A PROPOSAL FOR A WORLD BANK-ADMINISTERED MULTI DONOR TRUST FUND FOR RECONSTRUCTION AND DEVELOPMENT IN PAKISTAN S NORTH WEST FRONTIER REGION

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized A PROPOSAL FOR A WORLD BANK-ADMINISTERED MULTI DONOR TRUST FUND FOR RECONSTRUCTION AND DEVELOPMENT IN PAKISTAN S NORTH WEST FRONTIER REGION I. INTRODUCTION 1. Recent events in the Northwest Frontier Province (NWFP) and Federally Administered Tribal Areas (FATA) of Pakistan have led to one of the worst crises in the country s history. The conflict has imposed an immense cost on the local economy as large numbers of people have been forced to leave their homes and livelihoods while considerable damage has been caused to physical and social infrastructure. During the Swat valley offensive in May 2009, 2.7 million people were displaced, disrupting lives, livelihoods, and the provision of normal public services. In addition to loss of lives and injury the conflict has damaged private and public property including houses, standing crops, livestock, schools, health facilities, water supply/irrigation schemes, public office buildings, roads, electricity/gas networks, and businesses. 2. While military action has succeeded in reestablishing Government control in many areas, the conflict continues and reversals are possible. A military offensive continues in South Waziristan causing further destruction and suffering. As hundreds of thousands of internally displaced people (IDPs) return home in search of a return to normal life, others are being uprooted by a widening conflict. Lack of services, sporadic security related incidents, and limited economic activity pose continued challenges. Timely and effective rehabilitation, reconstruction, and assistance are needed to help the people in the conflict-affected areas cope with the consequences of the fighting and begin to move towards a peaceful future. 3. A strong international response is needed to help Pakistan recover from the crisis while addressing the underlying causes of the conflict. Success will require a rapid, sustained and expanded commitment from the international community a commitment that was highlighted at the April 2009 Tokyo Conference where over $5 billion in additional assistance was pledged for Pakistan. Against this backdrop, the Government and other development partners have requested that the World Bank create and administer a multi-donor trust fund (MDTF) for NWFP, FATA and affected areas of Balochistan (hereafter the MDTF ) to mobilize donor support and to finance critical investments in support of reconstruction and peace building. This paper proposes the establishment of the MDTF and describes its main features. II. RECENT DEVELOPMENT AND CONTEXT 4. The government has moved quickly to address the consequences of the crisis. Relief efforts have included rescue efforts and distribution of relief goods including tents, blankets, food, water, etc. among IDPs. The Government is also facilitating the return of IDPs by providing cash grants, transport, and basic food requirements until December The Government has also announced a program that includes cash compensation for affected households/families. UN agencies and international and local NGOs have been contributing to relief efforts. To facilitate coordination, the government has established the Provincial Relief, Rehabilitation and Settlement Authority (PaRRSA) to provide a single window for donor and partner interaction and to oversee the reconstruction, rehabilitation and settlement of the affectees of the crisis. PaRRSA has also been entrusted with providing back stopping support to local government administrations 5. The Government and donors recognize that the crisis has deep historical roots as well as links to the ongoing conflict in Afghanistan. FATA has long been governed under a colonial-era legal framework based on tribal structures that leaves it outside of the regular constitutional framework. Traditional governance structures have been uprooted by the conflict, making the area vulnerable to militancy. The situation is made more challenging by the long-standing social inequities and deprivation among the population in the northwest 1

2 frontier region circumstances resulting from decades of weak governance and inadequate social, economic and physical infrastructure and service delivery systems. These destabilizing factors are reflected in, inter alia, widespread unemployment; poorly controlled armed groups and arms circulation; depleted or damaged infrastructure; a rise in criminal and interpersonal violence; and an increasing illicit economy. The political and security environment thus poses unique and difficult challenges for Government and donors seeking to improve the lives of the people of the region. 6. Development outcomes in NWFP, FATA and Balochistan are far worse than for the rest of Pakistan. The Bank s NWFP Economic Report (2005) observed that NWFP s estimated per capita GDP in 2002/03 was only 60% of the average for the country, a clear indication of widespread poverty, particularly in its rural areas. The province s performance in education and health also remained below the national average. The literacy rate (10 years and older) at 47% 1 continues to remain below the national average of 55%, while also betraying a huge disparity in female literacy, which stands at 28%, compared to the national average of 42%. Vis-à-vis health and hygiene, it is striking to note that only 58% of households in NWFP had access to safe water, as of the year 2005, compared to 86% in Pakistan. Balochistan is also a lagging region with the weakest long-term growth performance of all provinces and a 2004 per capita income level of only two-thirds of Pakistan's overall level. Balochistan also stands out as the province with the weakest social development, scoring lowest in key indicators for education, literacy, health, water and sanitation for 2006/07. For example, two in five children aged 5 to 9 are enrolled in primary school. It also stands out as the province with the worst record on gender equality. 7. Similarly, FATA is among the poorest regions in the country, with about 60% of the population below the poverty line, according to Government estimates. Overall literacy is as low as 17.4% compounded by an abysmally low female literacy rate of 3%. Healthcare indicators are equally poor there is one doctor for every 7,670 persons in FATA compared to the country average of 1,226 persons per doctor. The key reasons for FATA s historical development lag are rooted in its remaining an isolated corner of the country cut off from the mainstream of Pakistani society, resource and capacity constraints, scarce economic activities, socio-cultural barriers and the law and order situation. 2 Realizing the precarious state of human development in FATA and its implications for the rest of the country, the government ventured a number of projects under the FATA Annual Development Programs over the years. However, meager financial allocations coupled with increased developmental costs resulted in huge unfunded liabilities (as much as Rs.40 billion). Even with increased allocations since 2002, the per capita government funded development investment in FATA (at US$ 11.3) compares poorly with the national average (of US$ 25.5) In view of the complex nature of the crisis and in order to address the root causes of the conflict the Government has requested the assistance of the World Bank and the Asian Development Bank (ADB) in preparing a systematic Post Crisis Needs Assessment (PCNA). The PCNA will cover the immediate post crisis transition and stabilization phase, medium term transformation, as well as the longer-term institution building, consolidation and development periods. The first phase of the PCNA a Damage and Needs Assessment was completed in November, The PCNA will, inter alia, address the underlying conflict-inducing factors such as social inequities, endemic poverty and weak-governance and address longer term strategic objectives of promoting sustainable peace-building, lasting security, economic development and growth, and improved social service delivery. 9. The total development budget in NWFP has more than doubled over the past five years from PKR 15 billion in to PKR 39 billion in The donor community has an active lending and grant portfolio in NWFP. For the year , foreign assistance totaled approximately US$63 million (13 percent of the total development budget). Major donors include Asian Development Bank, the World Bank, GTZ, DIFID, Government of Japan and USAID. The Bank, in particular has been a major partner of the GoNWFP 1 Pakistan Social and Living Standards Measurement Survey, PSLM Cost of Conflict in FATA, Planning and Development Department, FATA Secretariat, April Cost of Conflict in FATA, Planning and Development Department, FATA Secretariat, April

3 committing about US$500 since FY2000. In addition, a large share of financing provided for reconstruction following the 2005 earthquake was directed toward NWFP and the Bank delivered a large and successful postdisaster program in livelihoods and reconstruction. The Bank has also provided US$30 million for reconstruction of public infrastructure mostly damaged due to flood around the same time. In the health sector, the Bank has provided US$37.80 for HIV-AIDS and US$74.68 for national polio eradication programs, also being implemented in NWFP. 10. International experience in Afghanistan and elsewhere has demonstrated the value of a coordinated framework for pooling financial assistance under the overall leadership of the Government in line with Paris Declaration principles of client ownership, alignment with a country s own development strategy, harmonization with country systems, and a focus on results. Hence the Government and other development partners have requested that the World Bank create a multi-donor trust fund for affected areas of NWFP, FATA and Balochistan to finance critical investments in support of reconstruction and peace building. Preliminary informal indications suggest contributions of as much as $150 million will be pledged to help finance reconstruction and recovery and to finance investments designed to address the underlying causes of conflict. III. MDTF BENEFITS AND LESSONS LEARNED A. Expected Benefits 11. Based on international experience, the proposed MDTF is expected to bring the following benefits towards accelerating the pace and improving the quality of developmental spending in the North West Frontier Region. 12. Setting a Broad Strategic Vision and Harmonization of Programs with Government s Priorities. The proposed MDTF would enable more strategic prioritization of projects for funding and provide a platform to harmonize donor programs with the government s priorities. The MDTF will be set up in the context of national and regional development frameworks approved by the respective NWFP, Balochistan and FATA administrations and MDTF financing would be closely integrated into the government budget and associated reconstruction and development programs. The MDTF would also be aligned with ongoing and planned World Bank activities in Pakistan and NWFP. Supporting GoP efforts to address the causes and consequences of the crisis will be an important element of the upcoming CAS (expected to be discussed by the Board in March 2010). MDTF activities would be integral to the CAS and would include a planned Emergency Recovery Credit and a planned quick disbursing Human Development investment operation designed to support the Government of NWFP to sustain human development services and maintain education, health and social protection levels. 13. Aid Effectiveness. The proposed MDTF will provide a mechanism for enhanced coordination across multiple donors. Donors will provide funds to a general pool of funds which will be allocated across priority sectors in line with strategic priorities agreed between donors and government. Experience suggests that the alternative of donor-by-donor funding for specific projects or programs often results in fragmented and nonharmonized investments. The proposed MDTF will also exploit economies of scale by joining multiple donors and managing a large amount of funds through a single channel. This would help reduce transaction costs and the burden on government in terms of time, resources, and reporting requirements. The MDTF would aim for rapid results while at the same time seeking, through the PCNA process, to develop and implement medium and longer term approaches for addressing the causes of conflict in the region. 14. Financing and Portfolio Flexibility. The proposed MDTF will provide the flexibility to design funding components appropriate to the needs of the northwest border region, but within the framework agreed between the government and the donors. This could include financing not only for the investments activities and programs, 4 but also for salaries, non-project TA, O&M and other recurrent expenditure costs, feasibility studies and capacity building programs. Thus the MDTF would be able to generally finance a wide range of investment 4 This is not intended to refer to policy programs or financing of policy-based grants. 3

4 and recurrent needs of service delivery, capacity building and technical assistance activities using a wide range of implementing agencies. Moreover, it would be designed to provide sufficient flexibility to finance standalone projects or programs activities, including those co-financed by the government, bilateral or multilateral agencies, and also be able to employ mechanisms such as retroactive financing; output based disbursements, etc. 15. Inherent Program Controls. A Bank-administered MDTF would enjoy the advantage of combining the above funding flexibilities with sufficient control mechanisms to provide increased confidence to donors that funds are being disbursed and used only for the purpose for which they were provided, and in accordance with applicable World Bank procedures and acceptable financial and auditing standards. 16. Leveraging Potential Downstream Financing. A successfully operated and implemented MDTF program will enhance possibilities of drawing funding from a range of other bilateral donors who are interested in promoting the reconstruction and development agenda in the NWF-Region, and those who have been reluctant to invest in recent years due to inherent systemic deficiencies in the public expenditure regime and the law and order situation of the region. B. Lessons Learned from Other Trust Funds 17. Numerous lessons have been drawn from designing and implementing MDTFs over the past several years which have guided the preparation of the proposed NWF-Region MDTF. Some of these include the following 5 : (i). Although the proposed MDTF will not finance activities linked to law enforcement and military activities, addressing insecurity will nevertheless be of paramount importance, as a worsening security environment will undermine the effective working and achievement of results through the MDTF. This would require urgent and continued attention of the government and partners (bilateral and UN) on security sector reform and capacity building, to consolidate the authority of the state particularly in crisis-afflicted parts of the region. (ii). Complementary political and governance reforms will be needed in FATA in order to ensure the sustainability of reconstruction and development activities. (iii). The main, cross cutting developmental agenda for the NWF-Region will have to be necessarily accompanied by urgent and dedicated transitional and stabilization efforts in crisis hit and relatively backward areas of the region. This will help address equity concerns and avoid lopsided developmental spending by gradually bringing these areas at a developmental-par with the rest of the region, and indeed the country. (iv). Given the post-crisis, high-risk, high-cost environments in which it will operate, the MDTF will require flexible and predictable funding from donors, while recognizing the additional costs of operating in such an environment and accepting, as needed, non-traditional implementation arrangements (for example, through improved Bank/UN cooperation). (v). Focusing on medium to long-term development issues has emerged as an area of comparative advantage for MDTFs around the region. The NWF-Region MDTF would thus need to focus more on programmatic medium term approaches as a key instrument, entailing a succession of related programs, rather than standalone interventions, to ensure equitable development and wider distributive impact. 5 Review of Post-Crisis Multi-Donor Trust Funds. Document of the World Bank, Norway, Canada, Netherlands and United Kingdom. Report No. AAA15-1W. February

5 18. With respect to governance arrangements, reflecting lessons learned from other MDTFs, the governance and administrative arrangements of the MDTF will have the following key features: The World Bank will establish eligibility criteria consistent with objectives agreed with the donors in the administration agreement concerning activities to be financed, the geographic or sectoral scope of the MDTF, and the eligible types of procurement. Consistent with the Bank s current practice in Pakistan, financing of taxes and duties would be permitted. In line with World Bank policy, earmarking of donor funds would not be permitted. The management committee of the proposed fund will include representation from various multilateral bodies, but not contributing donors. Donors will play an active role in strategy and policy decisionmaking through a steering committee leaving operational matters to the management committee and MDTF Administrator. To maintain donor and public confidence, accountability and transparency frameworks will be rigorously implemented in the working of the MDTF. This will include development and adoption of Bank-standard risk identification and mitigation frameworks for the interventions funded under the proposed MDTF. Flexibility will be an essential element of the MDTF. It would be implemented in a dynamic environment, and priorities may shift over time. Activities would be grounded in the findings of the PCNA, but governance arrangements will allow for flexibility to respond to unanticipated needs or emerging opportunities. Involvement of the Governments of Pakistan, NWFP and FATA representatives in MDTF governance arrangements will instill full political ownership and inclusion with the MDTF objectives and processes. At the same time the proposed MDTF will operate with maximum public sector (line ministries and departments) participation and public transparency. IV. PROPOSED OBJECTIVE AND SCOPE OF WORK FOR NWF-REGION MDTF A. Strategic Objectives of Proposed MDTF 19. The strategic priorities of the TF will be informed by the ongoing Post-Conflict Needs Assessment, the Government s PRSP and other analytical work. The Trust Fund will support a comprehensive reconstruction and development strategy designed to restore infrastructure, services and livelihoods while addressing governance and other challenges that contribute to conflict. A Damage and Needs Assessment (DNA) of five districts of NWFP and two agencies of FATA has been completed. The DNA is part of, and aligned with, the PCNA framework for crisis recovery focusing on immediate service delivery-related infrastructure reconstruction and livelihoods restoration needs. The full PCNA, addressing the underlying causes of the crisis, is underway and will not be complete for several months. Hence the design of the MDTF will be flexible to accommodate its findings. The PCNA will lead to the formulation of a Transitional Results Framework that will identify priority outcomes and actions, in particular those aimed at addressing the causes of conflict. The MDTF is expected to serve to mobilize and manage donor resources directed at, inter alia, achieving these outcomes. Moreover, flexibility will be required to allow the trust fund to address possible changes in the development context or to take advantage of emerging opportunities. 20. The role of the MDTF will be to provide a coordinated financing mechanism for the Government of Pakistan s sector and investment projects and programs in the conflict-affected areas of NWFP, FATA and Balochistan. The overall objective of the MDTF will be to support implementation of a program of reconstruction and development aimed at recovering from the impact of the conflict and reducing the potential 5

6 for renewed conflict. The MDTF will finance projects identified by local and provincial governments to: (1) promote enhanced, sustainable and accountable delivery of basic services, including education, health, and administration of justice; (2) support livelihoods and community-based development of basic infrastructure and services; (3) help communities to access assets and market opportunities and create the basis for viable income generating activities; (4) support peace building activities and promote rapid crisis recovery in the Northwest Frontier Province, Federally Administered Tribal Areas, and Balochistan; 6 and (5) improve governance and institutional performance by strengthening, building and rebuilding state effectiveness through institutional strengthening and economic governance interventions. 7 TF arrangements will provide for integrity and accountability in the allocation and use of donor funds, as well as facilitate promptness and efficiency in implementation. 21. The fundamental principles underlying the MDTF will be the following: The Trust Fund will support a comprehensive reconstruction and development strategy designed to restore infrastructure, services and livelihoods while addressing governance and other challenges that contribute to conflict. The MDTF will finance government owned and implemented platforms that can grow rapidly and strengthen the legitimacy of the state using government systems, procedures, and institutional arrangements rather than donor executed projects that can disempower government, create dependency and weaken existing capacity. The Trust Fund will support government implementation through technical assistance and capacity building. The Trust Fund will facilitate rapid response; operations prepared under the MDTF would be processed under OP 8.0 (Rapid Response to Crises and Emergencies) with retroactive financing for reconstruction and livelihoods recovery activities. Trust Fund activities will be closely integrated with the Government Budget and projects will be approved by the Government of Pakistan and subject to fiduciary and safeguard standards that apply to World Bank financed projects processed under OP 8.0. The Trust Fund would not fund expenditures related to the military, civil police, paramilitary, intelligence services, anti-narcotics campaigns, and weapons of all kinds. This is consistent with the World Bank s policy on post-conflict countries which mandates the World Bank to work in close partnership with bilateral and multilateral agencies, particularly the United Nations and other institutions that have major responsibility for peace making, peace keeping and security. 8 6 For the purpose of this document the term peace-building activities means: activities that can be undertaken or financed consistent with the Bank s mandate and legal and policy framework that include the broad spectrum of reconstruction and institution-building efforts necessary to recover from conflict and that support the formulation of integrated strategies in order to lay the foundation for sustainable development including social and economic reintegration of conflict-affected populations, financing labor-intensive employment initiatives, financial support and technical assistance for economic reconstruction, and rebuilding legal and judicial systems. 7 This would include activities undertaken or financed consistent with the Bank s mandate and legal and policy framework that are directed at strengthening, building, or rebuilding institutions of governance that are capable of providing the population with transparent and accountable management of public finances and state assets, investment in human capital and social development, the rule of law, basic services and infrastructure, and an enabling environment for market formation, among other functions. 8 The MDTF may have to finance security/security consulting services necessary to carry on operations in the region, depending on the environment. 6

7 B. Scope of Work Geographic Scope 22. The MDTF will cover the Northwest Frontier Province, the Federally Administered Tribal Areas, and affected districts of Balochistan. Sectoral Focus 23. The following broad sectoral needs are envisioned as priorities for financing: 24. Pillar 1: Restoration of Damaged Infrastructure and Disrupted Services: Preliminary estimates from the Damage and Needs Assessment indicate the cost of immediate reconstruction at about US$1.1 billion for the five NWFP districts and two FATA agencies. Activities under this pillar would focus on: Reconstruction of damaged or destroyed public facilities including, but not limited to, health, education and government buildings, equipment and supplies Restoration of damaged infrastructure including power, transport, water supply and sanitation, and irrigation Cash grants for owner-driven reconstruction and repair of housing damaged in the conflict 25. Pillar 2: Improving local service delivery: through strengthened local governance and financing and through community driven development (CDD) interventions in respect of public infrastructure (the public goods side of service delivery). Activities under this pillar would: Increase the capacity and accountability of local (district and union) governments in managing resources and delivering services. Deliver basic infrastructure and service to low income communities by providing financing through community organizations. 26. Pillar 3: Improving provincial governance and service delivery through line departments such as provincial health and education departments. Recognizing that weakness in service delivery has contributed to poor human development outcomes and greater social inequity, the MDTF would seek to expand financing for and improve governance of local services. Activities would include: Strengthen the coverage, quality and governance of the education system through support for measures to: (a) improve enrolment and learning outcomes (b) strengthen the operation of schools and (c) promote better monitoring and evaluation. Strengthen the quality of primary and secondary health care services, and to strengthen stewardship of the health system. Improve key aspects of the social protection system, such as its coverage, targeting efficiency and costeffectiveness. Strengthening justice and rule of law. Strengthening civil administration. 27. Pillar 4: Supporting livelihoods, particularly for the internally displaced, through community credit and microfinance schemes, skills development interventions, and transitional workfare programs. Support for re-establishment of livestock lost as a result of conflict. Provision of agricultural inputs including fertilizer and seeds for wheat and vegetables and land preparation support to restore production. Targeted micro-credit lending to low income communities. 7

8 Livelihoods support including skills development and business development training to increase demand for new business investment among poor rural households. Provision of cash grants targeted at population living either in the conflict-affected areas or those who have been displaced by the conflict and meet objective poverty and vulnerability criteria. 28. Pillar 5: Capacity building and institutional strengthening. To meet the challenge of post crisis reconstruction, the capacity of government ministries and agencies of the Government of NWFP and the FATA Secretariat will be strengthened. This pillar includes activities such as: Support Government to review and revise, where appropriate, policies to consolidate peace and reduce the potential for future conflict by addressing the underlying causes of the conflict. This would include developing governance reforms for FATA. Strengthen capacity: of key government ministries and agencies to take forward post crisis reconstruction. NWFP s Provincial Reconstruction, Rehabilitation and Settlement Authority (PaRRSA) and the FATA Disaster Management Authority will be strengthened down to the district and agency levels respectively. C. Operational Security Considerations 29. The security situation in the northwest region remains fluid, varying across regions and over time. The rapid success military operations in the Swat Valley has created hope that the Government s approach may succeed in creating stability, but it is also clear that ongoing operations in FATA represent a bigger challenge and military action will continue for some time. While continued progress and steadily improving security is expected, this cannot be assured, setbacks are a possibility. In this context, operation of the MDTF will have to balance security-related constraints on operations with the need to move quickly to strengthen the legitimacy and credibility of the state in order to provide a more solid basis for political stability, security, and an enabling environment for business and civic activities. 30. While the MDTF is not expected to finance law enforcement and military activities (leaving this to Government and bilateral donors), security risks and the costs of doing business in security affected areas will have an impact on where activities are financed as well as their cost. In general, MDTF activities will be implemented once a permissive security environment has been established. This may entail rolling out activities sequentially as conditions permit. Nevertheless, operating in the region will entail increased security risks. Normal Bank supervision processes and standards will have to be tailored to this environment. MDTF financed activities will include a strategy for working in higher risk areas that will emphasize working through local partners and may include use of supervision consultants, monitoring agents, and security consultants to mitigate supervision and security risks. Allocation of MDTF resources would be adjusted to reflect such expenses, if necessary. D. Closing Date 31. Operation of the Trust Fund would close five years after effectiveness of the first project or June 30, 2015, whichever comes first. It is expected that the Contribution funds will be fully disbursed by December 31, The closing date could be extended by the World Bank Vice President for South Asia for up to 3 years, following a thorough review of the fund operations and in consultation with donors. V. MDTF FINANCING AND GOVERNANCE Expected Funding 32. The size of the MDTF would depend on the level of contributions and, over time, on the performance of the fund in terms of timely development of projects and the development effectiveness of the projects. No 8

9 forecast is made at this time; however, initial indications suggest a first round of funding commitments on the order of $150 million. Additional financing would be expected in the future, provided the MDTF performs well. Subsequent discussion in the program document is based on this first round funding estimate. 33. Approximately 93% of the MDTF will be executed by the Governments of Pakistan, NWFP, and Balochistan (also referred to as recipient executed). 9 These Governments may, if so agreed with the Administrator, use non-government entities, including UN agencies, to implement activities. In cases where UN agencies serve as implementing agencies, the Administrator would be entitled to rely on the Fiduciary Principles Accord. The Governance structure to manage the execution of those funds is described below. 34. Approximately 7% of the MDTF will be executed by the World Bank (BETF). This will cover: The costs of the Secretariat, Program Management and Administration. The cost of project/proposal preparation, appraisal and supervision 10; as well as. Analytical work and capacity building activities. Charges by the Bank representing administrative costs for its role as trustee of the trust fund, estimated at approximately US$ 1.2 million. A. Trust Fund Governance 35. The working of the proposed MDTF shall be governed by: (a) Administration Agreements between the Bank and donors; and, (b) Grant Agreements between the Bank and grant recipients. The Bank will administer the MDTF in accordance with fiduciary terms agreed with the trust fund donors. Activities financed from the TF will be administered under the Operational Policies and Procedures that apply to IBRD and IDA financing, including the Bank s framework regarding governance and anti-corruption. 36. The governance arrangements proposed for the MDTF will consist of three tiers: (i). (ii). (iii). A Trust Fund Steering Committee (TFSC) consisting of members of a Management Committee (MC) and contributing donors responsible for strategic direction; A Management Committee responsible for reviewing progress and approval of projects for consideration by the Administrator; An Administrator responsible for the day to day management of the MDTF including appraisal, implementation review, and monitoring and reporting on all performance aspects of fund-financed activities and supporting the Steering and Management Committees. Trust Fund Steering Committee 37. The Trust Fund Steering Committee (TFSC) would consist of members of the MC and contributing donors. The TFSC would serve as a Strategic Forum for discussion of MDTF policies, outcomes and programming of MDTF resources. The TFSC would meet on a semi-annual basis and would: 1) provide advisory guidance on program strategic goals, grant criteria and other high-level issues; 2) review and endorse the results matrix for the MDTF and the achievement of results envisaged for the MDTF; 3) provide advocacy support, and, 4) review and make recommendations regarding the overall allocation of fund resources across fund pillars. The donors will receive semi-annual reports on the performance of the MDTF. In addition there would be an annual meeting of all contributing donors joined by the Government of Pakistan and provincial governments, at which the previous year s performance and overall priorities and strategic directions would be 9 The terms Government of Pakistan and Government of NWFP are intended to include constituent ministries and agencies such as the FATA Secretariat and PaRRSA. 10 MDTF funds will exclusively be used to finance the preparation, appraisal and supervision of projects funded by the MDTF. 9

10 discussed. The TFSC would seek to operate on consensus, but would also have voting procedures that would accord weight in proportion to the size of donor contribution. 11 Management Committee 38. The primary responsibilities of the Management Committee would be to: 1) review and approve the MDTF s work program and budget allocations; 2) review and approve initiating grant requests submitted by a Government, Government ministry or agency; 3) review and endorse the reports prepared by the MDTF Administrator for submission to the TFSC as well as for public dissemination. Experience of Bankadministered multi-donor trust funds points to the need to ensure the efficiency of decision-making by keeping the composition of a resource allocation body like the Management Committee to a lean and meaningful number. Therefore the membership of the Management Committee is proposed to consist of: representatives of the International Financial Institutions (The World Bank, Asian Development Bank, and Islamic Development Bank) and the United Nations Development Program (UNDP), the Federal Government and Government of NWFP. 39. Conflict of Interest. In order to avoid any perceptions of conflict of interest, Management Committee members who would benefit as executing agencies or as co-financiers from specific proposals for funding would recuse themselves from Management Committee decisions on those proposals. Each member of the Management Committee would participate in the Management Committee on its own behalf and in a technical capacity, and not on behalf of any other entity or entities. The World Bank as Administrator and Trustee 40. The World Bank as the Administrator of the MDTF would be responsible for appraisal, implementation review, and monitoring and reporting on all performance aspects of fund-financed activities. The Administrator would ensure that funds are disbursed in accordance with the grant and administration agreements. The Administrator would have the ability to deny funding to any activity where in its view significant doubts arise as to whether the funds concerned will be effectively utilized for the agreed purpose. The key responsibilities of the Administrator will include: Handling the MDTF day-to-day operations, including coordination among development partners, maintaining records of the Management Committee s business, including meeting minutes and decisions. Arranging Steering Committee and Management Committee meetings; handling the correspondence and minutes of meeting of the TFSC and Management Committee. Providing guidance and clarification to project applicants and grant recipients on the MDTF policy and processes. Coordinating with the appropriate staff of the Administrator and/or consultants for project-specific activities such as analysis, appraisal, supervision, etc. Preparing semi-annual reports and submitting them to the Management Committee and Steering Committee. Ensuring effective communication and external relations. This includes the dissemination of information, recommendations and requests from the Management Committee, the Governments of NWFP and Pakistan and other authorities concerning sectoral programs and project requirements. 11 In the absence of consensus, decisions would be taken on the basis of a vote where the votes of each donor would be weighted on the basis of contributions disbursed into the MDTF on the day of the vote. 10

11 B. Financial Flows From Donors to the MDTF 41. Donors are encouraged to contribute to the MDTF. All contributions and, correspondingly, all payments out of the MDTF will be on a grant basis. Given the economics of managing the MDTF, there would be a minimum level of total contributions for the fund to be declared effective. 12 Contributions to the MDTF may be made at any time of the year. Donors would not be able to earmark or establish preferences for financing of specific investments, sectors or geographic areas. From MDTF to the Projects/Programs 42. All proposals for activities that are to receive the MDTF funding would come from the federal and provincial governments which may designate a counterpart ministry or agency to carry out this function. The proposals would then be screened and approved for further processing by the Management Committee on the basis of consistency with the overall goals and strategic priorities of the MDTF. The project would be approved by the MDTF Administrator based on the results of project appraisal. Once approved, a responsible Bank TTL would be responsible for implementation support using the policy and procedures applicable to World Bank projects (for recipient executed activities) and the Bank Administrative Manual (for Bank executed activities). On the approval of a particular project or activity, the Finance Department will open a designated account for the particular project or program and disbursements would be made by the MDTF administrator directly to the designated account. The World Bank will be responsible for all disbursements under the trust fund, in conformity with its own procedures and with the same diligence, and in conformity with the decisions of the Management Committee and the broad priorities established in consultation with the Trust Fund Steering Committee. Where grants are executed by UN agencies, financial management arrangements can be governed by the Fiduciary Principles Accord (FPA) signed under the Financial Management Framework Arrangement (FMFA) to which the concerned UN agency is a signatory. FPA provides assurance that the concerned UN agency has a sound fiduciary, accountability and oversight framework. UN agency s financial management system is used in such cases. VI. OPERATION OF THE PROPOSED MDTF A. General Principles 43. The Management Framework for World Bank-Administered Trust Funds approved by the Board on October 30, 2007, establishes the principles governing World Bank Management of Trust Funds. As trustee, the Bank exercises internal controls in the governance of trust funds. Trust Fund policy, risk assessment, and governance structure are overseen by the Bank s Board of Governors and Executive Directors, Audit, Budget, and Finance Committees, and the Committee on Development Effectiveness. Upon receipt of donor contributions to a trust fund, as scheduled in the Administration Agreement, the Bank converts the funds into a holding currency. Allocation of funds/grant awards will be made to projects or activities that are approved by the trust fund governance body, in accordance with the objectives and criteria for the trust fund, defined in the Administration Agreement between the Bank and the donor(s). 44. As Trustee, the World Bank will appoint a Program Manager and Secretariat to oversee key aspects of the MDTF. When operational, the team and the Secretariat will work with individual Task Team Leaders (TTLs) for each individual grant approved under the MDTF program. TTLs make use of World Bank fiduciary staff resources during the design, negotiation, and implementation of the grant activities. TTLs ensure that all activities financed under the TF are aligned with the objectives of the MDTF, that expenses incurred are eligible, and that due diligence with respect to economy and efficiency was performed. The team in Washington 12 The minimum level for total contributions is tentatively set at US$100 million. 11

12 will work in a close but complementary manner to the Secretariat which has the day to day Administration responsibilities. The Secretariat will operate from the Bank s Country Office in Islamabad, or in another location the Management Committee and Trustee may decide. 45. All activities financed through the NWF MDTF would be governed by Bank Policies (OP) and Procedures (BP), in particular, OP/BP 14.40, AMS 15, and LOA disbursement procedures. In addition, all operations prepared under the MDTF would be processed under OP 8.0 (Rapid Response to Crises and Emergencies) to enable rapid processing. B. Accountability for Use of Funds 46. The Bank, as Trustee, maintains accurate accounting records by Activity and Expenditure Category, as well as Allocations agreed with the donors by theme, sector, or other objective, and by recipient grant. For each recipient-executed project, or Bank-executed activity, a unique Trust Fund account is created Disbursing or Child Account with a designated Task Team Leader. Disbursing accounts are approved under a Window or Sub-Account, to facilitate reporting and accountability by purposes as agreed with the donors. To ensure alignment of grant funds with Bank objectives and transparency and accountability, an Activity Definition Code (P012345) is created for each Bank-executed Activity or recipient grant by the designated TTL and approved by the line manager in SAP. This includes a description of the work/project and a timetable for review and delivery. Funds may be posted only to approved Activity codes linked to the TF, or to approved expenses such as training, printing, operating materials, other, as defined in the table of Expense Restrictions (Bank executed activities) or Disbursement Categories (recipient executed projects). C. Categories of Activities and Expenditures to be Financed 47. Contributions will be used for the Bank-executed and Recipient-executed activities and for categories of expenditure described below. Contributions, after deduction of the Central Unit Administration Costs of approximately 0.75% will be allocated as follows: (i) 6% to finance Bank-executed activities (including program management costs and costs related to project preparation, appraisal and supervision); and (ii) 94% to finance Recipient-executed activities. The allocation between Bank-executed and Recipient-executed activities will be revised as needed on recommendations from Administrator with the written concurrence of Management Committee. 48. Eligible Expenditure Categories. The following are the eligible expenditure categories for Bankexecuted activities, (mainly technical and advisory services, knowledge dissemination, program administration, and project preparation, appraisal and supervision): (i) associate overheads; (ii) consultant fees; (iii) contractual services; (iv) equipment costs lease; (v) equipment costs purchase; (vi) extended term consultants; (vii) media and workshop costs; (viii) staff costs; (ix) temporary support staff costs; and (x) travel expenses. The Bank may reallocate among these categories to meet insufficient funds when they are deemed not necessary to meet other expenditures. For recipient-executed activities the eligible expenditure categories would be: (i) goods (and works); (ii) consultants' services; (iii) recurrent costs; (iv) conditional cash transfers; (v) sub-grants (both in cash and/or in kind); (vi) training and workshops; (vii) incremental operating costs; (viii) interest during construction; (ix) resettlement compensation (including land purchase); and (x) taxes and duties associated with any of the foregoing expenditures. 49. Accounting and Financial Reporting. The Bank will maintain separate records and ledger accounts in respect of the Contribution funds deposited in the trust fund account and disbursements made there from. The Secretariat will review on a monthly basis the status of disbursements and commitments under each TF account, and produce a summary The Bank will furnish to the Donor current financial information relating to receipts, disbursements and fund balance in United States Dollars with respect to the Contribution funds via the Bank's Client Connections secure website. Within six (6) months after all commitments and liabilities under this trust fund have been satisfied and the trust fund has been closed, the final financial information relating to receipts, 12

13 disbursements and fund balance in United States Dollars with respect to the Contribution funds will be made available to the Donor via the Bank's Client Connections secure website. 50. The Bank will provide to the Donor within six (6) months following the end of each Bank fiscal year the annual single audit report, comprising (a) a management assertion over internal controls surrounding the preparation of trust fund financial reports together with an attestation from the Bank's external auditors concerning the adequacy of internal control over cash-based financial reporting for trust funds as a whole, and (b) a combined financial statement for all cash-based trust funds together with the external auditor's opinion thereon. The cost of the single audit will be borne by the Bank. 51. If the Donor wishes to request, on an exceptional basis, a financial statement audit by the Bank's external auditors of the trust fund established under this Arrangement, the Donor and the Bank will first consult as to whether such an external audit is necessary. The Bank and the Donor(s) will decide on the most appropriate scope and provisions of reference of such audit. Following concurrence on the scope and provisions of reference, the Bank will arrange for such external audit. The costs of any such audit, including the internal costs of the Bank with respect to such audit, will be paid by the Donor. 52. Account Earned Income. Earned investment income is credited into the parent account, to be used for the agreed purposes of the NWF MDTF. 53. Employment of Consultants, Procurement of Goods and Others. The employment and supervision of consultants and the procurement of goods financed by the Contribution for the Bank-executed activities will be the responsibility solely of the Bank and will be carried out in accordance with its applicable policies and procedures. The Grant Agreements will provide that the Contribution will be used by the Recipients to finance expenditures for consulting, goods and civil works, as the case may be, in accordance with the World Bank's Guidelines on "Procurement under IBRD Loans and IDA Credits" and the World Bank's Guidelines on the "Selection and Employment of Consultants by World Bank Borrowers," in effect on the date of the Grant Agreements. 54. Administrative Fee and Cost Recovery. In order to assist in the defrayment of the costs of administration and other expenses incurred by IDA in managing the MDTF, the Bank may, following deposit of the Contribution by the donors, deduct from the total Contribution of the donors and retain for IDA s own account an amount equal to approximately three fourths of one percent (0.75%) of total contributions. In addition, program administration and management costs, secretariat costs, and costs related to project activities (including appraisal and supervision) will be charged to the Trust Fund based on actual costs; these costs would be subject to review based on actual experience and as other donors provide additional contributions to the MDTF. D. Environmental and Social Impacts 55. Recognizing the emergency nature of reconstruction and recovery operations to be financed by the MDTF while at the same time ensuring due diligence in managing potential environmental and social risks, an umbrella Environment and Social Management Framework will be prepared. Its purpose will be to assist executing entities in screening activities for likely social and environmental impacts, identifying documentation and preparation requirements, prioritizing activities, and for activities triggering safeguard policies preparation of necessary mitigation plans. E. Project Cycle 56. An indicative project processing cycle from proposal submission to approval and subsequent reporting, is presented in Annex-A. 13