ADB's Independent Evaluation Department takes a dim view

ISLAMABAD: The Independent Evaluation Department (IED) of the Asian Development Bank (ADB) has rated 'Power Distribution Enhancement Investment Programme - Tranche 1' less than likely sustainable due to the continuing risk of poor financial health of the DISCOs and the lack of details for the validation of the financial internal rate of return (FIRR) recalculation.

The validation downgraded Power Distribution Enhancement Investment Program - Tranche 4 and Multitranche Financing Facility (MFF) from highly relevant to relevant, due to design issues related to cost estimation and project scheduling and the lack of significant demonstration value, transformative effect, or innovative features.

Tranche 4 was also downgraded from highly efficient to efficient as the EIRR recalculation was not robust, and the MFF was efficient.

Both tranche 4 and the MFF are less than likely sustainable due to the continuing risk of the DISCOs' poor financial health and the lack of details for validating the FIRR recalculations.

The IED report stated that the project completion report (PCR) rated the project successful.

It was highly relevant for improving reliability and expanding the power distribution network to help meet the projected electricity demand.

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It was effective since the indicator targets were achieved, efficient since the recalculated EIRR was 16.7 percent, and likely sustainable since the FIRR was 20.3 percent against the weighted average cost of capital (WACC) of 10.6 percent.

The report stated that the resolution of tariff-related issues would enable the financial health of DISCOs to start improving from 2020.

This validation assesses the project relevant.

The project expanded and improved the distribution network but had design issues related to cost estimation and project scheduling, and lacked significant demonstration value, transformative effect, or innovative features.

It was effective as all four indicator targets were achieved and there were no outstanding safeguard issues.

There were several issues with the method and assumptions used for recalculating the EIRR, but it was expected to be higher than 12 percent so the project was efficient.

This validation assesses the project less than likely sustainable due to the continuing risk of poor financial health of the DISCOs and the lack of details for the validation of the FIRR recalculation. Overall, this validation assesses the project successful.

In 2008, the ADB approved the Power Distribution Enhancement Investment Program, a multitranche financing facility (MFF).

The framework financing agreement envisaged loans totaling $800 million for priority infrastructure under four tranches. This represented 15 percent of the needed investment under the government of Pakistan's power sector distribution sector roadmap (2008-2017). Another $10 million loan was allocated for an investment program support project, which was to be implemented concurrently with the MFF. It was to be structured similar to a technical assistance (TA) loan, with the same duration as the whole MFF program across all tranches. Tranche 1, which was approved with the MFF, was for $242 million investment and $10 million program support.

Tranche 1 investment project was for the improvement of power distribution infrastructure through rehabilitation, augmentation, and expansion of the STG (132 kilovolt [kV] and 66 kV).

Tranches 2, 3, and 4 were also for investments. The investment loans for tranche 1 were financially closed in January 2014, and the loans for tranches 2, 3, and 4 were closed in April 2019.

The investment program support project envisaged consulting services for improving and expanding the DISCOs' capabilities to prepare, implement, and monitor subprojects.

The loan for the support project was also closed in April 2019.

The facility completion report (FCR) rated tranche 4 highly successful and the MFF successful.

Both tranche 4 and the MFF were rated highly relevant for improving reliability and expanding the power distribution network to help meet the projected electricity demand.

Tranche 4 was highly effective as the indicator targets were exceeded, and the MFF was effective as all but one indicator targets were met. Tranche 4 was rated highly efficient since the EIRR exceeded 18 percent, and the MFF efficient as the EIRR of individual tranches varied between 16.4 percent and 26.5 percent.

Both tranche 4 and the MFF were rated likely sustainable since the recalculated FIRR exceeded the WACC, and the recovery of outstanding DISCO costs was expected to commence in fiscal year 2020, with the resolution of legal challenges over tariff-related issues.

This validation downgraded tranche 4 and the MFF from highly relevant to relevant due to design issues related to cost estimation and project scheduling and the lack of significant demonstration value, transformative effect, or innovative features.

It assesses tranche 4 highly effective as the project surpassed outcome targets and completed output targets, and the MFF was effective.

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Tranche 4 was also downgraded from highly efficient to efficient as the EIRR recalculation was not robust, and the MFF was efficient.

Both tranche 4 and the MFF are less than likely sustainable due to the continuing risk of the DISCOs' poor financial health and the lack of details for validating the FIRR recalculations.

Overall, this validation assesses both tranche 4 and the MFF successful.

The PCR rated the project "Power Transmission Enhancement Investment Program (Tranche 3)"successful, based on its relevant, effective, efficient, and likely sustainable ratings.

The project design was adequate and was aligned with the government and ADB' strategies and the project itself achieved its intended outcome and output targets.

The recalculated EIRR was above the economic opportunity cost of capital while the FIRR was above the WACC.

This validation assesses tranche 3 relevant, effective, efficient, and likely sustainable.

Tranche 3 made tangible contributions to increasing the transmission capacity and reducing losses.

Overall, this validation assesses the project successful.

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