Asian Development Bank’s Support Did Little to Solve Pakistan’s Energy Problems: Report

The impact of the Asian Development Bank (ADB)-supported reforms in the power sector of Pakistan has been only modest and fragile with circular debt and its threat to the sustainability of the sector being the biggest threat.

This was mentioned in the latest report, “ADB Energy Policy and Program 2009-2019”, prepared by the Independent Evaluation Department (IED) of the bank.

It stated that ADB renewed its support for energy sector reform after the government fully settled the circular debt of Rs. 480 billion in 2013.

The policy-based loan or lending (PBL) was fully coordinated with the International Monetary Fund’s (IMF’s) Extended Fund Facility and with the World Bank.

However, the IED sector assistance program evaluation (SAPE) that evaluated ADB’s support to Pakistan’s energy sector found that while several policy actions had been carried out, most outputs had not been fully delivered, and outcomes had not been achieved.

Despite ADB’s support, Pakistan’s circular debt tripled to Rs. 1.6 trillion.

In particular, the circular debt had more than tripled from around Rs. 450 billion in the fiscal year 2013 to Rs. 1.6 trillion in the fiscal year 2019 (about 4.2 percent of the gross domestic product), with the increase accelerating in the past two years.

Most of ADB’s financial support for improving sector institutions was for reforming the energy sectors in Pakistan and Indonesia, which had a combined lending volume of $2.4 billion, in parallel with other donors.

However, these operations showed only limited results, it added.

According to the report, Pakistan borrowed $1.1 billion for a large programmatic PBL in coordination with the IMF and co-financed by the World Bank and Agence Française de Développement (AFD) for a total of $2.4 billion to promote significant institutional reforms designed to reduce the sector’s financial losses from 2014 to 2017.

After a change of government and approval of the new IMF lending program in 2019, the ADB approved a follow-up programmatic PBL with the first subprogram of $300 million.

Pakistan and Indonesia were the second- and third-largest energy borrowers and their sub-sector distribution were similar to most of the projects intended to develop T&D infrastructure.

ADB’s loans to Pakistan financed a supercritical coal-fired power plant (the last coal power plant financed by the ADB) in 2013, an LNG re-gasification terminal (which should have been classified under the gas infrastructure sub-sector), and a CCGT power plant.

Pakistan’s Accelerating Economic Transformation Programme (Subprogram 2) project was primarily classified as public sector management (PSM) but it had an energy sector development and institutional reform component amounting to $100 million (29 percent of the ADB approved project amount).

At the sub-sector level, half of the non-core energy project components ($298 million) supported energy sector development and institutional reform.

Projects supporting this sub-sector included two program loans in Pakistan: the Accelerating Economic Transformation Programme (Subprogram 2) and the Punjab Government Efficiency Improvement Program (Subprogram 2).

While the contribution to energy sector reform is apparent in some projects, it is not clear in all of those with energy sector development and institutional reform components.

ADB responded with strong support for the extension and upgrading of electricity networks (39 percent of the total support) and conventional generation (22 percent of support was for the Jamshoro coal supercritical power plant) to reduce the significant power generation shortages that affected Pakistan until 2018.

One-fourth of the total was invested in institutional and policy reform, aimed at addressing the “circular debt” problem, although this was not greatly prioritized in the government’s strategic documents, except for addressing capacity, fragmentation, and regulatory aspects, it added.

Energy efficiency was also a top priority, because of the high losses in outdated power generation assets and power networks, which the ADB addressed through power grid enhancement projects (increasing transformer capacity and upgrading T&D lines).

The ADB program also led to the development of renewable energy, with the first wind and solar photovoltaic power projects, as well as hydropower projects.

The portfolio support for the pillar of energy sector reforms was weak, with most of the lending for capacity building and improved governance to Pakistan and Indonesia.

The policy’s pillar of “promoting energy sector reforms, capacity building, and governance” was not reflected in the ADB’s limited financing for the sector development and institutional reform sub-sector, which was concentrated in two countries (81 percent was allocated to programmatic PBLs in Pakistan and Indonesia).

Substantial pockets of unelectrified consumers remain in developing Asia.

Countries with low electrification rates include PNG (24 percent), Myanmar (57 percent), Pakistan (98 percent according to government, but only 77 percent per IEA estimates), Bangladesh (90 percent), Philippines (92 percent), and Nepal (94 percent). Further, the actual access rate to electricity in many countries, notably Pakistan, is a topic for debate, as a large share of the population lives without a continuous electricity supply.

In Pakistan, the centerpiece of the reform effort was the Sustainable Energy Sector Reform Program, financed by a $1.1 billion PBL disbursed over three sub-programs beginning in 2014 and closing in 2017, with parallel co-financing by the World Bank, Japan International Cooperation Agency, and the AFD.

Another PBL program, the Energy Sector Reforms, and Financial Sustainability Program was approved in December 2019, with similar objectives to the previous one.

This program runs parallel to another financing facility from the IMF.

ADB’s interventions have supported the financial sustainability of the distribution companies by helping to improve infrastructure and operations, but reductions in losses have been disappointing, with the weighted average of distribution losses essentially flat-lined at 18 percent over the fiscal year 2012–the fiscal year 2018 period, the report added.

In Pakistan, K-Electric, the vertically integrated utility of Karachi was privatized in 2005, supported by the ADB with relative success, however, further privatization of other distribution companies in the country has been stalled despite continual ADB support and encouragement.

There is a significant need to improve the operational efficiency of the energy sector state-owned enterprises.

These include not only power distribution companies, but also power generation and transmission utilities, as well as those in the gas sector.

While the privatization of state-owned enterprises may not be the optimal approach in some cases, adequate corporatization, financial discipline, good governance, and efficient operations should be supported through incentives.

These can be contained in the PBL, RBL, TA, and strictly enforced loan covenants.

There is a disconnect between what the Energy Policy 2009 allows and the ADB’s de facto ban on financing coal-fired generation since 2013.

While the policy allows investments in coal power plants, in practice, the ADB has ceased financing such plants, since the Jamshoro supercritical coal-fired power plant in Pakistan was approved in 2013.

The policy provides no prioritization or eligibility criteria for the selection of fossil-fuel-powered plants (including those involving natural gas), which has reduced its relevance and effectiveness with respect to sector development, especially institutional priority given to tackling climate change in Strategy 2030.

Inefficient institutions, inadequate regulations, and limited governance can further slow sector development by creating a vicious circle of loss-making entities.

Appropriate integrated energy planning and adequate governing and regulatory structures are essential if countries are to build sustainable energy systems, while market reforms can be helpful in improving the overall efficiency and financial viability of the power sector, creating a better climate for investment, together with complementary policy measures to deliver the social, economic and environmental outcomes required by society, the report added.

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