Page 1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB1782 Project Name Electricity Distribution and Transmission Improvement Project Region SOUTH ASIA Sector Power (100%) Project ID P095982 Borrower(s) GOVERNMENT OF PAKISTAN Implementing Agency Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared September 12, 2005 Estimated Date of Appraisal Authorization March 27, 2006 Estimated Date of Board Approval July 27, 2006 1. Key development issues and rationale for Bank involvement Structural economic reforms initiated in Pakistan in the late 90s have been generally successful in accelerating economic growth, controlling inflation, and maintaining fiscal and balance of payments stability. The G overnment’s Poverty Reduction Strategy Paper (PRSP) 1 identified the key development challenges facing Pakistan as: (a) achieving accelerated and sustained economic growth (8 percent p.a. over the next five years), particularly in rural areas; (b) reducing poverty; (c) providing essential services and infrastructure to the poor; (d) creating job opportunities; and (e) improving governance. A power sector capable of meeting growing electricity demand efficiently and reliably and extending service to underserved areas and poorer segments of the population will be critical for meeting the PRSP challenges. At present, the sector is not up to this task. It is beset by high technical and commercial losses (over 20 percent in a number of distribution companies and in some cases as high as 40 percent), bottlenecks in transmission and distribution, substandard quality of supply, underinvestment, high costs, and inadequate tariffs. About 30 percent of population has no access to power. There are large cross- subsidies in the tariff structure, with industrial and commercial consumers subsidizing residential ones. Government budget extended to the sector more than US$1 billion annually in subsidies in recent years. The Government recognized these long-standing problems and initiated a power sector reform in late 1990s aimed at addressing them. The reform included unbundling, corporatization, commercialization, and privatization of the industry 2 ; establishment of an independent regulatory agency; institutional strengthening in policy, governance, and corporate management areas; and mobilization of resources from private sector to meet the power sector’s technical, financial and human resource needs. Although much remains to be done, a good progress has been made: a new legal framework for the sector was adopted, an independent National Electric Power Regulatory Agency (NEPRA) was established, the Water and Power Development Authority (WAPDA) was unbundled, generation and transmission tariffs notified, privatization of several companies in generation and distribution completed or in progress, and a Policy 1 The PRSP and the Joint Staff Assessment (Report No. 27625-PAK, February 12, 2004) were discussed by the Board on March 11, 2004. 2 Water and Power Development Authority (WAPDA) has been responsible for electricity generation, transmission, and distribution in all areas of Pakistan with the exception of Karachi, where Karachi Electricity Supply Company (KESC) has played that role. The unbundling and restructuring elements of the reform program applied to WAPDA only, as the dominant monopoly; the other elements of the reform applied to the entire industry. Page 2 and Implementation Cell in the Ministry of Water and Power established. The most important outstanding action at this stage is to complete determination and notification of tariffs for distribution companies (expected to be done in the second half of 2005), so that the financial management of the sector can also be unbundled and decentralized. Further improvements in the sector and corporate governance are also needed to advance and lock-in the benefits of the sector reform. In recent years, the sector has not been able to make adequate investments, which are essential for addressing the sector’s pressing problems. Investments in reducing the high technical and commercial losses in the distribution systems are particularly critical and offer potentially the highest rate of return, by improving the efficiency of the existing supply system, promoting more efficient consumption (through reduced theft and strengthened commercial discipline), and reducing the need for additional generation. Removing the bottlenecks in transmission and distribution is vital for meeting the demand reliably and providing proper services to the consumers. On the reform side, there is a large and important unfinished agenda: to further advance commercialization, institutional strengthening and corporate governance; complete design and implementation of new electricity trading and settlement arrangements; strengthen government’s policy and ownership institutions; refine the regulatory framework on the basis of the lessons learned; and support investment planning and financing through public-private partnership, including in hydropower development. Completing this reform agenda is crucial for attaining and sustaining benefits of the investment projects as well as for creating conditions for sustained improvements in sector performance in general. Rationale for Bank involvement. Investments required over the next several years to accommodate the projected growth in electricity demand and address the sector’s technical and commercial inefficiencies are considerable, about US$3 billion over the next five years for distribution and transmission alone. There are no technical alternatives to these investments and such large funds cannot be fully mobilized without major involvement of international financing institutions, including the World Bank. The Bank has taken the lead in supporting the reform, which -- in conjunction with investment support – should help catalyze other donors and lenders, including from the private sector, to engage. The Project is consistent with the Country Assistance Strategy, which envisages Bank financing for power system strengthening in the context of a sector reform program leading to a financially viable and sustainable sector, the approach also endorsed by the Bank’s strategy for supporting infrastructure and the operational guidelines for the sector 3 . Historically, the Bank has been involved in all segments of the sector, financing specific investment projects, as well as supporting the reform program. The key lessons of past involvement emphasize the importance of good project preparation, realistic assessment of implementation capacity and arrangements, built-in flexibility for mid-course corrections, government’s commitment and support, and the need for a comprehensive sector program. Other donors, especially Asian Development Bank (ADB), Japan Bank for International Cooperation (JBIC), and Kreditanstalt fur Wiederaufbau (KfW) have been actively involved in Pakistan’s power sector. ADB is preparing a TA project for 2005, which may include support to the National Transmission and Dispatch Company (NTDC) (followed by an investment project with NTDC), implementation of a sector’s electricity trading model, and preparation of investment projects for funding by ADB and possibly other donors. JBIC is to finance modernization of NTDC’s dispatch center and has expressed 3 Country Assistance Strategy Progress Report for the Islamic Republic of Pakistan, Report No. 28262-PAK, March 26, 2004; Infrastructure Action Plan, World Bank, July 8, 2003; Public and Private Sector Roles in the Supply of Electricity Services – Operational Guidance for World Bank Group Staff, The Energy and Mining Sector Board, February 2004. Page 3 interest in rural electrification. KfW is financing some projects for strengthening the transmission grid and looking into small and medium size hydropower plants. The donors are coordinating their activities. The Government of Pakistan (GoP) requested that the Project be included in the Bank’s lending program for FY06 (EAD letter of July 26, 2005). The distribution companies (DISCOs) 4 and NTDC have requested and obtained approvals of their respective Board of Directors to pursue World Bank financing of their investment programs. The companies have prepared a number of investment projects which have been approved by GoP and from which the components for this Project will be selected. Additional preparatory work will be needed to strengthen environmental and social analysis, economic analysis and risk assessment, procurement plans, and, possibly, financial management for the Project. 2. Proposed project development objective The objective of the Project is to help increase the efficiency, reliability, and quality of electricity supply by supporting reductions in overall technical and commercial losses, increased availability of electricity, and improved voltage profile. The Project also aims to support power sector reform and investment planning and financing through technical assistance. 3. Preliminary project description The Project will consist of the following main components: (a) Strengthening electricity distribution networks to reduce losses and improve supply; (b) Strengthening electricity transmission network to reduce bottlenecks and improve system’s reliability and quality; and (c) Technical assistance (TA) for project implementation, capacity building, investment planning and financing, and sector reform. Distribution ( Bank loan: $130 million ): The distribution subsector, which is the key segment of the industry for restoring its financial performance, is responsible for the largest technical and commercial losses in the electricity supply chain in Pakistan. The DISCOs need to take urgent measures to strengthen their networks, reduce losses, and build their corporate capacities. Each DISCO has prepared an investment program which includes the following types of projects: (i) distribution rehabilitation and energy loss reduction (ELR); (ii) secondary transmission grid (STG; 66-kV and 132-kV network), (iii) distribution of power to new consumers (DOP); and (iv) rural electrification (RE). The total cost of the ELR and STG programs is about US$ 1.5 billion over the next 5 years. The Project will include selected components of these programs, which are oriented mainly toward improving the performance of the existing system and which would have the largest impact. The selection will be made on the basis of economic, financial and technical criteria, the credibility of the policy measures proposed by the companies to support the loss reduction programs and mitigate the Project risks, and the ability of the companies to timely prepare and implement the Project, including meeting the Bank’s project readiness criteria. Transmission (Bank loan: $55 million): The fast growing demand requires continuing strengthening and expansion of the already stressed transmission network. NTDC will continue to rely on international financing institutions to complement its own funds and commercial borrowing in financing its investment 4 Distribution companies are: Faisalabad Electricity Supply Company (FESCO), Gujranwala Electricity Supply Company (GESCO), Hyderabad Electricity Supply Company (HESCO), Islamabad Electricity Supply Company (IESCO), Lahore Electricity Supply Company (LESCO); Multan Electricity Supply Company (MESCO), Peshawar Electricity Supply Company (PESCO), Quetta Electricity Supply Company (QESCO), Tribal Area Electricity Supply Company (TESCO). The investment proposals of PESCO and TESCO are joint, since they separated only recently. Page 4 program, whose total costs exceeds $850 million over the next five years. NTDC asked the Bank to consider financing a 220-kV double circuit transmission line Dadu-Khuzdar in Balochistan, and two 220- kV substations (Kasowal and Ghazi Road) with the associated shorter transmission lines. 5 Technical Assistance (Bank loan: $15 million). This component will provide support in the following areas: (a) project implementation; (b) capacity building for the various corporate functions in the project companies; (c) investment planning and financing strategies, including attracting private investment, with particular emphasis – but not exclusive – on hydropower; and (d) the sector structural, policy, institutional and regulatory reform. The Project will be financed by the World Bank loan and by the companies themselves. The indicated size and the allocation of the Bank loan are preliminary and may change. 4. Safeguard policies that might apply Most, if not all, of the Project’s investment components are expected to be in Bank’s environmental category B and will require preparation and implementation of an environmental and social impact assessment and mitigation plan. Some other safeguards policies may also be triggered, which will be confirmed during preparation of the Project. 5. Tentative financing Source: ($m.) BORROWER 100 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 200 Total 300 The amount of Borrower’s financing and the size and allocation of the IBRD loan are preliminary and may change during project preparation. 6. Contact point Contact: Vladislav Vucetic Title: Lead Energy Specialist Tel: (202) 473-3977 Fax: (202) 522-2418 Email: Vvucetic@worldbank.org 5 The list is indicative and may change during project preparation. Page 5