Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No.

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1 Project Name Region Sector Project ID Borrower Report No. PID7363 Pakistan-Structural Adjustment Loan South Asia Banking, Power, Gas and Tax Administration PKPE59323 The Government of Pakistan Ministry of Finance Implementation agency Islamabad, Pakistan Ministry of Finance Date this PID prepared February 1999 Appraisal Date December 1998 Project Board Date January 21, 1999 Background To support its on-going structural reform program and to instill the culture of discipline and respect for the rule of law, the Government of Pakistan (GOP) has embarked on its current reform program in 1997 and has been making substantial progress. In a speech on June 11, 1998, Pakistan's Prime Minister presented a vision of a people that live up to their obligations, repay their loans and pay their tax and utility bills, irrespective of their influence. Since that date, the public agencies concerned have taken steps-- managerial, institutional and legal--to begin to clear up the outstanding amounts due. Instilling a culture of discipline and respect for due process in public expenditure is a second area of reform being tackled. The Government has begun to improve the governance and financial accountability throughout the economy. These efforts are accommodated through legislation, Executive orders, Judiciary reforms, amendments and structural reforms. The Bank is supporting these efforts through a series of Adjustment Loans, starting with a $250 million Banking Sector Adjustment Loan (BSAL) approved by the Board in December Substantial progress has also been made in the implementation of the reform program, despite a difficult macroeconomic setting and associated social and political pressures. The Government has shown a firm resolve to press ahead with reforms, specifically in areas of: banking, taxation, energy and public expenditures. Project Objectives The reforms supported by this operation are part of an agenda the Government has developed over several years, and extensively discussed with the Bank. From such reforms, and further reforms expected to be implemented in the coming 1-2 years, should gradually emerge: (a) a banking system that is largely in private hands, operating under banking regulations and prudential norms that meet international standards; (b) a more efficient and financially viable energy sector with a growing role for private investors, with independent regulatory authorities; (c) an autonomous, efficient and equitable tax administration that progressively raises the tax to GDP ratio by broadening the tax base and improving enforcement; and (d) an expenditure policy that subjects public spending to rigorous appraisal and spending ceilings.

2 Project Description The Structural Adjustment Loan (SAL) of Pakistan will support the Government of Pakistan in improving governance in the key public sector activities of banking, tax administration, public utilities, and public expenditure. Banking Sector The Banking Sector reforms supported by the SAL are a continuation of steps taken under the US$250 million Banking Sector Adjustment Loan, provided by the World Bank in December These reforms aim to strengthen banking system governance, bring in private sector management to the banks with some public ownership, arrest the flow of bad loans, curtail loss-making, and conserve assets of the nationalized banks prior to their privatization. They also aim to strengthen central bank independence and supervisory and regulatory capacities, and to build the capacity of the legal and judicial system for loan recovery. The SAL objectives in the banking sector are to help the government to collect specified levels of Non-Performing Loans as prior actions to Board presentation. A committee of banks has agreed with the Government on a set of administrative steps to facilitate recovery by financial institutions of debt in default and hence accelerate loan recovery. These include: (i) issuing an approved panel of public auctioneers available for appointment by the courts in suits brought by financial institutions and involving the disposal of property by public auction; (ii) requiring judges to appoint auctioneers exclusively from the panel established under (i) above; and (iii) issuing guidelines for use by the courts in restricting the number of times a property can be put up for auction in cases where the same property is required to be put up for auction more than once because of dispute arising over the value of the bids obtained. Public Utilities (Power Sector) In the Power Sector, the two main objectives of the SAL are: (1) to restore financial viability of the Water and Power Development Authority (WAPDA) and Karachi Electric Supply Corporation (KESC) by ensuring that line losses are reduced, distribution is improved, and cross-arrears between energy utilities and governments are settled; and (2) to ensure that the National Electric Power Regulatory Authority (NEPRA) becomes fully operational in order to regulate corporate entities and provide necessary comfort to investors and consumers. Over the medium-term, the reform agenda would focus on: (1) completing the corporatization process and establishing commercially-oriented autonomous corporations, with NEPRA issuing licenses for the new corporatized entities; (2) implementing theft and loss reduction programs and introducing other efficiency improvements; (3) intensifying bill collection efforts from both public and private customers; (4) implementing financial and other restructuring measures; and (5) accelerating the privatization program for the thermal generation and electricity distribution companies. Natural Gas Sector The Government has long been committed to the privatization of the Sui Northern and Sui Southern companies through a strategic sale with management -2 -

3 rights and the creation of an independent gas regulatory authority which promotes competition in the sector and de-politicizes tariff setting. The future agenda for reform includes further improving the financial discipline of the gas distribution companies, reducing the stock of overdue bills and improving the legal basis for gas tariff setting and collections. The steps include: (1) completion of cash recovery from the stock of overdue bills from the private sector, reduction in WAPDA and KESC arrears, and keeping the payment of gas bills by WAPDA and KESC current; and (2) enactment by the National Assembly of the Natural Gas Regulatory Ordinance and amendment of the penal code to make tampering with gas meters a crime. Taxation The Government has developed a tax reform program comprising both policy and administrative reforms. It is putting in place a tax administration which is more efficient and responsive. The program includes actions to reform tax administration; broaden the base of domestic taxes; further liberalize the trade regime; and increase tax revenues while these institutional reforms are being undertaken. The tax enforcement program is being strengthened with a more effective tax registration program, an information exchange program, better administration of the taxpayer identification numbers, and a strengthened tax audit regime. Significant progress has been made over the last two years in reforming the General Sales Tax into a modern, broadly-based value-added tax. The reform agenda for the tax administration envisages that the Central Board of Revenue (CBR) will be transformed into the Pakistan Revenue Authority through an act of legislation. The CBR is to increase the number of income tax payers with IDs to 1.6 million, the Law Ministry is to increase the number of fully functioning Tax Tribunals from seven to 15; and collect Rs3 billion of tax arrears. Public Sector Expenditure Reforms in this sector focus on adjustment in Public Sector Development Program (PSDP) allocations by imposing prioritized cutbacks on the lowpriority portion of the PSDP and retaining only the highest-priority projects. Reforms in this sector also include, (1) addressing the shortfalls in allocations for high-priority projects and for Social Action Program-related development activities by appropriately revising and protecting these allocations against budgetary cutbacks; (2) ensuring adequate and timely release of funds to all high-priority projects; and (3) strengthening monitoring and evaluation of development projects. Project Financing The SAL is a Single Currency Loan equivalent of US$350 million, with a twenty year maturity and a grace period of five years. The interest rate on the loan is LIBOR Base plus LIBOR Total Spread. The proposed loan was disbursed upon effectiveness. Project Implementation The SAL approved on the basis of Pakistan's reform program, the adequacy of the macroeconomic framework and its balance of payments needs. These three elements have all been worked out within the context of Pakistan Policy Framework, with the collaboration of the International Monetary Fund. The SAL -3 -

4 contributes much-needed resources within an overall financing plan that includes additional financing from the IMF and the Asian Development Bank. The approval of the SAL was based on a number of prior actions. Among them include: Banking: (1) collection of specified amounts from loan defaulters; (2) issuing (a) an approved panel of public auctioneers to banking courts to assist in the sale of properties belonging to judgement letters; and (b) guidelines for use by the banking courts in restricting the number of times a property can be put up for because of dispute arising over the value of the bids obtained. Power: (1) issuance of an Executive Order empowering Pakistan Electric Power Company to manage the implementation of the Borrower's power sector reform program; (2) Submission to the National Assembly, the WAPDA Act to allow for, inter alia, corporatization of WAPDA into separate entities; (3) preparation of a theft, loss and arrears reduction plan; (4) Clearance by the federal and provincial Governments of their past bills with WAPDA; (5) NEPRA issued, under the NEPRA Act, its Tariff Standards and Procedures Rules, and other terms and conditions related to generation, transmission and distribution by licensees; and (6) submission of a comprehensive tariff filing to NEPRA by WAPDA. Gas Sector: (1) acceleration of cash recoveries in the natural gas sector; (2) and submission to the National Assembly a bill to establish a Natural Gas Regulatory Authority to, inter alia, regulate tariff setting and strengthen collection. Taxation: (1) collection of agreed levels of tax arrears; (2) submission to the National Assembly a law for the establishment of the Pakistan Revenue Authority; (3) increasing the number of income taxpayers with ID numbers to at agreed level; and (4) increasing the number of fully functioning tax tribunals from 7 to at least 15. Public Sector Expenditures: (1) agreed with the Bank on the size and content of the budgetary and non-budgetary public development expenditures in line with its development priorities and the agreed macro economic framework; (2) ensured that federal and provincial Governments have provided adequate funds to meet agreed levels of expenditure as agreed with the Bank under the Social Action Program of the Borrower. Environmental Aspects In accordance with the Bank's Operational Directive on Environmental Assessment (OD 4.01), the proposed operation has been placed in Category "B" and will require no separate environmental assessment analysis or environmental management plan. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C Telephone No. (202) Fax No. (202) Mr. John Wall Tel: (202) Fax: (202) JWALL@WORLDBANK.ORG - 4 -

5 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending February 19,