Completion Report

Project Number: 38456-033 Loan Number: 2727 August 2019

Pakistan: Power Distribution Enhancement

Investment Program (Tranche 2)

This document is being disclosed to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS

Currency unit – Pakistan rupee/s (Pre/PRs)

At Appraisal At Project Completion 15 November 2010 30 June 2018

Pre1.00 = $0.0117 $0.0082 $1.00 = PRs85.70 PRs121.73

ABBREVIATIONS

ADB – Asian Development BankAEFS – audited entity financial statementAGP – Auditor General of PakistanAPFS – audited project financial statementDMF – design and monitoring frameworkDISCO – power distribution companyEARF – environmental assessment review frameworkEIA – environmental impact assessmentEIRR – economic internal rate of returnELR – energy loss reductionEMP – environmental management planFESCO – Faisalabad Electric Supply CompanyFIRR – financial internal rate of returnFMC – facility management consultantGEPCO – Gujranwala Electric Power CompanyHESCO – Hyderabad Electric Supply CompanyIEE – initial environmental examinationIESCO – Islamabad Electric Supply CompanyLARP – land acquisition and resettlement planLESCO – Lahore Electric Supply CompanyMEPCO – Multan Electric Power CompanyMFF – multitranche financing facilityMOWP – Ministry of Water and PowerMTDF – Medium-Term Development FrameworkNEPRA – National Electric Power Regulatory AuthorityNTDC – National Transmission and Despatch CompanyPEPCO – Pakistan Electric Power CompanyPESCO – Peshawar Electric Supply CompanyPFR – periodic financing requestPMU – project management unitROW – right-of-wayQESCO STG

––

Quetta Electric Supply Companysecondary transmission grid

T&D – transmission and distribution

WEIGHTS AND MEASURES GWh – gigawatt-hour (1,000 megawatt-hours) km – kilometer (1,000 meters) kV – kilovolt (1,000 volts) kW – kilowatt (1,000 watts) kWh – kilowatt-hour, unit of electrical energy (1

kilowatt for 1 hour) MVA – megavolt-ampere (1,000 kilovolt-amperes),

in an ideal system (no loss) the same as MW MW – megawatt (1,000 kilowatts) MWh – megawatt-hour (1,000 kilowatt-hours) V – volt, unit of electrical pressure W – watt, unit of electric power

NOTES

(i) The fiscal year (FY) of the Islamic Republic of Pakistan, its ministries, and the distribution companies ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2012 ends on 30 June 2012.

(ii) In this report, “$” refers to United States dollars.

Vice-President Shixin Chen, Operations 1 Director General Werner Liepach, Central and West Asia Department (CWRD) Directors Ashok Bhargava, Energy Division, CWRD

Xiaohong Yang, Country Director, Pakistan Resident Mission (PRM) Team leader

Ehtesham Zafar Khattak, Senior Project Officer (Infrastructure), PRM

Team members Anjum Asif, Senior Operations Assistant, PRM Khurram Shahzad, Associate Project Analyst, PRM Muhammad Ali Sheikh, Associate Financial Control Analyst, PRM

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

BASIC DATA i

MAP iv

I. PROJECT DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 2

A. Project Design and Formulation 2 B. Project Outputs 3 C. Project Costs and Financing 3 D. Disbursements 4 E. Project Schedule 4 F. Implementation Arrangements 5 G. Consultant Recruitment and Procurement 5 H. Gender Equity 7 I. Safeguards 7 J. Monitoring and Reporting 8

III. EVALUATION OF PERFORMANCE 10

A. Relevance 10 B. Effectiveness 10 C. Efficiency 11 D. Sustainability 11 E. Development Impact 12 F. Performance of the Borrower and the Executing Agency 13 G. Performance of the Asian Development Bank 13 H. Overall Assessment 14

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 14

A. Issues and Lessons 14 B. Recommendations 15

APPENDIXES

1. Design and Monitoring Framework 16

2. Project Cost at Appraisal and Actual 17

3. Project Cost by Financier 18

4. Disbursement of ADB Loan and Grant Proceeds 20

5. Contract Awards of ADB Loan and Grant Proceeds 21

6. Chronology of Main Events 22

7. Status of Compliance with Loan Covenants 23

8. Reassessment of Economic and Financial Analysis 32

9. List of Subprojects Under the Loan 38

10. Status of AEFS and APFS 43

BASIC DATA

A. Loan Identification

1. Country Islamic Republic of Pakistan 2. Loan number and financing source 2727 / ordinary capital resources (OCR)3. Project title Power Distribution Enhancement

Investment Program (Tranche 2) 4. Borrower Islamic Republic of Pakistan 5. Executing agency Pakistan Electric Power Company

(PEPCO) 6. Amount of loan $242,000,000 7. Financing modality Multitranche financing facility

B. Loan Data

1. Appraisal– Date started– Date completed

3 March 2010 25 November 2010

2. Loan negotiations– Date started– Date completed

3 December 2010 7 December 2010

3. Date of Board approval 14 December 2010 4. Date of loan agreement 28 January 2011 5. Date of loan effectiveness

– In loan agreement– Actual– Number of extensions

28 March 2011 5 October 2011 3

6. Project completion date– Appraisal– Actual

30 March 2015 30 June 2018

7. Loan closing date– In loan agreement– Actual– Number of extensions

30 March 2015 30 June 2018 3

8. Financial closing date– Actual 22 April 2019

9. Terms of loan– Interest rate

– Maturity (number of years)– Grace period (number of years)

London interbank offered rate (LIBOR) + 0.30% 17 3 (for principal repayment only)

10. Terms of relending (EconomicAffairs Division to PakistanElectric Power Company)– Interest rate 15% – Maturity (number of years) 17 – Grace period (number of years)– Second-step borrower

3 (for principal repayment only) Distribution companies

ii

11. Disbursements

a. Dates

Initial Disbursement 1 December 2011

Final Disbursement 19 February 2019

Time Interval 87 months

Effective Date 5 October 2011

Actual Closing Date 22 April 2019

Time Interval 91 months

b. Amount ($ ‘000)

Category

Original Allocation

(1)

Increased during

Implementation (2)

Canceled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

Loan 242,000 69,700 172,300 156,429 15,871 Total 242,000 69,700 172,300 156,429 15,871

C. Project Data

1. Project cost ($million)

Cost Appraisal Estimate Actual

Foreign exchange cost 301.55 156.43 Local currency cost 0.00 26.99

Total 301.55 183.43

2. Financing plan ($million)

Cost Appraisal Estimate Actual

Implementation cost Borrower financed 60.00 26.99 ADB financed 242.00 156.43 Other external financing

Total implementation cost 301.55 183.43

Interest during construction costs Borrower financed 0.00 1.00 ADB financed 12.48 5.98 Other external financing

Total interest during construction cost 12.48 6.98

3. Cost breakdown by project component ($million)

Component Appraisal Estimate Actual

Turnkey 116.48 74.81 Equipment 101.53 75.64 Civil works 24.57 17.04 Engineering 4.30 1.37 Resettlement and monitoring 18.38 1.98

Base cost total 278.27 176.45 Contingencies 11.51 0.00 Financing charges during implementation 12.48 6.98

Total 301.55 183.43

4. Project schedule

Item Appraisal Estimate Actual

Date of contract with consultants None None Original Scope

iii

Turnkey contracts including civil works and engineering (17 packages, 22 lots)

First turnkey contract 1 Jan 2012 21 Dec 2011 Last turnkey contract 30 Sep 2012 10 Apr 2014 Start of operations for the first turnkey contract 1 Jan 2014 9 Jun 2014 Start of operations for the last turnkey contract 1 Jan 2015 1 Jul 2018

Equipment and supplies Dates

First procurement 1 Jan 2012 28 Nov 2011 Last procurement 30 Sep 2012 31 Mar 2015 Completion of supply 31 Dec 2014 11 Apr 2018

Additional scope against savings Equipment (9 packages, 22 lots)

First procurement 15 Dec 2015 4 Mar 2016 Last procurement 10 Feb 2017 25 Sep 2017 Completion of supply 31 Mar 2018 15 Jul 2018

5. Project performance report ratings

Ratings

Implementation Period Single Project Rating

From 5 Oct 2011 to 31 Dec 2011 Potential problem From 1 Jan 2012 to 31 Dec 2012 Potential problem From 1 Jan 2013 to 31 Dec 2013 On track From 1 Jan 2014 to 31 Dec 2014 Potential problem From 1 Jan 2015 to 31 Dec 2015 On track From 1 Jan 2016 to 31 Dec 2016 On track From 1 Jan 2017 to 31 Dec 2017 On track From 1 Jan 2018 to 31 Dec 2018 On track From 1 Jan 2019 to 31 Jan 2019 On track

D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of Members

Inception 1–22 Feb 2011 4 28 a, b, c, d Review 1 5–9 Mar 2012 4 16 a, b, d, e Midterm review 18–30 Apr 2013 2 14 a, b Review 2 6–20 Jun 2014 2 21 b, f Review 3 22 May–3 Jun 2015 6 54 a, b, c, f, g, h Review 4 22 May–3 Jun 2016 2 14 b, f Review 5 17–19 Oct 2016 2 6 b, f Special loan administration 29–30 Nov 2016 2 4 a, i Review 6 1–9 Feb 2018 2 12 a, b

a = senior project officer, b = project analyst, c = consultant (environment), d = consultant (safeguards), e = principal energy specialist, f = energy specialist, g = social safeguards specialist, h = project analyst Energy Division, Central and West Asia Department (CWEN), i = portfolio officer Pakistan Resident Mission (PRM). Note: A separate mission for project completion review was not needed because the last mission in February 2018 collected the essential data and information, apart from reviewing the completion status of each subproject.

Multan

Gujranwala

Faisalabad

Hyderabad

ISLAMABADPeshawar

Karachi

Lahore

Quetta

Boundaries are not necessarily authoritative.

National Capital

Provincial Capital

City/Town

River

PAKISTAN

POWER DISTRIBUTION ENHANCEMENT INVESTMENT PROGRAM (TRANCHE 2)(as completed)

1000 20050

Kilometers (km)

N

73 00'Eo

73 00'Eo

35 00'No35 00'No

26 00'No

64 00'Eo

64 00'Eo

26 00'No

19PAK ABV

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the

colors, denominations, or information.

MVA Additions in DISCOs under T2

(5,304 MVA)13%

(36,905 MVA)87%

PESCOIESCO

FESCO

GEPCO

LESCO

MEPCOQESCO

HESCO

ADB under T2

Faisalabad Electric Supply Company

Gujranwala Electric Power Company

Hyderabad Electric Supply Company

Islamabad Electric Supply Company

Lahore Electric Supply Company

Multan Electric Power Company

Peshawar Electric Supply Company

Quetta Electric Supply Company

FESCO

GEPCO

HESCO

IESCO

LESCO

MEPCO

PESCO

QESCO

4,907

4,434

2,411

4,787

9,849

7,472

5,773

2,576

782

624

752

144

820

948

764

470

16%

14%

31%

3%

8%

13%

13%

18%

Total 42,209 5,304 13%

DISCOTotal

Capacity(MVA)

Addition under T2

(MVA)Percentage

ADB

DISCO

MVA

T2

Asian Development Bank

Power Distribution Company

megavolt-ampere

Tranche 2

=

=

=

=

I. PROJECT DESCRIPTION

1. Power is an essential commodity for the economic and social development of Pakistan.The supply of reliable electricity to customers throughout the country raises living standards andstimulates commercial and industrial growth. In May 2005, the Government of Pakistan startedimplementing a series of integrated activities in line with the power sector development strategyset in the Medium-Term Development Framework (MTDF).1 The MTDF envisaged additionalpower generation, transmission, and distribution capacities to ensure sufficient electricity supplyto meet the projected 8% per annum economic growth over the planning period. Subsequently,the power distribution companies (DISCOs), in coordination with the Ministry of Water and Power(MOWP) prepared the Power Distribution Sector Road Map.2 The road map recommended short-(priority), medium-, and long-term system improvement projects and detailed the investmentneeds. The total investment requirement for the DISCOs from 2008 to 2017 was estimated at$5.2 billion. The investments consisted of improvements to the secondary transmission grid(STG), distribution of power, and energy loss reduction (ELR). The government sought thesupport of the Asian Development Bank (ADB), the World Bank, and other multilateral andbilateral funding agencies to provide financing.

2. In line with the government’s long-term investment plan, in August 2008, ADB approvedthe Power Distribution Enhancement Investment Program (PDEIP), a multitranche financingfacility (MFF) for $810 million with an implementation period of 10 years.3 This represented 15.6%of the total power distribution sector investment plan for 2008–2017 of $5.2 billion. ADB’s Boardof Directors also approved a program support component from Asian Development Fundresources of $10 million with the MFF.

3. In accordance with the framework financing agreement (FFA), the government submitteda periodic financing request (PFR) to ADB for tranche 2 (the project) in March 2010. The totalproject cost was estimated at $302 million, of which ADB was requested to finance $242 million.The project was needed to help alleviate the power distribution bottlenecks and to reduceprolonged outages and load shedding. PDEIP – Project 2 was approved on 14 December 2010,signed on 28 January 2011, and became effective on 5 October 2011.4 Pakistan Electric PowerCompany (PEPCO) was the executing agency and the eight DISCOs were the implementingagencies.5 The impact of the project was improved power distribution infrastructure andmanagement.

4. The outcome was the removal of power system bottlenecks, resulting in a reduction oftransmission and distribution (T&D) losses through distribution system rehabilitation,augmentation, and expansion covering all eight DISCOs. This comprised physical investments insubprojects covering the STG: (i) augmentation, extension, conversion, and rehabilitation;(ii) STG transmission lines; and (iii) energy loss reduction through the installation of capacitors.The expected output was the completion of subprojects adding 3,380 megavolt-amperes (MVA)

1 Government of Pakistan, Planning Commission. 2005. Medium Term Development Framework (MTDF), 2005 – 2010. Islamabad.

2 Ministry of Water and Power, Government of Pakistan. 2008. Power Distribution Sector Roadmap, 2008 – 2017. Islamabad.

3 ADB. Pakistan: MFF - Power Distribution Enhancement Investment Program ($810 million). 4 ADB. Pakistan: Power Distribution Enhancement Investment Program – Project 2 ($242 million).5 Faisalabad Electric Supply Company (FESCO), Gujranwala Electric Power Company (GEPCO), Hyderabad Electric

Supply Company (HESCO), Islamabad Electric Supply Company (IESCO), Lahore Electric Supply Company (LESCO), Multan Electric Power Company (MEPCO), Peshawar Electric Supply Company (PESCO), and Quetta Electric Supply Company (QESCO).

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of transformer capacity and 387 kilometers (km) of new secondary 132 kilovolt (kV) transmission lines.

II. DESIGN AND IMPLEMENTATION A. Project Design and Formulation 5. The project was highly relevant at both appraisal and completion. It aimed at (i) allowing for system expansion to meet load and generation growth; (ii) improving efficiency, reliability, and system security; and (iii) reducing distribution losses. At appraisal, the project was consistent with ADB’s country strategy and Pakistan’s development priorities in the energy sector. Investments to increase energy security and efficiency were one of the four main strategic areas under the Pakistan country partnership strategy (CPS), 2009–2013.6 The energy sector road map under the CPS identified the removal of distribution system constraints, along with other steps, to strengthen the capacity of the energy supply chain. The government’s energy sector strategy, described in the MTDF, focused on ensuring the long-term viability of the sector by optimizing the energy mix. Improving T&D remains one of the six areas of assistance identified in the Pakistan CPS 2015–2019, focusing on sector reforms as well as investments in T&D infrastructure to reduce technical losses and theft.7 The Government of Pakistan’s Vision 2025 incorporates a four “Es” agenda—economy, energy, education, and elimination of extremism.8 Its vision is to create, by 2025, a globally competitive and prosperous country providing a high quality of life for all its citizens. Pakistan’s National Power Policy 2013 aims at reducing T&D losses and increasing revenue collection.9 6. Under the PDEIP, the ADB team worked with each DISCO to identify subprojects. The selected subprojects were an integral component of the distribution sector development road map and expansion program, based on (i) the National Transmission and Despatch Company (NTDC) load forecast using least-cost planning principles and (ii) the loading position of power transformers.10 The project scope mainly related to the secondary transmission system, including (i) new or upgraded substations, (ii) new transmission lines, and (iii) additions or augmentations to transformers within existing substations. Some substation subprojects included the construction of associated transmission lines to increase the existing transmission capacity. The project at appraisal comprised 131 subprojects. Ninety-four percent of the project scope was related to the secondary transmission system (132 kV voltage level) and the remaining scope covered the reduction of technical losses through the installation of 11 kV capacitor banks. During implementation, the number of subprojects increased to 167 because the DISCOs proposed additional subprojects against procurement saving.11 The additional subprojects added 1,166 MVA of transformer capacity at 132 kV and 404 MVA at 11 kV. The project design at appraisal catered to the distribution network expansion and enhancement of the DISCOs’ intake capacity from the transmission dispatcher (NTDC).

6 ADB. 2009. Pakistan Country Partnership Strategy, 2009 – 2013. Manila. 7 ADB. 2015. Pakistan Country Partnership Strategy, 2015 – 2019. Manila. 8 Government of Pakistan, Planning Commission. 2013. Pakistan Vision 2025. Islamabad. 9 Government of Pakistan, Ministry of Water and Power. 2013. National Power Policy 2013. Islamabad. 10 The distribution networks (excluding the Karachi area) are managed by eight independent DISCOs. Karachi is a

separate integrated utility (Karachi Electricity Supply Corporation) and was not part of the investment program. 11 ADB approved the subprojects through internal minor change memos dated 17 August 2015 and 27 June 2016.

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B. Project Outputs 7. The project had a single output of commissioning of subprojects. Out of the 131 subprojects envisaged at appraisal, 122 subprojects were STG projects and nine were ELR projects. The use of savings during implementation resulted in the addition of 36 STG projects. During implementation, the design and monitoring framework (DMF) was revised on 28 May 2013 as part of an ADB-wide DMF retrofit exercise to incorporate defined performance indicators with baselines in the DMF and to align the tranche and program DMFs of MFFs.12 Subsequently, DMF performance targets were enhanced—incorporating the results of savings utilization. Appendix 1 summarizes the achievements against the latest targets at project completion. 8. The first performance indicator was regarding the construction of 167 subprojects. A total of 164 subprojects were completed by the loan and MFF closing date of 30 June 2018. The three incomplete subprojects were 132 kV transmission lines, which were delayed because of right-of-way (ROW) and design-related issues. In one of these subprojects (the 132 kV Sahuwala–Pasrur transmission line under Gujranwala Electric Power Company [GEPCO]), 175 out of 212 transmission line towers were complete but the route was changed and redesigned because of ROW. Similarly, in another subproject (the 132 kV Dadu–Mehar–Larkana transmission line under Hyderabad Electric Supply Company [HESCO]) 423 out of 493 towers were constructed. In the third non-commissioned subproject (the 132 kV Central Park Grid Station along with the associated transmission line under Lahore Electric Supply Company [LESCO]), the design of the associated transmission line was revised because the area was waterlogged. The grid station works were completed but the transmission line construction was still in progress at project completion. Since loan closure, the DISCOs using their own resources have continued with the remaining works, which are expected to be completed in the third quarter of 2019. 9. The second performance indicator regarding the addition of 387.0 km of distribution line to the system was overachieved, with 394.8 km of lines added in the DISCO distribution networks at project completion. The completion of the three subprojects mentioned in para. 8 will add 185.0 km, achieving a total addition of 580.0 km to the distribution grid. C. Project Costs and Financing 10. The ADB loan amount was $242 million and the government share was $60 million at appraisal. The ADB midterm review mission (18–30 April 2013) assessed the loan utilization of various DISCOs following the completion of procurement and identified overall savings of $78.8 million. The large savings (26%) were mainly because of the tendency of DISCOs to overestimate the budget at the planning (PC-1) stage, the downward slide in market rates for oil/metals after the 2008 global financial crisis, and the devaluation of the Pakistani Rupee. The borrower requested the cancellation of savings of $69.7 million on 22 May 2013 and the utilization of the canceled amount under tranche 4, which was being processed at that time. On 6 June 2013, ADB conveyed the cancellation to the borrower. The ADB loan amount was revised downward to $172.3 million and the government contribution was reduced to $48.3 million. No further cancellations were made until the loan closing date of 30 June 2018. At project completion, ADB had contributed $156.4 million (91% of the revised ADB allocation) and the government’s share was $27.0 million (56% of the revised counterpart allocation). The main factor behind the low utilization of the government allocation is overestimation at the appraisal stage, e.g., the appraisal estimate of $10.51 million for inland transportation, letters of credit, and insurance

12 Earlier MFFs did not distinguish between the performance indicators in project DMFs and the MFF DMF. The MFF

program outcome and output were considered the impact and outcome for the projects.

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remained unutilized as these services were included in the scope of the awarded contracts. Similarly, the amount allocated for environment mitigation was not used (paras. 28–30). Details of the cost estimates at appraisal and the actual costs are in Appendix 2. 11. The financing plan at appraisal was based on an ADB to GOP ratio of 80:20, but the ratio at project completion was 85:15, reflecting actual costs. At appraisal, the DISCOs’ share of $60 million was based on the category allocation of each DISCO. Engineering and administrative costs, duties, and taxes to be funded by the DISCOs were included in the project cost estimation. After cancellation, the counterpart share was reduced to $48.3 million and the actual incurred expenses were $27.0 million (Appendix 3). D. Disbursements 12. Total ADB loan disbursements amounted to $156.43 million or 91% of the post-cancellation loan amount (para. 10). The first subproject-related funds were disbursed after 5 months of loan effectiveness on 16 March 2012 and the last disbursement was on 19 February 2019. Most (72%) of the funds had been disbursed by the original project completion date of 30 September 2015. Some of the subprojects approved at the appraisal stage were delayed because of rebidding, litigation in local courts, and ROW issues (para. 14). A winding-up period to close the loan account was extended by 3 months (from 31 October 2018 to 31 January 2019), enabling the disbursement of all eligible expenses. At financial closure, an undisbursed amount of $15.87 million was canceled. 13. The loan proceeds were disbursed in accordance with ADB’s. Disbursement projections were revised in September 2015 and August 2016 as part of the loan extensions. Annual and cumulative disbursement and contract award of the loan proceeds are in Appendixes 4 and 5. E. Project Schedule 14. The project was approved on 14 December 2010. The loan was signed on 28 January 2011 and became effective on 5 October 2011. At appraisal, physical completion was expected on 31 March 2015, with an original closing date of 30 September 2015. The loan closing date was extended three times for a total of 33 months. The first extension was from 30 September 2015 to 31 December 2016; the second extension was from 31 December 2016 to 31 March 2018; and a final extension of 3 months was from 31 March 2018 to the MFF closing date of 30 June 2018. The first two extensions were needed mainly to accommodate delays in procurement and the utilization of surplus proceeds for additional works and equipment. Of the 131 subprojects, 27 suffered substantial delays caused by (i) multiple rebidding for the procurement of power transformers in LESCO; (ii) a stay order given by Lahore High Court in the procurement of power transformers by Faisalabad Electric Supply Company (FESCO), which was finally cancelled in March 2015; (iii) rebidding in HESCO for a major turnkey contract, as no bidder participated in the initial bidding because of shortcomings in the base design; and (iv) ROW issues resulting in design changes and revision of the original routes in Islamabad Electric Supply Company (IESCO), GEPCO, and LESCO. As most subprojects under this tranche were turnkey projects, a final extension of 3 months was given to complete outstanding physical works against the unforeseen issues faced during implementation by HESCO, GEPCO, and LESCO. Appendix 6 lists the chronology of major events in project implementation. 15. The project was closed financially on 22 April 2019, about 10 months from loan closure. Financial closure was delayed because the implementing agencies needed to finalize outstanding contractual payments, mainly related to the extension of time claims and variations in scope.

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F. Implementation Arrangements 16. The project’s implementation arrangements designed at appraisal were a continuation of the implementation arrangements approved at the time of the MFF and tranche 1 in September 2008. They continued to function effectively and remained unchanged throughout the project period. The same arrangements were subsequently adopted for tranches 3 and 4 of the program. The implementation arrangements were appropriately designed to accomplish project activities and achieve the anticipated outputs. 17. PEPCO was the executing agency responsible for the overall supervision, coordination, and monitoring of project activities. It was responsible for keeping ADB informed of any developments in the borrower’s policies, programs, and investment plans related to power generation, transmission, and power distribution that may have materially affected the financial viability of PEPCO, DISCOs, or the investment program. DISCOs were the implementing agencies for all subprojects in their respective areas. Each DISCO established a project management unit (PMU) staffed by technical, procurement, social, and environmental specialists.13 A implementation consulting firm staffed with international and national experts was employed under the program, reporting to PEPCO on monitoring and administrative issues and helping DISCOs on operational issues by filling capacity gaps as applicable. Existing staff from the procurement, engineering, and finance departments were transferred to the PMUs while each DISCO appointed social and environmental staff for the first time. The arrangement succeeded in implementing subprojects efficiently in each DISCO. 18. PEPCO is used by the MOE to coordinate and monitor the DISCOs. The PEPCO’s role during implementation helped the project, but the staff turnover was very high. Six chief engineers were appointed during the project implementation period; some with a tenure of less than 6 months. The situation in the DISCO PMUs was somewhat better, with little staff turnover in core functions such as procurement and engineering. The PMUs were headed by a chief engineer (development), who in most cases rose to a senior position—even becoming DISCO chief executive officer—thus continuing to support implementation. G. Consultant Recruitment and Procurement 19. At program approval in September 2008, it was envisaged to hire consulting services under the program support fund (PDEIP – Project 1) to cover the preparation, implementation, and monitoring activities related to subprojects and to address capacity issues at the DISCO level.14 PEPCO recruited a facility management consultant (FMC) firm in March 2010 after a delay of 18 months, but the contract lasted for 1 year and was terminated in February 2011 because of poor performance. A second firm was recruited in June 2012 to resume the FMC activities and remained engaged until the program closure, carrying out consulting services for all four tranches of the program. The absence of an FMC for 17 months delayed the finalization of the engineering design of the turnkey subprojects and the completion of related safeguard documentation. Both firms were selected through quality- and cost-based selection in accordance with ADB’s Guidelines on the Use of Consultants (2006).15

13 The PMUs established under tranche 1 of the program continued throughout the investment program for all

subsequent tranches (2, 3, and 4). 14 ADB. Pakistan: Power Distribution Enhancement Investment Program – Project 1 ($252 million). 15 ADB. 2006. Guidelines on the Use of Consultants 2006. Manila.

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20. The consulting services contract included 1,141 person-months, comprising 146 person-months of international experts, 419 person-months of national experts, and 576 person-months of technical and support national staff. At completion, 1,246 person-months had been utilized (142 person-months of international experts, 392 person-months of national experts, and 712 person-months of national support staff). National technical and support staff person-months were increased in lieu of a reduction in the person-months of international and national experts, following DISCO requirements, through six contract variations during project implementation and were fully utilized. The actual record of person-months indicates low estimates of consulting services inputs at appraisal, especially of national technical/support staff requirements. Despite the delay in the award of the contract, the consultant provided adequate services to complete the subprojects of the program as planned. The contract period was 73 months.

21. At appraisal, 32 procurement packages were planned, with 17 turnkey packages for works and 15 packages for goods. During implementation, the 17 turnkey packages for works were divided into 22 lots and the 15 packages for goods were divided in a total of 46 lots. The cancellation of $69.7 million from the original loan amount in May 2013 was largely attributable to savings incurred in the turnkey projects (para. 10). During implementation, ADB approved the use of savings in August 2015 and June 2016. These savings were mainly from the procurement of goods planned at appraisal. As a result of the savings, nine new packages for the supply of goods (comprising 14 lots in total) were added. In total, 41 contract packages consisting of 82 lots were executed under this loan. All the procurement for works and goods was carried out using international competitive bidding and the single-stage single-envelope procedure, in accordance with ADB’s Procurement Guidelines (2006)—except for 12 lots related to goods supply that used national competitive bidding for four lots, seven lots that used the shopping method, and one lot that was a repeat order.16 22. The 17 turnkey packages (22 lots) were for works involving the construction of new 132 kV transmission lines and the construction or conversion of 132 kV grid stations. The packages were divided into lots based on the nature of the work and the geographical location. For example, IESCO-11 was divided into four lots, with one lot for the construction of a grid station and the remaining three lots for transmission lines located in different geographical locations within IESCO. The first turnkey contract was awarded on 21 December 2011 and all except one turnkey package (HESCO-08 lots 1 and 2) were awarded by 16 January 2013. HESCO-08 was delayed, as no qualified bidder participated in the initial round, but was finally awarded on 10 April 2014 after rebidding. The capacity of the DISCOs to execute turnkey contracts was severely exposed during implementation, as all six DISCOs implementing turnkey contracts lacked contract management skills. ADB and the FMC provided support as required. Matters related to contract effectiveness, scope variation, and time extensions delayed the completion of projects as they involved internal approvals by the management and board of directors of each DISCO. ROW issues added to delays because IESCO, LESCO, and GEPCO had to redesign the transmission line routes. Even after three loan extensions, three subprojects executed as turnkey were not completed until the MFF closing date of 30 June 2018 (para. 8). 23. The procurement of goods turned out to be more challenging. At appraisal, two packages of goods procurement were planned for seven DISCOs, with one package for the procurement of major equipment (power transformers, circuit breakers, and switchgear panels) and the second for the procurement of associated equipment and materials (cables, conductors, capacitors, and ancillary equipment). HESCO was the only DISCO that opted for a single package for the procurement of associated equipment and materials. During implementation, the immediate

16 ADB. 2006. Procurement Guidelines. Manila.

7

challenge was to break up the goods packages into lots. To ensure fair competition and maximum participation, different equipment (power transformers, circuit breakers, isolators, cables, hardware, and panels) needed to be procured in separate lots. As a result, each package was divided into three lots on average and the final procurement was carried out for 46 lots. The first goods contract was awarded on 28 November 2011 and all except two lots (FESCO-01 lot 1 and LESCO-01 lot 1) were awarded by 10 June 2013. Both the delayed lots were for the procurement of power transformers and were delayed because of various reasons (para. 14). All the DISCOs used the surplus savings in procuring more goods through 14 additional lots. The sheer volume of procurement of goods in 60 lots was the major challenge faced by ADB and the DISCOs. Bidding for the goods packages followed international competitive bidding, covering all the lots in each package, but the DISCOs evaluated the bids separately for each lot with the support of the FMC. ADB approval of the bid evaluation report was provided against each lot. The signed contract amount varied from $0.02 million to $7.50 million. In a few instances, where rebidding was recommended by a DISCO and approved by ADB, the procurement method was revised in accordance with ADB procurement guidelines (para. 21). H. Gender Equity 24. The project was categorized no gender elements in accordance with the Guidelines for Gender Mainstreaming Categories of ADB Projects (2012), so it did not include gender mainstreaming activities.17 It improved the living standards of households (and women) through increased access to and better quality of energy services. Further, all subproject activities directly and indirectly contributed to the improvement of women’s livelihoods in the subproject areas, including access to better health and education facilities as well as better employment opportunities for household members. I. Safeguards 25. Involuntary resettlement. The project was categorized B for involuntary resettlement. At program approval in February 2008, PEPCO prepared a land acquisition and resettlement framework that all the DISCOs endorsed. Six DISCOs (GEPCO, HESCO, IESCO, LESCO, Multan Electric Power Company [MEPCO], and PESCO) had subprojects with involuntary resettlement impacts. At appraisal, draft resettlement plans were prepared for 26 subprojects that were assessed as having involuntary resettlement impacts, while due diligence reports were prepared for eight subprojects that did not involve involuntary resettlement impacts. The respective DISCOs already owned most of the sites for the grid stations, except for six sites acquired following procedures under the Land Acquisition Act (1894) or through a willing buyer–willing seller arrangement. None of the grid station sites were acquired using the Land Acquisition Act urgency clause. About 16.6 hectares were purchased for the grid stations. A total of 1,886.2 hectares of land were affected, mostly temporarily during the transmission line construction. The works impacted 1,801 non-fruit trees and 532 fruit trees and partially impacted eight structures. A total of 2,267 households were affected. None of the affected households had to relocate or were severely affected. The total cost of compensation was PRs290.91 million. 26. Draft resettlement plans were updated following the approval of the final transmission line routes designed by the turnkey contractors, submitted to ADB for review, and publicly disclosed. Compensation payments were made in three stages—foundations, tower erection, and stringing.18 Each DISCO monitored the implementation of land acquisition and resettlement plans

17 ADB. 2012. Guidelines for Gender Mainstreaming Categories of ADB Projects 2012. Manila. 18 Stringing is the process of installing the conducting and grounding wires on transmission line towers.

8

(LARPs) internally through their environmental and social impact cells, while the FMC undertook external monitoring. Both internal and external resettlement monitoring reports were submitted to ADB biannually for review and disclosed on the ADB website. During project implementation, the monitoring noted compensation delays caused by the delayed assessment and processing of vouchers and checks, the unavailability of some displaced persons, and disputes over tower location and ownership claims. ADB flagged the delays; and notified and reminded the DISCOs to provide more staff and resources for assessing impacts, contacting displaced persons, and processing compensation. Except for these delays, ADB’s Safeguard Policy Statement (2009) and national requirements have generally been met. Workshops and coaching sessions were also undertaken to improve monitoring and grievance redress. At the time of loan closing, compensation payments had been completed except for a GEPCO subproject where works were being completed using the DISCO’s own resources (removed from the scope of the project) and a LESCO subproject where a few displaced persons could not be located. The amount is represented under “cross compensation” head within LESCO’s account for disbursement once the displaced persons become available.

27. Indigenous peoples. The project was categorized C for indigenous peoples at appraisal. No indigenous peoples were identified following ADB’s Safeguard Policy Statement during project implementation.

28. Environment. The project was categorized B for the environment, and ADB prepared and approved the initial environmental examinations (IEEs) for the turnkey projects in 2010. The IEEs were converted to environmental impact assessments (EIAs) to comply with local statutory requirements. The EIAs for tranche 2 were submitted to the concerned EPAs for issuance of environmental approval (No Objection Certificate). Public hearings for the tranche 2 subprojects of all DISCOs were conducted in accordance with Pakistan’s Environmental Protection Act, (1997) and environmental approvals were received by 2012.

29. Environment and social units with qualified environmental staff, established during tranche 1 in each DISCO, continued monitoring the implementation of the tranche 2 subproject-specific environmental management plans (EMPs) that were part of the respective IEEs. Further, the FMC’s environment staff provided overall supervision and support. The contractors for each environmental category B subproject were required to hire environmental staff for EMP implementation and submit monthly EMP monitoring reports to the client. ADB also fielded regular review missions to category B subprojects. Biannual environmental monitoring reports were regularly submitted and disclosed on the ADB website.

30. Because of the relatively simple nature of construction activities in the subprojects, no significant environmental impacts or major issues were encountered. Minor noncompliance, mostly related to worker health and safety and housekeeping, were addressed satisfactorily. J. Monitoring and Reporting 31. All covenants were relevant and remained applicable during project implementation. Appendix 7 shows the status of compliance with loan covenants at project completion. All loan covenants were adequately complied with, except for partial compliance with financial covenants relating to: (i) unmet targets of the debt service coverage ratio and self-financing ratio—indicating less than adequate financial health and sustainability of the DISCOs; and (ii) few pending submissions of audit reports mentioned below.

9

32. A project performance and monitoring system was established within PEPCO for monitoring of and reporting on progress toward the project’s output targets, through monthly and quarterly progress reports issued by the FMC. These reports provided details on the status of activities performed with respect to the procurement of materials, the physical execution of subprojects, contract awards and disbursements, and the monitoring and evaluation of social and environmental covenants. Each DISCO also submitted quarterly progress reports to ADB throughout implementation, complying with the reporting requirement agreed as part of the project agreement. 33. The Auditor General of Pakistan (AGP) issues independent audit opinion on all foreign-aided projects in Pakistan, including those funded by ADB. The project agreement required each DISCO to maintain a project account separate from their main operations accounts and submit a total of 64 (8 DISCOs for FY2012 -FY2019) audited project financial statements (APFS) during implementation. The requirement to submit APFSs was deferred in four instances for (i) HESCO in FY2012, (ii) IESCO in FY2017, and (iii) Quetta Electric Supply Company (QESCO) in FY2015 and FY2016, as no expenditures were incurred (Appendix 10). AGP issued an unqualified audit opinion for all the submitted APFSs. The average submission time of APFSs had a negligible delay of 5 days after the due date, except for two reports which were submitted with a delay of more than 6 months. At the time of PCR preparation, audit evidence was obtained for 96% of loan proceeds ($149 million). The project team is following up with the DISCOs to ensure submission of APFSs for FY2019 by 31 December 2019 for the remaining disbursements. At QESCO’s request, APFSs were deferred for FY2015 and FY2016 until FY2017, citing no expenditures during the period. However, noncompliance was noted when the APFS for FY2017 covered 24 months instead of 36 months, so the APFS for FY2015 was not submitted to ADB and is still pending. The confirmation of nil expenditure from the AGP for IESCO in FY2017 refers to lack of disbursements from the foreign component of the loan, as substantiated by the APFS for FY2018, wherein receipts under external assistance are nil and only PRs12.39 million in counterpart funds were disbursed in FY2017. 34. Each DISCO was also required to submit audited entity financial statements (AEFSs) annually. AEFSs were submitted for each fiscal year during FY2012–FY2017, with a few exceptions: (i) GEPCO for FY2016; (ii) PESCO and QESCO for FY2012; and (iii) LESCO for FY2015, FY2016, and FY2017. AEFSs for FY2018 were submitted by all DISCOs except QESCO and LESCO. as the audit is still in process and will be submitted once completed (Appendix 10). Out of 48 reports submitted to date, 23 were issued with a qualified audit opinion, mainly driven by regulatory challenges since the restructuring of the Water and Power Development Authority, e.g., the transfer of property ownership and disputes in the recording of payables and receivables with other industry players such as the Central Power Purchasing Agency. The average submission time for AEFSs was with a delay of 2 months, except for two reports submitted with a delay of more than 13 months. The non-submission of few AEFSs and delayed submission in some instances leads to the conclusion that compliance with AEFS covenant is only partially complied. 35. The financial management capability of DISCOs during the implementation period was found to be adequate and commensurate to the needs of the project. The DISCOs were required to comply with the financial covenants of Debt-Service Coverage Ratio (at least 1.2) and Self-financing Ratio (at least 20%) starting from FY2014 as per project agreement. ADB reiterated the importance of compliance with loan financial covenants to the DISCOs in review and consultation missions, stressing the importance of independent audit opinion on these ratios. Historically, DISCOs have generally complied with both or at least one ratio, mainly self-financing ratio. A

10

summary is given in Appendix 10, Table A10.3, based on either auditor opinion or ADB’s own calculation, except where AEFSs were not submitted.

III. EVALUATION OF PERFORMANCE A. Relevance 36. The project was highly relevant at appraisal and remains so at completion. The intended outcome of the project was strategically well aligned with the development priorities of the federal government, which emphasized system expansion to meet load growth, improving reliability, and reducing distribution losses. The project was well coordinated between the stakeholders (paras. 1–4, 56–58) and did not duplicate the work of other development partners. The intended outcome was aligned with ADB’s country and sector strategy of investments for bringing efficiency and security to the country’s power network by removing distribution system constraints (paras. 5–6). The project DMF was revised during implementation—aligning it with the program DMF and quantifying performance targets against baselines (para. 7). This revision improved the adequacy of the project design and formulation process, although it was also adequate at appraisal. Savings were utilized, enhancing the performance indicator (addition of MVA capacity), following the same project design and formulation. B. Effectiveness 37. The project is rated highly effective in achieving its intended outcome and outputs (Appendix 1). The intended project outcome of rehabilitated and expanded power distribution systems was attributable to the substantial achievement of project outputs. At approval, as in earlier MFFs, there was no distinction between performance indicators in the project and MFF DMFs. The investment program outcome and output were also considered the impact and outcome for the related projects. 38. The subprojects installed 5,340 MVA of 132 kV power transformers, enhancing the power transformation capacity of DISCOs all over Pakistan except Karachi. The project also added 580 km of 132-kV transmission line in all DISCOs, facilitating connectivity with newly constructed and existing grid stations besides power evacuation (Appendix 9). 39. The project outcome underwent a minor change in the retrofitted DMF. The outcome of “power distribution systems rehabilitated, augmented and expanded – system bottlenecks removed” stated at appraisal was changed to “power distribution systems rehabilitated, augmented and expanded.” One of the performance indicators was changed from 10.0% reduction in electricity outages to 0.5% reduction in T&D losses in the retrofitted DMF. T&D losses were considerably reduced, by about 2.6%, mainly because of DISCOs’ network expansion and improvement. The other performance indicator of adding 3,380 MVA in distribution capacity remained the same in both the appraisal and retrofitted DMF and was revised upward to 3,972 MVA because of the additional subprojects implemented using the project savings. At completion, the DISCOs’ network was expanded by 5,304 MVA at 132 kV and 404 MVA at 11 kV of installed transformer capacity.

40. The project output of commissioning of subprojects and the relevant indicators were not changed as part of the DMF retrofit exercise. The project’s planned output was surpassed, with 164 subprojects commissioned instead of 131 envisaged at appraisal. The other output in the DMF was also achieved, with 394.8 km of new 132 kV lines added at project completion, surpassing the target of 387.0 km at appraisal. In assessing the effectiveness of the project, the

11

soundness of the process used to select and prioritize individual subprojects was also considered (para. 6). No changes in circumstances during project implementation affected the appropriateness and effectiveness of the selected subprojects.

41. The project was categorized B for environment and social safeguards and followed relevant ADB safeguard policies. Although the capacity of the DISCOs’ environmental and social cells created some issues, the project team closely supported and monitored the work of DISCOs and contractors to ensure they followed ADB safeguard policies. The environmental impact of the subprojects was minor, mostly relating to the ROW of sub-transmission lines and in a few cases the construction of new substations. Adequate compensation was provided to the affected people, mainly against damage to trees and crops. The project was effective in resolving safeguards issues, such as ROW and cost compensation. C. Efficiency 42. This analysis results in an economic internal rate of return (EIRR) of 26.5% compared with 33.0% at appraisal. The EIRR calculated at completion is based on system approach taking into account the cost of generation, transmission and distribution. At appraisal, only distribution costs were considered for calculation of EIRR.19 Sensitivity analysis also shows strong economic viability, with an EIRR above the updated economic opportunity cost of capital of 9% (Appendix 8 contains a detailed analysis). The project is therefore rated efficient. 43. The project achieved its planned output, with the total withdrawals of $156.43 million accounting for 90.78% of the revised loan amount and 64.60% of the original loan amount. The canceled amount of $69.7 million was used in tranche 4 of the program (para. 10). The project’s efficiency was affected by delays that led to three loan extensions, adding 33 months to the loan period (para. 14) and resulting in delayed disbursements (para. 12). Despite these delays, the project’s indicator of efficiency—the EIRR—remains above the threshold. 44. Based on historical data from the DISCOs, a newly installed transformer’s full capacity is generally reached within 3–5 years of commissioning. The transformers installed by the project are currently operating at more than 80% of their capacity and reaching full operational capacity during summer months. The project benefits mainly come from the expanded capacity of grid stations by new and replaced transformers to supply an increased amount of electricity to the downstream DISCO networks, the addition of new customers, and the reduction in T&D losses as envisaged in the DMF. D. Sustainability 45. The completed subprojects are integral components of Pakistan’s sub transmission and distribution grid. Referring to the financial sustainability reported by all DISCOs (para. 31), they remain going concern entities (as confirmed by auditors) whose management does not intend to liquidate or cease operations and there is no alternate to an electricity distribution network. Further, as state-owned enterprises, DISCOs have sovereign backing and the ongoing tariff reforms aim to rectify the financial situation of the power sector as a whole (paras. 48–49), leading to the conclusion that the project should be rated likely sustainable. 46. All DISCOs have institutional sustainability, with an adequate level of qualified human resources and a governance structure supported by organizational arrangements. Dedicated

19 If the EIRR at completion is calculated on the same basis as at appraisal, it is above 35%.

12

departments with qualified staff for development, planning, finance, operations, and maintenance are in place. Nevertheless, DISCOs’ maintenance support arrangements could be improved, for example, by having experts readily available to advise station managers of the appropriate response to equipment failures requiring a nonroutine maintenance intervention. Effective and timely technical support for grid station managers would often avoid the need for replacement of equipment, enhancing the sustainability of the project and DISCO operations.

47. In assessing the sustainability of the project, the financial internal rate of return (FIRR) was calculated and is discussed in detail in Appendix 8. The project benefits come from the increased 132/11 kV transformer delivery capacity, the reduction in T&D losses, and the expansion in the distribution network—resulting in improved grid connectivity with reduced electricity outages. This analysis results in an estimated FIRR of 30.25% against 20.00% at appraisal. The estimated weighted average cost of capital was 6.98% at appraisal. At completion, it is calculated at 7.51% based on the actual financing mix, the current inflation rate, and other parameters (Appendix 8). The DISCOs’ contribution to actual project costs decreased to 15% (from 20% at appraisal) and the relending rate to DISCOs remained unchanged. While the difference between the FIRR and the weighted average cost of capital is smaller at appraisal, the estimated FIRR at completion is much higher, indicating the financial viability and sustainability of the project. 48. Whereas the project’s FIRR is higher than its cost of capital, the financial sustainability of most DISCOs remains weak, considering their huge levels of receivables and current financial losses. Increased electricity sales resulting from reduced forced outages and load shedding have rendered rates of return higher than the cost of capital. The financial sustainability of DISCOs depends on timely tariff determination by the National Electric Power Regulatory Authority (NEPRA) and its notification by the government. The operations of DISCOs are managed through a distribution margin allowed by NEPRA, with the power purchase price being a pass-through item. The determined tariff for FY2018 notified on 1 January 2019 includes a prior year adjustment component of PRs2.76 per kilowatt-hour (kWh) (18% of the determined tariff of PRs15.53/kWh). Prior year adjustment represents the unrecovered revenue requirement of DISCOs in previous years accumulated because of the delayed notification of the tariff.

49. The recovery of an entire backlog of unrecovered revenue through the notification of determined tariffs for FY2018 will not only improve the profitability of DISCOs but will also help generate the required cash flows. Subsequent to the notification of tariffs, NEPRA issued a periodic adjustment in tariffs on 14 June 2019 for July–December 2018 on account of the recovery of variations in the power purchase price, including the impact of T&D losses amounting to PRs189.638 billion. The recovery of this amount will further improve the financial sustainability of DISCOs. E. Development Impact 50. The project achieved the target of “improved power distribution and management.” By strengthening and expanding distribution capacity, it contributed to the quality and reliable delivery of electricity to customers, particularly benefiting commercial, residential, village electrification, and agriculture customers, including hospitals and schools. The project’s indirect impacts were increasing income-earning opportunities generated by increased access to electricity and job opportunities during construction. 51. The project achieved two of the three impact targets in the DMF (para. 40). It successfully contributed toward increasing the transformation capacity of the distribution grid. This led to an

13

increase in electricity sales of 24,341 gigawatt-hours (GWh) against the DMF target of 12,000 GWh and 82% village electrification against the DMF target of 78% in 2017.

52. The third target of achieving a 20% reduction in electricity outages was not achieved, as they improved by less than 1%.20 The recorded outages at all voltage levels (132/66/11 kV) in the PEPCO system totaled 534,976 in FY2017, showing a slight improvement against the DMF baseline of 539,514 in 2009. However, the outages for 132 kV feeders (94% of the project scope) were reduced by 19% from 9,243 in FY2009 to 7,789 in FY2017. The factors attributable to outages from 2009 to 2015 were mainly lack of generation capacity during peak electricity demand and system constraints in the transmission network of the NTDC. In the past five years, with improved generation capacity, outages are mainly attributable to overloaded distribution transformers and aging infrastructure at the 11kV level. Forced interruptions can still occur in contingency (N-1) situations when a critical asset fails, but the project improved the situation in the project areas.21 53. 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 and transmission bottlenecks are the main driver, and the poor definition of the project’s performance indicators, making them difficult to measure. Overall, the impact of the project is rated satisfactory. F. Performance of the Borrower and the Executing Agency 54. The performance of the Government of Pakistan as the borrower is rated satisfactory. Although loan effectiveness was delayed by about 6 months, the borrower (Economic Affairs Division), the line ministry, and the executing agency demonstrated strong ownership during project implementation. The borrower responded to important implementation matters (e.g., the change in scope using the loan savings) in a timely manner and monitored the project and facility progress regularly as part of the ADB Pakistan Resident Mission’s portfolio reviews. Senior management at the MOWP monitored progress on the removal of the T&D network’s system constraints monthly, which included some of the subprojects of this project. 55. When the investment program was approved, the role of the executing agency (PEPCO) was limited to monitoring the loan disbursements and coordinating reporting and other administrative requirements with ADB.22 When the project became effective, an FMC was in place to assist PEPCO in monitoring of and reporting on the facility, including this project (para. 32). The high staff turnover in PEPCO was compensated by minimal staff turnover in the FMC, resulting in continued timely delivery of the assigned tasks. Therefore, the performance of the executing agency is rated satisfactory. G. Performance of the Asian Development Bank 56. ADB’s performance is rated satisfactory. It was engaged from the start of the MFF with the executing and implementing agencies. The preparatory works for the project benefited greatly from this arrangement, resulting in ADB Board approval within 9 months of the government’s

20 Electricity outages considered a performance indicator are the forced outages caused by feeder tripping or technical

faults. Planned outages carried out by DISCOs because of construction works, maintenance, and load management were not counted.

21 N-1 contingency is the state of the power system when one of the nodes of the power grid is taken out of service or goes out of service due to an unforeseen event in the system.

22 ADB. Pakistan: MFF - Power Distribution Enhancement Investment Program ($810 million).

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periodic financing request. During implementation, ADB fielded nine review missions apart from the regular annual and quarterly portfolio missions. Delegation of the project to the resident mission helped achieve more effective implementation, with close monitoring of progress at the contract and subproject level. It also helped in timely identification of subprojects against savings. 57. The project records show that ADB’s review and approval of procurement documentation were completed in a timely manner. ADB review missions identified problems with DISCOs’ management of procurement early in the project, resulting in early intervention and support from ADB, especially since effective management was vital for all four MFF tranches to be completed within the 10-year facility time limit. However, ADB did not avail of the opportunity for more active engagement with DISCOs for capacity development and institutional improvement. H. Overall Assessment 58. The project is rated successful. The project’s rating recognizes that 98% of subprojects have been completed and commissioned at a cost significantly lower than the appraisal estimate. The design and construction were appropriate, and the assets installed under the project are being fully utilized. Without the project, the offtake capacity of the sub transmission system would be much reduced, and the power rationing required at periods of peak demand would be much higher than is currently the case. 59. The project has not been rated higher primarily because some impact and project outcomes set out in the DMF were not achieved even though the project, as designed at appraisal, was successfully delivered by DISCOs, albeit with some delay. Non-utilization of the support facility to improve DISCOs’ capacity to operate as a true commercial entity is also an impediment to a higher rating.

Overall Ratings Criteria Rating

Relevance Highly relevant Effectiveness Highly effective Efficiency Efficient Sustainability Likely sustainable Overall Assessment Successful Development impact Satisfactory Borrower and executing agency Satisfactory Performance of ADB Satisfactory

ADB = Asian Development Bank. Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons 60. Despite some critical issues, the project was successfully completed as designed and its outcome and outputs were substantially achieved. The following issues and lessons were, nevertheless, identified:

(i) Where the executing or implementing agency is unfamiliar with the project delivery approach planned at appraisal, e.g., the use of turnkey contracts, it would be helpful to conduct a comprehensive capacity assessment of the executing or implementing agency and market analysis before proposing bid packaging; propose a risk mitigation action plan, including capacity building measures; use

15

advance contracting aligned with the land acquisition plan; and include implementation support on contractual matters in the FMC terms of reference.

(ii) The structure of the MFF allowed for the transfer of the canceled loan amount to subsequent tranches, attesting to the suitability of the financing modality to the type of investment required for a distribution asset operator—multiple projects to be financed with ever-changing demand. The availability of the MFF allows for subprojects that are more critical or ready for implementation to be added in the different tranches. In some cases, delays caused by technical challenges can be remedied by transferring a subproject to subsequent tranches.

(iii) The schedule prepared at appraisal needs to be cognizant of the experience of the executing and/or implementing agencies in implementing projects and the time needed to implement procurement processes in accordance with ADB requirements. Detailed due diligence should be performed at appraisal to develop a realistic schedule, especially when the project involves an executing agency with no ADB project experience.

B. Recommendations 61. Future monitoring. Each DISCO has a grid system operations unit that supervises day-to-day operations, general maintenance and will monitor the performance of assets installed by the project. 62. Covenants. Most covenants have been complied with, except those related to determination of tariff as it falls under domain of the federal government and the regulator NEPRA. Delay in tariff determination by NEPRA and its notification by the federal government contributed to partial compliance with financial sustainability ratios. To curtail energy sector’s burden on the annual state budget is one core issue being addressed under the government’s recent agreement with the International Monetary Fund, under the extended fund facility approved in July 2019. Under an ongoing technical assistance study, ADB is leading efforts to develop a new energy policy in 2019 and a rolling five-year electricity plan for Pakistan.23

63. Further action or follow-up. Financial sustainability of the DISCOs is critical to provide adequate operation and maintenance services, including those installed under the project. ADB is continuing to finance the distribution subsector through a second distribution MFF targeting loss reduction and revenue increase by implementing advanced metering infrastructure and other technological interventions.24 Programmatic policy-based support to the energy sector is planned in the country operations business plan 2019–2021, with a focus on sector reforms to address financial sustainability.

64. Timing of the project performance evaluation report. This report is not considered necessary soon as the ongoing assessment of the DISCOs’ performance associated with the implementation of current and subsequent projects, and the appraisal of planned new loans should suffice.

23 ADB. Pakistan: Update on Energy Sector Plan ($1.05 million). 24 ADB. Pakistan: Second Power Distribution Enhancement Investment Program ($990 million).

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK Design Summary Performance Indicators and Targets Project Achievements

Impact Improved power distribution infrastructure and management

Electricity sales increased by 12,000 GWh in 2018 (baseline: 65,287 in 2009) Village Electrification rate increased from 71.8 % in 2009 to 78% in 2018 (baseline: 71.8% in 2009) Electricity outages reduced by 20 % by 2018 (in 2009 the number of recorded outages was 539,514)

Electricity sales increased by 24,341 GWh. The total electricity sales in PEPCO area were 89,628 GWh in FY17.1 Village Electrification rate increased to 82% in FY17.2 Electricity outages (forced outages) in PEPCO system reduced marginally and the number was 534,976 in FY17.3 For 132kV feeders (94% of project scope) the forced outages were reduced by 19% from 9,243 in FY09 to 7,789 in FY17.

Outcome Power distribution systems rehabilitated, augmented and expanded

Additional 3,972 MVA of distribution capacity installed by 2018. Energy losses (T&D Losses) reduced from 20.6% (percentage of gross generation) in 2009 to 20.1% in 2018.

5,304 MVA transformer capacity was installed at 132kV and 404 MVA was installed at 11kV Energy losses (T&D Losses) reduced to 17.95% in FY17.4

Outputs Subprojects commissioned

Construction of 167 subprojects including expansion, conversion, augmentation and extension of STG network completed by 2018. 387 km of new distribution lines added to the system by 2018.

164 subprojects were completed by 30 June 2018. The project added 394.8 km of new 132kV lines.

Source: Asian Development Bank.

1 Table 23, Chapter 10, Electricity Sector Overview, NEPRA State of Industry Report 2017 2 Table 68, Chapter 13, Electricity Distribution, NEPRA State of Industry Report 2017 3 Table 65, Chapter 13, Electricity Distribution, NEPRA State of Industry Report 2017 4 Table 57, Chapter 13, Electricity Distribution, NEPRA State of Industry Report 2017

Appendix 2 17

PROJECT COST AT APPRAISAL AND ACTUAL ($'000)

Appraisal Estimate Actual

Item ADB GOP Total Cost ADB GOP Total Cost

A. Investment Cost 1. Turnkey Project 116.48 0.00 116.48 74.81 0.00 74.81 2. Equipment and material 101.53 0.00 101.53 75.64 0.00 75.64 3. Civil work and erection 0.00 24.57 24.57 0.00 17.04 17.04 4. Engineering 0.00 4.30 4.30 0.00 1.37 1.37 5. Environmental mitigation and resettlement 0.00 6.93 6.93 0.00 0.00 0.00 6. Administration, audit and inspection 0.00 11.45 11.45 0.00 0.00 1.98 7. Inland transportation, LC and insurance 0.00 10.51 10.51 0.00 0.00 0.00 8. Duties and taxes 0.00 2.50 2.50 0.00 5.61 5.61 Subtotal (A) 218.01 60.00 278.01 150.45 25.99 176.45 B. Contingencies 1. Physical 5.76 0.00 5.76 0.00 0.00 0.00 2. Price 5.76 0.00 5.76 0.00 0.00 0.00 Subtotal (B) 11.51 0.00 11.51 0.00 0.00 0.00 C. {Item 3} 1. Interest during construction {Component C.1} 11.70 0.00 11.70 5.98 1.00 6.98 2. Commitment charges 0.78 0.00 0.78 0.00 0.00 0.00 Subtotal (C) 12.48 0.00 12.48 5.98 1.00 6.98 Total (A+B+C) 242.00 60.00 302.00 156.43 26.99 183.43

Source: Asian Development Bank estimates and annual APFS of implementing agencies.

18 Appendix 3

PROJECT COST BY FINANCIER

Table A3.1: Project Cost at Appraisal by Financier ADB

GOP

Total Costa

Amount % of Cost Category Amount

% of Cost Category Amount

Item A A/C B B/C C

A. Investment Costs

1. Turnkey Project 116.48 100.00% 0.00 0.00% 116.48 2. Equipment and material 101.53 100.00% 0.00 0.00% 101.53 3. Civil work and erection 0.00 0.00% 24.57 100.00% 24.57 4. Engineering 0.00 0.00% 4.30 100.00% 4.30

5. Environmental mitigation and resettlement 0.00 0.00% 6.93 100.00% 6.93 6. Administration, audit and inspection 0.00 0.00% 11.45 100.00% 11.45 7. Inland transportation, LC and insurance 0.00 0.00% 10.51 100.00% 10.51 8. Duties and taxes 0.00 0.00% 2.50 100.00% 2.50

Subtotal (A) 218.01 78.42% 60.00 21.58%% 278.01 B. Contingencies

1. Physical 5.76 100.00% 0.00 0.00% 5.76 2. Price 5.76 100.00% 0.00 0.00% 5.76

Subtotal (B) 11.51 100.00% 0.00 0.00% 11.51 C. Financial Charges During Construction

1. Interest during construction {Component C.1} 11.70 100.00% 0.00 0.00% 11.70 2. Commitment charges 0.78 100.00% 0.00 0.00% 0.78 Subtotal (C) 12.48 100.00% 0.00 0.00% 12.48 Total Project Cost (A+B+C+C) 242.00 80.14%% 60.00 19.86% 0 % Total Project Cost

80.14% {i.e., Financier 1’s

share in project cost}

19.86% {i.e., Financier 2’s

share in project cost}

100.00%

Note: 1. Numbers may not sum precisely because of rounding. Sources: Asian Development Bank estimates and annual APFS of implementing agencies.

Appendix 3 19

Table A3.2: Project Cost at Completion by Financier ADB

GOP

Total Cost

Amount % of Cost Category Amount

% of Cost Category Amount

Item A A/C B B/C C

A. Investment Costs

1. Turnkey Project 74.81 100.00% 0.00 0.00% 74.81 2. Equipment and material 75.64 100.00% 0.00 0.00% 75.64 3. Civil work and erection 0.00 0.00% 17.04 100.00% 17.04 4. Engineering 0.00 0.00% 1.37 100.00% 1.37

5. Environmental mitigation and resettlement 0.00 0.00% 0.00 0.00% 0.00 6. Administration, audit and inspection 0.00 0.00% 1.98 100.00% 1.98 7. Inland transportation, LC and insurance 0.00 0.00% 0.00 0.00% 0.00 8. Duties and taxes 0.00 0.00% 5.61 100.00% 5.61

Subtotal (A) 150.45 78.42% 25.99 21.58%% 176.45 B. Contingencies

1. Physical 0.00 0.00% 0.00 0.00% 0.00 2. Price 0.00 0.00% 0.00 0.00% 0.00

Subtotal (B) 0.00 0.00% 0.00 0.00% 0.00 C. Financial Charges During Construction

1. Interest during construction {Component C.1} 5.98 85.67% 1.00 14.33% 6.98 2. Commitment charges 0.00 0.00% 0.00 0.00% 0.00 Subtotal (C) 5.98 100.00% 1.00 0.00% 6.98 Total Project Cost (A+B+C+C) 156.43 85.28% 26.99 14.72% 183.43 % Total Project Cost

85.28% {i.e., ADB’s share

in project cost}

14.72% {i.e.,

GOP’s share in project cost}

100%

Note: 1. Numbers may not sum precisely because of rounding. Sources: Asian Development Bank estimates and annual APFS of implementing agencies.

20 Appendix 4

DISBURSEMENT OF ADB LOAN AND GRANT PROCEEDS

Table 4.1: Annual and Cumulative Disbursement of ADB Loan Proceeds ($ million)

Annual Disbursement Cumulative Disbursement

Year Amount ($ million) % of Total

Amount ($ million) % of Total

2011 0.24 0% 0.24 0% 2012 25.05 16% 25.30 16% 2013 50.20 32% 75.49 48% 2014 24.66 16% 100.16 64% 2015 17.61 11% 117.77 75% 2016 6.16 4% 123.92 79% 2017 17.48 11% 141.41 91% 2018 13.72 9% 155.13 99% 2019 1.30 1% 156.43 100% Total 156.43 100.00%

ADB = Asian Development Bank. Source: Asian Development Bank.

Figure 4.1: Projection and Cumulative Disbursement of ADB Loan Proceeds ($ million)

Notes: 1. Loan proceeds of $69.7 million were cancelled in May 2013. 2. Projections were revised in September 2015 and August 2016 as part of loan extensions. 3. Projections were changed as a result of eOps clean-up exercise in March 2014 and February 2016.

Source: Asian Development Bank.

149.00

206.00206.00

100.16

117.77123.92

141.41155.13

156.43

0.00

50.00

100.00

150.00

200.00

250.00

2011 2012 2013 2014 2015 2016 2017 2018 2019

$ m

illio

ns

Calender Year

Projected Annual Disbursements Actual Annual Disbursements

Projected Cumulative Disbursements Actual Cumulative Disbursements

Appendix 5 21

CONTRACT AWARDS OF ADB LOAN AND GRANT PROCEEDS

Table 5.1: Annual and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

Annual Contract Awards Cumulative Contract Awards

Yeara Amount ($ million) % of Total

Amount ($ million) % of Total

2011 24.34 15% 24.34 15% 2012 93.88 58% 118.22 73% 2013 3.89 2% 122.11 76% 2014 10.25 6% 132.36 82% 2015 13.62 8% 145.98 90% 2016 4.98 3% 150.96 94% 2017 10.48 6% 161.44 100% 2018 0.00 0% 161.44 100% 2019 0.00 0% 161.44 100% Total 161.44 100.00%

ADB = Asian Development Bank. a Classified by contract signing dates. Source: Asian Development Bank.

Figure 5.1: Projection and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

Notes: 1. Loan proceeds of $69.7 million was cancelled in May 2013. 2. Projections were revised in September 2015 and August 2016 as part of loan extensions. 3. Projections were changed as a result of eOps clean-up exercise in March 2014 and February 2016. Source: Asian Development Bank.

95.00

152.20

206.20206.20

118.22

122…132.36

145.98 150.96 161.44161.44

0.00

50.00

100.00

150.00

200.00

250.00

2011 2012 2013 2014 2015 2016 2017 2018 2019

$ m

illio

ns

Calender Year

Projected Annual Contract Awards Actual Annual Contract Awards

Projected Cumulative Contract Awards Actual Cumulative Contract Awards

22 Appendix 6

CHRONOLOGY OF MAIN EVENTS Date Event

3 March, 2010 Issuance of Periodic Financing Request (PFR) from executing agency PEPCO.

7 December, 2010 PFR Report circulation to ADB management. 14 December, 2010 Approval of PFRR by ADB management. 28 January, 2011 Signing of loan & project agreements. 1-22 February 2011 Loan Inception Mission. 28 February 2011 Contract termination with first FMC. 5 October, 2011 Loan effectiveness. 25 November, 2011 First contract awarded. 15 June 2012 Contract signing with second FMC. 18-30 April 2013 Mid-Term Loan review Mission. 6 June, 2013 Cancellation of partial loan amount of $69.7 million. 24 August, 2015 ADB approval for first loan extension by 15 months till 31 December 2016 and

approval of 17 subprojects against savings utilization. 27 June, 2016 ADB approval for second loan extension by 15 months till 31 March 2018 and

approval of 19 subprojects against savings utilization. 20 March, 2018 ADB approval for third loan extension by 3 months till 30 June 2018. 30 June, 2018 Loan closure. 31 January, 2019 End of winding up period. 19 February, 2019 Last financial transaction. 22 April, 2019 Loan accounts closure.

Source: Asian Development Bank.

Appendix 7 23

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan

Agreement

Status of Compliance

Implementation Arrangements: The Borrower shall, and shall cause the DISCO to, ensure that the Project is implemented in accordance with the detailed arrangements set forth in the FAM. Any subsequent change to the FAM shall become effective only after approval of such change by the Borrower and ADB, in the event of any discrepancy between the FAM and this Loan Agreement, the provisions of this Loan Agreement shall prevail.

LA, Schedule 5, Para. 1

Complied. For effective implementation of sub-projects under Multi-Tranche Facility, Project Management Unit (PMU) was established in February 2009, having the following functional sections:

1. Procurement 2. Planning Scheduling &

Coordination 3. Project Financing 4. GSC 5. E&SS

Sub-Projects under Tranche-II were implemented in accordance with the detailed arrangements set forth in the FAM

Land Acquisition and Resettlement: The Borrower shall, and shall cause the DISCO to, ensure that (a) all compensation, relocation, land acquisition and resettlement activities and livelihood rehabilitation programs under a Subproject are promptly and efficiently carried out in accordance with all applicable laws and regulations of the Borrower relating to land acquisition and involuntary resettlement, the Involuntary Resettlement Safeguards, the LARP, the respective LARP, and any corrective or preventative actions set forth in a Safeguards Monitoring Report; (b) no land is acquired for the purposes of any Subproject based on the emergency acquisition provisions of the Borrower's Land Acquisition Act (1894), as amended from time to time; (c) sufficient funds are made available, as necessary, for the efficient and timely implementation of activities specified in the respective LARP; (d) no notice is issued to a contractor for commencement of Works under a Subproject, until all compensation and other entitlements have been paid to displaced persons in accordance with the respective LARP; and (e) the implementation of the LARP is monitored and evaluated internally and externally.

LA, Schedule 5, Para. 2

Complied. For the subprojects involving land acquisition (new grid stations/ transmission lines), no land was acquired on emergency basis, land was purchased on willing seller, willing buyer basis under provision of Safeguard Policy Statement and complied with all applicable laws. Upon approval, the prepared LARPs were uploaded on ADB and respective DISCOs website and its implementation was monitored internally and externally. The extension/augmentation subprojects were carried out within walled boundaries of existing grid stations over paved yards. Sufficient funds were made available by respective DISCOs for compensation

24 Appendix 7

Covenant

Reference in Loan

Agreement

Status of Compliance

payments as part of counterpart funding.

Environment: The Borrower shall, and shall cause the DISCO to, ensure that (a) each Subproject is carried out in accordance with all applicable laws and regulations of the Borrower relating to environment, health, and safety, the Environmental Safeguards, the EARF, and all environmental measures and requirements set forth in the respective IEE and EMP, and any corrective or preventative actions set forth in a Safeguards Monitoring Report; (b) all mitigation and monitoring measures identified in the respective EMP are incorporated into detailed design of the Subproject; and (c) the implementation of the EMP is monitored and evaluated internally and externally.

LA, Schedule 5, Para. 3

Complied. initial environment examination (IEE) for the turn-key projects were prepared and approved by ADB in 2010. The IEE reports were converted from IEE format to EIA to comply with the local statutory requirements. The EIAs for Tranche 2 were submitted to the concerned EPAs for issuance of environmental approval/ NOC. Public hearings of Tranche 2 subprojects of all DISCOs were conducted as per Pakistan’s Environmental Protection Act and environmental approvals were received by 2012. Subprojects under Tranche-II were implemented in accordance with applicable laws and regulations relating to environment, health, and safety, the Environmental Safeguards, and all environmental measures and requirements set forth in the respective IEE and EMP. Relative mitigation measures were incorporated in detailed design of Tranche-II. Implementation of EMP was internally monitored by E&SS Cell of respective DISCOs and externally by FMC.

Safeguard Monitoring and Reporting: The Borrower shall cause the DISCO to: (a) submit semi-annual Safeguards Monitoring Reports to ADB and disclose relevant information from such reports to affected persons promptly upon submission; (b) if any unanticipated environmental and/or social risks and impacts arise during Project implementation that were not considered in the IEE, the EMP and the LARP,

LA, Schedule 5, Para. 4

Complied. Bi-Annual Monitoring Reports were prepared & submitted to ADB for disclosure. No environmental and social risks were associated with the implementation of Tranche-II sub-projects

Appendix 7 25

Covenant

Reference in Loan

Agreement

Status of Compliance

promptly inform ADB of the occurrence of such risks or impacts, with detailed description of the event and proposed corrective action plan; and (c) report any actual or potential breach of compliance with the measures set forth in the IEE, the EMP and the LARP promptly after becoming aware of the breach.

No breach to provision of IEE/EMP was encountered

Safeguards Provisions of Bidding Documents and Contracts: The Borrower shall, and cause the DISCO to, ensure that all bidding documents and contracts for Works contain provisions that require contractors to: (a) comply with the measures and requirements relevant to the contractor set forth in the respective IEE, EMP, the LARP, and any corrective or preventative actions set out in the Safeguards Monitoring Reports; (b) make available a budget for all such measures and requirements; (c) provide the Borrower and the DISCO with copy to ADB, with a written notice of any unanticipated environmental risks or impacts that arise during construction or implementation of the Project that were not considered in the IEE, the EMP, and the LARP; (d) adequately record the condition of roads, agricultural land and other infrastructure prior to starting to transport materials and construction; (e) fully reinstate pathways, other local infrastructure, and agricultural land to at least their pre-Project condition upon the completion of construction; and (f) abstain from the use of child labor.

LA, Schedule 5, Para. 5

Complied. Environment, health & safety provisions were made part of bidding documents for turn-key/civil works contracts. (a) Contractors were obligated through contract provisions to comply with respective IEE & EMP clauses (b) Budget for such compliance was available through counterpart funding. (c) Scope of Civil Work was limited. However, DISCOs arranged NEQS testing for Base Line & subsequent Monitoring Data. Comparison of Base Line & Monitoring Data was made part of Bi-Annual Monitoring Reports. Comparisons revealed that no environmental risks were associated. (d) No deterioration was associated with roads, agriculture land and other infrastructure. (e) No re-instatement of path ways was involved (f) Child labour was not allowed to work at site for execution of Tranche-II subprojects

The Borrower shall, and cause the DISCO to, ensure that the all works contracts follow all applicable labor laws of the Borrower and that these further incorporate provisions requiring the contractors to: (a) use their best efforts to employ women living in the vicinity of the Project Area; (b) not differentiate between men and women's

LA, Schedule 5, Para. 6

Complied. The contract agreement contained provisions for making efforts to employee women living in the vicinity of the Project Area, non- discrimination between men

26 Appendix 7

Covenant

Reference in Loan

Agreement

Status of Compliance

wages or benefits for work of equal value; (d) disseminate information at worksites on the risks of sexually transmitted diseases and human immunodeficiency virus/acquired immunodeficiency syndrome for those employed during construction; and (d) take measures to protect workers from potential exposure to sexually transmitted diseases.

and women wages/ benefits and to take measures to protect workers from potential exposure of sexually transmitted diseases for works of equal values Through on-job training, workers were informed regarding risks of sexually transmitted diseases and viruses

Counterpart Funding: The Borrower shall cause the DISCO to ensure the availability and timely release of counterpart funding for the timely implementation of the Subprojects.

LA, Schedule 5, Para. 7

Complied. Counterpart funding was made available and timely released for implementation of sub-projects of Tranche-II through the proceeds of respective DISCOs approved PC-1.

Tariffs and DISCO's Financial Performance: The Borrower shall ensure that the tariffs formulated for the DISCO are adequate to maintain the debt-service coverage ratio of at least 1.2 times from 2011 onward and a self-financing ratio of at least 20% for each fiscal year from 2011 onward.

LA, Schedule 5, Para. 8

Partially complied. Delay in tariff determination by NEPRA and its notification by the federal government contributed to partial compliance with financial sustainability ratios. Historically, DISCOs have generally complied with both or at least one ratio, mainly self-financing ratio (Appendix 10).

Governance and Anticorruption: The Borrower shall, and shall cause the DISCO to, (a) comply with ADB's Anticorruption Policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice relating to the Project; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation.

LA, Schedule 5, Para. 9

Complied. Tender Documents, as approved by ADB included anticorruption provisions. (a) During the implementation period, no complaint regarding anticorruption were received and no investigation was carried out by ADB (b) In case of any investigation, respective DISCOs were under an obligation to cooperate and extend all necessary assistance for satisfactory

Appendix 7 27

Covenant

Reference in Loan

Agreement

Status of Compliance

completion of such investigation

The Borrower shall cause the DISCO to ensure that the anticorruption provisions acceptable to ADB are included in all bidding documents and contracts, including provisions specifying the right of ADB to audit and examine the records and accounts of the executing and implementing agencies and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

LA, Schedule 5, Para. 10

Complied. Draft bidding documents containing anticorruption provisions were submitted by respective DISCO’s to ADB and subsequently approved. Upon finalization of procurement, the bidding documents became part of the contract documents. Audit Reports were shared with ADB for each financial year.

Project Agreement

Covenant

Reference in Project

Agreement

Status of Compliance

Particular Covenants Each DISCO shall carry out the Project with due diligence and efficiency, and in conformity with sound applicable technical, financial, business, and development practices.

Article II, Section 2.01 (a)

Complied.

In the carrying out of the Project and operation of the Project facilities, each DISCO shall perform all obligations set forth in the Loan Agreement to the extent that they are applicable to the DISCO.

Article II, Section 2.01 (b)

Complied.

Each DISCO shall make available, promptly as needed, the funds, facilities, services, equipment, land and other resources which are required, in addition the proceeds of the Loan, for the carrying out of the Project.

Article II, Section 2.02

Complied.

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

Article II, Section 2.03 (a)

Complied.

Except as ADB may otherwise agree, the DISCO shall procure items of expenditure to be financed out of the proceeds of the Loan in accordance with the provisions of Schedule 4 of the Loan Agreement. ADB may refuse to finance a contract where any such item has not been procured under procedures substantially in accordance with those agreed between the

Article II, Section 2.03 (b)

Complied.

28 Appendix 7

Covenant

Reference in Project

Agreement

Status of Compliance

Borrower and ADB or where the terms of conditions of the contract are not satisfactory to ADB.

Each DISCO shall carry out the Project in accordance with plans, design standards, specifications, work schedules and construction methods acceptable to ADB. Each DISCO 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.

Article II, Section 2.04

Complied.

Each DISCO shall take out and maintain with responsible insurers, or make other arrangements satisfactory to ADB for, insurance against such risks and in such amounts as shall be consistent with sound practice.

Article II, Section 2.05 (a)

Complied.

Without limiting the generality of the foregoing, each DISCO undertakes to insure, or cause to be insured, the Goods to be imported 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.

Article II, Section 2.05 (b)

Complied.

Each DISCO shall maintain records and accounts adequate to identify the items of expenditure financed out of the proceeds of the Loan, 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 operation and financial condition.

Article II, Section 2.06

Complied.

ADB and each DISCO shall cooperate fully to ensure that the purpose of the Loan will be accomplished.

Article II, Section 2.07 (a)

Complied.

Each DISCO through PEPCO 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 Relending Agreement, or the accomplishment of the purposes of the Loan.

Article II, Section 2.07 (b)

Complied.

ADB and each DISCO shall from time to time, at the request of either party, exchange views through their representatives with regards to any

Article II, Section 2.07 (c)

Complied.

Appendix 7 29

Covenant

Reference in Project

Agreement

Status of Compliance

matters relating to the Project, the DISCO and the Loan.

Each DISCO through PEPCO furnish to ADB all such reports and information as ADB shall reasonably request concerning (i) the Loans and the expenditure of the proceeds thereof; (ii) the items of expenditure financed out of such proceeds; (iii) the Project; (iv) the administration, operations and financial condition of the DISCO; and (v) any other matters relating to the purposes of the Loan.

Article II, Section 2.08 (a)

Complied.

Without limiting the generality of the foregoing, each DISCO through PEPCO 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 period.

Article II, Section 2.08 (b)

Complied.

Promptly after physical completion of the Project, but in any event not later than 3 months thereafter or such later date as ADB may agree for this purpose, each DISCO shall prepare and furnish through PEPCO 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 the DISCO of its obligations under this Project Agreement and the accomplishment of the purposes of the Loan.

Article II, Section 2.08 (c)

Complied.

The DISCO shall (i) maintain separate accounts for the Project and for its overall operations; (ii) have such accounts and related financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; and (iii) furnish to ADB, promptly after their preparation but in any event not later than 6 months after the close of the fiscal year to which they relate, certified copies of such audited

Article II, Section 2.09 (a)

Partially complied.

30 Appendix 7

Covenant

Reference in Project

Agreement

Status of Compliance

accounts and financial statements and the report of the auditors relating thereto (including the auditors’ opinion on the use of the proceeds of the Loan, compliance with the covenants of the Loan Agreement and the Project Agreement and the management letter from the auditors to the DISCO), all in the English language. The DISCO shall furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

Each DISCO shall enable ADB, upon ADB's request, to discuss the DISCO's financial statements and its financial affairs from time to time with the auditors appointed by the DISCO pursuant to Section 2.09(a) hereinabove, 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 the DISCO unless the DISCO shall otherwise agree.

Article II, Section 2.09 (b)

Complied.

Each DISCO shall enable ADB's representatives to inspect the Project, the Goods and Works, all other plants, sites, properties and equipment of the DISCO and any relevant records and documents.

Article II, Section 2.10

Complied.

Each DISCO 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.

Article II, Section 2.11 (a)

Complied.

Each DISCO shall at all times conduct its business in accordance with applicable technical, financial, business, and developed practices, and under the supervision of competent and experienced management and personnel.

Article II, Section 2.11 (b)

Complied.

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

Article II, Section 2.11 (c)

Complied.

Appendix 7 31

Covenant

Reference in Project

Agreement

Status of Compliance

Except as ADB may otherwise agree, each DISCO 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 and of its obligations under this Project Agreement.

Article II, Section 2.12

Complied.

Except as ADB may otherwise agree, each DISCO shall apply the proceeds of the Loan to the financing of expenditures on the Project in accordance with the provisions of the Loan Agreement and this Project Agreement and shall ensure that all items of expenditures financed out of the proceeds of the Loan are used exclusively in the carrying out of the Project.

Article II, Section 2.13

Complied.

Except as ADB may otherwise agree, each DISCO shall duly perform all its obligations under the Relending 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 Relending Agreement.

Article II, Section 2.14

Complied.

Each DISCO 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.

Article II, Section 2.15

Complied.

32 Appendix 8

REASSESSMENT OF ECONOMIC AND FINANCIAL ANALYSIS A. Introduction

1. This appendix contains the economic and financial reevaluation of the project in accordance with ADB guidelines for the Economic Analysis of the Projects and the Financial Management and Analysis of Project. The DISCOs networks were expanded by installation of transformers and transmission lines at 132 kV level as part of the project improving security of supply to customers, moving towards compliance with regulatory security standards for governing, planning and operation of the distribution system and reliability improvements on the lower voltages.

2. The methodology and assumptions adopted for reassessing the evaluation of the project generally follow those carried out at appraisal. The analysis quantifies the benefits and costs of the investment in economic terms and measures the net worth of the project to the country. B. Methods and Assumptions 3. The analysis – including determining the revised economic internal rate of return (EIRR), financial internal rate of return (FIRR), and weighted average cost of capital (WACC) – are based on the streams of costs and benefits resulting from augmentation, extension, conversion and rehabilitation of grids, STG transmission lines; and energy loss reduction. The streams of costs and benefits are set up as annual cash flows over the project life of 30 years and are then discounted to their net present values. 4. Project costs and benefits were estimated by comparing with and without project scenarios. The without project case assumes that DISCOs are not able to supply electricity to customers in the designated areas due to losses, system constraints and poor distribution and transmission network. Under the with and without project scenario, it is assumed that with-out the project, (i) system losses will not be reduced, (ii) DISCOs will not be able to provide electricity to the new consumers, and (iii) transformer’s capacity will not be improved as a result of expansion and augmentation of distribution facilities. C. Economic and Financial Benefits 5. Economic analysis uses the economic prices that are called as the shadow prices and it focuses on the economic values of the project cost and benefit. The actual EIRR comes out to be 26.50% as against the project EIRR of 33% indicating the efficiency of the project. Deviation of the financial values from the economic values of project cost and benefits arises from two major sources:

i) Price Distortions that are often created by government interventions such as taxes,

subsidies and price control or by imperfect competition (monopoly).

ii) Non-Marketed outputs.

6. Costs: The financial cost is converted to economic values by deducting the taxes and duties, financing charges, and all price contingencies. Most of the projects are completed on turnkey basis and the cost of labor component comprising skilled and local labor (semi and unskilled and non-tradable) is included in the project cost as fairly reflecting the economic opportunity cost. Labor in O&M costs was assumed to be skilled and non-tradable, with wages fairly reflecting economic opportunity costs. The economic value of land used by the project was

Appendix 8 33

assumed to be zero because this land was unlikely to be used for other purposes over the life of project. Operation and maintenance cost are assumed to be 1.5% of the capital cost over the period of project. The economic cost of project is arrived at by following the system approach and the cost of generating power is added. As there is excess generation capacity, therefore, only the cost of generating power is added rather than adding the investment and O&M cost of additional generation component. Average cost of fuel (variable cost) is considered while calculating the cost of generating power as the capacity charges are fixed in nature and must be paid irrespective of generating power.

7. Benefits: All the benefits incurred as a result of project are incremental benefits as it provides additional transformer capacity resulting in the provision of electricity to the new consumers. Further as a result of savings in the losses, the operations / running of expensive plants that are required to meet the electricity requirements can be avoided. Project has (i) removed the constraints in distribution system of electricity, (ii) improved the quality, (iii) reduced the losses and (iv) increase the supply of electricity by expansion in the distribution system / network.

8. Economic prices reflect the economic value of goods and services and provide important guidance on the choice of the public sector projects. Conceptually, economic prices can be defined as the gain (or loss) in social welfare associated with consuming an additional unit of a commodity. Social welfare can be measured by the consumption of commodities or services available to the society whether these are sold or not in a market. Thus, economic benefits of the project output are their contribution to increasing the consumption available to society. Economic costs of the project inputs reflect consumption sacrificed elsewhere by diverting the resources to the project from other use. The value of the total net change in the consumption available to the society represents the net economic impact of the project.

9. Benefit Valuation: Economic Analysis is carried from the perspective of entire economy and it assesses the impact of the project on the welfare of all the citizens of the country concerned. Power Sector Tariff is determined by independent regulator, National Electric Power Regulatory Authority (NEPRA) and is notified by the government keeping in view the socio-economic aspects of country. Incremental outputs are valued at the average of the current NEPRA determined tariff and the cost of alternative energy source and is used as an approximate value for WTP. This approximation is applied to value benefits throughout the operating years without expected increases in tariff to avoid overestimation of benefits. 10. WACC: To estimate the weighted average cost of capital (WACC), it is assumed in Periodic Financing Request that ADB will finance 80% of subproject costs whereas the actual expenditure shows ADB contribution of 85% of the total cost incurred. While calculating WACC, the same parameters as were used at the time of appraisal are followed. The Government relent the funds rupees to PEPCO/DISCOs at 15%, in accordance with the Tranche 1 on lending agreement and the government notification. In this regard, the foreign exchange risk was not to be borne by PEPCO/DISCO. The balance was financed through self-generated funds (equity). Fifteen percent was assumed for nominal cost under equity contribution, consistent with rate of return allowed for IPPs. The revised WACC is worked out at 7.51% based on actual financing mix, current inflation rate and other parameters. DISCOs are still not subjected to application of corporate tax rates, as financial statements for the latest FY shows accumulated losses due to non-recovery of full cost of tariff. 11. Standard Conversion Factor: Individual project items can be valued at their individual economic process. However, for ease of calculation, economic values of project outputs and input

34 Appendix 8

can also be derived from the financial values using conversion factors. The financial cost is converted to economic values by deducting the taxes and duties, financing charges and price contingencies. D. Economic Analysis 12. Economic analysis is simplified for analysis purpose by evaluating the impact of reduction in T&D losses (132kV & 11 kV) of DISCOs during the period FY 2014 to FY 2018. It is also assumed that one third of the benefits accrued as a result of reduction in the T&D losses of Discos are attributed to this project. The energy received by Discos at 132 kV in 2014, the first year after incurrence of major project expenditures is 82,926 GWh, whereas the energy received by DISCOs at 132 KV in 2018 is 106,139 GWh. The energy transferred from 132 KV to 11 KV is 81,016 GWh in 2014 and 104,094 GWh in 2018. Therefore, this indicates that the net T&D loss reduced from 2.3% to 1.93% with an annual average reduction of 0.09%. It is assumed that the project will not only continue with 0.09% reduction throughout the remaining period but will also help in controlling the increase in T&D losses due to the projected increase in sales to the extent of 9.8% per annum. Para 176 of ADB Economic analysis guidelines have prescribed a period of 20-30 years for evaluation purposes. As per para 3 of Appendix 7 of Periodic Financing Request (PFR), It is assumed that the investment will have a 30-year economic life and no residual value at the end of that life. 13. Since there have been significant supply constraints in the system, most of the increased supply due to the reduction in losses is assumed to be incremental and valued at average of the current NEPRA determined tariff and the cost of alternative energy source. As the project concept envisage the construction period of four years, therefore, it is assumed that the project benefits started accruing from fourth year (July 2015). The benefits have been actualized for the FY 2016 to FY 2018 at the average electricity tariff of Rs 12.33 / kWh, based on NEPRA tariff determination of Discos for FY 2014 -20151 and remained applicable from 10 June 2015 to 22 March 2018. For the Fiscal Year 2018-2019 onward till the project life of 30 year ending on FY 2042, the NEPRA determined tariff for FY 2017-20182 is Rs. 15.53 / kWh.

14. Average of current NEPRA determined tariff for Discos and the cost of alternate energy source is used as a proxy to WTP. NEPRA determined tariff is kept same despite the fact that tariff may increase significantly in future due to the changes in operating cost, inflationary impact, rate of return and increase in power purchase price; the impact of which will be pass on to the consumer through NEPRA tariff determination under the NEPRA Tarff Methodology3. It is also assumed that the sales will grow by 9.8% per annum since the project will help in improving the available units for sales and the generation capacity is enhanced by the government. The NTDC analysis4 for power demand forecast a peak demand to a level of 145,304 MW by 2030 indicating a growth rate of around 9.3%.

15. The Economic Analysis at appraisal was worked out at 33% with the assumption of oil prices at willingness-to-pay scenario of $40/bbl. At the time of appraisal, the tariff methodology did not allow to pass the impact of changes in oil price to consumer on monthly basis. However, under the current methodology, any changes in fuel prices are passed on to the consumers on

1 Government of Pakistan, NEPRA. 2015. NEPRA Tariff Determinations for DISCOs for FY2014-2015. Islamabad. 2 Government of Pakistan, NEPRA. 2019. Tariff Determination for DISCOs for FY 2017-2018. Islamabad. 3 Government of Pakistan, NEPRA. 2015. Guidelines for Determination of Consumer End (Methodology and Process).

Islamabad. 4 Government of Pakistan, NTDC. 2008. Electricity Demand Forecast based on regression analysis (2008-2030).

Lahore.

Appendix 8 35

monthly basis and NEPRA is authorized to notify such changes. Based on this, the consumer’s willingness to pay is set at the NEPRA determined tariff and notified by the government accordingly.

16. The Project will help customers receive reliable and quality power supply. The project reduced line losses; expanded network capacity and extended access to electricity. Incremental benefits are associated with increased electricity consumption by both new and existing customers.

17. Analysis of the increase in new customer connections reveals that during the period FY 2014 to FY 2018, 5,383,825 numbers of new consumers were added with compound average growth rate (CAGR) of 15%, whereas during the period FY 2009 to FY 2012, 2,563,591 new connections were provided, indicating a CAGR of around 13%5.

18. Actual progress of project also shows that total 5,304 MVA’s were added to the power distribution system that resulted in evacuation of addition electricity generation. While calculating / evaluating the economic benefits as a result of addition of new MVA’s, a load factor of 60% and power factor of 85% is assumed.

19. Other Non-Quantifiable Benefits: NEPRA framed NEPRA performance standards distribution rules, 2005 (PSDR) back in 2005 with a grace period of four years to DISCOs to improve their network and ensure compliance with these rules. The project has contributed significantly in improvement of distribution system and enables DISCOs to comply with the PSDR. According to NEPRA report for FY 2015-16, few of Discos have achieved a score of 74 out of 100 as established under NEPRA’s own methodology. Few of the technical indicators are SAIFI, SAIDI, time frame for new connections and safety etc.

20. Reduction in Distribution Losses due to ELR program: As project also includes implementation of energy loss reduction schemes. The impact of these in terms of reduction in distribution losses in not included in the cash flow benefits for economic evaluation

21. Economic Internal Rate of Return: An analysis based on the cost and benefits assumptions as given above results in an economic internal rate of return (EIRR) of 26.50%, above the economic appraisal analysis of 12% (Table 1). It is pertinent to mention here that at appraisal; system approach was not followed as is being done at the time of project completion analysis. If Economic rate of return is worked out based on appraisal methodology, then it ranges above 35%.

Table 1: Summary of EIRR Calculations for Tranche 2

Economic Internal Rate of Return for Discos Distribution Enhancement Improvement Project – Tranche 2 Analysis

Year Cost (PRs million) Benefits (PRs million) Net Benefits (PRs

million)

2012 839 (839) 2013 5493 (5493) 2014 3421 (3421) 2015 2373 (2373) 2016 1200 2457 1257

2017 1772 2544 772

5 Government of Pakistan, NEPRA. State of Industry Reports. Islamabad (8 years: 2010 – 2017).

36 Appendix 8

2018 1507 3791 2284

2019 5,526 12,660 7,134

2020 4,862 12,711 7,849

2021 4,882 12,767 7,885

2022 4,904 12,828 7,924

2023 4,929 12,895 7,966

2024 4,955 12,969 8,014

2025 4,985 13,050 8,065

2026 5,017 13,139 8,122

2027 5,053 13,237 8,184

2028 5,092 13,344 8,253

2029 5,134 13,462 8,328

2030 5,181 13,591 8,410

2031 5,233 13,734 8,501

2032 5,290 13,890 8,600

2033 5,352 14,061 8,709

2034 5,420 14,249 8,829

2035 5,995 14,456 8,961

2036 5,578 14,683 9,106

2037 5,668 14,933 9,264

2038 5,768 15,206 9,439

2039 5,877 15,507 9,630

2040 5,997 15,837 9,841

2041 6,128 16,200 10,072

2042 6,273 16,598 10,325

Economic Net Present Value (Rs Million) 21,726 Economic Internal Rate of Return 26.50%

22. Sensitivity analysis (Table 2) also shows strong economic viability where benefits are reduced by 10%, and costs are increased by 10%. In either case, strong economic viability is maintained. Some downward movements in benefits or increase in cost would not significantly impact the economic viability of the project. Para 16 of ADB Economic Analysis guidelines 2017 have revised the economic opportunity cost of capital to 9%. Even if the cost is increased by 10% and the benefits are reduced by 10%, the EIRR still remains above the economic opportunity cost and appraisal estimates.

Table 2: Sensitivity Analysis

Item EIRR ENPV (PRs million)

Base Case 26.50 21,726 Benefits Reduced by 10% 24.09 18,779 Cost increased by 10% 23.79 18,446 Benefits reduced by 10% and cost increased by 10% 21.42 13,660

E. Financial Analysis 23. The purpose of the financial evaluation is to assess the ability of the project to generate adequate incremental cash flows to recover the financial cost (capital and recurrent cost) without external support. Financial Analysis of the project is based on the incremental financial cash flows and cost. Financial evaluation of the project shows that actual FIRR at completion comes out to be 30.25% as against 20.16% at appraisal indicating the financial sustainability of the project (Table 3).

Appendix 8 37

Table 3: Summary of FIRR Calculations for Tranche 2 Financial Internal Rate of Return for Discos Distribution Enhancement Improvement Project – Tranche 2 Analysis

Year Cost (PRs million) Benefits (PRs million) Net Benefits (PRs

million)

2012 868 (868) 2013 5,683 (5,683) 2014 3,539 (3,539) 2015 2,455 (2,455) 2016 1,241 2,281 1,040

2017 1,834 2,362 529

2018 1,559 3,521 1,962

2019 964 11,341 10,377

2020 258 11,386 11,129

2021 258 11,436 11,179

2022 258 11,491 11,234

2023 258 11,551 11,294

2024 258 11,618 11,360

2025 258 11,690 11,432

2026 258 11,770 11,512

2027 258 11,857 11,600

2028 258 11,954 11,696

2029 258 12,059 11,802

2030 258 12,175 11,918

2031 258 12,303 12,045

2032 258 12,442 12,184

2033 258 12,596 12,338

2034 258 12,765 12,507

2035 258 12,950 12,692

2036 258 13,153 12,895

2037 258 13,377 13,119

2038 258 13,622 13,364

2039 258 13,891 13,633

2040 258 14,187 13,929

2041 258 14,512 14,254

2042 258 14,868 14,610

Financial Net Present Value (Rs Million) 33,085 Financial Internal Rate of Return 30.25%

F. Conclusion 24. Reassessment of the economic feasibility of the project based on analysis of benefits associated with project through reduction in line losses, addition of 5, 304 MVA’s and new consumers connected to the system results in economic internal rate of return of 26.5% as against the appraisal stage of 33%. This indicates the economic viability and efficiency of project and establishes the need of sub projects to improve system reliability, efficiency and quality of supply. A high financial rate of return than the appraisal stage assessment also indicates the financial sustainability of project in long run. Sensitivity analysis further strengths the economic viability of project as any downward movements in benefits and upward trend in cost would not significantly impact the net cash flows benefits.

38 Appendix 9

LIST OF SUBPROJECTS UNDER THE LOAN

Project No. Project Description

Scope of Work

Installed Capacity

(MVA)

Addition in System

(km) Commiss-

ioning Date

A. FESCO A.1 Subprojects 1. 132/11 kV G/S Factory Area

Faisalabad Augmentation 40x2 0 22/02/2017 &

02/03/2017 2. 132/11 kV G/S Jhang City Augmentation 40x3 0 16/08/2016 3. 132/11 kV G/S Gojra Augmentation 40x2 0 18/03/2017 &

08/08/2017 4. 132/11 kV G/S Jaranwala Augmentation 40x3 0 03/07/2017 5. 132/11 kV G/S Jhang Road Augmentation 40x2 0 18/06/2015 6. 132/11 kV G/S Samundri Road Augmentation 40x2 0 26/06/2015,

30/07/2015 7. 132/11 kV G/S Daud Khel Extension 26x1 0 15/01/2018 8. 132/11 kV G/S Ludewala Extension 26x1 0 26/01/2018 9. 132/11 kV G/S Jauhrabad Extension 26x1 0 11/06/2012 10. 132/11 kV G/S Nishtabad New Extension 26x1 0 20/11/2012 11. 132/11 kV G/S Kamalia Extension 26x1 0 18/09/2018 12. 132/11 kV G/S Mianwali Extension 26x1 0 16/02/2018 13. Grid Station equipment & Materials Procurement

of goods 0 0 29/08/2014

A.2 Subprojects from Savings 14. 132/11kV G/S Bhera Augmentation 26x1 0 19/02/2018 15. 132/11kV G/S Bhakar Augmentation 40x1 0 09/07/2017 Subtotal (A) 782 0 B. GEPCO B.1 Subprojects 16. 66/11 kV G/S Kolu Tarrar Conversions 26x2 0 19/05/2014 17. 66/11 kV G/S Jalal Pur Nau Conversions 26x2 0 19/05/2014 18. 132KV Hafizabad Road Gujranwala Augmentation 40x1 0 14/06/2013 19. 132/11 kV G/S Sialkot Cantt Augmentation 40x1 0 29/06/2013 20. 132KV Therisansi Gujranwala Augmentation 40x1 0 30/09/2013 21. 132/11 kV G/S Gujrat – 1 Augmentation 40x1 0 20/06/2013 132/11 kV G/S Gujranwala Cantt Augmentation 40x1 0 23/06/2013 22. 132/11 kV G/S Godh Pur New

Substation 40x2 0 07/10/2017

23. 132/11 kV G/S Daska – New New Substation

40x1 0 28/11/2014 &10/7/2017

24. 132/11 kV G/S Khiali By Pass (Gujranwala)

New Substation

40x2 0 19/05/2015

25. 132/11 kV G/S Sheranwala Gate (Gujranwala) GIS

New Substation

40x2 0 19/05/2015

26. 132 kV Nokhar GS to Hafizabad-II GS (Alternate Feed)

Transmission Lines

0 28.4 20/09/2016

27. 132kV In-Out Gujranwala-New GS – Their Sansi GS

Transmission Lines

0 15.4 28/08/2014

28. 132 kV In-Out Gakhar GS-Hafizabad GS (Main Feed)

Transmission Lines

0 16.5 26/02/2014

29. 132 kV Sahuwala GS to Pasrur GS Transmission Lines

0 43.4 Not completed at loan closure

30. 132 kV In-Out Naukhar GS to Hafizabad Rd. Sansi GS

Transmission Lines

0 23.3 30/07/2015

31. Grid Station equipment & Materials Procurement of goods

0 0 10/01/2013

Appendix 9 39

B.2 Subprojects from Savings 32. 11/0.4kV Pole mounted Distribution

Transformers New 0.2x920 0

Subtotal (B) 624 127 C. HESCO C.1 Subprojects 33. 66/11 kV G/S Sukkur City Conversions 26x2 7 G/S

09/08/2014. T/L

26/06/2014. 34. 66/11 kV G/S Larkana Old Conversions 26x2 1.97 23/09/2014 35. 66/11 kV G/S Talhar Conversions 13x1 0.9 G/S

04/08/2014 T/L

24/06/2014. 36. 132/11 kV G/S Jacobaabad-II New

Substation 13x1 0.5 24/9/2014

37. 132 kV Dadu N – Mehar – Larkana Transmission Lines

0 127.72 21/02/2019

38. 132 kV Shikarpur-N – Larkana Transmission Lines

0 65.1 01/09/2015

39. 132 kV Mir Pur Khas – Kandiar – Sanghar

Transmission Lines

0 64.38 01/06/2016

40. Grid Station equipment & Materials Procurement of goods

0 0 05/05/2016

C.2 Subprojects from Savings 41. 132/11 kV Pano Akil Augmentation 40x1 0 29/08/2018 42. 132/11 kV Jacobad Augmentation 40x1 0 01/03/2017 43. 132/11 kV Sukkur City Augmentation 40x1 0 09/12/2016 44. 132/11 kV Rohri Augmentation 40x1 0 10/01/2017 45. 132/11 kV Ghotki Augmentation 40x1 0 06/01/2017 46. 132/11 kV Larkana-2 Augmentation 40x1 0 10/07/2017 47. 132/11 kV Khairpu Augmentation 40x1 0 29/12/2016 48. 132/11 kV Kandh Kot Augmentation 40x1 0 29/11/2018 49. 132/11 kV Moro Augmentation 40x1 0 10/07/2017 50. 66/11 kV Thul Conversions 26x1 0 31/03/2017 51. 66/11 kV Kamber Conversions 26x1 0 31/12/2017 52. 132/11 kV Kandiar Augmentation 40x1 0 10/02/2017 53. 66/11 kV Nara-1 Conversions 26x1 0 09/04/2018 54. 66/11 kV Warah Conversions 26x1 0 30/0/.2018 55. 66/11 kV Radhan Conversions 26x1 0 31.05.2018 56. 66/11 kV Bhirya Road New

Substation 26x1 0 04/04/2018

57. 132/11 kV Dadu Augmentation 40x1 0 03/12/2017 Subtotal (C) 752 267.57 D. IESCO D.1 Subprojects 58. 132/11 kV G/S H-11 Islamabad Augmentation 26x1 0 14/10/2013 59. 132/11 kV G/S Mangla Left Bank

(L.B. Mangla) Augmentation 26x1 0 31/01/2011

60. 132/11 kV G/S Satellite Town Extension 26x1 0 17/01/2011 61. 132/11 kV G/S E-8 Islamabad Extension 40x1 0 20/02/2014 62. 66/11 kV G/S Noor Pur Sethi Conversions 13x2 0 09/06/2014 63. 132kV Choa Saiden Shah - Noorpur

Sehti Transmission Lines

0 45.13 09/06/2014

64. 132kV Hattain – Bagh Transmission Lines

0 26.72 07/04/2016

65. 132kV Mangla – LB Mangla – Rajar Transmission Lines

0 47.5 03/04/2017

66. Capacitor banks installation on 11kV Busbars in 9 Grid Stations

Capacitors (78 x 150kVar)

0 0 30/05/2012

40 Appendix 9

67. Capacitor banks installation on 11kV Busbars in 9 Grid Stations

Capacitors (60 x 200kVar)

0 0 30/05/2012

68. Grid Station equipment & Materials Procurement of goods

0 0 08/04/2016

Subtotal (D) 144 119.35 E. LESCO E.1 Subprojects 69. 132/11 kV G/S Allama Iqbal Town T-

3 Augmentation 40x1 0 11/12/2015

70. 132/11 kV G/S Said Pur T-3 Augmentation 40x1 0 29/02/2016 71 132/11 kV G/S Garden Town T-3 Augmentation 40x1 0 22/05/2015 72. 132/11 kV G/S Fateh Garh T-3 Augmentation 40x1 0 13/10/2015 73. 132/11 kV G/S Old Kot Lakhpat T-3 Augmentation 40x1 0 25/11/2015 74. 132/11 kV G/S Rehman Park T-3 Augmentation 40x1 0 11/08/2015 75. 132/11 kV G/S Shadman T-2 Augmentation 40x1 0 05/11/2010 76. 132/11 kV G/S Wapda Town T-1 Augmentation 40x1 0 11/11/2015 77. 132/11 kV G/S Badami Bagh T-2 Augmentation 40x1 0 31/01/2018 78. 132/11 kV G/S Bhatti Gate T-2 Augmentation 40x1 0 29/04/2009 79. 132/11 kV G/S Qartaba T-2 Augmentation 40x1 0 02/08/2011 80. 132/11 kV G/S Manga Mandi Augmentation 40x1 0 26/11/2015 81. 132/11 kV G/S DHA Rahber (Audit

and Acct. Housing Scheme) New Substation

26x2 0.8 14/08/2017

82. 132/11 kV G/S Jubliee Town Housing Scheme

New Substation

26x2 1.7 01/01/2016

83. 132/11 kV G/S Central Park Housing Scheme

New Substation

26x2 13.5 07/03/2019

84. 132/11 kV G/S Press Club Housing Scheme Harbanspura (Shaffi Colony)

New Substation

26x2 0.15 26/05/2017

85. 132/11 kV G/S Doula Chuchak New Substation

0 20.26 19/04/2016

86. Capacitor banks installation on 11kV Busbars in 37 Grid Stations

Capacitors (475 x 200kVar)

0 0 22/02/2013

87. Capacitor banks installation on 11kV Busbars in 37 Grid Stations

Capacitors (211 x 450kVar)

0 0 22/02/2013

88. Grid Station equipment & Materials Procurement of goods

0 0 22/01/2013

E.2 Subprojects from Savings 89. 11/0.4kV Pole mounted Distribution

Transformers New 0.2x1000 0

90. 100 kVA, 11/0.4kV Distribution Transformers (200 nos.)

New 0.1x200 0

91. 132/11 kV G/S Bhai Pheru Augmentation 40x1 0 26/10/2017 92. 132/11 kV G/S Boghiwal Augmentation 40x1 0 18/11/2017 Subtotal (E) 820 36.41 F. MEPCO F.1 Subprojects 93. 132/11 kV G/S Dunya pur Augmentation 26x1 0 06/09/2012 94. 132/11 kV G/S Baghdad-ul-Jadid Augmentation 26x1 0 24/01/2013 95. 132/11 kV G/S Chak No. 211/W. B Augmentation 26x1 0 07/01/2013 96. 132/11 kV G/S Kot Adu Augmentation 26x1 0 06/12/2012 97. 132/11 kV G/S Layyah Augmentation 26x1 0 20/12/2012 98. 132/11 kV G/S Noor Pur Augmentation 26x1 0 11/12/2012 99. 132/11 kV G/S Sheikh Fazal Augmentation 26x1 0 05/11/2012 100. 132/11 kV G/S Basti Muluk Augmentation 40x1 0 27/11/2012 101. 132/11 kV G/S Bahawalnagar Augmentation 40x1 0 22/01/2013 102. 132/11 kV G/S Multan Ind. Estate

Augmentation 40x1 0 04/12/2012

103. 132/11 kV G/S Multan Qasimpur Augmentation 40x1 0 31/01/2013 104. 132/11 kV G/S Sadiqabad Augmentation 40x1 0 04/02/2013

Appendix 9 41

105. 132/11 kV G/S Vehari Road Augmentation 40x1 0 07/02/2013 106. 132/11 kV G/S D.G. Khan Augmentation 40x1 0 07/10/2012 107. 66/11 kV G/S Ali Pur Conversions 13x2 11.4 24/11/2016 108. 66/11 kV G/S Fatehpur Conversions 13x2 2.7 13/04/2015 109. 66/11 kV G/S Noor Sar Conversions 13x2 0.5 19/10/2014 110. 132/11 kV G/S Miran Pur (Galaywal) New

Substation 26x2 11.5 09/07/2015

111. 132/11 kV G/S Kamir New Substation

26x2 0.5 29/09/2015

112. Capacitor banks installation on 11kV Busbars in 33 Grid Stations

Capacitors (255 x 200kVar)

0 0 27/07/2012

113. Capacitor banks installation on 11kV Busbars in 33 Grid Stations

Capacitors (115 x 450kVar)

0 0 27/07/2012

114. Grid Station equipment & Materials Procurement of goods

0 0 06/01/2014

115. F.2 Subprojects from Savings 116. 132/11 kV Khanewal Rd Multan Augmentation 40x1 0 28/03/2015 117. 132/11 kV R.Y khan Augmentation 40x1 0 20/03/2013 118. 132/11 kV Jalal Pur Pirwala Augmentation 26x1 0 28/02/2013 119. 132/11 kV Makhdum Rashid Augmentation 26x1 0 17/02/2015 120 132/11 kV Burewala Extension 26x1 0 05/11/2012 121. 132/11 kV Qadir Abad Augmentation 26x1 0 02/11/2012 122. 132/11 kV R.Y Khan Augmentation 40x1 0 02/11/2015 123. 132/11 kV Sadiqabad Augmentation 40x1 0 30/03/2015 124. 132/11 kV M/Garh Augmentation 40x1 0 26/12/2012 Subtotal (F) 948 26.6 G. PESCO G.1 Subprojects 125. 132/11 kV G/S Kohat Augmentation 40x1 0 23/05/2013 126. 132/11 kV G/S Peshawar Industrial Augmentation 40x1 0 05/07/2013 127. 132/11 kV G/S Peshawar City Augmentation 40x1 0 05/07/2013 128. 132/11 kV G/S Peshawar Fort Augmentation 40x1 0 30/10/2013 129. 132/11 kV G/S Peshawar University Augmentation 40x1 0 21/02/2013 130. 132/11 kV G/S Sakhi Chashma Augmentation 26x1 0 19/02/2013 131. 132/11 kV G/S Warsak Augmentation 26x1 0 29/03/2015 132. 132/11 kV G/S Hussai Augmentation 26x1 0 13/07/2013 133. 132/11 kV G/S Swabi Augmentation 26x1 0 31/08/2015 134. 132/11 kV G/S Bannu Augmentation 40x1 0 17/02/2013 135. 132/11 kV G/S Muzaffarabad Augmentation 26x1 0 12/06/2014 136. 132/11 kV G/S Charsadda Extension 26x1 0 02/28/2014 137. 132/11 kV G/S Hayatabad Extension 40x1 0 07/06/2013 138. 132/11 kV G/S Pabbi Extension 26x1 0 07/01/2014 139. 132/11 kV G/S Nowshera City Extension 26x1 0 02/25/2013 140. 132/11 kV G/S Swat Extension 26x1 0 28/08/2013 141. 132/11 kV G/S Abbotabad Extension 26x1 0 03/06/2014 142. 132/11 kV G/S Mansehra Extension 26x1 0 29/08/2014 143. 132/11 kV G/S Haripur Extension 26x1 0 27/05/2014 144. 132/11 kV G/S D.I. Khan Industrial

(Gomal Unversity) with T/L New Substation

26x2 2.5 22/05/2014

145. Grid Station equipment & Materials Procurement of goods

0 21/03/2016

146. G.2 Subprojects from Savings 132/11 kV Hattar-I Augmentation 40x1 0 12/12/2017 147. 132/11 kV Mardan-II Augmentation 40x1 0 08/10/2017 148. 132/11 kV Mardan-III Augmentation 40x1 0 10/10/2017 Subtotal (G) 764 2.5 H. QESCO H.1 STG Projects 149. 132/11 kV G/S Yaru Augmentation 26x1 0 03/26/2012 150. 132/11 kV G/S Khanozai Augmentation 26x1 0 04/13/2012

42 Appendix 9

151. 132/11 kV G/S Khudkucha Augmentation 26x1 0 05/04/2012 152. 132/11 kV G/S Sibbi Augmentation 26x1 0 24/01/2012 &

01/10/2012 153. 132/11 kV G/S Kharan Augmentation 26x1 0 28/04/2014 154. 132/11 kV G/S Turbat Augmentation 26x1 0 01/10/2012 155. 132/11 kV G/S Surab Augmentation 26x1 0 31/08/2013 156. 132/11 kV G/S Subhatpur Augmentation 26x1 0 03/02/2013 157. 132/11 kV G/S Duki Augmentation 26x1 0 10/04/2013 158. 132/11 kV G/S Gawadar Augmentation 26x1 0 05/12/2013 159. 132/11 kV G/S Muslim Bagh Extension 26x1 0 29/07/2013 160. 132/11 kV G/S Killa Saifullah Augmentation

& Extension 26x2 &

40x2 0 08/03/2015

161. 132/11 kV G/S Wadh Extension 26x1 0 07/11/2012 162. 132/11 kV G/S Quetta Industrial Augmentation

& Extension 26x2 &

40x2 0 05/03/2015

163. 132/11 kV G/S Zohri Extension 26x1 0 23/06/2012 164. Capacitor Banks Installation at

132/11 kV G/S Hurramzai 24 MVAR

Capacitors 0 0 24/03/2015

165. 3.6 MVAR Capacitor Banks installed at 32 Grid Stations

Capacitors 0 0 11/7/2013 to 6/2/2015

166. Purchase of Vehicles 0 0 14/07/2017 167. Grid Station equipment & Materials Procurement

of goods 0 0 18/12/2013

Subtotal (H) 470 0 GRAND TOTAL (A+B+C+D+E+F+G+H) 5,304 579.43

Appendix 10 43

STATUS OF AEFS AND APFS

Table A10.1: Status of APFS

DISCO Required Submitted Deferreda Pending for FY2019b

FESCO 8 7 1 GEPCO 8 7 1 HESCO 8 6 1 1 IESCO 8 6 1 1 LESCO 8 7 1 MEPCO 8 7 1 PESCO 8 7 1 QESCO 8 5 2 1 Total 64 52 4 8

DISCO = distribution company a Deferred because of nil expenditure b Due on 31 December 2019

Table A10.2: Status of AEFS

DISCO Required Submitted Not Submitteda Pending for

FY2019b

FESCO 8 7 1 GEPCO 8 7 1 1 HESCO 8 7 1 IESCO 8 7 1 LESCO 8 3 4 1 MEPCO 8 7 1 PESCO 8 6 1 1 QESCO 8 5 2 1 Total 64 48 8 8

DISCO = distribution company a Audit is in progress b Due on 31 December 2019

Table A10.3: Financial Ratios Compliance by DISCOs

DISCO FY2017a FY2018b

DSCRc SFRd Compliance DSCRc SFRd Compliance

FESCO NA NA NA 4.40 141% Complied GEPCO NA NA NA 1.63 103% Complied HESCO NA NA NA (0.16) 48% Partially complied IESCO 0.14 99% Partially complied (0.06) 106% Partially complied LESCO NR NR NR NR NR NR MEPCO 0.41 34% Partially complied 1.23 62% Complied PESCO NA NA NA (0.02) 70% Partially complied QESCO (2.95) -325% Not complied NA NA NA

DISCO = distribution company DSCR = debt service coverage ratio SFR = self-financing ratio NA = not available since auditors did not express separate opinion on financial covenants NR = not received a Based on auditor’s opinion on financial ratios as per ISAE3000 b Based on Asian Development Bank estimates c Debt service coverage ratio: calculated as free cash flow divided by annual debt service d Self-financing ratio: calculated as cash from internal sources divided by average annual capital expenditures