary capital resources PCR – project completion report PMU – project management unit QCBS – quality- and cost-based selection RRP – Report and Recommendation of the President

to the Board of Directors SVC – static VAR compensator TA – technical assistance UoSC – use of system charge WACC – weighted average cost of capital WAPDA – Water and Power Development Authority

WEIGHTS AND MEASURES GWh – gigawatt-hour (1,000 megawatt-hours) km – kilometer (1,000 meters) kV – kilovolt (1,000 volts) MVA – mega volt ampere MW – megawatt (1,000 kilowatts)

NOTES

(i) The fiscal year (FY) of the Government of Pakistan and its agencies ends on 30

June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2009 ends on 30 June 2009.

(ii) In this report, "$" refers to US dollars.

Vice-President W. Zhang, Operation 1 Director General S. O’ Sullivan, Central and West Asia Department (CWRD) Director J. Hwang, Officer-in-Charge, Energy Division, CWRD Team leader Y. Inoue, Finance Specialist (Energy), CWRD Team member A. Sakai, Energy Specialist, CWRD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

I. PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 1

A. Relevance of Design and Formulation 1 B. Project Outputs 2 C. Project Costs 3 D. Disbursements 3 E. Project Schedule 4 F. Implementation Arrangements 5 G. Conditions and Covenants 6 H. Consultant Recruitment and Procurement 6 I. Performance of Consultants, Contractors, and Suppliers 7 J. Performance of the Borrower and the Executing Agency 8 K. Performance of the Asian Development Bank 8

III. EVALUATION OF PERFORMANCE 9

A. Relevance 9 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 11 E. Impact 12

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13

A. Overall Assessment 13 B. Lessons 13 C. Recommendations 14

APPENDIXES

1. Design and Monitoring Framework 16 2. Equipment Installed by Project 18

3. Project Costs 19

4. Loan Disbursements 20 5. Project Implementation Schedule 21

6. Status of Compliance with Loan Covenants 22

7. Financial Analysis 30

8. Economic Analysis 35

9 Quantitative Assessment of Overall Project Performance 38

BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan – Original Amount – 1st Partial cancelation (13 May 2013) – 2nd Partial cancelation (11 Nov 2014) – 3rd Partial cancelation (22 Aug 2016) – Net Loan Amount 7. Program Completion Report Number

Pakistan 2396-PAK Power Transmission Enhancement Investment Program Tranche 2 Islamic Republic of Pakistan National Transmission & Despatch Company Limited $220,000,000.00 $ 50,000,000.00 $ 5,000,000.00 $ 8,161,868.89 $156,838,131.11 1662

B. Loan Data 1. Appraisal – Periodic Financing Request (PFR) dated 29 September 2007 received by

ADB 2. Loan Negotiations 3. Date of Management Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years) 8. Terms of Relending (if any) – Interest Rate – Maturity (number of years) – Grace Period (number of years) – Second-Step Borrower

8 October 2007 13 December 2007 17 December 2007 20 May 2008 19 June 2008 17 April 2009 3 31 December 2013 29 February 2016 22 August 2016 (financial closing) 3 LIBOR plus 0.60% less 0.40% credit 17 years 3 years 17% 17 years 2 years National Transmission and Despatch Company

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9. Disbursements a. Dates

Initial Disbursement 15 June 2009

Final Disbursement 22 August 2016

Time Interval 87.5 months

Effective Date

17 April 2009

Original Closing Date 31 December 2013

Time Interval 57.3 months

b. Amount ($ ‘000)

Category

Original Allocation

First Re- Allocation

Second Re-

Allocation

Total Amount

Canceled

Amount

Disbursed 01 Works (Old) 01A Works 01B Works–Turnkey–SVC at Lahore 02A Equipment 500kV 02B Equipment 220kV 02C Equipment 132kV 02D Testing and Construction Equipment 02E Transmission Lines 02F Other Equipment 03 Consulting Services 04 Interest & Commitment Charge 05 Unallocated

7,000 0 160 6,842 158 14,000 14,000 11,863 17,000 15,800 15,019

30,000 56,000 5,000 7,000 41,000 19,000 6,000 17,000 32,000

40,000 50,000 8,000 4,000 1,000 32,000 0 3,000 1,000

40,300 48,700 7,800 3,100

770 31,100

0 3,000

270

16,101

6,000 14,000 20,219

38,482 46,832 7,517 2,826

761 30,380

0 3,000

0

Total 220,000 170,000 165,000 63,161 156,838

10. Local Costs (Financed, ADB Loan) – Not applicable C. Project Data

1. Project Cost ($ ‘000)

Cost Appraisal Estimate Actual

Foreign Exchange Cost 205.00 136.35 Local Currency Cost 71.00 41.54 Total 276.00 177.89

2. Financing Plan ($ ‘000)

Cost Appraisal Estimate Actual

Implementation Costs Borrower Financed 56.00 21.05 ADB Financed 203.10 153.84

Total 259.10 174.89

IDC Costs Borrower Financed 0.00 0.00 ADB Financed 16.90 3.00

Total 276.00 177.89

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ADB = Asian Development Bank, IDC = interest during construction.

3. Cost Breakdown by Project Component ($’000)

Component Appraisal Estimate Actual

Civil Works Turnkey

51.50 167.10

29.32 18.77

Equipment 17.10 126.80 Contingency 23.40 Interest During Construction 15.50 3.00 Commitment Charges 1.40

Total 276.00 177.89

4. Project Schedule

Item Appraisal Estimate Actual

Civil Works Contract First Procurement N/A August 2008 Last Procurement May 2008 September 2010 Completion of Work April 2010 October 2011 Equipment and Supplies First Procurement November 2007 May 2008 Last Procurement February 2010 March 2012 Completion of Equipment Installation April 2010 January 2015 Turnkey contracts First Procurement November 2007 January 2010 Last procurement February 2010 August 2012 Completion of work June 2011 January 2015

5. Project Performance Report Ratings

Implementation Period

Ratings

Development Objectives

Implementation Progress

From 01 January 2009 to 30 June 2009 Satisfactory Unsatisfactory From 01 July 2009 to 31 December 2009 Satisfactory Satisfactory From 01 January 2010 to 30 June 2010 Satisfactory Satisfactory From 01 January 2011 to 22 August 2016

Overall Project Rating a

On Track

a In 2011, e-Operations was introduced and under the new rating system, performance is rated according to technical,

procurement, disbursement, financial management, and safeguards indicators. A single rating applies to the project.

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D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Membersa

Inception Review 1 Review 2 Review 3 Review 4 Review 5 Review 6 (MTR) Review 7 Review 8 Consultation Project completion review

25–28 Oct 2008 15–18 Feb 2009 28 May–02 Jun 2009 24 Feb–03 Mar 2010 27 Sep–01 Oct 2010 07–12 Feb 2011 20–24 Apr 2012 23–26 Feb 2013 09–16 Jul 2013 02 Jul 2014 27Mar– 2Apr 2017

3 6 2 4 3 4 6 8 2 2 4

12 6

10 10 15 12 30 38 16 2 7

a, t, n a, a, g, n, o, t

g, t g, t, l, j b, c, j

b, i, p, s g, I, k, p, s, q

d, i, q, p, e, m, f, g b, r

g h, g, u, v

a a = principal energy specialist, b = senior energy specialist, c = project management specialist, d = senior portfolio management specialist, e = principal integrity specialist, f = Director/CWEN, g = energy specialist, h = finance specialist (energy), i = senior project officer (energy) Pakistan Resident Mission (PRM), j = project implementation officer, PRM, k = senior safeguards officer PRM, l = social safeguards officer PRM, m = integrity officer, n = programs officer PRM, o = procurement officer PRM, p = environment specialist consultant, q = operations analyst, r = associate project officer, s = project analyst PRM, t = associate project analyst, u = economist consultant, v = project analyst consultant. CWEN = Energy Division, Central and West Asia Regional Department, MTR = midterm review.

I. PROJECT DESCRIPTION

1. The bulk of Pakistan’s power generation capacity comprises hydropower plants located in the north of the country and thermal power plants in the south. A 500 kV transmission backbone running the length of the county connects this generation to the major load center, located in the middle of this backbone, around Faisalabad, Islamabad, and Lahore. As a result, there are always significant power flow requirements from the north or south to the center, depending on the seasonal availability of hydropower. A 220 kV secondary transmission system moves power between this 500 kV backbone and the 132 kV sub-transmission systems operated by the country’s ten distribution companies and a vertically integrated electricity utility for the Karachi region, K-Electric. 2. The power system has insufficient capacity to meet the growing demand for power, and electricity is routinely rationed at times of peak demand. This prevents developing the economy to its full potential. Capacity constraints in the power system are manifested in (i) a shortage of generation, (ii) capacity constraints on the 500kV network that prevent full utilization of available generation at times of peak demand, and (iii) localized constraints due primarily to a lack of 220/132kV supply transformer capacity, which restricts the delivery of power to the distribution companies for onward delivery to the end users. In addition to these system constraints, the sector suffers from a chronic shortage of funds. The distribution companies have higher losses and lower collections than the regulator-determined levels, resulting in a lack of financial resources with which to fulfill payment requirements to power generation companies. 3. As part of ADB’s assistance to Pakistan’s electricity sector, in 2006, ADB approved up to $800 million in loans over a 10-year period through a multitranche financing facility (MFF) to finance the development of increased capacity in the transmission system through the implementation of a range of subprojects, each selected to overcome a specific transmission constraint.1 The project is the second of four tranches of the MFF and comprises a total of nine subprojects, each involving the construction of a transmission system augmentation, such as a new transmission line or substation, to remove a capacity bottleneck. The subproject locations are spread nationwide along the transmission grid. There was also a provision for the executing agency, the National Transmission and Despatch Company (NTDC), to use a small portion of the loan to finance the purchase of tools and construction equipment to be used for the installation and maintenance of transmission system assets.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. In 2007, when the project was formulated, the government was working to achieve the economic growth targets set out in its Medium Term Development Framework, 2005–10. 2 Electricity is a key input to economic growth but as the capacity of the power system was insufficient to meet the country’s needs, electricity was being rationed with consumers receiving grid supply for several hours a day. 3 In addition to the shortage of generation, bottlenecks in the transmission system prevented the full utilization of available generation. Bottlenecks included

1 ADB, 2006, Report and Recommendation of the President to the Board of Directors, Multitranche Financing Facility,

Islamic Republic of Pakistan, Power Transmission Enhancement Investment Program, Manila. 2 Government of Pakistan, Planning Commission. 2005. Medium Term Development Framework, 2005-10. Islamabad. 3 ADB. 2017. Report and Recommendation of the President to the Board of Directors, Islamic Republic of Pakistan

Sustainable Energy Sector Reform Program Subprogram 3. Manila.

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overloaded transmission lines and a lack of transformer capacity both within the transmission grid (500/220 kV) and at grid offtake points to distribution companies (220/132 kV). 5. The need to increase the capacity of the power system to support the achievement of the government’s economic growth target remains. This involves both increasing the available generation capacity and, at the same time, increasing the capacity of the transmission system to remove power delivery bottlenecks and accommodate the connection of new generation. ADB’s country strategy supported the government’s objective of increasing the capacity of the power system to promote economic development.4 ADB’s assistance to the sector is focused more on increasing the capacity of the transmission and distribution systems rather than on the development of new generation. Consistent with this strategy, the project was designed to increase the capacity of the transmission system by removing bottlenecks that prevented consumers’ electricity requirements being fully met at times of peak demand. 6. The transmission system in Pakistan is owned and operated by NTDC, a state-owned corporation. Prior to appraisal, NTDC analyzed the performance of the power system under various load and generation scenarios to identify actual and expected constraints and to identify and prioritize projects to address the shortfall in transmission capacity. The project, as designed at appraisal, included nine high-priority subprojects. In general, these subprojects were larger than those implemented under the Tranche 1 loan and involved the construction of new grid stations and/or relatively long transmission lines. In accordance with the government’s requirements for the utilization of loan funding, each subproject was supported by the government’s planning report called PC-1 reports, prepared by NTDC, which justified the need for the subproject within the broader context of the overall development of the power system to meet the country’s electricity requirements. B. Project Outputs

7. The project constructed five new grid stations, installed additional transformer capacity in two existing grid stations, and constructed five new transmission lines. The new assets for transmission capacity installed by the project are shown in Table 1 and a more detailed breakdown showing the nine subprojects and their associated assets is provided in Appendix 2.

Table 1: Assets Installed by the Project

Asset Unit Quantity

500/220kV transformers MVA 3x600a

220/110kV transformers MVA 14x250b

500kV transmission line km 21.4



Static VAR compensator – 1

Tools and construction equipment various various

kV = kilovolt, km = kilometer, MVA = mega volt ampere, SVC = static VAR compensator a Two additional 200 MVA single phase units were installed as spares. b Three of these transformers replace existing 160 MVA units so the total additional supply

transformer capacity was 3,020 MVA.

4 ADB. 2003. Pakistan: Country Strategy and Program Update, 2004–2006. Manila.

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8. At appraisal, it was intended that the static VAR compensator (SVC) was to be installed at Quetta. While the bidding process for this subproject was started, NTDC faced significant challenges in attracting a sufficient number of eligible bids and the bidding process was canceled.5 This subproject was later deferred and is now considered for implementation in the Second Power Transmission Enhancement Investment Program (MFF2).6 However, the installation of an SVC at the New Kot Lakhpot grid station in Lahore was transferred into the project from Tranche 1 of the MFF to allow for sufficient construction time within the loan period. 9. In addition to the nine subprojects, a small portion of the loan was used for the procurement of tools and construction equipment for use by NTDC in the construction and maintenance of its transmission assets. C. Project Costs

10. A breakdown of project costs covered by the loan is shown in Appendix 3. ADB paid 100% of all equipment supply contract costs, 80% of the SVC contract cost7 and 41% of the cost of the other installation contracts. NTDC paid the balance. The costs shown in Appendix 3 include NTDC’s contribution to the cost of these contracts but do not include NTDC’s internal overhead costs, such as project management unit (PMU) costs, and the costs incurred by NTDC’s design, procurement, and construction divisions in the management, supervision, and commissioning of the project. Furthermore, the schedule only shows project costs up to the date of loan closure. Costs associated with the final commissioning of the SVC are not included and will be met by NTDC from its own resources. 11. The total project cost of contracts financed under the loan, including the NTDC component, was $174.9 million. This is about 25% lower than the baseline appraisal estimate of $235.7 million.8 Apart from the removal of the SVC at Quetta and its replacement by a similar SVC at New Kot Lakhpot, there was no change to the project scope. The reduction in costs from the appraisal estimates is likely a result of the procurement of equipment mostly from developing countries, in particular China, and the reduction in commodity prices and increase in the intensity of competition that followed the global financial crisis in 2008. To reflect these savings from the original loan amount, $50 million was canceled in May 2013 and another $5 million was canceled in November 2014. At loan closing, a balance of about $8 million was canceled, making the total cancelation about $63 million. D. Disbursements

12. The project loan was approved on 17 December 2007 and became effective on 17 April 2009. Between loan signing and effectiveness, the government needed to reorganize its appointments to the boards of government owned corporations in the electricity sector so there was no duplication or conflicts of interest. This was a condition for loan effectivity. The original closing date was 31 December 2013 and there were three extensions up to 29 February 2016. The loan was extended to its final closing date so the contractor for the SVC at New Kot Lakhpot

5 It is understood that some manufacturers did not submit bids because of concerns about the security situation in

Quetta. 6 ADB. 2016. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing

Facility, Islamic Republic of Pakistan: Second Power Transmission Enhancement Investment Program. Manila. 7 This was the SVC at the New Kot Lakhpot contract, which was transferred from Tranche 1 (see para 17). There was

no change to the payment arrangements for this contract from that of Tranche 1 because of this transfer. This transfer was approved by ADB on 2 April 2012.

8 This baseline appraisal estimate excludes contingencies and loan financing charges.

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grid substation could be paid from the loan proceeds. The loan was financially closed on 22 August 2016. A schedule showing the disbursements from the loan disaggregated by quarter is provided in Appendix 4.

13. All the contract payments for equipment procurement and 41% of all contract payments

for installation were disbursed from the project loan (para. 10). An exception was the SVC contract transferred from Tranche 1 where the payment arrangement for the Tranche 1 loan was retained and 80% of contract payments were financed by the ADB loan. Loan disbursements were paid in accordance with ADB’s Loan Disbursement Handbook (2015, as amended from time to time) under direct payment and commitment procedures. 14. The total loan disbursements were $156.8 million, 29% less than the $220 million loan amount due primarily to the lower than expected equipment costs. Financing charges against this loan were $3 million. This was reduced from the original allocation of $17 million in May 2013, after re-estimating the needs. The reallocated amount was fully utilized by June 2014. E. Project Schedule

15. A comparison of actual project implementation with the appraisal schedule is given in Appendix 5 and the actual completion dates of all subprojects are shown in Appendix 2. While the loan was approved on 17 December 2007, it was signed on 20 May 2008, and became effective on 17 April 2009 as the government needed to meet the corporate governance condition for loan effectivity (para. 12). However, during this time, preparation for the construction of the Jarwar–Sadiqabad 132 kV transmission line continued. This was given a high priority, as the line was required to evacuate the full capacity of the Jarwar combined cycle power project. With ADB’s advance contracting and retroactive financing mechanism, most contracts for materials supply and for the construction of these lines were started in July 2008. The line, which was delivered using a multi-contract approach, was commissioned in June 2009. 16. Apart from the replacement of three transformers at the Ravi 220 kV grid station, which was completed in November 2011, other subprojects were fully commissioned in 2014 or later, largely due to delays in finalizing and awarding the turnkey contracts and the time taken by the turnkey contractors to complete the works. Other causes of delays included damage to transformers during port handling and damage to current transformers in a road accident. While the bidding for SVC at Quetta seems to have been affected by security concerns in the region, security does not appear to have been a significant issue for the other components of the project. 17. For the SVC at the New Kot Lakhpot grid station under Tranche 1 of the MFF, the tender evaluation was completed by NTDC in April 2010, but the contract commenced in July 2012, due to approval delays and the time required to resolve commercial issues with the contractor. As the subproject’s completion required more time than the remaining loan period of Tranche 1 of the MFF, it was transferred to Tranche 2.9 Installation and testing were completed in February 2016, after delays caused by a dispute between the main engineering, procurement and construction (EPC) contractor and its subcontractor over issues in other contracts. The commissioning still requires uprating of the 132 kV bus to which the SVC will be connected and is in progress for completion by end-2017. This is being undertaken by NTDC with its own resources.

9 ADB’s commitment letter for SVC under Tranche 1 of this MFF expired on 30 June 2012, the loan closing date.

Transferring this subproject to Tranche 2 allowed ADB to extend the term of its commitment and NTDC to meet its financing requirements without extending the closing date of the Tranche 1 loan.

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18. No detailed implementation schedule was included in the periodic financing request or project administration manual of the project, although an expected completion year of 2011 was given for all but one subproject. This would have meant an implementation period of 42 months from loan approval for most subprojects. The remaining subprojects were scheduled to be completed by June 2012. The original loan closing was set as 31 December 2013, 6 years after approval. It is likely that this relatively long implementation period reflected the size of individual subprojects, many of which involved the construction of new substations and their incoming transmission lines, and the use of turnkey contracts for project delivery. While NTDC was familiar with the procurement of supplies and works such as transformers and switchgear, the turnkey approach was new to NTDC and required the preparation of more project specific contract documents. The loan was eventually extended to February 2016. Except for the SVC at New Kot Lakhpot and the transformer extension at Ghazi Brotha, all projects were completed by end-2014. F. Implementation Arrangements

19. The borrower was the Islamic Republic of Pakistan and the proceeds of the loan were re-lent to NTDC through a subsidiary loan arrangement. NTDC was both the executing agency and implementing agency. The project was implemented using NTDC’s internal implementation departments with its design, procurement and construction departments contributing directly to project delivery. As agreed in the project administration manual for the project, a project management unit (PMU) was established under General Manager (Projects) of NTDC and was responsible for coordinating the work of the different departments in respect of the project, communicating with ADB and ensuring that ADB’s implementation and monitoring requirements were met. 20. While the PMU establishment was a significant milestone for the whole of the MFF, the PMU structure presented issues for further improvements. The PMU did not have full control of all NTDC staff working on the project. Instead, the PMU’s role was to liaise with ADB and to coordinate the inputs to the project provided by NTDC’s planning, design, procurement, and construction departments. As the PMU was organized along functional lines with staff responsible for managing all ongoing ADB projects, there was no project manager working only on the project and responsible for coordinating the different project inputs and completing the projects on time or looking ahead to mitigate issues and risks before they escalated. 21. Five subprojects, including the two projects at 500 kV grid substations and the SVC at New Kot Lakhpot were implemented using turnkey contracts10 and the remaining four used a multi-contract delivery approach where equipment for each subproject was procured from several suppliers. While the original procurement plan was designed to use the turnkey approach for the new Okara and TT Singh outdoor substation subprojects, these were completed using multiple contract equipment procurement, without any turnkey components. This is NTDC’s standard approach to project delivery. The project at Rohri also had substantial multi-contract procurement to complete the subproject. Overall, the use of multi-contract equipment procurement increased the number of contracts to 45, compared to 23 in the appraisal procurement plan. While a turnkey approach to procurement reduces the number of contracts and transfers some risk to the contractor, NTDC preferred to use multi-contract procurement for projects involving traditional transmission equipment, such as transformers and outdoor switchgear, so that it can use its standard equipment specifications and retain direct control of the installation contractor. NTDC views that project delivery using turnkey contractors is more suited to projects using newer

10 These include (i) extension of Ghazi Brotha 500 kV station, (ii) 500 kV station at DG Khan, (iii) 220 kV station at

Loralai, (iv) 220 kV station at Rohri and (v) SVC at New Kot Lakhpot.

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technology equipment such as gas insulated indoor switchgear and SVCs, where the contractor is in a better position than NTDC to manage the risks. G. Conditions and Covenants

22. A schedule showing the level of compliance with conditions and covenants relevant to the loans is shown in Appendix 6. NTDC is generally in compliance with all non-financial covenants, although this project completion report (PCR) was unable to confirm its level of compliance with the grid code.11 This is because the code is an extensive document with a multitude of different requirements and NTDC’s level of compliance can only be determined by a compliance audit. In developing countries, such codes are often aspirational and it is unlikely that such an audit would find full compliance. It would have been more appropriate to have required compliance with specific clauses of the code that were particularly relevant to the loan. However, through discussions with NTDC staff through the PCR mission, this PCR understands that NTDC is generally compliant with key code requirements. Due to the very high loading on the transmission system, some parts of the grid may not be fully compliant with the N-1 loading requirement at times of peak demand. 23. NTDC needs to improve its compliance with the time requirement to submit its audited entity financial statements to ADB within 6 months of the end of each financial year. The latest submission was for audited accounts for the 2013–14 financial year.12 While ADB is awaiting NTDC’s submission of the auditor’s opinion on financial covenants as of May 2017, these accounts show that NTDC complied with its covenanted financial ratios up to FY2014. Further, while NTDC submitted their own PCR of the project to ADB, it only had relevant financial information of the project and not the full contents suggested by ADB for PCRs. 24. The government needs efforts to comply with the loan covenant that requires it to ensure that government-owned entities, including distribution companies, provide prompt payment of amounts due to NTDC and to finance any shortfall. According to NTDC’s financial statements, receivables from the government alone were PRs31 billion in FY2014. This is, however, a part of a much larger circular debt problem in the Pakistan electricity subsector.13 The magnitude of this issue from 2012 to 2017 would have been difficult to predict at the time of project appraisal in 2006. For NTDC, this is largely resolved as the sector’s financial settlement function was separated as the Central Power Purchasing Agency Guarantee in 2015, which took over the receivables and payables away from NTDC’s transmission system operator functions. H. Consultant Recruitment and Procurement

25. A project management consultant for the MFF was financed and recruited under the MFF support facility Loan 2290.14 Tranche 2 involved only nine subprojects compared to 20 in Tranche 1. However, these subprojects were generally larger and more complex than in Tranche 1 as they involved the construction of new substations and transmission lines rather than transformer

11 National Electric Power Regulatory Authority, 2005, The Grid Code, Islamabad. 12 Preparation of the entity financial statements and its audited report for the 2014–15 financial year was delayed due

to NTDC’s separation of the power purchasing function and its account, through the establishment of the Central Power Purchasing Agency Guaranteed (CPPA-G) as a separate entity. ADB is supporting this major structural reform through Technical Assistance and Policy Based Lending.

13 For more details of the circular debt issues, refer to ADB. 2017. Report and Recommendation of the President to the Board of Directors, Pakistan Sustainable Energy Sector Reform Program Subprogram 3. Manila.

14 ADB. 2017. Project Completion Report for Multitranche Financing Facility Pakistan: Power Transmission Enhancement Investment Program – Tranche 1. Manila.

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augmentations or extensions. Because of this, turnkey contracts were used to deliver five subprojects (para. 21). While this reduced the total number of contracts,15 the turnkey contracts required longer procurement times, in part because bid documents were more complex and had to be tailored to each subproject. While all subprojects were eventually completed, there were cases of re-bids and cancelations, and some contracts also required 6–8 months to become effective, often due to NTDC’s delay in opening letter of credit (LC) accounts. There was also a concern over the leaking of confidential bid evaluation information. NTDC was consequently required to tighten its bid evaluation procedures and issued standard operating procedures for information management in 2011.16 While the use of turnkey contracts has benefits in the delivery of complex projects in that it reduces contract management input and transfers risk to the contractor, it was a new approach for NTDC. The experience NTDC gained in the project should help it recognize and better mitigate risks when turnkey contracts are used to deliver future projects. I. Performance of Consultants, Contractors, and Suppliers

26. The site visits for this report found that the quality of the equipment supplied and the associated installation work was good.17 During the PCR process, there was nothing to suggest that the assets installed under Tranche 2 did not meet the same high standard. 27. For the turnkey projects, the contractors were responsible for engineering, procurement, and installation. These contractors were generally unable to complete project implementation within the initial term of the contract. Turnkey contracts were awarded to international contractors that subcontracted the installation to local contractors, and some delays may have been due to the international contractors’ unfamiliarity with NTDC’s expectations and the capabilities of their local installation contractors. 28. The project management consultant for the MFF (para. 25) was recruited in October 2010, well after the project had commenced. The consultant monitored progress and prepared NTDC’s quarterly progress reports. The consultant’s contract was not renewed after the expiry of the 3-year contract term and no replacement consultant was appointed. In hindsight, it is likely that earlier engagement of project management consultants with experience in the implementation of ADB-financed projects in the power sector would have contributed to improving the effectiveness of the PMU (para. 20). Decisions on when and how consulting services were utilized appear to have been affected by the frequent change in the top management of NTDC. Making use of consulting services, especially for capacity development activities, requires strong will and leadership by NTDC management. The frequent change in management during the implementation of the MFF made it difficult to solidify such commitment. Further, gaps were observed in environmental monitoring and reporting due to the lack of sufficient support from project management consultants, caused by contract limitations. It is important that the consultant’s contract has adequate person-months allocated to environment staff commensurate with the number and scope of subprojects to be monitored.

15 The project included 45 contracts, compared to 75 in Tranche 1. 16 ADB. 2014. Project Procurement-related Review, Loan 2289-PAK (Tranche 1) and Loan 2396-PAK (Tranche 2):

Power Transmission Enhancement Investment Program. Manila. 17 The PCR Mission covered both Tranche 1 and Tranche 2 projects. As the two projects covered subprojects spread

across the country, selected sites from two tranches were visited by the PCR mission. A separate review of all project sites was conducted by a local consultant and confirmed the completion of the Tranche 2 projects.

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J. Performance of the Borrower and the Executing Agency

29. The executing agency’s performance is rated satisfactory. NTDC was able to commission all subprojects successfully (apart from the SVC at Quetta that was deleted from the project). While the SVC at New Kot Lakhpot is still to be connected to the substation, all other subprojects were in service or ready for commissioning by December 2014, a delay of 12 months from the original loan closing date. 30. The loan effectiveness was delayed due to the time required to meet the corporate governance requirement for loan effectivity. This was not the fault of NTDC, which has no control over the appointment of directors of government-owned corporations. This delay does not appear to have impeded the construction of the 132 kV Jarwar–Sadiqabad transmission line, which commissioned barely 2 months after loan effectivity. Advance procurement was also practiced for other subprojects, and in terms of the implementation, this delay of effectiveness does not seem to have caused significant delays in the completion of the project. 31. While the PMU was established to coordinate among different departments of NTDC for ADB-financed projects, the PMU structure could have been more effective. The PMU’s role was limited to liaising with ADB and to coordinating the inputs to the project provided by NTDC’s planning, design, procurement, and construction departments. It was not empowered to take project management responsibility for the timely completion of the projects. It was also organized along the functional lines of planning, procurement, finance, and safeguards and there was no project manager dedicated to the project and responsible for the timely completion of the individual subprojects. 32. This PCR considers that the project warranted a dedicated project manager due to its size, the geographical spread of the subprojects, and the use of the unfamiliar turnkey project delivery approach for five subprojects. An effective project management consultant could have contributed to filling this role. 33. The satisfactory rating of NTDC recognizes its technical competence and the fact that the project was completed for less than the appraisal budget and that most subprojects were completed within the original life of the loan of 5 years despite the initial loan effectivity delay outside of NTDC’s control. If NTDC could overcome the concerns raised here over the effectiveness of the PMU and the connection of the SVC to the substation, a higher rating would be warranted. 34. The performance of the government as the borrower is rated partly satisfactory due to the delay in meeting the corporate governance condition for loan effectivity. Although this requirement had been agreed during appraisal, the delay of almost 2 years in meeting this condition had an adverse impact on the project schedule. K. Performance of the Asian Development Bank

35. ADB’s performance is rated satisfactory. ADB fielded eight review missions during project implementation. The review missions initially focused on documenting implementation delays. As the project progressed and by 2010, progress was reported in detail at a contract and subproject level and agreed actions by both parties were documented.

9

36. The project records show that ADB’s review and approval of procurement documentation were completed in a timely manner. As ADB’s review missions identified problems with NTDC’s management of procurement early in the project, it likely warranted even earlier intervention from ADB, especially since effective management was vital for all four MFF tranches to be completed within the 10-year facility time limit. ADB could have had a more active engagement with NTDC to prepare consultancy terms of reference focused on meeting the identified capacity development needs. This would have required approval from the top management of NTDC. However, frequent change in the management of NTDC appears to have been a challenge for ADB to secure strong commitment from NTDC for such activities.

III. EVALUATION OF PERFORMANCE

A. Relevance

37. The project is rated relevant. Increasing the capacity of the power system was essential for the government to meet its economic development targets (paras. 4–5) and it is still a priority in 2017. In Pakistan, power is still being rationed because of generation shortages. Consumers in urban areas are currently being disconnected for approximately 4 hours per day and consumers in rural areas, where collection rates are lower, are being disconnected even longer (footnote 3). A shortage of electricity to the extent that supply needs to be rationed is disruptive to businesses, limits employment opportunities and makes the provision of essential services such as education and healthcare more difficult. Many consumers find it necessary to install their own generation to cover for those periods when a grid supply is not available and this increases the input cost of electricity to the economy. 38. The installation of new transmission lines and substations relieved overloads that would otherwise have prevented consumers from receiving supply from the grid. For example, the 3,020 MVA of net transformer capacity added by the project is about 8% of the total transformer capacity in 2013 and about 45% of the newly added capacity between 2007 and 2013. NTDC reported during the PCR mission that grid constraints have now been addressed to the point that forced load shedding to manage grid equipment overloads is rarely needed. Some transformers installed by the project are already heavily loaded, which further strengthens the relevance of the project. B. Effectiveness in Achieving Outcome

39. As in the design of earlier MFFs, at approval, there was no distinction between the design and monitoring framework (DMF) for Tranche 1 and the MFF as a whole. The impacts of the project focused on the provision of a more reliable and better-quality power supply as measured by NTDC’s compliance with the grid code, the delivery of additional power, the reduction of electricity outages, and an increase in the number of grid connected customers. The project has facilitated an improvement in all these areas, although progress in reducing the duration of planned load shedding has been limited by the continuing shortage of generation. As noted in the PCR of Tranche 1, these indicators have limited linkage with the project components and make an assessment of achievements by the project difficult. 40. The project outcome statement is set as “primary transmission systems rehabilitated, augmented and expanded – system bottlenecks removed.” The relevant performance indicators are, however, the completion of NTDC restructuring to achieve financial and operational autonomy and the implementation of adequate project management and information systems. These outcome indicators were listed as intangible outputs in the Tranche 1 DMF and difficult to be linked to the achievement of the outcome of the project, which is to improve the physical

10

performance of the transmission system. Further, there are no components in the project that would support the achievement of these outcome indicators, which makes it hard to assess the linkage between the outcome and the outputs of the project. 41. Nevertheless, NTDC is now operating as a separate government-owned company with operational and financial autonomy and it has project management and information systems in place (though improvements are needed and envisaged), satisfying the originally-set outcome indicators. 42. Despite this shortcoming in the DMF, the project constructed all planned outputs and all but the SVC are now in service. In assessing the effectiveness of the project and achievement of the project outcome statement, the PCR first considered the soundness of the process used to select and prioritize individual subprojects. Subprojects were selected by NTDC with the assistance of international consultants after an analysis of the network that used load flow simulations to identify the location of system bottlenecks. Subprojects were justified by NTDC through the preparation of a detailed planning report consistent with government requirements for the selection of projects to be financed by government loans. Second, the PCR considered whether there was any change in circumstances during project implementation that reduced the appropriateness and effectiveness of this selection and did not find any such changes in circumstances over time. The PCR, therefore, considers that the project outputs were highly relevant to the achievement of the outcome statement. 43. Of the nine subprojects, four were constructed within existing NTDC switchyards and therefore had no environmental or social safeguard impacts. Four new grid stations required the acquisition of unused land so there was no displacement of affected people. For three of these subprojects, the land was owned by the local government and the fourth site was procured at market rates from willing private sellers. The remaining subproject was a new transmission line between two existing grid stations. A total of 2,938 people were directly affected by the project, mainly through the location of transmission towers on private land and the loss of crops and trees along transmission line routes. All affected people have been fully compensated in accordance with ADB’s social protection policies and there are no outstanding issues. 44. The project is rated effective in achieving the outcomes identified in the PCR. Further, all subprojects as outputs are completed, and the PCR assesses that these outputs have led to achieving the outcome statement. Had NTDC had a more effective project management structure and prevented the delay in connecting the SVC with the substation, it would have warranted a higher effectiveness rating of the project. C. Efficiency in Achieving Outcome and Outputs

45. The project achieved all its planned outputs, except for the SVC at Quetta, which was removed due to a lack of bidder interest. Total loan withdrawals were 43% less than forecast at appraisal. During implementation, there were delays from loan effectiveness (para. 12), procurement, and contract effectiveness (para. 25), etc. These led to three loan extensions and an additional 32 months in the loan period. Despite these delays, the project’s indicator of efficiency—the economic internal rate of return (EIRR)—remains above the threshold. 46. In re-calculating the EIRR, loading data and history as in Tranche 1 was not yet available, as most of the subprojects of the project were completed in 2014 and not enough time has elapsed to collect such data. Based on data from NTDC, the installed transformers during Tranche 1 became fully loaded to its capacity within 5 years from commissioning. The transmission grid

11

remains heavily loaded as of this PCR, and there is nothing to indicate that the transformers installed by the project will not be loaded at a similar rate as those in Tranche 1. The benefit of the project, therefore, mainly arises from the expanded capacity of grid stations by new or replaced transformers to supply an increased amount of electricity to the downstream distribution company networks. This analysis results in an EIRR of 13.9%, which is above the updated economic opportunity cost of capital of 9%18 or even the original hurdle rate at appraisal of 12% (see Appendix 8 for a detailed analysis). The project is therefore rated efficient. D. Preliminary Assessment of Sustainability

47. The project is rated likely sustainable. All subprojects have now been commissioned. The PCR has no doubt the connection of the SVC to the substation will be completed in the near future. The project has been rated relevant and completed subprojects are now integral components of Pakistan’s transmission grid. It has made an important contribution to the development of Pakistan’s economy and the government is most likely to prevent this contribution from being eroded. 48. All grid stations visited had staff dedicated to equipment maintenance, and maintenance plans were in place. The PCR is confident that NTDC will repair or replace any equipment installed by the project that fails in service and notes that during its visit to subproject sites it saw instances where failed equipment had been replaced. 49. Nevertheless, NTDC’s maintenance support arrangements could be improved, for example, by having experts readily available to advise station managers of the appropriate response when an equipment fault or failure requires a non-routing maintenance intervention. While this is an issue of maintenance efficiency rather than sustainability and has not affected the rating, effective and timely technical support for grid station managers would often avoid the need for a full replacement further enhancing the sustainability of the project and NTDC’s operations. 50. In assessing the sustainability of the project, the project’s financial internal rate of return (FIRR) was also calculated and is discussed in detail in Appendix 7. NTDC’s income is based on a fee the electricity regulator sets based on the monthly maximum demand at each point of supply, called a use-of-system-charge (UoSC). The benefits of the project arise from the increased 220/132 kV transformer delivery capacity in megawatt installed under the project at grid stations where electricity is delivered to distribution companies. This analysis results in an estimated FIRR of 10.3%. The estimated weighted average cost of capital (WACC) is 5.2%. While the difference between FIRR and WACC is smaller than the appraisal estimates, the estimated FIRR of the PCR is higher than the re-estimated WACC, indicating the financial viability and sustainability of the project. 51. Some assumptions have improved since appraisal. The 17% interest rate of the re-lending arrangement between the government and NTDC for the project is currently reduced to 12% for new loans such as MFF2. Pakistan’s inflation in FY2016 was contained at 4.3%, and ADB’s inflation forecast for Pakistan as of April 2017 is 6% whereas the assumed inflation rate at appraisal was almost 7.5%. As a corporate entity, NTDC is also considered financially sustainable (footnote 6). These factors strengthen the sustainability of the project.

18 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila.

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E. Impact

52. The project has added a total of 3,020 MVA of net 220/132 kV supply transformer capacity at interfaces between NTDC’s transmission network and distribution company networks across the country. This transformer capacity is needed to deliver power fed into NTDC’s transmission network in bulk to the distribution company networks for onward distribution to electricity consumers. The transmission grid continues to be heavily loaded, indicating that the current rate of augmentation of the transmission system is only just sufficient to accommodate imminent growth in the demand for electricity. 53. Without the project, there would have been insufficient supply transformer capacity to meet consumer demand. This would have led to extensive forced supply interruptions during periods of high electricity demand because the transmission system would not have been able to deliver sufficient electricity to consumers even when the generation was available. Forced interruptions can still occur in N-1 situations when there is an unplanned failure of a critical transmission asset. However, the project improved the situation in the project areas. 54. The SVC at New Kot Lakhpot will improve the quality of supply experienced by customers of this grid station, which supplies large industrial customers with plant that can subject the grid to sudden changes in demand of relatively large magnitude. This, in turn, can cause sudden changes in the supply voltage experienced by other customers supplied from adjacent parts of the network. An SVC can respond very quickly to such changes to ensure a much more stable supply voltage. The technology is new to Pakistan, and the use of this technology will give NTDC a tool that has the potential to improve the performance of the grid more cost effectively than traditional design approaches. 55. Impact indicators of the project’s DMF include (i) full compliance with the grid code and transmission license by 2009 (para. 22), (ii) 10.5 GWh annually of additional power supplied through the grid by 2011,19 (iii) a reduction of electricity outages by 30% in 2011, and (iv) grid connected customers increased to 70% of the population by 2011. 56. Electricity delivered by NTDC was 74,565 GWh in 2006-07 and this increased to 87,835 GWh in 2010-11 before reducing to 84,424 GWh to in 2012-13. In 2015-16 deliveries were 94,909 GWh. This equates to an overall growth rate of 2.8% per year over the 10-year period. This measure can be volatile from year to year and the extent to which this increase can be credited to the project is unclear. For example, 2011-12 and 2012-13 were relatively dry years, which appear to have resulted in lower deliveries as thermal generation was not available to offset the reduced level of hydropower generation. 57. No significant progress has been made in reducing the generation shortfall since appraisal, as the rate at which generation capacity has been added has barely kept up with the growth in demand. In 2007–2008, this shortfall was estimated to be 4,400 MW and by 2014–2015 the shortfall had increased to an estimated 5,200 MW.20 System interruptions are not only a result of the transmission grid capacity but also a lack of generation. NEPRA predicts that the generation capacity deficit will start to reduce significantly from 2016–2017 and should be eliminated by summer 2019 if a planned 10,000 MW of new generation capacity, largely from the China–Pakistan Economic Corridor, is commissioned. Accommodating this new generation could be a challenge for NTDC as it will increase the amount of generation connected to the network by 77%.

19 Given the power delivered annually by NTDC, it is probable that this target should have been 10,500 GWh. 20 National Electric Power Regulatory Authority, 2016, State of the Industry Report 2015, Islamabad.

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Hence, in the medium term, the transmission grid is likely to remain heavily loaded, notwithstanding the continuing investment in capacity expansion. 58. In 2006–2007, Pakistan had 18.5 million electricity consumers of all categories and by 2014–2015 this had increased to 23.7 million. Over the same period, the number of electrified villages is estimated to have increased from 71% to 81%.21 59. The success of the project in achieving the impact targets in the DMF is considered satisfactory. A higher rating was not given because of the limited impact of the project on some measures, such as supply interruptions where the availability of generation is the main driver, and the poor definition of other measures, which makes them difficult to measure. Overall, the impact of the project is rated satisfactory.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

60. The project is rated successful. This rating recognizes that the design of the project was relevant to the growing demand for transmission grid capacity in Pakistan both at the time of appraisal and at completion; the project was effective in completing the outputs and the targeted outcome; the project’s economic efficiency was verified from sufficient economic returns; and the project and NTDC are both assessed to be likely sustainable (Appendix 9). All subprojects were completed at a cost significantly lower than the appraisal estimate. The standard of design and construction is good. Without the project, the offtake capacity of the transmission system would be much reduced and the required power rationing at periods of peak demand would be much higher than is currently the case. B. Lessons

61. In designing and formulating new projects, care should be taken to ensure that the impacts and outcomes specified in the DMF are well aligned with the designed project outputs. If the alignment between project design and project DMF is weak, the chances of a project being evaluated a success are reduced even if the project is delivered as planned, as is the case in this project, where NTDC performed well and completed all outputs. 62. In situations where the executing agency is unfamiliar with the project delivery approach planned at appraisal, such as the use of turnkey contracts, it would be helpful to provide implementation support through a consultant. For this project, implementation consultants were appointed almost 3 years after project approval. Had experienced support been available sooner, the time required to put turnkey projects in place may have been reduced. 63. There is also a need for a dedicated project manager to be responsible for and take ownership of each ADB-financed project. Currently, NTDC’s PMU is organized along functional lines and the responsibility for the completion of the project is unclear. In this situation, project management tends to be reactive rather than proactive and makes the project prone to delays. This is particularly important in situations where activities such as planning, design, procurement, and construction are delegated to various departments and undertaken by persons not reporting directly to the PMU.

21 The DMF target was to increase grid connected customers to 70% of the population. This target is poorly defined as

it is houses and businesses rather than people that are connected to the grid.

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64. While the technical complexity of the SVC led to delays in the implementation of the subproject in Tranche 1, the structure of MFF allowed for this subsequent tranche to take over the subproject without having to extend the Tranche 1 loan. This attests to the suitability of the financing modality to the type of investments required for a transmission asset operator. There are multiple projects to be financed with ever changing demand. The availability of the facility allows for subprojects that become ready or more urgent to be picked up by tranches. In some cases, the delays caused by technical challenges, as in the SVC, can be remedied by transferring the subproject to subsequent tranches. 65. Finally, the contractual structuring led to a much smaller number of contracts in this project. The choice of turnkey approach, though it had its own challenges, contributed to this result. This was reflected in the design of Tranche 3, which was mainly composed of turnkey contracts. In Tranche 1, all subprojects were implemented by a combination of multiple supply and works contracts, each of which normally applied to multiple subprojects. This led to a total of 75 contracts under Tranche 1. Tranche 2 had a total of 45 contracts, five of which were on turnkey basis. The total amount of the loan was comparable but with a larger capacity and longer lines installed. This project also involved new substations and was overall more complex than Tranche 1. C. Recommendations

1. Project Related

66. Future monitoring. Except for the SVC (para. 17), all assets installed by the project are in service and generally heavily loaded. As ADB is continuing to finance the development of the transmission grid, the ongoing assessment of NTDC’s performance associated with the implementation of current loan projects and the appraisal of planned new loans should suffice in monitoring the performance of investments made by the project. A project performance evaluation report is also not considered necessary for the same reason. 67. Covenants. Most loan covenants were related to the implementation of the project and so are no longer relevant. The exceptions are covenants related to the management and financial performance of NTDC but these continue to be regularly monitored and updated as necessary in respect of the MFF2 projects. Hence, no additional monitoring to the ongoing assessments from MFF2 is needed.

2. General

68. Monitoring framework. In the formulation and appraisal of future projects, a much higher priority should be given to ensuring that the DMF is closely aligned with the project design. 69. Implementation structure. In designing the implementation arrangement at project appraisal, ADB should ensure that the executing agency or the implementing agency appoint a dedicated project manager for each significant loan-financed project. This project manager would also be responsible for the completion of ADB-financed projects, liaison with ADB on routine matters relating to the project, coordination of both internal staff and outsourced contractors on day-to-day project implementation, ensuring that the project keeps to both budget and schedule, identifying project risks and, acting to mitigate risks before they evolve into more serious problems to the extent practicable. The ongoing preparation of the Tranche 2 of MFF2 is taking this approach in working with NTDC.

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70. Implementation support to NTDC. Even further constructive support to executing agencies would be recommended in cases where the executing agency is unfamiliar with ADB’s procurement, environmental, and social protection requirements and monitoring procedures. Consultants would need to be familiar with the relevant ADB processes and procedures and should be recruited during the final appraisal stages so that their work to support the executing agency can commence before or immediately after the loan is approved. Such consulting services are also recommended for capacity development. Understanding the processes, advantages, and disadvantages of procurement selection processes will help NTDC make better-informed choices of multi-contract or turnkey approaches. Finally, the transformers installed by both Tranche 1 and this project are heavily loaded already. Improved system planning capacity within NTDC would help mitigate the risks of overloading equipment in a short term. These activities require a strong commitment from NTDC’s management. The project and Tranche 1 of the MFF faced the challenge of frequent changes in the top management. Continued engagement at the top level will be vital for effective implementation of ADB-financed projects and to resolving the remaining challenges in Pakistan’s transmission system and the electricity sector as a whole.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Indicators/Targets Achievements

Impact Reliable and quality power supplied and service coverage extended.

Full compliance with grid code and transmission license by 2009. 10.5 GWh of additional power annually supplied through the grid by 2011. Electricity outages reduced by 30% in 2011. Grid connected customers increased to 70% of the population in 2011.

This cannot be assessed in full. NTDC is understood to be generally compliant. However, it may be that the loss of some heavily loaded supply transformers at times of peak demand will cause other transformers to exceed their emergency ratings for short periods. Achieved. Power supplied through the transmission grid increased from 74,565 GWh in 2006–2007 to 87,835 GWh in 2010–2011 to 98,248 GWh in 2015–2016. Achieved. Planned electricity shutdowns are currently 4 hours per day in urban areas and 6 hours per day in rural areas. No data is available on the extent of shutdowns required at appraisal but it is reported to have been about 6 hours in 2016. Unlike the situation at appraisal, almost all planned shutdowns are now due to a shortage of generation rather than a lack of transmission system capacity. Exact data is not available but likely achieved. The number of electricity connections to the grid has increased from 18.5 million in 2007 to 23.7 million in 2015. Electrification rate in Pakistan is also 97.5% in 2014.

Outcome Primary transmission systems rehabilitated, augmented, and expanded – system bottlenecks removed.

NTDC restructuring completed and operational and financial autonomy achieved by 2007.

Achieved. NTDC is now operating as an autonomous commercial entity. However, it missed an opportunity for capacity development by not utilizing available consultancy support funds in Loan 2290 for this purpose.

Appendix 1 17

Design Summary Performance Indicators/Targets Achievements

NTDC implements adequate project management and information systems by 2007.

Achieved. NTDC has project management and information systems in place. However, the effectiveness of these systems still requires improvement.

Outputs Power transmission capacity enhanced through system expansion and augmentation, and electricity from new power stations evacuated.

Subprojects commissioned according to schedules indicated in the investment and expansion plan.

Achieved. All subprojects have been constructed but the SVC at New Kot Lakhpot has still to be commissioned. Implementation was delayed requiring the loan closing date to be extended three times.

Activities with Milestones 1. Bidding for procurement of equipment for Tranche 2

subprojects (equipment) begun by November 2007. 2. Tranche 2 loan effective February 2008. 3. Bidding for procurement of equipment for Tranche 2

subprojects completed by March 2008 and for civil works by May 2008.

4. Procurement of equipment under Tranche 2

completed (July 2009–February 2010).

5. Installation of equipment for Tranche 2 subprojects completed (September 2008–April 2010).

6. Testing and commissioning of Tranche 2 subprojects

completed (September 2010–June 2011)

First equipment supply tender documents issued on 1 October 2017, prior to loan approval. The loan did not become effective until April 2009 due to the time taken by the government to meet the corporate governance condition. Bidding for last equipment supply contract was completed in June 2010 and for last installation contract in March 2011. Final equipment supply contract dated September 2012. Installation works of SVC at New Kot Lakhpot grid station completed February 2016. SVC has still to be commissioned. This will most likely occur during the Q3 of 2017.

GWh = gigawatt hour, NTDC = National Transmission and Despatch Company, SVC = static VAR compensator.

18 Appendix 2

EQUIPMENT INSTALLED BY PROJECT

Subproject Description Substation Voltage

(kV)

Transformer Capacity

(MVA)

Line Length

(km) Completion

1. New grid station and transmission line

Okara 220/132 3x250 10.1 Jul 2014


Toba Tek Singh

220/132 3x250 1.2 Dec 2014d

3. Static VAR compensator

Quetta Transferred for consideration in MFF2

4. Transformer extensiona

Ghazi Brotha 500/220 600b

(plus 200 spare)

– Jan 2015


D.G. Khan 500/220 2x600b

(plus 200 spare)

21.4 Aug 2014

6. New grid station Lora Lai 220/132 2x250 – Aug 2014

7.. New grid station Rohiri New 220/132 3x250 145.7 Sep 2013d

8. New transmission line

Jarwar–Sadiqabad

132 – 63.8 Jun 2009

9. Transformer augmentationa

Ravi 220/132 3x250 – Nov 2011

10. Static VAR compensatorc

New Kot Lakhpot

– – – –

11. Procurement of tools and construction equipment.

Km = kilometer, kV = kilovolt, MFF = multitranche financing facility, MVA = mega volt ampere.

a A transformer extension is the addition of a new transformer while a transformer augmentation is the replacement of a transformer with one of higher capacity.

b Each 600MVA transformer bank comprises three 200MVA single-phase units. c This subproject was transferred from Tranche 1. Installation and testing were completed in February 2016 but the

system cannot be commissioned until the 132kV busbar to this has been uprated. This work is currently underway and is expected to be completed within 2017.

d This is the commissioning date of the first transformer following completion of the civil works. The commissioning date of the remaining transformers at each substation is not known.

Appendix 3 19

PROJECT COSTS ($ million) Foreign Local Total Item Exchange Currency Cost

A. Installation 1. Works 1.48 27.84 29.32 2. Turnkey Contract 17.27 1.51 18.77 Subtotal (A) 18.75 29.35 48.09 B. Equipment 1. 500 kV Equipment 38.48 0.00 38.48 2. 220 kV Equipment 44.12 2.71 46.83 3. 132 kV Equipment 5.24 2.27 7.52 4. Testing and Construction Equipment 2.41 0.42 2.83 5. Transmission Lines 0.76 0.00 0.76 6. Other Equipment 23.59 6.79 30.38 Subtotal (B) 114.60 12.19 126.80 C. Finance Charges 1. Capitalization 3.00 0.00 3.00 Subtotal (C) 3.00 0.00 3.00 Total 136.35 41.54 177.89

20 Appendix 4

LOAN DISBURSEMENTS – LOAN 2396 ($)

Qtr1 Q2 Q3 Q4 Total

2009 0 11,980,420 8,948,973 20,929,393

2010 13,710,890 3,762,898 3,252,427 12,486,803 33,213,018

2011 1,301,476 3,531,943 5,551,633 4,356,804 14,741,856

2012 1,441,370 4,972,783 2,848,104 12,017,265 21,279,522

2013 7,593,571 6,101,227 4,324,715 21,842,634 39,862,148

2014 14,461,929 681,040 384,332 563,333 16,090,634

2015 5,215,327 227,723 95,804 1,042,651 6,581,505

2016 3,806 818,838 317,411 - 1,140,055

Total 43,728,369 20,096,452 28,754,846 61,258,464 153,838,131

Note: Finance costs not included.

Appendix 5 21

PROJECT IMPLEMENTATION SCHEDULE

: Original : Actual

Subproject Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2

1. Okara grid station and transmission line 220kV

2. T. T. Singh grid station and transmission line 220kV

3. SVC at Quetta Considered for MFF2.

4. Transformer extension at Ghazi Brotha 500kV

5. D. G. Khan grid station and transmission line 500kV

6. Loralai grid station and transmission line 220kV

7. Rohiri grid station and transmission line 220kV

8.. Jarwar-Sadiqabad trnsmission line 132kV

9.. Transformer augmentation at Ravi 220kV

10. SVC at New Kot Lakhpot

Power Transmission Enhancement Investment Program

Tranche 2 Project Implementation Schedule

2013 2014 20152008 2009 2010 2011 2012

22 Appendix 6

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan / Project

Agreement

Status of Compliance

The Borrower shall cause NTDC to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, electrical transmission, and environmental practices.

LA Article IV Section 4.01(a); PA Article II Section 2.01(a)

Complied with.

In the carrying out of the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 5 to this Loan Agreement and the Schedule to the Project Agreement.

LA Article IV Section 4.01(b); PA Article II Section 2.01(b)

Complied with.

The Borrower shall make available to NTDC, promptly as needed and on terms and conditions acceptable to ADB, the funds, facilities, services, land and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project.

LA Article IV Section 4.02; PA Article II Section 2.02

Complied with.

The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Project and operation of the Project facilities are conducted and coordinated in accordance with sound administrative policies and procedures.

LA Article IV Section 4.03

Complied with.

The Borrower shall take all action which shall be necessary on its part to enable NTDC to perform its obligations under the Project Agreement, and shall not take or permit any action which would interfere with the performance of such obligations.

LA Article IV Section 4.04

Complied with.

The Borrower shall exercise its rights under the Onlending Agreement in such a manner as to protect the interests of the Borrower and ADB and to accomplish the purposes of the Loan.

LA Article IV Section 4.05(a)

Complied with.

No rights or obligations under the Onlending Agreement shall be assigned, amended, abrogated or waived without the prior concurrence of ADB.

LA Article IV Section 4.05(b)

Complied with.

Establishment of CPPA.

The Government, through MOWP, and NTDC will ensure that the CPPA is established as an entity that is independent from NTDC and that all of the trade debt incurred by NTDC for its single buyer role is transferred to CPPA or otherwise separated from NTDC. The Government, through MOWP, will cause CPPA to define its corporate identity, devise a business plan and a strategic development road map to have a single corporate body accountable for the single buyer business. NTDC will ensure it submits to NEPRA an

FFA Schedule 3 Para. 10

Complied with. Commercial operation of an independent CPPA commenced in mid-2015 when the transfer of functions from NTDC was formalized and completed.

Appendix 6 23

application to revise its license to reflect the establishment of CPPA as a separate entity from NTDC.

Gender.

NTDC will follow the principles of the ADB’s policy on gender and development during each subproject implementation, including taking all necessary actions to encourage women living in the subproject area to participate in planning and implementing subproject activities. NTDC will monitor the subproject effects on women during each subproject implementation, through, where relevant, gender-disaggregated data collected pursuant to the monitoring and evaluation system referred to in the subproject performance monitoring system.


Complied with.

Land Acquisition and Resettlement.

NTDC shall ensure that: (a) all land and rights-of-way required by the Project are made available in a timely manner; (b) the provisions of the resettlement plans prepared for the Project by the Borrower and agreed with ADB (RPs) are implemented promptly and efficiently in accordance with their terms, all applicable laws and regulations of Pakistan, ADB’s Involuntary Resettlement Policy (1995), and the Land Acquisition and Resettlement Framework attached to Schedule 5 of the FFA (LARF); (c) the RPs are updated based on the detailed designs, prepared in full consultation with the affected persons and disclosed to them prior to submitting the RPs to ADB; (d) the commencement of civil works or a similar milestone is subject to ADB’s review and approval of the relevant RPs; (e) the contractor’s activities are in compliance with the requirements of the RPs, the LARF, applicable domestic laws and regulations, and ADB’s Involuntary Resettlement Policy (1995); (f) an independent monitor acceptable to ADB is engaged to carry out monitoring and evaluation and report to ADB in accordance with the requirements of the RPs.

PA Schedule Para. 4

Complied with.

Indigenous Peoples.

NTDC will ensure that all subprojects affecting ethnic minorities are constructed and operated in accordance with the requirements of ADB’s Policy on Indigenous Peoples (1998) as specified in the Indigenous People’s Development Framework (IPDF) agreed with ADB and the Indigenous Peoples Development Plans (or resettlement plans). NTDC shall ensure that the Ethnic Minorities Development Plans (or resettlement plans) are monitored and evaluated by an independent agency.

FFA Schedule 4 Subproject Selection Criteria Item (vii)

Not applicable. No indigenous people were affected by the project.

Women and Child Labor.

NTDC will ensure that (i) there is no differential payment between men and women for work of equal value, and (ii) civil works contractors do not employ child labor in the construction and maintenance activities in accordance with the relevant laws and regulations of the Government.


Complied with.

Governance. FFA Complied with.

24 Appendix 6

Pakistan acknowledges that ADB, consistent with its commitment to good governance, accountability and transparency, reserves the right to investigate directly, or through its agents, any possible corrupt, fraudulent, collusive or coercive practices relating to the subprojects. To support these efforts, Pakistan shall ensure that: (a) NTDC in its bidding documents for each Subproject, includes a provision specifying the right of ADB to audit and examine the records and accounts of, and all contractors, suppliers, consultants and other service providers as they relate to each Subproject; (b) NTDC cooperates with any such investigations and extends all necessary assistance, including access to all relevant contracts, accounting and bookkeeping records, as well as engagement of independent experts that may be needed for satisfactory completion of such investigations; and (c) All external costs related to such investigations as described in this Schedule are borne by the applicable subproject.

Schedule 3 Para. 9

Established, staffed and operating PMU or PIU. FFA Schedule 3 Para. 1

Complied with late. Improvements to the structure of the PMU have been recommended through review missions and this report.

Performance Monitoring and Reporting.

NTDC shall ensure that within 3 months of the effective date of the loan agreement, a Project Performance Monitoring System shall have been established by NTDC in a form and with a composition acceptable to ADB in accordance with the Investment Program and Subproject performance indicators.


Partially complied with. Progress reports have been prepared and submitted to ADB, but the completion report for Tranche 2 was not prepared and the mission was unable to obtain from NTDC all the project data required for this report.

Fielding of Consultants.

Except as otherwise agreed between the Borrower and ADB and set forth in the Procurement Plan, the Borrower shall apply quality-and-cost-based selection for selecting and engaging consulting services.

LA Schedule 4 Para. 6

Not applicable. There were no consultants engaged and financed under this project.

Tariff.

NTDC will submit a petition for tariff revision as required to maintain its financial viability. Following tariff determination by NEPRA, the Government will undertake to notify such tariff determination in a prompt manner. The Government will ensure that the tariff formulated for NTDC is adequate to cover its operating costs, maintenance, depreciation, and financing cost and to allow an acceptable return on the equity of NTDC.


Complied. The process through which NTDC regularly submits tariff petitions for review and approval by NEPRA is now mature.

Corporate Governance.

The Government will ensure that no person serving on the board of NTDC, WAPDA, a DISCO, or GENCO concurrently is a board member of any of the other entities, to avoid any actual or apparent conflict of interest.


Complied with. This was a condition for loan effectivity and was not achieved until April 2009.

Policy Dialogue.

The Government will ensure that ADB is kept informed about the Government’s policies and programs related to the power sector that will materially affect the financial


Complied with.

Appendix 6 25

viability of each subproject under the Investment Program, and in particular the power generation policies and program, as well as the power transmission policies.

Execution of Civil Works.

NTDC will ensure that, subsequent to award of civil works contract under any subproject, no section or part thereof under the civil works contract will be handed over to the contractor unless the applicable provisions of the LARF and Resettlement Plans, including, in particular, the timely delivery of compensation to affected families, Indigenous Peoples Development Framework and Indigenous Peoples Development Plans, and the EAF/EMPs have been complied with. Any changes to the location, land alignment of facilitating roads, or environment impacts on account of detailed designs of related subprojects will be subject to prior approval by ADB or related agency in accordance with the subproject selection criteria and procedures included in the FFA.


Complied with.

Subproject Selection Criteria.

The Government and NTDC shall ensure that all subprojects are selected in accordance with the agreed criteria set out in the FFA, which adhere to the relevant requirements of the power transmission investment plan and other applicable guidelines for subproject implementation.

FFA Schedule 4 Items (i) – (x)

Complied with.

Environment.

NTDC will ensure that: (i) the subprojects are constructed and operated in accordance with national and local environmental procedures and guidelines and with ADB’s Environment Policy (2002); (ii) the subprojects are designed, constructed, and operated in accordance with the environment management plans (EMPs) as reflected in the initial environment examinations and the Environment Assessment Review Framework; (iii) the EMPs will be incorporated in bidding documents and civil work contracts and implemented; and (iv) environmental performance reports will be submitted to ADB twice annually during the construction period, including progress made on the mitigation measures, monitoring data, problems encountered, enforcement, plan, and any violations.

PA Schedule Para. 5

Complied with.

Auditing and Accounting.

NTDC to maintain separate accounts for the Tranche 2 loan. Within 6 months of close of each fiscal year, NTDC shall submit audited subproject accounts and financial statements to ADB. An independent auditor acceptable to ADB will be hired by NTDC to conduct the audit.

FFA Schedule 3 Para. 18 PA Article II Section 2.09

Complied with up to FY2016. FY2017 project financial statements will be due in December 2017.

Financial Governance.

NTDC will ensure that its internal controls are in accordance with the National Accounting Standards and an independent and autonomous internal audit department will be set up within NTDC.


Not complied with. NTDC’s audited financial accounts are required to be issued annually but audited statements for FY2015 were submitted in June 2017, and FY2016 statements have

26 Appendix 6

not been submitted to ADBas of this report.

Counterpart Funding.

The Government will ensure, and cause NTDC to ensure, the availability and timely release of counterpart funding for the timely implementation of subprojects financed under the Investment Program.


Complied with.

Financial Autonomy.

The Government shall ensure that NTDC bills the paying authority directly and in a timely manner for the transmission services rendered to its customers. The Government shall ensure that the paying authority provides prompt payment to NTDC, and in case of any shortfall from the paying authority, the Government shall finance such shortfall in a timely manner.


Partially complied with. NTDC is operating as a financially autonomous entity and is billing its customers in a timely manner. Receivables from related government-owned entities increased from PRs 44 to PRs 73 billion between 2013 and 2014 and receivables direct from the government remained unchanged at PRs 31 billion over that period.

Financial Performance.

The Government of Pakistan will ensure that NTDC maintains a debt service coverage ratio (DSCR) of at least 1.2 from 2010 onward and a self-financing ratio (SFR) of at least 20% from 2008 onward.

FFA Schedule 3 Para. 11; PA Schedule Paras 2(a) and 3(a)

Complied with. NTDC’s 2014 accounts disclosed its debt services coverage ratio was 4.5% and a self-financing ratio of 27.9%.

Except as ADB shall otherwise agree, NTDC shall produce, for each of its fiscal years after its fiscal year ending 30 June, cash from internal sources equivalent to not less than 20% of the annual average of NTDC’s capital expenditures incurred, or expected to be incurred, for that year, the previous fiscal year and the next two years following fiscal years.

PA Schedule Para. 3(b)

Complied with up to FY2014 for which financial statements were submitted.

Before 31 March in each of its fiscal years, NTDC shall, on the basis of forecasts prepared by NTDC and satisfactory to ADB, review whether it would meet the requirements set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to ADB a copy of such review, upon its completion.

PA Schedule Para. 3(c)

Not complied with.

If any such review shows that NTDC would not meet the requirements set forth in paragraph (b) for its fiscal years covered by such review, NTDC shall promptly take all necessary measures including without limitation, filing applications with NEPRA seeking a tariff/rate increase to meet such requirements.

PA Schedule Para. 3(d)

Complied with. NTDC has been submitting regular petitions to NEPRA for tariff reviews.

Sexually Transmitted Diseases. With the assistance of the relevant local authorities, NTDC will cause contractors to distribute information on the risks of sexually transmitted diseases to those employed during each subproject construction.


Complied with. NTDC distributed relevant information to all local and foreign workers, contractors, and consultants employed during each subproject construction activities.

In the carrying out of the Project, NTDC shall employ competent and qualified consultants and contractors, acceptable to ADB, to an extent upon terms and conditions satisfactory to ADB.

PA Article II Section 2.03(a)

Complied with.

Except as ADB may otherwise agree, all Goods, works and consulting services to be financed out of the

PA Article II

Complied with.

Appendix 6 27

proceeds of the Loans shall be procured in accordance with the provisions of Schedule 4 to the Loan Agreement. ADB may refuse to finance a contract where Goods, Works or consulting services have not been procured under procedures substantially in accordance with those agreed between the Borrower and ADB or where the terms and conditions of the contract are not satisfactory to ADB.

Section 2.03(b)

NTDC shall carry out the Project in accordance with plans, design standards, specifications, work schedules and construction methods acceptable to ADB. NTDC shall furnish, or cause to be furnished, to ADB, promptly after their preparation such plans, design standards, specifications and work schedules, and any material modifications subsequently made therein, in such detail as ADB shall reasonably request.

PA Article II Section 2.04

Complied with.

NTDC shall take out and maintain with responsible insurers, or make other arrangements satisfactory to ADB for, insurance of the Project facilities to such extent and against such risks and in such amounts as shall be consistent with sound practice.


Complied with.

Without limiting the generality of the foregoing, NTDC undertakes to insure, or cause to be insured, the Goods to be imported for the Project and to be financed out of the proceeds of the Loans against hazards incident to the acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such Goods.

PA Article II Section 2.05(b)

Complied with.

NTDC shall maintain, or cause to be maintained, records and accounts adequate to identify the Goods, Works and consulting services and other items of expenditure financed out of the proceeds of the Loans, to disclose the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, its operations and financial condition.


Complied with.

ADB and NTDC shall cooperate fully to ensure that the purposes of the Loans will be accomplished.


Complied with.

NTDC shall promptly inform ADB of any condition which interferes with, or threatens to interfere with, the progress of the Project, the performance of its obligations under this Project Agreement or the Onlending Agreement, or the accomplishment of the purposes of the Loan.


Complied with.

ADB and NTDC shall from time to time, at the request of either party, exchange views through their representatives with regard to any matters relating to the Project, NTDC and the Loan .

PA Article II Section 2.07(c)

Complied with.

28 Appendix 6

NTDC shall furnish to ADB all such reports and information as ADB shall reasonably request concerning (i) the Loan and the expenditure of the proceeds thereof; (ii) the Goods, Works and consulting services and other items of expenditure financed out of such proceeds; (iii) the Project; (iv) the administration, operations and financial condition of NTDC; and (v) any other matters relating to the purpose of the Loan. Without limiting the generality of the foregoing, NTDC shall furnish to ADB quarterly reports on the execution of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter.

PA Article II Section 2.08(a), (b)

Complied with.

Promptly after physical completion of the Project, but in any event not later than three (3) months thereafter or such later date as ADB may agree for this purpose, NTDC shall prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by NTDC of its obligations under this Project Agreement and the accomplishment of the purpose of the Loan.

PA Article II Section 2.08(c);

Not complied with. Only partially completed completion report was submitted to ADB.

(b) NTDC shall enable ADB, upon ADB's request, to discuss NTDC financial statements and its financial affairs from time to time with the auditors appointed by NTDC pursuant to Section 2.09(a) hereabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officer of NTDC unless NTDC shall otherwise agree.


Not applicable. No record of ADB’s request for such meetings.

NTDC shall enable ADB’s representatives to inspect the Project, the Goods and Works financed out of the proceeds of the Loans, all other plants, sites, properties and equipment of the NTDC and any relevant records and documents.


Complied with.

NTDC shall, promptly as required, take all action within its powers to maintain its corporate existence, to carry on its operations, and to acquire, maintain and renew all rights, properties, powers, privileges and franchises which are necessary in the carrying out of the Project or in the conduct of its business.


Complied with.

NTDC shall at all times conduct its business in accordance with sound administrative, financial, electrical transmission, and environmental practices, and under the supervision of competent and experienced management and personnel.


Complied with.

NTDC shall at all times operate and maintain its plants, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound

PA Article II Section 2.11(c)

Complied with.

Appendix 6 29

administrative, financial, electrical transmission, engineering, environmental, and maintenance and operational practices.

Except as ADB may otherwise agree, NTDC shall not sell, lease or otherwise dispose of any of its assets which shall be required for the efficient carrying on of its operations or the disposal of which may prejudice its ability to perform satisfactorily any of its obligations under this Project Agreement.


Complied with.

Except as ADB may otherwise agree, NTDC shall apply the proceeds of the Loans to the financing of expenditures on the Project in accordance with the provisions of the Loan Agreements and this Project Agreement, and shall ensure that all Goods, Works and consulting financed out of such proceeds are used exclusively in the carrying out of the Project.


Complied with.

Except as ADB may otherwise agree, NTDC shall duly perform all its obligations under the Onlending Agreement, and shall not take, or concur in, any action which would have the effect of assigning, amending, abrogating or waiving any rights or obligations of the parties under the Onlending Agreement.


Complied with.

NTDC shall promptly notify ADB of any proposal to amend, suspend or repeal any provision of its charter or license and shall afford ADB an adequate opportunity to comment on such proposal prior to taking any action thereon.


Not applicable. There was no proposal on the part of NTDC to amend, suspend, or repeal any provision of its charter of license.

CPPA = Central Power Purchasing Agency, DISCO = power distribution company, DSCR = debt service coverage ratio, EMP = environmental monitoring plan, FFA = framework financing agreement, GENCO = power generation company, IPDF = indigenous people’s development framework, LA = loan agreement, LARF = land acquisition and resettlement framework, MOWP = Ministry of Water and Power, NEPRA = National Electric Power Regulatory Authority, NTDC = National Transmission and Despatch Company, PA = project agreement, PMU = project monitoring unit, PIU = project implementation unit, RP = resettlement plan, SFR = self-financing ratio, WAPDA = Water and Power Development Authority.

30 Appendix 7

FINANCIAL ANALYSIS A. Introduction 1. The report and recommendation of the President (RRP) of the project examined the overall financial performance of the National Transmission and Despatch Company (NTDC), and the project’s financial viability was discussed in an appendix. This analysis at project appraisal showed that the financial internal rate of return (FIRR) was estimated at 21.4% against the weighted average cost of capital (WACC) of 8.5%. B. Background and Assumptions 2. NTDC delivers electricity in bulk, through 220/132 kV supply transformers, to the distribution companies for onward distribution to consumers. The amount of electricity that NTDC can deliver is constrained by the capacity of these supply transformers. Augmentation of the transmission system upstream of these transformers, such as the installation of transmission lines and 500/220 kV transformers at 500 kV substations, is also needed to ensure that the system has sufficient capacity to deliver power to these supply transformers. These upstream transmission lines and power transformers have relatively high capacity increments so these upstream system investments tend to be in bulk, whereas the 220/132 kV supply transformers at the distribution system interface are smaller and can be installed incrementally to match demand. This analysis, therefore, assumes that the revenue that the project can generate is determined by the total capacity of the 220/132 kV transformers installed by the project, but also includes the cost of the upstream investments included in the project since such investments are also required for the full capacity of the supply transformers to be utilized. 3. At the time of the project completion review in April 2017, the latest loading data on most supply transformers installed by the project was not available.1 However, the transmission system in Pakistan is heavily loaded and most supply transformers installed under Tranche 1 of the multitranche financing facility (MFF) are already loaded during periods of peak summer electricity demand to between 80% and 100% of their rated capacity. Some transformers were loaded to more than 100% of rated capacity. There is nothing to suggest that the additional transformers installed under this project will not be loaded to a similar level. As the system is further developed, the loadings on individual supply transformer will fluctuate, since adding a new transformer allows the loadings on other transformers to be reduced, irrespective of whether these other transformers are situated in the same or neighboring substations. The National Electric Power Regulatory Authority (NEPRA) classifies a transformer as overloaded if its loading during periods of peak demand exceeds 80% of its rated capacity under normal system operating conditions. This analysis, therefore, assumes that over the longer term the rate of transmission system development will be calibrated to ensure that transformer loadings exceed 80% of rating only when other transmission elements are out of service due to an unplanned fault. 4. This analysis also assumed that a supply transformer installed by the project is loaded at times of peak demand to 50% of rating in the year after commissioning and that this increases linearly to 80% after it has been in service for a period of 5 years during summer peak demand. After this 5-year period, the analysis assumed that all transformers continue to be loaded at 80%

1 National Electric Power Regulatory Authority, 2016, State of the Industry Report 2015, Islamabad. Transformer

loading data is published annually by NEPRA in its annual State of the Industry Report. However, the latest report available is for FY2015 and the reported peak demands related to the 2014 summer, before many of the transformers installed by the project had been commissioned.

Appendix 7 31

capacity. However, this peak demand occurs only in the middle of summer while in winter, peak transformer loading reduces to around 66% of peak summer demand, based on information published by NEPRA. The analysis assumes that the transition between peak summer and peak winter demand is linear, which indicates that on commissioning a transformer will be loaded, on average, to 42% of its nameplate rating, increasing to 66% of nameplate rating after 5 years of operation. 5. Benefits. NTDC earns revenue from use of system payments by the distribution companies, with the payments determined by a use of system charge (UoSC) set by NEPRA. This is based on the peak half hourly demand in each calendar month (measured in kW per month [kW/month]). This tariff applies across the distribution network, irrespective of location. 6. The project installed an additional 3,020 mega volt amps (MVA) capacity of 220/132 kV supply transformers.2 To simplify the analysis, without introducing a material error, the project is assumed to comprise a single supply transformer of this rating, commissioned in 2014, which roughly equates to the mid-point of the sub-project commissioning dates. The project capital cost is the total cost of the project as calculated in Appendix 3: Project Costs. This is increased by 15%, to provide for the NTDC project inputs that have not been accounted for. These inputs include project design and management costs, as well as land acquisition, environment, and resettlement costs. An exchange rate of PRs89.71 per US dollar has been assumed, which is the weighted average exchange rate calculated from an analysis of the loan disbursement data. 7. In calculating the revenue to NTDC from the project, a UoSC of PRs126.75/kW/month has been used as the basis. This is the NEPRA determined UoSC that was applied in 2015, the first full year that most subprojects were in service.3 Since 2011, the annual compounded average increase of UoSC in real terms has been 4.2%.4 Based on this historical data, this analysis assumes that the UoSC is increased by 4% in real terms each year to avoid overestimation of benefits for future years (para. 13 of this appendix has further discussion on this tariff increase assumption). Other key assumptions required for the revenue estimate are a power factor of 0.85 and a load factor of 67%, the latter being taken from NEPRA’s published power industry statistics. Operation and maintenance costs are assumed to be 1.5% per annum and the project life is assumed to be 30 years. 8. Costs. The only cost breakdown of the project that the project completion review was able to obtain is shown in Appendix 3. While it can be inferred from this information that approximately 10% of the costs shown were for civil works the table does not include NTDC costs and does not include sufficient information on which to make an informed estimate of the cost of NTDC’s own inputs or the magnitude of the cost components to which shadow pricing should be applied.

2 The Ravi subproject was a supply transformer augmentation where new 250 MVA transformers replaced an existing

160 MVA units. In this case the additional capacity installed was only 90 MVA per transformer. 3 UoSC in 2009 and 2010 were higher at PRs 100.15/KW/month, which was determined in 2006. Therefore, the analysis

assumes the 2012 rate of PRs 85.91 /KW/month as a conservative estimate for 2009–2011. The UoSC was reduced in 2011, the first year of petition by NTDC since 2006. Since the years between 2006 and 2011 were years of strong demand growth, the overall revenue base of NTDC was substantially increased and in turn reduced the per KW revenue requirement. This is unlikely in the future, as the current problem is the insufficient capacity of the network to meet demand. The needed capacity expansion will require substantial investments and additional revenue requirements beyond the growth in supplied demand.

4 The determined UoSC was PRs 85.91/KW/month in 2012, PRs 126.75 in 2015 and 136.07 in 2017. This is about 58.4% increase since 2012 while the compounded impact of inflation from 2012 to 2017 (with an estimated inflation of 6% for 2017) is 30.2%. From 2012 to 2017, the compounded annual average increase in tariff is 9.6%, and the compounded annual average inflation is 5.4%. This results in a compounded annual real increase of tariff of 4.2%.

32 Appendix 7

Therefore, as a first approximation, for this analysis the capital cost in Appendix 3 has been increased by 15% to allow for NTDC’s contribution. 9. Weighted Average Cost of Capital. The weighted average cost of capital (WACC) of the project is estimated at 5.2% as in Table A7.1 with values in May 2017. While the ADB loan is based on a floating interest rate, the re-lending interest rate from the government to NTDC has been fixed at 17% since the beginning of the project. The cost of equity of NTDC has been estimated by NEPRA to be 15% in the latest UoSC determination for NTDC.5 The inflation rate is forecast to be 6%.6 The corporate income tax rate has been referenced from a recent NTDC project.7

Table A7.1: Weighted Average Cost of Capital of the Project

Financing Component ADB NTDC

Description Loan Equity Total

A Weighting 87.7% 12.3% 100.0%

B Nominal cost 17.0% 15.0%

C Tax rate 35.0% 0.0%

D Tax adjusted nominal cost (B x [1 - C]) 11.1% 15.0%

E Inflation rate 6.0% 6.0%

F Real cost ([1 + D] / [1 + E] - 1) 4.8% 8.5%

G Weighted cost (F x A) 4.2% 1.0% 5.2%

WACC (real) 5.2%

ADB = Asian Development Bank, WACC = weighted average cost of capital.

Source: Asian Development Bank estimates.

C. Financial Internal Rate of Return and Sensitivities 10. The financial analysis of the project is shown in Table A7.2 and a sensitivity analysis is shown in Table A7.3. For the base case, the estimated financial internal rate of return (FIRR) for the project is 10.3%, above the WACC of 5.2%. The net present value (NPV) is estimated to be PRs18,491 million. There was insufficient information in the RRP to allow an analysis to explain the difference between this result and the appraisal estimates, although it is known that the appraisal analysis considered each project independently, rather than taking the aggregated approach used in this PCR. 11. The appraisal analysis assumed a construction period of 3 years for new substations and 2 years for transformer and line extensions and augmentations. Actual construction periods were much longer. Furthermore, the Pakistan rupee depreciated by 32% on a weighted average over the construction period, when compared to the appraisal assumption. This depreciation increased the capital cost when expressed in local currency, given that 77% of contract costs were foreign currency expenditures8 and largely offset the impact of any loan savings.

12. More significantly, the revenues to NTDC in the appraisal analysis were substantially higher than the revenues shown in Table A7.2. This difference would be amplified if both analyses

5 National Electric Power Regulatory Authority. 2017. Determination of tariff for NTDC. Islamabad. 6 ADB’s standard inflation rate for Pakistan as of May 2017. 7 ADB. 2017. Periodic Financing Request for Multitranche Financing Facility: Second Transmission Investment

Enhancement Program Tranche 2. Manila. 8 At project completion, the rupee had depreciated 72% from the appraisal assumption.

Appendix 7 33

were undertaken at the same constant price currency base. The most likely explanation for this is different tariff assumptions between the two analyses. While the RRP gave a detailed explanation of the approach used by NEPRA to set the tariff, it provided no information on the actual tariff used in the appraisal analysis. However, it suggested that the tariff had two components, fixed and variable, whereas NTDC now only charges the kVA/month tariff component and only this fixed and capacity component has been used in this PCR analysis. 13. The sensitivity analysis is conducted on (i) a 10% reduction in revenue, which could arise if NTDC is unable to collect all the revenue or if tariff increases over time fall behind the assumption and (ii) a 10% increase in operation and maintenance costs. Both cases show sustained financial viability. As indicated in para. 7, the historical compounded annual average increase of UoSC in real terms was 4.2% from 2012 to 2017. This is a long period of evidence. Further, NTDC has filed new UoSC petitions on a more regular basis since 2012 than the period before, which increases confidence in NTDC’s initiatives to keep its UoSC up to date. Finally, even without any real tariff increase, the project still shows an FIRR of 7.1%, above the WACC estimate. D. Conclusion 14. While this analysis still shows financial viability with an FIRR above WACC, the financial analysis at appraisal showed a higher FIRR. This could be a result of the extended construction period, currency depreciation during construction, and a higher tariff assumption in the appraisal analysis. 15. There are also unquantified benefits. For example, while the transmission system remains very heavily loaded, the project will assist NTDC to reduce the risk of asset failure due to thermal overload. Asset failures have significant financial implications for NTDC including the cost of repair or replacement and a potential loss of revenue while the asset is out of service. Further, loss reductions are not accounted for by this analysis. NTDC currently charge distribution companies only for the capacity it serves in terms of kW and not kWh. However, any transmission losses beyond the regulator-allowed levels are charged as a penalty to NTDC and reflected as its costs. Therefore, if losses become higher with deteriorating assets, the project assets can prevent such financial losses by reducing losses with new lines and assets. 16. In addition to the financial viability of the project shown in this Appendix, the combination of these unquantified benefits, the assessment of NTDC’s corporate financial sustainability,9 and economic viability shown by the economic analysis (Appendix 8) provides comfort to assess that the project is rated likely sustainable.

9 ADB. 2016. Financial Management Assessment. Second Power Transmission Enhancement Investment Program –

Tranche 1. Manila.

34 Appendix 7

Table A7.2: Project Financial Analysis (PRs million)

Capital Cost Maintenance

Cost Tax Revenue Net Benefit

2009 4,520 0 0 0 (4,520) 2010 2,740 0 0 0 (2,740) 2011 5,095 0 0 0 (5,095) 2012 5,536 0 21 129 (5,428) 2013 214 0 84 526 228 2014 186 0 100 626 340 2015 45 274 289 1,806 1,198 2016 17 275 341 2,131 1,499 2017 0 275 393 2,456 1,788 2018 0 275 438 2,735 2,022 2019 0 275 485 3,033 2,272 2020 0 275 505 3,154 2,374 2021 0 275 525 3,280 2,480 2022 0 275 546 3,412 2,590 2023 0 275 568 3,548 2,705 2024 0 275 590 3,690 2,824 2025 0 275 614 3,838 2,948 2026 0 275 639 3,991 3,077 2027 0 275 664 4,151 3,211 2028 0 275 691 4,317 3,351 2029 0 275 718 4,489 3,496 2030 0 275 747 4,669 3,647 2031 0 275 777 4,856 3,804 2032 0 275 808 5,050 3,967 2033 0 275 840 5,252 4,136 2034 0 275 874 5,462 4,313 2035 0 275 909 5,681 4,496 2036 0 275 945 5,908 4,687 2037 0 275 983 6,144 4,886 2038 0 275 1,022 6,390 5,092 2039 0 275 1,063 6,645 5,307 2040 0 275 1,106 6,911 5,530 2041 0 275 1,150 7,188 5,762 2042 0 275 1,196 7,475 6,004 2043 0 275 1,244 7,774 6,255 2044 0 275 1,294 8,085 6,516

FIRR 10.3%

NPV @ WACC 18,491

FIRR = financial internal rate of return, NPV = net present value, PRs = Pakistan rupee, WACC = weighted average cost of capital. Source: Asian Development Bank estimates.

Table A7.3: Sensitivity Analysis

(PRs million)

FIRR NPV

1. Base case 10.3% 18,491

2. Revenue reduced by 10% 9.5% 14,741

3. Operations and maintenance increased by 10% 10.3% 18,191

4. No real tariff increase 7.1% 4,558

FIRR = financial internal rate of return, NPV = net present value, PRs = Pakistan rupee. Source: Asian Development Bank estimates.

Appendix 8 35

ECONOMIC ANALYSIS A. Introduction 1. In assessing the efficiency of ADB financing and the project, the economic viability of the project was re-examined. This analysis follows the principles of ADB’s guidelines for economic analysis1 and shares the technical and financial assumptions with the financial analysis (Appendix 7). At appraisal, the economic internal rate of return for the project was estimated to be 34.7% against the economic opportunity cost of capital of 12%. B. Assumptions 2. Costs. The analysis is conducted as a comparison of with- and without-project scenarios. The financial costs discussed in the financial analysis (Appendix 7) are converted to economic values by applying a standard conversion factor of 0.9 to non-traded components and further adjusted by a multiplier of 0.85 for non-skilled labor.2 Operation and maintenance are assumed to be 1.5% of the capital cost. As this economic analysis is conducted at the system level (i.e., values are accrued at consumption), the associated electricity generation and distribution costs have also been accounted for in calculating the benefits. 3. Benefits. The same assumptions of economic cost conversion have been applied to the benefits. As was done for the financial analysis, in the economic analysis the project is simplified for analysis purposes to the installation of a supply transformer rated at 3,020 MVA. It assumes that this transformer is loaded at 50% of capacity in the year following commissioning and that this loading ramps up in a linear fashion to 80% capacity after 5 years. A power factor of 0.85 and a load factor of 67% is assumed. The energy supplied to distribution companies in 2012, the year after commissioning the first transformer, is assumed to be 673 GWh but only 549 GWh is sold to consumers after allowing for distribution losses. All 220/132 kV supply transformers are assumed to be fully loaded in 2019 when it is assumed that an additional 9,823 GWh is supplied to consumers as a result of the project. 4. Since there have been significant supply constraints in the system and almost half of the electricity consumption in Pakistan is from residential customers, most of the increased supply is assumed to be incremental and valued at willingness-to-pay (WTP). The average electricity price, inclusive of tariff differential subsidies, was PRs12.30 per kWh for 2014–15, based on NEPRA’s tariff determinations for power distribution companies. This is used for this analysis as a proxy to WTP, as it reflects the unsubsidized cost of supply. The benefits accrued to the project is the WTP net of generation and distribution costs and adjusted by the standard conversion factor. 5. A small portion of the increased supply is assumed to be non-incremental and valued at resource saving, as customers such as industrial electricity users often use diesel generators to compensate for the lack of supply from the electricity grid. The difference between the cost of such diesel generator-based electricity and the electricity tariff paid by customers is used as a proxy for this resource saving value. This is estimated to be PRs4.84 per kWh.

1 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 2 ADB. 2016. Report and Recommendation of the President to the Board of Directors: Islamic Republic of Pakistan,

Multitranche Financing Facility: Second Transmission Investment Enhancement Program Tranche 1. Manila.

36 Appendix 8

C. Economic Internal Rate of Return and Sensitivity Analysis

6. An analysis based on the cost and benefit assumptions in paras. 2–5 results in an economic internal rate of return (EIRR) of 12.8%, above the economic opportunity cost of capital of 9% or that of the appraisal analysis of 12% (Table A8.1). 7. The sensitivity analysis also shows strong economic viability where benefits are reduced either as a whole or only on non-incremental benefits. In either case, strong economic viability is maintained. Some downward movements in benefits or increase in costs would not significantly impact the economic viability of the project. While the EIRR is lower than the appraisal estimate, with ADB’s new guidelines published in 2017 (footnote 31), the economic opportunity cost of capital has been revised to be 9%. This strengthens the positive result of this analysis. D. Conclusion 8. While the economic analysis shows an EIRR above the hurdle rate, the estimated EIRR is reduced by the very low cost of diesel in 2014–15. Based on the costs given in the 2015 State of the Industry Report, the cost used in this analysis was PRs17.14 per liter, compared to an equivalent cost of PRs26.92 in 2011–12, which was used for the project completion report for Tranche 1 of this MFF. This has reduced the resource saving and, in turn, the value of the non-incremental benefits. Additional benefits, such as savings in transmission losses, which would reduce the cost of generation have not been quantified for this analysis. Without the project, electricity shortages and outages would have been much worse. The project benefits of reduced electricity shortages and outages have not been quantified for this analysis. The economic viability with the rather conservative estimates adopted by this analysis and these potential unquantified benefits provide further confidence in assessing that the project can be rated efficient.

Table A8.1: Project Economic Analysis (PRs million)

Capital Cost

Maintenance Cost

Additional supply (GWh)

Incremental benefitsa

(GWh)

Non-incremental

benefits (GWh)

Incremental benefitsa

(PRs million)

Non-Incremental

benefits (PRs million)

Net benefits

(PRs million)

2009 4,385 0 0 0 0 0 0 (4,385)

2010 2,658 0 0 0 0 0 0 (2,658)

2011 4,942 0 0 0 0 0 0 (4,942)

2012 5,370 0 549 499 53 161 232 (4,976)

2013 208 0 2,156 1,983 186 641 809 1,243

2014 181 0 2,467 2,294 186 741 810 1,371

2015 43 266 6,844 6,433 442 2,079 1,926 3,696

2016 16 267 7,765 7,377 418 2,384 1,821 3,922

2017 267 8,603 8,259 371 2,669 1,614 4,016

2018 267 9,213 8,937 298 2,888 1,297 3,918

2019 267 9,823 9,627 212 3,111 992 3,836

2020 267 9,823 9,725 106 3,143 496 3,372

2021 267 9,823 9,823 0 3,175 0 2,908

2022 267 9,823 9,823 0 3,175 0 2,908

2023 267 9,823 9,823 0 3,175 0 2,908

2024 267 9,823 9,823 0 3,175 0 2,908

2025 267 9,823 9,823 0 3,175 0 2,908

2026 267 9,823 9,823 0 3,175 0 2,908

2027 267 9,823 9,823 0 3,175 0 2,908

Appendix 8 37

2028 267 9,823 9,823 0 3,175 0 2,908

2029 267 9,823 9,823 0 3,175 0 2,908

2030 267 9,823 9,823 0 3,175 0 2,908

2031 267 9,823 9,823 0 3,175 0 2,908

2032 267 9,823 9,823 0 3,175 0 2,908

2033 267 9,823 9,823 0 3,175 0 2,908

2034 267 9,823 9,823 0 3,175 0 2,908

2035 267 9,823 9,823 0 3,175 0 2,908

2036 267 9,823 9,823 0 3,175 0 2,908

2037 267 9,823 9,823 0 3,175 0 2,908

2038 267 9,823 9,823 0 3,175 0 2,908

2039 267 9,823 9,823 0 3,175 0 2,908

2040 267 9,823 9,823 0 3,175 0 2,908

2041 267 9,823 9,823 0 3,175 0 2,908

2042 267 9,823 9,823 0 3,175 0 2,908

2043 267 9,823 9,823 0 3,175 0 2,908

EIRR 13.9%

ENPV@9% 8,107

ENPV@12% 2,380

EIRR = economic internal rate of return, ENPV = economic net present value, GWh = gigawatt hours, PRs = Pakistan rupee a Incremental benefits are based on willingness-to-pay net of generation costs and distribution costs to account for the delivery cost of electricity to customers. Source: Asian Development Bank staff estimates.

Table A8.2: Sensitivity Analysis

Item EIRR (%) ENPV at 9%

(PRs million)

Switching value: 9%

hurdle rate (%) ENPV at 12%

(PRs million)

Switching value: 12%

hurdle rate (%)

Base case 13.9 8,107 2,380

Benefits reduced by 10% 12.6 5,718 33.9 713 14.3

Value of resource saving decreased by 10%

13.6 7,608 162.4 1,976 59.0

EIRR = economic internal rate of return, ENPV = economic net present value, PRs = Pakistan rupee, UoSC = use of system charge. Source: Asian Development Bank estimates.

38 Appendix 9

QUANTITATIVE ASSESSMENT OF OVERALL PROJECT PERFORMANCE

Criteria Assessment Rating (0–3)

Weight (%)

Weighted Rating

Relevance Relevant 2 25 0.50 Effectiveness Effective 2 25 0.50 Efficiency Efficient 2 25 0.50 Sustainability Likely sustainable 2 25 0.50

Overall Ratinga Successful 2.00 a Based on the following ranges: Highly successful ≥ or = 2.5, successful ≥ 1.75 and < 2.5, partly successful ≥ 0.75

and < 1.75, unsuccessful < 0.75.

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