Summary

Executive Summary

Without accelerated reform and an improved security situation, growth in Afghanistan is likely to remain slow with limited progress in reducing poverty from the currently high levels. Reforms are required immediately to both improve general investment confidence and mobilize existing economic potential. Aside from agriculture, extractives and energy are the only areas that harbor significant economic growth potential for Afghanistan.

Accelerated development of extractives and energy sectors is needed for the following reasons: (i) by diversifying sources of electricity supply, more Afghans can be provided with access to the electric grid. This will enable Afghans to lift themselves out of poverty, by allowing them to engage in more productive uses; (ii) diversifying electricity sources will also provide for more stable supply for those who already have access to the electric grid; (iii) increasing the supply of gas-fired power will help technically stabilize the electricity grid as the Government is advancing a MW solar energy program (compared to MW domestic power currently installed) as part of a wider green growth agenda; and importantly (iv) over the next years, extractives is the only sector that has the potential to generate exports and revenues at scale, and is able to generate foreign exchange thus providing for greater fiscal stability.

It is well recognized that gas power plants by independent power producers (IPPs) with medium to long term power purchase agreements (PPAs) can serve as an anchor for gas sector development. IPPs also serve as an effective on-the job capacity building opportunity in support of the expansion of gas-based power generation. However, Afghanistan has yet to demonstrate a fully integrated "proof of concept" investment to develop and deliver natural gas. Against this background, the Government of Afghanistan has requested the World Bank Group's support on a dedicated gas-to-power development program, which includes three inter-related initiatives aimed at jump-starting the extractives sector through a combined push-pull strategy.

The "push" for the development of the gas sector is provided for by a targeted project helping develop specific gas supply infrastructure and improve the governance of the gas sector, the Afghanistan Gas Project (AGASP). Simply put, this project ensures that enough gas can be supplied. It is to be financed by an IDA (grant). The "pull" is being provided by two small-size gas-fired power plants which will create the cornerstone market for the gas from Sheberghan: (i) a MW gas-fired independent power producer (IPP) at Sheberghan to operate in the short term and sited near the existing gas fields (the Sheberghan Gas-to- Power Project); and (ii) a MW gas-fired IPP to operate over a -year timeframe located at Mazar-e- Sharif (the Mazar Gas-to-Power Project).

The World Bank Group will support the first project with an IDA guarantee. The second project will be supported by IDA and MIGA guarantees, an IFC loan, and IDA PSW and other risk-mitigating instruments. The gas demand of these two projects requires the optimization of gas field facilities, including adequate dehydration, compression and desulfurization capacity, and the completion of construction of the Sheberghan - Mazar Pipeline (SMPL). These pieces of infrastructure are being funded under AGASP.

Notwithstanding the substantial risks, the proposed course of action is robust under the prevailing conditions of uncertainty. The approach has been tested using "robust decision making", in which one does not attempt to specify the probability of uncertain future events but uses statistical techniques to examine patterns and factors of vulnerability of choices in a wide range of futures. Using a scenario discovery method, Gencer et. al. () demonstrate that the decision to proceed with a gas-fired power plant for use of the Sheberghan gas is robust with respect to the main uncertainties over a very wide range of futures.

...