ICRR 10490
                                                                                               Report Number : ICRR10490
                    ICR Review
                    Operations Evaluation Department




1. Project Data :
             OEDID :
             OEDID:     L3252
         Project ID :   P010360
      Project Name :    Corporate Restructuring and System Expansion
            Country :   Pakistan
             Sector :   Oil & Gas Transportation
       L/C Number :     L3252-0 and L3252-1
  Partners involved :
       Prepared by :    Nils Fostvedt, OEDCM
      Reviewed by : Alain A. Barbu
    Group Manager : Gregory K. Ingram
       Date Posted : 08/17/1999

2. Project Objectives, Financing, Costs and Components :
Objectives : The borrower was the government -owned Sui Northern Gas Pipelines Limited (SNGPL). The project
objectives were to (a) place SNGPL on a sound longer term financial and technical footing so that it could manage
effectively an increasing supply of gas to the domestic market, and (b) to develop the physical gas infrastructure in
the northern parts of Pakistan, thus promoting the substitution of gas for higher -value imports of liquid fuels.
Financing : Total project costs of $624 million were partially financed by two IBRD loans (the original loan of $130
million, a supplemental loan of $60 million, less cancellations of $8.6 million).
Costs : The project costs were higher than the $ 547 million estimated at appraisal, on account of increased
investments (transmission lines, gas connections and transmission and distribution SCADAs ).
Components : The project aimed at strengthening SNGPL - one of the two principal gas transmission systems - by
(a) turning the utility from a government -controlled into a private-majority owned corporation, in order to make the
utility more autonomous and enhance its resource mobilization capability, and (b) strengthening its technical
capabilities. The project would also (c) expand SNGPL's infrastructure for the purification, transmission and
distribution of gas at least cost , thus promoting the substitution of gas for higher value petroleum products in the
northern parts of the country , and (d) rationalize the consumption and supply of gas through pricing and demand
management.

3. Achievement of Relevant Objectives :
The objectives were only partially met, particularly on the policy and institutional fronts (see below)

4. Significant Achievements :
The project expanded the capacity of the transmission system from 450 MMCFD to 1,000 MMCFD (versus 800
originally planned), and the target number of households and businesses to switch to gas in place of imported
kerosene was exceeded by about 70%, thus promoting the subsitution of gas for kerosene .

5. Significant Shortcomings :
SNGPL did not develop as planned . The privatization strategy was inadequately prepared at entry and suffered from
weak government commitment, the lack of an adequate regulatory framework and of the necessary gas pricing
reforms, the resistance of vested interests, and the modest absorptive capacity of the local financial market . Also,
SNGLP's finances have been affected negatively since the consumer tariffs were not adjusted to ensure cost
recovery, and SNGL has become increasingly overstaffed . However, the government-controlled shareholding has
been reduced to 60%, and further steps to proceed with the privatization of SNGPL are under preparation and could
possibly still be carried out.


6. Ratings :             ICR                       OED Review                Reason for Disagreement /Comments
               Outcome : Unsatisfactory            Unsatisfactory
     Institutional Dev .: Partial                  Modest
         Sustainability : Uncertain                Uncertain
   Bank Performance : Satisfactory              Satisfactory
      Borrower Perf .: Deficient                Unsatisfactory            The ICR rates the government's
                                                                          performance as highly satisfactory during
                                                                          preparation, but deficient during
                                                                          implementation, due to its inability to carry
                                                                          out the necessary sector reforms . The
                                                                          latter must be given the greater weight for
                                                                          the overall rating.
       Quality of ICR :                         Satisfactory

7. Lessons of Broad Applicability :
Important sector reforms - such as a privatization program - should be prepared so as to ensure sustained
commitment of the government and the borrower, taking into account the impact and attitude of major stakeholders .
The privatization program for a major utility should be agreed prior to project inception, and should integrate
appropriate regulatory reforms, pricing policies, measures to help ensure contractual stability, consideration of a
possible need for strategic investors, and a realistic analysis of the capacity of the targeted capital markets .

8. Audit Recommended?        Yes     No

9. Comments on Quality of ICR :
The ICR is generally satisfactory, and it addresses all major aspects of the project in reasonable detail . However,
the discussion of the pricing issues (and implications) could have been more clear, there was inadequate information
about the non-Bank financing of the project, and there was no discussion around the non -pricing aspects of demand
management that were contemplated at appraisal .