A Validation Report in May 2009 of a Project Completion Report (PCR)of Pakistan's Energy Sector Restructuring Program (ESRP). US$350M loan approved in 2000), by ADB's Independent Evaluation Department. The validation report called for, among others, a Labor Impoact Assessment that had not been undertaken as part of ESRP.
http://www.adb.org/Documents/Reports/Validation/PAK/in161-09.pdf
EXCERPTS:
Performance of the Borrower and Executing Agency:
From the ESRP much has been accomplished since December 2000, with ADB loans and guidance and further support from the IMF and other development partners. As reported by the PCR, in May 2007, the loan covenants have been complied with, except for the privatization of Jamshoro Power Company Limited (JPC) and Faisalabad Electric Supply Company (FESCO). According to the Privatization Commission, the two companies could be privatized in 2007. [As of June 2009, expressions of interest are still being solicited for the long-term lease of Jamshoro Power Company Limited. Faisalabad Electric Supply Company is still to be privatized.] The role of the MOF as the EA for the loans was also a source of strength for the Program. The MOF was well placed to see the link between Pakistan’s macroeconomic crisis and the need for reforms in the energy sector. A well-thought-out structure for monitoring and implementing the ESRP was established.
The Program achieved most of the planned outcomes. All seven outputs of the ESRP were at least partly achieved; KESC was restructured and privatized; the restructuring of WAPDA has also proceeded, albeit slowly; disputes with IPPs were all resolved; cross-indebtedness between power sector entities and the central and state governments has been largely eliminated, such that both government and the utilities are now more accountable for their financial performance; system losses in transmission and distribution have also been reduced, although there is considerable scope for further progress; substantial investment in the transmission and distribution system is being ensured in all the power sector companies. Increased monitoring is being done to avoid power theft; the regulator has gained considerably in capacity, and the enabling environment for a competitive power market has progressed since appraisal; the reform of the natural gas and petroleum sector has proceeded slowly but steadily; the Oil and Gas Regulatory Authority (OGRA) was formed in 2002 and has taken on an increasingly greater role in regulating the oil and gas sector. The unbundling of the sector and the establishment of effective regulation are major steps forward.
Not all was smooth: and many obstacles remain. The PCR reported that: privatization of KESC took considerably longer to achieve than envisaged at the time of the loan but was ultimately successful; capacity shortfalls continue in generation, transmission, and distribution; there were delays in the creation of a central power purchasing agency (CPPA); the Government has failed to announce tariffs for power retailers; there was lack of clarity in subsidy policies for the sector; the corporatized entities. Tranches 2 and 3 of Loan 1807 were paid off early, and the loan cancelled before the planned closing date. Not all of the work was completed nor all covenants met. The Government made a commitment to continue with the ESRP and the PCR has reported that the Government has fulfilled this commitment. The privatization of JPC and FESCO is the only area where covenants have clearly not been complied with. ADB has continued to remind the Government of its commitment but has only a limited ability to influence events, as the loans are closed and the key WAPDA development partner is the World Bank. Similarly, the social program of work planned under Loan 1809 was not carried out because the loan was cancelled by the Government. The PCR rated the performance of the Borrower and EA as “successful”. This Validation notes that the outputs that were achieved were “successful”. Considering the overall accomplishments and detractions this Validation also rates the performance as “successful”.
Performance of the Asian Development Bank:
Regular policy dialogue with the Government and monitoring by ADB ensured effective implementation of the Program. During loan negotiations and program implementation ADB also maintained in close coordination with the IMF and other partners in the ESRP. In addition to the ESRP, ADB has supported the power sector of Pakistan with other projects, which in essence supports the ESRP. The PCR reports that ADB has provided technical assistance to restructure the gas sector and build the institutional capacity of the National Transmission and Despatch Company Limited and the Alternative Energy Development Board. A major new loan for the transmission sector was approved in December 2006. A technical assistance project for the CPPA is ongoing. ADB’s private sector operations have an investment in KESC. A new loan for the distribution sector is being considered. Such wide-ranging assistance to the power sector is well justified. The MOF and other agencies involved in the ESRP have expressed their appreciation of the intensive policy dialogue and support they received from ADB during loan negotiations and implementation, particularly in the privatization of KESC. Much of the success reported in Section C(v), Performance of the Borrower and the EA, is attributable to the support provided by ADB. In administration of the loan, ADB disbursed funds promptly when covenants were met but held firm on releasing loans until the conditions were met, such as for privatization. ADB made regular representation to the Government when progress was slow on such key Conditions. Early cancellation of Loans 1807 and 1809 were unilateral actions by the Government and beyond ADB’s control. There were no problems with ADB’s performance. The performance of ADB is therefore deemed “satisfactory”.
Effectiveness in Achieving Outcome.
As reported in Section B(ii) above, this Validation considers objectives/outcomes of the Program as:
1. sector economic efficiency and consumer satisfaction,
2. to reform the energy sector in Pakistan, (provide a competitive power sector that can deliver
required quantities of quality power at least cost to the consumer),
3. to achieve sustainable growth in the energy sector,
4. to increase efficiency in the use of resources,
5. to improve customer focus in the delivery of services,
6. improvement in the national economy, and
7. the overarching outcome of poverty reduction.
As the TA Loan was cancelled by the Government, some of the potential positive outcomes of this loan have been negated and, without monitoring, the social impact of restructuring of KESC and WAPDA the outcome of Labor retrenchment and redeployment are not known. Although cancellation of the TA Loan has diminished the benefits of the Program there are nonetheless numerous accomplishments of the Program that will provide or contribute to the expected outcomes and accordingly this Validation rates the achievement of outcome as “effective”.
Overall Assessment:
The ESRP was implemented broadly as designed and has attained most of its planned objectives. Effective monitoring of the Program during implementation was provided by ADB through open dialogue with the Government and regular review missions. Some aspects of the Program were delayed, and the achievement in some areas, for example, privatization, was incomplete (at the time of cancellation of the loans). The cancellation of loans was a setback. However the Government has made a commitment to continue with the ESRP and has expressed the view that initial impediments to privatization have been removed, and further progress on implementation of Program is expected as planned. Since loan closing, the PCR reported that the Government has followed up on this commitment. The growing skills of the power sector regulator, the privatization of KESC, the improvement in the environment for IPP investment in the power sector, and the unbundling of WAPDA are real successes. Outcomes and impacts were mostly positive. As reported by the PCR and as indicated from the above Sections, overall, from the point of view of relevance, efficacy, efficiency, and sustainability, the Program is considered “successful”. This Validation agrees with the PCR and also rates the Overall Assessment as “successful”.
Lessons:
This Validation agrees with the Lessons to be learned that are identified by the PCR and paraphrased as follows:
1. The early processing of the loan and the success with respect to meeting the loan covenants demonstrate the importance of investing time in loan processing and setting tough conditions for loan approval.
2. The Program could have included a mechanism of formal review after about 18 months in order to consider revising the content and timing of loan covenants. The objective would be to make the covenants more relevant to prevailing conditions, strengthen or bring forward some conditions, and waive or defer others.
3. A well-thought-out structure for implementing the ESRP monitoring was established. The loans for the ESRP were closely coordinated with those of the IMF and other development partners, particularly the World Bank. This close coordination was a key strength in successful implementation of the ESRP.
4. If ADB attaches great importance to similar analysis, it should consider ensuring that commitment to undertake the analysis is irrevocable, for example, by making the work a loan condition and carrying out preliminary work before loan approval.
5. Where possible, ADB should link its loan conditions to aspects of the Program where it has strongly positioned itself in the policy dialogue and should take a leadership role in the financing partnership.
6. Difficult lending conditions like the requirement to privatize KESC are achievable, but ADB (and the EA) must be prepared to persevere over a long period and extensive support must be provided through technical assistance and policy guidance.
Recommendations:
This Validation agrees with the recommendations in the PCR as paraphrased below, with two supplementary recommendations.
1. Future Monitoring. ADB should maintain its policy dialogue with the Government over reform in the energy sector. ADB’s ongoing loan programs provide ample opportunity for reform dialogue and leverage on ESRP expected outputs.
2. Covenants. As in the above recommendation on Future Monitoring, further reform oriented covenants with respect to ESPR outputs should be incorporated in future loans to take advantage of the potential leverage.
3. Additional Assistance.
a. Substantial ADB involvement in future programs can help sustain the progress made under the ESRP. However, the investment needs to be linked to further reform efforts in such areas as: (i) commitment by the Government to announce tariff decisions approved by NEPRA in a timely manner and enable cost recovery across the power sector; (ii) clear policies on and payment arrangements for any subsidies for power supplies; (iii) stronger commitments to conclude the restructuring of WAPDA and the rivatization of some of its successor companies; (iv) progress toward open access in the power sector, at least for larger power consumers; (v) swift establishment of an independent CPPA; and (vi) strengthening of NEPRA as the independent power sector regulator.
b. In general, the model for future lending on large, long term projects should be multitranche facilities, so that the lending programs can be linked to progress on ongoing conditions and to further reform efforts.
c. ADB should also aim to provide funds in areas where it can take the lead in policy dialogue and reform, to ensure effective use of ADB funds.
Recommendations of Validation supplementary to the PCR.
As a supplement to the PCR recommendation on future monitoring, ADB should:
1. Evaluate the outcome of the labor retrenchment and redeployment resulting from the restructuring and privatization of KESC and WAPDA, to ensure that no social safeguard issues have come about on an ADB heavily supported program.
2. Ensure that Objectives, Outcomes, Components or Key Conditions and Outputs are clearly and definitively stated in the RRP’s and PCR’s and succinctly presented in the Design and Monitoring Framework and not buried in paragraphs of text.
Monitoring and Evaluation (M&E) Design, Implementation and Utilization (PCR assessment and Validation).
ADB provided close M&E during implementation of the ESRP, mainly through the ADB formal review missions, which were part of ADB’s program design, and also through coordination of activities with the IMF, World Bank and other development partners. ADB’s dialogue and counsel with the Government were based largely on this M&E which was essential and contributed significantly to the success of the Program. No post program monitoring was included in the design. A subprogram to monitor the effectiveness of the retrenchment and redeployment for KESC and WAPDA restructuring was planned as part of TA Loan 1809 but not implemented because the loan was cancelled. Further monitoring is proposed with respect to this subprogram in the recommendations herein.
Other (Safeguards, including governance and anticorruption; Fiduciary aspects):
(i) Safeguards.
Under the covenants of Loans 1807, 1808 and 1809 the Borrower and EA were required to ensure that social safeguards were addressed, with conditions covering (i) policy statements on economic and social objectives in the restructured power sector, (ii) mitigation measures to ensure that no undue adverse impacts are imposed on poor and low-income consumers during privatization of KESC, and (iii) labor restructuring strategy. It is noted that the PCR has indicated that most of these covenants were complied with. However, as discussed in several sections above, the TA Loan 1809 was particularly designed to undertake (i) a poverty impact assessment to monitor and evaluate impacts on residential and commercial consumers, with special attention to the poorest segment of consumers; and (ii) a labor impact assessment and provide a mitigation plan for privatization of KESC and WAPDA. This plan was cancelled with the loan precluding a significant social safeguard evaluation in the ESRP. This is considered further in the recommendations. There were no environmental safeguard issues in the ESRP.
(ii) Governance, Anticorruption and Fiduciary Aspects.
Governance, anticorruption and fiduciary aspects were central issues for ADB and its support of the ESRP. At the time of appraisal, worsening problems in these areas had a major impact on macroeconomic performance and hindered the effectiveness and sustainability of the power sector. Specifically, weak governance resulted in inefficient utility operations, power theft, illegal power supply, reduced billing and tariff collections, and nonpayment of arrears. These corrupt practices opened the way for massive waste and contributed to a build up of financial insolvency of the public utilities, which was possible only through corruption and malpractice at all levels of the organizational hierarchy—the government, politicians, labor, and the society in general. All of the key conditions of the ESPR as outlined in Section B(iii) are directly targeting governance, corruption and fiduciary concerns. Those conditions cover enhancing governance, enhancing the regulatory capacity and the capacity of the sector regulator, enhancing sector reform and enabling a competitive electricity market.