PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.

: AB4230 Project Name Region Sector Project ID Borrower(s) Implementing Agency Environment Category Date PID Prepared Estimated Date of Appraisal Authorization Estimated Date of Board Approval Sindh Coal Technical Assistance Project SOUTH ASIA Mining and other extractive (55%); Power (45%) P114278 GOVERNMENT OF PAKISTAN [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) October 14, 2008 May 19, 2009 September 15, 2009

1. Key development issues and rationale for Bank involvement A. Background Successive years of healthy economic growth in Pakistan have led to commensurate high growth in demand for energy. At the same time, economic growth is being impacted, inter alia, by energy shortages, the heavy fiscal burden of energy subsidies, and the high cost of imported oil. Rapid development of domestic resources is sorely needed. Natural gas and oil dominate Pakistans energy portfolio (1/3 of power is based on imported fuel), with two key domestic resourceshydropower and coalyet to be exploited substantially. Pakistans coal resource potential is estimated to be around 185 billion tonnes, of which about 175 billion tonnes are located in Sindh province at Tharone of the largest single coal deposits in the world. The consumption of coal in FY07 was only 7.9 million tons (of which 54% was imported coal) mostly in brick kilns and cement industries. Further, while the institutional structure for policy and regulation of power and hydrocarbons is well established in Pakistan, the establishment of corresponding structures for coal is only commencing. The national energy sector faces a number of critical challenges: (i) a resource deficit and lack of long-term energy balance (uncertainty about gas supplies is leading to greater use of furnace oil; power shortages reached 25% of peak demand in summer FY08); (ii) a financial deficit (petroleum product and electricity subsidies reached US$3 billion and US$2 billion respectively in FY08 about 3% of GDP; a recurring liquidity crunch has constrained generation); (iii) low efficiency (state-owned thermal power generation plants are operating at significantly low efficiency; transmission and distribution losses are at a quarter of generated electricity); and (iv) lack of affordability (the dependence on oil across the economy, particularly in power generation, and GOPs weak fiscal position have led to impacts on the poor and industrial competitiveness). The Government of Pakistans (GOP) Energy Sector Development Strategy aims to enhance energy supply sustainably while reducing the dependence on imported oil. Policy measures include (a) enabling a financial recovery; (b) implementing a social protection program to assist

the poor in receiving a minimum amount of energy; (c) streamlining GOPs institutional set-up in the energy sector to increase decision-making efficiency; (d) increasing private sector participation including through public-private partnerships, and (e) enhancing regional energy trade. B. Strategic Context and Genesis of Proposed Project Pakistan faces increasing economic hardship through reliance on high-cost, imported energy resources used in end-use markets. The healthy energy demand growth is expected to continue in the coming two decades, with Pakistan requiring an estimated additional 35,000 MW of power generation capacity by 2020, according to GoPs projections. The GoP expects a significant demand-supply gap to remain even after all low-carbon energy resources (such as indigenous hydropower, gas, and renewables) are matched to demand: Pakistans hydroelectric potential is estimated at 40,000 MW, out of which the economic hydroelectric potential is around 20,000 MW, whereas the capacity developed to date amounts to 5,010 MW. The risks to development include hydrological and geological risks; and production is seasonal (Pakistan's current installed hydropower capacity of 6,400MW falls to less than 2,000MW during the 4-5 months of winter when water flows are minimal). Cost of hydroelectric projects is very high, while interest from private sector has been low given security concerns. Natural gas supply to power sector is in decline, resulting in little or no natural gas use for power during 3-month winter period. Proven reserves have increased from 26.3 TCF in 2000 to 30.0 TCF in 2007. However proven reserves and production have remained flat over past 3 years, while demand in non-power sectors has grown. Gas supply to power is interrupted for space heating needs in winter. Priority is given to CNG for motor transport. Pakistans discovered crude oil reserves are about 937 million barrels of which 583 million barrels have already been produced. Oil is dominating Pakistans energy portfolio with 1/3 of power reliant on imported fuel. Pakistan's wind potential is estimated at 9,700MW and GOP expects some 3,000MW to be developed by 2020. The potential for large-scale regional electricity transmission projects, gas imports through regional pipelines and LNG imports remain under discussion with long lead times.

As such, the large indigenous coal resources of Sindh Province form an integral part of Pakistans long term energy security strategy. A revised least-cost energy portfolio expansion plan will give consideration to the development of the large coal resources within Thar Desert.1 C. Rationale for Bank Involvement Governments interest and commitment to reform is high. The establishment, in July 2008, of the Thar Coal and Energy Board (TC&EB) is the key institutional milestone signaling a feasible accommodation of federal and provincial constitutional roles related to coal-to-power
1

In January, 2008, NEPRA announced a benchmark tariff for Thar coal of 7.8 $cents/kWh based on its own update of technical studies.

development, and its role and mandate will be further defined in agreement between the provincial and federal stakeholders. A Roundtable Investors Meeting held in Washington (July 28-29, 2008), where TC&EB was presented to investors as well as to the World Bank Group by key ministers from the federal and provincial governments, resulted in the GOP requesting World Bank technical assistance to enable development of indigenous coal resources. This assistance would be a first step to rebalance Pakistans energy portfolio by utilization of indigenous coal resources for large-scale thermal industries and power generation. The design of the proposed Project is informed by recent World Bank coal-to-power projects in Europe and Central Asia and Africa regions, with two key lessons learned (a) the importance of preparatory strategic environmental / social assessment reinforced by technical studies, community consultation and strong communications; and (b) a strong communications outreach by core agencies. The proposed Project compliments other Bank activities in the energy sector and is aligned with Country Assistance Strategy objectives and corresponding strategic priorities of the Poverty Reduction Strategy Paper: (i) sustaining growth and improving competitiveness (will be supported through technical assistance to support governance reform in coal sector); and (ii) improving government effectiveness and service delivery (will be supported through the proposed transaction advisory service). The Government of Sindh jointly with the Ministry of Water and Power are requesting assistance from the World Bank given its broad experience in coal-to-power sector projects in other regions. The World Bank, based on the least-cost energy portfolio expansion plan, would assist the country in obtaining technical and policy advice needed to develop indigenous coal resources for power generation (and other potential use) in line with international good practices. The World Banks work in the sector, including clean-coal initiatives, and the climate change agenda, will inform reforms necessary for sustainable coal-to-power development in Pakistan; in particular, development of Thar coal deposits suitable for large-scale power generation. 2. Proposed objective(s) The project development objectives are (a) to help the Governments of Sindh and Pakistan strengthen the enabling policy, legal, and regulatory frameworks conducive to new investments in the coal-to-energy sector; and (b) assist the Governments of Sindh and Pakistan to attract qualified private investors to develop Thar coal deposits and build new capacity for coal thermal power generation, guided by high standards of environmental and social sustainability. The Project will ensure that the coal-to-power sector development responds to the needs of Pakistan's long-term energy strategy. Expected Project outcomes would be: (i) various policy, legal and regulatory instruments, consistent with international good practice, used by the Governments of Sindh and Pakistan in developing coal-to-power sector; and (ii) bidding and negotiations leading to financial close on new investment into at least one coal mine and at least one independent power producer (IPP) in Thar. 3. Preliminary description

The project is proposed as a technical assistance Credit of approximately $26 million to the Government of Sindh and Government of Pakistan. Preliminary component description is provided below: Component 1: Sector Governance and Capacity Building: Provide policy, legal and regulatory advisory services to key government agencies and other counterparts in order to (i) facilitate coal-to-power sector development, including ancillary infrastructure development, and (ii) complete the transaction for a selected Thar coal block. To this end the project will assist in developing the coal sector policy and the coal development road-map in line with Pakistans long-term energy strategy, updating applicable laws and regulations (including those related to mineral licensing and tendering procedures), and setting up operational environmental and social management framework for coal-to-power sector. The project will also strengthen the capacity of the provincial and federal governments to improve sector governance and attract quality private investments. Component 2: Transaction Advisory Services: In support of the governments efforts to attract quality private investors to develop Thar coal and to produce thermal power, the project will (i) update, or develop where needed, key technical, financial, market, and local impact analysis and other information relevant to the investors, including a basin-wide land-use plan for Thar; and (ii) provide transaction advisory services and due-diligence monitoring for a coal mine and an IPP transactions in a selected block of Thar, including preparation / issuance of requests for proposals, and assistance to the government with bid evaluations, negotiations, and financial closing. Component 3: Project Management and Communications: Finance costs associated with managing the proposed Project, including project coordination among implementing agencies, procurement and financial management, and environmental and social management. The project will also assist the Government of Sindh and Government of Pakistan to develop communications and outreach strategy in regards to the Project and to improve public consultations. 4. Safeguard policies that might apply
Safeguard Policies Triggered by the Project Environmental Assessment (OP/BP/GP4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OP/BP 4.36) Safety of Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP/GP 7.60) Projects in International Waterways (OP/BP/GP 7.50) Yes [x] [] [] [] [] [] [] [] [] [] No [] [x] [x] [x] [ ] [x] [x] [x] [x] [] TBD [] [] [] [] [x] [] [] [] [] [x]

4. Tentative financing

Source: BORROWER/RECIPIENT INTERNATIONAL DEVELOPMENT ASSOCIATION Total Contact point Mr. Michael Stanley, Lead Mining Specialist Oil, Gas, Mining and Chemicals Department The World Bank Tel. 202-473-6165 Fax 202-522-0395 Email: MStanley@worldbank.org

($m.) 6 26 32