Extended Annual Review Report

Project Number: 45905-014 Guarantee Number: 7348 October 2019

Foundation Wind Energy I and II Limited

Foundation Wind Energy I and II Projects

(Pakistan) This is an abbreviated version of the document, which excludes information that is subject to exceptions to disclosure set forth in ADB's Access to Information Policy.

CURRENCY EQUIVALENTS

Currency unit – Pakistan rupees (PKR)

At Appraisal At Project Completion 17 October 2011 28 February 2019

PKR1.00 – $0.0114 $0.0072 $1.00 – PKR88.00 PKR138.95

ABBREVIATIONS ADB

COD – –

Asian Development Bank commercial operation date

EIRR – economic internal rate of return EPA – energy purchase agreement EPC

DFI DMF FF

– – – –

engineering, procurement, and construction development finance institution design and monitoring framework Fauji Foundation

FFBL – Fauji Fertilizer Bin Qasim Limited FIRR – financial internal rate of return FWE I – Foundation Wind Energy I Limited FWE II

IDB – –

Foundation Wind Energy II Limited Islamic Development Bank

IFC IIF IPP

– – –

International Finance Corporation Islamic Infrastructure Fund independent power producer

NGO NPMV NTDC

– – –

nongovernment organization nonproject missed volume National Transmission and Despatch Company

O&M – operation and maintenance PCG

RRP WACC

– – –

partial credit guarantee report and recommendation of the President weighted average cost of capital

WEIGHTS AND MEASURES

GWh (gigawatt-hour) – 1,000,000 kilowatt-hours kWh (kilowatt-hour) – 1,000 watt-hours MW (megawatt) – 1,000,000 watts tCO2 – tons of carbon dioxide

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NOTES (i) The fiscal year (FY) of both Foundation Wind Energy I and II ends on 30 June. “FY”

before a calendar year denotes the year in which the fiscal year ends, e.g., FY2019 ends on 30 June 2019.

(ii) In this report, "$" refers to United States dollars.

Vice-President Diwakar Gupta, Private Sector Operations and Public–Private Partnerships

Director General Michael Barrow, Private Sector Operations Department (PSOD) Senior Advisor/ Officer-in-charge

Craig Roberts, Private Sector Operations Department/ Portfolio Management Division

Team leader Salman Ahmed, Investment Specialist, PSOD Team members Kharis Darunday, Associate Investment Officer, PSOD Jhiedon Florentino, Economics Officer, PSOD Arlene Porras, Senior Safeguards Officer, PSOD Raneliza Samiano, Safeguards Officer, PSOD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

EXECUTIVE SUMMARY ii

I. THE PROJECT 1

A. Project Background 1 B. Key Project Features 1 C. Progress Highlights 2

II. EVALUATION 3

A. Project Rationale and Objectives 3 B. Development Results 4 C. ADB Additionality 7 D. ADB Investment Profitability 7 E. ADB Work Quality 8 F. Overall Evaluation 8

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 9

A. Issues and Lessons 9 B. Recommended Follow-Up Actions 10

APPENDIXES 1. Project-Related Data 11 2. Results and Ratings for Project Contributions to Private Sector Development and

ADB Strategic Development Objectives—Infrastructure 13

3. Sector Review 17 4. Environmental Impact 20 5. Social Impact 23 6. Reevaluation of Financial Internal Rate of Return and Weighted Average Cost of

Capital 26

7. Reevaluation of Economic Internal Rate of Return 33

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BASIC DATA Foundation Wind Energy I and II Limited Foundation Wind Energy I and II Projects

(GU No. 7348 – Pakistan)

Key Project Data

As per ADB Loan Documents ($ million)

Actual ($ million)

Total Project Cost: FWE I FWE II

ADB Investment: Guarantee:

Committed FWE I FWE II

Called FWE I FWE II

Debt–Equity Ratio at Completion FWE I FWE II

135.55 134.90

33.43 33.18

nil nil

75:25 75:25

129.92 126.55

33.43 33.18

nil nil

74:26 72:28

Key Dates Expected Actual

Concept Clearance Approval Board Approval Financial Agreements Signed First Disbursement of Guaranteed Loan

FWE I FWE II

Final Disbursement of Guaranteed Loan FWE I FWE II

Commercial Operation Date FWE I FWE II

29 February 2012

29 March 2012 29 March 2012

29 May 2013 29 May 2013

1 June 2013 1 June 2013

28 March 2011 8 December 2011

18 May 2012

23 August 2013 16 April 2013

3 November 2014 17 August 2014

11 April 2015

10 December 2014

Financial and Economic Internal Rates of Return (%)

Appraisal Extended annual review report

Financial Internal Rate of Return FWE I FWE II

Economic Internal Rate of Return FWE I FWE II

11.60 11.54

12.42 12.41

10.51 10.30

13.20 13.00

Project Administration and Monitoring Dates

Investment appraisal Project administration

15-18, 31 August 2011; 27-28 September 2011 30 June 2012; 24 September 2012; 13-14, 18-19 February 2014; 17 February 2015; 20 April 2015;

2-4 February 2016; 13-14 April 2017; and 27 April 2018

Extended annual review report mission 2-3 April 2019 and 21-22 May 2019

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EXECUTIVE SUMMARY

On 8 December 2011, the Board of Directors of the Asian Development Bank (ADB) approved, for two wind power projects in Pakistan, (i) a partial credit guarantee (PCG) of up to $33.43 million in favor of the Islamic Development Bank (IDB) in respect of IDB’s financing of Foundation Wind Energy I Limited (FWE I), and (ii) a PCG of up to $33.18 million in favor of IDB in respect of IDB’s financing of the Foundation Wind Energy II Limited (FWE II).

The two projects were developed when Pakistan was facing a severe power generation shortfall, prompting an intensifying need to increase generation capacity and diversify the generation mix towards indigenous and less expensive sources of power, including renewable energy, particularly wind and solar.

The projects consist of two 50-megawatt (MW) wind power farms located in the Gharo wind corridor, 54 kilometers southeast of Karachi, Pakistan’s industrial and commercial hub. The projects were among the first wind independent power producers (IPPs) to be awarded letters of intent under the Renewable Energy Policy 2006.

The projects have been evaluated for their (i) development results; (ii) ADB additionality; (iii) ADB investment profitability; and (iv) ADB work quality. The development results of the projects have been rated as satisfactory based on performance across the following four dimensions: (i) contributions to private sector development and ADB strategic development objectives; (ii) economic performance; (iii) environment, social, health and safety performance; and (iv) business success.

The contributions to private sector development and ADB strategic development objectives are rated satisfactory. The projects have paved the way for Pakistan’s wind IPP sector. Currently, there are 24 completed wind IPPs with installed generation capacity of 1,245MW. The two projects have been directly beneficial in supporting new wind IPPs in the Gharo corridor. Presently, there are six wind IPPs in Gharo with a total installed capacity of 302.8MW. Additionally, 46 wind IPPs with a total capacity of 2,898MW are at an early stage of project development. The projects’ objectives were consistent with ADB’s strategic objectives.

The projects’ economic performance is rated satisfactory. The economic internal rate of return was recalculated at 13.20% for FWE I and 13.00% for FWE II, higher than the rate indicated at appraisal.

The projects are rated satisfactory for environmental, social, health, and safety performance, based on a review and evaluation of available safeguard documents, observations from site visits, and interviews with various stakeholders.

The projects are rated satisfactory for business success. The financial internal rate of return was recalculated at 10.51% for FWE I and 10.30% for FWE II. This compares favorably with the weighted average cost of capital of approximately 8%.

ADB’s additionality is rated excellent. ADB’s involvement in the projects (i) gave confidence to project parties, particularly local financial institutions, at a time when there was limited local appetite for wind IPPs; (ii) enabled the financing structure to be fully Shariah compliant, catalyzing local Islamic financing for infrastructure in Pakistan; and (iii) facilitated the equity investment of the Islamic Infrastructure Fund (IIF).

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The project is rated satisfactory for ADB’s investment profitability. The PCGs are priced in line with similar deals in Pakistan’s power sector. They also benefit from a 50% Swedish International Development Cooperation Agency guarantee. The PCGs have never been called and there have been no loss provisions or write-offs to date. All guarantee fees were paid on time.

ADB’s work quality is rated satisfactory. ADB’s effectiveness in screening, appraisal, and structuring is rated satisfactory. The projects are in line with ADB’s country, energy sector, private sector development, and environmental protection strategies. ADB is up to date and well informed on the projects’ progress and performance. Waiver requests are addressed in a balanced manner considering both the projects’ needs and ADB’s interests.

Overall, the projects are rated successful.

The projects’ main issues and lessons learned are: (i) pioneer and early stage projects have the highest developmental impact and greatest need for ADB support; (ii) suitable sponsor selection is critical for success, especially for early stage projects; and (iii) the catalytic impact of early stage projects is much more substantial than the projects’ immediate impacts.

ADB will continue to monitor the projects’ energy generation, particularly tracking grid stability and reliability and its impact on the projects’ ability to achieve their full generation and greenhouse carbon emissions avoidance targets.

I. THE PROJECT

A. Project Background

1. On 8 December 2011, the Board of Directors of the Asian Development Bank (ADB) approved, for two wind power projects in Pakistan, (i) a partial credit guarantee (PCG) of up to $33.43 million in favor of the Islamic Development Bank (IDB) in respect of IDB’s financing of Foundation Wind Energy I Limited (FWE I), and (ii) a PCG of up to $33.18 million in favor of IDB in respect of IDB’s financing of Foundation Wind Energy II Limited (FWE II).

2. The projects were developed when Pakistan was facing a severe power generation shortfall of 3,500–6,700 megawatts (MW) during peak times, resulting in 4 to 8 hours of load shedding per day. Additionally, higher usage of imported oil for thermal power generation had increased generation costs as well as strained foreign exchange reserves.1 Against this backdrop, there was an intensifying need to increase generation capacity and diversify the generation mix towards indigenous and less expensive sources of power, including renewable energy, particularly wind and solar.

B. Key Project Features

3. The two project sites are located in the Gharo wind corridor, 54 kilometers southeast of Karachi, Pakistan’s industrial and commercial hub. The sites are only 6 kilometers apart and were simultaneously developed to benefit from economies of scale. They are, however, legally, economically, and contractually distinct and do not rely on each other’s cash flows.

4. FWE I and FWE II have a combined capacity of 100MW or 50MW each. Each project site comprises 20 N100 turbines of 2.5 MW each from Nordex Singapore Equipment Limited (Nordex). Power evacuation from both sites to the national grid is through a 132-kilovolt line, built and operated by the National Transmission and Dispatch Company (NTDC). The projects were among the first wind independent power producers (IPPs) to be awarded letters of intent under the Renewable Energy Policy 2006 and have been developed on a build-own-operate basis.

5. The projects have been constructed under a fixed-price, date-certain, lump-sum, turnkey engineering, procurement, and construction (EPC) contract with Nordex and Descon Engineering Fze, United Arab Emirates (Descon). Operations management has been arranged under an operation and maintenance (O&M) contract with Nordex and Descon.

6. Power offtake is secured through a 20-year take-or-pay Energy Purchase Agreement (EPA) signed by each project company with NTDC through its clearing agent, the Central Power Purchasing Agency. In turn, the government is guaranteeing NTDC’s obligations under the EPA as part of its commitments under a 20-year implementation agreement.

7. The EPA assigns a net annual benchmark energy generation of 144.5 GWh for FWE I and 143.7GWh for FWE II.2 Any generation over these benchmarks is paid at only 10% of the prevailing tariff. The project tariff under the EPA is established on a full passthrough, cost-plus

1 In 2011, thermal power generation accounted for approximately 2/3rd of total energy generated, of which 70% was

reliant upon imported fuel following the depletion of indigenous gas reserves. 2 Benchmark generation is based upon P50 wind availability, assuming a capacity factor of 32.69% for FWE I and

32.8% for FWE II. This is based upon the complex monthly power curve energy (MW hour) corresponding to the predetermined monthly benchmark wind speed for a given month as provided in the EPA.

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basis, providing a 17% return on equity.3 The EPA compensates the projects for non-project missed volumes (NPVM), i.e. grid failures and load curtailments. The EPA also incorporates a Shortfall Energy Payment mechanism, assigning wind speed risk to NTDC, the offtaker. Hence the project is still able to earn revenues, up to benchmark energy values, even if generation is impacted by grid issues and low wind speed.

8. The projects’ total cost was $267 million. Financing was arranged at a 75:25 debt-equity ratio, with $200 million of debt and $67 million of equity. Project debt is structured under Islamic Finance principles and is fully Shariah-compliant.

9. A $133 million offshore Ijarah loan facility was arranged by IDB, which in turn was 50% secured by the ADB PCG.4 The balance debt of $67 million was arranged via a Pakistan rupee (PKR) Musharaka5 loan facility arranged by a syndicate of five local banks led by the National Bank of Pakistan.6 The projects’ loans have a 12-year door-to-door tenor, including a 2-year grace period.

10. Under the terms of the PCG, ADB benefits from pari passu status with other financiers. ADB’s position is substantively the same under the proposed PCG structure as under a conventional loan from the perspective of overall risk and security.

11. Lead sponsor for the projects is Fauji Foundation (FF).7 FF has a 30% share of FWE I and 20% share of FWE II. FF also has an indirect equity stake in the projects through Fauji Fertilizer Bin Qasim Limited (FFBL), which has a 35% share in both FWE I and FWE II.8 Other project sponsors include Islamic Infrastructure Fund (IIF), which owns a 35% share of FWE I and 25% share of FWE II.9 IIF was introduced to FF by ADB. FWE II has a third sponsor, the Tapal Group, which owns a 20% share in the project.10

C. Progress Highlights

12. The projects’ financing documents were signed on 18 May 2012, with financial closure being achieved on 23 July 2013 for FWE I and 3 April 2013 for FWE II. This followed approval and registration of the finance documents with the State Bank of Pakistan, the registration of the EPC documents with the State Bank of Pakistan, and the signing of the EPA and implementation agreement.

3 Costs include EPC, non-EPC, and operating costs. Pass-through items include foreign currency, inflation, interest,

and rates, which are adjusted on a quarterly basis. 4 Under Ijarah finance, the project assets to be leased by IDB shall be procured or developed by the project companies.

At the time of commercial operations, the assets are delivered to IDB and leased back to the projects. At the end of the lease period, the assets are transferred by IDB to the project company at a nominal cost.

5 Musharaka, roughly translated, means partnership. In this technique two or more financiers provide finance to a project. All partners are entitled to a share in the profits resulting in a ratio that is mutually agreed upon.

6 For FWE I, syndicate banks included National Bank of Pakistan, Faysal Bank Ltd, and United Bank Limited. For FWE II, syndicate banks included National Bank of Pakistan, Allied Bank Limited, and Meezan Bank.

7 FF is a charitable trust established in 1954. Structured as a holding company, FF has investments in sectors such as oil and gas, fertilizer, cement, power, food processing, sugar, and port terminals.

8 Fauji Group owns 68% of Fauji Fertilizer Bin Qasim Limited. 9 IDB and ADB jointly established the IIF in 2009. ADB. 2009. Report and Recommendation of the President to the

Board of Directors: Proposed Equity Investment Islamic Infrastructure Fund, L.P. Manila. 10 The Tapal Group comprises four companies in power generation, power equipment supply, industrial plant

construction, textiles, engineering, and chemicals.

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13. Civil works commenced on 12 August 2013 for FWE I and 8 April 2013 for FWE II. This was followed by the first disbursement for FWE I on 23 August 2013, and for FWE II on 16 April 2013. Final disbursement occurred on 3 November 2014 for FWE I and 17 August 2014 for FWE II.

14. The commercial operation date (COD) was 11 April 2015 for FWE I and 10 December 2014 for FWE II. This was about 10 weeks later than the contractually required COD under the EPA and caused by delays in the delivery of components and tower erection taking place during the high-wind season. However, achievement of COD was 2.8% (FWE I) and 4.8% (FWE II) below the cost expected at ADB approval.11

15. The first principal debt repayment for the projects occurred on 1 January 2015. To date, debt servicing, including payment of ADB PCG fees, has been timely with no delays or shortfalls.

16. From COD until March 2019, FWE I and FWE II have dispatched 390 GWh and 458 GWh of energy, respectively. Mechanically, the projects have exhibited sound performance with an average ~98% availability factor12 and ~30% capacity factor from FY2016 to FY2018.13 Actual electricity delivered has been about 21.5% lower than stated in the report and recommendation of the President (RRP) because the transmission and distribution network was less reliable than expected and the wind speeds were lower.14

17. Despite the lower than forecast generation, the projects’ profitability has been on budget, with revenues and profitability broadly in line with the RRP. This is due to the tariff structure, which compensates for grid issues and curtailment, as well as lower than benchmark wind speeds. The actual and forecast financial performance is in Appendix 6.

II. EVALUATION

A. Project Rationale and Objectives

18. The projects’ objectives, as set out in the RRP, were to (i) reduce Pakistan’s energy shortfall; (ii) foster confidence amongst potential investors and lenders and promote further private sector investment in renewable wind energy in Pakistan; (iii) produce lower-cost, carbon-efficient power from wind energy; and (iv) contribute to Pakistan’s energy security and energy mix (footnote 14). The objectives were consistent with ADB’s Strategy 2020,15 country partnership strategy for Pakistan, 2009–2013,16 and ADB’s Energy Policy.17

11 Project costs at ADB approval included a contingency of $5 million each for FWE I and FWE II. 12 Availability factor of a power plant is the amount of time that it is able to produce electricity over a certain period,

divided by the amount of time in the period. 13 Net capacity factor is the unitless ratio of an actual electrical energy output over a given period of time to the maximum

possible electrical energy output over that period. 14 ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Partial Credit

Guarantees, Foundation Wind Energy I and II Projects. Manila. 15 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020.

Manila. 16 ADB. 2009. Country Partnership Strategy: Pakistan, 2009–2013. Manila. 17 ADB. 2009. Energy Policy. Manila.

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B. Development Results

1. Contributions to Private Sector Development and ADB Strategic Development Objectives

19. Being among the first projects in the wind IPP sector in Pakistan, the two projects supported ADB's Strategy 2020 by promoting private sector development in this sector. They also furthered Strategy 2020 by leveraging the cofinancing partnership with IDB.18 Development of Pakistan’s wind IPP sector was also aligned with the country partnership strategy for Pakistan 2009-2013.19

20. The projects have reduced fossil fuel use and supported the improvement in energy mix and energy security by using indigenous wind resources, which is consistent with ADB’s Energy Policy.20 Wind generation capacity was nonexistent at the time of project processing and now accounts for about 3.6% of total installed generation capacity.

21. Two outcomes in the projects’ design and monitoring framework (DMF) relate to average annual generation of electricity and avoidance of greenhouse gas emissions. FWE I has been producing 107.3GWh per year and FWE II 117.8GWh per year. The corresponding avoidance of greenhouse gas emissions has been 51,000 tCO2 per year for FWE I and 56,000 tCO2 per year for FWE II using the emission factor 475 tCO2/GWh. Actual electricity delivered is about 21.5% lower than DMF targets, because of lower actual wind speeds and less reliability of the transmission and distribution network, both of which were key assumptions for the DMF outcomes. However, the reliability of this network has substantially improved with 2/3rd less curtailments during the 9 months ended March 2019. Assuming this trend continues, future generation and greenhouse emissions avoidance will increase towards target levels.

22. Another DMF outcome was that the projects’ net average tariff would be lower than that of plants running on imported fuel. As of June 2019, both FWE I and FWE II have a tariff of $0.12 per kWh, which is cheaper than the bottom 20 (out of 131) thermal power plants on NTDC’s Merit Order list, which all use imported fuel. However, more substantial is the overall current price of wind power in Pakistan, which has fallen to $0.04 per kWh, or less than half the price ($0.10 per kWh) of newer and more efficient diesel power plants. The projects pioneered the wind IPP sector, fostering its growth and improving Pakistan’s energy mix.

23. As regards DMF outputs, FWE I and FWE II combined employed 700 persons during construction, slightly below the target of 720 workers. During operations, FWE I and FWE II have employed a total of 145 persons, slightly below the target of 160 persons. The projects have also met DMF output targets for locally purchased goods and services, with FWE I spending $27.6 million on onshore EPC costs and FWE II spending $26 million.

24. FWE I and FWE II have paved the way for Pakistan’s wind IPP sector. Currently, there are 24 completed wind IPPs with installed generation capacity of 1,245MW. The projects have been directly beneficial in supporting new wind IPPs in the Gharo corridor, where there are now

18 Private sector development and leveraging partnerships through cofinancing are among the five drivers of change in

Strategy 2020. 19 The CPS for Pakistan, 2009-2013, emphasized development of the energy sector, private sector participation in

infrastructure development, and the expansion of ADB’s private sector operations in the energy sector. 20 Support for renewable energy is one of the three pillars of ADB’s Energy Policy.

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six wind IPPs with a total installed capacity of 302.8MW. Additionally, 46 wind IPPs with a total capacity of 2,898MW are at an early stage of development.

25. In addition, following its 20% equity investment in FWE II, the Tapal Group has established its own 30MW wind IPP, Tapal Wind Energy Pvt. Limited, which achieved COD in October 2016.

26. Given their pioneering status, the projects have been instrumental in supporting the development of Pakistan’s wind IPP sector, as clearly evidenced by its growth. Moreover, DMF results are deemed to be acceptable in view of the first-mover implications of the projects and the catalytic impact they have had. The projects' contributions to private sector development and ADB strategic development objectives are rated satisfactory. The private sector development indicators and ratings are in Appendix 2.

2. Economic Performance

27. The reevaluation of economic performance results in an economic internal rate of return (EIRR) of 13.2% for FWE I and 13% for FWE II, which is higher than the 12.42% for FWE I and 12.41% for FWE II estimated in the RRP. The weighted average cost of capital (WACC) of 7.76% for FWE I and 7.90% for FWE II is also higher than the 5.15% for each project at appraisal.

28. The project is rated satisfactory for economic sustainability as the EIRR is 1.67 times larger than the WACC. The calculation of the WACC is in Appendix 6, and a detailed economic analysis is in Appendix 7.

3. Environment, Social, Health, and Safety Performance 29. The projects were classified as environment category B. FWE I and FWE II prepared the initial environmental examination to comply with the requirements of the ADB Safeguard Policy Statement (2009) and the Pakistan government. The Sindh Environmental Protection Agency issued the environmental clearance prior to project implementation. The projects are fully compliant with the applicable national laws and regulations for (i) pollution prevention (air, water, noise and vibration, waste, soil); (ii) waste management; (iii) hazardous materials management; (iv) wildlife protection; (v) occupational health and safety; (vi) labor and employment; (vii) energy development; and (viii) cultural heritage protection. The projects also adhered to international standards such as ISO 14001:2015 (Environmental Management System) and International Finance Corporation’s Environment, Health and Safety (EHS) Guidelines for Wind Energy. No fines or penalties were imposed by the state.

30. During operation, the environmental management and monitoring activities consist of potable water testing for domestic use, air emission testing, and noise level monitoring (e.g. vehicles, generators, equipment). They are carried out by a third-party laboratory certified by the Sindh Environmental Protection Agency, and the results have complied with the permissible limits. A minimal amount of solid waste and hazardous wastes (e.g. cleaning agents, oil, and grease) is collected and disposed of by a licensed waste handler. The projects’ site is more than 10 km away from ecologically sensitive areas like national parks, wetlands, and wildlife sanctuaries. No endangered flora and fauna species have been affected by the projects. The impact on birds is insignificant.21 However, FWE I and FWE II staff and the O&M contractors should intensify their visual observation and recording of bird species mortality. Ali Muhammad Jatt, the nearest settlement, is 500 meters away from the gate of FWE II wind farm and 8.89 kilometers away from

21 Migrating birds generally fly at heights greater than the wind turbine tips, so the risk of bird kill or bird collision is low.

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the nearest turbine (WTG-20). As regards the FWE I site, Ali Muhammad Jatt is 18.81 kilometers away from the nearest turbine (WTG 10). Therefore, no noise, shadow flicker or blind glint impacts have been recorded by the projects.

31. An occupational health and safety plan, developed to support the implementation of ISO 14001 (Environmental Management System), is mainstreamed in the projects’ operations. This plan aims to identify potential hazards and develop responses or mitigating measures to eliminate sources of risk or minimize workers’ exposure to hazards during normal operation and regular preventive maintenance works (cleaning and greasing activities) for the wind power facilities. To technically equip the staff and workers, the O&M contractors have conducted training on first aid measures, personal protective equipment, fire-fighting techniques, the emergency response plan, snake bite prevention, electrical safety, defensive driving, and scaffolding standards. Training on the key elements of the Environmental Management Plan (EMP) and ISO 14001 is also conducted to continually increase the level of safety awareness and technical knowledge of the HSE staff and workers, while emergency response drills are regularly carried out onsite. Fire emergencies, medical emergencies (disease outbreaks), natural diseases, and security threats are documented.

32. A grievance redress mechanism is in place and local communities are aware that grievances or project-related issues can be directly raised with the the project HR manager or through the grievance logbook at the gate. No complaints have been raised by the communities in relation to the project. Based on the environmental monitoring reports, no environmental and safety accidents have been reported during construction and operation.

33. On social safeguards, the projects were categorized as C for both involuntary resettlement and indigenous peoples. The land where the projects are located is under lease to FF by the Alternative Energy Development Board. The transmission line was constructed by the NTDC within its existing right of way. No individuals or households were displaced in the development of the projects because, before project construction, the area was uninhabited and only used as access by some local fishermen to the coastal area to fish. The internal access road developed by the borrower is presently used by 20-30 local residents daily to access the fishing ground. The project site does not belong to any tribal group, nor is it being claimed as an ancestral domain.

34. During construction of the two projects, around 125 local residents were engaged and during operation, 10-12 local people from the nearby villages have been retained as regular staff, working as security guards and site helpers. There is no reported noncompliance by the company, contractor, and subcontractors with the national labor laws during construction and operation. The borrower has been implementing corporate social responsibility activities, which are significantly helping the communities. A detailed discussion on social impacts is in Appendix 6.

4. Business Success 35. Business success was evaluated based on Alternative 1 of the guidelines.22 The financial internal rate of return (FIRR) was recalculated as 10.51% for FWE I and 10.30% for FWE II, compared to an expected 11.60% and 11.54% estimated at appraisal. The WACC was calculated at 7.76% for FWE I and 7.90% for FWE II. Appendix 7 presents the FIRR and WACC calculations.

22 ADB’s Guidelines for the Preparation of Project Performance Evaluation Reports on Nonsovereign Operations

provides for Alternative 1: Project FIRR vs. WACC. The rating scale is as follows: (i) excellent: FIRR ≥ WACCx1.25; (ii) satisfactory: FIRR ≥ WACC; (iii) less than satisfactory: FIRR ≥ WACCx0.7; and (iv) unsatisfactory: FIRR < WACCx0.07.

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36. FIRR values are slightly lower than at appraisal because of circular debt, which has affected cashflows. Nevertheless, the FIRR remains robust and well above the projects’ WACC.

37. The project is rated excellent for business success as the FIRR is more than 1.25 times the WACC.

C. ADB Additionality

38. ADB’s additionality is rated excellent. ADB’s involvement in the projects was integral to the overall financing and clearly exhibits a catalytic impact.

39. At the projects’ concept stage, the local banking market had no experience in wind IPPs and limited knowledge of the technology, construction risks, and offtake arrangements. ADB’s involvement provided confidence that the transaction would be properly structured, and risks appropriately allocated amongst all project parties. As a result, five local lenders were brought into the transaction, providing 25% of total financing. For comparison, the first wind IPP, Zorlu Enerji Pakistan (Pvt.) Limited (also an ADB-financed project),23 only had one local lender, Habib Bank Limited, while the balance financing was arranged by other development finance institutions.

40. The projects also encouraged development of local Islamic financing for infrastructure projects. As of December 2011, Islamic finance only accounted for 1.8% or PKR4.7 billion of the total outstanding to infrastructure loans in Pakistan.24 The projects mobilized PKR6 billion of Islamic funding from local banks in 2012 and provided the impetus for further use of Islamic finance in infrastructure projects. As of the latest reported data, Islamic infrastructure finance has grown to 5% of total infrastructure loans outstanding or PKR24 billion.25

41. ADB’s involvement in the projects also facilitated IIF’s equity investment. IIF would only have been able to invest in the projects if they were financed through a fully Shariah compliant debt. In addition, ADB’s PCG allowed IDB to provide finance above its policy limit, arranging 75% of the projects’ debt .26 As IDB arranged most of the projects’ debt, this in turn made it easier to arrange the balance of 25% through local Islamic banks.

42. Moreover, the projects’ Islamic finance structure has been frequently referenced in publications and presentations as an example of Ijarah financing for project finance. 27 It has also been replicated in other Pakistan wind IPPs, namely the $132 million, 52.8GM, Master Wind Power Project.28

D. ADB Investment Profitability

43. ADB’s investment profitability to date is rated satisfactory. ADB has guaranteed, through PCGs, half of IDB’s loans to FWE I and FWE II, which were $66.9 million and $66.4 million, respectively. Each loan has a 12-year tenor, inclusive of a 2-year grace period. The PCGs are priced in line with similar deals in Pakistan’s power sector. There are no front-end and

23 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan, Zorlu Energy

Power Project (Pakistan). Manila. 24 Infrastructure Project Finance Review 2008-2012, State Bank of Pakistan. 25 Infrastructure Finance Review Jul-Dec 2016, State Bank of Pakistan. 26 Similar to ADB, IDB cannot finance more than 25% of a project’s costs, but via the PCG, the IDB facility provided

50% of the projects’ financing. 27 State Bank pf Pakistan, Islamic Infrastructure Project Financing in Pakistan, 2014. Meezan Bank Limited. Islamic

Infrastructure Project Finance 28 The World Bank. Mobilizing Islamic Finance for Infrastructure Public Private Partnerships

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commitment fees and mission expenses are reimbursable. At appraisal, it was recognized that the pricing is below ADB’s cost-recovery model; however, it was approved by ADB’s investment committee based on benchmark pricing, i.e. within the price range of similar ADB-approved transactions in Pakistan’s power sector.

44. The Swedish International Development Cooperation Agency is guaranteeing 50% of ADB’s guarantee. The PCGs have never been called and there have been no loss provisions or write-offs to date. All PCG fees were paid on time.

E. ADB Work Quality

45. ADB’s effectiveness in screening, appraisal, and structuring is rated satisfactory. The projects are in line with ADB’s country, energy sector, private sector development, and environmental protection strategies. The ADB loan was processed within a reasonable period, which demonstrates ADB’s responsiveness to clients’ needs without compromising good practice standards. Following concept clearance on 28 March 2011, ADB completed the financial, technical, environmental, social, and legal due diligence by October 2011. Board approval was obtained on 8 December 2011 and the financing agreements were signed on 18 May 2012.

46. Monitoring and supervision quality is rated satisfactory. ADB is up to date and well informed on the projects’ progress and performance. ADB receives quarterly operational and financial reports, audited financial statements, and annual environmental and social monitoring reports. The report submissions were complemented by regular communications with the projects’ management team, review missions, and site visits. Within ADB, project monitoring reports are prepared mostly on a quarterly basis.

47. Waiver requests are addressed in a balanced manner considering both the projects’ needs and ADB’s interests. ADB has processed three significant waivers and consents for the projects. These include (i) August 2014 – approval to extend the availability period; (ii) August 2015 – approval to avail of the working capital facility to fund liquidity shortfalls; and (iii) February 2019 – approval for replacement of the cash debt service reserve account with a stand-by letter of credit debt service reserve account.

48. Overall, ADB’s work quality is rated satisfactory.

F. Overall Evaluation

49. The projects’ overall rating is successful, as summarized in the individual category ratings below (Table 1).

9

Table 1: Evaluation of the Project

Indicator Unsatisfactory Less than

Satisfactory Satisfactory Excellent

A. Development Results ✓

(i) Contributions to private sector development and ADB strategic development objectives

✓

(ii) Economic performance ✓

(iii) Environment, social, health, and safety performance

✓

(iv) Business success ✓

B. ADB Additionality ✓

C. ADB Investment Profitability ✓

D. ADB Work Quality ✓

(i) Screening, appraisal, and structuring

✓

(ii) Monitoring and supervision ✓

Overall Rating Unsuccessful Less than Successful

Successful

✓

Highly Successful

Source: Asian Development Bank

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS A. Issues and Lessons

50. Pioneer and early stage projects have the highest developmental impact, and greatest need for ADB’s support. The projects have fostered the development of Pakistan’s wind IPP sector. ADB’s support has had demonstrable effects and promoted private sector investment in Pakistan’s wind power sector. The significance of this is underscored by the fact that at the time, relevant parties, such as equity investors, EPC contractors, and financial institutions, were reluctant to be involved in or had limited appetite for Pakistan wind IPPs. ADB’s profile and stature provided a high degree of confidence to project parties, enabling the projects to be realized.

51. Suitable sponsor selection is critical for success, especially for early stage projects. Although FF was new to the wind power sector, its prior experience in Pakistan IPPs and its financial strength supported the successful construction and operation of the projects. It is imperative that, for nascent sectors and new technologies, strong sponsors are selected who can manage the unexpected developments that come with early stage projects.

52. The catalytic impact of early stage projects is much more substantial than the projects’ immediate impacts. As exhibited by the projects’ tariff, while the generation cost is competitive, the real impact has been seen in how drastically generation costs and tariffs have declined for subsequent projects. Early stage projects should be expected to be relatively more costly or not as efficient; however, they can present high multiplier effects in terms of overall development.

53. DMF outcomes should be established after giving due consideration to the assumptions. Actual DMF outcomes for the projects regarding greenhouse gas emission avoidance were impacted by the unreliability of the transmission and distribution network and

10

lower than forecast wind speed. Although these were assumptions at the appraisal stage, they were not quantified. For future projects, where there is a known dependency on external factors, DMF outcomes should be adjusted accordingly.

B. Recommended Follow-Up Actions

54. ADB will continue to monitor the projects’ energy generation, particularly tracking grid stability and reliability and its impact on the projects’ ability to achieve their full generation and greenhouse carbon emissions avoidance targets. ADB will also require the projects to fully implement the Ecological Management Plan, for which a bird and bat monitoring survey needs to be carried out for two years (October 2019 to October 2021), with the results being documented for ADB review and further recommendation.

Appendix 1 11

PROJECT-RELATED DATA

Table A1.1: Investment Identification

1. Country Pakistan 2. 3.

Guarantee Number Type of Business

7348 Wind Energy Generation

4. Project Title Foundation Wind Energy I and II Projects 5. Guaranteed Companies Foundation Wind Energy I Limited; and

Foundation Wind Energy II (Private) Limited

6. Sponsors FF, FFBL, IIF and Tapal Group 7. Amount of Approved ADB Assistance FWE I: $33,430,000; FWE II: $33,180,000 8. Environment Category B. Updated Initial Environmental

Examination Reports dated 27 October 2011 were disclosed on ADB website.

FF = Fauji Foundation; FFBL = Fauji Fertilizer Bin Qasim Limited; IIF = Islamic Infrastructure Fund

Table A1.2: Investment Data 1. Concept Clearance Approval 28 March 2011 2. Date of Board Approval 8 December 2011 3. Signing of Legal Documents 18 May 2012 4. Loan Effectiveness 18 May 2012 5. Loan Closing (End of Availability Period)

FWE I FWE II

17 November 2014 17 August 2014

6. Guaranteed Loan FWE I Initial Disbursement 23 August 2013 Final Disbursement 3 November 2014 Amount Disbursed $33.43 million FWE II Initial Disbursement 16 April 2013 Final Disbursement 17 August 2014 Amount Disbursed $33.18 million 7. Guaranteed Loan Repayment FWE I Initial Repayment Date 1 January 2015 Final Repayment Date 1 January 2024 Outstanding Balance (2 July 2019) $16.5 million FWE II Initial Repayment Date 1 January 2015 Final Repayment Date 1 January 2024 Outstanding Balance (2 July 2019) $16.4 million

12 Appendix 1

Table A1.3: Project Cost FWE I FWE II Original Estimate

(At Signing) Actual Original Estimate

(At Signing) Actual

Item Amount ($ million)

% of Total

Amount ($ million)

% of Total

Amount ($ million)

% of Total

Amount ($ million)

% of Total

A. EPC costs 111.9 82.6 110.3 84.9 111.0 82.3 108.6 85.8 Onshore EPC contract n/a n/a 27.6 21.2 n/a n/a 26.0 20.5 Offshore supply contract n/a n/a 82.7 63.7 n/a n/a 82.6 65.3 B. Non-EPC costs 14.0 10.3 19.6 15.1 13.9 10.3 18.0 14.2 Duties and taxes 0.7 0.5 1.0 0.8 0.7 0.5 1.1 0.9 Project development cost and other non-EPC costs

3.8 2.8 5.8 4.5 3.8 2.8 4.7 3.7

Interest during construction

5.3 3.9 8.8 6.8 5.3 3.9 8.0 6.3

Financial charges 2.7 2.0 2.8 2.1 2.6 2.0 2.9 2.3 Pre-COD insurance 1.5 1.1 1.2 0.9 1.5 1.1 1.3 1.0 C. Contingencies 9.7 7.1 0.0 0.0 10.0 7.4 0.0 0.0

Total 135.6 100.0 129.9 100.0 134.9 100.0 126.6 100.0

Table A1.4: Data on ADB Missions

Mission Dates Person-Days

Persons Specialization of Members

Investment appraisal 15-18, 31 August 2011; 27-28 September 2011

22 7 Senior Investment Specialist Investment Specialist Senior Investment Officer Counsel Assistant General Counsel Safeguards Officers (2)

Project administration 30 June 2012 1 1 Senior Investment Officer Project administration 24 September

2012 1 1 Senior Investment Officer

Project administration 13-14 and 18-19 February 2014

8 4 Principal Environment Specialist Senior Investment Officer Safeguards Officer Associate Investment Officer

Project administration 17 February 2015 1 1 Investment Specialist Project administration 20 April 2015 2 2 Investment Specialist

Associate Investment Officer Project administration 2-4 February 2016 3 1 Investment Specialist Project administration 13-14 April 2017 1 1 Investment Specialist Project administration 27 April 2018 1 1 Investment Specialist Extended annual review

2-3 April 2019

6 3 Investment Specialist Senior Investment Officer Associate Investment Officer

Extended annual review – site visit

21-22 May 2019 6 3 Investment Specialist Senior Safeguards Officer Safeguards Officer

Appendix 2 13

RESULTS AND RATINGS FOR PROJECT CONTRIBUTIONS TO PRIVATE SECTOR DEVELOPMENT AND ADB STRATEGIC DEVELOPMENT OBJECTIVES

—INFRASTRUCTURE

Results Area Actual

Achievementsa Ratingb Justification Potential Future Achievementsc Riskd

1. Within company PSD effects

1.1 Improved skills. New or strengthened strategic, managerial, operational, technical, or financial skills.

Domain knowledge on wind IPP construction and operations has grown.

Satisfactory At the start of operations, key skilled O&M staff had to be imported. After 4 years of operation, local capabilities have been developed and most O&M staff, including managers, are local.

Continued growth of indigenous local skills for construction and management of wind farms.

Low

1.2 Improved business operations. Improved ways to operate the business and compete, as seen in investee operational performance against relevant best industry benchmarks or standards.

The projects streamlined the tariff Shortfall Energy and NPMVe invoicing mechanism with CPPA.

Satisfactory CPPA has been referring new wind IPPs to the projects’ management for them to establish internal invoicing processes for Shortfall Energy and NPMV.

Future wind IPPs will benefit from a well-established market practice for wind IPP invoicing

Low Shortfall Energy compensation is no longer offered however NPMV remains.

1.3 Improved governance. As evident in set standards related to corporate governance, stakeholder relations, ESHS fields and/or energy conservation, and their implementation.

Not applicable Not applicable

Not applicable Not applicable Not applicable

1.4 Innovation. New or improved infrastructure design, technology, service delivery, ways to cover or contain cost, manage demand or optimize utilization, improved risk allocation between private company and government, financial structure, etc.

A fully compliant Islamic finance structure was used.

Satisfactory The Ijarah format used by the projects has been replicated in other infrastructure transactions.

Greater liquidity from Islamic finance sources

Moderate

1.5 Catalytic element. Mobilizing or inducing more local or foreign market financing or foreign direct investment in the company.

Mobilization of local debt and foreign equity investment

Excellent ADB’s involvement resulted in five local lenders participating in the projects at a time when local banks were not familiar with wind IPPs. ADB also introduced IIF, bringing in an overseas equity investor to the projects

Local banks continue to finance wind IPPs that have a robust pipeline

Medium Bank power sector appetite constrained by exposure, mainly because of circular debt financing

14 Appendix 2

Results Area Actual

Achievementsa Ratingb Justification Potential Future Achievementsc Riskd

2. Beyond company PSD effects

2.1 Private sector expansion. Contribution by a pioneering or high-profile project that facilitates in its own right, or paves the way, for more private participation in the sector and economy at large.

Fostered knowledge and expertise on wind IPPs and Pakistan’s wind power sector in general, particularly in the Gharo corridor.

Satisfactory Being pioneering projects, they provided evidence of the viability of wind IPPs supporting the growth of the sector. The sector now has 24 projects with an installed generation capacity of 1,245MW, 302.8MW of which is based in the Gharo corridor.

An additional 46 wind IPPs with a total 2,898MW capacity at an early stage of project development

Medium

2.2 Competition. Contribution of new competition pressure on public and/ or other sector players to raise efficiency and improve access and service levels in the industry.

Successful completion of the projects has been followed by a boom in the wind IPP sector.

Satisfactory Many new projects are being established by sponsors without prior power sector experience, given the relative ease of entry

Further growth and investment in wind IPPs

Low Government policies remain conducive

2.3 Demonstration effects. Adoption of new skills, improved infrastructure assets and services, more efficient processes, maintenance regimes, improved standards, risk allocation, and mitigation beyond the project company.

Development of the Gharo wind corridor

Satisfactory Being the first wind IPP in Gharo, the projects initiated development such as the 13km access road and construction of the main transmission line. As a result, there are six wind IPPs at Gharo with an installed generation capacity of 302.8MW

Currently, no future projects are planned at Gharo

Low

2.4 Linkages. Relative to investments, the project contributes notable upstream or downstream linkage effects to business clients, consumers, suppliers, key industries etc. in support of growth.

Development of the wind energy profession in Pakistan Increased availability of wind power infrastructure and special machinery (cranes)

Excellent More reliable and experienced, indigenous expertise is available. Specialized equipment like cranes is locally available.

Some of the consultants and companies engaged by the projects are hired by the other wind IPPs.

Low

2.5 Catalytic element. Mobilizing or inducing more local or foreign market financing or foreign direct investment in the sector (beyond the company) through pioneering or catalytic finance.

The projects have catalyzed local financing for wind IPPs.

Excellent At the time of the projects’ financial closure, the local banking market had no experience in wind IPPs. Now local banks are actively financing such projects

Local banks continue to finance wind IPPs that have a robust pipeline

Medium Bank power sector appetite constrained by exposure, mainly because of

Appendix 2 15

Results Area Actual

Achievementsa Ratingb Justification Potential Future Achievementsc Riskd

circular debt financing.

2.6. Affected laws, frameworks, and regulation. Contributes to improved laws and sector regulation for public private partnerships, concessions, joint ventures, and build-operate-transfer projects; and liberalizing markets as applicable for improved sector efficiency.

Tariff regulation has changed from a cost-up basis to a feed-in tariff basis, which is applied to new entrants. The new terms include removal of the government’s wind risk guarantee.

Satisfactory The feed-in tariff structure will provide incentives to investors to decrease project development costs. Wind power projects will be financed without a wind risk guarantee, lowering overall generation costs.

Tariff setting continues to be liberalized and moves towards a more market-based / competitive format; reducing the cost of power generation.

Low Recent round of renewable energy tariffs have already been established on a bidding / low cost basis

3. Contribution to other ADB strategic objectives

3.1 Sector development (outputs). Contribution to other sector development outputs and outcomes not captured under point 2., such as capacity or network expansion.

The proportion of private sector participation in Pakistan’s energy sector has increased (as stated in the CPS Pakistan 2009-2013).

Satisfactory The percentage share of private sector power generation capacity has increased to 51%.

Further growth in private sector participation.

Low

3.2 Sector development (outcomes). Contribution to other sector development outputs and outcomes not captured under point 2, such as increased infrastructure utilization or consumption, improved in-country connectivity, and improved energy security.

Energy security has improved through the use of indigenous and sustainable resources such as wind, consistent with ADB’s Energy Policy.

Satisfactory Wind generation capacity was non-existent when the projects were processed and now accounts for approximately 3.6% of total installed generating capacity.

Continued growth of the renewable sector, as evidenced by the pipeline of wind IPPs, will further strengthen energy security.

Low Government policies remain conducive and grid issues are resolved.

3.3 Inclusion. Improved access to availability or affordability of infrastructure services for the poor and other disadvantaged groups.

Access to electricity, water, health services and microfinancing has improved for the local community in the project area.

Satisfactory The projects are contributing to the local community by providing solar home systems, water pumps, and tanks, as part of the corporate social responsibility program.

Continuation of the projects’ CSR programs over the project life of 20 years

Low

3.4 Job creation. Creation of additional sustainable jobs or self-employment. Distinguish between jobs created within and beyond the company.

Jobs were created within the company and externally through vendors and contractors.

Satisfactory Employed 700 persons during construction and 145 persons during commercial operations

These jobs will continue during the 20 years of the projects’ life.

Low

3.5 Environmental sustainability. Project net impact on GHG emissions. Any other contributions to environmental improvements.

On average, the projects avoided greenhouse gas emissions of 51,000 tCO2/year for FWE I and 56,000 tCO2/year for FWE II.

Satisfactory The projects produce sustainable energy

Future energy generation and corresponding greenhouse gas emissions avoided will improve as grid

Low Continued avoidance of greenhouse gases at current levels is subject to

16 Appendix 2

Results Area Actual

Achievementsa Ratingb Justification Potential Future Achievementsc Riskd

reliability improves.

transmission & distribution network reliability.

3.6 Regional integration: Project contributions to regional cooperation and integration by facilitating trade, cross-border mobility, cross-border power supplies, etc.

Not applicable as the projects do not have any features that extend across national borders

Not applicable

Not applicable Not applicable Not applicable

4. Overall Ratingf Satisfactory

ADB = Asian Development Bank; CPPA = Central Power Purchasing Agency; CPS = country partnership strategy; CSR = corporate social responsibility; ESHS = environmental, social, health, and safety; IPP = independent power producer; MW = megawatt; NPMV = non-project missed volume (see note e below); NTDC = National Transmission and Despatch Company; PSD = private sector development; RRP = report and recommendation of the President; a Achievements to be assessed for all result areas.b “Excellent” reflects a high level of achievement, usually exceeding targets. “Satisfactory” denotes a good level achievement

in line with expectations and set targets. “Less than satisfactory” reflects a low level of achievement below expectations. “Unsatisfactory” reflects no achievement or significant negative effects. “Not applicable” should only be used, if the project report and recommendation of the President does not mention this aspect in its presentation of envisaged project development results, project justification, ADB’s additionality, or the DMF itself, and if negative effects are not apparent.

c Potential for further achievements considering relevant developments in the medium term or external to the project. d Risk Rating Scale: high, medium, low. e NPMV means non-project missed volume and pertains to payment against energy not delivered due to a non-project event

such as lower than benchmark wind speed and grid events. f Overall rating scale is: Unsatisfactory, Less than Satisfactory, Satisfactory, Excellent. Sources: Asian Development Bank and Foundation Wind Energy I and II.

Appendix 3 17

SECTOR REVIEW 1. Overview of Pakistan’s energy sector. The Power Division of the Federal Ministry of Energy is responsible for providing strategic guidance, setting policies and coordinating and supervising organizations in Pakistan’s power sector. The provincial governments also have their own energy departments that can and do implement power projects within their province. Pakistan’s electricity sector is regulated by the National Electric Power and Regulatory Authority (NEPRA), whose independent mandate oversees generation, transmission, and distribution. Power generation is provided by state-owned generation companies (GENCOs) for thermal power, the Water and Power Development Authority (WAPDA) for hydropower, and independent power producers (IPPs). 2. The national electricity transmission system is run by the state-owned National Transmission and Despatch Company (NTDC), which transmits power between generators and the state-owned distribution companies (DISCOs), which serve consumers. Power is purchased from generators on behalf of the DISCOs by the Central Power Purchasing Agency (CPPA), which acts as Pakistan’s power market operator. The exception is K-Electric; a vertically integrated, private company that provides power generation, transmission, and distribution to the Karachi metropolitan area. In 2016, a deal was struck between Pakistan’s Abraaj Group and Shanghai Electric Power Company of China for the latter to acquire a majority stake in K-Electric for $1.8 billion – a deal that is yet to be confirmed by the Pakistan government. Finally, the Alternative Energy Development Board (AEDB) is an autonomous body under the Ministry of Energy whose role is to promote and implement renewable energy projects in Pakistan, a critically important role given the need to leverage domestic natural resources to curtail fossil fuel imports.1 3. Other agencies related to the power sector include the Planning Commission, which carries out energy integrated planning; the Private Power and Infrastructure Board (PPIB), which functions as a “one-window” office for private developers in thermal power generation; and the National Energy Efficiency and Conservation Agency (NEECA), which leads energy efficiency and conservation activities through development plans and policies, labelling, information outreach, and training.2 4. Current electricity capacity and generation. With oil- and diesel-fired generation being replaced with newer LNG- and coal-fired power, Pakistan is still largely dependent on thermal power, currently contributing almost two-thirds of capacity and 70% of power generation, with much of the fuel imported. Almost all the rest of Pakistan’s power generation is made up of hydro and, to a lesser extent, nuclear power.

1 Source: Institute for Energy Economics and Financial Analysis (IEEFA). December 2018. Pakistan’s Power Future. 2 Source: ADB. January 2019. Pakistan: ADB’s Support to Pakistan Energy Sector (2005-2017).

Appendix 3

18

Table A3.1: Pakistan’s Electricity Market Composition 2017/18 Capacity Generation Capacity

Utilization Source GW % of Total TWh % of Total

Oil, Gas, LNG 18.6 57.2 82.4 61.0 48% Coal 2.7 8.4 11.9 8.8 59% Hydro 8.2 25.4 28.2 20.9 44% Nuclear 1.3 4.0 8.7 6.5 79% Wind 0.9 2.9 2.1 1.5 29% Solar 0.4 1.2 0.7 0.5 22% Bagasse 0.3 1.0 1.1 0.8 40%

Total 32.5 100.0 135.1 100.0 Source: Institute for Energy Economics and Financial Analysis (IEEFA). December 2018. Pakistan’s Power Future.

5. Renewable energy. Renewables make up just 5.1% of installed capacity (2.8% of generation in 2017/18). While there has been some exploitation of Pakistan’s excessive wind and solar radiation resources, the number of wind and solar power installations remains low. The renewables sector is yet to experience the highly significant, fast-paced growth seen across other parts of Asia, which is driving renewable energy costs lower. Pakistan’s previous interim Minister for Energy highlighted the need for an increased role for renewable energy in the nation, in preference to reliance on LNG and coal imports. 6. To date, all of Pakistan’s wind power development has been in the Gharo-Jhimpir corridor in the south of the country, which has a theoretical potential of around 50 GW of wind energy. This corridor combines good wind resources with relative proximity to load centers and national grid connectivity. Pakistan also has good solar radiation resources, particularly in the south and southwestern parts of the country. Areas of high solar radiation include the Thar desert, parts of which have been allocated for coal mining to supply fuel to some of the proposed coal-fired power plants. In southeast Pakistan, Sindh Province has initiated its Sindh Solar Energy program (SSEP) that will see utility-scale, distributed, and residential solar installed, including up to 400 MW of capacity in solar parks. The World Bank has committed $100 million to the program. Pakistan is also moving into hybrid wind and solar installations, which help to smooth out variability in wind and sunshine. According to the AEDB, 13 letters of intent have been issued to project sponsors for hybrid systems. 7. Power demand analysis. As of 30 June 2017, nearly 28 million consumers in different sectors of the economy were integrated in Pakistan’s energy sector. Households are the largest consumers of electricity, followed by industrial, agricultural, and commercial consumers.

Table A3.2: Electricity Consumption by Sector, 2016-2017

Consumers Category

No. of Consumers (As of 30 June 2017)

Consumption (FYE 30 June 2017)

Numbers Percentage GWh Percentage

Household 23,937,200 85.5 48,055.1 48.2 Commercial 3,362,034 12.0 7,769.6 7.8 Industrial 356,913 1.3 23,951.6 24.1 Agricultural 326,143 1.1 9,222.1 9.3 Others 15,509 0.1 10,610.8 10.6

Total 27,997,799 100.0 99,609.2 100.0 Source: Government of Pakistan. 2017. NEPRA State of Industry Report. Islamabad.

8. Circular debt. A major issue within Pakistan’s electricity system is “circular debt,” which has accumulated over the years to reach Rs1.18 trillion ($8.9 billion) as of June 2018. Pakistan’s Economic Coordination Committee has defined circular debt as “the amount of cash shortfall

Appendix 3 19

within the CPPA, which it cannot pay to power supply companies.” The CPPA is often unable to recover full amounts from the power distribution companies (DISCOs) in order to pass those amounts on to power generators. 9. The difference between the high cost of generation and lower tariffs for some consumers creates a deficit. Government payments to cover the difference are often delayed. A further contributor to circular debt is that DISCOs cannot recover all billable amounts; for FY2017, the recovery rate was 92% against a target of 100%. Another major contributing factor to circular debt is the large transmission and distribution (T&D) losses that afflict the Pakistan electricity system. The target for T&D losses for FY2017 was 15.3%, whilst the actual loss was almost 18%. However, the total difference between electricity generated and electricity sold by DISCOs was 21.6% of electricity generated in FY2017. All of this leads to cash flow problems, often leaving DISCOs unable to make timely payments to power producers. 10. In its 2017 State of the Industry Report, NEPRA notes with concern that the DISCOs have made little progress in addressing T&D losses and have requested higher allowable losses than previously proposed. It further identifies Pakistan’s high T&D losses as a major impediment to the power sector’s financial sustainability, undermining the bankability of power purchase agreements, and identifying the need for government to assign a high priority to the issue. 11. Theft of electricity is also a major issue that contributes to losses. According to a recent report on circular debt to a Senate Committee, the estimated cost of power theft for FY2018 was over PKR53 billion ($430 million), with the rate of theft from the grid at 3.9%. The Senate Committee noted that unrecovered bills and T&D losses have left an annual funding gap of PKR295 billion ($2.2 billion). Although part of this will be recovered through consumers’ bills, around $900 million remains a burden on government, thereby becoming circular debt. To tackle the circular debt issue, the report recommended (i) an immediate injection of PKR400 billion ($3 billion) to prevent power plant closures, (ii) reduced reliance on imported fossil fuels, and (iii) increased emphasis on renewable energy.3

3 Source: Institute for Energy Economics and Financial Analysis (IEEFA). December 2018. Pakistan’s Power Future.

20 Appendix 4

ENVIRONMENTAL IMPACT A. Introduction

1. FWE I and FWE II projects have been constructed and operated by Fauji Foundation (FF). They are located in Thatta District, about 30 km southwest of Gharo town on the National Highway between Karachi and Thatta. They are adjacent to each other and considered as one big wind farm that consists of 40 units of wind turbines with Nordex N100 2.5 MW capacity and mounted at a hub height of 80 meters (m) strategically located within the 670-hectare land parcel. Other project components include step-up transformers, an underground electrical collection system that leads to the project substation, a plant operations and control building, an internal road network linking all the wind turbines, and plant O&M facilities. Access to the site is along a 3 kilometer (km) long and 30 m wide road from the coastal highway. The National Transmission and Dispatch Company (NTDC), the system operator, has constructed the transmission line along its right of way (ROW) for the evacuation of power.

2. The projects were classified as Environment Category B. The borrower prepared the initial environmental examination (IEE) for the two projects to comply with the requirements of ADB and the Government of Pakistan. The Sindh Environmental Protection Agency (SEPA) issued the “No Objection Certificate” for both projects on 02 March 2012. The environment and social management plan (ESMP) outlines the key issues and concerns and the measures to mitigate impacts during construction and operation. No industrial or residential activity is permitted on the land allocated for wind energy projects, since this area is in the Gharo Wind Corridor identified by the Alternative Energy Development Board.

3. The extended annual review report mission, which was fielded on May 2019, has evaluated the implementation of the ESMP and reviewed relevant health, safety, and environmental (HSE) documents provided by FWE I and FWE II in order to gauge compliance with the HSE aspects of the projects.

B. Mission Review Findings

4. Compliance with ADB safeguards requirements and national and environmental regulations. FWE I and FWE II, all contractors and subcontractors have legally complied with applicable laws for environmental protection; the health, safety, and welfare of the workers; disposal of solid waste and effluents; and the handling and disposal of toxic and hazardous substances. They have also met the standards for pollution streams. No fines or violations were imposed by the state. The projects are fully compliant with the applicable national laws and regulations for (i) pollution prevention (air, water, noise and vibration, waste, soil); (ii) waste management; (iii) hazardous materials management; (iv) wildlife protection; (v) occupational health and safety; (vi) labor and employment; (vii) energy development; and (viii) cultural heritage protection. The projects also adhered to international standards such as ISO 14001:2015 (Environmental Management System) and the International Finance Corporation’s Environmental, Health, and Safety (EHS) Guidelines for Wind Energy. FWE maintains transparent and timely reporting of information as required by the regulatory bodies.

5. Environmental Management and Monitoring Plans. The construction phase of the projects has been strictly monitored and supervised by the HSE site team to ensure that the local and international standards for the control of fugitive dust emission and noise due to construction activity are within permissible limits. No major accidents or fatalities were recorded, since the engineering, procurement, and construction (EPC) contractor had the necessary knowledge,

Appendix 4 21

expertise, and experience in the erection of the wind turbines. Upon completion of the project, the O&M contracor established an environmental department unit that included HSE officers at the project site. Since the projects are based on the latest wind technology, operation phase impacts are minimal and can be easily mitigated by good engineering design and practices. Water for domestic purposes is purchased from water vendors outside and is tested by a third party to ensure there is no bacterial growth that may cause a health hazard to workers. Periodic smoke emission and vehicular emission tests have been performed by a third party in order to identify the risk to the environment due to air pollution. The results of the smoke emission tests on vehicles, generator sets, equipment, and machinery are within SEPA’s permissible limits. All noise levels are being controlled at source. Vehicles have been equipped with exhaust mufflers (silencers) to minimize noise generation. The plant machinery is being inspected regularly to ensure that the noise generation is low, in line with the standard, and showing no harm to sensitive receptors. Noise testing has been carried out by a third party SEPA-certified laboratory and the results show compliance with the permissible limit.

6. The wastewater generated from domestic discharge is conveyed to the septic tank and then flows into the evaporation pond after treatment. An HSE representative ensures that the treated water is retained in the evaporation pond and not mixed with the nearby creek. Operation of the plant generates a very limited amount of solid waste and hazardous wastes (e.g. cleaning agent, oil and grease). There is no soil pollution since all hazardous wastes are stored in a separately designated container with proper labels and transported by a licensed waste handler to a permitted offsite disposal facility as designated by the government.

7. The power plant site is located on intertidal mud flats, and its immediate surroundings are lying completely vacant, with no habitation, cultivation or grazing. Ecologically sensitive areas like national parks, wetlands, and wildlife sanctuaries are more than 10 km away from the project site.1 No endangered flora and fauna species have been found. The hub height is 80 m and will not cause any significant disturbance to birds, which fly at heights over 150 m. Spacing between the generator sets is 300 m to allow a wide space for birds to fly through the blades. Therefore, impacts on birds are insignificant.2 Visual monitoring of bird carcasses has been carried out by a designated employee since the two wind farms became operational. The monitoring is carried out two hours after sunrise and two hours before sunset, every other day. Findings are nil. However, FWE I and FWE II staff and the O&M contractors should intensify their visual observation and recording of bird species mortality and of migratory birds visiting the project site.

8. Ali Muhammad Jatt, the nearest settlement to the FWE II gate, is 8.89 km away from the nearest turbine (WTG-20). For FWE I, Ali Muhammad Jatt is 18.81 km away from the nearest turbine (WTG 10). Therefore, no noise, shadow flicker or blind glint impacts have been experienced by this settlement.

9. Occupational Health and Safety (OHS) Plan. An OHS plan, developed to support the implementation of ISO 14001 (Environmental Management System), is mainstreamed in the projects’ operations. The OHS plan aims to identify potential hazards and develop responses or mitigating measures to eliminate sources of risk or minimize workers’ exposure to hazards during normal operation and regular preventive maintenance works (cleaning and greasing activities) for the wind power facilities. In summary, the OHS plan consists of: (i) HSE staffing resources, (ii) a training schedule, (iii) a work permit system, (iv) management of subcontractors, (v) a project

1 As confirmed in the IEE the site is not located in an area which is known for high bird concentration, or bird migration

route. Hence no feeding ground for birds has been affected by the project. The noise of the turbine blades is likely to keep the birds away from the wind farm.

2 Migrating birds generally fly at heights greater than the wind turbine tips, so the risk of bird kill or bird collision is low.

22 Appendix 4

specific emergency plan, (vi) incident reporting and investigation flow, (vii) control of non-conformance and emergencies, (viii) medical service at site, and (ix) the HSE Disciplinary, and Incentive and Recognition Program (an HSE monitoring program). FWE consistently monitors compliance with the approved OHS plan on a day-to-day basis and carries out weekly and monthly inspections. All inspections, audits, and assessments are regularly done by FWE and the O&M team and properly documented; follow-up is then undertaken. The process of inspection, audit, and monitoring is to ensure that all the contractors are complying with the requirements for all applicable operating procedures, including suggested action plans. The training conducted by the O&M contractors for the staff and workers has covered first aid measures, personal protective equipment, fire-fighting techniques, the emergency response plan, snake bite prevention, electrical safety, defensive driving, and scaffolding standards. Training on the key elements of the Environmental Management Plan (EMP) and ISO 14001 is also conducted to continually increase the level of safety awareness and technical knowledge of the HSE staff and workers. Emergency response drills have been performed on site to give insight into the existence of any constraints during an emergency. Emergency response drills involve a fire emergency, a medical emergency (a disease outbreak), natural diseases, and security threats.

C. Conclusion and Recommendation.

10. The environmental and social requirements of ADB’s Safeguard Policy Statement (2009) and applicable national laws and regulations have been adequately met. This conclusion is based on the review and evaluation of relevant HSE documents (such as the IEE, ESMP, environmental and social monitoring reports, ISO:14001:2015 policy and procedures), site visits to wind farm and host communities, and interviews with the HSE staff. FWE is committed to the continuous improvement of staff capacity on HSE issues through training and to close collaboration with the O&M contractor, government regulatory bodies, and the host communities to ensure the smooth operation of the wind farm facilities.

Appendix 5 23

SOCIAL IMPACTA. Project Overview 1. The two projects, which are only 6 kilometers (km) apart and separated by Tenaga Generasi Limited (TGL) Wind Farm, are located in the Gharo wind corridor 54 km southeast of Karachi, Pakistan’s industrial and commercial hub. There are 14 villages around the project area, the closest of which is Ali Muhammad Jatt. The nearby population is mostly rural and depends on cultivation, fishing, and other activities for their livelihood. Population details of nearby villages are indicated below:1

Name of Nearby Villages Number of Households

Population Remarks

Ali Muhammad Jatt 91 728 Nearest village to the FWE II wind farm gate (500 meters) and 8.89 km away from the nearest turbine (WTG-20). From the FWEL I site, the nearest turbine (WTG-10) is 18.81 km from the village

Arab Jatt 76 532 Mousa Khaskheli 82 574 Usman Jatt 45 315 Pandi Jatt 59 413 Karam Ali Jatt 46 322 Sathi Jatt 59 413 Babu Jatt 27 189 Radhu Angoro 26 208 Muhammad Ismail Kattiyar 72 504 Kharror Mala 28 196 Faqeer Muhammad Rajero Kamal Kattiyar 33 231 Gul Hassan Samo 78 546 Farthest village (6 km away from the

FWE I wind farm gate); 13.34 km from WTGF-20, and 23.28 km away from WTG-10)

Total 770 5,500

B. Project Overview 2. Involuntary resettlement and indigenous peoples. Development of the two wind farms entailed the use of 1,210 acres for FWE I and 1,420 acres for FWE II. Both areas are under lease from the Alternative Energy Development Board. The project sites are located close to each other and connected by a 7-kilometer internal access road. In between these projects is another wind farm owned by TGL. The road right of way is actually shared by the borrower and TGL. Prior to project development, the site, including its immediate surroundings, consisted of uninhabited tidal mudflats with no cultivation or grazing activity. The area is characterized by dry, hot, and humid conditions. Few fishermen previously traversed the site by foot to fish.2 They are still allowed to enter the area and can now access the fishing site using motorcycles. The company logbook indicated that 20-30 local residents use the internal access road daily.

3. From the coastal highway, the projects are accessible through an existing 3-kilometer road. The transmission line was constructed by the NTDC, the power purchaser, along NTDC’s existing right of way. No additional land was acquired for the project and there are no outstanding issues

1 Information provided by Fauji Foundation, the owner and operator of the two wind projects. 2 Fishermen in the area typically catch small fish, which are sold as bait to large-scale fishermen in the area.

24 Appendix 5

regarding the use of the land under lease and its associated facilities. No indigenous peoples are impacted by the two projects.

4. Other social dimensions. During construction of FWE I and FWE II, around 700 workers were engaged, 25% (125) of which were local people (all male). After project completion, 10-12 local workers were retained for the 2 project sites as regular staff. They are engaged as security guards and site or office helpers. Labor inspectors visit the project sites every year to conduct audits, and no noncompliance by the company, the contractor, and its subcontractors in relation to applicable national labor laws has been reported.

5. Stakeholder engagement and grievance redress mechanism. Consultations with relevant institutions and nearby communities were carried out as part of the IEE study. The main objective was to inform them of the proposed projects and potential impacts, obtain their views and concerns, and incorporate them to enhance the project design. Community engagement now involves updating project activities and asking how the sponsors can help them. The nearby communities have been vocally appreciative of the activities implemented by the borrower in their area, most importantly the potable water system, home solar systems, mirco-finance loans and a refurbished school. No complaints have been received to date from the community regarding the project. Aside from corporate social responsibility activities implemented by the borrower, local people recognize the value of the employment provided to the local people during construction and operation.

6. Local communities are aware that, aside from the grievance logbook at the gate, they can approach the project General Manager on project-related matters. The General Manager, aside from being in charge of workers’ welfare and grievances, also serves as the Community Relations Officer for the projects. Since the projects have been in operation, he has only been approached for assistance or project requests. No grievances have been raised by the workers and communities.

7. Corporate Social Responsibility activities. Since the project became operational, the borrower has been implementing the following activities, benefiting the nearby villages including women:

(i) Refurbishment of a school building with 4 classrooms in Gul Hasan Samo. The school had not been in operation and so the company sought the permission of the local government of Sindh to refurbish it and use some rooms as classrooms for informal basic classes. The school is presently housing 39 pupils aged 5-10 years old including young girls. The building was also provided with solar panels (for lighting and fans) and comfort rooms. A well will also be installed by the company for water supply. The company is now seeking approval from the government to allow the facility to operate as a regular school. If approved, the company will provide teachers and supplies and fund its administrative costs.

(ii) Assistance to the medical clinic. One of the rooms in the refurbished school building is presently used by a local NGO to run a clinic.3 The doctors are provided with transport, staff receive food on clinic days, and the company HSE ambulance can be used for emergency cases.4 One of the female patients interviewed during the site visit expressed her appreciation that a nearby clinic is available for the

3 The medical clinic is run by Shine Humanity. 4 The project provides transportation to medical doctors who are serving the medical clinic. The male doctor visits the

clinic once a week, while the female doctor reports once a month.

Appendix 5 25

villagers. Previously, they needed to travel 25-30 kilometers to go to the nearest hospital to be treated.

(iii) Provision of solar panels with energy storage. This is benefiting 445 households and allows family members, especially women and girls, to engage in other productive activities at night.5 It has been reported that some residents have died of snake bites. These households can at least see if a snake is approaching their home and protect the family members from being bitten. A household is provided with solar panels for basic lighting and to run, on a limited basis, some appliances.

(iv) Installation of potable water systems in 2 communities. These systems, for which 10% of the total project cost was provided by the beneficiaries, are benefiting 2,500 villagers. A water reservoir/tank is installed in the most populated area, especially benefiting women and girls who are generally tasked to fetch water for the household. Before the installation of the water tank, these women and girls had to walk 4 kilometers to fetch water using a water wheel. The water source is now a few meters away from the village center.

(v) Provision of loans for livelihood activities. As of December 2018, PKR850,000 has been provided to 17 villagers at PKR50,000 per borrower, payable in 2 years with a 2-month grace period. To date, PKR168,000 has been recovered and will be made available to other eligible borrowers.

(vi) Provision of 30 sewing machines to women villagers. FWE I and FWE II are still in the process of finding ways to bring these beneficiaries together through an NGO, train them, and sell their products for additional income.

(vii) Other activities. These include the administration of polio drops in the area and information campaigns on health.

C. Conclusion 8. Based on the review of documents, site visit, and engagement with the projects’ management and staff and members of the local communities, FWE I and FWE II are compliant with ADB’s social safeguard requirements. Its social safeguards performance is therefore rated satisfactory.

5 Although the poorest and the most vulnerable households are prioritized, all of the beneficiary households are

required to provide 20% of the total cost of the solar set-up to ensure that solar panels are maintained. One unit costs PKR15,000-17,000 inclusive of a 150 Watts mono panel, 2 bulbs, change controller, battery, and wiring. The panel can only sustain 3 bulbs, but one bulb is installed outside the beneficiary’s house so that those without a panel kit can also have access to lighting. The residents can also charge their mobile phones from the kit.

26 Appendix 6

REEVALUATION OF FINANCIAL INTERNAL RATE OF RETURN AND WEIGHTED AVERAGE COST OF CAPITAL

A. General 1. The projects consist of two 50 MW wind farms in Sindh, Pakistan. The plants have been developed and are operated by Foundation Wind Energy (FWE) I and II; both are special purpose vehicles.

2. Both project companies report in Pakistan rupees using accounting and reporting standards as applicable in Pakistan. Both the financial analysis and projections are based on the fiscal year, which starts on1 July and ends on 30 June. Financial projections from FY2019 to FY2035 cover the entire project life of the wind plant.

B. Revenues 3. Energy Generation. Commercial operations commenced in April 2015 for FWE I and in December 2014 for FWE II. The projects completed their first full year of operation by end-June 2016. The plant is operating at ~98% availability. Energy generation, however, has consistently been below benchmark energy in the first 3 fiscal years (26% below for FWE I and 18% below for FWE II) because of lower than expected wind speed and grid constraints. Wind speed risk and grid failures are, however, compensated under the energy purchase agreement (EPA) tariff mechanism, allowing both projects to bill at benchmark energy. Thus, annual revenue projections from FY2019 to FY2033 are based on benchmark energy production (144.5 GWh for FWE I and 143.6 GWh for FWE II).

4. Tariff Rate. Project revenues are derived from the reference tariff, which was notified by the National Electric Power and Regulatory Authority (NEPRA) in March 2012 (the Reference Tariff) and on the basis of which the EPA was negotiated with the National Transmission and Dispatch Company (NTDC). The Reference tariff was determined on a cost-plus basis taking into account the complex monthly power curves, project costs, O&M arrangements, inflation, the targeted return on equity, and the project borrowing (P+I). NEPRA also allowed onetime adjustment to the Reference Tariff at the time of COD i.e. tariff true-up. The tariff is further indexed to quarterly variations in foreign exchange rates, funding rates (i.e. LIBOR and KIBOR), and inflation (using the Pakistani Whole Price Index, and US dollar Consumer Price Index). The risk of variable wind speed is assumed by NTDC, the offtaker.

5. Cashflow. Owing to circular debt, it has been assumed that the projects will only receive the equivalent of eleven months of revenue during the year. Historically, this has been the trend for the average actual amount of receipts the projects have received. As a result, the FIRR figures are slightly lower than in the report and recommendation of the President (RRP). However, the assumption is conservative as it is anticipated that the issue of circular debt should not persist for the remainder of the projects’ life or till FY2035.

C. Main Costs and Expenses 6. Capital expenditure. Construction started in August and April 2013 and commercial operations in April 2015 and December 2014 for FWE I and FWE II, respectively. Total project costs were PKR12.94 billion for FWE I and PKR12.79 billion for FWE II. These costs include cost overruns caused by the delay in the plants’ commissioning dates.

Appendix 6 27

7. Operating expenditures. The projects’ operating expenses consist mostly of O&M contracts, insurance, site expenses and general administration payroll and costs.

8. Depreciation. Depreciation expenses are calculated on a straight-line basis over the 20-year period for plant and machinery, buildings, and civil works. Office equipment, furniture, and vehicles are depreciated over 3-10 years on a straight-line basis.

9. Interest rate assumptions. The interest rate assumed for the project debt incorporates (i) London Interbank Offered Rate (LIBOR), plus the loan margin on a $66.36 million loan for FWE I and a $66.86 million loan for FWE II; and (ii) Karachi Interbank Offered Rate (KIBOR), plus the loan margin on a $30 million equivalent local currency loan for FWE I and a $26 million equivalent local currency loan for FWE II.

D. Financial Internal Rate of Return 10. The financial internal rate of return (FIRR) was calculated for the entire life of the projects from FY2012 to FY2035. The first 4 years cover construction and testing, and the last 20 years represent the operational life of the projects. Financial data for FY2012–FY2018, i.e. capital expenditures, revenues, and operating costs, were extracted from corresponding audited financial statements. Data for the forecast period (FY2019–FY2035) were based on the updated financial model as of 10 December 2018 prepared by FWE I and FWE II. Based on these inputs, the FIRR was calculated to be 10.51% for FWE I and 10.30% for FWE II.

E. Weighted Average Cost of Capital The weighted average cost of capital (WACC) was recalculated at 7.76% for FWE I and 7.90% for FWE II. In comparison, the WACC for both projects was estimated at 5.15% at appraisal.

Appendix 7

28

REEVALUATION OF ECONOMIC INTERNAL RATE OF RETURN A. Overview 1. In 2011, the Asian Development Bank (ADB) approved two partial credit guarantees

totaling $66.61 million to guarantee two loans of the Islamic Development Bank (IDB) for the

financing of the Foundation Wind Energy (FWE) I and II Projects, each with a capacity of 50

megawatts (MW). The projects are located in the Gharo wind corridor, 54 kilometers southeast of

Karachi, Pakistan’s industrial and commercial hub. The National Transmission and Dispatch

Company (NTDC)/ Central Power Purchasing Agency (CPPA) is the sole off taker.

2. At the planning stage of the project, demand for electricity was estimated to grow by 8.7%

annually and supply was expected to fall short of peak demand by 2,000 to 3,000 MW.1 Indeed,

a widening gap between demand and supply resulted in rotating power outages and load

shedding even in urban areas. A third of the population also lacked access to grid electricity supply.

Pakistan’s energy mix consists of hydropower and oil- and gas-fired power plants, with each

accounting for 30%. Oil-fired power plants account for 46% of total generation costs.2

3. The project scope included engineering, design, procurement, construction, grid

connection, and operation and maintenance. The two wind power plants were constructed under

a fixed-price engineering, procurement, and construction (EPC) contract. Power evacuation from

both projects to the national grid is through a 132-kilovolt line built and operated by the NTDC.

Construction of the power plant commenced in 2011 and generation of electricity started in 2014/

2015, later than the original planned commercial date of operation because of delays in importing

equipment and also in erecting towers owing to strong winds.

B. Key Assumptions and Methodology

4. The economic reevaluation for the project was conducted in accordance with ADB’s

Guidelines on the Economic Analysis of Projects and observes the period from 2011 to 2034 as

in the original analysis.3 This economic analysis was carried out using the national numéraire,

applying a shadow exchange rate factor of 1.1 and a shadow wage rate factor of 0.8 as in the

original calculation. Nominal prices were converted to real values in 2011 prices using price

indices from official government statistics and inflation assumptions from the financial model. This

analysis uses information from actual operations and projected operations data from the updated

financial model of FWE I and FWE II.

5. This analysis differs from the ex-ante analysis in the following aspects:

(i.) The ex-ante analysis assumed the avoided climate damage as constant PKR1,214

(€10) in 2011 prices per avoided tCO2, based on the estimate of the traded price

of certified emissions reductions under the Clean Development Mechanism. ADB

adopted in 2017 a standard value of $36.3/tCO2 in 2016 prices with a 2% annual

real increase in value. The ADB standard is considerably higher and increases

over time. This analysis used the new ADB standard and considered, as a scenario

in the sensitivity analysis, the cost of carbon emissions used in the report and

recommendation of the President (RRP).

1 Bridge Factor. 2009. Information Memorandum Green Power (Private) Limited 49.5 MW Wind Farm. 2 ADB. 2019. Pakistan: ADB’s support to Pakistan energy sector (2005-2017). Manila 3 ADB. 2017. Guidelines for the economic analysis of projects. Manila.

Appendix 7 29

(ii.) The ex-ante analysis assumed a Grid Emission Factor (GEF) of 475 tCO2 per

GWh. This GEF is used in this analysis, while the recent GEF of 600 tCO2 per

GWh from the international financial institution dataset of harmonized grid factors

is considered in the sensitivity analysis.

(iii.) The RRP used 10% as the hurdle rate for the ex-ante evaluation, while the present

ADB guideline recommends a 9% social discount rate. The NPV using a 10%

social discount rate is shown in the sensitivity analysis.

C. Valuation of Economic Benefits 6. The analyses in the RRP as well as in this analysis assumed that all electricity generation

was incremental. Given the frequent electricity shortage in 2011 and its continuation until the

present, this assumption seems appropriate. Similar to what was done in the ex-ante analysis,

two economic benefits were considered for the projects: (i) additional domestic power

consumption; and (ii) the avoidance of greenhouse gas emissions that would have occurred if the

electricity had been generated by the general power system. The ex-ante analysis estimated the

benefits of electricity consumption using the per kWh tariff set by the regulator for the two projects

as proxy. This tariff is cost covering for operation and maintenance, insurance, return on equity,

and debt service. The actual generation costs of the projects are compensated based on a Power

Purchase Agreement on a cost-plus tariff with a 17% rate of return on equity, adjustment

forinflation, exchange rates or interest rates. The same approach was used in this analysis. This

ex post analysis used the actual tariff computed by the National Electric Power Regulatory

Authority (NEPRA) and was adjusted to 2011 prices as a proxy for consumption benefits. The

tariff used in this analysis is close to that used in the ex-ante analysis. The projects only provide

the electricity to the next substation, while the benefits are additional consumption by the end

user. In both calculations it was assumed that (i) the transmission and distribution system exists

but, because of insufficient power generation, is not fully used, and (ii) the increased supply did

not (immediately) require an upgrade of the transmission and distribution system.

7. Actual electricity delivered by the projects is 26% lower compared to that estimated in the

ex-ante analysis. This is because of grid failures and the limits on the actual amount of electricity

taken by the offtaker during the initial years. However, a declining occurrence of grid failure was

observed. Also, an increase in electricity delivered is expected in 2019 compared to the earlier

years. Given this, estimated future electricity output is expected to be the same as in the ex-ante

analysis. The estimated emission avoidance due to the two projects is 130,000 tCO2 annually.

D. Valuation of Economic Costs 8. The actual capital costs (excluding taxes and financial charges), fixed and variable O&M

costs for 2012 to 2018, and updated estimates for 2019 to 2035 are used. Capital costs during

construction, excluding taxes and financial charges, were almost the same as those estimated in

the RRP. Actual operation and maintenance expenditure in 2015 to 2018 and the re-estimated

values for 2019 to 2032 are 17% lower than the original projections.

E. Recalculation of Economic Internal Rate of Return and Net Present Value 9. The recalculated economic internal rate of return (EIRR) is 13.2% for FWE I and 13.0%

for FWE II, close to the two projects’ ex-ante EIRRs of 12.42% and 12.41%. Both exceeded the

original and the revised threshold recommended by the ADB guidelines.

Appendix 7

30

F. Sensitivity Analysis 10. The recalculated EIRR of the project was tested to see how it is affected by changes in

key parameters, including lower benefits, higher operating costs for the remaining time, climate

benefits as in the original economic analysis, and a higher social discount rate.