Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 321 56-PK

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$SO MILLION

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR A

PUNJAB MUNICIPAL SERVICES IMPROVEMENT PROJECT

May 8,2006

Energy and Infrastructure Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without Wor ld Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective March 3,2006)

Currency Unit = Rupees 59.40 = U S S l

ADB CAS CCB C D C D G C I D A DAR DPL DPR EA EIA EMP ERR ESF FAR FSL GDP HUD&PHED I&S I C R IRUDP JICA K O I C A KPI LG LG&RDD M&E M O U MTR O M O & M P A R P&DD PHED PIFRA PIP

FISCAL YEAR July 1 - June 30

ABBREVIATIONS AND ACRONYMS

Asian Development Bank Country Assistance Strategy Citizen Community Board City District City District Government Canadian International Development Agency Desk Appraisal Report Development Policy Loan Detailed Project Report Environmental Assessment Environmental Impact Assessment Environment Management Plan Economic Rate o f Return Environmental and Social Framework Field Appraisal Report Fixed Spread Loan Gross Domestic Product Housing, Urban Development and Public Health Engineering Department Infrastructure and Services Implementation Completion Report Integrated Rural & Urban Development Program Japan International Cooperation Agency Korea International Cooperation Agency Key Performance Indicator Local Government Local Government and Rural Development Department Monitoring and Evaluation Memorandum o f Understanding Mid Term Review Operations Manual Operation & Maintenance Project Appraisal Report Planning & Development Department Public Health Engineering Department Project to Improve Financial Reporting and Auditing Performance Improvement Plan

PLGO PMDFC PPIAF S I L TMA TMO TO uu WAPDA WASA WBI

Punjab Local Government Ordinance Punjab Municipal Development Fund Company Public Private Infrastructure Advisory Facility Specific Investment Loan Tehsil Municipal Administration Tehsil Municipal Officer Tehsil Officer Urban Unit Water and Power Development Authority Water and Sewerage Authority Wor ld Bank Institute

Vice President: Praful C. Pate1 Country Managermirector: John W. Wal l

Sector Manager: Sonia Harnmam Task Team Leaders: Jaehyang So, Shahnaz Arshad

PAKISTAN: Punjab Municipal Services Improvement Project

TABLE OF CONTENTS Page

A . STRATEGIC CONTEXT AND RATIONALE ................................................................. 7 Country and sector issues .................................................................................................... 7 Rationale for Bank Involvement ......................................................................................... 9 Higher level objectives to which the project contributes .................................................. 10

PROJECT DESCRIPTION ............................................................................................... 11 1 Lending Instrument ........................................................................................................... 11 2 Project Development Objective and Key Indicators ......................................................... 11 3 Project Components .......................................................................................................... 12 4 Lessons learned and reflected in the project design .......................................................... 14 5 Alternatives considered and reasons for rejection ............................................................ 15

C . IMPLEMENTATION ........................................................................................................ 15 1 Partnership Arrangements ................................................................................................. 15 2 Institutional and Implementation Arrangements .............................................................. 15 3 Monitoring and evaluation o f outcomesh-esults ................................................................ 16 4 Sustainability ..................................................................................................................... 17 5 Critical risks and possible controversial aspects ............................................................... 17 6 Loadcredit conditions and covenants ............................................................................... 19

D . APPRAISAL SUMMARY ................................................................................................. 19 1 Economic and Financial Analyses .................................................................................... 19 2 Technical ........................................................................................................................... 21

. 3 Fiduciary ........................................................................................................................... 22 4 Social ................................................................................................................................. 23 5 Environment ...................................................................................................................... 24 6 Safeguard Policies ............................................................................................................. 25 7 Policy Exceptions and Readiness ...................................................................................... 26

Annex 1: Country and Sector Background .................................................................................. 27 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ......................... 33 Annex 3: Results Framework and Monitoring ............................................................................. 35 Annex 4: Detailed Project Description ........................................................................................ 47 Annex 5: Project Costs ................................................................................................................. 57 Annex 6: Implementation Arrangements ..................................................................................... 58

1 2 3

B .

. . .

Annex 7 : Financial Management and Disbursement Arrangements ........................................... 59 Annex 8: Procurement ................................................................................................................. 71 Annex 9: Economic and Financial Analysis ................................................................................ 79 Annex 10: Safeguard Policy Issues .............................................................................................. 88

Annex 12: Documents in the Project Fi le .................................................................................... 96 Annex 13: Statement o f Loans and Credits ................................................................................. 97 Annex 14: Country at a Glance ................................................................................................... 100

Annex 11: Project Preparation and Supervision .......................................................................... 94

Annex 15: Map IBRD34614 ...................................................................................................... 102

PAKISTAN PUNJAB MUNICIPAL SERVICES IMPROVEMENT PROJECT

Source

PROJECT APPRAISAL DOCUMENT

Local Foreign Total

South Asia Energy and Infrastructure

BORROWER INTERNATIONAL BANK FOR

Date: M a y 8,2006 Country Director: John W. Wal l

Sector ManagedDirector: Sonia H a m m a d Yusupha B. Crookes

Team Leaders: Jaehyang So, Shahnaz Arshad Sectors: Water Supply (40%); Roads (25%); Solid Waste Management (20%); Sanitation (1 5%);

Themes: Access to urban services and housing (P); Municipal finance (S); Municipal governance and institution building (S) Environmental screening category: A Project ID: PO83929

Lending Instrument: Specific Investment Loan

9.00 0.00 9.00 49.00 1 .oo 50.00

For Loans/Credits/Others: Total Bank financing (US$m.): 50.00 ProDosed terms: USDollar; FSL; Grace Period 8 Years: Total Maturi ty 20 Years

DEVELOPMENT Total: 58.00 1 .oo 59.00

RECONSTRUCTION AND I I I I

Borrower: Government o f Pakistan

Responsible Agency: Government o f Punjab

Project implementation period: Start: July 2006 End: December 201 0

Expected effectiveness date: June 30,2006

Expected closing date: December 3 1,201 0 Does the project depart fi-om the CAS in content or other significant respects? Does the project require any exceptions from Bank policies?

I s approval for any pol icy exception sought from the Board? Does the project include any critical r isks rated “substantial” or “high”? Does the project meet the Regional criteria for readiness for implementation? Project development objective:

[ ]Yes [XI N o [ ]Yes [XINO

[ ]Yes [XINO [XIYes [ ] N o [XIYes [ ] N o

Have these been approved by Bank management? c ]Yes [ IN0

The objective o f the project is to improve the viability and effectiveness o f urban services provided by the participating TMAs, and to make such improvements sustainable and replicable in other TMAs through the creation o f a performance-based management framework at both TMA and provincial levels. Project description: Component 1 would finance improvements in service delivery in the participating TMAs through capacity improvement and infrastructure investments.

Component 2 would assist the capacity development o f Government o f Punjab: 0 Local Government and Rural Development Department 0 Planning and Development Department 0 Punjab Municipal Development Fund Company Which safeguard policies are triggered, if any?

0 Environmental Assessment (OP/BP/GP 4.01 0

0 Involuntary Resettlement (OPBP 4.12) Significant, non-standard conditions, if any: Board presentation: N/A Loadcredit effectiveness: N/A Covenants applicable to project implementation: Re$ PAD C. 6

Cultural Property (OPN 11.03, being revised as OP 4.1 1)

A. STRATEGIC CONTEXT AND RATIONALE

1 Country and sector issues

1. Pakistan i s currently the most urbanized country in South Asia. I t is experiencing a rapid urban transition with growth rates that are twice the rate o f increase o f the overall population. Over a third o f the total population o f 140 mi l l ion l ives in urban areas, and almost ha l f o f Pakistan's residents will be urban by 2015.' Pakistan's economy has experienced an even more rapid transformation. Cities and towns are the location o f a disproportionate share o f value added, with manufacturing and services that account for 75 % o f Gross Domestic Product (GDP). The more urbanized provinces l i ke Punjab have recognized the potential role o f cities in economic growth, and the need to make available adequate resources for investment in infrastructure and delivery o f services to improve the investment climate o f its cities.

2. The rapid urban transition in Pakistan could contribute even more to the pace o f the country's economic growth and poverty reduction i f cities did not suffer from severe infrastructure bottlenecks, service deficiencies, poor local governance, and inefficiencies in land and housing markets. Water and sanitation coverage rates have almost stagnated since the 1990s at about 58% and 30%, respectively. Unaccounted for water i s high, collection rates and cost- recovery levels are low, existing infrastructure i s run down, supply intermittent, and the quality o f water dubious. Other urban services are not much better in terms o f quality and sustainability. The shortfalls in urban services are not merely an outcome o f aggregate resource constraints. They are exacerbated by constraints in the institutional, governance, and financial arrangements that have defined local service delivery and financing.

3. The Government's 2001 flagship Devolution o f Power Program represents a unique opportunity to address key constraints that have plagued urban management and service delivery in Pakistan, as i t has done away with some o f the institutional fragmentation in urban service investment and operations. In the Punjab province, the devolution program has resulted in the establishment o f 144 Tehsil, Municipal Administrations (TMAs) and 5 Ci ty District Governments (CDGs) in Lahore, Rawalpindi, Gujranwala, Faisalabad and Multan.2 The country has made remarkably swift progress in establishing new legal and administrative structures at the local level, and in establishing the framework for devolving service functions.

4. The Punjab Local Government Ordinance (PLGO), 2001 provides a comprehensive l i s t o f regulations for local governments in the province. The Ordinance covers the range o f regulations from responsibilities and authorities o f the different levels o f local government institutions: district and city district governments, zila councils, tehsil and town municipal administrations, tehsil and town councils, union administrations, union councils, village and neighborhood councils, and citizen community boards (CCBs). The Ordinance also includes

' Recent analysis indicates that rapid expansion of ribbon urban development along major transport routes and the expansion of peri-urban areas around cities have been classified as rural rather than urban in the census statistics. Thus, i t appears that the proportion o f urban population i s higher than official estimates.

Whereas the Lahore CD was created in 2001, the other 4 CDs were created by GoPunjab in July 2005. Thus, all the 5 cities, which have WASAs and Development Authorities (DAs), now have the responsibilities of municipal service provision at the District level. Similarly, the number o f TMAs was originally 122, but has now increased to 144 by the sub-division of some previously larger TMAs.

7

regulations on finance, budgeting, local government property, intergovernmental relationships, and legal and electoral issues. The Ordinance is supplemented by rules on reporting, taxation, budgets, accounting, infrastructure, contracts, and works.

5. The broad framework o f devolution, as outlined in the PLGO, gives responsibility to T M A to provide a range o f municipal services and the provincial government to monitor the T M A s in the provision of services. Implici t ly there i s an expectation that better performing T M A s wil l receive greater incentives. This i s a drastic transformation, both for the T M A s which have to immediately acquire the technical and management expertise needed to deliver services, and for the provincial government to change i t s outlook from provision to monitoring and oversight.

6. The implementation o f the devolution plan i s progressing slowly. Because the majority o f TMAs have only been in operation for about four years, some newly created ones for even less, not al l have been able to discharge full responsibility for planning and financing newly acquired service responsibilities. Rather, T M A s have focused on the immediate day-to-day functions in the provision o f municipal services such as water supply, sanitation, solid waste, roads, street lighting, parks, and firefighting. Many TMAs are struggling to merely keep the services going and do not have the capacity or resources to undertake strategic, spatial, or investment planning.

7. At the same time, the provincial governments in the country have adapted themselves, with varying degrees of success, to the changed role they are expected to perform under the new system. Informally, the provincial governments continue to influence the performance o f the local governments by retaining authority over the postings and transfers o f the senior staff o f local governments, and by controlling fiscal transfers. However, formal reporting mechanisms, to enable provincial governments to effectively monitor performance and to chart a pol icy for performance management and capacity development o f local governments, have not been put in place. While the concept of performance monitoring i s s t i l l seen as an objective, i t has not yet been implemented at the local government level.

8. Critical issues that face the urban sector in the Punjab include the following3:

9. W h i l e core service delivery functions have been devolved to the TMAs, the corresponding capacity improvements for effective service provision have lagged behind. Most T M A s have not been able to invest in larger capital works since devolution, because o f their limited financial and technical capacity to plan and implement major systemic investments.

Service Delivery.

10. The existing TMA technical staff i s coping to the best o f i t s abilities, but has not been able to make any significant improvements in service delivery. Most local bodies lack the technical capacity to prepare multi-year capital budgets that adequately identify future

Additional issues are described in Annex I

8

maintenance and running costs, to manage their finances through improved revenue generation and collection performance, and to undertake financial planning, expenditure management, capital investment planning and budgeting within local financial capacity. Successful devolution of services wil l require building capacity in the T M A s to manage these activities.

11. Municipal Finance. T M A s are financed by a combination o f grants from Provincial government, property taxes, and own revenues, including charges for services provided. They are heavily dependent on provincial funds for both their operations and development budgets. Salaries form the bulk o f recurrent expenditures and are funded by a combination o f own revenues and grants to cover salaries o f staff that were transferred to TMAs post-devolution. Development expenditures cover a series o f small investment projects funded largely by provincial development grants distributed according to a formula. The distribution o f provincial grants to T M A s i s intended to reflect various factors, such as needs, fiscal capacity, fiscal effort, and performance. Nevertheless, the current distribution places the greatest emphasis on needs and, to an extent, fiscal capacity. Performance, and more importantly performance improvement, i s not yet a major factor in the distribution o f transfers.

12. Faced with the wide range o f capabilities, GoPunjab has placed a great deal o f emphasis on ensuring accountability with emphasis on financial management and financial reporting. As a bottom line measure, the province has dispatched full time auditors to each TMA. Although financial reporting guidelines are clearly stated in the PLGO 2001, it i s unclear how wel l TMAs are able to comply with the guidelines. Due to the current uncertainty about how quickly the revised national financial reporting format wil l be rolled out to the TMAs, i t is l ikely that improvement in TMA financial reporting wil l occur in two stages: first, compliance with the existing Punj ab provincial formats, and second, compliance with potentially revised Punj ab provincial formats

13. Provincial Government Capacity. The devolution o f services to T M A s should be accompanied by a change in the role o f the provincial government. Provinces wil l need to shift their focus from the direct provision o f urban services and direct capital investments towards development o f the policy and financial frameworks that allow local governments to succeed. Currently, GoPunjab has been monitoring budget inputs and disbursements through financial and audit functions, but has yet to develop a monitoring system to evaluate TMA financial and service performance and outcomes. Capacity to assume this oversight and enabling role at the provincial level i s s t i l l a work in progress.

2 Rationale for Bank Involvement

14. Four years after the “Big Bang” o f devolution, there i s a greater understanding o f what i s required o f TMAs and the provinces. Practical capacity constraints for the TMAs to meet the provincial regulations are now recognized. Similarly, the limitations o f the regulations that govern the TMAs are also becoming apparent. This i s an opportune time for the Bank to support the process underway in the Punjab through a focused operation to improve the management and service delivery capacity o f the TMAs. Such a program focused on strengthening capacity o f

9

T M A s to deliver services, w i l l provide local governments and Punjab with practical experience, as wel l as the opportunity for continuing focused analysis necessary to guide fbture adjustments to devolution policy.

15. The project seeks to tackle both the supply-side issues (Le. the lack o f strategic approach towards fund allocation) and the demand-side issues (i.e. T M A capacity) by being the f i rs t practical attempt at using the performance management concept that i s included in the PLGO, in the form o f a demand- and capacity-driven funds allocation mechanism. Many donors have identified the need to improve TMA capacity. However, most o f the donor efforts consist o f technical assistance and training programs on different aspects o f devolution, without focusing on the incentives for improved capacity and support to T M A s in implementation o f service delivery.

16. This project wi l l provide targeted capacity and service delivery enhancements to selected TMAs in the Province o f Punjab. The focus o f the project i s to assist the provincial government and TMAs with implementing the performance management concept in their operations. T M A s wil l be invited to participate in the project based on performance achieved since devolution. TMA continued eligibility in the project wil l be based on sustained Performance against appropriate targets to be set and mutually agreed between the TMA and the project. By designing and implementing an effective monitoring and evaluation system, the project will contribute to the provincial government’s ability to carry out its oversight and enabling role in the devolution process.

3 H i g h e r level objectives to which the project contributes

17. The urban sector was an area o f l imited engagement during the previous CAS due to reform shyness and slow progress in the sector. However, new opportunities for Bank re- engagement emerged as a result o f the priority given to devolution reforms and the delivery o f services at the local level. Interest in the sector has been enhanced with the Government o f Pakistan’s recent emphasis on the role o f cities as engines o f economic growth. More significantly, Punjab’s development priorities include a focus on urban areas and removal o f the constraints to their development, and the economic potential o f cities i s underscored in the Punjab Economic Report. The FY06-09 CAS reflects the Punjab’s and the Government o f Pakistan’s greater priority to urban development and reform.

18. This project’s focus on improving performance at both provincial and TMA level wi l l contribute not only to improvements in urban service delivery and investment decisions, but also to realizing the benefits of the devolution process by enhancing local capacity and fiscal choice. Additionally, this i s but one of a series o f related initiatives to support improvements in urban service delivery to the Punjab. A Development Policy Loan focused on the pol icy and institutional constraints in the large cities o f the Punjab i s currently under p repara t i~n .~ Advisory work on institutional and financial options for specific services, including water supply and

Punjab Large Cities DPL (FY08).

10

sanitation and solid waste management is in p r ~ g r e s s . ~ finance, land, and planning has also been recently completed.

Finally, sector work on municipal

B. PROJECT DESCRIPTION

1 Lending Instrument

19. The project i s conceived to foster a performance-based municipal investment program across a broad range o f urban services and institutional capacity building at both provincial and TMA levels. El igible TMAs would be able to tap both capacity and investment grants (TMAs are not allowed to borrow), while the project would finance capacity building activities at the provincial level. A Specific Investment Loan is regarded as the most suitable instrument to combine investment financing and capacity building activities.

20. The financial terms o f the Loan wil l be a Fixed Spread Loan (FSL), with total maturity o f 20 years and a grace period of 8 years. The disbursement period i s expected to be 4.5 years, to accommodate the 18 month implementation cycle o f many TMA infrastructure investments.

2 Project Development Objective and Key Indicators

21. Project development objective. The objective o f the project is to improve the viability and effectiveness o f urban services provided by the participating TMAs, and to make such improvements sustainable and replicable in other TMAs through the creation o f a performance- based management framework at both T M A and provincial levels.

22. Performance management framework, performance indicators and selection of TMAs. Because performance management is a core concept underlying the project, the development o f the performance monitoring framework and the selection o f performance indicators have been a key part o f project preparation. The T M A s in the Punjab province were evaluated against two criteria: a) ratio o f own source revenue to total revenue; and b) ratio o f development budget expenditure to total development budget resources. These two ratios measure T M A performance with respect to mobilization o f own source revenues and implementation capacity.

23. A core group o f indicators was selected to monitor each TMA (Annex 3). Each TMA will agree on a Performance Improvement Plan, with a specific set o f targets to measure performance in conjunction with a capacity or development grant. A subset o f the TMA indicators would be selected to build a provincial monitoring and evaluation database.

24. The overall project Key Performance Indicators (KPIs) will be the following:

Project outcomes Evidence, v ia reports from independent technical and social audit teams, o f improved effectiveness and financial and technical viability o f urban services provided by participating TMAs.

PPIAF grant for water and sanitation in the Punjab; PPIAF grant for solid waste management in the Punjab; and KOICA grant for solid waste management in the Punjab.

11

Evidence, v ia reports from independent technical and social audit teams, o f rising levels of satisfaction among key stakeholder groups with respect to services targeted under the project and improvement in selected service delivery indicators. Evidence, v ia reports from independent technical audit teams, o f GoPunjab’s improved capacity to monitor T M A performance. Evidence, v ia reports from independent technical and social audit teams, o f GoPunjab’s improved capacity to manage cultural heritage assets.

Project outputs Evidence, from selected monitoring indicators or v ia reports from independent technical and social audit teams, o f timely and satisfactory delivery o f project activities and relevant outputs, as planned. Such outputs are detailed at the T M A and at the provincial level in Annex 3.

3 Project Components

25. TMAs; and 2) technical assistance to the Punjab Provincial Government.

The project consists o f two components: 1) capacity grants and development grants to

Component One: Support for Tehsil Municipal Administrations - Capacity and Development Grants

26. Capacity grants will finance needed improvements in T M A s in the fields o f urban planning, financial management (including budget management), investment planning for service delivery, and operation and maintenance. This sub-component would finance the development o f capacity enhancing items, such as base maps, land use maps, computerized accounting systems, computerized complaint registers and annual customer surveys to monitor TMA performance.

27. Development grants will finance infrastructure investments (“sub-projects”) in the TMAs, which would be awarded based on performance o f the TMAs. The sub-component would start by financing relatively simple investments such as rehabilitation and extension o f existing infrastructure. Projects to be financed in Year 1 were selected based o n priorities developed according to their existing planning processes, as long as they were able to show a service delivery need, a sound development and management plan, technical design, and an agreement on the monitoring of performance indicators. During Year 1, T M A s wil l receive support for intensive capacity building in planning and will be able to develop a more robust capital investment prioritization process. As the TMA capacity to plan, prioritize and implement infrastructure investments grows, i t is envisioned that the size and complexity o f investment would also increase.

Component Two: Support for Other Institutions - Capacity Building and Other Activities

28. This component wil l assist the Government o f Punjab in a variety o f ways. I t wil l (i) support the capacity building o f the Local Government and Rural Development Department (LG&RDD); (ii) assist in capacity enhancement o f the Planning and Development Department

12

(P&DD>, including the newly established Urban Unit (UU) responsible for implementing the Cultural Heritage component; and (iii) support the PMDFC in adding to its capacity through contracting consultant services on a needs basis.

Support to LG&RDD wil l include: 0

0

0

assessment o f the Department’s structure and staffing in light o f its current mandate post- Devolution, hiring o f consultants and staff to fill critical skills, establishment o f a Monitoring and Evaluation system and an associated database to facilitate enforcement o f the PLGO and to track TMA Performance against the PLGO.

Support to P&DD will include: 0

0

0

0

expert advice on Cultural Heritage Issues, development of framework to rationalize institutional mandates for Heritage Asset Management, development o f an enabling legislative framework, implementation o f a pi lot project in the Walled City o f Lahore.

Support to PMDFC wil l include: 0 training on performance management, 0

0

0

0 technical and social audits.

consultants and staff to support design and implementation oversight o f capacity and development grants, consultants to accommodate peak workloads in the grant cycle, development o f a monitoring and evaluation database,

29. Total project costs are as follows:

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Table 1 : Summary Project Costs (US$ millions) Component cost YO Bank YO GoPunjab

(including Total Share Bank orTMA contingencies) cost Share

1 Grants to TMAs 1 .a Capacity Grant to TMAs 3.2 5% 3.2 100 0%

% 1 .b Development Grants to 45.5 77% 38.7 85% 15%

T M A s

2 Support t o Provincial Government

LG&RDD & PMDFC % (including M&E)

2.a Capacity building o f 1 .o 2% 1.0 100 0%

2.b P&DD 6.0 10% 6.0 100 0%

2.c Support to PMDFC 3.2 6% 1.0 31% 69% %

Total project costs 58.9 49.9 Front-end fee (0.25%) 0.1 Total project costs 59.0 100% 50.0 85% 15%

___

Note: Numbers may not add up due to rounding.

4 Lessons learned and reflected in the project design

30. The Bank has not been engaged in the urban sector for a number o f years in Pakistan. Key lessons from previous projects and urban sector operations elsewhere include the following:

Greater borrower ownership, and a longer te rm commitment o f resources for technical assistancehraining i s required for making sustainable institutional improvements. Specific initiatives need to be supported by the introduction o f performance-based incentive structures at the macro level; Inter-agency co-ordination must be improved, internal government procedures need to be streamlined, and effective project monitoring systems instituted; Representative local governments have a comparative advantage over provincial governments in project identification, development, appraisal, and execution. Provincial governments need to remain primarily responsible for the formulation and implementation of policies and regulatory frameworks; Any assistance to local governments should be “demand-driven”. Municipalities should also contribute to capital costs o f their sub-projects; Local ownership o f sub-projects through participation in identification and prioritization by key stakeholders is essential for success; Project size and complexity should be aligned with implementation, planning and technical capacity.

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5 Alternatives considered and reasons for rejection

3 1. Policy based loan. GoPakistan’s urban policy and Gopunjab’s devolution guidelines are clearly detailed in the PLGO. Moreover, the low utilization o f available development funds by TMAs makes i t clear that financing is not the main constraint to implementing urban investments. Therefore, GoPunjab requested direct assistance, rather than a pol icy based loan, to T M A s to implement investment projects and to build capacity in TMAs and in GoPunjab to address urban planning, management, and service delivery issues.

32. Broadening to, or focusing on, the poorest TMAs. TMAs were selected based on individual TMA performance against i t s own potential, identifying those T M A s that made the best use o f the means available. Therefore, the f i rst year selection includes poor TMAs that were selected on the basis o f their performance.

33. The focus o f the project i s not on expanding private provision o f services; rather, the goal o f the project is to measurably improve services to urban residents. I t i s expected that the T M A s and local governments wil l use extensive private sector services in design, implementation and supervision o f service delivery. In the long run, the project i s expected to increase the capacity o f T M A s to manage contracting o f private consultants, contractors and, eventually, service providers.

Private Sector Participation.

C. IMPLEMENTATION

1 Partnership Arrangements

34. Donors have provided assistance to GoPakistan to support i t s devolution process. Several have provided technical assistance and training on urban planning and management. The proposed project benefits from these efforts to ensure that valuable training resources are not duplicated unnecessarily. In particular, ADB’s Devolution Support Program and CIDA’s . Devolution Support Program have both provided useful l i n k s to partners at the TMA level.

2 Institutional and Implementation Arrangements

35. The Project Implementing Entity i s the Punjab Provincial Government. Within Gopunjab, the LG&RDD and the P&DD are the main departments responsible for this project (Annex 6). They have delegated the day to day implementation o f the project to the Punjab Municipal Development Fund Company (PMDFC), with the exception o f the implementation o f the P&DD component. The participating T M A s will be responsible for implementation o f investments in the service improvements. Additional details on implementation arrangements are available in Annex 6.

36. PMDFC was established in 1998, under a previous Bank initiative, as an independent, government-sponsored, not-for-profit Company l imited by guarantee. I ts autonomous, public- private Board o f Directors i s composed o f members o f the Provincial Government, c iv i l society

15

and the private sector - the stakeholders o f urban development in the Province o f Punjab. I t i s managed by a Managing Director and three General Managers: Institutional Development, Finance and Infrastructure. The company recruits staff from the market and has been able to attract capable and qualified staff. However, the company does not envision a significant growth in its own staffing. Rather, i t plans to contract from the available consultant market to deliver some o f the assistance that i s needed to implement the project.

37. PMDFC i s responsible for reviewing and selecting TMAs to be included in the project, against criteria that are described in Annex 4. PMDFC wil l appraise sub-project proposals submitted by TMAs, and work with them to ensure that the sub-projects are ready for implementation. PMDFC wil l also monitor sub-project implementation, and improvements funded through development grants, to evaluate sustainability and to ensure T M A continued eligibility for the project.

3 8. T M A s are responsible for identification o f investment proposals and performance improvements and subsequent implementation o f agreed Performance Improvement Plans (PIPS) and investment sub-proj ects.

39. To facilitate implementation o f the project, PMDFC has drafted a detailed Operational Manual (OM) with a detailed procurement annex and a Financial Manual (FM), which wil l provide T M A s with the necessary information on procedures to be followed during project implementation. PMDFC has also prepared an Environmental and Social Framework (ESF - see para. 68 to 76), which wil l be applied to each of the sub-projects. The principles o f the ESF will also be applicable to the Cultural Heritage component, as appropriate.

40. Provincial capacity-building i s divided into three components, each with specific implementation arrangements:

L G W D capacity building. LG&RDD will be responsible for implementation o f this subcomponent with the assistance o f PMDFC. I t i s currently envisioned that LG&RDD may temporarily need additional assistance and manpower to supplement i t s current staffing, and it i s anticipated that they wil l be assisted by PMDFC in identification and hiring o f the additional manpower. For the monitoring and evaluation database, PMDFC wil l first develop and maintain the database and then transfer the database to LG&RDD. P&DD capacity building. Implementation wil l rest with P&DD, which wil l entrust i t to P&DD’s newly set up Urban Unit (UU). PMDFC capacity building will be implemented by PMDFC.

3 Monitoring and evaluation of outcomes/results

41. There wil l be a monitoring and evaluation framework at the provincial level, which will include a set o f core indicators to measure T M A service delivery and capacity building. A detailed representative l i s t o f indicators to be included in the M&E framework i s found in Annex 3. In addition, at the TMA level, a set o f core monitoring indicators has been selected and wil l be maintained by each TMA and PMDFC. Finally, a subset o f these indicators will be used to monitor performance for project monitoring purposes. PMDFC is establishing indicator baselines for Year 1 TMAs. As most TMAs do not have even basic output information o n the

16

services they provide, additional baseline data wi l l be established during the f i rst year under the capacity-building component. Sections B.2 and B.3 explain the concept and rationale o f the project’s performance management framework, o f which M&E i s an essential component.

42. In addition, independent technical and social audit teams wil l be hired to: Evaluate outputs for which a quantitative indicator could not be defined, Evaluate the project’s progress towards reaching i t s outcomes, Evaluate PMDFC’s performance in implementing the Project (except for the P&DD capacity-building component).

0

0

0

43. available documentation, interviews, and fact-finding surveys in the TMAs as necessary.

These audits wil l be performed at mid-tern and at project completion, on the basis o f

4 Sustainability

44. The project aims to assist GoPunjab and the TMAs to implement the devolution plan. The first objective i s to provide sustainable improvements in service delivery at the TMA level. Detailed implementation arrangements will help ensure sub-proj ect sustainability. An important output o f the project wil l be a monitoring system that wil l allow GoPunjab to monitor the delivery o f services in the TMAs on an ongoing basis. In the long run, the performance management aspect o f the project may be adopted by GoPunjab and other provincial governments as a way to award other government transfers based on performance achievements. Project sustainability has been assessed at two levels to ensure that the above goals are achieved.

45. Sustainability for GoPunjab. The total project size, $50 million, i s a fraction o f the total transfers to T M A s from the provincial government. Once the concept o f using performance management as a basis to identify and reward high performing TMAs i s proven through this project, GoPunjab wil l be able to replicate and expand on the project through i t s own transfers.

46. Sustainability for individual TMAs. For individual TMAs, project sustainability may be ensured at three levels: First, the TMA co-payment for investment costs for the development schemes i s seen to be manageable through financial analysis o f the TMA annual financial flows, described in Annex 9. Second, TMA financial analysis shows that the projected O&M costs to sustain these development schemes are also manageable within the individual TMA budgets. Finally, PMDFC and TMAs wil l prepare, with the support o f LG&RDD and P&DD, a detailed O & M plan for the TMAs in the project to ensure that the physical investment will be sustained to produce the necessary improvement in service delivery.

5 Critical risks and possible controversial aspects

47. A s PMSP i s the f i rst performance based comprehensive capacity building and investment project in the Punjab province, the fol lowing r isks have been identified:

17

Table 2: Proiect risks Risks from Components to Achieving the PDOs Low procurement zapacity in T M A s

L o w response from contractors due to market conditions which include rapidly escalating and volatile prices o f construction materials during the post earthquake reconstruction period

Operations & Maintenance budget and capacity in TMAs continues to lag in performance. Continued conflict/delay in application o f national financial reporting standards to Punjab T M A s

Design and engineering capacity (of consultants)

Risk Rating

High

High

Moderate (project

High (sustainability) Moderate

outputs) I

L o w

Risk Minimization Measures

PMDFC wil l procure consultancy services and goods for the project. TMAs will be responsible for procurement o f works, and they will be provided close assistance by the design/ supervision consulting firm, and wil l be supervised by PMDFC. Transparency wil l be an important aspect o f the TMAs procurement processes through web posting. A clear procurement manual has been prepared and several technical assistance opportunities wil l be designed during preparation and as new TMAs come on line. The issue is currently affecting a l l engineering projects in Pakistan, and necessary actions are being explored at the national level. Interest for PMSIP development schemes wil l be stimulated through directed communications strategy to the national contractor industry and by reducing contractor risk on rapid materials price increases. The measures include, among others, inclusion o f price escalation terms, increases in mobilization advances, and reduction in certain overly restrictive qualification criteria. Increasing T M A project management capacity and ensuring that any new investment in infrastructure wil l be made sustainable through detailed capacity assistance, agreement on specific O&M actions in the PIPS, and PMSIP monitoring mechanisms. Project wil l assist T M A s to implement existing provincial financial reporting formats. There will be a conversion program and technical assistance i f the reporting format i s changed during the project time period. The Bank team working on the accounting and audit modernization project (PIFRA) will also monitor closely the provincial implementation. Project preparation has shown that the technical quality o f the design and engineering consultancy firm appointed through single source selection was rather l o w and did not take sufficient account o f existing field conditions. In response to this, PMDFC had to complement i ts already qualitatively well-staffed Engineering Department,

18

1 PMDFC capacity insufficient

Overall Rating

Risk Minimization Measures

in agreement with P&DD and the Bank. Moderate

by hiring an internal consultant with extensive relevant field experience. PMDFC wil l hire the design and supervision firm for the following year(s) schemes through competition and the terms o f reference will be made detailed enough to circumscribe al l the requirements o f the project. PMDFC wil l periodically monitor i t s capacity to manage TMAs and expand i t s capacity, as needed,

6 Loadcredit conditions and covenants

48. procurement and safeguards wil l apply.

Standard implementation covenants for staffing arrangements, financial management,

49. The following are the main Loan covenants: Compliance with the Operations Manual, the Financial Manual, and the Environmental and Social Framework, which cannot be changed materially without Bank approval; Quarterly Project progress reports and financial reports; Annual audit o f the financial statements o f the Project Implementing Entity; Compliance with agreed procurement arrangements; Compliance with the PLGO. A material adverse change to the PLGO wil l constitute grounds for suspension.

D. APPRAISAL SUMMARY

1 Economic and Financial Analyses

50. Financial Analysis. The financial analysis focuses upon the sustainability o f the PMSIP approach, as well as the sustainability o f i t s investments. The size o f the project was compared with. average investment in the municipal sector, to assess whether GoPunjab could afford to continue the project with i t s own funds. Using the past three years average transfer to TMAs for development expenditure as the base, the project’s total costs per year comes to just over a quarter o f the average amount transferred, indicating that transfers could include a performance based component without reducing the overall f low o f resources significantly.

51. TMAs have a wide choice o f basic urban infrastructure investments under PMSIP, provided that they result in an improvement in the level o f services. To ensure that TMAs see their participation in the project as a serious commitment, they will be required to make a contribution to capital costs. TMA financial analysis, based on historical and projected financial flows, was performed in order to determine the feasibility o f a 15% contribution by TMAs.

19

Furthermore, as the objective i s to raise service levels, investments in infrastructure wi l l be in T M A s which can afford the associated operational costs (while helping less wel l -of f TMAs through technical assistance and training to ensure they can raise the necessary funds).

52. In l ine with the project’s overall objectives, the financial analysis is tailored to assess what actions, if any, need to be taken by the T M A to discharge the financial obligation o f successfully operating and maintaining new infrastructure, so that service quality improvements can be delivered. The analysis looks at the past performance o f the TMA in raising revenues, and i ts recurrent expenditure patterns, to assess the likelihood o f surplus funds being available to take o n new obligations. Where a surplus has historically not existed, the analysis looks at opportunities to increase income and/or to decrease expenditure in order to create the fiscal space required. The results of the analysis, shown in Annex 9, demonstrate the financial viability o f identified schemes6

53. The cost of operating and maintaining infrastructure has been estimated in detail for water supply schemes, looking at the operation o f the integrated network. In this instance, improvements in key items o f infrastructure and operational procedures can have system-wide impacts - generating a stream of costs and benefits which have to be financially viable. An example o f this calculation i s given for Jhelum in Annex 9. For other infrastructure, an incremental cost equivalent to 5% per annum o f the capital cost o f the investment was estimated for operation and maintenance. The results o f the analysis confirms the financial viabi l i ty o f each o f the identified schemes calculated on this basis. However, although T M A s may have the financial capacity to sustain infrastructure, and provide adequate O&M, it i s expected that additional effort i s required at the provincial level to reinforce incentives for an ‘O&M approach’ in TMAs.

54. Economic Analysis. Infrastructure developments in the TMAs are expected to yield significant economic benefits. For al l sub-proj ects, a preliminary field appraisal i s conducted by PMDFC, followed by a detailed feasibility study done by consultants. The field appraisal reports include a review o f the sub-project affordability, both in terms o f investment and o f operation and maintenance. Guidelines for the economic analysis that must be included within the feasibility studies have been developed during project preparation, and will be updated and complemented as more data i s collected in the T M A s under the project’s capacity building activities.

55. Although several approaches to the economic analysis have been explored during project preparation (such as quantification o f time savings, health benefits, or assessing the willingness to pay) the lack o f data does not allow for a meaningful analysis. Having assessed the economic benefits of recent urban projects in Pakistan, there does not seem to be a recent precedent that could serve as a reference point. Therefore, household surveys that wil l serve the dual purpose o f creating a baseline for future project evaluation and a quick appraisal o f the economic viabi l i ty of sub-projects wi l l be carried out as part o f the feasibility studies for the second year sub-project pipeline. A more complete description o f the approach taken on economic analysis may be found in Annex 9.

At present, to be conservative, the analysis takes no account o f the National Finance Commission Award o f January 2006, which i s generally seen to favor larger financial transfers to local governments.

20

56. Feasibility studies for the first year sub-project pipeline attempted to calculate ERR wherever possible: namely for the road and water supply sub-projects. However, since guidelines were not in place, the approach for these calculations varied between sub-projects.

Estimated benefits o f the PD Khan roads sub-project include reduction o f vehicle operating costs and increases in commercial property values. The calculated ERR i s 17%. For the JheIum water supply sub-project, the estimated ERR ranges between 12% and 24% depending on some o f the parameters assumed for the analysis.

57. Capacity building components are expected to result in improvements in the cost effectiveness of: (i) service delivery in TMAs; (ii) the allocation process for provincial development funds; and (iii) cultural heritage investments.

2 Technical

58. Investments in TMAs were financed and implemented by provincial departments and l ine agencies such as Public Health Engineering Departments (PHED) with minimal involvement by the TMA. Therefore, the number and capacity o f technical staff in the T M A s are limited. TMA technical capacity wil l be reviewed and assistance will be provided to both improve the technical capacity as wel l as the quality o f the sub-projects being proposed. However, rather than increasing the number o f T M A staff, the project wil l seek to use consultants to assist TMAs whenever possible.

59. PMDFC and the Punjab P&DD selected NESPAK and Asian Consultants as project design and supervision consultants for Year 1 subprojects. In subsequent years there wil l be a pool o f prequalified sub-project design and supervision consultants to assist TMA staff. PMDFC engineering staff have also conducted detailed reviews o f Year 1 designs and, in some instances, requested consultants to modify them to:

Increase value for money and thus affordability o f the schemes, Ensure that actual field conditions and existing infrastructure are properly taken into account, Improve the maintenance o f the schemes.

60. A menu o f TMA capacity-building interventions, or Performance Improvement Programs (PIPS), has been developed by PMDFC. The l i s t i s included in Annex 3. Each PIP will include a selection o f these activities. Some o f the activities wil l be pre-requisites for a development grant, such as Operation & Maintenance capacity-building activities for new water and sanitation infrastructure.

61. Operation and maintenance o f existing assets i s generally inadequate in TMAs. An O & M Framework was prepared by PMDFC and will serve as the basis for developing adequate O & M capacity-building activities. PMDFC and the T M A s wil l agree on the appropriate O&M actions to be included in the PIPS - in particular for the maintenance o f development schemes financed by the project. An appropriate incentive framework will be developed at the provincial level to reinforce the T M A level interventions to the O&M framework.

21

3 Fiduciary

62. Financial management arrangements for the project are satisfactory and provide reasonable assurance that project funds wil l be used for intended purposes.

63. Financial management o f TMAs and PMDFC arrangements are wel l documented in the PLGO. A review of two Year 1 TMAs shows that these practices are being implemented at the local level. P M D F C developed a Financial Manual (FM) that i s acceptable to the Bank. The manual adequately covers staffing, budgeting, accounting policies and procedures, delegation o f financial powers, financial reporting, fund f low arrangements, payroll, and internal and external audit. Professionally qualified staff i s in place for financial management and internal audit functions. Two additional financial management staff positions are also in the process o f being filled.

64. PMDFC’s financial statements are audited by a firm o f chartered accountants and are acceptable for the Bank’s financial reporting purposes. PMDFC’s external audit should also cover project funded expenditure incurred by the TMAs. International Financial Reporting Standards (LFRS) and International Standards on Auditing (ISA) would be used for preparation and audit o f financial statements respectively. Payments for development grants will not be released to contractors without the independent project design and supervision consultants certifying works progress and works compliance with the tender designs.

65. Financial management arrangements o f P&DD would be used until such time that UU i s adequately staffed. P&DD’s financial management staff has experience in handling the Government’s accounting system. The requirements o f the Designated Account have been explained to them, and initial training on maintaining books o f account and reporting will be provided. An Accounts officer has been recruited for UU.

66. Procurement. TMA technical staff is responsible for the procurement o f works. The procurement procedures generally used are defined in the provincial and departmental guidelines. PLGO also gives procedures for approval o f schemes under Punjab TehsiUTown Municipal Administration (Works) Rules 2003. However, the procurement capacity o f TMAs i s limited to these set o f rules and only a few staff are aware o f the best practices in procurement with respect to transparency and competition.

67. Recognizing the limited procurement capacity at the TMA level, the project envisages PMDFC to play a lead role in procurement for the project. PMDFC will be responsible for overall procurement planning for the projects, and for procurement o f goods and consultancy services. The requirement o f goods, such as computers, office & field equipment, and heavy equipment, wil l be forwarded by TMAs to PMDFC. Works wil l be procured by TMAs with support from PMDFC, as well as design and supervision consultants. PMDFC wil l clear a l l the procurement decisions taken by the TMAs and shall be responsible for the process adopted. Procurement process for the project i s defined in the procurement annex to the Operations Manual. The Bank will provide training for PMDFC procurement staff, and PMDFC wil l in turn hold training sessions for appropriate TMA staff. In order to facilitate wider participation and

22

ensure transparency in procurements, PMDFC and TMAs wil l hold dissemination workshops for contractors and maintain a procurement web-site updating all relevant information. The Urban Unit (UU) will b e responsible for procurements under the P&DD component. Additional details o n the procurement procedures are given in Annex 8.

4 Social

68. Social Outcomes, Constraints and Risks. The social outcome o f the project’s development objective i s to improve the quality o f l i f e for the urban population through improved service delivery. Besides improved access to services and streamlined billing and payment arrangements, low income and other vulnerable groups wil l benefit from the participatory preparation and implementation o f the investments themselves. PMDFC wil l enhance local government capacity to support collective action and increase opportunities for the involvement o f c i v i l society. The main constraint in the project i s i t s current l imited capacity to implement such a demand-driven, participatory program. PMDFC’s capacity building program i s designed to address this r isk. Constraints to information flows for the poor could also be a barrier to their inclusion in project benefits; therefore, a communication strategy has been developed for the project. The Environment and Social Framework (ESF) has been disclosed on the PMDFC website inviting public comments and suggestions before finalization during appraisal. The executive summary has been translated in Urdu and disclosed at a l l Year 1 TMA offices in an accessible place, and discussed in public meetings when subprojects for funding are proposed. T M A s will record attendance and comments made at public meetings and address them during the detailed design.

69. The major social risks are possible exclusion from project benefits, or loss o f land and property from resettlement or land acquisition. Screening o f sub-projects having negative social impacts, and implementation o f mitigation action plans are required under the PMFDC’s ESF. The ESF address social r isks by requiring consultation and participation in planning and implementing activities, ensuring fair and timely compensation, and providing grievance redress mechanisms.

70. Participation of Key Stakeholders. Consultations are the basis o f preparation o f the investment plans and involve a broad range o f stakeholders including urban residents o f a l l socio-economic levels, members o f elected bodies, c iv i l society and private sector agencies, and municipal and provincial officials. These groups wil l participate in the preparation o f the draft Social Management plans during field investigations o f sub-project impacts, as described in the ESF, including consultation, disclosure and grievance redress mechanisms. The grant process also involves feedback mechanisms through monitoring and evaluation o f the plan’s implementation by the citizens, before further planning and investment cycles occur.

71. Monitoring of Social Impacts. The project includes a monitoring and evaluation program to track the project’s reform, investment and poverty impacts. This includes measurement o f social development inputs, outputs and outcomes related to: (i) participation o f local bodies and communities; (ii) coverage o f (i.e. provision o f benefits to) populations including vulnerable groups; (iii) access to urban amenities and services by low-income settlements (if displacement

23

i s unavoidable for any investment); and (iv) resettlement o f displaced families and restoration o f the livelihoods o f al l affected persons.

5 Environment

72. This project i s a Specific Investment Loan (SIL) and falls under OP4.01 on Environmental Assessment. The types o f infrastructure investments identified under the PMSLP include water supply, local roads, street lighting, drains and sewers. At the scale currently envisaged, these works wi l l have limited environmental impacts such as clearing o f land, changes to drainage patterns, and need for proper disposal o f collected waste and wastewater. These impacts are well understood, can be predicted, and are manageable provided that adequate attention i s paid to them in al l phases o f the work. The impacts during construction wil l need to be addressed and appropriate management and mitigation procedures and controls wil l be need to be included in the contractual agreements for the individual projects.

73. PMDFC has a formal pol icy to “promote environmentally sound, socially acceptable and commercially viable urban infrastructure projects that wi l l improve the standard o f living o f populations in and around project locations, and secure their involvement (where appropriate) in the operation and maintenance o f such projects”. Appropriate environmental review and appraisal steps have been integrated into PMDFC’s overall project appraisal process. The ESF process adopts a categorization approach broadly similar to that o f the Bank and many other agencies, with those projects likely to have serious environment or social impacts requiring more careful attention. This system identifies any sub-project o f a type or scale which would require an EA Report under PMDFC policy. This Project has been rated EA Category A since some o f the PMDFC “E-1” sub-projects might require a full EA under Bank policy, although not al l wi l l (for example, “public conveniences” are rated E-1 under the current ESF). Projects rated E-1 by PMDFC wil l be reviewed by the Bank to determine the level o f assessment required, but given the limited institutional and technical capacity o f the TMAs, few, if any, such projects are expected.

74. The f i rst year investments that have been reviewed for appraisal show that the ESF approach i s being implemented in an adequate manner. The checklist approach for identifying possible impacts at the f ield appraisal stage has been effective and will be refined as more specific experience i s gained. The Field Appraisal Reports have a wel l structured section on environment and PMDFC i s working with the design consultants to ensure that al l the relevant information is obtained and included in this section. A set o f standard contractual clauses to address agreed mitigation measures has been developed and provides a good basis for ensuring that these measures are taken forward to implementation, although there i s room for improvement in the details o f the clauses.

75. The project includes a component to support a Cultural Heritage initiative in Lahore, at the specific request o f the Government o f Punjab. A key objective i s to build the capacity o f the various authorities to plan for and implement a Cultural Heritage program. Physical investments under this component are l ikely to include works along crowded urban streets and would very probably rate as Category A. An appropriate EA process i s to be carried out and will be subject to review and approval by the Bank before any investment is cleared. N o physical works are

24

expected in the f i rst year and detailed discussions wil l be held with PMDFC and the other relevant authorities to identify and carry out the necessary preparatory studies.

76. Effective implementation i s the crit ical challenge for al l aspects o f PMSIP. PMDFC i s developing performance based approaches and has put in place supervision systems and monitoring mechanisms for the investments. Environmental aspects wil l be part o f the mandate of the works supervision consultant and wil l be included in the routine reporting to PMDFC. The grievance mechanism used by the project will be another route for environmental concerns or complaints to be brought to the attention o f PMDFC management.

6 Safeguard Policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [X 1 [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.1 1) [I Involuntary Resettlement (OP/BP 4.12) [X 1 [I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [X 1 Forests (OP/BP 4.36) [I [X 1 Safety o f Dams (OPBP 4.37) [I [X 1 Projects in Disputed Areas (OP/BP/GP 7.60) [I [X 1 Projects on International Waterways (OP/BP/GP 7.50) [I [X 1

[X 1

[I

77. The scale o f the investment works i s typically limited but the project design allows for some larger or more complex projects which would be flagged as E-1 under the PMDFC Framework and which might be categorized as Category A under OP4.01. The overall project has therefore been given a Category A rating. All E-1 projects wil l be reviewed by the Bank to determine the scope of work required to meet Bank requirements. Works in urban areas are likely to result in some interference with properties or business and, therefore, PMDFC’s Environmental and Social Framework includes measures to ensure that the requirements o f the Involuntary Resettlement Policy are met.

78. There i s always a possibility that some elements o f physical cultural heritage will be affected in urban areas, but the planned investments are normally designed to ensure that none o f these elements are impacted. The consultations planned for each sub-project and the review by PMDFC are considered adequate to ensure that no problems or disputes arise in this context. One o f the objectives of the cultural heritage component i s to upgrade the capability o f the authorities to develop and implement a program to restore and enhance the existing physical cultural assets and, thus, a separate cultural heritage plan is not required.

25

7 Policy Exceptions and Readiness

79. Policy exceptions. The project does not entail any exception to applicable Bank policies.

80. Readiness. The development sub-projects that have been reviewed as being ready to start implementation in the f i rst year amount to approximately US$ 10.8 million, which i s 18% percent o f the total project cost, and 24% o f the amount allocated to TMA development schemes.

26

Annex 1 : Country and Sector Background

PAKISTAN: Punjab Municipal Services Improvement Project

1. Pakistan i s currently the most urbanized country in South Asia. I t i s experiencing a rapid urban transition with growth rates that are twice the rate o f the overall population increase. Over a third o f the total population o f 140 mi l l ion l ives in urban areas, and almost hal f o f Pakistan’s residents wil l be urban by 2015.’ Pakistan’s economy has experienced an even more rapid transformation. Cities and towns are the location o f a disproportionate share o f value added, with manufacturing and services that account for 75 % o f Gross Domestic Product (GDP) located mainly in urban areas. The more urbanized provinces l ike Punjab have recognized the potential role o f cities in economic growth, and the need to make available adequate resources for investment in infrastructure and delivery o f services, to improve the investment climate in cities.

2. The rapid urban transition in Pakistan could contribute even more to the pace o f the country’s economic growth and poverty reduction, if cities did not suffer from severe infrastructure bottlenecks, service deficiencies, poor local governance, and inefficiencies in land and housing markets. Water and sanitation coverage rates have almost stagnated in the 1990s at about 58%, and 30% respectively. Unaccounted for water i s high, collection rates and cost- recovery levels are low, existing infrastructure run down, supply is intermittent and the quality o f water dubious. Other urban services are not much better in terms o f quality and sustainability. The shortfalls in urban services are not merely an outcome o f aggregate resource constraints. The shortfalls are exacerbated by constraints in the institutional, governance, and financial arrangements that have defined local service delivery and financing.

3. The Government’s 2001 flagship Devolution o f Power Program represents a unique opportunity to address key constraints that have plagued urban management and service delivery in Pakistan, as it has done away with some o f the institutional fragmentation for urban service investment and operations. In the Punjab province, the devolution program resulted in the establishment o f 144 Tehsil Municipal Administrations (TMAs) and 5 City District governments (CDs) in Lahore, Rawalpindi, Gujranwala, Faisalabad and Multan.’ The country has made remarkably swift progress in establishing new legal and administrative structures at the local level, and in establishing the fiamework for devolving service functions.

4. The Punjab Local Government Ordinance (PLGO), 2001 provides a comprehensive l i s t o f regulations for local governments in the province. The Ordinance covers the range o f regulations from institutional responsibilities o f the different levels o f local government - including district government, zila council, tehsi l and town municipal administration, tehsil and town councils, union administration, union councils, village and neighborhood councils, and

’ Recent analysis indicates that rapid expansion of ribbon urban development along major transport routes and the expansion o f peri-urban areas around cities have been classified as rural rather than urban in the census statistics. Thus, i t appears that the proportion of urban population i s higher than official estimates.

Whereas the Lahore CD was created in 2001, the other 4 CDs were created by GoPunjab in July 2005. Thus, all the 5 cities, which have WASAs and Development Authorities (Das), now have the responsibilities o f municipal service provision at the District level. Similarly, the number o f TMAs was originally 122, but now has increased to 144 by the sub-divisions o f some previously larger TMAs.

27

. ..

city Districts Towns

T e hs its

i. .- . . .. - ._ - .- .- . . , - . . -. Province of Punja b i ~. . 2

Districts

I l x--_----- ' I

Adrnin.

I

' t i

5. The broad framework o f devolution, as outlined in the PLGO, gives responsibility to T M A s to provide a range o f municipal services and the provincial government to monitor the T M A s in the provision of services. Implici t ly there is an expectation that better performing TMAs will receive greater incentives. This i s a drastic transformation, both for the TMAs which have to immediately acquire the technical and management expertise needed to deliver services, and for the provincial government to change their outlook from provision to monitoring.

6. The implementation o f the devolution plan is progressing slowly. Because the majority o f TMAs have only been in operation for about four years, some newly created ones for even less, not al l have been able to discharge full responsibility for planning and financing newly acquired service responsibilities. Rather, TMAs have focused on the immediate day-to-day functions in the provision o f municipal services such as water supply, sanitation, solid waste, roads, street lighting, parks and firefighting. Many TMAs are struggling to keep the services going and do not have the capacity or resources to undertake strategic spatial, investment, and operational planning.

7. At the same time, the provincial governments in the country have adapted themselves, with varying degrees o f success, to the changed role they are expected to perform under the new system. Informally, the provincial government continues to influence the performance o f the local governments by controlling the postings and transfers o f the senior staff o f the local governments, and by controlling fiscal transfers. However, formal reporting mechanisms to enable provincial government to effectively monitor the performance and chart out a pol icy for performance management and capacity development have not been put in place. While the concept o f performance monitoring i s s t i l l seen as an objective, i t has not yet been implemented at the local government level.

8. Critical issues that face the urban sector in the Punjab include the following:

9. Service Delivery: The core service delivery function for water supply, sanitation, roads, solid waste management, among others was devolved to the T M A . However, the corresponding capacity improvements have lagged behind, and there have not been any significant improvements in service delivery. Most TMAs have not invested in larger capital works since devolution, as they lack the finances and skills to plan for these large systematic investments.

10. Technical: Although the main T M A engineering staff are normally graduate engineers, smaller TMAs are experiencing staffing difficulties and positions may remain vacant or filled with an undergraduate. Until 2001 most TMA engineering staff were with either the Public Health Engineering Department (PHED) or the Local Government and Rural Development Department (LG&RDD), and sometimes lack basic analytical sk i l ls regarding the provision o f urban services. Few have experience in operation & maintenance o f urban infrastructureg, in a culture which lacks clear incentives for good operations and maintenance o f existing facilities. Design sk i l ls are more developed, but design are rarely presented satisfactorily as adequate plans and maps are lacking. TMA engineers correctly point out that i t is, in any case, dif f icult to ensure

Many TMAs allocate a sum of money for capital works for each Union Council. The Union Councilor decides how t h i s money should be spent; consequently infrastructure provision is un-coordinated and un-connected.

29

proper design and supervision o f the large number o f small, unconnected schemes that are being generated by a decision-making process which i s based on political expediency.

11. Municipal Finance: T M A s are financed by a combination o f grants from Provincial government, property taxes, and own revenues, including charges for services provided. They are heavily dependent on a series o f transfers for most o f their revenues. Expenditure covers recurrent and development categories. Over two thirds o f recurrent expenditures are represented by salary payments. Development expenditures are funded largely by transfers and whatever recurrent surpluses are generated at the T M A level. TMAs typically earn a surplus on their recurrent account, allowing them to make a financial contribution to development expenditure. In a small sample o f TMAs this surplus ranged from 30% to 135% o f recurrent expenditure. However, while T M A s may run a surplus at the overall TMA level, the revenues against specific infrastructure services do not cover the costs. For example, on average, only about 40% o f the recurrent expenditures on water supply are covered by revenues generated through tariffs. lo

12. T M A s have some financial management capacity, having inherited the staff and systems o f the earlier municipal governments, but nevertheless this capacity i s rudimentary and in need o f modification and updating. For example, although the accounting system provides adequate fiduciary safeguards when operated properly, i t s capacity to cost services (or separate services such as water and sanitation) i s poor. I t i s a manual system, which limits the flexibility when exporting results, and i t s internal control systems need to be improved. This final factor arises in part from the inadequate number of trained staff who are available, which can imply inadequate separate o f duties and i s a factor delaying the development o f internal auditing.

13. In about 80 to 90% o f al l TMAs, the lack o f staff is cited as the reason why collection o f fees and charges i s usually undertaken by a contractor through a procedure explicitly permitted under and regulated by the PLGO. Past experience, internationally as well as in Pakistan, shows that well-managed outsourcing o f collection o f taxes and fees brings in more revenues than self collection in most instances. Today, whenever a TMA i s not able to contract out the collection o f taxes, its revenues typically fal l significantly, reflecting the general experience and maybe reinforced by TMA’s present limited in-house capacity. Nevertheless the approach i s not a panacea, and i s only fully effective when the process o f involving private contractors i s open and competitive, and their performance i s actively monitored to limit the risks o f the public being mistreated. There is need to improve the contract management and supervision capacities o f the T M A s so that these negative aspects can be mitigated.

14. typical TMA:

The example of Jehlum below provides a broad overview o f the challenges facing a

lo Source: Punjab Local Government Finances: Financial Profiles of Selected Tehsi l Mun ic ipa l Administrations (TMAs), Sidat Hyder Morshed Associates (Pvt) Ltd.

30

Description of TMA Jhelum

TMA Jhelum i s one o f the three TMAs in the Jhelum District. I t lies in the Northern area of Punjab in a plateau range with i t s borders joining Azad Jammu & Kashrmr. The town o f Jhelum, itself, is the ma in town of the TMA, located o n the r ight bank of the Jhelum River and o n the Rawalpindi-Lahore highway. There are 16 U n i o n Councils in the TMA, o f wh ich 5 are located in urban areas.

Jehlum ranks as a median size TMA in the province by population. In 1998, the total TMA population was 516,942, o f wh ich 129,440 were in urban areas. Jehlum’s urban population i s estimated to have a growth rate o f 1.99 percent per annum. The current urban population (year 2005) i s estimated to be about 150,000, and expected to reach 180,000 in 2015.

T M A Management

Jehlum’s TMA management team consists o f TMO, TO (Finance), TO (Regulation), and TO (Infrastructure & Services). N o qualif ied planner could be found to fill the position o f TO (P), and the TMA is currently staffed by an acting TO (Planning).

The TMO’s office i s responsible for some general functions: b Complaint Cell. Although a Complaint Cel l was established as per the P L G O requirements, it serves

main ly as a record-keeping document, rather than an operational document that the TMA can use to identi fy and p lan needed service improvements.

Government, and TMA management information i s not widely available to the general public. b Dissemination of information. The annual budget i s the only information forwarded to the Provincial

The emphasis o f planning in the TMA is restricted to development control rather than i t s facil i tation and management. TMA staff focus mostly o n master planning. Annual Development Plans are prepared with input from citizens through the U n i o n Councils and other means, but without data collection or specific data analysis. N o physical data i s collected o r maintained. TMA Jehlum has a land use map, but no spatial plans, zoning maps o r base maps.

This i s the weakest departmental area o f TMA Jhelum, due main ly to the lack o f qualif ied staff and the lack of awareness about rules and powers as defined in P L G O 2001. The areas o f regulation include: (i) encroachments; (ii) markets; (iii) tax and fee collection; (iv) land rights and (v) development controls. The regulations, are no t enforced in a consistent manner. No records are available on the status o f pending legal cases.

Fin an ce

The Provincial Government collects Urban Immovable Property Tax and transfers it to the T M A s . Prior t o t h i s transfer, the cost o f collection and the Provincial Government share are taken out o f the tax collected for each TMA. In addition, the Provincial Government also deducts outstanding WAPDA dues f r o m each TMA’s share. TMA Jhelum has never reconciled i t s WAPDA dues with the deductions made by Government f r o m i ts UIPT share although t h i s should be done regularly t o avoid any excess deductions.

Jehlum’s own source revenue increased from Rs. 37.22 m i l l i on in 2001-02 to Rs. 85.99 m i l l i on in 2003-04. Thi: considerable increase i s a result of a major increase in revenues collected f r o m rents and rates during the year 2003. 04. During the same period, Jehlum’s development expenditure rose f r o m Rs. 12.85 m i l l i o n to Rs. 76.39 m i l l i on and Jehlum implemented 83% of the development projects planned at the beginning o f 2003-04.

’ Infrastructure and services

The office o f TO (I&S) i s lacking in qualified trained staff in almost a l l areas. There i s also a shortage o f technica equipment, such as surveying equipments and lab testing equipment. N o preventive maintenance i s being performed. Although a record o f household & commercial water supply connections i s maintained manually, it i!

31

not consistent with the record maintained by TO (F) for revenue collection. The rest o f the municipal services data i s :ither outdated or nonexistent..

The state o f the municipal infrastructure service delivery i s detailed below for selected urban infrastmcture:

Water supply The existing water supply system covers about 50 % o f the population. The system relies o n deep tube wells installed up to a depth o f 200 - 250 ft. A total o f 20 tubewells are operational, o f wh ich nine pump into overhead reservoirs, while the other eleven pump into the distribution network. The population not covered by the system uses 5 to IO-feet dug wells equipped with hand pumps. Such dug wells are expensive and not every household can afford them.

There i s no systematic chlorination, although bleaching powder i s added into the overhead reservoirs during the rainy season. The water pumped f r o m the tubewells i s o f very good quality, but i s sometimes contaminated in the distribution network due to leakage, poorly installed consumer connections, sub-standard materials used for connections, and the presence o f rusted main pipes that are past their design l ife.

There are 11,087 registered water customers in Jehlum, o f which 155 are commercial customers. The TO (I&S) estimates that an additional 7400 customers are i l legally accessing the water supply system.

B i l l i ng and collection i s done quarterly. The existing flat rate for domestic customers i s Rs. 35/ month, which i s currently planned to b e increased to Rs. 401 month. Commercial customers pay a f lat rate o f Rs. 200/ month. This i s planned to be increased to Rs. 250/ month. In 2004-05, 53% o f the total budgeted revenue was collected, or Rs. 2,790,030 out o f Rs. 4,788,500. About 25% o f total O&M expenses are recovered through collections. 43 staff are employed in the water supply system, and salary expense accounts for 77% o f the total O&M charges o f Rs. 11,264,400. Electricity costs account for Rs. 1,600,400 and repairs were recorded at Rs. 1,000,000.

Storm water drainage The existing drainage system consists o f open channels throughout the c i ty discharging into the Jhelum River. Some sections o f these channels are l ined or constructed in br ick masonry, while other sections are without any lining and flow as natural earthen channels. TMA staff maintains the storm water drainage system by regularly cleaning the drains; however, the condition o f the existing parts o f the drainage network vary widely. Moreover, Jehlum has not been able to extend the system to some newly developed areas within the TMA. As a result, a number o f inhabitants in the TMA suffer f r o m severe periodic flooding.

Sewerage A sewerage system exists only in the southwestern areas o f the city. The sewage f lows untreated into the Jhelum River. A treatment plant for waste water has been proposed under a comprehensive sewerage scheme.

32

Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies

PAKISTAN: Punjab Municipal Services Improvement Project

1. The Government o f Pakistan and the Punjab provincial government have worked with several donors to implement devolution. The following donor agencies have provided assistance to implement devolution:

2.

e

3.

Asian Development Bank Devolution Support Program provides technical assistance to the Ministry o f Finance and the Finance Departments o f the provincial government. The Asian Development Bank has recently announced an investment project focusing on TMAs. Canadian International Development Agency (CIDA) i s providing technical assistance to 2 TMAs in the Punjab on urban planning. C I D A has also provided technical assistance to the LG&RDD on improving i t s capacity to manage TMAs, including investments in computer equipment and software development. Japan International Cooperation Agency (JICA) i s providing technical assistance o n urban infrastructure to 1 TMA in the Punjab.

The Wor ld Bank’s devolution support program comprises a range o f instruments: The Punjab Big Cities Development Policy Loan (DPL) i s being proposed for FY08, to assist the large cities in the Punjab to develop capacity in municipal finance, urban transportation and improving service delivery. There i s sector work to review institutional options for the water and sanitation sector in the Punjab province, FY05, including regulatory and legal framework, the review o f institutional options for water uti l i t ies, tar i f f structures and the options for private sector participation. A similar study on institutional options, regulatory framework and private sector participation i s beginning for the solid waste management sector in the Punjab in FY06. WBI has provided devolution support through training courses targeted at both the national and provincial levels, including direct training to TMA staff in conjunction with PMSIP. In FY06, sector work on municipal finance, planning and land and housing under the devolution framework wil l be completed.

PMSIP wil l be coordinating with the other donor efforts in several ways: the project wil l not offer duplicate activities to those being financed by the other donors in the same TMAs. For example, PMSIP wil l not provide the type o f classroom training which i s provided under the Asian Development Bank provincial program. If the TMAs currently working with C I D A and JICA are also deemed eligible to participate in PMSIP, through the achievement o f some basic indicators, the project wil l complement the technical assistance being provided to the TMAs with financing to implement service delivery improvements and any additional capacity improvements necessary.

4. Within the World Bank urban program, PMSIP and the Big Cities DPL have targeted different levels o f the provincial government structure: PMSIP i s targeting T M A s and the DPL is

33

targeting Ci ty District governments. Both projects wi l l benefit from the specific sector work currently being conducted.

5. Finally, PMDFC i s committed to ensuring that financial management support and capacity building i s provided to TMAs in a manner that i s supportive of, and aligned with the government’s work on the objectives o f .the Bank-financed Project to Improve Financial Reporting and Accounting (PIFRA).

34

Annex 3: Results Framework and Monitoring

PAKISTAN: Punjab Municipal Services Improvement Project Results Framework

PDO ro significantly improve the yiability and effectiveness o f irban services provided by the iarticipating TMAs, and to nake such improvements wstainable and replicable in ither TMAs through the :reation o f a performance- >ased management framework it both T M A and provincial evels.

Component One: Improve service delivery to the citizens o f the TMAs selected for the project

Outcome Indicators Evidence, v ia reports from

independent technical and social audit teams, o f improved effectiveness, financial and technical viability o f urban services provided by participating TMAs.

Evidence, v ia reports from independent technical and social audit teams, o f rising levels o f satisfaction among key stakeholder groups with respect to services targeted under the project.

Component One: CORE INDICATORS For each sector, two performance indicators wil l be selected during the second performance management workshop, out o f the long list o f sector performance indicators that has been developed in the f i rst performance management workshop (see below).

ADDITIONAL INDICATORS Improvement in selected service delivery indicators, as chosen by each development grant-receiving T M A from the long list develoDed in the f i rst

Use of Outcome Information Assess the relevance o f

x-eparing repeater projects.

Foster broadening the performance management Framework for local government entities.

Component One: The Performance Improvement Plans that wil l be agreed between PMDFC and grant-receiving TMAs wil l set targets for the selected indicators.

Success in meeting the targets will be a criterion for further grants to be approved.

35

~~

Component Two:

guild capacity (i)

(ii)

At provincial level, manage a process o f performance improvement for TMAs,

At local (TMA) level, improve practices in terms o f project implementation capacity, service delivery, planning, financial management and operation and maintenance planning, financial management, and optimal utilization o f resources,

3erformance management workshop (see below).

Component Two :

At provincial level Evidence o f timely and satisfactory delivery o f project outputs, including:

implementation o f adequate arrangements to monitor T M A performance, implementation o f sound project appraisal criteria, provision o f adequate assistance & guidelines to TMAs, improved capacity to manage cultural heritage assets.

At TMA level a prioritized list o f projects and number o f prioritized projects implemented, implementation o f improved operation and maintenance practices , improvement in selected financial management and financial planning indicators, as chosen by each capacity grant- receiving TMA, as selected in the Performance Improvement Plans from the l i s t developed in the f i rst performance management workshop (see below).

:omponent Two:

;ome f i rst improvements in he capacity to manage iultural heritage assets wi l l be iecessary to implement the 'ilot Project in the Walled Zity o f Lahore

The Performance mprovement Plans that wi l l >e agreed between PMDFC md grant-receiving TMAs M i l l set targets for the selected ndicators.

Success in meeting the targets w i l l be a criterion for hrther y a n t s to be approved.

36

2 8 0 c,

.R a E CI

b m

00 m

h

4

.3 3 a2 v1

4

L CEl

W i3

0 Y

0 d

I Service Delivery

Water Supply

(ii) Sewerage and Drainage

(iii) Solid Waste Collection

(iv) Solid Waste Disposal

Cleaning

Roads

(.ii) Street Lights

(.iii) Parks i Municipal Services

Indicators

D Average number o f hours per day water supplied to households during the last month.

Number o f complaints registeredresolved (by type o f probledlocation) during the last month.

Number and percent o f households connected to the sewage system.

Number o f complaints registeredresolved on the sewage system (by type o f p r o b l e d location).

Number o f complaints registeredresolved on the drainage system (by type o f problem/location) during the last month.

Amount o f garbage generatedcollected per day (in tons).

Number o f complaints registeredresolved on solid waste collection (by type o f problem/location) during the last month.

Percent o f solid waste disposed o f f by dumping, landfi l l site, per day. 0

0 Number o f complaints registeredresolved on street cleaning (by type o f probledlocation) during the last month.

Percentage o f roads in excellent/goodfair/bad condition.

Number o f complaints registeredresolved about the roads (by type o f probledlocation) during the last month.

Percent o f streets with street lighting (by type o f probledlocation).

Percent o f street lights not working during the last month.

Number o f complaints registeredresolved about street lighting (by t y p e o f p r o b l e d location) during the last month.

0

0

0

0

0

0 Average number o f people visiting the TMA’s parks daily (by each park).

Percent o f citizens rating the conditions o f T M A parks as good with respect to (a) condition o f equipment (b) Overall cleanliness (c) condition o f grass (d) presence o f trees (e) number o f trash bins ( f ) safety during the day (g) safety during the night (h) toilet facility (by each park).

0 Amount o f Funds allocatedspent during the financial year o n O&M of:

(i) Water Supply

(ii) Sewerage & Drainage

42

Service Delivery Interventions

(iv) Roads

(v) Street lighting

(vi) Parks

(vii) Fire Fighting

Indicators

(iii) Solid Waste Management

43

List of Core Capacity-building Effectiveness Indicators to be monitored by TMAs and

’IP Tasks/Capacity n terven tions TMO OFFICE i) Setting up o f

Citizens’ Complaint Cell

TMA website ii) Development o f

iii) Performance Management S y s tem .

:iv) Initiation o f development schemes through CCBs.

(v) Training o f TMA staff

TO (Regulation)

Development of computerized data base Of: :

0 Legal cases for proper monitoring

0 Advertisement and signboards

0 Licenses and permits 0 Municipal estates and

properties

TO (Finance) (i) Adoption /

compliance of budgetary and accounting procedures as

- PMDFC

Performance / Effectiveness Indicators

D Number o f complaints registeredtrackedresolved per month.

B Website updated regularly.

B

D

Number o f times web site i s accessed (per month).

Performance management indicators report submitted to Tehsil Nazim on periodic basis by the TMO.

Performance management indicators report submitted to PMDFC on periodic basis.

Number o f CCBs registered during the last financial year.

Number o f CCBs which initiated CCBs’ schemes during the last financial year.

Number o f CCBs which completed CCBs’ schemes during the last financial year.

Percent o f CCB allocation utilized during the last financial year.

Number o f TMA staff got trained under each T O during the last financial year.

B

0

0

0

0

0

0 %age o f database computerized o f

i) ii) Advertisement and signboards iii) Licenses and permits iv) Municipal estates and properties

Legal cases for proper monitoring

0 Computerized annual budgets and accounts prepared according to PLGO requirements.

44

P I P TaskdCapacity Interventions

prescribed under PLGO.

~~

(ii) Financial Management System

(iii) Analysis o f user charges and related costs on periodic basis

iv) Enhancement o f revenue generation

ro (ms) :i) Development of

sk i l ls in preparation o f PC-I to PC-v.

(ii)

0

0

Water Supply

Improvement in Operation, Maintenance and Management o f Water Supply Systems

Enhancement of revenue generation.

~~

(iii) Sewerage

0 Improvement in Operation,

Performance / Effectiveness Indicators

0 Number o f officials using financial management system as a tool.

Number o f TMA staff undergone training in using some financial management software.

Number o f services for which sector specific costs are available. 0

Percent increase in own source revenues every year. i) % increase in fee/tax rate ii) % increase in fee/tax collection.

B

B

Percent. increase in TMAs own contribution to development expenditure. Percent increase in arrear recovery compared with last FY.

D Number o f TMA officials trained during the last financial year.

Number o f Trainings / Workshops held undergone by TMA staff,

No. o f relevant TMA staff got trained in specified areas.

Increase in number o f consumers.

Number o f illegal connection detectedremoved during the financial year.

Reduction in illegal connections compared with last FY.

Percent increase in arrears recovery compared with last FY.

Percent reduction in the amount o f over billing by WAPDA.

Percent decrease in cost o f production to revenue generated.

Percent increase in recovery o f water bills.

Number o f relevant TMA staff trained in specified areas.

0

0

0

0

45

Maintenance and Management o f Sewerage System

(1.) Improvement in existing drafting skil ls.

transparency in TMAs procurement process

(v) Improved

~

TO (Planning)

(i) Setting up o f GIs, mapping of services and developing a database o f services.

(ii) Action Plan I

Number o f TMA officials trained during the last year.

Functional Web-site for the T M A with procurement posting (IFB, summary o f evaluation report sand complaints).

Advertisement for and posting o f pre-registered f i r m s for the non-bank funded projects o f the TMAs.

= Basic maps prepared. 9 Database o f infrastructure developed and thematic maps

prepared. = Number o f municipal services for which complete database i s

developed.

. Number o f development/ capacity projects executed out o f priori t ized l i s t .

46

Annex 4: Detailed Project Description

PAKISTAN: Punjab Municipal Services Improvement Project

1. The Punjab Municipal Services Improvement project (PMSIP) project i s designed to improve the planning and management capacity in T M A s and to improve infrastructure service delivery in TMAs. The project consists o f two components: a) capacity grants and development grants to TMAs; and b) capacity building to the Punjab Provincial Government and PMDFC.

Component One: Support for Tehsil Municipal Administrations - Capacity and Development Grants

2. capacity improvement and infrastructure investments in qualified TMAs.

This component would finance improvements in service delivery in the TMAs through

a) Capacity grants would finance needed improvements in T M A s to improve urban planning, financial management, and investment planning and implementation for service delivery. Capacity grants wil l offer not only technical assistance but the resources for implementation. For example, in addition to learning about mapping and how mapping can improve the planning and implementation o f infrastructure service delivery, T M A staff wi l l be able to apply for a capacity grant to finance the development o f a base map. This sub-component would finance the capacity improvements needed in TMAs to improve management and service delivery, such as base maps, land use maps, computerized accounting systems, computerized complaint registers, and annual customer surveys to monitor TMA performance on service delivery.

b) Development grants wil l finance infrastructure investments in the TMAs. The prioritization and selection o f infrastructure investment wil l be determined by TMA staff, and it i s envisioned that as the project progresses the TMA’s capacity to identify and prioritize needed investments wil l continue to improve. Because the focus o f the development grant wil l be on service delivery improvements, this component would finance rehabilitation o f existing infrastructure as well as construction o f new infrastructure. As TMA capacity to plan, prioritize and implement infrastructure investments grows, i t i s envisioned that the size and complexity o f investment would also increase. The assessment o f T M A capacity on infrastructure projects would be determined by annual reviews.

3. The development grant requires a contribution by the TMA o f 15% o f the total investment cost. The TMA would also need to provide assurance that it wil l be able to finance the Operations and Maintenance costs associated with the investment. Because one o f the objectives i s to assist T M A s to develop capacity to do complex planning and implementation, i t i s envisioned that the project wil l not finance the routine small scale investments that have been made during the past few years. However, the project wil l assist T M A s to improve their management o f existing infrastructure through the capacity grant.

47

4. Development grants can be provided for infrastructure investments in water supply, sewerage, sanitation, solid waste management, urban roads, storm-water drains, street lighting, and community centers. Criteria for selection o f investments include:

(i) Evidence i s provided o f an important community need (ii) Likel ihood that the grant wil l provide significant help in meeting that need (iii) Reasonableness o f the cost estimates (iv) TMAs ability to meet i t s portion o f investment costs and TMA’s commitment to

(v) Identification o f a reasonable set o f performance indicators (vi) A service improvement plan which articulates the following:

ensure operations & maintenance o f the investment

0 Purpose o f the project including citizen benefits Detailed description o f the project

0 K e y performance indicators for tracking progress Available baseline data for each performance indicator Targets for each performance indicators - time phased

0 Who needs to do what by when and associated costs

Selection of TMAs:

5. Seven pi lot TMAs were selected at the beginning o f project preparation, in order to better understand the capacity and infrastructure needs o f the TMAs in the Punjab. The pi lot TMAs were selected using a balance o f representative sample in the province as well as those T M A s known to be better performers in the province. The pi lot TMAs were: Chakwal, Chiniot, Fateh Jang, Pind Dadan Khan, Gujranwala, Saddar, Lodhran, Dunyapur.

6. Additional Year 1 T M A s were selected using two criteria: a) ratio o f own source revenue to total recurrent revenue; and b) ratio o f development hnds expenditure to total development funds. The f i rs t ratio i s an indicator o f the TMAs capacity to generage i t s own revenue. The second ratio i s an indicator o f T M A implementation capacity, as the average TMA i s only able to implement 50% o f i t s total development funds.

7. After Year 1, subsequent TMA selection will be subject to the TMA’s achieving the performance targets specified in previous grant awards, and producing a l i s t of prioritized projects through a comprehensive planning process. New T M A s wil l be added according to their performance on the two selection criteria applied to Year 1 TMAs.

Typical Grant Processing Cycle:

8. The grant processing cycle wil l fo l low the TMA’s annual planning and budgeting cycle. Applications for grants should be included in the TMA’s annual budget plan in April, and grants will be available to disburse in June.

Step 1: TMA Eligibility: T M A s with the highest ratios on the selection criteria were invited to participate in the project. For inclusion in Year 1, 16 TMAs were selected out o f the

48

Punjab’s 121 by adding the 10 best performers (the selection criterion being the sum o f ratio 1 and ratio 2) to the already selected pilot TMAs’ :

TMA Ratio 1 Ratio 2 Total Score/ Pilot Bhalwal 54% 95% 1.49 Talagang 60% 87% 1.47 Jhelum 64% 83% 1.47 Attock 69% 72% 1.41 Toba Tek Sin& 64% 67% 1.31 Mai ls i 40% 91% 1.31 Kasur 37% 93% 1.30 Liaqatpur 36% 91% 1.27 Shorkot 52% 74% 1.26 Daska 38% 88% 1.26 Chakwal 5 8% 52% Pilot Chinio t 43% 56% Pilot Dun y apur 31% 54% Pilot Fatehjang 67% 42% Pilot Lodhran 33% 78% Pilot Pind Dadan Khan 32% 36% Pilot

Note: Pi lot TMAs were selected based on their early cooperation and participation in the project’s design.

Step 2: Field Appraisal Report (FAR): Eligible TMAs submit a detailed application for either a capacity grant and/or development grant. The assessment and selection o f TMAs wil l be done through a field appraisal report:

For Capacity Grant: The application for the capacity grant wil l be based on a detailed assessment o f the TMA’s existing capacity on planning, budgeting and financial management.

For Development Grant: The development grant application wil l consist o f a detailed description o f the proposed project and the issues surrounding the project. There should be a service improvement plan that specifies the purpose and benefits o f the project, as well as performance indicators, baseline, and targets. The FAR should also include demonstration o f ability to contribute to capital cost o f proposed sub-projects and demonstration o f ability to fund the associated O & M costs.

Step 3: Memorandum of Understanding (MOU): A Memorandum o f Understanding would be signed by the PMDFC and the TMA to confirm the TMA’s interest and capacity to participate in the project and to begin the preparation activities for the project.

l1 Gujaranwala, a pilot TMA, was excluded from the project because i t was later converted to a City District. It will likely be included in the Big Cities DPL. Saddar was also excluded as i t was merged with the City District o f Faisalabad.

49

Step 4: Grant Approval: PMDFC would approve capacity grants at the same time as overall TMA provincial budget approvals. For development grants, the PMDFC approval should happen before the TMA’s annual provincial budget approvals, so that T M A s can submit the matching grant application in their annual budget to the province.

Step 5: Annual Monitoring and Supervision Process: PMDFC w i l l conduct an annual assessment of the performance indicators set by the TMA. Satisfactory performance against the target indicators for development grants wil l determine the TMA’s continued eligibility to participate in the project, thereby access additional grants. PMDFC will input the results o f the annual assessment in the overall provincial monitoring database.

9. construction and implementation o f the development project.

PMDFC and the T M A will develop an appropriate supervision schedule during the

10. The processing cycle for Year 1 schemes was compressed due to the timing o f the second local government elections since devolution. While TMAs should have been able to begin documentation and preparation activities during the summer o f 2005, they were not able to receive endorsement from the NazimdTehsil Councils until after the elections. Intense preparation activities were conducted to ensure that appraised development projects would be ready to finance at the beginning o f the following budget year.

11. appraisal :

The table below gives the l i s t o f development projects being prepared at the time o f

50

L i s t o f sub-projects being prepared at time o f appraisal TMA Sub-project Estimated Cost (PKRs

Mill ion) Field Appraisal Reports and f i r s t draf t of feasability studies issued by Appraisal, sub-projects tendered out by Negotiations Jhelum Improvement and extension o f water 90.1

supply Construction o f storm water drains Rehabilitation o f water supply scheme Improvement o f urban water supply Widening and improvement o f urban roads Extension and improvement o f water

Extension and improvement o f water

B halw a1 Pind Dadan Khan

Toba Tek Sin&

Kasur supply

34.8 68.2 56.1 30.6

62.5

140.5 supply

Sub-total 482.7

Field Appraisal Reports issued by Appraisal, sub-projects being designed for tendering in Year 1 Shorkot Widening and improvement o f urban 55.0

roads, including street lighting Development o f public parks 24.0

Bhalwal Improvement o f sewerage system 53.0 Sub-total 212.0

Sub-total of sub-projects wi th FAR completed by Bank appraisal 694.7

Sub-projects at Field Appraisal Stage Chakwal Improvement o f water supply scheme 150.0 Mai ls i Improvement o f water supply scheme 80.0

Improvement o f solid waste management 30.0 system Improvement o f f ire fighting system 30.0

Development o f public parks 30.0 Chiniot Improvement o f solid waste management 30.0

system Sub-total 450.0

Li aq atpur Improvement o f water supply scheme 100.0

Total 1144.7

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Component Two: Activities

Support for Other Institutions - Capacity Building and Other

12. This component would assist the Government o f Punjab in a variety o f ways. I t wil l (i) support the capacity building o f the Local Government and Rural Development Department (LG&RDD) as the parent department o f all local governments (LGs); (ii) assist in capacity enhancement o f the newly established Urban Unit (W) in the P&DD, in leading the Cultural Heritage component - the Unit has been established with the mandate to provide Technical Assistance to the Planning and Development Department (P&DD) on al l matters relating to the urban sector; and (iii) support the PMDFC in adding to its capacity through consultant services.

Sub-component (a): Local Government and Rural Development Department

13. PMSIP wil l support LG&RDD in the following areas:

a) Assess the Department’s structure and staflng in light of its current mandate. Over time, LG&RDD has assumed new responsibilities, while its structure has not kept pace with its evolving role. Under the project, an assessment o f the appropriateness o f i t s current organizational structure for carrying out i t s mandate post devolution will be undertaken. This assessment should lead to the identification o f an appropriate organizational structure clearly defined roles and responsibilities; and requisite systems and internal procedures.

b) IdentifL critical skills shortages and provide stafing for the Department. Appropriate staffing is crucial to fully deliver on the departmental mandate. If the institutional assessment in (a) above, points to the need for staff that i s not available in the public sector, hiring from the market may be needed. And while the procedure to get the requisite permissions i s being hl f i l led, PMSIF’ could assist in supporting some key staff induction in LG&RDD over the Project period, which can later be absorbed permanently by the Department.

c ) Establish a Monitoring and Evaluation System. As the parent department o f LGs, LG&RDD needs to assume an oversight role to monitor their performance, particularly in service provision. This has become al l the more important in light o f the revised role o f the LGC. PMSIP would assist the LG&RDD in establishing a monitoring mechanism for the TMAs in a phased manner. Basic indicators o n the coverage o f each municipal service would be selected, and TMAs required to report annually to LG&RDD. This would have. several advantages. I t would encourage the TMAs to: (i) develop a database on the coverage o f each service; (ii) monitor the changes in the coverage o f their own services over time; and (iii) make informed investment decisions. I t would assist the LG&RDD to: (i) monitor the changes in coverage o f municipal services o f each TMA over time; (ii) compare the changes in coverage o f services across T M A s and therefore their performance; and (iii) monitor the outcomes o f investments hnded through special development funds.

52

The project wi l l assist in the development o f necessary software for the M&E system for the LG&RDD, as well as the PMDFC. Over time i t i s envisioned that the T M A s would also have the capacity to operate computer-based M&E systems, which the project wil l assist in establishing, and in linking them to to the system maintained by PMDFC as well as the GoPunjab. The project wil l also support capacity building and training o f staff in operating these M&E systems at al l the three levels.

Sub-component (b): Planning & Development Department

14. GoPunjab has been acutely aware o f the need to establish an effective mechanism that would assume a leadership and coordinating role on al l issues related to the urban sector. Since the P&D Department is the only agency with authority over al l other provincial departments and agencies, GoPunjab has established the Urban Unit (UU). The mandate o f this newly created unit i s to provide Technical capacity on al l matters relating to the urban sector. I ts Director has been appointed; while other staff are being recruited from the market. The unit would ensure the requisite coordination o f the multiple provincial and local government departments which influence and develop policies that affect cities, through a focal agency with requisite authority. The local government mandates are clear for municipal services, but unclear for formulating a vision or a strategy for citywide development, which this unit would support.

15. There is also a growing recognition within the GoPunjab that Cultural Heritage assets in the cities o f Punjab have r ich economic potential that can contribute to growth and poverty reduction, if appropriately tapped for cultural tourism. However, implementing any initiatives in this realm will require substantial preparatory work on issues o f institutional realignment and regulatory frameworks. GoPunjab i s keen that UU takes the lead in commencing on such work immediately. It i s also keen that a pi lot project in the Walled City o f Lahore (WCL) i s implemented to showcase methods and benefits o f conservation o f cultural assets and their productive rehse.

16. A recently completed Bank-executed, Italian Trust-funded study on Sustainable Development o f W C L has identified the Shahi Guzargah (the Royal Route), as an appropriate pi lot for this purpose. I t i s the route that the Mughal emperors followed to reach the royal palace, when returning from Delhi to Lahore. They entered the W C L through the Delhi gate, bathed in the Shahi Hammam (Royal Bath), and prayed in the Wazir Khan mosque en route to the fort. Over the years, many o f the private buildings along the route have either fallen into disrepair or have been replaced, and the public spaces encroached upon. The monuments however remain gems o f architectural heritage, and primary visitor attractions. The pi lot project envisages the creation o f a Heritage Trail that would lead visitors from the Delhi Gate to the Lahore Fort linking a variety o f cultural assets comprising o f monumental buildings, private residential buildings, traditional bazaars, and open spaces as a sequence o f experiences in a historic built environment.

17. PMSIP will assist the P&DD in: (a) developing requisite capacity to develop and implement Cultural Heritage initiatives, starting with the pi lot project, through providing appropriate specialist staffing; (b) undertaking studies to recommend rationalization o f

53

institutional mandates for management o f heritage assets; and (c) undertaking legal and technical studies to recommend appropriate amendments to the existing legislative framework.

a) Appropriate Expertise in Cultural Heritage issues. The UU will, under the Cultural Heritage (CH) component, begin looking at the issues o f the Walled Ci ty o f Lahore (WCL), including social, cultural, economic, and conservatiodrestoration o f the monuments and the built fabric. In order to do so, i t will require tapping into multiple skills, including legal and technical experts with global experience, which would be supported under the project..

b) Rationalization of institutional mandates for management of Heritage assets. There are serious issues arising from the multiplicity o f institutions that are responsible for the cultural assets in the Punjab. These include the federal and provincial Archaeology departments, the federal Auqaf Department, the federal Evacuee Trust Property Board, the federal Ministry o f Culture and provincial Department o f Culture, and the relevant District and Town governments.

In the Punjab, 244 historic monuments are under the control o f the provincial Department of Archaeology under the Punjab Special Premises (Preservation) Ordinance 1985, and 147 are under the federal Department o f Archaeology under the Antiquities Act o f 1975. W h i l e historic shrines are under the control o f Auqaf & Religious Affairs Department, their maintenance and restoration i s the responsibility o f the Department of Archaeology. Similarly, a historic structure l ike the Delhi Gate that was restored under a previous Bank-hnded project and turned into a school i s with the Education Department for maintenance which clearly has no expertise for it. The Evacuee Trust Property Board, under the Evacuee Trust Property Management and Disposal Act 1975 i s particularly responsible for monuments and buildings o f religious value to the minorities. A variety o f other agencies are responsible for the provision o f municipal services in the WCL.

This leads to difficult issues o f coordination and accountability. Moreover, within these agencies there i s a significant lack o f specific historic core management capacities, including skills, tools, and regulations. Whatever capacity i s available i s generic, unsuitable for maintaining and developing world class heritage assets such as exist in the W C L as wel l as al l over the province. Thus the project wil l support necessary TA to rationalize the institutional mandates through a lead agency l i ke the uu.

c ) Appropriate amendments to the existing Legislative Framework. The key legislative frameworks that govern the conservation, restoration, and maintenance o f historic assets in the Punjab are, as mentioned above, the Punjab Special Premises (Preservation) Ordinance 1985, Antiquities Act o f 1975, and the Evacuee Trust Property Management and Disposal Act 1975. A more recent addition i s the Punjab Heritage Foundation Act 2005. There contents are at times contradictory rather than complementary to each other. There i s an urgent need to thoroughly review these frameworks, assess the extent o f their relevance and applicability, and decide if they

54

require updating only, or need to be completely annulled and replaced by more comprehensive and relevant legislation.

d) Implementation of the Pi lot Project in the Walled City of Lahore. While Cultural Heritage initiatives require tackling issues on multiple fronts, implementation o f a pi lot project to showcase methods and benefits o f conservation o f cultural assets and their productive r e h e have globally proved to be effective in building consensus. For the WCL, the recent study has confirmed the general thinking within the GoPunjab that the Shahi Guzargah (the Royal Route), is an appropriate pi lot for this purpose.

The pi lot project envisages the creation o f a Heritage Trai l that would lead visitors from the Delhi Gate to the Lahore Fort linking a variety o f cultural assets comprising o f monumental buildings, private residential buildings, traditional bazaars, and open spaces as a sequence o f experiences in a historic built environment. The project wil l directly benefit the residents and businesses along and in the vicinity o f the Trail, particularly those with livelihoods linked to current and future activities in the pi lot area. W h i l e i t would require concerted information, education, and communication campaign to begin with, demonstration effects o f i t s positive outcomes are expected to be far reaching. And these in turn are likely to facilitate greater stakeholder buy-in for future initiatives. This sub-component will fund implementation o f the pilot.

Sub-component (c): Punjab Municipal Development Fund Company

18. PMDFC was established by the GoPunjab as an autonomous agency to assist local governments (LGs) in improving their service delivery. Since the devolution o f powers has devolved substantial responsibility to LGs, while their capacity to shoulder i t i s s t i l l limited, this assistance i s needed in a variety o f areas. It i s however advisable for PMDFC to keep a balance between retaining its lean structure for efficiency and effectiveness, while contracting services from the market for the sk i l ls required in assisting LGs. PMSIP wil l support the following activities:

a) Training on performance management. Performance management with the view o f improving outcomes i s a new concept under PMSIP, in which TMA staff wil l need substantive classroom as well as hands-on training. A core principle o f performance management i s that service delivery should be measured by outputs and outcomes, rather than by inputs. This concept is also reflected in the PLGO. However, based o n a review o f other donor supported training materials on performance management, i t seems that practical training on implementation is not available. This sub-component wil l finance technical assistance to help TMAs design and implement performance management principles to service delivery. The design o f a successful performance management system begins with the selection o f appropriate indicators. Consultants wil l assist with the design and selection o f performance indicators to be used by the TMAs, and monitored by them as well as PMDFC and the GoPunjab.

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b) Design of Capacity Grants. Customized capacity improvement programs wil l need to be developed for the TMAs, to be funded by the Capacity Grants. Unlike service delivery improvements, which can be standardized to a certain extent (a minimum level o f service provided in every TMA, for example), capacity improvement programs wil l need to be customized due to the wide variance in the existing capacity o f TMAs. This sub-component wil l finance TA for this purpose.

c) Appraisal and Monitoring of Capacity Grants. As the number o f Capacity Grants increases, PMDFC wil l require enhanced capacity to appraise them and monitor their implementation progress and quality. This i s envisioned to be conducted through contracting-in consultants, with monitoring done through detailed annual assessments for each TMA.

d) Appraisal and Monitoring of Development Grants. As the number o f Development Grants increases, PMDFC wil l require assistance in their appraisal and in monitoring their implementation progress and quality. This i s also envisioned to be undertaken through contracting-in consultants, and monitoring on a periodic basis.

e) Development of a Monitoring and Evaluation System and Database. PMDFC would also be assisted to establish and maintain a project management system, and evaluate progress o f TMAs against the performance targets that have been agreed to.

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Annex 5: Project Costs

PAKISTAN: Punjab Municipal Services Improvement Project Al l costs are expressed in USD millions'*

Component Cost13 YO Total Bank YO Bank GoPunjab Cost Share or TMA

Share 1 Grants to TMAs

1.b Development Grants 1.a Capacity Grants 3.2 5.4% 3.2 100% 0%

Year I schemes tendered out before Board Approval Jhelum water supply 1.5 3.4% 1.3 85% 15% Jhelum drainage 0.6 0.9% 0.5 85% 15%

PD Khan water supply 0.9 2.0% 0.8 85% 15% PD Khan roads 0.5 1 .O% 0.4 85% 15% TT Singh water supply 1 .o 2.6% 0.9 85% 15%

Bhalwal water supply 1.1 2.3% 1 .o 85% 15%

Kasur water supply 2.3 4.0% 2.0 85% 15%

Shorkot roads 0.9 1.5% 0.8 85% 15% Shorkot parks 0.4 0.7% 0.3 85% 15% Fatehjang water upp ply'^ 1.3 2.3% 0.8 85% 15% Bhalwal ~ewerage'~ 0.9 1.5% 1.1 85% 15%

Estimated Year 2 - 4 33.9 57.4% 28.8 85% 15% development schemes

Year I schemes with Field Appraisal Report available at time of Bank Appraisal

Sub-total component 1.b 45.5 77.1% 38.7 85% 15% 2 Support to Provincial

Government and PMDFC 2.a LG&RDD & PMDFC (M&E) 1 .o 1.7% 1 .o 100% 0% 2.b P&DD / Cultural heritage 6.0 10.2% 6.0 100% 0% 2.c PMDFC (management) 3.2 5.4% 1 .o 31% 69%

Sub-total 58.9 49.9

Total Project Costs 59.0 100% 50.0 85% 15% Front-end fee (0.25%) 0.1 0.1 100% 0%

l2 For the purpose of this table the conversion rate used was 1 USD = 60 Pak Rs. (consistent with the PC-1 submission). Figures may not add up due to rounding.

l3 Includes contingencies l4 For these two sub-projects, feasibility studies and designs were also available at time o f appraisal

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Annex 6: Implementation Arrangements PAKISTAN: Punjab Municipal Services Improvement Project

1. I t s responsibilities include among others:

LG&RDD oversees the functioning o f al l local governments in the Province o f Punjab.

0 Punjab Local Government Commission, 0

0

0

Development Funds and Development Schemes o f LGs pertaining to local funds - additionally they monitor all donor, federal, and provincial-funded programs, Framing/approval o f rules and regulations under the PLGO 2001 , Human resource management and appointment o f Tehsil and District Officers.

2. P&DD is the principal planning organization at the Provincial level. I t coordinates and monitors the programs prepared by the Provincial departments concerned with provincial development. The department also prepares an overall provincial Five Years Plan and the Annual Development Program. I t i s to act as a catalyst between different Departments in order to improve the pace and quality o f economic development in the Province. I t s main objectives are :

Assessment o f the material and human resources o f the province; formulation o f long and short term plans. Recommendations concerning prevailing economic conditions, issues, policies or measures. Coordination o f al l economic activities in the Provincial Government.

0

0

0

3. chaired by the Secretary, LG&RDD.

PMDFC will be monitored through its Board, which includes members o f P&DD and i s

Specific Project Implementation Responsibilities Components Implementation Procurement Reporting

a. Capacity grants T M A P M D F C PMDFC T M A P M D F C b. Development grants T M A P M D F C T M A P M D F C T M A P M D F C

2 Provincial government capacity building a. LG&RDD capacity LG&RDD/PMDFC PMDFC LG&RDD/PMDFC building b. P&DD P&DD P&DD P&DD c. PMDFC capacity building PMDFC PMDFC PMDFC

1 TMA

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Annex 7: Financial Management and Disbursement Arrangements

0 Accounting

0 Internal control

0 Fundsflow 0 Financial

reporting

PAKISTAN: Punjab Municipal Services Improvement Project

L o w Computerized accounting system NA already in place

Moderate Including a chapter on internal NA controls in the Financial Manual

L o w NA Moderate Including financial reporting NA

formats for 'TMAs in the M&E system

Financial Management Appraisal of PMDFC

Risk analysis

1. Inherent risk. The general environment in the country i s that often policies and procedures are not followed. Hence, i t would be critical to assure that these are followed in letter and spirit. This can be achieved by enhanced monitoring by PMDFC and the Bank.

2. Control risk. The control system in the PLGO and in the Financial Manual provide adequate assurance that project funds would be used for intended purposes, economically and efficiently

3 . Residual risk rating. Although the laid down policies and procedures provide sufficient assurance for effective financial management, residual risk rating for the project may be termed as Moderate since the implementing agencies have no prior experience o f implementing a Bank financed project. The FM Assessment Questionnaire and Risk Rating Summary are in the project file.

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R i s k

0 Auditing

Risk Risk Mitigating Measures Condition o f Rat ing Incorporated in Project Design Negotiation

Moderate Including audit o f TMAs in NA TORS o f PMDFC’s audit

Strengths and weaknesses

Detection Risk

4. Strengths. Existence of: 0

0

0 Computerized accounting system 0

0

Professionally qualified financial management staff in PMDFC Financial Manual for the project

Well documenjed Ordinance for TMAs that adequately covers financial management aspects Pre-audit o f al l T M A payments by the Local Fund Auditors

L o w Adequate financial controls and NA supervision by Bank staff

5. Weaknesses. 0

0

N o external audit arrangements for TMAs Weak recovery o f advances and dues by TMAs

Significant Weakness N o external audit arrangements for

Action Responsible Person Completion Date

Including TMAs’ Managing Director Before audit as part o f commencement o f

TMAs Weak recovery o f

PMDFC’s audit PMDFC’s audit Effective T M A s On going basis

Staffing

advances

6. PMDFC. The Finance & Administration Department i s headed by a General Manager supported by two Managers, two Deputy Managers, an Assistant Manager and an Administration Officer. The newly inducted General Manager, Finance, i s an experienced chartered accountant and has experience of multinational companies. The Manager, Budget & Accounts, i s an MBA from the U S and the Deputy Manager, Budget & Accounts, i s A C M A . The vacant positions o f Manager, Finance, and Deputy Manager, Finance, have been advertised and process for selection has been initiated. Job descriptions have been prepared for the above positions that provide assurance for adequate controls. Job descriptions in the Human Resource Manual prepared earlier wil l have to be revised to cater to the revised organogram.

monitoring by the management

7. TMAs. In T M A s Finance & Accounts department i s headed by a Tehsil Officer (Finance) looking after Revenue and Accounts sections. Generally, the Accounts section i s headed by a Superintendent with the fol lowing support staff:

0 Accountants (2)

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0 Assistants (2) 0 Accounts Clerks (3-4)

Budgeting

8. The Financial Manual (FM) states the process for preparation o f budget, which would be prepared using a bottom-up approach. Standard templates would be used for collecting information for the budget. The time table has also been provided for preparation, review and approval o f the budget. Budget figures would be input in the computerized accounting system for automatic control over expenditure.

PMDFC accounting

9. PMDFC i s governed by the 1984 Companies Ordinance. PMDFC uses accrual basis o f accounting. PMDFC’s computerized accounting system would be used for the project. The system has adequate data entry and system controls. The Chart o f accounts i s adequate to track project sources and application o f finds. Financial reports can be generated from the system using Excel.

10. The Financial Manual covers staffing, budgeting, accounting policies and procedures, delegation o f financial powers, payment processing, payroll processing, operation o f bank accounts including Designated Account, fixed assets, financial reporting, find f low arrangements, internal audit and external audit. Bank staff reviewed and provided comments o n the Financial Manual and the Operations Manual.

11. The bills payable register would be maintained for tracking and efficient processing o f payments. Data for FY05 i s being entered in the computerized accounting system and results would be compared with the manual results before using for FY06. The system has enough flexibility to track project inflows and expenditure. Salient features o f the computerized accounting system (Power Builder at front end and SQL Server at back end):

0 Multi level security system 0 Multi user system 0 Budget control feature 0 Expandable chart o f accounts - interim financial reports can be prepared from the system 0 Multi currency 0 Facility for online processing o f payments 0 Audit trail available for transaction processing 0 Online help 0 O f f site back-up would be kept o f the accounting data.

TMA accounting

12. adequately cover financial management aspects for the activities o f local governments:

The following ordinance, rules and guidelines apply to the local governments. These

Punjab Local Government Ordinance & Rules 2001 (PLGO) Punjab Local Government Budget Rules 2003

0

0

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0

0

0

Punjab Local Government Accounts Rules 2001 Local Government Accounts Manual issued by the Controller General o f Accounts Guidelines For District Government Accounts issued by the Accountant General, Punjab

13. The PLGO includes accounting policies and procedures to be followed by the local governments in respect o f receipts and expenditure using cash basis o f accounting. Unpaid liabilities at year end are reported separately. The Ordinance also lays down the internal control framework that i s adequate. As per PLGO, every TMA has to have a Tehsil Accounts Officer to process payments and maintain books o f account. The Accounts Officer i s also responsible for submitting monthly expenditure statement to the District Accounts Officer for consolidation and monitoring o f budget. The Tehsil Nazim may also appoint an internal auditor if necessary. Pre and post audit o f TMAs i s conducted by the local fund auditors.

14. The Punjab Local Government Budget and Accounts Rules lay down the procedures for preparation, execution o f budget and book keeping and reporting. An internal control measure in the Accounts Rules i s that Head o f Accounts o f one TMA would be responsible for inspection o f books o f account o f the other.

15. The Controller General o f Accounts has issued the Local Government Accounts Manual that prescribes in detail the accounting system to be followed for local governments. The Manual also contains a chart o f accounts that covers T M A activities up to the minor function. Detailed functions in respect o f minor fimctions wil l have to be added to fully cover TMA activities should this chart o f accounts be used by the TMAs. The manual also provides for reconciliation o f account with the State Bank o f Pakistan. PLGO, however, stipulates that accounts o f T M A s would be maintained as prescribed in the Ordinance till such time adequate capacity i s developed to conform to accounting system prescribed by the Auditor General o f Pakistan. Therefore, participating TMAs would be maintaining their accounts as prescribed in the PLGO.

16. The accounting books o f two Year 1 T M A s were reviewed. They are we l l maintained and bank accounts are reconciled, though a single bank book i s maintained for a l l the bank accounts. The Classified Abstract (Budget Control Register) i s also written up to date. The Chart o f Accounts i s adequate to report project activities to be undertaken by the TMA. It was agreed that a separate bank book would be maintained for funds received in respect o f the project.

17. As per PLGO, advances can not be given to contractordsuppliers. However, mobilization advance, if provided for in the agreements, may be given out o f the Designated Account. Cash collected on account of various heads o f income i s deposited in to the bank account on a daily basis. Separate bank accounts are used for this purpose. Checks are issued only by the Head Office. Fixed assets registers would be maintained by the implementing agencies for assets procured from project finds. Budgetary control o n schemes i s exercised using separate files for each scheme.

18. Recovery o f advances from office bearers and dues from the public appears to be a weak area that i s affecting financial strength o f TMAs. The Accountant General, Punjab has issued guidelines for district government accounting. The guidelines spell out the nature o f receipts and payments in to the Local Fund and the Tehsil Provincial Account. The guidelines also require

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that separate accounts be maintained for these two accounts. As per guidelines, the district government would release funds to TMAs on 3‘d o f each month.

19. There would be one Designated Account that would be operated by PMDFC to finance the Bank’s share in project activities. The Designated Account would be joint ly operated by two signatories (Managing Director and GM, Finance) as laid down in the Financial Manual. The Bank would provide loan to the Punjab government through the Federal government and the provincial government would in turn provide matching grants to T M A s through PMDFC.

20. and expenditure if followed in letter and spirit.

All the above policies, procedures and guidelines assure effective control over receipts

21. PMDFC is committed to ensuring that financial management support and capacity building is provided to T M A s in a manner that is supportive of, and aligned with the government’s work on the objectives o f PIFRA.

Internal control and internal auditing

22. PMDFC. Since internal audit would play an important role in assuring that PMDFC’s policies and procedures are being followed and project b d s are used for intended purposes, i t was agreed that internal audit arrangements would be in place for the project. A Manager, Internal Audit, who has partially completed chartered accountancy and Certified Internal Auditors’ courses has been inducted recently. H e would be administratively reporting to the Managing Director; however, he would h c t i o n a l l y report to the Board o f Directors. H e wil l conduct internal audit on a quarterly basis to ensure that PMDFC’s policies and procedures are being followed. H e wil l submit his report to the Board o f Directors. K e y internal control aspects are professional staffing, documented policies and procedures, budgetary control in processing payments and regular financial reporting.

23. TMAs. All payments are pre-audited by the resident internal auditor f rom the Local Fund Audit Department. Audit observations are cleared before making any payments. The Resident Assistant Director submits a report to the Provincial Director Local Fund Audit on a monthly basis.

24. As per the PLGO, the Nazim i s mandated to appoint/designate an Internal Auditor who i s head o f the Quality Services and Standards Office to conduct internal audit and help the TMA accomplish i t s major pol icy objectives - management audit. Internal Auditor’s scope o f work includes advisory services, evaluation o f design and systems, help in building capacity and timely delivery o f services. The Internal Auditor has to present his annual report to the Nazim under intimation to the Tehsil Council.

Financial Reporting

25. TMAs would submit monthly expenditure statements (using cash basis o f accounting and submitting a statement o f liabilities) in respect o f the project to PMDFC who would consolidate these for review o f the management and for preparation o f interim financial reports. Detailed

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formats for monitoring would be developed as part o f the Monitoring & Evaluation System to be developed for the project. PMDFC, being a corporate body would use International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) for reporting purposes. Format o f financial reports were agreed during appraisal. Interim financial reports would include sources and application o f funds by disbursement category and by component - formats attached. PMDFC’s computerized accounting system would be used for financial reporting.

Auditing

26. I t i s understood that there are no external audit arrangements for TMAs, therefore, i t was agreed that audit o f TMAs’ project accounts would be covered under PMDFC’s audit, if not done separately by the Auditor General’s Office. I t was agreed that PMDFC’s financial statements, audited by a firm o f chartered accountants, would be acceptable for Bank’s financial reporting purposes provided they show by way o f a note sources and application o f funds in respect o f the project. A leading firm o f chartered accountants would be appointed in the Annual General Meeting o f the members o f the General Body for this purpose. International Standards on Auditing would be used for audit purposes. PMDFC would submit to the Bank audited financial statements within six months o f the close o f each financial year Le. by 31 December each year. In addition to the audited financial statement PMDFC’s management wil l provide an assertion that funds have been used for intended purposes.

27. PMDFC’s audited financial statements wil l have to be provided to the Bank by December 31 each year. PMDFC’s accounts have been audited for FYs 99-05 by a firm o f chartered accountants who have given an unqualified opinion. There were no accountability issues in any o f the financial years.

Supervision plan

28. Since the implementing agencies do not have prior experience o f implementing a Bank financed project, the project wil l have to be supervised closely for the f i rst couple o f years. This would also help them train in report based disbursements. Thereafter, Bank’s normal supervision procedures may be followed.

B. FINANCIAL MANAGEMENT APPRAISAL OF P&DD

Risk analysis

29. Inherent risk. The general environment in the country i s that often policies and procedures are not followed. Hence, i t would be critical to assure that these are followed in letter and spirit.

30. Control risk. Controls as laid down in the General Financial Rules if followed provide adequate assurance that project fbnds wouId be used for intended purposes, economically and efficiently.

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3 1. Residual risk rating. Although the laid down policies and procedures provide sufficient assurance for effective financial management, residual risk rating for the project may be termed as Moderate since P&DD has n o prior experience o f implementing a Bank financed project. FM Assessment Questionnaire i s in project file.

rules as laid down by the

I supervision by Bank staff

Strengths and weaknesses

32. Strengths - existence of 0 Well documented financial ru les

33 . Weaknesses: 0 No internal audit arrangements 0 Lack o f professional staff in the accounts department

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Significant Weakness

N o internal audit

Action Responsible Person Completion Date

Strengthening Project Director On an on going arrangements Lack o f professional

Staffing

internal checks basis Induction o f Project Director By End February’06

34. The Urban Unit (W) that will implement the Cultural Heritage component i s not yet fully staffed. Therefore, the Budget & Accounts Section o f the Planning & Development Department would take care o f the financial management aspects o f the project till such time W is adequately staffed. The following staff in the Budget & Accounts and General sections perform the budgeting and accounting functions o f P&DD:

0

0 Section Officer (General) 0 Deputy Superintendent

Cashier

Under Secretary (Budget & Accounts)

None o f them hold qualifications in accounting; however, they are well versed in I the Government’s accounting procedures. A retired Grade 17 officer o f the Government who i s a Commerce graduate has been interviewed for UU. H e has 27 years experience in accounting.

staff in the Budget & Accounts Section

Budgeting

adequately qualifiedexperienced financial management staff in uu

35. The Budgeting and Accounting Section coordinates and reviews budget o f attached departments, autonomous bodies and P&DD. Budgetary control i s exercised by the AG’s office that passes payments and issues checks. Budget Control registers are also maintained by the respective departments.

Accounting

36. The Government’s accounting system i s followed using the N e w Accounting Model (NAM) developed under PIFRA. The Chart o f Accounts i s flexible enough to report project expenditure. The following books o f account are maintained by P&DD:

0 Cashbook 0 Budget Control register 0 Fixed assets register (without values)

37. Expenditure up to December 2005 was reported to the AG’s office for reconciliation. Values will be stated in the fixed assets register if assets are procured out o f project funds. Separate bank book and expenditure register would be maintained for the project.

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Internal control and internal auditing

38. payment o f expenditure.

Although there is no internal audit department, adequate controls exist for sanction and

Financial Reporting

39. Monthly statement o f expenditure is submitted to the AG’s office for reconciliation. Quarterly Sources and Application o f Funds Statement would be provided to PMDFC for consolidation and onward submission to the Bank. Liabilities at the end o f each quarter would be reflected in the Sources & Application o f Funds Statement. Accounting standards issued by the Auditor General o f Pakistan (AGP) would be used for accounting and financial reporting.

Auditing

40, Audit would be conducted by Auditor General o f Pakistan (AGP) who i s acceptable as auditor o f the project. Audited financial statements o f the Project showing sources and application o f funds would be provided to the Bank by end December each year. In addition to the audited financial statement P&DD’s management wil l provide an assertion that funds have been used for intended purposes.

41. P&DD’s accounts have been audited up to FY05, however, the audit report for FY05 has not yet been issued. Previous audits have noted procedural deviations which are being addressed by the Department.

Supervision plan

42. Since P&DD does not have prior experience o f implementing a Bank financed project, the project wil l have to be supervised closely in the init ial period. This would also help them train in report based disbursements. Thereafter, the Bank’s normal supervision procedures may be followed.

C. FUNDS FLOW AND DISBURSEMENT ARRANGEMENTS

Funds Flow Mechanism for PMDFC

43. The Punjab Municipal Development Fund Company (PMDFC) has capacity to (a) maintain proper books o f accounts for the project funds; (b) allocate funds to various decentralized locations based on identified and justified implementation needs; (c) monitor the use o f accounting fi-om project representatives in each o f these locations on a regular basis; and (d) prepare and submit regular replenishment requests to the Bank together with appropriate supporting documentation to evidence receipt and utilization o f al l Bank funds. The funding mechanism i s expected to work as described below:

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PMDFC shall establish a Designated Account (D/A), in accordance with the agreed procedures for Operation and Maintenance o f the D/A, issued by the Finance Division, Ministry o f Finance, Government o f Pakistan, Islamabad, to receive funds for Bank’s eligible share o f financing; The Bank would deposit an initial advance into the D / A , on the basis o f quarterly projections o f expenditures from PMDFC; PMDFC shall advance funds from the D / A to meet requirements o f the TMAs, and o f LG&RDD o f Government o f Punjab, provided these advances are accounted for within 90 days o f the date o f advance; The respective TMAs and LG&RDD shall establish separate local currency accounts for receipt o f the Bank’s eligible share o f financing in the respective cities where they are located; The expenditures from the D/A shall be for eligible expenditures only; Statement o f Expenditures shall be designed for the project at the negotiation stage and included in the disbursement letter, which wil l provide, at a minimum, the summary/total o f category wise expenditures collected from various T M A s and LG&RDD, as well as from records o f expenditures made by PMDFC; Standard summary sheets shall also be designed for the project and included in the disbursement letter together with supporting documentation for al l expenditures above the procurement prior review threshold; A reconciliation statement for the D/A in the standard format showing inter alia, the deposits received from the Bank, the amount advanced to each TMA and to LG&RDD, on what date each advance was made, and the amounts awaiting documentation from each o f these locations. In addition, the reconciliation statement should identify each lower level TMA and LG&RDD which did not account for the 90-days accounting cycle with an explanation for the delay; TMAs and LG&RDD will be given a maximum o f three months to submit their accounting to PMDFC for utilization o f the D/A funds received from PMDFC. Their accounting wil l consist o f a copy o f the bank statement for the account in which the project funds are held, a progress report showing physical achievements, and at a minimum, a summary o f expenditures by category in SOE/summary sheet format; PMDFC wil l fol low up regularly with each TMA, LGRDD, and P&DD if proper accounting has not been submitted within three-month period. No further advances will be made from PMDFC to delinquent locations until proper accounting has been received form them; Any amount withdrawn from the D/A and not accounted for within six months wil l be rehnded to the D/A; All SOE supporting documentation will be retained at PMDFC and shall be made available for review by the Bank’s supervision missions; Each T M A and LG&RDD, after incurring actual eligible expenditures, shall submit SOEs to PMDFC for seeking reimbursement from the Bank; and While PMDFC shall seek reimbursement from the Bank on a regular quarterly basis, i t would further advance funds to the respective T M A s and LG&RDD, o n a regular basis, to meet their future requirements.

68

Funds Flow Mechanism for P&DD

44. The Under Secretary, Budget and Accounts (B&A), Planning and Development Department (P&DD), Government o f Punjab, acts as a coordinator between i t s following attached departments/autonomous bodies and the Finance Department, Government o f Punjab, Lahore. H e deals with al l budgetary matters and related issues. The Section Officer (General), who i s also the Drawing and Disbursing Officer, prepares budget and forward the same to the Under Secretary, B&A, for arrangement o f his approval and subsequent releases to the concerned Departments :

(a) Director General, Agency for Brrani Areas Development (BAD), Rawalpindi. (b) Bureau o f Statistics, Lahore. (c) Punj ab Informatics Technology Board, Lahore. (d) Punjab Economics and Research Institute, Lahore. (e) Cholistan Development Authority, Bahawalpur.

45. P&DD has established a separate Urban Unit (W), which wil l subsequently take over the project work. Currently, the UU i s headed by a Project Director. Recruitment o f other staff for UU i s underway and i s likely to be completed shortly.

46. The existing Accounts Staff o f the P&DD has capacity to maintain books o f Accounts and prepare and submit regular replenishment requests to the Bank together with appropriate supporting documentation to evidence receipt and utilization o f al l Bank funds. The funding mechanism i s expected to work as described below:

The P&DD shall establish a designated account (D/A) in accordance with agreed procedures for operation and maintenance o f the D/A, issued by the Finance Division, Ministry o f Finance, Government o f Pakistan, Islamabad, to receive funds for the Bank’s eligible share o f financing; The Bank would deposit an initial advance into the D/A on the basis o f quarterly estimated projections received by Pⅅ The expenditures from the D/A shall be for eligible expenditures only; The UU has also obtained approval for opening o f an assignment account for meeting the Government’s share o f financing; Statement o f Expenditures shall be tailored for the project at the negotiation stage and included in the disbursement letter, which wil l provide, at a minimum, the summary/total o f category wise expenditures from records o f the Pⅅ The disbursement letter shall also include standard summary sheets designed for the project , requirement for supporting documentation for al l expenditures above procurement prior review threshold, and a reconciliation statement o f D/A in standard format showing inter alia deposits received from the Bank and payments made during reporting period; O n the basis of statement o f D/A received from the National Bank o f Pakistan, the P&DD shall seek reimbursement from the Bank on a regular quarterly basis; and All SOEs supporting documentation shall be retained by P&DD and made available for Bank review missions.

69

Disbursement

47. disbursements.

B o t h PMDFC and P&DD have adequate f inancial management capacity for report-based

48. indicated in Tab le 1 below:

The al locat ion of L o a n proceeds by disbursement category and al locat ion wil l b e made as

Table 1: Allocation o f Loan Proceeds Category Amount o f the Loan Percentage of Expenditures to

Allocated be financed (expressed in USD)

(1) Goods, works and consultants’ services

(a) for TMA Capacity grants and for Capacity Building for LG&RDD, P&D and PMDFC (b) for TMA Development grants

(2) Incremental Operating and Administrative costs”

(3) Front-end Fee

(4) Premia for Interest Rate Caps and Interest Rate Collars

48,875,000

100%

85%

1,000,000

125,000

0

100%

Amount payable pursuant to the Loan Agreement

Amount payable pursuant to the Loan Agreement

TOTAL AMOUNT 50,000,000

* The term “Incremental operating and Administrative Costs” includes the salaries, allowances and other emoluments o f LG&RDD, PMDFC and P&DD staff appointed to posts created after June 30, 2004 for the purposes o f the project, the operation and maintenance a n d or rental costs o f vehicles, equipment and office premises acquired and used for the purposes o f the project, bank charges and the costs o f advertising in the media for bids and other purposes o f the project.

70

Annex 8: Procurement

PAKISTAN: Punjab Municipal Services Improvement Project

A. General

1. Procurement for Punjab Municipal Services Improvement Project (PMSIP) wil l be carried out in accordance with the World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated M a y 2004; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004, and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure category i s given in the succeeding paragraphs. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need ,for pre/post qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan wil l be updated on a quarterly basis, or as required, to reflect the actual project implementation needs and improvements in institutional capacity. The Operations Manual also contains a procurement section, which gives the details o f the respective procurement responsibilities o f Punjab Municipal Development Fund Company (PMDFC) as well as Tehsil Municipal Authority (TMAs). PMDFC has the overall project planning and monitoring responsibility. TMAs interested in participating in the project prepare an initial proposal o f their schemes, and submit to PMDFC, for screening and approval. Once approved, PMDFC prepares the detailed design o f the schemes through consulting f i rms. The Project is divided into two components: Component 1 deals with capacity grants and development grants to TMAs, and Component 2 deals with technical assistance to LG&RDD, Planning & Development Department (P&DD) o f Punjab Provincial Government, and PMDFC. Component One procurement will involve works, goods and consultancy services, whereas, for Component Two major procurements shall be consultancy services after which further requirements o f a pi lot scheme for heritage restoration wil l be defined.

Procurement of Works

2. Works procured under this project, would include c iv i l works to be undertaken by T M A s for water supply, storm water drains, sewerage, roads, setting up o f f i re fighting system, and solid waste management. Estimated costs will range between U.S$ 0.08 mi l l ion and U.S$ 2.5 mi l l ion (Rs. 5 mi l l ion and Rs. 150 million) with an average outlay o f around US$ 1.2 to 1.4 mi l l ion (Rs 72 mi l l ion to 84 million). All procurements o f works will be done using the bidding documents for national competitive bidding agreed with (or satisfactory to) the Bank. Respective partner TMA will be the client for each o f the Works contract. PMDFC will give the TMAs very close support through designlsupervision consultants in evaluation, and PMDFC wil l i tself supervise the entire procurement process, and review and approve al l bid evaluation reports. The TMAs will contribute 15% o f the cost o f each sub-project under a Financing Agreement between PMDFC and the TMA. The details o f these arrangements are given in the Operations Manual. Under the P&DD component, requirement o f works (estimated within U S $ 5 million) for the

71

cultural heritage pi lot may be identified in the second year o f the project. P&DD wil l carry out these procurements through its Urban Unit (UU).

Procurement of Goods

3. Goods procured under this project would include computer hardware and software, printers, survey/field equipment, field vehicles, and specialized vehicles for firefighting and solid waste management. All goods procurement wi l l be done by PMDFC.

4. Given the nature o f the Project, goods and commodities estimated to cost less than U S $ 50,000 per package wil l be procured through Shopping procedures. Goods costing less than U S $ 300,000 wil l be procured through National Competitive Bidding (NCB) procedures. Goods costing more than U S $ 300,000 wil l be procured through I C B procedures. The procurement wil l be done using Bank’s SBD for International Competitive Bidding and bidding documents for national competitive bidding agreed with (or satisfactory to) the Bank.

Improvement of Bidding Procedures under National Competitive Bidding

5. The following improvements in bidding procedures wil l apply to a l l procurement o f Goods and Works under National Competitive Bidding, in order to ensure economy, efficiency, transparency and broad consistency with the provisions o f Section 1 o f the Guidelines:

i.

.. 11.

... 111.

iv.

vi. vii.

V.

... v111.

ix .

X.

xi. xii.

xiv.

... x111.

Invitation to pre-qualify or bid shall be advertised in at least one newspaper with nation- wide circulation, at least 30 days prior to the deadline for the submission o f the bid. Bid documents shall be made available, by mai l or in person, to al l who are willing to pay the required fee; Foreign bidders shall not be precluded from bidding and no preference o f any kind shall be given to national bidders in the bidding process; Bidding shall not be restricted to pre-registered f i rms; Qualification criteria shall be stated in the bidding documents; Single bids shall be considered for purposes o f bid evaluation; Bids shall be opened in public, immediately after the deadline for submission of bids; Bids shall not be rejected merely on the basis o f a comparison with an off icial estimate without the prior concurrence o f the Bank; Before rejecting al l bids and soliciting new bids, the Bank’s prior concurrence shall be obtained; Bids shall be solicited and contracts shall be awarded on the basis o f unit prices and not on the basis o f percentage rate quotations above or below an official estimate; Cost estimates shall be prepared on the basis o f market rates. Contracts shall not be awarded on basis o f nationality negotiated rates; Contracts shall be awarded to the lowest evaluated and qualified bidder; and Post-bid negotiations shall not be allowed with the lowest evaluated or any other bidders.

72

Selection of Consultants

6. All consultancy services for Component One will be hired by PMDFC. Consultancy assignments (firms) include design and supervision consultancy services for various groups o f TMAs, and urban planning services for various groups o f TMAs. Services o f f i r m s wi l l be procured through Quality and Cost Based Selection (Section I1 o f the Consultants Guidelines), or through the selection methods given in Section I11 to the Consultants’ Guidelines (paragraphs 3.1 to 3.13). PMDFC has already appointed a design & supervision firm for the schemes identified for the f i rs t year of the project, using their own funds. Under the P&DD component (Component 2), consultancy services for institutional studies, and legal & regulatory arrangements wil l be taken up in the f i rst year; based upon these studies, requirement o f further feasibilities may be identified to be taken up in subsequent years. Procurements for this component will be done by P&DD through W. Short l is ts of consultants for services estimated to cost less than $ 500,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

7. Services for Individual Consultants may be required for institutional development, O&M, training, social mobilization etc., and shall be procured following the stipulations o f Section V o f the Guidelines.

Selection of Particular Types of Consultants

8. Services o f firms for social mobilization, community participation, and training, and urban planning estimated to cost less than US$50,000 equivalent per contract may, with the Bank‘s prior agreement, be procured in accordance with the provisions o f paragraphs 3.15 and 3.16 of the Consultants Guidelines. If i t i s required for any specific assignment to engage universities, government research institutions, or any special organizations, such selection wil l be made by Selection Based on Consultants Qualification (paragraph 3.7 & 3.8 o f Consultant’s Guidelines) or Single Source Selection (paragraph 3.9 to 3.13 o f the Consultants Guidelines).

B. Assessment of the agency’s capacity to implement procurement

9. Procurement activities wi l l be carried out by PMDFC (services and goods) and TMAs (works). The procurement section o f PMDFC i s staffed by General Manager, Procurement, and a Procurement Consultant. TO (I&S) at the TMA i s in al l instance an engineer and responsible for procurement o f works. An overview o f the organization o f T M A s i s given in Annex 1, and organization o f PMDFC i s given below and in Annex 4. For the P&DD component, UU residing within P&DD o f GoPunjab wil l be the procuring agency.

10. An assessment o f the capacity for the project was carried out by the Procurement Specialist o f the task team in March 2006 for P&DD/UU, in January 2006 for PMDFC and in April 2005 for two sample T M A s (Chakwal and Chiniot) in April 2005. The assessment reviewed the organizational structure o f PMDFC and i t s procurement capacity, and the structure o f TMAs regarding procurement procedures.

73

1 1. the project have been identified. These risks along with the mitigation measures are:

Most o f the issueshsks concerning the procurement component for implementation o f

i. Procurement capacity

a. PMDFC’s Capacity PMDFC i s an autonomous body governed by a Board o f Directors. The executive head o f PMDFC i s the Managing Director, assisted by four General Managers, i.e. GM (Engineering), GM (Procurement and Environment), GM (Finance), and GM (Institutional Development). GM Procurement is adequately experienced to handle the responsibilities and obligations o f PMDFC for the project. Currently he i s assisted by a Consultant. The staffing requirement wil l be reviewed after the f i rs t quarter and if required, more staff wil l be added to the procurement section. PMDFC, has to play the pivotal role in the project implementation, as besides i t s own procurements, i t i s responsible for ensuring timely and efficient procurements by TMAs. Hence a strong and resourceful procurement section i s absolutely essential for the success o f the project. A training workshop on procurement o f works was held for T M A s and PMDFC staff on March 16. A workshop for procurement o f goods and consultancy services wil l be held for the benefit o f the PMDFC staff within the f i rst quarter.

b. TMA’s Capacity Generally the TO (I&S) i s responsible for procurement o f works. All works procurements for the project have to be done by TMAs. Most o f the TMAs have experience o f having implemented smaller contracts i.e. costing around Rs. 20 million, whereas the minimum estimated cost o f the f i rs t year contracts is Rs. 35 million, ranging up to Rs. 122 million. Bidding Documents have been prepared by PMDFC through their consultants. As mentioned in Paragraph 2 above, PMDFC wil l give the TMAs very close support through desigdsupervision consultants in evaluation, and PMDFC wil l itself supervise the entire procurement process, and review and approve al l bid evaluation reports. PMDFC wil l hold at least two workshops for training partner T M A s in the f i rst year (with assistance from the Bank), and subsequent workshops for the TMAs joining the project in later years. The Bank held the f i rst such workshop on March 16, 2006 for Jhelum, Bhalwal, T.T. Singh, Kusur and P. D. Khan.

c. U U ’ s Capacity UU is staffed by only a Project Director. The rest o f the staff i s yet to be hired. P&DD intends to h i re a procurement staff from the market for UU by June/July 2006. The procurement o f consultancy services i s planned to be initiated in August. In case a suitable candidate i s not identified, the Member, Engineering, o f P&DD along with his Assistant Chief, Consultancy, wil l provide their expertise to UU. These two staff are familiar with the Bank’s procurement procedures. Moreover, the Project Director, UU, has also experience of procurements o n donor agency funded projects.

.. 11. Contractor’s Capacity

Generally the smaller of the contractors who are expected to respond to the invitations have limited experience on N C B procedures involving post qualification. PMDFC will

74

disseminate general information o f the upcoming projects through press publication and the website. Training session(s) wil l be held for contracting firms, enabling them to understand the requirements o f filling in the bidding documents. PMDFC and TMAs will jo int ly ho ld these sessions. The f i rst such session was held on March 22 with the pre-bid meeting.

... 111. Delays in Procurements

The Operational Manual also contains the procurement annex for the project, which defines the internal working procedures for T M A s and PMDFC. These procedures include service standards at every stage o f procurement implementation. Procurement plan incorporates the deadlines synchronous to the defined procedures, and the plan itself i s to be closely monitored and upgraded at least on quarterly basis.

iv. Quality Assurance o f Contract Quality assurance in works i s a challenge for TMAs. Lack o f capacity i s the major reason for this shortcoming. As a safeguard to ensure quality o f construction, the design and supervisiod consultancy firm wil l provide resident supervision at a l l sites. The Project Manager o f the contracts wil l be a representative o f the firm. Services o f supervision consultancy f irm(s) wil l be procured by PMDFC.

v. Transparency In order to ensure transparency in the project implementation, disclosure i s made mandatory. PMDFC has developed and wil l maintain a website o n which al l procurement-related information wil l be displayed. This information wil l include procurement plan, notices o f invitation, summary o f bid evaluation and awards. Information regarding complaints and the action taken wil l also be posted o n the website. TMAs will be required to report al l complaints to MD PMDFC, who will take action on them and inform the Bank accordingly. PMDFC wil l also assist TMAs in setting up o f their own procurement databases.

12. The overall project risk for procurement after incorporating the above mitigatiodcorrective measures i s Medium. Capacity o f PMDFC & TMAs will be reviewed again within the first quarter o f the project implementation to ascertaidreassess the r isk.

13. An action plan for the above measures i s tabulated below:

75

ssue :apacity nhancement

3rst session dol vlarch 16,2006

belay in Procurement

Quality Assurance

%st session do: vlarch 16,2006

Transparency & Dissemination

'irst session do VIarch 22,2006

Action Appointment o f Procurement Manager in PMDFC

Appointment o f procurement staff with UU

Procurement trainings for:

0 PMDFC

0 TMAs

0 Contractors

Finalization o f the Procurement Manual

Arrangements for resident supervision through Consultants for

0 the f i rst year schemes

0 subsequent schemes

Press & web publication for the contractors extending invitation for the workshop

Setting up o f a PMDFC Procurement Database

Setting up o f TMAs procurement Database

rime Frame Before negotiation

Before ;ommencement o f procurement for Component 2

As soon as Manager Proc. i s appointed Before bids are received

As early as possible at east 15 days before the f i rs t bid opening Before negotiations

Ongoing

Indicated in Procurement Plan

Immediately

Immediately

During the implementation o f various schemes in T M A s

iesponsibility 'MDFC

)&DD

World Bank

PMDFC/WB

PMDFC/TMA!

PMDFC

PMDFC

PMDFC

PMDFC

PMDFC

PMDFC

tatus ;M Proc. ippointed

l o n e

Done

Done

76

C. Procurement Plan

14. The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan i s being finalized and shall be made available o n the PMDFC website as well as the Project’s database and in the Bank’s external website. The Procurement Plan wil l be updated in agreement with the Project Team quarterly or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Review of Procurement by the Bank

15. Prior Review: 1.

ii.

iii.

al l contracts for goods procured on the basis o f International Competitive Bidding; the f i rst contract for goods procured on the basis o f National Competitive Bidding and Shopping regardless o f i t s value; the f i rst three contracts for Works procured by TMAs, and the first contract for Works procured by P&DD, al l on the basis o f National Competitive Bidding regardless o f their value; the f i rs t contract each procured by PPMDFC and P&DD for consultants’ services provided by a firm regardless o f i t s value; each contract procured by PMDFC and P&DD for consultants’ services provided by a firm estimated to cost US$200,000 equivalent or more; the f i rs t contract for consultants services provided by an individual regardless o f value; and each contract for consultants’ services provided by an individual estimated to cost U S $ 100,000 equivalent or more.

iv.

v.

vi.

vii.

16. All other contracts will be subject to post review by the Bank and emphasis would be placed on ex-post procurement and end-use audits which will be carried out o n a regular basis to verify that the activities financed under the project are procured in accordance with agreed procedures and are used for the intended purposes.

Procurement Information and documentation

17. Procurement information will be recorded and reported as follows:

i. Complete procurement documentation for each contract, including bidding documents, advertisements, bids received, bid evaluations, letters o f acceptance, contract agreements, securities, related correspondence etc., will be maintained by the implementing agencies in an orderly manner so as to readily available for audit.

ii. Contract award information will be promptly recorded and contract rosters, in the agreed format, maintained by each TMA, and PMDFC.

iii. Comprehensive quarterly reports by PMDFC, indicating: a. revised cost estimates, where applicable, for each contract;

77

b. status o f on-going procurement, including a comparison o f originally planned and actual dates o f the procurement actions, including preparation o f bidding documents, advertising, bidding, evaluation, contract award and completion time for each contract; and updated procurement plans, including revised dates, where applicable, for the procurement actions.

c.

D. Frequency o f Procurement Supervision

18. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended six monthly supervision missions to visit the field to carry out post review o f procurement actions.

E. Details o f Procurements Requiring International Competition

19. No I C B Works contracts are expected. Estimated costs o f all the consultancy services, planned for the f i rs t 18 months, fal l within the U S $ 500,000 threshold, hence the shortlist can comprise o f only local f i rms. Some Goods may be procured through I C B after the f i rs t year o f the project. Information regarding Consultancy Service wil l be updated (by the end o f February 2006).

78

Annex 9: Economic and Financial Analysis

PAKISTAN: Punjab Municipal Services Improvement Project

A. FINANCIAL ANALYSIS

1. contributions to investment costs and the associated O & M costs.

The financial analysis below indicate that TMAs are able to sustain their individual

90.11 1 _ _ _" i _. - "_. """_ - . ~ ~ ".-I.I. 1 Jhelum 1 Extension & Improvement o f Water S - i Construction o f S torm Water Drains u- 34.82

2. The results o f a detailed analysis for TMA Jhelum's WSS scheme shows that the TMA will be able to afford the additional O&M for the new infrastructure and s t i l l maintain a reasonable surplus. This affordability depends heavily on the fol lowing improvements in net water revenues:

0 Increase domestic water tariffs from the existing Rs. 35 per month to Rs. 110 per month and commercial water tar i f f from Rs. 200 per month to Rs. 400 per month, f rom FY 07-

79

08 when the new infrastructure becomes operational.

making the new infrastructure operational. 0 Improve collection efficiency from the existing about 58% to 90% within five years o f

0 Provide 95% population coverage to maximize water revenues.

3. Table 2 below shows the net impact o f the WSS investment, excluding the capital expenditure and corresponding financing involved. T M A Nazims wil l need to be persuaded o f the merits o f taking the key actions mentioned above, and to make a commitment to see changes implemented, in order for the financial projections to be achieved. Whi le, in Jhelum’s case, the T M A i s relatively well o f f and could cross-subsidize water supply to some extent, efforts wil l need too be made to ensure that the water tari f f reflects at least the operational cost o f the service so that customers receive more correct signals about the cost o f the resource they are consuming. Part o f this i s l ikely to involve the creation o f a cost center for the service, so that costs and revenues can be easily compared. (At present, there i s no service costing within TMAs.) Ideally there would also be a move towards metering supply, but this i s likely to be beyond the TMA’s capacity and so an innovative solution would need to be found.

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Table 2: Improvement and Extension of Water Supply Scheme, Jhelum PROJECTED NET WATER REVENUES

Item 2005 2006 2007 2008 2009 2010 201s 2020 2025 Population Jhelum City 110,528 112,728 114,971 117,259 119,592 121,972 134,601 148,538 163,917 Kala Gujran 22,505 22,953 23,410 23,875 24,351 24,835 27,407 30,244 33,376 Total 133,033 135,680 138,380 141,134 143,943 146,807 162,008 178,782 197,293 Total Households Jhelum City 17,270 17,614 17,964 18,322 18,686 19,058 21,031 23,209 25,612 Kala Gujran 3,516 3,586 3,658 3,731 3,805 3,880 4,282 4,726 5,215 Total 20,786 21,200 21,622 22,052 22,491 22,939 25,314 27,935 30,827

Jhelum City 58,956 60,129 61,325 76,218 89,694 103,676 127,871 141,111 155,721 Kala Gujran 12,004 12,243 12,487 15,519 18,263 21,110 26,036 28,732 31,707 Total 70,960 72,372 73,812 91,737 107,957 124,786 153,907 169,843 187,428

Total Served Households 11,087 11,308 11,533 14,334 16,868 19,498 24,048 26,538 29,286

Served Population (Percent)) 53% 53% 53% 65% 75% 85% 95% 95% 95%

Total Connections Jhelum CityiKala Guiran

Domestic Commercial

Domestic Commercial

Additional New Connections

Average Water Tariff (RsJMonth) Domestic

Commercial

Domestic Commercial

Domestic Commercial

New Connection Fee (RsJConn.)

Total Water Charges (Rs.Million)

Total New Connection Fee (Rs.Million)

Domestic Commercial

Total

11,087 55

35 200

1,000 3,000

5 0 5

0 0 0

11,308 55

22 1

35 200

1,000 3,000

5 0 5

0 0 0

11,533 58

225 3

140 500

1,500 5,000

19 0

20

0 0 0

14,334 62

2,801 4

140 500

1,575 5,250

24 0

24

4 0 4

16,868 66

2,534 4

140 500

1,654 5,513

28 0

29

4 0 4

19,498 70

2,630 4

147 525

1,736 5,788

34 0

35

5 0 5

24,048 90

469 4

154 551

2,216 7,387

45 1

45

1 0 1

26,538 110

518 4

170 608

2,828 9,428

54 1

55

1 0 2

29,286 130

571 4

188 670

3,610 12,033

66 1

67

2 0 2

Total Water Revenues (RsMllion) 5 5 20 29 33 39 46 56 69

% Recovery 58% 58% 70% 75% 80% 85% 95% 95% 95%

Total recovered Rev. (Rs.Million) 3 3 14 22 26 34 44 54 66

Total Receipts Under With Project. 3 3 14 22 26 34 44 54 66 Net Water Receipts (Rs.Mil1ion) 0 0 11 19 23 31 41 51 63

Total Receipts Under WIO Project. 3 3 3 3 3 3 3 3 3

Total Expenditure(M.Rs).)

O&M Cost 21 24 27 29 36 42 49

Total 0 0 21 24 27 29 36 42 49 Cash flow (+I-) 0 0 -10 -5 -4 2 5 9 14

4. Table 3 shows the status o f the TMA’s recurrent income and expenditure, and demonstrates that, with an annual real growth o f 3%, the T M A maintains a strong recurrent account surplus, even in 2007-8 when it has to finance a deficit on the WSS current account. The impact o f separating Jhelum TMA into TMA Jhelum and TMA Dina i s shown from FY05- 06, when it became effective. Thereafter, however, the forecast assumes no increase in the grant for replacement o f octroi, despite the 2006 National Finance Award’s inclusion o f the 2.5% o f General Sales Tax in the divisible pool, which i s anticipated to assist local government.

81

Table 3: Tehsil Municipal Administration Jhelum Financial Analysis of TMA Investment Proposals

2002.03 2003-04 2004-05 2005-06 2006-07 2007-08 200849 2009-10 2010-11 Taxes T I P UIPT Other Tax

Total Recurrent Revenues 67#266,945 71,209,995 76,749,303

Fee Parking Fee Building Fee Cattie mandi fee Other Fees

Rents 8 Rates Water & Sewerage Rates Additional Revenues from new water scheme Municipal Rents

Other Income Tolls Misc. Income

Non Development Grants Salary & non salary grant Octroi Grant

59,078,679 77,572,822 80,601.222 86.755.723 95,411,920 99,875,710

9,678,317 10,196,849

1,184.340 21.039.506

10,526,765 2,619,113 1,007,298 1,113,791

15,466,967

2,221,290

3,966,409 6,207,699

1,018,750 1,545,023 2,563,773

6,760,000 13.229.000

21,969,000

27,771,532 30,555,200 42,491,500 1,354,687 2,260,000 2,800,000

10,686,503 6,404,924 9,500.263

2,611,789 3,000,000 3:OOO.WO 3,519,989 6,515,076 2,999,737

45,946,500 50,755,200 60,791,500

10,584.932 10,871,600 1,091,000

22,547,732

10,467,453 3,300,000

8 7 7,O 0 0 1,261,500

15,925,953

2,601.714

5,353,336 7,955,050

1,273,200 1,273,200

8,304,000 15,204.000

23,508,wO

25,979,815 26,697,409 27,498,332 2,884,000 2,970,520 3,059,636 6,360,231 8,611,036 6,669,370

20,695,095 24,108,725

1.741,OM) 1,500,000 1,545,000 1,591,350 1,798,842 1,653,837 1,909,453

40,463,889 62,572,900 68,778,864

10,230,405 11,197,954

1,181.WO 22,609,359

12,547,504 3,300,000

880.000 1,320,500

18.048,W4

2,776,469

7,530,471 10,308,940

1,412,WO 1,472,000

9,167,000 15,204,000

24 ,371 .m

Recurrent Surpius/(Deficit) 21,320.445 20,454,735 15,957.803

6,766,317 11,533,693

1,218,430 21,536,640

2,829,827 2,719,200

615,760 1,224,104 7,588391

2,146,367

7,756,385 9,902,752

1,090,770 1,090,770

5,759,626 13,200,000

18,050,626

18,614,790 8,999,922 11,822,357 13,422,154 19,090,760 18,918,235

9,049,907 11,679,909 1,252,923

22,182,739

2,914,722 2,800,776

840,233 1,260,827 7,816,557

2.210.758

11 ,I 17,763 7,889,077

21,317,618

1,123,493 1,123,493

5,932,415 13,200,000

19,132,415

9,321.404 12,236,307 1.290.51 1

22,848,221

3,002,184 2,884,799

865,440 1,296,651 8,051,054

2,277,081

18,728,531 6,226,749

29,234,361

1,157,198 1,157,198

6,110,387 13,200,000

19,310,387

9.60 1,046 12,603.396

1,329,226 23,533,668

3,082,229 2,971,343

691.403 1.337.61 1 8,292,586

2,345,394

23,422,652 6,475,611

34.243.857

1.191.914 7,191,914

5,293,699 13,200.000

(9,493,699

9.889.077 12,961,498

1.369.103 24,239,678

3,184,995 3,060,484

918,145 1,377.739 8,541,363

2,415.755

30,575,083 8,729,680

41,720,698

1,227,671 1,227,671

6,462,510 13.200.000

19,682,510

10,185,750 13,370.943

1,410,176 24,966,868

3,280,545 3,152,296

945.689 1,419,071 8,797,604

2,488,226

33,469,747 6,991,778

44,969,751

1,284,601 1.264501

6,676,965 13.2W.000

19,876,985

Non Development Expenditure Establishment Charged Expenditure Water supply O&M cost Additional O&M for new water scheme Additional O&M for new storm water drain Street light Other contingencies expenditure Total Recurrent Expenditure

28,323,282 3,151,425 9,135,451

27,324,355

1,793,230 1,639,091 1,966,736

73,333,569

29,172,960 3,245,967 9,409,514

28,931.670

1,847,027 1,666,263 2,025,736

76,321,760

30,046,170 3,343,346 9,691,600

32,146,300

1,902,436 1,738,911 2,066,510

80,957,475

AS8"IllptiO"S: 1: Ail projections arc made at Constant Rs. Real growib 3% i s assumed for all the T C V C ~ U C stream. 2 TMA Jchlum has bccn split into hvo TMAs as TMA Jehlum and T M A Dma from FY 05-06. As rcrult all revenue and cxpcndihue sueam has been rcduccd for TMA Jehlum for M05-06 based on thc rations ofprevious years achiai for the hvo CO Units. 3: The invcghlientpmjcctconsistofRs.90.11 million for waterrupplyandF3 34.82 mjllion forstom water drain. TMAconmhdon of 15% for the project cost har not been included in the financial analysis and i t i s assumed that T M A w i l l pay it from the development grants reeevivcd from the provincial govemnxnt 4: The additional revcnucs and O&M cost for the water upp ply scheme has bccn takcn from the tcchnical design report prcparcd by NESPAK.(work rhcct mached) 5: Additional O&M for storm water drain has been assumed as 5% of the invcrtmcnt cost.

5. projects in the project fi le.

Detailed analyses along the same formats are available for a l l Year 1 development sub-

B. ECONOMIC ANALYSIS

Infrastructure Development Component

6. Infrastructure developments in the TMAs are expected to represent 77% o f total project costs. They wil l be financed through grants and a 15% TMA contribution. An overall Economic Rate o f Return (ERR) o f these infrastructure developments could not be calculated as the project i s demand-driven, and systematic data collection for the init ial pipeline has not been carried out. First-year development sub-projects represent 24% o f the total Bank financing towards development costs, and 18% o f total bank financing towards total project costs.

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7. Under the grant procedure described in the operations manual, PMDFC conducts field appraisals o f al l proposed sub-projects. Field appraisals include an assessment o f the lower-cost alternatives and o f operation and maintenance costs o f sub-projects. Should the Field appraisal endorse the sub-project proposal, a feasibility study i s then carried out, which must include a financial analysis (see above) and an economic analysis. These analyses are conducted by consultants and/or PMDFC.

8. Guidelines and methodologies for these analyses will continue to be updated as capacity- building o f the TMAs improves collection o f required data. On the cost side, attention has been brought during project preparation to exploring lower-cost alternatives and phasing options in order to maximize the cost effectiveness o f the investment. On the benefits side, a quantification o f benefits o f the proposed sub-projects has been attempted wherever possible.

9. economic analysis that quantified the following benefits:

Urban roads. The feasibility study o f Pind Dadan Khan roads sub-project included an

Savings in vehicle operating costs

Increases in local commercial property values (shops and businesses along the proposed road) resulting from improved road conditions (reduction o f dust, drainage, etc.).

Savings in travel time

10. Data was collected during the field surveys (traffic counts and valuation o f likely increases in local commercial property prices and rents), and was further extrapolated using results fi-om previous studies. Details o f the analysis are available in the project fi le. The calculated ERR i s 17%.

11. Water Supply. Quantitative estimates o f project ERR were calculated on the example o f the Jhelum water supply scheme, with economic benefits expressed as increases in consumer surplus resulting from increased consumption. The estimates were made on the basis o f three different sets o f assumptions on consumer demand:

a constant budget demand curve; a straight l ine demand curve; willingness to pay as a percentage o f income (as per the feasibility o f the ADB financed project).

12. The analyses yielded ERR values o f 20%, 24% and 12% respectively; however, the results are highly sensitive to assumed values o f some o f the parameters and would only deliver a fragile economic justification. The detailed calculations are available in the project fi le.

13. projects and these, including their constraints, are outlined below:

For h t u r e sub-project appraisal, various approaches were considered for water supply

a) Benefits f r o m avoided time spent on collecting water.

14. If one were to approach the quantification o f benefits by valuing the avoided time spent on collecting water, one may not find sufficient evidence o f economic benefits, as most urban households have a water connection in their vicinity. According to two household surveys done

83

in 1998-1999 (one o f which i s a census), only about 49% o f urban households in Punjab have a water connection inside or outside the house (Table 4). However only 5.8% do not have water available within the household vicinity (Table 5).

Table 4: Urban Household Water Supply Coverage (Survey Data) Source of drinking water YO of urban population Tap in house 45% Tap outside house 4% Hand or mechanical pump 49% Dug wel l 1% River / canal / stream 0% Other 0% Total 100%

Source: Pakistan Integrated Household Survey, Round3: 1998-1 999, Federal Bureau of Statistics, GoP, Oct 2000.

Table 5: Urban Household Water Supply Coverage (Census Data) % of urban households

Source of drinking water 1980 1998 Inside 81.2% 94.2%

Tap 35.7% 54.8% Hand pump 42.7% 36.9%

Outside 18.8% 5.8% Tap 8.4% 3.2% Hand pump 6.8% 1.2% Well 2.9% 0.4% Pond 0.3% 0.1% Others 0.4% 0.9%

We l l 2.8% 2.5%

Source: 1998 Provincial Census Report o f the Punjab, Population Census Organization, Statistics Division, GoP, 2000.

15. Only a portion o f these uncovered households (5.8%) can be counted as potential beneficiaries from the project, as not al l unconnected households are likely to connect after completion o f the water supply scheme. Typically for an urban area, the issue i s less access than quality o f service: low pressure, brackish water, contamination from leakages and sanitation facilities, etc.

b) Health benefits from improved water and sanitation.

16. If one were to quantify potential health benefits f rom improved water supply, one may be able to identify significant health effects, provided one i s able to control adequately for the status o f overall sanitation (typically including the hardware and the software, i.e. hygiene practices) and other household or neighborhood characteristics that co-influence health impacts. Regression estimates for Pakistan in 1990/91 (Table 6) show that mothers’ educational status (proxying for

84

hygiene behavior) has the largest bearing on child mortality, followed closely by the availability o f pit latrines (with notably little value added o f flush toilets) and then piped water.15

Table 6: Determinants of Health status in Pakistan - Determinants of Infant and Child Mortality

Dependent Variable: Mortality in Children under 5 Under 5 y.0. mortality

Independent variables Coefficient (Standard error) Secondaryhigher education -0.701 (0.189) Pit toilet -0.622 (0.129) Piped water -0.249 (0.140) Rural -0.099 (0.113) Wealth -0.068 (0.028) Flush toilet -0.061 (0.125)

Source: World Bank (2005) Pakistan Punjab Economic Report: Towards a Medium Term Development Strategy, SASPR, The World Bank.

17. According to the same source, the health situation in Punjab i s the worst in the country. Yet, hardly any data to predict health impacts from water supply sub-projects in the concerned TMAs could be identified, and any economic analysis would have to rely on wild assumptions.

18. I t i s therefore proposed that under the project, baseline information will be collected in the TMAs to allow future measurement o f the impact o f the improvement o f the water supply andor sanitation facilities, which in turn could be used for future projects.

c) Willingness to pay (contingent evaluation or revealed preference surveys)

19. Estimating the willingness to pay for better quality water would be an alternative approach to the quantification o f the former two types o f benefits, and would also include benefits from improved convenience (better pressure, better taste, etc.). However, as consumer perceptions about what the price o f water should be has been distorted by artificially low tariffs, measuring willingness to pay would require a carefi l ly designed survey, which i s expensive and does often not - especially where potential beneficiaries are aware o f the implications o f their survey response - produce reliable results.’ Unfortunately, revealed preference data (often considered as a superior alternative) could not be identified for urban areas in Pakistan or other countries in the region, from which analogous assumptions could have been made.

20. Given these data uncertainties, consumer satisfaction surveys or rapid urban appraisals (RAPS) wil l be considered for implementation as part o f sub-project appraisal for Year 2 TMAs and these wil l include also a limited survey module assessing relevant household characteristics. They wil l help to inform on (a) inform on the priori ty actions required to instill greater

l5 Since the report does not specify the estimation approach, i t i s not possible to clearly identify the impact effects. l6 See, for instance, Griffen st a1 (1995) “contingent Valuation and Actual Behavior: Predicting Connections to N e w Water Systems in the State o f Kerala, India”, World Bank Economic Review, Vo l . 9, No. 3, pp. 373-395.

85

willingness to pay for urban services, since l ow willingness i s often associated with low satisfaction; and (b) create a baseline for later evaluation; and (c) generate relevant data that could be utilized in a rapid economic appraisal. Similar survey data wi l l be collected at the completion o f the project to provide lessons and information for future interventions - including repeater projects.

21. I t i s to be noted that after the first o f the two performance management workshops that were held in Lahore as part o f Project preparation activities, one TMA, Chiniot, has already taken the initiative o f conducting a customer satisfaction survey.

22. not been attempted at this stage.

Drainage Quantification o f the economic benefits o f the Jhelum drainage sub-project has

TMA capacity-building

23. Capacity-building components, at the T M A and provincial levels, make up for 22% o f total project costs. Although they are expected to improve the cost-effectiveness o f municipal services and therefore have significant economic benefits to the Province o f Punjab as a whole, quantification o f such benefits has not been attempted.

24. Municipal investment are currently being designed and implemented with little regard to actual condition o f existing assets, location o f future population growth and economic development. Capacity building under the project wil l foster prior consideration o f such aspects, from the collection o f data (mapping) to the prioritization o f development schemes fol lowing a process. This should significantly improve the cost-effectiveness o f future TMA infrastructure investments. The project wil l promote improvements in operation and maintenance practices, which i s also expected to result in increasing the economic l i f e and the productivity o f new and existing assets.

Provincial capacity-building component

25. At provincial level, capacity-building wil l focus on:

monitoring and evaluating T M A s cultural heritage

providing adequate assistance to TMAs

26. Setting up a monitoring and evaluation system at provincial level wil l support the project’s pi lot approach o f allocating development funds on a performance basis, namely according to the actual capacity to make an effective use o f such funds. Should the project’s approach prove successful and be extended to the Province as a whole, it would permit a much more efficient utilization o f public funds in TMAs, therefore increasing the economic return o f these funds.

86

Pilot cultural heritage development sub-component

27. The Pi lo t cultural heritage sub-project i s intended as much as a capacity building experience as an economic investment per se. Experience from other countries has shown that cultural heritage projects yield significant economic benefits. In particular, increased attractiveness o f renovated areas generates economic activity, increases in property values and commercial rents. N o quantification o f such effect has been attempted at this stage as the Pi lo t i s no t precisely defined: i ts actual scope will on ly be determined after a detailed institutional feasibil i ty assessment.

87

Annex 10: Safeguard Policy Issues

PAKISTAN: Punjab Municipal Services Improvement Project

A. Applicable policies

1. The project i s supporting a programmatic approach to urban investments, based on technical assistance and capacity building for eligible Tehsils, followed by grants to support identification and implementation o f priority investments. The proposed investments wil l be appraised by the Punjab Municipal Development Fund Company (PMDFC) for their eligibility and readiness for support under the PMSIP.

2. This project i s a S I L and as such falls under OP 4.01 on Environmental Assessment. Since these works are in urban areas, i t i s likely that some resettlement wil l be required for some sub-projects. OP 4.12 on Involuntary Resettlement wil l therefore apply.

3. Because the works wil l be within or close to existing urban areas, i t i s unlikely that there will be potential impacts on the natural environment which would trigger Bank Policies on Natural Habitats, Forests or Pest Management. This assumption will be checked as more details become available on init ial investment proposals.

4. In the urban areas there i s always the possibility that some elements o f physical cultural heritage wil l be affected but the urban upgrading investments planned are normally designed to ensure that none of these elements are impacted. The consultations planned for each sub-project and the review by PMDFC are considered adequate to ensure that no problems or disputes arise in this context. One of the objectives o f the component on cultural heritage i s to upgrade the capability o f the authorities to develop and implement a program to restore and enhance the existing physical cultural assets and therefore a separate cultural heritage plan i s not required.

B. Environment

Scope of the Project

5. The types of projects currently under consideration for possible support include: water supply and sewerage, sanitation, solid waste management, transportation, storm water drains, street lighting, and community centers. Other typical urban investments may be proposed for funding. The scale and cost of these works i s expected to be l imited and the impacts predictable and manageable.

Level of Environmental Assessment

6. This Project has been rated EA Category A since some o f the PMDFC “E-1” sub-projects might require a full EA under Bank policy, although not a l l will. For example, “public conveniences” are rated E-1 under the current ESF but would not normally be considered Category A. Projects rated E-1 by PMDFC wil l be reviewed by the Bank to determine the level o f assessment required but given the limited institutional and technical capacity o f the Tehsils,

88

few such projects are expected in the early years. infrastructure in the large cities in Punjab is not anticipated under this project.

Possible support for upgrading o f

7. N o sub-projects rated E-1 are included in the first year’s implementation, as these would require more t ime for detailed EIA and environmental management planning. The feasibility studies for sub-projects proposed for the f i rst year have been reviewed and show that impact mitigation measures are adequate but that public consultations, although held, require improved documentation and that specific mitigation measures proposed require detailed costing to ensure adequate funds and implementation mechanisms are in place. These improvements are being undertaken in the finalization o f the sub-proj ect proposals.

8. Most o f the new TMAs are very weak and considerable hand-holding i s envisaged to help them achieve the desired levels o f performance and service provision. The objectives o f the project include capacity building for the T M A s and the Performance Improvement Plans (PIPS) developed for each TMA in the project wi l l include key actions to strengthen environmental and social capabilities, as appropriate.

Environmental and Social Framework

9. The ESF sets out an approach for incorporating environmental and social r i s k management into the appropriate stages o f the overall PDMFC project management cycle.

10. Key steps in this process are: An Environmental and Social Information Package wil l be supplied to every applying TMA, as part o f the Grant Application material. At the early Desk Appraisal stage, the categorization o f the proposed investment i s confirmed and a checklist i s prepared for the field appraisal, as necessary. This information is included in the Desk Appraisal Report (DAR). During the Field Appraisal, the actual issues are identified and a site specific Environmental andor Social Management Plan i s drafted. The Field Appraisal Report (FAR) includes these issues and sets out any technical requirements which arise and which need to be incorporated into the final design. At the same time, any required capacity upgrading measures (including training and basic equipment) are included in the Performance Improvement Plan (PIP) which is the basis for the technical assistance to the T M A .

0 The subsequent feasibility study takes into account the earlier requirements and recommendations and includes the necessary Environment/Social Management Plan(s). As appropriate, the design modifications are included in the procurement and contract documentation.

0

0

0

0

89

Relationship between Operations Manual and Environmental and Social Framework

OPERATIONAL MANUAL

Information Package (includes Environment and Social requirements)

I

ESF

1 Site specific EnvlSocial Management Plan /

\ Specific technical measures

Required Performance improvements

11. The detailed Operational Manual (OM) has been agreed between PMDFC and the Bank and wil l be amended fkom time to time subject to the Bank’s approval. The relationship between the O M and the ESF in the design and appraisal stages has been established along the l ines set out above. The first year investments that have been reviewed for appraisal show that the ESF

90

approach is being implemented, although improvement is needed and is expected as both PMDFC and the T M A s gain further experience.

12. Effective implementation is the critical challenge for al l aspects o f PMSIP. PMDFC i s developing performance based approaches and have put in place supervision systems and monitoring mechanisms for the investments. Environmental aspects wil l be part o f the mandate o f the Supervising Consultant and wil l be included in the routine reporting to PMDFC. The grievance mechanism that i s also part o f the project wil l be another route for environmental concerns or complaints to be brought to the attention o f PMDFC management.

C. Social

13. The PMDFC commenced consultation o f the ESF framework in 2000. Before Appraisal, the draft ESF was disclosed on the PMDFC website inviting public comments and suggestions. Before appraisal, the executive summary was translated into Urdu and disclosed at al l Phase 1 T M A offices in an accessible place. Environmental and social issues identified in FARs were discussed in public meetings when subprojects are proposed for fimding at TMAs. Successive rounds are planned to be held with the beneficiaries o f the sub-projects, and TMAs as they apply.

14. under the ESF was addressed by:

The risk o f T M A s delaying in preparing or implementing mitigation measures required

Selecting relatively small and technically simple sub-projects to begin with; Requiring the f i rs t year’s pipeline o f sub-projects to be ready by Project Appraisal; Assisting TMAs with the selection o f appropriate consultants for sub-project preparation and implementation; Making the TMAs/consultants preparing sub-projects aware o f the ESF requirements on environment, resettlement etc; and Making continued investment grant disbursements contingent on satisfactory sub-project implementation progress.

0

0

0

0

0

15. Eligibility o f proposed infrastructure investment sub-projects will be determined in accordance with ESF criteria. Sub-projects selected for funding must have met environmental and social safeguard requirements.

16. Specific land or resettlement requirements o f any sub-project (if any) will be identified during field appraisal. The ESF describes the process for this, and provide requirements for developing mitigation measures. N o sub-projects require involuntary resettlement in the first year’s sub-projects. The small sites needed (a few square meters each, for 40 wells- total only about 0.5 ha for al l f i rs t year TMA sub-projects combined) but the exact locations for these are not constrained so T M A s can negotiate purchase o f required land if TMA-owned land i s not adequate. Utilities can be located along existing easements without displacing people or businesses and temporary construction impacts are recognized and have adequate proposed mitigation. Review o f the feasibility studies for sub-projects proposed for the first year shows that public consultations, although held, require improved documentation, which i s being undertaken. In order to allow time to build TMA capacity, sub-projects with resettlement issues were not included in the f i rst year’s pipeline; however capacity building will be implemented in

91

TMAs to build their familiarity with planning, implementing and monitoring land acquisition and resettlement activities. When a T M A successfully completes this training, later phases wil l allow those with demonstrated capacity to implement sub-projects with resettlement.

D. Building capacity

17. PMDFC will help improve the effectiveness o f TMA’s management o f environmental and social impacts during planning, implementation and operation o f proposed investments. Proposed criteria for graduating TMAs are shown below, which wil l be used as modules in the capacity building for al l TMAs.

1. Environmental1 y & socially sound projects, complying with agreed ESF policy.

2. Participatory planning & implementation and inclusion o f the poor in

7 Building Criteria 1 Concern

1. Realistic social and environment a1 standards for planning and implement ation.

2. Effective monitoring o f actual mitigation results.

3. Clear incentives and accountability

11 partners.

4. Common awareness and understanding o f the above.

5. Sub-proj ect prioritization i s based on adequate consultation.

r Graduation to S1 & E l Sub-Droiects Eligibility Criteria

1. TMAs effectively decide questions o f what mitigation i s needed to manage risks, who i s eligible for what and determining how much i s enough to achieve the standards, for e.g. o f environmental protection, replacement cost and income restoration;

2. Accuracy and credibility o f baseline data and reasonable certainty o f detecting and correcting any errors or problems during planning and implementation. To be able to meet standards, the T M A s must have sensitive monitoring systems & specific indicators for the adequacy o f the mitigation or compensation delivered and actual results;

3. TMAs have clear statements of task assignments, reasonable corrective consequences for mistakes or failures, and unambiguous responsibility and sources o f financing to corre functioning grievance redress systems;

4. Communication to ensure common awareness o f standards, monitoring and those affected, contractors

sub-project after public meeting.

92

Issue I Concern

project benefits . accountability

to citizens.

Eligibility Criteria

public hearings and documented periodic reporting o f the TMA’s performance to citizens.

I

18. the following:

Each module wi l l be field based, allowing real application o f the critical practices such as

(i) Basic practices: screening impacts, scoping assessments, planning mitigation options, public consultation to assess feasibility and acceptability o f options.

(ii) Social: land acquisition methods, census methods, classifying severity o f impacts and entitlements, responsibilities for planning and delivery o f entitlements before site handover.

(iii) Environment: site selection and route alignment to minimize environmental impacts and social disruption; restoration o f drainage patterns, land use etc; including mitigation measures in BoQ and contracts; management o f impacts during construction; monitoring of effectiveness o f measures.

(iv) Monitoring and grievance redress: transparency and public participation in planning, reporting and supervision responsibilities and formats during implementation, documenting land transactions, complaint response recordkeeping and procedures.

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Annex 11 : Project Preparation and Supervision

PAKISTAN: Punjab Municipal Services Improvement Project

Planned Actual P C N review 11/26/2003 08/25/2003 Init ial PID to PIC 08/27/2003 Initial ISDS to P IC 08/05/2003 Appraisal 01/03/2006 01/03/2006 Negotiations 03/27/2006 03/27/2006 BoardRVP approval 06/01/2006 Planned date of effectiveness 07/0 1 /2006 Planned date o f mid-tern review 09/3 0/2008 Planned closing date 12/31/2010

Key institutions responsible for preparation o f the project: 0

0

0

Punjab Planning and Development Department Local Government and Rural Development Department Punjab Municipal Development Fund Company

Bank staff and consultants who worked on the project included:

Jaehyang So Shahnaz Arshad Graeme Lee Soraya Goga Franqois Boulanger Kevin Tayler Kirsten Hommann Isfandyar Zaman Khan David Hanrahan Warren Waters Hasan Saqib Anwar Bhatti Uzma Sadaf Akhtar Hamid Sheila Braka Musiime Desiree Charles-Baveghems Harry Hatry Ritu Nayyar-Stone Lilian MacArthur Afzal MahmoocUShaukat Javed Christine Kessides Navaid Qureshi Roland Whi te

Name Title Unit Task Team Leader SASEI Local Institutions Specialist/Co-Task Team Leader Sr. Municipal Finance Specialist Local Development Specialist Urban Infrastructure Specialist Engineer Economist PSD Sspecialist Lead Environment Specialist Sr. Social Scientist Sr. Financial Management Spec. Financial Analyst - Disbursements Procurement Specialist Lead Counsel Counsel Program Assistant Performance Management Advisor Performance Management Advisor Program Assistant Program Assistant Peer Reviewer Peer Reviewer/ QER Panelist OER Panelist

SASEI SASEI SASEI SASEI Consultant Consultant SASFP SASES SASES SARFM SACPK S A R P S LEGMS LEGMS LEGMS Consultant Consultant SASEI SASEI TUDUR TUDTR EASPR .

94

Bank funds expended to date on project preparation:

1. Bank resources: USD 5 12,000 2. Trust funds: USD 75,000 3. Total: USD 587,000

Estimated Approval and Supervision costs: 1. Remaining costs to approval: USD 34,000 2. Estimated annual supervision cost: USD 150,000

95

Annex 12: Documents in the Project Fi le

e

e

e

e

e

e

e

e e

e

e

e

e

e

e

e

e

e

e

e

PAKISTAN: Punjab Municipal Services Improvement Project

Integrated Safeguards Data Sheet, Appraisal Stage Environmental and Social Framework, Volume I & 11, November 2005 Minutes o f Concept Review Meeting PMDFC Financial Management Questionnaire Minutes o f the Quality Enhancement Review Meeting Project Concept Note PMDFC Communication Strategy Punjab Public Financial Management and Accountability Assessment Financial Profiles o f Selected Tehsil Municipal Administrations Report Financial Analysis o f sub projects PMDFC Operational Manual, March 2005 PMDFC Financial Manual, February 2006 PMDFC Procurement Manual PMDFC Monitoring and Evaluation Scope and Terms o f Reference PMDFC Human Resource Management Manual Memorandum & Articles o f Association o f PMDFC PMDFC Communication Strategy for Environmental and Social Awareness Funding Agreement between PMDFC and TMA Memorandum o f Understanding between PMDFC and TMA Application for Performance Based Matching and Capacity Grants for PMDFC and TMA

96

Annex 13: Statement of Loans and Credits

PAKISTAN: Punjab Municipal Services Improvement Project

Original Amount in US$ Millions Difference between

expected and actual

disbursements Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.

ID Rev'd PO76872 2006 P IFRAI I 0.00 84.00 0.00 0.00 0.00 71.05 -3.00 0.00 PO99110 2006

PO97402 2006

PO88994 2005

PO77306 2005 PO10556 2004

PO82621 2004

PO83370 2004

PO82977 2004

PO78997 2004

PO71454 2003

PO74797 2003

PO74856 2003

PO77288 2003

PO35823 2001

PO71092 2001 PO56213 2001

PO34301 1997

Pakistan Earthquake ERC Second Partnership for Polio Eradication Taunsa Barrage Emergency Rehab. & Modem Tax Administration Reform Project HIGHWAYS REHAB NWFP Community Infrastructure I1 ( CIP2) PK Public Sect Capacity Building Project Second Poverty Alleviation Fund Project Sindh On-Farm Water Management Project AJK Community Infrastructure & Services Banking Sector Technical Assistance HTV/AIDS Prevention Project National Education Assessment System GEF-Protected Areas Management Project

WATER MANAGEMENT PROJECT TRADE & TRANSPORT PHASE OUT OF ODS PRE

NWFP ON-FARM

Total:

0.00 0.00

123.00

24.40

215.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

400.00 46.70

0.00

78.50

150.00 37.10

55.00

338.00

61.14

50.00

26.50

37.11

3.63

0.00

3 1.35

3.00 0.00

0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00

.o.oo 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

10.08

0.00

0.00 13 .OO

0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

3.47

0.00 0.00

313.39 20.13

83.49

95.01

294.55 33.77

36.99

180.54

40.65

42.43

13.02

27.5 1

3.15

7.85

17.16

0.14 4.99

0.00 -27.23

13.68

28.50

15.88 2.50

4.05

-10.00

12.38

8.96

8.09

10.11

1.54

2.49

5.96

0.01 0.55

0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

7.49

0.00

0.00

0.34

0.00 0.70

97

S T A T E M E N T OF IFC’s H e l d and Disbursed Portfolio (In Millions of U S Dollars)

Committed Disbursed IFC IFC

FY Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. Approval

2005 A B A M C O FUND

1995 1996 1995

1991 1993 1997 2001 2004 2003 2004 1991 2001 1990 1992 2002 2004

1996 2003 1995

2002 2004 2002 2005 2006 1983 2002 1965 1987 1991 1994 1995 2005 200 1

2004 2006 1996

ABN A M R O PAK AES La1 Pir AES Pak Gen Abamco Mgmt Askari Bank BRRIM Crescent Bahuman Crescent Bahuman Crescent Bahuman Dewan SME Dewan Salman Dewan Salman Engro Chemical Eni Pakistan FIIB FIIB Fauji Cement First UDL GTFP Metropolita Gul Ahmed K C T Kohinoor Metropolitan Bnk Micro Bank NBFI Credit Network Leasing PICT PICT PPL PPL Packages Packages Packages Packages Packages Packages Sarah Textiles Soneri Bank TRG Pakistan Tameer Bank Uch Power

0.00 3.46 6.00

17.31 10.13 0.00 4.00 0.00 0.00 0.00 3.34 0.00

27.50 30.00 0.00

15.00 0.00 0.00 0.40 7.00 0.46 9.45 6.89 7.50 3 .OO 0.00 7.00 1.94 6.00 8.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

25.00 1.60 3.00 0.00 0.00

34.29 2.00

0.00 9.50 9.50 0.29 0.00 0.27 0.3 1 0.20 0.00 0.99 0.00 0.00 1.95 0.00 0.27 0.40 0.00 0.00 0.00 4.10 0.00 6.30 0.00 2.43 0.00 0.00 0.00 0.00 1.40 5.96 0.05 0.02 0.02 0.01 0.26 5.43 0.00 0.00 4.20 1.01 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.50 0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 8.05 0.00 0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7.15 0.00 4.07 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

15.89

0.00 6.00

17.31 10.13 0.00 4.00 0.00 0.00 0.00 3.34 0.00

27.50 0.00 0.00

15.00 0.00 0.00 0.00 0.00 0.46 9.45 6.89 7.50 3.00 0.00 7.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.60 3.00 0.00 0.00

29.16

3.46 0.00 9.50 9.50 0.29 0.00 0.27 0.31 0.20 0.00 0.00 0.00 0.00 1.95 0.00 0.27 0.40 0.00 0.00 0.00 4.10 0.00 6.30 0.00 2.43 0.00 0.00 0.00 0.00 1.40 5.96 0.05 0.02 0.02 0.01 0.26 1.47 0.00 0.00 4.20 1.01 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.40 0.00 4.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1 S O 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 8.05 0.00 0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7.15 0.00 4.07 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

15.89 Union Bank - P A K . .. 0.00 0.00 2.00 0.00 0.00 0.00

98

Approvals Pending Commitment FY Company Loan Equity Quasi Partic. Approval

2004 Dewan SME 2.00 0.00 0.00 0.00 2004 NBFI Credit 35.00 0.00 0.00 0.00

99

Annex 14: Country at a Glance PAKISTAN: Punjab Municipal Services Improvement Project

28.5 26.1 22.3 21.6 22.5 23.8 24.9 25.1 15.9 16.3 17.6 18.2 49.0 50.1 52.7 53.3

POVERTY and SOCIAL Pakistan

-5 -10

2005 Population, mid-year (mi//ims) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 199945

Population (%) Labor force I%) Most recent estimate (latest year available, 199945)

Poverty (% of population below national poverty line) Urban population (% oftotal population) Life expectancy at birth (years) Infant mortality (per 1,000 live birihs) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Literacy (% ofpopulation age 15+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1985

Household final consumption expenditure 82.0 72.4 73.3 80.0 General gov't final consumption expenditure 12.1 11.7 8.4 7.8

GDP (US$ billions) Gross capital formationiGDP Expotts of goods and servtces/GDP Gross domestic savings/GDP Gross national savingdGDP

Current account baiance/GDP interest paymentslGDP Total debffGDP Total debt service/exports Present value of debffGDP Present value of debffexwrts

- 1 5 1

-GCF -GDP

31 1 18 3 10 4 5 9

22 7

-41 1 7

43 2 24 5

1985-95 199545

1985-95 199545 2004 2005 (average annual growth) Agriculture 4.1 2.7 2.2 7.5 Industry 6.3 4.4 12.0 10.2

Manufacturing 5.7 5.9 14.1 12.5 Services 5.2 4.3 6.0 7.9

Household final consumption expenditure 4.3 3.5 8.2 16.8 General gov't final consumption expenditure 3.9 2.4 2.1 2.3 Gross capital formation 4.3 0.8 -3.2 1.7 Imports of goods and services 3.4 1.4 -8.6 44.1

(average annual growth) GDP 5 2 3 7 GDP per capita 2 6 1 2 Exports of goods and services 9 8 6 5

-Growth of exports and Imports (oh)

6o

40

2o

.20

-Exports -Imports .

155.8 690

107.3

2.4 3.0

33 34 64 74 35 90 47 68 80 57

1995

60.6 18.5 16.7 15.8 21.0

-4.0 2.0

49.9 27.6

2004

6.4 3.9

-1.5

South Asia

1,447 590 859

1.7 2.1

29 63 66 49 84 61

103 108 97

2004

96.1 17.3 16.0 18.4 23.0

2.0 0.8

37.1 22.3 29.8

149.3

2005

7.8 5.2 7.6

Low- income

2,343 510

1,188

1.9 2 2

31 58 79 43 75 61

I00 105 94

2005

110.7 16.8 15.3 12.2 18.0

-1.3 0.7

31.8 12.3

2005-09

6.5 4.6

15.5

DeveloDment diamond*

Life expectancy T

GN i Gross

capita enrollment per primary

1 Access to improved water source

Pakistan I__

~ Low-income group

Economic ratios'

Trade -

Domestic Capital savings formation

indebtedness

Pakistan - ~ Low-income group

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services Manufacturing

1995 2004 2005 I Growth of capital and GDP (%) 1

Note: 2005 data are preliminary estimates. Group data are to 2004.

* The diamonds show four key indicators in the country (in bold) compared with its income-group average. if data are missing. the diamond will be incomplete.

100

Annex15: Map PAKISTAN: Punjab Municipal Services Improvement Project

IBRD Map 34614

RawalpindiRawalpindi

ISLAMABADISLAMABAD

MianwaliMianwali

BhakkarBhakkar

KhushabKhushab

SargodhaSargodha

GujratGujrat

SialkotSialkot

GujranwalaGujranwala

LahoreLahoreShekhupuraShekhupura

OkaraOkara

FaisalabadFaisalabad

SahiwalSahiwal

JhangJhang

LeiahLeiah

KhanewalKhanewal

BahawalnagarBahawalnagarVihariVihari

MultanMultan

MuzaffargarhMuzaffargarh

BahawalpurBahawalpur

D.G. KhanD.G. Khan

RajanpurRajanpur

Rahimyar-KhanRahimyar-Khan

R AWA L P I N D I

S A R G O D H A

GUJRANWALA

FAISALABADLAHORE

M U L T A N

D . G . K H A N

B A H AWA L P U R

Rawalpindi

Mianwali

Bhakkar

Khushab

Sargodha

Gujrat

Sialkot

Gujranwala

LahoreShekhupura

Okara

Faisalabad

Sahiwal

Jhang

Leiah

Khanewal

BahawalnagarVihari

Multan

Muzaffargarh

Bahawalpur

D.G. Khan

Rajanpur

Rahimyar-Khan

ISLAMABADAttock

Chiniot

T.T. Singh

Shorkot

Lodhran

Liaquatpur

Dunyapur

Mailsi

Kasur

Chakwal

DaskaBhalwal

P.D. Khan

Talagang

Fatehjang

Jhelum

ATTOCKRAWALPINDI

CHAKWAL JHELUM

MIANWALI

KHUSHAB

BHAKKAR

SARGODHA

GUJRAT

GUJRANWALA

SIALKOT

LEIAH

MUZ

AFF

ARG

ARH

D.G.KHAN

RAJANPUR

RAHIMYAR-KHAN

BAHAWALPUR

MULTAN

BAHAWALNAGAR

VIHARI

KHANEWAL

SAHIWAL

OKARA

KASUR

LAHOREFAISALABAD

JHANG

T.T.SINGH

SHEKHUPURA

LODHRAN

PAKPATTAN

NAROWAL

HAFIZ-ABAD

MANDIBAHAUDDIN

TR

I BA

L A

RE

A

Approximate Lineof Control

JAMMU

AND

KASHMIR

NORTHWESTFRONTIERPROVINCE

BALOCHISTAN

SINDH

I N D

I AI N D I A

INDUS R

.

SUTLEJ R.

RAVI R.

JHELUM R.

INDU

S R.

IND

US R.

CHENAB R.

72° 74°70°

28°

28°

30°

32°32°

30°

70°

72° 74°

BALOCHISTAN

SINDH

PUNJAB

N.W

.F.P.

ArabianSea

P A K I S T A N

Areaof Map

ISLAMABADAFGHANISTAN

INDIA

CH

INA

TURKMENISTANUZBEKISTAN TAJIKISTAN

Approx.Line of Control

JAMMU AND

KASHMIR

62° 66° 70° 74°

24°

28°

32°

36°

24°

28°

32°

36°

74°

PAKISTAN

PUNJAB MUNICIPAL SERVICES IMPROVEMENT PROJECT

YEAR-1 PROJECT TMAs

MAJOR CITIES

NATIONAL CAPITAL

TEHSIL BOUNDARIES

DISTRICT BOUNDARIES

DIVISION AND TRIBAL BOUNDARIES

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

RIVERS

0 30 60

KILOMETERS

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

APRIL 2006

IBRD 34614

Kasur