Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 47994 PK

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT FOR A PROPOSED CREDIT

IN THE AMOUNT OF SDR 66.9 MILLION (US MILLION 100 EQUIVALENT)

TO

THE ISLAMIC REPUBLIC OF PAKISTAN

FOR A

HIGHER EDUCATION SUPPORT PROGRAM

May 5,2009

Human Development Department 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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PAKISTAN - GOVERNMENT FISCAL YEAR July 1 - June 30

A IOU BOT CAS CFAA CGA C M CoA COE cos0 CPI D A C DAI Dfl D DPC EC EIA EPA FA GDP GER GFS GNI GNP GOP GTZ HE HEC HE1 HEMIS HESP HR HSSC IBRD IDA IFC IMF IPSAS

CURRENCY EQUIVALENTS (Exchange Rate Effective as o f April 30,2009

Currency Unit: Pak Rupees (PKR) US$l.OO = PKR 80.47

Weights and Measures Metric System

ABBREVIATION AND ACRONYMS

Allama Iqbal Open University Build/Operate/Transfer Country Assistance Strategy Country Financial Accountability Assessment Controller General o f Accounts Campus Management Chart o f Accounts Center o f Excellence Committee o f Sponsoring Organizations Consumer Price Index Departmental Audit Committee Degree Awarding Institution Department for International Development Development Policy Credit European Commission Environmental Impact Assessment Environmental Protection Agency Financing Agreement Gross Domestic Product Gross Enrollment Rate Government Finance Statistics Gross National Income Gross National Product Government o f Pakistan Gesellschaft h e r Technische Zusammenarbeit Higher Education Higher Education Commission Higher Education Institution Higher Education Management Information System Higher Education Support Program Human Resource Higher Secondary School Certificate International Bank for Reconstruction and Development International Development Association International Finance Corporation International Monetary Fund International Public Sector Accounting Standards

JSAN KAM LDP LUMS M&E MDGs MOE MOF MTDF

MTFF NAM NCES NEAS NEP NER PEFA PEPA PEPC PEPFM PER PERN PF PFM PFMAA PIFRA PLA PPP PRES0 PRGF PRSC PRSP PSLM

QECs SBA SBP SCEA SDR VAT

MTDF - HE

QAA

- Vice President: Isabel Guerrero

Country Director: Yusupha B. Crookes Sector Director: Michal Rutkowski Sector Manager: Amit Dar

Task Team Leaders: Benoit Mi l lo t and Naveed Hassan Naqvi

Joint Staff Advisory Note Knowledge Assessment Methodology Letter o f Development Policy Lahore University o f Management Sciences Monitoring and Evaluation Millennium Development Goals Ministry o f Education Ministry o f Finance Medium-Term Development Framework (Macro) Medium-Term Development Framework (Higher Education) Medium-Term Financing Framework New Accounting Model National Committee on Examination System National Education Assessment System National Environmental Policy N e t Enrollment Rate Public Expenditure and Financial Accountability Pakistan Environmental Protection Act Pakistan Environmental Protection Council Public Expenditure, Procurement and Financial Management Public Expenditure Review Pakistan Education and Research Network Policy Framework Public Financial Management Public Financial Management and Accountability Assessment Project for Improvement o f Financing Reporting and Auditing Personal Ledger Account Public-Private Partnership Poverty Reduction and Economic Support Operation Poverty Reduction and Growth Facility Poverty Reduction Support Credit Poverty Reduction Strategy Paper Pakistan Social and Living Standards Measurement Quality Assurance Agency Quality Enhancement Cells Stand-by Arrangement State Bank o f Pakistan Strategic Country Environmental Analysis Special Drawing Rights Value Added Tax

FOR OFFICIAL USE ONLY

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

PAKISTAN

HIGHER EDUCATION SUPPORT PROGRAM

TABLE OF CONTENTS

CREDIT AND PROGRAM SUMMARY .................................................................................... 1 I . I1 . I11 . JY .

V .

VI .

Table 1: Table 2:

Table 3 :

Table 4: Table 5: Table 6: Table 7: Table 8:

Figure 1: Figure 2:

INTRODUCTION ............................................................................................................ 4

COUNTRY CONTEXT ................................................................................................... 5 THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES ..... 10

BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ................................... 30 Link to CAS ................................................................................................. 30 Collaboration with the IMF and Other Donors ............................................ 30 Relationship to Other Bank Operations ....................................................... 31 Lessons Learned .......................................................................................... 31 Analytical Underpinnings ............................................................................ 31

THE PROPOSED HIGHER EDUCATION SUPPORT PROGRAM ....................... 33

Operation Description .................................................................................. 33 Policy Areas ................................................................................................. 33

OPERATION IMPLEMENTATION ........................................................................... 37

A . B . C . D . E .

A . B .

A . B . C . D . E . F .

Poverty and Social Impacts ......................................................................... 37 Environmental Aspects ................................................................................ 37 Implementation. Monitoring. and Evaluation .............................................. 38 Fiduciary Aspects ........................................................................................ 39 Disbursement and Auditing .......................................................................... 40 Risks and Mitigation .................................................................................... 41

TABLES

Medium-Term Macroeconomic Framework .................................................................... 8 Number o f Institutions and Enrollments in the Higher Education Sector (various years) ....................................................................................................................................... 12

Distribution o f Students and Graduates in Public and Private Universities. by Type o f University (2006/07) ................................................................................... 14 Higher Education and Labor Market: Selected Countries ............................................. 14 GNI per capita. Completion and Enrollment Rates. Selected Countries (2005) ............ 15 Tertiary Gross Enrollment Rates by Expenditure Quintile and Zone ............................ 15 Public Education Expenditure as % o f GDP - Selected Countries (2005) .................... 17 Analytical Underpinning o f the Proposed HESP ........................................................... 32

FIGURES

Trends in Economic Growth ........................................................................................... 5 Knowledge Economy Readiness: Pakistan and Malaysia ............................................. 11

BOXES

Box 1: MTDF-HE: Strategic Aims ........................................................................................... 18 Box 2: Prior Actions ................................................................................................................. 34 Box 3: Policy Framework ......................................................................................................... 34 Box 4: Good Practice Principles for Conditionality ................................................................. 36

ANNEXES

Annex 1 : Annex 2: Annex 3: Annex 4:

Letter o f Development Policy ........................................................................................ 45 Medium-term Higher Education Policy Matrix ............................................................ 53 Fund Relations Note ...................................................................................................... 63 Pakistan At a Glance ..................................................................................................... 66

Map IBRD 33460

The Higher Education Support Program Credit was prepared by an IDA team consisting o f Benoit Millot, Naveed Naqvi (Co-TTLs), Yoko Nagashima, Ismaila Ceesay, Saeeda Sabah Rashid, Asif Ali, Shahzad Sharjeel, Javaid Afza, Mohamed Allak, Norman LaRocque and Kai-Ming Cheng. Mohamad Khalid Khan, Amna Mir and Nasreen Shah provided operational support. Peer reviewers are: Jamil Salmi, Sajitha Bashir and Peter Materu.

CREDIT AND PROGRAM SUMMARY

PAKISTAN

HIGHER EDUCATION SUPPORT PROGRAM

Borrower

Implementing Agency

Financing Data

Operation Type

Main Policy Areas

Key Outcome Indicators

Program Development Objective(s) and Contribution to CAS

Risks and Risk Mitigation

Government o f Pakistan

Higher Education Commission

IDA Credit Terms: standard IDA terms (35-year maturity with a 10-year grace period Amount: SDR 66.9 mil l ion (US$lOO mill ion equivalent) to be withdrawn in a single tranche Single Tranche Development Policy Credit (DPC)

Higher Education: a) Quality and relevance o f teaching and research b) Access and equity c ) Governance and management d) Fiscal sustainability and effectiveness o f expenditure

1. At least one third o f increase in enrollments in university sector between 2007/08 and 2008/09 i s attributable to students enrolled in science and engineering

2. Number o f PhD graduates produced by Pakistani universities increases to at least 550 by 2008/09

3. Number o f International Journal Publications from Pakistani scholars increases to at least 3,500 by 2008/09 from 2,500 in 2007/08 PDO: Create the conditions to enhance the stock o f skilled Pakistanis able to contribute to an economy increasingly based on knowledge and technology, through an overhaul o f the university sector.

The HESP supports the completion o f initial reforms to increase equitable participation, enhance quality and relevance and strengthen the efficiency and sustainability o f the higher education sector with a view to sustaining momentum o f the core reform program through the current fiscal stress.

The CAS identifies sustainable growth as an essential pre-requisite for long term poverty reduction. The HESP aims at an expansion o f access to quality higher education in order to develop a skilled workforce which will be necessary for sustainable growth. Bank engagement in the higher education sector through the HESP DPC i s guided by the strategic principles o f the CAS: client pull, scaling up / replicating approaches that have already proved to be effective, and focusing on outcomes. Political situation

1

Risks: Pakistan has been through a period o f high turbulences. There are s t i l l concerns regarding the impact o f the economic policy response to the macroeconomic imbalances and possible differences amongst main political parties on a variety o f issues, against the backdrop o f local fundamentalism, regional conflicts, and intense international pressure.

Mitigation: The medium-term policy framework to which the Government i s committed minimizes the risks associated with the impact o f the measures to address the economic situation. While the political risks remain substantial at a general level, they may not affect higher education because o f unanimous support to the sector and as these reforms have been supported through the political changes o f the last 12- 18 months.

Uncertain macroeconomic situation

Risks: Despite several years o f efforts to consolidate the macroeconomic framework, risks remain o f increased external shocks, trade deficits, lower capital and remittance inflows, and growing fiscal unbalances, all resulting in a loss o f confidence which could in turn trigger a vicious circle and weaken growth prospects.

Mitigation: The IMF Stand-by arrangement and the authorities’ determination to ensure macroeconomic s tability and to encourage the business environment minimize the risk o f a worsening o f the situation. At the same time, both the PRES0 and the Fiscal Responsibility and Debt Limitation Act will mitigate risks that measures to reduce budget deficits lead to a reduction o f spending on education.

Inter- and intra Sectoral Trade-offs

Risks: While education and higher education in particular are currently high on the priority ladder o f the country’s leaders, a shift in inter-sectoral priorities remains possible. There i s a risk that the recent emphasis given to higher education wil l be questioned on the grounds that basic education should be given the absolute priority until Education for All i s achieved and primary education becomes universal.

Mitigation: There i s a wide consensus amongst mainstream political parties regarding the need to offset Pakistan’s lagging performance in the higher education sector, and to raise universities to international standards, so that they will become real engines o f growth. The risk that higher education would crowd out basic education i s mitigated through the capping put on the share o f the education budget allocated to higher education.

Internal resistance

Risks: They could originate from various quarters: (i) faculty staff uncomfortable with the emphasis on accountability and academic performance; (ii) administrators who feel threatened by the introduction o f stringent accountability rules; and (iii) students ideologically opposed to any reform that results in greater cost-sharing and/or partnership with

2

Operation ID

private business. All three constituents may form a common front, and paralyze HEC’s reformist efforts.

Mitigation: A major effort to engage in earlier consultation and in continuous dialogue with stakeholders should allow to reduce - but not to eliminate-- these risks. Several reforms (e.g. tenure track system) are introduced on a voluntary basis. In the future, HEC wil l initiate a communication strategy to engage the academic community and to spell out the benefits expected from the reforms. However, universities can always become hostage o f political rivalries regardless o f the scope o f reforms engaged (and o f the expected benefits), and there i s no recipe to fully avoid this risk.

Uneven institutional capacity

Risks: Institutional vulnerability exists at two levels. At the HEC level, the scope o f the reforms may overstretch the implementation capacity o f the Commission. Another risk i s linked to the fact that the chairman’s position has been vacant since the resignation o f the first incumbent. Additionally, if HEC were to lose i t s special autonomous status, it would lose i ts reformist capacity and i t s efficient modus operandi. At the university level, capacity is quite uneven, and often very weak.

Mitigation: The program i s carefully sequenced, and reforms are introduced gradually. An institutional review o f HEC will be carried out, leading to a redefinition o f tasks and skill mix. HEC has been satisfactorily functioning during the absence o f a chairman, with both the Commission fulfilling i ts oversight role and the executive director being in charge o f implementing reforms. A search process i s underway, and an eminent chairperson i s to be appointed shortly. The benefits o f keeping HEC an autonomous agency are understood by the Government. Improvements in the governance structure and massive training programs aim at reinforcing managerial capacity o f universities.

Fiduciary Issues

Risks: Budget support operations carry the generic r isks associated with weak financial management and procurement capacity.

Mitigation: Fiduciary risks are mitigated by (i) improved accounting and recording practices under the PIFRA regime; (ii) introduction o f new audit methodology; (iii) capacity building o f the financial management staff in universities; and (iv) progressive alignment o f procurement rules to international best Dractices. P102607

3

IDA PROGRAM DOCUMENT FOR A PROPOSED HIGHER EDUCATION SUPPORT PROGRAM

CREDIT

TO THE ISLAMIC REPUBLIC OF PAKISTAN

I. INTRODUCTION

1. This Program Document presents the proposed Higher Education Support Program (HESP). The HESP i s a development policy credit designed to support the Government o f Pakistan’s Higher Education Medium-Term Development Framework (MTDF-HE). The overarching, long-term objective o f the Framework i s to enhance the stock o f skilled Pakistanis able to contribute to an economy increasingly based o n knowledge and technology. The HESP wil l support the Government o f Pakistan (G0P)’s initiatives to increase participation, enhance quality and relevance and strengthen the efficiency and sustainability o f higher education institutions (HEIs). HESP wil l contribute to the rehabilitation o f the higher education sector o f Pakistan by helping sustain momentum o f the core program and key accompanying reforms being undertaken by the Higher Education Commission (HEC) through the current period o f fiscal stress.

2. The country i s going through a diff icult period on several fronts. For the past year and a half, the political situation has hindered the timely undertaking o f corrective actions requested by the deteriorating economy. Efforts were made early 2008 to promote private sector investment, better governance, increased devolution, investment in human capital, and protection o f the poor and vulnerable. However, it i s only since the fa l l o f 2008 that the new government launched adjustment measures targeted at fiscal and external deficits. The recently adopted Poverty Reduction Support Paper I1 (PRSP-11) o f the Government o f Pakistan provides a framework for the government’s policy agenda for the next three years. The Bank’s Poverty Reduction and Economic Support Operation (PRESO) supports Government policies aimed at regaining and maintaining macroeconomic stability, enhancing competitiveness, and protecting the poor and vulnerable through improved targeting o f safety nets and cash transfer programs.

3. In the long run, a shortage o f qualified labor hinders prospects o f further progress and will become more o f a bottleneck as the country transitions toward a knowledge-based economy and may even prevent sustaining a healthy growth. This i s why constituting a strong pool o f skilled workers i s a long term strategic goal, and why the existence o f such a pool i s a prerequisite without which the Pakistani economy wil l not be able to adapt i t se l f and to compete in the global market.

4. Despite the fact that the higher education sector has received support recently, the sector lags behind other countries in the region in terms o f various indicators. I t s output o f graduates was not aligned with the needs o f the economy --whether in quantitative or qualitative terms. I t was also out o f sync with the requirements o f a modern, tolerant and open society. In order to address the disconnect between what i s expected from the sector and what the latter can offer, HEC launched a series o f reforms to rehabilitate higher HEIs and make them more relevant t o the needs o f the 21st Century.

5. These measures are encapsulated in the MTDF-HE. They encompass a l l critical areas in urgent need o f improvement and have the potential to transform H E I s into one o f the engines o f economic growth and progress. They address quality and relevance issues, access and equity, governance and management, and the fiscal sustainability and effectiveness o f expenditure in higher

4

education. The latest point i s particularly important at a time when the country i s under fiscal stress and many sectors are competing for public funding.

6 . The reforms initiated by HEC and the investment made to implement them are necessary, but they are fragile. If disrupted, most o f the investment may be lost, the sector may fal l back in the disarray it was before HEC’s bold measures were launched and the economic recovery may be slowed down because o f an insufficient human capital basis. For this reason, it i s critical to protect the MTDF-HE and the resources needed for i t s implementation. The proposed HESP wil l contribute to sustaining the momentum of key reforms undertaken by the Commission.

7. The MTDF-HE i s part o f a comprehensive plan to overhaul the entire education system, including both basic and secondary education and encompassing both general and vocational streams. Reforms have been initiated at the federal, provincial and district levels (Punjab, Sindh, and NWFP) and supported by IDA. The HESP i s consistent with both the National Education Policy 1998-2010 and with the PRSP.

8. The proposed HESP i s also aligned with the country’s macro-economic strategy as reflected in the MTDF at the macro level. Both share the same diagnosis, the same objectives and the same strategy. The Macro-MTDF places increasing access to higher education as a priority for “Pakistan Incorporated”. The alignment and complementarities between the MTDF-HE and the macro-economic strategy i s clearly discernable in the Planning Commission’s “Vision 2030” document, which posits that “the economics o f knowledge must underpin policies for growth”.

9. HEC’s recent track record constitutes a good omen for the success o f the implementation of the MTDF-HE. The Bank’s technical assessment o f the MTDF-HE, published in a 2006 Policy Note’, i s largely positive. The Policy Note found that the Framework was a sound and articulate response to the sclerosis that characterized the sector for many years. By attacking up-front the factors underlying the poor quality o f HEIs , the Commission has addressed the root o f the problems facing the sector. Hence, the efficient implementation o f the reform package initiated by HEC warrants the combined support o f the Government and IDA.

11. COUNTRY CONTEXT

A. Recent Economic Developments

10. Pakistan’s development record was strong for the earlier part of this decade. During 2003104-2006107, the Pakistani economy grew at 7.3 percent p.a. on average, driven by solid performances in the services and industrial sectors (see Figure 1). The factors that contributed to growth included a benign external environment, availability o f external financing, political and macroeconomic stability. Key measures included renegotiation o f external debt with Paris Club creditors, pre-payment o f extensive debt, greater reliance on concessional borrowing for new loans, and liberalization o f the financial sector.

I

B habO1Ol 2001/02 2002103 2003104 2004105 2005106 2006107 2007108

” ” . . -I . -

’ The World Bank “Policy Note: Assessment o f the Medium-Term Development Framework” (World Bank 2006) was completed at the request o f the Ministry o f Finance

5

These measures, together with an expansion in the economy, led to a decline in public debt as well as a reduction in debt servicing cost. Growth translated into rising household incomes, with per capita income growing to US$878 in 2006/07, an 18.3 percent increase from US$742 two years earlier.2

1 1. Nonetheless, macroeconomic imbalances were building-up. The growth was in part explained by heavy reliance on external financing and on expansionary fiscal stance, while revenues and savings remained stagnant. A surge o f capital inflows from abroad allowed the government to finance the rising fiscal deficits at a low cost. The consolidated fiscal deficit increased from 2.3 percent in 2003/04 to 4.3 percent o f GDP in 2006/07, while domestic tax collection remained weak. The effect o f expansionary fiscal policy was compounded by a loose monetary policy, which caused an upsurge in domestic demand and contributed to acceleration o f inflation from 3.5 percent in 2001/02 to 7.8 percent in 2006/07. Concurrently, the current account deficit reversed from a surplus o f 4.8 percent in 2002/03 to a deficit o f 4.9 percent o f GDP in 2006/07, financed through ample capital inflows. The reliance on external financing le f t the economy vulnerable to external shocks and, despite the clear signs o f overheating, Pakistan concluded 2006/07 with no visible signs o f adjustment.

12. I n 2007/08, the sharp rise in international oil and food (specifically wheat) prices, in combination with policy inaction and internal political turmoil, led to rapidly expanding macroeconomic imbalances in Pakistan. Both fiscal and current account balances widened significantly. In the absence o f adequate remedial policy measures to address the imbalances-in particular not passing on the international price increases to domestic consumers-the economy begun to adjust through a slowdown in growth and rising inflation. Spending overruns led to a sharp increase in the 2007/08 fiscal deficit to 7.4 percent o f GDP, compared to the budget target o f 4.0 percent o f GDP. Expenditures exceeded the budget target by about 2.9 percent o f GDP, while revenues fell short o f the target by about 0.6 percent o f GDP. The sharp increase in the budget deficit was mostly caused by the overrun o f 2.7 percent o f GDP in budgetary subsidies (from the budget target o f 1.1 percent o f GDP to 3.8 percent o f GDP) owing to the rise in international commodity and o i l prices. The problem was compounded by an overrun o f 0.9 percent o f GDP in interest payments which was mainly due to an underestimation o f interest liabilities in the budget contributed to the increase in the budget deficit. The r ise in the budget deficit would have been even higher without the 1.2 percent o f GDP under-run in development spending.

13. I n parallel, increased import bills and strong aggregate demand contributed to a widening of the current account deficit in 2007/08. Pakistan’s current account deficit reached 8.4 percent o f GDP in 2007/08, compared to 4.8 percent in 2006/07. Over 50 percent o f this increase (1.9 percent o f GDP) was on account o f a 38 percent increase in the import price o f petroleum per barrel. The trade deficit increased by about 58 percent year-on-year to 9.1 percent o f GDP, mainly owing to sharp increases in the import bill.

14. Pakistan’s foreign reserves declined rapidly due to the large current account deficit, a reduction in net capital inflows, and inadequate adjustment of the exchange rate. While FDI flows remained relatively robust at US$5.1 bil l ion (albeit lower than in 2006/07) and remittances increased to US$6.5 billion, portfolio investments declined as investor confidence plummeted. Also, donor inflows significantly dropped as the macroeconomic framework went o f f track, and the privatization process came to a halt in 2007/08. Furthermore, given the large spread on Pakistan sovereign bonds, borrowing from international capital markets was not an option. As a result, foreign reserves were drawn down to pay for imports. By end-June 2008, the State Bank o f Pakistan (SBP) foreign exchange reserves dropped to US$8.6 billion, a fall o f about US$5.7 billion since October 2007.

For details see the Program Document o f the Poverty Reduction and Economic Support Operation (World Bank Report No. 46685-PK), March 2009.

6

15. Even though the deterioration in the terms-of-trade put increasing pressure on the exchange rate, the Rupee-Dollar exchange rate remained broadly unchanged around US$1 /PKR 61 until December 2007. During the second half o f 2007/08 SBP allowed some exchange rate flexibility and the exchange rate depreciated by 13 percent to reach US$l/PKR 68.4 by the end o f the fiscal year.

16. Faced with lower external financing and privatization receipts, Government resorted to direct borrowing from SBP for budget deficit financing. During 2007/08, government borrowing from SBP amounted to PKR 689 billion, increasing the total stock o f government debt owed to SBP to Rs. 1.1 tri l l ion at end June 2008. The rise in government borrowing kept the growth o f reserve money over 20 percent and fueled inflation (the average CPI increased by 12 percent in 2007/08 and by 2 1.5 percent on a year-on-year basis at end June 2008). SBP responded to the rise in inflation by increasing the policy discount rate by a total o f 200 bp by endJune 2008, but real interest rates remained negative by a large margin.

17. I n response to the widening imbalances and supply side shocks, real GDP growth declined from 6.8 percent in 2006/07 to 5.8 percent in 2007/08. In agriculture, floods and pest attacks depressed rice and cotton production, while industrial production and services were constrained by acute power and gas shortages.

18. Pakistan’s risk rating worsened as the economic situation deteriorated. Both Standard & Poor’s and Moody’s downgraded Pakistan’s sovereign debt ratings in May 2008 (from B+ to B and from B 1 to B2, respectively) owing to the sharp erosion in the fiscal position and the inadequate policy response to the worsening macroeconomic situation.

19. Recognizing the need to correct the macroeconomic imbalances, the Government embarked on a concerted effort to stabilize the economy starting with the 2008/09 budget. The budget, among other things, envisaged sizeable fiscal consolidation through power and fuel subsidy cuts and increased revenue effort. However, by November 2008 it was apparent that the budget measures were inadequate to contain the economic slide, aggravated by the global financial crisis, and to restore the investor confidence eroded by a sharp decline in foreign exchange reserves and further increase in the inflation rate.

20. To avoid a balance of payments crisis and default on foreign debt payments, the authorities developed a home-grown stabilization program, which was supported by the IMF through a 23-month Stand-By Agreement (SBA) in November 2008. The program includes a medium-term macroeconomic framework, which envisages fiscal and monetary tightening to bring down inflation and reduce the external current account deficit to sustainable levels. The 2008/09 program framework supported by SBA builds on the 2008/09 budget, modified to account for higher inflation projections and greater exchange rate adjustment than envisaged at the time o f the budget. The framework was revised during the f i rs t program review in February 2009 to take into account the impact o f significantly deteriorated global economy, resulting lower exports, foreign inflows and growth prospects in the short and medium term, as well as the change in the terms o f trade through lower international o i l and food prices. Table 1 summarizes the revised framework, and compares it with the initial November 2008/09 program framework for 2008/09.

2 1. The revised framework i s built around the following economic parameters for 2008/09:

0 Real GDP growth of 2.5 percent: the target was lowered from 3.4 percent owing to sharper than anticipated economic slowdown;

7

Fiscal deficit (excluding grants) of 4.3 percent of GDP: the init ial fiscal deficit target remained unchanged in nominal Rupee terms, but owing to the moderated GDP growth projection, the target as a share o f GDP increased from 4.2 to 4.3 percent;

Current account deficit of 5.9percent of GDP: the in i t ia l target o f 6.5 percent o f GDP was revised downwards due to a larger than anticipated decline in imports; and

Annual average consumer price inflation at 20 percent: the annual inflation target was adjusted downwards f rom 23 percent, as a result o f fall ing food and energy prices and lower economic activity.

Table 1 : Medium-Term Macroeconomic Framework hitial Revi~ed

Actual Program Program Projections 2006/07 2007/08 2008/09 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

lutput and p r i m .eal GDP at factor cost :onsumer prices (period average) akistani rupees per U.S. dollar (period averaee) avine and Investment hoss national saving hoss capital formation il 'ublic finances .evenue and grants .evenue Tax revenue

Non-tax revenue Grants

.=qenditure (including statistical discrepancy) i 2 Current expenditure

ofwhich : Federal Board of Revenue

Interest Other federal Provincial

o f which: one-off-outlays Development expenditure

Net lending tatistical discrepancy herall balance lnderlving (excluding grants and one-off-outlays) .xcluding grants icluding grants inancing External

Domestic 'otal eovernment debt .xtemal government debt )omestic government debt ionetarv sector let foreign assets let domestic assets !road money rivate credit ix-month treasury bill rate (period average; in %)

ixternal sector lerchandise exports. U.S. dollars (growth rate; in %) lerchandise imports, U.S. dollars (growth rate; in %) :went account including official current transfers (as % of GDP) hoss official reserves fin millions 0fU.S. dollars) /3 1 months of next year's imports o f goods and services lemorandum Items: .eal effective exchanee rate (annual average: percentage change) .eal Der caoita GDP loercentaee chaneel14

off which; privatization receipts

6.8 7.8 1.3

18.1 22.9

15.2 14.8 10.9 9.7 3.9 0.3

20.6 15.8 4.2 6.9 4.6 4.9 0.5 -0.1 -1.4

-3.9 -4.3 -4.0

4.0 2.0 0.6 2.0

54.1 24.2 29.9

8.1 11.3 19.3 17.2 8.8

4.4 8 0 -4.8

14,302 3.8

0.5 5 1

5.8 12.0

13.2 21.6

14.6 14.3 10.4 9.6 3.9 0.3

21.8 17.7 4.7 8.9 4.2 4.0 0.2 -0.3 0.1

-7.3 -7.4 -7.1

7 1 1.2 0.0 6.0 57.4 26.2 31.2

-7.8 23.2 15.3 16.4 9.6

16.5 31.2 -8.4

8,591 2.7

-0.8 4.1

3.4 23.0

13.5 20.0

15.1 14.9 11.0 10.2 3.9 0.2

19.0 16.0 4.6 7.6 3.9 3.0 0.2 0.0 0.1

-4.0 -4.2 -4.0

4.0 2.5 1.1 1.6

54.6 26.9 27.7

-4.9 15.7 10.8 25.2 12.7

12.0 1.1

-6.5 8,591 2.1

1',6 13,384

(Annual changes; in percent) 2.5 4.0 5.0 20.0 6.0 5.5

on percent of GDP) 14.2 20.1

15.4 15.2 11.3 10.0 3.9 0.2

19.3 16.1 4.8 7.3 4.0 3.2 0.2 0.0 0.2

-4.1 -4.3 -4.2

4.2 1.4 0.0 2.8 56.9 27.8 29.1

15.6 19.9

16.0 15.8 12.0 10.6 3.8 0.2

19.2 15.2 4.7 6.3 4.2 4.0 0.1 0.0 0.0

-3.3 -3.4 -3.2

3.2 1.0 0.2 2.2 55.3 26.2 29.1

17.3 21.6

16.8 16.4 12.8 11.5 3.7 0.4

19.4 14.2 3.5 6.4 4.3 5.2 0.0 0.0 0 0

-3.0 -3.0 -2.6

2.6 1.5 0.2 1.1

54.1 26.2 27.9

(Annual changes: in percenl) -3.4 -1.4 .. 11.8 12.1 .. 8.4 10.6 ,. 8.3 14.2 .,

-5.5 1.5 6.2 -14.5 -5.5 6.8 -5.9 -4.3 -4.3

9.091 10,591 11,091 3.0 3.3 3.2

0.9 2.4 3.4 12,970 14,298 15,838

6.0 5.5

18.6 23.0

17.4 17.0 13.5 12.3 3.5 0.4

19.7 14.1 3.1 6.6 4.4 5.7 0.0 0.0 0.0

-2.7 -2.7 -2 3

2.3 2.1 0.4 0.2 52.1 26.2 25.8

8.0 7.0 -4.3

11,891 3.2

4.4 17,712

6.5 5.5

19.7 23.9

17.7 17.3 13.9 12.7 3.4 0.4

19.6 14.0 2.8 6.7 4.5 5.6 0.0 0.0 0.0

-2.3 -2.3 -1.9

1.9 1.9 0.1 0.0 49.9 26.3 23.6

8.0 7.6 -4.2

11,891 3.0

4.9 19,901

7.0 6.0

21.5 25.2

17.9 17.5 14.3 13.1 3.3 0.4

19.7 13.8 2.5 6.9 4.5 5.9 0.0 0.0 0.0

-2.1 -2.1 -1.7

1.8 1.8 0.1 0.0

47.4 26.0 21.4

8.5 6.8 -3.7

12,891 3.0

5.4 22,572

. . iDP'at &ket prices (in billions ofPakistani rupees) 8.723 10.478 iDP at market prices (in billions 0fU.S. dollars) 144.0 167.6 .. 162.6 171.0 180.8 193.1 207.4 224.0 1 Including changes in invenlories. Invesrment data recorded by the Federal Bureou of Slatisrics are said to be underreport /rue activity ? Expendirure on socrol assistance in 2008/09 IS budgered at 0.5 percent of GDP. The program will /urger an aaiiirronal 0.3-0.5 percent of GDP. 1 Excluding gold. foreign deposirs of commercial banks held wirh the Stare Bonk of Pokistan. I The Realper capita GDP foryears MII. FY12, M13, andFYI4, thepopulariongrowrh rate is assumedro be 1.6%p.a. surces: Government ofPakisran for the historical years, and IMFprojecrrons.

8

22. The fiscal deficit reduction i s to be achieved by a combination o f expenditure cuts and revenue increases, with the burden of adjustment falling primarily on expenditures. The 2008/09 program assumes that Government’s net borrowing from SBP will be zero on a quarterly basis from November 1,2008 onwards, and Government will rely increasingly on non-bank borrowing and external financing. This, in addition to a sharp decline in aggregate demand during the second half o f 2008/09 i s expected to bring down average annual inflation to the program target.

23. At the f i rst quarterly review o f SBA in February 2009, the stabilization program remained on track. The rapid decline in international commodity and o i l prices since August 2008 has reduced the risks, facilitated improvement in the external position and the achievement o f targets.

B. Medium-Term Outlook

24. Pakistan’s real GDP growth i s projected to remain low in 2008/09 and 2009/10, and increase gradually from 2.5 percent in 2008/09 to 6.5 percent by 2012/13, although longer-term projections are particularly uncertain in view of the volatile global economic environment. Aided by increasing public investment-among other things in infrastructure, power, and transport- gross capital formation will rise and contribute to growth recovery and facilitate private sector activity. In parallel, gradually increasing private sector credit growth will help economic activity. Agriculture i s showing good growth prospects, while manufacturing and services are expected to recover only gradually as the domestic aggregate demand picks up and the availability o f power improves as a result o f investments in power generation. With the global recovery, exports are also projected gradually improve and reduce Pakistan’s external vulnerability over time.

25. Over the medium term, the Government’s revised macroeconomic framework targets a decline in the fiscal deficit (excluding grants) from 4.3 percent o f GDP in 2008/09 to 2.3 percent o f GDP in 2012/13. To meet the ambitious revenue targets, the authorities plan to implement bold and comprehensive tax policy and administration reforms. Owing to this sizeable revenue effort, total expenditures are projected to slowly climb back to about 20 percent o f GDP in 2012/13. Lowering inflation remains a challenge. The external current account deficit i s projected to decline to about 4.2 percent o f GDP by 20 12/13.

26. I n the medium term, increased productivity and export competitiveness are necessary to generate growth and reduce external vulnerability. To this aim, structural reforms to strengthen the investment climate and competitive environment are required. These will include measures to ease firm entry and exit, reduce barriers to competition and trade, and enhance labor market flexibility and labor competiveness. In addition, efforts to improve the financial sustainability and efficiency o f the power sector will be essential to attract investment in new power generation.

27. Protecting the poor and vulnerable i s essential during the stabilization process. Recognizing this, the federal Government and the Punjab Province increased spending on social safety nets by total o f 0.5 percent o f GDP in 2008/09. Further spending increases are projected in 200940. The federal Government launched the Benazir Income Support Program in the fall 2008, with the objective to provide cash grants to the poorest families in Pakistan. In parallel, the Province o f Punjab established i t s own income support program to protect the poor and vulnerable o f Punjab.

28. I n conclusion, despite a highly uncertain external environment, Pakistan i s now in a better position to attain the projected medium-term recovery path. Over the last few months, the stabilization efforts together with a decline in international commodity prices have succeeded in reducing external imbalances, rebuilding foreign exchange reserves, narrowing fiscal overruns and lowering inflation. However, the sharp deterioration in the global economic and financial outlook poses significant risks to exports, remittances and external financing, notwithstanding the fiscal stimulus packages prepared in a number o f countries. Even though projections in these areas as well

9

as forecasts about the speed o f real economy recovery were significantly moderated during the f i rst program review in February 2009, they may s t i l l turn out to be optimistic. Th is highlights the need for a rigorous implementation o f reforms, while protecting core development spending, in particular social spending, to ease the adjustment for the poor and vulnerable people. There i s a risk that the sharper than anticipated economic downturn w i l l lead to social tension as business activity slows down and f i r m s shed labor. Also, the risks to the domestic financial sector may increase. To mitigate this latter risk, SBP has adopted a problem bank management and contingency plan for dealing with problem banks, and measures to improve banking resolution and banking supervision are being implemented.

29. The medium-term revenue projections are ambitious and there i s a risk that they will not be met. However, the authorities want to retain the stretch targets in order to maintain the pressure for reform. Recognizing the need to substantially raise the tax to GDP ratio, they are keen to seize the opportunity for bold tax reforms, and are committed to take compensatory action in case revenues fall short o f targets. This wil l include cutting o f expenditures.

30. Stringent implementation of the economic program will be critical to success, and timely responses of fiscal and monetary authorities to emerging risks will be essential to ensure it remains on track. In the current economic environment, any medium-term projections are uncertain and regular adjustments are necessary in response to changed circumstances. The quarterly monitoring o f the IMF and the Bank’s Poverty Reduction and Economic Support Operation (PRESO) wil l mitigate these risks through continued policy dialogue on a proper adjustment path.

111. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES

A. Main Issues and ChallenPes

3 1. Access and quality remain significant challenges at all levels of the education sector in Pakistan. Access i s s t i l l far from being universal at the primary level, and quality issues plague the whole sector. As one climbs the education ladder, these problems exacerbate-and inequity aggravates. Despite substantial efforts to ramp up basic education in order to catch up with enrollment deficits and low learning outcomes, it wil l be difficult to reach education-related MDGs in the near future. Yet, the country cannot wait for the problems to be fixed at the basic level to address those at the upper levels. Doing this would jeopardize the country’s future.

32. Pakistan stands behind most other countries in the region when looked at from the knowledge economy point of view. The discrepancy i s particularly clear when comparing Pakistan with, for instance, Malaysia, a country which strives to bolster i ts education system (Figure 2). Out o f the several indicators used by the Knowledge Assessment Methodology (KAM), those relating to education --and specially higher education-- fare amongst the worse. Pakistan’s ambitions to become a knowledge economy are conditioned -amongst several other factors-by an up-scaling o f i t s entire education system -including higher education.

10

: Knowledge Economy Readiness: Pakistan and Malaysia Pakistan. Halaysia

Annual GDP Growth (Z) 10 In ternet Users per 1,000 People

Computers per 1,000 People GOP per Capita ( in /na l current 0 PPP)

GDP (current US$ b i l l )

Human Development Index

Poverty Index

Composite Risk Rating

Unemployment Rate (Z o f labor force)

Employment in Indust ry ( X )

Employment i n Services ( X ) Royalty Payments and Receipts (US$ T a r i f f & Non ta r i f f Ba r r i e rs

Total Telephones per 1,000 People

Gross Te r t i a ry Enrollment Rate

Gross Secondary Enrollment Rate

Adult L i teracy Rate (% age 15 and above)

Patents Granted by USPTO / M i l . People

Technical Journal A r t i c l e / N i l . People

Conparison Group: R 1 1 nost recent tKRn 2887)

Malaysia Pakistan

B. Pre-Tertian Education

33. Pakistan’s education indicators are low compared to countries with a similar level o f per capita income and countries in the South Asia Region. The challenges faced at the lower echelons o f the pyramid in Pakistan are enormous: (i) low levels o f education expenditure; (ii) inefficient use o f funds and underinvestment in quality; (iii) weak governance and service delivery, as evidenced by high teacher absenteeism, poor supervision, lack o f accountability mechanisms; (iv) limited access due in part to lack o f proper physical infrastructure; (v) shortage o f trained and qualified teachers: (vi) lack o f support for education, especially for girls, (vii) insufficient public/private partnerships (PPPs); and (viii) absence o f standardized data collection and dissemination.

34. Pakistan ranked 165th out o f 177 members in the education index o f the UNDP Human Development Report (2005). The Gross Enrollment Rate (GER) for primary school was 87 percent in 2005/06 - substantially lower than Bangladesh (1 06 percent), and India (107 percent4 Because o f the significant number o f over-age children in primary schools in Pakistan, the N e t Enrollment Rate (NER) was much lower (53 percent). There are also substantial regional, urban-rural income, and gender disparities in primary enrollments4. Drop-out rates are high. Learning achievements are low, and vary considerably, with the largest gaps being between schools’. At the middle school level, the GER drops to 49 percent, and at the Matric level, it was estimated at 44 percent in 2005/06.

35. There i s a clear and positive relationship between family income and enrollment rates in primary school. In addition to this early social selection, there i s a negative (although not across all provinces) relation between household income and enrollment in government schools. These features are harbingers o f what i s to happen at higher levels o f education.

Data for other countries are for 2003. In Sindh, over 70% o f rural girls have never been to school. Das, Jishnu, Priyanka Pandey and Tristan Zajonc (2006) Learning Levels and Gaps in Pakistan, World Bank Policy Research Working Paper 4067.

11

C. Higher Education

Universities/DAIs Public (2006/07) Private (2006/07) Total Degree Colleges (Year 11-14) Public (2005/06) Private (2005/06) Total Distance Education AIOU (2006/07) Virtual University (2006/07) Total Private Students appearing for exams

36. In Pakistan, higher education refers to education above grade 12, which generally corresponds to the age bracket [ I 7 to 231. The higher education system i s made up o f two main sub-sectors: universities / Degree Awarding Institutes (DAIS), and Colleges. The responsibility for HEIs i s shared between the provincial and federal governments. The former have administrative control over HEIs , while the latter, through HEC, provide funding to H E I s and control their ability to grant degrees. Provinces are responsible for the establishment o f HEIs, while HEC has the oversight o f public and private degree granting institutions and coordinate evaluations o f academic programs. Colleges are funded and regulated by provincial governments, and hence, not under HEC’s purview. Universities are responsible for their quality. In theory, colleges should play a critical role in building a middle level skilled manpower. In practice, however, they do not have the financial, human and technical means to do it, and serve as a last resort for those who did not make it to university. They are rightly considered as the weakest link o f the education chain.

Number of Institutions Enrollments

64 242,879 56 78,934

120 321,813

777 296,832 358 29,161

1,135 325,993

1 190,447 1 9,2 13 2 199,660

10 219,646

37. Colleges make up the single largest subsector. In 2005/2006, there were 1,135 public and private colleges, enrolling some 326,000 students. This compares with 120 public and private universities in 2006/07, which enrolled 322,000 students (out o f which 18,000 post graduate students). The distance education sector contributed a further 210,000 students in 2006/07, while the number o f private (external) students who appeared for exams stood at over 219,000.

38. Higher education i s chiefly public in nature, especially universities, DAIS and Colleges. The two providers o f distance education - Allama Iqbal Open University (AIOU) and the Virtual University are both public institutions. Public H E I s generally offer a wide range o f courses and programs, while private H E I s primarily offer a narrow range o f vocationally oriented courses such as business and IT. The bulk o f research in the HE sector i s conducted in public universities, while the private sector focuses on teaching. In 2006/07, the private sector represented some 23 percent o f HE1 enrolments and 9 percent o f Degree College enrolments (Table 2).

39. After two decades o f serious neglect, the higher education sector in Pakistan has undergone a rebirth in recent years. The situation began to reverse i t se l f in the early 2000s, with the Government showing a clear commitment to improving higher education, as evidenced by significant increases in spending on higher education and the creation o f HEC in 2002. As a result o f the reforms introduced subsequently, the higher education sector has made significant progress, but much remains to be accomplished.

12

40. Mechanisms to migrate from upper secondary to higher education are intricate. Admission to universities i s very selective, with less than 10 percent o f those taking the main entrance examination making it into universities. Access to universities i s mainly regulated by the Higher Secondary School Certificate (HSSC). In 2004, the pass rate was 50 percent, but universities admitted about one-fifth o f the 389,000 students who passed. Students who pass the exam but are not admitted to university usually enroll in affiliated colleges --or look for a job.

(a) Low Qualiv, Reduced Relevance

41. The long period of neglect in which higher education has been left until recently has resulted in poor quality teaching and learning, and a lack of focus on quality assurance and quality improvement. Quality indicators (teacher qualifications, publications in refereed journals, participation in international conferences) are on the low side. While the roots o f the problem are multiple, the availability o f qualified teaching staff i s probably f i rs t amongst them. There i s both a dearth of qualified staff and a lack of incentive/accountability mechanisms to optimize competences of existing staff. Only one out o f four faculty staff holds a PhD degree. Teaching has not been an attractive option for bright graduate students, given low salaries and status and limited support services. Hence, supply o f skilled faculty staff has been lagging behind.

42. Rote learning i s encouraged, leaving students with limited analytical and problem-solving ski l ls. Quality and depth o f knowledge o f the subject area are assumed to be indicated only by the results o f examinations, and the exams are reward mostly memorization. High pass rates are regarded as indicative o f good pedagogy. Thus teaching to the examinations i s the usual method. Yet, assessment methodologies are lax, and the examination system was rife with irregularities.

43. Pakistani universities have a long history o f inadequate library and computer facilities, limited availability o f teaching aids, lack o f access to the Internet, and outdated textbooks and other reading material. Laboratories, for the most part, have been poorly equipped and much o f the equipment i s outdated, and lacks proper maintenance.

44. Until recently, most general universities offered qualifications that were not aligned with international norms. Curricula remained unchanged for decades, oblivious o f the changes happening outside o f the academic world. The dichotomy between the structure o f degree programs in affiliated colleges and universities hindered the smooth transition o f two-year degree college students into the third year o f university. External students (also known as “private” students) constitute a special cohort o f students who register in public universities but do not attend nor receive any pedagogic support. The academic credentials o f those external students enrolling in third year o f university are particularly low, and they do not receive remedial courses to offset their disadvantage.

45. The situation i s no better at the post-graduate level, as reflected by weak research outputs. The production o f PhD i s strikingly low, making very thin the basis for vibrant research. There i s very l i t t le applied and/or basic research undertaken in both the humanities and sciences. This was highlighted in the 2002 report o f the Task Force on Improvement o f Higher Education, which noted that: “Research i s conspicuous by i t s absence in our seats o f higher learningyy6. Key ingredients are missing to establish a world standard research environment: (i) inter- and intra university linkages, (ii) university-industry linkages, (iii) opportunities for faculty staff to devote time to research; and (iv) lack o f professional ethics.

46. While a number o f private H E I s are below standards, a few private universities, such as Lahore University o f Management Sciences (LUMS) and

The private sector i s very heterogeneous.

Task Force on Improvement o f Higher Education in Pakistan (2002) Report of the Task Force on Improvement of Higher Education in Pakistan, World Bank, Washington DC, httu://www.tflie.net/resources/u~is~~i.htin.

13

the Agha Khan University, have strong national and regional reputations. Other private H E I s , including Iqra University or the Shaheed Zulfikar Ali Bhutto Institute o f Science & Technology performed well in comparison to many o f their public sector counterparts in the 2006 HEC rankings.

Unemployment Rate Tertiary Total

Rate o f Return (Tertiary)

47. The distribution o f students by type o f university suggests a lack o f relevance. While the country i s in acute need o f high level technicians, over three-quarters o f students in 2006/07 were enrolled in general and pure science studies, while only 11% were enrolled in engineering universities. In addition, general non-science students are by far the largest contingent, making almost half o f total enrollments (Table 3).

Pakistan Bangladesh India Sri Lanka

8.2 1 1.51 11.86 8.82 4.29 3.79 5.07 8.96

13.9 (a) 9 (b) 18.9 0 9.6 (d)

Table 3: Distribution o f Students and Graduates in Public and Private Universities, by Type of University

Source: HEC.

48. Despite their modest numbers, graduates do not find jobs easily, or those they find do not match their expectations, as evidenced by the fact that unemployment i s more widespread for university graduates than for those leaving with lower levels o f education. In addition, there i s little cooperation between universities and the industry in terms o f research. Yet, higher education yields hefty (and rising) private rates o f returns (Table 4).

(b) A Narrow-based, Inequitable System, Isolatedfi.om its Environment

49. Regardless of the indicator used, participation in higher education i s low. In 2004l05, enrollments represented 2.5 percent o f the corresponding age group. If enrollments in colleges are included, the higher education sector was estimated to enroll about 807,000 students, which s t i l l represents only 3.8 percent o f the corresponding age group. GER lags behind those in neighboring countries such as India and Bangladesh, and significantly behind those in countries such as Malaysia, Thailand, China or Indonesia 7(Table 5). Indeed, both the primary completion rate and the secondary net enrollment rate are lower than those observed in countries with a GNI per capita lower than, or equivalent to, that o f Pakistan. Participation rates are close to Sub-Saharan Africa averages.

’ Comparing enrollment rates at the tertiary level i s a challenge because definitions vary from one country to another one. In Table 13, the World Bank Edstats figure for Pakistan (drawn from UNESCO/Governmental sources) shows a higher enrollment rate than the one estimated by the team

14

Bangladesh

China Thailand Malaysia

GNIper capita

470

Primary Completion Rate

76.4

101.1 +

Secondary Net Enrollment Rate

44.3

86.2 (b) 91.6

QI QII QUI QIV 0.8 1.6 2.1 6.5

Tertiary Gross

QV Rural Urban 19.2 3.1 10.2

I

(a) data for 2000; (b) data for 1995; (c) “External students not included” -Definition of Tertiary Education in this database is wider than the one used in this document. Source: World Bank: EdStats

50. Given these low levels of participation, higher education in Pakistan lacks the capacity to leverage the knowledge economy that the country aspires to build. I t remains an elitist system, catering to a small proportion o f the eligible population. The combined effects o f earlier social selection and the low transition rate to university entail a highly skewed and inequitable enrollment distribution at that level (Table 6). Girls make up only one-third o f the total student population (vs. 38 percent in India, 44 percent in Indonesia and 55 percent in Malaysia) -- although they outnumber boys in medical schools.

5 1. This low participation results from a combination of supply and demand factors. On the supply side, the physical capacity o f public universities i s not sufficient to accommodate the growing number o f candidates, while, at the same time, existing facilities are not used efficiently, and the potential o f distance learning i s not fully exploited. The playing field o f higher education i s far from being even: despite the growing importance o f private providers, public institutions are privileged. There i s both an excess o f control over some aspects o f the regulation (e.g. establishment o f private H E I s ) and insufficient control over other aspects. Private HEIs receive little in the way o f government assistance.

52. On the demand side, student aid mechanisms have not adapted to the rapid expansion of enrollments. While scholarships offer a useful avenue for expanding participation among students from low-income families, the number o f scholarships remained small and their use has been hampered by the lack o f systematic and reliable data on family income. There i s no strategy to determine the respective roles and shares o f scholarships and student loans. Likewise, there i s no logical framework to determine eligibility criteria (whether for H E I s or for students).

15

(c) An Ineffective Management and Governance System

53. Sector-wide governance issues are a pervasive impediment to the optimal functioning of universities. Until recently, responsibilities in public universities were not clearly defined. Performance was not rewarded, let alone measured. Accountability was non-existent. Management was performed on a day-to-day basis, without a long-term strategic perspective, and without agreed targets against which to gauge progress. The internal management structure o f public HEIs was dysfunctional, with a powerful vice-president selected on mainly political criteria on the one hand, and a large, but weak senate on the other.

54. Pakistan did not have a national accreditation, quality assessment, or quality improvement process in place until 2003. L i t t le had been done in terms o f internal evaluations at HEIs, although a few o f them have conducted quality audits o f some o f their programs. There was no tradition o f academic quality reviews in universities. Similarly, there was l i t t le effort to evaluate faculty members internally. Until recently, there was no process to set standards for institutional accreditation and to evaluate programs and faculty quality.

55. HEC was created as a strong body with the power to foster badly needed changes in higher education. It was given the authority to assess financial needs, establish accreditation and quality improvement carry out curriculum review and enhancement, control and recognize degrees, accredit new institutions, promote and fund research. However, the staffing o f HEC was not fully at par with the multiplicity and complexity o f these tasks and the number o f H E I s to serve. The Commission i s s t i l l not completely immune against changes in the political leadership, and i ts autonomy i s s t i l l not fully guaranteed. Moreover, given the breadth o f the reforms it has launched, HEC lacks the communication strategy that i s indispensable to reach out HE stakeholders and the public at large.

56. HEC s t i l l does not have a reliable, timely Higher Education Management Information System (HEMIS) which would allow it to develop solid forecasts and facilitate strategic decision-making. There i s no continuity in the databases, including simple, basic data. For instance, it i s not possible to compare enrollment figures over time, even for the public sector.

57. On the financial management side, HEC was until recently hampered by inefficient financial management software and overstretched capacity. Financial management practices across H E I s remain uneven. Since these are autonomous bodies, they enjoy flexibility in formulating their financial management arrangements. Federally funded H E I s (public universities and DAIS) are subject to audit by the Auditor General and are bound by certain Government rules. Private H E I s are not subject to any such oversight. Newly established H E I s are required to get annual accounts audited by a chartered accountant, but they do not have a duty to report these to HEC. Currently, varied models o f financial governance are followed in these institutions.

58. HEC receives i t s spending authority from the Ministry o f Finance. Recurrent and development fund grant requests are processed by the Commission and checks are sent to the HEIs . Until October 2008, these checks were drawnagainst a Personal Ledger Account (PLA), which needed to be validated by the Federal Treasury Office before funds were released. Coupled with the delays in the quarterly releases, the entire process usually took more than 6 weeks. The new Assignment Account procedure has considerably reduced the time lag to an average o f two weeks.

59. In May 2003, the Public Procurement Regulatory Authority (PPRA) was set up through an Ordinance to regulate and take such actions as may be required to provide efficiency and transparency in public procurement. The PPRA prepared and notified the 2004 Public Procurement Rules. The Rules in themselves represent international best practice albeit with a credible appeals process and consultancy rules missing. In order to operationalize these new Rules effectively, it will be necessary to issue implementing regulations and standard bidding documents. These two areas are yet to be

16

completed, which leads to a lack o f clarity on the actual procurement process that needs to be followed under the new procurement rules. The newly adopted rules are regarded as the rules to follow for public procurement. Whi le the posting o f procurement notices on PPRA was mandatory for the procuring agencies, there was no stipulation regarding the posting o f notices o f award. Recently, the PPRA has directed al l procuring agencies to post notices o f award for contracts over PKR 50 million on its website.

I Country %

Tunisia 7.19 Morocco 5.92

Malaysia 5.90 South Africa 5.35 Kyrgyz Rep. 4.87

(4 An Under-resourced Sector

Country % Country % Egypt, Arab Rep. 4.79 Pakistan 2.25 Thailand 4.43 Chad 1.92

India 4.23 Rep. 1.84 Indonesia 3.49 Guinea 1.67 Philippines 3.23 U.A.E. 1.35

Congo,

60. Until the early 2000s, the university sector had been blatantly under-funded. The huge and unprecedented increase in the HEC budget since 2002 has been accompanied by parallel growth in student enrollments. Therefore, in real per-student terms, the surge has been modest, and with less than one-half o f one percent o f GDP spent on i t s universities, Pakistan continues to lag behind other comparable countries. Indeed, this reflects a general underinvestment in education (out o f 106 countries, Pakistan ranked 99 for the share of GDP spent on education in 2005) - See Table 7) - particularly acute at the tertiary education level.

61. Since 2001/02, all federal government funding to universities and DAIS i s provided through HEC budget. That year, this budget was at an extremely low level, whether measured as a share o f GDP (0.1 percent), o f the GOP budget (0.6 percent) or o f total education spending (6 percent). I t doubled the following year, and kept growing in real terms since then --until FY 2008 (currently at about 0.3 percent o f GDP). The bulk o f the recurrent budget i s dedicated to university grants which are used by H E I s to finance their operation costs. The development budget i s used to boost quality and innovation.

The Program

62. The multiple predicaments suffered by the university system, and the associated risks for the economy had been pointed out for many years. The f i rst and decisive step to respond to pressing alarms (including the Report o f the Task Force on Improvement o f Higher Education in 2002) was the creation, in 2002, o f the Higher Education Commission. HEC immediately embarked in a series o f initiatives to overhaul the sector. Then, in 2005, it issued its Medium-Term Development Framework, which systemizes and articulates these initiatives in a coherent strategic document.

63. The MTDF-HE focuses on universities, Degree Awarding Institutions and Centers o f Excellence (COEs). The exclusion of colleges from the MTDF-HE i s consistent with the HEC’s mandate and budget. The HEC’s only formal link with colleges i s an indirect relationship through the affiliation of colleges to universities. Affiliation allows some inputs into the quality o f teaching -for which universities get fees. The abysmal situation o f colleges and the importance o f addressing it i s now widely recognized. A number o f studies are being initiated to prepare the development o f a comprehensive reform strategy for these institutions. Without waiting for such a strategy, however, the

17

Government has launched pilot programs to assist colleges (e.g. in Punjab). In addition, the HEC’s program supported by the HESP includes measures to improve the transition between college and university programs, and to support pedagogical programs in the colleges.

64. HEC’s ambition, as embedded in the MTDF-HE i s to “facilitate institutions o f higher learning to serve as engines for the socio-economic development o f Pakistan”. To serve this ambition, HEC has identified four core strategic aims --faculty development, access and learning, research, and relevance- - and three cross-cutting supporting aims --governance, quality assurance, infrastructure development- - (Box 1). In operational terms, these aims translate into a reform program structured around four pillars: (i) quality and relevance o f teaching and research, (ii) access and equity, (iii) governance and management, and (iv) financial sustainability. These pillars are highly complementary and closely interrelated. The way they are organized here reflects in-depth discussions with HEC and full ownership by the Commission, and echoes the views o f the actors in charge o f implementing the actions and measures o f the MTDF-HE.

o * 8 3 To National V < Learning Priorities Development in Research

I Leadership, Governance, and Management I s 4 I I

J .- M c .- 5 Quality Assurance: Standards, Assessment, Accreditation

V I I

rh v)

Infrastructure Development: Physical, Technology 8

Pillar 1: Improving the Quality and Relevance o f Teaching and Research

65. The Government has recognized that the low and continuously withering standards o f higher education institutions were a major impediment to the development o f a knowledge economy. Immediately after i t s creation, HEC targeted quality o f both teaching and research as i t s f i r s t priority. A program was launched to equip faculty with the required qualifications and to make the teaching and research trade more attractive. Academic programs were restructured, labs and scientific material were procured, and research teams were linked up with international centers. As a result, most performance indicators went on an upward trend. Despite these progresses, the Pakistani higher education sector s t i l l does not fare well in international comparisons. Only two Pakistani universities make it in the main international rankings (National University o f Science and Technology and University o f Lahore), a n d only a few are listed amongst the best schools in the Asia Region. Consequently, the MTDF-HE takes a more aggressive stance and the f i rst pillar i s built around the quality o f the inputs, the process, and the products o f HEIs.

66. However, neither the quantity nor the quality o f students churned out every year can be determined solely against academic criteria and by the academic community alone. The expansion o f the system must be done within the framework o f the national priorities corresponding to the economic and social objectives the country has set up for i t se l f in the long-run. Thus, the f i rst pillar

18

also includes a series o f interrelated initiatives in order to address the lack o f relevance o f teaching and research to the needs o f 21 st Century.

(a) Immediate Actions

Buttress the supply, quality and performance of faculty staff

67. In order to address the acute shortage o f qualified faculty which largely contributes to the low quality o f higher education in Pakistan, an ambitious long-term plan to increase and improve the supply o f such faculty i s being developed. Based on a forecast o f faculty shortages, the Commission has reinforced i t s Foreign and Indigenous PhD Scholarship Programs for qualified students and faculty o f public and private H E I s in key priority areas (e.g. engineering, biotechnology, information technology, humanities/social sciences, and health science). All candidates are being selected on the basis o f clearly defined criteria. Awardees o f overseas scholarship programs are expected to serve in Pakistan for five years after completion o f their studies, and incentive kits are designed to that purpose. In addition to these long-term training opportunities, a new policy allows all interested indigenous PhD candidates to benefit from a six-month foreign training. A decision has been taken to scale up the scholarship programs in order to feed a steady flow o f qualified teaching staff.

68. To create a more favorable environment with greater incentives to attract and retain qualified and ambitious faculty who aim to build a career in higher education, the Government has launched a performance-based tenure track system for faculty in public HEIs. The Model Tenure Track Process Statutes for faculty staff in public universities were approved by the Finance Division, and notified by HEC, and they have been adopted already by about 40 percent o f al l HEIS. Tenure track appointments are conditioned on a PhD degree. An attractive salary package i s set up, in line with that in the private sector. While this system i s being applied to all new faculty appointments, existing faculty are provided with an option to apply for a tenure track appointment. Init ial appointments are on a term contract, whereas permanent tenures are granted only upon completion o f a full and transparent review process based on the recommendations o f a Technical Review Panel.

69. Steps have also been taken to boost the quality o f existing faculty. A professional development program aimed at improving pedagogical ski l ls and subject knowledge has been developed and recently approved by the Commission. The program includes in-service faculty development programs and curriculum-based short-term courses for junior faculty. A number o f additional scholarship schemes (many o f them supported by bilateral aid agencies) are also in place to encourage young outstanding teachers in selected fields.

Medium-Term Priorities

70. The scholarships scheme wil l be carried over in the outer years. The Government will institutionalize the performance-based Tenure Track system and wil l increase the proportion o f Assistant Professors hired under the new system. The number o f H E I s adopting the Tenure Track statutes wil l gradually increase (adoption i s voluntary). Finally, the Commission wil l pass a resolution to approve a comprehensive Professional Development Scheme, strictly linked to career development.

(b) Immediate Actions

Enhance the quality of courses andprograms delivered by HEIs

71. HEC has decided to raise the number o f four-year Bachelor degree programs in general universities with a substantially increased number o f required credit hours and a structured broad- based curriculum so that Pakistani undergraduate programs are aligned with international norms. The four-year integrated curriculum for Bachelor degrees in basic, social, natural and applied sciences follows standardized formathcheme o f studies.

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72. HEC has initiated consultations in view o f aligning undergraduate programs at affiliated colleges with those o f universities. The aim i s to facilitate a smoother transitioning from affiliated colleges to universities, and to reduce the unhealthy dichotomy o f the higher education sector split between these institutions. Precisely because o f this schism and the traditional lack o f cooperation between them, an outright and upfront change in the structures and programs would likely meet fierce resistance. Hence the choice to start with a wide consultation with stakeholders.

73. In order to restore the usefulness, reliability and fairness o f assessments, the National Committee on Examination System (NCES) has made several recommendations, including: (i) a shift from an annual system to a semester system; (ii) a more frequent usage o f multiple choice questions and short essay questions; and (iii) the training o f relevant professionals to improve assessment strategies, quality o f examination items and examination processes. The Commission has approved these recommendations and the guidelines developed by a team o f experts to implement them.

74. A first round o f review o f the post-graduate programs has been completed in all public universities, based on the Minimum Criteria for MPhil and PhD education defined by HEC. Based on the reviews which were carried out by the Vice Chancellors’ Post-graduate Program Review Committees, the Commission has closed sub-standard programs at six universities and assisted the concerned departments to fulfill the criteria so that they may be able to re-open the programs.

75. A wide national consultation has been launched as a f i rs t step to address the situation faced by external students, and to come to aconsensus on the main directions o f a plan to increase the level o f academic and curricular support for these students. The plan will spell out inter alia: (i) the establishment o f directorates o f distance education in HEIs , (ii) the development o f academic support activities and teaching materials; and (iii) the development o f capacity building activities.

Medium-Term Priorities

76. During the following years, HEC will: (i) institutionalize the reorganization o f the four-year undergraduate programs, through an increase o f the proportion o f H E I s offering structured broad- based curriculum; (ii) finalize the policy documents to align Colleges undergraduate programs with universities (iii) carry out training for faculty and university examination staff and start roll ing out the implementation o f an improved assessment methodology; (iv) complete the reviews o f post-graduate studies; and (v) draft and finalize a plan improve the delivery o f education to private students and start the setting up o f directorates o f distance education in H E I s .

(c) Immediate Actions

Align teaching and research outputs with national development objectives

77. First, the Commission has introduced measures to improve the employability o f HEIs’graduates by: (i) involving employers in the development o f broad-based curricula responsive to the labor market requirements; and (ii) developing Terms o f Reference for the establishment o f career counseling centers in universities whose mandate will be to facilitate the employment o f graduates through better information on labor market. Second, HEC has started the design o f a mechanism allowing aligning research funding with national priorities as they are spelled out in the “Vision 2030”. Finally, it has initiated programs to encourage university-industry collaboration through funding projects undertaken jointly by university teams and professional from local industries.

Medium Term Priorities

78. Actions initiated in 2008/2009 will be continued and their implementation strengthened. HEC will facilitate the implementation o f measures aimed at improving graduate employability and wil l ro l l out the development o f flexible broad-based curricula. Career counseling centers wil l be progressively

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established in public HEIs , which will be encouraged to launch tracer studies. HEC will also pilot new programs aimed at encouraging university-industry collaboration in R&D, including the establishment o f Technology Incubating Facilities, and wil l develop a roadmap for the establishment o f Offices o f Research to support research activities (including commercialization) in selected H E I s .

(4 Immediate Actions

Improve the quality of research undertaken in HEIs

79. A peer review process has been established for funding research in H E I s . Under this process, grants are awarded to researchers in a wide range o f disciplines for a period o f one to three years, only after research proposals have undergone a rigorous peer review. By introducing this process, HEC i s aligning Pakistani research with mechanisms used in advanced countries, and i s departing from earlier practices funded on ad hoc decisions and/or alliances o f interests.

80. HEC has introduced a number o f other programs aimed at strengthening research quality. A major initiative was to strengthen intra- and inter-university I T structures through the establishment o f the Pakistan Education and Research Network (PERN) - a nationwide educational intranet that links all public and private sector chartered H E I s in the country. PERN focuses on collaborative research, knowledge sharing, and resource sharing.

8 1. Secondly, in order to ease affordable access to scientific and technological research, HEC has introduced the Digital Library Program, which provides researchers at public and private H E I s with access to over 40 publisher databases and more than 23,000 leading research journals, covering approximately 75 percent o f the world’s peer-reviewed scientific journals. Thirdly, HEC i s promoting enhanced international research collaboration by linking departments in Pakistani universities with their counterparts in leading research universities abroad. Fourthly, HEC has developed and implemented rigorous criteria for the recognition o f quality research journals published in Pakistan.

82. HEC has taken several initiatives to promote research activities in private H E I s . First, a new policy has been promulgated, by which private H E I s become eligible to the peer-reviewed research grant program, and to receive 100 percent funding o f approved projects. This policy wil l allow researchers from high-quality private H E I s (e.g. Aga Khan University, LUMS) to access funding until now restricted to the sole public HEIs. Second, private universities are now also eligible to receive 50% matching grant to access the digital library and to recruit foreign faculty. Third, grants wil l be available to set up departments in fields critical to the socio-economic development o f the country.

Medium Term Priorities

83. In the following years, HEC will mostly focus on implementing the actions initiated to strengthen the quality o f research conducted in Pakistan, by mobilizing both public and private energies. In particular, it will adjust as needed the funding formula for research. The initiatives will be monitored so as to calibrate their respective importance, depending on the observed impact.

Pillar 2: Expanding Access to, and Enhancing Equity of, Higher Education

84. The very low enrollment rates prevailing in the early 2000’s have prompted HEC to take measures both to expand supply and to boost demand: existing infrastructure has been expanded, initiatives have been taken to promote distance learning and private participation, and more scholarships have been made available, while incentives were introduced to promote research. These measures have started to pay off. Between 2002/03 and 2004/05, total enrollments grew at an average annual rate o f 21 percent. However, given the rapid demographic growth, this expansion has not translated into a substantial increase o f the enrollment rate. If access to higher education i s not significantly broadened, Pakistan will not be able to reap the benefit o f the ongoing demographic

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transition. Recognizing this fact, HEC i s poised to take bolder measures in order to accelerate the expansion o f the sector. This i s what the second pillar o f the MTDF-HE i s about.

(a) Immediate Actions

Increase equitable access to higher education

85. In view o f addressing the very low rate o f participation in higher education, HEC i s resorting to a two-pronged strategy. First, on the supply side, it has significantly increased the physical capacities o f existing HEIs , in order to accommodate growing numbers o f students. To enhance access to students in disadvantaged regions o f the country, HEC has set up campuses as well as universities in these regions. Similarly, women universities are now operational in Quetta, Peshawar, Rawalpindi and Lahore and are being supported by HEC to expand their activities. However, as investments to build new facilities to put up incremental intakes would be daunting -especially under the current fiscal crunch- more reliance i s given to cost-effective distance learning approaches (AIOU and Open University). These approaches also allow more flexible study options, and are used as an instrument to broaden access to a whole range o f users, including students who have interrupted their studies for financial reasons, and adults.

86. Second, it has also taken action on the demand side, even though it i s to be noticed that the room to address equity issues in higher education in Pakistan i s relatively limited because the unequal distribution o f entrants in higher education i s the legacy o f the selection process which takes place at lower levels o f education. Despite these limitations, HEC has taken steps to lower the burden o f costs which keeps students from low income families at the gates o f universities. The first measure was to launch a program to progressively equip all H E I s with a student financial aid office which operates as the entry point for students to seek information on the costs o f studies and the sources o f financial support. Then, in order to ensure that higher education participation i s not the exclusive preserve o f the rich, the financial assistanceheed-based scholarship programs in both public and private H E I s have been expanded: in addition to a steady annual f low o f 750 scholarships on HEC’s own resources, about 2,500 scholarships are granted by USAID and JICA. Finally, a proposal for a pi lot loan scheme for selected public and private H E I s (to be supported by IFC) has been developed. Currently, about 10 percent o f undergraduate students are recipient o f some sort o f scholarship.

Medium Term Priorities

87. Over the medium-term, HEC will continue to address the need to increase participation and to promote equity, by augmenting resources, including physical infrastructure in existing H E I s and by promoting distance learning. The number o f need-based scholarships for undergraduate students studying at public and private H E I s wil l be augmented. As an important step to ensure the long-term sustainability o f the need-based scholarship scheme, the cost o f need-based scholarships will be shifted from the development budget to the recurrent budget. The pilot student loan program will be jump-started. Finally, in reviewing the funding formula used to fund HEIs , HEC will consider the introduction o f new criteria regarding the social distribution o f new intakes.

(b) Promote participation of the private sector

88. I t i s now widely recognized in Pakistan that, regardless o f how intensively engaged the public sector i s in scaling up i t s effort to increase the supply o f places in HEIs, lifting access to higher education at significantly higher will not be achieved without a substantial contribution o f the private sector. In order to foster further the expansion o f the private higher education sector, HEC has taken decisive steps to reform the regulatory and funding framework that governs private H E I s .

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Immediate Actions

89. A first key measure i s the approval by the Planning Commission of a policy allowing eligible private HEIs to qualify for up to 50 percent funding for development projects, subject to meeting “need-blind” admission requirements. The incentive package i s available to private H E I s that are not-for-profit, have at least 70 percent o f their courses taught by full-time faculty, have a campus o f their own and a proper governance structure, follow established accounting and audit procedures, and meet the Cabinet criteria for the establishment o f H E I s .

90. A second critical step taken to encourage private sector investment in higher education i s the notification by HEC of revised criteria regarding the creation of new private universities, and the relaxation o f earlier regulations governing their establishment (reduction in the amount o f land required, and in the amount o f trust funds to be retained, and relaxation o f the limits on where trust funds can be invested). Together, these changes will significantly lower the cost o f establishing private H E I s and free up capital for them to invest in increased capacity and improved quality (further to these measures, at least four new private universities wil l have opened in 2008/09).

Medium Term Priorities

91. HEC wil l develop a framework for monitoring the implementation o f the new policy regarding the establishment o f private universities, and assess i t s impact. The Commission will also initiate and complete a market feasibility study to determine the factors that influence foreign universities’ decisions to enter into collaboration with Pakistan universities and identify innovative ways in which Pakistan could promote the establishment o f foreign universities. Finally, the Commission wil l launch an awareness campaign so that private investors have a clearer understanding o f the conditions for entry and the possibility o f getting funded by HEC initiatives.

Pillar 3: Strengthening the Governance and Management of Higher Education

92. Recognizing that governance issues have plagued the sector for decades and s t i l l have the potential to dwarf the effective implementation o f the reforms it i s heralding, HEC has started to take measures on several fronts to tackle these issues (e.g. new rules regarding the selection o f universities vice-chancellors). These measures aim to instill a culture o f accountability in H E I s , clarify administrative procedures and establish the foundations for solid quality assurance mechanisms. Innovations have been introduced to facilitate financial management procedures and to increase transparency o f procurement processes.

93. The impact o f these initial measures can be seen both in H E I s and HEC. However, the internal governance o f H E I s remains inefficient, administrative staff are under-qualified and excessive power remains in the hands o f the vice-chancellor and the registrar. Similarly, within HEC, skill gaps and a heavy workload threaten the effectiveness o f the institution. Finally, basic data on the HE sector remain elusive and unreliable. Hence, the MTDF-HE i s taking these measures further in view o f a complete overhaul o f the governance structure o f the sector.

(a) Strengthen internal governance, management performance and accountability of HEIs 94. Reforming internal governance practices and introducing a culture o f accountability i s a central objective o f HEC’s strategy. H E I s are accountable for their performance to students, parents and other stakeholders in c iv i l society and Government. However, over time this tradition o f autonomy with accountability had eroded. Reversing this attitude i s a long term undertaking, which needs to be spread over several years. HEC’ strategy therefore i s to help H E I s to develop their own vision and programs, through consultation and consensus, rather than using a top-down approach which would entail high risks o f backlash.

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Immediate Actions

95. As a logical step further to the new way o f selecting vice- chancellors, HEC has started to provide management training to senior university management (vice-chancellors themselves, registrars, deans and heads o f department), to share international best practices, and to improve their management performance. These measures are also expected to prepare university leaders for further initiatives and reforms.

Medium Term Priorities

96. HEC will complete a diagnosis o f the current administrative management practices in public H E I s . On the basis o f this diagnosis, the Commission wil l prepare, in consultation with the H E I s , an administrative policy reform aiming to increase the participation o f faculty in decision-making process and to increase accountability within institutions. The policy wil l introduce mechanisms for merit- based appointment o f academic administrators and for empowering academic departments.

97. A template for the preparation o f 5-year strategic plans (including financial, academic and asset plans, performance indicators) wil l be developed. The Learning Innovation Unit o f HEC wil l develop custom-made training programs for HE1 administrators while continue providing training to senior university management, with an aim to strengthen H E I s ’ planning and management capacity.

(h) Immediate Actions

Reinforce mechanisms for quality assurance of academic programs

98. Under the Reform Program, a fully-functional Quality Assurance Agency (QAA) has been established in 2005 at the national level as a monitoring and regulatory body. The Government i s committed to make Q A A an autonomous body in the long term. During a transitional period, the QAA’s capacity will be strengthened. In addition, Accreditation Councils have been set up to assess the quality o f academic programs in four areas (Computing, Agriculture Education, Teacher Education, and Business Education). Quality Enhancement Cells (QECs) have been set up in public HEIs as per agreed criteria. The 20 newly created QECs serve as a focal point for quality assurance within H E I s for improvement o f their academic, teaching and learning standards.

99. Recognizing that the success o f institutional performance reviews depends on clear and carefully crafted national standards, HEC has worked closely with national and international specialists to prepare draft Institutional Accreditation StandarddCriteria aligned to international norms, and after gaining consensus on them within the academic community. A Quality Assurance (QA) with clear guidelines to streamline the assessments by QECs has been issued. Finally, the work to develop criteria for the institutional ranking o f domestic H E I s has begun with extensive consultation with stakeholders and using past home grown experience and leading international ranking practices.

Medium Term Priorities

100. To ensure the development o f successful program assessment mechanisms, Q A A will: (i) develop accreditation manuals which wil l spell out procedures for self-assessments; (ii) carry out pilot program accreditation to assess the appropriateness and effectiveness o f the process; and (iii) establish additional accreditation councils. The establishment o f QECs wil l be completed in all public HEIS, and initiated in private ones. A third party evaluation o f existing QECs wil l be carried out. Accreditation manuals wil l be finalized. Program-based ranking o f H E I s will be rolled out.

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(c) Immediate Actions

Bolster the Higher Education Commission ’s capacity

101. Implementing HEC’s ambitious agenda o f reforms requires an efficient, stable, and well staffed organization. To that end, senior and middle level managers have received training and have been exposed to best practices in renowned foreign centers. Terms o f Reference for a comprehensive Human Resource (HR) review have been drafted. The review will examine the current structure o f the Commission, including the roles and responsibilities o f the central leadership, the middle level professional staff, and staff o f regional directorates, and the division o f labor between these various levels. It will also scrutinize the institutional linkages between the Commission and the H E I s .

102. The vast array o f reforms launched by HEC has started to pay off, and the academic community i s generally satisfied with the Commission initiatives. Yet, critiques are also voiced - sometimes loudly-- often by lack o f an effort by HEC to explain the rationale for the reforms and to highlight their positive outcomes. Recognizing that it i s essential for the reforms to be complemented by a proactive and well-designed communications program with sector stakeholders and the wider public (including the press), HEC has started drafting a communication strategy.

Medium Term Priorities

103. The HR review will be completed, and i t s recommendations will be shared with stakeholders from HEC and outside. An action plan will be developed based on the recommendations o f the review, and measures will be launched according to the action plan. Training plans wil l be updated in accordance to the findings o f the review and the action plan.

104. HEC will have a communication needs assessment and a perception survey undertaken. Based on the findings, it wil l develop a more aggressive communication approach geared towards both the academic community and the society at large. A communication specialist will be recruited to bolster HEC’s communication team.

The communication strategy wil l be finalized.

(a) Immediate Actions

Expand a reliable and timely Higher Education Management Information System (HEMIS)

105. The lack o f a comprehensive and effective HEMIS i s hampering long-term sectoral planning (e.g. enrollment and budgetary projections), monitoring and evaluation. Hence, as a start to address this major deficiency, the Commission has decided to conduct a pilot o f the Campus Management (CM) module application in two H E I s . An internationally used institutional management tool, C M allows H E I s to manage both academic and financial activities, including enrollments, faculty, curriculum, equipment and building facilities. Implementation includes training on system operation and maintenance for HE1 staff.

Medium Term Priorities

106. The C M pilot project will be expanded to additional H E I s , and the associated training wil l continue. Progressive integration o f the individual HE1 data bases will be sustained so that a comprehensive, national HEMIS covering all public H E I s can be started and implemented. Later on, HEC wi l l seek means to include private sector H E I s so as to lean towards comprehensive coverage.

(e) Rationalize financial planning and management in the higher education sector

107. While widespread reforms are being carried out in public financial management under the Bank funded Project for Improvement to Financial Reporting and Auditing (PIFRA), the higher

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education sector remains outside the current ambit o f these reforms since both HEC and the H E I s are autonomous, self-accounting entities. However, HEC has embarked upon reforms aimed at increased effectiveness o f expenditures associated with enhanced transparency, quality and reliability o f financial information. This i s being done through improvements in funds f low mechanisms, comprehensiveness and timeliness in financial reporting and steps to augment good financial management across the sector. In addition, HEC has, on i t s own, initiated measures to enhance credibility and improve accountability.

Immediate Actions

108. To improve efficiency in the flow o f funds, the M O F has discontinued the use o f Personal Ledger Accounts (PLA) . These have now been replaced with Assignment Accounts and related procedures were notified in October 2008. Accordingly the Commission approached MOF for opening the necessary accounts. The Commission’s Assignment account i s now operational and i s being used for release o f both development and recurrent budget. It now takes 3 weeks on the average for funds to be transferred to H E I s for both development and recurrent expenditures.

109. To ensure that the objective o f producing timely, comprehensive and reliable financial statements i s achieved, HEC has commenced implementing the principles o f the New Accounting Model (NAM) introduced under the PIFRA. A strategy and plan o f action has been designed for preparation o f NAM based on the International Public Sector Accounting System (IPSAS) compliant annual financial statements, to be made available for audit within 4 months after the end o f each financial year. Simultaneously, the Commission embarked upon the automation o f accounting processes through SAP/R3 which has been operational with effect from July 1,2008.

110. To provide an analytical underpinning for reforms in the area o f financial governance, HEC has developed the Terms o f References for a pilot study to be conducted in selected public H E I s vis-a- vis international best practices in financial management and internal controls such as the COS08 Internal Control Integrated Framework. The study wil l cover topics including funds flow, organizational structures, budgeting, accounting policies and procedures, financial reporting and audit effectiveness (both internal and external). The main output will be the identification o f areas requiring interventions to facilitate the adoption o f NAM principles and eventually lead to the preparation o f NAM (IPSAS) compliant financial statements. In addition, recommendations for improvements in internal control structures wil l be made.

Medium Term Priorities

1 1 1. The recurrent budget allocation will be released within 10 days o f the start o f each quarter, while the development budget will be released within 15 days o f the start o f each half year. This will allow predictability in the f low o f resources to HEC for preparation o f credible spending plans that ensure expenditure effectiveness. Following the implementation o f SAP/R3 and adoption o f NAM principles, HEC wi l l prepare and present NAM (IPSAS) compliant annual financial statements o f FY 2008-09 for audit by December 3 1,2009. Subsequently, the time lag between the close o f a fiscal year and the presentation o f the financial statements for audit should be reduced to 4 months.

112. The pilot study on financial management practices will be completed. This will help establish a good practice model for public HEIs which can then feed into a reform strategy with an associated action plan to enhance the credibility o f expenditures at H E I s . COSO principles would serve as a guideline for this process.

COSO i s the Committee o f Sponsoring Organizations o f the Treadway Commission, a voluntary private sector

26 organization sponsored by five major professional associations o f the USA.

113. As of FY 2010, HEC will post quarterly budget execution statements on its website within 6 weeks o f the end of each quarter. The availability of timely and reliable budget execution information will assist informed decision making. The implementation o f SAPR3 will greatly facilitate the preparation of such reports. Putting these in the public domain will contribute towards greater transparency and openness. Over the medium term, public HEIs will be encouraged to follow suit.

@I Upgrade procurement performance in the higher education sector

114. While the PPRA issued the Public Procurement Rules in 2004, operationalization o f these ru les i s still in the making, with implementing regulations and standard bidding documents s t i l l under preparation. T h i s situation creates some degree of vacuum and ambiguity. In order to clarify the procurement environment in the higher education sector, HEC has taken immediate steps to make procurement transparent and efficient, and has several further measures ready for the years to come.

Immediate Actions

1 15. In order to enhance transparency in procurement, HEC has prepared a comprehensive Draft Procurement Handbook for goods, works and services and forwarded it to PPRA for comments. This will be accompanied by the requisite Standard Bidding Documents. In addition, HEC has commenced posting procurement notices and notices of award on i ts website in order to make the procurement process transparent.

Medium Term Priorities

116. Once the Procurement Handbook for goods, works and services (including Standard Bidding Documents) finalized and adopted by HEC, work will commence in two areas: dissemination of the handbook within HEC and extension of the scope of reform to the HEIs . HEC will ensure that procurement notices and notices o f award for procurements by 25 percent H E I s are posted on i ts website. In order to gauge the effectiveness of the new Handbook a third party ex-post sample reviews of procurements by 10 percent H E I s will be carried out.

117. A complete procurement capacity assessment will be carried out for HEC and a training needs assessment will be prepared so as to ensure that a l l personnel engaged in procurement are trained in the use o f the Handbook and best practice procurement. Finally, to ensure complete transparency, a complaints handling mechanism for aggrieved bidders will be established and results will be posted on HEC website.

Pillar 4: Ensuring Fiscal Sustainability and Effectiveness of Expenditure in Higher Education

1 18. Born after years of resource deprivation for the higher education sector, HEC started its tenure without too much attention to funding, which was easily obtained, thanks to the new priority given to the sector by the leadership o f the country. T h e Commission i s now fully aware of the costs implications of its program, and i s factoring them in i t s plans. Likewise, HEC i s conscious that resources are not unlimited, that trade-offs are to be made amongst sectors, and that it has to compete for resources. Therefore, it has to harness solid justifications to get the budgetary allocation necessary to implement its program. While, by any standards, the share o f public resources allocated to higher education i s still extremely low, the current economic and fiscal crisis has already led HEC to curtail some of the initial measures contained in the MTDF-HE, and to drop overambitious plans to create new engineering universities. I t reflects the consensus reached between HEC and the Ministry o f Finance (MOF) and the twofold commitment of the former to rationalize spending while implementing its program of reforms and of the latter to support financially this program.

The fourth pillar i s built around these concerns.

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(a)

Immediate Actions

119. Implementing an ambitious platform o f programs such as the MTDF-HE requires both a fairly good picture o f the future costs o f the programs, and a predictable flow o f resources to cover these costs. This can be achieved only if estimates and forecasts are reliable and if there i s a shared understanding o f the objectives, means and constraints by both the line institution (HEC) and the financier (MOF and Planning Commission). The Commission has taken steps to achieve full consistency with both the macro framework and the overall education sector.

Secure adequate funding for higher education within a sustainabIe overaIIjscaIframework

120. MOF has approved the Medium-term Financing Framework (MTFF) for higher education for the FY09/10-to-FY 11/12 period, consistent with the Federal government’s overall fiscal framework. A medium-term budgetary perspective i s vital for HEC to implement i t s extensive reform program in a sustainable manner. The MTFF provides HEC with greater certainty as to the resources available to carry out i ts program. At the same time, it also provides the M O F with a better basis for estimating annual funding allocations to HEC. The MTFF complements the MTDF-HE and constitutes a platform spelling out the nature o f the parallel obligations o f the two parties (HEC’s commitment to deliver and MOF’s commitment to fund). I t rationalizes budgetary negotiations, while introducing an element o f predictability in the amount o f resources needed for the sector.

121. The costs o f the MTDF-HE were projected using a detailed, comprehensive model based on demographic trends, intakes from secondary schools, transition rates, etc. Both recurrent and development costs were estimated on the basis o f the needs linked to the objectives o f the MTDF-HE (quality, access, relevance, and governance), differentiated by type o f institution. Improvements in internal efficiency (e.g. student-teacher ratios) are factored in. The model yields an estimate o f the “net expenditures” which remain to be financed by the federal budget.

122. Projections on the revenue side take are based on the Fiscal Responsibility and Debt Limitation Act o f 2005, which commits the Government to at least a doubling o f the budgetary allocation to the entire education sector as a share o f GDP between FY 2002 and FY 2012. This translates into an increase o f this share from 1.7 percent to 3.4 percentg. This i s the absolute “floor” set by the Act. However, the considerable needs o f the pre-university sector must be recognized. To that end, a cap o f 21 pe rcent for the share o f higher education expenditures in total education expenditures was built into the MTFF. Finally, non-governmental resources, whether through higher student fees, through generation o f H E I s ’ own resources or through further involvement o f the private sector were projected to increase, in order to minimize reliance on sole public monies.

123. The MTFF parameters provide the basis for HEC to receive the funds necessary to implement the MTDF-HE and to ensure that the Government i s on a path to meeting i t s education sector spending commitments. As a f i rst concrete step, to implement the MTFF, the MOF has released quarterly recurrent and development grants to HEC as per FY 2008/09 allocations for the third and fourth quarters.

Medium Term Priorities

124. In order to the MTFF to remain a realistic instrument, it needs to be constantly adjusted. Hence, HEC wil l update i t s resource requirements and forecasts. Similarly, the MOF allocations to HEC recurrent and development budget wil l be revisited and readjusted in subsequent years on the basis o f the rolling MTFF so that it w i l l allow HEC to achieve i t s medium term objectives.

Or, in t e r m s o f actual expenditures from 1.5% to 3.0% over the same period 9

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(b) Immediate Actions

Adjust the mechanism of resource allocation

125. HEC has introduced a formula to allocate recurrent budgetary resources to H E I s in a transparent manner. The formula i s an innovative feature, replacing the traditional historical approach o f a negotiated allocation based on previous year budget. The formula takes three parameters into consideration: (i) student numbers weighted for area o f study, (ii) grading and performance - as measured by the number o f MPhi l and PhD students and the number o f faculty with PhDs, and (iii) a compensation factor to counterbalance previous resource allocation inequalities among HEIs.

Medium Term Priorities

126. While this formula represented a significant advance and has worked well, HEC has identified a need to increase the link between funding and HE1 allocations. In order to address this, the resource allocation formula for public H E I s wil l be refined and a revised formula will be tested.

(c) Diversify sources offinds for HEIs

127. In 2006/07, about one-third o f total revenues o f public H E I s were from non-government funds generated from a range o f sources, including tuition fees, college affiliation fees, exam fees and other sources such as hostel charges. Public H E I s currently generate very l i t t l e money from contract research, commercial ventures, fundraising, endowments or other philanthropic sources. A number o f H E I s - and particularly older established universities - own assets such as land and buildings which have the potential to generate substantial revenues. The Commission i s beefing up i t s efforts to encourage H E I s to garner extra-budgetary sources o f revenues.

Immediate Actions

128. Fully engaged in re-adjustingthe MTDF-HE and updating the MTEF, HEC has opened discussions regarding the diversification o f resources. I t has also invited private sector organizations to fund scholarships in public H E I s .

Medium Term Priorities

129. Consultants wil l be recruited to develop a strategy to encourage H E I s to increase non- government sources o f f inding through better use o f assets at their disposal. The strategy wil l include asset management/endowment techniques, larger use o f asset holdings at H E I s and potential release o f regulatory or policy barriers to revenue generation. A roadmap to implement the strategy will be designed and pilots wil l be launched in H E I s on a voluntary basis.

(4 Immediate Actions

Optimize resource management in HEIs

130. HEC has begun collecting benchmark data on the cost o f delivery o f non-core services in public H E I s . This exercise wil l lay the ground for the development o f a framework for public-private partnerships (PPP) in the area o f non-core services. I t i s expected that it will provide valuable information to both HEC and HEIs , allow comparisons within the public sector, between public and private H E I s and with HEIs in other jurisdictions and give examples o f good practice both within and outside Pakistan.

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Medium Term Priorities

13 1. HEC wi l l complete the collection o f data on the cost o f non-core services, benchmark the cost o f delivery o f these services across H E I s and disseminate information collected. This wil l provide a basis for assessing the scope for increased efficiency in the delivery o f non-core services, and wi l l allow HEC to develop and pilot a toolkit to support HEIs undertaking PPP in the provision o f non-core services such as hostels, transportation, food services, I T and security.

132. HEC wi l l also explore how to make greater use o f the private sector in the financing, design, construction and operation o f public HE infrastructure. To kick-start this, the HEC wi l l develop a policy of encouraging the private provision o f infrastructure at H E I s (private finance initiatives), including benchmarking public and private sector managed building and operational costs. A special attention wil l be given to a particularly promising and common type o f PPP arrangement, the Build/Operate/Transfer (BOT) type o f arrangement, by which the private sector finances, designs, constructs and operates a public facility under a contract with the government for a given period.

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. LinktoCAS

133. The HESP i s fully consistent with the FY06-09 Country Assistance Strategy (CAS) that was approved by the Board in June 2006. The CAS had three inter-related and mutually reinforcing pillars linked to the strategic pillars o f the PRSP: (i) sustaining growth and improving competitiveness; (ii) improving government effectiveness and service delivery; and (iii) improving lives and protecting the vulnerable. The CAS identified sustainable growth as an essential pre-requisite for long term poverty reduction. By supporting Pakistan’s drive to improve access to, quality and relevance of, higher education, thus preparing a skilled workforce ready to spearhead the country’s growth ambitions the HESP i s aligned with these priorities. Should the program progress satisfactorily, the Bank potential programmatic engagement in the higher education sector wi l l be clearly reflected in the next CAS.

134. Bank engagement in the higher education sector at the federal level through the HESP DPC i s guided by the strategic principles o f the CAS: (a) client pull; (b) scaling up / replicating approaches that have already proved to be effective; and (c) focusing on outcomes.

B. Collaboration with the IMF and Other Donors 135. The IMF-supported Poverty Reduction and Growth Facility (PRGF) was concluded in December 2004, and the Government did not request a successor program. Until October 2008 Pakistan was on a standard Article IV surveillance schedule. The consultations concluded in December 2007 highlighted the widening current account deficit as the economy’s main vulnerability. In May 2008, the IMF concluded that a major fiscal adjustment effort accompanied by a substantial tightening of monetary policy and further exchange rate depreciation would be needed to contain inflation while reducing the current account deficit. At the request o f the Pakistani authorities, an IMF mission visited Islamabad in September 2008 to provide technical input to quantifying the economic stabilization package being developed by the authorities and preparing an updated medium-term macroeconomic framework. In light o f the deteriorating balance of payments position and substantial financing needs, the authorities entered into an IMF-supported 23-month SBA in November 2008.

136. The Bank i s collaborating actively with development partners at the federal and provincial levels, including through the PRES0 at the national level, and provision o f technical assistance for analytical and strategic work linked with the provincial reform program. Other development partners such as EC, NORAD, GTZ and DFID are complementing the Bank work in the NWFP, Punjab and

30

Sindh. However, until now, few development partners were significantly involved in supporting higher education in Pakistan. USAID, JICA and the British Council provide a large number o f scholarships.

C. Relationship to Other Bank Operations 137. The proposed E S P i s closely linked to several ongoing/ planned operations in the country. I t complements education projects in Punjab, NWFP and Sindh (which focus on increasing access and quality at basic and secondary education levels) as well as the National Education Assessment System (NEAS) project. Finally, the public financial management reforms supported by the HESP complement those being implemented under the platform o f the PIFRA, to improve the overall fiduciary environment and enhance the accountability process in the use o f public resources.

D. Lessons Learned 138. The HESP wil l be the f i rs t DPC in higher education in the South Asia Region. It builds upon lessons learned from previous policy based lending operations in Pakistan and from Bank experience o f policy reform programs in education in other countries. The key lessons include:

Strong political commitment and leadership are essential for a successful policy reform program to improve human development and reduce poverty;

Technically rigorous monitoring, evaluation and research studies are required to assess progress, measure results and outcomes, and guide the development o f future policy reforms;

Analytical and advisory activities that increase the knowledge base and advance the policy agenda play an important role in the deepening and broadening o f the reform program;

Strategic selection and sequencing o f reforms i s critical, along with appropriate capacity building measures, to ensure deep and lasting impact on human development;

Open consultation and communication with the community which the reforms will affect, serve, and benefit are essential for building consensus amongst stakeholders and for successful implementation o f sector-wide reforms.

E. Analytical Underpinnings

139. The policy actions supported by the proposed operation are based on earlier analytical work and the on extensive policy dialogue held during the preparation o f the Pakistan Higher Education Policy Note that was requested by MOF. They also draw heavily on international good practices in higher education - carefully contextualized to the Pakistani environment (Table 8 provides a summary o f linkages o f the proposed reform actions and the analytical reports).

140. Some o f the measures included in the program derive directly from the diagnosis and recommendations o f these previous works, for instance: (i) Study #I (item 3) @ Capping higher education expenditures as a share o f total education; (ii) Study # 3 (item 1) and Study # 7 (item 4) C3 Tenure track concept; (iii) Study # 3 (item 3) C3 Generalization o f HEMIS; (iv) Study # 3 (item 7) and Study # 5 (item 4) C3 Development o f the MTFF; (v) Study # 6 @ Revised criteria for establishment o f private universities; and (vi) Study # 7 ( item 1) C3 Creation o f the Quality Assurance Agency.

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#

(5)

Analytical Report

The Knowledge Economy and Education and Training in South Asia (September 2007)

Poverty Reduction Support Credit (PRSC) (May 2007)

Pakistan Higher Education Policy Note: An Assessment o f the Medium-Term Development Framework (June 2006)

Higher Education in Pakistan: A Historical and Futuristic PersDective (2005)

Pakistan Public Expenditure Management Report (January 2004)

Constructing Knowledge Societies: New Challenges for Tertiary Education (2002)

Task Force Report on Improvement o f Higher Education in Pakistan (2002)

8: Analytical Underpinning of the Proposed HESP Findings and Recommendations

1. Returns to higher education remain high and have increased relative to returns at lower levels o f schooling, suggesting supply i s lagging behind demand) 2. Graduate unemployment i s a temporary school-to-work transition phenomenon which should not distract policy makers f iom long-term investments in education 3. South Asia countries should shift emphasis to higher levels o f education without neglecting the unfinished agenda at the primary level 1. 2007/08 and 2008/09 federal budgets consistent with the targets set in the Fiscal Responsibility and Debt Limitation Law 2. Consolidate education expenditures consistent wi th the targets set out in PRSC: Improve access to, and higher quality of, education services 1. Strengthen skil ls o f existing and future faculty staff 2. Develop an assessment mechanism for student learning 3. Strengthen accreditation and quality assurance programs 4. Develop a comprehensive HEMIS 5. Introduce transparency and accountability into HEIs administrative procedures, strategic and financial planning, and financial management 6. Create vibrant PPP for competitive universities 7. Develop a communication strategy and invest in consultation 8. Ensure adequate funding for higher education within a sustainable overall fiscal framework 9. Continue mobilizing additional public resources for HEIs 10. Promote resource diversification 1. Upgrade the qualification o f the existing university teachers 2. Utilize fully the existing opportunities presented by Information Technology (and strengthen the Open University) 3. Encourage participation o f private sector wi th right incentives and regulatory environment 1. Increase the level and quality o f public expenditure on education 2. Develop incentive programs to stimulate demand for education especially among the poor to encourage enrollment 3. Develop public-private partnerships in social sectors 4. Prepare realistic estimates o f public funding requirements. 5. Give high priority to, and adequately fund, the Government plans for reversing the decline in higher education 1. Regulatory environment should encourage (rather than sti f le) innovations in public institutions and initiatives by the private sector to expand access to good-quality tertiary education

1. Grant universities autonomy and ensure their accountability 2. Create a central body to facilitate quality assurance 3. Fund-raising by individual universities must take place 4. Increase salary for recruitment and retention o f good quality faculty and staff 5. Give research a high priority by making a major allocation o f funds and creation o f an enabling environment

Links to HESP

Actions Pillars 1 & 2

Pillars 1 & 4

Pillar 4

Pillar 4

Al l policy actions

Pillar 1 Pillar 1 Pillar 3 Pillar 3 Pillar 3

Pillar 4 Pillar 3

Pillar 4

Pillar 4 Pillar 1 Pillar 2

Pillar 2

Pillar 4

Pillar 2

Pillars 2 & 4 Pillar 4 Pillar 4

Pillars 1 , 2, and 3

Pillar 3 Pillar 3 Pillar 4 Pillar 1

Pillar 1

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V. THE PROPOSED HIGHER EDUCATION SUPPORT PROGRAM

A. Operation Description 141. The proposed HESP Credit (US$ 100 million) i s a Policy Development Credit designed to support the Government o f Pakistan’s MTDF-HE. The overarching, long-term, objective o f the Framework i s to create the conditions for enhancing the stock o f skilled Pakistanis able to contribute to an economy increasingly based on knowledge, innovation and technology. The Higher Education Commission has started to implement the MTDF-HE, and i s planning to sustain and intensify i t s efforts to rehabilitate the higher education sector o f Pakistan, with the support o f the HESP.

B. Policy Areas 142. The proposed operation i s expected to yield complementary and closely intertwined benefits.

0 Knowledge Society: Pakistan ranked 9 1 st in the Global Competitiveness Report (2006/07). Even more telling, it ranked 104th for the education and training module in the same report. By supporting reforms aimed at increasing access, boosting quality and improving relevance, the proposed operation will contribute to harness the potential o f an enlarged pool o f young graduates, to improve labor productivity, and eventually, to sustain growth. Similarly, Pakistan i s lagging behind in terms o f investment in science and technology, and runs serious risks to be outpaced by i t s competitors and to miss the benefits o f globalization. By supporting the MTDF-HE measures to encourage research, the HESP wil l contribute to the renewal o f research with higher quality standards, to build the chain linking research and innovation and ultimately, to integrate the academic world and the economic sphere.

0 Poverty reduction: Through i t s impact on growth, the proposed operation wil l have an indirect, long-term effect on the general level o f poverty. The Government forecasts an increase o f the GDP per capita from i t s current $900 level to $1 150 by 2010. Improving the general level o f education and especially o f those who wil l be working in the growth driving sectors i s a prerequisite to achieve these results. The proposed operation will contribute to ensure that this prerequisite i s met and sustained.

Lower Zevels of education: Despite recent progress, the GER in secondary education i s s t i l l hovering at 44 percent and quality o f education i s poor at this level. The supply o f quality teachers i s a key ingredient to change this situation. By focusing on the quality o f education at the tertiary level, the proposed operation wil l contribute in the long run to enhance quality at lower levels o f education. Research conducted in universities on education wil l also help identify the main factors impeding a sustainable expansion o f quality basic education.

0 Contribution to fiscal stability: Growth cannot take place without macroeconomic stability. Reliable projections o f expenditures are a critical factor to achieve predictability o f budget outlays and to reduce fiscal turbulences. The multi-year medium term financial framework supported by this operation, and the agreement reached between HEC and MOF on the basis o f the MTDF-HE wi l l introduce more rationality and objectivity in the budgetary process, and wil l make this process less dependent on political vicissitudes.

0 Signaling effects: Transparent management, accountability and performance are important factors. By supporting the Government’s reforms to introduce such features and to promote good governance in universities, the HESP i s expected to have spill-over effects outside o f the higher education sector, thanks to the emergence o f a new cohort o f leaders trained in an improved governance environment. Similarly, the efforts to bring closer together the public

33

and private sectors in providing quality teaching and research are expected to have long term positive externalities. Finally, as highly educated citizens tend to be less prone to violence, increasing participation in higher education may contribute to improve security.

Goal 1: Increase supply o f skilled faculty

143. The HESP supports the completion o f initial reforms in the areas where it i s critical to signal a strong political wil l and to establish credibility both vis 6 vis all stakeholders. The most strategic o f these reforms constitute the prior actions which have been completed. Box 2 l is ts these prior actions. The Policy Framework (PF) summarizes goals, prior actions, and main indicators under each pillar (Box 3). The PF was prepared on the basis o f good practice principles for conditionality (Box 4). However, HEC i s committed to pursue these reforms in the subsequent years, and to take further measures to sustain and complement those already implemented. They are reported in the Policy Matrix (PM) -Annex 2).

Output indicators and targets: 1. Proportion o f additional public sector HEIs adopting the revised criteria for hiring faculty under the model Tenure Track system isat least 40% in 200819 2. Number o f faculty members havhg a PhD degree increases by at least300 by 2008/09

Box 2: Prior Actions Pillar I

Finance Division issues, and H E C notifies, model Tenure Track statutes for faculty staff in public HEIs

2 .s 2

Pillar I1 The Planning Commission notifies approval of policy allowing high quality private sector HEIs to qualify for up to 50% funding for development projects, subject to meeting ‘need-blind’ access requirements H E C notifies approval of, and implements, revised criteria for establishment o f private HEIs

’

Scale up PhD scholarship programs for qualified students and approve policy of fueign training o f six months for all indigenous PhD candidates Finance Division issues, and HEC notifies, model Tenure Track statutes for faculty staff in public HEIs Review professional devebpment module aimed at improving faculty pedagogical skills, assessmed, use o f technology, and improved student teacher interaction

Pillar I11 Public HEIs establish Quality Enhancement Cells (QECs) as per agreed criteria H E C prepares a comprehensive Draft Procurement Handbook for goods, works and services and forward to PPRA for comments

Goal 2: Enhance quality o f courses and programs

Pillar lV M O F approves the Medium-term Financing Framework (MTFF) for HEC for FY2009/10-FY2011/12 M O F releases quarterly recurrent and development grants to H E C as per FY 2008/09 allocations for the third and fourth quarters

Output indicators and targets: 1 .Plan for aligning undergraduate programs at affiliated colleges offering university programs i s issued 2. Proportion o f HEIs offering PhD programs that are meeting HEC criteria i s at least 75% in 2008/9

Box 3: Policy Framework (*) Overall outcome obiective: I Overall Outcome indicators and targets: Create the conditions”to enhance the stock o f skilled Pakistanis able to contribute to an economy increasingly based onknowledge and technology, through an overhaul o f the university sector

1. At least 1/3 o f increase in enrollme& in university sector between 2007/08

2 . Number o f PhD graduates produced by Pakistani universities increases at least

3. Number o f International Joumal Publications from Pakistan increases to at least 3,500 by 2008/09 from 2,500 in 2007/08

and 2008/09 attributable to students enrolled in science and engineering

to 550 by 2008/09

provide 1GB connectivity to at least 15 public and

I grantDrogram

.O id

2

0 r 0

Pillar 11: Expanding access and enhancing equity in higher education

Draft framework for institutional performance reviews Public HEIs establish Quality Enhancement Cells (QECs) as per agreed criteria Issue Quality Assurance (QA) Manual to streamline departmental assessment by QECs in HEIs

Goal 1: Increase equitable access to higher education

Output indicators and targets: 1. Increase in number of enrolled FTE students in the university sector by at

2 . At least 750 needs-based scholarships granted in 2008/09 least 15,000 by 2008/09

Promote distance learning through increasing Virtual University and AIOU enrollments Establish a student financial aid ofice in public and private HEIs Sustain the number of need-based scholarships for undergraduate students studying at public and private HEIs in

2 .;

Goal 2: Bolster capacity o f HEC

a 1 Pakistan

Output indicator and target: 1. Number o f staff attending training sessions. [Baseline (FY2007/08 = 70; Target (FY2008/09) = SO]

I Develop draft proposal for mtroducing a pilot loan scheme for students at selected public and private HEIs Goal 2 Promote oarhci~ation o f orivate sector I Outout indicator and target:

Goal 3: Generalize Higher Education Management Information System (HEMIS)

1 . I 1. Ai least 4 new private HEIS approved by HEC for grantof charter The Planning and Development Division notifies approval of policy allowing high quality private sector HEIs to qualify for up to 50% funding for development projects, subject to meeting ‘need-blind’ access requirements. HEC notifies approval of, and implements, criteria for the establishment of private HEIs

Actions

Output indicators and targets: 1. Campus Management Module ofHEMIS launched in at least 2 HEIs

I Pillar Ill Strengthening the governance and management o f higher education

Goal 4: Improve the financial planning and management in higher education

Output indicators and targets: 1. Integrated budget and expenditure reporting system in place

HEC designs a strategy and plan o f action for preparation o f N A M (IPSAS) compliant annual financial statements, to be made available for audit within 4 months after the end o f each financial year

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Goal 5: Imorove Drocurement Derformme in I OutDut indicators and targets:

Actions HEC prepares a comprehensive Draft Procurement Handbook for goods, works and services and forward to PPRA for comments

I Post procurement notices and notices o f atbard for procurements by HEC on website Ptllar IV Improving fiscal sustainability and effectiveness o f expenditure in higher education

Goal 1 Ensure adequate funding for higher I Output indicators and targets: education within a sustainable overall fiscal framework

Approved Medium Term Financing Framework

C .- 2 *

Actions I 0

(*) Prior actions are bolded Introduce a resource allocation formula for HEIs to rationalize fund allocation process

MOF approves Medium-term Financing Framework (MTFF) for HEC for FY2009/10-FY2011/12 consistent with overall fiscal framework M O F releases quarterly recurrent and development grants to HEC as per F Y 2008/09 allocations for the third and fourth quarters

Box 4. Good Practice Principles for Conditionality

Goal 2: Diversify source o f furds for HEIs

Principle I: Reinforce Ownership

Output indicators and targets: At least 10 private sector organizations/industry funding Scholarships in

After decades o f abandon, higher education has become a focus o f concern from the leadership o f the country when HEC took over the destiny o f the sector in 2002. Th is operation is the logical follow-up o f an init ial request by the M O F to the Bank to assess the HEC’s program. The strong initial political support to the reforms undertaken by HEC has survived the change o f government. As preparation o f the operation proceeded, HEC staff got deeply engaged in the DPC approach and in the translation o f the MTDF-HE into the PM, and ownership became stronger and stronger. The P M i s a genuinely joint product, mostly home-grown document fed with consultations with the academic and scientific communities.

Actions

Principle 2: Agree up front with the Government and other financial partners on a coordinated accountability framework

: Initiate consultation on resource generation and diversification Launch central Financial Aid and Development Center within HEC for resource generation and diversification

The Bank support, as summarized in the P M has been discussed at length wi th the HEC leadership and staff, shared with university representatives (from both the public and private sectors), and i t s parameters have been carehl ly adjusted and adapted to the local situation. The P M and the PF were also shared with other financial partners. However, until very recently, few o f the latter were involved in the university sector, other than through scholarship programs. The MTFF agreed upon between the MOF, HEC and the Bank provides a solid platform for any partner deciding to support the sector in the future.

Goal 3: Adjust HEC resource allocation mechanism for HEIs

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances

Output indicators and targets: Resource allocation formula for public HEIs revised

As the HESP i s the first DPC in higher education in South Asia, the accountability framework o f the operation was designed based on specific national circumstances. As the measures and actions contained in the P M are strictly echoing the Government’s reform package, the outcomes and indicators to measure them are by definition rooted in the country’s own reality, rather than being dictated by abstract theory or dogma. The procurement and financial management measures built in the operation reflect those taken by the Government in the larger context, including the PRES0 and the PRSC.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement

A consensus has been reached with HEC to select seven prior actions conditioning disbursement, distributed across al l four pillars o f the Policy Framework. There are many more milestones, which w i l l help monitoring

36

progress in the implementation o f the reform package, and are tools for HEC to follow up i t s own work, and take remedial actions in case o f departure from initial plans.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-basedfinancial support

Regular reviews will be conducted both by the Government and by the Bank, based on the framework of outcome indicators spelled out in the PM. A Steering Committee chaired by the Executive Director o f HEC wi l l convene on a regular basis to monitor progress. The Bank team will also follow up closely both from the Country Office and through regular and adequately staffed missions. These joint reviews wi l l allow avoiding

, unexpected developments, and wil l permit the predictability of the flow of financial support.

VI. OPERATION IMPLEMENTATION

A. Poverty and Social Impacts 144. Currently, higher education in Pakistan i s st i l l at the elitist stage, with a minute proportion o f the relevant cohort attending universities (or even colleges). Those who have made it to this level o f education have gone through a succession o f f i l ters during their basic education period. Academic performance aside, most o f these filters are o f a social nature. Consequently, those attending higher education today are not only few, they are also socially marked, but the room to radically alter this pattern at this level i s limited. Yet, by supporting actions to expand access, the proposed operation wil l contribute to reduce this social bias. However, HEC i s going further than simply increasing the number enrolled, and i s also implementing a program o f scholarships which will proactively address equity concerns and open up university doors to children o f families for whom higher education was until now unaffordable because o f i ts (direct and indirect) costs. The scholarship program wil l be paralleled by a loan scheme targeting students who do not fall in the poorest category, but st i l l need support to continue studying. In parallel, campuses are being open in disadvantaged regions and for women. Based on these various measures and the improvement o f the situation in lower levels o f education, it i s expected that the GER for the lowest two quintiles combined will increase from 2.4 percent to 3 percent within the next 4 years.

145. In addition to i t s direct equity impact, the HESP wil l also indirectly contribute to global poverty reduction in the long run. Such an indirect contribution has been documented in countries such as South Korea, which have invested heavily in education at al l levels, and have harvested both substantial growth rates and drastic reduction o f their poverty levels.

B. Environmental Aspects 146. The reforms and policies supported by the proposed loan to strengthen Pakistan’s higher education sector do not entail significant negative effects on Pakistan’s environment, forests, or other natural resources. The Government’s reform program includes the rehabilitation o f university buildings and minor extension o f existing infrastructures. These civi l works could be associated with minor negative environmental effects. The operation could entail positive environmental effects to the extent that policies are associated with increased numbers o f highly skilled Pakistanis that can develop environmental friendly technologies, conduct environmental research, and are prepared for strategic positions in the environmental sector. Pakistan’s environmental institutional framework, coupled with the adoption o f environmental safeguard standards for the expected civil works, constitutes an adequate framework to address the potential environmental effects o f the operation.

147. The Pakistan Environmental Protection Act (PEPA) o f 1997 i s the cornerstone o f the country’s environmental legislation. PEPA establishes the general conditions, tools, and organizational responsibilities for pollution prevention and control. Agencies with responsibilities for implementing

37

and enforcing the Act’s provisions include the Pakistan Environmental Protection Council (PEPC), the Pakistan Environmental Protection Agency (Pakistan EPA), the provincial Environmental Protection Agencies, and Environmental Tribunals. Within this framework, federal authorities are mainly responsible for policy formulation and provision o f resources and oversight to the provinces, while provincial authorities play the prominent role in implementing such policies and monitoring compliance with them.

148. The National Environmental Policy (NEP) o f 2005 constitutes an overarching framework for achieving the goals o f sustainable development through protection, conservation, and restoration o f Pakistan’s environment. Among the key instruments identified by NEP for i ts implementation i s the integration o f environment into development planning, including the diligent enforcement o f PEPA’s Environmental Impact Assessment (EIA) provisions. NEP also recognizes the need to strengthen the capacity o f federal, provincial, and district governments as a necessary condition for NEP implementation.

149. The Strategic Country Environmental Analysis (SCEA) prepared by the Bank identifies Pakistan’s main environmental challenges linked to economic growth and assesses the country’s institutional and organizational capacity to overcome such challenges. The SCEA found that the legislative and environmental management framework i s largely in place in Pakistan. However, the SCEA also provides recommendations to strengthen the capacity o f environmental agencies to anticipate and respond to environmental challenges.

C. Implementation, Monitoring, and Evaluation 150. The overall implementation and monitoring o f reforms i s being coordinated and managed by the Higher Education Commission. The Commission i s led by the Chairman”, who i s granted the status o f a Federal Minister, and the Executive Director who i s appointed as the head o f the Secretariat (with the status o f a Federal Secretary) and i s responsible for the implementation o f the orders, directives and policies o f the Commission. HEC consists o f various departments headed by Members and Advisors who manage major activities o f the Commission. Some o f the activities at the provincial level will be facilitated by the HEC’s Regional Centers (Karachi, Lahore and Peshawar). HEC has an impressive track record, and has managed to launch and carry out a number o f key reforms, including some politically sensitive ones (e.g. the tenure track system). However, the Commission’s capacity both at the central and at the regional level needs to be strengthened. A Human Resources Review will be undertaken and implementation o f i t s recommendations will follow suit.

15 1. The implementation o f reform actions related to the fiscal sustainability and effectiveness o f expenditure in higher education i s jointly managed by HEC and the Expenditure Unit o f the MOF. This dual responsibility i s critical to ensure the continuity o f the dialogue between the MOF and the Commission and to avoid major turbulences in either the program or its funding.

152. The development o f a comprehensive and effective Higher Education Management Information System (HEMIS) and capacity strengthening at the central level (HEC) and at each HE1 are the key reform actions under the Program (Pillar 3). The reforms aim to enhance timely and reliable data collection and data analysis and to institutionalize strategic planning processes at the HEC and the institutions. In the long run, only an efficient HEMIS will allow rigorous follow-up.

153. The monitoring o f various reform actions i s being done by the respective departments which are implementing the activities together with the M&E Department o f HEC. Each responsible

lo Since December 2008, the position i s held by an acting Chairperson, Ms. Shahnaz Wazir Ali, who i s also an Advisor to the Prime Minister for Human Development. An active search process to select a full-time chairperson i s underway.

38

department wil l be accountable for gathering data necessary to monitor the indicators attached to the reforms. Because o f the rigidity o f the system, the full outcomes o f most reforms undertaken will occur and be observable only after a few year lag. Rigorous evaluation o f the reforms will be possible only once their outcomes starts coming. However, both HEC and H E I s wil l start planning such evaluation by setting up baseline data. The academic community will be called upon for a number o f tasks related to quality improvement. HEC wil l commission independent agencies to conduct third party assessments in a number o f sensitive areas such as the tenure track system.

D. Fiduciary Aspects Country Context

154. The Pakistan Country Financial Accountability Assessment (CFAA) o f December 2003 highlighted improvements in expenditure reporting and monitoring, and stated that budget support operations disbursed and managed through Government’s financial management systems have satisfactory outcomes. However, it also underscored the need for building institutional and human resource capacity to support the transition to full reliance on Government systems, controls, and financial reporting. It revealed weaknesses in data reliability, particularly at the sub-national level. In accounting and financial reporting, challenges that remain to be addressed are: (i) creation o f internal audit units in departments to improve internal controls; and (ii) finalization o f the Controller General o f Accounts’ (CGA) control over organization, staffing, and training arrangements with clearly defined roles and responsibilities for staff reporting.

155. In addition, a PEPFM” review has recently been carried out. The review concluded, inter alia, that expenditure effectiveness would be fostered by a concerted review and revision o f Government business processes to eliminate redundant procedures in expenditure commitment and payments, particularly for the development budget.

156. Public Financial Management and Accountability Assessments (PFMAA) for the provinces o f Balochistan, Punjab, and NWFP were completed in May 2007, and identified deficiencies in internal audit and controls, and budget credibility. These assessments were based on the PEFA” PFMI3 Performance Measurement Framework. Reform strategies are being formulated to bridge the gaps. A federal-level PFMAA, using the same PEFA framework i s currently in progress and a draft report i s ready for discussion with the stakeholders.

157. A series o f actions and initiatives are already being implemented to achieve enhanced accountability and effectiveness o f public expenditures. These include both technical and institutional reforms which are mainly driven by the Bank funded Project for Improvement to Financial Reporting and Auditing (PIFRA). For better accounting and financial reporting, PIFRA has prepared a NAM which has introduced an IMF GFS compliant Chart o f Accounts (CoA). As o f FY 2007, the federal, provincial and district Governments are preparing their budgets on CoA. An automated budget compilation accounting and reporting system using the sophisticated SAPO33 i s being implemented country wide. To enhance effectiveness o f external audit, a risk-based audit methodology, compliant with international standards, i s being rolled out. I t has already been applied to federal government accounts for FY 2006. Introduction o f an Audit Management Information System i s also underway.

Public Expenditure, Procurement and Financial Management Public Expenditure and Financial Accountability Public Financial Management

II

12

13

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Higher Education Sector

158. HEC and the H E I s are autonomous, ‘self accounting entities’. PIFRA i s being rolled out to such entities in phases, starting from FY 2009. Eventually, HEC wil l be required to adopt NAM. The Commission, being keen to accelerate this implementation, held detailed discussions with the PIFRA directorate for a fast-track roll-out. Since funds were available, HEC decided to avoid administrative and bureaucratic delays and independently acquired the SAP/R3 software and proceeded with the adoption o f NAM. Accordingly, it i s now excluded from the scope o f PIFRA roll-out. Functional specifications are being reviewed by PIFRA experts to ensure consistency with NAM. The private H E I s have varied practices, but all recently established H E I s are required to put in place double-entry accounting systems and get their annual accounts audited by Chartered Accountants.

Procurement

159. The 2000 CPAR calls for a number o f institutional and procedural reforms in public procurement in Pakistan. In conjunction with the Bank’s assistance, it has served as an agenda for the Bank’s efforts for procurement reforms in Pakistan. These reforms are a necessary part o f good governance and transparency in the use o f public funds. To achieve the procedural / institutional reforms being sought, the key recommendation was the adoption o f a comprehensive law governing public procurement. There has been progress at varying paces in the area of procurement reform.

160. At the Federal level, the PPRA has been created and the Public Procurement Rules o f 2004 have been notified. HEC, being an organization under the purview o f the Federal Government, i s subject to the 2004 Public Procurement Rules, and i s in the process o f preparing a Procurement Manual in order to streamline i t s procurement processes as well as take a number o f steps that will lend further transparency to the process.

161. Safeguards Assessment of the Central Bank: An IMF Safeguards Assessment o f the State Bank o f Pakistan was conducted in 2001. It highlighted significant vulnerabilities, in particular relating to SBP financial statements and disclosure policies which fe l l short o f acceptable central bank standards. However, since 200 1 the risks associated with foreign exchange management control have been mitigated. SBP i s currently producing financial statements consistent with international accounting standards and formats. An independent review o f SBP’s internal audit function has been completed and the recommendations implemented. SBP has also established a process o f reconciling data reported to the IMF, and implemented guidelines to prohibit operations that pledge or encumber reserves, or place restrictions on, or otherwise impair the availability of, foreign exchange reserves outside the authorized framework. Also, the SBP Act has been accordingly amended to strengthen i t s independence and autonomy in the management o f reserves.

Overall Fiduciary Environment

162. Having due regard to the measures for mitigation o f the r isks associated with management o f the country’s foreign exchange reserves by SBP, the highest level o f commitment demonstrated for country-wide reforms in financial management being carried out under PIFRA and the initiatives being taken by HEC for improvement in procurement practices and financial governance in the higher education sector, the overall fiduciary risk associated with this operation i s rated ‘modest’.

E. Disbursement and Auditing 163. This proposed Credit would be made to the Islamic Republic o f Pakistan, represented by the Federal Ministry o f Finance. The IDA Credit proceeds, amounting to the equivalent o f US$ 100 million, would be transferred to the Federal Government in accordance with the terms o f the Financing Agreement (FA).

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Borrower and Credit Agreement:

164. Funds flow arrangements for the Credit: The proceeds o f the Credit will be disbursed on a single tranche basis upon Credit Effectiveness to the foreign exchange account o f the Government o f Pakistan held with the State Bank o f Pakistan. The Rupees equivalent o f the funds in the Account will, within two working days, be transferred into the Consolidated Fund o f the Government o f Pakistan (Account No. 1 - Non-Food) held with the SBP which i s used to finance budgetary expenditures.

165. Disbursements from the Consolidated Fund for activities to be financed under the Program by the Government o f Pakistan shall not be linked to any specific purchases, and no special procurement requirement shall be needed. The proceeds o f the Credit shall, however, not be applied to finance expenditures in the negative l i s t as defined in Appendix 1 o f the FA. If any portion o f the Credit i s used to finance ineligible expenditures as so defined in the FA, IDA shall require the Government to promptly, upon notice from IDA, refund the amount equal to the amount o f the said payment to IDA. Amounts refunded to IDA upon such request shall be cancelled from the Credit.

166. Accounting and Assurance Requirements for the Credit: The SBP, on behalf o f the Government, shall maintain an appropriate accounting system in accordance with generally accepted accounting principles. For this Credit, since no special fiduciary arrangements are required, no additional assurance requirements in the form o f a formal audit shall apply, in the light o f the fiduciary environment as established with the management o f foreign exchange reserves by the SBP. However, within 45 days o f disbursement o f the Credit by IDA, the Finance Secretary, Ministry o f Finance shall provide a written confirmation to IDA certifying the receipt o f the Rupees equivalent o f the Credit into the Consolidated Fund Account o f the Government o f Pakistan, the date o f the receipt, and the exchange rate applied to translate the Credit currency into Rupees.

F. Risks and Mitigation

167. The overall rating for the operation after mitigation i s “substantial”. There are several risks associated with both the reform program and the proposed operation. However, the potential benefits, together with the high level o f commitment and ownership in the country are deemed to offset these risks and to justify the Bank’s support to the reforms with the proposed HESP.

Political situation :

168. Pakistan has been through a period o f high turbulences. There are st i l l concerns regarding the impact o f the economic policy response to the macroeconomic imbalances and possible differences amongst main political parties on a variety o f issues, against the backdrop o f local fundamentalism, regional conflicts, and intense international pressure.

Mitigation: The medium-term policy framework to which the Government i s committed minimizes the risks associated with the impact o f the measures to address the economic situation. While the political risks remain substantial at a general level, they may not affect higher education because o f unanimous support to the sector and as these reforms have been supported through the political changes o f the last 12- 18 months.

Uncertain macroeconomic situation :

169. The overall macroeconomic situation i s fragile with attendant risks o f a balance o f payments crisis, significant slowdown in growth, and fiscal pressures crowding out poverty-related spending. Following a sharp deterioration in fiscal and current account deficits caused by o i l and food price shocks compounded by political uncertainty, the authorities developed a stabilization program and entered into an IMF SBA in November 2008. At the f i rs t quarterly review o f the SBA in February 2009, the stabilization program remained on track. The rapid decline in international commodity and o i l prices since August 2008 has reduced the risks, facilitated improvement in the external position and

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the achievement o f targets. However, given the global economic crisis, the medium-term outlook presents significant downside risks. The sharp deterioration in the global economic and financial outlook poses significant risks to exports, remittances and external financing. Even though projections in these areas as well as forecasts about the speed o f real economy recovery were significantly moderated during the first program review in February 2009, they may s t i l l turn out to be optimistic.

Mitigation; (a) The Bank plays a leading role in helping Pakistan and other stakeholders to mobilize needed resources; (b) Active, high level dialogue on macro targets and coordinated response with IMF and other donors to assist with formulation and implementation o f stabilization measures and provide financing as appropriate; (c) Work, together with government and donors, to sustain momentum for ongoing reforms to strengthen the environment for investment and growth; (d) Strong analytical work to support the Government economic team in developing and implementing policy measures for stabilization; (e) Both the PRES0 and the Fiscal Responsibility and Debt Limitation Act will mitigate risks that measures to reduce budget deficits lead to a reduction o f spending on education.

Inter- and intra Sectoral Trade-offs:

170. While education and higher education in particular are currently high in the priority ladder o f the country’s leaders, a shift in inter-sectoral priorities, and even their reversal remain possible. There i s a risk that the emphasis given to higher education wil l be questioned on the grounds that basic education should be given the absolute priority until Education for All i s achieved and primary education becomes universal.

Mitigation: There i s a wide consensus amongst mainstream political parties regarding the need to offset Pakistan’s lagging performance in the higher education sector, and to raise universities to international standards, so that they will become real engines o f growth. Both the “Vision 2030” and the PRSP put higher education as one o f the main ingredients to build “Pakistan Inc”. The risk that higher education would crowd out basic education i s mitigated by capping the share o f the education budget allocated to higher education

Internal resistance:

171. First, it could originate from faculty staff uncomfortable with accountability and academic performance (e.g. tenure track system). Second, it could come from administrators who feel threatened by the introduction o f stringent accountability rules. Thirdly, it could come from students ideologically opposed to any reform that results in greater cost-sharing and/or partnership with private business. All three constituents may form a common front, and paralyze HEC’s efforts to reform the system.

Mitigation; A major effort to engage in earlier consultation and in continuous dialogue with stakeholders should reduce - but not to eliminate-- these risks. HEC will initiate a communication strategy to engage the academic community and to spell out the benefits expected from the reforms. However, universities can always become hostage o f political rivalries regardless o f the scope o f reforms engaged (and o f the expected benefits) and there i s no recipe to fully avoid this risk.

Uneven institutional capacity:

172. Capacity constraints exist at two levels: (a) At the HEC level, the scope o f reforms may overstretch the implementation capacity o f the Commission. Another risk i s linked to the fact that the chairman’s position has been vacant since the resignation o f the f i rs t incumbent. Additionally, if HEC were to lose i t s autonomous status, it would also lose i t s reformist capacity and i t s efficient modus

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operandi; (b) at the institution level, administrative and faculty staff may become overwhelmed by increased daily management, planning activities and quality control requirements.

Mitigation: (a) HEC: The program i s carefully sequenced, and reforms are introduced gradually. An institutional review will be carried out, leading to a redefinition o f tasks and skill mix. HEC has been satisfactorily functioning during the absence o f a chairman, with both the Commission fulfilling its oversight role and the executive director in charge o f implementing reforms. A search process i s underway, and an eminent chairperson i s to be appointed shortly. Finally, the benefits o f keeping HEC as an autonomous agency are recognized by the Government; (b) H E I s : Improvements in the governance structure and massive training programs for faculty and administrative staff i s expected build capacity and to mitigate these risks.

Fiduciary Issues:

173. and procurement capacity.

Budget support operations carry the generic risks associated with weak financial management

Mitigution: Fiduciary r isks are mitigated by (i) improved accounting and recording practices under the PIFRA regime; (ii) the introduction o f new audit methodology; (iii) the capacity building o f the financial management staff in HEiIs; and (iv) the progressive alignment o f procurement rules to international best practices.

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ANNEXES

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ANNEX 1: Let ter of Development Policy

SECRETARY FINANCE

Government of Pakistan

(FINANCE DIVISION) Ministry of Finance

*** 3(10) EF-C.11/2005

D'o* No' Znd M a y , 2009 Islamabad, the ...............................

Higher Education Support Program: Letter of Development Policy

Dear Mr. Zoellick,

I. 1 am writing to request, on behalf o f the Government o f the Islamic Republic o f Pakistan (Government), for the Pakistan Higher Education Support Program (HESP) o f US% 100 million to create the conditions to enhance the stock o f skilled Pakistanis able to contribute to an economy increasingly based on knowledge innovation and technology, through an overhaul o f the university sector. This Letter o f Development Policy sets out the Government's key policy actions under the reform program o f the Higher Education Commission (HEC) as articulated in the Medium Term Development Framework (MTDF) o f the Commission. The Government i s seeking support for the MTDF o f the HEC which aims to increase participation, enhance quality and relevance and strengthen the efficiency and sustainability o f higher education institutions (HEls).

2. Despite the fact that the higher education sector received substantial government support since 2002, the sector lags behind other countries in the region in terms o f various indicators. The enrolment percentage o f the students in the age group o f 17-23 year in HEIs is lower than other comparable countries in the region. Furthermore. the output ofthe higher education sector was not aligned with the needs o f the economy --whether i n quantitative or qualitative terms. It was also out o f sync with the requirements o f a modern, tolerant and open society. In order to address the disconnect between what is expected from the sector and what the latter can offer, HEC has launched a series o f reforms to rehabilitate higher education institutions (HEls) and make them more relevant to the needs o f the 2 1st Century.

3. In the year 2002 the Government o f Pakistan set up HEC which developed a MTDF, covering the period from 2005-20 IO. The MTDF identifies major issues faced by the higher education sector and offers a long term vision and strategy. This strategic framework is built around four core aims and three supporting or cross cutting aims. The core aims are: (i) Faculty Development; (ii) Improving Access and Learning; (iii) Excellence in Research; and (iv) Relevance to National Priorities. In order to achieve these four objectives three cross cutting and supportive aims were identified: (t) Leadership, Governance and Management; (ii) Quality Assessment, Standards and Accreditation; and (iii) Infrastructure Development: Physical and Technological.

4. Building on the MTDF, HEC's vision for higher education in responding to domestic and global challenges, with the practicalsteps needed to deliver the HEC's contribution to the reform agenda is based on the following main pillars:

Pillar 1 - Pillar 2 - Pillar 3 - Pillar 4 -

Improving the quality and relevance o f teaching and research Expanding access and enhancing equity in Higher Education. Strengthening the Governance and Management o f Higher Education Improving fiscal sustainability and effectiveness o f expenditure in Higher Education.

5. The HEC has developed itself as an Organization that intends to move forward aggressively to achieve the goals as elucidated in the above Pillars. HEC progress to date and remaining actions under the Program are documented in the following pages. HEC envisages continuation o f implementation o f these programs t i l l the time that these are incorporated into the routine activities o f the HEls when HEC will limit its role as a facilitator, promoter and an auditor.

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Pillar 1: Improving the quali tvand relevance of teaching and research:

6. This pillar focuses on the three core aims o f the MTDF, namely faculty development, improving access and learning, and excellence in research with the cross cutting theme o f quality assurance and standards. *

7. Faculty Development: Only about 28% of the faculty o f public sector universities has PhD degrees in the year 2002-03. The need for faculty development within the higher education sector lies at the heart o f the HEC’s reform process, and an area in which vital and significant progress has been made. With a dual objective o f increasing institutional capacity and enhancing local research activities, a three pronged strategy was designed to achieve these objectives. Firstly, it developed a program o f indigenous and foreign scholarships strongly focused towards PhD studies primarily aimed at improving the academic qualifications o f university faculty. Secondly, as an immediate measure i t started a foreign faculty hiring program both on short and long term basis. Thirdly, it focused on capacity building of existing faculty through the Learning Innovation Department and National Academy o f Higher Education programs by organizing courses, workshops and seminars to build pedagogical skills aimed at improving the quality o f faculty at universities.

8. Several scholarship programs for enhancing qualifications o f the existing and new faculty o f the HEls as well as to attract people in the open market who wish to join as university faculty were launched from the very inception o f the HEC. To date, under 21 different scholarship schemes for PhD studies in international universities, 14,367 candidates were shortlisted for intensive out o f which 2,825 successful candidates are already abroad. A total o f 198 scholars have completed their education and have returned and are serving in Pakistani institutions; mostly at public sector HEls but a few in public-sector R&D organizations. Similarly, 4,173 PhD scholarships have been awarded under Indigenous PhD Program and these students are currently pursuing PhD studies all across Pakistan in public and private universities.

9. To meet the immediate shortfall o f well-trained faculty, 289 highly qualified foreign professors including 92 foreign nationals have been hired under the Foreign Hiring Faculty Program and placed on long term assigruiients across the county. Additionally, 175 foreign Professors are working on short term assignments.

10. For revitalizing the serving PhD, 489 Researchers and Faculty Members were awarded with 9-12 months Post-Doctoral Fellowships to work in international well eqvipped research laboratories and Universities. Out ofthese, 308 went abroad while 208 have completed their Post Doc and 100 are currently abroad. These relatively small investments have substantially increased research output for the Fellows and also paved way for international linkages and collaborative researches.

11. HEC launched a program for one-year initial placement o f every HEC scholar (and other Pakistani citizens) who did not have a confirmed employment in Pakistan prior to their return to Pakistan after completion o f PhD studies, in a public sector university willing to host them and ready to absorb them following their fresh faculty induction system. 30 scholars who have completed PhD from abroad and did not have a confirmed employment in Pakistan have been placed at various Universities under the ‘Placement o f PhD Scholars Returning from Abroad’ Program. Another batch o f 30 fresh PhDs or those about to complete PhD would soon be inducted in the universities under this Program.

12. Al l these efforts coupled with faculty development program o f several public sector universities would hardly be increasing a few percent o f the required PhD faculty needs o f the 56+ public sector universities. Realizing the enormity o f the task, HEC has prepared and submitted another PC-I for an additional 2000 PhD scholarships for meeting the ever-growing needs o f the universities for qualified faculty. Even after this addition, there would st i l l be a shortage o f foreign qualified PhDs. HEC is anticipating that, by the year 2012, there should be a sizeable mass o f well qualified faculty i n some o f the public sector uiiiversities which will further strengthen local doctoral programs.

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13. Retention o f well qualified motivated faculty is another challenge which was addressed in a comprehensive manner ensuring personal and professional satisfaction. HEC introduced the Tenure Track System in 2004. As per this system, the initial appointment o f faculty members is to be made on a contractual. basis. Permanent tenure i s granted subsequently on positive recommendations o f renowned international peers. Such faculty appointments carry an attractive salary package, comparable to that offered by the private sector. A l l new faculty appointments are now being filled through this system. Existing faculty members are also being allowed to opt for this system o f appointment on choice. 40% o f the public-sector HEls have adopted the model TTS statutes for making all fresh appointments.

14. HEC has implemented several in-service professional development programs ranging from training Master Trainers to short-term executive management, on-site training and workshops for university teachers and administrators. HEC regularly arranges and imparts a whole range o f one week to several months’ modular training programs. More than 1200 university teachers have been trained under the three months’ ‘Faculty Development Program’ designed for junior faculty.

I S . National Academy o f Higher Education (NAHE) is the project initiated by HEC for the professional development o f university faculty, as there i s no provision o f proper in-service training to the university faculty; even most of them don’t have pre-service training experience at all. In order to overcome this deficiency, NAHE is facilitating and conducting professional development coilrses through an intensive in-service program titled as staff development courses ( S D C ) at the door steps o f the public sector universities and degree awarding institutions across the country

16. Soon after its establishment, the HEC established a small Quality Assurance Department (QAD), a national Committee for Quality Assurance (QAC) and an independent Quality Assurance Agency (QAA). The roadmap used by the QAD was to: 1) create awareness among the academia about quality issues; 2) develop quality criteria; 3) develop processes for implementation o f criteria; and 4) monitor implementation o f quality criteria by the HEls. Quality assurance mechanisms have been successfully instituted across public sector Universities and standards established for award o f PhD studies and for publication in recognized research journals, adherence to a policy o f zero tolerance for plagiarism, establishment o f accreditation councils in the disciplines o f IT, Business Studies, Agriculture and Education to ensure that all programs in these disciplines are assessed by their peers and meet stringent quality standards. The QAD has published a number o f brochures dealing with the above topics which serve as guidelines for implementation o f these criteria by the HEls.

17. HEC, to bring uniformity in under-graduate programs, introduced a 4 year Bachelors degree program with a structured broad-based curriculum in HEls. Although a number o f universities have started awarding degrees under 4 year prograin but in many cases this program has not yet been implemented. The introduction o f this program in affiliated colleges is a major challenge. HEC has to work with provincial governments to make a jointeffort in this direction.

18. Revision o f Curricula has been focused to bring them at par with the international study programs. Intensive efforts were made to revise the outdated curricula through the respective National Curriculum Review Committees and, to date, I I 6 o f the curricula have been revised by the HEC.

19. The accreditation o f various programs through already existing Professional Councils and another 4 new Coiincils established by the HEC i s underway. However, all programs need to be accredited which will be done in phased manner. The volume o f work demands not only strengthening of QAA & Accreditation Councils but financial support will also be required to meet the anticipated cost of programme accreditation. The institutional accreditation will be carried out by QAA which also requires more funding.

, , .

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20. Although the quality culture has started taking roots in the HEls through the efforts o f the HEC, the present efforts have only just started addressing the QA program which includes establishment o f Directorates o f Distance Education at larger Universities to improve the quality o f private students and to recognize them as “Distant learners”, development of Qualification Framework with Technical Assistance (TA) from International organizations such as APQN, developing & strengthening Internal Quality Assurance (IQA) system at all HEls as a pre-requisite for Programme & Institutional Accreditation, programme Accreditation by the respective Accreditation Councils, Institutional AccreditatiodPerformance Evaluation on the pre-defined standards o f HEC establishment o f QA Centre at an appropriate University for the purpose o f research & development on QA processes & practices.

21. To ensure that all HEls should have access to research journals, the Digital Library (e-journal Program) i s one o f the greatest accomplishments o f the HEC. The Digital Library is accessible to approximately 250 institutions and provides open-access to e-books and journals in various fields o f study. A selection o f over 20,000 e-books and more than 300 online journals are available for researchers. The HEC has extended the Internet facility to all public sector universities by providing a fibre optic link with 2 mbps.

22. allocation o f more funds and efficient use o f existing resources.

23. Recognizing that the creation o f new knowledge through research i s the key to driving innovation, and one of the primary responsibilities o f an institution o f higher education, more than 20 Central Research Laboratories have been created at public universities across the country. These centres are meant to drive quality research and are being supported by major investments in information technology, such as the creation of a large Digital (e-journal) Library, video teleconferencing, etc.

HEC has launched a number o f initiatives to develop a strong Research System at national level by

24. HEC programs for promotion of research includes the traditional research proposal grants funding and support for presenting research papers at international and national professional conferences, to support for developing international research and institutional linkages, university-industry collaborative researches, purchase and upgrading o f laboratory instruments, and the Presidential Young Innovator awards.

‘ 25. More than 600 research grant proposals have been funded andidlaborations with international universities have been strongly encouraged. Through collaborative arrangements with the British Council and under the Pakistan-USA S&T Agreement, around 100 research partnerships have been initiated between Pakistani universities with those in the UK and the USA.

26. More than twenty five hundred faculty members o f public and private universities and degree awarding institutes were provided funds for presenting their research papers i n international conferences. A total o f 427 seminars, workshops andor conferences were also funded. This resulted in 240% increase in IS1 index scientific and research publications emanating from Pakistani universities and degree awarding institutes during last three years.

27. Numerous other initiatives have been undertaken for supporting excellence in academics and research. These included, Foreign and local Trainings, Pacts and Protocols, Country License for Advanced design software and Patent Filing.

28. Efforts are underway to develop a culture o f entrepreneurship, especially by establishing interdisciplinary, hybrid research incubators, technology parks, and centers o f excellence; in consultation with academia and industry. This would not only guide our research, but also facilitate the production and absorption o f quality resource into the industry.

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29. To promote open access to scientific literature and to promote the international visibility o f research originating from Pakistan, the Pakistan Research Repository (PRR) was established in 2005. The aim o f this service is to maintain a digital archive o f the intellectual output o f Pakistani institutions, to provide a single-entry access points to view this research, and to distribute this information as widely as possible. Currently, more than 1600 theses published in Pakistani universities have been uploaded to the repository.

Pillar 2: Trnnroving Access & Enhancine Equity

30. Considering that only 2.6 percent o f students in the age gmiip of 17-23 years were enrolled in H E l s during the year 2002, HEC earmarked improving access to quality higher education as one o f the key areas in its strategic planning. It succeeded to increase enrolment in HEls by about 140 per cent Le. from 132,126 in 2002 to 316,278 in 2008. Consequently, the enrolment in higher education o f the age group o f 17-23 years increased from 2.6 per cent in 2002 to 4.6 per cent in 2008; however this ratio is still the lowest among the South Asian countries that include Nepal, Bangladesh and Sri Lanka.

31. To achieve rapid increase in enrolment, the HEC encouraged admissions in the existing universities by linking funding with the enrolment as one o f the components o f the fonnula for funding the universities. I t also encouraged opening o f new DAIdniversit ies in the public and private sectors and facilitated the female education which now maintains the ratio o f 46.3 per cent compared with 36.8 per cent in HEls in 2002. The growth i n private sector Institutions was also remarkable i.e. from 44 to 56 during this period which needs further encouragement. To cope with the need to increase enrolment many Institutions have started evening programs to match the requirements o f space, faculty and infrastructure. A significant increase in enrolment at the postgraduate level during this period is especially commendable which shows a highly positive response o f the candidates to incentives offered by the HEC for such programmes.

32. The issues o f equity in the provisions o f higher education were addressed through provision o f a large number o f scholarships to the talented students. The HEC has managed to provide financial assistance to the needy students with the help of the donor agencies (namely USAID and JICA; and also from its own resources) and is also endeavouring to launch a major educational loans scheme to provide further opponiinities for higher education to less privileged but talented students. To provide residential facilities to the students o f rural areas, the HEC i s providing adequqte.funds to the universities for construction o f hostels at their campuses, for the students coming from distant areas.

33. New areas o f teaching and research have been introduced in the universities i n response to market demands and the diversity o f degree programs being offered by the HEls has expanded manifold. The HEC has embarked upon a program to document each degree in the form o f Qualification Framework and a Degree Supplement whicliis being finalized to provide basic information about each degree.

34. The unprecedented growth i n university level education during the period 2002-2005 has already put a great stress on the available physical and human resources o f HEIs to match the increased demand, while the issue o f quality assurance in higher education has become even more conspicuous. Emphasis on Quality Distance Education is seen as one o f the solutions to the gigantic problem and HEC plans to increase enrolment in the universities undertaking distance education, as well as to establish Directorates o f Distance Education i n the major public sector universities, while the quality parameters in this regard will be strictly enforced.

35. New institutions in the Public and Private sectors need to be established to maintain and enhance the existing level o f access to higher education by about 30% in the next 3 years. A concomitant increase in investment in terms o f infrastructure fac es, faculty development and Quality Management is required to maintain and enhance their rates ofgrowth in enrolment in the HEls.

Tertiary Education is a means to add value to the human capital o f a country.

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Strenethenine the Governance and Mannzement of Higher Education:

36. Weak Management and Governance is recognized as one o f the main obstacles for the improvemknt o f education system and to implement HEC reforms. Internal governance, management performance and accountability o f HEls need to be strengthened to create impact o f different reforms initiated by government in HE sector. To strengthen internal governance, management performance, and accountability o f HEls, we have planned to initiate following activities. to finalize guidelines to improve administrative management structure; to develop Custom-made training program and to ensure effective implementation. Accordingly senior HE1 management wil l be trained.

37. The Higher Education Commission consists o f the Commission, Le. the Board o f Governors headed by a Chairman and the Secretariat headed by the Executive Director who is the Chief Executive o f the HEC. HEC has been satisfactorily functioning, with both the Commission fulfilling its oversight role and the executive director i s in-charge of implementing reforms. While the affairs o f the post o f Chairperson are being looked after by the special Assistant to the Prime Minister on Social Sector, a search process is underway, and a chairperson will hopefully appointed by August 2009.

38. HEC wil l develop a template for preparation o f a five-year strategic plan including financial, academic plans and asset plans as well as targets and performance indicators for HEls. These wil l provide bases for all HEls to prepare their strategic plans.

39. HEC i s giving due importance to QA and has initiated different reforms to create awareness about quality and also develop good practices for different programs. Establishing Quality Assurance Agency (QAA) was another initiative in this direction. These quality assurance mechanisms have been successfully instituted across public sector Universities. Accreditation councils in the disciplines o f IT, Business Studies, Agriculture and Education have been established to ensure that all programs in these disciplines are assessed by their peers and meet stringent quality standards. The Quality Assurance Department has published a number o f brochures dealing with various topics as guidelines for implementation of these criteria by the HEIs. We are planning to establish accreditation councils in other selected disciplines. HEC also plans to get the QA Manual completed. Ranking list o f academic programs o f HEls will be published.

’ 40. The HEC does not differentiate between public sector and private, sector universities i n terms o f implementation o f Quality Standards. A l l the QA criteria and guidelines have been circulated among all the HEls for implementation and regular monitoring mechanism has been developed to ensure that each o f the criteria i s implemented fully and properly. HEC has established 30 Quality Enhancement Cells in various universities under QAA for activating Internal Quality Assurance in the HEls. I t is stipulated to have the QEC in all the remaining HEls to ensure adherence to at least the minimum baselines defined by HEC.

4 1. To bolster capacity o f HEC and strengthen it, we are planning to get a complete HR audit o f HEC to review the gaps and asses the needs keeping in view the changed scope o f HEC. Training will be arranged for senior middle management o f HEC and they wil l be exposed to best practise. Keeping in view importance o f IT and communication HEC staff will be provided with training opportunities i n IT, communication and management. HEC did arrange a few training courses for its employees but has to be done under a comprehensive systematic plan.

42. Improving communication o f HEC with stakeholders i s another missing link and needs special attention. HEC wil l enhance its existing communications capacity by hiring a professional communication specialist from the private sector. The cominunications needs assessment has already been initiated to be followed by finalization/implementation o f the Communications Strategy to better infordinvolve

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stakeholders and to give broader ownership o f HEC initiatives. Perception survey wil l be carried out and communication audit report will be periodically published.

43. The importance o f a robust, integrated and dynamic Information Management System (IMS) is crucial to improve management, in lowering expenses, and in better, more informed decision-making. The heart o f the IMS is a secure relational database containing all records o f students, personnel, finance etc. This database would be web-enabled and designed to provide different levels o f secured access to various authorized personnel for input and retrieval o f data. The IMS will be developed as part o f HEIMS which includes: (a) Administrative & Management Information; (b) Sttident Information; (c) Research Management & Faculty Information; and (d) Resource & Supply Chain Management.

44. Campus Management Solution (CMS) is an integrated solution which efficiently deals with the various activities o f an educational institution like faculty management, student management, administrative functions etc. and aims at strengthening the governance and management o f higher education. Campus Management wil l serve as the enabler for the institutions on how to deliver more competitive services to the sophisticated traditional and non-traditional students. I t provides and supports the nationwide standard framework for the services delivery for the Administration, Students and Faculty memben. As a pilot project six universities o f diversified discipline including medical, engineering and Liberal Arts and science from all the regions o f country are selected for implementation. The CMS modules include Recruiting & Admission, Sttident Records, Grade Book, Campus Self Service, Academic Advisement, Contributor Relations, Student Financials and Student Administration. HEC wil l be expanding these facilities in selected Institutions.

45. To improve the financial planning and management in the higher education sector HEC has designed a strategy and plan o f action for preparation o f N A M (IPSAS) compliant annual financial statements, to be made available for audit within four months after the end o f each financial year. This will increase effectiveness o f public expenditures in HEls associated with enhanced transparency, quality and reliability o f financial information for informed decision-making. This will also help for availability o f budgeted recurrent funds at the beginning o f each Financial quarters and development funds at the beginning o f each half year and provide timely and reliable HEC financial information including budget execution statements readily available on the web for decision making and public scrutiny. That wi l l help to strengrhened capacity o f public HEls to provide reliable and meaningful financial information and integrated budget and expenditure reporting system in place.

46. To improve procurement performance as well as for transparent and efficient procurement procedures in higher education sector HEC had finalized a Procurement Handbook for goods, works and services that will help HEls to reduce average procurement processing time with increased participation by bidders. We also plan to train staff accordingly.

Pillar 4: lmprovine fiscal.sustainabilitv and effectiveness of expenditure i n Hieher Education.

47. HEC has mobilized the universities to improve their fund raising abilities and generate additional funds through indigenous resources other than income from tuition fee etc by organizing the Alumni Association and developing better linkages with industry and the community. On the other hand, HEC has put in a considerable effort in managing risks and ensuring value for money and has taken various cost cutting meastires to economize the expenditure without compromising on quality.

48. While the increased governmerit funding i s justified, it is important that HEls complement this increase with increased revenues from tuition and other fees. Increased Government allocations for HEls would be justified on both efficiency and equity grounds and would provide institutions with additional resources to improve quality and research. Revenues generated from own resoiirces have increased considerably between 200U02 and 2007!08 - rising from Rs. 3.140 billion to Rs. 11.048 billion. This increase suffices and ensures the fiscal sustainability with increased government funding.

,I .

.

51

49. HEC has replaced i ts manual financial accounting system with a computer-based ERP (Enterprises Resource Planning) Solution backed by SAP - the world renowned business software solutions applications. HEC has successfully adopted double entry system o f accounting in line with the N A M (new counting m'odel) o f PIFRA (Project for Improvement in Financial Reporting and Auditing) adopted by the Government o f Pakistan. The SAP has been implemented to go-live with effect from 1st July, 2008 forthe four modules (i) FlICO - (Finance and controlling module), (ii) HR Module +Human Resource Management), (iii) MMdMate r ia l Management) and (iv) Project System-(For HEC Projects). The ERP solution provides 'real-time' access to financial data, project data and the organisation's assets register and other information. HEC reliability of financial reporting has improved markedly. The reconciliation levels o f fiscal accounts for revenue and expenditure that has been achieved would continue to excel with the adoption of internationally accepted principle o f accounts.

50. HEC intends to extend implementation o f ERF' solution to all the public sector H E k and would go for on-line access to the information related to revenue and expenditure as well as employees related data. HEC has implemented Campus Management Solution (CMS) - an integrated solution which efficiently deals with the various activities o f higher educational institutions and facilitates faculty management, student management, and administrative functions. This solution supports the nationwide standard framework for services delivery to students, faculty members and strengthened the administration. The CMS provides a better control for revenue collection o f universities.

51. Procurement rules based on PPRA rules and regulations have been prepared. These rules have been sent to the PPRA authorities for vetting and simultaneously are being implemented as these are in consonance with them. A l l the HEC procurement notices are being placed on HEC website for fair and open competition.

52. The Finance Division, Govt. o f Pakistan has finalized the Medium Term Financing Framework comprising recurrent and development allocations for Higher Education sector for FY 2009-10 to FY201 I- 12. These allocations are consistent with the core program of the HEC and the priority given by government to the sector. These have also been conveyed to the HEC and the World Bank separately vide letter D . 0 Dy. 1704iSIFS2009, dated April 7"', 2009. Tlic allocations to be made are given below:

Year 1 Recurring(Rs. In Billions) ,I Development (Rs. In Billions) m., -fin?. 1n I -. r I I I ._ 1 r LWY-IU 1 L I . 3 1 LL.3

FY 2010-1 I I 28.0 1 30.0 I 1 FY 2011-12 I 38.0 1 40.0

53. I n conclusion, I would like to reiteratethe commitment o f our Government to reforms and progress in the Higher Education sector, and I trust that this request for the World Bank support for their implementation will receive your favourable consideration.

Mr. Robert Zoellick President lntcrnational Bank for Reconstruction and Development 1815 H Street N.W. Washington DC, 20433

52

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ANNEX 3: Fund Relations Note

Assessment Letter for the World Bank March 2,2009

This note provides the IMF staf fs assessment o f Pakistan’s macroeconomic developments and prospects as background for the Poverty Reduction and Economic Support Operation policy loan being considered by the Executive Board o f the World Bank on March 26. The assessment is based on the findings o f the February 2009 IMF mission to Islamabad and Dubai that conducted the discussions with the Pakistani authorities o n the First Review under the Stand-By Arrangement (SBA) and the 2009 Article IV Consultation.

Recent Developments and Performance under the SBA Program

Economic developments in Pakistan since the SBA was approved on November 24,2008 have been favorable.

The exchange rate has been broadly stable, with the State Bank o f Pakistan (SBP) intervening on the buying side o f the interbank foreign exchange market. A s a result, the international reserves position has strengthened significantly (gross reserves amounted to $6.7 bi l l ion on February 23). There was a strong positive response from the T-bill market to the 200-basis points increase in the centra1 bank discount rate in mid-November, allowing the government to retire some o f its debt to the SBP. T-bill auctions through end-February have been consistently oversubscribed, with wide participation o f banks, and interest rates on T-bills came down from 14 percent (weighted average) in mid-January to 12.98 percent at the most recent session (February 25). There has also been a gradual ref low o f deposits into the banking system. Headline inflation declined markedly to 20.5 percent in January, due to lower food and energy prices, but year-on-year core inflation remains high at 19 percent, despite a decline in the month-on-month core inflation rate. In mid-December, the authorities removed the stock market price floor which had been in place for 3% months. Subsequently, stock prices dropped sharply, but the decline moderated in early January. Since then, the market has fluctuated in l ine with economic prospects and developments in international equity markets. All the quantitative performance criteria through end-December 2008 were observed. Through December, the budget registered a revenue shortfall that was compensated by expenditure restraint. Despite the improved confidence, credit and broad money growth have been slower than expected. Specifically, private sector credit growth, at 13 percent on an annual basis, has been lower owing to both lower demand f rom corporates and an increase in lenders’ risk aversion. Structural conditionality has generally been observed, although there is scope for

improvement in some areas. A contingency plan for handling problem private banks has been prepared. A committee to review the operational autonomy o f the SBP has been established. A tax administration reform plan has been prepared which comprises key reforms, such as the integration o f the income tax and sales tax departments and the replacement o f the current general sales tax with a broad-based VAT.

63

The authorities have requested technical assistance from the Fund to help with the design o f the VAT law, the revisions in the income tax legislation, and the possible introduction o f a carbon tax.

Electricity tariffs have been reviewed (with the World Bank) and it has been agreed that a 4 percent increase, to be implemented between February and June, would suffice to reach the cost recovery level, given the recent substantial drop in the price o f furnace oil. The SBP has stopped the direct provision of foreign exchange for furnace o i l o n February 1 , 2009, as agreed under the program. Progress has also been made toward the end-March 2009 benchmarks under the program. The fiscal program includes additional spending o n the social safety net. In late January, the authorities and the World Bank agreed on reforming the Benazir Income

The authorities have accelerated the preparation o f a plan to deal with the circular debt issue Support Program and introduce a scorecard for the identification o f poor households.

(inter-corporate debt in the energy sector).

Outlook

Since the SBA program was agreed in October, the world economic outlook has deteriorated significantly. This deterioration i s likely to affect Pakistan’s economy through several channels:

Domestic activity is likely to be weaker than originally envisaged in the program. Large- scale manufacturing output has dropped, and there has been a significant decline in exports. Preliminary projections for agricultural output in 2008/09 show that increases in rice and cotton crops, and the prospects o f a large wheat crop, would offset a decline in sugar cane production. Lower activity i s having an adverse impact o n fiscal revenue. Falling food and energy prices and the lower economic activity should continue to exert downward pressure on headline inflation. Under conservative assumptions, year-on-year headline inflation would decline to 10 percent by end-2008/09 (compared with 20 percent in the program), and to 6% percent by end-2009/10. The external current account has also improved, but the outlook is fragile owing to the recent decline in exports. The projected outcome for the external current account through end-2008/09 i s slightly better than envisaged in the program because a marked decline in imports is expected to outweigh the weaker export performance. The financial account surplus i s now expected to be somewhat lower than originally projected, due mainly to lower than envisaged inflows o f private capital. The overall external balance for 2008109 i s now projected to be better than programmed by about $500 million. This outlook, however, is subject to significant downside risks, especially if the drop in exports continues and remittances decline.

Key Challenges and Policy Issues

As noted above, the downturn in the world economy poses significant downside risks to economic activity and the external position. The authorities recognize that, given financing constraints, the scope for countercyclical policies i s l imited and that consolidating economic and financial stability remains the principal challenge faced by the authorities. The fiscal program and the monetary policy stance remain the key pol icy tools to consolidate stability.

64

The fiscal outlook for the remainder o f 2008/09 is likely to be affected by shortfalls in revenue and foreign budget financing. The authorities remain committed to the program target o f a deficit o f Rs. 562 billion, equivalent to 4.3 percent o f the revised GDP for 2008/09. The tax revenue shortfall i s expected to be partly offset by higher collections f rom the Petroleum Development Levy, as well as stepped-up auditing, and the authorities are committed to restraining expenditures, as needed, to achieve the budget deficit target. External budget financing in 2008/09 is now projected to be lower than expected, mainly reflecting a shortfall in external privatization proceeds.

Pakistan needs additional external resources in order to create fiscal space for higher development and social spending. A donor conference, tentatively scheduled for MarcWApril2009, will provide an opportunity to seek additional external assistance. The cumulative 500-basis points discount rate hike in 2008 has resulted in tighter monetary conditions. As inflation remains elevated, it i s premature at this stage to reduce interest rates, but rates may be lowered later in the year, provided that inflation continues to decline and the government avoids SBP financing o f the budget. The exchange rate should remain flexible, with market intervention largely aimed at meeting the international reserves targets.

Pakistan’s banks have weathered the crisis wel l so far, but there are increasing risks f rom the deteriorating economic outlook. Non-performing loans have risen to 9.1 percent in December 2008, from 7.7 percent in June. Stress tests by the FSAP update mission and by the authorities show that the deterioration in credit quality i s the main risk. Accordingly, the authorities need to continue to monitor developments in the banking system very closely.

Medium-term outlook

A significant increase in revenues as a share o f GDP remains the cornerstone o f the medium- te rm framework, but the economic downturn has led to a revision o f the medium-term path for fiscal and external adjustment. Growth i s projected to recover gradually t o 4.0 percent next year and 7.0 percent by 2013/14. Headline inflation is expected to decline rapidly to 6% percent by 2009/10. The external current account deficit is envisaged to narrow to 4% percent o f GDP in 2009/10 and to decline further to more sustainable levels by 2013/14. A significant increase in the revenue-to-GDP ratio will create fiscal space for higher public investment and sustainable growth. However, the room for increasing the public investment-to-GDP ratio may be more limited than previously assessed, as there i s a need to ensure that the outlook allows for an adequate increase in outlays o n poverty reduction.

Status o f IMF Relations

As noted, a SDR 5.169 bi l l ion ($7.6 billion) SBA was approved on November 24, 2008. The staff has just completed the discussions on the First Review o f the SBA and the 2009 Art icle IV Consultation, which are scheduled to be considered by the IMF Executive Board in late- March 2009.

65

ANNEX 4: PAKISTAN AT A GLANCE

66

3 l Y r i

67

AFGHANISTAN

CHINA

To Mandi

30°N

25°N

65°E 70°E 75°E

K2(Mt. Godwin-(Mt. Godwin-

Austen) (8,611 m)

FED. CAPITAL TERRITORY

ISLAMABAD

KarakoramRange

Tha

rD

e s e r t

Hindu

Kush

Central Makran Range

Indu

s

Ravi

Sutlej

Chenab

Jhelum

Zhob

Ind us

Mas

hkai

Indus

B A L O C H I S T A N

S I N D H

P U N J A B

NORTHERNAREAS

Quetta

Lahore

Peshawar

Muzaffarabad

ISLAMABAD

SrinagarKargil

Hyderabad

Faisalabad

Rawalpindi

Saidu

Chitral

D.I. Khan

GujratGujrat

Kahat

Bannu

GujranwalaGujranwala

D.G. Khan MultanMultan

Sahlwal

BahawalpurNok Kundi

ChamanChaman

Surab

Zhob

BadinThatta

Panjgur

Ranipur

Turbat

MoroMoro

Bela

Gwadar

ApproximateApproximateLine of ControlN . WN . W. F. F. P. P..

JammuJammuand Kashmirand Kashmir

B A L O C H I S T A N

S I N D H

P U N J A B

N . W. F. P.

FED. CAPITAL TERRITORY

ISLAMABAD

SrinagarKargil

Hyderabad

Faisalabad

Rawalpindi

Saidu

Chitral

D.I. Khan

Gujrat

Kahat

Bannu

Gujranwala

D.G. Khan Multan

Sahlwal

BahawalpurNok Kundi

Chaman

Surab

Zhob

BadinThatta

Panjgur

Ranipur

Turbat

Pasni

Moro

Bela

Gwadar

ApproximateLine of Control

Karachi

Quetta

Lahore

Peshawar

Muzaffarabad

ISLAMABAD

AFGHANISTAN

INDIAISLAMICREPUBLIC

OFIRAN

CHINATAJIKISTAN

Jammuand Kashmir

Indu

s

Ravi

Sutlej

Chenab

Jhelum

Zhob

Ind us

Mas

hkai

Indus

A r a b i a n S e aRann of Kutch

To Kandahar

To Kerman

To Kerman

To Khash

To Jodhpur

To Mandi

To Kabul

To LudhianaTo

Bhatinda

KarakoramRange

Tha

rD

e s e r t

Hindu

Kush

Central Makran Range

K2(Mt. Godwin-

Austen) (8,611 m)

35°N

30°N

25°N

30°N

25°N

65°E 70°E 75°E

65°E 70°E 75°E

PAKISTAN

0 50 100 150

0 50 100 150 Miles

200 Kilometers

IBRD 33460

JANUARY 2005

PAKISTANSELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endorsemen t or a c c e p t a n c e o f s u c h boundaries.

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES