This consultant’s report does not necessarily reflect the views of ADB or the government concerned. [For
PPTAs: Also, all of the views expressed herein may not be incorporated into the proposed project’s
design.]
CURRENCY EQUIVALENTS
(as of 31 May 2010)
ABBREVIATIONS
NOTES
(i) The fiscal year (FY) of the government ends on 30 June. FY before a calendar
year denotes the year in which the fiscal year ends, e.g., FY2010 ends on 30
June 2010.
(ii) In this report, "$" refers to US dollars.
In preparing any country program or strategy, financing any project, or by making any
designation of or reference to a particular territory or geographic area in this document, the
Asian Development Bank does not intend to make any judgments as to the legal or other status
of any territory or area.
CONTENTS
Page
I. INTRODUCTION 1
II. RECENT DEVELOPMENTS IN PAKISTAN AND PROGRAM IMPLICATIONS 1
III. PROGRAM PERFORMANCE AND STATUS OF IMPLEMENTATION 1
A. Compliance with Loan Conditions 1
B. Implementation of Policy Actions 2
C. Implementation of Program Technical Assistance 6
IV. CONCLUSION 6
V. THE PRESIDENT'S DECISION 6
APPENDIX
Progress on Monitorable Indicators 7
I. INTRODUCTION
1. On 31 October 2006, the Asian Development Bank (ADB) approved a: (i) a program
cluster (the program) comprising two subprograms for the Private Participation in Infrastructure
Program to the Islamic republic of Pakistan; and (ii) a $400 million policy reform loan for
subprogram 1, with actions to be completed in two tranches.1 The program aims to increase
private participation in infrastructure (PPI). To achieve this, subprogram 1 was designed to
address constraints in overall policy, legal, and regulatory frameworks. The priority sectors are
power and energy, transportation, and urban services. Subprogram 1 became effective on 19
December 2006, and the first tranche of $200 million was released on 22 December 2006. In
parallel, the government established the Infrastructure Project Development Facility (IPDF) to
develop infrastructure projects for private sector participation. An advisory technical assistance
(TA) of $1 million was approved with the loan.2 The second tranche release of $200 million
under subprogram 1 has been pending since December 2009.
3. The PPI Program was approved before the global food and fuel crises. However,
Pakistan started feeling the impact of these crises in late 2007, with the situation becoming
more severe in 2008–2009. The government sought support from the International Monetary
Fund (IMF), which approved a standby arrangement in the amount $7.60 billion in November
2008. In August 2009, the standby arrangement was increased by $3.70 billion. The IMF has
thus far disbursed $7.68 billion, including $1.48 billion for budgetary financing. IMF's most
recent review was completed in May 2010. The authorities have advanced on the stabilization
agenda and structural reforms. This has been done against a background of adverse security
developments, weak external demand, and challenging domestic fiscal circumstances. However,
underlying vulnerabilities remain. In particular, the power sector faces daunting financial
challenges and a capacity shortfall of 5,000 megawatts in the summer months. As part of ADB's
Accelerating Economic Transformation Program, which provides budgetary support under the
overall financing plan for the IMF stabilization program, the government is implementing a range
of measures to address power sector constraints. While the PPI Program was designed prior to
the stabilization program, the proposed second tranche release will provide much needed fiscal
cushion to the Government of Pakistan.
4. Despite the global economic environment and political and security challenges, all 11
second tranche release conditions have been fully complied with. The compliance status is
1
ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster of
Loans and Technical Assistance Grant to Pakistan for the Private Participation in Infrastructure Program. Manila
(Loan 2270-PAK and TA 4861-PAK).
2
ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Technical
Assistance Grant to Pakistan for Supporting the Private Participation in Infrastructure Program. Manila (TA 4861-
PAK attached to Loan 2270-PAK).
3
The implementation period of subprogram 1 is 3 years, to be closed by 30 June 2010.
2
reported in the Appendix.4 The implementing agencies have made progress in policy, legal, and
institutional reforms specified in the program. Four review missions were fielded to assess
progress under the program.
5. The program has two pillars. The first established an overall policy, legal, and regulatory
framework for PPI.
(i) national PPI policy,
(ii) national viability gap guidelines,
(iii) national PPI assessment report and action plan,
(iv) new national arbitration law, and
(v) national PPI tender procedures and concession agreements.
6. The second pillar deepened policy, legal, regulatory, and institutional reforms in priority
subsectors.
(i) hydro and coal-fired generation,
(ii) power,
(iii) road transport,
(iv) highway concessions,
(v) competitive tenders for PPI projects, and
(vi) railways.
7. This policy is to strengthen the legal and regulatory framework, fundamental for PPI. The
policies, procedures, standards, and best practices for PPI developed under the program
provide clarity and legal protection for investors and reduce the time and expense of project
development and transaction closure. More transparent, competitive, and fair tenders for PPI
projects will help attract more viable private investors.
8. Under the first tranche, a task force was formed to do the technical work required to
implement the program.5 The task force prepared a PPI policy in 2007. At ADB's request, and
with its technical support, a reformulation of the policy was developed in 2008 in consultation
with the IPDF and development partners.6 The policy was further refined in 2009. Operational
4
Of the 21 monitorable indicators, 11 indicate compliance, 7 partial compliance, and 3 work that is ongoing.
5
The task force is chaired by the adviser on finance to the Prime Minister and comprises representatives of line
agencies, regional governments, and the private sector. It was established to promote collaboration in program
implementation among federal, provincial, and local governments and vertically among agencies at the same level
of government.
6
The revised PPI policy specifically outlines the types of infrastructure and utilities eligible for private participation,
establishes the approval authorities for respective PPI projects, and protects investors through a framework of risk-
sharing arrangements and guarantees. The policy also establishes a framework for financial and fiscal incentives
for PPI and guarantees for PPI projects to be adopted by the government. The PPI policy reduces uncertainty for
both private investors and state agencies involved in developing and implementing PPI projects. The policy
outlines a framework for subsector arrangements that is in harmony with PPI polices for roads and railways and
was developed by the government as part of the program.
3
and promotional work facilitated awareness amongst concerned stakeholders. The government
formally adopted the revised PPI policy in January 2010.
Policy Condition 2 (S.4): The government to adopt guidelines in line with its
PPI policy and satisfactory to the ADB that
(i) establish an empowered committee responsible for approving
viability financing for eligible PPI projects,
(ii) set forth the eligibility criteria for such funding, and
(iii) provide for the procedures to be followed for submission, appraisal,
and approval of such funding.
9. The empowered committee was set up in 2007. "Viability gaps" are addressed through
policy and institutional mechanisms to provide financing for PPI projects in the form of capital
grants, one-time or in tranches during the construction phase of projects. The grants will not
exceed a specific ceiling to ensure that private investment is the dominant mode of financing for
each selected project. To maximize private investment across all PPI projects, clear eligibility
criteria were included for prioritizing PPI projects for this type of financing in line with
international best practice. Such viability gap funding may be particularly relevant in areas such
as the water subsector, in which sponsors are often unable to establish user charges high
enough to make projects financially viable in the short and medium term. These attributes, along
with procedures for appraisal and approval, are embodied in the viability gap fund (VGF)
guidelines. These guidelines were developed by the government based on extensive
consultation with ADB and other development partners in 2008 and 2009. The revised VGF
guidelines were approved by the chairman of the task force in May 2009.
Policy Condition 3 (S.7): The task force to (i) assess the implementation
and impact of the PPI policy, and (ii) develop, based on the lessons learned,
detailed proposals in line with international best practices for (a)
strengthening the policy, legal, and regulatory framework for PPI and (b)
broadening the policy's scope to cover other priority subsectors.
10. With ADB TA support, the task force secretariat assessed the public–private partnership
policy framework and developed an action plan for 2 years. This will be used by the government
and development partners as a basis for further reforms. The assessment was finalized in April
2009 and approved by the secretariat of the task force in May 2009.
11. The Law on Arbitration was enacted in 1940. It has substantial weaknesses, such as the
requirement to approach a court for settling an award, which defeats the purpose of arbitration.
As a result, the law has not worked well in practice. In 2005 the President promulgated the
Ordinance on the Recognition and Enforcement of Arbitral Awards to ratify the 1958 New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards. While this was a
noteworthy development for investors, the ordinance is an emergency law with limited tenure.
Ordinances lapse after 120 days unless extended or superseded by a new law. ADB and the
World Bank have provided significant technical support to the drafting of this law. ADB is
This consultant’s report does not necessarily reflect the views of ADB or the government concerned. [For
satisfied that the
PPTAs: Also, key
all of thefeatures of an effective
views expressed hereinarbitration
may not be lawincorporated
are included in the
into the proposed
draft submitted to
project’s
Parliament
design.] in April 2009.
4
12. This policy objective seeks to deepen reforms by developing frameworks that function at
various levels of government and in various subsectors. With an overall PPI policy in place,
provincial and subsector policies can be developed in accordance with it. Deepening reforms is
also accomplished by transferring PPI experience from those subsectors where PPI has
progressed, such as power generation, into areas that are lagging, such as roads, railways, and
water resources and sanitation.
Policy Condition 5 (S.12): The Private Power and Infrastructure Board (PPIB)
to adopt and disseminate standard processing procedures and documents
for PPI projects in hydro and coal-fired power generation.
13. The PPIB has developed standard documents for projects in hydro and coal-fired energy
generation, including standards for prequalification, letters of intent, guarantees, expressions of
interest, feasibility studies, and power purchasing agreements. The PPIB drafted for hydropower
projects the standard implementation agreement, power purchase agreement, and water use
agreement and disseminated them to various stakeholders, including 20 public departments and
organizations and about 8–10 private sponsors of projects under the PPIB. In addition, two
meetings were held by the PPIB, one in which all public sector stakeholders participated and the
other in which all private sector sponsors provided their inputs. Accordingly, the documents
were finalized in light of the comments of the stakeholders and submitted to the PPIB board for
approval. The PPIB formally adopted these documents in October 2009. The documents are
available on the PPIB website.7 PPIB's processing procedures are effectively captured in its
standardized documents along with the mandate conferred on it by the National Energy Power
Regulatory Agency to facilitate the application of the procurement processes outlined in those
documents.8
14. Under the first tranche release conditions, the PPIB issued letters of approval (or "letters
of support") for 3 projects. Since then, the PPIB has issued letters of support for an additional
11 projects, for a total of 14 projects with a combined capacity of 3,287 megawatts. Of these
projects, 12 projects with a capacity of 2,539 megawatts have achieved financial closure. In
addition, one project was commissioned in March 2009. 9 This progress notwithstanding,
Pakistan continues to face a severe power crisis, with a demand–supply shortfall of about 5,000
megawatts. Load shedding and blackouts have begun to cripple the economy, as consumers in
urban and rural areas alike across the country go without electricity for several hours daily. In
late April 2010, the government adopted a plan of emergency proportions to address financial
and capacity constraints, working closely with ADB and other development partners.
7
www.ppib.gov.pk/hydelcoal.html
8
National Energy Power Regulatory Agency website: http://www.nepra.org.pk/index.htm.
9
The commissioned project was the Attock Gen Power Ltd.
5
Policy Condition 7 (S.19): The government to (i) adopt and announce the
policy for PPI in the national highway subsector, and (ii) ensure that its
national transport policy is consistent with the policy for PPI projects in the
highway subsector.
15. In March 2008, the National Highway Authority (NHA) revised an early draft of the PPI
policy with ADB technical support. The NHA executive board cleared the revised policy, which is
consistent with the draft national highway policy of September 2008. The National Highway
Council gave final approval for the policy in May 2009.
16. Only one concession agreement has been signed by the NHA so far, for the Lakpass
Tunnel Project. The government commissioned the IPDF to undertake an assessment of this
agreement, as benchmarked against standard agreements developed by the IPDF in line with
international best practices. The assessment was submitted to ADB in April 2010.
Policy Condition 9 (S.23): NHA to (i) identify PPI projects with a total value
of at least PRs100 billion, and (ii) invite additional bids through an
international competitive tender for PPI projects with a total value of at
least PRs30 billion.
17. The government has renewed its commitment to PPI in the national highway sector,
without which the large financing requirements related to infrastructure development and
maintenance cannot be met. The NHA has achieved the objective by identifying 14 projects for
over PRs108 billion and inviting additional bids with a total value of at least PRs36 billion.
Encouragingly, four projects totaling PRs42 billion had been tendered as of January 2010.
18. In 2008, the Ministry of Railways developed a draft policy document and terms of
reference for further enhancement with ADB technical support. The Ministry of Railways
finalized and approved a policy document on private participation in operating freight and
passenger trains on Pakistan Railways’ infrastructure in May 2009. The PPI Policy for Railways
was approved by Ministry of Railways in October 2009.
19. The IPDF developed guidelines for PPI project preparation and feasibility studies,
This consultant’s
guidelines report does notand
for procurement, necessarily
model reflect the views ofpartnership
public–private ADB or the government
agreementsconcerned. [For
for federally
PPTAs: Also, all of the views expressed herein may not be incorporated into the proposed
10 project’s
supported PPI projects, and embarked on stakeholder consultations by May 2007. In terms of
design.]
10
The documents are available from the IPDF website at www.ipdf.gov.pk.
6
coverage, these are on par with similar guidelines from comparable countries. Both ADB and
World Bank have provided TA support.
20. TA 4861 (footnote 2) has contributed towards building local expertise and capacity in
some aspects of PPI in Pakistan, specifically with respect to six of the 11 policy conditions. It
supported the government's policy-related outputs, including the PPI policy document, VGF
guidelines, PPI assessment, arbitration law, national highway PPI policy document, and railway
PPI policy document. The TA has thus far supported 9 person-months of international
consulting inputs and 4 person-months of national inputs, using about $260,000 as of March
2010. In addition, the TA has supported a strategic evaluation of the PPIB in the amount of
$102,500. In total, 35% of the TA has been utilized. The TA is now being restructured to support
the identification of projects with PPI potential.
IV. CONCLUSION
21. The government has made considerable progress in implementing the reforms agreed
under the program, despite the fragile security environment and technical complexity inherent in
policy reform programs. It has pursued reforms on several fronts simultaneously and remains
committed to further progress. Promoting PPI has become even more critical and relevant in
light of the global financial crisis, given the continuous erosion of fiscal space that constrains
public investments in infrastructure in Pakistan and elsewhere.
22. In view of the substantial progress made in the implementation of the Private
Participation in Infrastructure Program, as evidenced by full compliance with all 11 tranche-
release conditions, the President is satisfied that the necessary requirements for the release of
the second tranche of the loan for the Private Participation in Infrastructure Program have been
met. In accordance with the established procedure, the President will authorize the release of
the second tranche in the amount of $200,000,000 for the Private Participation in Infrastructure
Program. The authorization will be effective not less than 10 working days after the circulation of
this progress report to the Board.
Appendix 7
Summary
Ten monitorable conditions have been fully complied with.
Progress is ongoing for 11 monitorable conditions.