Periodic Financing Request Report. Project No December MFF 0009-PAK: Punjab Irrigated Agriculture Investment Program: Tranche 2

Transcription

1 Periodic Financing Request Report Project No December 2011 MFF 0009-PAK: Punjab Irrigated Agriculture Investment Program: Tranche 2

2 CURRENCY EQUIVALENTS (as of October 2011) Currency Unit Pakistan rupee (PRs) PRs1.00 = $ $1.00 = PRs 85.0 ABBREVIATIONS ADB Asian Development Bank ADF Asian Development Fund APs affected persons AWB Area Water Board CCA cultivable command area cms cubic meters per second EA executing agency EARF environmental assessment and review framework EIRR economic internal rate of return EMP environmental management plan FFA framework financing agreement FO farmers organization GDP gross domestic product ICB international competitive bidding IEE Initial environmental examination JICA Japan International Cooperation Agency LARF land acquisition and resettlement framework LARP land acquisition and resettlement plan LBDC Lower Bari Doab Canal LBDCIP Lower Bari Doab Canal Improvement Project LCC Lower Chenab Canal MFF multitranche financing facility NCB national competitive bidding NKBP New Khanki Barrage Construction Project O&M operation and maintenance PFR periodic financing request PIAIP Punjab Irrigated Agriculture Investment Program PIAPPF Punjab Irrigated Agriculture Project Preparation Facility PIDA Punjab Irrigation and Drainage Authority PID Punjab Irrigation Department PMO Project Management Office PMU Project Management Unit PSC Project Steering Committee RF resettlement framework RP resettlement plan

3 WEIGHTS AND MEASURES cusec Cubic feet per second km kilometer ha hectare Mha million hectares mm millimeter GLOSSARY abiana irrigation service fee conjunctive use combined use of surface and ground waters rabi crops grown during the period from about December to May kharif crops grown during the period from about June to November NOTES The fiscal year (FY) of the Islamic Republic of Pakistan ends on 30 June. In this report, "$" refers to US dollars. Vice President X. Zhao, Operations 1 Director General J. Miranda, Central and West Asia Department (CWRD) Director M. Ojiro, Environment, Natural Resources and Agriculture Division, CWRD Team leader Team members Peer reviewers A. Ali, Water Resources Specialist, CWRD Z. Abbas, Environment Specialist, CWRD C. Cabrales, Operations Assistant, CWRD R. Farrukh, Senior Project Officer, Pakistan Resident Mission (PRM) R. Jones, Natural Resources and Agriculture Economist, CWRD A. Khokhar, Senior Safeguards Officer, PRM D. Perkins, Counsel, Office of the General Counsel (OGC) S. Roth, Social Development Specialist (Gender and Development), CWRD M. Katagami, Natural Resources and Agriculture Specialist, Regional and Sustainable Development Department (RSDD) and member Agriculture, Rural Development, and Food Security CoP T. Panella, Principal Water Resources Specialist, Southeast Asia Department (SERD) and member Water CoP In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

4 CONTENTS Description TRANCHE AT A GLANCE I. BACKGROUND 1 II. ASSESSMENT OF MFF IMPLEMENTATION 2 III. PROPOSED PERIODIC FINANCING REQUEST 3 A. Impact and Outcome 3 B. Outputs 4 C. Investment and Financing Plans 4 D. Implementation Arrangements 5 E. Project Readiness 6 F. Advance Contracting and Retroactive Financing 7 IV. DUE DILIGENCE 7 A. Technical 7 B. Economic 8 C. Governance 8 D. Poverty, Social and Gender Dimensions 9 E. Safeguards 9 F. Climate Impacts 10 G. Risks and Mitigating Measures 10 H. Risks Categorization 11 V. ASSURANCES 11 VI. RECOMMENDATION 11 APPENDIXES: 1. PFR from the Government Tranche Design and Monitoring Framework Project Administration Manual Economic Analysis (Tranche investments) Updated Summary of Poverty Reduction and Social Strategy Contribution to the ADB Results Framework List of Linked Documents 30 SUPPLEMENTARY APPENDIXES (available on request) A. Client Feasibility Studies and Engineering Designs B. Loan and Project Agreements C. Compliance Status with Framework Financing Agreement and Loan Covenants of the Project 1 D. Due Diligence Report

5 TRANCHE AT A GLANCE Project Name MFF Punjab Irrigated Agriculture Investment Program Tranche 2 (New Khanki Barrage Construction Project; NKBP) PFR No. 2 Project No Country Pakistan, Islamic Republic of Department CWRD Date of Receipt by ADB of PFR Request 12 September, 2011 Division CWER Project Data Sheet eqno=03&typecd=3 Tranche Summary (as requested by the government in PFR) Impact: The impact of the proposed project will be the improved agricultural production and farm income in Lower Chenab Canal (LCC) command area (Gujranwala, Hafizabad, Sheikhupura, Nankana Sahib, Faisalabad, Jhang and Toba Tek Singh districts). Outcome: The outcome will be the sustainable improved delivery of services for irrigated agriculture and better water management in LCC command area. Outputs: The project outputs will be (i) New Khanki Barrage completed on time and within the budget and (ii) EA s improved project management capacity. Implementation Arrangements: Punjab Irrigation Department (PID) will be the executing agency (EA) and will implement the project through its existing project management office (PMO) for barrages. Project Readiness. The key readiness requirements are met: preliminary and final design; advance actions on contractor and consultant recruitment (with process completes early in 2012); safeguards action plans and financing plans (disclosed and funding in place); provincial and federal level approvals (through the planning commissions) and local counterpart financing for other project components. All other standard due diligence work has been completed (technical, commercial, economic, financial, procurement, etc). The project is categorized as B for resettlement and environment and C for indigenous people. The original MFF land acquisition and resettlement framework (LARF) was updated and has been disclosed. A land acquisition and resettlement plan (LARP) was prepared. The terms of reference (TOR) for construction supervision consultants have been prepared and the consultant short listing is complete. The EA received bid for a national competitive bidding (NCB) contract on 22 September This is being evaluated. The international competitive bidding (ICB) contract process is underway. Tranche Sector Classification Sector: Agriculture and Natural Resources Subsectors: Irrigation and flood management Tranche Thematic Classification Theme: Economic growth Subthemes: Climate Change Impact Adaptation Yes Mitigation No Gender Mainstreaming Gender equity theme Effective gender mainstreaming Some gender benefits No gender elements

6 Targeting Classification General Intervention Targeted Intervention (i) Geographic dimensions of inclusive growth (ii) Millennium Development Goals (iii) Income poverty at household level Location Impact Rural High National Low Urban Regional High Tranche Risk Categorization Low Risk Complex Safeguard Categorization (Refer to ADB Safeguards Policy Statement. Operations Manual, OM F1. Manila.) Category Required Document Disclosure Date (i) Environment B IEE 30 Sep Weblink: (ii) Involuntary resettlement B Updated LARF 11 Oct Weblink: (iii) Indigenous peoples C NA Weblink: Financing Requested from ADB Modality Source Amount ($ million) Project Loan Asian Development Fund Total: Source Amount ($ million) Cofinancing No Cofinancing Available Counterpart Financing Government of Punjab 39.0 Aid Effectiveness Parallel project implementation unit No Program-based approach No Significant Developments in the MFF and Tranche 1 Physical Progress. Tranche 1 Project has awarded six out of nine civil works contracts and six consultancy mandates. Prequalification and bidding documents for the remaining three civil works contracts (total amount $102 million) have been completed and bids for two of the contracts invited. As of 31 August 2011, the cumulative contract awards and disbursements are $ million and $26.02 million, respectively. Physical progress is 35% with an elapsed period of 50%. Implementation is moving in the right direction, although there remains some catching up to do, especially with the remaining contracts. Non-Physical Progress. The Project Management Unit and all associated operating units envisaged under the Project have been established and are functioning satisfactorily. Tranche 1 provided funds to prepare a new generation of projects. The MFF also provided financing the institutional reforms. The reform package is inclusive of outreach and training at all levels. To date 49 farmer organizations have been established for the operation and management of the distribution canals and preparatory work to set up the Area Water Board for operation and management of the main canal is complete. Compliance. Thirty two covenants out of 34 are presently being complied with. The two problem

7 covenants relate to (i) establishing separate imprest accounts for Directorate of On-Farm Water Management (DOFWM) and PIDA and (ii) developing a participatory irrigation management model (PIMM). ADB has agreed with the Punjab Irrigation and Finance Departments assessment, that the separate imprest accounts for DOFWM and PIDA are not required. PIMM (PIDA revised rule 2010) allows existing PID field offices to assist FOs in operational management during a transitional period. Following the revised PIDA rules, a model irrigation management transfer (IMT) agreement has been developed and an agreement signed with the FOs. An interim cost sharing policy for Lower Bari Doab Canal (LBDC) is being prepared following Government of Punjab s current policy. The EA has established a website that shows water accounts for 24 main canals regarding entitlements, deliveries & balance share as well as policy for sharing surpluses and shortages. Resettlement. The resettlement plans (RP) for all civil works contracts were prepared following the resettlement framework (RF) under the MFF. The latter has been updated to comply with ADB s Safeguard Policy Statement (2009). Punjab has allocated $6.9 million (PRs595.0 million) in the revised Planning Commission Proforma (PC1) and is providing funds in line with requirements. Final RPs for five civil works contracts under tranche 1 were completed and disclosed. The entitlements as specified in the RPs were provided to the affected persons (AP) prior to their relocation under ongoing contracts for the construction of Jandraka and 15L distributary canals. The same policy is being followed with respect to all other contracts. Grievance redress committees for ongoing contracts have been established. Internal monitoring reports are submitted to ADB on a monthly basis. An independent external monitor has been recruited and the first external monitoring report prepared. The results are positive. Environment. All the civil works are being carried out in accordance with ADB s Safeguards Policy Statement 2009 and the Environmental Assessment and Review Framework (revised 2011). An environmental management plan (EMP) has been prepared for each civil works contract and is incorporated in the applicable bidding document. All mitigation and monitoring measures identified in the final detailed design are incorporated into the EMP and are to be implemented during construction phase. All contract packages contain provisions dictating compliance with all environmental requirements. Lessons Learned. Future works should be packaged into fewer and larger contracts rather than numerous small contracts to reduce implementation complexities and the administrative burden on the EA. The quality of the consultants was low. ADB worked together with the EA and the consultants rationalizing the consultancy packages and negotiating deployment of quality staff for the key positions. Qualifications for key staff will be carefully drafted and strictly adhered to in the future. MFF projects preparation was slow lacking into project readiness (design, procurement, safeguards, local budgets and internal approvals) and limited oversight over new tranche investments. ADB conveyed the Punjab Government to cancelling the MFF, if subsequent tranches are not processed on time. It created a new momentum to turnaround the slow moving MFF. Against this, ADB retains a strong client relationship, skills to handle irrigation and the right blend of physical and nonphysical investments. Project preparation (readiness) is now geared up, which will lead to a faster conversion of finance into stand-alone transactions, contract awards and disbursements. These lessons are being applied in the context of the second PFR. CPS/COBP PAK: Country Partnership Strategy

8 I. BACKGROUND 1. In December 2006, the Asian Development Bank (ADB) approved a $900.0 million 1 multitranche financing facility (MFF) for the Punjab Irrigated Agriculture Investment Program (PIAIP) to co-finance investments in the irrigation sector in Punjab. Two loans for the first project totaling $227.8 million were approved on 13 December 2006 and became effective on 24 August 2007; $217.8 million equivalent from Ordinary Capital Resources (OCR) and $10 million equivalent from the ADB s Special Fund (ADF) resources 2. The MFF finances investments to improve century-old irrigation infrastructure and associated facilities. It also prompts institutional reform premised on eventual farmer management of the irrigation system to raise the effectiveness and efficiency of delivering irrigation service. The Design and Monitoring Framework (DMF), which accompanied the MFF, was updated after ADB revised its safeguards policies and procedures (Safeguards Policy Statement, 2009). 2. Punjab sought increased investment in its underperforming irrigated agriculture infrastructure and institutions. Irrigated agriculture accounts for 28% of Punjab s GDP and employs over 50% of its labor force. Irrigated cultivable agriculture covers 8.4 million hectares (ha) with a cropping intensity of 122%. Fourteen barrages supply water through 22 main and link canals. 3 Upgrading the irrigation system requires over $3 billion. 3. The Country s Partnership Strategy (CPS) ( ) prioritizes improving irrigation infrastructure. The water resources sector road map identifies improving infrastructure, institutions and agricultural productivity to drive sustained agricultural growth. The Medium-Term Development Framework (MTDF) 4 estimated expenditure on the irrigation sector at a high 32% annually since ADB s agriculture sector evaluation (2006) for Pakistan emphasizes rehabilitating water resources and irrigation in its lending portfolio. Punjab Irrigation Department s (PID) asset management plan requires rehabilitation of seven barrages and five main canal systems. 5 Punjab adheres to the sector road map and follows the reforms principles as in the MTDF. PID already transferred management of 1.5 million ha to the farmers organizations (FOs). The World Bank and Japan International Cooperation Agency (JICA) also supported the irrigation sector institutional reforms through development policy loans and the Punjab irrigation system improvement project The Lower Bari Doab Canal Improvement Project (LBDCIP) financed under MFF tranche 1 is improving the Balloki Barrage on the Ravi River, the 200-km Lower Bari Doab Canal (LBDC), and about 1,500 kilometers (km) of distributary and minor canals that supply water to 700,000 ha. ADB has now received a second periodic financing request (PFR) for $270 million 7 1 This amount comprised (i) up to $890.0 million equivalent form ADB s ordinary capital resources and (ii) up to $10.0 million equivalent in Special Drawing Rights (SDR) from ADB s Special Funds resources (Asian Development Fund [ADF]). On 15 December 2011, ADB s Board of Directors approved an amendment to the MFF for PIAIP which (i) reduced the facility amount of the MFF to an amount not exceeding the equivalent of $700.0 million and (ii) increased the limit on the use of ADF resources for the MFF to an amount not exceeding the equivalent of $280.0 million. 2 Total project cost was estimated at $281.4 million 3 Total canals length is 37,643 kilometers including 6,429 km main canals and 31,214 km distributary and minor canals. 4 Originally, the MTDF covered a period from 2005 to 2010, but it was extended until 2011 and is likely to continue for Taunsa, Balloki, Jinnah, Khanki, Suleimanki, Trimmu, Panjnad and Islam barrage and Lower Chenab, Lower Bari Doab, Pakpattan, Thal and Sidhnai canals systems. 6 The World Bank provided $123 million for Taunsa Barrage, $145 million for Jinnah Barrage and $100 million development policy loans. 7 Total project cost is estimated at $309 million

9 2 for the New Khanki Barrage Construction Project (NKBP) (see Appendix 1). It will supply water to the downstream Lower Chenab Canal (LCC) system, which irrigates 1.2 million ha and benefits 568,000 farming families. II. ASSESSING MFF IMPLEMENTATION 5. Physical Progress. Six of nine civil works contracts for rehabilitating the main canal and the Balloki Barrage have been awarded. Bidding documents, and the prequalification process, for the remaining three contracts have been completed. The project management office is staffed and implementation and project preparation consultants recruited. A midterm review in May 2011 noted improved implementation. Cumulative contract awards and disbursements stand at around $ million and $20 million, respectively. Physical progress is 35%, with an elapsed period of 50%. Achieving the remaining milestones is possible with the current progress rate. 6. Non-Physical Progress. Under Tranche 1 the Punjab Irrigation and Drainage Authority (PIDA) created 49 farmers organizations (FOs) and set up 3,576 Khal Panchayats 8. These FOs will manage and operate the distributary and minor canals, and will select the officials for the area water boards (AWB) by December AWB will operate and maintain the main canal. FO s capacity building is already in progress and covers technical aspects of canal operation and management, financial management, administration and on-farm water management as well as agricultural activities, planning, and oversight. A groundwater monitoring and management study is also underway as originally envisaged. 7. Project Management. PID established a project management office (PMO) and a project management unit (PMU) with three project implementation offices, and recruited the consultants. A project steering committee (PSC) is operational; it guides policy and oversees project implementation 8. Compliance. Thirty two of the 34 covenants are complied with. The two remaining covenants relate to (i) establishing separate imprest accounts for Directorate of On-Farm Water Management (DOFWM) and PIDA and (ii) developing a participatory irrigation management model (PIMM). ADB agreed with the Punjab Irrigation and Finance Departments assessment that the separate imprest accounts for DOFWM and PIDA are not required. PIMM (PIDA revised rule 2010) allows existing PID s field offices to assist FOs in operational management during a transitional period. PID updates its website ( regularly 9. The social and environmental safeguard staff was already appointed and all covenants on safeguards are being fully complied with. Details of covenant compliance status are in Supplementary Appendix. 9. Resettlement. The executing agency (EA) prepares resettlement plans (RPs) for the civil works contracts following the resettlement framework (RF) for MFF. The RF has been updated to comply with ADB s Safeguard Policy Statement (SPS) (2009). Punjab allocated $6.9 million (PRs595.0 million) in the revised Planning Commission Proforma (PC1) and is providing required funds for resettlement activities. The EA finalized and disclosed five RPs under tranche 1 and provided entitlements to the affected persons (AP) prior to their relocation. The same procedures will be followed for contracts. Grievance redress committees for ongoing contracts 8 Synonymous to water user associations at water course level with the exception that Khal Phanchayats are recognized as legal entities under Punjab law 9 The PID website discloses and updates discharge data of 24 main canal systems. It also includes the progress of the on-going projects including the Japan financed LCC Project and LBDCIP.

10 3 were established. Internal monitoring reports are submitted to ADB every month. An independent external monitor was recruited and the first external monitoring report has been prepared. The results are satisfactory. 10. Environment. All the civil works are being carried out in accordance with ADB s SPS (2009) and the Environmental Assessment and Review Framework (EARF) (revised 2011). The EA included an environmental management plan (EMP) for each civil works contract in the bidding documents. The EMPs incorporate mitigation and monitoring measures, which will be implemented during construction. All contract packages contain provisions entailing compliance with the environmental requirements. The compliance status with the environmental safeguards is in Supplementary Appendixes. 11. MFF Utilization. The MFF moved very slowly since its inception. ADB raised concerns with the authorities on the slow progress and informed them regarding possible cancellation of the facility, unless enough priority projects were prepared and submitted. ADB also reported on the slower than expected implementation progress of the works financed under tranche 1. Government of Punjab informed ADB of its intention to accelerate investments in the sector and confirmed the following investment plan for the next few years. Tranche Loan amount Approval by ($ million) Tranche 2: New Khanki Barrage Construction Project 270 Dec 2011 Tranche 3: Suleimaki Barrage and Pakpattan Canal 90 May 2012 Tranche 4: Trimmu and Panjnad barrages 110 Jan 2013 Total Major Challenges and the Lesson Learned. Fewer and larger contracts are preferred over numerous small contracts to reduce implementation complexity and lighten the administrative burden of the EA. The quality of the design and supervision consultants fielded for LBDCIP was less than satisfactory. ADB dialogue with the EA and their subsequent negotiation with the consultants resulted in deployment of quality staff for the key positions. This problem suggests strengthening of the consulting staff qualification requirements for future recruitment exercises. Subsequent MFF tranches preparation activities were slow and lacking in project readiness (design, procurement, safeguards, local budgets and internal approvals) and limited oversight by the relevant committee affected new tranche investments. ADB constructively dialogued with the Punjab Government and successfully resolved these problems. Project preparation (readiness) is now geared up, which will result in more timely contract awards and disbursements. These lessons are being applied in the subsequent tranches. A. Impact and Outcome III. PERIODIC FINANCING REQUEST 13. The impact of the proposed project will be the improved agricultural production and farm income in Lower Chenab Canal (LCC) command area (Gujranwala, Hafizabad, Sheikhupura, Nankana Sahib, Faisalabad, Jhang and Toba Tek Singh districts). The outcome will be the sustainable improved delivery of irrigation water for agriculture in the LCC command. Design and Monitoring Framework (DMF) for Tranche 2 and the Facility are in Appendix 2.

11 4 14. The NKBP will divert a 330 m 3 sec -1 (11,653 ft 3 sec -1 ) irrigation supply to the LCC serving about 1.2 million ha. JICA 10 is financing $100 million LCC improvement project rehabilitating canals and implementing institutional reforms. The JICA project will be completed by December B. Outputs 15. The project outputs will be (i) New Khanki Barrage completed on time and within the budget and (ii) EA s improved project management capacity. The project outputs will be achieved through activities including recruitment of construction supervision consultants, construction of coffer dams, main weir and canal head regulator, installation of barrage gates and hoisting arrangements and construction of undersluices and two road bridges across the river and the canal. 16. The NKBP was not included in the indicative list of subsequent projects under the MFF. However, the Framework Financing Agreement (FFA) Schedule 4, Para 3 allows the Government of Punjab to modify the proposed sub-projects listing with the addition of priority sub-projects, which are in compliance with the project selection criteria. Construction of a new Khanki Barrage (NKB) at the upstream end will ensure reliable irrigation delivery to 1.2 million ha in the LCC command benefitting 568,000 farming families and reducing flooding risk across another 20,000 ha. C. Investment and Financing Plans 17. The total project cost is $309 million. This includes base cost, contingencies, taxes and duties and interest during implementation (Table 1). Detailed cost estimates by expenditure category and by financier are given in the project administration manual (PAM) (Appendix 3). Item Table 1: Tranche Investment Plan ($ million) Amount a A. Base Cost b 1. New Khanki Barrage Project Management 12 Subtotal (A) 250 B. Contingencies c 52 C. Financing Charges During Implementation d 7 Total (A+B+C) 309 a Includes taxes and duties of $36.4 million to be financed from government resources. b In mid-2011 prices. The new Khanki Barrage comprises civil, electrical and mechanical works and project management includes costs of consultants and PMO staff and operating costs. c Physical contingencies computed at 4.75% for civil works, mechanical and electrical works, consulting services, and PMO operating costs. Price contingencies computed at 1% on foreign exchange costs and 6.7% (2012), 7.5% (2013) 6.5% (2014, 2015 and 2016) d The loan will have a term of 32 years, including a grace period of 8 years, and an interest charge of 1% per annum during the grace period and 1.5% per annum thereafter. Source: ADB due diligence report based on approved PC 1 by the Government of Pakistan. 10 The project was financed by Japan Bank for International Construction (JBIC) in 2007 before merging its overseas operation with JICA in October 2008.

12 5 18. The government has requested a loan in various currencies equivalent to SDR172,417,000 ($270 million) from ADB s Special Funds resources to help finance the project. The loan will have a 32-year term, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the draft loan and project agreements. NKBP is a non-revenue generating project with high direct poverty reduction content. The financing plan is prepared and is given in Table 2. Table 2: Financing Plan ($ million) Source Total % ADB s Special Funds (ADF) Government of Punjab Total Source: ADB due diligence report based on approved PC 1 by the Government of Pakistan. D. Implementation Arrangements 19. Executing Agency. The PID will be the EA. PID has successfully executed numerous ADB, JICA and World Bank financed projects. PID has completed three World Bank financed projects including Taunsa Barrage rehabilitation project (loan amount $123 million), irrigation system rehabilitation project (loan amount $200 million) and development policy loan (DPL) amounting $100 million supporting public finance reforms, strengthening devolution and service delivery, and improving fiduciary. PID is currently implementing the World Bank financed Jinnah Barrage rehabilitation project with a loan amount of $145 million, the JICA financed LCC improvement project with a loan amount of $100 million and the ADB financed Lower Bari Doab Improvement Project (LBDCIP) with a loan amount of $228 million and has ample technical, procurement and managerial capacity to oversee these investments, as well as the proposed NKBP under ADB financing. 20. Project Management: The existing Project Management Office (PMO) for barrages will be responsible for implementing the project for PID. The PMO teams will be strengthened providing additional staff for engineering, safeguards, procurement and financial management tasks. The implementation arrangements are summarized in Table 3 and described in the PAM. Table 3: Implementation Arrangements Aspects Arrangements Implementation period From January 2012 to December 2016 Estimated project completion date 30 June 2016 Project management (i) Oversight body (ii) Executing agency (iii) Key implementing agencies (iv) Project implementation unit Procurement Project Steering Committee comprises Chairman Planning and Development Board, Punjab (Chair) and secretaries of Finance, Irrigation, Agriculture and Environment Departments and Member Engineering Planning and Development as committee members. Punjab Irrigation Department Punjab Irrigation Department PMO Barrages through a dedicated NKBP Unit of 11 staff International 1 contract $ 234,000,000 competitive bidding National competitive 1 contract $ 4,000,000 bidding Shopping 2 contracts $105,000

13 6 Consulting services QCBS (90:10) 1,478 person-months $ 9,500,000 Retroactive financing and/or advance contracting The government requested advance contracting and agreed to finance all the expenses incurred before the loan effectiveness as its contribution to the project. Disbursement Direct payment Civil works, goods and consultants Commitment Office and laboratory equipment procedure Imprest fund The ceiling shall not exceed the lower of (i) the estimated expenditure to be financed for the next six months or (ii) the equivalent of $1.5 million, whichever is less. Statement of Individual payments liquidated using SOE expenditure procedures shall not exceed $100,000 QCBS stands for quality- and cost-based selection. All procurements for services will follow ADB s Guidelines on the Use of Consultants (2010, as amended from time to time and for supplies and works will follow ADB s Procurement Guidelines (2010, as amended from time to time). The loan proceeds will be disbursed in accordance with ADB s Loan Disbursement Handbook (2007, as amended from time to time) and detailed arrangements agreed upon between the government and ADB. Source: Project team estimates. 21. Supervision consultants will assist the PMO in supervising the construction activities. The consultants will supervise the construction, verify the quantities and certify the interim payments for the project. The consultants will fill the role of the engineer as defined in standard FIDIC contracts. 11 The consultants will be selected internationally using quality- and cost-based selection method (QCBS; 90:10) following ADB Guidelines on the Use of Consultants, 2009, as amended time to time. The consultants will have a dual reporting function to the EA and ADB and will be required to field in-house staff for all core competencies. The tranche 1 consultants and the consultants who were involved in preparation of the engineering design of this project will be considered eligible to compete for tranche 2 supervision services; should they express interest in doing so. Their current activities do not grant them an unfair competitive advantage (see Para 1.12 of the ADB s Guidelines on the Use of Consultants 2009). E. Project Readiness 22. The ADB operation department has introduced tighter project readiness filters prior to the approval of tranches under MFFs and for stand-alone projects. The readiness requirements include final engineering design (if build-only contracts are anticipated), preliminary engineering design (if design and build contracts are envisaged), completion of the bidding process for supervision consultants and contractors (to match the bid price to the finance), completion of safeguards plans and completion of land acquisition and resettlement (at least for the first 24 months of land acquisition and resettlement needs), appropriate budget allocations for at least 24 months of works and completion of all internal approvals at the Government level. In this instance, the project has a full feasibility study and detailed engineering design. The engagement of supervision consultants is advanced, although not completed (short list completed and the bidding process is in place). The bidding process for the civil works contracts is well underway, with full roadshows having taken place in various capitals in the region and elsewhere. It is anticipated that the bidding will be near completion by year-end or during the first month of To make up for the lack of final data on price, ADB and the Government agreed to a substantial contingency on the construction cost. This should minimize the risk of 11 The engineer has final approval authority for technical matters, development of bidding materials, and sign-off on contracting supervision as defined in standard FIDIC general conditions of contract.

14 7 under-funding. Safeguards plans are all in place. Significant land acquisition or resettlement is not envisaged. All internal approvals have been obtained and local counterpart finance has been set aside. The full concurrence of the Government and the EA on the project scope has been obtained. Procurement plan is in Appendix 3. Details of the implementation plan, procurement plan and a fund flow mechanism are in PAM. F. Advance Contracting and Retroactive Financing 23. The government has requested advance contracting and agreed to bear all the related expenses incurred before loan effectiveness as its contribution to the project. Therefore, no retroactive financing is required for this project. The EA and the government of Punjab were informed that agreement on advance actions does not commit ADB to provide financing through the MFF. IV. DUE DILIGENCE 24. The PID submitted the project documents including feasibility report, detailed engineering design, initial environmental examination (IEE), updated environmental and resettlement framework (EARF) and draft resettlement plan (RP). The project team conducted extensive due diligence on the technology, investment plan and safeguard requirements. The project preparation is backed by a final design. The project team reviewed and found the final design acceptable. A. Technical 25. The proposed new Khanki Barrage (NKB) will replace 100-year old existing Khanki headworks, which is at the brink of failure and may result in no water delivery to the LCC for several crop seasons. The NKB will be located at 275 meters downstream from the existing headworks and will reliably divert up to 330 m 3 sec -1 (11,653 ft 3 sec -1 ) of irrigation supplies to 1.2 million ha. It will increase safe flood capacity from 22,654 m 3 sec -1 (800,000 ft 3 sec -1 ) to 31,149 m 3 sec -1 (1,100,000 ft 3 sec -1 ) and eliminate the annual water leakages of 370 million cubic meters. NKB will reduce the flood risk from once in 50 years to once in 100 years. It will also provide a gate operating deck and a bridge facilitating road communication access across the river. The new barrage will feature pile foundations, independent undersluices and motoroperated radial gates. This technology is compatible to local conditions and PID is currently operating and maintaining similar barrages throughout Punjab. 26. Punjab has agreed to increase the annual operation and maintenance (O&M) budget for NKB from Rs38 million now to Rs50 million ($0.6 million) in normal year and up to Rs200 million ($2.4 million) in a flood-year. 12 Punjab has ensured (i) an independent assessment and verification of the O&M works and (ii) an independent audit of the O&M expenditure. PID has experience of O&M of 14 similar barrages. 27. Rehabilitation of LCC system will be completed by 31 December 2011 under JICA funding. The institutional reforms are in place and management of most of the distributary and minor canals has already transferred to the FOs. Rehabilitated LCC system will translate benefits of reliable water supply from NKB into an improved and sustainable production system. 12 Based on data from 14 barrages in Punjab, a recent estimate shows an average annual O&M requirement for one barrage varies between Rs40 million and Rs50 million.

15 8 B. Economic 28. The direct beneficiaries are 568,000 farming families living in 7 districts within the LCC command area. This is equivalent to 3 million people, most of whom have very low incomes. The average farm size in the canal command is only 2.65 ha (6.5 acres). People other than those living in the LCC command will benefit from better road access across the river. Typical beneficiaries were consulted during the due diligence process. 29. The economic benefits are derived from two sources: (i) stable and reliable agricultural production; and (ii) traffic flow across the Chenab River over the new Khanki barrage. The estimated benefits are the income forgone and increased production costs that would occur, assuming barrage failure without the project. The key factor in measuring benefits is determining the year of failure of the barrage without replacement. Because of the unstable foundation conditions at the existing headworks, risk analysis associated with the barrage has been adopted - the year of failure being established as a high probability. Variation in capital costs is also included as a random variable. The analysis was simulated for 5,000 iterations and the results are presented in terms of probabilities. Sensitivity analysis is not required as variations to benefits and costs are implicitly included in the base analysis. The economic analysis reflects the benefits the society will gain from the project. Financial prices and costs are converted to economic values, and where possible externalities are measured and included. An O&M cost of Rs200 million a year was used in the analysis, which is the maximum requirement during flood year. The O&M requirement for a normal year is Rs50 million. This analysis is in accordance with ADB s guidelines for economic analysis 13 and risk analysis. 14 The mean economic internal rate of return (EIRR) is 21% and the range goes from (10 th percentile) to 31.3% (90 th percentile). The probability of the project exceeding the 12% EIRR threshold is 85%. Detailed calculations of economic analyses are in Appendix 4. C. Governance 30. Anticorruption. ADB s Anticorruption Policy (1998, as amended from time to time) was explained to and discussed with the Government of Punjab and PID. The specific policy requirements and supplementary measures are described in the PAM. ADB reserves the right to investigate, audit and examine the records and accounts of PID directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the investment program and/or the NKBP. To support these efforts, relevant provisions of ADB s anticorruption policy are included in the loan regulations and the bidding documents for contracts under NKBP. 31. Financial Management. The project team evaluated the PID s financial management, performance and procurement capacity specifically relating to NKBP requirements. The team is of the view that it satisfies ADB s financial management and procurement requirements. The PID's current financial management system is capable of (i) recording the required financial transactions and balances; (ii) providing regular and reliable financial statements and monitoring reports during project implementation; (iii) safeguarding financial assets; and (iv) subjecting required financial documents to audit acceptable to ADB. The PMO is staffed with experienced personnel, who are familiar with ADB s Handbook for Borrowers on the Financial Governance and Management of Investment Projects Financed by the ADB, August A dedicated 13 ADB, Guidelines for the Economic Analysis of Projects. Manila; ADB Handbook for the Economic Analysis of Water Supply Projects. Manila. 14 ADB, Handbook for Integrating Risk Analysis in the Economic Analysis of Projects. Manila.

16 9 NKBP unit will further strengthen the capabilities to execute, manage, and monitor project implementation Disbursement Arrangements: Loan disbursements for goods and services under major civil works and consultant s contracts will be made using direct payment methods as outlined in the Loan Disbursement Handbook. Imprest account will be used for small payments, mainly for operating cost and affected persons dislocation. 33. Accounting, Auditing, and Reporting: The PID will maintain separate accounts and records for all expenditures incurred on the Project. The PMO will consolidate and review the accounts, and after auditing, will submit them to the PID, Department of Finance and ADB. Project accounts will be audited annually by the Auditor General of Pakistan. The audited accounts and audit report will be submitted to ADB no later than 6 months after closing the corresponding fiscal year. The audit report will include a statement verifying that funds disbursed by ADB against statements of expenditure have been used for the purpose for which they were provided. The PMO will submit quarterly financial and physical progress reports within one month following the end of the quarter to which they relate. 16 Within 3 months of Project completion, the PMO will submit to ADB a project completion report quantifying physical progress and monitoring the utilization of loan funds. 34. Project Performance Monitoring and Evaluation: A project performance management system will be established in the PMO within 6 months of loan effectiveness. The system will be tailored to project-specific requirements and prepared in consultation with PID. A database of key benchmark indicators will be established by the PMO in consultation with ADB. This will become part of the project monitoring system and will be routinely updated and monitored at least twice a year, including prior to midterm review and project completion. D. Poverty, Social and Gender Dimensions 35. Poverty Reduction. Pakistan s two-third population lives in rural areas, where incidences of poverty and vulnerability are high (IFAD, 2010) 17. Punjab s irrigation system supplies water to 8.4 million ha, which is a major livelihood source of more than 40 million people. The project will directly benefit about 3 million people. Approximately 80% of the targeted beneficiaries are classified as poor including 50% vulnerable being at a lower band of the poverty. Women (50% of the beneficiaries) are the essential part of the family labor in agriculture and food related activities. Only less than 20% of the people in the project area have access to the public facilities. The project will provide new road link across the river facilitating the nearby population specifically women and children, access to better health and education facilities. A summary of poverty reduction and social strategy assessment is in Appendix 5. E. Safeguards 36. Land Acquisition and Resettlement. The Project is categorized as category B for involuntary resettlement and category C for indigenous people impacts. 18 Limited impacts on land because of the construction of the new Barrage have been identified. In any case, LARP 15 Existing PMO is headed by a full time project director and comprises technical, financial, procurement, social and environment, and administrative units. 16 In addition, PMO will prepare other such information and reports relating to the Project and its implementation as ADB may reasonably request. 17 IFAD s Punjab Poverty Alleviation Project Report, October ADB s categorization (accessible from the list of linked documents in Appendix 7).

17 10 has been prepared in line with the country s Land Acquisition Act 1894 and Resettlement Framework first prepared and agreed upon under the MFF. This work has been updated to comply with ADB's SPS (2009). A total of 69 households (414 persons) will be affected by the project. In total, 19 houses will be affected, which include 14 houses owned by the PID in its staff colony and 5 private houses. PID will build new houses in the colony to accommodate its 14 staff families. The private house owners will be compensated through replacement costs. The other damages include 24 fruit and 13 wood trees and loss of crops on acquired land during project implementation. The number of affected people through dislocation or through 10% loss of their productive assets represents less than 200. The resettlement cost is estimated at just under $500,000. Government of Punjab will purchase the necessary land to comply with the resettlement plan. Resettlement costs will be financed under the loan. 37. The project area does not include communities that may be defined as indigenous people under ADB s SPS (2009). Consequentially, indigenous people impact classification for the project area is C. 38. Environment. The project is categorized as category B project for the environment. 19 The due diligence work included site visits to the project area. The government conducted an IEE and submitted its report. ADB considered it inadequate and the due diligence team updated it so that it now meets the requirements of ADB s SPS (2009). The major anticipated environmental impacts are (i) soil contamination around the contractor s camp, (ii) dust, smoke and noise, (iii) compaction of soil, (iv) water leakage from temporary dikes and (v) damage to flora and fauna. The mitigation measures have been agreed and will be included in the contractor s contractual obligation to the Government. The main provisions include (i) managing the camp s waste properly, (ii) maintaining the roads and drainage ditches in proper order, (iii) using low noise machinery, (iv) monitoring and strengthening temporary dikes and (v) maintaining the borrow area leveled and useable at the completion of the contract. F. Climate Impacts 39. Indus basin (NKBP is a part), is subject to relative risk from (i) lower water flows associated with glacial recession, and (ii) flash floods resulting from both heavy monsoon rainfall in the catchment and on rare occasions glacial blockage collapses in the upper catchments. While it is envisioned that climate-induced extreme events and variability may occur, the Khanki barrage is located at downstream of major structures, and is therefore significantly buffered by the upstream infrastructure. NKBP and its beneficiaries are therefore at low likelihood of vulnerability and risk from climate-induced upstream impacts; and introduction of climate risk management actions within the narrowly defined barrage project area is deemed unnecessary. Nevertheless, improved barrage flood capacity from once in 50 year return period to once in 100 year return period and water supply augmentation from the Mangla reservoir at river Jhelum to the Khanki Barrage at River Chenab during low flow periods accommodate risks of high and reduced river flows in the Chenab River. G. Risks and Mitigating Measures 40. Major risks and mitigation measures are summarized in Table 4 below and described in detail in the risk assessment and the risk management plan ADB s categorization (accessible from the list of linked documents in Appendix 7). 20 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 7).

18 11 Risks Extreme flood event delays barrage construction. Climate-induced reduction in water flows and availability for Punjab irrigated agriculture, or energy driven water releases from the reservoirs. Security conditions worsen to a level that reduces interest of the international bidders in ICB bidding. H. Risks Categorization Table 4: Summary of Risks and Mitigation Measures Mitigation Measures The project design calls for constructing coffer dams to protect barrage works under construction from the river flows. Further, an appropriate construction methodology that allows completion of the Barrage foundation work (underwater parts of the structures) before the flooding season from July to September will be agreed with the successful bidder during contract negotiations. Climate change projections indicate likely decrease in river flows due to decreased rainfall regimes. The Khanki Barrage receives water from the Mangala reservoir through UJC during low flows. The flow augmentation from the Mangla reservoir provides water shortage make up arrangement during low river flows. NKBP area is relatively safe. Government will provide its land for the contractor s camp. The project area is small and the bidders will be requested to include the camp security cost in the bid. Roadshows conducted to attract the quality bidders from the region and elsewhere. 41. ADB has more than 30 years of experience of working in water sector in Pakistan. PID has implemented several irrigation and barrage projects with ADB, World Bank, JICA and other donors as an executing agency. Further, this project has no safeguard categorization of A. However, the project, due to its loan of more than $200 million, is categorized as complex. Contribution to ADB s result framework is summarized in Appendix 6 and a list of the linked documents is presented in Appendix 7. V. ASSURANCES 42. The government and the PID have assured ADB that the implementation of the project shall conform to all applicable ADB policies including anticorruption measures, safeguards, gender, procurement, consulting services and disbursement as described in detailed in the PAM and loan documents. 43. The government and the PID have agreed with ADB on certain covenants for the project, which are set forth in the loan agreement and the project agreement. VI. RECOMMENDATION 44. On the basis of the approval by ADB s Board of Directors for the provision of loans under the multitranche financing facility in an aggregate amount not exceeding the equivalent of $700,000,000 to the Islamic Republic of Pakistan for the Punjab Irrigated Agriculture Investment Program, it is recommended that the President approve the proposed tranche as described in paragraph 18 of this report and the draft loan agreement and project agreement for the proposed tranche substantially in the forms attached to this report.