Distribution: Restricted EB 2005/86/R.24/Rev.1 13 December 2005 Original: English Agenda Item 9(c)(iii) English

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1 Distribution: Restricted EB 2005/86/R.24/Rev.1 13 December 2005 Originl: English Agend Item 9(c)(iii) English IFAD Executive Bord Eighty-Sixth Session Rome, December 2005 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE BOARD ON A PROPOSED LOAN TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR THE MICROFINANCE INNOVATION AND OUTREACH PROGRAMME Due to resource constrints nd environmentl concerns, IFAD documents re produced in limited quntities. Delegtes re kindly requested to bring their documents to meetings nd to limit requests for dditionl copies.

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3 TABLE OF CONTENTS CURRENCY EQUIVALENTS WEIGHTS AND MEASURES ABBREVIATIONS AND ACRONYMS MAP OF THE PROGRAMME AREA LOAN SUMMARY PROGRAMME BRIEF iii iii iii iv v vi PART I THE ECONOMY, SECTORAL CONTEXT AND IFAD STRATEGY 1 A. The Economy nd the Microfinnce Sector 1 B. Lessons Lerned from Previous IFAD Experience 1 C. IFAD s Strtegy for Collbortion with Pkistn 2 PART II THE PROGRAMME 3 A. Progrmme Are nd Trget Group 3 B. Objectives nd Scope 4 C. Components 4 D. Costs nd Finncing 7 E. Procurement, Disbursement, Accounts nd Audit 8 F. Orgniztion nd Mngement 8 G. Economic Justifiction 9 H. Risks 9 I. Environmentl Impct 10 J. Innovtive Fetures 10 PART III LEGAL INSTRUMENTS AND AUTHORITY 10 PART IV RECOMMENDATION 11 ANNEX SUMMARY OF IMPORTANT SUPPLEMENTARY ASSURANCES INCLUDED IN THE NEGOTIATED LOAN AGREEMENT 13 i

4 APPENDIXES I. COUNTRY DATA 1 II. PREVIOUS IFAD FINANCING IN PAKISTAN 2 III. LOGICAL FRAMEWORK 3 IV. COST AND FINANCING 7 V. IMPLEMENTATION ARRANGEMENTS AND RESPONSIBILITIES 9 VI. ORGANIZATIONAL CHART 13 VII. FINANCIAL AND ECONOMIC ANALYSIS 14 ii

5 CURRENCY EQUIVALENTS Currency unit = Pkistn rupee (PKR) USD 1.00 = PKR 60 PKR 1.00 = USD WEIGHTS AND MEASURES 1 kilogrm (kg) = pounds (lb) kg = 1 metric tonne (t) 1 kilometre (km) = 0.62 miles (mi) 1 metre (m) = 1.09 yrds (yd) 1 squre metre (m 2 ) = squre feet ft 2 1 cre (c) = hectre (h) 1 h = 2.47 c ABBREVIATIONS AND ACRONYMS COSOP I&O LPO MFI MI&OP MIS PKR PO PPAF PRSP RIMS YPO country strtegic opportunities pper innovtion nd outrech linkge prtner orgniztion microfinnce institution Microfinnce Innovtion nd Outrech Progrmme mngement informtion system Pkistn rupee prtner orgniztion Pkistn Poverty Allevition Fund Poverty Reduction Strtegy Pper Results nd Impct Mngement System young prtner orgniztion GOVERNMENT OF THE ISLAMIC REPUBLIC OF PAKISTAN Fiscl Yer 1 July 30 June iii

6 MAP OF THE PROGRAMME AREA iv

7 ISLAMIC REPUBLIC OF PAKISTAN MICROFINANCE INNOVATION AND OUTREACH PROGRAMME LOAN SUMMARY INITIATING INSTITUTION: BORROWER: EXECUTING AGENCY: TOTAL PROGRAMME COST: AMOUNT OF IFAD LOAN: TERMS OF IFAD LOAN: COFINANCIERS: AMOUNT OF COFINANCING: CONTRIBUTION OF BORROWER: APPRAISING INSTITUTION: COOPERATING INSTITUTION: IFAD Islmic Republic of Pkistn Pkistn Poverty Allevition Fund, government-creted pex funding gency operting through NGO prtner orgniztions USD 30.5 million SDR 18.3 million (equivlent to pproximtely USD 26.5 million) 40 yers, including grce period of ten yers, with service chrge of three fourths of one per cent (0.75%) per nnum Prtner orgniztions USD 3.3 million USD (Pkistn Poverty Allevition Fund contribution) IFAD World Bnk v

8 PROGRAMME BRIEF Who re the progrmme beneficiries? While the progrmme re comprises ll rurl res of the country, there is prticulr focus on those communities tht re currently underserved in terms of microfinnce. The overll focus of the progrmme, nd of the Pkistn Poverty Allevition Fund (PPAF) with which it will work, is on the poor. The mndte of the PPAF is to help the poor, lndless nd ssetless to enble them to gin ccess to resources for their productive self-employment, to encourge them to undertke ctivities of income genertion nd poverty llevition nd in order to enhnce their qulity of life. The progrmme s beneficiries re rurl poor households, which cn be clssified into three groups: (i) smll frmers, livestock owners, trders nd microentrepreneurs; (ii) women nd women-heded households; nd (iii) rurl poor households living below the poverty line. Why re they poor? The first group tend to hve lrge fmilies, low levels of litercy, poor ccess to helth cre, schooling, clen wter nd snittion, limited ccess to finncil services, nd re often disdvntged in mrketing surpluses. As coping strtegies, they resort to reducing consumption; borrowing from the lndlord, moneylender nd shopkeeper; seeking wge lbour; selling livestock; nd liquidting other ssets. The second trget group, women nd women-heded households, re much more vulnerble to poverty thn men, due to inter li: low indictors of socio-economic development, culturl brriers nd norms, restricted entry to lbour mrkets, low mobility, limited resource ownership nd mrginliztion. The third group rurl households living below the poverty line (USD 87 per yer for n verge household) represents bout one third of the rurl popultion nd hs been incresing. Few of these households own lnd or hve secure ccess to lnd nd mny depend on smllstock for their livelihood. How will the progrmme benefit the trget group? The progrmme responds to these livelihood constrints through the provision of broder rnge of microfinnce services, focused on rurl poor households. It will encourge existing microfinnce opertors, which re or potentilly could be prtner orgniztions (POs) of PPAF, to explore wys of further extending their outrech to households nd communities tht to dte hve been difficult to rech for resons of remoteness, culturl/religious brriers to trditionl credit, gender bis nd/or inpproprite delivery systems. To do this, the progrmme will support the development nd testing of microfinnce products such s livestock insurnce, lesing rrngements, equity prtnerships, nd Islmic modes of finncing (which re bsed on profit-shring rther thn being interest-bsed), nd other new finncing systems tht reduce debt burden, minimize risk, promote sset cretion nd fcilitte income-genertion. As prt of this process, the progrmme will emphsize the development of pproches nd products prticulrly keyed to women s needs nd the constrints they fce. How will they prticipte in the progrmme? The min body of progrmme funding is in the innovtion nd outrech fcility, flexible funding mechnism to permit the POs to implement pilot projects to test nd develop new microfinnce products nd pproches, nd therefter to finnce their scling up. The innovtion nd outrech projects will be developed by the POs jointly with their member community orgniztions nd prticipting rurl households. These households will become the recipients of the newly developed microfinnce products. For those products tht hve been successfully piloted nd developed, n incresed number of households will be ble to ccess the new products/services. As the products/services will be trgeted t poorer communities, nd prticulrly the women nd women-heded households within them, these communities will experience mrked improvement in their livelihoods. It is estimted tht some poor households will benefit directly from the progrmme over its five-yer implementtion period. With the uptke of successfully piloted products/services through PPAF s minstrem funding (currently bout USD 264 million is llocted for credit nd enterprise development), the future number of indirect beneficiries of the IFAD-finnced progrmme could be substntil. vi

9 REPORT AND RECOMMENDATION OF THE PRESIDENT OF IFAD TO THE EXECUTIVE BOARD ON A PROPOSED LOAN TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR THE MICROFINANCE INNOVATION AND OUTREACH PROGRAMME I submit the following report nd recommendtion on proposed lon to the Islmic Republic of Pkistn for SDR 18.3 million (equivlent to pproximtely USD 26.5 million) on highly concessionl terms to help finnce the Microfinnce Innovtion nd Outrech Progrmme. The lon will hve term of 40 yers, including grce period of ten yers, with service chrge of three fourths of one per cent (0.75%) per nnum. It will be dministered by the World Bnk s IFAD s cooperting institution. PART I THE ECONOMY, SECTORAL CONTEXT AND IFAD STRATEGY 1 A. The Economy nd the Microfinnce Sector 1. Pkistn hs popultion of 159 million (July 2004) with the mjority of people living in the irrigted Indus River plin in Punjb nd Sindh. Sixty-eight per cent of the popultion re rurl. North West Frontier Province nd Blochistn, which ccount for bout 20% of the popultion, re culturlly very diverse nd mong the poorest res. However, the rurl res of Sindh nd southern districts in Punjb re lso extremely poor. In spite of tripling in per cpit incomes over the pst 50 yers, Pkistn s humn development lgs behind tht of countries with similr income levels. About one third of the totl popultion lives below the poverty line but, s the Poverty Reduction Strtegy Pper (PRSP) notes, further 20% re clssified s trnsitory vulnerble. Nevertheless, the economy hs been performing reltively well nd hs mde strong recovery since the economic crisis of the lte 1990s. Sound mcroeconomic policies nd structurl reforms hve resulted in stronger export nd current ccount position, lower debt burden, ccess to interntionl cpitl mrkets nd revivl in growth. The microfinnce sector in Pkistn is still smll but, with the incresing focus on microfinnce s n instrument of poverty reduction in Pkistn, it hs been growing rpidly. The vilbility of donor funding nd the promulgtion of legl frmework for the microfinnce sector hve been key fctors. The estblishment of the Pkistn Poverty Allevition Fund (PPAF) nd the Khushhli Bnk, the emergence of n ctive second tier of microfinnce institutions nd the vilbility of lrge mount of donor funding hve been importnt elements. However, despite this growth, only very smll portion of the demnd for microfinnce is currently being met. B. Lessons Lerned from Previous IFAD Experience 2. The lessons lerned from IFAD s experience in Pkistn, mny of which re lso highlighted in the Independent Externl Evlution of IFAD, include: (i) the need for more focus on sustinbility; (ii) lck of emphsis on innovtion; (iii) limited line gency cpcity, lck of stff motivtion nd overly bureucrtic procedures; nd (iv) overly complex designs in reltion to project implementtion cpcity. A number of lessons pertinent to the design of the IFAD progrmme evolved from the implementtion of the first project supporting the PPAF, finnced by the World Bnk: (i) cpcity-building nd development of pro-poor institutions re criticl for poverty reduction; 1 See Appendix I for dditionl informtion. 1

10 (ii) progrmme interventions should be demnd-driven; (iii) utonomy nd freedom from politicl pressures re criticl for effective functioning; (iv) the orgniztion is only s good s the qulity of its stff; (v) decentrliztion enbles orgniztions to respond rpidly nd successfully to community demnds; nd (vi) simple processes fcilitte complince. The design of the current progrmme builds on the forementioned lessons from IFAD s interventions nd lso reflects the World Bnk s findings. C. IFAD s Strtegy for Collbortion with Pkistn 3. Pkistn s policy for poverty erdiction. The Government s policies recognize tht the incidence of poverty nd the vulnerbility of the poor will not be reduced without sustined, brodbsed economic growth. The Government lso recognizes tht growth cn only be generted nd sustined by the privte sector. The response is supportive investment climte nd policy frmework tht provides mple room for privte firms, smll nd lrge, to invest nd crete jobs in griculture, industry nd services. The PRSP, entitled Accelerting Economic Growth nd Reducing Poverty: The Rod Ahed, is key instrument in spelling out this policy. It is built round four pillrs: (i) ccelerted nd brod-bsed economic growth while mintining mcroeconomic stbility; (ii) improving governnce nd consolidting devolution; (iii) investing in humn cpitl; nd (iv) trgeting the poor nd the vulnerble with emphsis on socil inclusion. Within this frmework, there is incresing focus on microfinnce s n instrument of poverty reduction in Pkistn, s reflected in the new Microfinnce Ordinnce tht emphsizes trgeting the poor nd encourges the entry of new plyers. Furthermore, the effort mde in creting sound legl nd regultory frmework for the finnce nd bnking sector hs resulted in conducive environment for development of the sector nd prticulrly for growth in microfinnce. 4. The microfinnce ctivities of the mjor donors. Two of the lrgest poverty reduction progrmmes with microfinnce focus re: (i) the World Bnk-finnced Second Pkistn Poverty Allevition Fund (PPAF-II); nd (ii) the Microfinnce Sector Development Progrmme (MSDP) finnced by the Asin Development Bnk. The PPAF-II provides the min body of finnce for the PPAF nd ws instrumentl in its estblishment. Funding totls USD 238 million, of which USD 158 is for microcredit. The MSDP hs s its key objective poverty reduction by developing the microfinnce sector to efficiently provide finncil nd socil services to the poor. It hs two components: policy lon to support reform progrmme for the microfinnce sector; nd project lon of USD 80 million to provide microfinnce services to the poor through the Khushhli Bnk. Other importnt donor inititives include: the Europen Union s progrmme for Finncil Services Sector Reform to help develop new locl microfinnce institutions (MFIs) through prtnership with the Orngi Chritble Trust nd, recently, new progrmme to develop young microfinnce NGOs. The Kshf Foundtion ( PPAF prtner orgniztion) nd the Pkistn Microfinnce Network hve been supported by the Deprtment for Interntionl Development of the United Kingdom of Gret Britin nd Northern Irelnd. The United Sttes Agency for Interntionl Development nd the United Sttes Deprtment of Agriculture re supporting the PPAF through its ssistnce for drought mitigtion schemes in Blochistn nd funding of the PPAF s Enterprise Development fcility. The Swiss Agency for Development nd Coopertion hs responded to the needs of the finnce sector by providing support through its Finncil Sector Strengthening Project to promote innovtive inititives in microfinnce nd ssistnce to the Stte Bnk of Pkistn to develop microfinnce legisltion. 5. IFAD s strtegy in Pkistn. IFAD s strtegy for the development of its lending portfolio in Pkistn is evolving. The current country strtegic opportunities pper (COSOP), which ws presented to the Executive Bord in December 2003, provides the frmework for the most recent progrmme in the country nd for the proposed progrmme. The six projects/progrmmes currently under implementtion in Pkistn, including the most recent Community Development Progrmme emerging from the current COSOP, re ll re development projects/progrmmes, trgeted t poor districts of the country. The proposed Microfinnce Innovtion nd Outrech Progrmme (MI&OP) is fully in line with the COSOP. It responds directly to the COSOP s three strtegic objectives: (i) strengthening the cpcity of the rurl poor nd their orgniztions; (ii) improving equitble ccess 2

11 to productive nturl resources nd technology; nd (iii) incresing ccess to finncil services nd mrkets. It lso responds to the rel chllenge in Pkistn, s identified in the COSOP, to secure necessry locl support for implementtion of poverty-reduction strtegies nd progrmmes, prticulrly those incorporting gender-minstreming elements. The progrmme dels explicitly with three of the COSOP s thrusts: (i) griculturl nd rurl development; (ii) women s empowerment; nd (iii) ccess to resources. Within the COSOP, the importnce of credit in ddressing poverty nd in improving the livelihoods of the rurl poor is highlighted. 6. Progrmme rtionle. The rtionle for progrmme design is bsed on number of fctors. First, while the PPAF s microfinnce opertions hve grown rpidly, s hve the resources t its disposl, there is substntil unmet demnd, prticulrly mong the rurl poor, both for incresed vilbility of credit nd for more diversified microfinnce services tht respond to the prticulr needs of the rurl poor. Second, lthough the PPAF hs been highly successful in building up the cpcity of its prtner orgniztions (POs) nd developing sustinble microfinnce system, the expnsion of microfinnce lending is plcing stress on the PPAF s current network of POs. There is thus need to identify nd promote new POs cpble of working effectively in the microfinnce ren, prticulrly in rurl res. Finlly, the progrmme s emphsis on enterprise development for the benefit of poor households, focusing prticulrly on livestock, will complement present PPAF opertions nd provide the PPAF with powerful tool to reduce poverty nd empower women, especilly in poorer rurl districts where livestock is the min source of household livelihood. 7. The rtionle for the progrmme is lso very closely linked to the rtionle of working with the PPAF s n orgniztion. PPAF is one of Pkistn s most successful nd effective gencies for promoting poverty erdiction nd through its current network of some 56 POs, rnging from smll locl NGOs to lrge regionl nd ntionl NGOs nd microfinnce institutions, it provides suitbly sound nd dynmic system for mnging the proposed microfinnce progrmme. The PPAF hndles its investment resources with prudence nd discipline nd produces results through rigorous monitoring nd mngement. As such, it is n idel institution for IFAD to work with nd through which to pursue IFAD s poverty erdiction mndte. PART II THE PROGRAMME A. Progrmme Are nd Trget Group 8. The progrmme will be ntionl in scope nd geogrphiclly will concentrte exclusively on rurl res nd poor communities. Criteri for defining rurl res will be specified in the opertion mnul. In terms of outrech, the progrmme will ssist the PPAF s POs in focusing on those communities tht either do not currently come within their opertionl re or do not hve dequte ccess to microfinnce services from the POs. 9. The trget group for the progrmme cn be divided into three: (i) smll frmers, livestock owners, trders nd microentrepreneurs; (ii) women nd women-heded households; nd (iii) rurl poor households living below the poverty line. Poverty in Pkistn is lrgely rurl nd intrinsiclly linked to the performnce of the griculture sector, with sset ownership being one of the principl vribles. In most rurl res, the mjority of the first group smll frmers, livestock owners, smll trders nd microentrepreneurs would be clssified s poor. They represent perhps the lrgest segment of the trget group nd the one tht is most poorly served by microfinnce institutions especilly those who live in the less ccessible districts nd subdistricts. Prticiptory processes during progrmme design indicted tht even when households nd enterprises do hve ccess to rurl finnce, the nture, terms nd conditions nd size of the lons vilble often do not mtch their needs or bility to repy. The sitution is similr with the second trget group women nd women-heded households. Very often the terms of the credit, the repyment structure, the need for them to trvel outside their communities nd even the tendency for credit officers to be mle, constrin them from 3

12 ccessing rurl finnce nd this is especilly true in trditionl rurl communities. The progrmme will focus prticulrly on this trget group nd develop specil products nd processes for women. To help fcilitte this, new stff member of the PPAF will be finnced by the progrmme: gender mnger, to stimulte gender debte, develop gender strtegies nd promote gender gend. The third trget group poor rurl households below the poverty line hve been shown to be vible recipients of microfinnce when it is mtched to their potentil constrints. The focus on innovtion nd development of new products is gered to their cpbilities nd potentil. The specil emphsis on livestock one of the min sources of livelihood for households in the trget group will lso respond to the opportunities tht could be vilble to improve their livelihoods nd increse their household ssets. B. Objectives nd Scope 10. The development gol is to reduce poverty nd improve livelihoods of rurl households. Centrl to chieving this gol nd s the overll objective, the progrmme will enble the ctive rurl poor incresingly to ccess wider rnge of sustinble finncil services nd products tht respond to their needs. The progrmme will be n integrl prt of the PPAF s most importnt opertion its credit nd enterprise development progrmme nd will through the development of new microfinnce products nd services leverge the sizeble funding lredy vilble to POs through the PPAF s regulr lending progrmme (2.5 million beneficiries to dte). The households tht re projected to benefit directly from progrmme funding represent only portion of the households tht should ultimtely benefit from the progrmme once successful products nd services re minstremed. C. Components 11. Component 1: innovtion nd outrech fcility. The objective of the component is to enble POs to develop new pproches/credit pckges nd other finncil products keyed to mrket demnd in order to, s the PPAF sttes, move from microcredit to microfinnce. This requires greter rnge of finncil products nd more dynmic pproch to provision of credit, ensuring greter responsiveness to the needs of the client nd the funding modlities of the enterprises/ctivities being finnced. 12. The component investment involves the cretion of fund totlling USD 20.8 million, composed of credit nd grnt resources, with 50/50 split between credit nd grnts. The fcility represents flexible source of funding tht could be drwn on by the PPAF s POs to fcilitte piloting, ction reserch, ssessment nd initil scling up of new microfinnce products nd pproches in rurl res of the country. 13. The fcility will be fully demnd-driven mechnism. The lloction of grnt versus credit resources will be mde on project-by-project bsis, guided by simple nd trnsprent criteri, specified in n opertions mnul. Credit will be used to fund the lending/finncing element of projects, while the grnt portion will cover the costs of setting up the project, trining/systems development nd portion of the operting nd cpitl costs. Any PO registered with the PPAF will be eligible to submit project proposl for finncing. Projects must meet eligibility criteri specified in the opertionl policies mnul. Projects must demonstrte tht they will trget exclusively poor households (s defined in the progrmme s opertions mnul), contribute to poverty reduction, be implemented in rurl res or hve strong scling up potentil for rurl res nd rech finncil self-sufficiency within the project period. 14. The fcility will comprise two finncing windows: (i) the regulr window with pilot project sublons (nd other finncil products) up to PKR (currently bout USD 1 700) per client; nd (ii) privte sector linkge window with sublons up to PKR (USD 5 000) per client. The first window is gered to individul lons nd other finncil services. The second window, 4

13 which is llocted bout 10% of the fcility s lon funds, is imed primrily t smll enterprises nd trding/mrketing opertions tht re ble to fcilitte production increses by number of linked poor households, thereby improving their economy nd tht of their communities. 15. The rnge of potentil projects tht could be finnced from the fcility is considerble. A prtner design workshop held t the beginning of progrmme formultion provided ides potentilly of interest to the POs. A number of these were nlysed, elborted, nd models produced indicting their finncil ttrctiveness, including: Islmic mode of finncing, privte niml helth services, rurl svings nd credit groups/internl lending, micro-insurnce, microlesing, socil microlending/emergency credit nd equity-bsed finncing. 16. Component 2: young prtner progrmme. The objective of the component is to strengthen emerging cpcities in the microfinnce sector in rurl res. This will be chieved by helping the PPAF develop new POs nd providing young grdutes with prcticl exposure nd experience to enhnce the vilbility of professionls for existing nd emerging POs t the middle mngement level, thereby incresing the institutions cpcity for professionl mngement nd growth. This will involve three inititives: (i) young prtner development inititive; (ii) interntionlly-linked prtner inititive; nd (iii) young professionls scheme. 17. As with the innovtion nd outrech (I&O) fcility, component investment, totlling USD 6.3 million, will involve combintion of grnt nd credit resources. The first two inititives combine grnts for institutionl development pckges tht orgniztions will ccess for trining nd mngement support with n incrementl line of credit to llow potentil POs to test their skills nd cpcity in hndling lons nd other finncil service products. The third will finnce trining nd technicl support. 18. The young prtner development inititive will enble the PPAF to work with new rurlly focused orgniztions tht hve the potentil to be serious microfinnce providers. There is rnge of orgniztions tht could qulify for prticiption in the progrmme, from smll, essentilly community-bsed orgniztions to lrger, reltively well-estblished, locl NGOs or even nscent MFIs tht currently re not formlly registered s POs with the PPAF. Ech prticipting orgniztion will work with the inititive for period of three yers, t which time the successful ones will grdute nd be ccredited s PPAF POs. Over the progrmme period, plns cll for 15 young prtner orgniztions (YPOs) to be supported under the inititive, with trget of 12 YPOs ccredited s new PPAF POs. This should result in n expnsion in the number of PPAF POs by 21% over the current level of bout The interntionl linkge prtner inititive provides n opportunity for PPAF to prtner with interntionl MFIs operting successful rurl credit progrmmes in the region, with the im of ssisting promising Pkistni professionls to set up microfinnce opertions. The interntionl linkge MFIs will bring proven system nd sound credit mngement experience to the prtnership. The PPAF will contribute knowledge of the locl microfinnce mrket, ccess to line of credit, nd its bility to ttrct dynmic, young Pkistni people with the bility to set up new microfinnce institutions. The inititive will comprise: n intense nine-month exposure nd trining progrmme, followed by estblishment of new MFIs s PPAF linkge prtner orgniztions (LPOs), nd provision of the line of credit. It would comprise two phses: the first in yer 1 nd second one fter the midterm review in yer 3. Ech phse will be mnged by the PPAF nd n interntionl MFI nd provide for the induction of ten interntionl progrmme professionls, with trget of two new MFIs being estblished t the end of ech nine-month trining period four new prtner MFIs in totl. 20. The young professionls scheme will support the PPAF s current internship progrmme for young professionls wishing to work in POs. It focuses on motivted young people coming from poor rurl fmilies with solid eductionl bckground. It will be reltively smll nd low-cost intervention but one tht will work towrds the progrmme s min objectives: to build up cpcity to 5

14 provide sound finncil services to rurl clients. The scheme will comprise trining over period of four months, followed for successful grdutes by n dditionl eight-month ttchment to PO. Over the progrmme, the PPAF will trin bout 96 young professionls. 21. Component 3: support for prtner orgniztions. The objective is to strengthen POs bility to sustinbly extend their outrech nd expnd the scope of current microfinnce opertions in rurl res. The component investment, totlling USD 1.3 million, will involve the finncing of technicl ssistnce, studies, trining nd workshops in support of cross-cutting themes nd key res of focus. 22. Support under the component is focused on six subjects tht re key to the successful implementtion of the progrmme nd the I&O fcility, nd to development of vible microfinnce institutions. This will be demnd-driven fcility vilble to POs, with cceptnce of proposls bsed on n greed nd published set of criteri, s specified in the I&O Opertions Mnul. The six specil subjects, or specil res of focus, include the following: (i) cross-cutting themes of poverty reduction nd gender blncing; (ii) ssistnce to fcilitte livestock enterprise finncing, the finncil sustinbility of POs microfinnce opertions nd doption of risk mngement strtegies; nd (iii) ssistnce for POs development/preprtion of I&O projects. To help the POs work with the progrmme s cross-cutting themes nd specil res of focus, PPAF will mke vilble funding for trining sessions, studies nd technicl support in order to: (i) help POs better understnd nd ctivte the themes within their orgniztionl/mngement structure nd design or djust I&O projects so tht they re responsive to the themes; nd (ii) fcilitte POs development of proposls nd their prticiption in the I&O fcility prior to submission of projects to the PPAF. 23. Component 4: mngement support. The objective of the component is to increse PPAF s cpcity to develop innovtive microfinnce products nd pproches nd to expnd their microfinnce opertions in rurl res. The component investment, totlling USD 1.7 million, comprises funding for vehicles nd equipment, studies nd technicl support, trining nd exchnge visits, nd workshops plus funding the slries nd llownces for six new stff positions in the PPAF. 24. As such, the progrmme will provide the incrementl mngement resources necessry to enble the PPAF to tke on the dded mngement lod nd responsibilities resulting from the ctivities funded under the progrmme. Rther thn creting progrmme mngement unit nd progrmme coordintor position, the progrmme will be mnged within the PPAF s present mngement structure with the Chief Operting Officer hving the dy-to-dy responsibility. To enble the key units in PPAF to hndle the incresed worklod resulting from the progrmme, the equivlent of six new mngement executive positions will be funded. While most of these officers time will be spent on progrmme ctivities, they will perform other PPAF ctivities s nd when required. In ddition, the progrmme will crete new position of gender mnger, thus estblishing gender focl point in PPAF. 25. In ddition to funding these positions, the component will provide supplementry resources for the PPAF to enble the institution to fund supporting opertions for the progrmme, including inter li: (i) promoting nd fcilitting strt-up for the I&O fcility nd for the young prtner progrmme; (ii) crrying out themtic reserch, bseline surveys, impct ssessment, Results nd Impct Mngement System (RIMS) nchor indictor surveys nd mid-term nd completion reviews; (iii) orgnizing I&O/PO coordintion/lessons lerned workshops; (iv) developing regionl linkges nd exchnge progrmmes with other MFIs; (v) developing gender strtegy nd opertionl mens to promote women in microfinnce ctivities nd in the PPAF nd POs; nd (vi) fcilitting policy response work to drw out constrints nd opportunities regrding microfinnce legisltion nd policy. 6

15 D. Costs nd Finncing 26. Progrmme costs re estimted t USD 30.5 million, with bse cost of USD 30.2 million. Physicl nd price contingencies nd foreign exchnge content re smll, ech less thn 1% of the bse costs. By fr the lrgest portion of the progrmme costs is llocted to finncing the I&O fcility bout 70% of totl resources. The second mjor element of progrmme costs is the young prtner progrmme, representing bout 21% of bse costs. The mngement cost of the progrmme would be low, t 6% of bse costs. 27. In terms of progrmme finncing, IFAD will mke vilble lon of bout USD 26.5 million, on highly concessionl terms, which would cover 87% of the estimted progrmme costs. The POs will contribute bout 10.8% of progrmme costs. The PPAF s contribution (2.5% of totl costs) will cover portion of the costs of stff remunertion, llownces nd operting expenses, plus txes nd duties on the goods nd services procured directly by PPAF. TABLE 1: SUMMARY OF PROGRAMME COSTS (USD 000) Component Locl Foreign Totl % of Foreign Exchnge % Bse Costs A. Innovtion nd outrech fcility B. Young prtner progrmme 1. Young prtner development inititive 2. Interntionl linkge prtner inititive 3. Young professionls scheme Subtotl C. Support for prtner orgniztions D. Mngement support Totl bse costs Physicl contingencies Price contingencies Totl progrmme costs Discrepncies in totls re due to rounding. TABLE 2: FINANCING PLAN (USD 000) IFAD PPAF Prtner Orgniztions Totl Component Amt. % Amt. % Amt. % Amt. % Foreign Exchnge Locl (Excl. Txes) A. Innovtion nd outrech fcility B. Young prtner progrmme 1. Young prtner development inititive Interntionl linkge prtner inititive Young professionls scheme Subtotl C. Support for prtner orgniztions D. Mngement support Totl disbursement Discrepncies in totls re due to rounding. Duties nd Txes 7

16 E. Procurement, Disbursement, Accounts nd Audit 28. Procurement. Procurement of goods, equipment nd services will be in ccordnce with IFAD s procurement guidelines. The progrmme involves no procurement requiring interntionl competitive bidding. Goods nd services estimted t USD (or equivlent) or more will be wrded through locl competitive bidding. Goods nd services costing less thn USD will be procured on the bsis of locl or interntionl shopping. Direct contrcting will pply to goods costing USD 600 or less nd consultnt services costing USD or less. All contrcts costing more thn USD will require prior no-objection by the cooperting institution. 29. Disbursement, ccounts nd udit. A specil ccount in United Sttes dollrs in commercil bnk cceptble to IFAD nd operted by the PPAF, s uthorized by the Ministry of Finnce, will be set up to fcilitte the regulr flow of funds. The initil deposit is expected to be USD 2.6 million. The specil ccount will be used for trnsfers to the generl PPAF ccount nd to the POs, YPOs nd LPOs under finncing greements with the PPAF. Replenishment of the specil ccount by IFAD will be mde ginst withdrwl pplictions, supported by pproprite documenttion or sttements of expenditure. The PPAF nd POs will mintin pproprite finncil records nd ccounts in ccordnce with PPAF s systems. For goods nd services procured directly by PPAF, the generl PPAF ccount will be used. This ccount is held by the PPAF with the ABN AMRO Bnk nd used for ll PPAF s direct expenditures. PPAF opertes seprte ledger ccounts for its vrious projects nd would open three dditionl ledger ccounts for MI&OP: (i) for generl expenditure; (ii) for the regulr window of the I&O fcility revolving lon fund; nd (iii) for the fcility s privte-sector linkge window revolving lon fund. Progrmme ccounts would be subjected to independent nnul udit contrcted by the PPAF. The uditors will certify the ccounts, including seprte opinion on the specil ccount. Ech implementing gency will be responsible for finncil reporting nd onwrd provision of finncil sttements to the PPAF, who will produce nd submit to IFAD nd the cooperting institution, the consolidted finncil sttements on n nnul bsis. Annul consolidted finncil sttements will be prepred nd udited in ccordnce with Interntionl Stndrds on Auditing subjected to nnul udit by independent externl uditors contrcted by the PPAF cceptble to IFAD nd will lso include seprte opinion on the opertion of the specil ccount nd mngement letter ddressing the dequcy of the ccounting nd internl control systems F. Orgniztion nd Mngement 30. The PPAF will be responsible for progrmme implementtion, undertken through its network of POs, which will retil the credit nd other microfinnce products nd services to the ultimte beneficiries. The Economic Affirs Division of the Ministry of Economic Affirs nd Sttistics, nd the Ministry of Finnce, will provide government oversight, s they currently do for the PPAF through their representtion on the PPAF Bord of Directors. The systems nd bodies currently in plce to provide oversight nd coordintion for the World Bnk-finnced PPAF-II, nd for the PPAF itself, operte effectively nd will be used by the progrmme: the PPAF s min body, which provides policy guidnce nd reviews finncil sttements nd nnul budgets; nd the PPAF Bord of Directors, consisting of representtives from the privte sector, NGOs nd the Government, which is responsible for setting opertionl policies nd procedures, nd reviewing nd pproving nnul workplns nd budgets. To fcilitte progrmme implementtion, The PPAF will employ dditionl stff to ssist in mnging the progrmme nd in prticulr the I&O fcility. The stff will be fully integrted s prt of the PPAF s regulr mngement structure (see chrt in Appendix VI) nd while the min prt of their worklod will be to implement progrmme ctivities, they will lso be responsible for crrying out other PPAF work. The prime document for guiding progrmme implementtion will be the I&O Opertions Mnul tht forms n integrl prt of the PPAF s generl opertions mnul. The mnul, tken together with the pprisl report, lon greement nd subsidiry finncing greement, will be the min documents guiding progrmme implementtion. 8

17 G. Economic Justifiction 31. Progrmme benefits. Some households will benefit directly from the progrmme. The I&O fcility will, by mtching new finncil products nd services to the needs of rurl households nd microenterprises, result in increses in household incomes nd reduction in household debt levels. The second component, young prtner progrmme, by bringing young nd dynmic institutions into the PPAF s network of POs, will help to develop new ides, dopt n incresingly rigorous pproch to microfinnce, nd expnd the presence of dedicted microfinnce providers in rurl res. The support for prtner orgniztions will promote greter focus on number of key subjects for the PPAF s POs nd help to ensure tht essentil cross-cutting themes will be dequtely integrted into the implementtion of the I&O projects nd the strengthening of prtner institutions. The mngement support component will promote the PPAF s opertionl efficiency, fcilitte effective monitoring nd evlution, nd ensure sound implementtion of the progrmme. 32. Gender benefits. The substntil ttention to gender in the design of the progrmme is expected to produce cler nd positive impct during implementtion. The impct is expected in three wys: (i) greter gender focus of prticipting institutions, through promoting gender udits, developing gender strtegies, providing gender trining nd ensuring equl or preferentil tretment for women in the selection of prticipnts in the interntionl linkge inititive nd the young professionls scheme; (ii) gender focus in I&O projects, by requiring tht prticipting POs include project gender strtegy in the design of their projects; nd (iii) gender focus in progrmme opertions, through progrmme plnning tht consciously incorportes gender spects, pying rigorous ttention to gender in monitoring nd evlution, nd estblishing gender focl point in the PPAF. 33. Livestock-relted benefits. The progrmme s inititive to broden the rnge of livestock enterprises is likely to provide benefits to both rurl poor livestock producers nd the POs. At present, producers re obtining credit mostly for the purchse of nimls profit mrgins re generlly nrrower nd risks tend to be higher thn they re further up the mrket chin. Mking finnce vilble for the poor to engge in enterprises tht dd vlue to their livestock rering will produce higher returns for the borrowers. For the POs, expnding the rnge of finncil products imed t the livestock sector will crete new opportunities nd help reduce the risk of lending by spreding the risk cross wider rnge of ctivities with different risk profiles. 34. Finncil nd economic nlysis. No economic nlysis of the progrmme ws crried out, in light of its emphsis on institutionl support for the microfinnce subsector; the flexible nture of the funds to be estblished under the progrmme; the diversity of institutions involved; nd pplicble tx regimes. However, direct benefits will be reflected in the incrementl number of rurl institutions providing more efficient nd client-responsive finncil services. These benefits to the rurl economy would be prticulrly evident in the incresed outrech to underserved res, s mesured in terms of the numbers of ctive clients nd the size of the portfolios supported by the progrmme. The finncil impct of the progrmme ws exmined t three levels: (i) the progrmme s rurl clients; (ii) the PPAF; nd (iii) the Government. The clients of the prticipting POs i.e. the progrmme beneficiries will improve their incomes nd lso their svings rtes. Regrding the PPAF, csh flow nlysis of the institution, with progrmme, shows smll but positive impct on the PPAF s finncil position, with n incrementl income over the five yers of USD 1.2 million, equivlent to contribution of 3% to nnul income. The progrmme s finncil return to the Government will lso be positive. Government csh flow with progrmme would result in net positive effect on government finnces of bout USD 3.8 million t current prices. H. Risks 35. With n innovtive progrmme of this nture, there re lwys some risks but none of them is substntil. While there re risks ssocited with individul components, these re considered cceptble nd mngeble. With the I&O fcility for exmple, there is risk of limited uptke by the 9

18 POs for developing new nd innovtive finncilly vible products nd pproches for poor clients in rurl res risk for fcility tht is demnd-driven. It is however mitigted by the positive experiences tht number of POs lredy hve hd with new products nd pproches nd the strong interest expressed during progrmme design by brod rnge of POs in testing nd developing new products. Another possible risk for the fcility is tht PO Bords of Directors could prevent POs from chrging cost-covering rtes for finncil services thus jeoprdizing the finncil sustinbility of the microfinnce opertions supported under the fcility. While mny PO Bords of Directors re reluctnt to increse interest rtes to mrket levels, the progrmme includes specil inititive under the third component to promote professionl mngement of finncilly sustinble microfinnce opertions mong the POs; it lso includes s prerequisite tht pilot projects funded under the fcility must demonstrte tht they would be finncilly sustinble. There is lso broder risk: whether there is potentil to develop new finncilly vible products for poor rurl clients. Rurl res re unquestionbly more difficult nd more costly for MFIs, but POs lredy hve experience of running rnge of vible rurl microfinnce opertions. Experience from neighbouring countries lso indictes the potentil for developing finncilly vible nd sustinble rurl finnce opertions. I. Environmentl Impct 36. An environmentl screening nd scoping note ws prepred during formultion in line with IFAD procedures. The note clssified the progrmme s low Ctegory B nd confirmed tht the potentil for significnt negtive impct is miniml nd tht no forml environmentl impct ssessment would be required. J. Innovtive Fetures 37. The pproch of using privte-sector-mnged public compny to reduce poverty the PPAF is one of Pkistn s most importnt poverty erdiction inititives is not unique. Neither is the PPAF s pproch of working with brod rnge of community-focused NGOs tht deliver microfinnce to poor households nd smll enterprises. However, to do so successfully, to do it profitbly nd to chieve the growth rtes tht the PPAF hs chieved over the pst four yers is quite remrkble. The progrmme will contribute to the PPAF s continued success by providing source of funding tht will llow the PPAF nd prticulrly its POs to test, pilot, experiment, ssess nd develop new ides nd pproches to the delivery of microfinnce services nd shre them mong the POs in the PPAF s prtner network i.e. to give them the ltitude to innovte. Innovtion should help them improve penetrtion in rurl res, nd rech poor households, women nd socilly conservtive groups more effectively. Innovtion is prticulrly importnt in Pkistn s stndrd lon pckges, while successful, cnnot fully respond to the constrints experienced by these groups or tke full dvntge of vilble opportunities. PART III LEGAL INSTRUMENTS AND AUTHORITY 38. A lon greement between the Islmic Republic of Pkistn nd IFAD will constitute the legl instrument for extending the proposed lon to the borrower. A summry of the importnt supplementry ssurnces included in the negotited lon greement is ttched s n nnex. 39. The Islmic Republic of Pkistn is empowered under its lws to borrow from IFAD. 40. I m stisfied tht the proposed lon will comply with the Agreement Estblishing IFAD. 10

19 PART IV RECOMMENDATION 41. I recommend tht the Executive Bord pprove the proposed lon in terms of the following resolution: RESOLVED: tht the Fund shll mke lon to the Islmic Republic of Pkistn in vrious currencies in n mount equivlent to eighteen million three hundred thousnd specil drwing rights (SDR ) to mture on or prior to 1 December 2045 nd to ber service chrge of three fourths of one per cent (0.75%) per nnum, nd to be upon such terms nd conditions s shll be substntilly in ccordnce with the terms nd conditions presented to the Executive Bord in this Report nd Recommendtion of the President. Lennrt Båge President 11

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21 ANNEX SUMMARY OF IMPORTANT SUPPLEMENTARY ASSURANCES INCLUDED IN THE NEGOTIATED LOAN AGREEMENT (Negotitions concluded on 29 November 2005) 1. PPAF progrmme ccount. The PPAF will open nd therefter mintin in bnk ccepted by IFAD n ccount denominted in locl currency for progrmme opertions (the PPAF progrmme ccount ). The PPAF will be fully uthorized to operte the PPAF progrmme ccount. 2. Counterprt funds. The Government of Pkistn (the Government ) will ensure tht the PPAF mkes vilble to the progrmme funds from its own resources in n ggregte mount of pproximtely USD or its equivlent in ccordnce with the subsidiry lon nd grnt greement. 3. Chnnelling of progrmme resources. The PPAF will trnsfer vilble funds nd other resources clled for in the nnul workplns nd budgets to ech PO, YPO nd LPO, in ccordnce with the relevnt PO, YPO nd LPO greement to crry out the relevnt component in ccordnce with such PO nd YPO greements. 4. Monitoring. The PPAF will expnd, s soon s prcticble but in no event lter thn 180 dys fter the effective dte, nd therefter mintin its existing informtion mngement nd progress monitoring system to enble it to continuously monitor the progrmme. The progrmme monitoring nd evlution will be integrted in the overll MIS operted by the PPAF. The PPAF will ensure tht s condition for PO, YPO nd LPO prticiption in the progrmme, ech PO, YPO nd LPO s MIS includes trining nd technicl support ctivities in mnner stisfctory to IFAD. The MIS of the PPAF nd ech PO, YPO nd LPO will lso perform results nd impct monitoring, cceptble to IFAD, to gther informtion on progrmme impct. A set of indictors will be developed to enble regulr monitoring using prmeters tht re consistent with those of the Government s Microfinnce Network nd the Microfinnce Informtion Exchnge, thus fcilitting the prticipting institutions ccess to locl nd interntionl informtion pltforms. The PPAF will collect its implementtion progress nd impct dt consistent with IFAD s Results nd Impct Mngement System (RIMS) nchor indictors. 5. Insurnce. The PPAF will insure ll progrmme stff nd equipment during progrmme implementtion in ccordnce with its policy for its regulr stff. 6. Gender focus. The Government will ensure tht due considertion is given to gender issues in progrmme implementtion nd mngement in respect of, inter li, progrmme beneficiries, the recruitment of progrmme stff by the PPAF, POs, YPOs nd LPOs, nd young professionls. 7. Legl frmework. The Government will continue to support the development nd coming into force of n enbling legl environment for microfinnce institutions in the progrmme re. 8. Suspension. In ddition to the events set forth in Article of the Generl Conditions: () IFAD my suspend, in whole or in prt, the right of the Government to request withdrwls from the lon ccount upon the occurrence of ny of the events set forth therein or ny of the following events: (i) the subsidiry lon nd grnt greement, or ny provision thereof, hs been wived, suspended, terminted, mended or otherwise modified without the prior consent of IFAD, nd IFAD hs determined tht such wiver, suspension, termintion, mendment or modifiction hs hd, or is likely to hve, mteril dverse effect on the progrmme. 13

22 ANNEX (ii) ny competent uthority hs tken ny ction for the dissolution of the PPAF or the suspension of its opertions, or ny ction or proceeding hs been commenced for the distribution of ny ssets of the PPAF mong its creditors. (b) IFAD will suspend, in whole or in prt, the right of the Government to request withdrwls from the lon ccount if the udit report required by the lon greement hs not been stisfctorily completed within 12 months fter the finncil reporting period set forth therein. 9. Conditions precedent to withdrwl. The conditions precedent to withdrwl re s follows: () (b) no withdrwls will be mde in respect of expenditures from the lon until the progrmme opertions mnul hs been dopted by the PPAF in the form pproved by IFAD; nd no withdrwls will be mde in respect of expenditures from the lon until the specil ccount nd the PPAF progrmme ccount hve been duly opened. 10. Conditions of effectiveness. The following re specified s conditions precedent to the effectiveness of the lon greement: () (b) (c) the lon greement hs been duly signed, nd the signture nd performnce thereof by the Government hve been duly uthorized nd rtified by ll necessry dministrtive nd governmentl ction; the subsidiry lon nd grnt greement, in form nd substnce cceptble to IFAD, hs been duly signed by the Government nd the PPAF; the signture nd performnce thereof by the Government nd PPAF hve been duly uthorized or rtified by ll necessry corporte, dministrtive nd governmentl ction; nd copy of the signed subsidiry lon nd grnt greement, certified s true nd complete copy thereof by competent officer of the Government, hs been delivered to IFAD; nd fvourble legl opinion, issued by n uthorized officer of the Ministry of Lw, Justice nd Prlimentry Affirs of the Government, pproved by IFAD, in form nd substnce cceptble to IFAD, hs been delivered by the Government to IFAD. 14