Document of The World Bank FOR OFFICIAL USE ONLY \9c/42 Report No.7407-PAK STAFF APPRAISAL REPORT PAKISTAN SUI NORTHERN GAS PIPELINESLIMITED (SNGPL) CGtPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT JULY 12, 1990 Energy Operations Division Country Department I Europe, Middle East and North Africa Regional Office This document has a restricteddistribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
\9c/42 Report No.7407-PAK
STAFF APPRAISAL REPORT
PAKISTAN
SUI NORTHERN GAS PIPELINES LIMITED (SNGPL)
CGtPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
JULY 12, 1990
Energy Operations DivisionCountry Department IEurope, Middle East and North Africa Regional Office
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENT
Currency Unit Pakistan Rupee (Rs)US$1.00 - Rs 21.50
MEASURES AND EOUIVALENTS
1 barrel (bbl) - 0.159 cubic meters1 metric ton of oil (0.85 specific gravity) - 7.4 bblMCF = 1,000 cubic ft.MMCF = 1 million cubic ft.MMCFD = 1 million cubic ft. daily1 BCF = 1 billion cubic ft.1 TCF = 1 trillion cubic ft.1 ton of crude oil equivalent (toe) = 1.0 ton of crude oil
ADB - Asian Development BankARL - Attock Refinery LimitedBOC - Burmah Oil CompanyBOT - Build-Operate-TransferCDWP - Central Development Working PartyCIP - Core Investment ProgramDGG - Directorate General of GasERG - Energy Review GroupESL I - Energy Sector Loan I (Loan 2552-PAK)ESL II - Energy Sector Loan II (Loan 3107-PAK)ECC - Economic Coordination CommitteeECNEC - Executive Cormnittee of the National Economic CouncilFY - Fiscal YearGDS - Gas Development SurchargeGOP - Government of PakistanICB - International Competitive BiddingIMF - International Monetary FundKESC - Karachi Electric Supply CompanyLES - Long-Term Energy StrategyLIB - Limited International BiddingMPNR - Ministry of Petroleum and Natural ResourcesMPD - Ministry of Planning and DevelopmentMOP - Ministry of ProductionMWP - Ministry of Water and PowerNDFC - National Development Finance CorporationNEPC - National Energy Policy CommitteeNFL - National Petroleum LimitedNRL - National Refinery LimitedOGDC - Oil and Gas Development CorporationPEPA - Pakistan Environmental Protection AgencyPERAC - Pakistan Refinery and Petrochemicals CorporationPFP - Policy Framework PaperPGCL - Pirkoh Gas Company LimitedPIDC - Pakistan Investment Development CorporationPMDC - Pakistan Mineral Development CorporationPOL - Pakistan Oilfields LimitedPPL - Pakistan Petroleum LimitedPRL - Pakistan Refinery LimitedPSEDF - Private Sector Energy Development FundPSO - Pakistan State Oil LimitedSCADA - Supervisory Control and Data AcquisitionSNGPL - Sui Northern Gas Pipelines LimitedSSGC - Sui Southern Gas CompanyWAPDA - Water and Power Development Authority
GOP's Fiscal Year (FY)
July 1 - June 30
FOR OFFICIAL USE ONLY
PAKISTAN
SUI NORTHERN GAS PIPELINES LIMITED (SNGPL)
CORPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
STAFF APPRAISAL REPORT
Table of Contents
Page No.
LOAN AND PROJECT SUMMARY .............................. i
I. ENERGY SECTOR .............................. 1
A. The Economy ....................................... 1
B. Sectoral Setting .................................. 2
C. Developments in the Sector, FY79-FY88 .............. 4
D. Natural Gas Subsector ............................. 5
E. Bank Group's Role in the Energy Sector andExperience with Past Lending .................... 10
II. THE BORROWER .11
III. THE PROJECT ..................... 15
IV. FINANCIAL ASPECTS .27
V. ECONOMIC JUSTIFICATION .33
VI. AGREEMENTS REACHED AND RECOMMENDATIONS .36
This report was prepa.ed by Messrs. A. Oduolowu (Senior PetroleumSpecialist), M. Sharma (Economist), C. Schroeder (Senior Financial Analyst),M. Shirazi (Senior Gas Specialist) and M. Mengesha (Procurement Specialist-Consultant). Secretarial assistance was provided by Mmes. Anne Haldar,Young Hong and Hannah Pratt.
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
ANNEXES
Page No.
1.1 Organization of the Energy Sector .......................... 401.2 Details Relating to Long-Term Energy Strategy (LES) ........ 411.3 Proven Gas Reserve Estimates ............................... 511.4 Summary of Probable Gas Reserves ........................... 521.5 Summary of Gas Analysis .................................... 531.6 Historical Trends in the Consumption of Gas by Sectors ...... 541.7 Historical Developments in the Consumption
of Gas (1971-1989) ........................................ 551.8 Production Forecast by Fields ............................... 561.9 Forecast of Transmission System Requirements of Gas ......... 582.1 Composition of SNGPL's Equity Ownership ..................... 592.2 SNGPL - Organization Chart .................................. 603.1 Detailed Project Description ................................ 613.2 Implementation Schedule ..................................... 723.3 Project Cost ................................................ 733.4 Disbursement Schedule ....................................... 753.5 Bank Supervision Input Into Key Activities ................. 764.1 Income Statements ........................................... 794.2 Balance Sheets ............................................. 804.3 Sources & Applications of Funds ............................. 824.4 Projected Borrowing Requirements ................... ........ 844.5 Projected Investment Program ................................ 855.1 SNGPL's Actual and Forecast Sales of Gas .................... 865.2 Assumptions and Calculation for the Rate of Return .......... 876.0 Selected Documents in Project File .......................... 91
MAP IBRD No. 20961R1
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PAKISTAN
SUI NORTHERN GAS PIPELINES LIMITED (SNGPL)
CORPORATE RESTRUCTURINIG AND SYSTEM EXPANSION PROJECT
LOAN AND PROJECT SUMNARY
Borrower: Sui Northern Gas Pipelines Limited (SNG't)
Guaranto_: Islamic Republic of Pakistan
Amount: US$130 million equivalent
Terms: Twenty years, including a five-year grace period, atthe Bank's standard variable interest rate.
Project Description: The proposed Project would cover three components:Corporate Restructuring of SNGPL, InfrastructureDevelopment, and Consultancy Services and Training.Corporate Restructuring of SNGPL would involve: (a)restructuring of SNGPL's ownership through issuance ofnew additional equity shares to dilute public sectorownership initially from 91% to 51%, and subsequentlyto at most 40%; (b) restructuring SNGPL's Board ofDirectors to reflect the new shareholding; (c)establishing financial performance criteria to improveits efficiency and ability to raise equity; and (d)reviewing the regulatory functiors of t1-: DirectorateGeneral of Gas. Infrastructure Developmeni. would providefor: (a) installation of a 1 x 120 MKCFD gaspurification plant at Sui; (b) expansion of thetransmission system capacity by about 300 MMCFD; (c)expansion of the distribution network to supply naturalgas by FY96 to new domestic, commercial, and industrialconsumers, 2 fertilizer plants and the power station atKot Addu; (d) installation of a linepipe coating plant;(e) installation of a telecommunication system formonitoring the operations of the network; and (f)procurement of compressors and construction equipmentrequired for the installation of the linepipe.Consultancv Services and Training would cover: (a)safety and hazard assessment survey of the transmissionand distribution system; (b) upgrading the capabilityof the Directorate General of Gas, and training of SNGPLstaff through a collaborative arrangement with a foreignprivate gas utility; (c) development of SNGPL's financialmanagement information systems and data processing andtraining in internal auditing of computerized accountingsystems; (d) designing the new formula for settingSNGPL's prices net of the Gas Development Surcharge and
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performance criteria; (e) services of financial advisersand an underwriter or consortium of underwriters tomanage the issuance of shares; and (f) design,engineering and supervision of high pressure pipelineconstruction at river crossings.
Benefits: The proposed Project would assist GOP in restructuringSNGPL with a view to increasing its autonomy and abilityto mobilize resources from the financial capital marketsand the general public, as well as expanding theutility's transmission and distribution network at leastcost. Specific benefits under the proposed Project areexpected from: (a) increased private sector investmentin SNGPL, supporting GOP's fiscal reforms by restrainingthe growth of public debt; (b) incremental sales of gasto new consumers; (c) incremental consumer investmentcontributions; and (d) substitution of gas for highervalue petroleum products which, at the margin, areimported.
Risks: The main risks associated with the proposed Project are:(a) inability of SNGPL to raise the required financialresources from the capital markets; (b) delays in theimplementation of the proposed Projen.t because of itsrelatively large size compared to past investmentsundertaken by SNGPL; (c) a decline in the productivityof the gas fields to a level lower than forecast; and(d) environmental impact from possible gas leakages.These risks are being addressed through the provisionof: (a) professional services of a financial adviserand underwziters tc assist SNGPL in managing themarketing of equity shares in the doLestic capitalmarket; (b) consultancy services for the engineering,design and supervision of the construction of the highpressure pipelines and the establishment of acollaborative arrangement with an experienced foreignprivate sector utility to assist SNGPL in projectimplementation, as well as train its staff in pipelineoperation and maintenance and establishment of adequatesafety measures including the installation of a new SCADAsystem to monitor gas flows and detect faults along thesystem; and (c) technical assistance and consultancyservices under ESL II for the development of the Lotifield, and under Pirkoh III Development Project, financedby the Asian Development Bank for the development of thePirkoh field, and assistance to OGDC under the proposedDomestic Resources Development Project, for theaccelerated development of new gas fields.
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Project Financing:
Rs Million USS MillionLocal Foreign Total Local ForIign Total
CORPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
STAFF APPRAISAL REPORT
I. ENERGY SECTOR
A. The Economy
1.01 Pakistan's economic performance during the period FY79-88 comparesfavorably with that of many developing countries. Growth in GDP, averaging about6.5% annually, was accompanied by a steady docline in inflation from 10% in FY79to 6% in FY88. Despite these achievements, macroeconomic imbalances had becomea concern by FY88. Specifically, as public expenditures had increased fasterthan revenues in the 1980s, the fiscal deficit increased from 5% of GDP in FY80to 8.7% in FY88. Inflation also began to increase in that year, reaching 10%in FY89. While merchandise export volume continued to grow, a deterioration inthe terms of trade and geneially accommodative domestic credit contributed toan overall increase in the trade deficit. These developments together with thecontinuing erosion in remittances from Pakistanis abroad brought the currentaccount deficit to about 4.3% of GNP in FY88. More critically, the CentralBank's gross foreign reserves at end-FY88 were equivalent to less than two anda half weeks of annual imports of goods and services, and less than the externalshort-term liabilities of the banking system.
1.02 As the emerging imbalances were likely to become a major impediment tosustaining economic growth of about 5.5% or more annually, as was envisaged forthe Seventh Plan period (FY89-93), the Government of Pakistan (GOP), inconsultation with the International Monetary Fund (IMF) and the Bank, initiateda medium-term macroeconomic adjustment and structural reform program aimed atfostering strong economic growth while ensuring domestic and external financialstability. The key requirements of the program, which initially covered theperiod FY89-91, are: (a) a reduction of the fiscal deficit, through an enlargedsales tax and other measures to broaden the tax base and the substantialcontainment of the growth of expenditures; (b) implementation of additional tradepolicy reforms with significant liberalization of non-tariff barriers; and (c)initiation of reforms in key sectors, such as finance, agriculture and energy,that will be important to improving the efficiency and growth potential of theeconomy. In support of GOP's program, the IMF's Executive Board approved onDecember 28, 1989, a three-year arrangement under the structural adjustmentfacility for a cumulative amount of SDR 347 million and a first annualarrangement for SDR 109 million, as well as a 15-month stand-by arrangement foran amount of SDR 273 million. The Bank's Executive Directors, discussed thepolicy framework paper in December 1988. The Bank approved an AgriculturalSector Adjustment Loan for US$200 million in August 1988, a Financial SectorAdjustment Loan for US$150 million in March 1989, and a Second Energy Sector Loan(ESL II; Loan 3107-PAK) for US$250 million in June 1989. The proposed Projectfits into the overall framework of the ESL II program of structural reforms and
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is designed to support the corporate restructuring of Sui Northern Gas PipelinesLtd. (SNGPL) and assist in expanding, at least cost, its transmission anddistribution capacity for the supply of gas to new consumers whose energyrequirements are currently being met by higher value petroleum products, the bulkof which are imported.
1.03 Implementation of the policy measures tinder the FY89 adjustment programhas been broadly on track with respect to the liberalization of the trade regime,tariff rationalization, industrial incentives, domestic credit restraint and theflexible management of the exchange rate. Tnese policies have contributed toan increase in private investment, a slowing of inflation toward the end of FY89,and an increase in export volumes despite the severe floods, disturbances inmajor industrial cities and the constraints on development expenditures.However, several economic problems surfaced in 1989. The external currentaccount deficit instead of declining from 4.3% of GNP in FY88 to 3.4% of GNP inFY89 as programmed, widened to 4.7%, and international reserves remained at avery low level, mainly as a result of a deterioration in the terms of trade.The fiscal deficit, while still falling from 8.3% of GDP to 7.3% of GDP in FY89,was higher than the target of 6.7%. Revenues increased as projected butexpenditures grew faster than originally foreseen, mainly because of increasesin subsidies linked to higher than projected import of wheat. Consequently,following a review in September 1989, the date for achieving the end-programmacroeconomic targets was extended by one year to FY92 with IMF and World Bankconcurrence, while the schedule for policy reforms remained unchanged.
1.04 During the first nine months of FY90, the second year of the program,the macroeconomic situation has generally improved. Overall economic growth willprobably exceed 5%, industrial output has recovered, private investments appearstrong and a good wheat crop is expected. Inflation has been reduced to below6%. Preliminary fiscal data reviewed by an IMF mission in May 1990 indicate thatthe budget deficit for FY90 is likely to exceed the target by about 0.5% of GDP,primarily because of larger than programmed defense spending. This expenditureoverrun is also expected to lead to a slightly larger external current accountdeficit than targeted (by about US$0.1 billion or less than 0.2% of GDP) onaccount of larger defense rela'Ued imports. Exports, other than rice and cotton,on the other hand, are expected to be on target. While the IMF mission in naywas unable to complete its work for the second review under the StandbyArrangement, the IMF's management has agreed to extend the scheduled review fromend-June to end-November 1990 as GOP has initiated measures to comply with thetwo end-March performance criteria and reiterated its commitment to achievingthe agreed overall fiscal deficit target of 5.5% of GDP in FY91.
B. Sectoral Setting
1.05 Energy Resources. Pakistan's commercially exploitable energy resourcesconsist of about 30,000 MW of hydropower potential, 16 trillion cubic feet (TCF)of proven and 6.3 TCF of probable reserves of natural gas, 175 millioin tons ofproven and 725 million tons of probable reserves of coal and lignite, and 54million tons of proven and 4 million tons of probable reserves of oil. Thecountry also has a relatively large base of traditional fuels in form of fuelwood
and agricultural and animal waste, which play a crucial role in meeting theenergy needs of the rural consumers. However, as the consumption of fuelwoodis already in excess of what can be replenished through reforestation and thesupplies of biomass are diminishing on a per capita basis, the share oftraditional fuels in the overall supply of energy is expected to decline relativeto that of commercial energy resources. As a consequence, and given the modestreserves of oil and the technical limits on the economic substitution of coaland gas for petroleum products, as well as the long lead time and substantialfinancial resources required to bring the major hydro sites on stream, Pakistanis expected to remain dependent on imported energy over the foreseeable future.The rate of growth of energy imports could be contained, however, by:restraining the growth of demand for energy through price and non-price measuresincluding rehabilitation and retrofitting of power plants, refineries and energyintensive industries; accelerating the development of smaller hydropower sitesand also of oil, gas and coal and encouraging the substitution of the latter aswell as that of imported coal for higher value petroleum products; andstrengthening implementation capabilities of entities involved in the sector.
1.06 Institutional Setting. Four ministries share the responsibility forthe energy sector: the Ministry of Petroleum and Natural Resources (MPNR), theMinistry of Water and Power (MWP), the Ministry of Production (MOP), and theMinistry of Planning and Development (MPD). Coordination between the ministrieson energy matters is provided by the Energy Wing of MPi, which acts as asecretariat for the National Energy Policy Committee (NEPC) and Energy ReviewGroup (ERG). NEPC is responsible for the formulation of GOP's overall energypolicy. The review of the investment plans of the sector and the approval ofenergy pricing proposals is under the Jurisdiction of the Economic CoordinationCommittee (ECC). The Executive Committee of the National S_onomic Council(ECNEC) and the Central Development Working Party (CDWP) review and approve majorproposals and projects for all sectors, including energy.
1.07 The day-to-day management and operation of the energy sector is vestedin a number of public and private sector entities. The public sector entitiesare: the Water and Power Development Authority (WAPDA), which is responsiblefor developing Pakistan's water resources and for the construction, operationand maintenance of power generation, transmission and distribution facilitiesthroughout the country, except the Karachi area; the Oil and Gas DevelopmentCorporation (OGDC) for exploration and development of oil and gas; the PakistanMineral Development Corporation (PMDC) for the exploration and development ofmineral resources; the State Petroleum Refinery and Petrochemical Corporation(PERAC) and the National Refinery Limited (NRL) for processing crude oil; andNational Petroleum Limited (NPL) for a proposed hydrocracker project. Alsoinvolved in the energy sector are a number of semi-autonomous entities in whichGOP has, either directly or through public financial institutions, a controllinginterest. These are: Karachi Electric Supply Corporation (KESC), which isresponsible for the construction, operation and maintenance of power generationfacilities, as well as the transmission and distribution for electricity supplyin the Karachi area; SNGPL and the Sui Southern Gas Corporation (SSGC) for thetransmission and distribution of natural gas; and Pakistan State Oil Limited(PSO) for marketing and distribution of petroleum products. Private sectorentities include: a large number of Pakistani coal mining companies; tworefineries, the Attock Refinery Limited (ARL) and Pakistan Refinery Limited
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(PRL); and several oil and gas development companies including Pakistan PetroleumLimited (PPL), Pakistan Oilfields Limited (POL), the Fauji Foundation, UnionTexas, Occidental Petroleum Limited .id other international oil companies injoint ventures with OGDC. As shown in the organization chart of the energysector (Annex 1.1), all operational entities (public and semi-autonomous) areunder the jurisdiction of MPNR, except for WAPDA, KESC, NRL and PRL. MWP hasjurisdiction over WAPDA and KESC and MOP over NRI, and NPL. In addition, theDepartment of Forestry, in the Ministry of Agriculture is responsible forafforestation and the Pakistan Environmental Protection Agency for issuesrelating to the implementation of GOP's environmental policies.
C. Developments in the Sector. FY79-FY88
1.08 The Fifth Plan (FY79-FY83) ewphasized the accelerated development ofdomestic energy resources and rationalization of energy prices. Financial andimplementation constraints, however, impeded the achievement of the supplytargets for all energy products except natural gas. The largest shortfall wasin the oil and power subsectors where only 64% and 50% of the output targets,respectively, were achieved. These shortfalls, together with the rapid growthof consumption, precipitated by GOP's policy of underpricing energy in an effortto stimulate economic growth, increased the country's dependence on importedenergy. In recognition of the growing supply gap, GOP accorded high priorityto restructuring the sector during the Sixth Plan (FY84-FY88). Its objectiveswere to accelerate and rationalize the development of energy, correct distortionsin energy pricing, streamline the institutions and agencies in the sector andincrease private sector involvement in the development, production and deliveryof energy. However, as these objectives were not translated into concretepolicies and programs, in the first two years of the Plan, only one-half of theplanned investment program for the sector was implemented, energy prices wereallowed to decline in real terms, and the institutions in the sector remainedunresponsive to the pressing needs of the economy. These setbacks prompted GOPto formulate a Long-Term Energy Strategy (LES), covering the period 1986-2010.It calls for implementing integrated programs of structural reforms over five-year intervals, corresponding to the planning cycle, in the areas of: resourcedevelopment and energy investments; pricing, resource mobilization and demandmanagement; and institutional development.
1.09 To assist GOP in implementing the reforms called for by LES, a seriesof sector loans was envisaged by the Bank, each in support of a monitorable coreprogram of policy actions and priority investments, which would form the umbrellafor the Bank's lending for specific energy investments and for the more effectivecoordination of external financing for the sector. The first phase of thesereforms was implemented successfully under the first Energy Sector Loan (ESL I,Loan 2552-PAK) during the last three years of the Sixt'. Plan (FY86-88). Supportfor implementing the second phase, which constitutes an integral part of themedium-term structural adjustment and policy reform program, is being providedunder ESL II (para 1.02), covering the first three years of the Seventh Plan(FY89-92). Details relating to LES and review of the progress made in itsimplementation under ESL I and ESL II are presented in Annex 1.2.
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D. Natural Gas Subsector
Organization of the Subsector
1.10 MPNR has overall responsibility for the development of the oil andnatural gas subsector. The downstream activities for the natural gas subsectorare discharged through the Directorate General of Gas (DGG), one of the fiveDirectorates in the Ministry. DGG functions as a regulatory body and, inaccordance with the Natural Gas Ordinance of 1967, is responsible for overseeingthe operations of the gas transmission and distribution companies which, interalia, include a review of their investment programs, as well as the harmonizationof their forecasts of demand for gas. DCG, together with the Ministry ofFinance, also reviews the financial performance of the transmission anddistribution companies and assists them in mobiliz.ng resources for theirinvestment programs. In addition, DGG recommends changes in the procedures forallocating gas to regions and consumer categories and in the level and structureof the consumer price of gas. These recommendations, however, require theapproval of ECC and the Cabinet prior to implementation (para 1.06).
1.11 Pakistan has two principal gas transmission systems, the northern andsouthern systems. The northern system, managed by SNGPL, supplies gas to thecities of Multan, Faisalabad, Lahore, Gujranwala, Islamabad and Peshawar fromthe Sui gas field and other gas fields in the Potwar area. The southern system,managed by SSGC, runs south from the Sui Field to serve both sides of the Indusriver valley and the major cities of Karachi and Hyderabad. In addition, thereare three smaller systems: (a) the Quetta pipeline, owned by SSGC, transportsgas from the Sui field to the city of Quetta; (b) the Mari system, ow;red by theFauji Foundation, supplies gas to three fertilizer plants; and (c) two separatepipelines owned by WAPDA transmit gas from the Sui, Mari and Kandkhot fields tothe Guddu power station.
Gas Reserves
1.12 Natural gas was first discovered at Sui in 1952. Since then severalother fields have been discovered, including the non-associated gas fields atMari, Khandkot, Pirkoh, Loti, Qadirpur and Kadanwari; the condensate fields atDhodak, Dhurnal, Dakhni and Adhi; and low quality gas fields at Uch, Panjpir andNandpur. As noted (para 1.05), proven recoverable reserves of gas are estimatedat about 16 TCF (400 mtoe) and probable reserves at about 6.3 TCF (156 mtoe)(Annexes 1.3 and 1.4). All of the non-associated gas fields are located aroundthe Sui region in the central part of the country. These fields account forabout 80% of total recoverable reserves. The quality of gas in Pakistan, interms of heating value, varies from field to field. The location of the maingas fields is shown on the attached map (IBRD No. 20961R1) and the averagecomposition of the gas from the major fields is given in Annex 1.5.
Historical Developments in the Consumption and Supply of Gas
1.13 Consumption of gas increased between FY71 and FY89 at an average annualrate of 7.5%, from 294 MMCFD to 1,081 MMCFD (Annex 1.6). However, the rate ofgrowth of consumption has declined significantly since FY82, from an average of9.3% between FY71 and FY82 to 4.7% between FY82 and FY89. This decline is
attributable to supply constraints caused by GOP's past policy of settingproducer prices for gas at levels which failed to provide producers theincentives needed to increase output from existing fields and bring intoproduction already discovered fields (para 1.19). Moreover, as GOP's consumerpricing policy was inappropriate for restraining the growth of demand, shortagesof gas started to emerge in 1981 (para 1.08). In response to these shortages,GOP initiated a number of measures aimed at rationalizing the consumption andsupply of gas. On the demand side, a gas allocation procedure was adopted topromote the substitudion of fuel oil and coal for gas. Accordingly, gas wasreleased from the cement industry for use by households and its supply to othernew industrial consumers was curtailed to nine months each year. The supply ofgas to the power subsector was also fixed as was the number of connections tobe provided to domestic and commercial consumers. The allocation of gas,together with a nearly three-fold increase in the consumer price of gas betweenFY81 and FY89 (para 1.20), resulted in a marked shift in the shares of gasconsumed by the main sectors of the economy, especially the residential sectorand the cement and power subsectors. As shown in Annex 1.7, between FY82 andFY89, the share of the cement subsector declined from 9.2% to 1.3%, while thoseof the residential sector and the power subsector increased from 8.3% and 28.8%to 13.0X and 36.0%, respectively. As for the other sectors, their shares haveremained virtually unchanged and as of FY89, these were about 2.8% for thecommercial sector; 26.4% for the fertilizer industry; and 21% for the industrialsector.
1.14 On the supply side, GOP concluded agreements on gas producer priceswith PPL and the Fauji Foundation in 1982 and 1984, respectively, to providethese producers additional incentives to increase their output from the Sui andMari gas fields. Under ESL I a new gas producer formula was adopted and athree-year Core Investment Program (CIP) for exploration and development wasoutlined (para 1.19). It covered three main elements: (a) the appraisal anddevelopment of fields to be undertaken by OGDC using its own resources andbudgetary allocations; (b) exploration and development activities to beundertaken through existing joint ventures; and (c) new joint ventures inprospective areas for which further effort was to be made in mobilizing privatesector participation. The joint ventures were intended to supplement OGDC'stechnical capabilities and mobilize resources for exploration and development.The implementation of these measures has enabled GOP to conclude twenty-one newjoint venture contracts; accelerate the development of Pirkoh, Loti, Dakhni,Nandpur and Panjpir fields; increase the recoverable reserves by about 4.63 TCF,and the output of gas from about 300 BCF (7.5 mtoe) in FY83 to about 395 BCF (9.5mtoe) in FY89. Moreover, in order to further encourage private sectorinvolvement in petroleum exploration and development in Pakistan, GOP promotedthe available acreages for exploration in December 1988 in Houston and London.As the response of private sector to the promotion was highly favorable, GOP hasfurther revised the gas producer price formula for new offshore concessions tosustain this momentum (para 1.19).
Forecast of Supply and Demand for Gas
1.15 The gas supply and demand forecast for the period FY90-FY2006, preparedby GOP in the context of a gas utilization and demand management study completedin December 1987, was revised by GOP under ESL II to take into account the recent
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developments in the subsector. On the basis of the proven recoverable reservesand the reservoir characteristics of the already discovered fields, output ofgas is forecast to increase gradually from about 1,200 MMCFD in FY90 to about2,000 MMCFD in FY2006, representing an average annual increase of about 3.5%.This would allow GOP to maintain a reserve to production ratio of at least twentyyears. The production profile is presented in Annex 1.8. According to theforecast production of gas from existing and already developed fields, supplywill fall short of unconstrained demand, which is forecast to increase at anaverage annual rate of about 5.2%. In recognition of these supply constraints,GOP with Bank assistance has outlined for the Seventh Plan period a gasallocation procedure for meeting the requirements of gas for the priority sectorswhich maximizes the benefits to the economy. Specifically, the procedure callsfor allocating incremental supplies of gas to various consumer categories in thefollowing descending order based on the "net-back" value of gas to each categoryof consumer: (a) fertilizer industry to which priority has been accorded becauseof major bottlenecks in port handling facilities and the infrastructure forinland transportation; (b) residential and commercial consumers, as a substitutefor higher value kerosene; (c) the power subsector for use in combined cyclepower plants, as a substitute for diesel oil; (d) general industries, exceptsteel and cement, to displace fuel oil; and (e) the power subsector as asubstitute for fuel oil for base load thermal power plants.
1.16 Based on the projectec availability of gas and its allocation tovarious consumer categories, the revised forecast calls for sales increasing atan average annual rate of about 3.5%, from 1,098 MMCFD in FY90 to 1,897 MMCFDin FY2006. However, as shown in Table 1.1 below, the allocation procedurestogether with the agreements reached under ESL II on measures to rationalize thelevel and structure of consumer price of gas (paras 1.20 and 1.21) are expectedto release gas for higher value uses. Accordingly, the residential sector wouldexperience the highest rate of growth, averaging about 6.6% annually, followedby commercial consumers (4.6%), fertilizer and general industries (3.2%) andpower (1.8%).
Table 1 1: Forecast of Gas Demand and Supply FY9O-FY2006(MMCFD)
Moreover, the share of gas absorbed by the residential and commercial sectorstogether would increase from 18.2% in FY90 to about 27.9% in FY2006. Bycontrast, the share of gas consumed by the fertilizer industry and the powersubsector would decline from 26.8% and 30% to 25.6% and 23.0%, respectively.
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Gas Development Program
1.17 GOP's medium term development program for the gas subsector calls for:(a) drilling of about 250 wells by both the private and the public sectors toaccelerate the appraisal and development of the gas fields at Loti, Sui, Pirkoh,Khandkot, Bad.in Block, Mari, QadiPpur and Kadanwari, the condensate fields ofDhodak, Dakhni and Adhi, and the low quality gas fields of Uch, Panjpir andNandpur; and (b) expanding the infrastructure for the purification, transmissionand dist:ibution of gas. In particular, SNGPL's capacity would be increased toabout 800 MMCFD; transmission pipelines would be extended and reinforced to:(a) connect the Dhodak, Adhi and Dakhni fields; and (b) supply the combined cyclepower station at Kot Addu (paras 3.02 and 5.02). The capacity of SSGC'stransmission line on the right bank of the Indus would be increased to transportan additional 100 MMCFD of gas from the Badin fields. The projected gasrequirements for both the SNGPL and SSGC transmission systems are given in Annex1.9. The development program for the gas subsector which constitutes an integralpart of the CIP for the Seventh Plan, will receive priority in telms of resourceallocation and implementation will be monitored under ESL II (para 1.02).
1.18 To implement this program, Rs 38 billion would be invested during theSeventh Plan in the development of oil and gas subsector by both the public andprivate sectors for exploration drilling, appraisal and development of discoveredoil and gas fields, and the expansion of the gas transmission and distributionretwork. Investments amounting to Rs 14.9 billion would be undertaken by OGDC,Rs 4.4 billion by SSGC, and Rs 6.5 billion by the private sector. As for SNGPL,its investments are expected to amount to Rs 12.2 billion during the Seventh Planand about Rs 7.8 billion would be incurred between FY94-96 (para 4.08). Thisprogram includes, inter alia, about Rs 13 billion for the proposed Project, andabout Rs 3 billion for extending the distribution network which constitute a partof' the Government's social development program. The Bank has reviewed theinvestment program and advised GOP that it is large relative to the availabilityof resources and the implementation capacity of SNGPL and, hence, should bereviewed annually (para 4.06). Furthermore, in order to ensure that thedistribution network to connect new town is not extended in an ad hoc fashion,specific economic criteria are to be developed and reviewed with the Bank forthe selection of the new towns to be connected (para 3.11).
Gas Pricing and Demand Management
1.19 Producer Price of gas refers to the price per unit of gas at the well-head and covers the financial cost of extraction and a return to investors. Theformula for setting this price was changed under ESL I as the formula that hadbeen in place since 1981 had not succeeded in increasing the private sector'sinvolvement in the exploration and development of gas for two reasons: (a) the12% rate of return it guaranteed was low relative to the returns secured by theoil industry elsewhere; and (b) it required that the well-head price of gas beset after discovery, which entailed a higher risk for investors given thelikelihood of protracted negotiations once discovery was made. To address theseshortcomings, the new formula links the producer price of gas to two-thirds theborder price of fuel oil, less a discount to be negotiated prior to discoverybased on the geological and market conditions of the concession involved. In
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1987, a year after it was adopted, GOP on its own accord, expanded theapplicability of this formula to cover not only new concessions but also thealready discovered fields, provided the concessionaires were willing torenegotiate their entire contract. The private sector has responded favorablyto these initiatives and so far exploration contracts have been signed for 21new onshore concessions and negotiations are underway for several others (para1.14). In addition, new gas fields have been discovered at Qadirpur by OGDC andat Kadanwari by the joint venture of OGDC and IASMO, and the production of gashas increased by about 25%, with OGDC doubling its output. Notwithstanding thesegenerally satisfactory developments, the downturn in the international price ofoil has made exploration in new high cost concession areas, particularly inremote and offshore areas, less attractive to the private sector under theprevailing producer price formula. Therefore, with the objective of providingadditional stimulus to the private sector to increase its involvement in theexploration and development of gas, under ESL II, GOP has revised the producerprice formula for new offshore concessions granted after July 1, 1989, by linkingthe well-head price of such gas to full parity with the border price of fuel oil,less a negotiated discount for geological and market conditions.
1.20 Consumer Price of gas refers to the price per unit of gas paid by theend-use consumers and covers the producer price, the utilities' costs oftransmission and distribution and their financial returns, as well as a gasdevelopment surcharge (GDS), which accrues to GOP as rent. GDS represents thedifference between the consumer price and the utilities' costs including theproducer price and returns. Prior to 1981, GOP maintained the consumer priceof gas at levels lower than those of its substitutes to encourage the use of gasand buffer the economy from the adverse impact of a higher bill for energyimports. As this was resulting in the uneconomic use of gas and was denying thesubsector the resources needed to implement an expanded exploration anddevelopment program, GOP agreed under the First Structural Adjustment Loan toraise the weighted average consumer price of gas to two-thirds the border priceof fuel oil, a commitment that was reaffirmed under ESL II. In keeping with thisagreement, gas prices were increased six times between FY81 and FY89 by anaverage of about 23% in nominal terms. As of December 1989, the weighted averageconsumer price of gas was slightly higher than the then prevailing border priceof fuel oil (Rs 41.6/MCF compared to Rs 40.7/MCF) and well above the target of66% originally agreed to with the Bank.
1.21 The progress made by GOP in adjusting the level of the consumer priceof gas, however, was not accompanied by corresponding realignments in itsstructure, where distortions were relatively widespread. Specifically, the priceof gas to consumers, other than general industries, the cement subsector and thecommercial sector, was lower than the price of petroleum products it wasdisplacing. The price paid by WAPDA in FY89 for pipeline quality gas was at fullparity with the domestic price of fuel oil, but for direct purchases of gas fromproducers it was only at 25% of fuel oil parity. Likewise, the 10% of thehouseholds in the country with access to gas were paying only 24% of the domesticprice of kerosene and only 22% of the domestic price of fuelwood, both of whichare used by the remaining 90% of the households. Unlike the general industrialconsumers and the cement subsector, the fertilizer industry was paying forpipeline quality gas only 32% of the domestic price of fuel oil. In view of theprevailing supply constraints, which augment the need for rationalizing the
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consumption of gas and mobilizing financial resources for implementing thedevelopment program of the subsector, GOP agreed under ESL II to implementmeasures required to address these distortions, including increases in the priceof gas to households and the power subsector (para 4.06). As for the fertilizerindustry, which is a major consumer of gas and has important links to theagricultural sector, GOP agreed to complete by March 31, 1991, a study to assessthe impact of higher gas prices on the ex-factory prices of fertilizer andidentify investments in retrofitting and changes in technology to improve theefficiency of gas utilization.
1.22 The demand for gas in Pakistan varies significantly by time of day andseason. This, together with the supply constraints that have persisted since1981, has induced GOP to curtail the supply of gas to new industrial consumersto nine months each year (para 1.13). As a result, for the remaining threemonths, these consumers shift to the use of higher-value petroleum products suchas kerosene and diesel which, at the margin, are imported. As this is contraryto the objectives of LES, GOP needs to adopt a load management strategy thatwould balance the supply and demand of gas and promote allocative and operationalefficiency. Such a strategy would require storing the excess gas undergroundand producing it to meet peak demand. The Bank, in consultation with GOP andSNGPL, has ascertained that sufficient gas is available for storage particularlyduring the summer months. The Gas Utilization Study has identified the nowdepleted Dhtilian field as a suitable candidate for creating such a facility,subject to completion of a detailed feasibility study to assess its viability.Moreover, as the domestic price of diesel oil and kerosene is at presentsubstantially higher than that of gas, the willingness to pay of consumers whosubstitute the former for the latter during peak periods, is substantially higherthan what they are currently paying for pipeline quality gas. As the surpluscaptured by such consumers could be mobilized by GOP through better demandmanagement including the implementation of time of day and seasonal tariffs, GOPagreed under ESL II to recruit consultants under terms and conditionssatisfactory to the Bank to complete, by March 31, 1991, a study to: (a) assessthe potential for peak shaving of gas consumption; (b) formulate a structure oftariffs for gas which would promote peak shaving; and (c) prepare a timetablesatisfactory to the Bank for the implementation of the new tariff structure.
E. Bank Group's Role in the Energy Sector and Experience with Past Lending
1.23 The Bank Group's involvement in Pakistan's energy sector started in1955, with a loan to KESC for the construction of a thermal power station. Sincethen, it has assisted in the implementation of projects in all energy subsectors.Prior to 1985, the Bank Group had made 16 loans/credits to Pakistan for energyprojects: in the power subsector, the Bank participated in the Indus BasinDevelopment Projects, and provided a series of four credits/loans to KESC andthree to WAPDA; in the petroleum subsector, the Bank's involvement included fiveloans to SNGPL for the expansion of the infrastructure for the transmission anddistribution of gas, three to OGDC for exploration and development of oil andgas and one to NRL for improving its energy efficiency. All of these projectshave been or are about to be completed.
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1.24 In addition to ESL I and ESL II, the Bank Group has made eight loansand a credit in the energy sector since 1985. These include: WAPDA IV (Loan2499-PAK) and WAPDA V (Loan 2556-PAK) for the least cost extension andreinforcement of the secondary and high voltage transmission grid; the PetroleumResource Joint Venture Project (Loan 2553-PAK) to assist GOP in mobilizingprivate sector involvement in exploration and development of oil and gas; theKot Addu Combined Cycle Project (Loan 2698-PAK) to add another 250 MW ofgenerating capacity through the conversion of combustion turbines to combinedcycle operation; the Power Plant Efficiency Improvement Project (Loan 2792-PAK)for the rehabilitation of existing power plants and conversion of combustionturbines to combined cycle operation; the Refinery Energy Conservation andmodernization Project (Loan 2842-PAK) for restructuring product output andstreamline existing systems; the Private Sector Energy Development Project (Loan2982-PAK), the first of its kind to be processed by the Bank with the objectiveof increasing private sector involvement in energy development; the TransmissionExtension and Reinforcement Project (Loan 3147-PAK) supports the continuationof work on least cost expansion of the high voltage transmission grid; and theRural Electrification Project (Credit 2078-PAK and Loan 3148-PAK) which is aimedat improving rural productivity and quality of life of the rural population.
1.25 The proposed Project would be the Bank's sixth operation with SNGPL.The first five have been completed successfully. The Bank through thisrelationship has contributed to expanding SNGPL's gas transmission anddistribution network and to strengthening its financial, management and technicalcapabilities. The Project Completion Report (PCR) for SNGPL IV Project (Loan1107-PAK), however, noted that separate financial and managerial objectives tobe developed for the Project's Department of the Company were not adopted fully.Likewise, the SNGPL V Project for which the PCR is under preparation has furtherconfirmed that, despite the autonomy granted so the corporation under theCompanies Act, GOP exercises substantial control in the day-to-day managementof SNGPL, including the appointment of senior staff. Such control is neithercorducive to the efficient operation of the company, nor does it fosteraccountability, issues that are likely to gain especial significance in view ofthe planned investments which would more than double the assets of the company.The measures to be implemented under the proposed Project are aimed at, interalia, restructuring SNGPL along commercial lines and increasing accountabilityand autonomy.
II. THE BORROWER
Background
2.01 SNGPL, the Borrower of the proposed Loan, was incorporated in 1963under the Companies Act as a private limited company and converted in 1964 toa public limited company. Originally established as a gas transmission anddistribution company, its activities have expanded and currently include theconstruction and operation of pipelines, both for itself and other organizations.It has an authorized capital of Rs 400 million, of which Rs 383 million has beenissued and paid up.
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2.02 Until 1970, SNGPL's shares were held in equal proportions by Burmah Oi'LCompany (BOC), the Pakistan Industrial Development Corporation (PIDC) and thegeneral public. liowever, through equity contributions and subsequently throughthe acquisition of shares sold by BOC, GOP became in 1973 the majorityshareholder in SNGPL. As of May 1990, about 91% of SNGPL's shares were owned,directly or indirectly, by GOP, followed by BOC (6.7%) and the general public(2.3%). The company's shares are traded on the Karachi and Lahore stockexchanges. Details relating to the current ownership of SNGPL are presented inAnnex 2.1, and summarized below.
I %
GOP (direct holding) 51.0 51.0
Indirect Government Holdin&s
Pakistan Investment DevelopmentCorporation 9.7
State Life Insurance Corporation 5.3Pakistan Insurance Corporation 2.2National Development Finance
Other GOP controlled institutions _..2Subtotal 24.5
Other Public Sector Shareholding
National Investment Trust 9.0Investment Coiporation of Pakistan 6.5
Subtotal 15.5
Private Sector
Burmah Oil Company of UK 6.7General Public 2,3Subtotal 9.0
TOTAL 100.0
Organization and Management
2.03 As a public limited company, SNGPL operates under the provision ofthe Company Ordinance of 1984. Ownership is conferred through ordinaryshareholding, and control is exercised through a Board of Directors who areelected by the shareholders for a period of three years and are eligible forreapiointment. The Company Ordinance, however, provides for the appointment ofdirectors to the Board to protect creditors interests. Currently, SNGPL's Boardconsist of 14 members, 12 of whom are elected by the respective shareholders.As majority shareholder, GOP exercises the prerogative of appointing eightmembers to the Board including the Chairman. In addition, it appoints two otherdirectors who represent GOP controlled banks and development financeinstitutions, the creditors of the company. Of the remaining four directors,one is from the Pakistan Investment Development Corporation, a wholly-ownedgovernment enterprise; one each from the government-owned and controlled mutualfunds, the National Investment Trust and Investment Corporation of Pakistan; andone from the BOC. The Board is responsible for the formulation of long-termpolicy, though all major decisions currently require Government approval priorto implementation (para 1.10). Consequently, the day-to-day management and
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decision making of the company are strongly influenced by the Government, andits investment program often reflects Government's priorities.
2.04 The Managing Director, who is appointed by resolution of the Board,after confirmation by GOP, is responsible for the day-to-day management of thecompany. He is assisted by three (financial, technical and commercial) GeneralManagers, and six senior managers, including managers for Telecommunications,Audit,. Corporate Planning, Data Processing, Systems and Procedures, the CompanySecretary and a Special Assistant. The ;nior management is qualified, competentand well-experienced. However, in light of the strong influence in the day-to-day running of the company by the government, the authority of the company'smanagement is limited, which is not conducive to quick decision-making and smoothoperation. The proposed Project, through the restructuring of the ownership andmanagement of the company would promote the autonomy and independence accordedto SNGPL under the Companies Act (paras 3.05 and 3.07). The current organizationchart is presented in Annex 2.2.
Sources of Gas Supplies and Existing Facilities
2.05 As of January 1990, the major source of 4as for SNGPL was the Suifield, which is operated by PPL with whom it has two long-term contracts withdedicated reserves: one for purchases of up to 428 MMCFD until the year 1999,and the other for purchases of up to 55 MMCFD until 1998 (para 3.06). Othersources of gas include about 7 MMCFD from the Toot field, operated by OGDC and18 MMCFD from Meyal field, operated by POL. SNGPL has also negotiated contractsfor additional gas supply with: OGDC for the purchase of about 225 MMCFD of gasfrom Pirkoh (130 MKCFD), Loti (70 MMCFD), and Dakhni fields (25 MMCFD); with thePOL/OGDC joint venture for the purchase of about 21 MMCFD from the Adhi field;and with the Oxy/OGDC Joint Venture for 37 hMCFD from the Dhurnal field (para3.14). Negotiations are also underway with: OGDC for 50 MMCFD from the Dhodakfield, and 40 MMCFD from Qadirpur; and the Lasmo/OGDC Joint Venture for 60 MMCFDfrom the Kadanwari field (Annex 3.1).
2.06 The main transmission and distribution system owned and operated bySNGPL consists of: (a) 2,446 km of high pressure pipeline of varying diameterto transmit the gas from Sui, Toot and Meyal field to cities in Punjab and theNorthwest Frontier Pi.ovince via Multan and Faisalabad; and (b) 8,722 km ofvarying diameter pipelines to distribute this gas to a large number of citiesand towns including Lahore, Faisalabad, Islamabad, Peshawar, Gujrat and Sialkot.In addition, SNGPL owns and operates several compressor stations (Map IBRD20961R1) to facilitate the movement of the gas along the system; purificationplants at Sui with a total capacity of 450 MMCFD; and an LPG plant at Dhurnal.SNGPL's existing system supplies gas to about 23,781 commercial consumers, about540,000 domestic consumers, and about 2,860 industrial consumers including 5fertilizer plants and WAPDA for power generation. Over the next six yearsSNGPL's system capacity is expected to be increased from 450 MMCFD to about 800MKCFD (para 3.14).
Corporate Planning
2.07 SNGPL's Corporate Planning Department is staffed by two seniorengineers and a junior accountant. The primary function of this department has
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been to prepare SNGPL's medium-term investment program over a five year span onthe basis of gas allocated by the Government, and also project implementationand financing plans (generally referred to as PC-1) for the investment programfor goverrnment clearance and approval. It also liaises with financialinstitutions such as the Bank for identifying sources for financing itsinvestment program. In view of the envisaged expansion of SNGPL's activitiesto be undertaken under the proposed Project, the capability of the CorporatePlanning department would be strengthened in the areas of economics, financeand system planning (para 3.21).
Project Engineering and ImDlementation
2.08 SNGPL has a separate department for project design and implementation.It is headed by the Manager Projects, who reports to the Technical GeneralManager. The department has successfully implemented a number of projects,including the SNGPL IV Project (Loan 1107-PAK) and the SNGPL V Project (Loan2324-PAK), and those for other entities in Pakistan such as WAPDA. The companycarries out its own design, engineering and construction of transmission anddistribution pipelines, except for pipelines across large rivers for whichSNGPL's inhouse expertise is limited. As the prJposed Project involves theconstruction of pipelines across two rivers (Ravi and Sutlej rivers), consultantswill be recruited to assist SNGPL in the design, engineering and supervision ofthe construction of pipelines across rivers (para 3.10).
0rieration and Maintenance
2.09 SNGPL has competent personnel to operate and maintain its gastransmission and distribution network. Currently its methods and procedures foroperation and maintenance are satisfactory. However, with the expansion of thesystem, SNGPL would need to monitor more closely the gas supply flow patternwithin its system to respond more effectively to changes in demand, particularlyduring peak periods. This would require the installation of a modern SupervisoryControl And Data Acquisition (SCADA) system. The implementation of the firstphase of the SCADA system was initiated under ESL I and would be completed underESL II (para 1.02). The second phase of the SCADA system required for theenvisaged expansion of the network would be implemented under the proposedProject (para 3.02). In view of recent increases in losses due to pipelinecorrosion, there is a need for improving the procedures for the coating of thelinepipes, and upgrading SNGPL's procedures for monitoring safety and detectingpossible gas leakages. Provision has been made under the proposed Project, forthe installation of a new up-to-date coating plant and for a collaborativearrangement with an internationally reputable gas utility to undertake a safetyand hazard assessment survey of SNGPL's entire transmission and distributionsystem with the objective of establishing and implementing appropriate safetymeasures (para 3.21).
Personnel and Staffing
2.10 Personnel management and staffing is the responsibility of thePersonnel Manager, who reports to the Commercial General Manager. Since 1983,SNGPL has adopted a relatively cautious approach to recruitment and, as a result,its staff has increased annually by only about 2%, from 3,800 in 1983 to 4,352
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by June 1990. This approach, in turn, has enabled SNGPL to substantially improvethe consumer-employee ratio which, in June 1990, was about 142:1 compared to101:1 in June 1983. On the basis of the configuration and level of complexityof the SNGPL's system, this ratio compares favorably with those of other welldeveloped gas distribution systems. Of the total staff employed by SNGPL, 381(9%) are engaged in project construction and the remaining 3,971 (91%) inoperations. SNGPL's clerical and support staff is represented by a union, whichnegotiates the terms and conditions of employment. A two-year contract, coveringthe period July 1, 1989 to June 30, 1991, was ratified by the Sui Northern GasEmployees Union and SNGPL on October 21, 1989. The overall relationship betweenlabor and management is good and the total package of wages and benefits offeredby SNGPL is considered attractive by local standards.
Training
2.11 Training of staff is the responsibility of the Personnel Manager andline managers. Under the Fourth and Fifth SNGPL Projects (Loans 1107-PAK and2324-PAK), the Bank assisted SNGPL in upgrading the technical and managerialcapabilities of its staff through overseas training in selected aspects of gasutility management and operations. SNGPL has recently appointed a full timeTraining Coordinator under the Personnel Manager for the coordination andimplementation of all training programs. However, given the growth and diversityof operations envisaged under the proposed Project, especially the shift fromsingle to multiple sources of gas supply, SNGPL has requested the Bank to financea collaborative arrangement with an internationally reputable private gasutility. Through this arrangement, assistance would be provided to SNGPL toupgrade its operational procedures and allow its staff to obtain on-the-jobtraining overseas or in Pakistan, in the areas of long term planning, operationand maintenance, inventory control, corporate planning, project implementation,safety and industrial emergency prevention (para 3.21).
III. THE PROJECT
Project Objectives
3.01 The objectives of the proposed Project are to: (a) assist GOP inrestructuring SNGPL's equity ownership to make the utility more autonomous andenhance its resource mobilization capability by enabling it to tap new sourcesof financing including private sector financing; (b) expand SNGPL'sinfrastructure for purification, transmission and distribution of gas at leastcost; (c) promote the substitution of gas for higher value petroleum productsin the northern part of the country; (d) rationalize the consumption and supplyof gas through pricing and demand management; and (e) strengthen SNGPL'scapabilities in long-term planning, project implementation, inventory control,operation and maintenance and safety.
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Proiect DescriRtion
3.02 Over a period of six years, the proposed Project would support threecomponents, Corporate Restructuring of SNGPL, Infrastructure Development andConsultancy Services and Training. Details of the proposed Project are presentedin Annex 3.1 and summarized below:
A. CorRorate Restructuring of SNGPL. This would involve:
(a) Restructuring of SNGPL's Ownership: Presently, GOP owns directly about51% and indirectly, through GOP-owned institutions, about 40% ofSNGPL's shares. The restructuring of the ownership involves mobilizingresources from the private sector through issuance of additional equityshares, initially to dilute public sector ownership from 91% to 51%,and subsequently to at most 40% (para 3.05);
(b) Restructuring of SNGPL's Management, which would include thereconstitution of the Board of Directors of the company to reflect thenew shareholding in the company. In order to ensure reduced Governmentinvolvement in the management and decision making of the company, theChairman and Managing Director and other key personnel of the companywould be appointed by the Board of Directors (para 3.07);
(c) Establishment of Financial Performance Criteria to include a new basisfor setting SNGPL's prices net of the Gas Development Surchargecollected on behalf of GOP (Prescribed Prices) and providing for, interalia, the capping of SNGPL's prices rather than of its rate of returnon fixed assets, for the purpose of improving the efficiency of theborrower and enhancing its ability to raise equity from capital markets(para 4.03); and
(d) Reviewing the Regulatory Functions of the Directorate General of Gas(DGG). Currently, DGG is responsible for: establishing the guidelinesand commercial objectives for the development of the gas subsector;allocating gas and setting gas tariffs for the utilities and monitoringtheir activities. The planned expansion of the gas transmission anddistribution systems throughout the country and in particular theproposed expansion of the SNGPL system and restructuring of the Companyunder this Project, makes it necessary to upgrade the capabilities ofDGG to enable it to act effectively as a regulatory authority. Underthe proposed Project, the role of DGG would be reviewed andrecommendations made on how to improve its regulatory functions (para3.08).
B. Infrastructure DeveloRment. This would provide for:
(a) installation of a 1 x 120 MMCFD gas purification plant at Sui forpurifying the additional gas from Pirkoh, Loti, and the newlydiscovered gas fields of Kadanwari and Quadirpur;
(b) expansion of SNGPL's transmission system capacity by about 300 NMCFDincluding the construction of approximately 215 kms of 30-inch diameter
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pipeline between Sui and Multan and installation of 6x4000 BHPcompressor units to enable SNGPL evacuate the additional gas from thegas fields in the Sui region;
(c) expansion of SNGPL's distribution system to supply gas to the powerstation at Kot Addu and two fertilizer plants to be constructed betweenSahiwal and Lahore, and to connect during FY93-96 approximately 330,000domestic, 6000 commercial and 400 industrial new consumers;
(d) installation of a linepipe coating plant, to improve the coatingprocess, extend the life of the linepipes and improve operationalsafety during construction;
(e) installation of a telecommunication system (SCADA) for monitoring theoperations of the transmission and distribution network; and
(f) procurement of compressors and construction equipment for installationof the linepipe.
C. Consultancy Services and Training. This would cover:
(a) a safety and hazard assessment survey of the transmission anddistribution system;
(b) upgrading the capability of the Directorate General of gas, andtraining of SNGPL staff in the areas of long-term planning, projectimplementation, pipeline system operations and maintenance, inventorycontrol and safety through a collaborative arrangement with a foreignprivate gas utility;
(c) further development of SNGPL's financial management information systemsand data processing including definition of its computer hardware andsoftware needs, and a review of its billing cycle; and training ininternal auditing of computerized accounting systems;
(d) designing the new formula for setting SNGPL's Prescribed Prices andperformance criteria referred to in the description of the CorporateRestructuring program in para 3.08;
(e) services of financial advisers and an underwriter or consortium ofunderwriters to manage the issuance of shares; and
(f) design, engineering and supervision of high pr'ssure pipeline at rivercrossings.
Project Cost
3.03 The total cost of the proposed Project, including physical and pricecontingencies and interest during construction, is estimated at US$546.5 millionequivalent, of which taxes and duties amount to about US$103.9 million. Of thetotal cost, about US$129.9 million would be in foreign exchange and aboutUS$416.6 million equivalent in local costs. The cost estimate is based on
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quotations for similar works and equipment in Pakistan, and reflects January1990 prices. Physical contingencies have been estimated at 10% of the base cost.Price escalation for local costs has been assumed at 6.8% for FY91 and 6%thereafter. Price escalation for foreign costs has been assumed at 4.9X p.a.for FY91-95 and 4.3% for FY96. The resulting total local and foreign costs foreach year have been converted into/from USDollars at the estimated averageexchange rate for that year. The cost estimate for the proposed Project issummarized in Table 3.1 below.
Table 3.1: Summarv of Project Cost Estimate
Rs Million USS MillionL.C. F.C. Total L.C. F.C. Total
Of which Taxes & Duties 2,472 - 2,472 103.9 - 103.9
Project Financing
3.04 The financing plan for the proposed Project is based on the frameworkfor the restructuring of SNGPL which calls for reducing GOP's direct and indirectshareholding in SNGPL from 91% to at most 40% through share issues to the generalpublic (para 3.05). The proposed Loan in the amount of US$130 million equivalentwould cover the total foreign exchange required for the Project and would be madedirectly to SNGPL, with GOP as guarantor. SNGPL would cover the foreign exchangerisk. New equity issues and local loans would cover local costs of,respectively, US$93 million and US$121 million equivalent. The remaining localcosts, US$203 million equivalent, would be financed by SNGPL from internalsources, including customer contributions and security deposits. The financingplan for the proposed Project is summarized below in Table 3.2.
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Table 3.2: Financing Plan
Rs Million USS MillionLocal Foreign Total Local Foreign Total
3.05 Restructuring of SNGPL's Ownership. The timetable and actions to beimplemented to achieve the corporate restructuring of the entity was discussedin relative detail by the Bank with the Government - the current ma'orityshareholder of SNGPL. It was agreed that the reduction of GOP's shareho'dingto not more than 40% would be by dilution through the issuance of about 219million new equity shares of SNGPL to the general public over a period of fiveyears (1991-1996) (Annex 3.1). The first issue of about 57.5 million new equityshares would be implemented not later than June 30, 1991. In order to achievethe reduction of GOP's direct and indirect shareholding from 91% to 51%, GOPmust refrain from purchasing directly or indirectly any of these shares. Theremaining shares would be issued in series annually depending on the financialrequirements of SNGPL to fund its investment program. Therefore GOP has agreedto reduce its direct and indirect shares in the company to not more than 51%through _he issuance of 57.5 million new eguity shares to be implemented notlater than June 30. 1991 and not exercise- its right to purchakse or otherwiseacquire. either directly or indirectly. any of the new eguity shares. if at anytime. the total of any such shares sought to be purchased or other-wise acquired.when added to GOP's direct and indirect shareholding in SNGPL would cause itsdirect and indirect shareholding to exceed 40% (Rara 6.01(a)). In addition.SNGPL has agreed to issue: (i) not later than June 30. 1291. 57.5 million newequity shares to the general public: (ii) not later than June 30, 1992. about37.5 million new eauitv shares: (iii) not later than June 30. 1993. about 50million new equity shares: (iv) not later than June 30. 1994. about 57 millionnew equity shares: and (v) not later than June 30. 1995 about 17 million neweauity shares (nara 6.03(a)!.
3.06 SNGPL's finance department will be responsible for implementing theissuance of new equity shares. However, before shares can be issued to thepublic, the issue must be authorized by SNGPL's board of directors andshareholders (increase of Authorized Capital) and by the Controller of Capitalissues. It should then be underwritten by one or several of the specialized
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private sector financial institutions. As SNGPL has no experience in marketingsuch issues, it would require the assistance of a financial adviser to manageanG market the issues (para 3.05). In order to ensure that the process for theissuance of the equity shares is implemented in a timely fashion, SNGPL agreedto: (a) provide not later than December 31. 1990. evidence satisfactory to theBank that it has obtained all necessary consents and clearances for the marketingof the new equitv shares (nara 6,03(b)): and (b) aRpoint not later than January31, 1991. an underwriter or a consortium thereof. satisfactory to the Bank onafully committed basis to market the new eauity shares (6.03(c)). Of thesizeable local currency loans (US$121 milijon equivalent) required for theproject, SNGPL intends to contract loans totalling Rs 1.5 billion (approximatelyUS$70 million equivalent) from various local financial institutions in 1990.To ensure timely availability of the funds required for implementation of theproposed Project, the following have been set as conditions of effectivenessof the proposed Loan: (a) appointment by SNCPL of financial advisers, whoseoualifications. exgerience and terms of reference are satisfactory to the Bank.to manage and implement measures for raisinig the reguired resources througheauity issues and loans (para 6.04(a')): and (b) submission of evidence ofconcluded loan agreements totalling Rs 1.5 billion with local financialinstitutions (nara 6.04(b)).
3.07 Restructuring of SNGPL's Management. The reconstitution of the Boardof Directors would be implemented not later than March 31, 1992, after theissuance of the first set of new equity shares. In order to increase theautonomy of the management of the company, the appointment of the Chairman andManaging Directors and other key senior staff of SNGPL, which is currently theprerogative of GOP, is now to be made by the Board of Directors as provided forin the Company's Ordinance and, until such time that the Government shareholdingis reduced to a minority position, the Bank shall be given an opportunity tooffer its views on proposed appointments by the Board of Senior Staff.Furthermore, as part of the assistance to be provided under the collaborativearrangement between SNGPL and a reputable international private sector gasutility, the Corporate Planning Department and the operational management ofSNGPL would be reviewed with the intention of upgrading its capabilities.Therefore SNGPL has agreed: to appoint to the staff of the Corporate PlanningDepartment by not later than March 31. 1991, an economist. financial analyst andsystem planner all with approRriate gualifications and experience (Rara 6.03(d)):and (ii) reconstitute its Board of Directors not later than March 31. 1992. toreflect the new ownership of the Company (Rara 6.03(e)).
3.08 Review of the Regulatory Functions of DGG. As mentioned in para 3.02(A)(d), provision has been made under this project for GOP to undertake a study,with the objective of reviewing the regulatory role of DGG and recommendingactions to be taken to upgrade its capabilities. Therefore GOP has agreed toinitiate not later than October 1. 1991 and complete not later than March 31.1992. a study, under terms of reference satisfactory to the Bank. to upgrade theregulatory caRabilities of DGG: furnish to the Bank the findings andrecommendations of such study for review and comments: and thereafter taking intoaccount the Bank's comments. implement the findings and recommendations of suchstudy not later than March 31. 1993 (para 6.01(b)).
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3.09 Design and Engineering. With regard to the expansion of thetransmission and distribution network, SNGPL undertook an in-house study in 1987,to identify the least cost option for increasing its transmission anddistribution capacity from about 450 M1ICFD to abeut 80) MMCFD by 1996, based ona GOP approved allocation of about 200 MUFD of additional gas from Pirkoh andLoti fields, and about 100 MMCFD from other new fields. Three pipeline optionswere evaluated by SNGPL for increasing the capacity of its system by 300 MMCFD.These include replacing the existing pipeline with either a 24-inch, 28-inch ora 30-inch pipeline. The combination of the length, size and associatedcompression required was optimized. The study concluded that the 30-inch optionis least cost for expanding the capacity to transport about 800 MMCFD of gaswithout compromising operational safety and flexibility. SNGPL has alreadyprepared the detailed design and technical specifications for this option. TheBank has reviewed the results of the optimization study and the design andtechnical specifications, and found them satisfactory.
3.10 As part of the high pressure 30-inch pipeline to be installed wouldcross two rivers, Ravi and Sutlej, consultants with proven expertise would berequired to assist in the design, engineering and supervision of constructionof the pipeline across these rivers (para 2.08). About 30 manmonths ofconsultancy services would be required. SNGPL has agreed to recruit consultantsby October 31. 1991. under terms and conditions satisfactory to the Bank. fo.the Rreparation of the detailed design and engineering and suRervision ofconstruction of the high pressure pipeline across rivers Ravi and Sutlei (Dara6.03(f)).
3.11 The distribution component of the proposed Project is part of SNGPL'splan for the development of the distribution network in the northern part of thecountry (para 5.02). The plan calls for connecting about 584,000 domestic,11,700 commercial and 800 industrial consumers, including the Kot Addu powerplant and two new fertilizer plants and, an estimated 150,000 consumers in newtowns between 1990 and 1997 (Annex 3.1). Of these, about 330,000 domestic, 6,000commercial and 400 industrial consumers, and the power plant at Kot Addu and twonew fertilizer plants to be built along the Multan-Sahiwal-Lahore route, wouldbe connected under the proposed Project during 1993-1996 (Annex 3.1). The Bankhas reviewed this component of the distribution plan, including the investmentrequired and the specifications of the equipment and materials to be procured,and found them satisfactory. This target is achievable, given SNGPL'sperformance in 1988 and 1989, when about 80,000 new consumers were connectedannually. With regard to the new towns, SNGPL is currently finalizing its mapof the new towns and developing economic criteria for the selection and rankingof the towns with regard to their nearness to the major transmission lines andthe numoer of consumers and amount of gas to be provided. These new towns willnot be financed under the proposed Project as GOP has promised to provide SNGPLabout Rs 3,000 million during FY91-96 for the new towns from the PeoplesDevelopment Fund (PDF) established for social development programs. However,in order to ensure that the distribution development plan is implementedsatisfactorily, SNGPL agreed to complete the Rlan for distribution of gas to newtowns and in consultation with GOP establish not later than June 30. 1991.criteria satisfactory to the Bank. for the ranking and selection of the new townsto be connected (Rara 6.03(g)).
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3.12 SNGPL would utilize its Project and Distribution Departments for theimplementation of the system expansion component of the proposed Project. TheseDepartments would be responsible for the construction of the transmission anddistribution networks, design, engineering and application of cathodic protectionand for the inspection of the coating and wrapping of linepipes. Since most ofthis work would be carried out while the system is in operation, SNGPL would beassisted by consultants under the proposed collaborative arrangement to ensureclose coordination between construction and operating units of SNGPL and alsoto ensure that shutdowns and tie-ins to the existing system are carried outefficiently and with minimum disruption in gas supply. As the Project andDistribution Departments have acquired substantial experience in carrying outsuch work under similar operating conditions, especially through theirinvolvement in the Fourth and Fifth SNGPL projects (para 2.08), the proposedarrangement is satisfactory.
3.13 In addition to its own staff, SNGPL intends to utilize qualified localcontractors and consultants to undertake the civil works, such as trench diggingand backfilling, for the distribution network and to inspect pipeline welding,respectively. To complement its limited experience in the design, engineeringand construction of pipelines across river crossings, the proposed Projectprovides for consulting services for tile supervision of construction of pipelinesacross the rivers Ravi and Sutlej (para 3.10).
3.14 Gas Supplv Contracts. The proposed Project was prepared by SNGPLbased on the approved allocation of about 728 MMCFD of gas, consisting of 130MMCFD from Pirkoh, 70 MMCFD from Loti, 100 MMCFD from other fields, and 428MMCFD from Sui gas fields supplied under an existing contract with PPL. OGDCundertook a study in 1989 with the assistance of consultants to evaluate theproduction capability of the Loti and Pirkoh fields. The study confirms thatabout 250 MMCFD of gas can be produced for the next 20 years from Pirkoh andabout 70 MMCFD from Loti field. OGDC, however, would have to drill 35 additionalwells at Pirkoh and 9 wells at Loti to achieve this level of production.Currently, about 165 MMCFD of gas is being produced from Pirkoh field and 40KMCFD from Loti field. The development of Pirkoh is being financed by the AsianDevelopment Bank under the Pirkoh III Development Project, currently ongoing,while Loti field development is being financed under the Bank's ESL II Project(Loan 3107-PAK). Bank staff have reviewed these development programs and foundthem satisfactory. On this basis, SNGPL signed new supply contracts with OGDCfor the purchase of 200 MMCFD of gas from Pirkoh and Loti fields (para 2.05).The Bank has reviewed the contracts, and found them satisfactory, and incompliance with industry standards. Contracts for additional gas from the newfields are currently being negotiated with OGDC and its joint venture partner,Lasmo oil company. In order to ensure that adequate volume of gas is availableand allocated to SNGPL for this project, the following confirmations have beenreceived from GOP and SNGPL: (a) a letter from the Government confirming thatthe gas allocated to SNGPL from the Sui region will be increased starting fromJanuary 31, 1992, in accordance with SNGPL's requirements, to reach not less than728 MMCFD by June 30, 1995 and thereafter maintained at not less than this levelfor the next 15 years; and (b) (i) a ratified gas contract between Pirkoh GasCompany Ltd. and SNGPL for the supply of up to 130 MMCFD of gas from Pirkoh fieldfor at least 20 years starting not later than January 31, 1992; (ii) ratifiedgas contracts between OGDC and SNCGL for the supply of up to 40 MMCFD of gas from
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Loti field not later than January 31, 1992, to be increased to 70 MMCFD byJanuary 31, 1994, for the next 20 years. In addition, SNGPL is currentlynegotiating with OGDC and its joint venture partners for the supply of additionalgas from the newly discovered gas fields of Qadirpur, Kadanwari and Dhodak (para2.05).
Right of Way
3.15 The high pressure gas transmission pipelines would be constructed, forthe most part, on rights of way of existing pipelines, except for the 18 inchline from Qadirpur to Lahore, which would require new rights of way. In the pastSNGPL has not experienced any major difficulties in obtaining rights of way.As per the construction schedule of the proposed Project, the rights of way forthe new lines would not be required until December 1991, but delays beyond thatdate would adversely affect the proposed Project. Therefore. in order to ensurethe timely implementation of the proposed Project. SNGPL agreed to take allnecessary actions to commence not later than December 31. 1990. the process ofacquisition of the land reguired for the construction of the high pressure gastransmission pipelines (Rara 6.03(h)).
Procurement
3.16 Procurement of goods, materials and services financed by the Bank wouldbe in accordance with the Bank's guidelines. Contracts amounting toapproximately US$114.5 million equivalent to be financed under the proposed Loanwould be awarded through International Competitive Bidding (ICB). This amountincludes about US$58 million for importing portions of the 30-inch and 24-inchdiameter linepipes to be used at river crossings since the specifications forthese cannot be manufactured locally. Domestic preference of 15% or theapplicable custom duties, whichever is less, would be given to localmanufacturers competing for supply of goods under ICB. In order to standardizeequipment, some items including spare parts would be procured through LimitedInternational Bidding (LIB) in accordance with Bank guidelines. The list ofequipment and materials to be procured through LIB under Bank financing and allrelated procurement documents would be approved by the Bank and the total valueof such items would not exceed US$4 million. Direct contracting (DC) forcompressor units, which for reasons of standardization can only be procured fromone supplier would amount to about US$8.5 million. The civil works componentof the proposed Project is estimated at about US$122 million, of which US$60million equivalent for implementing a portion of the transmission system as wellas the distribution development program would be contracted out under localprocurement procedures; the Bank would not finance contracts awarded under suchprocedures. The remaining US$62 million equivalent would be for the constructionof the high pressure transmission line, for which SNGPL's Project Department workforce would be used, as this work would be carried out in sections over a widelyscattered area without disrupting existing operations. Locally suppliedmaterials and equipment worth US$251 million include reserved procurement forwhich no Bank financing would be required. This includes about US$120 millionfor the portion of the 30-inch diameter steel linepipes to be manufacturedlocally, and for which local manufacturers have been prequalified. This amounthas been excluded in establishing the amount of the proposed Loan. Neitherreserved procurement nor local procedures will have an adverse effect on project
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cost or implementation schedule. Table 3.3 summarizes the procurementarrangements for the proposed Project. Documents for each Bank-financed contractwith an estimated value of US$1 million equivalent or more would be subject toprior review by the Bank. Such prior review will apply to more than 70X ofBank-financed contracts. The remainder would be subject to selective post-awardreview. It is expected that there would be about 50 bid packages. Consultancyservices for technical assistance and training (US$3.0 million approximately)would be procured using Bank Guidelines for the Use of Consultants. The studiesare expected to require approximately 110 manmonths at an estimated cost ofUS$2.0 million. Expenditures of up to US$12 million for heavy constructionequipment and compressors to be used cn the spur to Kot Addu for which SNGPLexpects to make an early start, committed under Advanced Contracting would beeligible for retroactive financing.
Table 3.3: Procurement Arrangements(US$ Million)
R1iUKct Element Procurement Method hICB LIB DC OteaTtal
Ia Includes reserved procurement, SNGPL's work force, civil works contractedlocally, and Technical Services for which Bank guidelines for consultantsuse would apply.
/b Excludes Interest During Construction (IDC) of about US$23 million.
/c Includes duties and taxes about US$104 million.
Note: Figures in parenthesis are the respective amounts financed by the Bank Loan.
3.17 Bidding documents have been finalized for the procurement of materialsand equipment that require a long lead time to manufacture. Procurement of theseitems is expected to begin in August 1990 in order for the proposed Project tobe completed within the estimated period of about 72 months. In view of theurgency of bringing onstream the additional gas handling facilities, the Bankhas approved the bidding documents for construction equipment required for theinstallation of the 30 inch pipeline. As the contracts for these are expectedto be awarded by March 1991, financing should be in place by not later thanSeptember 1990, which is about 90 days after the scheduled date for BoardPresentation. The implementation schedule for the proposed Project is shown inAnnex 3.2. SNGPL is, at present, finalizing the project document (PC-1) forECNEC approval. In order to ensure that project implementation is not delayed,the aRproval by ECNEC of the PC-1 document would be a condition of effectivenessof the proRosed Loan (para 6.04(c)).
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Disbursements
3.18 The Bank funds would be disbursed against: (a) 100% of CIF cost ofimported goods or ex-factory cost of domestically manufactured goods subject toICB; (b) 100% of the cost for training; and (c) 100% of the foreign expendituresand 80% of local expenditures for engineering and consulting services.Disbursements would also be made against the CIF cost of goods procured of upto US$4 million through LIB and up to US$8.5 million through direct contractingfor proprietary items. Disbursements would be fully documented except forpayments not exceeding US$100,000. Such disbursements would be made againststatements of expenditure (SOEs), the documentation of which would not besubmitted to the Bank but retained for inspection by the supervision missions.Standard procedures for auditing SOEs would apply (para 4.11). In order tofacilitate disbursements, a special account would be established in a commercialbank in Pakistan, under terms and conditions satisfactory to the Bank. Theinitial deposit in the special account would be about US$5 million, representingtLe estimated average expenditures for a four-month period for the items financedby the Bank. The estimated expenditures expected over the implementation periodof the proposed Project are shown in Annex 3.3. The schedule of disbursementsfor the proposed Bank Loan is presented in Annex 3.4. The disbursement profileof the proposed Project is similar to that used for the ongoing SNGPL V Project(Loan 2324-PAK), and complies with profiles for Bank-financed gas pipelineprojects. The closing date for the proposed Loan would be December 31, 1996,six months after the estimated physical completion of the proposed Project.
Environmental AsRects
3.19 The proposed Project would promote the increased use of natural gas,a clean burning fuel, whose use would contribute to the alleviation of thepollution that would otherwise result from greater use of petroleum products,particularly high sulphur fuel oil. A secondary benefit of the proposed Projectwould be a reduction in the use of fuel wood by residential gas users which woulddecrease pressure on forest resources in the project area. However, in orderto ensure that the provisions of Government of Pakistan Ordinance XXXVII of 1983,"Control of Pollution and Protection of the Environment" are adhered to fully,the submission by SNGPL of evidence that the pro forma Environmental ImpactAssessment has been approved by the Pakistan Environmental Protection AgenQ(PEPA) has been set as a condition of effectiveness of the proRosed Loan (para6.04(d)).
3.20 The proposed Project is an expansion of an existing gas transmissionand distribution system. The standards for equipment and installation procedureswould conform to international works. The main transmission pipelines would beinstalled underground in previously acquired rights of way owned by SNGPL, exceptat river crossings where pipelines cross on bridges or flyover. In areas wherethe pipelines could be exposed to scouring and may be subject to physical damageby flooding water currents, special precautions would be taken, including coatingof the linepipes with water resistant materials to minimize erosion. Supervisionwould be provided during construction by the SNGPL Projects Department, and acontinuous inspection procedure would be adopted to protect the pipelines beforean emergency develops.
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3.21 The gas to be supplied for the proposed Project from Pirkoh and Lotihas no sulphur compounds. The new purification plant would be capable ofremoving Hydrogen Sulphide (H2S) and Carbon dioxide (CO2) from Sui gas and CO.from the Pirkoh and Loti gases. H2S would be burnt in a flare stack which wouldbe designed in compliance with the current World Bank emission guidelines whichrequire that emissions not exceed 100 micrograms per cubic meter of sulphuroxides on an annual average basis and not exceed 500 micrograms per cubic meterof sulphur oxides on a peak daily basis. Since OGDC would dehydrate the gas fromPirkoh and Loti at source, carbonic acid would not be generated as a by-product.The new purification plant would be an addition to the existing purificationfacilities at Sui and would be fenced in. In addition, the proposed plant siteis located far from any residential area. With proper operation and maintenanceof the plant, there would be no significant concentration of gases at groundlevel even within the plot limits of the plant. To ensure the safety of workersand local residents, an air quality monitoring system satisfactory to the Bankwould be installed at the plant and personnel trained to operate the system.Assurances have been provided that an adequate safety zone would be maintainedaround the plant, to avoid either formal or informal settlements being at riskto an industrial accident. In order to ensure that under the proposed Projectthe development and implementation of a training program which, inter alia, wouldinclude industrial emergency prevention, planning and management at the plantwould be undertaken, SNGPL agreed to finalize by June 30. 1991. the contractualarrangement for a collaborative arrangement under terms and conditionssatisfactory to the Bank. with an internationally reRutable nrivate sector gasutility with proven experience in gas transmission and distribution for thepurRose of providing technical assistance and training to its staff in the areasof long-term Rlanning. pipeline system operations and maintenance. invento_rycontrol and safety (para 6.03(i)).
Project Risks
3.22 The main risks associated with the proposed Project are: (a) inabilityof SNGPL to raise the required financial resources from the capital markets;(b) delays in the implementation of the proposed Project because of itsrelatively large size compared to past investments undertaken by SNGPL; (c) adecline in the productivity of the gas fields to a level lower than forecast;and (d) environmental impact from possible gas leakages. These risks are beingaddressed through the provision of: (a) professional services of a financialadviser and underwriters to assist SNGPL in managing the marketing of equityshares in the domestic capital market; (b) consultancy services for theengineering, design and supervision of the construction of the high pressurepipelines and the establishment of a collaborative arrangement with anexperienced foreign private sector utility to assist SNGPL in projectimplementation, as well as train its staff in pipeline operation and maintenanceand establishment of adequate safety measures including the installation of anew SCADA system to monitor gas flows and detect faults along the system; and(c) technical assistance and consultancy services under ESL II for thedevelopment of the Loti field, and under Pirkoh III Development Project, financedby the Asian Development Bank for the development of the Pirkoh field, andassistance to OGDC under the proposed Domestic Resources Development Project,for the accelerated development of new gas fields.
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3.23 The pipelines would be buried and protected against corrosion. The newSCADA system to be installed would improve the monitoring of the gas flows anddetection of faults along the system (para 3.02). In addition SNGPL has a 24-hour emergency maintenance service for any reported gas leaks in the network orin the household premises and their connections. Previous records have provedthat the system is operating satisfactorily. Nevertheless, in view of theenvisaged expansion of SNGPL's network, provision has been made under theproposed Project for the training of the company's staff in safety measuresthrough a collaborative arrangement with an experienced private gas utility (para3.21).
Project Monitoring
3.24 SNGPL's record under previous Bank projects of furnishing requiredreports on project implementation has been satisfactory in terms of scope, detailand frequency. Under the proposed Project, SNGPL would be required to submitto the Bank quarterly reports, covering physical progress, consultancy services,project cost, disbursements and administrative aspects of the project. Inaddition, SNGPL would be required to prepare and furnish to the Bank, within sixmonths after the closing date, or such later date as will be agreed for thispurpose, a Project Completion Report of such scope and detail as the Bank shallreasonably request. The Bank would supervise the proposed Project twice eachyear during the scheduled implementation period, FY91-FY97. However, becauseof the corporate restructuring component and the relative inexperience of GOPand SNGPL in this area, the Bank staff input for supervision would be higher thanthe overall average for investment operations. The staff-inputs required forsupervision are estimated at about 18 staffweeks for each of the first two yearsand 12 staffweeks for each of the subsequent years. Details of the staff inputsrequired are presented in Annex 3.5.
IV. FINANCIAL ASPECTS
Introduction
4.01 The financial and accounting affairs of SNGPL are governed by theCompanies Ordinance of Pakistan which, among other things, broadly stipulatesthe accounting system, disclosure requ'rements, audit procedures, and accountingfor deferred taxation. However, since SNGPL is a utility which has thedistribution monopoly for natural gas, a scarce resource, in the northern partof the country, GOP stipulates both the volume of gas sales and the sales pricesfor each customer category, and levies a "Gas Development Surcharge" (GDS) onSNGPL's sales revenues designed to transfer to the Budget all income other thanthat which is required to provide the agreed rate of return to SNGPL'sshareholders. The net sales prices corresponding to the revenues retained bySNGPL after deduction of the GDS, are known as its "Prescribed Prices". Theobjective of SNGPL's agreed rate of return is to ensure a sound financialcondition for SNGPL and an adequate return for its shareholders, but it is nota determining factor in setting gas prices, because the ultimate consumer priceis far in excess of the cost of gas to the utility and the cost of transmission
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and distribution. In addition to SNGPL's tariffs, its investment programs aswell as borrowings also require COP's approval (para 2.03).
Past Financial Performance
4.02 SNGPL's detailed financial statements for the period FY86 to FY89 arepresented in Annexes 4.1 - 4.3, and its operating performance is summarized inTable 4.1 below.
Table 4.1: SNGPL's Oneratinx Results. FY86-89
FY86 FY87 FY88 FY89
Avg. Daily Gas Purchases (1MCFD) 394 386 426 451Annual Gas Purchases (MMCF) 143,670 140,835 155,398 164,790Gas Throughput (Purchases Net of Purifn.
Rate of Return (x):On net fixed assets in service /S- valued at historical cost 20.6 19.1 19.4 18.7- revalued through June 30, 1985/d 10.1 10.3 12.0 12.0- revalued through June 30, 1989 9.0 8.9 9.4 8.1On share capital & reserves/I 18.8 15.7 10.8 18.4
Internal Cash Generation (M)/t 33 31 49 32Debt Service Coverage Ratio 2.3 2.0 2.0 1.5Debt/Equity Ratio 45/55 49/51 54/46 53/47Current Ratio (excldg. stores and spares) 1.3 1.4 1.3 1.1
/a Transmission and distribution losses during FY87-FY89 were abnormally highdue to leakages from corroded pipes and defective metering. Replacement ofcorroded pipes and defective meters is in process.
/b FY90 sales represents the latest forecast based on the actual sales for thefirst half of the fiscal year.
/c Average net fixed assets in service, net of unamortized consumer contributions./4 Value shown in Company's balance sheets./e Excluding revaluation surplus and deferred consumer contributions./1 Including consumer contributions and deposits, and net of non-cash working
capital requirements and other cash outflows.
4.03 Under the Fifth Sui Northern Gas Project (Loan 2324-PAK), SNGPL was toachieve in each year a minimum rate of return of 10% on its average revaluednet fixed assets in service. As shown in Table 4.1 above, this target has notbeen met if revaluation of fixed assets after FY85 is taken into account, becauseof flaws in the application of the formula. The principle of revaluing fixedassets has never been fully accepted in Pakistan, and SNGPL has been the onlycompany in Pakistan which, at the Bank's insistence, has applied it, albeitreluctantly and in an inconsistent manner. In order to put the performance ofthe utility on a basis consistent with what private sector investors would seekin terms of a sufficiently attractive return on shares in the context of GOP'srestructuring of SNGPL (paras 3.04 and 3.06), it is proposed to introduce byJuly 1, 1993 a formula similar to that recently introduced in the gas andtelephone industries in Britain and the USA, under which the utility's prices
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rather than its rate of return would be capped, thus providing upside/downsidepotential for greater/inadequate operating efficiency. To this end and as partof the proposed Project, SNGPL would engage consultants to define an appropriateformula, and undertake to implement this formula within three years (para3.02(c)). In the meantime, since SNGPL's rate of return is not a determiningfactor in setting consumer prices (para 4.01), it is proposed to accede toSNGPL's request to replace the existing rate of return requirement of 10% onrevalued assets by a minimum rate of return requirement of 17.5% on fixed assetsvalued at historical cost in order to overcome the difficulties encountered inthe application of the fixed asset revaluation formula. As shown in theprojections in Table 4.2, a 17.5% rate of return on SNGPL's fixed assets athistorical cost during the period FY91-96 would be roughly equivalent to a rateof return on revalued assets of 10%. Furthermore, in order to ensure that anygross revenue increases from gas sales to consumers over and above the amountspresently projected will contribute to the financing of the proposed Project,the Gas Development Surcharge would be set at no more than 32% of gross revenuesin FY92 and at no more than 28% thereafter. In consequence of the foregoing.GOP and SNGPL have agreed to appoint. no later than June 30. 1991. consultantssatisfactory to the Bank to establish a new formula for setting SNGPL's pricesnet of the Gas Development Surcharge collected on behalf of GOP ("PrescribedPrices"), and take all necessary measures to ensure that the said formula shallbe applied by SNGPL not later than July 1. 1993 (para 6.02(a)): and. in themeantime. to take all measures necessary to enable SNGPL in each fiscal year toearn a rate of return of at least 17.5% on net fixed assets in service valuedat historical cost (para 6.02(b)). Furthermore. GOP has agreed to take allmeasures necessary to: (a) set the Gas Development Surcharge at not more than32% of the gross revenue from gas sales to consumers in FY92 and at not more than28% thereafter (para 6.01(c)): and (b) notify SNGPL of: (i) the final PrescribedPrices applicable for FY90: and (ii) the provisional increase in PrescribedPrices for FY91 to ensure that for FY91 the 17.5% rate of return on net fixedassets in service valued at historical cost will actually be achieved (para6.01(d)).
4.04 Under Loan 2324-PAK, SNGPL may not incur, except as otherwise agreedwith the Bank, any additional debt if its debt/eauity ratio is higher than 60:40.SNGPL's indebtedness has been below this limit in recent years (Table 4.1).Because of SNGPL's large capital investment program and borrowing needs duringthe next six years, it is now proposed to raise the limit to a ratio of 70:30,which is still considered acceptable. SNGPL has agreed to seek the Bank'saRproval before incurring additional long-term debt if after the incurrence ofsuch debt its debt/eguity ratio would be greater than 70:30 (para 6.03(j)). Asshown in the projections summarized in Table 4.2 below and detailed in Annex4.2, SNGPL is expected to remain below this ratio in all years.
4.05 Also under Loan 2324-PAK, SNGPL is to declare dividends for any oneyear only if after payment of the dividend, SNGPL's current assets excludingstores and spares would not be less than its current liabilities. As shown inTable 4.1 above, SNGPL's current ratio has been satisfactory, and it is expectedto remain so (Table 4.2). SNGPL has agreed to continue to declare dividends onlyif after payment of the dividend SNGPL's current assets excluding stores andsRares would not be less than its current liabilities (Rara 6.03(k)).
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Future Financial Performance
4.06 SNGPL's financial projections for the period FY90 to FY96 are presentedin Annexes 4.1 - 4.5 and summarized in Table 4.2 below. The projections arebased on the sales forecast by the Company and the Bank and assume that the priceof gas used by households will reach 50% of the domestic price of kerosene byJune 30, 1993, and 100% by June 30, 1998 in accordance with the variousprovisions concerning gas pricing, which are now included in the agreementspertaining to ESL II (para 1.21) and to which the Government has reaffirmed itscommitment that: (a) beginning in FY91. annually increase the price of gas tohouseholds so as to achieve full Rarity with the border price of fuel oil by June30. 1993 (Rara 6.01(e)): (b) annually increase the develoDment surcharge on thesale of gas to power Droducers so that by June 30. 1995. the Rrice of such gas.including such development surcharge. shall achieve full Rarity with the domesticDrice of fuel oil, less discounts for the gas transmission investments made bythe Rower oroducers (para 6.01(f)): and (c) continue to maintain the Rrice ofgas supplied as fuel by the gas transmission and distribution companies to theindustrial. Rower and commercial sectors at least at fully parity with thedomestic price of fuel oil (para 6.01(g)). The projections also assume thatSNGPL's average sales revenue net of the Gas Development Surcharge payable toGOP, will cover the purchase price for gas, plus the cost of transmission and
distribution and secure a 17.5% rate of return on SNGPL's net fixed assets inservice valued at historical costs (para 4.03). In order to ensure that SNGPLachieves the agreed financial performance targets in each year, GOP and SNGPLhave agree' to furnish to the Bank by December 31 of each year. a reRort on thecompany's actual and forecast oRerating and financial Rerformance for theprevious and current financial year. specifying the actions that will be takento fulfill the financial covenants (Rara 6.02(c)). Furthermore SNGPL has agreedto oreRare and furnish to the Bank for review and comment. not later than June30. 1991. a revised corporate investMent and financing plan. and annually revisesuch Dlan and furnish it to the Bank for review and comment (para 6.03(1)).
Rate of Return (ROR):On net fixed assets in service /a- valued at historical cost 17.5 17.5 17.5 17.5 17.5 17.5 17.5- revalued through June 30, 19 85/b 12.5 13.9 14.7 15.4 15.7 16.0 16.4- revalued through end of projections 8.6 9.8 9.6 10.1 10.1 10.0 10.1On share capital and reserves /c 17.2 20.2 18.0 19.6 19.4 19.0 21.8
Internal Cash Generation (X) 33.4 34.1 41.2 38.0 48.5 56.2 56.9Debt Service Cover. Ratio 1.8 1.8 2.0 2.1 2.3 2.1 1.6Debt/Equity Ratio 53/47 52/48 55/45 55/45 55/45 57/43 56/44Current Ratio (excldg. stores and spares) 1.1 1.2 1.1 1.1 1.0 1.0 1.0
7'! Average net fixed assets in service, net of unamortized consumer contributions./b Value shown in Company's balance sheetsI Excluding revaluation surplus and deferred consumer contributions.IS Including consumer contributions and deposits, and net of non-cash working
capital requirements and other cash outflows.
Future Investment and Financing Plan
4.07 In line with the Core Investment Program (CIP) agreed with GOP in thecontext of ESL II (Ln. 3107-PAK) presented to the Bank's management in June1989, SNGPL would invest about Rs 10.3 billion (US$454 million) during theremainder of the Seventh Plan (FY89-93) and an additional Rs 9.8 billion (US$397million) during FY94-96. SNGPL's financing plan for this investment program issummarized in Table 4.3 below (For details, see Annex 4.5).
Table 4.3: SNGPL's Investment and Financing Plan. FY9O-FY96(in Millions of Rupees and of US Dollars)
(a) Including interest during construction of Rs 601 million (US$27 million).
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4.08 The financing for the foreign cost of the investment program(Rs 3,687 million/US$158 million), would consist of: (a) the balances of theSNGPL V Loar. (2324-PAK) and ESL I (2552-PAK) disbursed during FY90 (approximatelyUS$5 million); (b) the Bank loan of US$130 million for the proposed Project;(c) approximately US$14 million (for the Dhakni and Adhi projects and formetering, system control and protection equipment) from ESL II (Loan 3107-PAK)to finance extensions of work carried out under ESL I or SNGPL V (para 1.25);and (d) approximately US$8 million equivalent internal cash generation, for thepurchase of foreign exchange for distribution development before the proposedProject. Internal cash generation, including consumer contributions .Lnddeposits, would finance 49% of the local costs of the investment program %'Rs16,477 million/US$693 million), share issues 13%, and local loans (para 3.03)the remaining 38X.
Accounting and Audits
4.09 Accounting: SNGPL has a centralized accounting system based oncommercial accounting principles and the requirements of the Companies Ordinanceof Pakistan. The accounting system includes fairly comprehensive informationsubsystems for financial, commercial and technical operations, and capital works.The billing of all consumer categories has been computerized, except for thebilling of industrial consumers in areas other than the Lahore and Islamabadregions. SNGPL has prudent receivables collection practices, which includecharging interest at 2% per month for delayed payments and disconnection ofsupply of seriously delinquent customers. SNGPL's overall accounts receivableposition has been satisfactory. In view of the expected growth in the company'soperations, provision has been made under the proposed Project for consultancyservices for: (a) formulatien of a strategy for further development of SNGPL'sfinancial management informaLion systems and data processing, includingdefinition of its computer hardware and software needs; (b) a review of thecompany's billing cycle; and (c) training of SNGPL's staff in computer auditing(para 4.10). SNGPL has agreed to appoint by March 31. 1991 consultantssatisfactory to the Bank for the studies and training (a. b and c above). underterms of reference satisfactory to the Bank. and to submit the comDleted studies.recommendations and an imRlementation plan. to the Bank no later than June 30.1992 (Rara 6.03(m)).
4.10 Internal Audit: SNGPL has an internal audit group which reportsdirectly to the Managing Director. The internal audit procedures aresatisfactory. However, the group lacks staff trained in auditing computerizedaccounting systems. Training in computer auditing is, therefore, included asa component in the proposed Project (para 3.02).
4.11 External Audit: SNGPL's accounts are audited by a firm of CharteredAccountants in accordance with guidelines prescribed in the Companies Ordinanceof Pakistan. As agreed under SNGPL V (Loan 2324-PAK), the company has furnishedthe audit reports on its accounts and on compliance with the Bank's loancovenants, to the Bank within six months of the end of its financial year. Thequality of the audit reports has been satisfactory. SNGPL has agreed to continueto furnish the auditor's roprts on its annual accounts and on compliance withBank covenants to the Bank within six months of the end of each financial year.In addition. the auditors' annual reRorts will be extended to cover the sRecial
- 33 -
account (para 3.18) and all statements olf expenditure on the basis of whichwithdrawals are made for the proRosed Proiect (para 6.03(n)).
Insurance
4.12 SNGPL carries adequate liability and property insurance on itsfacilities, including a collective fire and consequential loss of profit policyand a public liability policy. The major insurance policies are with thestate-owned National Insurance Company. These policies conform to ind.strypractice in Pakistan and are considered adequate.
V. ECONONIC JUSTIFICATION
Actual and Forecast Sales of Gas
5.01 SNGPL's gas sales increased from 246 MMCFD in FY79 to 400 MMCFD inFY89, representing an average annuial rate of about 5%. However, as noted (para1.29), because of supply constraints resulting from GOP's pricing policies inthe past, the rate of growth of sales declined after FY82 from an average ofabout 11% between FY79 and FY82 to about 2.4% between FY82 and FY89. In orderto address this imbalance, GOP initiated a number of measures aimed atrationalizing the consumption and supply of gas. These include the adjustmentsin producer and consumer prices of gas and the introduction of an allocationprocedure to release gas from the cement and steel industry to displace highervalue kerosene in the residential and commercial sectors and high speed dieselin combined cycle power plants. It was largely because of these measures thatthe rate of growth of sales between FY82 and FY89 was virtually stagnant for theindustrial sector and higher than the average for that period for residential(10.6%) and commercial (3.3%) consumers and the power subsector (4.8%). As forthe sales of gas to the fertilizer industry, these continued to increase but ata lower rate of growth than the average for the period FY82-FY89, 1.5% comparedto 2.4%. Details relating to SNGPL's actual and forecast sales of gas for theperiod FY79-FY97 are presented in Annex 5.1 and summarized in Table 5.1 below.
Table 5.1: Actual and Forecast Sales of Gas by SNGPLFY79-FY97
5.02 SNGPL's sales are forecast to increase between FY90 and FY97 at ahigher rate of growth than was the case between FY82 and FY89, averaging about
- 34 -
8.2% compared to 2.4% annually. The acceleration in the rate of growth of salesis due to the overall increase in allocation of gas approved by GOP for thenorthern region. On the basis of the availability of additional gas and theproposed adjustments in the level and structure of the consumer price of gas,which are expected to rationalize the consumption of this resource, SNGPL hasprepared an investment program fox meeting the requirements of the prioritysector (para 1.18). As shown in Table 5.1, the targets associated with theprogram call for the power subsector experiencing the highest rate of growth,averaging about 15.4% annually, followed by the fertilizer industry (10.5%), theresident!al consumers (7.9%), the commercial consumers (5.4%) and the industrialsector (2.1%). These rates of growth imply that the relative share of theindustrial sector in total sales would decline from 32% in FY89 to 22% in FY97,while those of the other sectors, except commercial consumers would increasecorrespondingly: from 19% to 23% for residential consumers, from 19% to 22% forthe power subsector and from 24% to 27% for the fertilizer industry. As for thecommercial consumers, their relative share of total sales is expected to remainunchanged at about 4%. These shifts in the shares of gas consumed by the varioussectors are generally consistent with the objectives of LES, that of substitutinggas for higher value petroleum products.
5.03 SNGPL's investment program is designed to supply gas to prioritysectors. In addition to ongoing work on the operation and maintenance of thesystem, it calls for: (a) the development of the distribution network untilFY92; (b) the implementation of the proposed Project which includes the extensionof the distribution network between FY93-96; (c) the constructiolL of a dedicatedpipeline for the supply of gas from the Dhodak field to the combined cycle powerplant at Kot Addu; and (d) the extension of the gas supply network to new towns.SNGPL's current forecast of gas sales is based on the first three components ofthe investment program, which respectively account for 19 MMCFD, 240 MMCFD and50 MMCFD of incremental sales. The sales associated with the fourth component,have not been included in the current forecast because the towns in question havenot yet been identified. The contribution of this component to overall forecastof sales is expected to be marginal, as the prevailing resource constraints arelikely to be an impediment to the envisaged accelerated expansion of thedistribution network in new towns. Nevertheless, in order to ensure that theextension of the gas supply network is not carried out in an ad hoc fashion,agreement has been reached under the proposed Project on the establishment byJune 30, 1991, of criteria for selecting new towns to be connected and on anannual review of SNGPL's investment program which would allow for, inter alia,an assessment of adherence to such criteria (paras 3.11 and 4.06).
Least Cost Alternative
5.04 In addition to restructuring SNGPL's ownership to make the utilitymore autonomous, the proposed Project provides for expanding its infrastructurefor the purification, transmission and distribution of gas, which would displacehigher value petroleum products. For the least cost analysis, therefore, twooptions were considered: with and without the proposed Project. This involvedcomparing the cost of supplying petroleum products to be displaced by gas withthe cost of the proposed Project, including the incremental cost to be incurredby OGDC on increasing the output from the Pirkoh and Loti fields and ondeveloping the Kadanwari field. The petroleum products were valued at the CIF
- 35 -
price of fuel oil plus the cost of inland transportation, as at the margin, itis this fuel that would be displaced by gas. Details relating to the assumptionand calculations, which are on project file, show that the proposed Project isthe least cost alternative.
Internal Economic Rate of Return
5.05 The internal economic rate of return (IERR) for the proposed Projectis about 24.8%. It is based on the measurable costs and benefits associated withthe proposed Project shown in Annex 5.2. The measurable costs include: (a) costof capital and labor required to implement the proposed Project; (b) operationand maintenance cost which were estimated at 3% of the capital cost of theproposed Project; and (c) the current producer price of gas of Rs 15.38/MCF,which was negotiated by OGDC for the Pirkoh gas field. It represents themarginal cost of gas in terms of future supply of gas to SNGPL, and is based onthe formula agreed to under ESL I which links the producer price of gas to two-thirds the border price of fuel oil less negotiated discounts for the geologicaland market conditions of the concession involved. Although not financed underthe proposed Project, expenditures on conversion of consumer facilities,amounting to Rs 1,194 million equivalent, are incurred by consumers and thereforeare included in the calculations of the rate of return. The measurable benefitsinclude: (i) incremental revenues associated with the forecast sales based onthe weighted average consumer price of gas of Rs 41.6/MCF'/ for pipeline qualitygas, which was taken as a proxy for the consumers' willingness to pay; and (ii)consumer contributions, which are paid by consumers at the time of connectionto the SNGPL system. These are distributed over the period FY93-FY96 and, areestimated to amount to Rs 1,037 million, in January 1990 prices. Both the costsand benefits attributable to the proposed Project were expressed in theirequivalent border prices using appropriate conversion factors. Details of theassumptions used and the calculations are presented in Annex 5.2.
5.06 The IERR of 24.8% for the proposed Project is significantly higherthan the opportunity cost of capital of about 11%, reflecting that the priceconsumers are currently paying for gas is substantially in excess of the costsassociated with meeting their demand, which include the average incremental costsof production, transmission and distribution plus a return to the utilities ofabout 17.5%. The surplus, representing the rent, is captured by GOP through aGDS as a means of mobilizing resources (para 1.20).
5.07 Rationale for Bank Involvement. The proposed Project is an integralpart of the proposed ESL II program, which provides the umbrella of priorityinvestments and policy reforms to oe implemented during the period FY89-93. Theproposed ESL II is aimed at assisting the Government in implementing LES andachieving a crucial objective of the medium-term macroeconomic framework agreedto with the Fund and the Bank, that of reducing the fiscal deficit to sustainthe economy's growth momentum and control inflation, and enhancing the role ofprivate sector in energy development. The Bank's support for this Project is
'/ Reflects the national average, which is higher than the average forSNGPL because of differences in the composition of consumers served.
- 36 -
to be viewed in the context of its continuing role in promoting bothprivatization and the corporate restructuring of revenue-earning entities andin assisting GOP in mobilizing cofinancing from donors including those from theprivate sector.
VI. AGREEMENTS REACHED AND RECOMMENDATIONS
6.01 Agreements and assurances have been obtained from the Government thatit will:
(a) reduce its direct and indirect shareholding in SNGPL to not more than51% by June 30, 1991 through the issuance of 57.5 million new equityshares and not exercise its right to put_hase or otherwise acquiredirectly or indirectly, any of the new equity shares to be issued bySNGPL, if at any time, the total of any such shares sought to bepurchased or otherwise acquired, when added to its existing direct andindirect shareholding of SNGPL would cause its direct and indirectshareholding in SNGPL to exceed 40% (para 3.05);
(b) initiate not later than October 31, 1991, and complete not later thanMarch 31, 1992, a study, under terms of reference satisfactory to theBank, to upgrade the regulatory capabilities of the DGG; furnish tothe Bank the findings and recommendations of such study for review andcomments; and thereafter taking into account the Bank's comments,implement the findings and recommendations of such s"udy not later thanMarch 31, 1993 (para 3.08); and
(c) take all measures necessary to set the Gas Development Surcharge at notmore than 32% of the gross revenue from gas sales to consumers in FY92and at not more than 28% thereafter (para 4.03).
(d) take all measures necessary to notify SNGPL of: (i) the finalprescribed prices applicable for FY90; and (ii) the provisionalincrease in Prescribed Prices for FY91 to ensure that for FY91, the17.5% rate of return on net fixed assets in service valued athistorical cost will actually be achieved (para 4.03).
(e) beginning in FY91, annually increase the price of gas to households soas to achieve full parity with the border price of fuel oil by June 30,1993 (para 4.06);
tf) annually increase the development surcharge on the sale of gas to powerproducers so that by June 30, 1995, the price of such gas, includingsuch development surcharge, shall achieve full parity with the domesticprice of fuel oil, less discounts for the gas transmission investmentsmade by the power subsector (para 4.06);
(g) continue to maintain the price of gas supplied as fuel by the gastransmission and distribution companies to the industrial, power and
- 37 -
commercial sectors at least at full parity with the domestic price offuel oil (para 4.06);
6.02 Agreements and assurances have been obtained from GOP and SNGPL thatthey will:
(a) appoint no later than June 30, 1991, consultants satisfactory to theBank to establish a new formula, for setting SNGPL's prices net of theGas Development Surcharge collected on behalf of GOP (PrescribedPrices), and take all necessary measures to ensure that the saidformula shall be applied by SNGPL not later than July 1, 1993 (para4.03);
(b) take all measures necessary to enable SNGPL in each fiscal year to earna rate of return of at least 17.5X on net fixed assets in servicevalued at historical cost (para 4.03); and
(c) furnish to the Bank by December 31 of each year, a report on thecompany's actual and forecast operating and financial performance forthe previous and current financial year, specifying the actions thatwill be taken to fulfill the financial covenants (para 4.06).
6.03 Agreement has been obtained from SNGPL that it will:
(a) issue (i) not later than June 30, 1991, 57.5 million new equity sharesto the general public; (ii) not later than June 30, 1992, about 37.5million new equity shares; (iii) not later than June 30, 1993 about 50million new equity shares; (iv) not later than June 30, 1994 about 57million new equity shares and (v) not later than June 30, 1995, about17 million new equity shares (para 3.05);
(b) provide not later than December 31, 1990, evidence satisfactory to theBank that it has obtained all necessary consents and clearances for themarketing of the new equity shares (para 3.06);
(c) appoint not later than January 31, 1991, an underwriter or a consortiumthereof, satisfactory to the Bank on a fully-committed basis to marketthe new equity shares (para 3.06);
(d) appoint to the staff of the Corporate Planning Department by not laterthan March 31, 1991, an economist, financial analyst and system plannerall with appropriate qualifications and experience (para 3.07);
(e) reconstitute its Board of Directors, not later than March 31, 1992 toreflect the new ownership of the Company (para 3.07);
(f) recruit consultants by October 31, 1991, under terms and conditionssatisfactory to the Bank, for the preparation of the detailed designand engineering and supervision of the high pressure pipeline acrossrivers Ravi and Sutlej (para 3.10);
- 38 -
(g) complete the plan for distribution of gas to new towns and inconsultation with GOP establish, not later than June 30, 1991, criteriasatisfactory to the Bank, for the ranking and selection of the newtowns to be connected (para 3.11);
(h) take all necessary actions to commence not later than December 31,1990, the process of acquisitions of the land required for theconstruction of the high pressure transmission lines (para 3.15);
(i) finalize by June 30, 1991 the contractual arrangement for acollaborative arrangement, under terms and conditions satisfactory tothe Bank, with an internationally reputable private sector gas utilitywith proven experience in gas transmission and distribution for thepurpose of providing technical assistance and training to its staff inthe areas of long-term planning, pipeline system operations andmaintenance, inventory control and safety (para 3.21);
(j) seek the Bank's approval before incurring additional long-term debtif after the incurrence of such debt its debt/equity ratio would begreater than 70:30 (para 4.04);
(k) continue to declare dividends only if after payment of the dividendSNGPL's current assets excluding stores and spares would not be lessthan its current liabilities (para 4.05);
(1) prepare and furnish to the Bank for review and comments, not later thanJune 30, 1991, a revised corporate investment and financing plan, andannually revise such plan and furnish it to the Bank for review andcomments (para 4.06);
(m) appoint by March 31, 1991, consultants satisfactory to the Bank andunder terms of reference satisfactory to the Bank, for implementingstudies for: (i) formulation of a strategy for further development ofSNGPL's financial management information systems and data processing,including definition of its computer hardware and software needs; (ii)reviewing the company's billing cycle; and (iii) training of SNGPL'sstaff in computer auditing, and to submit the completed studiesrecommendations and an implementation plan to the Bank, no later thanJune 30, 1992 (para 4.09); and
(n) furnish auditor's report on its annual accounts and in compliance withBank covenants to the Bank within six months of the end of eachfinancial year. In addition, the auditor's annual reports will beextended to cover the special account and all statements of expenditureon the basis of which withdrawals are made for the Project (para 4.11).
6.04 It was agreed with GOP and SNGPL that the following would be conditionsof effectiveness of the proposed Loan:
(a) appointment by SNGPL of financial advisers, whose qualifications,experience and terms of reference are satisfactory to the Bank, to
- 39 -
manage and implement measures for raising the required resourcesthrough equity issues and loans (para 3.06);
(b) submission of evidence of concluded loan agreements totalling Rs 1.5billion with local institutions (para 3.06);
(c) approval by ECNEC of the PC-1 document (para 3.17); and
(d) submission of evidence that the pro-forma Environmental ImpactAssessment of the Project has been approved by the PakistanEnvironmental Protection Agency (para 3.19).
6.05 On the basis of the project justification and the agreements reachedwith GOP and SNGPL, it is recommended that the Bank support the proposed Projectwith a loan of US$130 million to SNGPL for a term of 20 years, including a five-year grace period.
EMlEGJuly 12, 1990
PAKISTANSUI 'NORTUERN GAS PIPELINES LTIITED CSNGPL)
CORPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
Organization of the Energy Sector
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CORPORATE RESTRUCTUR'NG AND SYSTEM EXPANSION PROJECT
A. Long-Term Energy Straregy (LES)
Naior Trends in the ConsumDtion and SURP1l of Energy
1. Pakistan's consumption of commercial energy increased between FY79 andFY88 at an average annual rate of about 8.1%. During this period the relativeshares of coal and hydropower in the total supply of snergy have remainedvirtually unchanged at about 7% and 16.5%, respectively, while those of gas andpetroleum products, the bulk of which are imported, varied markedly. Inparticular, the share of gas after having increased from 39% in FY79 to 42% inFY83 dropped to about 39% in FY88, mainly because of supply constraints.Reflecting the balancing role of petroleum products in the mix of fuels consumed,their share declined from 38% in FY79 to 36% in FY83 and, since, has risen toabout 39% in FY88. Moreover, despite the recent threefold increase in thedomestic output of oil, nearly 80% of the petroleum products consumed in FY88were imported.
2. The forecast for the period 1989-2010 calls for demand increasing atan average annual rate of about 7% up to the mid-1990s and declining graduallythereafter to about 6%. Although the output of domestic energy resources,especially of coal and hydropower and, to a lesser extent of oil and gas, isforecast to increase, their share in total supply is expected to decline relativeto that of imported energy. Consequently, In order to meet. the forecast demandat least cost, the share of coal, both imported and domestic, in totalconsumption is forecast to increase from 7% in FY88 to about 21% in FY2010 tosubstitute for higher value petroleum products and gas. Despite this, the shareof petroleum products would increase from the present level of 39% to 50% byFY2010. By contrast, the share of gas is expected to decline to about 12% and,given the long lead time and resources required to develop the country's majorhydro sites, the share of hydropower in the overall supply of energy is expectedto increase only marginally to about 20%. LES accommodates these trends throughthe implementation of integrated programs of structural reforms over five-yearintervals, corresponding to the planning cycle. These reforms are discussedbelow under the following subheadings: resource development and energyinvestments; pricing, resource mobilization and demand management; andinstitutional development.
Resource Development and Energy Investments
Primary Energy
3. Of the country's 30,000 MW of hydropower potential, only 2,897 MW havebeen developed, and another 1,928 MW are at an advanced stage of implementation.This relatively low level of development is attributable to delays in siteselection, inadequate preparation and shortage of financial resources. LES callsfor the development of another 8,700 MW by the year 2010. Of this, 7,700 MWwould be in large schemes of between 1,000 MW and 3,000 MW to be implemented in
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Page 2 of 10
sequence, and the remaining 1,000 MW in relatively small schemes of between 100MW and 300 MW to be implemented concurrently with the large schemes. In orderto initiate the implementation of LES, GOP completed, in 1985, a feasibilitystudy, followed by detailed project preparation for Kalabagh (2,400 MW) underfinancing from United Nations Development Program (UNDP). Also, under financingfrom the Canadian International Development Agency (CIDA), a study to evaluateand rank the remaining unexploited potential hydro sites in the country of morethan 200 MW was completed in 1985. The hydro ranking study recommended thedevelopment of Basha (2,400 MW and ultimately 3,600 MW) after Kalabagh. Aprefeasibility study for Basha was undertaken concurrently with the hydro rankingstudy and also completed in 1985. In addition, GOP completed, in 1987, a studyto evaluate the hydro sites of less than 200 MW under financing from KfW ofGermany.
4. Coal is one of Pakistan's principal domestic energy resources. Despitethe suitability of this coal for the production of electricity and industrialsteam, its share in the supply of commercial energy has remained virtuallystagnant, at about 7%. The stagnation is attributable to the energy pricingpolicy pursued by GOP in the past, whereby the prices of competing fuels, i.e.,fuel oil and natural gas, were maintained at a lower level than the marketdetermined price of coal. This induced industry, the power subsector andhousehold consumers to shift from coal to natural gas and fuel oil. Presently,97% of the coal produced in Pakistan is used by brick kilns, mainly because oftechnological constraints. Since 1985, GOP has increased the prices of naturalgas and petroleum products. As a result, the present price of domestic coal,in terms of thermal equivalency, is competitive with the prices of substitutefuels. However, despite the realignment of relative prices, coal productionremains sluggish because of: (a) the absence of a stable market for its useother than for the manufacture of bricks; (b) the inadequacy of the lawsgoverning coal exploration and development by the private sector which holds 75%of all the proven reserves in Pakistan; and (c) PMDC's limited technical,managerial and financial capacity to sustain the implementation of programs forthe development of publicly-held concessions. LES calls for assessing thereserves held by PMDC to delineate tracts suitable for exploration anddevelopment, and the introduction of a framework for allowing PMDC to enter intojoint ventures with local and international private companies to overcome itstechnical, managerial, and capital constraints. LES also calls for coalconcessions to be put on an equal footing with those in the oil and gassubsectors. This would allow for their termination should concessionaires failto invest in resource assessment and development within a specified period oftime, rather than continuing the present practice of holding concessionsindefinitely irrespective of the investment undertaken. In order to provide astable market for coal, the construction of power plants based on fluidized bedtechnology of appropriate sizes would be pursued, and incentives to stimulateinvestments by the private sector in the modernization of the coal mines wouldbe introduced. Since current projections show that, despite a more efficientand systematic exploitation of Pakistan's proven reserves production would notbe adequate, coal imports would be required to ensure that future demand forenergy is met at least cost. Accordingly, LES calls for increasing the annualimports of coal from 0.5 mtoe to 5 mtoe by the year 2010 as a substitute for
a:annexl-2 (chapS disk)
Annex 1.2Page 3 of 10
higher value fuels, i.e. petroleum products and natural gas, and the developmentof the infrastructure for coal handling.
5. The rate at which gas and, to a lesser extent, oil are being developedis slower than the resource base warrants. LES calls for the formulation of aprogram to identify: geologically risky areas where exploration would beundertaken through joint ventures with the private sector, which would providerisk capital and know-how to supplement the financial and technical capabilitiesof OGDC; areas where OGDC would take the sole responsibility for exploration anddevelopment; arr', areas which would be developed through work programs,subcontracts, erc. with private sector entities. LES also calls for theaccelerated development of already discovered oil and gas fields and of thedormant low quality gas fields for use in the generation of electricity.
6. The share of traditional fuels in rural energy consumption is decliningbecause of deforestation, caused primarily by the unrestrained use of fuelwoodand the absence of a national program for afforestation to replenish supply.As a result, the availability of fuelwood has declined, forcing its pricesignificantly above the price of kerosene, both measured in terms of thermalcontent. This has had an adverse impact on the income of the rural low-incomehouseholds. Accordingly, LES proposes a household energy survey to determinethe pattern of enerry consumption, the potential for substitution betweentraditional and commercial fuels, and the means for meeting the energy needs ofthe rural poor at least cost. It also calls for an assessment of the potentialfor the increased use of solar energy for meeting low-temperature hot water needsand for the formulation of a national afforestation program to be implementedas a part of the Five-Year Development Plans.
7. Secondary Energy. LES calls for the formulation of long-term leastcost development plans for the production, transport and distribution ofelectricity, coal, gas and petroleum products to be implemented in successivefive-year intervals, corresponding to the planning cycle. In the powersubsector, investments would move towards increased reliance on domestic energyresources, such as coal and hydropower, and the use of petroleum products andgas only when deemed economic. In this respect, the use of natural gas wouldshift from conventional base load plants to combined cycle and peaking plants.Domestic coal production would be increased to substitute for petroleum productsand gas in the power and industrial sectors. In order to supplement domesticcoal, future increases in the thermal generating capacity for base load plantswould be based on imported coal. The least cost expansion plan for powergeneration for the period 1989-2010 calls for the development of about 28,500MW of generating capacity, approximately 8,700 MW (30X) of which would be basedon hydro. The remaining 19,800 (70%) would be thermal capacity, of which about9,300 MW (33%) would be based on imported oil and 4,500 MW (16X) on domestic gas.Generation capacity based on coal would provide about 6,000 MW (221), including4,600 MW based on imported coal. Approximately 30% of the proposed capacity,amounting to 8,500 MW, is expected to be added by the private sector.
8. LES also calls for the implementation of a long-term plan for thereinforcement and extension of transmission and distribution networks to ensurethat power is transported and delivered efficiently. The transmission
a:annexl-2 (chap6 disk)
-44- Annex-1.2Page 4 of 10
development program would involve the extension and reinforcement of the 500-kVnetwork to efficiently evacuate electricity from the major hydropower stationsin the north (Tarbela and Mangla) to the south during the rainy seasons, andtransport power from the major thermal stations in the south to the north duringthe dry seasons. In addition, the efficient operation of the integrated powersystem requires a dispatch system that would optimize the operation of the powerstations to meet the demand at least cost. The secondary transmission networkwould also be extended and reinforced to reduce technical losses. As for thedistribution system, substantial investment would be undertaken to ensure itsextension at least cost to reduce losses and integrate the rural areas into anational low voltage network.
9. As the demand for petroleum products and production of oil fromexisting fields increase, the refining capacity would need to be expanded to meetthe demand at least cost. LES calls for increasing the refining capacity between1989 and 2010 by 5 million tons, of which one million tons would be in the formof secondary refining to crack fuel oil. In addition, there is a need forincreasing the storage and handling facilities for petroleum products. As forthe infrastructure for natural gas, LES calls for the expansion of the gasprocessing capacity and the reinforcement and extension of the transmission anddistribution networks in the urban areas to meet the increased demand , basedon a long-term plan whose implementation would be phased over successivefive-year plans.
Pricing. Resource Mobilization and Demand Management
10. LES calls for rationalizing energy prices to promote efficiency andresource mobilization. To achieve this objective, prices of tradeable energyproducts, such as oil and petroleum products would be set, at a minimum, at theirequivalent border prices plus the cost of inland handling. As for electricity,lignite and gas, which in the case of Pakistan are considered non-tradeable,their prices would be set to cover the economic cost of supply, including apremium for depletion when applicable, and finance at least 40% of the investmentprogram of each entity from internal sources. Moreover, the structure of pricesfor gas, coal and electricity would be realigned to reflect the structuredictated by the economic cost of supply. As the demand for gas exceeds supply,economic pricing of this resource dictates that in order to rationalize itsconsumption and mobilize resources for GOP, its price to various consumercategories should be adjusted to reach parity with the petroleum products itdisplaces. In addition the structure of gas tariffs should be revised andseasonal tariffs introduced to rationalize demand.
Institutional Development
11. LES calls for improving the efficiency of the entities in the sectorby decentralizing decision making and moving towards financial and administrativeautonomy. KESC's finances would be restructured to ensure that revenues coverall costs and at least 40% of its investment program. As for WAPDA, itsdependence on annual allocations under the budget would be phased out throughgreater reliance on the commercial markets for mobilizing financing. In the areaof planning, the strategy calls for strengthening the capabilities of the Energy
a:annexl-2 (chap6 disk)
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Wing in MPD to assume the lead role in integrating the plans of the entities inthe sector into a comprehensive energy development plan dictated by nationalpriorities, taking into account financial and resource constraints. In the powersubsector, LES calls for the integrated operation of WAPDA and KESC in investmentplanning and operations to ensure that demand for electricity is met at leastcost. PMDC would be restructured to assume a more active role in the developmentof its coal reserves through joint ventures with the private sector for thepurpose of developing specific proven reserves. In the oil and gas subsectors,OGDC would become increasingly self-reliant in financing its exploration anddevelopment program, through joint ventures, internal resources and the creditmarket, and its technical and managerial capabilities strengthened to evolveinto a company whose operations are based on internationally accepted industrystandards. Government involvement in SNGPL and SSGC would be reduced to allowfor a greater role for the private sector.
12. The implementation of the investment plans in the energy sectorcontinues to be constrained by the shortage of financial resources and, to someextent, the lack of technical know-how. The implementation capabilities of thepublic sector and semi-autonomous entities in the sector are also taxed and,consequently, their ability to achieve the targets under the five-yeardevelopment plans are hindered. LES calls for GOP to outline and introduce aninstitutional framework aimed at providing the security and incentives for theprivate sector to increase its involvement in the development of energy tocomplement the investments of the public sector. Although the private sectorhas been involved in the development of the oil and gas for several years, itsrole would be further strengthened with the introduction of a better compensationpackage and fiscal incentives. As for the power and coal subsectors, LES callsfor reducing the investment outlays of public sector entities and delineatingspecific investments that would be earmarked for consideration by the privatesector to provide about 30% of the total installed power generating capacity bythe year 2010, and contribute at least 50% of the incremental annual productionof domestic coal.
B. ImRlementation of LES: Progress under ESL I and ESL II
13. Energy Investments. As a first step towards rationalizing investmentsand minimizing the shortfalls in energy supply, a Core Investment Program (CIP)of priority projects was agreed to under ESL I, including the sources offinancing for its implementation such as the contribution of GOP through theAnnual Development Plan and that of the sector entities from their internally-generated funds. In keeping with this agreement, GOP took all necessary actionsrequired to mobilize resources for the implementation of the priority proje.;ts.As a result, actual investments between FY86 and FY88 were only 8% lower thanenvisaged, Rs 46 billion compared to Rs 50 billion. This represents asubstantial improvement relative to the past, when deviations between plannedand actual investments were as high as 50%.
14. To ensure consistency between the sectoral and the medium-term policyframework targets, a detailed forecast of demand for energy for the Seventh andEighth Plans (FY89-98) was prepared under ESL II, based on the projected rates
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of growth for the main sectors of the economy and increases in the domesticprices of energy products. The ongoing and new projects required to meet theforecast demand were identified and their financial requirements were matchedwith the implementation and self-financing capabilities of the public sector andsemi-autonomous entities. Projects in excess of those to be undertaken by thepublic entities were earmarked for implementation by the private sector to reducepotential shortages in energy supply. The CIP for ESL II comprises ongoing andnew projects to be implemented during the first three years of the Seventh planby both the public and private sectors. Progress in the implementation of theCIP for FY89 and FY90 has been satisfactory in terms of both mobilization andallocation of these resources for the agreed priority projects.
15. Resource Development, In keeping with the objectives of LES o;developing 8,700 MW of new hydropower potential by the year 2010, GOP apj -under ESL I to initiate by December 1986 a feasibility study for Basha I ,0MW), which was to be developed after Kalabagh (2,400 MW). This study, ho aver,could not be implemented because WAPDA's views concerning the scope and timingof the work to be undertaken differed markedly from those of the consultants whohad prepared the prefeasibility study for Basha. To resolve these differences,an international panel of experts was appointed by GOP in 1988 at the behest ofthe Bank. Based on a review of the prefeasibility study, the panel outlined awork plan which has been approved by GOP and the Bank. The appointment ofconsultants for the preparation of the feasibility study for Basha has been setas a condition of release of the second tranche of ESL II. Moreover, as theimplementation of Kalabagh has also been delayed because of unresolved issuesconcerning the allocation of water between provinces and compensation for landto be inundated, the development of sites at Chashma (240 MW), Taunsa (110 MW),Jinnah (110 MW) and Ghazi Ghariala (1,000 MW) is being accelerated under ESL IIto offset, at least partially, the 2,400 MW shortfall in hydrocapacity resultingfrom this delay.
16. Under ESL I, two studies were completed on issues relating to the coalsubsector. The first identified the main operational constraints impeding thedevelopment of coal and outlined a comprehensive program to assess the reservesat Lakhra and Sonda Thatta. The assessment of PMDC's lease area at Lakhra wascompleted in 1986 and proven reserves sufficient to produce 4 million tonsannually were identified. The second study outlined a strategy for restructuringPMDC to promote the more efficient operation of mines in the public sector, andprovided a basis for reviewing the role of the public sector in coal mining.The recommendations of this study have been reviewed under ESL II and GOP hasagreed to prepare and submit to the Bank an action plan for improving theoperational efficiency and financial viability of PMDC. Moreover, to comply witha condition of effectiveness of ESL II, GOP has also approved the developmentof the proven reserves at Lakhra through a joint venture between PMDC and theprivate sector and has issued an invitation for the latter to submit proposals.Finally, GOP has submitted to the Bank terms of reference for a study which wouldreview the institutional arrangements for granting coal concessions and theexisting fiscal incentive framework with a view to encouraging investments bythe private sector in the development of coal.
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17. In keeping with the objectives of LES of accelerating the explorationand development of oil and gas, a new gas producer pricing formula was adopted(para 1.35) and a national policy aimed at increasing the level of foreign andlocal private equity investment and balancing the role of the public and privatesectors in the exploration and development of oil and gas was outlined under ESLI. As a result, new oil and gas fields were discovered and a number of alreadydiscovered oil fields and non-associated gas fields were developed. In addition,a detailed Hydrocarbon Habitat Study of all onshore basins in the country wascompleted and a concession promotion map of the high priority and accessibleareas was prepared. Areas where exploration would be undertaken by OGDC and theprivate sector were identified and successfully promoted to the latter in Londonand Houston, in December, 1988. Under ESL II, GOP agreed to further acceleratethe development of already discovered fields and review periodically with theBank, the progress made in exploration by both the private and public sectors.The first such review was completed in February 1990.
18. Households are the single largest consumers of energy in Pakistan,accounting, for approximately 45% of total energy consumed. The decline in thesupply of fuelwood to households, together with the increase in the use of otherbiomass fuels suggests that the forest cover is being rapidly depleted withattendant adverse environmental consequences. However, the existing data areinadequate for formulating a policy aimed at optimizing the mix of biomass andmodern fuels for household consumption. Under ESL II, GOP has initiated withfinancing from UNDP the development of a comprehensive database on householdenergy use patterns and formulation of a household energy strategy. In addition,GOP agreed to review the ongoing work on forestry inventory, identify gaps inthe work program and formulate a long-term reforestation program.
19. Pricing. Resource Mobilization and Demand Management. To restrainthe growth of demand for energy and mobilize resources for priority projects,agreement was reached under ESL I on the rationalization of both producer andconsumer prices. In accordance with this agreement a new formula for theproducer price of gas was adopted and the consumer Rrice of gas was adjusted toreach the target of two-thirds the border price of fuel oil by FY88. Detailsrelating to the developments in the price of gas are discussed in paras 1.35-1.37.
20. Electricity Tariffs, which had remained virtually unchanged in thefour years up to FY85, were increased under ESL I by an average of 6.5% per yearin nominal terms between FY86-89. These increases, together with the extensionin FY87 of the applicability of the fuel adjustment surcharge to residentialconsumers whose consumption is more than 300 kWh/month, raised the averagerevenue from Rs 0.74'/kWh in FY86 to Rs 0.94/kWh in FY89 and enabled WAPDA tofinance in each of those four years abou. 40% of its investment program frominternal sources as agreed under ESL I. In addition, as a first step towardintegrating the operations of WAPDA and KESC and ensuring equity among consumersof electricity throughout the country, the tariffs of the two systems wereunified in FY88 and measures aimed at rationalizing the structure of tariffs werealso introduced, including a higher than average adjustment in tariffs forresidential and agricultural consumers. To sustain this momentum, under ESL IItariffs were increased again on September 1, 1989, by 16%. Presently, the
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average tariff level of the combined WAPDA and KESC systems is approximately 74%of the long run marginal cost. The implementation of another increase to enableWAPDA to self-finance 40% of its investment program for FY91 has been set as acondition for the release of the second tranche of ESL II. Moreover, as a meansfor further rationalizing consumption, GOP also agreed under that loan tointroduce peak/off-peak pricing for the 300 largest industrial consumers whoaccount for about 20% of the total electricity sales.
21. With the objective of providing incentives to refineries to improvetheir product-mix and efficiency, a new formula for ex-refinery pricing wasintroduced in 1988 for the two refineries in Karachi. This formula, however,was not appropriate for the Attock refinery, as it has access only to locally-produced crude oil, the production and specification of which varies from yearto year leading to widely fluctuating costs of refining per unit of output.This, in turn, results in widely fluctuating profit levels. To accelerate theimplementation of a new and equitable system for setting ex-refinery prices ofpetroleum products, GOP agreed under ESL II, to develop and install a detailedrefinery processing simulation model within the Directorate General Oil, MPNR,with assistance from consultants, to review the experience of the two Karachirefineries with the new pric.ng formula and on the basis of this review, revisethe new pricing formula for ex-refinery products for the Attock refinery. Thefirst such review was completed in February 1990 and the second review isscheduled for December 31, 1990.
22. In 1981, GOP adopted a policy of passing on the increases in theinternational price of petroleum products to final consumers. The policy wasnot applied uniformly in that the prices of kerosene and fuel oil were keptbelow their economic cost of supply, while prices of the other products weremaintained substantially higher than their correcponding border prices. Thedecline in the world market price of oil since 1986, and the fact that domesticretail prices were only marginally reduced ir. response to this decline broughtthe level of domestic prices of all petroleum products above their border prices.As a result of this policy, the petroleum subsector continues to be the principalcontributor to the national budget, and distortions in the relative prices amongproducts have been reduced. However, in order to ensure that the resourcemobilization potential of the petroleum subsector is not eroded in case the CIFrupee price of crude oil rises above the level it was when the retail consumerprices of petroleum products were last adjusted, GOP agreed under ESL II torecover from consumers the resulting difference in the price of crude oil. Inaccordance with this agreement, GOP increased the weighted average consumer priceof petroleum products by about 11% in March 1990. The prevailing weightedaverage retail price is at about 180% of the weighted average border price, withthe prices of all products being higher than their respective border prices.
23. Unlike the prices for electricity, gas and oil, the prices of coalare not regulated by GOP, but determined by market forces. On a price basisalone, coal is competitive with fuel oil and also with wood and charcoal.Accordingly, no action on coal pricing policy was sought under ESL II.
24. To serve as the focal point for all conservation activities, a NationalEnergy Conservation Centre (ENERCON) was established under ESL I. In keeping
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with its mandate, ENERCON has initiated training and outreach programs, andcompleted audits in 43 private and 27 public sector industrial plants. Inaddition, a Building Energy Code has been drafted and a program to audit 300tubewells and retrofit 100 of them has also been launched. To sustain thismomentum, GOP has furnished to the Bank, as agreed under ESL II, an action planfor undertaking detailed engineering and feasibility studies in about 20 of thelargest industrial energy consuming plants in the private sector and financingenergy conserving investments and related studies for about 20 of the largestenergy consuming plants in the private sector. In addition, GOP has furnishedto the Bank TORs for a study to be completed with assistance from consultants,to identify the constraints to conservation arising from tax, industrial andtrade legislation and formulate a package of incentives to promote energyconservation.
25. Institutional Development. In order to streamline the decision-makingprocess and improve the operating efficiency of the power subsector, a studyaimed at reorganizing WAPDA was completed by GOP under ESL I with the assistanceof consultants financed by USAID. The study recommended the separation ofWAPDA's distribution function from generation and transmission. Thisrecommendation has been accepted, in principle, and, as agreed under ESL II, GOPhas furnished to the Bank an action plan for the establishment of a distinct andself-contained distribution wing within VAPDA.
26. Presently, KESC is not in a position to mobilize the large amount ofresources required to rehabilitate its distribution system, where technicallosses are in excess of 30% of gross generation and the quality of service ispoor and eroding. In order to address these problems, under ESL II, GOP hasappointed an inter-ministerial committee for overseeing the preparation byconsultants of a financial and organizational restructuring plan for KESC.
27. As OGDC was expected to assume an expanded role in oil and gasdevelopment during the Sixth Plan, GOP agreed under ESL I to strengthen itsmanagerial capabilities and move towards financial self-refinance. Accordingly,the corporation's investment program for FY86-88 was rationalized and, morerecently, a decision was made to remove OGDC from the budget and reorient itsoperations along commercial lines. In addition, as agreed under ESL II, GOP hasappointed consultants to implement a financial restructuring plan for OGDC andinternational auditors to audit its financial operations for FY90 and FY91.
28. The office of Energy Planning (ENERPLAN) was established under ESL Iwith USAID financing. In 1986, ENERPLAN was merged with the existing EnergyWing in MPD. Since its establishment, the Energy Wing has been involved in allaspects of planning, including the preparation of the energy. chapter of theSeventh Plan. It has also successfully served as the main interlocutor betweenthe Bank and GOP under ESL I as well as coordinator of all energy sector entitiesunder that operation, a function it retain under ESL II. Under ESL II, GOP hasinitiated the steps to replace its contract personnel by regular employees ona permanent basis and to strengthen its finance and economic sections.
29. Environmental AsRects. Following the approval of the PakistanEnvironmental Protection Ordinance in 1983, GOP established the office of
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Environmental and Urban Affairs Division in the Ministry of Housing and Works.Similar provincial agencies have been established in Punjab and Sind, and stepsare currently being taken to establish these in Baluchistan and North WestFrontier Province. To address the prevailing environmental problems GOP agreedunder ESL II to develop a monitorable Environmental Action Plan, which wouldprovide for inter alia: (a) adoption of environmental standards and guidelinesfor assessment of energy projects; (b) development of environmental capacity inkey institutions in the sector; and (c) adoption of improved health and safetyand emergency management standards. The action plan is presently being reviewedby the Bank.
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PAKISTANSUI NORThERN GAS PIPLLI;;,S 'LITv (SNGPL)
CORPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
CORPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
Detailed Proiect Description
1. Bank involvement with SNGPL began in 1964, the year it became apublic limited company under the Companies Act. The Bank, through a series offive loans, assisted SNGPL in expanding its gas handling facilities and instrengthening its operational and institutional capabilities. GOP andgovernment-owned institutions currently owns about 91% of SNGPL's shares.Substantial control is therefore exercised by GOP in SNGPL's management andoperations and, in the appointment of senior staff. As part of its dialoguewith GOP in the objectives of LES, the Bank has recommended for the increasingof private sector involvement in revenue earning entities like SNGPL and acorresponding reduction in Government control to provide greater financial ar.doperational autonomy to such entities. As a prelude to full privatization ata later date, GOP has now agreed to substantially reduce its direct and indirectshareholding in SNGPL with a corresponding increase in the ownership of thecompany by the private sector as part of a Corporate Restructuring plan toincrease the autonomy of the entity. The increase in private sector investmentin the company and corporate restructuring would facilitate the mobilization offoreign and local resources from the private sector and enhance the autonomy ofSNGPL's decision making process and efficiency.
2. Currently, about 38.3 million shares of SNGPL are traded in theKarachi stock exchange market. Of this, GOP directly owns about 19.5 millionshares (51%) and indirectly through Government-owuned financial institution about15.3 million shares (40%). Burmah Shell Company of UK owns about 2.5 millionshares (6.7%) and the general public about 800,000 shares (2.3%).
3. The corporate restructuring program will consist of: (a)restructuring of the ownership of the company through the issuance to the generalpublic of about 219 million new equity shares, to be implemented in phases during1991-96; (b) reconstitution of the Board of Directors to reflect the newownership of the company; (c) establishing financial performance criteria; and(d) reviewing the regulatory function of the Directorate General of Gas.
4. Restructuring of Ownership of SNGPL. Prior to issuing new equityshares, the company would issue bonus shares to current owners on a one-to-onebasis. This implies that although the number of shares would initially bedoubled to 78 million shares, the percentage of ownership would not change.The bonus shares are expected to be issued before December 31, 1990. The firstissuance of about 57.5 million shares to the general public would be implementednot later than June 30, 1991. In order to reduce GOP's direct and indirectshareholding of the company from 91% to 51%, GOP must refrain from purchasingdirectly or indirectly any of these shares. The remaining 161 million new equityshares would be issued in series annually as follows: 37.5 million shares by
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June 30, 1993; about 50 million shares by June 30, 1993; about 57 million newequity shares by June 30, 1994; and about 17 million new equity shares by June30, 1995. These volume of shares are based on the financial requirements ofSNGPL for implementing the project. Although GOP can directly or indirectlypurchase from these new equity shares, its total purchase must be such as toensure that its direct and indirect shareholding will not be more than 40%.Assuming that GOP purchases just enough shares to maintain its ownership at notmore than 40%, the changes in the status of ownership as a result of the newequity shares to be issued would be as shcvn in the Table 3.1 below.
Table 3.1: Composition of SNGPL's Equity Ownership(Millions of Shares)
1989 1990 1991 1992 1993 1994 1995
GOP (Direct andIndirect) 34.8 69 69 69 86 108 115
Private Sector 3. .5 7 57.5 106.5 128 163 173
TOTAL 38.3 76 126.5 166 214 271 288
From Table 1 above, it implies that GOP's direct and indirect share ownershipwould reach a level of about 40% by 1992.
5. Restructuring of SNGPL's Management. The reconstitution of theBoard of Directors would be implemented not later than March 31, 1992, afterthe issuance of the first set of 57.5 million new equity shares when GOP's directand indirect shareholding has been reduced to about 51%. Future reconstitutionof the Board would be carried out annually to reflect the changes in ownership.It is expected that by January 31, 1993, when GOP's ownership has been reducedto about 40%, its number of directors in the Board of 13 members would be reducedfrom the current level of 10 to about 5 members and the remaining members wouldbe appointed by the private sector. Furthermore, the appointment of theChairman, Managing Director and key officials of SNGPL, which in the past hasbeen the prerogative of GOP would now be made solely by the Board of Directors.
6. Establishment of Financial Performance Criteria. The financialperformance criteria consisted of maintaining the price of gas paid to SNGPL(Prescribed Price) on the basis of ensuring that SNGPL achieved a rate of returnof not less than 10% on revalued assets. This has been difficult and cumbersometo apply and besides the fact that it does not provide adequate incentives tothe company to maintain an efficient operation as well as provide itopportunities to raise equity from capital market, the principle of revaluingfixed assets has never been fully accepted in Pakistan and SNGPL has been theonly company in Pakistan applying it. It is now proposed that a study be donewith the assistance of consultants under terms of reference satisfactory to theBank to establish a formula for setting SNGPL's consumer prices net of the GasDevelopment Surcharge collected on behalf of GOP (Prescribed Price) andproviding, inter alia, the capping of SNGPL's prices rather than of its rate ofreturn on fixed assets, for improving the efficiency of SNGPL and enhancing its
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ability to raise equity from capital markets. This will put the performance ofthe utility on a basis consistent with what private sector investors would seekin terms of a sufficiently attractive return on their investment in the company.In the meantime the prescribed price of gas would be set to ensure that SNGPLachieves a rate of return of 17 1/2% on a historical valued assets and aninternal cash generation of 40% in order to make it financially viable and reduceto a manageable limit, the level of borrowing. These criteria would be reviewedannually in light of financial requirements of SNGPL.
7. Reviewing the Regulatory Function of the Directorate General of Gas.DGG is responsible for establishing the guideline and commercial objectives forthe development of the gas subsector, allocating gas and setting gas tariffs forthe utilities and monitoring their activities. The proposed expansion of theSNGPL's system and restructuring of the company under this project, and thepossible privatization of SSGC in future, make it necessary to upgrade thecapabilities of DGG to enable it act effectively as a regulatory authority.Under the proposed Project, a study would be undertaken to review and recommendsteps to be taken to improva regulatory function of DGG.
Part II - Infrastructure Development
8. In line with the objectives of LES (Annex 1.2), exploration anddevelopment of oil and gas resources have been accelerated. This has resultedin the discovery of several oil and gas fields in the country particularly aroundthe Sui region. The new fields being developed include Pirkoh, Loti, Kadawari,Quadirpur, Adhi, Dakhni and Dhurnal from which about 246 MMCFD additionalpipeline quality gas is expected to be available as from 1992 and would increaseto about 346 MMCFD by 1995. Of this, about 300 MMCFD has been allocated to SNGPLand the balance to SSGC. These allocations and the sources of the gas aresummarized in Table 3.2 below.
Table 3.2: Incremental Gas SupplY
Current Allocation Future Allocation(in MMCFD) (in MMCFD)
9. In addition to the incremental gas from the new fields, the lowquality gas fields of Nandpur, Panjpir and Uch would be developed during the
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Seventh Plan period and the incremental gas purchased would be dedicated topower generation by the private sector and WAPDA. Table 3.3 below summarizesthe proposed gas allocation from these fields.
Table 3.3: Gas Allocation for Power and Fertilizers a/
Current Allocation Future Allocation(MMCFD) (MMCFD)
1990 - 1992 1992 - 2006
FIELDS NORTH SOUTH TOTAL NORTH SOUTH TOTAL
Sui (Guddu Power Stn) - 103 103 - 10? 103Mari (Fertilizer) - 152 152 - 267 267
j/ This gas is for non-SNGPL and SSGC system but to the respectivecaptive fertilizer and power plants.
** Low quality gas from these fields are for power stations proposedto be built and financed through BOT arrangements by the private sector.
10. SNGPL's transmission capacity from Sui to the northern part of thecountry is about 450 MMCFD, which is currently adequate to handle the allocationof about 428 MMCFD from the Sui. In order to transmit the additional 300 MMCFDof gas to be available by 1991, the transmission capacity needs to be expandedto about 800 MMCFD. However, the efficient transport of this gas would require:improving SNGPL's dispatch and gas flow monitoring system to reduce losses Inthe network which, with the full utilization of available capacity, have doubledfrom 2% in FY85 to about 4% in FY89; and strengthening SNGPL's capabilities insystem operations and maintenance, in line with the expansion of the gas handlingfacilities.
11. The Infrastructure Development to be undertaken under the projectwould include: Installation of a 1 x 120 MMCFD purification plant; expansionof the transmission system capacity by 300 MMCFD; expansion of the distributionsystem; installation of a pipeline coating plant; and installation of atelecommunication and gas flow monitoring system.
12. Purification Plant. The gas purification facility installed at Suiis jointly owned by SSGC and SNGPL. At the completion of SNGPL V project (Loan2324-PAK), the capacity would be increased by about 120 MMCFD from SSGCrespectively; leaving 197 which 428 MMCFD is for SNGPL; and 290 MMCFD for SSGCrespectively; leaving 197 MMCFD as surplus capacity, of which 60 MMCFD would befor standby and 137 MMCFD as the effective surplus capacity. The Sui gaspurification facility would then be comprised of eleven parallel banks with thefollowing capacities:
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No. of Units Capacity/Unit Total CapacityMMCFD MMCFD
5 50 2502 100 2002 110 2202 240 240
11 910
13. The capacities shown are the net product gas capacities leavingthe purification plant. The raw gas delivered to the purification plant isreduced after treatment by approximately 7%, which is known as shrinkage. Thesupply pressure to the purification plant is 1150 psig and the pressure deliveredto the transmission system is 1070 psig. In view of the fact that under theproposed project about 200 MMCD of gas from Loti and Pirkoh would have to bepurified, since this gas though free of H2S, would be blended with raw Sui gasrich in H2S, the current excess purification capacity of 37MMCFD would not beadequate. Under the proposed project, SNGPL would install a1 x 120 MMCFD purification capacity at Sui to increase total purificationcapacity to 1030 MMCFD which would be adequate to handle SNGPL and SSGCrequirements and still leave adequate capacity for maintenance and standby.The plant will use MEA (mono-ethanol-amine) process which absorbs sulphurcompounds and carbon dioxide similar to the process currently being used in thegas treating facilities at Sui.
14. Raw gas from Sui main limestone contains sulphur compounds (mainlyhydrogen sulphide) and carbon dioxide plus condensate. Raw gas is cooled toseparate the condensate before entering purification plant. The gases arecurrently treated in 10 parallel banks suing MEA (mono-ethanol-amine) whichabsorbs the sulphur compounds and carbon dioxide. The wet gases are thendehydrated using glycol to produce pipeline quality dry gas suitable for use indomestic and commercial applications. The MEA and glycol are recovered in aregeneration section and recycled again for future continuous use.
Transmission Pipeline
15. The high pressure transmission expansion to be undertaken under theproposed Project, would increase the transmission capacity of gas from the Suiregion (including Loti and Pirkoh) to 750 MMCFD with the added flexibility offurther increasing the capacity to 800 MMCFD with minimal incremental investmentand no increase in compression. The capacity of the various sections of the highpressure system when completed would be as follows.
The operating pressure along the high pressure pipeline system wouldvary from 900 psig to 1235 psig. Heavier wall pipes will be used down streamof the compressor station (within the high pressure region), in order to avoidstress corrosion cracking. Discharge gas cooling equipment being installed underthe ESL I (Loan 2552-PAK) would also help to achieve this objective. Thestandard grade of steel linepipe to be used under the proposed project is givenbelow:
API 5L--56 for 24"x.438 diameter;24"x.344 diameter; and24"x.563 diameter
API 5LX-60 for 30"x.438 diameter
Comoression Ratio: The ratio of delivery pressure to suctionpressure for compression on the high pressure transmission pipeline would varyfrom 1.2 to 1.40. This is within industry standards.
16. ,h.e (i.xisting high pressure transmission system is designed totransmit 450 MMCFD to 800 MMCFD from Sui to field. The proposed project willexpand the system capacity from 450 to 800 MMCFD from Sui to Multan. The newconsumers will be located downstream in the new towns, along the proposed 18"diameter pipeline from Qadirpur Rawan to Lahore, as well as the Lahore city,Faislabad, Islamabad, Peshawar, and Kotri. By using larger diameter pipelinesizes, the pressure along the pipeline would be reduced, thereby improvingcompression ratio, and hence, a minimal amount of compression 31700 BHP wouldbe required in Pirkoh-Loti fields and on the Sui to Multan section. The proposedsystem expansion will comprise of looplines (refer to Map IBRD No. 20961R1 astabulated below.
Pipeline Length ofDiameter Pipeline(in inches) From To (in miles)
30 Sui AC-1 37.5030 AC-1 AC-4 101.7830 AC-4 AC-6 75.6024 AC-6 AC-7 13.8818 AC-6 Lahore 200.0016 CC-3 Wah 60.0016 in various sections 155.80
including to NWFTotal: 644.55
17. The construction of the transmission pipelines will be carried outin three phases. Phase I will consist of replacing the existing 18" line withthe 30 inch loopline from Sui to the Sutlej River during 1990 - 1991 parallelto the existing 24" line. In Phase II, the 18" pipeline replaced by the 30"diameter loopline, will be used to construct the new Qadirpur Rawan - Lahore18" diameter section and scheduled to be completed by 1992. Phase III willcomprise of constructing the remaining 30" loopline north of the Sutlej River.
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Distribution Network Expansion
18. SNGPL is in the process of completing a gas distribution masterplan.Part of this plan to be implemented under the proposed Project would consist ofconstruction of about 1,356 miles (2,183 kms) of different diameter pipelinesand the installation of customer service connection and meters and regulatingstations to supply gas to an estimated additional 584,000 domestic consumers,11,700 commercial consumers, 800 industrial consumers and two fertilizer plants.In addition, and as part of the Government social sector development program,about 150,000 new consumers are to be supplied gas in new towns which have notyet been supplied with gas. SNGPL is currently completing the map andestablishing the criteria for ranking and selection of towns to be connected.In order to ensure that the distribution plan is not implemented in an ad hocfashion, SNGPL has agreed to review the map and the criteria to be used with theBank when completed. Under the proposed Project, about 330,000 new domesticconsumers, 6,000 commercial consumersa, 400 industrial consumers and twofertilizer plants will be connected by 1996. According to this plan, the gasmarket in SNGPL area would increase by about 300 MMCFD by 1996. About 100 MMCFDof this gas would be supplied from the northern fields, and the balance ofapproximately 200 MMCFD from the Sui region would be transmitted toward Multanand Lahore through the additional transmission capacity provided under theproposed Project. The plan for connecting the new consumers to the network isshown in the Table 3.4.
Table 3 .4:PAKISTAN
SUI NORTHERN GAS PIPELINES LINTED (SNGPL)
CORPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
19. Cathodic protection would be implemented through application ofImpressed DC current using rectifiers to the transmission pipelines. The testingof coating and wrapping is carried out by a holiday detector applying 9.000 to13.000 volts. This process, in conjunction with the coating of pipelines wouldprotect the pipes from corrosion.
Pipeline Coating
20. SNGPL experienced operational difficulties with the application ofcoal-tar based materials under the Fifth Project for coating the pipeline, whichresulted in delay of the pipelaying process. Under the proposed project, SNCPLwill use a i.ew generation state-of-the-art pipeline coatings, consisting ofextruded polyethylene and epoxy which are relatively easier to apply and wouldconsiderably enhance the life span of the transmission system. To facilitatethis operation, a small pipe coating plant would be procured under the Project,and a result, the rate of pipelaying would be accelerated.
Telecommunication and Telemetry/SCADA
21. The proposed project will finance the installation of thetelecommunications and telemetry system required fore the new 18" line fromQadirpur Rawan to Lahore. The system would comprise of a 24-channel microwavesystem similar to the Sui - Multan system recently completed under SNGPL V.SNGPL, is in the process of selecting consultants to assist in the overallplanning, system, path engineering and frequency analysis. After the consultantstudy is completed by March 1989, SNGPL would apply to GOP for approval oftransmitting frequency. The scope of equipment supply for this component of theproject comprises of two radio (microwave) - relay terminals; six repeaterstations with associated multiplex; self-supporting towers, antennas and feedercables; and an automated telemetry/SCADA. The procurement process for theseitems would start by April 1990, in accordance with Bank procurement guidelinesand contract will be awarded to the lowest evaluated bidder. Delivery at siteof the items is expected by June 1991 and installation and commissioning wouldbe completed by about March 1991.
Part III - Technical Assistance and Training
22. Consultancy services and training would be provided to assist SNGPLin implementing the issuance of shares, design, engineering and supervision ofconstruction of high pressure pipeline at river crossings; developing of SNGPL'sfinancial management information systems and internal auditing of computerizedsystems and implementing training of SNGPL staff in the areas of long termplanning; project implementation, system operations and maintenance; inventorycontrol and safety through a collaborative arrangement with a foreign privategas utility.
-70- Annex 3.1Page 10 of 11
River Crossings
23. The proposed expanded high pressure transmission line will crosseight rivers. SNGPL's technical capabilities in the design and construction ofhigh pressure transmission pipelines across rivers is limited. Since the designof these crossings is to be initiated by October 1990 and construction completedby December 1993, SNGPL intends to hire consultants to undertake the detailedengineering design, carrying capacity, soil survey and construction supervisionon the two river crossings. Approximately 30 man-months would be required inconsultant services to undertake this study. The foreign exchange cost of thiscomponent is estimated at US$500,000.
Management Information System (MIS)
24. Consultants would be required to: (i) formulate a strategy forfurther development of SNGPL's financial MIS and data processing, includingdefinition of its hardware and software needs; (ii) a review of the company'sbilling cycle; and (iii) training of SNGPL's internal audit staff in the auditingof computerized accounting systems. Proposals from consultants would be reviewedin tow stages, technical and financial, in accordance with the Bank's guidelinesfor hiring consultants. The study is expected to require about 30 man-monthsand is expected to cost approximately US$ 560,000.
Training
25. Under the ongoing SNGPL V Project, GDC of Chicago (the consultantthat undertook the Gas Utilization Study) had coordinated training activitiesfor SNGPL, which were restricted to visits abroad by SNGPL staff to attend shortcourses. However, under the proposed Project, the training component wouldinclude on the job training program, complemented with training visits abroad.SNGPL is expected to submit for the Bank review a detail training program by loaneffectiveness. This program would be formulated around a long-term collaborativeagreement with an experienced gas utility abroad. The proposed trainingarrangement, would provide SNGPL with the desired broad-based package oftechnical assistance and training in key operational areas. Such an approachis considered more effective in providing the technical assistance for upgradingthe capabilities of SNGPL in all facets of gas transmission and distribution.The Bank would assist SNGPL in preparing the Terms of Reference for the longterm collaborative agreement with a utility company. The approximate number ofpersons requiring training in various disciplines would be about forty as shownbelow:
-71-Annex 3.1
Page 11 of 11
AREA DISCIPLINE No. of Staff
Operation Pipeline maintenance 2Cathodic protection 2Gas measurement 6Gas dispatching/SCADA 4Compression 2Pipeline Design and Planning 2Gas Purification IPipeline Construction 2
SNGPL has appointed a training coordinator to manage the training componentunder the proposed Project. Under the proposed collaborative arrangement witha reputable international gas utility, assistance would be provided for thetraining of SNGPL staff in the areas of long-term planning, projectimplementation, system operations and maintenance, inventory control andimplementation of adequate safety measures. The overall foreign exchange costof the training component is estimated at about US$1,000,000.
PAKISTAN
SUI NORTHERN GAS PIPELINES LIV'ITED (SNGPL)
CORPORATE RESTRUCTURING AND SYSTEM EXPANSIONImplementatlon Schedule
Of Which Taxes andDuties (80k o!Foreton ostsit s 2i 0 237 592 0 592 455 0 455 599 0 599 402 0 402 187 0 187 2,472 0 2,472
ia base costs reflect orices and the exchange rate o0 aporoxiuatelv Rs 21.50rUS1 prevailing on January 1, 1990.;b Phvsica' contlngerLles have reen estimated at 101 of base cost.; c Price escatatior, for locai costs has been assutsed at b.81 for FY91 and 6.102 p.a. thereafter. Price continQenties for foreign costs expressed in Rem have bn
calculated bv escaiatinq their USOoliar costs at 4.i% p.a. for FfYl-95 and 4.3Z for FY96 and converting the resulting total USPollar cost for each year into Rupm atestiaateo averaue exchanoe rate for that year.
,24-maw-9SC 3NGPLKii.Wk
x
0.
PislSIAN
SUi NORTHERN BAS PIPELINES LINITED ISN[P)UIRPORATE RESTRUCTURING AND SYSTEN EIPANSION PROJECT
Project CostiMillions of USDollars)
FM91 FiS2 FY93 FY94 FY95 Fy96 TOTAL
Locai Foreiqn Total Local Foreign Total Local Foreign Total Local Foreign Total Local Formign Total Local Foruiqn Total Lcal Foreign Total
ia base costs reflect prices and the exchanqe rate of approximately Rs 21.50/1US1 prevailing on January 1. 1990.
lb PhYSzca1 continoencies have been estimated at 107 of base cost.
:c Price estaiation for forelon costs has been assumed at 4.9 n.a. for F91-95 and 4.31 far FY96. Price continqencies for local costs eprnssed in USOullars have bren
calculdtea ov escd'atinQ their Ruoee costs at 6.01 for FY91 and at 61 p.a. thereafter and converting the resultinq total Rupee cost for each year into USDllars at th
estimate! a,er4qe e,chnanqe rate for that Year.
su X
0.r.w
-75-
PAKISTAN &max 3.4
SUI NORTHERN GAS PIPELINES LIMITED (SNGPL)
CORPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
Disbursement Schledule /a
Fiscal Year USS Million*_ ca_ a_ Q~~~~uartel Cumulative
10/90 Supervision Mission Petroleum and 6- Loan Effectiveness P i p e 1 i n e- Project Initiation, Engineers.including clearance forequity issues, procurement,mobilization of projectteam, acquisition of rightsof way, preparation ofstudi'-s for upgrading DGG,new prescribing pricingformula, engineering forriver crossing, MIS.
12/90 - Review of financial Finance Iperformance in FY90 andforecast for FY91.
- Procurement Engineer 4
03/91 Supervision Mission Petroleum and 7- Review of detailed plans P i p e 1 i n efor: (1) equity issues; (2) Engineers,study for upgrading DGG; (3) Finance andadjusting consumer price of Economics.gas; (4) appointing consul-tants for remunerationformula, detailed engineer-ing for river crossings andMIS.- Status of developmentdistribution program andcollaborative arrangement.- Detailed design andconstruction progress.
07/91 - Review of TORs, tender Engineer 2documents and evaluationsand distribution developmentplan
09/91 Supervision Mission E n g i n e e r , 4- Review of progress in Finance andconstruction, status of Managementstudies and training programand detailed plans forreconstitution of Board.
12/91 - Review of financial Finance 2performance in FY91 andforecast for FY92.
- Procurement Engineer 3
03/92 Supervision Mission Petroleum and 7- Review of detailed plans P i p e 1 i n efor: second equity issue Engineers andand price adjustments. Finance and- Status of implementation, Economicsincluding studies, physicalprogress and actions takento reconstitute Board.
09/92 Two SuDervision Missions E n g i n e e r , 1203/93 - Review of progress in Finance and
implementing t h e Economicsr e s t r u c t u r i n g ,infrastructure developmentand technical assistancecomponents.
1993/94 Two supervision missions. E n g i n e e r , 12F i n a n c eEconomics
CORPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
Assumptions and Calculations for the Rate of Return
COSTS
1. Capital Costs. Investment expenditures on civil works, material andequipment, and land amount to about Rs 7,987 million, including physicalcontingencies but excluding prL-e contingencies, taxes and duties. Expenditureson conversion of consumer facilities, amounting to Rs 1,194 million, though notfinanced under the proposed Project, are incurred by consumers, and, therefore,are included in the calculations of the race of return. Details relating to -.hephasing of expenditures are presented below:
Civil Works, Equipment Conversion ofMaterials and Land Consumer Facilities
2. Local Costs are expressed in their equivalent border prices using thefollowing conversion factors: capital goods at 0.81 of the domestic prices; andunskilled labor at 0.77 of the domestic wage rate.
3. Annual Operation and Maintenance Costs (O & M). These are estimatedat 3Z of the capital costs associated with the expansion of the transmission anddistribution network.
4. Incremental Cost of Production. Gas for the proposed Project would besupplied by OGDC from its Pirkoh and other fields, for which a producer priceof Rs 15.38/MCF was negotiated by OGDC. It represents the marginal cost of gasin terms of future supply to SNGPL and is based on the formula agreed to underESL I which links the producer price of gas to two-thirds the border price offuel oil less negotiated discounts.
BENEFITS
5. The measurable benefits associated with the proposed Project include:(a) service connection charges which are paid by the consumers to SNGPL; and (b)revenues associated with incremental sales. Service connection charges,expressed in January 1990 prices, amount to about Rs 239 million in FY93; andRs 266 million in each of the remaining three years. These are based on SNGPL'smarket c velopment plan and the service connection charge of Rs 2,709 forresidential consumers, Rs 7,382 for commercial consumers, and Rs 111,000 for
-88- . Annex 5.2Page 2 of 4
industrial consumers. The revenues associated with incremental sales arecalculated usin- the estimated weighted average consumer price of pipelinequality gas of Rs 41.6/MCF in January 1990, which is taken as a proxy for theconsumers' willingness to pay.
PAKISTAN
SUI NORTHERN GAS PIPELINES LIMITED (SNGPL)
CORPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
Phasin2 of Investment Expenditures 2/(Rs Million)
Cost of ConvertingPROJECT COST Consumer Facilities
Foreign Local 2/ LocalCapital Capital Labor Capital SkilledGoods Goods Skilled Unskilled Total Goods Labor Total
1/ Expressed in Rs. MiLtion, except where indicated.
-91-
Annex 6.0
PAKISTAN
SUI NORTHERN GAS PIPELINES LIMITED (SNGPL)
CORPORATE RESTRUCTURING AND SYSTEM EXPANSION PROJECT
Selected Documents in Proiect File
1. Government of Pakistan ETnergy Working Group, Draft Seventh Five-Year PlanReport, 1987.
2. Shadow Prices in Pakistar, March 1986; Report by Metroeconomica Ltd. U.K.
3. Gas Consumer Pricing Policy in Pakistan, Draft Final Report October 1987,Coopers & Lybrand.
4. Sui Northern Gas Pipelines Ltd. Annual Report (1985-89).
5. Sui Northern Gas Pipelines Ltd. Project VI Description (Form PC-1, 1988).
6. Procurement Schedule agreed with SNGPL for the proposed Project.
7. Principal Gas Fields and their Production Potential.
8. Major Gas Fields by Year of Discovery and Ownership.
9. Pakistan Gas Utilization Study (1988) Report submitted by Gas DevelopmentCorporation (GDC) of Chicago, USA, compriad of:
Volume I - Appendix: Gas ImportsVolume II - Gas Demand and AppendixVolume III - Utilization of High Inert Gas FieldsVolume IV - Supply Development ProgramVolume V - SCADA SystemsVolume VI - Study of Peakshaving MethodsVolume VII - Demand Management and Ranking of Project PackagesVolume VIII - Summary and Recommendations
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