Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: PAD1738

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROJECT PAPER

ON A

RESTRUCTURING AND PROPOSED ADDITIONAL LOAN

IN THE AMOUNT OF US$ 130 MILLION

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR

ADDITIONAL FINANCING FOR PUNJAB IRRIGATED AGRICULTURE PRODUCTIVITY IMPROVEMENT PROGRAM PROJECT

November 7, 2017

Agriculture Global Practice South Asia Region

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

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

ii

CURRENCY EQUIVALENTS Exchange Rate Effective November 2017

Rs 105 = US$1

FISCAL YEAR July 1 – June 30

ABBREVIATIONS AND ACRONYMS

AF Additional Financing CPS Country Partnership Strategy DA Designated Account DESCs District Environmental and Social

Coordinators DGAWM Director General Agriculture Water

Management DPD HQ Deputy Project Director at Headquarters DWMHQ Director Water Management

Headquarters ERR Economic Rate of Return ESA Environment and Social Assessment ESC Environmental and Social Coordinator ESMP Environmental and Social Management

Plan FM Financial Management FMIS Financial Management Information

System GDP Gross Domestic Product GoP Government of Pakistan GoPunjab Government of Punjab GRS Grievance Redress Service HEIS High Efficiency Irrigation Systems IBRD International Bank for Reconstruction

and Development IBWS Indus Basin Water System ICT Information Communication Technology IDA International Development Association

IFR Interim Financial Reports IRR Internal Rate of Return M&E Monitoring & Evaluation MTR Mid Term Review NGO Non-Governmental Organization OFWM On Farm Water Management ORAF Operational Risk Assessment Framework PAD Project Appraisal Document PCPS Pre-cast Concrete Sections PDO Project Development Objectives PIPIPP Punjab Irrigated Agriculture Productivity

Improvement Program Project PISCs Project Implementation Supervision

Consultants PMU Project Management Unit RPCU Regional Project Coordination Unit SCF Standard Conversion Factor SDR Special Drawing Rights SORT Systematic Operations Risk-Rating Tool SSCs Supply and Service Companies USD United States Dollar W/Cs Watercourses WB World Bank WUA Water Users Association

Vice President: Annette Dixon Country Director: Patchamuthu Illangovan

Senior Global Practice Director: Practice Manager/Manager:

Juergen Voegele Mary Kathryn Hollifield

Task Team Leader(s): Masood Ahmad/Tahira Syed/Guo Li

ii

PAKISTAN ADDITIONAL FINANCING FOR PUNJAB IRRIGATED AGRICULTURE PRODUCTIVITY

IMPROVEMENT PROGRAM PROJECT

ContentsI.  Introduction ............................................................................................................................. 1 

II.  Background and Rationale for Additional Financing .......................................................... 1 

III.  Proposed Changes ................................................................................................................ 4 

IV.  Appraisal Summary ............................................................................................................. 7 

V.  Risks ..................................................................................................................................... 9 

VI.  World Bank Grievance Redress ........................................................................................... 9 

Annex 1: Revised Results Framework .......................................................................................... 10 

Annex 2: Detailed Project Description ......................................................................................... 14 

Annex 3. Systematic Operations Risk-Rating Tool (SORT) ........................................................ 23 

Annex 4. Economic and Financial Analysis ................................................................................. 25 

iii

ADDITIONAL FINANCING DATA SHEET

Pakistan

Additional Financing for Punjab Irrigated Agriculture Productivity Program Project (P157736)

SOUTH ASIA

GFA12 .

Basic Information – Parent

Parent Project ID: P125999 Original EA Category: B - Partial Assessment

Current Closing Date: 31-Dec-2018

Basic Information – Additional Financing (AF)

Project ID: P157736 Additional Financing Type (from AUS):

Scale Up

Regional Vice President: Annette Dixon Proposed EA Category: B - Partial Assessment

Country Director: Patchamuthu Illangovan Expected Effectiveness Date: February 28, 2018

Senior Global Practice Director:

Juergen Voegele Expected Closing Date: 31-Dec-2021

Practice Manager/Manager:

Mary Kathryn Hollifield Report No: PAD1738

Team Leader(s): Masood Ahmad, Guo Li, Tahira Syed

Borrower

Organization Name Contact Title Telephone Email

Islamic Republic of Pakistan, Economic Affairs Division,

Arif Ahmed Khan Secretary +92-51-9212769 secretary@ead.gov.pk

Project Financing Data – Parent (PK Punjab Irrig Agri Productivity Improvement Program Project (P125999) (in USD Million)

Key Dates

Project Ln/Cr/TF Status Approval Date

Signing Date Effectiveness Date

Original Closing Date

Revised Closing Date

P125999 IDA-50810 Effective 20-Mar-2012 12-Apr-2012 26-Apr-2012 31-Dec-2018 31-Dec-2018

Disbursements

Project Ln/Cr/TF Status Currency Original Revised Cancelled Disbursed

Undisbursed %

Disbursed

P125999 IDA-50810 Effective XDR 161.20 161.20 0.00 130.56 30.64 80.85

iv

Project Financing Data - Additional Financing for Punjab Irrigated Agriculture Productivity Program Project (P157736 ) (in USD Million)

[ X ] Loan [ ] Grant [ ] IDA Grant

[ ] Credit [ ] Guarantee

[ ] Other

Total Project Cost: 206.0 Total Bank Financing: 130.0

Farmers: 70.0 Financing Gap: 0.0

Financing Source – Additional Financing (AF) Amount

Farmers 76.0

IBRD 130.00

Financing Gap 0.00

Total 206.0

Policy Waivers

Does the project depart from the CAS in content or in other significant respects? No

Explanation

Does the project require any policy waiver(s)? No

Explanation

Team Composition

Bank Staff

Name Role Title Specialization Unit

Masood Ahmad Team Leader (ADM Responsible)

Lead Hydropower Specialist

Water, Irrigation, Irrigated agriculture

GEEDR

Uzma Sadaf Procurement Specialist

Senior Procurement Specialist

Procurement and Contract Management

GGODR

Syed Waseem Abbas Kazmi

Financial Management Specialist

Senior Financial Management Specialist

Financial Management

GGODR

Qurat ul Ain Hadi Financial Management Specialist

Senior Financial Management Specialist

Financial Management

GGODR

Chaohua Zhang Safeguards Specialist

Lead Social Development Specialist

Social GSURR

Ahmad Imran Aslam Safeguards Specialist

Environmental Specialist Environment GENDR

Salma Omar Safeguards Specialist

Senior Social Development Specialist

Social GSURR

Hanna Jang Country Lawyer Counsel Legal LEGES

Martien Serrano Country Lawyer Senior Counsel Legal LEGES

v

Victor Ordonez Loan Operations Senior Finance office Loan WFALA

Tahira Syed Co-Team Leader Senior Rural Development Specialist

Rural Development GFADR

Anwar Bhatti Financial Analyst Disbursements Disbursements SA1PK

Faly Diallo Loan Operations Finance officer Loan Operations WFALA

Guo Li Agri. Economics Senior Agriculture Economist

Marketing, Value Chain

GFA12

Shabir Ahmad Team Member Senior Program Assistant Operational Support SACPK

Venkatakrishnan Ramachandran

Team Member Program Assistant Operational Support GFADR

Locations

Country First Administrative Division

Location Planned Actual Comments

Pakistan Punjab province All districts All districts

All districts

Institutional Data

Parent ( PK Punjab Irrig Agri Productivity Improvement Prog Project-P125999 )

Practice Area (Lead): Agriculture

Cross-Cutting Topics

[ X ] Climate Change

[ ] Fragile, Conflict & Violence

[ X ] Gender

[ X ] Jobs

[ X ] Public Private Partnership

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100)

Major Sector Sector % Adaptation Co-benefits %

Mitigation Co-benefits %

Agriculture, fishing, and forestry

Irrigation and drainage 83

Public Administration, Law, and Justice

Public administration- Agriculture, fishing and forestry

11

Agriculture, fishing, and forestry

Agricultural extension and research

6

Total 100

Themes

Theme (Maximum 5 and total % must equal 100)

Major theme Theme %

vi

Rural development Rural services and infrastructure 43

Environment and natural resources management

Water resource management 43

Rural development Rural policies and institutions 14

Total 100

Additional Financing for Punjab Irrigated Agriculture Productivity Program Project ( P157736 )

Practice Area (Lead)

Agriculture

Contributing Practice Areas

Cross Cutting Topics

[ X ] Climate Change

[ ] Fragile, Conflict & Violence

[ X ] Gender

[ X ] Jobs

[ X ] Public Private Partnership

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100)

Major Sector Sector % Adaptation Co-benefits %

Mitigation Co-benefits %

Agriculture, fishing, and forestry

Irrigation and drainage 83 30 30

Public Administration, Law, and Justice

Public administration- Agriculture, fishing and forestry

11 10 10

Agriculture, fishing, and forestry

Agricultural extension & research

6 10 10

Total 100

I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this

project.

Green House Gas Accounting

Net Emissions -31,222,171.00 tCO2-eq Gross Emissions

352,872,336.00 tCO2-eq

Explanation: The net carbon balance quantifies GHGs emitted or sequestered as a result of the project compared to the without-project scenario. Over the project duration of 20 years, the project constitutes a carbon sink of 31,222,171 tCO2-eq. The project provides a sink of 14 tCO2-eq per ha, equivalent to 0.7 tCO2-eq per ha per year. The main carbon sinks are primarily from reduced agricultural inputs, while other sources include land use change, perennials, and the introduction of climate-smart practices for annual crop production. At the time of appraisal, the overall percentage of co-benefits was calculated at 45% for the project.

Major theme Theme %

vii

Rural development Rural services and infrastructure 43

Environment, natural resources management Water resource management 43

Rural development Rural policies and institutions 14

Total 100

Consultants (Will be disclosed in the Monthly Operational Summary)

Consultants Required? Consultants will be required

Pakistan Additional Financing for Punjab Irrigated Agriculture Productivity Program Project (P157736)

I. Introduction

1. This Project Paper seeks the approval of the Executive Directors to provide an additional Loan in an amount of US$130 million to the Islamic Republic of Pakistan for Additional Financing for Punjab Irrigated Agriculture Productivity Program Project (PIPIPP) (P157736). The proposed additional loan would help meet the financing gap, allow scaling up of key activities, and finance a new activity on post-harvest processing and value addition. The closing date of the original Credit is proposed to be extended by one year to December 31, 2019. II. Background and Rationale for Additional Financing

Country and Sector Context

2. Pakistan’s macroeconomic performance improved yet remains modest. Pakistan’s economic outlook is for moderately higher growth. Pakistan’s GDP growth continues to increase and was at 5.3 percent in FY17, up from 4.7 percent for FY15-16 and 4.0 percent in the previous year. Macroeconomic risks have increased and the external balance is vulnerable given the persistent current account deficits that put further pressure on reserves. Efforts to reverse the current macroeconomic imbalances and continue implementation of structural reforms will be needed for sustaining growth and improving welfare.

3. Despite slight improvement in FY17, agriculture sector performance has been disappointing, primarily due to low production of all major crops including wheat, rice and cotton. In particular, production of cotton contracted by nearly 30 percent in 20161. Poor quality inputs, particularly seeds and pesticides, resulted in low farm revenues, making agricultural productivity not only stagnant but also the lowest in South Asia. Some other elements contributing to low productivity include excessively large government procurement programs, an outdated agricultural research system, low water efficiency, and poor irrigation management. Input market distortions include poorly regulated seed markets and large and untargeted subsidies for fertilizer and irrigation water. To address these challenges, Pakistan needs to improve the competitiveness of its agriculture sector by increasing on-farm productivity and improving efficiency and quality along the post-harvest value chain. This project helps address the issue by improving productivity at the farm level, making farms more competitive, and adding value with processing at the farm level.

4. Pakistan is facing a significant climate change risk. The Global Climate Risk Index places Pakistan among the top 10 most climate-vulnerable countries. Pakistan increasingly experiences droughts and cyclones; floods have caused damages approaching US$ 14 billion since 2010. Climate change heightens the pressure to manage water resources with utmost care. The melting Hindu Kush–Karakoram–Himalayan glaciers could affect water flows into the Indus River system, with implications for energy and food security. Agriculture produces approximately 41% of all GHG emissions in Pakistan, mostly through livestock production. To continue to reduce poverty and increase shared prosperity, Pakistan requires technologies and practices which can strengthen the agriculture sector’s ability to deal with the climate risks through both adaption and mitigation activities. Like the parent project, the additional financing will continue to improve water use efficiency through making irrigation system more resilient to climate change, reduce emission in pumping water, and improve fertilizer use efficiency, all these outcomes will contribute a strengthened capacity of the agriculture sector to deal with the climate change risk. 5. Irrigation and drainage sector performance improved, but challenges remain. The availability of water is crucial for economic growth. Pakistan’s agriculture sector is almost wholly dependent on irrigation, with more than 90 percent of agricultural produce supported by irrigated lands. At the same time,

1 Pakistan Development Update – making growth matter, November 2016, The World Bank

2

the country’s per capita availability of usable water is decreasing, primarily because of population growth, but also because of pollution and inefficient use of water resources. It is estimated that about 40 percent of the water is lost in the unlined community watercourses (W/Cs) through seepage, spillage, side leakage, and evapotranspiration by the weeds and wild bushes along the W/C. In Punjab, of the total 59,500 W/Cs in irrigated areas, about 43,700 were improved before the parent project under various internationally funded projects and the Government-funded National Program for Improvement of Watercourses. Under PIPIPP 5,500 new W/Cs are being improved, leaving about 10,300 that still need to be improved. However, many of the W/Cs had only minor improvements, and only 15 percent of the sections were lined in an effort to extend project coverage and benefits as much as possible.

6. The W/Cs improvement program started in late 1970s. Even though it is an extremely beneficial investment, it initially had slow acceptance by and uptake among the farmers. It took at least two decades (1980s and 1990s) to sort out and understand the technical, social, cost, and implementation issues; now the program is extremely popular in the farming community. However, in the early days of the program, most W/Cs received only meager improvements: mostly earthen sections were reconstructed, often less than 15 percent of the W/Cs was lined, and only turnout structures were installed. Many of the improvements carried out in the 1980s were not done to the standards being used today. As the field investigation and analysis have shown that the optimal target length of lining would be 50 percent of the W/C, this standard would be adopted under the proposed additional financing (AF).

7. The laser land-leveling program started in the 1980s, and it also took a while to be adopted by the farming community. Its benefits include saving up to 30 percent of irrigation water, uniform seed germination, and increased efficiency of fertilizer uptake, resulting in crop yields that are 20 percent greater. The parent project provided 5,000 laser leveling units, and Punjab now has the capacity to level about 3 million acres annually. The laser units are very popular, and people are purchasing them with their own resources; laser leveling has become an income-generating activity. Therefore, the AF would not finance laser units. 8. The High Efficiency Irrigation System (HEIS) program is a new initiative by the Government of Punjab that increases the efficiency of water use from 40 percent to 95 percent. Although HEIS technologies have been developed and successfully adopted in various countries around the world, uptake of this program has been slow. The high installation cost is a constraint to the adoption of these technologies. Recent research and development of low-cost efficient irrigation technologies, particularly in China, has improved the cost-effectiveness of these systems for orchards, field crops, and vegetables. The parent project promotes HEIS as a key intervention for enhancing agricultural productivity and for generating employment opportunities in installing and maintaining the systems. Private sector participation is being promoted through the manufacturing and supply of materials. A significant impact of the HEIS technologies is the increased participation of women farmers, as irrigation has become a daytime-only activity and is much easier to manage because of a simple tap mechanism. In addition, the employment of women has increased in the HEIS farms; in particular, at least 50 women are employed on an average 10-acre vegetable farm. The AF will continue to support the HEIS interventions. 9. Agricultural productivity and market access are crucial for inclusive economic growth. With strong forward linkages with the industry and services sectors, the agriculture sector has a strong influence on Pakistan’s economic growth. Although agriculture’s contribution to GDP has gradually decreased from 47 percent in 1960 to 21 percent in 2015, it is still the main source of employment and is a key driver of exports, which continue to be generally agriculture-based. In Punjab, 58.9 percent of the total land area is cultivated, and about 22 million acres are covered under the Indus Basin Water System (IBWS). The province contributes significantly to the country’s total agricultural production: it produces more than 80 percent of Pakistan’s cotton, almost 70 percent of its wheat, nearly 60 percent of its sugarcane, and 50 percent of its rice. In fruits alone, Punjab accounts for 66 percent of the country’s production of mango,

3

more than 95 percent of citrus, 82 percent of guava, and 34 percent of dates. Punjab’s overall contribution to Pakistan’s agriculture sector is estimated at more than 80 percent, of which about 90 percent comes from irrigated areas. 10. The farm structure in Punjab is bimodal: 85 percent of farms have less than 5 hectares and collectively make up 47 percent of the farm area. Technology and innovation have also been bimodal: the remaining 15 percent of farms show greater per-hectare yields through access to improved seeds, on-farm mechanization, and improved agricultural practices, much of which has been spurred through value chain linkages. Therefore, a key challenge facing the agriculture sector in Punjab is forging market opportunities for smallholders to promote their economic inclusion and secure their participation in value chains.

Project Implementation Status and Performance

11. The parent project became effective on April 26, 2012, and work on all components is progressing as scheduled. The midterm review mission was undertaken in December 2015/January 2016 along with pre-appraisal of the AF. The Government of Punjab was found to be in compliance with all legal covenants and fiduciary performance standards. Implementation progress has consistently been rated as Highly Satisfactory since effectiveness. Under component A focusing on HEIS, drip irrigation systems have been installed on about 26,000 acres, and all laser leveling units (with an increased target of 5,000 units) have been provided. The implementation of component B is nearly completed. Under B1 about 4,200 W/Cs have been completed, and work is in progress on 1,300 W/Cs. Under B2 and B3 the targets of 1,500 and 2,000 schemes, respectively, have been met. 12. The program is highly demand-driven, and beneficiary participation is central to it. The farmers participate through Water Users Associations (WUAs) formed under the WUA Act of 1981. WUAs are involved in planning and designing interventions, procuring materials and services, and managing schemes. A key aspect of the parent project has been the participation of women. Women members of the WUAs take part in the planning and designing processes to ensure that women’s interests are addressed in the location of structures. The WUA decides on the scope and nature of improvements and selects the material—for example, brick or concrete canalets. 13. In the HEIS interventions, about 35 percent of the employees were women. An even greater women’s participation rate was recorded in the smaller farms, up to 5 acres, which had about 43 percent women employees. In the 10-acre farm category, women accounted for 52 percent of those employed. On vegetable farms, in particular, over 54% of employees are women. Women, especially poor women, have benefited significantly from employment generation under the project through HEIS interventions.

14. The main rationale for the AF project is to meet the financing gap of about US$60 million under the parent project and scale up project activities under component B in particular. In addition, reflecting the lessons from implementation of the parent project, the AF project will add construction of ponds in canal command areas underlain with saline groundwater and in rain-fed areas for water harvesting under component A1 (HEIS component). A new subcomponent C3, for post-harvest processing and value addition, will be added on a pilot basis; the aim is to generate sufficient experience to determine whether a separate program can be developed on the basis of the lessons from the AF project. The pilot will specifically address women’s involvement in agriculture, particularly in agro-processing and value addition. Women will also benefit from post-harvest measures in which they are often involved. Women’s involvement in the AF project will be monitored, and their feedback will be captured through surveys and case studies to inform the planning of any future projects. The rate of return for the AF project is similar to that of the parent project, about 30 percent.

4

15. Relation to Country Partnership Strategy. The proposed AF supports the World Bank’s twin goals of poverty reduction and shared prosperity. One of the main objectives of the Country Partnership Strategy (CPS) for 2015-2019 (Report No. 84645-PK, discussed at the Board on May 1, 2014) is to strengthen the country’s irrigation infrastructure and agricultural competitiveness. The CPS promotes potentially transformational interventions for improved competitiveness, expanded investment, and improved productivity of farms and businesses. The proposed AF directly addresses the CPS objectives of private sector development (CPS Results Area 2) and inclusion (CPS Results Area 3). The AF would promote private sector participation in irrigation and agriculture and contribute to productivity outcomes by making continuing investments in high-efficiency irrigation technologies, fostering agricultural value chains, and promoting private sector participation in agribusiness. The AF would scale up support for water use efficiency and technology adoption that will promote crop diversification and increased productivity, which directly contributes to the CPS Outcome 2.2 of increased productivity for farmers and use of irrigation schemes. By supporting efficient management of Pakistan’s water resources and adoption of improved technologies, the AF would be instrumental in its adaptation to climate change, thereby contributing also to Outcome 3.3, increased resilience to disasters in targeted areas. 16. Agriculture is an important part of the Bank’s engagement in Pakistan. Bank-supported projects in both Punjab and Sindh are seeking to unlock new drivers of growth in agriculture by facilitating and promoting diversification into high-value agriculture and by supporting the adoption of improved technologies, introduction of high-efficiency irrigation systems, and establishment of agro-processing capacity. The Bank is scaling up this engagement with additional projects, including the AF. III. Proposed Changes

17. The detailed AF project description is attached in Annex 2. A summary of proposed changes is provided below.

Summary of Proposed Changes

The AF would provide resources for all components of the original project. It would primarily fund the following: (i) make up the deficit in component A1 related to installation of HEIS, with the addition of ponds in canal command areas underlain with saline groundwater and in rain-fed areas for water harvesting, and filtration systems for drinking water where feasible (US$60 million); (ii) make up the deficit in and scale up component B of the project related to upgrading of community irrigation systems, as the implementation of this component under the parent project is nearly completed (US$44.5 million); (iii) a new subcomponent under component C focusing on post-harvest processing and value addition is added, based on the lessons of the parent project (US$11 million); (iv) continued project management and support (US$14.2 million); and (iv) make up for the loss of resources due to changes in exchange rate between SDRs and USD. Component A2 of the parent project is not being supported under this AF. The closing date for the credit for the parent project is extended by one year to December 31, 2019.

Change in Implementing Agency Yes [ ] No [ X ]

Change in Project's Development Objectives Yes [ ] No [ X ]

Change in Results Framework Yes [ X ] No [ ]

Change in Safeguard Policies Triggered Yes [ ] No [ X ]

Change of EA category Yes [ ] No [ X ]

Other Changes to Safeguards Yes [ ] No [ X ]

Change in Legal Covenants Yes [ ] No [ X ]

5

Change in Loan Closing Date(s) Yes [ X ] No [ ]

Cancellations Proposed Yes [ ] No [ X ]

Change in Disbursement Arrangements Yes [ ] No [ X ]

Reallocation between Disbursement Categories Yes [ ] No [ X ]

Change in Disbursement Estimates Yes [ ] No [ X ]

Change to Components and Cost Yes [ X ] No [ ]

Change in Institutional Arrangements Yes [ ] No [ X ]

Change in Financial Management Yes [ ] No [ X ]

Change in Procurement Yes [ ] No [ X ]

Change in Implementation Schedule Yes [ X ] No [ ]

Other Change(s) Yes [ ] No [ X ]

Development Objective/Results PHHHDO

Project’s Development Objectives

Original PDO: The project’s development objective is to improve the productivity of water use in irrigated agriculture. The parent PDO will remain as is under the proposed AF.

Change in Results Framework PHHCRF

The revised Results Framework is attached in Annex 1, and a summary of revised targets is provided below:

- Completion of HEIS system on 120,000 acres, with ponds in saline areas and for rainwater harvesting, and filtration systems for drinking water where possible;

- Total number of schemes under component B would be 11,550, with B1 and B2 in canal command areas having 8,900 W/Cs of various types, and B3 having 2,650 schemes.

- Targets for the new subcomponent C3 are added as intermediary results indicators. A total of 100 processing units (equipment and facilities) for value-added production will be established.

- Targets for women’s participation are added as three new intermediary results indicators: (i) at least 30 percent of the WUAs will have women members; (ii) employment on HEIS units would include around 3 women per acre; and (iii) at least 30 percent of agro-processing and value-addition facilities provided by the AF project would employ women.

Components

Change to Components and Cost PHHCCC

The component structure will remain the same, with additional targets under all subcomponents of Component B: Upgrading of Community Irrigation Systems and new activities under Component C: Improved Agriculture Technology/Practices and Monitoring and Evaluation by including a new sub-component C 3: Support to Post-harvest Processing and Value Addition. The changes in each component are explained below.

Component A: Installation of High Efficiency Irrigation Systems. Implementation of Component A1, involving the installation of HEISs such as drip and sprinkler systems, is progressing well. The AF would provide continued support to the completion of targets under component A1: Installation of HEIS over an area of 120,000 acres. Under the AF project the upper limit for providing a subsidy to a HEIS unit would be 12.5 acres, instead of the 15 acres used in the parent project. Two complementary activities would be added

6

to this component: (a) rainwater harvesting ponds; and (b) systems for filtration of water for drinking purposes and storage of about 50 liters. Rainwater harvesting ponds are added in this component on a pilot basis, particularly in the rain-fed areas of the Pothohar region of Punjab. This region consists of hilly slopes with considerable rainfall but no canal water availability, and groundwater levels are deep and contaminated. In this area ponds with a minimum capacity of 5 acre-feet (6,170 cubic feet) would be constructed for rainwater harvesting.

Component B: Upgrading of Community Irrigation Systems. The implementation methodology and institutional structure would be the same as under the parent project. W/Cs would be improved using only pre-cast concrete sections (PCPS) with water-tight joints. Water turnout structures would be replaced with properly designed concrete structures (pucca nakas). The earthen sections of the W/C would be improved using clean compacted soil. The project would continue to provide technical assistance for W/C design and layout and construction supervision to the WUAs. Under the AF, the target would be to line 50 percent of W/C length using PCPS. The length of the W/Cs, installation of diversion structures, and other improvements to earthen sections of the W/Cs would be in accordance with the current standard practice and optimized for each W/C. WUAs/farmers would share the cost by providing labor, and the Government of Punjab would provide PCPS and other material needed for W/C improvement.

Component C: Improvement of Agricultural Technology and Practices, and Monitoring and Evaluation of Project and Environmental and Social Management Plan. Changes in this component would be based on implementation experience and lessons learned: (i) continued support under subcomponents C1 (US$1 million) and C2 for monitoring and evaluation and impact assessment of the additional works under the AF (US$1.0 million); and (ii) adding a new subcomponent to support processing and value addition for farmers adopting efficient irrigation technologies (US$17 million with US$8 million from IBRD that would be matched by the farmers, and US$1 million for technical assistance). The details are described below. Sub-component C3: Support to Post Harvest Processing and Value Addition. This sub-component will cover the costs of equipment, technical assistance, and training for value addition, increased productivity, and quality improvement through good agricultural practices for improved crop husbandry, as well as equipment for pre- and post-harvest handling of produce, including implements that ensure improved and hygienic on-farm harvest management and small scale processing equipment and machines. Beneficiaries of the food processing and value-addition equipment and machinery would be selected according to criteria similar to those used for the laser leveling equipment and managed the same way. This subcomponent will focus specifically on women’s involvement in agro-processing facilities and activities related to post-harvest value addition. Component D: Project Management, Independent Project Supervision, Strategic Studies, and Technical Assistance to Project Implementing Entity. The AF will finance supplementary costs for project management, supervision, and technical assistance and training.

Current Component Name Proposed Component Name

Parent Project Current Cost (US$M)

AF Project Proposed Cost (US$M)

Action

Installation of High Efficiency Irrigation Systems

Installation of High Efficiency Irrigation Systems

234.0 89.2 Funds added, A2 component dropped from AF project

7

Upgrading of Community Irrigation Systems

Upgrading of Community Irrigation Systems

160.0 89.2 Scale-up of this component: 2,000 more schemes added

Improved Agriculture Technology/Practices and Monitoring and Evaluation

Support to Post-Harvest Processing and Value Addition

9.0 15.0 New sub-component C3 added under the AF

Project Management, Supervision, Technical Assistance, Training and Strategic Studies

Supplementary costs for project management, supervision, and technical assistance and training

20.5 12.3

No change, but some language added to component description for clarity

Front end fee 0.325

Total: 423.5 206.0

Other Change(s)

Implementing Agency Name Type Action

Directorate General Agriculture (Water Management) Implementing Agency No Change

Change in Implementation Schedule

The proposed AF will support additional/expanded activities that are expected to be completed by December 31, 2021. The closing date of the credit for the parent project, IDA Credit 5081-PK will be extended by one year to December 31, 2019, to allow completion of the HEIS component.

IV. Appraisal Summary

Appraisal Summary S

Economic and Financial Analysis PHHASEFA

The parent project (PIPIPP) has started generating transformational impacts on Punjab’s irrigated agriculture sector by reducing water losses and introducing technologies to improve water conservation and increase the productivity of water. The investments under the parent project have generated an overall Economic Rate of Return (ERR) over 30 percent, with high social and employment benefits.

Strong ownership of these investments is confirmed by the very high demand and by users’ substantial financial and in-kind contributions toward the investment cost. Using a similar approach as adopted at appraisal, the ERR has been estimated based on actual data for various project interventions to establish the economic viability of different sizes of farms and for each different source of irrigation. The updated economic analysis reveals the values of Internal Rates of Return (IRRs) as 30 percent, which proves the project is highly beneficial. Sensitivity analysis also proves the robustness of the IRR; therefore, the investment of the AF project may be made without any substantial risk. Furthermore, the project has greenhouse gas (GHG) reduction co-benefits (see Annex 4 for details).

Technical Analysis PHHASTA

Several studies carried out in Pakistan and India have shown that lining up to 60 percent of the W/C is economically viable2. Under PIPIPP a detailed study and field observations carried out on 12 W/Cs (8

2 Under the warabandi system of irrigation scheduling, water flows in the head section of the W/C all the time, while water flow in the tail end section is for only a short period of time. Even though users at the tail end benefit most from lining the W/C, lining the tail section itself provides the least benefits as the duration of water flow is less and thus the amount of losses saved is very small; the duration is longer in the head sections, and thus a high amount of water loss can be saved by lining.  

8

unimproved and 4 improved) showed that (i) about 80 percent of the losses can be saved by lining 50 percent of the length of the W/C; and (ii) the ERR is highest at 50 percent lining and becomes lower than 12 percent (considered as the opportunity cost of capital) for lining more than 55 percent of the W/C (see Annex 2 for details). A conservative length of 50 percent of W/Cs would be the target to be lined under the AF. In reality, lining for some W/Cs would be reduced because of issues related to branching and costs.

Social Analysis PHHASSA

For both the parent project and the AF project, beneficiary participation is key to the project implementation approach. Drawing on the lessons from the parent project, the AF project design includes an additional subcomponent that will support farmers in adopting better post-harvest management practices, establishing small-scale agro-processing and value-addition facilities, and generating greater employment opportunities. Based on analysis and experience from the original project, the AF project will have a greater involvement of women. Women will be a key focus group in the implementation of the new sub-component, and additional activities that reflect women farmers’ feedback can be included. Women already participate in the WUAs as members, and the AF project will ensure that the benefits related to women’s participation in WUAs and in post-harvest and value-addition activities are specifically monitored.

To address the social issues, an Environmental and Social Assessment (ESA) report prepared for the parent project found that the proposed project is not expected to generate any long-term or irreversible adverse social impacts, or any direct social impacts that are different from those of the parent project. Environment Category B is maintained for the AF as for the parent project, and the ESA prepared for the parent project remains valid. However, the Director General Agriculture Water Management (DGAWM) office has prepared an addendum to the original ESA for the AF, which covers the revised and scaled-up project scope. This Addendum was cleared and disclosed by the borrower on June 14, 2016, and disclosed at the World Bank InfoShop on June 15, 2016. The social impacts of the AF will be mainly positive: inclusion of farmers in water management through WUAs, and improved livelihood security through value addition to agriculture produce. Women will be involved in WUAs where feasible, and their views and feedback will be elicited during monitoring and evaluation.

In the original project, citizen engagement has been ensured through regular consultation. The feedback from farmers and members of the WUAs is incorporated into all phases of project planning and implementation. The AF project will not only continue this level of citizen engagement, but will also strengthen the effectiveness of this engagement.

Environmental Analysis A

Environment Category B is maintained for the AF as for the parent project. The scope of additional work proposed under Component B does not bring in any additional or new environmental impacts other than those that have already been covered in the ESA prepared for the parent project. New activities proposed in Component C3 may have additional environmental impacts, such as those related to the disposal of waste and wastewater from fruit-washing bays and cleaning platforms, construction-related issues with small-scale washing bays and platforms, and disposal of discarded fruits and vegetables (generally and largely biodegradable material). Occupational health and safety may be an additional potential environmental impact for the new activities related to post-harvest processing centers. These potential impacts are temporary and reversible in nature and can be mitigated through appropriate mitigation measures, such as avoiding interventions in environmental hot spots and wildlife protected areas when expanding cultivation fields; raising farmers’ awareness about and building their capacity for judicious use of chemical inputs; using occasional flood irrigation in HEIS fields to avoid salt build-up in soil; planting trees to compensate for any tree cutting; avoiding cropped areas while carrying out the W/C improvement and other construction works during the project; and limiting the extent of W/C lining in the sweet groundwater zone to minimize negative

9

impacts on groundwater recharge. The Addendum to the ESA proposes adequate mitigation measures for the issues arising from the implementation of Component C3, and after the adequate implementation of these measures, no residual impacts are expected. The Addendum proposes the preparation of a separate Environmental and Social Management Plan (ESMP), cleared by the Bank, for each post-harvest fruit/vegetable processing facility under Component C3.

Fiduciary Analysis A

The project’s existing financial management arrangements are exemplary and will be maintained under the proposed AF. A separate designated account (DA) at the National Bank of Pakistan will be established to receive the funds from the Bank. To strengthen procurement capacity, a qualified procurement staff will be added to the DG-AWM office in headquarters.

V. Risks

18. The overall risk rating for the proposed AF is Moderate, the same as that for the parent project. The Systematic Operating Risk-rating Tool (SORT) has been prepared for the Project. The detailed SORT is attached as Annex 3, and a summary of risk ratings is provided below.

Risk PHHHRISKS

Risk Category Rating (H, S, M, L)

1. Political and Governance Low

2. Macroeconomic Low

3. Sector Strategies and Policies Moderate

4. Technical Design of Project or Program Low

5. Institutional Capacity for Implementation and Sustainability Moderate

6. Fiduciary Moderate

7. Environment and Social Moderate

8. Stakeholders Low

9. Other

OVERALL Moderate

VI. World Bank Grievance Redress

19. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

10

Annex 1: Revised Results Framework

Project Name:

Additional Financing for Punjab Irrigated Agriculture Productivity Program Project (P157736)

Project Stage: Additional Financing Status:

Team Leader(s):

Masood Ahmad Requesting Unit:

SACPK Created by: Tahira Syed on 08-Dec-2015

Product Line:

IBRD Responsible Unit:

GFA12 Modified by: Tahira Syed on 22-Mar-2017

Country: Pakistan Approval FY: 2018

Region: SOUTH ASIA Lending Instrument:

Investment Project Financing

Parent Project ID: P125999 Parent Project Name:

PK Punjab Irrig Agri Productivity Improvement Prog Project (P125999)

.

Project Development Objectives

Original Project Development Objective - Parent:

The project’s main objective is to improve the productivity of water use in irrigated agriculture.

Proposed Project Development Objective - Additional Financing (AF): same as above, no change.

Results

Core sector indicators are considered: Yes Results reporting level: Project Level

.

Project Development Objective Indicators

Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target

No Change Reduction in water losses in the project area

Percentage Value

Date 22-Mar-2017

Comment 45% level of current losses

41% reduction in water losses 45% reduction in use of fertilizers

45% level of current losses reduced for: - 11,550 W/Cs improved

11

- 120,000 acres covered by HEIS

No Change Increased agriculture output per unit of water used

Cubic Meter (m3) Value

Date 22-Mar-2017

Comment 12 Rupees per m3 7 Rupees per m3

Value of production increased: - by 45% over an area (acres) - by 9% over areas covered by number of W/Cs

Value of production increased: - by 45% over area (acres) - by 9% over areas covered by number of W/Cs

Intermediate Results Indicators

Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target

No Change Drip and High Efficiency Systems

Number Value 0.00 26000.00 120,000 acres

Date 22-Mar-2017 31-Dec-2021

Comment

Revised Laser leveling equipment

Number Value 0.00 5000.00 5,000.00

Date 22-Mar-2017 31-Dec-2021

Comment Target 3,000, actual 5,000

Target achieved

Revised Improvement of watercourses in canal command

Number Value 0.00 7000.00 11,550.00

Date 22-Mar-2017 31-Dec-2021

Comment

New B1. Improvement of new watercourses

Number Value 0.00 4000.00 5,700.00

Sub Type Date 22-Mar-2017 31-Dec-2021

Breakdown Comment

New B2. Improvement of partially improved watercourses

Number Value 0.00 1500.00 3,200.00

Sub Type Date 22-Mar-2017 31-Dec-2021

Breakdown Comment

12

New B3. Irrigation schemes outside canal command area

Number Value 2000.00 2,650.00

Sub Type Date 22-Mar-2017 31-Dec-2021

Breakdown Comment

Revised Introduction of improved agricultural practices

Percentage completion

Value 0.00 100.00

Date 22-Mar-2017 31-Dec-2021

Comment

New C3. Processing units (equipment and facilities) for value-added production

Number Value 0.00 100.00

Sub Type

Supplemental

New Percentage of women members in WUAs that are project beneficiaries

Percentage

Value 0.00 At least 30% WUAs will have women members

Date 22-Mar-2017 31-Dec-2021

Comment

New Number of women employed on HEIS units per acre

Number

Value 0.00

At least 3 women are employed on HEIS units per acre

Date 22-Mar-2017 31-Dec-2021

Comment

New

Percentage of agro-processing and value-addition facilities that employ women

Percentage

Value 0.00

At least 30% of agro-processing and value addition facilities provided by the AF project would employ women

Date 22-Mar-2017 31-Dec-2021

Comment

No Change Number Value 0.00

13

Technologies demonstrated in the project areas (number)

Date 22-Mar-2017 31-Dec-2021

Comment HEIS technology installed on 26,000 acres

HEIS technology installed on 120,000 acres

No Change Clients who have adopted an improved agr. technology promoted by the project

Number Value 0.00

Date 22-Mar-2017 31-Dec-2021

Comment HEIS technology installed on 26,000 acres

HEIS technology installed on 120,000 acres

No Change Clients who adopted an improved agr. technology promoted by project – female

Number Value 0.00

Sub Type Date 22-Mar-2017 31-Dec-2021

Breakdown Comment

New

Percentage of beneficiaries that feel project investments reflected their needs and brought improvements (disaggregated by gender)

Percentage Value 0.00 100.00

Date 22-Mar-2017 31-Dec-2021

Comment Based on surveys conducted by the government with the support of M&E consultant

.

14

Annex 2: Detailed Project Description

1. The Project Development Objective (PDO) under additional financing (AF) would be the same as the parent project’s: to improve the productivity of water use in irrigated agriculture. The proposed AF for PIPIPP would support: (i) meeting a financing gap of about US$60 million under the parent project; (ii) scaling up of project activities under component B, whose implementation is nearly completed; and (iii) additional complementary activities of construction of ponds under component A1, and a new subcomponent C3 for post-harvest processing and value addition, based on lessons learned during implementation.

2. The component structure will remain the same, with additional targets under all subcomponents of Component B and new activities under the new subcomponent C3: Support to Post-harvest and Value Addition. Estimates of saving and loss under the parent project are provided in Table 1 along with the reallocation of funds of the parent project needed to meet these savings/losses and additional funds required (IBRD) under the AF. Table 2 provides targets and AF cost estimates and total project cost. The activities under the AF project are described below, by component.

3. Component A: Installation of High Efficiency Irrigation Systems. Implementation of component A1, installation of high-efficiency irrigation systems (HEIS) such as drip and sprinkler systems, is progressing well. The AF would provide continued support for the completion of targets under component A1: Installation of HEIS over an area of 120,000 acres. It would provide US$60 million to (i) meet the gap in financing from the parent project due to cost increases of US$25.1 million—about US$13 million due to increased financing of ponds in saline groundwater areas where a canal is the only source of water, about US$3 million for ponds in rain-fed areas for water harvesting, and about US$9.1 to cover cost increases in HEIS; (ii) make up for US$16.6 million used for completing targets for component A2 (US$4.5 million) and component B (US$12.1 million); the actual additional amount needed for component B is US$18 million, of which US$5.9 million is met from the savings in components C and D and the rest from component A1; and (iii) meet the loss of the SDR-to-USD exchange rate of about US$18.3 million.

4. Two complementary activities would be added to this component: (i) rainwater harvesting ponds, and (ii) systems for filtration of water for drinking purposes and storage of about 50 liters. Rainwater harvesting ponds has been added to this component on a pilot basis in rain-fed areas—in particular, the Pothohar region of Punjab, which has sloping lands with considerable rainfall and no canal water with very deep groundwater levels or bad aquifers. In this area ponds with a minimum capacity of 5 acre-feet (6,170 cubic feet) would be constructed for rainwater harvesting. The cost of each such pond would be around US$9,000, and the project would provide 60 percent of the cost, or US$5,500 per pond. The ponds would be properly designed with intake and spillway structures. They would not be lined but would remain earthen ponds to improve recharge to the groundwater and collect sheet flow from the surrounding area. The ponds would be used as a source of water for the HEIS, and fish would be stocked in them. About 500 ponds would be provided under the project for the Pothohar area. As necessary, the cost-sharing arrangements would be adjusted after the construction of about 50 ponds in various parts for Pothohar, to reflect the lessons of experience. The drip head units would be fitted with a cylinder with sand media filter for filtering and producing water of quality suitable for drinking purposes. Chemical and biological analysis of the water at source and after the filtration system would ensure that it meets the water quality standard and can be safely produced at all times. The system would also have a storage tank of about 50 liters. The workers and labor at the farm would benefit from using this drinking water at the farm and taking it home as needed.

15

Table 1. Estimates of Savings and Loss in the Parent Project and AF Required (US$ millions) A2. Laser Leveling Equipment 7.9 12.4 -4.5 12.4 0.0 12.4

Sub-total A 120.9 150.5 -29.6 90.5 60.0 150.5B. Watercourse Improvement Program B1. Improvement of Watercourse 80.4 84.8 -4.4 84.8 4.7 89.5 B2. Improvement of W/C partially imp, 12.1 26.1 -14.0 26.1 29.8 55.9 B3. Improvement of W/C Barani Areas 7.0 6.6 0.4 6.6 10.0 16.6

Sub-total B 99.5 117.5 -18.0 117.5 44.5 162.0

C. Improved Agriculture Technology/Practies and Monitoring and Evaluation

C1. Introduction of Improved Agricultural Practice 7.0 3.5 3.5 3.5 1.0 4.5 C2. M&E Project Management Support 2.0 1.5 0.5 1.5 1.0 2.5 C3. Processing valeu addition and marketing 9.0 9.0

Sub-total C 9.0 5.0 4.0 5.0 11.0 16.0D. Project Management Support, Supervision Teechnical Assistance Traning

D1. Project Implemenmtation and Management 10.0 8.8 1.2 8.8 6.2 15.0 D2. Project Supervision and Third Party Validation 9.6 9.0 0.6 9.0 6.0 15.0 D3. Strattegic Studies, TA and training etc. 1.0 0.9 0.1 0.9 2.0 2.9

Sub-total D 20.6 18.7 1.9 18.7 14.2 32.9Loss in SDR to USD rate 18.3 (18.3) 18.3 18.3

Sub-Total 250.0 310.0 -60.0 250.0 129.7 379.7Up-front Fee 0.325 0.325

Total 250.0 310.0 -60.0 250.0 130.0 380.0

Table 2. Estimated Cost of Project, AF Targets, and Financing Plan (US$ million) A1. Drip and high efficiency Systems Acres 120,000 230.2 92.1 138.1 A2. Laser Leveling Equipment Number 5,000 93.0 80.6 12.4

Sub-total A 323.2 172.7 150.5B. Watercourse Improvement Program B1. Imporvement of Watercourse Number 5,700 137.7 48.2 89.5 B2. Imporvement of W/C partially imp, Number 3,200 86.0 30.1 55.9 B3. Improvement of W/C Barani Areas Number 2,650 25.5 8.9 16.6

Sub-total B 11,550 249.2 87.2 162.0

C. Improved Agriculture Technology/Practies and Monitoring and Evaluation

C1. Introduction of Improved Agricultural Practices 4.5 4.5 C2. M&E Project Management Support 2.5 2.5 C3. Processing valeu addition and marketing 17.0 8.0 9.0

Sub-total C 24.0 8.0 16.0D. Project Management Support, Supervision Teechnical Assistance Traning

D1. Project Implemenmtation and Management 15.0 15.0 D2. Project Supervision and Third Party Validation 15.0 15.0 D3. Strattegic Studies, TA and training etc. 2.9 2.9

Sub-total D 32.9 32.9Loss in SDR to USD rate 18.3 0.0 18.3

Sub-Total 647.5 267.9 379.7Up-front Fee 0.325 0.0 0.325

Sub-Total 647.8 267.9 380.0

16

5. Component B: Upgrading of Community Irrigation Systems. The implementation methodology and institutional structure would be the same as under the parent project. W/Cs would be improved using only pre-cast concrete sections (PCPS) with water-tight joints. Water turnout structures would be replaced with properly designed concrete structures (pucca nakas). The earthen sections of the W/C would be improved using clean compacted soil. The project would continue to provide technical assistance for W/C design and layout, as well as construction supervision to the WUAs. Under the AF, PCPS would be used to line a target of 50 percent of W/C length. The length of the W/Cs, installation of diversion structures, and improvements to earthen sections of the W/Cs would be in accordance with the current standard practice and optimized for each W/C. WUAs/farmers would share the cost by providing labor, and the Government of Punjab would provide PCPS and other material needed for W/C improvement. The table below shows the number of W/C and irrigation schemes to be improved under the project, broken down for the parent project and the AF. The AF would cover all districts of Punjab.

Original Project

Additional Financing Total

B1. Improvement of new W/Cs 5,500 200 5,700

B2. Improvement of Partially Imprd. W/Cs 1,500 1,700 3,200

B3. Irrigation schemes outside canal command area 2,000 650 2,650

Total 9,000 2,550 11,550

6. Length of W/C Lining. The W/Cs improvement program started in the late 1970s. Although it brought extremely beneficial investments, initially it had slow acceptance and uptake by the farmers. It took at least two decades (1980s and 1990s) to sort out and understand the technical, social, cost/benefits, and implementation issues. Now the program is very popular and is in high demand by the farming community. At the beginning of the program only marginal improvements were made to the W/Cs: mostly earthen sections were reconstructed, a small part (often less than 15%) of the W/Cs was lined, and turnout structures were installed. This was because the lining must be done during short windows of canal closure without affecting the irrigation schedule of the warabandi system (weekly time rotation of water based on the size of the land holding). Furthermore, the substantial investment cost was to be shared among all shareholders of the W/C, yet each had varied incentives to line the W/C, since the farmers at the tail end of the W/C had maximum benefits while those at the head section had the least. With the introduction of parabolic PCPS for lining (instead of brick and mortar), the time for construction has been shortened: the linings are now constructed year-round under quality-controlled factory conditions and fitted in the W/C quickly during the 10-day canal closure period. This process reduces costs significantly by avoiding the cumbersome process of ordering and stockpiling various materials (sand, cement bricks) and the subsequent painstaking construction and curing process carried out by masons and laborers. With PCPS, the sections for the whole W/C are ordered and installed quickly and easily by an experienced crew. Therefore, there is now great interest, willingness, and demand from farmers to line longer sections of the W/Cs.

7. Several studies carried out in Pakistan and India have shown that lining up to 60 percent of the W/C is economically viable.3 Under PIPIPP a detailed study and field observations carried out on 12 W/Cs (8 unimproved and 4 improved) showed that (i) about 80 percent of the losses can be saved by lining 50 percent of the length of the W/C; and (ii) the ERR is highest at 50 percent lining and becomes lower than 12 percent (considered as the opportunity cost of capital) for lining more than 55 percent of the W/C. A more conservative length of 50 percent of W/Cs would be the target to be lined under the AF. In reality, lining for some W/Cs would be reduced because of issues of branching and costs.

3 Under the warabandi system of irrigation scheduling, water flows in the head section of the W/C all the time, while water flow in the tail end section is for only a short period of time. Even though users at the tail end benefit most from lining the W/C, lining the tail section itself provides least benefits as the duration of water flow is less and thus the amount of losses saved is very small. The duration is longer in head sections, and thus a high amount of water loss can be saved by lining.  

17

8. Component C: Improvement of Agricultural Technology and Practices, and Monitoring and Evaluation of Project and Environmental and Social Management Plan. Changes in this component would be made to reflect implementation experience and lessons learned: (i) supplementing subcomponents C1 (US$1 million) and C2 for monitoring and evaluation and impact assessment of the additional works under the AF (US$1.0 million); and (ii) adding a new subcomponent C3 to support processing and value addition for farmers adopting efficient irrigation technologies (US$8 million).

9. Subcomponent C3: Support to Post-Harvest Processing and Value Addition. This subcomponent will cover the costs of equipment, technical assistance and training for value addition, and processing. The project will hire consultants who will design and implement crop-specific technical assistance in post-harvest processing, packaging, and value addition. Farmers and other value chain participants would be supported for processing equipment and technology adoption, food safety and hygienic packaging, branding and connecting buyers and sellers. This subcomponent will focus specifically on women’s involvement in agro-processing facilities and activities related to post-harvest value addition.

10. The AF would provide equipment for processing and value addition on pilot basis. The project will provide technical support for processing various fruits and vegetables: pulping, concentrate making, drying, oil extraction, preservation, and packing. Interested farmers and entrepreneurs would be identified and screened against eligibility criteria; they would be provided equipment for processing units on a 50:50 cost-sharing basis, while they would bear all related costs of works and installation and of such supplementary activities as space for equipment installation and small-scale works—for example, the construction of washing bays, cleaning platforms, and so on. About US$8 million is allocated and US$1 million is allocated for technical assistance, training, and other supporting activities.

11. The beneficiaries of the food processing and value addition equipment and machinery would be selected according to criteria that are similar to those used for the laser leveling equipment, and the process would be managed the same way. The main criteria would be the capacity of the beneficiary to execute the proposed processing technique and methodology, an acceptable business model with a lot of room for innovation, and willingness to process the crops/produce of others as well. As for the laser leveling units, the beneficiaries would deposit their share of the cost with the department, after that an order would be placed with the vendor for providing the required machines, and upon delivery of the machines and equipment the full payment would be made to the supplier. Detailed selection criteria and management process that are satisfactory to the Bank would be developed during project implementation.

12. Component D: Project Management, Independent Project Supervision, Strategic Studies, and Technical Assistance to Project Implementation Entity. The AF will also finance supplementary costs for project management, supervision, and technical assistance and training: the cost of (i) project implementation and management, including mobilization of farmers; surveys, engineering, and designs; implementation supervision and assistance to the farmers and suppliers, and ensuring the quality of the works carried out by farmers and suppliers/vendors etc.; (ii) project supervision and spot-checks, covering quality and quantity aspects, by third-party consultants, on the basis of which the funds would be disbursed; (iii) strategic studies and pilot projects that would be identified during project implementation; and (iv) technical assistance and training, in particular training project staff (i.e., training the trainers) in crop diversification; shift to horticulture, vegetable, and floriculture crops; operation and maintenance of the irrigation systems and the units installed under the project; and activities identified in risk assessment and governance and accountability measures.

Cost Estimates and Unit Rates for Disbursements.

13. The project is designed with the following cost-sharing arrangements: (i) farmers provide the labor for the construction of schemes; (ii) the Government of Punjab provides the staff required for implementation of the project; and (iii) the cost of materials for project works is financed from the AF proceeds. In addition, incremental operating costs and specialized assistance in the form of individual

18

consultants and temporary staff could be provided from component D, to which about US$8.2 million is allocated.

14. Cost Estimates for HEIS. The cost estimate for the HEIS systems for 3-, 5-, and 10-acre units are estimated as of April 1, 2016, using the actual cost of installation of HEIS as of September 2016, increased by 5 percent (see Table 3). The unit rates for disbursements would be per-acre cost, excluding the farmers’ share listed in the GoPunjab/IDA/IBRD columns.

Table 3. Cost per acre of HEIS (drip) with and without pond, as of April, 2017

Cost Per Acre

Farmers' Share

GoPunjab/IBRD

Cost Per Acre

Farmers' Share

GoPunjab/IBRD

HIES upto 3 acres unit $/Ac 2,226 890 1,336 3,358 1,343 2,015HIES upto 5 acres unit $/Ac 1,946 778 1,168 3,010 1,204 1,806HIES upto 10 acres unit $/Ac 1,722 689 1,033 2,688 1,075 1,613Overall Average 1,965 786 1,179 3,019 1,207 1,811

Unit

Without Pond (USD) With Pond (USD)

15. Cost Estimates for W/C Costs and Unit Rates for Disbursement. The cost estimate for the W/C lining with PCPS is made using the average rate of Rs. 1800 (US$17.14) per linear foot, which is the average cost under the parent project. Also, for already improved W/Cs, an allocation of Rs. 100,000 (US$952.4) has been made for repairs of the old section. The average length of W/Cs is 3,900 meters. When 30 percent lining (1,170 meters) was the target length for lining under the parent project, the actual length generally lined by farmers was about 65 percent of the target length—around 761 meters. It is assumed that the target of lining 50 percent of the W/Cs’ length would be achieved, as longer lining is feasible when done with PCPS. The same assumption is made for increasing the lining of W/Cs for which 15-30 percent had already been lined. The average length expected to be lined in each case and the cost of material and labor (assuming 35% of material) is provided in Table 4. The unit rate for disbursements would be the material cost to be paid by the Government.

Table 4. Cost per W/C (in Rs. 000 and USD)

Material Government

Labor Farmers Total

Material Government

Labor Farmers Total

1. Concrete Pre-cast New 0-50% 1,370 2,466 863 3,329 23,486 8,220 31,7062. Concrete Pre-cast 15-50% 1,080 2,044 715 2,759 19,467 6,813 26,2803. Concrete Pre-cast New 30-50% 840 1,612 564 2,176 15,352 5,373 20,7264. Irrigation Schemes 250 88 338 2,381 833 3,214

Rupees 000 per W/C USD Per W/C

Avg. length linned (m)

Implementation Arrangements and Incremental Resources

16. Implementation approach. Project implementation is highly demand-driven and is based on beneficiary participation at all levels of planning, designing, and managing schemes. In addition, the program is generating a critical mass of highly trained HEIS technicians, suppliers, and manufacturers through project investments, giving a visible boost to private sector businesses and agriculture-based industries.

17. In the parent project, beneficiary participation is ensured through extensive consultations and user surveys as well as the full involvement of WUAs in all decision-making processes. Before any improvement works are commissioned, consultations are carried out with users and community members receive training after the formation of a WUA. The WUAs are legal entities and are registered under the

19

WUA Act of 1981. The WUA decides on the scope and nature of the improvement and selects the material—for example, brick or concrete canalets. They procure the material and provide skilled and unskilled labor.

18. Because the WUAs share the financial costs of improving the W/Cs, they have complete ownership of these structures and readily contribute to operations and maintenance responsibilities. This participatory approach has been key to the success of the W/C improvement program in Pakistan. However, it has been a slow process of change over the past two decades. Farmers are now able to fully acknowledge the benefits of improved W/Cs and show willingness to participate in and contribute to the W/C improvement program. Demand has increased to such an extent that the parent project has to use a selection process to prioritize scheme approval. The high demand is a key justification for increasing the target number of improved W/Cs in the AF project. The AF project will not only continue the program by providing additional resources to improve W/Cs, but will also ensure that the irrigation and drainage sector reforms are deepened and WUAs are strengthened. An important aspect of the WUAs’ participation is women’s participation in the program. The results from the parent project show that women are members of WUAs. While they may not be involved in providing labor for W/C improvement, they are involved in all planning and design consultations and help ensure adequate attention to operations and maintenance.

19. The AF project will ensure that women’s involvement remains central to the program’s participatory approach by introducing gender-specific activities. The new subcomponent C3, which focuses on post-harvest processing and value addition, is designed to ensure that women benefit through additional employment and income-generation opportunities and are involved in home-based agribusiness enterprises. The AF project also includes gender-specific indicators related to women’s participation in the WUAs and in the agro-processing and value-addition interventions. It is expected that through this program 30 percent of WUAs will have women members. Since women are already involved, although informally, in many home-based value-addition enterprises, it is expected that through targeted monitoring under the AF project, at least 30 percent of the facilities funded by the project will have women employees.

20. Implementation arrangements. The implementation arrangements under the AF will remain the same as in the parent project. The DGAWM will continue to be responsible for the implementation of the project and act as its Project Director. The Directorate of On-Farm Water Management has demonstrated that it has the capacity to implement such programs in Punjab.

21. DGAWM, under the Punjab Secretary of Agriculture, would be responsible for all aspects of the project, including technical, implementation, procurement, financial management, safeguards, and oversight of the technical assistance and training program. DGAWM would be supported by the following: (i) Director, Water Management Headquarters (DWMHQ); (ii) Deputy Project Directors at Headquarters (DPD HQ) for W/C improvements; (iii) Deputy Director Finance, and accounting staff; (iv) a highly qualified procurement specialist and supporting procurement staff; and (v) support staff. Implementation offices will continue to be located in (i) three Regional Project Coordination Units RPCU in Lahore, Multan, and Rawalpindi; and (ii) District Offices in all districts of Punjab.

22. Financial management. The project’s existing financial management (FM) arrangements are exemplary and will be maintained under the proposed AF. The project’s FM staff are suitably qualified and experienced. The internal controls in place are highly effective, including segregation of duties, reconciliations, approvals, certification of payments by project implementation and supervision consultants (PISCs), pre-audit and budget checks, payments through crossed checks, and access controls on Financial Management Information System (FMIS). Vehicles’ movements are properly logged, fixed assets are tagged and coded, and periodic physical verification is carried out by a committee independent of the custodians. Financial reporting has been timely and in accordance with acceptable standards. The Bank has received acceptable audited financial statements up to FY14-15, and the audit reports have not highlighted any major issues. There are no overdue audit reports or unsettled ineligible expenditure in respect of the project implementing entity. The overall FM risk is rated Moderate.

20

23. Disbursement arrangements. For AF, the DGAWM) will open a separate designated account at the National Bank of Pakistan to receive the funds from the Bank. Report-based disbursements will be made quarterly, based on the forecast provided in the quarterly Interim Financial Reports (IFRs). Within 45 days after the end of each calendar quarter, the projects will prepare IFRs for that quarter and submit them to the Bank. Advances will be provided for the following six months based on the expenditure forecast for that period as reported in the IFRs. Subsequent IFRs will document expenditures against the advance received and forecast expenditures for the further six months; on the basis of the forecast, the amount of funds to be disbursed will be determined. Disbursements for components A and B would be based on the agreed unit rates that would be updated every six months.

Allocation of the Loan (AF)

Disbursement category Amount (US$)

Percentage of expenditure to be

financed (includes taxes)

(1) Subprojects (Parts A and B of the Project) 109,675,000 100%

(2) Goods, works, non-consulting services, and consultants’ services for the Project (including audits), Training, and Operating Costs under parts C and Part D of the Project

20,000,000

100%

(3) Front-end Fee 325,000 Total 130,000,000

24. Procurement for the proposed AF would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated January 2011 (revised July 2014); and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated January 2011 (revised July 2014), and the provisions stipulated in the Loan Agreement. The procurement performance as rated in the last Implementation Status Report is Satisfactory.

25. A procurement assessment has been carried out, and institutional capacity is deemed satisfactory. Procurement responsibility rests with the office of DGAWM, which has procurement capacity and has gained experience during the implementation of the parent project. A procurement specialist will be added to the DGAWM office at headquarters. As under the parent project, component B of the AF project will be implemented through community participation with output-based disbursements. The parameters of community participation in the W/C improvement activities have been agreed with the Bank, and the procedures for pre-qualification of PCPS suppliers and for selection of beneficiaries have been agreed upon under the parent project. Consultancy firms under components C and D will be hired using the Bank’s guidelines. The Bank will conduct procurement training sessions to facilitate efficient procurement and contract implementation.

26. Safeguards. The AF project is not expected to generate any direct social safeguard impacts that are different from those of the parent project. Environment Category B is maintained for the AF as for the parent project, and the ESA prepared for the parent project remains valid. However, the DGAWM office has prepared an addendum to the original ESA for the AF, which covers the revised and scaled-up project scope. This Addendum has been cleared by the Bank and was disclosed by GoPunjab on June 14, 2016.

27. According to the ESA, the project activities are not expected to cause any long-term or irreversible adverse environmental impacts. The key potentially negative environmental and social impacts of the interventions under the parent project are changes in land use patterns, particularly where barren/fallow land is brought under cultivation; contamination of soil and water caused by excessive use of chemical inputs; salt build-up in crop root zones; loss of natural vegetation and trees during W/C improvement; and reduced groundwater recharge caused by W/C lining. The scope of the additional work

21

proposed under component B will not generate any environmental impacts additional to those that have already been covered in the ESA. New activities proposed under component C3 may have additional environmental impacts—for example, those related to the disposal of waste and wastewater from fruit/vegetable washing bays and cleaning platforms, construction-related issues with small-scale washing bays and platforms, and disposal of discarded fruits and vegetables (generally and largely biodegradable material). These potential impacts are temporary and reversible in nature and can be mitigated through such measures as avoiding interventions in environmental hot spots and wildlife protected areas when expanding cultivation fields, raising farmers’ awareness about and building their capacity in the judicious use of chemical inputs, using occasional flood irrigation in HEIS fields to avoid salt build-up in soil, planting trees to compensate for any tree cutting, avoiding cropped areas while carrying out the W/C improvement and other construction works during the project, and limiting the extent of W/C lining in the sweet groundwater zone to minimize negative impacts on groundwater recharge.

28. The Addendum proposes adequate mitigation measures for the issues arising from the implementation of component C3, and after the implementation of these measures, no residual impacts are expected. Land acquisition will not be required for the project rehabilitation works, which will be undertaken within existing boundaries. The project areas contain no indigenous communities as defined under World Bank OP 4.10, Indigenous Peoples.

29. The original ESA contains an ESMP for any possible environmental and social impacts under the project. The ESA Addendum for the AF project uses the same ESMP, with some additions related to the proposed activities under component C3. Because occupational health and safety may be an additional potential environmental impact for the new activities related to post-harvest processing, the Addendum proposes the preparation of a separate ESMP for each post-harvest fruit/vegetable processing facility under component C3. These ESMPs will need to be cleared by the Bank before these facilities can be established. For establishing these facilities, transparent and accessible guidelines on the selection process will be established and communicated widely to all farmers to ensure that the selection process is seen as transparent and fair, and to avoid possible social conflict.

30. The original ESA report presents a well-structured organogram for the implementation arrangements of the ESMP. The DGAWM has overall responsibility for the project’s environmental and social performance, in accordance with national and WB requirements, and has designated an officer to be the provincial-level Environmental and Social Coordinator (ESC) for the parent project. This officer has been ensuring the effective implementation of the ESMP throughout the implementation of the parent project, and also maintains liaison and coordination with the district-level WUAs, who have been designated as the district environmental and social coordinators (DESCs) in their respective districts. The DESCs in turn supervise and coordinate with the WUAs and farmers on the actual implementation of the environmental and social guidelines and other ESMP requirements during project implementation. These institutional arrangements have been found to be quite effective during the implementation of the parent project, and therefore similar arrangements will be continued for the AF project. In addition, a social and gender assessment of WUAs will be undertaken during the AF project.

31. The PISCs will be responsible for the implementation of the ESMP, including the production and maintenance of all the documentation outlined in the ESMP. Monitoring and evaluation (M&E) consultants will be responsible for third-party monitoring.

32. The client has been successfully implementing the ESMP of the parent project and also has had extensive engagement with the WB in the past and therefore fully understands the environmental safeguards requirements at the planning and operational levels. While it does not at present have any environmental management unit in its operational hierarchy, it presents and implements project-level operational arrangements. The implementation performance of environmental safeguards under the parent project has been consistently rated Satisfactory. Elaborate implementation arrangements, including quarterly progress reporting, are already in place and will continue for the AF. The project has been conducting training

22

programs for its field staff as outlined in the ESA, and similar trainings will be continued during the implementation of AF project.

33. Key stakeholders consulted during the preparation of the original ESA included the following: (i) people directly affected by the project and project beneficiaries (farmers, WUA members, and other villagers); (ii) sales and service companies; (iii) officials from the Agriculture Department and from agriculture research institutes; (iv) staff of the Environment Protection Agency of Punjab; (v) academia; (vi) donors; and (vii) nongovernmental organization (NGOs), international organizations, and other interest groups. The stakeholders—including the project-affected people, project beneficiaries, and other local communities in several districts—have remained involved during implementation. Similar consultations were carried out for the AF project and during the preparation of the ESA Addendum and will be continued during the implementation phase.

34. OP 7.50, Projects on International Waterways, was triggered for the parent project because the irrigation infrastructure improvement activities that were proposed for financing would take place in areas along, and drawing water from, the Indus River—an international waterway as described in the policy. Under component A of the parent project, the installation of HEIS would take place over an area of about 120,000 acres. This maximum acreage is maintained for the purposes of the AF project and there is therefore no change in this regard. Under component B, the parent project aimed to finance the improvement of community irrigation systems, primarily focusing on the W/Cs in canal-irrigated and rain-fed areas. Under this component, WUAs would be established and would receive support to improve about 2,000 W/Cs. The AF project would increase this number of W/Cs to11,550, but the additional W/Cs are within the scheme of irrigable areas targeted under the parent project. The improvements would not affect the flows in the river system in any way; they are third-tier canals and would overall result in more efficient water use by the farmers and better economic returns. The exception to the requirement to notify other riparians of the Indus River, which was approved by the Regional Vice President on December 10, 2011, covers the scope of activities under the AF project and is therefore maintained.

23

Annex 3. Systematic Operations Risk-Rating Tool (SORT)

1. The following matrix describes the rationale for the proposed rating for each risk and the mitigation plans.

1. Political and governance Rating Low

Description Risk management Political pressures related to reforms

in the sector could challenge continued progress and undermine governance.

While progress in RTI has been made, challenges to enforcement and continued transparency and accountability remain.

Regular dialogue with government and officials from Government of Punjab (GoPunjab), and EAD to ensure client ownership, transparency, and accountability.

Project will emphasize information dissemination and transparency through disclosure of project documents according to the Bank’s Policy on Access to Information and the Government of Pakistan’s (GoP’s) Right to Information Act.

2. Macroeconomic Rating Low Description Risk management

While the current macroeconomic position of the GoP is good with sustained GDP growth, continued efforts to improve fiscal deficits and balance of payments will be necessary.

Sustained engagement is planned throughout the project to ensure proactive engagement with the GoP to support continued and coordinated economic growth.

3. Sector strategies and policies Rating Moderate Description Risk management

Stalled reforms in the sector could undermine continued progress during implementation.

Support through project interventions to continue reforms.

4. Technical design of project or program

Rating Low

Description Risk management The project design expands and scales

up an existing project. Continued improvement of W/Cs along the optimal

target length of lining would be scaled up and value chain development will be added under this AF.

5. Institutional capacity for implementation and sustainability

Rating Moderate

Description Risk management DGAWM has developed significant

institutional capacity for implementation of the project activities, through several Bank- financed interventions.

Project implementation will be supported by incremental staff in the project management unit (PMU) that is responsible for the AF project. This will include additional fiduciary (procurement) and safeguards staff.

6. Fiduciary Rating Moderate Description Risk management

The project procurement systems are in line with WB guidelines. The capacity of the implementing agency is deemed satisfactory.

DGAWM has been undertaking similar activities under the parent project, and the AF will expand activities that have been performing well. The PMU will hire an additional procurement specialist to undertake the AF activities.

24

FM arrangements being used are satisfactory to IDA/IBRD, and no major issues have been identified.

The project will maintain the current FM

arrangements for the AF.

7. Environment and social Rating Moderate Description Risk management

The anticipated impacts of the project will need to be monitored to ensure that no adverse environmental or social impacts occur.

An ESMP has been prepared for the parent project, and remains valid for the AF project. It has been updated to reflect the additional scope of work anticipated under the scaled-up activities.

8. Stakeholders Rating Low Description Risk management

The new technologies promoted by the project are popular with the farmers now, and the expansion of these technologies presents low risk. However, issues of quality, selection of beneficiaries, or other issues may emerge.

DGAWM will maintain stakeholder engagement through beneficiary selection processes as agreed with IDA/IBRD. Existing information and grievance redress mechanisms will be maintained under the AF.

25

Annex 4. Economic and Financial Analysis

1. The parent project is expected to generate transformational impacts on Punjab’s irrigated agriculture sector, by reducing water losses and introducing technologies to improve water conservation and increased productivity of water. The evidence from the field is that the project’s impact on water productivity is better than was expected at appraisal. Even the HEIS component, which is new, is accelerating now as capacity has been enhanced for various stakeholders, SSCs, consultants, and Government staff, and the demonstration effect of the systems installed since 2012 is being realized. 2. At appraisal, a simplified approach was used to estimate the incremental benefits of the project. The cost-benefit analysis was based on determining a discount rate that equalizes the costs and benefits—that is, the economic rate of return (ERR). The cost-benefit analysis was confined to assessing the costs and benefits of component A, Improving Water Productivity,4 and component B, Upgrading Farm Level Irrigation Conveyance Systems.5 The benefits of component C, Technical Assistance, and of the training under component D were not quantified, and it was assumed that these services are required for the benefits of components A and B. The original economic analysis estimated internal rates of return (IRRs) by components. The IRRs for HEIS were estimated to range from 32.2% to 43.3% for different size of farms and crops; and the IRR was estimated for laser land leveling as 29.6%, for regular W/C improvements as 42.6%, for the improvements of additional W/Cs as 30.5%, and for W/C improvement in non-canal command areas (Barani Area) as 19.7%. In 2011, at appraisal, the project cost was estimated at US$423.5 million with estimated completion over 5 years starting from July 2012.

3. The updated expenditure and cost estimates show that the IDA funds allocated in the project for component A (US$113 million) are not adequate to meet the targets in the project. For completing 120,000 acres of HEIS with modifications (two types of ponds, and drinking water filtration systems) about US$138.1 million are required from the IDA/IBRD credit, meaning an additional requirement of US$25.1 million. Of this amount, US$13.0 million is due to the additional financing required for the revised financing rate for ponds on about 20,000 acres where HEIS is to be installed, mostly in saline groundwater areas where canals are the only source of water supplies, and US$3 million is for the rainwater harvesting ponds. The remaining US$9.1 million is due to cost increases in the unit rates for installation of HEIS and for the filtration units. Adding another 2,000 laser leveling units to the original project target of 3,000 units increased the cost of the A2 component from US$7.9 to US$12.4, with a gap of US$4.5 million. Thus the total funds required to meet the current agreed targets under component A equal US$29.6 million. Similarly, there is a cost increase of about US$18.0 in component B, primarily in component B2, which is met from savings from components C and D (US$5.9 million) and remaining from the AF. Also, component B’s scale-up of about 2,000 schemes has a cost of about US$34.8 million.

4. These changes require updating the project’s economic and financial analysis and re-estimating the costs and benefits for the AF project. The updated economic analysis is based on actual data available at the project’s midterm review (MTR). The analysis approach is similar to that used for the appraisal of the original project. The challenge remains to fully capture and quantify the benefits of component C. Table 4.1 compares the IRR at appraisal and at the MTR stage.

4 Installation of HEISs and Strengthening of Precision Land Leveling Services in Private Sector. 5 Improvement of Unimproved Canal Irrigated Watercourses, Completion of Partially Improved Watercourses & Rehabilitation of Irrigation Conveyance Systems in Non-Canal Commanded Areas

26

Table 4.1. Estimated IRR of Key Project Activities (%)

Project intervention Appraisal (Feb 2012)

MTR (Mar 2016)

High Efficiency Irrigation System (HEIS) 43.2 35.1 Rainwater Harvesting Ponds Not Applicable 24.1 Laser Land Leveling 32.7 29.6 Watercourse Improvement in Canal Command Area 28.1 42.6 Watercourse Rehabilitation of Partially Improved W/Cs 23.1 30.5 Watercourse Improvement in Non-Canal Command Area 19.7 24.9 Overall Project 32.6 30.2

5. Under the AF project, another activity—constructing rainwater harvesting ponds—has been added to component A. Economic analysis has also been carried for this part of the component, separately as a subcomponent. The analysis estimates the overall IRR of the activity as 24%.

Economic Analysis

6. The representative sample data are collected by project M&E consultants for (i) establishing baselines, and (ii) assessing the impacts of the project. The data are drawn from multiple sources to include activities under original project components as described below. 7. Component A1: Improving Water Productivity (HEIS). As of December 31, 2015, the project had completed 2,376 HEIS schemes benefitting an area of 22,139 acres comprising 12,003 acres of orchards (2640 acres of existing and 9363 acres of new orchards); 3,665 acres of vegetables; and 6,471 acres of row crops, all on farms of 3-15 acres in size. The sample data were collected from 38 HEIS farms.

8. Component A2: Laser Land Leveling. According to the present analysis, the rental value of the laser services is Rs. 1,400 per hour. On average, 2.3 hours are estimated to level one acre of land. The frequency of land leveling is once in about 4 years. The target of providing 3000 laser leveling units to service providers was achieved within the first three years of the project, and about 2.52 million acres of land have been levelled to date.

9. Component B1: Improvement of Unimproved Canal Irrigated Watercourses. The sample data are collected from 58 W/Cs by interviewing 6 farmers, 2 each at the head, middle, and tail reaches of the W/Cs. Thus the sample farm area covers 7,035 acres comprising 540 farming households.

10. Component B2: Completion of Partially Improved Watercourses. The target of improving 1,500 W/Cs was achieved ahead of schedule. For economic analysis, data were collected from 34 W/Cs.

11. Component B3: Rehabilitation of Irrigation Conveyance System in non-canal command area. The target of improving 2,000 irrigation schemes was achieved ahead of schedule. Data were collected from 38 irrigation schemes.

12. Yield. Average yields have been computed at the level of each component and compared with yields achieved at control. The incremental yields have been used for the present economic analysis. The summary of yields per acre for major crops is shown in Tables 4.2 and 4.3.

27

Table 4.2. Per-Acre Yield of HEIS Farm

Vegetables Yield

(Kg/Acre) Crops

Yield (Kg/Acre)

Orchards Yield

(Kg/Acre)

Cucumber 48680 Wheat 1620 Kinno 9800

Tomato 17013 Cotton 1360 Lemon 8400

Hot pepper 7800 Sugarcane 37200 Guava 9600

Capsicum 23000 Maize 3400 Mango 8800

Potato 8600 Potato 10000

Table 4.3. Per-Acre Yield of Improved W/Cs Farms

Crops Average yield Kg/

Acre Crops

Average yield Kg/ Acre

Wheat 1497 Sugarcane 32275

Potato 10138 Rice (fine) 1569

Cotton 969 Rice (coarse) 1971

Maize 3084

13. Data on the technical coefficients of all the crops (seed rate, fertilizer rate, labor days, yield, etc.) are compiled from impact assessment surveys and validated with the input of the agricultural expert of the M&E consultants. 14. Price and labor. Data on prices and labor wages are collected from the published agricultural commodity price bulletins.6 Crop budgets are prepared for major crops (wheat, maize, and pulses) and orchards (citrus, mango, guava, and grapes). Investment costs for the selected sample schemes are collected from the PISCs and from supply and service companies. Methodology 15. The economic analysis has been conducted for sample schemes representing each component. The data collected by the M&E consultants for the sample HEIS schemes, laser leveling, and W/Cs have been used to assess impacts and conduct updated economic analysis. Since the project’s major focus is on efficient use of water and improved water flow to the irrigation system, the economic analysis is restricted to quantifying the incremental benefits due to the expansion,7 stabilization (timely availability of water), and intensification impacts generated from the benefited areas. It is envisaged that improved and reliable irrigation water flow will lead to better management of water and other inputs to enhance irrigated crop productivity. The present analysis focuses on existing crop yields and gross margins in existing orchards. Partially irrigated and fully irrigated situations in the sample schemes of improved W/Cs are considered.

6 Monthly Price Bulletins issued by Bureau of Statistics, Government of Pakistan, for December 2015, supplemented with the prices issued by the Market Committees present at District Level within the Project area. 7 Drip irrigation systems (HEIS), installed in 2640 acres of existing orchards, saved 33% of irrigation water (as compared to conventional irrigation), which is being utilized for expansion in the area by intensifying the crops. Sprinkler systems have also been installed over 5417 acres for the row crops, saving 40% of irrigation water as compared to conventional irrigation water.

28

Assumptions on crop yields are kept modest and estimated incremental benefits conservative. It is envisaged that these benefits will be most likely realized for over 20 years or more.

Estimation of Incremental Benefits 16. Since the returns for new orchards with HEIS will start only in 3-6 years, after the plants attain their maturity, the economic analysis has been estimated against the project’s investment at existing orchards only. The project impact has been estimated considering (i) the incremental yields of fruits; (ii) reduced costs in use of fertilizers and other inputs; and (iii) actual installation costs of the HEIS and the allied costs for administration and management. The useful life of the system is assumed as 20 years for the analysis, similar to the one considered at appraisal. For the new orchards, it may safely be concluded that their IRRs will be much higher than those of the existing orchards, because the number of plants per acre in new orchards is higher than that envisaged at appraisal. The plants are being placed at 3ft by 3ft in rows and columns, and high-yield varieties are being used. 17. Since the rainwater harvesting ponds under the AF project would be used as the source of water for a HEIS covering up to 12.5 acres, the similar cropping pattern and other practices prevailing at Pothohar (likely to be orchards of grapes and olives) have been used for the present analysis for this activity being proposed under the AF project. However, the analysis would be revised and updated after the construction of about 50 ponds to take advantage of experience in this aspect. Since very limited data are available at present for estimating the cost of stocking fish in these ponds, the cost and benefits of fish stocking have not been accounted for and will be evaluated when the analysis is updated. 18. The data collected from the field are summarized in Table 4.4.

Table 4.4. The Sample and Data Collected from the Field for Economic Analysis

Intervention

Progress achieved Sample data

collected8

No. Benefitted

area (acres)

No. Benefitted

area (acres)

High Efficiency Irrigation System (HEIS) - Orchards 407 3890 23 188 - Row Crops 225 1729 8 73 - Vegetables 124 1585 7 67 Laser Land Leveling 2700 810000 12 3600 Watercourse Canal Command Area 1416 566400 58 23200 Watercourse Partially Completed in Canal Command Area 822 164400 34 6800 Watercourse Improvement in Non-Canal Command area 938 18760 38 760

Note: The above progress was achieved up to June 2014, after which the field surveys were initiated for sample data collection.

Main Assumptions 19. The analyses rely on the information presented in the Baseline Report on Project Implementation prepared by the M&E consultants. The current analyses compare the project results with the projections made at appraisal. 20. Following the approach adopted at appraisal, crop budgets have been drawn up for each intervention as the basis for both the financial and economic analysis. These budgets cover a range of representative crops grown under HEIS and under the typical farming irrigated by W/Cs and within the irrigation schemes. Based on these crop budgets, one-acre farm budgets have been prepared to show typical costs and returns separately for each component of the project—HEIS farms, canal-irrigated farms, and barani area farms.

8 The data collected by the M&E consultants.

29

Project Costs a. Investment Costs

21. At appraisal the project costs were estimated at US$423.5 million, and the revised estimated cost to complete the project in its original form is US$499 million. Including the cost of scaled-up works brings the revised cost estimate to US$642.7 million. The updated project cost estimate shows that farmers’ share increased from US$262.7 million (original estimates at appraisal) to US$363 million. The increase in the project costs is due to several factors:

Devaluation of Rupee and change in Special Drawing Rights (SDRs). Addition/development of farm-level storage for HEIS farmers. Increase in unit prices of HEIS over original estimates. Overall increase in prices of W/C lining material over the prices at the time of project

initiation.

In addition, the AF project would continue support to component B, Upgrading Farm Level Irrigation Conveyance Systems, and would scale up all three subcomponents as described below. After meeting the financing gap, an additional US$34.8 million would be provided to scale up this component. 22. Support to Post Harvest Processing and Value Addition (total US$17 million, with IDA/IBRD share US$8 million and farmer share US$8 million for equipment and machines, and US$1million for technical assistance and training). To help farmers meet Pakistan’s changing demand for food products, this component supports post-harvest processing and value addition.

Table 4.5. Additional Scope of Works with Additional Funding

Component/subcomponent Nos. A1 Rainwater harvesting ponds 500 B1. Improvement of new W/Cs 200 B2. Improvement of partially improved W/Cs 1,700 B3. Irrigation schemes outside canal command area 650

C3. Support to Post Harvest Processing and Value Addition About 1,000 units of machines and

equipment 23. The economic analysis considers investments made for the sample schemes, including administrative costs. All the costs have been converted to economic values and brought to the level of December 2015 by applying MUV factors. b. Operation and Maintenance Costs 24. The annual operation and maintenance costs are based on the actual data collected for the sample farms for each type of intervention and have been included in the cash flow of costs. 25. In the economic analysis, the financial prices were converted into economic values by removing taxes and subsidies from input and output prices and calculating import parity prices for fertilizers and export parity prices of wheat, rice, maize, and cotton. A standard conversion factor of 0.9 was used to convert financial prices into economic values for non-tradable goods. For labor, a shadow wage rate factor of 0.73 was used for unskilled labor, given the competitiveness in the labor market and labor scarcity in the project area. 26. The analysis uses December 2015 constant prices for all inputs and outputs for the entire project period. The following other assumptions and approaches were used in the analysis:

30

The full costs of sampled schemes are taken into account. A discount rate of 12%, the opportunity cost of capital, is used as the cut-off rate. It is observed from the data of sampled schemes that the incremental agricultural yields

and production benefits from expansion, intensification, and stabilization start with a one-year time lag following the commencement of project implementation; however, the benefit increase will be gradual, achieving its target in 10 years after commencement of project implementation. This assumption has been used in developing the cash flow of benefits.

The useful life of the civil works under the project would be 20 years. Summary of Results 27. Following the approach adopted at appraisal, the IRR has been estimated for various project interventions to establish the economic viability of different sizes of farms and of each different source of irrigation. Tables 4.6 and 4.7 summarize the results.

Table 4.6. IRR (Percent) of HEIS for Various Crops and Farms

Explanatory Notes: n/a = not available; means the analysis for the crop has not been carried out. Since the present analysis is based on actual data collected for the sample farms and the new orchards have not yet attained maturity, the analysis for the new orchards is not available.

3 5 10 15 3 5 10 15A. Drip Installation

A.1 Existing Orchardsi Citrus 38.9         41.1          50.2        55.6        22.4 27.9 33.3 38.0 ii Guava 31.7         33.3          40.6        48.4        13.8 17.9 21.8 25.1 iii Mango 40.7         42.8          51.2        58.0        32.1 39.4 46.6 53.0

A.2 New Orchards

i Citrus 22.1         23.7          27.9        30.9        n/a n/a n/a n/a

ii Guava 21.4         22.0          26.3        31.4        n/a n/a n/a n/a

iii Mango 22.1         22.7          25.7        28.6        n/a n/a n/a n/a

iv Citrus + Vegetable 27.5         32.1          37.3        43.7        n/a n/a n/a n/a

iv Others (Grapes & Olives) n/a n/a n/a n/a 47.8 58.4 68.9 78.2

A.3 Vegetables - Tomato 18.1         26.8          32.6        36.0        14.4            18.1      18.5          19.4         

- Potato 21.2         27.3          33.6        37.5        33.8            41.5      44.7          52.0         

 ‐ Chillies 20.9         28.4          34.0        38.3        n/a n/a n/a n/a

- Vegetables (Overall) n/a n/a n/a n/a 25.3            28.3      29.3          30.5         

A.4 Other Cropsi Sugarcane 13.7         18.1          24.9        26.7        17.6 27.0 29.2 33.0 ii Cotton 22.0         33.4          35.9        37.4        5.2 11.0 12.3 14.4 iii Flower Roses 22.5         31.7          38.0        42.8        25.3 37.5 40.4 45.5

B. Sprinkleri Wheat Canal Command 15.8         19.6          30.5        31.0        6.5 10.0 13.8 16.6 ii Wheat Barani Area 17.5         21.7          33.6        34.7        10.0            14.0      18.3          21.6         

iii Pulses 16.2         21.2          27.4        31.6        12.0            16.3      21.0          24.6         

v Maize n/a n/a n/a n/a 16.7            21.8      27.6          32.1         

Farm Size (Acres)At Appraisal Based on Actual Data (March 2016)

CropsSr. Farm Size (Acres)

31

Table 4.7. IRR (Percent) of Different Project Components

Project intervention PAD

(Feb 2012) Updated

(Mar 2016) High Efficiency Irrigation System (HEIS) 43.2 35.1 Water Harvesting Ponds Not Applicable 24.1 Laser Land Leveling 32.7 29.6 Watercourse Improvement in Canal Command Area 28.1 42.6 Watercourse Rehabilitation of Partially Improved WCs 23.1 30.5 Watercourse Improvement in Non-Canal Command Area 19.7 24.9 Overall Project 32.6 30.2

28. The results differ from the appraisal projections because of the increase in the costs of material and particularly the unit costs of installing HEIS. Table 4.8 compares the costs of HEIS installations.

Table 4.8. Comparison of Costs for Installation of HEIS of Different Crops

Category Size At PC-1 (2011) Avg.

Cost (Rs./Acre) Actual Avg. Cost

(Rs./Acre) Increased %

Orchards

3 acres 122,398 163,673 25.22 5 acres 88,578 132,965 33.38

10 acres 70,048 112,006 37.46 15 acres 58,009 98,052 40.84

Total Orchards 84,758 126,674 33.09

Vegetables

3 acres 155,678 202,725 23.21 5 acres 126,585 166,806 24.11

10 acres 112,823 155,464 27.43 15 acres 110,550 134,703 17.93

Total Vegetables 126,409 164,924 23.35

Row Crops

3 acres 164,936 241,071 31.58 5 acres 127,702 167,907 23.94

10 acres 98,248 156,470 37.21 15 acres 84,503 139,778 39.54

Total Row Crops 118,847 176,306 32.59 Overall Average 30.06

29. Higher IRRs are observed for potatoes, sugarcane, and roses—potatoes gave a better yield than was estimated at appraisal, and the prices of sugarcane and roses increased in local and international markets. 30. The sensitivity analysis indicates that the IRR is robust and not sensitive to reasonable cost overruns or reduced benefits, or to a combination of both (see Table 4.9).

Table 4.9. Sensitivity Analysis: IRR Response %

Project intervention PAD

(Feb 2012) Updated

(Mar 2016) Base case 32.6 30.2 Cost increased by 20% 25.7 25.6 Benefits reduced by 20% 24.2 22.2 Cost increased and benefit reduced simultaneously by 20% 18.5 18.7 Benefits delayed by two years 19.6 18.5

32

Conclusion 31. The analysis reveals the values of IRRs as 30.2%, which proves the project to be economically feasible. Sensitivity analysis also proves the robustness of the IRR; therefore, the investment of AF may be made without any substantial risk.

Green House Gas Accounting – Mitigation and Adaptation Benefits

Background and Methodology 32. In its 2012 Environment Strategy, the World Bank has adopted a corporate mandate to conduct greenhouse gas (GHG) emissions accounting for investment lending. The quantification of GHG emission is an important step in managing and ultimately reducing GHG emission, and is becoming a common practice for many international financial institutions. 33. To estimate the impact of agricultural investment lending on GHG emission and carbon sequestration, the World Bank has adopted the Ex-Ante Carbon-balance Tool (EX-ACT), which was developed by the Food and Agriculture Organization of the United Nations (FAO) in 2010. EX-ACT allows the assessment of a project’s net carbon-balance, defined as the net balance of CO2 equivalent GHG that were emitted or sequestered as a result of project implementation compared to a without project scenario. EX-ACT estimates the carbon stock changes (emissions or sinks), expressed in equivalent tons of CO2 per hectare and year.

Application of EX-ACT 34. Data source. The project team provided data for the GHG accounting analysis. 35. Project boundaries. The GHG accounting considers various aspects of Punjab Irrigated Agriculture which includes the installation of high efficiency irrigation systems (HEIS) on about 48000 ha, provision of 3,000 LASER units to farmers / service providers, improvement of 5,500 unimproved canal watercourses, completion of lining on 1,500 partially improved watercourses and rehabilitation of 2,000 irrigation schemes in non-canal commanded areas. 36. Basic assumptions. The Punjab province in Pakistan has tropical climate with dry moisture regime. The dominant soil type is High Activity Clay (HAC). The project implementation phase is 5 years and the capitalization phase is assumed to be 15 years. The 20-year implementation period is standard in the use of EX-ACT. The “without project scenario” is assumed not to differ from the “initial scenario” except fertilizers use and energy consumption. The analysis further assumes the dynamics of change to be linear over the duration of the project. 37. Land use change. With the introduction of improved citrus, mango and guava, 24,000 ha of degraded land will be converted to perennials. 36704 ha of degraded land will be converted to biannual cropping system with annual cropping intensity. 38. Crop production. A range of climate smart practices will be applied on 2,131,904 ha of annual cropland. Due to the constraints of data availability at current stage. There are some assumptions:

a. 48,000 ha of staple crop lands will be under HEIS with project. b. 20% of total area of annual cropland (that is, 426,381 ha), will be improved with

integrated nutrient management with project. Urea and compost will be applied.

33

39. The interventions are summarized in the Table 1 below.

Table 4.10. Climate-smart intervention practices

Crop Improved agronomic practices

Nutrient management

Water management

No residue burning

Manure application

Area (ha)

Wheat 882,079

Rice 381,326

Cotton 406,469

Sugarcane 83,808

Potato 18,857

Vegetables 4,190

Orchards 20,952

Others

297,518

40. Inputs and investments. As the amount of fertilizer can be more precisely tuned to the needs of the crop with drip irrigation, the quantity of fertilizer applied is expected to decrease. Due to the use of nutrients on annual crops, it is assumed that urea and compost are used on 426,381 ha of land. Insecticides and fungicides are assumed to be applied on 490,277 ha land. Consumption of electricity and diesel declines as drip irrigation will be based on gravity from the farm level storage on higher slopes. Trickle and sprinkle will be applied in 40,000 and 8,000 ha of land respectively.

Results 41. Net carbon balance. The net carbon balance quantifies GHGs emitted or sequestered as a result of the project compared to the without project scenario. Over the project duration of 20 years, the project constitutes a carbon sink of 31,222,171 tCO2-eq. The project provides a sink of 14 tCO2-eq per ha, equivalent to 0.7 tCO2-eq per ha per year.

Table 4.11. Results of the ex-ante GHG analysis in tCO2-eq Components of the project Gross fluxes

Without With Balance All GHG in tCO2eq

Positive = source / negative = sink

Land use change

Degraded land to tree crops - -2,030,820 -2,030,820

Degraded land to bi-annual cropping - -1,657,033 -1,657,033

Annuals -2,217,181 -5,946,342 -3,729,161 Perennials establishment - -2,831,400 -2,831,400 Agricultural inputs 226,012,448 208,673,541 -17,338,907 Energy consumption 129,077,069 125,428,725 -3,648,344 Construction of irrigation systems - 13,493 13,493

Total 352,872,336 321,650,165 -31,222,171

Per hectare 164 149 -14

34

Per hectare per year 8.2 7.5 -0.7 42. Carbon sources and sinks. The main carbon sinks are primarily from reduced agricultural inputs (Figure 1), while other sources include land use change, perennials, and the introduction of climate-smart practices for annual crop production. 43. Fluxes per component; Balance per component; With Project and without project balance; and Share of the balance per GHG are shown.

Figure 1. GHG emission and carbon sequestration in tCO2-eq.

44.