the world bank for official use only · sngpl sui northern gas pipelines limited ssgc sui southern...
TRANSCRIPT
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: 59980-PK
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED IBRD LOAN
IN THE AMOUNT OF US$100 MILLION
AND AN IDA CREDIT
IN THE AMOUNT OF SDR 64.5 MILLION (US$100 MILLION EQUIVALENT)
TO
ISLAMIC REPUBLIC OF PAKISTAN
FOR A
NATURAL GAS EFFICIENCY PROJECT
April 2, 2012
Sustainable Development Unit
Pakistan Country Management Unit
South Asia Region
This document has a restricted distribution and may be used by recipients only in the
performance of their official duties. Its contents may not otherwise be disclosed without World
Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CURRENCY EQUIVALENTS
Exchange Rate Effective January 1, 2012
Currency Unit = PKR (Pakistani Rupees)
PKR 90.00 = US$ 1
US$ 0.011 = PKR 1
FISCAL YEAR
July 1 – June 30
ABBREVIATIONS AND ACRONYMS
bcf Billion cubic feet bcfd Billion cubic feet per day CAGR Compound annual growth rate CNG Compressed natural gas (used in Pakistan‘s transport sector) CPS Country Partnership Strategy DPL Development policy loan EIA Environmental impact assessment EIRR Economic internal rate of return ESMF Environmental and Social Management Framework FIRR Financial internal rate of return FY GOP
Fiscal year Government of Pakistan
IBRD International Bank for Reconstruction and Development KESC Karachi Electric Supply Company mmbtu Million British thermal units mcf Thousand cubic feet mmcf Million cubic feet mmcfd Million cubic feet per day NPV Net present value OGRA Oil and Gas Regulatory Authority (Pakistan) PMO Project Management Office (implementation unit) PAD Project appraisal document psig Pounds-force per square inch gauge PSQCA Pakistan Standards and Quality Control Authority SNGPL Sui Northern Gas Pipelines Limited SSGC Sui Southern Gas Company Limited tcf Trillion cubic feet UFG Unaccounted-for gas WACOG Weighted average cost of gas WAPDA Pakistan Water and Power Development Authority
Regional Vice President: Isabel M. Guerrero
Country Director: Rachid Benmessaoud
Sector Director: John Henry Stein
Sector Manager: Jyoti Shukla
Task Team Leader: Bjorn Hamso
Table of Contents
I. Strategic Context ....................................................................................................1
A. Country Context.......................................................................................................1
B. Sectoral and Institutional Context .............................................................................2
C. Higher Level Objectives to Which the Project Contributes ........................................9
II. Project Development Objectives (PDO) .................................................................9
A. PDO ........................................................................................................................9
B. Project Beneficiaries ................................................................................................9
C. PDO-level Results Indicators.................................................................................. 10
III. Project Description............................................................................................... 10
A. Project Components ............................................................................................... 10
B. Project Financing ................................................................................................... 12
1. Lending Instrument ............................................................................................ 12
2. Project Cost and Financing ................................................................................. 12
IV. Implementation .................................................................................................... 13
A. Institutional and Implementation Arrangements ...................................................... 13
B. Results Monitoring and Evaluation ......................................................................... 14
C. Sustainability ......................................................................................................... 15
V. Key Risks and Mitigation Measures .................................................................... 16
VI. Appraisal Summary ............................................................................................. 17
A. Economic and Financial Analysis ........................................................................... 17
B. Technical ............................................................................................................... 19
C. Financial Management ........................................................................................... 20
D. Procurement........................................................................................................... 21
E. Social .................................................................................................................... 21
F. Environment .......................................................................................................... 22
G. Communication...................................................................................................... 23
Annex 1: Results Framework and Monitoring ..................................................................... 24
Annex 2: Detailed Project Description.................................................................................. 26
A. Project Objective and Components ......................................................................... 26
B. Project Scope ......................................................................................................... 26
C. Components ........................................................................................................... 26
D. Project Activities Financed Entirely by Counterpart Funds ...................................... 32
E. Other Related Donor Activities............................................................................... 32
F. About the Implementation Agency or Sub-borrower ............................................... 33
G. Gas Prices in Pakistan ............................................................................................ 33
Annex 3: Implementation Arrangements ............................................................................. 34
A. Project Administration Mechanisms ....................................................................... 34
B. Financial Management ........................................................................................... 36
iv
C. Disbursements ....................................................................................................... 38
D. Procurement........................................................................................................... 39
E. Environmental and Social ....................................................................................... 44
F. Monitoring & Evaluation ....................................................................................... 45
G. Role of Partners ..................................................................................................... 46
Annex 4: Operational Risk Assessment Framework (ORAF) .............................................. 47
Annex 5: Implementation Support Plan ............................................................................... 50
Annex 6: Team Composition................................................................................................. 52
Annex 7: Economic and Financial Analysis .......................................................................... 53
A. Economic Analysis ................................................................................................ 53
1. Underground Replacement and Rectification ...................................................... 54
2. Overhead Leak Survey and Rectification ............................................................ 55
3. Pressure Management ........................................................................................ 56
4. Cathodic Protection............................................................................................ 57
5. Theft reduction (Metering and Surveillance) ....................................................... 58
6. Entire Project ..................................................................................................... 58
B. Financial Analysis .................................................................................................. 59
C. Financial Analysis of SSGC ................................................................................... 62
1. Background ....................................................................................................... 63
2. Financial highlights 2006-10 .............................................................................. 63
3. Gas Demand-Supply Balance & UFG................................................................. 67
4. Projections ......................................................................................................... 69
5. Risk analysis ...................................................................................................... 70
Annex 8: Carbon Financing and Global Environmental Facility (GEF) ............................. 73
A. Carbon Financing ................................................................................................... 73
B. Global Environmental Facility (GEF) ..................................................................... 73
List of Tables Table 1: Natural Gas Consumption by Sector in FY10 ...............................................................5
Table 2: Unaccounted-for Gas (UFG) in FY11 ..........................................................................6
Table 3: Project Cost and Financing Summary ........................................................................ 13
Table 4 Training Plan for Gas Training Center ....................................................................... 30
Table 5: Gas Prices in Pakistan, 2012 ..................................................................................... 33
Table 6: Disbursement Withdrawal Categories ........................................................................ 39
Table 7: Procurement Plan (abbreviated; 1st tranche)*)........................................................... 42
Table 8: Procurement Prior Review Thresholds ....................................................................... 43
Table 9: Procurement Actions ................................................................................................. 43
Table 10: Summary of Procurement Packages ......................................................................... 44
Table 11: Economic Benefits for Underground Replacement and Rectification ......................... 55
Table 12: Economic Benefits for Overhead Leak Survey and Rectification................................ 55
v
Table 13: Economic Benefits for Pressure Management ........................................................... 57
Table 14: Economic Benefits for Theft Reduction (Metering and Surveillance) ......................... 58
Table 15: Economic Benefits for Entire Project ....................................................................... 59
Table 16: Financial Analysis of Underground Replacement and Rectification .......................... 60
Table 17: Financial Analysis of Overhead Leak Survey and Rectification ................................. 60
Table 18: Financial Analysis of Pressure Management ............................................................ 60
Table 19: Financial Analysis of Metering and Surveillance ...................................................... 61
Table 20: Financial Analysis of Entire Project......................................................................... 61
Table 21: Key Financial Ratios 2006-2010 .............................................................................. 63
Table 22: Key Cash Flows 2006-2010 ..................................................................................... 64
Table 23: Capital Expenditure Breakdown 2006-2010 ............................................................. 67
Table 24: Key Assumptions for Financial Forecasts 2011-2020 ............................................... 70
Table 25: Key Financial Ratios 2011-2020 .............................................................................. 71
Table 26: Key Cash Flows 2011-2020 ..................................................................................... 72
List of Figures
Figure 1: Primary Energy Supply (2001-2010) ..........................................................................2
Figure 2: Energy Consumption by Sector (2001-2010) ...............................................................2
Figure 3: Gas Supply and Demand Gap (2010-2025).................................................................3
Figure 4: Natural Gas Consumption by Sector 2001-2010 .........................................................4
Figure 5: SSGC Project Implementation Organization Chart ................................................... 34
Figure 6: SSGC Department Heads Reporting to the PMO ...................................................... 35
Figure 7: Higher-cost imported gas to enter mix after 2015 ..................................................... 68
Figure 8: Gas tariff to double by 2015, triple by 2020 .............................................................. 68
Figure 9: UFG percentage with the Project ............................................................................. 69
Figure 10: UFG volumes with the Project................................................................................ 69
Map IBRD 38212
vi
vii
PAD DATA SHEET
Pakistan
Natural Gas Efficiency Project
PROJECT APPRAISAL DOCUMENT
South Asia Region
Sustainable Development Department
Date: April 2, 2012
Country Director: Rachid Benmessaoud
Sector Director: John Henry Stein
Sector Manager: Jyoti Shukla
Team Leader: Bjorn Hamso
Project ID: P120589
Lending Instrument: Specific
Investment Loan
Sector(s): Oil & Gas
Theme(s): Other environment and resources
management
EA Category: B
Project Financing Data:
Proposed terms:
● Loan ● Credit ○ Grant ○ Guarantee ○ Other:
IBRD Flexible Loan with fixed spread, 23 years of maturity including a 7-year grace period,
and disbursement-linked level principal repayments. IDA Credit Blend terms, i.e. 1.25 percent
interest charge, 0.75 percent service charge, a maximum commitment charge of 0.5 percent, and
25 years of maturity including a 5-year grace period.
Source Total Amount (US$M)
Total Project Cost:
Co-financing:
Borrower:
Total Bank Financing:
IBRD
IDA
New
Recommitted
272
72
100
100
Borrower: Islamic Republic of Pakistan
Responsible Agency: Sui Southern Gas Company Ltd. (SSGC)
viii
Contact Person in SSGC: Mr. Syed Hassan Nawab, Dy. Managing Director
Telephone No.: (92)-21-99021000
Fax No.: (92)-21-99231698
Email: [email protected]
Estimated Disbursements (Bank FY/US$ m)
FY 2012 2013 2014 2015 2016 2017
Annual - 24 46 46 42 42
Cumulative - 24 70 116 158 200
Project Implementation Period: July 2012 – June 2017
Expected effectiveness date: July 1, 2012
Expected closing date: December 31, 2017
Does the project depart from the CAS in content or other
significant respects?
○ Yes ● No
If yes, please explain:
Does the project require any exceptions from Bank policies?
Have these been approved / endorsed (as appropriate by Bank
management?
Is approval for any policy exception sought from the Board?
○ Yes ● No
○ Yes ○ No
○ Yes ○ No
Does the project meet the Regional criteria for readiness for
implementation?
● Yes ○ No
Project Development objective
The development objective of the Project is to enhance the supply of natural gas in Pakistan by
reducing the physical and commercial losses of gas in the pipeline system.
ix
Project description
Component 1: UFG Reduction: This component will finance Goods and Works that will help
reduce unaccounted-for gas (UFG) in the gas distribution system, including system
segmentation and pressure management, pipe replacement and repair, cathodic protection, and
advanced metering systems.
Component 2: Appliance Efficiency Pilot Project: This component will finance modern, energy-
efficient gas appliances and/or retrofit appliance components for residential consumers in a pilot
project.
Component 3: Technical Assistance: This component will finance assistance to the
implementation agency for improving its organizational capacity and customer orientation and
for managing the Project.
Safeguard policies triggered?
Environmental Assessment (OP/BP 4.01)
Natural Habitats (OP/BP 4.04)
Forests (OP/BP 4.36)
Pest Management (OP 4.09)
Physical Cultural Resources (OP/BP 4.11)
Indigenous Peoples (OP/BP 4.10)
Involuntary Resettlement (OP/BP 4.12)
Safety of Dams (OP/BP 4.37)
Projects on International Waters (OP/BP 7.50)
Projects in Disputed Areas (OP/BP 7.60)
● Yes ○ No
○ Yes ● No
○ Yes ● No
○ Yes ● No
○ Yes ● No
○ Yes ● No
○ Yes ● No
○ Yes ● No
○ Yes ● No
○ Yes ● No
Conditions and Legal Covenants:
Agreement Reference Description of
Condition/Covenant
Date Due
Loan Agreement, Section 5.01 Execution of Subsidiary Loan
Agreement, Effectiveness of
Financing Agreement
Effectiveness
Financing Agreement,
Section 5.01
Execution of Subsidiary
Financing Agreement,
Effectiveness of Loan
Agreement
Effectiveness
Project Agreement, Schedule,
Section I.A.2
Maintenance of competent
personnel in adequate
numbers
Throughout Project
implementation
Project Agreement, Schedule,
Section I.C.1 (a)
Compliance with
Environmental and Social
Management Framework
Throughout Project
implementation
x
Project Agreement, Schedule,
Section II.C.4 (a)
Maintenance of current ratio
of 1:1
Throughout Project
implementation
Project Agreement, Schedule,
Section II.C.5 (b)
Maintenance of debt service
coverage ratio (actual cash
flow) of 1.0/1.0/1.1/1.2/1.2
for FY13 through FY17,
respectively
Throughout Project
implementation
Project Agreement, Schedule,
Section I.A.3
Appointment of Independent
Monitoring and Evaluation
Consultant; Maintenance of
said Consultant
Within 3 months of
Effectiveness; Throughout
Project implementation
Loan Agreement, Schedule 2,
Section II.A / Project
Agreement, Schedule,
Section II.B
Carrying out of early-term
Project review
Within 18 months of
Effectiveness
Loan Agreement, Schedule 2,
Section II.A / Project
Agreement, Schedule,
Section II.B
Carrying out of midterm
Project review
Within 30 months of
Effectiveness
1
I. Strategic Context
A. Country Context
1. Pakistan has important strategic endowments and development potential. The country
is located at the crossroads of South Asia, Central Asia, China and the Middle East and is
thus at the fulcrum of a regional market with a large population, significant and diverse
resources, and an untapped potential for trade. The increasing proportion of Pakistan‘s
working-age population provides the country with a potential demographic dividend but also
with the critical challenge to provide adequate services and increase employment. Poverty
levels have declined from 34.5 percent in 2001/2002 to an estimated 17.2 percent in
2007/2008, although over the past two years there have been signs that poverty levels may be
increasing again. An important recent development is the devolution of greater decision-
making authority in the provision of services to the provinces. Furthermore, the country has
one of the most extensive water/irrigation networks in the world. The water/ irrigation assets
have underpinned food security in one of the most arid countries in the world and provide the
basis for a rapid potential growth in agricultural income and employment. Similarly, these
water networks offer significant potential for increasing power supply.
2. Pakistan faces significant economic, governance and security challenges to achieve
durable development outcomes. The persistence of conflict in the border areas and security
challenges throughout the country is a reality that affects all aspects of life in Pakistan and
impedes development.
3. As Pakistan recovered from the 2008 global crisis, its gross domestic product (GDP)
grew 3.8 percent in Fiscal Year 2009/2010 (FY09/10). The 2010 floods, exacerbated by a
hike in food and fuel prices, caused economic growth to slow down to 2.4 percent in
FY10/11. Growth is forecast to rise somewhat to the 3.5 percent range in FY11/12. Inflation,
at 13.7 percent in FY10/11 and forecast at 12 percent for FY11/12, is set to continue its four-
year run in double digits. Fiscal performance has continued to exert a drag on the economy;
as the fiscal deficit was 6.3 percent of GDP in FY10/11 and may be close to or above 6.0
percent of GDP in FY11/12 as well. The rate at which exports and remittances grow affects
prospects for the current account, which showed a surplus of 0.2 percent of GDP in FY10/11
but which will likely become a deficit of 1-1.5 percent in the current year, as per
government‘s forecasts. Currency reserves have been in the range of about 4 months of
imports for the past year but may decline to a certain extent towards the end of this year.
4. Availability of electricity and other energy is considered to be a main constraint to
economic activity in Pakistan. The power sector faces a large gap between supply and
demand, and load shedding is prevalent. Approximately, 86 percent of Pakistan‘s population
has access to electricity1, but the quality and reliability of supply is poor. Together with
delayed hydropower development (despite large water networks), shortage of domestically
produced natural gas to fuel Pakistan‘s thermal power plants is among the main causes of the
unfolding energy crisis. The latest Poverty Reduction Strategy Paper (PRSP-II) places high
1 Source: Pakistan Social and Living Standards Measurement Survey 2006-07. The comparable access rate as per World
Development Indicators is 62%.
2
priority on the development of the energy sector as a prerequisite to sustainable economic
growth.
B. Sectoral and Institutional Context
5. The energy sector in Pakistan is in a crisis for a number of reasons. High economic
growth in 2002-2006 caused a surge in energy demand that planners had not fully
anticipated, most notably in the
industry (Figure 2)2. Fragmented
governing structures, weak
governance and inadequate
decision-making process have
impeded timely development of
large domestic energy resources
such as hydropower and renewable
energy. Large coal reserves were
discovered in 1991 but are not in
use. Many years of inadequate
financial incentives for domestic
production of natural gas have
brought production near a tipping point into decline and have left gas resources untapped
while at the same time the gas network has been expanded to reach new customers. Reduced
allocation of gas to power generation has caused the power sector to import oil products as
fuel, thereby increasing the cost of electricity.
6. Weak sector governance is
reflected in high electricity costs
for reasons that include suboptimal
power investment choices and poor
cost control. Electricity tariffs have
been raised by the government and
have almost doubled in the 2008-
10 period after several years of no
adjustment, but they are still
trailing full costs due to a growing
dependence on oil for power
generation. A governmental ―tariff
differential subsidy‖ has been established to compensate the electricity distribution
companies for the inadequate consumer tariffs, but it was often neither paid on time nor in
full, thereby contributing to ―circular debt‖ where end users do not fully pay their electricity
service providers, thus choking the financial flows to transmission companies, power
producers, and fuel suppliers. Sector performance is further damaged by large cross subsidies
2 Sources for Figures 1, 2 and 4: Pakistan Energy Yearbook, 2006 and 2010 editions, Hydrocarbon Development Institute of
Pakistan
Figure 2: Energy Consumption by Sector (2001-2010)
Figure 1: Primary Energy Supply (2001-2010)
3
in the natural gas sub-sector to households and the fertilizer industry, distorting consumption
and discouraging energy efficiency and conservation measures while not being particularly
efficient in supporting the poorest parts of the population (see tariff overview in Annex 2,
Table 5). By international standards, and compared to oil products, natural gas is
inexpensive in Pakistan, which exacerbates the problem of its inefficient use. It seems
unlikely that Pakistan can return to economic growth rates of 5-7 percent on a sustainable
basis unless the energy sector performance is drastically improved.
7. Natural gas is a vital source of energy supply in Pakistan, as shown in Figure 13
above. In FY10, Pakistan consumed about 1.5 trillion cubic feet (tcf) of gas, all domestically
produced and representing 49 percent of the country‘s total primary energy supply. However,
many large gas fields are in decline, and at current production forecasts, the country is at or
near its peak production. Proven remaining reserves were in 2010 estimated at 27.6 tcf.
Domestic gas exploration and production is undertaken by state-owned firms as well as by
the private sector, including both Pakistani and international firms. It is a mature industry
that has been operating since the 1950s. At the moment, Pakistan is not yet engaged in
international trade of natural gas; however, the Government and private sector stakeholders
are planning the importation of liquefied natural gas (LNG) as well as pipeline gas from
neighboring countries.
8. Natural gas is transmitted and distributed by two companies, namely Sui Southern
Gas Company Ltd. (SSGC), the implementing agency and sub-borrower in this Project, with
a network covering Karachi, Interior Sindh and limited distribution in Balochistan; and Sui
Northern Gas Pipelines Ltd. (SNGPL) with most of its customer base in Punjab with
distribution stretching into Khyber-Pakhtunkhwa. Both companies are listed on the domestic
stock exchanges. As of June 30, 2011, SSGC had approximately 53 percent direct state
ownership while government-controlled financial institutions and public sector companies
held about 19 percent share. The Government held a minority share of 31.68 percent in
SNGPL (2011) with government-controlled entities holding an additional 24.33 percent.
9. Pakistan‘s main challenges in the gas sector are related to
a. Scarcity of gas
b. Inadequate allocation of gas
c. Inefficient end-use of gas
d. High levels of unaccounted-for
gas (UFG).
10. Scarcity of gas. The sector is facing
a supply gap of about 0.5 tcf forecasted for
2015 that is set to increase to almost 2 tcf
by 2025. On the other hand, Pakistan has
unproven – but probable – reserves of
unconventional gas mostly locked in so-
3 Figure 1 shows primary electricity in the form of hydro, nuclear, and imported power. In FY10, 29 percent of the gas supply
and 44 percent of the oil supply was used as fuel in power generation.
Figure 3: Gas Supply and Demand Gap (2010-2025)
4
called ―tight‖ reservoirs, which are more costly to extract due to the nature of these
reservoirs. Should these reservoirs be tapped, they could possibly cause a doubling of the
domestic gas reserves, extend the plateau production level, and cause a slower production
decline. Figure 3 shows a forecast for domestically produced and imported natural gas and a
demand gap for 2010-20254. This does not include unconventional gas in the form of so-
called tight gas and shale gas. Through a new regulation in 2011, the Government has
provided financial incentives to gas production companies to allow for economic recovery of
the urgently needed unconventional gas; however, it is unclear whether this would be
sufficient to trigger investment on a large scale.
11. Natural gas scarcity has reached crisis proportions because (i) the production has not
kept pace with the expansion of the gas network and demand in general; (ii) the gas pricing
regime has not been used effectively as an instrument of demand management; and (iii)
prices of substitute fuels (mainly petroleum-based products) have risen faster than that of gas.
Over the six years to FY10, gas consumption grew by an annual average of 9 percent in the
industry, 5 percent in the residential sector, and more than 30 percent in the transport sector
(compressed natural gas – CNG). Gas supplies to the power sector declined by 6 percent
annually over the same period (see Figure 4). Expanding access to gas for the population and
businesses has been a political priority, as evidenced by budget transfers from provincial
government in support of the gas network expansion. Furthermore, the network expansion
has allowed the gas companies to deploy more capital, earning a financial return on expanded
net fixed assets. Further expansion of the gas distribution grid is unsustainable unless large,
additional gas resources are made available by imports and enhanced domestic production.
12. Inadequate allocation of gas. Pakistan‘s ―Natural Gas Allocation and Management
Policy‖ of 2005 establishes a load management policy for gas at times of gas scarcity, which
unfortunately is now a normal situation. The policy establishes the following merit order of
gas dispatch: 1) domestic and commercial sectors; 2) fertilizer sector and industrial process
gas use; 3) independent power plants and WAPDA/KESC power plants with firm gas
purchase agreements; 4) general industry and CNG sectors; 5) WAPDA/KESC power plants
without firm gas purchase agreements and captive power5; and 6) the cement sector.
13. At this time of severe
shortage of electricity due to
inadequate fuel supply to the power
stations, the above merit order
would benefit from further review.
For many years, major state-owned
thermal power plants have operated
without binding gas purchase
agreements and therefore have been
given a low supply priority, causing
less gas to be supplied as fuel for
power generation. This is in
4 Estimates in Figure 3 are provided to OGRA‘s report ―State of the Regulated Petroleum Industry 2008-09‖ by SNGPL, SSGC,
and MPNR (Directorate General Petroleum Concessions). 5 ―Captive power‖ is power generation undertaken by industrial consumers for their internal power use.
Figure 4: Natural Gas Consumption by Sector 2001-2010
5
conflict with the intentions of the allocation policy, and the Government is working to rectify
the contractual situation. The inadequacy in implementing the gas allocation policy has been
a major cause of the retraction of gas from power plants over the last several years while
supply-restricted electricity demand increased by 4 percent annually. Expensive imported
petroleum products filled part of the fuel supply-demand gap at the thermal power plants, but
electricity load shedding has been severe. In FY10, gas was used as shown in Table 1. The
winter of 2011-12 has also witnessed severe gas load-shedding which led to the closure of
industry and CNG stations and very low pressure for the household sector. As a consequence,
rioting broke out in many cities throughout Pakistan.
Table 1: Natural Gas Consumption by Sector in FY106
Sector SSGC
customers’ gas
consumption
bcf FY10
Pakistan gas
consumption
bcf FY10
Percent share
of consumption
(%)
FY10
Average annual
growth (%)
FY05-10
Residential 74 219 17 5
Commercial 10 37 3 6
General industry 123 320 25 9
Steel/cement/fertilizer 43 235 18 2
Power 115 367 29 -6
Transport (CNG) 24 99 8 32
Total 389 1,278* 100 2
* 298 bcf of the gas was consumed by power and fertilizer plants that received gas directly from gas producers. All other
gas was distributed by SNGPL and SSGC. For SSGC, sales to the steel industry are included in ―general industry‖.
14. Inefficient end use of gas. In the residential sector, inefficient appliances are
estimated to cause gas waste on the magnitude of 30-40 billion cubic feet (bcf) per year, and
even higher wastes are estimated in the industrial sector. The household gas appliance
industry in Pakistan generally produces low-efficiency appliances that do not meet the
Pakistan Standard of 2008, which dictates minimum thermal efficiency requirements for a
number of gas appliances. In 2010-11, the Pakistani authorities (Pakistan Standards &
Quality Control Authority – PSQCA) set up a laboratory for testing of thermal efficiency of
gas appliances, a precondition for adequate certification of appliance manufacturers.
Improvements are necessary in appliance certification, energy efficiency labeling, and
enforcement of standards. Furthermore, residential gas consumers have limited incentive to
shift to more efficient appliances because of low gas prices by international standards.
Average end-user tariff for gas as of January 1, 2012, was 360 PKR/mmbtu (4.00
US$/mmbtu)], and the average tariff to households was half that level due to cross-subsidies
from rates charged to industrial consumers and power plants (see estimated cross subsidies in
Annex 2, Table 5). Gas for feedstock to fertilizer plants was sold at one third of the average
end-user tariff.
6 Source: Pakistan Energy Yearbook 2010
6
15. High levels of unaccounted-for gas (UFG). UFG is the difference between the total
volume of metered gas received by a gas utility during a time period and the volume of gas
metered as having been delivered to its consumers, excluding the utility‘s self consumption.
In Pakistan UFG was recorded at 10.64 percent in FY11; see Table 2 below. UFG is
therefore a major contributor to the gas supply crisis (how does it compare to the supply-
demand gap?). UFG is typically 1-2 percent in member countries of the Organization for
Economic Cooperation and Development (OECD). The dollar equivalent of Pakistan‘s UFG
that fiscal year was US$ 323 million in terms of gas purchased and a petroleum substitution
value three times higher if the volume of lost gas would have been channeled to power
generation.
Table 2: Unaccounted-for Gas (UFG) in FY117
Gas Distribution Company Volume of gas
purchased
(billion cubic feet)
Volume of UFG
(billion cubic feet)
Percentage of
UFG
Sui Southern Gas Company Ltd. 395.8 37.4 9.43 %
Sui Northern Gas Pipelines Ltd. 656.5 74.6 11.36 %
Total 1052.3 112.0 10.64 %
16. There are a number of factors that contribute to the UFG calculation. Most of the
UFG comes from dilapidated/deteriorating pipelines. Other sources are leaking joints in
service connections; gas theft in the form of tampered-with meters, illegal connections, and
possible collusion with utility personnel; old, malfunctioning metering equipment; and gas
leakage due to higher than required pressure. Although pilot projects and various tests have
been undertaken, the source of UFG can only be well categorized and located by segmenting
the pipeline network, meaning that small parts of it are isolated in a way that allows the gas
company to compare gas volumes going into the segment with gas volumes used (invoiced)
in the segment. Such segmentation has only been made in a limited way so far, but is an
essential task in the proposed Project.
17. UFG has largely remained on the same percentage level over the last decade (with an
upswing in FY10 and FY11 when UFG increased by about one percentage point each year),
implying that UFG has grown at the pace of the gas market. The following reasons are
considered central to this unsatisfactory development: (a) the central and provincial
governments have mandated that the two gas companies expand the gas networks to new
towns and villages and industrial areas. This has drawn company resources and focus away
from operation and maintenance of the existing network; (b) the gas companies‘ financial
returns are based on a (commonly used) compensation model where consumer tariffs are
calculated to provide a specific return on net fixed assets, which would favour investment in
system expansion rather than maintenance and up-keep of the existing system; (c) there has
been no substantive financial punishment (through regulation) on the gas companies for high
UFG until recently; (d) craftsmanship and quality control in operations have been lacking
(e.g. high prevalence of new service connections that are leaking from the outset); (e) gas
theft based on collusion between users and utility staff cannot be excluded as a possible
7 Source: OGRA and gas companies
7
factor; (f) rooting out gas theft could have been a more efficient operation if legislation had
provided the gas companies with effective tools to prosecute gas theft. The Criminal Law
(Amendment) Act 2011 has been promulgated whereby theft and tampering with gas meters
is liable up to 6 months‘ imprisonment and/or PKR 100,000 fine for domestic consumers and
up to 10 years imprisonment and/or fine of PKR 5 million for industrial & commercial
consumers.
18. The Government has been aware of the sector issues described above, but has not
been able to solve them, partially due to low political will. More recently the severity of the
combined gas and power shortages has inspired a more focused effort, part of which is
addressed in the ―Vision Statement for Accelerated Development of Pakistan‘s Power Sector
for Sustained Economic Growth‖, as presented by the Prime Minister in May 2010. This
―Vision 2020‖ contains plans for increased energy production from various domestic sources
(coal, hydro, gas) and imports; increased allocation of gas to the power sector; increased
energy conservation; and an increased role for the private sector. In the natural gas sector, the
Government has put in place a financial and regulatory structure that would better support the
development of gas in ―tight‖ reservoirs, from which gas production is costlier. The impact is
still unclear. The Government has been engaged in developing projects for importation of
LNG and piped gas from neighboring countries. However, the financial burden placed by the
energy sector on the Government‘s finances in particular and the economy in general is
hindering the Government from moving resolutely towards implementation of its adopted
strategy. Government efforts to improve the downstream gas sector are described below.
19. The Oil and Gas Regulatory Agency (OGRA) has put in place a regulatory regime
that punishes the gas companies financially for excessive UFG. Although the mechanism has
operated since 2002, it was only in 2009 that the financial penalties became severe. The
specific mechanism is to annually adjust downward the amount of UFG that is allowed in the
cost base for establishing consumer tariffs. Any UFG above the threshold volume must be
paid out of company profits8. This system reduced the FY09 pre-tax profit of SNGPL by
PKR 4601 million (US$ 58 million) and of SSGC by PKR 2,707 million (US$ 35 million),
thereby reducing the companies‘ return on assets dramatically. In September 2010, OGRA
decided to retroactively increase the gas companies‘ allowable UFG for FY10 from about 5
percent to 7 percent. With that change, the UFG penalty reduced SSGC‘s pre-tax income by
PKR 934 million (US$ 11 million). SSGC had claimed that lifting the allowable UFG level
was necessary for assuring company finances that could support a 5-year UFG reduction
program9. OGRA had planned to move back to the original trajectory and only allow about
4.5 percent UFG in FY11; however, the gas companies have taken OGRA to court on such
decision, claiming that there are no changes in circumstances that justify a lower allowable
UFG in FY11 than in FY10.
8 In FY2003 OGRA‘s regulation allowed the actual UFG of 7.57% and 8.19% for SSGC and SNGPL, respectively, to be
considered as operating costs. In the following years, the allowable UFG was gradually reduced until it in FY2010 reached 4.5%
(lower target) and 5.5% (upper target). UFG up to the lower target was accepted as operating costs and half of the UFG between
lower and upper target was likewise accepted. All other UFG was disallowed and thus became a cost element that reduced the
profitability of the companies. OGRA decided in September 2010 to change the gas companies‘ allowable UFG for FY2010 to
7%, reasoning that such decision was necessary, in the case of SSGC ―to remain a viable commercial entity and the same is in the
ultimate interest of the consumers‖. 9 OGRA‘s original benchmark for FY2010 would have caused a reduction in SSGC‘s pre-tax income by US$ 33 million.
8
20. The heightened regulatory pressure places UFG reduction high on SSGC‘s
management agenda. UFG reduction will not only improve the company‘s financial
position; it will also be a vehicle for improved customer service. From the national
perspective, reducing UFG may be the quickest means of adding usable gas to the network10
.
21. Improving governance, accountability and organizational effectiveness. SSGC‘s
management has a range of plans to improve governance, accountability, and organizational
effectiveness that would support a shift to a more commercially oriented, customer-focused
business culture. SSGC has traditionally dealt with the UFG problem at the company level.
With the renewed focus on UFG reduction, the company is re-organizing to implement its
UFG reduction effort. The company is segmenting the network into small operating units
(SOUs), typically serving 20,000 customers and with an executive in charge of all functions
of each SOU, including UFG reduction, measurement, system maintenance, cathodic
protection, billing customer service, etc. There will be clear targets and accountability for
UFG reduction. Meters will be installed under the Project to allow data collection and
reporting for each SOU. This will be complemented by changes in staff incentives, with
weight given to UFG reduction in performance scorecards. The planned organizational
changes and investments in management information systems will enhance accountability
and improve oversight of operations and customer behavior. Continuation of OGRA penalty
will help focus on governance issues associated with UFG. Segmentation of SSGC‘s
network, installation of pressure management system and new administrative tools, will
significantly enhance the management‘s ability to understand its UFG problem and to pursue
cases of gas theft. This will also allow government and regulator better insight into SSGC‘s
UFG problem. SSGC will also seek involvement of civil society to eliminate UFG in the
renovated segments. The information and monthly monitoring data will be put on SSGC‘s
website for disclosure to public together with the name of the responsible executives in
charge of respective SOUs.
22. SSGC has a new focus on improving operational quality and ensuring that standards
from OGRA are met and relevant guidelines are followed, with revamped technical audits
being used as a tool in the improvement process. The company plans to implement a quality
management system based on the ISO 9001:2008. Technical and management training will
be boosted through technical assistance and increased utilization of the company‘s Gas
Training Institute. The company has initiated online and remote monitoring of industrial and
commercial gas meters as part of the effort to reduce gas theft. SSGC will acquire business
intelligence software that will help extract essential UFG-related information from its
business data warehouse created by the company‘s ―Enterprise Resource Planning and
Customer Care & Billing System‖. Customer satisfaction surveys will be undertaken, in part
to gauge impacts where the pipeline system has been rehabilitated under the Project. SSGC
supported the new Criminal Law (Amendment) Act enacted in late 2011, which, among
other, empowers the gas companies to seek effective prosecution of gas theft. The above
actions, together with the investments facilitated by the Project, would help the gas company
to improve its financial position and customer service while at the same time better managing
Pakistan‘s scarce gas supplies, of special importance in an environment of rising demand and
constrained finances.
10
In a global perspective, reducing atmospheric emissions of natural gas is a high climate change priority.
9
23. Against this backdrop, the Government has requested World Bank support for a
project to address the UFG problem. The Government believes Bank support is suitable
because: (a) the gas companies have over the last decade been unable to solve the problem on
their own; (b) significant financial resources are necessary; (c) the UFG problem is
increasingly intolerable in view of the growing gas and power shortages; (d) an UFG
reduction project would give significant results over the medium term (3-5 years). The
Government expects the Project to support governance in the sector not the least because of
the Project‘s approach – segmenting the gas network in the Project area into about 400 units
that allow the UFG situation and the causes thereof become more transparent. The Project is
also seen as a catalyst for organizational improvement in terms of capacities and
accountability.
C. Higher Level Objectives to Which the Project Contributes
24. The Government‘s main goal in the energy sector is to increase the affordability and
availability of energy, with a priority focus on electricity services and an associated focus on
reducing dependence on costly oil imports. The Project is seen as a remedy to some of the
problems of the sector by cost-effectively making more natural gas available for economic
use, including for thermal power plants, while at the same time reducing emissions of
greenhouse gases. Project interventions are geared towards efficiency and service
improvements in the distribution of natural gas, which contribute to the overall enhancement
of the operational efficiency of the energy sector and consequently the availability and
affordability of energy in Pakistan.
25. The Project supports a key pillar in the Country Partnership Strategy (CPS) for FY10-
14 on improving infrastructure to support growth. The CPS and its progress report, which
have been endorsed by the Government of Pakistan (GOP), lists the Project in its‘ Planned
Lending Program.
II. Project Development Objectives (PDO)
A. PDO
26. The development objective of the Project is to enhance the supply of natural gas in
Pakistan by reducing the physical and commercial losses of gas in the pipeline system.
B. Project Beneficiaries
27. Project beneficiaries will be mainly consumers of natural gas in Pakistan, who would
have more gas available; see less UFG financed in the tariff; and would experience better
customer service since Project interventions will improve the gas company's ability to
maintain adequate gas pressure. The Project will also help curtail Pakistan‘s emission of
greenhouse gases through the avoidance of direct methane gas leakages into the atmosphere.
10
28. The reduction in UFG would mean that more gas is potentially available for power
generation fuel and could displace expensive petroleum products being used for the same
purpose.
29. UFG reduction has a positive effect also on the gas company SSGC, contributing to
its financial stability.
C. PDO-level Results Indicators
30. The primary PDO-level results indicator will be the reduction in the amount of
unaccounted-for gas (UFG) as a result of Project interventions. A secondary PDO indicator
will be the length of pipeline provided with cathodic protection, which is a proxy indicator
for the difficult-to-measure prevention of further UFG increase that would occur without
such cathodic protection. Consumer satisfaction will be gauged based on survey data from
areas subject to Project-financed network improvements.
III. Project Description
A. Project Components
The Project is divided into the following components (estimated IBRD/IDA financing in
parenthesis):
31. Component 1: UFG Reduction (US$ 190 million). This component will finance the
following sub-components:
a. Segmentation and pressure management
b. Pipeline rehabilitation
i. Overhead leak detection
ii. Pipeline replacement or rectification
c. Cathodic protection
i. Pipe recoating and road restoration
ii. Installation of cathodic protection equipment
d. Advanced metering systems
32. The UFG reduction components, when fully implemented, are expected to reduce
UFG by 22.2 bcf per year as compared to SSGC‘s overall UFG level of 37 bcf in 2011. The
UFG level in 2018 is estimated to about 28 bcf with the Project (and about 50 bcf without the
Project). That brings the UFG percentage down from current 9 percent to 5 percent with
base-case assumptions (see Annex 7). Besides the direct UFG reductions, the cathodic
protection system financed under the Project will substantially prevent the UFG situation in
the un-rehabilitated parts of the pipeline network from growing worse. While the above
numbers are considered conservative estimates for a well-executed Project, they also indicate
the need for sustained investment efforts also after the implementation of the Project. The
Project provides SSGC with tools to better control future UFG levels, notably in the context
11
of SSGC‘s planned organizational changes to enhance accountability and the company‘s
investments in management information systems that improve oversight of operations and
customer behavior (as referred to in Section I B above).
33. Segmentation and pressure management (US$ 18 million) are at the core of the
Project since effectively reducing UFG requires the company to know where in the system
the UFG is most prevalent. This requires elaborate work of the gas company staff to ring-
fence smaller parts of the gas network (―segments‖) by installing bulk meters at inlet points
and by making sure that customers are coded to the correct segment. Input-output gas
measurements (the difference is UFG) will be complemented by pressure testing and leakage
surveys in order to better understand the UFG problem and to rank segments for
rehabilitation work and focus of theft investigations. About 400 bulk meters will be procured
under the Project for placement at town border stations and elsewhere in the grid. In
conjunction with segmentation, automatic pressure management and monitoring systems will
be procured. These will provide better adaptation of pressure levels in the pipelines to meet
the hourly demand. Their main function will be before segments are rehabilitated and in parts
of the network that will not be prioritized for rehabilitation. Since higher leakage occurs with
higher pressures, the pressure management systems contribute to reducing UFG.
34. Pipeline rehabilitation (US$ 117 million) involves replacement of irreparable leaking
pipes in addition to rectification of existing, less damaged ones. It is estimated that 5,750 km
of pipelines would be replaced and about 18,700 km would undergo some form of
rectification/leak repairs under the Project. The actual condition of a pipe is not fully known
until it is dug up and/or examined from the surface, hence, the actual lengths of
replaced/rectified pipes will shift during Project implementation as SSGC conducts
additional field surveys and segmentation work to determine the condition and optimal
course of action for the system. The Project will finance pipelines of varying types and
diameters, mostly polyethylene (PE) pipes, but in special cases steel pipes, together with the
required connections and fittings. The replacement of distribution network steel pipes with
non-corroding polyethylene pipes is a major shift for the company, and will be an important
factor in suppressing UFG in the future. Operational equipment will also be procured, such as
pipe fusion equipment, welding plants, electric generators, air compressors, de-watering
pumps, transport and specialized vehicles, leak survey equipment, testing laboratories, and
gas chromatography analyzers. Works such as trenching, backfilling, and road restoration is
set to be outsourced to contractors.
35. Cathodic protection (CP) (US$ 20 million) will reduce the rate of corrosion from
existing underground steel pipes, thus arresting the increase in leakages. This will be
achieved through installation of recoating material for approximately 450 km of pipes,
installation of power sources, battery back-up systems, magnesium anodes, and remote CP
monitoring systems.
36. Advanced metering systems (US$ 35 million) will replace old meters that are
inaccurate and prone to tampering. Surveillance equipment will also be procured to monitor
gas theft at metering stations. About 270 turbine meters will be procured for large industrial
customers and about 12,500 ultrasonic meters for industrial and commercial customers. Data
12
acquisition and monitoring systems as well as provers (for testing accuracy of meters) will
also be procured.
37. Component 2: Appliance Efficiency Pilot Project (US$ 5 million). The proposed pilot
will support the Government and the gas companies‘ energy conservation efforts. This
component will finance the deployment of high-efficiency gas appliances and/or the
retrofitting of components in consumers‘ existing appliances to enhance thermal efficiency.
Focus will be on cook stoves and water heaters. The Project will finance goods and services
for the pilot as well as consulting services to assist in the detailed design and execution of the
pilot project. It is expected to be undertaken in the context of related initiatives by the
Government and gas companies, such as energy efficiency awareness campaigns, improved
appliances quality certifications, energy efficiency labeling, and manufacturing industry
education.
38. Component 3: Technical Assistance (US$ 5 million). Building on SSGC‘s heightened
focus on customer service and quality in operations, the project will finance technical audits,
training of trainers for the company‘s Gas Training Institute (and equipment for it) as well as
annual customer satisfaction surveys. The surveys will in part be used for gauging service
improvements in the rehabilitated network areas. Project implementation will be supported
by various consulting services: Owner‘s Engineer, Lender‘s Engineer (monitoring &
evaluation), and support for the consumer appliance efficiency pilot project. The main project
consultants will be contracted internationally and will assist also in technology transfer,
including in the field of trenchless pipe laying.
B. Project Financing
1. Lending Instrument
39. A Specific Investment Loan (SIL) from the International Bank for Reconstruction and
Development (IBRD) and a Credit from the International Development Association (IDA)
are proposed for this operation. The Loan and the Credit will be signed with the Government
of Pakistan. The funds will be on-lent to the implementing agency, SSGC. In addition to the
Loan Agreement and the Financing Agreement between IBRD/IDA and the Government of
Pakistan, a Project Agreement will be signed between IBRD/IDA and SSGC, the Project
Implementing Entity, in accordance with the terms of a subsidiary agreement to be signed
between the Government of Pakistan and SSGC.
2. Project Cost and Financing
40. The estimated cost of the Project is US$272 million, of which IBRD and IDA would
finance US$200 million with the remaining US$72 million financed by the sub-borrower,
SSGC (Table 3).
13
Table 3: Project Cost and Financing Summary
Project Components Project Cost IBRD and IDA
Financing
SSGC Financing
US$ US$ % US$ %
1. UFG Reduction 262 190 73 72 27
2. Appliance Efficiency Pilot Project 5 5 100 - -
3. Technical Assistance 5 5 100 - -
Total Baseline Costs 272 200 74 72 26
Contingencies (included in components) - - - - -
Total Project Cost/Financing Requirement 272 200 74 72 26
41. SSGC had applied for Global Environmental Facility (GEF) financing to scale up and
support its Appliance Efficiency Pilot Project. An amount of US$ 1.5 million was supported
by Pakistan‘s GEF National Steering Committee, as compared to the $5 million for which
SSGC applied. Size of possible support is being assessed by SSGC with respect to cost -
effectiveness. SSGC is also considering preparing a Clean Development Mechanism (CDM)
carbon finance operation (or CDM successor operation) which would support its leveraging
of additional resources for the UFG reduction program. No International Financial
Institutions other than the World Bank are currently engaged in financing the Pakistan
downstream gas sector. USAID has been participating in the NGEP missions and may
consider supporting activities in the gas sector that could complement the World Bank‘s
engagement.
IV. Implementation
A. Institutional and Implementation Arrangements
42. The Project will be implemented by SSGC in its distribution areas in Karachi, interior
Sindh, and in Balochistan. The Project will be implemented over a period of five (5) years
from late FY12 to FY17. Many of the sub-components would be broken into four of five
annual procurement tranches (or procured with staggered delivery) in order to tailor
procurement of goods to available implementation resources within and outside the company.
43. SSGC management has set up a Project Management Office (PMO) led by a Project
Manager at the Senior General Manager level. The PMO will report directly to a Project
Director, who reports to the Managing Director. The PMO will be responsible for overall
project implementation including planning activities, monitoring and evaluation, and
preparation of quarterly progress reports. The core team of the PMO will work with
dedicated personnel in the various line departments so that the Project is integrated into
SSGC‘s organization as much as possible while project management does not have
distracting operational duties. Furthermore, SSGC has established an UFG oversight
committee reporting to the company‘s Board.
14
44. The activities planned for the pipeline rehabilitation sub-component are a
continuation of ongoing work of SSGC. The Project represents a three to four times scale-up
of the pipeline replacement activity, but it nevertheless constitutes less than half the
company‘s capacity when taking into account the resources currently used for network
expansion. SSGC management plans to draw on these resources for the Project, but will
nevertheless seek to optimize resource use by some outsourcing. Works which involve
pipeline trenching, refilling, and road restoration will be outsourced to contractors as agreed
in the procurement plan.
45. SSGC has implemented a number of large government/company-financed gas
network expansion projects over the last decade and a major project financed by ADB in the
1990s, demonstrating good project management capabilities. This is in part confirmed by the
Bank‘s Project team‘s assessments of the company‘s procurement, financial, and
environmental management capacity. Furthermore, SSGC intends to utilize TA funds to fill
any resource gaps which may be required through the provision of an Owner‘s Engineer. The
Owner‘s Engineer will support the PMO with overall project implementation, including, inter
alia, procurement and contract management, cost control, progress monitoring, and quality
assurance/control. The consultant will also introduce the company to new technologies such
as trenchless pipe-laying, which may impact how the Project is executed. The environmental
and social impact work will be carried out by the company‘s Health, Safety, Environment
(HSE) Department in compliance with both Pakistan‘s and the Bank‘s safeguards policies
and standards, as laid out in the Environmental and Social Management Framework (ESMF)
prepared specifically for the Project. SSGC is intent on monitoring direct service impact of
the Project, including through undertaking customer satisfaction surveys11
.
46. The Project will also finance a Lender‘s Engineer, who will focus on results
monitoring, including gas accounting to measure UFG reduction, effectiveness of use of the
Project‘s financial resources, and progress monitoring , to assist with informing the
Government, the regulator, and the World Bank. Risks related to corporate-level
governance, fraud, and corruption will be monitored through Bank oversight of all Bank-
financed procurements, and thresholds will be set at appropriate levels that ensure adequate
Bank prior review of contracts, as well as through procurement post reviews and audits. The
Project will utilize standard Bank funds flow arrangements, including direct withdrawals,
letters of credit, and regular replenishment of two Designated Accounts for IBRD and IDA
funds, respectively, in the name of the sub-borrower, SSGC.
B. Results Monitoring and Evaluation
47. Monitoring and evaluation of results for the Project will revolve around the reduction
of UFG as a result of Project interventions. However, the operation will also support
governance and organizational capacity building, reflected in monitoring indicators for UFG
reporting to the regulatory agency (OGRA), for training, and the execution of customer
satisfaction surveys. There is generally no additional investment cost associated with results
monitoring and evaluation since the data is routinely collected by SSGC as part of their
11
To the extent the gas company has not been able to regularly maintain adequate gas pressure, the task will be easier when
leakages are removed and when automatic pressure management systems help balance supply and demand hour by hour.
15
regular operations. The measurement of UFG varies slightly for each component of the
Project and is described as follows:
e. Pipeline rehabilitation: This component is expected to constitute a large share of
the UFG reduction effort. Segments of the pipeline to be rehabilitated will be
isolated and meter readings taken at end-user level and from one or several bulk
meters upstream of the segment. The UFG is the difference between the
measurements for gas flowing into and out of the segment. After the
rehabilitation works are concluded, a second measurement will be taken at the
same control points under the same pressure conditions. The variance between the
two sample points will be the net reduction in UFG for that segment. When
physical UFG has been eliminated (or otherwise accounted for), remaining UFG
may be theft or measurement inaccuracies, which then will be addressed. The
process will be repeated for each segment of the pipeline being replaced or
rehabilitated, and the aggregate will be the total UFG reduction attributable to the
Project.
f. Cathodic protection: The objective of such a system is to halt corrosion, thereby
ensuring that the number and size of holes in the pipes do not further increase
over time. An improved cathodic protection system will cause UFG to level off
in a measurable way; however, various factors, such as imperfect knowledge of
the cathodic protection baseline, changes in theft, and new leakages from
consumer connections may skew the results calculation. Hence, a proxy
monitoring metric for this component will be the length of pipeline with new
cathodic protection.
g. Pressure management: UFG will be measured in the relevant segments before
and after automatic pressure management systems are installed.
h. Advanced metering: The UFG reduction impact from new industrial and
commercial sector meters will be verified in various ways; by doing before/after
measurement of flows; by the testing of individual meters in laboratories; and by
analyses of changes in consumption patterns and volumes after the installation of
new ―tamper-proof‖ meters.
48. Intermediate results indicators will be in the length in kilometres of pipelines
rehabilitated, the number of consumer meters and pressure management systems installed,
and the amount of segmented UFG reporting to the regulator undertaken.
C. Sustainability
49. As described in section I B above, SSGC‘s management is committed to customer
service and UFG reduction and to deploying new management structures, new management
information systems, and new quality control systems that will enhance accountability and
drive results in the fight against commercial and technical gas losses. Nevertheless, vigilance
16
by OGRA over time would be necessary so that financial penalties are upheld in case of
inadequate performance in UFG reduction12
.
50. The segmentation of SSGC‘s pipeline network to be undertaken by the Projec t
represents a major enhancement in the company‘s ability to find, categorize, and eliminate
UFG in the future. Furthermore, the shift from steel pipes to corrosion-free polyethylene
pipes will have a major, lasting impact on UFG levels.
51. The waste of a scarce, domestic energy source at a time of sustained energy crisis is a
major incentive for Pakistan to reduce UFG. Likewise are the massive emissions to the
atmosphere of methane gas, a highly potent greenhouse gas, from the leaking gas distribution
network. Pakistan has ratified the Kyoto Protocol to the United Nations Framework
Convention on Climate Change (UNFCCC).
V. Key Risks and Mitigation Measures
52. A detailed Operational Risk Assessment Framework (ORAF) has been prepared. The
overall implementation risk of the operation is considered to be Substantial. Details are
provided in Annex 4, and the following paragraphs summarize key risks that support this
evaluation.
53. Implementation Capacity. Although SSGC has managed large network expansion
projects in the last decade, it is more than 10 years since the company has managed an IFI-
financed project (ADB). SSGC is familiar with network segmentation, a core activity under
the Project, but has not undertaken it to a large extent in the past.
- Mitigation: resource gaps will be filled as necessary including the provision of an
Owner‘s Engineer to support SSGC. Project management will focus on the Project
without having additional operational duties. Procurement thresholds for prior/post
review will be set at levels that ensure adequate Bank procurement guidance and
overview.
54. Governance. SSGC has not been able to achieve OGRA benchmarks in recent years,
which has reduced the utility‘s profitability. Since this lack of compliance did not result in
substantive punitive actions except for the financial loss, the utility‘s management may not
be fully incentivized to follow commercial principles and standards. If SSGC‘s management
during Project implementation should neglect to undertake a systematic, comprehensive and
transparent segmentation of the distribution network to find out where the UFG is most
prevalent, or not use the investment funds where they can most effectively reduce UFG
(merit-order interventions), it would represent a governance issue.
- Mitigation: The financial penalty by OGRA for excessive UFG has enhanced SSGC‘s
focus on governance issues associated with UFG and will continue to do so provided
that the penalty is maintained on an adequate level (downward trend in allowable
12
See description of OGRA‘s penalty system for excessive UFG in Section 1 B, paragraph 19.
17
UFG). The Project will cause SSGC‘s network to be ―segmented‖, which together
with new administrative tools significantly enhances the management‘s ability to
understand its UFG problem and to pursue cases of gas theft, while at the same time
allowing government and regulator better insight into SSGC‘s UFG problem. Bank
involvement would help ensure that the Project is prepared and executed according to
best industry practices and standards.
55. Meeting higher-level Government sector objectives. As the Project makes more gas
available for consumption, its routing to the power sector for power plant fuel can best be
secured if gas network expansion is curtailed.
- Mitigation: This is a Government policy issue with no direct measures within the
Project. However, the Project will absorb two-thirds of SSGC‘s historical investment
capacity, and limitations to the company‘s debt service capability will constrain non-
UFG investments.
VI. Appraisal Summary
A. Economic and Financial Analysis
56. Economic analysis. The Bank‘s Project team is satisfied that the Project has adequate
economic return. The key economic benefit of the project is gas saved from becoming UFG
and made available for use in Pakistan‘s gas system. Yearly estimated reduction in UFG
volume was quantified using the respective economic lives of the investments in
underground pipeline replacement and rectification, overhead leak rectification, automated
pressure management and theft reduction, and then the entire project. The saved gas was
valued at the wellhead price of additional domestic gas (the most likely source from which
SSGC can make up for lost gas). This value gives a minimum bound of the economic benefit
(imported gas to come in the next decade is expected to be more than twice as expensive as
domestically produced gas). The costs included were the investment costs (plus incremental
Operations and Maintenance (O&M) cost where assets were not replacing existing assets).
For the economic (and financial) analyses, conservative assumptions were taken about the
per-unit UFG reduction from underground leakage, overhead leakage, pressure management
and gas theft.
57. The base case for the entire Project bears an economic internal rate of return (EIRR)
of 36 percent with a net present value (NPV) of US$ 281 million at 12 percent. For each
component, EIRR and NPV were calculated at a discount rate of 12 percent (as used by the
Government of Pakistan), and a sensitivity rate of 15 percent. The sensitivity of these
parameters was investigated for four scenarios for each component: 20 percent cost increase,
20 percent reduction in benefits, one-year delay in implementation, and all three of these
impacts simultaneously. The NPV for each component was found to be robust. Details for all
scenarios by Project component are available in Annex 7.
58. Financial analysis. The key financial benefit of the project for SSGC is the reduction
of OGRA‘s UFG penalty. Using SSGC‘s projection of UFG benchmarks to be set by OGRA
18
till 2020, the reduction in OGRA‘s UFG penalty was computed for the UFG reduction
benefit for each component and for the entire project. Therefore, financial benefits were only
counted for 10 years. The costs included were: the investment cost, O&M cost where
applicable, and the interest cost to be incurred by SSGC for this project. The EIRRs and
NPVs were calculated using the discount rates and sensitivities used in the economic
analysis. The financial returns were found to be reasonable in the base case for most
components and high for the metering and theft reduction component (since more accurate
meters would bring financial, though not economic, benefit to SSGC). With all impacts
simultaneously, financial internal rates of return (FIRRs) were reasonably robust for all
components. The NPVs are positive for all components under the base case and the
sensitivity scenarios. The base case for the entire Project bears a FIRR of 43 percent with an
NPV of US$ 252 million at 12 percent. Details for all scenarios by Project component are
available in Annex 7.
59. Corporate financial analysis. SSGC‘s core business is gas transmission and
distribution regulated by OGRA. It also runs unregulated businesses in meter manufacturing,
LPG production (JJVL), and LPG air-mix. Each year, OGRA guarantees SSGC a cost-
recovery tariff plus a 17 percent return on its Net Fixed Assets in Operation with deductions
for not meeting OGRA benchmarks on UFG, human resource cost, etc. The cost of gas is a
pass-through.
60. SSGC sold US$ 1.29 billion worth of natural gas in FY11—projected to reach US$
2.9 billion in 2015 with more expensive imported gas entering the system. SSGC‘s financial
position has deteriorated in recent years mainly due to the UFG problem, the historic fuel
price rise, and the steep rupee devaluation against the dollar. SSGC has suffered operating
loss every year since 2005. Profitability has deteriorated: from a net profit margin of 1.9
percent in FY05 to 0.2 percent in FY09. A net profit margin of 4.1 percent was posted in
FY11 on the back of relief from OGRA (on the UFG benchmark and on excluding non-
regulated income from the cost recovery tariff calculation).
61. Long-term capital expenditure (averaging some US$ 75 million per annum) was
financed by medium-term borrowing and was focused on network expansion with low
priority to UFG reduction. Total long-term debt rose from US$ 170 million at end-FY06 to
US$ 287 million at end-FY09 (due to the precipitous rise in oil prices, 30 percent rupee
devaluation and circular debt), then falling to US$ 163 million at end-FY11. SSGC‘s debt-to-
equity ratio deteriorated from about 45:55 in FY06 to about 65:35 in FY09—aggressive for a
gas utility—only returning to 45:55 in FY10 with the help of short-term borrowing. With
debt levels rising and operating income falling, debt service coverage also fell to 0.5 in FY10
but recovered to 1.4 in FY11 with relief from OGRA.
62. In this context, the UFG project 2013-2017 offers a critical path to financial recovery
for SSGC. The base-case financial projections show the company returning to financial
health, even with 90 percent project implementation success. Assuming financial re lief from
OGRA to last in FY11 and FY12, net profit margin is projected to fall to 0.4 percent in FY15
but reach 1.0 percent in 2018. By 2017, SSGC‘s debt service coverage can be 1.4 and debt -
to-equity can be a reasonable 57:43. Capital expenditure is to be focused much more on UFG
reduction (some two-thirds out of the average total capital expenditure of US$ 105 million).
19
Long-term debt would rise significantly in this period peaking in FY18 but then falling
gradually. With suitable pruning of non-UFG capital expenditure, SSGC‘s financial recovery
can be achieved with significantly lower long-term debt: with capital expenditure averaging
US$ 90 million per annum in 2013-2017, long-term debt can fall from the vicinity of PKR
37bn ($325 million) in 2017 (under the higher capital expenditure scenario) to a more
manageable PKR 33bn ($282 million)But rising repayment capacity (due to the UFG project
components‘ pay-back periods of 6-7 years) and the terms of World Bank support, would
help the company repay. Cash from operations is projected to rise as UFG reduction is
implemented.
63. These results were found to be generally robust to adverse changes in circular debt, a
collapse of the rupee, a spike in crude oil prices, and a delay in gas import projects—
variables which are beyond the company‘s control. UFG-related scenarios (slower
implementation of the UFG reduction project or lower-than-expected benefits from the UFG
reduction effort) produced deleterious effects on the company‘s finances. This highlights the
importance of successful implementation of the UFG reduction project which is a variable
the company can influence.
B. Technical
64. The Bank‘s Project team is satisfied that the Project has the right technical approach
to the UFG problem. Both SSGC and the Bank‘s team are aware that it is a challenge for
SSGC to scale up its UFG reduction efforts three to four times through Project activities and
have taken this into consideration during Project planning and preparation. An assessment of
the relative size and composition of the various contributors of UFG requires continuous
surveying and real-time monitoring. As the Project progresses through the initial
implementation phases, data will become available and SSGC will be able to divide its
network into segments (approximately 400 of them) in which UFG measurement will be
carried out. UFG measurements, supported by leakage surveys, will help ensure that Project
funds and company resources are deployed in geographical areas where the UFG is the
highest. 23 cases of network segmentation and testing in residential areas during Project
preparation showed about 90 percent of UFG to be underground leakages, although that
percentage share is expected to be substantially lower for the total network.
65. UFG reduction techniques. Physical UFG in Pakistan‘s pipeline system is largely
caused by corrosion causing holes in the steel pipe network. Gas may also leak from faulty
welds and threaded connections of pipes and equipment. Non-physical UFG (commercial
losses) stem from gas theft, measurement inaccuracies, and possibly accounting errors. To be
able to reduce UFG, it needs to be localized. That is best done by segmentation of the
network into smaller units where measured incoming gas volume can be compared with
aggregate gas consumption by the end users in the segment. The measurement difference is
UFG. Pressure testing of the main pipes (by blocking valves to service connections) can help
separating underground UFG from above-ground UFG (the latter being leakages from
connections, theft, and measurement errors).
20
66. With the UFG problem identified, remedies would involve replacing the leakiest
pipes, repairing others with clamps or patches, and replacing various equipment including
meters that have been tampered with or otherwise are faulty. Furthermore, to the extent a
leakage problem can not immediately be remedied, automatic pressure management systems
can reduce the pressure in a segment to the minimum level required to meet the demand
every hour of the day. That reduces UFG, since gas leakages are largely proportional to the
pressure in the leaking pipe. For steel pipes that are not subject to renovation under the
Project, a well-functioning cathodic protection system can largely stop further corrosion, i.e.
help avoid an increase in number and size of holes in the pipe walls. The Pakistani gas
networks have incomplete cathodic protection; its maintenance has been lacking, and without
adequate power backup, the protection system has not been functioning in periods of
electricity blackouts. The Project will finance all above-mentioned UFG reduction
techniques. Outside the Project, it will be important that new service connections are made
leak free from the outset, which has not always been the case in the past.
67. UFG reduction area. The Project focuses on Sindh and Balochistan, which is the
service territory of the sub-borrower, transmission and distribution company Sui Southern
Gas Company Ltd. (SSGC). About 90 percent of the gas is consumed in Sindh (largest part in
Karachi) and about 10 percent in Balochistan (mostly Quetta). A project component was
considered for the gas network in Punjab and Khyber-Pakhtunkhwa; however, SNGPL,
which serves those regions, is seeking solutions to its UFG problem that currently do not
involve World Bank financing. Should SNGPL‘s approach change, Additional Financing to
this Project could be considered.
C. Financial Management
68. The Financial management (FM) arrangements at SSGC are effective and well
documented. The Finance and Internal Audit functions are managed by capable
professionals and the units are adequately staffed. Accounts are computerized and controls
exist for the preparation of vouchers, verification and approval thereof, and subsequent data
entry. The Internal Audit function has a dual reporting obligation to the Audit Committee
and to SSGC‘s Managing Director. The Audit of FY11 accounts has been completed and is
available on SSGC‘s web site. Auditors have given a qualified opinion on the financial
statements due to the uncertainty of recovering PKR 29.159 billion from KESC that is
financially weak. All FM transactions for the Project will be handled by dedicated staff in
the Project Accounting unit of SSGC‘s Finance Department. Based on the Bank‘s review
and assessment of SSGC‘s FM capacity, the risk is considered Moderate.
69. SSGC complies with the Code of Corporate Governance applicable to companies
listed on stock exchanges. The code provides guidelines for establishing a framework of
good governance whereby a company is managed in compliance with the best practices of
corporate governance. The code covers representation of independent directors, filling up of
casual vacancies, holding of board meetings, appointment of key personnel, compliance with
corporate and financial reporting requirements, meetings of Audit Committee, etc.
21
D. Procurement
70. Procurement for the proposed project would be carried out in accordance with the
World Bank‘s ―Guidelines: Procurement of Goods, Works, and Non-Consulting Services
under IBRD Loans and IDA Credits & Grants January 2011‖ and ―Guidelines: Selection and
Employment of Consultants under IBRD Loans & IDA Credits & Grants by World Bank
Borrowers January 2011‖ and the provisions stipulated in the Legal Agreement.
71. Procurement activities will be carried out by SSGC. SSGC is a publically traded
company that follows private-sector best-practice procurement processes. As a majority
public sector company, it is subject to Pakistan‘s Public Procurement Regulatory Authority
(PPRA) Procurement Rules of 2004, which, with some minor exceptions, generally meet
international good practice. SSGC has a separate procurement department that is headed by a
General Manager who reports to Deputy Managing Director. The General Manager is
supported by Deputy General Manager with an organized hierarchy of staff. A well-
structured procurement policies and procedures manual exists, and its use is mandatory. The
manual is regularly reviewed and updated as necessary. There are clear accountabilities and
processes in place to govern the procurement function.
72. An assessment of SSGC‘s procurement capacity was undertaken during project
preparation, including an assessment of processes for procurement packages slated for
retroactive financing under the Project. SSGC does not have prior experience of
procurement under World Bank Guidelines. In order to strengthen the capacity in this area,
two training sessions for SSGC procurement staff were carried out during Project
preparation. Additional training by Bank staff will be carried out in order to further build
capacity for smooth project execution. The procurement performance risk is rated
―Substantial‖ at the time of Negotiations, a rating that will be reviewed and revised based on
SSGC‘s performance during Project implementation.
A Procurement Plan has been agreed with SSGC. Project procurement supervision will be
carried out on a bi-annual basis, with more frequent supervision occurring during the first
year of implementation if needed. Minimum ten percent of the contracts below the prior-
review threshold will be subject to post reviews. Details of the procurement assessment and
arrangements are provided in Annex 3.
E. Social
73. The Project is expected to have an overall positive social impact as it reduces safety
risks and health hazards associated with methane gas leakages as well as provides energy
conservation and causes reduction in the utility costs for consumers. The gas company‘s
ability to maintain adequate gas pressure is expected to increase in network areas
rehabilitated under the Project. The process and time required for trenching, laying new pipes
(or repairing of existing ones), refilling of trench, and road restoration may have limited
short-term impacts on the right-of-ways where these works will take place. Works are
expected to be completed on the same day. Access to natural gas is expected to be cut off
during specific hours of the day in order to complete the works. A survey of people impacted
22
by pipeline rehabilitation work, which also served as a consultation mechanism, was
undertaken by SSGC during Project preparation. Based on the survey/social assessment, it
was determined that there will be no loss of livelihood as a result of Project interventions,
and thus, the Project does not trigger OP 4.12 ―Involuntary Resettlement.‖ Prior to any works
taking place, affected consumers will be notified by SSGC and informed on the location of
works and hours of day when the gas supply will be temporarily disconnected. A separate
Environmental and Social Management Framework (ESMF) has been developed for the
Project, as commented on further below.
74. The survey results also indicated that SSGC follows the established rules and
regulations of the Government of Pakistan for handling social impacts and grievances caused
by such work that is similar in nature to the work expected to be carried out under the
Project. SSGC has an established grievance redress mechanism, and the priority of works is
impacted by the number of complaints received from a particular area. The majority of
consumers surveyed have indicated that they are aware of the systems of registering
complaints with SSGC (half of the respondents have actually used the system) and were
satisfied with SSGC‘s response.
F. Environment
75. The Project will result in a net positive environmental benefit given that it seeks to
reduce emissions of methane gas, a potent greenhouse gas, from overhead and underground
leakages in the pipeline system. The environmental screening category of the Project is ―B‖,
requiring a partial environmental assessment. The Project triggers OP 4.01 ―Environmental
Assessment‖. None of the other safeguard policies are triggered since the Project does not
entail any new construction or works which are not on the right-of-ways of the existing
pipeline network.
76. A separate Environmental and Social Management Framework (ESMF) has been
developed for the Project and was agreed with SSGC for use during Project implementation.
The ESMF provides for the mechanisms and actions that need to be taken for monitoring and
potentially mitigating any environmental and/or social impacts resulting from Project
interventions. The ESMF follows a framework approach since the location of interventions
will be established as the Project progresses. Although a framework approach to safeguards
is being adopted under the Project, no plans are required to be prepared, as the framework is
adequate for all monitoring and mitigation, and no particularities are attached to specific
Project sites that would warrant the preparation of separate plans.
77. SSGC‘s processes and procedures are in compliance with International Standards
Organization (ISO) on Environmental Management Systems (ISO 14001:2004) and
Occupational Health and Safety Management System Standard (OHSAS 18001:1999). SSGC
maintains a Health, Safety and Environment (HSE) Manual that covers the management of
occupational health, safety, and environmental hazards of its activities, processes,
equipments and products. An HSE department within SSGC conducts assessments of all
routine and non-routine activities undertaken by the organization itself or through other
consultants or contractors.
23
78. In compliance with ISO 14001:2004 and OHSAS 18001:1999, SSGC conducts
periodic training of staff and management at all levels of the organization on guidelines and
processes. All site distribution offices have an HSE in-charge who conducts random checks
for compliance. Compliance is also externally monitored by ISO and OHSAS on a semi-
annual basis.
79. The main activity under the Project that is likely to have an environmental impact is
the pipeline rehabilitation works in the urban areas of Karachi, Interior Sindh and Quetta.
Given that all rehabilitation and replacement works will occur along existing right-of-ways of
the distribution networks, no land acquisition will be required. Both rehabilitation and
replacement of pipelines will require the excavation of 3 feet wide and 4-5 feet deep
channels. The old pipes will be replaced with high-density or medium-density polyethylene
pipes up to 180 millimeters in diameter. Other activities such as routine underground
leakage surveys, the installation of automatic pressure profiling and advanced metering
systems will have negligible environmental impacts. The ESMF provides a detailed account
of the procedures to be followed for all project activities, especially since the exact location
of all pipelines to be replaced and repaired will be determined after detailed segmentation
and surveys have taken place at various stages during the initial project implementation
period.
G. Communication
80. Stakeholder understanding and cooperation is important for achieving the Project's
Development Objectives. Proactive and strategic communication by the government in
general and the SSGC in particular can play a major role in winning over the public support.
Behavior Change Communication (BCC) can play a major role in reducing gas theft and also
convince beneficiaries to adopt more efficient appliances under the pilot component. An
awareness and outreach campaign by SSGC focusing on the reduction of unaccounted-for
gas and its impact on a common citizen's life in terms of tariff determination and gas
pressure, can win over popular support and will encourage user-level cooperation in pointing
out theft and leakages. A strategic communication component can dramatically broaden and
deepen the impact of this project as it will engender understanding of and generate support
for efficient use of gas in Pakistan's overall energy portfolio. The World Bank can help in
augmenting the utility's communication capacity and provide technical assistance in this
regard. For SSGC‘s physical pipeline work in the streets, the Project‘s Environmental and
Social Management Framework lays out a communication strategy to ensure that impacted
people are properly informed about pipeline work in their neighbourhood.
24
Annex 1: Results Framework and Monitoring
Project Development Objective (PDO): To enhance the supply of natural gas in Pakistan by reducing the physical and commercial losses of gas in the pipeline system.
PDO Level Results Indicators* C
ore
Unit of Measure
Base-line
Cumulative Target Values Fre-
quency Data Source/ Methodology
Respon-sibility for
Data
Collection
Description (indicator definition
etc.) FY13 FY14 FY15 FY16 FY17
PDO Level Results Indicators*
Reduction in unaccounted-for gas (UFG)
Billion cubic feet of gas per year
0 1.5 6.8 17.1 32.4 52.4*) Annual Measured before and after investments
SSGC Variance between volumes of gas measured at the upstream bulk meter and consumer meters.
Gas pipeline cathodically protected**)
Km 0 2,000 4,000 6,000 8,000 10,000 Annual SSGC/ Measurement
SSGC Proxy indicator for the prevention of further increase in UFG that would take place without cathodic protection.
Intermediate Results:
Component 1: UFG Reduction
Gas pipeline rehabilitated
Km 0 750 2,000 3,250 4,500 5,750 Annual SSGC/ Measurement
SSGC Km of replaced pipes.
Pressure management systems installed
Number 0 0 100 250 400 400 Annual SSGC/ Reporting
SSGC
Meters installed Number 0 2,500 5,050 7,550 10,100 12,635 Annual SSGC/ Counting SSGC
Segmented UFG reporting to OGRA
No. of segments
0 50 100 200 300 400 Quarterly SSGC/ Reporting SSGC Segment reporting will include UFG
statistics and repair status and plans.
Component 2: Appliance Efficiency Pilot
Pilot project undertaken % com-pletion
0 0 25 50 100 100 Annual Pilot Report SSGC Percentage of total energy efficient gas appliances or retrofits installed.
Component 3: Technical Assistance
Customer satisfaction surveys
Acc. number of surveys
0 1 2 3 4 4 Annual External Survey
SSGC Annual surveys undertaken to gauge customer satisfaction in general and in areas with system rehabilitation.
International training of trainers undertaken
No. of person-days
0 170 340
510 510 510 Annual SSGC/ counts
SSGC International training on utility operations and technology.
*) The table shows cumulative UFG reduction targets. The annual UFG reduction targets in FY13 through FY17 are 1.5 – 5.3 – 10.3 – 15.3 – 20.0 bcf, respectively. The annual UFG reduction level in FY18 and going forward is 22.2 bcf.
**) Proxy indicator. Unlike other sub-components, cathodic protection, which stops the increase in number and size of holes in steel pipe walls, is a preventive measure, effect of which is difficult to isolate/measure/calculate.
25
PDO Level Results Indicators* C
ore
Unit of Measure
Base-line
Cumulative Target Values Fre-
quency Data Source/ Methodology
Respon-sibility for
Data
Collection
Description (indicator definition
etc.) FY13 FY14 FY15 FY16 FY17
Financial Indicators
SSGC’s Current Ratio Ratio 1.0 1.0 1.0 1.0 1.0 1.0 SSGC
SSGC’s Debt Service Coverage Ratio
Ratio 1.4 1.0 1.0 1.1 1.2 1.2 SSGC
26
Annex 2: Detailed Project Description
A. Project Objective and Components
81. The development objective of the Project is to enhance the supply of natural gas in
Pakistan by reducing the physical and commercial losses of gas in the pipeline system.
82. The highest impact on reducing gas losses is through the reduction of UFG in the gas
distribution system, and this is where the bulk of the Project‘s funds will be put to use. In
addition, a component is reserved for funding a pilot project for deploying residential gas
appliances to support the Government‘s wider energy efficiency initiatives. Furthermore,
funds are allocated for technical assistance to enhance the sub-borrower‘s operational
capacity and customer orientation, and to provide implementation support for the Project.
B. Project Scope
83. Whereas Pakistan has a multitude of natural gas producers, state-owned as well as
international and local companies, the gas transmission and distribution is handled by only
two companies: Sui Northern Gas Pipelines Ltd. (SNGPL) with headquarters in Lahore,
covering Punjab and Khyber-Pakhtunkhwa; and Sui Southern Gas Company Ltd. (SSGC)
with headquarters in Karachi, covering Karachi, interior Sindh, and Balochistan (Quetta).
The Project will support SSGC‘s UFG reduction efforts.
84. Support to SNGPL‘s UFG reduction program was also considered during Project
preparation. However, the company explores other options for financing their program.
Should SNGPL in the future consider an approach where the Bank could play a role, the
Bank would consider its options to provide support, which would include Additional
Financing to this Project.
C. Components
85. The Project is divided into the following components (estimated IBRD/IDA financing
in parenthesis):
Component 1: UFG Reduction (US$ 190 million)
Component 2: Appliance Efficiency Pilot Project (US$ 5 million)
Component 3: Technical Assistance (US$ 5 million)
86. Component 1: UFG Reduction. This component will finance the following sub-
components (estimated IBRD financing in parenthesis):
Segmentation and pressure management (US$ 18 million)
Pipeline rehabilitation (US$ 117 million)
i. Overhead leak detection
ii. Pipeline replacement or rectification
27
Cathodic protection (US$ 20 million)
i. Pipe recoating and road restoration
ii. Installation of cathodic protection equipment
Advanced metering systems (US$ 35 million)
87. Network segmentation. Before replacing or repairing pipes, SSGC will ―segment‖ the
distribution network by installing bulk meters at nodes in the grid, i.e. at the 537 Town
Border Stations (TBS) and in several cases downstream of the TBS‘. The segment‘s bulk
meter readings will be compared with the aggregate of the involved consumer meter
readings. The difference between the two gas volume numbers is the UFG in the segment.
Also, pressure testing will be undertaken as well as leak detection surveys to help further
locate and categorize the UFG and guide the rectifying strategy (repairs versus pipe
replacements). The segmentation strategy will allow SSGC to rehabilitate segments in close
to merit order, although some segmentation and rehabilitation work will take place
simultaneously as the company early in the Project addresses segments already identified
with high UFG.
88. Since SSGC‘s pipeline network only to a limited extent has been segmented before
Project start-up, the company does not today have a thorough overall understanding of its
UFG problem. 23 field surveys undertaken as part of Project preparation have added to the
organization‘s UFG knowledge. It seems clear that UFG is omnipresent in the distribution
grid, but varies widely among pipeline segments. UFG would typically increase by age in a
steel-pipe grid, but age is only one of many parameters that impact UFG. Soil conditions and
water logging, maintenance, availability of cathodic protection, etc. are other important
factors. Lack of adequate knowledge about physical UFG sometimes adds to the difficulty of
finding and uprooting gas theft. If fully rehabilitated segments still have UFG, it is most
likely caused by gas theft or metering errors. SSGC will seek to eliminate such remaining
UFG in the renovated segments.
89. The Project will procure Pressure Management Systems for use at the Town Border
Stations. These automatic systems will ensure that the pressure in the various pipeline
segments is adequate for meeting hourly gas demand. Leakage from corroded steel pipes is
largely proportionate with the pipeline pressure. The automatic Pressure Management
Systems will reduce the average pipeline pressure and thus reduce the UFG beyond what is
possible with the current manual pressure management system, where SSGC‘s field staff
several times a day modifies the pressure in parts of the network by physically turning
valves. The automatic Pressure Management Systems will also feed information about
system pressure and gas flows to central computers for better monitoring.
90. Pipeline rehabilitation. The Project will finance about 5,750 km of gas pipes (about
20 percent of SSGC‘s total system), which will result in a massive conversion from steel
pipes to polyethylene pipes, a decision much driven by the non-corrosive characteristics of
the latter. Mostly for pipe dimensions larger than 8 inches SSGC will use steel pipes in the
rehabilitation work. Steel pipes would constitute about ten percent of the length of pipes
procured.
28
91. For network segments where leakage is less intense, SSGC will rectify existing pipes
by using leak clamps and patches rather than replacing the pipes. The company expects to
rectify 18,700 km of pipes under the Project.
92. Categorized under pipeline rehabilitation is also numerous ancillary equipment to be
procured for executing the operation, such as pipe fusion equipment, welding plants, electric
generators, air compressors, de-watering pumps, transport and specialized vehicles, leak
survey equipment, pipeline locators; plungers; machines for squeezing, beveling, and
bending pipes, testing laboratories, and gas chromatography analyzers.
93. SSGC has analyzed its available staff per skill category, and will in part use its own
staff and in part rely on contractors to undertake the work involved. For pipeline
rehabilitation, SSGC plans to lay, weld, and connect the pipes by its own staff, but use
contractors for trenching, trench refilling, and road surface re-installment. Outsourcing
strategy may be modified during the project, and available internal resources would depend
on the amount of network expansion work that will take place in parallel. In the past, SSGC
has annually expanded the grid by more than double the length of annual pipeline
replacement envisaged under the Project.
94. Cathodic protection. Lack of cathodic protection of steel pipes over the years is a
major cause of UFG today. A cathodic protection system ensures that a low-voltage electric
direct current is led through the pipe wall, causing corrosion to take place on sacrificing
anodes rather than on the pipe itself. While such systems can be highly effective in reducing
corrosion, SSGC‘s cathodic protection systems have been poorly maintained, not fully
installed, and have suffered from lack of back-up power when grid-supplied electricity was
unavailable. Over decades, electricity supply in Pakistan has been plagued by frequent and
long-lasting black-outs, resulting in, among other, corrosion in the gas pipeline network.
95. The Project will procure cathodic protection components such as pipe recoating
material, magnesium anodes, power sources, battery and solar power backup systems, remote
monitoring systems, and installation services.
96. Advanced metering systems: SSGC does not have a good understanding of what
portion of the UFG is gas theft. Field surveys and theft reduction statistics indicate that theft
may constitute between 10 and 20 percent of the UFG, with the bulk of it in the industrial
and commercial sectors, but possibly on a rising curve recently under a situation of high gas
prices and load shedding. Gas theft can take the form of meter tampering or meter
bypass/illegal connections, and cases of customer collusion with utility staff cannot be
excluded. The Project plans to finance 12,500 virtually ―tamper-proof‖ ultrasonic meters for
commercial customers. For larger consumers, 270 turbine meters will be procured together
with video surveillance systems. These investments have the potential to significantly reduce
UFG (see Economic Analysis Annex). Fighting gas theft may have more of a financial
impact than a physical impact, although there are expectedly many cases where consumers
will consume less gas when faced with paying for the gas in full.
97. Component 2: Appliance Efficiency Pilot Project (US$ 5 million). The proposed pilot
will support both the Government and the gas companies‘ energy conservation efforts. This
29
component will finance the deployment of high-efficiency gas appliances, or retrofits for
existing appliances, such as burner tip orifices made for thermal efficiency. Focus will be on
cooking stoves and possibly water heaters. Attention will be paid to consumers‘ financial
incentives to replace inefficient appliances. This is a concern notably because by
international standards, gas prices are low in Pakistan, and, furthermore, residential tariffs are
currently set to about half of the average end user tariff by means of cross subsidies from
industrial and power plant tariffs. This situation favors seeking retrofit solutions rather than
appliance replacements.
98. A thorough plan will need to be instituted to successfully manage the proposed
Consumer Appliance Pilot Project, and the Project will provide funding for consultant
services to assist SSGC with developing and implementing it.
99. Available funds for the Appliance Efficiency Pilot Project could finance about
200,000 cooking stoves or about 35,000 water heaters, however, much larger number of
consumers could be reached if burner tip orifices were replaced – in a labor-intensive door-
to-door operation which also would include consumer education. Awareness-raising
campaigns will be undertaken in association with the pilot project. SSGC will recover the
appliance pilot cost from involved consumers through affordable installments on the utility
bills. The pilot project will be carried out in coordination with other concerned stakeholders
such as the Pakistan Standards and Quality Control Authority (PSQCA) and the National
Energy Conservation Centre (ENERCON).
100. As of June 30, 2011, there were about 6.2 million residential gas consumers in
Pakistan, of whom 2.3 million were served by SSGC. If on average all current residential
consumers could save 15 percent of the gas they consume, a conservative figure, it would
free up more than 30 bcf/year of gas (of which about 10 bcf/year among SSGC‘s customers)
that could be channeled to other sectors. However, the wholesale replacement of consumer
appliances is typically a process that could take place over more than a decade. In addition to
the demand-side management benefits of high-efficiency appliances, the impact on UFG
should not be overlooked (reduced demand means less UFG as long as the system leaks). The
energy efficiency savings potential in the industrial sector is expected to be even higher than
in the residential sector.
101. With the technical support of both gas companies, SNGPL and SSGC, the Pakistan
Standards and Quality Control Authority developed and issued new standards for domestic
and commercial gas appliances in 200813
. The regulation requires that manufactured or
imported gas appliances are certified and labeled in compliance with the policy. In 2010-11,
PSQCA had set up facilities for testing the thermal efficiency of the appliances. It is
understood that only a few of the several hundred appliance models manufactured in Pakistan
actually meet the thermal efficiency standards. PSQCA plans to take steps to ensure that
13
PSQCA‘s regulation for residential and commercial gas appliances stipulates the following thermal efficiency
requirements: (a) room heaters, vented type: minimum 70% for appliances with input rating in excess of 20,000 Btu
per hour and 65% for stoves with lower input rating; (b) radiant room heaters (vented or semi-vented): minimum
35%; (c) water heaters: minimum 65%; (d) stoves: minimum 50% for burners having rated inputs of 0.25 m3/hour
and minimum 42% for inputs exceeding 0.30 m3/hour; (e) cooking ranges: minimum 48% for burners having input
8,000-10,000 Btu/hour and minimum 45% for larger burners.
30
non-compliant appliances are removed from the market, although this may not be an easy
process. Information and education campaigns would be part of the solution.
102. Component 3: Technical Assistance (TA) (US$ 5 million). The Technical Assistance
component supports the following activities:
Training and capacity building for SSGC‘s Gas Training Institute (US$0.95 million)
Annual customer satisfaction surveys (US$ 0.125 million)
Owner‘s Engineer (US$ 2.0 million)
Lender‘s Engineer (monitoring and evaluation) (US$ 0.8 million)
Technical audits (US$ 0.5 million)
Appliance Pilot Project Consultant (0.15 million)
103. In support of improved customer service and quality in operations, the Project will
finance training of trainers for the company‘s Gas Training Institute, as well as some
technical equipment for the Institute (US$1.4 million). SSGC plans to triple its training
intensity and the Project will contribute to facilitate such higher activity level; see training
details in Table 4 below. The company also will seek twinning arrangements with a well-
reputed international gas institute. Annual customer surveys in areas with rehabilitated
network under the Project will gauge impact on customer satisfaction. A UFG-free segment
will have a better ability to deliver gas to customers at adequate pressure, and in other
network segment the automatic pressure management can have similar impact. To support
implementation, the services of an Owner‘s Engineer will be financed by the Project. This
firm will also help provide access to international best practices and knowledge transfer on
advanced rehabilitation technologies such as trenchless pipe laying in addition to overall
operations and maintenance of the gas distribution and transmission network. A Lender‘s
Engineer (monitoring and evaluation) will assist in providing oversight of project
development and results, including the gas accounting for UFG reduction measurements. The
consultant will provide reporting to SSGC, the World Bank, the Government, and OGRA.
Consultant support will be provided to define in detail and implement the Consumer
Appliances Pilot Project.
Table 4 Training Plan for Gas Training Center
FY12 onwards, annual plan Training Sessions Person Days Per
Year
Introduction to Microwave Telecommunication system
Introduction to SCADA system
Telecom System Maintenance & Upgradation
SCADA System, Flow Computer, Instrumentation
Calibration, Maintenance & Upgradation
TOTAL Services Department 16 2,400
Basic Corrosion Prevention / CP Techniques.
CP Equipment /Machines.
Surface Preparation, Coating Techniques and Coating
31
FY12 onwards, annual plan Training Sessions Person Days Per
Year
Advance CP Techniques
TOTAL Cathodic Protection Department 15 790
General Environmental Awareness
Personal Protective Equipments Wear and Care
Introduction to Health, Safety & Environmental
Auditing
Internal Auditing of Occupational Health & Safety
Management
Defensive Driving Course
Fire Prevention, Basic Fire Fighting & Emergency
Response Course
Comprehensive Fire Fighting Course
First Aid & CPR Course
Safety Investments for Protection of SSGC Employees
TOTAL Health/Safety/Environment Department 20 955
Construction & Maintenance of Gas Pipeline (P.E &
Steel Line Pipe)
Procedure and Techniques for Gas Fitters
Gas Leak Survey & Rectification / Controlling UFG
Hot Tapping and Stoppling
Welding Techniques ( for Engineers)
TBS Installation and Maintenance
UFG awareness Program
Boring Techniques
Welding Techniques for Staff
TOTAL Distribution Department 54 5350
Flow Computer: Installation, configuration,
maintenance & trouble shouting
Gas Chromatograph: Installation, configuration,
maintenance & trouble shouting
EVC / POC : Installation, configuration, maintenance &
trouble shouting
Online Remote monitoring & Data Acquisition System
Proving of Industrial Meters
Ultrasonic meters: Installation, configuration,
maintenance & trouble shouting
CMS Maintenance
32
FY12 onwards, annual plan Training Sessions Person Days Per
Year
Moisture Analyzers, H2S Analyzers & Hydrocarbon
dew parts analyzers
TOTAL Measurement Department 27 2325
Repair and Maintenance of regulators
Leak survey and rectification
Procedure and techniques for gas fitters
Awareness Regarding Gas Theft / UFG Controlling
Fitting Techniques for House Line Fitters
Replacement of underground/overhead low pressure
lines
Understanding CC & B
Prevention of Corrosion
TOTAL Customer Relations Department 30 1250
Introduction to Meter Reading
Understanding of ultrasonic domestic meters
Project Management / MS Project
TOTAL Other Disciplines 30 1410
GRAND TOTAL 192 14,880
D. Project Activities Financed Entirely by Counterpart Funds
104. A large number of contracts will be entered into mostly for the less specialized work
of pipeline trenching, trench refilling, and road restoration. These Works contracts will be
financed entirely by counterpart funds.
E. Other Related Donor Activities
105. No International Financial Institutions other than the World Bank are currently
engaged in financing the Pakistan downstream gas sector. ADB and the World Bank financed
investment projects in the sector during the 1990s. USAID, who participated in parts of the
Project preparation, may consider supporting activities in the gas sector that could
complement the World Bank‘s engagement. Areas of engagement could include assistance
to the upstream gas sector to support development of regulation that would help stimulate gas
production from ―tight‖ and ―shale‖ gas reservoirs, and it could include measures to facilitate
a more rapid transformation to energy-efficient consumer gas appliances, including education
of domestic appliance manufacturers. In the past, ADB has provided investment funds to
SSGC and the World Bank to SNGPL in parallel activities during the 1990s.
33
F. About the Implementation Agency or Sub-borrower
106. Sui Southern Gas Company Limited (SSGC) is a joint-stock company listed on the
domestic stock exchanges and with headquarters in Karachi. In 2011, SSGC had
approximately 53 percent direct state ownership while government-controlled financial
institutions and public sector companies held about another 19 percent share. SSGC operates
under a license from the Oil and Gas Regulatory Agency to construct and operate gas
transmission and distribution pipelines in the provinces Sindh and Balochistan (see map in
Annex 9) and to distribute and sell natural gas in these provinces. Its license is valid until
2032, but the company‘s exclusive rights to distribute and sell gas in its area ended on June
30, 2010. The company‘s 14-person Board has representatives from government institutions
as well as the private sector. The Board has subcommittees for human resources, audits, and
finance, and an associated UFG Committee. In FY11, SSGC had sales revenues of PKR 110
billion (US$ 1.2 billion) and profit after tax of PKR 4.7 billion (US$ 52 million) on sales of
about 360 bcf (10 billion cubic meters) of gas. Return on assets was 11.9 percent, and the
debt : equity ratio was 45 : 55. By end FY11, the company supplied 2,339,000 residential
customers, 25,000 commercial customers, and 4,000 industrial customers. The company has
about 8,000 employees.
G. Gas Prices in Pakistan
Table 5: Gas Prices in Pakistan, 2012
Consumer Category Sales Prices as of January 1, 2012
(rounded figures)
PKR/mmbtu US$/mmbtu
(conversion for
illustrative purposes)
Selected cross
subsidies*
US$ Million
Residential (estimated avg.) 173 1.92 423
Commercial 600 6.67
Cement 694 7.71
Fertilizer (feedstock) 116 1.29 442
Industry 495 5.50
Transport (CNG) 652 7.24
Power generation 481 5.34
Independent power producers 438 4.87
Captive power 495 5.50
Weighted average gas price 360 4.00
Source: OGRA. The residential sector has block tariffs. Some large industrial consumers have individual prices.
*Cross subsidy calculation based on these gas volumes: residential: 219 bcf; fertilizer feedstock: 163 bcf; total market: 1,278
bcf for FY10 (Pakistan Energy Yearbook 2010). The calculation does not take into account variations in cost of service. A
calorific value of 930 btu/cf was used.
34
Annex 3: Implementation Arrangements
A. Project Administration Mechanisms
107. SSGC will be the implementing agency for this Project. The implementation of
project components will be integrated into the company‘s organization as much as possible.
SSGC has appointed a project manager at the Senior General Manager level who will be in
charge of a Project Management Office (PMO) which will draw on identified resources
within the various departments (procurement, financial management, maintenance,
operations, environment, etc.). The PMO will report to a Project Director. The PMO will be
responsible for overall project implementation including all planning activities, monitoring
and evaluation and preparation of quarterly progress reports. This arrangement will allow
SSGC to monitor project implementation through a dedicated core team while being
supported by the various functional units within the organization. Figure 5 illustrates the
functional relationship of the PMO vis-à-vis other SSGC departments.
Figure 5: SSGC Project Implementation Organization Chart
108. The PMO will be led by a Project Manager supported by three (3) project engineers
in charge of planning, costing, and progress monitoring. The team will also include a
financial analyst, an information technology (IT) specialist, and other support staff. Figure
6 below illustrates the reporting relationship between the PMO and the other supporting
department heads at SSGC.
35
Figure 6: SSGC Department Heads Reporting to the PMO
109. SSGC has implemented a number of large infrastructure expansion projects. It has
sound project management capacity and systems in place. Procurement, financial
management, and environmental/social capacities have been found satisfactory. SSGC will
add resources to fill any gaps, if required. SSGC‘s management intends on retaining the
services of an ‗Owner‘s Engineer‘ to provide overall project management and technical
support to the implementation of various components. The Project will also finance a
Lender‘s Engineer, who will focus on results monitoring, including gas accounting to
measure UFG reduction, effectiveness of use of the Project‘s financial resources, and
progress monitoring, to assist with informing the Government, the regulator, and the World
Bank.
110. The Owner‘s Engineer‘s main tasks can be summarized as follows:
a. Technical design support which includes advice on the selection of technologies
and methods utilized in UFG reduction (e.g. trenchless pipe-laying).
b. Overall procurement support for:
Preparation / review of bidding documents for goods and works;
Responding to questions from bidders and participating in pre-bid
meetings if required
Reviewing bids and preparing bid evaluation reports;
Coordinating with contractors during implementation; and
Reviewing and updating the procurement plan as required.
c. Overall implementation support including a review of contractors‘ procedures,
monitoring time schedule and cost control, review and evaluation potential
change orders, and overall quality assurance/quality control of project
implementation.
36
d. Participation in site visits for the supervision of major works.
e. Review of the project cash flow and of contractors‘ payment certificates and
verification of works completed.
111. Pipeline replacement activities will be mainly driven by SSGC‘s own resources. The
current manpower capacity at SSGC is composed of eight (8) teams consisting of field
supervisors, welders, fitters (both skilled and un-skilled labor) and compressor operators.
Each team can carry out replacement and/or rehabilitation works on approximately 2.5
kilometers (km) of a pipeline segment per month, with an annual capacity of 240 km. The
overall pipeline replacement/rehabilitation works envisaged under this project is
approximately 5,000 km, and more than 60 percent of this is preliminarily planned in the
Karachi region (3,150 km). Initial surveys have shown that high impact on UFG can be
obtained in that region, and this is where most of the works are expected to take place using
SSGC‘s own resources. To achieve the 5-year target of 3,150 km in Karachi, an average of
630 km should be rectified, which is about 2.5 times the existing rehabilitation capacity and
would require an additional 13 teams which SSGC will have to make available to complete
the works. These can be drawn from teams that have been focusing on system expansion, but
SSGC will also use outsourcing, adjusted to the circumstances of the various tranches of
procurement and gaining experience as the project moves forward.
B. Financial Management
112. FM risk assessment: Whereas the country risk level concerning FM is Substantial, at
the entity and Project levels the risk is considered Moderate, as the financial management
arrangements are assessed to be adequate. The risk relating to auditing is considered Low.
Given their nature, it is anticipated that the risks will be mitigated by adequate financial
management supervision from the Bank‘s Islamabad office.
113. FM arrangements: The financial management arrangements in SSGC are quite
effective and well documented. The Finance and Internal Audit departments are managed by
professional accountants and adequately staffed. Accounts are computerized and adequate
controls exist in the preparation of vouchers, verification and approval thereof, and data
entry. The internal audit functionally reports to the Audit Committee and administratively to
the Managing Director. The average method of costing is used for the costing of inventory.
See comments to external audit further below.
114. Budgeting and counterpart funding: The budget preparation and execution system is
adequate. A memorandum is issued to all departments to provide annual targets and budget
proposals in respect of revenue and capital expenditure. The budget department consolidates
these for discussion with the divisional heads. The agreed figures are included in the
preliminary budget document. The budget also includes gas sale and purchase, physical
targets, other revenues, debt analysis and cash flows. The preliminary budget is reviewed by
the Budget Committee that comprises the Managing Director, Deputy Managing Directors
and Senior General Managers. The preliminary budget is recompiled as agreed in the Budget
37
Committee meeting and submitted to the Finance Committee of the Board of Directors after
which it is submitted to the Board of Directors for approval. Thereafter, the budget figures
are uploaded in the computerized system and released to the respective departments.
Expenditure is monitored against the budget on a monthly and quarterly basis by General
Managers and Board of Directors. Counterpart funds will be provided from SSGC‘s cash
flow supplemented with commercial credits as necessary. Counterpart funds would be
accessed through the General Fund Account.
115. Flow of funds: Effective procedures are in place for processing payments including
those for material. Payments are processed through the computerized accounting system
where various security levels have been created. Financial powers have been delegated to
officials for efficient processing of payments. Two segregated Designated Accounts would
be opened into which IBRD and IDA funds, respectively, would be received from the Bank.
This account would be managed by the Cash & Bank Section in the company and jointly
operated by two senior officials of SSGC working for the Project. Bank funds would be
disbursed using a report-based system. Funds forecast for the next six months would be
disbursed that would be accounted for on a quarterly basis. Counterpart funds would be
accessed through the General Fund Account.
116. Staffing: SSGC‘s Finance department is adequately staffed with professionally
qualified accountants. The Project Accounting Section would be responsible for accounting
and financial reporting for the project. SSGC agreed to ensure that adequate staffing remains
in place in the sections of the Finance Department dealing with the project.
117. Accounting: The Board of Directors has approved manuals (on various dates) that
covers procurement, doubtful debts, store and spares, fixed assets, risk management, credit
and discount policy and deferred credit. Changes, if any, are approved by the Board of
Directors. Separate guidelines have been issued for accounting of projects. These include
guidance on opening of new projects, booking of cost including indirect costs and closing of
projects. SOPs have been issued for process details. SSGC follows accrual accounting and all
the relevant IFRSs. The accounting is computerized in Oracle in which the Project Module
would be used for project accounting, which is considered adequate.
118. Internal controls: Adequate segregation of duties, delegation of financial powers and
pre-audit assure effective internal controls. There is adequate segregation of work in respect
of execution of transactions, recording of transactions and custody of assets. Similarly, the
functions of ordering, receiving, accounting for, and payment of goods and services are
adequately segregated. All bank accounts are operated by joint signatories, one from the
management and one from the accounts department. The preparation of bank reconciliations,
entry in bank book, and approval are adequately segregated. SSGC has an internal audit
department that reports functionally to the Audit Committee and administratively to the
Managing Director. The department is headed by a General Manager who is adequately
supported by a team comprising professional qualified accountants. Job descriptions have
been prepared for key positions. The audit report is presented to the Audit Committee and a
data base is maintained for unresolved audit observations. The Audit Committee of the Board
of Directors has approved an audit policy that covers scope, independence, responsibilities,
38
authority, standards and reporting. The project would be covered in the periodic internal
audit.
119. SSGC has an effective inventory management system. The average method of costing
is used for the valuation of inventory.
120. Periodic financial reporting: A monthly report on budget monitoring is presented to
the management. The Borrower will provide the Bank with quarterly financial monitoring
reports for the Project as well as quarterly progress reports for the Project . The Borrower will
provide the Bank with quarterly interim financial reports (IFRs) for the Project as well as
quarterly progress reports for the Project. IFRs due within 45 days of the end of each
calendar quarter would be used for disbursement of funds on a quarterly basis.
121. Arrangements for external audit: The Audit Committee evaluates leading firms of
chartered accountants, recommends to the Board of Directors, and the shareholders approve
in the Annual General Meeting. The auditors/engagement partners have to be rotated every
three years. The project would be required to provide acceptable audited financial statements
to the Bank by 31 December every year. In addition to the audited financial statements,
SSGC‘s management will provide an assertion that project funds have been used for their
intended purposes. A separate audit of project accounts would not be required. The entity‘s
audited financial statements would include by way of a note the sources and uses of funds
with respect to the project. The audit for FY11 has been completed and is available on
SSGC‘s web site. The auditors have given a qualified opinion due to the uncertainty of
recovering in full PKR 29.159 billion from KESC that is financially weak. There are no
unsolved audit issues from the previous year.
122. FM documentation: The FM documentation will be maintained in the Project files,
where also the appraisal-stage FM assessment can be found.
C. Disbursements
123. Designated Accounts: Two segregated Designated Accounts in US$ will be opened
into which IBRD and IDA funds, respectively, will be received from the Bank. These
accounts will be managed by the Cash & Bank Section and jointly operated by two senior
officials of SSGC working for the project. Bank funds will be disbursed using a report-based
system. Funds forecast for what will be disbursed the next six months will be accounted for
on a quarterly basis. Counterpart funds will be accessed through the General Fund Account.
124. Retroactive financing: The Bank‘s project team proposes to accept retroactive
financing arrangements for the project. Retroactive financing is permitted under the
following conditions: (a) the activities financed are included in the project description; (b)
the payments are for items procured in accordance with applicable Bank procurement
procedures; (c) such payments do not exceed 20 percent of the loan amount; and (d) the
payments were made by the borrower not more than 12 months before the expected date of
Loan Agreement signing.
125. Disbursement conditions: There are no specific disbursement conditions.
39
126. Withdrawal of the proceeds of the Loan and Credit: Funds withdrawals from the
IBRD loan and IDA Credit will be undertaken in accordance with the Loan Agreement and
Financing Agreement, respectively, as outlined in Table 6 below:
Table 6: Disbursement Withdrawal Categories
Category Amount of the IBRD
Loan Allocated
(US$)
Amount of the IDA
Credit Allocated
(US$ equivalent)
Financing Share*
(1) Goods, non-consulting
services, consultants‘
services (including for
audits), and Training for
the Project
87,250,000 87,500,000 100%
(2) (2) Works for the Project
(except for Parts 1 (b) (i)
and (c) (i) of the Project)
12,500,000 12,500,000 30% **)
(4) Front-end Fee 250,000
(5) Unallocated
Total 100,000,000 100,000,000
*) Financing shares are exclusive of taxes.
**) Percentage financing of co-financed Works. SSGC will finance other Works contracts 100 percent from own funds.
D. Procurement
127. The procurement of goods and works for the proposed project will be carried out in
accordance with the World Bank‘s "―Guidelines: Procurement of Goods, Works, and Non-
Consulting Services under IBRD Loans and IDA Credits & Grants January 2011‖ and the
procurement of consultancy services will be done in accordance with the ―Guidelines:
Selection and Employment of Consultants under IBRD Loans & IDA Credits & Grants by
World Bank Borrowers January 2011‖, and the provisions stipulated in the Legal Agreement.
The various items under different expenditure categories are described in general below. For
each contract to be financed by the Loan, the different procurement methods or consultant
selection methods, the need for pre-qualification, estimated costs, prior review requirements,
and time frame are agreed between the Borrower and the Bank in the Procurement Plan.
128. Procurement of Works: Works procured under the Project will include trenching and
back-filling of trenches for replacement of pipes or coating of pipes, road rehabilitation
works, and some installation works. Works are planned to be fully financed by SSGC. All
40
contracts estimated to cost above US$ 4 m shall be procured through International
Competitive Bidding (ICB) procedures using the Bank‘s Standard Bidding Documents
(SBDs) for Works. Contracts costing up to US $4 million shall be procured through National
Competitive Bidding (NCB) procedures using bidding documents agreed with the Bank.
Contracts estimated to cost up to US$ 100,000 shall be procured using shopping procedures.
129. Procurement of Goods: Goods procured under this project will include: polyethylene
line pipe, mild steel line pipe, supply and installation of automatic pressure management
equipment, supply and installation of cathodic protection systems, turbine meters, filter
assemblies, ultrasonic meters, welding plants, electro fusion machines, air compressors, de-
watering pumps, generators, vehicle-mounted leak survey equipment, high efficiency
consumer appliances like stoves and water heaters for a pilot project, motor vehicles and
miscellaneous equipment required for undertaking the UFG project. All contracts estimated
to cost above US$ 600,000 shall be procured through ICB procedures using the Bank SBDs
for Goods. Contracts costing up to US$ 600,000 shall be procured through NCB procedures
using bidding documents agreed with the Bank. Contracts estimated to cost up to US$ 50,000
shall be procured using shopping procedures.
130. Improvement of bidding procedures under National Competitive Bidding: The
following improvements in bidding procedures will apply to all procurement of Goods and
Works under National Competitive Bidding, in order to ensure economy, efficiency,
transparency and broad consistency with the provisions of Section 1 of the Guidelines:
a. Invitation to bid shall be advertised in at least one national newspaper with a wide
circulation at least 30 days prior to the deadline for the submission of the bid;
b. Bid documents shall be made available, by mail or in person, to all who are
willing to pay the required fee;
c. Foreign bidders shall not be precluded from bidding, and no preference of any
kind shall be given to national bidders in the bidding process;
d. Bidding shall not be restricted to pre-registered firms;
e. Qualification criteria shall be stated in the bidding documents;
f. Bids shall be opened in public immediately after the deadline for submission of
bids;
g. Estimates shall be based on market rates, and bids shall not be rejected merely on
the basis of a comparison with an official estimate without the prior concurrence
of the World Bank;
h. Before rejecting all bids and soliciting new bids, the World Bank's prior
concurrence shall be obtained;
i. Bids shall be solicited and contracts shall be awarded on the basis of unit prices
and not on the basis of a composite schedule of rates;
j. Contracts shall not be awarded on the basis of nationally negotiated rates;
k. Single bids shall also be considered for evaluation;
41
l. Contracts shall be awarded to the lowest evaluated and qualified bidder; and
m. Post-bid negotiations shall not be allowed with the lowest evaluated or any other
bidders.
131. Consulting Services: Consulting services procured under the project will include
hiring of firms for Owner‘s Engineer, Lender‘s Engineer, Technical Audit, Customer
Satisfaction Survey, and Advisor for the consumer appliances pilot subproject. Contracts
with consulting firms will be procured in accordance with Quality and Cost-Based Selection
procedures or other methods given in Section III of the Consultan ts‘ Guidelines, such as
quality-based (QBS), fixed-budget (FBS), least-cost selection (LCS), consultant‘s
qualification (CQS) or single-source selection (SSS). For contracts with consulting firms
estimated to cost less than $500,000 equivalent per contract, the shortlist of consultants may
comprise entirely national consultants in accordance with the provisions of paragraphs 2.7 of
the Consultant Guidelines.
132. Services for assignments that meet the requirements set forth in paragraph 5.1 of the
Consultant Guidelines may be procured under contracts awarded to individual consultants in
accordance with the provisions of paragraphs 5.2 through 5.3 of the Consultant Guidelines.
Under the circumstances described in paragraph 5.4 of the Consultant Guidelines, such
contracts may be awarded to individual consultants on a sole-source basis.
133. Training: Will include training abroad for SSGC staff, many of whom would
subsequently act as trainers in SSGC. Any firm which will be hired to develop a customized
training program for SSGC will be treated as procurement of consultant services; otherwise
training for standard courses offered by institutions regularly will not be a procurement
activity.
134. Summarized Procurement Plan: The procurement plan for the 1st-tranche
procurement (first year) is shown on next page. Most of the major procurement packages are
procured annually (i.e. 5 tranches); various equipments may have three or fewer tranches.
Date of Bank‘s approval of the Procurement Plan: February 10, 2012.
Date of General Procurement Notice: November 30, 2010, Issue 787 of UN Development
Business paper version. Online: October 28, 2010.
Period covered by shown Procurement Plan: First tranche in FY12.
42
Table 7: Procurement Plan (abbreviated; 1st tranche)*)
*) CP=cathodic protection; METER=Measurement-related equipment; TA=technical assistance; UNDER=underground
pipes and related equipment.
135. Prior-Review Thresholds: Procurement decisions for Goods and Works and non-
consulting services are subject to prior review by the Bank as stated in Appendix 1 to the
Guidelines for Procurement. Selection decisions for Consultants are subject to prior review
by the Bank as stated in Appendix 1 to the Guidelines for Selection and Employment of
Consultants. Based on the capacity assessment of the implementing agency, the following
prior-review thresholds and procurement actions have been stipulated.
43
Table 8: Procurement Prior Review Thresholds
Procurement Prior
Review
Threshold
(US$)
Comments
Works, Supply and Install, Turnkey
Contracts
4 Million The first contract for each category shall be
subject to prior review, irrespective of value. In
addition all Direct contracts shall be subject to
prior review.
Goods 0.6 Million The first contract for ICB (Goods) category shall
be subject to prior review, irrespective of value.
In addition all Direct contracts shall be subject to
prior review.
NCB (Goods) packages Not subject to
prior review
The first contract for NCB (Goods) category shall
be subject to prior review, irrespective of value.
In addition all Direct contracts shall be subject to
prior review.
IT systems and Non-consulting
services
0.6 Million The first contract for non-consulting services,
irrespective of value, shall be subject to prior
review. In addition all Direct contracts shall be
subject to prior review.
Consultants – Competitive Methods
(Firms)
0.5 Million The first contract for the selection of consultant
firms shall be subject to prior review, irrespective
of value.
Consultants – Competitive Methods
(Individuals)
0.2 Million The first contract for the selection shall be subject
to Prior review, irrespective of value.
Consultants – Single Source (firms
and individuals)
All
Table 9: Procurement Actions
Action Responsibility Time Status
1 Procurement link maintained on
the website
SSGC Ongoing Website functional
2 Procurement training Bank As and when required Bank conducted two
procurement trainings
in 2011.
3 Procurement Manual SSGC By Negotiations Under Preparation
4 Share Complaint handling
system with Bank
SSGC Within one month after
effectiveness
Basic mechanism is in
place. Bank will review
the process
5 Hiring of Owner‘s Engineer for
Procurement Support
SSGC Within one month after
effectiveness
Hiring process needs to
be initiated
6 Independent Second Tier
Complaint Appeal System
SSGC Within one month after
effectiveness
SSGC needs to send
notification
44
136. Procurement Planning. SSGC has developed a Procurement Plan which will be
available at the borrower‘s website. It will also be available in the Project‘s database and on
the Bank‘s external website. The Procurement Plan will be updated in agreement with the
Project Team annually or as required to reflect the actual project implementation needs and
improvements in institutional capacity.
137. Goods and Works: Any other special procurement arrangements: Advance
procurement based on the approved procurement plan will be allowed subject to Bank‘s
applicable Guidelines for the Procurement of Goods and Works.
138. Consultants - Shortlist comprising entirely of national consultants: Shortlist of
consultants for services estimated to cost less than US$ 500,000 equivalent per contract, may
comprise entirely of national consultants in accordance with the provisions of paragraph 2.7
of the Consultant Guidelines.
139. Consultants - Any other special selection arrangements: Advance procurement based
on the approved procurement plan will be allowed subject to the Bank‘s applicable
Guidelines for the Selection of Consultants.
140. Summary of procurement packages: Table 10 below summarizes the procurement
packages as planned for the entire Project.
Table 10: Summary of Procurement Packages
Description Procurement/
Selection
Method
Estimated Cost
(US$ million)
Domestic
Preference
(yes/no)
Works packages ICB 5.5 No
Works packages NCB 91.2 No
Goods packages ICB 159.4 No
Goods packages NCB 11.3 No
Consultant packages ICB QCBS 3.5 No
Consultant packages NCB QCBS 0.1 No
Training 1.0 No
Total 272
ICB=International Competitive Bidding; NCB=National Competitive Bidding; QCBS=Quality and Cost Based Selection
E. Environmental and Social
141. A separate Environmental and Social Management Framework (ESMF) has been
prepared for Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Ltd. The
ESMF provides for the mechanisms and actions which need to be taken for monitoring and
potentially mitigating any environmental and/or social impacts resulting from Project
interventions. The ESMF follows a framework approach since the location of interventions
45
will be established as the Project progresses. Although a framework approach to safeguards
is being adopted under the Project, no plans are required to be prepared, as the framework is
adequate for all monitoring and mitigation and no particularities are attached to specific
Project sites that would warrant the preparation of separate plans.
142. Sui Southern Gas Company Limited was certified in 2005 by ISO 14001:2004
Environmental Management Systems and OHSAS 18001:1999 Occupational Health and
Safety Management System Standard. Sui Northern Gas Pipelines Ltd. is also ISO
14001:2004 certified and was certified in 2009 for the Operational Health and Safety
Assessment Series (OHSAS) 18001- 2007. Both companies have a Health, Safety and
Environment (HSE) Manual that covers the management of occupational health safety and
environmental hazards of its activities, processes, equipments and products. The HSE
department of each of the companies is required to conduct assessment of all routine and
non-routine activities and activities of all persons having access to the work place whether
provided by the organization or others.
143. The ISO 14001:2004 Environmental Management Systems and OHSAS 18001:1999
Occupational Health and Safety Management System Standard certification requires periodic
training of all staff from the level of the contractors to the Management of the company on
the guidelines and processes. All site distribution offices have a HSE in-charge who conducts
random checks for compliance. The compliance to ISO and OHSAS is also externally
monitored every six months.
F. Monitoring & Evaluation
144. Results indicators will be collected by SSGC and updated on a quarterly basis. The
data will be collected at sites where physical works are being carried out, starting with the
segmentation works to identify the highest volume of UFG and will be used to initiate
activities such as pipeline replacement and/or rehabilitation, cathodic protection, etc. Field
data collected will be analyzed by SSGC at headquarters and integrated into the overall UFG
reduction plan. Monitoring and Evaluation support will be provided by the Lender‘s
Engineer, who will provide reporting to SSGC, the World Bank, The Government, and
OGRA. SSGC will report UFG-related information to OGRA on a quarterly basis on the
basis of network segments, and will posts UFG information on the company‘s website.
145. SSGC will be monitoring the overall UFG reduction efforts using existing resources
and manpower at various town border stations and through regular site surveys by its staff.
Additional equipment such as four-wheel drive vehicles and other ancillary equipment will
be required by SSGC in order to support its staff for effective M&E of activities and results.
The cost of such equipment will be borne by SSGC and procured using Bank funds.
Successful implementation of each component should produce a positive effect through
lower measurable UFG volumes.
146. To effectively monitor the overall progress of implementation, SSGC has developed a
multi-year schedule using the latest project management tools and software, such as
Microsoft Project. The activity sequencing and dependencies have been developed as the
46
baseline based on the work which will be undertaken throughout the project. The baseline
will be benchmarked against actual progress and will be tracked on a routine basis by SSGC
and updates will be produced on a quarterly basis to SSGC management and the Bank to
review overall implementation. These updates will provide data on progress to date for each
activity, variance from baseline and expected time to completion. A Gantt chart will be
produced for each, updated to reflect this information, and critical activities will be tracked
using the Critical Path Method (CPM). The baseline schedule will be revised if and when
necessary.
G. Role of Partners
147. USAID is an active partner with the Government in the energy sector and has
expressed interest in supporting activities in the gas sector that could be complementary to
the Bank‘s engagement, see Annex 2, Section E.
47
Annex 4: Operational Risk Assessment Framework (ORAF)
Project Development Objective(s)
The development objective of the Project is to enhance the supply of natural gas in Pakistan by reducing the physical and commercial losses of gas in the pipeline system.
PDO Level Results Indicator:
The reduction in the amount of unaccounted-for gas caused by the Project.
1. Project Stakeholder Risks Rating: Moderate
Description: Consumers are largely interested in low-cost energy supply while the Government has to balance this interest with its own fiscal constraints and its need to have consumers carrying the cost of energy supply to avoid unaffordable subsidies. These conflicting interests could generate dissenting views about the Bank‘s involvement in the sector.
Risk Management: A dissemination strategy on the benefits of UFG reduction has been prepared by SSGC. The Bank will also support the utility with generating positive messages on the advantages of reducing gas losses and theft.
Resp.: Client Stage: Prep. / Impl. Due Date : n/a Status: Ongoing
2. Implementing Agency Risks (including fiduciary)
2.1 Capacity Rating: Moderate
Description: The project represents a large endeavor for the utility. Also, non-familiarity with World Bank procurement guidelines poses a reasonable risk in carrying out the requisite due diligence. Efficiency and transparency in procurements could be an issue. The utility‘s ability to mobilize any counterpart funds required may be constrained since the utility‘s profitability is eroded by high gas losses.
Risk Management: The utility has implemented a number of large infrastructure expansion projects including with International Financial Institution (ADB). It has good project management capacity and systems in place. As to procurement, an extensive review of the utility‘s capacity was carried out prior to appraisal and yielded an initial Substantial risk rating. FM capacity was similarly addressed and found satisfactory in terms of record keeping, accounting and auditing systems and procedures. The project will include resources to fill in any gaps, if required.
Resp.: Client Stage: Preparation Due Date : n/a Status: Completed
2.2 Governance Rating: Substantial
Description: OGRA's regulations require annual reductions in UFG by the gas utilities. SSGC has not been able to achieve OGRA benchmarks in recent years, which have eroded the utility‘s profitability. Since this lack of compliance did not result in any punitive actions except for a cash loss, the utility‘s management may not be fully incentivized to follow
Risk Management: An investment program (this Project) to address the problem of UFG would also help mitigate a core problem relating to profitability for the gas company and have a stabilizing impact on utility management. Greater transparency and accountability made possible through segmentation and monitoring losses at the sub-system called small operating unit (SOU) with assigned responsibility and performance targets measured by a scorecard that is made public enabling social accountability.
48
commercial principles and standards.
If SSGC‘s management should neglect to undertake a systematic, comprehensive and transparent segmentation of the distribution network to discover where the UFG is most prevalent, or not use the investment funds where they can most effectively reduce UFG (merit-order interventions), it would represent a governance issue.
Poor governance may lead to decreased service delivery and inefficiencies. Capacity within the Government to oversee and regulate the activities of gas utilities (who hold some monopoly powers) could be limited.
Resp.: Client Stage: Prep. / Impl. Due Date : n/a Status: Ongoing
Risk Management: Bank involvement and oversight of project preparation would help ensure that the project is executed according to best industry practices and standards. A Lender‘s Engineer will focus on results monitoring, effectiveness of use of the Project‘s financial resources, and progress monitoring.
Resp.: Bank Stage: Implementation Due Date : n/a Status: Ongoing
Risk Management: While the Government has oversight responsibility as the majority owner, the utility‘s performance is regulated by OGRA, which has developed comprehensive performance standards, rules and regulations.
Resp.: Client Stage: Implementation Due Date : n/a Status: Ongoing
3. Project Risks
3.1 Design Rating: Moderate
Description: While gas supplies have expanded relatively rapidly, UFG (i.e. technical losses, theft, metering errors) has also expanded. UFG levels are 4-5 times the international norm of about 1-2 percent of sales volume.
A pilot project component where residential consumers' inefficient gas-using equipment (such as space heaters and water heaters) is replaced with high-efficiency equipment, would involve the utilities in an activity with which they have little experience.
One intention of the project is to make more natural gas available for high-value use, such as for fuel to large, state-owned thermal power plants that currently burn costly fuel oil. There is a risk that the extra gas made available will not be channeled to the highest-value use in the Pakistani energy sector
Risk Management: Project designs have been reviewed by the Bank and are considered in line with good industry practice. The Project will provide international expertise (Owner‘s Engineer) for project implementation to complement the sub-borrower‘s own expertise and resources.
Resp.: Client Stage: Implementation Due Date : 3 months after effectiveness
Status: Ongoing
Risk Management: A consultant with access to international experience (and to be provided access to World Bank experience) will assist the Borrower in planning and implementing the consumer appliance pilot project.
Resp.: Client Stage: Implementation Due Date : n/a Status: Ongoing
Risk Management: To ensure that gas freed up by the Project is channeled to high-value uses requires not only rational allocation policies but also competent implementation. The Bank will continue to interact with and advise the Government on refining its gas allocation priorities.
49
since competitive market forces are not present. Resp.: Client Stage: Implementation Due Date : n/a
Status: Ongoing
3.2 Social & Environmental Rating: Low
Description: The Project is expectedly benign with respect to environmental and social impacts. Any noticeable impacts would mostly come from temporary trenching work to replace gas pipes. Existing company procedures are considered in line with good industry practices.
Risk Management: Environmental and social impacts of the Project have been studied, and an Environmental and Social Management Framework (ESMF) has been developed during project preparation. Its implementation will be monitored by the Bank
Resp.: Client Stage: Prep. / Impl. Due Date : n/a Status: Ongoing
3.3 Program & Donor Rating: Moderate
Description: The Bank has been engaged in the energy sector for many years and is in active dialogue with the Government and key stakeholders concerning the development of Pakistan‘s energy sector.
Risk Management: Continued Bank oversight during implementation.
Resp.: Bank Stage: Implementation Due Date : n/a Status: Ongoing
3.4 Delivery Monitoring & Sustainability Rating: Moderate
Description: Key to Project success is the task of ―isolating‖ smaller parts of the distribution grid so that the UFG problem can be analyzed on a detailed level (by ―segment‖). Risks to delivering results involve inadequate segmentation and ignoring the segment information by undertaking investments under the Project not in accordance with merit order.
Risk Management: The Project will finance an Owner‘s Engineer to help obtain efficient project execution. A Lender‘s Engineer will focus on results monitoring, effectiveness of use of the Project‘s financial resources, and progress monitoring. Continued Bank oversight during implementation. Conversion from steel pipes to polyethylene pipes under the Project will contribute substantially to the sustainability of investments in technical loss reduction.
Resp.: Bank Stage: Implementation Due Date : n/a Status: Ongoing
Overall Implementation Risk Rating: Substantial
50
Annex 5: Implementation Support Plan
148. Strategy and approach for implementation support
(a) The Task Team Leader will assume overall responsibility for project implementation.
The Bank team is well-staffed both at headquarters and in the field, with five (5) full-
time staff based in Islamabad. Since the majority of the works are in the southern
provinces of Pakistan, mainly Karachi, the team may engage a consultant based in
Karachi to coordinate the overall effort between implementation review missions.
(b) Project design is based on the principle of segmentation whereby SSGC isolates the
gas systems into segments to monitor overall gas flow in and out of that segment.
This, together with physical leakage surveys, will allow SSGC to direct its project
resources to where the UFG problems are the most severe. As these activities are a
continuation of regular work undertaken by SSGC, albeit on a much larger scale, it
reduces the implementation risk. SSGC will contract an Owner‘s Engineer to
complement SSGC‘s own expertise and resources in implementation of the Project.
Furthermore, the Project will finance a Lender‘s Engineer, who will focus on results
monitoring, effectiveness of use of the Project‘s financial resources, and progress
monitoring, to assist with informing the Government, the regulator, and the World
Bank. The Bank team will review SSGC‘s implementation plans as they develop over
time with gained experience and provide necessary support to ensure timely
completion of all activities.
(c) SSGC and the Bank have agreed to use the gas company‘s own resources and
manpower for the installation work, with the balance being met through outsourcing
and contracting. Information on outsourced Works packages is specified in the
procurement plan. M&E and data collection will be the primary responsibility of
SSGC.
149. The skills-mix needed for implementation support and estimate of resource
requirement is shown in the table below:
Time Focus Skills Needed Resource
Estimate
Partne
r Role
First 12 months Project
Implementation
capacity
Technical solutions
Safeguards
Procurement
Gas distribution
engineering
Regular supervision
team skills
US$175,000 -
12-48 months Regular supervision
activities
Regular supervision team
skills
US$140,000 p.a. -
51
I. Skills Mix Required
Skills Needed Number of Staff Weeks Number of Trips Comments
TTL 10 3
Co-TTL (Local) 12 Local
Gas Engineer 4 1
Procurement 8 Local
FM 2 Local
Environmental
Safeguards
2 1
Social Safeguards 2 1
Local consultant 5 Local
II. Partners
150. There are no other Project partners.
52
Annex 6: Team Composition
151. World Bank staff and consultants who worked on the project:
Name Title Unit
Anjum Ahmad Sr. Energy Specialist SASDE
Asif Ali Sr. Procurement Specialist SARPS
Khalid Bin Anjum Procurement Specialist SARPS
Rashid Aziz Sr. Energy Specialist SASDE
Ken Bilston Gas Sector Specialist Cons.
Sameena Dost Sr. Counsel LEGES
Minerva Espinosa Program Assistant SASDE
Abdulaziz Faghi Operations Officer SASDE
Bjorn Hamso Sr. Energy Economist/Task Team Leader SASDE
Javed Hussain Gas Sector Specialist Cons.
Robert M. Lesnick Program Coordinator SEGOM
Shahid Lutfi Environmental Specialist Cons.
Yuka Makino Natural Resources Mgmt. Specialist SASDI
Khizra Pervez Program Assistant SASDO
Kazim Saeed Econ. & Financial Analysis Cons.
Hasan Saqib Sr. Financial Mgmt. Specialist SARFM
Mohammad Saqib Econ. & Financial Analysis SASDE
Raghuveer Y. Sharma Chief Investment Officer IFC
Chau-Ching Shen Sr. Finance Officer CTRFC
Richard J. Spencer Lead Energy Specialist SASDE
Chaohua Zhang Sr. Social Sector Specialist SASDS
53
Annex 7: Economic and Financial Analysis
152. At end-June, 2011, SSGC‘s gas distribution mains spread over 31,251 km, of which
26,199 km (84 percent) was steel and 5,052 km (16 percent) was polyethylene (PE). With
service connections scaling another 7,004 km in steel and 998 km in PE, the entire network
spans 39,253 km. In 2010-11, SSGC served 360 bcf of gas to some 2.37 million customers of
which 2.34 million were domestic customers, some 25,000 commercial and nearly 4,000
industrial customers. Industrial customers consumed 266 bcf (74 percent) of the gas sold,
followed by domestic consumers (80 bcf), and commercial customers (10 bcf). The volume
of UFG was reported at 35.8 bcf in 2010-11.
153. The Project‘s objective is to reduce UFG from SSGC‘s gas distribution system
through investments in, inter alia,
a. Underground pipeline replacement and rectification
b. Overhead leak detection and rectification
c. Network segmentation and automated pressure management
d. Advanced metering.
In addition, improvements in SSGC‘s cathodic protection system, technical assistance, and a
pilot project to promote gas appliances with high thermal efficiency will be supported. All
UFG volume calculations in the economic and financial analyses assume gradual
implementation of planned investments through each year. Therefore, only a half of the
benefits from the investments in a given year are counted in that same year. Full benefits
from a year‘s investments are counted in the subsequent year.
A. Economic Analysis
154. Benefits have been quantified for the bulleted items above by calculating the yearly
estimated reduction in UFG volume from each of these components and then the entire
Project. The key assumptions were:
a. For the economic analysis, constant prices of goods, construction/installation and
other costs were used.
b. A US$/Pakistani Rupee exchange rate of PKR 85/US$ was used for the economic
analysis.
c. The economic life of pipelines and associated equipment is taken to be 17 years
(30 years based on design parameters less 13 years weighted average age of
distribution pipelines of 1‖, 2‖, 4‖, 6‖ and 8‖ diameter—the diameters to be
replaced under the Project). Salvage value was taken to be zero. For turbine
meters and ultrasonic meters, SSGC estimates an economic life of 15 years. An
economic life of 10 years was taken for pressure management equipment.
d. Incremental O&M costs were not included where the Project is replacing existing
pipelines and equipment (the replacements are likely to reduce O&M costs). For
54
automated pressure management, an annual O&M cost equivalent to 1.5 percent
of the equipment‘s cost was used (based on SSGC annual reports).
e. The calorific value of gas was taken to be 0.925 mmbtu / mcf (million British
thermal units per thousand cubic feet)
f. For the NPV calculations, a discount rate of 12 percent (the hurdle rate used by
the Government of Pakistan)14
and a sensitivity discount rate of 15 percent were
used.
155. UFG causes SSGC to purchase additional gas to serve customers. The key benefit of
this Project‘s activities is gas saved from becoming UFG. Over the economic life of the
assets being created, the opportunity cost of gas saved from UFG is the price of any
additional gas supply that SSGC has to acquire to replace the lost gas. Additional gas is most
likely to come from new domestic finds. Therefore, the economic value of gas saved is taken
as the wellhead price of gas for Zone III under the Pakistan Petroleum Policy 200915
using a
crude oil price forecast for 2011-2035 from the US Department of Energy‘s Annual Energy
Outlook16
. This is a minimum estimate of the opportunity cost because imported gas
expected in the coming decade is slated to cost more than twice as much as any domestic
finds under Pakistan‘s prevailing petroleum policy.
156. For each component, economic internal rates of return (EIRR) and net present values
(NPV) were generated for scenarios involving the main risks to realization of economic
returns: (a) 20 percent increase in cost, (b) 20 percent reduction in benefits, (c)
implementation delays of 1 year , and (d) a combination of (a), (b) and (c).
1. Underground Replacement and Rectification
157. SSGC estimates that underground leakage from its 31,074 km of steel mains and
services accounts for more than 60 percent of its UFG. Using data from network
segmentation and leak detection surveys, SSGC plans to replace 5,750 km and plug leaks in
18,700 km of its underground steel network over the next five years. The replacement will be
90 percent PE (to avoid corrosion) and the rest steel. Further, very small strips of pipe that
are leaking heavily will be replaced. SSGC estimates that 60 percent of its UFG is due to
leakage of which 90 percent is from underground leaks and 10 percent from overhead leaks.
Based on limited surveys, SSGC estimates that for each kilometer of steel network to be
replaced or rectified, on average, a reduction in UFG of 1,570 cubic feet per day will be
achieved on average (with some variation based on which areas are being addressed). In
addition, SSGC will also fully replace all customer service connections served by pipes that
are being replaced (assumptions from ‗overhead‘ section below were used to estimate UFG
14
The Government of Pakistan uses 12% as discount rate for evaluating projects. Citing GOP‘s choice, recent World
Bank projects have used 12% in Pakistan, e.g., Karachi Port Improvement Project (August, 2010), Punjab Barrages
Improvement Project (June, 2010), Punjab Education Sector Project (May, 2009). The Bank‘s Nigeria Electricity &
Gas Improvement Project (May, 2009) also took 12%. 15
Zone III is the highest prospectivity zone (bearing the lowest wellhead price for new gas) and largely overlaps
with SSGC‘s franchise area. 16
The 2035 price forecast is maintained till 2040.
55
reduction from this activity). Based on these assumptions, a cumulative 14.9 bcf/year
reduction is estimated in UFG due to the project. With this estimate, the base case bears an
economic internal rate of return of 47 percent with NPV of US$ 216 million at 12 percent
(Table 11). The ‗all impacts‘ case maintains a healthy EIRR (21 percent) and NPV of US$ 80
million. At a switching value of 545 cubic feet per day per km, the NPV (at 12 percent base
case) falls to zero.
Table 11: Economic Benefits for Underground Replacement and Rectification
Underground Replacement and Rectification
Scenarios (US$ 147 Million)
EIRR NPV
(US$M @
12%)
NPV
(US$M @
15%)
Base Case 47 % 216 165
Capital cost increase by 20% 38 % 193 143
Reduction in benefits by 20% 36 % 150 110
Delay of benefits for 1 year 34 % 182 130
All impacts 23 % 99 60
2. Overhead Leak Survey and Rectification
158. For addressing leaking service connections to SSGC‘s 2.25 million existing
customers, two approaches are planned: (i) the entire service connection would be replaced
for the 466,000 customers whose service mains are to be replaced among the 5,750 km17
(mentioned above), and (ii) of the remaining 1.78 million customers, leak detection will be
conducted and defective threaded fittings (including service valves, regulators, meter lock
cocks, and pipe) will be replaced. Based on limited surveys, it is estimated that about 50
percent service connections will be found to be leaking among each group and that for every
customer, a reduction of 8 cubic feet per day in UFG can be achieved (in the first year 6 cfd
is assumed to allow for teething problems). This translates to a cumulative 3 bcf/year
reduction in UFG due to the Project. A healthy economic return of 39 percent is obtained in
the base case with US$ 19 million NPV. The ‗all impacts‘ case maintains an EIRR of 15
percent and US$ 3 million NPV (Table 12). At a switching value of 4.7 cubic feet per day per
customer, the NPV (at 12 percent, base case) falls to zero.
Table 12: Economic Benefits for Overhead Leak Survey and Rectification
17
On average, the SSGC network serves 80 customers per km.
56
Overhead Leak Survey and Rectification
Scenarios (US$ 33.5 Million)
EIRR NPV
(US$M @
12%)
NPV
(US$M @
15%)
Base Case 41 % 22 17
Capital cost increase by 20% 31 % 17 12
Reduction in benefits by 20% 28 % 12 9
Delay of benefits for 1 year 28 % 17 12
All impacts 15 % 3 (0)
3. Pressure Management
159. The rate of gas lost through leakage is dependent upon condition of the pipes and
their operating pressure. Improving the condition of pipe by repair/replacement is on-going,
however, reducing pressures at times when full capacity is not required has proven to be a
cost-effective mitigation strategy that can be implemented in a short period of time.
160. One method of minimizing pressure is to make adjustment in operating pressure. This
works by determining in advance (using demand forecasting) what the maximum demand in
a time period is likely to be and what corresponding town border pressures should be to meet
that demand. Manual adjustments are then made three to five times a day. For example, on a
typical summer day last summer, the TBS at NIPA in Karachi was operated at 14 pounds-
force per square inch gauge (psig) during the cooking peaks (7 am – 2 pm and 5 pm – 9 pm),
at 10 psig in between these peaks and at 7 psig during the night (weighted average pressure:
10.6 psig). On a typical winter day last winter (when gas demand in SSGC‘s system rises
mainly due to water heating load), the same TBS was operated at 18 psig during the peaks
and at 12 psig off-peak (weighted average pressure: 15 psig).
161. SSGC is currently making manual adjustment at almost all the Town Border Stations
except the two stations where pressure profiling equipment is in operation. Automatic
pressure management equipment can change pressures at 15-minute intervals with real-time
data.
162. The method of pressure control is to feed back extremity pressure to the Town Board
Station in real time and continuously adjust pressures such that a Town Board Stations just
maintains required pressures at the extremity. This produces lowest possible operating
pressure and therefore lowest leakage. Equipment being used by SSGC is designed to operate
in real time mode and they are planning to switch over to real time mode.
163. SSGC currently has 537 Town Border Stations. Automatic pressure management
equipment is proposed to be installed at 400 TBS‘s along with metering facility. Given the
operating pressures currently in use by SSGC, a reduction of 20 percent in gauge pressure is
estimated to result in a 10 percent gas saving. Based on this, SSGC estimates that for every
unit to be installed, 4.8 million cubic feet per year will be saved and a cumulative 1.92 bcf
per year reduction in UFG will be achieved by year 5 of the Project. This yields a base-case
52 percent economic return and a US$ 36 million NPV at 12 percent (Table 13). At a
57
switching value of 1.5 million cubic feet per year per unit, the NPV (at 12 percent base case)
falls to zero.
Table 13: Economic Benefits for Pressure Management
Pressure Management Scenarios
(US$ 17.8 million)
EIRR NPV
(US$M @
12%)
NPV
(US$M @
15%)
Base Case 52 % 36 26
Capital cost increase by 20% 42 % 32 23
Reduction in benefits by 20% 39 % 25 18
Delay of benefits for 1 year 36 % 30 20
All impacts 24 % 18 11
4. Cathodic Protection
164. SSGC estimates that some 50 percent of its steel distribution network is currently
without any cathodic protection. Another 20 percent is partially protected and only 30
percent is under adequate protection. This is causing corrosion to continue and increase UFG
by an estimated 6 percent each year. Effective cathodic protection requires coating of
pipeline, adequate protection monitoring, and availability of uninterrupted power supply to
maintain potential on steel pipe. To arrest the progression of the gas leakage rate, SSGC will
make the following investments:
a. SSGC surveys show that of the 5,000 kilometers of its steel pipelines of more
than 4-inch diameter, some 10 percent need re-coating (SSGC does not re-coat
pipelines of less than 4-inch diameter because it is more cost-effective to replace
them). Under this component, 450 km of 4-inch and above steel pipelines will be
re-coated.
b. SSGC has some 600 cathodic protection stations. Under this component, cathodic
protection remote monitoring equipment will be installed on all these stations.
c. Electricity supply is being interrupted up to five hours a day due to the power
shortage prevailing in the country. This is impacting the cathodic protection
systems. Under this component, SSGC will also install 250 battery backup
systems and 120 solar power sources for cathodic protection stations.
d. Where CP stations are not feasible, magnesium anodes provide CP cover by
giving the required current. Under this component, SSGC will also install 4,500
magnesium anodes.
165. Benefits of cathodic protection are critical for UFG reduction in a distribution
network dominated by steel. But these benefits could not be adequately quantified.
58
5. Theft reduction (Metering and Surveillance)
166. SSGC plans to reduce theft among large industrial and commercial customers.
Among industrial customers, SSGC has installed customer monitoring stations at 3,000
customers‘ sites. For 500 of these large industrial customers, SSGC will install video
surveillance systems. SSGC has been able to reduce theft averaging about 16 million cubic
feet (mmcf) per customer in the last five years (870 mmcf from 55 customers). A
conservative estimate of 0.6 percent increase in sale to the largest 500 industrial customers is
taken as benefit from video surveillance systems at customers' sites. This means 2.5mmcf /
customer / year which would reduce theft by 1.25 bcf due to the Project. The switching value
is 0.87 mmcf / customer (keeping saving from tamper-proof meters at 0.084 mmcf / customer
/ year).
167. Among commercial customers, SSGC plans to install ultrasonic, tamper-proof meters
at 12,500 customers‘ sites. SSGC has been able to reduce theft averaging 0.5 mmcf /
customer in the last five years (1074 mmcf from 2,174 customers). An estimate of 15 percent
increase in sale to 12,500 commercial customers is taken as benefit from installation of
ultrasonic meters. This means about 0.084 mmcf / customer / year. Total reduction in year 5
is estimated to be a little over 0.8 bcf. The switching value is 0.002 mmcf per year per
customer (keeping the saving from surveillance systems at 2.5 mmcf / customer / year).
168. Theft reduction benefits, but not metering accuracy improvements, were included in
the economic analysis because the accuracy improvement benefit of advanced meters is a
purely financial benefit (as a transfer from customer to SSGC) (Table 14). Therefore, this
benefit is included in the financial analysis.
Table 14: Economic Benefits for Theft Reduction (Metering and Surveillance)
Theft Reduction (Metering and Surveillance)
Scenarios (US$ 35.2 million)
EIRR NPV
(US$M @
12%)
NPV
(US$M @
15%)
Base Case 25 % 20 13
Capital cost increase by 20% 19 % 13 6
Reduction in benefits by 20% 18 % 9 4
Delay of benefits for 1 year 20 % 14 7
All impacts 11 % (1) (6)
6. Entire Project
169. For the entire project, the benefits quantified for the above four components were
compared to the total cost of the project. The cumulative UFG reduction due to the project is
estimated to be 22.2 bcf per year. This UFG number is not compared to OGRA‘s UFG
benchmark here because it does not include the meter accuracy benefit—included in the
financial analysis below. The base case shows 36 percent EIRR with US$ 281 million NPV
at 12 percent. The ‗all impacts‘ case bears an economic return of 18 percent (Table 15).
59
Table 15: Economic Benefits for Entire Project
Entire Project Scenarios
(US$ 272 million)
EIRR NPV
(US$M @
12%)
NPV
(US$M @
15%)
Base Case 36 % 281 206
Capital cost increase by 20% 29 % 237 164
Reduction in benefits by 20% 28 % 181 123
Delay of benefits for 1 year 27 % 230 154
All impacts 18 % 97 40
B. Financial Analysis
170. Financial benefits were quantified for underground pipeline replacement and
rectification, overhead leak detection/rectification, pressure management, and metering by
calculating the year-wise estimated reduction in UFG volume from each of these components
and then the entire Project. The key assumptions were:
a. For the financial analysis, prices of goods, construction/installation and other
charges were distributed into domestic and imported. Domestic costs were
advanced at 10 percent inflation rate for the coming five years. Costs of imported
goods were advanced at 2.5 percent dollar inflation rate for the coming five years.
b. The US$/Pak Rupee exchange rates projected by GOP for its dialogue with the
IMF were used to convert rupee costs into US dollar for the financial analysis.
c. OGRA allows SSGC a straight-line depreciation rate of 6 percent per annum on
pipelines and equipment which translates into a financial use life of 17 years. The
financial life of the pipelines and associated equipment to be procured was taken
to be 10 years (17 years less 7 which is the weighted average age of pipelines
currently under depreciation) with zero salvage value.
d. Incremental O&M costs were not included where the Project is replacing existing
pipelines and equipment (the replacements are likely to reduce O&M costs). For
automated pressure management and metering equipment, an annual O&M cost
equivalent to 1.5 percent of the equipment‘s cost was used (based on SSGC
annual reports).
e. The calorific value of gas was taken to be 0.925 mmbtu/mcf.
f. For the NPV calculations, a discount rate of 12 percent (the hurdle rate used by
the Government of Pakistan)18
and a sensitivity discount rate of 15 percent were
used.
18
The Government of Pakistan uses 12% as discount rate for evaluating projects. Citing the Government‘s choice, recent World
Bank projects have used 12% in Pakistan, e.g., Karachi Port Improvement Project (August, 2010), Punjab Barrages Improvement
60
171. The key financial benefit to SSGC from UFG reduction is the reduction in OGRA‘s
UFG penalty. The reduction in OGRA‘s UFG penalty was computed for the UFG reduction
benefit for each component. OGRA has indicated that the relief in its UFG benchmark in
FY10 was a one-time relief. A conservative assumption is made about the UFG benchmark.
It is maintained at 4.5 percent from 2011 onwards. In addition to the investment cost (and
O&M cost where applicable), the interest cost to be incurred by SSGC for this project was
allocated to each of the components on a pro-rata basis.
172. The financial internal rates of return and net present values for the components are
shown below:
Table 16: Financial Analysis of Underground Replacement and Rectification
Underground Replacement and Rectification
(US$ 147 million)
FIRR NPV
(US$M @
12%)
NPV
(US$M @
15%)
Base Case 47 % 157 128
Capital cost increase by 20% 36 % 120 94
Reduction in benefits by 20% 33 % 89 68
Delay of benefits for 1 year 31 % 121 89
All impacts 15 % 23 3
Table 17: Financial Analysis of Overhead Leak Survey and Rectification
Overhead Leak Survey and Rectification
(US$ 33.5 million)
FIRR NPV
(US$M @
12%)
NPV
(US$M @
15%)
Base Case 47 % 33 27
Capital cost increase by 20% 41 % 29 23
Reduction in benefits by 20% 34 % 19 14
Delay of benefits for 1 year 31 % 25 19
All impacts 16 % 5 1
Table 18: Financial Analysis of Pressure Management
Project (June, 2010), Punjab Education Sector Project (May, 2009). The Bank‘s Nigeria Electricity & Gas Improvement Project
(May, 2009) also took 12%.
61
Pressure Management
(US$ 17.8 million)
FIRR NPV
(US$M @
12%)
NPV
(US$M @
15%)
Base Case 52 % 20 17
Capital cost increase by 20% 38 % 15 12
Reduction in benefits by 20% 36 % 11 9
Delay of benefits for 1 year 32 % 16 12
All impacts 15 % 3 0
173. SSGC sees inaccurate metering as a source of gas losses. If this source of
Unaccounted-for-Gas is reduced, additional revenue accrues to SSGC (even though no
additional gas is introduced into the system. Under this component, SSGC plans to replace
conventional meters with 230M turbine meters at 70 industrial customer locations and with
60M turbine meters at 200 industrial customer locations19
. Among commercial customers,
SSGC plans to replace conventional meters with 2,500 ultrasonic, tamper-proof meters of
2000 cubic foot per hour capacity and 10,000 ultrasonic meters of 880 cubic foot per hour
capacity. As part of its segmentation effort, 400 bulk meters will be installed at TBS‘s across
the network. In addition to the theft reduction benefit presented in the economic analysis
section above, the benefit of higher sales due to more accurate meters was also included in
the financial analysis.
Table 19: Financial Analysis of Metering and Surveillance
Metering and Surveillance
US$ 35.2 million
FIRR NPV
(US$M @
12%)
NPV
(US$M @
15%)
Base Case 87 % 100 85
Capital cost increase by 20% 73 % 94 80
Reduction in benefits by 20% 68 % 71 60
Delay of benefits for 1 year 53 % 84 69
All impacts 37 % 52 41
174. For the entire Project, the FIRRs and NPVs are given below.
Table 20: Financial Analysis of Entire Project
19
230M: 230,000 cubic feet per hour; 60M: 60,000 cubic feet per hour.
62
Entire Project
US$ 272 million
FIRR NPV
(US$M @
12%)
NPV
(US$M @
15%)
Base Case 43 % 252 204
Capital cost increase by 20% 33 % 189 145
Reduction in benefits by 20% 27 % 116 84
Delay of benefits for 1 year 27 % 170 120
All impacts 13 % 15 (17)
175. Using SSGC‘s projection of 6 percent per annum increase in the overall volume of
UFG (without the UFG reduction project), the system UFG is estimated to reach 50 bcf by
2017. Under the financial analysis, successful implementation of the UFG reduction project
could cut this UFG volume by 40 percent.
C. Financial Analysis of SSGC
176. SSGC has suffered operating loss (net sales less cost of gas and operating expenses)
every year since 2005. Capital expenditure has been focused on expansion and strengthening
of the network and on connecting new gas fields with low priority to UFG reduction. SSGC‘s
debt-to-equity ratio deteriorated from about 45:55 in FY06 to about 65:35 in FY09—
aggressive for a gas utility. With debt levels rising and operating income falling, debt service
coverage (pre-tax revenue plus interest payments, depreciation and amortization over debt
obligations) also fell to 1.0 in FY10.
177. The gas demand/supply gap is expected to widen in Pakistan during the next decade,
and most of the additional gas is expected to be higher-cost imported gas. This makes the
UFG reduction Project highly significant—not only to increase gas supply and preserve
resources, but also to contain UFG penalties, which will be calculated using a rapidly
increasing weighted average cost of gas. Both these aspects have significant impact on
SSGC‘s financial standing.
178. The Project presents a path to financial recovery for SSGC based on UFG reduction.
A financial model was developed to simulate SSGC‘s financial statements for 2012-2020
including the UFG reduction Project. The base case projections show that SSGC‘s UFG
Project 2013-2017 can return the company to financial health through gas saved by UFG
reduction and longer-term borrowing, even with 90 percent implementation success20
.
Capital expenditure is to be focused much more on UFG reduction (about half out of the
average total capital expenditure of PKR 11.1 billion (US$ 105 million) per year—using
more outsourcing). By 2017, SSGC‘s debt service coverage can be 1.4 and debt-to-equity can
be a reasonable 57:43. With suitable pruning of the capital expenditure program, SSGC’s
financial recovery can be achieved with significantly lower long-term debt: with capital
expenditure averaging PKR 9.5 billion (US$ 90 million) per annum in 2013-2017, the long-
20
The percentage refers to a success rate in achieving the Project‘s UFG reduction target and is not the UFG target
value itself.
63
term debt can fall from the vicinity of PKR 37bn in 2017 (under the higher capex scenario) to
a more manageable PKR 33bn.
179. These results were found to be generally robust to adverse changes in circular debt, a
collapse of the rupee, a spike in crude oil prices, slower implementation, lower-than-expected
benefits, and a delay in gas import projects. But a few critical assumptions underpin these
results: (i) the steep tariff increases required to cover higher-cost gas would be implemented
in an environment of gas shortages; (ii) unless significant new domestic gas discoveries are
forthcoming and put on-stream, suitable gas import projects would replace depleting
domestic fields; (iii) with the help of outsourcing during the UFG project, SSGC‘s
implementation capacity is assumed to increase compared to the last few years, and (iv)
SSGC will not make capital expenditure commitments which are beyond its financing
capacity.
1. Background
180. Regulatory regime. SSGC‘s core business is gas transmission and distribution
regulated by OGRA (it also runs unregulated businesses in meter manufacturing, LPG
production (JJVL), and LPG air-mix). For each fiscal year, the regulatory regime guarantees
SSGC a cost-recovery tariff plus a 17 percent return on its Net Fixed Assets in Operation (net
of deferred credit and depreciation) but with deductions to this return if SSGC does not meet
OGRA benchmarks. The key deductions to SSGC‘s return are: OGRA penalties for not
meeting OGRA‘s performance benchmarks notably for UFG and for human resource (HR)
cost21
. The cost of gas is a pass-through cost for SSGC.
181. Tariff regime. Based on the average tariff determined by OGRA for a given year, the
Government sets the tariff for each consumer category. The resulting average tariff may be
less (or sometimes more) than the average tariff determined by OGRA. In such cases, GOP
uses a ‗balancing account‘ called the Gas Development Surcharge (GDS).
2. Financial highlights 2006-10
182. SSGC has suffered operating loss (net sales less cost of gas and operating expenses)
every year since 2005 (Table 21). In FY05 and FY06, OGRA‘s UFG penalty began to bite
and the company dipped into operating loss in both years. In FY06, additional loans of PKR
3 billion helped capital expenditure of PKR 5.4 billion, payment of principal (PKR 1.5
billion) and interest (PKR 1 billion) as well as dividend distribution of PKR 1 billion. Total
long-term debt stood at PKR 10.2 billion (Table 22).
Table 21: Key Financial Ratios 2006-2010
21
OGRA also disallows certain capital expenditures it does not consider prudent.
64
Key Ratios 2006 2007 2008 2009 2010
Operating margin -0.1% -1.1% -3.7% -4.7% -0.4%
Net margin (net profit/net sales) 1.3% 0.4% 1.3% 0.2% 4.1%
Dividend payout ratio 99% 97% 116% 84% 0.0%
Debt service coverage ratio 2.2 1.3 2.3 0.7 0.8
Current ratio 1.1 1.0 1.1 1.1 1.0
Debt : equity 46 : 54 56 : 44 60 : 40 64 : 36 45 : 55
Operating margin: (Net sales – cost of gas – operating expenses) / Net sales; Dividend payout ratio: (Cash dividend paid
in current year) / (Net profit of previous year); Debt service coverage ratio: (Net profit + interest paid on debt +
depreciation + amortization + provisions) / (interest on debt + principal repayment); Current ratio: current assets / current
liabilities; Debt : Equity is (Non-current portion of long-term debt) / (Non-current portion of long-term debt + total
equity) : (Total equity) / (Non-current portion of long-term debt + total equity)
183. In FY07, SSGC‘s royalty from JJVL (an unregulated LPG business) began to rise,
just as the circular debt began to make its presence felt. The JJVL royalty offset SSGC‘s
operating loss of 1.1 percent of net sales in FY07 and helped keep SSGC‘s net margin
positive. Capital expenditure of PKR 8.5 billion was undertaken in FY07 (above the FY05-
10 average of PKR 6.5 billion). With this expenditure, rising interest cost, and the need to
repay existing loans (compounded by the impact of a UFG penalty of PKR 1.2 billion), new
loans of almost PKR 6 billion were contracted in FY07. Total long-term debt jumped to PKR
14.9 billion. A dividend of PKR 0.8 billion was distributed.
Table 22: Key Cash Flows 2006-2010
65
Key Cash Flows (PKR million) 2006 2007 2008 2009 2010
Cash from operations 6,957 5,928 5,705 (3,630) 7,093
New loans 3,000 5,980 12,533 6,800 1,000
Service dues from new customers 639 963 1,024 1,324 619
Interest on late payments from customers 109 97 168 2,865 1,985
Short-term borrowing 3,721
Cash used/(added) for year (1,601) (1,617) (89) 2,879 856
MAJOR INFLOWS 9,104 11,351 19,341 10,238 15,274
Capital expenditure (5,393) (8,566) (6,044) (6,583) (6,040)
Repayment of principal (1,445) (1,507) (11,533) (332) (6,808)
Interest on debt, late payment to suppliers (1,002) (1,483) (1,712) (2,668) (3,030)
Dividend payments (999) (866) (334) (832) -
MAJOR OUTFLOWS (8,839) (12,422) (19,623) (10,415) (15,878)
Other (net) 265 (1,071) (282) (177) (604)
Total long-term debt 10,244 14,868 15,959 22,466 16,679
Net sales (PKR million) 66,303 69,084 74,626 108,151 107,737
UFG penalty (478) (1,158) (769) (2,818) (932)
184. In FY08, the effect of worsening operating loss (3.7 percent of net sales), UFG
penalty, and rise in HR cost was offset by a commensurate rise in JJVL royalty and shrinkage
income, again keeping net margin barely positive. The FY08 capital expenditure was about
PKR 6 billion. To contain interest cost (which is not allowed into the rate base by OGRA),
SSGC swapped some PKR 11.5 billion of higher-cost long-term debt (at KIBOR plus 200
basis points) for lower-cost debt (at KIBOR plus 20 basis points). Only PKR 1 billion of new
debt was acquired in FY08 bringing the total to PKR 15.9 billion. A dividend of PKR 0.3
billion was distributed.
185. With this background, SSGC finances sustained a triple-hit within one year—FY09:
a. With the precipitous rise in the international price of crude oil, the value of SSGC
gas sales rose 45 percent year-on-year—while gas sales by volume rose only 4
percent from FY08 to FY09. The circular debt deteriorated significantly. This sent
the change in working capital for the year to a net negative PKR 7.5 billion (nine
times its average for the previous five years).
b. A serious decline in the value of the rupee caused a PKR 2.4 billion foreign
exchange loss on gas purchases (which is compensated by OGRA in the tariff
determination for the year but still imposes a temporary call on cash).
66
c. A UFG penalty of PKR 2.8 billion was imposed by OGRA and the operating loss
worsened further to 4.7 percent of net sales. As a result, instead of a contribution
of cash from operations, there was a deficit of PKR 3.6 billion.
186. The principal repayment was low in FY09 after the previous year‘s swap. And
interest payments to gas suppliers on late payment by SSGC were balanced with interest
payments from customers on late payments to SSGC. But with capital expenditure of PKR
6.6 billion in FY09, another PKR 6.8 billion in new loans had to be secured and cash reserves
of PKR 2.8 billion were depleted to cover cash needs for the year. Service dues of PKR 1.3
billion received from new customers were also useful. Dividend of PKR 0.8 billion was
distributed. The total long-term debt stood at PKR 22.5 billion at the end of FY09.
187. Key ratios. During 2005-09, SSGC managed receivables and payables such that
current ratio remained at 1.0 or above. But with the net additional borrowing of PKR 14
billion in this period, SSGC‘s debt-to-equity ratio deteriorated from about 45:55 in FY06 to
about 65:35 in FY09—aggressive for a gas utility. With debt levels rising and operating
income falling, debt service coverage (pre-tax revenue plus interest payments, depreciation
and amortization over debt obligations) also fell to 0.8 in FY10.
188. OGRA relief. SSGC‘s UFG level rose from 7.4 percent (i.e. 7.4 percent of gas supply
available to SSGC) in FY05 to 7.97 percent in FY10. The penalty in FY10 (when the average
UFG target was 5 percent) would have been PKR 2.8 billion which (along with finance cost)
would have seriously impacted SSGC‘s FY10 bottom line. Giving consideration to SSGC‘s
financial position, OGRA allowed two kinds of relief for FY10:
a. Relaxation in the UFG benchmark to 7 percent, reducing the penalty to PKR 0.9
billion.
b. Exclusion of the following items from operating income: Royalty from JJVL
(PKR 2,594m), Late Payment Surcharge (PKR 1,058m), Sale of gas condensate
(PKR 145m) and meter manufacturing profit (PKR 89m). This was a total
reduction of nearly PKR 4 billion from operating income which meant that the
cost recovery tariff allowed to SSGC rose.
189. With the relief from OGRA and a reduction in the cost of gas (as the international
price crude oil fell precipitously in FY10), SSGC posted a minor operating loss and a
healthier net margin (-0.4 percent and 4.1 percent of net sales, respectively). With this relief,
SSGC retired PKR 4 billion more of trade payables than receivables and about PKR 1 billion
more in interest payable than receivable. Capital expenditure of PKR 6 billion was
undertaken. With insufficient cash left for retirement of long-term debt, SSGC used PKR 0.8
billion of cash reserves and PKR 3.7 billion of short-term borrowing in retiring PKR 6.8
billion of long-term debt in FY10. The long-term debt stood at 16.7 billion at end-FY10 with
debt-to-equity ratio back to a reasonable 45:55. But PKR 3.7 billion of long-term debt had
been transferred to short-term debt.
67
Table 23: Capital Expenditure Breakdown 2006-2010
PKR million 2006 2007 2008 2009 2010
Avg.
2006-10
New towns/villages 533 1247 695 1749 2,064
1,258
Normal Expansion 1809 3416 3043 3183 3,031
2,896
T&D network (& other) 3,051 3,903 2,306 1,651 945
2,371
Capital expenditure incurred 5,393 8,566 6,044 6,583 6,040 6,525
- Of which capital
expenditure on rehabilitation
123
211
325
1,028
905
518
Approved capital expenditure
7,066
9,502 10,432
7,275
8,727
8,600
Additions to rate base
2,466
3,264
3,795
3,436
2,808
3,154
Capital Works in Progress
(CWIP)
2,675
4,313
4,005
3,538
3,528
3,612
190. Capital expenditure. During the five years till end-June 2010, SSGC made capital
expenditures of about PKR 32.6 billion and distributed approximately PKR 3 billion in
dividend. (Roughly, on a cash basis, these were financed with internal cash generation of
PKR 22 billion, net long-term borrowing of PKR 7.7 billion and service dues from new
customers of PKR 4.5 billion). But the capital expenditure has mostly been focused on
expanding the network (to new towns/villages and in areas served by the existing network),
strengthening/upgrading the existing network, removing bottlenecks, and extending the
network to new gas fields (Table 23). Of this capital expenditure, only PKR 2.5 billion (8
percent) has been focused directly on rehabilitation of the network—the core UFG reduction
activity.
191. Implementation capacity. The average annual capital expenditure of PKR 6.5 billion
was against approved capital expenditure budgets of PKR 8.5 billion which gives an indirect
indication of the company‘s capacity for implementation. Another indication is that the
capital expenditure of PKR 6.5 billion per annum has been matched with only PKR 3.1
billion per annum of capitalization (which adds to the asset base and earns the company a
return). The capital works in progress (CWIP) account has averaged a larger amount (PKR
3.6 billion) than annual capitalization, indicating that projects are being commissioned but
not completed as fast.
3. Gas Demand-Supply Balance & UFG
68
192. Gas demand to outstrip supply. The demand for gas has outstripped supply since
FY09 and gas load-shedding has been common since FY10. The demand-supply gap is
projected to widen in the coming decade (Figure 7) with higher cost imported gas—white
bars—set to replace low-cost domestic gas—dark bars. SSGC projects gas demand in its
franchise area to grow at 10.8 percent compound annual growth rate (CAGR) in 2010-15 and
3.2 percent CAGR in 2015-20 (from 1.3 billion cubic feet per day (bcfd) in 2010 to 2.2 bcfd
in 2015 and 2.6 bcfd in 2020). But supply is expected to rise gradually to only 1.4 bcfd by
2015 and only rise to 1.5bcfd by 2020—assuming major gas import projects and expansion
of domestic supply are not delayed. These import projects and domestic supply are critical
because, according to current plans,
they would account for more than
half of gas supply beyond 2015
(Figure 7). During 2010-15, the
supply from current fields is expected
to deteriorate rapidly as major gas
fields—Sui, Badin, Sawan, Miano,
Zamzama, and Bhit—deplete
(currently, there are no gas imports).
SSGC expects some 80 mmcfd per
annum from new domestic gas fields
from 2015 onwards; 500 mmcfd from imports commissioned in 2014 (plus another
500mmcfd in 2016). With these assumptions (used in the financial model), SSGC‘s gas
supply can grow at 3.5 percent CAGR in 2010-2015 to reach 1.4 bcfd in 2015 and at 1.0
percent CAGR in 2015-2020, compared to 3 percent in 2005-2010. It is important to note
here that the declining production from Badin will reduce the JJVL royalty income which has
buttressed SSGC‘s financial results in recent years (JJVL production is linked to Badin).
193. Higher-cost gas. SSGC‘s
2011 weighted average cost of gas
(WACOG) is estimated at PKR
271/mmbtu (US$ 3.1/mmbtu). With
the introduction of higher-cost
imported gas (above $10/mmbtu) and
some higher-cost domestic discoveries
(around $6/mmbtu), the weighted
average cost of gas is projected to rise
to PKR 563/mmbtu in 2015 and PKR
984/mmbtu in 2020 (Figure 8). Crude
oil price forecasts (annual global average) for 2012-20 from the US Department of Energy
Annual Energy Outlook of January 2012 were used which see crude oil averaging $98 per
barrel in 2012, US$120 per barrel in 2015 and US$130 per barrel in 2020. Assuming that the
pass-through of fuel costs to the end consumer will continue without delay, this increase in
gas cost plus planned asset increases will nearly double the average retail tariff by 2015
(from PKR 334/mmbtu in 2011to PKR 604/mmbtu in 2015) and triple it in rupee terms by
604
1,019
563
984
100
300
500
700
900
1,100
2010 2012 2014 2016 2018 2020
Rs/mmbtu Average Sales Tariff WACOG
Figure 8: Gas tariff to double by 2015, triple by 2020
1,085 1,1421,280
1,3861,426 1,437 1,495 1,498 1,498
-
300
600
900
1,200
1,500
2010 2012 2014 2016 2018 2020
mmcfd SSGC gas supply by wellhead price
>=$10
$8-$10
$5-$8
$2-$5
<=$2
Supply
Sales
Figure 7: Higher-cost imported gas to enter mix after 2015
69
2020 (PKR 1,018/mmbtu). These sharp tariff increases will need to be implemented in an
environment of increasing gas shortages.
194. UFG benchmark. The available gas supply and UFG reduction levels are critical to
SSGC‘s UFG penalty calculation—and its cash flows. OGRA has gradually tightened its
(average) UFG target from 6 percent of gas supply in 2005 to 5 percent in 2010. Giving due
consideration to SSGC‘s financial position, OGRA relaxed the FY10 UFG benchmark to 7
percent. In 2011, SSGC secured a stay order from court against allowing the benchmark to
fall from 7 percent for FY11, and this situation has prevailed so far. Therefore, the UFG
benchmark has been assumed to be 7 percent in 2011 and 2012. In consultation with SSGC,
it was assumed that after 2012, the benchmark will fall by half a percent per year till it
reaches 4.5 percent in 2016 and is maintained at 4.5 percent thereafter (financial projections
in this annex use these assumptions).
195. UFG reduction plan. SSGC
estimates that the total volume of UFG
would increase at 6 percent per annum if
no UFG reduction effort is made. The
UFG reduction plan 2013-2017 is
estimated to reduce UFG to 30.2 bcf in
2017 (Figure 10). This can contain the
UFG penalty to PKR 3.2 billion by 2018.
But, beyond 2018, the penalty is
expected to rise, calculated using a
higher WACOG (Figure 8).
4. Projections
196. A financial model was developed to simulate SSGC‘s financial statements for 2012 -
2020 including the UFG project. A base case was developed based on the key assumptions in
Table 24. The base case projections show that SSGC‘s UFG Project 2013-2017 can return
SSGC to financial health through
gas saved by UFG reduction and
by focusing capital expenditure
much more on UFG reduction.
More than half the average total
capital expenditure of PKR 11.1
billion is planned for UFG
reduction using outsourcing
(details in procurement plan). By
2017, SSGC‘s debt service
coverage can be 1.4 and debt-to-
equity can be a reasonable 57:43 (Table 25). With suitable pruning of the capital expenditure
program, SSGC‘s financial recovery can be accelerated.
8.0%
9.4% 9.5%8.7%
7.7%7.1%
6.4%5.5% 5.2% 5.3% 5.4%
0%
3%
6%
9%
12%
2010 2012 2014 2016 2018 2020
UFG (%)
Figure 9: UFG percentage with the Project
35.0 37.4 39.6 40.5 39.2 36.933.3
30.2 28.4 28.9 29.4
-
10
20
30
40
50
2010 2012 2014 2016 2018 2020
BCF UFG - Volume
Figure 10: UFG volumes with the Project
70
Table 24: Key Assumptions for Financial Forecasts 2011-2020
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
OGRA UFG target
(average) %
7.0 7.0 6.5 5.5 5.0 4.5 4.5 4.5 4.5 4.5
Crude oil price (inter-
national average) US$/bbl
96 98 107 114 120 123 126 128 129 130
Exchange rate PKR/US$ 88.5 93.0 97.0 101.
3
105.
8
110.
6
115.
7
120.
9
126.
4
132.
2
Interest rate (3-month
KIBOR, average) %
13.7 12.1 11.5 11.5 11.5 11.5 11.5 11.5 11.5 11.5
Circular debt intensity
(months overdue)
5 5 4 4 3 3 3 3 3 3
Savings from UFG
reduction:
Underground leaks 1.67 mcfd/km
Overhead leaks 8 cubic feet/day/customer
Pressure management 5 mmcf/unit
197. The assumptions underlying these base case projections include OGRA‘s relief
measures for FY10 extended to FY11 and FY12. This means rising UFG penalties from 2011
to 2017 supported by the rising price of crude oil after which the project‘s impact would
bring the penalty down to PKR 3.2 billion in 2018. Beyond 2018, the moderate increase in
UFG projected would lead to higher penalties due to the increasing cost of gas (which is used
to value the disallowed UFG).
198. Long-term debt would rise significantly in this period. But rising repayment capacity
due to the UFG Project and the terms of World Bank support (25-year tenor including 5
years‘ grace compared to 5-year tenor including 2 years‘ grace from local commercial banks)
would help the company repay. Cash from operations is projected to rise as UFG reduction is
implemented and also with some help from working capital management (at the introduction
of import projects in 2014 and in 2016).
5. Risk analysis
199. Sensitivities were run on key risks affecting the debt service coverage ratio (DSCR),
current ratio, and debt-to-equity. The results were found to be generally robust to adverse
changes in circular debt, a collapse of the rupee, a spike in crude oil prices, and a delay in gas
import projects—variables which are beyond the company‘s control. But under UFG -related
scenarios (slower implementation of the UFG project, lower-than-expected benefits from the
UFG effort), deleterious effects were seen on the company‘s finances. This highlights the
importance of successful implementation of the UFG reduction project, which is a variable
the company can influence:
a. Circular Debt: The resolution of the circular debt level assumed in the base case was
moderated to a worse scenario: additional delay of 5 months of sales from 2011 to
2015 and 3 months thereafter. DSCR was robust to this case (with active cash
71
management) and remained above 1.0 through 2020. And debt-to-equity falls to
58:42 in 2015 and 2017 and improves thereafter. The current ratio was found to be
robust to this scenario.
b. Exchange rate: A 30 percent drop in the value of the rupee in 2013 and subsequent
short-term borrowing as a mitigation measure showed that DSCR can be maintained
above 1.0 through 2020. Current ratio can also be maintained at 1.0. Debt-equity
deteriorates to 61:39 in 2017 but improves thereafter.
c. UFG project implementation: If the UFG Project is implemented at only 80 percent
of plans in 2013-2017 (i.e. 80 percent of projected benefits and 80 percent of planned
borrowing for the project), SSGC remains in operating loss throughout the decade
and does not turn a profit beyond 2014. The higher level of gas losses will force more
borrowing on the company which means debt:equity will continue to deteriorate, and
the maintenance of debt service coverage above 1.0 will become difficult.
d. Lower-than-expected benefits: Underground leak removal (through pipeline
replacement and rectification) is the most significant component of the UFG
reduction project. A 20 percent drop in the gas saving expected from this component
was found to impact DSCR: it remains 1.0 or above only with significant additional
borrowing. Once the company borrows more than it can repay from its operations, it
would have to start borrowing to repay existing debt. The debt-equity ratio would fall
successively in this situation.
e. Imported gas delayed: A delay in the gas import projects from 2014 to 2016 and from
2016 to 2018 has only a temporary effect on DSCR which falls to 1.0 in 2015 but
improves thereafter. Debt-equity would deteriorate slightly to about 60:40 in 2017
and improve thereafter.
f. Sharp increase in international price of crude: If the price of crude oil rises by 30
percent in 2013 to $120 per barrel and maintains that level till 2015 and then follows
its forecasted path, short-term borrowing can help manage the shock. With this
mitigation measure, debt service coverage is not affected significantly and debt-
equity falls towards 60:40 in 2017 but improves thereafter.
Table 25: Key Financial Ratios 2011-2020
Key Ratios 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Net margin (net profit/net
sales) 4.1% 3.2% 1.1% 0.9% 0.4% 0.4% 0.8% 1.0% 0.9% 0.8%
Debt service coverage ratio 1.4 2.4 1.8 1.1 1.1 1.2 1.4 1.5 1.4 1.4
Current ratio 1.0 1.1 1.1 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Debt : equity 45:55 50:50 53:47 50:50 54:46 55:45 57:43 54:46 51:49 49:51
Operating margin: (Net sales – cost of gas – operating expenses) / Net sales; Dividend payout ratio: (Cash dividend paid in current year) / (Net profit
of previous year); Debt service coverage ratio: (Net profit + interest paid on debt + depreciation + amortization + provisions) / (interest on debt +
principal repayment); Current ratio: current assets / current liabilities; Debt : Equity is (Non-current portion of long-term debt) / (Non-current portion
of long-term debt + total equity) : (Total equity) / (Non-current portion of long-term debt + total equity)
72
Table 26: Key Cash Flows 2011-2020
Key Cash Flows 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cash from operations
13,381
10,483
10,393
16,116
10,629
19,649
15,808
14,551
15,967
16,482
New loans
10,989
8,021
5,932
5,081
10,625
4,403
7,499
4,902
5,793
7,114
Service dues from
new customers
708
399
325
340
357
374
516
762
773
782
Interest on late
payments from
customers
3,382
-
-
-
-
-
-
-
-
-
Short-term
borrowing
-
2,108
2,198
-
511
-
-
-
-
-
Cash used/(added)
for year
(464)
(767)
(317)
(1,153)
(510)
(866)
(1,160)
(256)
(556)
(465)
MAJOR INFLOWS
27,996
20,244
18,530
20,384
21,611
23,560
22,663
19,958
21,977
23,913
Capital expenditure
Repayment of
principal
(10,340)
(10,714)
(9,973)
(10,829)
(10,911)
(11,134)
(11,018)
(9,472)
(9,456)
(9,422)
Interest on debt, late
payment to suppliers
(12,665)
(4,169)
(4,212)
(5,395)
(5,704)
(7,180)
(5,165)
(3,481)
(5,051)
(7,221)
Dividend payments
(2,424)
(2,883)
(3,389)
(3,441)
(3,838)
(4,112)
(4,859)
(5,033)
(5,033)
(5,032)
MAJOR
OUTFLOWS
(954)
(886)
(1,065)
(306)
(511)
(198)
(299)
(612)
(1,069)
(754)
Other (net)
(26,383)
(18,652)
(18,639)
(19,971)
(20,964)
(22,623)
(21,341)
(18,598)
(20,609)
(22,429)
Total long-term debt
18,743
23,236
27,528
29,458
34,849
35,872
41,192
42,772
43,671
43,597
Net sales (PKR
million)
114,529
134,833
154,280
222,942
273,095
335,610
417,516
444,595
467,822
497,277
UFG penalty (2,470) (3,000) (3,085) (4,724) (5,772) (6,426) (4,440) (3,181) (3,801) (4,383)
73
Annex 8: Carbon Financing and Global Environmental Facility (GEF)
A. Carbon Financing
200. The Pakistan Natural Gas Efficiency Project is potentially eligible under the Kyoto
Protocol‘s Article 12, which establishes the Clean Development Mechanism (CDM) allowing
public and private sector parties in industrialized countries to invest in greenhouse gas
mitigation projects implemented in developing countries. The CDM enables investors to
receive a credit toward their emission reductions target under the Kyoto Protocol and
associated regional agreements. This potential eligibility is important even though the
project will not be registered as a CDM project before the mechanism closes by the end of
2012, because it could make the project attractive to buyers of emission reductions outside
the CDM mechanism as well as in the case of an extension of the Kyoto Protocol.
201. SSGC is seeking to leverage carbon financing to support the overall UFG reduction
program.
202. Over a five-year period, the Project expects to build up reductions of natural gas
emissions to the atmosphere to an annual level of about 16 bill ion cubic feet per year (about
450 million cubic meters per year). The highly potent greenhouse gas methane constitutes
more than 90 percent of the natural gas emitted to the atmosphere. The emission reductions
are mostly achieved through replacing pipes, repairing pipes, and by introducing advanced
pressure management systems. Reduction in emissions will be the key performance indicator
under the Project. In addition to reducing methane gas emissions, the Project has an
additional positive climate effect to the extent that saved natural gas will be routed to thermal
power plants where it will replace high CO2-emitting liquid petroleum products as plant fuel.
B. Global Environmental Facility (GEF)
203. SSGC applied to Pakistan‘s GEF National Steering Committee in response to the call
for proposal for GEF-5 funding. The GEF National Steering Committee approved a funding
of US$ 1.5 million as compared to the US$ 5 million applied for. A GEF allocation would
provide an additional source of funding for Component 2 of the Project (Appliance
Efficiency Pilot). This intervention meets the objectives of climate change mitigation as well
as adaptation under GEF. The 2009 GEF National Dialogue with Pakistan concluded that i n
order to meet its growing energy needs, Pakistan requires specific assistance in environment-
friendly technologies and renewable energy development on a sustainable basis. GEF
funding under the Project would support the advancement of energy-efficient household
appliances and support public awareness of the positive climate, economic, and energy
security impacts of conversion to such appliances.
SaiduSaiduMansehraMansehra
AbbottabadAbbottabadTakhtabaiTakhtabai
Daud Daud KhelKhel
PeshawarPeshawar
CharsaddaCharsadda
MianwaliMianwali
D.I. KhanD.I. Khan
JhelumJhelum
SialkotSialkotGujratGujrat
SargodhaSargodha
FaisalabadFaisalabad
LahoreLahore
JaranwalaJaranwala
D.G.D.G.KhanKhan
Kot AdduKot Addu
MultanMultanMianMian
ChannunChannunChichiwatniChichiwatni
ChunianChunian
SahiwalSahiwal
MuzaffargarhMuzaffargarh
BahawalpurBahawalpur
Rahimyar KhanRahimyar KhanSadiqabadSadiqabad
Dera BugtiDera Bugti
SuiSui
QuettaQuetta
SibiSibi
KhuzdarKhuzdar
JacobabadJacobabad KandhkotKandhkot
LarkanaLarkana
KhairpurKhairpur
NawabshahNawabshahSangharSanghar
Mirpur KhasMirpur Khas
BadinBadinThattaThattaKarachiKarachi
Nok KundiNok Kundi
PanjgurPanjgur
ISLAMABADISLAMABAD
KACHKACH
MACHI-AB-E-GUMMACHI-AB-E-GUM
BADIN-ZAIBADIN-ZAI
ABIGULABIGULSOR-RANGI-DAGHARISOR-RANGI-DAGHARI KHOST-SHARIG-HARNAIKHOST-SHARIG-HARNAI
CHAMALONGCHAMALONGDUKKIDUKKI
MARGATMARGAT
PIR-ISMAIL-ZIARATPIR-ISMAIL-ZIARAT
JOHANJOHANSANNISANNI
SALT-RANGESALT-RANGE
HANGUHANGU CHARATCHARAT
MAKARAT-KURD-SHOMAKARAT-KURD-SHO
CHOICHOI
THARTHAR
BALGORBALGORDUREJIDUREJI
LAKHRALAKHRA
MANGLAMANGLA
NANDIPURNANDIPUR
BASHABASHAKOHALAKOHALA
DARGAIDARGAIMUNDAMUNDA
WARSAKWARSAK GHAZIGHAZIBROTHABROTHA
TARBELATARBELA
KALABAGHKALABAGH
CHASHMACHASHMA
RASULRASUL
SHADIWALSHADIWAL
OKARAOKARA
KURRAMKURRAMGARHIGARHI
CUDDUCUDDU
KHANKOTKHANKOT
BIN QASIMBIN QASIMKNPPKNPP
PASNIPASNI
JAM SHOROJAM SHORO
A F G H A N I S T A NA F G H A N I S T A N
I N D I AI N D I A
I S LAMICI S LAMICREPUBL IC OFREPUBL IC OF
IRANIRAN
CH INACH INA
JAMMUJAMMUand KASHMIRand KASHMIR
TAJIKISTANTAJIKISTAN
B A L O C H I S T A NB A L O C H I S T A N
KHYBERKHYBERPAKHTUNKHWAPAKHTUNKHWA
S I N D HS I N D H
P U N J A BP U N J A B
SaiduMansehra
AbbottabadTakhtabai
DaudKhel
Peshawar
Charsadda
Mianwali
D.I. Khan
Jhelum
SialkotGujrat
Sargodha
Faisalabad
Lahore
Jaranwala
D.G.Khan
Kot Addu
MultanMian
ChannunChichiwatni
Chunian
Sahiwal
Muzaffargarh
Bahawalpur
Rahimyar KhanSadiqabad
Dera Bugti
Sui
Quetta
Sibi
Khuzdar
Jacobabad Kandhkot
Larkana
Khairpur
NawabshahSanghar
Mirpur Khas
BadinThattaKarachi
Nok Kundi
Panjgur
ISLAMABAD
KACH
MACHI-AB-E-GUM
BADIN-ZAI
ABIGULSOR-RANGI-DAGHARI KHOST-SHARIG-HARNAI
CHAMALONGDUKKI
MARGAT
PIR-ISMAIL-ZIARAT
JOHANSANNI
SALT-RANGE
HANGU CHARAT
MAKARAT-KURD-SHO
CHOI
THAR
BALGORDUREJI
LAKHRA
MANGLA
NANDIPUR
BASHAKOHALA
DARGAIMUNDA
WARSAK GHAZIBROTHA
TARBELA
KALABAGH
CHASHMA
RASUL
SHADIWAL
OKARA
KURRAMGARHI
CUDDU
KHANKOT
BIN QASIMKNPP
PASNI
JAM SHORO
B A L O C H I S T A N
KHYBERPAKHTUNKHWA
S I N D H
P U N J A B
A F G H A N I S T A N
I N D I A
I S LAMICREPUBL IC OF
IRAN
CH INA
JAMMUand KASHMIR
TAJIKISTAN
A r a b i a n S e a
ApproximateLine of Control
65° 70° 75°
25°
25°
30°
35°
30°
35°
60°
60° 65° 70° 75°
0 200 Miles100
0 200100 300 Kilometers
SSGC GAS PIPELINES
SNGPL GAS PIPELINES
OIL PIPELINES
OIL REFINERIES
OIL STORAGE
HYDRO POWER STATIONS
THERMAL POWER STATIONS
GAS COMPRESSOR STATIONS
OIL FIELDS
GAS FIELDS
CONDENSATE FIELDS
COAL FIELDS
GAS WELLS
OIL WELLS
OIL & GAS WELLS
OIL & GAS WELL SUSPENDED
MAIN CITIES
NATIONAL CAPITAL
INTERNATIONAL BOUNDARIES
EXISTINGPROPOSED
ORPLANNED
P A K I S T A NE N E R G Y
NATURAL GAS EFFICIENCY PROJECT
T h e b o u n d a r i e s , c o l o r s , denominat ions and any other i n f o r m a t i o n s h o w n o n t h i s map do no t imp l y, on t he p a r t o f T h e W o r l d B a n k Group, any judgment on the lega l s ta tus of any te r r i to r y, o r a n y e n d o r s e m e n t o r a c c e p t a n c e o f s u c h boundar ies .
MA
RCH
2012
IBRD 38212