Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 43784-PK

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR23.4 MILLION (US$38 MILLION EQUIVALENT)

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR A

WATER SECTOR CAPACITY BUILDING AND ADVISORY SERVICES PROJECT

May 27, 2008

Sustainable Development Department Environment and Social Development Pakistan Country Management 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 be otherwise disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Exchange Rate Effective March 2008

Currency Unit = Pakistani Rupee (PRs) PRs 60.0 = US$1

SDR = US$1.62976

FISCAL YEAR July 1 – June 30

Weights and Measures

Metric System

1 meter (m) = 3.280 feet 1 hectare (ha) = 2.470 acres

1 Kilometer (km) = 0.620 miles 1 cubic meter (m) = 35.310 cubic feet 1 million acre feet (MAF) = 1.234 billion cubic meters 1 cubic foot/second (cfs) = 0.0283 cubic meters/sec (m3/sec)

FOR OFFICIAL USE ONLY

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank IFRS International Financial Reporting Standards AGP Auditor General of Pakistan IPDF Infrastructure Project Development Facility AGPR Accountant General Pakistan Revenues IRSA Indus System River Authority AI Annual Impact IUFR Interim Un-audited Financial Report BCM Billion Cubic Meters MAF Million acre feet BER Bid Evaluation Report MW Megawatts BP Bank Procedures M&E Monitoring and Evaluation BOI Board of Investments MoWP Ministry of Water and Power C&M Coordination and Monitoring NCB National Competitive Bidding

CA C&M Chartered Accountant Coordination and Monitoring

NGO Non Governmental Organizations

CA Chartered Accountant OPCQC Operations Services Quality Assurance and Compliance

CAS Country Assistance Strategy PCMU Project Coordination and Management Unit CFAA Country Financial Accountability Assessment PC-II Planning Commission Proforma for TA Projects

CQ Consultants Qualification PMPIU Project Management and Policy Implementation Unit

DA Designated Account PDO Project Development Objective DFID Department for International Development PPP Public Private Partnership DP Direct Payment PPIB Private Power Infrastructure Board FM Financial Management PSC Project Steering Committee FMR Financial Management Report PSR Project Supervision Rating

ECNEC Executive Committee of National Economic Council

QCBS Quality and Cost Based Selection

GDP Gross Domestic Product RAP Resettlement Action Plan GPN General Procurement Notice RFP Request for Proposal Packages GOP Government of Pakistan SIL Specific Investment Loan I&D Irrigation and Drainage SPN Specific Procurement Notice IAS International Accounting Standards SOP Standard Operating Procedure IBIS Indus Basin Irrigation System TA Technical Assistance

IBRD International Bank for Reconstruction and Development

TOR Terms of Reference

ICB International Competitive Bidding UNDB United Nations Development Business ICR Implementation Completion Report WAPDA Water and Power Development Authority

IDA International Development Association WCAP Water Sector Capacity Building and Advisory Services Project

GLOSSARY

Abiana Irrigation water charges Mogha Ungated outlet from distributary or minor canal Chacks or Dehs

Tertiary irrigation command areas Rabi Winter crop season (November-March)

Kharif Summer crop season (April-October) Warabandi Rotational system for water distribution

Vice President: Praful Patel Country Manager/Director: Yusupha Crookes

Sector Manager/Director: Karin Kemper/Constance Bernard Task Team Leader: Masood Ahmad

iv

PAKISTAN

WATER SECTOR CAPACITY BUILDING AND ADVISORY SERVICES PROJECT (WCAP)

TABLE OF CONTENTS

Page

A. STRATEGIC CONTEXT AND RATIONALE ..................................................................1

1. Country and Sector Issues .................................................................................................. 1

2. Rationale for Bank Involvement......................................................................................... 5

3. Higher level objectives to which the project contributes ................................................... 6

B. PROJECT DESCRIPTION..................................................................................................6

1. Lending instrument............................................................................................................. 7

2. Project development objective and key indicators ............................................................. 7

3. Project components............................................................................................................. 7

4. Lessons learned and reflected in the project design ......................................................... 11

5. Alternatives considered and reasons for rejection............................................................ 11

C. IMPLEMENTATION .........................................................................................................12

1. Partnership arrangements (if applicable) .......................................................................... 12

2. Institutional and implementation arrangements (See Annex 6 for details) ...................... 12

3. Monitoring and evaluation of outcomes/results ............................................................... 12

4. Sustainability .................................................................................................................... 13

5. Critical risks and possible controversial aspects .............................................................. 14

6. Credit conditions and covenants....................................................................................... 16

D. APPRAISAL SUMMARY ..................................................................................................17

1. Economic and financial analyses...................................................................................... 17

2. Technical .......................................................................................................................... 17

3. Fiduciary........................................................................................................................... 17

4. Social ................................................................................................................................ 18

5. Environment ..................................................................................................................... 19

6. Safeguard policies............................................................................................................. 19

7. Policy Exceptions and Readiness ..................................................................................... 19

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Annex 1: Country and Sector or Program Background..........................................................20

Annex 2: Major Related Projects Financed by the Bank and/or other agencies...................27

Annex 3: Results Framework and Monitoring .........................................................................28

Annex 4: Detailed Project Description ......................................................................................33

Annex 5: Project Costs ................................................................................................................37

Annex 6: Implementation Arrangements ..................................................................................39

Annex 7: Financial Management and Disbursement Arrangements......................................43

Annex 8: Procurement Arrangements.......................................................................................51

Annex 9: Economic and Financial Analysis ..............................................................................58

Annex 10: Safeguard Policy and Issues .....................................................................................60

Annex 12: Project Preparation and Supervision ......................................................................61

Annex 13: Documents in the Project File ..................................................................................63

Annex 14: Statement of Loans and Credits...............................................................................64

Annex 15: Country at a Glance ..................................................................................................67

Pakistan: Water Sector Capacity Building and Advisory Services Project ...........................67

MAP: IBRD 36123

vi

PAKISTAN

WATER SECTOR CAPACITY BUILDING AND ADVISORY SERVICES PROJECT (WCAP)

PROJECT APPRAISAL DOCUMENT

South Asia Regional Office

SASRD

Date: May 27, 2008 Country Director: Yusupha Crookes Sector Manager/Director: Karin Kemper/ Constance Bernard Project ID: P110099 Lending instrument: Specific Investment Loan

Team Leader: Masood Ahmad Sectors: General Water, Sanitation and Flood Protection (50); Irrigation and Drainage (25%); Renewable Energy (25%) Themes: Water Resources Management (P); Managing for Development Results (P); Rural Policies and institutions (S); Other Public Sector Governance (S); Environmental screening category: B

Project Financing Data: [ ] Loan [X ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing US$38 million (SDR 23.4 million equivalent) Proposed terms: Standard IDA Credit

Financing Plan (US$m.) Source Local Foreign Total

Borrower IDA Total

- 23.0

23.0

- 15.0

15.0

- 38.0

38.0

Borrower: Islamic Republic of Pakistan Responsible Agency: Ministry of Water and Power, Water and Power Development Authority

Estimated disbursements (Bank FY/US$m) FY FY09 FY10 FY11 FY12 FY13

Annual 3.0 4.0 10.0 10.0 11.0 Cumulative 3.0 7.0 17.0 27.0 38.0 Project implementation period: Start: September 1, 2008 End: August 31, 2013 Expected effectiveness date: September 1, 2008 Expected closing date: February 28, 2014

vii

Does the project depart from the Country Assistance Strategy (CAS) in content or other significant respects? Ref. PAD A.3

[ ]Yes [X] No

Does the project require any exceptions from Bank policies? Ref. PAD D.7 Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

[ ]Yes [X] No [ ]Yes [] No [ ]Yes [X] No

Does the project include any critical risks rated “substantial” or “high”? Ref. PAD C.5.

[]Yes [X] No

Does the project meet the Regional criteria for readiness for implementation? [Y] Yes []No Project development objective: The main project objective is to improve management and investment planning of water resources in the Indus River Basin. Project Description: Component A: Capacity Building of and Support to Federal Institutions in Water Resources Planning and Management (US$17.0 Million). This component would provide for capacity building of and support to federal institutions involved in water resources planning, management and development. The component includes, among other things, support for building human resources and institutional capacity in the federal institutions and support for developing studies, strategies and plans for improving water resources planning and management. Component B: Improvement in Water Resources Management and Development (US$17.0 million). This would include inter-alia: (i) upgrading of existing tools, databases, models and management systems; (ii) sediment management studies for the Indus system and possibility of flushing sediments through the Tarbela Reservoir and its impact basin wide; (iii) preparation of a power investment plan with focus on hydropower development in the upper Indus and conjunctive operation of dams and infrastructure; and (iv) feasibility studies and preparation of designs for quickly/easily implementable hydropower plants suitable for financing by international financial institutions. Component C: Project Management Coordination, Additional Studies, Training (US$4.0 million). This component would support the Government, in particular the Ministry of Water and Power (MoWP) with project management—including coordination of all project related activities and monitoring and evaluation of project impacts and technical and financial audits. This will also support institutional strengthening and training of staff involved in water resources management. Which safeguard policies are triggered, if any? Environmental Assessment (OP/BP/GP 4.01) Projects on International Waterways (OP/BP/GP 7.50) Significant, non-standard conditions, if any, for: Board presentation: Anticipated approval of PC-II by the Executive Committee of National Economic Council (ECNEC) Loan/credit effectiveness: None

Covenants applicable to project implementation: Ref. PAD C.6

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A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues 1. Country Issues and Country Assistance Strategy. The key challenge for Pakistan is to sustain its recent growth performance in order to generate significant poverty reduction, necessitating continued sound macroeconomic management along with further improvements in the investment climate. In particular, Pakistan’s infrastructure platform needs significant investment in order to support its growth and service delivery goals; infrastructure services including electricity, paved roads, municipal services, and telecommunications which reach a relatively low proportion of the population, and are critical to improving human development outcomes. Approximately 40 % of the population lacks access to power and about 75% of all rural health, education and market facilities are accessible only by earth tracks. Similarly, water and sanitation services which are critical to achieving human development outcomes suffer from poor quality and limited availability. Per capita water availability in Pakistan is currently 1,100 cubic meters (CM) which is projected to decline to 800 CM by the year 2020. 2. The infrastructure challenge is particularly acute with respect to water, as Pakistan relies on the largest contiguous irrigation system in the world to provide basic food security (90 % of food production and 25 % of Gross Domestic Product GDP). However, this massive infrastructure is deteriorating and in need of rehabilitation along with reforms to improve the allocation of water as well as the efficiency of its use. Moreover, competition for water is growing among the provinces and across the varied needs for irrigation, industrial and domestic use, and the environment. Pakistan has already begun ramping up its investments, beginning with the urgent rehabilitation of barrages. Yet,, there remains a need for significant new investment, not only in irrigation but also in other uses of water, including hydropower generation and urban-industrial and domestic supplies (50 % of the population is not served by a formal supply system and sanitation and water treatment reaches less than 10 % of the population). At the same time, there is uncontrolled pollution of surface and groundwater from agriculture, industry and rapidly growing cities. 3. The CAS for Pakistan (discussed by the Board on June 1, 2006) increased the volume of lending to Pakistan during the next four years with immediate priority on addressing the impact of the October 2005 earthquake. More importantly, based on Government’s priorities for sustaining growth and accelerating poverty reduction, the CAS envisions an expansion in lending in infrastructure (primarily energy, water, and transport) and human development. In the water and irrigation sectors the Bank is envisaged to support a combination of institutional reforms and investments throughout the system including major investments in the rehabilitation of critical assets and reforms to improve the quality, efficiency, and accountability with which irrigation services are delivered. The Project fits well in the CAS and it is a major element of the Bank’s assistance to Pakistan in the water and hydropower sector. Sector Background 4. Pakistan is one of the world’s most arid countries, with an average rainfall of under 240 millimeters (mm) a year. It is located in an area which was once a desert and, it would have remained largely a desert without the development of the canal systems, dams and hydraulic structures that divert water from the Indus River and its tributaries. These canals, which are commonly referred to as irrigation canals, are in fact the country’s main waterways in the country. They are the sole source of water supply supporting life and livelihoods in the areas that made the settlement of the population possible. In addition to providing water for irrigated agriculture, they led to the development of major cities, industrial and growth centers and civilization on the desert. The Indus Basin Irrigation System (IBIS) is now the largest contiguous irrigation system in the world and it is the back bone of the country’s economy.

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5. The IBIS consists of the Indus River and its tributaries, three major storage reservoirs, 19 barrages, 12 inter-river link canals, 43 irrigation canal commands (covering over 38 million acres), and over 110,000 watercourses delivering water to farms. Water is diverted from the rivers by barrages or headworks into the main canals. About 104 million feet of water is diverted from the river system to the canals annually. Generally, the hierarchical canal system runs from the main canals to the branch canals, distributaries/minors and watercourses that supply water to chacks or dehs (tertiary irrigation command area) through moghas (ungated outlets) in the distributaries and minors. Groundwater resources are substantial, with more than 600,000 tubewells in the country contributing significantly to the water supplies in area underlain by fresh groundwater. 6. Indus Waters Treaty of 1960. Today’s IBIS system is an outcome of the major revamping of the system done to enable the Indus Water Treaty of 1960 with India. With the partition of the sub-continent in 1947, the border between India and Pakistan cut across the Indus, its five eastern tributaries and several canal systems. The World Bank led the efforts resulting in the Indus Waters Treaty of 1960 under which the Indus system was divided between India and Pakistan, with the western rivers (Indus, Jhelum and Chenab) allocated to Pakistan and the eastern tributaries (Ravi, Beas and Sutlej) allocated to India. As part of the works associated with the Treaty, and funded through the Indus Development Fund managed by the World Bank, a plan was prepared to provide new reservoir storage and link canals within Pakistan to enable the large-scale transfer of water within Pakistan from the western rivers to the eastern rivers, thus sustaining flow in these rivers for irrigation and other purposes. The Mangla Dam, with about 6 million acre feet (MAF) of storage on the Jhelum River, and the Tarbela Dam, with about 11 MAF on the Indus River, and 9 link canals, were constructed as the central elements of the re-engineering of the Indus River System that was necessary to meet Pakistan’s water needs after the Indus Waters Treaty. The Treaty has been sustained for 48 years and the infrastructure (storages and link canals) has played a crucial role in making the treaty feasible for Pakistan. The infrastructure developed by the Indus Treaty also helped with improving water resources management basin wide (increasing canal diversions from 67 MAF to about 104 MAF currently in the Indus Basin and timeliness in delivery of water) and, combined with the conjunctive use of groundwater resources propelled by investments in Salinity Control and Reclamation (SCARP) tubewells, resulted in a substantial improvement in the efficiency of water use. Water Sector Issues 7. Pakistan successfully tackled the issues resulting from division of the Indus Waters (Indus Water Treaty of 1960 with India) and developed the IBIS into a colossal water system that is unique in the world. Today Pakistan faces numerous challenges, including: (i) increased water stress, with limited groundwater that can be mobilized, resulting in the need to build surface water storage facilities that require huge investments; (ii) acute power shortages and increasing power demands requiring the development of untapped hydropower resources; (iii) irrigation and drainage sector issues including low surface water delivery efficiency, low productivity, water logging and salinity and degradation of the resource base, poor operation and maintenance and low cost recovery (resulting in dilapidated infrastructure); (iv) basin wide water resource management issues and the need to comply with environmental requirements and flows to the delta area; (v) climate change uncertainties and related impacts on water resources; and (vi) the constrained investment climate in the sector requiring huge investments to meet the challenges. 8. Basinwide Water Resources Management. The development and management of Pakistan’s water resources, in general, and of the Indus Basin, in particular, is a huge challenge, requiring very high levels of administrative, engineering and scientific capabilities. Over recent decades the capacity for modern water resources management at both the federal and provincial levels has not evolved rapidly enough to meet emerging challenges. Looking to the future, the development and management of water resources will need to be dramatically improved to address the combination of population growth, persistent poverty, lagging growth in rural areas and looming water resource constraints and to meet the

3

needs of a modernizing nation. Critical to the country strategy is the development of key institutions and adequate mechanisms and instruments that effectively address a consistent basin water resources management strategy. Pakistan would embrace a national reform agenda with the aim to further strengthen the federal role of existing institutions and particularly ensure that trust building, equity, capacity and efficiency are effectively embedded in the institutional architecture to manage the country’s water resources. In the short term, high priority must be given to supporting the capacity development at the federal and provincial levels. In parallel, clear mechanisms and instruments would be necessary that build on Pakistan’s platform of defined water entitlements, making their administration of these more transparent and accountable from the inter-provincial to the user levels. In the medium and long term, the Indus System River Authority (IRSA) needs to be entrusted with a clear institutional and regulatory framework to enable it to: (i) make measured decisions about water allocation to the regions and the provinces based on the most modern tools/models; (ii) conduct a transparent assessment of water availability, distribution, and accounting/measurement throughout the system; and (iii) reflect appropriate modalities for benefits-sharing among the provinces inclusive of assets ownership and operation. This will also require adequate human resources, transfer of knowledge with possible twining arrangements and a scenario with climate change considerations. This program could serve to build trust among the main water users and stakeholders leading to greater cooperation at all levels (local, provincial and federal) with strong ownership and participation in future water sector investment programs. 9. Need for multi-purpose storage reservoirs. When river flow is variable, storage is required so that water supply can more closely match demand. The lack of storage capacity1 and control structures is another major constraint to proper water resources management in Pakistan. Water availability in the IBIS is highly seasonal, with 85% of annual river flows occurring during a 90 to 120 day period (June to September) making storage imperative for both the Rabi (winter –November-March) crop season, during which the main staple crop (wheat) is grown, and in early Kharif (summer April-October) during which cash crops (such as cotton, rice and sugarcane) are grown. Relative to other arid regions, Pakistan has very little water storage capacity (equivalent to 30 days of annual Indus flows, compared to 900 days of storage on the Colorado River). This storage is gradually being lost due to the large amounts of silt brought by the waters originating from the glaciers and snow melt in the young Himalayas. The capacity of Pakistan’s existing reservoirs (Tarbela, Mangla and Chashma) has declined by 27% and the cumulative decline will likely increase to 35% by 2012 and to 57% by 2025. It is estimated that if no new storage is built, canal diversions will decrease over the next decade. The Government of Pakistan (GOP) estimates that Pakistan needs to, at least, double its storage capacity—an increase of 18 million acre feet (MAF) by 2025—in order to meet the projected water requirements (6 MAF for the replacement of storage lost to siltation and 12 MAF of new storage). The storage is also required to generate hydropower which is a key component of the country’s energy system and on which reliance is expected to increase in the future. The increased storage capacity can also play a useful role in maintaining environmental flows in the critical reaches of the river system and in improving the ecology of the riverine and delta areas. At this time, Pakistan is raising the Mangla Dam, by adding about 2.7 MAF of storage. However, due to the hydrology of the Jehlum River, using the entire capacity of this storage is not possible every year (perhaps four out five years fillings of reservoir will be possible). Therefore, storage on the Indus River is more essential and effective due to higher flows allowing an effective reservoir yield (possibly more than the storage capacity) and much higher hydropower generation, because of higher flows and the possibility of developing an Indus Hydropower Cascade. 10. Hydropower. Energy is the lifeline of economic development. Unfortunately, Pakistan has historically suffered from energy shortages and demand suppression because of limited supplies and lack of adequate infrastructure development for provision of energy to the industrial sector. The major energy consuming sectors of the country are: industrial (38 %), transport (32 %), residential and commercial (25 %), agriculture (2.5 %) and others (2.5 %). The lack of sustained and affordable energy to industry has

1Pakistan Water Country Assistance Strategy – Pakistan’s Water Economy Running Dry, 2005.

4

restrained economic growth and created declining trends for industrial investment in the country. The per capita energy consumption, which is one of the key development indicators as well as a measure of the quality of life of a country, is low with only 14 million BTU compared to 92 million BTU for Malaysia and 34 million BTU for China. 11. Currently, the power sector is experiencing acute shortages. Electricity sales rose 40 % in the last five years (ending June 30, 2007), while generation capacity remained practically stagnant. It is estimated that the system lacks about 4,000 megawatts (MW) to cover current demand with acceptable reliability. Demand, however, is expected to grow at expected rate of 8 % per year in the medium-term. The current energy generation is about 65% from thermal plants (oil 29%, gas 36%, coal 0.3%), nuclear 2.3% and hydropower generation is 33%. This requires an accelerated expansion in the power generation systems for which Pakistan has to tap hydropower potential. With multipurpose storage and cost sharing among other sectors (irrigation, domestic water use, flood, environment etc.), high altitudes in the north with substantial water flows and relatively sparse population in these areas, hydropower is the most attractive source of energy for Pakistan. However, the country has developed only 15 % of its estimated 40,000 MW of economically viable potential—a proportion much lower than its neighboring countries (India and China utilize over 30 % of potential) and much lower than industrialized countries (which utilize around 75 %). At present, Pakistan is planning for hydropower to provide about half of the new energy generated in the medium term, since it has recognized that: the value of power is not subject to market volatility; it generates substantial local economic multipliers (the mostly-local construction content of hydropower is about 80 % versus about 20 % for thermal power); and it provides high-value peaking power (which is likely to be worth about four times the value of a unit of base load). 12. Irrigation and Drainage Sector Issues. Agriculture is the single most important source of employment and exports (two thirds of employment and 80 % of exports). About 90 % of the food production and 25 % of the GDP comes from irrigated agriculture primarily from the IBIS. Irrigation also represents more than 95 % of the total consumptive use of water. Despite the fundamental role it has in the economy, Irrigation and Drainage (I&D) in Pakistan faces major issues that are reflective of underlying institutional weaknesses. 2 The major institutional issue is a near exclusive control of the irrigation and drainage system by public sector entities, characterized by the usual inefficiencies of centralized bureaucracies, lack of corporate skills and poor client (farmer) focus and accountability. Institutional weaknesses manifest in the form of: (i) low surface water delivery efficiency (only about 35-40 % from the canal head to crop root zone); (ii) water distribution inequities; (iii) wasteful on-farm water use; (iv) water logging and salinity; (v) poor operation and maintenance (O&M) and low cost recover; and (vi) constrained investment climate. For more details, please see Annex 1. 13. The two largest provinces of Pakistan, Punjab and Sindh, as well as the major users of IBIS water, have embarked on reform programs supported by Bank operations particularly in the irrigation and water infrastructure management. As a result, significant progress in the decentralization of irrigation management and participation of water users in the management of I&D systems have been made, leading to better services (particularly in Punjab) with more sustainable systems and clear entitlements. Furthermore, good practices in social and environmental aspects are now taking place in water infrastructure, as witnessed by the Mangla dam raising project. The Bank would continue to support the deepening of the reform program in these provinces including extending established entitlements to groundwater. In addition, the Bank will work with the other two provinces, the North West Frontier Province (NWFP) and Balochistan, to start similar operations. This proposed Project will build linkages with ongoing reforms and provide a strategic framework with strong mechanisms and instruments to ensure both effective institutional building and capacity enhancement for Pakistan’s water sector.

2Pakistan: Irrigation and Drainage Issues and Options, March 1994, Report No. 11884-PAK, Pakistan Water Country Assistance Strategy – Pakistan’s Water Economy Running Dry, 2005.

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14. Financing Constraints for the Sector. The returns to investment in the water sector (irrigation, hydropower, domestic and industrial uses as well as for environment) are very high in Pakistan. However, these investments are not forthcoming, despite the large needs for investments in the sector to expand water supplies, to improve water management and control and to upgrade and modernize the century old system, resulting in its continued stagnation and deterioration. The lack of investments is becoming a major constraining factor to developing a vibrant water and hydropower sector. Many of the multipurpose reservoirs, though primarily constructed for meeting water demands for irrigation, actually recover their cost from hydropower sales. There is a need to diversify the financing sources for multipurpose storages. So far, GOP has only tapped public resources for investments in the water and hydropower systems and currently owns major assets in these sectors. GOP already realizes that the required investments are likely to be much higher than current public investments have been over the last few years. Even assuming funding from donors and additional internal generation (the hydropower sales currently generate a positive cash flow), there is expected to be a significant funding gap. Given this tight fiscal situation, GOP is keen to tap the private sector to the maximum extent possible to supplement public resources. Pakistan has had success in the past in attracting private investment for power generation through public-private partnership (PPP) mode, but these have been mostly for thermal power. PPP in hydropower tends to be considerably more difficult, and this problem is compounded by investor perceptions of country risk that are, at present, not favorable for Pakistan. 15. GOP appreciates the challenge involved in attracting private financing. It has established an Infrastructure Project Development Facility (IPDF) within the MOF with the charge of promoting PPP, and a special cell has been created in IPDF to specifically focus on investments in the water sector. IPDF will, in close coordination with MoWP and WAPDA, develop a medium-term financing strategy including identifying possible areas suitable for PPP where funds from GOP, donors and internal generation can be leveraged to attract private financing. The Project would strengthen IPDF’s capacity in this regard. 16. The water sector issues are enormous and complex and addressing them will require a series of investments and long term commitment on the part of the Government. The proposed Project would help the Government to: (i) address issues related to water resources management in the main river system, allowing a transparent way for water flow forecasting, availability, distribution and accounting, and thus building trust, (ii) help address water policy and technical issues necessary for the investment program; and (iii) assist in developing a financing strategy and a strategic social and environmental assessment framework necessary for the large investment program the Government is planning. Some support would be provided under the Project to provinces to develop better linkages between the federal and provincial systems. The support to the provinces is being provided under several ongoing provincial operations such as the development policy loans (DPLs) to Punjab and the Sindh Water Sector Improvement Project (WSIP) and it will be scaled up under the Barrage Rehabilitation Programs in Punjab and Sindh and possibly new operations in Balochistan and the North West Frontier Province (NWFP). 2. Rationale for Bank Involvement 17. The Bank has a long history of partnership and collaboration with Pakistan. In particular, the Bank is seen as a trusted partner in the water sector and a coordinator for international financial institutions and other development partners. As a key partner and principal donor, it has provided support to several main interventions in the development of the IBIS, including: (i) facilitating Indus Water Treaty negotiations between Pakistan and India in 1950s; (ii) establishing of the Indus Basin Development Fund that supported the construction of Mangla and Tarbela Dams and several inter-river link canals and barrages that enabled the implementation of Indus Treaty (which is still observed despite several wars between the two nations); (iii) formulating the Salinity Control and Reclamation Program (SCARP-1968); (iv) formulating the Revised Action Plan for Irrigated Agriculture in 1979; (v) assisting in the Water Sector Investment Planning Study (WSIPS) in 1991 that led to the Inter Provincial Water

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Apportionment Accord of 1991 and the establishment of the Indus River System Authority (IRSA); (vi) preparing the Sector Environmental Assessment in 1993 to provide perspective for the development of the Ninth Five Year Plan; (vii) developing, perhaps most importantly, the Irrigation and Drainage Strategy of 1994 (Pakistan: Irrigation and Drainage – Issues and Options 11884-PAK) that led to a major shift in the direction of the I&D sector of Pakistan and implementation of current institutional reform agenda; and (viii) the formulation of the Pakistan Water CAS (Pakistan’s Water Economy Running Dry, 2005 34081-PK) that highlighted the recent issues that the water sector is facing and outlined an approach to deal with them. The two largest provinces (Punjab and Sindh), which manage more than 85 % of the IBIS, have embarked on far reaching irrigation reforms and have made significant progress on the reform agenda. Altogether, the Bank has supported more than 48 operations in irrigation, drainage and water resources development and the power sector so far. 18. The Government is seeking support from the Bank for its knowledge, expertise and experience in the sector, in addition to its financing. This is particularly the case for this Project, where the Bank is expected to play a key role in providing support for: (i) strengthening water resource management institutions at the federal (main system) level and building on measures for institutional strengthening already underway in provinces; (ii) supporting the development of financing strategies for investment programs in water and hydropower sectors; and (iii) strengthening project planning, development and management, ensuring appropriate technical designs, implementation and environmental and social features. Given the Bank’s history of engagement and expertise in the water sector in Pakistan, the rationale for supporting the country in addressing these challenges is clear and fully aligned with the key findings of the Bank’s 2005 Country Water Resources Assistance Strategy. 3. Higher level objectives to which the project contributes 19. The Project supports the Bank CAS as well as a key priority of Pakistan to upgrade water infrastructure. The three inter-linked and mutually reinforcing pillars of the CAS are: (i) sustaining growth and improving competitiveness; (ii) improving government effectiveness and service delivery; and (iii) improving lives and protecting the vulnerable. Under the first pillar, the Bank will support a combination of institutional reforms and investments in the water sector including, major investments in the rehabilitation of critical assets and reforms to improve the quality, efficiency, and accountability with which water and irrigation services are delivered. The Project supports all key pillars of the Pakistan’s CAS and Water CAS. 20. Main Messages of Bank Water CAS. The Pakistan Water CAS completed, in November 2006, identifies the key challenges in the water sector as well as strengths and opportunities on which Pakistan needs to build upon. It recommends that Pakistan focus on the following four key areas: asset management and development, water resources management, irrigation service delivery, and on-farm productivity. The Project would directly support the first two key areas while the other key areas are suitably addressed under ongoing and planned provincial operations. B. PROJECT DESCRIPTION

21. The project design reflects the overall need of Pakistan to address both the institutional and human resource capacity building needs, as well as the fundamental, technical and investment issues associated with large water infrastructure. As such, the combination of management and water development provides a strong coherent framework through which Pakistan would surely lay the foundation for the renewal and sustainability of its water sector. For the purpose of effective implementation, various tasks under the framework are divided into activities to be implemented by relevant institutions. These activities together form a coherent framework for improving the long-term sustainable management of water resources in the Indus Basin.

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1. Lending instrument 22. The lending instrument is a Specific Investment Loan (SIL). 2. Project development objective and key indicators 23. The main project objective is to improve the management and investment planning of water resources in the Indus River Basin. 24. The Indus system’s management needs to optimize the returns to Pakistani society, ensure productivity increases and support growth while addressing poverty, equity, trust and sustainability issues. The Indus system’s development requires very large investments in asset management and expansion, including multi-purpose water infrastructure projects. Given the scale of these investments, it is particularly important that sound financial and institutional architecture, effective management of environmental and social trade-offs, and broad civil society understanding are achieved. The Project would support the Government’s efforts for creating an enabling environment and developing financing strategies and options for the large water/hydropower infrastructure development plans of the Government concurrently with the Project and not consecutively. 25. The progress towards achieving the development objective will be measured through the following key performance indicators of Pakistan’s water management:

• Enhanced capacity of the relevant institutions to manage water resources using modern tools, techniques and methodologies; and

• Enhanced capability in planning and financing investments in water and hydropower sector.

3. Project components 26. The Project is designed to achieve the above objectives and consists of the following components: Component A: Capacity Building of and Support to Federal Institutions in Water Resources Planning and Management (US$17.0 Million) 27. This component aims at reinforcing the mandates of the federal institutions and addressing the impediments to better performance. It would support capacity building of and support to federal institutions involved in water resources planning, management and development. The component includes, among other things, support for building human resources and institutional capacity in federal institutions, and support for developing studies, strategies and plans for improving water resources planning and management. It will have the following sub-components: 28. Component A1. Capacity Building in Regulation, Policy and Planning (US$4.0 million). This component recognizes the strategic mandate of the Ministry of Water and Power (MoWP) to coordinate and foster the overall development of the water and power sector in Pakistan. As such, this component will focus on strengthening the Indus System’s institutional and regulatory framework. This is likely to include, but will not be limited to, the following: (i) water resources regulation, policy and planning; (ii) studies and policies for benefit sharing among stakeholders; (iii) studies and action plans for asset development, ownership, and operation (including potential inter-provincial assets, public-private partnerships, etc); (iv) building trusted entitlement and benefit sharing regimes (national/provincial/local); (v) studies on the lessons learned from the implementation of past and current resettlement action plans in Pakistan and international best practices with a view to improvements in the national resettlement policy

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and the preparation of a handbook to improve project specific resettlement plans; (vi) strategic sectoral environmental and social assessments of the whole Indus basin that could serve as a basis for project specific environment assessments and environmental management plans and help address and internalize environmental issues in the water resources management planning (a similar Sectoral Assessment was carried out in 1991/92 and published in 1993 but needs to be upgraded, deepened and broadened and also include climate change impacts on Indus hydrology, water availability and potential implications for water infrastructure development); (vii) strategy for enhancing the productivity of water use, studies for improvements in irrigation efficiency; and (viii) knowledge sharing on groundwater availability and management inclusive of conjunctive uses. The recommendations of these studies would be implemented within a basin-wide perspective to integrate relevant issues into the overall management of the Indus system (e.g. water resources/environmental assessment/sedimentation/institution building). 27. Component A2. Capacity Building in System Planning Management and Operation (US$4.5 million). The mandate of the Indus River System Authority (IRSA) is to ensure the regulation and distribution of surface waters among the Provinces in Pakistan. Consistent with the need to enhance and develop IRSA into a modern institution, this component would strengthen IRSA’s capacity to carry out its role as envisaged in the 1991 Water Apportionment Accord. This would cover inter-alia: (i) the establishment of digital and GIS based databases with the capability to integrate satellite images, and of management information systems with web-based interfaces for access to information by all stakeholders, including the public; (ii) studies and development of modern tools for improving seasonal, monthly, and 10-daily inflow forecasts to the system and of possible scenarios for water requirements and for demands by various sectors and provinces; (iii) development and improvement of tools and models for simulation and optimization of the operation and management of the Indus system’s water resources including updating and enhancement of the Indus Basin Model; (iv) establishment of a water flow measurement system at key points on the river system as part of a plan to improve water auditing and transparency and communication in water distribution; (v) institution and regulatory framework development inclusive of strategic staffing , twinning with other river basins, benefits sharing with assets development, ownership and operation and (vi) capacity building for IRSA in understanding investment and financing program in the Indus Basin.. 28. Much of this work will be carried out in collaboration with the Water and Power Development Authority (WAPDA) (and the work program outlined in Component B1) and with the provincial authorities responsible for water resources planning and management. The Project will make the adequate arrangements for an appropriate and progressive transfer of the upgraded monitoring equipment from WAPDA to an enhanced IRSA. Similarly, it will also ensure that the data system is properly configured and accessible thus enabling transparent management and sharing with the provinces. It will involve the provision of consulting services, equipment and goods, and incremental staff salaries. 29. Component A3. Capacity Building in Developing Financing Strategies for Water and Hydropower Sector (US$5.5 million). This component supports the development of public-private partnerships in mobilizing investments for hydropower. The infrastructure Project Development Facility (IPDF) will build upon the experience of and work in collaboration with WAPDA and the Private Power Investment Board (PPIB) in the implementation of this component. The component will build the capacity of (IPDF), in particular the new water cell tasked with developing financing strategies for water sector programs and hydropower infrastructure and with providing advice on a variety of financial, fiscal, legal and regulatory issues. The support will cover inter-alia the following: (i) review of the medium-term investment program and identification of a financing strategy, including areas of potential interest to private sector; (ii) review of the existing institutional, legal and administrative framework for financing water infrastructure and development of proposals for upgrading based on international best practices; (iii) the development of potential modalities for PPP taking into account possible support from the Government, donors and revenues from the sector; (iv) a proposed medium-term financing strategy with an assessment of the availability of various sources of funding; and (v) asset ownership, benefit- sharing

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alternatives, etc., and the definition of the public sector’s financing role to complement/support potential private investments. 30. The Project would support a full time national expert (team leader) of the water cell with 2-3 qualified specialists and funding to retain specialized international legal and financial advisory services. In addition, the Project would also support consulting services for carrying out the various studies and analyses mentioned above, including advisory services from international investment banks as and when required. 31. Component A4. Preparation of Feasibility Studies for Small Dams and Water Storage. (US$3.0 million). This component will support the Planning Commission and provide consulting services for carrying out various feasibility studies for small dams and water storages. A list of feasibility studies would be developed and approved by the Project Steering Committee and the Association. 32. Support to the Provinces would be included under the four sub-components outlined above in coordination with the various federal agencies. Direct support to the provinces is being/would be provided in the form of separate ongoing operations, including on-farm, irrigation, and water sector improvement projects, and water sector development policy loans (DPLs) to improve water resources management and water use efficiency within the provincial systems. Component B: Improvement in Water Resources Management and Development (US$17.0 million). 33. WAPDA’s mandate is to coordinate the large investments in water projects and the huge task of expanding the electricity network across Pakistan. Consistent with this mandate, this component will provide strategic support to WAPDA to enhance its mandate activities. This would include, inter-alia, the following: (B1) upgrading of existing tools, databases, models and management systems, seasonal, monthly and

10-daily planning and operational models and the revised Indus Basin Model; development of additional systems client interfaces; operationalization of these tools for water/power planning and operation and their linkage and/or transfer to IRSA and to the provincial institutions;

(B2) sediment management studies for the Indus system in particular the possibility of flushing

sediment through the Tarbela reservoir, downstream impact, upstream development of water storage facilities, feasibility level designs of sediment flushing facilities etc; bathymetric surveys of major reservoirs and provision of modern bathymetric equipment and systems and training in bathymetric surveys; The sediment studies may also cover other rivers and river reaches where channel morphology and hydraulics (such as Sutlej) has changed significantly due to changes in the water flows and sediment transport. The tools and models would be developed for future use by WAPDA to continue its work on sediment management as further development of the Indus systems proceeds.

(B3) preparation of power investment plan, with a focus on hydropower development in the upper

Indus and conjunctive operation of dams and other infrastructure; development of asset management plans for major infrastructure managed and operated by WAPDA and safety inspections by national and international panel of experts, etc; other laboratory equipment for site investigations and quality control of construction and training in use of these equipment possibly under specific pilot projects;

(B4) preparation of feasibility studies and design for quickly/easily implementable hydropower

projects suitable for financing by international financial institutions, etc. without any

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transboundary and riparian issues. These studies would also include environment and social assessments, and environment/social management plans according to GOP and Bank guidelines.

34. Component B1, in particular, would be implemented in close collaboration with IRSA and interfaces would be developed for the exchange of information, data, models and other tools between WAPDA, IRSA and the provinces. Component C: Project Management and Additional Studies (US$4.0 million) 35. This component would support the Government and in particular, MoWP with project management which includes coordination of all project related activities, monitoring and evaluation of project impacts and technical and financial audits. An important feature of this component would be to enhance human resources capacity within the federal institutions particularly, IRSA. The component will put in place an adequate training program both within Pakistan and abroad to enhance the overall capacity of staff. In addition, attention will be paid to the recruitment and training of young staff to ensure that Pakistan institutions such as IRSA are adequately staffed to carry out their mandates.

Project Cost Estimates (US$ Million)

Project Components Total Cost A. Capacity Building of and Support to the Federal Water Resources Planning and Management A1. Capacity building in regulation, policy, and planning 4.0 A2. Capacity building in system planning, management and operation 4.5 A3. Capacity building in developing financing strategies for the water and hydropower sector 5.5 A4 Feasibility studies for small dams and water storages 3.0

Subtotal A 17.0 B. Improvement in Water, Resources Management and Development B1. Upgrading of tools, water resources database, management system, models 1.5 B2. Sediment management studies 3.0 B3. Asset management plans, dam safety inspections and studies 2.5 B4. Feasibility studies for run of the river hydro projects (two studies) 10.0

Subtotal B. 17.0 C. Project Management, Coordination, Strategic Studies, Training C1. Project coordination, monitoring and evaluation 1.0 C2. Strategic studies approved by PSC during implementation 2.0 C3. Technical assistance and training 1.0

Sub-total E 4.0 Total 38.0

36. This component will also support strategic studies and technical assistance that may be identified during project implementation. This component has been designed to allow flexibility for incorporating new sub-components as they arise. The possible areas for funding include training in detailed design, tender designs of water/power infrastructure, construction standards and codes, design of dams, hydraulic structures, power planning, consulting and contracting services, contract administration/management and construction supervision, procurement, financial management, legal, environmental, social and water quality issues. Further technical assistance might also include: promoting center of excellence for post graduate training in research, customized professional (re)training (water economics, laws, negotiations), study tours and short-term assignments abroad for young staff. The various elements will consolidate the

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institutional development and water management agenda. Additional studies not yet identified would subsequently be approved by the Project Steering Committee (PSC) for implementation by suitable organizations including federal or provincial governments or other suitable organizations such as PPIB, BOI, etc. Appropriate arrangements would be made with these and other organizations for carrying out the analysis and studies. 4. Lessons learned and reflected in the project design 37. The key lessons from similar projects in Pakistan, Indonesia and from experience world-wide with Technical Assistance (TA) projects that are incorporated in the project design include the following: (i) The rules and procedures governing the implementation of TA operations should be simple and streamlined in order to reduce transaction cost and ensure speedy implementation. This would be achieved by authorizing PSC to approve any changes, additions and studies/activities that may have to be included as needs arise instead of having to request Government approval for each activity. An umbrella (PC-II) would be approved for the Project which would cover all activities to be undertaken with approval of the Project Steering Committee. (ii) The Secretary of MoWP would have the full authority to decide on most matters regarding the award of contracts for studies, disbursements and other administrative matters. The TA would be managed and coordinated by the project director of the project management and policy implementation unit (PMPIU) on a day-to-day basis. The PMPIU of MoWP has sufficient technical and management capacity to manage and coordinate with other implementing agencies. (iii) The excessive complexity in terms of institutional participation would be avoided (by limiting the TA to federal institutions and the main river system) and complementarities would be established through linkages among provincial institutions under the proposed Project or other Bank operation: (iv) Technical assistance and consulting contracts would be packaged to the extent possible in order to avoid lengthy procedures and overhead in the selection, monitoring and management of these contracts. (v) Measures would be introduced to improve the procurement and management of contracts (such as establishment of a procurement website etc.) to reduce the number of disagreements, arguments and disputes and allow greater focus on the delivery of outputs and outcomes. 5. Alternatives considered and reasons for rejection 38. Considering that the TA operation has been found to be the best vehicle for helping the Government achieve the objectives outlined above, several alternatives were considered for the design of the TA to meet the goals in most effective way. These include: 39. Flexibility vs. Fully Defining the Scope. Flexibility is preferred instead of fully defining the scope. The essential activities have been defined but can be modified and additional activities may be added during project implementation using the resources under Component C. 40. Consultancy vs Training. Traditionally, capacity building projects are heavily dependent on external consultants who fly in for short periods, provide immediate technical and analytical support, and leave without establishing any in-house or resident capacity in the system. The Project is designed to build in-house capacity and use external assistance where necessary in particular for high value advice and training.

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41. Federal (Main River System) vs. Provincial (distribution systems). Selectivity would be exercised by focusing more on improving water management of the main river system and federal institutions that are essential for building trust in water distribution among the main stakeholders and developing ownership/partnerships for large investments. The two major provinces which manage more than 85 % of the IBIS already have started reform programs under ongoing provincial operations. The Bank would work towards the development of similar programs for the other two provinces.

C. IMPLEMENTATION 1. Partnership arrangements (if applicable) 42. While the Project is only financed by the Government and IDA, Pakistan’s water, irrigation and drainage and hydropower programs are fully coordinated with the other major donors such as the Asian Development Bank (ADB), DFID and The Netherlands. The Project would use the PMPIU established under a technical assistance project financed by ADB. The implementation of Project activities would be coordinated with other donors and stakeholders in Pakistan. 2. Institutional and implementation arrangements (See Annex 6 for details) 43. The MoWP will be the primary implementing agency for the Project (see Chart-I Annex 6). The Project Steering Committee (PSC) headed by the Secretary of MoWP will provide policy guidance and monitor overall project implementation and outcomes. The members of PSC will include the Secretaries of the Ministry of Finance, Privatization Commission, Ministry of Food, Agriculture and Livestock (MINFAL) and the Ministry of Environment, Member of the Planning Commission, Chairman of IRSA, Chairman of WAPDA, Chief Executive IPDF, Chief Executive of BOI, Advisor for MoWP, Project Director of PMPIU, and the Provincial Secretaries of Irrigation and Power. The PMPIU will act as the Secretariat for PSC. PSC’s membership may be adjusted from time to time to address the project issues more appropriately. 44. The Ministry of Water and Power (MoWP) would be responsible for the Project’s overall implementation and coordination with other ministries and agencies in the Government. The MoWP would anchor the Project within the newly created PMPIU. The latter will be responsible for the implementation of Component A1 of the Project and overall management, coordination of futures studies, training etc. under Component C of the Project. The project director of PMPIU is designated as the project director for WCAP. The Indus River System Agency (IRSA) would be responsible for the implementation of Component A2 of the Project in collaboration with WAPDA. IRSA would also work closely with WAPDA in the implementation of Component B1. The Infrastructure Project Development Facility (IPDF) will be responsible for implementation of Component A3 of the Project. The IPDF will work very closely with WAPDA, MoWP, Ministry of Finance, Privatization Commission, BOI, PPIB and other institutions involved in financing and development of hydropower infrastructure. WAPDA will be responsible for implementing Component B of the Project. 3. Monitoring and evaluation of outcomes/results 45. MoWP, PMPIU, IRSA, Planning Commission, and WAPDA and other implementing agencies will submit quarterly reports in an appropriate format to GOP, PSC, and the Bank no later than three weeks after the end of each quarter. The quarterly report would cover the progress and updates on procurement implementation of various consultancy services, goods and progress on institutional components, and training initiatives. The reports would also cover financial information, including: (i) comparison between actual physical and financial outputs with forecasts, and updated six-months project forecasts; (ii) project financial statements, including sources and application of funds, expenditures by category statement, and designated account reconciliation statement for the Designated Account (DA);

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and (iii) a procurement management report, showing status and contract commitments, as well as complaints. 46. PMPIU and MoWP will also prepare annual reports by no later than April 30 of each year of project implementation. The report will cover: (i) the progress of each component, implementation of key features of the strategies and studies, key performance indicators, operation of project facilities, and financial statements; and (ii) the annual work program for the following fiscal year, annual funds required for implementation with breakdown of each financier, an updated disbursement profile, planned actions for mitigating negative effects during construction, and target indicators for the coming year. The annual work program for the next fiscal year will be finalized by April 30 of each year. A mid-term review of the Project will be undertaken by August 30, 2010. An implementation completion report (ICR) will be submitted to the Bank no later than six months after the closing date. 4. Sustainability 47. The focus of the Project is on improving the sustainability of the water systems in Pakistan. It will support several activities to improve water resources management, sediment management, environmental and social management, all of which will lead to improved long term sustainability of the water systems in physical, economic, environmental, social and financial terms. The technical assistance and training will enhance the capacity of concerned institutional staff in better planning, management, development and operation and maintenance of water systems. 48. The Project will improve the technical skills and capacity of key water management institutions such as IRSA, WAPDA, and MoWP and introduce the latest techniques, tools and methods to support water resources management. Maintaining these tools does not require extraordinary resources and their application is likely to continue in the future as well. The strategic environment and social assessments and sedimentation studies will lead to the sustainable use of the basin’s resources and the existing reservoirs in the system. 5. Communication strategy: 49. The Project is not directly engaged in building water infrastructure but it includes hydropower feasibility studies and the preparation of resettlement policies that will trigger stakeholders’ concerns and hence their participation and involvement. Thus, the Project includes a communications strategy as the best practice approach for raising public awareness on relevant issues and facilitating the understanding and endorsement of relevant stakeholders. The communication strategy will focus on mechanisms that can build support among the different stakeholders to: (i) strengthen the implementing agencies communications and create awareness for their respective missions and the Project activities; (ii) foster collaboration between involved agencies and stakeholders in order to build trust and confidence in critical activities and policies requiring their inputs in the decisions making process; (iii) encourage participation and convince the public about the transparency of decision-making on sensitive issues such as water allocation, infrastructure development and impacts; (iv) build a credible corporate image for implementing agencies. 50. The communications strategy should be based on the following key principles: (i) inform while respecting stakeholders opinions in terms of concerns and lack of awareness; (ii) create an inclusive, open and reliable dialogue with the stakeholders in order to get the feedback and readjust the strategy as needed; (iii) use a multimedia approach to ensure that all related segments of stakeholders are reached; (iv) encourage the Project staff and management to keep themselves informed and be accessible to both the media and the public; and (v) build on the implementation of the Project activities and give visibility to implementing agencies as credible institutions with a clear vision in addressing issues.

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5. Critical risks and possible controversial aspects 51. The effective and responsive governance risks (and proposed mitigation) associated with the Project are summarized below:

Risk factors Description of risk Ratinga

of risk Mitigation measures

Rating of

residual risk

I. Country- and Sector-Level Risks Sector policies

and institutions² � WAPDA may not

appreciate the progressive transfer of competence to IRSA in water resource management activities and may react by withholding its collaboration

� IPDF strategy in financing hydropower encounters difficulties with public private partnership.

� Highly variable capacity among involved agencies in carrying out proposed activities.

M � The Project strongly emphasized collaboration between WAPDA and IRSA with clear roles and responsibilities in water management including transfer of competences.

� The Project will support the

preparation of a clear and flexible financing strategy by looking at various options to ensure sustained financing of the hydropower agenda.

� An institutional capacity building

plan has been proposed to enhance the overall capacity of involved agencies.

M

II. Operation-Specific Risks

Technical/design � Administrative difficulties deriving from number of agencies involved and potential lack of coordination between implementing agencies.

� The Project’s capacity building and studies approach which may lead to lack of focus on strategic issues relevant to the GOP

M � There is strong commitment by the GOP and MoWP in implementation of the TA Project that would facilitate timely intervention in case of delays. The mechanism of the Project Steering Committee (PSC) chaired by the Secretary of MoWP involving representatives from key line ministries would be used to address any issues that may arise during implementation. PSC would regularly monitor project implementation and performance. MoWP has delegated day to day operations to PMPIU which has adequate

M

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objectives. staff to follow up on project implementation. PMIU would also be strengthened for project implementation.

� The Project’s focus on priority activities identified by GOP to advance the water, knowledge and infrastructure agenda. Consequently the project design establishes strong linkages with GOP’s vision to further move toward completion of key targeted priority studies.

Implementation capacity and sustainability

� Overload of external expertise leading to low impact of capacity enhancement within the GOP institutions.

� IPDF may have weak capacity to carry out activities under its component

M � The Project’s capacity building activities includes provision for intensive training of young staff in specific areas crucial for GOP in advancing the water and infrastructure agenda. Also the consultants’ teams are likely to consist of foreign and local consultants.

� The Project will support the establishment establish a cell within IPDF to carry out 1/3 of activities directly related to it. The remaining funds are aimed at consultancy services for strategic advice on infrastructure funding.

M

Financial management and Procurement

� Some implementing agencies may have fiduciary compliance difficulties thus contributing to slow project implementation.

S � The project design involve fiduciary support to implementing agencies especially on procurement and financial management to ensure that fiduciary issues are fully mastered and reporting and clearance are in full compliance with the Bank requirements.

M

Social and environmental safeguards

� Lack of consistent safeguards policy particularly in resettlement that could prompt GOP’s reluctance to move forward with the safeguards agenda.

M � The Project strongly crafted the safeguards dimension on lessons and best practice knowledge learning to support Pakistan in preparing a robust and flexible safeguards framework including a national resettlement plan.

L

Other

III. Overall Risk (including Reputational Risks) M

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52. Possible Controversial Aspects. Since the Project is building the Government’s capacity for undertaking investments in water/hydropower infrastructure, it is possible that some groups may intentionally or unintentionally misunderstand the purpose and features of the Project and interpret them as direct investments in Indus River dams. This issue is to be addressed by clearly defining the outputs and outcomes of the Project components and activities and through proper communication strategy as outlined above. 6. Credit conditions and covenants 53. Prior to negotiations: Approval of PC-II by CDWP (approved on April 30 2008) 54. Conditions for Board Presentation: Anticipatory Approval of PC-II by ECNEC Conditions for Effectiveness: None 55. During Implementation: (i) GOP shall ensure that the Project Steering Committee and staff in PMPIU, IRSA and WAPDA

are maintained with appropriate terms of reference agreeable to the Association, until project completion;

(ii) GOP shall ensure that MoWP, PMPIU, IRSA, WAPDA, and Planning Commission maintain a financial management system for the Project, maintained by qualified staff comprising an updated financial manual and a computerized Project Accounting and Management Information System until project completion;

(iii) GOP shall ensure that MoWP, PMPIU, IRSA, WAPDA, and IPDF maintain a financial management system for the Project, maintained by qualified staff until project completion;

(iv) GOP would ensure that independent private auditors are engaged to provide an assurance on the effectiveness and application of internal controls over contractual payments and to carry out post-procurement reviews.

(v) GOP would ensure that web posting of invitations, evaluations and awards is done since the very first selection of consultancy, procurement documentation and record keeping systems, including a website showing the status of procurement of various contracts and their performance would be established and made fully operational by PMPIU and a procurement complaint handling system is put in place by not later than March 31, 2009;

(vi) MoWP, PMPIU, IRSA, WAPDA and other implementing agencies would monitor the physical and financial progress of the Project, implementation of the overall as well as subproject level environmental and social management plans, and the project impact studies, analyze the data on key performance indicators on a regular basis and prepare and submit quarterly and annual progress reports, and by March 31 of each year, the annual work plans for the following year. The annual work program for the following year will be finalized in agreement with the Association not later than May 31 of each project year;

(vii) the mid-term review of the Project would be undertaken by July 1, 2010. Implementation and Quality of Work 56. GOP shall ensure that technical scope, description, terms of reference, specifications and designs of all project activities, (goods, works and services) are based on international standards followed for such works and with due consideration to environmental and social aspects, and satisfactory to the Association.

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D. APPRAISAL SUMMARY 1. Economic and financial analyses 57. Not Applicable. There is no economic evaluation methodology for technical assistance projects. This is primarily a capacity building and training program. However, much of the analysis proposed to be undertaken would support better water resources management, improved planning and development of water resources of the Indus Basin with better environmental and social consideration and all this would potentially generate enormous benefits for the country. The Project supports studies, and analytical work that would lead to sustainable development of water and hydropower resources. 2. Technical

58. The major project activities are not complex. The purpose is to enhance capacity of MoWP, IRSA and WAPDA and other concerned institutions and modernize them to improve water resources management, planning and development. The internationally recruited consultants would support the implementing agencies. The state of the art tools, systems and models would be developed and on the job training would be provided to the concerned agency staff for the continuation of the Project activities in the future. 3. Fiduciary Procurement Arrangements (see Annexes 8 for details) 59. The project procurement would mainly comprise consultancies, some goods and very few/small works contracts (if at all). Various components of the Project pertain to MoWP (including PMPIU), IRSA, WAPDA, and Infrastructure Project Development Facility (IPDF). Procurement shall be conducted by WAPDA and the PMPIU for their respective components. PMPIU will also provide procurement assistance to IRSA, IPDF and Planning Commission. WAPDA has strong institutional procurement systems, and has executed a number of Bank assisted projects, and will responsible for procurement of Component B, and some portions of Component C. The General Manager for Coordination and Monitoring (C&M) has been designated as the procurement focal person for these components, and with the assistance of the chief engineer and directors, he shall be responsible for coordinating and executing procurement by the various sections for Planning, Dams and Hydro planning within WAPDA. The procurement process with all steps and timelines is elaborated in the procurement manual. Procurement for MoWP, IRSA and Planning Commission (Components A1, A2 A4, and some portions of Component C) shall be conducted with assistance of PMPIU. Responsibility for Component A3 which is to be executed by IPDF would also rest with IPDF, but PMPIU will have a key role in the procurement planning, documentation and evaluations. The senior advisor is the focal person to coordinate the procurement within IPDF. While a procurement staff member will be hired in PMPIU, the project director, assisted by the director of water resources has been identified as the procurement focal person. The procurement arrangements have been agreed upon with the implementing agencies. In order to ensure efficiency and transparency in procurement, the Bank shall hold training sessions. A procurement web-site shall be maintained with adequate dissemination protocol and procurement planning shall be done in keeping with market synergies and provisions for international participation. The implementation of procurement plans shall be monitored by the Bank with a view to assessing any need for amendments. Financial Management and Disbursement (see Annex 7 for details) 60. The financial management arrangements of the Project are acceptable to the Bank. The PMPIU under the MoWP will be primarily responsible (together with WAPDA, IRSA, and IPDF) for maintaining these arrangements during project implementation. This will include mechanisms to draw the Bank

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funds, disbursement of the funds for the project activities, maintenance of proper books of accounts, and preparation of in-year and annual audited financial statements. Each entity would use their own financial management procedures and retain auditable records for examination by external auditors. The implementation and associated procurement and financing arrangements for activities that are to be carried out by entities other than already identified under the Project will be agreed by PSC in consultation with the Bank. In order to mitigate specific risks, the agreed financial management arrangements provide for an additional systems assurance on internal controls over contract management and payments, together with ex-post review of procurements etc. for all project activities carried out by different implementing agencies. By taking these actions, MoWP will be capable of implementing the project in accordance with the requirements of OP 10.02. 61. The Project would use report-based disbursement mechanism for accessing the Bank funds i.e. through the submission of six-monthly projections included in Interim Un-audited Financial Reports (IUFRs). The advance(s) and subsequent replenishment of funds would be deposited in a segregated Designated Account maintained by PMPIU from where advances would be made to second-generation revolving fund (imprest) accounts of WAPDA, IRSA, and IPDF. 62. Owing to considerable risks associated with the contract payments, it is of utmost importance that: (i) the individual payments are accurately and transparently computed; (ii) the claims are concurrently documented and verified for audit purposes, and (iii) the transparent and efficient mechanisms are adopted to handle any deductions. PMPIU would devise brief standard operating procedures (SOPs) for managing the contract payments and SOPs will describe the steps to be observed by the implementing agencies before making any such payments. The internal systems assurance exercise would examine the implementation of the SOPs by all implementing entities. The project’s consolidated financial statements would be separately prepared in accordance with the International Public Sector Accounting Standards and audited by the Auditor General of Pakistan. 63. Financing Plan. The total Project cost, US$38 million, will be financed by IDA. 64. Retroactive Financing. To meet the urgent project preparation and start-up needs, the IDA credit could be used to retroactively finance expenditures incurred during the period between appraisal (April 2008) and Credit signing (June 2008) of up to 20 % of the credit amount, provided that procurement procedures acceptable to the Bank are followed. 4. Social 65. In view of its TA character, the Project does not have any physical investments other than the installation of flow measuring stations on the Indus River and is not expected to have any direct adverse impacts. But overall, the Project would have significant impacts in strengthening local capacity to manage the social aspects of future basin-wide development and improving the quality of both investment planning and implementation. 66. Preliminary discussions have tentatively identified five focal areas related to the social aspect of the assistance package. These include local participation in water management, communication and transparency in water distribution, benefit sharing, civil society engagement and mitigation of adverse impacts from investment projects, such as involuntary resettlement. Assistance will be extended to relevant government institutions at the national, provincial and local levels and will cover policies, institutions, management practices and tools. Project support will be provided through reviews, studies, training workshops, technical assistance in upgrading technical tools and preparation of investment feasibility studies. The assistance package will be further elaborated and detailed for implementation as terms of reference are developed for interventions under each Project component.

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5. Environment 67. Similar to the social aspects, the Project is not expected to have any direct adverse environmental impacts. The Project would support several vital studies necessary for understanding and establishing enabling environmental assessment framework for the Indus basin. This includes a sectoral, strategic environmental assessment of the Indus Basin that is expected to have a broader scope compared to the 1991/92 Sectoral Environmental Assessment and also builds upon several studies carried out by the Government on environmental flows to the Indus delta and sea and (complementing the work to be done under the Sindh Water Sector Improvement project); and sediment management study of the Indus system, etc. The Project would also help improve water resources management in the Indus system and help address water and land degradation issues in the long run. The safeguard aspects and the rationale for categorizing it as a Category B project are provided in the safeguard section below. 6. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [x] [ ] Natural Habitats (OP/BP 4.04) [ ] [x] Pest Management (OP 4.09) [ ] [x] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [x] Involuntary Resettlement (OP/BP 4.12) [ ] [x] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [x] Forests (OP/BP 4.36) [ ] [x] Safety of Dams (OP/BP 4.37) [ ] [x] Projects in Disputed Areas (OP/BP/GP 7.60) [ ] [x] Projects on International Waterways (OP/BP/GP 7.50) [X ] []

Environmental Assessment (EA): The project is rated category B. 68. The Project includes capacity building for key federal water resources management institutions, and water resources management and development studies, which do not foresee physical works other than installation of flow measuring stations on the Indus River. The Project triggers OP/BP/GP 7.50 on International Waters. However, no notification will be required since the Project falls within one of the exceptions to the notification (feasibility studies). The Project will fund TA activities to enhance the Borrower’s capacity to manage environmental and social impacts under the investment programs of the Indus River Basin, covering policies and implementation practice in involuntary resettlement and environment management, such as basin level strategic environmental assessment and studies on resettlement. The Project is therefore not likely to result in any direct environmental or social impacts. However, the feasibility studies for hydropower projects that will be developed under this Project (under Component B4) will include specific environmental and social assessments in accordance with Bank policies and guidelines. In order to have better oversight for the preparation of EAs and SAs for these potential investments, the Project has been classified as Category B based on consultation with Operations Services Quality Assurance & Compliance (OPCQC) and in line with the most recent guidance issued on project screening and classification. Therefore, no specific EA or SA will be prepared and submitted to the InfoShop for this Project. 7. Policy Exceptions and Readiness 69. No policy exception is needed for this Project.

20

ANNEX 1: COUNTRY AND SECTOR OR PROGRAM BACKGROUND

PAKISTAN: Water Sector Capacity Building and Advisory Services Project A. Country and Sector Background 1. Country Issues and Country Assistance Strategy. The key challenge for Pakistan is to sustain its recent growth performance in order to generate significant poverty reduction, necessitating continued sound macroeconomic management along with further improvements in the investment climate. In particular, Pakistan’s infrastructure platform needs significant investment in order to support Pakistan’s growth and service delivery goals. Infrastructure services including electricity, paved roads, municipal services, and telecommunications reach a relatively low proportion of the population. Improvements in basic infrastructure are critical to improving human development outcomes. Approximately 40 % of the population lacks access to power and about 75 % of all rural health, education and market facilities are accessible only by earth tracks. Similarly, water and sanitation services which are critical to achieving human development outcomes suffer from poor quality and limited availability. Per capita water availability in Pakistan is currently 1,100 cubic meters (CM) which is projected to decline to 800 CM by the year 2020. 2. The infrastructure challenge is particularly acute with respect to water as Pakistan relies on the largest contiguous irrigation system in the world to provide basic food security (90 % of food production and 25 % of Gross Domestic Product GDP). However, this massive infrastructure is deteriorating and in need of rehabilitation along with reforms to improve the allocation of water as well as the efficiency of its use. Moreover, competition for water is growing among the provinces and across the varied needs for irrigation, industrial and domestic use, and the environment. Pakistan has already begun ramping up its investments, beginning with the urgent rehabilitation of barrages. Yet, there remains a need for significant new investment, not only in irrigation but in other uses of water, including hydropower generation and urban-industrial and domestic supplies (50 % of the population is not served by a formal supply system and sanitation and water treatment reaches less than 10 % of the population). At the same time, there is uncontrolled pollution of surface and groundwater from agriculture, industry and rapidly growing cities. 3. The CAS for Pakistan (discussed by the Board on June 1, 2006) increased the volume of lending to Pakistan during the next four years with immediate priority on addressing the impact of the October 2005 earthquake. More importantly, based on Government’s priorities for sustaining growth and accelerating poverty reduction, the CAS envisions an expansion in lending in infrastructure (primarily energy, water, and transport) and human development. In water and irrigation sectors the Bank is envisaged to support a combination of institutional reforms and investments throughout the system including major investments in the rehabilitation of critical assets and reforms to improve the quality, efficiency, and accountability with which irrigation services are delivered. The Project fits well in the CAS and it is a major element of the Bank’s assistance to Pakistan in the water and hydropower sector. B. Sector Background. 4. Pakistan is one of the world’s most arid countries, with an average rainfall of under 240 millimeter (mm) a year. It is located in an area which was once a desert. And, it would have remained largely a desert without the development of the canal systems, dams and hydraulic structures that divert water from the Indus River and its tributaries. These canals, which are commonly referred to as canals, are in fact the country’s main waterways. They are the sole source of water supply supporting life and livelihoods in the area that made the settlement of the population possible. In addition to providing water for irrigated agriculture they led to development of major cities, industrial and growth centers and civilization on the desert. The Indus Basin Irrigation System (IBIS) is now the largest contiguous irrigation system in the world and it is the back bone of the country’s economy.

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5. The IBIS consists of Indus River and its tributaries, three major storage reservoirs, 19 barrages, 12 inter-river link canals, 43 irrigation canal commands (covering over 38 million acres), and over 110,000 watercourses delivering water to farms. Water is diverted from the rivers by barrages or headworks into the main canals. Annually about 104 million feet of water is diverted to the from the river system to the canals. Generally the hierarchical canal system runs from the main canals to the branch canals, distributaries/minors and watercourses that supply water to chacks or dehs (tertiary irrigation command area) through moghas (ungated outlets) in the distributaries and minors. Groundwater resources are substantial with more than 600,000 tubewells in the country contributing significantly to the water supplies in area underlain by fresh groundwater. 6. Indus Waters Treaty of 1960. Today’s IBIS system is outcome of the major revamping of the system done to enable the Indus Water Treaty of 1960 with India. With the partition of the sub-continent in 1947, the border between India and Pakistan cut across the Indus, its five eastern tributaries and several canal systems. The World Bank led the efforts resulting in the Indus Waters Treaty of 1960 under which the Indus system was divided between India and Pakistan, with the western rivers (Indus, Jhelum and Chenab) allocated to Pakistan and the eastern tributaries (Ravi, Beas and Sutlej) allocated to India. As part of the works associated with the Treaty, and funded through the Indus Development Fund managed by the World Bank, a plan was prepared to provide new reservoir storage and link canals within Pakistan to enable the large-scale transfer of water within Pakistan from the western rivers to the eastern rivers, thus sustaining flow in these rivers for irrigation and other purposes. Mangla dam with about 6 million acre feet (MAF) of storage on the Jhelum River and Tarbela dam with about 11 MAF on the Indus River, and 9 link canals, were constructed as the central elements of the re-engineering of the Indus River System that was necessary to meet Pakistan’s water needs as a consequence of the Indus Waters Treaty. The Treaty has been sustained for 48 years and the infrastructure (storages and link canals) has played a crucial role in making the treaty feasible for Pakistan. The infrastructure developed by the Indus Treaty also helped to improve the water resources management basin wide (increasing canal diversions from 67 MAF to about 104 MAF currently in the Indus Basin and timeliness in delivery of water) and combined with the conjunctive use of groundwater resources propelled by investments in Salinity Control and Reclamation (SCARP) tubewells resulted in a substantial improvement in the efficiency of water use. Water Sector Issues 7. Pakistan successfully tackled the issues resulting from division of the Indus Waters and developed the IBIS into a colossal water system that is unique in the world. Today Pakistan faces numerous challenges in the water sector, which include: (i) increased water stress because of the limited groundwater that can be mobilized thereby creating the need for building surface water storage facilities that require huge investments; (ii) acute power shortages and increasing power demands requiring development of untapped hydropower resources; (iii) irrigation and drainage sector issues including low surface water delivery efficiency, low productivity, water logging and salinity and degradation of the resource base, poor operation and maintenance and low cost recovery (thus dilapidated infrastructure); (iv) basin wide water resource management issues and the need to comply with environmental requirements and flows to the delta area; (v) climate change uncertainties and related impacts on water resources; and (vi) the constrained investment climate in the sector requiring huge investment to meet these challenges. 8. Basinwide Water Resources Management. The development and management of the water resources of Pakistan in general and the Indus Basin is a huge challenge, requiring very high levels of administrative, engineering and scientific capability. Over recent decades the capacity for modern water resources management at both the federal and provincial levels has not evolved rapidly enough to meet the emerging challenges. Looking to the future, the development and management of water resources will need to be dramatically improved to address the combination of population growth, persistent

22

poverty, lagging growth in rural areas, and looming water resources constraints, and to meet the needs of a modernizing nation. Pakistan has to invest simultaneously in the infrastructure and in the institutions required for the sustainable management of increasingly-scarce water. High priority must be given to supporting the development of capacity at the federal and provincial levels. For surface water supplies, the emphasis will be on consolidating Pakistan’s platform of defined water entitlements, making the administration of these more transparent and accountable from the inter-provincial to the user levels. The Indus System River Authority’s (IRSA’s) capacity needs to be enhanced to enable it to make measured decisions about water allocation to the regions and the provinces based on the most modern tools/models along with the ability to conduct a transparent assessment of water availability, distribution, and accounting/measurement throughout the system. This is crucial for building trust among the main water users and stakeholders that would be necessary for developing ownership of and participation in future water sector investment programs. 9. Need for multi-purpose storage reservoirs. When river flow is variable, storage is required so that the supply of water can more closely match water demand. The lack of storage capacity3 and control structures is another major constraint to proper water resources management in Pakistan. Water availability in the IBIS is highly seasonal with 85 % of annual river flows occurring during a 90 to 120 days period (June to September) making storage imperative for the Rabi (winter –November-March) crop season, during which the main staple crop (wheat) is grown and in early Kharif (summer April-October) during which cash crops (such as cotton, rice and sugarcane) are grown. Relative to other arid regions, Pakistan has very little water storage capacity (equivalent to 30 days of annual Indus flows, against 900 days of storage on the Colorado River). This storage is gradually being lost due to the large amounts of silt brought by the waters originating from the glaciers and snow melt in the young Himalayas. The capacity of Pakistan’s existing reservoirs (Tarbela, Mangla and Chashma) has declined by 27 % and the cumulative decline is predicted to increase to 35 % by 2012 and to 57 % by 2025. It is estimated that if no new storage is built, canal diversions will decrease over the next decade. GOP estimates that Pakistan needs to more than double its storage capacity, an increase of 20 million acre feet (MAF) by 2025 in order to meet the projected water requirements (6 MAF for the replacement of storage lost to siltation and 12 MAF of new storage). The storage is also required for generation of hydropower which is a key component of the country’s energy system and on which reliance is expected to increase in the future. The storage can also play a useful role in maintaining environmental flows in the critical reaches of the river system and improving the ecology of the riverine and delta areas. At this time, Pakistan is raising the Mangla Dam which will add about 2.7 MAF storage. However, due to the hydrology of the Jehlum River filling of this storage is not possible every year (perhaps four out five filling would be possible). Therefore, storage on the Indus River is more essential and more effective due to higher flows allowing effective reservoir yield (possibly more than the storage capacity) and much higher hydropower generation both due to higher flows as well as the possibility of developing an Indus Hydropower Cascade. 10. Hydropower. Energy is the lifeline of economic development but unfortunately Pakistan has historically suffered energy shortages. The major energy consuming sectors of the country are industrial (38 %), transport 32 %), residential and commercial (25 %), agriculture 2.5 %) and others (2.5 %). The country historically has been subjected to energy demand suppression due to limited supplies and lack of adequate infrastructure development for provision of energy to the industrial sector. The lack of sustained and affordable energy to industry has restrained economic growth and created declining tendency for industrial investment in the country. The per capita energy consumption, which is one of the key development indicators as well as measures of quality of life of a country, is low with only 14 million BTU, as compared to 92 million BTU for Malaysia and 34 million BTU for China.

3Pakistan Water Country Assistance Strategy – Pakistan’s Water Economy Running Dry, 2005.

23

11. Currently, the power sector is experiencing acute shortages. Electricity sales rose 40 % in the five years (ending June 30, 2007), while generation capacity remained practically stagnant. It is estimated that the system lacks about 4,000 MW to cover demand with acceptable reliability. Also demand is expected to grow at 8 % per year in the medium-term. The current energy generation is about 65% from thermal plants (oil 29%, gas 36%, coal 0.3%), nuclear 2.3% and hydropower generation is 33%. This necessitates an accelerated expansion of the power generation systems. To do this, Pakistan has to tap hydropower potential, because hydropower is a relatively cheaper option, is reliable, and for system stabilization, jumping load, and frequency management as thermal generation expands over time. With multipurpose storage and cost sharing among other sectors (irrigation, domestic water use, flood, environment etc,), high altitudes in the north with substantial water flows and relatively sparse population in these areas, hydropower is the most attractive source of energy supply for Pakistan. However, the country has developed only 15% of its estimated 40,000 MW of economically viable potential, a proportion much lower than its neighboring countries (India and China utilize over 30 % of potential) and much lower than rich countries (which utilize around 75 %). Recognizing the value of power which is not subject to market volatility, which generates substantial local economic multipliers (the mostly-local construction content of hydropower is about 80 % versus about 20 % for thermal power), and which provides high-value peaking power (which is likely to be worth about four times the value of a unit of base load), Pakistan is planning for hydropower to provide about half of the new energy generated in the medium term. 12. Irrigation and Drainage Sector Issues. Agriculture is the single most important source of employment and exports (two thirds of employment and 80 % of exports). About 90 % of the food production and 25 % of the GDP comes from irrigated agriculture primarily from the IBIS. Irrigation is also represents more than 95 % of the total consumptive use of water. Despite the fundamental role it has in the economy the irrigation and drainage (I&D) in Pakistan face major issues that are evident in various forms with many of them stemming from underlying institutional weaknesses. 4 The major institutional issue is a near exclusive control of the irrigation and drainage system by public sector entities, characterized by the usual inefficiencies of centralized bureaucracies, lack of corporate skills and poor client (farmer) focus and accountability. Institutional weaknesses manifest in the form of: (i) low surface water delivery efficiency (only about 35-40 % from the canal head to crop root zone); (ii) water distribution inequities; (iii) wasteful on-farm water use; (iv) water logging and salinity; (v) poor operation and maintenance (O&M) and low cost recover; and (vi) constrained investment climate. 13. The two major provinces of Pakistan, Punjab and Sindh, and the major users of the IBIS water system have embarked on reform programs supported by Bank operations and have made significant progress in the decentralization of irrigation management and participation of the water users in the management of I&D systems leading to better services (particularly in Punjab) and more sustainable system. The Bank would continue to support the deepening of the reform program in these provinces and work with the other two provinces, the North West Frontier Province (NWFP) and Balochistan, to start similar operations. 14. Constrained Investment Climate in the Sector. The returns to investment in the water sector (irrigation, hydropower, domestic and industrial uses as well as for environment) are very high in Pakistan. However, these required investments are not forthcoming, despite the large needs for investments in the sector to expand water supplies, improve water management and control and to upgrade and modernize the century old system, resulting in its continued stagnation and deterioration. The lag in investments is becoming a major constraining factor in developing a vibrant water and hydropower sector. Many of the multipurpose reservoirs though primarily constructed for meeting water demands for irrigation actually recover their cost from the sale of hydropower. There has to be a shift in

4Pakistan: Irrigation and Drainage Issues and Options, March 1994, Report No. 11884-PAK, Pakistan Water Country Assistance Strategy – Pakistan’s Water Economy Running Dry, 2005.

24

the financing strategy for multipurpose storage. So far, the Government has only tapped public resources for investments in water and hydropower systems and currently owns the major assets in the sector. Hydropower generation provides substantial financial flows and could be of great interest to the private sector if the operations were structured properly. The extent of the investment demands may require non- traditional methods for financing infrastructure and may involve the domestic and foreign private sector and perhaps the securitization and privatization of the existing assets and/or building public private partnerships (PPPs). The main challenge is to structure the water and hydropower investment program in a manner that would allow the mobilization of financing from non-traditional sources so that the investments in the system can keep pace with the growing demands in the immediate future. C. Irrigation and Drainage Sector Reform Program 15. After the development of the 1994 irrigation and drainage strategy5, there has been a major change in the Government’s approach. The Government adopted a completely new strategy to address irrigation system issues and started an institutional reform program to revamp I&D institutions with the aim of establishing an efficient, self-sustaining I&D system. The Government’s efforts were supported by Bank-financed operations such as the National Drainage Program, the Punjab Groundwater Development Project, the ongoing NWFP and Sindh On Farm Water Management (OFWM) projects as well by other donors. Under the reform program, the irrigation service is being decentralized by developing commercially oriented area water boards (AWBs) on a canal command level, while management at the distributaries’ level is transferred to Farmer Organizations (FOs). Autonomous provincial irrigation and drainage authorities have been established for water delivery to AWBs and handling of off-farm drainage and regulations. 16. The reform program is more advanced in the Sindh Province. The latter has passed the Sindh Water Management Ordinance of 2002, which provided the underlying legal basis for the new institutions as well as the definition of their roles in the sector. Sindh has also established three AWBs in the Nara Canal, Ghotki Canal and the Left Bank covering Akram Wah and Fuleli canals. The FOs have been established on almost all distributary canals in these AWBs. Punjab has also implemented very impressive I&D reform programs that are being scaled up under the ongoing development policy loans (DPLs). Reforms programs are underway in Balochistan and the North West Frontier Province (NWFP) although they lag behind considerably. D. Water Country Assistance Strategy - Priorities for Future 17. The World Bank’s 2005 Country Water Resources Assistance Strategy “Pakistan’s Water Economy: Running Dry” (the ‘Pakistan Water CAS’) underscored thirteen main sobering facts and recommended that high priority be paid toward addressing the following issues: (i) increased water stress, with limited additional surface water and groundwater that can be mobilized; (ii) dependence on one river basin; (iii) degradation of the resource base; (iv) over exploitation and deterioration in the quality of groundwater; (v) flooding and drainage issues; (vi) the looming threat of climate change; (vii) an inadequate knowledge base; (ix) dilapidated infrastructure; (x) a financially unsustainable system; (xi) the need to invest in costly and contentious large dams; (xii) poor governance and low trust; and (xiii) low water productivity. Consistent with the CAS recommendations, the proposed Project will support Pakistan in building the fundamentals through which the water issues would be addressed in the medium and long term. The following priorities include: 18. Asset Management and Development. Pakistan has a large endowment of water resources infrastructure, most of which is owned and managed by the provinces, and are quite old. The condition of

5 Pakistan: Irrigation and Drainage Issues and Options, March 1994,

25

this stock of infrastructure is a major cause for concern. In some instances – such as Taunsa, Gudu and Sukkur barrages – the precarious state of the structures puts the well-being of millions of people at risk. In other instances, the effect is more insidious. Because of the poor condition of canals and pipes and treatment plants, the infrastructure does not produce the services it should and people have to adapt to unreliable and sub-standard services. 19. For these reasons, both federal and provincial authorities should develop a culture and practice of asset rehabilitation and management. This should include the development of asset management plans which include an inventory of existing assets, an evaluation of their condition and the requirements for one-time and regular rehabilitation and for maintenance. This assessment will provide the basis for a set of short- and medium-term priorities for asset rehabilitation and maintenance. The asset management plans must make explicit the requirements (and trade-offs) for public and user financing, and the importance for developing efficient institutional arrangements for rehabilitating and maintaining infrastructure. 20 Water Resources Management. The development and management of the water resources of Pakistan in general, and the Indus Basin, in particular, is a huge challenge, requiring very high levels of administrative, engineering and scientific capability. There is broad agreement that over recent decades the capacity for modern water resources management at both the federal and provincial levels has not evolved rapidly enough to meet the emerging challenges. Accordingly, the Government will need to give high priority to supporting the development of capacity at the provincial and federal levels. For surface water supplies, the major emphasis will be on consolidating Pakistan’s platform of defined water entitlements, making the administration of these more transparent and accountable, from the inter-provincial to the user levels. For groundwater, capacity for knowledge generation and a policy for (and its implementation) groundwater management will be critical. 21. Irrigation Service Delivery. Infrastructure is, of course, not an end in itself, but a means to an end for providing users with better, more sustainable services. In many ways, state water institutions in Pakistan (at both the federal and provincial levels) have not made the transition from the era of development and construction to the era where management of resources and services is the primary challenge. The formal service delivery structures for both irrigation and water and sanitation services are exclusively large public enterprises, which operate with little accountability to their users and with little transparency. The transition away from this old model to modern service delivery architecture should be a major objective. The emphasis will need to be on instruments rather than just on organizational forms. This will mean an emphasis on the development of frameworks which encourage the entry of new players (including community organizations and the small- and large-scale private sector), the use of contracts which specify the rights and obligations of providers and users and benchmarking for all water services. Major emphasis on the nexus of entitlements, measurements and transparency will be sine quo non. This will mean emphasizing measurement and reporting throughout, and the associated investments in measurement devices, information technology and real-time reporting of what is actually delivered to whom. 22. On-farm Productivity. Irrigation services are simply one input into a multi-faceted effort to improve agricultural production. Many of the elements of this challenge (such as credit, marketing and agricultural research and extension services) will need to be addressed as part of the Government’s overall rural and agricultural program. The investment portfolio will need to go beyond the delivery of water services and must involve investments in on-farm services (land leveling, watercourse lining – for which a major program is already under implementation-, introduction of new technologies) which are essential for agricultural diversification and for improving the amount of crop, income and jobs produced per drop of water.

26

E. Water Sector Capacity Building and Advisory Services Project (WCAP). 23. These water sector issues are enormous and complex, addressing them would require series of investments and long term commitment. The proposed Project would help the Government to address issues related to water resources management in the main river system. This in turn will allow for a transparent mechanism for water flow forecasting, availability, distribution and accounting, thus building trust among federal and provincial institution with the involvement of the stakeholders at all levels. As a result, this will help address water policy and technical issues of the investment program and assist in developing a financing strategy and a strategic social and environmental assessment framework necessary for the large investment program the Government is planning. Some support would be provided under the Project to the provinces to develop better linkages between the federal and provincial systems. Such support to provinces is already being provided under several ongoing and provincial operations such as the development policy loans (DPLs) to Punjab and Sindh Water Sector Improvement Project (WSIP) and it will be scaled up under the Barrage Rehabilitation Progams in Punjab and Sindh and possibly through new operations in Balochistan and the North West Frontier Province (NWFP).

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ANNEX 2: MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER AGENCIES

PAKISTAN: Water Sector Capacity Building and Advisory Services Project

Project

Latest Supervision (PSR) Ratings

Bank-financed

Implementation Progress

(IP)

DevelopmentObjective

(DO) Improving efficiency of water use and capital cost recovery

On-Farm Water Management Project, I, II, III, Command Water Management

S S

Rehabilitation of irrigation and drainage systems and improvements in O&M

Irrigation System Rehabilitation Project I and II S S

Rationalization of public expenditures on O&M and community participation in irrigation management.

Fordwah Eastern Sadiqia (South) Project S S

Rationalization of public expenditures on O&M and community participation in irrigation management.

Punjab Ground Water Development Project S S

System improvements, institutional changes, cost recovery, drainage system development, and community development

Left Bank Outfall Drain Project

S S

Community participation, improvements in irrigation facilities and O&M

Balochistan Community Minor Irrigation Project S S

Institutional reforms, control of waterlogging and salinity, improved water management

National Drainage Program U U

Participatory irrigation management, empowering of FOs, and productivity enhancement

Sindh On-Farm Water Management and NWFP on-Farm Water Management Projects.

S S

Participatory irrigation management, empowering of AWBs, and FOs, and productivity enhancement

Water Sector Improvement Project (WSIP) S S

Other development agencies Improving efficiency of irrigation systems, reform program, community participation, cost recovery etc.

ADB and OECF supported OFWM, Saudi Fund, DFID co-financed Projects in Sindh.

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

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ANNEX 3: RESULTS FRAMEWORK AND MONITORING

PAKISTAN: Water Sector Capacity Building and Advisory Services Project

Results Framework PDO Outcome indicators for the PDO Use of Outcome

Information To improve the management and investment planning of water resources in the Indus River Basin.

Enhanced capacity of institutions to manage water resources using modern tools, techniques and methodologies; Enhanced capability in planning and financing investments in water and hydropower sector;

Y2-Y5: The ability of institutions to use modern tools, techniques and methodologies to manage water resources will provide evidence on the improvement in the quality of water management. Y2-Y5: Existence before the end of the Project of financing plans and viable business models to support the water and hydropower sector.

Intermediate results by component

Output indicators for each component Use of intermediate outcome monitoring

information Component A. Capacity Building of and support to Federal Institutions in Water Resources Strategic staffing plan implemented Measurement of the water flow improved Financing strategy for water infrastructure by IPDF developed

Component A. Number of staff identified and trained in various institutions to improve management and planning of the Indus River System Telemetry stations upgraded and staff trained for continuous data collection and monitoring to perform flow measurements; Financial business model developed and approved by IPDF .

Component A. Y2-Y4: At least 90% of strategic staffing plans are achieved or the capacity building activities of MoWP should be revised. Y2-Y4: Assess progress made in developing technical tools and regulatory instruments in the Indus basin system. Y1-Y3: Assess the number of studies carried out to develop a business model.

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Intermediate results by component

Output indicators for each component Use of intermediate outcome monitoring information

Component B. Improvement in Water Resources Management and Development in WAPDA Data monitoring through WAPDA and IRSA will be improved Sediment management studies and flushing tests for the Tarbela Reservoir carried out Feasibility studies for hydropower investment in the Upper Indus prepared

Component B. Quality of data accessible to the public through an upgraded network system and transferred to an enhanced IRSA Sediment management studies and flushing tests for Tarbela Reservoir completed Number hydropower sites identified by WAPDA and put forward for feasibility studies

Component B. Y1-Y3: Assess the effective implementation of the upgrading tools and models of the Indus System. Y2-Y4: Progress report on the sediment management studies and tests carried out. Y2-Y4: Progress report on the feasibility studies.

Component C. Project management and additional studies Project Management Unit with monitoring cell and fiduciary capacity fully established and operational; Training programs implemented to enhance GOP water institution needs.

Component C. Evidence of performing project management unit to be provided through timely fiduciary and monitoring reporting percentage of training programs effectively designed and satisfactorily carried out;

Component C. Timely quarterly and annual progress reports are indications of a well functioning PMU. Assess the progress in the training programs with the number of effective participant that will later rejoin their initial institutions.

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PMPI

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- 32

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33

ANNEX 4: DETAILED PROJECT DESCRIPTION

PAKISTAN: Water Sector Capacity Building and Advisory Services Project Project Objectives 1 The main project objective is to improve the management and investment planning of water resources in the Indus River Basin. 2. The Indus system’s management needs to optimize the returns to Pakistani society, ensure productivity increases and support growth while addressing poverty, equity, trust and sustainability. The Indus system’s development requires very large investments in asset management and expansion, including multi purpose water infrastructure projects. Given the scale of these investments, it is particularly important that sound financial and institutional architecture, effective management of environmental and social trade-offs, and broad civil society understanding are achieved. The Project would support the Government’s efforts to creating an enabling environment, developing financing strategies and options for the large water/hydropower infrastructure development plans and helping in their concurrent implementation. Project Components 3. The Project is designed to achieve the above objectives and consists of the following components: Component A: Capacity Building of and Support to Federal Institutions in Water Resources Planning and Management (US$17 Million) 4. This component aims at reinforcing the mandates of the federal institutions and addressing the impediments to better performance. It would support capacity building of and support to federal institutions involved in water resources planning, management and development. The component includes, among other things, support for building human resources and institutional capacity in federal institutions, and support for developing studies, strategies, and plans for improving water resources planning and management. It will have the following sub-components: 5. Component A1. Capacity Building in Regulation, Policy and Planning (US$4.0 million). This component recognizes the strategic mandate the Ministry of Water and Power (MoWP) to coordinate and foster the overall development of the water and power sector in Pakistan. As such, this component will focus on strengthening of the Indus System’s institutional and regulatory framework. This is likely to include, but will not be limited to, the following: (i) water resources regulation, policy and planning; (ii) studies and policies for benefit sharing among stakeholders; (iii) studies and action plans for asset development, ownership, and operation (including potential inter-provincial assets, public-private partnerships, etc); (iv) building trusted entitlement and benefit sharing regimes (national/provincial/local); (v) studies on the lessons learned from the implementation of past and current resettlement action plans in Pakistan and international best practices with a view to improvements in the national resettlement policy and the preparation of a handbook to improve project specific resettlement plans; (vi) strategic sectoral environmental and social assessments of the whole Indus basin that could serve as a basis for project specific environment assessments and environmental management plans and help address and internalize environmental issues in water resources management planning (a similar Sectoral Assessment was carried out in 1991/92 and published in 1993 that needs to be upgraded, deepened and broadened to also include climate change impacts on the Indus hydrology, water availability and potential implications for water

34

infrastructure development); (vii) strategy for enhancing the productivity of water use, studies for improvements in irrigation efficiency; and (viii) knowledge sharing on groundwater availability and management inclusive of conjunctive uses. 6. Component A2. Capacity Building in System Planning, Management and Operation (US$4.5 million). The mandate of the Indus River System Authority (IRSA) mandate is to ensure the regulation and distribution of surface waters among the Provinces in Pakistan. Consistent with the need to enhance and develop IRSA into a modern institution, this component would strengthen IRSA’s capacity to carry out its role as envisaged in the 1991 Water Apportionment Accord. This would cover inter-alia: (i) establishment of digital and GIS based databases with the capability to integrate satellite images, and of management information systems with web-based interfaces for access to information by all stakeholders, including the public; (ii) studies and development of modern tools for improving seasonal, monthly, and 10-day inflow forecasts to the system and of possible scenarios for water requirements and for demands by various sectors and provinces; (iii) development and improvement of tools and models for simulation and optimization of the operation and management of the Indus system’s water resources including updating and enhancement of the Indus Basin Model; (iv) establishment of a water flow measurement system at key points on the river system as part of a plan to improve water auditing and transparency and communication in water distribution; and (v) institution and regulatory framework development inclusive of strategic staffing, twining with other river basins, benefits sharing with assets development, ownership and operation. 7. Much of this work will be carried out in collaboration with Water and Power Development Authority (WAPDA) (and the work program outlined in Component B1) and with the provincial authorities responsible for water resources planning and management. It will involve the provision of consulting services, equipment and goods, and incremental staff salaries. 8. Component A3. Capacity Building in Developing Financing Strategies for Water and Hydropower Sector (US$5.5 million). This component supports the development of public-private partnerships in mobilizing investments. It will build upon the experience of institutions such as WAPDA and the Private Power Investment Board (PPIB) in leveraging foreign investment (i.e. thermal power plants) to support the mandate of developing an enabling environment for hydropower business in Pakistan. The component will build the capacity of the Infrastructure Project Development Facility (IPDF), in particular the new water cell tasked with developing financing strategies for water sector programs and hydropower infrastructure and with providing advice on a variety of financial, fiscal, legal and regulatory issues. The support will cover inter-alia the following: (i) review of the medium-term investment program and identify financing strategy, including areas of potential interest to private sector; (ii) review of the existing institutional, legal and administrative framework for financing water infrastructure and development of proposals for upgrading based on international best practices; (iii) development of potential modalities for PPP taking into account possible support from the Government, donors, and revenues from the sector; (iv) a proposed medium-term financing strategy with an assessment of availability of various sources of funding; and (v) asset ownership, benefit- sharing alternatives, etc., and definition of the public sector’s financing role to complement/support potential private investments. 9. The Project would support a full time national expert (team leader) of the water cell with 2-3 qualified specialists and funding to retain specialized international legal and financial advisory services. In addition, the Project would also support consulting services for carrying out the various studies and analyses mentioned above, including advisory services from international investment banks as and when required.

35

10. Component A4. Preparation of Feasibility Studies for Small Dams and Water Storage. (US$3.0 million). This component will support the Planning Commission and provide consulting services for carrying out various feasibility studies for small dams and water storages. A list of feasibility studies would be developed and approved by the Project Steering Committee and the Association. 11. Support to the provinces would be included under the four sub-components outlined above in coordination with the various federal agencies. Direct support to the provinces is being/would be provided in the form of separate ongoing operations, including on-farm, irrigation, and water sector improvement projects, and water sector development policy loans (DPLs) to improve water resources management and water use efficiency within the provincial systems. Component B: Improvement in Water Resources Management and Development (US$17.0 million). 12. WAPDA’s mandate is to coordinate the large investments in water projects and the huge task of expanding the electricity network across Pakistan. Consistent with this mandate, this component will provide strategic support to WAPDA to enhance its mandate activities. This would include, inter-alia, the following: (B1) upgrading of existing tools, databases, models and management systems, seasonal, monthly and

10-day planning and operational models and the Revised Indus Basin Model; development of additional systems client interfaces; operationalization of these tools for water/power planning and operation and their linkage and/or transfer to IRSA and to the provincial institutions;

(B2) sediment management studies for the Indus system in particular the possibility of flushing

sediment through the Tarbela reservoir, downstream impact, upstream development of water storage facilities, feasibility level designs of sediment flushing facilities etc.; bathymetric surveys of major reservoirs and provision of modern bathymetric equipment and systems and training in bathymetric surveys; The tools and models would be developed for future use by WAPDA in continuing work on sediment management as further development of the Indus systems proceeds.

(B3) preparation of power investment plan, with a focus on hydropower development in the upper

Indus and conjunctive operation of dams and other infrastructure; development of asset management plans for major infrastructure managed and operated by WAPDA and safety inspections by national and international panel of experts, etc.; other laboratory equipment for site investigations and quality control of construction and training in use of these equipment possibly under specific pilot projects;

(B4) preparation of feasibility studies and of designs for quickly/easily implementable hydropower

project suitable for financing by international financial institutions etc., without any transboundary and riparian issues. These studies would also include environment and social assessments and environment/social management plans according to GOP and Bank guidelines. Based on the outcome of the feasibility studies detailed designs of the selected projects would be carried out for which additional financing may be identified.

13. In particular, Component B1 would be implemented in close collaboration with IRSA and interfaces would be developed for the exchange of information, data, models and other tools between WAPDA and IRSA.

36

Component C: Project Management and Additional Studies (US$4.0 million) 14. This component would support the Government and in particular, MoWP with project management which includes coordination of all project related activities, monitoring and evaluation of project impacts, and technical and financial audits. An important feature of this component would be also to enhance human resources capacity within the federal institutions particularly, in IRSA. The component will put in place an adequate training program both within Pakistan and abroad to enhance the overall capacity of staff. In addition, attention will be paid to the recruitment and training of young staff to ensure that Pakistan institutions such as IRSA are adequately staffed to carry out their mandate. 15. It will also support strategic studies and technical assistance that may be identified during project implementation. This component has been designed to allow flexibility for incorporating new sub-components as they arise. Possible areas for funding here include training in detailed design, tender designs of water/power infrastructure, construction standards and codes, design of dams, hydraulic structures, power planning, consulting and contracting services, contract administration/management and construction supervision, procurement, financial management, legal, environmental, social and water quality issues. Further technical assistance might also include: promoting centers of excellence for post graduate training in research, customized professional (re)training (water economics, laws, negotiations), study tours and short assignments term abroad for young staff. The various elements will consolidate the institution development and water management agenda. Future studies not yet identified would subsequently be approved by the Project Steering Committee (PSC) for implementation by suitable organizations including federal or provincial governments or other suitable organizations such as PPIB, BOI, etc. Appropriate arrangements would be made with the organizations for carrying out the analysis and studies.

37

ANNEX 5: PROJECT COSTS PAKISTAN: Water Sector Capacity Building and Advisory Services Project

Project Cost Estimates and Financing (US$ million)

Project Components Total Cost

IDA Financing

A. Capacity Building of and Support to Federal Water Resources Planning and Management A1. Capacity Building in regulation, policy, and planning 4.0 4.0 A2. Capacity Building in system planning management and operation 4.5 4.5 A3. Capacity Building in developing financing strategies for water and hydropower sector 5.5 5.5 A4. Feasibility studies for small dams and water storages 3.0 3.0

Subtotal A 17.0 17.0 B. Improvement in Water, Resources Management and Development B1. Upgrading of tools, water resources database, management system, models. 1.5 1.5 B2. Sediment Management Studies 3.0 3.0 B3. Asset management plans, dam safety inspections and studies 2.5 2.5 B4. Feasibility studies for run of the river Hydro projects (two studies) 10.0 10.0

Subtotal B. 17.0 17.0 C. Project Management, Coordination, Strategic Studies, Training C1. Project coordination, Monitoring and Evaluation 1.0 1.0 C2. Strategic Studies Approved by the Steering Committee during Implementation 2.0 2.0 C3. Technical Assistance and Training 1.0 1.0

Sub-total E 4.0 4.0 Total 38.0 38.0

38

Project Cost by Component and Expenditure Category (US$ million)

Component/Expenditures Goods Training Total

Incremental operating

costs Consulting Services

A1 Capacity building in regulation, policy, and planning 0.3 3.5 0.2 4.0A2 Capacity building in system planning management and operation 0.3 2.0 2.2 4.5A3 Capacity building in developing financing strategies for water and hydropower sector 5.5 5.5A4 Feasibility studies for small dams and water storages 3.0 3.0

Subtotal A 0.6 14.0 2.4 17.0B1 Databases, models etc. 0.2 1.0 0.3 1.5B2 Sediment studies 0.2 2.8 3.0B3 Hydropower planning 0.2 2.3 2.5B4 Feasibility studies 10.0 10.0

Subtotal B 0.6 16.1 0.3 17.0C1 Project coordination, monitoring, etc, 0.2 0.6 0.2 1.0C2 Other studies 2.0 2.0C3 Other TA and training 0.2 0.3 0.5 1.0

Subtotal C 0.4 2.9 0.2 0.5 4.0Total 1.6 33.0 2.9 0.5 38.0

Incremental operation costs can also cover incremental staff salaries

39

ANNEX 6: IMPLEMENTATION ARRANGEMENTS

PAKISTAN: Water Sector Capacity Building and Advisory Services Project Overall Project Management. The proposed project implementation arrangements are shown in Chart I. The Government of Pakistan (GOP) would have overall responsibility for project management would coordinate through its Ministry of Water and Power (MoWP). MoWP would anchor the Project within the newly created Project Management and Policy Implementation Unit (PMPIU) and provide overall guidance and coordination through a Project Steering Committee. The implementation arrangements are described in further detail below. The Project Steering Committee (PSC) headed by the Secretary of MoWP would provide policy guidance and monitor overall project implementation and outcome. The remaining members of PSC would include the Secretary of the Ministry of Finance, Member of the Planning Commission, Chairman of IRSA, Chairman of WAPDA, Secretary of the Privatization Commission, Secretaries of the Ministry of Food, Agriculture and Livestock (MINFAL) and Environment, Chief Executive of IPDF, Advisor to MoWP, Project Director of PMPIU, and the Provincial Secretaries of Irrigation and Power. The PMPIU will act as the Secretariat for PSC. PSC’s membership may be adjusted from time to time to address the project issues more appropriately. The PSC will meet at least once every quarter or more frequently whenever issues requiring resolution are submitted for its consideration. The PSC would: (i) review physical and financial progress reports, evaluate outcomes, ensure consistency of project implementation with the implementation framework, provide policy guidelines and advise implementing agencies as to how issues affecting implementation can be overcome; (ii) review and approve new work plans proposed by the Project’s implementing agencies, (iii) resolve issues not settled by implementing agencies; (iv) facilitate adequate approval required by GOP; (e) ensure adequacy and continuity of project management staff; and (v) ensure that the Project complies with all legal and financial covenants. The Ministry of Water and Power (MoWP) would be responsible for the overall implementation and coordination with other Ministries and agencies in the Government. The MoWP would anchor the Project within the newly created Project Management and Policy Implementation Unit (PMPIU). The project director of PMPIU has been designated as the project director for WCAP. The PMPIU will be responsible for providing support to MoWP and PSC and for implementing Component A1 of the Project. It will also coordinate the implementation of Component C of the Project and procurement for A2 and A3. . The Indus River System Agency (IRSA). This Authority is responsible for the regulation and distribution of surface waters among the Provinces in accordance with the Water Apportionment Accord of 1991. IRSA would be responsible for the implementation of component A2 of the Project in collaboration with WAPDA. IRSA would also work closely with WAPDA in implementation of Component B1. The Infrastructure Project Development Facility (IPDF) established in 2006 as a non-profit organization to promote public private partnerships in infrastructure, would be responsible for the implementation of Component A3. The IPDF will work very closely with WAPDA, MoWP, Ministry of Finance, Privatization Commission, Board of Investment and other institutions involved in financing and development of hydropower infrastructure. The Water and Power Development Agency (WAPDA) would be responsible for Component B of the Project. The General Manager for Coordination and Monitoring (C&M) would be responsible for overall

40

coordination of WAPDA components under the supervision of the Member of the (Water). The General Manager (Planning & Design) would be responsible for Component B1 (upgrading of tools, water resources databases, management system and models). In particular, Component B1 would be implemented in close collaboration with IRSA and interfaces would be developed for the exchange of information, data, models and other tools between WAPDA and IRSA also with proper linkages with the provinces. Component B2 (sediment management studies) would be implemented by the General Manager of the Tarbela Dam Project. Component B3 (hydropower development planning, asset management plans and dams safety) would be implemented by the General Manager (Technical Services). Component B4 (feasibility studies of hydropower projects) would be implemented by the General Manager (Hydro Planning). For Component B4, WAPDA will work jointly with IPDF. Preparation of PC-II. An umbrella PC-II has been prepared allowing for flexibility in defining the detailed scope of each study for subsequent preparation of the terms of reference for the consultant studies and for the preparation of specifications for equipment, goods and/or works. The PSC would be authorized to approve the work plans of the focal institution. Project Implementation Period. The timeline is as follows: The Project would be implemented over a period of about five years. Board approval: June 2008; Effectiveness: September 1, 2008; Project Completion: August 2013; and Credit closing date: February 28, 2014. Monitoring and evaluation of outcomes/results The monitoring cell of PMPIU will have the overall responsibility for gathering and consolidating the quarterly reports from all implementing agencies in an appropriate format to be submitted to GOP, PSC, and the Bank no later than three weeks after the end of each quarter. The quarterly report would cover the progress and expected completion date for civil works and equipment/goods contracts, progress on institutional components, training and studies, and activities of the project implementation consultants, M&E, other technical, procurement and financial management consultants. The reports would also cover financial and procurement information including: (i) comparison of actual physical and financial outputs with forecasts and updated six-months project forecasts; (ii) project financial statements, including the sources and application of funds, expenditures by category statement, and designated account reconciliation statement for the Designated Account (DA); and (iii) a procurement management report showing status and contract commitments. The PMPIU and MoWP will also prepare annual reports by no later than March 31 of each year of project implementation. The report will cover: (i) the progress of each component, implementation of key features of the strategies and studies, key performance indicators, operation of project facilities, and financial statements; and (ii) the annual work program for the following fiscal year, annual funds required for implementation with breakdown by financier, an updated disbursement profile, planned actions for mitigating any negative effects during construction, and target indicators for the coming year. The annual work program for the next fiscal year would be finalized by May 31 of each year. A mid-term review of the Project would be undertaken by April 20, 2010. An implementation completion report (ICR) would be submitted to the Bank no later than six months after the closing date. Communication strategy The Project is not directly engaged in building water infrastructure but it includes hydropower feasibility studies and preparation of resettlement policies that may trigger stakeholder concerns. Thus the Project includes a communication strategy as a best practice approach to raise awareness on relevant issues and to facilitate the understanding and endorsement of the relevant stakeholders. The communication strategy will focus on mechanisms that can build support among the different stakeholders to: (i) strengthen the

41

implementing agencies communications and create awareness for their respective missions and the Project activities; (ii) foster collaboration between the involved agencies and the stakeholders to build trust and confidence on critical activities and policies requiring their inputs in the decision making process; (iii) encourage participation and convince the public about the transparency of decision making on sensitive issues such as water allocation, infrastructure development and impacts and (iv) build a credible corporate image for implementing agencies. The Communications Strategy should be based on the following key principles: (i) inform while respecting stakeholders opinions in terms of concerns and lack of awareness; (ii) create an inclusive, open and reliable dialogue with stakeholders in order to get feedback and readjust the strategy as needed; (iii) use a multimedia approach to ensure that all related segments of stakeholders are reached; (iv) encourage Project staff and management to keep themselves informed and be accessible to both the media and the public; and (v) build on the implementation of the Project activities and give visibility to implementing agencies as credible institutions with a clear vision in addressing issues.

- 42

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ANNEX 7: FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS

PAKISTAN: Water Sector Capacity Building and Advisory Services Project Financial Management Arrangements Adequate financial management arrangements are required to be in place in order to maintain the smooth implementation of the project activities. Suitably qualified financial management personnel are therefore required to establish and manage a robust financial information system in accordance with acceptable accounting, internal control and financial reporting policies and procedures. The financial management assessment provides an outline of the agreed financial management (FM) arrangements and identifies the inherent and control risks and corresponding actions mitigating these risks. The inherent and control risks are “modest”6 in this case. The PMPIU at MoWP shall be the principal implementing and coordination agency for the Project and a single Designated (Special) Account under the administrative management of PMPIU will therefore be established. The PMPIU will be responsible for putting in place the required financial management infrastructure with the adequate staff to manage the Designated (Special) Account, and withdraw funds from the Credit through replenishment of the Account as well as through direct payments. The PMPIU will also be required to effectively discharge the accounting, internal control, financial reporting and external audit coordination responsibilities for the entire Project. In order to effectively and efficiently manage these responsibilities, the PMPIU has three FM positions including two finance and business specialists and one accounts/administrative officer, although one of the finance and business specialist positions is presently still vacant. The vacancy needs to be filled urgently. WAPDA, IRSA, and IPDF, have financial management staff in place within their respective finance units. The respective staff capacities are adequate to cater to the incremental activities of the Project. Only IRSA needs to fill the position of budget and accounts officer under the senior budget and accounts officer, for which the selection process is already underway. The Project would use a report-based disbursement mechanism for accessing Bank funds through the submission of six monthly projections included in the interim un-audited financial reports (IUFRs). As the Project would be completely financed by IDA funds, there will be no ‘assignment account’ representing the Government of Pakistan’s contribution to the Project. WAPDA, IRSA, and IPDF will serve as key participating agencies in the execution of the Project will each be authorized to maintain and operate a revolving fund (imprest) account, sourcing funds from the Designated (Special) Account. This would enable them to directly finance eligible expenditures related to the Project activities. In the case of large contracts, these participating agencies would authorize PMPIU to make the direct payments to the contractors/service providers. The implementation and associated procurement and financing arrangements for the activities that are to be carried out by the entities other than those already identified under the Project will agreed by PSC in consultation with the Bank. Owing to the considerable risks associated with the contract payments, it is of utmost importance that: (a) the individual payments are accurately and transparently computed; (b) the claims are concurrently documented and verified for audit purposes; and (c) the transparent and efficient mechanisms are adopted to handle any deductions. While the internal systems of the implementing agencies would be used for financial management, the PMPIU would devise brief Standard Operating Procedures (SOPs) for managing the contract payments for clarity purposes and they will describe the steps to be observed by the implementing agencies before making any payments.

6 The risk-rating follows four point scale where ‘modest’ is less than ‘high’ and ‘substantial’ and greater than ‘low’.

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The PMPIU will also engage an independent firm to carry out an internal systems assurance, which will include an assessment of internal controls over contract management, payments, and ex-post review of procurements etc. with respect to all the activities of the Project carried out by the different implementing agencies. The Auditor General of Pakistan will carry out the audit of consolidated annual financial statements of the Project, and the annual audited financial statements of the Project shall be submitted to the Bank within six months after the close of each fiscal year. Country Issues Relevant to the Project The Country Financial Accountability Assessment (CFAA, Dec 2003) identified several weaknesses in data reliability and presentation in the public financial management systems in the country. However, a number of initiatives and actions are currently being implemented to address the weaknesses. Among these initiatives is the Project to Improve Financial Reporting and Auditing (PIFRA) at the federal, provincial and district levels. Significant progress has been achieved so far to increase the effectiveness, transparency, and accountability in public expenditure management and as a result, the state of public financial management is gradually improving. The Public Financial Management and Accountability7 assessments of three provinces are carried out in FY 2006-07 which confirm the significant progress in implementing reforms if public financial management. However, PIFRA is an identified initiative that needs to be implemented largely by autonomous agencies at national the level, so the risks inherent to public financial management systems are unlikely to affect the Project.

Risk Analysis Overall the inherent financial management risk of the Project is assessed as “modest”. The elements of the overall risk assessment, together with their respective mitigating measures, are highlighted in the table below: Risk Risk Rating Risk Mitigating Measures

Incorporated into Project Design Condition of

Negotiations, Board or Effectiveness (Y/N)

Inherent Risk Modest - Country Level Substantial - Project implementation by PMPIU and

identified autonomous agencies of the federal government

N

- Entity Level - Project Level Modest - Recruitment of a professional

accountant in PMPIU. N

Control Risk Modest - Budgeting Modest - Project budgets updated regularly N - Accounting Modest - - Internal Control Substantial - Development of SOPs for contract

payments - Commissioning of an internal systems assurance exercise

N

N

7 The provincial PFMAs are carried out using a more refined and globally accepted PEFA framework, which gives an indicator-led insight into various elements of the public financial management.

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Risk Risk Rating Risk Mitigating Measures Incorporated into Project Design

Condition of Negotiations, Board or

Effectiveness (Y/N) - Funds Flow Modest - Use of report-based disbursement

- WAPDA to be allowed advance based on 180 days’ cash flow projections

N

N -Financial Reporting

Modest - Agreement on the format of the IUFRs - Adoption of International Public Sector Accounting Standards

N

N - Auditing Modest - Federal Audit wing of the Auditor

General would coordinate the audit of the project

N

Overall Risk Modest Strengths and Weaknesses With a single Designated (Special) Account to be established for the Project, a fairly high proportion of the project costs would be directly processed through the account by the PMPIU itself. Also, since the PMPIU will have qualified FM staff, an inherent strength will be established to ensure effective, efficient and accountable management of funds. A key weakness is the lack of prior experience of implementing entities in managing Bank-financed projects of similar nature, i.e. a TA of this magnitude in the recent past. There have been signs of difficulties in handling contractual payments, especially in the case of consultancy contracts, in other Bank-financed projects. Therefore, it would be important to build the capacity of implementing entities right from the stage of articulating the financial provisions in the consultancy contracts to the clear interpretation of the payment milestones, monitoring/certification process, and delegation of financial powers to meet the contractually stipulated period of payment. Implementation and Institutional Arrangements The PMPIU, housed in the MoWP, would take the overall responsibility for the execution of the Project components under the oversight and inter-institutional coordination of the Project Steering Committee, chaired by the Secretary, MoWP. The PMPIU would involve other relevant agencies in the implementation of the various project components, sub-components, and activities. Key among these agencies are WAPDA, IRSA, and IPDF. Staffing Arrangements In order to effectively and efficiently manage these responsibilities, the PMPIU has three FM positions including two finance and business specialists and one accounts/admin officer, although one of the Finance and Business Specialist positions is presently still vacant. The finance and business specialist holds an M.Phil in Finance and Marketing, whereas the accounts/admin officer has a background in the government audit and accounts. While these three FM staff should be sufficient in handling the workload of the Project, the PMPIU needs to recruit a qualified accountant (CA, ACCA etc.) to fill the vacant post of finance and business specialist in order to attain a suitable mix of expertise. The recruitment and placement of the market-based qualified accountant is a specific condition for project negotiation. WAPDA, IRSA, and IPDF, all have adequate financial management staff in place within their respective finance units. The respective staff capacities are adequate to cater to the incremental activities of the

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Project. Only IRSA needs to fill out the position of budget and accounts officer under the senior budget and accounts officer, for which the selection process is already underway. The selection and placement of the budget and accounts officer, suitably qualified as defined by IRSA in the Conditions and Qualifications for Direct Appointment/Promotion, is a specific condition for negotiation. Funds Flow/Disbursement Arrangements One Designated (Special) Account in US Dollars will be established for the Project, out of which IDA Credit funds will be released and it will be managed and operated by the PMPIU. The IDA funds (according to the government procedures) will be channeled through the State Bank of Pakistan to the Designated (Special) Account of the Project at the National Bank of Pakistan. The project director of the PMPIU would observe GOP instructions issued by the Finance Division (Dated November 25, 2002 and updated June 6, 2005) regarding the maintenance and operation of revolving fund accounts opened for IDA, IBRD and ADB Credits/Loans. The project director will also do the compilation of the financial reports by function and object heads requirements. The Project would use report-based disbursement mechanism for accessing the Bank funds i.e. through the submission of six-monthly projections included in Interim Un-audited Financial Reports (IUFRs). Since WAPDA, IRSA, and IPDF will be the key participating agencies for the implementation of this Project, the need to establish ‘revolving-fund (imprest) accounts’ through advances to be made from the Designated (Special) Account has been well recognized. The PMPIU would advance to these entities an amount equal to the budgeted expenditures related to the Project over a 90-day period, and replenish the account at the end of each calendar month on a revolving basis. Based on the volume of activities to be undertaken by WAPDA, an exception is drawn to allow for advances equivalent to 180 days’ expenditures and replenishment on a quarterly basis. WAPDA, IRSA and IPDF will nominate their respective authorizing officers for the purpose of approving expenditures from the imprest and will identify on a monthly basis the staff in their respective finance sections to the imprest bookkeeper. A simplified imprest account shall be maintained by the responsible officials of these entities in a manner sufficient to render the classified account to the PMPIU for the consolidation of the project financial reports. The certified receipts for the expenditures incurred will be kept by these respective entities for the purposes of the annual audits. In the case of direct payments requested by these entities, the PMPIU should execute the payment requests against contracts within seven working days after the receipt of such a request. This is necessary to avoid any delays in project implementation due to unreasonable delays normally associated with making payments for goods or services rendered, especially where the contracting agent is not the same as the paying agent. Chart II best presents the schematic flow of IDA funds for the Project to the implementing entities. Apart from the Designated (Special) Account to be maintained by the PMPIU, there will be no ‘assignment’ account representing the GOP’s contribution to the project implementation activities. The Bank has agreed to provide 100% financing for all core project expenditures by taking advantage of the flexible expenditure eligibility criteria under the country financing parameters agreed between GOP and the Bank. The proposed IDA Credit would be disbursed over a period of five years. The Project is so designed to allow for the disbursement categories to be closely mapped with the project components and sub-components. The allocation of the Credit proceeds by disbursement category, and the related percentages to be financed under the IDA Credit are shown in Table 1.

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Accounting Policies & Procedures The PMPIU and other implementing agencies shall establish the controls necessary for the preparation of accounting records and the approval of transactions, ensuring that all transactions are correctly made and adequately explained. An adequate chart of accounts will be developed to properly account for and report on the project activities by components and sub-components. Adequate segregation of duties among staff working in these entities shall be in place in order to deter any abuse of authority and to safeguard the assets of the Project. In addition, the implementing entities would adopt effective budgetary procedures and controls linked with the processing of commitments and payments. A proper examination of the variances from the budget, both physical and financial, shall be ensured.

:

Chart II Flow of Funds in Schematic Form Internal Systems Assurance Owing to the considerable risks associated with the contract payments, it is of utmost importance that: (a) the individual payments are accurately and transparently computed; (b) the claims are concurrently documented and verified for audit purposes and (c) the transparent and efficient mechanisms are adopted to handle any deductions/withheld amounts. While the internal systems of implementing agencies would be used for financial management, the PMPIU would devise brief standard operating procedures (SOPs) for managing the contract payments for enhanced clarification, which will describe the steps to be observed by the implementing agencies before making any such payments. The PMPIU will engage an independent firm to carry out an internal systems assurance, which will include an assessment of internal controls over contract management, payments, and ex-post review of procurements etc. with respect to all the activities of the Project carried out by different implementing agencies. The exact terms of reference of the internal systems assurance would be refined each year with concurrence by the Bank to include other items in order to safeguard against risk elements identified by

World Bank Credit Account

Service Providers & Contractors

Designated Account in the NBP

Implementing Agencies 90 or 180 days Revolving Fund Imprest Accounts

IRSA WAPDA IPDF

MOWP: PMPIU

Direct Payments

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then. The first assurance exercise would be commissioned when a reasonable number of contracts have already been awarded. Financial Reporting Framework The Project shall be required to comply with the financial reporting requirements of the Bank in all respects and shall ensure that all supporting acquaintances related to the transactions financed by the IDA funds are appropriately maintained.

Table: Disbursement Arrangements (US$ million)

Category

Total Amount

IDA

Allocation

Financing

Percentage 1. Goods and Works 100% of expenditures (a) Equipment and Goods Under Part A1 and C 0.4 0.4 (b) Equipment and Goods Under Part A2 2.2 2.0 (c) Equipment and Goods Under Part B 0.3 0.3

Subtotal Goods 2.9 2.7

2. Consulting Services 100% of expenditures (a) Consulting Services under Part A 14.0 10.0 (b) Consulting services under Part B1 1.0 1.0 (c) Consulting services under Part B2, B3 B4 15.1 15.0 (d) Consulting services under Part C 2.9 2.0

Sub-Total Consulting Services 33.0 28.0

3. Incremental Operating expenditures and training 100% of expenditures (a) incremental admin and operating expenditure 0.6 0.6 under part A of the project (b) Incremental expend. Under Part B 0.6 0.6 (d) under part C 0.4 0.4

(e) Training 0.5 0.5

Sub-Total 2.1 2.1

4. Unallocated

5.2

Total 38.0 38.0

Quarterly Interim Un-audited Financial Reports (IUFRs) should be prepared by the PMPIU and made available to the Bank within 45 days after the end of each quarter. The key constituents of the IUFRs are

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as follows: ‘Sources of Funds and Uses of Funds by Components, Sub-components, Activities and Categories’; ‘Physical Progress and Output Monitoring Report’; ‘Procurement Status Report’; ‘Cash Forecast Report’; and ‘Designated (Special) Account Activity Report’. The format of these constituents will be agreed and documented at project negotiation. PMPIU would prepare the IUFRs by consolidating the financial information of its own activities with that included in the reports received from other implementing agencies. For the purposes of the consolidation, the internal transfer of funds from the Designated Account to second generation imprest accounts will be eliminated, and cash balances in all the accounts will be cumulatively reported as the project cash balance. The PMPIU shall adopt a cash basis of financial reporting, based on the IPSAS 8 requirement, for preparing and consolidating the annual financial statements of the Project. For the purposes of providing additional comprehensiveness, the ‘notes’ to the annual audited financial statements to be submitted to the Bank should adequately disclose the commitments and obligations outstanding at the close of the year. For the purpose of assuring the completeness of the Government’s civil accounts in respect of IDA funded expenditures of the Project, the PMPIU shall provide a comprehensive report of the expenditures made from the Designated (Special) Account and also through direct payments to the Accountant General Pakistan Revenues (AGPR) on a monthly basis by the 12th of the following month. These expenditures, after reconciliation, will be aggregated with the overall government civil accounts. External Audit Because the PMPIU is a new office, the activities have so far not been audited; however, other participating agencies, which will have project imprest accounts, are subject to regular audit. The audit of WAPDA9 and IRSA is carried out by the Department of the Auditor General of Pakistan according to its annual audit work program. In the case of IRSA, the audit observations were shared with the agency for FY 2005-06, and IRSA has submitted the annotated replies to the audit observations. IPDF 10 is a government owned company registered under the section 42 of the Companies Ordinance, 1984 (as a non-profit organization) therefore, the company’s annual financial statements are audited by private auditors. The annual financial statements audited by the Auditor General of Pakistan, 11 covering all aspects of the Project, would be submitted to the Bank within six months after the close of the fiscal year. While various field offices may be involved in carrying out the audit related to the project activities undertaken by different entities, the Director General (Federal) Audit would coordinate all such activities and will be responsible for consolidating and issuing the audit report on the consolidated annual financial statements of the Project. Although the usual time taken in rigorous audit is longer than that acceptable to the Bank, in the case of Bank financed projects, the Government has agreed with a time schedule that is acceptable to the Bank. The annual audit reports will consist of a single opinion on the financial statements of the Project

8 International Public Sector Accounting Standards – Cash Basis 9 www.wapda.gov.pk 10 www.ipdf.gov.pk 11 The role of the Auditor-General to carry out the annual audit of the project financial statements of the Bank-financed projects is generally acceptable to the Bank. The Auditor-General being the Supreme Audit Institution in Pakistan has formally adopted the INTOSAI Standards on auditing. In addition, the new Financial Audit Manual enshrines the principles contained in the International Standards on Auditing issued by International Federation of Accountants, therefore in compliance with the Bank’s guidelines: Annual Financial Reporting and Auditing for World Bank-financed Activities (June 2003).

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including the Designated Account reconciliation and withdrawal schedule. A management letter shall accompany all audited financial statements. The PMPIU and other implementing agencies will provide the auditors with full access to the Project related documents and records, including the compensation payments database. The Bank will review the compliance with the audit requirements as per the table given below: Implementing Agency Audit Opinion Due Date PMPIU (MoWP) Project Consolidated Financial Statements December 31

The usual Government procedures for resolution and settlement of audit observations would be applicable for this Project. Material observations will be presented before the Public Accounts Committee (after scrutiny by the Departmental Accounts Committees (DACs), as required) whereas the ordinary audit observations will remain a subject of the DACs. Retroactive Financing To meet the urgent project preparation and start-up needs, the IDA Credit may be used to retroactively finance expenditures incurred during the period between appraisal (April 2008) and Credit signing (June 2008) of up to 20% of the Credit amount, provided that procurement procedures acceptable to the Bank are followed. Action Plan Agreed Action RESPONSIBILITY Completion By

1. Appointment and placement of the Finance and Business Specialist in PMPIU

PMPIU July 31, 2008

2. Appointment and placement of the Budget & Accounts Officer in IRSA

IRSA Completed

3. Preparation and approval of brief Standard Operating Procedures for Contract Payments

PMPIU July 31, 2008

4. Agreement on the format of the IUFRs PMPIU Negotiations Implementation Review Plan The staffing adequacy for this Project, in terms of number and quality, will provide the requisite assurance that the Project’s financial management arrangements are adequate. With this in mind, the Bank’s normal supervision procedures will suffice, although a closer and intensive supervision will be required in the first year to ensure compliance with the agreed implementation of FM arrangements.

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ANNEX 8: PROCUREMENT ARRANGEMENTS

PAKISTAN: Water Sector Capacity Building and Advisory Services Project

1. Procurement under the Project would be carried out in accordance with the World Bank’s Guidelines: Procurement under IBRD Loans and IDA Credits of May 2004 revised October 2006, and Guidelines for Selection and Employment of Consultants by World Bank Borrowers of May 2004 and revised in October 2006. The Bank’s standard bidding documents for procurement under International Competitive Bidding (ICB) and sample bidding documents for procurement under National Competitive Bidding (NCB) which are already being used in other Bank financed projects in Pakistan and will be used for procurement of goods and works under the Project. The Bank’s Standard Request for Proposal document will be used in the selection of consulting firms. GOP shall ensure that the Project is carried out in accordance with the provisions of the Anti-Corruption Guidelines. 2. All expected procurement of goods, works and consultants’ services will be listed in the Project’s General Procurement Notice (GPN). Specific Procurement Notices (SPNs) shall be published for all ICBs for goods and works, and consultancy assignments estimated to cost more than US$200,000. A GPN will be published in the United Nations Development Business (UNDB) by end of May 2008, and it will be updated annually. Overall procurement arrangements with tentative amounts are given in Table 1. Procurement of Works 3. The Project is not likely to involve much civil works. The presently identified contracts include only one possible civil works contracts, i.e. water flow measurement stations to be installed by IRSA; that too once finalized could eventually qualify as a supply and installation contract. Other works contract as identified shall be included in the procurement plan. All works contracts to be executed by WAPDA shall be procured through the General Manager (C&M) and those to be executed by other implementing agencies shall be procured by PMPIU. All contracts estimated to cost more than US$3million shall be procured using Bank’s standard bidding documents for International Competitive Bidding (ICB). Works estimated to cost more that US$50,000 shall be procured using National Competitive Bidding documents acceptable to the Bank, while works estimated to cost less than US$50,000 shall be procured through Shopping. Procurement of Goods 4. Goods procured under this Project are likely to include: office equipment, vehicles, furniture, field equipment and heavy equipment, bathymetric, investigations and material testing laboratory equipment, etc. All field/operational vehicles would be procured through Shopping. The International Competitive Bidding (ICB) procedure would be used for all contracts estimated to cost more than US$300,000 equivalent, using the Bank’s standard bidding documents. Contracts costing more than US$100,000 would be procured through NCB, using the bidding documents acceptable to the Bank and contracts costing less than US$100,000 may be procured through Shopping. Improvement of Bidding Procedures under National Competitive Bidding

5. The following improvements to the bidding procedures will apply to all procurement of goods and works under National Competitive Bidding, in order to ensure economy, efficiency, transparency and broad consistency with the provisions of Section 1 of the Guidelines: (i) Invitation to bid shall be advertised in at least one national newspaper with a wide circulation at

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least 30 days prior to the deadline for the submission of bids; (ii) bid documents shall be made available, by mail or in person, to all who are willing to pay the

required fee; (iii) foreign bidders shall not be precluded from bidding and no preference of any kind shall be given

to national bidders in the bidding process; (iv) bidding shall not be restricted to pre-registered firms; (v) qualification criteria shall be stated in the bidding documents; (vi) bids shall be opened in public immediately after the deadline for submission of bids; (vii) bids shall not be rejected merely on the basis of a comparison with an official estimate without

the prior concurrence of the Association; (viii) before rejecting all bids and soliciting new bids, the Association’s prior concurrence shall be

obtained; (ix) bids shall be solicited and works contracts shall be awarded on the basis of unit prices and not on

the basis of a composite schedule of rates; (x) contracts shall not be awarded on the basis of nationally negotiated rates; (xi) single bid shall also be considered for award; (xii) contracts shall be awarded to the lowest evaluated and qualified bidder; (xiii) post-bidding negotiations shall not be allowed with the lowest evaluated or any other bidders; (xiv) draft NCB contract would be reviewed by the Bank in accordance with the prior review

procedures; (xv) A firm declared ineligible by the Association, based on a determination by the Association that

the firm has engaged in corrupt, fraudulent, collusive, coercive or obstructive practices in competing for or in executing an Association-financed contract, shall be ineligible to be awarded an Association-financed contract during the period of time determined by the Association.

(xvi) Each contract financed from the proceeds of a Credit shall provide that the suppliers, contractors and subcontractors shall permit the Association, at its request, to inspect their accounts and records relating to the performance of the contract and to have said accounts and records audited by auditors appointed by the Association. The deliberate and material violation by the supplier, contractor or subcontractor of such provision may amount to obstructive practice.

Selection of Consultants 6. Major consulting services under the Project would be required for the sedimentation studies and analysis, strategic environmental assessments, hydro power planning studies, feasibility studies for the hydropower plants, and support to IPDF for developing financing strategies. Consultancies to be selected by WAPDA will be processed by them, while PMPIU will be the focal point for processing all the consultancies to be hired by MoWP, IRSA and IPDF. Contracts with consulting firms will be procured in accordance with Quality and Cost Based Selection procedures or other methods given in Section III of the Consultants’ Guidelines. Consulting services selection would be carried out through Quality and Cost Base Selection (QCBS) for contracts with consulting firms costing more than US$200,000 equivalent, and through Consultants Qualification (CQ) for contracts costing up to US$200,000. Short lists of consultants for services estimated to cost less than US$500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

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Selection of Particular Types of Consultants 7. UN agencies and other institutions may be hired as consultants, where they are qualified to provide technical assistance and advice in their area of expertise. Subject to prior no objection from the Bank, single-source selection may be used if the criteria outlined in paragraph 3.10 of the Guidelines are fulfilled. Selection of Individual Consultants 8. Services for assignments that meet the requirements set forth in paragraph 5.1 of the Consultant Guidelines may be procured under contracts awarded to individual consultants in accordance with the provisions of paragraphs 5.2 through 5.3 of the Consultant Guidelines. Under the circumstances described in paragraph 5.4 of the Consultant Guidelines, such contracts may be awarded to individual consultants on a sole source basis. Incremental Operating Costs 9. The incremental operating costs for covering incremental staff salaries, rent, office supplies, utilities, operating and maintenance expenditures of office equipment and vehicle, etc. would be disbursed on the basis of annual budgets to be prepared by the implementing agencies and agreed with IDA. Assessment of Agency’s Capacity to Implement Procurement 10. As indicated in the risk section, the project risk is rated as “substantial ” from the procurement and contract management points of view. This assessment is based on the existing multi-agency procurement arrangement, previous performance of implementing agencies such as WAPDA, and capacity assessment of all participating implementing agencies. WAPDA has extensive experience with hiring consulting firms as well as procuring goods, and their selection process is documented for various thresholds of delegation. However, its procurement cycles are too long. Likewise, IPDF has a defined system of selection of firms. IRSA and MoW&P have to follow the federal procurement rules; which are not elaborate for consultancy services. All the implementing agencies understand that the Project would be implemented, through the Bank’s procurement rules, which are given in this annex and supporting documents. The procurement arrangements have been agreed with the implementing agencies. Various components of the Project pertain to MoWF, IRSA, WAPDA, and IPDF. WAPDA shall be responsible for procurement of Component B, and some portions of Component C. The General Manager (C&M) has been designated as the procurement focal person for these components. Assisted by his Chief Engineer and Directors, he shall be responsible for coordinating and executing procurement by the various sections of Planning, Dams and Hydro Planning within WAPDA. Procurement by MoWP, IRSA and the Planning Commission (Components A1, A2, A4 and some portions of Component C) shall be conducted with assistance from PMPIU. While a procurement staff member will be hired for PMPIU, the Project Director assisted by the Director of Water Resources is identified as the procurement focal person. The responsibility for Component A3 which is to be executed by IPDF would also rest with IPDF, but PMPIU will have a key role in procurement planning, documentation and evaluations. The Senior Advisor is the focal person to coordinate the procurement within IPDF. IPDF shall also be staffed to undertake its own procurement. 11. In order to ensure the efficiency and transparency in procurement, the following measures would be taken for implementation of the Project: (i) A procurement website would be developed by WAPDA (as a link to their existing website) to

provide the project specific procurement plan, procurement notices, invitation to bid, bid

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documents and Request for Proposal Packages (RFPs) as issued, latest information on procurement contracts, status of evaluation, complaints and actions taken, contract award and performance under the contracts and other relevant information related to procurement. All such information shall also be provided by PMPIU for the project components under their execution on their website. The website would be accessible to all bidders and interested persons equally and free of charge. The PMPIU website and the project link to the WAPDA website shall be fully functional by October 31, 2008. However, all information commencing from the GPN shall be immediately posted on the existing WAPDA website.

(ii) Procurement training sessions will be held for all implementing agencies to ensure that the

requirements and timelines of the Bank financed procurement is clearly understood at the commencement of the Project. The Bank will conduct such training, as soon as the procurement staff member for the PMPIU are hired which should not be later than June 30, 2008.

(iii) Procurement Plans will be backed up with diligent market research to ensure that the packages

for ICB and/or NCB are aligned to the market capacity. ICBs shall be processed if the local markets are found deficient/limited for certain specialized goods. Packaging shall be done in a cost effective manner, optimizing on economy of scale. No procurement shall be processed unless included in the procurement plan and approved by the Bank. Procurement plan updates shall be included in the quarterly progress reports.

(iv) Adequate dissemination for consulting firms and goods suppliers shall be ensured by providing

procurement updates (particularly procurement notices and request for expression of interest) to foreign missions in the country.

(v) A procurement manual is being prepared by PMPIU and it will document all the procurement

processing and approval procedures to be followed by the implementing agencies as well as the responsibilities and timelines for approvals/reviews.

(vi) A credible system of handling complaints would be put in place. The PMPIU would manage

the complaint handling system with overall oversight by the PSC. This system would include maintenance of a database, a standard protocol with appropriate triggers for carrying out investigations, and taking action against involved parties. PMPIU would develop the system as soon as possible and it would be reviewed by the Bank. For ICB/international selection of consultants the Bank prescribed complaint redress mechanism will apply. Details of the system will be given in the Procurement Manual which shall be finalized before negotiations. The system shall be fully functional by March 31, 2009. A status report of the complaints handling mechanism shall be included in the quarterly progress reports.

(vii) A panel of experts shall be formed for quality assurance. Local and international experts shall be

hired on short-term assignments to review the reports prepared by the consultants, and provide feedback to the client to optimize the outputs. A panel of experts would also be used to prepare TORs and specifications as and when required.

12. With the above arrangements, the procurement under the Project is likely to be effective and transparent resulting in a smooth implementation of the Project and achievement of the project development objectives. At this stage, procurement risk of the Project is rated “high”. However, the procurement process and implementation of the contracts would be reviewed every six months by the PSC in collaboration with the Bank and adjustments would be made and corrective actions would be taken if necessary.

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Procurement Planning 13. The Borrower is developing a procurement plan for project implementation which provides the basis for the procurement methods. This plan will be agreed between the Borrower and the project team before negotiations, and would be available from the borrower’s website. It will also be available from the project database and the Bank’s external website. The Procurement Plan will be updated in agreement with the project team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Table: Procurement Arrangements (US$ million)

Category ICB NCB Other Total 1. Goods and Works (a) Equipment and Goods Under Part A1 and C 0.4 0.4 (0.4) (0.4) (b) Equipment and Goods Under Part A2 2.2 2.2 (2.2) (2.2) (d) Equipment and Goods Under Part B 0.3 0.3 (0.3) (0.3)

Subtotal Goods 2.2 - 0.7 2.9 (2.2) - (0.7) (2.9)

2. Consulting Services (a) Consulting Services under Part A 14.0 14.0 (14.0) (14.0) (b) Consulting services under Part B1 1.0 1.0 (1.0) (1.0) (c) Consulting services under Part B2, B3 B4 15.1 15.1 (15.1) (15.1) (d) Consulting services under Part C 2.9 2.9 (2.9) (2.9)

Sub-Total Consulting Services 33.0 33.0 (33.0) (33.0)

3. Incremental Operating Expenditures and Training (a) incremental admin and operating expenditure 0.6 0.6 under part A of the project (0.6) (0.6) (b) Incremental expend. Under Part B 0.6 0.6 (0.6) (0.6) (d) under part C 0.4 0.4

(0.4) (0.4) (e) Training 0.5 0.5

(0.5) (0.5)Sub-Total 2.1 2.1

(2.1) (2.1)Total 2.2 - 35.8 38.0

(2.2) - (35.8) (38.0)

56

Review of Procurement by the Bank 14. Thresholds for prior review are given below. These thresholds would be reviewed in 18 months and adjustments would be made on the basis of the implementation experience. (i) All ICB contracts for works and goods; (ii) All single source selections or direct contracts; (iii) First NCB contract for goods, irrespective of value, awarded by each implementing agency; (iv) First NCB contracts for works, irrespective of value; and thereafter each contract for works

estimated to cost US$300,000 equivalent or more; (v) First contract procured through shopping, for goods and works by each implementing agency; (vi) The first consultant services contract with consulting firms, irrespective of value, awarded by

each implementing agency, and thereafter all contracts with firms estimated to cost US$100,000 equivalent or more;

(vii) The first consulting services contract with individual consultants, irrespective of its value, awarded by each implementing agency, and thereafter all contracts with individuals estimated to cost US$50,000 equivalent or more.

15. All other contracts will be subject to Post-Review by the Bank. Each implementing agency will send to the Bank a list of all contracts for post-review on a quarterly basis. Post reviews as well as implementation reviews would be done every six months. Such review of contracts below the threshold amounts will constitute a sample of about 10-15 % of the contracts.

Procurement Information and documentation – Filing and database 16. Procurement information will be recorded and reported as follows: (i) Complete procurement documentation for each contract, including bidding documents,

advertisements, bids received, bid evaluations, letters of acceptance, contract agreements, securities, related correspondence etc., will be maintained by the implementing agencies in an orderly manner and readily available for audit.

(ii) Contract award information will be promptly recorded and contract rosters as agreed will be

maintained by each implementing agency. (iii) Comprehensive quarterly reports by WAPDA and PMPIU indicating: (i) revised cost estimates,

where applicable, for each contract; (ii) status of on going procurement, including a comparison of originally planned and actual dates of the procurement actions, preparation of bidding documents, advertising, bidding, evaluation, contract award and completion time for each contract; and (iii) updated procurement plans, including revised dates, where applicable, for the procurement actions.

(iv) A procurement database would be developed to support the procurement website. It will register

relevant information in a database format that would be suitable for analysis. The database would include the above information and, in addition, other relevant information such as official estimates (global unit prices based on market rates), all bidders (individual, companies, joint ventures, owners information, bank guarantee information, etc.), all bids and relevant staff offered (technical experts, work supervisors, etc.). The database would be designed and supervised by PMPIU in accordance with the format agreed with the Bank. This database could be used as a resource by the implementing agencies to plan for future projects.

57

Frequency of Procurement Supervision 17. Bank supervision would be carried out regularly every six months. However, supervision will be conducted more frequently in the early stages of project implementation. In addition to the prior review, Bank supervision missions, will include a procurement specialist, who would carry out post reviews of procurement actions. The Bank’s procurement specialist based in the Country office in Pakistan will be available to discuss procurement issues with the implementing agencies and provide guidance as and when needed. Details of the Procurement Arrangements 1. Civil works. The Project will no involve major civil works contracts. 2. Consulting Services 1 2 3 4 5 6 7

Ref. No.

Description of Assignment

Estimated Cost (US$)

Number of

Contracts

Selection Method

Review by Bank (Prior/ Post)

Expected Proposals

Submission Date

1 Consulting services for financing strategies (Part A3)

4.0 1 QCBS Prior Oct 2009

2 Consulting services for institutional strengthening (Part A3)

1.0 1 QCBS Prior Oct 2008

2 Sediment studies (Part B2) 3.0 1 QCBS Prior Dec 2008 3 Hydropower planning (Part B3) 1.0 1 QCBS Prior Jan 2009 4. Feasibility for hydro-power

plants (Part B4) 4.0 2/3 QCBS Prior July 2009

58

ANNEX 9: ECONOMIC AND FINANCIAL ANALYSIS

PAKISTAN: Water Sector Capacity Building and Advisory Services Project The objective of Pakistan’s water sector capacity building is to support capacity development and analytical work in Pakistan in order to ensure the effective management and development of the Indus River system in the context of significant economic, social, and environmental change. The overall benefits from this technical assistance will be substantial for Pakistan as it would contribute to adding value in strategic sectors including institution building, reduction of skill gaps across line agencies and to bringing innovative technical and financial solution for the sustainable development and management of Pakistan’s water resources. The specific benefits from each component are summarized below: Component A focusing on enhancing Pakistan’s water institution capacities and ensuring sustainable management of the Indus Basin water resources would be the most important contribution of this Project. As the Project involves almost all water institutions at the federal level, institution capacity building combined with adequate technical and regulatory instruments would provide large benefits for water sector sustainability. Indeed, these benefits would not result in direct earnings; instead, they would relate to public good planning and management in the long term. First, capacity building of MoWP will bring changes and substantial benefits in addressing water resources issues across Pakistan. Enhancing the institutional framework for water resources management through MoWP and consolidating the existing regulatory framework with adequate policy, accurate planning and innovative ideas with skills mix will help address most of the water sector shortcomings. In addition, the strategic studies for benefits sharing among the stakeholders and the development of mechanisms to facilitate an environment of trust through the adoption of international best practices will effectively enhance the overall vision and capacity planning of MoWP in addressing the water management issues in Pakistan. Second, capacity building of and support to IRSA will forge the way towards water resources management at the basin level. There are tangible benefits that can flow from this component by enabling the establishment of a strong river basin organization within Pakistan. Hence, beyond consolidating IRSA’s role in 1991 water apportionment, building capable human resources, accruing water allocation reliability and monitoring and, most importantly, developing adequate institutional instruments and mechanism would legitimize IRSA and build trust and confidence in its capacity to effectively manage the Indus Basin system. Additional benefits will also stem from the subsidiary principles to be applied between IRSA and the provinces thus ensuring coherent and transparent management of the Indus system and setting the path for long-term sustainability. Finally, capacity building of and support to IPDF will bring a new and innovative approach to planning and financing large water infrastructure in Pakistan. Not only benefits from this component will enhance the technical level of the targeted institutions with the provision of reliable business models and financing plan for large infrastructure. It will directly impact the country’s economy by helping to attract more investment and secure the financing needed for the water infrastructure development. Component B will bring the much needed benefits in terms of knowledge and technical expertise that are vital in ensuring performance of Pakistan water sector. The emphasis on upgrading and modernizing the database and network system would not only enhance the reliability of water allocation and distribution but will also contribute to more efficiency and productive use of the Indus water system. Furthermore, by including the water infrastructure maintenance and the investment design for hydropower, this component

59

sets a strategic vision towards Pakistan’s long-term solutions for the water and power sector. This will be further materialized through the feasibility studies of quickly/easily implementable hydropower which Pakistan needs to meet the growing power and water demands. The benefits of Component C will mainly accrue from the working environment of the different line agencies with enhance coordination and coherent monitoring of all planned activities. As a result, this will augment the efficiency of the involved institutions and their ability to develop a coherent vision and management of water resources. The additional benefits would also derive from the training of young staff and retaining them to ensure that Pakistan closes the skill gaps in water resources management and hydropower development.

60

ANNEX 10: SAFEGUARD POLICY AND ISSUES

PAKISTAN: Water Sector Capacity Building and Advisory Services Project

The Project includes capacity building for key federal water resource management institutions and water resources management and development studies. No physical works other than the installation of flow measuring stations on the Indus River is foreseen. The Project will fund TA activities to enhance the Borrower’s capacity to manage the environmental and social impacts under the investment programs of the Indus River Basin, covering policies and implementation practices in involuntary resettlement and environment management such as basin level strategic environmental assessment and studies on resettlement. The Project is therefore not likely to result in any direct environmental or social impacts. However, the feasibility studies for hydropower projects that will be developed under this Project (under Component B4) will include specific environmental and social assessments in accordance with World Bank Policies and Guidelines. In order to have better oversight for preparation of EAs and SAs for these potential investments, the Project has been classified as Category B based on consultations with OPCQC and in line with the most recent guidance issued on project screening and classification. Therefore, no specific EA or SA will be prepared and submitted to the InfoShop for this Project.

61

ANNEX 12: PROJECT PREPARATION AND SUPERVISION

PAKISTAN: Water Sector Capacity Building and Advisory Services Project

Planned Actual PCN review 03/12/2008 03/13/2008 Initial PID to PIC 03/12/2008 03/18/2008 Initial ISDS to PIC 03/12/2008 05/02/2008 Appraisal 05/01/2008 05/02/2008 Negotiations 05/08/2008 05/12/2008 Board/RVP approval 06/19/2008 Planned date of effectiveness 08/01/2008 Planned date of mid-term review 07/31/2010 Planned closing date 01/31/2014 Key institutions responsible for preparation of the Project: Ministry of Water and Power (MoWP), Indus River System Authority (IRSA), Water and Power Development Authority (WAPDA) Bank staff and consultants who worked on the project included: Name Title Unit Masood Ahmad Ousmane Dione

Lead Water Resources Specialist and Task Team Leader Lead Water Resources Specialist

SASDA

SASDI Usman Qamar Sr. Irrigation Engineer SASDA Winston Yu Water Resources Specialist SADDA Raghuveer Sharma Lead Financial Specialist ECSSD Genevieve Connors Young Professional SASDN Tahira Sayed Judith Plummer Javaid Afzal

Operations Analyst, Communications and Coordination Specialist Sr. Financial Analyst Environmental Specialist

SASDA

SASDE SASDI

Chaohua Zhang Rashid Aziz Furqan Ahmad Saleem

Senior Social Sector Specialist Sr. Energy Specialist Financial Management Specialist

SASDI SASDE SARFM

Riaz Mahmood Finance Analyst SACPK Uzma Sadaf Procurement Specialist SARPS Martin Serrano Counsel LEGES Chau-Ching Shen Financial Officer LOAG2 Nadia Islam Program Assistant SASDA Shabir Ahmad Staff Assistant SASDA David Grey

Senior Water Advisor

SASDO

Peer Reviewers Abel Mejia Joseph Goldberg Pankaj Gupta Armarquaye Armar Alessandro Palmieri

Sector Manager Senior Consultant/Advisor Senior Financial Analyst Lead Energy Specialist Lead Dam Specialist

ETWWA ECSSD AFTEG ETWEN OPCQC

62

Bank funds expended to date on project preparation: Bank resources: FY BB 127,767.56 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$90,000 2. Estimated annual supervision cost: US$250,000

63

ANNEX 13: DOCUMENTS IN THE PROJECT FILE

PAKISTAN: Water Sector Capacity Building and Advisory Services Project Technical Reports and Papers IRSA: Indus River System Authority, briefing document, February, 2008. IPDF: Institutional Project Development Facility-Financing and structuring of new multipurpose Reservoirs, October 2007; IPDF: Institutional Project Development Facility-Annual Report of IPDF, June 2007; IPDF: Institutional Project Development Facility Ordinance, May 2006; R. Laffite: Baglihar Hydroelectric Plant – Expert determination on point of difference referred by the Government of Pakistan under the provisions of the Indus Water Treaty 1960, February 2007 WAPDA: Hydropower Development in Pakistan, February 2008; World Bank: Pakistan: Evolution of the World Bank Assistance in the Water Sector, March, 2005; World Bank: Sindh Water Resources Management- Issues and Options- World Bank Working Paper Number 36. World Bank: The Indus Waters Treaty, 1960

64

Annex 14: Statement of Loans and Credits PAKISTAN: Water Sector Capacity Building and Advisory Services Project

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P089378 2008 Balochistan SSIP 0.00 25.00 0.00 0.00 0.00 25.13 0.00 0.00

P084302 2008 Sindh Water Sector Improvement Project 0.00 150.20 0.00 0.00 0.00 160.68 -3.48 0.00

P090501 2007 Land Records Mgmt & Information Systems

0.00 45.65 0.00 0.00 0.00 48.53 1.31 0.00

P094086 2006 Balochistan Education Support Project 0.00 22.00 0.00 0.00 0.00 20.05 -1.49 0.00

P097402 2006 Second Partnership for Polio Eradication 0.00 46.70 0.00 0.00 0.00 0.32 -22.36 -3.91

P083929 2006 Punjab Municipal Services Improvement 50.00 0.00 0.00 0.00 0.00 43.38 19.78 1.38

P099110 2006 Pakistan Earthquake ERC 0.00 400.00 0.00 0.00 0.00 27.08 -13.01 0.00

P076872 2006 PIFRA II 0.00 84.00 0.00 0.00 0.00 59.22 16.55 0.00

P077306 2005 Tax Administration Reform Project 24.40 78.50 0.00 0.00 0.00 92.82 60.70 0.00

P088994 2005 Taunsa Barrage Emergency Rehab. & Modern

123.00 0.00 0.00 0.00 0.00 29.06 32.72 0.00

P078997 2004 Sindh On-Farm Water Management Project

0.00 61.14 0.00 0.00 0.00 9.66 8.54 0.00

P082621 2004 NWFP Community Infrastructure II ( CIP2)

0.00 37.10 0.00 0.00 0.00 13.14 -9.27 0.00

P082977 2004 Second Poverty Alleviation Fund Project 0.00 238.00 0.00 0.00 0.00 111.83 -226.50 11.18

P083370 2004 PK Public Sect Capacity Building Project 0.00 55.00 0.00 0.00 0.00 23.66 18.05 0.00

P010556 2004 HIGHWAYS REHAB 50.00 150.00 0.00 0.00 0.00 185.28 -8.98 38.97

P077288 2003 National Education Assessment System 0.00 3.63 0.00 0.00 0.00 2.04 1.22 0.00

P074856 2003 HIV/AIDS Prevention Project 0.00 37.11 0.00 0.00 0.00 12.58 7.09 7.05

P074797 2003 PK Banking Sector Technical Assistance 0.00 26.50 0.00 0.00 0.00 6.61 1.27 0.00

P071454 2003 AJK Community Infrastructure & Services 0.00 20.00 0.00 0.00 0.00 34.01 -4.08 22.58

Total: 247.40 1,480.53 0.00 0.00 0.00 905.08 - 121.94

77.25

65

Pakistan Statement of IFC’s Held and Disbursed Portfolio

In Millions of US Dollars

Committed Disbursed

IFC IFC

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

2005 ABAMCO FUND 0.00 3.46 0.00 0.00 0.00 3.46 0.00 0.00

1995 AES Lal Pir 12.42 9.50 0.00 0.00 12.42 9.50 0.00 0.00

1996 AES Pak Gen 9.20 9.50 0.00 5.37 9.20 9.50 0.00 5.37

1995 Abamco Mgmt 0.00 0.29 0.00 0.00 0.00 0.29 0.00 0.00

1991 BRRIM 0.00 0.23 0.00 0.00 0.00 0.23 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 2.72 0.00 2.50 1.50 2.72 0.00 2.40 1.50

2006 Dewan Petroleum 15.00 12.00 0.00 0.00 0.00 0.00 0.00 0.00

2004 Dewan SME 0.00 0.98 0.00 0.00 0.00 0.00 0.00 0.00

2003 Dewan Salman 25.00 0.00 5.00 0.00 25.00 0.00 4.00 0.00

1991 Engro Chemical 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00

2006 Engro Chemical 0.00 0.64 0.00 0.00 0.00 0.64 0.00 0.00

2001 Eni Pakistan 12.00 0.00 0.00 0.00 12.00 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

2004 First UDL 7.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

GTFP Metropolita 2.54 0.00 0.00 0.00 2.08 0.00 0.00 0.00

1996 Gul Ahmed 8.10 4.10 0.00 5.22 8.10 4.10 0.00 5.22

2006 Habib Bank Li... 0.00 0.00 50.00 0.00 0.00 0.00 0.00 0.00

2003 KCT 6.46 0.00 1.50 0.00 6.46 0.00 1.50 0.00

1995 Kohinoor 6.25 6.30 0.00 2.03 6.25 6.30 0.00 2.03

2002 Micro Bank 0.00 2.43 0.00 0.00 0.00 2.43 0.00 0.00

2004 NBFI Credit 6.50 0.00 0.00 0.00 6.50 0.00 0.00 0.00

Orix Finance 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2006 Orix Leasing 17.00 0.00 0.00 0.00 17.00 0.00 0.00 0.00

2005 PICT 6.00 0.00 0.00 0.00 6.00 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 1.33 0.00 0.00 0.00 1.33 0.00 0.00

2002 PPL 0.00 5.63 0.00 0.00 0.00 5.63 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

2006 Paktel 2005 35.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2001 Sarah Textiles 1.12 0.00 0.00 0.00 1.12 0.00 0.00 0.00

2004 TRG Pakistan 0.00 4.16 0.00 0.00 0.00 4.16 0.00 0.00

2007 TRG Pakistan 0.00 2.50 0.00 0.00 0.00 2.50 0.00 0.00

2006 Tameer Bank 0.00 1.01 0.00 0.00 0.00 1.01 0.00 0.00

1996 Uch Power 29.60 0.00 0.00 0.00 19.68 0.00 0.00 0.00

Total portfolio: 239.91 72.98 59.00 14.12 134.53 56.04 7.90 14.12

66

Pakistan IFC Approvals

In Millions of US Dollars

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2004 CSIBL 0.04 0.00 0.00 0.00

2006 IHFL II 0.01 0.00 0.00 0.00

2004 Dewan SME 0.00 0.00 0.00 0.00

2006 JSPE Fund 0.00 0.02 0.00 0.00

2006 Habib Bank 0.00 0.05 0.00 0.00

2006 Paktel 2005 0.00 0.00 0.00 0.03

2006 Orix SME OLP 0.02 0.00 0.00 0.00

2006 Tameer Bank 0.00 0.00 0.00 0.00

2006 Dewan Petroleum 0.00 0.00 0.00 0.03

Total pending commitment: 0.07 0.07 0.00 0.06

67

Annex 15: Country at a Glance Pakistan: Water Sector Capacity Building and Advisory Services Project

P OVER T Y and SOC IA L So uth Lo w-

P akistan A sia inco me2006Population, mid-year (millions) 159.0 1,470 2,353GNI per capita (Atlas method, US$) 800 684 580GNI (Atlas method, US$ billions) 126.7 1,005 1,364

A verage annual gro wth, 2000-06

Population (%) 2.4 1.7 1.9Labor force (%) 3.8 2.1 2.3

M o st recent est imate ( latest year available, 2000-06)

Poverty (% of population below national poverty line) .. .. ..Urban population (% of to tal population) 35 29 31Life expectancy at birth (years) 65 63 59Infant mortality (per 1,000 live births) 79 66 80Child malnutrition (% of children under 5) 38 45 39Access to an improved water source (% of population) 91 84 75Literacy (% of population age 15+) 47 60 62Gross primary enro llment (% of school-age population) 87 110 104 M ale 99 116 110 Female 75 105 99

KEY EC ON OM IC R A T IOS and LON G-T ER M T R EN D S

1986 1996 2005 2006

GDP (US$ billions) 38.1 76.2 109.5 126.8

Gross capital formation/GDP 18.5 18.9 19.1 21.7Exports o f goods and services/GDP 10.3 14.0 15.7 15.3Gross domestic savings/GDP 6.7 12.0 15.2 13.7Gross national savings/GDP 16.5 15.2 25.6 23.6

Current account balance/GDP -2.0 -6.0 -1.0 -4.3Interest payments/GDP 1.5 1.6 0.7 0.7Total debt/GDP 39.3 39.1 30.8 28.4Total debt service/exports 25.0 28.3 10.9 8.8Present value of debt/GDP .. .. 25.8 ..Present value of debt/exports .. .. 125.9 ..

1986-96 1996-06 2005 2006 2006-10(average annual growth)GDP 5.0 4.2 7.7 6.9 6.6GDP per capita 2.3 1.8 5.1 4.7 4.5Exports o f goods and services 8.0 8.2 9.6 9.9 4.1

ST R UC T UR E o f the EC ON OM Y

Pakistan

Low-income group

D evelo pment diamo nd*

Life expectancy

Access to improved water source

GNIpercapita

Grossprimary

enrollment

Pakistan

Low-income group

Eco no mic rat io s*

Trade

Indebtedness

Capital formation

Domesticsavings

1986 1996 2005 2006(% of GDP)Agriculture 27.6 24.7 21.5 19.4Industry 23.4 23.5 27.1 27.2 M anufacturing 16.3 15.2 18.6 19.5Services 49.0 52.2 51.4 53.4

Household final consumption expenditure 77.3 74.4 76.9 75.5General gov't final consumption expenditure 10.7 10.5 7.8 10.9Imports o f goods and services 16.9 17.8 19.6 23.3

1986-96 1996-06 2005 2006(average annual growth)Agriculture 4.3 2.4 6.5 1.6Industry 5.8 5.5 12.1 5.0 M anufacturing 5.2 7.1 15.5 10.0Services 5.1 4.8 8.5 9.6

Household final consumption expenditure 4.7 3.7 12.1 3.3General gov't final consumption expenditure 3.0 4.5 1.7 48.3Gross capital formation 4.3 2.2 16.7 12.1Imports o f goods and services 4.3 3.1 40.5 18.7

Note: 2006 data are preliminary estimates. Group data are for 2005.

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

-10

0

10

20

01 02 03 04 05 06

GCF GDP

Gro wth o f capital and GD P (%)

-20

0

20

40

60

01 02 03 04 05 06

Exports Imports

Gro wth o f expo rts and impo rts (%)

68

Pakistan

P R IC ES and GOVER N M EN T F IN A N C E1986 1996 2005 2006

D o mestic prices(% change)Consumer prices .. 10.8 9.3 7.9Implicit GDP deflator 3.8 8.7 7.0 9.3

Go vernment f inance(% of GDP, includes current grants)Current revenue 14.6 15.0 13.7 14.2Current budget balance -0.8 -2.4 -0.8 -0.6Overall surplus/deficit -6.8 -6.0 -3.1 -3.7

T R A D E1986 1996 2005 2006

(US$ millions)Total exports (fob) 2,945 8,311 14,401 16,764 Cotton 513 507 111 124 Rice 342 504 933 1,011 M anufactures 2,055 4,989 8,268 9,881Total imports (cif) 6,002 12,015 18,753 23,967 Food .. 1,519 706 783 Fuel and energy 1,039 2,010 4,534 .. Capital goods .. .. .. ..

Export price index (2000=100) .. 119 124 128Import price index (2000=100) .. 113 131 142Terms of trade (2000=100) .. 106 94 90

0

2

4

6

8

10

01 02 03 04 05 06

GDP def lator CPI

Inf lat io n (%)

0

10,000

20,000

30,000

00 01 02 03 04 05 06

Exports Imports

Expo rt and impo rt levels (US$ mill.)

B A LA N C E o f P A YM EN T S1986 1996 2005 2006

(US$ millions)Exports o f goods and services 3,796 9,977 17,801 20,345Imports o f goods and services 7,230 15,227 25,608 33,232Resource balance -3,434 -5,250 -7,807 -12,887

Net income -640 -1,953 -2,386 -2,676Net current transfers 3,302 2,610 9,125 10,105

Current account balance -772 -4,593 -1,068 -5,458

Financing items (net) 1,200 4,163 458 6,588Changes in net reserves -428 431 610 -1,130

M emo :Reserves including gold (US$ millions) 1,638 2,839 10,722 12,053Conversion rate (DEC, local/US$) 16.1 33.5 59.4 59.9

EXT ER N A L D EB T and R ESOUR C E F LOWS1986 1996 2005 2006

(US$ millions)Total debt outstanding and disbursed 14,954 29,829 33,675 36,079 IBRD 605 3,007 2,238 2,151 IDA 1,560 3,480 6,865 7,777

Total debt service 1,626 3,287 2,443 2,269 IBRD 88 436 404 383 IDA 26 63 167 152

Composition o f net resource flows Official grants 315 200 911 0 Official creditors 398 1,115 590 834 Private creditors 55 556 933 852 Foreign direct investment (net inflows) 106 922 2,183 3,500 Portfo lio equity (net inflows) 3 285 451 0

World Bank program Commitments 756 558 1,550 1,498 Disbursements 249 651 845 975 Principal repayments 50 265 427 387 Net flows 199 386 419 588 Interest payments 63 234 145 148 Net transfers 136 152 274 440

Development Economics 10/1/07

-6

-4

-2

0

2

4

6

00 01 02 03 04 05 06

C urrent acco unt balance to GD P (%)

G: 1,630 A: 2,151

D: 6,899

C: 1,456

B: 7,777

F: 3,617

E: 12,549

A - IBRDB - IDA C - IM F

D - Other mult ilateralE - BilateralF - PrivateG - Short-term

C o mpo sit io n o f 2006 debt (US$ mill.)

MAP SECTION

Karachi

Hyderabad

Sanghar

Jacabadad

Rahimyar Khan

Bahawalpur

MultanVihari

Sahiwal

Faisalabad

Mianwali

ISLAMABAD

Lahore

Gujrat

Kohat

DHANDS &COASTAL CREEKS

RANN OF KUTCH

GUDUBARRAGE

TAUNSABARRAGE

PUNJNADBARRAGE

ISLAMBARRAGE

SULEIMANKEBARRAGE

FEROZEPURBARRAGE

BALLOKIBARRAGE

TRIMMUBARRAGE

CHASHMABARRAGE

RASULBARRAGE

MARALABARRAGE

KHANKIHEADWORKS

MANGLADAM

TARBELADAM

SALALDAM

JINNAHBARRAGE

MAILSISYPHON

RAVISYPHON

KOTRIBARRAGE

SUKKURBARRAGE

Upper Swat Canal

Swat

Riv

er

Kabul R.

Lower Swat Canal

Kabul R.C.

Soan River

Jhel

um

River Ja

lal Pur Br..

Upper Jhelum

Lowe

r

Chen

ab C

.

Jhan

g B

ranc

h

Che

na

b

Rav

i

River

Jhel

um C

anal

Lower

R. Q. Link

Upp

er C

hena

b C

anal

B. S. Link II

B.S. Link I

Dipalpur Canal

Lower Bari C

anal

Tha

l C

anal

C. J. Link

Indu

s

Rive

r

Beas

RIve

r

Sutle

j

Rive

r

Pakpattan

Canal

Mailsi

Canal

T. S. M. Link

Haveli C

anal

Sidh

naiC

anal

Man

kara

B

r. C

haub

ara Kasa W

ala Dr.

Mahm

ood Br. N

urpur Br.

Dhin

gana

Br.

East

Ford

wah C

anal

Fordw

ah Br

.

Bahawal Cana

l

T.P. Lin k

Rang

pur

Ca

nal

EvaporationPonds

EvaporationPonds

Prop

osed

Daj

al B

r. Ex

tensio

n

D. G

. Kh

an

Can

al

Abb

asia

Can

al

Pun

jnad

Canal

Pat Feeder Canal

Desert Canal

Bagari Canal

Kirthar C

anal

N.W. Canal

Ghotki Feed

er

Indus River

Nar

a C

anal

Watah Canal

Rice

Ca

nal

Dad

u C

anal

Rohri Canal

Kha

irpur

Ca

nal

Lined Canal

Fuleli Canal

Pinyari

Can

al

Kalri

Can

al

KalriLake

ChotiariLake

ManchharLake

HamalLake

ARABIANSEA

Muzaffargarh C

21

22

23

24

25

26

27

28

29

30

31

32

33

41

42

43

34

35

36

37

38

39

40

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

JAMMU &KASHMIR

ApproximateLine of Control

I N D I A

THA

L D

ESER

T

SALT RANGE

THAR

DESERT

P U N J A B

S I N D H

BA

LO

CH

IST

AN

N . W . F . P .

67º

24º

25º

26º

27º

28º

29º

30º

31º

32º

33º

34º

24º

25º

26º

27º

28º

29º

30º

31º

32º

33º

34º

68º 69º 70º 71º 72º

73º 74º

68º 69º

70º 71º 72º 73º 74º

PAKISTAN

WATER SECTORCAPACITY BUILDING

AND ADVISORY SERVICESPROJECT

CANAL COMMAND AREAS

CANAL COMMAND AREA BOUNDARIES(PROSPECTIVE AREA WATER BOARDS)

MAJOR RIVERS

MAIN CANAL, BRANCHES AND RIVERS

PROPOSED CANALS

OUTFALL DRAINS

SYPHONS, BARRAGES

SELECTED CITIES

NATIONAL CAPITAL

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

50

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

PUNJAB

N.W.F.P.

CANAL COMMANDS(PROSPECTIVE AREA

WATER BOARDS)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

Upper Jhelum CanalLower Jhelum CanalMarala Ravi Link CanalUpper Chenab CanalLower Chenab CanalHaveli CanalDipalpur Link CanalRavi SyphonDipalpur Canal (Upper & Lower)Lower Bari Doab CanalPakpattan Above S.M. Link CanalSidhnai CanalMailsi Below S.M. Link CanalFordwah & Eastern SadiqiaQaim CanalBahawal CanalPanjnad & Abbasia CanalsD.G. Khan CanalMuzaffargarh CanalRangpur CanalThal CanalPaharpur Canal

Upper Swat CanalLower Swat & Doaba & SholgaraWarsak High LevelKabul RIver & Jui Shekh & Inundation

SINDHGhotkiDesert CanalNorth West CanalBegari Sind CanalRice CanalDadu CanalKhairpur West CanalKhairpur East CanalRohri CanalEastern Nara CanalPinyari CanalGaja Canal (Lined Channel)Fuleli CanalTando Bago (Lined Channel)Kalri Baghar

42

43

BALOCHISTANPat Feeder CanalNorth West Canal

0

0 4020 60 80 100 Miles

20 40 60 80 100 Kilometers

BALOCHISTAN

SINDH

PUNJAB

N.W

.F.P.

ArabianSea

P A K I S T A N

Areaof Map

ISLAMABAD

AFGHANISTAN

INDIA

CH

INA

TURKMENISTANUZBEKISTAN TAJIKISTAN

Approx.Line of Control

JAMMU AND

KASHMIR

62º 66º 70º 74º

24º

28º

32º

36º

24º

28º

32º

36º

74º

IBRD 36123

APRIL 2008