Pakistan : Sustainable Energy Sector Reform Program - Subprogram 2

Project Name

Sustainable Energy Sector Reform Program - Subprogram 2

Project Number

47015-002

Country / Economy

• Pakistan

Project Status

Closed

Project Type / Modality of Assistance

• Loan

Source of Funding / Amount

Loan 3321-PAK: Sustainable Energy Sector Reform Program - Subprogram 2

Source	Amount
Ordinary capital resources	US$ 100.00 million

Loan 3322-PAK: Sustainable Energy Sector Reform Program - Subprogram 2

Source	Amount
Asian Development Fund	US$ 300.00 million

Loan: Sustainable Energy Sector Reform Program - Subprogram 2

Source	Amount
World Bank	US$ 500.00 million

Loan: Sustainable Energy Sector Reform Program - Subprogram 2

Source	Amount
Japan International Cooperation Agency	US$ 41.32 million

Strategic Agendas

• Inclusive economic growth

Drivers of Change

• Governance and capacity development
• Knowledge solutions
• Partnerships
• Private sector development

Sector / Subsector

• Energy / Energy sector development and institutional reform

Gender

No gender elements

Description

The Program will help the Government with the short-term stabilization measures and start the long-term restructuring for a sustainable power sector. The impact of the overall program will be a sustainable energy sector that supports economic growth. The outcome will be a reliable and sustainable energy system.

Project Rationale and Linkage to Country/Regional Strategy

The programmatic approach and subprogram 1 were approved on 24 April 2014 in support of the 2013 National Power Policy of the Government of Pakistan, which seeks to build an affordable, reliable, sustainable, and secure energy sector to support the country's economic growth. The programmatic approach, fully coordinated with the International Monetary Fund (IMF) under its extended fund facility, takes a chronological approach of over 5 years to provide dynamic, long-term support to multidimensional reforms, with an annual subprogram that matches the budget cycle. Subprogram 1, cofinanced by the World Bank and the Japan International Cooperation Agency (JICA), established a solid foundation for implementation of reforms in subsequent subprograms. Subprogram 2 will support the second year of the programmatic approach. The eighth review of IMF was completed in September 2015.

In 2014, Pakistan's economy grew by 4.1%, above the forecasted global growth of 3.6%. The gap between electricity demand and supply is expected to remain about 5,500 megawatts, or 20% of peak demand, until 2018. The average duration of load shedding in 2014 was around 810 hours a day in most areas, and up to 1820 hours in rural areas. The chronic energy shortage decreases business confidence and negatively affects manufacturing, trade, and consequently household income. Textile exports, which account for more than 50% of goods export receipts, have only increased marginally since 2010. The steady deterioration of power availability has also hurt business confidence. Private investment has decreased by 7.5% since 2008. Although power sector subsidies have decreased from 1.8% (FY2013) to 0.8% (FY2015) of gross domestic product, they are still a significant contributor to the government's weak fiscal position.

Pakistan initiated a comprehensive energy sector reform program in the early 1990s, but the results have been mixed and expected efficiencies have not been fully achieved. The past reforms led to the unbundling of the Water and Power Development Authority into 15 corporatized entities: nine regional power distribution companies (DISCOs), four thermal power generation companies (GENCOs), the National Transmission and Despatch Company (NTDC), and the Water and Power Development Authority. The Central Power Purchasing Agency (CPPA), a unit within NTDC, was licensed to act as a single buyer and seller of electricity. All entities are still fully owned by the government except for the Karachi Electric Supply Company, which was privatized in 2005. Independent power producers (IPPs)generate 56% of the country's power. The National Electric Power Regulatory Authority (NEPRA), established in 1997, determines tariffs, issues licenses, and regulates the sector. About two-thirds of the population had access to grid electricity in 2014, and electricity consumption has remained constrained at about 80 terawatt hours per year since 2009 despite the growth in demand

The subprogram 2 was prepared in coordination with the IMF, World Bank, JICA, and other development partners in order to increase the overall economic impact. Pakistan's macroeconomic indicators are improving and all IMF quantitative performance criteria were met by the end of 2014. Inflation eased in July 2015 to a 1.3% annual rate. Financial sector indicators remain sound and foreign exchange reserves reached $13.5 billion by the end of June 2015. The Fiscal Responsibility and Debt Limitation Act 2005 required the government to reduce the ratio of public debt to gross domestic product to 60% by June 2013 & maintain it below 60% from then on. The ratio was 63% for FY2014, down from 63.6% in FY2013, mainly because of a lower fiscal deficit and appreciation of the Pakistan rupee against the US dollar. Although challenges remain, the IMF believes that as structural reforms take hold, bottlenecks will ease, growth will accelerate, and vulnerabilities will recede.

Impact

Economic growth through sustainable energy sector (National Power Policy, 2013)

Project Outcome

Description of Outcome

Reliability, sustainability, and affordability of the energy system improved

Progress Toward Outcome

Ongoing. Subprogram 2 released on 30 November 2015.

Implementation Progress

Description of Project Outputs

Tariffs and subsidies managed

a. Clear policies on tariffs and subsidies that are targeted at low-income customers

b. Policy implementation through NEPRA rules and guidelines ensured

c. Discretionary policy decisions and lag in tariff approval and implementation reduced

Sector performance and market access for private sector participation improved.

a. Losses reduced and collection rate of DISCOs improved

b. Demand-side efficiency improved and energy conservation strengthened

c. Generation costs managed through least-cost planning, and following of the plan for new power generation plants ensured

d. Gas supply increased and gas market opened to direct contracting between producers and large-volume gas consumers

e Performance of public sector power companies commercialized and improved

f. Commercial operations of the CPPA institutionalized

Accountability and transparency in the power sector achieved

Status of Implementation Progress (Outputs, Activities, and Issues)

Ongoing. Policy matrix for Subprogram 3 being updated.

Geographical Location

Nation-wide

Safeguard Categories

Environment

C

Involuntary Resettlement

C

Indigenous Peoples

C

Summary of Environmental and Social Aspects

Environmental Aspects

An environmental assessment for the entire program found that the policy action requiring the government to prepare a least-cost generation and transmission plan may have future impacts on the environment if not appropriately managed. The covenants in the loan agreement include carrying out a strategic environmental assessment and making sure that any identified long-term environmental impact is managed in accordance with the Safeguard Policy Statement.

Involuntary Resettlement

No involuntary resettlement.

Indigenous Peoples

No impacts on indigenous peoples.

Stakeholder Communication, Participation, and Consultation

During Project Design

Consultations has been held with government, non-government organizations, commercial organizations, and the donor community.

During Project Implementation

Consultations will be continued with non-government organizations, commercial organizations, and the donor community during implementation.

Contact

Responsible ADB Officer

Mtchedlishvili, Levan

Responsible ADB Department

Central and West Asia Department

Responsible ADB Division

Energy Division, CWRD

Executing Agencies

Ministry of Economic Affairs, Economic Affairs Division

Timetable

Concept Clearance

-

Fact Finding

02 Feb 2015 to 13 Feb 2015

MRM

18 May 2015

Approval

20 Nov 2015

Last Review Mission

-

Last PDS Update

29 Mar 2016

Funding

Loan 3321-PAK

Loan 3322-PAK