Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: June 2010 Proposed Loan for Subprogram 2 Islamic Republic of Pakistan: Sindh Growth and Rural Revitalization Program

2 CURRENCY EQUIVALENTS (as of 26 May 2010) Currency Unit Pakistan rupee/s (PRe/PRs) PRe1.00 = $ $1.00 = PRs ABBREVIATIONS ADB Asian Development Bank ADP Annual Development Plan APM agriculture produce market BHU basic health unit BOR Board of Revenue CPA core policy area DAC Departmental Accounts Committee GoS Government of Sindh GPF general provident fund M&E monitoring and evaluation MIS management information system MTBF medium-term budgetary framework MTFF medium-term fiscal framework P&DD Planning and Development Department PAC Public Accounts Committee PC-1 Planning Commission development project template PDF project development facility PFM public financial management PPP public private partnership PPRA Public Procurement Regulatory Authority PSE public sector enterprise SDR special drawing rights SFMH Sindh Fund Management House SPF Sindh Pension Fund TA technical assistance WDD Women Development Department GLOSSARY hari tenant, a person who is a landless farm worker SAP/R3 resource planning software produced by Systemanalyse und Programmentwicklung AG/third generation taluka subdivision of a district, as identified by government notification

3 NOTES (i) (ii) The fiscal year (FY) of the government ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2010 ends on 30 June In this report, "$" refers to US dollars. Vice-President X. Zhao, Operations 1 Director General J. Miranda, Central and West Asian Department (CWRD) Country Director R. Stroem, Pakistan Resident Mission, CWRD Sector Director R. Subramaniam, Financial Sector, Public Management and Trade Division, CWRD Team leader Team members Peer reviewers Y. Elhan-Kayalar, Senior Economist (Public Financial Management), CWRD R. Jayewardene, Principal Social Development Specialist, CWRD L. Nazarbekova, Senior Counsel, Office of the General Counsel D. Rehm, Senior Economist (Fiscal Management), CWRD M. van der Auwera, Social Security Specialist, CWRD O. Zia, Project Officer (Public Management), CWRD T. Niazi, Senior Governance Specialist, RSDD A. Shah, Financial/Capital Markets Specialist, SARD 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 Page I. THE PROPOSAL 1 II. THE PROGRAM 1 A. Rationale 1 B. Impact and Outcome 2 C. Outputs 3 D. Program Costs and Financing 6 E. Implementation Arrangements 7 III. DUE DILIGENCE 7 A. Economic and Financial 7 B. Governance 8 C. Poverty and Social 8 D. Safeguards 9 E. Risks and Mitigating Measures 9 IV. ASSURANCES 10 V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework List of Linked Documents Development Policy Letter Policy Matrix 21

5 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the Islamic Republic of Pakistan for subprogram 2 of the Sindh Growth and Rural Revitalization Program (the program or subprogram 2). 2. The program will support accelerated and sustainable economic growth in the province of Sindh in Pakistan (Sindh). This will be achieved by reforming public expenditure management and improving the business environment for the private sector to participate in infrastructure investments and service delivery. The program will stimulate economic activity, which will create employment opportunities. Gender mainstreaming at policy and project design levels will ensure that benefits accrue to both men and women in Sindh. The program will thus help reduce poverty, starting with rural Sindh. II. THE PROGRAM A. Rationale 3. Sindh has about a quarter of Pakistan's population, generates a third of its gross domestic product. Sindh has a strategic location for trade, entrepreneurial capacity, and a vibrant financial sector. 1 Sindh has a strategic location and is relatively better off, with a provincial per capita income that is 37% higher than the national average. 2 Yet growth and income distribution have been uneven. While 54% from services (led by construction and finance) of the gross provincial product came from industry and 30% from industry, agriculture contributed only 15% during Half of Sindh s population lives and is employed in rural areas. However, budget allocations do not reflect this distribution; the government has underinvested in rural infrastructure. 4. Resources are limited in Sindh and are not used efficiently. The economic crisis has constrained federal support, the security crisis has made investments uncertain, and structural weaknesses in public expenditure management limit the quality and geographic coverage of services. Despite pressing needs-for transport, energy, water and sanitation infrastructure, and accessible, quality health and education services-16% of Sindh s annual development budget was not used in FY2009 due to capacity and structural constraints. 3 And without an enabling legal framework and the requisite institutional structure, private sector's role in infrastructure provision and service delivery has remained limited. 5. In 2008, Sindh developed a multi-sector reform agenda for the program jointly with the Asian Development Bank (ADB) 4 to reduce urban rural disparities, attract private sector investment, and create fiscal space through public financial management reforms. Subprogram 1 supported the start-up phase of the reform agenda of the Government of Sindh (GoS), which is in line with ADB's country partnership strategy. 5 The reforms under subprogram 1 included: (i) initiation of policy work on public-private partnerships (PPPs) in Sindh; (ii) establishment of a Public Enterprise Working Group to assess public enterprise performance, and to develop reform options for these enterprises; (iii) rationalization of development budgets in line 1 Summary Country Economic Indicators for Pakistan are provided as linked document 6. 2 Advanced Economic Research Centre Sindh Economic Data for FY2008. Karachi (mimeo). 3 Footnote 1, staff calculations based on Sindh Annual Development Plan for FY ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Islamic Republic of Pakistan for the Sindh Growth and Rural Revitalization Program Cluster. Manila (Loan 2484-PAK). 5 ADB Country Partnership Strategy: Pakistan, Manila.

6 2 departments; (iv) establishment of a Public Accounts Committee in the Provincial Assembly and short-listing of four departments for reducing audit backlogs; (v) establishment of an Employee Benefit Administration Task Force and adoption of an action plan to better manage employee benefits; (vi) identification of rural development priorities and initiating work on rural investment plan; and (vi) improvements in primary health care provision in rural areas through PPPs and rural empowerment initiatives. 6. The proposed subprogram 2 builds on and supports these reforms. GoS has taken measures to: (i) strengthen public financial management for efficient planning and utilization, to get maximum value for money; (ii) reform planning and budgeting processes and procedures; (iii) implement a rural revitalization and investment plan to improve growth prospects; (iv) create institutional and regulatory structures to attract private sector investments through public private partnerships, thereby generating fiscal space; and (v) increase investments in roads and communications to connect and open up remote and rural areas to markets and investors, stimulating economic activity and contributing to poverty reduction. The resource requirements are significant, however, and Sindh faces fiscal constraints at present. The proceeds of the loan will partly alleviate those constraints, while helping to leverage the proposed reforms. B. Impact and Outcome 7. Subprogram 2 will promote broad-based growth across the province and spur growth in the depressed rural economy. The program's long-term impact will be inclusive and balanced economic growth. The main outcome of the program will be improved efficiency and delivery of selected services in Sindh, through greater private sector participation, institutionalized gender mainstreaming, and adequately provisioned employee benefit management. 8. To facilitate robust and inclusive growth, it is necessary to increase rural incomes and investments in Sindh. Poor seed quality and market distortions reduce the income of farmers, particularly small-scale growers. Accordingly, Sindh Seed Corporation will be given greater autonomy through private sector management to improve the supply of certified seeds. Another key challenge is access to finance. With accurate and readily available land titles, land can constitute a marketable asset. Computerization of land records will help generate definitive titles, which in turn will enable small as well as large farmers' access to commercial credit and rural support programs. By removing barriers to private sector investment in the agriculture produce markets (APMs) and corporatizing public APMs, growers will be able to sell their produce directly at the best possible price. Kotri, Larkana, and Nooriabad industrial estates under the Sindh Industrial Trading Estate Limited will be restructured to attract private investment and help promote industrial activity. Moreover, GoS will partner with the private sector to provide infrastructure, generate employment, and supply better services. 9. The lack of adequate health and social welfare services imposes considerable costs that adversely impact economic wellbeing. PPPs which are currently in their infancy and focus largely on physical infrastructure will be diversified to provide basic health services with the public sector, enforcing minimum service delivery standards and monitoring results through citizen satisfaction surveys. Public sector employees are an important element of service delivery, but face difficulties in obtaining their employee benefits, including pensions. Pension reforms will be implemented to ensure that budgetary provisions are adequate, and administrative reforms will be made to allow timely allocation and payment of benefits. Women generally have limited representation, opportunities, and access, and the program will help institutionalize gender mainstreaming in policy formulation, project implementation, and performance monitoring.

7 3 C. Outputs 10. Subprogram 2 will support reforms in three core policy areas (CPAs). Reforms aimed at promoting gender equality cut across all these policy areas. i. Core Policy Area 1: Private Sector Participation in Economic Activities 11. Enabling Environment for PPPs. The private sector can be a powerful ally of the government in infrastructure development and service delivery. The government recognizes it cannot meet development financing needs alone. PPPs will allow the private sector s financial resources and technical and managerial expertise to supplement public resources, freeing government resources for investment in priority non-infrastructure sectors such as education, health, and agriculture. Subprogram 2 will support the development of legal, regulatory, and institutional frameworks for PPPs. 12. During subprogram 2 period, a PPP law was drafted and enacted. A PPP policy was developed to provide operational guidance; it incorporates environmental and social safeguards, and gender provisions to ensure sound project design and inclusive implementation. The PPP and risk management units were formed, and their capacity will be developed systematically over the next two years. Guidelines for a project development facility (PDF) and a viability gap fund were developed to support PPPs. Current procurement rules were amended to include PPPs. 13. Commercialization of PSEs. The private sector will become a more prominent stakeholder in managing public sector enterprises (PSEs). Efficient and financially sustainable PSEs can generate revenues and reduce the fiscal burden on the government. To help unlock the economic potential of PSEs and attract private investments, chief executive officers and members of boards of directors with proven experience in competitive market settings with be hired. Four PSEs from industry and agriculture sectors were chosen as pilot cases. Their Articles and Memorandum of Association are being revised to empower the respective boards of directors. GoS developed a restructuring policy for the three pilot industrial estates, based on the lessons learned from these pilots. The Sindh Seed Corporation Act 1976 is being revised to provide for private sector-led management in order to improve corporate efficiency and increase provision of certified seed. ii. Core Policy Area 2: Public Expenditure Management 14. Efficiency of Investments. Planning and informed budget preparation will enable efficient management of public resources. In order to improve the quality of public investments and align public expenditure with policy objectives, the government will roll out the medium-term fiscal framework (MTFF) to all government fiscal operations, and adopt a medium-term budgetary framework (MTBF) for Departments of Education and Irrigation and Power in FY2011. The MTBF will be extended to Departments of Agriculture and Livestock, and Fisheries during FY2012. A rural investment plan is being developed to identify key requirements and mobilize resources for rural revitalization. Investments will be prioritized based on development targets and resources. Twice tokenization of projects in annual development plans has been discontinued. 15. Monitoring and Evaluation. Systematic monitoring of results will support informed policy decisions. Effective monitoring and evaluation (M&E) against performance standards and priorities improves the accountability of resource use and service delivery, and can inform

8 4 policymaking and budget preparation. During Subprogram 2 period, business process reengineering of the government's M&E systems continued with introduction of a comprehensive automated monitoring system (i.e., the Project Monitoring and Evaluation System) and capacity building of M&E staff. The government will have third party evaluation of large development schemes, and publish evaluation reports on its website to improve transparency. To inform policy decisions, the Sindh Bureau of Statistics will be restructured to capture and analyze gender-disaggregated data. 16. Audit and oversight. Improved internal controls, audit compliance and legislative oversight will improve management of scarce resources. Strengthened audit capacity will help in improving compliance with financial and accounting provisions, thereby reducing waste and leakages. To improve internal controls for public financial management, in line with notified budget ceilings, an MTBF for FY2011 will be adopted. New scheme approvals for the Annual Development Plan (ADP) will precede budget deliberations in the Assembly starting with FY2012. The Sindh Public Procurement Regulatory Authority (PPRA) Act was enacted, and PPRA rules aimed at greater transparency in public procurement were developed and adopted during subprogram 2. A project feasibility fund has been established to finance feasibility studies for proposed projects to ensure high quality projects when the relevant line department lacks the requisite capacity. The Public Accounts Committee (PAC) will provide timely legislative oversight on public investments. Departmental Accounts Committees (DACs) will continue to reduce audit backlogs and improve audit compliance. Business processes in PAC will be streamlined and a customized management information system (MIS) adopted, to: (i) improve its capacity, and (ii) ensure audit backlogs are systematically cleared by DACs. To decrease budgetary losses, the government will strengthen its internal control strategy and improve public auction rules for moveable assets. 17. Employee Benefits. Improved management of employee benefits will provide adequate income security for civil servants, reduce contingent liability, and create much needed fiscal space. In 2002, GoS began pre-financing its growing pension and general provident fund liabilities. With ADB's support, GoS has undertaken actuarial valuations, estimating the contingent liabilities of pensions and the general provident fund for FY2008 and FY2009, to inform policy decisions. FY2009 accrued liabilities were reported and cost of both schemes calculated in line with the International Public Sector Accounting Standard (IPSAS) 25. In addition, Pay and Pension Commission reviewed reform options and a financing strategy has been prepared for the partial pre-funding of both pension and general provident fund benefit payments. GoS established the Sindh Fund Management House (SFMH), which will manage these funds to improve transparency and accountability during the investment process. 18. During subprogram 2 period, an SFMH investment unit was established. GoS adopted an SFMH strategy. An SFMH Bill is being prepared, based on the government's SFMH strategy. A reliable recordkeeping system is required to manage the employee benefits effectively and to provide accurate, timely payments. The accountant general of Sindh has computerized its recordkeeping system, and all available data were entered during subprogram 2 period. The accountant general of Sindh has launched one-window facilitation cells for swift processing of pension applications. Employee benefits package was reviewed; reform options for an affordable and sustainable employee benefit system were identified for adoption. iii. Core Policy Area 3: Rural Economy 19. Investments in Rural Areas. A rural investment plan will identify means of bridging the rural urban economic divide. A sector development plan will be prepared to prioritize areas for

9 5 short-, medium- and long-term interventions. GoS will develop an MTBF aimed at rural revitalization with Departments of Irrigation and Power, Education, Agriculture, Livestock and Fisheries. 20. Entry to and Management of Agriculture Produce Markets. Free entry to markets will enable competition and long-term productivity gains, and ultimately contribute to growth. GoS is amending the Agriculture Produce Market Act (1939) to remove the exclusive territory protection for APMs established under the act. This will broaden the participant base, increase commercial activity in APMs, and help raise rural incomes. More competitive APMs will become financially self-sustainable, thereby reducing the fiscal burden. The amended APM law will enable the private sector to establish and manage APMs, and incorporate existing public APMs as companies. Initially, all market administrators will be removed and more broad-based market committees will be appointed. Seven of the largest APM committees have already been constituted. The committees will oversee the transition to company status. ADB will provide technical assistance to pilot-test the corporatization of three APMs. 21. Land Titles. Proof of land ownership allows farmers access to credit and support programs. Definitive land titles will provide legal certainty with respect to land ownership and confer rights on farmers, enabling them to access commercial credit, which is a key constraint for farmers in purchasing farm inputs and increasing agricultural outputs. To improve the quality and management of land records, the Board of Revenue will conserve paper land records, computerize them, create a geographic information system for land management, and restructure its Survey and Settlement Department. Pilot testing of the geographic information system at taluka level and computerization of land records will start in July 2010 to support the milestones identified in the rural investment plan. The Land Revenue Act of 1967 will be reviewed for possible amendments. 22. Basic Heath Care Provision. Access to adequate primary health care contributes to overall productivity gains in rural areas. Poor health imposes considerable costs on those least able to purchase private health care, adversely affecting their employment opportunities and incomes. Since resources are limited, innovative solutions are required to finance and provide quality health care at the basic health unit (BHU) level. In 2005, the government partnered with the People s Primary Health Care Initiative to manage the BHUs. During subprogram 2 period, the initiative's management contract has expanded to include 18 of 23 Sindh districts. Service delivery performance can be monitored using measurable and objectively verifiable standards. A GoS committee, led by the Health Department, updated and improved the existing minimum service delivery standards. New standards will provide a benchmark for health service provision in Sindh. A third-party assessment will be conducted to take stop of beneficiary satisfaction with health services at BHU level. Beneficiary feedback and minimum service delivery standards benchmarks will be used in developing a results-based health sector policy. iv. Crosscutting Reforms Aimed at Promoting Gender Equality 23. Women face challenges in accessing quality health services, employment opportunities, and securing entitlements. During subprogram 2 term, to integrate gender priorities and responsiveness into policy decisions and project implementation, the Planning Commission's development project pro forma for concept papers (PC-1) was modified. It now requires genderdisaggregated data on the target beneficiaries and impact of every project in the ADP, with the goal of moving from targeted programs for women to resource allocation that is inherently based on gender needs.

10 6 24. Supported by the program, GoS also reconstituted the Provincial Development Working Party, 6 which now includes the secretary of the WDD as a permanent member, thereby ensuring gender-related policy inputs are incorporated in investment decisions and ultimately the entire public sector development portfolio. This will encourage equitable budgetary allocations. At the operational level, GoS adopted a new coordination mechanism (in its business processes) among WDD and line departments. Sindh s accountant general and the Sindh Bureau of Statistics will maintain gender disaggregated data to inform policy decisions. Moreover, the PPP policy and PDF guidelines have been drafted. They include clear provisions for addressing any adverse project impacts (e.g., loss of livelihoods) on women, and ensure that positive impacts stemming from PPP projects (e.g., employment generation) accrue to women as well as men. In addition, the program s technical assistance resources supported the Board of Revenue in computerizing land records (with a gender filter), which will transform land into an undisputable and marketable asset. Women landowners, including haris, will be able to access credit and support programs using land as collateral, and earn their livelihoods Achievements under subprogram 2 will form the foundation of subprogram 3-supported reforms during July 2010 December Under subprogram 3, ADB will continue its partnership with the government to: (i) develop a PPP pipeline in the transport sector and strengthen risk management capacity of GoS; (ii) restructure selected public sector enterprises; (iii) rationalize the ADP process; (iv) fully staff and operate SFMH; (v) strengthen the technical capacity of agriculture, industries, and women development departments, the State Bureau of Statistics, and the M&E cell; and (vi) develop a results-based health sector plan. D. Program Costs and Financing 26. GoS has initiated a number of programs to revive rural growth in Sindh and has committed to increase rural investments in line with MTFF during FY2009 FY2012 period. It has also allocated PRs20.7 billion within its ADP to targeted programs for rural development in FY2010 (Table 1) and plans to allocate PRs22.5 billion in FY2011. To meet its pension liabilities, the government has allocated PRs5 billion in FY2010. GoS faces tough socioeconomic challenges, and it is committed to addressing them with well-designed initiatives, such as the provision of land, technical, and financial support to landless haris, thus incorporating marginalized segments of society into mainstream economic activities. 27. To effectively support marginalized groups and sustain inclusive development, GoS requires about PRs29 billion ($342.9 million) in FY2011. In order to meet these overall programrelated requirements of GoS which otherwise may not be met the Government of Pakistan has requested a loan in various currencies equivalent to SDR81,100,000 ($120 million) from ADB s Special Funds resources for subprogram 2. 8 GoS will provide the remaining resources. The loan will have a term of 24 years including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% thereafter, and other terms and conditions set forth in the draft loan and program agreements. The Government of Pakistan will relend the loan proceeds to the Sindh government. The terms and conditions will be the same as those extended by ADB to the federal government, including those relating to foreign exchange and interest rate risks. 6 The GoS authority that approves all development schemes (projects), from PRs 60 million to PRs5 billion. 7 A detailed Gender Action Plan is provided as linked document 9 to this report. 8 A Development Policy Letter from GoS, as endorsed by Government of Pakistan is provided in Appendix 3.

11 7 Table 1: Government of Sindh Expenditures in Areas Covered by the Program (PRs billion, unless otherwise specified) FY2010 FY2011 Rural investments a Land titling Pension fund capitalization Funds b Total Equivalent in $ million a Includes GoS targeted programs for agriculture, livestock, fisheries, mineral development, and special packages for rural development. b Comprises project development fund/facility (PRs300 million) and viability gap fund (PRs3 billion) for publicprivate partnership projects, and project feasibility fund (PRs200 million) for provincial development programs. Note: Exchange rate used is $1 = PRs84.855, as of 26 May FY denotes fiscal year. Sources: Government of Sindh Medium-Term Fiscal Framework ( ), Sindh Budget , and ADB staff estimates. 28. Based on the current resource envelope, subprogram 3 is provisionally included in ADB s budget framework as $120 million. The specific terms and size of the loan will be confirmed during the processing of subprogram 3, on the basis of reform progress, requirement for and availability of resources. E. Implementation Arrangements 29. The Sindh Planning and Development Department, as the executing agency, will be responsible for the overall implementation of subprogram 2, including coordinating the implementation of policy actions by various departments, program administration, disbursements, and the maintenance of program records. The program management unit, set up under subprogram 1, will continue to coordinate day-to-day implementation requirements and arrangements. Finance Department will coordinate the activities of major implementing agencies (i.e., the Departments of Agriculture, Livestock and Fisheries, Health, Industries, Works and Services, Irrigation and Power, Board of Revenue). Subprogram 2 implementation period is from January 2009 to June Loan proceeds will be available for subprogram 2 for withdrawal in a single tranche, to be released subject to conditions specified in the loan agreement. The proceeds of the program loan will be disbursed in accordance with ADB's simplified disbursement procedures for program loans. 9 The Governments of Pakistan and Sindh will ensure that the local currency counterpart funds generated from loan proceeds for subprogram 2 are used to support reforms in line with the program. III. DUE DILIGENCE A. Economic and Financial 30. The constraints impeding economic growth in Sindh need to be addressed through various instruments. ADB has reviewed economic and financial performance of Sindh, especially the provincial expenditure management and rural development options, and worked 9 ADB Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila.

12 8 closely with key stakeholders and development partners 10 in designing the program. Analytical underpinnings of program design are consistent with the International Monetary Fund assessments for financial viability of the program. 11 It will help alleviate policy, institutional, legal and regulatory bottlenecks. By so doing, the program will expand the fiscal space of the GoS, and attract private sector to commercially viable propositions previously handled by GoS. 31. In parallel, ADB is also assisting Sindh to improve its water supply and sanitation systems in secondary cities and peri-urban areas. ADB's large-scale transport and power sector projects are channelled through the federal government. From an economic and financial due diligence point of view, the proposed loan will leverage reforms and provide considerable benefits to Sindh, as noted under the three core policy areas. B. Governance 32. The program includes regulatory and administrative reforms for fiscal transparency and public financial management. Introduction of an encompassing MTFF and development of an MTBF will support improvements in planning and budget implementation. Efficient use of fiscal resources is crucial, and requires effective fiscal monitoring and control procedures, internal control functions, and appropriate procurement procedures. Recent initiatives by the PAC and DACs have substantively reduced the outstanding external audit observations. 12 The adoption of the Sindh PPRA Law and the fuller complement of (new and revised) rules will support transparency, consistency and accountability in procurement practices. In addition, a procurement manual for PPPs will be developed. The program will support introduction of enterprise resource planning software for accounting and professional off-budget management of pension and other contingent liabilities. Service delivery will benefit from greater transparency resulting from MIS adoption, public private partnerships, and third party evaluations. 33. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government of Pakistan and the GoS. And they agreed to the provisions of the program on efficient and effective use of loan proceeds, for the reforms in program areas. C. Poverty and Social 34. Karachi, Sindh's capital city, has the highest per capita income in the country, while rural inhabitants are among the country s poorest. Sindh has the highest incidence of absolute landlessness (62%) and the lowest share of land ownership (26%) in Pakistan. 13 Wealthy landlords account for less than 1% of all farmers, but hold 60% of all farmland in Sindh. There has been no perceptible improvement in children s health indicators during the last 15 years. Maternal and infant mortality rates remain higher than in other countries with comparable levels of development, and malnutrition rates are extremely high. Fertility rate in Sindh (4.1 children born per woman) is higher than the national average (3.4), even though Sindh has the highest number of per capita health care professionals in the country. While access to public services 10 A development coordination matrix is provided as linked document A summary sector assessment and the IMF assessment letter are provided as linked documents 2 and 7, respectively, to this report. 12 Since December 2008 (subprogram1), audit backlogs for the four departments addressed under this program have been systematically reduced. Reductions of 61% in Agriculture Department, 69% in Irrigation and Power Department, 58% in Livestock and Fisheries Department, and 89% in Works and Services Department have been achieved during subprogram 2 period. PAC and DACs will continue to address the remaining backlog. 13 Government of Pakistan Pakistan Agricultural Census Islamabad: Agricultural Census Organization.

13 9 improved in Sindh, 14 this has yet to translate into improved development outcomes. 35. Under CPA 1 of the program, employment opportunities will be generated vis-à-vis PPP projects. Under CPA 2, more efficient use and management of public resources will enable (i) improved service provision by the public sector, and (ii) fiscal space for GoS to provide social services. And under its rural revitalization component (CPA 3), the program supports initiatives that aim to address some of these disparities. In the long run the computerization of land records will allow land titling to be regularized, which is necessary to access agricultural credit and support schemes, and improving livelihoods of the rural poor. Finally, the productivity of people derives in part from their physical well-being. Under subprogram 2, the GoS developed new minimum service delivery standards, incorporating maternal and child health care (in line with Millennium Development Goals 4 and 5) as a benchmark; started assessing current gaps in service delivery via third party evaluation of public and private service providers at basic health care units. These will contribute to preparation of a health sector plan to close these gaps. D. Safeguards 36. The program is categorized as category C with respect to potential impacts on environment, involuntary resettlement, and indigenous peoples, and does not trigger any of ADB's safeguard requirements under ADB's Safeguard Policy Statement Program design also includes safeguard measures beyond program completion. During subprogram 2 period, a PPP unit was established, but it is not a project financier. The PPP Law 2010, prepared under the program, requires that project preparation include a feasibility study, initial environmental examination, and environmental impact assessment in line with industry international best practices. A PPP policy was drafted to ensure compliance with best practice standards and procedures on environmental and social safeguards. E. Risks and Mitigating Measures 38. Benefits from the program may be fully realized only if risks are addressed or mitigated. Mitigation measures have been incorporated into the subprogram 2 design. 16 Overall, the integrated benefits and positive impact of the program are expected to outweigh the costs. 39. Major risks and mitigating measures are summarized in Table 2: Risks Political risks. Fragility of coalition may threaten sustainability of reforms, especially for private sector participation and corporatization. Macroeconomic risks. Economic crisis may reduce resources available to Sindh. Table 2: Summary of Risks and Mitigating Measures Mitigating Measures Effective and continuous engagement with policy makers, bureaucrats, and practitioners has helped develop ownership at all levels. The Government of Pakistan is working with international financial institutions to stabilize its fiscal position. The revised National Finance Commission formula provides for yearly increases in funds allocated to Sindh. 14 Devolution Trust for Community Empowerment Social Audit of Governance and Delivery of Public Services: Pakistan 2004/2005. Islamabad: UNDP. 15 ADB Safeguard Policy Statement. Manila. 16 A detailed Risk Assessment and Management Plan is provided as linked document 10 of this report.

14 10 Risks Governance risks. PFM structure, capacity constraints, lack of transparency in administration and transactions may stall reforms. Implementation risks. Reforms in most areas are highly complex. There are significant capacity constraints. Bureaucratic resistance to change may delay implementation. Source: Asian Development Bank. IV. Mitigating Measures Adoption of medium-term budgetary frameworks helps articulate sector priorities. Stronger internal controls and financial management help ensure accountability in using resources. Greater transparency in procurement, monitoring and evaluation practices. Soliciting end-user feedback to inform policy responses (e.g. the citizen's satisfaction survey). Ownership (of reforms) by politicians and bureaucrats; supported by targeted capacity development Effective program management unit. Close monitoring and follow up by ADB. ASSURANCES 40. The Government of Pakistan and GoS have assured ADB that implementation of the program shall conform to all applicable ADB policies. They agreed with ADB on certain covenants for the program, including those on policy actions and their continuation, policy dialogue, use of counterpart funds and program implementation, which are set forth in the loan agreement and program agreement. As part of program reforms, GoS has also agreed to the following: (i) (ii) (iii) GoS shall prepare, by 31 October 2010, a capacity development plan, with an indicative budget for its implementation, for undertaking environmental and social review and audits of PPP projects. GoS shall adopt a restructuring policy for Kotri, Larkana, and Nooriabad industrial estates by 30 July GoS shall refine it financing strategy for pension and general provident fund to provide for long-term targets in line with actuarial estimates for FY2011 onwards, and approve it by 31 December V. RECOMMENDATION 41. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan in various currencies equivalent to SDR81,100,000 to the Islamic Republic of Pakistan for subprogram 2 of the Sindh Growth and Rural Revitalization Program from ADB s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 24 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and program agreements presented to the Board. Haruhiko Kuroda President 2 June 2010

15 Appendix 1 11 Design Summary Impact Inclusive and balanced economic growth with reduced poverty and rural urban inequality in Sindh DESIGN AND MONITORING FRAMEWORK Performance Targets and Indicators with Baselines Average annual provincial GDP growth rate equal to at least national growth rate (i.e. planned at 2% in FY2010) Rural poverty incidence declining from 2007 to 2012, i.e. from beginning to completion of the program Gender-responsiveness made a selection criteria for development projects in Sindh from 2012 Data Sources and Reporting Mechanisms Economic and statistical reports by federal and GoS entities World Bank, International Monetary Fund, and ADB financial and economic publications Multiple indicator cluster survey and Pakistan Social and Living Standards Measurement Survey reports Assumptions and Risks Assumptions Sustained recovery of the Pakistan economy Inclusive and balanced growth of Sindh economy Continued commitment to reforms by provincial and federal governments Risks Political instability hinders investor confidence Poor security situation and law and order adversely affects economic activity Outcome Improved efficiency and delivery of selected services in Sindh Measurable progress made on 5 PPP projects (e.g., identification, pre-feasibility, bidding, financial closure) in Sindh by FY2011 Delays in ADP approval process halved in FY2010 Wider geographical coverage (at least 5 additional districts) and improved provision of basic health service delivery in FY2010 compared with 2008 (subprogram 1) WDD empowered to: (i) coordinate all gender cells in line departments; (ii) contribute to sector policies and development expenditures, based on gender-disaggregated data from BOR, EBAT, SBOS, and PC-1 forms, Economic and statistical reports by federal and GoS entities ADB, World Bank, and International Monetary Fund financial and economic publications GoS annual budgets and ADP performance reports Third party evaluation of primary health care (February August 2010) ADB consultations with key stakeholders and consultation reports Vested interest groups resist reforms Assumptions Political and macroeconomic stability Continued commitment to reforms by GoS and effective leadership in line departments Risks Poor security situation Lack of transparency in administration and transactions Implementation delays due to weak public sector capacity Pension and general provident fund managed in line with international best practices by FY2011 Key Outputs PPPs introduced in infrastructure and social service provision, (supplementing public resources with private resources) PPP unit and RMU formed and began operations by March 2010, with 6 staff (including 2 from the private sector) One PPP project implemented, and feasibility studies for at least 3 potential PPP projects prepared by the end of FY2010 Appointment notifications GoS's tender documents and approved contracts and agreements Assumptions Buy-in and sufficient, capacity for reforms in P&DD, Finance Department, and relevant line departments Quality consultancy services delivered Adequate TA support

16 12 Appendix 1 Design Summary Reduced government involvement in commercial activities Improved public expenditure management Performance Targets and Indicators with Baselines Articles and memorandum of association drafted to establish a new entity to manage and operate at least 3 industrial estates 100% of twice-tokenized schemes cancelled and practice of tokenization discontinued by end FY2010 Allocation ratio of 70:30 for strategic sectors and 60:40 for overall ADP ongoing and new schemes maintained from FY2010 onwards; 100% approval of new schemes for FY2010 reached by February 2010 Data Sources and Reporting Mechanisms GoS draft articles and memorandum of association GoS annual budget statements, budget call circulars GoS ADP analysis and evaluation reports Assumptions and Risks Risks Resistance from vested interests in the public sector Weak reform management capacity in government agencies Rapid turnover of program management staff Delay in consulting service recruitment and poor quality of consultant outputs Mechanism for gender mainstreaming in development planning introduced Improved transparency of development expenditure Secretary, WDD included as member of PDWP, and coordination procedure between WDD and departmental gender cells notified by May 2010 Develop capacity to monitor development expenditure in M&E Cell (March 2010) and Sindh PPRA Authority (May 2010) through staffing and training Data on 50 schemes entered in PMES, by May 2010 P&DD notification M&E Cell and PPRA organograms and notification for appointment PMES screen shots PPRA posted 100% of available tenders on their website, by the end of FY2010 PPRA website PRs3 billion transferred to SPF and PRs2 billion to SGPIF, by May 2010 Bank statements of SPF and SGIPF accounts Improved employee benefits management (towards an affordable and sustainable benefit package) Investment unit established for SPF and SGPIF with at least 3 staff from private sector, by May 2010 At least 90% of all available civil service payroll records and 100% of historical records of civil servants and pensioners entered in SAP/R3 by mid-may 2010 Investment in rural areas increased by at least 10% between FY2010 and FY2011 Notification of staff appointments GoS payroll records print outs GoS's ADP Increased and sustained rural investments (towards reduction of the urban-rural divide) Development of MTBF initiated in Irrigation and Power and Education, key departments in rural economy (March 2010) BOR road map Land records computerized (towards clear land ownership) Land records will be computerized in tandem with the rural investment strategy (accurate information on land titles will be accessible to poor landowners, enabling access to agricultural support services) BOR progress reports

17 Appendix 1 13 Design Summary Market barriers removed (towards more open APMs) Performance Targets and Indicators with Baselines New APM Law (to corporatize the markets and broaden the representative base of market committees) submitted to the Provincial Assembly by May 2010 Data Sources and Reporting Mechanisms GoS's draft APM law Assumptions and Risks Health service delivery contracted out (towards more accessible and high quality services) Coverage and quality of primary health care improved, with PPPs active in at least 18 of 23 districts by May 2010 Independent citizens satisfaction survey commissioned on basic health service delivery by PPHI and public health providers by March; results published by August 2010 Memorandums of understanding between the GoS and its private sector partners Third party evaluation results based on exit interviews, household surveys of end users Activities with Milestones Core Policy Area 1: Promote private sector participation by the GoS 1.1 Staff PPP unit and begin staffing RMU (March 2010) 1.2 Enact PPP Law (March 2010; with TA resources) 1.3 Draft procurement manual and VGF guidelines (April 2010; TA resources) 1.4 Draft articles and memorandum of association for new entity to restructure and manage Kotri, Larkana, and Nooriabad, industrial estates by May 2010 (TA resources) 1.5 Draft revisions to Sindh Seed Corporation Act 1976 by April 2010 (TA resources) Core Policy Area 2: Improve public expenditure management by the GoS 2.1 Issue expenditure ceilings for departmental development budgets (May 2010) 2.2 Discontinue twice tokenization practice (FY2010). 2.3 Include Secretary, WDD in PDWP as a permanent member (May 2010) 2.4 Develop a coordination mechanism among WDD and line departments' gender cells (May 2010) 2.5 Customize PMES for Sindh and enter data on 50 schemes (May 2010; TA resources) 2.6 Start third party evaluation of ADPs by engaging an evaluation team (February 2010) 2.7 Prepare action plan to restructure SBOS (May 2010) 2.8 Fully staff M&E Cell (March 2010) 2.9 Verify departments reduced audit backlogs (April 2010) 2.10 Enact PPRA Law, notify PPRA rules (March 2010) 2.11 Fully staff PPRA (May 2010) 2.12 Capitalize SPF with PRs3 billion and SGPIF with PRs2 billion (May 2010) 2.13 Recruit chief investment officer and actuarial support staff for Sindh Fund Management House investment unit (May 2010) Inputs Subprogram 2: loan of $120 million TA 7201 resources (balance of $800,000 for associated TA for cluster Loan 2484: Sindh Growth and Rural Revitalization, 2008) ADB staff resources Core Policy Area 3: Revitalize the rural economy by the GoS 3.1 Formulate medium term fiscal framework for , and initiate MTBF in irrigation and power and education departments (March 2010) 3.2 Prepare time-bound action plan for complete survey and mapping of rural towns (April 2010; TA resources) 3.3 Finalize draft and submit APM Law to Provincial Assembly (May 2010; TA resources) 3.4 Sign management contracts for basic health care units in 18 of 23 districts (May 2010) 3.5 Interdepartmental commission (comprising health, finance, planning and development, and population welfare departments and PPHI) to develop minimum service delivery standards for primary health care, including maternal and child healthcare (April 2010) ADB = Asian Development Bank; ADP = annual development plan; APM = Agriculture Produce Markets; BOR = Board of Revenue; EBAT = Employee Benefit Administration Task Force; GDP = gross domestic product; GoS = Government of Sindh; M&E = monitoring and evaluation; MTBF = medium-term budget framework; P&DD = Planning and Development Department; PDWP = Provincial Development Working Party; PMES = project monitoring and evaluation system; PPHI = people's primary health initiative; PPP = public private partnership; PPRA = Public Procurement Regulatory Authority; RMU = Risk Management Unit; SBOS = Sindh Bureau of Statistics; SGPIF = Sindh General Provident Investment Fund; SITE = Sindh Industrial and Trading Estate; SPF = Sindh Pension Fund; TA = technical assistance; VGF = viability gap fund; WDD = Women Development Department. Source: Asian Development Bank.

18 14 Appendix 2 LIST OF LINKED DOCUMENTS 1. Agreements Loan Agreement Program Agreement 2. Summary Sector Assessment 3. Project Classification Summary 4. Contribution to the ADB Results Framework 5. Development Coordination 6. Country Economic Indicators 7. International Monetary Fund Assessment Letter 8. Summary Poverty Reduction and Social Strategy 9. Gender Action Plan 10. Risk Assessment and Risk Management Plan 11. List of Ineligible Items 12. Others Sindh Growth and Rural Revitalization Program Problem Tree Sindh Growth and Rural Revitalization Program Overview

19 DEVELOPMENT POLICY LETTER Appendix 3 15

20 16 Appendix 3

21 Appendix 3 17

22 18 Appendix 3

23 Appendix 3 19

24 20 Appendix 3

25 Appendix 4 21 POLICY MATRIX Impact: Higher and sustained economic growth, and reduced poverty and rural-urban inequality in Sindh Outcome: Greater private sector participation and improved public expenditure management for the province as a whole, and particularly in rural Sindh Objectives Actions under Subprogram 1 (Apr 2007-Dec 2008) Core Policy Area 1: Promote private sector participation Promote private and public partnerships FD to have prepared a concept paper outlining a framework for developing provincial PPPs and for establishing a PPP Unit Actions for Subprogram 2 (January 2009-June 2010) 1.1 FD to have operationalized PPP Unit and Risk Management Unit (RMU) 1.2 GoS to have finalized drafts of (i) PPP policy, (ii) PDF guidelines, incorporating Equator Principles and gender equity provisions 1.3 GoS to have enacted the PPP Law 1.4 PPP unit to have drafted PPP procurement manual and VGF guidelines Indicative Triggers for Subprogram 3 (July Dec. 2011) PPP pipeline to be defined based on transport sector mapping PPP Policy Board to notify (i) PPP Policy, (ii) PDF Guidelines, (iii) PPP Procurement Manual, and (d) PPP selection criteria incorporating Equator Principles and gender equity provisions FD to develop an integrated record keeping and analysis system of all contingent liabilities for PPP and non- PPP projects Staff qualified in environment and social management of projects engaged Improve efficiency of public enterprises GoS to have notified the establishment of a Public Enterprise Working Group, and FD to have assessed past financial performance of public enterprises GoS to have committed to introduce private management into or to divest the Sindh Small Industrial Estate Corporation, Sindh Industrial Trading Estate Company, Sindh Seed Corporation, and Sindh Agriculture Market Committees; and to have taken steps to review and identify options for doing so 1.5 GoS to have identified Kotri, Larkana, and Nooriabad for restructuring and developed a restructuring policy (including mother body, separate boards of management for the 3 estates) 1.6 Agriculture Department to have submitted to Provincial Assembly the amended Sindh Seed Corporation Act 1976 to provide for an empowered private sector board of directors and management GoS to strengthen Industries Department to effectively regulate corporatized entities and assert ownership rights GoS to restructure Kotri, Nooriabad, and Larkana industrial estates, based on the restructuring policy GoS to restructure SSIC with empowered board of directors and management Core Policy Area 2: Improve public expenditure management Improve efficiency of public investment GoS to have formed a Budget Ceiling Committee to recommend the budget ceilings for each line department, and P&DD to 2.1 Budget Ceiling Committee to have recommended global limits for departments' development budgets GoS to achieve a 70:30 ratio of ongoing to new schemes Departments to secure approval of the remaining