The World Bank. Document of. Public Disclosure Authorized FOR OFFICIAL USE ONLY. Report No Public Disclosure Authorized

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1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No Public Disclosure Authorized PROJECT PERFORMANCE AUDIT REPORT PAKISTAN Public Disclosure Authorized THIRD WAPDA POWER PROJECT (CREDIT 968-PAK AND SAC 39-PAK) JUNE 30, 1989 Public Disclosure Authorized Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of 1 not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Name of Currency - Rupec (Re) one Rupee Paisa Appraisal Year Exchange Rate: US$1 - Re Completion Year - Exchange Rate: US$1 - Re Current Year Exchange Rate: US$1 - Re Average Exchange Rate during Project Implementation = US$1 - Rs UNITS AND MEASURES kw = Kilowatts 14W = Megawatt - 1,000 kilowatts kwh Kilowatt Hour GWh = Gigawatt Hour = 1 million kwh Km = 1,000 meters 0.62 miles kva = Kilovolt Ampere MVA = Megavolt Ampere = 1,000 Kilovolt Ampere MVAR = Megavolt Ampere Reactive ABBREVIATIONS AND ACRONYMS ADB = Asian Development Bank CIDA Canadian International Development Agency EDF = Electricit4 de France EEC = European Economic Community EHV = Extra High Voltage GOP = Islamic Republic of Pakistan IDA = International Development Association IERR = Internal Economic Rate of Return KESC = Karachi Electric Supply Corporation KfW Kreditanstalt fur Wiederaufbau MFEA Ministry of Finance and Economic Affairs OED Operations Evaluation Department PCR - Project Completion Report PPAM = Project Performance Audit Memorandum PPAR = Project Performance Audit Report SAC = Special Action Credit STG = Secondary Transmission Grid UK UniteL Kingdom USAID = United States Agency fot International Development WAPDA = Water and Power Development Authority of Pakistan

3 THE* WORLD SANK F0 UK Ony Wahnglon. DC U.S A. Oir iii Due1wte-Ceewal oftate* IWeA1146 June 30, 1989 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Pakistan Third WAPDA Power Project (Credit 968-PAK and SAC 39-PAK) Attached, for information, is a copy of a report entitled 'Project Performance Audit Report on Pakistan - Third WAPDA Power Project (Credit 968- PAK and SAC 39-PAK)" prepared by the Operations Evaluation Department. Attachment This docume.t has a restricted distribution and may be used by recipients only in the performance

4 FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT PAKISTAN THIRD WAPDA POWER PROJECT (CREDIT 968-PAK and SAC 39-PAK) TABLE OF CONTENTS Page No. Preface... i Basic Data Sheet... ii Evaluation Summary... v PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND 1... II. THE PROJECT III. IMPLEMENTATION EXPERIENCE... 2 A. Delays B. Quality of Civil Works... 3 C. Revisions of Project Scope... 3 IV. PROJECT OUTCOME A. Costs... 4 B. Financing 5... C. Project Achievements... 6 D. Co-financing Experience... 6 E. Environmental Considerations... 7 F. Financial Performance... 7 G. Performance of Consultants... 7 H. WAPDA's Performance... 8 I. Performance of the Bank Group... 8 V. CONCLUSIONS 8... PROJECT COMPLETION REPORT I. INTRODUCTION II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL III. PROJECT IMPLEMENTATION IV. OPERATING PERFORMANCE V. FINANCIAL PERFORMANCE VI. INSTITUTIONAL DEVELOPMENT VII. ECONOMIC RE-EVALUATION VIII. PERFORMANCE OF THE BORROWER AND THE ASSOCIATION IX. CONCLUSIONS This document has a restricted distribution and may be used by recipients only in the performance

5 Table of Contents (Cont'd) PCR ANNEXES Pale No. 1. Report of Compliance with Major Loan Covenants Forecast Growth of Installed Generating Capacity Original Program of Transmission and Substation Rehabilitation and Expansion Estimated and Actual Project Costs Details of Grid Stations and Transmissions Lines Completed Schedule of Contracts and Deliveries of Main Equipment Items Estimated and Actual Schedules of Cumulative Disbursements Income Statement - SAR vs. Actual Sources and Applications of Funds - SAR vs. Actual Balance Sheets - SAR vs. Actual Internal Economic Rate of Return... 61

6 1 PROJECT PERFORMANCE AUDIT REPORT PAKISTAN THIRD WAPDA POWER PROJECT (CREDIT 968-PAX and SAC 39-PAX) PREFACE 1. This report presents the results of a performance audit of the Third WAPDA Power Project for which the Bank Group provided Credit 968-PAK for US$45 million. The Credit was approved on December 20, 1979, signed on January 10, 1980, and became effective July 30, This Credit, the seventh lending operation to the power sector of Pakistan, was made to the Islamic Republic of Pakistai, the implementation being the re.ponsibility of Water and Power Development Authority of Pakistan (WAPDA), who would be the ultimate beneficiary. The Bank Group was also responsible for the disbursement of funds from the Special Action Credit (SAC) 39-PAK of US$35 million by the European Economic Community (EE.;, which was signed on January 10, The appraisal indicated that the project would be completed by December 31, However, there was considerable delay in implementing the early stages. Therefore, by the target date, less than 402 of the project facilities were in operation. However, various components were completed and placed ir service in stages, and the project was virtually complete by December 31, It was necessary to extend the closing date of the Credit from December 31, 1984, to December 31, 1985, and the last payment was made on August 21, 1986, at which time the credit was fully disbursed. The SAC Credit was formally closed on September 30, 1984 and the Credit was fully disbursed on November 28, The Project Performance Audit Report (PPAR) consists of a Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED), and a Project Completion Report (PCR) dated June 1988, prepared by the Energy Division, Country Department I, of the Europe, Middle East and North Africa Regional Office and the Resident Mission, Pakistan. The audit uses Bank reports, records, and files related to the project, and the results of an OED mission to Pakistan in November The audit finds that, in general, the PCR describes the project experience in sufficient detail to support the lessons and conclusions which emerged, and the PPAM summarizes pertinent information contained in the PCR. However, it adds discussion, inter alia, about the construction schedule, as the audit confirms the PCR's finding that the timetable considered at alpraisal was overly optimistic. 5. Following standard OED procedures, copies of the draft PPAR were sent to the Government and the Co-financier. No comments were, however, received.

7 ii PROJECT PERFORMANCE AUDIT REPORT PAKISTAN THIRD WAPDA POWER PROJECT (CREDIT 968-PAK and SAC-39-PAK) BASIC DATA SHEET KEY PROJECT DATA ORIGINAL APPRAISAL 1TEM PLAN PLAN ACTUAL (02/78) (11/79) TOTAL PROJECT COST (US$ millions) a/ b/ Underrun (US$ millions) 93.2 Underruns (Z) 18 CREDIT AMOUNT SAC AMOUNT Date of Completion of Physical Components 12/31/83 12/31/83 12/,'-'86 Portion Completed 100% 1001 S z Internal Economic Rate of Return Financial Performance Good Good Mixed Institutional Performance Good Good Mixed ESTIMATED AND ACTUAL CUMULATIVE CREDIT DISBURSEMENTS (USS mil ion) Association FY IDA 968-PAK Amended Appraisal estimate Actual Actual as a X of estimate SAC 89-PAK Amended Appraisal estimete Actual c/ Actual as a % of estimate aj Exchange rate Rs 9.90 = 1 US$. k Average exchange rate during project implementation: Re 18.70/USS. c) The original US885.0 million credit from the EEC was totally disbursed. The amount shown is the value of the 7 European currencies at the time of disbursement.

8 iii PROJECT DATES Original Appraisal Item Plan Plan Actual (02/78) (11/79) First men,'.oned in file. 4/77 Government application 8/77 Negotiations 4/17/ /17-20/79 Board Approval 6/6/78 12/20/79 Credit agreement date 1/10/80 Effectiveness date 7/30/80 Closing dates: IDA 968-PAK 12/31/84 12/31/85 SAC 39-PAK 12/31/82 9/30/84 staf Dftfr 12Z1 M3f ASAA IM i MA M1 T Pre-Appraisal 3.* 8.2 * Appraisal Negol4isfbons supervision Ot*r Total MISSION DATA No. of No. of Staff Date of Item Month/year Weeks Persons Week Report Project Identification kiret.ppraisal 9-10/ /1/77 Updating Information 6/ /78 Updating appraisal 10-11/ /26/79 Supervision I 5/ /30/80 Supervision II 2/ /27/81 Supervision III 4-5/ /17/82 Supervision IV 12/ /21/83 Supervision V 4/ /7/83 Supervision VI 11/ /4/84 Supervision VII 9/ /3/84 Supervision VIII 2/ /25/85 Supervision IX 10/ /25/86 Supervision X 2/ /29/88 (Completion) TOTAL 44.7

9 iv OTHER PROJECT DATA Borrowers Islamic Republic of Pakistan Beneficiaryt Water and Power Development Authority of Pakistan (VAPDA) Follow-up project: Fourth VAPDA Power Project (Loan 2599-PA) EXCHANGES RATES February July 1981 US$l.n - Re 9.90 July June 1982 US$1.0 - Rs July June 1983 US$1.0 - Re July June 1984 US$1.0 - Rs July June 1985 US$1.0 - Rs July June 1986 US$1.0 - Rs July June 1987 US$1.0 - Re 17.30

10 V PROJECT PERFORMANCE AUDIT REPORT PAKISTAN THIRD VAPDA POWER PROJECT (CREDIT 968-PAK and SAC-39-PAK) EVALUATION SUMMARY Introduction 1. The Third WAPDA Power Project su,)ported by Credit 968-PAK of US$65 million and Special Action Credit 29-PAK of US$35.0 million, approved in December 1979, was the seventh Bank Group operation in Pakistan's power sector. According to its title, it was the third such operation for which Water and Power Authority of Pakistan (WAPDA), the semi-autonomous Government agency responsible inter alia for public electricity supply, was the Beneficiary. The Project and its Objectives 2. The project covered: (i) the implementation of the last four years of WAPDA's Secondary Transmission Program itcluded in Pakistan's Fifth Five- Year Plan covering FYs 1978/79 to 1982/83; and (ii) studies of new dispatching facilities and of the conversion of 220 kv lines to 500 kv (PCR, para. 2.11). 3. The objectives were: (i) to increasv WAPDA's capability to satisfy demand growing at a rate in excess of 102; (ii) to improve the system's flexibility; (iii) to reduce transmission and distribution losses; and (iv) to strengthen WAPDA as an institution, in particular, in reviewing its investment program, improving its financial position, rationalizing electricity tariffs, and reinforcing its accounting system and practices (PCR, para. 2.10). Implementp ion Experience 4. WAPDA completed the physical project components in December 1986, three years later than anticipated at appraisal, mainly because of a slow start, in part related to WAPDA's initial failure to assign sufficient staff to the iiplementation of the project. Further sources of delays were: (i) protracted procedures to appoint consultants: (ii) difficulties in acquiring land and right-of-way; and (iii) insufficient appreciation, at appraisal, of seasonal limitations on construction. 5. Total actual pzoject costs (US$412.7 million or Rupees 5695 million) were 182 lower in US$ ai.d 142 higher in Rupees than estimated. The differences essentially were a conseqtience of the devaluation of the Rupee against the main currencies in wh.ch WAPDA had to pay the imported project components.

11 vi Of the above total cost, IDA provided 112, EG 62, ADS 72, KfW 62, Government 181, and WAPDA 522. Results 6. The project achieved all its main objectives, albeit, in part, later than expected at appraisals (i) It greatly increased capacity and flexibility of WAPDA's secondary transmission system and thus helped the utility increase the segment of the population with access to electricity from 222 in 1977 to 351 in 1988; (11) WAPDA was able to reduce its transmission and distribution losses (technical and non-technical) from 342 of energy sent out in FY79, to 252 in FY87, which still leaves roam for further improvement; and (iii) WAPDA's institutional and financial performance has improved and leaves WAPDA strengthened; in particular, over the past ten years, the utility was able to generate internally, in average, well over 40Z of its investment. Nevertheless, in 1987/88, with a self-financing ratio of 372, it fell slightly short of the covenanted 40Z minimum. Sustainability 7. Sustainability of the benefits from the physical project components seems well assured, as WAPDA has proven reasonably competent in maintaining its system and is further improving its capability, in particular, in the context of the latest Bank Group project. Further, Government has over the past 30 years demonstrated its commitment to the sector's objectives, in particular, to financial viability. This same commitment is crucial for the sustainability of the benefits derived from the institutional progress achieved during project implementation. Findings and Lessons 8. The audit concludes that the project, all in all, was a success. This is, inter alia, reflected in the internal economic return of the project, which the PCR (para. 7.01) estimates at 142, up from 112 at appraisal, mostly because of higher incremental revenues than expected. The success would have been more spectacular had WAPDA been able to complete the project with less delay. 9. A main conclusion, far from new, is, that the Bank Group should assist the executing agency in preparing a detailed implementation schedule that may be tight, but has a reasonable chance to be followed, as it would hav- to assume that, from the many risks that surround such a project, one or the other (though not identifiable ex ante) is nearly bound to materialize. In the same context, it should emphasize the specific measures that the Borrower and/or the Beneficiary should take to provide adequate staffing, financing, and other resources required for timely execution. 10. An important obstacle to starting quickly with project implementation proper has been the protracted finalization of complementary financing. Therefore, the lesson that this experience taught and that the Bank applied in

12 vii the subsequent project was. that it is necessary to have the full financing of the project agreed and available, when project esecution starts (PPAM, para. 25).

13 1 PROJECT PERFORMANCE AUDIT MEMORANDUM PAKISTAN THIRD WAPDA POWER PROJECT (CREDIT 968-PAK and SAC 39-PAK) I. BACKGROUND 1. The Bank Group's involvement in Pakistan's power sector began in 1955 with a loan to the Karachi Electric Supply Corporation (KESC) and continued with another four operations with KESC, approved between 1955 and The corresponding loans and credits assisted the company in developing its electricity generating capacity. The Bank Group also participated in the Indus Basin Development Project with, inter alia, the partial funding of the expenditures for the Tarbela Project (Loan 548-PAK and Credits 581-PAK and 771-PAK). 2. The first Bank Group operation involving WAPDA was Credit 213-PAK in 1970, which provided US$23 million towards the funding of an increase in the utility's substation capacity. It was followed by Loar 1208-PAK of US$50 million in 1975, of which, due to savings in contract costs, only US$35 million were ultimately used to help finance a 500-kV transmission line tying the hydro generating plants in the north with the thermal plants in the center and southern part of the country. The facilities included in these projects are operating satisfactorily. 3. WAPDA estimates Pakistan's hydropower potential at some 10,000 MW, of which. by 1977, 2670 MW were developed. As, at the time, only about 22% of the population had access to eleltricity, there was a large demand for new connections. Moreover, in the 1970s, in the existing system, consumption had increased by about 10% annually. Therefore, demand growth was expected to continue at least at that pace. In order to meet this demand, WAPDA had started an ambitious construction program to increase its generating capacity during the Fifth Five-Year Plan covering Fiscal Years 1978/79 tc 1982/83 by 1740 MW; this implied the installation of units 5 to 8 (700 MW) at the Tarbela hydroplant, units 7 and 8 (200 MW) at the Mangla hydro facility, and units 5 and 6 (80 MW) at the Warsak hydroplant. WAPDA's prcgram also foresaw additions to several thermal plants. 4. Bringing the energy from WAPDA's hydroplants located in the mountainous northern part of the country to the main consumption centers, predominantly situated in the south, requires strong and reliable transmission facilities, elements that, in the second half of the 1970s, were missing in WAPDA's system. Indeed, capacity and flexibility of the utility's transmission and distribution installations were deficient, as illustrated by system losses exceeding 342 of energy sent out from the generating stations.

14 2 5. Against this background, Government and WAPDA requested the Bank Group to provide part of the funds needed to cover the foreign cost to be incurred during the last four years (i.e. FY 1979/80 to FY 1982/83) of WAPDA's Secondary Transmission Program, part of the country's kifth Five-Year Plan. This became the Third WAPDA Power Project, discussed here, and for which IDA provided a US$45 million credit, the European Economic Community (EEC), the Asian Development Bank (ADB), and Kreditanstalt fuer Wiederaufbau (KfW) contributing additional funds. 6. After lending for the project which is the subject of this audit, the Bank Group continued to support WAPDA's development in the power sector under: (i) the Fourth WAPDA Power Project associated with Loan 2499 of US$100 million, approved in 1985, which helps finance transmission and distribution facilities. (ii) the Fifth WAPDA Power Project associated with Loan 2556 of US$100 million, also approved in 1986 and applied to fund the construction of a 500-kV transmission line, (iii) the Sixth WAPDA Power Project associated with Loan 2698, approved in 1986 and partially funding 200 MW of generating capacity at KOT Addu, and (iv) the Power Plant Efficiency Improvement Project in the context of which Loan 2792 of US$70 million, approved in 1987, helps finance the addition to WAPDA's installed capacity (a) of 120 MW through rehabilitation of existing generating plant and (b) of 80 MW through conversion of conibustion turbines to combined cycle optration. II. THE PROJECT 7, The main objective of WAPDA's Secondary Transmission Program under the Fifth Five-Year Plan, and therefore also of the IDA project, was, as the name suggests, to provide WAPDA with ar. adequate secondary transmisqion system including grid stations for the balanced development of WAPDA's capability to meet the expected demand. However, the project also pursued WAPDA's institutional strengthening in order to make the company better prepared for efficiently fulfilling its mandate. In particular, it aimed at improving WAPDA's financial position, rationalizing tariffs, reducing transmission and distribution losses, and improving the accounting system. 8. In accordance with the above objectives, the project included the construction of (i) 2700 miles of 220 kv, 132 kv, and 66 kv transmission lines, (ii) /132 kv and 132/66/11 kv grid stations, and (iii) -torage facilities. Beyond this, the credit financed studies for a load dispacching system and for the conversion of 200 kv lines to 500 kv. III. IMPLEMENTATION EXPERIENCE A. Delays 9. Essentially, WAPDA completed the project at the end of 1986, i.e. three years late. Earlier Bank Group projects had suffered similar delays. Indeed, the first (Credit 213-PAR of 1970) was completed about five years

15 3 later than originally planned because of (i) procurement problems, worsened by the war between Pakistan and India and, later, by the transformation of East Pakistan into Bangladesh; (ii) the 1973 steep increase in oil prices; and (iii) several instances of political unrest. The second project (Loan PAK) was completed fourteen months late as protracted proceduras delayed the appointment of consultants and, in turn, the award of the contracts for the transmission line towers. The third project, audited here, suffered similar delays in its early phase, when engineering design and procuremrnt started at an exceedingly slow pace, in part related to the fact that WAPDA failed to assign sufficient staff to the corresponding tasks. Thus, for many contracts, it issued invitations to bid one year or more later th i initially planned. Other reasons for the delays were: (i) difficulties in land acquisition; (ii) the remoteness of construction sites; (iii) the periodic scarcity of funds; (iv) in some cases, the non-availability of Pakistani vessels for shipping, in accordance with national regulations, of materials and equipment from the country of origin to Pakistan; and (v) the failure to take into account, at appraisal, of the seasonal limitations to which some of the construction planned was submitted. Thus, access to many areas was prohibited during the paddy season. Further, in Beluchistan, concreting during wintertime proved impossible with the means available. Similarly, excavation during the summer season in Sind was difficult because of the high water table. B. Quality of Civil Works 10. The audit confirms the PCR's finding that civil works carried out by local contractors and supervised by WAPDA are generally of poor quality and, in some cases, show signs of deterioration (PCR, para.3.12). Indeed, the OED mission ti Pakistan visited several sites and, while it did not obser;... any outright failure, it noted that, in several instances, the general appearancof structures suggests that tlere could be some concern over the structural integrity of the facilities and their ability to function as planned over their useful life assumed at 35 years. It is difficult to determine ex-post, whether poor workmanship provided by local contractors could have been antiticipated. However, the audit judges that it should have been possible, after an initial phase that had made obvious some of the shortcomings, to take corrective measures, in particular, closer supervision by WAPDA, to make sure that, the grid stations constructed in the later years of the project, would be carried out in accordance with the state of the art. C. Revisions of Project Scope 11. To provide the proper basis for design, WAPDA regularly reviewed the power demand in each area to be supplied, and, taking into account availability of material and equipment, adjusted location and capacity of grid stations and interconnecting lines. Of the 216 grid stations with an installed capacity of about 4800 MVA and the 4340 km of transmission lines originally planned, by the end of 1988, it had completed 205 stations (i.e. 5% less than planned) with an installed capacity of 6451 MVA (i.e 34Z more than foreseen) and 4462 km of transmission lines, which essentially corresponds to what was envisaged at appraisal. The audit found that the adjustments of the scope were reasonable, as, in several load ceaters, demand did not materialize at the pace expected, which called for relocation or postponement of lines and

16 4 substations. In other cases, the adjusted demand projections called for larger facilities at an earlier stage than originally planned. The audit further agrees with WAPDA's decision and IDA's concurrence to change the location of some grid stations because e.g the proximity of structures, some erected during project implementation, made the initial scheme more costly or inappropriate. IV. PROJECT OUTCOME A. Costs 12. The following table sets forth the project costs estimated at appraisal and those actually incurred (PCR, para. 3.02): PROJECT COST (US$ millions) Appraisal Estimate Actual Local Foreign Total Local Foreign Total Transmission line & Grid station Equip /a /b Studies Contingencies Physical Price Total Project Cost I Project Cost (millions of Rupees) /a The following average exchange rates were used to convert the annual local expenditures in Rs to US$: US$1 - Rs 9.9 (1979)(1980)(1981), Rs (1982), Rs (1983), Rs (1984), Rs (1985), Rs (1986), Rs (1987), and Rs (1988). /b The foreign cost differs from that shown in PCR PCR figures are from Borrower and PPAM figures are from the lending agencies. 13. When viewed in US$ terms, WAPDA achieved savings of US$93.2 million (18Z) in total project costs, mostly due to lower local costs than expected, whereas the foreign exchange component was about as estimated. This is mostly related to the devaluation of the Rupee with respect to the main currencies in which WAPDA had to pay the foreign cost. However, advantageous prices

17 5 obtained as a consequence of ICB have contributed to this outcome, which materialized in spite of partly higher quantities of work implemented (in particular installed capacity of substations). For WAPDA the comparison of costs in Rupees is of special relevance. From this point of view, the project showed a 142 cost overrun, which essentially represents the effect of the devaluation seen from the Pakistani side. B. Financing 14. At the time of the initial appraisal, in October 1977, the Bank Group had budgeted a US$30 million operation in Pakistan's power sector. As the project envisaged turned out to require US$60 million in foreign financing, Government was advised to seek additional funding from other sources. ADB, KfW, and the UK expressed interest in co-financing the project (PCR, para. 2.04). During the delay caused by Government's reluctance to fulfill financial conditions of negotiations of the planned IDA credit (PCR, para. 2.03), the scope of the project was considerably revised. Hence, in November 1979, when the appraisal report was finalized, the estimated total cost had risen to US$505.9 million including US$131.5 million in foreign exchange. Meanwhile, the UK authorities had withdrawn their financing offer, but CIDA and the EEC had agreed to participate. Thus, the financing plan at appraisal was as shown below (PCR, para. 2.08). The same table also sets forth the contributions to project financing as they actually turned out. SOURCES OF FINANCING (US$ millions) Appraisal Estimate Actual Local Foreign Total Local Foreign Total IDA Credit 968-PAK IBRD Loan 2552-PAK /a EEC SAC 39-PAK ADB KfW KfW CIDA /b GOP WAPDA Total /c 125.0/d La A disbursement of US$341,000 from the Energy Sector Loan IBRD 2552-PAK was made in October 1986, because IDA Credit 968-PAK had been fully disbursed, and this amount was needed to cover retention money on contracts which IDA had funded. /b CIDA subsequently withdrew its offer of funds for the project. /c Local costs as received from WAPDA.

18 6 Id The actual total foreign cost differs from that shown in the PCR because the PCR has used the total as recorded by WAPDA. The WAPDA foreign costs do not appear to include the disbursements from KfW's first loan of DM 30 million. This PPAM is based on the payments as recorded by IDA, EEC and ADB in various currencies converted to US dollars at the time of diabursement. For Kf%' each payment was converted to DM at the time of disbursement, and for this PPAM, the annual disbursements were converted to US dollars using the average exchange rate for the year. 15. The EEC loan was fully disbursed and, therefore, the US$26.5 million figuring as the actual financing provided through SAC 39-PAK is the US$ equivalent reflecting the variations over the project period of the exchange rates of the nine European currencies making up the loan. Although, at appraisal, the amount shown for ADB was US$25 million, ADB actually made a loan of US$67 million and committed US$41 million to this project, US$24 million to the load dispatching center project, and US$2 million to the Tarbela project. At the end of 1988, US$2.4 million of the project account remained committed to the project and were to be disbursed in The excess, US$10.7 million, has been reallocated to the load dispatching project (PCR, para. 3.14), which, after slow progress on the local centers, is now expected to be completed in June Both KfW loans have been fully committed and the final amounts of about DM 1.0 million (about US$600,000) for KfW-1 and DM 3.6 million (about US$2.1 million) are expected to be disbursed during C. Project Achievements 16. The audit finds that WAPDA has achieved the main objectives of the project, i.e., to provide the utility with new and expanded secondary transmission facilities to meet the expected growth in demand for electrical energy from consumers, old and new. This success is confirmed by the fact that in the ten years ending in June 1988, over 3,250,000 new consumers were connected to the system, a 292 increase over the 2,528,000 which were served in An estimated 35% of the population has now access to electricity (22% in 1979). At the same time, the new transmission lines and grid stations have helped reduce the losses in the system through lower over-loading and reduced length of existing and new 11 kv distribution circuits. The actual reduction in total losses of electrical energy sent out from the generating stations from 34.2Z in 1978/79 to in 1986/87 and the improvements in the power factor allow WAPDA to meet a higher peak demand with the same generating facilities, and may be compared to the addition of a 500 MW unit to the system. Thus, the benefits obtained from this project justified the costs incurred, and formed a basis for the subsequent project (Loan 2499-PAK) to provide further expansion to the system. D. Co-financing Experience 17. The audit considers that the Association provided useful help and assistance in locating additional funds for this project when it was found that the foreign exchange requirements exceeded the funds available from the Association (PCR, para. 2.04). Also, as the project was under way, KfW found

19 7 that the funds provided under its initial loan were insufficient, and made a second loan to enable WAPDA to complete 16 grid stations, which, otherwise, would have been deleted from the project. E. Environmental Considerations 18. In some areas, WAPDA experienced considerable resistance to the construction of transmission lines, particularly during the growing season, when farmers were reluctant to allow access across their fields. Thus, the selection of appropriate routes and the timing of construction became an important factor. There was also strenuous opposition to the location of some of the substations. In order to satisfy the adjacent landowners, compromises had to be made by choosing locations that were less desisable from WAPDA's point of view. Nevertheless, access to the lines for maintenance is a continuing problem. All in all, there has been no significant deterioration of the environment as a result of the completion of the project. F. Financial Performance 19. During project implementation, WAPDA adhered to the financial covenants which formed part of the agreement with IDA. Its financial situation improved significantly. Under the Second Power Project (Loan PAK) consultants had prepared a study and made recommeidations on financial systems and accounting procedures, financial planning, stores management, fixed asset accounting, and project expenditure recording, particularly on large projects. WAPDA implemented the recommendations of the study (PCR, para. 6.02), reduced arrears in billing, lowered technical and non-technical losses, adjusted tariffs structure and raised eleciricity tariffs. Altogether, this led to an improvement in earnings, and of WAPDA's financial situation in gener-1. FDr example, at the end of June 1987, the debt/equity ratio was 56/44 compared to 61/39 in June 1979, and the ratio of current assets to current liability was 2.9 in 1987 (PCR, para. 5.06). The selffinancing ratio increased from 37% in 1979 to 70% in 1984, but fell to 35% in 1987, which was below the target of 40% (PCR, para. 5.03). This audit concurs with the observation in the PCR (para. 9.03) concerning the formula for calculating the self-financing ratio, and agrees that the use of the average capital expenditure in the current, preceding and succeeding years is preferable to using the expenditures of the current and preceding two years. 20. This audit finds that the financial position of WAPDA has improved significantly since this project was completed (PCR, para. 5.06). This resulted from agreements reached in connection with the Energy Sector Loan (2552-PAK), which led to tariff increases of 10% in FY1986, 13Z in FY1988 and 15% in FY1989, as well as to an extension of the fuel adjustment surcharge to consumers using more than 300 kwh per month. The audit further notes that the average electricity rate which was at 58% of long run marginal cost (LRMC) in 1985, was at 74% of LRMC in 1988, a significtnt improvement. G. Performance of Consultants 21. The Bank Group did not request WAPDA to retain ccnsultants for assistance in the preparation of bidding documents and the supervision of

20 8 construction, because it considered that WAPDA staff had gained sufficient experience in carrying out similar duties on previous projects. However, consultants funded by the Association were engaged to study the conversion of transmission lines from 220 kv to 500 kv, and they concluded this work in a satisfactory manner. Consultants were also retained to supervise the components of the project which ADB and KfW funded, and no adverse comments on the consultant's performance have been reported. H. WAPDA's Performance 22. The Bank Group might have been somewhat optimistic when it assumed that WAPDA had overcome the weaknesses which were partly responsible for the delays incurred in the first two projects. Indeed, WAPDA's performance in the initial stages of the present project was less than adequate because of the lack of project management experience and inadequate staffing of the project management team. However, after the first year, the Rituation improved considerably (PCR, para. 8.01). I. Performance of the Bank Grouo 23. This audit finds that!ie Association played an important role in the initial stages by defining components and coordinating the various aspects of the project with WAPDA staff, and subsequently negotiatir- with a number of lending agencies to provide for the needed financing of the foreign exchange requirements (PCR, para. 8.03). During the many supervision missions, the Association's staff gave advice on both technical and administrative matters, and although the project was completed well behind schedule, the Association made a valuable contribution to its eventual success. V. CONCLUSIONS 24. The audit finds that this project was successful, as it achieved the objective of improving the secondary transmission grid to enable the supply of electricity to be spread more widely throughout the country, thus allowing more people access to electrical services (PCR, para. 9.01). The three years' delay in completion should not detract from the overall accomplishments of WAPDA because, not only did the supply of electricity improve, but WAPDA's entire operations, at all levels 3.ncluding administration, technical and financial (PCR, para. 9.02), did, too. The results of this project were encouraging and led to the conclusion that work of this nature should be continued, which is being done in the context of the three subsequent projects. The audit further concludes that the present financial position of WAPDA is satisfactory and that the company, through its ability to selffinance a significant portion of its capital investment, does not represent a financial burden for the Government. 25. The operational stoff found that an important obstacle to starting quickly with project impiel..ntation has been the protracted finalization of complementary financing. Therefore, the lesson that this experience taught and that was applied to the subsequent project was, that it is necessary to

21 9 have the full financing of the projict fully agreed and available when project execution starts.

22 10 PROJECT COMPLETION REPORT PAKISTAN THIRD WAPDA POWER PROJECT (CREDIT 968-PAK and SAC 39-PAK) Energy Operations Division Country Department I Europe, Middle East and North Africa Region

23 11 PROJECT COMPLETION REPORT PAKISTAN THIRD VAPDA POWER PROJECT CREDIT 968-PAK AND SAC 39-PAK) 1.01 In Pakistan the major responsibility for public electricity supply is entrusted to the Water and Power Development Authority (WAPDA), a semi-autonomous agency created in 1958 and which operates throughout the country except the Karachi area. WAPDA accounts for about 80% of the public power supply in Pakistan, while the Karachi Electricity Supply Corporation (KESC) accounts for the remaining 20%. WAPDA is organized into two "Wings": a Water Wing, responsible for the overull planning of water resources, and construction and operation of irrigation systems; and a Power Wing. The Power Wing, herein referrei to for convenience as WAPDA, is responsible for the planning and design of power projects, generation of electricity from hydro and thermal sources, and the construction, operation and maintenance of tr-nsmission lines, grid stations, and distribution systems In 1977 when the project was initially appraisld, WAPDA had an installed generating capacity of about 2,670 MW of which 1,100 MW were in thermal powe- plants. WAPDA's power system - stretching about 1,200 km from North to Souta - had high losses becaune of the relatively low voltage used for transmission (220, 132 and 66 kv), long distances between substations resulting in excessive lengths of primary feeders and distribution lines, thefts and bad metering. The total number of consumers at the end of FY77 was about 2.1 million. Of the total losses of 34.2% in 1978/79, the losses in the transmission system were estimated at about 12.1% while those in the distribution system were estimated at about 20.1%. A high 8-10% of these losses was due to thefts and bad metering. In order to substantially reduce losses in the transmission and distribution system, large investments were required to transport high voltage power, to install additional stepdown substations to reduce the length of primary feeders, and to apply appropriate reactive power compensation. Stringent and cffective measures were also needed to curb the high losses due to thefts and bad metering. Bank GrouR Involvement 1.03 By 1977, the Bank Group had assisted WAPDA with two lending operations to develop its transmission system, particulzrly the 500 kv transmission; in addition, the Bank administered the Indus Basin Development Fund and a subsequent fund contributed by the Aid-to-Pakistan Consortium members for financing multi-purpose irrigation and power projects, including Mangla and Tarbela dams. The!irst lending operation for WAPDA was a Credit (IDA 213-P.K) of US$23 million in 1970 for a project to augment transmission

24 12 substations capacity. Despite a delay of about three years, principally due to problems in procurement, this project was substantially completed in The second lending operation was a loan (Loan 1208T-PAK) of US$ 50 million in 1975 to finance part of the 500 kv transmission system from Faisalabad to Guddu to evacuate the power generated by Tarbeia hydro station. Despite a delay of 14 months in completing the project due to slow procurement of goods and services, the project achieved its objectives as concluded in the Project Completion Report which was distributed to the Executive Directors on January 3, For the Fifth Five Year Plan period (1978/ /83), WAPDA prepared an expansion program which comprised the addition of 1,315 MW in generating capacity (see Annex 1), the construction of additional primary transmission lines at 500 kv, and the expansion of the secondary transmission grid (STG) throughout Pakistan. The STG component of this program was estimated to require an investment of about Rs 6,350 million (equivalent to US$641 million), with a foreign exchange component equivalent to US$156 million GOP then requested the Bank Group to consider financing an STG project based on WAPDA's program in the Fifth Plan as a follow-up to the project financed under IDA Credit 213-PAK. The subject project emerged out of this request of GOP. Orivin and Preparation II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL 2.01 Project preparaticn started early in 1977, when a Bank Group mission identified a possible project made up of a time-slice of WAPDA's 1978/ /83 STG expansion program plus studies for upgrading the 220-kV Faisalabad-Guddu-Karachi transmission line to 500 kv operations and the study of a new load dispatch center. The proposed project was tentatively estimated to require about US$30 million in foreign exchange from the Bank Group WAPDA's STG expansion program had been developed within the framework of GOP's capital investment priorities for the Fifth Five Year Plan. On the basis of those priorities, WAPDA employed consulting firms to carry out the feasibility studies of the proposed STG expansion program, prepared the project document and obtained the approval thereto of all the GOP agencies at various stages of processing. Appraisal 2.03 The Bank Group appraisal (September/October 1977) raised a number of issues which took considerable time to resolve. The performance of GOP/WAPDA under the ongoing pow; r projects at that time had been unsatisfactory in many respects and there were serious deficiencies in various aspects of WAPDA's operations. The Association considered that, before negotiations of the proposed Project, the following steps needed to be taken: (a) GOP should convert from debt to equity about Rs 1,300 million in respect of shortfalls in internal cash generation in fiscal years 1976 and 1977, and refund to WAPDA, preferably in cash, the interest that WAPDA had already paid on this amount;

25 13 (b) WAPDA should be granted and have implemented an additional tariff increase of 15% applicable to all cuttomers, or have instituted a new fuel clause to read as foliows: "A fuel surcharge will be added to each kilowatt-hour sold during the billing month, such surcharge to be equal to the total cost of fuel consumed and power purchased by WAPDA during the previous twelve months divided by the kilowatt-hour sales to all customers during the previous twelve months"; (c) the contract for consultancy services to assist in carrying out the implementation of recommendations regarding accounting and organization should be awarded; (d) WADPA's financial organization should be strengthened by creating the post of General Manager (Finance) and three senior finance posts in each of the three operating groups, and by the recruitment of competent staff to fill these posts; and (e) WAPDA stould undertake a tariff study with outside assistance so that future rate increases could take into account the manner in which increases were distributed between classes of customers and respective cost of services. In addition, the Association proposed that, in view of the exceptionally high system losses, WAPDA send the Association for discussion and agreement during negotiations, a detailed Action Plan to reduce these losses, including actions to improve metering and to reduce theft, and specific annual targets for loss reduction rates The appraisal mission estimated the project cost at about US$176 million with US$63 million in foreign exchange. Since only US$30 million was available for the project in the Association's lending program for Pakistan, it was suggested that GOP seek additional financing from other sources. At this stage, KfW, ADB and the UK expressed interest in cofinancing the project. Follow-up Appraisal 2.05 In view of considerable delay by GOP and WAPDA in fulfilling the conditions of negotiations, and the likelihood of an expansion in the scope of the project, the Bank fielded a follow-up appraisal mission in October The reformulated project covered four years (FY80-83) of WAPDA's five-year (FY79-83) development program of its STG system. In February 1979, a revised package for a proposed US$30 million IDA Credit was submitted to the Loan Committee. In addition to the IDA 'redit, it was recommended that an EEC Special Action Credit in the amount of US$35 million be also considered for the project. Negotiations and Approval 2.06 Negotiations were held in April 1979 and as anticipated, the main difficulty was over the question of tariff increases. The Association had sought a 50% tariff increase by July 1, 1979 and an increase in internal cash generation from 30% to 40% of investment. The GOP/WAPDA delegation advised that the price of wheat at ration shops had just been substantially increased A J t'at -n ition- in thp r, try the f- -ible r e in

26 14 It also agreed that tariffs would be further increased by a minimum of 10% by July 1980, and another 10% by July On the basis that these tariff increases would raise the proportion of WAPDA's capital expenditures financed thrcigh internal cash generation from 23% in FY80 to 40% in FY83, the negotiations were satisfactorily concluded By August 1979 it became apparent that UK cofinancing fur the project was unlikely and that additional financing to the tune of US$35 million was needed to meet the foreign exchange requirements of the project. The Association, therefore, agreed to increase the proposed IDA Credit from US$30 million to US$45 million, and proposed to seek financing from ADB The project was presented to the Board and approved on December 20, The total project cost was estimated at the equivalent of US$505.9 million with US$131.5 million in foreign exchange. Desides the US$45 million IDA Credit and the US$35 million EEC Credit, CIDA, KFW and ADB were expected to participate with loans of US$14.5 million, US$18.0 million and US$25 million equivalent respectively. To ensure complete foreign cost financing, the IDA Credit had a cross-effectiveness condition with the 'fw loan. Project Objectives 2.09 The main objective of WAPDA'6 power development program during the Fifth Five Year Plan (1978/ /83), which covered the original period of the subject Project, was to provide adequate transmission and distribution facilities, in addition to the generation plants, to fulfill the targets envisaged for the industrial and agricultural sector of Pakistan's economy. The provision of adequate secondary transmission lines and grid substations formed an important link in the overall power system for balanced and coordinated development The specific objectives under the project were: (a) to review the size and composition of the power subsector investment program; (b) to strengthen WAPDA's financial position by raibing its internal cash generation to 40% of average annual investment by FY83; (c) to rationalize power tariffs; (d) to reduce losses in the transmission and distribution networks to 21%, including not more than 5% due to theft and bad metering, by the end of FY84; and (e) to improve WAPDA's accounting system and practices. These objectives were only partially accomplished. Further institutional development is being attempted under the suceeding lending operations. Project Description 2.11 The Project, as designed, covered the last four years (1979/ /83) of WAPDA's STG program in the Fift. Five Year Plan, comprising the following components:

27 15 (a) transmission lines: installation of about 4340 km of 220 kv, 132 kv, and 66 kv single and double circuit lines (see Annex 3); (b) substations: construction, expansion and conversion of 210 substations L' of 220/132 kv and 132/66 kv (see Annex 3), with an aggregate capacity of 4,800 MVA; (c) construction of storage facilities for project materials and equipment; and (d) consulting services for; (i) a load dispatch system study; and (ii) a study on conversion of the 220 kv Karachi/Tarbela transmission system to 500 kv operation. The Project was expected to be completed by December 31, It was understood that tte project scope allowed flexibility as to the identification of the STG substations and associated transmission lines, number of subjtations and transformer capacity to be installed. Variations in power demand and other implementation circumstances required some changes in the project content which are discussed further in para Annex 1 sets forth the main covenants under the Project and the extent of compliance with them by GOP and WAPDA. It will be seen that except in regard to the accounting system, audit and e rgy losses, their performance was satisfactory. Performance under the financ i covenant, though satisfactory strictly in the context of the project, masks some real problems (para 5.05). III. PROJECT IMPLEMENTATION Credit Effectiveness 3.01 By May 1980, GOP/WAPDA had fulfilled all the conditions precedent to the effectiveness of the Credits except one relating to the signing and effectiveness of the KfW loan. The KfW loan for an amount of DM 33 million was signed on May 19, 1980, but only became effective on July 25, Finally, both the IDA and SAC Credits were declared effective on July 30, Project Cost 3.02 The project was completed at a cost of US$400.4 million which is 20.9% lower than the appraisal estimate of $505.9 million. In terms of the Pakistani Rupee, the actual cost incurred was Rs million as against the appraisal estimate of Rs million, an increase of 14%. A detailed comparison of the estimated and actual project cost is shown in Annex 4 and is summarised in Table 3.01 below. The apparent difference in results when comparing the total project cost in US Dollar and Pakistani Rupees is because of the large variation in the exchange rate during the implementation of the project; the appraisal estimate was based on an exchange rate of US$ 1= Pak Rs 9.90, which worsened to US$1 = Pak R in FY87. The savings of US$105.5 million in total project cost comprised US$86.7 million in local costs and 1/ The SAR refers to 216 substations, while the President's Report and the Development Credit Agreement only mentioned 210 substations.

28 16 US$18.8 million in foreign costs. The savings arose mainly due to: (i) competitive prices of equipment and material received through international tendering and less than expected price contingencies. The actual costs were lower than the appraisal estimates by 40% for transmission towers and poles, 43% for conductors and ground wires, 50% for insulators and hardware, 38% for construction, and 13% for engineering and administration. TABLE 3.01 SUMMARY OF ESTIMATED AND ACTUAL PROJECT COSTS Appraisal Estimate Actual Local Foreign Total Local Foreign Total (in Million Rupees) (in Million Rupees) STG Facilities 3, Studies Taxes & Duties Total: (in Equivalent US$Million) (in Equivalent US$Million) STG Facilities Studies Taxes & Duties Total: Project Financing 3.03 At project appraisal, financing of the foreign exchange cost of the project was envisaged as follows: (i) IDA US$45 million (yard structures, equipment for 132/66 kv grid substations, 1979/80 and 1980/81 transmission lines, and construction equipment) (ii) EEC Special Action US$29 million equivalent (equipment for 132/66 kv grid substations) (iii) CIDA (tied) US$14.5 million (1981/82 and 1982/83 transmission lines) (iv) KfW (untied) US$18 million equivalent (equipment for 30 specified 132/66-kV grid substations) (v) ADB US$25 million (220-kV grid substations, capacitors and telecommunication equipment)

29 17 The above amounts totalling US$131.5 million were expected to finance the foreign exchange cost of equipment estimated at US$129.7 million, plus the cost of a load dispatch control system study estimated at US$1.0 million to be financed by ADB and a study to examine the problem of the 220 kv to 500 kv conversion program estimated at US$0.8 million to be financed by IDA. The Special Action Credit was also designed to finance around US$6 million of local costs which comprised, principally, grid substations foundationr, control rooms and warehouse facilities for storage of project materiala and equipment. The CIDA credit was ultimately dropped and a total amount equivalent to US$114.2 million was actually obtained from the other financing agencies during the project implementation period. Revisions to Project Scope 3.04 In the course of project implementation, WAPDA adjusted the location and number of the grid stations based on regular reviews of power demands in each area and the availability of materials und equipment. The list of STG substations and associated transmission lines finally included in the project is shown in Annex 5. Of the originally proposed 210 substations with 4800 MVA transformer capacity, 206 substations were installed with a net addition of 6,451 MVA in transformer capacity. As regards transmission lines, the original project scope envisaged construction of a total length of 4,344 km, while the revised project included 4,462 km of lines. Within the project, 1215 MVAR of 11 kv capacitors were installed in the STG substations; this component was financed entirely by the ADB. The transmission lines and associated substations finally constructed under the project, are given below, cla.sified by sources of foreign exchange funding. TABLE 3.02 SUMMARY OF SUBSTATIONS AND TRANSMISSION LINES FINALLY CONSTRUCTED UNDER THE PROJECT Substations Transmission Lines Transformer Capacity -1 Length Number MVA km IDA & EEC-financed 177 3,789 3,758 KfW-financed ADB-financed 6 1, Total Project 206 6,451 4,462 1/ Net capacity increase after deletions.

30 18 Implementation Schedule 3.05 The project was originally scheduled for completion by December By October 1986, an IDA supervision mission found that of the 210 STG substations, 158 had been commissioned, while 46 were being constructed, and two were expected to slip into the second half of 1987 due to difficulties with land acquisition. Regarding the associated transmission lines, over 90% (4,053 ka) of the total length of 4,462 had been commissioned and the balance (409 ka) was expected to be ready in early The project was thus substantially completed by December 31, The closing date was extended from the original December 31, 1984 to December 31, 1985 to accommodate the extended date for completion The main reasons for the delay in project implementation were the following: (a) although the IDA and SAC Credit agreements were signed in January 1980, they only became effective in Jily 1980 (para 3.01) and award of contracts for substation eqiipment and line materials was correspondingly delayed; (b) inadequate supply of local funds from time to time; (c) non-availability of Pakistani vessels for shipping purpose; (d) insufficient staffing of both the Project management office and the STG Design Office, to be able to meet the project implementation schedule; (e) remoteness of many substations and transmission lines with difficult access and poor living conditions: and (f) difficulties with land acquisition involving in some cases lengthy litigation before the transfer of ownership. In retrospect, the original project implementation schedule calling for completion in four years from signing of the Credit agreement was optimistic considering the above factors. Procurement 3.07 Except for delays and the usual initial difficulties of conformity of tender documents with the Bank Group guidelines, the procurement of goods financed under the IDA and SAC Credits was generally handled without major problems Seventy-one contracts for goods and services were finally awarded by WAPDA, of which fifty-two contracts were financed from the proceeds of the subject IDA Credit and nineteen contracts were financed from the proceeds of SAC 39-PAK. Annex 6 gives the list of contracts, the contract amounts, the supplier and country of origin of goods and services, and the original delivery date compared to the actual delivery date. In general, about one year was required from bid invitation date to plcement of the order. Actual delivery dates were on average about one year later than originally foreseen. Studies for upgrading the Faisalabad-Karachi power transmission system to 500 kv were awarded to the consortium of HARZA (USA) and NESPAK (Pakistan); the

31 Procurement under the KfW and ADB loans was done following the guidelines of these financing agencies and as far as the Association is aware, encountered no major problems. Disbursements 3.10 Disbursements from both the subject IDA Credit and SAC 39-PAK fell behind schedule from the beginning of project implementation because of delays in procurement for most of the equipment and materials needed. A comparison of actual disbursement and appraisal forecast is provided in Annex 7. For both Credits, disbursement took three years more than anticipated at appraisal. Due to currency fluctuations the equivalent of US$26.5 million was actually withdrawn out of the US$35 million equivalent originally attributed to SAC 39-PAK. Project Execution 3.11 Apart from the delay of three years, the project was executed satisfactorily. Throughout its implementation phase, the project was managed by a Project Management Team headed by the Chief Engineer STG as Project Director. The Chief Engineer Design (T&G) acted as "Engineer" for the Project and supervised design and other technical matters related to the project. The Chief Engineer, Grid System Construction (GSC) Lahore and the Chief Engineer (GSC) Hyderabad served as directors of the "Executing Agencies" under their cotmands. The GSC organizatiun entrusted project supervision to the local project directors in charge of the divisions concerned In general, delays occurred in preparing bid documents, and design drawings and specifications. Moreover, insufficient personnel were assigned for project management. Civil works for substations were awarded on the basis of local competitive bidding, generally to small contractors insufficiently equipped to perform in a workmanlike manner. Supervision at sites was not thorough, with the result that civil works are generally of poor quality and in some cases show signs of deterioration The erection of equipment was carried out directly by WAPDA's own personnel in a competent manner. The erection of transmission lines, including conductor stringing, was also generally done by WAPDA's own personnel. In some cases it was awarded to contractors through local competitive bidding. The work was hampered by: (a) hold-up of work due to litigation for right of way passage; (b) unwillingness of contractors in certain instances to continue work due to delayed payments; (c) lack of security in remote areas; and (d) labor disputes.

32 The study for the load dispatch system, financed from the ADB loan, was converted into a full-fledged implementation of the load dispatch system with the setting up of a National Control Center at Islamabad and two regional centers at Islamabad and Jamshorn. Originally scheduled to be commissioned in June 1986, it is presently planned to be in service by June 1989 due to delays by WAPDA/ADB in decisions concerning the implementation schedule The study for upgrading the Tarbela-Karachi transmission system to 500 kv was carried out by BARZA and NESPAK under the supervision of WAPDA's T&G Department. Computer studies were done on the optimum schedule of conversion of the Faisalabad-Guddu-Jamshoro section of the system (temporarily energized at 220 kv) to establish operating procedures and constraints. Moveover, the substation design parameters and basic equipment rating were determined for Multan, Guddu, Dadu, Jamshoro and extension to Faisalabad substation. The conversion study was completed in October 1982, while the expansion study was finished in February Project Progress Reporting 3.16 WAPDA met the Association's reporting requirements, submitting on a regular basis quarterly progress and annual reports. Initially, the quarterly project progress reports were extremely detailed, elaborate and bulky, sometimes with unnecessary data. Later in the course of project implementation, WAPDA agreed to tailor the progress reports to the Association's requirements as indicated in the outline provided by the Association. Performance of Contractors 3.17 The performance of the civil contractors with respect to concrete finish in some of the substations visited during supervision and completion missions was of low quality. In general, WAPDA needs to tighten the civil works supervision to ensure that contractors perform their work in a workmanlike manner. WAPDA should also look into the possibility of issuing tenders for sizeable civil works contracts in connection with STG development programs in order to attract larger, better equipped, and more responsible contractors. Performance of Consultants 3.18 Consultants for the transmission conversion study performed efficiently and produced a plan that was implemented without major difficulties. Similarly, the consultants for the load dispatch systen performed competently with adequate support from WAPDA's load dispatch personnel WAPDA's Design Department, which acted as "Engineer" for the STG component of the Project, initially did not organize its work in an efficient manner with consequent delays in issuing tender documents and construction drawings. However, as a result of the guidance provided by IDA supervision missions, the technical specifications and design of substations were subsequently modified.

33 21 IV. OPERATING PERFORMANCE 4.01 The achievements under the Project could be viewed in terms of WAPDA's overall performance. In this context, the targets set by WAPDA for the Fifth Five-Year Plan in generation, maximum demand and number of consumers were essentially met The actual power demand in the areas covered by the project is generally consistent with the appraisal forecast except for Daudkhel, Hyderabad and Sukkur areas. In the Daudkhel area, the power demand fell short of the forecast because the generation program at Chashma Nuclear Power Plant was deferred, and thus the expected development could not materialize as anticipated. In the Hyderabad and Sukkur areas, the development did not match the forecast figures mainly due to political unrest during the implementation phase of the project. On the other hand, in major load centers of the north, namely, Peshawar, Lahore, Faisalabad and Gujranwala, the power demand exceeded the forecast figures Peak power demand on WAPDA's power system reached about 4,000 MW in 1986, a 100% increase from the peak demand in 1980, when the project started. Power generation increased in the same period by 59.5% to reach 21,055 GWh in Compared with the appraisal expectations, the peak demand increased at an average of 11.5% per year as against a forecast of 8.8%, while generation progressed at an average of 9.2% per year as against a forecast of 8.9%. The number of consumers added to the system increased by 268,000 per year as against the appraisal target of 162,000. Reduction of Energy Losses 4.04 A specific objective of the Project was to reduce losses in the transmission and distribution networks from the inordinately high level of 34.2% to 21%, including not more than 5% due to theft and bad metering, by the end of FY84. Various measures were taken to achieve the target (e.g. erection of 500 kv grid system including upgradation from 200 kv to 500 kv, addition of sub-transmission lines and substations, addition of capacitors to improve the system power factor, stringent measures to prevent theft of power etc.), but despite good progress, the progress was not rapid enough to attain the target of 21% by FY84. In fact, the losses were still 24.9% in FY87, three years after the target year. Further loss reduction is not likely to materialize because WAPDA lacks experience in identifying the sources of energy losses and in designing a comprehensive investment plan for reinforcing, rehabilitation and retro-fitting the network. The problem is being addressed under subsequent lending operations, both of the Bank group and the USAID.

34 22 V. FINANCIAL PERFORMANCE Introduction 5.01 A specific objective under the Project was to strengthen WAPDA's financial position by raising its earnings. WAPDA's financial affairs are governed by the WAPDA Act which requires the utility, inter alia, to generate sufficient revenues from electricity sales to cover operating costs including depreciation and debt service and achieve a reasonable return on investment. Under the First WAPDA Power Project (Credit 213-PAK), WAPDA agreed to achieve a rate of return of 8% on revalued average net fixed assets in use. However, because of GOP's reluctance to cause WAPDA to revalue its assets, this covenant was replaced in FY76 under the Second WAPDA Power Project (Loan 1208T-PAK) by an internal cash g-neration covenant. It required WAPDA to generate annually from internal sources, beginning with FY80, 30% of the capital expenditures, averaged over the previous two years and the current year, without taking into account the net changes in workirg capital. In order to ensure that adequate local funds were available for the implementation of WAPDA's expanding investment program, which included an increasing proportion of local cost component, the level of internal cash generation was raised under the subject project to 40% from FY83. Accountina System and Oraanization 5.02 WAPDA's billing and collection, and control over its finances have improved significantly. Under the Second WAPDA Power Project, WAPDA engaged Peat, Marwick, Mitchell and Co. (PMM) of the UK as consultants to study the utility's financial organization and outline the means for improving its financial management, particularly in the areas of accounting systems and procedures, and organization and staffing. The study, which was completed in FY82, recommended the introduction of a decentralized accruals based accounting system with a code of accounts, the updating of inventory management methods, and the streamlining of financial reporting procedures. These recommendations were partially implemented by WAPDA with the assistance of PMM who were reappointed under the subject project. A limiting factor which has stood in the way of full implementation is the shortage of qualified accounting staff. The problems of staff and training are being addressed in the subsequent lending operations. Income Statements. Tariffs and Self-financinit Ratio 5.03 WAPDA's revenues from electricity sales increased from an average of PRs per kwh in FY79 to PRs per kwh in FY87. The net internal cash generation (self-financing ratio) increased from 37% in FY79 to 70% in FY84, and then declined to 35% in FY87. The electricity generation increased from 10,608 GWh in FY79 to 18,052 GWh in FY84 representing an annual average growth rate of 12.1% compared to the SAR forecast rate of 10.0%. The higher actual growth rate was because of relatively better hydro avaulability than the forecast. However, the actual sales growth rate of 12.R% was lower than the forecast rate of 13.7%, primarily because of WAPDA's inability to reduce losses as forecast (para 4.04). Income and funds statements comparing WAPDA's actual performance with the appraisal forecasts during the period FY79-84 are presented in Annexes 8 and 9, and summarized below:

35 23 TABLE 5.1 WAPDA'S INCOME STATEMENT-APPRAISAL ESTIMATE VERSUS ACTUAL 1/ FY79 FY84 FY87 Appraisal Actual Appraisal Actual Actual kwh generated (million) kwh sold (million) kwh sold as % of kwh generated Average Rev/kWh sold (paisa) Rs. Million Operating Revenue Operating Expenses Operating Income Operating Ratio (M) Net Income after Interest and Payments to Govt Net Internal Cash Generation as % of Capital Investment Rate of Return on Historically Valued Assets Rate of Return on Revalued Assets WAPDA's tariff increased by an average of 9.0% annually during FY79 to FY84, compared to the appraisal forecast of 9.4%. A significant tariff increase of 25% in FY80, followed by increases of 8.4% in FY81 and 8.6% in FY82 were made to comply with the financial performance covenant agreed with the Association. However, no increases were effected during FY83 - FY85. Tte next substantial tariff increase was of 8.8% effective July 1, Average revenue/kwh realized by WAPDA during the FY;9 - FY84 period, however, increased by 11.4% per annum, due to the introduction of the fuel adjustment clause (FAC) in FY80. Although FAC was designed to recover fuel costs entirely, its non-applicability to domestic consumers for socio-political reasons (until FY87) resulted in a recovery of only about 65% of the fuel cost incurred. The electricity prices which averaged 70 paisa/kwh in FY87 are about 68% of long run marginal cost (LRMC) of supply. Although the trerd of adjustments in average electricity pricing is encouraging, structural aspects of WAPDA's tariffs need to be examined in order to rationalize consumption and provide incentives for load management. WAPDA's tariff levels excluding FAC are given below: 1/ Appraisal Projections were made for the period FY79 - FY84.

36 24 TABLE 5.2 WAPDA'S AVERAGE TARIFF - ACTUAL VERSUS SAR Actual SAR Forecast---- Paisa/kwh % Increase Paisa/kwh % Increase FY FY FY FY FY FY (-) 0.45 FY FY (-) 3.72 Internal Cash Generation 5.05 After reaching the high level of 70% internal cash generation in FY84, the ratio was 37% in ty85, 50% in FY86 and 35% in FY87, as against the. covenanted 40%. The high self-financing ratio of 70% in FY84 was mainly because of slippages in WAPDA's investment program stemming from reductions in annual budgetary allocation. In FY85, by contrast, there was virtually no slippage in the implementation of the planned investment program (Rs 6,768 million compared to Rs 4,621 million in the preceding year); however with no increases in tariff, the self-financing ratio in that year fell to about 37%. In order to ensure greater concurrence between planned and actual investments and enable WAPDA to achieve the target self-financing ratio, agreement was reached with GOP and WAPDA under the Energy Sector Loan on a three-year core investment program for FY86-FY88. For FY86, WAPDA achieved a self-financing ratio of 50%. In FY87, WAPDA's actual expenditures were 5% lower than planned (Rs 9,872 million compared to Rs 10,390 million). Nevertheless, due to revenue losses from introduction of flat rate tariffs for agricultural consumers, the self-financing ratio for FY87 again dropped to 35%. Thus it is seen that though WAPDA's performance under the financial covenants was satisfactory strictly in the context of the project, this was only because of the low level of capital investment and the impact of the formula (para 9.03). Present Financial Position 5.06 At the end of FY87, WAPDA's capitalization position was strong with a debt/equity ratio of 56/44 compared to a ratio of 61/39 at the end of FY79. This increase in equity was mainly due to improved earnings; retained earnings amounted to 61% of total equity at the end of FY87, compared to only 26% at the end of FY79. In addition to a strong capitalization position, the ratio of current assets to current liabilities of 2.9 and the coverage of debt service by gross internal cash generation of 1.5 were satisfactory. The >ook value of fixed assets was shown at historical cost, as required by GOP. WAPDA's gross fixed assets in service increased between FY80 and FY87 by about 160%; of these, 56% were financed from WAPDA's internal sources and 44% from borrowii.gs. WAPDA's balance sheet as of June 30, 1987 is summarized below:

37 25 TABLE 5.3 WAPDA'S BALANCE SHEET - AS OF JUNE 30, 1987 (Rupees Million) Assets Fixed Assets in operation 54,723 Less: Depreciation 10,928 Net Fixed Assets in Operation 43,795 Work-in-Progress 9,389 Total Fixed Assets 53,184 Current Assets 7,409 Less: Current Liabilities 2,512 4,897 58,081 Equity and Liabilities Government Investment 2,437 Government Equity 3,574 Consumer Contribution 3,781 Retained Earnings 15,319 Total Equity 25,111 Long-Term Debt 31,412 Other Liabilities - Consumer Deposits Interest Accrued 1,200 Total Other Liabilities 1,558 Total Equity and Liabilities 58,081 Debt/Equity Ratio 56/44 Current Ratio 2.9 VI. INSTITUTIONAL DEVELOPMENT 6.01 The project included: (i) implementation of financial systems and procedures arising out of the recommendations of an international accounting firm earlier engaged by WAPDA under the Second WAPDA Power Project; and (ii) consulting services for the implementation of a load dispatch system, and (iii) consulting services for the conversion of and upgrading the existing 220 kv Tarbela-Karachi transmission lines to 500 kv operations. Progress was achieved in all these three areas Based on the recommendations of the accounting firm, WAPDA staff established an accrual-based accounting system with a detailed code of accounts, resulting in a reliable historical database for the purposes of financial planning and reporting. Implementation of the system has only been partial partly because of the shortage of qualified accounting staff (para 5.02). WAPDA also initiated a comprehensive training program for its accounts and finance staff, and modified its acc3unting service rules to recruit qualified staff from outside. In addition, the General Manager and Deputy General Manager, Finance were appointed which strengthened the role of the financial function in WAPDA.

38 Based on the load dispatch system stuay, a National Control Centre (NCC) at Islamabad along with two regional centres at Islamabad and Jamshoro are being set up and are expected to be in service by June NCC would also assist in training of the operational staff. With regard to the 500 kv system conversion study, it provided WAPDA staff with the necessary tools to proceed with upgrading of the system and also planning for the new 500 kv Lai-re/Jamshoro transmission lines (Fifth WAPDA Power Project-Loan 2556-PAK). VII. ECONOMIC RE-EVALUATION Internal Economic Rate of Return 7.01 At project appraisal, an IERR of atout 10.9% was computed based on a 1978/ /83 time slice of WAPDA's overall investment program. This was done since the project comprised a part of WAPDA's complex development program and it was not possible to separate in a meaningful way that portion of incremental revenues that could be attributable to the project and compute an internal economic rate of return (IERR) on the project. The IERR has now been recalculated for the 1980/ /88 time slice of WAPDA's investment program, yielding a 13.7% return on investment using as proxy for benefits the increased energy sales resulting from the construction of the power facilities during this period. For the purposes of this calculation, all costs and benefits were converted to 1978/79 rupees and adjusted for border prices The assumptions used for computation of IERR are given below: (a) the year by year capital expenditures from FY80 (the first year of commencement of expenditures under the subject Project) through FY87 plus some additional expenditures during FY88 needed to complete the project were taken as the stream of investments; (b) the local currency component of expenditures has been broken down in a ratio of 75% material cost to 25% labor cost. The labor cost has been further broken down in the ratio of 30% skilled labor to 70% unskilled labour. These costs have been shadow priced by using conversion factors of 1.10 for materials, 1.06 for skilled labor, and 0.63 for unskilled labor; (c) the foreign exchange costs have not been shadow priced given the floating exchange rate prevailing during the time slice period; (d) the incremental sales estimated for FY88 have been kept as proxy for benefits for the useful life of the project; (e) the actual average sale price per kwh for FY81 - FY87 and the estimated sale price for FY88 have been used for calculation of the revenue stream; and (f) the recovery of fuel surcharge has been estimated on the basis of incremental energy sales and included in the benefits. Annex 11 summarizes the IERR computation.

39 27 The new satimated IERR, which is near the opportunity cost of capital, indicates that the average tariffs are close to the mean incremental cost of supply, based on the time slice of investment program for the period 1979/ /88. VIII. PERFORMANCE OF THE BORROWER AND THE ASSOCIATION Assessment of WAPDA's Performance 8.01 The performance of WAPDA in the engineering area, while falling short of appraisal expectations, was satisfactory particularly in the later part of project execution. At appraisal, it was recognized that the project is part of a complex program comprising a large number of works in distant locations which needed to be carefully coordinated. The initial delays of about two years also showed that planning and inter-departmental coordination were the major weaknesses in project implementation. However, under the project WAPDA was able to (1) establish a special project management team with operating procedures and capabilities in planning and execution; and (ii) prepare standard engineering designs and specifications which would help them in implementing future projects, such as, the Fourth WAPDA Power Project (Loan 2499-PAK). In the institution-building area, much progress was achieved. It reduced WAPDA's system losses from 34.2% in FY79 to 24.9% in FY87 as against the covenanted target of 21% in FY84 (para 4.04). It made substantial progress towards improving WAPDA's accounting systems cnd procedures, although much remains to be done (para 5.02). It also strengthened WAPDA's financial position considerably by raising its self-financing ratio to 35-70% in FY84-87 (para 5.05). The Association's Performance 8.02 The Association formally supervised the project ten times over the seven-year implementation period, and maintained excellent relations with GOP and WAPDA officials. The frequency of missions was adequate except towards the close of the project when after a supervision in February 1985, the next supervision mission was mounted in October 1986, more than one ani a half years later. There was continuity in staff assignments to the project. The Association identified the right issues and provided appropriate covenants where action was needed. In spite of the enormous area covered by the project, field visits were also made by the Association staff to provide guidance and comments to WAPDA The Association played a crucial role in bringing KfW and ADB into the project as cofinanciers. This role was important not only at the project preparation stage but also during project implementation when these agencies were provided with the findings of the Association's supervision missions. IX. CONCLUSIONS 9.01 Though delayed by three years, the Project was entirely successful in achieving its main objective which was to provide Pakistan with an adequate secondary transmission grid infrastructure to efficiently utilize the power generation and bulk transmission facilities. The lessons learned and the deficiencies of insufficient inter-departmental coordination noted in WAPDA's implementation of the project have helped in the design of the on-going Fourth, ' ' Proi t (T I on, IW)

40 The project achieved much progress in the institution-building area. It reduced WAPDA's system losses from 34.2% in FY79 to 24.9% in FY87 as against the covenanted 21% in FY84 (para 4.04). It made substantial progress towards improving WAPDA's accounting system and procedures (para 5.02). It also strengthened WAPDA's financial position considerably by improving its earnings and securing a self-financing ratio in the range of 35-70% during FY84-87 as against the covenanted 40% (para 5.05). Although the level of tariffs was adjusted upwards, the necessary restructuring of tariffs was not undertaken with a view to providing consumers, particularly residential and tubewell users, the incentives to reduce their demand3 r.nd to shift from peak to off-peak periods. The implementation of the accrual-based accounting system has established a reliable historical database, for the purposes of financial planning. Lessons Learned 9.03 A deficiency in the financial covenant became evident during project implementation. WAPDA was able to achieve around the covenanted 40% level of cash generation with minimal or no tariff increases mainly because (i) the actual investment was as low as about 50% of the planned investment, and (ii) the level was determined by averaging the capital expenditure over the current year and the preceding two years. The formula was backward-looking and had little relation to the current investment needs. The low level of capital investment was a major factor in the power shortages and high system losses that the country has experienced. The problem resulting from the covenant has been addressed in the subsequent lending operations where a forward-looking covenant, effective FY89, has been introduced under which the level of cash generation is determined with reference to the average capital expenditure of the current, preceding and succeeding years.