FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 99.5 MILLION (US$150 MILLION EQUIVALENT) TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR A PUNJAB CITIES GOVERNANCE IMPROVEMENT PROJECT Sustainable Development Department Urban and Water Unit South Asia Region August 8, 2012 Report No: PK This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective: August 1, 2012) Currency Unit = Pakistan Rupees (PKR) PKR = US$1.00 US$ 1.00 = SDR 0.66 FISCAL YEAR July 1 June 30 ABBREVIATIONS AND ACRONYMS ADP Annual Development Plan MIS Monitoring and Information System CDG City District Government MTBF Mid-Term Budgetary Framework CIP Capital Investment Plan NAM New Accounting Model CNG Compressed Natural Gas NCB National Competitive Bidding CPUs City Program Units NPV Net Present Value CQS Consultants Qualification Selection O&M Operation and Maintenance DA Development Authority OP Operational Procedure DAMP Development and Asset Management Plan ORAF Operational Risk Assessment Framework DCO District Coordination Officer OSR Own Source Revenue DLIs Disbursement Linked Indicators P&DD Planning and Development Department E&TD Excise and Taxation Department PDCA Punjab Development of Cities Act EDO Executive District Officer PDO Project Development Objective EEP Eligible Expenditure Program PFC Provincial Finance Commission EIA Environmental Impact Assessment PFM Public Financial Management EPA Environment Protection Agency PFMAA Public Financial Management and ii Accountability Assessment Public Financial Management Performance Report ESMF Environmental and Social Management Framework PFM-PR ESMP Environmental and Social Management Plan PHA Parks and Horticulture Authority FBS Fixed Budget Selection PLGO Pakistan Local Government Ordinance FDA Faisalabad Development Authority PMSIP Punjab Municipal Services Improvement Project FY Financial Year POL Petrol, Oil, and Lubricants GDA Gujranwala Development Authority PPP Public Private Partnership GDP Gross Domestic Product PPPRA Punjab Public Procurement Regulatory Act GIS Geographic Information System PPRA Public Procurement Regulatory Authority GoPunjab Government of Punjab QBS Quality Based Selection GPN General Procurement Notice RDA Rawalpindi Development Authority HUDD Housing and Urban Development RFP Request for Proposal Department IAS Internal Audit Specialist SBDs Standard Biding Documents IBRD International Bank for Reconstruction and SC Steering Committee Development ICB International Competitive Bidding SIL Specific Investment Loan SOP Standard Operation Procedures IDA International Development Association SSS Single Source Selection IDAMP Integrated Development and Asset SWM Solid Waste Management Management Plan IEE Initial Environmental Examination TA Technical Assistance IEG Independent Evaluation Group TEPA Traffic Engineering and Planning Agency

3 IFR Interim Financial Report TMA Town Municipal Administration LCS Least Cost Selection ToRs Terms of Reference TPV Third Party Validation LDA Lahore Development Authority UIPT Urban Immoveable Property Tax LG Local Government USPMSU Urban Sector Planning and Management Services Unit (Private) Limited LGD Local Government and Community WASA Water and Sanitation Agency Development Department MD Managing Director WB World Bank MDA Multan Development Authority WHO World Health Organization Regional Vice President: Country Director: Sector Director: Sector Manager: Task Team Leader/Co-Task Team Leader: Isabel M. Guerrero Rachid Benmessaoud John Henry Stein Ming Zhang Raja Rehan Arshad/Shahnaz Arshad iii

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5 Table of Contents I. STRATEGIC CONTEXT... 1 A. Country and Provincial Context... 1 B. Sectoral and Institutional Context... 3 C. Higher Level Objectives to which the Project Contributes... 7 II. PROJECT DEVELOPMENT OBJECTIVES... 7 A. Project Development Objective... 7 III. PROJECT DESCRIPTION... 8 A. Project Components... 8 B. Project Financing C. Lessons Learned and Reflected in the Project Design IV. IMPLEMENTATION A. Institutional and Implementation Arrangements B. Results Monitoring and Evaluation C. Supervision Strategy D. Sustainability V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings B. Overall Risk Rating Explanation VI. APPRAISAL SUMMARY A. Economic, fiscal and financial assessment B. Technical C. Financial Management D. Procurement E. Environment F. Social ANNEXES Annex 1: Results Framework and Monitoring Annex 2: Detailed Project Description Annex 3: Implementation Arrangements iv

6 Annex 4: Operational Risk Assessment Framework (ORAF) Annex 5: Implementation Support Plan Annex 6: Team Composition Annex 7: Fiscal, Economic, and Financial Analysis Annex 8: City Expenditure Review of Five Large Cities in Punjab Province v

7 PAD DATA SHEET PAKISTAN Punjab Cities Governance Improvement Project PROJECT APPRAISAL DOCUMENT South Asia Region SASDU Date: August 8, 2012 Country Director: Rachid Benmessaoud Sector Director: John Henry Stein Sector Manager: Ming Zhang Team Leader(s): Raja Rehan Arshad/Shahnaz Arshad Project ID: P Lending Instrument: Specific Investment Credit Sectors: Sub-national government administration (45%), General water, sanitation and flood protection sector (35%), General transportation sector (20%) Themes: Urban services and housing for the poor (33%), Municipal governance and institution building (33%), Decentralization (17%), Municipal finance (17%). EA Category: B Partial Assessment Category Project Financing Data: Proposed terms: Fixed-Spread Loan (FSL) with commitment-based level repayments [] Loan [X ] Credit [ ] Grant [ ] Guarantee [ ] Other: Source Total Project Cost: Borrower: Financial Contribution to project components Total Amount (US$M) Total Bank Financing: IDA 150 Borrower: Islamic Republic of Pakistan Responsible Agency: Province of Punjab, Planning and Development Department Contact Persons: Mr. Javed Aslam, Chairman, Planning and Development Board, Government of Punjab. vi

8 Address: Civil Secretariat, Lahore. Telephone No.: ; Fax No.: Estimated Disbursements (Bank FY-July to June/US$ m) FY FY13 FY14 FY15 FY16 FY17 Annual Cumulative Project Implementation Period: Start - October 19, 2012; End - June 30, Expected effectiveness date: September 19, 2012 Expected closing date: June 30, 2017 Does the project depart from the CAS in content or other significant respects? Yes No If yes, please explain: Does the project require any exceptions from Bank policies? Have these been approved/endorsed (as appropriate) by Bank management? Is approval for any policy exception sought from the Board? If yes, please explain: Does the project meet the Regional criteria for readiness for implementation? If no, please explain: Project Development Objective: Yes Yes Yes No No No Yes No The project development objectives are to support the Province of Punjab s cities in strengthening systems for improved planning, resource management, and accountability, and to improve the Province of Punjab s capacity to respond promptly and effectively to an Eligible Crisis or Emergency. vii

9 The proposed project includes two components: Component 1 Performance Grant 1 : This component focuses on two areas of urban governance: resource planning and management, seeking to improve decision making, consolidate revenue sources and strengthen resource mobilization; and transparency and voice in the preparation, monitoring and evaluation of plans and programs in urban areas. This component will provide an annual grant to the project cities, based on achievement of specified annual targets against a set of DLIs in selected governance areas. Component 2 Project Implementation and Capacity Building: This component supports the cities and province through technical assistance and capacity building to achieve the DLIs and enhancement in revenue. The Urban Sector Planning and Management Services Unit (USPMSU), and a City Program Unit (CPU) in each of the five cities will be responsible for providing this support and the corresponding costs will be financed from this component. Component 3: Contingent Emergency Response: This component will support preparedness and rapid response to disaster, emergency, and/or catastrophic events, as needed. The provisional zero cost for this component will allow for rapid reallocation of credit proceeds from other components under streamlined procurement and disbursement procedures. This component could also be used to channel additional funds should they become available as a result of the emergency. Safeguard policies triggered? Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60) Conditions and Legal Covenants Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Financing/Project Agreement Reference PA, Schedule, Section I.D.1 Description of Condition/Covenant GoPunjab will sign an Agreement with USPMSU acceptable to the Bank Date Due Within 1 month of Effectiveness 1 As per the terms of the Project, the Bank shall provide credit to the Government of Punjab (GoPunjab). The GoPunjab will in turn disburse funds to the cities in the form of a Performance Grant under Component 1. viii

10 PA, Schedule, Section I.D.1(c)(vi)(B) PA, Schedule, Section I.D.1(c)(vi) PA, Schedule, Section II.D.2 PA, Schedule, Section I.C.1 PA, Schedule, Section I.B.1(a) PA, Schedule, Section I.F.4 FA, Appendix, Section I.7 FA, Appendix, Section I.33 USPMSU will appoint a financial management specialist USPMSU will appoint an Internal Audit Specialist GoPunjab will appoint a financial management specialist for each CPU Memoranda of Partnerships (MoPs) with the five cities participating in the project are adhered to The Project is carried out according to the Operations Manual The Eligible Expenditure Programs are implemented according to the Environment and Social Management Framework Each CDG maintains a City Program Unit under the DCO for Project implementation Each CDG maintains a Planning and Coordination Committee (PCC) with requisite terms of reference Within 2 months of the signing of the above Agreement between GoPunjab and USPMSU Within 2 months of the signing of the Agreement between GoPunjab and USPMSU Within 3 months of Effectiveness Recurrent Recurrent Recurrent Recurrent Recurrent ix

11 I. STRATEGIC CONTEXT A. Country and Provincial Context 1. Country context: Pakistan is the world's sixth most populous country, yet its economy is ranked the 45 th largest in the world. As such, with a per-capita income of US$1,050 in 2010, Pakistan is ranked as a low-income country. After a period of strong economic growth and poverty reduction in the early part of this millennium, 2 progress appears to have slowed considerably due, in part, to external shocks emanating from volatility in international commodity and financial markets, but also as a result of policy inaction, as heightened macroeconomic imbalances have not been adequately addressed. Increased macroeconomic instability, political volatility, and unfavorable security conditions adversely affected the profitability of firms and employment activities. Natural calamities too exacted a heavy toll on the country and the economy. In addition, weak public sector governance remains a major obstacle for economic recovery In 2011/12, economic growth accelerated to 3.7 percent from 3.0 percent in 2010/11. Although economic growth fell short of the growth target of 4.2 percent set at the beginning of the year, considering that the economy had to bear another round of devastating floods in 2011/12, the acceleration in growth signifies the resilience in the economy. Despite the robust growth in workers remittances, the current account situation worsened as terms of trade changed against Pakistan s exports. With weak capital inflows and large obligatory payments on its international debt (including those to IMF), the foreign exchange reserves declined from 3.9 months of imports in the beginning of the year to 2.5 months by the end. Tax collection improved by almost 1 percent of GDP, yet shortfall in non-tax revenue and overrun in power subsidy (including the one-time payment of 1.9 percent of GDP for consolidation of subsidyrelated debt) caused the fiscal deficit to increase to 7.4 percent of GDP. 4 Increased reliance on monetary mode of financing the fiscal deficit kept inflationary pressures high with inflation averaging about 11.5 percent, somewhat lower than 12 percent anticipated at the beginning of the year. 3. Looking ahead, GDP growth rate is projected to accelerate to 4.3 percent in 2012/13 and stay around percent in the next two years with strong domestic demand, recovering exports, and continued robust growth in remittances providing the growth impetus. Inflation is expected to ease only gradually toward single digits. The fiscal deficit should tend towards a target 3-4 percent of GDP, a range that would closely approach a golden rule matching current spending to revenue. A key determining variable in facilitating this will be the tax-to-gdp-ratio, which is projected to gradually increase to around 12 percent as a result of a broadened tax base, new taxes, reduced tax expenditure, and solid improvements in tax administration. 2 The economy grew at an average of 7.3% between fiscal years 2004 and 2007 and the poverty rate fell by half from 34.5% in 2001/02 to 17.2% in 2007/08. 3 As one indicator, the country is ranked 42nd most corrupt out of 183 countries in the 2011 Corruption Perceptions Index produced by Transparency International. Weak governance has been identified as one of the main constraints to economic growth and development in the federal government's Growth Strategy (Planning Commission, Government of Pakistan, 2011). 4 On the basis of fiscal transactions during the year, the fiscal deficit declined from 5.9 percent of GDP in 2010/11 to 5.5 percent in 2011/12. 1

12 Percent of Population Percent 4. Provincial context: Partly because of its size, Punjab has a significant influence on the level and change of national economic and social indicators. With a total population of about 74 million in well over half of the national total and a close to 60 percent share of the economy (Figure 1), Punjab is a major determinant of national economic growth and poverty reduction. During the early 2000s, Pakistan s solid economic and social performance was closely related with robust economic growth and poverty decline in Punjab. Social indicators in Punjab, like those in rest of Pakistan, have shown noticeable improvements in recent years, but still lag those of comparable countries and regions. Punjab still faces significant development challenges. Economic growth has slowed down over the last three years. Poverty in Punjab declined sharply between 2001/02 and 2007/08 (Figure 2). However, with economy slowing down sharply and inflation remaining persistently high, there is strong possibility that poverty may be on the increase Figure 1: Share of Punjab in National Income, 2010/ Figure 2: Incidence of Poverty in Punjab and Pakistan Punjab Rural Punjab Urban Pakistan Punjab Agriculture Industry Commerce Other Services GDP In the early to mid- 2000s, Punjab managed its finances quite prudently. Abundant transfers from the federal government, and fiscal and financial management reforms created sizable fiscal space. Between 2002/03 and 2006/07, provincial revenue almost doubled. As a result, it s recurrent expenditure increased by 52 percent and its development program increased almost six-fold from Rs 18 billion in 2002/03 to Rs 110 billion in 2006/07. In 2008/09, however, as economic conditions deteriorated due to external and internal shocks, the provincial fiscal situation was badly impacted. Large shortfalls in revenue and sharp increases in expenditure led to a fiscal deficit, prompting the provincial government to borrow heavily from the State Bank of Pakistan. Servicing this debt has imposed an additional burden on already weak finances. Nonetheless, the province showed a significant fiscal surplus in 2010/11. This was partly an outcome of a favorable NFC Award that significantly enhanced the province s share of federal revenue, but partly was also due to a strong effort made by the provincial government to reduce its low priority expenditure. 6 5 According to the results of the most recent population census. 6 Most of the untargeted subsidies were eliminated in 2010/11. However, some new ones, especially the yellow taxi scheme, were introduced in the 2011/12 budget. 2

13 B. Sectoral and Institutional Context 6. Cities are at the center of Pakistan s economic development and growth. Of Pakistan s current population of 177 million, over 65 million (or 37%) live in cities 7 compared to 43 million (32%) in Urban economic sectors have become the drivers of economic growth in Pakistan 9 as a whole, as well as in the Punjab. It is estimated that cities contribute 78% of the country s GDP 10 ; in the Punjab, the five largest cities account for 50% of the gross value of industrial production Punjab is among the most urbanized regions of South Asia and is experiencing a consistent and long-term demographic shift of the population to urban regions and cities. The urban population in 2011 is projected as 48% of the total on the basis of the inter-census rate of 3.4% per annum recorded in While Lahore, the capital of Punjab and its largest city, is currently home to about 8 million people, its population is expected to reach 10.8 million people in owing to its position as an urban magnet in the region. Punjab has four other cities with populations in excess of one million, namely Faisalabad (3 million), Gujranwala and Rawalpindi (2 million each), and Multan (1.7 million) 14. Collectively, about half of the urban population in Punjab is concentrated in these five cities. In addition, three other large cities (Sialkot, Bahawalpur and Sargodha) are poised to cross the one million mark. 8. Yet cities in the Punjab face many challenges. Cities have inadequate infrastructure and urban management capacities to meet current needs, let alone an ability to respond to growing demand. Water and sanitation service in the largest cities is unreliable and intermittent providing only 4-16 hours of water supply per day and to only about half of the urban population. Service provision is not financially sustainable due to a combination of low tariffs, low collections, and the steep increase in energy tariffs. Aquifers are over exploited: for instance in Rawalpindi, the water table has gone down from 8-20 meters in to meters by Wastewater is disposed off untreated in natural channels and water-bodies. Similarly, the solid waste service collects only about half of the waste being collected; and this waste is disposed off in substandard dumps and waterways. Widespread under-performance in service delivery and infrastructure deficiencies affect living conditions and handicap business growth reducing the productive potential of cities. Yet they remain the engines of provincial and national economic activity Government of Pakistan, Finance Division (2011). Economic Survey of Pakistan , Islamabad. 8 Government of Pakistan (2001) Census Report of Pakistan, Islamabad 9 Government of Pakistan, Planning Commission (2007). Vision The economic dynamics of Pakistan s cities makes them important engines of growth Section 10.4: Cities as Engines of Growth, p Government of Pakistan, Planning Commission (2011). Task Force Report on Urban Development. Executive Summary, p.vi. 11 Government of Punjab, Asian Development Bank, World Bank and UK Department for International Development (2005). Pakistan: Punjab Economic Report. Table 5.23, p. 96 based on the Punjab Census of Manufacturing Industry. 12 Government of Pakistan (2001) Provincial Census Report of the Punjab, Islamabad. 13 Government of the Punjab, (2006). Poverty Focused Investment Strategy for Punjab, Lahore; this figure would be 12.4 million if projected on the basis of the inter-census growth rates from the last census are used. 14 Projected on the basis of the inter-census growth rates from the last (1998) population census. 15 Ibid. The challenge for Punjab is to develop a strategy to manage the accelerating urbanization in a manner that the province s cities become more livable, while also serving as engines of growth. p.29. 3

14 9. Institutional and systemic obstacles pose significant challenges to improved performance in urban areas: Fragmented mandates and vague jurisdictional boundaries hinder spatial planning. A multitude of agencies are operating both at the local and provincial level without distinctive mandates and well-defined roles, and with vague functional boundaries. The division of responsibilities amongst individual agencies is nebulous, highly overlapping, and largely indistinguishable. Each of these entities has a different planning remit, and their plans do not cover the same spatial distribution. This in addition to lack of coordination, hampers the efficient use of development funding. In Lahore for example, the city district government (CDG), the development authority (DA), and the traffic management agency (TEPA) are all involved in road construction works within the city. In addition, the provincial government departments are also implementing road projects directly. Moreover, the second-tier of local government in the city, the town municipal administrations (TMAs) also maintain, repair, and rehabilitate roads and streets. City level systems for resource planning and management are severely lacking. The strategic framework and direction for economic development and spatial growth is weak, and even where plans have been prepared, they are not followed as they have no legal force and in any case are too broad and general to be implementable. There is no medium term prioritization of projects beyond the annual portfolio of schemes - the Annual Development Program (ADP), although this is a requirement of the local government budget rules. In the ADP, projects are not prioritized according to public preferences and fail to address needs on a consistent, sustainable, and strategic basis. Budgetary planning and resource allocation practices suffer due to the lack of a coherent vision, with the consequence that spending is largely erratic, where smaller development projects are preferred and selected at the expense of important civic needs that require a longer, multi-year commitment. Punjab cities do not possess adequate planning and management capacity, or the channels required to elicit information from the community on their preferences so as to develop a responsive and coherent funding strategy. Finally, many aspects of financial management in the city government and city entities are inadequate, including management of budgets, expenditure controls, cash-flow management, management of creditors, asset management, and liability management. Internal audit capacity and audit controls are weak. Urban areas also suffer from non-predictable capital investment funding and low own source revenues. The Provincial Finance Commission (PFC) award, through which formula based fiscal transfers are made to local governments, does provide a solid and predictable basis for basic service delivery. However, own source revenues (OSR) are small and declining in proportion to the overall budgets, reflecting poor revenue effort. OSR as a percentage of total revenues varies between 3% for Gujranwala to 8% for Lahore. An absence of revenue management and lack of political will are the main factors behind poor revenue effort since both provincial legislators and local councilors are reluctant to approve increase in fees, charges, or taxes. As financing of major capital investment is controlled and managed directly by the provincial government, the volume of development funding beyond the PFC, is 4

15 non-predictable and relies heavily on provincial schemes and political allocations ( tied grants and vertical programs). There is an absence of accountability of local governments to citizens. Oversight responsibilities are not clearly distributed amongst various entities involved at the provincial, local government, and service delivery levels. Policy-making and service delivery roles are generally found converged within the same agencies, leaving little room for effective oversight of their performance. As a result, officials and agencies at all levels are not held accountable for failures due to inappropriate reporting lines and lack of sufficient monitoring arrangements. Service delivery agencies in particular are not accountable to the communities they serve, since they are controlled directly by the provincial government instead of the cities. 10. Government of Punjab s Urban Agenda: The government s fundamental urban goal is to improve the performance and accountability of cities by strengthening the planning, financing, execution, and monitoring functions of local governments. The Government of Punjab (GoPunjab) Urban Agenda is reflected in the Mid-Term Budgetary Framework (MTBF) According to the MTBF the vision of GoPunjab for the urban sector is to develop modern and efficiently managed urban centers to serve as engines of growth for provincial economy (see Figure 3). 11. Water and Sanitation Agencies (WASAs) and DAs of the large cities (Lahore, Faisalabad, Rawalpindi, Gujranwala & Multan) and District Governments of selected intermediate cities (having population ranging million) of Punjab are covered under the MTDF. The proposed project is in line with the following policy interventions highlighted in MTDF : Streamline functional and operational alignment of District Governments, DAs, WASAs, TEPA, etc.; Update legislation for empowered, responsive, efficient and accountable City Governments; Review and rationalize all levies, fees, and rating areas; Encourage greater own-source revenue generation by CDGs /WASAs/DAs with matching provincial grants; Prepare Capital Investment and Asset Management Plans. Link new schemes to such plans of the city; and, Undertake provincial Master Planning to guide all future investments. 12. GoPunjab has recognized that carrying out of urban reforms is a long-term undertaking, and therefore is approaching it in three stages. In the first stage, which is largely complete, the GoPunjab has initiated, through a series of provincial instructions, changes aimed at improving the operating environment for urban development i.e., institutional coherence in strategic and medium term planning, transparency in procurement decisions, professionalization of service delivery entities, and introduction of GIS based information system. 16 MTDF , Annual Development Program Vol-II, Government of Punjab 5

16 13. As a second step, GoPunjab is currently focusing on strengthening urban governance the institutions and management systems need to ensure that these reforms are successful. These governance actions include: (i) boundaries alignment; (ii) improving the planning process; (iii) introducing development and asset management planning across the urban space; (iv) strengthening and integrating fiscal transfers and enhancing resource mobilization at the local level; (v) strengthening accountability of urban institutions; and (vi) transparency in decision making. 14. Based on these policy and governance improvements, GoPunjab plans to tackle service delivery in the third stage of its urban strategy aiming at: (i) sustainable urban development and expansion of municipal services in city areas; (ii) administratively and financially autonomous city entities; and (iii) participatory and informed decision making. Figure 3: Government of Punjab Urban Agenda Step 1: Urban Reforms Reintroduction of urban identity in the law. Medium Term Development Framework. Approved Policy Framework for Urban Immoveable Property Tax (UIPT) Reforms. Transfer of full UIPT receipts to Local Governments (LG). Punjab Public Procurement Regulatory Authority Act & Punjab Procurement Rules. Orperationalization of Urban Unit in Planning and Development Department (P&DD) as technical support for GoPb and LGs. Performance criteria based and competitively recurited management team for WASA. Service delivery standards for WASAs. GIS based information system (IRIS). Notified city area in five CDGs Step 2: Improve Urban Governance Alignment of planning areas of city entities with city areas. Improved fiscal consolidation & enhanced revenue mobilization efforts. Automation of UIPT system. Framework for participatory 3 years integrated, rolling development and asset management planning. Operationalization of public disclosure and access to information. Enhanced transparency and accountability of institutions through citizen feedback mechanisms and one window complaint redress systems. Improved asset management system with GIS based invertory of assets. Institutional capacity building. Step 3: Improve Service Delivery Expansion of service delivery in a phased manner in city areas. Operationalization of fully autonomous entities with clarity of mandates and jurisdictions. Scaled up investments and budgets allocations for asset maintenance. Increased OSR with widened tax base, increased user charges, and fee, etc. Hard budget constraints. Urban development in accordance with 3 years integrated, rolling development and asset management plans of CDGs. Improved asset management. Improved service delivery with operationalization of citizen feedback and implementation of effective grievance & complaint redress systems. Application of safeguards procedures and policies. 6

17 C. Higher Level Objectives to which the Project Contributes 15. The project is aligned to the priorities of the Pakistan Country Partnership Strategy which include fostering livability and economic growth and dynamism within Pakistan s major cities and rapidly growing urban settlements, and the need for greater transparency and accountability, improved responsiveness, and a better interface with the citizens. At the national level, the project furthers the objectives of the Pakistan Framework for Economic Growth by supporting city management systems necessary to underpin the emergence of creative cities as the hubs of innovation, entrepreneurship, and culture 17. The framework provides a number of recommendations for local/city governments, such as 18 : Shift focus from expanding urban infrastructure to increasing productivity and efficiency of the existing networks; Reform the existing institutions that manage the infrastructure and facilitating them to adopt innovative engineering and maintenance techniques; Encourage the local/city governments to improve systems for the collection of Own Source Revenue (OSR); Make urban governance system more responsive, efficient and accountable, by adopting two essential prerequisites - political power to administer and trained manpower to run the system. 16. Keeping in line with the overall objective of the framework, the project contributes to the provincial government s vision of cities as engines of economic growth, and its committed agenda to unlock their potential 19 and strengthen city management. The Project is expected to have a transformative impact on the management of urban areas in Punjab. It will also allow for rapid reallocation of credit proceeds or additional funding under streamlined procedures, as needed, in order to support preparedness and rapid response to disaster, emergency, and/or catastrophic events. II. PROJECT DEVELOPMENT OBJECTIVES A. Project Development Objective 17. The project development objectives are to support the Province of Punjab s cities in strengthening systems for improved planning, resource management, and accountability, and to improve the Province of Punjab s capacity to respond promptly and effectively to an Eligible Crisis or Emergency. The project builds on the policy reforms already undertaken by GoPunjab, and focuses on the institutional issues in stage 2 of the urban agenda. The achievement of the development objective will help the provincial government and cities to address the third stage of 17 Government of Pakistan, Planning Commission (2011). Framework for Economic Growth Pakistan. 18 Government of Pakistan, Planning Commission (2011). Task Force Report on Urban Development. Executive Summary, p.vi. 19 Government of Punjab, Planning and Development Department (2009). op.cit. and MTDF , Annual Development Program Vol-II, Government of Punjab 7

18 GoPunjab s urban agenda, i.e., to improve delivery of municipal services in the medium to long term on a more sustainable basis. Project Beneficiaries 18. The direct beneficiaries of the project are the five largest cities (city governments and agencies) in Punjab participating in the Project. Indirectly, the other cities in the Punjab, particularly the remaining three large non-project cities (Sialkot, Bahawalpur and Sargodha), will benefit from the capacity building and system development activities under the project. In addition, secondary beneficiaries from the Project will also include the 14.5 million urban residents of the five large cities of the Punjab (Lahore, Faisalabad, Rawalpindi, Gujranwala and Multan), which are classified as City Districts. Project Development Objective (PDO) Level Results Indicators Success in meeting the project development objective will be measured against a baseline in FY 2012 by the following outcome indicators. The strengthening of planning and resource management systems will be measured by the first indicator while the second indicator is designed to capture improvements in accountability of city governments towards citizens: Table 1: Project Outcome Indicators Percentage of development and asset maintenance expenditure of the city and city entities which are spent according to the three-year rolling development and asset management plan (DAMP)(%) Percentage of service area population having an institutionalized mechanism available at city service delivery entities for providing feedback and grievance redress. Baseline End of Project (2017) 0% 80% 0% 100% III. PROJECT DESCRIPTION A. Project Components Component 1: Performance Grants 21 (US$ 145 million) 20. Component 1 focuses on two areas of urban governance and is aligned with the seven DLIs. The first sub-component addresses resource planning and management, seeking to improve decision making, consolidate fragmented revenue sources and strengthen resource mobilization. The second sub-component addresses transparency and voice in the preparation, monitoring, and evaluation of plans and programs in urban areas. 20 Relevant PDO level indicators related to the second part of the PDO will be included in case the contingent emergency response component (Component 3) is activated 21 As per the terms of the Project, the Bank shall provide credit to the Government of Punjab (GoPunjab). The GoPunjab will in turn disburse funds to the cities in the form of a Performance Grant under Component 1. 8

19 21. This component will provide an annual grant to the project cities based on satisfactory performance in selected governance areas. The disbursement decision will be based on achievement of pre-specified results: annual targets that will need to be achieved for disbursements against a set of Disbursement Linked Indicators (DLIs). The achievement of annual targets for disbursements against the seven DLIs (Table 2 below and Annex 1) will be individually assessed for each city every year by the Directorate General Monitoring and Evaluation (M&E), P&DD Punjab, through independent assessment teams. The assessment teams deployed hence will comprise third party/ private sector firm(s) contracted by the M&E Directorate of P&DD Punjab as independent assessment agencies. The DLIs and corresponding annual targets have been identified with the Government over the course of preparation to reflect specific areas of improvement. The achievement of all annual targets specified for disbursements against the entire set of DLIs by each city applicable for the year would be required for disbursement for that city. 22. Sub-component 1.1: Resource Planning and Management (DLIs 1-4): Four improvements are supported: a) Capital Improvement and Asset Maintenance: Cities will prepare three-year rolling Development and Asset Management Plans (DAMP). The preparation of these plans will be coordinated at the city level and will be based on integration of the capital improvement and asset maintenance plans of the city and its entities. The planning will be for a three year period with the first year detailed to form the annual budget for that year. These plans will be updated each year for a three year period on a rolling basis. This will help improve the consistency of development and asset maintenance plans across the city space and for all services, and to prioritize and rationalize investment decisions; b) Financial Reporting and Procurement Procedures: Arrangements will be made for producing annual consolidated financial statements of CDGs and efficient implementation of procurement procedures. Cities will develop Standard Operating Procedures (SOPs) focusing on streamlining of the procurement rules with other directives; and implementation of procurement rules, including but not limited to, procurement planning, equal opportunity, transparency and efficiency; c) Intergovernmental Finance: Currently there are multiple funding windows, some supporting CDGs and others service entities (e.g., WASAs), with the result that the CDG does not have a complete picture of the level of funding coming to the city for infrastructure and service delivery. To address this, the Government of Punjab will report to the CDGs, all transfers including amounts to city entities, at the time of making the transfers. This will provide a complete picture to each CDG of the funding available to the city as a whole, and the funds flowing to the city entities. In turn, this will help the CDGs to prepare city budgets keeping in view predictability of funding. Each CDG will also be able to hold city entities accountable for results against such funding. This consolidation will in turn allow improved planning and control of resources for city level development expenditures; and d) Strengthening Own Source Revenue: Cities will be supported to achieve improvements in the property tax regime through the digitization of Urban Immovable Property Tax (UIPT) records, GIS based spatial-mapping of urban properties, and the establishment of a UIPT database and billing system that allows 9

20 the taxpayers to use a web based interface to view property valuations as well as to generate vouchers for annual payment. 23. Sub-component 1.2: Transparency and Voice (DLIs 5-7). Three improvements are supported: a) Boundary Alignment: The project will support the introduction of an integrated spatial planning, development, and asset management planning process that will use a common urban boundary definition, and in which all city level entities participate. A common boundary will be used by the city and the city entities for the purposes of spatial and service delivery planning, which will be coordinated at the city level. Similarly, the city will coordinate the preparation of multi-year development and asset management plans, which will prioritize the demands of the citizens, and the needs of the city and the city entities; b) Public Disclosure of Information: The project will support improvements in the collection (and up-dating) of data, preparation of periodic reports, and disclosure of information to citizens. The city and its entities will post budgets, half yearly and annual reports including financial statements, notices of award of contracts, etc. on their websites and disseminate to the public through radio, television, newspapers and at public notice boards in prominent places at all their offices accessible to the public; and c) Citizen Feedback: The project will also support the development of a complaint and grievance redress mechanism for citizens. The city and its entities will operationalize a one-window complaint center and follow-up mechanism linked to all service providers in the city. Table 2: Disbursement Linked Indicators DLIs Indicators DLI 1: Resource Planning Three-Year rolling and integrated Development and Asset Management Plans implemented by each CDG for area within its city boundary. DLI 2: Procurement Good procurement performance practices operationalized in CDGs through implementation of the provincial procurement rules. DLI 3: Intergovernmental Reporting of flow of funds to CDGs and city entities, at the CDG Finance System level. DLI 4: Revenue Collection Improvements in Own Source Revenue (OSR) collection systems. System DLI 5: Boundary Alignment Boundary of city area adopted by each city and its entities as the spatial planning and service delivery area. DLI 6: Public Disclosure and Public Disclosure and Access to Information mechanism Access to Information operationalized. DLI 7: Accountability Effective and transparent feedback and grievance redress mechanisms operationalized. 24. Disbursements under Component 1 will be tracked against a set of Eligible Expenditure Programs (EEPs) that reflect non-salary O&M expenditures of existing urban assets and services such as roads and water supply in the city. The amount of the performance grant for each city is determined on the PFC formula basis, at an increasing scale of distribution across four years. The 10

21 detailed schedule for commencing of the assessment, the finalization of results from the annual assessment, and the announcement of the consequent disbursements is included under Annex The EEPs are under two departments/entities for each city included in the project: the Works and Services Department of CDGs and WASAs. Based on the government budgets, the EEPs identified under the project account for about 7.8% of total expenditure of five cities and their service entities (including expenditure of CDGs, DAs, and WASAs), 10.8% of total current expenditure 22, and 34.8% of total current expenditure related with urban related functions 23. The EEPs are under the city current budget, and are: (i) power/energy needed for machinery, operations for asset maintenance and service delivery (56% of the EEP expenditures); and (ii) repair and maintenance of machinery, equipment, roads, buildings, and water supply/drainage (44% of the EEP expenditures). The Bank s guidelines on procurement will be applicable to the EEPs and the framework for addressing social and environmental safeguards will be applicable to all activities included in the EEPs. 26. First-year targets against the set of DLIs were met by Project Appraisal, and therefore, disbursement for the first year will be made on Project Effectiveness. For the following years, a city will need to meet all annual targets specified for disbursements against the seven DLIs for that particular year, in order to be eligible for disbursement for that year. A city that does not meet the entire set of annual DLIs targets for a particular year, will have the opportunity to meet the combined set of annual targets against DLIs the subsequent year, in which case it will be eligible for the funds for both years together (the previous year and the current year). If a city does not meet the annual targets for disbursements against DLIs for two consecutive years, the funds for the city will be distributed among the other cities that have met the disbursement targets against DLIs, in accordance with the PFC formula. 27. A city that has received funding on achievement of annual targets for DLIs, shall have to spend in that year on the EEPs in aggregate terms, more than or equal to the amount received. If a city spends less on EEPs in aggregate terms, than what it received at the start of the year, in the subsequent year it will only receive an amount equal to what it spent on EEPs for the previous year, while the remaining amount out of its allocation based on the PFC formula will be rolled over to the following year. In that case, the city would need to meet the specified targets for all DLIs and spend at least the disbursed amount and the remaining balance from previous year s disbursement against the EEPs in aggregate terms, in order for full disbursement for the following year. If the city does not meet the spending requirement against the EEPs in aggregate terms for two consecutive years, the difference between project funds going to the city and actual spending on EEPs by that city, will be distributed across other eligible cities. The amount disbursed to defaulting cities would be refunded to the Province for allocating to the other partner cities. 22 Current expenditure includes mainly salary related expenditure and O&M related expenditure. 23 Urban related functions refer to expenditures under DAs, WASAs, and the Works and Services Department and Municipal Services Department of the CDGs. 11

22 Component 2: Project Implementation and Capacity Building (US$ 5 million) 28. This component supports the cities and province through technical assistance and capacity building to achieve the DLIs and enhancement in revenue. The Urban Sector Planning and Management Services Unit (USPMSU), and a City Program Unit (CPU) in each of the five cities will be responsible for providing this support and the corresponding costs will be financed from this component. Funds will be disbursed through a lapsable Assignment Account, managed by USPMSU against forecast of TA expenditures for the next year to be submitted by the P&DD, GoPunjab. 29. Disbursement under component 2 will be made each year based on annual tranches subject to the achievement of the respective annual DLI targets of Component 1 by at least one Project city. This is important so that the TA and Capacity Building funds essential to help cities achieve the DLIs are available in a timely manner. 30. On behalf of the GoPunjab, USPMSU will be responsible for: (i) project administration and coordination; (ii) project financial management; (iii) project reporting; (iv) monitoring and evaluation; and (v) strategic communications. 31. The USPMSU will also manage the capacity building activities under the project including: (i) formulation of TORs/ RFPs; (ii) assistance to CPUs for conducting the selection process and contract management; (iii) ensuring quality assurance on the delivery of the capacity building initiatives; and (iv) facilitating knowledge sharing between the five project cities. The capacity building will be in areas including but not limited to: (i) city-wide urban planning; (ii) resource planning; (iii) procurement; (iv) management of environmental and social impacts; (v) citizen participation and use of social accountability approaches and tools; and (vi) preparation of service delivery investment pipeline for third stage of GoPunjab urban strategy. 32. The CPUs will be responsible for: (i) liaison with the provincial departments and coordinating with the focal persons at the city entities; (ii) supporting the cities to make the provincial urban agenda operational at the city level; (iii) facilitating progress towards achievement of the DLIs at the city level; (iv) trouble shooting and advising the city to implement the improvements; (v) monitoring project implementation, preparing city level reports, and implementation of requisite impact evaluations; (vi) facilitating the annual assessment of progress achieved against DLI targets undertaken by independent agents; (vii) assisting city departments and agencies in identification of capacity building requirements; (viii) communicating consolidated city-specific capacity building requirements to the USPMSU on an annual basis for approval of the annual city specific capacity building plan; and (ix) assisting in identification of technical assistance requirements, including but not limited to preparation, design and engineering of sub-projects and city specific studies and assessments, and drawingup/approving their terms of reference. 33. Component 2 will also support the Directorate General M&E in engaging M&E firm/s for independent third party assessment of achievement of the DLIs as outlined under Component 1. Moreover, required capacity for procurement and contract management to be engaged at the DG M&E for the procurement and supervision of third party M&E firm/s will also be supported. 12

23 The resource engaged in this regard will also be responsible for building the capacity of M&E Directorate in the area of procurement and contract management. 34. Component 2 will also provide support to the USPMSU for UIPT automation. Furthermore, part of the proceeds under Component 2 may also be utilized for the development of a follow up project aimed at improvement of service delivery in the third stage of GoPunjab s urban strategy. Any uncommitted / undisbursed funds from Component 2 in the last year of the Project may be reallocated to Component In addition to this, USPMU will also be supported under this Component to work with relevant national and provincial entities to undertake GIS-based disaster risk modeling and assessments of selected urban centers. These efforts will be coordinated with other relevant ongoing/planned Bank supported initiatives. 36. In view of Punjab Municipal Development Fund Company s (PMDFC) experience and expertise, its services may be utilized for undertaking capacity building initiatives for city governments and their entities under this component. PMDFC, over the past several years, has been the implementing agency for the Bank-funded Punjab Municipal Services Improvement Project (PMSIP), which has achieved impressive results in the institutional development and performance improvement of local governments. Component 3: Contingent Emergency Response (US$ 0) 37. This component will support preparedness and rapid response to a natural disaster, emergency, and/or catastrophic event as needed. The provisional zero cost for this component will allow for rapid reallocation of credit proceeds from other components under streamlined procurement and disbursement procedures. Following an adverse natural event that causes a major natural disaster, the GoPunjab may request the Bank to re-allocate project funds to this component (which presently carries a zero allocation of credit proceeds) to support response and reconstruction 24. The component would hence allow the GoPunjab to request the Bank to recategorize and reallocate financing from other project components to partially cover emergency response and recovery costs. This component could also be used to channel additional funds should they become available as a result of the emergency. 38. Disbursements under Component 3 will be contingent upon the fulfillment of the following conditions: (i) The Recipient has determined that an Eligible Crisis or Emergency has occurred and the World Bank has agreed and notified the Recipient; (ii) The Province of Punjab has prepared and adopted the Contingent Emergency Response (CER) Implementation Plan that is agreed with the World Bank; and (iii) The Province of Punjab has prepared, adopted, and disclosed safeguard instruments required, as per Bank guidelines, for all activities from the CER Implementation Plan eligible for financing financed under Component Such a reallocation would not constitute a formal Project restructuring, as permitted under the particular arrangements available for contingent emergency response components (ref. Including Contingent Emergency Response Components in Standard Investment Projects, Guidance Note to Staff, April 2009, footnote 6). 13

24 39. Disbursements will be made against a positive list of critical goods or the procurement of works, and consultant services required to support the immediate response and recovery needs. All expenditures under this component, should it be triggered, will be in accordance with BP/OP 8.0 and will be appraised, reviewed and found to be acceptable to the Bank before any disbursement is made. 40. Retroactive financing will also be available for payments made under the contingent emergency response component, up to 12 months prior to the activation of the Component. The amount available for retroactive financing will be up to 40 percent of the contingent component amount (after reallocation, if any). The eligibility of expenditures that are claimed under this facility will be subject to the corresponding terms for retroactive financing included under Annex 3 of the document, and the legal agreements. B. Project Financing Lending Instrument 41. The project is a US$150 million five-year results based Specific Investment Credit. An additional US$ 4 million will be contributed through counterpart funding by the Government of Punjab. Table-3: Project Cost and Financing Project Components 1. Performance Grants 2. Project Implementation Support and Capacity Building 3. Contingent Emergency Response Total Baseline Costs Total Financing Required Project Cost (USD million) IDA Financing (USD million) % Financing 100% 55% 0 97% 42. The counterpart funding of US$ four million provided by GoPunjab will be utilized for financing operating expenditures at the USPMSU, towards meeting the project objectives. IDA Credit will support dedicated resources needed for achievement of TA and Capacity Building needs. C. Lessons Learned and Reflected in the Project Design 43. Institutional development versus service delivery. The project supports GoPunjab s phased approach to urban development i.e., broad urban reforms, followed by improvements in urban institutions and systems, and finally investments in service delivery. This approach builds a strong enabling environment for urban level improvements, and avoids burdening cities with investment programs that are poorly planned and executed, under financed, and ultimately badly maintained. Emerging global lessons indicate that successful cities change their ways, improve their finances, attract private investors, and take care of their citizens. Enabling these values implies cities have to be well managed and sustainable. These lessons are particularly important 14

25 in the context of emerging evidence that growth is taking place in small and medium sized cities. There are large benefits of urbanization, driven by rising productivity, fluid labor markets, and greater market access. Preparing cities in Punjab to reap from these benefits is the core underpinning of this operation, with a strong focus on the bedrock of building credible and strong city institutions. 44. Performance grants. The project builds on experience from PMSIP, as well as the Bank s global experience specifically with local government grant programs. The lessons learnt from performance-based conditional grants indicate that these grants are effective at bringing about institutional change. A recent Independent Evaluation Group (IEG, 2009) report noted that the best municipal development programs implemented several reforms, including performancebased grants, to incentivize cities to improve revenue and expenditure management, procurement, and planning and budgeting with a focus on improving municipal information systems. Local level discretion in revenue allocation and management improved operation and maintenance, made monitoring more effective, and was successful in providing higher quality services at a lower cost, and in a manner more reflective of local needs. The Bank s Urban Strategy: System of Cities Harnessing Urbanization for Growth and Poverty Alleviation (2009,) emphasizes that performance grants and municipal contracts can provide incentives for reform and capacity strengthening. A major lesson is that performance measures need to be incremental, clear, and easy to measure objectively. Another lesson is that in order to be credible, the system needs to have clear, transparent, and objective formulae for allocations and reallocations of performance grants. This experience and the lessons learnt have been incorporated in the project design. 45. Disbursement linked indicators. The project builds on the experience of other projects utilizing disbursement linked indicators. Most specifically it builds on the Bank s experience in the education sector in Pakistan, particularly the Punjab Education Sector Project. Its lessons a strong commitment by the provincial government to a comprehensive action program, a small number of key DLIs and specific protocols for monitoring and evaluating their achievement have been incorporated into the proposed project. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 46. The project implementing entity will be the Government of Punjab through the Planning and Development Department (P&DD). P&DD will be responsible for coordination between relevant provincial departments, for which it has established a Steering Committee (SC) for the project headed by the Chairman, Planning and Development Board. It comprises of Secretaries from four provincial departments (Finance, Local Government and Community Development, Housing and Urban Development, and Public Health Engineering), the five District Coordination Officers of the project cities, and the Project Director USPMSU as the Secretary. The SC will be responsible for overall guidance and monitoring of project implementation. External monitoring will rest with the Directorate General Monitoring and Evaluation, Planning and Development Department (P&DD). 15

26 47. P&DD will entrust project management and implementation to the Urban Sector Planning and Management Services Unit (USPMSU) through an Agreement between GoPunjab and the USPMSU (Private) Limited. Under this arrangement, the liaison, internal monitoring, and coordinated project reporting at the provincial level will be the responsibility of the USPMSU on behalf of the P&DD. In addition, USPMSU will be the main agency responsible for implementation of Component 2 of the project. 48. A City Program Unit (CPU) will be established in each of the five cities to support project implementation and assist in delivering on the city level activities. CPUs will function under the office of the executive head of the city (DCO) who shall be ultimately responsible for delivering on the project activities. Each CPU shall be adequately staffed with requisite skills to support the cities to deliver on the project results. 49. The GoPunjab has signed Memorandum of Partnerships (MoPs) with the five participating cities, delineating roles and responsibilities of all parties. The MoPs lay out the envisaged institutional roles, operational responsibilities, and results required to be achieved under the Project at the provincial and city levels. 50. Upon the activation of Component 3 subject to the fulfillment of due conditions, the GoPunjab will need to designate the responsible agency for implementation of activities under Component 3, and may delegate the development and adoption of Contingent Emergency Response Implementation Plan as well as the development, adoption, and disclosure of safeguards instruments to the responsible agency. B. Results Monitoring and Evaluation 51. Annex 1 provides the results framework including outcome indicators and intermediate outcome indicators for each project component. The CPU will have the overall responsibility for ensuring that the implementing departments and entities (WASAs, and DAs) produce half-yearly and annual progress reports as required by the provincial government. These departments/entities will establish and/or improve on the management information systems (MIS) to ensure better links between the cities consolidated budgets and improvements in O&M and asset management. The data and reports generated from the MIS will enable monitoring these improvements in cities performance in budget and ADP execution and service delivery through enhanced O&M and asset management. In addition, the project will strengthen implementing entities capacities in core business functions of expenditure management, procurement, asset management, participatory planning and accountability. All together these system improvements will enhance the flow of information between the citizens and their service providers, and as a result strengthen accountability for better results. 52. The USPMSU will be responsible for internal monitoring and coordinated project reporting at the provincial level. The Directorate General M&E at the P&DD will be responsible for: (i) external monitoring of the implementation of the project on an annual basis, and (ii) midterm and implementation completion reviews of the project. Moreover, third party evaluations will provide the basis for measuring the achievement of the project outcomes, using publicly available information. The project will also establish a baseline, which will help develop a robust 16

27 monitoring and evaluation system of the project. Analysis of this information will facilitate analyzing the potential impacts of the project on urban governance. 53. With respect to performance grants, the disbursement decision will be based on achievement of pre-specified results, i.e., annual targets against all DLIs. The achievement of annual targets for DLIs at the city level will be individually assessed for each city, every year, by independent assessment teams under the DG M&E (P&DD). The DLIs include intermediate outcomes, incremental steps and results contributing to improved efficiency and effectiveness during and beyond the project. The achievement of all annual targets against DLIs applicable for the year would be required to ensure disbursement. 54. For standard reporting to the Bank, the USPMSU will be responsible for: (i) preparation and submission of financial and technical progress reports under the project; (ii) submission of project accounts to audit in a timely way and for onward submission of audit reports to the Bank; and, (iii) ensuring funds flow, accounting, audit, financial reporting and control are maintained as envisaged in the project operational manual. C. Supervision Strategy 55. The supervision strategy for the Project is based on several mechanisms that will enable enhanced implementation support to the Government of Punjab and timely and effective monitoring of Project activities. These are described in detail in the PAD and Financing Agreement of the Project. Key features of the supervision strategy are explained below: 56. Joint Review Missions: The Bank Supervision Team will join the Government of Punjab to formally review program implementation semi-annually. The March/April missions will focus on assessing progress towards DLI targets, implementation of TA, and review of financial management reports. The September/October missions will conduct a comprehensive review of Project performance against the Results Framework and agree on planned actions (including financing plan) for coming years, in addition to progress under the TA component. As part of formal and ongoing technical missions, extensive field visits will be undertaken to determine reform outcomes, and to take corrective actions for improvement at the district and school levels. One month prior to the joint review missions, USPMSU will provide to the Bank Supervision Team a comprehensive progress report on Project activities, studies and evaluations. 57. The TTL and other key members of the Bank team including fiduciary and safeguards staff are based in the country office which will enable continuous dialogue with the IA supplemented by missions throughout the duration of the project for additional support as and when needed. 58. Mid-term Review: A mid-term review would be undertaken to identify any divergences from the planned outcomes and identify any mid-course corrections that may be needed with particular focus on ensuring sustainability and scalability of improvements engendered under the project. The mid-term review would also serve as a platform to plan for the post-project completion phase. It is anticipated that improved and strengthened management and operational systems introduced during the course of the project will be embedded within the core urban systems prior to the conclusion of the project. 17

28 59. Independent Third Party Validations (TPVs): The engagement of third party/ private sector firm(s) as independent assessment agencies by the M&E Directorate of P&DD Punjab to undertake assessment of progress against annual DLIs targets provides another independent monitoring and supervision mechanism. While the independent assessment agencies will fully mobilize for annual assessments in line with the schedule presented under Annex 2, collection of data from primary / secondary sources will continue year round to facilitate the annual assessment exercise. The data collected hence will be shared with the M&E Directorate of P&DD Punjab for review and onward transfer to the Bank Supervision Team as part of the progress reports shared before the September/October review missions. 60. Security risks: The prevailing security situation in Punjab is not anticipated to have a significant impact on the supervision of the Project. If conditions warrant, the Bank Supervision Team will consider alternate forms of supervision, such as greater use of electronic means, reliance on TPVs and inbuilt monitoring. The emerging e-monitoring system of Punjab Government will also be utilized and further developed. D. Sustainability 61. The legislative framework for local governments in Punjab is under review by the GoPunjab. Under the Punjab Local Government Ordinance 25 (PLGO) 2001, local governments were constituted at various levels including in the large cities. After two terms of elected local governments, the GoPunjab has undertaken a review and reform exercise aimed at introducing improvements in the urban governance and management system through changes in the local government legislative framework. Consequently, the GoPunjab has developed the Draft Local Government Bill 2012 which is expected to be discussed and approved by the legislative assembly later this year. The Bill further strengthens the legislative underpinnings, preserves the institutional arrangements envisaged for the project, and strongly supports the project objectives and the proposed set of governance improvements. 62. System management improvements introduced under the project shall be implemented as the core system at city level: in the city government, city entities, authorities and agencies. The project utilizes an incremental approach, where changes are phased in at the city level in accordance with enabling framework to be provided by the provincial government. This approach will ensure that the improvements brought about during the initial years are strengthened and sustained in the later years of the project and beyond. 63. All operational and process level systems are being introduced as mainstream systems with full faith and backing of the higher tier of the government. A mid-term review would be undertaken during project implementation to assess project sustainability as well as to identify and remedy any divergences from the planned outcomes. The mid-term review would also serve as a platform to plan for the post-project completion phase. It is anticipated that improved and strengthened management and operational systems introduced during the course of the project will be embedded within the core urban systems prior to the conclusion of the project. The 25 Punjab Local Government Ordinance (Ordinance No VIII of 2001) was promulgated in August 2001 after repealing Punjab Local Government Ordinance, 1979 (VI of 1979). 18

29 government is already incorporating elements of the improvements under the project in the design of the new local government system. 64. With regards to physical asset sustainability, the project supports EEPs in repair and asset maintenance. The project also provides for creating transparency in, and public disclosure of, the funding allocated for operations and maintenance. The capacity-building and technical assistance activities supported by the project include development of systems and staff training in asset management. 65. Communication Strategy: The Bank will support the Implementing Agency in developing an effective internal and external communications strategy during project implementation which would ensure adequate dissemination of information regarding the broader reforms undertaken as part of the project. It is important that the communications strategy is designed in a way that it distinguishes between the achievements under the project, which focus on improvements in the urban governance systems of the five cities, and areas beyond the scope of this project, such as service delivery. Strategic communication will help in creating buy-in and support both from within the various government entities involved and the external stakeholders to ensure sustainability of reforms. A well designed and implemented communication strategy not only helps in managing perceptions and expectations of the project interventions but can actually remove some of the developmental bottlenecks by striking partnerships. 66. As part of focusing on the systemic reforms achieved under the project, the communications strategy should highlight the availability of various previously non available mechanisms, such as grievance redressal and information disclosure systems. The communications strategy should aim to not only inform the citizens of such initiatives, but also create ownership of the systemic reforms and their outputs among the citizens of the five cities and stakeholders beyond them to enable scaling up and replication. 67. In order to align the communication strategy behind the wider urban reforms undertaken by the provincial government, the communication function for this project will be housed in the USPMSU. This communication unit will design the overarching communication strategy and help coordinate and supervise its implementation through communication staff in the respective CPUs, and city entities. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Table-4: Risk Ratings Summary Table Stakeholder Risk Rating Implementing Agency Risk - Capacity High - Governance High Project Risk - Design Substantial - Social and Environmental Low - Program and Donor Low Overall Implementation Risk High 19

30 B. Overall Risk Rating Explanation 68. The overall risk rating at preparation as defined in the project ORAF (Annex 4) is High. The geographic span of the project as well as the number of entities involved in project implementation across the five cities, pose risks that may hamper timely progress towards DLIs and importantly, the PDO. 69. Weak capacity in City District Government and affiliated entities as well as weak systems arising from fragmented mandates, procedural deficiencies and lack of accountability represent a substantial part of risks associated with project implementation. Furthermore, there is a possibility that provincial and city level entities non-familiarization with the Bank s fiduciary and safeguard requirements could risk quality of preparation and project execution, particularly monitoring and evaluation (M&E). The project itself provides key mitigation measures to address systemic weaknesses and capacity risks through the undertaking of a capacity assessment during project preparation and provision of capacity building and technical support, in addition to implementation support at the provincial and city levels during project execution. Additionally, the USPMSU, which played a key role in developing the GoPunjab s urban agenda, has demonstrated a high level of capacity for policy analysis, information management and program implementation. 70. Potential changes in the Local Government System as well as turnover in key leadership positions, affecting Government ownership of, and commitment to, the project also potentially represent high risks to the realization of the PDOs. The project design, however, mitigates this to a large degree by focusing on strengthening institutions and systems. The Bank will also support the implementation agency in developing and disseminating an effective communications strategy to lend voice to the reform agenda across successive provincial administrations, and to create public awareness of systemic and institutional reforms. Furthermore, to demonstrate commitment to the project, the Government would have to undertake the initial set of DLI targets at both the provincial and city levels prior to disbursements to be undertaken under component 1 for the first year of the project. VI. APPRAISAL SUMMARY A. Economic, fiscal and financial assessment Economic analysis 71. The economic analysis provides the justification for project intervention in the five large cities of Punjab. The operation will invest in deferred stock maintenance rather than expansion of new infrastructure. This focus will enable the cities and associated entities to improve efficiencies in service delivery and in addition, allow for savings in scarce resources to be channeled on other city development priorities rather than expansion of new infrastructure. In addition, cities will establish or improve monitoring databases, which will enable tracking unit costs of investments supported by the operation. In turn, during the course of implementation, cities and associated entities will be provided technical support through the project to enable them select investments based on cost-benefit analysis. 20

31 72. In the absence of government intervention, the immediate implication is that the current stock of infrastructure and cities systems will continue to deteriorate. Concurrently, the operational costs will continue to increase as the existing stock of assets will consume more energy as opposed to well maintained assets. In other words, the option of doing nothing at the moment is much more costly to the Government of Punjab. These benefits include better managed cities with the potential to generate greater efficiencies in service delivery, savings scarce resources for alternative investment priorities by the provincial government, and improved cities finances. 73. The benefits that arise from GoPunjab being able to generate more revenues from property taxes include possible investments in basic infrastructure in cities, improved maintenance of assets, and enhanced service provision. The benefits from such investments can generate significant benefits that we claim can exceed the estimated costs on the DLIs shown above. Other potential benefits could arise from improvements in procurement practices. Cities will be able to better manage and allocate their resources, and as a result, access and quality of basic services will be improved. Cost-benefit analysis is not applied since most of the funding goes to improved maintenance of assets and technical assistance. However, the project will support cities to develop monitoring databases upon which unit costs of investments will be established and hence, during the course of implementation it will be possible to quantify some of the benefits and enable a cost-benefit analysis. Fiscal and financial analysis 74. The reforms supported through the project are likely to strengthen systems and processes, including physical planning, financial management, revenue mobilization, procurement, e- governance, performance monitoring and local planning and budgeting. The analysis also demonstrates that there is potential to improve revenues from property tax enhancements supported through the project. The project will support ongoing reforms on property taxation being implemented by the USPMSU on behalf of the Government of Punjab. Through this project technical assistance will be provided to enhance the documentation of the properties. This will simplify the process of rolling out the GIS-based property tax system. Lastly, supporting water and sanitation authorities in Punjab is likely to improve their abilities to maintain existing infrastructure of water supply and sanitation. It is expected that the utilities will lower operational costs that arise in part due to high electricity costs and use of obsolete water equipment. B. Technical 75. The project directly supports the Government of Punjab s urban agenda, and more specifically, it strengthens the institutions and systems needed to carry out the critical urban policy reforms that have already been introduced. The project design is based on an extensive policy dialogue with GoPunjab, and is grounded in capacity assessments of the provincial cities, sectoral assessments (water and sanitation and solid waste management), analysis of the legal structure of local governments and reviews of the municipal finance and property tax regimes, As such, the project will support the capacity in CDGs and city entities to plan, implement and monitor programs, and manage resources more effectively. This will include strengthening 21

32 functional alignment, capital budgeting procedures, procurement and safeguards, and citizen involvement. Finally, the results based structure of the project (performance grants) will reinforce the achievement of planned outcomes. C. Financial Management 76. The overall project s residual risk rating is considered Moderate on completion of risk mitigating measures. The inherent risk is High. Country level risk is Substantial to Moderate as CDGs (part of its revenues and expenditures) and the entities, authorities and entities in the city lie outside the domain of PFM system. FM arrangements exist, but system requires improvement and harmonization with PFM system under agreed upon action plan to enable fiscal consolidation. The inherent risks can be mitigated once institutional arrangements are in place. Key FM staff needs training and capacity building. Qualified and experienced, internal audit staff is being appointed for an effective internal audit function that ensures effective control environment. A Finance Manager is also being appointed to work exclusively for the project. 77. Project funds for Component 1 would be disbursed annually in to the Punjab Consolidated Fund (Provincial Account No.1, Non-Food), subject to completion of identified eligibility criteria and achievement of DLIs. A forecast for expenditure to be tracked as EEPs would be provided every year along with the statement of DLIs achieved. Provincial Government funds from the Punjab Consolidated Fund (Provincial Account No.1, Non-Food) would be transferred to WASAs under intimation to the respective District Coordination Officers (DCOs) and Executive District Officers (EDO) Finance & Planning. Adequate controls would be exercised in processing payments for the selected EEPs, accounting and reporting. The fiscal transfers from the Punjab Consolidated Fund (Provincial Account No.1, Non-Food) will be utilized for meeting operational expenses related to Component 1(Performance Grants). Bank funds disbursed would be tracked (by each city) against expenditure on EEPs in that year, and thereafter to see that cities continue to meet the agreed criteria. 78. Project funds for Component 2 will also be disbursed annually in to the Consolidated Fund (Provincial Account No.1, Non-Food) as an advance against forecast of TA expenditures for the next year. The Finance Department, GoPunjab will immediately release these funds as a grant to an Assignment Account of USPMSU; a sub-account of Punjab Consolidated Fund (Provincial Account No.1, Non-Food) maintained with the National Bank of Pakistan for managing Project Implementation Support and Capacity Building costs. Documentation of advance will be based on actual TA expenditures (supported by invoices, receipts, etc) reported in the semi-annual Interim Financial Reports (IFRs) to be submitted to the Bank within 45 days after end of each period. The USPMSU has handled a Bank grant some years back and their staff has the required experience of keeping books of account and preparing IFRs. The Auditor General of Pakistan will audit the annual financial statements of the project. D. Procurement 79. This project focuses on systemic procurement strengthening as well as the transactions under EEPs. The project will develop the procurement capacity of the participating City District Governments and WASAs with specific focus on planning and implementation. In the context of 22

33 the transactions under the project, the Bank s procurement procedures shall be applicable only to the procurable items within the EEPs. 80. At the provincial level, Punjab enacted a procurement law in late Procurement rules have also been adopted which are based on the procurement rules of the federal government. Custodianship of the regulatory framework is however yet to be effectively established. The office of provincial Managing Director (MD) Public Procurement Regulatory Authority (PPRA) is not resourced adequately. Currently a full time MD PPPRA is appointed with no other technical/support staff. PPPRA has identified the next step as effective institutional functionality, development of Standard Bidding Documents (SBDs) and implementing regulations, setting up of complaint redressal mechanism, developing an M&E system, and overall capacity building of the procuring agencies through training programs. 81. The city district governments are required to use the provincial procurement rules, but compliance is partial due to gaps in implementation instruments, certain conflicting directives, as well as dissemination issues. As a part of the systemic improvements, the participating entities shall establish a SOP for procurement and contract management systems streamlining the applicable rules, and circumscribing procurement planning system linked to the budget, web postings, disclosures and complaints redressal mechanism. The pre-registration (enlistment) procedure shall also be rationalized. Eligible expenditures subject to Bank s procurement guidelines are civil works (repair and maintenance of roads etc) and goods (procurement of machinery, replacement of pumps, etc.) included within the EEP of repair and maintenance of machinery, equipment, roads, buildings, and water supply/drainage. All procurements under the TA shall also be subject to the Bank s procurement and consultancy guidelines. The details are provided in the procurement section Annex The DLI matrix provides the timelines for all agreed actions. These actions will assist the government in furthering their procurement reform agenda through better implementation of the notified procurement rules which aim at enhancing the economy, efficiency and transparency of the system. E. Environment 83. The project development objectives are to support the Province of Punjab s cities in strengthening systems for improved planning, resource management, and accountability, and to improve the Province of Punjab s capacity to respond promptly and effectively to an eligible crisis or emergency. Under the component 1 on Performance Grants, funds are to be provided to strengthen the system through improved operation and maintenance (O&M) of existing urban assets and services, such as roads and water supply service. Even O&M activities are to be confined to repair and rehabilitation of the existing right of way for the roads, and repair and rehabilitation, change of existing water supply pipelines, which are in dilapidated conditions. Other eligible expenditures include: (1) power/energy needed for machinery, operations for asset maintenance and service delivery; and, (2) repair and maintenance of machinery, equipment, roads, buildings, and water supply. No new schemes investments are eligible or going to be funded under this component. The proposed project has accordingly been categorized as B per Bank s Operational Policy on Environmental Assessment. 23

34 84. Over one-half of the urban population in Punjab province lives in these five large cities and contributes to around 50 percent of industrial production in the province. Unfortunately, urban air quality, solid waste management, sewage disposal and water quality, - environmental indicators related with urban development, remain major issues needed to be tackled in a more systematic way than the current business as usual. Except in Multan, where there exists one sanitary landfill site, which caters for around 30 percent of the solid waste generated there in all other cities solid waste management remains a major issue. Similarly, PM 10 and PM 2.5 levels, indicators reflecting the state of air quality, in these five cities are also well above the WHO thresholds. In terms of sewage disposal, except in Faisalabad where about 20 percent effluent is treated prior to its disposal, no other city has got treatment facilities installed. Receiving water bodies, like the river Ravi in case of Lahore, have therefore turned into sort of a sewer. Some of the data numbers on these aspects have already been presented in section B Sectoral and Institutional Context of this document. It becomes therefore imperative that environmental management considerations are integrated into urban planning and development process so that gains made in terms of economic and industrial growth in the province are sustainable in the long run. 85. Recognizing the fact that the project will finance only O&M activities of existing urban assets and services, which have low to moderate, short to medium duration and reversible environmental impacts, the borrower has considered the project as an opportunity to introduce reforms for the integration of environmental management aspects in the cities urban planning and development process. The project has therefore prepared an environmental and social management framework (ESMF) with an aim to guide the five cities on the internalization of environmental and social considerations at large in the cities planning and development process. The ESMF has been prepared after detailed in-house discussions, desk research on the legal and institutional framework, analysis of priority issues in the infrastructure sector, consistency checks with operational policies of the World Bank and other multilateral agencies. The ESMF also defines environmental and social assessment procedure to be followed by the City District Governments (CDGs) and other city entities while preparing, appraising, and implementing individual schemes under the Project. These procedures include i) environmental and social screening of every scheme to be implemented under the Project; ii) undertaking corresponding environmental assessments (EAs) and preparing an Environmental and Social Management Plan (ESMP) for each scheme having moderately to adverse significant environmental and/or social impacts; iii) implementing the ESMPs; and iv) undertaking environmental and social monitoring to ensure effective implementation of the mitigation measures included in the ESMP. 86. The ESMF team visited five cities and held meetings with CDGs and other stakeholders in December The focus of discussions during meetings was on identification of broader environmental and social issues, review of procedures for the integration of environmental aspects into cities' urban planning, development and service delivery process. The consultations with the CDGs specifically focused on: (i) review of existing overall planning and development process including in agencies like WASA and Development Authorities in the five cities; (ii) gathering views on adequacy of environmental legislation and regulatory requirements for urban development; (iii) existing practices in the CDGs to integrate environmental considerations in the planning and development process; (iv) review of adequacy of existing institutional arrangements for the implementations of environmental management plans (EMPs) where IEEs / EIAs were prepared including review of documentation and reporting arrangements in response 24

35 to clearance conditions imposed by Punjab EPA while issuing licenses; and (v) review of availability of human, technical and financial resources in the participating cities in conformity to environmental laws and regulatory regime in relation to planning and development requirements of the cities. 87. The ESMF also explains the organizational structure to ensure effective and coordinated implementation of the recommendations in the document. The overall responsibility for the implementation of ESMF will remain with the Project Director, USPMSU. A dedicated Safeguards Coordinator will be appointed by the Project Director at the USPMSU, who will be responsible for operationalisation of the ESMF, and will coordinate with the implementing agencies at the CDGs and monitor their activities during the implementation phase. The Safeguard Coordinator will also ensure that the cities are properly capacity built to be able to perform the activities as per the requirements of the ESMF by designing training programs and generating discussions on various forums. The Safeguard Coordinator will also be responsible for arranging an independent assessment, a third party validation of ESMF implementation, which will be carried out on an annual basis. At the CDGs, each large city will also have a dedicated Safeguards Specialist at the City Program Unit (CPU), who will ensure effective implementation of the ESMF within the respective city. S/he will prepare the scheme-specific ESMPs, carryout monitoring to ensure effective implementation of the mitigation measures proposed by the ESMPs, and produce regular reports, which will document the process and outcome of the entire ESMF implementation during the reporting period. Besides, District Officer Environment in each city will facilitate the Safeguards Specialist in the review of screening checklist, and getting clearances from Punjab EPA, where required. He will also supervise and provide technical support in the ESMP monitoring program. 88. The ESMF implementation cost has been estimated to be about PKR 52 million, provided through the project. This covers cost of personnel, capacity building, and third party validation. The cost of implementation of individual ESMP will be included in the scheme cost. 89. Component 3 may have certain environmental issues associated with activities that may be financed under the component, should it be triggered. As a condition for disbursement under Component 3, the implementing agency will carry out a screening of the activities included in the CER Implementation Plan for any potential environmental impacts. Furthermore, any safeguard instruments required under the ESMF will be prepared, submitted to the World Bank for review and approval, and thereafter adopted and locally disclosed by the implementing agency prior to disbursements under Component 3. Should this screening require a modification of the Environmental Assessment categorization of the Project and / or trigger any of the Bank's safeguards policies, a restructuring will be carried out to record these changes and make applicable the attendant requirements. 90. Furthermore, in case Component 3 is triggered, safeguard aspects of project activities would be in line with the ESMF. The ESMF provides guidelines on the implementing agency s responsibilities for integrating and managing environmental aspects into the investment design and implementation. This document would guide the implementing agency in undertaking a rapid environmental assessment for the potential activities under this component. 25

36 F. Social 91. The project will assist in the strengthening and improvement of the urban management system in the areas of citizen engagement, transparency and social accountability. There are various relevant policy provisions adopted and good practices under implementation by the cities. However, its implementation performance varies. The project will conduct a review of existing mechanisms and initiatives draw lessons from their implementation and build on best practices to promote their replication. Necessary policy provisions or implementing guidelines will be developed and introduced to promote good practices and guide their implementation. The project will also include capacity building activities and technical support to ensure that cities continue citizen engagement and that urban governance systems are strengthened in order to become more responsive to public needs. In line with this, DLIs and performance criteria have been developed for actions to be undertaken at the provincial and city levels. 92. Public Disclosure of Information: DLI 6 will support the release of information to the public. Key documents such as Annual Development Program (ADP), Budgets and documents related to award of contracts are to be made available to be public. A range of options for public disclosure of documents, both internet-based and others, to ensure that dissemination are undertaken widely and free of cost to the public. Public consultations on accounts as required under the existing rules, and stakeholder consultations on ADP and Budgets are to be undertaken to ensure public participation. 93. Grievance/Complaints Redress Mechanism: DLI 7 on citizen involvement will pertain to the establishment of a comprehensive grievance redress mechanism, developing the complaint cells required under the PLGO A one-window operation will be made operational where it is non-existent. Where existing, it will be improved and strengthened to receive complaints on services. The mechanism will provide means of tracking a complaint and institute a follow-up system to ensure that complaints are addressed quickly. 94. The project as designed will not require any land, involuntary resettlement or affect indigenous communities Therefore, it is concluded that the project will not trigger World Bank OP 4.10 on Indigenous People or OP 4.12 on Involuntary Resettlement. An Environmental and Social Management Framework has been prepared in line with relevant local laws and OP 4.12 to address unexpected safeguard impacts in case they do materialize. 95. As a condition for disbursement under Component 3, GoPunjab will carry out a screening of the activities included in the CER Implementation Plan for any potential social impacts. Furthermore, any safeguard instruments required under the Environmental and Social Management Framework (ESMF) will be prepared, submitted to the World Bank for review and approval, and thereafter adopted and locally disclosed by the implementing agency prior to disbursements under Component 3. Should this screening require a modification of the Environmental Assessment categorization of the Project and / or the triggering of any of the Bank's safeguards policies, a restructuring will be carried out to record these changes and make applicable the attendant requirements. 96. Furthermore, in case that Component 3 is triggered under the project, the ESMF will specify the social assessment requirements of project implementation. Should this component be 26

37 triggered, the implementing agency will be assisted to apply this framework to address any social impacts in post disaster recovery and reconstruction programs, including temporary and preventive resettlement. 27

38 Annex 1: Results Framework and Monitoring PAKISTAN: Punjab Cities Governance Improvement Project Results Framework Project Development Objective (PDO): To support the Province of Punjab s cities in strengthening systems for improved planning, resource management, and accountability, and to improve the Province of Punjab s capacity to respond promptly and effectively to an Eligible Crisis or Emergency. PDO Level Results Indicators 26 Percentage of development and asset maintenance expenditure of the city and city entities which are spent according to the three-year rolling development and asset management plan (DAMP)(%) Percentage of service area population having an institutionalized mechanism available at city service delivery entities for providing feedback and grievance redress. Unit of Measure Baseline Cumulative Target Values Frequency % 0 80% Baseline, mid-term (Year 2); Year 4; and at project closure (Year 5). % 0 80% 100% Baseline, mid-term (Year 2): Year 4; and at project closure (Year 5). Data Source/ Methodology CDGs, city entities, P&DD. USPMSU will collect all expenditure information and compare it with the three-year rolling development and asset management plan. The quality and effectiveness of the feedback mechanisms will be evaluated through citizen surveys. CDGs and city entities. USPMSU will also collect all data on availability of mechanism to Responsibility for Data Collection USPMSU USPMSU 26 Relevant PDO level indicators related to the second part of the PDO may be included in case the contingent emergency response component (Component 3) is activated 28

39 DLI the city population. INTERMEDIATE RESULTS Intermediate Results Area One: Improving resource planning and management. Intermediate Results Indicators 27 Unit of Measure Baseline Frequency Data Source/ Methodology Responsibility for Data Collection Three year rolling plans for capital investment and asset maintenance are adopted by city district governments. 1 Procurement process conforms with provincial rules 2 Text Text CDG and its entities prepare annual development plans independent of each other. There is no coordination or integration of development and maintenance needs and plans. Inconsistent application of Punjab Public Procurement Regulatory Act (PPPRA) rules and lack of clarity due to conflicts with some directives and administrative Consolidated Annual Development Plans available at the CDG level Instructions issued to CDGs and city entities on enforcement of and compliance with the Punjab Public Procurement Outline draft 3 year rolling Development and Asset Management Plan prepared including completion of asset inventory Cities have documented processes as standard operating procedures for planning, procurement and contract management. 3 year rolling integrate Development and Asset Management plan prepared 3 year rolling integrate Development and Asset Management plan prepared Stipulations of the procurement rules (and the SOPs) complied with for all city level projects. 3 year rolling integrate Developmen t and Asset Management plan prepared Stipulations of the procurement rules (and the SOPs) complied with for all city level projects. Ongoing Ongoing CDG and city entities. USPMSU will monitor progress CDGs and city entities. USPMSU will monitor progress USPMSU USPMSU 27 Additional intermediate results indicators may be included in case the contingent emergency response component (Component 3) is activated 29

40 Reporting on the flow of funds from GoPunjab to urban areas is consolidated at the city level. 3 Text issues. There are multiple parallel funding sources to CDGs and the city entities, due to which the CDG does not have knowledge of the total funding coming to the city. Regulatory Authority (PPPRA) Act, the Punjab Procurement Rules 2009, and all procedures established under PPPRA. Instructions issued that all development and nondevelopment allocations/ UIPT proceeds/ funds/ grants/ foreign assistance for all city entities shall be reported to the CDG at the time of being transferred from the GoPunjab to the city entities. Each CDG is being provided details by the Finance Department regarding transfers being made to the city entities, at the time of the transfers. Each CDG is being provided details by the Finance Department regarding transfers being made to the city entities, at the time of the transfers. Each CDG is being provided details by the Finance Department regarding transfers being made to the city entities, at the time of the transfers. Each CDG is being provided details by the Finance Department regarding transfers being made to the city entities, at the time of the transfers. Ongoing CDG, city entities, and FD. USPMSU will monitor progress. USPMSU Systems for Own Source Revenue collection are improved 4 Percent age The UIPT records are maintained manually and not fully ordered and updated An approved Action Plan for mapping and automation of UIPT, and instructions issued to UIPT automation pilot completed Each city entity has operationalized the approved Action Plan 30 At least 75% UIPT automation completed At least 75% UIPT automation completed Ongoing CDGs, WASAs, Excise and Taxation Department. USPMSU will monitor progress USPMSU

41 DLI each city entity, authority and agency to prepare an Action Plan for enhancement of self collected OSR. Intermediate Results Area Two: Improved voice and transparency. Intermediate Results Indicators* A common boundary for urban planning is utilized by urban institutions to achieve an integrated planning process. 5 Unit of Measure Text Baseline Frequency Planning boundaries of CDG and city entities are different Boundary for planning purposes aligned to city boundary Action plan for phased extension of service boundary to align it to city boundary Implementat ion of the first year of the extension of the service boundary of each city Implementat ion of the first year of the extension of the service boundary of each city Ongoing Data Source/ Methodology CDGs, city entities, LGD and H&UDD. USPMSU will monitor the progress on the actions on an ongoing basis Responsibility for Data Collection USPMSU Periodic reports on plans and programs are prepared by city district governments and disclosed to public. 6 Text There is no consistent and transparent mechanism of public disclosure and access to information, in particular financial and procurement CDGs instructed to establish a mechanism for public disclosure and access to information, in particular financial and procurement CDGs developed mechanism approved CDGs implement the approved mechanism CDGs implement the approved mechanism CDGs implement the approved mechanism Ongoing CDGs. USPMSU will monitor progress. USPMSU 31

42 information, across all cities and city entities. information Citizens can utilize feedback and grievance redress mechanism. 7 Text There is no established system or mechanism of feedback and grievance redress at the city and city entity levels. CDGs instructed to establish a mechanism for feedback and grievance redress. CDGs developed mechanism approved CDGs implement the approved mechanism CDGs implement the approved mechanism CDGs implement the approved mechanism Ongoing CDGs. USPMSU will monitor progress USPMSU Although CDGs and city entities has established complaint cell which need to be strengthened Disbursement Linked Indicators Area Indicator Baseline Targets for Disbursement Protocol Year 1 DLIs (At Effectiveness) Year 2 DLIs (End of Year 1) Year 3 DLIs (End of Year 2) Year 4 DLIs (End of Year 3) DLI 1: Resource Planning Three-Year Integrated Rolling plans for Development and Asset Management implemented by each CDG for area within its city boundary. CDG and its entities 28 prepare annual development plans independent of each other. There is no coordination or integration of development and maintenance Each CDG and its entities have been instructed to adopt a 3 Year Rolling Integrated Development and Asset Management Plan (IDAMP) as mandatory integrated Each CDG has prepared a consolidated Annual Development Plan (ADP), which includes the ADPs for municipal services of Each CDG has prepared a consolidated ADP (as for the previous year). A mechanism for preparation of IDAMP has been approved, and each CDG has prepared a complete GIS Each CDG has prepared an IDAMP, including development and asset management plans of the CDG for municipal services and of each Year 1 Protocol: Instructions have been issued by P&DD vide No.3(36) ECA/P&D/2003- VII, dated Feb 23, 2012, directing each CDG and its entities to adopt a 3 Years Rolling IDAMP for municipal services. Instructions have been issued by LG&CDD vide No. SO.FPs (LG)1-3/2010(P), dated Feb 3, 2012 to CDGs, and by HUD&PHED HUD&PHED, vide No. SO(UD)1-34/2011, dated Jan 23, 2012 to city entities, directing them 28 City entities include Development Authority (DA), Water and Sanitation Agency (WASA), Traffic Engineering and Planning Authority (TEPA), Parks and Horticulture Authority (PHA), and Solid Waste Management (SWM) department/lahore Waste Management Company (LWMC). 32

43 needs and plans. development and asset maintenance planning exercise for municipal services. each CDG, its entities. based inventory of assets. entity. to prepare GIS based inventory of assets. Year 2 Protocol: Consolidated ADP reflects all programs/projects being undertaken in the city, by sector and entity (to include all on-going, new and planned investments, separately for creation of new assets, refurbishment and replacement). Year 3 Protocol: Assessment of the GIS based inventory of assets prepared by each CDG, to ascertain that the inventory is complete. DLI 2: Procurement Good procurement performance practices are set up at CDGs through implementation of the Provincial procurement rules. Inconsistent application of Punjab Public Procurement Regulatory Act (PPPRA) rules and lack of clarity due to conflicts with some directives and administrative issues. Instructions issued to CDGs and city entities on enforcement of and compliance with the Punjab Public Procurement Regulatory Authority (PPPRA) Act, the Punjab Procurement Cities have documented processes as standard operating procedures for planning, procurement, and contract management. 33 Stipulations of the procurement rules (and the SOPs) complied with for all city level projects. Year 4 Protocol: 3 Year Rolling IDAMP prepared in accordance with the approved mechanism, reflecting all programs/projects being undertaken in the city, by sector and entity (to include all on-going, new and planned investments, separately for creation of new assets, refurbishment and replacement), with details for the first year and outline plans for the second and third years, in accordance with the approved mechanism. Year 1 Protocol: MD-PPRA has issued instructions vide No. MD(PPRA)10-1/2011, dated Jan 10, 2012 to relevant provincial departments, CDGs and city entities to comply with PPRA rules and procedures. Year 2 Protocol: Processes of planning, transparent preregistration, bidding, bid acceptance and rejection, administrative authorities, dissemination, and contract management aligned with the provincial rules, and documented in the SOPs which are

44 DLI 3: Intergovernmental Finance System DLI 4: Revenue Collection System Reporting of flow of funds to CDG and city entities, at the CDG level Improvements in Own Source Revenue (OSR) Collection Systems. There are multiple parallel funding sources to CDGs and the city entities, due to which the CDG does not have knowledge of the total funding coming to the city. The UIPT records are maintained manually and not fully ordered and updated Rules 2009, and all procedures established under PPPRA. Instructions have been issued stating that all development and nondevelopment allocations/ UIPT proceeds/ funds/ grants/ foreign assistance for all city entities shall be reported to the CDG at the time of being transferred from the GoPunjab to the city entities. An Action Plan has been approved for mapping and automation of UIPT. Instructions have been issued to each city entities to prepare an Action Plan for enhancement of self collected OSR. Each CDG is being provided details by the Finance Department regarding transfers being made to the city entities, at the time of the transfers. GoPunjab has completed the UIPT automation pilot. Action Plans prepared by city entities for enhancement of self collected OSR have been approved Each CDG is being provided details by the Finance Department regarding transfers being made to the city entities, at the time of the transfers. Each city entity has operationalized the approved Action Plan Each CDG is being provided details by the Finance Department regarding transfers being made to the city entities, at the time of the transfers. The GoPunjab has completed at least 75% UIPT automation. notified for implementation. Year 4 Protocol: Assessment to ascertain that compliance is assessed is being achieved. Year 1 Protocol: FD of GoPunjab has issued Policy letter No. LD(L)4-319/2006 (Part-1), dated March 15, 2012 stating that all development and non development allocations /funds for all the city entities shall be made under intimation to the CDG. Year 2, 3 and 4 Protocol: Assessment of all provincial transfers including for entities, authorities, and agencies in city are reported to the city government at the time of the transfer with details of the transfer. Year 1 Protocol: Instructions have been issued by FD, vide No.SO(TAX)1-11/ , dated Feb 17, 2012 to each city entity, authority, and agency to prepare an Action Plan for enhancement of revenues and recovery of arrears. E&TD has approved the Action Plan for automation of UIPT system. Year 2, 3 and 4 Protocol: Assessment of UIPT automation. Relevant level has approved Action Plans for enhancement of self collected OSR by city entities Assessment of operationalization of approved Action Plans. 34

45 DLI 5: Boundary Alignment Boundary of city area adopted by each city and its entities as their planning and service area. In each City District, planning and service areas of CDG and city entities are different. As such, the notified city boundary has not been adopted by city entities for urban spatial and development/mai ntenance planning. Adoption by city entities of city boundary as their respective planning area for the purposes of Integrated Development and Asset Management Planning (IDAMP). A notified and approved Action Plan for phased extension in Service Delivery area for city entities to align such area to city boundary over the Action Plan time period. Year 1 Protocol: Under Section 1 (2) of LDA Act 1975.LDA area is the entire City District of Lahore area. Instructions have been issued by HUD&PHED under PDCA 1976 directing the DA in each city to adopt the city boundary for spatial and landuse planning, and WASA, TEPA, and PHA to adopt city boundary for planning of infrastructure and service delivery 29. Instructions have been issued by LG&CDD under PLGO 2001 directing CDG s SWM Department/LWMC in each city to adopt city boundary for planning of infrastructure and service delivery. Year 3 Protocol: Instructions are issued by HUD&PHED, along with an approved Action Plan, instructing each WASA, PHA, and TEPA to implement a phased extension of Service Delivery boundary to align with the city boundary in accordance with the phasing and timeline in the Action Plan. Instruction are issued by LG&CDD, along with an approved Action Plan, instructing SWM/LWMC to implement a phased extension of Service Delivery boundary to align with the city boundary in accordance with the phasing and timeline in the Action Plan. - Service Delivery Area is defined as 29 The functional areas of TEPA Lahore, WASA (Rawalpindi, Gujranwala, Multan & Faisalabad) and PHA ((Lahore, Multan & Faisalabad) are already defined as DA areas / city areas in their notification for establishment. Therefore fresh notification for planning areas is only required for WASA Lahore and PHA Rawalpindi 35

46 DLI 6: Public Disclosure and Access to Information DLI 7: Accountability Public disclosure and Access to Information mechanism implemented. Effective and transparent feedback and grievance There is no consistent and transparent mechanism of public disclosure and access to information, in particular financial and procurement information, across all cities and city entities. There is no established system or mechanism of The CDGs and city entities have been instructed to establish a mechanism for public disclosure and access to information for municipal services, in particular financial and procurement information. The CDGs and city entities have been instructed to 36 Mechanism developed and approved for public disclosure and access to information fully implemented by each CDG and its entities. Mechanism developed and approved for complaint the area within which the entity is responsible for infrastructure development and service delivery. - Action Plan is defined as a detailed time-bound plan with activities/resources, needed for the extension of the Service Delivery Area boundary to be aligned with the city boundary. Year 1 Protocol: LG&CDD has issued instructions vide No. SO.FPs(LG)1-3/2010(P), dated Feb 3, 2012 to CDGs, and HUD&PHED has issued instructions vide No. SO (UD)1-34/2011, dated Jan2 3, 2012 to city entities, to establish a mechanism for public disclosure and access to information in accordance with the provisions of PLGO Year 3 Protocol: A detailed mechanism for public disclosure and access to information has been developed, and approved by the GoPunjab. This mechanism should describe in detail the objective, scope, and procedures for implementation of public disclosure and access to information. Assessment has been done of each CDG and its entities to ascertain that the mechanism has been implemented in accordance with the approved mechanism. The implementation of the mechanism shall apply to all information being generated for municipal services at the CDG and its entities levels, as described in the scope of the approved mechanism. Year 1 Protocol: Instructions have been issued by LG&CDD vide No. SO.FPs(LG)1-3/2010(P), dated Feb 3, 2012 to CDGs,

47 redress mechanisms implemented. feedback and grievance redress at the city and city entity levels. Although CDGs and city entities has established complaint cell which need to be strengthened establish a mechanism for complaint monitoring and resolution, and for grievance redress related to municipal services. monitoring and resolution, and grievance redress related to municipal services fully implemented by each CDG and its entities, in accordance with the provisions of PLGO 2001 and by HUD&PHED HUD&PHED vide No. SO(UD)1-34/2011, dated Jan 23, 2012, to city entities, directing them to establish a mechanism for complaint monitoring and resolution, and grievance redress in accordance with the provisions of PLGO Year 3 Protocol: A mechanism for complaint monitoring and resolution, and grievance redress has been developed and approved. This mechanism should describe in detail the objective, scope, and procedures for implementation of complaint monitoring and resolution, and grievance redress. Assessment has been done of each CDG and its entities to ascertain that the mechanism has been implemented in accordance with the approved mechanism. The implementation of the mechanism shall apply to all municipal services being offered by the CDG and its entities, as described in the scope of the approved mechanism. 37

48 Annex 2: Detailed Project Description PAKISTAN: Punjab Cities Governance Improvement Project Overview 1. The project is a US$150 million five-year results based Specific Investment Credit. The project design evolves from a comprehensive urban sector dialogue between the Bank and the provincial government over the last several years. The project builds on the policy reforms already undertaken by GoPunjab, and focuses on the stage 2 of the urban agenda: strengthening urban governance the institutions and management systems. The dialogue has centered on a review of the province-led reform process aiming to improve urban management; remove impediments at the operational and structural levels; and plug any gaps that might exist in terms of monitoring and control mechanisms required for transparent and streamlined operations at the city level. The urban agenda has supported several critical reforms, and the GoPunjab now seeks to foster results, especially at the city level. There is a general agreement between the Bank and GoPunjab that any major increase in resources for urban areas needs to focus on the results that can be achieved by strengthening the planning, expenditure, and accountability frameworks. The achievement of the development objective will then help the provincial government and cities to address the third stage of GoPunjab s urban strategy, i.e. to improve delivery of municipal services in the medium to long term on a more sustainable basis. 2. The project utilizes a results based approach, and consistent with this focus, the disbursement decision will be based on achievement of pre-specified results referred to as Disbursement Linked Indicators (DLIs), determined in partnership with the government. The DLIs reflect priority elements in furthering the government s urban agenda, critical at the provincial level, within the existing legislative, regulative, and policy framework of the government. They include intermediate outcomes, incremental steps and results contributing to improved efficiency and effectiveness during and beyond the project. 3. Component 2 supports capacity building and project implementation, which will disburse against Interim Financial Reports (IFRs). Component 1: Performance Grants 30 (US$ 145 million) 4. Component 1 focuses on two areas of urban governance and is aligned with the seven DLIs. The first sub-component addresses resource planning and management, seeking to improve decision making, consolidate fragmented revenue sources, and strengthen resource mobilization. The second sub-component addresses transparency and voice in the preparation, monitoring, and evaluation of plans and programs in urban areas. 5. Sub-component 1.1: Resource Planning and Management (DLIs 1-4): Four improvements are supported: 30 As per the terms of the Project, the Bank shall provide credit to the Government of Punjab (GoPunjab). The GoPunjab will in turn disburse funds to the cities in the form of a Performance Grant under Component 1. 38

49 a. Capital Improvement and Asset Maintenance: Cities will prepare three-year rolling Development and Asset Management Plans (DAMP). The preparation of these plans will be coordinated at the city level and will be based on integration of the capital improvement and asset maintenance plans of the city and its entities. The planning will be for a three year period with the first year detailed to form the annual budget for that year. These plans will be updated each year for a three year period on a rolling basis. This will help improve the consistency of development and asset maintenance plans across the city space for all services, and prioritize and rationalize investment decisions; b. Financial Reporting and Procurement Procedures: Arrangements will be made for producing annual consolidated financial statements of CDGs and efficient implementation of procurement procedures. Cities will develop Standard Operating Procedures (SOPs) focusing on streamlining of the procurement rules with other directives; and implementation of procurement rules, including but not limited to, procurement planning, equal opportunity, transparency and efficiency; c. Intergovernmental Finance: Currently there are multiple funding windows, some supporting CDGs and others service entities (e.g., WASA). Government of Punjab will report to the CDGs, transfer of funds including amounts to the city entities at the time of the transfers. This will provide a complete picture to each CDG of the funding available to the city as a whole, and the funds flowing to the city entities. This will help the CDG to eventually prepare city budgets keeping in view predictability of funding. Each CDG will also be able to hold city entities accountable for results against such funding. This consolidation will in turn allow improved planning and control of resources for city level development expenditures; and d. Strengthening Own Source Revenue Collection Systems: Cities will increase revenues through improvements in the property tax regime. The provincial government is planning to improve the administration and collection of property tax by computerizing property registers and the automation of billing and collection systems. This activity shall involve the digitization of Urban Immovable Property Tax (UIPT) records, GIS based spatial-mapping of urban properties, and the establishment of a UIPT database and billing system that allows the taxpayers to use a web based interface to view property valuations as well as to generate vouchers for annual payment. The approach is being piloted in Sialkot, which is an intermediate city in Punjab. WASAs are preparing action plans to improve billing and collection of water tariffs through computerization and regularizing non-legal connections. Related Technical Assistance Activities: (i) annual budgets, capital investment plans, and asset management plans; (ii) expenditure management; (iii) ensuring compliance with uniform norms and standards for financial reporting, legislative compliance, (iii) introducing management information systems and ensuring IT standardization in line with the integrated financial management frameworks; (iv) implementation and operational planning, e.g. developing strategies for project execution; capacity building for project monitoring, developing contract management frameworks (key players, roles, 39

50 authorities, reporting arrangements, bills preparation and clearance procedures, quality certification etc). Implementation of provincial safeguard rules; development of 3rd party monitoring / validation; Implementation of provincial procurement rules; procurement planning and execution (procurement plans, adoption of e-procurement, contract detailing and packaging); assessment of capacity of contractors / consultants / suppliers and implementing agencies, and safeguards; Automation of property records and enhancing database, entry, verification, and billing and collection procedures; 6. Sub-component 1.2: Transparency and voice (DLIs 5-7). Three improvements are supported: a. Boundary Alignment: The project will support the introduction of an integrated spatial planning, and development and asset management planning process that will use a common urban boundary definition, and in which all city level institutions participate. In any given urban area there are CDGs and other city level service entities, i.e., WASA, DA, PHA, TEPA, and Solid Waste Management (SWM) Department. Each of these entities has a different planning remit, and their plans do not cover the same spatial distribution. The resulting lack of coordination hampers the efficient use of development funding. A common boundary will be used by the city and the city entities for the purposes of spatial and service delivery planning, which will be coordinated at the city level. Similarly, the city will coordinate the preparation of multi-year development and asset management plans, which will prioritize the demands of the citizens and the needs of the city and the city entities; b. Public Disclosure of Information: The project will support improvements in the collection (and up-dating) of data, preparation of periodic reports and disclosure of information to citizens, in particular financial and procurement information. The city and its entities will post budgets, half yearly and annual reports including financial statements, notices of award of contracts, etc. on their website and disseminate to the public through radio, television, newspapers and at public notice boards in prominent places at all their offices accessible to the public; and, c. Citizen Feedback: The project will also support the development of a complaint and grievance redress mechanism for citizens. The city and its entities will operationalize a one-window complaint center and follow-up mechanism linked to all service providers in the city. Related Technical Assistance Activities: City Development Plans (CDPs) and Master plans; multi-jurisdictional spatial and service delivery planning; land use planning and land management strategies; land records management; local economic development. Design of Annual Reports, dissemination strategies,, website design, use of social media 40

51 Design of hotlines and design of grievance redressal systems; 7. Disbursement Linked Indicators. As noted above, the disbursements under Component 1 will be linked to the achievement of pre-specified annual targets against Disbursement Linked Indicators (DLIs). The achievement of the seven DLIs (Annex 1)) will be individually assessed for each city every year by Monitoring and Evaluation (M&E) Directorate of the P&DD Punjab, through independent assessment teams. The assessment teams deployed hence will comprise third party/ private sector firm(s) contracted by the M&E Directorate of P&DD Punjab as independent assessment agencies. The DLIs and corresponding annual targets have been identified with the Government over the course of preparation to reflect specific areas of improvement. The achievement of all DLIs by each city applicable for the year would be required to ensure disbursement. 8. First-year DLIs were met by Project Appraisal, and therefore, disbursement for the first year will be made on Project Effectiveness. For the following years, a city will need to meet all the DLIs for that particular year in order to be eligible for disbursement for the year. A city that does not meet the DLIs for a particular year will have the opportunity to meet the combined DLIs the subsequent year, in which case it will be eligible for the funds for both years together (the previous year and the current year). If a city does not meet the DLIs for two consecutive years, the funds for the city will be distributed among the other cities that have met the DLIs, in accordance with the PFC formula. 9. The annual schedule for commencing of the assessment, the finalization of results from the annual assessment and the announcement of the consequent disbursements is given below: 41

52 Table 2.1: Annual Schedule for DLIs Targets Achievement Assessment and Disbursement for EEPs ( ) Activity Responsible Agency Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Ongoing annual assessment of the achievement of specified DLI targets by each city undertaken Results from the assessment exercise presented to M&E Directorate, P&DD, Punjab for analysis and consolidation Sharing of consolidated results from the DLI target achievement analysis for the 5 Cities with the Bank Disbursement decisions for the subsequent year based on the achievement by each City of DLI targets communicated to the provincial government and the Cities Disbursement of funds under Component 1 of the Project to the Provincial Government as credit Transfer of Funds from Provincial Government to the Cities as Performance Grants against the achievement of specified DLI Targets for the preceding year Independent agencies contracted by DG M&E, P&DD Independent agencies contracted by DG M&E, P&DD DG M&E, P&DD Pⅅ World Bank World Bank FD 42

53 10. Eligible Expenditure Programs: Disbursements under Component 1 will be tracked against a set of Eligible Expenditure Programs (EEPs) that reflect non-salary O&M expenditures of existing urban assets and services, such as roads and water supply. The Bank s guidelines on financial management and procurement will be applicable to the EEPs, and the framework for addressing social and environmental safeguards will be applicable to all activities included in the EEPs. 11. Based on the government budget, the EEPs identified under the project account for about 7.9% of total expenditure of the five cities and their service entities (including expenditure of CDGs, Development Authorities, and WASAs), 10.8% of total current expenditure 31, and 35.2% of total current expenditure related with urban related functions The EEPs are under two departments/entities for each city included in the project: the Works and Services Department of CDGs and WASAs. 12. The following two types of expenditures will constitute EEPs and will be financed under this project (Tables ) 13. Repair and maintenance of transport, machinery, equipment, roads, buildings, and water supply/drainage: Expenditure items included in this category for Works and Services Department of CDGs refer to major expenditures needed for repair and maintenance for existing urban roads, streets, buildings, transport (vehicles), machinery, and equipment. This will not include any new road construction or road/street widening expenditures. Expenditures in five cities in for this category are about 17.5 million US Dollar (USD). For WASAs, this category refers to expenditures related with operation and maintenance for water supply and drainage assets and operations and does not include any expenditure related with sewage. Expenditure in five WASAs in for this category is about 10.5 million USD. It is important to note that the repair and maintenance activities are usually under-budgeted for most WASAs and have become a major bottleneck to operate efficiently. For example, the O&M expenditure for Lahore WASA for was about 34 million USD, while the budget for Lahore WASA for is 40 million USD. 14. Power/energy needed for machinery, operations for asset maintenance and service delivery: This refers mainly to the power and energy consumption needed for service delivery operations and associated machinery for both Works and Services Departments and WASAs. These expenditures are needed and critical for urban asset management and maintenance, and they are translated into various budget items across CDGs and WASAs. 32 Expenditure number for is used here as indication and baseline of how much cities spend on identified EEP items. Analysis shows that expenditure over recent years is quite consistent. 43

54 Table 2.2: EEPs and Expenditures for Works and Services Department, CDGs EEP budget items for CDG Expenditures (in million USD) (Works & Services Dept) Lahore Faisalabad Multan Rawalpindi Gujranwala Total Repair and A130 (R&M of Maintenance transport) A131 (R&M of machinery and equip.) A136 (R&M of roads and streets) A 137 (R&M of buildings and structures) A033 Utilities (including electricity, gas, and water) Total Source: expenditure data from CDGs budget books Table 2.3: EEPs and Expenditures for WASAs EEP budget items for WASA Expenditures (in million USD) Lahore Faisalabad Multan Rawalpindi Gujranwala Total Repair and Water supply Maintenance * system Drainage system Purchase of maintenance materials and store items for operation Power and Energy Total Note*: R&M for WASAs does not include Sewage related R&M. Source: expenditure data from WASAs budget books Table 2.4: Breakdown of EEP Expenditures for Five Cities, Expenditure (Million USD) Repair and maintenance 28 44% Power/energy % Total EEP Expenditure % Percentage of Total EEP Expenditure 44

55 Table 2.5: EEP Comparison with Government Expenditure for Five Cities (Million USD) (actual expenditure) Total Expenditures (CDGs+ DAs+ WASAs) Total Current (Recurrent) Expenditures Total Current Expenditures of Urban-related Functions Total expenditure for EEP items 63.3 Avg. credits supported by this project for five cities each year 36.3 Expenditure in EEP items as % of Total Expenditure 7.9% Expenditure in EEP items as % of Current Expenditure 10.8% Expenditure in EEP items as % of Current Expenditure on Urban-related 35.2% functions Note: *Budget data includes CDG, DA, and WASA ** Urban-related functions include: Works and Services Dept, Municipal Services Dept, DA, WASA *** Exchange Rate: USD 1 = PKR Allocation of Component 1 Funds. (Tables )The allocation for the funds under Component 1 to the cities is determined on a PFC formula, at an increasing scale of distribution across four years. Out of total $145 million for Component 1, there is an increasing scale of distribution of funds from Year 1 to Year 4 of the project, from 18% for Year 1, 20% for Year 2 to 28% for Year 3, and 34% for Year 4 (Table 2.6 for allocation of funds across four years). The incremental increase, in parallel with the improvement and strengthening of the city systems for planning, budget allocation, procurement, expenditure management and systems and procedures for O&M of infrastructure and services provides a check against waste and misuse of the funds. Beginning with the third year, when most of the essential frameworks are in place, and critical city procedures and processes are operational, there are significant increase in the funds available to the city. These increases in the performance grants, it is expected, will begin to be matched by progressive and sustainable increases in cities revenue. Table 2.6: Allocation of Project Funds for Each Year (million USD) Year 1 Year 2 Year 3 Year 4 Total Share of Project Funds 18% 20% 28% 34% 100% Number of Project Funds for Each Year Table 2.7: Provincial Finance Commission (PFC) Allocation Shares PFC Formula Share Lahore 29% Faisalabad 24% Rawalpindi 16% Gujranwala 16% Multan 14% Total 100% Source: PFC Formula 45

56 Table 2.8: Allocation of Project Funds for Each City, Each Year (million USD) Year 1 Year 2 Year 3 Year 4 Total City EEP Expenditures Lahore Faisalabad Rawalpindi Gujranwala Multan Total Component 2: Project Implementation and Capacity Building (US$ 5 million) 16. This component supports the cities and province through technical assistance and capacity building to achieve the DLIs and enhancement in revenue. The Urban Sector Planning and Management Services Unit (USPMSU), and a City Program Unit (CPU) in each of the five cities will be responsible for providing this support and the corresponding costs will be financed from this component. 17. Disbursement under component 2 will be made each year based on annual tranches subject to the achievement of the respective annual DLI targets of Component 1 by at least one Project city. This is important so that the TA and Capacity Building funds essential to help cities achieve the DLIs are available in a timely manner. 18. Funds will be disbursed through a lapsable Assignment Account, managed by USPMSU against forecast of TA expenditures for the next year to be submitted by the P&DD, GoPunjab. The component will provide an annual grant to the project by way of an advance against forecast of TA expenditure for the next year. The financing will be made from the Punjab Consolidated Fund (Provincial Account No.1, Non-Food) into the Assignment Account of the USPMSU, maintained at the National Bank of Pakistan. Documentation of the advance will be based on actual TA expenditures supported by invoices, receipts, etc as reflected in the semi-annual interim financial reports. The USPMSU is will be responsible for: 19. Project management and administration: (i) oversee the CMUs; (ii) liaise and coordinate with provincial departments; (iii) monitor contract implementation and payments to consultants; and (iv) ensure disclosure of project related documents. 20. Monitoring and evaluation: (i) track the DLIs; (ii) maintain project related baseline information; (iii) provide progress reports to GoPunjab and the World Bank. 21. Project FM: (i) prepare accounting and financial reporting of all moneys received under the project; (ii) submit project accounts to audit in a timely way and for onward submission of audit reports to the Bank; and (iii) ensure funds flow, accounting, audit, financial reporting, and controls are maintained as envisaged in the Operations Manual. 22. Strategic Communications: (i) develop an effective communications strategy during project implementation highlighting the project s focus on improvements in the urban 46

57 governance systems of the five cities, and areas beyond the scope of this project, such as service delivery. 23. The USPMSU will also manage the core capacity building program intended for all cities sponsored under the project, including: (i) formulation of TOR/ RFP; (ii) conduct the selection process and contract management; (iii) ensuring quality assurance on the delivery of the core capacity building activities; and (ii) facilitating knowledge sharing between the five project cities. The USPMSU will further be responsible for approving the annual city-specific capacity building programs proposed by the CPUs to address additional individual capacity needs of the city governments and agencies. The CPUs will be responsible for: 24. Project coordination and implementation at city level: (i) liaison with the USPMSU, external auditors etc. at the provincial level and coordinate with the focal persons at the city entities. 25. Ensure progress towards achievement of DLI targets by: (i) supporting the cities to make the provincial urban agenda operational at the city level; (ii) facilitating progress towards achievement of the DLIs at the city level; and (iii) providing trouble shooting and advising the city to implement the improvements. 26. Reporting, monitoring and evaluation: (i) monitoring project implementation, preparing city level reports, and undertaking requisite impact evaluations; and (ii) facilitating the annual assessment of progress achieved against DLI targets undertaken by independent agents. 27. Capacity building, resourcing and technical assistance: (i) assisting city departments and agencies in identification of capacity building requirements; (ii) communicating consolidated city-specific capacity building requirements to the USPMSU on an annual basis for approval of the annual city specific capacity building plan; (iii) assisting in identification of technical assistance requirements, including but not limited to preparation, design and engineering of subprojects and city specific studies and assessments, and drawing-up/approving their terms of reference. 28. The capacity building support and technical assistance provided under this component to the city governments as well as other city departments and agencies will be strongly outcome based with a predominant focus upon critical requirements in areas that are essential to the meeting of annual targets for the provincial and city level disbursement linked indicators. The capacity building support will be available to the cities in the form of two simultaneous programs. First, the USPMSU will develop and manage a core capacity building program focused on across the board capacity needs for the achievement of DLI targets that are common to all the participating cities. Simultaneously, the CPU established at each city will facilitate the city government and other departments/agencies to identify city-specific capacity needs, and communicate the consolidated requirements to the USPMSU in the form of a proposed annual capacity building program for the city. The USPMSU will then manage the approved cityspecific capacity building program each year to address specific support needs. 47

58 Core Capacity Building Programs: 29. City-wide urban planning: improved and better researched and participatory City Development Plans (CDPs) and Master plans, addressing the current legal and systemic constraints to integrate planning across different parts of city governments/ agencies and multiple institutions; better land use planning and land management strategies; planning for urban development and redevelopment; metropolitan planning and local economic development. Specific planning challenges for example, include modernizing physical planning approaches and processes; enabling property title certification, improving land records management and the creation of project development plans. The adoption of concurrent boundaries by each city and its entities as their planning area under the project will ensure that consistent mandates exist across the entire designated city area in terms of responsibility for planning. Similarly, the notified and approved action plan for phased extension in Service Delivery area for city entities to align such area to city boundary will attempt to regularize mandates for service delivery functions with the long term aim to overcome fragmentation of mandates between various service delivery agencies responsible for the same services. 30. Resource planning: This module will assist CDGs in institutionalizing links between planning and budgeting processes: (i) annual budgets, capital investment plans, and asset management plans); (ii) expenditure management; (iii) ensuring compliance with uniform norms and standards for financial reporting, legislative compliance, (iii) introducing management information systems and ensuring IT standardization in line with the integrated financial management frameworks; (iv) implementation and operational planning, e.g. developing strategies for project execution; capacity building for project monitoring, developing contract management frameworks (key players, roles, authorities, reporting arrangements, bills preparation and clearance procedures, quality certification etc). 31. Urban immovable property tax (UIPT): This module will seek to improve the effectiveness, reliability, and transparency of property taxation by automation of property records and enhancing database, entry, verification, and billing and collection procedures; support under Component 2 will be utilized by the USPMSU for the incremental operating costs, or costs for the procurement of technical consultancies for data entry and field surveys under the UIPT automation activity; 32. Procurement: Implementation of provincial rules; procurement planning and execution; development and implementation of standard operating procedures (SOPs) ensuring good procurement practices; 33. Management of environmental and social impacts: Implementation of provincial rules; development of 3rd party monitoring / validation.); 34. Citizen involvement and participation: This module would seek to improve the content and quality of the interactions between local officials and citizens through support for citizen awareness and participation (e.g. design of hotlines and design of grievance redressal systems); 48

59 35. Preparation of service delivery investment pipeline for third stage of GoPunjab urban strategy. (i) Service delivery strategies; (ii) Business Plans for the overall asset development, operations, maintenance and sustainable service provision; preparing clear-cut road maps or business plans to commit to improved service levels with clear indicators (e.g. staffing ratio, collection improvements, energy consumption, non-revenue water (NRW) reduction etc; providing sector finance overviews, for example in water supply and sanitation operations, reflecting true picture of costs, which is needed to make sound management and investment decisions and designing tariffs; developing financial models for assessing various investment / operational scenarios; (iii) Revenue management, tariff frameworks, subsidy design, billing and collection systems. 36. In view of Punjab Municipal Development Fund Company s (PMDFC) experience and expertise, its services may be utilized for undertaking capacity building initiatives for city governments and their entities under this component. PMDFC, over the past several years, has been the implementing agency for the Bank-funded Punjab Municipal Services Improvement Project (PMSIP), which has achieved impressive results in the institutional development and performance improvement of local governments. 37. Component 2 shall also support the Directorate General M&E in engaging M&E firm/s for independent third party assessment of achievement of DLIs as outlined under Component 1. Moreover, required capacity for procurement and contract management to be engaged at the DG M&E for the procurement and supervision of third party M&E firm/s will also be supported. The resource engaged in this regard will also be responsible for building the capacity of M&E Directorate in the area of procurement and contract management. 38. In addition to this, USPMU will also be supported under this Component to work with relevant national and provincial entities to undertake GIS-based disaster risk modeling and assessments of selected urban centers. These efforts will be coordinated with other relevant ongoing/planned Bank supported initiatives 39. In addition to the above, part of the proceeds under Component 2 may also be utilized for the development of a follow up project aimed at improvement of service delivery at the third stage of GoPunjab s urban strategy. Any uncommitted / undisbursed funds from Component 2 in the last year of the Project may be reallocated to Component 1. Component 3: Contingent Emergency Response (US$ 0) 40. This component will support preparedness and rapid response to natural disaster, emergency, and/or catastrophic events, as needed. The provisional zero cost for this component will allow for rapid reallocation of credit proceeds from other components under streamlined procurement and disbursement procedures. Following an adverse natural event that causes a major natural disaster, the GoPunjab may request the Bank to re-allocate project funds to this component (which presently carries a zero allocation of credit proceeds) to support response and 49

60 reconstruction 33. The component would hence allow the GoPunjab to request the Bank to recategorize and reallocate financing from other project components to partially cover emergency response and recovery costs. This component could also be used to channel additional funds should they become available as a result of the emergency. 41. Disbursements under Component 3 will be contingent upon the fulfillment of the following conditions: (i) The Recipient has determined that an Eligible Crisis or Emergency has occurred and the World Bank has agreed and notified the Recipient; (ii) The Province of Punjab has prepared and adopted the Contingent Emergency Response (CER) Implementation Plan that is agreed with the World Bank; and (iii) The Province of Punjab has prepared, adopted, and disclosed safeguard instruments required as per Bank guidelines for all activities from the CER Implementation Plan eligible for financing under Component Disbursements would be made against a positive list of critical goods or the procurement of works, and consultant services required to support the immediate response and recovery needs. All expenditures under this component, should it be triggered, will be in accordance with BP/OP 8.0 and will be appraised, reviewed and found to be acceptable to the Bank before any disbursement is made. In accordance with BP/OP 8.00, this component would provide immediate, quick-disbursing support to finance goods (positive list of imports agreed with the GoPunjab), works and services needed for response, mitigation, recovery and reconstruction activities. Emergency operating costs eligible for financing would include the incremental expenses incurred by the GoPunjab for early recovery efforts arising as a result of the impact of major natural disasters. 43. Goods, Works and Services under this component would be financed based on review of satisfactory supporting documentation presented by the government including adherence to appropriate procurement practices in emergency context. All supporting documents for reimbursement of such expenditures will be verified by the Internal Auditors of the GoPunjab and by the Project Director, certifying that the expenditures were incurred for the intended purpose and to enable a fast recovery following the damage caused by adverse natural events, before the Application is submitted to the Bank. This verification should be sent to the Bank together with the Application. 44. Specific eligible expenditures under the category of Goods include: (i) construction materials; water, land and air transport equipment, including supplies and spare parts; (ii) school supplies and equipment; (iii) medical supplies and equipment; (iv) petroleum and fuel products; (v) construction equipment and industrial machinery; and (vi) communications equipment. 45. Specific eligible expenditures under the category of Works may include urgent infrastructure works (repairs, rehabilitation, construction, etc.) to mitigate the risks associated with the disaster for affected populations. Specific eligible expenditures under the category of Services may include urgent studies (either technical, social, environmental, etc.) necessary as a 33 Such a reallocation would not constitute a formal Project restructuring, as permitted under the particular arrangements available for contingent emergency response components (ref. Including Contingent Emergency Response Components in Standard Investment Projects, Guidance Note to Staff, April 2009, footnote 6). 50

61 result of the effects of the disaster (identification of priority works, feasibility assessments, designs of adequate works, delivery of related analyses, etc). 46. Retroactive financing will also be available for payments made under the contingent emergency response component (Component 3) up to 12 months prior to the activation of the Component. The amount available for retroactive financing under Component 3 will be up to 40 percent of the contingent component amount (after reallocation, if any). The eligibility of expenditures that are claimed under this facility will be subject to the corresponding terms for retroactive financing included under Annex 3 of the document and the legal agreements. 51

62 Annex 3: Implementation Arrangements PAKISTAN: Punjab Cities Governance Improvement Project Project Administration Mechanisms: 1. The project implementing entity will be the Government of Punjab through the Planning and Development Department (P&DD). P&DD will be responsible for coordination between relevant provincial departments, for which it has established a Steering Committee (SC) for the project headed by the Chairman, Planning and Development Board. It comprises of Secretaries from four provincial departments (Finance, Local Government and Community Development, Housing and Urban Development, and Public Health Engineering), the five District Coordination Officers of the project cities, and the Project Director USPMSU as the Secretary. The SC will be responsible for overall guidance and monitoring of project implementation. 2. P&DD will entrust project management and implementation to the Urban Sector Planning and Management Services Unit (USPMSU) through an Agreement between GoPunjab and the USPMSU (Private) Limited. Under this arrangement, the liaison, internal monitoring, and coordinated project reporting at the provincial level will be the responsibility of the USPMSU on behalf of the P&DD. In addition, USPMU will be the main agency responsible for implementation of Component 2 of the project. 3. External monitoring will rest with the Directorate General Monitoring and Evaluation, Planning and Development Department (P&DD). The Directorate will contract third party/private sector firm(s) as independent assessment agencies for the annual appraisal of DLIs targets achievement. 4. The implementation of project activities at the city level will be supported by the City Program Units (CPUs) established in each city. In addition, the provincial Finance Department will be responsible for the administration of Performance Grants under Component 1 to cities. 5. In case the Component 3 is activated, the GoPunjab will need to designate the responsible agency for implementation of activities under Component 3, and may delegate the development and adoption of CER Implementation Plan as well as the development, adoption, and disclosure of safeguard instruments to the responsible agency. 6. Urban Sector Planning and Management Services Unit (Private) Limited has been established as a private company owned by the GoPunjab. The USPSMU is tasked with formulating and coordinating policy reforms related to urban management and infrastructure service delivery, and is staffed with multi-disciplinary skills. 7. GoPunjab will sign an Agreement with the USPMSU under which the USPMSU, on behalf of the P&DD, will be responsible for liaison, internal monitoring, fiduciary, M&E, and consolidated overall reporting of implementation progress. USPMU will also be the main agency responsible for implementation of Component 2 of the project, as well as for delegated tasks under Component 3 (if and when activated) on behalf of P&DD. A Project Director will be appointed at the USPMSU for overall management of USPMSU tasks, functions and activities 52

63 under the project. The Project Director USPMSU may also provide the higher-level guidance to ensure complementarily with other ongoing urban sector activities in the Punjab. 8. Additional resource and capacity needs of the USPMSU for fulfilling its obligations under the project will be supported by the project. These will include, but not be limited to the following: Financial Management Specialist Internal Audit Specialist Procurement Specialist Environmental Specialist Social Safeguards Specialist Monitoring and Evaluation Specialist Communications Specialist 9. Provincial level functions for the USPMSU include (i) provincial level inter-departmental coordination and consultation amongst the P&DD, Finance Department (FD), Local Government and Community Development Department (LG&CDD), Housing, Urban Development and Public Health Engineering Department (HUD&PHED), and the Excise and Taxation Department (E&TD) in relation to the project implementation; and (ii) contracting-out to independent contractors to undertake technical assistance. 10. Project coordination and internal monitoring shall entail (i) liaising with the Bank; (ii) monitoring implementation progress towards achievement of the DLIs; (iii) ensuring province and cities meet reporting requirements by collating and summarizing progress reports for review by provincial government and the Bank; (iv) working with the provincial P&DD and the Bank to determine reallocation of performance grant funds, if and where necessary; (v) co-coordinating with the E&TD with regard to the technical assistance for UIPT and other project related matters; (vi) monitoring key governance requirements of the project, particularly fiduciary issues and procurement, and safeguards considerations; (vii) preparing consolidated annual reports of progress in project implementation; (viii) trouble shooting as requested by the cities or the Bank, including identifying and reporting problem areas during implementation and facilitating solutions as necessary. 11. Capacity building activities to be implemented by the USPMSU under Component 2 includes, among others include: (i) preparing an overall capacity building plan for the project;(ii) procuring independent contractors for the capacity building activities at the provincial level and in the cities, and managing the activities; (iii) approval of the proposed city-specific annual capacity building programs; and (iv) conducting reviews and assessments of the supply side capacity building activities undertaken. 12. Strategic Communications: In order to align the communication strategy behind the wider urban reforms undertaken by the provincial government, the communication function for this project will be housed in the USPMSU. This communication unit will design the overarching communication strategy and help coordinate and supervise its implementation through communication staff in the respective CPUs, civic agencies and utilities. 53

64 13. UIPT Automation: The USPMSU will also be responsible for implementing the UIPT automation activity as per the specified annual targets for the corresponding DLI. This will involve co-coordinating with the Excise and Taxation Department 34 (E&TD). 14. Finance Department: A performance grants mechanism will be created in the Finance Department, GoPunjab to manage and administer the performance grants to the city. In addition, Finance Department will transfer funds from the Punjab Consolidated Fund (Provincial Account No.1, Non-Food) to WASAs and DAs under intimation to the respective District Coordination Officers (DCOs), Executive District Officers (EDO) Finance & Planning of each CDG and USPMSU. 15. The Directorate General Monitoring and Evaluation (DGM&E), P&DD 35 will be responsible for: (i) external monitoring of implementation of the project on an annual basis; and (ii) mid-term and project completion reviews of the project. The Directorate will contract third party/private sector firm(s) as independent assessment agencies for the annual appraisal of DLIs targets achievement. Required capacity for procurement and contract management to be engaged at the DG M&E for the procurement and supervision of third party M&E firm(s) will be engaged under the project. 16. City Program Unit (CPU): A City Program Unit will be established in each of the project cities to support project implementation and assist them to deliver on the city level activities. CPUs will provide all necessary support in achieving the project objectives at the city level and will work in close coordination with the administrators in each city who shall be ultimately responsible for delivering on the project activities. CPUs shall be adequately staffed with requisite skills to assist the city deliver on the project results. 17. Structure and Functions of CPU: The CPU will be established within the city government, as part of the office of the executive head of the city (currently the District Coordination Officer). The CPU will facilitate the city government departments and city level entities, authorities and agencies, and coordinate with them on various project related activities. The CPU will be provided with sufficient operational capacity for performing its designated functions including: (i) liaison with the USPMSU, FD, external auditors etc at the provincial level and coordinate with the focal persons at the city entities; (ii) supporting the cities to make the provincial urban agenda operational at the city level; (iii) facilitating progress towards achievement of the DLIs at the city level; (iv) providing trouble shooting and advising the city to 34 E&TD has already approved Action Plan for automation of UIPT system. However, the recently enacted legislation Punjab Revenue Authority Bill 2012 has resulted in the establishment of Punjab Revenue Authority (PRA), which is envisaged to assume the taxation and revenue collection functions over the coming years from E&TD in a phased manner. Subject to the eventual transfer of the functional mandate for UIPT collection from E&TD, the PRA will assume responsibility for the implementation of the action plan as the successor entity. 35 The Directorate General Monitoring and Evaluation (DGM&E) was established under the administrative control of P&DD in October 2007, for independent monitoring and evaluation of public sector / multilateral donor funded projects, and to undertake Third Party Validations of specified projects. In the last two years, more than 100 projects under various sectors have been evaluated by DGM&E ranging from PKR 10 million to PKR 8,000 million. There are a total 45 employees of the Directorate including 19 gazetted officers. 54

65 implement the improvements; (v) monitoring project implementation, preparing city level reports, and implementation of requisite impact evaluations; (vi) facilitating the annual assessment of progress achieved against DLI targets undertaken by independent agents; (vii) assisting city departments and agencies in identification of capacity building requirements; (viii) communicating consolidated city-specific capacity building requirements to the USPMSU on an annual basis for approval of the annual city specific capacity building plan and contracting independent contractors for its implementation at the city level; and (ix) assisting in identification of technical assistance requirements, including but not limited to preparation, design and engineering of sub-projects and city specific studies and assessments, and drawingup/approving their terms of reference. 18. Resources to be engaged at the CPUs are expected to include, but not be limited to: Implementation and Coordination Specialist Institutional Development Specialist Urban / Planning Specialist Financial Management Specialist Procurement Specialist Safeguards Specialist Monitoring and Evaluation Specialist 19. Planning and Coordination Committee (PCC): Each CDG will establish and operationalize a Planning and Coordination Committee (PCC) with requisite terms of reference. The meetings of the PCC will facilitate the resolution of intra-city and inter-jurisdictional coordination issues as well as the achievement of such DLI targets as the consolidation of Annual Development Plans (ADPs) and the preparation of integrated city-wide rolling development and asset management plans. 55

66 Figure 3.1 Implementation Arrangements Chart Steering Committee Composition: Chairman P&DD, 4 provincial department Secretaries, Project Director of USPMSU as Secretary, 1 representative from the Urban Sector Planning and Management Services Unit, and 2 political representatives from Punjab Responsible for overall guidance and monitoring of project implementation Planning and Development Department City Governments Provincial Departments Urban Sector Planning and Management Services Unit, P&DD Punjab Headed by Project Director Responsible for: Liaison with provincial departments (P&DD, FD, LG&CDD, HUD, PHED, E&TD) Project coordination and all fiduciary responsibilities Administration of the performance grants Internal monitoring and reporting Implementation of the core capacity building program intended for all cities Facilitating CPUs for undertaking annual capacity building programs based on cityspecific needs Directorate General Monitoring and Evaluation, P&DD, Punjab Independent Annual Performance Assessment Agency(ies) City Program Unit (Lahore, Faisalabad, Gujranwala, Rawalpindi, and Multan) In City District Governments Liaison with the USPMSU, external auditors etc. at the provincial level Coordination for ensuring progress towards achievement of the DLIs at the city level Assist city departments & entities to develop and implement city specific capacity building programs Assist city departments & entities to identify additional human resource needs and undertake recruitment Assist city departments & entities to identify technical assistance requirements Monitor project implementation and develop city level reports Facilitate the annual progress assessment against DLI targets by designated independent agents KEY: Approval and Reporting Reporting and Monitoring Liaising and Coordination 56

67 Financial Management, Disbursement, and Procurement 20. Country issues related to Public Financial Management System. The World Bank has carried out extensive analytical work on the public financial management (PFM) systems in the country. The Pubic Financial Management and Accountability Assessment (PFMAA) reports of the Punjab Government and the Federal Government of May 2007 and June 2009 respectively were conducted using PEFA-PFM Performance Measurement Framework. PEFA assessments for the Federal and Punjab have been completed in June 2012 and cleared by the PEFA Secretariat and it is expected that Government of Pakistan will soon authorize their publications. 21. A number of initiatives and actions are being implemented to remedy weaknesses noted in the PFMAA reports. Most notable are the ones initiated under the Bank-financed project (PIFRA) at the federal, provincial, and district levels. PIFRA has computerized accounting and financial reporting using the New Accounting Model (NAM). Significant progress has been achieved so far to increase effectiveness, transparency, and accountability in public expenditure management and, as a result, the state of public financial management is gradually improving. 22. Timeline of year-end financial reporting has improved at the federal and in all provinces and districts owing to the introduction of the automated budget management systems. Civil Accounts are prepared and submitted to the Ministry of Finance/ Finance Department within 12 to 15 days of the end of each month. Annual financial statements are being prepared by the federal government and provinces using International Public Sector Accounting Standards (IPSAS). Draft financial statements for FY 11 for the federal government and provinces were submitted for audit in August, To enhance effectiveness of external audit, a risk-based audit methodology compliant with international standards is being applied at federal and provincial levels and will be rolled out in districts. In addition, the efficiency has improved through the use of Computer Assisted Audit Techniques and the application of systems-based audit methodology. Moreover, legislative oversight across the federal and provincial governments has seen marked improvement over the last few years. 24. The Public Financial Management Performance Review (PFM-PR) for the Punjab five large City District Governments (CDGs) and affiliated entities comprising DAs, WASAs and TEPA sub-entity of Lahore Development Authority was carried out as part of this project. The PFM-PR that is based on PEFA Assessment framework, indicates weaknesses in the financial management performance of CDGs and affiliated entities in the areas governing: implementation of development activities as envisaged in the annual approved budget mainly due to frequent delays in transfer of committed funds, both on account of annual PFC Award and disbursement of development funds by the provincial government; decline in Own Source of Revenues (OSRs) due to non-revision in customers fee-rates, for example, WASAs monthly tariffs have remained unchanged for more than 6-8 years; staff at the affiliated entities of CDGs require necessary training in PFM system to comprehend reporting under the New Accounting Model (NAM); access to budgetary information is not adequate; multi-year fiscal planning using the Mid-Term Budgetary Framework (MTBF); and lack of: fixed assets management, effectiveness of internal auditing, and procurement practices.; Risk-Based Audit (RBA) methodology has not been 57

68 adequately followed by the government auditors while conducting the audit of annual accounts of CDG and affiliated entities; unresolved audit observations (mostly relate to inadequacy of internal control systems) have accumulated over the years; as well as the extent of legislative scrutiny of budget and audit reports are the important issues which must be addressed on priority basis. 25. Acceptable Performance Indicators- PIs for the respective CDG and affiliated entities in the PFM performance, in a statistical form, are summarized below: CDG Faisalabad Almost 28% PIs are at acceptable level; consist of As and Bs whereas FDA and WASA-Faisalabad indicate 37% and 26 % high level performance respectively. CDG Gujranwala 28% are rated as acceptable level PIs as against 32% each acceptable PIs for GDA and WASA-Gujranwala. CDG Rawalpindi Rawalpindi PIs rated acceptable level constitute 28% whereas RDA and WASA-Rawalpindi have shown 28% and 42% rated as acceptable PIs. CDG Lahore Has the lowest number of acceptable performance indicators of 12% whereas LDA, WASA-Lahore and TEPA show 26%, 32% and 37% respectively as acceptable PIs. CDG Multan Almost 36% PIs are rated as acceptable. The MDA and WASA- Multan good performance indicators comprises of 42% and 32% respectively. 26. Affiliated Entities of CDGs comprise of: Lahore CDG - Lahore Development Authority (LDA) and WASA-Lahore whereas TEPA-Lahore is affiliated to LDA ; Gujranwala CDG Gujranwala Development Authority (GDA) and WASA-Gujranwala; Faisalabad CDG Faisalabad Development Authority (FDA) and WASA-Faisalabad; Multan CDG - Multan Development Authorities (MDA) and WASA-Multan; and Rawalpindi CDG Rawalpindi Development Authority (RDA) and WASA-Rawalpindi are autonomous bodies, but made affiliated entities under the Punjab Local Government Ordinance, 2001 (PLGO,2001). These affiliated entities currently received annual development funds from the HUD&PHE Department of the GoPunjab. 27. FM Risk Assessment and Mitigation. The overall FM risk in the project is rated as Substantial that may come down to Moderate after mitigation measures have been taken. Table 3.1: Financial Management Risk Assessment and Mitigation Risk Risk Rating Risk Mitigation Measures Residual Risk Rating Inherent Risk Substantial Moderate Country/provi High - Integrated use of country wide FM systems. Moderate nce specific - Use of results based disbursement mechanism based on risks Entity specific risk Substantial DLIs - Capacity building of CDGs and departments; - Provision of SAP terminals to PMU, CMU, DAs and WASAs for real time monitoring of budget execution. Moderate 58

69 Risk Risk Rating Risk Mitigation Measures Project specific risk Substantial - Internal auditing throughout project life ensuring control effectiveness of policies and procedures and timely reporting of receipts and uses of funds ; Residual Risk Rating Moderate Control Risk Moderate Low Budgeting Substantial - Identification of all relevant budget and account codes for sub departments (DAs, WASAs and TEPA) of CDGs and Implementation of NAM COA to record, classify, and report, fund, function, program, and objects. - Communicate PFC award by May 31, under PLGO, for budget approval by June CDGs need to fully adopt PLGO rules for budget documentation Moderate Accounting Moderate - Immediate measures needed to record outstanding liabilities at CDGs level. - Reconciliation of accounts to be completed (on 20 th of each month) between DAO and DDOs and banks. - Staff needs training to produce financial statement in accordance with IPSAS. Internal Controls Substantial - Formation of Internal Audit department within CDGs and affiliated entities, - Training of internal auditors on modern practices and LGO Audit Rules, 2003; - At present manual and inadequate fixed assets records being maintained in a scattered manner. There is a need to developed proper computerized Fixed Assets Management system. - Daily wages workers data to be computerized and established output based agreement. - Any change in the payroll would be based on the personnel record. Funds flow Moderate - Release of payments against only budget allocations already made and documented adequately. - Funds for program implementation to be released by GoPunjab in timely manner. Financial Reporting Auditing and follow up on issues Substantial Substantial - Adoption of uniform reporting format by CDGs and affiliated entities as developed under PIFRA for provincial government financial statements and semiannual financial reports format of the Project in concurrence with the Bank. - Timely production of financial statement for audit purposes. - Resolution of outstanding audit observations through regular Departmental Accounts Committee meetings. - Agreement on general scope of audit (fully adopt FAM) for the Project annual financial statements, combining the certification and regularity aspects of auditing. - Provision of DAs annual financial statements in timely manner for management use and audit purposes. Low Moderate Low Moderate Moderate 59

70 Risk Risk Rating Risk Mitigation Measures Residual Risk Rating - Review of ZACs formation and committee members (consisting provincial assembly law makers). - Training for auditors about implementation of FAM Inquiries on wrong audit paras by auditors. Overall Risk Substantial Moderate 28. Implementation Entity: All aspects of financial management and disbursement for the Project will be managed by the Urban Sector Planning and Management Services Unit, on behalf of the Planning & Development Department, GoPunjab. A City Program Unit (CPU) will be established in each of the five cities to support project implementation and assist it to deliver on the city level activities and results. CPUs will assist cities in meeting DLIs, and will also provide USPMSU with the necessary financial data on EEPs for the respective CDGs and WASAs, enabling them to produce half-yearly IFRs and project annual financial statements on a timely basis. 29. Staffing: Staff at the CDGs and their affiliated entities are adequately qualified and experienced in current accounting processes. However, they require some training to fully understand the New Accounting Model (NAM) and IPSAS. The Bank would coordinate with PIFRA to provide the required training. 30. The role of Finance and Accounts Departments in the CDGs is suggested for expansion under the proposed instituational framework whereby the staff will not just manage functions of its own entity(ies) but will also provide faciliation to other entities / department like DAs, WASA and TEPA in the prepartion of accounts under NAM and financial reporting. 31. The USPMSU is recruiting a Finance Manager and an Internal Audit Specialist fully dedicated to the project to perform the FM functions at USPMSU and CPUs. They would provide support to both the components. A SAP terminal would be provided to the USPMSU for this purpose. 32. Budgeting: EEPs would be a part of the existing budget with separate budget and account codes to enable monitoring and reporting. Government s existing budgeting system would be used for the project. 33. Arrangments would be made at a later stage to link financial data / records of affilated WASAs to the financial records at CDGs for consolidation purposes. The consolidated report would be sent to the CDGs Executive District Officer- Finance & Plannig [EDO (F&P)] for incorporation in SAP using PIFRA system. Payments against approved expenditures would be made by the District Accounts Officer after veryifying avaiable budget ceilings for expenditure. 34. Internal Controls and Internal Auditing: The PEFA diagnostic assessment report identifies absence of adequate internal audit arrangements in CDGs and affiliated WASAs. 60

71 35. As per Local Government (Internal Audit) Rules, 2004 Nazim of each CDG has to have in place Quality Services and Standards Office headed by an Internal Auditor to ensure effective risk management, control and governance. Internal Auditor is supported by a Deputy Internal Auditor. As per rules, the Internal Auditor has to report to the Principal Accounting Officer, Nazim and Council members. Functions and responsibilities of internal audit are adequately defined in the Rules. Posts have been created in all the five CDGs but not filled up. The GoPunjab would ensure compliance with the Internal Audit Rules. Resident auditors have been posted in WASAs from Local Fund Audit an attached office of Finance Department, however, they are performing pre-audit of payments only and no comprehensive internal audit of these agencies is being carried out. Internal audit needs to be strengthened in WASAs in order to evaluate their performance regularly and improve service delivery. An Audit plan has to be prepared and selected offices audited. The Internal Auditor has to submit an annual report to the Nazim and the Council. Findings have to be followed up within a couple of months. 36. The USPMSU will appoint an Internal Audit Specialist for purposes of the internal audit of project funds to fill the vacuum of non functional internal audit office at CDGs and WASAs. Separate third party validation would be carried out during the project life to further evaluate the process of institutional strengthening of cities and service delivery effectiveness. These studies may also review the social accountability principles enshrined in these processes. 37. For utilization of Component 2 funds, a lapsable Assignment Account to be established with the National Bank of Pakistan and operated by USPMSU under joint signatures of two senior officials of the USPMSU will be used. The transactions from this account will be subject to internal audit. Dedicated financial management staff would be engaged for the project. Separate books of account would be maintained and bank account reconciled on a monthly basis. 38. Funds flow, disbursement, and financial reporting arrangements: Disbursement in respect of Component 2 will be released annually to the Punjab Consolidated Fund (Provincial Account No.1, Non-Food) as an advance against forecast of TA expenditures for the next year. The Finance Department, GoPunjab will immediately release these funds to a lapsable Assignment Account maintained with the National Bank of Pakistan and operated by USPMSU. Documentation of advance will be based on actual TA expenditures (goods, non-consulting services, consulting services, training, and operating costs) supported by invoices, receipts, etc., reported in the semi-annual IFRs to be submitted to the Bank within forty five days of the end of each period. Disbursement under component 2 will be made each year based on annual tranches subject to the achievement of the respective annual DLI targets of Component 1 by at least one Project city. 39. Project funds for Component 1 would be provided on an annual basis into the Punjab Consolidated Fund (Provincial Account No.1, Non-Food) on achievement of Disbursement Linked Indicators (DLIs) verified by the Director General (M&E), Planning & Development Department. Therefore, no segregated Designated Account will be established for receiving Bank funds for this Component. As DLIs for Year 1 have been met at Project Appraisal, first disbursement from the Bank to Punjab Consolidated Fund (Provincial Account No.1, Non-Food) will be made upon Project Effectiveness against forecast EEPs (as included in the Interim Financial Reports) for the following year from Effectiveness. Subsequent actual EEPs will be 61

72 submitted for documenting previous advances made, before next batch of advance is made. Any advances made by the Bank remaining un-documented at the closing date of the project will be refunded to the Bank. Bank funds so disbursed will be transferred from the Punjab Consolidated Fund (Provincial Account No.1, Non-Food) to the CDGs. 40. The funds transfers are based on achievement of DLIs by CDGs and would be tracked against EEPs in that financial year. For following years, a city needs to meet all DLIs for that particular year in order to be eligible for disbursement for the year. Shortfall in expenditure on EEPs in aggregate terms, if any, than what it received at the start of the year, would be rolled over to the following year to enable the participating entity to make up for the shortfall. If the city does not meet the spending requirement against the EEPs in aggregate terms, for two consecutive years, the difference between project funds going to the city and actual spending on EEPs by that city would be refunded to the Province for allocating to the other partner cities. Bank s financial management guidelines would apply to the EEPs. Punjab Government s existing system for processing payments, recording and financial reporting in respect of EEPs is adequate and meets Bank s requirements. The Punjab Government would ensure timely transfer of funds (as per instructions issued by the Finance Department on 15 March, 2012) received from the Bank to the respective CDGs in the respective Special Drawing Accounts. 41. The following two types of expenditures will constitute EEPs under Component 1 and will be financed under this project: i) Repair and maintenance of machinery, equipment, roads, buildings, and water supply/drainage: This EEP item refers to both Works and Services Departments and WASAs. Expenditure items included in this category for Works and Services Department of CDGs refer to major expenditures needed for repair and maintenance for existing urban roads, streets, and buildings. This will not include any new road construction or road/street widening expenditures. ii) Power/energy needed for machinery, operations for asset maintenance and service delivery: This refers mainly to the power and energy consumption needed for service delivery operations and associated machinery for both Works and Services Departments and WASAs. 42. Separate account codes exist in CDGs and WASAs for the EEPs. These account codes are being consistently applied by the implementing agencies. CDGs and WASAs would ensure that EEP transactions are recorded promptly, preferably on a daily basis. 43. Participating cities have been allocated project funds that would be disbursed on a yearly basis on achievement of agreed DLIs. The allocation has been determined on the basis of %ages in the PFC Award. If any city fails to fully achieve DLIs for a particular year and incur the minimum expenditure on EEPs, the remaining undisbursed amount would be carried forward for disbursement in the subsequent year. However, if any city fails to do so for two consecutive years its share may be reallocated to the other participating cities. The funds disbursed to the defaulting city would be refunded to the Province for allocation to the other partner cities. If the aggregate amount spent on EEPs falls short of the total amount disbursed under Component 1 by closing date, the shortfall will have to be refunded to the Bank. 62

73 44. Provincial Government funds from the Punjab Consolidated Fund (Provincial Account No.1, Non-Food) will be transferred to WASAs in accordance with the instructions issued by the Finance Department under intimation to the respective District Coordination Officers (DCOs) and Executive District Officers (EDO) Finance & Planning. Adequate controls would be exercised in processing payments for the selected EEPs, accounting and reporting. A focal person would be designated by each participating entity for purposes of the project. 45. Each implementing entity will prepare six monthly Budget Execution Reports (BERs) in respect of EEPs. WASAs would forward their BERs to the respective CDGs who would review and forward these to the USPMSU for consolidation. However, the P&DD, GoPunjab would be responsible for submitting six monthly agreed IFRs to the Bank within forty five days of the end of each period. IFRs would be supported by BERs. IFRs would show sources and application of funds in respect of selected EEPs i.e. Bank and GoPunjab s share in EEPs. Annual Withdrawal Application supported by IFRs and BER would be signed by officials of the Finance Department. IFRs would include a forecast of expenditure to be incurred on EEPs in the next two six monthly periods. 46. Disbursements in respect of Component 1 will be based on anual Withdrawal Applications (WAs) duly signed by an authorized representative of the P&DD, GoPunjab. The Withdrawal Application will include statement of DLIs achieved, IFRs and BERs for the relevant period. Disbursement from the credit proceeds, in US Dollars, will be transalted to Pak Rupees by the State Bank of Pakistan, and the local currency shall form part of the transaction basis for the operation s accounting and reporting. The IFRs will include EEPs for documentation against previous advance and forecast of the next year s EEPs as the basis for disbursement. 47. The format and content of IFRs will be agreed during Negotiations. The USPMSU has primary responsibility for preparing these statements on behalf of the P&DD, GoPunjab. However, the P&DD, GoPunjab would have complete responsibility for submitting six monthly agreed IFRs to the Bank. 48. Disbursement arrangements under Component 3 will be established upon triggering of the component and agreed under the required CER Implementation Plan. 49. Disbursement Linked Indicators (DLIs). The disbursements against Component 1 and Component 2 will be tracked against selected categories of key budget items referred to as Eligible Expenditure Programs (EEPs) for five cities. The amount available for Component 1 to each city will be decided according to the Government fiscal transfer principle which is based primarily on the size of population of each city. The funds will be disbursed for those cities which have met all the agreed DLIs. The rest of the funds for the cities which do not qualify for disbursement during the year will be rolled over to the next year for same cities. Disbursement under component 2 will be made each year based on annual tranches subject to the achievement of the respective annual DLI targets of Component 1 achieved at a minimum by one city. This is important so that the TA and Capacity Building funds essential to help cities achieve the DLIs are available in a timely manner. 63

74 50. DLIs reflect the key results that are expected during the course of project implementation, that are related with achievement of intermediate outcome and therefore contribute to the PDOs. The DLIs reflect critical outcome areas for both provincial level and city level governments. 51. Proposed EEPs under Component 1 focus on selected operation and asset maintenance expenditures of existing urban assets and services, such as roads and water supply service. These expenditures are critical for urban asset management and maintenance. Similarly, EEPs under Component 2 will finance technical assistance expenditures. Eligible expenditures will include (i) expenditures for goods, works, and non-consulting services required for the carrying out of EEPs under component 1; and (ii) expenditure on goods, non-consulting services, consultants services (including for audits), Training, and Operating Costs for the carrying out of Technical Assistance Activities under Component 2. The allocation of credit proceeds are depicted in the following Table. Table 3.2: Allocation of Credit Proceeds Category (1) Eligible Expenditure Programs under Component 1 of the Project: (a) First scheduled disbursement (On or about the Effective Date) (b) Second scheduled disbursement (Approximately one (1) year after the Effective Date) (c) Third scheduled disbursement (Approximately two (2) years after the Effective Date) (d) Fourth scheduled disbursement (Approximately three (3) years after the Effective Date) (2) Performance Grants for Technical Assistance under Component 2 of the Project: (a) First scheduled disbursement (On or about the Effective Date) (b) Second scheduled disbursement (Approximately one (1) year after the Effective Date) (c) Third scheduled disbursement (Approximately two (2) years after the Effective Date) (d) Fourth scheduled disbursement (Approximately Amount of the Financing Allocated (expressed in US$) $26,100,000 $29,000,000 $40,600,000 $49,300,000 $2,000,000 $1,000,000 $1,000,000 $1,000,000 Percentage of Expenditures to be Financed (inclusive / exclusive of Taxes)

75 Category three (3) years after the Effective Date) (3) Emergency Expenditures under Component 3 of the Project: (a) Critical Goods under Part 3 (a) of the Project Amount of the Financing Allocated (expressed in US$) 0 Percentage of Expenditures to be Financed (inclusive / exclusive of Taxes) 100 (b) Goods, works, non-consulting services, 0 consultants services, and Training under Parts 3 (b) and (c) of the Project Total Amount $150,000, Operating Costs means the incremental operating costs under the Project incurred by the Recipient and the Project Implementing Entities for purposes of Project management, implementation, and monitoring and evaluation on account of office supplies and consumables, utilities, bank charges, communications, mass media and printing services, vehicle rental, operation, maintenance, and insurance, office space rental, building and equipment maintenance, domestic and international travel, lodging, and subsistence allowances, and salaries and salary supplements of contractual and temporary staff, but excluding salaries and salary supplements of members of the Recipient s or the Province of Punjab s civil service. Where the salaries and any salary supplements of contractual and temporary staff go, those of such staff in the dedicated team established at USPMSU for purposes of Project implementation will be financed out of the credit, whereas those of such staff at USPMSU outside of the dedicated team will be financed out of GoPunjab s funding. 53. GoPunjab may request the Bank to re-allocate project funds to Component 3 in the event of a major natural disaster. Disbursements under Component 3 will be contingent upon the fulfillment of the following conditions: (i) The Recipient has determined that an Eligible Crisis or Emergency has occurred and the World Bank has agreed and notified the Recipient; (ii) The Province of Punjab has prepared and adopted the Contingent Emergency Response (CER) Implementation Plan that is agreed with the World Bank; and (iii) The Province of Punjab has prepared, adopted, and disclosed safeguard instruments required as per Bank guidelines for all activities from the CER Implementation Plan eligible for financing financed under Component For critical goods under Component 3, the Bank will reimburse expenditure made on the basis of: (a) evidence of the purchase of Critical Goods (e.g. bills of lading) certified by the Recipient s customs department for imported goods and the Accountant General of the Province of Punjab for locally procured goods; (b) evidence of payment for said Critical Goods (e.g. receipts or retirement documents with respect to letters of credit, payment vouchers); and (c) letters of comfort or affidavits from the Auditor General of Pakistan certifying the retroactive, current, or expected use of said Critical Goods for the carrying out of said Part of the Project, including details of the use of any of said Critical Goods consumed as of the date of such letters or affidavits. The Recipient will not use the critical goods financed under the component for military or paramilitary purposes. If the World Bank determines at any time that the proceeds of 65

76 the Grant were used to make a payment for either: (i) ineligible expenditures; or (ii) goods eventually used for military or paramilitary purposes, the Recipient shall the amount of such payments or the costs of these goods. All amounts so refunded to the World Bank shall be subsequently cancelled by the World Bank. 55. Retroactive Financing: Retroactive financing will be applicable for the contingent emergency response component (Component 3) up to 40 percent of the contingent component amount (after reallocation, if any). Furthermore, retroactive financing for Component 3 under the project will be applicable for eligible procurements, carried out not more than 12 months before the implementation of the contingent component is triggered, as per the provisions of the Bank s Procurement Guidelines, and all expenditures, for which retroactive financing is sought, will be submitted to the Bank in order to verify their eligibility as per the project objectives and procurement guidelines. 56. Financial Reporting: Accounting records will be maintained using the government-wide integrated financial management information system implemented under PIFRA and in accordance with the country accounting procedures and policies defined in the New Accounting Model (NAM). These policies and procedures are being progressively and consistently applied at the provincial as well as district government levels. Use of NAM policies and procedures conforms to International Standards and are acceptable to the Bank. 57. WASAs would provide to the USPMSU, through respective CDGs, statements of receipt and expenditure (using their existing accounting system) on formats designed by the USPMSU in consultation with the Bank on a monthly basis. The USPMSU will also obtain monthly accounts of CDGs from the PIFRA terminal, would work out entity and city wise consolidated expenditure under EEPs for Component 1, and would prepare consolidated financial statements (IFRs) on behalf of P&DD, GoPunjab, for both the components on the format agreed with the Bank. 58. Reports will be designed in the FMIS to provide detailed information (object head-wise) of budgeted and actual expenditure for all components of the project. These will form documentation of expenditures against Bank s financing of the project. Half yearly IFRs would be submitted by the P&DD, GoPunjab within forty five days of the end of period in respect of Component 1 and Component Auditing: The annual financial statements of the project with a comprehensive disclosure of the operations, resources and expenditures will be prepared, audited and submitted by GoPunjab to the Bank within 6 months of the close of each financial year. The Auditor General of Pakistan will conduct audit of the project financial statements and this arrangement is acceptable to the Bank. Financial statements would show sources and application of funds in respect of the three components of the project. The audit report on the financial statements of the project for the year ending June 30 each year is due December 31 each year. There are no overdue audit reports in respect of any of the implementing agencies. 60. Supervision Plan: The project will require regular implementation support, particularly on collection of EEPs data from the WASAs and financial reporting. Bank staff will review 66

77 during implementation: (a) the IFRs, project audited financial statements; and (b) the project s financial management and disbursement arrangements to ensure compliance with agreed requirements. Table 3.3: Agreed Actions Sr. No. Action Required Responsibility Time Line 1. USPMSU will appoint a financial USPMSU Within 2 months of the signing of management specialist the above Agreement between 2. USPMSU will appoint an Internal Audit Specialist 3. Each CPUs will appoint a financial management specialist 4. Internal audit arrangements as required by the Government to be in place Procurement USPMSU USPMSU CDGs WASAs and GoPunjab and USPMSU Within 2 months of the signing of the Agreement between GoPunjab and USPMSU Within 3 months of Effectiveness December 31, In this project design, the activities subject to the Bank s procurement review include goods, works and services under the EEPs and the expenditures (goods and services) under the TA. The two EEPs are (i) power/energy needed for machinery, operations for asset maintenance and service delivery, and (ii) repair and maintenance of machinery, equipment, roads, buildings, and water supply/drainage. Procurements under the latter EEP and the TA would be carried out in accordance with the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits of January 2011, and Guidelines for Selection and Employment of Consultants by World Bank Borrowers of January At the city district governments level the project will assist in developing a system of adequate planning, and documentation of SOPs for procurement. The CDGs and WASAs are required to use the provincial procurement rules, but compliance is partial due to gaps in implementation instruments, as well as dissemination issues. The participating entities shall establish a procurement planning system linked to the budget, developing an SOP for procurement and contract management systems, web postings, pre award disclosures and complaints redressal mechanism. The pre-registration (enlistment) procedure shall also be rationalized. These SOPs shall also streamline the various directives and notifications etc. which seem conflicting with the procurement rules. These timelines of these actions are documented in the DLI matrix. Procurement of Works 63. Civil works under the project fall within the EEP of repair and maintenance. This category refers to the W&S department of CDGs and WASAs. In the last fiscal year the total expenditure on this category was about US $ 17.3 m and 10.5 m respectively for the five cities. These works shall be taken up by the five city governments and city entities in adequate packages, to the extent possible. The project takes cognizance of the fact that procurement planning for repair and maintenance activities shall be limited to routine actions, and subject to changes for emergency requirements. ICBs are not envisaged in works. Contracts estimated to 67

78 cost upto US $ 100,000 shall be done using shopping procedures, and contracts estimated to cost upto US $ 6 million shall be done using NCB procedures for which the NCB documents agreed with the Bank shall be used. Contracts estimated to cost more than US $ 6 m (if any) shall be done using ICB procedures. Procurement of Goods 64. The identified EEPs are expected to entail procurement of machinery, equipment, vehicles for operation etc. International Competitive Bidding (ICB) procedure would be used for all contracts estimated to cost more than US$500,000 equivalent, using Bank s standard bidding documents. Some goods including office equipment etc. could also be procured by the USPMSU. Goods contracts costing more than US$ 50,000 would be procured through NCB, using the bidding documents acceptable to the Bank and contracts costing upto US$ 50,000 may be procured through shopping procedures. Improvement of Bidding Procedures under National Competitive Bidding 65. The procedures applicable to the procurement of goods and works under contracts awarded on the basis of National Competitive Bidding shall be those set out in Rules 5 and from 20 till 36 (a) of the Punjab Public Procurement Rules (2010) (No. MD (PPRA)2-1/2010), with the modifications set out below in order to ensure economy, efficiency, transparency, and broad consistency with the provisions of Section I of the Procurement Guidelines, pursuant to paragraph 3.3 of said Guidelines. In the event of a conflict between the Recipient's procedures and the modifications set out below, the latter shall govern. 66. The following improvements in bidding procedures will apply to all procurements of Goods and Works under National Competitive Bidding, in order to ensure economy, efficiency, transparency and broad consistency with the provisions of Section 1 of the Guidelines: a) Invitations to bid shall be advertised in at least one (1) national newspaper with a wide circulation, at least thirty (30) days prior to the deadline for the submission of bids. b) Bid documents shall be made available, by mail or in person, to all who are willing to pay the required fee. c) Foreign bidders shall not be precluded from bidding, and no preference of any kind shall be given to national bidders in the bidding process. d) Bidding shall not be restricted to pre-registered firms. e) Qualification criteria shall be stated in the bidding documents. f) Bids shall be opened in public, immediately after the deadline for the submission of bids. g) Single bids shall also be evaluated. h) Bids shall not be rejected merely on the basis of a comparison with an official estimate without the prior written agreement of the Association. i) Before rejecting all bids and soliciting new bids, the Association s prior written agreement shall be obtained. 68

79 j) Contracts shall not be awarded on the basis of nationally negotiated rates. k) Bids shall be solicited and works contracts awarded on the basis of unit prices. l) Contracts shall be awarded to the lowest evaluated and qualified bidder. m) Post-bidding negotiations shall not be allowed with the lowest evaluated or any other bidder. n) Draft contracts shall be reviewed by the Association in accordance with Prior Review procedures. o) A firm declared ineligible by the Association, based on a determination by the Association that the firm has engaged in corrupt, fraudulent, collusive, coercive, or obstructive practices in competing for or executing an Association-financed contract, shall be ineligible to be awarded an Association-financed contract during the period of time determined by the Association. p) Each contract financed from the proceeds of the Financing shall provide that the suppliers, contractors, and subcontractors shall permit the Association, at its request, to inspect their accounts and records relating to the performance of the contract and to have said accounts and records audited by auditors appointed by the Association. The deliberate and material violation by the supplier, contractor, or subcontractor of such provision may amount to an obstructive practice. q) Recipient-owned enterprises shall be eligible to bid only if they can establish that they are legally and financially autonomous, operate under commercial law, and are not a dependent agency of the Recipient. r) The Association shall declare a firm ineligible, either indefinitely or for a stated period, to be awarded a contract financed by the Association if it at any time determines that the firm has, directly or through an agent, engaged in corrupt, fraudulent, collusive, coercive, or obstructive practices in competing for or executing a contract financed by the Association. Selection of Consultants 67. Consultancy services would be hired by USPMSU, and office of DG M&E. Selection of firms for supporting capacity building of CDGs and WASAs and other project support shall be done by the USPMSU. The third party validation firm shall be selected by the office of DG M&E. Contracts with consulting firms will be procured in accordance with Quality and Cost Based Selection procedures or other methods given in Section III of the Consultants Guidelines, such as quality based (QBS), fixed budget (FBS), least cost selection (LCS), consultants qualification (CQS) or single source selection (SSS). For contracts with consulting firms estimated to cost less than $500,000 equivalent per contract, the shortlist of consultants may comprise entirely national consultants in accordance with the provisions of paragraphs 2.7 of the Consultant Guidelines. 68. Selection of Individual Consultants: Services for assignments that meet the requirements set forth in paragraph 5.1 of the Consultant Guidelines may be procured under contracts awarded to individual consultants in accordance with the provisions of paragraphs 5.2 through 5.3 of the Consultant Guidelines. Under the circumstances described in paragraph 5.4 of the Consultant Guidelines, such contracts may be awarded to individual consultants on a sole-source basis. 69

80 69. Selection of non-consulting Services: Some of the data entry contracts are expected to be contracted out using the procedures for selection of non-consulting services. There could be multiple contracts estimated to cost at an aggregate US $ 550,000. International Competitive Bidding (ICB) procedure would be used for all contracts estimated to cost more than US$500,000 equivalent, contracts costing more than US$ 50,000 would be procured through NCB, and contracts costing up to US$ 50,000 may be procured through shopping procedures. The Bank s sample documents for non-consulting services shall be used for the ICBs and NCBs. Assessment of Agency s Capacity to Implement Procurement 70. An assessment of procurement system and practices was conducted for the city district governments, development authorities and WASA of Lahore and Rawalpindi. Although there are established systems of procurement committees and approval authorities, there is a need to have adequate competencies of procurement planning and management as well as contract implementation and monitoring. Certain deficiencies were also identified in the bidding and contract documents being used. The overall dialogue with Provincial Project Unit as well as city district governments addresses the aspects of adequate procurement planning of overall portfolio with budget linkages as well as a robust system of contract management. The TA for support of the cities shall be administered in the USPMSU and a procurement manager shall be hired to coordinate all selection processes. The office of DG M&E is staffed with 30 technical experts and the DG himself has extensive experience of consultancies and contract management. A project specific staff for procurement and contract management shall additionally be hired at the DG M&E office. While the project will address these aspects for improving the overall procurement environment in general and the sector in particular, the following action are agreed in order to ensure that the procurements subject to the Bank s review (EEPs and TA) are done in an efficient, and transparent manner. Currently the project risk is the categorized as substantial, which shall be reviewed during implementation. a) A procurement link would be maintained at the relevant implementing agency of the various cities website to provide the overall procurement plans and updates. It will be the responsibility of the City Program Units to ensure that the website is current for all goods, works and consultancies; for which procurement plans, procurement notices, invitation to bid, bid documents and Request for Proposal (RFPs) as issued, latest information on procurement contracts, complaints and actions taken, contract award and performance under the contracts and other relevant information related to procurement shall be displayed. The website would be accessible to all bidders and interested persons equally and free of charge. b) A standard operating procedure for the project procurements shall be prepared which shall identify a procurement focal point within each City Program Unit, the evaluation committees, approval authorities, contract signing authorities, and timelines. c) The Bank will hold Procurement training sessions for all the relevant implementing entities as well as USPMSU to ensure that the requirements and timelines of the Bank financed procurements are clearly understood at the very commencement of the project. d) Adequate packaging of various procurement activities is very essential in this project as the EEPs with procurable items address the overall portfolio, and there has been a very 70

81 vague concept of an overall packaging in the system. The Bank will support the implementing agencies on this aspect since the very initial stage. e) A credible system of handling complaints would be put in place. The respective CPUs will manage the complaint handling system, which would include maintenance of a database, a standard protocol with appropriate triggers for carrying out investigations, and taking action against involved parties. A second tier would be formed at the USPMSU level. For ICB/international selection of consultants the Bank prescribed complaint redressal mechanism will apply. The details shall be described in the SOP and shall be amended if the overall system is developed by the Punjab PPRA and found acceptable to the Bank. Status report for complaints handling mechanism shall be included in the quarterly progress reports. Table 3.4: Procurement Actions Sr. # Action Responsibility Date Status i. Procurement link maintained on the website CPUs Aug 31, 2012 Websites exist, procurement link to be developed. ii. SOPs for project procurement CPUs /Implementing agencies Aug 31, 2012 Basic systems exists iii. Procurement training Bank Apr 7, 2012 and follow ups Initial session held with CDGs and WASA on Apr 7. Follow up as soon as staff hired at USPMSU. iv. Adequate packaging CPUs /Implementing agencies Ongoing To be incorporated in the procurement plans iv. Complaint handling system CPUs/ USPMSU Dec 31, With these above arrangements, the procurement under the project is likely to be effective and transparent resulting in smooth implementation of the project leading to achievement of the project development objectives. At this stage procurement risk rating of the project is kept substantial. Procurement Planning 72. The Borrower is developing a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan will be agreed between the Borrower and the Project Team before negotiations, and would be available at the borrower s website. It will also be available in the Project s database and in the Bank s external website. The 71

82 Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Review of Procurement by the Bank 73. Thresholds for prior review of contracts under eligible expenditures are given below. These thresholds would be reviewed in 18 months and adjustments upwards or downwards would be made based on implementation experience. a) All ICB contracts for works, goods and non-consulting services; b) All single source selections or direct contracts; c) First NCB contract for Goods, irrespective of value to be awarded by each city; d) First NCB contracts for works, irrespective of value to be awarded by each city; e) First NCB contract for non-consulting services; f) First contracts procured through shopping, for goods and works to be awarded by each city; g) The first Consultants Services contract with consulting firms, irrespective of value, and thereafter all contracts with firms estimated to cost US$200,000 equivalent or more; h) First consulting services contract with individual consultants, irrespective of value, and thereafter all contracts with individuals estimated to cost US$50,000 equivalent or more. 74. All other contracts will be subject to Post-Review by the Bank. Each implementing agency will send to the Bank a list of all contracts for post-review on a quarterly basis. Post reviews as well as the implementation reviews would be done six monthly. Such review of contracts below threshold will constitute a sample of about percent of the contracts. Procurement Information and Documentation Filing and Database 75. Procurement information will be recorded and reported as follows: a) Complete procurement documentation for each contract, including bidding documents, advertisements, bids received, bid evaluations, letters of acceptance, contract agreements, securities, related correspondence etc., will be maintained by the implementing agencies in an orderly manner, readily available for audit. b) Contract award information will be promptly recorded and contract rosters as agreed will be maintained. c) Comprehensive quarterly reports by CPU /USPMSU indicating: (i) revised cost estimates, where applicable, for each contract; (ii) status of on-going procurement, including a comparison of originally planned and actual dates of the procurement actions, preparation of bidding documents, advertising, bidding, evaluation, contract award and completion time for each contract; and (iii) updated procurement plans, including revised dates, where applicable, for the procurement actions. 72

83 Frequency of Procurement Supervision 76. Bank Joint Review Missions would be carried out every six months, however, more frequently in the early stages of the project, with a procurement specialist participating. In addition to the prior review, Bank supervision missions would carry out for post review of procurement actions. The Bank s procurement specialist based in the Country office in Pakistan will be available to discuss procurement issues with the implementing guidance as and when needed. Details of the Procurement Arrangements Table 3.5: Consulting Services Ref. No. Description of Assignment Estimated Cost (US$) Activity 1 Activity 2 Activity 3 Activity 4 Activity 5 Consultancy for Training to prepare provincial level officials for resource planning at the provincial Level, Development of Formats with relevant provincial departments, Pretesting of formats for the downstream training for city officials, particularly MTDF (or IDMAP), pretesting of operational testing with city governments and city level agencies and development of consolidated ADPs (City Government, MTDF Cell, city entities) with an interface with Provincial Government. Consultancy for Development of Software for Automation of UIPT and its Pilot in Sialkot District Consultancy for Automation of UIPT in selected 5 city district governments Consultancy for UIPT Automation across the province. Consultancy to develop MIS, Database its integration with 290, , , , ,000 Selection Method Competitive Method (Firm) CQS Competitive Method (QCBS) Competitive Method (QCBS) Competitive Method (QCBS) Competitive Method Review by Bank (Prior / Post) Prior Post Post Post Post Expected Proposals Submission Date End of Oct End of Oct, 2012 End Dec.2012 DLI- 1 Resource Planning DLI-4 Revenue Collection Regime DLI-4 Revenue Collection Regime DLI-4 Revenue Collection Regime DLI-7 Accountabi 73

84 Ref. No. Description of Assignment Estimated Cost (US$) Activity 6 GIS, for Performance Reporting System at CDG Level with an interface at Provincial Level. Development and Finalization of Reporting Formats & Channels for district & Provincial Levels. Training & Capacity Building for usage of the developed systems at District & Provincial Level. Consultancy for the development of an assets management and infrastructure investments system & capacity building of CDGs for Asset Inventories at the City Level 200,000 Selection Method (Firm) CQS Competitive Method (Firms) CQS Review by Bank (Prior / Post) Post Expected Proposals Submission Date End Dec, 2012 lity DLI- 1 Resource Planning Activity 7 Activity 8 Activity 9 Consultancy for data collection and inventorization of assets based on existing records and surveys with information on age and original investment cost & allied information for Asset Inventories at the City Level 1. Consultancy for development of Urban Land Records management system and zoning plan for city areas 2. Consultancy for development of SOPs for Urban Land Records Management Consultancy for Urban Land Records Field Surveys 550,000 Competitive Method (Individual) QCBS 1,500, , ,000 Competitive Method (Firms) QCBS Competitive Method (Indiv) CQS Competitive Method (Firm) QCBS Post Prior Post Post End Nov, 2012 End Dec, 2012 End Oct, 2012 End Oct, 2012 DLI- 1 Resource Planning DLI-5 Boundary Alignment DLI-1 Resource Planning DLI-4 Revenue Collection Regime Activity 74

85 Ref. No. Description of Assignment Estimated Cost (US$) 10 Activity 11 Activity 12 Consultancy for Capacity Building of CDGs in Procurement Systems/ Performance, Development of SoPs & Trainings. M&E Firm for 3 rd Party Validation (to be hired by DG M&E) Selection Method 200,000 Competitive Method (Firm) CQS Review by Bank (Prior / Post) Post Expected Proposals Submission Date End Oct, 2012 DLI-2 Procureme nt 10,00,000 immediate USPMSU to transfer funds to DG M&E to process the hiring. Environmental and Social (including Safeguards) 77. Component 1 on Performance Grants to the five participating cities is to be used for strengthening systems and funds are to be provided for the improved operation and maintenance (O&M) of existing urban assets and services, such as roads and water supply service. Other eligible expenditures include: (1) power/energy needed for machinery, operations for asset maintenance and service delivery; and, (2) repair and maintenance of machinery, equipment, roads, buildings, and water supply. No new schemes investments are eligible or going to be funded under this component. Furthermore, even O&M activities will be confined to repair and rehabilitation of the existing right of way for the roads, and repair and rehabilitation of existing change of water supply pipelines, which are in dilapidated conditions. 78. The project has therefore prepared an environmental and social management framework (ESMF) with an aim to guide the five cities on the internalization of environmental and social considerations at large in the cities planning and development process. The ESMF also aims to ensure that city governments adopt and pursue sound environmental and social procedures and practices given in the document. The ESMF has been prepared after detailed in-house discussions, desk research on the legal and institutional framework, analysis of priority issues in the infrastructure sector, consistency checks with operational policies of the WB and other multilateral agencies. The ESMF also defines environmental and social assessment procedure to be followed by the city governments and other city entities while preparing, appraising, and implementing individual schemes under the Project. This procedure includes i) environmental and social screening of every scheme to be implemented under the Project; ii) preparing an Environmental and Social Management Plan (ESMP) of each scheme having moderately significant environmental and/or social impacts (schemes having significant environmental and/or social impacts are not included in the Project); iii) operationalizing this ESMP during scheme implementation; and iv) environmental and social monitoring to ensure effective implementation of the mitigation measures included in the ESMP. 75

86 79. Environmental and Social Management Procedures: In order to address the potentially negative environmental and social impacts associated with PCGIP, and equally importantly to integrate environmental management aspects in the cities urban planning and development process, the borrower has prepared an Environmental and Social Management Framework (ESMF). The ESMF conforms to the national regulatory and World Bank safeguard policy requirements. 80. Screening of Schemes: Screening will be first step of the environmental and social management procedure. Each scheme during its preparation stage will be screened with respect to environmental and social considerations. The Safeguards Specialist at the CPU will be responsible to carry out this screening. The screening criteria are presented below. 81. Environmental Categories: Depending on size, cost, location and the nature, scheme will have varying impacts on city environment. The rigorousness of environmental assessment requires identifying and mitigating the impacts, largely dependent upon the complexities of scheme. To facilitate effective screening, schemes are categorized into three categories viz. E-1, E-2 and E-3. a) E-1 schemes are those wherein major environmental impacts are foreseen; b) E-2 schemes are expected to have only moderate environmental impacts; and c) E-3 schemes are the schemes with negligible environmental impacts and hence, these can be termed as environmentally benign. 82. Since PCGIP funds are exclusive for operation and maintenance and rehabilitation schemes, schemes falling under E-1 category shall not be funded. Table 3.6 below illustrates tentative categorization of schemes based on their environmental sensitivity. 76

87 TABLE 3.6: PROFILE OF SCHEMES WITH TENTATIVE ENVIRONMENTAL CATEGORIZATION Schemes Environmental Category Requirement Schemes Environmental Category I. Water Supply & Sewerage II. Transportation A. Water Supply A. Roads 1. Water bodies intake works E-1 EIA 1. New Roads E-1 EIA 2. Water treatment plants E-1 EIA 2. Widening of roads outside ROW E-1 EIA 3. Water supply augmentation E-2 ESMP 3. Widening of roads within ROW E-2 ESMP 4. Water supply distribution lines E-2 ESMP avoiding 4. Rehabilitation any and improvement effect on E-2 ESMP of roads surface. 5. Repair and Maintenance of water E-3 EIA 5. Construction and improvement E-2 ESMP tanks of foot paths. 6. Repair and Maintenance of E-3 None 6. Construction of Traffic islands E-3 None overhead reservoirs 7. Up-gradation of existing head E-3 None 7. Construction and improvement E-3 None works road dividers. 8. Generators for tube well, pumping station etc. E-3 None 8. Other traffic and transport management measures. E-3 None B. Storm water Drainage B. Street Furniture (O&M) 1. Rehabilitation of open drains E-2 ESMP 1. Traffic signals E-3 None 2. Rehabilitation of closed drains E-2 ESMP 2. Street lights E-3 None 3. Repair and maintenance of open E-3 None 3. Sign boards E-3 None and close drains. C. Sewerage/Sanitation C. Road Structures 1. Rehabilitation of sewerage E-1 EIA 1. ROBs / RUBs E-1 EIA networks including pumping stations and treatment plants 2. Rehabilitation of sewers E-1 EIA 2. Under passes Requirement 77

88 Schemes Environmental Category Requirement Schemes Environmental Category Requirement 3. Rehabilitation of sewerage E-2 ESMP - Pedestrian ways E-2 ESMP networks 4. Public conveniences and pumping stations E-2 - Cycle E-2 ESMP 5. Pay and use latrines E-2 ESMP - Fast moving lanes E-2 ESMP 6. Septic tanks E-2 ESMP 3. Small Bridges/ pedestrian E-2 ESMP bridges 4. Culverts E-3 None III. Solid Waste Management IV. Community Amenities 1. Landfill site E-1 EIA 1. Landscaping E-2 ESMP 2. Compost yards E-1 EIA 2. Parks E-2 ESMP 3. Other waste treatment facilities E-1 EIA 3. Playgrounds E-2 ESMP 4. Construction of storage points E-2 ESMP 4. Community centers E-2 ESMP 5. Door to door waste collection E-3 None V. General 6. Segregation and recycling of E-2 ESMP 1. Computer Facilities E-3 None waste facilities 7. SWM Vehicles E-3 None 2. Weighbridges Note: For investment schemes that have not been environmentally categorized, they will initially be considered as category E-1, unless otherwise specified by the GoPunjab. Schemes falling in E-1 and S-1andS-2 categories will generally be on negative list. Moreover standard established checklist procedure such as Leopold Matrix aided with sector specific guidelines published by Ministry of Environment, Pakistan would be used to evaluate environmental impacts of schemes and sub-schemes activities in order to classify the same into E-1, E-2 or E-3 category. 78

89 83. Social Categories: Based on the number of households that may be affected by the scheme, i.e. Affected Households (AHs) and magnitude of impacts, schemes are categorized as S-1, S-2 and S-3. a) S-1 schemes are those schemes that will involve the resettlement of more than 40 households, and are expected to have significant negative social consequences; b) S-2 schemes are those which will involve the resettlement of less than 40 households and are expected to have significant social consequences affecting local inhabitants; c) S-3 schemes are not expected to have any significant adverse social impacts; 84. Since PCGIP funds are exclusively allocated for operation and maintenance and rehabilitation schemes, thus schemes falling under S-1 and S-2 categories shall not be funded through the project. Table 3.7: Categorization of schemes based on social sensitivity Category Description Type of Scheme Requirement Level of Issues Management Measures S-1 Serious negative Resettlement and > 40 households RAP S-2 social impact expected Moderate Rehabilitation Plan will be required, Social Management in addition Plan to a involved 1-40 households RAP S-3 negative social impact No negative expected social impacts expected (SMP) in addition to Social Assessment Social Assessment Report Report involved No involuntary resettlement Affected Persons None 85. Subsequent to the screening discussed above, the type of environmental and social assessment requirements for each scheme will be determined according to the following criteria: a) Schemes having E1 and S1 categories: full EIA (or ESIA) will need to be conducted for each individual scheme. In addition, a Resettlement Action Plan (RAP) will be prepared for each scheme with S1 category. b) Schemes having E2 and S2 categories: Environmental and Social Management Plan (ESMP) will be prepared for each individual scheme. In addition, an Abbreviated Resettlement Action Plan will be prepared for each scheme with S2 category. c) Schemes having E3 and S3 categories: no further assessment is needed. 86. ESMPs Preparation: For each scheme with E2 category, ESMP will be prepared by the Safeguards Specialist at the city government level. The ESMP preparation will be an integral part of the scheme preparation/appraisal process, and ESMP will be an integral part of the scheme documentation. The ESMP will include details of the works to be carried out under the scheme, the site-specific environmental and social information (baseline), and site-specific and scheme-specific mitigation measures. The ESMPs will be reviewed and cleared by the DO (Environment) of the respective City. 79

90 87. First five ESMPs of the schemes under the Project will be sent to WB for their review and approval. 88. EIAs (and RAP) Preparation: The schemes with E1 and S1/S2 categories will not be implemented under the Project; hence EIA/ESIA or RAP will not be conducted/ prepared. However, city governments/city entities may undertake schemes with E1 category with government financing, and for such schemes, EIAs will need to be conducted and their formal approval obtained from the Punjab EPA. Similarly, for the government-financed schemes having S1/S2 category, RAP will need to be prepared. Implementation of ESMPs and EIAs 89. ESMP Implementation. During the scheme implementation, the mitigation and monitoring measures included in the ESMP will need to be implemented. The ESMP will be included in the bidding documents (if the scheme is to be contracted out), and hence it will be included in the contractor s scope of works/services. Similarly, if the scheme is to be implemented by the concerned department itself, the ESMP will be included in the scope of work/services. The ESMP cost will be included in the scheme implementation cost. 90. Environmental and social monitoring will also be carried out to ensure effective implementation of the ESMP. First tier of monitoring will be conducted along with the monitoring of the works being carried out under the scheme. At the second tier, the Safeguards Specialist will carry out spot checks to ensure ESMP implementation. Checklists prepared on the basis of mitigation measures proposed in the ESMP will be used for this purpose. Photographic record will also be maintained for this purpose. 91. EIA Implementation: A similar procedure as described above will be used for the schemes for which EIAs are prepared. The EIA will be included in the bidding documents (if the scheme is to be contracted out), and hence it will be included in the contractor s scope of works/services. Similarly, if the scheme is to be implemented by the concerned department itself, the EIA will be included in the scope of work/services. The EIA cost will be included in the scheme implementation cost. Integration of Environmental and Social Safeguards Management in Scheme Life Cycle 92. The environmental and social management procedure described above will be seamlessly integrated within the scheme identification, preparation, appraisal, approval, and implementation cycle. Environmental and social screening will be carried out at the scheme identification stage. The scheme-specific EIAs/ESMPs will be prepared during the scheme preparation/appraisal stage. Finally, ESMPs and EIAs will be implemented during the scheme implementation stage. This is further explained in the sections below and also presented in Table Preparation of Scheme: During preparation stage, the implementing entity (city government/other city entity) will include the following details in scheme proposal: 80

91 a) Technical aspects such as scheme eligibility for loan funding; details on suitability of scheme site; availability and appropriateness of inputs, and proven experience with the technology offered, engineering designs, and rehabilitation, operation and maintenance arrangements; b) Economic aspects such as cost estimates, financial operating plan, economic and financial viability, and adequacy of proposed financing; c) Organizational aspects such as institutional, legal and contractual framework; risk analysis; necessary clearances from regulatory entities; and required covenant format; and d) Each scheme will be screened according to the criteria defined in Table 3.6. The screening will be done on the format as provided in the form of checklists Screening will be carried out by the Safeguards Specialist. 94. Scheme Appraisal: During scheme appraisal stage, the following activities will be performed: a) Review of the technical aspects such as scheme eligibility for loan funding; details on suitability of scheme site; availability and appropriateness of inputs, and proven experience with the technology offered, engineering designs, and rehabilitation, operation and maintenance arrangements; b) Review of the economic aspects such as cost estimates, financial operating plan, economic and financial viability, and adequacy of proposed financing; c) Review of the organizational aspects such as institutional, legal and contractual framework; risk analysis; necessary clearances from regulatory entities; and required covenant format; and d) If the Scheme is categorized as E1, an EIA will be conducted. If the Scheme is categorized as E2, an ESMP will be prepared. For the scheme categorized as E3, no further environmental assessment is needed. ESMPs will be prepared by the Safeguards Specialist, whereas EIA preparation will be outsourced. 95. During the appraisal stage, the environmental and social appraisal shall focus on the following aspects: a) Compliance with regulatory requirements and clearances; b) Comprehensiveness of the ESMP in light of the activity specific environmental and social issues; c) Integration of environmental and social measures in to the design wherever relevant; d) Arrangements for implementation of ESMP, including institutional capacity and contractual provisions; e) Inclusion of ESMP budgets in the scheme cost; f) ESMP monitoring and reporting arrangements; g) Adequacy of the social issues identified and suggested mitigation measure; h) Need for any legal covenant to address any specific environmental risks including regulatory risks. 81

92 96. The Safeguards Specialist will ensure that the above requirements are fulfilled. The DO (Environment) will review and approve the ESMPs and also advise the implementing entity on the environmental regulatory requirements. Sanction, Funds Disbursement and Scheme Implementation 97. The scheme will be approved once all the technical requirements are fulfilled and the ESMP/EIA is cleared. As stated above, ESMPs will be cleared by the DO (Environment), whereas EIAs will be approved by the Punjab EPA. 98. The ESMP or EIA of each scheme will be included in the bidding documents and the contracts. In this manner, the ESMP or EIA will be included in the overall scope of works/services, and the contractor will implement the mitigation measures included in the ESMP or EIA alongside other works/services included under the contract. 99. Monitoring, Audit, and Evaluation: The implementing entity will monitor the contractor to ensure complete and proper implementation of the works/services in accordance with the contract During this phase, the Safeguards Specialist will conduct environmental and asocial monitoring to ensure that the mitigation measures given in the ESMP or EIA are effectively implemented. The environmental and social monitoring will include the following: a) Frequent site visits by the Safeguards Specialist b) Environmental and social monitoring to ensure effective implementation of ESMPs/EIA particularly the mitigation measures included in these documents. The monitoring will be conducted with the help of checklists prepared on the basis of the mitigation plans included in ESMPs/EIAs. c) Laboratory analysis will be conducted if so specified in the ESMPs/EIA. d) Photographic records will be maintained where applicable/useful Third Party Validation: A sample-based third party validation (TPV) will be carried out on an annual basis to evaluate the overall effectiveness of ESMF implementation for all the schemes undertaken by each of the CITY GOVERNMENT/other entities in a particular year. The Safeguards Coordinator will be responsible for this validation and will engage suitable entity (such as consultants) for this purpose. 82

93 Table 3.8: Environmental, Social Assessment, and Management Process Milestones/ Process Responsibility Decision/Outcome Objectives 1. Scheme Screening Screen from Safeguards Specialist Environmental and environmental and social perspective social categorization The implementing entity will prepare the Proposal including: Environmental Screening report including categorization (E1, E2, or E3; S1, S2, or S3 Social Screening report including categorization (S1, S2, or S3) of scheme; Determination of type of assessment needed (EIA; ESMP; or no further assessment) 2. Scheme Appraisal Detailed Environmental Preparation of ESMP Safeguards Specialist Completed ESMP and Social Appraisal Preparation of EIA Safeguards Specialist Completed EIA (through outsourcing) Review of ESMP DO (Environment) Approved ESMP Review of EIA Punjab EPA Approved EIA 3. Funds Sanction and Disbursement Finalization of Contract Agreement a. Disburse first funding/money installment. b. Include ESMP/EIA in bidding documents and contracts Implementing entities ESMP/EIA included in contracts Scheme implementation ESMP/EIA implemented alongside the scheme works Contractor ESMP/EIA implemented. 4. Monitoring, Audit and Evaluation of a Scheme Monitoring Environmental and social monitoring to ensure effective Safeguards Specialist Monitoring reports implementation of mitigation measures included in ESMP/EIA Third party validation Sample based assessment and evaluation of ESMF Safeguards Coordinator Environmental and implementation for all schemes implemented by each CITY GOVERNMENT/city entity in a particular year (through outsourcing) Social TPV Reports 83

94 102. Capacity Building: GoPunjab envisages capacity building of its own personnel, city governments and city entities in order to ensure that the ESMF is effectively implemented. The government personnel will be exposed to formal training in the management of environmental and social issues. The training program for various personnel will include an orientation program on the ESMF, social and environmental assessment processes, participatory methodologies, and other related aspects The training will focus on the environmental and social issues. The contents will basically focus on the ESMF profile, concept, regulatory requirements, environment and social priority issues, cycle, outline of Environmental Assessment (EA) / Social Assessment (SA) and report formats in respect of the environmental aspects. In respect of social aspects the course content will focus on the resettlement and restoration policies and procedures, national and provincial requirements, land acquisition process, identification of affected persons, social entitlement frameworks, social assessment, resettlement action planning techniques, risk assessment and management skills, complaint redress mechanism, disclosure of information and mechanism of citizen accountability such as citizen score cards system. The program will be structured in such a way that it clearly brings out the value addition and enhancement benefits of proper management of environmental and social issues. The generic training program is elaborated in Table The Safeguards Coordinator will be responsible for the overall implementation of the training program. S/he will be assisted by the Safeguards Specialists of each city government in their respective city for this purpose In addition to the above, the USPMSU will make concerted efforts to mainstream the environmental and social topics with the main training program of capacity building of concerned departments of GoPunjab. The Unit will help improve the effectiveness of management of environmental and social impacts during planning, implementation and operation of proposed investments by city governments and city entities. Proposed criteria for graduating city governments and city entities are shown in Table.9, which will be used as modules in capacity building for all city governments and city entities. Each module will be field based, allowing real application of the critical practices such as the following: a) Basic practices: screening impacts, scoping assessments, planning mitigation options, public consultation to assess feasibility and acceptability options; b) Social: land acquisition methods, census methods, classifying severity of impacts and entitlements, responsibilities for planning and delivery of entitlements before site handover; c) Environment: site selection and route alignment to minimize environmental impacts and social disruption; restoration of drainage patterns, land use; including mitigation measures in Bill of Quantities (BOQs) and contracts; management of impacts during construction; monitoring of effectiveness of measures; and d) Monitoring and grievance redress: transparency and public administration in planning, reporting and supervision responsibilities and formats during implementation, documenting land transactions, complaint response record keeping and procedures. 84

95 Table 3.9: Generic Training Program Program Contents Duration Schedule Participants Module 1 ESF Profile Module 2 Environmental Module 3 Social Professionals at provincial GoPunjab Concept Assessment Process Assessment Process 1½ day and city government level ESMF Concept Environmental Laws & R&R policies and (1st, 2nd and 3rd Regulatory Regulations procedures year of the PCGIP) Heads of implementing Requirements-E&S EIA process National & Provincial city governments and city entities and other Priority Issues Identification of requirements monitoring agencies Scheme/ Project Cycle Environmental Impacts Land Acquisition EA/SA Process Outline Impact identification process Reports & Formats Methods Identification of APs Identification Mitigation Social Entitlement Measures Frameworks Formulation of Social Assessment Environmental RAP Techniques Management Plan Implementation and Monitoring Institutional Mechanism Program 1 Orientation Program / Workshop for city governments and city entities Program 2 Orientation Program / Workshop for Implementing city governments and city entities Module 1 ESF Profile GoPunjab Concept ESMF Concept Regulatory Requirements-E&S Priority Issues Scheme / Project Cycle EA/SA Process Outline Reports & Formats Module 2 Environmental Assessment Process Environmental Laws & Regulations EIA process Identification of Environmental Impacts Impact identification Methods Identification Mitigation Measures Formulation of Environmental Management Plan Implementation and Monitoring Institutional Mechanism 85 Module 3 Social Assessment Process R&R policies and procedures National & Provincial requirements Land Acquisition process Identification of APs Social Entitlement Frameworks Social Assessment RAP Techniques 1½ day (1st, 2nd and 3rd year of the PCGIP) Commissioners & DCO of the potential city governments Engineering/Public Health personnel from the implementing city governments and city entities Engineering personnel from city governments and city entities / consultants. Program -3 Module 1 Water Module 2 Solid waste Module 3 Roads, Traffic 1½ days (every Open Forum

96 Program Contents Duration Schedule Participants Workshop on supply, sewerage and management and Transportation alternate year) Feed back and comments Sectoral sanitation ESMF Concept ESMF Concept (Introduction will be from the Participants. Environmental and ESMF Concept Regulatory Requirements- Regulatory common to all and Social Assessment Regulatory E&S Priority Issues Requirements-E&S participants will be Commissioners & DCO Requirements-E&S split according to of the potential city EA/SA Process Outline Priority Issues their respective governments Priority Issues Identification of EA/SA Process Outline sectors) EA/SA Process Outline Environmental Impacts Identification of Engineering/Public Identification of Identification Mitigation Environmental Impacts Health personnel from the Environmental Impacts Measures Identification Mitigation implementing city Identification Mitigation governments and city Formulation of Measures entities Measures Environmental Formulation of Formulation of Management Plan Environmental Engineering personnel Environmental Implementation and Management Plan from city governments Management Plan Monitoring Implementation and and city entities / Implementation and Social Entitlement Monitoring consultants. Monitoring Frameworks Social Entitlement Social Entitlement Social Assessment Frameworks Frameworks RAP Techniques Social Assessment Social Assessment Case Studies RAP Techniques RAP Techniques Case Studies Case Studies Program - 4 Experience Sharing Module Experiences and Best Practices Experiences on implementation of E&S in implemented schemes. Best Practices followed in E&S Site visits to schemes / project sites. 2 day (1st, 2nd and 3rd year of the Commissioners & DCO of the potential city governments Engineering/Public Health personnel from the implementing city governments and city entities and those in the implementing process 86

97 ESMF Reporting and Documentation 106. CPU Level: The Safeguards Specialists will maintain complete record of ESMF implementation at the City level. This will include: Environmental and social screening record for each scheme ESMPs and their approvals, EIAs and their approval, Complete record of environmental and social monitoring (filled checklists, laboratory analyses, and photographs), Record of ESMF trainings conducted at the City level In addition, each Safeguards Specialist will be responsible for preparing ESMF quarterly progress reports for the respective City. These reports will include information on prepared/approved ESMPs during the reporting period, a summary of monitoring records, a summary of the training record, and a summary of any outstanding issues USPMSU Level: The Safeguards Coordinator will maintain record of the overall ESMF implementation for the entire Project. This will include: Quarterly reports prepared by Safeguard specialists Report of third party validations conducted for overall ESMF implementation ESMF trainings conducted at the USPMSU level The Safeguards Coordinator will be responsible for preparing the ESMF progress reports for the entire Project on a six-monthly basis. These reports will essentially be prepared on the basis of the quarterly reports prepared by the individual city governments through their Safeguards Specialists Application of ESMF for Government-Financed Schemes: As stated at the outset, the GoPunjab through the present ESMF seeks to integrate environmental and social considerations in the cities overall planning, service delivery, and development processes. Towards this end, the environmental and social management procedure will not only be applicable to the schemes to be implemented under the Project, it will also be gradually adopted for all service delivery functions in the large cities, by the end of the Project. This will thus ensure integration of environmental management aspects in the cities entire urban planning and development process The following framework is devised for achieving complete compliance of the environmental and social management procedure for all the schemes/functions of the city governments by the end of Project: By the end of first year of Project: 10 % government-financed schemes to follow the environmental and social management procedure. By the end of second year of Project: 30 % government-financed schemes to follow the environmental and social management procedure. 87

98 By the end of third year of Project: 60 % government-financed schemes to follow the environmental and social management procedure. By the end of fourth year of Project: 100 % government-financed schemes to follow the environmental and social management procedure The quarterly progress reports prepared by Safeguards Specialists and six-monthly reports prepared by the Safeguards Coordinator will include implementation status of the above framework. The third party validations will assess progress on this aspect also Summary of Roles and Responsibilities for ESMF Implementation: Summary of roles and responsibilities of various persons/entities for ESMF implementation is provided in Table 3.10 below: Table 3.10: Roles and Responsibilities for ESMF implementation Safeguards Coordinator (Urban Sector Planning and Management Services Unit) Capacity building at USPMSU and City level for effective ESMF implementation. Liaison and coordination with city governments and Safeguards Specialists for ESMF implementation. Monitoring implementation of framework defined in Section 6.6. Reviewing ESMF QPRs prepared by Safeguards Specialists Preparing ESMF six-monthly reports on the basis of ESMF quarterly progress reports and other reports. Conducting (through outsourcing) annual third party validation for all the schemes undertaken in the large cities. Liaison with outside agencies/entities including WB. Any other activity assigned by USPMSU. Safeguards Specialists (City Governments) Environmental and social screening of all schemes under the Project; Environmental and social governmentfinanced schemes per framework defined in Section 6.6. Documentation for screening. Preparing ESMPs for each Project scheme with E2 category; Preparing ESMPs for each governmentfinanced scheme with E2 category per framework defined in Section 6.6. Conducting EIAs of each Project scheme with E1 category (through outsourcing); Conducting EIAs of each governmentfinanced scheme with E1 category per framework defined in Section 6.6 (through outsourcing). Ensuring that ESMP/EIA is included in the respective scheme s scope of work, bidding documents and contracts; and ESMP/EIA implementation cost is included in respective scheme cost. Conducing monitoring to ensure effective implementation of ESMP/EIA during scheme implementation. Preparing monitoring reports; ESMF quarterly reports. Coordinate with Safeguards Coordinator for ESMF trainings at the City level. Any other activity assigned by Safeguards Coordinator or city government. 88 DO (Environment) Review of environmental and social screening. Provide technical and regulatory support and guidance; Review and clearance of ESMPs. Coordinate with Punjab EPA for EIA clearance. Provide technical and regulatory support and guidance. Review of monitoring reports.

99 114. Component 3 may have certain environmental issues associated with activities that may be financed under the component, should it be triggered. As a condition for disbursement under Component 3, the implementing agency will carry out a screening of the activities included in the CER Implementation Plan for any potential environmental and social impacts. Furthermore, any safeguards instruments required under the ESMF will be prepared, submitted to the World Bank for review and approval, and thereafter adopted and locally disclosed by implementing agency prior to disbursements under Component 3. Should this screening require a modification of the Environmental Assessment categorization of the Project and / or the triggering of any of the Bank's safeguards policies, a restructuring will be carried out to record these changes and make applicable the attendant requirements Furthermore, in case Component 3 is triggered, safeguard aspects of project activities would be in line with the ESMF. The ESMF provides guidelines on the implementing agency s responsibilities for integrating and managing environmental and social safeguards aspects into the investment design and implementation. This document would guide the implementing agency in undertaking a rapid environmental assessment for the potential activities under this component. In addition the ESMF will also specify the social assessment requirements of project implementation. Should this component be triggered, the implementing agency will be assisted to apply this framework to address any social impacts in post disaster recovery and reconstruction programs, including temporary and preventive resettlement 89

100 Annex 4: Operational Risk Assessment Framework (ORAF) PAKISTAN: Punjab Cities Governance Improvement Project Project Development Objective(s) To support the Province of Punjab s cities in strengthening systems for improved planning, resource management, and accountability, and to improve the Province of Punjab s capacity to respond promptly and effectively to an Eligible Crisis or Emergency. PDO Level Results Indicators: 1. Percentage of development and asset maintenance expenditure of the city and city entities which are spent according to the three-year rolling development and asset management plan (DAMP)(%) 2. Percentage of service area population having an institutionalized mechanism available at city service delivery entities for providing feedback and grievance redress. 1. Project Stakeholder Risks Rating Moderate Description : Risk Management (Borrower Risks): Borrower Risks : A potential change in government at the provincial level results in reprioritization in government agenda. Urban reforms may not remain a government priority, negatively affecting ownership of the project and relationship with the Bank. Internal reforms within a number of institutions may result in reform fatigue particularly during the process of restructuring of management and adapting to newly developed procedures and processes. Beneficiary Risks : The project, primarily focusing on institutional reforms, may not be perceived by secondary beneficiaries (communities in the 5 targeted cities) as having delivered a set of tangible results during and / or at the completion of the project. Such beneficiaries may not have access to project reports, financial statements, audit observations etc. - Regular consultations with the leadership at the provincial and city government level to ensure that urban reforms continue to remain a priority for the government. - The government s commitment and ownership of the project is demonstrated through the successful implementation of prior actions, particularly the achievement of first year DLIs at the project effectiveness stage, as well as issuance of Letter of Sector Policy. - Resp: Client Stage: Prep Due Date : Status: Not yet Due Risk Management (Beneficiary Risks): - Operationalization of citizen feedback mechanism at both provincial and city levels, including regular public stakeholder consultations and citizens survey to capture beneficiary views. Reports detailing progress of sub-projects, audit observations, financial statements of city governments amongst others, will be publicly disclosed. - An effective communications strategy to be developed aiming to ensure adequate dissemination of information about project objectives and the envisaged improvements in urban governance systems, to residents and communities in the participating cities. This communication campaign will prove vital in particular 90

101 towards ensuring that the residents of the cities benefitting from the project are informed about, and are able to make full use of greater access to information and strengthened grievance redressal system. - Resp: Client Stage: Imp Due Date : Status: Not yet Due 2. Implementing Agency Risks (including fiduciary) 2.1. Capacity Rating: High Description: Limited capacities in the city governments to implement city level programs and ability to handle larger investment portfolios on account of weak systems arising from fragmented mandates, procedural deficiencies, and lack of accountability. Unfamiliarity with the Bank s processes, particularly fiduciary and safeguards requirements at the provincial and city government level may negatively affect quality of deliverables. Risk Management : - The highly-satisfactory performance of the implementing agency (USPMSU) leading up to the project, including the achievement of all first-year DLIs, is demonstrative of the existence of essential capacity at the provincial (PPU) level. - The project directly aims to strengthen the existing systems and procedures at the city level. For this purpose city government s capacity building needs to be assessed during appraisal and adequate funds and modalities worked out for meeting these needs through project funds. - Upfront preparation of a comprehensive operational manual by USPMSU, covering all aspects of project management, assigning specific roles and responsibilities for project implementation. - The linkage between disbursement of funds and satisfactory achievement of DLIs incentivizes the cities to address capacity gaps and deliver results. - Resp: Client Stage: Prep Due Date : Status: Not yet Due 2.2. Governance Rating: High Description: Risk Management: - The project will put in place sound implementation arrangements at both the The implementation arrangements involve different tiers of government and multiple institutions spanning across five cities, which may lead to weak oversight, imbalanced performance and provincial (PPU) and city (CPU) level, with effective monitoring and evaluation, and coordination mechanisms. A high-level steering committee will provide guidance and direction to the overall project. could pose governance challenges. - Province to sign as part of the project negotiations (prior actions), a letter of sector policy detailing legislative and regulatory requirements. - City government to sign Memorandum of Partnership during the project negotiations. - Resp: Client Stage: Prep Due Date : Status: Not yet Due 3. Project Risks 3.1. Design Rating: Substantial Description: Risk Management (Scope) : The USPMSU and the Directorate General M&E at Punjab will coordinate and monitor Scope: progress in all 5 cities, particularly in relation to the achievement of DLIs. CPUs will be 91

102 The project is spread over 5 cities, across the geographic span of Punjab, and the sheer scale of the project may pose a risk. Complexity of Reforms: The project design relies on the government to undertake institutional reforms which are untested both within the province and the country. The institutional change may be unacceptable to relevant stakeholders. set-up in each city to establish the communication flow between the cities and the USPMSU. - Resp: Client Stage: Prep Due Date : Status: Not yet Due Risk Management (Complexity of Reforms) : - Implementation of institutional realignment measures as proposed under the project through a gradual and sequenced programmatic operation - Incentivizing cities to meet program objectives through DLI based disbursements. - Cultivating champions of change at various levels and ensuring the continued involvement of such players for a longer program period - Ensuring the necessary legal protection of the proposed institutional realignment reforms - Keeping the political leadership abreast of all planned institutional reforms throughout the program period, and cultivating/educating demand for these reforms at various levels - Resp: Client Stage: Prep Due Date : Status: Not yet Due 3.2. Social & Environmental Rating: Moderate Description: Risk Management (Environmental and Social Safeguards) : Institutional capacity will be built through the project to undertake social actions related to DLIs. Dedicated staff at the USPMSU will provide hands-on training to the city governments to implement the Environment and Social Management Framework (ESMF). Capacity constraints exist regarding integration of environmental and social safeguards in the Urban Planning process, which may translate into inadequate implementation of safeguards during project life. - Resp: Client Stage: Prep Due Date : Status: Not yet Due 3.3. Program & Donor Rating: Low Description: Overlap and Conflicting Programs: Potential overlap may exist between the project s components and other donor-funded programs in the urban sector in the 5 targeted cities. The project DLIs may potentially come into conflict with other donor-funded TA programs / interventions. Risk Management (Overlap and Conflicting Programs) : Active engagement with other donors / agencies for increased coordination and communication at the project implementation stage and during the project life. Mapping of multi-sectoral donor activities to identify overlaps and potential conflicting activities. - Resp: Bank Stage: Prep Due Date : Status: Not yet Due 3.4. Implementation & Sustainability Rating: Substantial 92

103 Description: Uncertainty regarding the sustainability of institutional performance achieved under the project, beyond the project life poses a risk. The Provincial government and city governments may not remain incentivized to make further progress towards urban reform and improved service delivery, once the project achieves full disbursements. Risk Management : - The fact that the GoPunjab has achieved the first step in its Urban Reforms Agenda demonstrates its commitment towards sustainable urban development reforms. The project represents the second step in GoPunjab s agenda, which includes (i) improving the planning process; (ii) introducing capital investment and asset management planning across the urban space; (iii) consolidating fiscal transfers and enhancing resource mobilization at the local level; and (iv) strengthening the accountability of urban institutions. Based on these policy and governance improvements, GoPunjab will then tackle service delivery in the third stage of its urban strategy. - Resp: Client Stage: Prep Due Date : Status: Not yet Due 5. Project Team Proposed Rating Before Review 5.1. Preparation Risk Rating: High 5.2 Implementation Risk Rating: High 93

104 Annex 5: Implementation Support Plan PAKISTAN: Punjab Cities Governance Improvement Project Strategy and Approach for Implementation Support 1. The strategic approach for the implementation support has two objectives: (i) to monitor the implementation of the risk mitigation defined in the ORAF and provide the technical advice necessary to facilitate achieving the PDO; and (ii) to monitor implementation progress on the project and to contribute to the quality of the capacity building of the five large cities of Punjab and associated implementing agencies by providing best practices and benchmarks. Procurement. Implementation support will include: (i) support to enable cities to implement provincial procedures for procurement, allowing for competitive bidding, public disclosure of results and audits of procurement practices; (ii) support to ensure adherence to guidelines on financial management and procurement will be applicable to the EEP; (iii) the framework for addressing social and environmental safeguards will be applicable to all activities included in the EEP; (iv) review of the Procurement Plan and procurement performance; and (v) provide training and guidance on Procurement to the implementing agencies, e.g. CDGs, WASAs, DAs, etc. Financial Management. (i) During supervision the team will review the financial management reports as the basis for fund disbursements. In addition, the team will review the audit reports and on the basis of these suggest appropriate remedies or clarifications to the implementing agencies. The team will also work with the USPMSU, Planning & Development Department and the City Program Unit (CPU) to assist in improving coordination among the implementing entities (CDGs,WASAs, DAs) in areas of financial management (accounting, reporting, and auditing). Environmental and Social Safeguards. The Bank team will supervise the implementation of the Environment and Social Management Framework (ESMF) by the implementing entities and monitor the progress in execution of the planning process that is inclusive of marginalized communities. Monitoring and Evaluation. During the implementation review, the Bank team will review the results monitoring framework and the implementation of the risk mitigations identified in the ORAF. Implementation Support Plan 2. Most of the Bank team members will be based in the Pakistan country office to ensure timely, efficient and effective implementation support to the client. Formal supervision and field visit will be carried out semi-annually (with the exception of the first year after project effectiveness where regular short missions will be fielded to ensure smooth project kick-off). Fiduciary requirements and inputs. Through TA the project will support strengthening of systems and staff capacities at the USPMSU, Planning & Development Department and the City Program Unit (CPU) in core functional areas of physical planning, financial management, revenue mobilization, procurement, e- governance, performance monitoring and local planning and budgeting. This will 94

105 enable these staff to better guide the implementing agencies in all systems building reforms supported under the project. In particular, the Bank s financial management, procurement, environment, operations and safeguards staff will work very closely with the implementing agencies to ensure compliance in the EEPs. 3. The main focus of the implementation support is summarized below: Time Focus Skills Needed Resource Estimate Partner Role First twelve Procurement review of the Procurement Specialist 4 SWs N/A months bidding documents Procurement Training Procurement Specialist 1 SW FM training and supervision FM Specialist 2 SWs Project supervision Urban Specialist 8 SWs coordination Task Team Leadership TTL 8 SWs Financial Management, FM Specialist 2 SWs N/A months disbursement and reporting Urban Specialist 8 SWs Procurement monitoring Procurement Specialist 2 SWs Environment/Social monitoring Environment Specialist Social Specialist 2 SWs 2 SWs 8 SWs Urban Specialist Task Team Leadership TTL 8 SWs N.B: SW Staff Week; N/A Not Applicable. 4. Staff Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Task Team Leader 8 SWs annually 2-3 Procurement 2 SWs annually Field trips required Financial Management Specialist 2 SWs annually Field trips required Environment Specialist 2 SWs annually Field trips required Social Specialist 2 SWs annually Field trips required Urban Specialist 8 SWs annually Field trips required 95

106 Annex 6: Team Composition PAKISTAN: Punjab Cities Governance Improvement Project Name Title Unit Raja Rehan Arshad Lead Disaster Risk Management Specialist GFDRR Shahnaz Arshad Senior Urban Specialist SASDU Uzma Sadaf Senior Procurement Specialist SARPS Hasan Saqib Senior Financial Management Specialist SARFM Javaid Afzal Senior Environment Specialist SASDI Chaohua Zhang Lead Social Development Specialist SASDS Sameena Dost Senior Counsel LEGES Chau-Ching Shen Senior Finance Officer CTRLN Abdu Muwonge Economist SASDU Zhiyu Jerry Chen Urban Economist SASDU Shabir Ahmad Senior Program Assistant SASDO Lilian MacArthur Program Assistant SASDO Shahnaz Meraj Program Assistant SASDO Richard L. Clifford Consultant SASDU Mihaly Kopanyi Consultant WBIUR Suhaib Rasheed Consultant SASDU Ahsan Tehsin Consultant SASDU Sohaib Athar Consultant SASDU 96

107 Annex 7: Fiscal, Economic, and Financial Analysis PAKISTAN: Punjab Cities Governance Improvement Project Introduction 1. The project objective is to support Punjab cities in strengthening systems for improved planning, resource mobilization, expenditure management, and accountability. The achievement of the development objective will position the provincial government and capacitate the cities to improve delivery of municipal services in the medium to long term on a more sustainable basis. Economic Analysis 2. The economic analysis provides the justification for project intervention in the five large cities of Punjab. The operation will invest in deferred stock maintenance rather than expansion of new infrastructure. This focus will enable the cities and associated entities to improve efficiencies in service delivery and in addition, allow for savings in scarce resources to be channeled on other city development priorities rather than expansion of new infrastructure. In addition, cities will establish or improve monitoring databases, which will enable tracking unit costs of investments supported by the operation. In turn, during the course of implementation, cities and the associated entities will be provided technical support through the project to enable them select investments based on cost-benefit analysis. 3. Evidence from international experience supports the project s interventions to improve the capabilities of conducting cost-benefit analysis at the city level. A review of case studies of similar projects, particularly in China, Ghana, India, Indonesia, Tanzania, and Zimbabwe, shows that more frequent use of cost-benefit or cost-effectiveness analysis enabled cities officials to select the best investments and achieve outcomes efficiently. A key ingredient in this process is establishment of strong monitoring and evaluation (M& E) systems so that there is a focus on achieving results. In addition, strong M&E systems helped reduce the expenses of cost-benefit analysis by providing data needed to estimate required rates of return for alternative investments. At present, M & E systems are weak and thus, inhibit the ability of cities to undertake costbenefit analysis to inform investment decision making. Establishing M&E systems will allow city authorities to generate much need data on unit costs of investments and keeping track of the benefits. 4. In the absence of government intervention, the immediate implication is that the current stock of infrastructure and cities systems and processes will continue to deteriorate. Concurrently, the operational costs will continue to increase as existing stock of assets will consume more energy as opposed to well maintained assets. In other words, the option of doing nothing at the moment is probably much more costly to the Government of Punjab (GoPunjab) when compared to the possible benefits that likely to accrue from investing US$ 150 million under this project. The benefits include better managed cities with the potential to generate greater efficiencies in service delivery, saving scarce resources for alternative investment priorities by the provincial government, and improved cities finances. 97

108 Fiscal Analysis of City District Governments 5. This section analyzes the fiscal situation of the five cities of Lahore, Faisalabad, Rawalpindi, Gujranwala, and Multan and the associated entities (that is, development authorities and water utilities). This section focuses on the revenue side of the City District Governments (CDGs) and the associated entities over the past few years. It analyzes the trends in transfers, own source revenues (and in particular, property taxes), user charges and other forms of receipts. Transfers include the Provincial Finance Award (PFC), the Octroi Grant, the supplementary grants for development and non-development. Based on available collected budget data the PFC constitutes the largest source of transfers to all cities, and development authorities Table 1 below shows selected budget receipt aggregates for the five city district governments in FY 2010/11 in Punjab. Lahore and Faisalabad lead in the amount of receipts followed by Gujranwala. In Lahore and Faisalabad, transfers from the provincial government, constitute 33 percent and 25 percent respectively of their total receipts. In terms of own source revenues (OSR), of the estimated Rs million from all the five cities, Lahore, Faisalabad and Rawalpindi shares were 53 percent, 19 percent and 10 percent respectively. Multan and Gujranwala receive the least amount in terms of transfers, and in addition, generate the lowest in terms of OSR. Table 7.1: Punjab. Budget Receipt Aggregates for Five City District Governments in FY 2010/11 Receipts in Rs Million Percentage of the total Lahore Faisalaba d Rawalpin di Gujranw ala Multan Total Laho re Faisalab ad Rawalpin di Gujranw ala Total Receipts 14, , , , , , % 25% 14% 14% 14% Transfers from Provincial Government 13, , , , , , % 26% 14% 14% 14% Of which: Share of PFC 10, , , , , , % 26% 14% 15% 15% Share of Octroi Grant 1, , % 24% 8% 10% 13% Current Year 1, , % 24% 9% 10% 13% Arrears % 27% 0% 12% 15% Supplementary Grants Development 1, , % 0% 18% 8% 0% Supplementary Grants Non-Development % 70% 5% 7% 0% Own-Source Revenue , % 19% 10% 6% 12% Taxes % 8% 54% 0% 38% Share of UIPT % 0% 0% 0% 100% Fees and Fines , % 18% 10% 7% 0% Source: computed using Budget estimate data. 7. In Lahore CDG transfers from the province contribute between 91.5 percent and 95.8 percent of the total receipts. Most of the transfers are in the form of the PFC award up to the tune of between 70 percent and 74 percent. Less than 20 percent of the transfers are in the form of the Octroi. Both the supplementary grants on development and non-development combined comprise less than 15 percent. Receivables from province for various heads carry less than 5 percent. Own source revenue is very low (less than 5 percent). Property taxes constitute less than one percent. However, fees and fines are a significant source of revenue for Lahore CDG. Multa n 36 This analysis deals with Lahore water and sanitation authority (WASA) separately in the next section. All other WASAs are not included in this analysis. 98

109 Particularly from general bus stands, commercialization fees of roads mainly, parking stand fees and sanitation fees. In Faisalabad CDG, transfers constitute a significant source of receipts over 97 percent as evidenced by the data from the last 3 years. The PFC award constitutes close to 90 percent and the octroi grant about 8 percent of the total transfers. Own source revenue is a small percentage of the total receipts with Urban Immovable Property Tax (UIPT) constituting less than 3 percent. Fees and fines are a significant source of revenue constituting over 60 percent of the total OSR. The main sources of fees and fines are advertisement, commercialization fee, and general bus stand fees. All the other sources combined constitute less than 3 percent of the total OSR. In Rawalpindi CDG, a major source of receipts is in the form of provincial transfers (over 97 percent of total receipts). The PFC award is the major source of provincial transfers. The octroi grant is a minor source of transfers. Supplementary grants (for development and non- development) and receivables from the GoPunjab all together covered below 8 percent in 2010/11. Own source revenue is a minor source of income for Rawalpindi CDG (less than 3 percent per annum over the last three years). Most of the OSR is in the form of fines and fees and very minimal is generated from property taxes. 8. In Gujranwala CDG, transfers constitute roughly about 98.8 percent of total receipts. Most of the transfers are in the form of the PFC, ranging from 72 to 89 percent in the last three fiscal years. The share of the octroi is small, ranging from 5 to 6 percent in the last three fiscal years. Between 2009/10 and 2010/11, revised budget estimates showed that both supplementary development grants and non-development grants hovered between 4 percent and 17 percent. Revised estimates suggest that OSR is very low less than 2 percent per annum. UIPT is not a major source of OSR. Fees and fines constitute about 82 percent of total receipts, with the major sources being general bus stand fees, and advertisement. In Multan CDG, total receipts were budgeted at Rs million in 2011/12, Rs million in 2010/11, Rs million and Rs million in 2008/09. Overall, transfers from the provincial government constitute around 97 percent. Most of the transfers come in the form of PFC awards. The Octroi grant is a minor source of the grant. Similarly, OSR is a minor source of income to Multan CDG. Most of the OSR is generated from the UIPT, local rates on land interest assessable and the tax on vehicle. The main sources of income in fees and fines are advertisement and general bus stands. Development Authorities (DAs) In Lahore Development Authority, transfers from the province dropped in FY 2010/11 compared to FY 2008/ /10. In terms of contribution to total receipts, transfers were not a major source in 2010/11, although they constituted about 28 percent in 2008/ /10. The authorities major source of receipts is OSR contributing over 72 percent. The share of UIPT is less than 14 percent in 2010/11. Fees and fines are a significant source of OSR for LDA in 2010/11 contributing about 61 percent of the total OSR. However, revised estimates in the previous two years show less than 40 percent contribution by OSR. Commercialization fees are the major source of OSR. In 2010/11 it contributed about 67 percent of OSR. Transfer fees of residential plots in DA housing schemes, extension of building period fees in DA housing schemes are the other minor sources of fees and fines. Estate development contributes about 20 percent of the OSR. Land sales are another significant source of revenues for the DAs. In 2010/11, land sales were budgeted to grow by 19 percent, while in the previous two years the 37 Data is not available for Gujranwala CDG 99

110 revised estimates suggest an increase of more than 75 percent. In Faisalabad Development Authority (FDA), provincial transfers constituted about 58.2 percent of total budgeted receipts in 2010/11. However, actual transfers to the FDA were about 47 percent of the total receipts in 2009/10. Most of the transfers come in the form of the Annual Development Plan (ADP). The second most important source of transfers is classified as transfers for other development packages. OSR are a major source of income for the FDA contributing almost 53 percent of the total receipts. Of the OSR, fees and fines contribute more to FDA s incomes than do UIPT taxes. The major sources of fees and fines are departmental charges, transfer fees of residential plots in DA housing schemes, and other forms of fines, fees and penalties. 10. In Gujranwala DA (GDA), transfers are a major source of income corresponding to at least 70 percent per annum according to revised budget estimates. Most of the transfers come in the form of the ADP followed by the development packages. OSR is another major source of income for the GDA with close to 20 percent of total revised budget receipts. However, UIPT is not a major source of income to the GDA. Fees and fines are another source of income, particularly the transfer fees of residential plots in DA housing schemes, departmental charges and plan submission fees in DA housing schemes. With respect to estate development, the sale of houses, shops and other buildings is the major source of income. The GDA also collects income on electricity charges on rented properties, profit on investment and PLS accounts and CDRs received from contractors. In Multan DA, OSR is the major source of income between more than half of the total contribution to the DA s receipts. Transfers are the second major source of income (hovering between 22 percent and 49 percent). Transfers for other development packages are the main source of the transfers. Fees and fines, particularly from commercialization fees, penalties, transfer fees of residential plots in DA housing schemes, and departmental charges are other minor sources of income to the DA. Overall summary, fiscal aggregates 11. Table 2a shows selected fiscal aggregate indicators of the City District Governments of the five large cities of Punjab. The largest percentage of receipts to cities is in the form of transfers. In all five cities but Lahore, over 95 percent of total receipts come in the form of transfers from provincial or federal government. Most of the transfers come in the form of the PFC award. Own source receipts constitute a small portion of total receipts, with the lowest in Gujranwala (with about 1 percent of total receipts). In Lahore, own source receipts constitute about 6 percent of the total receipts and in Faisalabad; OSR constitutes about 2 percent of the total receipts. Licenses, fees and fines are a key source of OSR for the CDGs. Property taxes are a minor source of revenue, yet the potential is high to contribute to the overall finances of the cities. 100

111 Table 7.2a: Selected Fiscal Aggregates of the CDGs of the Five Large Cities of Punjab Multi-year Averages Lahore Faisalabad Rawalpindi Gujranwala Multan Transfers as a percentage of total receipts 94% 98% 97% 99% 98% Own-source Receipts as percentage of Total Receipts 6% 2% 3% 1% 2% PFC as a percentage of total transfers 74% 88% 82% 80% 71% Octroi as a percentage of total transfers 13% 9% 5% 6% 7% Taxes as percentage of Own-source Receipts 0% 2% 13% 0% 7% Licenses, fees and fines as percentage of Own-source Receipts 82% 68% 66% 82% 66% User Charges as percentage of Ownsource Receipts 1% 2% 0% 0% 0% Other Receipts as percentage of ownsource revenue 11% 29% 21% 18% 27% Source: Computed from City District Budget data, Government of Punjab *Computations based on available actual/realized budget data for the period 2007/8 2010/ Table 2b shows selected fiscal aggregate indicators of the WASAs of the five large cities of Punjab. A large percentage of receipts to WASAs are in the form of transfers, ranging from 38 percent in Rawalpindi to 83 percent in Gujranwala. WASAs do not get transfers from the PFC award so most of these receipts are tied grants for development projects. Own source receipts constitute the second major chunk of total receipts, ranging from 17 percent in Gujranwala to 62 percent in Rawalpindi. These own-source receipts primarily include two components: share of UIPT (collected on their behalf by the provincial government and then transferred annually) and user charges for water and sewage. User charges constitute over 60 percent of own-source receipts in all cities except Gujranwala, where they are 27 percent only. In that city, taxes have formed a larger chunk of own-source receipts at 59 percent. In general, however, taxes (primarily property tax share) are a low share of own-source receipt, with the number in Lahore being 17 percent. Table 7.2b: Selected Fiscal Aggregates of the WASAs of the Five Large Cities of Punjab Multi-year Averages Lahore Faisalabad Rawalpindi Gujranwala Multan Transfers as a percentage of total receipts 51% 75% 38% 83% 82% Own-source receipts as percentage of total 49% 25% 62% 17% 18% receipts Taxes as percentage of own-source receipts 17% 22% 29% 59% 28% User charges as percentage of own-source receipts 76% 71% 61% 27% 62% Source: Computed from WASA Budget data, Government of Punjab *computations based on available actual/realized budget data for the period 2007/8 2010/ A recent report on property taxation in Punjab shows that the UIPT provides for only a small amount of revenues because of unclear local government fiscal incentives, an unreliable information base, a high level of reliefs and exemptions, a low level of motivation and expertise, 101

112 and insufficient capacity in the UIPT administration. The project will seek to tackle the impediments that result in inefficient collection of the property taxes in the five cities of Punjab (without changing the tax rates). Potential impact of operation on UIPT 14. Revenues from property taxation allow city governments in Punjab to pay for maintenance of key infrastructure and to provide basic services to the citizens. One of core objectives of the Government is to improve own source revenue (OSR) through improving tax policy and administration. The commitment to restructure the UIPT system culminated in drafting the new Punjab Urban Immovable Property Tax Law in May One of the main goals of the medium-term policy framework of the Government on the UIPT is to extend the coverage of the UIPT. More recently, the Government with the support of the World Bank has developed a blue print and action for reform of the property tax system. The action plan for reform seeks to improve incentives in the intergovernmental fiscal system, expand the tax base and to make tax administration more effective Among the key assumptions of this blue print are to widen the tax base (e.g. by incorporating those areas that are currently not taxed and to broaden the tax base by implementing the proposals of the draft UIPT legislation). 39 The new draft proposes redefinition of the rating area in accordance with the PLGO; redefinition of immovable property, redefinition of a liable person; indexation and elasticity of tax rates, as levying authority; valuation issues (e.g. preparation of a 3 year valuation lists; creation of a valuation table for each rating area); review of exemptions; administrative changes including the introduction of an assessing authority, a billing authority and a levying authority. 16. The USPMSU embarked upon a massive computerization process of all properties in Punjab. A new Geographic Information Systems (GIS)-based property tax register will be available in The proposed Punjab large cities project will contribute to operationalization of the register. The analysis below shows projections for the potential increases in UIPT based on the assumption that every five years the actual collection of taxes would double. As shown in Figure 1 there is a huge gap between the actual collection of property taxes and the potential. 17. Through this project technical assistance will be provided to enhance the documentation of the properties. This will simplify the process of rolling out the GIS-based property tax system. Three scenarios are developed to predict the potential gains in form of property tax collection assuming no changes happen in the existing tax rate regime. For simplicity, we first estimate the average growth rate in property tax collection over a 5 year period. The data show that the lowest average growth rate was about 2.14 percent corresponding to fiscal years (especially 2001/02 and 2004/05) when actual property tax collection declined compared to the previous fiscal years. This is assumed the worst case scenario. The second case scenario corresponds with an average 38 Institute of Revenue Rating and Valuation (2009), Property Tax Decentralization Program: Scope Evaluation Report, Draft, April Caveat of the analysis: There are other factors outside the scope of the proposed Punjab Large cities project that may constrain increasing UIPT as stipulated in following analysis. These constraints may include the organizational obstacles (e.g. insufficient staff capacity) that may impede the Excise and Taxation Department to better administer UIPT. 102

113 growth rate of about 7 percent. The third and most optimistic scenario is when an average growth rate of 15 percent is applied. Figure 7.1: Punjab Province. Actual and Potential Property Tax Collection (in Rupees), 1993/ / / / / / / / / / / expected collection (potential) actual collection Source: Based on data from Government of Punjab. 18. Applying each of the three scenarios simulations are carried out of the potential effects on property taxes if the GoPunjab was able to ensure better monitoring of the UIPT. The base scenario is that tax rates do not change and that there is no documentation, and hence better monitoring of property taxes. Existing analysis predicts that better monitoring can increase property taxes by about 15 percent per annum. To allow for error in this prediction, we look at three scenarios a low case scenario in which only 5% increase, a medium case of 15%, and the 20% increase in property taxes. Table 3 below summarizes the three scenarios. In the worst case scenario, property taxes can increase by between US$ 10 million and US$ 41 million and in an optimistic scenario it is possible to generate between US$ 37 million and US$ 147 million over the life of the project. Table 7.3: Illustration of Potential Scenarios of Property Tax Increases through Improved Documentation (in US$ million) Year Worst case scenario Medium case scenario Third case scenario 5% 15% 20% 5% 15% 20% 5% 15% 20% 2009/ / / / / / /

114 Year Worst case scenario Medium case scenario Third case scenario 2016/ Est. increase Source: Computations using actual property data of the province. 19. Some of the project benefits are possible to quantify and others are difficult to do so. This analysis attempts to quantify, where feasible, some of the potential benefits. Among the expected quantifiable benefits due to improving the systems of city governance in Punjab is increased property tax revenues. As shown above, under different scenarios property tax revenues are likely to increase when the project supports enhancements of the GIS based property tax system. 40 Given the nature of the project there are numerous other benefits that are difficult to quantify (for example, responsiveness of city governments to citizen s demands. To arrive at estimates of the potential net present values and internal rates of return that maybe associated with the project investments, estimates of the DLI costs shown below in Table 7.4 are applied to the potential property tax revenue benefits captured in the Table 3 above. Table 7.4: Estimated DLI costs (US$ million) Estimated Costs US$ Million Boundary Alignment 3.53 Public Disclosure and Access to Information 2.37 Accountability 0.77 Resource Planning Procurement 0.29 Intergovernmental Finance System 0.11 Revenue Enhancement 0.44 Rollout of the Property tax system 3.50 Other O& M related investments The benefits that arise from GoPunjab being able to generate more revenues from property taxes include possible investments in basic infrastructure in cities, improved maintenance of assets, and enhanced service provision. The benefits from such investments can generate significant benefits that we claim can exceed the estimated costs on the DLIs shown above. Other potential benefits could arise from improvements in procurement practices. Cities will be able to better manage and allocate their resources, and as a result, access and quality of basic services will be improved. Financial Analysis of the Potential Impact of the Project on Utility (ies ) Operational Efficiency: The Case of WASA, Lahore. 21. At present, the total number of water supply connections in Lahore is 610,000. Of these, about 95 percent (some 577,000) are household connections and 5 percent being commercial 40 A limitation of this analysis is that it is difficult to entirely attribute improvements in the property tax administration to the project. In addition, there may be costs associated with the increases in taxes, especially if the gains from the tax reforms are not redistributed to benefit those that need the basic public services, especially the urban poor. 104

115 connections. The total number of metered connections is 107,000. The total number of virtually metered connections is 379,000. Seventy thousand meters have been purchased and are gradually being installed in the virtually metered areas. The average duration of water supply in the city is 18 hours in the summer and 14 hours in the winter season. This analysis uses the example of Lahore Water and Sanitation Agency (WASA) to demonstrate the potential impact of the PLC operation on the ability to maintain existing infrastructure of water supply and sanitation. There is scope for the water utilities to lower operational costs (e.g. high electricity costs partly due to running obsolete water equipment).the WASAs in the five cities of Punjab can improve service delivery to their customers by addressing operational inefficiencies associated with breakdowns of water supply and sanitation equipment. This analysis is based on financial statements of Lahore WASA. Every fiscal year (running from July 1 st to June 30 th ) Lahore WASA prepares financial statements (including balance sheet (B/S), profit and loss statement (P/L), and cash flow sheet (C/S)) for water and waste water. 22. Lahore WASA has a potential to increase its water revenue, if (i) there are more water meters to allow for better understanding of the water consumed; (ii) better management of water utility ledgers; and (iii) better communication between customers and WASA, and (iv) improvements in the computerized water billing system, among others. An analysis of Lahore Balance sheet shows that of the total assets, roughly 60 percent are fixed assets and 9 percent are long term investment assets. In terms of current assets, the largest item is consumers receivables at about 56 percent of all current assets. Creditors accrued and other liabilities constitute about 82 percent of the current liabilities. Long term loans constitute about 82 percent of the long term liabilities. The accumulated consumer receivables (recoverable from defaulters) were about 1645 million rupees in 2008/9. Most of the receivable was attributed to domestic households (about 85 percent) followed by commercial about 10 percent and government organizations 5 percent. One of the options that Lahore WASA can effectively use to tackle the issue of escalating consumer receivables is the installation of meters of all consumers. In 2004, water and wastewater tariffs were revised. As a result, operating and non-operating revenues increased. However, the increase was temporary as expenses rose due to increases in electricity and fuel prices (roughly by about 43 percent of total cost), increase in repair costs of vehicles, tube-wells and sewage pumps, and pay raise of payroll (roughly 30 percent of total cost) as of The increases in electricity costs are attributed to two main factors, (i) the increase in electricity tariffs and (ii) old equipment that consume more energy. 23. Table 7.5 below shows the non-development expenditures over 2007/8 and 2008/9. Increase in power and energy prices and increases in repair and maintenance costs constituted about 64 percent of the total non-development expenditures. Between 2007/8 and 2008/9 power and energy prices and repair and maintenance costs increased by 20 percent and 14 percent respectively. WASA receives subsidies so as to be able to meet some of the O & M costs. 105

116 Table 7.5: Lahore WASA. Non-development expenditures (Rs. Million), 2007/8 2008/9 Non-development expenditure 2007/8 2008/9 2009/ / / / / / / /17 Power and Energy Actual Actual forecast forecast forecast forecast forecast forecast forecast forecast Payroll and burden Repair and maintenance Total expenditures Source: Lahore WASA *WASAs sustain the incremental O&M 24. During the project preparation it was mentioned that one of the key constraints faced by Lahore WASA is that of breakdown of capital assets and the lack of adequate resources for preventive maintenance. Assume Lahore receives an allocation of US$ 10 million from city governments (attributable to improvements due to the project), which translates into an additional US$ 2 million per year for expenditure on operations and maintenance. What does this mean in terms of the financial analysis of Lahore WASA? In this analysis, we forecast the future Lahore WASA balance sheet using average percentage changes in all aggregates over the period 2003/4 2007/8. We then project the future values under the assumption that the situation in past (on average) will prevail in the future. Table 7.6 below shows the forecast balance sheet. Lahore WASA may have 8 percent to 15 percent more resources to expend on O&M of water and waste water equipment. However, based on the estimates in Table 7.6, it is important to acknowledge that the contribution toward WASAs is likely to be too low to create significant impact in improving the financial situation. Nevertheless, the project will aim at enhancing systems for better management of water utilities. 106

117 Table 7.6: Lahore WASA. Balance sheet (2003/4 2007/8), forecasts (2008/9 2016/17) Description 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/ / / / / / / /17 Fixed assets Fixed assets CWIP State held for capital expense Advance for acquisition for land sub-total Long term Investment Long term loan to employees long term security deposit deferred expenditure sub-total current assets stores and spare consumers receivables current portion of long term investments loans and advances to employees Pre-payment and other receivables Bank Balances sub-total Total Liabilities Capital contribution accumulated loss sub-total grant deferred credit sub-total long term liabilities long term loans employees benefits consumers and plumbers deposits sub-total current liabilities current portion of long term loans DWIP creditors accrued and other liabilities sub-total overall total Source: Computations using Lahore WASA data 107

118 Annex 8: City Expenditure Review of Five Large Cities in Punjab Province PAKISTAN: Punjab Cities Governance Improvement Project 1. This section analyzes the fiscal situation of the five cities of Lahore, Faisalabad, Rawalpindi, Gujranwala, and Multan in Punjab Province, including the expenditure review as well as analysis of funds of flow. For the purpose of the analysis, City District Governments (CDGs), Development Authorities (DAs) and Water and Sanitation Authorities (WASAs) are all included in the analysis for each city. Actual revenue and expenditure number are used in the analysis for the past three years. 2. This specific section focuses on the expenditure side of the five cities, including City District Governments (CDGs), Development Authorities (DAs), and WASAs. For the purpose of the analysis, urban and municipal service related expenditures refer to the expenditures occurred at these departments/entities: (1) Works and Services Department under CDGs, (2) Municipal Services Department under CDGs, (3) DAs, and (4) WASAs. 3. For the past three years, total expenditures for the five cities combined have outpaced total revenues (including transfers and OSR) (see Figure 1). This is also true for most cities in most of the recent three years, except Multan, whose revenues for the past two years were above its local expenditures 41 (see Table 1 and Figure 2). Figure 8.1: Comparison of Total Revenue and Total Expenditure for Five Cities Source: Computed using city budget books. 41 City deficit is not analyzed because there is no available data on starting and ending balances of city budgets. The analysis focuses on the flow of funds, revenues, and expenditures. 108

119 Table 8.1: City-District Wide Expenditures for Five Cities, (Million USD) Total Receipts Total Expenditure Current Expenditure Capital / Development Expenditure Lahore Faisalabad Rawalpindi Multan Gujranwala Total 5 Cities Note: This includes City District-wide expenditure in the following three entities: City District Governments, WASAs and Development Authorities. Figure 8.2: Comparison of Total Revenue and Total Expenditure for Each City, Source: computed using city budget books. 4. The five cities have spent more on current expenditures than on development/capital expenditures for the past three years. In , five cities combined spent US $586 million on current expenditures and US$ 211 million on development budgets. (see Figure 3) Within the current expenditures, employee related expenses (salary and allowances) take the biggest share ($446 million) (see Table 2). 109

120 Figure 8.3: Comparison of Current Expenditure v.s. Capital/Development Expenditure for Five Cities, Source: computed using city budget books. Table 8.2: Detailed City District-Wide Expenditure, All 5 Cities, All figures in USD Million CDG DA WASA Total 5 Cities Current Expenditure of which: Employee related expenses Non-employee related expenses Current Expenditure on Urban/Municipal Service Delivery Functions* of which: Employee related expenses Non-employee related expenses Development Expenditure on Urban/Municipal Service Delivery Functions* Total Expenditure on Urban/Municipal Service Delivery Functions* Expenditure on Urban/Municipal Service Delivery Functions as % of Total Expenditure 22% 100% 100% 44% Source: computed using city budget books. 5. Municipal service delivery related expenditures contribute to a substantial portion of total expenditures. The five cities spent $353 million in on municipal service related expenditures, among which $180 million was on current expenditures and $173 million was on development/capital expenditures. Figure 4 shows that Lahore spent nearly 60% of its total expenditures on municipal service related, such as water and sanitation and roads. While WASAs and DAs spend all of their expenditures on municipal service related activities, CDGs spend averagely 22% of their expenditures on municipal service, mainly being from Works and Services Department and Municipal Service Department. Specific numbers range from 12% to 31% cross the cities. 110

121 Figure 8.4: Comparison of Total City Expenditure on Municipal Service Delivery, Source: computed using city budget books. 6. Salaries and Allowances of employees take a large share under the city current expenditures. 46 percent of total current expenditures related with municipal service for five cities are paid to the city employees as salaries and allowances (see Figure 5 and Figure 7). Among the non-salary current expenditures on municipal service activities, two biggest expenditure items are: electricity for operations; and repair and maintenance of machinery, equipment, buildings and roads. In , for five cities combined, these two items contribute 36% and 34% respectively of total non-salary current expenditures (see Figure 6). Electricity expenditure mainly comes from WASAs and has become a substantial expenditure item for most WASAs Lahore WASA spent nearly $24 million on electricity bills in (see Figure 7). 7. Expenditure on Repair & Maintenance (R&M) varies a lot across cities. Multan spent 1.4% of its total expenditure on R&M in and Lahore spent 6.5% of its total expenditure on R&M in (see Table 3) 111

122 Figure 8.5: City-Wide Current Expenditure on Municipal Service Delivery, Combined Five Cities, Source: computed using city budget books. Table 8.3: City Expenditure on Repair & Maintenance, All 5 Cities, (million USD) Total Expendit ure Lahore Faisalabad Rawalpindi Multan Gujranwala Repair & Maintena nce Exp Share of R&M Exp 6.0% 6.5% 5.3% 4.3% 3.9% 3.9% 2.7% 4.1% 3.0% 1.8% 1.4% 1.5% 3.4% 2.6% 4.2% Source: computed using city budget books. 8. Flow of Funds: In the Punjab province, five districts have been notified as City Districts, which are headed by City District Governments (CDGs). The area under their jurisdiction includes the built-up urban area (the large city ) as well as surrounding rural areas or other smaller, urban areas in the same district. Besides CDGs, these five districts also have Development Authorities and Water and Sanitation Authorities (WASAs). Finally, all City Districts have a number of Town Municipal Administrations (TMAs) that provide certain municipal services. However, these TMAs are not part of this project. 112

123 Figure 8.6: City-Wide Non-Salary Current Expenditure on Municipal Service Delivery, Combined Five Cities, Source: computed using city budget books. Figure 8.7: Comparative City-wide Current Expenditure on Municipal Service Delivery, Source: computed using city budget books. 113