ASIAN DEVELOPMENT BANK · ASIAN DEVELOPMENT BANK . Project Procurement-Related Review . Loan 2289-PAK (Tranche 1) and Loan 2396-PAK (Tranche 2): Power Transmission Enhancement Investment

ASIAN DEVELOPMENT BANK

Project Procurement-Related Review

Loan 2289-PAK (Tranche 1) and Loan 2396-PAK (Tranche 2):

Power Transmission Enhancement Investment Program

This report has been redacted in accordance with Asian Development Bank’s Public

Communications Policy (PCP) issued in 2011. In particular, it excludes confidential and other information in accordance with paragraph 70 of the PCP.

Office of Anticorruption and Integrity October 2014

CONTENTS

Page

EXECUTIVE SUMMARY i

OVERVIEW 1

FINDINGS 4

RECOMMENDATIONS 11

CONCLUDING COMMENTS 13

APPENDIXES 1 NTDC Organizational Chart 2 PPRR Approach and Methodology

ABBREVIATIONS

ADB - Asian Development Bank BEC - bid evaluation committee BER - bid evaluation report CCC - Central Contracts Cell CWEN - ADB Energy Division, Central and West Asia Department EHV - Extra High Voltage Unit, NTDC ITB - instruction to bidders MFF - multitranche financing facility MP&M - Materials Procurement and Management Unit, NTDC NTDC - National Transmission and Despatch Company Limited OAI - ADB Office of Anticorruption and Integrity PMU - project management unit PPRR - project procurement-related review PRM - ADB Pakistan Resident Mission

NOTE

In this report, $ refers to US dollars.

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A project procurement-related review is a review undertaken by OAI on ongoing ADB-financed projects, to confirm compliance with applicable ADB policies, guidelines, and the grant and project agreement, with a focus on

preventing and detecting integrity violations (http://www.adb.org/site/integrity/integrity-violations) involving ADB-related activities as defined under ADB’s Anticorruption Policy as amended

(http://www.adb.org/documents/anticorruption-and-integrity-policies-and-strategies) and ADB’s Integrity Principles and Guidelines (http://www.adb.org/documents/integrity-principles-and-

guidelines) as amended from time to time.

ADB’s Anticorruption Policy requires all parties, including borrowers, beneficiaries, bidders, consultants, suppliers, contractors, and ADB staff to observe the highest ethical standards when participating in ADB-related activities. The Policy supports ADB’s obligation, in accordance with Article 14 (xi) of the Agreement Establishing the Asian Development Bank, to ensure that the

proceeds of ADB financing are used only for intended purposes.

The PPRR assesses internal controls in place, identifies irregularities and instances of noncompliance, inspects the project outputs, and recommends enhancements to mitigate or

eliminate opportunities for fraud, corruption, or abuse of resources and to help improve development effectiveness of future projects.

A project procurement-related review is not

an evaluation to assess development effectiveness of ADB-funded projects. It does not review project outcomes or development impact, which can only be assessed after the completion of a

project.

EXECUTIVE SUMMARY 1. The Office of Anticorruption and Integrity (OAI), Asian Development Bank (ADB) conducted a project procurement-related review (PPRR) of Loan 2289-PAK (Tranche 1) and Loan 2396-PAK (Tranche 2) of the Power Transmission Enhancement Investment Program (collectively, the Project). The PPRR was completed in three phases. Phases 1 and 2 covered the review of procurement and financial management of contracts awarded under Tranche 2 and an assessment of the executing agency’s capacity. Phase 3 involved the inspection and verification of project assets. The overall objective of the PPRR was to assess compliance with applicable ADB policies, guidelines, and agreements focusing on preventing and detecting integrity violations. This report documents findings and makes recommendations as a result of the PPRR. 2. The PPRR determined that the Project generally complied with ADB’s requirements and guidelines but gaps in internal control mechanisms existed. OAI recognizes that the PPRR samples examined were from the earlier tranches of the Project, at a time when the capacity of the executing agency was weak due to the absence of adequate training. This made project implementation vulnerable to inefficiencies and procurement processes susceptible to irregularities.1 Notwithstanding, the following areas are highly critical for the successful implementation of the Project and require continuous monitoring.

• Functions and management capacity of project management unit (PMU) need strengthening. Project activities, including financial management, were handled ad hoc by some offices under the National Transmission and Despatch Company Limited (NTDC) in Lahore and Hyderabad. As per the requirements under the Framework Financing Agreement, ADB has insisted that an independent PMU is established rather than just an ad hoc team acting as a coordinator for project activities. The lack of a dedicated PMU resulted in procurement delays and payment issues. The key findings presented below are systemic and may potentially reoccur in other subprojects in light of the complexity and geographical spread of the Project. Although some steps have been taken by NTDC to strengthen the PMU, more needs to be done such as minimizing high turnover of the PMU manager and staff to effectively manage the Project.

• Multi-layer evaluation process needs streamlining. The current multi-tiered

review and approval process of the NTDC bid evaluation may have resulted in leakages of confidential information and delays in award of contracts. Leakages may have been caused by numerous staff that had free access to and could easily distribute confidential bid information. NTDC is in the process of streamlining measures on bid evaluations and security controls over bid information to expedite bid evaluation activities and prevent leakage of confidential bid information.

• Bid evaluation quality and capacity need enhancement. Despite NTDC’s history

of technical competence and experience, there is room for improvement in terms of the quality of bid evaluations, especially with respect to evaluation of bidders’ responsiveness to commercial and financial terms of the bid documents. Thus, NTDC should establish and strictly observe guidelines for the selection of members of evaluation committees on a merit basis to facilitate pooling of adequate skills set.

1 The PPRR team acknowledges that efforts have been made shortly after the PPRR to improve project implementation.

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• Minimize payment delays. Delays in releasing payments to contractors for as high as 307 days, after the lapse of allowable lead times to process payments, were noted in 33 instances. Delayed payments affect the cash flow of contractors and may contribute to Project delays. NTDC has since adopted a wider use of the direct payment method to both strengthen the financial management system and ensure prompt payments to contractors/vendors.

3. The Power Transmission Enhancement Program is expected to be completed by 31 December 2016. The PPRR Team recognizes NTDC’s efforts in improving its procurement process and documenting controls under Tranche 3 procurements, following several discussions with ADB. Lessons learned from this PPRR, if adopted, will help improve project implementation going forward. If replicated, lessons learned from this PPRR will also improve other ADB-financed and/or administered projects. 4. Strong internal controls mitigate the risk of improper use of Project funds and assets, maximize development effectiveness, and deter fraud and corruption. The NTDC acknowledges the PPRR findings and will take the lead in addressing the issues in this report to strengthen Pakistan’s capacity to manage for development results.2

2 Comments on ‘development effectiveness’ throughout this report pertain to observations and recommendations with respect to anticorruption measures, strong internal controls, and compliance with applicable guidelines. Such comments aim to enhance development effectiveness and are not intended as comments on the overall development effectiveness of the Project.

OVERVIEW 1. The Office of Anticorruption and Integrity (OAI), Asian Development Bank (ADB) conducted a project procurement-related review (PPRR) of Tranche 1 (Loan 2289-PAK) and Tranche 2 (Loan 2396-PAK) of the Power Transmission Enhancement Investment Program (collectively the Project). The review took place in three phases.

• In Phase 1, an initial assessment of the capacity, internal controls, and readiness of the executing agency, the National Transmission and Despatch Company Limited (NTDC) for the PPRR, was conducted.

• Phase 2 of the PPRR involved the detailed review of the NTDC’s procurement process and financial management system, including related internal controls.1

• In Phase 3, asset verification procedures were completed to establish the physical

existence, acceptability, and proper use of project assets.2 The focus of the detailed review during Phase 2 of the PPRR was Tranche 2 sampled contracts, while Phase 3 inspected project outputs from a combination of sampled contracts under both Tranche 1 and Tranche 2. This report documents findings and makes recommendations as a result of the PPRR.

2. The overall objective of the PPRR was to assess compliance with applicable ADB policies, guidelines, and agreements, focusing on preventing and detecting integrity violations. Based on the PPRR coverage as described in paragraphs 8 to 10 of this report, the PPRR Team is satisfied that project implementation is mostly compliant with relevant requirements. Notwithstanding, major weaknesses were noted in the areas of internal control mechanisms, procurement process, financial management system, and physical inspection of project assets. These are more fully discussed in the Findings section of this report. Background 3. ADB has assisted in developing Pakistan’s energy sector since 1968. Total lending to the energy sector extended by ADB has amounted to around $3 billion, accounting for about one-third of total funding from external resources and representing 28% of its total lending to Pakistan.3

4. ADB continues to assist Pakistan’s energy sector by funding Pakistan’s Power Transmission Sector Road Map, an integral part of the Government’s Medium-Term Development Framework for 2005-2010, to achieve the targeted 8% annual growth in gross domestic product.4 Under the Power Transmission Sector Road Map is the Power Transmission Enhancement Investment Program (the Program), managed by the NTDC. The total cost of the Program is estimated at $3.9 billion as presented in Table 1. ADB’s financial support to the Program amounts to a maximum of $800 million under a multitranche financing facility (MFF), of

1 Phase 1 was conducted at NTDC headquarters in Lahore from 15 to 25 April 2013 in collaboration with ADB’s CWEN. Phase 2 was conducted at NTDC offices at WAPDA House and NTDC House, both at Lahore, from 20 to 31 May 2013. Among others, security risks due to a general election in Pakistan were considered in setting the timing for Phases 1 and 2 of the PPRR.

2 This phase involved site inspections in districts of Okara, Multan, Lahore, Shikarpur, and Faisalabad from 13 to 24 December 2013. Commencement of Phase 3 was slightly delayed due to challenges in engaging the engineering consultants.

3 ADB. 2006. Report and Recommendations of the President to the Board of Directors: Proposed Multitranche Financing Facility to the Islamic Republic of Pakistan: Power Transmission Enhancement Investment Program. Manila.

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which $790 million are funded from ADB’s ordinary capital resources and $10 million from its Asian Development Fund.4

5. The MFF has financed three tranches totaling $602.2 million5 as of the PPRR cut-off date.6 Figure 1 illustrates the tranches funded by MFF.

6. The Tranche 1 comprised 20 subprojects, and the related loans 2289-PAK and 2290-Pak were closed on 8 February 2013. For Tranche 2, five subprojects have been completed of the total 10 subprojects. The remaining five are expected to be completed in 2014.7 The Program is expected to be completed by 31 December 2016. Lessons learned from this PPRR will help improve project implementation for the ongoing subprojects under Tranches 2 and 3, future subprojects under Tranche 4, as well as other ADB-financed and/or administered projects.

4 Framework Financing Agreement for PAK: Power Transmission Enhancement Investment Program dated 3 November 2006.

5 Tranche 1 (Loan 2289/2290) for $139 million, Tranche 2 (Loan 2396) for $220 million, and Tranche 3 (Loan 2846) for $243.2 million. Loan savings from the MFF’s balance totaling about $248 million, after closing Tranche 1 and cancelling $50 million from allocation of Tranche 2, are planned for utilization in Tranche 4.

6 PPRR cut-off date was 31 December 2012. 7 Project data sheets.

Total ProgramAmount Share Amount Share

ADB 790 20% 10.0 80%Other Financiers 1,959 50% 0.0 0%NTDC 1,165 30% 2.5 20%Total 3,914 100% 12.5 100%

($ million)Table 1: NTDC Investment Plan

ADB = Asian Development Bank, NTDC = National Transmission and Despatch Company, OCR = ordinary capital resources, ADF = Asian Development Fund.

Subprojects (OCR) Program Support (ADF)

15%

22%

27%

30%

6%

Figure 1: Loan Tranches Financed Under MFF

Tranche 1

Tranche 2

Tranche 3

Tranche 4 (estimated)

Partial cancellation of Tranche 2

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7. Activities under the Project are implemented through the overall coordination of the General Manager, Projects Department of NTDC. There are three implementing offices: Extra High Voltage Unit 1 (EHV-1), Extra High Voltage Unit 2 (EHV-2), and Materials Procurement and Management Unit (MP&M). Each EHV unit is headed by a Chief Engineer under the direct supervision of the General Manager, Grid Station Construction of NTDC, who also heads the MP&M. Appendix 1 provides the NTDC organizational chart. PPRR Coverage 8. The PPRR Team examined 13 contracts across major contract categories aggregating to about $124 million (or 78% of contracts awarded) under Tranche 2 as of the PPRR cut-off date. Figure 2 shows the breakdown of contract activities compared to the scope of the review.

9. The PPRR Team also examined the financial management and disbursements under Tranche 2 amounting to $66 million (or 71%) of total disbursements of $92 million. The PPRR approach and methodology are summarized in Appendix 2. 10. In addition, PPRR engineering consultants verified existence and use of project goods and assessed the quality of works covered by nine sampled contracts under Tranches 1 and 2.8

8 As of the PPRR cut-off date, only five subprojects under Tranche 2 were completed. Thus, the sample contracts for asset inspection were expanded to cover five completed subprojects under Tranche 1 with due consideration of proximity and contract values.

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5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

Amou

nts i

n $

mill

ions

Contract Categories Under Tranche 2

Figure 2: OAI Reviewed Contracts Across Project Categories

Allocation

Contracts Awarded

Reviewed

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FINDINGS

11. The PPRR findings are categorized as follows: (a) internal control weaknesses, (b) procurement process, (c) financial management system, and (d) asset inspection. A. Internal Control Weaknesses

12. The PPRR Team assessed the Program’s internal controls and identified areas where improvements can be made. Strong internal controls contribute to making the Program less vulnerable to fraudulent and/or corrupt activities. It also aids in the achievement of intended outcomes through timely and smooth delivery of target outputs.

1. Weak project management

13. According to the Framework Financing Agreement, a project management unit (PMU) should have been established and headed by a PMU project manager who has an overall responsibility of managing Project activities and subprojects.9 During the PPRR fieldwork, there was no dedicated PMU or a full-time PMU manager. As illustrated in the NTDC organizational chart in Appendix 1 and discussed in paragraph 7, Project activities are divided among different implementation offices. While the General Manager (Projects) is the overall Project coordinator, the day-to-day project management functions and staff capacity need to be strengthened. 14. In the area of financial management, the establishment of a dedicated PMU would allow quicker turnaround and more focused attention on billing concerns of contractors by NTDC. For example, a number of payment issues concerning accuracy of contractor billings as well as timeliness of processing were noted. CWEN also emphasized to the NTDC in the February 2014 review mission to incorporate the financial management function into the PMU structure. In the area of asset management, PPRR identified areas for improvement on project oversight and planning. Given that subprojects under the MFF are relatively complex in nature, strong leadership in the PMU cannot be overemphasized.

2. Leakage of confidential bid information 15. The PPRR Team finds that the complex evaluation system and multiple layers of review of bid evaluation reports (BERs) may be one of the contributing factors exposing the NTDC to leakage of confidential bid information. As numerous staff had free access to bid information, any of them could easily leak confidential documents to outsiders. At the time of PPRR fieldwork, the BERs go through multiple offices irrespective of whether the reports are prepared in-house or outsourced to a third party consultant. After bid opening, bids are forwarded to design engineers for evaluation where the BER is prepared. The BER is then sent to MP&M; Managing Director, NTDC; NTDC-Scrutiny Committee; Board of Directors, NTDC; Technical Committee of the Board of Directors, NTDC; General Manager, Projects Department; and finally to ADB for approval. Finding Addressed 16. NTDC has improved the multi-layer bid evaluation process by reducing the number of offices providing comments and subsequently endorsing BERs to one office. The PPRR team was informed that the procurement process has now been centralized with the MP&M of NTDC, and the involvement of lower level staff processing BERs has been limited. Both measures

9 Framework Financing Agreement (PAK: Power Transmission Enhancement Investment Program) dated 3 November 2006, Schedule 3 – Implementation Framework, paragraph 1.

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resulted in quicker turnaround time for NTDC to prepare and approve BERs, and reduced the risk of leakage of confidential bid information.

3. Absence of BEC member possessing financial expertise

17. The capacity of the bid evaluation committees (BECs) in evaluating the financial aspects of bids is weak and needs improvement. While the NTDC has a process of appointing BEC members, none of the NTDC staff who is considered a financial expert is a BEC member or adviser. This weakens the NTDC in its ability to consistently and adequately evaluate bids as corroborated by key procurement findings highlighted below. Finding Addressed 18. NTDC has upgraded its capacity to undertake financial evaluation of bids with the appointment of an NTDC Finance Manager as a regular member of the Central Contracts Cell (CCC). The CCC is the primary group within NTDC tasked to review BERs, which are prepared by an in-house engineer or a third-party consulting firm, prior to submission to ADB for concurrence.

B. Procurement process

19. The PPRR Team reviewed the NTDC’s procurement processes from bid preparation, bid opening, bid evaluations, to contract awards. Most shortcomings were noted in bid evaluations, especially pertaining to assessing commercial and financial responsiveness of bids, and in the application of bid evaluation criteria. Based on the nature of these findings, weak capacity of the executing agency may have contributed largely to erroneous bid evaluation results and compromised the integrity of the bid evaluation process. Highlighted in the succeeding paragraphs are the key procurement findings for sampled contracts under Tranche 2 of the MFF.

1. Potential misrepresentation by bidders

20. Bids in five contracts contained irregularities, inconsistencies, and/or potential misrepresentation by the bidders based on the review of eligibility forms, financial information, supply records, and other supporting documentation. OAI will investigate these potential integrity violations of ADB’s Anticorruption Policy following ADB’s Integrity Principles and Guidelines. Violations defined in ADB’s Anticorruption Policy invariably result in ineffective and/or improper use of the Project’s funds, thereby reducing development effectiveness.

2. Lack of due diligence by the BEC

21. The ADB Procurement Guidelines require the borrower to ascertain, among others, whether the bids (a) meet the eligibility requirements specified in the Guidelines, (b) are substantially responsive to the bidding documents, and (c) are otherwise generally in order. The Guidelines also require the borrower to carry out due diligence on the technical and financial qualifications of bidders to be assured of their capabilities in relation to the specific contract and to ask for clarification needed to evaluate their bids.10 22. The examples below highlight situations wherein the BECs did not exercise due diligence in the evaluation of bids which risked awarding of contracts to unqualified contractors or vendors.

10 ADB Procurement Guidelines (February 2007), paragraphs 1.7, 2.46, and 2.48, respectively.

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23. The PPRR identified eight instances where bidders provided questionable information supporting their eligibility, financial capacity, and relevant experience. With the exception of a bid in one contract, the BEC failed to identify irregularities, inconsistencies, and/or potential misrepresentation in bids. 24. In one contract, the NTDC appropriately disqualified a bidder on the basis of submitting a bid bond in the name of only one member of the joint venture.11 However, in another contract, the NTDC considered the bid as responsive when the bid guarantees submitted by the winning bidder did not meet the requirements of the bidding document.12 The deviation was not noted in the BER. In effect, the contract was awarded to a non-responsive bidder, though there was no evidence to suggest that the winning bidder refused to commit to the terms of their bid after award. Inconsistent application of bid evaluation criteria may give the perception that particular bidders are being favored, which may result in complaints on the integrity of the procurement process. Favoritism often results in awarding a contract to an unqualified bidder, which ultimately leads to poor quality of works and promotion of unfair practices.

25. The PPRR Team also noted an instance where the BEC requested the winning bidder through post-bid clarification to provide authenticated operational certificates to support specific experience of similar projects and to prove acceptability of major equipment under the contract. However, no documentation showing submission of required documents was evident in the project documents.

3. Improper price evaluation

26. The ADB Procurement Guidelines require the borrower to carefully examine the technical and financial qualifications of bids to be assured of bidders’ capabilities in relation to the specific contract and to seek clarification to appropriately evaluate their bids.13 27. In one contract, errors were noted in the adjusted bid price of the winning bidder due to inaccurate computation of capitalized cost of losses for transformers, resulting in an overstatement of a bid price. Additional errors relating to omission of discounts in the price evaluations were noted in the three losing bids. The latter was caused by the inaccurate capture of bid prices and discounts from the bid opening register to the bid opening record. Improper price evaluation and inadequate quality assurance review risk flawed evaluation and awarding a contract to an unqualified bidder who is not the lowest substantially qualified, or who does not have adequate capacity to perform contractual obligations.14

4. Noncompliance with bid document requirements and ADB’s Procurement Guidelines

28. Noncompliance with requirements of the bid documents and ADB’s Procurement Guidelines were noted in 13 tenders, which did not enhance the transparency of the procurement process.

11 This violates Section 1, clause 21.7 of the Instruction to Bidders (ITB). 12 This violates clause 21.7 of the ITB. 13 ADB. 2007. Procurement Guidelines. Manila. paragraphs 1.6, 1.7, 2.46, and 2.48. 14 In this case, ranking of substantially qualified bidders was not affected.

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29. Absence of bid sales and bid receipts registers. MP&M failed to maintain bid sales and bids receipts registers15 required by ADB’s Procurement Guidelines.16 It was thus impossible to ascertain how, when and by whom bids were submitted, whether all parties were provided the same information, and whether bids were submitted within the advertised deadline.

30. Incomplete Information on bid opening record. The Instructions to Bidders require the NTDC to prepare a bid opening record containing, among others, information on bid security or bid securing declaration submitted, if one was required.17 This information was not indicated in the bid opening record for 5 of 13 contracts which gives noncompliant bidders the opportunity to rectify invalid or missing bid securities.

31. Bid opening records not shared with participating bidders. ADB’s Procurement Guidelines necessitate prompt transmittal to ADB and to all bidders who submitted bids in time of a copy of the bid opening record by the NTDC.18 Noncompliance with this requirement diminishes the transparency of the bid opening process. According to CWEN, this weakness has been addressed for procurements under Tranche 3 of the MFF, as submission of bid opening records is strictly required and being monitored by ADB. Findings addressed 32. Going forward, NTDC indicated that the sales register is being maintained in all tenders including those financed with NTDC’s own resources. The transparency of the bid opening procedures is also being ensured by a committee whose members are present during actual bid opening.

5. Critical project documents not available 33. Not all required procurement-related documentation was made available for the PPRR, such as original and duplicate copies of both winning and losing bids under four contracts reviewed. NTDC explained that limited storage facilities may have contributed to some documents being misplaced. The lack of key project documents is a restriction to the scope of the PPRR, and it significantly limited the PPRR Team’s ability to evaluate whether the bid processes complied with ADB’s Procurement Guidelines, relevant guidelines, and ADB’s Anticorruption Policy for these contracts. Thus, there is a need for improved compliance with relevant covenants in the Project Agreement between the NTDC and ADB, which state that the NTDC shall enable ADB representatives to inspect any records and documents relevant to the Project.19 C. Financial Management System

34. The PPRR Team examined the financial management system and disbursement processes of the NTDC managed in both Lahore and Hyderabad project offices, and interviewed relevant project officers.20 While review and approval processes for disbursement transactions appear to have existed, such controls were found ineffective as highlighted in the

15 Such as (i) names and nationalities of entities purchasing and submitting bids, (ii) mode of submission, (iii) date and time bids are received, (iv) information on substitution / withdrawal and submission of alternative bids, and (v) name and contact details of bidder representatives.

16 Paragraph 2.44. 17 Paragraph 27.4. 18 Paragraph 2.45. 19 Project Agreement: Power Transmission Enhancement Investment Program – Tranche 2, Article 2, Section 2.10. 20 Contracts under MP&M and EHV-1 are processed either in the NTDC Headquarters in Wapda House or the

NTDC project office in Lahore, while EHV-2 contracts are processed in the NTDC project office in NTPS WAPDA Colony in Hyderabad.

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succeeding paragraphs. Weak project management structure compromises the timely and effective day-to-day management of subprojects and weakens the Project’s financial management system. 35. A graphical summary of the occurrence of financial management-related findings across the 13 ICB contracts reviewed which are under Tranche 2 of the MFF is shown in Figure 3 below.

0 2 4 6 8

Delayed payments to suppliers

Un-reconciled disbursements between EA and ADB records

Expired performance securities

Expired contracts

No. of Contracts Affected

Figure 3: Financial Management Findings

1. Expired contracts 36. Contract extensions were not processed while works were still ongoing. The NTDC continued making payments after contracts had expired for a period ranging from 1 to 599 days in at least 16 instances across seven contracts. Expired contracts expose the Project to the risk of contractors not performing and/or poorly performing without recourse.

2. Expired performance securities

37. There were six instances where performance securities had expired prior to delivery of goods among six contracts reviewed. There is no record that the NTDC required the suppliers to extend the validity period nor did the suppliers submit updated performance securities. The NTDC cannot call on expired performance securities should the suppliers default on their obligations to deliver goods or fail to repair defective goods.

3. Unreconciled disbursements between executing agency and ADB records 38. In three contracts reviewed, the payment summaries of the NTDC’s disbursement records as of the PPRR cut-off date did not reconcile with ADB’s database.21 The differences which are currently being reconciled by NTDC range from $1,026 to $1,134,675. These discrepancies may result in duplicate payments to suppliers and losses to the Project if not resolved.

21 Batch reports.

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4. Delayed payments to suppliers 39. In three contracts, delays in releasing payments to suppliers were identified for progress billings.22 Payment delays were noted to be as high as 307 days, after the lapse of the allowable lead time, to process payments.23 40. The PPRR Team reviewed the disbursements processed by the ADB Controller’s Department (CTL) and ADB Pakistan Resident Mission (PRM), and determined that both have performed within their service level standards.24 The PPRR Team concluded that the payments were delayed partially because of NTDC’s late submission of invoices to the resident mission under direct payment method and/or delays in providing clarifications to CTL queries on billings. 41. Delayed payments strain the suppliers’ cash flow and may cause a ripple effect on project implementation beyond being an issue of noncompliance with the terms of payment of contract agreements.25 Ultimately, benefits to target beneficiaries may not be timely delivered, thereby reducing development effectiveness. Findings Addressed 42. As a way to minimize payment delays caused by opening lines of credit, NTDC is in the process of adopting the direct payment method more extensively and accordingly is planning to reflect such in the bidding documents for subsequent tranches. Meanwhile, CWEN in its recent review mission for Tranche 3, requested NTDC to strengthen PMU’s function of managing financial matters including swiftly opening lines of credit, more rigorous and prompt invoice processing, and better monitoring of contract disbursements. D. Asset Inspection

43. The PPRR deployed a team of engineering consultants to visit 10 project sites covering nine sample contracts. The Team also located Project goods warehoused in New Kotlakhpat, Lahore in the province of Punjab under the 10th sample contract. With the exception of maintenance issues for control boxes warehoused by the NTDC, inventory control over equipment and loose materials was generally found in order. However, project planning, oversight by the NTDC, and quality control by supervision consultants can be enhanced as discussed below. 44. A high-level review of findings relevant to civil works and Project assets inventory management is presented in Table 2. This is an indicative overall picture of the PPRR main assessment with respect to civil works and goods contracts.26

22 Progress payments are made through commitment procedures. 23 Advances should be paid within 28 days after compliance of requirements while progress billings should be paid

within 45 days after presentation of invoices. 24 Predetermined number of days to process transactions at every stage. 25 The contract agreement provides that 10% of the contract price for goods will be paid within 28 days on

presentation of the following documents: (1) letter of acceptance of advance payment guarantee by the Purchaser, and (2) invoice in triplicate representing the 10% of the price of goods. Further, the contract agreement provides that 80% of the value of goods / services delivered by the supplier shall be made within 45 days of receipt of invoices, and shipping documents in the case of goods.

26 These ratings are not wholly objective as subjective professional judgment was exercised by the engineering consultant.

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Table 2: Asset Inspection Results

Tranche No.

Contract Reference

No.Description Design Flaws /

WeaknessesDeviation from Design / Plan

Quality of Work

Execution

Maintenance Issues Safety

1 23 Erection, Testing, and Commissioning of AIS Portion of 220kV WAPDA Town Grid Station

Very Good As per design Good Good Very Good

1 31 Procurement of 220kV GIS Plant, Design, Manufacture, Supply, Installation, Testing, and Commissioning

Very Good As per design Good Good Very Good

1 40 Testing and Commissioning of Extension Works at 220kV Multan Grid Station

Very Good As per design Very Good Very Good Very Good

1 45 Erection, Testing, and Commissioning of Transformer Extension at Sheikhupura 500 kV G/S

Very Good As per design Good Good Needs Improvement

1 51 Construction of 220/132kV Gas Insulated Swithgear (GIS) Plant, Including Design

Very Good As per design Needs Improvement

Good Very Good

2 19 Procurement of A.I.S. Plant for 220 KV Rohri Substation Including Design, Supply, Installation Testing and Commissioning on Turnkey Basis

Very Good As per design Needs Improvement

Very Good Very Good

2 24 Procurement of 11 kV Switchgear and Metering Panels

N/A N/A Very Good Good N/A

2 25 Erection, Testing, and Commissioning of New 220kV Okara Grid Station with Transmission Line

Needs Improvement

As per design Needs Improvement

Needs Improvement

Needs Improvement

2 44 Design, Supply, Installation of Static Var Compensator at 220kV New Kot Lakhpat Grid Station

Very Good As per design Good N/A Very Good

Note: Scale used indicates the following: N/A = Not applicable; Very good = no issues; Good = minor issues were noted; Needs improvement = serious issues were noted.

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1. Delays in project completion

45. Significant delays occurred in eight sample contracts due to implementation issues. Better coordination between the NTDC, the supplier/contractor, and other parties that are involved in the subprojects may have minimized Project delays. In particular, bottlenecks were faced in respect of delays in (i) site clearance and possession; (ii) testing of key system components prior to commissioning of grid station; (iii) pre-shipment inspections; (iv) delivery and/or installation of equipment, cabling, and construction materials; and (v) rectification of defects in equipment. 46. In the aforementioned instances, proper coordination and project oversight would have set clear expectations from all parties concerned and timely remediated implementation issues. In addition to draining the Project’s resources, delays in project completion ultimately deferred benefits to intended beneficiaries.

2. Poor quality and incomplete works

47. A number of quality and workmanship issues were observed in three subprojects across four project sites.27 Though these should not affect the overall performance of the plants and auxiliary structures, the sheer number of defects signifies poor quality controls by the contractor and may decrease the longevity of the constructed facilities. Notwithstanding, the NTDC committed to rectify these defects prior to final handover.

3. No outgoing transmission lines

48. The PPRR Team acknowledges that overall progress of civil works at the grid station at Okara is about 95%.28 However, electricity flowing into one grid station cannot be transferred to electricity distribution facilities due to the lack of outgoing transmission lines. Although erection of outgoing lines is outside the scope of ADB contracts examined, absence of said facilities renders the grid station not fully functional.

RECOMMENDATIONS 49. The following recommendations are made to address the issues noted during the PPRR and assist the NTDC in improving the integrity, transparency, and efficiency of its project implementation. ADB’s Central Asia Regional Department is requested to ensure that recommendations are appropriately implemented and to periodically update OAI with implementation status thereof.

A. Internal Control Weaknesses

50. Major recommendations in the area of internal controls are for the NTDC to:

a. strengthen the functions and management capacity of the PMU by ensuring that a full-time dedicated project director is empowered to lead and manage day-to-day project activities (paragraphs 13-14); and

b. consider requiring the BEC members and third party consultants involved in the bid evaluation process to sign a declaration of independence and non-disclosure

27 One Tranche 1 and two Tranche 2 contracts 28 Project data sheet for MFF-Power Transmission Enhancement Investment Program – Tranche 2, updated as of

27 March 2014.

12

agreements prior to undertaking bid evaluations. To further increase transparency, the NTDC should consider restricting access to bids and BER through limited distribution, reproduction, and labelling (paragraph 15).

B. Procurement Process

51. Noncompliance with ADB’s Procurement Guidelines may lead to undetected integrity violations and flawed evaluation results. Ultimately, these increase the risk of unfair procurement practices and noncompetitive bidding. Thus, the NTDC should strictly comply with ADB Procurement Guidelines and ensure that:

a. the evaluation committee carefully evaluates bid proposals and thoroughly documents BERs, consistently observing applicable evaluation procedures especially on required supporting documents and evaluation criteria (paragraphs 21-27);

b. the evaluation committee implements quality assurance review procedures to ensure accuracy of evaluation results (paragraph 27);

c. complete documentation to support justification of compliance to conditions of award is kept by the BEC to fully support its recommendation to award (paragraphs 23-25);

d. complete information on bid opening records are indicated as required under ADB’s Procurement Guidelines (paragraph 30);

e. bid opening records are promptly provided to all bidders who submitted bids and to ADB (paragraph 31);

f. procurement processes are institutionalized to ensure consistent application of procedures across all procurement-related activities (paragraphs 26-31); and

g. a document retention policy requiring ADB project-related documents to be kept is established in compliance with the Project Agreement (paragraph 33).29

C. Financial Management System

52. Given the nature of the findings and in view of the currently ongoing automation of accounting systems of the NTDC, it is recommended that the financial management system for this Project be strengthened, ensuring that:

a. a system to track the expiry dates of contracts and validity periods of submitted advance and performance securities is established. The tracking mechanisms should prompt the NTDC of expiring contracts and securities, allowing sufficient time to inform suppliers of upcoming expiration, and extend contracts or renew the submitted securities (paragraphs 36-37);

b. project records are reconciled with ADB’s database periodically, ideally on a monthly basis (paragraph 38); and

c. disbursement processes are institutionalized to ensure consistent implementation of disbursement-related activities (paragraphs 36-41).

D. Asset Inspection

53. The PPRR Team recommends that the NTDC:

a. coordinate project activities more closely with project staff in the central and field offices to support the liasing function of project supervision consultants and

29 Power Transmission Enhancement Investment Program – Tranche 2 Project Agreement dated 20 May 2008, paragraph 2.10

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enhance planning and timely identification of bottlenecks in project implementation (paragraphs 45-46);

b. ensure that high-level coordination of Project activities with relevant ministries of the Government are facilitated and progress onsite preparatory works and other works post-subproject completion are suitably accomplished (paragraphs 45-48); and

c. identify the gaps which result in inadequate maintenance of Project assets. This includes ensuring that the responsible office has the necessary resources to ensure effective maintenance (paragraph 47).

CONCLUDING COMMENTS 54. Being the power system’s backbone, the MFF-Power Transmission Enhancement Investment Program is crucial to the rising demand from the people in Pakistan including industrial, agricultural, and commercial users. During the fieldwork, the PPRR Team had firsthand experience encountering daily power outages, which hampered work efficiency. Power disruptions and shortages are drawbacks to Pakistan’s economy and negatively affect people’s daily lives. 55. The Program is challenging, thus requires rigorous monitoring and management of subprojects to ensure timely resolution of bottlenecks and smooth project implementation. While the NTDC has years of experience and institutional knowledge in the power sector, the procurement process and financial management need improvement in a manner that exhibits greater transparency and accountability. The NTDC should, at the very least, apply bid evaluation criteria consistently, carefully examine bids, prevent leakage of confidential bid information, improve financial management controls, and establish a fully functional PMU. 56. Strong procurement and financial management controls and compliance with relevant guidelines mitigate the risk of improper use of Program funds, maximize development effectiveness, and deter fraud and corruption. The procurement, financial management, and internal control deficiencies identified here should not recur in the remaining life of this Program and future power projects in Pakistan. The PPRR Team encourages CWEN to continue to work together with the Government of Pakistan to strengthen its commitment in promoting transparency and accountability. Implementation of recommendations in this report can only augment results achieved to date. 57. The PPRR Team acknowledges and thanks the NTDC officials for their cooperation and assistance during the PPRR. Through NTDC’s cooperation, the PPRR Team’s preliminary findings were promptly elevated to competent levels of authority and representatives of consulting firms responsible for specific tenders. Along with its proactive initiative in suggesting measures to improve its bid evaluation system, it was observed that NTDC officials take pride in their participation in this power project and has promptly addressed some of the key findings in this report subsequent to the PPRR fieldwork.

58. The cooperation of CWEN and PRM in this exercise is much appreciated also. ADB values the courtesy and support extended to the PPRR Team.

Appendix 1

Loan No. 2396–PAK: MFF Pakistan Power Transmission Enhancement Investment Program – Tranches 1 and 2

NTDC Organizational Chart

Source: http://www.ntdc.com.pk/Organogram.php (downloaded 2 October 2014).

Appendix 2

Page 1 of 3

Loan 2289-PAK: Power Transmission Enhancement Investment Program – Tranche 1 and Loan 2396-PAK: Power Transmission Enhancement Investment Program – Tranche 2

—Project Procurement-Related Review (PPRR) Approach and Methodology The approach and methodology for the planning and fieldwork phases are summarized below. I. Phase 1: Planning – Initial Assessment (23 to 28 February 2013)

1. The PPRR Team, in collaboration with the Energy Division of the Central and West Asia Department (CWEN), Asian Development Bank (ADB), conducted an initial assessment of the capacity, internal controls, and readiness of the National Transmission and Despatch Company Limited (NTDC) and the project management offices (PMOs) from 23 to 28 February 2013.1 The PPRR Team:

• reviewed the organizational structures of the executing agency and the PMOs, including the program implementation arrangements;

• determined the program documentation organization and record-keeping systems;

• gained an understanding of the program’s procurement and disbursement processes, and conducted a walkthrough and review of procurement and disbursements processes and documentation made available for selected contracts;

• conducted a walkthrough of the procurement process; • visited one of four warehouses of NTDC to conduct preliminary inspection of

loose materials; • identified risks relating to procurement and financial management processes and

systems; and • finalized selection of sample contracts for the fieldwork.

II. Phase 2: Fieldwork (21 to 30 May 2013)

Procurement Review 2. To achieve the PPRR objectives, the PPRR Team evaluated the program’s procurement processes and checked compliance with ADB’s Procurement Guidelines and other applicable policies, procedures and guidelines, as well as with relevant covenants in the Loan Agreement and Financing Agreement between Pakistan and ADB. 3. The PPRR Team determined whether sufficient and accurate records and reports on civil works and other items procured were maintained. The PPRR Team reviewed, as applicable:

• requests for proposals, invitations of bids, advertising procedures, and bidding

period; • receipt and opening of bids/proposals; • bid evaluations and recommendations for award of contract;

1 Prior to commencement of the planning mission, the PPRR team provided the executing agency with a list of the PPRR requirements, including procurement and disbursements documentation of selected contracts.

Appendix 2

Page 2 of 3 • award of contract; • time taken for processing of procurement; and • contract execution, including contract variations, if any.

4. The PPRR Team identified weaknesses in the procurement processes and procedures, and sought clarifications from the relevant stakeholders on the PPRR findings. The PPRR Team also assessed the procurement capacity of the executing agency.

Financial Management and Disbursements Review 5. The PPRR Team reviewed the program financial management system and selected disbursements on the sample contracts. The PPRR was designed to establish whether:

• the executing agency and PMOs have adequate capacity for the program’s financial management and disbursements;

• financial management system and controls were in place to adequately capture all transactions and on a timely basis;

• adequate documentation was available to support the expenditures; • contract payments including those paid using the commitment and direct

payment procedures were accurate, and promptly paid in accordance with payment terms stipulated in the contract;

• all transactions were genuine, authorized, and have been appropriately reviewed and approved; and

• all transactions were eligible for ADB financing. III. Phase 3: Asset Inspection (13 to 24 December 2013)

16. The PPRR Team’s engineer consultants visited subproject sites to assess the constructed infrastructure and quality of works for eight civil works contracts. These civil work contracts pertain to construction works in Punjab and Sindh Provinces. 17. With its engineer consultants, the PPRR Team assessed whether the assets:

• physically exist at the appropriate location; • were in accordance with specifications stated in the supporting documents; • were of prima facie acceptable quality; and • were being used for the intended purpose.

18. The PPRR engineer consultants liaised with the MFF officials at the NTDC head office and field offices during the asset inspection. The PPRR engineer consultants verified if the infrastructure and facilities were in place, in compliance with the appropriate standards, and followed the correct procedures and process defined in ADB guidelines and general engineering practices, both prevalent in local and international context. In addition, the consultants assessed whether the constructed infrastructure pose any safety risks that may affect the community or its nearby environment. 18. In addition, the PPRR engineer consultants identified project goods at the NTDC warehouse located in New Kotlakhpat, Lahore to confirm existence and use.

Appendix 2

Page 3 of 3 IV. Wrap-up and Discussion of PPRR Findings 6. Preliminary observations gathered from the PPRR were documented and discussed with and commented upon by the program officials concerned. Phases 2 and 3 of the review were wrapped up on 31 May 20132 and 24 December 2013, respectively, through a formal exit meeting attended by representatives of NTDC. Further review and analyses of project documents took place off-site subsequently. 7. The PPRR Team briefed the ADB project staff for the program on the key preliminary findings prior to the exit presentation3 and upon return to ADB Headquarters.

2 OAI, through CWEN, invited officials and / or representatives from the Ministry of Economic Affairs and Statistics (Economic Affairs Division) and Ministry of Water and Power, both in Islamabad, but nobody came for the exit briefing. This might be attributed to the results of the national elections where the new government was yet to be inducted.

3 During Phase 2 of the PPRR.