Document of The World Bank FOROFFICIAL USEONLY ReportNo: 32156-PK PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$SO MILLION TO THE ISLAMICREPUBLIC OF PAKISTAN FORA PUNJAB MUNICIPALSERVICES 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 of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective March 3,2006) Currency Unit = Rupees 59.40 = USSl FISCAL YEAR July 1 - June30 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank CAS Country Assistance Strategy CCB Citizen Community Board C D City District CDG City District Government CIDA Canadian International Development Agency DAR Desk Appraisal Report DPL Development Policy Loan DPR DetailedProject Report EA Environmental Assessment EIA Environmental Impact Assessment EMP Environment Management Plan ERR Economic Rate o fReturn ESF Environmental and Social Framework FAR FieldAppraisal Report FSL Fixed Spread Loan GDP Gross Domestic Product HUD&PHED Housing, UrbanDevelopment and Public Health Engineering Department I&S Infrastructure and Services ICR Implementation Completion Report IRUDP IntegratedRural & UrbanDevelopment Program JICA Japan International CooperationAgency KOICA Korea International CooperationAgency KPI Key Performance Indicator LG Local Government LG&RDD Local Government and Rural Development Department M&E Monitoring andEvaluation M O U Memorandum o fUnderstanding MTR MidTerm Review O M Operations Manual O&M Operation & Maintenance PAR Project Appraisal Report P&DD Planning& Development Department PHED Public HealthEngineering Department PIFRA Project to Improve Financial Reporting and Auditing PIP Performance Improvement Plan PLGO Punjab Local Government Ordinance PMDFC Punjab Municipal Development FundCompany PPIAF PublicPrivate InfrastructureAdvisory Facility S I L Specific Investment Loan TMA Tehsil MunicipalAdministration TMO TehsilMunicipalOfficer Tehsil Officer uu TO UrbanUnit WAPDA Water and Power Development Authority WASA Water and Sewerage Authority WBI World Bank Institute Vice President: Praful C. Pate1 Country Managermirector: JohnW. Wall Sector Manager: Sonia Harnmam Task Team Leaders: Jaehyang So, Shahnaz Arshad PAKISTAN: PunjabMunicipalServicesImprovementProject TABLE OF CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 7 1 Country and sector issues.................................................................................................... 7 2 Rationale for Bank Involvement......................................................................................... 9 10 B.3 Higher level objectives to which the project contributes.................................................. PROJECT DESCRIPTION ............................................................................................... 11 1 Lending Instrument........................................................................................................... 11 2 Project Development Objective and Key Indicators......................................................... 11 3 Project Components .......................................................................................................... 12 4 Lessons learned and reflected inthe project design.......................................................... 14 15 C.5 Alternatives considered andreasons for rejection ............................................................ IMPLEMENTATION ........................................................................................................ 15 1 PartnershipArrangements................................................................................................. 15 2 Institutional and ImplementationArrangements.............................................................. 15 3 Monitoringand evaluation o f outcomesh-esults................................................................ 16 4 Sustainability..................................................................................................................... . . . 17 5 Critical risks and possible controversial aspects............................................................... 17 19 D APPRAISAL SUMMARY .6 Loadcredit conditions andcovenants............................................................................... ................................................................................................. 19 1 Economic and Financial Analyses .................................................................................... 19 2 Technical........................................................................................................................... 21 . 3 Fiduciary ........................................................................................................................... 22 4 Social................................................................................................................................. 23 5 Environment...................................................................................................................... 24 6 Safeguard Policies............................................................................................................. 25 7 26 Annex 1: Country and Sector Background.................................................................................. Policy Exceptions andReadiness...................................................................................... 27 Annex 2: Major RelatedProjects Financedby the Bank and/or other Agencies......................... 33 Annex 3: Results Framework andMonitoring............................................................................. 35 Annex 4: Detailed Project Description........................................................................................ 47 57 Annex 6: ImplementationArrangements ..................................................................................... Annex 5: Project Costs................................................................................................................. 58 Annex 7: FinancialManagement andDisbursementArrangements ........................................... 59 Annex 8: Procurement ................................................................................................................. 71 Annex 9: Economic and Financial Analysis................................................................................ 79 Annex 10: Safeguard Policy Issues.............................................................................................. 88 Annex 11: Project Preparation and Supervision.......................................................................... 94 Annex 12: Documentsinthe ProjectFile.................................................................................... 96 Annex 13: Statement o fLoans and Credits ................................................................................. 97 Annex 14: Country at a Glance................................................................................................... 100 Annex 15: Map IBRD34614...................................................................................................... 102 PAKISTAN PUNJABMUNICIPAL SERVICES IMPROVEMENT PROJECT PROJECTAPPRAISAL DOCUMENT South Asia Energy and Infrastructure Date: May 8,2006 Team Leaders: Jaehyang So, Shahnaz Arshad Country Director: John W. Wall Sectors: Water Supply (40%); Roads (25%); Solid Waste Management (20%); Sanitation Sector ManagedDirector: Sonia H a m m a d (15%); Yusupha B. Crookes Themes: Access to urban services and housing (P); Municipal finance (S); Municipal governance and institutionbuilding (S) Project ID: PO83929 Environmental screening category: A LendingInstrument: Specific InvestmentLoan For Loans/Credits/Others: Total Bank financing (US$m.): 50.00 ProDosedterms: USDollar; FSL; Grace Period 8 Years: Total Maturity 20 Years Source Local Foreign Total BORROWER 9.00 0.00 9.00 INTERNATIONAL BANKFOR 49.00 1.oo 50.00 RECONSTRUCTION AND I I I I DEVELOPMENT Total: 58.00 1.oo 59.00 Borrower: Government ofPakistan Responsible Agency: Government ofPunjab Project implementation period: Start: July 2006 End:December 2010 Expected effectiveness date: June 30,2006 Expected closing date: December 31,2010 Does the project depart fi-om the CAS incontent or other significant respects? [ ]Yes [XIN o Does the project require any exceptions from Bank policies? [ ]Yes [XINO Have these been approved by Bank management? ]Yes [ IN0 Is approval for any policy exception sought from the Board? c[]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] N o 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 inother TMAs throughthe creation ofaperformance-based management framework atboth TMA andprovincial levels. Project description: Component 1would finance improvements inservice delivery inthe participating TMAs through capacity improvement andinfrastructureinvestments. Component 2 would assist the capacity development o f Government o fPunjab: 0 Local Government and Rural Development Department 0 PlanningandDevelopment Department 0 Punjab Municipal Development FundCompany Which safeguard policies are triggered, ifany? 0 EnvironmentalAssessment (OP/BP/GP 4.01 0 Cultural Property (OPN 11.03, being revisedas OP 4.11) 0 Involuntary Resettlement (OPBP 4.12) Significant, non-standard conditions, ifany: Boardpresentation: N/A Loadcredit effectiveness: N/A Covenants applicable to project implementation: Re$ PAD C.6 A. STRATEGIC CONTEXT AND RATIONALE 1 Country and sector issues 1. Pakistan is currently the most urbanized country inSouth Asia. It 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 million lives in urban areas, and almost half 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 urbanizedprovinces like 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 if cities did not suffer from severe infrastructure bottlenecks, service deficiencies, poor local governance, and inefficiencies in land andhousingmarkets. Water and sanitationcoverage 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 ofwater dubious. Other urbanservices are not muchbetter interms 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 inthe 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 of 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 City 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 inestablishing the framework for devolving service functions. 4. The Punjab Local Government Ordinance (PLGO), 2001 provides a comprehensive list 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 urbandevelopment alongmajor transport routes and the expansion of peri-urban areas around cities have been classified as rural rather than urban in the census statistics. Thus, it appears that the proportionof urbanpopulationis higherthan official estimates. Whereas the Lahore CD was created in 2001, the other 4 CDs were createdby GoPunjab in July 2005. Thus, all the 5 cities, which have WASAs and DevelopmentAuthorities (DAs), now have the responsibilities of municipal service provision at the District level. Similarly, the number of TMAs was originally 122, but has now increasedto 144 by the sub-division of some previouslylarger 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 TMAs in the provision of services. Implicitly there i s 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 its outlook from provision to monitoring and oversight. 6. The implementation o f the devolutionplani 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 all 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 merely keep the services going and do not havethe capacity or resources to undertake strategic, spatial, or investmentplanning. 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 policy for performance management and capacity development o f local governments, have not been put in place. While the concept of performance monitoring i s still seen as an objective, it has not yet been implemented at the local government level. 8. Critical issues that face the urban sector inthe Punjab include the following3: 9. Service Delivery. While core service delivery functions have been devolved to the TMAs, the corresponding capacity improvements for effective service provision have lagged behind. Most TMAs have not been able to invest in larger capital works since devolution, because of their limited financial and technical capacity to plan and implement major systemic investments. 10. The existing TMA technical staff is coping to the best o f its 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 Additionalissues are described inAnnex 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 will require buildingcapacity inthe TMAs to manage these activities. 11. Municipal Finance. TMAs 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 TMAs i s intendedto 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 inthe distribution o ftransfers. 12. Facedwith 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 inthe PLGO 2001, it i s unclear how well TMAs are able to comply with the guidelines. Due to the current uncertainty about how quickly the revised national financial reporting format will be rolled out to the TMAs, it is likely that improvement in TMA financial reporting will occur in two stages: first, compliance with the existing Punjab provincial formats, and second, compliance with potentially revised Punjab provincial formats 13. Provincial Government Capacity. The devolution o f services to TMAs should be accompanied by a change in the role o f the provincial government. Provinces will 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 beenmonitoring budget inputs anddisbursements 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 still a work inprogress. 2 Rationale for Bank Involvement 14. Four years after the "Big Bang" o f devolution, there i s a greater understandingo 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 inthe 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 TMAs to deliver services, will provide local governments and Punjab with practical experience, as well 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 first practical attempt at usingthe performance management concept that i s included inthe 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 TMAs in implementation o f service delivery. 16. This project will provide targetedcapacity and service delivery enhancements to selected TMAs inthe Province of Punjab. The focus o f the project is to assist the provincial government and TMAs with implementingthe performance management concept intheir operations. TMAs will be invited to participate in the project based on performance achieved since devolution. TMA continued eligibility in the project will be based on sustained Performance against appropriate targets to be set and mutually agreedbetween 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 inthe devolution process. 3 Higher level objectives to which the project contributes 17. The urban sector was an area o f limited 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 is 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 will contribute not only to improvements inurban 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 policy and institutional constraints inthe large cities o f the Punjab i s currently under preparati~n.~Advisory work on institutional and financial options for specific services, including water supply and PunjabLarge Cities DPL(FY08). 10 sanitation and solid waste management is in p r ~ g r e s s . ~Finally, sector work on municipal finance, land, and planninghas also been recently completed. B. PROJECTDESCRIPTION 1 LendingInstrument 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. Eligible 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 buildingactivities. 20. The financial terms o fthe Loan will be a FixedSpread Loan (FSL), with total maturity o f 20 years and a grace period of 8 years. The disbursementperiod is expected to be 4.5 years, to accommodate the 18 month implementation cycle o fmany TMA infrastructureinvestments. 2 ProjectDevelopmentObjectiveand 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- basedmanagement framework at bothT M A and provincial levels. 22. Performance management framework, performance indicators and selection of TMAs. Because performance management is a core concept underlyingthe 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 TMAs 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 fown source revenues andimplementationcapacity. 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 of targets to measure performance in conjunction with a capacity or development grant. A subset o f the TMA indicatorswould be selected to build a provincial monitoring and evaluation database. 24. The overall project Key Performance Indicators (KPIs) will be thefollowing: Project outcomes Evidence, via 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 inthe Punjab; PPIAF grant for solid waste managementinthe Punjab; and KOICA grant for solidwaste management inthe Punjab. 11 Evidence, via 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 inselected service delivery indicators. Evidence, via reports from independent technical audit teams, o f GoPunjab's improved capacity to monitor T M A performance. Evidence, via reports from independenttechnical and social audit teams, o f GoPunjab's improved capacity to manage cultural heritage assets. Project outputs Evidence, from selected monitoring indicators or via reports from independent technical and social audit teams, o f timely and satisfactory delivery of project activities and relevant outputs, as planned. Such outputs are detailed at the T M A and at the provincial level inAnnex 3. 3 Project Components 25. The project consists o f two components: 1) capacity grants and development grants to TMAs; and 2) technical assistanceto the PunjabProvincial Government. Component One: Support for Tehsil Municipal Administrations - Capacity and Development Grants 26. Capacity grants will finance needed improvements in TMAs 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 onperformance o fthe 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 on 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, TMAs will 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, it is envisioned that the size and complexity o f investment would also increase. Component Two: Support for Other Institutions-Capacity Buildingand Other Activities 28. This component will assist the Government o f Punjab in a variety of ways. It will (i) support the capacity building of the Local Government and Rural Development Department (LG&RDD); (ii) in capacity enhancement of the Planningand Development Department assist 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 will include: 0 assessment o f the Department's structure and staffing inlight o f its current mandate post- Devolution, 0 hiringo fconsultants and staffto fill critical skills, 0 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 expert advice on Cultural Heritage Issues, 0 development of framework to rationalize institutional mandates for Heritage Asset Management, 0 development o f an enabling legislative framework, 0 implementationo f a pilot project inthe Walled City o f Lahore. Support to PMDFCwill include: 0 training on performance management, 0 consultants and staff to support design and implementation oversight o f capacity and development grants, 0 consultants to accommodate peak workloads inthe grant cycle, 0 development o f a monitoring and evaluation database, 0 technical and social audits. 29. Total project costs are as follows: 13 Table 1: Summary ProjectCosts (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 DevelopmentGrantsto 45.5 77% 38.7 85% 15% TMAs 2 Support to Provincial Government 2.a Capacity buildingo f 1.o 2% 1.0 100 0% LG&RDD & PMDFC % (includingM&E) 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 Totalprojectcosts 59.0 100% 50.0 85% 15% ___ Note: Numbers may not addup due to rounding. 4 Lessons learnedand reflectedin the projectdesign 30. The Bank has not been engagedinthe urbansector for a number of years inPakistan. Key lessons from previous projects and urban sector operations elsewhere include the following: Greater borrower ownership, and a longer term commitment o f resources for technical assistancehraining is 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 inproject 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 ftheir sub-projects; Local ownership o f sub-projects through participation in identification and prioritization bykey stakeholders is essential for success; Project size and complexity should be aligned with implementation, planning and technical capacity. 14 5 Alternatives considered and reasonsfor rejection 31. 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 it clear that financing is not the main constraint to implementing urban investments. Therefore, GoPunjab requested direct assistance, rather than a policy based loan, to TMAs 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 its own potential, identifying those TMAs that made the best use o f the means available. Therefore, the first year selection includes poor TMAs that were selected on the basis o ftheir performance. 33. Private Sector Participation. 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. It is expected that the TMAs and local governments will 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 TMAs to manage contracting o f private consultants, contractors and, eventually, service providers. C. IMPLEMENTATION 1 PartnershipArrangements 34. Donors have provided assistanceto GoPakistan to support its 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 Programhave bothprovided useful links to partners at the TMA level. 2 Institutionaland ImplementationArrangements 35. The Project Implementing Entity is the PunjabProvincial 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 FundCompany (PMDFC), with the exception o f the implementation o f the P&DD component. The participating TMAs will be responsible for implementation of 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 limited by guarantee. Its autonomous, public- private Board o f Directors is composed o f members o f the Provincial Government, civil society 15 and the private sector - the stakeholders o f urban development in the Province o f Punjab. It 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, it plans to contract from the available consultant market to deliver some o f the assistance that i s neededto implementthe project. 37. PMDFC is responsible for reviewing and selecting TMAs to be included in the project, against criteria that are described in Annex 4. PMDFC will appraise sub-project proposals submitted by TMAs, and work with them to ensure that the sub-projects are ready for implementation. PMDFC will also monitor sub-project implementation, and improvements funded through development grants, to evaluate sustainability and to ensure TMA continued eligibility for the project. 38. TMAs 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 will provide TMAs 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 will 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. It i s currently envisioned that LG&RDD may temporarily need additional assistance and manpower to supplement its current staffing, and it i s anticipated that they will be assisted by PMDFC in identification and hiringof the additional manpower. For the monitoring and evaluation database, PMDFC will first develop and maintainthe databaseand then transfer the databaseto LG&RDD. P&DD capacity building. Implementationwill rest with P&DD, which will entrust it to P&DD's newly set up Urban Unit (UU). PMDFCcapacity building will be implementedbyPMDFC. 3 Monitoring and evaluation of outcomes/results 41. There will 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 list o f indicators to be included inthe M&E framework is found inAnnex 3. In addition, at the TMA level, a set o f core monitoring indicators has been selected and will 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 on the 16 services they provide, additional baseline data will be established during the first 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 fwhich M&E i s an essential component. 42. Inaddition, independenttechnical andsocial audit teams will behiredto: 0 Evaluate outputs for which a quantitative indicator could not be defined, 0 Evaluate the project's progress towards reachingits outcomes, 0 Evaluate PMDFC's performance in implementing the Project (except for the P&DD capacity-building component). 43. These audits will be performed at mid-tern and at project completion, on the basis o f available documentation, interviews, and fact-finding surveys inthe TMAs as necessary. 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-project sustainability. An important output of the project will be a monitoring system that will 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 beenassessed 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 TMAs from the provincial government. Once the concept o f using performance management as a basis to identify and reward high performing TMAs is proven through this project, GoPunjab will be able to replicate and expand on the project through its 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 will prepare, with the support o f LG&RDD and P&DD, a detailed O&M plan for the TMAs inthe project to ensure that the physical investmentwill be sustained to produce the necessary improvement inservice delivery. 5 Criticalrisks and possible controversial aspects 47. As PMSP i s the first performance based comprehensive capacity building and investment project inthe Punjab province, the following risks have been identified: 17 Table 2: Proiect risks Risks from Components RiskRating RiskMinimizationMeasures to Achievingthe PDOs Low procurement High PMDFC will procure consultancy services and zapacity inTMAs goods for the project. TMAs will be responsible for procurement o fworks, and they will be provided close assistanceby the design/ supervision consulting firm, and will be supervised by PMDFC. Transparency will be an important aspect o fthe TMAsprocurement processesthrough web posting. A clear procurement manualhas beenprepared and several technical assistanceopportunities will be designed duringpreparation and as new TMAs come on line. Low response from High The issue is currently affecting all engineering contractors due to market projects inPakistan, and necessary actions are conditions which include beingexplored at the national level. Interest for rapidly escalating and PMSIP development schemes will be stimulated volatile prices o f through directed communications strategy to the construction materials national contractor industry and byreducing duringthe post contractor risk on rapid materials price increases. earthquake The measures include, among others, inclusion o f reconstructionperiod price escalation terms, increases inmobilization advances, and reductionincertain overly restrictive qualification criteria. Operations & Moderate IncreasingT M A project management capacity and Maintenancebudget and (project ensuringthat any new investment ininfrastructure capacity inTMAs outputs) I will bemade sustainable through detailed capacity continues to lag in High assistance, agreement on specific O&M actions in performance. (sustainability) the PIPS,and PMSIP monitoring mechanisms. Continued conflict/delay Moderate Project will assist TMAs to implement existing inapplication ofnational provincial financial reporting formats. There will financial reporting be a conversionprogram and technical assistance if standards to Punjab the reporting format i s changed duringthe project TMAs timeperiod. The Bank team working on the accounting and audit modernizationproject (PIFRA) will also monitor closely the provincial implementation. Design and engineering Low Project preparationhas shown that the technical capacity (of consultants) quality o f the design and engineering consultancy firm appointed through single source selectionwas rather low and did not take sufficient account o f existingfield conditions. Inresponse to this, PMDFC had to complement its already qualitatively well-staffed Engineering Department, 18 RiskMinimizationMeasures byhiring an internal consultant with extensive relevant field experience. PMDFC will hire the design and supervision firm for the following year(s) schemes through competition and the terms o freference will be made detailed enough to circumscribe all the requirements o f the project. PMDFC capacity PMDFC will periodically monitor its capacity to insufficient 1 manage TMAs and expand its capacity, as needed, inagreementwithP&DDand the Bank. Overall Rating Moderate 6 Loadcreditconditionsandcovenants 48. Standard implementation covenants for staffing arrangements, financial management, procurement and safeguards will apply. 49. The following are the main Loan covenants: Compliance with the Operations Manual, the Financial Manual, and the Environmental andSocial Framework, which cannot be changed materially without Bank approval; Quarterly Project progress reports and financial reports; Annual audit o fthe financial statements o fthe Project ImplementingEntity; Compliance with agreed procurement arrangements; Compliance with the PLGO. A material adverse change to the PLGO will constitute grounds for suspension. D. APPRAISAL SUMMARY 1 EconomicandFinancialAnalyses 50. Financial Analysis. The financial analysis focuses upon the sustainability o f the PMSIP approach, as well as the sustainability o f its 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 its own funds. Usingthe 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 reducingthe overall flow o fresources 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 contributionto capital costs. TMA financial analysis, based on historical andprojected 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 will be in TMAs which can afford the associated operational costs (while helping less well-off TMAs through technical assistance and training to ensure they can raise the necessary funds). 52. In line 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 its recurrent expenditure patterns, to assess the likelihood o f surplus funds being available to take on new obligations. Where a surplus has historically not existed, the analysis looks at opportunities to increase income and/or to decrease expenditure inorder 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 viability o f each o f the identified schemes calculated on this basis. However, although TMAs may have the financial capacity to sustain infrastructure, and provide adequate O&M, it is expected that additional effort i s requiredat the provincial level to reinforce incentives for an `O&M approach' inTMAs. 54. Economic Analysis. Infrastructure developments in the TMAs are expected to yield significant economic benefits. For all sub-projects, 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 TMAs under the project's capacity building activities. 55. Although several approaches to the economic analysis have been explored duringproject 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 assessedthe 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 will serve the dual purpose o f creating a baseline for future project evaluation and a quick appraisal o f the economic viability of sub-projects will 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 inAnnex 9. At present, to be conservative, the analysis takes no account of 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 inplace, the approach for these calculations varied betweensub-projects. Estimated benefits o f the PD Khan roads sub-project include reduction o f vehicle operating costs and increases incommercial property values. The calculated ERR i s 17%. For the JheIum water supply sub-project, the estimated ERRranges between 12%and 24% dependingonsome ofthe parameters assumedfor 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 inTMAs were financed and implementedby provincial departments and line agencies such as Public Health EngineeringDepartments (PHED) with minimal involvement by the TMA. Therefore, the number and capacity o f technical staff in the TMAs are limited. TMA technical capacity will be reviewed and assistancewill beprovided to both improve the technical capacity as well as the quality o f the sub-projects being proposed. However, rather than increasing the number o f T M A staff, the project will seek to use consultants to assist TMAs wheneverpossible. 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 will 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 1designs and, in some instances, requested consultants to modify them to: Increase value for money andthus affordability o f the schemes, Ensure that actual field conditions and existing infrastructure are properly taken into account, Improve the maintenance o fthe schemes. 60. A menuo fTMA capacity-building interventions, or Performance Improvement Programs (PIPS), has been developed by PMDFC. The list i s included inAnnex 3. Each PIP will include a selection o f these activities. Some o f the activities will 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 inTMAs. 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 TMAs will agree on the appropriate O&M actions to be included inthe PIPS- inparticular 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 will beused for intendedpurposes. 63. Financial management o f TMAs and PMDFC arrangements are well documented in the PLGO. A review of two Year 1 TMAs shows that these practices are being implementedat the local level. PMDFC developed a Financial Manual (FM) that i s acceptable to the Bank. The manual adequately covers staffing, budgeting, accounting policies andprocedures, delegation o f financial powers, financial reporting, fund flow 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 of 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 UUi 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 beenrecruited 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 limitedto these set o f rules and only a few staff are aware o f the best practices inprocurement 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, will be forwarded by TMAs to PMDFC. Works will be procured by TMAs with support from PMDFC, as well as design and supervision consultants. PMDFC will clear all 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 will inturn hold training sessions for appropriate TMA staff. In order to facilitate wider participation and 22 ensure transparency inprocurements, PMDFC and TMAs will hold dissemination workshops for contractors and maintain a procurement web-site updating all relevant information. The Urban Unit (UU)will be responsible for procurements underthe P&DD component. Additional details on the procurement procedures are given inAnnex 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 life 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 will benefit from the participatory preparation and implementation o f the investments themselves. PMDFC will enhance local government capacity to support collective action and increase opportunities for the involvement o f civil society. The main constraint inthe project i s its current limited capacity to implement such a demand-driven, participatory program. PMDFC's capacity buildingprogram is designed to address this risk. 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 all Year 1 TMA offices in an accessible place, and discussed inpublic meetings when subprojects for funding are proposed. TMAs will record attendance and comments made at public meetings and address themduringthe detaileddesign. 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 risks 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 all socio-economic levels, members o f elected bodies, civil society and private sector agencies, and municipal and provincial officials. These groups will 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 andinvestmentcycles 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) to urban amenities and services by low-income settlements (ifdisplacement access 23 i s unavoidable for any investment); and (iv) resettlement o f displaced families and restoration o f the livelihoods o f all affected persons. 5 Environment 72. This project is a Specific Investment Loan (SIL) and falls under OP4.01 on Environmental Assessment. The types o f infrastructure investmentsidentified under the PMSLP include water supply, local roads, street lighting, drains and sewers. At the scale currently envisaged, these works will 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 all phases o f the work. The impacts during construction will need to be addressed and appropriate management and mitigation procedures and controls will be need to be includedinthe contractual agreements for the individual projects. 73. PMDFC has a formal policy to "promote environmentally sound, socially acceptable and commercially viable urban infrastructure projects that will 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 beenrated EA Category A since some o f the PMDFC "E-1" sub-projects might require a full EA under Bank policy, although not all will (for example, "public conveniences" are rated E-1under the current ESF). Projects rated E-1by PMDFC will be reviewed by the Bank to determine the level o f assessment required, but given the limited institutional and technical capacity of the TMAs, few, if any, such projects are expected. 74. The first 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 field appraisal stage has been effective and will be refined as more specific experience i s gained. The Field Appraisal Reports have a well structured section on environment and PMDFC i s working with the design consultants to ensure that all 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 inthe 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 likely to include works along crowded urban streets and would very probably rate as Category A. An appropriate EA process is to be carried out and will be subject to review and approval by the Bank before any investment is cleared. No physical works are 24 expected in the first year and detailed discussions will be held with PMDFC and the other relevant authorities to identify and carry out the necessary preparatory studies. 76. Effective implementationi s the critical challenge for all aspects of PMSIP. PMDFC i s developing performance based approaches and has put in place supervision systems and monitoring mechanisms for the investments. Environmental aspects will be part o f the mandate of the works supervision consultant and will be includedinthe routine reportingto PMDFC. The grievance mechanism used by the project will be another route for environmental concerns or complaints to be brought to the attention o fPMDFC 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, beingrevised as OP 4.11) [X 1 [I Involuntary Resettlement (OP/BP 4.12) [X 1 [I Indigenous Peoples(OD 4.20, beingrevisedas OP 4.10) [I [X 1 Forests (OP/BP 4.36) [I [X 1 Safety ofDams (OPBP 4.37) [I [X 1 Projects inDisputed Areas (OP/BP/GP 7.60) [I [X 1 Projects on International Waterways (OP/BP/GP 7.50) [I [X 1 77. The scale o f the investment works i s typically limitedbut 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 will be reviewedby 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 of the InvoluntaryResettlement Policy are met. 78. There i s always a possibility that some elements o f physical cultural heritage will be affected inurban areas, but the planned investments 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 inthis 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 separatecultural heritage planisnot 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 beenreviewed as being ready to start implementation in the first year amount to approximately US$ 10.8 million, which i s 18% percent o fthe total project cost, and 24% of the amount allocated to TMA development schemes. 26 Annex 1: Country and Sector Background PAKISTAN: PunjabMunicipalServices ImprovementProject 1. Pakistan is currently the most urbanized country inSouth Asia. It i s experiencing a rapid urbantransition with growth rates that are twice the rate ofthe overall population increase. Over a third o f the total population o f 140 million lives in urban areas, and almost half 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 % of Gross Domestic Product (GDP) located mainly in urban areas. The more urbanized provinces like 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 inthe 1990s at about 58%, and 30% respectively. Unaccounted for water is high, collection rates and cost- recovery levels are low, existing infrastructurerundown, 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 definedlocal 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 urbanmanagement and service delivery inPakistan, as it has done away with some of the institutional fragmentation for urban service investment and operations. In the Punjab province, the devolution program resulted in the establishment o f 144Tehsil 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 inestablishing the fiamework for devolving service functions. 4. The Punjab Local Government Ordinance (PLGO), 2001 provides a comprehensive list o f regulations for local governments in the province. The Ordinance covers the range o f regulations from institutional responsibilities of the different levels o f local government - including district government, zila council, tehsil and town municipal administration, tehsil and town councils, union administration, union councils, village and neighborhood councils, and 'Recent analysis indicates that rapid expansionof ribbon urban development alongmajor transport routes andthe expansionof peri-urbanareas around cities have been classified as rural rather than urban in the census statistics. Thus, it appears that the proportionofurbanpopulationishigherthan 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 responsibilitiesof municipal service provision at the District level. Similarly, the number of TMAs was originally 122, but now has increasedto 144 by the sub-divisions of some previouslylarger TMAs. 27 . .. city Districts Towns Province of i... ._-.- .- .., . .-. .- .. - - Punjab Districts i Te~.its hs . 2 Adrnin. I Il ' I x--_----- ' t i 5. The broad framework o f devolution, as outlined in the PLGO, gives responsibility to TMAs to provide a range o f municipal services and the provincial government to monitor the TMAs in the provision of services. Implicitly there is an expectation that better performing TMAs will receive greater incentives. This is 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 provisionto 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 all 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 of 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 policy for performance management and capacity development have not been put in place. While the concept o f performance monitoring i s still seen as an objective, it has not yet been implemented at the local government level. 8. Critical issuesthat face the urbansector inthe 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 TMA. 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 skills 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 skills are more developed, but design are rarely presented satisfactorily as adequate plans and maps are lacking. TMA engineers correctly point out that it is, inany case, difficult to ensure Many TMAs allocate a sumof money for capital works for each Union Council. The Union Councilor decides how this 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: TMAs 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 of 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 TMAs may runa 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 byrevenues generated through tariffs.lo 12. TMAs 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, its capacity to cost services (or separate services such as water and sanitation) i s poor. It i s a manual system, which limits the flexibility when exporting results, and its internal control systems needto 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. Inabout 80 to 90% of all TMAs, the lack of staff is cited as the reasonwhy collection of fees and charges is usually undertaken by a contractor through a procedure explicitly permitted under andregulated bythe PLGO. Past experience, internationally as well as inPakistan, shows that well-managed outsourcing o f collection o f taxes and fees brings inmore revenues than self collection inmost instances. Today, whenever a TMA i s not able to contract out the collection o f taxes, its revenues typically fall 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 involvingprivate 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 of the TMAs so that these negative aspects can be mitigated. 14. The example of Jehlum below provides a broad overview o f the challenges facing a typical TMA: loSource: Punjab Local Government Finances: Financial Profiles of Selected Tehsil Municipal Administrations (TMAs), Sidat Hyder Morshed Associates (Pvt) Ltd. 30 Descriptionof TMA Jhelum TMA Jhelum is one of the three TMAs inthe Jhelum District. It lies in the Northern area of Punjab in a plateau range with its borders joining Azad Jammu & Kashrmr. The town of Jhelum, itself, is the main town of the TMA, located on the right bank of the Jhelum River and on the Rawalpindi-Lahore highway. There are 16 Union Councils inthe TMA, o fwhich 5 are locatedinurban areas. Jehlum ranks as a median size TMA inthe province by population. In 1998, the total TMA population was 516,942, o f which 129,440 were inurban 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) is estimated to be about 150,000, and expected to reach 180,000 in 2015. TMA Management Jehlum's TMA management team consists o f TMO, TO (Finance), TO (Regulation), and TO (Infrastructure & Services). No qualified 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 is responsible for some general functions: b Complaint Cell. Although a Complaint Cell was established as per the PLGO requirements, it serves mainly as a record-keeping document, rather than an operational document that the TMA can use to identify and plan needed service improvements. b Dissemination of information. The annual budget i s the only information forwarded to the Provincial Government, and TMA management information i s not widely available to the general public. The emphasis o f planning in the TMA is restricted to development control rather than its facilitation and management. TMA staff focus mostly on master planning. Annual Development Plans are prepared with input from citizens through the Union Councils and other means, but without data collection or specific data analysis. No physical data i s collected or maintained. TMA Jehlum has a land use map, but no spatial plans, zoning maps or base maps. This is the weakest departmental area o f TMA Jhelum, due mainly to the lack o f qualified staff and the lack of awareness about rules and powers as defined inPLGO 2001. The areas of regulation include: (i) encroachments; (ii) markets; (iii) and fee collection; (iv) land rights and (v) development controls. The regulations, are not enforced tax ina consistent manner. Norecords are available onthe status o fpendinglegalcases. Finance The Provincial Government collects Urban Immovable Property Tax and transfers it to the TMAs. Prior to 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 from each TMA's share. TMA Jhelum has never reconciled its WAPDA dues with the deductions made by Government from its UIPT share although this should be done regularly to avoid any excess deductions. Jehlum's own source revenue increased from Rs. 37.22 million in 2001-02 to Rs. 85.99 million in 2003-04. Thi: considerable increase i s a result of a major increase inrevenues collected from rents and rates during the year 2003. 04. During the same period, Jehlum's development expenditure rose from Rs. 12.85 million to Rs. 76.39 million 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 all areas. There is also a shortage o f technica equipment, such as surveying equipments and lab testing equipment. No preventive maintenance i s being performed. Although a record o f household & commercial water supply connections is 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 is :ither outdated or nonexistent.. The state o f the municipal infrastructure service delivery is detailed below for selected urban infrastmcture: Water supply The existing water supply systemcovers about 50 % o f the population. The system relies on deep tube wells installed up to a depth o f 200 - 250 ft. A total o f 20 tubewells are operational, o f which 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 is no systematic chlorination, although bleaching powder i s added into the overhead reservoirs during the rainy season. The water pumped from the tubewells i s o f very good quality, but is 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 pipesthat are past their design life. 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 illegally accessing the water supply system. Billing and collection i s done quarterly. The existing flat rate for domestic customers i s Rs. 35/ month, which is currently planned to be increased to Rs. 401month. Commercial customers pay a flat rate o f Rs. 200/ month. This is 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 city discharging into the Jhelum River. Some sections o f these channels are lined or constructed in brick 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 inthe TMA suffer from severe periodic flooding. Sewerage A sewerage system exists only inthe southwestern areas o f the city. The sewage flows untreated into the Jhelum River. A treatment plant for waste water has beenproposedunder a comprehensive sewerage scheme. 32 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies PAKISTAN: PunjabMunicipalServices ImprovementProject 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: 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 inthe Punjab on urbanplanning. CIDA has also provided technical assistanceto the LG&RDD on improving its capacity to manage TMAs, including investments in computer equipment and software development. Japan International Cooperation Agency (JICA) i s providing technical assistance on urbaninfrastructure to 1TMA inthe Punjab. 2. The World Bank's devolution support program comprises a range of 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 is 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 utilities, tariff structures and the options for private sector participation. A similar study on institutional options, regulatory framework and private sector participation i s beginningfor the solid waste management sector inthe Punjab inFY06. e 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. InFY06, sector work on municipal finance, planning and land and housing under the devolution framework will be completed. 3. PMSIPwill be coordinating with the other donor efforts in several ways: the project will not offer duplicate activities to those being financed by the other donors inthe same TMAs. For example, PMSIP will 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 CIDA and JICA are also deemed eligible to participate in PMSIP, through the achievement o f some basic indicators, the project will 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 fthe provincial government structure: PMSIPis targetingTMAs andthe DPLis 33 targeting City District governments. Both projects will benefit from the specific sector work currently being conducted. 5. Finally, PMDFC i s committed to ensuring that financial management support and capacity building is provided to TMAs in a manner that i s supportive of, and aligned with the government's work on the objectives of .the Bank-financed Project to Improve Financial Reporting and Accounting (PIFRA). 34 Annex 3: ResultsFrameworkand Monitoring PAKISTAN: PunjabMunicipalServices ImprovementProject ResultsFramework PDO Outcome Indicators Useof OutcomeInformation ro significantly improve the Evidence, via reports from Assess the relevance o f yiability and effectiveness o f independenttechnical and x-eparing repeater projects. irban services providedby the social audit teams, o f iarticipating TMAs, and to improved effectiveness, Foster broadening the nake such improvements financial and technical performance management wstainable and replicable in viability o f urbanservices Framework for local itherTMAs through the providedbyparticipating government entities. :reation o f a performance- TMAs. >asedmanagement framework itbothTMA andprovincial Evidence, via reports from evels. independenttechnical and social audit teams, o frising levels o f satisfaction among keystakeholder groups with respect to services targeted underthe project. Component One: ComponentOne: ComponentOne: Improve service delivery to CORE INDICATORS The Performance the citizens o fthe TMAs For each sector, two Improvement Plans that will selected for the project performance indicatorswill be be agreed between PMDFC selected duringthe second and grant-receiving TMAs performance management will set targets for the selected workshop, out o fthe long list indicators. o f sector performance indicators that has been Success inmeeting the targets developed inthe first will be a criterion for further performance management grants to be approved. workshop (see below). ADDITIONAL INDICATORS Improvement inselected service delivery indicators, as chosen by each development grant-receiving T M A from the long list develoDed inthe first 35 3erformance management workshop (see below). Component Two : :omponent Two: ~~ Component Two: guild capacity At provincial level ;ome first improvementsin (i)At provincial level, Evidence o ftimely and he capacity to manage manage a process o f satisfactory delivery o fproject iultural heritage assets will be performance outputs, including: iecessary to implement the improvement for TMAs, implementation o f adequate 'ilot Project inthe Walled arrangementsto monitor Zityo fLahore T M A performance, implementation o f sound project appraisal criteria, provision o f adequate The Performance assistance& guidelines to mprovement Plans that will TMAs, >eagreed betweenPMDFC improved capacity to mdgrant-receiving TMAs manage cultural heritage Mill set targets for the selected assets. ndicators. Success inmeetingthe targets (ii)Atlocal(TMA)level, At TMA level will be a criterion for hrther improve practices in aprioritized list of projects yants to be approved. terms o fproject and number o fprioritized implementation projects implemented, capacity, service implementation o f delivery, planning, improvedoperation and financial management maintenance practices, and operation and improvement inselected maintenance planning, financial management and financial management, financial planning and optimal utilization indicators, as chosen by o fresources, each capacity grant- receiving TMA, as selected inthe Performance Improvement Plans from the list developed inthe first performance management workshop (see below). 36 b m 2 c, 0 8 .R aE CI 00 m h 4 W i3 0 d 0 Y .3 3 a2 v1 4 CElL IService Delivery Indicators D Average number o fhours per day water supplied to households during Water the last month. Supply Numbero fcomplaintsregisteredresolved(bytype o f probledlocation) duringthe last month. (ii) Sewerage Numberandpercent ofhouseholds connected to the sewage system. and Drainage Numbero fcomplaints registeredresolvedonthe sewage system (by type o fprobled location). Numbero fcomplaints registeredresolvedon the drainage system (by type o fproblem/location) duringthe last month. (iii) Solid Waste Amount o f garbage generatedcollectedper day (intons). Collection Numbero fcomplaintsregisteredresolvedon solidwaste collection (by type o fproblem/location) duringthe last month. (iv) Solid Waste 0 Percent o f solid waste disposed offby dumping, landfill site, per day. Disposal 0 Number o f complaints registeredresolved on street cleaning (by type Cleaning o fprobledlocation) duringthe last month. Roads 0 Percentage o froads inexcellent/goodfair/bad condition. 0 Number o fcomplaintsregisteredresolved about the roads (bytype of probledlocation) duringthe last month. (.ii)StreetLights 0 Percent o f streets with street lighting (bytype o fprobledlocation). 0 Percent o f street lights not working duringthe last month. i 0 Numbero fcomplaintsregisteredresolved about street lighting(bytype o fprobled location) duringthe last month. (.iii)Parks 0 Average number o fpeople 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 oftrees (e) number oftrash bins (f) safety duringthe day (g) safety duringthe night (h) toilet facility (by eachpark). 0 Amount o fFundsallocatedspent duringthe financial year on O&M of: Municipal Services (i) WaterSupply (ii) Sewerage&Drainage 42 Service Delivery Interventions Indicators (iii) SolidWasteManagement (iv) Roads (v) Street lighting (vi) Parks (vii) FireFighting 43 List of Core Capacity-building- Effectiveness Indicators to be monitored by TMAs and PMDFC 'IP Tasks/Capacity nterventions Performance / Effectiveness Indicators TMO OFFICE DNumberof complaints registeredtrackedresolvedpermonth. i) Setting up o f Citizens' Complaint Cell ii) Developmentof B Website updated regularly. TMA website B Numberoftimes web site is accessed(per month). iii) Performance D Performance management indicators report submittedto Tehsil Management Nazim on periodic basis by the TMO. System. B Performance management indicators report submitted to PMDFC onperiodic basis. :iv) Initiation o f 0 Number of CCBs registered duringthe last financialyear. development schemes through 0 Numberof CCBs which initiatedCCBs' schemes duringthe last CCBs. financial year. 0 Numbero fCCBs which completedCCBs' schemes duringthe last financial year. 0 Percent o f CCB allocationutilized duringthe last financial year. (v) Training o f TMA 0 NumberofTMA staff got trainedundereachTO duringthe last staff financial year. TO (Regulation) 0 %age o f database computerized o f Development of i) Legal cases for proper monitoring computerized data base ii) Advertisementandsignboards Of: : iii) Licensesandpermits 0 Legal cases for proper monitoring iv) Municipal estates andproperties 0 Advertisement and signboards 0 Licenses andpermits 0 Municipal estates and properties TO (Finance) 0 Computerized annual budgets and accounts prepared according (i) Adoption/ to PLGOrequirements. compliance of budgetary and accounting procedures as 44 PIP TaskdCapacity Interventions Performance/ Effectiveness Indicators prescribedunder PLGO. ~~ (ii) Financial 0 Numbero fofficials using financial management system as a Management tool. System Numbero fTMA staff undergone training inusing some financial management software. (iii)Analysisofuser 0 Number of services for which sector specific costs are available. charges and related costs on periodic basis iv) Enhancement o f Percent increase inown source revenues every year. revenue generation i)%increaseinfee/taxrate ii)%increaseinfee/taxcollection. B Percent.increase inTMAs own contribution to development expenditure. B Percent increase inarrear recovery compared with last FY. ro(ms) D Numbero fTMA officials trained duringthe last financial year. :i) Developmentof skills inpreparation o fPC-Ito PC-v. (ii) WaterSupply NumberofTrainings / Workshops heldundergone by TMA staff, 0 Improvement in No. o frelevant TMA staff got trained inspecified areas. Operation, Maintenance and Management of Increase innumber o f consumers. Water Supply Numbero fillegal connectiondetectedremovedduringthe Systems financial year. 0 Reductioninillegal connections compared with last FY. Percent increase inarrears recovery compared with last FY. 0 Enhancement of revenue generation. 0 Percent reduction inthe amount o f over billingby WAPDA. 0 Percent decrease incost ofproduction to revenue generated. 0 Percent increase inrecovery ofwater bills. ~~(iii) Sewerage Numbero frelevant TMA stafftrained inspecified areas. 0 Improvement in Operation, 45 Maintenance and Management o f Sewerage System (1.) Improvement in Numbero fTMA officials trained duringthe last year. existing drafting skills. (v) Improved Functional Web-site for the T M A with procurementposting transparency in (IFB, summary of evaluation report sand complaints). TMAs procurement process Advertisement for and posting o fpre-registered firms for the non-bank fundedprojects o fthe TMAs. ~ TO (Planning) =Basic maps prepared. (i) SettingupofGIs, 9Database o f infrastructure developed and thematic maps mapping of prepared. services and =Number o fmunicipal services for which complete database is developing a developed. database of services. (ii) ActionPlan .Numbero f development/ capacity projects executed out o f prioritizedlist. I 46 Annex 4: DetailedProjectDescription PAKISTAN: PunjabMunicipalServices ImprovementProject 1. The Punjab Municipal Services Improvement project (PMSIP) project i s designed to improve the planning and management capacity in TMAs 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 buildingto the Punjab Provincial Government and PMDFC. Component One: Support for Tehsil Municipal Administrations - Capacity and DevelopmentGrants 2. This component would finance improvements in service delivery in the TMAs through capacity improvement and infrastructure investmentsinqualified TMAs. a) Capacity grants would finance needed improvements in TMAs to improve urban planning, financial management, and investment planningand implementation for service delivery. Capacity grants will 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 will 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 will finance infrastructure investments in the TMAs. The prioritization and selection o f infrastructure investment will be determined by TMA staff, and it is envisioned that as the project progresses the TMA's capacity to identify and prioritize needed investments will continue to improve. Because the focus o f the development grant will 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, it 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 determinedby 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 will be able to finance the Operations and Maintenance costs associated with the investment. Because one o f the objectives i s to assist TMAs to develop capacity to do complex planning and implementation, it i s envisioned that the project will not finance the routine small scale investments that have been made during the past few years. However, the project will assist TMAs 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 finvestments include: (i)Evidenceisprovidedofanimportantcommunityneed (ii)Likelihoodthatthegrantwillprovidesignificanthelpinmeetingthatneed (iii) Reasonableness o fthe cost estimates (iv) TMAs ability to meet its portion o f investment costs and TMA's commitment to ensure operations & maintenance o fthe investment (v) Identificationo f a reasonable set o fperformance indicators (vi) A service improvementplanwhich articulates the following: 0 Purpose o fthe project including citizen benefits Detailed description o fthe project 0 Key performance indicators for tracking progress Available baseline data for eachperformance indicator Targets for eachperformance indicators -time phased 0 Who needs to do what by when and associated costs Selection of TMAs: 5. Seven pilot TMAs were selected at the beginningo fproject preparation, inorder to better understand the capacity and infrastructure needs o f the TMAs in the Punjab. The pilot TMAs were selected using a balance o f representative sample in the province as well as those TMAs known to be better performers in the province. The pilot TMAs were: Chakwal, Chiniot, Fateh Jang, PindDadan Khan, Gujranwala, Saddar, Lodhran, Dunyapur. 6. Additional Year 1TMAs were selected usingtwo 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 first ratio is an indicator o f the TMAs capacity to generage its 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 implement50% o fits 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 list of prioritized projects through a comprehensive planningprocess. New TMAs will be added according to their performance on the two selection criteria applied to Year 1TMAs. Typical Grant Processing Cycle: 8. The grant processing cycle will follow the TMA's annual planning and budgeting cycle. Applications for grants should be included inthe TMA's annual budgetplan inApril, and grants will be available to disburse inJune. Step 1: TMAEligibility: TMAs 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 of ratio 1and 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 Mailsi 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 58% 52% Pilot Chiniot 43% 56% Pilot Dunyapur 31% 54% Pilot Fatehjang 67% 42% Pilot Lodhran 33% 78% Pilot PindDadanKhan 32% 36% Pilot Note: Pilot TMAs were selected based on their early cooperation and participation inthe 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 will be done through a field appraisal report: For Capacity Grant: The application for the capacity grant will 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 will 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 inthe project andto beginthe preparationactivities for the project. l1Gujaranwala, a pilot TMA, was excluded from the project because it was later converted to a City District. It will likely be includedinthe BigCitiesDPL. Saddar was also excluded as it was mergedwith the City District ofFaisalabad. 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 TMAs can submit the matching grant application intheir annual budgetto the province. Step 5: Annual Monitoring and Supervision Process: PMDFC will conduct an annual assessment of the performance indicators set by the TMA. Satisfactory performance against the target indicators for development grants will determine the TMA's continued eligibility to participate in the project, thereby access additional grants. PMDFC will inputthe results o fthe annual assessmentinthe overallprovincialmonitoring database. 9. PMDFC and the T M A will develop an appropriate supervision schedule during the construction and implementation ofthe development project. 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 readyto finance at the beginningo fthe following budgetyear. 11. The table below gives the list o f development projects being prepared at the time o f appraisal: 50 L i s t of sub-projects being prepared at time of appraisal TMA Sub-project Estimated Cost (PKRs Million) FieldAppraisal Reports and first draft of feasability studies issued by Appraisal, sub-projects tendered out by Negotiations Jhelum Improvementandextensionofwater 90.1 supply Constructiono f stormwater drains 34.8 Bhalwa1 Rehabilitationofwater supply scheme 68.2 PindDadanKhan Improvementof urbanwater supply 56.1 Wideningandimprovemento furban 30.6 roads TobaTek Sin& Extensionandimprovementofwater 62.5 supply Kasur Extensionandimprovementofwater 140.5 supply Sub-total 482.7 FieldAppraisal Reports issued by Appraisal, sub-projects beingdesignedfor tenderinginYear 1 Shorkot Wideningandimprovementof urban 55.0 roads, includingstreet lighting Developmentofpublicparks 24.0 Bhalwal Improvementofseweragesystem 53.0 Sub-total 212.0 Sub-total of sub-projects with FAR completed by Bank appraisal 694.7 Sub-projects at FieldAppraisal Stage Chakwal Improvementofwater supplyscheme 150.0 Mailsi Improvementofwater supply scheme 80.0 Improvementof solidwastemanagement 30.0 system Improvementof fire fighting system 30.0 Liaqatpur Improvementofwater supply scheme 100.0 Developmentofpublicparks 30.0 Chiniot Improvemento f solidwastemanagement 30.0 system Sub-total 450.0 Total 1144.7 51 Component Two: Support for Other Institutions - Capacity Building and Other Activities 12. This component would assist the Government o f Punjab in a variety o f ways. It will (i) support the capacity building o f the Local Government and Rural Development Department (LG&RDD) as the parent department of 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 all matters relating to the urbansector; and (iii) the PMDFC inadding to its capacity through consultant services. support Sub-component (a): Local Governmentand RuralDevelopmentDepartment 13. PMSIP will support LG&RDD inthe 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 its current organizational structure for carrying out its 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 internalprocedures. b) IdentifL critical skills shortages andprovide 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 hlfilled, PMSIF' could assist in supporting some key staff induction in LG&RDD over the Project period, which can later be absorbed permanentlybythe 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 all 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 on the coverage o f each municipal service would be selected, and TMAs required to report annually to LG&RDD. This would have.several advantages. It 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) informed make investment decisions. It 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 TMAs and therefore their performance; and (iii) monitor the outcomes o f investments hndedthrough special development funds. 52 The project will assist inthe development o f necessary software for the M&E system for the LG&RDD, as well as the PMDFC. Over time it i s envisioned that the TMAs would also have the capacity to operate computer-based M&E systems, which the project will assist in establishing, and in linking them to to the system maintained by PMDFC as well as the GoPunjab. The project will also support capacity buildingand training o f staff inoperating these M&E systems at all the three levels. Sub-component(b): Planning& DevelopmentDepartment 14. GoPunjab has been acutely aware o f the need to establish an effective mechanism that would assume a leadership and coordinating role on all issues related to the urban sector. Since the P&D Department is the only agency with authority over all other provincial departments and agencies, GoPunjab has established the Urban Unit (UU).The mandate o fthis newly created unit i s to provide Technical capacity on all matters relating to the urban sector. Its 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 rich economic potential that can contribute to growth and poverty reduction, if appropriately tapped for cultural tourism. However, implementingany initiatives in this realm will require substantial preparatory work on issues o f institutional realignment and regulatory frameworks. GoPunjab i s keen that UUtakes the lead in commencing on such work immediately. It i s also keen that a pilot project in the Walled City o f Lahore (WCL) i s implemented to showcase methods and benefits o f conservation of 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 pilot for this purpose. It i s the route that the Mughal emperors followed to reach the royal palace, when returning from Delhi to Lahore. They entered the WCL 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 pilot 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 pilot 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 City o f Lahore (WCL), including social, cultural, economic, and conservatiodrestoration o f the monuments and the built fabric. Inorder to do so, it 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. While 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 like 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 fmunicipal services inthe 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 is generic, unsuitable for maintaining and developing world class heritage assets such as exist in the W C L as well as all over the province. Thus the project will support uu. necessary TA to rationalize the institutional mandates through a lead agency like the 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 of 1975, and the Evacuee Trust Property Management and Disposal Act 1975. A more recent addition is 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 Pilot Project in the Walled City of Lahore. While Cultural Heritage initiatives require tackling issues on multiple fronts, implementation o f a pilot 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 pilot for this purpose. The pilot 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. The project will 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 pilot area. While it would require concerted information, education, and communication campaign to begin with, demonstration effects o f its positive outcomes are expected to be far reaching. And these inturn are likely to facilitate greater stakeholder buy-in for future initiatives. This sub-component will fundimplementationo f the pilot. Sub-component (c): PunjabMunicipalDevelopmentFundCompany 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 it i s still 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 skills required in assisting LGs. PMSIP will 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 will 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 inthe PLGO. However, based on a review o f other donor supported training materials on performance management, it seems that practical training on implementation is not available. This sub-component will 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 will assist with the design and selection o f performance indicators to be used by the TMAs, and monitoredbythem as well as PMDFC andthe GoPunjab. 55 b) Design of Capacity Grants. Customized capacity improvement programs will 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 will need to be customized due to the wide variance inthe existing capacity of TMAs. This sub-component will finance TA for this purpose. c) Appraisal and Monitoring of Capacity Grants. As the number of Capacity Grants increases, PMDFC will 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 will require assistance in their appraisal and inmonitoring their implementation progress and quality. This i s also envisioned to be undertaken through contracting-in consultants, and monitoring on aperiodic 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 performancetargets that have been agreed to. 56 Annex 5: Project Costs PAKISTAN: PunjabMunicipal Services ImprovementProject All costs are expressedinUSDmillions'* Component Cost13 YOTotal Bank YOBank GoPunjab Cost Share or TMA Share 1 Grants to TMAs 1.a Capacity Grants 3.2 5.4% 3.2 100% 0% 1.b DevelopmentGrants Year I schemes tendered out before Board Approval Jhelumwater supply 1.5 3.4% 1.3 85% 15% Jhelumdrainage 0.6 0.9% 0.5 85% 15% Bhalwalwater supply 1.1 2.3% 1.o 85% 15% PDKhanwater supply 0.9 2.0% 0.8 85% 15% PDKhanroads 0.5 1.O% 0.4 85% 15% TT Singhwater supply 1.o 2.6% 0.9 85% 15% Kasur water supply 2.3 4.0% 2.0 85% 15% Year I schemes with Field Appraisal Report available at time of Bank Appraisal Shorkotroads 0.9 1.5% 0.8 85% 15% Shorkotparks 0.4 0.7% 0.3 85% 15% Fatehjangwater 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 Sub-totalcomponent 1.b 45.5 77.1% 38.7 85% 15% 2 Support to Provincial Governmentand PMDFC 2.a LG&RDD & PMDFC(M&E) 1.o 1.7% 1.o 100% 0% 2.b P&DD / Culturalheritage 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 Front-endfee (0.25%) 0.1 0.1 100% 0% Total Project Costs 59.0 100% 50.0 85% 15% l2For the purposeof this table the conversion rate usedwas 1 USD= 60 Pak Rs. (consistent with the PC-1 submission). Figures maynot addupdue to rounding. l3Includes contingencies l4 Forthesetwo sub-projects, feasibility studies and designswere also availableat time o fappraisal 57 Annex 6: ImplementationArrangements PAKISTAN: PunjabMunicipalServices ImprovementProject 1. LG&RDD oversees the functioning o f all local governments in the Province of Punjab. Its responsibilities include among others: 0 Punjab Local Government Commission, 0 Development Funds and Development Schemes o f LGs pertaining to local funds - additionally they monitor all donor, federal, andprovincial-funded programs, 0 Framing/approval o frules and regulations under the PLGO 2001, 0 Humanresource management andappointment ofTehsil andDistrict Officers. 2. P&DD is the principal planning organization at the Provincial level. It 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. It i s to act as a catalyst between different Departments in order to improve the pace and quality o f economic development inthe Province. Its main objectives are : 0 Assessment o f the material and human resources o f the province; formulation o f long and short term plans. 0 Recommendations concerning prevailing economic conditions, issues, policies or measures. 0 Coordination o f all economic activities inthe Provincial Government. 3. PMDFC will be monitored through its Board, which includes members o f P&DD and i s chaired by the Secretary, LG&RDD. SpecificProjectImplementationResponsibilities Components Implementation Procurement Reporting 1 TMA a. Capacity grants TMAPMDFC PMDFC TMAPMDFC b.Development grants TMAPMDFC TMAPMDFC TMAPMDFC 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 capacitybuilding PMDFC PMDFC PMDFC 58 Annex 7: FinancialManagementand DisbursementArrangements PAKISTAN: PunjabMunicipalServices ImprovementProject FinancialManagementAppraisalof PMDFC Risk analysis 1. Inherent risk. The general environment in the country i s that often policies and procedures are not followed. Hence, it would be critical to assure that these are followed in letter and spirit. This canbe 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 financedproject. The FMAssessment Questionnaire andRisk Rating Summary are inthe project file. 0 Accounting Low Computerized accounting system NA already inplace 0 Internalcontrol Moderate Including a chapter on internal NA controls inthe FinancialManual 0 Fundsflow Low NA 0 Financial Moderate Including financial reporting NA reporting formats for'TMAs inthe M&E system 59 Risk Risk RiskMitigating Measures Condition of Rating Incorporated in Project Design Negotiation 0 Auditing Moderate Including audit o f TMAs in NA TORSo fPMDFC's audit Detection Risk Low Adequate financial controls and NA supervision by Bank staff Strengths and weaknesses 4. Strengths. Existence of: 0 Professionally qualified financial management staff inPMDFC 0 Financial Manual for the project 0 Computerized accounting system 0 Well documenjedOrdinance for TMAs that adequately covers financial management aspects 0 Pre-audit o f all T M A payments by the Local FundAuditors 5. Weaknesses. 0 N o external audit arrangements for TMAs 0 Weak recovery o f advances and dues by TMAs Significant Action Responsible Person Completion Date Weakness N o external audit Including TMAs' Managing Director Before arrangements for audit as part o f commencement o f TMAs PMDFC's audit PMDFC's audit Weak recovery o f Effective TMAs Ongoingbasis advances monitoring bythe management Staffing 6. PMDFC. The Finance & Administration Department is headed by a General Manager supported by two Managers, two DeputyManagers, 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 ACMA. The vacant positions o f Manager, Finance, and DeputyManager, 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 will have to be revised to cater to the revisedorganogram. 7. TMAs.InTMAs Finance & Accounts department i s headedby a Tehsil Officer (Finance) looking after Revenue and Accounts sections. Generally, the Accounts section i s headed by a Superintendentwith the following support staff: 0 Accountants (2) 60 0 Assistants (2) 0 Accounts Clerks (3-4) Budgeting 8. The Financial Manual (FM) states the process for preparationo 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 inthe computerized accounting system for automatic control over expenditure. PMDFCaccounting 9. PMDFC is 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 is adequate to track project sources and application o f finds. Financial reports can be generated from the system usingExcel. 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 flow arrangements, internal audit and external audit. Bank staff reviewed and provided comments on 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 Multilevel security system 0 Multiuser system 0 Budgetcontrol feature 0 Expandable chart o f accounts -interimfinancial reports can beprepared from the system 0 Multicurrency 0 Facility for online processing o fpayments 0 Audit trail available for transaction processing 0 Onlinehelp 0 O f f site back-up wouldbe kept o fthe accounting data. TMA accounting 12. The following ordinance, rules and guidelines apply to the local governments. These adequately cover financial management aspects for the activities o f local governments: 0 Punjab Local Government Ordinance & Rules2001 (PLGO) 0 Punjab Local Government BudgetRules 2003 61 0 Punjab Local Government Accounts Rules2001 0 Local Government Accounts Manual issued by the Controller General of Accounts 0 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 is also responsible for submittingmonthly 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 andpost audit o fTMAs is conducted bythe local fund auditors. 14. The Punjab Local Government Budget and Accounts Rules lay down the procedures for preparation, execution o fbudget andbook keepingand 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 fthe other. 15. The Controller General o f Accounts has issued the Local Government Accounts Manual that prescribes indetail the accounting systemto 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 will have to be added to fully cover TMA activities should this chart o f accounts be usedby 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 TMAs would be maintained as prescribed inthe 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 inthe PLGO. 16. The accounting books o f two Year 1TMAs were reviewed. They are well maintained and bank accounts are reconciled, though a single bank book i s maintained for all the bank accounts. The Classified Abstract (Budget Control Register) i s also written up to date. The Chart o f Accounts i s adequateto report project activities to beundertakenby the TMA. It was agreed that a separate bankbook would bemaintained for funds received inrespect 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 is 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 on 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 of receipts and payments in to the Local Fund and the Tehsil Provincial Account. The guidelines also require 62 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 eachmonth. 19. There would be one Designated Account that would be operated by PMDFC to finance the Bank's share inproject activities. The Designated Account would bejointly 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 inturnprovide matching grants to TMAs through PMDFC. 20. All the above policies, procedures and guidelines assure effective control over receipts and expenditure iffollowed inletter and spirit. 21. PMDFC is committed to ensuring that financial management support and capacity building is provided to TMAs in a manner that is supportive of, and aligned with the government's work on the objectives o fPIFRA. Internalcontrolandinternalauditing 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 intendedpurposes, it 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 hctionally report to the Board o f Directors. H e will conduct internal audit on a quarterly basis to ensure that PMDFC's policies and procedures are beingfollowed. He will submit hisreport to the Board o f Directors. Key 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 from 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 is mandated to appoint/designate an Internal Auditor who is head o f the Quality Services and Standards Office to conduct internal audit and help the TMA accomplish its major policy 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 intimationto the Tehsil Council. FinancialReporting 25. TMAs would submit monthly expenditure statements (using cash basis o f accounting and submittinga statement o f liabilities) inrespect of the project to PMDFC who would consolidate these for review o f the management and for preparation o f interim financial reports. Detailed 63 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. Interimfinancial reports would include sources and application o f funds by disbursement category andby component - formats attached. PMDFC's computerized accounting system would be used for financial reporting. Auditing 26. It is understoodthat there are no external audit arrangements for TMAs, therefore, it 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. It 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 inthe 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 will provide an assertion that funds have beenused for intendedpurposes. 27. PMDFC's audited financial statements will have to beprovided to the Bankby 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 fthe financial years. Supervisionplan 28. Since the implementing agencies do not have prior experience o f implementing a Bank financed project, the project will have to be supervised closely for the first couple o f years. This would also help them train inreport 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 is that often policies and procedures are not followed. Hence, it would be critical to assure that these are followed inletter 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. 64 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 no prior experience o f implementing a Bank financed project. FM Assessment Questionnaire i s inproject file. rules as laid down by the Isupervision by Bank staff Strengthsandweaknesses 32. Strengths - existence of 0 Well documented financial rules 33. Weaknesses: 0 No internal audit arrangements 0 Lack o fprofessional staff inthe accounts department 65 Significant Action ResponsiblePerson CompletionDate Weakness N o internal audit Strengthening Project Director Onan on going arrangements internal checks basis Lack o fprofessional Induction o f Project Director By EndFebruary'06 staff inthe Budget adequately & Accounts Section qualifiedexperienced financial management staffin uu Staffing 34. The Urban Unit (W)that will implement the Cultural Heritage component is not yet fully staffed. Therefore, the Budget & Accounts Section o f the Planning & Development Departmentwould take care ofthe financial management aspects ofthe 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 Under Secretary (Budget & Accounts) 0 Section Officer (General) 0 DeputySuperintendent Cashier None o f them hold qualifications in accounting; however, they are well versed in the I Government's accounting procedures. A retired Grade 17 officer o f the Government who i s a Commerce graduate has been interviewedfor UU.He has 27 years experience inaccounting. Budgeting 35. The Budgeting and Accounting Section coordinates and reviews budget o f attached departments, autonomous bodies and P&DD. Budgetarycontrol is 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 New Accounting Model (NAM) developed under PIFRA. The Chart o f Accounts is flexible enough to report project expenditure. The following books o f account are maintained byP&DD: 0 Cashbook 0 BudgetControlregister 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. Separatebank book and expenditureregister would bemaintained for the project. 66 Internal controland internalauditing 38. Although there is no internal audit department, adequate controls exist for sanction and payment o f expenditure. FinancialReporting 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 of each quarter would be reflected inthe 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 is 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 will provide an assertion that funds have been used for intendedpurposes. 41. P&DD's accounts have been audited up to FY05, however, the audit report for FY05 has not yet beenissued. Previous audits have noted procedural deviations which are being addressed bythe Department. Supervisionplan 42. Since P&DD does not have prior experience o f implementing a Bank financed project, the project will have to be supervised closely in the initial period. This would also help them train in report based disbursements. Thereafter, the Bank's normal supervision procedures may be followed. C. FUNDSFLOW AND DISBURSEMENT ARRANGEMENTS FundsFlow Mechanismfor 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 of all Bank funds. The funding mechanismi s expectedto work as described below: 67 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 requirementso f the TMAs, and o f LG&RDD o f Government o f Punjab, provided these advances are accounted for within 90 days o fthe 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 inthe respective cities where they are located; The expenditures from the D/A shall be for eligible expendituresonly; Statement o f Expenditures shall be designed for the project at the negotiation stage and included in the disbursement letter, which will provide, at a minimum, the summary/total o f category wise expenditures collected from various TMAs and LG&RDD, as well as from records of expenditures made byPMDFC; Standard summary sheets shall also be designed for the project and included in the disbursement letter together with supporting documentation for all expenditures above the procurement prior review threshold; A reconciliation statement for the D/A inthe 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 will 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 fexpenditures bycategory inSOE/summary sheet format; PMDFC will follow 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 untilproper accounting has been received form them; Any amount withdrawn from the D/A andnot accounted for within six monthswill be rehndedto 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, it would further advance funds to the respective TMAs and LG&RDD, on a regular basis, to meet their future requirements. 68 FundsFlow Mechanismfor 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 its following attached departments/autonomous bodies and the Finance Department, Government o f Punjab, Lahore. H e deals with all 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 of 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) Punjab InformaticsTechnology 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 will subsequently take over the project work. Currently, the UUi s headed by a Project Director. Recruitment o f other staff for UUi 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 all 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 andmaintenance o f the D/A, issued bythe 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 receivedbyPⅅ The expenditures from the D/A shall be for eligible expenditures only; The UUhas also obtained approval for opening o f an assignment account for meeting the Government's share o f financing; Statement o fExpendituresshall be tailored for the project at the negotiation stage and included in the disbursement letter, which will provide, at a minimum, the summary/total o f category wise expenditures from records of the Pⅅ The disbursement letter shall also include standard summary sheets designed for the project , requirement for supporting documentation for all expenditures above procurement prior review threshold, and a reconciliation statement o f D/A instandard format showing inter alia deposits received from the Bank andpayments made during reportingperiod; On the basis of statement o f D/A received from the National Bank o f Pakistan, the P&DDshall seek reimbursement from the Bankon aregular quarterlybasis; and All SOEs supporting documentation shall be retained by P&DD and made available for Bank review missions. 69 Disbursement 47. B o t h PMDFC and P&DD have adequate financial management capacity for report-based disbursements. 48. The allocation of Loan proceeds by disbursement category and allocation will b e made as indicated inTable 1below: Table 1: Allocation of Loan Proceeds Category Amount of the Loan Percentageof Expendituresto Allocated befinanced (expressedinUSD) (1) Goods, works and 48,875,000 consultants' services (a) for TMA Capacity 100% grants and for Capacity Buildingfor LG&RDD, P&D andPMDFC (b) for TMA Development 85% grants (2) Incremental Operating and 1,000,000 100% Administrative costs" (3) Front-endFee 125,000 Amount payable pursuant to the Loan Agreement (4) Premia for 0 Amount payable pursuant to the Interest Rate Caps Loan Agreement and Interest Rate Collars 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 inthe media for bidsand other purposes o f the project. 70 Annex 8: Procurement PAKISTAN: PunjabMunicipalServices ImprovementProject A. General 1. Procurement for Punjab Municipal Services Improvement Project (PMSIP) will be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure category is 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 will 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 of Punjab Municipal Development Fund Company (PMDFC) as well as Tehsil Municipal Authority (TMAs). PMDFC has the overall project planning and monitoring responsibility. TMAs interested inparticipating inthe 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 firms. The Project is dividedinto 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 pilot scheme for heritage restoration will be defined. Procurementof Works 2. Works procured under this project, would include civil works to be undertaken by TMAs for water supply, storm water drains, sewerage, roads, setting up o f fire fighting system, and solid waste management. Estimated costs will range between U.S$ 0.08 million and U.S$ 2.5 million (Rs. 5 million and Rs. 150 million) with an average outlay o f around US$ 1.2 to 1.4 million (Rs 72 million 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 of the Works contract. PMDFC will give the TMAs very close support through designlsupervision consultants in evaluation, and PMDFC will itself supervise the entire procurement process, and review and approve all bid evaluation reports. The TMAswill contribute 15% o fthe cost o f each sub-project under a FinancingAgreement 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 US $ 5 million) for the 71 cultural heritage pilot may be identified in the second year of the project. P&DD will carry out these procurementsthrough its UrbanUnit (UU). Procurementof 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 will be done by PMDFC. 4. Given the nature o f the Project, goods and commodities estimated to cost less than US$ 50,000 per package will beprocuredthrough Shoppingprocedures. Goods costing less thanU S $ 300,000 will be procured through National Competitive Bidding (NCB) procedures. Goods costing more than U S $ 300,000 will be procured through ICB procedures. The procurement will be done using Bank's SBD for International Competitive Bidding and bidding documents for national competitive biddingagreedwith (or satisfactory to) the Bank. Improvementof BiddingProceduresunderNationalCompetitiveBidding 5. The following improvements in bidding procedures will apply to all procurement of Goods and Works under National Competitive Bidding, in order to ensure economy, efficiency, transparency andbroad consistency with the provisions o f Section 1o fthe Guidelines: i. Invitationtopre-qualifyorbidshallbeadvertisedinatleastonenewspaperwith nation- wide circulation, at least 30 days prior to the deadline for the submission o f .. the bid. 11. Biddocuments shall be made available, by mail or inperson, to all who are willing ... to pay the required fee; 111. Foreign bidders shall not be precluded from bidding and no preference o f any kind shall be given to national bidders inthe biddingprocess; iv. Biddingshallnot berestrictedto pre-registered firms; V. Qualification criteria shall be stated inthe bidding documents; vi. Single bids shall be considered for purposes o fbidevaluation; vii. Bids shall be opened in public, immediately after the deadline for submission of ... bids; v111. Bids shall not be rejected merely on the basis o f a comparison with an official estimate without the prior concurrence o fthe Bank; ix. Before rejecting all bids and soliciting new bids, the Bank's prior concurrence shall be obtained; X. Bids shall be solicited and contracts shall be awarded on the basis of unit prices and not on the basis of percentage rate quotations above or below an official estimate; xi. Cost estimates shall be prepared on the basis o fmarket rates. xii. x111. Contracts shallbe awarded to the lowest evaluated and qualified bidder; and ... Contracts shall not be awarded on basis o fnationality negotiated rates; xiv. Post-bid negotiations shall not be allowed with the lowest evaluated or any other bidders. 72 Selectionof 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 of TMAs, and urban planning services for various groups o f TMAs. Services of firms will be procured through Quality and Cost Based Selection (Section I1o f the Consultants Guidelines), or through the selection methodsgiven in Section I11to the Consultants' Guidelines(paragraphs 3.1 to 3.13). PMDFC has already appointed a design & supervision firm for the schemes identified for the first year of the project, usingtheir own funds. Underthe P&DD component (Component 2), consultancy services for institutional studies, and legal & regulatory arrangements will be taken up in the first 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 throughW.Short lists 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 ofparagraph 2.7 o fthe Consultant Guidelines. 7. Services for Individual Consultants maybe requiredfor institutional development, O&M, training, social mobilization etc., and shall be procured following the stipulations of Section V o f the Guidelines. Selectionof ParticularTypes of Consultants 8. Services of 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 it i s required for any specific assignment to engage universities, government research institutions, or any special organizations, such selection will 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 fthe Consultants Guidelines). B. Assessment of the agency's capacityto implementprocurement 9. Procurement activities will be carried out by PMDFC (services and goods) and TMAs (works). The procurement section o f PMDFC i s staffedby General Manager, Procurement, and a Procurement Consultant. TO (I&S) at the TMA i s inall instance an engineer and responsible for procurement o f works. An overview o f the organization of TMAs i s given in Annex 1, and organization of PMDFC i s givenbelow and inAnnex 4. For the P&DD component, UUresiding within P&DD of GoPunjab will bethe procuringagency. 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 TMAs (Chakwal and Chiniot) in April 2005. The assessment reviewed the organizational structure o f PMDFC and its procurement capacity, and the structure o f TMAs regardingprocurement procedures. 73 11. Most o f the issueshsks concerning the procurement component for implementation o f the project have been identified. These risks along with the mitigation measures are: i. Procurementcapacity a. PMDFC's Capacity PMDFC is an autonomous body governed by a Board o f Directors. The executive head o f PMDFC is 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 will be reviewed after the first quarter and if required, more staff will be added to the procurement section. PMDFC,has to play the pivotal role in the project implementation, as besides its own procurements, it 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 TMAs and PMDFC staff on March 16. A workshop for procurement o f goods and consultancy services will be held for the benefit o fthe PMDFC staff within the first quarter. b. TMA's Capacity Generally the TO (I&S) is 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 first year contracts is Rs. 35 million, rangingup to Rs. 122 million. Bidding Documents have been prepared by PMDFC through their consultants. As mentioned inParagraph 2 above, PMDFC will give the TMAs very close support through desigdsupervision consultants in evaluation, and PMDFC will itself supervise the entire procurement process, and review and approve all bid evaluation reports. PMDFC will hold at least two workshops for training partner TMAs in the first year (with assistance from the Bank), and subsequent workshops for the TMAs joining the project in later years. The Bank held the first such workshop on March 16, 2006 for Jhelum, Bhalwal, T.T. Singh, Kusur and P. D.Khan. c. U U ' s Capacity UUis staffed by only a Project Director. The rest of the staff is yet to be hired. P&DD intends to hire a procurement staff from the market for UU by June/July 2006. The procurement o f consultancy services is 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, will 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 on 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) will be held for contracting firms, enabling them to understand the requirements o f filling inthe bidding documents. PMDFC and TMAs will jointly hold these sessions. The first such session was heldon March 22 with the pre-bid meeting. ... 111. Delays inProcurements The Operational Manual also contains the procurement annex for the project, which defines the internal working procedures for TMAs and PMDFC. These procedures include service standards at every stage o f procurement implementation. Procurement planincorporates 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 inworks i s a challenge for TMAs. Lack of capacity is the major reason for this shortcoming. As a safeguard to ensure quality o f construction, the design and supervisiod consultancy firm will provide resident supervision at all sites. The Project Manager o f the contracts will be a representative o f the firm. Services o f supervision consultancy firm(s) will beprocuredbyPMDFC. v. Transparency In order to ensure transparency in the project implementation, disclosure is made mandatory. PMDFC has developed and will maintain a website on which all procurement-related information will be displayed. This information will include procurement plan, notices o f invitation, summary o f bid evaluation and awards. Information regarding complaints and the action taken will also beposted on the website. TMAs will be required to report all complaints to MDPMDFC, who will take action on them and inform the Bank accordingly. PMDFC will 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 implementationto ascertaidreassess the risk. 13. An actionplanfor the above measuresis tabulated below: 75 ssue Action rime Frame iesponsibility tatus :apacity Appointment o f Before negotiation 'MDFC ;M Proc. nhancement Procurement Manager ippointed inPMDFC Before )&DD Appointment o f ;ommencement o f procurement staff procurement for with UU Component 2 Procurement trainings for: World Bank 3rst session dol 0 PMDFC As soon as Manager vlarch 16,2006 Proc. i s appointed Before bids are PMDFC/WB %st session do: 0 TMAs received vlarch 16,2006 As early as possible at PMDFC/TMA! 'irst session do 0 Contractors east 15 days before VIarch 22,2006 the first bidopening belay in Finalization o fthe Before negotiations PMDFC lone Procurement Procurement Manual Quality Arrangementsfor Assurance resident supervision through Consultants for 0 the first year Ongoing PMDFC schemes 0 subsequent Indicatedin PMDFC schemes Procurement Plan Transparency Press & web Immediately PMDFC Done & publication for the Dissemination contractors extending invitation for the workshop Done Settingup o fa Immediately PMDFC PMDFC Procurement Database Duringthe PMDFC Setting up o f TMAs implementation o f procurement Database various schemes in TMAs 76 C. ProcurementPlan 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 on the PMDFC website as well as the Project's database and in the Bank's external website. The Procurement Plan will 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 Procurementby the Bank 15. Prior Review: 1. all contracts for goods procured on the basis o f International Competitive Bidding; ii. thefirstcontractforgoodsprocuredonthebasisofNationalCompetitiveBidding and Shoppingregardless o f its value; iii. thefirstthree contractsforWorksprocuredbyTMAs,andthefirstcontractfor Works procured by P&DD, all on the basis o f National Competitive Bidding regardless o ftheir value; iv. the first contract each procured by PPMDFC and P&DD for consultants' services provided by a firm regardless o f its value; v. each contract procured by PMDFC and P&DD for consultants' services provided bya firm estimated to cost US$200,000 equivalent or more; vi. the first contract for consultants services provided by an individual regardless o f value; and vii. each contract for consultants' services provided by an individual estimated to cost U S $ 100,000 equivalent or more. 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 on a regular basis to verify that the activities financed under the project are procured in accordance with agreed procedures and are used for the intendedpurposes. ProcurementInformationanddocumentation 17. Procurement information will be recorded and reported as follows: i.Completeprocurement documentation for eachcontract, includingbiddingdocuments, advertisements, bidsreceived, bid evaluations, letters o f acceptance, contract agreements, securities, related correspondence etc., will be maintained by the implementing agencies inanorderly mannerso as to readily available for audit. ii.Contractawardinformationwillbepromptlyrecordedandcontractrosters,intheagreed format, maintainedby each TMA, andPMDFC. iii.ComprehensivequarterlyreportsbyPMDFC,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 c. updated procurement plans, including revised dates, where applicable, for the procurement actions. D. Frequencyof ProcurementSupervision 18. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the ImplementingAgency has recommended six monthly supervision missions to visit the field to carry out post review o fprocurement actions. E. Detailsof ProcurementsRequiringInternationalCompetition 19. No ICB Works contracts are expected. Estimated costs o f all the consultancy services, planned for the first 18 months, fall within the U S $ 500,000 threshold, hence the shortlist can comprise o f only local firms. Some Goods may be procured through ICB after the first year o f the project. Information regarding Consultancy Service will be updated (by the end o f February 2006). 78 Annex 9: Economic and FinancialAnalysis PAKISTAN: PunjabMunicipalServices ImprovementProject A. FINANCIAL ANALYSIS 1. The financial analysis below indicate that TMAs are able to sustain their individual contributions to investmentcosts and the associated O&M costs. 1 Jhelum _ _ 1 Extension& ImprovementofWater S 90.11 1 _" i _. - iConstruction o f Storm Water Drainsu-- "_. """_ - . ~ ~ ".-I.I. 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 still maintain a reasonable surplus. This affordability depends heavily on the following improvements in net water revenues: 0 Increase domestic water tariffs from the existing Rs. 35 per month to Rs. 110per month and commercial water tariff from Rs. 200 per month to Rs. 400 per month, from FY 07- 79 08 when the new infrastructure becomes operational. 0 Improve collection efficiency from the existing about 58% to 90% within five years o f making the new infrastructure operational. 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 will 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. While, inJhelum's case, the T M A i s relatively well off and could cross-subsidize water supply to some extent, efforts will need too be made to ensure that the water tariff 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 likely 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 solutionwould needto be found. 80 Table 2: Improvement and Extensionof Water Supply Scheme, Jhelum PROJECTEDNET WATER REVENUES Item 2005 2006 2007 2008 2009 2010 201s 2020 2025 Population JhelumCity 110,528 112,728 114,971 117,259 119,592 121,972 134,601 148,538 163,917 KalaGujran 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 TotalHouseholds JhelumCity 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 ServedPopulation(Percent)) 53% 53% 53% 65% 75% 85% 95% 95% 95% JhelumCity 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 TotalServed Households 11,087 11,308 11,533 14,334 16,868 19,498 24,048 26,538 29,286 TotalConnections JhelumCityiKalaGuiran Domestic 11,087 11,308 11,533 14,334 16,868 19,498 24,048 26,538 29,286 Commercial 55 55 58 62 66 70 90 110 130 Additional New Connections Domestic 221 225 2,801 2,534 2,630 469 518 571 Commercial 3 4 4 4 4 4 4 Average Water Tariff (RsJMonth) Domestic 35 35 140 140 140 147 154 170 188 Commercial 200 200 500 500 500 525 551 608 670 New ConnectionFee (RsJConn.) Domestic 1,000 1,000 1,500 1,575 1,654 1,736 2,216 2,828 3,610 Commercial 3,000 3,000 5,000 5,250 5,513 5,788 7,387 9,428 12,033 TotalWater Charges (Rs.Million) Domestic 5 5 19 24 28 34 45 54 66 Commercial 0 0 0 0 0 0 1 1 1 Total 5 5 20 24 29 35 45 55 67 New ConnectionFee (Rs.Million) Domestic 0 0 0 4 4 5 1 1 2 Commercial 0 0 0 0 0 0 0 0 0 Total 0 0 0 4 4 5 1 2 2 TotalWater 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 ReceiptsUnder WIO Project. 3 3 3 3 3 3 3 3 3 TotalReceiptsUnder 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 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 inthe grant for replacement o f octroi, despite the 2006 National Finance Award's inclusion of the 2.5% of General Sales Tax inthe 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 9,678,317 10,584.932 10,230,405 6,766,317 9,049,907 9,321.404 9.601,046 9.889.077 10,185,750 UIPT 10,196,849 10,871,600 11,197,954 11,533,693 11,679,909 12,236,307 12,603.396 12,961,498 13,370.943 Other Tax 1,184.340 1,091,000 1,181.WO 1,218,430 1,252,923 1.290.511 1,329,226 1.369.103 1,410,176 21.039.506 22,547,732 22,609,359 21,536,640 22,182,739 22,848,221 23,533,668 24,239,678 24,966,868 Fee Parking Fee 10,526,765 10,467,453 12,547,504 2,829,827 2,914,722 3,002,184 3,082,229 3,184,995 3,280,545 Building Fee 2,619,113 3,300,000 3,300,000 2,719,200 2,800,776 2,884,799 2,971,343 3,060,484 3,152,296 Cattie mandi fee 1,007,298 877,O00 880.000 615,760 840,233 865,440 691.403 918,145 945.689 Other Fees 1,113,791 1,261,500 1,320,500 1,224,104 1,260,827 1,296,651 1.337.611 1,377.739 1,419,071 15,466,967 15,925,953 18.048,W4 7,588391 7,816,557 8,051,054 8,292,586 8,541,363 8,797,604 Rents 8 Rates Water & Sewerage Rates 2,221,290 2,601.714 2,776,469 2,146,367 2.210.758 2,277,081 2,345,394 2,415.755 2,488,226 Additional Revenues from new water scheme 11,I17,763 18,728,531 23,422,652 30,575,083 33,469,747 Municipal Rents 3,966,409 5,353,336 7,530,471 7,756,385 7,889,077 6,226,749 6,475,611 8,729,680 6,991,778 6,207,699 7,955,050 10,308,940 9,902,752 21,317,618 29,234,361 34.243.857 41,720,698 44,969,751 Other Income Tolls 1,018,750 Misc. Income 1,545,023 1,273,200 1,412,WO 1,090,770 1,123,493 1,157,198 1.191.914 1,227,671 1,284,601 2,563,773 1,273,200 1,472,000 1,090,770 1,123,493 1,157,198 7,191,914 1,227,671 1.264501 Non Development Grants Salary & non salary grant 6,760,000 8,304,000 9,167,000 5,759,626 5,932,415 6,110,387 5,293,699 6,462,510 6,676,965 Octroi Grant 13.229.000 15,204.000 15,204,000 13,200,000 13,200,000 13,200,000 13,200.000 13.200.000 13.2W.000 21,969,000 23,508,wO 24,371.m 18,050,626 19,132,415 19,310,387 (9,493,699 19,682,510 19,876,985 Total Recurrent Revenues 67#266,945 71,209,995 76,749,303 59,078,679 77,572,822 80,601.222 86.755.723 95,411,920 99,875,710 Non Development Expenditure Establishment 27,771,532 30,555,200 42,491,500 25,979,815 26,697,409 27,498,332 28,323,282 29,172,960 30,046,170 Charged Expenditure 1,354,687 2,260,000 2,800,000 2,884,000 2,970,520 3,059,636 3,151,425 3,245,967 3,343,346 Water supplyO&M cost 10,686,503 6,404,924 9,500.263 6,360,231 8,611,036 6,669,370 9,135,451 9,409,514 9,691,600 Additional O&M for newwater scheme 20,695,095 24,108,725 27,324,355 28,931.670 32,146,300 AdditionalO&M for new storm water drain 1.741,OM) 1,793,230 1,847,027 1,902,436 Street light 2,611,789 3,000,000 3:OOO.WO 1,500,000 1,545,000 1,591,350 1,639,091 1,666,263 1,738,911 Other contingenciesexpenditure 3,519,989 6,515,076 2,999,737 1,798,842 1,653,837 1,909,453 1,966,736 2,025,736 2,066,510 Total Recurrent Expenditure 45,946,500 50,755,200 60,791,500 40,463,889 62,572,900 68,778,864 73,333,569 76,321,760 80,957,475 Recurrent Surpius/(Deficit) 21,320.445 20,454,735 15,957.803 18,614,790 8,999,922 11,822,357 13,422,154 19,090,760 18,918,235 AS8"IllptiO"S: 1: Ailprojectionsarc made at ConstantRs. Real growib 3% is assumedfor all the TCVC~UCstream. 2 TMA Jchlumhas bccnsplit intohvo TMAs as TMA Jehlumand TMA Dma fromFY 05-06. As rcrult all revenueand cxpcndihue sueam has beenrcduccdfor TMA Jehlum for M05-06 basedon thc rations ofprevious years achiai for the hvo CO Units. 3: The invcghlientpmjcctconsistofRs.90.11 million for waterrupplyandF3 34.82 mjllion forstom water drain. TMAconmhdonof 15% for the projectcosthar not been includedin the financial analysis and it is assumedthat TMA willpay it from the developmentgrantsreeevivcd from the provincialgovemnxnt 4: The additionalrevcnucsand O&M cost for the water upp ply schemehasbccntakcnfromthe tcchnical designreportprcparcdbyNESPAK.(workrhcctmached) 5: AdditionalO&M for storm water drainhasbeenassumedas 5% of the invcrtmcntcost. 5. Detailed analyses along the same formats are available for all Year 1 development sub- projects inthe project file. B. ECONOMICANALYSIS InfrastructureDevelopmentComponent 6. Infrastructure developments in the TMAs are expected to represent 77% o f total project costs. They will be financed through grants and a 15% TMA contribution. An overall Economic Rate o f Return(ERR) of these infrastructure developments could not be calculated as the project i s demand-driven,and systematic data collection for the initial pipeline has not been carried out. First-year development sub-projects represent 24% of the total Bank financing towards development costs, and 18% o f total bank financing towards total project costs. 82 7. Under the grant procedure described in the operations manual, PMDFC conducts field appraisals o f all proposed sub-projects. Field appraisals include an assessment o f the lower-cost alternatives and o f operation and maintenance costs of 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 of the TMAs improves collection of requireddata. 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 fbenefits o fthe proposed sub-projects has beenattempted wherever possible. 9. Urban roads. The feasibility study o f Pind Dadan Khan roads sub-project included an economic analysis that quantifiedthe following benefits: Savings invehicle operating costs Savings intravel time Increases in local commercial property values (shops and businesses along the proposed road) resulting from improved road conditions (reduction o f dust, drainage, etc.). 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 file. The calculated ERR i s 17%. 11. Water Supply. Quantitative estimates o fproject 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 line 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 highlysensitive to assumedvalues o f some o f the parameters and would only deliver a fragile economic justification. The detailed calculations are available inthe project file. 13. For hture sub-project appraisal, various approaches were considered for water supply projects and these, including their constraints, are outlined below: a) Benefits from avoided time spent on collecting water. 14. Ifone were to approach the quantification ofbenefitsbyvaluing 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 ofwhich is a census), only about 49% of urbanhouseholdsinPunjabhave a water connection inside or outside the house (Table 4). However only 5.8% do not have water available within the householdvicinity (Table 5). Table4: UrbanHouseholdWater Supply Coverage(SurveyData) Source of drinkingwater YOof urbanpopulation Tap inhouse 45% Tap outside house 4% Hand or mechanicalpump 49% Dugwell 1% River/ canal / stream 0% Other 0% Total 100% Source: Pakistan Integrated Household Survey, Round3: 1998-1999, Federal Bureau of Statistics, GoP, Oct 2000. Table 5: UrbanHouseholdWater Supply Coverage(Census Data) % ofurbanhouseholds Source of drinkingwater 1980 1998 Inside 81.2% 94.2% Tap 35.7% 54.8% Handpump 42.7% 36.9% Well 2.8% 2.5% Outside 18.8% 5.8% Tap 8.4% 3.2% Handpump 6.8% 1.2% Well 2.9% 0.4% Pond 0.3% 0.1% Others 0.4% 0.9% Source: 1998 Provincial Census Report o fthe Punjab, Population Census Organization, Statistics Division, GoP, 2000. 15. Only a portion of these uncovered households (5.8%) can be counted as potential beneficiaries from the project, as not all 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 of service: low pressure, brackish water, contamination from leakages and sanitation facilities, etc. b) Healthbenefitsfrom improvedwater andsanitation. 16. Ifone wereto quantify potentialhealthbenefits from improvedwater supply, one maybe able to identify significant health effects, provided one i s able to control adequately for the status of 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 hygienebehavior) has the largest bearing on child mortality, followed closely by the availability ofpit latrines (with notably little value added of flushtoilets) andthenpipedwater.15 Table 6: Determinantsof Healthstatus inPakistan- Determinantsof Infant and ChildMortality DependentVariable: Mortalityin Childrenunder 5 Under 5 y.0. mortality Independentvariables Coefficient (Standarderror) Secondaryhigher education -0.701 (0.189) Pit toilet -0.622 (0.129) Pipedwater -0.249 (0.140) Rural -0.099 (0.113) Wealth -0.068 (0.028) Flushtoilet -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 inPunjab i s the worst in the country. Yet, hardly any data to predict health impacts from water supply sub-projects inthe concerned TMAs couldbeidentified, and any economic analysis would have to rely onwild assumptions. 18. It is therefore proposed that under the project, baseline information will be collected in the TMAs to allow future measurement of the impact o f the improvement o f the water supply andor sanitation facilities, which inturn could be usedfor future projects. c) Willingnessto pay (contingentevaluationor revealedpreferencesurveys) 19. Estimating the willingness to pay for better quality water would be an alternative approach to the quantification of 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 shouldbe has been distorted by artificially low tariffs, measuring willingness to pay would require a carefilly designed survey, which i s expensive and does often not - especially where potential beneficiaries are aware o f the implications of their survey response - produce reliable results.' Unfortunately, revealed preference data (often considered as a superior alternative) could not be identified for urban areas inPakistan or other countries inthe region, from which analogous assumptions could have beenmade. 20. Given these data uncertainties, consumer satisfaction surveys or rapid urban appraisals (RAPS)will be considered for implementation as part o f sub-project appraisal for Year 2 TMAs and these will include also a limited survey module assessingrelevant household characteristics. They will help to inform on (a) inform on the priority actions required to instill greater l5Since the report doesnot specify the estimation approach, it i s not possible to clearly identify the impact effects. l6See, for instance, Griffen st a1 (1995) "contingent Valuation and Actual Behavior: Predicting Connections to New Water Systems inthe State o f Kerala, India", World Bank Economic Review, Vol. 9, No. 3, pp. 373-395. 85 willingness to pay for urban services, since low 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 will be collected at the completion o f the project to provide lessons and information for future interventions - including repeater projects. 21. It is 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. Drainage Quantification o fthe economic benefits o f the Jhelum drainage sub-project has not been attempted at this stage. 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 designedand implemented with little regard to actual condition o f existing assets, location o f future population growth and economic development. Capacity buildingunder the project will foster prior consideration o f such aspects, from the collection o f data (mapping) to the prioritization o f development schemes following a process. This should significantly improve the cost-effectiveness o f future TMA infrastructure investments. The project will promote improvements in operation and maintenance practices, which is also expected to result in increasing the economic life and the productivity o f new and existing assets. Provincialcapacity-buildingcomponent 25. At provincial level, capacity-building will focus on: providing adequate assistanceto TMAs monitoring and evaluating TMAs cultural heritage 26. Setting up a monitoring and evaluation system at provincial level will support the project's pilot 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 extendedto 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 Pilot 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 Pilot i s not precisely defined: its actual scope will only be determined after a detailed institutional feasibility assessment. 87 Annex 10: SafeguardPolicyIssues PAKISTAN: PunjabMunicipalServices ImprovementProject A. Applicablepolicies 1. The project is 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 will be appraised by the Punjab Municipal Development Fund Company (PMDFC) for their eligibility and readiness for support underthe PMSIP. 2. This project i s a SIL and as such falls under OP 4.01 on Environmental Assessment. Since these works are inurban areas, it i s likely that some resettlement will be required for some sub-projects. OP 4.12 on Involuntary Resettlement will therefore apply. 3. Because the works will be within or close to existing urban areas, it is 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 initial investmentproposals. 4. Inthe urbanareas there is always the possibility that some elements of physical cultural heritage will 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 of the component on cultural heritage is 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 heritageplan i s not required. B. Environment Scope ofthe 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 is expected to be limited andthe impacts predictable and manageable. Level of EnvironmentalAssessment 6. This Project has beenrated EA Category A since some o f the PMDFC "E-1" sub-projects might require a full EA under Bank policy, although not all will. For example, "public conveniences" are rated E-1 under the current ESF but would not normally be considered Category A. Projects rated E-1by PMDFC will 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. Possible support for upgrading o f infrastructure inthe large cities inPunjab is not anticipated under this project. 7. No sub-projects rated E-1 are included inthe first year's implementation, as these would require more time for detailed EIA and environmental management planning. The feasibility studies for sub-projects proposed for the first 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 inthe finalization o f the sub-project 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 of performance and service provision. The objectives o f the project include capacity building for the TMAs and the Performance Improvement Plans (PIPS) developed for each TMA inthe project will include key actions to strengthenenvironmental and social capabilities, as appropriate. Environmental and Social Framework 9. The ESF sets out an approach for incorporating environmental and social risk management into the appropriate stages o fthe overall PDMFC project management cycle. 10. Key steps inthis process are: 0 An Environmental and Social Information Package will be supplied to every applying TMA, as part o fthe GrantApplication material. 0 At the early Desk Appraisal stage, the categorization o f the proposed investment is confirmed and a checklist i s prepared for the field appraisal, as necessary. This information is included inthe Desk Appraisal Report (DAR). 0 During the Field Appraisal, the actual issues are identified and a site specific Environmental andor SocialManagement Plan is drafted. 0 The Field Appraisal Report (FAR) includes these issues and sets out any technical requirementswhich 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 assistanceto the TMA. 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. 89 Relationshipbetween Operations Manual and Environmentaland Social Framework OPERATIONAL MANUAL InformationPackage (includes Environmentand Social requirements) I ESF 1 Site specific EnvlSocial / Management Plan \ Specific technical measures Required Performanceimprovements 11. The detailed Operational Manual (OM) has been agreed between PMDFC and the Bank and will 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 lines 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 TMAs gain further experience. 12. Effective implementation is the critical challenge for all 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 will be part o f the mandate o f the Supervising Consultant and will be included in the routine reporting to PMDFC. The grievance mechanism that i s also part o f the project will be another route for environmental concerns or complaints to be brought to the attention of PMDFC management. C. Social 13. The PMDFC commenced consultation o f the ESF framework in2000. 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 all 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 plannedto be heldwith the beneficiaries o f the sub-projects, andTMAs as they apply. 14. The risk o f TMAs delaying in preparingor implementing mitigation measures required underthe ESFwas addressedby: 0 Selecting relatively small andtechnically simple sub-projects to begin with; 0 Requiringthe first year's pipeline of sub-projects to beready byProjectAppraisal; 0 Assisting TMAs with the selection o f appropriate consultants for sub-project preparation andimplementation; 0 Making the TMAs/consultants preparing sub-projects aware o f the ESF requirements on environment, resettlement etc; and 0 Makingcontinued investment grant disbursements contingent on satisfactory sub-project implementationprogress. 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. No 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 all first year TMA sub-projects combined) but the exact locations for these are not constrained so TMAs 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. Inorder to allow time to build TMA capacity, sub-projects with resettlement issues were not included inthe first year's pipeline; however capacity buildingwill 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 will allow those with demonstrated capacity to implement sub-projects with resettlement. D. Buildingcapacity 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 will be used as modules in the capacity buildingfor all TMAs. 7BuildingCriteria 1 r Graduationto S1 & E l Sub-Droiects Concern EligibilityCriteria 1. Environmental1 1. Realistic social 1. TMAs effectively decide questions o fwhat y & socially and mitigation is needed to manage risks, who is sound projects, environmenta1 eligible for what anddetermining how much i s complying standards for enough to achieve the standards, for e.g. o f with agreed planningand environmental protection, replacement cost and ESF policy. implementation. income restoration; 2. Effective 2. Accuracy and credibility o fbaseline data and monitoring o f reasonable certainty o f detecting and correcting actual any errors or problems duringplanningand mitigation implementation. To be able to meet standards, results. the TMAs must have sensitive monitoring systems & specific indicators for the adequacy o f the mitigation or compensation delivered and actualresults; 3. Clear incentives 3. TMAs have clear statements of task assignments, and reasonable corrective consequences for mistakes accountability or failures, andunambiguous responsibility and 11partners. sources o f financing to corre functioning grievance redress systems; 4. Common 4. Communicationto ensure common awareness o f awareness and standards, monitoring and understanding those affected, contractors o fthe above. 2. Participatory 5. Sub-project planning& prioritization is sub-project after public meeting. implementation based on andinclusion adequate o fthe poor in consultation. 92 Issue I Concern Eligibility Criteria project benefits. accountability public hearings and documented periodic to citizens. reporting o fthe TMA's performance to citizens. I 18. Eachmodule will be field based, allowing real application o f the critical practices such as the following: (i)Basicpractices: screeningimpacts, scoping assessments,planningmitigationoptions, public consultationto assess feasibility and acceptability o f options. (ii)Social: landacquisitionmethods, censusmethods, classifyingseverity ofimpactsand entitlements, responsibilities for planning and delivery o f entitlements before site handover. (iii)Environment: site selection androute 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 fmeasures. (iv) Monitoring and grievance redress: transparency and public participation in planning, reporting and supervision responsibilities and formats during implementation, documenting landtransactions, complaint response recordkeeping andprocedures. 93 Annex 11: Project Preparationand Supervision PAKISTAN: PunjabMunicipalServices ImprovementProject Planned Actual PCNreview 11/26/2003 08/25/2003 Initial PID to PIC 08/27/2003 Initial ISDS to PIC 08/05/2003 Appraisal 01/03/2006 01/03/2006 Negotiations 03/27/2006 03/27/2006 BoardRVP approval 06/01/2006 Planneddate of effectiveness 07/01/2006 Planned date o f mid-ternreview 09/30/2008 Planned closing date 12/31/2010 Key institutions responsible for preparationofthe project: 0 Punjab Planning and Development Department 0 Local Government and Rural DevelopmentDepartment 0 Punjab MunicipalDevelopment FundCompany Bank staff and consultants who worked on the project included: Name Title Unit Jaehyang So Task Team Leader SASEI Shahnaz Arshad Local Institutions Specialist/Co-Task Team Leader SASEI Graeme Lee Sr. Municipal Finance Specialist SASEI Soraya Goga LocalDevelopment Specialist SASEI Franqois Boulanger Urban InfrastructureSpecialist SASEI KevinTayler Engineer Consultant Kirsten Hommann Economist Consultant Isfandyar Zaman Khan PSD Sspecialist SASFP David Hanrahan Lead Environment Specialist SASES WarrenWaters Sr. Social Scientist SASES Hasan Saqib Sr. FinancialManagement Spec. SARFM Anwar Bhatti FinancialAnalyst -Disbursements SACPK Uzma Sadaf Procurement Specialist SARPS Akhtar Hamid Lead Counsel LEGMS Sheila Braka Musiime Counsel LEGMS Desiree Charles-Baveghems Program Assistant LEGMS HarryHatry Performance Management Advisor Consultant RituNayyar-Stone Performance Management Advisor Consultant LilianMacArthur Program Assistant SASEI Afzal MahmoocUShaukat Javed Program Assistant SASEI Christine Kessides Peer Reviewer TUDUR Navaid Qureshi Peer Reviewer/ QERPanelist TUDTR Roland White OERPanelist . EASPR 94 Bank funds expendedto date on project preparation: 1. Bankresources: USD512,000 2. Trust funds: USD 75,000 3. Total: USD 587,000 EstimatedApproval and Supervision costs: 1. Remainingcosts to approval: USD34,000 2. Estimated annual supervisioncost: USD 150,000 95 Annex 12: Documentsin the ProjectFile PAKISTAN: PunjabMunicipalServices ImprovementProject e Integrated Safeguards Data Sheet, Appraisal Stage e Environmental and Social Framework, Volume I & 11, November 2005 e MinutesofConcept Review Meeting e PMDFC Financial Management Questionnaire e Minutesofthe Quality Enhancement ReviewMeeting e Project Concept Note e PMDFC Communication Strategy e Punjab Public FinancialManagement and Accountability Assessment e Financial Profiles o f Selected Tehsil Municipal Administrations Report e Financial Analysis o f sub projects e PMDFC OperationalManual, March2005 e PMDFC Financial Manual, February 2006 e PMDFC Procurement Manual e PMDFC Monitoring and Evaluation Scope and Terms o fReference e PMDFC HumanResource Management Manual e Memorandum & Articles o f Association ofPMDFC e PMDFC Communication Strategy for Environmental and Social Awareness e FundingAgreement betweenPMDFC and TMA e Memorandum o fUnderstandingbetweenPMDFC and TMA e Application for Performance Based Matching and Capacity Grants for PMDFC and TMA 96 Annex 13: Statement of Loans and Credits PAKISTAN: Punjab MunicipalServices ImprovementProject Original Amount inUS$ Millions Difference between expected and actual disbursements Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. ID Rev'd PO76872 2006 PIFRAII 0.00 84.00 0.00 0.00 0.00 71.05 -3.00 0.00 PO99110 2006 Pakistan EarthquakeERC 0.00 400.00 0.00 0.00 0.00 313.39 0.00 0.00 SecondPartnershipfor 0.00 46.70 0.00 0.00 0.00 20.13 -27.23 0.00 PO97402 2006 Polio Eradication Taunsa Barrage 123.00 0.00 0.00 0.00 0.00 83.49 13.68 0.00 Emergency Rehab. & PO88994 2005 Modem Tax Administration 24.40 78.50 0.00 0.00 0.00 95.01 28.50 0.00 PO77306 2005 ReformProject PO10556 2004 HIGHWAYSREHAB 215.00 150.00 0.00 .o.oo 0.00 294.55 15.88 0.00 NWFP Community 0.00 37.10 0.00 0.00 0.00 33.77 2.50 0.00 PO82621 2004 Infrastructure I1( CIP2) PK Public Sect Capacity 0.00 55.00 0.00 0.00 0.00 36.99 4.05 0.00 PO83370 2004 BuildingProject SecondPoverty 0.00 338.00 0.00 0.00 0.00 180.54 -10.00 0.00 PO82977 2004 Alleviation FundProject SindhOn-FarmWater 0.00 61.14 0.00 0.00 0.00 40.65 12.38 0.00 PO78997 2004 ManagementProject AJK Community 0.00 50.00 0.00 0.00 0.00 42.43 8.96 0.00 PO71454 2003 Infrastructure & Services Banking Sector Technical 0.00 26.50 0.00 0.00 0.00 13.02 8.09 0.00 PO74797 2003 Assistance HTV/AIDS Prevention 0.00 37.11 0.00 0.00 0.00 27.51 10.11 7.49 PO74856 2003 Project National Education 0.00 3.63 0.00 0.00 0.00 3.15 1.54 0.00 PO77288 2003 Assessment System GEF-ProtectedAreas 0.00 0.00 0.00 10.08 0.00 7.85 2.49 0.00 PO35823 2001 ManagementProject NWFP ON-FARM 0.00 31.35 0.00 0.00 3.47 17.16 5.96 0.34 WATER MANAGEMENT PO71092 2001 PROJECT PO56213 2001 TRADE & TRANSPORT 0.00 3.00 0.00 0.00 0.00 0.14 0.01 0.00 PHASE OUT OF ODS 0.00 0.00 0.00 13.OO 0.00 4.99 0.55 0.70 PO34301 1997 PRE Total: 97 S T A T E M E N T OF IFC's Held and DisbursedPortfolio (In Millions of US Dollars) Committed Disbursed IFC IFC FY Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. Approval 2005 ABAMCO FUND 0.00 3.46 0.00 0.00 0.00 3.46 0.00 0.00 ABNAMRO PAK 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 1995 AES La1Pir 17.31 9.50 0.00 0.00 17.31 9.50 0.00 0.00 1996 AES Pak Gen 10.13 9.50 0.00 8.05 10.13 9.50 0.00 8.05 1995 Abamco Mgmt 0.00 0.29 0.00 0.00 0.00 0.29 0.00 0.00 Askari Bank 4.00 0.00 0.00 0.00 4.00 0.00 0.00 0.00 1991 BRRIM 0.00 0.27 0.00 0.00 0.00 0.27 0.00 0.00 1993 Crescent Bahuman 0.00 0.31 0.00 0.00 0.00 0.31 0.00 0.00 1997 Crescent Bahuman 0.00 0.20 0.00 0.00 0.00 0.20 0.00 0.00 2001 Crescent Bahuman 3.34 0.00 2.50 1.50 3.34 0.00 2.40 1.50 2004 Dewan SME 0.00 0.99 0.00 0.00 0.00 0.00 0.00 0.00 2003 Dewan Salman 27.50 0.00 5.00 0.00 27.50 0.00 4.00 0.00 2004 Dewan Salman 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991 Engro Chemical 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 2001 EniPakistan 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 1990 FIIB 0.00 0.27 0.00 0.00 0.00 0.27 0.00 0.00 1992 FIIB 0.00 0.40 0.00 0.00 0.00 0.40 0.00 0.00 2002 Fauji Cement 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 First UDL 7.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 GTFP Metropolita 0.46 0.00 0.00 0.00 0.46 0.00 0.00 0.00 1996 GulAhmed 9.45 4.10 0.00 7.15 9.45 4.10 0.00 7.15 2003 K C T 6.89 0.00 1.50 0.00 6.89 0.00 1S O 0.00 1995 Kohinoor 7.50 6.30 0.00 4.07 7.50 6.30 0.00 4.07 MetropolitanBnk 3.OO 0.00 0.00 0.00 3.00 0.00 0.00 0.00 2002 Micro Bank 0.00 2.43 0.00 0.00 0.00 2.43 0.00 0.00 2004 NBFICredit 7.00 0.00 0.00 0.00 7.00 0.00 0.00 0.00 2002 Network Leasing 1.94 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 PICT 6.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2006 PICT 8.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1983 PPL 0.00 1.40 0.00 0.00 0.00 1.40 0.00 0.00 2002 PPL 0.00 5.96 0.00 0.00 0.00 5.96 0.00 0.00 1965 Packages 0.00 0.05 0.00 0.00 0.00 0.05 0.00 0.00 1987 Packages 0.00 0.02 0.00 0.00 0.00 0.02 0.00 0.00 1991 Packages 0.00 0.02 0.00 0.00 0.00 0.02 0.00 0.00 1994 Packages 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1995 Packages 0.00 0.26 0.00 0.00 0.00 0.26 0.00 0.00 2005 Packages 25.00 5.43 0.00 0.00 0.00 1.47 0.00 0.00 2001 SarahTextiles 1.60 0.00 0.00 0.00 1.60 0.00 0.00 0.00 Soneri Bank 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 2004 TRG Pakistan 0.00 4.20 0.00 0.00 0.00 4.20 0.00 0.00 2006 Tameer Bank 0.00 1.01 0.00 0.00 0.00 1.01 0.00 0.00 1996 UchPower 34.29 0.00 0.00 15.89 29.16 0.00 0.00 15.89 UnionBank - PAK 2.00 0.00 ... 0.00 0.00 2.00 0.00 0.00 0.00 98 Approvals PendingCommitment FY Company Loan Equity Quasi Partic. Approval 2004 DewanSME 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: PunjabMunicipalServices ImprovementProject POVERTYand SOCIAL South Low- Pakistan Asia income DeveloDmentdiamond* 2005 Population,mid-year (mi//ims) 155.8 1,447 2,343 GNI per capita (Atlas method, US$) 690 590 510 Lifeexpectancy GNI (Atlas method, US$ billions) 107.3 859 1,188 T Average annual growth, 199945 Population(%) 2.4 1.7 1.9 Labor force I%) 3.0 2.1 2 2 GNi Gross Most recent estimate (latestyear available, 199945) per primary capita enrollment Poverty(% ofpopulationbelow nationalpovertyline) 33 Urban population (% oftotalpopulation) 34 29 31 Life expectancyat birth (years) 64 63 58 1 Infantmortality (per 1,000live birihs) 74 66 79 Child malnutrition (% of children under5) 35 49 43 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 90 84 75 Literacy(% ofpopulation age 15+) 47 61 61 Gross primaryenrollment (% of school-age population) 68 103 I00 I__ Pakistan Male 80 108 105 ~ Low-income group Female 57 97 94 KEYECONOMIC RATIOS and LONG-TERMTRENDS 1985 1995 2004 2005 Economicratios' GDP (US$ billions) 31 1 60.6 96.1 110.7 Grosscapital formationiGDP 183 18.5 17.3 16.8 Expottsof goods and servtces/GDP 104 16.7 16.0 15.3 Trade Grossdomestic savings/GDP 5 9 15.8 18.4 12.2 - Gross national savingdGDP 22 7 21.0 23.0 18.0 Current account baiance/GDP -41 -4.0 2.0 -1.3 interestpaymentslGDP 17 2.0 0.8 0.7 Domestic Capital Total debffGDP 43 2 49.9 37.1 31.8 savings formation Total debt service/exports 24 5 27.6 22.3 12.3 Present value of debffGDP 29.8 Presentvalue of debffexwrts 149.3 indebtedness 1985-95 199545 2004 2005 2005-09 (average annualgrowth) - GDP 5 2 3 7 6.4 7.8 6.5 Pakistan GDP per capita 2 6 1 2 3.9 5.2 4.6 Low-income group Exportsof goods and services ~ 9 8 6 5 -1.5 7.6 15.5 STRUCTUREof the ECONOMY IGrowth (% of GDP) 1995 2004 2005 of capitaland GDP (%) 1 Agriculture 28.5 26.1 22.3 21.6 Industry 22.5 23.8 24.9 25.1 Manufacturing 15.9 16.3 17.6 18.2 Services 49.0 50.1 52.7 53.3 -5 -10 Householdfinal consumption expenditure 82.0 72.4 73.3 80.0 -151 General gov't final consumption expenditure 12.1 11.7 8.4 7.8 -GCF -GDP 1985-95 199545 2004 2005 (averageannualgrowth) -Growth of exports and Imports (oh) Agriculture 4.1 2.7 2.2 7.5 6o Industry 6.3 4.4 12.0 10.2 40 Manufacturing 5.7 5.9 14.1 12.5 Services 5.2 4.3 6.0 7.9 2o Householdfinal consumption expenditure 4.3 3.5 8.2 16.8 Generalgov't final consumption expenditure 3.9 2.4 2.1 2.3 .20 Gross capital formation 4.3 0.8 -3.2 1.7 Importsof goods and services -Exports -Imports 3.4 1.4 -8.6 44.1 . Note:2005 data are preliminary estimates. Group data are to 2004. * The diamonds show four key indicatorsinthe country (in bold) comparedwith its income-group average. if data are missing.the diamondwill be incomplete. 100 Annex15: Map PAKISTAN: PunjabMunicipalServices ImprovementProject IBRDMap34614 IBRD 34614 74° TURKMENISTAN 72° 74° UZBEKISTAN TAJIKISTAN CHINA 36° 36° Approx. Line of Control .F.P. Approximate Line AFGHANISTAN JAMMU Attock N.W R. ISLAMABAD ISLAMABAD ISLAMABAD AND of Control KASHMIR Fatehjang RawalpindiRawalpindi JAMMU 32° 32° INDUS ATTOCK RAWALPINDI PUNJAB AND P A K I S T A N R AWA L P I N D I KASHMIR BALOCHISTAN 28° Talagang Chakwal Area 28° Jhelum of Map CHAKWAL JHELUM INDIA SINDH MianwaliMianwali P.D. Khan GUJRAT R. Gujrat Gujrat 24° Arabian 24° JHELUM MANDI SIALKOT Sea Sialkot Sialkot MIANWALI BAHAUDDIN Daska 62° 66° 70° 74° KhushabKhushab Bhalwal GUJRANWALA NAROWAL SARGODHA 70° KHUSHAB Gujranwala Gujranwala SargodhaSargodha 32° HAFIZ- NORTHWEST S A R G O D H A GUJRANWALA ABAD 32° FRONTIER BHAKKAR PROVINCE Chiniot SHEKHUPURA Bhakkar Bhakkar CHENAB R. Shekhupura Shekhupura Lahore Lahore FaisalabadFaisalabad LAHORE I N D I A JhangJhang FAISALABAD LAHORE FAISALABAD JHANG Kasur BALOCHISTAN Leiah Leiah LEIAH T.T. Singh R. KASUR Shorkot T.T. RAVI Okara Okara D . G . K H A N SINGH SahiwalSahiwal OKARA SAHIWAL INDUS Khanewal Khanewal PAK PATTAN D.G. KHANEWAL R. KHAN R. Multan Multan M U LTA N SUTLEJ 30° Muzaffargarh Muzaffargarh MULTAN Vihari hari VIHARI Bahawalnagar Bahawalnagar 30° AREA D.G. Khan D.G. Khan RH LODHRAN Mailsi BAHAWALNAGAR FFARGA Dunyapur TRIBAL Lodhran MUZA Bahawalpur Bahawalpur RAJANPUR Rajanpur Rajanpur BAHAWALPUR R. Liaquatpur PAKISTAN INDUS B A H AWA L P U R PUNJAB MUNICIPAL SERVICES Rahimyar-Khan Rahimyar-Khan IMPROVEMENT PROJECT YEAR-1 PROJECT TMAs RAHIMYAR-KHAN I N D I A Kasur MAJOR CITIES 28° NATIONAL CAPITAL TEHSIL BOUNDARIES DISTRICT BOUNDARIES SINDH 28° DIVISION AND TRIBAL BOUNDARIES 0 30 60 PROVINCE BOUNDARIES KILOMETERS INTERNATIONAL BOUNDARIES RIVERS This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 70° 72° 74° APRIL 2006