Document ofThe World Bank

Report No. 24188-PAK

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FORA

PROPOSED CREDIT

IN THE AMOUNT OF SDR 71.2 MILLION

(EQUIVALENT TO US$90 MILLION)

TO

THE ISLAMIC REPUBLIC OF PAKISTAN

FOR A

STRUCTURAL ADJUSTMENT CREDIT FOR

THE GOVERNMENT OF NORTH WEST FRONTIER PROVINCE

May 31, 2002

Poverty Reduction and Economic ManagementSouth Asia Region

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GOVERNMENT FISCAL YEARJuly I - June 30; FY 02 =FY 2001/02

CURRENCY EQUIVALENTS

Currency Unit = Pak Rupees (PRs.)US$1 = PKR 60.30 (May 2002 Floating Inter Bank Rate)

WEIGHTS AND MEASURESMetric System

ABBREVIATIONS AND ACRONYMS

AsDB Asian Development Bank LHW Lady Health WorkerAG Accountant General (Provincial) MDG Millennium Development Goals

AIT Agriculture Income Tax M&E Monitoring and Evaluation

AWB Area Water Boards MICS Multi-Indicator Cluster Survey

BHU Basic Health Units MOP Memorandum of President

CAS Country Assistance Strategy MTBF Medium-Term Budget Framework

CDL Cash Development Loan NAB National Accountability Bureau

CFAA Country Financial Accountability Assessment NEAS National Education Assessment SystemCGA Comptroller General of Accounts (Federal) NFC National Finance CommissionCIP Community Infrastructure and Services Project NGOs Non-Government OrganizationsCWD Communications and Works Department NRB National Reconstruction Bureau

DAC Departmental Account Committee NWFP North West Frontier Province

DAO District Accounts Office O&M Operation & Maintenance

DFID United Kingdom Department for International P&D Planning and Development Department

Development PAC Public Accounts CommitteeDoE Department of Education PAD Pakistan Audit Department

DoH Department of Health PFAA Provincial Financial Accountability Assessment

EIROP Essential Institutional Reform Operationalization PFC Provincial Finance ComrnissionProject PIFRA Pakistan Improvement of Financial Reporting

EMIS Education Management Information System and AuditingEPI Expanded Program of Immunization PD Program DocumentESR Education Sector Reform PIHD Pakistan Integrated Household SurveyFMC Fiscal Monitoring Committee PRGF Poverty Reduction Growth Facility

GAVI Global Alliance for Vaccines and Immunization PRP Provincial Reform Program

GoNWFP Govemrnment of the North West Frontier Province PRSP Poverty Reduction Strategy Paper

GoP Govermnent of Pakistan PSC Public Service Commission

GST General Sales Tax PSDP Public Sector Development Program

GTZ German Development Corporation PTAs Parents-Teachers Associations

HMIS Health Management Information System SAC Structural Adjustment Credit

HR Human Resource SAP Social Action ProgramIDA International Development Association SBP State Bank of PakistanIMF International Monetary Fund SDC Swiss Development CooperationI-PRSP Interim Poverty Reduction Strategy Paper SMEDA Small and Medium Enterprise Development

KPP Khushal Pakistan Program AuthorityLGO Local Government Ordinances UNDP United Nation Development Program

WAPDA Water and Power Development Authority

Vice President: Mieko Nishimizu, SARVP

Country Director: John W. Wall, SACPKSector Director: Sadiq Ahmed, SASPRTask Team Leaders: Abid Hasan, SACPK

Mark Sundberg, SASPR

NWFP STRUCTURAL ADJUSTMENT CREDIT

TABLE OF CONTENTS

I. THE ECONOMIC SETTING AND RECENT DEVELOPMENT ................................................ 1

A. Introduction .................................................. IB. The National Context for Reform .................................................. 1

II. THE PROVINCIAL CONTEXT FOR REFORM .4

m. THE PROVINCIAL REFORM PROGRAM .8

A. Strengthening Accountability and Professionalism of State Institutions .9B. Accelerating Human Development .10C. Improving Fiscal Sustainability and Restoring Financial Accountability .15D. Promoting Sustainable Growth .20

IV. THE PROPOSED NWFP STRUCTURAL ADJUSTMENT CREDIT . .21

A. Pakistan Country Assistance Strategy .21B. The Proposed Credit: Rationale, Prior Actions, and Medium Term Benchmarks .23

V. BENEFITS AND RISKS .28

TABLES

Table 1: NWFP Social Indicators .Table 2: NWFP Key Fiscal Indicators .7Table 3: NWFP: Summary of Medium-Tenn Budget FY99 to FY05 .17Table 4: Prior Actions and Key Triggers .25Table 5: Monitoring Indicators .27

CHARTS

Chart 1: Poverty Trends .4Chart 2: Poverty Head Count (Urban). 5Chart 3: Poverty Head Count (Rural). 5Chart 4: NWFP: Provincial Revenue and its Uses .7

ANNEXES

Annex A: Letter of Development Policy and Policy Reform MatrixAnnex B: Poverty and Social Development in NWFPAnnex C: Devolution and Inter-Governmental Fiscal Framework for Pakistan and NWFPAnnex D: NWFP Fiscal Restructuring and Medium Term Budget Framework FY03-05Annex E: Public Financial Accountability and Management in NWFPAnnex F: NWFP Education Sector ReformsAnnex G: NWFP Health Sector ReformsAnnex H: NWFP Civil Service and Governance ReformsAnnex I: NWFP Private Sector Development ProgramAnnex J: Statistical Annex

MAP

Task Team

Task Managers Abid Hasan, Mark Sundberg

Peer Reviewer Jeffrey Hammer

Fiscal/Public Expenditure Zareen Naqvi, Zubair KhanManagement

Administrative Reform Nick Manning

Poverty Monitoring & Ambar NarayanSocial AnalysisSectoral Inputs Ameer H. Naqvi, Shahnaz Kazi, Asya Akhlaque, Sarshar Khan, Sohail Malik

Legal Counsel Said Al-Habsy

FMS/Procurement Arif Yaqub, Ahsan Ali, Anwar Bhatti

Program Assistants Subooh Badar, Shahid Malik, Lin Chin, Shams ur Rehman

PAKISTAN

NWFP STRUCTURAL ADJUSTMENT CREDIT

Credit and Program Summary

Borrower: Government of Pakistan (GoP)

Implementing Agency: Government of the North West Frontier Province (GoNWFP)

Beneficiary: North West Frontier Province (NWFP)

Amount: Credit: SDR 71.2 million (US$90 million equivalent)

Terms: IDA: Standard with 35 years maturity and 10 years grace period

On lending Terms: IDA terms with Federal Government bearing the foreign exchange risk

Description: The NWFP Structural Adjustment Credit (NWFP SAC) supports the economicand social reform program of the Province. The reform program is built onfour main pillars: (i) strengthening provincial governance through the reformof the civil service to strengthen the accountability, integrity andprofessionalism of state institutions; (ii) strengthening public health andeducation delivery systems and the devolution of responsibilities to expandaccess to these services, with a focus on primary service delivery; (iii) fiscaland financial management reforms to increase provincial revenues, reprioritizeexpenditures, strengthen procurement and improve budget preparation,execution, and oversight; and (iv) deregulation and business facilitation toenhance prospects for growth and poverty alleviation. The proposed credit isfully consistent with the macroeconomic program and the Interim PovertyReduction Strategy of the Government of Pakistan.

Beneflts: Implementation of the NWFP SAC-supported reforms will transform the waythe provincial government provides services. Decentralization is shifting thelocus of responsibility to local governments, enhancing local capacity, anddeveloping a new strategic emphasis on development outcomes and primaryservice delivery. The civil service reform and restructuring is integral to thisprocess, devolving administrative responsibility downwards, and advancing anagenda for fiscal decentralization. This aims to make the government moreaccountable, increase efficiency, and improve social indicators, includingreducing the significant gender disparities.

Risks: The major risks are: (i) continuity of political commitment of the GoNWFP toreforms given the forthcoming October 2002 elections; (ii) setbacks in theimplementation of the GoP's reform agenda; and (iii) external shocks arisingfrom a downturn in the economy or tensions along Pakistan's borders. Whilelack of continuity will threaten many of the benefits expected from the reforms,the Bank's support program is self-adjusting to mitigate the risk of reformderailment through the entry and exit triggers. Follow-on lending will continueonly as long as the NWFP government continues to perform satisfactorily.

Disbursement: The full amount of credit would be disbursed in a single tranche.

Project ID Number: PE-P077834

IDA PROGRAM DOCUMENT FOR A PROPOSED CREDIT TO THE ISLAMIC REPUBLICOF PAKISTAN FOR THE NWFP STRUCTURAL ADJUSTMENT PROGRAM

I. THE ECONOMIC SETTING AND RECENT DEVELOPMENTS IN PAKISTAN

A. INTRODUCTION

1. This memorandum seeks approval for a US$90 million Structural Adjustment Credit to theIslamic Republic of Pakistan for the Government of the North West Frontier Province (GoNWFP). Thiscredit will support a wide-range of reforms being implemented by the GoNWFP. These reforms, led bystrong champions in the government, including the Governor of the province, the Cabinet, committedcivil servants, and backed by civil society, aim to reduce poverty in the province by improvinggovernance, public finances, public service delivery, and the enabling environment for private sectorgrowth. These reforms are expected to reverse a decade of poor governance and economic and socialdecline. The reforms are fully consistent with and complement the Federal Government of Pakistan's(GOP) Interim Poverty Reduction Strategy (I-PRSP).

2. The proposed Credit is consistent with the FY03-05 Country Assistance Strategy (CAS) andfollows nearly two years of dialogue between the provincial government and the World Bank. The CASis focused on, inter alia, "provincial/district based assistance strategies focused on governance, humandevelopment and community-based services" which this credit proposes to support. The Bank's dialoguewith the provincial government started with the discussion of the report Reforming Provincial Finances(Report # 21362-PK). This report highlighted the need for restructuring provincial finances, improvinggovernance and public service delivery, and the investment climate in the context of a medium-termreform program. In FY01, the Bank launched a dialogue with three provinces in Pakistan (Punjab, Sindh,and NWFP) on their reform programs. NWFP is one of the provincial governments, along with Sindh,where these reforms and dialogue have matured sufficiently to warrant Bank support. The GoNWFP hassought financial assistance through an adjustment credit to support the province's ongoing comprehensivereform program, which intends to bring about systemic changes to build a stronger foundation for growthand poverty reduction in the medium term. The proposed credit is, thus, consistent with both the sub-national emphasis of the Bank's CAS and strong client demand. This credit also supports the devolutionprogram by implementing critical province-wide reforns in fiscal management and governance.

3. The proposed credit is also consistent with the macroeconomic framework and structural reformssupported under the IMF's Poverty Reduction and Growth Facility (PRGF). Proceeds of the proposedNWFP SAC will support enhanced provincial expenditures on priority development areas, as envisionedunder the Government's I-PRSP program. The Government of Pakistan has confirmed that additionalresources transferred to NWFP under the proposed Credit will be fully accommodated within the PRGF'sconsolidated expenditure targets.

B. THE NATIONAL CONTEXT FOR REFORM

4. Pakistan is a federation of 4 provinces' and 7 tribal areas. Under the 1973 Constitution mostpublic service delivery is the responsibility of provincial governments. Their budgets account for 80% ofPakistan's public expenditures in areas such as education, health, agriculture, roads, and irrigationservices. In contrast, since tax authority is concentrated at the Federal Government, federal transfers(based on the awards of the National Finance Commission (NFC)) account for around 80% of provincialresources.2 Under the 1997 NFC awards the Federal government passes on 37.5% of all federally

I Balochistan, NWFP, Punjab and Sindh are the four provinces.2 This share varies between provinces, with Punjab and Sindh being relatively less dependent on Federal transfers.

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collected taxes (on income, trade, and excise taxes) to the provinces based on their respective populationshares. The new NFC award (NFC 2002) is currently being discussed between the federal governmentand the provinces (see para. 9).

5. For over a decade, as at the federal level, Pakistan's provinces have been facing a crisis in publicfinances, civil service performance, and public service delivery. Lack of fiscal space for poverty reducingexpenditures, a narrow tax base, a large but mainly unskilled civil service, poor accountability andtransparency, have resulted in the provinces suffering from deficits (shortfalls of spending and servicedelivery relative to needs) in the funding and delivery of social services (education, health, rural watersupply and sanitation). Similarly, infrastructure deficits (roads, irrigation and drainage, and municipalservices in poor condition) increase the cost of doing business and impose a heavy burden on theeconomy and the people. Multiple federal and provincial regulatory agencies harass the private sectorand discourage entrepreneurship and economic activity. An important point to be noted is that inPakistan, provincial fiscal deficits cannot exceed what the federal government is willing to lend to themand the limited overdraft Ways and Means advances from the central bank.3

6. Since assuming power in October 1999, the military government showed awareness of thecountry's difficult circumstances. Its response was the quick articulation of an ambitious reform programaimed at modernizing Pakistan and its institutions. Many aspects of the reform agenda built on efforts ofprevious administrations, yet a salient new feature was the government's attention to governance. Cross-cutting measures to improve governance were made the center of the reform program so Pakistan couldgradually rebuild its severely eroded credibility, re-establish confidence in public institutions, andimprove the investment climate to revive growth. Progress in the implementation of reforms during thefirst two years of the administration was unprecedented - both for the scope and the depth of reforms. Inthe short period of time leading to the FY02 budget, the government made significant progress in turningaround the poor governance environment that was at the core of Pakistan's deteriorating performance. Itimplemented measures to reform key institutions, reduce the fiscal deficit, encourage export-orientedgrowth, improve the climate for domestic and foreign investment, strengthen the banking system, improvepublic financial management and accountability, enhance transparency and external oversight ofgovernment actions, strengthen social safety nets, and improve the delivery of key public services inhealth, education, and family planning. These reforms were actively supported by a ten-month US$600million Stand-By Arrangement approved by the IMF Board in November 2001; new short term liquidityrelief approved by the Paris Club in January 2001; a US$350 million Structural Adjustment Creditapproved by IDA in June 2001, and a new program lending from the AsDB.

7. The program of reforms initiated in 1999 has since been institutionalized in an Interim PovertyReduction Strategy Paper (I-PRSP), which was discussed at the Boards of the Bank and the IMF inDecember 2001. The I-PRSP was formulated after extensive provincial/district consultations during2001, and paved the way for a three-year US$1.25 billion Poverty Reduction and Growth Facility (PRGF)approved by the IMF Board in December 2001. The strategy aims at pooling poverty reduction efforts atthe federal, provincial and the district levels, linking social and poverty related expenditures with theattainment of key social and human development goals. The Government's poverty reduction strategy isbased on four main pillars:

* reviving economic growth to at least 5 percent per year to accelerate poverty reduction;addressing the debt burden problem through fiscal consolidation and more rapid export growth;improving revenue mobilization and changing the composition of expenditures to allocate greaterresources toward social sectors and critical infrastructure; and improving the business

3 On a one time basis in the mid-1980s, provinces were allowed to raise federal government guaranteed loans from the domesticmarket, but since then this has been discontinued.

environment by restoring the credibility of government policies and providing a level playingfield to all areas of business, removing distortions, and reducing the cost of doing business;

* improving governance by restoring the integrity and accountability of state institutions with aparticular focus on tax administration reforms; devolution of powers to newly established localgovernments; improved public financial management; and civil service reforms;

* closing the social gap by improving the delivery system of basic education, preventive healthcare, and family planning while gradually increasing expenditures as stronger growth, improvedtax administration, and continued donor support enhance available resources; and

* reducing the vulnerability of the poor by improving social protection and employmentopportunities by enhancing access to credit, redistribution of public lands, implementation ofcommunity-based infrastructure programs, and direct cash transfers for the neediest.

8. Pakistan has embarked on a far-reaching devolution program whereby power has devolved fromthe provinces to the newly set up District Govemments, under the Local Govenmment Ordinance (LGO).4

The devolution has abandoned the old system of sub-national govemance consisting of the Provinces,Divisions and Districts and created three new levels of country-wide elected govemrnments, along with theProvinces. The three tiers are: Districts, Tehsils and Union Councils. There are now 6,455 new electedlocal Governments.5 A major departure from the past has been the reservation of 33%6 seats for womenand explicit inclusion of other disenfranchised groups such as peasants and workers representatives in thelocal govemments. The motivating idea behind the devolution was to reorganize state structures todecentralize delivery of basic social services and improve accountability of state functionaries. Citizen'sinvolvement is a key element of the devolution plan. Elected members at the three tiers of localgovemment would be the key decision-makers responsible for planning, service delivery and oversight.Compared to the earlier system where provinces were responsible for delivering most social andeconomic services, the district govermments would be responsible, from now on, for delivering socialservices. Tehsils and Union Councils would be responsible for local roads/streets, and all water andsanitation services. (See Annex C for more details). Most of the administrative staff in the districts wereredeployed from the provincial line departments to the district and sub-district levels. However, thecapacity of district officials to manage remains an area in need of strengthening.

9. While the political and administrative aspects of devolution have been implemented, more clarityis needed on the new fiscal transfer framework and mechanisms between the three tiers. The impact of thefiscal centralization of the past is still quite strong; sub-national govemments are heavily dependent onfederal transfers.7 There is increasing demand from the provinces to get a higher share of tax assignmentsfrom the federal govemment. This is in light of the deteriorating provincial finances, higher debt burdenand also greater emphasis on poverty reduction expenditures which largely take place at the provinciallevel. The federal govemment has proposed that perfomiance and need-based criteria be also included inthe formula. Pending establishment of the four permanent Provincial Finance Commissions (PFCs) underthe LGO, expected in July 2002, interim provincial finance committees have initiated work on the fiscaldevolution issues alongside the federal government's NFC 2002 Commission. Transparent and certainfederal-provincial and provincial-local government mechanisms clarifying fiscal responsibilities andmeans of transfer of funds would be critical for fiscal decentralization to be fully achieved. The final newNFC award is expected to be announced well before the FY04 budget. The PFC awards laying out theprovincial-district and sub-district arrangements would follow once the NFC awards are announced.Implementation of both the new NFC and Provincial Finance Awards will start from FY04.

4 Each province enacted a Local Govemment Ordinance (LGO) in July 2001.5 Comprising 96 city /districts governments, 337 townlTehsil governments, and, 6022 union council governments.6 The participation of women is, however, much lower. Only 17% of the more than 124,400 new union councilors are women; alarge number of women's seats remain vacant.7For Provinces, an average 82 percent in FY01 and almost 100% for districts in FY02.

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10. The provinces will still retain a key role under the new decentralization structure for two reasons.First, the provinces will continue to be responsible for critical province-wide services, including: (i)managing the consolidated provincial finances and fiscal transfers to local governments; (ii) executingprovincial development programs, delivering province-wide services such as irrigation, road networksand tertiary services; (iii) undertaking monitoring and evaluation of local governments; and (iv) providingthe regulatory framework for the private sector. Second, the success of decentralization depends on theimplementation of the key provincial reforms. These include: (i) fiscal restructuring to provide greaternon-salary budgets for local governments; (ii) civil service reforms to right size the civil service and notburden district governments with excessive staff;8 (iii) governance improvements and strengthening ofaccountability rules so that these help and not hinder local governments; (iv) setting up good monitoringand evaluation systems, and strengthening local government administrative capacity. Clearly, any effortto improve public services and human development will have to focus on provincial and districtgovernment reforms.

11. There is now a major opportunity for the provinces to turn around the performance of their publicsectors within the context of GOP's comprehensive reforms to accelerate growth and reduce poverty.Provinces and the new local governments would be the linchpin of implementing the government'spoverty reduction strategy as envisioned in I-PRSP. Hence, support to provincial governments would beessential to the success of both the devolution plan and Pakistan's poverty reduction strategy in the shortand medium term.

II. THE PROVINCLAL CONTEXT FOR REFORM

12. NWFP faces difficult and unique development chaUenges due to its geography, history andlocation. With a population of close to 20 million and growing at 2.8 percent per year, NWFP is the thirdlargest province of Pakistan. It is landlocked, as the country's only port is over 1500 km away to thesouth. Land routes to the north are few and difficult through a hilly terrain. The province itself is largelymountainous, with only 30 percent cultivated land. Nearly 50% of the population lives in themountainous and arid areas. NWFP shares a long border with eastem and southern Afghanistan and mostof its population has the same ethnic background (Pushtoon) as parts of bordering Afghanistan. Over thepast two decades, NWFP has been the frontline province vis-a-vis Afghanistan, hosting more than 2million Afghan refugees (most of whom have practically made the province their home). The continuingconflict in Afghanistan proved to be an especially heavy burden on the province's resources, creating aserious disruption in trade, putting an enormous pressure on public services and physical infrastructure,hence stretching the province's limited fiscal resources.

13. NWFP is one of the poorest provincesin Pakistan. Poverty is pervasive and deep, Chart 1: Poverty Trendsespecially in the rural and mountainous regionsof NWFP (Annex B). Currently 31% of the 45urban and 47% of the rural population live 40- - -below the poverty line-far higher than the 35-

national average. Not only have poverty levels 30 - ;=_=25 ----------

been higher, (Chart 1, 2 and 3), but poverty 20 -continued to rise in NWFP during the 1990s. 15-- +PakNWFP also stands high on several important 10 ------------------------------- --- NWFPdeterminants of poverty compared to other 0

provinces in Pakistan. These include having a 1992/93 1993.94 1996/97 1998/99

larger average family size (7.8 members perhousehold compared to 6.8 for Pakistan as a Source: Poverty in Pakistan in the 1990s: An Interim Assessment,

The World Bank, 2001.

i Salaries now account for around 85% of district government budgets.

whole); higher dependency ratios; higher illiteracy rates,9 low education attainments; very small andfragmented land holdings (average farm size in NWFP is only 2.2 acres compared to 9.4 acres inPakistan); and generally lower access to physical and health-related infrastructure. Given the limitedresource base and high dependence of the provincial economy on domestic and foreign workerremittances, those with low human capital or skills who are unable to seek work outside the province tendto be among the poorest groups. The recent district-level Multi-Indicator Cluster Survey (MICS), the firstone in Pakistan, shows that there is a considerable variation within the province in terms of poverty andhuman development. Districts located in the northern mountainous zones and relatively inaccessibleareas rank very low in terms of social indicators with extremely low literacy levels, low primary schoolenrolments, very low coverage for safe water and sanitation, and high levels of malnutrition.

Chart 2: Poverty Head Count (Urban) Chart 3: Poverty Head Count (Rural)35 5030 EPakstan *NWFP 45 UPakistan NNWFP

25 _ _ 35 -U ~~~~~~~30 20 2°

is - Er ~~~~~20 15 - _ _ * 20 _ - C _

10 m -I-0 * U0 -

1992/93 1993t94 1996/97 1998/99 O 199293 1993/94 1995/97 1998 _

Source: Poverty in Pakistan in the 1990s: An Interim Assessment, The Wotld Bank, 2001.

14. NWFP has poor social indicators, and the highest gender disparities in Pakistan. There hasbeen an improvement in both education and health indicators during the last decade (Table 1).Enrollment rates have increased, infant mortality rate has dropped and child immunization also increased.However, as in the rest of Pakistan, social indicators continue to be low. Thus, literacy and enrollmentcontinues to be low. More than Table 1: NWFPSoclallndicator40% of children under two years iwo91 1998-99

of age are not fully immunized, GrossmPam l bEnrolment(%s 67 70while infant mortality and Male 92 84matemal mortality rates are still Female 44 54

comparatively high despite tnbntmol,t rateh(seres)improvements. A major area Mae 143 672

needing attention is the social Female 116 57Immunizston rte (%) for 12-23 months old children

and economic position of women Overall, both sexes 41 54

which remains weak in NWFP. Male 50 52Female 31 56Traditionally they occupied the Dellvery by quallfied health peraonel (%)private (as opposed to the public) overal 29 46

Rural 26 43sphere of life and had limited Urban 39 66participation in the Prweno, Armong (%) marfe women 9 10

socioeconornic development.'° Awareness 42 92socioeconomic development..Opebonal Basic Heala Unib (BHUs) %) NA 85TiMs is manifested in several Household access to clean water (%) 43 53

indicators. Female enrolment Sou e NWFP Scdal AcIon Prooram SAPP-II Midtrnm.

rates in primary education are

9 Literacy rates for population 15 years and above, for NWFP are lower compared to the average of Pakistan. While maleliteracy rate compares well with Pakistan, female literacy is only 15% in NWFP compared to 27% in Pakistan (Annex B).'0Data on social indicators varies considerably depending upon source. Efforts are underway to improve reliability of data. Girlsprinary enrollment rates increased during 1990-99 more rapidly than for boys. Immunization coverage increased onlymarginally for boys, but nearly doubled for girls and now exceeds the male immunization rate.

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around 54% while they are 84% for boys. Female literacy is reported to be only 15% in NWFP, abouthalf the national rate. Participation of women in the labor force is very low." In the recent localgovernment elections in NWFP, female voter participation was very low in some districts. Emnpoweringwomen is thus one of the most important challenges faced by the province.

15. NWFP has a limited resource base. With around 13% of Pakistan's population, the estimatedper capita income of the province is around 30% lower than the average for Pakistan.' 2 Historically, theprovincial economy has been mostly dependent on agriculture (livestock, timber, tobacco, horticulturalproduction), services, public employment especially in the armed forces, and low skilled workersremittances from inside and outside the country. The province has been growing at a low rate for anumber of years while population has been fast increasing (including the influx of Afghan refugees)which has led to depleting natural resources, stagnant remittances, and under development. NWFP has aweaker resource base than other provinces, and value-added in agriculture and most industry is very low.NWFP derives one-third of its income from largely traditional agriculture, far higher than for Pakistan asa whole (Annex J), and is dependent on food grain produced in other provinces to feed its population.

16. Much of NWFP's economic potential is unexploited. Much of the mineral wealth of theprovince such as precious and semi-precious stones, marble, granite as well as the tourism potentialremains under exploited. The industrial base is limited, and attempts to expand industry by setting uppublicly-funded industrial estates have failed. However, there is a vibrant mnicro and small sector whichhas led to exports from the province growing six times over the five years, from around US$30 million inFY97 to around US$200 million in FY01. These exports consist of precious and semi-precious stones,carpets and rugs and handicrafts. This export-oriented infornal small scale sector has the potential togrow further under the provincial growth strategy and private sector development reforms. One of themost abundant natural resource is river water, which is used for hydel electricity generation (e.g. from thelargest dam in Pakistan-the Tarbela dam). The province is, however, dependent on Water and PowerDevelopment Authority (WAPDA) for the NFC mandated hydel generation profits. Since WAPDA hasbeen suffering losses for several years, NWFP has not been getting its agreed share of hydel profits.Under the new strategy of encouraging small hydel generation plants, and development of off-gridlocalized energy distribution from these plants, the province has the potential to attract industry byoffering them localized and inexpensive sources of energy. Improvements in human development, whichare part of the NWFP's reform strategy, would be another source of achieving productivity gains for theprovince because of the large service economy and the tradition of labor migration from the province.

17. The province's own revenues are low and its fiscal position has deteriorated during the 1990s.Close to 90% of provincial receipts come from the federation (including WAPDA), reflecting the verylimited provincial tax base (Chart 4). Not only the tax base is small but also the taxes that the provincecan levy are not buoyant. As a result of lower than envisaged federal fiscal transfers and hydel profits,and inadequate tax base and efforts at raising own revenues, the province continued to run fiscal deficitswhich were largely financed through expensive domestic loans from the federal government.'3 As aresult, the province continued to accumulate large and unsustainable debt, which, because of high debtservice, also made the longer-term fiscal position unsustainable. By the end of the 1990s, the provincialdebt service was claiming around 28% (FY00) of total receipts. Debt service, salaries and pensions,claimed about 70% of total receipts, leaving little flexibility within the budget for other expenditures such

" Female participation in the labor force has been traditionally low in Pakistan because a large majority of women work at homeor are engaged in home-based activities and are not properly counted. According to the 1996/97 Labor Force Survey theparticipation rate of women in NWFP is 9% compared to 18% in Punjab and 14% for Pakistan as a whole.2 This is based on a study by the Planning and Development Department for 1996/97 and 1997/98. The absence of provincial

GDP estimates in Pakistan prevents doing growth analysis for NWFP.13 Provinces can only finance deficits through loans/grants from federal government, and limited short term ways and meansloans from SBP.

as operational, maintenance, and development expenditures. As Table 2 shows, key fiscal indicators havedeteriorated since the mid-90s.

Chart 4: NWFP - Provincial Revenue & Its Uses

Resources Uses of ResourcesPm.incbl

reeps D | .opmle <,nt,,.. .

HydeJ profits * ***+ 18% 3820%

ODiltServicixm fl .X ! ldivisible 23% .. . , .* Repair and

I | . | ponl & gmtn Maini nce69% Comoiiomd 2%

9%

Source: FinanceA Appropriation Accounts ofthe Government ofNWFPfor 1999/00A

Table 2: NWFP: Key Fiscal Indicatoms (%)

Mid 1990's FY00

Debt Outstanding/Total Revenue 114 209

Debt Servicingrrotal Revenue 24 28

Development Expenditure/Total Expenditure 21 11

Repair & Maintenance/Current Expenditure 6 2Source: GoNWFP Budget and Appropriation Accounts.

18. The province's financial management has been weak. First, procurement rules and regulationsare outdated. The application of these is aggravated by the actual procedures and practices that havegrown up to thwart genuine competition for government business and to give officials wide latitude inapplying, ignoring or misusing the tangle of rules. This has resulted in inefficient procurement that lackstransparency and provides little assurance of value for money. The legal and regulatory framework alsodoes not provide effective means for settling disputes or addressing the grievances of suppliers,contractors, and consultants. Second, financial management has been weak and accountability andinternal control have suffered severe erosion. While systems and procedures were in place, these wereignored leading to breakdown of internal controls, poor quality of public accounts and lack ofreconciliation of accounts.'4 The provincial Public Accounts Committee (PAC) and DepartmentalAccount Committees (DACs) were dysfunctional for over a decade. Successive governments hadintroduced several layers of checks and balances-to try to reduce abuse-making financial releaseprocedures very time consuming and cumbersome.

Pakistan's financial accountability framework and accounting and auditing institutions are centralized and provinces mostlyfollow Federal Govermment accounting and budgetary rules. Though there is no separate assessment of the provincialaccountability framework by the Bank, the desk review relating to the Country Financial Accountability Assessment (CFAA),undertaken in 2001, and diagnostic work during appraisal, reviewed provincial financial accountability issues and localgovemment financial accountability framework. It confirmed these findings. A full CFAA and PFAA are planned in FY03(Details in Annex E).

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m. THE PROVINCIAL REFORM PROGRAM (PRP)

19. At the time of taking over in 1999, the present Government of NWFP faced a number of serioussocioeconomnic issues, and daunting development challenges, including a stagnant economy; endemicgovernance and breakdown of accountability within the government and to users; poor service delivery inall major services; wasteful and inefficient expenditures; low tax potential and high dependence onFederal fiscal transfers; and a rigid expenditure structure dominated by establishment costs, debtservicing, and subsidies. It confronted a sense of despair and widespread perception among citizens thatgovernment had become dysfunctional.

NWFP's Vision and Reform Strategy

20. The Government started to address the multiple social and economic problems during 2000, withvarying degrees of success. Recognizing that many of the problems were interdependent and needed amore systematic approach, the GoNWFP decided to develop a comprehensive reform program for theprovince. For this purpose, it prepared a strategy document, the Provincial Reform Program (PRP) 2001-2004, which was discussed extensively with various agencies, including the Bank. It was approved by theNWFP Cabinet in June 2001. Several of the PRP reform measures were incorporated in the FY02 Budgetand reflected in the Budget White Paper and other documents. NWFP was the first province to embarkon such a comprehensive reform program. In line with the goals of the I-PRSP, the overarching objectiveof the PRP'5 is to restore good governance and the respect for the rule of law, enhance effectiveness ofpublic expenditures, and reestablish the integrity of state institutions and their accountability to the public.The PRP has the following four main pillars with strengthening governance to improve public servicedelivery as the cross cutting theme:

* Governance reforms to achieve an efficient, accountable, and service oriented civil service;* Reforms to improve service delivery in key sectors (especially basic social services);* Fiscal and financial management reforms to improve governance in budget and financial

management, adopt a medium term budget framework (MTBF), enhance effectiveness andaccountability of expenditures, and strengthen resource mobilization; and

* Establishing an effective and transparent enabling environment for private sector development toaccelerate economic growth.

21. Post September 11 events reinforced the view that a prosperous and stable NWFP is critical toPakistan's campaign against violent militancy. In addition, there is a consensus among the policy makersand civil society that a more literate and healthy population would enhance job opportunities within andoutside the province, and mitigate the risks for extremism. Recently, the Government of Pakistan,together with the governments of NWFP and Balochistan, has initiated preparation of a federally fundeddevelopment program to address the under development of the areas bordering Afghanistan. Themajority of the populated border areas fall in NWFP. These areas are among the poorest in NWFP, andthe program is intended to provide resources for physical infrastructure, social services, and incomegenerating activities. Moreover, the Federal and the NWFP government have also formulated a long termprogram to mainstream the tribal areas-politically, legally and constitutionally-with the rest of thecountry. This would be a historic step-to correct an anomaly of over one hundred years.

22. In preparing the PRP, the government held extensive consultations. However, it has not so fardiscussed and / or disseminated the PRP program to the new District Nazims, Councilors, and districtofficials, waiting for them to settle down in their new roles. It intends to initiate the dialogue with thenew district governments to ensure that the detailed sectoral strategies and investment programs contained

15 The PRP will form the core of the proposed provincial PRSP that would be developed as part of the full PRSP.

in the PRP fully reflect the district government priorities, and to engender ownership of the reformobjectives.

A. STRENGTHENING ACCOUNTABILrrY AND PROFESSIONALISM OF STATE INSTITUTIONS

23. Decades of neglect and decay took their toll on governance in the province, as in the rest of thecountry. The result has been excessive staff, poor compensation (especially at higher levels), decliningquality of civil servants, over-centralization of decision-making, complaints of widespread corruption andmalfeasance, poor management systems, and cumbersome and costly procedures. These are complexissues which would take a long time to address. The GoNWFP has therefore drawn a phased and realisticprogram to achieve its objectives in this area (Details in Annex H).

Devolution and Civil Service Reforms

24. Objectives and Strategy. The objectives of the devolution and civil service reforms are toincrease the efficiency of government operations, make them more accountable to users, effective indelivering public services, and raise the level of competence and integrity of government officials.Government strategy to achieve these objectives is to fully implement the devolution of power,decentralize functions and operations, reduce staff at the provincial level, tighten the system ofaccountability, reorganize functions and departments at the provincial level, improve recruitment andmake promotions more performance based, simplify procedures, and computerize business process.

25. Recent Reforms. The restructuring and rightsizing of provincial government, includingadministrative and operational aspects of the Devolution, have been largely completed. In regards todevolution, the required staff (around 200,000 out of total 280,000 provincial employees) have beenassigned to district governments,16 and district budgeting and most other non-policy functions have beentransferred to the districts. The district Rules of Business have been prepared, training of electedrepresentatives and staff has been instituted, local government contract rules have been notified, anddistrict accounts have been established. In regards to rightsizing, the GoNWFP has restructured 26provincial departments, merging several departments, closing autonomous bodies and several specializedagencies, thus streamnlining and downsizing the departmental structure and re-focusing it according to newfunctions. Consequently on the basis of identified redundancies, over 6,000 employees have been placedin a surplus pool, many of whom have been assigned to districts. In addition, the number of ministeriallevel positions have been reduced from around 40 to 10.

26. Recruitment, promotion, and transfer policies have been revised and the key institution managingthem strengthened. The provincial Public Service Commission (PSC) has been strengthened and mademore autonomous, through appropriate changes in its legislation and government's administrative andFinancial Rules. The PSC has been made fully responsible for all recruitment of officials of officer grade.Institutional mechanisms have been put in place to make recruitment and promotion merit- andperformance-based. The existing contract employment policy is being revised with a view to maldng alltask- and location-specific positions subject to contract employment. The Government is continuing itsfreeze on new hiring, except for social sector delivery staff such as teachers; and the compulsoryretirement rules have been amended to facilitate retiring of redundant or incompetent officials.

27. Far reaching Judicial Reforms have been initiated. The judicial and executive functions havebeen legally separated. The judiciary has been made autonomous in matters of recruitment of judicialofficials and financial aspects, which is a significant step in enhancing the independence of the judiciary.

16 Eventually most of these staff would become district government employees. For now they are provincial employees, but theirpostings and performance evaiuation is now done by district governments.

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28. Several institutional reforms and capacity building programs have been initiated. These include:(i) the Essential Institutional Reform Operationalization Project (EIROP) funded by UNDP, SDC andGTZ, was initiated in March 2001 to assist with Human Resource (HR) and institutional reform andsupport capacity building and training at the district level. The EIROP will be implemented over threeyears; (ii) with DFID support, a training program for the new elected representatives and officials hasbeen launched at district and lower levels. In phase I, all union councilors were trained. A specialprogram of training women councilors is planned shortly. The government has started training of districtgovernment functionaries'in Financial Management, Budgeting, and Development Planning. It has alsolaunched a program of IT training; and (iii) cognizant of the huge capacity building needs, especially toimplement the PRP and the expanded social sector programs, the government has initiated a review ofunmet capacity needs. It has already decided to establish the Education and Health Sector Reforms Units,the Budget Analysis Unit, and the overall Economic Reforms Unit. In addition, the government hasapproved a comprehensive three year capacity building program to strengthen the managerial andtechnical capacity of provincial and district officials.

29. Medium-Term Reforms. Over the medium term, the Government plans to continue to implementthe reformns under way and further intensify them. Among the planned actions are: (i) implementing theexpanded capacity building program; (ii) developing a HR database using computerized payroll data andby conducting a civil servants census; (iii) reviewing and adjusting the restructuring, downsizing, andpersonnel management measures; (iv) strengthening district government staffing and staff training; (v)completing district rules of business and codes; (vi) establishing courts for small causes and familydisputes; (vii) establishing public safety and accountability commissions/offices at the provincial anddistrict levels; (viii) appointing separate senior officials to handle public complaints against officials; and(ix) establishing a Local Government Commission to oversee performance of district governments. Theongoing and planned reforms are expected to have a significant impact in terms of increasing theefficiency, effectiveness, and integrity of the civil service, as well as making it more responsive topeople's needs through devolution and administrative decentralization.

Anti-Corruption Initiatives

30. The government has moved aggressively on anti-corruption by sending a clear signal that no oneis above the law, and taking steps to reduce corruption in the future. Anti-corruption rules have beensimplified to make disciplinary actions easier to implement. Better enforcement has resulted in theinitiation of 2240 disciplinary cases since 1999 (compared to a. similar number in the last decade), overhalf of which have been decided. In addition, it has dismissed or suspended about 300 educationdepartment employees (including teachers) for negligence and prolonged absence from duties.

31. The drive by National Accountability Bureau (NAB) against past high profile corruption has alsosent a very powerful message that poor governance practices will be punished. In NWFP alone, NAB hasinvestigated and is prosecuting several high profile provincial politicians and public officials, including14, ex-ministers and 36 high level bureaucrats accused of being involved in corrupt practices and abuse ofoffice (e.g., political appointments of teachers).

B. ACCELERATING HUMAN DEVELOPMENT

32. A major thrust of the Government's reform effort is to improve the delivery of humandevelopment services to turn around the current situation and have a lasting impact on productivity,equity, poverty, and social support system. These efforts are in tandem and complementary to thefinancial and governance reforms that would have a positive impact on improved delivery of variousgovernment services, through increased resources, efficiency, and responsiveness of the system. Theimportant reforms in the delivery of social services and delivery of community infrastructure services arediscussed below.

Education

33. The education indicators in the province are still relatively low (Annex F), the main reasons forwhich are: inadequate financial resources; physical inaccessibility of many areas; poorly trained and ill-paid teachers; general decay in educational standards in the country; inadequate supply of instructionalmaterials in schools; poor physical facilities in schools; weak accountability, institutional capacity andmanagement of the educational system; and lack of conmmunity involvement in school affairs.

34. Objectives and Strategy. The Provincial Reform Program has made educational improvement thefoundation for achieving longer-term economnic development and poverty alleviation in the province. Inall public speeches the Governor reiterates his personal commitment to education, stating that "educationis the first priority, second priority and third priority of the government". The Government's medium-term objectives in the sector are to: (i) improve primary education (both enrollment and quality ofinstruction); (ii) reduce gender and rural-urban disparities; and (iii) expand the capacity at the secondaryschool level. These objectives will be achieved by increasing resource allocation to the sector, allocatingmore resources to female education, upgrading the quality of instruction and teacher training, improvingthe management structure, implementing devolution, and increasing community and private sectorinvolvement. In May 2002, the government approved a comprehensive medium-term reform program,which builds upon and strengthens the reform program developed in 2001 under the PRP and reflectshigher budgetary allocations included in the MTBF for FY03-05.

35. Recent Reforms. The highest priority is being given to improving quality and access by takingthe following measures: (i) approving a comprehensive province-wide staff and facility rationalizationplan which would serve as a basis for needs-based recruitment, rationalization of facilities to reduceinefficiencies, and redeployment to ensure every primary school meets the targeted teacher student ratioof 1:40. As part of this rationalization plan, recruitment for 2,100 additional teachers has been approvedfor immediate deployment to schools without adequate teachers; (ii) addressing teacher absenteeism bydeploying teachers to their home districts and facility-specific contract recruitmnent; (iii) introducing aresults-based teacher evaluation and reward system and initiating a province-wide periodic studentassessment system as part of the National Education Assessment System (NEAS), which would be fullyfunded in the FY03 budget; (iv) strengthening of teacher training programs; (v) the institutional andmanagement reforms comprising bifurcation of the provincial education department into lower and higherlevel education; (vi) creating separate teaching and management cadres, the latter is meant to establish aprofessional school managerial cadre; (vii) introducing computer literacy and English-medium instructionon a pilot basis; (viii) introducing textbook deregulation for Classes 9-12, and developing a road map forexpanding this initiative to the primary sector, to allow for more efficient and competitive printing andpublishing of text books; (ix) establishing clear criteria for the establishment/construction of primaryschools and upgradation of schools, in order to strengthen transparency of decision making and ensurethat decisions are in line with sector goals; and (x) establishing an Education Sector Reform Unit andstaffing it to monitor and oversee progress in implementation of reforms.

36. Public-private partnerships and community involvement is being encouraged through: (i)initiating a program to encourage private sector to use unoccupied government buildings for establishingschools; (ii) restructuring the Frontier Education Foundation which supports NGOs providing education,to make it autonomous and expand its activities to promote public-private partnership with adequatelinkages with the Departrnents of Education; (iii) strengthening parent-teacher associations (PTAs) inalmost all 20,000 primary schools; and (iv) providing funds for instructional materials and minor repair(IM&R) to individual schools through the PTAs.

37. The monitoring and supervisory mechanisms have been strengthened. Circle Teams have beendesignated to carry out field visits every two weeks to monitor absenteeism and availability of inputs atthe facility level based on the new monitoring forms. The reports are reviewed monthly at the district

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level, and will now be reviewed quarterly by the Education Minister. The government views these stepsas supplementing the citizen/community oversight and accountability arrangements built into thedevolution plan. These are viewed as the only sustainable and effective way to monitor agencyperformance. In addition, the Education Management Information System (EMIS) would be fully fundedin the regular budget, starting in FY03.

38. Steps have been taken to reduce gender disparity. The FY02 budget allocated 70% of thesector's development budget to girls' schools, and innovative incentive schemes are being developed toincrease girls' enrollment. A major primary school facility up-gradation program is being initiated toensure that essential missing physical facilities (such as toilets, boundary walls, electricity) are providedto 100% of girls schools by end-FY03.

39. The allocation for education has been increased significantly. Expenditures on education haveincreased by 27% from Rs. 6.9 billion in FY99 to Rs. 8.8 billion in FY01. Expenditures have beenreallocated toward primary and secondary education and vocational training (including teacher training)and away from tertiary and university education. User charges from higher education, which havehistorically been very low, were increased by around 20% in FY01.

40. Medium-Term Reforms. Over the medium term, the Government plans to take the followingactions: (i) increase allocations by over 75% from Rs. 8.5 billion in FY02 to Rs. 14.7 billion in FY05,including increasing instructional materials and minor repair allocations several folds; (ii) complete themanagement reforms to implement the process of district-based management, separation of teaching andmanagement staff, and training of staff; (iii) complete the teacher redeployment, and facilityrationalization based on the approved staff and facility rationalization plan; (iv) expand school capacity inpartnership with the private sector and communities and continue the strengthening of PTAs; (v) provideessential physical facilities in all primary schools, especially for girls, and continue the policy of largerallocation of development funds for girls' schools; (vi) deployment of teachers in home districts andlocation-based new recruitment, and in-service teacher training; (vii) consolidate performance-basedteacher evaluation and compensation, and the province-wide student assessment system; (viii) continuetextbook de-regulation; (ix) expand secondary school capacity, PTAs for secondary schools, and schoolfacilities for computer literacy; (x) establish primary schools in seriously deficient districts; (xi) furtherincrease in higher education user charges; and (xii) continue to strengthen the monitoring and supervisionsystem including the commissioning of a regular third party user and facility survey in October 2002, andannually thereafter, for independent monitoring of, among others, service delivery indicators.

41. The impact of these wide-ranging reforms is expected to be substantial. By the end of FY05, theoverall primary school enrolment is expected to increase by 15%, with girls' enrolment increasing by30%." By the end of FY03, 100% of girls' schools would have basic physical facilities (such as toiletsand boundary walls), and 100% of boys' schools will achieve the target by end of FY05. Serious gaps inschool capacity in remote areas would have been remedied. The quality of teachers, instruction, andstudent achievement are also expected to be significantly higher by FY05.

Health

42. Underlying the low level of health indicators are inadequate and uneven availability of primaryhealth facilities, poorly staffed and stocked clinics, unplanned expansion of facilities, inadequateallocations which are heavily skewed towards the tertiary health care, and high incidence of preventablediseases.

17 Traditionally, the govemment has tracked gross enrollment rates. With the introduction of MICS and strengthening of EMIS,NWFP will start tracking net enrollment rates from FY04.

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43. Objectives and Strategy. The objective in the health sector is to significantly improve healthindicators in the province over the medium term. The Government's strategy, prepared in consultationwith stakeholders, is to improve the management structure, reorganize health facilities, with a multi-levelreferral system, focus on preventive and primary health care, remove obvious gaps in facilities, increasebudgetary allocations as well as user charges, and increase reliance on the private sector with adequateregulation. The reform program, including, actions already implemented, is summarized below withdetails in Annex G.

44. Recent Reforms. The Health Care and Hospital System Management Reforms have beeninitiated. The Department of Health has been restructured in line with the Devolution initiative with asubstantive shift of staff and resources to the districts. A management cadre has been created, and theseparate male/female cadres of doctors have been merged. A Health Sector Reform unit has beenestablished to strengthen capacity for planning and monitoring the reform process. Plans are beingformulated, on a district basis, to rationalize health service delivery and facilities aimed at developing agraded and referral based system with appropriate staffing norms. A pilot is under implementation in onedistrict to rationalize facility and serve as the basis for wider replication. Rationalization studies areunderway in 13 other districts. All tertiary hospitals have been given financial and administrativeautonomy with the aim of achieving financial self-sufficiency in three years, while plans are beingdeveloped to protect access of the poor through safety nets. A hospital management system is beingdeveloped to improve cost effectiveness and efficiency of public hospitals. A three year program hasbeen approved to engage more female nurses to meet acute shortages at the district and sub-districthospitals. And finally, facility-specific contracts have been introduced to reduce absenteeism.

45. Communicable Disease Control and Maternal Health Programs have been strengthened. Aprogram to expand the coverage of immunization under the Global Alliance for Vaccination Initiative(GAVI) has been approved. This expanded program includes support for activities such as monitoring,staff development, and cold chain improvement which are all expected to improve coverage ofimmunization. The Hepatitis B vaccination has been initiated in three districts and province-widecoverage will begin in FY03. A provincial task force, chaired by the Governor, for polio elimination hasbeen overseeing an aggressive campaign against polio. Polio cases have been reduced from 57 in FY00to 28 in FY01. An intensive campaign for Tr immunization of pregnant women in 15 high risk areas,with involvement of Lady Health Workers (LHWs), was initiated in August 2001. A plan to recruit 1800additional LHWs has been approved, and their role and that of paramedics is being expanded to includenutritional and reproductive health education. Finally, the TB DOTS program has been revitalized in 5districts covering 20 percent of the population.

46. Allocations for health sector have also been increased from Rs. 1.7 billion in FY99 to Rs 1.9billion in FY01. More emphasis has been given to expenditures on primary health care and mother andchild care where the expenditures have increased by 8% compared to a 2% overall increase in healthexpenditures during this period.

47. Medium-Term Reforms. As health sector reforms have been initiated in all the important areas,the emphasis in the medium term will be on consolidation and strengthening. In particular, theGovernment plans to focus on the following activities: (i) strengthening the Reform Unit, capacity andtraining of the district staff, and the hospital management system; (ii) reviewing the experience of thepilot project for a graded referral system and replicate it in other districts; (iii) expanding the use ofLHWs and paramedics as the frontline health workers and continue location-specificrecruitment/deployment of health workers; (iv) augmenting public health services in partnership with theprivate sector and local communities; (v) implementing phased increases in user charges and putting inplace an effective safety net for the poor; (vi) expanding the coverage of communicable disease controlprograms of immunization, TB DOTS, and of reproductive health services; (vii) increasing total

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expenditures by 120% to Rs.4.3 billion in FY 05, with higher allocation for primary care; and (viii)monitoring the impact of reforms through periodic MICS and third party surveys.

48. As a result of the above reforms, there would be a substantial increase in the coverage, efficiency,and quality of health service delivery. Thus it is projected that coverage by FY05 would increase fromthe present (FY02) as follows: (i) immunization coverage of children under two years of age wouldincrease from 54% to 80%; (ii) immunization coverage of pregnant women (two doses of TT) wouldincrease from 34% to 45%; (iii) percentage of population with access to TB DOTS would increase from20% to full coverage; (iv) the number of polio cases would be brought to zero; and, (v) the number ofLHWs would be increased from 7,800 to 14,000, resulting in an increase in coverage of primary healthcare and family planning services from the current 37% to 75% of the population. The systemic changesbeing made would make the provincial health system leaner, decentralized, sufficiently self-financed, costeffective, and responsive to the needs of local communities.

Women's Development

49. Progress in this area has been going on for many years. Women are increasingly receivingeducation, participating in many professions and businesses, and playing an active role in politics.However, the Government realizes that it has to sharpen and strengthen its focus on this importantdevelopment issue to fully utilize its human resources. The Government's strategy in this regard is two-fold. First, in each of the sectoral reform areas, especially in the crucial education sector, concertedefforts are being made to reduce gender disparity. Also access to maternal and family planning services isbeing increased. Second, the Department of Women Development has under implementation severalschemes, partly with support from the private sector and local communities, to promote skill developmentamong women and provide temporary shelter, a crisis center, and free legal assistance for women indistress. The Government plans to expand these activities through public-private partnership, communityhelp, and NGOs' assistance. A Provincial Steering Committee, including civil society members, wouldoversee these activities, and provide a vehicle to raise people's awareness of the needs and rights ofwomen.

Urban Services, Water Supply, and Sanitation

50. The devolution has provided an opportunity to address key institutional constraints, which havehistorically hindered the delivery of urban services, especially to the poor. Using this opportunity,GoNWFP has: consolidated various service delivery agencies (Communications & Works and PublicHealth Engineering Department) with fragmented and overlapping service provision mandates;transferred functions and organizations to the local governments (including the Urban DevelopmentAuthorities); and instituted special arrangements for the main urban center, the Peshawar City District. Aregulatory body will be established for the urban water sector at the provincial level. The GoNWFP hasnurtured an enabling environment for participatory development and has spearheaded Community DrivenDevelopment initiatives throughout the province. The Bank's Community Infrastructure Project in NWFPhas been a success story to the extent that a follow-on operation is being planned. The Province is alsothe first in the country to start the development of an integrated and participatory strategic plan at a citydistrict level, which is likely to provide a model for a comprehensive development framework for thenewly formed district governments. The Government intends to examine the need for any furtherstreamlining of agencies in this sector, adopting a uniform policy for community participation andresponsibility, and upgrading the management and technical capability of the local government urbanservices institutions.

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C. IMPROVING FISCAL SUSTAINABILITY AND RESTORING FINANCIAL ACCOUNTABILITY

Fiscal and Expenditure Reforms

51. Objectives and Strategy. To expand fiscal resources for meeting its growing development andservice needs, the GoNWFP has adopted a comprehensive medium-term fiscal strategy. This includes: (i)increasing provincial revenues through further tax reform and accelerating user charge increases andsaving interest payments through better debt management; (ii) divesting inessential activities; (iii)implementing fiscal devolution; (iv) improving budgetary process, financial management, procurementprocess and transparency; (v) strengthening the audit oversight arrangements; and (vi) formulating amedium term budget framework. The key medium term pillar of fiscal adjustment is on expendituremanagement and increasing non-tax revenues and user charges, given the low immediate potential forenhancing taxes.

52. Recent Reforms. The Government has started implementing the above strategy and has alreadytaken actions in key areas as discussed below:

53. Implementation offiscal decentralization has begun at the provincial level. In anticipation of thedevolution of powers, the province prepared the initial district budgets for FY02. Local governments arepreparing their own budgets for FY03, and the needed staff has been re-assigned to the districts. Startingin FY02, the province began allocating certain development funds across districts based on clear criteria,including population and indicators of social development and backwardness. NWFP is the first provinceto have used a needs-based formula for budgetary transfers to the districts.

54. Revenue measures are being implemented to strengthen revenue mobilization. The tax reformsinclude reducing and restructuring provincial taxes; imposing of income-based agricultural income tax tocomplement the province's land-based tax (unlike the other provinces the land tax in NWFP is applied toall landholdings without exemptions); outsourcing of collection of motor vehicle tax and harmonization ofrates with other provinces; and restructuring and expanding of the base of the Urban Property Tax from18 to 27 rating areas. Moreover, enhancement and rationalization of user charges has been initiated,especially for economic and tertiary-level social services. Irrigation water rates (abiana) are beingincreased by 25% each year. Higher user charges for roads and tertiary health and education services arealso planned, beginning in FY03.

55. Expenditures have been reprioritized to improve composition and strengthen expendituremanagement. The development program was rationalized. Over the last two years, the number ofongoing projects has been reduced by two-thirds, from 1125 to 375 projects; as a result the "throw-forward" of fiscal liabilities to complete ongoing projects was also reduced by 62% from Rs.24 billion toRs.9 billion. Throw-forward now is around 100% of the annual development program compared to morethan 300% a few years ago. The share of development expenditure in total expenditures has increasedfrom an average of 10-15% during FY98-01 to 25% in FY02. The GoNWFP has reduced the wheatsubsidy from Rs. 2.7 billion in FY99 to Rs. 1 billion in FY02. A number of public enterprises andautonomous bodies have been closed, which would save around Rs.70-100 million annually.

56. Budget formulation and monitoring has improved. Unlike past practices, the government is nolonger permitting spending commitments to be made against net hydel profits above the capped amountof Rs 6 billion. It has also programmed expenditures assuming a shortfall of around 5% in federal tax*transfers to NWFP. The GoNWFP has also instituted several reforns in the preparation, processing, andexecution of the budget including: posting fiscal data on the web; economic classification of expendituresin budget documents; introducing a mid-term review; computerizing budget preparation; establishing anew schedule for timely release of funds; and establishing a professionally staffed Budget Analysis Unit,to start functioning in early FY03.

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57. Budget Outcome for FY02 is on track. During the first 9 months of FY02, provincial taxcollection is well on track to meet the budget targets mainly due to higher collection of electricity duty;collections of other taxes are also consistent with the budget. Collection of user charges add up to 65percent of the budgeted amount despite lower collection of 'abiana' on account of drought. Federal taxtransfers have been slightly lower than anticipated due to lower collections at the federal level. However,transfer of hydel profits, up until May, were only Rs. 1.7 billion out of the 'capped' Rs.6 billion for theyear. Substantial federal grants for the Khushal Pakistan Program and subvention have offset some of theshortfalls in total revenue receipts. On the expenditure side, partly reflecting revenue shortfalls andtransitional disruptions due to devolution, total expenditure is just above 60 percent of the budgetedamount for the whole year. Expenditures have picked up in the fourth quarter, now that proceduralbottlenecks to transfer of funds to the districts have been resolved.

58. A Medium-Term Budgetary Framework (MTBF) has been formulated. The province has preparedan MTBF for FY03-05 to adopt a framework for improving the allocation of resources and planning forpriority development expenditures over the medium term. Table 3 and Annex D show the provincialMTBF approved by the Cabinet of GoNWFP, which has been predicated on the following broadassumptions. First, the existing National Finance Commission formula has been assumed for planningpurposes. Second, the resources accruing from hydel profits transfers to NWFP from WAPDA have beenprojected at the capped amount of Rs. 6 billion per year. Lastly, provincial revenue buoyancyassumptions have been taken at very conservative levels to avoid unrealistic projections.

59. The Government expects that, as a result of the revenue and expenditure reforms underway andproposed under MTBF, additional fiscal space generated will be approximately Rs.2.6 billion/year, about5-6 percent of total expenditures. Over the next three years, the provincial efforts are conservativelyexpected to generate Rs.7.8 billion in additional spending capacity. This will be achieved through first,increasing provincial "own revenue" mobilization, as follows: (a) increasing non-tax revenues, of whichuser charges are forecast to rise by over 75% by FY05; (b) increasing provincial tax revenues, which areprojected to grow by 15% in FY03 and 10% each during FY04 and FY05.18 The collection of agricultureincome tax (AIT) will be strengthened. This is conservatively estimated to raise Rs. 60 million in the firstyear, and gradually increase thereafter. Implementation difficulties are anticipated given the need forimproved land surveys, limited collection capacity, and the need for imnprovement in local taxadministration. However, the reform effort has a very important longer term role to play through closinga major loophole for tax evasion, reducing a major distortion that has been politically difficult to tackle,and creating a vehicle for local taxation that has a significant potential. It is expected that over a five toten year period this could become a far more significant revenue source. Second, withdrawal of thepoorly targeted and ineffective wheat subsidy is expected to generate about Rs.1.5 billion (50% of ownrevenue) each year in savings. In future, only allocations for management costs of strategic stocks will bemade. Third, expensive debt of around Rs. 6 billion will be retired over FY03-05. This will save theprovince about Rs.1.0 billion over three years and reduce the share of interest payments in totalexpenditures from 17% at present to 10% in FY05.

is Despite the generally non-buoyant nature of provincial "own revenue" sources, the projected increases are significantespecially for FY03. However the increase does not show up in the rounded off ratios (as % of provincial GDP), Table 3,because of their relatively small size. In any case the base for estimating the ratio, provincial GDP, is not very reliable. Thetargets for FY04 and FY05 have been conservatively estimated (taking into account recent trends, administrative capacity andsimultaneous measures to increase national taxes) and will be re-evaluated based on the results of the study of the provincial taxpotential, which is planned to be completed prior to formulation of FY04 budget.

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Table 3: NWFP: Summary of Medium-Term Budget FY01 to FY0S(Rs. Million)

ProJectons

FYO1 FY02Federal Transfers 30262 33003 34116 37022 40248

Federal tax assignment 18573 19550 21700 24087 26937Subventon grant 3828 4249 4716 5235 6011Hydel profits from WAPDA 6000 6000 6000 6000 6000Other grants 1862 3204 1700 1700 1700

Provincial Resources 3948 3777 4374 4742 5136Provincial taxes 1360 1408 1624 1784 1945User Charges 988 1066 1457 1665 1898Non-tax & Capital ReceIpts 1601 1303 1293 1293 1293

Total Receipts 34523 37144 38861 42143 46170

Current Expenditure 30278 30196 32980 34347 35908of which:Sodal services 10442 10282 11308 12385 13517Interest payments 7151 7009 6628 5944 5328Subsidies 1450 1000 0 0 0

Development Expenditure 5898 10413 11754 13987 16299of whilch:Sodal services 686 720 3687 4819 5560

Total expenditure 36247 40608 44734 48333 52207Overall Defilcit -1724 -3465 -5873 6191 -6037

Financing 1724 3465 5873 6191 6037Foreign Project Assistance (net) 1564 3324 3748 4194 4502Other finandng items' 160 141 -1175 -1303 -1365Cash development loan (CDL) 0 0 -2100 -2100 -2100Proposed World Bank Finandng 0 0 5400 5400 5000

Share In Total ExpendituresCurrent Expenditure 83.5 74.4 73.7 71.1 68.8

Interest payments 19.7 17.3 14.8 12.3 10.2Development Expenditure 16.3 25.6 26.3 28.9 31.2Total sodal sector 30.7 27.1 31.2 33.5 35.3of which: Educaton 24.3 21.0 24.3 25.9 28.1

Health 6.0 6.1 6.7 7.4 7.1In Percent of Provincial GDPFederal Tax Assignment 5.4 5.3 5.4 5.4 5.6Provincial Taxes 0.4 0.4 0.4 0.4 0.4Non-tax Receipts 2.3 2.1 2.0 1.9 1.8of which: Hydel Profits 1.7 1.6 1.5 1.4 1.2

User Charges 0.3 0.3 0.4 0.4 0.4Grants 1.7 2.1 1.7 1.6 1.7Total Recelpts 9.9 10.0 9.6 9.5 9.5

Current Expenditure 8.7 8.2 8.2 7.8 7.4Development Expenditure 1.7 2.8 2.9 3.2 3.4Overall defidt -0.5 -0.9 -1.5 -1.4 -1.2Total Sodal Sector Expenditure. 3.2 3.0 3.5 3.7 3.8

Source: Government of NWFP, Staff estimates.

Comprse the aggregate total of: Ways and Means Advances, Public Accounts (net) and repayment of domestic loans.2 Since provincial GDP data are unreliable, these ratios are only indicative

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60. As a result of fiscal restructuring, the share of current expenditures will fall from 74% of totalspending in FY02 to 69% in FY05, with a corresponding increase in development expenditure. Theexpenditures on priority social sectors-mainly education and health-will increase from 27% of totalexpenditures in FY02 to 35% in FY05.19 It is expected that with the implementation of its fiscal strategy,the province would have a more sustainable fiscal position, and, together with institutional reforms, animproved public service delivery.

61. To complement efforts to generate their own resources, the GoNWFP is seeking financialassistance from the Bank, for support of its broad based development efforts and restructuring of theprovincial fiscal accounts. As a result of the projected borrowings from the Bank, the GoNWFP's totaloutstanding debt will increase from Rs. 73 billion in FY02 to Rs. 95 billion FY05, but total debt service(including principal) will decline from Rs.8.6 billion to Rs.7.8 billion over the same period due to lowerinterest payments. As a proportion of the government's receipts, total debt service will decline from 23%in FY02 to 17% in FY05.

62. Medium-Term Reforms. The medium-term reforms focus on efforts to strengthenimplementation of revenue and expenditure reforms consistent with the MTBF, and include furtherimprovement of revenue mobilization to achieve a sustainable fiscal positi6n, and enhanced funding forsocial services to meet medium term target outcomes. In addition, the GoNWFP aims to furtherstrengthen budget processing and monitoring, including computerization, increasing the coverage of fiscaldata posted on the web, and program and performance budgeting. The permanent Provincial FinanceCommission would be established to institutionalize fiscal decentralization and review on an ongoingbasis fiscal performance of the districts. In addition the government will be undertaking a study on taxpotential which will be completed during FY03, to provide the provincial government with the analysisand recommendations on further tax measures for the FY04 budget. A medium term plan will bedeveloped, during FY03, for the modernization and strengthening of AIT collection and processing. Alsoan agreement would be reached with the Federal Bureau of Statistics, and funding provided, to collectreliable provincial economic data.

Financial Management and Accountability

63. Financial management and accountability issues are at the center of the NWFP Government'sreform program. Improvement in fiscal management, quality of public accounts, public accountability,and procurement are among the key reform targets. The GoNWFP has taken the following actions tostrengthen and improve financial management. (Details are in Annex E).

64. The Fiscal Monitoring Committee (FMC) and the Departmental Account Committees (DA Cs) arefully functioning. The Provincial FMC has been functioning adequately and has done a good job.According to the provincial AG, for FY01, 100% of NWFP's provincial receipts and 100% ofexpenditures were reconciled, compared to only 50-60% a few years ago. This was a good achievementcompared with past experience and the situation in other provinces. Reconciliation between the AG andthe State Bank of Pakistan (SBP) have improved substantially and the amounts in suspense are nowinsignificant, with the re-introduction of next day reconciliation between the DAOs and the SBP/NationalBank of Pakistan. Unlike the past when DACs were infrequently held, the DACs are now being heldregularly as per the schedule provided by the AG's office. In FY01 and FY02, 100% of the DACs wereheld.

19 In education: from an annual average of Rs.0.5 billion (FY98 - 02) of development expenditures to an annual average ofRs.2.9 billion during FY03-05; and in health: from Rs.200 million annual average, during FY98-02, to annual average of Rs.0.9billion during FY03-05.

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65. The accounting capacity is being strengthened as follows: (i) NWFP will appoint in early FY03 aProvincial Financial Controller in its Department of Finance to lead financial management reforms. TheController's main task will be to implement financial management and public financial accountabilityreforms. In addition, the Controller will be responsible for: (a) accounting and financial reporting (jointlywith the provincial AG); (b) developing provincial capacity to handle accounting and payroll; (c)preparing program to strengthen internal controls, internal audit, and financial policies and procedures;and (d) assisting agencies respond to audit observations and systemic issues; and (ii) the position of theDistrict Accounting Officers-the linchpin in the accounting systems-are being upgraded toprofessionally manage the accounts under the newly devolved fiscal authority. The province has decidedto upgrade, for all major districts, these DAO positions to officer grade to attract qualified staff. Theywill induct younger and better trained staff at this critical first tier accounting management position.

66. A Public Accounts Committee (PAC) has been formed. The functioning of the ad-hoc PAC inNWFP was delayed due to a High Court ruling against it. This judgment has recently been rescinded,and the Committee formed in end-May 2002. The Governor has requested the PAC to review past auditreports on last-in first-out basis and open all Committee meetings to the public. It is expected that PACwill be made a fully functioning agency with the province taking prompt action on its recommendations.

67. Fund Release Procedures for Development and Non-salary Funding for Priority Sectors havebeen Streamlined. For the development budget, 50% of releases are now made each in July and January.In case of non-development expenditures, releases are being made as follows: 10% in July, 40% inAugust, 40% in January, with remaining 10% kept as contingency.

68. The Overall Legal and Regulatory Frameworkfor Procurement is being improved starting withthe approval of a new Procurement Ordinance to simplify processes, increase competition andtransparency, and introduce a code of ethics.20 Thereafter, during FY03, detailed rules and regulationswould be notified, the existing Purchase Manual revised, and standard bidding documents introduced.

69. The General Provident and Pension Funds have been Established. In order to better manage thegovernment's deferred liabilities, the GoNWFP has established a separate General Provident Fund and aPension Fund outside the Provincial Consolidated Fund. At present the General Provident Fund has atotal deposit of Rs. 3 billion, against the present total deferred liability of Rs. 6 billion. The Pension Fundpresently has deposits of Rs 1.6 billion against the current pension liability of Rs. 2.5 - 3 billion perannum. The government has been increasing the capital of the Pension and Provident Funds in the lasttwo years and intends to continue this during FY03-05, depending upon resource availability. Theamounts placed in these Funds are invested in approved fixed income securities and the interest incomegenerated is ploughed back into the respective Funds.

70. In addition to above measures, the GoNWFP has recently approved a Financial ManagementReform Program. This program provides a broad framework, a road map for its implementation andbenchmarks (Annex E). It has been agreed with the GoNWFP that a detailed Provincial FinancialAccountability Assessment (PFAA) is to be conducted jointly by the Bank and the GoNWFP byDecember 2002. This assessment will cover accountability issues for all tiers of government in theprovince. Based on the findings of the PFAA, a more comprehensive short, medium, and long termfinancial management reform action plan will be prepared and agreed between the Bank and theGoNWFP.

71. Supplementing the provincial efforts, the Bank supported project for strengthening accountingand financial reporting is also being implemented at the provincial level. Under the project, the adoptionof the New Accounting Model and computerization of government accounting system will have a positive

20 The NWFP Governor approved enactmnent of the Ordinance on May 30, 2002.

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impact on the reliability and timeliness of provincial accounts. By December 2003, all of the DistrictAccounting Offices (DAOs) will be computerized and linked to the provincial Accountant General's(AG's) Office and the Finance Department.

D. PROMOTING SUSTAINABLE GROWTH

72. The PRP correctly emphasizes that not only accelerating growth is key to poverty reduction butalso the private sector has to be the engine of this growth. It has developed strategies to improve thebusiness environment, enhance productivity of agriculture, reduce the role of the public sector incommercial and industrial activities, and promote public-private partnerships. Reforms to improve theefficiency of the province's infrastructure, including irrigation facilities, road and urban infrastructure andservices, and environmental protection would also support the growth process. However, the PRP'spresent growth-enhancing strategy is not as well advanced as other components of the reform program,but it would be accelerated during FY03-05. The specific steps the province has taken or intends to takeare discussed below.

Improving the Business Environment For Industry and Trade

73. The GOP has recently established a Cabinet Committee on Deregulation to review the federallevel regulatory constraints to the development of the private sector. The GoNWFP, in addition toassisting this GOP Committee, is implementing several reforms (Annex 1). These are: (i) a public-privatesector Deregulation and Facilitation Review Committee has been established to review provincialregulatory constraints, and its recommendations would be implemented over the next two years; (ii) theIndustries Department has been reorganized, and its focus is being shifted to promotion, facilitation, andenforcement of safety regulations; (iii) divestiture/privatization of commercial activities is beingimplemented. The government intends to start reducing its shareholding in the Bank of Khyber, the mainprovincially-owned commercial enterprise, to reach below 50% by FY04 and complete divesture byFY05. In addition, a program has been initiated to lease the dozen or so off-grid micro hydel projects tothe private sector in the local area; (iv) to exploit the province's mineral, gemstone, and marble resourceson economic lines, the Mineral Department has been restructured, a Policy Committee appointed,Concession Rules amended to allow entry of small-scale businesses, and a Mineral InvestmentFacilitation Authority has been established; and (v) a detailed province wide study would be undertakenin FY03 to analyze the sources of and constraints to private sector development, with particular emphasison the role of SMEs. This would be used to design a more focused economic growth and povertyalleviation strategy (taking into account findings of recent poverty related studies, Annex B) to unleashthe province's full potential. It would be a much-needed and timely piece of work, especially as theprovince stands to gain significantly, because of its locational advantage, from business possibilitiesrelated to the reconstruction in Afghanistan.

Other Productive Sectors

74. The PRP also includes sectoral reforms to improve the effectiveness and quality of economic andinfrastructure services that are critical to growth.

75. Agriculture. Although the arable land in the province is not extensive, agriculture remains themainstay of the province. An agriculture and rural sectoral strategy is being developed, with someimplementation begun, emphasizing: (i) targeting overall agricultural growth through sound policies,including reducing the role of the public sector, withdrawing subsidies and allowing market pricing; (ii)alleviating poverty in rural areas; (iii) ensuring farmers' access to necessary technical information andinputs to increase agricultural productivity and exploiting the province's comparative advantage inproduction and export of high value added crops and horticultural products, by rationalizing the extensiondepartment and initiating a program to enhance its technical capacity; (iv) further developing the seed

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industry with public-private partnership; (v) expanding vaccination coverage of livestock; and (vi)divesting all non-core activities. The province is in the process of legally winding up three recentlyclosed autonomous bodies (the Frontier Cooperative Bank, the Agricultural Development Authority, andthe Fruit and Vegetable Board), and downsizing or restructuring other agencies to shift focus toagricultural policy, research and development, and extension services.

76. Irigation. Although NWFP is not as widely irrigated as Punjab, efficient irrigation of theprovince's fertile tract is crucial for its agriculture and the economy. Under the on-going NationalDrainage Project, the government has initiated institutional reforms to decentralize the management of theirrigation and drainage system, improve maintenance of the system, enhance water availability at the tailend, and increase cost recovery. These reforms involve: (i) transforming the Irrigation Department intoan autonomous NWFP Irrigation and Drainage Authority, leaving only regulatory functions in thegovernment domain; (ii) establishing commercially oriented and autonomous Area Water Boards (AWB)at the canal command level, with farmer representation; (iii) devolving O&M and cost recoveryresponsibilities to formally organized Farmer Organizations at the distributary/minor levels; and mostimportantly, (iv) fostering beneficiary/community/private sector participation in all aspects of theoperation and management of the irrigation and drainage systems. These institutional reforms have beeninitiated but implementation needs to be accelerated. In addition, to generate resources for the watersector, the water charges (abiana) have been increased annually by 25% and the government has takenright sizing and cost reducing measures, including a freeze on new recruitment, sale of assets (earthmoving machinery, tubewell rigs, etc.) and privatization of government tubewells through communitymobilization. Over the medium term, the government plans to follow through with the above reforms andensure that the new institutions are made operational.

77. Roads. The province has a relatively good road network, except in a few remote, hilly areas, butadequate maintenance is a major issue. The Government has initiated several measures to deal with theissues of inefficiency of the system, poor cost recovery, inadequate funding, and the backlog ofmaintenance of provincial roads. These measures include establishing an autonomous HighwayAuthority, under public-private oversight, for managing all aspects of provincial highways. TheAuthority would be responsible for managing the newly established Road Maintenance Fund whichwould be funded through user charges, and would help improve service delivery. Maintenance and otherroad construction activities will continue to be outsourced. In addition, a specific program is beinginitiated to rehabilitate, during the next seven years, all the roads in very poor conditions. TheGovernment has prepared a program for increasing user charges to self-finance the Maintenance Fund, aswell as completing the back-log of maintenance work within five years.

IV. THE PROPOSED NWFP STRUCTURAL ADJUSTMENT CREDIT

A. PAKISTAN COUNTRY ASSISTANCE STRATEGY

78. The Government of Pakistan is engaged in fundamental reforms for the transformation of thecountry. These reforms cover a broad spectrum-politics, institutions, economic, gender, and social.They provide a clear break with the past, especially regarding gender equity. The main goal of the BankGroup's Assistance Strategy is to support these fundamental reforms for a transition to a modern IslamicState through a program of analytical services, institutional capacity building, and demand driven lending.The triggers underpinning the operationalization of the Bank Group's assistance strategy is based onmeasurable outcomes which have the MDGs as a frame of reference, in alignment with corporatepriorities and global public goods.

79. The Pakistan CAS advocates a programmatic approach focused on transfer of knowledge andcapacity building first, and resources second, in a flexible pursuit of key development outcomes.Pakistan's I-PRSP sets out the process underlying a sweeping and ambitious reform program. These

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reforms are inherently long term in nature as acknowledged by the government and can therefore be moreeffectively supported by multi-year programs-at the national, provincial, and district levels-hence theneed for a programmatic approach for the Bank Group's assistance strategy. The core program of fiscaland governance reforms at both the provincial and district levels is an area for which the Bank'sprogrammatic approach is best suited; reforms take several years to yield results, and support needs to beflexible and consistent to withstand the uncertainties inherent in such an endeavor. Moving forward withreforms will also require assurance of a reasonable degree of financial support over the medium-term.Hence the Bank's use of a series of adjustment credits to the federal and provincial governments willprovide a predictable and performance-based budgetary support to enable the reforming provinces torestore their financial equilibrium while undertaking the difficult and politically controversial reforms.The approach will also help the Bank manage risks by pacing its assistance with the future government'sability to pursue reforms, and to give assurance of "just in time" support.

80. Self Activating Entry and Exit Triggers for Bank Assistance to Provinces. As noted, Pakistan'sprovinces face a fiscal crisis, itself the result of poor governance and economic management, which hascrippled their ability to deliver on their mandate. Since a significant volume of the Bank's lendingprogram is linked to structural reforms to increase the provinces' fiscal space and improve their capacityto deliver basic services, the Bank's provincial lending program will be regulated by the following entrycriteria.

* There is a reforming government at the provincial level with committed "reform champions" atthe top and capable reform leaders within the administration.

* The provinces would have already initiated a number of reforms to restore good governance andimprove their public finances and public service delivery. This includes:> fiscal discipline translated into reduced short-term Ways and Means borrowing from the SBP

for deficit financing;2'> improved performance of Financial Management Committees and PACs;> initiation of civil service reform including pay & pensions adjustment, rightsizing by

eliminating positions, as per skills requirements, at the provincial and in autonomous andsemi-autonomous bodies; and

> marked improvement in civil service delivery, including enforcement of location-specificteacher and health worker contracts, control of staff absenteeism, and implementation ofperformance-based remuneration and teacher training programs.

81. Correspondingly, Bank lending to the provinces will be guided by the following exit criteria:

* Deterioration or reversal of reforms to improve social service and governance.* Reappearance of substantial short-term Ways and Means borrowing to finance the budget deficit.* Expansion of public sector contingent liabilities (through off-budget financing of public

enterprises and other entities).

82. The GoNWFP reform program meets the entry criteria above. There is a reforming governmentat the provincial level with committed "reform champions" at the top and capable reform leaders withinthe administration. The provincial government is committed to reform and owns the program, as isevident from the PRP document and its implementation over the last 18 months despite financial andcapacity constraints. The reform program has clear objectives and is well articulated. The province hasalready initiated a range of reforms to restore good governance and improve their public finances andpublic service delivery. There is a significant improvement in the financial accountability and

21 Provinces only source of short-term borrowing are Ways and Means Advances from SBP which they have to return the sameyear. However, because of persistent deficits, in case of Sindh and Balochistan, some of these have been converted into mediumtenn loans.

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management. Civil service reforms have been initiated. Critical steps have been taken to improve servicedelivery through location-specific civil service contracts, control of staff absenteeism, andimplementation of performance-based remuneration and teacher training programs. Importantly, thestrong actions already taken have enhanced the credibility of both the provincial leadership and thesustainability of reforms.

83. Bank's ongoing operations in NWFP. The Bank's on-going portfolio in NWFP consists of threeprojects which focus on: (i) the rehabilitation of the drainage infrastructure through the country-wideNational Drainage Program (NWFP's share is around US$20 million IDA) and the NWFP On FarmWater Management (US$21 million IDA), which is helping to reduce water losses and implement farmermanaged irrigation system; and (ii) NWFP Community Infrastructure Project (US$22 million IDA) whichsupports community driven small infrastructure schemes. There has been a discernible improvement inthe performance of the NWFP portfolio during the last two years due to an aggressive portfolioimprovement strategy. Two of the three province-specific projects closed last year with satisfactoryoutcomes, while the third-NWFP Community Infrastructure Project-is currently being implementedsatisfactorily and is also being replicated in other provinces. Implementation of the National DrainageProgram is also beginning to pick up in the province.

84. Supporting Analytical Work and Technical Assistance. The proposed Credit builds oneconomic work such as the Reforming Provincial Finances Study (Report # 21362-PK), the CountryFinancial Accountability Assessment Part I (FY01) which also assessed provincial fiduciary issues, thediagnostic work done for the Social Action Project in education and health sectors in the late 1990s, theInterim Pakistan Poverty Report (FY02), and the preparatory work done on NWFP provincial reforms bysuccessive Bank missions in FY01 and 02. The Bank supported the work on the FY03-05 MTBF for thisCredit.

85. Economic and growth analysis in the province remains weak due to lack of reliable data ofprovincial GDP estimates. This is an area where more detailed AAA is needed for improving ourunderstanding of the province's economic structure, sources of growth, constraint to private sectordevelopment and in developing a framework to regularly, estimate provincial GDP series. Moreover,assistance may be required to build provincial capacity for tracking outcomes that are aligned with thePRSP and with the MDGs.

86. Partnership and Donor Coordinah'on. Presently, the most active partners for NWFP are: (i) theAsian Development Bank, which is providing support for social sectors, area development, judicialreforms, and urban development; (ii) the UK DFID, which provides support for social sectors andcapacity building; and (iii) UNDP, which is providing assistance for capacity building and institutionalreform. The Bank and GoNWFP have kept these partners fully informed about the proposed operation,and a provincial Development Forum is planned for July 2002.

B. THE PROPOSED CREDIT: RATIONALE, PRIOR ACTIONS, AND MEDIUM TERM BENCHMARKS

87. The Credit (US$90 million) is designed as the first in the series of structural adjustment creditsthat would cover the period of the FY03-05 MTBF, provided a strong commitment to reform ismaintained. The size of this credit (and subsequent credits) is based on the direct cost of reforms, thestrength of the reform program, absorptive capacity, and the resource requirements of expanding supportfor priority social services. The proposed credit would allow the province to incur larger budgetaryexpenditures entailed by the province's reform program, especially the costs of fiscal restructuring andservice delivery improvements. The MTBF developed by the provincial government, by making systemicchanges to increase the fiscal space, ensures that the province does not become permanently dependent onexternally financed budgetary support beyond the medium to long term.

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88. The Federal government has expressed strong support for this (and the Sindh) provincial credit byagreeing to pass on the entire Rupee equivalent of the Bank credit on IDA terms, bearing the foreignexchange risk itself. The size, terms and conditions (of this and the Sindh operation) have been discussedin detail between Federal government and IMF staff, to ensure that they are fully consistent with thePRGF fiscal framework.

89. Prior Actionsfor Board Presentation. The Credit is based on specified prior actions that reflectthe momentum of the government's ongoing program. These are few in number, but significant in termsof their influence on development outcomes supported by the reforms. They include a paradigm changein the four core areas of the reform program: (i) implementation of a strategy to strengthen the quality anddelivery of priority education and health services; (ii) governance reforms to restructure the civil serviceand deepen the program of decentralization; (iii) fiscal and financial management reforms; and (iv)private sector development, including regulatory reform. The prior actions are listed in column 2 of Table4, and have all been completed.

90. Triggers for Subsequent Operations. The current NWFP SAC has been formulated as the initialoperation in a three year program of support, with subsequent operations being negotiated on an annualbasis and based on the performance in the preceding year, achievement of pre-agreed actions, theobserved strength of the reform program, and satisfactory macroeconomic framework as per the PRGF.The indicative triggers for the next operation are shown in column 3 of Table 4. These continue to focuson social service delivery, governance reform, M&E and fiscal and financial management reformsrequired to keep the program on track. The loan preparation cycle would aim to time loan effectiveness atthe beginning of each fiscal year to support the budget, consistent with the MTBF. Medium-termoutcomes are highlighted in the Policy Matrix (Annex A, Attachment 1).

91. Disbursement, Procurement, and Financial Management. The Credit will follow the Bank'ssimplified disbursement procedures for adjustment operations.

* The Credit proceeds will be deposited into a GoP Deposit Account at the SBP, which will beaudited by the SBP's independent auditors..The local currency equivalent will be transferred, in a single tranche, to the GoNWFPConsolidated Account No. 1 (Non-food) within two days after the Credit proceeds are receivedby the GOP. These proceeds would be subject to the usual GoNWFP budget execution and auditpolicies and procedures, along with all other GoNWFP funds.

* The Auditor General of Pakistan will audit the transfer of the local currency equivalent from theGoP to the GoNWFP. This audit will examine the conversion of the USD Credit proceeds intorupees and the transfer of those rupees to the GoNWFP Consolidated Account No. I (Non-food).

* The Credit proceeds will not be used to finance expenditures excluded under Schedule of theDevelopment Credit Agreement. If any portion of the Credit is used for ineligible purposes asdefined by the Development Credit Agreement, IDA will require the government either to returnthat amount to the Deposit Account for use for eligible expenditures or to refund the amount toIDA.

* The Federal Government will onlend on IDA terms in Rupee equivalent at the exchange rateprevailing on the date of transfer.

* The SBP, on behalf of the Government, will maintain an appropriate accounting system inaccordance with generally acceptable accounting principles. It will provide the requiredinformnation on the receipt and use of the Credit funds and will prepare annual financialstatements, up to and including the fiscal year in which the balance in the Deposit Account iszero, in a format agreed at negotiations.

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Table 4: Prior Actions and Key Triggers

Outcomes Prlor Actions Taken IndicatIve Trlggen for Follow-up Operaion

W _w_~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,,

Govemment restructuing to devolve staff to Uphold the effective ban on new recruitment estructuring of 26 Annual review of the mstructuring and staff rationalzations;disbtrts and rationalize staffing, consstent Departments/attached departments and abollon of more than notify and Implement revised Rules of Business.with decentralization agenda, to Improve 6000 positions; notification of the Surplus Pool and Faclityefficiency and effectiveness of provindal Specific contract Policies.govemment

Promoting merit and professionalism of the Establish full authority of the NWFP Public Service Commission Computerize HR database for all provindadWdtr emplyees;dvil service, and Improve Human Resource (PSC) for recruitment of officers; increase the PSC's reduce recruitment time to four months for contcktual andManagement administrative autonomy; Introduce a transparent and merit- tenured staff; pilot contract-based employment Implemnt

based promotion system; approve comprehensive capacity capacty building program.building program.

Judidary made Independent Judidary sepamated from executive and provided finandal andrecruitment autonomy.

Monitoring strengthened to Improve public Implement and publish Multiple Indicator Cluster Survey (MICS); M&E arrangements fully functional: Publidy dissemiate thirdservice perfomiance and responsiveness to full funding of educatonal and health management infomation pary survey report and agency annual reports; EMIS and HMISpublic needs. systems; approve program for third party monitoring and user made fully functonal

surveys.

r; ''i"l:hUl;-lltti:Jl ! IS'P1 ,DUCAt'lADHAEducaton reforms to expand access to Approve staff ratlonalization program; approve program for Complete provision of sanationAater facilities to girl's sdcool;quality education servies, improve provision of water and sanitation facilities to all girls schools; achieve enrolment and dmpout reducton targets; completeenrollments by 15% in 3 years, reduce establish educaton sector reform unit approve program to expanded recruitment and redeployment of teachers;gender dispaities, increase aduit literacy. recruit 2000 primary teachers; introduce teacher absenteeism Implement absenteeism monitorng system; comple teachedreduce/eliminate absenteeism monitoring system; Increase educaton alocatons within MTBF. management caderizatlon; FY03 expenditures (total and IMUR)

as per MTBF program.

Health refomis to strengthen provincial and Establish a management cadre; grant increased managerial and Extend coverage of TB DOTS and immunization as perdirct management capadty, Improve the finandal authorty to tertiary hospitals; initiate rationalizaton of prgram; deploy 1800 new Lady Healt Workers and 200quality and coverage of communiable ditrict heaflth services; appmve program to Increase female female nurses; approve long-term heaflth sectdor reform plan;disease control and matemal and child nursing staff and LHWs; approve enhanced Immunization pilot facilty-specifc contract employment FY03 expenditureshealth lntervention programs. program with GAVI support increase health allocatons wHhin as per MTBF progam.

MTBF.

'~4 ~' JlW.LP-RO,1NG RSCAELJSUSTAJNABtT' R

Improved development effectiveness of Intmduce agriculture Income tax; appmval of AIT administraton Program to modemize AIT administraton inifiated; faxexpenditures and fiscal displine; modemization study; rationalize total number of faxes; rateslpolicy revised In light of fax potential study to bestrengthen provindal revenue base; protect rstructure and enlarge urban immovable property fax from 18 underaken In FY03.key social and piority development to 27 rating areas, and revise valuation formula.expenditures In the budget reduceIme nttoofteY0bugtcslttwthtgtsDuntargeted subsidy; improve the Adopt FY03-05 MrBF; reduce wheat subsidy; reease KPP and enhance sodal expenditure, boost own revenues; limit wheatmaintenance of public assets and SAP funds to dstrics on formula basis In FY02; estabilsh Road procurnement for strategc stocks only; full ncdoning of theinfrastructure. Maintenance Fund and the General Provident and Pension Road Fund, Pension and Provident Funds; Provincial Finance

funds Awards announced

Strengthen financial management capacity Initate Financial Management Reform Prgram: publily- FY03 benchmarks of the Financial management reform actonand accountability, increase the available monthly recondliaton of revenue and expenditure plan met new Procurement Regulations notified; andtransparency and effiency of public accounts; establishment of Provincial Public Accounts standardized pmcurement and bidding system as per theprocurement Commitee (PAC); upgrade DAO posWons for major dtricts; Procurement Ordinance.

appoint provincal financial controlbr; new ProcurementOrdinanoe appmved; adoptlon by Cabinet of FinancialManagement Reform Acdon Plan.

o,$ h i 17 0ROWT

An improved business environment to PSD enabing refomas lniflated: establish Deregulaton PSD refomis continued, lnduding: PSD Strategy announced;increase investment prvate sector Committee; dose three agricukural and commercal Satisfactory Implementation of Deregution program; GoNWFPbusiness actvity; accelerate rral growth. autonomous bodies; Privatlzation decision of Bank of Khyber shareholding In BOK bebw 50%; and rursUagroulture growth

approved. strategy developed.

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92. Accounts and Audit of Deposit Account. While the IMF Safeguards Assessment missionidentified several risk factors in the accounts and audit of the SBP, considerable progress has been madein implementing remedies to mitigate the vulnerabilities identified. An important mitigating factor forfiduciary risks is the govermment's commitment and demonstrated progress in the implementation of itsambitious agenda of public financial management reforms. This agenda has been built on the basis ofvery solid economic and sector work carried out both by the Bank and the 1MF, and its implementation isbeing supported by technical assistance programs from the Bank and the AsDB. The financial statementsof the Deposit Account will be audited by independent auditors acceptable to IDA under terms ofreference in accordance with acceptable international standards of auditing. The first audited financialstatements will be submitted to IDA within six months of the Govemment's fiscal year ending June 30,2003.

93. Fiduciary Issues. NWFP province historically has had a better track record, compared to otherprovinces, in respect of financial management and intemal controls. Having achieved 100%reconciliation, the GoNWFP has initiated a comprehensive program of financial management reforms(paras 63-71). Overall, the provincial financial management reforms are aimed at, and will ensure, thatfiduciary risks are mitigated and public expenditures are spent effectively and as intended.

94. Environmental Aspect. A national environment impact assessment will be carried out in FY03by the South Asia Environmental Unit to assess compliance with environmental laws and institutionalreforms that need to be taken to improve environmental management. The NWFP reform programincludes strengthening of the provincial EPA,22 that will have a positive impact on environment. TheGoNWFP is planning to expand its capacity to implement the National Environmental Quality Standardsand review of environmental assessment. The Govemor has directed the line departments that publicsector projects should not proceed without an environmental assessment, as required under the EPA law.Policy measures supported by this credit will have limited direct adverse impact on the environment.

95. Monitoring and Evaluation (M&E) Arrangements. The outcome targets listed in Table 5 willbe monitored by the GoNWFP.

96. The GoNWFP has a three pronged strategy for strengthening M&E arrangements. First, theGovernment has undertaken the NWFP Multiple Indicator Cluster Survey (MICS 2001), the first of itskind in Pakistan. The GoNWFP will discuss the MICS report with all stakeholders to reach a consensus,during FY03, to use this as the baseline for tracking human development indicators in the future. TheGovernment plans to repeat the survey every 34 years.23 In addition, the government intends to upgradeM&E as follows: (i) strengthen the Health and Education Management Information Systems to monitoragency performance and key social indicators; (ii) undertake an annual independent third party userfacility and service quality surveys. These surveys would establish and track service quality, usersatisfaction, and district performance indicators; (iii) request the Federal Bureau of Statistics, and providefunding, to regularly collect economnic data for the province; (iv) prepare agency annual reports, startingwith social service delivery agencies, which would be disseminated publicly; and (v) produce a quarterlyfiscal monitoring report, prepared by the Finance Department, to report on implementation of fiscalreforms and the status of the accounts reconciliation; this report will be posted on the web. Theseinitiates, together, will also address the weak data on economic, poverty and social indicators in NWFP.

97. Second, as a part of Pakistan's Interim-Poverty Reduction Strategy M&E arrangements, NWFPwould track (i) pro-public expenditures (e.g. on primary education); (ii) output (e.g. trained teachers); and

22 Starting FY02, a full-fledged Environment Department has been established and forest, fisheries and wildlife are now itsattached departments under the Secretary Environment. In FY02, 3 zonal offices of EPA have been set up in and 3 stationaryand 2 mobile units are being operated, by the EPA, for testing and monitoring of vehicular emissions.23 The MICS provides a baseline for basic socio-economic indicators across all districts in the province, and will be used informulation of the PFC fiscal devolution exercise.

- 27 -

(iii) outcomes (e.g. the share of primary schools student graduating) variables; and (iv) MDG indicators.As in other provinces, NWFP's Planning and Development Department will be mainly responsible forcoordinating this task with the Federal government PRSP Secretariat. This process would also help inrationalizing baseline infonnation, and in setting targets that are consistent with the full PRSP targets.

Table 5: Monitoring Indicators

Areas an Indicators End-Perdod Targets (FY05) Institutional Arrangements forMonitoring

1. Overaila) Provindal GDP grwth rate 4-5% Planning and Development Departmentb) Poverty (caloric) 38 % (down from 44% In FY99) Source for Poverty Data: PIHS Survey

every two yearsI Pubik Finance

a) Provindal Tax Revenue Growth 15% annual growth In FY03; 10% p.a. in FY04 & 05. Quarterly Fiscal Monitoring Reports,b) User charges 75% Increase over FY03-05 Annual Budget Statements ofc) Pro-poor l-PRSP expenditures From 29% ot expenditures In FY02 to 35% In FYO5 Department of Finance, and Annuald) Development expenditures From 26% of total expenditures In FY02 to 31% In FY05 Budgets

e) Maintain timely, comprehensive and 100% computerIzaton and reconciliation of Civil Department of Finance/Accountantreconciled fiscal data using the New Accounts. General's OfficeAccountng Model

S. Social Sectosa) Gross primary enrollment rate 85% (up from 70%) PIHS, Annual EMIS,MICS, Annualb) Gross primary enrollment rate female 84% (up from 54%) Monitorlng Reports prepared by thec) Reduction In prImary school dropout rates 35% (down from 45%) Education Sector Reforms Unit andd) Girls schools provided essential physical 100% by FY03 Third Party Survey

faclities -do--do-

e) Full immunization of children less than 2 80% (up from 54%) PIHS, Annual HMIS, MICS, Annualyears (%) Report of the Health Sector Reform Unit

f) % of populaton with access to TB Control 100% (up from 20%) and Third party SuNeyusing DOTS -do-

g) Antenatal coverage of pregnant women by 45% (up from 34%) -do-health professionals -do-

h) Contraceptive Prevalence Rate 35% (up fmm 21%) -do-

4. Infrastructurea) Populaton with access to safe drinking water 65% (up from 58%) PIHS, MICSI Proportion of roads dassfiRed in poor

conditlon. 50% (down from 80%) Annual reports of CWD, andIndependent surveys

98. Third, the overall monitoring of reform implementation will be the responsibility of theEconomic Reform Unit in the Finance Department. Its report will be reviewed on a monthly basis by aSecretary-level Committee chaired by the Minister of Finance, with quarterly review by the-Cabinet.Special units to monitor progress on the sectoral PRP have been set up in the Education and HealthDepartment, and a Budget Analysis Unit is being formed in the Finance Department to monitor theMTBF.

99. Dissemination and Communications Strategy. As part of the FY03 budget package, all reformrelated documentation will be in the public domain. The Government has also developed a disseminationstrategy, using workshops and print and electronic media, to inform the citizens and other stakeholders(e.g., Nazims and Naib Nazims) about the reform program, and engender ownership.

- 28 -

V. BENEFITS AND RISKS

100. The proposed Credit is a high risk and high return operation. The high return comes from

supporting a comprehensive program of reforms implemented by the leadership and the executingagencies of a province that directly affect poverty and welfare of close to 20 million people of NWFP.

The high risk comes from the transitory political situation in Pakistan and the coming into office of newly

elected provincial governments in October 2002, and possible weakening in their commitment to thecontinuity of the reforns. These risks and their mitigating measures are discussed in some detail below.

101. Benefits. The operation is expected to have substantial benefits in terms of both the process and

the development outcomes. The process has helped the Government to sharpen its focus on more

systemic reforms to be supported by the Credit and to shift to a rolling medium-term program. In termsof outcomes, this credit is expected to lead to improved governance, an accountable government, fasterhuman development, and poverty reduction, as a result of the following measures:

* Institutional, policy and process reforms to establish accountability, transparency, and the rule oflaw.

* A civil service that is client driven, more accountable, performance-oriented, and merit-based.

* A social sector service delivery system that provides greater access and better qualitv education,especially for girls, and higher coverage of immunization and health programs.

* A sustainable fiscal position subordinated to a medium-termn framework, fiscal restructuring that

will provide more resources for poverty reduction expenditures, improvement in the procurementrules that will increase economy, efficiency and transparency in procurement, and financialmanagement that will enhance effectiveness of expenditures.

* A revitalized private sector, increased trade and economic growth, and an increased private sector

role in service delivery.

102. A major benefit of the program would be greater stability and growth, by addressing core issues

of poverty, weak governance, and poor service delivery, which provided a conducive breeding ground for

religious militancy and extremisrm This program, together with the proposed program to mainstream(with the rest of Pakistan) the tribal areas and develop border areas, should be seen as an important plank

in Pakistan's campaign against militancy and extremism.

103. Risks. The reform program and this operation face several risks. First, and most immediate, isthe risk of lack of continuity in Government commitment to reforms as October elections approach. Anew government will be elected and most ministers are expected to change as a result. A second risk

arises from the weak implementation capacity. While the provincial government has initiated far-

reaching structural reforms, implementation capacity is stretched very thinly and in several areas technical

expertise is weak. A third major risk arises from the threat of external shocks, either in the national

economy, impacting on resource transfers from the center and own revenues, thereby diverting revenues

from priority needs, or the possibility of tensions along the borders disrupting norrnal commerce. These

are all significant risks which must be recognized and weighed in the context of potential benefits.

104. Mitigating Factors. There are, however, several mitigating factors that help reduce the potentialimpact of these risks on the program. The design of the reform program, including the substantial transferof resources and authority to lower levels of government, has set in motion institutional changes that have

both generated strong local support, and created a momentum for reform that any incoming governmentwill find difficult to reverse. The provincial program is homegrown, seen to be locally 'owned', andenjoys consensus among major stakeholders. It will be widely disseminated through print and electronicmedia. In addition, several of the objectives of the program (e.g., expanding girls' education, improvingservice delivery, resolving fiscal issues, improving governance) were shared by preceding governments

- 29 -

and, because of demand by the civil society, are expected to remain an important part of the reformnagenda of any future government.

105. Sustaining 'quick wins' is often critical to generating persistent support for the reform program.Reforms have been institutionalized in bodies such as the newly elected district governments, the PublicAccounts Committee, the provincial Fiscal Monitoring Committee, and at more micro but importantlevels such as PTAs and the Road Fund. Most important, these reforms are expected to help delivervisible and significant benefits on the ground through improved service delivery, public accountability,and greater transparency. If the reforms are explained well, as the GoNWFP is trying to do, the politicalcosts of reversing the reforms would become significant.

106. The program has also been designed with a clear exit strategy, if exit proves necessary.Subsequent support programs will be conditional on satisfactory implementation of the reformns outlinedin this project document. Also clear triggers have been established for follow-on operations, and politicalcommitment would be evaluated in advance of any Bank support.

107. The risks from exogenous shocks are high in Pakistan, given that the country is still on the path ofrecovery, burdened with high debt, and located in a turbulent region. These risks may be greater in thecase of NWFP, given its proximity to Afghanistan and the large share of its arid agriculture. While theseare not insignificant, the reform program design addresses them by aiming to strengthen local govemmentinstitutions, improve social indicators, support improvements in the business environment, and achievequick wins to gamer support for the program. These elements are all critical to the political and economicstabilization of the provincial economy.

108. NWFP faces the risk of unpredictable flows of hydel profits from WAPDA. This risk is beingmitigated by the initiation of WAPDA's Financial Improvement Plan (in the context of the proposedSecond Structural Adjustment Credit) and the recent directive of the President to WAPDA to transfer theagreed hydel profits to NWFP on a quarterly basis.

109. Finally, the capacity limitations at various levels of the government in the province do pose risks,but several sources of training and technical assistance are in place (or will be in place in the comingmonths) to offset these risks. The on-going Essential Institutional Reform Operationalization Projectfocuses on training district and provincial staff. Reform implementation units are being set up, andtechnical assistance is being made available by bilateral donors. The GoNWFP has approved acomprehensive capacity building program to enable the provincial and district govemments to strengthenthe implementation of key structural and governance reforms for which it intends to seek DFID support.

Annex APage I of 16

SHAUKAT AZIZ ISLAMABADMinister for Finance& Economic Affairs

May 27, 2002

Mr. James D.Wolfensohn,President,World Bank,Washington, DC 20433USA

Dear Mr. Wolfensohn,

Please find attached a Letter of Development Policy, dated 24 May2002, from the Government of NWFP to the Ministry of Finance. The letterdelineates the broad and comprehensive reform agenda, through which theGoverniment of NWFP proposes to strengthen and consolidate its economicprogram, and for which it has sought assistance from the InternationalDevelopment Association of SDR 71.2 million (US $ 90 million equivalent).

The Government of Pakistan supports this continued initiative andrecommends the proposal for consideration of the InternationalDevelopment Association.

With regards,

Yours sincerely,

Annex APage 2 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N.-W.F.P.

D.O. No. 13o c 6u,A) Z-30/Fo/zo20- 200Z

Dated Peshawar, the - ay24, .20z

Mr. Shaukat AzizFederal Minister for Finance and Economic AffairsGovernment of PakistanIslamabad

Dear Mr. Aziz:

Government of the North West Frontier ProvinceLetter of Development Policy

The North West Frontier Province (NWFP) faces difficult development challenges due to itsgeography, history, and location. The province is landlocked and largely mountainous, with only 30percent of its area being cultivable. With around 13% of Pakistan's population, the estimated per capitaincome of the province is nearly 30% lower than the average for Palistan. NWFP has a weaker resourcebase than other provinces. The province has also been experiencing low growth for a number of years,with depleting forests, stagnant remittances, and inadequate development in other sectors. The provincialeconomy is mostly dependent on relatively low value-added agriculture, services, public employmentespecially in the armed forces, and low-skilled workers remittances from inside and outside the country.

The present Government of NWFP (GoNWFP), which came into office in 1999, faced a numberof daunting development challenges, including: a stagnant economy; endemic governance issues; abreakdown of accountability; poor service delivery in all major services; wasteful and inefficientexpenditures; low social indicators; low tax potential; and heavy dependence on Federal transfers. Thebudget was also saddled with a rigid expenditure structure dominated by high establishment costs, debtservicing, and subsidies.

Recognizing that many of the problems were interdependent and needed a more systematicapproach, our Government decided to develop a comprehensive reform programme for the province.With this in view we prepared the Provincial Reform Programme (PRP) 2001-2004, which draws uponthe goals and strategies of the country's overall Interim Poverty Reduction Strategy Paper (I-PRSP). Ourprogramme places particular emphasis on governance, devolution, and financial management reforms as ameans to expand and improve the delivery of critical social services (especially education and health).After extensive discussions with various agencies, including the World Bank, the programme wasapproved by the NWFP Cabinet in June 2001. Several of the PRP reform measures were incorporated inthe FY02 budget and reflected in the budget White Paper and departmental plans.

The PRP was prepared after extensive consultations throughout the province. In the light of thePRP, during the last twelve months, our Government has already implemented significant institutionaland process reforms. We are planning further reform measures in the coming months in consultation withthe newly elected District governments. Attachment I lists all the reform actions taken and those plannedfor the medium term.

Annex APage 3 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N.-W.F.P.

r ~~~~~~D.O. NQ, . z S °F/_R0

Dated Peshawar. the &11v z* 2

We would like to note here that the events following September 11, 2001, have reinforced theview that a prosperous and stable NWFP is critical to Pakistan's campaign against terrorism. In addition,there is a consensus in our government and the civil society that effective poverty alleviation withenhanced job opportunities and a more literate and healthy population is the most effective deterrentagainst extremism. We are confident that our ongoing reform programme provides the best means ofachieving this end.

THE PROVINCLAL REFORM PROGRAMME (PRP)

I. Governance And Civil Service Reforms

Governance in our province, as in the rest of the country, had seriously deteriorated over the lastfew decades. This deterioration manifested itself in excessive staffing, poor compensation (especially athigher levels), declining quality of civil servants, over-centralization of decision-making, endemiccorruption, poor management systems, and wasteful procedures. To tackle these difficult issues, we havedrawn an ambitious, but feasible and phased programme.

Governance and civil service reforms, the essential vehicle for implementing the PRP, aim at asignificant increase in government efficiency, accountability, service delivery, competence and integrity.Our strategy is to fully devolve power, decentralize functions and operations, reduce staff at theprovincial level, tighten the system of accountability, reorganize functions and departments at theprovincial level, improve recruitment, make promotions more merit and performance based, simplifyprocedures, and computerize business processes. We have already put in place the following measures:

Administrative and Operational aspects of Devolution have been largely completed: Therequisite staff (around 200,000 out of total 280,000 provincial employees) have been assigned to districtgovernments, district rules of business prepared, training of elected representatives and staff instituted,local government contract rules notified, and district accounts established. Partly as a result of thedevolution exercise, we have restructured and down sized the provincial departments. This has involvedmerging several departments and abolishing several autonomous bodies and redundant agencies. Thisexercise covered over two dozen departments and agencies. Consequently, over 6,000 employees becameredundant and have been placed in a surplus pool. Some of these employees have been assigned todistricts to meet local needs.

Other measures adopted for improving governance include: (i) the provincial Public ServiceCommission (PSC) has been strengthened and made autonomous; (ii) institutional mechanisms have beenput in place to make recruitment and promotion merit- and performance-based; (iii) a contractemployment policy framed earlier is being revised to make all task- and location-specific positionscontract employment; (iv) the Government is continuing its freeze on new hiring, except for social sectordelivery staff; and (v) retirement rules have been amended to facilitate retiring of redundant orincompetent officials.

Annex APage 4 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N..W.F.P.

D.O. NQ. Bo 6,F"*,W r- 3o/0 O/°OO --?oO 2Dated Peshawar, the MAY z44, zoo2

Far reaching Judicial Reforms have been implemented to ensure the independence of thejudiciary. The judicial and executive functions have been separated. The Judiciary has been madeautonomous in matters of recruitment of judicial officials and in financial aspects.

A three-year institutional reform and capacity building programme, (called Essential InstitutionalReform Operationalization Project (EIROP), funded by UNDP, SDC and GTZ, was initiated in March2001 to assist in institutional reform, comprehensive capacity building, and training of staff, specially atthe district level. In addition, with DFID support, a training programme for the newly electedrepresentatives and officials has been launched at district and lower levels.

We are cognizant of the huge capacity building needs, especially to implement the PRP and theexpanded social sector programmes. Hence, based on a preliminary review, we have drawn up anexpanded capacity building plan including specific plans for various sectors. We have also establishedself-contained reform units for education, health and implementation of the PRP.

A major part of improved governance is reduction in corruption. We have taken a number ofsteps towards that end. Anti-corruption Rules have been simplified to make it easier to take disciplinaryactions. Better enforcement of disciplinary rules has resulted in the initiation of 2240 disciplinary casessince 1999 (compared to a similar number over the entire last decade). Over half of these cases have beendecided. In addition, we have dismissed and/or suspended about 300 education department employees(including teachers) for negligence and prolonged absence from duties.

Over the medium term, we plan to continue to implement the reforms under way and furtherintensify them. Among the planned actions are: implementing the expanded capacity buildingprogramme; developing an HR database from payroll data; conducting a civil servants census in FY03-04; reviewing and adjusting the restructuring, downsizing, and personnel management measures;strengthening district government staffing and staff training; completing district rules of business andcodes; establishing courts for small causes and family disputes; appointing separate senior officials tohandle public complaints against officials; establishing public safety and accountabilitycommissions/offices at provincial and district levels; establishing local government commission; andextending e-government to all departments and districts. We intend to seek support of the UK DFID forthe expanded capacity building program.

The above ongoing and planned reforms are expected to have a salutary effect in terms ofincreasing the efficiency, effectiveness, and integrity of the civil administration, as well as making it moreresponsive to people's needs through devolution and administrative decentralization.

II. Enhanced Service Delivery

The core of our Govermment's reform effort is to improve the delivery of services, especiallyhuman development services, which will have a lasting impact on productivity, equity, and poverty. Thiseffort is in tandem with the govemance and financial reforms (discussed in a later sections) designed toensure increased resources, efficiency, and capacity. The important reforms in the delivery of social andcommunity infrastructure services are discussed below.

Annex APage S of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N.-W.F.P.

D.O. NQ. So ( //zoe °o2

Dated Peshawar, ihe Alq Zv, 2.02

Education

Some progress was made in the education sector during the last 10 years. Nevertheless, partlybecause of the initial low base of education in the province, various education indicators are stillrelatively low, and there is a great deal of variation within the province. Gender differentials areespecially large, with girls' primary gross enrollment rate presently at less than 54% as compared to morethan 85% for that of boys. The reasons for this state of affairs are longstanding and well-known:inadequate financial resources; physical inaccessibility of many areas; poorly trained and ill-paidteachers; general decay in educational standards in the country; inadequate supply of instructionalmaterials in schools; poor physical facilities in schools; weak accountability, institutional capacity, andmanagement of the educational system; and lack of community involvement in school affairs. This isobviously a very serious situation, which would take years to remedy, but we are determined to address it.

The PRP has made educational improvement the foundation for achieving longer-term economicdevelopment and poverty alleviation goals in the province. The medium-term objectives in the sector areto: improve primary education (both enrollment and quality of instruction); reduce gender and rural-urban disparities; and expand the capacity at the secondary school level. These objectives will beachieved by increasing resource allocation to the sector, allocating more resources to female education,upgrading the quality of instruction and teacher training, improving the management structure,implementing devolution, and increasing community and private sector involvement.

We are giving the highest priority to improving the quality of education. A comprehensive staffand facility rationalization exercise has been approved to serve as a basis for redeployment and needs-based recruitment. As part of this plan, we shall ensure that every primary school meets the targetedteacher-student ratio of 1:40. This will be achieved through teacher redeployment and facility specificcontract recruitment. During FY03, we intend to recruit 2000 primary school teachers on a facility-specific basis. Deploying teachers in their home districts and localized recruitment would also reduceteacher absenteeism. A results-based teacher evaluation and reward system has been introduced and aprovince-wide, periodic student assessment system is being initiated. Teacher training programmes arebeing strengthened. To improve its focus, the provincial education department has been bifurcated forlower and higher level education. A district cadre of schools has been created; a training programme fordistrict staff has been initiated; and the separation of teaching and management cadres has beenintroduced. The latter is meant to establish a professional school managerial cadre. Computer literacyand English-medium instruction are being introduced on a pilot basis. Textbook de-regulation has.beenintroduced for Classes 9-12, and a road map for expanding this initiative to the primary sector has alsobeen developed. An Education Sector Reform Unit has been established to monitor and oversee progressin implementing reform.

We are encouraging public-private partnerships and community involvement in the promotion ofeducation. We have initiated a programme to encourage the private sector to use unoccupied governmentbuildings for establishing schools. We have restructured the Frontier Education Foundation (whichsupports NGOs providing education) to make it autonomous and expand its activities to promote public-private partnership. We have formed PTAs in allmost all 20,000 primary schools. The PTA capacity isbeing strengthened and funds for instructional materials and minor repairs are being allocated toindividual schools through the PTAs.

Annex APage 6 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N.-W.FP.

D.O. NQ. 7oA/s) iS,o /FD/2oe'-2oo2

Dated Peshawar, the AlAy 24- .Doz

We have substantially strengthened the monitoring and supervision mechanism for schools.Circle Teams in each district, have been designated to carry out field visits every two weeks to monitorabsenteeism and availability of inputs at the facility level based on new monitoring forms. The reportsare reviewed monthly at the district level, and will now be reviewed quarterly by the Education Minister.We view these steps as supplementing the citizen/community oversight and accountability arrangementsbuilt into the devolution plan. In addition, the Education Management Information System (EMIS) wouldbe fully funded in the regular budget, starting FY03.

Budgetary allocations for education have been increased very substantially. Total current anddevelopment expenditures on education increased by 27% (from Rs. 6.9 billion to Rs. 8.8 billion) during1998/99 to 2000/01. Expenditures have been reallocated toward primary and secondary education andvocational training (including teacher training) and away from tertiary and university education. Usercharges from higher education have been increased by 20% over the last three years.

To accelerate reduction in gender disparity, this year's budget allocated 70% of the sector'sdevelopment budget to girls' schools, and innovative incentive schemes are being developed to increasegirls' enrollment. A major primary school facility up-gradation programme is being initiated to ensurethat 100% girls schools are provided toilets and boundary walls by end-FY03.

Medium-Term Programme

We plan to complete or take the following actions over the medium term: (i) enhance budgetaryallocation, which are envisaged to increase by 72% from Rs. 8.5 billion in FY02 to Rs. 14.7 billion inFY05; (ii) complete the management reforms in education, including district-based management, separateteaching and management staff, and train management staff; (iii) complete teacher redeployment, andfacility rationalization based on approved staff and facility rationalization plan; (iv) continue and/orstrengthen: provision of primary schools in seriously deficient districts; expansion of school capacity inpartnership with the private sector and communities; establishment of PTAs; provision of essentialphysical facilities in all primary schools, especially for girls; the current large allocation of developmentfunds for girls' schools; deployment of teachers in home districts and location-based new recruitment; in-service teacher training; performance-based teacher evaluation and compensation; the province-widestudent assessment system; and textbook de-regulation; (v) initiate and/or expand: secondary schoolcapacity; PTAs for secondary schools; and school facilities for computer literacy; (vi) continue tostrengthen the monitoring and supervision system including commissioning a regular third party user andfacility survey in October 2002, and annually thereafter; the survey would also provide independentmonitoring of education indicators; and (vii) we plan to continue to increase higher education usercharges over the medium term.

We believe that the impact of these wide-ranging reforms will be substantial. By the end ofFY05, the gross primary school enrolment is expected to increase by 15%, with girls' enrolment by 30%.By end of FY05, 100% of both girls' and boys schools would have all the necessary physical facilities.Serious gaps in school capacity in remote areas would have been remedied. The quality of teachers,instruction, and student achievement are also expected to be significantly higher by that time.

Annex APage 7 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N..W.F.P.

D.O. NQ. t'%s)Z-3o /FD/2oo--2oa2

Dated Peshawar, the_"W A> 4ZOcZ

Health

Despite improvement in the past, health indicators in the province on the whole remain relativelypoor. More than 40% of children under two years of age are not fully immunized, while infant mortalityand maternal mortality rates are still comparatively high. Underlying the low level of indicators are:inadequate and uneven availability of primary health facilities, poorly staffed and stocked clinics,inadequate allocations which are heavily skewed towards the tertiary health care, and high incidence ofpreventable diseases.

Our objective in the health sector is to significantly improve health indicators in the provinceover the medium term. Our strategy, prepared in consultation with stakeholders, is to improve themanagement structure, reorganize the healthcare system and have a multi-level referral system, focus onpreventive and primary health care, remove obvious gaps in facilities, increase budgetary allocations aswell as user charges, and increase reliance on the private sector with adequate regulation. Towards thisend, we have already taken a number of steps and several more are planned.

We have initiated Health Care and Hospital System Management Reforms. The Department ofHealth has been restructured in line with the Devolution initiative with a substantive shift of staff andresources to the districts. A management cadre has been created, and male/female doctors cadres havebeen merged. A Health Sector Reform unit has been established to strengthen capacity for planning andmonitoring the reform process. Planning has been initiated for rationalization of district health serviceswith the objective of developing a grade and referral based system with appropriate staffing norms, and apilot programme in one district is under implementation. All tertiary hospitals have been given financialand administrative autonomy with the aim of making these financially self-sufficient in three years, whileplans are being developed to protect access of the poor through safety nets. A hospital managementsystem is being developed to improve cost effectiveness and efficiency of public hospitals. Location-based recruitment and improved working/timing facilities are underway to reduce absenteeism.

Communicable Disease Control and Maternal Health Programmes have been strengthened.Specifically: (i) a programme to expand the coverage of immunization under Global Alliance forVaccination Initiative (GAVI) has been approved by the provincial government and will now beconsidered at the national level; (ii) Hepatitis B vaccination has been initiated in three districts, andprovince wide implementation will begin in early FY03; (iii) Polio cases have been reduced from 57 in2000 to 28 in FY01, with a target of eliminating cases by FY04; (iv) an intensive campaign for TTimmunization of pregnant women in 15 high risk areas with involvement of Lady Health Workers(LHWs) was initiated in August 2001; (v) a plan to recruit 1800 additional LHWs has been approved,and their role and that of paramedics is being expanded to include nutritional and reproductive healtheducation; and (vi) the TB DOTS programme has been revitalized in 5 districts, covering 20 percent ofthe population.

Budgetary allocations for the health sector were increased from Rs. 1.7 billion in 1998/99 to Rs1.9 billion in 2000/01. Expenditures on primary health care and mother and child care were increased by8%.

Annex APage 8 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N.-W.F.P.

D.O. NQ. B. (h J) I-30/fDO-60, -Jooz

Dated Peshawar. the A y 20 0Zooz

Medium-Term Programme

In the medium term, our Government's emphasis will be on expansion and strengthening thereforms. We have recently approved a medium-term health program, identifying key priorities andexpenditure allocations. In particular, we plan to focus on the following activities: (i) increasingbudgetary allocations between FY03-05 by a dramatic 120%, with higher allocations for primary care; (ii)strengthen the Reform Unit, capacity and training of the district staff, and the hospital managementsystem; (iii) rationalize and upgrade district health facilities including addressing critical shortages ofnurses in district and sub-district hospitals; (iv) expand the use of LHWs and paramedics as the frontlinehealth workers to provide the first contact basic health care/advice; (v) continue location-specificrecruitment/deployment of health workers; (vi) augment public health services in partnership with theprivate sector and local communities; (vii) implement phased increases in user charges, with an effectivesafety net for the poor; (viii) expand the coverage of communicable disease control programmes ofimmunization, TB DOTS, and of reproductive health services; and (ix) monitor the impact of reformsthrough periodic household and third party surveys.

We believe that these reforms would result in substantial increases in the coverage, efficiency,and quality of health service delivery. Thus it is projected that immunization coverage of children undertwo years of age would increase from 54% to 80% by FY05; antenatal coverage of pregnant women (byhealth professionals) would increase from 34% to 45% by FY05; percentage of population with access toTB DOTS would increase from 20% to 100% by FY05; the number of polio cases would be zero byFY05; and the number of LHWs would be increased from 7,800 to 14,000, resulting in an increase incoverage of primary health care and family planning services from the current 37% to about 75% of thepopulation by FY05. We expect that the systemic changes being made would make the provincial healthsystem leaner, decentralized, more self-financed, cost effective, and responsive to the needs of localcommunities.

Women's Development

Our Government recognizes that the province has a relatively conservative society. Hence, itrequires a special focus on addressing gender issues and improving the welfare of women. Some progresshas been made in this area in the past few years. Women are increasingly receiving education;participating in many professions and businesses; and playing an active role in politics. However, weplan to sharpen our focus on this extremely important development issue to fully utilize our humanresources. We have a two-fold strategy in this regard. First, in each of the sectoral reform areas,especially in the crucial education sector, concerted efforts are being made to reduce gender disparity andmainstreaming women's role. Second, the Department of Women Development has underimplementation several schemes, partly with support from the private sector and local communities, topromote skill development among women and provide temporary shelter, a crisis center, and free legalassistance for women in distress. We plan to expand these activities through public-private partnership,community help, and NGO assistance. A Steering Committee, including civil society members, wouldoversee these activities and provide a vehicle to raise people's awareness of the needs and rights ofwomen.

Annex APage 9 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N.-W.F.P.

D;O. NQ. & (4) Z-30/FD/200r-2ooZ

Dated Peshawar, the Y42y4, 2002.

Community and Urban Infrastructure

Devolution has provided an opportunity to address key institutional and communityinfrastructure constraints, which have historically hindered the delivery of urban services especially tothe poor. Using this opportunity, our Government has consolidated various service delivery agencies(merging Communications & Works and Public Health Engineering Departments); transferredappropriate functions and organizations to the local governments (including the Urban DevelopmentAuthorities); and instituted special arrangements for the main urban center, Peshawar City District.Regulatory body will be established for urban water sector at the provincial level. Our Government hasnurtured an enabling environment for participatory development and has spearheaded Community DrivenDevelopment initiatives throughout the province. The Bank's Community Infrastructure Project in NWFPis being sticcessfully implemented and a follow-on project is being planned. Our Province is also the firstin the country to commence the development of an integrated and participatory strategic plan at a citydistrict level, which is likely to provide a model for a comprehensive development framework for thenewly formed District Governments. Our Government intends to examine the need for any furtherstreamlining of agencies in this sector, adopting a uniform policy for community participation andresponsibility, and upgrading the management and technical capability of the local government and urbanservices institutions.

m. Ensuring Fiscal Sustainability and Financial Accountability

The fundamental and long-standing fiscal issues facing the province are: (i) the shortage ofavailable fiscal resources resulting from rigid revenue and expenditure structures, unpredictability of thevolume of federal revenue receipts, especially net hydel profits from WAPDA, and accumulated debts;(ii) growing expenditure needs on account of current inadequacy of service coverage, infrastructure, andthe relatively high population growth rate; (iii) outdated and inadequate regulations, rules, and instructionmanuals leading to procurement that lacks efficiency, transparency, and is vulnerable to corruption; and(iv) poor financial management and oversight.

Flscal Reform

Close to 90% of provincial revenues are derived from the Federation, on account of taxassignments, hydel power generation profits, and federal grants. The remaining 10% revenues arederived from provincial taxes (which have a narrow base and are not buoyant), user charges, and othernon-tax receipts. This structure, and the poor economic base of the province, leaves little leeway, in themedium term, for our Government to increase revenues through our own efforts.

In recent years, hydel receipts from the WAPDA have not been fully predictable. Consequently,we have been often forced to resort to expensive stop-gap borrowing, as well as to unplanned cuts inexpenditures, which often fall on development and non-salary expenditures.

Current expenditures constitute over 80% of total expenditures, out of which contractualobligations (salaries and interest payments) claim the largest part, while development expenditures havebeen seriously constrained. In the past, development expenditures were financed from borrowed

Annex APage 10 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N..W.F.P.

r ~~~~~~D.O. N,B ,S)- 0/>/20

Dated Peshawar, the A t1' z. 2COZ

resources, mainly expensive (interest rates of 15% and above) Cash Development Loans (CDLs) from theFederation. The total provincial debt in FY01 was Rs. 69.8 billion (almost 200% of total revenue receiptsof the province), half of that on account of CDLs, with debt service claiming 25 % of total revenues.

To expand our fiscal resources for meeting our growing development and service needs, ourGovernment has adopted a comprehensive medium-term fiscal strategy. This includes: (i) increasingprovincial revenues through further tax reform and accelerating user charge increases; (ii) divestinginessential activities; (iii) implementing fiscal devolution; (iv) improving the budgetary process, financialmanagement, procurement process, and transparency; (v) strengthening the audit oversight arrangements;and (vi) formulating a medium-term budget framework (MTBF). The key medium-term emphasis offiscal adjustment is on expenditure management and increasing non-tax revenues and user charg'es, giventhe low potential for enhancing taxes.

We have already started implementing the above strategy and have taken actions in key areas asdiscussed below:

Our Government has implemented fiscal decentralization. In anticipation of the devolution ofpowers, we prepared the initial district budgets for FY02. Local governments are being made responsiblefor preparing their own budgets for FY03, and the needed staff has been assigned to them. We beganallocating certain development funds across districts based on clear criteria, including population andsocial indicators. NWFP is the first province to have used such a needs-based formula for budgetarytransfers to the districts. A Provincial Finance Committee has been established which is working on aformula based fiscal transfer to the local governments. The awards to transfer funds to the localgovernment are expected to be announced in June 2002.

Our Government has pursued revenue measures aggressively to strengthen resourcemobilization. The tax reforms include reducing and restructuring provincial taxes; imposition of income-based agricultural income tax to complement the province's land-based tax; outsourcing of collection ofmotor vehicle tax and harmonization of rates with other provinces; and restructuring and expansion of thebase of the Urban Property Tax from 18 to 27 rating areas. Moreover, enhancement and rationalization ofuser charges has been initiated, especially for economic and tertiary-level social services. Irrigation waterrates (abiana) are being increased by 25% each year in anticipation of better service delivery.

Our Government has reprioritized expenditures to improve its composition and strengthenexpenditure management. The development progranune has been rationalized. During the last two years,we have reduced the number of projects in the portfolio by two-thirds and the "throw-forward" of fiscalliabilities to complete ongoing projects by 65%, with further reductions of 50% and 25%, respectively, tobe made by the early next fiscal year. Throw forward now is around 100% of the annual Public SectorDevelopment Programme compared to more than 300% a few years back. In addition we have increasedthe share of development expenditure in total expenditures from an average of 10-15% during FY98-0I to25% in FY02.

Annex A

Page 11 of 16MINISTER FOR FINANCE,

PLANNING, DEVELOPMENTGOVERNMENT, N..W.F.P.

D;O. No. Bo(fJP sW'q0 /-30o/tV/doI-8Zoz

Dated Peshawar, the M- 2y 24, zOoz

Our Government was the first in Pakistan to establish a Pension Fund for provincial civil servantsto better manage provincial contingent liabilities. A separate fund has also been established to coverliabilities on account of General Provident Fund. A number of public enterprises and autonomous bodieshave been closed, which would save around Rs.70-100 million annually.

We have made substantial improvements in budget formulation and monitoring. Unlike pastpractices, we are no longer permitting spending commitments to be made against net hydel profits abovethe capped amount of Rs 6 billion. We have also programmed expenditures assuming a shortfall ofaround 5% in federal tax transfers to the province. We have also instituted several reforms in thepreparation, processing, and execution of the budget, including: posting fiscal data on the website;economic classification of expenditures in budget documents; merging three different departmentalsubmissions during the year into one mid-year review; computerizing budget preparation; establishing anew schedule for timely release of funds; and establishing a professionally staffed Budget Analysis Unit,to start functioning in early FY03. Programme and Performance Budgeting (PPB) will be initiated in afew pilot departments during FY03.

Medium-Term Programme

To strengthen the provincial finances and help implement the PRP, we have approved a Medium-Term Budgetary Framework (MTBF) for FY03-05. The MTBF is predicated on several key parameters.First, the existing National Finance Commission (NFC) formula has been assumed for planning purposes.Second, the resources accruing from hydel profits transfers to NWFP from WAPDA, have been projectedat the currently capped amount of Rs. 6 billion per year, pending resolution of the matter. In regard toimproving predictability of hydel receipts from WAPDA, we expect full and timely implementation of therecent decision by the Chief Executive directing WAPDA to transfer the capped amount of the net hydelprofits on a pro-rata quarterly basis. Third, the framework incorporates new revenue measures that havebeen implemented or are planned for launch in FY 2002/03. In this regard, very conservative revenuebuoyancy assumptions have been used. The MTBF is consistent with I-PRSP objectives. The MTBFwould be a rolling framework and each years' budget will take into account available NFC resources,federal transfers and exceptional budgetary financing.

We expect that, as a result of the fiscal reforms underway, and those proposed in the MTBF,additional fiscal space generated will be approximately Rs.2.6 billion/year, about 5 to 6 percent of totalexpenditures. Over the three year period, this would amount to nearly Rs. 7.8 billion. Briefly, thefiscalreform measures are: (i) increasing non-tax revenue of which user charges are forecast to increase by75% by 2004/05; (ii) agricultural income taxation (AIT), initially imposed on farms earning in excess ofRs. 80,000 net annual income ($1,200 in 2002 rates). This is conservatively estimated to raise Rs.60million in the first year, but would gradually increase thereafter, through improved land surveys andincreased collection capacity. This reform effort has a very important longer term role to play; closing amajor loophole for tax evasion, reducing a major distortion that has been politically difficult to tackle, andcreating a vehicle for local taxation that has significant potential; (iii) withdrawal of the poorly targetedand ineffective wheat subsidy is expected to save about Rs.1.5 billion each year. In future, onlyallocations for management cost of strategic stocks will be made; (iv) higher user charges for roads andtertiary health and education services are also planned, beginning FY03; (v) under a new debt

Annex APage 12 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N.-W.XP.

p r ~~~~~~~~D.O. Ng.er2as/e/DZo-o2

Dated Peshawar, the "s' ZY, ;002

management policy, our government has decided to retire about Rs. 2 billion of expensive debt in2002/03; the same is planned in the next two years. This will save us Rs. 180 million in debt service in2003/4 and about Rs. 850 million over the following two years. Share of interest payments in totalexpenditures will decline from 17% to 10% over the three year period; (vi) reducing the share of currentexpenditures from 74% of total spending in FY02 to 69% in FY05, with a corresponding increase indevelopment (capital) expenditure; and (vii) reallocation of expenditures to priority social sectors-mainly primary education, primary health, and agricultural services, including irrigation-which willincrease their share from 26% of total expenditures in FY02 to 35% in FY05, consistent with therespective department's implementation capacity.

With the implementation of its fiscal strategy, the province would achieve a more sustainablefiscal position, increase expenditures on pro-poor program, and, together with institutional reforms,improve public service delivery. We are committed to protecting allocation for the pro-poor expenditure,especially that for primary education and health, in the event of revenue shortfalls. In addition, to ensurethat implementation of the enhanced social sector program begins expeditiously, we have initiatedpreparation of the PC-ls which are expected to be approved by July 2002. On this basis, we envisageinitial funding would be released to the implementing agencies in August 2002.

In the medium team, we aim to: further strengthen budget processing, including computerization,and presentation; establishing a standing Provincial Finance Commission in FY03 to institutionalize thefiscal decentralization and to review the fiscal performance of districts on an on-going basis; providenecessary assistance/training to district on fiscal matters; make PAC a fully functioning accountabilityagency, and take prompt action on its recommendations; increase capitalization of pension and providentfunds; and improve coverage of fiscal data on the web site. We will be undertaking a study of theprovince's tax potential (including AIT) during FY03, which will recommend further tax effort measuresfor introduction in FY04 budget. We will also undertake a study in FY03 for modernizing andstrengthening AIT collection and processing. We intend to reach agreement with the Federal Bureau ofStatistics for collecting reliable provincial economic data.

Financial Management Reforms

Financial management and accountability issues are at the core of our reform programme. Thereare serious weaknesses in financial management, accountability, and internal controls. While systemsand procedures were in place in the past, these were ignored leading to poor quality of public accountsand lack of reconciliation of accounts. The Public Accounts Committee (PAC) was dysfunctional forover a decade. Moreover, the several layers of checks and balances introduced by successivegovermments to try to check and reduce abuse became extremely time consuming and cumbersome. Ourprocurement rules and regulations are outdated. This is further aggravated by the actual procedures andpractices that thwart genuine competition for government business resulting in inefficient and costlyprocurement. The legal and regulatory framework also does not provide an effective means for settlingdisputes or addressing the grievances of suppliers, contractors and consultants. Thus, improvement infiscal management, quality of public accounts, public accountability, and procurement are among the keyreform targets. The programme to strengthen and improve financial management comprises the followingkey components.

Annex APage 13 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N.-W.F.P.D.O. No.30 2; /2o /-3Q>PD/20f -Z.0Z

Dated Peshawar. the A s . 2-oZ

We have adopted a Financial Management and Accountability Reform Programme (FMARP) forthe province. Under this programme a detailed Provincial Financial Accountability Assessment (PFAA)will be prepared jointly with the Bank. This assessment will cover accountability issues for all tiers ofgovernment in the province. Based on the findings of the PFAA, a short, medium, and long term financialmanagement reform action plan will be prepared in agreement with the Bank

The provincial Fiscal Monitoring Committee (FMC) and Departmental Accounting Committees(DAC) are functioning. The provincial FMC has been functioning adequately and has done a good job.According to the Accountant General (AG), for FY01, 95% of NWFP's provincial receipts and 100% ofexpenditures were reconciled, compared to only 50-60% a few years back. This is a significantachievement compared with past record. Reconciliation between the AG and the State Bank of Pakistan(SBP) have also improved substantially, and the amount in suspense are now insignificant. The DACshave been held regularly as per the schedule provided by the AG's office. In FY01 and FY02, 100% ofthe DACs were held.

Institutions responsiblefor the accountingfunction are being strengthened in several ways. (i) Lastyear we upgraded our computerization system at twelve major District Accounts Offices (DAOs)covering close to 60% of provincial expenditures; (ii) PIFRA supported reforms are being implemented atthe provincial level through the adoption of the New Accounting Model (NAM) and a morecomprehensive computerization of government budgeting and accounting systems which will have apositive impact on the reliability and timeliness of provincial accounts. By December 2003 over 80% ofprovincial transactions would be computerized; (iii) a Provincial Financial Controller will be shortlyappointed in the Department of Finance to lead financial management reforms. The Controller's maintask will be to implement financial management and public financial accountability reforms. In addition,the Controller will be responsible for accounting and financial reporting (jointly with the ProvincialAccountant General), developing provincial capacity to handle accounting and payroll, organizing financeand accounting functions of the government, staffing and training, internal controls and audit, financialpolicies and procedures, and addressing audit observations and systemic issues; (iv) the position ofDistrict Accounting Officers, the linchpin in the accounting system, has been upgraded to grade 18 for allmajor districts, to professionally manage the district accounts under the newly devolved fiscal authority;and (v) the province is holding discussions with the AG to prepare for budgeting and accounting at theTehsil level and assess capacity needs.

The Public Accounts Committee has been revived. The functioning of the PAC in NWFP wasdelayed due to High Court ruling against it, which judgment has recently been vacated. The governmenthas promulgated an Ordinance, and an ad-hoc Committee has been established. The ad-hoc PAC wouldbe reviewing audit reports on last-in first-out basis, and all Committee meetings would be open to thepublic. The PAC would play an important role in enforcing accountability in the province.

We have approved a new Procurement Ordinance to increase transparency and efficiency in publicprocurement and introduce a new code of conduct and ethics for public official handling procurement.By March 2003, we will revise the provincial Purchase Manual to notify new procurement rules and issuestandard bidding documents.

Annex APage 14 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N..W.F.P.

N r ~~~~~D.O. No. v '& -af /0z2o

Dated Peshawar, the 85 a O, zoo z

IV Enabling Sustainable Growth

Our Government believes that over the long term accelerating growth is key to poverty reduction,and that the private sector has to be the engine of growth. In the PRP, we have proposed strategies toimprove the business environment; enhance productivity of agriculture; reduce the role of the publicsector in commercial and industrial activities; and promote public-private partnerships. Reforms toirnprove the efficiency of the province's infrastructure, including irrigation facilities, road and urbaninfrastructure and services; and environmental protection would also support the growth process. We planto undertake during FY03 a detailed province-wide study to analyze the sources of, and constraints to,private sector development, with particular emphasis on the role of SMEs. The study would be especiallytimely now; because of our locational advantage the province stands to gain significantly from businessopportunities related to the reconstruction in Afghanistan..

The industrial and commercial activity in the province has been at a low ebb for some time. Partof the problem has been over-regulation of business. This largely relates to federal laws and rules ratherthan of the province. Considerable liberalization of business rules was done over the last decade.However, there are still too many laws and related inspections governing business, some of which aresuperfluous, not fully enforced, or just a source of harassment and corruption. Our Government, inaddition to assisting the Federal Deregulation Committee in this task, has established a provincialDeregulation and Facilitation Committee; its recommendations would be implemented over the next twoyears.

We are also implementing several other reforms in this area. The Industries Department has beenreorganized, and its focus is being shifted to promotion, facilitation, and enforcement of safetyregulations. A Census of Manufacturing is under way, which will help us in policy analysis. The mainprovincially-owned commercial enterprise, the Bank of Khyber, is scheduledfor privatization starting inSeptember 2002. To exploit the province's mineral, gemstone, and marble resources on economic lines,the Mineral Department has been restructured, a policy committee appointed, concession rules amendedto allow entry of small-scale businesses, and a Mineral Investment Facilitation Authority has beenestablished.

To enhance growth prospects, we are undertaking a number of reforms in productive sectors asdiscussed below.

Although the arable land in the province is not extensive, agriculture remains the mainstay of theprovince. A sectoral strategy is being developed emphasizing: targeting overall agricultural growththrough sound policies, including reducing the role of public sector, withdrawing subsidies, and allowingmarket pricing; ensuring farmers' access to necessary technical information and inputs to exploit theprovince's comparative advantage in production and export of high value-added crops and horticultureproducts; rationalizing the extension department and initiating a programme to enhance its technicalcapacity; further developing the seed industry with public-private partnership; expanding vaccinationcoverage of livestock, and divesting all non-essential activities. The province is in the process of windingup three autonomous bodies (the Frontier Cooperative Bank, Agricultural Development Authority, andFruit and Vegetable Board), whose role is now redundant.

Annex APage 15 of 16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, M.W.F;P.

D.O. No._________________

Dated Peshawar. the 24, ZOO2

We are firmly of the view that efficient irrigation of the province 's fertile tract is crucial for itsagriculture and the economy. Major issues in this respect are poor maintenance of the irrigation system,poor water availability at the tail end, and inadequate cost recovery. To address them, our Governmenthas initiated institutional and policy reforms to decentralize the management of the irrigation and drainagesystem. These reforms comprise: (i) transforming the Irrigation Department into an autonomousIrigation and Drainage Authority, leaving only regulatory functions in the government domain; (ii)establishing commercially oriented and autonomous Area Water Boards (AWB) at the canal commandlevel, with farmer representation; (iii) devolving O&M and cost recovery responsibilities to formallyorganized Farmer Organizations at the distributary/minor levels; (iv) fostering beneficiary / community /private sector participation in all aspects of the operation and management of the irrigation and drainagesystems; (v) increasing water charges (abiana) by 25% annually to reach fully cost recovery; and (vi)undertaking cost reducing measures, including a freeze on new recruitment, sale of assets (earth movingmachinery, tubewell rigs, etc.), and privatization of government tubewells through communitymobilization. Over the medium term, we plan to accelerate the institutional reforms to ensure that thenew institutions are made operational, and to follow through with the other reforms.

The province has a relatively good road network, except in a few remote, hilly areas. However,O&M of roads is a major issue. The poor maintenance of roads leads to increased private cost in terms oflost time and expensive vehicle maintenance and, finally, to higher capital cost of road rehabilitation. Theissues are inefficiency of the system, poor cost recovery, and inadequate funding. Our Government hasinitiated several measures to deal with the backlog for maintenance of provincial roads and the broaderinefficiency issues. These include establishing an autonomous Highway Authority, under public privateoversight, for managing all aspects of provincial highways. The Authority' would be responsible formanaging the newly established Road Maintenance Fund to recover user charges and improve servicedelivery. Maintenance and other road construction activities will continue to be outsourced. In addition,a specific programme is being initiated to rehabilitate, during the next seven years, all of the roads that arein very poor condition. Our Government has prepared a programme for increasing user charges to makethe Maintenance Fund self-financed for maintenance, as well as for completing the back-log ofmaintenance work within five years.

Communication Strategy

The GoNWFP has developed a communication and dissemination strategy. Using workshops,seminars, and print and electronic media, we intend to widely disseminate the reform programme to ourcitizens, civil society, elected local government officials and government officials at the provincial andlocal government levels. We also intend to post on our website our reform programme.

Monitoring and Evaluation

The monitoring and evaluation of the reform programme will be the responsibility of theEconomic Reforms Unit in the Finance Department. Its reports will be reviewed on a monthly basis by acommittee chaired by the Minister of Finance, Planning and Development, with quarterly reportssubmitted to the Cabinet.

Annex APage 16of16

MINISTER FOR FINANCE,PLANNING, DEVELOPMENT

GOVERNMENT, N..W.F.P.

D.O. NQ. 2aCfo,,/-3o/Fq/2 o-2co2

Dated Peshawat, the A ' 245. .oo q

Attachment 2 lists the key outcomes and process indicators and targets, which will be specificallymonitored and tracked. These include indicators for growth, poverty, fiscal aspects and social sectors,and take into account the I-PRSP indicators. The targets and progress against these will be posted on thewebsite, on a six monthly basis, starting January, 2003.

We are fully committed to the reform programme outlined above. The Government of NWFP isdetermined to implement this programme. We believe that the programme is strong and focused. It isbuilt around an integrated monitoring framework. It presents a new, ambitious, and holistic vision of ourmedium term economic development based on a strategic prioritization of key actions agreed upon afterextensive consultations and intensive lesson learning. It fits within the overall I-PRSP framework forPalistan. We submit this programme to seek support for it by International Development Association,starting with a US$90 million credit for supporting the first year of the MTBF for FY03-05.

With all the best wishes,

Yours Sincerely,

Farid RehmanMinister for FinanceGovernment of NWFPPakistan.

Attachment 1 of Annex APage I of 8

NWFP STRUCTURAL ADJUSTMENT PROGRAM FY2003-05POUCY MATRIX

.~ ~andfOrmcomea Actons Taken Medium Term Measures for FY 2003-05

Devolutfon* A decentralized administration responsive to local * Staffing of Districts and Tehsil Govemments completed. * Review and complete the implementation of district Rules of

needs and a devolved polifical structure. * Rules of Business for District Councils implemented. Business and needed codes (FY03).* Increased competence and professionalism of local * Local Govemment Contract Rules notified. * Establish a Local Govemment Commission (FY03).

govemment staff. * Dist/Tehsil Provincial Accounts established. * Strengthen district govemment staffing and staff training (FY03-FY04).

* Institute E-Govemment in all departments and districts (FY03-FY05).

Restructuring and down-sking* Lean policy-oriented govemment at the provincial * Recruitment ban maintained, except for social sectors as needed. * Complete annual review of the restructuring, downsizing, and accoun

level. * 26 Departments/attached departments have been restructured and more reforms (FY03).* Efficient business processes. Better staffing mix than 6000 sanctioned posts abolished at the Provindal level. * Complete staff rationaleation between local and provindal

with smaller proportion of lower grade staff. * Revision of the Provincial Rules of Business to modemize business govemments (FY03-05).processes initiated. * Notify and implement the revised Rules of Business (FY03).

* Surplus Pool Policy established. * Complete the disposition of the provincial surplus pool (FY04).* Develop a program for reducing the proportion of lower grade staff

relative to officers (FY03).

Promoting merit and professionalism andImproving Human Resource Management* Merit- and performiance-based personnel * The purview of Provincial Public Service Commission (PPSC) extended * Reduce the time taken for recruitment of staff through PPSC to 4

recruitment and management to contract-based recruitmetnt; has complete administrative autonomy, months (FY03).* Improved accountability, reduced corruption and budget flexibility increased. * Develop an acion plan for creating district cadres for other sectors

misconduct * District cadres for Health and Education established. besides Health and Education (FY03).* Flexible workforce. * A more transparent promotion system and objecive performance * Amend 1973 Civil Servants Act or otherwise remove risk of* Removal of ghost workers and tracking of pension appraisal system for senior grades introduced. regularization of contract employees (FY03).

liabilities. * Stronger enforcement of Efficiency and Disdpline Rules and NWFP * Pilot contract-based employment (FY03).* More effective use of existing staff resources. Removal from Service Ordinance, against corrupt and inefficient staff. * Significantly extend the average time in post of senior civil servants

* Compulsory retirement enforced for staff that have been superseded (FY04)..__ _ _ __ twice; had two penalties imposed; had low performance grading; or are * Hold a civl service census (FY03-04).

Attachment I of Annex APage 2 of 8

Reform Ara Actiors Taken Medium Term Measures for FY 2003.05and Outcomes

known to be corrupt * Build HR database by: (i) completing the computerization of all* Comprehensive capacdty building program for provincial and district staff dsiict and departmental payrolls (FY03); fii) linking databases to

approved. provide central HR database to Finance (FY03); (iW) verifyingagainst civil service census (FY04); and fiv) using database toassess government pension liabilities (FY04).

* Implement capacity building program (FY03-05).Judicial Reifors* Improved system of justice. * Judicial Service Rules revised. * Establish Family Courts to handle family laws and disputes (FY03-* Complete independence of the Judiciary from the * Chief Justice of High Court made the appoin6ing authority for lower level 04).

Executive. Judges. * Establish separate courts for minor civil cases (FY03-04).* Increased access to jus6ce. * The Judicdary separated from the Executive. * Establish a training program for the judicial staff (FY03).* Specialized performance of judicial and * Standardize recruitment and personnel management of judicial staff

prosecutoral functons. (FY03-04).* Strengthen the Law Department (staffing and facilites) to enable it

to propedy perform its expanded functions (FY03-04).

Educaion* Improved quality and access to education. * Medium term Insttutonal Reform Program for education sector * Approve PC-1s for implementing the reform program by July 2002,* Increased overall gross school enrolment by 15%, approved. and release inital funding by August 2002.

and reduced drop-out rates by 10%, by FY05. * Program approved to bring the teacher student ratio to 1:40 through * Provide MTBF programmed funding, including for IM&R and EMIS* Improved leaming environment, redeployment, contract recruitment, and to start with hiring of around (FY03-05).* Reduced gender disparity. 2,000 teachers in FY03. * Staff fadlity rationalization (FY03-05).* Improved delivery system. * To reduce gender disparity, 70% of the education PSDP allocated for * Maintain monitoring and supervision program (FY03-05).* Specialized school management girs schools. * Initiate third party user survey in October 2002.* Improved availability and quality of textbooks. * Program approved to provide missing basic facilities to all girs primary * Ensure that 1:40 teacher student ratio is achieved through teacher* Community involvement and support ensuring schools by end-FY03, and all schools by end-FY05. redeploymentlnew hiring (FY05).

studentlteacher attendance, maintenance of * Staff and facility rationalization exercise for primary and secondary * Maintain the enlarged allocation (70%) for girts schools in theschools, and provision of adequate instructional schools approved. education PSDP (FY03-05).materials. * Frontier Education Foundation (FEF) restructured. * Provide adequate physical facilities in girls schools (FY03).

* Better management capacity and efficiency at the * School capacity expanded by using vacant govemment buildings, * Carry out redeployment and needs-based contract recruitment bydistrict level. operating evening dasses, using public-private partnerships, September 2002.

* A standardized and objecive student assessment of encouraging (and regularizing) private and community primary schools. * Develop adequate linkages of the Frontier Educabonal Foundatoneducabonal quality. * Introduced a regular mechanism for monitoring and supervision of with the Education Department (FY03).

schools, including teacher absenteeism, fully funded EMIS, and a third * Expand capacity of secondary schools to encourage completion of

Attachment 1 of Annex APage 3 of 8

Reform Areaand Outcomes Actons Taken Medium Teri Measures for FY 2003.05

party user survey. primary education for continuing education (FY03-05).* Initiated separation of management and teaching cadres. * Complete separation of teaching and management cadres (FY03).* District cadre of officials created. * Complete district-based management and functional specialization* Textbooks publication for grades 9-12 deregulated. (FY03-04).* Introduced results-based annual review/reward system for teachers. * Expand deregulation and privatisation of textbook publishing to* PTAs fomned in most schools, and funds for instruiconal materials and cover entire education sector (FY03-05)).

minor maintenance disbursed through them. * Continue the esuls-based system of teacher evaluaton (FY03-05).* Intrduced English as a medium of instruction in selected schools in two * Complete formation of PTAs in primary schools, strengthen their

pilot districts. functioning, and infftate secondary school PTA (FY03).* Approved a program, including funding, for a province-wide periodic * Expand English medium instnucion based on experienoes of pilot

student assessment system. (FY03-05).* Established an Education Sector Reform Unit * Continue to improve and expand the student assessment system

(FYO3-05).* Implement cost recovery for secondary and higher levels (FY03-

05).* Strengthen and make fully functional the ESR Unit to monitor and

oversee progress in reforms (FY03).

Health* A lan, efficient, and specialized health * Medium term health sector reform program approved. * Approve PC-is for implementing the program by July 2002 and

system/service; improved management and * Infitated health management and institutional reforms: restructured release initial funding by August 2002.capacity for analysis/policy and removal of gender Health Department kept policy and reform functions at the provincial * Pmvide MIEF programmed funding, induding full hnding for HMISinequality. level and devolved service delivery to the districts. (FY03-05).

* Increased access of patients to the level of service * Established a Health Sector Reform Unit at the provincial level. * Strengthen the capacdty of the Reform Unit for review, analysis,needed; cost effective service; and reduction in * Created a managenmnt cadre at both provincial and district levels. monitoring, and policy recommendations (FY03).demand at the tertiary level. * Merged male and female cadres of doctors. * Develop a comprehensive plan for longer term sectoral reforms,

* Improved management and pernrfoance of major * Approved a 3 year program to create additfonal positions for female with the assistance of development partners (FY03-04).hospitals. nurses at the district and sub-disbict hospitals. * Build skills of district managers in planning, needs-based budget

* Increased immunization of children under 2 years * Approved by the concemed District Nazim a pilot plan for rationalizing formulation, and personnel management (FY03-04).from 54% to 84% in FY05. health services in one district with a graded and referral-based system * Complete assignment of staff to the management cadre (FY03).

* Increased antenatal coverage of pregnant women and appropriate staffing nomis. * Implement the program to create additional positions of nurses toby health professionals from 34% to 45% in FY05. * Granted autonomy to tertiary hospitals with detailed rules of business. meet critical shortages at the distric and sub-district hospitals

* Increased coverage of TB control using DOTs * Fostered public-private partnership in health care delivery. (FY03-05).strategy from 20% to 100% by FY05. * Intrduced facility specific contract employment * Extend phased rationalization of health facilties to other districts

* Developed and strengthened training programs for Lady Health Workers based on detailed plans and mapping exercises (FY03-05).

Attachment 1 of Annex APage 4 of 8

Reform Area Acdons Taken Medium Term Measures for FY 2003-05and Outcomes

(LHWs) and community based paramedical workers, including approval * Complete a study on user charges with a safety net for the poor byto hire 1800 addibional LHWs. December 2002; put in place the safety net mechanism based onApproved PC-is for strengthening EPI (with GAVI support), TB, and the study (FY03).Malara control programs. * Continue to encourage community awareness/participabon and

private/NGO role in health care delivery, particularly in reproductivehealth issues and in the TB DOTS program (FY03-05).

* Expand use of LHWs to provide primary health care; increase thenumber of LHWs from current 7800 to 14000 (FY05).

* Extend TB DOTS coverage to an additional five districts (FY05).

5b -~~~~ ~~~ -;i7C ImpivIij s 1j,iitdo ri,ig FinancilAcciuintabflhfyj.-.-'n' Fiscal sustalnablllty* A predictable and sustainable fiscal outlook; * Approved a sustainable MTBF, FY 03-05. * Pro-poor allocatons/expenditures on track, as per agreed targets.

reduced debt burden; increased fiscal space; * Approval to establish a Budget Analysis Unit. * Implement FY03 Budget in accordance with MTBF.increased expenditure on priority service delivery * Revise/extend MTBF annually for following three years.areas; and increased fiscal discipline. * Increase fiscal space for the province by: increasing own revenues;

systematically increasing user charges on various services; andcontaining establishment budget.

Tax and User Charges Reform* Increased fiscal space. * Introduced an income-based Agriculture Income Tax (AIT). * Achieve tax collections, including AIT, as per agreed targets.* More efficient and equitable provindal revenue * Provincial taxes reduced from 22 to 9 to reduce multplicity. * Complete AIT study by December 2002, and initate by April 2003

system. * Restructured and enlarged the scope of the urban immovable property implementaton to strengthen AIT collecton.* Increased cost recovery. tax (UIPT); rating areas increased from 18 to 27. * Complete a study on taxaton potental in the province. (FY03).* Greater Reliance on own revenues. * Outsourced and hamionized Motor Vehicle Tax. * Increase own revenues, provincial tax, non-tax revenues and user

* Enforced GST on Services. charges by around 40% (FY05).* Established a separate Excise and Taxation (E&T) Department * Revise Stamp Duty Schedule. (FY03).* Increased irrigation water charges (Abiana) in FY02 by 25%. * Complete property tax survey (FY04).* Approved study of AIT administration system to be undertaken in FY03. * Develop a water rate fomiula based on water volume supplied,

starting with new schemes (FY04).* Continue to implement phased increase in water rates to make at

least irrigation maintenance self-financed (FY05).

Expenditure Reforms* Improved expenditure prioritsation; higher priority * Established a Road Maintenance Fund to receive user charges and * Restrict wheat procurement expenditures to maintenance of buffer

Attachment 1 of Annex APage 5 of 8

Rehrm Ama Acdons Taken Medium Term laums for FY 2003-05- and Outcomes

aloations to social services. finance road maintenance. stocks (FY03).* Allcations based on perfonnance and projected * Incrased the share of developnent expenditures in total * Confinue tD adequately finance the agreed program of sodal and

needs. expenditures/receW oher service (FY03-05).* Improved cost recovey. * Significantly reduced the wheat subsidy. * Continue to Improve sermice delivery and increase user charges for* Maintenance of public assets. * Established a General Provident and a Pension Fund to manage mads to make the Fund seff-finandng by FY05* Better demand management deferred liablites. * Continue to h asreaslmatn the rafio of development* Imroved service delivery. * Rationalized the development program by: reducing the throw forward of expenditures.

projects by 65%, and nunber of pmjects by 213. * Build up capital of Prvident and Pension Funds (FY04-05).* Freeze on now hinng, except fhr social sectors, continued.

hoces Refonms* Greater budgetary discipline; reduced red tape and * Compressed the current three Depatmental expenditure submissions * Iniffate preparaion of program and perfomrnance budgeting in a few

nultiple exercises; improved expenditure analysis into one. Departnents on a pilot basis(FY03).based on ecnomic functions. * Substituted one mid-term Budget review (excesses and surrenders) for * Expand perfommance budgesing to aDl Deparnents by FY 0.

the current two reviews. * Review and further simplify the budgeting process, including* Reduced the red tape by computerizing budget preparabon. computerization (FY03).* Revised policy and procedure for fimely release funds. * Refine the budgetary dassification and make it an integral part of

budget documents (FY03-05).* Indude economic dassification of the Budget in the Annual Budget

Statement (FY04).

Flscal Devolufon* Complete devolution of fiscal functions in line with * Appointed a Provincial Finance Commfftee. * Establish standing Provindal Finance Commission (FY03).

political and administative devolution. * KPP and SAP funds released according to formula-based albcations in * Approve Provincial Finance Awards (FY03).FY02. * Separate District and Tehsil budgets (FY03).

* Assigned adequate staff to districts for fiscal management * Review fiscal performance of districlstehsils each year and takesteps to imprve processes, allocation basis, staffing, and training(FY03-05).

* Allocate all development and non-salary funds according to formulabased allocations (FY03-05).

Publik fnancial Management andAccountabilfty* More reliable, comprehensive, and timely * Adopted a Financial Management and Accountability Reform Program * Appoint Provincial Financial Controller (September 2002).

information on provincial and district goverment (FMARP) that indudes: (a) 100% reconciled provindal and distnict * Complete PFM and prepare a time bound detailed Action Planfinancial transactions. *Pubric Financial Statements", (b) elimination of unidentified (FY03-04).

Attachment I of Annex APage 6 of 8

Reform Area Acftons Taken Medium Term Measures for FY 2003-05and Outcomes

* Improved financial management at all levels of expenditures and financing, (c ) strengthening of District Accounts * Introduce NAM with the PIFRA computerized system, in all districtsgovemnment Offices and below (d) implementabion of New Accounbing Model (NAM), (FY03-05).

* Increased credibility of provincial and bcal wth PIFRA systems, and (e) computerization of payroll. * Implement capacity development plan, induding appointment,govemment financial statements. * Decision taken to appoint Provincial Financial Controller. recruitment, and training of DAOs (FY03-05).

* Improved intemal controls, extemal audit, and * Provincial Public Accounts Committee (PAC) established and decision * Phased improvement in reconciliation of Provident Fund accounts,legislative oversight. taken to make it open to public. and all assets and liabilities to achieve 100% (FY05).

* More open and answerable govemment. * Decision to carry out a detailed Provincial Financial Accountability * Publish financial statements (half yearly from FY04 and quarterly* Public availability of financial informtiaon. Assessment (PFAA). from FY05) of district govemments (FY04-05).

* Upgraded the DAO position to grade 18, for all major districts. * Establish an intemal audit unit for each ministry/department (FY03-05).

* Amend/enact rules for timely submission of audit reports toprovincial and district PACs for timely review by them (FY03).

* Track auditors and PAC recommendations for implementationusing an MIS (FY03-05).

* The adhoc PAC commences sessions open to the public (FY03).* Annual implementabon review of PAC and DAC directives (FY03-

04).* Complete by December 2002 a review of the financial positon

induding any contngent liabilities of public enterprises, ABs, andsimilar bodies and publish their annual accounts with FY04 budget(FY03-04).

Procurement* Improved public procurement * New Procurement Ordinance legislating the fundamental principles of * Revise provincial procurement rules and manuals to: standardize* Shortened procurement periods and reduced good public procrement, approved by Govemor for enactment bidding documents, establish an effective mechanism to redress

irregularities and complaints. complaints, simplify the process, increase transparency and* Increased efficiency and transparency in efficiency, and introduce a code of conduct and ethics for public

procurement officials handling procurement (FY03).* Initiate procurement training programs for govemment staff (FY

03).

Autonomous Bodies (ABs)ZIPublic Enterprises (PEs)* Complete disinvestments; better utlizabon of public * Closed three Agricultural ABs (Agriculture Development Authority, Fruit * Reduce share holding to less than 50% by FY04 and complete

management capacity. - & Vegetable Board, and Co-op Bank). privabsation of Bank of Khyber (FY05), market conditions* No public sector role in providing goods and * Decision taken for privatsation of Bank of Khyber. permit6ing.

services; enhanced economic efficiency, and * Complete the legal dosure of three Agricultural ABs (FY03).

Attachment 1 of Annex APage 7 of 8

Reformn Ara Acdons Taken Medium Term Measures for FY 2003-05and Outcomes

reduced risk of fiscal drain. * Privatize small hydel projects (FY03-05).Transparency and Public Access to BudgetDocuments. * Decision taken to rake available the Budget document through an * Continue/improve public access to Budget documents and their

Full transparency of fiscal position and activities; authrized commerdal agent transparency (FY03-05).expanded inter-face of the govemment and the * Annual Budget Statement on the Website. * Improve coverage of fiscal accounts on the prvincial websitepublic. * Monthly Summary Fiscal Accounts on the Website. (FY03-04).

-. ~~ l- -m# a---- - - - -~~~~~~~i~~~i~~ ~~~ mPodig'sustainahi .Grot -- _f

Privafe Sector Development* Streamiined and smaller public sector agencies * Established a Private Sector Deregulabon Committee composed of

responsible only for promotion, facilitation, govemment, business, and public representatives to review the business * Complete a study on promobng private enterprise, including SMEs,necessary regulation, informtibon, and technical and investment environment and make recommendations. in the province (April 2003).assistance. * Completed integrationlmerger of various agencies relating to mining to * Implement steps to improve business environment, induding

* A more liberalized, vibrant private sector for improve focus, reduce establishment expenses, and expand exploration, developing a private sector strategy (FY03-04).promotion of growth and employment and reducfion leasing, and mine safety activies. * Review the performance of public sector technical / vocationalin poverty. * Established a Mneral Investment Facilitabon Authornly. schools and consider privatizing them (FY03-04).

* Increased investment, production/commerce, and * Established a Gemstone Policy and Mineral Promotion Committee. * Contnue to streamline and consolidate PSD activities and focus ontrade with Afghanistan. * Amended the Mining Concession Rules to allow entry of small-scale promoEton, faclitation, and safety regulation (FY03-05).

* Increased productivity and growth in agriculture entrepreneurs. * Complete the ongoing divestiture of unsuccessful industial estates,sector. * Converted the Sarhad Development Authority into an Investment PEs under SDA, and units under the Mineral Department and Small

Facilitation Authority for investnent prOmotion through a one-indow Industries Board (FY05).investment faciTty. * Complete and start implementing the agricultural strategy (FY03-

* Decision taken to develop an agricultural strategy to reduce rural 05).poverty, enhance productivity and value added of agriculture.

Road Service* Improved road service. * Established an autonomous Highway Authority, with public-private * Make the Authority fully responsible and accountable for building,• Lower maintenance cost of vehicles. oversight, for planning and managing provincial highways; managing rehabilitation, and maintenance of provincial roads.* Better demand management the Road Maintenance Fund to recover user charges; maintaining * Increase user charges in a phased manner, keyed to road usage* Self-financing of road maintenance. roads; and improving service derivery. and capacity to pay (FY03-05).

* The maintenance program to cover at least 15-20% provincial roadnetwork each year (FY03-05).

* Make the Road Fund self-financing (FY05).

Attachment 1 of Annex APage 8 of 8

Reform Area Acbns Taken Medium Term Measures for FY 200W5and Outcomes

Al=~~~~~~~~~~~~~~~~~ r-=2--=r -iin 16=i ZE-M hPvoiSen RX Im hi enta6n.-,. --' --Monitoring & Evaluation (M&E) Mechanisms* A more informed governance. * Completed the 40-variable socio-economic survey (NWFP Mutiple * Repeat the MICS every 3-4 years (FY05).* Better targeting of poverty and social sector Indicator Cluster Survey (MICS), 2001). * Use the survey results for policy direction, poverty programs, and

programs. * Approved a program for independent third party monitoring and user better service delivery (FY03-05). - -* Better tracking of perfomiance. surveys. * Undertake user surveys annually (first survey initiated October

2002), and disseminate findings publicly (FY03-05).* Collection of reliable provincial economic data by the Planning

Department/Federal Bureau of Statistics (FBS) (FY03-05).* Prepare and make public annual M&E reports by Reform Units

(FY03-05), and post on website.Reform Implementation* Successful implementation of reforms. * Established an Economic Reform Unit in the Finance Department * Monitor reform implementation as per the program, suggest any

reporting to the Govemor/Chief Executive on a quarterly basis. adjustments, and help prepare the rolling 3-year MTBF (FY03-05).Approved a communication and dissemination strategy on reform * Implement communication and dissemination strategy.implementation.

Attachment 2 of Annex APage I of I

Monitoring Indicators

Areas and Indicators End-Period Targets (FY05) Institutional Arrangementsfor Monitoring

1. Overalla) Provincial GDP growth rate 4-5 % Planning and Developmentb) Poverty (caloric) 38 % (down from 44% in FY99) Department; Source for

Poverty Data: PIHS Surveyevery two years

2. Public Financea) Provincial Tax Revenue Growth 15% annual growth in FY03; 10% p.a. in FY04 & 05. Quarterly Fiscal Monitoringb) User charges 75% increase over FY03-05 Reports, Annual Budgetc) Pro-poor l-PRSP expenditures From 29% of expenditures in FY02 to 35% in FY05 Statements of Department ofd) Development expenditures From 26% of total expenditures in FY02 to 31 % in Finance, and Annual Budgets

FY05e) Maintain timely comprehensive and 100% computerizaton and reconciliation of civil Department of

reconciled fiscal data using the accounts. Finance/Accountant General'sNew Accounting Model Office

3. Social Sectors'a) Gross primary enrollment rate 85% (up from 70%) PIHS, Annual EMIS,MICS,b) Gross primary enrollment rate 84% (up from 54%) Annual Monitoring Reports

female prepared by the Educationc) Reduction in primary school 35% (down from 45%) Sector Reforms Unit, and

dropout rates Third Party Surveyd) Girls school provided essential 100% by FY03 -do-

physical facilities -do-PIHS, Annual HMIS, MICS,

e) Full immunization % of children less 80% (up from 54%) Annual Report of the Healththan 2 years Sector Reform Unit and Third

f) % of population with access to TB 100% (up from 20%) party SurveyControl using DOTS -do-

g) Antenatal coverage of pregnant 45% (up from 34%) -do-women by health professionals -do-

h) Contraceptive Prevalence Rate 35% (op from 21%) -do-4. Infrastructure

a) Population with access to safe 65% (up from 58%) PIHS, MICSdrinking water

b) Proportion of roads classified in poor 50% (down from 80%) Annual reports of CWD, andcondition. Independent surveys

1 The baseline data is based on PIHS, EMIS and HIMS. During next year, GoNWFP will revise the targets taking intoaccount the new baseline based on the MICS 2001 report, once its findings are agreed by all stakeholders. In addition,for Education, it will target and track the net enrolment targets based on the MICS.

Annex BPage I of 9

POVERTY AND SOCiAL DEVELOPMENT IN NWFPI

1. Poverty in NWFP should be understood in the broader context of poverty in Pakistan.2 Inaddition, understanding issues specific to poverty in the province also requires examining theconcentration of poverty across areas within NWFP, which will help inform policymakers by identifyingpriority needs and target groups for intervention. That said, this Annex is restricted to disaggregatingpoverty at the regional (rural/urban) level within NWFP, recognizing that the important task of analyzingdistrict-level poverty and exploring variations across districts must await the availability of survey datathat is representative at the district level. The recently conducted Multi-Indicator Cluster Survey (MICS)2001, is a first attempt to get district-level representative estimates in the NWFP. The preliminary resultsform MICS show that there is considerable variation within the province in terms of poverty and socialindicators (see Table 2 Annex J). Districts of Kohistan, Upper Dir, Bunner, Batagram, Shanga and Tankare among the poorest six districts in NWFP, ranking extremely low in terms of social indicators. Moredetailed assessment of within-province poverty and social development would be possible in the future,once the MICS data is available for analysis and the survey is repeated every 3-4 years as planned.

2. Among the major provinces of Pakistan, NWFP is by far the poorest, with an overall incidence ofpoverty substantially higher than that for the country as a whole (poverty headcount for NWFP is 44%,compared to 33% for Pakistan). As shown in Table 1, both urban and rural poverty in NWFP are higherthan that for the 'entire country (poverty headcounts for urban and rural NWFP are 31% and 47%respectively, compared to 24% and 36% respectively for all of Pakistan). Moreover, depth and severityof both urban and rural poverty, measured by poverty gap and squared poverty gap respectively, arerelatively higher for NWFP than for the rest of the country. Consistent with the poverty estimates,average per-capita consumption expenditures are also lower for NWFP vis-a-vis the rest of the country.Inequality in NWFP, as measured by the gini coefficient for per equivalent adult consumption, is verysimilar to that for the country, in rural and urban areas alike.3

3. The overall picture of consumption /income poverty in NWFP thus corresponds closely with thatof Pakistan as a whole-higher concentration of the poor in rural areas, lower average consumption levelsin rural areas, and relatively higher inequality in urban areas. Moreover, as Table 2 shows, the 15percentage point rural-urban gap in headcount rates for NWFP in 1998-99 is higher than that for thewhole of Pakistan and second only to Sindh among all provinces. The high rural-urban gap has all themore significance for overall poverty in NWFP, since the province is much more rural than the country asa whole-around 85% of NWFP's population live in rural areas, compared to about 72% of the country'spopulation. Meanwhile, the rural areas of NWFP account for around 90% of the total number of poorpeople in the province.

' This Annex draws heavily on the work done under the Bank's AAA Poverty in Pakistan in the 1990s: An Interim Assessment,draft report 2001. Some of the social indicators in this note differ from those noted in Annex G and H, which are based on thePakistan Integrated Household Survey (PIHS) reports because of differences in definitions used for the same indicators. Forinstance, in this Annex, literacy ratios are for population 15 years and above, whereas the PIHS use population 10 and above fortheir calculations.2 The source for all data, unless otherwise specified, is the Pakistan Integrated Household Survey (1998/99).3 Note that overall gini for NWFP is slightly lower than that for the country, while urban and rural ginis are identical; thisapparent paradox is caused simply by the fact that NWFP is significantly more rural (in terms of share of population) than thecountry as a whole, which means that rural gini is weighted more in the average gini for NWFP than for Pakistan.

Annex BPage 2of 9

Table 1: Mean Consumptlon, Inequality and Poverty: 1991/99

Urban Rural Overall

1. Mean per-capita monthly consumption (current Rs)

All Pakistan 1193 819 924

NWFP 1071 735 785

2. Inequality (Consunmption Gini4)

All Pakistan 0.35 0.25 0.31

NWFP 0.35 0.25 0.28

2. Poverty Headcount (%)

All Pakistan 24.2 36 32.7

NWFP 31.2 46.5 44.3

3. Poverty Gap

All Pakistan 5.0 7.9 7.0

NWFP 6.6 10.5 9.9

4. Severity of poverty (squared poverty gap)

All Pakistan 1.5 2.5 2.2

NWFP 2.2 3.4 3.2

4. Table 2 shows how Table 2: Incidence of Poverty by Province and Region

poverty in NWFP has (199899) (199091)

changed over the decade. Urban Rural Overall Urban Rural Overall

From 1990-91 to 1998-99, Punjab 26.5 34.7 32.4 29.4 38.5 35.9

urban poverty in NWFP Sindh 19.0 37.1 29.2 24.1 30.8 27.6

declined substantially (by NWFP 31.2 46.5 44.3 37.0 40.6 40.0

close to 6 percentage 28.4 24.0 24.6 26.7 20.9 22.0points)-even more than the Balochistan

decline in national urban Azad J & K 14.5 15.7 15.6

poverty. Meanwhile, Northern Areas 22.6 37.9 36.5

incidence of poverty in rural FATA . 44.5 44.5

NWFP increased by more National 24.2 36.0 32.7 28.0 36.9 34.0than 4 percentage points overthe same period, although rural poverty headcount for the country actually fell slightly over the sameperiod. Unlike Punjab, the largest and most populated province in Palistan, where rural and urbanpoverty alike have shown modest declines over the decade, poverty reduction in the 1990s in NWFPappears to have occurred only in urban areas while rural areas have become poorer on the average.However, it is also important to note that notwithstanding the decline in urban poverty in NWFP duringthe decade of the 1990s, urban areas in this province still remain the poorest in the country by a largemargin.

Characteristics of the Poor

5. Understanding the nature of poverty requires looking beyond the limts of poverty as defined bylack of consumption, and examining the characteristics of poor households to identify the non-incomedimensions of poverty. In this context, it is useful to draw correlations between consumption/incomepoverty and various household characteristics. Although such correlations will not be enough to establish

4Gini coefficient for per equivalent adult consumption expenditure (using equivalence scale: I child = 0.8 adult).

Annex BPage 3 of 9

a causal relationship, they do help address the question of who the poor are, as well as provide roughindications about why they are poor.

6. Firstly, the poor are more likely to live in larger Table 3: Poverty Headcount by Household Size

households (Table 3). Poverty incidence is found to CategorIes: NWFP (1998-99)increase rapidly as household size increases: from a Household Size Urban Rural Overall

headcount rate of well below 20% for households of size 1-2 0.0 2.7 2.3

5 and below, to 34% for those of size 6 to 7, and 57% 3-5 8.4 20.8 18.9

for those of size 11 and above. While these simple . .calculations do not take into account the well-known 6 18.3 37.2 34.0

"scale factor" in consumption, which tends to 8-10 44.0 49.9 49.1

underestimate the per person consumption in large 11-15 40.1 60.0 56.9

households vis-a-vis smaller ones, the differences inpoverty incidence in Table 3 are large enough to reflect >16 39.4 61.6 58.6a true negative correlation between household size andpoverty.5

7. Poverty is expected to be strongly associated with lack of asset ownership, an importantcomponent of which is agricultural land in rural areas. The average size of agricultural land owned bypoor households is 0.25 hectares in rural NWFP, compared to 0.71 hectares for the non-poor. As mightbe expected, and following the pattern seen in national figures, rural poverty headcount falls as the size ofland holdings increases. However, the decline in poverty incidence is marginal as landholdings increaseupto 2 hectares-headcount falls from 48% among landless households to 44% among those with 1 to 2hectares of land-and then sharp, to 33% among those with 2 to 4 hectares, and 12% among those withmore than 4 hectares of land (Table 4). This suggests that small and marginal landholders are almostequally poor as those who own no land, while poverty among large landowners is significantly lower.

8. There are a few observations thatcan be made on comparing the pattern Of Table 4: Rural Poverty Headcount by Household Land Ownership (I998landholdings in NWFP vis-a-vis the rest of -% of Populaton Inthe country. Table 4 suggests that inequality Land Ownership Poverty H [eadcount % artoi

in land ownership in rural NWFP is lower Category Rural Rural Rural Rural________________ Pakcistan NWiFP Pakistan NWIP

than the average for the rest of the country.For the country as a whole, 61% of the rural No Land Owned 40.3 47.7 61.4 54.9

population belongs to households that own >0- I hectare 33.8 44.9 18.4 35.6

no land, while 7% has landholding of 4 >1 -2 hectare 29.5 43.6 5.9 4.4

hectares or more. The corresponding >2 - 4 hectare 22.4 33.3 7.0 3.7

numbers are 55% and 2% for rural NWFP,suggesting that land ownership is less I4 hectre 12.8 11.5 7.3 1.5

concentrated there than for the rest of the country. Moreover, as Table 4 shows, a very large majority oflandowners (36% of the rural population) in NWFP belong to the category of small and marginal farmers,namely those who own between 0 and I hectare of land, compared to the country on an average (18% ofthe rural population).

9. The relatively low land inequality in NWFP also comes through from looking at averagelandholdings of the poor and the non-poor. The poor, on the average (median), own 0.25 hectares of land

5 The "scale factor" of the household is not taken into account, since consumption is computed on a per equivalent adult basis. Inother words, the possibility that larger households enjoy economies of scale in consumption would mean that these may actuallybe less poor than the calculations here reveal. Adjusting for this kind of bias, however, is difficult, since it will require detailedknowledge of consumption of individual household members - not available from standard household expenditure surveys.

Annex BPage 4 of 9

in rural NWFP, compared to 0.71 hectares for the non-poor, while the corresponding figures for thecountry are 0.4 hectares and 1.4 hectares respectively. Thus, lower inequality aside, both the poor andnon-poor in NWFP own less land than the same groups in the rest of the country on the average, a factthat is entirely consistent with the previous observation that there are relatively few large landowners inNWFP.

10. The implications of less concentration of land ownership, and the prevalence of smalllandholdings for agriculture productivity and poverty is important to consider, particularly in the contextof the high rate of rural poverty observed in NWFP. This is however too complex a question and needs tobe one of the subjects of a detailed analysis of the rural economy of NWFP. Such an analysis should alsoseek to identify the key constraints to rural incomes and productivity in the province - whether the issueof access to land is of crucial importance, or whether other factors, like lack of access to factors likeinfrastructure including irrigation and credit, play equally critical roles.

11. Poverty, as expected, is strongly associated with lack of human capital, measured by theeducation and literacy status of the head of the household. Poverty headcount among those living inhouseholds with literate heads is around 54% in NWFP, compared to 26% for households where the headis not literate-a difference of 28 percentage points which is even greater than the 21 point differenceseen for the country as a whole. Moreover, poverty headcount in NWFP as well as in the country as awhole declines steadily with increase in the education of the head of the household (Table 5). Finally, itappears that for NWFP and the entire country alike, poverty declines more steeply with literacy andincreased levels of education - especially for relatively higher levels of education of middle school andabove - in urban areas than in rural areas. This is as expected, since returns to education are likely to behigher in urban areas, where better opportunities to utilize the skills provided by education are likely toexist.

Table 5: Poverty Headcount by Literacy & Education of Household Head (1998-99)'

Urban Rural Overall

All Pakistan NWFP All Pakistan NWFP All Pakistan NWFP

Non-liteate 39.5 43.9 42.9 54.8 42.3 53.6

Literate 15.4 18.7 25.1 27.9 21.3 25.9

Never attended school 38.8 44.0 43.3 54.8 42.5 53.6

Cl. 1-5 (primary) 26.8 41.2 30.7 33.7 29.6 34.9

Cl. 6-9 (middle) 18.7 30.9 25.8 34.2 23.3 33.5

Cl. 10-II (matric) 13.0 12.2 20.0 26.7 16.8 23.2

Cl. 12 (intermediate) 8.2 3.1 17.6 21.2 12.1 14.8

College & above 4.5 0.6 6.5 9.8 5.3 6.3

a) Literacy rates have been calculated here for population 15 years and above.

12. Occupational status of the household head is another important factor likely to be associated withpoverty (Table 6). In urban NWFP, employment of the household head as related to poverty does notshow clear patterns, partly due to lack of detailed employment data. One observation that stands out isthat a much larger proportion of households in the bottom quintile of expenditure have the head of thehousehold working as paid employees, than for the urban population as a whole. This may be because alarge proportion of the paid employees in the urban sector are engaged as wage labor in the informalsector, which is known to be a significant employer in urban areas.

Annex BPage 5 of 9

Table 6: Distribution of Population by Expenditure and Occupation of Household Head (NWFP) (%)

.Own Unpaid Owner Owner Owner OwnerConsumption Not EmI account faid Paid Cultivator Cultivator Cultivator Cultivator Share-Expenditure Group worMdng mployer worker/self- worier employee (<1 hec (1 to <2 bec (2 to <4 hec (>4 hec cropper

employed land) land) land) land)

RURAL

Bottom Quintile 1 20.1 0.3 16.9 0.7 27.3 24.8 0.7 1.4 0.0 7.9

Quintile 2 26.7 1.6 16.5 0.5 28.8 13.3 2.2 1.2 0.0 9.2

Quintile 3 18.7 1.7 15.0 0.7 31.2 18.2 5.1 1.5 0.4 7.6

Quintile 4 22.6 1.3 15.4 0.5 28.3 22.3 1.3 0.7 0.4 7.3

Top Quintile 5 35.6 1.7 15.8 0.6 22.0 12.8 2.0 1.1 1.2 7.2

Overall population 24.7 1.3 15.9 0.6 27.5 18.3 2.3 1.2 0.4 7.9

Mean Monthly p.c. 828 1067 720 661 699 669 688 703 1467 656Consumiption (Rs.) __ _ _ __ _ _ _ _ _ ___ _ _ _

URBAN

Bottom Quintile 1 23.3 0.1 25.9 0.0 47.0 1.4 0.5 0.0 0.0 1.8

Quintile 2 19.7 0.0 25.9 0.7 39.1 11.5 1.2 0.0 0.0 1.9

Quintile 3 33.9 2.6 21.4 0.0 35.6 2.7 1.5 0.0 0.0 2.3

Quintile 4 30.6 1.5 30.4 0.0 30.0 2.5 0.0 0.4 0.0 4.7

Top Quintile 5 28.1 3.9 29.1 0.0 37.5 0.4 0.0 0.0 0.2 1.0

Overall population 27.1 1.6 26.5 0.2 37.9 3.7 0.7 0.1 0.0 2.3

Mean Monthlyp.c. 1137 1267 1106 706 1028 724 672 1385 3168 868Consumption (Rs.) . ..._ ,__ __

13. In rural NWFP, the poor households are relatively more likely to be headed by individualsworking as a paid employee, a majority of whom are likely to be wage labor in farms, or as an owner-cultivator with less than I hectare of land. For instance, while 25% of the bottom expenditure quintilelives in households whose head belongs to the latter category, only 13% of the top quintile does so.Again, however, the pattern of employment does not tell a clear story of relationship betweenemployment and incidence of poverty.

14. The poor in NWFP also suffer from lack of connectivity to a number of services, which has directimplications for their human development. As Table 7 portrays, the poor have relatively low access tosafe drinking water and sanitation facilities: they are less likely to use closed sources of drinking waterand be connected to a drainage system. As expected, the poor are also less likely to be connected toelectricity.

15. Availability of all these amenities is characterized by large rural-urban gaps in NVWFP, just likefor the country as a whole (Table 7). Also, in terms of access to safe water and connectivity to drainage,urban and rural areas alike of NWFP fare significantly worse than the country as a whole. While 58% ofthe population in NWFP use piped or closed sources for drinking water, 80% of the country do so; while35% of NWFP is connected to any form of drainage system, the same is true for 47% of Pakistan. Lowaccess to critical amenities in NWFP-combined with the fact that the poor suffer from especially severelack of connectivity to these facilities, and also that poverty in this province is higher than the country

Annex BPage 6 of 9

average - would necessarily mean that income poverty is also associated with a high degree of health riskin the province. That said, as Table 7 shows, in terms of connectivity to electricity, NWFP does betterthan the average for the rest of the country in both urban and rural areas.

Table 7: Access to Amenities, Induding Sanitation, Drinidng Water, Electricity, etc. (1998/99)(% of Po ulation with Access In Each Case)

Cloed/ipe Sorce Connected to Connected to Net

for Drinidng Water' Any Drainage Electricity Literacy NetSystem7 Rate

NWFPPoor 50.1 28.3 72.1 22.7 38.0

Non-poor 64.7 40.2 81.7 40.7 58.9

Rural 53.6 27.3 74.5 30.2 45.8

Urban 85.4 80.1 94.6 50.2 66.5

Overall 58.3 35.1 77.5 33.4 48.6

All PaldstanRural 74.1 30.7 63.3 33.5 45.2

Urban 94.2 89.1 92.4 63.1 66.5

Overall 79.8 47.1 71.5 42.5 50.5

Non-Income Dimensions of Poverty: Human Development

16. Poverty is multi-dimensional, manifested not only in low levels of consumption, but also that ofhuman capital, exacerbated by the inability to undertake investments to improve skills. Exploring thehuman dimensions of poverty would thus be critical in understanding not only the nature and extent ofdeprivation in NWFP, but also the extent to which such deprivations translate into lack of capability toenhance future economic opportunities. As might be expected, the poor in NWFP are characterized byrelatively low levels of human development, as indicated by various education and health indicators.Table 7 shows that in urban and rural areas alike, poor households have lower literacy rates amongmembers (23% of all poor are literate, compared to 41% of the non-poor), and lower net primaryenrollment rates (38% among the poor, compared to 59% among the non-poor).

17. It is also important to note-from Table 8-that for NWFP, almost every education or femalehealth indicator is found to be lower than the corresponding country average, with the sole exception ofmale net primary enrollment. For instance, female literacy rates in rural and urban NWFP are 11% and35% respectively, compared to the already low country averages of 17% and 52% respectively; pre-natalconsultation rates in rural and urban NWFP are 20% and 36% respectively, compared to country averagesof 22% and 60% respectively. As far as rural-urban gaps are concerned, they exist for all indicators inNWFP, but tend to be smaller than those for the country as a whole. This should however not beconstrued as a positive feature, since the smaller gaps in NWFP are mostly caused by its urban areaslagging behind the rest of the country, rather than by the rural areas doing better than the rest of thecountry.

6 Includes piped water, and outside, closed water sources. These sources of drinking water are potentially safer than thealtemative: "outside, open" source. However, access to potentially safer sources does not guarantee safety of the drinking waterfrom these sources. The proportion of population with using piped/outside open sources is thus merely indicative of the?roportion of the population with access to safe drinking water.

Includes underground, as well as open drain systems.

Annex BPage 7 of 9

Table 8: Selected Human Develo ment Indicators (1998-99)Mate Female Male Net Fermle Net Pre-natal Ever UseMale Fernale Primary Priy Consultation Contraception (% of

Literacy Literacy Enrollment Enrollment Rate (% of Married Women ofRate (%/.) Rate (M) Rate (%) Rate (o) Pre gancies) A e 15-49W n

Rural:NWFP 51.5 11.4 57.9 32.8 19.6 13.9

Pakistan 51.0 16.8 53.6 36.4 22.0 14.3

Urban:

NWFP 65.5 35.2 73.4 59.3 36.0 27.2

Pakistan 73.2 52.3 68.5 64.6 60.1 34.1

Overall

NWFP 53.8 15.1 60.0 36.4 21.6 15.8

Pakistan 58.0 27.2 57.2 43.6 31 .19.5

a) Literacy rates have been calculated here for population 15 years and above.-b) In Annex G, the contraceptive prevalence rate is shown as 21% which is based on a family planning survey conducted in 2001.

18. Comparing the education indicators of NWFP with the country averages, it is also apparent thatwhile adult literacy rates in the province (33% on the whole) are found to lag far behind those forPakistan (43%), the gap with the rest of the country is marginal for enrollment rates (49% for NWFP, and51% for Pakistan). This suggests that although the spread of education in NWFP has historically beendeficient, there is reason to be optimistic about the future, as rising enrollment rates close the gap ineducational attainment between the province and the rest of the country. However, this optimism must betempered by the observed gender gaps: while male net primary enrollment rates for NWFP are higherthan the corresponding country averages for rural and urban areas alike, female enrollments still lagbehind those for Pakistan.

19. Gender gaps are significant for all relevant indicators in NWFP, as they are for the country as awhole. Following the pattem seen in the country, gender gaps tend to be wider in rural areas than inurban areas of NWFP. Moreover, gender gaps in NWFP are found to be more severe than for the countryas a whole. For instance, the gender gap in literacy rates in rural and urban NWFP are equal to 40 and 30percentage points respectively, compared to corresponding gaps of 34 and 21 percentage points for thecountry. The fact that a similar picture emerges for primary enrollment rates also suggests that underpresent conditions in NWFP, gender gaps in educational attainment are likely to persist, and even widenin the future.8, unless corrective action is taken as being proposed under the PRP.

20. Further analyses have revealed that gender gaps in Pakistan, as well as for individual provinces,tend to be similar for both poor and non-poor households. However, since educational attainment amongthe poor is generally low in the first place, large gender gaps necessarily translate into particularly lowliteracy and enrollment rates among poor women, with adverse implications for future humandevelopment - since women's education is known to be especially critical for child health and education.

21. Looking across the spectrum of human development indicators, a consistent pattem that emergesis one of rural and urban areas alike in NWFP comparing poorly with the corresponding areas of the restof the country on the average. The story of NWFP lagging behind on most indicators of humandevelopment is entirely consistent with that of income/consumption poverty, where both urban and rural

sThe gender gap in net primary enrollment rates in rural and urban NWFP are equal to 25 and 14 percentage points respectively,compared to corresponding gaps of 18 and 4 percentage points for the country

Annex BPage 8 of 9

areas of NWFP are found to be poorer, on the average, than corresponding areas in the country taken as awhole.

Access to Schools and Health Facilities in Rural NWFP

22. Among the number of factors that may constrain human development in rural NWFP, access tofacilities is potentially important, and also measurable from existing data sources. As Table 9 shows, onavailability of education facilities in rural areas, NWFP in fact fares rather well, not only relative to ruralPakistan, but also in absolute terms. For instance, for more than 91% of the population of rural NWFP,the nearest primaryschool for girls is I km Table 9: Access to Schools In Rural Areas (% of Rural Population) (1998-"99)'

or less distant from thevillage they live in, Punlab Slndh NWFP Balochistan Azad J&K paidstan

compared to 79% of the Nearest Girls' Prim Schoolpopulation of entire InPSUor<=] kmdistancel° 90.2 45.6 91.1 41.3 100.0 78.7rural Pakistan.Moreover, almost the Distance >I & <6 km 7.2 22.0 5.7 6.1 0.0 9.7entire rural population Distance 6 km 2.6 32.4 3.2 52.7 0.0 11.6

of NWFP lives in Nearest Boys' Prim School

villages where the In PSU or <=l km distance 95.0 94.8 99.6 90.5 100.0 95.4nearest primary school

nearet prmary choo Disance 1 & 6 km4.0 4.8 0.4 3.5 0.0 3.4for boys is 1 km. or less Distance >l & <6km

distant. Distance km6 k 1.0 0.4 0.0 5.9 0.0 1.1

23. On access to ruralhealth facilities, a similar Table 10: Access to Health FadlIties In Rural Areas by Province (1998-99)

story prevails for rural NWFP % of Rural Population with Health FadlIties In % of Rural PopI.vis-a-vis the rest of the PSU/village with Familycountry (Table I10). By any Hospital, Hospital, Dispensary, Any Health Planning Facility

Dispensary or Clinic or Health Facility or within 3 km. ofdefiition of health facility, Clinic" Worker Worker' 2 PSU

rural NWFP enjoys betteravailability than rural Punjab 38.2 54.4 70.8 79.6Pakistan on the average.13 Sindh 36.9 56.5 62.5 65.3

Around 76% of the rural NWFP 54.3 63.5 75.9 72.1

population of NWFP lives invillages with some kind of Balochistan 54.9 58.1 60.4 60.9health facility or health Azad J & K 55.9 68.1 71.3 81.7

worker, which is the highest Rural 42.0 5735

among all provinces. Access Pakistan 56.4 69.1to family planning services is however slightly low for NWFP than for rural Pakistan as a whole.

9 Access to schools here refers to the presence of any school (public/private/NGO/religious). The proportion of public schools,however, in rural areas is high in the total number, so that the access figures in Table 9 do not change much if only public schoolsare included.' PSU refers to Primary Sampling Unit of the survey, which in rural areas is the village." All public and private hospital, dispensaries and clinics (including BHUs, RHCs, Mother & Child Clinics, and Famnily WelfareClinics).12 Includes private practitioners and nurses13 Various definitions of health facilities include combinations of hospital, dispensary, clinic, health worker, private practitioners,and nurses.

Annex BPage 9 of 9

24. Thus on the whole, rural NWFP compares well with the rural parts of the country as a whole interms of incidence or availability of health and education facilities. This is encouraging by itself, and canbe expected to lead to better education and health indicators in the long run. At present however, therelatively high availability of facilities does not appear to translate into commensurate outcomes in healthand education where, as seen above, NWFP tends to lag behind the rest of the country. While the higher(relative to the country) rural male primary enrollment rate in NWFP is consistent with the almostuniversal availability of male primary education, female primary enrollment in NWFP lag behind ruralPakistan, in spite of far higher incidence of girls' schools in the province.

25. This apparent puzzle may be explained by a number of factors. Social and cultural mores,particularly as they relate to demand for girls' education or use of health services for females, may play arole; lack of income or wealth may also depress demand for education.14 Equally important is the factthat the figures listed above are but imperfect measures of access. Firstly, the mere presence of a facilityis not enough to guarantee quality, or even that the facility is functional. Quality problems in educationand health facilities, according to a number of studies, are rampant in Pakistan, and the conditions inNWFP are similar which can be ascertained only after careful study. Secondly, these measures do notaccount for the exclusion of social groups, which are also likely to have high concentration of poverty,from services and facilities. Both these problems can significantly reduce the effectiveness of services forthe poor and disadvantaged groups, thereby affecting their potential to develop skills and enhance futureeconomic opportunities. Recaping the above, the PRP is attempting to address the quality andgovernance aspects, to improve service delivery of education and health.

14 Regression analyses have shown household's economnic status to be an important determinant of school participation, for entirePakistan and individual provinces alike.

Annex CPage I of 6

DEVOLUTION AND INTER-GOVERNMENTAL FISCAL FRAMEWORK FOR PAKISTAN AND NWFP

1. This note presents intergovernmental arrangements in Pakistan as of May 2002 with particularemphasis on the situation of NWFP. We present the intergovernmental arrangements, divided in threeparts: institutional framework, responsibilities/expenditures, and revenues.

Institutional Framework

2. Pakistan is a two-tier federal state with 4 provinces Punjab, Sindh, North -West Frontier Province,Balochistan), various special areas (tribal-FATA, northern) and a federal district (Islamabad). Localgovernments are established provincially through local government ordinances. A new set of localgovernments were created under the Local Government Ordinance (LGO) 2001 which replaces the LGO1979. The changes included: (i) the abolition of three levels of provincial administrative units, divisions,districts and tehsils and of the existing municipal bodies (municipalities and towns); and (ii) the creationof three country-wide levels of local governments: districts (called city districts in the four provincialcapitals) tehsils/talukas (called towns in the four city districts),and union councils. There are alsocantonment boards that administer the civilian part of military cantonments.

3. The three new types of local government bodies are not a legal hierarchy, but are linked as apolitical set-up as follows:

* Each Union council is composed of 21 directly elected members elected in a multi-memberconstituency on a non-party basis.

* The Nazim and Naib Nazim (mayor and deputy mayor) are elected on a joint ticket.* The Nazim of the Union Council then becomes e.x-officio a member of the District council.* The Naib Nazim of the Union council becomes ex-officio a member of the Tehsil council.

The remaining 19 seats on the Union Council are allocated as follows:* Twelve muslim seats, four of which are reserved for women.* Six seats for peasants and workers, of which two are reserved for women.* One seat for minority communities, where appropriate.

4. The Union Councils councillors are the Electoral College for the District/Tehsil councillors atlarge and the District (Tehsil) Nazim and Naib Nazim, none of which can be Union Council councillors.District (TehsilVTown) councils arecomposed of the Union Council Nazims Elections to Local Bodies In NWFP(Naib Nazims). Seats have been reserved Elections to Union councils took place on four dates inwithin District and Tehsils Councils for various districts: December 3l , 2000; March 2l , 2001; May 31,women such that women represent 33% of 2001; and July 2nd 2001.the total number of Union Councils in theDistrict, and 33% of the total number of These were followed by elections of councilors at large

and Nazims/Naib Nazims at the District and tehsil levels inUnions in the Tehsil. In addition, 5% of August/September 2001. They were held in a fair and impartialDistrict and Tehsil seats have been reserved manner with little violence involved; were contested by a largefor peasants (countryside)/workers (cities), number of newcomers to politics at the Union Council level,and 5% for minorities. Thus, overall, District including women and peasants-workers. While the significantcouncils and Tehsil councils are made up of political office of district Nazim and Naib Nazini were in manycouncis andTehsi councls ar madeup of cases held by someone with previous political experience, many ofabout 2/3 directly elected members and 1/3 those elected as Union councillors were often new entrants toindirectly elected, including the two most politics - many coming from community and NGO backgrounds.powerful ones, the Nazim (Mayor) and theNaib Nazim (Deputy Mayor).

Annex CPage 2 of 6

5. These local governments are supported by civil servants posted to districts and paid by theprovince out of a notional district budget wage item. Staff appointed to District governments is drawnfrom both Federal and provincial cadres. The Senior Officer in the District is the District CoordinatingOfficer (DCO) who replaces the former Deputy Commissioner (DC), and, in a key change, now reports toan elected politician, the Nazim. The majority of DCOs are drawn from the DMG (District ManagementGroup) of the Federal Civil Service. Nazims may request the transfer of a DCO. Below the DCO is anadministrative structure of 10 to 12 Executive District Officers (EDOs), who are responsible for varioussectors. For the EDOs, the key change is that they now report to the DCO and not to the line ministries inthe former divisional/provincial hierarchy.

Responsibilities and Expenditures

6. Responsibilities of thefederal government and the Table 1. Federal and Provincial Powers

provinces are set out in the S a Pvc Pervice

1973 Constitution of Pakistan e R Efena i

under Article 70(4), Fourth ~ ~ ~ Posts and Telegraphs

Schedule. One finds a list of 7j,-I Ft ERnad aff ais

federal powers (in two parts) Freign Exchand eand a list of joint powers for b ForeigExchange

the federal and provincial 2 r Lnstitutes for Research

orders of governments. Such a Federal nment I Ports and Aerodromes

list is called a concurrent list in J t i $ ShippingBritish type constitutions; in > Stock ExchanResthis case the federal G oroI tloical Surveys

govemment has paramountcy, M MXteorologicl Surveys

which means that in case of .Railwas

conflict federal legislation Mineral OInd ustries

prevails. Provinces haveresidual powers. There is no IF ~~~)~J~I Population Planning

Curriculum Developmentlist of exclusive provincial Sylus Planningpowers but some mention of .. r P ovn t Ti Centers of Excellence

them in the two lists (as o rnments Tourism

exceptions). Table I Social Welfare

summarizes the constitutional . 4j,j 4 i . pVocational/Technical Training

Q, l g I7 Historical Sites and Monuments

7. The powers of . Z Law a OrJustice

districts, tehsils/talukas, and t$IL j 4 , 1 Tertiary Health Care and Hospitalsunion councils are described in 'rf Highways

Table 2. It shows that districts Princo rna Urban TransportV4l'I,~ Secondary and Higher Education*are mainly responsible, for yjo 4 Agricultural Extension

human capital type services, Fertilizer and Seeds Distribution

education and health, while Lrrigation *Land Reclamationatehsils and, to a lesser extent According to Federal Legislative List; b' According to Concunrrnt Legislative Listunion councils, are responsible The federal govemment through the University Grants Commission (UGC) funds University

for the provision of rhunicipal Education, but administrative control is provincial govemments.type services. *- Development of irrigation is a federal subject.

Annex CPage 3 of 6

Table 2. Responsibilities of Districts, Tehsils, and Union Coundis, Paidstan, 2002

Responsibility District Tebsil Union CouncilEducation Primary and secondary education, Literacy X XHealth Dispensaries and local hospitals X XRoads District roads Local roads and street Local streetsWater X Water supply systems Wells and PondsSewers and Sanitation X Yes XFire services X Yes XParks playgrounds X Yes YesAnimals X Slaughterhouses, Fairs Cattle pounds and grazing areasCultural and sport services X Fairs, cultural events LibrariesStreet services X Street lighting ,signals Street lightingVaria x Register births and deathsSource: Analysis of Local Government Ordinance 2001. An X indicates no rcsponsibilities.

Revenues

8. The financing of the various levels of governments in Pakistan is somewhat complex due to thelarge use made of intergovernmental transfers. Figure I summarizes the main elements as of 2002.

Provincial Revenues

9. The main source of'provincial revenues is a transfer based on a share of federal tax collections.The decision on the list of taxes to be shared (the "divisible pool"), the ratio of the provincial/federalshare of the pool, and the formula for its distribution to the provinces is to be fixed at least once every fiveyears (Constitutional provision) by the National Finance Commission (NFC). The NFC members are thefederal Finance Minister, the finance ministers of each of the four provinces, plus other members as thePresident chooses. The NFC last rendered an Award in 1996, allocating to the provinces 37.5% of thedivisible pool distributed to the provinces according to population (based on the 1981 Census ofPopulation).

10. This divisible pool, which is about Rs. 430 billion in FY02, is made up of the income tax (Rs. 150billion), sales tax (Rs. 180 billion), and revenues from customs (Rs.70 billion), federal excises, and wealthand capital value taxes (Rs. 30 billion). In addition, various other tax transfers and grants are also madeby the federal government to the provinces. This includes some federally ceded taxes, referred to asstraight transfers, that are returned to the provinces on a derivation basis net of a 2% federal collectioncharge (e.g., royalties on petroleum and on natural gas, surcharges, and excise on natural gas. TheNational Finance Award is now under review. Various possibilities are under study both with respect tothe size of the provincial share of the divisible pool and the distribution formula. At present, onlypopulation and backwardness criteria (for NWFP and Balochistan) is used.

District/Tehsil/Union Councils Revenues

11. Districts are entirely funded by the transfers of resources by the provincial government in 2001-2002. Until devolution, districts were budgetary units of provincial governments and, as result, did nothave autonomous revenues. Even now, the Districts rely primarily on provincial funds - earlier thesewere budget line items, now they are accounting/real transfers. Thus implicitly there is total reliance onfederal-provincial transfers. Indeed, district budgets for 2001-2002 were prepared by the provincialfinance departments and then approved by the Zila councils in the fall of 2001. Tehsils have inheritedfrom their various predecessor urban bodies both the Urban Immovable property tax (UPT) and theOctroi/ZilaTax (OZT) replacement grant revenues. Union Councils do not have own revenues and aredependent on development funds granted by the district councils.

Annex CPage 4 of 6

Figure 1Intergovernmental Financial Relations in Pakistan, 2002: a Schematic Exposition

Federal RevenuesDivisible pool revenues Unshared

Straight V 37.5% V 62.5% Reve estransfersof taxes

to Provinces Federalprovinces Grants to

provincesorovinces |KP |

OFZTI

Provincial * Provincial revenuesrevenues

Districts transfers ProvincialCurrent: spending* Salaries Cur* non salaries Develop

-ment4

. ~OZT

District _Union SpendingCouncil Development eslown / budget spendingrevenues

U vion CCBUnion councils projectDevelopment budgets funding

Tehsilown revenues

(UIPT, user fees)

Annex CPage 5 of 6

Provincial Revenues

12. The main source of provincial revenues is a transfer based on a share of federal tax collections.The decision on the list of taxes to be shared (the "divisible pool"), the ratio of the provincial/federalshare of the pool, and the formula for its distribution to the provinces is to be fixed at least once every fiveyears (Constitutional provision) by the National Finance Commission (NFC). The NFC members are thefederal Finance Minister, the finance ministers of each of the four provinces, plus other members as thePresident chooses. The NFC last rendered an Award in 1996, allocating to the provinces 37.5% of thedivisible pool distributed to the provinces according to population (based on the 1981 Census ofPopulation).

13. This divisible pool, which is about Rs. 430 billion in FY02, is made up of the income tax (Rs. 150billion), sales tax (Rs. 180 billion), and revenues from customs (Rs.70 billion), federal excises, and wealthand capital value taxes (Rs. 30 billion). In addition, various other tax transfers and grants are also madeby the federal government to the provinces. This includes some federally ceded taxes, referred to asstraight transfers, that are returned to the provinces on a derivation basis net of a 2% federal collectioncharge (e.g., royalties on petroleum and on natural gas, surcharges, and excise on natural gas. TheNational Finance Award is now under review. Various possibilities are under study both with respect tothe size of the provincial share of the divisible pool and the distribution formula. At present, onlypopulation and backwardness criteria (for NWFP and Balochistan) is used.

District/Tehsil/Union Councils Revenues

14. Districts are entirely funded by the transfers of resources by the provincial government in 2001-2002. Until devolution, districts were budgetary units of provincial governments and, as result, did nothave autonomous revenues. Even now, the Districts rely primarily on provincial funds - earlier thesewere budget line items, now they are accounting/real transfers. Thus implicitly there is total reliance onfederal-provincial transfers. Indeed, district budgets for 2001-2002 were prepared by the provincialfinance departments and then approved by the Zila councils in the fall of 2001. Tehsils have inheritedfrom their various predecessor urban bodies both the Urban Immovable property tax (UIPT) and theOctroi/ZilaTax (OZT) replacement grant revenues. Union Councils do not have own revenues and aredependent on development funds granted by the district councils.

OZT

15. Until 1999, urban bodies such as municipal corporation or town committees collected Octroi(import taxes levied by municipal entities at their borders on goods imported for resale) while rural onescollected Zila Export taxes on agricultural goods exported out of rural (then called " Zila") councils.Together, the octroi (collected largely in urban areas) and zila (rural area) taxes accounted for 50% to60%-of autonomous local revenues. While productive of revenues, both taxes (which when combined arereferred to as the OZT) were inefficient and a source of corruption at the point of collection.Accordingly, they were abolished in May 1999 by the Inter-Provincial Coordination Committee (IPCC)as of fiscal FY00 with the agreement that the federal govemment would come up with a replacementgrant to be paid to urban bodies, now the Tehsils.

16. In FY00, the federal govemment implemented a 2.5 % point increase (from 12.5% to a 15%) inthe General Sales Tax (GST) in all of Pakistan, including NWFP, that was distributed directly to localbodies as a revenue replacement grant (OZTRRG). For FY01 and subsequent years, arguing that the 2.5percent of the GST was generating an amount well in excess of the initial Rs. 19 billion (Rs. 30 billionsin FY01), the federal govermnent broke the direct link between the OZT and 2.5% points of GST by

Annex CPage 6 of6

placing the 2.5% of the GST proceeds in the divisible pool to be then divided between provincesaccording to the NFC formula.

UIPT

17. Tehsils also have access to (a pre-devolution) Urban Immovable Property Tax (UPT) and variousfees and user charges. The UIPT, which contributes only 3% to 5% of total tehsil revenues, isadministered and collected by the provinces, with 80.75% of collections remnitted to tehsils and theremainder retained by the provinces.

Annex DPage I of 13

FISCAL RESTRUCTURING AND MEDIUM TERM BUDGETARY FRAMEWORK

Background and Issues

1. The finances of the Government of NWFP are characterized by an almost complete dependenceon the federal government (and WAPDA - a federal corporation) for revenue resources, and a skewedand rigid expenditure structure dominated by establishment and debt servicing costs. Divisible pooltransfers, subventions from the federal government, and transfer of hydel profits from WAPDA constitute90% of overall provincial revenue (Table 1, page 3). The provincial finances and budget implementation,therefore, are highly vulnerable to the fluctuations of federal revenue collection and shortfalls and delaysin transfer of hydel profits from WAPDA.

2. Chronic shortfalls in federal revenues have rendered provincial budget-making difficult and oftenunrealistic. Federal Transfers to NWFP, while continuing to contribute about 87 percent of total receiptsduring the last 5 years, have turned out to be well below the projections under the NFC award. Shortfallsin actual divisible pool transfers against NFC projections reflect poor revenue collection by the federalGovernment, but shortfalls in transfers of subvention grants and hydel profits have introduced a largedegree of uncertainty into NWFP's budgetary operations. The timing of resource transfer from theFederal Government has also been skewed and unpredictable, forcing the GoNWFP to access expensivemoney from Ways and Means Advances and adversely impacting provincial budgetary operations andproject implementation.

3. The present fiscal situation presents a dilemma for the provincial governnent. On the one hand,the excessive dependence of provincial revenue on federal transfers leaves very little room for theprovince to absorb the shortfalls in federal transfers or create much needed fiscal space throughmobilization of its own revenue, at least in the short run. On the other hand, creating space throughcutbacks in provincial expenditures have served to aggravate provincial liabilities because they have onlydeferred expenditures on maintenance of physical infrastructure and human development and under-funding of pension and other obligations.

4. Ad-hoc transfer of expenditure responsibilities, especially for financing the Annual DevelopmentProgram (ADP) and the Khushhal Pakistan Program (KPP), without a corresponding transfer ofresources, has led to increased fiscal stress for the province and significant shortfalls in these importantexpenditures. In anticipation of a significant increase in revenue transfers, the federal governmentdiscontinued the Cash Development Loans (CDLs) to the provincial governments in FY01, thus makingNWFP responsible for financing the entire local components of its development program (Rs 3.2 billion)from its own resources. Furthermore, the bulk (Rs 1.94 billion) of the funding responsibility for the KPP,which was launched in FY00 with federal financing, was also transferred to the provincial governmentduring FY01. Moreover, NWFP was also asked to bear a number of unforeseen one-time expendituresduring FY01 on account of giving an Eid bonus to its employees (Rs 300 million) and local bodieselections (Rs 141 million). These responsibilities added to the fiscal squeeze on the province.

5. Revenue receipts from the Federation and WAPDA have historically been unpredictable: actualtransfers are significantly below beginning of the year projections, and receipts are often delayed.Moreover, according to the 1992 government decision, NWFP was to receive from WAPDA on accountof hydel profits Rs.9.4 billion in FY98 rising to Rs.14.3 billion in FY02. However, WAPDA'sdeteriorating fiscal situation has led to both capping transfers at Rs.6 billion, and to an erratic pattern oftransfers with end of year bunching, and often requiring pressure by the federal government on WAPDA.In FY01 the federal government (and WAPDA) transferred about Rs 4 billion to the province in the lasttwo weeks of FY01, making it impossible for the provincial government to fully utilize the funds duringthe fiscal year. The lower and erratic transfers have resulted in expensive borrowing by the province, as

Annex DPage 2 of 13

well as in unplanned cuts in expenditures, which often fall on development and non-salary O&Mexpenditures where the province has greater discretionary authority.

6. The province has a weak revenue base. First, all major broad-based and buoyant taxes areconstitutionally in the domain of the federal government. The only relatively broad-based taxes left to theprovinces are taxes on agriculture and property. Compared with other provinces, NWFP faces a handicapin effectively utilizing these taxes. The provincial government's ability to generate significant revenuesfrom the agriculture sector is limited due to the dominance of small farms. UIPT and Stamp Duty ontransfer of urban property, two major revenue sources in Punjab and Sindh, are adversely affected by thesmall size of the urban sector in NWFP and the large proportion of cantonment areas, which fall outsidethe provincial domain. Inadequate tax effort has further contributed to the stagnation of provincial ownrevenues over the last three years.

7. The structure of provincial expenditures is extremely rigid. Provincial expenditure is dominatedby establishment costs (pay, allowances and pensions), which preempts more than 40% of currentexpenditures, debt servicing (20%), and the food subsidy (10%). Hence a full 70% of provincialexpenditure is unadjustable in the short run, implying that in times of fiscal stringency, disproportionatecuts have to be applied to already low O&M or development expenditures.

8. Provincial development expenditures also suffer from too much dependence on Federalgovernment priorities andfederal andforeign-funded programs which do not reflect provincial needs andproprieties. Development expenditures in the past were financed from borrowed resources, mainlyexpensive (interest rates of 15% and above) Cash Development Loans (CDLs) from the Federation. Thetotal provincial debt in FY01 was Rs. 69.8 billion (almost 200% of total revenue receipts of the province),half of that on account of CDLs, with debt service claiming 25% of total revenues. There is also lack of astrategic focus in the development program which reads more like a series of projects rather than a well-defined program; many of which are under-funded and poorly prioritized. Another problem with thedevelopment program is that it fails to take into account future recurrent expenditures and does notallocate fimds for O&M which impacts on the future delivery of services. Better prioritization of thedevelopment plans within a medium term budgeting framework is a major focus of the Provincial ReformProgram.

9. In summary, establishment costs are large with very little left for non-wage and expenditures onO&M and expansion of services; there are rigidities in the division and classification of expenditures;public investment is not geared to strategic objectives and needs of the province; and budgetary andexpenditure management based on short-term goals and objectives.

10. Financial management has been weak and accountability and internal control suffered severeerosion. While systems and procedures were in place, these were ignored leading to poor quality ofpublic accounts and lack of reconciliation of accounts. The Public Accounts Committee (PAC) wasdysfunctional for over a decade and Departmental Account Committee (DAC) meetings were heldirregularly, resulting in a significant erosion of financial management capacity. Successive governmentsintroduced several layers of checks and balances-to try to reduce abuse-making financial releaseprocedures very cumbersome. This lead to delays in implementation of programs. Annex E discussesstrengthening public financial management.

Annex DPage 3 of 13

Table 1: NWFP -Govemment Receipts, FY98FY02(Rupees million)

Budget 9 monthsFY98 FY99 FY00 FY01 FY02 FY02

Revenue and Grants 25775 27555 30590 33821 36294 22201Federal tax assignment 13554 14422 16567 18573 19550 12409Provincial taxes 862 969 1286 1360 1408 1111Direct taxes 291 305 341 370 441 284

Agriculture income tax 42 45 71 23 50 34UIP tax 54 62 67 136 140 82Land revenue 177 176 172 177 200 143

Indirect taxes 570 664 945 991 967 827Provincial excise 12 17 16 15 20 15Motorvehicletax 312 357 417 444 452 352Stampduty 116 113 142 139 140 114Electricity duty 7 6 265 220 233 294

Non-tax Receipts 7820 8054 7860 7885 7583 1996Interest and Dividends 122 110 92 150 35 20Hydel profits from WAPDA 6000 6000 6000 6000 6000 1700Civil Administration Receipts 152 149 182 180 258 163

General administration 52 46 32 33 108 59Law and order 101 102 150 147 150 104

User Charges 1042 1107 1153 988 1066 693Community services 197 219 229 175 193 88Social Services 304 246 345 262 283 148

Education 217 122 162 165 170 .84Health 86 121 180 95 110 62

Economic Services 540 642 578 550 590 457Agriculture 75 89 83 83 90 73Forestry 265 349 262 254 220 192Irrigation 144 146 170 185 250 92

Other Receipts 504 687 432 568 160 97Federal Government Grants 3527 4019 4871 5689 7453 6685

Subvention grant 3310 3647 3882 3828 4249 2980Other development grants 217 372 989 69 704 1164KPProgram/ESR 0 0 0 1793 2500 2541

Foreign grants 12 92 6 313 300 0

Total Receipts 26539 28132 31619 34523 37144 21560

Percent of Total ReciptsProvincial taxes 3.2 3.4 4.1 3.9 3.8 5.2

Direct taxes 1.1 1.1 1.1 1.1 1.2 1.3Indirect taxes 2.1 2.4 3.0 2.9 2.6 3.8

Non-tax Receipts 29.5 28.6 24.9 22.8 20.4 9.3Hydel profits from WAPDA 22.6 21.3 19.0 17.4 16.2 4.6User Charges 3.9 3.9 3.6 2.9 2.9 3.2

Federal Government Grants 13.3 14.3 15.4 16.5 20.1 31.0

Source: Govemment of NWFP, Staff calculatons.

Annex DPage 4 of 13

11. Execution of the budget in FY02 through the third quarter is largely on track, with improvedrevenue collection and expenditures as per the budget plan. Collection of electricity duty has been higherthan anticipated and other taxes are largely on target. Collection of user charges reached 65 percent of thebudgetted amount despite lower collection of 'abiana' on account of drought and water supply shortfall.Federal tax transfers have been slightly lower than anticipated due to lower collections at the federallevel; however transfer of hydel profits were only Rs.1.7 billion out of the 'capped' Rs.6 billion for theyear. Substantial federal grants for development, KPP and subvention have offset some of the othersshortfalls in total revenue receipts. On the expenditure side, outlays are just above 60 percent of thebudgetted amount for the whole year, but expected to pick up in the last quarter with removal ofprocedural bottlenecks to transfer of funds to the districts.

Reform Program and Medium Term Budget Framework

12. The provincial government knows that in order to achieve its reform objectives of acceleratedbroad-based development, poverty reduction and improved service delivery, it is imperative to putprovincial finances on a more sustainable footing and create fiscal space. The government has approved aMedium Term Budgetary Framework (MTBF) for improving the allocation for priority developmentexpenditures over the medium term. To attain this goal, the government has already taken a number ofactions to restructure its finances, and others are being actively considered. Besides initiating someimportant budgetary reforms, a number of actions have been taken to mobilize additional revenues fromprovincial sources, restructure provincial expenditures, reduce interest payments through debtmanagement and improve the budget and financial management. Some of the key actions are listedbelow:

Revenue Mobilization

13. Actions Taken. The provincial govemment has made revenue mobilization an important elementof its reform program with the aim of financing the necessary infrastructure, improving social servicesand enhancing private sector activity. Under the Provincial Reform Program (PRP), the govemment plansto rationalize and simplify the revenue structure and systems. The objective is to have fewer revenueheads, simplify revenue administration, minimize collection costs, and match funding needs with the nettax burden on citizens. The govermment has taken a number of actions in this regard over the last twoyears and more are planned. Some of the key actions taken include the following:

(i) Imposition of agricultural income tax: While retaining the land tax (see Table 2A for the taxschedule), a full-fledged provincially collected income tax has been levied on all farmers with anannual income of Rs 80,000 or more (see Table 2B).' The land tax is levied without anyexemption limit, a feature that distinguishes the agricultural income tax in NWFP from that inother provinces. The govenmment expects to collect around Rs. 50-60 million in the next twoyears from agricultural income taxes. It also expects to collect an additional Rs. 66 million peryear from the land revenue due to rate adjustment.

(ii) The govemment of NWFP has agreed to undertake a study on revenue potential from land taxand AIT, reorganization of AIT administration and up-grading of training and skill developmentin FY03. The govemment plans to impart tax payer education and assistance.

See the attached Land Tax and Agricultural Income Tax Ordinance, dated July 27, 2000.

Annex DPage 5 of 13

Table 2A: Schedule of Land Tax

Farm Size Annual Tax

Up to 5 acres of cultivated land Rs 50 per acreLand not exceeding 12.5 acres Rs 72 per acreLand exceeding 12.5 acres Rs 100 per acreMatured orchards Rs 300 per acreNote: The tax rates apply to irrigated land. For tax purpose of tax, one acre of irrigated land

would be considered as equal to two acres of un-irrigated land.

Table 2B: Schedule of Agricultural Income Tax

Income Category Annual Tax

Where net taxable agricultural income 5%Does not exceed Rs 100,000

Where net taxable income exceeds Rs 100,000 Rs 5,000 plus 7.5% of the amountbut does not exceed Rs 200,000 exceeding Rs 100,000

Where net taxable income exceeds Rs 200,000 Rs 12,500 plus 10% of the amountbut does not exceed Rs 300,000 exceeding Rs 200,000

Where net taxable income exceeds Rs 300,000 Rs 22,500 plus 15% of the amountexceeding Rs 300,000

(iii) Restructuring of the Urban Immovable Property Tax (UIPT): NWFP has made a major effort torestructure its UIPT by making the tax formula-based and shifting from area-based to factor-based (i.e. based on plot size, covered area, and age of the property, location, etc.) assessment.(The Ordinance amending the NWFP UIPT was promulgated on August 13, 2001). Moreover,UIPT has been extended to additional 9 rating areas (from 18 to 27) in the province. Revenuesfrom this source more than doubled from Rs. 67 million to Rs. 135.6 million between FY00 andFY 01 as a result of the restructuring and revaluation of the UITP.

(iv) Privatization and harmonization of Motor Vehicle Tax (MVT). NWFP is the first province thathas outsourced the collection of MVT to the private sector. A private firm is responsible forcollecting MVT in Peshawar (at Rs 15 per vehicle). In order to avoid shifting of the (mobile) taxbase to the least taxed province/area, Punjab, Sindh and NWFP have recently agreed toharmonize their MVT rate structure.

(v) Simplification and rationalization of the provincial tax structure by reducing the number of taxesor 22 to only nine. With the levying of GST on certain services in FY01, the province abolishedtaxes on the services that were brought into the GST net. Also a number of minor taxes such asthe entertainment tax on cinema houses (generating 0.02% of total receipts), video license fees(generating Rs. 1.3 million in FY01) have been abolished. The net gain from these measureswas Rs. 183.5 million in FY01 (Rs 35 million loss due to abolishing services and entertainmenttaxes and Rs. 218.5 million gain from GST on services).

(vi) Extension of the Tobacco Development Cess (TDC) to open market transactions: The TDC waslevied at Rs 2 per kg on the quota of tobacco allotted by Pakistan Tobacco Board to variousmanufacturing factories. Since the quota covered only half of the production, the TDC wasextended to open market transactions to widen the tax net. This is expected to generate Rs. 50million annually.

Annex DPage 6 of 13

14. Rationalization of user charges for provincial services: The provincial government has made adecision in principle to rationalize user charges, especially on economic and tertiary level social services.Errigation water rates ("Abiana") are increasing by 25% annually. The higher Abiana rate increasedcollection by Rs. 23 million (from Rs. 163 million in FY00 to Rs. 186 in FY01). Fees on driving licenses,tests of motor vehicle fitness, applications and tests conducted by the provincial Public ServiceCommission, etc. have been revised upward. Driving license fee increase had led to increased revenues ofRs 5 million. Uses charges for tertiary level heath facilities and higher education fees have been revisedupward and are planned to be further increased in FY03.

15. Establishment of Excise and Taxation Department: In November 2000, tax collection functionsof the Finance Department were separated and given to the newly established Excise and Taxation (E&T)Department, with the mandate to collect all provincial taxes except stamp duties and those related toagriculture, which are in the domain of the provincial Board of Revenue (BOR). The new E&TDepartment was initially installed in 17 out of the 24 districts but it has now been expanded to all districtsof the province.

Expenditure Management

16. Actions Taken. The provincial government aims to improve expenditure management tocomplement revenue measures in order to create fiscal space and maximize the benefits from limitedresources. It has taken following measures for containment of establishment costs:

* Abolished all vacant posts* Froze all new appointments, except in health and education.* Banned accelerated promotions.* Stopped the facility of medical treatment abroad.* Abolished recruitment of contingent paid staff in the Works Department.* Banned up-gradation of posts.* Fixed ceiling on POL charges according to grades.* Fixed ceiling on office and residential phones.* Disposed of surplus vehicles, which earned Rs 240 million.

17. Contract employment: A decision has also been taken that all new recruitments will be onfacility-based contracts. This should reduce the government's pension and G.P. Fund liabilities. Thegovernment is reviewing the contract employment policy to devise a policy that suits provincial jobrequirements and also provides savings where possible. Initially this will be piloted before being adoptedmore generally. Three categories of posts are being defined: (i) regular recruitment in core governmentpositions; (ii) task-specific fixed term appointments; and (iii) location specific jobs.

18. nheat subsidy: The province had been spending more than 10% of its expenditure on the wheatsubsidy. The subsidy absorbs the differential between the procurement price and the issue price (the priceat which wheat is sold to the flour mills). With the procurement price rising higher than the market price,the wheat subsidy had increased sharply in recent years.2 The main beneficiaries of the generalized wheatsubsidy in NWFP (as in other provinces) are the flour mill owners rather than farmers. The governmentintends to discontinue the program to provide wheat to flour mills to remove the subsidy, starting withFY03, retaining only the strategic buffer stock maintenance role with government. After covering arrearson wheat procurement3, the government expects to save about Rs. 1.5 billion annually.

2 In FYOI, on the basis of estimated procurement of 1.6 million of tons, the provincial budget allocated Rs 3.4 billion for thewheat subsidy. Another Rs 3 billion has been earmnarked for this purpose in NWFP's FY02 budget.3 The current arrears are: Rs 345 million to MINFAL, Rs. 2.5 million to PASSCO and Rs. 500 million to the Government ofPunjab.

Annex DPage 7 of 13

19. Debt retirement. The Government plans to retire Rs.6.3 billion of expensive debt (cashdevelopment loans) over three years in three tranches of Rs.2.1 billion each. The most expensivecomponents of this debt carry an interest rate of 17.7%. As a result, total debt service is projected todecline significantly over the medium term (para. 29).

20. Utilization of overextended public infrastructure: A decision has been taken to utilize vacantpublic buildings as schools wherever possible. Other vacant buildings are to be used to provide officesfor the new local governments. A few school and college buildings, which remain unutilized after schoolhours, have been rented out to private sector providers of education services (mostly computer institutes),which will augment resources for the education sector. Expression of interest have been invited to useother buildings for second shifts.

21. Restructuring the development budget: On the development side, the past tendency of starting alarge number schemes with limited development resources has led to thin-spreading of the developmentbudget, which caused considerable delays in completion of schemes, cost escalations and erosion ofeconomic and social returns. Furthermore, overloaded development programs created a large number offacilities that could not be operationalized due to paucity of funds and/or other operational reasons. Theprovincial government has taken bold steps to tackle this problem by better prioritizing developmentschemes, and by dropping most new and relatively new schemes from the development budget. As aresult of this restructuring and prioritization, the ADP portfolio has been reduced by 2/3 from 1,125 on-going projects in FY99 to 375 projects in FY01, with a reduction in throw-forward liabilities of 62% fromRs 24 billion to only Rs 9 billion. Further reductions in the number of projects and the throw-forward ofliabilities are planned within the current fiscal year.

22. Establishment of criteria for prioritizing development projects: The govemment has devised thefollowing criteria for financing schemes from the development budget: The first priority is on-goingforeign assisted projects and poverty alleviation schemes; second, on-going schemes with financialprogress of 75% followed by 50% completed or more; and third, new schemes for primary and girlseducation, health, water supply and sanitation. In the event of revenue shortfalls, the govenmment hasdecided to protect pro-poor expenditures especially in education and health. The govemrnment is alreadymonitoring poverty related expenditures in the context of the I-PRSP. The PRP supplements and isconsistent with the I-PRSP.

23. In addition, other measures and decisions taken to contain overall recurrent expenditure, improvethe efficiency of govermment agencies and manage the government's debt, include the following:

* Privatization of about 10 small hydel plants (1-1.5 MW) run by SHYDO for which Expression ofInterests have been invited.

* Winding up of a number of public enterprises and autonomous bodies4 .* Streamlining of the remaining autonomous bodies e.g. Sarhad Development Authority (SDA),

Small Industries Development Board (SIDB), Sarhad Industrial Development Board, etc.* Establishment of statutory General Provident Trust Fund and a Pension Fund.5

* Establishment of a Road Maintenance Fund to receive user charges and maintain the road system.* Establishment of the Hydel Trust Fund to fund new hydel schemes6.* Promoting private-public partnership in delivery of provincial services.* Initiation of self-financing schemes in higher educational institutions.

4More details on autonomous bodies are in Annex F on Public Financial Accountability and Management in NWFP.5 Both these funds have been notified as an act of the NWFP Provincial Assembly on March 8, 1999.6 For instance this Trust Fund would be receiving proceeds from new schemes like Malakand III which is a 80 MW scheme thatis expected to earn Rs. 600-800 million per year.

Annex DPage 8 of 13

Budgetary Reforms

24. Actions taken. The budgetary procedures have been streamlined: A number of practical stepshave been taken to make the budgeting process simpler and more realistic. These include:

* Better assessment/projection of receipts from the federal government in light of chronicshortfalls. The provincial government has opted to budget for some of these expected shortfallsby projecting both federal revenue transfers and KPP grants at 5% lower than those budgeted bythe federal government. In the past, provincial budgets used CBR revenue projections, but hadexperienced 5-10% shortfall in actual revenue assignments to it. Unlike past practices thegovernment is no longer permitting spending commitments to be made against net hydel profitsabove the capped amount of Rs 6 billion. Shortfalls in hydel profits (Rs 8.3 billion in FY02,based on the 1992 formula) were put in a special category ("unallocable") Spending agencieshave been allocated funds, which, in the view of Provincial Finance Department, could befinanced from the expected overall revenue receipts, excluding the unallocable amounts. This hasmade the budget more realistic.

* The policy for release of budgetary funds by the Finance Department has been modified to betterenable the line departments to discharge their expenditure responsibilities. Compared with thepast practice of transferring non-salary and development budgets through quarterly releases, thenew policy has the following schedule of budget releases:

Development Budget: 50% in July and 50% in JanuaryNon-Development Budget: 10% in July, 40% in August, and 40% in January7

* Preparation of the Annual Budget Statement (ABS) on the IMF fiscal format which is in linewith the format adopted by the federal government. This would make the budget more transparentand would give a better idea of the province's budgetary practices.

* Posting fiscal data on the web (www.brain.net.pk/-nwfpfin/fin_site).

* Discontinuation of the process of preparing and presenting a three-part recurrent budget bymerging the continuing new expenditures with the permanent budget. This has reduced thepaperwork and saved time in processing three budget requests.

* Substituting the two budget reviews with one mid-term review again to save time and duplicationof effort.

* Computerizing budget preparation to reduce red tape, streamline procedures and improve budgetanalysis

* Moving up the date for preparing revised estimates of expenditure for the ongoing fiscal yearfrom June to March, and the cut-off date for re-appropriation of funds from one head to anotherfrom June to April 30. This move is likely to reduce the end-year rush on the budget and wouldensure a smoother spending stream.

25. Fiscal Decentralization: NWFP has been the fore-runner in terms of preparing for the devolutionof state functions, authority and finances to the district (and lower level) governments. The provinceprepared District recurrent budgets for FY02, which greatly facilitated the functioning of the new districtgovernments in the initial year of devolution. It also made significant allocations in the development

7 10% is kept as a cushion to deal contingencies/shortfalls.

Annex DPage 9 of 13

budget for schemes to be executed by the district governments. The District Development Committeescan now approve schemes up to Rs 10 million. Moreover, the Planning and Development Departmenthas devised an objective, indicator-based formula to distribute development funds among districtgovernments. These indicator based formulae were used for KPP and SAP in the past.8 The KPP formulahas been further refined. The new formula gives the following weights: 30% for population; 20% foreducation indicators (primary school going population, out of school children, and illiteracy); 10% forhealth indicators (population per institution and per doctor); 10% for population without access to ruralwater supply; 10% for Urban population; 10% for lag in road infrastructure; and 10% for lag in ruralsanitation. and would be used to allocate the Annual Development Plan from FY03.

Medium-Term Budget Framework

26. The provincial government has adopted a Medium-Term Budget Framework (MTBF) FY03-05.The MTBF will be published as an attachment to the Annual Budget Statement. This is based on therealization that the present mode of budgeting has a number of weaknesses (e.g., short-term focus, input-based, basically incremental in nature, etc.) and does not facilitate achievement of the government'sreform objectives. In addition, the government plans to initiate performance budgeting for the Education,Health, Police and Judiciary in FY03 and extend it to other sectors in FY04.

27. The revenue enhancement effort underlying the MTBF is shown in Table 3.

Table 3: NWFP -Additlonal Fiscal Space as a result 9of Fiscal Reform(Rs. Million)

FY03 FY04 FY05

Increase in Revenues

Provincial taxes 229 316 391

Non-tax Receipts 78 78 78

User Charges 436 576 706

Dedine in Expenditure

Subsidies 1450 1450 1450

Interest payments 0 179 33610

Total Fiscal Space created 2193 2598 2960

28. Taken together, the tax and non-tax revenue measures are significant, and are expected togenerate Rs. 300 million in provincial taxes and non-tax receipts in the first year, increasing to Rs.470million in FY05. Provincial taxes are forecast to increase by 15% in FY03 and by around 10% per annumover the subsequent two years. In addition, receipts from higher user charges are projected to increasesignificantly, growing by Rs.436 million in the first year, and reaching Rs.706 million in FY05 (higherfuel toll tax, water charges, and tertiary health and education fees). User charges will initially jump by37% and continue increasing by 14% per annum in the following two years. The above noted effortsreflect a considerable revenue effort by the Province, considering the weak initial base. As a result ofthese increases, the GoNWFP is likely to become eligible for Rs.100 million from the FederalGovernment in FY03 for fiscal effort in accordance with the NFC award.

8 The current KPP formula allocated funds by assigning a weight of 40% for population, 30% for lag in social infrastructure and30% for lag in physical infrastructure.9The figure shown in each year is increase over the trend with out reforms.1 Savings of Rs.494 million in FY06.

Annex DPage 10 of 13

29. Additional savings will be generated by rationalizing expenditures; the largest gain will comefrom reducing the untargeted wheat subsidy which has mainly benefited intermediaries. About Rs. 1.5billion a year is expected to be saved on account of the withdrawal of wheat subsidy. The governmentwill continue to spend about Rs.500 million to manage a minimal strategic wheat stock maintained forfood security purposes in the province. In addition, the savings from improved debt management areexpected to be Rs.179 million in FY04 and Rs.336 million and Rs.494 million, respectively, in thefollowing two years.

30. The net effect of the measures, noted in paras. 27-29, will be to generate fiscal savings of Rs.2.2billion, in the first year, increasing to nearly Rs.3.0 billion by FY05, and cumulatively totaling Rs.7.8billion over the FY03-05. This is equivalent to over 50 percent of total provincial own-resources duringthe same period. Roughly 40% of this accrues from measures to enhance revenues, and the rest fromexpenditure savings.

31. Proposed Increase in Development Expenditures under the MTBF. The reform program aims tosignificantly expand the reach and quality of service delivery in education, health, gender-focusedprograms, and economic and community services. Resources will also be required to financeinfrastructure O&M, infrastructure up-gradation, and extension of infrastructure. Table 4 summarizes thekey additional expenditures.

Table 4: NWFP * Proposed Increase in Development Expenditures 11

(Rs. Million)

FY03 FY04 FY05

Educafion 1400 2000 3000

Health 400 1000 1500

Agriculture Services 654 380 380

Community Services 500 500 500

Increase in Pro-Poor Development 2954 3880 5380ExpendituresSouce: NWFP Govemment, Staff estimates.

32. Table 5 summarizes the aggregate fiscal picture during the period FY03-05, reflecting the aboverevenue measures, enhanced development expenditures, fiscal restructuring and overall financing gap.

1 1 The figure shown in each year is the increase over the trend without reforms. Thus, for example, in case of education, totaldevelopment expenditures (including those proposed under PRP) amount to Rs 2.0 billion (FY03), Rs. 2.7 billion (FY04) and Rs.3.9 billion (FY05).

Annex DPage 11 of 13

Table 5: NWFP - Summary of Medium-Term Budget, FY99 to FY05(Rs. Million)

ProjectionsFY01 FY02 rdaP;-i IN

Federal Transfers 30262 33003 34116 37022 40248Federal tax assignment 18573 19550 21700 24087 6937Subvention grant 3828 4249 4716 5235 6011Hydel profits from WAPDA 6000 6000 6000 6000 6000Other grants 1862 3204 1700 1700 1700

Provincial Resources 3948 3777 4374 4742 5136Provincial taxes 1360 1408 1624 1784 1945User Charges 988 1066 1457 1665 1898Non-tax & Capital Receipts 1601 1303 1293 1293 1293

Total Receipts 34523 37144 38861 42143 16170

Current Expenditure 30278 30196 32980 34347 15908of which:Social services 10442 10282 11308 12385 13517Interest payments 7151 7009 6628 5944 5328Subsidies 1450 1000 0 0 0

Development Expenditure 5898 10413 11754 13987 16299of which:Social services 686 720 3687 4819 5560

Total expenditure 36247 40608 44734 48333 52207Overall Deficit *1724 *3465 -5873 *6191 -6037

Financing 1724 3465 5873 6191 6037Foreign Project Assistance (net) 1564 3324 3748 4194 4502Other financing items' 160 141 -1175 -1303 -1365Cash development loan 0 0 -2100 -2100 -2100Proposed Wold Bank Financing 0 0 5400 5400 5000

Share In Total ExpendituresCurrent Expenditure 83.5 74.4 73.7 71.1 68.8

Interest payments 19.7 17.3 14.8 12.3 10.2Development Expenditure 16.3 25.6 26.3 28.9 31.2Total social sector 30.7 27.1 31.2 33.5 35.3of which: EducaUon 24.3 21.0 24.3 25.9 28.1

Health 6.0 6.1 6.7 7.4 7.1In Percent of Provincial GDP 2Federal Tax Assignment 5.4 5.3 5.4 5.4 5.6Provincial Taxes 0.4 0.4 0.4 0.4 0.4Non-tax Receipts 2.3 2.1 2.0 1.9 1.8of which: Hydel Profits 1.7 1.6 1.5 1.4 1.2

User Charges 0.3 0.3 0.4 0.4 0.4Grants 1.7 2.1 1.7 1.6 1.7Total Receipts 9.9 10.0 9.6 9.5 9.5

Current Expenditure 8.7 8.2 8.2 7.8 7.4Development Expenditure 1.7 2.8 2.9 3.2 3.4Overall deficit -0.5 -0.9 -1.5 -1.4 -1.2Total Social Sector Expenditure 3.2 3.0 3.5 3.7 3.8

Soume: Govemment of NWFP, Staff estimates.

Comprise the aggregate total of: Ways and Means Advances, Public Accounts (net) and repayment of domestic loans.2 Since provincial GDP data are unreliable, these ratios are only indicative

Annex DPage 12 of 13

33. The main features of the projections in Table 5 are: (i) the overall expenditures increase from Rs.41billion in FY02 to Rs. 52 billion in FY05. While the share of current expenditures declines from 74 %in FY02 to 69% in FY05, the share of development expenditure rises correspondingly; (ii) theGoNWFP's focus on human development is reflected in higher expenditure on social sector, the share ofwhich will increase from 27% in FY02 to over 35% in FY05; (iii) the share in total expendituresconsumed by interest payments is projected to decline sharply from 17% in FY02 to 10% in FY05. Thisis largely due to prepayment of expensive debt; (iv) as a consequence of higher pro-poor expenditures, theoverall budget deficit is projected to jump to Rs. 5.9 billion in FY03 from Rs. 3.5billion in the previousyear. However, the underlying improvement in the fiscal position is more explicit in the last year, as thedeficit starts to decline in FY05; and (v) after taking account of the expected foreign assistance, therepayment of foreign and domestic loans, and reflecting the GoNWFP's intention to retire expensive CDLdebt, there is a financing gap of about Rs.5.4 billion in each of the years FY03-FY04, and Rs.5.0 billionin FY05. The GoNWFP intends to seek financial assistance from the World Bank of about US$90million (equivalent to Rs.5.4 billion at existing exchange rates) in each of the three years, in support of itsbroad based development efforts and restructuring of provincial fiscal accounts.

34. Sustainability. As a result of the intended borrowings noted above, the GoNWFP's totaloutstanding debt will increase from Rs. 73 billion in FY02 to Rs. 95 billion FY05. However, estimateddebt/GDP ratio will fall marginally over this period (from 19.8% to 19.5%) and more importantly, totaldebt service (including principal) will decline from Rs.8.6 billion to Rs. 7.8 billion over the same perioddue to lower interest payments (Table 6). As a proportion of the government's receipts, debt service willdecline from 23.2% in FY02 to 17% in FY05 and help create greater fiscal space for priority developmentexpenditures. The overall budget deficit is projected to decline significantly in the years following theprogram reflecting a deceleration in expenditures and continuing revenue growth.

Table 6: NWFP - Outstanding Debt, Debt Service

FY02 FY03 FY04 FY05(In Rupees million, unless otherwise stated)

GoNWFP Total Outstanding Debt 72999 79892 87176 94763of which: CDLs 35320 32045 28615 25067

(In % of total) (48) (40) (33) (26)Foreign debt 27490 36639 46233 56135Deferred liab. GPF 7746 8520 9372 10309(in % of GDP) 19.8 19.8 19.7 19.5

Interest payments as % of total debt 9.6 8.3 6.8 5.6CDL's 10.6 9.5 8.5 7.5Foreign debt 1.2 1.2 0.9 0.7

Debt Service Total 8616 8554 8080 7773(In % of total receipts) 23.2 22.0 19.2 17.0

(in % of GDP) 2.3 2.1 1.8 1.6Source: NWFP Govemment; Staff estimates.

Comprise the aggregate total of: Ways and Means Advances, Public Accounts (net) and repayment of domestic loans.2 Since provincial GDP data are unreliable, these ratios are only indicative

Annex DPage 13 of 13

Medium Term Measures

35. In the medium term the government would continue implementing the reforms to improvefinancial management, improve service delivery, provide adequate funding for social services, have betterdebt management and strengthen fiscal decentralization. Revenue and expenditure reform measures asprogrammed in MTBF, which has been approved by the NWFP Cabinet, would continue. Thegovernment would revise the Stamp Duty Schedule, complete the Property Tax Survey and upgrade usercharges in education, health, irrigation and public health sectors. In addition, further improvements willbe made in budget processing, including computerization, presentation and expanding coverage of fiscaldata on the web. Fiscal performance of districts will be reviewed and necessary assistance/trainingprovided to them. Transparent revenue sharing arrangements between the province and districts would beformulated and would devolve UIPT and Entertainment tax to Tehsil level. PAC will be made a fullyfunctioning accountability agency with provinces taking prompt action on its recommendations. Inaddition the government will be undertaldng a study on tax potential and AIT modernization which willbe completed prior to FY03, to provide provincial government with analysis and recommendations onfurther tax effort for introduction in FY04 budget. Also agreement would be reached with the FederalBureau of Statistics, and funding provided, to collect reliable provincial economic data. Fiscal data willbe tabulated in both economic and financial classification.

36. In summary, creating fiscal space and a successful implementation of fiscal decentralizationmeasures, will be the key to success of the reform program. Although NWFP does not have control overthe level or fluctuations of federal transfers (which account for 90% of total provincial receipts), itsefforts to maximize the available fiscal space by vigorously mobilizing own revenue from taxes, non-taxrevenue sources, and user charges will be very important. The provincial government has made an effortto build in incentives for increasing and effectively collecting user charges by keeping the proceeds withthe agencies delivering the services for the purpose of O&M. Similarly, fiscal space can be created bybetter prioritizing and economizing on expenditures-as the province has been doing by reducing thenumber of schemes and throw-forward in the ADP, and through rationalization of staffing. Limitingexpenditures on wheat to maintenance of strategic stocks, will also open up fiscal space. A significantcontribution to fiscal space will be generated by the planned retirement of Rs.2 billion expensive debtannually over FY03-05. The federal government can help expand resources for NWFP and the otherprovinces by raising and stabilizing federal revenues, considering various options for reducing verticalfiscal imbalances, and working closely with the provinces on matters that affect their budgets and the nextNational Finance Commission Award.

Annex EPage I of 8

PUBLIC FINANCIAL ACCOUNTABILITY AND MANAGEMENT IN NWFP PROVINCE

1. Financial management and accountability issues are at the center of the NWFP Government'sreform program. Improvement in fiscal management, quality of public accounts, civil service and publicaccountability, and procurement are among the key reform targets.

2. A preliminary Provincial Financial Accountability Profile has been prepared for NWFP provinceand based on its findings, a Reform Program has been agreed with the Government. The desk reviewundertaken as part of the Country Financial Accountability Assessment (CFAA) also reviewed theprovincial financial accountability issues and had a special section on the Local Government financialaccountability framework. As part of the final CFAA, a separate modular paper will be prepared in theform and scope of a Provincial Financial Accountability Assessment (PFAA) by December 31, 2002 tofeed into the main CFAA report. This assessment will cover accountability issues for all tiers ofgovernment in the province.

Accountability Framework

3. Pakistan's Financial Accountability Framework and accounting and adiditing institutions arecentralized. The financial rules governing Federal and Provincial Governments described in theConstitution are completely similar, and provinces mostly follow Federal Government budgetary rules.The Federal Government's Controller General of Account's office, attached to the Federal Ministry ofFinance, is responsible for the preparation of the Civil Appropriation Accounts of all Governments, fromthe Federal to the District Governments. The Pakistan Auditor General's office is responsible for auditingthe different levels of governments except the smallest tiers of local governments (which is audited by theLocal Fund Audit Department). Much of the desk review and analysis for the proposed CFAA andBank's interventions through the ongoing Project to Improve Financial Accounting and Auditing(PIFRA) and the proposed follow-on project apply to all tiers of governments. These factors guided thepolicy dialogue between GoNWFP and the Bank teams in the preparation of this credit.

4. The main findings of the preliminary Profile and CFAA desk review relevant to NWFPgovernment are that:

* public accountability practices has weakened in all areas over the last decade - budget preparationand implementation, accounting, monitoring and reporting of public expenditures, transparency,auditing, and legislative oversight. Correspondingly, the fiduciary risks are high. While a legalframework for public accountability is in place, it needs modernization as many of the rules areantiquated and do not provide enough incentives for enforcement.

* lack of fiscal transparency and poor budget monitoring have undermined both Federal andProvincial budgets as tools of economic policy. Inadequate accountability for public enterprisefinancial management, lack of monitoring of implicit and contingent liabilities, and lack oftransparency of budgets have all contributed to lowering the effectiveness of public expenditures.There is inadequate intra-year monitoring and reporting of budget implementation.

* accounting and financiai reporting functions have been undermjned in their objectives of assuringfinancial regularity, propriety of expenditures and compliance with budget appropriations throughwidespread breakdown of established internal controls. External financial statements havebecome unreliable as these have been prepared in recent years without appropriate reconciliation.The completeness, accuracy and timeliness of accounting information has been hampered -by theuse of a largely manual single entry accounting system for maintaining government accounts,

Annex EPage 2 of 8

with associated high risk of errors and delays in capture of accounting data and absence oftracking obligations and commitments.

* auditing function has suffered because financial statements were not presented on a timely basisand Public Accounts Committees (PACs) have not reviewed the reports expeditiously, therebylimiting the relevance of the public audit system. The quality of the audit reports needsimprovement by reducing the emphasis on irregularities and giving more attention to materialityand significant systemic weaknesses of financial management. The role of the PACs in bringingthe principal accounting officers of ministries and departments, and their staff, to account forserious non-compliance with financial policies and procedures has been weakened due to thedelay with which audit reports have been dealt with.

* More robust and accurate financial position needs to be determined in respect of potentiallyunfunded liabilities of Autonomies Bodies (ABs). The GoNWFP currently has 14 autonomousand quasi-autonomous bodies out of which 4 are self funded. The bodies funded from the budgetrange from Development (Forest, Hydel etc) Authorities, Education Foundation and Text BookBoard. The self financed ones are Employees Social Security Institution, Workers WelfareBoard, Minimum Wages Board and Workers Children Education Foundation Board. In additionNWFP owns 80% shares of the Bank of Khyber(BoK). The GoNWFP has started the process ofdissolution of autonomous bodies which have either not fulfilled their objectives, are notfinancially viable or are not required because of private sector involvement. Since 1999 theGoNWFP has dissolved 4 such autonomous bodies namely the Agriculture DevelopmentAuthority, Fruit and Vegetable Board, Provincial Frontier Cooperative Bank and the ProvincialUrban Development Board. While aggregate financial picture is not readily available, the NWFPFinance Secretary has stated that on an aggregate basis, the ABs are small, and not significant inbudgetary or quasi-fiscal liability terms; also GoNWFP has not been provided any guarantees orloans, in the past, which could pose a potential liability to the province. At end 2001 the BoK hadan asset base of Rs 17.2 billion, deposits of Rs 14.1 billion and loans of Rs 7.0 billion. As per theFY01 external audit report, BoK is fully provisioned as per the State Bank of Pakistan PrudentialGuidelines; after provisioning its capital amounts to Rs 1.0 billion.

5. The CFAA desk review also noted that the GoP had launched a comprehensive program to addressthese issues at the national level. The main challenges are to implement these reformns and extend it tosub-national governments.

6. On-going Reforms. The following components of the ongoing PIFRA project and the proposedfollow on project will have a positive impact on the provincial financial accountability and managementin terms of improving timeliness and reliability of accounts.

* Adoption of the New Accounting Model (NAM) which includes a new Chart of Accounts (CoA)having flexibility to track expenditures down to the lowest tier of government.

* Computerization of government accounting in stages with proposal to cover all the 127 sites inPakistan.

* Development of systems specification and a suitable add on feature for addressing the accountingand reporting needs of districts and downwards.

* Capacity building of the District Accounts Offices

7. In addition, GoNWFP has initiated the following actions:

* Improving public accounts markedly under the leadership of the Provincial Fiscal MonitoringCommittee (FMC). Appropriation Accounts were fully reconciled for FY 00 and 01. NWFP wasthe only province, which compiled the expenditures both by function and object. For the current

Annex EPage 3 of 8

year, 90% expenditure and 85% receipt for the month of February 2002 and 80% expenditure and70% receipts for the month of March 2002 had been reconciled.

* Strengthening accountability through setting up of an ad-hoc PAC: The Government made all outefforts to constitute an ad-hoc Public Accounts Cornmittee but could not succeed due to an stayorder by a Court. The order has now been vacated and the Committee has been formed.

* Improving debt and quasi-fiscal management: To strengthen quasi-fiscal management, theGoNWFP is now launching a review of all off-budget accounts with a view to reduce theirnumber.

* A development scheme for computerization of financial system for current and developmentbudgets, accounting system and communication of information between the District FinanceDepartments and Provincial Finance Department has been approved and the roll out of thecomputerized system under PIFRA and the follow on projects will address the requirements ofthe lower tiers of government.

* District Government Financial management and the District accounts Offices (DAO) in majordistricts have already been upgraded to Grade 18 and qualified personnel are being posted

* As part of the financial management improvement program, GoNWFP has decided to appoint aProvincial Financial Controller in the Department of Finance. The appointment will be made byJuly 15, 2002. The Controller's main task will be to implement financial management and publicfinancial accountability reforms. In addition, the Controller will also be responsible foraccounting and financial reporting (jointly with Provincial Accountant General), developingprovincial capacity to handle accounting and payroll, organization of finance and accountsfunction of the GoNWFP, staffing and training, internal controls and internal audit, financialpolicies and procedures and response to audit observations and systemic issues.

8. The agreed immediate actions include: (see page 5 and 6 of this annex for agreed Reform ProgramMatrix).

* Appointment of a Provincial Financial Controller (as per the terms of reference agreed with theBank) to initiate and lead the NWFP financial management reform program.

* Constitution of Task Force/Steering Committee to guide development of the financialmodernization program.

* Setting up of ad-hoc PAC and opening of its proceedings to the press.

* Carry out a modular provincial accountability assessment and agree on a detailed time boundfinancial management reform program.

* Improving the legal and regulatory framework for public procurement by approving aProcurement Ordinance legislating the fundamental principles of good public procurementpractices in order to simplify processes, promote free and open competition, increasetransparency, reduce time lag between tender invitation to award, and strengthen code of ethicsaspects.

9. Medium Term Reform Program, includes: (i) implementation of the Financial ManagementReform Program, institutional and personnel reforms to improve financial management capacity andintemal controls in provincial departments; establishment of intemal audit unit in each line departments;(ii) strengthening District Government Financial Management and upgrading the level of DistrictAccounts Officers (DAOs) in major districts to Grade 18 and post qualified personnel in these posts; (iii)computerization of all fiscal accounts up to the district level; (iv) improvements in fiscal transparency byintroducing the new Chart of Accounts and New Accounting Model; (v) review and reforms of financial

Annex EPage 4 of 8

rules to make these consistent with the new accounting model; (vi) improving the tracking ofrecommendations of the Auditor General and PACs; publication of audit reports on the provincial website; and (vii) in order to confirm that there are no significant liabilities for autonomous bodies theGoNWFP has agreed to conduct a detailed review for the identification of all liabilities of autonomousbodies which have budgetary impact and develop a program to cover all un-funded liabilities by March2003.

Improving the Legal and Regulatory Framework for Procurement

10. While the GoNWFP has taken steps to decentralize procurement to increase efficiency, theprocurement of goods, civil works and consultants' services is carried out through outdated andambiguous rules and regulations. The application of these rules is further distorted by the actual practicesthat have progressively grown to thwart genuine competition for government business and to allowofficials wide latitude in applying, ignoring or misusing the rules resulting in inefficient procurement thatprovides little assurance of transparency and value for money. The legal and regulatory framework alsodoes not provide an effective means for settling disputes or addressing the grievances ofsuppliers/contractors/consultants.

11. The Government of NWFP has decided to improve the overall legal and regulatory framework forprocurement through the followings measures:

(a) A new Procurement Ordinance, legislating the fundamental principles of good publicprocurement practices, approved for enactment by the Governor on May 30, 2002 (key features ofOrdinance in Attachment 1).

(b) develop and notify by March 31, 2003, new procurement rules and regulations, consistent withthe Procurement Ordinance, to simplify processes, increase competition and transparency, andintroduce a code of ethics applicable to all procurement of goods, works and consultants' servicesin the province

(c) develop and adopt also by March 31, 2003, standard bidding documents for procurement ofgoods, pharmaceuticals/vaccines, and works; and

(d) establish by August 31, 2003, a fair and effective mechanism for redressal ofgrievances/complaints from suppliers, contractors and consultants.

(e) The GoNWFP also plans to initiate by June 30, 2003, institutionalized procurement trainingprograms to develop the capacity of government staff in effectively carrying out procurement.

12. The NWFP Finance Department will be responsible for implementation of the agreedimprovements in the procurement framework through close consultation and coordination with theconcerned line departments and agencies. For this purpose, a dedicated and qualified focal person will beappointed by August 31, 2002, in the Finance Department who will be assisted, as may be required, byqualified government staff deputed from within the Finance Department or from other governmentagencies, or by short-term consultants engaged from the private sector.

Annex EPage 5 of 8

NWFP SAC - Financial Management Indicators

t; =:- ---- -- :r- -:--, , - - rjr4-k, ~ : ,-;- - ~ -- - - _ t ,.t--,! - (03/02

A. More reliable, 1. Progressively improved reconciled data in Irprovement in each Receipts-70% (03/02) FMC, PFC and AGcomnprehensive, all accounting units. 95% reconciliation to be quarter till the target of Exp. 80% (03/02)timely and achieved within 2 months after close of the 100% reconciliation ofaccurate month, revenue, expenditure,information assets and liabilities (GPFpertaining to and others) is achieved.provincial and 2. Substantial reduction in "unidentified" Improvement in each Suspense account- PFC, FMC, AGdistrict financing from public accounts and deposits. quarter till the target of 80%(03/02)government 95% reconciliation to be achieved within 2 100% reconciliation offinancial months after close of the month. suspense account istransactions achieved.

3. Progressive closure of all off-budget Identify all off-budget New initiative CGA,PFC, AG,accounts. accounts by December 31, GoNWFP

2002 and develop a planfor their progressiveclosure.

4. Up gradation of the grade levels of DAOs Already upgraded New initiative CGA,PFC, Financeand TAOs (Grade 18) in major districts. Department

5. Improving quality of the staff of DAOs Improvement in each year The existing quality is Finance Department,through training and fresh induction. as per plan not satisfactory both in PFC, AG

accounting andcomputer skills

6. Progressively increasing percentage of Improvement in each year Payroll and accounting CGA, AG, PFC,government transactions through according to plan and in only 17 of 24 DAOs Finance Departmentcomputerized accounting (SAP). PIFRA roll out. is in place

B. Imnproved 7. Publish useable budget monitoring reports From FY2003 Non-existent PFC, Financeinternal control Departmentenvironment

8. Establishment of an effective internal audit Progressive institution to Non-existent PFC, FinanceC. Increased unit for each Ministry. be achieved by June 2003 Department

credibility ofprovincial and 9. Publishing audited accounts of PSEs, To be published with FY Not available at present PFC, Financelocal government autonomous and quasi-autonomous bodies. 03 budget. I _I Department

Annex EPage 6 of 8

S. No, I Outcome Performance BenchmarA Tar2et Date BawWine(ffay2002j ResDonsibilit

financialstatements with 10. Timely aggregation and audited financial On-going New Initiative Finance Departments,public and statements. AG and Auditorinternational Generaldonorcommunity

D. Reduced 11. Detailed review and identification of all March 2003 New initiative Finance Departmentbudgetary impact liabilities of autonomous bodies which haveof autonomous budgetary impact and develop a program tobodies' quasi- cover all unfunded liabilities.fiscal liability

2. Improved financial 1. Appointment of Provincial Financial July 15, 2002 New initiative GoNWFPmanagement of all Controllerlevels of NWFP 2. Operationalization of PAC May 31,2002 PAC notified, members GoNWFPgovernment being selected

3. Constitution of Task Force/Steering July 15, 2002 New initiative GoNWFP, CGACommittee

4. Carry out a provincial financial accountability December 31,2002 New diagnostic work GoNWFP with Bank &assessment and agree on a detailed time bound other donors supportFM improvement program

5. Publication of annual reports (half-yearly From first quarter of FY New initiative GoNWFP, AG, Districtfrom FY 04 and quarterly from 05) along with 2003-04 Governments, CGAaudited financial statements of districtgovernments.

3. A. Improved 1. Incorporation of details of actual cash From annual audit report New initiative PFC, PAC Secretariatexternal audit recovery from audit findings due to fraud, relating to FY2000and legislative waste and abuse reported in the Auditoroversight General's annual report (installation of

tracking system for recoveries on account ofaudit findings).

B. More open and 2. MIS to determine the % of audit From annual audit report New initiative PFC, PAC Secretariatanswerable recommendations accepted by the PAC relating to FY200government 3. MIS to review the % of PAC's From annual audit report New initiative PFC, PAC Secretariat

recommendations accepted by the relating to FY2000Government.

4. Posting of audit reports in the web page soon From annual audit report New initiative PFC, PAC Secretariatafter PAC's discussion relating to FY2000

5. Prescribing a schedule of examination of audit As soon as the regular New initiative PFC, PAC Secretariatreports by PAC, by amending the Standing PAC is in session I I

Annex EPage 7 of 8

Procedure6. Making PACs open to press As soon as PAC is in New initiative PFC, PAC Secretariat

session_4. Inmprovement in I1. New Procurernent Ordinance approved for May 30, 2002 New initiative Finance Dept.

Public Procurement enactment by the Governor.2. Develop and notify new Procurement Rules March 31, 2003 New initiative Finance Dept.

and Regulations.3. Develop and adopt standard bidding March 31, 2003 New initiative Finance Dept

documents.4. Initiate institutionalized procurement training June 30, 2003 New initiative Finance Dept

programs for government staff.5. Establish effective mechanism to redress August 31, 2003 New initiative Finance Dept

complaints/grievances from suppliers I I I

Annex EPage 8 of 8

Attachment 1

KEY FEATURES OF THE NEW PROCUREMENT ORDINANCE

1. The passage of the NWFP Procurement Ordinance is the most significantaccomplishment to-date in the procurement reform efforts in Pakistan. The ordinance establishesa legal framework for carrying out procurement which was non-existent up till now in NWFP orfor that matter in any other province or even at the federal level. It includes many importantprovisions to streamline the procurement process, promote fair and open competition, increasetransparency, reduce delays, and address governance related aspects.

2. The ordinance introduces a code of ethical conduct for government staff and suppliersand requires all members of the Procuring Entities and Purchase Committees to sign a declarationcertifying that they will abide by the applicable rules and code of conduct. Similar certificationswill be required from suppliers, contractors and consultants. The ordinance also includes explicitprovisions on fraud and corruption along with remedial measures.

3. In terms of process improvements; the ordinance incorporates the main principles ofgood public procurement practices that were either missing from or were being incorrectlyapplied under the existing rules and procedures. The ordinance now explicitly stipulates thatopen competition will be the preferred method and all other methods will be used onlyexceptionally in accordance with the rules. It requires that the solicitation documents issued tobidders must be complete and should clearly specify the requirements, evaluation criteria andcontract conditions. It also states that evaluation of bids contract award must be strictly inaccordance with the pre-disclosed criteria and that no other criteria shall be taken into account.The ordinance also requires, for the first time, that the qualification of the bidder to satisfactorilyperform the contract must be ascertained, on the basis of the qualification criteria provided in thebidding documents, before contract award. Post-bid negotiations are not permitted with anybidder, except under exceptional circumstances to be prescribed in the rules

4. To reduce delays, the ordinance requires upfront procurement planning and alsostipulates the necessity to award contracts within the original bid validity period, with extensionsonly under exceptional circumstances in accordance with the rules. Another important provisionin the Ordinance pertains to the requirement for notifying unsuccessful bidders of the outcome ofthe procurement process promptly after award of contract. The ordinance also provides biddersand suppliers an opportunity to file grievances/complaints and requires that the redressal of suchgrievances must be carried out in an efficient and equitable manner.

5. The incorporation of the fundamental principles of good public procurement practices inthe procurement ordinance, followed by the development of new procurement rules andregulations and standard bidding documents, is expected to reduce irregularities in theprocurement process and discourage corruption.

Annex FPage I of 10

NWFP EDUCATION SECTOR REFORMS

Key Issues

1. Historically, the performance of the education sector in NWFP has been slow and stagnant, with

enrollment and literacy rates rising only marginally and growing disparities between girls and boys and

urban/rural as can be seen from the table below.

Key Education Indicators

Primary Gross Primary Gross Literacy Rate - Literacy RateEnrollment Rate Enrollment Rate Boys2 - Girls- Boys - Girls

NWFP 85.4 53.7 53.8 15.1

Pakistan 80.0 61.0 58.0 27.2

Source: PIHS & EMIS.

2. This poor performance is caused by a number of factors, that include:

* Limits and gender disparities in access to education: Despite the clearly spelled out vision of the

Government of NWFP giving top priority to primary education, especially girls education,

substantial gender disparities continue to exist. And despite the increase in the number of girls'

schools which was as high as 58.6% between Academic Year (AY) 1992/93 and AY 2000/01 as

compared with a 2.7% decrease in the number of boys institutions during the same period3, there

are still a large number of areas without girls schools. The latter decrease is due to efficiency

measures taken by the Government of NWFP to merge or close 3,582 schools with very low

enrollments.

* Limited access for continuing education: At the same time, the focus on emphasizing primary

education has resulted in a widening gap in the numbers of primary, middle, secondary and

higher education institutions, depriving the vast majority of primary school graduates from

admission into middle and high schools. Out of the total number of institutions in the school

sector, 86% are primary, 8% middle, 5% high schools and only 1% higher secondary schools.

* Low enrollments, rural-urban and gender gaps in enrollment rates: The percentage increases in

girls' and boys' enrollment at primary level from AY 1992/93 to AY 2000/01 were 56.9% and

12.1% respectively, for an overall increase of 26.8%. Despite the priority given to primary

education, especially to girls'.education, and the much larger increase in girls enrollment as

compared with that of boys, the gender gap is still wide, as can be seen from the table below:

This Annex incorporates the main features of the "Institutional Reforms Program of Government of NWFW,

Schools & Literacy Departmient, May 2002.

2 For Populations 15 years and above.

3 Source: Annual School Census (1999-00 and 2000-01) and presentation made by the Literacy and School (L & S),

and Higher Education Departments.

Annex FPage 2 of 10

Gross Primary Sch ol Enrollment Rates in NWFP, AY 2000 01________ ________ _ _ Boys Enrollment Girls Enrollment Total Enrollment

(% (%) (%Government Primary Schools 75.1 49. 62.9Private Primary Schools 10.3 4.1 7.3All Primary Schools 85.4 53.7 70.2Note: Percentages refer to share of population age 5-9. Data were provided by the NWFP Department ofLiteracy and Primary Education. The enrollment includes estimated enrollment of private primary schools(7.3% of the overall).

* Gender disparities: Gender disparities in Gross Enrollment Rates (GERs) are significant in bothpublic and private schools, and in rural and urban areas. The GER of rural government schoolswas reportedly 84.2% for boys and 52.3% for girls during 1999/00, and for urban areas thesefigure were 71.65% for boys and 55.1% for girls.4 One of the reasons for low enrollment ratesfor girls, especially in rural areas, is non-availability of local female teachers. The teachersposted in rural schools from other areas of the province get themselves transferred out to places oftheir choice. As a result, girls' schools may be closed and girls drop out.

* Inadequate facilities for schooling beyond primary education: A very large number of childreneither do not have access to middle school and secondary school education or do not getadmission beyond the primary level. This is evident from the GER of grades VI-ViII, which isreported to be 47.5% for boys, 20.3% for girls and 34.7% overall, and those of grades IX-X,which are reported to be 36% for boys, 13.8% for girls and 25.6% overall.

* Non/under-utilization of existing resources and wastage in the system: There were 478 unutilizedprimary schools, 5,416 under-utilized primary schools, and 594 primary schools without teachersaccording to the Annual School Census Report (ASC) for 2000/01. Drop-out rates betweenKachi and grade-5 (around 48%; boys 34.7%, girls 70.3%) and repetition rates (ranging between11% and 18.4% in various grades) are very high. No reliable data are available on completionrates, but they appear to be low. It is estimated that around 80% of the boys and girls (more boysthan girls) who reach grade-5 complete that grade. A large number of buildings constructedunder various programs for primary and secondary education facilities continue to remain unused.

* Low user charges at secondary and higher education levels: Currently students of grades 6-8, 9-10 and 11-12 pay a total of Rs. 80, Rs. 104 and Rs. 290, respectively, as admission and tuition feeper annum, which is very low by any standard. However, in view of the poverty situation in theprovince, a large number of families cannot pay even that amount. Similarly, tuition fees atFA/FSc., BA/BSc., and MA/MSc. levels are Rs. 330/360, Rs 400/420 and Rs. 960/1440respectively, which are extremely low for higher education.

* Schools lack basic physical facilities: Around 50% of primary schools and a large number ofmiddle, high and higher secondary schools lack facilities like water supply, sanitation facilities,and boundary walls. -A large number of school of all levels need major or minor repairs.

* Low quality of education: The quality of education in NWFP is widely acknowledged to beunsatisfactory. The failure of most students to remain in school long enough to acquire functionalliteracy and numeracy has been noted earlier. In addition, most of those who do completeprimary school or graduate from secondary or tertiary institutions do not achieve the level ofcompetency that is required for success in the modem world.

4Source: Govermment of NWFP, Department of Education, EMIS Annual School Census Report 1999/00.

Annex FPage 3 of 10

* Weak management and implementation capacity of field staff: The Education Departmentsrecognize that financial management is very weak, especially at the field level. The personshandling financial resources are not trained in financial management. They cannot prepare even aproper budget based on the needs of the system. The field staff generally lack school supervision,management, monitoring and evaluation skills. They are not made aware of their job descriptionor trained according to their job description. Accountability measures, although they exist, arenot enforced. Schools lack proper resources and operational budget, and field staff lack basicneeds in terms of mobility, office equipment, and O&M budget. With the establishment ofdistrict governments, capacity building becomes even more important.

* Irrational distribution of staff, especially teaching staff: There were 2,537 schools with ateacher/student ratio below 1:20 and 1,192 schools with a ratio above 1:50 according to ASC2000/01. There are 6,300 additional teachers required in 5,746 schools, while there are 7,075excess teachers in 5,620 schools according to the ASC 2000/01. This clearly shows that thespatial distribution of teachers is not rational. The mis-deployment issue predominantly relates toprimary education and less to secondary and higher levels, but, there is oversupply of teachers insecondary schools and above in urban areas, while there are "shortages" of secondary teachers inrural schools. Administrative and managerial staff are considered to be in need of rightsizing aswell.

* Substandard quality of service delivery: The govermment is fully cognizant of the fact thatservice delivery is poor. Contributing factors include the following. The communication systemis inadequate to make field officials and schools' staff aware of the national and provincialpolicies and programs and their objectives. Appropriate systems like student assessment are notin place to inform the parents, educational managers and policy makers what students arelearning. There are no institutional arrangements for continuous in-service training of teachersand supervisory and managerial staff. Teachers at the primary level have to handle multi-gradeteaching, for which they are not trained. O&M budget allocations are inadequate for schools andfor field staff. To improve service delivery at the school level, PTAs were formed in almost allprimary schools, and around 2,100 PTA members were trained through NGOs. All teachers andhead-teachers have received some orientation as part of the in-service teacher training program.However, other members of the PTAs could not receive any orientation, and therefore there isstill lack of awareness among the PTAs about their roles and functions. PTAs' members willcontinue to require information and support as their roles solidify.

Government Strategy and Reform Program

3. Since FY00, the Government of NWFP has been in the process of developing a comprehensivestrategy to tackle the issues noted above, and to introduce wide-ranging reforms to improve theperformance of the education sector. The govemment has now prepared a medium term plan for threeyears titled "Institutional Reforms Program, Schools and Literacy Department, Govemment of NWFP,May 2002". The provincial Govemment's efforts are focused on capacity building during the first year ofthe plan i.e. during FY03, improving the quality of education; increasing enrollments, especially of girlsat the primary level; expanding secondary education to provide greater access to primary schoolgraduates; increasing cost recovery at secondary and tertiary levels of education with concessions for thepoor; and expanding non-govemment participation for provision of education and to improve servicedelivery. NWFP's education reform program are in line with and have been linked with the FederalMinistry of Education's Education Sector Reform Program for 2001-04.

Annex FPage 4 of IO

4. The expected outcomes by the end of FY05 of the NWFP education sector reform program are:

* 15% increase in enrollment at the primary level (30% for girls).

* 7.5% increase in enrollment at the middle level.

* 10.5% increase in enrollment at the secondary level.

* 10% reduction in overall drop out rate.

* 5% increase in private sector participation in the education sector.

* Achieving a 1:40 teacher-student ratio (instead of the current 1:33).

* Gender disparity reduced.

* 100% of girls' schools without basic physical facilities provided these by end-June 2003.

* 100% of boys' schools without basic physical facilities provided these by end-June 2005.

* All managers trained in administrative and financial matters, particularly in the context ofdevolution and new responsibilities.

* Community involved in school management and support through effective PTAs.

* Service delivery improved: all teachers are trained; teachers deployment rationalized. teacherabsenteeism arrested; improved instructional material made available; classroom environmentimproved.

Increasing Allocation for the Sector

5. In order to increase the financial allocation for the education sector, the Government of NWFPhas taken the following actions:

* The annual funding for the school education sector recurrent budget has been increased in FY02.However, spending will be about Rs. 7.9 billion compared to Rs. 8.30 billion in FY01. Thisbrings the share of education to 24.1% of the total provincial expenditures. The expenditures oneducation would increase by 73% from Rs 8.5 billion in FY02 to Rs 14.7 billion in FY05. Theallocations for the school education sector for the next three years are shown in the followingtable:

(Rs. billion) FYO FY02 FY03 FY04 FY05Recurrent 8.2 7.9 8.8 9.8 10.8Development 0.6 0.6 2.0 2.7 3.9TOTAL 8.8 8.5 10.8 12.5 14.7

Source: NWFP Medium Term Budget Framework (MTBF) 2003-05

* To initiate the ESR-funded programs, Rs. 254 million has been released to the province, and thesefunds have been transferred to the districts as well. The province has also received the secondinstallment of ESR funds but it has yet to be released to the districts.

* In light of priority attached by the government to elementary education, a policy decision hasrecently been made to establish a fund upgrading elementary education facilities (both private andpublic) in which user charges that are gradually being introduced at the higher levels and

Annex FPage 5 of 10

contribution by donors and philanthropists will be pooled. This fund will be managed by theElementary Education Foundation. The details will be worked out during FY03.

Improving Access to Education

6. An important part of the reform program is to increase access to education through the followingmeasures during FY 03-05. The government has taken following actions:

* A decision has been taken to ensure that all non-functioning schools are made fully functionalthrough strategies that include staff rationalization to ensure that teachers are posted, teacherabsenteeism monitoring, and providing missing physical facilities to the school.

* Innovative activities have been initiated to increase enrollment, including holding of specialcommunity mobilization drives and special enrollment meetings with existing PTAs.

* Enrollment targets (targets for reduced drop-out rates) are being set by the districts, and acomplete enrollment target plan based on district plans will be consolidated at the provincial levelby end-June 2002.

* The recruitment of 2410 new district-specific contract female teachers (against vacant posts) tomake functional non-functional schools has been approved by the Govemor, and recruitment isexpected to be completed by August 31, 2002.

7. Over the medium-term, following actions are planned:

* To close the gap of physical infrastructure constraints and to fulfill the demands of additionalenrollment, the number of school classrooms will be increased from 55,036 to 60,920 to provideshelter to 235,360 additional children by June 2004.

* Out of the above, the increase in girls' classrooms will be from 19,601 to 21,510 to provideshelter to 76,360 additional girls by June 2003.

* Provision of the following basic facilities is part of the three year medium term plan (FY03-05):(a) primary schools: latrines to 6883 schools; electricity to 9036 schools; water supply to 9988schools; and boundary walls to 6506 schools; (b) secondary schools: latrines to 142 schools;electricity to 99 schools; water supply to 88 schools; and boundary walls to 97 schools.

Reducing Gender Gap

8. The reform program also aims to reduce gender gaps and reduce boys-girls/rural-urbandisparities. Actions taken include the following:

* The decision has been made in FY02 to spend 70% of the development budget allocated toprimary education on girls' education, especially in rural areas and urban disadvantaged areas.However, the percentage of allocation may vary from district to district in view of the currentsituation in an individual district.

* Innovative activities to expand girls' access to education have been initiated, including a WFP-supported edible oil program that is being implemented in six "backward" districts, and GirlsCommunity Model Schools that are being established under an ADB-supported project.

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9. Actions planned over the medium-term include:

* The existing criteria for establishment of new primary schools has been developed to ensure thatany and all new schools are opened in under-served areas, particularly to target girls in ruralareas.

* All girls' schools without physical facilities (such as toilets, water, boundary walls, electricitywhere available) will be provided these missing facilities by the end of FY03 (June 2003).

Improving Efficiency of the System

10. The Government of NWFP aims to increase efficiency in the education sector through optimumutilization of existing resources and reducing wastage in the system. Actions taken include the following:

* A staff and facility rationalization exercise has been completed. The plan for re-deployment andrecruitment, and any new construction based on this exercise has been approved by thegovernment.

* Based on this plan, schools and staff will be rationalized by end-August 2002 through acomprehensive plan prepared by the Department of School Education and Literacy for staff re-deployment, new recruitment (contract, facility-based), using available unused governmentbuildings for educational purposes, and construction of additional facilities if and wherenecessary.

Enhancing Cost Recovery

11. The government also has initiated a program for improving cost recovery at the tertiary level.The Department of Higher Education has prepared a proposal for approval by the next fiscal year togradually increase admission and tuition fees for secondary schools and colleges. This proposalanticipates addition collection of Rs. 200 per annum from each higher level student.

Improving Quality of Education

12. In order to improve the quality of education, a number of activities have been initiated. Theseinclude improving the learning environment through introduction of revised textbooks, in-service teachertraining, involvement of communities and parents, provision of instructional material, and other measuresto improve quality. Actions taken include the following:

* Teacher Training: 220 positions of Teacher Trainers have been created as part of the devolutionplan for conducting in-service training courses for school teachers in districts, while 771 positionsof Learning Coordinators have been abolished, reflecting their perceived lack of effectiveness insupporting teachers and improving quality. Training is being carried out in collaboration betweenthe Govemment Colleges for Elementary Teaching and the Institute for Educational Developmentof the Aga Khan University.

* Instructional materials and school repairs (IM&R): Current low levels of spending on classroomconsumables, school repairs and procurement of furniture and jute mats for primary and middleschools have been modestly increased in FY02 from Rs. 1650 per class to Rs. 1750 per class, andthese have been disbursed through PTAs in FY00 and FY01. This year under the new devolutionsystem, Rs. 24 million has been released to the EDO (Education) accounts for onwarddisbursement to PTAs.

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* Introduction of English: English has been introduced as a subject in all primary schools of theprovince in response to the growing demand for English by parents. The Textbook Board hasdeveloped and made the English textbooks available. Teachers up to grade 4 level have beentrained in teaching of English during in-service teacher training under an IDA-GTZ supportedprogram.

* Teaching of science and math through English language medium: A pilot program has beeninitiated in all of the middle and high schools (450 schools) of Kohat and Swat districts to teachscience and math through English medium. The objective of this initiative as well as the teachingof English in all primary schools is to reduce the gap between elite and non-elite educationaltracks.

* NEAS: A PC-1 has been approved for introduction of student assessment at grade-4 and grade-8level as part of the National Education Assessment System (NEAS), and is expected to beimplemented starting in FY03.

* Textbook De-Regulation: A decision has been made to privatize the publishing of textbooks.Initially, publishing of textbooks of Classes 9 - 12 has been given to the private sector on thebasis of royalty. There are plans to phase this to the primary sector from FY03 for which adetailed road map has been developed by the Textbook Board for approval by the Government.

* To meet the growing demand for computer education, computer literacy is being introduced insecondary schools through public-private partnership as well as through support from theMinistry of Science and Technology.

13. Actions planned over the medium-term include:

* Continuation of the teacher training program to ensure that all teachers are trained during FY03.

* Instructional Materials and school repairs (IM&R): An amount of Rs 294.4 million (includingRs 199.3 million for elementary schools) would be made available to schools / PTAs duringFY03 for IM&R.

* Teaching of science and math through English language medium: Taking this reform initiativebeing piloted in two districts to scale has huge cost implications, which the provincialgovernment is fully aware of and is considering the introduction of user charges to sustain it. TheNWFP Government is planning on undertaking an evaluation of this pilot before expanding thisinitiative to other districts in FY03.

* NEAS: Begin implementation of NEAS in FY03. For this purpose, an allocation of Rs 3.5million will be made through recurrent budget for FY03.

* Continuation of the textbook deregulation initiative, expanding it to cover the entire educationsector.

Capacity Building and Rationalization

14. Actions taken for improving management and implementation capacity and rationalization ofstaff distribution include the following:

* In line with the devolution plan, the Department of Education (DoE) has been bifurcated intoseparate Departments for School Education and Literacy, and for Higher Education in order toimprove the administrative efficiency of the education system. The number of officers at thedistrict level has also been reduced from seven to four (EDO, and three District Officers - one for

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primary and literacy, one for secondary and one for development) in large districts and from fiveto three in small districts (no separate DO for development in 12 such districts). To give arepresentation to female officers, at least one of the DOs is female. District allocations for bothrecurrent and development budgets have been made.

* To improve the administrative management of the education sector and to prevent frequenttransfers between schools and supervision/administrative positions, approval for the separation ofthe teaching and management cadres has been made, and will be implemented at the start ofFY03. The officers of the two departments have been asked to indicate their choice as to whetherthey want. to become part of the teaching or management cadre. Although a large number ofofficials want to be part of the management cadre, it is anticipated that implementation of thisinitiative will encourage the development of a strong teaching cadre that is made up of thoseeducators that are dedicated, supported by a professional cadre of managers. The Department hasconstituted committees which will interview officials to select as many as are required toestablish the management cadre. A draft of service rules and career structure of the schoolsmanagement and teaching cadre has been prepared.

* Implementation of a comprehensive training program for the new district managers and makingthe Nazims aware of the government policy has started from February 2002 with DFID fundingand technical support. The 18-month training is focusing on building planning skills and will becompleted by June 2003.

* Contract appointments: The policy of appointing teaching staff on contract is part of the overallprovincial government policy and procedures, and has been notified for new appointments in theeducation sector.

* Staff rationalization: As mentioned above, a staff and facility rationalization exercise has beencompleted and a redeployment plan has been prepared to implement the results of rationalizationexercise.

* Accountability mechanism: A start has been made by initiating a system of reward andpunishment on the basis of secondary and higher secondary school examination results for schoolheads and teachers on a pilot basis.

* Financial Management: Reconciliation of accounts was completed for Higher Education up toMay 2001 and for Literacy and School Education up to March 2001. District based school staff(Assistant District Officer Accounts) has been appointed to specifically focus and handlefinancial matters, audit and accounts. On the job training is being given to these officers. TheDepartmnent arranged training of 120 Drawing and Disbursing Officers (DDOs) in budgethandling and accounts keeping.

* EMIS/PMIS and establishment of overall M&E system: The existing EMIS has only collecteddata for primary schools in the past (including some limited data on private schools). Startingthis year (for school year 2001), data on secondary and higher education institutions has beenincluded in the census to make it more comprehensive. The report for this year's census isexpected to be finalized in June 2002. It has been decided to fund EMIS in the regular budget forFY03 onwards.

15. Actions planned over the medium-term include:

* Completion of the separation of teaching and management cadre during FY03.

* As a result of rationalization exercise, 2410 positions of female teachers are planned to be filledthrough contract appointment. Criteria for teacher recruitment on contract basis has been

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approved. A teacher will be appointed for a specific school, and will not be able to transfer toanother facility.

* An effective results-based performance evaluation system will be developed in FY03, andimplemented by end-FY03.

* Continued full funding of EMIS and an allocation of Rs 3.0 million would be made throughrecurrent budget for FY03 and thereafter.

Service Delivery Improvements

16. To bring improvements in service delivery, the following actions have been taken:

* O&M Budget: 29.1% of the total provincial O&M budget has been allocated to education andhealth in the FY02 recurrent budget (as opposed to 23% in FY01).

* The role of PTAs is being expanded to more actively monitor student and teacher absenteeism.The departments fully recognize the need for reformation of PTAs, strengthening their roles andfunctions and providing them legal cover. PTAs also can be formed in middle, secondary, andcolleges.

* Monitoring Teacher Absenteeism: A new proforma has been developed to monitor primaryschools' teacher absenteeism every two weeks, and action based on these reports is being taken.Action has been taken so far against 288 teachers who have been dismissed or have had otherdisciplinary action (suspension) taken against them as a result of this new monitoring system.Circle teams have also been formed (made up of ADO Inspection, ADO Training, and the EDO)to perform monitoring and supervision through regular field visits, and further monitoring by theMinister is also being undertaken.

17. Over the medium-term the actions planned include:

* The role of PTAs will further be strengthened including reforming of PTAs, particularly tomonitor student and teacher absenteeism.

* Monitoring of teacher attendance will be further institutionalized, ensuring that the districtofficials and DOE officers are involved and using the new monitoring tools.

Promoting Public-Private Partnerships

18. One of the cornerstones of the education sector reform program is to promote public-privatepartnership to expand private sector participation in the delivery of education services while ensuringequitable access and quality of service. To this end, the following actions have been taken:

* Innovative programs based on public-private partnerships have been initiated, including eveningshifts in existing Government primary schools to allow up-gradation of these schools to middleand higher levels, and the Adopt-a-School Program. A Project Director for Public-PrivateCollaboration has been appointed.

* An Ordinance by the NWFP Government has been issuedfor the registration andfunctioning ofprivate educational institutions at all levels to regulate and facilitate the private sector'sparticipation in education.

* The Frontier Education Foundation has been restructured to provide it autonomy to enable it tofacilitate the public-private partnerships. A new Managing Director from the private sector has

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been posted, and other improvements are in the process of being implemented to make the FEFmore effective in reaching out to the private sector ensuring adequate and effective linkages withthe two departnents of education.

Strengthening Implementation and Monitoring

19. Key factors that will ensure effective implementation of the program include following (amongothers discussed in the foregoing sections), which the government intends to implement.

* An Education Sector Reform Unit has been established to oversee and monitor the initiatives andreforms in the education sector.

* Approval of all PC-Is for programs included in the MTBF, which the Education and FinanceDepartment intend to undertake, will be given by end-July 2002.

* Timely release offunds (during July) by the Finance Department.

* Time bound implementation plan to be prepared by the Department of S&L by end-May and toshare it with districts during June 2002.

* Regular monitoring by the districts of their program (by district Planning Units planned to beestablished by the department) and, by the Department of S&L on provincial level (by M&ESection of the Directorate of Education) using simple monitoring instruments that department willprepare by mid-June 2002 with the help of a short term consultant.

* Translating the monitoring indicators (as included in department's plan) into implementable andmonitorable targets for each district (e.g. enrollment increase, decreasing drop-out etc.) as hasbeen done in case of provision of physical facilities.

* In order to have baseline information based on the reforms initiated, the NWFP Governmentintends to commission a third party user and facility survey exercise that will assess the progresstill date of a 10% sample of all institutions in areas that include enrollment, teacher attendance,quality inputs (such as teacher training), availability of IM&R funds at the school level, PTAparticipation and condition of the physical resources (buildings, furniture, etc.) at the school level.This survey will be completed during the third quarter of FY03 (by end-April 2003).

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NWFP HEALTH SECTOR REFORMS

Key Issues

1. NWFP has shown some gains in health outcomes during the 1990s. Recent evidence based onthe Pakistan Integrated Household Survey (PIHS) and the Pakistan Reproductive Health and FamilyPlanning Survey (PRHFPS) undertaken in 2001, is broadly indicative of a rising trend in health andpopulation indicators. Despite some improvements, enormous challenges remain:

* Roughly 46% of children less than two years of age are not fully immunized.* Use of contraceptive methods is limited to 21 percent of currently married women aged 15-49

years.* Large disparities persist in health outcomes between poor and non-poor households and between

rural and urban areas.* The utilization rate of primary health facilities has remained low and constant over the last decade

at an average of 22 outpatients per day, while average outpatient attendance at MCH centers hasrisen from 7 to 10 per day.

Factors Constraining Health Sector Performance

2. These include:

* Low levels of government spending with average per capita expenditure on health of roughly Rs.260 per annum in the past decade.

* Poor returns to available resources attributable to weak and centralized management and othergovernance issues, particularly related to personnel problems such as absenteeism, hiring of staffon other than merit grounds, frequent transfers and mis-deployment of staff.

* Weak motivation of staff due to lack of career development opportunities for health professionals.* Virtual neglect of the private sector, including poor regulation and monitoring of both public and

private providers.

Government Strategy To Address The Issues: The Reform Program And Plans

3. The Departnent of Health's reform program is aimed at addressing the problems noted above.The reform plan has been developed through a consultative process extending over four years and twosuccessive governments with involvement of a wide range of stakeholders. Through its Reform Program,the NWFP Health Department expects to achieve the following outcomes:

* Increase in development spending on health by an additional amount of Rs.3 billion over the threeyear period.

* An increase in full immunization coverage of children aged between 12-23 months from 54% to80% by FY05.

* There will be '0' cases of polio by FY05.* An increase in antenatal coverage of pregnant women by health professionals from 34% to 45%

by FY05.* An increase in contraceptive prevalence rate from 21% to 35% by FY05.* An increase in the percentage of population with access to TB Control using DOTS strategy from

20% to full coverage by FY05.* Increase in the number of Lady Health Workers (LHWs) deployed from 7800 to 14000 by FY05.* A restructured and efficient organization and management of the health sector program.

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4. The reform program comprises: increased financial allocations, organizational and managementreform and programmatic reforms. The NWFP Government has recently formally approved a mediumterm health sector strategy which aims to consolidate organizational and programmatic reforms.

A. Increased Financial Allocations

5. The health reform program will be supported by a substantial increase of 120 percent in healthexpenditures. The additional resources will support: (i) expansion of preventive health care programsincluding of EPI and TB DOTS; (ii) building management capacity particularly at the district level withthe objective of developing an efficient and responsive district health system in the province; (iii)rationalization and upgrading of health facilities at district level and below; (iv) creation of additionalpositions of female nurses to address critical shortages at district and sub-district hospitals; (v) monitoringand evaluation and special studies to track the progress of reforms; and (vi) various interventions toimprove maternal health through increased access to trained personnel at birth and raising communityawareness of reproductive health issues by government-NGO collaboration.

B. Organizational And Management Reform

6. The major thrust of the reform plan is on organizational and management reforms to improve theefficiency of service delivery and to mobilize resources. The reform agenda includes:

* Restructuring of the Health Department in line with the devolution initiative.* Building institutional capacity for reforms.* Introduction of systematic transfer and posting policies.* Introduction of measures to reduce staff absenteeism and ensure availability of drug and supply of

inputs at the facility level.* Rationalization of district health care services.* Reducing shortages of female nurses in district and sub-district hospitals.* Introducing hospital autonomy.* Strengthening public-private partnership, including introduction of institution-based private

practice of doctors.* Monitoring the impact of the reforms on health outcomes and process indicators.

Actions Taken

7. The Department has been restructured to reflect the emerging needs and roles in the context ofthe devolution initiative. This restructuring involves a reduction in size of provincial staffing at theDirectorate and Secretariat, and a corresponding increase of human and financial resources at the districtlevel. Thus: (i) the provincial staff at the Directorate and the Secretariat have been reduced by 34% and37% respectively, and budgets by 86% and 67% respectively; (ii) staff strength and budgets at the districtlevel have been increased by 39% and 67% respectively; (iii) the restructuring has been accompanied bysignificant delegation of administrative and financial authority to the districts. Prior to the reform districtmanagers had very limited financial and personnel management authority, however under the new rulesconcomitant with Category I powers, the Executive District Officer's Health (EDOs) are authorized tomake all purchases within their jurisdiction, and are empowered to hire and discipline staff in grades I to15 in all categories. For officer level staff, the EDO has authority for postings and transfers within thedistrict. The roles and responsibilities for different levels have been clearly identified and notified; and(iv) a managerial cadre at the district level has been introduced to make optimal use of the nearly 100health personnel trained in public health management, hospital management, etc. several of whom are

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employed in inappropriate positions. The management cadre will primarily consist of positions in theDistrict Health Management Teams including EDO Health and related staff as well as the hospitalmanagement teams including Medical Superintendents and their teams. The terms and conditions of thiscadre have been developed. The cadre is expected to be given legislative cover.

8. The Institutional Capacity for Reforms is being strengthened. A Health Sector Reform Unit(HSRU) has been notified to strengthen the institutional capacity for planning and monitoring the processof policy and management reforms. HSRU will serve as a technical backstopping unit for the newlyestablished district health systems and will also be responsible for coordinating donor assistance forhealth sector reforms. The HSRU is staffed with a Chief, Deputy Chief for the Federally AdministeredTribal Areas (FATA), and four senior planning officers. While at present the HSRU is operating on anad-hoc basis, it will be incorporated in the ADP as part of the cross sectoral capacity building programwith formnal approval of the PC I for the HSRU expected by August 2002.

9. A Systematic Transfer and Posting Policies has been introduced. A new policy notified by theDepartment of Health enhances transparency in procedures for transfers and posting. The selection ofExecutive District Health Officers (EDOs) has been undertaken through interviews and clearly specifiedcriteria including appropriate qualifications and management experience. In this process, 24 EDOsHealth and four coordinators each for each EDO were selected by a high level committee of the HealthDepartment headed by the Minister of Health and which included the Secretary Health and DG Health.For each post a panel of three persons was interviewed and the best qualified officer was appointed asEDO. This marks a major departure from past routine transfer procedures on the basis of seniority.

10. Measures have been taken to Reduce Staff Absenteeism. These include the: (i) introduction offacility specific contracts for new recruitment; (ii) monitoring of BHU staff through routine visits bydistrict staff and reported on monitoring formats; (iii) strengthening of supervisory staff at the districtlevel and below; and (iv) taking of disciplinary action against routinely absent staff, as a result of whichover 300 staff have been affected.

11. Rationalization of Health Care Services has been initiated. Historically health facilities havebeen added to the Health Department over a period of time in an incremental manner and currently theprovince has a total of 1593 facilities. comprising District, Tehsil and Civil Hospitals, RHCs, BHUS,MCH Centers, Sub Health Centers, etc. The poorly planned expansion of the health infrastructureincluding wrong site selection inappropriate staffing and budgeting, duplications with similar facilities inclose proximity is a major cause of low utilization rates. To address this problem the Department isimplementing a pilot for rationalizing health services in the district of Charsadda which will serve as amodel for wider replication across the province over the next 3 years. A detailed mapping of facilities byworkload and access to nearest medical facility has been completed in Charsadda and has been used asthe basis for redeployment of staff and resources into three broad categories of health facilities:Community Health Centre (CHC) with doctor; CHC without doctor and hospitals graded as A, B, C andD. The number of facilities in the district is being reduced to half the existing number (from 43 to 23)through the closure of health centers with very limited workload. A decision has also been taken towithdraw doctors from 80% of primary health facilities and to post them to LSMFs while the primaryfacilities will be run by female paramedics.

12. Autonomy has been granted to tertiary hospitals as follows: (i) the NVFP Government enacted anAutonomy Bill in 1999 to enable granting of managerial and financial authority to four tertiarygovernment hospitals; (ii) detailed Rules of Business under the 1999 Act were developed and formallyapproved in June 2001. These confer a high degree of financial and management authority to the ChiefExecutive of the autonomous hospitals. With these rules in place, the decisions regarding cost recoveryand exemption mechanisms have effectively been given to the Institutional Management Communities

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(IMC) rather than the Government; (iii) the Chief Executives of three of the four autonomous hospitalshave been hired on a contract basis at market salaries; (iv) the Government financing of these institutionsis to be capped at the current level for the next three years; and (v) cost recovery has been introduced insome hospitals particularly for diagnostic services however as yet there has been no significant increase inuser charges for outpatients and inpatients to general wards. Mechanisms for protecting the poor need tobe further defined. Anecdotal evidence suggests an improvement in availability of medicines andpresence of staff however a framework for systematic monitoring and evaluation of the impact of thesereforms on hospital performance and access to hospital services has not been developed.

13. Public Private Partnership is being strengthened. Recognizing the need to engage moreeffectively with the private sector including NGOs, the Department of Health is experimenting with someinitiatives to enhance public private collaboration which are elaborated below. Here it needs to bementioned that all three pilots lack an adequate monitoring and evaluation framework to enableassessment of their impact on service delivery.

(i) A Basic Health Unit in the remote district of Kohistan has been contracted out to aJapanese funded NGO for a five year period for provision of free service to the populationof the area. The government's contribution is limited to the building and existingequipment while the NGO is responsible for staffing, maintenance and all supplies and hasexclusive administrative control.

(ii) An Emergency Satellite Centre (ASC), which includes a select number of specialistservices and serves.a catchment population of 150,000 has been leased to a UK based NGOwith partners in Pakistan. In this case all the inputs including the physical infrastructure,staff, medicines and other supplies are provided by the Department and the revenue fromuser charges which are based on standard government rates also accrues to the publictreasury. The NGO is responsible for management. The staff reports directly to the NGOrather than the EDO.

(iii) The District Hospital Mansehra has entered into a contract with the Frontier MedicalCollege of Abbottabad, a private sector entity, for utilizing the facilities at the hospital forteaching purposes. Payment under the contract which is initially for a three year period ison the basis of a capitation fee at the rate of Rs.50,000 per student per annum.per class.Under this arrangement an estimated amount of Rs.15 million will be paid to the hospitalover three years. The government is responsible for provision of the development andrecurrent budget including staffing.

14. Institution-based Private Practice has been initiated. A change in the rules of appointment andconduct has been enforced effective March 1, 2002 whereby government doctors and paramedic andnursing staff cannot undertake private practice outside the government facility in the evenings, as hasbeen the prevalent trend. Instead, institution-based private practice of doctors has been introduced inpublic hospitals during evening hours, when outpatient services are closed at these facilities. While theaim of reducing absenteeism and increasing utilization of Government facilities is laudable a carefulreview of the effectiveness of the scheme is necessary including the perspectives of all concernedstakeholders.

15. Monitoring the Impact of the Reforms on Health Outcomes and Process Indicators has beeninitiated A baseline Multi Indicator. Cluster Survey has been completed in 2001 with assistance fromUNICEF. The data show wide differences across district in key process indicators, e.g., proportion ofbirths attended by trained health workers varies between 3 and 64 percent. The data have been used torank districts on the basis of selected human development indicators with the objective of identifyingdistricts which will need investment and technical support to improve social outcomes.

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Actions Planned in the Medium Term

16. In the medium term, the Department of Health plans to consolidate the process of managementand organizational reform through: building capacity of district health teams; rationalization andupgrading of secondary health facilities; creation of female nursing positions to address shortages indistrict and sub-district hospital; formulation of a policy framework for public private partnerships;development of a financing and monitoring framework for autonomous hospitals with the aim of ensuringequity and efficiency; and completion of a master plan for longer term health sector reforms to ensurecontinuity of the process.

17. Capacity Development of the District Health Teams: Capacity of district managers will be built inareas of planning, needs based budget formulation, and personnel management to enable them todischarge their new responsibilities effectively. In view of the importance of strengthening managementcapacity to the successful functioning of the devolved system, detailed training plans will be developedon a priority basis and approved within the current fiscal year. The HSRU and the Provincial HealthService Academy will provide assistance in systems development and training activities.

18. Rationalization and Upgrading of Secondary Health Services will be undertaken in selecteddistricts in a phased manner along the lines of the Charsadda Pilot. A comprehensive mapping exercisebased on selected criteria including patient load will serve as the basis of redeployment of staff andresources, ensuring appropriate skill mix, and identifying requirements for upgrading physicalinfrastructure. The detailed plan for rationalization will then be agreed with the District Nazims beforeformal approval. The Charsadda pilot which has gone through these various stages is ready forimplementation pending approval by the Governor. Considerable progress has also been achieved indeveloping plans for another 13 districts through consultation with the District Nazims and theDepartment.

19. Reducing Critical Shortages of Female Nurses: A 3-year program has been approved to increasesubstantially female nursing positions in district and sub-district hospitals. As a result the nurses tohospital beds ratios will be brought closer in line with standards laid down by the Pakistan NursingCouncil. Reducing the imbalance in staffing will be an essential pre-requisite to improving the quality ofsecondary health facilities.

20. Promoting Public-Private Partnerships: The Department of health will be move beyond thecurrent approach of ad-hoc partnerships and will developing a policy framework for future collaborationwith NGOs and the private sector. Standard operation procedures and protocols including outsourcingcontracts between public and private agencies/NGOs will be developed. Use of NGOs will be fosteredparticularly in the HIV-AIDS and TB DOTS control programs and in raising community awareness ofreproductive health issues.

21. In addition a pilot community health financing scheme managed by an NGO will be implementedin selected union councils in two districts of the province. The prepayment scheme will assess thefeasibility of pooling health risks among the rural population through greater participation of localcommunities.

22. Evidence Based Decision Making: The following Monitoring and Evaluation and AnalyticalStudies would be undertaken:

* Monitoring and Evaluation: Follow-up third party district household surveys will be undertakenregularly to assess the impact of reform on intermediate health indicators. Such information,collected independently, would contribute to increasing accountability of district governments

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and would enable the provincial governments to monitor progress of priority programs. The datawill provide a valuable means of triangulating HMIS data and thereby serve to improve thequality and use of HMIS statistics.

* Evaluation of Autonomous Hospitals to assess the reform's impact on utilization of hospital careby the poor, in addition to measuring other dimensions of performance such as efficiency, qualityof services and financial performance.

* User Cost Study: A study has been designed to measure the cost of delivery of selected hospitalservices to the Government and based on paying capacity of the users, and other related policyobjectives, a cross subsidization regime will be studied. The study is planned to be completedwithin the next year to inform policy and design on structuring cost recovery while protecting thepoor.

* Master plan for longer term reforms in the health sector: The HSRU with technical assistancefrom the Asian Development Bank and bilateral donors is undertaking several studies(institutional analysis, needs assessment for management capacity building, financial analysis,review of legal aspects of reform, social analysis, review of options for improving quality ofhealth care, stakeholder analysis and health sector reform tracking system) which will serve todefine the parameters of management and financial reforms. A master plan of longer term healthsector reforms based on this body of empirical and analytical work will be completed andapproved following a consultative process with key stakeholders. This would be an essential steptowards ensuring continuity of the reform process.

C. Programmatic Reforms

23. On the programmatic front, the reform plan reaffirms the importance assigned to preventive healthcare and specifically aims to increase access to immunization, TB control and maternal and child healthcare services. Strategic medium-term plans have been developed to strengthen and expand prioritypreventive programs including EPI and TB DOTS for the FY03-FY05 period, with adequate provision ofresources in the FY02 ADP.

Actions Taken

24. Expanded Program of Immunization: NWFP has seen some improvement in immunizationcoverage. The proportion of children fully immunized has risen from 39 percent in the mid-nineties to54% by the end of the decade. Polio cases have been reduced from 57 in 2000 to 28 in 2001, with a targetof eliminating polio and achieving zero polio cases by FY05. A provincial task force, chaired by theGovernor, for polio elimination has been overseeing an aggressive campaign against polio. Intensiveefforts have also been made to improve supplementary TT immunization of pregnant women in 15 highrisk areas. The plan for strengthening and expansion of routine immunization with GAVI support hasbeen approved by the Planning Department. This expanded program includes support for activities suchas monitoring, staff development, and cold chain improvement.

25. Increasing TB DOTS Coverage: The TB DOTS program has been revitalized in 5 districts andsome agencies during 2001, and is now covering roughly 20 percent of the population. The program isusing LHWs, family members and health staff to ensure compliance with treatment. Adequate resourceshave been allocated but utilization is slow due to capacity constraints at the district level.

26. Maternal Health including Family Planning: The Maternal and Child Health and FamilyPlanning Program has been fully funded in FY02, and its outcome has resulted in significantimprovement in key indicators of maternal health services, including coverage of antenatal care andattendance at births of trained health service providers, as indicated by the Pakistan Reproductive Health

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and Family Planning Survey data. The positive trend is likely to be due to the intensive efforts toimprove immunization of pregnant women by active involvement of LHWs.

Actions Planned in the Medium Term

27. In the medium term, the Department plans to prioritize expansion of coverage and quality ofservices in communicable disease control programs of immunization (including elimination of polio inNWFP by FY05), TB DOTS, malaria and maternal health with a particular focus on poorly performingdistricts.

28. Given the wide inter-district variation in performance, the Department plans to intensify its focuson increasing coverage of EPI in poorly performing districts to enable it to meet its target of 80 percentcoverage by FY05. The enhanced 5-year EPI program with GAVI support emphasizes performancebased disbursement as well as technical assistance and managerial support to poorly performing districts.Other strategies include: (i) increasing mobility and travel and per diem (TA/DA) allowances ofvaccinators; (ii) involvement of LHWs in the immunization campaign; (iii) expansion of EPI centers; and(iv) social mobilization initiatives.

29. The Department also plans to expand and ensure quality of the TB DOTS program: The TBDOTS program aims to increase coverage up to 100% by FY05 and improve TB cure rates to 85%, andachieve a 70% case detection rate by FY05. In addition to the government allocations, the program willbe supported by KfW and GTZ through interventions which include: (i) establishing partnership with anNGO with the requisite expertise and successful experience of collaboration with government on TBDOTS; (ii) implementation of programs in refugee populations (iii) strengthening capacity for monitoringand supervision.

30. Access to maternal health services and family planning services will be improved through thedeployment of an additional 1800 Lady Health Worker raising their total number from 7800 at present to9600 by the end of 2003 and to 14000 by 2005. As a result coverage of primary health care and familyplanning services provided through the Lady Health Worker's Program will increase from the current 37percent to roughly 50 percent in FY03 and 75 percent of the population of NWFP by FY05.

31. The medium term strategy places a strong emphasis on improving maternal health. Interventionsspecifically aimed at reducing maternal deaths include the development of a community midwiferyprogram, upgrading of secondary hospital and promoting NGO involvement in raising awareness at thecommunity level on all aspects of reproductive health.

32. Midwifery training will be provided to selected LHWs and other appropriately qualifiedapplicants with preference for residents of poorly performing districts. The training will be providedwhere possible at the district level in a phased manner with provision for a maximum of 25-30 studentsincluding 20 LHWs and 5-10 private candidates. Linkages of the trained midwives in the private sectorwith the various levels of health services will be fostered through the LHW supervisory system andthrough provision of supplies.

33. Additionally, partnerships are envisaged with NGOs to raise community awareness on all aspectsof reproductive health and to develop linkages between community and the primary and secondary levelfacilities. The proposed collaboration would benefit from the experience of the Haripur ReproductiveHealth Pilot supported by Save the Children Fund which is widely regarded as a successful model ofcommunity mobilization to improve reproductive health. These initiatives together with upgradation ofsecondary hospitals with appropriate skill mix of staff are expected to contribute to increased referralparticularly for emergency obstetric care critical for reducing maternal mortality.

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NWFP CIVIL SERVICE AND GOVERNANCE REFORMS

I. It is important to recognize the scale of the governance program changes being undertaken inNWFP. This is clear from the various reform documents, notably the Provincial Reform Program 2001-04 which was approved by the provincial Cabinet on June 19, 2001, the White Paper 2001-2002, and theBudget Speech of 28 June 2001, as well as recent discussions with the government officials. The mainobjective of these reforms is to improve service delivery for better economic outcomes and improvesocial indicators, such as poverty, basic education, basic health, and basic community-orientedinfrastructure.

2. NWFP has already made a great deal of progress in restructuring provincial governmentdepartments and preparing for devolution. This has resulted in some organizational streamlining. Thedistrict governments have been organized and staffed in a timely manner (with key staff, including theDistrict Coordination Officers, already appointed), and a great deal of work has gone into identifying andinventorying the assets of the new local governments.

3. The province has made a promising start at civil service reform, implementing various measuressuch as enforcing better discipline, restructuring the provincial government in preparation for devolution,transferring administrative staff within the provincial government, preparing for the use of contractappointments, and improving the performance evaluation process (along the lines instituted by the federalgovernment). In the longer term, the government has identified four main areas of concern: lowcompensation at senior levels; declining quality of new entrants; very limited resources for adjustment;and a large base of current/retired government employees. These challenges would have to be confrontedas the reform process continues.

4. The provincial governance and civil service reforms are based on three main pillars:

(a) Devolution - including restructuring the provincial government, budgeting and resourceallocation for the future, and setting up the new district arrangements, including assigning staff,identifying new roles in the new structures, introducing new systems, and finalizing the powersof the main bodies.

(b) Personnel management - of which the most radical is the planned move to much greater use ofcontract and facility specific appointments. Other measures include rightsizing and restructuringgovernment departments, managing staff under the new devolved system, providing moreadministrative autonomy to the provincial Public Service Commission (PSC), a new performanceappraisal system, and pulling together the formerly scattered regulatory framework into a newcodified manual, Estacode.

(c) Capacity building - which, as time and resources permit, will need to include the necessaryfacilities and equipment for the devolved organizations, training both on and off the job, andappropriate new systems and procedures as well as better information systems.

5. Given the complexity and scope of the reforms, this Annex highlights only the most significantareas in which changes have already been made or are envisaged.

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A. Devolution

6. The following actions have been taken.

* Government departments have been restructured both at the provincial and district level. Thedistrict level restructuring was carried out taking into account the actual needs and the resourceavailability. Administrative control of district departments is now with the district governments.

* Key district staff have been being posted. All District Coordinating Officers (DCOs) have beenappointed, and most of the Executive District Officers (EDOs), especially the key ones ofeducation and health, are also in place. Most of the line department staff are in place (around200,000 out of a total of 280,000). Data on the staff at the district levels are being compiled.

* Performance monitoring systems have been set up. The Governor chairs a monthly meeting ofdistrict Nazims and officials to discuss governance issues and review performance. Monitoringcommittees have been constituted by all the district (Zila) Councils. Dispute Resolution("Masalahat") Committees have been set up at the sub-district levels. As per the LocalGovernment Ordinance, a Local Government Commission is being constituted to oversee theworking of local govermments and to help in conflict resolution. The Commission will comprisesmembers from both public and private/non-government sectors.

* Fiscal devolution has begun. Provincial, and Local Fund accounts have been opened at thedistrict, tehsil and union council levels. Mechanisms for smooth transfer of funds from theprovinces to the districts and lower levels have been set up. All district government tehsils andUnion administrations have prepared and passed their budgets. The taxation powers of thedistrict, tehsil and union councils have been defined and sphere of administration had beendelineated. Local govenments have begun the process of rationalizing user charges and findinginnovative ways of raising local resources. To date the development funds of the KPP, SAP, ESRand the President's Program for Rehabilitation of Education have been devolved to the districts. Ithas been decided that all non-salary recurrent expenditures would be devolved to the district inFY03-04, while salary expenditures would remain with the provincial governments for sometime.

* Multiple Indicator Cluster Survey (MICS) has been conducted to get baseline data at the districtlevel. The government with the assistance of UNICEF has conducted a MICS covering a largenumber of socio-economic indicators to develop a district-level baseline. The survey would be auseful tool to monitor future performance and to .make formula-based resource allocationdecisions among districts.

* Creation of a Cadre of district employees for social sectors. The government has set up a specialcadre of district employees in the Education and Health Departments to ensure effective control(hiring and firing powers) and improve provision of social services. The staff in grades 1-15would be recruited from the district on the recommendation of a District Recruitment Committee(comprising provincial and district officials). Postings and transfers of these functionaries wouldbe within the district; and district authorities would be able to take disciplinary actions againstthese employees.

* Accountability mechanisms have been put in place. To ensure accountability of district levelfunctionaries, the government proposes to appoint an eminent jurist as a Provincial Mohtasib(Ombudsman) with offices in each district. The NWFP government also proposes to set up anambitious Accountability Management System where performance of individuals anddepartments would be evaluated against measurable criteria.

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B. Restructuring and Rightsizing of Government Departments

7. The following actions have been taken.

* As a result of devolution to the district levels, full set of departmental restructuring plans wereprepared, including inventories of staff and material (notably office and residentialaccommodation, vehicles, furniture and equipment). In several cases quite radical slimmingdown of provincial structures occurred, which reflects new approaches to business rather thansimply a minimal response to the needs of devolution. The restructuring/reorganization of 14Administrative Department and 16 Attached Departrnents was carried out during FY01. Thefollowing are some examples of the restructuring exercise.

> In order to raise the standard of education and give focused attention to primary and highereducation, the Education Department was bifurcated into the Primary Education and LiteracyDepartment and the Secondary and Higher Education Department.

> To distribute the heavy workload, the Services and General Administration Department(S&GAD) was bifurcated into the Establishment Department and AdministrationDepartment.

> The Environment Department which was under the Planning and Development Department,was separated and attached with the Forests Department to ensure better functionalequivalence.

> To ensure integrated approach to infrastructure development, the Communications and Works(C&W) Department, the Public Health Departments, and Public Health EngineeringDepartments have been merged into the Works and Services Department (W&S).

> The Excise and Taxation Department which was attached to the Finance Department has beenmade into a independent organization.

> To give special attention to IT, a special cell on Information Technology has been created inthe Governor's Secretariat.

> A number of attached Departments were either abolished or converted into independent Cells,such as the Directorate of Local Government and Rural Development has been made part ofthe Office of the DCO; Chief Engineer C&W has been merged into the Provincial HighwayAuthority; Registrar of Cooperative Societies has been converted into a Cooperative Cell;Directorate of Artificial Insemination and the Frontier Cooperative Bank have beendissolved, the Directorate of Industry and Commerce has been merged with the LaborDirectorate.

> A number of offices/departments which were not useful were abolished, such as the PriceStabilization Cell; Sarhad Overseas Cell; Supply wing of the Industries Directorate,Manpower Directorate; C&W Store division; Pawinda Cell Home Department, etc.

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* As a result of the above-mentioned restructuring/rightsizing of government departments, there arenow 23 Departments and 40 attached Departments (down from 46). This exercise helped inmeeting the requirement of creating 12 line departments according to the Devolution plan withinthe existing staff resources without creating a large number of posts.! It also resulted in a pool of6,162 surplus staff of which all except for 1,414 have been relocated. The restructuring has beenaccompanied by a reduction in the number of ministers from the previous 40, to the current 10.

* Close to 90% of the staff in the surplus pool came from lower government grades (BPS grades 1-11 ) where overstaffing has traditionally been a problem. The surplus pool also got staff fromdepartments which had the bulk of the provincial employment (Education and Health) or wereoverstaffing was a problem (e.g. Agriculture, Revenue and Estate, Works and Services andForestry). However, the problems in the current staffing mix created by the large number ofunqualified (and often illiterate) staff at lower levels will remain. This will be addressed overtime by attrition - as no new staff is being hired below grade 11.

* Well defined criteria for declaring any staff surplus were formulated and notified. The policy oflast-in-first-out was followed. The NWFP Civil Service laws were amended to incorporate staffin the surplus pool. All those declared surplus are being adjusted in other available positions. Inline with the Federal government's restructuring/rightsizing exercise and to make the reformspolitically acceptable, pay and benefits of surplus staff were protected, even if staff were to beplace in a position below what they occupied at redundancy. To date, about half of these surplusemployees have been placed in 8,000 posts that had been identified under sanctioned posts underthe new district governments, after matching requirements with the skills mix and experience ofthe surplus staff.

* Closure of Autonomous Bodies. The provincial government has decided to wind up all of itsAutonomous Bodies, by privatizing, liquidating, or closing them. The goal is not to have anypublic sector role in provision of goods and services and in commercial activities in which theprivate sector can play a role. Also closure of the public enterprises and autonomous bodies willlead to better utilization of public management capacity. In the short-term, the governmentintends to restructure some of the units in order to fetch a better price at the time of their sales.Thus:

> The Fruit and Vegetable Development Board was closed down in 2001. The Board met allobligations related to its closure from its own resources.

> The Agriculture Development Authority (ADA) was closed down in the last quarter of 2001,with no outstanding loans to be paid to the provincial government.

> Liquidators have been appointed for the Frontier Cooperative Bank who are in process ofvaluing the assets of the bank in preparation for liquidation.

> The Provincial Urban Development Board has been wound up.

> The Bank of Khyber is being prepared for privatization. A chartered accountant firm has beenhired to prepare the privatization document. The government is planning to reduce itsshareholding to below 50% by FY04 and complete divestiture by FY05.

> With respect to the remaining Autonomous Bodies, the government will restructure theSarhad Hydel Development Organization (SHYDO), convert the Sarhad Development

'Creating 12 departments at the district levels required more than new 50,000 positions.

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Authority (SDA) into an Investment Facilitation Board and is in the process of reviewing andthe structure and functions of the Small Industries Development Board (SlDB).

C. Personal Management Reforms

8. The following actions been taken.

* A recruitment ban applies to all grades and requires the Governor to exempt any criticalvacancies. The ban has been upheld successfully and there has been very little new recruitment.There has been a reduction in sanctioned posts from 281,759 to 279,250.

* Merit and Professionalism. The Recruitment policy has been made more transparent. Theprovincial Public Service Commission (PSC) has been strengthened and made more autonomous,through appropriate changes in its legislation and government's administrative and FinancialRules. All Commission members are in place. The Commnission gained responsibility forappointments to all officer level (grade 17 and above) posts and many posts between grade 11 -16. The PSC Rules (Function) of 1983 have been amended, enabling the Commission to recruitcontract staff when required by the government.

* Transfers and postings policy have been made more transparent. The Provincial GovernmentPostings and Transfer Policy has been notified. The Policy specifies the tenure and criteria fortransfers of civil servants. To avoid conflict of interest, officers of executive/administrative postswould not be placed in their residence of domicile. Some gender sensitive considerations havebeen put in the policy, such as if both spouses are government servants, efforts would be made topost them at the same stations, and posting unmarried female employees near their home.

* Objective criteria have been defined for Promotion of civil servants. The notification givesdetailed guidelines regarding the criteria for promotion and lays out an objective weights-basedformula for evaluating civil servants up for promotion. The new appraisal system is morefocused on performance and less on personal characteristics; and it seeks to curb the tendency forall officers to receive high assessments. Points are given for academic qualification, researchpapers/publications, teaching experience, foreign training/courses, participation inworkshops/seminars, as well as the past performance based on the Annual Confidential Reports(ACRs). The concept had been especially applied in the "Award of BPS-21 in MeritoriousService cases" scheme.

* A merit based performance evaluation policy has been formulated. The proforma for writingAnnual Confidential Reports (ACRs) has been revised and procedures have been modified so thatACRs are written on time.

* Civil service pay has been raised in line with the Federal government's pay and pension reformwhich has been effective from January 2002. The revised pay-scales restore a substantial portionof the lost purchasing power of wages (which had not been increased since 1994), decompressesthe salary scale for every grade, and subsumes all ad-hoc salary increases obtained by someservices between 1994 and 2000. The impact of the increase in pay for FY02 (half-year) isaround Rs. 5 billion. The new pension scheme has reduced the commutation from 50 to 40percent and calculates the commutations on the basis of reduced, more actuarially fair,commutation factors.

* The rules and regulations governing personnel management (as pulled together in the Estacode)had become excessively complicated and opaque over time. The government is rewriting andsimplifying these rules in a new Establishment Code (Estacode). Volume One of the Code hasbeen published.

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* Provincial Rules of Business are being updated. New set of District Rules of Business have beencompiled and have been published in the context of the Devolution.

* Special efforts are being undertaken to remove corrupt and inefficient civil servants. ExistingAnti-Corruption Rules have been revised. Under the Federal Government Anti-CorruptionStrategy, the Anti-Corruption Agency's organizational role is being reviewed.

* Disciplinary rules have been substantially modified in the Removal from Service (SpecialPowers) Ordinances, 2000 and 2001. Procedures to try corrupt and inefficient civil servants hasbeen streamlined and simplified. Earlier a Committee took up cases against civil servants but nowthe Chief Secretary and Director Anti-Corruption look into the case which has speeded up theprocess. This has resulted in a record number of corruption cases were taken up (2,224) anddecided (1,396) within the last three years. Around 300 Education Department employees(including teachers) have been dismissed for negligence and prolonged absence from duties.

* A Compulsory Retirement Policy has been introduced in line with the Federal government policy,through the NWFP Civil Service Ordinance 2000 and 2001, to weed out inefficient governmentservants who had completed 20 years of service.

* Improving Human Resource Management is being given greater attention. The proposal to movetowards a more significant use of contract-based employment is a brave and determined step, andoffers a practical method for increasing flexibility and for limiting future pension liabilities.Introducing extensive contract-based employment may require piloting. Avoiding any risk ofregularization of contract staff will at the very least require an amendment to the 1973 CivilServants Act. Recruitment on contract will now fall within the purview of the provincial PSC.However, it will also require a similar change to the purview of the Service Tribunal if appeals tothe civil courts are to be kept to the minimum.

* The flexibility provided by the greater use of contract staff will place a greater responsibility onmanagers to plan and use their human resource effectively. This will require that the averagetenure of Secretaries and other senior staff is extended from the current 7.5 months.

* One key issue to be addressed is that there is no centralized human resource database. TheFinance Department tracks sanctioned posts rather than staff, and thus:

> It is unable to identify readily whether there are ghosts. With a centralized databaseconsistent with the payroll, a comprehensive census or some sample headcounts can becompared against the database to determine whether there are significant discrepancies.

> In budget preparation, the Department is reliant on manual submissions from lineDepartments on their current workforce, and it is difficult to ensure the accuracy of these.

> Perhaps most significantly from a fiscal perspective, the government cannot undertake anyactuarial analyses of its pension liability, as it does not know the age profile and theretirement dates of its workforce.

* Without centralized human resource databases, Departments are unable to exercise anymeaningful workforce planning. Without an overview of staff, their ages, their work locations,their skills, and their qualifications, the government cannot identify any pressing skills gaps, andcannot ensure that staff resources are distributed appropriately.

* The most promising approach for developing a HR database is by building up from thecomputerized payroll data. The government plans to develop this database from computerized

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payroll data during FY03-04; the planned civil servants census in FY04 would help in validatingthis HR database.

D. Capacity Building

9. The following reforms are underway:

* There is general agreement that a process of capacity building is essential to make a success ofthe deep and widespread changes involved in governance reforms. In particular, there aremultifaceted capacity building needs related to devolution. Cognizant of the huge capacitybuilding needs, especially to implement the PRP and the expanded social sector programs, thegovernment has initiated a review of unmet capacity needs. It has already decided to establish theEducation and Health Sector Reforms Units, the Budget Analysis Unit and overall ReformImplementation Unit. Draft capacity building plans for health, education and local governmenthave been drawn up. The government has recently approved a comprehensive three-year capacitybuilding program to strengthen managerial and technical capacity of provincial and district levelofficials to support the reform program. Other important initiatives that have been taken to buildcapacity in the province are:

> Essential Institutional Reform Operationalization Project (EIROP)) funded by UNDP, SDCand GTZ has been initiated in March 2001 to assist with HR and institutional reform andsupport comprehensive capacity building and training at the district level. The EIROP will beimplemented over three years. Under this project all the District Nazims and the DCOswould shortly be visiting Nepal and Philippines to get a first-hand feel for the localgovernment functioning in those countries and learn from shared experiences. Othercapacity-building components under this program include setting up of District CitizenInformation Centers, assisting the Provincial Finance Commissions, and provincial tasksforces on decentralization.

> A training program for the new elected representatives and officials has been launched atdistrict and lower levels. In phase I, all union councilors were trained according to the NRBcurriculum. Three regional workshops have been held for Nazims and governmentfunctionaries. A special training program for female representatives in the local governmentsis also planned.

> The government has started holding training of district government functionaries in FinancialManagement, Budgeting, and Development Planning.

> The government has launched a program of IT training for Section Officers in line with theFederal government program.

> The Community Infrastructure Project (CIP), an intervention financed by the Bank andGoNWFP, aims at capacity building of the communities at the Tehsil level for improvedinvolvement in the local development.

> With the aim of strengthening the Tehsil and Union Council communities and statefunctionaries in service delivery the GoNWFP in collaboration with the joint Bank-Water andSanitation Program (WSP) has initiated a pilot intervention in Dera Ismail Khan district ofNWFP.

> IUCN Pakistan and SDC (through SPCS-IV PSDN Project) have been assisting GoNWFPand the non-profit sector to improve its systems and performance for improved servicedelivery.

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E. Other Institutional Reforms

10. In addition, the broader reforms noted above, the government has also initiated the followingreforms:

* Judicial Reforms. The provincial government is committed to making the judiciaryadministratively and financially independent. The judicial and executive functions have beenlegally separated. The judiciary was granted financial independence a few years ago. This gavethem full control on spending based on their allocated budget without recourse to approval ofother departments in matters of staffing, postings, etc. The Judicial Service Rules have beenrecently revised. The Chief Justice of the NWFP High Court is now in charge of all judicialappointments and personnel issues.

* E-Governance. The government has begun to take the first steps in establishing e-govemance.At present the systems within the P&D, Finance and the Home Departments are being networked.In the next stage networks would be set up for Education and Health Departments.

* It is proposed to extend these networks to other government departments and link theDepartmental networks once they are completed.

* The provincial and district governments are discussing setting up e-governance PublicInformation Centers on a pilot basis which will carry the standard government forms and otherdocuments.

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NWFP PRIVATE SECTOR DEVELOPMENT

Overview

1. The industrial sector in NWFP has been in a serious recession: of the total of 1,970 registeredindustrial units established in NWFP,' one-third are closed down. Moreover, of the total functioningunits, 60% are operating at below capacity. At the same time, exports have been growing at an impressivepace during the last several years. From around US$37 million in FY97, exports more grown by six.imes over five years to US$223 million in FY012 As Table 1 indicates the biggest and also fast growingexports in dollar terms have been traditional goods from NWFP such as precious and semi-preciousstones, carpets and rugs and handicrafts. However, a wide range of new products, including cotton yarnand machine tools have also started entering the export market in the last few years. This apparentdichotomy between industrial and export performance can be partly explained by the fact that mostexport-oriented industries are predominantly oprating in the informal/cottage industry sector, while theindustrial decline has been in the formal sector.

Key Issues

2. The following are key issues facing private sector development:

* With around 44% people below the poverty line, there is an urgent need to create moreemployment.

* The slump in the formal industrial sector is attributed to overall depressed market conditions;poor credit accessibility; lack of technical manpower; economic policy distortions, includingover-regulation; price interventions affecting both outputs and inputs; high tax rates and poor taxadministration; trade restrictions; the government crowding out the private sector; and inadequateinfrastructure (especially roads).

* The province suffers from locational disadvantages: it is landlocked and is over a thousand milesaway from the Karachi seaport. As it is highly dependent on the south for both its inputs/rawmaterials and markets, higher transportation costs make it difficult for NWFP's industry tocompete. Until a few month ago there was a virtual ban on land route trade via Afghanistan whichrestricted the potential for exports to markets in the neighboring region.

* At this point in time, NWFP is poised to take full advantage of the post-war reconstruction inAfghanistan by using its locational proximity for facilitating private sector development andgenerating overall economic growth. After the establishment of the Interim Authority inAfghanistan post September 11 events, there have been several moves by the Pakistanigovernment to help the private sector participate in reconstruction efforts and expand trade withAfghanistan. Significant headway has been made in the long standing demand of the NWFP

Fifty percent of the total number of industrial units in NWFP are located in the four industrial estates/EPZ established by theSarhad Development Authority (SDA) and nine small industrial estates/clusters set up by the Sarhad Industries DevelopmentBoard (SIDB).2 According to many private sector representatives, this is an underestimated figure as a lot of exports from Karachi, Sialkot andother cities originate from NWFP. However, EPB only includes export data related to firms holding licenses in NWFP.3 Of the top five exporting items viz. carpets/rugs; cotton yarn; gemstones, leather and honey, only cotton yarn is predonminantly(95%/o) in the formal sector and is produced in industrial estates.

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private sector to allow free trade with Afghanistan with a minimal negative list.4 According torecent estimates the land route trade has increased significantly after September and now stands atRs. 14 million per day. The govemment plans to set up trade warehouses on the Pakistan-Afghanistan border to help the private sector further expand trade and take advantage of businessopportunities in Afghanistan. Pakistan and Afghanistan have discussed opening bank branches ona reciprocal basis, including a branch of an Afghan bank in Peshawar. Recently, Pakistan andAfghanistan reached an agreement to revive commercial air traffic after many years; once a weekflights have started by Pakistan International Airlines and the Afghan Ariana Airlines in May2002; with more frequent weekly flights are expected to commence in the near future. Thesemoves would help in strengthening financial relationships and would be particularly useful infacilitating trade and commerce between the two countries, with NWFP benefiting significantly.

Vision and Reform Program

3. The Provincial Reform Program aims to increase economic growth through the development of avibrant private sector and have a lead role assigned to the private sector in industrial development. In thisregard, it has the following goals:

* Realign the role of the government from production and control to promotion and facilitation ofprivate sector; withdrawal and disinvestment from public sector production activities.

* Restructure and reform government departments and institutions around private sectordevelopment needs.

* Improve the business environment by initiating a deregulation process so as to reduce the costs ofdoing business and encourage businesses to grow and expand.

* Promote industrial development based on sectors with comparative advantage, such asarchitectural stone (marble and granite); gemstones; leather goods; agro-industrial processing;tourism; and hydel power.

* Support labor intensive industries at present, industry accounts for only 6% of total employmentin NWFP).

* Focus on exports.

* Provide Business Development Services to Small and Medium Enterprises - particularly export-oriented - in the areas of technical training, technology transfer, information systems,management capacity, and marketing.

4. Actions Taken. The provincial government has already made substantial progress inimplementing its reform program for private sector development. Some of the key measures taken are asfollows:

(a) Reducing the role of the public sector

* There were 13 public sector units established by the Sarhad Development Authority (SDA); 12have already been divested. The remaining unit is in the process of being privatized.

4 The Economic Coordination Council (ECC) recently approved the negative list of imports to Afghanistan; all other items exceptthese would be allowed for exports. The negative list includes a) cigarettes, cigars and tobacco substitutes; b) dyes and chernicals;c) yam of all types; d) PVC and PMC materials; e) polyester materialized film; and f) ball bearings. The ECC allowed the exportof hitherto banned items to Afghanistan including fertilizer (urea); high speed diesel, fumace oil and other petroleum products;and zero-rate exports from the EPZ/Bonds except vegetable ghee and cooking oil.

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* Out of the 39 mineral exploration and development industrial units with the Mineral Explorationand Development Projects Department, around one-fourth have been leased to the private sectorwhile the rest are in process.

* The Industries Department has been reorganized to remove duplication and overlap between theIndustries and the Education Department. Also reorganization of the technical training/vocationaltraining centers has taken place and staff have been put in the surplus pool.

* Staff have been retrenched in the Stationery and Printing Department in the last two years: inFYOO-01, staff size was reduced from 380 to 265 employees leading to a saving of Rs.5.2 million.

* Some retrenchment has also taken place in different autonomous bodies, i.e. SDA and the SmallIndustries Development Board (SIDB).

* To reduce establishment costs, expand leasing and improve on mine safety, the government hasmerged and integrated various agencies related to mining into a Directorate General of Minesand Minerals.

* The Sarhad Hydel Development Organization (SHYDO) has invited expression of interest tolease out 12 small hydel stations (100-400 KWs) to the private sector. These stations are locatedin remote mountainous areas. There is a potential for the private sector to provide off-gridelectricity and develop related private sector activities in these areas.

* The government has begun the process of privatization of the Bank of Khyber with the aim of fulldivestiture by FY05.

(b) Expanding Public-Private Partnerships

* The government has established a Private Sector Deregulation and Facilitation ReviewCommittee comprising government and private sector representatives to review the investmentclimate and make recommendations to facilitate business opportunities.

* Public-private partnerships have also been expanded in specific industrial areas. Private sectorstakeholders have been inducted in many key committees, including the Mineral MinesCommittee, Gemstone Promotion Committee, and the Mineral Investment Facilitation Authority.

* The Sarhad Development Authority is being converted into an Investment Facilitation Authority(EFA), with public-private partnership to promote investment. It is envisaged that IFA willmanage the industrial parks, EPZs, one-window investment facilitation, and coordination with theFederal Board of Investment. Similarly, the SIDB is in the process of being reorganized, withgreater emphasis on public-private partnerships.

* The Gemology Institute, Leather Training Institute and Leather Garments Training Institute havebeen established and management control in all of these institutes will rest with the private sector.

* A committee on policy formulation and rules amendment has been constituted under SecretaryIndustries with private sector representation to suggest amendments in Rules and formulateprivate sector friendly policies.

(c) Expanding the role of the private sector

* Mining Concession Rules, 1976 have been amended for the gem sector to allow entry of small-scale gemstone excavators. The new rules allow an SME to apply for land lease for gemstoneexcavation, without the pre-requisite of getting registered with any official entity. This is in sharpcontrast with the past, when only registered firms could apply.

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* A policy has been fornulated by SHYDO for private sector investment in small (up to 20 MWcapacity) off-grid hydel projects. A total of 27 MW of potential sites have been identified indifferent sites on Upper Swat canal. In the first phase four contracts, without any governmentguarantees, have been awarded on the Machai and Abazai canals to the private sector to developcaptive power plants which would be developed over two years.

(d) Industrial Deregulation

* Major mining sector regulatory reforms have taken place. These include: (i) ratification of theNational Mineral Policy (NMP) 1995; (ii) re-constitution of the Mines Committee, with strongprivate sector representation which would provide technical input into policy formulation andhelp increase transparency in decision making; and (iii) a separate Directorate for MineralDevelopment by merging three existing agencies that were established for mineral development.

* Although deregulation has taken place in a few sectors (mines and minerals, and gemstones), acomprehensive review and streamlining of the current regulatory burden of 37 labor laws and 23possible inspection rules that affect private sector activity in NWFP (see the table 2-3 at the endof this Annex) is needed.

* While most of the industrial rules, regulations and inspections have been framed by the federalgovernment, implementation falls in the purview of the province. This means that there is scopefor streamlining through administrative adjustments (such as reducing the number of inspectionsor restricting their timing). The Deregulation and Facilitation Committee will examine presentregulations, to simplify procedures, and to coordinate the work on provincial deregulation withthe efforts at the Federal level.

5. Medium Term Reforms. The government intends to undertake following actions in the mediumterm:

* The government plans to initiate in FY03 a detailed province-wide study looking at the sourcesand constraints to promoting growth, especially focusing on the SME sector. This study wouldhelp in formulating a more focused economic growth strategy to help promote the private sectorin the province.

* The provincial government plans to divest the remaining public enterprises over the next twoyears.

* SDA will sell off the land from its two unsuccessful industrial estates D.I. Khan and Ghazi).

* The government plans to adopt a Policy of Business Facilitation to improve the businessenvironment.

* The provincial government will continue with its disinvestments program in the mineral sector.

* Undertake a review of the public sector technical and vocational training schools and considerprivatizing them or placing them under public-private partnership.

* Further rationalization of staff in SIDB is planned.

Annex IPage 5 of 7

Table 1: EXPORT PERFORMANCE OF N.W.F.P.

Sr. No. I Commodttles § 1996-97 199748 1998-99 1999-2000 2000-01

I C_ __on Yom 5,682 '12,341,153 27,073,623 29,356,6702 Tobacco _ 11,387 4,680,000 5,398,000 9,950,9383 Pre4tones 3,431.818 4,010,932 8,155,211 12,872,207 18,280,0004 Carpets a Rugs 22,227,273 38,848,984 45,453,270 95,203,138 1300000005 lHandicrafts 1.477,273 2.974.008 4,456.988 294,283 7.000.0006 [DrN Fnjits 2,188,838 2,988,155 958,122 738,882 821,0007 IShoes 161,384 9,621 i1,876 83,B85 5,3048 Cloth 31,818 88 888 1,300 2 888 9509 Spices . 34,074 . . 928

10 Leaft &LeatherProductr 1,243,182 - 1,939,019 1,109410 11,684,7i1 9,490,00011 Plants and Seeds 98 5,84e 30,500 1,27512 Fumiture 79,091 189,783 353,357 2,808,104 1,274,41813 Medical Herbs _ 283,838 298 458 1568201 1 502,041 1.798,09314 Honey < X542,048 699,612 1,558,462 7,729,858 785912115 lSocks and gloves 93,884 1348e54 48,37516 Ena7neerlna aoods 98,384 858 97017 Match Boxes 2,993,182 11.088,123 5,059,393 3,908,530 8,429,89318 Artificlal Jewelry 36,818 2.794 42,930 35,737 19,83919 Towels 7,32120 Caps 6,13a 1,320 1,28621 Sheep Casing 12e,591 = 8,920 4,89822 Lamb Skins 90923 Books and Calendars 1,120 40,850 400 14,12824 Tiles and Marbles 38,409 _ 71238 54,088 11,140 1,95025 Garments 30,000 8,757 20,882 288 34,33028 Machines Tools/Machinery 1,165 83,250 118,13027 Food Stuff/Bubble Gums 479,548 328,368 1,784,99828 Plastic Sheets/Plastic oods . ._29,309 2,10529 Shopping Bags/Polythyeene bag 2,000 1,68330 Rice 403,864 293,424 44,140 15 894 . 4482531 Vegetable . _._850 386 733_94632 Stainless Steel utinsils 5,000 2,902 24,34233 Cassettes 1,878 78,812 1,974 3,22034 Ekectical Goods 4773 15 12035 Fresh Fruits 4!389 352,091 6,305,789 897,25438 Medical Equipment 18 81637 C arettes . 130,328 106,90338 Green Tea 27 440 14_12539 Mushroom 1,311,48840 Chemicals 30,39541 Conical tails Unit Bomb Bodies 254,080

_____(Semi Finished)42 Misc. _ _49,82 1 573*805 434,904 14.112,627 550,443

Total US Dollars 37,487,957 6,118,603 87,299,956 191,319,114 223,165,643Source: Export Promotion Bureau, Peshawar.

Annex IPage 6 of 7

Table 2

THIE LIST OF LAWS APPLICABLE TO INDUSTRY

1. hip Ordinance, 1962.2. Boilers Act, 1923.3. Consumers Protection act, 1997.4. Disabled Persons (Employment and Rehabilitation) Ordinance 1981 & Rules 1988.5. Employees' Old Age Benefits Act, 1976.6. Employees Social Security Ordinance, 1965.7. Employers' Cost of Living (Relief) Act 1951 & Rules, 1969.8. Employment (Records of Services) Act 1951 & Rules 1969.9. Employment of Children Act 1991 & Rules 1995.10. Factories Act, 1934.11. Industrial Relations Ordinance, 1969.12. Industrial Statistics Act, 1942.I3. Industries Control on Establishment & Enlargement Ordinance, 1963.14. Minimum Wages Ordinance 1961 & Rules 1960, 1962.15. NWFP Standard Weight & Measures Enforcement Act, 1976.16. NWFP Mining Concession Rules, 1976.17. Partnership Act, 1932.18. Payment of Wages Act, 1936.19. Price Control and Prevention of Profiteering and Hoarding Act, 1977.20. Provincial Employers Social Security Ordinance 1965 and Rules.21. Record of Service Act.22. Registration of Stone Crushers Under NWFP Finance Act, 1995.23. Societies Registration Act, 1860.24. The Coal Mines (Fixation of Rates of Wages) Ordinance, 1960.25. The Companies Profits (Workers' Participation) Act, 1988.26. The Excise Duty on Minerals (Labor Welfare) Act, 1967.27. The Mines Act, 1923.28. The Mines Maternity Benefit Act, 1941.29. The Pakistan Essential Services (Maintenance) Act, 1952.30. The West Pakistan Factories Canteen Rules, 1959.31. The Pakistan Industrial & Commercial (Standing Order) Ordinance, 1969.32. West Pakistan Maternity Benefit Ordinance 1958 & Rules, 1961.33. West Pakistan Minimum Wages for Unskilled Workers Ordinance 1969.34. West Pakistan Shops and Commercial Establishments Ordinance & Rules, 1969.35. Workers' Children Education Cess Ordinance, 1971.36. Workers Welfare Fund Ordinance, 1972.37. Workmen Compensation Act, 1923 & Rules 1961.

Annex IPage 7 of 7

Table 3

LIST OF POSSIBLE INSPECTIONS FACED BY INDUSTRYUNDER VARIOUS LAWS

Name of the Act Frequency of Visits ConcernedDepartment

I Factories Act 1934 Once a year Labor2 Employment of Children Act 1994 Once a year or on complaint from union Labor

or individual3 Employment Cost of Living Act, 1973 Once a Year or on receipt of complaint Labor4 Disabled Person Employment & Rehab. Once a Year or on receipt of complaint Labor

Ordinance 19815 Standing Orders Ordinance, 1966 Once a year Labor6 West Pakistan Maternity Benefit Rules, 1961 Whenever the rules are applicable Labor7 Minimum Wages Ordinance, 1961 On receipt of complaint Labor8 Payment of Wages Act, 1936 Once a Year or on receipt of complaint Labor9 Industrial Relations Ordinance, 1969 Once a Year or on receipt of complaint Labor

10 Factories (Record of Services) Act, 1934 Once a year Labor11 Certifying Surgeon Twice a year Labor12 Health and Hazards Inspector Once a year Labor13 Shop and Establishment Inspector Once a year Labor14 Weight and Measures Inspector Once a year Agriculture and

Bureau of Prices15 Minimum Wage Inspection Inspector Once a year Labor16 Apprenticeship under Apprenticeship Ordinance Once a year Labor

196217 NWFP Employees' Social Security Institution Once a year Labor18 Employment and Exchange Inspector Once a year Labor19 Inspection under the Stamp Act, 1890 Once a year Board of Revenue20 Civil Defense Inspection under Factories Act, Once a year Home Department.

193421 Inspection of Boiler under Boiler Act 1975 Once a year (for fitness); & on request Industries

for new registration22 Mines Inspector Once a year Industries23 The Electricity Act, 1917 & Rules 1937 Once a year Industries

Annex JPage I of 7

STATISTICAL ANNEX

Table 1: Selected Macroeconomic Indicators for Pakistan

Estimate Projections1998/99 1999/00 2000/01 2001/02 2002/03 2003/04

Output and Prices (annual changes In percent)Real GDP at factor cost 4.2 3.9 2.7 3.3 4.7 5.2Consumer Prices 5.7 3.6 4.4 3.0 3.9 4.0

Savings and Investment (percent of GDP)Gross National Savings 11.9 13.5 12.8 15.3 15.0 15.0

Govemment -3.0 -3.6 -1.8 0.3 0.8 1.4Non-Govemment 15.0 17.2 14.6 15.0 14.2 13.6

Gross Capital Formation 15.6 15.6 14.7 15.2 16.2 16.8Government 3.7 3.2 2.7 3.4 3.6 3.9Non-Govemment* 11.9 12.4 12.0 11.8 12.6 12.9

Public Finances (percent of GOP)Budgetary Revenue 16.2 16.5 15.7 16.9 17.3 17.3Budgetary Expenditure 22.2 23.0 21.0 22.7 21.5 20.6Budgetary Balance -6.0 -6.5 -5.2 -5.7 -4.2 -3.3Primary Balance 1.3 1.1 1.5 1.2 2.1 2.4Net Public Debt 91.6 89.4 95.4 92.4 87.9 84.6Interest Payments 7.3 7.6 6.8 7.0 6.3 5.7

Extemal Sector ( percent of GDP)Merchandise Exports 12.8 13.3 15.0 14.9 15.4 15.8Merchandise Imports 16.4 15.6 17.1 16.4 16.9 17.1Current Account Balance excluding official transfers -4.6 -3.6 -3.3 -2.4 -2.7 -2.2Current Account Balance induding official transfers -3.6 -2.1 -1.9 0.1 -1.2 -1.8Total Extemal Debt (percent of current receipts) 331.6 310.7 319.8 308.7 291.7 270.1Total Debt Service (percent of current receipts) 41.2 38.4 32.1 33.5 29.6 26.3

Gross Reserves (US$ million) 1672.0 908.0 1681.0 2427.0 3396.0 3955.0(In weeks of next year imports) 7.7 3.9 7.5 10.1 13.3 14.8Financing Gap (US$ million) .. . .. .. 233.0 223.0

* Induding Public Enterprises.

Sources: World Bank and IMF staff Estimates.

Annex JPage 2 of 7

Table 2: NWFP at a Glance

SOCIAL INDICATORS ALL-NWFP PAKISTAN

Population. 2001/02 (millon)a 20 140.6GSDPIGNP per capita. 2001 (US$) 300 429

Average annual growth, 198148 Popidation GrowthPopulation (%) 2.8 2.6 * *NWFP

Most recent estimate (latest year available since 1990) b 3Poverly % of population below poverty line 44 33 _Urban populatoin (% of tot populatlon) 17 32 2 2 .._Infant mortality (per 1,000 live births) 62 89Access to safe water (% of households) 58 81 e lAccess to toGet facilities (% of households) g8 64 o 0 Uterate populatlon (% of total population) 37 46 1991-n 15n41 1581a-Propordon attending primary school (aged 4 to 9) 70 71

Male 84 80Female 64 61

STRUCTURE OF THE NWFP PROVINCE ECONOMY c1980-81 199647 1098-99

(% of GSOP)Agriculture 34 31 32Industry 1i 17 17

Manufacturing 6 7 7 PervsCit income mRs)Service 61 63 61 80OO

E PaStdatw(compound annual real growth) 5x0o ** P-Agriculture n.a. 6.1 12.6 _ _Industry n.a. 8.4 7.5 E L iI.]

Manufactuhing n.a. 8 17.8 3000Services n.a. 6.1 3.1 20-_

Gross Slate Domestic Product (Rs BOllon) 23.8 59.1 63.1 198081 199g"7 1998-99GSDP per capita (Rs) 2147 3478 3604

STATE FINANCE d1938/90 1991/95 1998199 1909/00 2000/01

(% of GSDP)Total Revenue & Grants 9.1 10.3 9.4 9.8 9.7

Provlnce's Own Revenue 1.3 3.8 3.1 2.9 2.7 RPvenuO DefiitFederal Transfers ncl. Grants 7.9 6.6 6.3 8.7 7.1 1Lt.0*-.---:_-

Total Expenditure 14.1 13.1 9.9 10.3 10.0 1 T n etRevenue Expenditure 11.0 9.9 8.5 9.3 8.5 f 0 .-_-_------....-..........

Interest payment & debt servicing 2.9 2.8 2.1 2.3 2.0Capital Expenditue (net) 3.1 3.1 1.3 0.9 1.5 0.0 - ----

Revenue Defict (-y Surplus (4) -1.9 0.4 0.9 0.3 1.3Gross Fsca Deficit (-y Surplus() 4.9 -2.7 -0.5 -0.7 -0.2Totl Outstanding Debt 17.2 14.8 9.7 9.3 10.8 I

oUU,Fe. a) r:srn,u,, uasuu on a popwuwian or 7 r. , n rni uu,ua Lw ti ww u e.70b grwrin towa.0) etI-stan ntegra tod h1ousenhoa urvey 191wuYC) Lima Lomesttc roduc or nvwi-I- Itr/go,a) Medium lemm nudpet 1-rmeworr

Annex JPage 3 of 7

Table 3: Ranking of NWFP Districts by Key Social Indicators

District Rank Malnutrition Water Sanitation Primary 1 Literacy Contraceptives*/% % /% Enrollment F'~~~~~ %~~

Top 6 DistrictsPeshawar I 31.6 77.3 56.5 67.5 51.9 28.0Haripir 2 30.3 64.8 59.4 84.8 57.9 24.0Abbotabad 3 33.0 69.2 57.3 90.3 63.1 23.0Malakhand 4 30.4 75.6 42.6 73.1 44.8 25.0

Kohat 5 32.7 69.7 47.6 69.1 46.7 14.0

Nowshera 6 35.7 1 71.9 46.4 68.1 41.5 22.0

Middle 12 DistrictsChitral 7 37.4 63.3 67.4 63.6 42.8 29.0

Swabi 8 40.5 70.1 39.2 70.5 38.9 25.0Mardan 9 33.0 73.6 38.9 60.3 38.9 18.0

Manshera 10 34.7 57.5 38.7 70.0 51.2 16.0Swat I 1 49.3 69.3 45.2 51.4 40.5 28.0

D I Khan 12 43.0 79.9 41.2 48.6 33.3 18.0Bannu 13 37.9 84.4 32.1 46.5 41.3 16.0

Lower Dir 14 35.0 74.2 30.5 59.1 35.4 13.0Karak 15 30.5 66.3 27.2 53.0 46.5 8.0Hangu 16 36.0 58.7 43.0 54.0 36.1 12.0Charsadda 17 35.9 58.1 27.9 56.6 33.7 23.0Lakki Marwat 18 36.5 61.4 34.2 59.1 33.0 10.0

Bottom 6 DistrictsTank 19 47.6 66.9 33.1 46.9 30.7 7.0

Shanga 20 53.4 44.2 38.9 42.2 28.0 15.0Batagmnu 21 48.7 53.2 27.0 47.5 27.9 14.0Bunner 22 39.6 55.3 27.3 43.4 26.1 3.0Upper Dir 23 46.9 24.8 12.6 37.9 24.5 1.0Kohistan 24 49.6 11.9 3.7 23.3 14.7 0.0

Source: Preliminary Resultsfrom the Multi Indicator Cluster Survey, 2001.

Annex JPage 4 of 7

Table 4: NWFP: Distribution of Provincial GDP by Sector "

1980481 1997-98

Sector Paldstan NWFP NWFP

Agriculture 32.2 34.0 25.0 32.0

Major crops 16.8 13.5 10.5 7.2

Minor crops 5.6 8.2 4.5 5.5

Livestock 8.5 11.9 9.1 19.3

Industry 223 15.2 26.5 16.7

Mining 0.4 0.7 0.4 0.7

Manufacturing 14.5 6.4 18.3 7.2

Large-scale 11.6 4.2 11.9 3.9

Small-scale 4.2 2.2 6.4 3.3

Construction 4.9 5.8 3.7 4.3

Electricity/Gas 2.5 2.3 4.1 4.5

Services 453 50.8 48.2 51.1

Transport 10.1 l1.8 10.0 11.5

Wholesale/Retail 15.8 11.5 15.6 16.1

Finance 2.3 2.2 2.2 1.9

Ownership of Dwellings 4.8 4.7 5.7 2.7

Public Admnin/Defense 8.2 10.6 4.1 7.8

Social and Community Participation 7.7 10.0 8.7 11.0

1/ At best these are guestimates.Source: GDP of NWFP 1997/98, Bureau of Statistics, Planning, Environmentand Development Department, Government of NWFP.

Annex JPage 5 of 7

Table 5: Sectoral Growth rates of NWFP GDP It

1997/98 1998/99 1999/00 2000/01

Agriculture 0.9 0.7 1.8 0.0Major crops 1.0 0.2 1.3 -1.2

Uvestock -0.1 0.6 0.5 1.3

Industry 0.9 0.2 0.8 0.1Mining and quarrying 0.0 0.0 0.1 0.0

Manufacturing 0.5 0.3 0.1 0.5Large scale 0.3 0.1 0.0 0.3

Small scale 0.2 0.2 0.2 0.2

Construction 0.1 -0.3 0.3 0.0

Electricity, gas and water 0.4 0.2 0.4 -0.4

0.0 0.0 0.0 0.0

Services 1.2 2.0 23 2.8Transport, storage & commun. 0.8 0.4 0.4 0.7

Commerce -0.2 0.3 0.4 0.8

Financial Inst. -0.5 0.3 0.1 0.1

Ownership of dwellings 0.1 0.1 0.1 0.1

Public administration & defense 0.2 0.2 0.4 0.4

Other services 0.7 0.7 0.7 0.7NWFP GDP at factor cost 3.0 3.0 4.9 3.0

Pakistan GDP at factor cost 3.5 3.1 4.8 2.71/ At best thse are guestimates.

Source: Government of NWFP(Sectoral shares for 1997/98), IMF, & Economic Survey.

Annex JPage 6 of 7

Table 6: NWFP: Education Sector, 2000-01

Institution Number Enrollment Teaching Staff

Primary Schools' 22,375 2,047,371 61,174Male 14,934 1,277,363 42,234Female 7,441 770,008 18,940

Middle Schools2 2,034 159,799 19,964Male 1,299 109,211 12,958Female 735 50,588 7,006

High Schools 1,335 445,765 39,776Male 1,063 335,197 31,547Female 272 110,568 8,229

Higher Secondary 192 129,141 1,7853SchoolsMale 146 89,353 1,332Female 46 39,788 453

Intermediate and' 97 65,721 2,914Degree CollegesMale 68 46,009 2,221Female 29 19,712 693

Technical InstItutions5 57 11,209 1,010Male 45 10,269 883Female 12 940 127

1 Data only covers government schools as per Annual School Census 2000-01 conducted by the Directorateof Primary Education, NWFP. There was an additional enrollment in private schools estimated at 238,182of which enrollment of girls was 63,354.2 Data on middle, high and higher secondary schools has been given by the Directorate of SecondarySchools.3The number of teaching staff shown here is the staff who teaches only at grades XI-XII. The other staff ofthese institutions is included in the staff shown against high schools.4Data on colleges has been given by the Directorate of Higher Education.5 Data on technical education has been given by the Directorate of Technical Education, Department ofIndustries.

Annex JPage 7 of 7

Table 7: NWFP: Government Health Facilities, 2002

Type of Institutions 2002No. Beds

HospitalsTertiary Hospitals 7 3580District Hospitals. 15 3237Tehsil Hospitals 10 377Other hospitals 124 6879(matemity/TB/Mental)First Level Care FacflItiesRural Health Centres 80 886Basic Health Units 848 NilDispensaries 415 112MCH Centres 94 16TOTAL l1597 . 1508l7.

Source: Dept. of Health, Govemment of NWFP

MAP SECTION

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Report No.: 24188 PAK

Type: PAD