Document of The World Bank FOR OFFICIAL USE ONLY Report No. 53553-PK INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR THE ISLAMIC REPUBLIC OF PAKISTAN FOR THE PERIOD FY 2010-13 July 30, 2010 Pakistan Country Management Unit South Asia Region International Finance Corporation MENA Region This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The date of the last Country Assistance Strategy was June 1, 2006. CURRENCY EQUIVALENTS: (Exchange Rate as of 4 March, 2010) Currency Unit = Pakistan Rupee (PKRs) US$ = PKRs 85.1 GOVERNMENT'S FISCAL YEAR: (July 1 ­ June 30) ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities IMF International Monetary Fund ADB Asian Development Bank IRS Internationally Recruited Staff ADR Alternate Dispute Resolution Center KP Khyber-Pakhtunkhwa AIDS Acquired Immunodeficiency Syndrome LHW Lady Health Workers AML Anti-Money Laundering LSM Large-Scale Manufacturing BISP Benazir Income Support Program MDG Millennium Development Goals CAS Country Assistance Strategy MDTF Multi-Donor Trust Fund CASCR Country Assistance Strategy Completion Report MEF Multi-Tranche Financing Facilities CBR Central Board of Revenue MIGA Multilateral Investment Guarantee Agency CCBs Citizen Community Boards MSME Small and Medium Enterprise CCP Competition Commission of Pakistan MTDF Medium Term Development Framework CEDAW Convention on Elimination of all Discrimination NEP National Environmental Policy Against Women NLTA Non-Lending Technical Assistance CFAA Country Financial Accountability Assessment NSPS National Social Protection Strategy CGA Controller General of Accounts NGOs Non-Governmental Organizations CPS Country Partnership Strategy NSS National Savings Scheme CFT Combating the Financing of Terrorism NTCIP National Trade Corridor Improvement Program DFID Department for International Development (UK) NWFP North West Frontier Province DPC Development Policy Credit PCNA Post Crisis Needs Assessment DPL Development Policy Loan PEFA Public Expenditure and Financial Accountability EAD Economic Affairs Division PEPA Pakistan environment Protection Act FATA Federally Administered Tribal Areas PIFRA Project to Improve Financial Reporting and FBR Federal Bureau of Revenue Auditing FESCO Faisalabad Electricity Board PLGF Punjab Local Governance Framework FRDLA Fiscal Responsibility and Debt Limitation Act PPAF Pakistan Poverty Alleviation Fund GDP Gross Domestic Product PPPS Public-Private Partnerships GEF Global Environment Facility PRESO Poverty Reduction and Economic Stabilization GoP Government of Pakistan Support Operation HD Human Development PRSC Poverty Reduction Support Credit HIV Human Immunodeficiency Virus PRSP Poverty Reduction Strategy Paper HNP Health, Nutrition, and Population QAG Quality Assurance Group IBRD International Bank for Reconstruction and SBA Stand-BY Arrangement Development TARP Tax Administration Reform Project ICR Implementation Completion Report TFR Total Fertility Rate IDA International Development Association TSA Treasury Single Account IEG Independent Evaluation Group TTP Tehrik-e-Taliban-e-Pakistan IFC International Finance Corporation VAT Value-Added Taxation IBRD and IDA IFC Vice President: Isabel Guerrero Vice President, Operations: Rashad Kaldany Country Director: Rachid Benmessaoud Director: Michael Essex Task Team Leaders: Tom Buckley, Satu Kahkonnen Task Leader: Nadeem Siddique This Country Partnership Strategy was prepared under the guidance of Yusupha Crookes, by a core team that included Tom Buckley, Lin Chin, Rob Floyd, Rapti Goonesekere, Said Al Habsy, Uzma Ikram, Satu Kahkonen, Eric Manes, Naveed Naqvi, and Nadeem Siddique. Valuable support and comments were provided by Preeti Arora and Thomas O'Brien. The preparation of this CPS involved many contributors from the extended Pakistan Country Team. Although it is impossible to name them all, their contributions are gratefully acknowledged. TABLE OF CONTENTS E X E C UT I V E SUM M A R Y ..................................................................................................................... i I. INTRODUCTION ................................................................................................................. 1 II. COUNTRY CONTEXT ........................................................................................................ 2 A. Political Developments .................................................................................................... 2 B. Economic Developments ................................................................................................. 3 C. Poverty Trends and Vulnerability .................................................................................... 8 D. Progress in Human Development, Gender, MDGs ........................................................ 10 III. KEY DEVELOPMENT CHALLENGES AND GOVERNMENT'S POVERTY REDUCTION STRATEGY................................................................................................ 11 A. Key Development Challenges........................................................................................ 11 B. Government's Poverty Reduction Strategy ................................................................... 15 IV. PROPOSED WORLD BANK GROUP STRATEGY, FY2010-2013 ............................. 16 A. Lessons Learned from the Past ...................................................................................... 16 B. Feedback from Consultations ........................................................................................ 18 C. Strategic Priorities for Bank Group Support: The CPS Pillars ...................................... 18 V . I M PL E M E NT I NG T H E ST R A T E G Y : T H E W B G PR OG R A M .................................. 34 A. Portfolio Management ................................................................................................... 34 B. Financing........................................................................................................................ 36 C. Analytical and Advisory Activities ................................................................................ 38 D. Partnerships .................................................................................................................... 39 VI. RISKS AND RISK MITIGATION .................................................................................... 41 TABLES Table 1: Pakistan Selected Economic Indicators 2004/05-2009/2010 ..........................................4 Table 2: Federal Government Subsidies 2007/08-2008/09 ...........................................................6 Table 3: Medium-Term Macroeconomic Framework 2008/09-2013/14.......................................7 Table 4: Poverty Headcount Rate ..................................................................................................8 Table 5: Growth and Inequality Decomposition............................................................................8 Table 6: Key Social Indicators, 2008...........................................................................................10 Table 7: Summary of Consolidated Fiscal Accounts 2003/04-2009/10 ......................................12 Table 8: PRSP-II Pillars and Areas..............................................................................................15 Table 9: CPS Pillars and Outcome Areas ....................................................................................19 Table 10: Pakistan Country Partnership Strategy: Priority Lending Program Summary ..............21 Table 11: Priority Lending Program by CPS Pillars......................................................................22 Table 12: Bank Portfolio Indicators...............................................................................................35 Table 13: AAA-Selected Outputs by CPS Pillars..........................................................................38 F I G UR E S Figure 1: Trends in Real GDP Growth 1977/78-2008/09..............................................................3 Figure 2: Contribution to GDP Growth .........................................................................................3 Figure 3: Trends in Twin Deficts...................................................................................................5 Figure 4: Fiscal Balance Excuding Grants.....................................................................................5 Figure 5: Budgetary Subsidies were Reduced but Remain High...................................................5 Figure 6: Trend in Inflation............................................................................................................7 Figure 7: Poverty Trends at the Province Level Since 1998-99 ....................................................9 Figure 8: Composition of Vulnerable Households by Two Measures of Vulnerability ................9 Figure 9: Net Enrollment Rates by Poverty and Vulnerability Statueses in 2001.........................9 Figure 10: Net Ernrollment Rates ..................................................................................................10 Figure 11: Health Indicators .........................................................................................................11 B OX Box 1: Who are Vunlerable in Pakistan?.........................................................................................9 ANNEXES Annex I: CPS Results Framework Annex II: CAS Completion Report Annex III: Country Financing Parameters Annex IV: Partnership Annex B1: Country at a Glance and MDG Annex B2: Selected Indicators of Bank Portfolio Performance and Management Annex B3: FY10-14 IBRD/IDA Proposed Lending Programs Annex B3: IFC and MIGA Program Annex B4: Summary of Non-Lending Services Annex B5: Social Indicators Annex B6: Selected Economic Indicators Annex B7: Key Exposure Indicators Annex B8: Selected Indicators of Bank Portfolio Performance and Management Annex B8: Statement of IFC's Held and Disbursed Portfolio for Pakistan PAKISTAN COUNTRY PARTNERSHIP STRATEGY FY 2010-2013 EXECUTIVE SUMMARY i. During the previous CAS period strong growth and rapid poverty reduction through 2007 stalled as the economy faced crisis in 2008. An ambitious reform program of the government elected in 2008 has reduced the fiscal and, in particular, the external current account deficit, increased GDP growth, restored foreign exchange reserves, and reduced inflation. The reforms have also resulted in a significant increase in power tariffs along with an automatic pass through of international fuel prices. The government still has more work to do in a difficult security environment to further reduce inflation and the fiscal deficit, particularly to eliminate the large losses of public sector entities in the power, transport and manufacturing industries, and increase public revenues through the introduction of a value added tax and better tax administration. The country's top leadership is cognizant of this and is committed to continue spearheading reforms in these areas. ii. The Government's strategy focuses on regaining macroeconomic stability after the economic crisis and on structural reforms required to support the recovery of strong and sustainable growth. The overall vision of PRSP-II is to steer Pakistan's economic growth back to the range of 5-7 percent per year by stimulating growth in the production sector; creating adequate employment opportunities; improving income distribution; and harnessing the country's economic competitiveness through economic liberalization, deregulation and transparent privatization. The strategy recognizes that to steer Pakistan back on a path of broad-based growth, create jobs, and reduce poverty, a prolonged period of macroeconomic stability, financial discipline and sound policies is required. iii. Lessons Learned from the Previous CAS. The CPS reflects lessons learned from the Bank's past engagement in Pakistan. In particular, the need to adapt to a rapidly changing political and security environment during implementation of the FY06-09 CAS highlights the need for flexibility. In addition, the proposed CPS will focus more on the longstanding structural problems (like tax revenue mobilization and power) that contributed to the rapid erosion in growth and stability during 2007 and 2008. Reflecting the need for greater realism, the proposed CPS outlines a less ambitious priority IBRD/IDA lending program while leaving open the possibility of doing more should conditions permit. Finally, given Pakistan's unique development and geopolitical challenges, enhanced partnership arrangements are critical. Bank Group Assistance Strategy iv. This CPS seeks to support Pakistan to address some of the major institutional, policy and financing constraints on its capacity to achieve and sustain high economic growth rates, to manage conflict and to improve the social indicators and capacity of its population. The World Bank Group's support to Pakistan will be organized around four pillars: (i) improving economic governance; (ii) improving human development and social protection; (iii) improving infrastructure to support growth; and (iv) improving security and reducing the risk of conflict. v. Improving Economic Governance. Addressing the shortcomings of Pakistan's economic management is critical not only for restoring macroeconomic stability but also for reducing the likelihood of reversals leading to another cycle of growth giving way to stagnation. Enhancing domestic revenue mobilization will be the urgent priority during the CPS period. Strengthening public expenditure management at all levels of government will complement this focus. The strategy also focuses on governance of markets with a view to strengthening Pakistan's competitiveness by addressing barriers to competition, and factor market rigidities (including constraints in access to finance). The World Bank will support improvements in the legal and policy framework for growth through analytical work and ii policy-based lending. Through AAA and policy dialogue the Bank will support increased efficiency, competition and broadening of financial markets as well as improvements in financial infrastructure. An integral part of IFC's strategy in Pakistan is to increase access to finance to underserved groups, especially micro, small, and medium enterprises (MSMEs) by strengthening financial intermediation and business management and corporate governance practices at enterprise level. vi. Improving Human Development and Social Protection. Improvement in human development, including social protection, is critical to the goal of building resilience at the level of families and individuals. The focus of Bank Group efforts will be to support increased spending on human development along with reforms to improve governance and accountability in the provision of services with the level of Bank closely tied to the achievement of agreed results under specific programs. There will be enhanced attention to assessing and addressing the needs of vulnerable groups among the poor, such as women and displaced people. In education, the CPS will support government programs that combine supply side interventions and demand-side measures to improve access to education with a focus on equity to address regional and gender imbalances. In social protection, the Bank will sustain its partnership with the Government in establishing the Benazir Income Support Program (BISP) as the country's national safety net program with a focus on increasing its targeting efficiency and strengthening its operation. IFC will continue to explore opportunities for investment in private health and education sectors. Particular emphasis will be given to promoting public-private partnerships, wholesaling through financial intermediaries, and technical and vocational education. vii. Improving Infrastructure to Support Growth. At present, power is the most pressing need in infrastructure and the Bank Group will support adoption of policies to bring about financial sustainability, expansion of generation in a least cost manner, and improvement in the efficiency of transmission and distribution. A significant increase in IBRD lending is envisioned to support enhanced power generation. IFC will support development of the power sector with a focus on supporting privatization of utility and distribution companies, improving of utility efficiency and promoting energy efficiency, as well as development of renewable power generation (hydro and wind generation). IFC will be a significant investor in transport and logistics. In agriculture, the strategy envisions technical assistance to help Pakistan in agricultural policy analysis and design with a view to increasing agricultural competitiveness and expanding rural livelihoods. IFC will explore investment opportunities in agribusiness (including warehousing and logistics), and support agribusiness SMEs through financial intermediaries. viii. Improving Security and Reducing the Risk of Conflict. The persistence of conflict in KP and FATA poses a threat to some of the most vulnerable and marginalized populations in Pakistan, while also challenging economic stability across the country. The absence of employment opportunities and inadequate livelihoods in FATA and KP has created a favorable environment for militant groups whose economic incentives for potential recruits greatly outweigh available opportunities while political and governance deficits, including weaknesses in the justice system, perpetuate a historical experience of disenfranchisement, alienation, corruption, poverty and underdevelopment that have fuelled the crisis. Bank support will be guided by the results of a Post Crisis Needs Assessment (PCNA) which is now underway. This is a highly complex area, and the Bank's knowledge is evolving but limited. We will, however, make this a major thrust of our work. Support under the CPS may include support for agricultural/livestock-linked employment and livelihoods, expansion of general and technical/vocational education, investment in energy and transport, and social protection. In addition, the strengthening of local government will also be a focus to enhance the legitimacy of the state and counter the claim to legitimacy by militant groups as a viable alternative to the state. Implementing the Strategy ix. Recognizing the challenges and uncertainties facing Pakistan in the coming few years, the strategy emphasizes a more focused prioritization on key outcomes with flexibility to enable the Bank iii Group to meet emerging challenges and opportunities. Hence within the overall strategic framework outlined above, the strategy will prioritize Bank support as follows: First, the CPS gives special focus to the achievement of those outcomes that have the potential to be truly transformational. These outcomes are deemed to be pivotal to the sustained achievement of most of the rest of PRSP-II objectives and CPS outcomes and will be the areas where the Bank Group will concentrate much of its efforts. Pakistan cannot effectively build the foundation to make headway on exploiting its strategic advantages and endowments in the medium to long-term without successfully addressing these very basic issues. These objectives are by no means easy ­ indeed, many of them represent longstanding challenges where progress has been incremental, at best. In these areas the CPS envisions a full range of services including AAA, IBRD/IDA financing and, where appropriate, MDTF resources for the conflict affected region. These transformational outcomes are: · Strengthening Tax Policy and Administration: raising the ratio of tax to GDP (currently only 10.2 percent of GDP) is absolutely essential if Pakistan is to have the resources to invest in human development and infrastructure, and if it is to build resilience to future shocks and guard against costly and disruptive growth reversals. · Expanding Power Provision: reforming the power sector and ensuring sustainable expansion of supplies is absolutely essential if industrial and service activity is to be increased and productivity raised. · Addressing Security: coping with the consequence of conflict while reducing the prospects of future conflict is essential for long term growth. This is a highly complex area, and the Bank's competence and knowledge is evolving but limited. We will, however, make this a major thrust of our work, giving emphasis to service provision and job creation in highly vulnerable areas, (and drawing upon emerging findings from the WDR and from work in Pakistan). x. Second, in addition to these transformational priorities, the strategy identifies a core program of support to improve educational and health outcomes, strengthen the potential for increased and more productive labor force participation, reinforce safety net systems and enhance the earning capacity of the poor and vulnerable. These objectives relate directly to key elements of the MDGs and related social outcomes and indicators. The core program also includes selected investments in ports, water management and financial management. xi. These two areas comprise the priority lending program to be financed during the CPS. Finally, the CPS envisages the potential for the program to expand beyond this priority program to address key challenges which do not meet all of the selectivity criteria but where the Bank would like to support the government to lay the basis for interventions to successfully address significant development challenges. Such challenges include fostering livability and economic growth and dynamism within Pakistan's major cities and rapidly growing urban settlements, and strengthening fiscal management in Pakistan's provinces. The CPS will support such activities where the individual programs are ready and the prospects for success and results are strong. We will also link expansion of the overall lending program beyond the priority program to progress being made against the objectives of the transformational activities. The above approach to engagement with Government under the CPS emphasizes exercising selectivity in what we can firmly undertake to do effectively while not foregoing the option to do more, if conditions permit. It should allow for more effective use of our resources under the uncertain conditions we expect to continue to face in Pakistan. xii. In line with the need for selectivity, the proposed CPS also identifies subsectors and thematic areas where the Bank will not lend. In the energy sector, given our limited resources and capacity, the Bank will not engage in coal. On governance, the Bank will play only a supporting role with partners iv leading in the areas of civil service and judicial reforms. In agriculture, the strategy envisages providing analytical support to formulate strategies and policies to increase value-added in the sector. We may extend this role to supporting the government to develop program platforms that may serve as vehicles for other development partners to provide financing to the sector, subject to demand from government and partners. Finally there are sectors, like highways, where risks are such that the Bank Group will not engage pending significant improvement in institutional governance or strong measures being taken by Government to mitigate risks, including fraud and corruption risks. xiii. The priority lending program amounts to an estimated $3.7 billion (IBRD/IDA) through FY12, equivalent to about 60 percent of a total potential lending envelope of up to $6.0 billion during the 4 year CPS period (FY10-13). IFC intends to invest between $1.3 and $1.5 billion provided that the economic and security situations do not deteriorate significantly, and will continue with its robust program of Advisory activities. The Bank on behalf of development partners will administer complementary grant financing of at least $100 million for the MDTF for the Northwest Border Region. This amount may increase depending on developments in the region and results achieved. Risks and Mitigation xiv. Given the serious and multifaceted challenges that Pakistan faces, this CPS poses greater than normal risks. The FY10-13 CPS will be implemented in the context of economic austerity with the potential for policy reversal as well as other uncertainties. Notably, although Pakistan has made much progress in stabilizing the economy, reviving growth of GDP, exports and foreign exchange reserves and reducing inflation and the current account deficit, the fiscal situation remains vulnerable and inflation high and hence there is a risk of macroeconomic slippage. In addition, ongoing conflict within Pakistan and in Afghanistan poses a risk to stability while proposed Bank Group activities in the conflict-affected northwest greatly increase the Bank's exposure to such risks. Finally, there are implementation risks which impact the Bank Group's program. The Bank Group will seek to mitigate these risks through pro- active measures to reduce exposure of staff to security risks and through alternative means of supervision along with continued attention to capacity building and robust fiduciary arrangements such as those involving third-party monitoring. By design, the Bank program is largely structured to be dependent on results, with disbursements for a significant part of priority program and commitments against the contingent part of the overall program firmly dependent on program and results achieved during implementation. PAKISTAN COUNTRY PARTNERSHIP STRATEGY FY 2010-2013 I. INTRODUCTION 1. Pakistan has extraordinarily important strategic endowments and great development potential. Three endowments, all of which can help propel growth and poverty reduction, stand out. First, Pakistan occupies a strategic location at the crossroads of South Asia, Central Asia, China and the Middle East. It is at the fulcrum of a huge market with a vast population, enormous and diverse resources and huge untapped potential for trade -- and a huge potential source of demand and growth for Pakistan. Second, Pakistan has a huge population; the sixth most populous country in the world and the most urbanized in South Asia. Pakistan has undergone a major demographic transition over the last 40 years, exemplified by high fertility rates from 1960 to the mid-1980s, a progressive decline in the fertility rates thereafter and an overall decline in the ratio of the dependent age population to the working age population from 90 percent in the early 1960s to about 68 percent today. The increasing proportion of Pakistan's population that is of working age provides Pakistan with a potential demographic dividend, namely, the potential for increased economic growth as a result of increasing and productive participation of the population in the labor force. Third, Pakistan has one of the most extensive irrigation networks in the world. The country's irrigation assets have underpinned food security in a country that ranks amongst the world's most arid and provide the basis for rapid potential growth in agricultural income and employment. 2. Pakistan has seen episodes of high economic growth rates when it appeared that this development potential would be realized. But growth episodes have typically been hobbled by unsustainable macro imbalances reflecting low domestic revenue mobilization and public savings. Pakistan has been plagued by cycles of high growth interrupted by shocks and crises and followed by relative stagnation. Similarly, while Pakistan has made great strides in service delivery over the last three decades, it has not been able to translate an increasing working age population into a strong and sustained impetus for growth. Social indicators for both health and education have remained low and have lagged seriously behind other countries in the region. The level of expenditure on education and health has been severely constrained by limited fiscal space and the weight of other spending priorities. Finally, Pakistan's strategic location has also brought its own set of challenges in the form of overlapping religious and national identities, contested geographical boundaries and sharply contrasting ideological orientations ­ factors which have sometimes contributed to generating conflicts that have deeply affected Pakistan and the expenditure priorities of the Pakistan state. 3. To make headway in realizing its development potential, Pakistan must overcome the obstacles to its ability to sustain high economic growth rates, to manage conflict and to improve the social indicators and capacity of its population. This CPS seeks to support Pakistan to address some of the major institutional, policy and financing constraints on its capacity to do so. However, many of the constraints that Pakistan face relate to the nature of its political institutions, the political economy environment and the consequential scope for action by policy makers. Part of the challenge for the Bank in this CPS is to recognize the limits of the effectiveness of its support given the impact of these political economy factors and, as a consequence, the need to be very selective in where and how it provides support. 4. The previous World Bank Group Country Assistance Strategy for Pakistan is instructive in this regard. The CAS covered the period from FY06 to FY09. The CAS was prepared during a period of relative political stability and optimism about the country's prospects for growth and poverty reduction. Both stability and optimism proved short-lived. Political stability started to unravel in mid-2007, two years into the implementation of the CAS at the same time as the Pakistan economy was buffeted by external shocks. The resolve to take adjustment measures weakened, the rate of economic growth stalled and decelerated, Pakistan went into a severe macroeconomic crisis and security conditions started to 2 deteriorate markedly both in the western border regions and in major urban centers. In the process, original plans in the CAS were substantially unfulfilled. II. COUNTRY CONTEXT A. Political Developments 5. Reflecting geopolitical and financial pressures after independence, consolidation of the state and its capacity took precedence over the broadening of political participation and the sharing of power and authority. A parliamentary and participatory political system took root only slowly, with the first nationwide general elections held only in 1970. Until then, effective power and authority lay initially with unelected members of the executive and subsequently with a succession of military rulers. During this period, a pattern of early dismissal or dissolution of elected officials and provincial assemblies by the executive took hold. In the 38 years between 1970 and 2008, Pakistan was under effective military rule for a total period of 20 years. Six civilian governments were elected to office for the remainder of the period; none completed its term before being dismissed or overthrown from office. 6. But Pakistan has been undergoing remarkable political and constitutional changes over the last two years. Civil society and the judiciary have been playing a more active and independent role; free and fair elections were held and vigorously contested by largely unfettered political parties with competing manifestos of the nature and scope of public goods and services to be provided by the state; military leadership has stayed on the sidelines, focusing primarily on security challenges (see below); political competition continues to be vigorous but political accommodation has expanded. There is optimism about the prospects for political stability and for increased accountability by the state for the scope and quality of public goods and services provided to citizens. One outgrowth of this political climate has been the recent major changes in the division of revenues between the federal and provincial governments. With these changes, more resources will now go to the provincial governments who hold the mandate for delivery of most basic services. Similarly, the role of provincial governments in delivery of social and economic services has been enhanced through the Eighteenth Constitutional Amendment. Also, experience during the last two years suggests that an elected government with broad legitimacy can command the political support needed to take politically difficult policy measures (as in energy pricing and public expenditures) that improve the prospects for better economic and social outcomes. In many respects, therefore, recent political developments present a window of opportunity for reforms especially in service delivery and in some areas that require strong political legitimacy to pursue changes that adversely affect popular or vested interests. 7. Security conditions within Pakistan started to deteriorate progressively from 2001 with the political and military spillover of the war in Afghanistan. Early government efforts to drive out foreign fighters and their allies from their refuges in the tribal areas met considerable and violent resistance and resulted mostly in stalemate. At the same time, events abroad like the war in Iraq and domestic political conditions created opportunities for active mobilization of support by various Taliban factions in the Federally Administered Tribal Areas (FATA) and Khyber-Pakhtunkhwa (KP). 1 As its support and presence increased, the Taliban role shifted in many areas to direct attempts at challenging the writ of the state and supplanting its role at the local level. Starting in 2007, Taliban factions in FATA and KP coalesced under the unified banner of the Tehrik-e-Taliban-e-Pakistan (TTP). Subsequently, the TTP seized control of large swaths of FATA and the tribal regions of KP, and began to present a major security challenge to the Government of Pakistan. Overall, fatalities in terrorism-related violence increased from about 200 in 2003 to above 6,000 in 2008. The deployment of suicide attacks and the high rate of increase in fatalities have significantly raised the perception of insecurity in Pakistan, especially in the key urban areas. 1 Formerly the Northwest Frontier Province which was renamed under the 18th Constitutional Amendment, approved in April 2010. 3 8. In mid-2009, government, with the active support of parliament, launched a concerted military effort to reverse the erosion of the writ of the state in major areas in KP and FATA, starting with the Swat Valley in the Malakand Division. The Swat Valley held symbolic importance as the first area in Pakistan, outside FATA, where militants had taken effective control. The full-scale military operations have so far led to the successful displacement of militants in the targeted areas. But they also resulted in about three million internally displaced persons. Taking care of IDPs as well as reconstructing the conflict-damaged areas will impose a major additional fiscal burden on Pakistan in the short run. But the reassertion of state control also represents an important opportunity for the government to take measures to ensure durable peace and development in these critical border areas in the future. B. Economic Developments 9. Pakistan's economic history has also been turbulent, with repeated cycles of rapid Figure 1: Trends in Real GDP Growth 1977/78-2008/09 10% growth followed by stagnation (Figure 1). Time and again Pakistan's economy has 8% recovered from crisis, exhibited often- impressive economic and social performance, 6% soon to find that progress is unsustainable and 4% whittled away in a new round of crisis. Above average growth in the 1960s and 1980s 2% coincided with episodes of reform and 0% economic and political stability along with high 1977/78 1979/80 1981/82 1983/84 1985/86 1987/88 1989/90 1991/92 1993/94 1995/96 1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 levels of external assistance. In contrast, during the 1970s and 1990s, political upheaval, economic uncertainty and regional tensions were accompanied by few or incomplete reforms and, toward the end of the 1990s, macroeconomic instability. 10. The most recent growth spell followed prolonged stagnation in the 1990s. Beginning in Figure 2: Contribution to GDP Growth 2000, the economy strongly recovered and grew at Consumption Total Investment 12% Net external demand GDP Growth at FC 7.3 percent on average per year during 2003/04- 2006/07. However, this growth was partly 8% explained by heavy external financing inflows after 4% September 11, 2001. In parallel, monetary policy 0% was loosened. These policies led to consumption- -4% driven growth (Figure 2) and acceleration of 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 inflation. With domestic demand outpacing output, the current account reversed from a surplus to a * Data on constant prices of 1999/2000 deficit, and signs of overheating were evident. The Source: Pakistan Economic Survey sharp rise in international oil and food prices, combined with policy inaction and internal political turmoil, rapidly expanded macroeconomic imbalances in Pakistan in 2007/08. In the absence of adequate measures to address the imbalances--in particular, not passing on international price increases to domestic consumers while covering price increases through rising subsidies--the economy slid into a crisis. The onset of the global financial crisis further aggravated the situation. 11. By mid-October 2008 the foreign exchange reserves of the State Bank of Pakistan (SBP) had dropped to about three weeks of imports, the nominal exchange rate had depreciated significantly, monetization of government debt was in full swing with a rapid rise in inflation, and spreads on Pakistani sovereign bonds had climbed above 2,000 basis points. In response, in November 2008, to avoid a default on foreign debt payments, the authorities developed a homegrown stabilization program, 4 supported by the IMF through a Stand-By Arrangement (SBA). The stabilization program envisaged fiscal and monetary tightening to bring down inflation and reduce the external current account deficit to sustainable levels. Towards Stabilization 12. The ambitious reform program of the government has brought about a significant reduction in the fiscal and current account deficits and restored foreign exchange reserves while GDP growth has started to pick up. Foreign remittances have grown thanks to the government's remittance drive. Increases in power tariffs totaling 80 percent since February 2008 along with an automatic pass-through of fuel prices have helped to address the fiscal deficit. Inflation has fallen from over 20 percent in 2008 to about 13 percent. The government has more work to do in a difficult security environment to further reduce inflation and the fiscal deficit, in particular by eliminating large losses of public sector entities in the power, transport and manufacturing industries and by increasing public revenues through the introduction of the value added tax and better tax administration. Table 1: Pakistan Selected Economic Indicators 2004/05 to 2009/10 Actual Est. Proj. 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Output and Prices (annual changes in percent)\ Real GDP at factor cost 9.0 5.8 6.8 4.1 2.0 3.0 Consumer prices (period average) 9.3 7.9 7.8 12.0 20.8 11.5 Overall Fiscal Balance (in percent of GDP) Excluding grants -3.3 -4.3 -4.3 -7.6 -5.2 -5.1 Including grants -3.0 -3.7 -4.0 -7.3 -5.0 -4.6 Total Government Debt 62.9 57.4 54.1 58.5 55.6 56.9 External government debt 29.4 26.6 24.2 26.7 26.2 25.6 Domestic government debt 33.5 30.8 29.9 31.8 29.4 31.2 Current account including official transfers -1.4 -3.9 -4.8 -8.4 -5.6 -3.8 End period Gross Official Reserves (in months of next year's imports of goods and services) 3.7 3.8 2.6 2.8 4.3 13. Economic activity has slowed significantly in the past year-and-a-half due to reduced domestic and global demand, but is now showing some signs of picking up. Real economic growth declined to 2 percent in 2008/09, compared to an average annual growth of 6.6 percent in the preceding five years, but is projected to rebound to 3 percent during 2009/10. In terms of the sectoral composition of growth, the services sector, which accounts for more than half of GDP, has continued to grow, the large-scale manufacturing (LSM) production index has shown modest positive growth during the first seven months of 2009/10 while agricultural sector growth has been weaker than projected and prospects for the sector remain weak in 2009/10. Overall growth has been driven by private consumption in the past year (see Figure 2). The share of public and private investment in GDP rapidly contracted in 2008/09, which does not augur well for the future productive capacity of the economy and medium-term growth prospects. 5 14. The decline in international commodity and oil prices, the domestic Figure 3: Trends in Twin Deficts (as % of GDP) economic slowdown and increased workers' Fiscal balance External current account balance 6 remittances have facilitated improvement in 4 the country's external position. The current 2 account deficit has declined from 8.4 percent 0 of GDP in 2007/08 to 5.6 percent of GDP in -2 2008/09, and is projected to narrow to 3.8 -4 percent of GDP by end-2009/10 (Figure 3). -6 Exports have continued to decline as a result -8 of decreased external demand and slowdown -10 in industrial production due to electricity 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 shortages and deterioration in security. Continued strong growth in worker's remittances in the past few years has also contributed to improvements in the external current account balance. This growth has benefitted from vigorous Government efforts at promoting increased remittances. 15. Other financial inflows (foreign direct and portfolio investment and debt) have dropped sharply owing to macroeconomic instability, security perceptions and concerns and global recession. Net capital inflows have remained on a decreasing trend during 2009/10: in the first eight months FDI declined to US$1.3 billion compared to US$2.8 billion in the same period in 2008/09; and portfolio investment remained negative. Despite these developments, foreign exchange reserves of the State Bank of Pakistan rebounded to about US$11 billion (equivalent to about three months of imports) by mid-March Figure 4: Fiscal Balance Excluding Grants (% of GDP) Target Actual 2010, mostly as a result of IMF disbursements. -8% 16. While the external position has improved, -6% -0.051 -0.04 -0.042 the fiscal performance remains weak. The fiscal -4% deficit has declined from the 2007/08 level, but not as far and fast as envisaged. The fiscal deficit -2% (excluding grants) declined from 7.6 percent of GDP in 2007/08 to 5.2 percent of GDP in 2008/09, 0% but fell short of the target of 4.2 percent of GDP 2007/08 2008/09 2009/10 * * Actual data for 2009/10 is only for first two quarters (Figure 4). The reduction in fiscal deficit was achieved solely through compression in federal public expenditure as total revenue mobilization Figure 5: Budgetary Subsidies were Reduced but Remain declined (from 14.6 percent of GDP in 2007/08 to Budget Revised 4% 14.1 in 2008/09). Although the overall subsidy bill declined from the high level of 3.9 percent of GDP 3% in 2007/08, it was still 1.9 percent of GDP - 10 percent of overall Government expenditure - in 2% 2008/09 (Figure 5, Table 2). The 2009/10 fiscal 1% deficit target has already been revised upwards from 4.6 to 5.1 percent of GDP, but the increased 0% target is subject to significant risk. The fiscal 2005/06 2006/07 2007/08 2008/09 2009/10 deficit during the first half of 2009/10 was already 2.7 percent of GDP, and seasonality implied a higher fiscal deficit in the second half of the fiscal year. To stay within the target, the authorities have decided to cut federal development spending by 30 percent. However, other spending pressures are also emerging: electricity subsidies are projected to substantially overrun targets, and spending on security is expected to increase owing to ongoing conflict. 6 17. On the revenue side, tax revenues have declined sharply as Table 2: Federal Government Subsidies (percent of GDP), 2007/08 - 2008/09 the economic slowdown has 2007/08 2008/09 reduced the buoyancy of Budget Revised Budget Revised Pakistan's two main tax bases, Power Sector Utilities 0.7 1.3 0.7 0.9 manufacturing and imports. Tariff Differential subsidy 0.4 1.0 0.6 0.8 Federal tax collection declined others 0.3 0.3 0.1 0.1 from 9.8 percent of GDP in Food subsidies 0.1 0.5 0.2 0.2 2007/08 to 8.8 percent of GDP in POL (refineries and OMC) 0.2 1.7 1.1 0.5 2008/09, but is projected to Others 0.2 0.5 0.3 0.3 recover to 9.2 percent of GDP in Total Subsidies 1.1 4.0 2.4 1.9 2009/09. However, during the first nine months of 2009/10, the collection increased by 10.7 percent, compared to the 19.3 percent required to meet the annual target. With the exception of sales tax, all taxes performed inadequately vis- à-vis the annual target, so there is potential sizeable downside risk to revenue projections. 18. After a delay of over two years, the federal and provincial governments agreed on a new (seventh) National Finance Commission (NFC) Award on December 30, 2009, which provides for significant changes in inter-governmental revenue sharing from July 1, 2010 onwards. The new award has raised the share of provinces in the divisible pool of federally collected taxes from 46.25 percent to 56 percent. However, the new revenue sharing arrangement will be sustainable only if substantially increased revenue is mobilized and/or if it is accompanied by a transfer of expenditure responsibility from the federal to provincial governments. As a result of the recent amendment of the Constitution, further functional responsibilities will be devolved to provinces. 19. Since November 2008, the Government has met its financing needs mainly through non-bank borrowing. The increase in T-bill placements has enabled the Government to reduce the level of monetization. 20. Total government debt (including obligations to the IMF) as a share of GDP is projected to rise from 59.3 percent in 2008/09 to 62.4 percent in 2009/10. About half of the debt is external and half domestic. Total debt is projected to remain over 60 percent of GDP in the medium term, but thereafter decline. The external debt-to-exports ratio rose to 220 percent in 2008/09, is projected to peak at 273 percent in 2011/12 and start thereafter gradually declining. However, debt sustainability analysis suggests that external debt service remains manageable although there are potential risks to this assessment from sources such as lower than projected growth and foreign direct investment (FDI), and higher than projected current account deficit, interest rates and exchange rate depreciation. 21. Credit to the private sector fell dramatically after the onset of the crisis as economic activity slowed, but is showing signs of recovery. Thanks to large government borrowing to finance budgetary needs, and a surge in credit demand by public sector enterprises, banks have been able to avoid lending to the relatively risky private sector as non-performing loans (NPL) increased. 2 Non-performing loans increased from 8.4 percent in September 2008 to 12.4 percent in September 2009. Although the accumulation of NPLs has slowed down since March 2009, the overall level is still rising. NPLs are generally adequately provisioned for. Banks, other than a few small ones, remain profitable and generally well capitalized. The exceptions are expected to be handled through mergers and fresh capital injections. Stress tests performed by SBP indicate that the large and medium sized banks are relatively robust, though some medium sized banks are vulnerable to crisis scenarios. 2 During the first nine months of 2009/10, the credit demand for government budgetary operations and public sector enterprises stood at Rs 404 billion, more than three times the size of credit demand in the private sector. 7 22. As a result of reduced aggregate demand and international commodity and oil prices, Figure 6: Trend in Inflation 12 m Average Y-O-Y Core inflation has declined, but remains a concern. 23% Inflationary pressures, which had eased after the 20% second half of 2008/09, have resurfaced since 17% October 2009 (Figure 6). This is partly due to 14% the base effect, but partly also reflects increased food prices and upward adjustments in energy 11% prices. The core inflation, which indicates the 8% Jul-09 Feb-09 Sep-09 Feb-10 Jan-09 Jan-10 Dec-09 Jun-09 Aug-09 May-09 Oct-09 Nov-09 Apr-09 Mar-09 Mar-10 persistence of inflationary pressures, has also been rising since December 2009. The average inflation target of 11 percent for 2009/10 is likely to be somewhat exceeded. Medium-Term Outlook 23. While the economy is stabilizing, continued improvement in the macroeconomic situation will remain a challenge. Global economic recovery has started, but remains fragile and slow. Global trade is projected to remain depressed and unemployment high for years in a large part of the world. Pakistan can expect little in the way of a substantial growth impetus from global markets. Pakistan's future economic prospects will hinge on good economic policies and management. 24. According to the government's medium-term macroeconomic framework, which is supported by the IMF's Stand-By Arrangement, Pakistan's real GDP growth is projected to start recovering slowly at 3 percent in 2009/10, and increase gradually to 5 percent by 2012/13 (Table 3). However, longer-term projections are particularly uncertain in view of the volatile global and domestic economic environment. Table 3: Medium-Term Macroeconomic Framework 2008/09 ­ 2013/14 Rev Proj Projections 2008/09 2009/10 2009/10 2010/11 2011/12 2012/13 2013/14 Output and prices Real GDP at factor cost 2.0 3.0 3.0 4.0 4.5 5.0 5.5 Consumer prices (period average) 20.8 11.0 11.5 7.5 6.5 6.0 6.0 Public finances Revenue and grants 14.3 15.2 14.9 15.4 15.9 16.2 16.6 Expenditure (inc. Statistical discrepancy) 19.1 19.5 19.5 19.3 19.0 19.0 19.3 Overall balance Excluding grants -5.2 -4.9 -5.1 -4.2 -3.3 -3.0 -2.9 Including grants -5.0 -4.3 -4.6 -3.8 -3.1 -2.8 -2.7 Total government debt 55.6 55.8 56.4 55.3 54.1 52.8 51.1 External sector Current account (as % of GDP) -5.6 -4.2 -3.8 -4.0 -3.9 -3.6 -3.4 Gross official reserves (in million of US$) 9,114 14,104 14,715 17,815 18,365 17,365 15,965 In months of next year's imports of goods and services 2.8 4.2 4.3 4.9 4.7 4.2 3.6 Memorandum Items GDP at market price (in billion of Pakistan rupees) 13,095 14,972 15,039 16,814 18,712 20,827 23,291 GDP at market prices (in billions of US$) 166.5 176.8 178.9 191.1 202.9 216.0 231.3 8 25. The external current account deficit is projected to widen again to 4 percent of GDP in 2010/11 as imports pick up before declining slowly. Remittances are projected to grow by 7 percent in 2009/10, and continue to grow at 6.5 percent thereafter with the help of government's remittance drive. Foreign exchange reserves are expected to build up from US$14.7 billion at end-June 2010 to about US$18.4 billion by end-June 2011/12 with the import coverage projected to fall from 4.9 months in 2010/11 to 3.6 in 2013/14. However, these projections also are subject to substantial risk, since the resumption of foreign inflows is uncertain. 26. Pakistan's medium-term outlook hinges on a significant increase in tax revenues: by 2-3 percentage points of GDP by 2012/13. To meet this target, the authorities have committed to comprehensive reforms of tax policy and administration. This includes quick implementation of a broad- based value-added taxation (VAT) of goods and services, which the authorities plan to roll-out in October 2010. However, the process is somewhat complicated as the Constitution assigns taxation of services to the provinces. Hence, separate provincial and federal VAT laws have been submitted to the respective parliaments, and are likely to be approved after the federal and provincial governments agree on implementation modalities of the tax.3 Failure to raise revenues as planned would further heighten Pakistan's vulnerability to shocks, and jeopardize development efforts, and deepen the country's reliance on foreign aid. If revenues are raised as planned, total expenditures could be maintained at the current level as a share of GDP over the medium term. In addition, if subsidies (in particular on power) were significantly reduced, there would be space for a steady increase in development spending. Otherwise, expenditure plans would need to be revisited. C. Poverty Trends and Vulnerability 27. Poverty trends: As a result of Table 4: Poverty Headcount Rate (Incidence of Poverty) economic and political turbulence, poverty 1998/99 2001/02 2004/05 2005/06 2007/08 has also been volatile in Pakistan. Pakistan Pakistan 30.6 34.5 23.9 22.3 17.2 saw an impressive decline in poverty during Urban 20.9 22.7 14.9 13.1 10.1 2001/02-2007/08: the share of the Rural 34.7 39.3 28.1 27.0 20.6 population living in poverty halved, down Source: Poverty estimates from 1998-99 to 2005-06 are from the Pakistan Economic Surveys and poverty estimates for 2007-08 are from 34.5 percent in 2001/02 to 17.2 based on the World Bank staff estimation. percent in 2007/08 (Table 4). Both urban and rural areas saw significant reductions. Table 5: Growth and Inequality Decomposition This progress was made possible by growth 2001/02 ­ 2005/06 ­ in real per adult consumption expenditures Average effect 2005/06 2007/08 and declining inequality during 2005/06- Change in poverty headcount -12.8 -4.7 2007/08 (Table 5). Key human Growth component -17.0 -3.6 development indicators of educational Inequality component 4.2 -1.2 attainment, health outcomes, and Source: World Bank staff estimation based on PIHS 2001-02, PSLM 2005-06, 2007-08. unemployment rates corroborate these trends through 2007/08. 28. The pace of poverty reduction varied across provinces (Figure 7). Poverty in Punjab and KP steadily reduced from 1998/99 onwards, while in Sindh and Balochistan it recorded sharp rises in 2001/02 and 2005/06, possibly owing to weak agricultural performance in those years. The reduction in poverty in KP is particularly noteworthy, and high level of remittances, both foreign and domestic, seem to have facilitated that. 3 The introduction of VAT has been delayed by three months to allow the federal and provincial governments to reach an agreement on implementation modalities of VAT. The tax is now expected to be introduced from October 1, 2010. 9 29. However, taking a longer Figure 7: Poverty Trends at the Province Level Since 1998-99 term view reveals that compared to 1990/91, the poverty headcount has 60 changed little. The poverty rate rose 50 gradually with many ups and downs 40 after 1990/91 until it started Punjab declining in 2001/02. Volatility of 30 Sindh economic status at the individual 20 level is even larger than aggregate NWFP figures show. According to analysis 10 Balochistan based on a recent panel data, more 0 than 40 percent of the population 1998-99 2001-02 2004-05 2005-06 2007-08 was moving in or out of poverty between 2001/02 and 2004 when the Source: World Bank staff estimation using PIHS 1998-99, 2001-02 and PSLM 2004-05, economy started growing and the 2005-06 and 2007-08. poverty headcount rate was declining by 10 percentage points. The large volatility in poverty suggests that a substantial portion of Pakistan's population is vulnerable, living close to the poverty line, and could fall into poverty as a result of shocks. See Box 1 for a discussion on characteristics of the poor and vulnerable in Pakistan. Box 1: Who are Vulnerable in Pakistan? Who are vulnerable? The overlap between vulnerable and poor households is low: about 60 percent of the highly vulnerable population does not belong to the poorest 20 percent. This means that a significant share of the non-poor population is as vulnerable as poor households (Figure 8). Vulnerable households are characterized by their limited asset ownership (such as land holding and livestock) and a large household size. They also invest little in children's education and health (Figure 9), which leads to poverty traps, if left unaddressed. Figure 8: Composition of Vulnerable Households by Two Figure 9: Net Enrollment Rates by Poverty and Measures of Vulnerability Vulnerability Statuses in 2001 Probability of being Asset Indicator in Poor Vulnerable Others poor in PRHS 2007/08 50 Poor Non-poor Poor Non-poor 40 30 20 33% 35% 10 67% 65% 0 primary middle matric Source: The World Bank staff estimation using PSLM 2007-08 data Source: The World Bank staff estimation based on and PRHS I and II. PRHS series. 10 30. In fact, the analysis of the poverty impact of recent economic shocks suggests that the recent gains in poverty reduction may have been partly reversed in the wake of recent economic crises. Food and fuel prices rose by 23.7 and 18.4 percent, respectively, between 2007/08 and 2008/09, resulting in a 21 percent reduction in purchasing power. The 2007/08 household survey results indeed suggest that poverty started rising towards the end of that fiscal year. However, the impact of the recent economic downturn on poverty will only be known when the next household survey has been conducted and results analyzed. D. Progress in Human Development, Gender, MDGs 31. Pakistan's social indicators have consistently failed to match its economic progress. While human development indicators have improved since 2001/02, they still lag well behind other low income countries at a similar level of income (Table 6), heightening the vulnerability of the population. Table 6: Key Social Indicators, 2008 Indicator Pakistan South Asia Low income Net primary school enrolment rate, male (% of age group) 73 88 76 Net primary school enrolment rate, female (% of age group) 57 83 69 Public spending on education (% of GDP) 1.6 2.2 3.4 Immunization rate 80 72 78 Public spending on health (% of GDP) 0.3 0.9 1.6 Infant mortality rate (per 1,000 births) 73 59 80 Births attended by skilled health staff (%) 39 42 42 Life expectancy at birth, male (years) 65 63 57 Life expectancy at birth, female (years) 66 66 59 Total fertility rate (births per woman) 3.9 2.9 4.2 Population growth rate (% annual average for period) 2.3 1.6 2.2 32. Education: Access to education remains a significant challenge. Net enrolment rates in primary Figure 10: Net Enrollment Rates education have increased over the past decade (Figure 70 10), but access remains far from universal, and there are significant regional, rural-urban, and gender 60 disparities. Compared to the average in South Asia and 50 other low-income countries, Pakistan is lagging behind in female enrolment at the primary school level. 40 Access issues are even larger at higher levels of education. Tertiary enrollment rates are estimated at 30 about 4 percent of the eligible age cohort (17-23), and less than 8 percent of the workforce has received 20 formal training. 10 33. In addition, the quality of education is weak at 0 all levels of education, drop-out rates are high, and 1998/99 2001/02 2005/06 2007/08 learning achievements are low and varied. Poor performance in the sector reflects partly the shortage of Primary (6-10) Middle (11-13) qualified and motivated teachers but also weak Matric (14-15) governance and management and the concomitant lack of accountability and effectiveness in service delivery. While further investment in education is required, expenditure effectiveness is a key sector issue that needs to be addressed vigorously. 11 34. Health: Select health indicators--such as full immunization rates and prevalence of Figure 11: Health Indicators diarrhea--have improved in the past few years 80 30 (Figure 11). However, progress in improving 70 Diarrhoea in Past 30 days (%) child, infant and maternal mortality as well as 25 Immunization rate (%) the provision of reproductive health services has 60 been slow. Under-five mortality and fertility 20 50 rates remain the highest among South Asian countries. Chronic child malnutrition is about 40 15 40 percent, and high levels of out-of-pocket 30 10 expenditures for health services hamper access 20 of the poor to basic services. Significant gender 5 and rural/urban disparities persist. 10 0 0 35. Gender: While improving, gender 1998/99 2001/02 2005/06 2007/08 disparities persist in Pakistan. Female literacy rates remain low at 42 percent. The health Full Immunization Rate (12 - 23 months) status of women is worse than that of men, and Diarrhoea in Past 30 Days (%) under 5 adversely affected by lack of mobility and information as well as social norms. These factors have an adverse impact also on family planning programs and fertility, and thus enhancing female education would be particularly important. Female labor force participation rate, though increased among highly-skilled women, remains low at 21.5 percent, and the share of women at managerial positions at two percent. 36. However, at the same time, girl's age at marriage has gone up and women's political representation has increased as a result of reservation of seats for women in local bodies and Parliament. Elevation of women to key positions in the media has also brought gender issues to the public discourse. The latest household survey results also indicate that women, even the poorest ones, are increasingly aware of the importance of family planning and there is a large unmet demand for family planning services. 37. Millennium Development Goals (MDGs): Pakistan is unlikely to meet the MDGs (see Annex B1). While the country was on track to meet the poverty reduction goal, the recent economic crisis and its adverse impact on poverty may have jeopardized its achievement. III. KEY DEVELOPMENT CHALLENGES AND GOVERNMENT'S POVERTY REDUCTION STRATEGY A. Key Development Challenges 38. The analysis of Pakistan's recent development performance points to a number of critical challenges to meet going forward. 39. Weak revenue mobilization is the central challenge for addressing Pakistan's tight fiscal constraints. Pakistan's tax collection has failed to improve since the late 1990s, and is among the lowest in the world. The tax-to-GDP ratio recovered to 10.9 percent in 2006/07 but, due to the economic crisis, dropped to 10.2 percent in 2008/09. Problems in tax collection are related to administrative limitations and weaknesses in tax policy that have been unduly responsive to the needs of vested interests. Tax evasion is rampant and there is a vast network of special treatments and exemptions backed up by powerful vested interests. Nonetheless, progress has been made in improving the structure on energy taxes by converting the petroleum surcharge, the yield of which was impacted by developments in international markets and domestic political considerations, into a fixed petroleum levy. Also there has 12 been some progress in implementing reforms in the Federal Bureau of Revenue, although these have yet to result in increased tax revenue. Piecemeal changes in tax legislation have eroded the coherence of the tax structure with numerous preferences favoring certain sectors and economic activities over others. Finally, there are serious questions of equity: in a nation of about 160 million people, only 1.8 million file for income tax, and of about 17,000 enterprises, only 4,000 declare taxable income. 40. Improving the level, composition and efficiency of public expenditure is critical to achieving Pakistan's development objectives. While the lack of fiscal space (Table 7)--arising mainly from a low tax collection--severely constrains spending on core government functions, a large share of scarce resources is channeled into uses with limited economic or social returns. As a result compared to other countries, Pakistan spends relatively less on almost all key sectors of the economy. For example, expenditure on roads, energy, health and education account for only 14 percent of total spending in Pakistan, compared to the global average of twice that level. Improving the effectiveness of spending not only through better allocation of resources and a more careful choice of priorities but also through better implementation, more efficient delivery of services and plugging of leakages and waste is a key challenge. This will require increasing the capability and authority of public institutions, especially those concerned with economic and financial management and the delivery of public services. Table 7: Summary of Consolidated Fiscal Accounts 2004/05-2009/10 (% of GDP) 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Actual Actual Actual Actual P.Actual Proj. Total revenue and grants 14.1 14.8 15.2 14.9 14.3 14.9 Total revenue 13.8 14.2 14.9 14.6 14.1 14.4 Federal revenue 13.0 13.0 14.0 13.5 13.1 13.7 Tax revenue 9.6 10.1 9.8 10.2 9.8 10.1 Non-tax revenue 3.4 3.0 4.2 3 3.3 3.6 Provincial revenue 0.9 1.1 0.9 1.2 1.0 0.8 Grants 0.3 0.6 0.3 0.3 0.2 0.5 Total expenditure 18.4 18.7 20.2 22.2 19.1 19.5 Current expenditure 14.5 14.4 15.8 18.1 16.0 16.2 Federal expenditures 10.6 10.0 11.2 13.8 11.8 12.5 Interest payments 3.2 3.1 4.3 4.8 4.9 4.4 Defense 3.3 3.2 2.9 2.8 2.5 2.8 Subsidies 0.9 1.2 1.2 4.0 1.9 1.3 Others 3.2 2.5 2.9 2.3 2.5 4.0 Provincial Expenditures 3.9 4.4 4.6 4.3 4.2 3.7 Development Expenditure 3.9 4.3 4.4 4.1 3.1 3.4 Federal 2.5 2.5 2.3 2.0 1.6 2.1 Provincial 1.4 1.9 2.1 2.1 1.5 1.3 Deficit(excluding grants) -3.3 -4.3 -4.3 -7.6 -5.2 -5.1 Deficit(including grants) -3.0 -3.7 -4.0 -7.3 -5.0 -4.6 Financing 3.0 3.7 4.0 7.3 5.0 4.6 External(Net) 1.7 2.7 2.0 1.2 0.5 1.8 Domestic 1.3 1.0 2.0 6.1 4.5 2.7 Bank 1.1 0.8 1.2 5.1 2.7 1.1 Non-bank(incl. privatization receipts) 0.2 0.2 0.9 1.0 1.7 1.6 Memo items FBR revenue (percent of GDP) 9.2 9.4 9.7 9.8 8.8 9.2 Sources: Ministry of Finance, Government of Pakistan and IMF. 13 41. Shortages of reliable infrastructure represent a key constraint to sustained growth. Availability of electricity is currently considered to be the main constraint to economic activity. The sector faces a large gap between supply and demand leading to widespread load shedding and forcing many firms to invest in captive supply. One in every six firms identifies power as a major or severe obstacle to business while only 65 percent of households have access to electricity. Governance constraints are a key contributor to these outcomes and include (i) widespread theft of electricity amid weak enforcement and administrative systems to deter and punish such acts; (ii) weak corporate governance, pressure and accountability for performance by management in the sector: and (iii) investment decision-making marred by widespread perceptions of corruption. Beyond the power sector, the transportation network is aging and inefficient, imposing estimated costs of 4-6 percent of GDP on the economy and expected to face huge challenges in adapting to prospective shifts in demand if agricultural growth and diversification takes root. Inadequate and poorly managed urban infrastructure also represents a critical constraint to expansion of key growth centers and livability in the country's most rapidly growing population centers. Overall, Pakistan has immense investment and institutional reform needs in order to build an infrastructure platform capable of both sustaining and adapting to growth. 42. Conflict and insecurity represent major obstacles to economic development and poverty reduction and therefore dealing with the causes and consequences of conflict represents a critical challenge. The security situation in Pakistan is precarious, having deteriorated over the past four years, and imposes a large cost to society. The Government and donors recognize that the crisis has deep historical roots as well as links to the ongoing conflict in Afghanistan. The Federally Administered Tribal Areas--a focus of ongoing military operations--has long been administered under a colonial-era legal and governance framework based on tribal structures that leaves it outside of the regular constitutional framework. A patronage tradition has grown and fueled grievances that have been exploited by insurgent forces. Inadequate justice and the rule of law, critical components of the provision of public goods, are seen as integral dimensions of the crisis in FATA and KP. The ascendancy of militancy in Swat, for example, was directly linked to perceived degradation in the responsiveness of the justice system. 43. Addressing longstanding economic deprivation and social inequities among the population in the northwest frontier region is critical to dealing with conflict. FATA consistently ranks lowest in Pakistan across key sets of human development indicators, and KP follows not far behind. The region also hosts among the largest demographic segments of young men between the ages of 15 and 29 years while offering little in the way of employment and livelihood opportunities. Young men are particularly vulnerable to the economic incentives provided by militant groups. The widely reported monthly stipend for a ground-level recruit is between Rs. 15,000 and 20,000 (US$188 to US$251) far more than the Rs. 6,210 ($77) a month for a rare, well-paying unskilled job. Unemployment among young men ages 15 to 24 stands at 10.5 percent in KP (numbers are dramatically higher in tribal areas than in settled districts). In contrast, unemployment in Sindh province for the same demographic is at 4.1percent, and for the country as a whole the figure rests at 7.1percent. The adverse impacts of these disparities, in terms of their contribution to the nurturing of grievances and to militancy and insecurity, are increasingly felt beyond the northwest frontier region. 44. Providing employment for a young, growing and increasingly urbanized population is a major challenge for Pakistan. Approximately 29 percent of the 161 million population of Pakistan is in the age group of 15 to 24, and this is projected to increase by another 10 percent by 2020. 4 Exports of manufactured, labor intensive goods are one of Pakistan's main windows to income and employment generation for this work force, and thus for poverty reduction. However, the focus of industrial policy has remained on promoting import substitution and subsidizing exporting firms rather than improving productivity through competition and on developing competitive manufacturing export sector. Pakistan's share of world trade remains small at less than 1 percent and the share of trade in the economy has 4 National Institute of Population Studies (NIPS), Government of Pakistan, November 2006. 14 declined in the last few years to less than 31 percent of GDP in FY2009. Product diversification of exports remains limited; textiles and garments account for 70 percent and ten other sectors for 22.5 percent of total exports. Thirty-two individual products, more than half of which are in the textiles and garments sectors, are the principal export drivers. 45. Modest progress was made during the previous CAS period but Pakistan's human development indicators continue to lag behind those of the region. At all levels, participation rates remain the lowest in the South Asia region. Progress has been more encouraging in increasing education enrolments, but quality and retention rates (especially for girls) remain a concern. In addition, there is slow progress in improving health outcomes including child, infant and maternal mortality, and in enhancing the provision of reproductive health services. Under-five mortality remains the highest among the large South Asian countries as does the fertility rate (Pakistan's Total Fertility Rate (TFR) is 4.1 compared to 2.9 in India and Bangladesh). Chronic child malnutrition is very high at around 40percent. Significant gender and rural/urban disparities persist. And the MDGs are unlikely to be met. 46. These poor human development outcomes are a function of both inadequate investment and ineffective use of available resources. Public expenditure on health and education remain low by international standards while weaknesses in public service delivery limit the effectiveness of spending. Recent health facility surveys in Baluchistan and Sindh indicate that many health workers are not showing up regularly to work. In Balochistan, the absentee rate for all staff was 50 percent, while for doctors it was 58 percent and for female paramedics, 63 percent. The available evaluation evidence indicates that the efficiency of public expenditure in education is relatively low and learning outcomes in the state sector fall well short of that in the private sector. 47. In parallel, to protect the poor during economic adjustment, government's social safety net system needs strengthening. Even though Pakistan has had a myriad of safety net programs targeted primarily at the chronic poor, ranging from (unconditional) cash transfers to social care services and microfinance programs, they have had little impact on poverty and vulnerability. Programs have been fragmented and often duplicative, with limited coverage and poor targeting. To strengthen the safety net systems and increase coverage, the government launched the Benazir Income Support Program (BISP) in September 2008, with the objective of providing cash grants to the poorest families in the country identified on the basis of a robust targeting methodology. The program intends to cover the 5 million poorest families in 2009/10, and expand the coverage to 7 million families in 2010/11, prospectively covering close to 25 percent of the population. As such, BISP is by far the largest social safety net program in Pakistan and could become the core safety net in the country. 48. Ultimately, governance challenges lie at the heart of most of Pakistan's economic development priorities. The achievement of Pakistan's development objectives depends on improved governance of the public sector ­ greater transparency and accountability, strengthened legal and regulatory frameworks especially for private sector activity, improved responsiveness, and a better interface with citizens. Improvements in the delivery of education, gains in the coverage of social protection programs and increased access to health care all require that the state performs its functions more effectively and efficiently at federal and at provincial levels. Similarly, overcoming some of the binding constraints to economic growth such as infrastructure constraints depends in large part on Pakistan's ability to effectively plan, prioritize and execute policy. These constraints have become more profound as the country has faced a range of economic and security shocks. There is no shortage of good policies, laws and regulations in Pakistan but, owing to institutional weaknesses, the implementation of these policies and enforcement of laws has often been weak. As a result, consistent and sustained implementation of economic policies and reforms has eluded Pakistan. 49. A range of survey evidence confirms Pakistan's governance challenges. The Worldwide Governance Indicators suggest that Pakistan is at or below the 25th percentile on key dimensions of 15 governance, and significantly below the South Asia averages with the exception of regulatory quality. A recent Investment Climate Survey indicates that governance constraints are critical to the overall business environment. Despite improvements in the business--governance interface, firms' perception of corruption and crime have worsened; between 2002 and 2007, the percent of firms citing corruption as a major constraint to doing business rose from 40 to 57 percent. Overall, almost half of all Pakistani firms reported at least one incident of bribery. B. Government's Poverty Reduction Strategy 50. PRSP-II: The current T able 8: PR SP-I I Pillar s and A r eas administration finalized the second PRSP (PRSP-II) in January 2009. PRSP-II Pillar Sectors/Areas under Each Pillar PRSP-II reflects the Nine Point Plan of 1 Macroeconomic Stability and · Macroeconomic stability Real Sector Growth the Prime Minister and is fully aligned with the MDGs and covers fiscal years 2 Protecting the Poor and the · Social protection Vulnerable 2008/09-2010/11. It focuses on 3 Increasing Productivity and · Agriculture and agribusiness regaining macroeconomic stability after Value Addition in Agriculture the economic crisis and on structural 4 Integrated Energy · Energy Development Program reforms required to support the · Environment recovery of strong and sustainable 5 Making Industry · Product and factor markets Internationally Competitive growth. The overall vision of PRSP-II · Market governance is to steer Pakistan's economic growth · Trade Policy back in the range of 5-7 percent per 6 Human Development for the · Education 21st Century annum by stimulating growth prospects · Health in the production sector; creating · Drinking water, sanitation and adequate employment opportunities; solid waste management improving income distribution; and · Population program harnessing the country's economic · Gender and female competitiveness through economic empowerment liberalization, deregulation and 7 Removing Infrastructure · Water for irrigation Bottlenecks through Public transparent privatization. The strategy Private Partnerships (PPPs) · Transportation (roads, trucking, envisions an economy with competitive ports, railways, aviation) enterprises, productive employment · Housing and asset titles opportunities, transparent governance 8 Capital and Finance for · Bank financing Development and low poverty. PRSP-II is · Non-bank financing comprehensive with nine pillars, 9 Governance for a Just and Fair · Decentralization System ranging from macroeconomic stability · Judicial system and real sector growth to social · Corruption protection and governance. Table 8 · Tax administration below highlights the PRSP-II pillars · Public financial management and sectors/areas covered under each. · Civil service reform · PPPs 51. The strategy recognizes that to steer Pakistan back on a path of broad-based growth, create jobs, and reduce poverty, a prolonged period of macroeconomic stability, financial discipline and sound policies is required. Government's strategy aims to create adequate employment opportunities, and to improve income distribution and competitiveness through economic liberalization, deregulation and transparent privatization. To mitigate poverty, it aspires for pro-poor growth, with more emphasis than under the previous strategy on agriculture and manufacturing, as well as on services. It also seeks to strengthen the social safety net to protect the poor and vulnerable. The strategy also recognizes that gender disparities represent a critical constraint to achieving Pakistan's development objectives and reaffirms Pakistan's commitment to implementation of the Convention on Elimination of all forms of Discrimination Against Women 16 (CEDAW). The strategy to address gender inequality features measures to increase women's access to services and opportunities in the short term along with a range of reforms to increase political, economic social and legal empowerment of women. 52. While PRSP-II provides a comprehensive framework for Pakistan's efforts to stabilize the economy and bring it back to a higher growth path, it also has several limitations. Progress in critical areas for poverty reduction will require greater harmonization with provincial activities. While the strategy refers to provincial initiatives and programs, in particular in the areas of health and education where provinces bear most of the burden of service delivery, it is not systematically coordinated with provincial strategies and plans, or the coordination mechanism is not clearly spelled out. 53. PRSP-II advocates a productivity-based export strategy. However, by focusing on specific product groups, the export strategy may invite introduction of distortions rather than a level playing field for all product groups and for firms of all sizes, especially if there are no effective criteria for choosing potential beneficiaries and the nature and duration of incentives provided to them. In this context, an important area of focus would be policy and program actions in areas which are seen as barriers to entry and growth, such as land markets, creditor right enforcement, an improved judiciary and strengthened competition policy. 54. Perhaps the major concern with PRSP-II is its very ambitious thematic and sectoral scope relative to the institutional capacity to implement it over its stipulated timeframe. The PRSP-II recognizes the limitations in the public sector's governance and institutional capacity for its implementation but proposes a limited reform agenda to strengthen these areas. The strategy explains why public financial management, civil service reform, tax administration, and judicial and public procurement reform are all good things to pursue, but in some cases--for example, in the case of public procurement and judicial and civil service reform--little is said about what is proposed for the coming years, how this will be attained and the extent to which progress (or lack thereof) in these areas will advance the execution of the overall PRSP. 55. The concerns about execution of the strategy have received added impetus in recent months in the wake of the recent NFC Awards (para. 19) and its changes in the distribution of fiscal resources between the federal and provincial governments. Government now envisages that there will need to be major strategic shifts in the role and responsibilities of the civil service, public enterprises and other public agencies and major enhancements in their capacity and effectiveness in order to ensure that service delivery, financial and development goals are achieved. The government plans to further revise the PRSP to reflect these expected strategic shifts. IV. PROPOSED WORLD BANK GROUP STRATEGY, FY2010-2013 A. Lessons Learned from the Past 56. The FY06-09 CAS envisioned a significant increase in the volume of Bank financing for Pakistan with an overall IBRD/IDA lending envelope of up to $6.5 billion ($3.1 billion of IDA and $3.4 billion of IBRD) under a high case scenario characterized by strong performance and improving creditworthiness. With the onset of the political, economic and security crises, this scenario could not be realized; Bank lending for the CAS period totaled $4.6 billion ($4 billion IDA and $0.6 billion IBRD) with IDA exceeding the planned amount due to the higher IDA15 resource envelope. IBRD lending fell short as macroeconomic deterioration led to a decline in creditworthiness and a suspension in IBRD lending in late FY08 in line with the low case scenario outlined in the CAS. IFC, in contrast, was able to commit investment financing of approximately $960 million, exceeding the CAS target of $500-600 million. 57. The CAS Completion Report (Annex II) presents an assessment of the previous Bank strategy and points out that the previous CAS was implemented during a particularly volatile time in Pakistan, 17 which partly explains its limited impact. Owing to political turmoil and deteriorating security, many of the gains in growth and poverty reduction were reversed. There were mixed achievements in strengthening governance: while in-roads were made in public financial management and community-led development, governance issues remained largely unaddressed due to lack of political will. At the same time, the Bank's response to the 2005 earthquake was deemed excellent, efforts through the Pakistan Poverty Alleviation Fund were strong, and there were solid achievements in education. 58. Drawing on the findings of the CAS Completion Report as well as the 2005 Country Assistance Evaluation, the CPS reflects seven key lessons of experience from the Bank's engagement in Pakistan: · Flexibility is essential. The FY06-09 CAS could not foresee the degree of political upheaval and deteriorating security environment experienced in Pakistan over the past three years. Nevertheless, the Bank was able to reorient the country program, both in terms of focus (e.g., increased attention to social protection) and instruments (reducing the reliance on policy-based sector lending) in order to help the Government to weather the immediate crisis and begin to build the foundations for renewed growth while strengthening the emphasis on the achievement of results as the basis for the Bank's support. · The Bank needs to focus more on the longstanding structural problems that contributed to the rapid erosion in growth and stability while being realistic about the difficulty in addressing them. Efforts to address these problems, including measures to increase tax revenue collection, contain government spending and to reduce the anti-export bias in economic policy were underway during the last CAS period, but these either proved to be short lived or impossible to follow through on in the prevailing political climate. As a result, the strong growth performance at the time of CAS preparation could not be sustained. Strengthening the institutional foundation to support sustained implementation of reforms is clearly an essential element in reducing the likelihood of a repeat of the policy reversals that have been characteristic of the past. But, it is not enough. In particular, the political economy context is crucial in determining what institutional reforms are viable and sustainable and the Bank needs to make clear judgments as to the scope and structure of its support given its assessment of this context. In some cases, this assessment might well lead to the Bank not engaging in certain areas where the pay-off to our involvement is particularly uncertain. · Once it decides that there are sound grounds for its involvement and support, the Bank needs to be less ambitious and more realistic about the likely pace of institutional reform and capacity building in Pakistan. Reforming institutions and bringing about systemic change (e.g., civil service reform, reforming the Federal Bureau of Revenue, improving land records administration, and strengthening the performance of public sector institutions) almost without exception proceeded more slowly than anticipated in the CAS or project documents. The legacy of decades of state neglect to address crucial reforms and the influence of entrenched interests are difficult to overcome, requiring sustained engagement over a long period. · Timely and reliable monitoring and evaluation is critical to achieving results. Strong monitoring to measure how programs are delivering and to track results is critical for measuring performance and implementation, and refining interventions through better informed decision making. To ensure the quality of data, results should be validated through independent means including third-party surveys and social accountability mechanisms. Monitoring at the level of the overall country program is needed as well as at the level of individual operations in order to support a dialogue with the client on the need for adjustments in the direction of the overall country program. · Program delivery targets need to be realistic. The upper end of the proposed program under the FY06-FY09 CAS represented a nearly three-fold increase in lending for Pakistan. In light of the uncertainties and implementation constraints, this was extremely ambitious. The proposed CPS 18 therefore outlines a more modest priority IBRD/IDA lending program of approximately $3.7 billion while also identifying a potential lending envelope of up to $6.0 billion. This approach is intended to provide a selective focus in key areas while leaving open the possibility of doing more should conditions permit. · Programmatic investment operations can provide multi-year support for reforms while addressing implementation capacity constraints. The previous CAS included substantial sectoral policy-based lending. While development policy lending proved effective in bringing about the adoption of significant policies and reforms programs greater attention was needed to capacity building and implementation support. Responding to this need, the CPS program reflects a shift toward greater use of programmatic investment operations that include technical assistance and institutional support interventions to improve planning, management, governance arrangements and monitoring capacity. · Given Pakistan unique development and geopolitical challenges, enhanced partnership arrangements are critical. A number of development partners have scaled up assistance to Pakistan over the past several years. Donors and government are seeking coordinated financing mechanisms and enhanced policy and strategic dialogue in order to increase aid effectiveness and reduce the strain on government capacity. Greater use of instruments like SWAPs and use of the MDTF will therefore be a feature of the proposed CPS. Facilitating communication and the development of shared results frameworks will also be an increasing focus, both in the context of the overall aid effectiveness dialogue and in the context of MDTF-supported activities in the border areas. B. Feedback from Consultations 59. Multi-stakeholder consultations on the priorities for the CPS were conducted in July 2009 and January 2010 in Pakistan. A wide variety of stakeholders within federal and provincial governments, private sector, academia, think tanks, civil society organizations, and other development partners were interviewed. Feedback on priorities was remarkably consistent across all these groups. 60. All consulted groups viewed improving governance to be a priority. Weak or corrupt management rather than lack of resources was considered to be the main constraint to improved service delivery. Similarly, given frequent load-shedding, increasing the availability of energy was viewed as essential, with significant interest in alternative forms of energy to help mitigate costs and ensure reliability of supplies. Agriculture was seen as critical for restoring and sustaining inclusive growth, and the groups consulted recommended that the Bank move beyond irrigation to support measures to enhance yields and efficient use of inputs. Finally, the promotion of public-private partnerships, notably in the delivery of basic services such as education, was suggested as a means to address some governance concerns. C. Strategic Priorities for Bank Group Support: The CPS Pillars 61. Drawing on the analysis of the challenges Pakistan faces, and the lessons that the Bank has learned in supporting Pakistan in recent years, the CPS is centered on four pillars: (i) improving economic governance; (ii) accelerating delivery of human development and social protection services; (iii) improving infrastructure to support growth; and (iv) improving security and reducing the risk of conflict. The clusters of outcomes to be supported under each of the CPS' pillars are summarized in Table 9. 62. With respect to seeking to support Pakistan to improve economic governance the CPS program will focus on measures to enhance Pakistan's resilience to shocks that undermine its capacity to deliver basic services, improve social indicators and promote essential public and private investment in infrastructure. Pakistan has been subject to a variety of shocks ranging from weather, seismic and flood 19 events, international energy resource price changes, geopolitically-conditioned flows of external assistance, to domestic political turmoil. Supporting the creation of institutions and mechanisms to smoothly and effectively manage or absorb such shocks and their impacts in the future will be central to the Bank Group's efforts. Table 9: CPS Pillars and Outcome Areas Improving Economic Governance · Improve Macroeconomic Management · Strengthen Tax Policy and Administration: · Strengthen Public Expenditure, Financial and Procurement Management: · Enhance Capacity and Accountability in Public Sector Management · Strengthen Governance of Markets Improving Human Development and Social Protection · Improve Equitable Access to Quality Education · Reduce Vulnerability Through Effective Safety Nets · Enhance Rural Livelihoods · Enhance Delivery of Health, Nutrition and Population Services · Improve Disaster Risk Management Improving Infrastructure to Support Growth · Expand Power Provision and Increased Efficiency and Reliability in Energy Supply · Improve Efficiency and Reliability of the Transport and Logistics Network · Strengthen Irrigation Infrastructure and Agricultural Competitiveness · Improve Urban/Municipal Infrastructure and Services: · Environmental Sustainability for Better Health Outcomes and Improved Competitiveness Improving Security and Reducing the Risk of Conflict · Increased Employment and Livelihood Opportunities in Conflict-Affected Areas · Increased Responsiveness and Effectiveness of the State 63. In supporting Pakistan to enhance human development outcomes, the CPS will focus on consolidating and extending the efforts started in the last year of the previous CAS to reorient our engagement in the education sector to focus explicitly on the achievement of results and to reinforce the mutual accountability for results under our partnership. Specifically, we would continue the shift in our engagement across the human development sectors to one that conditions timely and predictable Bank support and disbursements on achievement of agreed results on the ground based on clearly specified and agreed upon results frameworks. 64. The support for infrastructure under this CPS represents a re-engagement in a significant and direct way in this sector by the Bank after a very limited presence under the two previous CASs. The focus of our renewed engagement will be on helping Government to sustainably expand the availability and reliability of electricity supplies. Infrastructure investments will be crucial to both addressing the major constraints to economic output in the short to medium term and, given the opportunities for regional collaboration in infrastructure investment and provision, to enabling Pakistan to start building ties to regional markets. This will be closely linked with assistance to help further develop a competitive private sector in Pakistan. In particular, building on the substantial increase in IFC investments during the previous CAS period, the Bank Group will increasingly seek to mobilize private sector players through public private partnerships and market development approaches. 65. Under the conflict pillar, the Bank will support Government to implement its strategy to promote broader and deeper development in the conflict-affected areas of Pakistan and enhance the presence and 20 responsiveness of the state to citizens in these areas. This strategy will build on the Post-Crisis Needs Assessment (PCNA) currently being prepared in close collaboration with the ADB, the European Union and the UN at the request of the Government. The PCNA will provide a strategic framework that identifies priority areas for interventions to promote peace and prevent a relapse into conflict. The framework will have as its foundation detailed analyses of the causes and drivers of conflicts based on input from a variety of sources: extensive consultations with and perception surveys of the directly affected populations and other stakeholders in FATA and KP, available analyses of the historical, political, economic and ideological genesis of the conflict in the area, and lessons from conflicts in other societies. This framework will also serve as a conflict filter for the Bank for the activities that it will support in conflict-affected areas through both its own programs and budgetary and lending resources and through other programs supported by trust funds under its administration. 66. The strategy will prioritize Bank support as follows: First, we will give special focus to the achievement of those outcomes that have the potential to be truly transformational. These outcomes are deemed to be pivotal to the sustained achievement of most of the rest of PRSP-II objectives and CPS outcomes and will be the areas where the Bank Group will concentrate much of its efforts. Pakistan cannot effectively build the foundation to make headway on exploiting its strategic advantages and endowments in the medium to long-term without successfully addressing these very basic issues. In each of these "transformational" areas, the Bank will mobilize all of its instruments ­ including AAA, lending, and Trust Funds ­ to help Pakistan achieve its development objectives. These transformational outcomes are: · Strengthening Tax Policy and Administration: raising the ratio of tax to GDP (currently only 10.2 percent of GDP) is absolutely essential if Pakistan is to have the resources to invest in human development and infrastructure, and if it is to build resilience to future shocks and guard against costly and disruptive growth reversals. · Expanding Power Provision: reforming the power sector and ensuring sustainable expansion of supply is absolutely essential if industrial and service activity is to be increased and productivity raised. · Addressing Security: coping with the consequence of conflict while reducing the prospects of future conflict is essential for social cohesion, stability and long term growth both in the directly affected and vulnerable communities but also in the rest of the country. This is a highly complex area, and the Bank's competence and knowledge is evolving but limited. We will, however, make this a major thrust of our work, giving emphasis to service provision and job creation in highly vulnerable areas, (and drawing upon emerging analyses from the WDR and from work in Pakistan). 67. Second, in addition to these "transformational musts" the strategy identifies a core program of support to improve educational and health outcomes, strengthen the potential for increased and more productive labor force participation, reinforce safety net systems and enhance the earning capacity of the poor and vulnerable. These objectives relate directly to key elements of the MDGs and related social outcomes and indicators. The core program also includes selected investments in ports, water management and financial management to facilitate growth and strengthened public sector governance. 68. These two program areas comprise the priority lending program to be financed during the CPS. The outcomes and outputs associated with the priority program are described in the results framework at Annex 1 and summarized in Table 10 below. The selected outputs are defined by a number of characteristics. They represent outputs where Government has demonstrated interest, commitment and capacity in implementing or utilizing support, including making progress in putting enabling policy and institutional frameworks in place. They are also areas where the Bank has developed knowledge and 21 experience of the risks of implementation and results and has the capacity to effectively support Government. Finally, they represent programs that can be fully and adequately prepared for implementation during the CPS period. Table 10: Pakistan Country Partnership Strategy: Priority Lending Program Summary CPS Pillars Transformational High Core Priority Program Contingent Program Priority Program · PRSC 1 · Financial Reporting and Provincial Fiscal Mgt Improving Economic · PRSC 2 Auditing II Governance · PRSC 3 · Social Safety Net DPC · Higher Education DPC · Tertiary Education · Sindh Education Sector II · Gilgit Baltistan Education Improving Human · Punjab Education Sector II Development and Social Protection · Safety Net ­ Graduation Support · Balochistan Education · Enhanced Nutrition for Mothers and Children Project · HIV/AIDS II · Tarbela IV Hydropower · Punjab Barrages II · Punjab Large Cities APL Extension · Karachi Port Improvement · Power Sector Guarantee · Gas Enhancement & Operations Efficiency Improvement · Dasu Hydropower project Improving Infrastructure · Central/South Asia · Sindh Barrage to Support Growth Regional Electricity Rehabilitation Transmission · Electricity Transmission and Distribution APL II · KP Emergency Recovery Improving Security and Credit Reducing the Risk of · MDTF for Northwest Conflict Border Region 69. Admittedly, the transformational high priority program presents particularly difficult and longstanding challenges. The Bank has been extending support to Pakistan to address tax revenue mobilization and fiscal space issues as well as energy sector performance and regulatory challenges for the past two decades with only limited success in helping Pakistan to overcome deep political economy challenges, create effective and viable institutions and show durable results. Recognizing that these problems are not necessarily amenable to short-term solutions, the Bank has committed itself to these issues over the long term, and will work strongly in partnership with others. With respect to the core program, the Bank is on more solid footing, with a track record of innovation and some measure of success in scaling obstacles to achieving sustained and increasing results, notably in education and safety nets in recent years. 70. Finally, the CPS envisages the potential for the program to expand beyond this priority program to address key challenges which do not meet all of the selectivity criteria above but where the Bank would like to support the government to lay the basis successfully addressing significant challenges. Such challenges include fostering livability and economic growth and dynamism within Pakistan's cities, supporting provincial authorities to enhance own-revenue mobilization and ensure effective public expenditures, and attracting private sector financing to large scale infrastructure investments. The CPS will support such activities where the individual programs are ready and the prospects for success and results are strong. We will also link expansion of the overall lending program beyond the priority program to progress being made against the objectives of the transformational activities. The Bank would 22 not seek to expand the scope of its program of support if the government is not making sufficient progress on resolving electricity supply issues and on tax revenue mobilization. 71. The priority lending program amounts to an estimated $3.7 billion (IBRD/IDA), equivalent to about 60 percent of a total potential financing envelope of up to $6.2 billion (including MDTF financing) during the CPS period. The priority program is summarized in Table 11 below. Table 11: FY10-12 Priority Financing Program by CPS Pillars 1 Pillar/Sector $US M Pillar I: Improving Economic Governance PRSC/Public Financial Management 924 Pillar II: Improving Human Development and Social Protection Safety Nets 300 Education 1,115 Health/Nutrition 87 Pillar III: Improving Infrastructure to Support Growth Energy 850 Water/Ports 275 Pillar IV: Improving Security and Reducing the Risk of Conflict KP Emergency Recovery Credit/MDTF 100 Total 3,651 1/ IBRD/IDA only; excludes $150m estimated MDTF Financing. 72. We have also identified subsectors and thematic areas where the Bank will not lend under the CPS and will only maintain a very limited engagement, if any. In the energy sector, the Bank will concentrate its support on helping Pakistan exploit its considerable hydropower potential, improve the efficiency of utilization of developed hydropower capacity and natural gas resources and reduce leakages and losses of both energy resources and electricity. Given our limited resources and capacity and this commitment, the Bank will not engage in coal. 73. On governance, specifically in the areas of civil service and judicial reforms, other partners have a substantial depth of knowledge and capacity and, in some cases, a significant track record of engagement in Pakistan. The Bank will not duplicate the capacity and efforts of such partners in Pakistan and will not be actively engaged in these areas under the CPS. 74. A number of development partners are active in the health sector, both at the center and in the provinces and are providing active partnership and leadership on the health agenda. The Bank has recently completed a review of the sector and is actively engaged as a knowledge partner of the government in health insurance and financing in the context of our work on strengthening safety nets and disseminating global and regional practices in the field. In partnership with UNAIDS and other development partners, we have been active in supporting the efforts of the Federal and Provincial governments on HIV/AIDS. We have also started preparation of a potentially catalytic project addressing chronic nutritional deficiencies amongst mothers and children. We will continue in this limited role of advocacy, very selective and catalytic lending and knowledge sharing and partnership in key areas in the sector. 75. In agriculture, the Bank envisages playing a major role during the CPS period only in providing analytical support to government and the development partners to formulate strategies and policies to 23 increase value-added in the sector. We may extend this role to supporting the government to develop program platforms that may serve as vehicles for other development partners to provide financing to the sector, subject to demand from government and development partners. 76. The Bank has had a long, productive engagement in the telecoms sector focusing on helping the government to formulate and implement reforms. These reforms led to a large inflow of foreign investment in the sector and dramatic improvements in sector performance. The sector looks to its own resources and to the market for financing and advisory services and the Bank has no compelling role in the sector given other pressing demands on our resources. 77. There are sectors, like highways, where risks are such that the Bank Group will choose not to engage pending significant improvement in institutional governance or strong measures being taken by Government to mitigate risks, including fraud and corruption risks. The case for Bank financing of cost overruns under an ongoing highways rehabilitation project is currently under review. Other than the possible financing of this case, if justified, the Bank will not engage in the highway sector during this CPS period. Other partners are already substantially engaged in this subsector. 78. On Public Private Partnerships, the Bank and IFC will work closely together to pursue economically and financially attractive opportunities that are consistent with both our strategic emphasis in promoting investments in power and transport. The Bank will support such activities through its guarantee instrument (focusing its role on sector governance and regulatory issues) while relying on IFC to provide leadership and expertise in assessing the appropriateness, financial viability and the adequacy of the risk allocation features of specific proposals. 79. The Bank Group engagement will reflect the need for flexibility. The support of the Bank under the proposed CPS is structured to be flexible in the face of considerable uncertainty and to ensure that its level is closely tied to evolving evidence of its likely effectiveness. Despite the recent promising developments on many fronts, the operating environment in Pakistan is likely to continue to be uncertain during the CPS period, reflecting three key factors: insecurity, especially in the western border areas of FATA and KP; domestic political conditions; and macroeconomic or sectoral conditions. Overall Bank lending and IFC investment over the CPS period will depend crucially on macroeconomic and sector policy performance, political and security conditions, and investment climate ­ all of which underpin the viability and sustainability of the Bank Group's program under the CPS. Slippages in macroeconomic performance may undermine the basis for the Bank Group's engagement for budget support operations, impair access to IBRD resources and affect the viability of some of our sector programs. Similarly, our investment lending operations require the effective implementation of key sector policies. The design of the CPS provides strong inbuilt mitigation to some performance risks to which the Bank program is exposed by linking our support in most of the programs either to achieved agreed results or completed key prior actions. Our support is designed to be scaleable, upwards or downwards, depending on program performance. Political and macroeconomic instability will also limit the growth in IFC's investment program. In such eventuality, IFC will put greater emphasis on portfolio management and short-term self-liquidating trade finance investments. Pillar 1: Improving Economic Governance 80. Strengthened Tax Policy and Administration. Enhancing domestic revenue mobilization will be an urgent priority during the CPS period. To address chronic underfunding of key services (see table 6) and avoid episodic crises, tax revenue needs to be substantially increased. Otherwise, targeted improvements in social indicators and physical infrastructure will remain unaffordable. So far, progress has been elusive; instead of increasing, the overall tax to GDP ratio has declined in the past couple of years. Also, while there has been some improvement in the organization and management of the Federal Bureau of Revenue (FBR), more progress is needed, especially in improving compliance. The authorities have an ambitious target for increasing the tax to GDP ratio, and will need to adopt significant changes in 24 tax policy to widen the tax net, while strengthening tax compliance through improvements in tax administration. The government's strategy for increasing tax revenue combines tax policy and tax administration reforms. On tax policy, the main driver will be implementation of a broad-based VAT beginning in FY11. On tax administration, the Government will continue to pursue a shift from a "type- of-tax" organizational structure to a functionally integrated tax administration. In a type-of-tax structure, each tax--sales tax, income tax, excise tax, and customs duties--has its own administration. Taxpayers face a confusing array of different rules, processes and procedures to obtain tax registration, file returns, make payments, manage audits, and file appeals. This creates an unnecessary duplication of services that should be common across all tax types. More importantly, by increasing the number of points of contact between tax collectors and taxpayers and multiplying rules across different taxes, a type-of-tax structure opens greater opportunities for discretion in the application of tax laws, and hence, corruption. 81. In the past couple of years, the World Bank has put increasing emphasis on tax policy and administration reforms, and increased assistance to these areas through analytical and non-lending technical assistance supported by the UK Department for International Development (DFID). The ongoing Tax Administration Reform Project (TARP) has been supplemented by an intensive technical assistance effort at the federal level. In parallel, a comprehensive study of Pakistan's tax system, structure and policies was carried out to identify weaknesses and options for tax policy reform, and technical assistance provided to support introduction of a VAT. This support will be further intensified during the upcoming CPS period. Given Government's renewed commitment to tax administration reform and the enhanced urgency of increasing tax revenues due to the economic crisis, TARP (which was originally scheduled to close in December 2009) has been extended by two years, and the federal level technical assistance program will be continued. To start tapping the significant untapped revenue potential at the provincial level, analysis of provincial revenue mobilization is proposed to be carried out and, provided provincial governments are willing to address identified weaknesses, we will follow that with a provincial lending operation to strengthen provincial tax administration and policies. Further, in view of declining customs duties and reported leakages, an assessment of customs policies and procedures is proposed to be carried out and, as required, technical assistance mobilized to strengthen customs administration. 82. Improved Macroeconomic Management. Macro instability in Pakistan stems partly from shortcomings of economic management. The fact that, despite years of implementing economic reforms, Pakistan's economic management was unable to withstand the pressures emerging from a changed political situation in the country and a worsening international economic environment reflects the fragility of economic institutions in the country. Addressing the shortcomings of Pakistan's economic management is critical not only for restoring macroeconomic stability but also for reducing the likelihood of reversals leading to another cycle of growth giving way to stagnation. 83. A new series of Poverty Reduction Support Credits (PRSC) is proposed to be the Bank's primary lending instrument to support strengthening of macroeconomic management at the federal level. This will complement continued strong partnership with the ADB and, in particular, the IMF with PRSCs reinforcing key elements of the Stand-By Arrangement, including reforms in tax administration and energy pricing. PRSCs will also support other crosscutting and sector-specific issues and will serve as a platform for other donors (e.g., Japan) to provide parallel financing in support of critical reforms. A Country Economic Memorandum will be prepared early in the CPS period to inform the medium-term reform process. Also, the work on monitoring the poverty trends and determinants will continue. The PRSC will be complemented by a series of analytical and non-lending technical assistance to strengthen economic management in various areas as highlighted below, to inform and guide the reform process. 84. Strengthened Public Expenditure, Financial and Procurement Management: Public expenditure management at all levels of government will continue to be a focus. Currently, development programs and projects are approved without adequate consideration of their fiscal impact, while efficiency and effectiveness of public expenditure are low. At the same time, the government lacks 25 efficient cash management. There is no comprehensive cash management framework with a Treasury Single Account (TSA) and weekly cash flow forecasting. As a result public sector entities have accumulated significant idle cash balances outside the Treasury system at the same time as borrowing requirements have continued to increase significantly. In addition, there is weak oversight of fiscal risks related to public and state-owned enterprises. Further, the regulatory environment governing public procurement remains incomplete, and there is lack of monitoring and grievance handling system. 85. There have been some improvements. For example, through the Second Project for Improvement of Financial Reporting and Auditing (PIFRA II) good progress has been made in improving public financial management, including the roll-out of the new government-wide Chart of Accounts consistent with international standards for budgeting, accounting, and financial reporting; improved timeliness in the rendering of accounts for audit and the completion of the audit processes using improved risk-based audit practices that conform to international standards; adoption of international public sector accounting standards; and enhanced disclosure in financial reports. Also, the government is in the process of shifting to a medium-term budgeting framework. 86. During the CPS period, the Bank will seek opportunities, primarily through AAA and Technical Assistance to assist the government to improve management of development spending, and support the move away from single-year budgeting to a medium term budget framework. Government recognizes that the project planning, expenditure, and evaluation processes managed by the Planning Commission need strengthening. The Bank will continue supporting the transition to a Treasury Single Account (TSA) system with a comprehensive cash management framework. In parallel, the Bank is proposing to conduct Public Expenditure Reviews in the two largest provinces, provided they concur, to identify the gaps and options for reform. Further analytical work is planned in public financial management, including public financial accountability assessments covering at least two provincial governments. PIFRA II is scheduled to close in December 2010. However, further support through additional financing, to sustain reforms is planned. The Bank will also continue working towards improving public procurement at federal and provincial levels through improvement of procurement regulations and procedures, development of procurement institutions, and institutionalizing third party procurement monitoring with independent grievance mechanisms. In addition to analytical work, much of the work on procurement is proposed to be done in the context of sectoral lending operations. 87. Strengthened Competitiveness and Governance of Markets. Global competitiveness indicators rank Pakistan in the bottom quartile of the world even prior to the recent economic and political instability. While power is considered to be the main constraint to business at present, there are governance related barriers to competition including labor market rigidities, firm barriers to entry and overwhelming complications to exit. Key weaknesses in market governance and policy include: (i) weak governance and oversight of corporate firms; (ii) an insolvency regime that is fragmented and has key gaps in its provisions; (iii) factor markets that lack flexibility; (iv) high entry costs into business that fosters a high level of informality; (iv) an incoherent trade policy framework with considerable distortions; and (v) an export promotion framework that is ineffective, costly and fails to reduce the anti- export bias in the system. Addressing these issues through support for improvements in the legal and policy framework for outward oriented growth will be a goal of the Bank's policy dialogue and will be supported with analytical work as well as through our PRSC engagement, where appropriate. 88. Priorities for the financial sector are three-fold: further deepening of the financial sector, strengthening financial infrastructure and increasing access. Through AAA and policy dialogue the Bank will support increased efficiency, competition and broadening of financial markets through restructuring and resolution/ privatization of the remaining and more importantly loss making public sector banks, DFIs and specialized banks. Building on earlier technical assistance we will also support improving financial infrastructure including payment systems, credit information and banking laws to strengthen and enhance stability and efficiency of financial transactions. With respect to Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), the GoP has taken important steps, on the legal and 26 regulatory front (adoption by Parliament of an AML law, issuance of AML/CFT regulations by the financial sector supervisors) as well as in terms of implementation (notably by the strengthening of the financial intelligence unit). The Bank plans to maintain a policy dialogue with the authorities on AML/CFT issues, and to provide technical assistance to the authorities in close coordination with partners. 89. Access to finance is a major constraint impeding private sector development in Pakistan. Recent data indicate that Pakistan's microfinance penetration is among the lowest in Asia at 1 percent, while 93 percent of SMEs lack access to finance. The CPS will seek opportunities to build the financial infrastructure platform necessary to support financial institutions in building their capacity and incentives to increase financial outreach to micro, small and medium enterprises (MSME), as well as poor households, women, and micro enterprises and also expand the housing finance market. IFC's strategy in Pakistan is to increase access to finance for underserved groups, especially MSME clients. IFC's support to Pakistan's financial sector include the following areas: (i) wholesaling through financial intermediaries to support agribusiness, health, education and infrastructure; (ii) providing support for international trade through trade finance facilities; (iii) equity investments in banks involved in SME financing; (iv) investments in insurance and sustainable finance; and (iv) Advisory Services support in the areas of SME and housing finance, credit bureau, capital markets development, corporate governance, business and management skills training, and Alternative Dispute Resolution. IFC has also established an Alternate Dispute Resolution Center (ADR) in Karachi and is currently in the process of establishing one in Lahore to be followed by Peshawar. The scope of ADRs is to provide alternate legal recourse to SMEs and women. In the area of financial markets and work relating to Doing Business/Investment Climate improvements, both IFC and World Bank teams will collaborate closely to capitalize on synergies and each institution's comparative advantage. Pillar 2: Improving Human Development and Social Protection 90. Improving Pakistan's relatively weak human development indicators represents one of Pakistan's longstanding challenges and the PRSP II envisages major investment in strengthening the human resource base. The Government recognizes that its goals for growth and poverty reduction cannot be met without a healthy, skilled and competent workforce that can respond to the demands of a growing economy. Improvement in human development, including social protection, is also critical to this CPS' goal of building resilience at the level of families and individuals. The focus of Bank Group efforts will be to support the increase and reorientation of public expenditure toward human development along with reforms to improve governance and accountability in the provision of services, with enhanced attention to assessing and addressing the needs of vulnerable groups among the poor, such as women and displaced people. 91. While progress was made during the previous CAS period, Pakistan's human development indicators continue to lag behind those of countries with similar incomes and levels of development. Literacy has risen from 53 percent in 2005 to 56 percent in 2008, gross primary enrollment rates increased from 86 percent to 91 percent, secondary gross enrolment rates increased from 44 percent to 50 percent, while tertiary gross enrollment rates are estimated to have risen from 3 percent to 4 percent of the eligible age cohort (17-23). In addition, there is slow progress in improving health outcomes including child, infant and maternal mortality, and in enhancing the provision of reproductive health services. Under-five mortality remains the highest among the large South Asian countries, as does the fertility rate (Pakistan's TFR is 4.1 compared to 2.9 in India and Bangladesh). Chronic child malnutrition is very high at around 40 percent. Significant gender and rural/urban disparities persist. 92. Improved Equitable Access to Quality Education Services. In education, the government is committed to doubling education expenditures from 1.5 percent of GDP (in 2003 to 3 percent of GDP) by 2013 as envisaged in the Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005 that provides an 27 indication of the minimum level of public funds to be allocated to the education sector. 5 In FY07, education expenditure reached 2 percent of GDP; however they have since fallen as a result of the macroeconomic crisis, reaching around 1.8 percent of GDP in FY09. The Bank Group CPS will support a reversal in this trend. 93. There is growing recognition of the importance of supporting education at all levels in the country. The enrolment rates drop precipitously after primary schooling. From a primary school level (age 5-9) GER at 91 percent, (M: 97 percent, F: 83 percent), the GER drops to 50 percent (M: 59 percent, F: 41 percent) at the secondary level. There are several reasons for this drop but one reason that stands out is the shortage of higher-level schools, especially in rural areas. There are, on average, six government primary schools for each middle or higher-level school, and in some parts of the country this ratio is as high as 1:13. The main thrust of the Bank's efforts in primary and secondary education will be to support sector wide provincial reform programs with and explicit focus on results through ongoing provincial programmatic education investment loans. The CPS will support government programs that combine supply side interventions (constructing and upgrading facilities, need driven and merit-based teacher recruitment) and demand-side measures (free textbooks, female stipends, subsidies to low fee private schools) to improve access to education with a focus on equity to address regional and gender imbalances. World Bank support for these programs is supplemented by parallel financing arrangements from the UK, Canada (in Punjab) and the European Union (in Sindh). 94. The strategies supported by Bank operations in the education sector are designed to specifically target schooling outcomes of female children. Specifically, education operations in both Sindh and Punjab are financing payment of stipends to secondary age girls in public schools. Moreover, the programs include supply side initiatives that address deficiencies that have a bigger impact on girls' enrolments. For example service delivery elements targeted by these programs, such as local school availability and teacher characteristics (i.e., female teachers) have been shown to have a larger effect on girls' participation. 95. Tertiary education enrollment rates are especially low and estimated to be less than 4 percent of the eligible age cohort (ages 17-23). Tertiary education is plagued by limited availability of appropriately qualified faculty members, inadequate facilities, and weak quality assurance mechanisms. This compares unfavorably with countries such as India and Malaysia with tertiary enrolment rates of 8 percent and 30 percent respectively. In line with the Government's growth and competitiveness objectives, we will continue to support a broad spectrum of strategic higher education reforms with an enhanced focus on results. In addition, given that only 8 percent of the workforce had received formal vocational training, we will assist in the development of technical and vocational training programs that help address skills gaps. 96. There is wide recognition that weak governance and accountability of service providers at all levels is a major hurdle to the expansion of quality education. An increased focus on improving quality by strengthening mechanisms and systems to measure student learning and promoting the use of information on student learning will also be a central aspect of our education programs, supported by enhanced community-based and third party monitoring of the quality of basic education. Institutional and governance reforms will continue to form an integral part of the program with a view to increasing accountability, reducing corruption and leakage and supporting evidence-based policy making. The CPS 5 Chapter II, 3 (3a) of the FRDLA states that: "ensuring that in every financial year, beginning from the first July, 2003, and ending on the thirtieth June, 20 13, the total public debt is reduced by not less than two and a half per cent of the estimated gross domestic product for any given year: Provided that the social and poverty alleviation related expenditures are not reduced below 4.5% of the estimated gross domestic product for any given year and budgetary allocation to education and health, will be doubled from the existing level in terms of percentage of gross domestic product during the next ten years". 28 will support interventions to address gender, rural-urban, and provincial disparities. The education operations are supported by analytical work, including several impact evaluations that are built into the main education operations and a flagship Education Sector Review is envisaged during the CPS period. IFC will attempt to address the mismatch in the quality of education provided and labor market needs by exploring investment opportunities in high quality private education institutions (including vocational and technical training), promoting training schools for teachers and nurses, supporting public-private partnerships in education, and strengthening private service delivery of business development services. IFC will specifically focus on increasing the access of women to quality education. 97. Reduced Vulnerability Through Effective Safety Nets. The macroeconomic crisis in Pakistan and the still unfolding global economic slowdown have made social protection an urgent priority ­ and a strategic opportunity to build systems and institutions for better service delivery. Furthermore, the poor and the non-poor alike remain vulnerable to individual level risks such as health shocks and unemployment, and to community-wide risks such as natural disasters. 98. Recognizing the urgent need to protect the poor and the vulnerable, the Government of Pakistan launched a new flagship social safety net program in 2008, the Benazir Income Support Program. The Bank is partnering with the Government in establishing the Benazir Income Support Program (BISP) as the country's national safety net program with a focus on increasing its targeting efficiency and strengthening its operation. This will continue to be an important element of our strategy during the period of the CPS, working with partners including the UK and the US. BISP has a strong focus on empowerment of women since benefits of the program go exclusively to women. 6 In addition, the Bank will support the consolidation of existing safety net programs as well as a harmonization with safety net programs implemented by provincial governments (for example State Government of Punjab implements a major Food Support Program; while the Government of KP is responding to the IDP crisis linked to ongoing conflicts and also preparing a cross-sectoral HD project to better address the education, health and social protection needs of the population). Likewise, the Bank will provide technical assistance for the development of long-term exit/graduation-from-poverty strategies through targeted skills-training, labor/employment opportunities (especially for young people and women), education and health interventions. Finally, the Bank will support the development and implementation of workable health insurance model based on international experience to the ultra poor population so that they do not have to sell off their few resources in order to pay for hospital care. 99. These graduation programs are at different stages of development at this time. The Government has already piloted several CCTs to improve schooling outcomes of primary and secondary level children. Health insurance for the poor is identified as a priority area in the Government's new budget, but the key policy decisions to increase the poor's health care utilization and accompanying health-supply arrangements are yet to be formulated. Similarly, implementation arrangements for facilitating exit from poverty through skills-training and employment need to be developed. Complementary to the ongoing SSN TA project, the Bank's economic and sectoral work will focus on documenting and interpreting the effects of economic shocks on the poor; evaluating the effectiveness of poverty exit/graduation strategies; revealing the linkages between employment, poverty and vulnerability; and regularly updating the basic social protection diagnostics (on safety nets, pensions, disability etc). 100. Thus the Bank's program to support the safety net reform agenda will combine support for key reforms and institutional restructuring; investments to continue and scale up interventions that improve 6 International evidence on intra-household allocation and on the use of conditional cash transfers in other countries provided to women has repeatedly shown the increases in women's income translates in more expenditures for food, children, clothing, education supplies and other goods for children (shoes, medicine, etc.). In addition, female beneficiaries have reported an increase in their self-esteem and improved relationships in the family - with less incidence of domestic violence by their partners or other decision-makers (in-laws) as they are more able to contribute to the household's economy. 29 the living conditions of highly vulnerable populations (including the poor, the IDPs and the disabled); technical assistance to strengthen capacity for reform implementation at the federal and province levels; and analytical work to inform policy makers and the design and implementation of Bank operations. 101. Enhanced Rural Livelihoods. A large proportion of Pakistan's poor live in rural areas and are highly vulnerable to economic shocks (such as from the food price inflation), the effects of insecurity, and to weather shocks and natural disasters. Strengthening the asset base of rural households and improving their access to markets and services is therefore an important part of poverty exit and graduation strategies. During the CPS period, the Bank Group will continue to support Pakistan, through the Pakistan Poverty Alleviation Fund (PPAF) and other appropriately well-governed and managed entities, to reduce the vulnerability and strengthen the livelihood opportunities - agriculture based and rural small enterprises - of poor households. This will include a focus on vulnerable groups such as women, disabled and youth. Community-based programs will focus on the enhancement of productive assets of the poor, including their skills and financial assets, and the development of producer organizations and community institutions so that they can more effectively link with markets and access government services (including safety net programs). IFC business development programs will focus on expanding access to business skills training tailored to small enterprises, especially targeting women entrepreneurs. 102. Enhanced Delivery of Health Nutrition and Population Services. The proposed program also focuses on better governance and management of delivery of basic health services to improve the efficiency, coverage and the quality of essential health services, especially in disadvantaged areas of the country. Further, this CPS will support Pakistan in developing service delivery models which will help the country to sustain service delivery levels when these systems come under duress due to natural and man-made disasters by providing support for emergency services both at community and facility level. IFC will seek to help increase access to quality private health services by exploring investment opportunities in private health facilities, and supporting public-private partnerships in the health sector. 103. Levels of malnutrition are very high in South Asia and Pakistan is no exception. Malnourishment in early life has a great impact on morbidity and mortality and is devastating to a child's potential for education development and productivity later in life. This CPS will seek opportunities to address malnutrition in a multi-sectoral way by adding components to ongoing and new programs in various sectors that can contribute to the response. A national operation with a focus on maternal and child nutrition will also be considered. 104. Pakistan continues to face a challenge to address the concentrated epidemic of HIV infection among street based drug users and its associated networks with increasing HIV prevalence among most at risk population. The Bank will continue to support expansion of HIV/AIDS services for the vulnerable population sub-groups through a follow-on Second HIV/AIDS project with a focus on service delivery and surveillance especially in high prevalence provinces. 105. Despite increasing allocations for the health sector under PRSP-I, Pakistan health financing strategy remains inconsistent. Pakistan still spends only 0.6 percent of its GDP on health sector besides spending on areas that do not facilitate progress towards MDGs. In health, the government is committed to doubling health expenditures from 0.5 percent of GDP in 2003 to 1 percent of GDP by 2013 as envisaged in the Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005, which provides an indication of the minimum level of public funds to be allocated to the health sector. In addition, Pakistan is also inadequately mobilizing external resources. The Bank will support Pakistan in development of practical health financing strategy, enhance its health investments and spend it better on priorities to make progress towards MDGs. The CPS will seek to help focus improving equity by enhancing access to basic services package of acceptable quality with minimum cost to the poor and that facilities providing basic services are adequately funded to provide the services. 30 Pillar 3: Improving Infrastructure to Support Growth 106. Expanded Power Provision and Increased Efficiency and Reliability in Energy Supply. Available and affordable power is critical to long-term growth and for improved quality of life. The energy sector in Pakistan faces many challenges including significant supply shortages and financial uncertainty. Despite significant energy resource endowments (particularly hydropower and natural gas), Pakistan is a net importer of energy, mainly in the form of oil and petroleum products. Close to a third of Pakistan's power production is based on imported residual fuel oil. Over the past five years, government has made some progress in addressing technical and commercial losses and bottlenecks in transmission and distribution: overall losses have been reduced in four of the electricity distribution companies to below 15 percent which is close to international best practice levels; one million new connections have been added every year; and efforts to grant more managerial autonomy to the distribution companies are well under way. Some progress has also been made in filling the shortfall in generating capacity in the sector through expedited processing of IPPs in the pipeline. Nonetheless, the demand-supply gap remains substantial and load shedding is likely to continue for some time. 107. Sector finances were a major challenge when the current government took over two year ago but government has made progress in substantially increasing cost recovery levels and putting in place regulatory processes to allow for more timely and less political tariff adjustment procedures to reflect underlying operating cost increases. Since 2008 consumer power tariffs have been increased by nearly 60 percent. 108. During the CPS period, the Bank Group will support continued policy reforms in the sector. In addition to the continued focus on sector financial viability, the Bank would support institutional reforms, such as streamlining the institutional setup within the government to increase the efficiency of decision making as regards policy formulation, planning and investments; strengthen the autonomy and accountability of the sector entities, especially distribution companies, and refine the industry structure to enable more private sector participation, including lessening the government's contingent liabilities (e.g., power purchase guarantees). 109. The Bank Group will help in addressing the investment deficit. In view of the importance of having sufficient gas for power production, the Bank would support the gas sector to improve efficiency, reduce unaccounted for gas (UFG) and redeploy more gas to the power sector; and possibly support an LNG import facility through the Bank's guarantee instrument. An important focus of the Bank's support to the sector would be in the hydropower arena, where we plan to help finance the Tarbela power generation expansion project (about 1000 MW additional capacity) and help government to complete feasibility and design studies for other potential projects. Subject to the outcome of these studies, the Bank will consider financing. In terms of regional cooperation, the World Bank and IFC, in concert with other financiers, will help finance the Central Asia-South Asia Electricity Transmission and Trade Project (CASA 1000), sponsored by Pakistan and Afghanistan (as prospective importers of electricity), and Kyrgyz Republic and Tajikistan (as prospective exporters). Assistance to the electricity distribution industry would be continued through the ongoing Electricity Distribution and Transmission Improvement Project APL series. Assistance in the energy sector is coordinated closely with partners including the US, Japan, and ADB. 110. The Bank Group is already providing assistance to piloting energy conservation programs through a series of initiatives including conversion of irrigation pumping to solar pumping, solar water heating, launch of a CFL distribution program, and Smart Metering in distribution. We will scale up some of these initiatives contingent on success of the current pilots. The Bank's interventions in the sector will also help ensure environmental global best practice, particularly regarding carbon based energy and will include targeted efforts to reduce emissions of air pollutants and greenhouse gases. 31 111. Supporting private investments in the power sector is a critical element of IFC's strategy in Pakistan. IFC will support development of the power sector through investments that are sustainable in the long term and will focus supporting privatization of utility and distribution companies, as well as development of renewable power generation (hydro and wind generation). IFC will also support development of low cost thermal power (such as natural gas based combined cycle plants), which will improve the sector's operating costs, and on a selective basis, IFC will support development of fast track oil based power plants that can alleviate the current power crises. IFC, under the Advisory Services, has been engaged by the Government to assist in the privatization of Faisalabad Electricity Board (FESCO) ­ a distribution company. This is being done on a pilot basis and, if successful, there is a long list of distribution companies for the future. Based on demand from the investors in the power sector, IFC Advisory Services can further partner with the companies to design and implement programs for improving utility efficiency, reducing transmission losses and increasing energy productivity at consumer level. IFC will also continue supporting reputable local/foreign players both in the upstream and downstream sectors and expects to take blue chip Pakistan companies to work in other countries. IFC and the World Bank are exploring opportunities to jointly finance power projects in Pakistan. Investment prospects currently under varying stages of review and preparation include an LNG terminal and a run of the river hydro prospect. The Bank plans to support these prospects, where appropriate, using our guarantee instruments. 112. Improved Efficiency and Reliability of the Transport and Logistics Network. Under the previous CAS, the World Bank worked closely with Government in the design and implementation of the National Trade Corridor Improvement Program (NTCIP). The national trade corridor linking Karachi to Peshawar accounts for 95 percent of external trade and contributes 85 percent of GDP. The initiative addresses constraints in rail, road, ports, and air services and infrastructure, and provides regional cooperation opportunities, particularly with India, Afghanistan, Iran and China. 113. Although the performance of the ports sector lags that of other regional ports, there has been progress with increased participation of the private sector and improvements in dwell times and handling charges. The Bank and IFC will finance the Karachi Port Improvement Project to support further efficiency improvements. Other projects that support rationalization of the ports sector may also be considered. Greater challenges lie in the restructuring of Pakistan Railways to reverse a longstanding trend of freight shifting to roads. In the context of the government's reform plans for public sector enterprises, the Bank will provide support to the government to explore options to help improve the utilization of the current rail infrastructure and to increase commercialization and strengthen financial and operating performance in the sector. Pakistan's ports and railways as well as its transport services industry play a crucial role in regional trade links and improvements in their condition and performance will have strong spillover benefits for its neighbors as well. 114. IFC will be a significant investor--with MIGA supporting investments via PRI --in transport and logistics, including ports, cement/clinker terminals, airlines and airports; and will explore establishment of warehousing and cold chains. IFC is also focusing on supporting the port sector with sub-national financing, where it is considering a loan to Karachi Port for berth reconstruction. IFC has also had initial discussions with Port Qasim officials on finance for deepening of the main navigation channel. IFC is seeking a pilot project on the privatization of toll roads and is expected to bid for the advisory services on the Karachi- Hyderabad (N 9) toll road. This can pave the way for future privatization of other toll roads. IFC is also at the very early stages of planning advisory work on the privatization of airports and will study the gaps in the logistic sector. 115. Strengthened Irrigation Infrastructure and Agricultural Competitiveness. A critical prerequisite for agricultural growth is good performance of Pakistan's integrated irrigation system, a sector in which the Bank has been deeply engaged and where we have a number of projects currently under implementation. Bank support under the CPS will include rehabilitation of major assets such as barrages and continued capacity development at the regional and federal level for managing water 32 resources. This work will complement the work of other partners in the irrigation sector including ADB and Japan. The Bank's assistance will put particular emphasis on improving the efficiency of irrigation systems, taking into account the loss of soil fertility, salinity and water logging that have resulted from inadequate irrigation and are estimated to have an economic cost of more than 1 percent of GDP per annum. 116. During the CPS period, we will start to shift the balance of our engagement in the sector towards agriculture and the enhancement of productivity and value-addition. Making agriculture more efficient, productive and profitable will help reduce poverty in Pakistan as agriculture accounts for 21 percent of GDP and 43 percent of employment. At the same time, poverty is highest in the rural areas, and approximately 75 percent of poor people reside outside cities. In Pakistan crop yields and livestock productivity remain stagnant and substantially below yields achieved in other countries in Asia. Pakistan has not diversified production, and has not focused on high value products such as export grade crops, horticulture, livestock and fisheries. 117. The World Bank Group Program envisions at first a program of technical assistance and support to help Pakistan in setting agricultural policy analysis and design of good agricultural policies. This will be closely coupled with an emphasis on knowledge engagement, working with the Government and stakeholders to define critical areas for intervention either in terms of policy or critical public investments to support and drive productivity in the sector. In this context, there is an urgent need to re-build Pakistan's agricultural policy analysis capacity and start to avoid costly policy mistakes. IFC will explore investment opportunities in agribusiness (including warehousing and logistics), and support agribusiness SMEs through financial intermediaries. In close coordination with emerging investment opportunities, IFC Advisory Services will seek to (i) establish complementary programs in selected regions to enhance the performance of promising agribusiness sub-sectors with high growth potential; and (ii) support the development of interlinked agriculture industries such as agri-machinery, irrigation materials, packaging and transport. 118. Improving water resources management through efficient irrigation, improving the water infrastructure including building multi-purpose storage dams and strengthening institutions responsible for water management are some of the key actions urgently required to sustain and improve the water sector and the agriculture sector. Under the ongoing Pakistan Water Capacity Building Project the World Bank is assisting Pakistan to strengthen institutions and explore global best practice options for a range of water sector improvements aimed at increasing the efficiency of the Indus system as a whole and to plan better for allocation of water to different competing downstream uses and to minimize water related inter- state conflicts. A critical aspect of the options being considered includes the feasibility of constructing additional storage capacity, which could include larger dams. The project provides for assistance to Pakistan to attract advisory services to structure public-private partnership and financing arrangements when and if viable investment options are defined. A separate technical assistance program under preparation with the Ministry of Environment will support the articulation of a national climate change strategy and will take into account Pakistan's water needs and the impact of emerging climatic change issues. Within the scope of its agribusiness programs, IFC Advisory Services will assist in promoting the adoption of environmentally sustainable practices and technologies such as High Efficiency Irrigation Systems (HEIS), water recycling or reuse, waster treatment and recycling, and implementation of energy efficient technologies throughout the agribusiness value chain. 119. Improved Urban/Municipal Infrastructure and Services. Urban centers account for more than one-third of Pakistan's population and much of its economic power. In the coming years urbanization will continue to accelerate, increasing the economic and demographic concentration of Pakistan around its hierarchy of urban settlements ­ cities and towns. In this context, managing urban densities will be critical to achieving the overall development goals in Pakistan. But, the policy challenge confronting the urban sector is daunting: governance structures for cities are ill-defined, accountability to urban residents is weak, resources are limited, and access to services is poor and inequitable. Improving cities livability 33 and strengthening their growth potential will also be a critical aspect of the development challenge confronting Pakistan. The Bank's strategy is meet this challenge by supporting the Government's urban policy and institutional reform agenda with a focus on the improvements in: (i) city management, governance, and finance; (ii) urban municipal services; (iii) urban roads and transport systems; and (iv) city planning, land use, and housing. 120. Ongoing changes in the Punjab Local Government Ordinance have created promising opportunities for the Bank to support the urban and local governance reform agenda in Punjab. The Bank's engagement has already provided the underpinnings for the preparation of Punjab Local Governance Framework (PLGF) 2010 intended to reconfigure the existing governance structures at the local level for strengthening accountability, transparency, service delivery, and citizen participation. In this context, the Bank is proposing a multi-pronged approach to supporting the reform of the urban sector in Pakistan, by focusing on both large cities and medium and small towns i.e. the whole urban hierarchy. 121. The proposed Punjab Large Cities project will assist the Government of Punjab in implementing the proposed reforms in a phased manner, to bring about a fundamental shift in the way cities are managed. Furthermore, the Bank will extend its dialogue and technical assistance to launch similar initiatives in the other provinces. The ongoing Punjab Municipal Services Improvement Project (PMSIP) focuses on establishing a culture of accountability, through local government capacity building, performance benchmarking, and providing investment grants to improve service delivery in the smaller municipalities of the Punjab. The Bank proposes to further enhance its assistance in municipal services through the Punjab Water and Sanitation Project. This will be complemented by the technical assistance and capacity building initiative of the WSP. The Bank is also conducting economic and sector work in the urban transport and housing sectors, to help shape its future involvement in these sectors. 122. Environment Sustainability for Better Health Outcomes and Improved Competitiveness. Improved environmental conditions and a strict environmental regulatory framework are important to improve Pakistan's competitiveness. Environmental degradation already constitutes an obstacle to economic growth. The Bank has developed a suite of non-lending technical assistance, grant-financed activities, and analytical work to support implementation of the National Environmental Policy (NEP), address the impact of poor environmental policies on Pakistan's industrial competitiveness, and develop capacity at the provincial level for appropriate policy design and implementation. In response to the need to support the development of the country's capacity for environmental assessment, the Bank will support an overall strengthening of Pakistan country environmental systems, including: (i) the capacity to identify and address environmental problems/priorities in an effective manner, taking into account concerns of stakeholders, particularly the most vulnerable groups, and (ii) its processes to adequately monitor and evaluate progress to overcome these environmental priority problems. The Bank will also support Government's development and implementation of a broad climate change strategy, and will assist in mobilization of support to allow for the realization of carbon finance revenues from implementation of mitigation programs in a post-Kyoto carbon regime, including, but not limited to, efforts under the World Bank Carbon Partnership Facility. IFC will support power generation by investments in low cost thermal power (natural gas, and combined cycle) and renewable energy (like wind, hydro, and solar). IFC will also provide Advisory Services supported by investments in the area of clean production technology. Pillar 4: Improving Security and Reducing the Risk of Conflict 123. Coping with the causes and consequences of the ongoing conflict in the Northwest Border region is an urgent priority for the Government and Pakistan's development partners. Conflict centered in Pakistan's Khyber-Pakhtunkhwa Province (KP) and the Federally Administered Tribal Areas (FATA) has had severe human and economic consequences in areas ranking amongst the poorest in Pakistan. The insurgency has also extended its reach to other urban centers of Pakistan through targeted militant attacks that have caused significant loss of life and degradation of investor confidence. The persistence of conflict in KP and FATA poses a threat to some of the most vulnerable and marginalized populations in 34 Pakistan, while also challenging economic stability across the country. At the request of the Government, the Bank in collaboration with the ADB, the EU and the UN, started to prepare a Post Crisis Needs Assessment (PCNA) for KP and FATA. The PCNA is still underway, but community and other stakeholder consultations already indicate potential priorities to address the structural sources of crisis and contribute to peacebuilding during stabilization, consolidation and ultimately the transition to long-term development. 124. Increased Employment and Livelihood Opportunities in Conflict-Affected Areas. The absence of employment opportunities and inadequate livelihoods in FATA and KP has created a favorable environment for opportunistic militant groups whose economic incentives for potential recruits greatly outweigh available opportunities. Consultations with communities as part of the PCNA process indicate that creation of employment is identified as the most highly rated priority for intervention. KP and FATA are dominantly agrarian economies, with livelihoods substantially predicated on agriculture and livestock. Also evident was the importance of prioritizing opportunities especially, but not exclusively, for young men (ages 15-29) who comprise the main target group for militant recruitment. Bank support, financed by the planned Emergency Recovery Credit or from the MDTF may include support for agricultural/livestock-linked employment and livelihoods, expansion of general and technical/vocational education, investment in energy and transport, and social protection. 125. Increased Responsiveness and Effectiveness of the State. Political and governance deficits may be the single most important driver of crisis in FATA and KP today, perpetuating a historical experience of disenfranchisement, alienation, corruption, poverty and underdevelopment, and facilitating the conditions of lawlessness, insecurity and extremism that have fuelled the downward spiral of crisis. Effective governance will require the establishment of robust interfaces that directly involve communities in the planning, prioritization and implementation of programs. The writ of the state is most directly extended and strengthened at the community level through those local government structures which are potentially the most visible interfaces of the state. The strengthening of local government, particularly its ability to efficiently and equitably deliver services, can greatly enhance the legitimacy of the state and counter the claim to legitimacy by militant groups as a viable alternative to the state. 126. To implement the findings of the PCNA as well as to contribute to the financing and implementation of the DNA, the Bank will administer a Multi Donor Trust Fund (MDTF) 7 with estimated contributions of about $150 million from various donors. The Trust Fund will support a comprehensive reconstruction and development strategy designed to restore infrastructure, services and livelihoods while addressing governance and other challenges that contribute to conflict. In addition the Bank will prepare an Emergency Recovery Credit which will complement the MDTF program. Finally, a planned KP Human Development operation will focus on strengthening service delivery in the context of conflict. This is a highly complex area and one where the Bank does not have a track record of engagement in Pakistan. Hence, specific interventions will be developed on the basis of the findings of the PCNA, but will need to be flexible and adapted during implementation. V. I M PL E M E NT I NG T H E ST R A T E G Y : T H E W B G PR OG R A M A. Portfolio Management 127. During the last CAS period, despite mounting political, security and economic challenges, portfolio performance remained reasonably strong (see Annex B8 and Table 12). The disbursement ratio improved from 34 percent in 2008 to 40 percent for FY09, against a regional average of 24 percent. Although Projects- at- Risk increased to 19 percent in FY10 (partly on account of greater realism in assessing portfolio performance), the overall portfolio riskiness was less than the SAR and Bank averages. While average project age has not increased, almost half the projects in the current portfolio are 7 Establishment of a Programmatic MDTF for the Northwest Frontier Region of Pakistan IDA/R2020-0006. 35 five years or older, including two of the three largest projects. One third of the portfolio has had closing dates extended, in most cases on account of additional financing required to respond to cost overruns from unforeseen inflationary pressures or to expand the scope or scale of well performing projects. This was broadly in accordance with the Region's policy on project extensions. 128. The strategy for portfolio management in the Table 12: Bank Portfolio Indicators CPS for the next four years will Indicator 2006 2007 2008 2009 continue to emphasize quality at Projects Under Implementation 19.0 20.0 22.0 26.0 entry and proactive management of project implementation issues Projects at Risk (%) 2.6 5.0 18.2 15.4 in collaboration with the Commitments at Risk (%) 0.0 5.0 7.1 9.6 government. Regular interaction Disbursement Ratio (%) 34.0 37.5 33.8 39.9 with the government counterparts will assume even greater significance given the increasingly uncertain and risk prone project implementation environment. The practice of holding regular portfolio review meetings with Economic Affairs Division (EAD) at the federal level, and with the Planning and Development Departments of the Provincial governments will continue as it has helped to ensure timely attention to project issues and achievement of intended outputs and results during the implementation period. In view of the lessons learnt from implementation over time, the Bank's country team is increasingly focusing on simplifying the design of new projects. Effective use is being made of the "additional financing" mechanism to quickly scale up programs that have demonstrated effectiveness. In terms of programming, we expect to see a shift in the portfolio mix during the new CPS period with IBRD-funded sector investment projects supplementing the IDA-supported Sector-wide programmatic (results-based) operations and the development policy credits focused principally on the PRSC series. Finally, the project supervision strategy will place greater emphasis on providing implementation support to the government and allocating resources according to the Operational Risk Assessment Framework (ORAF)-assessed risk profile of a project, according to ORAF. 129. During the CPS period, IFC will continue to work on maintaining a diversified portfolio in Pakistan while seeking to partner with new clients. In the event of an adverse political and macroeconomic environment, IFC will focus primarily on portfolio management, investments in short- term self liquidating trade finance, supporting portfolio companies, and providing Advisory support. A substantial proportion of IFC's portfolio management in Pakistan is handled in the field. 130. Managing Security Risks. Though Bank Group operations in Pakistan continue to show satisfactory performance, given the uncertainty and security challenges, a business as usual approach is no longer tenable. The deterioration in security conditions has already led to significant changes in the Bank Group's operational practices. Over the past two years, the Bank Group has progressively introduced flexibility in procedures (including expanded Bank-financed access to computer and telecommunications services to all staff) to allow staff to work off-site, increased vigilance and improved physical facilities to enhance safety and security of the WBG staff and visiting missions. A strong core of field-based national staff manages the majority of Bank Group operations in Pakistan, allowing the Bank to continue serving the client in challenging circumstances (IFC has two field offices in Pakistan--Islamabad and Karachi). However, the ongoing security concerns do constrain our ability to readily draw in international staff to complement national staff and to readily deploy resident staff to deliver and supervise operations as we try to manage the security footprint with a view to reducing the risk exposure of staff. This constraint is particularly binding during periods of volatile security conditions and it particularly affects our ability to deploy non-resident international staff. One strategy to partly relieve this constraint is to increase the complement of relevant international staff in Islamabad. However, as a Phase III location under the UNDSS security risk ranking system, Pakistan is a non-family posting -- a designation which, in combination with increasing perceptions of insecurity in the country, has rendered Pakistan a relatively unattractive site for long-term assignments for internationally recruited staff (IRS). Another mitigation approach is to reduce the level and complexity of output to simplify both our safety and security risk 36 management and our program management. This latter option is an integral part of the CPS (paras. 78- 80) while management has been actively looking at options to address the staff mix and deployment issues. 131. Looking forward, despite the risky operational environment, the demand for Bank Group services, both from the GoP and other development partners remains strong. Hence the challenge will be to creatively manage security risks in order to deliver the WBG program. As it has been over the past two years, this will be a dynamic process of working with the government and other partners such as UN Department of Safety and Security (UNDSS) to monitor risks and adjust our operational stance accordingly. A significant challenge in this respect will be to find ways to enhance supervision in the field while mitigating risks associated with staff travel. Risks associated with implementation of operations in KP and FATA, where we are scaling up operations in response to requests from the government and development partners, would be given particular attention and resources. The supervision strategy will focus on various options to strengthen monitoring and evaluation of Bank programs. These may include: · Operational visits by provincial project teams (headed by a senior Provincial Government official) to Bank's Islamabad Office for project implementation reviews. · Third-Party monitoring and supervision and promotion of sustained beneficiary participation in projects in collaboration with civil society organizations (CSOs). · Project supervision by third-party technical and financial auditors as independent Monitoring Agents, paid from Bank loan proceeds. · Use of the Global Distance Learning Network (GDLN) for project launch and supervision-related activities. · Use of existing or newly-established video-conferencing (VC) facilities at provincial capitals to facilitate frequent meetings and contacts between Project staff and Bank supervision teams in Islamabad and Washington. Besides establishing IT connectivity, consideration will also be given to the provision of VC equipment to project implementation entities to facilitate communications, as part of project implementation and monitoring arrangements. 132. The above are already relatively well-used practices in the program. Learning from examples in Afghanistan, Sri Lanka, Nepal and other Bank regions, we will also seek to make greater use of technology to increase the reliability of such "remote supervision" methods. These could include GIS/GPS based monitoring systems including transmission of GPS-indexed photographs of project sites and implementation activities through mobile or satellite phones. B. Financing 133. Based on Pakistan's IDA 15 allocation of SDR 2.0 billion (including hard term IDA), annual average IDA availability would be in the range of $1.0 billion. However since IDA 15 usage was frontloaded with commitments of $1.6 billion in FY09, annual average IDA availability in FY10 and FY11 is expected to be about $800 million per year. The priority lending program targets IDA lending of $2.6 billion over FY10-12. Priorities for IDA financing include education, social protection and health as well as PRSCs which would support cross-cutting structural reforms. 134. The economic recovery now underway has opened up the prospect for resumption of IBRD lending to Pakistan and the CPS envisages IBRD lending of up to $2.0 billion over the CPS period. The priority lending program targets IBRD lending of $1.075 billion over FY 10-12. The actual volume of IBRD lending would depend on Pakistan's creditworthiness and IBRD's ability to provide financing given overall capital constraints. However, in the event macroeconomic reforms stay on track with continued improvements in economic performance and creditworthiness this CPS proposes IBRD 37 investment lending averaging about $500 million per year within an overall IBRD lending envelope of $2.0 billion. Maintenance of a sound macroeconomic framework (characterized by reserves equal to at least 3 months of next year's imports of goods and services and a stable or declining government debt to GDP ratio) would be required for any IBRD lending. Lending amounts for FY11-FY13 are indicative and dependent on IBRD's overall lending capacity. Priorities for IBRD lending are power, water, ports. IBRD guarantees would also be used to support private investment in the energy sector. 135. Development policy lending represents a smaller share of the proposed lending program than in the last CAS which envisioned up to 50 percent of total lending taking the form of policy-based lending. While PRSCs and potential province-level DPCs will be retained to support cross-cutting structural reforms essential to supporting growth, sectoral policy-based loans are not proposed. During the CPS period, IBRD resources will be devoted to investment lending. Overall, development policy lending accounts for about one quarter of the priority lending program. 136. Modulating Bank Support. Taken together, the modulation of IBRD and IDA financial support over the CPS period would constitute an overall range of support of approximately $3.7-$6.0 billion. Reflecting the need for flexibility, the IBRD/IDA financing envelop is not fully programmed beyond the priority lending program. The actual level of financing would be guided by performance in improving macroeconomic performance and (in the case of IBRD financing) creditworthiness. At the global level, in assessing performance, critical consideration will be given to Government's progress in improving key macroeconomic indicators (particularly the tax/GDP ratio) while adhering to the guidelines in the Fiscal Responsibility Law for poverty-related expenditure. Reaching the upper end of the range with IBRD lending of up to $700 million in a single year within the overall envelope would require strong ongoing progress to maintain and improve macroeconomic management. To manage IBRD's exposure risk, no fast disbursing IBRD lending is envisaged. In the event of a reversal in macroeconomic stabilization, IDA lending would focus on sustaining ongoing programs in health, education and social protection, with potentially additional operations for community driven development. 137. IFC Financing Program. In the last CAS period (FY06-09) IFC committed investments in 48 projects with the total value of $958 million, greatly exceeding the target of $500-600 million. IFC's current committed portfolio in Pakistan is $771 million in 40 projects, and the two largest sectors are financial markets and power. During this period IFC also increased its advisory activities significantly particularly in the areas MSME development including access to finance. In the upcoming CPS period (FY10-14) IFC intends to invest between $1.3 billion and $1.5 billion provided that the economic and security situations do not deteriorate significantly. The emphasis would be in financial markets, infrastructure, health and education and agribusiness. IFC is in the process of developing a programmatic approach for advisory services in collaboration with other donors. 138. Leveraging Other Resources. Beyond IBRD/IDA financing and IFC investments, the CPS will seek to leverage other resources in support of the strategy. International experience in post-crisis situations including Afghanistan and elsewhere has demonstrated the value of a coordinated framework for pooling financial assistance under the overall leadership of the Government in line with Paris Declaration principles of client ownership, alignment with a country's own development strategy, harmonization with country systems, and a focus on results. The Multi-donor Trust Fund for the Northwest Border Region will provide such a framework. In education, ongoing education operations tightly linked to provincial education sector reform programs in Sindh and Punjab provide a platform for other partners' financing including Canada, the EU, and UK DFID. The Bank has also played a critically important role in helping the government to develop a new safety net institution and programs (BISP) that are now serving as a platform that increasing numbers of donors, including UK DFID and US, are supporting. Looking ahead, partners are considering the development of an MDTF to support public financial management reform, a high priority for a several partners. Ongoing Bank-executed trust funds to support Bank engagement on PRSCs and the water sector would also continue. 38 C. Analytical and Advisory Activities 139. Provision of world-class knowledge is an integral part of the proposed strategy and analytical and advisory services will continue to be used to support the policy dialogue on sector reforms and inform the content of lending operations. Recent regional and corporate reviews of AAA work suggest there is room for improvement. Specifically, client involvement and collaboration, including knowledge partnership with local institutions has been seen as limited with the result that policy conclusions are seen as a donor- driven agenda. In addition, much of the focus of AAA is on what to do with relatively little attention given to involving practitioners and experts in sharing with clients, in practical ways, how to do things. Finally dissemination efforts are uneven and not well planned. 140. Addressing these issues will be a focus of a more strategically programmed and managed AAA program during the CPS period. In order to use the Bank's knowledge to leverage greater impact, the AAA program will increase the use of programmatic non-lending technical assistance (NLTA). During the past few years, NLTA combining short, on-demand policy notes with advisory support and capacity building has proved to be valuable for supporting reform implementation, often in combination with or as a precursor to, lending. Examples include the intensive NLTA support for implementation of enhanced targeting of safety net program and in tax administration. Second, the Bank will increasingly use AAA to work with local policy think tanks and academic institutions to build capacity for policy analysis and to promote a more informed public policy debate. Finally dissemination will be more carefully planned with a view to maximizing impact. Table 13: AAA ­ Selected Core Outputs by CPS Pillar FY10 FY11 FY12 FY13 · Public Expenditure · Country Economic · Provincial Revenue · Poverty Assessment Review Memorandum Mobilization Update · Poverty Assessment · Governance and · Tax Administration · Sector Governance · Gilgit-Baltistan Political Economy NLTA Analysis Improving Economic Economic Report Notes · Country Gender · NBFI/Bond Market Governance · Competition Policy · Strengthening Assessment Development NLTA Insolvency NLTA · Export · FSAP Update Competitiveness/ Trade Study · Health Sector Report · Education Sector · BISP Impact · Education Impact Report Evaluation Evaluation Improving Human · Social Protection · Labor Market Report Development and Social Protection · Health Sector Expenditure Review · Current Issues in · Climate Change · Provincial Roads Improving Power policy note · Agriculture Value Review Infrastructure to series Added NLTA Support Growth Improving Security · Post Crisis Needs · Governance and and Reducing the Risk Assessment Political Economy of Conflict 141. IFC will continue efforts to raise corporate governance standards in the private sector by working with key market institutions such as the State Bank of Pakistan and the Securities Exchange Commission of Pakistan to deliver training and disseminate knowledge. It will also strive to build local capacity to deliver corporate governance services to the market. In order to enhance the performance and competitiveness of Pakistani SMEs, IFC Advisory Services will be provided to SMEs to develop their business skills and managerial capacities. IFC will capitalize on intermediaries and partners, such as local training companies and large corporations, to expand its outreach to local SMEs. A specific target group 39 for these Advisory activities will be corporations in high growth sectors and sectors of strategic importance to Pakistan's socioeconomic development (e.g., the financial sector, telecommunications, general manufacturing, health and education). 142. Mainstreaming Gender. The 2005 Country Gender Assessment and the previous CAS note that there are significant and entrenched obstacles to addressing gender imbalances in Pakistan and hence policy interventions directed specifically at gender inequality in the public domain are needed. With a view to increasing the focus on addressing gender across the entire Bank program, a gender review of the portfolio was recently carried out. The review found that the overall performance of the Bank's lending portfolio in Pakistan can be rated as "moderately satisfactory" on mainstreaming gender issues at the design and implementation stages with human development sectors--education, health and social protection--performing better on mainstreaming gender issues, as there is a long history of analytical work and technical assistance available to these sectors. Nevertheless the findings suggest there is room for improvement in designing interventions across all sectors to address gender issues. 143. The gender review reflects current practices and identifies areas of potential improvement for integrating gender in sectors and projects. It recommends that sectors and project teams commit to undertaking more focused gender analysis to more thoroughly and sustainably mainstream gender concerns into sectors and projects. Practical, operationally relevant notes that guide each sector on how to effectively integrate gender into its operations will support this analysis. Going forward the country team will seek to reflect gender issues more directly in project design by: (i) undertaking gender policy dialogue at the design stage for areas of activities where gender mainstreaming can be promoted, using social assessments to inform the design of public sector reforms needed to promote recruitment of women, and capacity building of client teams; (ii) taking account of overarching areas of weakness in addressing gender issues, so that effective strategies can be identified and included in future (similar) project preparation, and (iii) for operations where a direct interaction with community or beneficiary groups is not expected, carrying out rapid gender assessments in order to ascertain that no aspect of project design or implementation will have undesirable gender-related effects. Through its microfinance investments, IFC has reached over 75,000 women borrowers in Pakistan, and this emphasis will continue throughout the CAS period. IFC investments also will track gender disaggregated outcome indicators (e.g., female jobs created, female students enrolled etc.). Similarly, IFC Advisory Services will continue raising awareness among women to resolve disputes through mediation. In addition, IFC will also seek to promote gender diversity in board of directors and senior management in the private sector. 144. The country team also will begin to adopt new instruments for gender work, in addition to the above measures to integrate gender into sector and project operations. Such instruments would include any combination of the following: (i) a stand-alone project aimed at providing skills training to young men and women who are unable to remain in school--with gender groups separated and skills types deemed socially acceptable for each group--to enhance their chances of secure employment in growth sectors of Pakistan's economy; (ii) analytic work on gender issues in conflict-affected or other fragile contexts, such as KP; and (iii) learning activities that build capacity of country team staff, managers and clients to better incorporate gender concerns into their planning, policies and programs. D. Partnerships 145. The Government leads coordination of the policy dialogue and donor support in Pakistan and Bank's program is coordinated with, and supported by, the efforts of other development partners. There are limited donor coordination mechanisms, but a number of working committees support increased collaboration and moving towards Paris Declaration goals. There is growing interest among development partners to formulate and develop a joint Results Framework for our support to Pakistan as a tool to foster better, simple, explicit and transparent donor co-ordination of and dialogue in support of Pakistan's development agenda. The Bank has agreed to take the lead on this initiative and will work with 40 Government and development partners to move this forward. Annex IV provides a more complete discussion of partnership activities. 146. The World Bank Group, under the leadership of the Government, will continue to increase partnership efforts. This will include enhanced utilization of trust funds and ensuring that trust funds are fully integrated into World Bank budgeting and strategy processes. Likewise the World Bank will continue to carry out analytical work jointly with other development partners. IFC will leverage existing partnerships and build new ones with partners such as IFC investment clients, large corporations, and development organizations to expand its outreach and enhance its development impact. Partnerships with Standard Chartered and the Aga Khan Foundation are already in place. During the previous CAS period, joint analytical work was conducted with the UK Department for International Development, ADB, and the United Nations. The World Bank and the IMF developed a strategic partnership for implementation and monitoring the IMF Stand-By Arrangement whereby the World Bank led policy dialogue on tax administration, electricity and social protection issues. 147. The energy sector investments are a key priority in the CPS 2010-2013 and we are coordinating our efforts with partners having significant engagement in this area. The Bank, jointly with ADB, is leading the electricity pricing and sector financing dialogue linked to the IMF stand-by facility. In terms of investments, ADB has Multi-Tranche Financing Facilities (MFF) focused on electricity transmission, strengthening of distribution network (covering all eight DISCOs) and energy efficiency programs. We have an ongoing project for electricity distribution and transmission improvement for four of the DISCOs, mainly financing activities complimentary to the ADB's operations. USAID is an emerging player with major energy sector investments announced recently as part of their new assistance plan. They are working on four new production plant refurbishments, including Tarbela to provide 450 additional megawatts of power as part of the US$125 million energy program announced in October 2009. USAID has also announced financing of some hydro projects and focusing on policy reform as well in order to attract private investment in the sector. The Bank is in active discussion with the USAID team to ensure synergies in assistance plans. Japan and KfW are other active players in the sector involved in specific projects, mainly for power transmission. IDB is partnering with the Bank in the Central Asia - South Asia (CASA) Electricity Import Project. 148. The Bank has been actively engaged with the Government and other development partners in helping strengthen social safety nets in Pakistan. Our reform initiative with the Benazir Income Support Program (BISP) is serving as a viable platform to channel funds to support Government's programs in this area. To date, USAID has provided $85 m of direct budget support to BISP for cash transfers to eligible beneficiaries identified under the Bank program. USAID has announced plans for more resources for BISP under the ongoing strategic dialogue. DFID provided interim TA support of $2.5 m through a trust fund to support technical work to prepare the Bank program of safety net support. DFID's current program has allocations for further work in this area. ADB's Accelerated Economic Transformation Program (AETP) window had a trigger on beneficiary targeting under BISP and the next tranches of the program are expected to continue this focus. EU and AusAid are other interested partners currently in contact with us with plans for possible financing of safety net activities. We will continue to share broad contours and progress of safety net reforms with interested partners to facilitate complimentarity in programming development resources. 149. The education sector is another area with encouraging prospects for partnerships. The Bank is working with DFID, EU, CIDA, to coordinate support around the medium term education sector reform programs of Punjab and Sindh. USAID has shown interest in providing parallel resources to the program as well. A similar initiative is being prepared for the KP. Financing such holistic sector programs has reduced duplication of effort and encouraged each partner to support overall sector results and outcomes. 150. Post-crisis support for KP is a CPS priority where the Bank from the very start has sought enhanced coordination among all interested partners. The Multi-Donor Trust Fund (MDTF) for the 41 border region aims to facilitate harmonization of donor programs with government's priorities as well as a mechanism for enhanced donor coordination across sectors in line with strategic priorities agreed between donors and government. The MDTF management committee will have representation from ADB, IDB and UN. In terms of financial contributions, the Bank has signed the Administration Agreement with DFID and Australia. Other likely contributors to the fund include US, EU, Denmark, and Turkey. The strategic priorities and programming of the MDTF will be informed by the ongoing Post-Conflict Needs Assessment (PCNA), which is being prepared in collaboration with the UN, EC, and ADB as key partners. 151. Given its strategic importance, Pakistan is a recipient of substantial donor resources linked to its proximity and historic relationship to the conflict in Afghanistan as well as broader efforts to combat violent extremism. Over the past two years, Pakistan's partners have sought to increase their assistance and to mobilize resources from the international community. In support of these efforts, the World Bank co-organized with the Government of Japan the Tokyo Donors Conference in April 2009 and provides technical support, as needed, to the "Friends of Democratic Pakistan" meetings. Government and donors recognize that extraordinary assistance provided as a result of these efforts needs to be aligned with Government's overall poverty reduction vision. With this in mind, the Bank will seek to support GoP's efforts to reinvigorate the Pakistan Development Forum as a forum for fostering this alignment. The Bank will also seek to create platforms, like MDTF, through which donors can channel additional support. The Bank will also continue to explore options using SwAP-like instruments to allow donors to support ongoing Government-owned programs such as those in education. VI. RISKS AND RISK MITIGATION 152. Several key risks for the implementation of the CPS surfaced clearly during the last CAS period. These risks included macroeconomic slippage, security risks, and exogenous shocks and all three of these risks materialized in ways that had significant impact on the CAS and WBG program. 153. Political Risk. The FY 10-13 CPS will be implemented in the context of economic austerity and other uncertainties. Hence there is a possibility that the economic stabilization program which entails considerable short term economic pain for many Pakistanis could be reversed. This risk is mitigated by the significant resources at stake under the IMF Stand-By Arrangement as well as the strong support from a wide range of external donors and partners who have a significant stake in Pakistan's success as a stable, democratic country. At the same time, it will be important for the Bank and other partners to seek to further mitigate this risk by building more ownership and buy-in by working to build understanding of, and support for needed economic reforms across the political spectrum. 154. Macroeconomic Risks. Although Pakistan has made progress in stabilizing the economy, reviving growth of GDP, exports and foreign exchange reserves and reducing inflation and the current account deficit, the fiscal situation remains vulnerable and inflation high. Partly owing to robust inflow of workers' remittances, the balance of payments situation has improved. However, there is a risk that remittances will decline, especially from the countries of the Middle East, notwithstanding Government's strong efforts to provide incentives to foster greater flows. Also, exports continue to perform poorly and the slow global recovery may continue depressing external demand as well as foreign inflows. Renewed widening of external imbalances would need to be countered through greater efforts to control internal imbalances. The IMF-supported Stand-By Arrangement supported by intensive dialogue with the Bank will mitigate these risks by committing the authorities to fiscal and current account deficit targets. 155. Conflict and Security. The success of the recent military operations in Swat and South Waziristan has created some optimism about the possibility for a rapid end to the conflict. However chances are good the conflict, which is primarily taking place in remote and difficult terrain, will prove to be protracted. At the same time, the war in Afghanistan is growing in intensity. The conflict is likely to have several spikes before long term stability and peace are achieved. Targeting programs in conflict 42 affected areas, as this CPS proposes, greatly increases the Bank's exposure to such risks. Deterioration in security across the entire country is also possible. In this context, attracting foreign investment will remain a challenge and the conflict will continue to be a drain on the resources and attention of the Government and people of Pakistan. The Bank Group will continue to monitor the overall security situation and take action to mitigate security risks to staff. As discussed above, we will also work with partners to find ways to carry out oversight in ways that reduce security risks. However, the strategy proposed in this CPS is one that necessarily entails somewhat higher risks than the alternative of restricting Bank Group engagement to only the most secure parts of the nation. However given the necessity for Pakistan of addressing the conflict in order to achieve its development objective, the risk is deemed warranted. In the context of the PCNA the Bank is increasing the use of conflict analysis in order to better understand the development side drivers of the conflict. 156. Management of the MDTF for the Northwest Border Areas poses reputational risks for the Bank. One is a possible disconnect between donor expectations and the strategy and program that emerge from the PCNA process. In addition, despite strong interest from Government and donors, MDTF start up could be delayed by slow selection and preparation of projects and capacity constraints. Finally, success in addressing longstanding development challenges in the region will require addressing governance issues linked to conflict. However, such reforms may prove difficult and delay or impede MDTF- financed operations, particularly in FATA. To mitigate these risks, the Bank will emphasize communication and harmonized high-level dialogue with all stakeholders on the strategy setting process in order to clarify linkages and strategic priorities and to build support for reforms needed to improve the chances for success. Capacity building for counterparts is being provided through the PCNA process to support implementation. Finally, in order to streamline MDTF management, trust fund governance arrangements have been designed, based on best practices learned from other MDTFs, to give donors full input on policy and strategic matters while day-to-day operational and administrative are left to the Management Committee and Administrator. 157. Implementation Risks. There are implementation risks on both the part of the Bank Group and Pakistan. Weak capacity and an adverse investment climate remain serious challenges. These risks will be mitigated at the project level with appropriate World Bank and IFC technical assistance, as well as by support for cross-cutting reforms to improve the capacity and incentive frameworks faced by counterparts. There are also fiduciary risks which impact the Bank's program. The Bank Group will seek to mitigate these risks through pro-active measures to reduce exposure of staff to security risks through alternative means of supervision along with continued attention to capacity building and robust fiduciary arrangements such as those involving third-party monitoring. On the Bank side, capacity constraints are related to the Bank's reduced presence in Pakistan. Efforts to mitigate implementation risks on the Bank side will consist primarily of taking full advantage of the benefits of the Bank's ongoing investment lending reform initiative, in particular enhancing supervision and implementation support and making use of simplified procedures where applicable. A strong and large IFC field presence in Pakistan has thus far helped mitigate the implementation risks associated with security and macroeconomic vulnerabilities, and IFC was able to deliver a robust program even in the past difficult fiscal year. IFC expects to continue to have a strong field presence in Pakistan in the coming CAS period. 158. Overall CPS Program Design and Risk Management. The design of the program under the CPS has three features that minimize risks for the Bank engagement. First, Bank support for economic management reforms is firmly dependent on government making satisfactory progress in meeting key reform milestones. Second, for the program centered on HD outcomes (comprising about 30 percent of Bank priority program) disbursements by the Bank will depend on progress made by government in meeting results agreed under the program. Finally, expansion of the support under CPS beyond the priority program will depend on progress made in meeting key targets under the most critical components of the program. Annex I Page 1 of 9 ANNEX I : PAKISTAN FY10-13 CPS Results Framework Pakistan's Development Agenda World Bank Group CPS Expected outcomes at the Long-term Outcome Goal Issues and Constraints end of the CPS period and Outputs/Milestones Bank Group Assistance interim milestones OUTCOME PILLAR 1: IMPROVED GOVERNANCE AND PERFORMANCE OF PUBLIC SECTOR Improved Macroeconomic Management Macroeconomic stability regained · Continued high · Fiscal deficit (excluding · Expenditure levels consistent Lending and maintained macroeconomic imbalances grants) reduced to at or with macro stability · new PRSC series (PRSC1 FY10; · Fiscal sustainability assured by threaten economic growth below 3.5% of GDP by PRSC2 FY11; PRSC3 FY12) · Strategy for restructuring or reducing budget deficit to 3% of and worsening poverty 2012/13 AAA privatization of public sector GDP · High losses of public sector enterprises developed · Poverty Assessment (FY10) · Reduced losses of public and enterprises · At least one public sector · Gilgit-Baltistan Economic Report state-owned enterprises enterprise restructured and/or (FY10) privatized · Country Economic Memorandum (FY11) · Poverty Assessment Update (FY12) · Country Gender Assessment (FY12) Strengthened Tax Policy and Administration Domestic revenue mobilization · Inefficient tax · Tax to GDP ratio · Risk-based tax compliance Lending significantly increased administration, narrow tax improved to 12.7% of management implemented (tax · PRSC I-III · Tax to GDP ratio at 15% of base and skewed tax GDP (from 10.2% of GDP payer audits reintroduced, Supervision GDP structure threaten stability in 2008/09) by 2012/13. enforcement efforts stepped · Tax Administration Reform and increase macro up) Project vulnerability · Broad-based VAT introduced NLTA: · Tax administration (FY11-12) AAA · Provincial Revenue Mobilization (FY12) Annex I Page 2 of 9 Pakistan's Development Agenda World Bank Group CPS Expected outcomes at the Long-term Outcome Goal Issues and Constraints end of the CPS period and Outputs/Milestones Bank Group Assistance interim milestones Strengthened Public Expenditure, Financial and Procurement Management Increased efficiency and · Outdated budgetary and · Medium Term Budget · Sectoral reviews and Budget Lending effectiveness of public spending planning processes and Framework (MTBF) Strategy Papers prepared to · PRSC I-III · Overall poverty-related protocols functional at the federal guide the MTBF process expenditure consistent with the · Poorly prioritized and level and launched at the · Strategy for reform of public NLTA requirement of FRDLL executed public investment provincial level investment, processes and · Government Debt and Cash program institutions prepared. Management (FY10-11) · Public investment program aligned with development · Lack of appropriate cash · Treasury Single Account fully AAA priorities and implemented management functional and expanded to · Public Expenditure, Procurement efficiently cover provinces and Financial Management Review (FY10) Increased transparency and · Weak oversight of fiscal · Increased timeliness of · Fully integrated country-wide Lending accountability in the use of public risks related to public and government financial data: financial management · PIFRA II: Additional Financing funds state-owned enterprises in-year reports within 10 information system functional (FY11) · Uneven credibility of the days of month-end; year- budget due to forecasting end reports within 3 · Timely and reliable fiscal Supervision weaknesses months of year-end operations tables and in-year · Second Project for Improvement · Improved quality and civil accounts published of Financial Reporting and · Lack of timeliness in Auditing (PIFRA II) presentation of audit reports timeliness of government · Completion of audits within 6 to legislative organs audits: audit reports months of end FY and AAA · Discrepancies between fiscal consistent with ISA delivery of audit reports to the · PEFA Updates--2 provinces and monetary balances and completed within 7 months legislature within a month of (FY11) reconciliation problems of year-end audit completion. Enhanced Capacity and Accountability in Public Sector Management Well functioning institutions of · Limited oversight and weak · Strategy developed for · Action plan for AAA accountability and oversight accountability of public improving effectiveness of implementation of Freedom of · Institutions of Accountability institutions institutions of Information Ordinance Review (FY11) · Weaknesses in the accountability such as developed and under · Country governance and political legislative scrutiny of annual Ombudsman, Public implementation. economy notes (FY11) budget law and of audited Accounts Committee, accounts and audit reports Auditor General · Institutional independence eroded by political pressures Annex I Page 3 of 9 Pakistan's Development Agenda World Bank Group CPS Expected outcomes at the Long-term Outcome Goal Issues and Constraints end of the CPS period and Outputs/Milestones Bank Group Assistance interim milestones Strengthened Governance of Markets Strengthened market governance and · Business laws not conducive · Labor market flexibility · Strategy and implementation Lending incentives for improved trade and firm to modern economy enhanced as measured by plan for Private Sector adopted · PRSCI-IV dynamics business surveys. by Government · Current insolvency regime AAA · Trade orientation (X+M) increases does not allow for · Reduced anti-export bias · ESCA, OSHA approved and · Export Competitiveness and to 35-40% of GDP. restructuring. resulting from trade provincial regulations Trade Policy (FY12) restrictions as measured by proposed · Share of intra regional trade · Labor laws inflexible, NLTA the average MFN tariff. increases particularly on hiring side · Strengthened monitoring and implementation of Doing · Strengthening Insolvency Regime · Trade policy lacks (FY11) Business Reforms particularly coherence, contains around business entry, labor considerable distortions flexibility and creditor rights Deepened financial sector · Weak policy and regulatory · Increase in number of · Financial sector areas AAA regime for long term finance active borrowers by 35% identified for strengthening · Financial Sector Assessment and capital markets relative to baseline (1.8 Update (FY11) · Improved policy and · An underdeveloped NBFI million borrowers) institutional foundation to · NBFI Assessment (FY13) sector leading to weak support capital markets and competition, limited range NBFIs NLTA of financial products, and · Increased access to · Access to Finance (FY11) biases in the access to commercial liquidity by MFIs IFC financial services · at least 10 trade finance · Limited access to financial investments services by households and · At least 5 SMMEs investments, SMMEs. including equity investments; 5 Advisory projects (FY10-14) OUTCOME PILLAR 2: IMPROVED HUMAN DEVELOPMENT AND REDUCED VULNERABILITY Improved Equitable Access to Quality Education Improved educational outcomes for · Gaps in access to education Improved equitable access to Educational institutional capacity Lending primary, secondary and tertiary persist, with regional and quality education services at and governance strengthened: · Higher Education DPC (FY10) students: gender disparities primary, secondary tertiary · Improved governance and · Punjab Education Sector Project · Increased level: II (FY12) · Student learning levels low, management of education completion/graduation rates and quality and · Primary GER increases service delivery · Sindh Education Sector Project II (male/female) at primary, from 91% (F 83 / M 97) 08 (FY12); effectiveness of teaching · Better and strengthened secondary, tertiary levels. requires further focus to 95% (F 90/ M 98) · Tertiary Education Support · % university students measurements of student Project (FY12) graduating. · Weak implementation and · Reduction in primary drop learning · Sindh Skills Development Project management capacity at out from 9% to 6% Annex I Page 4 of 9 Pakistan's Development Agenda World Bank Group CPS Expected outcomes at the Long-term Outcome Goal Issues and Constraints end of the CPS period and Outputs/Milestones Bank Group Assistance interim milestones · Increased share students district levels and below · Reduction in primary · Establishment of teacher (FY11) graduating with targeted female dropout rates from standards and certification Non-lending TA scientific & technological and 25% to 20% systems · TA to develop quality standards vocational qualifications · Roll out of national and and systems · Secondary GER increases AAA from 53% (F 49 / M 58) 08 provincial programs for Vocational Education and · Education Sector Review (FY11) to 57% (F54/ M61) · Impact evaluations of Training Reforms · Tertiary GER increases interventions supported (FY13) from 4% to 6% IFC · 2 investments in private sector networks Reduced Vulnerability Through Effective Safety Nets Enhanced Social Protection · Safety net programs · Number of families · Nationwide poverty scorecard Lending · Improved income and insufficiently funded and covered by social safety roll out (in at least 80 percent · Safety Net DPC (FY10) consumption of the poorest weakly targeted to the poor nets increases to 7 million of districts in the country) · NWFP HD project (FY11) households · Weak institutional by 2012. completed and data processed · Safety Nets Graduation (FY12) arrangements for policy · Improved targeting of for eligibility determination · Increased household investments Supervision in poor children's human development, coordination safety nets programs. · National social protection · SSN TA development and monitoring strategy updated; policies · Programs supporting developed to increase informal · SSN DPC · Decreased impact of income graduation from poverty sector employees' access to social insurance; and AAA shocks on poor households limited and not integrated · Just in Time Policy Notes on with safety nets provincial social protection programs harmonized with Social Protection (FY11) · Lack of mechanisms to federal programs · Social Safety Net Impact cushion households from the Evaluation Report (FY12) · Graduation strategies for negative effects of income · Health Insurance TA (FY13) safety nets piloted and results shocks (due to bad health · Labor Markets and Vulnerability and others) evaluated. ESW (FY13) · Implementation agency for national safety net established and coordinated with relevant graduation programs Annex I Page 5 of 9 Pakistan's Development Agenda World Bank Group CPS Expected outcomes at the Long-term Outcome Goal Issues and Constraints end of the CPS period and Outputs/Milestones Bank Group Assistance interim milestones Enhanced Delivery of Health, Nutrition and Population Services · High rates of malnutrition in · Prevalence of children 0-6 · Health service delivery Lending Good progress towards the MDGs, especially for maternal and child women and children months exclusively systems strengthened. · Enhanced Nutrition for Mothers breastfed increased by 15% and Children (FY11) health and nutrition and for HIV: · High TFR · Contraceptive prevalence · A plan for a publicly funded · Reduction in prevalence of health insurance program · HIV/AIDS II ( FY11) · Poor management of health rate increased to 35% · PRSC III (FY12) children under-5 who are · HIV/AIDS prevention, care developed services underweight (weight for age) in and treatment services AAA line with MDG target. · High OOP and low provided to 70% of target · Health Expenditure Review · Total fertility reduced by 0.3 government expenditure to groups (FY11) · HIV prevalence in high risk Health IFC groups remains below 5% · 1 investment in a private health Reduced vulnerability to catastrophic facility health expenditure · PPP Advisory project (FY10-14) Enhanced Rural Livelihoods Enhanced livelihood opportunities · Limited assets (financial, · Expanded use of farmer · 70% of community Supervision for the rural poor human, physical) of poor and community organizations have received · PPAF II (05) households organizations to link requested skills training and/or · PPAF III (09) Increased market access for small · Limited bargaining power producers to markets (at livelihood grants farmers and social capital of the least 20% of federated organizations report · Centers linking farmers to rural poor markets and financial services effective linkages with · Poor access to services and market and private sector created markets built) OUTCOME PILLAR 3: IMPROVED INFRASTRUCTURE TO SUPPORT PRIVATE SECTOR INVESTMENT AND GROWTH Increased Power Provision and Increased Efficiency and Reliability of Energy Supply Energy sector meets energy · Supply shortages/frequent · Losses in electricity · Strengthened electricity and Lending (electricity and gas) demand in an power outages, especially at reduced from 22% to 17%; gas networks leading to · Natural Gas Enhancement and efficient, affordable and peak demand and unaccounted for gas improved technical and Efficiency Project (FY11) environmentally sustainable manner · Precarious power sector reduced from 10% to 6%. commercial performance of · Tarbela IV Extension Hydro financial situation creating · Load shedding in power energy networks, gas and (FY11) macroeconomic risks sector reduced from 25% of electricity · CASA1000 Electricity · Gas shortages leading to peak demand to 15%; gas · Expansion of public hydro Transmission Project (FY11) load shedding eliminated. generation capacity initiated increased consumption of Supervision oil · Improved financial under Tarbela Extension · Electricity Distribution and viability: (a) zero budget Project. · Low operational, technical Annex I Page 6 of 9 Pakistan's Development Agenda World Bank Group CPS Expected outcomes at the Long-term Outcome Goal Issues and Constraints end of the CPS period and Outputs/Milestones Bank Group Assistance interim milestones and commercial efficiency support for tariff subsidies; Transmission Project (FY08) · Investments in cross-border and (b) 20% of investments · Weak sector governance energy supply infrastructure AAA financed by internal cash (policy and regulatory generation initiated under CASA 1000 · Energy Sector Policy Notes functions) and even weaker project. (FY10-13) corporate governance of · Catalytic investments to · Power Sector Review (FY11) public energy companies promote private investments in IFC gas and energy. · at least 6 investments in power/energy; 1 Advisory project (FY10-14) Improved Efficiency and Reliability of the Transport and Logistics Network Reduced transport costs and transit · A fragmented approach · Transit time of containers · Logistics Perception Index Lending times through improved transport towards trade facilitation from Karachi Port to from 2.62 in 2005 to 2.36 at · Karachi Port Improvement logistics and trade facilitation. and transport logistics Lahore reduced from 11 end of CPS period (FY10) · Cumbersome customs and days to 6 days at end of · Ports Master Plan prepared · 1-2 IFC investments in port CPS period. administrative procedures · Road sector review covering sector. (Jointly with KPIP) between Pakistan and financial, regulatory Afghanistan Supervision governance, and institutional · Trade and Transport Facilitation 2 · High port costs and long framework for national and (FY09) dwell times sub-national highways completed · Highway Rehabilitation · Road networks with inadequate capacity and low · At least 2 investment projects in transport sector; + Advisory service standards project · Limited private investment AAA in transport · Regional Transportation Study (FY11) IFC · 2 investment projects in transport sector; and 1 Advisory project · 1 Advisory project in logistics sector Strengthened Irrigation Infrastructure and Agricultural Competitiveness Improved sustainability of water and · Lack of user participation in · Improved equity in water · Decentralization of water Lending irrigation systems water management distribution as measured by management with more farmer · Punjab Barrages II Project (FY10) delivery performance ratio participation Supervision · Inadequate operations and from 0.4 to 0.6 (with · Sindh On­Farm Management maintenance perfect equity equaling 1.0) · 20% increase in numbers of Annex I Page 7 of 9 Pakistan's Development Agenda World Bank Group CPS Expected outcomes at the Long-term Outcome Goal Issues and Constraints end of the CPS period and Outputs/Milestones Bank Group Assistance interim milestones · O&M spending increased farmers' organizations and Project · Inadequate monitoring and management of groundwater by 20%, and cost recovery area managed by them. · Balochistan Small Scale Irrigation aquifers is increased by 10%. · Strengthened capacity of · Sindh Water Sector Improvement water management institutions · Inequities in surface water distribution, shortages at the · Initiation of rehabilitation and tail end of the system modernization of 2 barrages Enhanced agricultural productivity, · Agricultural policy capacity · Expanded use of improved · Improved agricultural Supervision value addition, and diversification weak techniques for crop research, extension services, · Balochistan Small Scale Irrigation production and animal training and policy analysis · Increased production of high · Crop yields and animal capacity NLTA husbandry value products productivity remain flat · ESW on agricultural adaptation to · Increased agricultural exports · Production not sufficiently climate change (FY11) diversified into higher value · Agricultural Value-Added TA · Increased agricultural yields agriculture (horticulture, (FY11) dairy) IFC · Technical knowledge and expertise not widely adopted · 2 Investment projects in agri- · Weak markets and low sector and Advisory project value addition (FY10-14) Improved Urban/Municipal Infrastructure and Services · Improved quality of life in the · Rapid urban transition · Improved urban planning · Metropolitan areas in Punjab Supervision urban areas and increased · Weak urban service delivery and management and their service providers · Punjab Municipal Services contribution of urban areas to as a result of fragmented frameworks implemented managed by a single authority Improvement Project (PMSIP) growth and poverty reduction responsibilities, weak in select municipalities. with accountability and AAA · Increased access to water, capacity and limited appropriate managerial and · Urban policy dialogue (NLTA) sanitation, transport and other accountability of public fiscal autonomy · IFC Advisory Assistance urban services in selected sector institutions · Improved database on land municipalities · Narrow and poorly and housing issues IFC administered local tax base · PPP Advisory project (FY10-14) · Poorly performing land markets Annex I Page 8 of 9 Pakistan's Development Agenda World Bank Group CPS Expected outcomes at the Long-term Outcome Goal Issues and Constraints end of the CPS period and Outputs/Milestones Bank Group Assistance interim milestones Environmental Sustainability for Better Health Outcomes and Improved Competitiveness Reduction in environmental · Environmental degradation · Pakistan's ranking for · Adoption of environmental IFC degradation costs at least 8 percent of "stringency of and social sustainability · At least 3 projects in renewable GDP environmental regulations" criteria in manufacturing and energy; advisory services in · Reduction of the costs of in the Global transportation sectors cleaner production. environmental degradation from · Vague environmental Competitiveness Reports 8.84 to 8 percent of GDP regulatory framework and improved (from 68/131 to · Strategic medium-term NLTA lack of enforcement 66/131) environmental action plans · Environmental sustainability and developed by provinces · Weak coordination between industry (FY11) agencies and government · Cleaner Production Advisory · Environmental management for completed growth and poverty alleviation in · Inadequate capacity to plan Sindh (FY12) and manage environmental impacts of infrastructure development Enhanced resilience to climate · Climate change to · National Strategy for · Development of national AAA change compound economic growth Climate Change Adaptation strategy for climate change · Climate change adaptation in and poverty reduction designed and under adaptation and mitigation Pakistan (FY11) · Reduction in cost of damage due challenges implementation to extreme climatic events from an average of US$6.3 to US$6 million/flood and from US$1.6 to US$1.5 million/cyclone OUTCOME PILLAR 4: IMPROVING SECURITY AND REDUCING THE THREAT OF CONFLICT Increased Employment and Livelihood Opportunities in Conflict Affected Areas Revitalized agriculture/livestock · Economic deprivation · Increased employment, · Community based planning Financing based economy and increased creates economic especially for young men and implementation of rural · Multi-Donor Trust Fund (FY10- livelihood and employment environment conducive to · Minimum livelihoods livelihoods enhancement 13) opportunities in conflict affected exploitation by militant ensured across crisis- interventions · NWFP Emergency Recovery areas of KP and FATA groups. affected areas · Commercial and small-scale Credit (FY10) · A better trained, and better market oriented agriculture AAA skilled workforce in KP expanded · PCNA and FATA · Regulatory reforms facilitate `doing business' in KP and FATA · Direct firm support through matching grants and challenge funds generate new private sector employment · Social protection interventions Annex I Page 9 of 9 Pakistan's Development Agenda World Bank Group CPS Expected outcomes at the Long-term Outcome Goal Issues and Constraints end of the CPS period and Outputs/Milestones Bank Group Assistance interim milestones secure minimum livelihoods for displaced persons and vulnerable crisis-affected populations implemented · General education and TVET training programs developed and targeted to address market demands for specific skills and expertise Increased Responsiveness and Effectiveness of the State Improved service delivery and · Perceived weaknesses in · Enhanced impact and · Completion of PCNA with Financing governance (in line with the rest of governance, capacity, conflict-sensitivity of Transitional Results · Multi-Donor Trust Fund (FY10- the country) in areas affected by representation and development programs Framework and action plan 13) conflict in KP and FATA responsiveness has eroded implemented in · PCNA action plans contributes · NWFP Emergency Recovery trust in the state communities affected by to enhanced governance, Credit (FY10) · Worsening security armed or violent conflict. improved service delivery in AAA undermines service delivery · Strengthened capacity and fragile and conflict affected · PCNA · Community participation in strategic reform of regions with direct community governance low or absent governance institutions in participation, including CDD KP and FATA mechanisms · Key infrastructure and public services restored in conflict- affected areas Annex II Page 1 of 40 A NNE X I I : F Y 06-09 P A K I ST A N C A S C OM PL E T I ON R E POR T Country: Pakistan Date of CAS: FY06-09 Date of Progress Report: None Period covered by CAS Completion Report: July 2006 to June 2009 CAS Completion Report completed by: Harry Garnett and Nicole Goldstein Date: I. Introduction 1. This CAS Completion Report (CASCR) assesses the effectiveness of the FY06-09 World Bank Group Country Assistance Strategy (CAS) for the Islamic Republic of Pakistan (Report Number 35718- PAK, dated April 4, 2006). It is based upon portfolio implementation performance reports, Implementation Status Reports and Aide Memoires for each project during the CAS period; Implementation Completion Reports for projects completed during the CAS period and IEG reviews of those reports; QAG reviews; interviews with client counterparts at federal and provincial levels and representatives of civil society; and interviews with Country Team members, past and present. 2. The CAS specifies the outcomes that would support the Government's long term development goals, as well as targets, intermediate indicators, and indicators used to measure the outcomes, all of which facilitate the task of assessing the achievement of results. II. Government's Strategic Goals (PRSP 2003 and Medium Term Development Framework 2005-2010) 3. The CAS was based upon the Government's strategic goals as articulated in the 2003 PRSP and refinements to the PRSP embodied in the 2005-2010 Medium Term Development Framework (MTDF). The new PRSP, which was prepared shortly after the preparation of the CAS, did not significantly change the Government's strategic objectives. The 2003 PRSP had four pillars: i. Accelerating economic growth while maintaining macroeconomic stability: the strategy aimed to expand the role of the private sector by strengthening the enabling role of government. ii. Improving governance: key elements included accelerating civil service reform, furthering devolution, improving access to justice, police reforms, and accelerating improvements in public procurement and financial management. iii. Investing in human capital: the PRSP included increased allocations for education, water and sanitation, rural infrastructure and health, as well as organizational reforms in human development ministries and agencies. iv. Targeting the poor and vulnerable: The PRSP included social protection programs to improve the welfare of the poor and vulnerable groups. III. World Bank Strategic Objectives and CAS Outcomes (FY06-09) 4. The FY06-09 CAS was well aligned with the Government's strategic goals. Pillar 1 of the CAS, Sustaining High and Broad-based Growth and Improving Competitiveness, is aligned with the PRSP's Annex II Page 2 of 40 Pillar 1, Accelerating Economic Growth While Maintaining Macroeconomic Stability, Pillar 3 links with the PRSP's Pillar 4, Targeting the Poor and the Vulnerable, while Pillar 2 is aligned with the PRSP's Pillar's 2 and 3, Improving Governance and Investing in Human Capital. The CAS includes a clear results framework with measurable indicators to guide program planning, country performance monitoring and portfolio performance monitoring. The results framework includes 3 pillars, 11 objectives, 64 outcome indicators, and 79 intermediate indicators. 5. CAS Context and Relevance. The overall CAS objective of sustaining growth and accelerating poverty reduction was relevant and well aligned with the Government's own program. The previous CAS period had seen Pakistan's recovery from economic crisis followed by rapid growth and significant progress in poverty reduction. GDP growth reached 8.4% in FY04/05 and, despite the challenges posed by the October 2005 earthquake, was expected to remain above 6%. Seeking to capitalize on this relatively favorable environment, the CAS was designed to support an ambitious program of second generation reforms and accelerated infrastructure investment to put Pakistan on a higher growth trajectory over the medium term. This proved overly optimistic. 6. The generally favorable country context that prevailed at the time the CAS was prepared began to deteriorate markedly beginning in 2007. Positive economic prospects gave way to large imbalances driven by rapidly rising oil prices followed in rapid succession by the global food and financial crises. Concurrently, sound macroeconomic management and policy performance were undermined by a hotly contested political transition. A prolonged period of political confrontation, constitutional crisis and uncertainty undermined Government's ability to meet growing economic challenges. Domestic and international security challenges, while not new, reached crisis proportions during the CAS period, imposing large human and financial costs while seriously eroding investor confidence. This rapidly changing context meant that the challenge for the country team was to shift the focus to addressing near term challenges while at the same time sustaining the focus on longer term challenges and adapting to meet the priorities of the new government that came to power during the CAS period IV. Results Assessment 7. Attachment 1 provides a detailed analysis of CAS progress and World Bank Group performance against the results framework. This section summarizes these findings by pillar and outcome. Pillar 1: Sustaining High and Broad-based Growth and Improving Competitiveness 8. Strengthen macroeconomic management and allocation of resources. Maintaining the hard- won benefits of macroeconomic stability was critical to sustaining growth. When the CAS was prepared, recent performance had been promising in terms of growth but inflationary pressures were growing, ad hoc and inconsistent tax policy changes were constraining revenue mobilization and implementation of tax administration reforms was at an early stage. Losses of state-owned enterprises continued to be a drain on the budget. The CAS program in this goal area set out to strengthen tax policy and administration, improve debt management and public expenditure management. 9. The Bank contributed to progress in strengthening macroeconomic management and the allocation of resources through the Poverty Reduction Strategy Credits (PRSCs) II and III and through Annex II Page 3 of 40 support for fiscal reforms included in a series of provincial DPCs. Later, to assist in addressing the urgent need for stabilization, the 2009 Poverty Reduction and Economic Support Operation (PRESO, 46685- PAK), prepared in close consultation with the IMF, helped address critical revenue and expenditure issues. Improved tax administration was supported through The Tax Administration Project (077306- PAK) that began during the previous CAS and has been extended to 2011. Although it is expected that the project will eventually achieve its development objective, the project struggled with moderately satisfactory implementation due in part to strong opposition to needed organization changes in the Federal Bureau of revenue. The project is now being restructured with intensive supervision and non-lending technical assistance to revitalize the reform program. The project also suffered from delays in the design and implementation of IT systems. On the positive side, the tax policy reform ESW and NLTA dialogue ­ given considerable urgency by the macro crisis ­ have led to adoption of a plan to introduce a VAT beginning in FY2011. In addition, creation of large and medium taxpayers' units appears to have paid off with a significant decline in businesses identifying tax administration as a major impediment in the most recent investment climate assessment. 1 Nevertheless, poor tax mobilization remains one of the key macroeconomic issues. Total revenue actually fell from a very low 14.9 per cent of GDP in 2007 to 14.3 per cent in 2008. 10. These operations were underpinned by AAA including a Tax Policy Report, the Pakistan Export and Growth report, Trade Policy Notes, a Pakistan Access to Finance Study, a Labor Market Study, and the Pakistan Investment Climate Assessment. AAA was also carried out at the provincial level to include the Sindh Economic Report, the Balochistan Economic Report, NWFP Growth Policy Notes, and the Northern Areas Economic Report. 11. Despite progress during the first two years of the CAS period, overall the World Bank did not achieve its objectives for this goal. During the first half of the CAS period, macroeconomic performance continued to be good. Growth in FY06 -07 averaged 6% of GDP and the debt/GDP ratio continued to fall. The poverty headcount fell, reaching 17 percent in the 2007-08 household survey compared with 22% in 2005-06. 2 However, the macroeconomic situation deteriorated substantially during the latter half of the CAS period, with increasing inflation, widening fiscal and current accounts and slowing economic growth. Much of this can be attributed to external factors, such as exogenous oil and commodity price shocks, the worldwide financial and economic crisis, political and security instability, and the Government's inability to take the steps necessary to undertake needed adjustments in energy pricing and revenue mobilization. As a result federal subsidies increased from 1.2 per cent of GDP in 2007 to 3.8 per cent of GDP in 2008, with the budget deficit increasing from 4.3 per cent of GDP to 7.4 per cent. Foreign reserves declined rapidly due to the large current account deficit, a reduction in net capital inflows and an inadequate adjustment of the exchange rate. GDP growth, which peaked at about 9 per cent in FY 2004, is expected to be around 3 per cent for 2009/10. 12. The CAS identified macroeconomic slippage as a key risk and envisioned intensified dialogue on macroeconomic policy underpinned by annual PRSCs. However, the PRSC series could not be delivered, as the Government was increasingly distracted by internal political turmoil which sapped reform 1 Pakistan Investment Climate Assessment, Rept No 46435-PK, 2008 2 Poverty did rise in the last quarter of PSLM 2007-08 survey period (April ­ June 2008) and can be expected to have risen further after the survey period as the full impact of food and fuel crises and the breakout of the global financial crisis came after the PSLM 07-08 was completed Annex II Page 4 of 40 momentum. Worsening security conditions also contributed to a decline in investor and business confidence as well as increased security-related expenditure which worsened the fiscal situation. In response, the World Bank stepped up engagement on macroeconomic policy and deepened cooperation with the IMF. By the end of the CAS period, the authorities had entered into a Stand By Arrangement with the IMF, with the World Bank taking the lead in policy dialogue on key structural reforms of tax administration, power sector reform and safety nets. Thus, rather than helping to sustain high growth as originally envisioned, the focus of the Bank's work shifted to a more short-term focus on stabilization. 13. Increased diversification and exports in agriculture. Although the Government had made progress in liberalization in the sector a priority during the previous CAS period, it was still heavily involved in the procurement of local production; and factor markets including land, water and credit still did not function well. The World Bank set out to support the preparation of an integrated rural strategy, as well as analysis related to adapting technologies for rain-fed areas and livestock, and policy and institutional reforms beginning with land records registration in Punjab. AAA included the Pakistan Rural Growth and Poverty Reduction Report (which included a rural strategy). The Punjab Land Records Management and Information Systems Project suffered substantial delays, mainly because of weaknesses in project management capacity and delays in software development, as well as an increase in the scope of the project. The Sindh On-Farm Water Management Project (078997-PAK, 2004-2009) has been rated only moderately satisfactory due to capacity and environmental problems. The NWFP On Farm Water Management Project also aimed to support improvements in agricultural productivity. 14. Irrigation and Drainage. Pakistan's extensive irrigation system, one of the largest in the world is under stress as a result of growing demand, deteriorating infrastructure and poor governance. The World Bank strategy reflected a conclusion that weak performance of the Pakistan irrigation and drainage sector reflects major underlying institutional weaknesses. The Bank set out to support a combination of institutional reforms and investments including the rehabilitation of critical assets; capacity development at provincial and federal levels; improvements in the quality, efficiency and accountability with which irrigation services are delivered; and investment in on-farm services. Reforms included decentralization of irrigation service from large public entities to commercially oriented area water boards. The Bank provided technical assistance for a range of water related issues, including financing, storage and hydrology through the Water Resources Capacity Building Project (WCAP ­P 110099, 2009). Other operations included the Sindh Water Sector Improvement Phase I Project (2008), the Balochistan Small Scale Irrigation Project (2008), the Punjab Irrigation DPLs (2006, 2007), and the Taunsa Barrage Emergency Rehabilitation and Modernization Project (towards the end of the previous CAS, 2005). The NWFP On-Farm Water Management Project (2007) achieved its objectives but concern was expressed about the potential unsustainability of the farmers' organizations. The operations were supported by AAA including the Pakistan Country Water Resources Assistance Strategy (34081-PAK, 2005) and a Punjab Water Supply and Sanitation report (P101686, 2007). 15. Performance against this goal has been mixed. The irrigation governance and management agenda made good progress under the Punjab Irrigation DPL series. Positive results include a system of Asset Management Planning for irrigation; a new groundwater management policy; and the transfer of public sector managed tubewells to farmers. Under the program three hundred water users associations have been established, covering some 1.5 million hectares of land. The Sindh project's rating was reduced to unsatisfactory in December 2008. The Balochistan Small-Scale Irrigation project started slowly Annex II Page 5 of 40 because preparatory action had to be undertaken after the project became effective. Rehabilitation of the Taunsa Barrage was completed ahead of schedule, although the project encountered some problems in addressing community concerns related to re-settlement and livelihood assistance activities. Progress with the Water Sector Capacity Building Project has been moderately satisfactory, the main problem being technical assistance components, which have been hampered by a fragmented approach to training. 16. Improving the business environment for trade and investment. Policy makers were focusing on strengthening international competitiveness through rising productivity including improving economic governance, fostering flexibility in factor markets and making it easier for entrepreneurs to do business. The World Bank set out to support these policies through analytical work, including the Pakistan Export Growth and Competitiveness Report (35499-PK, 2006) and capacity building. Other AAA included the Pakistan Value Chain Study, a Labor Market Study and an Investment Climate Assessment. 17. The CAS targeted enhanced labor market flexibility as a key goal. This was to be achieved through reforms to existing labor laws. With PRSC support, Government made significant progress in revising labor legislation to reduce compliance costs for businesses and to increase labor force participation, particularly for females. Further reforms were targeted through PRESO with submission to Parliament of a new Employment and Service Condition Act aimed at consolidating related laws governing employment conditions. This Act remains pending with Parliament. 18. The CAS also targeted a strengthened legal framework for competition through restructuring of the Monopoly Control Authority. This was largely achieved as a new competition policy framework was approved and an independent Competition Commission of Pakistan (CCP) created in November 2007. Significant progress has been made to establish the framework and operationalize CCP. 19. One of the key objectives of the Poverty Reduction and Economic Support Operation (46685-PK, 2009) was to enhance competitiveness through reducing barriers to business entry and exit and strengthening the financial sector. The operation was designed to build upon an extensive program of technical assistance by the Bank since 2006, including the above mentioned report. Under PRESO, Government rolled out an electronic platform for business registration with the aim of further simplifying procedures. The Second Trade and Transport Facilitation Project was approved by the Board in May 2009. 20. IFC's activities related to trade finance were successful during the CAS period, particularly after the introduction of the Global Trade Finance Program to local banks in 2006. An increasing number of banks ­ up to 11 in FY09 - made use of IFC's trade finance guarantees. It became even more important after the global economic crisis affected Pakistan with a total of $223.9 million in guarantees in FY09 21. Notwithstanding progress in some of the structural reform areas targeted by the CAS, the overall business environment worsened due to the deteriorating macroeconomic situation and increasing distortions arising from rapidly rising price subsidies. The increasing political uncertainty and instability also reduced incentives for domestic as well as foreign investors. 22. Improving Delivery and Efficiency of Infrastructure Services. Recognizing that poor infrastructure represented a serious constraint to growth and investment, the CAS targeted a significant Annex II Page 6 of 40 share of lending toward the water, transport, urban and energy sectors. In general, however, the CAS emphasized policy reforms (e.g., privatization, private sector participation, and institution building) supported through DPLs over large infrastructure investment projects which, to the extent they were envisioned, were planned for the latter part of the CAS period. Investment projects were expected to be approved once reforms had advanced sufficiently to make public investment effective. The CAS also supported some investment operations in key sectors, including power, telecommunications, oil and gas and transport. AAA included a Transport Competitiveness Report (P093998, 2006), an Infrastructure Implementation Capacity Assessment (P100848, 2007), and the Public Private Partnership policy note (P087007, 2007). Projects included the Electricity Transmission and Distribution Project (2008-2012); and the previous CAS's National Highway Rehabilitation-Additional Financing (010556-PAK, 2003- 2009). Non lending technical assistance was provided (by the Public Private Infrastructure Advisory Facility) to develop and design a universal access program for mobile telephony and broadband. IFC set out to support investment in power and distribution (Karachi Electric Supply Company and Engro Power), the development of country's gas and petrochemical resources (Dewan Petroleum and Engro polymer), the expansion of container terminals (Pakistan International Container Terminal) and private telecommunications sector (Paktel). IFC was also engaged in advisory services in public private partnership (PPP) development, supporting the GOP's regulatory bodies and its infrastructure privatization sector. 23. Progress on corporatization and improved performance in the power sector was mixed. Implementation of the Electricity Transmission and Distribution Project has been very slow due to routine project matters. Nevertheless, project ISRs indicate steady reductions in technical and commercial losses in the participating power distribution companies. However these achievements were overshadowed by a financial crisis in the sector caused by Government's inability to adjust tariffs in response to increasing power generations costs (principally due to rising oil prices). This was a major contributor to the fiscal crisis in 2008/09. In addition, lack of investment in generation capacity led to major shortfalls in power. 24. In transport, the CAS envisioned a series of DPLs in support of the Government's National Trade Corridor initiative as well as ongoing implementation of the of The National Highways Rehabilitation project which was extended with additional financing. However, progress in implementing the NTC reform agenda proceeded more slowly than planned, in part due to the ambitiousness of the targeted reforms and in part due to the change in Government. For example, there was negligible progress in corporatizing Pakistan Railways or establishing a sustainable financing mechanism for the National Highway Authority. The NHA project was rated as "satisfactory" in the most recent ISR with the program on track to meet its development objectives. Major achievements include: the road network in poor/very poor condition reduced from 49% to 39.5% against an end of project target of 35%; travel time on N-5 reduced by 9% reaching the end of project target of 10%; and fatalities on N-5 decreased by 44%. Problems included higher prices than anticipated, shortages of materials, and a lack of timely availability of Government counterpart funds. 25. Improving access to market-based finance. The Bank Group set out to support reforms that would deepen the financial sector and lengthen instruments. This built on earlier reforms that had transformed a mainly state-owned and weak banking system into a healthier, market based system, but with some financial institutions still under government control, and with large segments of the economy Annex II Page 7 of 40 without access to formal credit. The Pakistan Access to Finance Report (P100850) and the Pakistan Investment Climate Assessment (P098872, 2009) were carried out towards the end of the CAS period. 26. While, Pakistan's financial system grew significantly over the CAS period, total financial assets of 150 percent of GDP are far below those of countries like China (543 percent), India (298 percent of GDP), and Thailand (211 percent). In spite of recent achievements, access to financial services remains quite limited in Pakistan. The predominant share of the financial system, the banking sector, remains focused on large enterprise lending, with an increasing interest in consumer financing (though still on a very small scale), to the relative neglect of SMEs, rural areas, microfinance, and the poor. 27. Reform of the National Savings Scheme (NSS) moved forward modestly. The modernization and automation of information technology systems for the (NSS) began in 2009 and will be rolled out successively at NSS outlets across Pakistan over the coming years. The authorities also took actions in 2008 and 2009 to improve the forecasting of debt service on NSS instruments. In the context of PRESO, the authorities agreed to develop a medium-term debt management strategy, but this will not be undertaken until 2010. 28. IFC's investment funded finance related advisory services under the PEP-MENA program including: strengthening financial markets and expanding access to finance for MSME's; improving corporate governance practices; and in privatization and public private partnership (PPP) development, supporting the GOP's regularity bodies and its infrastructure privatization efforts. IFC was not successful in its training and advisory project for the housing sector which was to work with individual banks to improve internal credit and risk systems, policies and procedures to promote affordable housing finance, largely because the Government did not take the steps necessary to reorganize and reorient the House Building Finance Company. 29. Assessment of Pillar 1: The overall objective of this pillar, high and broad-based growth, was not achieved, despite a strong program of lending, AAA, investment and an active policy dialogue. The economy had deteriorated by the end of the CAS period, although the macroeconomic indicators were beginning to deteriorate even as the CAS began to be implemented. Key macroeconomic indicators are worse now than they were in 2006. The principal reason for this was Government's inability to undertake reforms on taxes, expenditure, and commodity pricing needed to maintain fiscal and economic stability with growth. While there was progress in strengthening institutions of economic management and some progress in areas such as irrigation institutional management, competition policy, technical losses in power, this progress was overshadowed by the Government's focus on elections, the new Government's need to win broad-based political support and the rising security threats to the nation. Much of the ambitious policy-based lending program for infrastructure development envisioned in the CAS had to be deferred as project preparation slowed during the political transition and creditworthiness considerations eliminated Pakistan's access to IBRD financing. 30. In retrospect, while they were cited in the CAS, the risks related to policy reversals due to political changes and macroeconomic slippages were underestimated. The Fiscal Responsibility and Debt Limitation Law, which was seen as significantly mitigating the risk of the latter, proved ineffective in ensuring policy makers took action to address rising economic imbalances. The lack of ownership for Annex II Page 8 of 40 energy pricing reforms introduced in a time of more stable energy prices was also not appreciated, contributing to the rapid deterioration in macroeconomic performance. Pillar 2: Strengthened Governance and Service Delivery 31. Greater efficiency, transparency, and accountability in the use of public resources. Improving governance was included in almost every operation in the CAS. There were governance elements, which set out to improve policy making and implementation, accountability and transparency, in sectoral projects, DPCs and DPLs, and the PRSCs at both provincial and federal levels. The Bank continued to support public financial management reforms begun in 1996 including strengthening legislative oversight; improving accounting and auditing; introducing better corporate governance; and additional analytical support to assist in defining the agenda for further reforms. 32. Public Expenditure and Financial Accountability (PEFA) Assessments were carried out for each of the provinces and the Federal Government. The principal instrument for implementing reforms in accounting and auditing was the Second Improvement to Financial Reporting and Accounting (PIFRA II, 2005) project which has made satisfactory progress. The accounting and auditing goals were achieved at the federal and provincial levels, to be extended to the districts in 2009. Auditing, which used to be on a transaction basis is now in accordance with international risk-based practice. The budget process too has been improved with the introduction of a medium term perspective. Progress with legislative oversight, through capacity building for the Public Accounts Committee (PAC), was not satisfactory, although the post-election PAC appears to be much more serious about its responsibilities. Procurement capacity improvements were supported through procurement assessments, capacity building under the PSCB project, the PRSCs, the DPC s and DPLs, and the sectoral projects. More progress is needed before procurement reaches the standards achieved in accounting and auditing. 33. Enhanced capacity for service delivery and public sector management. Goals under this objective were to include improvements in management of the civil service (merit-based recruitment and promotion, structural changes to support devolution, further pay and pension reforms, and capacity building through effective national and international training) and reforms to increase the accountability and efficiency of local governments. Pakistan's devolution initiative was seen as a cornerstone of the government's strategy for improving service delivery by making the public sector more accountable to citizens and more efficient at delivering basic services. 34. With respect to civil service reforms, The Public Sector Capacity Building Project (3904-PAK, 2004) and PRSCs were to be the main operations. Preparation of a civil service reform agenda and creation of a civil service reform unit represented a promising start along with the creation of a high level National Commission on Governance Reforms. However those proposals stalled. As a result the planned District Service and National Executive Service were not created and no progress was made in reducing pay compression. Nevertheless, progress was made on less ambitious reforms to improve recruitment by the Federal Public Service Commission by revamping the testing process and improving capacity of the FPSC itself. On balance, civil service reform efforts yielded negligible results. 35. At the end of 2008, the PSCB project was rated only moderately satisfactory. The ISR stated that there was a "need for broader civil service measures to complement professional development and Annex II Page 9 of 40 capacity building, including pay and pensions, recruitment and training." It was recommended that the implementation unit be more active in facilitation, coordination and fiduciary oversight. On the positive side, professional development of mid-level civil servants proceeded on schedule. However, the project's design, which focused heavily on training and analytical outputs, reduced its impact on public sector performance. The PRSCs and the sectoral and provincial DPCs and DPLs also set out to improve service delivery, with some success. 36. Although the sectoral DPLs and DPCs supported sub-federal level governance, little support was given to supporting capacity building at the local level. One problem was that, despite legislative changes and the election of local councils, staff continued to report to provincial governments and the future of the local government system is uncertain ­ the ambitious decentralization reforms introduced in 2001 were revisited and in some cases reversed. Several projects including the Punjab Municipal Services Improvement Project and the NWFP and AJK CIP projects had the dual objectives of strengthening and supporting the local government system while also supporting the delivery of community infrastructure. Under the NWFP CIP project 699 Citizen Community Boards (CCBs) have been registered in nearly all Tehsil Municipal Authorities. 37. Improved municipal service delivery. Following the swearing in of 6,400 newly elected local governments in 2005, the Bank's support for devolution was to include analytical work on roles and responsibilities under the new devolved framework, citizen participation, and capacity building. The CAS also set out to support the Government's urban agenda by helping to address weaknesses in policies and administrative structures that undermine service delivery in cities. A series of DPLs was envisioned to support policy reforms to address (i) improved coordination and consistency of urban planning and land management; (ii) municipal finance; and (iii) infrastructure service delivery. However the DPL series was not delivered as planned. The Punjab Municipal Services Improvement Project (7380-PAK, 2006) aimed to build capacity and provides grants for investments to improve service delivery in small municipalities. The project has suffered from slow implementation. Issues included frequent staff turnover, inadequate allocations for operations and maintenance, and jurisdictional problems. Capacity constraints were severe, exacerbated by the uncertainty associated with the political transition. 38. Assessment of Pillar 2: The overall goal to strengthen governance and service delivery was partially achieved. Good progress on financial reporting and accounting were offset by a lack of progress in public sector management and a failure to deliver planned lending in the urban and local governance sectors. The success of PIFRA II and the significant AAA on federal and provincial PEFA assessments sets the stage for continued progress in public financial management, but entry points and champions will be needed for both public sector reform and local government strengthening. Ownership of the local government reforms turned out to be weaker than anticipated. Pillar 3: Improving Lives and Protecting the Vulnerable 39. Improved delivery of health and education services. Performance in the education sector, although improving, had been handicapped by inadequate resources, over-centralization, and weak public sector management. The Bank planned to continue its focus at the provincial level through development policy credits with annual tranches linked to outcomes in Sindh, Punjab and NWFP, and sector investment projects in Balochistan. With slow progress in improving health outcomes for the poor, the Annex II Page 10 of 40 CAS concentrated on encouraging a government focus on public health functions, expanding access to primary health care and family planning, supporting increases in overall health expenditure, and piloting new approaches to heath service delivery. System reforms would be supported through a series of provincial development policy credits. The Bank also planned to help the Government identify its priority interventions in environmental management, including in water and sanitation. 40. The educational DPCs generally achieved their policy objectives. The Punjab Education Sector DPC I, which began under the previous CAS and ended during this one, exceeded many of its indicators, met most of the others, and only fell short for a few, resulting in a satisfactory operation according to the ICR. Three more DPCs followed. The first three Punjab Education Development Policy Credits were rated as satisfactory, exceeding the primary school enrolment outcome indicators and just falling short for secondary education. Punjab Education DPCs II and III outcomes were rated satisfactory by IEG. Sindh too had a DPC, to be followed, as was Punjab IV, by a three year Education Sector Project. Balochistan's Education Support Project (4203-PAK, 2006-2011) has made satisfactory implementation progress. The National Educational Assessment Project (3775-PAK), jointly funded by DFID, which began in 2003 and closed in June 2009, started slowly but eventually made satisfactory progress in achieving its development objective of ensuring that assessment mechanisms and instruments in place although more support will be required to strengthen the capacity and institutionalize assessments. AAA included a study of Higher Education Policy, which underpins the Higher Education Support Program which was approved by the Board in September 2009. 41. While the Punjab education DPCs were successful in achieving many critical policy and institutional reforms, there was modest improvement into learning outcomes during this period. While several institutional reforms to strengthen quality were put in place, these did not translate to improved learning outcomes during the CAS period. The program responded to changing needs by moving from a program built around the policy reforms promoted by single tranche provincial DPCs to slightly longer term sectoral programs, also at the provincial level, that focused on more operational issues. 42. In health, the CAS envisioned support at the federal level in communicable disease prevention programs (polio and the ongoing HIV/AIDS project), health surveillance and maternal and child health (through support to the Lady Health Worker (LHW) program) During the CAS two health sector operations were approved along with the province-level HD DPC in NWFP. The PRSC also included health triggers, one of the prior actions for health - consolidated health expenditures for 2005/06 to be consistent with the targets set out in the PRSP ­ was not met, despite a good increase in expenditures. 43. The HIV/AIDS Prevention Project (2003-2009) has institutionalized HIV/AIDS service delivery through the private sector with public sector financing and has been able to stabilize HIV prevalence where service delivery interventions have been operationalized. However, the project continues to suffer from inadequate procurement and financial management staffing and is rated as moderately satisfactory. The Polio Eradication II Project including supplementary financing, which closed in 2007, achieved its development objective in terms of coverage but the transmission of polio virus persisted due to security situation in different parts of Pakistan The health surveillance and LHW projects did not proceed as Government priorities shifted. Annex II Page 11 of 40 44. Reduced vulnerability and improved livelihoods for poor communities through effective safety nets, targeted interventions, and hazard risk management. At 0.5 per cent of GDP, expenditure on social safety nets programs is lower in Pakistan than in most other developing countries. The targeted CAS outcomes included development of a social protection policy, piloting of conditional cash transfers, development of a targeting mechanisms and increased spending on poverty-targeted safety nets. The Bank's support for social safety nets was planned to include assistance to the chronic poor (widowed, disabled and elderly), help for the poor to escape poverty, and support for families and individuals to cope with seasonal shock and natural disasters. The Bank also set out to buttress support for social security. Support would be provided through PRSCs, a stand-alone social protection operation, assistance for persons with disabilities in earthquake affected areas, and social protection components in the provincial DPCs and emergency operations. In 2007 the Bank prepared the Pakistan Social Safety Net Report. 45. While these interventions were generally on track the CAS agenda was overtaken by events as the new government that came to power in late 2008 had an ambitious agenda for scaling up social protection under a new Benazir Income Support Program. The Bank responded with rapid TA and lending (approved in the first month of FY 10) to help Government design and roll-out a dramatically expanded cash transfer program for poor families using a proxy mean test targeting mechanism. With this, a key CAS goal was achieved - expanded spending on safety nets using an objective targeting mechanisms developed with Bank support. 46. Improved livelihoods and services for poor communities and drought prone areas. The CAS targeted increased community participation in local infrastructure and services and an increase in microcredit borrowers. These outcomes were to be supported by the ongoing PPAF and CIP projects. The ICR for the Second Poverty Alleviation Project, which became effective in 2004, noted poorly defined PDO indicators, while the belatedly established M&E system focused on outputs rather than outcomes. This partly reflects the evolution of PPAF focused on micro-finance provision and strengthening civil society to a broader livelihoods focus. The PDO of the recently approved PPAF III improves the focus on outcomes and impact. Implementation had been affected by the earthquake in 2005, and deterioration in the macroeconomic and security situations. However, the ICR concludes that the development objectives have been largely achieved and that the project has been highly satisfactory. The project met or exceeded most of its indicators. It also managed to adapt successfully to changes in financing and the external environment, including four additional finance credits -- two in support of earthquake relief and rehabilitation and the other additional finance to strengthen the approach to social mobilization in the poorest areas of Pakistan. 47. The AJK Community Infrastructure Project (3689-PAK, 2002-2008) has made moderately satisfactory implementation progress, although it is thought that stronger follow up on the project is required by the Government and market based salaries need to be paid to attract well qualified staff. Project management has suffered from frequent changes in staffing. The Second NWFP Community Infrastructure Project made satisfactory progress despite the deteriorating security environment in the province and the increased difficulty in tackling gender and social issues. The project also experienced frequent changes in staff. 48. Reducing Pakistan's vulnerability to natural disasters. Close to the end of the previous CAS, donors including the World Bank, pledged $6.5 billion for earthquake relief. Beginning with the ongoing Annex II Page 12 of 40 Earthquake Recovery Credit, the Bank planned to assist Pakistan to develop a hazard risk management strategy. The Bank also planned to work with the Government and other partners to develop capacity to carry out the strategy and to integrate risk management into development programs. 49. Following an Earthquake Damage and Needs Assessment prepared by the World Bank, the Asian Development Bank and other partners in 2005, the World Bank prepared the Earthquake Emergency Recovery Project (P09910, 2006). This project was rated satisfactory in terms of its development objective and highly successful in terms of implementation performance. The project's housing reconstruction, livelihood support and import financing components were fully disbursed and pilot projects in disaster relief management were launched. A total of $238 million Additional finance was provided to the PPAF for earthquake relief and rehabilitation, which leveraged an additional US$26 million from IFAD. This project had strong community participation in reconstruction and was rated satisfactory. Earthquake additional finance was also provided to the GoNWFP, which was linked to the NWFP OFWMP. AAA included the Emergency Cyclone Damage and Needs Assessment. 50. The GEF Protected Area Management Project, which began in 2001, is not referred to in the Results Framework, and is due to close in 2009, was successfully implemented in AJK and NWFP, but suffered from staffing, financial management and disbursement problems in Balochistan. AAA included a Strategic Country Environmental Assessment in 2006 which highlighted the high costs to the Pakistan economy (at least 6% of GDP) of environmental degradation and helped solidify a consensus on the need for a more active response. This has laid the groundwork for future work in the upcoming CAS. 51. Assessment of Pillar 3: World Bank Group performance under Pillar III was very good, although progress was limited in some areas. The Earthquake Recovery Project was considered best practice and has been used as global best practice, while in education programs generally met their development objectives and there was a strategic shift to results based approaches in Sindh and Punjab. The Bank's social protection work scaled up strongly towards the end of the CAS with introduction of the Benazir Income Support Program and support to PPAF was improved through a stronger focus on outcomes and impact. V. World Bank Performance ­ Portfolio Management Lending 52. Lending. During the CAS period 12 national projects, 8 provincial DPLs or DPCs, 7 sectoral provincial projects, and two PRSCs were approved. Budget support mainly through DPCs accounted for about half of lending in the early years of the CAS. There was no budget support in 2008. Budget support returned with the PRESO in 2009. A number of planned project were dropped and others slipped to the following year. Every project originally planned for 2008 was dropped or forwarded to 2009 with the exception of the Social Mobilization and Balochistan SSIP. Ten projects planned for 2009 were also dropped, with three added: Third Partnership for Polio Eradication, PESO and second Transport and Trade Facilitation Project. 53. Portfolio Performance. As of June 2009, there were 26 projects in the portfolio, with commitments of $3.6 billion; one of the highest levels in the Bank, although $1.4 billion worth of projects Annex II Page 13 of 40 are expected to close in the next 18 months. The Second Poverty Alleviation Fund Project, which became effective in 2003 and will close in 2010, is the largest, at $551 million (including additional financing), followed by the Earthquake Emergency Recover Credit at $400 million, Earthquake Responses Additional Funding ($440 million) and two infrastructure projects - Highway Rehabilitation, and Electricity Distribution and Transmission. Despite the political, security and economic situations, only 15 percent of projects are at risk (the regional average is14 per cent). The disbursement ratio improved from 34 percent in 2008 to 40 percent for FY09, against a regional average of 24 percent. One third of the portfolio has had closing dates extended, one by four years, two by 1½ years and the rest by one year. Some of the extensions were caused by a slow start-up, in many cases because the institutional arrangements were not in place. Financial management, procurement, slow disbursement, M&E, and country environment are the most common flags. Almost half the projects in the current portfolio are five years or older, including two of the three largest projects. 54. Design and Quality at Entry. Quality reviews generally found design and quality at entry to be good. For example, the strengths in design of PIFRA II were thought to be the appropriateness of the approach, both in terms of IT and organizational arrangements, and close and continuous contact with donors to avoid gaps and duplication. The NWFP CIP II design strength was thought to be the way it built upon lessons learned in the predecessor project. Being able to build upon earlier related operations was also identified as the strength of the Balochistan Education Support Project. All three were successful projects. In contrast the Tax Administration Project was considered not to be ready for implementation with key project management and institutional problems not resolved 16 months into the project. The review of the Public Service Capacity Building Project pointed out that the project's results could not be sustained unless the civil service was transformed. These last two projects have had limited success. 55. Closed Projects. Eight projects were both closed during the CAS period and rated by IEG. All were approved under the previous CAS. The Partnership for Polio Eradication was rated highly satisfactory, Trade and Transport, and Punjab Education DPC II and III were rated satisfactory, and PRSC I, NWFP On Farm Water Management, and Second Partnership for Polio Eradication were rated moderately satisfactory. 56. IFC's portfolio. IFC made new investment commitments of $966 million between FY06-09, which exceeded the target by $300 million (Annex 8). As a result IFC's committed portfolio increased steadily between FY06 and FY09 (FY06 - $273 million, FY07 - $522 million, FY08 - $665 million, FY09 - $714 million). Of particular note is $224 million in new commitments in FY09 for trade finance, which offset the lower volume of investment in other sectors during the economic crisis. The overall portfolio is performing well with about 11% of principal in non-accrual mainly due to a default by one company. The development impact of projects in Pakistan, tracked by IFC's Development Outcome Tracking System (DOTS), is generally higher than the IFC average. Non-Lending 57. Economic and Sector Work. ESW work conducted during the CAS has been relevant and of high quality. The analytical work informed future operations, as well as the dialogue with the federal and provincial governments on macroeconomic and sectoral issues. Peer reviewers generally praise the Annex II Page 14 of 40 quality of the deliverables. The non-lending program included 29 pieces of analytical work (See Attachment 4). Nine had a provincial focus, of which six were focused on public financial management, including provincial and Federal PEFAs. Core economic and social work included the Pakistan Earthquake Damage and Needs Assessment, Growth and Export Study, the Higher Education Policy Note, Rural Growth and Poverty Reduction study, a report on Transport Competitiveness, a Strategic Country Environment Assessment, a Value Chain Study, and a Gap Analysis of Public Accounting and Auditing, all prepared early in the CAS, setting the scene for future operations. Economic reports were prepared for Sindh, Balochistan and the Northern Areas. Later ESW included a Social Safety Net Study, a Labor Market Study, a Tax Policy Report and a Public Expenditure Review. 58. Technical Assistance and Policy Advice. Technical assistance, at about $1 million a year, and policy advice, have been particularly important components of the CAS given the very fluid political and economic environment, with severe economic problems at a time of political change. The interactions between the Bank team and Government have focused on fuel and commodity pricing issues, taxation, the fiscal and balance of payments deficits, and rising debts during the final years of the old administration. Substantial technical support has also been provided on public financial management and sectoral issues. However, the dialogue was important in defining the policy reforms to be supported by the budget operations and also the components of the investment operations throughout the CAS. The Bank's mobilization of support and technical assistance following the earthquake has been particularly appreciated by the Government. Forty nine trust fund financed activities were carried out during the CAS to provide technical support. Instruments 59. PRSCs, DPLs/DPCs. The CAS envisioned that half of the lending program would be delivered in the form of development policy lending and in the first two years of the CAS period about half the lending was in the form of budget support. Apart from the first PRSC, which was prepared in 2005, before this CAS, and a second in 2007, and the PRESO operation, all budget support has taken the form of provincial DPCs (and one provincial DPL). These DPCs have all been sectoral, based upon reforming the key policy and institutional issues. They have tended to be annual programmatic operations. There were four Punjab Education DPCs, including the first one under the previous CAS, two NWFP DPCs, and two Punjab Irrigation DPLs. After one Sindh Education DPC, the Government and the Bank decided that the sector's issues could best be addressed through a more operationally focused three-year Education Sector Project. The choice of sectors depended on the importance of issues in that sector but even more so on there being a champion for the reforms. It was expected that reforms in one province would, if successful, be copied in another. This did happen in the case of some of the educational reforms. 60. The CAS envisioned annual PRSCs as central to pursuing the structural reform agenda. The first of a planned series of PRSCs was implemented in 2005. The second the following year was delayed, largely because of inaction on the critical power issue. The Government was unable to reduce subsidies to the sector that were now equivalent to 1 per cent of GDP. The planned third PRSC was not prepared. In the face of an increasingly dire economic situation, the Government entered into a Standby Arrangement with the IMF and the Bank prepared the PRESO operation. Since many of the issues in the PRSC series were also critical to the macro dialogue with the IMF, the Bank played a key role in the IMF program as well as supporting key stabilization actions through PRESO. Annex II Page 15 of 40 61. Common Funds and SWAPs. Although the Bank did not participate in any common funds, many operations involved a sector wide approach, addressing the policy and institutional issues in the sector as a whole, as well as in some cases providing investment financing. There was, for example, good collaboration and parallel financing of programs such as in education in Sindh and Punjab. Most operations were preceded by analytical work and extensive use was made of trust funds to carry out the analytical work and provide technical support. VI. Aid Coordination and Donor Harmonization 62. Overall, formal donor collaboration has been relatively weak. At various times donors have discussed convening a local consultative group or more formal donor group, but this has not happened. That said, there is good collaboration at the project and sector level, with an effective division of responsibility, particularly among WB, ADB, and DfID. There was been outstanding collaboration and cooperation around the natural disasters (the earthquake and floods). While there has not been a lot of formal work on harmonization, the development partners have made substantial progress in using countries systems for procurement (all but ICB) and financial management due to the PIFRA project. There is very good collaboration with the IMF, with staff participating in joint missions and close coordination on power sector and tax policy/administration. Government formed a set of aid effectiveness working groups in 2007 to serve as a forum for promoting harmonization of practices across donors. The consensus among donors was that there is scope for greater harmonization provided Government were to take a more active role in coordination. VII. Client Feedback 63. A distinction can be made between made between the views of government officials and civil society. The former are generally very appreciative of the responsiveness of World Bank staff in Islamabad and Washington. The latter can be critical of the Bank, with their main concern being that the World Bank does not consult people at the community level sufficiently. This is partly at least a matter of perceptions: generally where community participation was appropriate, Bank staff, together with Government counterparts, did consult at the community level. Some of the community based projects have been among the most successful. The civil society representatives were also similarly critical of the various governments over the CAS period and the bureaucrats in the public administration. Their general view was that all parties concerned did not develop and implement programs that sufficiently benefited the poor. Likewise, feedback emphasized the most effective programs were ones where the World Bank had had a long involvement in the sector, did not change task managers frequently, the Bank was prepared to change its own views and there was strong Government ownership. VIII. Lessons and Conclusions 64. The 2006-2009 CAS implemented a number of the recommendations of the completion report for the previous CAS. This CAS had a strong focus on results throughout the CAS period and on the programmatic approach in its first two years. The recommended emphasis on capacity building was implemented through the PSCB project, which ran throughout the CAS period, but little progress was made with civil service reform. The lending program also featured an increase in TA lending to Annex II Page 16 of 40 complement budget support operations as with the Social Safety Nets and Water TA projects. The completion report also recommended that projects be kept simple and realistic to increase their chances of being implemented on time as planned. Some were implemented on time and as planned, including some very complex operations, such as the Earthquake Relief. But many projects were delayed, due to the political, security and economic environment as well as project complexity. 65. The economic, political and security situations changed quite dramatically within a year of CAS preparation, making it much more difficult for the Bank and its partners to implement the objectives of the CAS and its policy reforms, program, and projects. The CAS was also implemented in a very unstable governance as well as economic environment. For these reasons the implementation of the Bank's program provides important lessons about being flexible and stressing ownership. The implementation of the CAS demonstrates the importance of monitoring the achievement of its intended outcomes and being prepared to adjust the program on the basis of the results achieved as well as the changing political, security and economic environment. 66. The experience of implementing the FY06-09 CAS underscores the need for flexibility to meet evolving client needs in the face of deteriorating country conditions. The CAS was designed to be flexible with a lending envelope that would have permitted a significant increase in lending under a scenario of continued strong performance. But beyond modulating the overall level of financing, deteriorating country conditions required the country team to also: increase selectivity and shift focus to address near-term challenges; identify alternative lending instruments; and, adjust Bank operations to mitigate security risks. The planned reliance on development policy operations to advance sector reforms, especially at the provincial level, proved vulnerable to macroeconomic conditions which made such operations impossible. IBRD lending had to be curtailed as creditworthiness deteriorated while IDA support was increasingly shifted to programmatic investment operations insofar as possible in order to sustain support for ongoing reforms. The Bank's engagement in power and tax administration was reoriented to address immediate fiscal challenges in coordination with the IMF. Worsening security in Pakistan required relocation of international staff, significant expenditure on enhancing physical security, and use of innovative approaches for supervision. Notwithstanding all these challenges, the Bank was able to deliver an expanded IDA program, contributing significantly to Pakistan's stabilization efforts. 67. Social protection national platform, education ­ macro constraints plus evidence suggested that policies along were not getting results shifted instruments. PRSCs not possible reform and timing structural reforms still central.. 68. The next CAS needs to focus more strongly on longstanding structural problems that contributed to the rapid erosion in growth and stability and to assess more rigorously the degree of ownership for needed reforms. Efforts to address these problems, including measures to increase tax revenue collection, contain government spending and to reduce the anti-export bias in economic policy were underway at the time of the CAS, but these either proved to be short lived or impossible to follow through on in the prevailing political climate. As a result, the strong growth performance at the time of the CAS could not be sustained. While these issues were recognized and mentioned in the CAS, in retrospect, the weakness of ownership and likelihood of reversal should have been recognized and addressed more forcefully in the CAS policy dialogue and program. By 2007, as the political transition started to occupy the attention of leaders, it was also becoming clear that the economic, and the associated Annex II Page 17 of 40 fiscal, monetary and balance of payments situations were continuing to deteriorate and that the federal government was not prepared to take the steps needed to rectify matters. 69. The Bank needs to be more realistic about the pace of institutional reform and capacity building in Pakistan. Reforming institutions and bringing about systemic change (e.g., reforming the Federal Bureau of Revenue, improving land records administration, and strengthening the performance of public sector institutions) almost without exception proceeded more slowly than anticipated in the CAS or project documents. The legacy of decades of neglect and the influence of entrenched interests are difficult to overcome, requiring sustained engagement over a long period. In addition a more comprehensive, less input oriented, approach to capacity building was needed in order to address incentives and improve performance of public sector entities. 70. A CAS Progress Report or Interim Strategy Note would have been useful as a way of taking stock and recalibrating the CAS in light of the rapidly changing strategic environment. The decision not to prepare a CASPR is understandable in light of the difficulty in anchoring a revised strategy in the absence of an articulated policy by a new government. However, an ISN would have been possible. Such a mid-term evaluation may have enabled a clearer decision on whether or not to pursue various CAS objectives given the prevailing complex political situation. Monitoring and evaluation systems, including regular progress reports, are essential to a results oriented CAS and to better manage fiduciary risk. 71. Ownership issues were critical to the successes and failures of the CAS program. Two particularly important principles were applied by the CAS team in the choice of programs and projects to be supported by the Bank: there had to be a politically committed champion for the reforms and the institutional arrangements for implementing the reforms had to be in place. Members of the team noted that important sector wide reforms and supporting projects in health care and civil service reform were not included in the CAS because one or both of those principles could not be applied. The taxation project that was included in the CAS made little progress largely because it lacked a strong national champion. 72. Unlike education, there were no major health sector operations, although some health sector triggers were included in the PRSC, and technical assistance was provided through trust funds. The Bank's support to the 2008 Lady Health Worker project was dropped. There were two focused health sector projects, Polio Eradication and HIV-AIDs Prevention. Bank staff explained the absence of health DPCs or sector investment programs by the lack of a champion for reform. The Bank carried out a health sector review that includes options for future reform. 73. In the case of civil service reform the Government set up a commission to examine key issues. The commission has prepared some recommendations on pay and pensions, but they have yet to be published, let alone acted upon by the Government. No plans have been prepared to restructure the civil service. 74. The failure of the CAS to achieve its economic growth and stabilization objectives is, partly, some said largely, attributable to the Government's inability to take the necessary tough policy decisions on taxation and the price of fuel and food. The Bank maintained a strong policy dialogue throughout the CAS. The Tax Administration project was an instrument for carrying out the technical work and capacity Annex II Page 18 of 40 building that could have underpinned tax reforms that would have mobilized more tax revenue and therefore reduced the budget deficit. Likewise, a parallel TA activity has been ongoing to press forward with the tax admin reform for the past year 75. The omissions of health sector, agriculture, taxation and civil service reform from the program raises the issue: what should the Bank do if a sector faces serious problems, yet there is no champion for reform, even more so if reform in the sector concerned is needed to complement and sustain reforms elsewhere? In the cases of the health sector and civil service reform, the Bank could have focused operations at lower levels of government and, in the case of health, communities. Some members of the team believe that the Bank should have been more active at the local government rather than provincial level. The CAS's operations at the community level were amongst its most successful in achieving the intended outcomes. 76. A strategy that may work where ownership is weak is to support technocratic champions at the mid-levels of the provincial and federal civil services, in the hope that those champions could and would win support from the administrative and political leadership. The Bank did indeed carry out a policy dialogue on health and civil service reform throughout the CAS, but never managed to develop a critical mass of support for systemic reform from with the administration. In some instances project preparation was spread over many years in order to build ownerships and make sure the institutional arrangements for implementation were in place. PIFRA was such a project. Attachments: 1. CAS Completion Report Analysis 2. Planned Bank Lending Program and Actual Deliveries 3. Planned AAA Program and Actual Deliveries 4. ICR/IEG Ratings for Projects that Exited the Portfolio During FY 2006-2009 5. Selected Indicators of Bank Portfolio Performance and Management 6. IDA Projects That Exited the Portfolio During FY 2006-2009 7. Investment Lending, Board Approvals 8. IFC Program and Deliveries 9. Persons Consulted Annex II Page 19 of 40 Attachment 1: CAS Completion Report Analysis Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators Pillar 1: Sustaining High and Broad-based Growth and Improving Competitiveness Strengthen Macroeconomic Management and Utilization of Resources · Poverty incidence · Fiscal deficit · The budget deficit increased from 4.3% of GDP to 7.4% of GDP in 2008. · Development Objective for reduced from 32% in (before grants) at or the Tax Reform Project is 2001 to 28% in 2005- below 4.5%; Tax­ Tax-GDP ratio did not reach the target (source IMF) moderately satisfactory 06 and 22% in 2011. to-GDP ratio 2007/08 2008/2009 2009/10 and implementation increased to at least progress in moderately · Average real GDP 11.5% by 2008-09 Prog Proj Prog Proj unsatisfactory. Intensive growth rate of 6.5% supervision and NLTA from 2006-2009. · Improved 9.6% 10.2% 10% 11% 10.6 % supported by PRESO and organizational the IMF Stand By · Macroeconomic efficiency and stability maintained. Arrangement reinvigorated effectiveness of the · Poor tax mobilization was a significant bar in achieving the target ratio and total revenue actually fell reform momentum. · Stock of public debt Central Board of from a very low 14.9% of GDP in 2007 to 14.3% in 2008. There is still weak enforcement of tax reduced to 50% of Revenue collection culture. Without the FBR taking on strong enforcement activities, tax payers still do not · Policy dialogue with GDP by 2008-09. meet their obligations to file accurate returns and pay their obligations on time. Government led to an · Strengthened appreciation of the reforms capacity for · There has been modest progress on the integration of income tax and sales tax functions. There is still required; but political macroeconomic, a weak financial management system at the FBR and more work in strengthening the procurement weakness of Government poverty and social system must be brought about. A positive sign has been that the top management structure at FBR made it difficult to monitoring. headquarters is now in place.. implement some key reforms. · The macroeconomic situation deteriorated in the CAS period. Not enough direction was taken in addressing low tax revenue mobilization. The Government did not pass on the higher costs of · The Bank adjusted to the fuel/food. deteriorating Year 2004 2005 2006 2007 2008 2009 macroeconomic environment with Origin of GDP (% 2.4 6.5 6.3 3.7 1.5 2.1 increased dialogue, change real change) in instruments and increased supervision Annex II Page 20 of 40 Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators Increase Diversification and Exports in Agriculture · Some success in · Increase in agriculture · Increased · The NWFP On-Farm Water Management Project had as its overall objective of increasing agricultural productivity/competiti productivity and growth and productivity and expanding farm incomes through better irrigation. The IEG appraisal increasing productivity, veness (including diversification at the recognized that the project delivered on its key outputs, even exceeding some expectations. The but little progress in livestock) farm level ongoing Sindh On-Farm Water Management Project has also resulted in increased yields - according improving functioning of to a recent survey, cropping intensity and crop yields have increased by 14 percent and 12 percent land markets. · Improved functioning · Better functioning respectively compared with the baseline data. of rural factor markets: of land markets. · Little progress in export of water, land, and credit. · The IMF Pakistan, 2009, Article IV Consultation and First Review Under the Stand-By Arrangement · Increased noted that agricultural output in wheat crop were positive and described it as `bumper year' and non-traditional crops horticulture significant increases in the rice and cotton crops were also recorded, though there was a decline in · Punjab Irrigation project production. sugar cane production. However improved access to water will continue to underpin growth in the was delayed because of · Increased export of agriculture sector. government opposition to non-traditional apply inappropriate local · A separate Agricultural Marketing Department was created to formulate and implement internal and crops. management model. export market strategies, to facilitate the linkages and partnerships between farmers and cooperatives, public and private sectors. · Some improvement in trade policy were achieved · Pakistan's trade policy has been mainly geared towards export diversification in the nontraditional sector, by reducing the cost of doing business and enhancing productivity and competitiveness in · Some policy progress manufacturing. The Government has also made efforts to enhance market access for Pakistan's overwhelmed by exports--particularly to development partners. Government's unwillingness to address key food pricing issues. Efficient and Sustainable Irrigation and Drainage Infrastructure and Service Delivery · Efficient, transparent · Improved · Hydraulic infrastructure was progressively made safer and sustainable. Over 1600 saline tube-wells · Progress made at the and accountable water management of were closed during the CAS period. provincial level and and irrigation sector irrigation and progress enhanced by supporting increased drainage · For barrage rehabilitation the physical outcomes were met but although some farmers were policy based loans during agricultural production infrastructure. disadvantaged because inadequate amounts of water reached their areas and in the FY08 their the CAS period. and other uses of situation was aggravated by acute water shortages in the Indus River. · Improved irrigation · Lack of progress with water. service delivery · The development policy loans attempted to emphasize the nexus of water entitlements, measurements national water policy. through increased and transparency. Water accounts for instance continued to be posted on the Irrigation and Power participatory Development website ­ fostering the creation of a transparent administration of water entitlements management and and sustainable management of water resources. cost recovery in · Studies were carried out to identify issues on water entitlements, and legal and physical constraints to, irrigation. and opportunities to, and opportunities for promoting water markets. · Transparent and Annex II Page 21 of 40 Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators more equitable water allocation and · An outcome of the NWFP On-Farm Water Management Project, according to IEG noted that farmers distribution of in the project area have become much more aware of their roles in managing water resources at water. distributaries, minors, and watercourse levels. These results are expected to lead to significant increases in farm incomes, and contribute to poverty reduction in the project area: today, the irrigation infrastructure rehabilitated under the Project is serving some 132,000 ha of irrigated land upon which the livelihoods of some 2 million people are directly or indirectly dependent. Improving the Business Environment for Trade and Investment · Strengthened · Enhanced labor · Pakistan's rank in the Ease of Doing Business Report slipped in 2009 to 136 from 134 in the previous · Bank's policy dialogue competitiveness, market flexibility. year in the "Employing Workers" data. was not particularly increased productivity effective in labor market and improved · Strengthened legal · Its Rigidity of Employment Index remained consistent between 2007-2009 at 43. flexibility improving investment climate. framework for competitiveness, although competition. · The difficulty of hiring workers index for 2009 was recorded at 78 compared to the regional figure of progress was made on the 22.2. The overall rigidity of employment index was recorded as 53 compared to the regional figure of competition framework. 26.2. · Pakistan's rank for "protecting investors" slipped from 19 in 2008 to 24 in 2009. · The challenges for launching a business worsened with a fall in three places from 74 in 2008 to 77 in 2009. · The PRSC aimed to enhance competitiveness through reducing barriers to business entry and exit and strengthening the financial sector. Moderately Satisfactory progress was achieved under PRSC I. It was stated in the ICR that foreign investors display significantly increased interest in the Pakistani market. · Labor Reform Amendment in 2006 aimed to amend four existing laws governing employment conditions. This legislation aimed to increase female labor force participation, and improve labor market flexibility on both the hiring and firing side through the following amendments: Improving Delivery and Efficiency of Infrastructure Services · A financially self- · Power sector · The timely implementation of key measures in the power sector Action Plan was not achieved. · The Bank continues a key sustaining power corporatized into policy dialogue in the sector capable of independent · There was a rising financial deficit in the sector. The overall deficit of the WAPDA successor power sector with some supporting economic generation, companies rose from about Rs 25 billion in FY05 to Rs 42 billion in FY06; it increased further to success, but continued Annex II Page 22 of 40 Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators growth and providing transmission and about Rs 80 billion in FY07. This increase was largely attributed to rising generation costs (due to challenges. reliable services to distribution entities increase in prices of fuel oil and natural gas), which did passed through to end consumers. existing and new by region. · The power sector has consumers. · In FY09 the Government agreed to electricity tariff adjustments to eliminate tariff differential largely been corporatized. · Improved subsidies by end-June, 2009. As a first step under this plan, tariffs were increased by 1 percent performance of the · It has proved politically effective February 1, 2009. difficult to raise tariffs to regulatory framework. · WAPDA restructuring -- transfer of Grid Systems Construction (GSC) to discos was completed at the level needed to make new entities sustainable without end of 2006. · Reduced fiscal costs subsidies. of the sector. · Staffing of Central Power Purchasing Agency (CPPA) was improved with more than 60 staff transferred from WAPDA to CPPA. This is an important step toward establishing a credible CPPA capable of fulfilling its function. · Expanded use of · Increased fixed, · Pakistan Telecommunication Company Limited (PTCL): The bidding and transfer of management · Good progress, but there is telecommunications mobile, and rural control to Etisalat (UAE) for a 26% stake was completed in March 2006. need to undertake second services. teledensity. generation reforms in the · Pakistan Telecommunication Authority (PTA) largely met the targets under the EIP (in some cases sector that will enable · Strengthened legal Pakistan to attract increased exceeded) and is continuing to make progress with regard to the telecom deregulation reforms and and policy investments. framework and encouraging competition with private sector led growth. Its success in implementing the deregulation improved policy. · The Bank provided performance of the technical assistamce to the · Despite the various challenges faced by Pakistan over the last few years, success in the ICT sector has regulatory regime. Universal Service Fund been steady. In 2007-2008, the private FDI in telecoms was approximately 30% of overall FDI in Company to develop its · Increase in delivery Pakistan. access program. of e-services for citizens. · Over the last CAS period, teledensity increased 5 fold from approximately 12% (in July 2005) to just over 60% (end March 2009), despite a drop in compounded annual growth rate in 2008. There has been a push to take services into rural, previously unserved and underserved areas (despite security and political challenges. More efficient, safe and reliable transport system, · Improved traffic · There was improved traffic flow on the network monitored through improvements in key indicators · The Bank program did not moving good and people flow on National relating to: (i) road network condition; (ii) travel time; and (iii) road safety. The PDO for the scale up to support the more effectively. Trade Corridor as Highways Rehabilitation project is rated as `Satisfactory'. NTCIP as planned, but measured by ongoing interventions were operating costs and · NHA has implemented increased toll rates, which will result in additional Rs 1.5 to 1.8 billion generally successful. travel times resources for maintenance. Toll implementation with regards to trucks remained suspended when · The Bank and Government Government (on demand of transporters) reduced the toll rates from August 15, 08 - December 31, struggled with procurement Private sector 2008. issues in the sector. participation in road Annex II Page 23 of 40 Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators transport increased · Investment in transport with private sector participation has risen. 2007 2006 2005 Investment in transport with private sector 550 251 240 participation (current US$) · The Trade and Transport Facilitation project helped establish a public/private sector collaborative institutional framework to develop and support the first phase of Pakistan's medium-term trade. · A competitive oil and · Percentage of · Although, the authorities maintained a premium between domestic and international petroleum prices, · The fuel price issue was a gas sector, providing households using the retail prices of petroleum products were significantly reduced to pass in part the benefit of lower major part of the policy quality products in an gas as cooking fuel oil prices to consumers. On December 1, the retail prices of gasoline and diesel were reduced by Rs. 9 dialogue with the efficient and cost increases from 30% Government. Generally and Rs. 4 per liter to Rs. 57.7 ($0.73) and Rs. 48.0 ($0.61), respectively. to 40%. although the technocrats appreciated the need to · Progress in raise prices, the political expanding gas leadership was unwilling to supply through do so. Civil society was imports. also very hostile to price · increases. Improving Access to Market-Based Finance Enhanced labor Amendments to a range of Labor Laws were passed which increased the number of overtime and regular Some progress was made, · A strong and market flexibility and hours possible, given enterprises more flexibility on setting working hours and increase the working particularly support to the diversified financial strengthened legal hours for women competition framework. sector with equitable framework of access operating under competition. An Employment and Services Conditions Act was prepared which codified 14 laws and increased the sound regulation. flexibility of hinging and firing The drafting of new labor laws covering occupational safety, benefits, training was started. To support these reforms, a labor market study was finalized as a part of AAA program. A new competition policy was adopted and a new Competition Commission was established and became operational. Annex II Page 24 of 40 Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators Pillar 2: Strengthened Governance and Service Delivery Great Efficiency, Transparency and Accountability in the Use of Public Resources · Credible, transparent · Strengthened public · The Second Improvement to Financial Reporting and Accounting (PIFRA II) made satisfactory · Although much remains to and accountable use of expenditure progress, but the Government has not facilitated the preparation of consolidated financial statements be done, improvements public monies. management. for the entire government especially in the accounting side of public financial · Increased · A key area of weakness in achieving all of the needed PFM outcomes in this area, however, is the lack management has been a credibility, source of considerable accuracy, of progress in establishing internal controls and internal audit success in improving comprehensiveness · Excellent progress made in implementing modern system-based audit to government accounts; this accountability, with the and timeliness Bank playing a key role. effort has transformed the nature of government audit. Specific attention is being paid to internal government financial data. control and internal audit weaknesses. · Improved quality · Accounting and auditing goals achieved at the federal and provincial levels and are currently being and timeliness of extended to the district, with auditing now in accordance with international risk based practice. government audits. · Budget process now includes an integration of development and recurrent budgets, and a medium · Strengthened term perspective. Legislative oversight of public · There was limited strengthened legislative oversight of public expenditure and the Public Accounts expenditure. Committee did not function effectively. · Efficient and · Improved · Modest progress. Revision of procurement rules so that they now conform to international best · Bank had strong role in transparent public transparency and practice, constitutes a major opportunity to reduce waste and corruption. improving procurement procurement efficiency in public rules and performance procurement at o However, to date, enforcement of these new regulations has languished, awaiting key follow-up through its projects. Federal, Provincial, actions on implementing regulations and monitoring and reporting mechanisms- under PRSCI. Municipal and Autonomous bodies · Public Procurement Rules 2004 were being implemented The Rules are increasingly being recognized level as the rules to follow for procurement. In fact, the federal government has advised the provinces to enact the PPRA rules in their respective provinces as well and the Governments of Sindh and · Improved credibility of bidding process Balochistan have adopted the rules to apply to all procurements of the provincial and district governments. · Alignment between PPRA and Auditor Generals Of Pakistan Annex II Page 25 of 40 Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators Enhanced Capacity for Service Delivery and Public Sector Management · Efficient, accountable · Professional · The scope of civil service capacity building program was reduced due to slow implementation during · There has been little civil service staffed by qualifications of the first two years of the project, but is now starting to show important results. The college/university political ownership of the highly qualified civil servants outreach program has reached 241 institutions, and 48 officers in FPSC have received specialized public sector management individuals. increased. agenda and the Bank training. program had limited impact · Civil service compensation · A high-level National Commission on Governmental Reforms (NCGR), headed by the ex-Governor beyond training and policy State Bank which was constituted in April 2006 and finalized a set of ambitious reforms on the basis dialogue. reformed to reflect market realities. of broad consultations within Pakistan. This package was subsequently approved by the Commission's high powered steering committee. However, the intervening political transition has · Civil service rendered the status of that package uncertain. restructured to further devolution. · A new Chairman for NCGR was appointed in the CAS period and that a pay and pension commission · Civil service is being formed. pensions reformed. · The performance of the PCU needs further strengthening in the areas of facilitation, coordination and fiduciary oversight. The Bank's community level · Accountable and Strengthened links · Despite legislative changes and the election of local councils, government employees continued to projects in addition to AJK efficient local between local report to provincial governments and the devolution policy is under reconsideration. CISP have been quite governments. governments and successful. However, community · Under CISP project 597 Community Based Organizations are formed and registered whereas effective decentralized local organizations (COs). Community Action Plans (CAPs) of 519 CBOs are formulated against envisaged target of 425. government has not taken Increased transfer of root. national fiscal space to · AJK Community Infrastructure project 597 CBOs have been organized and registered. 519 CBOs provincial and local out of 597 have formulated their Community Action Plans and prioritize their needs; while governments . contracts with 418 CBOs out of 519 has been signed for construction of community infrastructure as pre the requirement & prioritization of these CBOs · Increased capacity · Through the PPAF, more than 41,000 community groups have been organized in rural areas of COs to participate in development planning. Annex II Page 26 of 40 Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators Improved Municipal Service Delivery · Good performance · Improved quality of · Improved quality, · Overall implementation progress on the Punjab Municipal Services Improvement Project was rated life in the urban areas efficiency and through the PMSIP, but as moderately satisfactory. 14 infrastructure investment subprojects ­ including water supply and increased access to urban this did not translate into rehabilitation and extension, roads improvement and rehabilitation, street pavements and fire fighting contribution of urban services in selected a broader program of systems were supported. areas to growth and municipalities. urban sector work as poverty reduction. · Improved urban · The operationalization of the Financial Management Information System in 15 partner TMAs has planned. planning and been very successful. But there has not been much progress in the budgeting and municipal finance management database. This is because the GoPunjab has rotated all TMA staff and assigned auditors who have frameworks taken over from the TMAs all physical files covering the 2001-2008 time periods. This has implemented in paralyzed the TMAs' budget preparation and execution process. The PMDFC has only started selected receiving 2008/09 budgets ­ and the budget reports prepared by the TMAs are confused and municipalities. erroneous. · Increased access to water, sanitation, transport and other urban services in selected municipalities. Pillar 3: Improving Lives and Protecting the Vulnerable Improved Delivery of Health and Education Services · Increased learning · Gross primary · PSLM 06/07 ­ Gross primary enrolment (ages 5-9) reached 91%. · The Bank involvement in achievement of enrollment education reform has been primary school increases from 72 to · Over the CAS period, while gender and rural-urban differences in primary school completion rates successful. The Bank students. 104 percent. appear to be minor, primary school completion rates for children from the poorest quintile are 13 adjusted from policy percentage-points below completion rates for children from the richest quintiles. For children from lending to sector projects as · Gender gap in literacy · Gross enrollment the macro situation reduced: ratio of rate for middle rural households and the poorest quintile: completion rates are 11 and 42 percentage points lower than for urban children and children from the richest quintiles. deteriorated and the literate female/males school increases programs evolved towards increases from 65 from 41 percent in · Tertiary enrollment rates are estimated at around 4% of the eligible age cohort (17-23) while less than more outcome oriented percent in 2005 to 93 2001-02 to 52 needs. percent by 2015. percent in 2009. 8% of the workforce has received formal training. · Literacy rate of 15-24 · Increase in gross · Transition rates to higher levels of education are stagnant with secondary Net Enrollment Rates year olds increased enrollment of girls (NER) at about 26 percent in 2005/06 and 2006/07. However, gender parity in primary and secondary Annex II Page 27 of 40 Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators from 58% in 2001 to in primary school levels is improving, and with continued focus on girls' education, Pakistan is likely to achieve its 78% in 2011. from 61 in 2001-02 gender parity targets. Literacy rates remain low: only 55 percent of the population ten years and older percent to 85 are literate, with only 30 percent rural female literacy. · Improve post-primary percent in 2009. access and quality. · Education allocations in the FY06 provincial budget (supported through PEDPC II) increased by and · Increase gross enrollment of girls 12.6%. Districts allocated 15% more non salary budget for education from their own budgets. The in middle school budget increases financed through the provincial budget filled infrastructure gaps; supporting targeted from 35 in 2001-02 incentives such as stipends and free textbooks; financed quality improvement such as teacher training percent to 45 and non-salary budgets for schools; and supporting capacity building programs. percent in 2009. · In terms of Governance: The Education Department has created a unified Planning Wing by merging · Increase the two wings for college and school education to focus on planning and monitoring functions for the enrollments in entire sector, including mainstreaming the management and information systems developed by the Higher Education (particularly for PMIU within the core functions of the Planning Wing. Capacity support programs are under bottom 20 percent implementation. A plan for restructuring of the district education management system has been of the population). approved. · Punjab Education DPC III: The education budget increased by over 50 percent over three years, allowing financing of infrastructure and targeted subsidies such as free text books and stipends. Almost 60% of non-functioning schools were opened up by hiring new contract teachers. Improved Health Outcomes · Contraceptive · Overall, there were only three health projects and none at the provincial level. The HIV/AIDS · The Bank decided to prevalence rate Prevention Project suffers from inadequate procurement and financial management staffing and is support narrowly focused · Under 5 mortality rate increased from 28% rated as moderately satisfactory. reforms. The Bank felt that reduced from 103 to to 34% by FY09. there were enough other 60 (per 1,000 live · The Polio Eradication II project achieved its development objective in terms of coverage but failed donors in the sector and that births). · Proportion of births the sector lacked champions attended by skilled with its zero case objectives. for major reforms. · Maternal mortality rate health personnel · The Contraceptive Prevalence Rate (CPR) for Pakistan stands at 22 percent, less than half that of reduced from 450 to rises from 31% to other South Asian countries. The contraceptive prevalence rate (CPR) was 30 percent for all methods 250 (per 100,000 live 38%. births). and 22 percent for modern methods in 2008. This is almost a four-fold increase in modern methods · Percentage of usage compared to its value of 5.2 percent in 1974-75. · Polio eradicated. children (12-23 months) fully · The percentage of births attended by health professionals (doctor, nurse, midwife or LHV) increased · Spread of HIV immunized from 23 percent to 36 percent while institutional deliveries rose from 21 to 32 percent over the last infection reduced. increased from 77% three years. to 85%. · HIV, in some cities, has spread to male sex workers (MSWs) and Hijras (Eunuch Sex Workers, · HIV prevalence remains below 5% ESWs). The positive achievement was that HIV appears not to have spread yet to the female sex of female sex worker (FSW) population and, in those cities with extensive HIV prevention efforts; there has been a Annex II Page 28 of 40 Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators workers and decrease in risky behaviors among the high-risk groups. stabilizes among male sex workers, truckers, jail inmates and IDUs. Reduced Vulnerability and Improved livelihoods of poor communities through effective safety nets, targeted interventions and hazard risk management · Vulnerability reduced · Increased school · The Planning Commission's constituted Panel of Economists in its Interim Report based on 2004- 05: · Although poverty levels through attendance among the poverty head count number of 23.9 percent suggested an increase of around 6 percentage points in have risen, some of the well implementation of well poor children poverty incidence for the year 2008-09. targeted support by the targeted, financially (bottom 2 quintiles) World Bank has helped to viable, and well and among disabled · Similarly, the Task Force on Food Security based on the World Bank estimates of poverty head count reduce vulnerability. administered social children. ratio of 29.2 percent in 2004-05 estimated that poverty head count increased to 33.8 percent in 2007- assistance and social 08 and 36.1 percent in 2008-09 or about 62 million people in 2008-09 were below the poverty line. · 600,000 earthquake victims · Coverage of safety provided with earthquake security programs. nets increased from · Data suggests that between 2005 and 2009 more than 12-14 million people may have been added to resistant homes 4% to 20% for poor the ranks of the poor in Pakistan. This would translate into an increase in poverty from 22.3 percent of (bottom 2 quintiles). the population in 2005-06 to between 30-35 percent in 2008-09. · However disaster management institutional · Reduction in fiscal · Through the NWFP CIP II, the preparation of over 600 community actions plans agreed between capacity has not been liabilities of the CCBs and TMAs has resulted in improved responsiveness of municipal authorities to community established. The agency civil service priorities. concerned has not been pensions. · Pakistan Poverty Alleviation Fund has enhanced the availability of resources and services to the poor. given responsibility for the Since commencement of operations in April 2000 to date, PPAF has disbursed approximately Rs 55.5 recent IDPs. Increased community billion to 75 Partner Organizations across the country. participation in the · The World Bank played an decision making · The AJK Community Infrastructure Project (CISP), CIP and PPAF supported programs such as important role supporting process and community managed drinking water, sanitation, pavements and link roads- made moderately PPAF, CIP and CISP. partnership between satisfactory implementation in spite of the 2005 earthquake. municipalities. · Improved delivery of services, and productive and social infrastructure. · Increased access to credit, including microcredit. Annex II Page 29 of 40 Long Term Strategic CAS Outcomes and CAS Progress World Bank Performance Goals Indicators World Bank response to the · Areas affected by · Vulnerable · The Bank is currently supporting a multi-sectoral response through its Earthquake Recovery Project earthquake was seen as global October 2005 populations (ERP) and Pakistan Poverty Alleviation Fund (PPAF). best practice. earthquake provided livelihood rehabilitated. support during post- o The ERP includes housing reconstruction, livelihood support, import financing, and capacity earthquake period. building. The PPAF is mainly focusing on housing reconstruction. The overall housing program · Vulnerability to is progressing satisfactorily, with more than 80 percent of the destroyed houses at various stages hazards reduced · Basic services and of reconstruction, and more than 25 percent having already been substantially completed to through increased public infrastructure seismic resistant standards. Similarly, the original livelihoods support component, entailing preparedness. restored in earthquake affected monthly livelihood support grants to eligible affected families was satisfactorily completed in area. December 2006. The Bank has supported rehabilitation of national highways damaged in the earthquake. Furthermore, on government's request, the Bank in collaboration with Asian · Owner driven Development Bank, conducted a preliminary damage and needs assessment of the cyclone/flood housing reconstruction affected areas of Sindh and Balochistan in August 2007. This was done on similar lines as the complete in selected earthquake 2005 damage and needs assessment, which was completed in three weeks. areas.. 500 community physical infrastructure schemes were rehabilitated in 32 union councils in NWFP and · Strengthened GoP AJK. 200,000 houses were completed (the objective was to completed 241,000 before the end of the capacity to manage project). By this time, 750,000 people were trained or provided basic training in seismic resistant housing and minimize the construction impact of future disasters. Annex II Page 30 of 40 Attachment 2: Planned Bank Lending Program and Actual Deliveries Fiscal Year Project Amount: US&(M) Amount US&(M) IDA IBRD Total Status IDA IBRD Total FY06 Punjab Education DPC II 100 0 100 Actual 100 0 100 PIFRA II 84 0 84 Actual 84 0 84 Earthquake Reponses - Additional Financing 340 100 440 Actual 340 100 440 Earthquake Emergency Recovery Credit 400 0 400 Actual 400 0 400 Second Partnership for Polio Eradication 46.7 0 46.7 Actual 46.7 0 46.7 National Highways Rehab 0 65 65 Actual 0 65 65 NWFP DPC I 90 0 90 Actual 90 0 90 Balochistan Primary Education 20 0 20 Actual 22 0 22 Punjab Irrigation Sector DPL I 0 100 100 Actual 0 100 100 Punjab Municipal Services Improvement 0 50 50 Actual 0 50 50 PRSC II 350 0 350 Forwarded to FY07 0 0 0 Punjab Lands Record Management 35 0 35 Forwarded to FY07 0 0 0 Additional Actual Projects: Punjab Education DPC-III 100 0 100 TOTAL FY06 1497.7 FY07 PRSC III 300 0 300 Dropped 0 0 0 Punjab Education DPC III 100 0 100 Started in FY06 100 0 100 NWFP DPC II 130 0 130 Actual 130 0 130 Sindh Education DPC 50 0 50 Actual 50 0 50 Punjab Irrigation DPL II 0 100 100 Actual 0 100 100 Sindh Water Sector Improvement 140 0 140 Forwarded to FY08 0 0 0 Balochistan Small Scale Irrigation 25 0 25 Dropped 0 0 0 Electricity Transmission and Distribution 0 200 200 Forwarded to FY08 0 0 0 DERA II/Kushaal Pakistan 200 0 200 Dropped 0 0 0 National Trade Corridor I 0 300 300 Dropped 0 0 0 Water Investment TA 0 50 50 Forwarded to FY08 0 0 0 Lady Health Workers 0 200 200 Dropped 0 0 0 PRSC II 350 0 350 Slipped from FY06 350 0 350 Punjab Lands Record Management 45.7 0 45.7 Slipped from FY06 45.7 0 45.7 Additional Actual Projects: PEDPC IV 100 0 100 Additional Financing Second Partnership for Polio Eradication 21.1 0 21.1 PPAF II Earthquake Additional Financing II 138 0 138 TOTAL FY07 1034.8 FY08 PRSC IV 100 200 300 Dropped 0 0 0 Punjab Education DPC IV 100 0 100 Forwarded to FY09 0 0 0 NWFP DPC III 130 0 130 Dropped 0 0 0 Sindh Education DPC II 50 0 50 Forwarded to FY09 0 0 0 Punjab Irrigation DPL III 0 100 100 Dropped 0 0 0 Earthquake Recovery Credit II 0 125 125 Carried out in FY07 0 0 0 Higher Education 0 100 100 Forwarded to FY09 0 0 0 Punjab Barrage Rehabilitation 0 200 200 Forwarded to FY09 0 0 0 Balochistan Mineral Sector Development 25 25 50 Forwarded to FY09 0 0 0 Punjab Large Cities Improvement DPL I 0 100 100 Forwarded to FY09 0 0 0 Social Protection 50 0 50 Forwarded to FY09 0 0 0 Kushaal Pakistan / Social Mobilization 0 75 75 Actual 0 75 75 Health Surveillance System Improvement 50 0 50 Dropped 0 0 0 National Trade Corridor II 0 300 300 Dropped 0 0 0 Sindh Fiscal DPC 100 0 100 Dropped 0 0 0 Sindh Water Sector Improvement 150.2 0 0 Slipped from FY07 150.2 0 150.2 Electricity Distribution and Transmission 83.1 173.6 256.7 Slipped from FY07 83.1 173.6 256.7 Water Investment TA 0 38 38 Slipped from FY07 0 38 38 Additional Actual Projects: Balochistan SSIP 25 0 25 TOTAL for FY08 544.9 FY09 PRSC V 350 0 350 Dropped 0 0 0 Punjab Education DPC V 100 0 100 Dropped 0 0 0 NWFP DPC IV 130 0 130 Dropped 0 0 0 Pakistan Poverty Alleviation Fund III 250 0 250 Actual 250 0 250 Sindh DPC 150 0 150 Dropped 0 0 0 Punjab Large Cities Improvement DPL II 0 100 100 Dropped 0 0 0 Electricity Transmission and Distribution II 0 200 200 Forwarded to FY09 0 0 0 Rural Telecom 0 30 30 Dropped 0 0 0 Capacity Building II 100 0 100 Dropped 0 0 0 National Trade Corridor III 0 300 300 Dropped 0 0 0 Provincial Irrigation Infrastructure 0 100 100 Dropped 0 0 0 Federal Water Infrastructure 0 300 300 Dropped 0 0 0 Sindh Education Sector Project 50 0 50 Slipped from FY08 50 0 50 Social Safety Net Technical Assistance 60 0 60 Slipped from FY08 60 0 60 Punjab Education Sector Project 350 0 350 Slipped from FY08 350 0 350 Additional Actual Projects: Third Partnership for Polio Eradication 74.7 0 74.7 PRESO 500 0 500 Second Trade and Transport Facilitation 25 0 25 TOTAL for FY09 1309.7 Annex II Page 31 of 40 Attachment 3: Planned AAA Program and Actual Deliveries FY06 CAS Plans (April, 2006) Status - CAS Completion Report (Final Date of Current Completion Report) FY Project Status 2006 Disability TA/ Action Plan Dropped Pension Reform Strategy Dropped Provincial Procurement Assessment Dropped Rural Growth and Poverty Reduction Forwarded to FY07 Safety Net Report Forwarded to FY07 Higher Education Policy Note Actual Social Protection TA Dropped Labor Market Study Forwarded to FY07 Strategic Country Environment Assessment Actual Trade Policy Notes Delivered in FY05 Gap Analysis of Public Accounting and Auditing Actual Urban non-Lending TA Dropped Transport Competitiveness Actual Additional Actual AAA PK Value Chain Study Growth and Export Competitiveness Study Trade Policy Notes II Value Chain Study Earthquake Damage and Needs Sindh Economic Report 2007 Balochistan Economic Report Actual Public Sector/Judicial Study Dropped Poverty Update Dropped Tax Policy Study Actual Education Sector Report Dropped Competition Policy TA Dropped Investment Climate Assessment Dropped Health Sector Review Dropped Livestock Policy Note Dropped Local Government Civil Service Reform TA Dropped Oil & Gas Non-Lending TA Dropped Public Financial Management /Accountability Assessments Dropped Monitoring and Evaluation TA Dropped Pension Reform TA Dropped Development Policy Review Dropped Provincial Public Financial Accountability Assessment Dropped Public-Private Partnership in Education in Punjab Forwarded to FY08 Wheat Policies and Food Security Dropped Rural Growth and Poverty Reduction Slipped from FY06 Safety Net Report Slipped from FY06 Labor Market Study Slipped from FY06 Additional Actual AAA Punjab WS&S Labor Market Study NWFP PEFA/OECD-DAC BIS Indicators Pakistan Safety Net Study Punjab PFMA - PEFA and Diagnostics 2008 Access to Finance Forwarded to FY09 Capital Market. TA Dropped Devolution TA/Policy Note Dropped HD Monitoring and Evaluation TA Dropped Sindh Education Dropped Statistical Strengthening TA Dropped Fisheries Policy Note Dropped Land Markets Administration TA Dropped Policy Notes for New Government Dropped Annex II Page 32 of 40 FY06 CAS Plans (April, 2006) Status - CAS Completion Report (Final Date of Current Completion Report) FY Project Status 2008 Continued Micro-insurance Report Dropped PPP for Agriculture Technology and Services Dropped Skill Development / Labor Market TA Dropped Public-Private Partnerships in Education in Punjab Slipped from FY07 Additional Actual Projects NWFP Growth Policy Note Emergency Cyclone Damage Needs Assessment Infrastructure Implementation Pakistan/ India Cotton Trade Policy Note Balochistan Mining Sector Policy Report 2009 Statistic Strengthening TA Dropped Housing Finance Dropped Debt Market Development Dropped Banking Sector TA Dropped Education TA Dropped Access to Finance Slipped from FY08 Additional Actual AAA PK Investment Climate Assessment II PEFA Federal Government NWFP - Mining Sector Policy Note Ongoing Northern Areas Economic Report* PFMA Sindh Pakistan - AML /CFT Assessment FSAP Update Pakistan DeMPA Assessment Ongoing Public Expenditure Review - PMA* Tax Policy Report Annex II Page 33 of 40 Attachment 4: ICR/IEG Ratings for Projects that Exited the Portfolio During FY 2006-2009 Outcome % Sustainability % Institutional Dev Exit FY Project Bank Performance Borrower Performance Satisfactory Likely Impact% Substantial ICR IEG ICR IEG ICR IEG ICR IEG ICR IEG 2006 Partnership for Polio Eradication HS HS S S S S Punjab Second Education Sector DPC S S Likely S S S S S Punjab Education DPC III S S S S S S Punjab Irrigation Sector DPL (cannot find) S S Trade and Transport S S # M S S S MS Pakistan PRSC I S MS Likely Likely M M S S S S NWFP SAC II S S Likely Likely M M S S S S NWFP DPC I 2007 NWFP Second Development Policy Credit Sindh DPC PEDPC - IV Punjab Irrigation DPL II PK PRSC II S S Low. Negligible risk to global environment Phase out of ODS PRE S outcome S S 2008 Second Partnership for Polio Eradication MS MS S MS MS MS MS NWFP On-Farm Water Management Project MS MS S MS MS MS MS 2009 Poverty Reduction and Economic Support Operation National Education Assessment System PK Banking Sector TA Pakistan Earthquake ERC Annex II Page 34 of 40 Attachment 5: Selected Indicators of Bank Portfolio Performance Indicator 2006 2007 2008 2009 Portfolio Assessment Number of Projects under Implementation 19 20 22 27 Average Implementation Period (years) 49.9 59.0 70.8 92.7 Percent of Problem Projects by Number 0.0 5.0 13.6 7.4 Percent of Problem Projects by Amount 0 5 6.7 7.3 Percent of Projects at Risk by Number 0 5 18 11 Percent of Projects at Risk by Amount 0.0 5.0 7.1 8.3 Disbursement Ratio (%) 77.4 37.5 33.8 39.2 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) $3,000 $2,964 $2,928 $3,449 Average Supervision (US$/project) $100 $102 $98 $119 Memorandum Item Since FY 80 Last Five FYs Proj Eval by IEG by number 150 16 Proj Eval by IEG by Amt (US$ million) 12,170.3 2,409.30 % of OED Projects Rated U or HU by Amount 23.6 13.9 % of OED Projects Rated U or HU by Number 18.7 6.3 Annex II Page 35 of 40 Attachment 6: I DA Projects That Exited the Portfolio During FY 2006-2009 IDA Net Comm Total Date, Rev IEG Risk to Exit Year Project Date Approval unsure of Undisburse Age years Ext Mos Latest IP Risk Flags Closing DO Rating units from d Bal BW! FY06 Partnership for Polio Eradication 5/15/2003 6/30/2006 427 0.2 3.129 0 Moderate Punjab Second Education Sector DPC 7/1/2005 10/31/2006 964.7 0 1.334 Moderate Trade and Transport Facilitation Project 4/24/2001 6/30/2006 29.9 0.1 5.186 10/31/2004 Moderate NWFP SAC II 6/22/2004 3/31/2006 1409.2 0 1.773 12/31/2004 # PRSC I 9/2/2004 3/31/2006 4532.5 0 1.575 12/31/2004 # Punjab Education Development Policy Credit III 6/1/2006 6/30/2007 1025.7 0 1.079 Moderate Public Irrigation Sector Development Loan Policy 6/1/2006 6/30/2007 1027.6 0 1.079 NWFP DPC I 6/1/2006 6/30/2007 930.4 0 1.079 FY07 NWFP Second Development Policy Credit 6/7/2007 12/31/2007 1293.6 0 0.567 Sindh DPC 6/7/2007 12/31/2007 990.2 0 0.567 PEDPC IV 6/7/2007 12/31/2007 994.3 0 0.567 Punjab Irrigation DPL II 6/7/2007 12/31/2007 1,000 0 0.567 PK PRSC II 5/22/2007 3/31/2008 3528.9 0 0.860 Phase Out of ODS PRE 1/23/1997 12/31/2006 86.2 4.4 9.942 6/30/2001 FY08 Second Partnership for Polio Eradication 1/26/2006 6/30/2008 692.4 0.2 2.427 6/30/2008 Significant NWFP on Farm Water Management Project 6/12/2001 9/30/2009 208.3 0 8.307 6/30/2006 Significant Poverty Reduction and Economic Support Operation 3/26/2009 3/31/2010 4847.5 0 1.014 FY09 National Education Assessment System 6/3/2003 6/30/2009 Slow Disbursement Banking Sector TA 7/9/2002 6/30/2009 Slow Disbursement Pakistan Earthquake ERC 12/15/2005 6/30/2008 Slow Disbursement Annex II Page 36 of 40 Attachment 7: Investment Lending, Board Approval FY05-FY09 Revised Net Project Board Project Name Closing Comm ID Date Date ($m) FY05 P076872 PIFRA II 09/06/2005 12/31/2010 84.0 Taunsa Barrage Emerg Reh & P088994 03/15/2005 12/31/2008 123.0 Modern P099110 Pakistan Earthquake ERC 12/15/2005 06/30/2009 400.0 FY06 P083929 Punjab Municipal Services Improve 06/01/2006 12/31/2010 50.0 P094086 Balochistan Education Support 06/22/2006 01/31/2011 22.0 P097402 2nd Partnership for Polio Eradication 01/26/2006 06/30/2008 46.7 FY07 P090501 Land Records Mgmt & Info Systems 01/25/2007 03/31/2012 45.7 P099542 PK Earthquake Disability 05/21/2007 # 2.5 P084302 Sindh Water Sector Improvement 9/18/2007 4/30/2013 150.2 FY08 P089378 Balochistan SSIP 2/26/2008 6/30/2013 25.0 P095982 Electricity Distributn & Transmissio 6/17/2008 6/30/2012 256.7 P110099 Water Sector Capacity Buidling 6/26/2008 2/28/2014 38.0 FY09 P105075 PPAF III 6/4/2009 1/31/2015 250.0 P101684 Second Trade & Transport Facilit. 5/12/2009 12/31/2013 25.0 P102608 Punjab Education Sector Project 6/4/2009 6/30/2012 350.0 P103160 Social Safety Net TA 6/18/2009 7/31/2013 60.0 P107300 SINDH EDUCATION SECTOR 6/4/2009 6/30/2012 300.0 P114508 3rd Partnership for Polio Eradication 6/18/2009 12/31/2011 74.7 Annex II Page 37 of 40 Annex 8: IFC Objectives and Achievements FY 2006-2009 Table 1: Investment Operations Target: $600 million Achievements: US$ in million FY06 US$ 125 m in 9 companies FY07 US$ 287 m in 11 companies FY08 US$ 235 m in 15 companies FY09 US$ 320 m* in 14 companies Sub-total US$ 966 m *Expected by June 30, 2009 Annex II Page 38 of 40 Table 2: Advisory Services PEP-MENA: Targets and Achievements Targets Objective Achievements Strengthen Financial Markets and 1. Privatization study of First Women Bank Ltd - expanding access to affordable Completed housing for low and middle- 2. Habit Bank Ltd I & II ­ Completed income citizens. PEP-MENA to launch a training and advisory 3. Tamer Micro Finance Bank I & II- completed project for the housing sector and will work with individual banks to 4. Kasha Foundation ­ Completed improve internal credit and risk 5. Credit Information Services- completed systems, policies and procedures. Working with financial institutions 6. Development of Business Plan for Privatization study of in developing and promoting new House Building Finance Corporation- Completed financial products and services as 7. NRSP Advisory-Completed well as, assist in improving operational performance. Specific 8. Housing Finance TA to Central Bank- Completed focus is on developing solutions 9. Sustainable Finance Pakistan- In progress for the housing, Micro Credit, SME banking sector. A further 10. Allied Bank Advisory- In progress focus is on housing finance. 1. Corporate Governance in the financial sector & establishment of CG institute in Karachi- completed Improving Corporate Governance Practices 2. Pakistan CG Project- In progress 3. SME Management Training- In progress In privatization and Public Private CIA signed MOU with Goop to advice on Infrastructure Partnership (PPP) development, Project Development Facility (IPDF). CIA recently signed PEP-MENA will support the another agreement with Goop to support privatization of Goop's regulatory bodies and its Faisalabad Electricity Board (FESCO). infrastructure privatization efforts Annex II Page 39 of 40 Annex 9: Persons Consulted During the Review Federal Government of Pakistan Mr. Ahmed Jawad, Privatization Commission Mr. Farrakh Qayyum, Secretary EAD Lt. General Sajjad Akram, Deputy Chairman, ERRA Lt. General (R) Farooq Ahmed Khan, Chairman, National Disaster Management Agency Dr. Waqar Masood Khan, Secretary Textiles Industry Mr. M. Ismail Qureshi, Secretary, Establishment Division Mr. Suleman Ghani, Secretary, Ministry of Commerce Mr. Tanwir Ali Agha, Auditor General of Pakistan Mr. Ashraf M. Hayat, Secretary Planning Commission Lt. General Nadeem Ahmad, Corps Commander, Mangla Mr. Shahid Rafi, Secretary, Ministry of Water & Power Mr. Asif Bajwa, Additional Secretary (Budget), Ministry of Finance Projects Mr. Ahmed Jamal, Pakistan Poverty Alleviation Fund (PPAF) Mr. Muhammad Sher Khan, Managing Director, BISP Mr. Muhammad Abdul Basir, Acting Project Director, PIFRA Proj. and Director General PIFRA Operations Development Partners ADB, CIDA, DFID, EC, Embassy of Japan, UNDP, USAID Civil Society Mr. Mehtab Haider, Reporter, The News Mr. Nadeem Malik, Director Programme, AAJ-TV Mr. Rana Qaiser, Resident Editor, Daily Times Mr. Khawar Ghumman , Senior Reporter, Dawn Mr. Shahbaz Rana, Sr Reporter, Dunya TV Mr. Farhan Bokhari, Pak. Correspondent, Financial Times Mr. Afzal Bajwa, Chief Reporter, The Nation Dr Farrukh Saleem, Columnist, The News International Dr. Ali Cheema, Department Of Economics, LUMS Dr Zafar Mueen Nasir, Chief of Research, PIDE Dr. Tariq Rehman, Director, National Institute of Pakistan Studies, Quaid-e-Azam University Mr Abid Sulehri, Executive Director, Sustainable Development Policy Institute Mr. Nasser N S Jaffer, Chief Executive, Jaffer Brothers (Pvt) Ltd Dr. Shireen Mazari, Director General, Institute of Strategic Studies Mr. Fayyaz Baqir, Director , AHKRC Mr. Sarwar Bari, National Coordinator, Pattan Development Foundation Mr. Asad Rehman, Director Programmes, Sungi Development Foundation Mr. Niaz Kathia, Executive Director, Village Development Organisation Ms. Rakhshanda Naz, Chief Operating Officer, Aurat Foundation Dr. Hafiz A. Pasha, Member, Economic Advisory Board, 15-Maqbool Cooperative Annex II Page 40 of 40 Housing Society Mr. Shahid Kardar, Director, Systems Pvt. Ltd Government of Punjab Rab Nawaz, Secretary, Planning and Development Shaleman Najof, Planning and Development Syeda Naqui, Planning and Development Muzzam Jamil, HUD and PHED Muhammed Asif, PMIU-PESRP Sihail Raza, ditto Izhar Ahmed, Schools and Education Zuficar Ahmed, P&W Ahmed Chelma, Higher Education Muhammed Abid Bodla, Infrastructure Development Asrar al Haq, SPRU Amjad Duraiz, ECA P&D World Bank Junaid Ahmad, Sector Manager, Urban, SASDU Ismaila Ceesay, FM Specialist Gajan Pathmanathan, Manager, SASDO Ben Loevinsohn, Lead Public Health Specialist, AFTH John Wall, former Country Director Pakistan Sadiq Ahmed former Country Director Pakistan, SAR Chief Economist Yusupha Crookes, current Country Director, Pakistan Rob Floyd, Coordinator, Pakistan; Acting Country Director Bangladesh Said Al-Habsy, Operations Advisor Naveed Naqui, Sr. Education Specialist Amer Zafar Durrani, Sr. Transport Specialist Zafar Iqbal Raja, Sr. Highway Engineer Dr. Rashid Aziz, Sr. Energy Sector Specialist Dr. Hanid Mukhtar, Sr. Economist Dr. Inaam Haq, Sr. Health Sector Specialist Muhammad Iftikhar Malik,Sr. Social Protection Specialist Satu Kakonen, Lead Economist IFC Nadeem Siddiqui Mariko Higashi Annex III Page 1 of 1 A NNE X I I I : P A K I ST A N ­ C OUNT R Y F I NA NC I NG P A R A M E T E R S Item Parameter Explanation/Remarks Cost Sharing: Limit on the proportion of Up to 100% The Bank's financing percentage in each project would be individual project costs that the Bank may determined on a case-by-case basis, depending upon project finance type, sector, etc. In many projects, the practice of requiring government counterpart funding would continue. In general, low to moderate contribution by Government (federal/provincial), beneficiaries and others are expected in CDD-type projects and water sector projects. Moderate contribution by Government (federal/provincial) is expected in infrastructure projects. 100% Bank financing could occur in pro-poor projects, such as social sector projects and projects in poor and remote areas. 100% Bank financing may also occur in capacity building projects with moderate to high in-kind contribution by the Government (such as staff time, office space and equipment). Recurrent Cost Financing: Any limits No country- In determining Bank financing of recurrent costs in that would apply to the overall amount of level limit individual projects, the Bank will take into account recurrent expenditures that the Bank may sustainability issues at the sector and project levels. finance Financing of recurrent costs will be carefully assessed, particularly financing of Government staff salaries, which the Bank will only finance for specific purposes. For example, where our support is primarily programmatic (such as in the education sector), there may be need to finance recurrent costs and for a longer duration (as long as program continues) to support achievement of program objectives. Recurrent cost financing may also be allowed to support cost of managing project implementation and to ensure sustainability of project activities. Local Cost Finance: Are the requirements Yes The two criteria are met. Therefore the Bank may finance local costs in any proportion needed in individual projects. for Bank financing of local expenditures met, namely that: (i) financing requirements for the country's development program would exceed the public sector's own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii) the financing of foreign expenditures alone would not enable the bank to assist in the financing of individual projects Taxes and Duties: Are there any taxes and No Taxes and duties in Pakistan are generally reasonable. Also, duties that the Bank would not finance? taxes and duties are not discriminatory against Bank- financed projects. At the project-level, the Bank would consider whether taxes and duties constitute an excessively high share of project cost. Annex IV Page 1 of 6 A NNE X I V : P A R T NE R SH I PS 1. The World Bank in Pakistan engages with the federal, provincial governments and coordinates with the development partners on a regular basis through various formal and informal mechanisms. There is an ongoing dialogue with the governments both at the level of country management and technical teams in the context of overall country and sector strategy and for preparation and implementation of specific operations. With the development partners also, there are periodic exchanges at the level of heads of development agencies to ensure synergies in respective programs and to follow up on opportunities of collaboration, co- financing, parallel financing or supplementary grants. There are some technical level informal donor coordination forums also which meet fairly regularly to discuss issues of common interest. 2. In the spirit of the Paris Declaration, the Bank supports the Government in leading coordination of the policy dialogue and donor support in Pakistan. The Economic Affairs Division, Ministry of Finance has established a Donor Coordination Cell and has been working to improve its functional capacity. In the provinces, the Provincial Planning and Development Departments are responsible for coordinating with development partners. The Pakistan Development Forum is one of the key mechanisms the government uses to facilitate discussion on priority development issues and coordinate donors around the government's poverty reduction strategy and program. Annual PDFs were held until 2006 when the event could not be organized for reasons of political transition and security considerations. The government intends to resume the PDF from this year and the forum is currently planned to take place in 2010. There have been efforts to replicate the forum at the provincial level and the Punjab Development Forum was organized every year from 2003-2007. The Bank provides financial and technical support to the government in organizing the PDFs and to bring greater clarity and focus on the key results the government intends to achieve. We will continue to work with development partners and the government to further refine linkages and align the strategies and results in respective programs to support achievement of aid effectiveness goals. Table 1 highlights the engagement of development partners in Pakistan with reference to the priority defined under the Pakistan's Poverty Reduction Strategy (PRSP-II). 3. A recent development is the government's plan to formulate an Aid Effectiveness Policy to formalize guidelines, parameters, and results framework for the aid dialogue and coordination agenda. The Bank welcomes the effort and has expressed support for the endeavor. Another significant initiative to provide leadership on implementation of the Paris Declaration commitments is the Steering Committee on Aid Effectiveness, which is convened and chaired by the Minister of Economic Affairs and includes all multilaterals and major bilateral donors as members. As part of the deliberations of the Steering Committee, a number of Working Groups have been created to support the government efforts on implementation of the Paris Declaration goals. The working groups are co-led by the donors and the government. The World Bank is co-leading two of the Working Groups to help the government in implementing the Sector Wide Approaches (SWAp) in Education and to achieve Harmonization and Strengthening of Financial Management and Procurement Systems. Key developments and recommendations of these groups are discussed in the section below. The Bank also participated and provided inputs to the other working groups co-led by the ADB (Capacity Development) and DFID (Strengthening of Monitoring and Evaluation Systems). The working groups serve as effective platform for a focused discussion on some key Paris Declaration Annex IV Page 2 of 6 commitments such as strengthening of the country systems. However, implementation of the recommendations of the working groups would require sustained attention and effort both on part of the government and the development partners. Continued leadership of the government to steer this process and commitment on part of the development partners to bring some fundamental changes in the way they do business will be imperative in determining the outcome of this initiative. The Bank will continue to support the government in the process of implementing the proposed actions of the working groups. Table 1: Coverage of PRSP-II Areas by Development Partners, Fall 2009 One UN Joint Effort Asian Development Development Bank Nether lands World Bank Commission Switzerland European Germany Australia USAID Islamic Japan CIDA DFID IFAD Bank IMF Macroeconomic stability Social protection Agriculture Energy* and environment Product and factor markets, market governance, trade Policy Education, health, drinking water, sanitation and solid waste management, population program, gender and female empowerment Water for irrigation, transportation (roads, trucking, ports, railways, aviation), housing and asset titles Capital and finance Decentralization, judicial system, corruption, tax administration, public financial management, civil service reform, PPPs Notes: * People's Republic of China is providing support for Chashma Nuclear Power Project and assistance for a hydropower station in Gilgit. 4. The Working Group on Financial Management and Procurement, Country Systems Strengthening and Harmonization is co-chaired by the Ministry of Finance and the World Bank. The Group's mandate is to deliberate and evaluate proposals to help improve the Annex IV Page 3 of 6 government systems to graduate to a level of robustness and compliance with international standards to provide an acceptable mechanism for partners to channel aid. At the same time, the working group is also required to put forth proposals for the donors to simplify, harmonize and align their procedures and reporting requirements to the government systems. The report for the Financial Management Systems has been finalized and the findings have been shared and discussed with the partners and the government. The draft report on Procurement Systems is at an advanced stage and will be finalized shortly. The Financial Management Report has applied generally accepted framework of PEFA indicators/sub-indicators as benchmarks to analyze the existing government FM practices and performance in externally-financed projects. Specific recommendations have been made for the government and partners identifying entry points for streamlining the budgeting and accounting procedures, expenditure management, in- year and year-end financial reporting, internal and external auditing functions, and legislative scrutiny/review by Public Accounts Committee etc. For these functions, donors will also need to adjust their requirements to align with the country systems and specific areas for actions have been highlighted in the report. 5. The Procurement Report (to be finalized) has applied the generally accepted framework of OECD DAC Baseline Indicators and UNCITRAL Model Legislation on Procurement as benchmarks (broadly accepted good practices) for assessing the country procurement systems. These include indicators on legislative and regulatory framework, institutions and management capacity, procurement operations and market practices, and integrity and transparency of public procurement systems including the appeals mechanism. Initial findings suggest gaps in the country systems which need to be addressed to allow their use by partners. While procurement reforms by the federal government, provincial governments, and autonomous public bodies are underway and Governments have established the overarching regulatory authorities, they need strengthening and the legislation creating these authorities also needs review. Detailed guidelines and standard bidding documents are generally missing. In general, capacity issues in procuring agencies, regulatory authorities, and accountability institutions are the major bottlenecks in achieving efficiency, economy, and transparency of the procurement systems. The assessment also points towards a need for a capacity development framework, and suggests an action plan to take forward the systems reform and harmonization agenda in parallel. In terms of harmonization, major multilaterals, the World Bank and ADB, have made good progress to align their procurement guidelines and standard bidding documents for borrowers. Joint conduct of procurement diagnostic studies, and greater collaboration with partners during preparation of SWAp operations are other outcomes worth mentioning. Nonetheless, the report highlights that donors need to better align their assistance for procurement systems reforms and have to harmonize the way procurement systems capacity is assessed and build a common approach towards mitigating identified risks. 6. Working Group on Sector wide Approaches (SWAps) in Education, co-led by the Bank, had a series of consultations with federal, provincial governments and partners working in the education sector in Pakistan. The working group deliberations helped form a broad consensus that a sector wide approach to support the Government's own framework of reforms and education development has the promise to deliver on effective coordination of financial and technical assistance. The Sector-Wide Approach (SWAp) allows the Government and the donors to finance a sector program rather than a particular project based on a clear sector strategy and an agreed mid-term expenditure framework. It brings out the focus on sector results and Annex IV Page 4 of 6 outcomes and helps strengthen institutions and country systems, promote holistic and strategic thinking, flexible use of program resources to finance the sector program, and has a potential to reduce transaction costs. As an outcome of the discussion of the Working Group, there has been significant progress in coordinating donor support to the education sector in Pakistan. The Bank, along with partners has prepared operations coordinating support around the medium term education sector reform programs of Punjab and Sindh. A similar initiative is underway for the NWFP. Disbursements under the Bank's operations reimburse the governments against selected key education budget line items referred to as Eligible Expenditure Programs (EEPs) such as teacher salaries, girls stipends etc. Disbursements are based on the achievement of pre-specified results, referred to as disbursement-linked indicators (DLIs), which represent priority elements in the respective reform programs. Total financing provided by the development partners amounts to approximately 15% of the total education sector programs. Financing such holistic sector programs has reduced duplication of effort and encouraged each partner to support overall sector results and outcomes. 7. Other Harmonization and Alignment Initiatives: The Bank has taken concrete steps to harmonize its procedures including financial management and procurement. As mentioned earlier, the World Bank and Asian Development Bank's procurement rules and documents are synchronized to a large extent. A similar exercise is underway in the area of financial management. Effective July 1, 2003 the World Bank has simplified, updated and clarified its audit policies in line with its commitment to enhance partners' capacity and to harmonize with other donors. Consequently, with the change in audit policies, the World Bank may accept the normal audited financial statements of the borrower and implementing entities, when they are prepared and audited in accordance with standards acceptable to the Bank and disclose information in line with the Bank's requirements on the activities supported by the Bank funds; may also accept national auditing standards when these are considered equivalent to international standards, and may permit exemptions from the normal audit in limited circumstances. The Bank may accept a single audit opinion on the annual financial statements for each operation it supports instead of requiring separate opinions on statements of expenditure and special accounts. 8. Joint Programs and Analytical Work: Japan is providing parallel financing for the Poverty Reduction Strategy Credit (PRSC). DFID is supporting the projects on Tax Administration Reform, HIV/Aids and Social Safety Nets. As mentioned in section 6, DFID, EC, CIDA, GTZ and the Bank are coordinating support around the medium term education sector frameworks in Punjab and Sindh. The Bank is preparing an HD operation (education, health, social protection) for the Government of NWFP on similar lines from EC, AusAid, GTZ, Norway and DfID. 9. The Bank has been actively encouraging joint analytical work to inform policy dialogue and program development around key issues. During the previous CAS period, the Bank worked with DFID, ADB, and the EC to deliver Public Expenditure and Financial Accountability (PEFA) Assessments for all four provinces. Provincial Economic Reports for all four provinces were also prepared jointly with partners. The economic report on Gilgit-Baltistan is being prepared jointly with the Agha Khan Development Network and is at an advanced stage. Most recently, the Bank has worked with DFID and EC to carry out an integrated Review of Public Expenditure, Procurement, and Financial Management Practices in Pakistan. The World Bank Annex IV Page 5 of 6 and the IMF developed a strategic partnership for implementation and monitoring the IMF Stand-By Arrangement whereby the World Bank led policy dialogue on tax administration, electricity and social protection issues. Further, in response to a series of crisis (earthquake, floods, military intervention), the World Bank has led a number of Damage and Needs Assessments (DNAs) with participation from more than 15 development partners in the past few years. The earthquake response effort is considered a best practice where a G-7 plus forum was effectively convened to ensure common direction and coordination of the relief, early recovery, and reconstruction and rehabilitation efforts. This model was quickly replicated later in organizing timely response to emergency situations after flash floods and most recently for the DNA and Post Crisis Needs Assessment (PCNA) following the Pakistan Army's offensive in the Swat Valley - (please see next sections for discussion on PCNA and MDTF). 10. The World Bank, under the leadership of the Government, will continue to increase partnership efforts. This will include enhanced utilization of trust funds and ensuring that such trust funds are entirely integrated into World Bank budgeting and strategy processes. As of end December 2009, the Pakistan program included 62 active trust funds with a net commitment of over US$116 million. The DFID Funded Poverty Reduction Support Credit Technical Assistance trust fund has been financing critical inputs to support tax policy/administration reforms and implementation of the safety net programs. The analytical work supported by the DFID trust fund is expected to help develop consensus on the needed policy reforms in poverty reduction, education quality, and private sector development. The Bank has also been administering Japanese Social Development Fund (JSDF) and Japan Policy and Human Resources Development Fund (PHRD) grants to finance significant interventions in health, education, environment and earthquake affected areas including support for the IDA Disability Project. The Bill and Melinda Gates Foundation and UN Foundation supported initiatives of Polio eradication in Pakistan in the form of Buy Down arrangements. Other major partners providing grant resources through the Bank are Netherlands, Germany, AusAid, and CIDA. 11. Given the economic challenges and an increasing interest among development partners to support Pakistan, the "Friends of Democratic Pakistan" meeting and the Tokyo Donors Conference were organized in April 2009. The World Bank co-organized the Donors Conference with the Government of Japan and supported Government of Pakistan in the process of mobilizing support from the development partners. Though programming and timely delivery of the financial pledges by partners remain to be an issue, the Bank has been actively supporting the government and partners in identifying viable platforms and instruments to program the financial pledges and leverage capacities in the country's priority areas. The Multi-donor Trust Fund (MDTF) for the Northwest Frontier Province (NWFP), FATA and Balochistan is one such example. On the request of the government, the Bank is putting this trust fund together to provide development partners a viable platform to pool their funds to support achievement of common goal of post-crises reconstruction and rehabilitation of the border areas. 12. The MDTF will enable strategic prioritization of projects for funding and provide a mechanism for enhanced donor coordination and platform to effectively harmonize donor programs across strategic priorities agreed between donors and government. The trust fund financing will be part of the government budget and associated reconstruction and development programs. The overall objective of the MDTF will be to support implementation of a program of reconstruction and development aimed at recovering from the impact of the conflict and reducing Annex IV Page 6 of 6 the potential for renewed conflict. The MDTF will finance projects identified by local and provincial governments to: (1) promote enhanced, sustainable and accountable delivery of basic services, including education, health, and administration of justice; (2) support livelihoods and community-based development of basic infrastructure and services; (3) help communities to access assets and market opportunities and create the basis for viable income generating activities; (4) support peace building activities and promote rapid crisis recovery in the Northwest Frontier Province, Federally Administered Tribal Areas, and Balochistan; 1 and (5) improving state effectiveness by strengthening governance and institutional performance. 13. The strategic priorities and programming of the MDTF will be informed by the ongoing Post-Conflict Needs Assessment (PCNA), the Government's PRSP and other analytical work as needed. Following a request from the Government of Pakistan, the PCNA process was formally initiated in the middle of August 2009, with the UN, EC, and ADB as key partners or core group supporting GOP, GoNWFP and FATA Secretariat. The PCNA aims to cover the immediate post crisis transition and stabilization phase, medium term transformation, as well as the longer-term institution building, consolidation and development periods. The first phase of the PCNA--a Damage and Needs Assessment--was completed in November, 2009. The DNA is part of, and aligned with, the PCNA framework for crisis recovery ­ focusing on immediate service delivery-related infrastructure reconstruction and livelihoods restoration needs. Since the full PCNA will not be complete for several months; the design of the MDTF will be flexible to accommodate its findings. The PCNA will lead to the formulation of a Transitional Results Framework that will identify priority outcomes and actions, in particular those aimed at addressing the causes of conflict. The MDTF is expected to serve to mobilize and manage donor resources directed at, inter alia, achieving these outcomes. Moreover, flexibility will be required to allow the trust fund to address possible changes in the development context or to take advantage of emerging opportunities. To ensure effective information exchange on the PCNA and MDTF process, clear and regular communication is being maintained with partners, including periodic updates and consultations at key milestones of the process. 14. The Bank will continue to build on the strong foundation of partnerships as described above based on mutual trust and accountability. In the same spirit, we have recently concluded the Consultations on the WB Country Partnership Strategy (CPS) 2010-2013 and the final draft has benefited from the valuable feedback that we received from the government and development partners. This would be used as a basis for a sustained dialogue in the coming years to ensure complementarity and effectiveness of donor support to Pakistan. 1 For the purpose of this document the term "peace-building activities" means: activities that can be undertaken or financed consistent with the Bank's mandate and legal and policy framework that include the broad spectrum of reconstruction and institution-building efforts necessary to recover from conflict and that support the formulation of integrated strategies in order to lay the foundation for sustainable development including social and economic reintegration of conflict-affected populations, financing labor-intensive employment initiatives, financial support and technical assistance for economic reconstruction, and rebuilding legal and judicial systems.