Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 39416 - PK

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A

PROPOSED SECOND PUNJAB IRRIGATION SECTOR DEVELOPMENT POLICY LOAN

IN THE AMOUNT OF US$lOO MILLION

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

May 2,2007

Sustainable Development Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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AAA ADB AMP AWB CAS CSR C W R A S

DAC

DPC DPL DPR EL4 FO GDP GIS GOP GOPunj ab GST FGW IBRD

IEE IDA

I D S C

IMF I M I S

IMTA

CURRENCY EQUIVALENTS (As o f April 22,2007)

US$1 .o PKR 60.68

PAKISTAN- GOVERNMENT FISCAL YEAR July 1 -June 30

Weights and Measures M e t r i c System

1 meter (m) = 3.280 feet 1 hectare (ha) = 2.470 acres 1 Kilometer (km) = 0.620 mi les lcubic meter (m) = 35.310 cubic feet

1 million acre feet (MAF) = 1.234 billion cubic meters 1 cubic foot/second (cfs) = 0.0283 cubic meterdsec (m3/sec)

ABBREVIATION AND ACRONYMS

Analytical & Advisory Assistance Asian Development Bank Asset Management Plan Area Water Board Country Assistance Strategy Composite Schedule o f Rates Country Water Resources Assistance Strategy Departmental Accounts Committee Development Pol icy Credit Development Pol icy Loan Delivery Performance Ratio Environmental Impact Assessment Farmer Organization Gross Domestic Product Geographic Information System Government o f Pakistan Government o f Punjab General Sales Tax Fresh Groundwater International Bank for Reconstruction and Development In i t ia l Environmental Examination International Development Association Inter-departmental Steering Committee International Monetary Fund Irrigation Management Information System Irr igation Management Transfer

IPD I R S A I S A ISRP ITPS JICA

JBIC

M&E MTBF M&R NDP NFC NWC NWP O&M PAC PC P&D PEDPC

PEFA

PER PESRP

P F M PFMA

PIDA

.. 11

Agreement Irr igation and Power Department Indus River System Authority In i t ia l Social Assessment Irr igation Sector Reform Program Independent Thud Party Surveys Japan International Cooperation Agency Japan Bank for International Cooperation Monitoring & Evaluation Med ium Term Budget Framework Maintenance & Repairs National Drainage Program National Finance Commission National Water Counci l National Water Pol icy Operation & Maintenance Public Accounts Committee Provincial Cel l Planning & Development Punjab Education Development Pol icy Credit Public Expenditure and Financial Accountability Public Expenditure Review Punjab Education Sector Reform Program Public Financial Management Provincial Financial Management & Accountability Punjab Irr igation & Drainage

PIDS PIFRA

PMO PRGF

PRMP

P-PRSP

SBP S E W

Authority Provincial Irrigation Departments Project to Improve Financial Reporting &Accounting Project Management Office Poverty Reduction & Growth Facility Punjab Resource Management Program Punjab-Poverty Reduction Strategy Paper State Bank of Pakistan Social and Environmental Management Unit

SCEA

SGW TDF TFP TWs UIPT WAPDA

WPC WOMC

WRS

Strategic Country Environmental Assessment Saline Groundwater Tarbela Development Fund Total Factor Productivity Tube wells Urban Immovable Property Tax Water & Power Development Authority Water Policy Cell Website Oversight & Management Committee Water Resources Strategy

Vice President: Praful Pate1 Country Director: Yusupha B. Crookes

Sector Director/Sector Manager: Task Team Leaders:

Constance A. Bemard/Adolfo Br izz i Manuel ContijocMJsman Qamar

... 111

PAKISTAN PROPOSED SECOND PUNJAB IRRIGATION SECTOR DEVELOPMENT POLICY LOAN

TABLE OF CONTENTS

ABBREVIATION AND ACRONYMS .......................................................................................... ii

LOAN AND PROGRAM SUMMARY .......................................................................................... 1

1 . INTRODUCTION ............................................................................................................ 3

I1 . THE COUNTRY CONTEXT .......................................................................................... 4

I11 . THE GOVERNMENT PROGRAM ............................................................................... 15

I V . BANK SUPPORT TO THE GOVERNMENT PROGRAM ........................................ 24

V . THE PROPOSED LOAN ................................................................................................ 29

V . OPERATION IMPLEMENTATION ............................................................................. 34

ANNEXES Annex-1: L e t t e r o f Sector Development Policy ............................................................................ 46

Annex-2: Development Policy Matrix ........................................................................................... 53

Annex-3: Environmental Screening Matrix ................................................................................. 62

Annex-4: Social Screening Matrix ................................................................................................ 71

Annex-5: Comparison o f DPL2 Triggers and Prior Actions Taken .......................................... 81

Annex-6: IMF Public Information Notice (PIN). December 7. 2006 ......................................... 86

Annex-7: Status o f Bank Group Operations ................................................................................ 90

Annex-8: Country at a Glance ....................................................................................................... 93

MAP IBRD 35483

TABLES Table 1: Pakistan: Selected Economic Indicators 2004/05-2009110 ................................................................. 5

Table 2: Summary ofProvincia1 Fiscal Accounts. 2001/02-2006/07 ............................................................... 8

Table 3: Punjab .. Irrigation Department Recurrent Budget by Objects. 2005/06-2006/07 ........................... 11

Table 4: Punjab .. Irrigation Sector Medium-Term Development Program. 2005/06-2008/09 ...................... 11

Table 5: Punjab .. Public Sector Debt Sustainability Framework. Baseline Scenario. 2006-2026 ................ 13

Table 6: Baseline, Targets and Cumulative Achievements of ISRP .............................................................. 20

FIGURE Figure 1 : Consolidated Fiscal Def ic i t ................................................................................................................ 6

Task Team Manuel Contijoch, Usman Qamar, Co-TTLs (SASSD), Hanid Mukhtar, Sr. Economist (SASPR), Martin Serrano, Sheila Braka Musiime, Senior Counsels, Ismaila Ceesay, Senior Financial Management Specialist, Furqan Ahmad Saleem, Financial Management Specialist (SARFM), Pramod Agrawal, Senior Social Development Specialist, Walter Garvey, Jawaid Afzal (SASSD-Environment), Asif Ali, Senior Procurement Specialist (SAPS), Shahzad Sharjeel (SAREa, M. A. Rasheed (Water Resources Engineer-consultant), M. Ehsan (M&R Specialist-consultant), Shamshad Gohar (Groundwater Specialist-consultant), Imran Ali (Communications and Political Economy Specialist consultant), Frank K Steenbergen, Ahmad K. Bhatti (Groundwater Policy Consultants), Anwar Ali Bhatti (Disbursements), Lilac Thomas, Ghulam Ali, Program Assistants (SASSD), Shabir Ahmad, Team Assistant (SASSD) Peer Reviewers: Douglas Olson, Claudia Saddof; and Daryl Fields

V

vi

LOAN AND PROGRAM SUMMARY

PAKISTAN PROPOSED SECOND PUNJAB IRRIGATION SECTOR DEVELOPMENT POLICY

Borrower

Implementing Agency

Beneficiary

Amount

Terms

Tranching Development Objectives and Description

Benefits

Risks and Mit igat ion Strategy:

LOAN

Islamic Republic o f Pahstan

Government o f Punjab

Province o f Punj ab

U S $ 100 m i l l i on

F ixed Spread Loan, payable in 20 years, including an 8-year grace Deriod Single Tranche "ne purpose o f this proposed second development pol icy loan i s t o upport Government o f Punjab's (GOPunjab) medium term h g a t i o n lector Reform Program (ISRP), covering the period 2006-2008. ;ey pil lars o f the ISRP are (i) Institutional andpolicy reforms to rllprove the management and maintenance of the irrigation system 3 ensure its long term sustainability; (ii) Water resources zanagement reforms to make intra-province water allocation and 'istribution more transparent; (iii) Irrigation service delivery eforms to improve the quality, efficiency and accountability with ghich irrigation services are delivered; and (iv) Reforms to improve Jater use efficiency and on-farm productivity.

'here have been good progress and positive outcomes since the lunch o f ISRP in FY05/06. A good start has been in: reducing the ack-log o f deferred maintenance; malung intra-province water l location and distribution more transparent; improving service elivery in canals where operation and maintenance (O&M) zsponsibility has been transferred to farmers; and increasing water se efficiency and productivity in target areas. The proposed second

~~

I a n will assist GOPunjab in moving forward. (i) improved efficiency and sustainability o f hydraulic infi-astructure, which i s critical for Punjab's growth; (ii) greater transparency and equity o f water distribution in accordance with entitlements; (iii) greater participation and empowerment o f water users in irrigation service delivery; (iv) improved capacity in the h g a t i o n and Power Department (IPD), and farmer organizations (FOs) for dealing with social & environmental issues; and (v) improved productivity.

When the f i rs t development pol icy loan was approved, a major r i s k identified was the history o f uneven high level support t o the

1

Disbursement:

Sector Code:

Proiect ID: Number:

irrigation reform agenda. However, GOPunj ab has remained strongly committed to the reform program, which continues to receive strong polit ical support. Water users/farmers also continue to participate in the implementation o f reforms with great enthusiasm and are witnessing the positive outcomes o f participatory irrigation management. Whi le there remains an inherent risk that a change in polit ical leadership could affect the current momentum, the reforms have reached the take-off point and there would be pressures to move ahead. Continued Bank support, however, remains critical.

Another risk i s that adequate levels o f funding for maintenance and repairs (M&R) may not be sustained. However, the fiscal situation in Punjab has improved and the yardsticks for allocation o f M&R budgets have been rationalized. Adequate funding has been allocated for FY06/07.

There i s also a r i s k that staff redundancies resulting f rom the devolution o f responsibilities to FOs may bring to bear polit ical pressures on the government to slow down the process o f change. IPD i s mitigating this risk by adopting a strategy o f natural attrition o f redundant staff. Furthermore, close monitoring, benchmarking, coupled with a wel l designed communication strategy i s being used to widely publicize the objectives and the positive outcomes o f the reform program.

I P D has l imited capacity for managing social and environmental risks associated with asset management activities. This risk i s being mitigated by strengthening institutional capacity in these areas through training and capacity building and mainstreaming guidelines for addressing social and environmental r isks in asset management.

Finally, there i s a risk that IPD has l imi ted capacity to effectively uti l ize enhanced resources for M&R. This risk i s being addressed by improving asset management planning, and allocating M&R funds in accordance with needs as we l l as implementation capacity. JS$ 100 mi l l ion equivalent disbursed in a single tranche upon Loan ffectiveness. rrigation and Drainage

P102333

2

THE ISLAMIC REPUBLIC OF PAKISTAN PROPOSED SECOND PUNJAB IRRIGATION SECTOR DEVELOPMENT POLICY

LOAN

I. INTRODUCTION

1. The proposed US$lOO mi l l ion Loan would be the second in a programmatic series o f three Development Policy Loans o f US$ 100 mi l l i on each, to support the Government o f Punjab’s (GOPunjab’s) medium term irrigation sector reform program (ISRP), covering FY06- 08. The f i rs t year o f ISRP was supported by the US$ 100 mi l l ion (equivalent) Punjab Irrigation Sector Development Policy Loan approved by the Board on June 1, 2006. This proposed loan would support the second year o f the reform program.

2. The four inter-related pillars o f the ISRP are: (A) Institutional and pol icy reforms to improve the management and maintenance o f the irrigation system to ensure i t s long term physical and financial sustainability; (B) Water resource management reforms to make intra- province water allocation and distribution more transparent; (C) Reforms to improve the quality, efficiency and accountability with which irrigation services are delivered; and (D) Reforms to improve water use efficiency and on-farm productivity.

3. High level of commitment --within the bureaucracy as well as in the political leadership, and the farming community-- has been the key factor of success. Punjab i s n o w recognized as the leading province in Pahstan in irrigation reforms and other provinces are seehng to fo l low suit. GOPunjab’s ownership and support t o the ISRP i s evident from: (i) the leadership provided by a high level inter-departmental reform steering committee reporting to the Chief Minister; (ii) scaling up o f irrigation management transfers to farmer organizations (FOs) from one to three new canal command areas, with a system o f monitoring and benchmarhng performance in place; (iii) a near doubling o f resources allocated for maintenance and repairs (M&R) and system rehabilitation, and operationalization o f a system o f performance audits; (iv) major achievements in m a h n g water entitlements more transparent, with a robust Irrigation Management Information System in place; and (v) launching o f a major reform and investment program (US$900 mill ion) complementary to the ISRP, with the assistance o f ADB.

4. Participation of stakeholders has been a central element of the I S M . An extensive consultation process was undertaken during the design o f the ISRP. Continuing dialogue with water users/farmers, during the process o f social mobil ization for establishing FOs and capacity building activities, i s an integral part o f the reform process.

5. The program being supported under the proposed second loan seeks to move forward the ISRP agenda under each reform pillar, focusing, inter alia, on (i) sustainability of the hydraulic infrastructure by sustaining adequate funding for M&R, reducing costs and further improving financial accountability; (ii) expanding the coverage and improving the quality o f the Irrigation Management Information System (IMIS) to further enhance transparency in the administration o f water entitlements; (iii) improving service delivery by scaling up irrigation management transfers, benchmarkmg o f performance, improving communications with stakeholders, and mainstreaming environmental and social safeguards in operations and maintenance activities; and (iv) enhancing productivity through (a) pol icy reform and incentives for adopting new technology; (b) improving markets, and (c) restructuring agricultural research.

3

11. THE COUNTRY CONTEXT

The National Context - Recent Economic Developments

6. Since the beginning of the new millennium, Pakistan’s economy has staged a remarkable turnaround, lay ing the ground for sustained growth and poverty reduction. The 1990s were a period of slow growth, and progress in reducing poverty and improving social indicators stagnated. Successive governments initiated reforms, but with only modest results as reforms faltered midway due to rising polit ical pressures and constrained external financing. Beginning in 2000, the Government initiated a more wide-ranging and ambitious reform program that was articulated in the Government’s 2003 Poverty Reduction Strategy Paper, “Accelerating Growth and Reducing Poverty, The Road Ahead.” These reforms, along with debt restructuring, and increased remittances and concessional a id flows, resulted in a dramatic turnaround o f the economy. In contrast to several previous IMF programs, both the 2000 Stand-by Arrangement (SBA) and the 2001 three-year arrangement under the Poverty Reduction and Growth Facil ity (PRGF) were successfully completed. Recent years have witnessed considerable improvement in the performance o f the industrial and services sector, leading to a significant acceleration in economic growth, to 7.5 percent in 2003!04 and 8.6 percent in 2004105. In 2005!06, Palstan’s economy withstood serious adverse shocks emanating f rom i t s worst ever earthquake, a sharp increase in o i l prices, and less favorable weather conditions, and registered continued strong growth o f 6.6 percent.’

* For more details on macroeconomic situation and prospects see the program document of Second Poverty Reduction Support Credit, March 2007.

4

Table 1: Pakistan: Selected Economic Indicators 2004/05-2009/10

2004/05

National Income and Prices GDP (at factor costs o f 1999100) Agnculture Manufactunng Other Sectors

Inflation Savings and Investment Investment Fixed Capital Formation

Pnvate Public

National Savings Public Finance Total Revenue Total Expenditure

Current Expenditure a/ Development Expenditure & Net Lending

Consolidated Government Fiscal Balance Net of Earthquake Impact

Total Debt Domestic Debt Foreign Debt

Balance of Payments

Exports (% change, current US) Imports (“h change, current US) Current Account Balance (% o f GDP)

Foreign Exchange Reserves (US million)

Memo Items Earthquake Spending (Rs billion) (% o f GDP) GDP at current market pnces (Rs Billion)

13

(in months o f next year’s Imports o f GNFS)

2005/06 2006/07 I 2007/08 I 2008/09 1 2009/10 Prqjections

7.0 4.5

10.5 6.8

7.5

(percent of 20.3 18.8 13.9 5.0

15.7

8.6 6.7

12.6 8.1

9.3

7.2 4.4

1 1.2 6.9

5.5

GDP) 20.8 19.3 14.2 5.2

16.6

18.1 16.5 12.1 4.4

16.5

13.7 17.0 13.9 3.1

-3.3

61.4 33.1 28.3

15.9 37.6 -1.6

9,791 3.6

... ...

6,581 11,375 basis o f latest )urce: Government o f Pakistan projections. Some adjustmen

information.

12,854 available

~~

6.6 2.5 8.6 7.6

7.9

20.0 18.4 13.6 4.8

15.6

13.9 18.1 14.0 4.2

-4.2 -3.4

56.0 27.1 28.9

13.8 31.4 -4.4

10,760 3.6

65.8 0.9

7,7 13

(percent o 13.1 17.3 12.7 4.6

-4.2 -3.6

50.1 23.1 27.0

8.0 11.0 -4.6

11,794 3.6

50.0 0.6

8,893

YDP) 13.5 17.4 12.7 4.8

-4.0 -3.6

46.0 20.5 25.5

12.0 10.0 -4.2

13,625 3.8

40.0 0.4

10,084 staff on tl.

7.1 4.5

11.8 6.5

5.0

21.5 20.0 14.7 5.3

17.6

13.8 17.5 12.6 4.9

-3.7 -3.5

42.9 18.6 24.3

13.0 10.5 -4.0

15,133 3.8

22.0 0.2

7.3 4.3

11.7 6.7

5.0

22.0 20.5 15.1 5.4

18.4

14.2 17.7 12.6 5.1

-3.5 -3.4

39.7 16.6 23.1

14.0 11.0 -3.8

16,977 3.8

13.0 0.1

7. The acceleration in economic growth since 2001102 has led to higher household incomes and lower poverty. In 2005106, the per capita income increased to $847, up f rom $742 a year earlier (an increase o f 14 percent in nominal dollars). More importantly however, a l l segments o f the population, in both urban and rural areas, have gained f rom income growth. Poverty declined significantly, and Palustan’s social indicators have started to show some improvements .*

According to the CPI-based price index overall poverty declined from 34 4% to 23.9%. In urban areas, poverty declined from 22.7% to 14 9% and in rural areas, from 39 3% to 28.1 %. According to survey-based prices, overall poverty declined from 33 3% to 28.3%. In urban areas, poverty declined from 22 0% to 18.4%, and in rural areas, f rom 37 9% to 32.9% T h e CPI based price index suffers f rom being collected only in urban areas, thereby leaving out rural areas where poverty i s the greatest The survey based price data suffers from being very limited, collecting only food and transport prices, which may be unrepresentative o f the items on which rural households actually expend

5

8. The government’s prudent expenditure and debt management strategies have resulted in sustained fiscal improvement, despite l imi ted progress in improving revenue collections and reducing power sector losses. Due primarily t o increased savings o n the interest bill, the overall fiscal deficit (excluding grants) declined f i o m 5.4 percent o f GDP in 1999/00 to

Figure 1: Consolidated Fiscal Deficit

-2 .o

-2.5

-3 .o

& -3.5 er 0 0

-4.0 I ; -4.5 U h

f -5.0

-5.5

-6.0

-6.5

...............................................................

...............................................................

.............................. -Without Earthquake ...............................................................

200W02 2002103 2003104 2004105 2005106 2006107 1

about 3.3 percent in 2004/05. Earthquake related expenditures contributed to a higher deficit o f 4.2 percent of GDP in 2005/06.3 Net o f earth-quake effect the fiscal deficit was 3.3% o f GDP, implying that a significant part o f earthquake impact was absorbed within the budget (See Figure 1). Rapid economic growth, availability o f grants and concessional finance, debt cancellation and fiscal consolidation has enabled Palustan to reduce i ts debt burden sharply. The government pol icy o f using privatization proceeds towards retirement o f debt also contributed to lessening o f debt burden. Total government debt fe l l f rom about 80 percent o f GDP in 2001/02 to 56 percent in 2005/06. Moreover, despite the rapid fiscal adjustment, social and poverty-related expenditures continued to increase sharply and over a four year period (200 1/02-2005/06) were raised by 1.8 percentage points o f GDP or by over 12 percent p.a. in real per capita terms, although they remain l o w in comparison with other countries at similar levels o f per capita income. The Government promulgated the Fiscal Responsibility and Debt Limitation Act in June 2005, under which it has committed itself to specific targets o f fiscal adjustment and debt reduction.

9. Rapid economic growth and an expansionary monetary pol icy contributed to strong aggregate demand. This caused an upsurge in inflation, which increased to 9.3% in 2004/05. However, the inflation rate dropped to 7.9% in 2005/06 as authorities took measures to tighten money supply. Despite continued healthy growth in exports during the past two years, the external situation deteriorated, as imports growth exceeded exports by a considerable margin. As the trade gap widened, the current account has gone f i o m a surplus to a deficit, which in 2005/06 i s estimated to have reached 4.2 percent o f GDP, despite sizeable increases in workers’ remittances. Worsening current account balance was financed mainly through non-debt inflows as continued strong foreign investors’ interest l ed to a substantial increase in FDI.

Macroeconoinic Outlook and Debt Sustainability

10. Prospects for continued rapid growth are good, provided that polit ical and macroeconomic stability are maintained. The government i s aiming to increase growth to 7-8

In 2005106, the earthquake-related expenditure amounted to 0.9% o f GDP.

6

percent over the long run. For this, i t plans to continue to implement r e f o m s to reduce the cost o f doing business in Palustan, attract investment through the privatization program, and reduce infrastructure and human development shortfalls. The SBP and the Government have expressed their commitment to control inflationary pressures and the growing external imbalances, and are expected to take actions to counter them.

11. Since early 2005, there has been a gradual tightening o f the money supply. Interest rates have inc rea~ed ;~ reserve and liquidity requirements ratios have been raised (by more than 2 percentage points in the current fiscal year); and the discount rate has been increased (by 50 basis points to 9.5. These, coupled with relative stabilization o f o i l prices in the international markets and crossing the hump o f some lumpy imports, l ed to a marked slow down in imports during the f i rs t 7 months o f 2006/07.’ The import growth i s projected at 11% for 2006/07. This, however, did not result in any significant improvement in current account balance as exports too decelerated. The Pakrstani rupee has appreciated by around 12 percent in real terms over the past 18 months, which aided the strong growth in imports, and may have dampened growth in exports. Nonetheless, the sudden and sharp deceleration in exports f rom the beginning o f this fiscal year may in part be due to structural factors that have eroded international competitiveness. Owing to higher non-debt inflows, the foreign exchange reserves increased, albeit only marginally. On the basis o f these developments, it i s projected that whi le the current account deficit will remain high during the next three years, increased capital f lows will cause a gradual build-up o f foreign exchange reserves, which are projected at 3.6 months o f imports in 2006/07 and rising to 3.8 months for the next three years.

12. Tighter monetary pol icy also led to some easing of inflationary pressures. Consumer price inflation declined somewhat f rom a peak o f 11.5 percent in April 2005 to 9 percent in July 2005 and 8.1% in January 2007. On the basis o f a sharp deceleration in monthly inflation in January, end-year inflation i s projected to decline to 7.5%.

13. Tax revenue collection during the f i rs t h a l f o f 2006/07 was 27% higher than the corresponding period in the previous year, in spite o f the sharp deceleration in import-related taxes. Direct taxes were higher by 66%, reflecting the increased profitabil ity o f the corporate sector, in particular banking, energy and telecommunications, as wel l as better tax compliance due to the tax administration reforms within the Central Board o f Revenues (CBR). The fiscal deficit is, therefore, projected to decline gradually f rom 4.2% o f GDP in 2005/06 to 3.5% by 2009/10. These relatively l o w levels o f fiscal deficit will contribute to further improvements in Palustan debt indicators. Debt sustainability analysis has been carried out by the IMF and by the Wor ld Bank, and indicates that the government’s debt reduction path (which i s prescribed in the Fiscal Responsibility and Debt Limitation Law) i s consistent with a sustainable debt outlook. As discussed in paragraph 6, fo l lowing the conclusion o f the Poverty Reduction and Growth Faci l i ty (PRGF) in 2004, Palustan i s n o w o n a standard Article IV surveillance schedule. IMF post- program Monitor ing was deemed unnecessary by the IMF’s Board. An IMF Article IV Consultation mission took place in August 2006, and a Staff Report was discussed by the IMF Board in early November 2006.

14. Provincial Context - Issues in provincial finances and recent developments: For over a decade, Punjab’s public finance had been quite prudently managed. The government’s

Treasury Bill rates increased from 1.7% in 2003104 to over 8% in the current year. The growth in imports decelerated from 3 1 % in 2005/06 to 12% during the f i rs t seven months o f 2006/07.

7

fiscal strategy6 has been effective in creating a significant fiscal space in the provincial budget to sustain the wide ranging reforms that the provincial government has initiated. These reforms, which aim at improving the management o f and financing for various high-priority public services such as education, irrigation and health, have led to a significant increase in provincial expenditure. Furthermore, in an effort t o increase the pace o f economic development in the province, the provincial government has substantially enhanced i t s development outlays. As a result, provincial fiscal deficit has increased. However, the fiscal deficit is s t i l l relatively small (below 1% o f provincial GDP -- see Table 2) to be considered a threat t o the fiscal and financial stability o f the province, or to sustainability o f key reform initiatives undertaken by the government. In addition provincial debt i s less than 6% o f provincial GDP and i s expected to decline steadily in future.

Table 2: Summary of Provincial Fiscal Accounts, 2001/02-2006/07

Total Resources Total Revenues

Tax and Non-Tax Transfers Provincial Revenues

Tax Revenues Non-Tax Revenues

Development Grants From the Federal Government From Donors

Total Expenditure Current Expenditures

General Administration h w & Order Community Services Social Services Economic Services Subsidies Debt Servicing Grants & Unallocable

Developnz ent Expenditure Locally Financed (ADP) Foreign Project Assistance (FPA)

Fiscal Deficit

Financing Foreign Loans (Net) Provincial Domestic Loans (Net) Loans from the federal Government Others (Domestic Loans &Cash) \1

2001/02 Revised

5.45 5.00 4.07 0.92 0.52 0.41

0.45 0.44 0.01

5.56 4.52 0.61 0.48 0.16 1.67 0.45 0.11 0.72 0.31

1.04 0.75 0.29

-0.11

0.11 0.20 0.00

-0.12 0.03

2002/03 Revised

5.31 5.24 4.35 0.88 0.51 0.37

0.08 0.07 0.01

5.82 4.66 0.54 0.54 0.07 0.25 0.33 0.12 0.66 2.14

1.16 0.90 0.26

-0.50

0.50 0.21 0.00

-0.1 1 0.41

2003/04 Revised

5.74 5.57 4.36 1.21 0.65 0.56

0.17 0.10 0.07

6.39 4.68 0.47 0.68 0.07 0.31 0.34 0.07 0.51 2.23

1.71 1.41 0.30

-0.65

0.65 0.17 0.00

-0.1 1 0.59

2004/05 Revised

5.43 5.42 4.40 1.02 0.57 0.45

0.00 0.00 0.00

6.22 4.08 0.44 0.57 0.07 0.32 0.29 0.04 0.43 1.91

2.14 1.88 0.26

-0.79

0.79 0.56 0.00

-0.27 0.50

201 Budget

5.89 5.89 4.60 1.29 0.63 0.66

0.00 0.00 0.00

5.59 4.13 0.47 0.55 0.05 0.33 0.35 0.02 0.31 2.06

1.46 1.20 0.26

0.30

-0.30 0.49 0.00

-0.26 -0.81

2006107

5.91 4.82 1.09 0.64 0.45

0.00 0.00 0.00

6.56 4.21 0.47 0.65 0.02 0.35 0.38 0.02 0.30 2.03

2.35 2.18 0.17

6.39 5.04 1.35 0.65 0.70

0.00 0.00 0.00

7.19 4.46 0.60 0.58 0.13 0.51 0.34 0.02 0.22 2.05

2.73 2.53 0.21

-0.66 I -0.80

-0.24 0.32

15. The provincial revenue has continued to grow at a healthy rate o f about 15% p.a. over the last f ive years (2000/01 - 2005/06) as both the own-source revenue and federal transfers

For last four years, the government has been pursuing a strategy o f creating additional fiscal space through: (i) increased revenue mobilization; ( i i ) reducing low-priority expenditures (e.g. subsidies); (iii) reducing debt servicing by swapping expensive debt with concessional loans; and (iv) reducing (in medium-term) the burden o f pensions and provident fimd payments by creating and/or capitalizing dedicated Pension and G.P. Funds.

8

continue to show robust increases. Moreover, despite the repeated increase in salary o f government employees during the last 5 years, the recurrent expenditure of the province has grown at an annual rate o f only 10%. T h i s i s mainly o n account o f fiscal reforms undertaken by the government, as expenditure o n untargeted provincial subsidies declined at a rate o f 28% p.a. and the provincial strategy o f swapping more expensive federal government debt with less expensive foreign debt has been instrumental in reducing the interest payments o f the government by 6% p.a. 7

16. The increase in fiscal deficit i s therefore solely o n account t o the sharp escalation in development spending, which have increased at a rapid rate of 31% p.a. during the last 5 years. This i s partly due to conscious efforts o n the part o f the provincial government to utilize the additional fiscal space to catch-up with the large human and infrastructure development needs o f the province, which have accumulated during the last decade due to expenditure compression caused by the adverse fiscal situation. However, a part o f this increase, especially in 2006107 budget, was caused by the province's inabil ity to implement i ts debt reduction strategy as was envisaged earlier. This was mainly due to delays in adjustments made in the federal accounts for these early repayments,* leading to some reduction in the benefits o f provincial debt reduction policy. The provincial government, therefore, opted for the next best use o f these fiscal resources, i.e. to recapitalize the pension fund and to use them for social and infrastructural development o f the province. Inclusion o f Special Infrastructure Program (SIP) into the provincial development budget i s another factor behind this sharp increase in development program.

17. The SIP, comprising three large road sector projects,' explains almost one-half (Rs 23 bil l ion) of the increase in 2006/06 provincial development program. Furthermore, the provincial Medium-Term Development Framework (MTDF)" shows large allocations for these projects in 2007108 and 2008/09. This implies that the rapid increase in development budget may continue in 2007108, but this growth wil l drop sharply in 2008/09.

18. Nonetheless, the government remains fully aware that these projects are too costly to be fully financed through provincial budget. I t therefore worlung o n strategy to implement these projects on public-private partnership (i.e. BOOT) basis, where basic physical infrastructure would be financed through the provincial budget, whi le the operational investment will be made by private sector operators. This will reduce the budgetary impact o f these projects to about one- half. Moreover, the authorities have indicated that if the fiscal deficit continues to increase, the provincial government i s prepared to take necessary additional steps to ensure fiscal stability. In this regard, i t i s prepared to re-prioritize i t s expenditure and curtail the low-priority spending while malung adequate allocations for social sectors and other high-priority expenditure. In addition, as a contingency plan to reinforce fiscal discipline, the provincial government has already obtained approval f rom the Chief Minister to cap the development budget at the 2006/07 level in nominal terms (i.e. Rs 100 bil l ion) for the next three years.

7 Under thc provincial fiscal reform program, the untargeted food (wheat) subsidy is being phased out, whereas under its debt management strategy, the province pre-maturely retired Rs 12 bi l l ion o f expensive federal loans from the proceeds o f concessional financial assistance it received from Asian Development Bank (PFNP) and the Wor ld Bank's first education credit (PESAC) T h e issue related to adjustment of early repayments has recently been resolved. These include Lahore Ring Road (with an estimated cost o f Rs 18 billion), Lahore-Sialkot Motonvay (Rs 13 billion) and Lahore Mass Transit System (Rs 168 billion) As the provincial MTBF was put on hold (see below), the provincial government decided to prepare a MTDF Instead, which gives three-year sectoral projections for development expenditures only

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19. Budgetary reforms: On structural reforms, the preparation o f provincial Med ium Term Budget Framework (MTBF) suffered a temporary setback, as the federal government insisted that a l l provincial efforts for medium-term budgeting should fo l low the federal government methodology o f a phased (department-wise) preparation o f MTBF through detailed costing o f departmental activities. However, n o w that the federal government itself has changed i t s methodology," adopted a new model, the provincial government has restarted the process o f preparing 2006/07-2008/09 MTBF. In this regard, the finance department has already prepared three-year projections for provincial fiscal resources and broad sectoral ceilings for departmental/sectoral expenditures. These ceilings will n o w be discussed with the l ine departments,I2 before the finalization o f MTBF. The government feels that the provincial MTBF would be finalized soon.

20. The concept and legal framework for the establishment o f Punjab Pension Fund was recently approved by the provincial Cabinet and the framework has been forwarded (as a Bill) to the Provincial Assembly for discussion and enactment. The professionally managed Punjab Pension Fund would be established after approval o f i t s A c t by the Provincial Assembly. The government has already placed Rs 2 b i l l ion into the Pension Fund while another Rs 10 b i l l ion have been earmarked for the Fund in the 2006107 budget, which wil l be deposited into the Fund after i t s formal establishment.

Significant progress i s made on other structural reforms.

21. Irrigation sector budget: The 2006107 provincial budget shows a significant increase in allocation for irrigation sector. Compared with the (revised estimates of) 2005/06 expenditures, the recurrent budget for the sector has been increased by 13.5%. Whi le the 11% increase in the establishment cost i s budgeted mainly to cater for the salary increase announced by the federal government, the maintenance and repairs (M&R) budget shows a healthy increase o f 19%. This increase i s even more pronounced (54%) when compared with the 2005/06 budget, as additional funds were allocated for these expenditures during 2005/06, as M&R budgets estimates were rationalized on the basis o f market rates instead o f CSR (see Table 3).

22. On the development side, the increase in irrigation sector allocation i s more than 21%, with allocation for flood-related c iv i l works, buildings and for donor-assisted projects increasing by 62%, 196%, 45%, respectively (see Table 4). The provincial Medium-Term Development Framework (MTDF) shows a sharp increase in development allocation for the irrigation sector, with bulk o f this increase financed through donor funds.

The new MTBF methodology i s more in line with the methodology which the Punjab government has been pursuing for the last 3 years For this purpose, the Finance Department will arrange a workshop in next few weeks, so as to discuss the sectoral expenditure ceilings jointly with all departments.

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I O

Fable 3: Punjab - Irrigation Department Recurrerit Budget by Objects, 2005/06-2006/07

Llrarnage Total Irrigation Sector 4 1 5,403.221 I 6,131.145

itape lrierease FY07 KE vs

Table 4: Punjab -- Irrigation Sector Medium-Term Development Program, 2005/06-2008/09

Survey. Investigation L Research irrigation. Drainage & ~ ~ l a i ~ ~ i o ~ Flood Works Small Ikims Foreign Alded Propt Burldingr Power Miscellaneous

ource. Provincial budget documents.

2005'06 Allocation

171 36 I .62Q 27

154 00 622.39

3,608.00

~ 7 . 8 1

60.49

46.68 0.00

7,000.00

100 oa

(Rsl l ron) %age Increase FY07 Vs FY06

2 5% - 1 8.6%

5 5% 62.8%

-39.296 45 3% I %.9% -20.9%0 12.5%

21.4% --

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23. Provincial debt and its sustainability: Rapid increase in provincial development expenditure has led to a sharp increase in province’s borrowing from the donor community. This created some concerns about the province’s debt situation and sustainability o f provincial finances. However, a careful look at the provincial debt indicates that these fears are largely unfounded. N o t only that the provincial debt has remained in the acceptable range both as percent o f PGDP and provincial revenue, the debt situation has improved significantly during the last five years and i s expected to improve further in future, despite the continued high reliance o f the province on external loans (see Table 4). Whi le the constitutional constraints on provincial borrowing could be attributed with the soundness o f provincial debt situation, the improvement in the provincial debt situation i s solely due to a sound debt pol icy adopted by the province over the last f ive years. Swapping more expensive federal government debt with the less expensive foreign debt has not only improved the provincial fiscal space but has also led to a marked improvement in the NPV o f provincial debt. Whi le the stock o f provincial debt has increased from Rs 161 b i l l ion in 2001/01 to Rs 231 b i l l ion in 2005/06, as a percent o f PGDP, it has declined f rom 7.7% to 5.9%. The improvement in NPV o f provincial debt i s even more pronounced, which has fallen by more than ha l f during this period (from 4.8% o f PGDP in 2000/01 to 1.9% in 2005106).

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24. On the assumptions o f continued good economic performance by the province; continued availability o f U S $ 300-600 mi l l i on o f additional foreign loans per annum. (albeit not o n as concessional terms as in the past); and normal amortization o f existing debt, the debt situation o f the province i s projected to improve sharply in future, as the provincial debt (and i t s NPV) are expected to continue to decline as a percent o f PGDP and the provincial revenue. The provincial debt service l iabi l i ty wi l l therefore decline sharply leading to a rapid improvement in provincial fiscal space thereby ensuring the sustainability o f provincial reform initiatives, including those in the irrigation sector.

25. In summary, whi le the provincial fiscal deficit has increased, thefiscalposition of the province has remained sound as the fiscal deficit s t i l l constitutes a relative small portion o f provincial GDP. In addition, the provincial debt position has continued to improve and i s l ike to improve further in future. The provincial finance authorities remain confident and adamant to maintain the provincial fiscal stability, without compromising the sustainability o f i ts key reform initiatives. Whi le the growth in development budget will slow down f rom 2008/09 (or even earlier), growth in recurrent expenditure will accelerate as financing o f government’s sectoral reforms moves f rom the development to recurrent budget. Nonetheless, the amendment made in the NFC Award will provide the Punjab government with sizeable increase in federal revenue transfers, whi le interest payments and other low-priority expenditure will continue their downward trend in future. This will enable the provincial government to fully finance i t s reform activities while maintaining fiscal stability.

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111. THE GOVERNMENT PROGRAM

Federal Program

26. The federal government has taken several important actions during the last two years to address water sector challenge^'^ that fa l l within the federal domain, including support to the provinces for water conservation; planning and developing additional water storage capacity; determination o f environmental flow requirements o f the Indus delta; and establishing capacity in the Ministry o f Water and Power to steer water sector reform and build institutional capacity for fundamental sector needs, including, among others, proposals for the creation o f an independent D a m Safety Organization and strengthening o f the Indus River System Authority (IRSA), which i s responsible for the administration o f the Inter-Provincial Water Apportionment Accord o f 1991.

Punjab’s Program

27. Imgat ion i s one o f the building blocks o f the Punjab Poverty Reduction Strategy Paper (P-PRSP) currently being revised. The existing P-PRSP emphasizes improv ing governance by enhancing the accountabil ity o f state institutions; improvement in social service del ivery systems; accelerating growth and generating employment through enhanced focus o n product ive sectors; and enhancing the effectiveness o f public expenditures through budgetary and institutional reforms. When the ISRP14 was designed and launched, Punjab faced several challenges in the water sector. These challenges and the ISRP strategy for addressing them are summarized below”.

Punjab’s Irrigation Sector Reform Program (ISRP).

Long term physical andfinancial sustainability of Punjab ’s irrigation systeni

28. The Challenge: In the past Punjab invested massively in water infrastructure but much o f i t got into a state o f disrepair because o f the past pol icy of build-izeglect-rebuild. This was true even for some o f the major barrages, where failure would be catastrophic. There was n o modem asset management plan nor an effective financing plan that would permit t o answer the three basic questions o f h o w much money i s needed, who should pay, and h o w should i t be used. Most o f the IPD budget was for staff salaries, leaving maintenance and repair chronically under- funded. The quality o f irrigation services was poor providing l i t t le incentive for farmers to pay abiana (water charges). Consequently, cost recovery was l o w which fed into a vicious circle. Moreover, management o f a number o f assets (e.g. tube wells, machinery workshops), which were an unnecessary burden o n the budget, could be progressively divested to the private sector.

29. The ISRP Strategy. During the preparation o f the ISRP the Government recognized the need for a change in the incentive structure. Given the large back-log o f accumulated deferred maintenance (PKR 120 billion), the ISRP envisages a multi-pronged strategy involv ing both short and medium terms measures for: improving asset management and progressively

For a detailed description of the policy actions taken by the Federal government, see the Program Document for the Punjab Irrigation Sector DPL, Report No.35955-PK, April 27,2006 The ISRP i s fully in line with, and complements, the federal government’s initiatives, at the provincial level For a detailed description o f the sector issues, see the Program Document for the Punjab Irrigation Sector DPL, Report No.35955-PK, Apnl27,2006.

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reducing the accumulated deferred maintenance; reducing operating and administrative costs; rationalizing and improving recovery o f abiana through user participation in assessment and collection; implementing a more transparent pol icy for sharing cost o f M&R (budgetary allocations and user charges); and developing institutional capacity for efficient M&R with due regard to social and environmental aspects.

Transparency of intra-province water allocations and distribution

30. The Challenge: Poor governance and l o w t rust amongst water users were identified as the key factors underlying the poor performance o f the irrigation system and l o w productivity. Lack o f reliable information on entitlements, water availability in the system, and the volumes o f water actually supplied, resulted in uncertainty for farmers, and promoted discretionary decision malung, poor accountability, and rent seelung behaviors, amongst the operators16. Inequitable water distribution (as wel l as water theft) was common a l l the way fi-om the barrages to the watercourses. The worst affected were the poorest farmers who were typically at the tail-end o f the distribution system.

31. The I S R P Strategy. The ISRP emphasizes the nexus of surjiace water entitlements, measurements and transparency and ultimately extending this to groundwater as well. These reforms seek to enhance farmer confidence, reduce uncertainty o f water deliveries and help increase productivity. In the long run, the opportunity cost o f water would become more transparent and provide incentives for allocation o f water towards uses of higher returns, through a market mechanism. Effective administration o f a well-established system o f water entitlements would also help address the anarchic development o f groundwater use, among others by making surface water distribution more reliable and predictable. It would also make water management at the FO level more effective and equitable by allowing more f lexibi l i ty in adapting to scarcity and reducing internal conflicts.

Improving Irrigation Service Delivery

32. The Challenge. h g a t i o n institutions in Palustan have not made the transition f rom the era o f development and construction to the era where management o f resources and services i s the primary challenge". h g a t i o n service delivery was the monopoly o f the IPD and was characterized by: unreliable and inequitable water deliveries"; rent seekmg behaviors; absence o f user participation in operation, maintenance and management; lack o f an effective communication strategy; and l o w recovery o f operation and maintenance costs. L o w O&M cost recovery in part reflected the poor services received in exchange f rom the IPD, and in part, the lack o f involvement o f the farmers in the management o f water distribution and operation and maintenance. There was no relationship between better recovery (by the Revenue Department) and better quality services (by IPD). As a consequence, accountability o f the IPD was mostly

l6 Conceptually, the simplest task for water managers i s to move water in a predictable, timely manner to those who need i t and have a right to it. While Punjab has among the best water engineers in the world, in the past, this task was done less in the light o f day and more behind an opaque curtain. Th is resulted in inequitable distribution o f water, poor technica1 performance and a pervasive environment o f mistrust and conflict, from the provincial level to the watercourse. Helping start the transition to a modem service delivery architecture was a major objective o f the National Drainage Program. Whi le achievements under the NDP were modest, many lessons were learned (focusing on a few key objectives, and encouraging experimentation with different forms o f institutional reform), and the centrality o f the objectives o f the N D P remain valid. Fanners in the tail reaches o f the canals invariably do not get their share o f water due to the poor state o f the canals, water theft by farmers in upper reaches, and rent seeking b y operators.

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upwards rather than downwards towards the final client-the irrigators. Also, the “monopoly” o f the IPD on service delivery had not been conducive to the intervention o f new actors and partners.

33. The I S R P Strategy. Malung the service delivery system more efficient required decentralization o f responsibilities to FOs as we l l as contractual arrangements for delivery o f bulk water supplies, whereby rights and responsibilities were clarified and accountability mechanisms improved, and an effective strategy to communicate with stakeholders both within and outside the IPD. Participatory Irrigation Management has proven a l l over the wor ld to ho ld the promise o f more effective management o f distributary systems by the farmers themselves, if coupled with the transfer o f financial authority over a share o f the water charges. Transfer o f irrigation schemes to FOs needs to be accompanied by adequate capacity building programs as wel l as rehabilitation or an enhanced M&R program for the existing infrastructure. The good results achieved in the LCC East canal system (where this transition has already taken place) need to be gradually extended to the remaining canal commands, whi le focusing on building capacity o f FOs and maintaining an effective change management strategy for IPD.

Improving water use efficiency and productivity

34. The Challenge: Irrigation and agriculture have remained relatively disconnected because o f the supply-driven nature o f the irrigation system. Consequently, agriculture productivity has remained l o w despite the large investment in water infrastructure. Whi le improving agnculture productivity will remain a long-term objective, with many elements to it, the irrigation sector ought to become more responsive to the need o f agriculture production, especially t o the need for diversification and value addition. For th is to happen, more attention needs to be give to demand side actions that will greatly exercise a strong influence over farm incomes through prices and fiscal policy.

35. The I S R P Strategy. Increases in agnculture productivity need to come both f rom supply and demand driven measures where more efficient water distribution needs to be accompanied by more output (crops, jobs and income) per drop o f water used19. Actions have to taken on several policy fronts, including: (i) incentives for adoption o f water conserving technologies and for moving away from crops and practices that waste water; (ii) improving the agriculture markets and incentives structure; and (iii) restructuring the agricultural research system to help generate appropriate technology and improved agronomic practices.

K e y Achievements under the I S R P

36. The achievements made during the second year o f the ISRP are summarized b e l o d o :

A. Pillar I: Reforms to improve the management and maintenance of the irrigation system to ensure its long term physical and financial sustainability

37. During thefirst year of the ISRP, progress was made in several key areas, including (i) preparation o f a complete inventory of IPD assets and assessment o f the deferred maintenance

To improve efficiency o f water use, Punjab also needs to gradually adopt a system of water deliveries and water charges on volumetric basis. Considering that the proposed operation is part o f a three-year program, a summary o f the achievements made in the first year o f the program is also presented for the sake of clarity and continuity.

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and the rehabilitation needs; (ii) rationalization of yardsticks for estimating budget requirements for routine and preventive maintenance (the yardsticks are n o w based on market prices rather than CSR, as was the case earlier); (iii) a two fold increase in the M&R budget during FY06 as compared to FY05; (iv) formulation o f a M&R cost sharing policy that makes the requirements for public sector financing and users’ contribution for various tiers o f the system explicit (based on the identification o f public and private goods); (v) establishment o f a system for M&R performance evaluation; and (vi) implementation o f various measures for ensuring greater transparency in procurement and enhanced financial accountability o f IPD executives.

38. During the second year of the ISRP, the IPD has moved ahead with the fol lowing reforms actions: (i) A 10 year Asset Management Plan that sets priorities for m e d i u d l o n g term rehabilitation and maintenance o f the existing infrastructure and incorporates social and environmental guidelines, has been prepared; (ii) M&R yardsticks have been revised t o reflect FY07 market prices2’, and the FY07 M&R budget has been allocated accordingly; (iii) divesture of public sector owned tube wells has been started (50% o f remaining FGW and over 50% o f SGW tube wells) have been notif ied for “transition”22; (iv) a performance evaluation system for M&R has been operationalized, and a Procurement Unit has been established in IPD as part o f a Project Monitor ing Unit that would oversee implementation o f new major projects; (v) backlog o f advance audit observations has been reduced by 20.7% exceeding the target o f 20% reduction in FY07; and (vi) abiana collection performance has improved.

B. Pillar 11: Water Resource Management Reforms to emphasize the nexus of entitlements, measurements and transparency and build on Punjab ’s existing platform of water entitlements23

39. During thefirst year of the ISRP, progress was made in several key areas, including: (i) an Irrigation Management I?formation System (IMIS), that allows monitoring o f authorized and actual water diversions in various parts o f the system, was established; (ii) IPD undertook repairs (and installation o f new water metering gauges), in the L C C East canal system, and started posting on the PD website information on water entitlements and actual volumes o f water diverted in al l the 24 main canals o f Punjab; (iii) staff was recruited and trained for gauge reading and data transmittal & capture in the I M I S system; (iv) a website oversight committee comprising o f FOs’ representatives, IPD officials, and other stakeholders was established to ensure that information on the website i s responsive to the users’ needs, accessible, user friendly, clear, accurate and timely; and (x) water users n o w have access to a toll-free telephone number to report any deviations between entitlements and actual diversions, and to register complaints.

40. During the second year of the ISRP, the fo l lowing actions have been taken to deepen and broaden the reform under this pillar: (i) water accounts (allocations and deliveries, balance

The yardsticks are being further revised to reflect Irrigation Zone-specific M&R funding requirements. “Transition” includes: handover o f tube wells to farmer groups for operation as such; or replacement by smaller capacity farmer owned tube wells wi th capital cost subsidized by government; or permanent closure, if not needed by farmers for irrigation or drainage purposes. Pakistan has a long- and well-established tradition o f water entitlements. The 1991 Inter-provincial Water Accord establishes clear entitlements for each province. Implicit in the Water Accord, too, is a set o f water entitlements at the canal command level. There are also well-established rules for further distributing water to the distributary and outlet levels. Below the outlets, the warubandi i s a proxy (appropriate in its era) to a water right, in which a farmer has a right to time, a surrogate for water. However, the administration o f intra-province water entitlements needs to be made more transparent and implemented in a participatory manner.

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shares, etc.) for a l l main canals continue to be posted on IPD website; (ii) water accounts for distributary canals in L C C East canal system have also posted o n the IPD website; (iii) warabandi (water entitlements at the farm level are being published by W J A s o n their respective notice boards; and (iv) a draft o f a holistic groundwater management strategy covering al l sub-sectors (agriculture, urban and rural drinlung water, industry, environment) has been prepared.

C. Pillar 111: Irrigation Service Delivery Reforms to improve the quality, efficiency and accountability with which irrigation services are delivered

41. During the first year of the ISRP, progress was made in several key areas, including: (i) the process o f decentralization and devolution o f irrigation management responsibility was started -- One Area Water Board (AWB) was established in the LCC East Canal System, FOs were established o n a l l i ts distributary and Irrigation Management Transfer Agreements (IMTAs) were signed with 84 FOs; (ii) training and capacity building24 o f FOs was started; and (iii) preparations for monitoring and benchmarking o f FOs were initiated; (iv) water discharge measurements o n main, branch and distributary canals were carried out o n daily basis in LCC East canal system; (v) to enhance trust and confidence measurement of discharges at head o f distributaries were carried out jo in t ly by IPD and FOs; (vi) a Social and Environmental Management Unit (SEMU) was established with a mandate to build awareness and capacity for social and environmental risk management in FOs, AWBs, and IPD; and (vii) a high level Interdepartmental Steering Committee was established to monitor overall re form progress and provide guidance.

42. During the second year of the IS-, the fo l lowing key actions have been taken: (i)notification o f two new AWBs covering the L C C (West), and the LBDC main canals; (ii) establishment o f 95 additional FOsZ5 and signing o f IMTAs with them; (iii) continuation o f FO capacity building program; (iv) staffing and capacity building o f IPD’s Social and Environmental Unit (SEMU), which has prepared guidelines for increasing awareness within IPD, AWB, and FOs, for assessing and mitigating social and environmental risks associated with asset management activities; (v) preparation o f a communication strategyz6 and a related action plan that will help i n fo rm and win stakeholders’ support for the reform, as we l l as improve overall communication within the IPD and with water users, and improve IPD’s public image; (vi) arrangements have been made for internal monitoring, and the services o f an independent agency have been procured for external monitoring (third party validation); (vii) rehabilitation o f FO managed channels i s being carried out under ongoing projects; (viii) PD i s in the process o f developing a modernization plan; and (ix) IPD has completed staffing o f i ts Reform Unit.

24 Capacity building involves a range o f technical, managerial and social aspects, including financial management, O&MIM&R planning, water measurement, abiana collection, conflict resolution and consensus building, women’s role, environment, monitoring, procurement and contract management. This number i s expected to exceed 100 within FY07. While the communication strategy (covering internal and external communications as wel l as publicity o f ongoing reforms and efforts to improve the public image o f the IPD) was still under preparation, IPD adopted some good practices, including consultation with farmers on scheduling o f canal closures for annual maintenance as wel l for rehabilitation works.

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D. Pillar IV: Reforms to improve water use efficiency and on-farm productivity

Outcome Indicator

43. Whi le n o pr ior actions were envisaged in the context o f DPL I, GOPunjab made progress in several key areas during the f irst year of the ISRF’, including: successful implementation o f water conservation measures, including improvement over 4,000 watercourses and uptake o f 500 laser land leveling units by farmers and service providers, which were used for leveling some 19,500 ha o f land. In the command area of improved watercourses and the land leveled, increases in cropping intensity and crop yields and on-farm jobs were achieved. A Department of Agricultural Marketing was established to deal with marketing issues; a Punjab Agricultural Marketing Company was formed for the creation o f market infrastructure for perishable commodities; market information systems were established at the district level; and proposals were prepared for amending the Punjab Agricultural Produce Ordinance to support the role o f private sector, and public-private partnerships, and for restructuring agncultural research.

Baseline 2005-06 Achievement up to M a r c h 2007 (targets in parenthesis)

44. During the second year of the ISRP, water conservation measures were continued on a larger scale, with the FY07 targets for watercourse improvement were increased from 4,000 to 5,000, and for laser leveling units f rom 500 to 1,000. Outside the ambit o f the DPL2, the Department o f Agriculture i s also carrying out various reforms that complement the program supported by the B a n k (i) an amendment to the Agncultural Produce Marketing Ordinance o f 1978 i s being processed, which among others wil l open up entry o f farmers and private sector in the management o f agriculture market places; help to formulate and implement internal and export market strategies; rationalize the system o f market fee; and facilitate linkages and partnerships between farmers and cooperatives, and (ii) restructuring the agncultural research sector has been started. The package includes reactivation o f the Punjab Agnculture Research Board (PARB), and creation o f corporate bodies for dealing with important crops, with the abil ity to attract qualified scientists and with adequate administrative and managerial flexibility.

45. Status o f Outcome Indictors of ISRP: The table below shows the progress achieved during the f i rs t two years o f the ISRP in terms o f the key outcome indicators compared to the baseline values and targets under each reform pillar.

Table 6: Baseline, Targets and Cumulative Achievements of ISRP 27

1. Pillar I: Ensurini 0 5% reduction in

accumulated deferred maintenance each year

Budget allocated for M&R in accordance with MTBF.

htegrity and Sustainability of, deferred maintenance = Rs 120 b i l l ion in F Y 0 6

Baseline: Rs 1.2 bn (FY05)

[ j a b ’ s Irrigation System 0 11.8% reduction in

accumulated deferred maintenance (5% reduction each year) F Y 0 6 =R 2 b i l l ion --66% increase (66% increase) FY07= Rs 2.236 billion, (about 10% increase each year).

0

Source: IPD Reform Unit, Punjab Agriculture Department and Bank staff estimates 21

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Outcome Indicator

Reduction in electricity bills for tube wells

Abiana collection performance improved

Accountability o f executives

2. Pillar 11: Makin1 Capacity and system created for transparent administration o f water entitlements.

* Over abstraction o f groundwater in critica areas mitigated (ascertained by physical moni tor in E).

Baseline 2005-06

IF’D’sannual expenditure on electricity bills for government T W s (Rs 9 13 mi l l iodyear in FY06-baseline)

FOs--70 % (of the assessed amount) in FY05;

Non-FO areas 47% in FY05

Budget execution statements not produced quarterly

Progressive reduction in back-log o f audit observations.

Water Allocation and Distri

system fully equipped with functional and calibrated gauges

baseline: no canal

Water entitlements and actual diversions not made public

Groundwater monitoring system not in place and available data not disseminated

Achievement up to March 2007 (targets in parenthesis)

Annual expenditure on electricity bills for government T W s in FY07 projected at Rs 665 m i l l i on (to be reduced to Rs 200 million/year by FY 08)

Abiana collection for Rabi 05/06 was 78%. (85% of the assessed amount by FY08).

Abiana collection for Rabi 05/06 in non-FO areas was 58%. (65% by FY08)

Budget execution statements produced quarterly

20.7% reduction achieved by March 2007. (The target was to reduce backlog by 20% by end of 2006-07)

Ition More Transparent. One canal system (LCC East) equipped with gauges, and the entire irrigation system linked with the M I S (12 canal systems or 50% of the entire irrigation system equipped with calibrated gauges by the end of FYO8) Water entitlements and actual diversions posted on IF’D website As o f March 27,2007 # o f hits on IPD website was 1 1,385 (water accounts posted on IPD website)

A drafc strategy has been prepared and i s being refined in light o f various recommendations

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Outcome Indicator Baseline 2005-06

0 K e y water quality parameters in critical areas posted on IPD website.

3. Pillar 0 DPRS~* (ratio o f

authorized and actual

Achievement up to M a r c h 2007 (targets in parenthesis)

0 Groundwater level and quality data have been placed o n

discharges at the head and tai l outlets) increased

0 Number o f FOs with IMTAs signed

0 Changes in s l u l l and gender mix . Number o f staff with higher qualifications.

0 Number o f IPD, FO staff trained.

0 Approved guidelines for management o f environmental and social r isks available o n website.

0 # o f I E E a n d E I A prepared under applicable legislation,

- h a

1I: Improving Irrigation Set 0 Average DPR 50%

(baseline in FY06)

0 Baseline: 3 FOs exist

0 Baseline: predominantly c i v i l and irrigation engineering and accounting slulls; n o female staff; 65 staff with post- graduate degrees

0 Few staff and FOs trained

0 Guidelines do not exist

Only externally financed projects subjected to EIAs

lq:;/irri gation.puGi ab.l+ov.uk nd wmw.punj ab.Eov.uk

ices Delivery 0 The average DPR o f 19 FO-

managed distributaries monitored i s 71% (75% by FYO8 for distributary canals for which IMTAs have been signed and physical improvements have been implemented).

0 IMTAs signed with 177 FOs (84 FOs by DPL I; 184 FOs by DPL II; 284 FOs by DPL IIQ.

0 Changes in sk i l l and gender mix partially accomplished in S E M U and Reform Unit. About 40 staff with higher qualifications.

0 8 staff received foreign training; 55 Trainers and 9,272 farmers trained; 70 FO office bearers, 30 PIDA staff and 80 IPD staff trained in country.

0 Guidelines prepared (approval and dissemination by DPL2).

0 EL4 for one project prepared and approved by EPD. Funds allocated for EMP.

The delivery performance Ratio (DPR) is a measure o f equity o f water distribution and i s calculated as the ratio o f authorized discharges to actual discharge at the head and tail o f the distributary canals. A DPR value o f 1 represents full equity

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Outcome Indicator

approved by EPD and disseminated. EMPs funded and implemented.

qualified staff.

social risks in O&M and rehabilitation identif ied and addressed.

0 Adequate number o f

0 Environmental and

4. Pillar IV: E n Increase in water productivity, employment and incomes o f farmers participating. Water use efficiency (field application efficiency) 25%-40% increase, depending on the kinds o f technologies applied on the plots in FYO8

0 Diversification and shift into high-value crops attained

BaseIine 2005-06

wraging New Technology tc High losses in unimproved watercourses (about 40%)

0 In general, land i s only coarsely leveled.

Very few pressurized irrigation system exist

Achievement up to M a r c h 2007 (targets in parenthesis)

0 Social and environmental staff

0 Being complied with recruited

lncrease Productivity 0 Over 10,000 w/c improved or

under improvement, yielding saving o f water (10,000 watercourses improved)

0 1,000 Laser units taken up by service providers. 19,500 H a land leveled by June 2006, (40,000 ha/year).

intensity in improved watercourses (25%)

0 24% increase in crop yields in improved watercourses (20%)

0 About 3.2 mi l l ion person months o f direct and 3.9 person months o f indirect employment created.

26% increase in cropping

46. ISRP, and it i s evident that:

Table 5 above shows good overall progress towards the program targets set under the

0 A good beginning has been made in moving away from the policy of build-neglect-rebuild that had resulted in gradual deterioration o f the hydraulic infrastructure in the past;

0 Intra-province water entitlements have been made more Transparent. Punjab has embraced the golden principle o f “what you cannot measure, you cannot manage” and started o n the journey o f makmg administration o f water entitlements progressively more transparent. The quality, ef jcienq and accountability of irrigation services have improved in the areas served by canals where reforms have been implemented. Investments in water cortservation technologies are proceeding on, or ahead oJ targets, with visible improvement in water use efficiency (20%-30% increase) and productivity.

0

0

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IV. BANK SUPPORT TO THE GOVERNMENT PROGRAM

LINK TO COUNTRY ASSISTANCE STRATEGY (CAS)

47. The proposed Second Irrigation Sector DPL i s specifically identified in the 2006-09 CAS, which reflects the lessons learned during the last C A S period, including among others: (i) a programmatic approach provides the flexibil i ty t o support reforms whi le managing r isk ; (ii) greater attention needs to be given to capacity building; and (iii) the need to focus o n results.

48. CAS Results Supported by the Proposed DPL. The proposed Loan would contribute to the fo l lowing outcomes, which the Bank expects to influence during the CAS period: (i) improved management o f irrigation and drainage infrastructure; (ii) improved irrigation service delivery, through participatory irrigation management and efficient cost recovery; and (iii) transparent and more equitable water allocation and distribution.

49. The CAS milestones and indicators o f progress towards the above outcomes include: Asset Management Plans prepared with increased funding for M&R; number o f FOs established and collecting abiana; reduced water losses in on-farm channels (see CAS Results Framework). These CAS outcomes and indicators are directly supported by the proposed DPL and are included in ProgradPol icy Matr ix along with baselines and targets.

COLLABORATION WITH THE IMF AND OTHER DONORS

50. The Bank and International Monetary Fund (IMF) continue to have significant interactions on Pakistan’s macroeconomic issues. After successful completion o f the last PRGF arrangement, Pakistan authorities have not sought a successor arrangement with IMF. Pahstan i s n o w on a yearly Article N Consultations cycle. The Bank continues to work closely with the IMF o n these consultations. The last IMF Art ic le N Consultations mission was undertaken in August 2006, in which the Wor ld Bank participated as an ob~erver .~ ’

51. Besides the Bank, the ADB, Japan International Cooperation Agency (JICA) and the Netherlands Government are the main donors in the water sector in Pahstan. The Bank has close coordination, and full alignment o n the sector assistance strategy, with these partners. During the last ten years, ADB and JBIC have co- or parallel-financed several operations with the Bank; including the NDP and the Drought Emergency Recovery Program. In 2005, the Netherlands Government approved a Pahstan- specific free standing t rust fund for supporting Bank Group’s advisory services, and technical assistance activities, in the water sector. JICA i s currently parallel-financing an ongoing project for the rehabilitation o f the Taunsa Barrage, and ADB has recently negotiated a multi tranche financing facil i ty (MFF) for a Punjab Irrigated Agriculture Improvement Program (PIAIP) with an estimated cost o f US$900 mi l l ion over eleven years. This MFF complements the institutional and pol icy reforms supported by the proposed Bank Loan and would support rehabilitation and improved management o f major hydraulic infrastructure (e.g. several barrages and main canals). The I S R P wil l also benefit f rom the reforms supported by ADB under the Punjab Resource Management Program.

29 The report on these consultations was issued in December 2006, and is available at the IMF official website: htta:/iwww.imf.orqiexternalipubsicaff Ionares.cfm?sk=20156.0

24

RELATIONSHIP TO OTHER BANK OPERATIONS

52. Ongoing Bank support to Pakistan in the water sector includes: (i) support for institutional reforms and on-farm productivity through On-Farm Water Management Projects- one each in NWFP and Sindh, which seek to improve water management and irrigation service delivery through increased farmer participation; (ii) support for rehabilitation and modernization o f vital irrigation infrastructure to safeguard their integnty and reduce risks o f failure (Taunsa Barrage Emergency Rehabilitation and Modernization Project in Punjab); and (iii) provision o f just in time, technical assistance and analytical and advisory assistance (AAA) to Government, o n strategc and pol icy issues, through t rust funds and other sources o f funding. Experience under the Taunsa Barrage Project has highlighted the need for a major enhancement in IPD's capacity to identify, and deal with, social and environmental issues, including resettlement, communication and consultation with farmers, and identification o f mitigation measures in an effective and timely manner.

53. Future Program: The Bank's Country Water Resources Assistance Strategy (CWRAS) for Palustan provided the underpinning o f the water sector elements o f the CAS. The CAS includes support for a combination of institutional reforms and investments in the sector including: (i) major investments in rehabilitation o f critical assets (including barrages and main canals), and preparation o f Asset Management Plans, which will set priorities for rehabilitation and maintenance, make explicit the requirements for public and user financing, and develop institutional arrangements for M&R o f infrastructure; (ii) development of capacity at the provincial and federal levels for improving water resource management; (iii) reforms to improve the quality, efficiency, and accountability with which irrigation services are delivered; and (iv)investments in on-farm services. The Bank will continue to implement the CWRAS, supporting an agenda o f pol icy and institutional reform and capacity building as we l l as investments, including rehabilitation o f existing critical assets. W e would also prepare a framework for supporting new storage and hydropower within the context o f future management and development o f the Indus r iver basin, articulated in the concept paper for the Irzdus21 initiative3'. Finally, given the major scientific, pol icy and implementation challenges ahead, the Bank, with support f rom the Government o f the Netherlands, wil l provide analytical and technical support to the federal and provincial governments. Bank support will be provided through development pol icy lending as we l l as specific investment lending to finance infrastructure and institutional reforms, including the up-coming Water Sector Improvement Project in Sindh and a small scale irrigation project in Balochistan.

54. Experience under recently closed projects. h g a t i o n Sector DPLl has been described in Section II131.

The experience under the Punjab

In line with the CAS and CWRAS, the Indus2I initiative includes support for development o f new water storage infrastructure on the Indus River within the context of modernizing the management and development o f the Indus Basin system to meet the needs of Pakistan in the 21" Century. A two-track approach i s envisaged with Truck One, focusing on ensuring that management and development of the water resources leads to productivity increases, efficient growth, while addressing poverty and equity; and Truck Two, devoted to moving forward infrastructure development, adopting modem standards and good global practices See Program Document for DPLl (Report No. 35955-PK) for experience under other closed projects.

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LESSONS LEARNED

55. The Bank has played a central ro le in the development of Pakistan’s Indus Basin Imgat ion System, the largest integrated irrigation network in the world. The Bank’s partnership with Palustan in the water sector dates back to 1952 when the f i rs t loan was approved for a water project in the then East Pahstan. In the 1950s, the Bank’s good offices were instrumental in the successful negotiations o f the Indus Waters Treaty (1960) between Pakistan and India, which settled the division o f the waters o f Indus Basin between the two countries, fo l lowing Partition in 1947. After the signing o f the Indus Waters Treaty, the Bank helped to mobil ize funds and administered the Indus Basin Development Fund during 1960-1 967, which financed the physical works to implement the Treaty provisions, also known as the Indus Basin Development Project (IBDP). Subsequently, f rom 1968 onwards, the Bank administered the Tarbela Development Fund (TDF), which was extended to the post-Tarbela construction period, during which extensive remedial works were implemented, after the f i rs t impounding o f the Tarbela reservoir. Thereafter, the Bank played a catalytic role in periodic major reviews o f the irrigation and power strategy, and funded parts o f the resulting investment programs. Recently, the Bank also played i t s role under the Treaty in the context o f the “difference” that arose regarding the Baglihar dam.

56. In addition to financing specific investments, the Bank also supported Economic and Sector Work and provided analytical and advisory assistance (AAA) that culminated in several major sector reports, including: Water and Power Resources o f West Pahstan: A Study in Sector Planning: (popularly h o w as the Lief t inck Report 1967); Revised Act ion Program for h g a t e d Agriculture (1979); the Water Sector Investment Planning Study (1991); Pahstan -- Imgat ion and Drainage: Issues and Options (1994); and Accelerated Development o f Water Resources and Imgated Agriculture, prepared as part o f the Public Expenditure Review, carried out in 2003. In addition, several sector pol icy and planning studies, including a draft National Water Policy, and a framework for a Drainage Master Plan for the country were prepared through the technical assistance components o f Bank-assisted projects as wel l as various Trust Funds managed by the Bank, including the Bank-Netherlands Water Partnership Program.

57. Overall the Bank has had a fruitful dialogue and partnership with Pakistan in the water sector with major positive outcomes at the national and international levels, including the conclusion o f the Indus Waters Treaty with India, the major infrastructure accomplishments under the Indus Basin Project, the success o f the Salinity Control and Reclamation Program, System Rehabilitation, evolution o f sector strategies and policies, and launching o f major institutional reforms under the recently closed National Drainage Program Project. K e y lessons learned from past Bank operations in the water sector and recent experience with the Punjab Imgat ion Sector DPLl and Education Sector DPCs, are that successful implementation o f reforms requires:

(0

(ii)

(iii)

Focus o n instruments and incentives for reforms rather than simply on organizations, programs and projects. An approach based o n “principled pragmatism” which recognizes that reforms and investments must proceed in parallel; Strong polit ical championship, government ownership, and commitment are essential for the success and continuity o f reform programs. This leads to high level monitoring and oversight, and creates a momentum in the system to focus on outcomes. Alignment o f vision and strategy among the key set o f pol icy makers and implementation teams i s essential. Financial and technical support o f an external

26

agency, such as the Bank, i s more meaningful if these conditions are in place. These conditions also need to be matched with champions at the implementation level, supported by strong dedicated teams. A combination o f investments, and pol icy and institutional reforms, supported by a programmatic lending instrument, with disbursements based o n strong quantifiable pr ior actions, backed by intensive ongoing dialogue, anchored o n pol icy and implementation reviews. Analytical work pr ior to the program.

ANALYTICAL UNDERPINNINGS

58. Besides the CWRAS, the Bank’s support to Punjab’s ISRP has been developed on the basis o f extensive analytical work undertaken by the Government both at the federal and provincial levels. At the federal level, the Pakistan Planning Commission prepared the Ten-Year Perspective Plan (September 2001); the Ministry o f Water and Power prepared a Water Resources Strategy (WRS), with the assistance o f the ADB in 2002, and a draft National Water Policy (NWP) in 2005 with resources provided under the NDP Project. The key recommendation o f these analyses was that Pahstan needs to adopt a holistic approach to water management; improve the governance o f scarce water resources; improve the efficiency o f irrigation; and help ensure long term sustainability o f irrigated agricu1t~n-e~~.

Underpinning of Environmental Aspects

59. As identified in the Strategic Country Environmental Assessment (SCEA), finalized in June 2006, Palustan has a comprehensive national pol icy and institutional framework for environmental management in place. The Pahstan Environmental Protection A c t 1997, confers broad-based enforcement powers to the Pakistan Environmental Protection Agency (Pak-EPA) and the provincial environmental protection agencies. The Pak-EPA Review o f In i t ia l Environmental Examination and Environmental Impact Assessment Regulations, 2000 (BE-EIA Regulations, 2000) provides the necessary details o n the preparation, submission, and review o f in i t ia l environmental examinations and environmental impact assessments. The National Environmental Quality Standards (NEQS) define maximum allowable concentrations o f pollutants in municipal and liquid industrial effluents discharged to inland waters. The Pak-EPA has published a set o f environmental guidelines for carrying out environmental assessments and the environmental management o f different types o f development projects, including those in the protected and sensitive areas. According to the guidelines, irrigation and drainage projects serving more than 15,000 ha require an EIA, whi le those serving less than 15,000 ha require an IEE. An EIA i s also normally required for projects in protected and sensitive areas, unless advised otherwise by the regulatory agencies.

60. The existing regulatory framework for environmental management and implementation experience notwithstanding, the SCEA highlights a number o f significant weaknesses in the current administrative and implementation capacity. Principal among these are a ubiquitous shortage o f trained manpower and insufficient budgetary allocations, a lack o f clear definit ion o f roles, work plans and targets, and ineffective coordination and communications between federal, provincial and local administrative entities. The result i s that, whi le an appropriate and necessary administrative capacity exists o n paper, i t s effectiveness i s seriously curtailed in

See Program Document for Punjab Irrigation Sector Development Policy Loan (Report 35955-PK, dated April 27,2006) for details.

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27

practice due to these shortcomings. To help address these weaknesses, the Bank has shown i ts willingness to provide assistance to the Min is t ry o f Environment and provincial environmental agencies for the implementation o f the National Environment Policy 2005, which i s associated with a significant increase in the federal budget allocation for environmental management.

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V. THE PROPOSED LOAN

OPERATION DESCRIPTION

61. The purpose o f the proposed Loan i s to provide continued financing to the Province of Punjab, to move forward with implementation o f the ISRP, described in Section 111. Based o n the past experience, both GOPunjab and the Bank agree that the Development Policy Loan (DPL) instrument i s a more suitable instrument for supporting the reform agenda than a SIL.

62. This operation would be the second in a programmatic series o f three Development Policy Loans to support GOPunjab’s medium-term program (ISRP) that i s l inked to achieving specific outcomes in the irrigation sector. The Bank’s support would help ensure that key reforms are successfully implemented by focusing o n the right instruments and incentives. At the same time, because o f i t s broader incidence and “budget support” nature, the DPL allows us to engage at higher levels o f Government o n key pol icy reforms and enhance the leverage o f the dialogue. The proposed Loan would use the window o f opportunity that continues to exist in Punjab for creating incentives for both outcome improvements and overall performance in the irrigation sector.

Status o f Prior Actions for DPL2, and Triggers for DPL333

63. Of the thirteen triggers set for DPL2 at the time o f DPLl approval, eleven have been converted into prior actions, without any change, by March 2007 (see Annex 5). Regarding the remaining two triggers (both under Reform Pil lar I V and relating to A p c u l t u r e Markets, and Agriculture Research) it has been agreed with GOPunjab that more time i s needed for internal debate and review processes within the government and that these reforms would be pursued outside the ambit o f DPL2. GOPunjab has assured the appraisal mission that these reforms are supported at the highest level and will be completed within FY07. The Government has prepared a Letter o f Sector Development Policy (Annex 1) which reflects the progress already made under the ISRP and the program direction during the next year and beyond. The pr ior actions taken and milestones achieved under DPL2, and the agreed triggers fo r DPL3 are included in the Development Policy Ma t r i x (Annex 2) and summarized below.

A. Pillar I: Institutional and Policy Reforms to improve the management and maintenance of Punjab’s irrigation system to ensure its integrity and sustainability

Prior Actions for DPL 11:

i. M&R budget for 2006-2007 allocated in accordance with revised yardsticks.

ii. 50% o f the existing 1,200 FGW TWs t r a n ~ i t i o n e d ~ ~ ; and transition o f SGW TWs started.

The selection o f prior actions and triggers i s based on “Good practice principles on conditionality” (see Box following this paragraph). The term “transition” includes permanent closure and replacement by smaller capacity tube wells jo int ly owned by local farmer groups; or transfer as such, to local farmer groups.

33

34

29

iii. A System o f fortnightly (on average twice monthly) meetings o f the Departmental Accounts Committee (DAC) institutionalized, with at least 20% o f the back-logs of advance audit observations reviewed and resolved (baseline o f March 3 1,2006).

iv. Performance on Abiana collection in non-FO canals improved (as a % o f the assessed amount o f current dues).

Agreed Triggers for DPL HI:

i . Asset Management Plan fully funded and reflected in the MTBF. Results o f f i r s t two years evaluated.

M&R Budget allocated in accordance with market prices.

iii. Transition o f a l l remaining FGW and SGW TWs completed, except for those T W s that are needed for saline drainage purposes.

iv. System of fortnightly (twice monthly average) meetings o f the Departmental Accounts Committee P A C ) continued, with at least 25% (45% cumulative) o f the back-logs o f advance audit observations reviewed and resolved.

v. Abiana revenue enhanced by improving collection performance (as a % o f assessed amount).

ii. yardsticks revised according to

B. Pillar 11: Water Resource Management Reforms to make intra-province water allocation and distribution more transparent

Prior Actions for DPL II:

i. Monthly water accounts posted o n IPD website.

ii. Installation and calibration o f gauges completed for at least one full canal system (the L C C East Canal), and distributary canal discharge data for the LCC canal system posted on IPD website.

Agreed Triggers for DPL 111:

i. Monthly water accounts posted on IPD website.

ii. Installation and calibration o f gauges completed for two more canal systems.

iii. Implementation o f Surface Water Quality Monitor ing Plan (including water for domestic use) started in priority areas. Information o n water quality and sources o f pollution disseminated locally and posted o n the IPD website.

C. Pillar 111: Irrigation Service Delivery Reforms to improve the quality, efficiency and accountability with which irrigation services are delivered.

35 M&R yardsticks have been revised to reflect the specific requirements o f each of the 6 irr igation zones in Punjab.

30

Prior Actions for DPL 11:

i. IPD Reform Unit fully functional and M&E reports prepared.

ii. A communication strategy prepared, approved and launched

iii. One hundred36 new FOs established & IMTAs signed. Capacity building o f FOs continued.

iv. To raise awareness o f social and environmental risks, guidelines developed for their identification and control in operation, maintenance and rehabilitation o f irrigation infi-astructure.

Agreed Triggers for DPL 111:

i. Implementation o f communication strategy continued.

ii. 100 new FOs established in new AWBs and IMTAs signed. Capacity building o f FOs continued.

iii. Environmental and social risk management guidelines approved and made available o n website.

D. Pillar IV: Reforms to improve water use efficiency and on-farm productivity: Whi le one o f the three triggers set for this pi l lar under DPL l has been converted in to a pr ior action, and the remaining two are expected to be converted to pr ior actions by June 2007, it has been agreed with GOPunjab that the reform under this pi l lar will be pursued outside the ambit o f DPL2 and 3 to al low more time for internal debate and government processes (also see Annex 5).

95 new FOs established and IMTAs signed by March 2007. T h i s number expected to exceed 100 by June 2007.

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Good Practice Principles on Conditionality Principle I: Reinforce Ownership

‘l’he operation supports Punjab’s Irrigation Sector Reform Program ( I S M ) . which i s an integral part o f the Punjab’s Medium Tern] Budgetary Franiework and one of the building bocks o f Punjab’s PRSP currently under revision. High level o f ownership o f the ISRP i s evident from the leadership provided b y the elected Muslim League government arid personal attention devoted by the Chief Minister ; scatmg up a f reform initiative in a prioritized and sequciiccd manner: a near doubling o f resources allocated for the sector; and m j o r achievements in the first year of the program, Extensive consultattons were undertaken during the dcsign ofthe ISRP, and continuing dialogue nith stakeholders i s an integral part of the reform process. The track record o f reform implenientation has vastly Intproved since the present government came to power. Sriccessfid implenientation of DPI, 1 bears witness to the governnient’s and other stakeholders’ commitment. The ISRP i s underpiimed by extensive analytical work b y government as well as the Bank, including the Country Water Resources A lance Strategy (CWUS), which was disclosed a year prior to the preparation o f the ISRP. ‘ Ihe C W U S was widely acclaimed in Pakistan and fully embraced by Punjab and reflected in the ISRP. Bath the CWRAS and ISRP embody deep under standmg o f the political ecortorny of water sector r e f o r m in Pakistan. They provide sufficient policy space to pursue rcforms with full support from stakeholders.

Principle 2: Agree up front with the goveritmeitt and other fifrunciul parttters om a coordinated accountability framework

The Bank support for the IRSP IS sumnmrized in a sector policy matrix, which includes expected outcomes o f the refonn program atid monitorable indicators. Other donors, irtcludirtg Ann and JBIC are supporting program and projects that are fully aligned with, and are complementary to, the ISRP. A id for the irrigation sector is coordinated by a high level Inter-Uepartmental Refomi Coniminee headed by the Chairman o f Planning and Development Doad. The Dank also plays a role in hamorminng donor support for the reform progrant.

ank 0 CQ

Principle 4: C‘Jwnse sniy

Pr 5: c*o rent w s conducive to p rmance-hased financial support

e reviews are held

ts for both Internal indicators, and b ~ n c ~ ~ a r k i ~ g perfomunce, are in place. The Bank team also carries out regular periodic reviews o f refonn progress and outcomes. These reviews include ficld visits and direct interaction with stakeholders. ?he tinling of the operation i s well suited to Punjab’s needs, which seeks budgetary support to be disbursed prior to beginning of each fiscal year. The Bank support volume i s announced early enough to be incorporated in the budget preparation cycle.

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BENEFITS AND EXPECTED OUTCOMES OF THE ISRP

64. Implementation o f the ISRP would y ie ld benefits in terms of:

(i) Improved fiscal and asset management would safeguard the integnty, and help ensure sustainability o f Punjab’s vital irrigation infkastructure, which i s the back bone o f i t s agriculture based economy. Short term benefits would include adequate hnding for M&R and safeguarding against r i sks o f failure. Med ium and long term benefits would include better maintenance and performance o f infrastructure leading to more reliable and equitable water deliveries to the ta i l ends o f the system (where a higher proportion o f the smaller land holdings and poorer sections of the farming community are located), and more efficient water use leading to higher productivity.

(ii) Improved governance o f water resources and enhanced transparency o f the administration o f intra-province water entitlements and water distribution would lead to greater t rust and confidence among water users. Short term benefits would include improved perception o f water users about administration o f water entitlements and intra- province distribution; fewer water related disputes among users; greater farmer confidence in the reliabil i ty and timeliness o f water deliveries, leading to greater investments in crop husbandry and productivity. Med ium and long term benefits would include development o f water market leading to greater allocation o f water resources towards crops with higher economic value, through market mechanisms.

(iii)Improved reliabil i ty o f irrigation service delivery, at the bulk transmission as we l l as distribution levels, with greater involvement o f users, would in the short term lead to improved equity o f water distribution to tail ends o f canals, and an increase in water use efficiency and productivity in the medium to long term. Decentralization o f water service delivery would also lead to improved O&M o f the lower end o f the irrigation system which i s currently the most dilapidated part o f the system. The ISRP will also encourage the entry o f new players as bulk water providers.

(iv) The promotion o f new and more efficient water technology (pressurized irrigation systems, laser guided land leveling, etc) through public-private partnerships would lead to higher efficiency o f water use, diversification towards higher value crops, increased productivity and more jobs as compared to conventional crops.

POLICY AREAS

65. The pol icy areas supported by the proposed Loan and related challenges, government actions, and triggers are articulated in various sections o f the report and summarized in the Policy Matr ix. Broadly speakmg, the key pol icy areas supported by the ISRP include: (i) Policies that would lead to improved fiscal and asset management, including policies for improved asset management planning; adequate funding o f M&R, reducing costs; divesting non-profitable lines o f business to the private sector; and O&M cost sharing principles, that make the use o f budget and users charges for public and private goods more explicit; (ii) Policies to improve governance o f water resources, including more transparent administration o f water entitlements, and incentives for more efficient use o f scarce water resources; (iii) Policies to facilitate decentralization o f irrigation service delivery, with greater role o f farmers and other water users in management, and incentives for improving equity o f water distribution and improved operation and maintenance; and (iv) Policies for encouraging use o f improved and more efficient irrigation technology through a system o f incentives for promoting public-private partnerships.

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V. OPERATION IMPLEMENTATION

POVERTY AND SOCIAL IMPACTS

66. Whi le a macro-economic analysis (Poverty and Social Impact Analysis) o f the impact o f the pol icy and institutional reforms supported by the ISRP has not been carried out3’, the reforms--improved asset management, water resource management, irrigation service delivery and productivity-- supported under the proposed operation would have positive poverty and social impacts (see Social Screening Matr ix at Annex 4). In Punjab, most rural livelihoods depend directly or indirectly o n agriculture, and agriculture productivity depends importantly o n the availability o f water for irrigation - specifically the public provision o f canal water. Despite the growth o f groundwater as an additional source o f water for irrigation, and i ts sale and distribution in local informal water markets, canal water remains the critical and most important source o f water for irrigation in the Indus plain. In this regard, the Pakistan Poverty Assessment3* which was based o n the Pakistan Rural Household Survey39 found that:

0

0

Ownership o f a p lo t within a watercourse command area confers access to irrigation water, but does not guarantee canal water availability. Water use appears to vary systematically with the location o f the watercourse along the main channel (distributary or minor) as wel l as the location of the farmer’s p lo t o n the watercourse command area - specifically, water availability decreases significantly if the watercourse i s located near the ta i l o f the distributary or minor, and/or if the plot i s located near the ta i l end o f the watercourse.

67. least two factors appears to be important in affecting water availability:

This location effect i s wel l known, but the Assessment suggests that the interplay o f at

0 The f i rs t i s the deteriorated and silted condition o f many distributaries, minors and watercourses, and their related structures such as gates and outlets - seepage losses along these canals are often high and their hydraulic performance l o w with the result that the system does not function as it was designed or intended, i.e., plots in different parts o f the command area, especially those near the ta i l o f canals would receive less water than was intended. Second, the Assessment found that when the data are controlled for p lot location, the availability o f canal water increases significantly where farmers reported informal payments for water; where there i s less inequality o f land ownership, and where the land holdings o f the three largest cultivators o n the watercourse i s high. The Assessment notes that since larger landowners are likely to be able to lobby more effectively with irrigation officials and politicians, this latter finding suggests

0

37 Recent surveys, including the Pakistan Integrated HousehoId Survey 2002 and Pakistan Social L iv ing Standards measurement Survey 2005, did not focus on land and farms. However, available data clearly indicates that the highest incidence o f poverty i s within agricultural labor and rural non-farm workers and also that 91 % o f the small farmers are poor. The Punjab P&D Department has indicated that it would consider expanding the scope of the next round of Multi-indicators Cluster Survey (‘ICs) to establish more clear linkages between policies supported under the ISRP andpoverty. Assessment o f Poverty in Pakistan was undertaken by the Government and the World Bank and completed in September 2002. The PRHS survey covered 2700 households in 16 districts. Since the data were collected at p lot level, the sample includes 1500 irrigated plots on about 400 watercourses (in Rabi 2000-2001, and Kharif2000).

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that water availability depends to some extent on the abil ity o f cultivators to influence irrigation officials.

68. The Assessment found hard evidence for three key findings:

0 A significant percentage o f small farmers and tail-enders actually get less water than their share; Per-hectare water delivered to these farmers i s significantly lower than that delivered to upstream farmers; and There i s widespread lack o f transparency in water allocation.

69. The lack o f transparency in water allocation i s important, and stems largely fi-om the long-standing lack o f participation o f farmers in water management decisions, combined with the tendency o f the departments over time to centralize management decisions, such as water scheduling and distribution. These two factors over time have the effect o f greatly diminishing transparency and information access. Addressing the above problems is a key objective of the institutional and governance reforms, which Punjab has started as part of its ISRP.

70. One negative impact o f the ISRP would be redundancies in IPD resulting fi-om farmer take over o f responsibility o f O&M o f distributary canals and abiana collection and transition o f government tube wells. GOPunjab plans to deal with redundancies through a process o f natural attrition as wel l as retraining and redeployment. The redundant staff would not lose employment. They would either be absorbed in other vacant positions within IPD or other government formations or transferred to the provincial “surplus pool” where they wil l continue to receive salaries and benefits, till they reach the age o f retirement.

71. The proposed improvement in abiana recovery (improved collection) could impose an additional burden on farmers4’. However, increased farmer participation in management o f irrigation services will reduce the hidden costs o f water that farmers have to pay, and will l ike ly result in a single payment through abiana, which i s less than the informal payments farmers have been malung. Secondly, water charges represent a small fraction o f the farm budget41. Thirdly, the fact that farmers pay a much higher price for groundwater transaction^^^ indicates their willingness and capacity to pay for more reliable and timely water supply. The reforms will thus have a positive impact o n overall physical and financial sustainability o f the irrigation system by gradually increasing abiana collection.

72. Transition o f government tube wells could have a negative impact o n water logging or reduce access to groundwater. However, the transition i s being implemented in a manner that i t does not have a negative impact on water logging and salinity or reduce access to groundwater for irrigation. The process followed successfully in past transition projects has been adopted,

There is anecdotal evidence that small and marginal farmers generally pay abiana, and the defaulters are mainly influential farmers. Water charges represent about 5 percent o f cost o f agricultural inputs, and a similar percentage o f the net farm income. Also, in Punjab, farmers in the tail reaches (outlets in last 33 percent o f canal length) are charged ha l f the flat abiana rate. T h e Study on Rural Factor Markets (Report No. 30381-PK, dated November 19,2004) indicates that groundwater prices range from Rs 125 to Rs 240 per hour. A recent survey in the LBDC command indicates that for diesel operated tubewells the groundwater price ranges from Rs 300 to Rs 350 per hour , which i s several times higher than the current flat abiana rates in Punjab (Rs 50 per acre for the Rabi season and Rs 85 per acre for the Kharif season).

35

which involves social mobilization to organize handover o f operational fi-esh groundwater tube wells t o local communities, or replacing the large tube wells with smaller capacity community tube wells (partly funded by government) which farmer groups can operate and maintain more easily. Past experience has been that when these tube wells are managed by farmers they are able to better meet their crop requirements whi le performing the drainage function as well. In the Muzaffargarh canal command area, where most o f the remaining fresh groundwater government tube wells are located, the timing o f the transition process was adjusted taking into account the canal closure required for the emergency rehabilitation o f the Taunsa Barrage.

73. IPD carries out annual maintenance o f canals in the month o f January, and for this purpose, canals are closed and water deliveries for irrigation and drinking water supplies (in saline groundwater areas) remain suspended during this month43. In addition, IPD also undertakes additional canal closures, when required for special maintenance and rehabilitation works. The planning and scheduling o f closures i s normally done by IPD in consultation with the Agriculture Department and indirectly with farmers as well. However, in the past, communications with the farmers were not fully effective and consequently some farmers did not receive timely information. The reform program addressing this issue in two ways. Firstly, by preparing and launching an effective communication strategy, which, among others, includes an effective system o f consulting with, and informing farmers about canal closures, in a timely manner". And, secondly, where special.cana1 closures are foreseen to have an adverse impact o n livelihoods o f small and marginal farmers, the government organizes programs for l ivelihood assistance and focused poverty interventions before canal closure. This approach was adopted during the 2006-2007 canal closures.

74. The improvement o f equity in irrigation water delivery (Pillar 3 o f the reforms), may have a negative impact o n those who benefit f rom the current inequities in water distribution (farmers as wel l as unscrupulous hnctionaries who engage in water theft). I t i s w e l l known that over irrigation, on the one hand, and water deficit on the other, both reduce water productivity and income o f farmers. Head-end farmers suffer where over watering causes water logging and salinity, while the tail-enders experience water stress. Therefore, restoration o f equity should result in a win-win situation.

IMPLEMENTATION, MONITORING AND EVALUATION

75. The implementation o f the I S R P i s spearheaded by the Minister and Secretary o f IPD. An IPD Reform Unit, assisted by four teams, each responsible for a reform pi l lar i s responsible for day to day monitoring and follow-up actions. An Inter-departmental Steering Committee headed by the Chairman P&D oversees program implementation, provides pol icy guidance and secures polit ical support and backmg.

Monitoring and Evaluation System

76. including the following four components:

GOPunjab has established a system for monitoring the implementation of the ISRP,

43

44 For drinking water supplies, farmers store water in tanks before hand or rely on truck mounted water tanks.

In 2006, the canal closure information in respect o f the Taunsa Barrage canals was systematically and effectively disseminated to farmers prior to the scheduled closure dates. The government also supported installation o f additional hand pumps in areas where FGW was available.

36

i. ii. iii. iv.

Monitor ing by the IPD Reform Unit and PIDA Monitoring by a Website Oversight and Monitor ing Committee (WOMC) Monitor ing by the Inter-departmental Steering Committee (IDSC) Independent Third Party Surveys (ITPS)

77. The Reform Unit i s responsible for: (a) strategic planning and implementation o f the reform program, including activities supported under the proposed DPL 2; (b) monitoring and reporting o n the key performance monitoring indicators, (c) maintaining close oversight o f the progress o f a l l aspects o f the reform program, including among others:

i. 11.

111. ...

iv. V.

v1. vii. viii.

Arrangements for M&E, including third party validation; Expansion o f capacity for social mobilization for establishing FOs; Preparation o f a communication strategy and i t s implementation; Building capacity for social and environmental assessment; Operationalizing the h g a t i o n Management Information System (MIS); Preparation o f a groundwater strategy; Surface water quality monitoring program; and Preparing periodic M&E and progress reports o n the implementation o f the reform program, in close coordination with the Agnculture Department who are responsible for collecting and collating monitoring data relating to Pil lar I V o f the ISRP.

78. The Website Oversight and Monitoring Committee (WOMC) i s headed by Secretary IPD and includes representatives o f Agnculture Department, FOs, RSPs, representatives o f academia and c iv i l society, and PIDA officials, directly involved in social mobilization for the establishment o f FOs. This WOMC helps ensure that the information provided o n the IPD website i s easily accessible, user friendly, clear, accurate and updated regularly.

79. The IDSC headed by the Chairman P&D, and with the Secretaries o f Finance, IPD, Agnculture, and Environment Protection Departments, and the Managing Director o f PIDA, as i t s members, provides pol icy guidance and monitors overall outcomes o f the DPL. Secretary IPD acts as the secretary o f the IDSC. The IDSC meets at least once every quarter or more frequently whenever issues requiring resolution are submitted for i t s consideration. I t s responsibilities include: (i) review quarterly DPL progress reports, evaluate outcomes, and ensure that the various pr ior actions, triggers and milestones in the Policy Ma t r i x are completed in a timely manner; (ii) provide pol icy guidance and advise implementing agencies h o w issues affecting implementation can be overcome; (iii) monitor assessment and collection o f abiana; (iv) ensure adequate budgetary allocations for M&R, in accordance with the MTBF; and (v) assist IPD and Agriculture Department in securing resources for building their institutional and communication capacity.

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Outcome Indicators

80. monitoring instruments are included in the Development Policy Matr ix.

The expected outcomes, monitorable indicators (baseline values and targets) and

Independent Third-party Surveys (ITPS)

81. Whi le most monitoring aspects are amenable to internal arrangements, IPD Reform Unit has recently contracted an independent external agency to conduct third-party surveys to verify implementation o f program interventions and evaluate outputs and outcomes through random surveys as wel l as case studies, including the fol lowing monitorable indicators, inter alia:

i

11

... 111

iv

V

The equity (measured by the delivery performance ratios -DPR), timeliness o f water distribution amongst members o f FOs, cost sharing and O&M arrangements, and performance o n collection o f abiana;

The performance o f IPD/AWBs and FOs in M&R o f the irrigation system;

A p c u l t u r a l and water productivity;

Functioning o f FOs (meeting, participation, performance o f executive committees; h o w decisions are made; internal information flows; book keeping), financial viabil ity and sustainability; and

Impact on small farmers, women, tenants, and landless.

82. Bank Staff will also monitor critical actions and periodically review progress o f implementation o f the reform program, as we l l as the subsequent actions o f the Government’s program. Bank staff will focus o n the outcomes o f the program and the adjustments that need to be made to the operation as it evolves, to take into account the latest developments, stakeholder support, and feasible options for realizing the intended development goals. The focus o f these reviews wil l be largely based o n the monitoring o f outcome indicators and the objectives o f the program. At the same time, the overall status o f the Government’s program will be monitored to determine whether the agreed pr ior actions and milestones are being met.

FIDUCIARY ASPECTS

83. Financial Management: As concluded in the Country Financial Accountability Assessment - Pahstan (December 2003), there were substantial opportunities for consolidating current reforms throughout Pahstan and for introducing additional reforms to further strengthen public financial accountability. The challenge for governments at the national and provincial levels i s to sustain pol icy level commitment to reform and set the pace for further implementation o f measures designed to enhance the accountability arrangements in al l tiers o f the governments. A s a further testimony to the commitment o f the GOPunjab, a Provincial Financial Management and Accountability (PFMA) Assessment using the transitional PEFA framework (pre-June 2005) was carried out for the Province and completed in April 2005 under the jo in t auspices o f the DFID, Wor ld Bank, and the EC. This assessment captured and isolated the province-specific accountability shortcomings and helped the province to design i ts own reform agenda that has

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enabled the province to focus o n implementing the required reforms which together are enhancing the accountability regime at the sub-national level. The Assessment report indicated a clear will o f the government o f Punjab to progress o n financial management reforms as evidenced by the scale and variety o f actions already underway under the auspices o f the Finance Department and the PIFRA Project. Using the public financial management performance measurement framework, the PFMA report concluded that the GOPunj ab performed reasonably we l l against the erstwhile 28 PEFA PFM Performance Indicators.

84. The measures already undertaken as outlined in the achieved benchmarks in the PFMA assessment indicate that the province, as a whole, i s wel l geared to consolidating on the achievements made so far and, through self-assessment, i s already wel l positioned to track further improvements or deviations in their re form implementation progress. This i s reaffirmed through the commitment o f the province and by inclusion in the Punjab Government’s Whi te Paper o n the Budget o f the Provincial Government for FY 2006/07 o f the reform actions taken and planned to be taken against each o f the PEFA Performance Monitor ing Indicators. The White Paper was presented to the Provincial Assembly and, in so doing the government has demonstrated i t s will to transparently and accountably implement the required reforms aimed at improving public financial management province-wide.

85. Underlying the province’s commitment to the reform agenda, achievements against the milestones have been realized in the fol lowing areas: (a) the budget formulation process continues to adopt a systematic pol icy o f orderliness and participation and this was evident in the we l l articulated and coherent ‘budget call circular’ for the FY 2006/07 budget; (b) provincial and district governments’ daily cash balances are generally consolidated into a f o r m of daily report for effective cash f l ow planning and management, although public enterprises accounts and Zakat accounts remain excluded; (c) consistent with the requirements o f the N e w System o f Financial Control and Budgeting, the whole year’s budget in the case o f recurrent expenditures are released by the Finance Department and, similarly, at least 40% o f the approved annual development program budget i s released at the start o f the fiscal year to support more t imely expenditure planning and commitments by Principal Accounting Officers; (d) since the budgeted resources reach the spending departments o n a timely basis, the spending departments have, in general, n o w begun their commitment planning in advance o f releases o f funds instead o f wai t ing until the funds are released; this i s particularly evident in the IPD; (e) the pension and provident fund modules under the PIFRA regime are n o w activated and the process o f generating pension and provident fund data for purposes o f ascertaining the contingent liabilities o f the superannuation schemes for public employees has begun; (0 timeliness in data reconciliation has improved as a result o f the increase in number o f IT connected accounting sites in the province although a l o t remains to be done before province-wide connectivity i s achieved by September 2007; (g) the good practices o f introducing and replicating monthly expenditure monitoring systems are being more aggressively adopted at the district government levels for development programs although this improvement i s l imi ted to a few districts at the moment; (h) the office o f the Auditor General at the province has commenced the implementation o f the new risk-based audit methodology that has started to support the enhancement o f audit quality and timeliness; and (i) two Public Accounts Committees, operating in parallel, are functioning to support a faster and timely review o f audit reports and audited accounts at the provincial level although there st i l l exists a significant back-log o f unreviewed audit observations in the audit reports and accounts o f the province, and particularly for the district governments.

86. Overall, as revealed by the Punjab PFMA (2005), the financial accountability environment in the province provides adequate safeguards for reliance on government financial

39

management systems. This i s reinforced by the progress o f actions implemented since the IMF Safeguards Assessment (2001) o f the State Bank o f Palustan (see below). A s a result, the fiduciary risk o f the program continues to be rated as ‘modest’.

87. With the enduring commitment o f the government o f Punjab to deepening reforms in the area o f PFM, the multi-donor team was requested by the government in the first quarter o f FY 2006/07 to update the PEFA PFM Performance Measurement Framework, using the approved Framework o f June 2005. The W o r l d Bank, ADB, DFID, and E C jo in t ly commenced work o n the update and a draft of the report i s now ready for discussion at the stakeholders’ workshop. This PEFA related work will be supplemented by a form o f ‘detailed diagnostics’ o f the weak performance areas with a v iew to government re-designing i t s own reform strategy for improving on those identified areas. The government’s will t o include the strategy as part o f i t s White Paper i s indicative, in n o small measure, o f i t s responsiveness to advance the course o f reform in PFM. The preliminary results o f the updated draft PEFA report show that the government has already delivered on some o f the key areas o f reform outlined in the earlier report. Remaining areas o f weakness that are being progressively managed but largely under the auspices o f the PIFRA overarching reforms agenda include (a) the quality and timeliness o f the in-year and year- end financial reporting, particularly at district government levels; (b) slower roll-out o f the new risk-based auditing methodology that i s compliant with International Standards o n Auditing so that presentation o f quality audited accounts and audit reports to the legislature i s accomplished within 12 months o f the end o f the fiscal year. Other key weakness requiring pol icy reforms within the purview o f the both the provincial and federal government relate, principally, t o the negative institutional impact arising fi-om the ‘duality o f control’ o f the district accounts officers by both the Controller General o f Accounts at the federal level and the Finance Department at the provincial government level. Although improvements have been registered in the reconciliation o f fiscal and monetary balances through improved cash management processes at the provincial level, the reconciliation o f differences between expenditure ‘drawing and disbursement officers’ and the ‘accounting and payments offices’ remains a source o f concern that the PIFRA, when fully rol led out, i s geared to eliminate.

88. An IMF Safeguards Assessment o f the State Bank o f Palustan (SBP) was conducted in 2001. It highlighted significant vulnerabilities at the SBP, particularly as relating to i t s financial statements and disclosure policies which fel l short o f acceptable Central Bank standards. However, since a program o f reform has been agreed with the IMF and i s being implemented, the risks associated with foreign exchange management control have been mitigated. The SBP has transitioned to producing financial statements which accord with international accounting standards and formats. An independent review o f the SBP’s internal audit function, as recommended by the Safeguards Assessment, has since been completed and recommendations implemented. The SBP has also established a formal process o f reconciling data reported to the Fund as wel l as implemented guidelines to prohibit operations that pledge or encumber reserves, or place restrictions on, or otherwise impair the availability o f foreign exchange reserves outside an authorized framework, equally, the SBP’s A c t has been accordingly amended to strengthen and guarantee i t s independence and autonomy in the management o f reserves as required under the Safeguards Assessment.

89. The IPD, which will implement the program o f activities and pol icy actions under this DPL, has an institutional and financial management framework that i s premised o n the province’s model. Whi le there also remain accountability issues requiring the deepening o f reform measures at the sectoral level, the potential for improvement and the commitment to

40

reform as demonstrated by actions taken during the f i rs t program per iod are great. The IPD, l ike other government departments, i s subject to the same accountability regime in the province; i t s budget execution and internal control processes are generally satisfactory to support the achievement o f the program’s objectives. External auditing o f the department’s financial transactions i s conducted by the Auditor General o f Pakistan through the Directors General of Provincial and District Audits stationed in Lahore, Punjab. Although follow-up o f audit observations was generally weak during the f i rs t DPL operation, there i s n o w adequate evidence to confirm that the Departmental Accounts Committee (DAC) of the Irrigation and Power Department holds regular meetings (average o f twice monthly) to discuss and resolve audit issues as a way to recognizing the importance o f accountability. At the same time, significant numbers o f audit observations are resolved during those DAC sessions. The establishment o f a Cel l to monitor both the settlement o f audit observations issued against the department as we l l as the status o f budget execution across the divisions and irrigation circles has heightened the accountability prospects in the department.

90. procurement strategy that addresses the fol lowing areas:

Procurement Reform. The Government o f Punjab has developed and approved a

Creation o f a central body to develop and guide the implementation and operation o f a new procurement framework which should include rules, regulations, procedures and standard bidding documents. Identification o f key stakeholders and including them in the consultative process to ensure strong buy-in f rom c i v i l services, private sector and c i v i l society organizations. Development o f a procurement monitoring system to collect, analyze and disseminate procurement related data within government and to the public, which will include web based procurement notices, and notices o f award o f a l l GOPunjab contracts. Development o f a complaint handling mechanism. Preparation o f training and capacity building programs for individuals involved in procurement based o n international best practice. Creation o f benchmarks and a baseline study o n current status o f procurement and establishment o f key perfomance indicators.

The strategy aims at completing these actions within two years. In order to implement this reform strategy, two committees have been set up, one under the Chairman P&D and the other headed by Additional Secretary (Procurement). Each o f these committees has representation f rom the second committee and has held several meetings to gain stakeholder alignment and review progress in implementation. In another related development, GOPunjab, in response to a request f rom the Prime Minister, i s considering the adoption o f the Public Procurement Rules, 2004 o f the Federal Government’s Public Procurement Regulatory Author i ty (PPRA). The rules have been reviewed by the Bank and found to be in conformity with international best practice, with only a second tier appeals or complaints handling process and consultancy specific rules missing. GOPunjab has already adopted a good set of Guidelines for the selection o f consultants, and should be able to very quickly adopt the PPRA rules. T h i s will jump start the reform process and quick progress can be made toward the creation o f a monitoring and evaluation system, and downstream actions l ike preparation o f regulations, procedures and standard bidding documents. GOPunjab has also finalized the draft o f an Ac t to establish a procurement regulatory body as recommended by the procurement reform strategy which i s in the final stages o f review by stakeholder departments, after which, i t will be forwarded to the Provincial cabinet for approval t o be placed before the Provincial Assembly.

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As part o f i t s reform program, the IPD i s establishing a Procurement Unit to advise and assist in procurement o f works, goods, and contract management. IPD has also introduced a system o f posting procurement notices o n i ts website. During appraisal i t was agreed that the IPD will decide on a threshold above which, procurement notices for goods, works and services, including contracts for maintenance work, will be posted on the IPD website and the availability o f this information wil l be communicated to the public at large. At the same time, the IPD will commence work to post notifications o f awards on i t s website.

91. Overall Fiduciary Environment: Overall, as revealed by the Punjab PFMA (2005), the preliminary results o f the PEFA (2007) Assessment, and the monitored trajectory o f reforms already initiated and are being implemented in the area o f public procurement, the fiduciary environment in the province provides adequate safeguards for reliance on government financial management systems. This i s further reinforced by the progress o f actions implemented since the IMF Safeguards Assessment (2001) o f the State Bank o f Palustan (see above). As a result, the overall fiduciary risk o f this second operation continues to be rated as ‘modest’.

DISBURSEMENT AND FIDUCIARY ASSURANCE

92. Fundsflow arrangements for the Loan will be as follows: The Government o f Palustan shall identify a Foreign Exchange Account with the State Bank o f Pakistan (SBP) and which forms part o f the country’s official foreign exchange reserves, into which the proceeds o f the Loan will be disbursed on a single tranche basis upon Loan effectiveness. The Rupees equivalent o f the funds in the Account will, within two worlung days, be transferred into the Consolidated Fund o f the Government o f Punjab (Account No. 1 - Non-Food) held with the SBP which i s used to finance budget expenditures.

93. Disbursements f rom the Consolidated Account No. 1 (Non-food) by the Government o f Punjab shall not be tied to any specific purchases and n o special procurement requirement shall be needed. The proceeds o f the Loan shall, however, no t be applied to finance expenditures in the negative l is t as defined in the Schedule o f the Loan Agreement. If any portion o f the Loan i s used to finance ineligible expenditures as so defined in the Schedule o f the Financing Agreement, IBRD shall require the Government to promptly, upon notice f rom IBRD, refund an amount equal to the amount o f the said payment to IBRD. Amounts refunded to IBRD upon such request shall be cancelled f rom the Loan.

94. Assurance Requirements for the Loan: For this Loan, since there wil l be n o required special fiduciary arrangement, n o additional assurance requirement in the form o f a formal audit shall apply, particularly in the light o f the fiduciary environment as established with the management o f foreign exchange reserves by the SBP. Within 45 days o f disbursement o f the Loan by IBRD, however, the Finance Secretary o f the Province shall provide a written confirmation to IBRD, certifying the receipt o f the Rupees equivalent o f the Loan into the Consolidated Fund Account o f the Government o f Punjab, the number o f the account, the date o f the receipt, and the exchange rate applied to translate the Loan currency into Rupees.

ENVIRONMENTAL ASPECTS

95. The financing provided under the DPL wil l support a wide range o f improvements in irrigated agriculture in Punjab through strengthening o f institutions, and the introduction o f systems and practices to provide adequate, equitable and reliable irrigation supplies. The

42

expected results are improvements in the management o f asset stock, the management o f water resources, irrigation service delivery, land productivity and water use efficiency. These improvements are expected to lead to environmentally positive outcomes, including some reductions in water-logging and salinity.

96. The on-going operations o f the IPD include maintenance and rehabilitation o f existing main canals, branch canals, distributaries, and the drainage network. These activities present localized, small-scale environmental risks, and may potentially affect the f l o w o f water t o wetlands. T o address these concerns, the proposed loan supports strengthening o f the IPD’s Social and Environmental Management Unit (SEMU), which has already been established and has a mandate to build awareness and capacity for environmental and social r i s k management in the FOs and AWBs. The S E M U has prepared guidelines for the management o f environmental and social r i sks in IPD operations with Bank’s assistance. An important design consideration to be addressed in these guidelines was the need to protect wetland habitats, some of which may be critically dependent on seepage from canals. The guidelines therefore specifically address the importance o f understanding any impacts o n wetlands and the need to take appropriate action where wetlands may be affected. Further, these Guidelines wil l also help in assessing the potential changes in the hydrological regimes (quantity & quality aspects) and potential impacts due to the project activities o n natural resources including forests and grazing lands in the area. Fo r the construction phase, the guidelines wil l ensure environmental safeguards by focusing o n the management o f borrow areas, proper disposal o f excavated materials, site restoration and management o f associated canal closures. The guidelines wil l be disseminated through the IPD website.

97. The S E M U has also commenced a study o f water quality in the surface drains in 2006, with a focus on identifying pollution loads o n the system. The Bank i s ready to support the preparation by IPD o f an integrated review o f the issues and challenges in one selected drainage basin, through a Strategic Environmental Assessment. This assessment would incorporate a comprehensive institutional review o f the sector, and will also address the need to protect water quality in the irrigation system through tighter control o f pollution f rom industrial effluents, municipal sewage, urban solid waste, and agncultural runoff. In this regard, a j o in t mechanism between IPD and Punjab EPD i s needed for ensuring the effective compliance with the NEQS to protect surface and groundwater resources.

98. An Environmental Screening Ma t r i x for the policies and reform actions supported under the proposed loan i s attached (see Annex 3: Environmental Screening Matrix). Based o n this assessment and the preceding considerations, there wil l be n o significant effects associated with the proposed operation on the environment, forests and natural resources.

R I S K S AND R I S K M I T I G A T I O N

Potential R isks and Mitigation Strategies

99. At the time o f processing o f the first development pol icy loan the history o f uneven high level support t o the irrigation reform agenda was identified as a high risk. However, GOPunjab has remained strongly committed to the reform program, which continues to receive strong polit ical support. Water userdfarmers also continue to participate in the implementation of reforms with great enthusiasm and are witnessing the positive outcomes o f participatory irrigation management. Whi le there remains an inherent r i s k that a change in polit ical leadership

43

could affect the current momentum, the reforms have reached the take-off point and there would be pressures to move ahead. Continued Bank support, however, remains critical.

100. There i s an inherent signzjkant r i s k that staff redundancies resulting f rom the devolution o f O&M responsibilities to FOs coupled with anti-reform lobbying by those who may stand to lose as a result o f the reforms (e.g. farmers who benefit f r om the current inequities in water deliveries) may bring to bear polit ical pressures o n the government to slow down the process o f change. GOPunjab i s mitigated this r isk by adopting a strategy o f natural attrition as wel l as retraining and redeployment. The redundant staff would not lose employment they would either be absorbed in other vacant positions within IPD or transferred to the provincial “surplus pool” where they wil l continue to receive salaries and benefits until retirement. Furthermore, close monitoring, benchmarkmg i s being used to highlight the positive outcomes o f the reforms to win stakeholder support.

101. Another significant r i s k i s that IPD uses conventional methods for consulting with, and informing stakeholders, which are not fully effective. However, as part o f this operation, IPD has developed a communication strategy to more effectively communicate with both internal and external stakeholders. The strategy covers aspect o f change management as well, as reforms proceed. A good start on communicating more effectively with farmers was made this year in the context o f Taunsa Barrage Rehabilitation.

102. Another significant r i s k i s that IPD has limited capacity for managing social and environmental issues associated with asset management activities. This risk i s being mitigated by strengthening IPD’s, A m ’ s and FOs institutional capacity in these areas through training and capacity building. Particular attention i s being given to addressing issues associated with canal closures required for maintenance and rehabilitation activities. T o identify and manage r isks associated with asset management activities including canal closure and rehabilitation and maintenance activities o f the IPD, the S E W will conduct In i t ia l Social Assessment (ISA) for social screening o f M&R and rehabilitation works to identify any potential adverse social impacts and suggest appropriate mitigation measures. An appropriate format for ISAs and screening procedures has been developed as part o f the social and environmental guidelines, which S E M U has prepared.

103. There i s a moderate risk that adequate levels o f funding for maintenance and repairs (M&R) may not be sustained. However, the fiscal situation in Punjab has improved and the yardsticks for allocation o f M&R budgets have been rationalized. Adequate funding has been allocated for FY06/07. Future M&R allocations would be made in accordance with the Province’s MTBF.

104. Similarly, there i s moderate r isk that IPD has l imi ted capacity to effectively uti l ize enhanced resources for M&R. This r i s k i s being addressed as part o f the asset management planning, which among others allocates M&R funds takmg in to account the local needs as wel l as implementation capacity. As part o f the asset management plan, a system o f performance evaluation has been instituted to ensure that M&R funds are judiciously allocated, properly utilized in a transparent manner with full regard to procurement and fiduciary safeguards, downwards accountability to farmers. The outcomes and impacts will be closely monitored.

105. There also exists a moderate risk from the weak financial management capacity at the provincial level that could hamper implementation o f the reform program and i t s activities. This

44

r i s k i s however mitigated by a series o f factors, including enhancing IPD capacity and the increasing level o f computerization o f financial transactions under the PIFRA regime.

106. Another moderate r i s k relates to riparian issues. Construction o f new, as well as remodeling of existing hydraulic infrastructure, involve careful consideration o f downstream water rightdentitlements, and there are risks o f riparian issues arising. This r i s k i s mitigated by the existence o f the 1991 Inter-provincial Water Accord, which i s administered by the Indus River System Authority (IRSA). Intra-province water allocations and entitlements are also covered by the Accord, and one key pi l lar o f the reforms supported by the proposed loan focuses on greater transparency in administration o f intra-province water entitlements.

107. Finally, there i s a moderate risk related to macroeconomic management. Although the pol icy stance o f the government has remained appropriate, inflation and external trade deficit indicate significant excess liquidity in the economy, and call for resolute actions to contain money supply and improve export competitiveness. In this regard, the Government i s committed to take necessary steps to ensure macroeconomic stability. The SBP has already taken steps to tighten money supply.

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Annex-1 : Letter o f Sector Development Policy

No. l(4) IDA.1106. GOVERNMENT OF PAKISTAN

MINISTRY OF ECONOMIC AFFAIRS AND STATISTICS OMIC AFFAIRS DIVISION)

mabad, I Ith April, 2007 Phone.9206556 Fax:92 10734 & 920597 Section Officer

Subject. SECOND P N SECTOR DEVELOPMENT POLICY LOAN (DPL-11) - INVlTATlON TO NEGOTIATE

Dear Mr. Crookes,

Reference World Bank letter of April 10, 2007 on the subject. Please

find enclosed the Government of Punjabs letter of Sector Development Policy.

With regards,

Yours sincerely,

(TANVEER AZMI)

Mr Yusupha Crookes, Country Director, World Bank Islamabad Office, Islamabad.

* c 1 2 ' 7)) ..%

No.PS Chairman(P&D)4/2007- 1'19 GOVERNMENT OF THE PUNJAB

PLANNING & DEVELOPMENT MPARTMENT

Dated Lahare the 4* April 2007

and those the government IS camrnitt@d to lake in the oontext of a programmatic Series of three Welopmnt Policy Loans the government IS seelang frm We World Bank, in suppwt of the Punjab l-ation Sector Reform Prwrarn (PISRP) kslg implemented 'durin~ MOM8 PlSW is an integral part of the revised Povefly ReductKtn Strategy Paper which thepovmmnt 1s curreMty prepanng

2. The government's weml vlsm IS "to make quentttativr and qualllative improvements m tha lrves of the &ens' To thk end, the government is, infer alia, implamenting reforms for. improving governance, and fiscal and financial management; creabng a suppccting environment for growth !ed by the private sector, and impmvit?g the eftidency wrth Mich public WMGBS are provided. The government has inuessed public spending in high pnortty sectprs, indud~ng educatton and lnfgatt~n and is targehg poverty ' \ whils at the same time maintaining Rscal Su6kiflabillty. The pnontfes have been raflected in lte medtum term b w t a r y framewwk (MfBF) We have already receivcd suppwt from the

J\. W a n Development Bank (ADBJ under ihe Funjab Resource Management Programme (PRMP), punjab i r r iga~ Agrladture improvement Program (PWP) and fr~m JBIC for

knfr;ratNcture improvement in LCC East and West Cands, white the lntemtimal Bank for Reconsttuction and Developmeni (IBRD) is supporting reforms in the imgation sector through a sene6 of deveiopment poky credits and Barrages Rehabifitaticn Prcgram. The PISRP requKes progression arW conttnuityfrom one year to the next and that DPL2 support will provtde this cdntrnuity

As part of the overall reform program, the government is f w s q on the Inigtrbon Sector, which has crtblcsl ~npartan~? for the economy of Punjab. Agriculture contributes 28 percent of Punjabs GDP and pvides employment to about 45 percent of the labour fwce. Over 90 percenl of Punjab's agrwltural produdron Is danved tfom about 8 d million hectws of irrigated land served by Punjab's higstion and dratnage system, whch is one d the iargest contwous inigation systsms in ihe world, with an estimated replacement value of about US$20 b i f l i (2005/0S estlm&).

Despite ewnmic g r m in the province, ewnamic opporlunitks in the rural

1

D , e - 2 - - 3 .

to agriculture elated actwibes ContinueU growrh in agrtcukure a key to the alleviation of poverty, whffih is 8iWihCf1RtM higher in rural areas as

wernment IS qute aware of the chalknges and the wnStraint8 in the is fuliy committed to addressmg them in der to reap the potential d he key sectw pfbblms are smm- below:

I

: 'OJXtM m: l a 3 id M'J;:?; COOZ C i J&j

47

71 b Crowing water shwtagea Detenwated irngabon and drainaga tnfrastrudure Lack of fermer participation in operation maintenance and management

Lack of finanaal sustanabilit~ Lack of pfupetly calibrated Row meaauremsnt gauges and trained and matlvated staff

b Uncontrolled growth of private tubewells has M to over exploitationtrnining and &tenorahon of groundwater qUaw In many arees Governmen4 tubwelts have generally outliwd their useful rte and place undue burden on the m m n t budget . The tmgation establishment has 5 m over time and lack of conformance to the good precrices fdlowed in the past has 1ed to inMciencies

Of IrIigdiW W I C e S

Punjab lmgation Sector f?&ITn Program

6. cognizant of the aforemenibed prowems Ibe gwemment has devetoped a mion and strategy The long term n'sion IS "to provide pdequats, d,refjabfe

f Punjab aiming at enhanfd agricultural w&h foow on W M i c mamgement and

&wdbasedinsWoWairelbrms*. The government has launched a medium term reform pmgrarn for achieving this viaon, based on lessons learnt from past expenence and after ext$TIsIye c o n s u ~ i m with variws stakehoMen within and OuWde the gwemment, including policy and strategic dialogue with the Wwfd Bank and other devslopment pilrtnera The strategic h i o n indudes IraWtinitnnal and p o l ~ ~ y refoms w wpll as cntical invdrnenls for rehatlilitalm and system improvement The refom, pmaram is buitt MI the foltowing four kiter-related pillars. These pliars are consistent wdh the priohbes identded in the Wodd 6ank Country Water Reswrcw Asststawe strategy, to whkh the govemmant Qf Punjab contributed dunng rh preparation, and which we endorse

Pillar k lnstitufonal and Policy Reforms to Improve fhe managemenf and maintenance of ihe rmgation system to ensum its long tern, phys-1 and hand& sustmabiliiy.

Pillar II-. Watw Resource RIilnrgwnent Refoms to emphasnt! the cnticat impartance d water ed&mnts, measumnts, and transparency The objecbm is to make rntfa-province water aliocations and diSWutWn mom fmmareM, and to u/~mab& exfend the srsfem of ernnEsments to g m ~ t e r as we/! in the &q term.

Pillar Ill IrrigatSon SeMct Delivery Rafonns: The objedive uoder thb pillar is to improve the quality, efkiancy and acmmtabddy d irdptlon swm, through @%fer partinpalion Of farmers, ~stifu&iona! refoms and the use of mtractual anangomenis among wafer supply agencies and users

Pillar Iy; Refwms lo encwrags new technology to improve water use %mciency and on-fam productivity; through a system of incentms artd refoms h aqrinitture markding and reseer&

1he foflawing Pewraphs d m b u the adions the govwnment has already

Pillar 1: institutional and policy Reforms: The status of actions already taken a d vo~osed in the neal year is as f d l ~ .

0)

7. taken t h e that wil be takn io the next year, as well w t h w in the ye* beyond.

Budget 1s being allocated according io m s e d yards-. Rs 2.236 billton have been skated in the Wo6~7 M&R budset on me baas of revised yrdsticks

2

48

L1

fit) Around 1,600 saline tubwells h i m been closed we.f ?8' FeWuary 2007 NOttas fCn dmure dB03 FGW tubewetis w.e.f. 16.10.07 have been issued. IPD has a b b a e d notices for CIosure of the remainmg So2 FGW by October 2007. System of fortnghtiy (twice rnonthty werap) meetrngs of the Departmentel Auxwnts Committee (DAG) has been instrtutionam 20.7% of the back- logs of advance audit cbewtions wm mewed and resoivecl during the DPL 1. Performance on Abiana coiledion in non-FD canals for Rab! 200546 increased from 52% to 58% of the arae6seU amount Partial &&ne collection figures for Wrarrf ZDC6 (as of February) are higher than the mrespmking Bgurea rOr Knanf2005 (28% in February 2007 against 22% in February 2006). In FO managed are83 the Abrana wllecbon for Rabi 2005- 06 wd8 78% A 10 year Asset Management Plan (AMP) has been prepared The total cost of Ah8P is estimated at Rs 132 bi Dunq 200506. GOPUnjab spent Rs 8 4 billion on rehabiftatan pf imgation and dra~nage systwn and barrages, which ccnstitutes about 6.6% raducticn in the awrnulakd deferred maintenance Performance Evaluabon system for M&R has been amroved by GOPunjab and its implementation has been started ConsuYLsnls for Third Party Monitomg are being appointed A reeEistrc and tansparent policy for W R cost sharing betwan budgetary allocaliwrs and war charges for various tiers of the system ha5 been approved by We government

The government is cwnrnitted to make fufiher pmgrass on the above initiattves dunng the next year A partial list of key action8 the government would take duntyl FY07/08 and beyond is given below

{ij AMP wilt be fully funded and ref)ected in the MTBF Resutts of fist two years mil be evalualed (coshltargets at d~erani levels, increases M reliability, equity effciency, Wer p r o d u d i etc) M8R Budget alooated tn accordance wUb revised mal yartfstrcks. Transibon d ail remainiw FGW and SGW TWs Will be completed, except for those T w s that are needed fw saline drairrpge purposes System of tomghtly (twice monthly average) meetings of the osparhentai Accounts Committee (DAC) wll be continued, with at least 25% (45% curnutst&e) of the backlogs of advance audit observatrans reviewed and resdved dwing FY 07/08,

(v) Abiana revenue wllection wll be enhanced by impmvlng collection petfarmam% (at bast 85 % of assessed amom In Nan-FO areas and at least 855 in FO areas},

(14

fiv)

(v)

(vi)

{vti)

(ii] (ill}

(iv)

Pillar il: Water RwKNlrce Management Reforms: Spedfic actions already taken by the government and those in progress include

(I) IPD has posted on its website water accounts for 28 main canals regarding enbtternenta, derwerres 6 balance sham on the W t t e s m,Duniab aov pk and MtD://irrlaahon.punlab 4ov.ck Data on the websib is updated on 10 daily basis.

(11) Installattan of R o w metenng gauge8 in the LCC East AWB has bm completed DisMbutary dtsmrge data IS posted m IPD webite.

(III) Surfate Water Quality Mordtonng Plan defined and its implementation started.

(IVJ A draft Gmundwdte Led Thedocument will be finaitzed by ring Committee by June 2007 This MATE misston rewmrnendations, mainly to start pilot groundwater management schemes including: stakeholder parbwpahcn; economic incentm: strengthening Of knowledge b&se and regulatq measures. GW Infamation 16 now available

3

: 'MXZtj

49

.. . -

in the Government of Punjab web site abon.Puniab PW ok FOs in LCG East have started water dspfh and qualily groundwdter monitoring Biological and t o m parameters will be intmduced in the rnonitonng of gromdwater quality, starting in the pilot zones and gradually extendng to the Pmuim to anficipale possiMe health hazards and undeftske w r c e protection measures We propose to transform Ure Drecrorate of Land Rectarnalron Into a Gmunmter blonitonng UM in IPD. Cntena for . i) allocating acklitlonal water that kurnes availaNe under the Accord, and ii) sharing water sh-es among w e l commands, has been prepad and Is being made public. PuWication ol water atc~vnts for all dtshtbutary canals in LCC (East) will be posted on IPD webslte and updated every 10 days by April 10,2007

A partial list of key actions the governmen! would lake during FY07108 and

fv)

(vi)

beyond is gmn beiow:

(I) (it)

[iii)

Water accounts of all main canals will continue to be mted on IF0 websiie. Installabon and calitxation of gauges completed for two more canal systems (LCC West, CRBC).

Implementation of Surface Water Quaidy Mcnitonng Plan (mdudmq that for domestic use) started in prof@ area8 lnform&on on water qual@ and sources of ponution disseminated locally and posted onthe iPD webslte. PuMlmtion of water gccounfs for all dlstnbutav canals, where reforms commence, on IW websitewhich wsll be updated every 10 days. lrnplemefitatin of the Clroundwater Managemenl Plan developed this year

Studw wll be came6 out to identify iswes on water enktlements, and legal and physical constraint$ to, and opportunities for, promoting water markr?ce$. IPD will start pparabon of a n wppt model. The dynamic hydraulic model wilt f a d W decisions cate discharp at different off-takes m the system according to the water availability situation.

(iv)

(v)

(vi)

(wi)

Wig be started.

Pillar Ill Irrigation Service Delivery Refarms: the stahls of and proposed in the next year IS as follows

(I)

(ii)

A Strategic Planning and R e f m Umt has been establahed in IPD. The Unit prepared mternd M8E reports of the Reform Program A Communication strategy has been ?pared LPD has been canyrng Out varmus acUvitlCs to Improve wmmunicahons wtth internal and external stakeholders (e g canal dosure information dissemination a media campayln on reforms, uxnmunicstians though the website tnduding wrnmunicahon on emergency repain work at T a m a hsrrage) So far 69 new FOs have been established and lnigation Management Transfer Agreemenfs [IMTAs) sgned with these FOs Further 24 IMTAs will be srgned by mi&npnl2007. To raise awareness of environmental and social risks, guidelines have been devdoped tor their identrfmtion and cwlk’ol in Dperatlon, malntenance and rehabilitation of idgation infrastructure LCC (East) AWB IS operational and two nw, AWBs (LCC West and LBDC) have been notified. Rehabilitahon of 80 chmnela in LCC (Eaet) AWB managed by 27 FOs IS in prporess On 10 channels 100% work has been complettsd while on ether channels the prcqress IS 80 to 90% snd E expded to be completed by end of Awl 2W7 Benchmarking system for FOs has been intrcduced by PlDA

In t e r n of

(a)

(IV)

(v)

(vi)

(vti)

to further the reforms, the government is cwnmitted to the :olloWing dunno beyond

4

: ’M mj

50

- . '1.

.. , . (I) (11)

(iii)

Implementation of communication strategy will be continued 100 new FOs wtll be estaMished in new AWBs and IMTAs signed Capacity building of FOs continued. Enwonmentat and souat risk manegement gukklines approved and made available on websrte Implementatm of environmental and m a l nsk management capadty building program continued We will continue and expend the went modernhation plan for IPD to identify the need for use of modern twls io make a more efficient use of the human resources available in IPD and inrtlate a pmcass of wde consultslime., $eminam and dismssion of working papers on the futwe institutional arcMecture of the sector in the province Two already ndifi AWBs wdl be made operational and two further AWBs named Rehabilitation of FO managed channels Wilt be continued Benchmariting of FOs will be estabbshed and Wst report diecmsed in a workshop on Benchmatldng

(IV)

(v)

{VI)

(vii)

Pillor IY: Refomw to encourage new technology to improVe water use efficioney and orrfwm produclfvity: The status of actions already taken end pcoposed n the next year IS as follows:

Water conservation programs d watercourse improvement and provision of Land Laser Leveltng are conthulng and following tergets are likely to be met by the end of the Ascal year FYO6/D7 - 4000 Water Courrres tmpovad = 1000 Laser Levclef UNt6 delivered = Project proposal prepared for promoting pressunzed rrngation

systems The actions retatmg to Amendment of the Puqab Agricultural Produce Ordinance, 2978; Reshudunng of mearch. and preparation of models of economc incentives (cost sharing, matching grant, regulations, pol i is , mstiiuuans~ are being pursued outside the ambl of DPU Following targets are proposed during FY07108 = 4000 Water Courses improved .

(i)

(11)

(ai)

1 WO Laser Leveler Wnks delhrered ImplemenMion of Project for promctlng pressurized imgatian systems started

Initial Assessment of Impact of the Reforms

8. The inibai mmhoring of the Program Mirates that the hydraulic infrastructure is progressively bang made safer and sustainable; there is a sizable incresse In M8R budget and mvesbnents to take care of dsferrsd maintenance of irrigation and drainage infrastructure Qpemm and maintenance of distribution system in LCC E&; LCC West and CRBC have been handed over to FOs. who are also responsible for colisctbn of abiana The mllfxbon of abiana in FO ares is higher as compared to nmFO areas. *ich will contnbuie to ?inancia1 SUst8tnability. FOs in LCC East earned out maintenance and repain work of dMribuiam wt of their 4% share of water charges and have spent over Rs 24 3 MHian

9. Capacity and system has been W e d for transparent administration of water enbtlernents and sustainabie management of water resources. Water accOunts for 24 main canals regarding cntttkrnents, deliverbs 6 balance share are now posted on the website Data on the website 18 updated on 10 datly basis. astributary discharge data has been posted on the IPD website

IO. Delivery Performance Ralb 4 P R (ram of actual and authomed discharge at the head and tal outlets) of distributaries in LCC (East being measured by PiDA and

5

51

- _ ,-. . Program Monitoring and Irnpiementation Unit (PMIU) and will te v w i f t by th i i party

consultants PIDA has m p k t e d tha baseline pre condfilon survey of al channels in LCC (East) CmYe. The observabans by PMlU indicate that the average DPR for April to September 2006 was 0.84 in Burala Dlvisiwr, 0.65 in Upper Gugera; 0 85 in Lower Gugera and 0.68 in KhanM Division. The overal average DPR In LCC East system WRS 0.71

11. Joint measurement of discharges at head of disbibutwres by IPD and FOS k being carried wt The FOs are regutarty momloring the dischargts of outlets. PlDA M&E staff also ch& the discharge and infm FOs whefever any needed These steps have resulted in improved equily d water more than 2.800 disputers. This Included 1,758 disputes related to unauthorized M e r use/ water theft

12 Department of Agricullure (DOA) attmates i n d i d that 5014 watercourses improved in 2005-D6 resulted in improved ddnrery of irrigation water suppfies to the fanner6 fields ihereby kadtng to enhanced agricultural PrOducbOn. About 3.23 million person months of direct a d 3.9 person mwrths of indired employment have been created 83 a result of implementation of the Nabanal Program for Watercourse Improvement,

13. 500 LASER units were provided to the service providers dumg 2005-06 which carried out leveliing of 29,419 ha up to end October 2006. The land lewllirtg is estimated lo increase the krlgated area by 2% (588 ha) due fo reduced bnglh of field dMes and dikes. A 20% increase in crop yields s estimated for the levelled area.

Sustainabiliry of the Refonns

?4. The reform program has the endorsement of the govwnment and IS enthusiastically supported by all stakeholders, particularly the farming community as well as the rural poor who stand to gain the mmt me Govemmen! of Punjab IS confl&nt of the sustarnaklrty of the reform program, which requires progression and conbnulty from one year to the next and that DPK support will provide this continuity. Policy Meink in YristeprrlB &ncIomd(Aanex-€).

Requesi tor World Bank Support

t 5. The Government of Pakistan is requested to endorse and canvey to the World Bank our request to approve the Second lnigabon Sedor Development Policy Loan, in an amount of USSIOO million equivalent in a programmatic senes of three Development Paticy Loans in support of the government of Punjab's medium term imgstm sector r e f o n pragram (PISRP), during three years (p/2006-FY2008) rvlth a tatel amount of US$ 300 milhon.

16, In closing, I would like to confirm that the re fm propam described above has the c m n t of Mlnister for lrrtgatlon and the Chef Minister Punjab. 1 would ako like to reiterate that the government's commitment b implement the reform program, while rnamtaining sustansbility standards with respect fo souat and envlronmental aiteria and to strengthening over bme ttte relevant government pohuw and inatitutwns.

6

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Annex-6: IMF Public Information Notice (PIN), December 7,2006

Public Information Notice (PIN) No. 0611 39 December 7,2006 Public Information Notices (PINs) form part o f the IMF's efforts to promote transparency o f the IMF's views and analysis o f economic developments and policies. With the consent o f the country (or countries) concerned, PINs are issued after Executive Board discussions o f Article IV consultations with member countries, o f i t s surveillance o f developments at the regonal level, o f post-program monitoring, and o f ex post assessments o f member countries with longer- term program engagements. PINs are also issued after Executive Board discussions o f general pol icy matters, unless otherwise decided by the Executive Board in a particular case. The Report for the 2006 Art ic le I V Consultation with Pahstan i s also available

On November 22, 2006, the Executive Board o f the International Monetary Fund (IMF) concluded the Art ic le IV consultation with Pahstan.'

Background

Pahstan's recent economic performance has been impressive. Growth has accelerated, improvements in public spending and wide-ranging structural reforms have reduced the debt burden and increased efficiency, and pro-poor policies have helped lower poverty rates. The devastating earthquake of October 2005 lef t a heavy toll in terms o f human lives and physical and social infrastructure, but had relatively minor effects on macroeconomic indicators (except for an increase in government spending) owing mainly to the small share o f the affected areas in the overall economy.

Economic developments during the fiscal year ending in June 2006 were favorable, with buoyant real GDP growth and inflation declining to 7.6 percent. The external current account deficit, however, increased to US$5 b i l l ion (3.9 percent o f GDP), f rom US$1.5 b i l l ion (1.4 percent o f GDP) a year earlier. Record-high net capital f lows (mainly f rom foreign direct investment-including privatization) more than covered the larger deficit and allowed for a build up o f nearly U S $ I b i l l ion in off ic ia l international reserves. The interbank market exchange rate was broadly unchanged from end-June 2005.

The fiscal deficit exceeded the original budget target for 2005/06 owing to earthquake-related spending. Excluding the latter, revenues and expenditures rose by roughly the same amounts compared to the outturn in the previous fiscal year. The government debt-to-GDP ratio fe l l t o 56percent by the end o f June, below the 60 percent ceiling stipulated in the 2005 Fiscal Responsibility Law. The budget for 2006/07 targets a deficit o f 4.2 percent o f GDP (excluding grants), unchanged f rom the estimated outturn for 2005/06.

The growth o f broad money and bank credit to the private sector decelerated in 2005/06, but private sector credit continued to expand at a relatively strong pace. Bank lending rates became increasingly positive in real terms as inflation declined; the real return o n bank deposits remained negative. The State Bank o f Pahstan's (SBP) claims o n the government rose by more than total government borrowing f rom the banhng system, as the SBP absorbed treasury bills that commercial banks did not ro l l over upon redemption. In July 2006, the SBP tightened

86

monetary conditions by raising reserve and liquidity requirements o n bank deposits and the discount rate.

Foreign investors' interest in Palustan increased significantly in 2005/06. Foreign direct investment inflows, excluding privatization, rose by 70 percent, and foreign demand for Palustani bonds was strong. Government divestiture f rom electricity and telecommunications entities generated large foreign exchange inflows and revitalized the privatization process.

Progress o n structural reforms, other than privatization, was mixed. Reforms to broaden the income tax base and streamline rates continued, and the legal framework for investor protection was strengthened. However, implementation o f the schedule of higher regional electricity tariffs, a key step for continued reform o f the power sector, remains pending, and progress o n trade liberalization slowed.

Executive Board Assessment

Executive Directors commended Palustan's impressive macroeconomic performance since 200 1. They welcomed in particular the acceleration in output growth, the steady decline in debt ratios, and the fa l l in poverty rates. Directors noted that Palustan's strong track record o n the macroeconomic and structural reform fronts had made the country increasingly attractive to foreign investors, as shown by the record-high inf lows o f foreign direct investment (FDI) during 2005/06 and the favorable terms obtained o n recent sovereign bond placements in the international capital markets.

Directors noted that during 2005/06 the Pakistani economy had withstood we l l the impact o f large negative shocks, including the tragic earthquake o f October 2005, a sharp rise in international o i l prices, and unfavorable weather conditions. Although these shocks had l imi ted the scope for fiscal maneuver, growth had remained buoyant, inflation had declined slightly and the import coverage o f reserves had remained stable.

Directors nonetheless noted the r i s k s to the outlook, including the continued strength o f domestic demand, and i ts adverse effects o n the trade and current account deficits as wel l as o n the pace o f disinflation during 2005/06. They noted also the authorities' v iew that macroeconomic imbalances would decline without the need for further changes in the stance o f policies envisaged for the current fiscal year, and welcomed the government's commitment to tighten monetary policy, if warranted. However, most Directors felt that macroeconomic policies during 2006/07 should be more effectively geared at reducing domestic demand and strengthening the balance o f payments position. T o this effect, many considered that a further tightening o f monetary pol icy (including by al lowing higher cutof f rates at treasury bill auctions) should not be delayed to help strengthen the external position and al low the government to meet i t s inflation target. Mos t Directors considered that to be effective, monetary po l icy should be supported by exchange rate flexibil i ty and a fiscal pol icy that keeps this year's budget deficit (excluding grants and earthquake-related expenditures) at least at the level o f 2005/06.

Directors stressed that, beyond 2006/07, Pakistan's macroeconomic policies should a im at ensuring that the external current account deficit-to-GDP ratio remains on a declining path with a steady build up o f reserves. In this regard, they encouraged the authorities to adopt a po l icy stance that maintains real interest rates at positive levels accompanied by a close monitoring o f credit growth, and a fiscal consolidation program that lowers the overall fiscal deficit t o a sustainable level over the medium term.

87

Directors viewed the favorable prospects for sizable FDI inf lows as important for future gains in productivity and investment, but also as presenting challenges for macroeconomic pol icy in the years ahead. They highlighted that continued reliance on FDI inf lows o f uncertain size and timing would require a large degree o f f lexibi l i ty in economic policymaking. In this connection, Directors stressed the need to improve the government's capacity to generate timely pol icy responses to shortfalls o f external financing arising f rom negative balance o f payments shocks. Directors were o f the v iew that those shocks should generally require monetary pol icy and exchange rate responses, but also envisaged a role for fiscal tightening in cases where the shocks are large, or more permanent in nature. Directors cautioned that the option o f resorting to the use o f international reserves to cover shortfalls of external financing (especially those stemming f rom delays in FDI-related flows) ought to be used sparingly.

Directors viewed structural reforms conducive to higher saving and investment, an improved business climate, and well-targeted poverty-related spending as critical for sustaining growth and poverty reduction over the medium term. They encouraged the authorities to quickly complete the reform o f the regulatory and tar i f f framework for the power sector, and step up efforts to broaden the tax base and further curtail tax exemptions. Directors also saw scope for improving the government's debt management strategy, including by increasing the issuance o f long-term marketable securities and reducing i t s reliance on treasury bills and the National Savings Schemes (NSS) to finance the fiscal deficit. Directors welcomed the initiatives underway to modernize the N S S and reform the system o f broker-financing o f stock trading, but noted that these should be followed quickly with measures that enable the integration o f the N S S with local financial markets.

Directors welcomed the authorities' commitment to maintaining a liberal trade regime and their determination to contribute to the success o f the Doha round o f trade talks. They called on the authorities to resist pressures to reinstate ad-hoc tar i f f and non tar i f f measures and broaden export subsidy schemes.

Directors encouraged the authorities to further improve the quality and timeliness o f data, including by reporting fiscal data on an economic classification. They also urged the authorities to expedite the process o f subscribing to the Special Data Dissemination Standard.

88

Pakistan: Selected Economic Indicators, 2001/02-2005/06 f /

I I 2001/02 I 2002/03 I 2003/04 I 2004/05 I 2005/O(E I (In percent o f GDP, unless otherwise noted)

Monetary sector Net foreign assets (change in percent of broad money) Net domestic assets (change in percent o f broad money)

[ Output and prices I I I I I I

13.4 17.5 2.1 2.2 1.7 2 0.5 17.5 17.1 13.4

6.6 I I 3.1 I 4.7 I 7.5 I 8.6 I I Real GDP at factor cost (owcentage change)

I 15.4 I 18 I 19.6 I 19.3 I 15.2 I I Broad money (annual change: in oercent) I Private credit (annual change; in oercent) I 4.8 I 18.9 I 29.8 I 33.2 I 23.2 I 1 %x-month treasurv bill rate benod average. in percent) I 8 2 I 4 1 1 1 7 I 4 7 1 8 2 I

I Real effective exchange rate (annual average; percentage change) 4/ I -2.6 I -0.1 f -1.8 I 0.3 I 5.3 I Sources: Pakistani authorities; and IMF staff estimates and projections I/ Fiscal year ends June 30. 21 Including changes in inventories. Investment data recorded by the Federal Bureau o f Statistics are said to underreport true activity. 31 Excluding gold, foreign deposits held with the State Bank of Pakistan, and net o f outstanding short-term foreign currency swap and forward contracts. 41 An increase i s a real appreciation. I Under Article IV o f the IMF's Articles o f Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion o f the discussion, the Managing Director, as Chairman o f the Board, summarizes the views o f Executive Directors, and this summary i s transmitted to the country's authorities.

I N F ~ X ~ E ~ ~ A L RELATXO 5 ~ ~ ~ A ~ ~ ~ ~ ~ T Public Affairs Media Relations

Phone 202-623-7300 Phone: 202-623-7100

Fax: 202-623-6278 Fax : 202-623 -6772

89

Annex-7: Status of Bank Group Operations

Original Amount in US$ Millions Difference between expected and actual

disbursements

Project ID F Y Purpose IBRD I D A SF GEF Cancel. Undisb. Orig. Frm.

PO90501 2007 Land Records Mgmt & 0.00 45.65 0.00 0.00 0.00 45.56 0.00 0.00 Rev’d

PO94086

PO76872 PO99110 PO83929

PO97402

PO88994

PO77306

PO10556 PO82621

PO83370

P 0 8 2 9 7 7

PO78997

PO71454

PO74797

PO74856

PO77288

PO35823

PO71092

2006

2006 2006 2006

2006

2006

2006

2005 2005

2005

2005

2005

2005

2005

2005

2005

2005

2005

Information Systems Balochistan Education Support Project PIFRA I1 Pakistan Earthquake ERC Punjab Municipal Services Improvement Second Partnership for Polio Eradication Taunsa Barrage Emergency Rehab. & Modern Tax Administration Reform Project HIGHWAYS REHAB NWFP Community Infrastructure I1 ( CIP2) PK Public Sect Capacity Building Project Second Poverty Alleviation Fund Project Sindh On-Farm Water Management Project AJK Community Infrastructure & Services Banking Sector Technical Assistance HIV/AIDS Prevention Project National Education Assessment System GEF-Protected Areas Management Project

WATER MANAGEMENT

NWFP ON-FARM

0.00

0.00 0.00 50.00

0.00

123.00

24.40

215.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

22.00

84.00 400.00

0.00

46.70

0.00

78.50

150.00 37.10

55.00

476.00

61.14

50.00

26.50

37.1 1

3.63

0.00

31.35

0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

53.04

10.08

0.00

0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

3.47

20.19

64.54 89.15 46.38

1.22

52.55

92.31

239.02 28.17

33.03

186.85

18.32

38.33

10.70

21.59

2.96

6.43

7.12

-1.97

2.53

4.65

0.00

26.68

-16.1 1

46.78

7.77 5.24

9.72

-63.59

4.55

3.57

5.79

10.56

1.61

3.14

-2.80

0.00

0.00 0.00 0.00

0.00

0.00

0.00

-3.84 0.00

0.00

0.00

0.00

0.00

0.00

9.15

0.00

0.00

-6.93

PROJECT

90

STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions o f U S Dollars

Committed Disbursed

IFC IFC

FY Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. Approval

2005 ABAMCOFUND 0.00 3.46 0.00 0.00 0.00 3.46 0.00 0.00 1995 1996 1995 1991 1993 1997 200 1 2006 2004 2003 1991 2006 2001 1990 1992 2004

1996 2006 2003 1995 2002 2004

2006 2005 2006 1983 2002 1965 1987 1991 1994 1995 2005 2006 2001 2004 2007 2006 1996

AES La1 Pir AES Pak Gen Abamco Mgmt BRRIM Crescent Bahuman Crescent Bahuman Crescent Bahuman Dewan Petroleum Dewan SME Dewan Salman Engro Chemical Engro Chemical Eni Palustan FIIB FIIB First UDL GTFP Metropolita Gul Ahmed Habib Bank Li ... KCT Kohinoor Micro Bank NBFI Credit Orix Finance Orix Leasing PICT PICT PPL PPL Packages Packages Packages Packages Packages Packages Paktel2005 Sarah Textiles TRG Pakistan TRG Pakistan Tameer Bank Uch Power

12.42 9.20 0.00 0.00 0.00 0.00 2.72

15.00 0.00

25.00 0.00 0.00

12.00 0.00 0.00 7.00 2.54 8.10 0.00 6.46 6.25 0.00 6.50 5.00

17.00 6.00 8.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

25.00 35.00

1.12 0.00 0.00 0.00

9.50 9.50 0.29 0.23 0.3 1 0.20 0.00

12.00 0.98 0.00 1.95 0.64 .o.oo 0.27 0.40 0.00 0.00 4.10 0.00 0.00 6.30 2.43 0.00 0.00 0.00 0.00 0.00 1.33 5.63 0.05 0.02 0.02 0.01 0.26 5.43 0.00 0.00 4.16 2.50 1.01

0.00 0.00 0.00 0.00 0.00 0.00 2.50 0.00 0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

50.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 5.37 0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.22 0.00 0.00 2.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

12.42 9.20 0.00 0.00 0.00 0.00 2.72 0.00 0.00

25.00 0.00 0.00

12.00 0.00 0.00 0.00 2.08 8.10 0.00 6.46 6.25 0.00 6.50 0.00

17.00 6.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.12 0.00 0.00 0.00

9.50 9.50 0.29 0.23 0.3 1 0.20 0.00 0.00 0.00 0.00 1.95 0.64 0.00 0.27 0.40 0.00 0.00 4.10 0.00 0.00 6.30 2.43 0.00 0.00 0.00 0.00 0.00 1.33 5.63 0.05 0.02 0.02 0.01 0.26 1.47 0.00 0.00 4.16 2.50 1.01

0.00 0.00 0.00 0.00 0.00 0.00 2.40 0.00 0.00 4.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 5.37 0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.22 0.00 0.00 2.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

29.60 0.00 0.00 0.00 19.68 0.00 0.00

91

Approvals Pending Commitment

FY Approval

2004 2006 2004 2006 2006 2006 2006 2006 2006

Company Loan

CSIBL 35.00 IHFL I1 5.00 Dewan SME 2.00 JSPE Fund 0.00 Habib Bank 0.00 Paktel2005 0.00 Orix SME OLP 17.00 Tameer Bank 3.70 Dewan Petroleum 0.00

Equity

0.00 0.00 0.00

20.00 50.00 0.00 0.00 0.00 0.00

Quasi

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Partic.

0.00 0.00 0.00 0.00 0.00

30.00 0.00 0.00

25.00 Total pending commitment.

92

Annex-8: Country at a Glance

Pakistan at a dance 4/6/07

POVERTY and SOCIAL

2006

Povew (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) infant mortalitv (per 7,000 Cve btrthst Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulafion,ni Literacy (% ofpopulation age 15+) Gross primary enrollment (% of schi?o/-age populafiarii

Male

ENDS

19 7 -2 4

Interest naymentstGDP 1 8 Total debUGDP 46 9 7 otai debt serviceiexports 25 0 Present value of debVGDP Present value of debtiexports

South LOW- Pakistan Asia income

1590 1,470

1221 1,005 770 684

2 4 1 7 $ 8 2 1

35 29 65 63 80 66 38 45 91 84 47 60 82 110 95 116 69 105

1 9 0 7 47 1 30 4 2a 3 10 9

25 4 125 9

2,353 580

1.364

1 9 2 3

31 59 80 39 75 62

104 110 99

17 3

-3 3

1986-96 1996.06 2005 2006 2006-10 (average annual growth) GDP 5 0 4 2 1 3 6 2 6 7 GDP per capita 2 4 1 7 4 7 4 1 4 5 Expwts of goods and servicsls 8 0 a 3 9 6 12 9 17 0

Development diamond*

Life expectancy

GNI Gross per t- primary capita enrollment

i

Access to improved water source

Pakistan I-I_I_IxI

- - Low-income group

Economic ratios'

Trade

T i

Domestic Capita I savings formation

1 Indebtedness

Pakistan - - _ L ow-income arom

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services

Manufacturing

1986

27.6 23.4 16.3 49.0

79.2 12.8 22.7

1986-96

4.3 5.8 5.2 5.1

4.7 3.0 4.3 4.3

1996 2005

25 5 22 2 24 2 26 5 16 0 17 8 50 4 51 3

72 9 78 0 12 6 7 7 21 4 19 3

1996-06 2005

2.5 6.7 5.5 11.4 6.8 12.6 4.8 8.0

4.4 13.1 0.5 1.7 1.6 9.3 3.3 40.5

2006

20.5 26.7 18.3 52.9

81.4 7.6

24.4

2006

2.5 5.9 8.6 8.8

8.1 4.8 9.9

23.9

' Growth of capital and GDP (%)

L 5 T 10 5

0 -5

-1 0

;Growth of exports and imports (%) 1

I E X D Q ~ ~ S ImDOrtS I

Note 2006 data are preliminary estimates Group data are to 2005

The diamonds show four key indicators in the country (in bold) compared with its income-qroup averaqe if data are missinq, the diamond will be incomplete

93

PRICES and GOVERNMENT FIMANCE

Domestlc prices i% change) Consumer prices Implicit GDP deflator

j includes current gmntsf

TRADE

(US$ mil?mnsj

Conversion rate

EXTERNAL DEBT and RESOURCE FLOWS

(US$ rniflmns) Total debt outstanding and cBsbursed

IBRD IDA

Total debt service IBRD IDA

Official grants Official creditors Pnvate creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disburseman ts Principal repayments

Interest payments Net transfers

Composition of net resource flows

et

1986

3 3

-8 1

1986

1986

3.638 16.1

1986

14,954 605

1,560

1.626 88 26

31 5 398 55

IO6 3

756 249 50

199 63

136

1996

10 8 8 A

18.0 -2 8 -7 8

'I 996

1

119 113 Z 06

1996

1

-4,593

2,839 33 5

1996

29,829

3,480

3,287 436

63

3,007

200 1,115

556 922 285

558 651 265 386 234 152

2005

9.3 8 7

-3 4

2005

1

1

1 24 T 31 44

59 4

2005

33,675 2,238 6,865

2,443 404 1 67

91 1 590 933

2,183 451

1,550 845 427 419 145 274

2006

7.9 t o 3

14.5

-42

2006

128

$2,488 59 9

2006

InRatlon ("f,) 5u 25 20 15 10 5 0

Export and import lewis (US$ milt.)

30Udo T

Current account balmtet0 GDP I"/) 6 1

Composition of 2065 debt (US$ mill.)

A - IBRD E -Bilateral 13 - IDA 0 - 0Lht.r multilateral F - Pncate C . IMF B -Short-term

Devdopment Economics 416107

94

MAP SECTION

••

•••

••

•••

•

•

••••

••

• •••••• ••• • • • • • • ••

Approx. Lineof ControlJAMMU

ANDKASHMIR

Islamabad

Arabian Sea

TAJIKISTAN CHINA

I N D I A

A F G H A N I S TA N

ISLAMICREP. OF

IRAN

TURKMENISTAN

UZBEK.TAJIK.

BALOCHISTAN

SINDH

PUNJAB

N.W.F.P.

This map was produced by the Map Design Unit of The World Bank.The boundaries, colors,denominations and anyother information shownon this map do not imply, on the part of The World Bank Group, anyjudgment on the legal status of any territory, or any endorsement oracceptance of such boundaries.

70° 75°

35°

30°

75°

25°

70°65°60°

MA

Y 2007

25°

30°

35°

60° 65°

GilgitChitral

Mardan

PeshawarKahat

Rawalpindi

Bannu

Mianwali Khushab

ISLAMABAD

Jhelum

Sargodha

GujratSialkot

Gujranwala

Bhakkar

JhanaLahore

KasurFaisalabad

Sahiwal

MultanD.G.Khan

Bahawalpur

Bahawalnagar

Rahimyar Khan

RohriSukkur

Larkana

Dokri

Nawabshah

Hyderabad

Thatta BadinKarachi

Bela

Gwadar

Panjgur

Kalat

Khuzdar

Quetta

Sibi

D.I.Khan

Jhel

um

R.

R.

Ravi

Sutlej

R.

Indus

R.

Nar

aC

anal

Nal

R.

Mouths ofthe Indus

IndusR.

Kuna

r

R.

TAJ IK ISTAN

C H I N A

AFGHANISTAN

N.W.F.P.

PUNJAB

JAMMUand KASHMIR

ApproximateLine of Control

B A L O C H I S T A N

Zhob R.

S I N D H

A R A B I A N S E A

I S L A M I C R E P.

O F I R A N

I N D I A

PROJECT PROVINCE

SELECTED CITIES

NATIONAL CAPITAL

MAIN ROADS

RAILROADS

RIVERS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

IBRD 35483

PAKISTAN

SECOND PUNJAB IRRIGATION SECTORDEVELOPMENT POLICY LOAN

PAKISTAN

0 100 200 300 KILOMETERS

0 50 100 150 200 MILES

30°

35°

75°

35°

30°

25°

75°70°65°

25°

70°65°