Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA & IDA-57400) ON A SERIES OF CREDITS

Transcription

1 Public Disclosure Authorized Document of The World Bank Public Disclosure Authorized IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA & IDA-57400) ON A Report No: ICR SERIES OF CREDITS Public Disclosure Authorized IN THE AMOUNT OF SDR744 MILLION (US$1.1 BILLION) TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR POWER SECTOR REFORM DEVELOPMENT POLICY CREDITS I & II Public Disclosure Authorized December 29, 2017 Energy and Extractives Global Practices Global Practice South Asia Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective as of December 31, 2016) Currency Unit = Pakistan Rupee (PKR) US$1.00 = PKR SDR 1.00 = US $ FISCAL YEAR July 1 June 30 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank BISP Benazir Income Support Programme CPPA-G Central Power Purchasing Agency (Guarantee) Limited CPS Country Partnership Strategy DPC Development Policy Credit Disco Distribution Company, (WAPDA successor company) ECC Economic Coordination Committee (of the Pakistan Cabinet) EFF Extended Fund Facility (of IMF) FBR Federal Board of Revenue FDI Foreign Direct Investment FGD Flue Gas Desulfurization GDP Gross Domestic Product Genco Generation Company (WAPDA Successor Company) GHG Greenhouse Gas GWh Gigawatt Hour HESCO Hyderabad Electric Supply Company HFO Heavy Fuel Oil Hydel Hydroelectric IDA International Development Association IFC International Finance Corporation IPP Independent Power Producer JICA Japan International Cooperation Agency KESC Karachi Electric Supply Company Limited (now K-Electric) kwh Kilowatt Hour MEPCO Multan Electric Power Company MoF Ministry of Finance MPNR Ministry of Petroleum and Natural Resources MW Megawatt MWP Ministry of Water and Power MTB Market Treasury Bill MYT Multiyear tariff NDT NEPRA-determined Tariff NEPRA National Electric Power Regulatory Authority NPL Non-Performing Loan NTDC National Transmission and Dispatch Company OGRA Oil and Gas Regulatory Authority PEFA Public Expenditure and Financial Accountability PESCO Peshawar Electric Supply Company PFM Public Financial Management PMT Proxy Means Test PSIA Poverty and Social Impact Assessment SBP State Bank of Pakistan SDR Special Drawing Rights SEPCO Sukkur Electric Power Company SOE State owned Enterprise USAID United States Agency for International Development WAPDA Water and Power Development Authority Senior Global Practice Director: Practice Manager: Task Team Leader: ICR Team Leader: Riccardo Puliti Demetrios Papathanasiou Richard J. Spencer Fanny Missfeldt-Ringius ii

3 ISLAMIC REPUBLIC OF PAKISTAN DEVELOPMENT POLICY CREDITS I & II IMPLEMENTATION COMPLETION REPORT Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring CONTENTS 1. Program Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned (both operation-specific and of wide general application) Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1: Bank Lending and Implementation Support/Supervision Processes Annex 2: Development Outcome Indicators Annex 3: Stakeholder Workshop Report and Results Annex 4: Summary of Borrower s ICR and/or Comments on Draft ICR Annex 5: Comments of Co-financiers and Other Partners/Stakeholders Annex 6: List of Supporting Documents iii

4 A. Basic Information Program 1 Country Pakistan Program Name Power Sector Reform Development Policy Credit Program ID P L/C/TF Number(s) IDA ICR Date 12/07/2017 ICR Type Core ICR Lending Instrument DPL Borrower Islamic Republic of Pakistan Original Total Commitment SDR M Disbursed Amount SDR M Implementing Agency: Ministry of Finance Co-financiers and Other External Partners: N/A Program 2 Country Pakistan Program Name Power Sector Reform: Second Development Policy Credit Program ID P L/C/TF Number(s) IDA ICR Date 12/07/2017 ICR Type Core ICR Lending Instrument DPC Borrower Islamic Republic of Pakistan Original Total Commitment SDR M Disbursed Amount SDR M Implementing Agency: Ministry of Finance Co-financiers and Other External Partners: N/A iv

5 B. Key Dates Power Sector Reform: Development Policy Credit - P Process Date Process Original Date Revised / Actual Date(s) Concept Review: 10/28/2013 Effectiveness: 05/06/2014 Appraisal: 03/20/2014 Restructuring(s): - - Approval: 05/01/2014 Mid-term Review: - - Closing: 06/30/ /30/2015 Power Sector Reform: Second Development Policy Credit - P Process Date Process Original Date Revised / Actual Date(s) Concept Review: 01/28/2015 Effectiveness: 12/04/ /31/2016 Appraisal: 09/22/2015 Restructuring(s): - - Approval: 11/12/2015 Mid-term Review: - - Closing: 12/31/ /31/2016 C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating Outcomes Satisfactory Risk to Development Outcome High Bank Performance Highly Satisfactory Borrower Performance Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry Highly Satisfactory Government: Satisfactory Quality of Supervision: Highly Satisfactory Implementing Agencies Satisfactory Overall Bank Overall Borrower Highly Satisfactory Performance Performance Satisfactory C.3 Quality at Entry and Implementation Performance Indicators Power Sector Reform: Development Policy Credit - P Implementation Performance Indicators QAG Assessments Rating Potential Problem Program at any time No Quality at Entry None Problem Program at any Time No Quality of Supervision None DO rating before Closing Satisfactory v

6 Power Sector Reform: Second Development Policy Credit - P Implementation Performance Indicators QAG Assessments Rating Potential Problem Program at any time No Quality at Entry None Problem Program at any time (Yes/No): No Quality of Supervision None DO rating before Closing/Inactive status Moderately Satisfactory D. Sector and Theme Codes Power Sector Reform: Development Policy Credit - P Original Actual Major Sector Energy and Extractives Other Energy and Extractives Major Theme/Theme/Sub Theme Public Administration Public Finance Management 6 6 Business Enabling Environment Fiscal Policy 6 6 Power Sector Reform: Second Development Policy Credit - P Original Actual Major Sector Energy and Extractives Other Energy and Extractives Oil and Gas Major Theme/Theme/Sub Theme Public Finance Management Business Enabling Environment Fiscal Policy E. Bank Staff Power Sector Reform: Development Policy Credit - P Positions At ICR At Approval Vice President: Annette Dixon Philippe Le Houerou Country Director: Patchamuthu Illangovan Rachid Benmessaoud Practice Manager/Manager: Demetrios Papathanasiou Julia Bucknall Task Team Leader: Richard J. Spencer Richard J. Spencer ICR Team Leader: Fanny Missfeldt-Ringius - ICR Primary Author: Sati Achath - vi

7 Power Sector Reform: Second Development Policy Credit - P Positions At ICR At Approval Vice President: Annette Dixon Philippe Le Houerou Country Director: Patchamuthu Illangovan Patchamuthu Illangovan Practice Manager/Manager: Demetrios Papathanasiou Julia Bucknall Task Team Leader: Richard J. Spencer Richard J. Spencer ICR Team Leader: Fanny Missfeldt-Ringius - ICR Co-author: Sati Achath - F. Results Framework Analysis Program Development Objectives (PDOs) The objective of the DPC program was to support the government of Pakistan in: (i) reducing subsidies and improving tariff policy; (ii) improving sector performance and opening the market to private participation; and (iii) ensuring accountability and transparency. vii

8 PDO Indicator(s) Power Sector Reform: Development Policy Credits 1 and 2 Indicator Baseline Value DPC1 Target (end FY15/16) DPC2 Target Actual Achieved (end at Completion or FY15/16) 1 Target Years Policy Area A: Reducing Subsidies and Improving Tariff Policy A.1. Subsidies allocated in Federal budget (as % of budget) 1.80% 0.40% 0.80% 0.70% Date achieved 30 June June June June 2016 Comments (incl. % achievement) DPC2 target overachieved. Original target changed from 0.4% to 0.8% of GDP (see table 2). Policy Area B: Improving Sector Performance and Opening the Market to Private Participation B1. Increased bill collection in DISCOs (% of total billing) 86% 90% 94% 94.60% Date achieved 30 June June June June 2016 Comments (incl. % achievement) Targets overachieved. B2. Increased gas supply 3.8 billion SCFD 5 billion SCFD 3.9 billion SCFD Date achieved 30 June June June 2016 Comments (incl. % achievement) Target not achieved. All contracted power generated Market and system by IPPs, B3. Separation of market operations in operations and transmission single entity system operations (NTDC/ CPPA-G) GENCOs and WAPDA Hydel traded through an independent CPPA-G All contracted power generated by IPPs, GENCOs and WAPDA Hydel traded through an independent CPPA-G Date achieved 30 June June June 2016 Comments (incl. % achievement) Achieved. Policy Area C: Ensuring Accountability and Transparency C1. Disco performance reports and NEPRA review published None Yes Yes Date achieved 30 June June June 2016 Comments (incl. % achievement) Achieved. G. Ratings of Program Performance in ISRs Power Sector Reform: First Development Policy Credit - P No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 05/20/2015 Satisfactory Satisfactory Listed if different from DPC1 target. viii

9 Power Sector Reform: Second Development Policy Credit - P No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 12/13/2016 Moderately Satisfactory Satisfactory H. Restructuring (if any) Not applicable. ix

10 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal 1. The program was prepared at a time when Pakistan s energy sector performance was weak. Over the previous five years, Gross Domestic Product (GDP) growth had averaged only 3.6 percent, barely keeping pace with population increase. Low growth was in part the result of recurrent natural disasters, including severe floods in 2010 and 2011, and a difficult security situation. Economic management was poor, and much-needed structural reforms had been neglected. Productivity growth had slowed, private investment had fallen, the external position had weakened, and Central Bank reserves had declined to critical levels. The fiscal deficit for fiscal year 2012/2013 (fiscal year (FY)12/13) was 7.6 percent of GDP and was projected to increase further in the coming year. 2. Pakistan s energy sector was facing a serious crisis, especially in electricity. In FY12/13, shortages averaged 4,000-5,000 Mega-Watt (MW), meaning that about one quarter of demand was not met. At the same time, up to 5,000 MW of capacity was lying idle because an acute liquidity crisis among generators prevented sufficient fuel from being purchased. Yet in the same year, the government provided subsidies to the sector that amounted to four times federal expenditure on the health and education sectors. Both personal and economic life in Pakistan were deeply affected by routine load shedding of 8-9 hours daily, and sometimes even more. 3. The poorly performing electricity sector was thought to have reduced GDP growth by 2 percent per annum for the past several years. The sector relied heavily on government support through direct subsidies amounting to about 1.8 percent of GDP in FY12/13. Costs that could not be recovered from consumers or the government were accumulated in the books of the public electricity distribution companies (Discos). The Discos in turn failed to pay fully for goods and services they received, especially electricity generated by independent power producers (IPPs). 4. Commonly called the circular debt 2, these accumulated arrears amounted to about four percent of GDP in FY12/13. Actions were required to address two main distortions: the longstanding gap between the cost of service and revenues gained either from tariffs or subsides; and the unusually high cost of providing that service. At the same time, there was a need to address the inequities caused by poorly targeted subsidies to ensure that the sector developed in a socially and environmentally sustainable way. 5. The reforms of the energy sector in Pakistan had begun with the support of the World Bank in July 1992 when the government of Pakistan adopted a strategic plan for the unbundling of the energy sector, that up to that point had been vertically integrated. It was to open the door for private sector participation, which in turn was to bring more resources and efficiency of implementation. As in FY12/13, the government was facing a non-sustainable fiscal situation. Attracting private partners to finance generation moved forward with the adoption of the 1994 Policy Framework and Package of Incentives for Private Sector Power Generation. 2 Circular debt is being referred to as the amount of cash shortfall within the CPPA-G, which it cannot pay to power supply companies. This shortfall is the result of (a) the difference between the actual cost of providing electricity and the revenue realized by the Discos from sales to customers, plus subsidies; and (b) insufficient payments by Discos to CPPA-G out of the revenue realized (due to prioritizing their own needs before payments). 1

11 6. This policy proved highly successful with the financial close of about 20 IPPs with a total capacity of 4,500 MW and total leveraged foreign debt of about US$3 billion. However, in hindsight the program lacked a transparent mechanism to select those power plants that were part of the least-cost expansion plan, and an upper threshold of power plants to be installed (the World Bank had recommended a limit of 2,000 MW). 7. Partly because of a lower than expected demand, and partly due to the inability of the government to raise tariffs and rain in the inefficiencies of the distribution sector (losses, collections), the overall cost of the program was too high for the sector to absorb. Rather than forcefully moving forward the needed reforms to improve the performance of the Discos, the government focused on renegotiating the agreements with the IPPs over a period of nearly ten years. It left the relationship between the private sector and government bruised. This together with a lack of investments in hydropower led to the shortfall of power experienced in FY12/13 and an ever-growing need for subsidies for the power sector stifling economic development elsewhere. 8. The general election of April 2013 delivered a new Federal government with an absolute majority, and presaged the first democratic-to-democratic government handover. The strong mandate enabled a bold reform agenda aimed at stimulating growth. The government agreed a three-year Extended Fund Facility (EFF) agreement with the IMF early in its term, a major feature of which was structural reform of the energy sector. Other major donors were also undertaking programs aligned with the reform of the sector, most notably the Asian Development Bank (ADB), Japan (JICA), the UK and the US. 9. The World Bank prepared two independent Development Policy Credit (DPC) series in support of the IMF program. Aside from the DPC series dedicated to the energy sector and under review in this ICR, there was a DPC series supporting Fiscally Sustainable and Inclusive Growth, which was also a series of two DPCs and focused on macroeconomic reform, including financial sector, business environment, revenue collection, and privatization. Both DPC series were prepared in close collaboration across the teams. The strong partnership of international organizations and donors together with a determined new government led to a success of all programs across the board, and broke the record of a series of unsuccessful fiscal DPCs and IMF programs. Rationale for Bank Assistance 10. The new government identified its strategy around the four Es : energy, economy, extremism and education. The Country Partnership Strategy (CPS) planned to be in place from the start of FY15 reflected similar aims in its four pillars: transforming the energy sector; private sector development; reaching the underserved, neglected and poor; and service delivery. The program for the energy pillar of the CPS reflected a twin-track approach: sector reform, accompanied by investment aimed at improving efficiency and reducing costs. The CPS had been built up through a wide process that included broad consultation across all sections of civil society in Pakistan. 11. Early actions by the government included the transfer of the circular debt directly onto its books in June 2013 and the adoption of a National Power Policy in July In August and October 2013, it implemented substantial tariff increases. The coincidence of a new and empowered government, an IMF program and broad consensus among business, households and 2

12 donors on the need for deep reform offered a solid opportunity for tackling the most challenging issues of the power sector. 12. The DPC series formed the cornerstone of Bank s engagement on the policy side and supported the Government in deepening this agenda. Lessons from development policy financing in Pakistan in the early 2000 period pointed clearly towards the need for energy reform to be supported through separate, sectoral instruments. 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) The original PDOs were: (i) (ii) (iii) Reduce subsidies and improve tariff policy. Improve sector performance and open the market to private participation. Ensure accountability and transparency. Original Key Results Indicators: 13. The following results indicators were selected for the program: (i) (ii) (iii) (iv) (v) Reduced subsidies allocated in the federal budget from a baseline of 1.8 percent of GDP in FY12/13 to 0.4 percent by the end of FY15/16. Increased bill collection in Discos from a baseline of 86 percent of bills collected in FY12/13 to 90 percent of bills collected in FY15/16. Increased domestic gas supply from 3.8 billion standard cubic feet per day in FY12/13 to 5 billion standard cubic feet per day in FY 15/16. All contracted power generated by IPPs, Gencos and WAPDA Hydel traded through an independent Central Power Purchasing Agency by the end of FY 15/16. Household consumer awareness of the extent to which the government subsidizes electricity from a baseline of zero in FY12/13 to 25 percent of all household consumers by FY15/ Revised PDO (as approved by original approving authority) and Key Indicators 14. The PDO was not changed. Between DPC-1 and DPC-2 the following indicators were revised: (i) Reduced subsidies allocated in the federal budget. The end of program target was revised from 0.4 percent by the end of FY15/16 to 0.8 percent by the end of FY15/16. (ii) Increased bill collection in Discos. The end of program target was revised from 90 percent of bills collected in FY15/16 to 94 percent of bills collected in FY15/16. (v) Disco performance reports and NEPRA review published from a baseline of zero in FY12/13 to a target of the reports and review published [no date given]. 1.4 Original Policy Areas Supported by the Program (as approved) 15. The DPC program series supported the government s reforms in three policy areas: (i) Reduce subsidies and improve tariff policy: This programmatic area supported reducing, making more transparent, and better targeting subsidies to support the financial viability of the sector and improve the government s fiscal position. Measures in this area aimed to limit subsidies, move tariffs to levels consistent with recovery of reasonable costs incurred through efficient operations, and strengthen the role of the sector s economic regulator, the National Electric Power Regulatory Authority (NEPRA). 3

13 (ii) Improve sector performance and open the market to private participation: Support was provided to: (a) reduce electricity theft and increase bill collection by the Discos; (b) increase gas supply; and (c) move the electricity sector towards market-oriented operation. (iii) Ensure accountability and transparency: To ensure broader stakeholder support, the DPC program improved monitoring, governance, transparency and rigor in reporting of results in the energy sector. Actions included monitoring and self-reporting mechanisms for sector entities, and oversight by independent experts. 1.5 Revised Policy Areas (if applicable): 16. The policy areas were not changed during implementation. 1.6 Other significant changes 17. Changes were made to the indicative triggers and results indicators for DPC-2 during preparation to react to changing circumstances during the operation, and the evolving dialogue. The changes made and their rationale are discussed in Section 2.1, Program Performance, below. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 18. The Power Sector Reform Credits consisted of two programmatic DPCs with the schedule and amounts as set out in Table 1. Table 1: Power Sector Reform DPC Series: Operation Schedule Operation Approval Dates Disbursed Amount (US$ Million) Actual Closing Date DPC 1 (P128258) 05/01/ /30/2015 DPC 2 (P152021) 11/12/ /31/ Several of the indicative DPC-2 triggers set out in the Program Document for DPC-1 were modified during preparation of DPC-2, as were some of the outcome indicators. They recognized changes in approach agreed during the continued dialog between the authorities and the Bank. Table 2 sets out the program performance, adjustments and the outcomes. 4

14 Table 2: Program Performance, Adjustments and Outcomes Prior Actions DPC 1 Indicative Triggers in DPC 1 for DPC 2 Prior Actions DPC 2 Changes, Performance and Outcomes 1. Ministry of Water and Power notifies the revised tariffs determined by NEPRA resulting in an average 44% tariff increase for industrial, commercial, and bulk consumers and an average 32% increase for households using more than 200kWh/month, agriculture and other consumers compared with tariffs effective June MoF settles power sector circular debt in the amount of PKR 480 billion. Policy Area A: Reducing Subsidies and Improving Tariff Policy 1. Following the mechanism in 2014 Tariff and Subsidy Policy Guidelines, MWP informs NEPRA of the FY14/15 budgeted subsidy to incorporate in the tariff determination of each Disco, to apply in FY14/15 expected to result in electricity subsidies to be reduced to 0.7% of GDP. 2. Further to Prior Action 3 of DPC 1: (i) NEPRA issues guidelines for Disco tariff determination covering principles, methodologies, timetable, formula and procedures for both annual and multi-year tariff (MYT); and (ii) MWP publishes in its website a cap for total overdue payables to power generators not to exceed [PKR 220 billion]; and (iii) overdue payables to power generators are below the cap for at least [3] months. 1. Following the mechanism in 2014 Tariff and Subsidy Policy Guidelines, MWP has informed NEPRA of the FY14/15 subsidies by consumer category to incorporate in the tariff determination of each Disco, to apply in FY14/15 expected to result in electricity subsidies to be reduced to 0.8% of GDP. 2. MWP has published in its website a cap for total overdue payables to power generators not to exceed PKR 314 billion and a plan to reduce the flow of new overdue payables to PKR 39 billion by FY17/18, with interim targets for the flows of PKR 92 billion in FY15/16 and PKR 57 billion in FY16/17. Minor change to accommodate the way notification is done. Based on NEPRA determination in March 2015 the subsidy amount was 0.7% of forecasts. By the time of notification in June 2015 a changed consumer mix and slightly lower GDP resulted in an increase to 0.9%. In the target fiscal year 2016, a lower level of 0.7 percent was reached. Monitored through result indicator A1: Reduced subsidies allocated in Federal budget. Baseline in FY12/13: 1.8% of GDP; period between DPC-1 and DPC-2, reduced to 1.2% of GDP in FY 12/13, 0.9% of GDP by end FY14/15, and 0.7% by end of FY15/16. Original program target of 0.4% of GDP was not achievable because of continued government commitment to provide subsidies to consumers using up to 300kWh/month. Tracked using governmentprovided data. The action was simplified to focus on key action in the original trigger, namely the cap on circular debt and strengthened by an action plan to phase it out, which government published. It was subsequently monitored as part of the IMF program. Monitored through result indicator B1: increased bill collection by Discos. Baseline in FY12/13: 86%; target in FY15/16: 94%. Tracked in collaboration with the IMF program, which was reviewed quarterly. The Bank supported the review process. 5

15 Prior Actions DPC 1 Indicative Triggers in DPC 1 for DPC 2 Prior Actions DPC 2 Changes, Performance and Outcomes 3. Economic Coordination Committee (ECC) approves the Tariff and Subsidy Policy Guidelines covering: (i) subsidy policy for low-income residential customers; (ii) multi-year tariffs; (iii) equalization mechanism and guidance for tariff setting as envisaged in the NEPRA Act, including forward looking fuel price adjustments; and (iv) guidance for circular debt management related to overdue payables to generators by CPPA- G. 3. The Government has implemented a mechanism based on tariff surcharges and a Tariff Rationalization Fund to maintain nationwide uniform tariffs in Discos while ensuring cost recovery. This new action was included to give credit for an important structural reform that shifted the cost from the national uniform tariff on to the electricity consumer, done at a time to take advantage of falling oil prices. The team suggested that this action was opportunistic and identified in the dialogue during preparation of DPC-2. Nevertheless, given that the tariff setting process adopted mechanics for adjustment to ensure cost recovery, subsidies will be reduced in the long run. 4. (i) MWP instructs PESCO, HESCO, SEPCO, and MEPCO to outsource to the private sector collection of their respective feeders with losses of 50% or above; (ii) MWP instructs all Discos to implement a revenue protection program that ensures correct billing, reduces losses, in particular theft, and improves collections; (iii) Council of Common Interests initiates discussion on a mechanism to automatically withhold a proportion of the electricity arrears of provincial government entities; and (iv) Federal Government establishes mechanism to withhold budget transfers to federal agencies or entities which have arrears of payment for electricity that exceed 90 days of billing by Discos. Policy Area B: Improving Sector Performance and Opening the Market to Private Participation 3. Each Disco identifies and assesses existing consumer receivables and their respective recoverability to reflect, in accordance with the Companies Ordinance and the General Accounting Practices, re-classification and provisioning of the qualified receivables in its audited financial statements for fiscal year ended 30 June The action was dropped This action was completed satisfactorily and the accounts reflected the change. Nevertheless, the action did not adequately reflect the outcome being sought, namely to increase collections in Discos which was included in the circular debt plan completed under prior action 2 in DPC-2. 6

16 Prior Actions DPC 1 Indicative Triggers in DPC 1 for DPC 2 Prior Actions DPC 2 Changes, Performance and Outcomes 5. (i) MPNR discloses the 2013 Model Petroleum Concession Agreement on its website; (ii) MPNR announces the award of petroleum exploration blocks for the 2013 bidding round; and (iii) OGRA issues at least 3 pricing notifications to enable producers to start developing new and incremental gas production with increased prices allowed under the 2012 Petroleum Policy. 4. MPNR notifies rules for enhancing gas production from producing, dormant or under-producing concessions. 4. MPNR has signed supplemental agreements agreeing revised prices for 92 exploration concessions and production leases at the levels set out in the 2012 Petroleum Policy, including 26 with the private sector. The replacement action addressed a longoutstanding issue of greater concern to gas exploration and production companies. It was expected to increase domestic gas production more rapidly. Measured through result indicator B2, Increased gas supply: from a baseline in FY12/ 13 of 3.8 billion standard cubic feet per day (bcfd) to a target at the end of FY15/16 of 5 bcfd. Tracked through dialogue with MPNR which provided relevant data. 5. The Economic Coordination Committee of the Cabinet has approved policy directives that LNG will be provided to consumers who pay its full cost through the tariff. This new action was introduced in response to the plan to import significant quantities of LNG. Supports adoption of a sound policy that will improve investor confidence and avoid risk of gas being diverted to segments where costs cannot be recovered. The LNG imports contributed to result indicator B2. Identified through dialogue with MPNR. Dialogue led to support for wide ranging gas sector reform. 6. CPPA-G s Memorandum and Articles of Association amended to establish CPPA-G as an agent to purchase electricity on behalf of distribution companies (including Discos); and CPPA-G and Genco Holding Company endorse Heads of Agreement reflecting key principles for Power Purchase Agreements (PPAs) for existing thermal plants, with energy price based on heat rate testing. 5. (i) NTDC files request and NEPRA amends NTDC license to remove CPPA- G functions and NTDC s authority to purchase or sell electricity; and (ii) CPPA-G signs an energy supply agreement with each Disco to procure power on its behalf. 6. (i) CPPA-G signs on behalf of Discos PPA with WAPDA Hydel for existing plant and PPAs with all Gencos, one PPA for each existing operational thermal plant of Gencos; and (ii) WAPDA enters into agreement with CPPA-G for administration of current PPAs of IPPs under 1994 policy. 6. (i) CPPA-G has demonstrated operational capability to handle all steps in the billing and settlement cycle of electricity sales by Generators and purchases by Discos; and (ii) NEPRA has granted an amendment to NTDC license to eliminate CPPA-G functions. The single revised action better focused on the desired outcome of the original two triggers rather than processes leading to it, and reduced the risk of reversal. Measured through result indicator B3, separation of market operations and transmission system operations: from a baseline in FY12/13 of market and system operations being in a single entity (NTDC/CPPA-G) to a target in FY15/16 for all contracted power generated by IPPs, GENCOs and WAPDA Hydel being traded through an independent CPPA-G acting on behalf of Discos. Change was agreed through dialogue with MWP, NEPRA and NTDC. 7

17 Prior Actions DPC 1 Indicative Triggers in DPC 1 for DPC 2 Prior Actions DPC 2 Changes, Performance and Outcomes 7. NTDC implements web-based open access to operational information, including merit order, and daily payment instruction to generators. 8. Each Disco (i) includes subsidy amount in customer s bills; and (ii) publishes on its website monthly billing and collection data aggregated by consumer category. 9. ECC approves establishment of monitoring units within both MWP and MPNR with responsibilities for monitoring the energy sector, reporting on a quarterly basis; and MWP and MPNR formulate the scope of work for advisors who will review the quarterly monitoring reports and make those reviews public. Policy Area C: Ensuring Accountability and Transparency 7. CPPA-G implements web-based access to monthly amount due and payment by each Disco including arrears, to CPPA-G and by CPPA-G to generators. 8. MWP implements public web-based access to monthly results of performance contracts signed with Discos, NTDC and Gencos. 9. NEPRA publishes at least monthly on its website, information provided by all licensees on selected performance standards results and indicators. 7. CPPA-G publicly disclosed on its website the monthly amounts due, and payments made, by each Disco to CPPA- G, and by CPPA-G to Generators, including arrears. 8. NEPRA has disclosed the annual Discos performance and evaluation report, and has initiated outreach action to consumers on the content thereof; and Discos have disclosed on their respective websites their annual performance reports, including their plans to improve service delivery. Largely rewording, but introduced public access to information and supported transparency for privatization. Tracked through regular monitoring of the CPPA-G web site by task team, and feedback to MWP as the owner of CPPA-G when performance lagged. Combined the two triggers and focused on monitoring of performance of licensees through regulator rather than management by MWP. Was also aimed at building consumer awareness of comparative Disco performance. Measured through result indicator C1, Disco performance reports and NEPRA review published from a baseline of no publication in FY12/13 to a target of the reports and review published (not dated in original program document). 8

18 2.2 Major Factors Affecting Implementation: 20. Preparation and early implementation of the operation was positively affected by the following factors: Strong government commitment: The new government publicly expressed its commitment to reducing the chronic electricity shortages and sector indebtedness, as well as introducing sector reforms that had been planned for a number of years. The program was largely driven by the government reform agenda and its commitment, specifically, to end load shedding in 2017, before the end of its term in power. Harmonized messaging from development partners: The program was jointly prepared and monitored with Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA) using a shared policy matrix, though with minor differences. It was part of a wider program of support which included an IMF extended arrangement, a substantial focus of which was structural adjustment in the energy sector. The UK and US, two other key donors also coordinated their policy dialogue. The harmonized messaging allowed the government to focus on a single set of agreed actions, while providing additional leverage for the donors. The first operation focused on crisis management, the second on reform. The first operation focused on the immediate actions required to get the sector functioning adequately, with the intention of enabling deeper reforms, that needed to be rooted in a functioning sector in the second operation. This approach was well aligned with the government s interests but risked the later and more difficult reforms not being followed through adequately. Lessons learned from previous operations: The program drew on previous experience with energy policy lending in Pakistan 3 and elsewhere, in particular by ensuring: (i) Executing dedicated sector operations rather inserting a limited number of prior actions in a multi-sector or general macro-economic support operation. (ii) Continuous assessment of progress and adaptation as the reform evolved, including changing indicative triggers and indicators. This was greatly facilitated by the regular review of the IMF program in which the Bank participated (iii)precise definitions of actions, and when they were considered complete were prepared in advance and documented in a separate program Technical Memorandum. Prior actions were designed to trigger further reform works. The prior action that introduced the policy that the users of LNG should pay the full cost of gas triggered a major reform of the downstream gas sector, while the work on gas concessions has triggered upstream reform, including plans to create an independent regulator. The Bank has supported these further reforms through ASA. 3 Particularly Independent Evaluation Group, World Bank, Project Performance Assessment Report on Public Sector Adjustment Loan/Credit (Ln 3645-PK, Cr PK); Structural Adjustment Loan (Ln PK); Structural Adjustment Credit (Cr PK); and Second Structural Adjustment Credit (Cr PK), Report No , December 19,

19 Soundness of background analysis underpinning the program: Given the long-standing concerns with the performance of the power sector in Pakistan, there was a wealth of analysis that had been prepared by the Bank and other development partners. Policy notes prepared in the run up to the recent election had updated much of the earlier work and there was close agreement between most parties on what was needed. 21. Later implementation of the program was negatively affected by the following factors: Waning commitment to reform. With the passage of the most immediate crisis in the power sector, the government commitment frayed. While MoF s interest in the program remained strong, MWP s weakened, as it perceived it gained little from the reforms while having to undertake the bulk of the work. This was not so obvious with MPNR, perhaps because of the closer relationship between the two, based on MPNR s role in raising revenue for government. Withdrawal from privatization program. Privatization was not made an explicit part of the program but several prior actions were designed to support the government s ambitions to privatize the Gencos and Discos. Actions that supported this, and would have been sustained by privatization include reduction of subsidies, improvement of performance, clarification of contractual relationships and greater transparency. Vested interests reduced the impact of the reforms. The separation of the National Transmission and Dispatch Company (NTDC) and the Central Power Purchasing Agency (CPPA-G) was delayed resulting in delayed appraisal of the second operation. While CPPA- G has now become an independent agency, its mandate is still temporary and the underpinning Commercial Code has not yet been fully revised, arguably because market participants favor the status quo over moving to a wholesale market. Limited capacity for follow through. In two examples, limited capacity has affected the implementation of the reforms: (i) MWP s ability to prepare and implement a plan to reduce the circular debt slowed down the process of restoring the sector s financial viability. Partly in consequence, the circular debt has continued to rise. (ii) The management of upstream gas concessions have remained a bottleneck to increased gas supplies. MPNR s Directorate General of Petroleum Concessions had few and poorly qualified staff. The volume of work required to manage new concessions exceeds its capacity, contributing to the limited increase in domestic gas production. Sustained implementation of some prior actions has been difficult. Some prior actions, particularly where continued disclosure of information is required, have not been sustained. In consequence, the chance has been lost of creating a virtuous circle of supply of information bringing greater transparency to the sector. 22. Risk was broadly assessed correctly. The overall risk was assessed as high, with the following factors identified: Political, social and industrial opposition to increases in the retail electricity tariff and its impact on inflation. The risk to the subsidized tariff did not materialize. Helped by the marked reduction in oil prices, which are reflected in tariffs by a monthly adjustment mechanism, tariffs fell during the DPC period. Some of the subsidies were clawed back by 10

20 not passing the full fuel price adjustments through to the subsidized consumer categories, thus helping reduce the overall subsidy burden. Judicial intervention delaying implementation of tariff adjustments and other reform measures. The risk was assessed as moderate in the first operation and raised to substantial in the second and may have been underestimated. Judicial interventions in the tariff policy area affected two issues: surcharges and tariff determinations, and both these can impact the sector s financial position and hence put at risk the subsidy reduction outcome. Although mitigation measures were adopted, they have not been effective. Macroeconomic stability affected by vulnerability to external and internal shocks. The risk did not materialize and was not specifically rated. If anything, the positive economic shock of sharply reducing oil prices, that took place during the implementation of DPC-2 assisted in achieving its objectives, by providing additional space for the government to reduce subsidies in the sector. Weak management in operating companies and excessive control by MWP. The risk was correctly identified but underestimated. Weak management has continued to hold the sector back, despite mitigation through performance contracts (which have since been allowed to lapse), monitoring and criminalizing power theft. MWP has continued to manage the sector closely. The abandonment of the privatization program and failure to follow through on the mitigation has further worsened the effect of the risk. In consequence companies continue to underperform. Opposition from vested interests. The risk that vested interests would oppose commercialization and increased accountability and access to information was correctly identified. Substantial opposition to the changes, in detail rather than in principle, mostly from within the sector and led in part by MWP, has reduced the effectiveness of some of the reforms. Technical Assistance to NEPRA (by the Bank) and to CPPA-G (by ADB) has been put in place but this has not been sufficient to avoid backtracking, so the mitigation has not been fully effective. The first operation front loaded politically challenging no regrets actions. The risk identified here was that while such actions were potent, it may have made it more difficult to undertake the reforms to address more deep-rooted problems. This does seem to have been the case. Fiduciary risks were assessed as substantial. The mitigation identified was the new PEFA Plus program that was initiated during the program. There have been no issues with fiduciary aspects of any of the budget support operations, so it appears that the mitigation has been satisfactory. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: 23. M&E Design: Design was satisfactory, and relied on a simple framework operating with limited but key indicators that are linked to the CPF outcomes. Government of Pakistan and the Bank used the Results Framework presented in Annex 2 as a monitoring tool. M&E was designed to be reported jointly with ADB and JICA. Periodic monitoring and dialogue with the relevant line ministries and other stakeholders involved in implementing the reforms was designed to take place through Bank field missions and through staff on the ground in Pakistan. The targets were slightly modified during implementation to better reflect the reform progress. 11

21 The indicators were relevant to the PDOs and the collection methods were those of the government. Load shedding data, which would have been desirable as a monitoring indicator, were not available because it was not made available by the Government. 24. M&E Implementation: The program relied on routinely reported indicators for quantitative M&E purposes and carried out discussions with the stakeholders, all of whom were responsive to requests for information. Regular monitoring of key issues took place through face to face interaction and, more formally, during IMF program reviews, held quarterly. The MoF provided necessary information regarding disbursement and utilization of the funds including regular and reliable documentation on progress regarding the reform program. 25. M&E Utilization: Appropriate data collected by the Government on indicators were evaluated and used during supervision missions, and for decision-making on policy work. The information provided was used in dialogue with the Government in further shaping and improving power sector governance. The same indicators were used for inputs to the program Learning Review which took place in FY 17, when the operation closed. The information was used to help develop how the Bank could further support the sector, particularly relating to gas sector reforms. 2.4 Expected Next Phase/Follow-up Operation (if any): 26. The Bank formulated the program as a two-operation series. ADB formulated the program as a five-operation series. The Bank informally considered whether its participation in further operations as envisaged under the ADB program but decided against continuation. 3. Assessment of Outcomes Rating: Satisfactory 3.1 Relevance of Objectives, Design and Implementation 27. Relevance of Objectives: The program objectives were relevant at the time of appraisal and remain so at closing. The three policy areas: reducing subsidies and improving tariff policy; improving sector performance and opening the market to private participation; and putting in place accountability and transparency are central to improved sector performance. Improved performance in the electric power sector and the wider energy sector is vital if Pakistan s fiscal sustainability, growth and job creation aspirations are to be met. The negative impact of the performance of the electricity sector on businesses was noted again in 2018 where the World Bank s Doing Business report ranks Pakistan at 167 out of 190 countries in terms of the ease with which business can get access to electricity. These were at the core of the Country Partnership Strategy (CPS) for and continue to be so in the CPS for Relevance of Design: The program design was relevant in that the design balanced adaptation as reforms were implemented with a framework to ensure continued coherence. Prior actions were precisely formulated to avoid any delays or failures to complete them. Indicative triggers were adapted as required. The design took into account several key lessons from previous experience in energy policy lending in Pakistan. Policy measures supported by the program and results indicators were in line with the operation s and higher level objectives set out in the CPS. 29. Relevance of Implementation: Implementation arrangements enabled the operations to remain relevant during implementation. The robust country office in Islamabad and the presence 12

22 of the Task Team Leader (TTL) in the field greatly facilitated implementation and monitoring on a continuous basis. 3.2 Achievement of Program Development Objectives 30. The DPC operation was successful in achieving its objectives in which the government s actions paved way for attaining all of the triggers and most of the targeted outcomes of sector reform. Progress on individual pillar objectives is detailed below: Achievements under Policy Area A - Reducing Subsidies and Improving Tariff Policy: 31. At the heart of the measures taken under Policy Area A was the attempt to get a handle on the circular debt problem that Pakistan s energy sector is hostage of. Over the past decade it reached up to 5 percent of nominal GDP. This circular debt problem follows from the Discos inability to recover their full cost either from their customers or the Government. The cash shortfall means that they cannot pay the bills for electricity supplied to them. In turn, the public generators are unable to pay their fuel bills, and IPPs curtail their supply. The consequent shortages of electricity are the main cause of load shedding, and all the economic and social consequences following on from there. The problem was well documented ahead of the DPC (Trimble et al (2011) and USAID (2013)). 32. By targeting this singularly most important reason for failure of Pakistan s power sector in a head-on manner, the team with full support from Bank management demonstrated that the DPC is a suitable instrument for energy sector challenges that are financially significant, but otherwise near intractable. It is worthwhile noting that addressing the financial viability as a single key issue in Pakistan had not been tried before. Other efforts had sought out secondary objectives such as privatization or private sector participation as an indirect means to achieving financial viability of Discos. 33. The combination of actions proposed under the DPC focused on (i) reducing the subsidies allocated by the Federal government as a driver for better performance throughout; (ii) cleaning up the debt problem (MoF settles the circular debt, and thereafter a debt ceiling is maintained); and (iii) moving the tariff setting mechanism towards better cost recovery by introducing automatic adjustments (see Table 2). 34. Results indicator A1: Reduced subsidies allocated in Federal Budget. The baseline value was 1.8% of GDP. In the period between DPC-1 and DPC-2, subsidies were reduced to 1.2% of GDP in FY 12/13. By the end of FY15/16 they reached 0.7% of GDP. 35. For the target year of FY 2016, a level of 0.7 percent was reached, amounting to a more than halving of the annual subsidies. 36. Originally a program target of 0.4 percent of GDP had been set. However, it was revised because of continued government commitment to provide subsidies to consumers using up to 300kWh/month. Against the background of prevailing political economy, it was felt that maintaining the subsidy at up to the 300kWh level would support the middle class in Pakistan at a time when further social unrest was not desired. The cost of the subsidy did amount to 0.4% of GDP. 37. As a complementary measure to reaching A1, a cap on circular debt was to be maintained at levels less than PKR 314 billion. Circular debt is being referred to as the amount of cash shortfall within the CPPA-G, which it cannot pay to power supply companies. This shortfall is 13