Completion Report

Project Number: 34339-013 MFF Number: 0005 Loan Numbers: 2286 and 2287 December 2020

Pakistan: Renewable Energy Development Sector

Investment Program

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 Program Completion 10 November 2006 7 June 2018

PRe1.00 = $0.0166 $0.0086 $1.00 = PRs60.72 PRs115.63

ABBREVIATIONS

ADB – Asian Development Bank AEDB

APFS – –

Alternative Energy Development Board audited project financial statements

CDM – clean development mechanism DMF – design and monitoring framework EIRR – economic internal rate of return FIRR – financial internal rate of return HPP – hydropower plant IEE – initial environmental examination IPD – Irrigation and Power Department JPY – Japanese yen KPK – Khyber Pakhtunkhwa MFF – multitranche financing facility MTDF – medium-term development framework NEPRA

O&M – –

National Electric Power Regulatory Authority operation and maintenance

PEDO – Pakhtunkhwa Energy Development Organization PHYDO Pakhtunkhwa Hydel Development Organization PMU – project management unit RE – renewable energy REDSIP – Renewable Energy Development Investment Program SHYDO – Sarhad Hydel Development Organization TA – technical assistance WACC – weighted average cost of capital

WEIGHTS AND MEASURES

GWh – gigawatt-hour (1,000 megawatt-hours) kV – kilovolt (1,000 volts) kW – kilowatt (1,000 watts), unit of power: used in the context of

installed generation capacity/connected load(s) kWh – kilowatt-hour, unit of electrical energy (1 kilowatt for 1 hour), unit

of energy: measures energy supplied and consumed and billed MVA – megavolt-ampere (1,000 kilovolt-amperes), in an ideal system

(no loss) the same as MW MW – megawatt, unit of power: 1MW=1,000 kW 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., FY2018 ends on 30 June 2018.

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

(iii) In consultation with CWRD, a single completion report has been prepared for the multitranche financing facility (MFF) because the MFF was closed after tranche 1.

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

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

Ehtesham Khattak, Senior Project Officer (Infrastructure), PRM

Team members Anjum Asif, Senior Operations Assistant, PRM Khurram Shahzad, Associate Project Analyst, PRM

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

CONTENTS

Page BASIC DATA i

MAP v

I. PROGRAM DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 3

A. Program Design and Formulation 3 B. Program Outputs 3 C. Program Costs and Financing 4 D. Disbursements 4 E. Program Schedule 5 F. Implementation Arrangements 5 G. Technical Assistance 6 H. Consultant Recruitment and Procurement 7 I. Gender Equity 8 J. Safeguards 9 K. Monitoring and Reporting 10

III. EVALUATION OF PERFORMANCE 11

A. Relevance 11 B. Effectiveness 11 C. Efficiency 12 D. Sustainability 12 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 15

A. Issues and Lessons 15 B. Recommendations 16

APPENDIXES

1. Design and Monitoring Framework 17

2. Program/Project Cost at Appraisal and Actual 18

3. Program/Project Cost by Financier 19

4. Disbursement of ADB Loan and Grant Proceeds 21

5. Contract Awards of ADB Loan and Grant Proceeds 22

6. Chronology of Main Events 23

7. Status of Compliance with Loan Covenants 24

8. Re-Assessment of Economic and Financial Analysis 37

9. List of Subprojects Implemented Under the Program 49

10. Status of Compliance with Financial Covenants 51

BASIC DATA

A. Loan Identification

1. Country Islamic Republic of Pakistan

2. Multitranche financing facility (MFF) number 00053. Loan numbers and financing source 2286 (ordinary capital resources) and

2287 (special operations) 4. Project title Renewable Energy Development Sector

Investment Program 5. Borrower Islamic Republic of Pakistan 6. Executing agencies Alternative Energy Development Board (at

the federal level); and Irrigation and Power Departments of the governments of Khyber Pakhtunkhwa (formerly the North-West Frontier) and Punjab (at the provincial level)

7. Amount of loans Japanese yen 12,508,650,000 ($105,000,000)1 under Loan 2286; and SDR6,973,000 ($10,273,897) under Loan 2287

8. Financing modality MFF

B. Loan Data

1. Appraisal– Date started– Date completed

20 June 2006 30 June 2006

2. Loans negotiations– Date started– Date completed

30 October 2006 31 October 2006

3. Date of Board approval 13 December 2006 4. Date of loan agreements 5 October 2007 5. Date of loan effectiveness

– In loan agreement

– Actual– Number of extensions

3 January 2008. Ninety (90) days after the date of the loan agreement 29 November 2007 0

6. Program completion date– Appraisal– Actual

30 June 2012 30 June 2018

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

30 June 2012 31 December 2017 4

8. Financial closing date– Actual 7 June 2018

9. Terms of loan 2286

1 In January 2016, the Asian Development Bank (ADB) approved the government of Punjab’s request to proceed with a swap of JPY into US dollar because of the depreciation of JPY against the dollar.

ii

– Interest rate

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

London interbank offered rate (LIBOR) plus 0.60% per annum 25 5 (for principal repayment only)

10. Terms of loan 2287– Interest rate

– Maturity– Grace period

1.0% per annum during grace period, and 1.5% per annum thereafter 32 years 8 years

11. Disbursements

a. Dates

L Loan 2286

L Loan 2287

Initial Disbursement 24 July 2008 6 April 2009

Final Disbursement 13 April 2018 30 April 2018

Time Interval 116 months 108 months

Loan 2286 L Loan 2287

Effective Date 29 November 2007 29 November 2007

Actual Closing Date 07 June 2018 07 June 2018

Time Interval 126 months 126 months

b. Amount ($ ‘000)

(i) Loans 2286 and 2287-PAK

Category

Original Allocation

(1)2

Increased during

Implementation (2)3

Canceled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

144,500 0 0 0 112,736 31,764

Total 144,500 0 0 0 112,736 31,764

C. Program Data

1. Program cost ($ million)

Cost Appraisal Estimate Actual

Foreign exchange cost 91.5 101.0 Local currency cost 53.0 43.7

Total 144.5 144.7

2. Financing plan ($ million) Cost Appraisal Estimate Actual

Implementation cost Borrower financed 30.0 43.7 ADB financed 115.0 101.0 Other external financing 0.0 0.0

Total implementation cost 145.0 144.7

Interest during construction costs Borrower financed 0.0 0.0 ADB financed 1.0 1.0

2 The amount in US dollars is the equivalent of JPY as per ADB forex on 5 October 2007 (loan signing date). 3 The amount under Loan 2286 changed several times because of the (i) appreciation of JPY against the US dollar in

2012, which increased the amount from $105 million to $161.9 million; (ii) depreciation of JPY against $ in 2013, 2014, and 2015, which decreased the amount to $129 million, $125 million3, and $116.5 million, respectively. No increase is considered here because it was based only on currency fluctuations.

iii

Other external financing 0.0 0.0 Total interest during construction cost 1.0 1.0

3. Cost breakdown by project component ($ million)

(i) Loan 2286 and 2287-PAK

Component Appraisal Estimate Actual

Clean Energy Development 101.7 117.6 Feasibility Studies 7.3 6.7 Capacity Development 8.4 10.5 Taxes and Duties 2.6 1.4 Base cost total 120.0 136.2 Contingencies 11.8 8.6 Financing charges 12.7 0.0 Total 144.5 144.8

4. Program schedule

Item Appraisal Estimate Actual

Date of contract with consultants:

Punjab KPK

31 Mar 2008 31 Mar 2008

2 May 2009 30 Apr 2008

Date of Works Contracts (Construction of HPPs and SHYDO Building):

First turnkey contract Jan 2008 15 Oct 2009 Last turnkey contract NA 17 Dec 2012 Start of operations for the first turnkey contract Mar 2008 15 Jan 2010 Start of operations for the last turnkey contract NA 17 Mar 2013 Date of Equipment/Goods (Vehicles, Furniture & Office Equipment and Tools & Maintenance Equipment):

First procurement Jan 2008 28 Jun 2011 Last procurement NA 17 Dec 2012 Completion of supply NA 31 Dec 2013

HPP = hydro power plant, KPK = Khyber pakhtunkhwa, SHYDO = Sarhad hydel development organization

5. Program performance report ratings

Ratings

Implementation Period Single Project Rating From 30 Nov 2007 to 31 Dec 2007 On track From 1 Jan 2008 to 31 Dec 2008 On track From 1 Jan 2009 to 31 Dec 2009 On track From 1 Jan 2010 to 31 Dec 2010 On track From 1 Jan 2011 to 31 Dec 2011 On track From 1 Jan 2012 to 31 Dec 2012 On track From 1 Jan 2013 to 31 Dec 2013 On track From 1 Jan 2014 to 31 Dec 2014 On track 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 7 Jun 2018 On track

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D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of Members

Fact-Finding Inception 5 Mar – 13 Mar 2007 5 45 a, b, f, e, h Review 1 5 Mar – 13 Mar 2007 5 40 a, b, f, e, h Review 2 3 May – 10 May 2007 2 16 a, b Review 3 24 Sep – 28 Sep 2007 4 20 a, b, c, e Review 4 21 Apr – 25 Apr 2008 2 10 a, b Review 5 7 Dec – 11 Dec 2008 2 10 a, b

Review 6 12 Feb – 16 Feb 2009 5 25 a, b, c, e, f Review 7 13 May – 14 May 2009 2 4 a, b Review 8 8 Jul – 20 Jul 2009 5 60 a, b, c, e, f Review 9 7 Dec – 11 Dec 2009 2 10 a, b Review 10 6 Feb – 13 Feb 2010 2 16 a, b Review 11 6 Mar – 19 Mar 2010 2 26 a, b Review 12 15 Jan – 19 Jan 2011 2 10 a, b Consultation 22 Mar – 22 Mar 2011 1 1 b Consultation 25 May – 28 May 2011 1 4 b Review 13 29 Jul – 9 Aug 2011 2 22 a, b Review 14 14 Feb – 19 Feb 2012 2 8 a, b Midterm review 16 Apr – 26 Apr 2013 2 20 a, b, c, e, f Review 15 1 Apr – 11 Apr 2014 2 10 a, b Review 16 10 Dec – 12 Dec 2014 2 6 a, b Review 17 9 Mar – 13 Mar 2015 2 8 a, n Review 18 5 Oct – 15 Oct 2015 2 14 a, n Review 19 5 Feb – 9 Feb 2018 1 4 a

Project Completion Review 5 – 28 Feb 2020 3 48 a, r, s a = senior project officer, b = principal energy specialist, c = senior safeguards officer, e = senior investment specialist, f = energy specialist, h = project analyst,

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MAP

I. PROGRAM DESCRIPTION

1. Pakistan’s rapid economic growth has been generating a high level of demand for reliableand sustainable energy. Historically, the country has always been an energy importer and highlydependent on fossil fuels. While Pakistan remains a net importer of energy, its energy mix nowconsists of 71% thermal including nuclear, 24% hydropower, and 5% other renewables.1 Over theyears, Pakistan’s challenges have included balancing the supply of electricity against demand;incomplete policies and ineffective sector reforms aimed at improving sector performance;multiple structural weaknesses; and insufficiencies upstream (fuel supply), downstream(households and businesses), and in the core components of the sector (generation, transmissionand distribution). However, significant progress has been made in reducing the gap betweensupply and demand, primarily through large investments in generation.2 The physical investmentshave resulted in an electricity surplus for Pakistan in 2019 for the first time in many years (totalinstalled generation capacity has gradually increased from 28,399 megawatt (MW) to 36,010 MWin the last 2 years).

2. Despite the progress, the pace of sector development sustainability has been slow, andthe expected efficiencies have yet to materialize. Pakistan has systematically attempted to reducethe high generation cost by (i) shifting from expensive imported furnace oil to cheaper and moreefficient gas generation by importing liquefied natural gas; (ii) promoting and encouraging thedevelopment of renewable energy (RE);3 and (iii) forming dedicated provincial departments andspecialized RE companies to design and implement power projects that involve increasedinvestment by the private sector, including public–private partnerships, and optimize the use ofindigenous power resources. However, Pakistan still has insufficient renewable generation(medium-sized hydropower, solar, wind, geothermal, and marine sources, solid and liquidbiofuels, biogas, and municipal waste) and off-grid solutions.

3. To meet its vision for the energy sector, Pakistan has (i) increased private sectorinvestment in the entire production chain; (ii) reduced technical, non-technical, and financiallosses; (iii) improved sustainability and reduced the level of government subsidies; and (iv)improved service delivery. In 2005, the Government of Pakistan started implementing a series ofintegrated activities in line with the power sector development strategy set out in the Medium-Term Development Framework (MTDF).4 This strategy was designed to deliver various keyoutcomes: (i) basic sector reforms to create an enabling environment for private sectorparticipation; (ii) better sector analysis and stronger capacity among the relevant sectororganizations; and (iii) promotion of infrastructure development projects in generation,distribution, and transmission entities, while including RE development. The MTDF envisagedthat power generation, transmission, and distribution capacities would be increased to provide asufficient supply of electricity to meet the projected annual growth of 8% in gross domesticproduct.

4. The development of indigenous, nonpolluting, and renewable sources of energy wouldhelp Pakistan meet its need for power diversification and alternative power resources. Pakistan

1 National Electric Power Regulatory Authority. 2018. State of Industry Report, 2018. Islamabad. 2 Over the last few years, the energy sector has grown at an average annual rate of 3.2%. 3 The Alternative Energy Development Board (AEDB) was established in 2003 as a central agency for RE under the Ministry of Power and Water. Its main objective was to facilitate and promote development of RE in Pakistan. In addition to AEDB, the Pakistan Council of RE technologies (PCRET) has also been strengthening its technical expertise for the promotion and propagation of RE technologies in solar, micro-hydel, and wind power. The main function of PCRET is to develop, acquire, adapt, promote and disseminate RE technologies within Pakistan. 4 Pakistan, Planning Commission. 2005. Medium Term Development Framework, 2005–2010. Islamabad.

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is one of the richest countries in the world in terms of hydro, solar, and wind power generation, but these resources are largely untapped. By making strategic use of this potential, Pakistan can achieve its ambitious RE goals and increase the share of RE in the electricity generation mix from 5% in 2020 to 30% for wind and solar power and from 24% to 30% for hydropower by 2030.5 RE can (i) contribute to off- and on-grid connections to achieve access to electricity and energy efficiency; (ii) support rural development and economic activities in remote locations; (iii) be one of the mitigation actions to address climate change challenges while producing insignificant impacts on the environment.6 5. To improve the quality of the power system through RE, as well as people’s lives and welfare, especially in rural areas, Pakistan needed to invest in new facilities and capacity development and introduce reforms. Therefore, in line with its long-term investment plan and commitment to develop the RE sector, in October 2006 the government entered into a Framework Financing Agreement with the Asian Development Bank (ADB) for $510.8 million equivalent with an implementation period of five years for the RE development sector investment program (REDSIP). ADB’s Board of Directors also approved technical assistance (TA) of $10 million from the Asian Development Fund to support program components under the multitranche financing facility (MFF).

6. The MFF was initially planned with 3 tranches to finance $2.2 billion of REDSIP’ requirements.7 REDSIP combined (i) physical investments in new generating capacity across four provinces (Balochistan, Khyber Pakhtunkhwa (KPK)8, Punjab, and Sindh) in several subsectors, and (ii) nonphysical interventions in policy reform, capacity development, fiduciary oversight and governance, regulatory and legal frameworks, knowledge management, safeguards, procurement, disbursements, program implementation, evaluation, supervision, and monitoring and reporting. The MFF had its context in a road map for the energy sector as a whole, a product of diagnostic work that identified key constraints, challenges, and opportunities in the country. In December 2006, ADB approved the MFF and tranche 1. Tranche 2 was designed to provide credit guarantees to help in mobilizing long-term debt and equity from domestic and international investors to fund wind and other RE power plants. However, the government decided not to pursue this approach and tranche 2 was closed in 2013 without being processed. Similarly, tranche 3, intended to construct two small hydropower plants, was also shelved in 2015 without being processed as there was insufficient time to complete the plants within the MFF period.

7. The envisaged program impact was inclusive economic growth and a reduction in carbon dioxide emissions. The program aimed to contribute to economic development and people’s wellbeing through an expanded power supply (generation of 1,700 gigawatt-hours (GWh) annually and 600,000 new grid connections or almost five million people). The program’s intended outcome was the increased production and use of clean energy through RE sources in a financially sustainable manner. The program’s designed outputs were: (i) the development of clean energy physical investments; (ii) due diligence and feasibility studies for eight new subprojects; and (iii) capacity development.

5 Pakistan has identified (i) hydropower potential of more than 45,000 MW per year; (ii) an exploitable potential of 50,000 MW of electricity generation through wind turbines in the coastal belt of Sindh and Balochistan (in southern Pakistan); and (iii) solar potential of more than 100,000 MW. 6 Substitution of biomass (animal dung, wood, and kerosene) improves the local indoor air quality. 7 The $2.2 billion was split as follows: $510.8 million of ADB financing + $390 million of counterpart financing + $1.3

billion of co-financing. 8 Formerly known as the North-West Frontier Province.

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II. DESIGN AND IMPLEMENTATION A. Program Design and Formulation 8. After the government delegated authority to the provinces to develop their own power generation capacity up to 50 MW, implementation of REDSIP became mandatory to meet the government’s twin goals of energy security and promoting alternative power generation.9 REDSIP also supported electrification and poverty reduction in remote and rural areas. Therefore, at approval, the program’s outcome was aligned with ADB’s country partnership strategy for Pakistan prepared in 2003, as well as with the government’s development strategy and its strategic objectives in the energy sector.10 The program was also consistent with ADB’s Long-term Strategic Framework: Lessons from Implementation (2001–2006)11 and Energy Policy 2000.

B. Program Outputs 9. The program was designed to start with a first batch of subprojects (outputs) for project preparation, capacity development, and the physical investments in KPK and Punjab provinces, where huge potential hydropower resources were available. The planned outputs are summarized below. 10. Output 1: Clean energy development investments under Loan 2286. The original design called for the development and/or expansion of eight small to medium-sized run-of-the-river hydro-electric power plants (HPPs) in the provinces of KPK (1. Ranolia (17.5 MW), 2. Daral Khwar (36.6 MW), and 3. Machai (2.82 MW)) and Punjab (4. Marala (7.64 MW), 5. Pakpattan (2.82 MW), 6. Chianwali (5.38 MW), 7. Okara (4.16 MW), and 8. Deg Outfall (4.04 MW)).

11. A minor change in the program’s scope was approved on 26 July 2011 to (i) remove Daral Khwar HPP from tranche 1 because of insufficient funds to complete all the subprojects; and (ii) reallocate an uncommitted loan amount from KPK to Punjab province to enable the completion of five HPPs.12 An additional minor change in the program’s scope was approved in 2012 to exclude Okara HPP because of the lack of funds resulting from the significant depreciation of the Japanese Yen (JPY) against the US dollar.13

12. Output 2: Feasibility studies and due diligence for new sites under Loan 2287. Experts were engaged to prepare eight new hydropower proposals in KPK and Punjab provinces.14 Their work included the detailed due diligence on all standard project finance areas associated with ADB-financed transactions, namely technical, commercial, legal, regulatory, operational, management, and governance matters, as well as capacity, financial management, fiduciary oversight, and safeguards.

13. Output 3: Capacity development under Loan 2287: The intended output was the establishment of new evaluation, monitoring, and reporting systems at the federal, provincial, and

9 In 2005, the government of Pakistan (government) announced a target calling for RE to reach 3.5% and 6.0% of the total energy supply mix by 2015 and 2030, respectively. 10 ADB. 2003. Country Strategy and Program Update, 2004-2006 Pakistan. Manila. 11 https://www.adb.org/sites/default/files/evaluation-document/35428/files/sst-reg-2007-38.pdf (accessed on 3 January

2020) 12 ADB approval was provided after completion of technical, financial, and safeguards due diligence. 13 For Daral Khwar and Okara HPPs, the KP and Punjab governments were to use their own budgets, respectively. 14 Three feasibility studies in KP (Koto (40.8 MW), Jabori (10.2 MW), and Karora (11.8 MW) HPPs); and 5 feasibility studies in Punjab province (main line Lower Chenab canal (7.55 MW), Qadirabad Barrage (23.0 MW), Khanki Barrage (14.09 MW), Qadirabad Balloki Link canal (10.71 MW), and Upper Chenab canal (3.58 MW) HPPs).

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implementing agency levels. This output also aimed to define and execute a program to help improve strategy and policy formulation and planning, knowledge management, staff coaching and training, financial management systems and practices, fiduciary oversight, accounting and auditing, and financial reporting. In addition, it would contribute to institutional strengthening for the operation and maintenance (O&M) of the new HPPs. 14. The design and monitoring framework (DMF) and actual achievements are in Appendix 1. C. Program Costs and Financing 15. The MFF investment program totaled $2.2 billion. At appraisal, the estimated cost of the first tranche (covering eight subprojects) was around $145 million, comprising (i) JPY 12,508,650,000 ($105,000,000 equivalent) under Loan 2286, (ii) SDR6,973,000 ($10,273,897 equivalent) under Loan 2287, and (iii) government financing of $30 million. TA up to $800,000 was granted to the borrower to help develop RE sources and the capacity of Alternative Energy Development Board (AEDB). 16. The amount under Loan 2286 was changed several times because of the (i) appreciation of JPY against the US dollar in 2012, which increased the amount from $105 million to $161.9 million;15 (ii) depreciation of JPY against $ in 2013, 2014, and 2015, which decreased the amount to $129 million,16 $125 million,17 and $116.5 million, respectively.18

17. The actual and programmed financing structure is in Appendix 2. The actual and programmed costs broken down by financier are in Appendix 3. D. Disbursements 18. The total loan amount of $112.74 million was fully disbursed in accordance with ADB’s Loan Disbursement Handbook (2001, as amended from time to time), using direct payment and reimbursement procedures. Appendix 4 shows the disbursement of the ADB loan proceeds by year. 19. Disbursement was initially slow. The first disbursement was made on 24 July 2008 for implementation consultants, eight months after loan effectiveness on 29 November 2007 and 90 days after the first contract award. Some of the subprojects approved at appraisal were delayed because of rebidding, litigation in local courts, and right-of-way issues. The final disbursement was completed in Q2 2018, 4 months after the loan closing date. A winding-up period to close the loan account was extended by 10 months (from 30 June 2017 to 30 April 2018), enabling the disbursement of all eligible expenses. At financial closure, an undisbursed amount of $4,164,031, SDR1,592,229, and JPY369,582,746 million was canceled; thus, actual total disbursements at loan closing were $112.74 million. 20. Disbursement projections were revised in May 2013, March 2014, and April 2016 as part of the loan extensions. Annual and cumulative contract awards are in Appendix 4.

15 As of February 2012, ADB Forex $1.0 = JPY77.25. 16 As of April 2013, ADB Forex $1.0 = JPY96.55. 17 As of April 2014, ADB Forex $1.0 = JPY99.57. 18 As of March 2015, ADB Forex $1.0 = JPY119.69.

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E. Program Schedule 21. The main events in program processing and implementation are presented chronologically in Appendix 6. The loans were approved on 13 December 2006, signed on 5 October 2007, and became effective on 29 November 2007. The program was to be implemented from November 2007 to June 2017 and the loan utilization period was expected to run through 2012. Overall program implementation performance was not fully satisfactory. There were four extensions because of:19 (i) delays in loan signing caused by the need for the Planning Commission’s approval, which took 10 months instead of 3-4 months;20 (ii) the failure to take advance action on the recruitment of program implementation consultants; (iii) delays in the procurement of turnkey contracts for the subprojects, resulting from additional time required for the government’s approval to reflect cost increases and changes in the program’s scope; (iv) delays in contract effectiveness by 8 months for Marala and Pakpattan HPPs and 5.5 months for Deg Outfall and Chianwali HPPs; (v) contractors’ weak performance for Deg Outfall and Chianwali HPPs; (vi) delays in internal approvals of the Punjab Power Development Company Limited (PPDCL)’21 (vii) delayed preparation and approval of model studies of program components and ground water conditions; (viii) additional dewatering and land acquisition requirements because of geological conditions at Marala HPP site; (ix) delayed and incomplete civil works because of unforeseen circumstances and complications (arising from the construction of the feeder channel) at Chianwali HPP; (x) insufficient financial and human resources of the sole contractor for all four HPPs in Punjab province; (xi) remedial actions to address the sudden settlement of the spillway of Deg Outfall HPP in 2017, resulting in damage to about 70% of the spillway and the need to rebuild the structure; (xii) delayed completion of the transmission lines for the newly built Marala, Machai, and Ranolia HPPs; (xiii) delays in tariff determination by the National Electric Power Regulatory Authority (NEPRA) for Deg Outfall and Chianwali HPPs; (xiv) security concerns at the Ranolia HPP site in KPK; (xv) delayed equipment deliveries resulting from delays in factory acceptance of hydraulic model tests for Marala and Pakpattan HPPs; (xvi) non-availability of water in the canal for Machai HPP; and (xvii) extension of the deadline for the completion of turnkey contracts because of ongoing road rehabilitation works that made it difficult to access subprojects and test civil works. F. Implementation Arrangements 22. Implementation arrangements designed at appraisal were generally applied and, considering the provincial governments’ organizational structures, they were the best possible options to deliver and achieve the program’s outputs and performance targets. No major changes were made after program approval, and no unexpected events affected the program.

19 The 4 extensions totaled 66 months. The first extension was from 30 June 2012 to 30 June 2014 (approved on 11

April 2012) to complete the contract awards for (i) Deg Outfall, Chianwali, and Okara HPPs for Punjab province; and (ii) Ranolia, Machai, Marala, and Pakpattan for KPK province due to start-up delays. The second extension was granted from 30 June 2014 to 30 June 2016 (approved on 30 June 2014) to complete the remaining construction works (mainly at Chianwali HPP) and the capacity development component in Punjab. The third was approved on 27 June 2016 to extend the loan closing date from 30 June 2016 to 30 June 2017; and the final extension was from 30 June 2017 to 31 December 2017 (approved on 26 May 2017) to complete the remaining subprojects (ongoing Marala, Chianwali, Deg Outfall HPPs under Loan 2286, and training activities (clean development mechanism registration and validation of the Punjab subprojects under Loan 2287).

20 The Planning Commission is a financial and public policy development institution of the Government of Pakistan for the development and execution of any projects in government departments. The delay in the signing occurred because the Planning Commission’s internal procedures required additional time to finalize the loan signing.

21 Delays resulted from (i) the change in the generator and turbine manufacturers; (ii) the 8 months taken to explore public–private partnership options; and (iii) the need to validate the contractors’ designs with the irrigation department, as HPPs were located within the irrigation channels.

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23. At appraisal, the executing agencies were AEDB at the federal level and the Irrigation and Power Departments (IPDs) of the governments of KPK and Punjab at the provincial level. The implementing agencies were the Pakhtunkhwa Hydel Development Organization for KPK (subsequently Pakhtunkhwa Energy Development Organization [PEDO]) and PPDCL for Punjab.22

24. PEDO established a project management unit (PMU) in Peshawar, which was responsible for (i) constructing three HPPs; (ii) undertaking eight feasibility studies, due diligence work, and capacity development; and (iii) building a new office base.

25. A PMU was also established in Punjab IPD; its responsibilities included procurement, advance actions for consultant recruitment, and accounting. The state-owned PPDCL was established under the Punjab IPD to manage, monitor, and supervise the construction facilities, and own and operate the newly built HPPs. The tasks of the PMU were then handed over to PPDCL, which became the implementing agency for the program component in Punjab.

26. Both PMUs managed and supervised the program and were headed by project directors who reported directly to the respective executing agency’s manager. The project directors were the main contact point for day-to-day working communication between the executing and implementing agencies and ADB.

27. The procurement capacity assessment concluded that the executing and implementing agencies of the program had adequate capacity but limited experience with ADB’s procurement policies and procedures. As assessed at appraisal, consulting services were required to assist the implementing agencies with procurement and program implementation. G. Technical Assistance 28. Since the existing institutional capacity of AEDB did not enable it to fulfill the roles of RE central agency and MFF executing agency, ADB provided technical assistance (TA) from its TA Special Fund to formulate the medium-term RE policy and strengthen AEDB’s institutional capacity to implement the MFF.23 The TA was associated with the $510 million MFF loans and the expected impact was the increased use of RE sources in Pakistan and decreased reliance on fossil fuels. The design outcome was the medium-term RE policy and enhanced capacity of AEDB. The outputs were (i) the medium-term RE policy proposal for on-grid and off-grid applications and a needs assessment (tranche 1 of the REDSIP);24 and (ii) capacity development assistance (tranche 2 of the REDSIP); and (iii) a due diligence review for tranche 2 .

22 Established in 1986 as a small hydel development organization, it was converted in 1993 into an autonomous body

as the Sarhad Hydel Development Organization (SHYDO). In 2013, SHYDO was renamed PHYDO (Pakhtunkhwa Hydel Development Organization). On 3 November 2014, ADB approved the change in the implementing agency from PHYDO to Pakhtunkhwa Energy Development Organization (PEDO), following Government’s notification on 17 April 2014.

23 The TA was approved on 1 December 2006 with a completion of date of 31 May 2008 (extended till 10 July 2009). It was financed and carried out pursuant to (i) the TA Framework Agreement between the government and ADB dated 07 March 1996; and (ii) the arrangements described in paras. 3–6, Appendix 6 of the report and recommendation of the President.

24 17 person-months of international consultants and 10 person-months of national consultants were engaged. The actual inputs were 14.4 person-months of international consultants and 13.0 person-months of national consultants, along with 2 person-months for an individual legal consultant.

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H. Consultant Recruitment and Procurement 29. Consultant recruitment. For the physical component of the program, the recruitment of program implementation consultants was completed as envisaged at appraisal, but with delays. ADB’s Guidelines on the Use of Consultants (2006, as amended from time to time) were followed, using the quality- and cost-based selection method, and a quality-cost ratio of 80:20.25 The consulting services contracts were signed separately for Punjab and KPK as per the procurement plan.26 The actual inputs of the consulting firms were increased through several contract variations to ensure the quality of the works, optimize supervision activities, and ensure the timely completion of tasks. 30. The non-physical components (capacity development, clean development mechanism (CDM) registration, and validation of Marala, Pakpattan, Chianwali, Deg Outfall, and Okara HPPs) were undertaken under Loan 2287. The contract between PPDCL and the CDM individual consultant was signed on 23 April 2014, following ADB’s Guidelines on the Use of Consultants (2006, as amended from time to time) using the quality- and cost-based selection method with a quality-cost ratio of 80:20 and a bio-data technical proposal. The contract for $299,571 equivalent for capacity building at PEDO was signed on 29 August 2012 between PEDO and FINCON Services Pakistan in association with the Human Resource Development Institute. No deviations from the agreed-upon procedures or disagreements between the borrower or the executing and implementing agencies and ADB on the selection of consulting firms or individuals were recorded. 31. The performance of the implementation consultants in both provinces for the physical and non-physical components was not entirely satisfactory. Problems arose during the detailed design and construction works and were not successfully resolved, partly because of weak collaboration, delayed intervention, lower-than-expected quality of work, and underestimation of the scope of work and services required. However, the consultants did provide useful inputs such as introducing good practices in project management and supervision, supporting the use of advanced technology at newly built HPPs, and carrying out feasibility studies and PEDO capacity development. 32. The feedback from the executing and implementing agencies during the project completion mission also confirmed that (i) the consultants did not fully perform their responsibilities in compliance with the terms of reference, in a timely manner, and within budget; and (ii) the performance of the consultants was less than satisfactory.

33. Procurement. Turnkey contracts were awarded according to ADB’s Procurement Guidelines (2006, as amended from time to time) using international competitive bidding and a single-stage, two-envelope bidding procedure. All contracts were awarded (Appendix 5) and completed, although the actual amount of the contracts awarded was less than projected because exchange rate fluctuations reduced the loan’s US dollar equivalent. The preparation of bidding documents and bid evaluations were carried out with substantial support from consultants. 34. The delays in awarding the turnkey contracts occurred mainly because of (i) the low quality of the detailed design, bidding documents, and technical bid evaluation reports;27 and (ii) the

25 The technical proposal was weighted at 80% and the financial proposal at 20%. 26 The consulting services with Punjab Hydro Power Consultants in Punjab Province started in May 2009 and are still ongoing because the Chianwali and Deg Outfall HPPs have not yet been physically completed. 27 Because of low quality, the first contract award was completed in December 2010, 35 months after loan effectiveness. The last contract was awarded in January 2014.

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insufficiency of funds under Loan 2286 as a result of the depreciation of JPY.28 For Punjab Province, the bid evaluations were mainly conducted by consultants, and with their guidance AEDB and the provincial governments endorsed the bidding documents and technical bid evaluation reports. While AEDB and the IPDs had experience in procurement with other multilateral development partners, they had no experience with ADB’s policies and procedures for the procurement of goods, works, and services. To address the gap, the consultants strengthened their team by engaging an additional procurement specialist with more experience in ADB procurement policies and procedures. With lessons gained from the first package, procurement for the other turnkey contracts was quicker.

35. Contractors. The performance of the contractors for the subprojects in KPK is assessed as satisfactory as both newly built HPPs have been energized. However, overall, the contractors’ performance in Punjab is less than satisfactory because of the lack of technical and commercial competence, resulting in delays in the completion of Deg Outfall29 and Chianwali HPPs.30 All works at the two HPPs in KPK and two of the HPPs in Punjab were completed to contract specifications and energized.31 However, the average delay in completing all the projects was 3 years. All contractors at energized HPPs mostly fulfilled their contractual responsibilities, and their construction activities were well organized. The executing and implementing agencies and the consultants inspected and subsequently commissioned all completed works. Tests showed that the works were mostly reliable and met the required technical specifications. The quality of the completed works at energized HPPs (Ranolia, Machai, Pakpattan, and Marala) is acceptable and satisfactory, while the quality at Deg Outfall and Chianwali HPPs is not acceptable. With support from the construction supervision consultants, ADB undertook contract performance reviews and field visits during implementation to address some challenges. Although these actions improved the contractors’ performance and slightly mitigated potential further delays, the program’s physical output was not fully achieved.

36. Suppliers. The equipment suppliers performed their contractual obligations effectively, delivering equipment on time and installing them properly at all six HPPs. They also provided training and technical services and met all safeguard requirements. The relevant government agencies examined the installation works and found their quality to be acceptable. Thus, the performance of the suppliers was satisfactory. I. Gender Equity 37. The program was categorized as no gender elements in accordance with the Guidelines for Gender Mainstreaming Categories of ADB projects (2006), so it did not include gender mainstreaming activities. However, the program was sound on gender grounds as 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

28 Okara HPP was removed from the program’s scope in 2013 because of insufficient funds resulting from JPY depreciation against the US dollar and no increase in counterpart financing to cover the financing gap. The proposed contract amount for Okara HPP was $23.9M against the available $6.3M, and any further deprecation of JPY could have resulted in insufficient funds for disbursement for the already awarded HPPs in Punjab and KPK provinces. 29 A sudden settlement of the spillway of Deg Outfall HPP in 2017 resulted in damage to about 70% of the spillway and the need to rebuild the structure. Reconstruction of the spillway is expected to be completed by June 2021. 30 Completion of the Chianwali HPP was delayed because of a change in design relating to the addition of a feeder channel. In addition, the design was reassessed after the spillway settlement issue at Deg Outfall HPP. Commissioning is now planned for March 2021. 31 The average annual generation for the HPPs is 43.37GWh for Marala, 20.88 GWh for Pakpattan, 100.5 GWh for Ranolia, and 15.78 GWh for Machai. Once the remaining two HPPs are completed and energized, the average annual generation will be 27.65 GWh for Deg Outfall and 28.82 GWh for Chianwali.

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improvement of women’s livelihoods, including access to better health, roads, and education facilities, as well as better employment opportunities for household members. J. Safeguards 38. Environment. The program was classified as category B for environmental impacts as only minor and site-specific adverse impacts were anticipated. The initial environmental examination (IEE) reports for the six subprojects, which were prepared in accordance with ADB's Environmental Assessment Guidelines (2003) and Environment Policy (2002), as well as the government’s Environmental Assessment Regulations and Guidelines, were disclosed in May 2006. An Environmental Assessment Framework was prepared in line with ADB safeguard requirements and agreed with the provincial governments. The IEE reports were also updated by the turnkey contractors once the detailed designs and environmental management plans had been completed. Environmental requirements were included in turnkey and consulting services contracts and specific activities were carried out to ensure the environmental soundness and sustainability of the program. 39. The executing and implementing agencies ensured that the preparation, design, construction, implementation, operation, and commissioning of the program facilities complied with the laws and regulations relating to the environment, health and safety, environmental safeguards, the requirements of the IEE, the environmental management plan, and the corrective or preventive actions in the safeguards monitoring report. Subprojects mostly complied with the environmental safeguards covering the design and pre-construction, natural environment, ecological environment, and environmental pollution. Public consultations were held regarding the environment, and no significant issues were raised. The natural habitat of sites was not affected to any significant extent. 40. Involuntary resettlement. The program was classified as category B under ADB’s Involuntary Resettlement (1995) policy. At appraisal, draft resettlement plans were prepared for eight 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.

41. Draft resettlement plans for the final six subprojects were updated by the turnkey contractors once the detailed designs had been completed. Following ADB’s no-objection, the resettlement plans were publicly disclosed. Compensation payments were made and PEDO and PPDCL monitored the implementation of the land acquisition and resettlement plans internally through their environmental and social impact cells. Adequate compensation was provided to the affected people and safeguard issues were effectively resolved. Both internal and external resettlement monitoring reports were submitted to ADB semiannually for review and disclosure. Land acquisition and compensation was managed well, albeit with some delays owing to the systemic weaknesses in Pakistan’s Land Acquisition Act of 1894 and the lengthy procedures for compensation assessment and verification, ownership claims, and disbursement. The unavailability of some displaced persons (DPs) and disputes over the location of towers also delayed compensation payments. Nonetheless, these issues were addressed during implementation, and the country safeguard review missions of 2015 and 2016 did not identify any outstanding safeguard issues. Thus, the project remained consistent and compliant with ADB’s Involuntary Resettlement Policy (1995) and Environment Policy (2002) and national requirements. Workshops and coaching on safeguard issues were also undertaken to improve safeguard monitoring and implementation of the grievance redress mechanism.

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42. The executing and implementing agencies ensured that all land and rights-of-way for the program were made available to the works contractors in accordance with the agreed-upon schedules under the works contracts, and that all land acquisition and resettlement activities were implemented in compliance with national laws and regulations. 43. Indigenous peoples. At appraisal, the program was categorized B for indigenous peoples under ADB’s Policy on Indigenous Peoples (1998) and relevant sections of ADB’s Operations Manual (amended from time to time). However, no indigenous peoples were identified either then or subsequently under ADB’s Safeguard Policy Statement (2009), which was issued during program implementation.

44. No significant adverse environmental impacts or social impacts on involuntary resettlement and indigenous peoples were recorded. The program’s implementation was regularly monitored and reported and the construction activities in the subprojects were relatively small. Minor noncompliance, mostly related to worker health and safety, was addressed satisfactorily.

45. Poverty aspect. The program was expected to deliver immediate direct benefits to the poor and vulnerable communities in the subproject areas because it (i) provided a more reliable and affordable power supply through newly built HPPs, resulting in a significant reduction in poverty through advancements in education, health, roads, and water supply, while also combating climate change; (ii) created temporary and full-time employment opportunities;32 (iii) resulted in increased income through employment in local agricultural food production, which grew because of higher quality and consumption; (iv) had direct and positive impacts on the quality of life in low-income villages through electrification; and (v) contributed to economic growth and sales of generated power to the national grid, allowing local governments to generate income that can be targeted specifically for social development in the provinces, particularly the poor and vulnerable communities. The program was also beneficial to the entire nation as both the poor and nonpoor benefited directly from a more stable supply of electricity and indirectly through the development of the national economy. K. Monitoring and Reporting 46. Conditions and covenants. All the covenants in the loan and project agreements were relevant and appropriate, and remained applicable during program implementation. Furthermore, all the covenants concerning implementation arrangements, environmental protection, social and resettlement issues, and governance were complied with (Appendix 7). None of the covenants were modified, suspended, or waived. 47. A program performance and monitoring system was established within PEDO and Punjab IPD for the monitoring of and reporting on progress toward the program’s output targets, with PEDO and PPDCL issuing monthly progress reports. These reports provided details on the status of activities performed, including the procurement of materials, the physical execution of subprojects, contract awards and disbursements, and the monitoring and evaluation of social and environmental covenants. PEDO and PPDCL also submitted quarterly progress reports to ADB throughout implementation, complying with the reporting requirement in the project agreements. Audited project accounts and financial statements were provided and disclosed with slight delays.

32 Over 100 local skilled and 500 unskilled workers were temporarily employed by turnkey contractors, subcontractors, and consultants for the physical component of the program. Skilled workers are employed for the O&M of the newly built HPPs.

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However, the project and facility completion reports were not prepared (except for the project completion report for Pakpattan HPP subproject) and thus not submitted to ADB by the executing and implementing agencies.

III. EVALUATION OF PERFORMANCE A. Relevance 48. The program’s design is rated relevant at appraisal and completion as its intended outcome was strategically aligned with ADB’s program for Pakistan and the government’s strategic objectives for energy and poverty reduction, and its development priorities. The sector development approach was sound, but the MFF modality was not the best approach because separate physical investment projects (tranches) could have been financed more effectively through a project -based loan that included reform actions. 49. The program serves the purpose of developing indigenous, nonpolluting, and renewable sources of clean energy to help meet Pakistan’s power shortage and address the routine load shedding, especially in rural areas.33 The investment program contributed to the government’s objective of universal electrification under the Roshan Pakistan Program .34 It also helped the government to achieve its principal goals of sustained economic growth and poverty reduction. ADB’s support for RE development will also reduce carbon emissions and contribute to the management of climate change—a priority under Strategy 2030. The program remained central to ADB’s country partnership strategies 2009–2013 and 2015–2019, which supported investments to rehabilitate and upgrade power sector infrastructure, maximize access to energy for all, and promote energy efficiency and expansion of renewable energy through sector reforms.35 The program also aimed to introduce low-carbon technologies and increase financial support for clean energy projects to enhance Pakistan’s energy diversity and security. 50. At completion, the program was still relevant to the sector priorities of ADB and the government. The program’s (i) rationale and results chain were sound; (ii) design had no significant deficiencies in achieving the desired outcome despite some unrealistic indicators; (iii) design and associated DMF were appropriate; and (iv) activities did not duplicate the program work of other development partners and were well coordinated between the stakeholders to support the government in achieving the availability, affordability, and sustainability of the power sector. B. Effectiveness 51. The program is rated less than effective. Although the non-physical components (the feasibility studies and capacity development) were completed and the program’s outcome was largely achieved, there were shortcomings in achieving the physical outputs (Appendix 1).

33 The construction of small and medium-sized HPPs also brought additional advantages: (i) because HPPs can generate power to the grid immediately, they provide essential back-up power during major electricity outages or disruptions; (ii) in addition to a sustainable clean fuel source and technology, hydropower’s other benefits include flood control, irrigation, and water supply; (iii) high energy efficiency (about 80-85%); (iv) reliable, mature technology and competitive costs; (iv) approval and licensing processes that are generally simpler than those for large-scale facilities; and (v) minimal environmental impact (zero emissions of CO2). 34 http://roshanpakistan.pk/ (accessed on 30 December 2019). 35 ADB. 2009. Country Partnership Strategy. Pakistan, 2009–2013. Manila; ADB. 2015. Country Partnership Strategy. Pakistan, 2015–2019. Manila; and ADB. 2019. Country Partnership Strategy. Pakistan, 2019–2022. Manila.

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Despite the reduced scope, the program was delayed by 6.5 years from its original target (for reasons explained in para. 21), and the physical component was not fully achieved and is still ongoing, affecting the program’s effectiveness. On the other hand, the program effectiveness rating was not affected by safeguard-related issues as (i) safeguard plans and monitoring reports were disclosed properly and executed on time; (ii) potentially negative environmental impacts were minimized;36 (iii) the program has significant environmental benefits compared with fossil fuel power plants since HPPs do not produce atmospheric emissions, or create acid rain or greenhouse gases;37 (iv) the program did not include any social impacts or specific gender elements;38 and (iv) no safeguard-related issues and complaints remained unresolved. 52. The program’s intended outcome of the increased production and use of clean energy through RE sources in a financially sustainable manner was achieved because the program outputs were substantially completed. DMF targets were revised and redefined because of minor changes in the program’s scope (para.11). C. Efficiency 53. The overall rating of the combined subprojects is efficient. The economic internal rate of return (EIRR) for the program has been recalculated at (i) 16.40% compared to 18.24% at appraisal with a corresponding economic net present value of $3,494 million. For KPK projects, the EIRR at completion was 17.7%, slightly above the 17.2% envisaged at appraisal. In Punjab as two projects are yet to be completed, the EIRR is 14.3% compared to 19.4% at appraisal. The EIRR computation and the corresponding sensitivity analysis are based on cashflows from the commissioned subprojects and exclude the subprojects currently under construction. Details of the reevaluation of the EIRR are in Appendix 8. D. Sustainability 54. The program is rated likely sustainable based on available O&M support, although the physical component is not fully completed. Incremental revenue from the subprojects should be sufficient to cover debt servicing, depreciation, O&M, and return on equity. The incremental benefits and costs for each subproject were computed based on the approved tariff and aggregated to provide the overall financial internal rate of return (FIRR). Using the respective wholesale tariffs for the subprojects, the FIRR rate is favorable with a weighted average cost of capital (WACC) of 3.67%, rendering the four completed subprojects financially viable. However, the FIRR is unfavorable for the two subprojects yet to be completed, with the FIRR declining to 4.66% as compared to the 8.45% calculated at appraisal because construction has taken 9 years as against the initial estimate of 3 years. The operational efficiency and potential CDM credit revenue from minimizing the adverse environmental impact of greenhouse gas emissions were not incorporated as additional revenue sources; however, these will further increase the FIRR, as explained in detail in Appendix 8. E. Development Impact 55. At appraisal, the program’s expected impact was inclusive economic growth and a reduction in carbon dioxide. This was to be assessed through the performance targets of (i)

36 As they can change water temperature, river flow, and fish migration and populations, during construction and operation, the medium-sized HPPs were closely monitored for possible adverse impacts on the environment. 37 The newly built HPPs will also contribute to a reduction of 72,000 tons in greenhouse gas emissions over 6 years. 38 The program interventions did not result in any negative impacts on women. A sustainable and reliable power supply supports women and men equally.

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sustained annual gross domestic product growth of 6% to 8% from 2007; and (ii) avoided CO2 emissions of 175,000 tons annually from 2011 and 775,000 tons annually from 2017 onwards 56. The program achieved two of the three impact targets in the DMF (outputs). It successfully contributed towards achieving (i) the due diligence support and enforcement of the capacity development program (outputs 2 and 3), and (ii) the addition of clean energy through the installation of four out of six small to medium-size HPPs. The program is rated satisfactory in achieving the development impact targets. A higher rating has not been given because of the limited impact of the program on some measures; for example, only six HPPs were installed. F. Performance of the Borrower and the Executing Agency 57. The performance of the Government of Pakistan as the borrower and AEDB as executing agency is rated less than satisfactory. The loan closing was delayed by about 6.5 years, the borrower (Economic Affairs Division), the line ministry, and the provincial implementing agencies demonstrated weak ownership during program implementation. There were delays in the release of counterpart funds as well as absence of timely response on important implementation matters. However from 2015 onwards, the provincial implementing agencies did provide adequate support for the program’s contractors and consultants and regularly monitored progress in implementing the program and constructing the HPPs as part of its reviews of the Pakistan Resident Mission’s portfolio. 58. As the main counterpart for this program at the federal level, AEDB’s performance was below expectations. Implementation of the program was slow and efforts to successfully implement and complete the program with advisory assistance from the implementation consultants were not effective. On the positive side, the implementing agencies complied with ADB policies and national laws on the environment, land acquisition, and resettlement. Delays occurred mainly at the outset of the program because of internal procedures, slow procurement, and a delay in completing the detailed engineering design. However, the implementing agencies accounted for these unforeseen implementation delays by effectively managing contractors’ activities to accelerate program implementation. The implementing agencies submitted all financial reports and performance monitoring and progress reports as required and complied with the safeguard requirements. G. Performance of the Asian Development Bank 59. ADB’s performance is rated less than satisfactory. The individual program under the MFF was processed by ADB headquarters in close coordination with AEDB and with assistance from the resident mission. The preparatory works for the program benefited from this arrangement, resulting in approval by ADB’s Board of Directors within one month of the government’s periodic financing request. Although not related directly to ADB project performance, tranche 1 designs were overly complex and ambitious, and program preparatory works were insufficient, leading to low quality at program entry and significant delays, prolonged procurement, a cost overrun, and ultimately delayed completion. ADB could have considered design changes and DMF improvement during implementation. ADB responsiveness to some procurement submissions by the government was slow. The government could have been persuaded to reduce gauge fragmentation.

60. During implementation, ADB fielded 22 missions (an inception mission, 19 review missions, and a project completion review mission in February 2020). ADB did not supervise implementation closely enough for adequate monitoring of program performance, nor did ADB

14

always took timely and appropriate action. Delegation of the program administration to the resident mission in January 2015 helped to achieve more effective implementation, with close monitoring of progress at the contract and subproject level. Although ADB maintained a good relationship with the borrower and the consultants throughout program execution, the quality of the portfolio monitoring, the reporting of progress and covenant compliance, and risk management was inconsistent. H. Overall Assessment 61. The program is assessed overall as successful, given that the outputs and outcomes were not fully achieved. Under the physical component, (i) new generation capacity was 30.06 MW out of the envisaged 44 MW;39 (ii) annual incremental energy output was 180.53 GWh out of the envisaged 272 GWh; and (iii) construction of PEDO’s new building was completed in 2014 and its goods (testing equipment, office outfitting, and vehicles for project supervision) were procured. Under the non-physical components, (i) the feasibility studies for eight new RE schemes were completed; and (ii) capacity building, consisting of 23 training workshops and 8 courses, based on a needs assessment at the provincial and program levels, was completed. The program’s intended impacts can be achieved and sustained once the two HPPs in Punjab province are energized.

62. The program is relevant because it was, and still is, in line with the government’s development objectives and ADB policies and strategies, which are focused on upgrading and developing energy infrastructure and enhancing investment opportunities.

63. The program is rated less than effective, even though the output targets were mostly met and the generated outcomes exceeded the indicators in the DMF. While the physical component fully complied with ADB’s environmental and social safeguard requirements, the design and construction were not the most appropriate and the assets installed under the program are being only partially utilized. 64. The efficient rating for the program is justified because the EIRR for the subprojects is comfortably above the hurdle rate and the economic opportunity cost of 12%, and the program was implemented efficiently despite delays. The FIRR for the subprojects is 4.66%, with a WACC of 3.67%, which is lower than the WACC of 4.43% at appraisal in 2006. 65. The rating of likely sustainable is based on available O&M support for the subprojects and the government’s continued focus on the energy sector.

Overall Ratings Criteria Rating Relevance Relevant Effectiveness Less than effective Efficiency Efficient Sustainability Likely sustainable Overall Assessment Successful Development impact Satisfactory Borrower and executing agency Less than Satisfactory Performance of ADB Less than Satisfactory

39 Four HPPs (Marala, Pakpattan, Chianwali, and Deg Outfall) in Punjab; and two HPPs (Ranolia and Machai) in KPK.

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IV. ISSUES, LESSONS, AND RECOMMENDATIONS A. Issues and Lessons 66. Weak project readiness. Subprojects suffered from weak readiness, as demonstrated by the substantial cost, time overruns, and initial delays.40 Applying the following readiness filters during program processing can ensure better implementation: (i) completion of critical actions and necessary approvals by the government for loan signing, environmental clearances, land acquisition, program scope, procurement, other administrative permissions, and cost and funding arrangements; (ii) completion of the detailed design (or design-build specifications) for infrastructure works; (iii) preparation and approval of procurement documents (including specifications) with technical expert support; (iv) substantial completion of advance contracting of consultant recruitment and turnkey contracts; (v) provincial internal procedures; (vi) measures to address security concerns; and (vii) completion of key project-specific preparatory actions. Many of these filters are now being applied to projects and programs in Pakistan41. 67. Further the MFF modality was not the best approach because separate physical investment projects (tranches) could have been financed more effectively through a project-based loan that included reform actions. 68. Implementation arrangements. The program demonstrated that the executing agencies have the capacity to undertake major construction projects related to the augmentation and rehabilitation of generation (especially small HPPs), transmisison, and distribution infrastructure. Nonetheless, their staff could benefit from ADB-sponsored training and workshops on procurement, safeguards, and financial management. In addition, ADB should ensure that the executing and implementing agencies fully understand ADB’s end-to-end procurement processes from project/program inception. This will require training on the importance of timely and accurate procurement, as set out in ADB’s project administration manual. 69. Involvement of communities. In locations with no reliable electricity supply, people are highly motivated and strongly support the implementation of development projects and programs. The involvement of communities at all stages of planning and implementation raises their awareness and encourages cooperation. During the program implementation, community members stressed the importance of capacity building to support the partial independence of the O&M of the RE system. Social experts stated that the program increased the communities’ sense of responsibility and competence to solve problems in the village, as well as their self-confidence. 70. Quality of procurement plan. Subprojects suffered major delays because of weak procurement, leading to substantive time and cost overruns. Procurement is critical in infrastructure projects, requiring preparation by project/program design consultants and close supervision by consultants, the government and executing agencies, and ADB. Program implementation team from ADB should have been more proactive in assisting in the implementation of startup activities such as consultant recruitment and preparation of engineering designs.

40 Initial delays are attributed to the lack of detailed design and weak procurement readiness at tranche approval. Subsequent delays were caused by prolonged procurement activities for reviews and approvals. 41 Within energy sector, this approach has been adopted for processing of 300 MW Balakot HPP and tranche 4 of

second MFF for Power Transmission Enhancement Investment Program.

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71. Cost overruns. Factors that contributed directly to the cost overruns include the higher cost of labor and materials than estimated at appraisal, the significant JPY depreciation, the inadequate program preparation, and the incomplete engineering design. Further frequent contract variations and minor changes during implementation also increased the costs. The cost overruns indicate the importance of sound engineering design and value engineering that can (i) support more accurate cost estimates; (ii) preclude or minimize minor changes in the project’s scope or variations to contracts during construction; and (iii) set a more reasonable and realistic implementation schedule.

72. Knowledge transfer. As the newly built grid connected HPPs are using advanced technology, technicians will require new skills to ensure proper O&M. Therefore, further onsite training will be needed to ensure the sustainability of the program’s operational life, preferably within the defect liability period.

B. Recommendations 73. Future monitoring. Each implementing agency have a generation system operations unit that supervises day-to-day operations and general maintenance and monitors the performance of the assets installed under the program. 74. Covenants. Most covenants have been complied with, except those related to the determination of tariffs, as this falls under the domain of the federal government and the regulator NEPRA. A delay in tariff determination by NEPRA and its notification by the federal government contributed to partial compliance with financial sustainability ratios. Curtailing the energy sector’s burden on the annual state budget is one of the core issues being addressed under the government’s recent agreement with the IMF, under the extended fund facility approved in July 2019. ADB is also providing programmatic, policy-based support to the government under its Energy Sector Reforms and Financial Sustainability Program, which is structured in three subprograms with a list of actions to be completed between 2019 and 2022. It is recommended that the covenants in the loan and project agreements be maintained in their existing form until all the subprojects under the loan have been completed.

75. Further action or follow-up. Historically, provincial energy departments have been able to maintain and operate their systems. The O&M costs are built into the tariff and approved by the regulator. However, the provincial governments have not been very successful in getting the private sector to invest in the projects for which feasibility studies were completed under the program. ADB remains engaged with the provincial governments and is continuing to finance development of the energy sector at the provincial level through its Access to Clean Energy Investment Program.42 Due diligence based on technical competence, environmental and social safeguards, and relevance should be conducted during the site activities for the completion of Deg Outfall and Chianwali HPPs.

76. Timing of the program performance evaluation report. ADB’s independent evaluation department should prepare the program performance evaluation report in 2023 as 3 years should be sufficient to observe the program’s efficiency and sustainability. This will allow for the collection of useful information on program benefits and a better assessment of the outcome of the program.

42 https://www.adb.org/projects/documents/pak-access-to-clean-energy-rrp

Appendix 1 17

DESIGN AND MONITORING FRAMEWORK Design Summary Performance Indicators and Targets Project Achievements Impact Reduction in CO2 emission.

Avoided CO2 emission by 175,000 tons annually from 2011 to 775,000 tons annually 2017 onwards.

Partially achieved: For Punjab based four (Marala, Pakpattan, Deg Out Fall and Chianwali) projects/HPPs, the CO2 emission is calculated at 76,608 tons annually. For KPK/PEDO the data is not available.

Outcome Increased production and use of clean energy.

Increased renewable energy (RE) share in energy mix for power generation from 0.9% in 2005 to 1.5% in 2015.

Achieved: The installed RE capacity was 3,36% whereas RE generation in 2015 was 1.35% of the total generation1.

Outputs Part A. Clean Energy Development Small to medium-size hydropower stations are operational in KP and Punjab. Part B. Due Diligence Feasibility studies and other due diligence work on new RE schemes completed. Part C. Capacity Development Training needs assessment at the provincial and project levels conducted.

At least 44 MW of new generating capacity constructed and functioning by 30 December 2014. At least 272 GWh annually of incremental energy output at 60%-85% plant factor by 30 December 2014. Feasibility studies for 8 new RE schemes completed by 30 June 2012. A capacity development program for the first province available by Q2 2012.

Partially achieved: 30.6MW added to new generating capacity by 2019. Partially achieved: 180.53 GWh of incremental energy is available annually. Achieved: All 8 Feasibility Studies are completed. Achieved: Construction of PEDO (formerly SHYDO) building is complete. Achieved: Contract for consulting services for capacity building/development of PEDO and related entities is completed. 23 trainings (international/national) were conducted; 8 courses were implemented; and 57 officials attended the national and international trainings. Achieved: The procurement of goods for PEDO building (capacity building) is complete. Achieved: In Punjab, the contract between PPDCL and the Clean Energy Development Mechanism (CDM) individual consultant has been signed and under implementation. PPDCL staff are envisaged to receive hands-on training with regards to registration and validation procedure related to CDM.

1 Chapter 10 Energy Sector Overview (10.1 & 10.2); NEPRA State of Industry Report 2016

18 Appendix 2

PROGRAM/PROJECT COST AT APPRAISAL AND ACTUAL ($ million)

Appraisal Estimate Actual

Item Foreign

Exchange Local

Currency Total Cost Foreign

Exchange Local

Currency Total Cost

NWFP Part A: Clean Energy Development 36.2 22.0 58.3 35.8 15.1 50.9 Part B: Feasibility Studies 1.2 1.8 2.9 1.6 0.0 1.6 Part C: Capacity Development 1.4 2.3 3.7 6.0 0.5 6.5 Taxes and Duties 0.0 1.5 1.5 0.0 0.02 0.02 Subtotal Base Cost 38.8 27.6 66.4 43.4 15.6 59.0 Contingencies 4.0 2.5 6.5 0.0 5.6 5.6 Financing Charges 7.0 0.0 7.0 0.0 0.0 0.0 Total Project Cost NWFP 49.8 30.1 79.9 43.4 21.1 64.62 Punjab Part A: Clean Energy Development 28.0 15.4 43.4 50.8 15.9 66.7 Part B: Feasibility Study 2.2 2.2 4.4 5.1 0.0 5.1 Part C: Capacity Development 2.3 2.3 4.7 1.7 2.3 4.0 Taxes and Duties 0.0 1.1 1.1 0.0 1.4 1.4 Subtotal Base Cost 32.6 21.1 53.6 57.6 19.6 77.2 Contingencies 3.4 1.9 5.3 0.0 3.0 3.0 Financing Charges 5.7 0.0 5.7 0.0 0.0 0.0 Total Project Cost Punjab Province 41.6 23.0 64.6 57.6 22.6 80.2 Total Cost 91.5 53.0 145.0 101.0 43.7 144.7

MW = megawatts Sources: Asian Development Bank estimates and audited project financial statements (APFS) of executing/implementing agencies Note: 1. Numbers may not sum precisely because of rounding. 2. Dharal Khwar and Okara hydropower plant were excluded from program reference para 13 of this report. Hence, Part A has lesser financing then estimated.

Appendix 3 19

PROGRAM/PROJECT COST BY FINANCIER

Table A3.1: Program/Project Cost at Appraisal by Financier ($ million)

ADBa

GOPb

Total Cost

Amount

% of Cost

Category Amount

% of Cost

Category Amount Item

NWFP

Part A: Clean Energy Development 36.2 62.09% 22.0 1.61% 58.3 Part B: Feasibility Studies 1.2 41.38% 1.8 9.72% 2.9 Part C: Capacity Development 1.4 37.84% 2.3 54.95% 3.7 Taxes and Duties 0.0 0.00% 1.5 50.04% 1.5

Subtotal Base Cost 38.8 58.43% 27.6 20.82% 66.4 Contingencies 4.0 61.54% 2.5 100.00% 6.5

Financing Charges 7.0 100.00% 0.0 0.00% 7.0

Total Project Cost NWFP 49.8 62.33% 30.1 37.67% 79.9

Punjab Part A: Clean Energy Development 28.0 64.52% 15.4 35.48% 43.4 Part B: Feasibility Study 2.2 50.00% 2.2 50.00% 4.4 Part C: Capacity Development 2.3 48.94% 2.3 48.94% 4.7 Taxes and Duties 0.0 0.00% 1.1 100.00% 1.1 Subtotal Base Cost 32.6 60.82% 21.1 39.37% 53.6 Contingencies 3.4 64.15% 1.9 35.85% 5.3 Financing Charges 5.7 100.00% 0.0 0.00% 5.7 Total Project Cost Punjab Province 41.6 64.40% 23.0 35.60% 64.6

Total Cost 91.5 63.10% 53.0 36.55% 145.0 % Total Project Cost 63.10% 36.55%

Notes: 1. Numbers may not sum precisely because of rounding. 2. Percentage is calculated for share of ADB or GOP to Total Cost. a ADB’s share in project cost. b Government of Pakistan’s share in project cost. Source: Asian Development Bank.

20 Appendix 3

Table A3.2: Program/Project Cost at Completion by Financier ($ million)

ADBa

GOPb

Total Cost

Amount

% of Cost

Category Amount

% of Cost

Category Amount Item

NWFP

Part A: Clean Energy Development 35.8 70.33% 15.1 29.67% 50.9 Part B: Feasibility Studies 1.6 100% 0.0 0.00% 1.6 Part C: Capacity Development 6.0 92.31% 0.5 7.69 % 6.5 Taxes and Duties 0.0 0.00% 0.02 100% 0.02

Subtotal Base Cost 43.4 73.56% 15.6 26.44% 59.0 Contingencies 0.0 0.00% 5.6 100.00% 5.6

Financing Charges 0.0 0.00% 0.0 0.00% 0.0

Total Project Cost NWFP 43.4 67.16% 21.1 32.65% 64.62

Punjab Part A: Clean Energy Development 50.8 76.16% 15.9 23.84% 66.7 Part B: Feasibility Study 5.1 100% 0.0 0.00% 5.1 Part C: Capacity Development 1.7 42.50% 2.3 57.50% 4.0 Taxes and Duties 0.0 0.00% 1.4 100.00% 1.4 Subtotal Base Cost 57.6 74.61% 19.6 25.39% 77.2 Contingencies 0.0 0.00% 3.0 100% 3.0 Financing Charges 0.0 0.00% 0.0 0.00% 0.0 Total Project Cost Punjab Province 57.6 71.82% 22.6 28.18% 80.2

Total Cost 101.0 69.80% 43.7 30.20% 144.7 % Total Project Cost 69.80% 30.20%

Notes: 1. Numbers may not sum precisely because of rounding. 2. Percentage is calculated for share of ADB or GOP to Total Cost. a ADB’s share in project cost. b Government of Pakistan’s share in project cost. Source: Asian Development Bank estimates.

Appendix 4 21

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 2010 5.649 5.01% 5.649 0.98% 2011 10.268 9.11% 15.917 2.77% 2012 6.401 5.68% 22.318 3.89% 2013 17.451 15.48% 39.769 6.93% 2014 25.292 22.43% 65.061 11.34% 2015 29.542 26.20% 94.603 16.48% 2016 13.394 11.88% 107.997 18.82% 2017 1.925 1.71% 109.923 19.15% 2018 2.813 2.50% 112.736 19.64% Total 112.736 100.00% 573.972 100.00%

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

Figure 4.1: Projection and Cumulative Disbursement of ADB Loan Proceeds

($ million)

0

20

40

60

80

100

120

140

160

180

2010 2011 2012 2013 2014 2015 2016 2017 2018

$ m

illio

ns

Calendar Year

Projected Annual Disbursement Actual Annual Disbursement

Projected Cummulative Disbursements Actual Cummulative Disbursements

22 Appendix 5

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

Year Amount

($ million) % of Total Amount

($ million) % of Total 2010 11.365 10.79% 11.365 1.24% 2011 72.664 68.96% 84.029 9.15% 2012 35.570 33.76% 119.599 13.02% 2013 0 0.00% 119.599 13.02% 2014 0 0.00% 119.599 13.02% 2015 0 0.00% 119.599 13.02% 2016 0 0.00% 119.599 13.02% 2017 0 0.00% 119.599 13.02% 2018 -14.231 -13.51% 105.368 11.47% Total 105.368 100.00% 918.356 100.00%

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

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

-40

-20

0

20

40

60

80

100

120

140

160

2010 2011 2012 2013 2014 2015 2016 2017 2018

$ m

illio

n

Calendar Year

Projected Annual Contract Awards Actual Annual Contract Awards

Projected Cummulative Contract Awards Actual Cummulative Contract Awards

Appendix 6 23

CHRONOLOGY OF MAIN EVENTS Date Event 31 October 2006 Issuance of Periodic Financing Request (PFR) from borrower. 2 November 2006 Approval of PFR by ADB management. 13 December 2006 Loan approval 5 October 2007 Loan signing 5-13 March 2007 Loan Inception Mission. 29 November 2007 Loan effectiveness 30 April 2008 First contract award 24 July 2008 First disbursement 16-26 April 2013 Mid-term review mission 21 December 2017 Last contract award 30 April 2018 Last financial transaction/disbursement 7 June 2018 First partial cancellation 31 December 2017 Project closing 7 June 2018 Loan account closure/Financial closing Source: Asian Development Bank.

24 Appendix 7

STATUS OF COMPLIANCE WITH LOAN COVENANTS Loan Covenants (Loan 2286-PAK)

Covenant

Reference in Loan

Agreement

Status of Compliance The Borrower shall cause each Project Executing Agency and each Implementing Agency to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and social practices.

Section 4.01. (a) – Article IV, LA

Complied with.

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

Section 4.01. (b) – Article IV, LA

Complied with.

The Borrower shall make available to the Project Executing Agencies and the Implementing Agencies, promptly as needed and on terms and conditions acceptable to ADB, the funds, facilities, services and other resources which are required, for the carrying out of the Project.

Section 4.02 – Article IV, LA

Complied with.

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

Section 4.03 – Article IV, LA

Complied with.

The Borrower shall take all action which shall be necessary on its part to enable the Project Executing Agencies and the Implementing Agencies to perform their obligations under the respective Project Agreements and shall not take or permit any action which would interfere with the performance of such obligations.

Section 4.04 – Article IV, LA

Complied with.

Project Implementation Arrangements AEDB shall be the Project Executing Agency at the federal level, responsible for overall coordination of the Project. At the provincial level, IPD of NWFP shall be the Project Executing Agency, responsible for the carrying out of the NWFP components, and IPD of Punjab shall be the Project Executing Agency, responsible for the carrying out of the Punjab components.

Para 1 – Schedule 5 to LA

Complied with.

SHYDO shall be the Implementing Agency, responsible for the day-to-day implementation of the NWFP components, and IPD of Punjab shall be the Implementing Agency until the Punjab Power Development Company Limited (PPDCL) shall have been legally established in accordance with the applicable laws of the Borrower, and become fully operational in a manner satisfactory to ADB.

Para 2 – Schedule 5 to LA

Complied with.

The Borrower shall ensure that (a) the Project is carried out in accordance with the FFA and all the Schedules (including Annexes) attached thereto; and (b) without limiting the generality of the foregoing, the implementation of the Project is consistent with the implementation frameworks set forth in Schedule 3 to the FFA.

Para 3 – Schedule 5 to LA

Complied with.

Subproject Selection Criteria and Approval Process All Subprojects to be financed using the proceeds of the Loan shall be selected and approved in accordance with the criteria and approval process set forth in Schedule 4 to the FFA.

Para 4 – Schedule 5 to LA

Complied with.

Appendix 7 25

Covenant

Reference in Loan

Agreement

Status of Compliance Safeguard Frameworks The Borrower shall ensure that each Project Executing Agency and Implementing Agency implements the Project in accordance with Schedule 5 to the FFA, including all Annexes attached thereto.

Para 5 – Schedule 5 to LA

Complied with.

Anticorruption and Good Governance

The Borrower shall cause the Project Executing Agencies and the Implementing Agencies to ensure that (a) relevant provisions of ADB’s Anticorruption Policy, are included in the bidding documents for the Project; (b) all contracts financed using the Loan proceeds include provisions specifying ADB’s right to audit and examine the records and accounts of the Project Executing Agencies and the Implementing Agencies, and all contractors, suppliers, and consultants and other service providers as they relate to the Project.

Para 6 – Schedule 5 to LA

Complied with.

The Borrower shall cause the Project Executing Agencies to publicly disclose on the website information on how the Loan proceeds are being used for the intended beneficiaries following applicable procedures. The website shall (a) present financial statements; (b) track procurement contract awards, and (c) include information on, among others, the list of participating bidders, name of the winning bidder, basic details on bidding procedures adopted, amount of the contract awarded, the list of goods and/or services purchased, and their intended and actual utilization. In addition, the Project Executing Agencies shall ensure that (a) national and provincial newspapers in Urdu, Pushtoo and English carry such details on a regular basis, at least semiannually; and (b) TV and radio broadcasts are made in these language broadcasts at national and provincial levels, as appropriate, giving these same details.

Para 7 – Schedule 5 to LA

Complied with.

Roadmaps The Borrower shall ensure timely implementation of its roadmaps for energy sector, power sector and renewable energy development, as more fully described in Schedule 1 to the FFA.

Para 8 – Schedule 5 to LA

Complied with.

Tariffs The Borrower shall ensure that tariffs are set at the level necessary to ensure financial sustainability and viability.

Para 9 – Schedule 5 to LA

Complied with.

Clean Development Mechanism and Global Environmental Facility The Borrower, NWFP and Punjab shall cooperate with ADB in harnessing benefits from clean development mechanism and the global environmental facility.

Para 10 – Schedule 5 to LA

Complied with.

26 Appendix 7

Loan Covenants (Loan 2287-PAK) Covenant

Reference in Loan

Agreement

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

Section 4.01 – Article IV, LA

Complied with.

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

Section 4.02 – Article IV, LA

Complied with.

The Borrower shall take all action which shall be necessary on its part to enable the Project Executing Agency and the Implementing Agencies to perform their obligations under the respective Project Agreements, and shall not take or permit any action which would interfere with the performance of such obligations.

Section 4.03 – Article IV, LA

Complied with.

Appendix 7 27

Covenants in Project Agreement (Province of Punjab) Covenant

Reference in Loan

Agreement

Status of Compliance Punjab shall carry out the Project with due diligence and efficiency, and in conformity with sound administrative, financial, engineering, environmental and social practices.

Section 2.01. (a) – Article II, PA

Complied with.

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

Section 2.01. (b) – Article II, PA

Complied with.

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

Section 2.02 – Article II, PA

Complied with.

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

Section 2.03. (a) – Article II, PA

Complied with.

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

Section 2.03. (b) – Article II, PA

Complied with.

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

Section 2.04 – Article II, PA

Complied with.

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

Section 2.05. (a) – Article II, PA

Complied with.

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

Section 2.05. (b) – Article II, PA

Complied with.

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

Section 2.06 – Article II, PA

Complied with.

28 Appendix 7

Covenant

Reference in Loan

Agreement

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

Section 2.07. (a) – Article II, PA

Complied with.

Punjab 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 accomplishment of the purposes of the Loans.

Section 2.07. (b) – Article II, PA

Complied with.

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

Section 2.07. (c) – Article II, PA

Complied with.

Punjab shall 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 Goods, Works and consulting services and other items of expenditure financed out of such proceeds; (iii) the Project; (iv) the administration, operations and financial condition of Punjab; and (v) any other matters relating to the purposes of the Loans.

Section 2.08. (a) – Article II, PA

Complied with.

Without limiting the generality of the foregoing, Punjab shall furnish to ADB quarterly reports on the execution of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter.

Section 2.08. (b) – Article II, PA

Complied with.

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

Section 2.08. (c) – Article II, PA

Complied with.

Punjab shall (i) maintain separate accounts for the Project; (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 accounts and financial statements and the report of the auditors relating thereto (including the auditors' opinion on the use of the proceeds of the Loans and compliance with the financial covenants of the Loan Agreements as well as on the use of the procedures for imprest account/statement of expenditures), all in the English language. Punjab shall furnish to ADB such further information concerning such

Section 2.09. (a) – Article II, PA

Partially complied.

Appendix 7 29

Covenant

Reference in Loan

Agreement

Status of Compliance accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

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

Section 2.09. (b) – Article II, PA

Complied with.

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

Section 2.10 – Article II, PA

Complied with.

Punjab 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.

Section 2.11. (a) – Article II, PA

Complied with.

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

Section 2.11. (b) – Article II, PA

Complied with.

Punjab 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, engineering, environmental, social, and maintenance and operational practices.

Section 2.11. (c) – Article II, PA

Complied with.

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

Section 2.12 – Article II, PA

Complied with.

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

Section 2.13 – Article II, PA

Complied with.

Punjab shall carry out the Project in accordance with the FFA and all the Schedules (including Annexes) attached thereto.

Para 1, Schedule to PA

Complied with.

Financial Management and Performance Indicators

30 Appendix 7

Covenant

Reference in Loan

Agreement

Status of Compliance Punjab shall initiate discussions with NTDC or any other potential buyer on tariff as described in the draft PPA and shall ensure that the PPA is signed as a condition for disbursement of the Loan proceeds for payment for generators and power transformers in accordance with paragraph 7(b) of Schedule 3 to the Ordinary Operations Loan Agreement.

Para 2, Schedule to PA

Complied with.

Punjab shall ensure that as soon as legally established and fully functional, the Punjab Power Development Company Limited (PPDCL) enters into a Project Agreement with ADB.

Para 3, Schedule to PA

Complied with.

Punjab shall cause PPDCL to define its corporate identity, devise a business plan and a strategic development roadmap, so that a single corporate body is accountable for a given business not later than 30 June 2008.

Para 4, Schedule to PA

Complied with.

Punjab shall cause PPDCL to implement the institutional strengthening plan agreed with ADB to attain financial and operational independence not later than the FY ending 2007.

Para 5, Schedule to PA

Complied with.

Punjab shall cause PPDCL to maintain a debt service coverage ratio (DSCR) of 1.2, operating ratio of 80 percent, return on net fixed assets of 5 percent, and 70:30 debt to equity ratio from FY2009 onwards.

Para 6, Schedule to PA

Complied with.

Land Availability and Resettlement

Without limiting the generality of Schedule 5 to the FFA and all the Annexes attached thereto, Punjab shall, subject to compliance with the relevant provisions of the Resettlement Framework (RF), the Resettlement Plan (RP), Environmental Assessment Framework (EAF) and Environmental Management Plan (EMP), and in accordance with all applicable laws and regulations of the Borrower and Punjab, acquire or make available the land and rights to land free from any encumbrances, and clear utilities, trees, and any other obstruction from such land, required for commencement of construction activities in accordance with the schedule agreed under the related civil works contract.

Para 7, Schedule to PA

Complied with.

Punjab shall ensure that all land and rights-of-way required by the Subprojects are made available in a timely manner and that the provisions of the RP, including compensation and entitlements for affected households and persons, are implemented in conformity with all applicable laws and regulations of the Borrower, including as amended from time to time, and the entitlement benefits as listed in the Borrower’s applicable laws, and ADB’s Policy on Involuntary Resettlement, 1995, and the agreed RF.

Para 8, Schedule to PA

Complied with.

Punjab shall ensure that people affected by each Subproject are fairly compensated and in a timely manner on replacement values in accordance with the RP and RF, such that their living standards are not adversely affected. Punjab shall submit progress and completion reports on land acquisition and resettlement under the quarterly progress reports for each Subproject.

Para 9, Schedule to PA

Complied with.

Within three (3) months of the Effective Date, Punjab shall engage an independent external expert/agency acceptable to ADB for monitoring and verification of the RP implementation under each Subproject that will be responsible for providing ADB through the PMU, quarterly

Para 10, Schedule to PA

Complied with.

Appendix 7 31

Covenant

Reference in Loan

Agreement

Status of Compliance monitoring and evaluation reports on resettlement implementation in accordance with the RP.

Within three (3) months of the Effective Date, Punjab shall also establish a grievance redress committee (GRC) for the Project for addressing any grievances from affected peoples concerning resettlement, environment, and other social issues in a timely manner.

Para 11, Schedule to PA

Complied with.

Environment Without limiting the generality of Schedule 5 to the FFA, Punjab shall ensure that environmental assessment of the Subprojects is conducted according to the ADB’s Environment Policy, 2002, the Borrower’s environmental laws, and the EAF.

Para 12, Schedule to PA

Complied with.

Midterm Review A midterm review shall be carried out two (2) years after the Effective Date. The midterm review shall, among other things, focus on the engineering, resettlement, environmental aspects of the Project and the financial status of PPDCL.

Para 13, Schedule to PA

Complied with.

32 Appendix 7

Covenants in Project Agreement [North West Frontier Province (NWFP) and Sarhad Hydel Development Organization(SHYDO)]

Covenant

Reference in Loan

Agreement

Status of Compliance NWFP and SHYDO shall carry out the Project with due diligence and efficiency, and in conformity with sound administrative, financial, engineering, environmental and social practices.

Section 2.01. (a) – Article II, PA

Complied with.

In the carrying out of the Project and operation of the Project facilities, NWFP and SHYDO shall perform all obligations set forth in each of the Loan Agreements to the extent that they are applicable to NWFP & SHYDO and all obligations set forth in the Schedule to this Project Agreement.

Section 2.01. (b) – Article II, PA

Complied with.

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

Section 2.02 – Article II, PA

Complied with.

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

Section 2.03. (a) – Article II, PA

Complied with.

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

Section 2.03. (b) – Article II, PA

Complied with.

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

Section 2.04 – Article II, PA

Complied with.

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

Section 2.05. (a) – Article II, PA

Complied with.

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

Section 2.05. (b) – Article II, PA

Complied with.

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

Section 2.06 – Article II, PA

Complied with.

Appendix 7 33

Covenant

Reference in Loan

Agreement

Status of Compliance ADB, NWFP and SHYDO shall cooperate fully to ensure that the purposes of the Loans will be accomplished.

Section 2.07. (a) – Article II, PA

Complied with.

NWFP & SHYDO 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 accomplishment of the purposes of the Loans.

Section 2.07. (b) – Article II, PA

Complied with.

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

Section 2.07. (c) – Article II, PA

Complied with.

NWFP & SHYDO shall 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 Goods, Works and consulting services and other items of expenditure financed out of such proceeds; (iii) the Project; (iv) the administration, operations and financial condition of NWFP and SHYDO; and (v) any other matters relating to the purposes of the Loans.

Section 2.08. (a) – Article II, PA

Complied with.

Without limiting the generality of the foregoing, NWFP and SHYDO shall furnish to ADB quarterly reports on the execution of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter.

Section 2.08. (b) – Article II, PA

Complied with.

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

Section 2.08. (c) – Article II, PA

Complied with.

NWFP and SHYDO shall (i) maintain separate accounts for the Project; (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 accounts and financial statements and the report of the auditors relating thereto (including the auditors' opinion on the use of the proceeds of the Loans and compliance with the financial covenants of the Loan Agreements as well as on the use of the procedures for imprest account/statement of expenditures), all in the English language. NWFP and SHYDO shall furnish to ADB such further information

Section 2.09. (a) – Article II, PA

Partially complied. The reports were provided albei with delays in submission.

34 Appendix 7

Covenant

Reference in Loan

Agreement

Status of Compliance concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

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

Section 2.09. (b) – Article II, PA

Complied with.

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

Section 2.10 – Article II, PA

Complied with.

Each of NWFP and SHYDO 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.

Section 2.11. (a) – Article II, PA

Complied with.

Each of NWFP and SHYDO shall at all times conduct its business in accordance with sound administrative, financial, environmental, and social practices, and under the supervision of competent and experienced management and personnel.

Section 2.11. (b) – Article II, PA

Complied with.

Each of NWFP and SHYDO 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, engineering, environmental, social, and maintenance and operational practices.

Section 2.11. (c) – Article II, PA

Complied with.

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

Section 2.12 – Article II, PA

Complied with.

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

Section 2.13 – Article II, PA

Complied with.

NWFP and SHYDO shall carry out the Project in accordance with the FFA and all the Schedules (including Annexes) attached thereto.

Para 1, Schedule to PA

Complied with.

Financial Management and Performance Indicators

Appendix 7 35

Covenant

Reference in Loan

Agreement

Status of Compliance NWFP and SHYDO shall initiate discussions with NTDC or any other potential buyer on tariff as described in the draft PPA and shall ensure that the PPA is signed as a condition for disbursement of the Loan proceeds for payment for generators and power transformers in accordance with paragraph 7(b) of Schedule 3 to the Ordinary Operations Loan Agreement.

Para 2, Schedule to PA

Complied with.

NWFP shall cause SHYDO to define its corporate identity, devise a business plan and a strategic development roadmap, so that a single corporate body is accountable for a given business not later than the fiscal year (FY) ending 2007.

Para 3, Schedule to PA

Complied with.

NWFP shall cause SHYDO to implement the institutional strengthening plan agreed with ADB to attain financial and operational independence not later than the FY ending 2007.

Para 4, Schedule to PA

Complied with.

NWFP shall cause SHYDO to maintain a debt service coverage ratio (DSCR) of 1.2, operating ratio of 80 percent, return on net fixed assets of 5 percent, and 70:30 debt to equity ratio from FY 2008 onwards.

Para 5, Schedule to PA

Complied with.

Land Availability and Resettlement

Without limiting the generality of Schedule 5 to the FFA and all the Annexes attached thereto, NWFP shall cause SHYDO to, subject to compliance with the relevant provisions of the Resettlement Framework (RF), the Resettlement Plan (RP), Environmental Assessment Framework (EAF) and Environmental Management Plan (EMP), and in accordance with all applicable laws and regulations of the Borrower and NWFP, acquire or make available the land and rights to land free from any encumbrances, and clear utilities, trees, and any other obstruction from such land, required for commencement of construction activities in accordance with the schedule agreed under the related civil works contract.

Para 6, Schedule to PA

Complied with.

NWFP shall cause SHYDO, to ensure that all land and rights-of-way required by the Subprojects are made available in a timely manner and that the provisions of the RP, including compensation and entitlements for affected households and persons, are implemented in conformity with all applicable laws and regulations of the Borrower, including as amended from time to time, and the entitlement benefits as listed in the Borrower’s applicable laws, and ADB’s Policy on Involuntary Resettlement, 1995, and the agreed RF.

Para 7, Schedule to PA

Complied with.

NWFP shall cause SHYDO to ensure that people affected by each Subproject are fairly compensated and in a timely manner on replacement values in accordance with the RP and RF, such that their living standards are not adversely affected. SHYDO shall submit progress and completion reports on land acquisition and resettlement under the quarterly progress reports for each Subproject.

Para 8, Schedule to PA

Complied with.

Within three (3) months of the Effective Date, NWFP and SHYDO shall engage an independent external expert/agency acceptable to ADB for monitoring and verification of the RP implementation under each Subproject that will be responsible for providing ADB through the PMU, quarterly monitoring and evaluation reports on resettlement implementation in accordance with the RP.

Para 9, Schedule to PA

Complied with.

36 Appendix 7

Covenant

Reference in Loan

Agreement

Status of Compliance Within three (3) months of the Effective Date, NWFP and SHYDO shall also establish a grievance redress committee (GRC) for the Project for addressing any grievances from affected peoples concerning resettlement, environment, and other social issues in a timely manner.

Para 10, Schedule to PA

Complied with.

Environment Without limiting the generality of Schedule 5 to the FFA, NWFP and SHYDO shall ensure that environmental assessment of the Subprojects is conducted according to the ADB’s Environment Policy, 2002, the Borrower’s environmental laws, and the EAF.

Para 11, Schedule to PA

Complied with.

Midterm Review A midterm review shall be carried out two (2) years after the Effective Date. The midterm review shall, among other things, focus on the engineering, resettlement, and environmental aspects of the Project and the financial status of SHYDO.

Para 12, Schedule to PA

Complied with.

Appendix 8 37

RE-ASSESSMENT OF ECONOMIC AND FINANCIAL ANALYSIS

FINANCIAL ANALYSIS AND EVALUATION OF SUBPROJECTS

A. ASSUMPTIONS

1. The Renewable Energy Development Sector Investment Program (REDSIP) identified eight subprojects which were analyzed in accordance with ADB guidelines.1 The Projects were identified in November 2006 and later on two projects namely Daral Khawar and Okara were excluded from initial consideration. Disbursement for six projects started in 2012 and completed in 2019. Out of the remaining six projects construction of four projects is complete, pending formal Commercial Operation tests subject to execution of Power Purchase Agreement. One project namely Deg Out Fall (4.04MW) suffered structural failure during construction therefore commissioning of Chianwali (5.38 MW) was put on hold since the same EPC contractor was engaged for the Chianwali Project as well. The detailed evaluation of design is being conducted to see if the structural failure is attributable to poor design or quality of civil work; in which case, the faults should be rectified. Therefore, for evaluation purposes, only the four completed projects are considered. All financial costs and benefits are expressed in June 2020 prices assuming the commercial operations will commence from FY 2021. For the Financial Internal Rate of Return (FIRR) and the Economic Rate of Return (EIRR) analysis, a 30-year term of the Power Purchase Contract and corresponding tariff control period was considered post completion and actual construction period ranging from 9 to 10 years. However, these are in-consistent with the grace period of 5-year as defined in relevant loan agreements and construction period of 30 months as per tariff petition approved by Regulator. The residual capital asset value was estimated using a 2% depreciation rate over the assets' economic lives of 50 years.

2. The exchange rate at the time of disbursement is used for purposes of the analysis. Incremental financial benefits were limited to sales of electricity generated from the four subprojects2 to the Central Power Purchasing Agency (Guarantee) Limited, acting as the Market Operator for and on behalf of National Transmission and Dispatch Company (NTDC) and Distribution Companies (DISCOs). The operation and maintenance costs, insurance expense and debt servicing cost are in line with the tariff approved by National Power Regulatory Authority (NEPRA). The plant energy usage at 1% of gross generation and respective plant factors for each project are modeled.3 Under federal and provincial government policies, owners of small hydropower projects need not pay income or turnover tax. The tariff is determined considering projects as Build-Own-Operate-Transfer (BOOT) basis; however, the projects are owned by provincial bodies therefore residual value is considered at end of tariff control period of 30 years.

B. TARIFF METHODOLOGY

3. NEPRA policy requires cost recovery as the basis for off-take tariff determination and automatic tariff adjustment to account for fuel price, inflation, and exchange rate variation is available. NEPRA has already determined the tariff of five subprojects including one yet to start commercial operations. Table 1 summarizes the reference tariff of four sub projects:

Table 1- Reference Tariff (PKR/kWh)4

Description Marala HPP PakPattan

HPP Ranolia HPP

Machai Canal HPP

Chianwali HPP

Year 1 to 20 9.1177 7.6541 4.2775 5.8301 11.4584

Year 21 to 305 5.8358 4.8815 2.6981 3.6623 7.3060

Levelized tariff 8.7997 7.3855 4.1246 5.6200 11.0561

4. The retail tariffs currently range from PKR4.0/kWh (first 50 kWh for residential users) to PKR 19.54/kWh (commercial users), resulting in an average retail tariff of about PKR15.54/kWh6. The significant increase in tariffs is due to country’s heavy dependence on thermal power generation (based in large part, on imported fuel). In addition,

1 ADB Financial Due Diligence a methodology Note 2009. 2 Generation connected to the grid at 132 kV and higher is sold to NTDC and lower voltages are sold to the local distribution company. 3 A non-unity availability factor allows for unscheduled plant outages. 4The Reference tariff as approved by NEPRA dated 12 Feb 2015 for Marala HPP, 4 Feb 2015 for Pak Pattan HPP, 2 Aug 2016 for Chianwali HPP, 29 April 2015 for Ranolia HPP and 14 March 2014 for Machai Canal HPP. 5 Tariff control period is 30 years, considering BOOT project, whereas project economic life is 50 years. 6 DISCOs consumer Tariff dated 26 Nov 2019 for FY 2019-20

38 Appendix 8

there exists a step-down Tariff structure whereby after completion of debt servicing period, the Independent Power Producer’s Tariffs fall significantly. In essence, the tariff structure is “front loaded”. The country has recently adopted the long-term strategy to enhance use of less-costly resources via increasing the share of hydro, coal, and alternative energy in the overall energy mix. The Indicative Generation Capacity Expansion Plan (2047) prepared by the NTDC and submitted to NEPRA; envisages that share of hydro power in overall energy mix will increase to 42% with a minimal reliance on imported fuel. This is even more evident because current retail as well as generation tariff levels are intensely exposed to upward pressure due to rising fuel costs. The hydropower generation tariffs of subprojects are the least-cost option available and the financial sustainability of implementing agencies (IAS) with the approved tariffs are found to be satisfactory.

C. WEIGHTED AVERAGE COST OF CAPITAL

5. The weighted average cost of capital (WACC) for the four subprojects is computed in real terms. The financing sources consist of ADB lending from the ordinary capital resources facility as per actual disbursement of total project costs, and the balance though government contributions in the form of equity, i.e. PSDP allocation through budgetary support. For ADB’s LIBOR-based loan, the applicable fixed SWAP rate of 0.962% plus provision of 0.20% as ADB’s spread and being sovereign loan additional provision of 50 basis points spread is applied7. Provincial government entities such as PEDO and PPDB will earn benchmark 17% IRR over equity investment. This is comparable and in-line with the most recently tendered 20-year State Bank of Pakistan bond of 10.51% (24 June 2020)8 as risk free rate plus rate of 6.62% of Cash Development Loan9 by Federal Government to Provincial Government dated 2 December 2019 as cost of equity. This is considered sufficient margin for these relatively low-risk small hydropower projects. On the basis of these assumptions, combined WACC is estimated at 3.67% as shown in Table 2

Table 2 Weighted Average Cost of Capital (WACC) Combined

ADB PPDB +PEDO

Description OCR Loan Equity Total

A Weighting 63.1% 36.9% 100%

B Nominal cost10 1.66% 17.13%

C Tax rate 0.00% 0.00%

D Tax adjusted nominal cost (B x [1 - C]) 1.66% 17.13%

E Inflation rate11 1.50% 6.80%

F Real cost ([1 + D] / [1 + E] - 1) 0.16% 9.67%

G Weighted Cost (F x A) 0.10% 3.57% 3.67%

WACC (Real) 3.67%

D. FINANCIAL INTERNAL RATE OF RETURN (FIRR)

6. Incremental revenue from the subprojects should be sufficient to cover debt servicing, depreciation, operations and maintenance (including Insurances) and return on equity. Incremental benefit and cost for each subproject was computed based on approved tariff and is aggregated to provide overall project Financial Internal Rate of Return (F-IRR). Using respective wholesale tariffs for the projects, the FIRR rate is favorable with the value of WACC at 3.67% rendering financial viability for four projects reaching completion under the investment facility. However, the FIRR is unfavorable with the investment cost of two projects yet to complete and start generation. The FIRR has drastically reduced as compared to initial evaluation due to construction period of 9 year as against initial estimate of 3 years. The operational efficiency, and potential clean development mechanism credit revenue while minimizing adverse

7 ADB indicative lending rates for LIBOR based loan facility as of 29th June 2020 8 Pakistan Investment Bond (PIB) rate for 20-year maturity is 10.51% as per latest auction held on 24 June 2020 (same is used as Risk Free Rate). http://www.sbp.org.pk/ecodata/Pakinvestbonds.pdf. 9 Rate of Cash development loan by Federal Government to Provincial government is 6.62% (i.e. Cost of equity borrowing) http://www.finance.gov.pk/circulars/circular_02122019.pdf 10 ADB Indicative lending rates is LIBOR-based loan products, the applicable year fixed swap rate, plus a maturity premium of 0.20% and adding 0.5% for Sovereign Loan. https://www.adb.org/sites/default/files/page/227681/adb-indicative-rates-29June2020.pdf 11 Inflation rates for FY 2020 as published by Economics and Research Department (ERD) of ADB (ADOS 2020-INFLATION JUNE 2020) https://www.adb.org/what-we-do/data/economic-data

Appendix 8 39

environment impact from greenhouse gas emissions were not incorporated (as additional revenue sources) however these will further increase the FIRR. The calculated FIRRs are summarized in Table 3

Table 3-Project Returns Base Case

Marala Pakpattan Punjab

(Combined)

Ranolia Machai KPK

(Combined)

All Subprojects Combined

NPV (actual) 1,179 452 1,630 342 (185) 164 1,577

FIRR (actual) 5.8% 5.9% 5.8% 4.21% 2.67% 3.87% 4.66% FIRR (initial) 7.4% 8.2% 8.1% 8.5% 8.5% 8.8% 8.45%

E. RISK ASSESSMENT AND SENSITIVITY ANALYSIS

7. Legal and regulatory risk, while considered low to moderate, arises mainly as a consequence of the number of public entities that could have a stake in implementing and operating the subprojects due to complications in procedural requirements from various ministries.

8. A holistic approach will be adopted to address fiduciary risks mainly arising from lack of a coherent institutional framework at the federal, provincial, and company levels covering legal governance, organization, financial (budgets and business systems), and commercial aspects of business. ADB assisted in developing an accounting and financial management manual for Pakistan (2006), to mitigate fiduciary risks at subproject level

9. The Projects being considered for the FIRR computation are now entering the operations phase and are accordingly prone to various operational risks prevalent in the current Market. Analysis of these risks with appropriate Mitigations, is provided in Table 4 below:

Table 4-Project Operational Risks

Risk Description

Project Impact Risk Area

Symptoms Triggers Risk

Response Response Strategy

Seismic Risks

Non-availability of Power Plant due to geotechnical changes which can mandate change in design and implementation. Negative Cost overruns will have to be funded and will result in reduced FIRR

Operation Risk

This risk relates to the exposure faced by all the Hydropower Projects as the sites are found to be exposed to extreme seismic conditions and incorporation of seismic conditions is not appropriately done by the designer.

Traces of seismic activity in the region

Transfer (i) Continued reassessment of the seismic risk so as to ensure preparedness in case of such threat.

(ii) Ensuring that adequate coverage to loss is available and if necessary engaging additional insurance cover for protection against gaps in the prevailing provisions related to such events in the security documents.

40 Appendix 8

Changes in Governing Laws and Policies in

policy

Commercial Risk. The incentives available to the Project will change which would affect Project Implementation approval process

Strategy Risk

Risk of shift in government policy that may have an adverse impact on the interests of the Project

Changing Political environment.

Changing Demand Supply scenario in Power market.

Privatization of power off taker

Mitigation Where due to a policy shift the Project is likely to suffer a loss, the Project Company's mitigation steps would be through seeking legal remedy, including the courts, and seek restraining orders on the basis of legitimate expectations, promissory estoppel.

Internal Security Risk

Delays in Project Implementation. Commercial Risk associated with completion delays and legal recourse available under Project Agreements.

Operation Risk

It is a risk generated from internal security situation of country. Such as terrorist activities

Law and order degradation in Project area

Transfer Company’s own insurance cover should provide extra cover and fill the gap. Insurance agreements should be carefully drafted to ensure that cover is extended as much as possible.

Delayed Payments

Commercial Risk associated with Management of receivables which erodes Project FIRR due to the Impact of timing difference in payments and related FX devaluation

Operation Risk

It is risk of delay in payment from power purchaser for the power procured. The prevailing issue of circular debt in Pakistan continues to pose a serious risk to the bankability of power projects.

Circular debt, Management capability and liquidity situation of power off taker

Mitigation (i) Ensuring adequacy of the coverage provided through the Project Agreements

(ii) Retaining sufficient working capital to cater payment delays and having backup financing arrangements

(iii) Reserve fund created, under which adequate funds will be available for debt servicing.

Appendix 8 41

Unfavorable COD Stage

Tariff determination

Negative costs overrun to be financed through Standby Equity and Debt; which are not recovered through Tariff

Financial Risk

It is the risk of tariff determination by NEPRA that is lower than claimed by the project sponsor

Demand supply scenario. Regulator's unwillingness to acknowledge all costs

Mitigation (i) If there is any increase in the cost during construction period, project company should notify NEPRA through tariff application before COD.

(ii) Financial fee and charges, insurance during construction, insurance during operation and financing terms should be kept within the threshold limits of NEPRA.

10. Financial risks identified at subproject level included (i) increase in prices of cement, steel, fuel, and other raw materials; (ii) delay in project implementation; (iii) delay in power purchase agreement (PPA) negotiations and tariff determination; and (iv) failure to mobilize the necessary counterpart funds. These risks were considered to be manageable, however delay in PPA execution has negative impact on financial viability of the projects. For instance, Punjab projects have been exporting to power purchaser and are not receiving payments against debt servicing. Counterpart funding was in line with actual disbursement and was provided from the annual development programs of the provincial governments.

11. Since the projects are completed and have started supply to grid therefore sensitivity analysis was undertaken for (i) the delay in execution of PPA i.e. till execution of PPA, projects will not get debt servicing component of the tariff and payment will be made out of own sources, an IRR impact of 4.45% (ii) 10% increase in Operation cost over and above allowed tariff, an FIRR impact of 4.24% and (iii) combination of the two will have an FIRR impact of 4.05%. The estimated FIRR at evaluation stage was 6.8%. Though FIRR has reduced after completion of the project however It can be concluded that projects are robust and can adequately absorb the operational risks. Table 5 summarizes the impact of Sensitivity against each Project.

V. TABLE-5 PUNJAB AND KPK SENSITIVITY ANALYSIS

All NPVs in PKR Million

Scenarios Marala Pakpattan Punjab

(Combined) Ranolia Machai

KPK (Combined)

Combined

1-year delay in signing of PPA

NPV 952 368 1,320 123 (235) (103) 1,249

FIRR 5.4% 5.4% 5.4% 3.86% 2.43% 3.55% 4.45%

10% increase in Cost

NPV 907 352 1,259 87 (242) (146) 899

FIRR 5.3% 5.4% 5.3% 3.81% 2.37% 3.50% 4.24%

Combination of above

NPV 794 310 1,104 (22) (267) (280) 612 FIRR 5.1% 5.2% 5.1% 3.64% 2.25% 3.34% 4.05%

42 Appendix 8

VI. TABLE 5: COMBINED PROJECT FIRR

4 OPERATIONAL HPPs COMBINED 6 HPPs COMBINED1

Amount in PKR Million Amount in PKR Million

Period Year Capital

Expenditure Total

Revenue Operation

Cost Net

Benefits Period Year

Capital Expenditure

Total Revenue

Operation Cost

Net Benefits

-9 2011 (436.25) (436.25) -9 2011 (488.19) (488.19)

-8 2012 (1,295.85) (1,295.85) -8 2012 (1,354.96) (1,354.96)

-7 2013 (804.76) (804.76) -7 2013 (1,247.76) (1,247.76)

-6 2014 (2,207.38) (2,207.38) -6 2014 (2,341.45) (2,341.45)

-5 2015 (1,280.56) 0.00 0.00 (1,280.56) -5 2015 (1,961.04) 0.00 0.00 (1,961.04)

-4 2016 (1,361.38) 13.91 0.00 (1,347.48) -4 2016 (2,887.20) 13.91 0.00 (2,873.29)

-3 2017 (2,019.44) 48.68 0.00 (1,970.76) -3 2017 (2,587.15) 48.68 0.00 (2,538.47)

-2 2018 (780.14) 148.75 0.00 (631.39) -2 2018 (880.62) 148.75 0.00 (731.86)

-1 2019 (1,162.68) 128.76 0.00 (1,033.92) -1 2019 (1,297.63) 128.76 0.00 (1,168.87)

1 2020 (7.09) 1,134.83 (257.62) 870.12 1 2020 (171.57) 1,134.83 (302.04) 661.22

2 2021 1,134.83 (302.04) 832.79 2 2021 1,134.83 (302.04) 832.79

3 2022 1,134.83 (302.04) 832.79 3 2022 1,134.83 (302.04) 832.79

4 2023 1,134.83 (302.04) 832.79 4 2023 1,134.83 (302.04) 832.79

5 2024 1,134.83 (302.04) 832.79 5 2024 1,134.83 (302.04) 832.79

6 2025 1,134.83 (302.04) 832.79 6 2025 1,134.83 (302.04) 832.79

7 2026 1,134.83 (302.04) 832.79 7 2026 1,134.83 (302.04) 832.79

8 2027 1,134.83 (302.04) 832.79 8 2027 1,134.83 (302.04) 832.79

9 2028 1,134.83 (302.04) 832.79 9 2028 1,134.83 (302.04) 832.79

10 2029 1,134.83 (302.04) 832.79 10 2029 1,134.83 (302.04) 832.79

11 2030 1,134.83 (302.04) 832.79 11 2030 1,134.83 (302.04) 832.79

12 2031 1,134.83 (302.04) 832.79 12 2031 1,134.83 (302.04) 832.79

1 Only Investment component is assessed. The benefits from generation is not included.

Appendix 8 43

13 2032 1,134.83 (302.04) 832.79 13 2032 1,134.83 (302.04) 832.79

14 2033 1,134.83 (302.04) 832.79 14 2033 1,134.83 (302.04) 832.79

15 2034 1,134.83 (302.04) 832.79 15 2034 1,134.83 (302.04) 832.79

16 2035 1,134.83 (302.04) 832.79 16 2035 1,134.83 (302.04) 832.79

17 2036 1,134.83 (302.04) 832.79 17 2036 1,134.83 (302.04) 832.79

18 2037 1,134.83 (302.04) 832.79 18 2037 1,134.83 (302.04) 832.79

19 2038 1,134.83 (302.04) 832.79 19 2038 1,134.83 (302.04) 832.79

20 2039 1,134.83 (302.04) 832.79 20 2039 1,134.83 (302.04) 832.79

21 2040 720.92 (302.04) 418.89 21 2040 720.92 (302.04) 418.89

22 2041 720.92 (302.04) 418.89 22 2041 720.92 (302.04) 418.89

23 2042 720.92 (302.04) 418.89 23 2042 720.92 (302.04) 418.89

24 2043 720.92 (302.04) 418.89 24 2043 720.92 (302.04) 418.89

25 2044 720.92 (302.04) 418.89 25 2044 720.92 (302.04) 418.89

26 2045 720.92 (302.04) 418.89 26 2045 720.92 (302.04) 418.89

27 2046 720.92 (302.04) 418.89 27 2046 720.92 (302.04) 418.89

28 2047 720.92 (302.04) 418.89 28 2047 720.92 (302.04) 418.89

29 2048 720.92 (302.04) 418.89 29 2048 720.92 (302.04) 418.89

30 2049 4,421.81 720.92 (302.04) 4,840.70 30 2049 5,966.62 720.92 (302.04) 6,385.51 FIRR 4.66% FIRR 3.07% FNPV @WACC (PKR in Million) PKR 1,577 FNPV @WACC (PKR in Million) (PKR 1,220)

( ) = Negative. FIRR = Financial Internal Rate of Return. FNPV = Financial Net Present Value. KPK = Khyber Pakhtunkhwa. PKR = Pak Rupee

44 Appendix 8

ECONOMIC ANALYSIS OF SUBPROJECTS

A. Assumptions 1. All costs and benefits have been expressed at constant June 2020 price levels. The domestic price numeraire was used; tradable inputs were valued at their border price equivalent values and were converted to domestic equivalents using an estimated Shadow Exchange Rate Factor (SERF) of 1.21 as summarized in Table-1. For Economic Internal Rate of Return computation, “shadow pricing” methodology has been used to remove distortions caused by taxes / subsidies as well as shortages or surplus of labor and materials. The Shadow Wage Rage Factor (SWRF) of 0.73 has been used to drive the economic price of unskilled labor. The economic internal rate of return (EIRR) was calculated on the Consumer Surplus / “Willingness to Pay (WTP)” basis and discounting the incremental annual Cashflows over 30 years. An oil price of $40 per barrel (bbl) has been used as a base case for economic internal rate of return (EIRR) calculations.

Table-1 Shadow Exchange Rate Factor1 Shadow Exchange Rate

Factor

2014 2015 2016 2017 2018 2019 2020* Average

Total Imports M 4,630,521 4,644,152 4,658,749 5,479,721 6,694,897 7,443,253 7,246,032 5,828,189

Total Exports X 2,583,463 2,397,513 2,166,846 2,138,186 2,555,043 3,128,230 3,633,613 2,657,556

Import Duties Tm(1) 240,997 306,140 406,180 496,018 608,325 685,397 632,133 482,170

Sales Tax on

Import Tm(2) 1,002,110 1,088,823 1,323,685 1,323,261 1,491,310 1,464,887 1,656,432 1,335,787

Subsidies on

Imports Sm 305,748 241,593 207,161 153,717 114,194 195,345 226,049 206,258

Export Duties Tx 139,984 163,969 190,581 198,570 205,877 233,591 242,357 196,418

SERF 1.21

B. Calculation of Willingness to Pay (WTP) 2. Despite introduction of new generation capacities, Pakistan continues to suffer from power shortages. The project is expected to provide incremental economic benefits through generation capacity enhancement and efficiency improvement. With this premise, it may be noted that the subprojects, comprising of construction of hydroelectric power stations in the province of Punjab and KPK which produce both incremental and non-incremental outputs. Due to the fact that the primary and secondary transmission grids are peak-constrained, it has been assumed that the bulk of incremental consumption will be in the residential sector. About 15 to 20 years ago, Residential consumers used kerosene lamps for reserve lighting when grid-supplied electricity was unavailable. The economic life-cycle cost of kerosene lamps is approximately Rs. 28.15/kWh. However, majority of people now uses LED, UPS, batteries, generators and solar sets for lighting instead of kerosene lamp. Incremental consumption is expected to accrue partially as a consequence of improved availability releasing suppressed demand and partially as a consequence of improved supply quality. The difference between tariff and alternative energy sources represents consumer surplus. Therefore, the average WTP for different categories of domestic consumers works out as Rs. 16.82 /kWh. 3. In the commercial, industrial, and agricultural sectors, diesel generators are typically employed to provide backup electricity when grid-supplied electricity is unavailable or when the voltage is too low for proper operation of electrical. Electricity in the agriculture sector is primarily used for irrigation pumping, however in Pakistan irrigation area are watered through canals and open small channels and reliance on electricity is minimal. Therefore, no WTP has been calculated for agricultural customers. Thus, diesel generators were assumed to be the next best alternative for commercial customers, at an estimated life-cycle cost of Rs. 26.9 / kWh and Rs. 29 /kWh for Industrial Consumers. The weighted average of willingness to pay comes to Rs. 18.01 / kWh which has been used in our calculation of economic benefits, as summarized in Table-2

1 Pakistan Economic Survey 2019-20, Statistical Appendix

Appendix 8 45

Table-2 Weighted Average of Willingness to Pay

Consumer Categories Willingness to Pay

(WTP)-Rs/kWh

No of Consumers2 Weighted Average

Residential 16.82 9,703,254 163,208,732

Commercial 26.90 1,115,720 30,012,868

Industrial 29.00 151,017 4,379,493

Total 10,969,991 197,601,093

Weighted Average WTP 18.01 /kWh

C. Estimation of Costs and Benefit 4. Economic costs exclude taxes, price contingencies and financial charges during construction. The Project cost itself includes the capital investment cost and physical contingencies. The main economic benefit of the subprojects is electricity generation to meet electricity demand (incremental output) and to displace more expensive thermal plant (non-incremental output). Incremental output was valued using consumers' estimated willingness to pay (WTP) Non-incremental output was valued using the estimated long-run marginal costs (LRMCs) of peak and off-peak energy. 5. Funding for the project is through ADB’s REDSIP Loan. Financing from the Asian Development Fund will be used for generation capacity enhancement as well as implementation supervisory. Relevant Provincial Government’s contributions will be in the form of equity to be injected into the implementing agency (i.e., PEDO (for KP) and PPDB (for Punjab) based subprojects). D. Economic Internal Rate of Return (EIRR) and Sensitivity Analysis 6. The basis for evaluation is a comparison of benefits and costs between the “with” and “without” subprojects cases. The analysis period is 30 years, including actual development period of 9 to 10 years. The four operational projects have EIRR of 16.39% as against initial estimates of 18.24%. In addition, the subprojects yield a positive NPV thus rendering the Project Economically viable. The 4 sub projects will add 30.06 MW to overall Capacity. Out of 4 projects 3 projects of 13 MW have been connected at 11 kV grid level and one project of 17MW in KPK province is connected at 132kV level. Therefore, the Capacity cost at generation level has been included to calculate the benefits. The benefits in this analysis are conservative as the environmental and avoidance of traditional alternative energy sources have not been quantified. The result of analysis is summarized in Table-2

Table-2 Economic Benefits

Indicators Initial Estimates Actual Results

Projects Punjab KPK Combined Punjab KPK Combined

EIRR 19.4% 17.2% 18.24% 14.39% 17.72% 16.40%

NPV in million PKR 2,165 PKR 1,884 PKR 4,064 PKR 751 PKR 2,726 PKR 3,494

7. The four projects have achieved commercial operation, whereas two projects have yet to achieve commercial operation. The Economic IRR computation and the corresponding sensitivity analysis is based on Cashflows from the commissioned Projects and excludes Projects currently in construction Phase. Sensitivity analysis has been conducted for three scenarios (i) benefits reduced by 10%. (ii) Operation cost increase by 10% and (iii) combination of two i.e. benefits reduces and cost increases. No case found less than 11% EIRR in sensitivity analysis. The estimated EIRR is greater than 10%, which is the cutoff rate. The analysis in Table-3 showed that projects are independently and collectively resilient to negative changes in key assumptions and variables.

Table-3 Sensitivity Analysis

Sensitivity Parameter Punjab HPP KPK HPP Combined HPP

Benefits Reduced by 10% 11.69% PKR 637 14.65% PKR 2,504

13.43% PKR 3,143

2 Power System Statistics 44th Edition (Consumers of relevant DISCOS only i.e. PESCO, FESCO and GEPCO)

46 Appendix 8

Cost Increased by 10% 12.77% PKR 1,075

15.68% PKR 3,191

14.49% PKR 4,267

Combination of above two 11.53% PKR 571 14.56% PKR 2,450

13.31% PKR 3,022

Appendix 8 47

Economic Viability on Consumer Surplus / Willingness to Pay Basis Economic Viability on Consumer Surplus / Willingness to Pay Basis

Cost Estimates for Operational HPPs Cost Estimates- Overall Investment

SCF 0.90 Net

Capacity MW

29.69 Net

Generation (kWh)

186,461,647

SCF 90.00% Net

Capacity MW

29.69 Net

Generation (kWh)

186,461,647

Energy Benefits Energy Benefits

GWh/a 186.46 Gross

(Rs /kWh)

17.86 Net (Rs /kWh)

16.08 GWh/a 186.46 Gross

(Rs /kWh)

17.86 Net (Rs /kWh)

16.08

Aux Consumption (%) 1.00% Station Use (kW) 0.297 Aux Consumption (%) 1.00% Station Use (kW) 0.297

Economic Viability on Consumer Surplus Basis- Combined 4 HPPs Economic Viability on Consumer Surplus Basis- Combined 6 HPPs

Year Capital

Cost O&M Cost

Total Cost Benefits Net

Benefits Year

Capital Cost

O&M Cost

Total Cost Benefits Net

Benefits

2011 (419.31) (419.31) (419.31) 2011 (488.19) (488.19) (488.19)

2012 (1,278.23) (1,278.23) (1,278.23) 2012 (1,354.96) (1,354.96) (1,354.96)

2013 (784.18) (784.18) (784.18) 2013 (1,247.76) (1,247.76) (1,247.76)

2014 (2,178.57) (2,178.57) (2,178.57) 2014 (2,341.45) (2,341.45) (2,341.45)

2015 (1,242.21) (1,242.21) (1,242.21) 2015 (1,961.04) (1,961.04) (1,961.04)

2016 (1,262.51) (1,262.51) 45.79 (1,216.72) 2016 (2,887.20) (2,887.20) 45.79 (2,841.41

)

2017 (1,984.94) (1,984.94) 159.56 (1,825.38) 2017 (2,587.15) (2,587.15) 159.56 (2,427.59

) 2018 (755.09) (755.09) 433.15 (321.94) 2018 (880.62) (880.62) 433.15 (447.47) 2019 (1,144.13) (1,144.13) 372.05 (772.07) 2019 (1,297.63) (1,297.63) 372.05 (925.57) 2020 (5.37) (302.04) (307.41) 2,997.82 2,690.42 2020 (171.57) (302.04) (473.61) 2,996.77 2,523.16 2021 (302.04) (302.04) 2,997.82 2,695.79 2021 (302.04) (302.04) 2,997.82 2,695.79 2022 (302.04) (302.04) 2,997.82 2,695.79 2022 (302.04) (302.04) 2,997.82 2,695.79 2023 (302.04) (302.04) 2,997.82 2,695.79 2023 (302.04) (302.04) 2,997.82 2,695.79 2024 (302.04) (302.04) 2,997.82 2,695.79 2024 (302.04) (302.04) 2,997.82 2,695.79 2025 (302.04) (302.04) 2,997.82 2,695.79 2025 (302.04) (302.04) 2,997.82 2,695.79 2026 (302.04) (302.04) 2,997.82 2,695.79 2026 (302.04) (302.04) 2,997.82 2,695.79 2027 (302.04) (302.04) 2,997.82 2,695.79 2027 (302.04) (302.04) 2,997.82 2,695.79 2028 (302.04) (302.04) 2,997.82 2,695.79 2028 (302.04) (302.04) 2,997.82 2,695.79 2029 (302.04) (302.04) 2,997.82 2,695.79 2029 (302.04) (302.04) 2,997.82 2,695.79 2030 (302.04) (302.04) 2,997.82 2,695.79 2030 (302.04) (302.04) 2,997.82 2,695.79 2031 (302.04) (302.04) 2,997.82 2,695.79 2031 (302.04) (302.04) 2,997.82 2,695.79 2032 (302.04) (302.04) 2,997.82 2,695.79 2032 (302.04) (302.04) 2,997.82 2,695.79

48 Appendix 8

2033 (302.04) (302.04) 2,997.82 2,695.79 2033 (302.04) (302.04) 2,997.82 2,695.79 2034 (302.04) (302.04) 2,997.82 2,695.79 2034 (302.04) (302.04) 2,997.82 2,695.79 2035 (302.04) (302.04) 2,997.82 2,695.79 2035 (302.04) (302.04) 2,997.82 2,695.79 2036 (302.04) (302.04) 2,997.82 2,695.79 2036 (302.04) (302.04) 2,997.82 2,695.79 2037 (302.04) (302.04) 2,997.82 2,695.79 2037 (302.04) (302.04) 2,997.82 2,695.79 2038 (302.04) (302.04) 2,997.82 2,695.79 2038 (302.04) (302.04) 2,997.82 2,695.79 2039 (302.04) (302.04) 2,997.82 2,695.79 2039 (302.04) (302.04) 2,997.82 2,695.79 2040 (302.04) (302.04) 2,997.82 2,695.79 2040 (302.04) (302.04) 2,997.82 2,695.79 2041 (302.04) (302.04) 2,997.82 2,695.79 2041 (302.04) (302.04) 2,997.82 2,695.79 2042 (302.04) (302.04) 2,997.82 2,695.79 2042 (302.04) (302.04) 2,997.82 2,695.79 2043 (302.04) (302.04) 2,997.82 2,695.79 2043 (302.04) (302.04) 2,997.82 2,695.79 2044 (302.04) (302.04) 2,997.82 2,695.79 2044 (302.04) (302.04) 2,997.82 2,695.79 2045 (302.04) (302.04) 2,997.82 2,695.79 2045 (302.04) (302.04) 2,997.82 2,695.79 2046 (302.04) (302.04) 2,997.82 2,695.79 2046 (302.04) (302.04) 2,997.82 2,695.79 2047 (302.04) (302.04) 2,997.82 2,695.79 2047 (302.04) (302.04) 2,997.82 2,695.79 2048 (302.04) (302.04) 2,997.82 2,695.79 2048 (302.04) (302.04) 2,997.82 2,695.79 2049 (302.04) (302.04) 2,997.82 2,695.79 2049 (302.04) (302.04) 2,997.82 2,695.79

NPV @ 10% PKR

4,388.31 NPV @ 10%

PKR 1,942.14

IRR 14.59% IRR 11.69%

Appendix 9 49

LIST OF SUBPROJECTS IMPLEMENTED UNDER THE PROGRAM

Table A9.1: Summary of Program Achievements

GWH = gigawatt-hours, MW = megawatt, Nos = numbers

Description Addition Province of Punjab KPK

(Formerly NWFP and SHYDO) Total

Tranche 1

Capacity (MW) 10.46 20.32 30.78

Incremental Energy (GWH) 64.25 116.28 180.53

Feasibility Studies (Nos) 5 3 8

Subprojects 4 2 6

Program

Capacity (MW) 10.46 20.32 30.78

Incremental Energy (GWH) 64.25 116.28 180.53

Feasibility Studies (Nos) 5 3 8

Subprojects 4 2 6

50 Appendix 9

Table A9.2: Tranche 1 Subprojects

Project No. Project Description

Scope of Work

Capacity (MW)

Addition in System

(MW)

Addition in System

(GWh Annually)

Completion Date

Delay (No. of Days from Targeted)

A. Province of Punjab 1.

Marala HPP Constructio

n 7.644 7.644 43.37 December 2017 1,122

2. Pakpattan HPP Construction

2.82 2.82 20.88 August 2016 664

3. Chianwali HPP Construction

5.38 0 0 December 2017 1,594

4. Deg Outfall HPP Construction

4.04 0 0 Not Yet N/A

Subtotal (A) 10.464 64.25 B. Province of KPK (formerly NWFP

and SHYDO)

5. Ranolia HPP Construction

17.5 17.5 100.5 September 2015 407

6. Machai HPP Construction

2.82 2.82 15.78 November 2017 1,361

Subtotal (B) 20.32 116.28 GRAND TOTAL (A+B) 30.784 180.53

Note: (i) The original scope at Chianwali HPP was completed in December 2017 (delay of 1,594 days); however, the scope had to be expanded to include a feeder channel for energizing, (ii) Okara HPP was removed from the program’s scope because of insufficient loan funds, and (iii) Deg Outfall HPP (in May 2017 the physical progress was 75% with targeted completion on 31 December 2017) was not energized because of damage to the spillway. All the main contract activities and additional works at six HPPs were completed according to specifications and met the requirements for operation.

Appendix 10 51

STATUS OF COMPLIANCE WITH FINANCIAL COVENANTS

Table A10 Status of APFS for the Tranche 1/Program

EA Required Submitted Deferreda Pending

Punjab 22 14 8 0 KPK 22 19 3 0 Total 44 33 11 0

EA = executing agency a Deferred because of nil expenditure in the respective fiscal year