Major Change of Trimmu and Panjnad Barrages Improvement Project (PAK- 47235)

ECONOMIC AND FINANCIAL ANALYSIS Islam Barrage Rehabilitation

A. Introduction

1. The economic analysis of the Islam barrage rehabilitation project has been undertaken according to Asian Development Bank (ADB) guidelines1 and describes the economic rationale for public intervention. The proposed Project will manage irrigation water supplies through the Bahawal Canal (5,400 cusecs) and Qaim Canal (558 cusecs) on the left bank and Mailsi Canal (4,883 cusecs) on the right bank of the Islam Barrage on the Sutlej River. The CCA of the two canals on the left bank is 106044 acres and located within the administrative boundary of district . Analysis of the available data2 reveals that there has been declining trend in the irrigated area as well as in the yield level of crops. The data has been summarized in the Table below3.

Table 1: Reduction in cropped Area and Yield of Major Crops in District Bahawalpur

Area in 000 Acres Yield Kg/Acres Major Crops 2013-14 2016-17 Percent 2013-14 2016-17 Percent Change Change Cotton 662 598 -9.7% 895 853 -4.7% Mash 0.041 0.011 -73.2% 244 182 -25.5% Vegetables (Chilies) 0.78 0.73 -6.4% 1809 682 -62.3% Wheat 714 709 -0.7% 1849 1385 -25.1% Gram 0.6 0.3 -51.6% 484 333 -31.1% Potato 0.5 0.79 56.1% 7775 8585 10.4% Sunflower 10.0 5.4 -46.0% 741 746 0.7% Change over in 4 Years 1388 1314 -18.8% -19.6% Average Reduction per Year -4.7% -4.9% Source: Directorate of Agriculture, Crop Reporting Service, Punjab. Rabi and Kharif Crop Reports for the year 2013-14 and 2016-17.

2. The above Table shows that the actual irrigation area under the major crops which has already been reduced from nominal 1.39 million acres to 1.31 million acres, which is about 18.8% reduction in 4-years, or reducing annually at about 4.7 percent.

3. The following table shows that the actual withdrawals by the Sutluj Valley canals, which has already reduced from 13.83 million-acre feet (MAF) to 13.15 MAF in year 2015- 16. Though, this information has not been used in estimation the economic evaluation, yet it is important to see that the withdrawals have been reduced at about 0.08% per year. It indicates that there is need to conserve scarce irrigation water for its efficient use by rehabilitating the infrastructure.

1 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 2 Directorate of Agriculture, Crop Reporting Service. Punjab–Crop acreage data for the years 2013-14 and 2016- 17. 3 Latest officially available to public. 2

Table 2: Withdrawals4 by Sutluj Valley Canals (MAF)

Year Rabi Kharif Total Change over year 2006-07 4.15 9.68 13.83 2007-08 3.4 10.42 13.82 -0.07% 2008-09 3.29 9.78 13.07 -5.74% 2009-10 3.02 9.84 12.86 -1.63% 2010-11 5.04 9.33 14.37 10.51% 2011-12 4.41 8.55 12.96 -10.88% 2012-13 4.39 8.65 13.04 0.61% 2033-14 4.36 9.72 14.08 7.39% 2014-15 4.38 9.76 14.14 0.42% 2015-16 3.93 9.22 13.15 -7.53% Change over 10 Years -0.77% Average Reduction per Year -0.08%

4. The economic analysis for the proposed AF has been carried out by developing with and without project scenarios. It is conservatively assumed that under the without project scenario the irrigated area in the command of Barrage will be maintained at present level. While under the with-project scenario, with the proposed AF interventions, the existing irrigated area will be restored to the 2013-14 level. A benefit–cost analysis is undertaken to measure the key investment criteria of economic internal rate of return (EIRR) and economic net present value (ENPV).

B. Macroeconomic Assessment

5. ’s agriculture sector experience modest growth during 1970–2016 when it grew by about 3.4% per annum5 The highest growth rates were achieved in 1985 (11%), 1992 (10%), and 1996 (12.0%). The agriculture sector experienced negative growth of –5% in 1984 and 1993, and –2% in 2001 because of severe droughts during these periods. Based on the Food and Agriculture Organization of the United Nations (FAO) data,6 the pattern of growth in the country’s overall real gross domestic product (GDP) has been closely linked to that of the agriculture sector, despite the declining share of the agriculture sector to the overall GDP. Even with the sector’s modest growth and declining share, it was able to contribute around 27.0% or roughly $18.3 billion per annum in real terms to the country’s average annual $73.0 billion-real GDP at 2005 constant prices and was able to employ more than 42.3% of the country’s labor force. As of 2010 Punjab accounted for roughly 55% of the country’s total agriculture production area, and Sindh 19%.7

C. Rationale

6. The barrage, the subsidiary weir and the gates operating mechanism are presently in a dilapidated condition. The Barrage has passed about 90 years of its life, which is more than double of its economic/designed life and the aging process has caused extensive deterioration of different components/structures and significant damage to the regulating gates and hoisting equipment. The Barrage survived for a longer time than to its designed

4 Government of Punjab. 2017. Table 8: Development Statistics of Punjab 2017, Bureau of Statistics. Lahore 5 Average Annual Growth Rate for The Agriculture Sector was 4% during 2000–2016. 6 Food and Agriculture Organization of The United Nations. 2015. FAO Statistical Pocketbook. Rome. 7 Government of Pakistan, Pakistan Bureau of Statistics. 2012. Pakistan Agricultural Census 2010. Lahore. 3

life only due to having proper care and maintenance extended by the Punjab Irrigation Department (PID). Any further damage to this barrage can render it non-operative causing colossal losses due to non-production of agricultural crops, loss of large infrastructure of roads and buildings, increasing the restoration cost, adversely affecting the national economy in addition to human, social and environmental disaster due to possibility of flood miss-management.

7. Therefore, to save the infrastructure, to meet future water requirements and maintain agricultural productivity, it is important to rehabilitate and improve the deteriorating infrastructure of Islam Barrage. Further, the economic benefits of improved water supplies are not likely to be obtained without proposed investment, as cost-effective mechanisms for recovery of water charges at commercially viable rates are unavailable, and private sectors’ investment is therefore precluded.

8. Further, to meet future water requirements sustainably, and to reduce flood risks, rehabilitation and upgradation of Islam Barrage is needed. Moreover, to avoid complete failure and for effective flood water management in the area is important to sustain the agricultural productivity but it is also unlikely to be provided by the private sector. Hence, government intervention is required to rehabilitate and upgrade the barrage.

9. The present condition of decreasing trend in cropped area and in yields in the project area is due to non-availability of adequate and quality irrigation water. Increase in cultivated area, crop intensities, and yields in the command area is not possible without developing the facilities and management of flood water through the proposed barrage. An intervention such as this project is necessary because farmers in their own private capacity do not have the incentive to invest in Barrage rehabilitation and flood water management because of the prohibitively high financial costs. Moreover, such an investment would not generate sufficient direct financial returns for private sector investors. Since irrigation water is a public good, investments in irrigation development can only succeed if undertaken by the government.

10. Readiness to rehabilitate and upgrade the Islam barrage is high, as the feasibility study and the detailed engineering design had already been completed by the government. There is a strong linkage between the improvement of the Islam barrage and that of the Trimmu and Panjnad barrages, as the nature of works involved in rehabilitating and upgrading old barrages are similar. The project implementation arrangements for the Islam barrage will be a replication of those for the current project. The project management office (PMO) for the current project will be responsible for the Islam barrage, enabling significant efficiency gains.

D. Project Scenarios

11. Without-Project Scenario. The without-project scenario involves no intervention for the provision of barrage rehabilitation and flood water management in the project area.

12. With-Project Scenario. With the improved provision of irrigation water supply through the canals off shooting from the Barrage, there would be improvement in the cropping intensity and crop yields, particularly towards restoration of the area reduced due to deteriorating condition of the Barrage. In this scenario, the reduced cropping area of about 74,000 acres of the Bahawalpur district will be brought again under irrigation. A timely and adequate volume of water availability for kharif crops will be ensured. The present level of cropping intensity and the yields level will be restored to the level pertaining in year 2013-14. In effect, this will contribute to improve environmental conditions, particularly in the primary impact area, and would enhance living standards in the project area.

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E. Project Benefits

13. Quantified benefits. Project intervention will generate both incremental and non- incremental benefits. The incremental benefits will be generated by barrage rehabilitation (restoration and sustainability of agricultural command area), whereas non-incremental benefits arise from water savings associated with the wastewater improvement and better flood water management practices. These are evaluated using above stated approach and methodology. The chief quantified benefits of the project are restoration of cropped area and yield level as of 4-years before. These benefits would arise from; (i) increase in crop yields because of better water availability, and (ii) restoring the cropped area of about 74,000 acres reducing in past for want of irrigation water. In addition, the agricultural benefits will also accrue because of improved long-run farm and flood water management, and availability of reliable irrigation water supply. The net incremental benefits have been estimated at the crop level by developing per-hectare crop budgets of all crops under both the without- and with- project scenarios.

Table 3: Crop Yields (Kg per Acre) and Cropped Areas (Acres)

Yield (Kg/Acre) Cropped Area (Acres) Future Future Future Crops Future With Base Base Year Without Without With Project Year Project Project Project Cotton 853 853 901 72,285 72,285 79,274 Rice 1,112 1,112 1,127 4,110 4,110 4,110 Maize 2,776 2,776 2,811 2,696 2,696 2,696 Vegetables 2,965 2,965 2,995 430 430 457 Oilseeds 374 374 378 214 214 214 Fodder (Kharif) 4,544 4,544 4,588 3,771 3,771 3,771 Others (Kharif) 313 313 397 4,867 4,867 8,428 Wheat 1,385 1,385 1,670 88,483 88,483 89,103 Vegetables 5,547 5,547 5,603 1,186 1,186 1,186 Oilseeds 650 650 657 3,421 3,421 4,994 Fodder (Rabi) 13,348 13,348 13,481 4,775 4,775 4,775 Others (Rabi) 2,279 2,279 3,011 187 187 284 Sugarcane (P) 27,620 27,620 27,896 7,615 7,615 7,615 Orchard (P) 3,433 3,433 3,470 2,141 2,141 2,141 Key; P=Perennial crop; Others (Rabi and Kharif) represents minor crops like millet, gwara seed, sorghum etc. Source;(i) Directorate of Agriculture, Government of Punjab; ii) Asian Development Bank estimates.

14. Unquantified benefits. The Barrage rehabilitation and upgradation will also be minimizing incidence of floods due to increased flood capacity at Barrage, which is expected to reduce damages from operating the breaching sections for the future floods. The project will provide protection to 13,900 acres (5,625 ha) flood plain areas8, inundated by controlled/ uncontrolled breaches in the right marginal bunds against peak floods up to 332,000 cusecs (9,401.2 comics) discharge (design flood) at Islam Barrage. The estimation is based on an inundated area from historic flooding. Presently this area is fully developed, thickly

8 PID. 2009. Feasibility Study and Detailed Design of Islam Barrage 2009. Lahore 5

populated, infrastructure laid all over and has high economic value which will be protected by proposed measures against design flood.

15. Aside from the improved productivity of irrigated crops arising from the availability of reliable irrigation water supply, other benefits from the Project include reduced household expenditures on medical services; reduced costs for repairing road and vehicle damage from flooding; and reduced loss of productive activity due to illness or poor health. The project is also expected to yield non-quantifiable benefits, including the sustained road link across the Sutlej River, connecting two towns of in district and in Bahawalpur district vital for trade and goods transportation. These benefits were not quantified for the analysis but are quoted to indicate the project’s importance both socially and economically. Moreover, under with project, the cost of rehabilitation of the Islam Barrage will be offset by the expected benefits from the protection of agricultural production following possible barrage failure and elimination of potential flood losses of infrastructure and disaster to human lives and livestock.

F. Price Datum and Other Main Assumptions

16. The assumptions used in converting financial into economic values and estimating economic parameters include the following: (i) the standard conversion factor (SCF) of 0.899 has been calculated using the appropriate data for the FY2013-FY2016 for Pakistan9; (ii) the SCF has been used to convert a financial price into its economic price for non-tradable goods; (iii) a shadow wage rate factor10 of 0.78 was used for unskilled labor; (iv) specific conversion factors for cement, steel, petroleum products, and insecticides have also been derived for converting the values into economic terms; (v) a discount rate of 9% was considered as the opportunity cost of capital according to the guidelines; and (vi) the useful economic life of the project is assumed as 30 years.

17. Derivation of SCF. The SCF depends upon volume of imports and exports and taxes thereof. Subsidies, if any are provided on imports or exports also play as an important factor for derivation of the SCF. The derivation of SCF has been shown at Annex B, Table B1.

18. Border prices of tradable commodities for wheat, rice, cotton, and sugarcane were computed on the basis of latest available World Bank commodity11 forecasts; (i) export parity prices have been derived for rice and cotton, which are the major export commodities of Pakistan; (ii) import parity prices have been derived for wheat, sugarcane and fertilizers. The exchange rate of US$1 equivalent12 to PRs158 was used in economic analysis. The analysis is undertaken in constant May 2019 prices. The Tables showing price derivations have been placed as Annex-A. The summary prices have been shown as below;

Table 4: Financial and Economic Values

9 An average SCF for the 2012-13 to 2015-16 was calculated using the formula SCF = (M+X) / [(M+Trn)+(X-T,) I where M is CIF value of imports, X is FOB value of exports, Trn is net value of taxes on imports, T is net value of taxes on exports. 10 The factor of SWR was derived by eliminating the market distortions in the prevailing market wage rate (MWR), the data have been used for the year 2016 from Bureau of Statistics, Punjab. 11 World Bank. 2018. Agricultural Commodity Prices–June 2018. Islamabad 12 August 2019. ADB Manila. 6

Item Unit Financial value Economic value Cotton* PRs/kg 80.63 93.17 Rice* PRs/ kg 45.41 81.27 Maize (Kharif) PRs/ kg 19.38 17.44 Kharif Vegetables PRs/ kg 36.67 33.00 Kharif Oilseeds PRs/ kg 48.63 43.77 Kharif Others PRs/ kg 49.24 44.31 Kharif Fodder PRs/ kg 4.14 3.72 Wheat (Rabi) * PRs/ kg 31.38 42.61 Rabi Vegetables PRs/ kg 19.57 17.62 Rabi Oilseeds PRs/ kg 35.89 32.30 Rabi Fodder PRs/ kg 4.05 3.64 Rabi Others PRs/ kg 9.67 8.70 Sugarcane * PRs/ kg 4.31 3.76 Orchard PRs/ Plant 33.75 33.75 Fertilizers: N--(UREA) * PRs/Nkg 60.87 105.66 P--(DAP) * PRs/Nkg 139.13 135.65 Potash* PRs/Nkg 106.00 130.55 * Border prices used (World Bank Commodity Price Data Billiton May 2019) Source: Asian Development Bank estimates.

G. Project Costs

19. Capital Costs. The capital costs include civil works, mechanical and electrical equipment, project management and technical assistance, and cost of resettlement action plan. Total base cost including physical contingencies have been estimated as PRs2,886 million in financial terms. The cost has different composition of tradable, non-tradable and labor contents in the ratio of 36%, 32% and 34% respectively. Total project economic costs have been valued on the basis of cost estimates in financial values and was converted into respective project economic cost using SCF and the shadow wage rate. In economic terms, the total capital cost amounts to PRs2,465 million, exclusive of taxes and duties.

20. Project investment costs have been worked out in detail based upon engineering estimates and placed at Annex C, Table C1.

21. Operation and maintenance costs. The O&M costs have also been taken from the historical data of year wise funds allocation and actual expenditures made for the barrage, average of actual expenditures during the last three years has been taken for the present analysis. A three-year average O&M cost is estimated13 as Rs 21 million per annum. The same in economic terms is valued at Rs 18.9 million per annum. Conservatively, the annual real increase in maintenance costs has also been computed at 10% per annum and accounted for in the cash flows.

22. Project Economic Costs. Derivation of economic costs has been done under standard perspectives as explained under approach and methodology. The derivation of economic costs has been shown at Annex-C, Table C2 H. Economic Analysis and Estimated Results

13 After rehabilitation, the O&M costs will reduce substantially. However, to be on the conservative side, the reduction in O&M cost has not been taken in the analysis. If the reduction in O&M cost is taken, the ERR would be higher. 7

23. Approach and methodology. A benefit–cost analysis was undertaken to measure the economic internal rate of return (EIRR) and the economic net present value (ENPV) as economic viability criteria. All costs and benefits have been valued in economic terms by converting the financial values by appropriately using the SCF for non-tradable goods. For major tradable goods, export and import parity prices were derived separately. The analysis estimated the net incremental economic benefits attributable to the project by comparing the net economic benefits in the without-project scenario with that of the with-project scenario using a 9% discount rate. The net incremental benefits were estimated at the crop level for each crop considered in the project.

24. Economic returns and sensitivity analysis. Construction of the project envisages management of flood waters and providing efficient water for irrigation adequately and in timely manners. It is estimated that with the provision of regulated irrigation due to project interventions, an area of about 74,000 acres will be restored to irrigation and the cropping intensity will be brought back to the level of 2013-14. The negative trend from 2013-14 to 2016-17 in crop intensity and yields was not extrapolated till 2019, as the new data was not available. This is taken as a conservative approach and it is assumed that the levels of 2016-2017 will remain at 2019. From project, the yields are also expected to recoup to the level lost during the last four years. All these development interventions will enhance productivity and increase farm incomes. Thus, the project is deemed economically viable given the calculated overall EIRR of 17.6% and the overall ENPV of PRs1,828.4 million. Table below outlines the results of economic analysis and sensitivity analysis.

Table 4: Results of Economic Analysis

ENPV Sensitivity Switching Results of Evaluation Change (PKR EIRR Indicator Value million) (SI) (SV) Base Case 1,828.4 17.6% Sensitivity Scenarios Case 1 - Increase in Capital Costs +10% 1,631.8 16.2% 1.08 93% Case 2 - Increase in O&M Costs +10% 1,792.5 17.5% 0.20 500% Case 3 - Combined Case 1 and 2 as above 1,596.0 16.1% 1.46 69% Case 4 - Decrease in Overall Benefit -10% 1,413.1 15.9% 2.94 34% Case 5 - Benefit Delay by 2 years -2 years 1,092.1 13.5% n.a 6 years Case 6 - Combination of Cases 3 and 4 as above 1,180.7 14.4% n.a n.a EIRR = economic internal rate of return; ENPV = economic net present value; n.a = not applicable; SI - sensitivity indicator, the ratio that compares percentage change in ENPV with percentage change in a variable; SV - switching value, the percentage change in a variable sufficient to reduce ENPV to zero.

25. Table 5 presents the estimated streams of costs and benefits. These strong economic results are due to the substantial size of the economic benefit stream relative to the least-cost engineering options for the project cost.

Table-5: Cash Flow of Costs and Benefits (PKR Million – 2019 Constant Prices)

Agriculture Benefits Net Investment Total YEAR O&M Incremental Costs Costs Without With Incremental Benefits Project Project Benefits 1 4.12 - 4.12 9,802 9,802 - (4.12) 2 963.70 - 963.70 9,854 9,854 - (963.70) 3 1,416.83 - 1,416.83 10,003 10,003 - (1,416.83) 4 80.00 - 80.00 10,052 10,052 - (80.00) 8

Agriculture Benefits Net Investment Total YEAR O&M Incremental Costs Costs Without With Incremental Benefits Project Project Benefits 5 - 18.89 18.89 10,052 10,624 571.53 552.64 6 20.78 20.78 11,731 12,310 579.05 558.27 7 22.86 22.86 11,731 12,318 586.67 563.82 8 25.14 25.14 11,731 12,325 594.39 569.25 9 27.66 27.66 11,731 12,325 594.39 566.74 10 30.42 30.42 11,731 12,325 594.39 563.97 11 33.46 33.46 11,731 12,325 594.39 560.93 12 36.81 36.81 11,731 12,325 594.39 557.58 13 40.49 40.49 11,731 12,325 594.39 553.90 14 44.54 44.54 11,731 12,325 594.39 549.85 15 49.00 49.00 11,731 12,325 594.39 545.40 16 53.90 53.90 11,731 12,325 594.39 540.50 17 59.28 59.28 11,731 12,325 594.39 535.11 18 65.21 65.21 11,731 12,325 594.39 529.18 19 71.73 71.73 11,731 12,325 594.39 522.66 20 78.91 78.91 11,731 12,325 594.39 515.48 21 86.80 86.80 11,731 12,325 594.39 507.59 22 95.48 95.48 11,731 12,325 594.39 498.91 23 105.03 105.03 11,731 12,325 594.39 489.37 24 115.53 115.53 11,731 12,325 594.39 478.86 25 127.08 127.08 11,731 12,325 594.39 467.31 26 139.79 139.79 11,731 12,325 594.39 454.60 27 153.77 153.77 11,731 12,325 594.39 440.62 28 169.15 169.15 11,731 12,325 594.39 425.25 29 186.06 186.06 11,731 12,325 594.39 408.33 30 204.67 204.67 11,731 12,325 594.39 389.72 ENPV 2,458.80 $390.93 2,324.28 113,554.77 117,707.46 4,152.69 1,828.41 EIRR 17.6% Note: EIRR = Economic Internal Rate of Return, ENPV = Economic Net Present Value, Rs. = Pakistani rupee Source: ADB’s estimations

I. Distribution Analysis

26. Household Financial Returns. From the perspective of farm households, the project interventions would generate an average annual benefit of around PRs6,894 per Acre (PRs17,036 per ha). With an average farm size of 4.90 acres (1.98 ha)14 in the command areas and average rural family size of 6.04 people15, a farm household is expected to get an income increase of about PRs33,782 per annum, whereas per capita income in the project beneficiary household will increase by about PRs5,593 per annum. The computation of farm income is shown below.

Table 6: Farm Income Analysis (Average Farm Size - 4.9 Acres)

14 Government of Pakistan. 2010. Census of Agriculture (2010), Pakistan Census Organization. Islamabad 15 Government of Pakistan. 2015-2016. The Household Integrated Economic Survey –(HEIS) 2015-16, in cities of Sargodha, Bahawalpur, Hyderabad, Sukkur, Peshawar, Quetta and Islamabad, Bureau of Statistics. Islamabad. 9

Benchmark Full Development Area Net Area Net Crops Cropping Under Returns Cropping Under Returns Intensity crops Years Intensity crops PKR (Ac) PKR (Ac) Cotton (Kharif) 68.17 3.34 188,604 74.76 3.66 209,142 Rice (Kharif) 3.88 0.19 7,240 3.88 0.19 7,349 Maize (Kharif) 2.54 0.12 7,682 2.54 0.12 7,793 Vegetables (Kharif) 0.41 0.02 1,175 0.43 0.02 1,272 Oilseeds (Kharif) 0.20 0.01 142 0.20 0.01 146 Others (Kharif) 4.59 0.22 2,345 7.95 0.39 4,125 Fodder (Kharif) 3.56 0.17 2,573 3.56 0.17 2,605 Wheat (Rabi) 83.44 4.09 119,010 84.02 4.12 122,087 Vegetables (Rabi) 1.12 0.05 4,573 1.12 0.05 4,681 Oilseeds (Rabi) 3.23 0.16 2,619 4.71 0.23 3,991 Fodder (Rabi) 4.50 0.22 7,988 4.50 0.22 8,108 Others (Rabi) 0.18 0.01 122 0.27 0.01 186 Sugarcane (K&R) 7.18 0.35 36,096 7.18 0.35 42,366 Orchard (K&R) 2.02 0.10 8,763 2.02 0.10 8,863 Total 185.00 9.07 388,931 197.13 9.66 422,713

27. Distribution of Project Benefits and Poverty Impact. The distribution of the project benefits across poor and non-poor producers was estimated. The ENPV of PRs1,828 million was derived from the present value of the benefits (PRs4,152 million) less the present value of the costs (PRs2,324 million). The distribution of the project benefits across poor and non- poor beneficiaries was estimated based on the World Bank poverty head count ratio at purchasing power parity with population living at $1.25/day and $2.0/day16,17. Poor farmers are primary beneficiaries of the project benefits. The Government costs include the capital and O&M costs of the investment. The total benefit to the poor is PRs 2,105 million (of which PRs 527 million goes to extremely poor) with project poverty impact ratio of 0.51. Computation of distribution analysis is as below.

28. Computation of distribution analysis has been shown as below.

Table 7: Distribution of Project Benefits

Producers Item Government Total (Project Area) Government (2,324) (2,324) Nonpoor 2,047 2,047 Poor 1,578 1,578 Very Poor 527 527 Total 4,153 (2,324) 1,828

J. Financial Sustainability

16 Poverty headcount ratio at $2 a day (PPP) (% of population). http://data.worldbank.org/indicator/SI.POV.2DAY accessed 20 September 2015 17Since the updated value of this indicator is no more available at site of the World Bank, the value prevailing in year 2015 is assumed valid while updating the analysis in 2019 10

29. The Punjab Irrigation Department (PID) has seven decades experience of irrigation system O&M including barrages, irrigation canals and distribution systems. For barrages, the PID's Barrage Manual provides comprehensive guidance on O&M including periodic inspection and maintenance records. The barrage team within the PID submits annual operation, maintenance, and monitoring reports of each barrage to PID headquarters/senior officials, where the respective experts analyze the data and arrange for special inspections of the sites/Barrages if required. Independent auditors audit the annual budget. The Government of Punjab allocates annual funds for operation in its provincial budget including funds for flood and other emergency situations, when needed.

30. The O&M of canal and distribution system is guided by the irrigation sector reforms of decentralization, participatory irrigation management and improved service delivery. The functions of PID are being shared with other institutions, established in the recent past, like Punjab Irrigation and Drainage Authority (PIDA) at provincial level, Area Water Board (AWB) at Canal Command level, Farmers Organizations (FOs) at distributary level and water user associations (Kha/Punchayats (KP)) at water course on outlet level. The operational management structure for Islam Barrage is given in Table below.

Table 8: Punjab Government Operational Management Staff at Islam Barrage

Sr. Position of Staff Number 1 Chief Engineer (Head) 1 2 Superintending Engineer 1 3 Executive Engineer 1 4 Assistant Executive Engineer/Sub divisional Officer 1 5 Divisional Accounts Officer 1 6 Divisional Head Draftsman, Draftsman, and Tracers 4 7 Sub-Engineers 6 8 Head Clerk, Accounts Clerk, and Sub-Divisional Clerk 4 9 Signaler and Telephone Attendants 3 10 Mistries, Electricians, Mates, Beldars, Fitters, Gate Operators 103 Total Staff 125 Mistries = Skilled labor to help in operation of the barrage, Beldar = skilled technician for maintenance of the barrage.

K. Adequacy of O&M Budget Allocation.

31. The government of Punjab undertakes to keep increasing its maintenance and repair budget for barrages in par with the increase in the updated estimates of O&M requirement.

32. The PID is also in the process of developing an asset management plan for its entire irrigation infrastructure, but it still lacks a dynamic, computer-based decision support system that enables the PID to identify the priority O&M funding need (of specific, individual infrastructure facility over other schemes/structures across the entire asset portfolio). The government of Punjab and the PID see the crucial need for such decision system and undertake to carry out the feasibility of such system that is appropriate to the prevailing institutional and physical setting of the PID and its assets by the end of 2019. The proposal to finance this system is expected to be discussed with the Japan International Cooperation Agency, for possible inclusion under its forthcoming water sector investment plan for Punjab.

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33. The project will provide upgraded infrastructure which would reduce the O&M expenditure. A summary of O&M expenditures18 for the last five years is presented below:

Table 9: Annual Expenditure for Operations and Maintenance

Barrage Annual FY2015 FY2016 FY2017 FY2018 FY2019 Allocation PKR million Islam Allocation 29.9 33.1 37.8 24.9 30.8 Barrage Actual 28.6 31.8 15.6 22.2 28.2 FY = Fiscal year; /a This includes maintenance, repair, operational management and emergency repair when needed.

34. For overall irrigation infrastructure in Punjab, the PID prepares and regularly updates the O&M expenditure needs for the assets based on the O&M ‘yardstick’. Since 2008, the maintenance budget has increased from PRs 2.3 billion to PRs 9.2 billion, while the operational budget (including nearly 40,000 staff) increased from PRs 4 billion to PRs 11 billion. Maintaining the ageing infrastructure has led to an increase of the maintenance budget from one-third to about half of the total O&M budget in last ten years. Overall, there is an annual increase of 11% in O&M budget from FY2008 to FY2019 barring fluctuations in some years. The increase in O&M budget in last ten years follows the same trajectory with the overall increase in government of Punjab non-development budget. Based on this, a forecast of overall irrigation infrastructure O&M budget till 2027 shows more than twice the increase from current O&M budget of PKR 20 billion to PKR 46 billion. Since the share of O&M remains at 1-2% of the Punjab’s non-development budget, there will be sufficient fiscal headroom for increasing O&M allocations of irrigation projects including the Islam Barrage. The government and PID overall budget is given in Table 10 below.

Table 10: Forecast of Annual PID Operations and Maintenance 2020-2027

FY Total non- Total O&M Budget in PID O&M Utilization of development Irrigation Punjab non - Expenditure O&M Budget Budget O&M Budget development (PKR (%) (PKR million) (PKR million) Budget (%) million) 2008 575,533 6,427 1% 6,281 98% 2009 607,266 7,310 1% 7,163 98% 2010 651,740 7,886 1% 7,370 93% 2011 483,840 11,122 2% 10,582 95% 2012 554,057 10,784 2% 10,600 98% 2013 682,175 12,568 2% 12,182 97% 2014 894,507 16,944 2% 15,719 93% 2015 805,927 12,824 2% 12,385 97% 2016 1,029,942 18,159 2% 17,039 94% 2017 1,036,873 18,582 2% 17,887 96% 2018 1,323,825 19,308 1% 16,990 88% 2019 1,640,715 21,320 1% 19,401 91% Forecast based on FY2008-2019 2020 1,804,652 23,776

18 Source: Punjab Irrigation Department (PID). 12

FY Total non- Total O&M Budget in PID O&M Utilization of development Irrigation Punjab non - Expenditure O&M Budget Budget O&M Budget development (PKR (%) (PKR million) (PKR million) Budget (%) million) 2021 1,984,969 26,514 2022 2,183,303 29,568 2023 2,401,454 32,973 2024 2,641,402 36,771 2025 2,905,325 41,006 2026 3,195,619 45,729

2027 3,514,919 50,9 96

35. With increase in PID overall O&M financial headroom each year, Islam Barrage will continue to receive the O&M allocation as per year-on-year adjustments based on maintenance and repair cyclical needs, nature of maintenance and repair, coping with floods, and exceptional needs as it arises. Upgrading Islam Barrage will reduce the O&M during implementation period and in short to medium term. The consultants will update the O&M planning process for Islam Barrage by preparing the O&M Manual, which shall give the nature of periodic physical interventions to be made by way of preventive and curative maintenance to be carried out every year, data to be collected and records maintained and periodic inspections to be made to ensure safety of the barrage. The O&M procedures will be detailed and those should be do-able to maintain integrity of structures for their design life. Resultantly, yard sticks (both physical and financial) for the maintenance intervention works will be prepared to facilitate planning of the O&M activities every year. The provision of O&M manual will be in line with the project agreement prepared for Trimmu and Panjnad Barrages Improvement Project. 13

Annex-A: Derivation of Economic Prices Table -A1: Economic Price Derivation of Basmati Rice ECONOMIC PRICES FOR USE IN ISLAM BARRAGE PROJECT PUNJAB Economic Price of Basmati Rice - Export Parity

Description Basmati

-Thai 5% broken milled white Rice FOB Bangkok (US$ /M. Ton)/a 408.00 -Quality adjustment /b 829.53 -Exchange Rate /c 158.00 -FOB in Pak. Rupee 131066

-Karachi port Handling, Storage Charges 2621.33 -Packing Charges (50 Kg.bag) 1310.66 -Losses @ 2% 2621.33 -Storage and Handling 69.00 -Transport Charges from Mill to Karachi /d 1338.19 -Ex. Mill value of Rice 123105.81 Conversion to Paddy -Milled Rice, Export Parity(67%) 82480.89 -Husk Local Sale 100.00 -Total Value Paddy Rice 82580.89 -Milling Charges 1070.00 -Local Transport and Market Charges 237.60 -Farm=gate Price of Paddy Rs./ M .ton 81273.29 Rs./Kg. 81.27 /a World Bank Commodity Price Data May, 2019 /b For differences in quality and marketing; based on relationship /a World Bank Commodity Price Data May, 2019 /c US$ 1 = Rs.158 as on Aug 2019 /d Adjusted by SCF of 0.90

14

Table A2: Economic Price Derivation of Wheat

ECONOMIC PRICES FOR USE IN ISLAM BARRAGE PROJECT PUNJAB Economic Price of Wheat - Import Parity

Description Wheat

Canadian No. 1 WRS, in Store, St. Lawrence (US$/M. Ton) /a 211.50 Adjusted by factor of 1.03 /b 217.76 Freight and insurance 39.64 CIF Karachi, constant US$ per metric ton 257.40 Exchange rate /c 158.00 CIF Karachi, constant Rs. per metric ton 40669.3

Port Handling, Storage and transportation to market adjusted by SCF. /d 2178.56 Local market Price 42847.9 Handling and Transp. between farm gate and market adjusted by SCF. -237.60

Farm gate price, constant Rs per M.Ton. 42610.3

Rs Per Kg 42.61

/a World Bank Commodity Price Data May, 2019 /b For differences in quality and marketing; based on relationship between export unit price and prices of reference quality. /c US$ 1 = Rs.158 as of Aug 2019 /d Adjusted by SCF of 0.90 15

Table A3: Economic Price Derivation of Cotton ECONOMIC PRICES FOR USE IN ISLAM BARRAGE PROJECT PUNJAB Economic Price of Cotton - Export Parity

Description Cotton

Middling, 1-3/32 Inch, CIF Europe (US$/M.Ton) /a 1820.0 Adjusted by factor of .94 /b 1714.7 Exchange rate /c 158.0 FOB Karachi, constant Rs per metric ton 270915.1

Handling and Transp. between port and market adjusted by SCF/d 1356.4 Ex-Ginnery Price of 1 Ton Lint 269558.7

Value of 2 tons of Cottonseed 52500.0 Value of 3 tons of Seed Cotton 322058.7 Value of 1 ton of seed cotton @ 1/3 107352.9 Ginning, baling, etc. adjusted by SCF. 13950.0 Handling and Transp. between farmgate and mill adjusted by SCF. 237.6

Price at ginnery, per metric ton of Seed Cotton 93165.3 Price Rs. per Kg 93.17 /a World Bank Commodity Price Data May, 2019 /b For differences in quality and marketing; based on relationship between export unit price and prices of reference quality. /c US$ 1 = Rs.158 as on Aug 2019 /d Adjusted by SCF of 0.90

16

Table -A4: Economic Price Derivation of Sugarcane ECONOMIC PRICES FOR USE IN ISLAM BARRAGE PROJECT PUNJAB Economic Price of Sugarcane - Import Parity

Description Sugarcane

ISA Daily Price, FOB and Stowed Carib. Ports (US$/M.Ton) /a 280.00 Freight and insurance 39.64 CIF Karachi, US$ per metric ton 319.64 Exchange rate /b 158.00 CIF Karachi, constant Rs per metric ton 50502.5 Handling and Transp. between port and market adjusted by SCF/c 1896.19

Market price of sugar. 52398.7 Processing, etc. adjusted by SCF. 3478.5

Price of sugar at mill 48920.2 Equivalent price of sugarcane (8.6%) /d 3766.86 Add Value of Moeses 50.00 Handling and Transp. between farmgate and market adjusted by SCF. 54.00

Farmgate price of sugarcane Per M.Ton. 3762.86

Price Rs. per Kg 3.76

/a World Bank Commodity Price Data May, 2019 /c US$ 1 = Rs.158 as on Aug 2019 /c Adjusted by SCF of 0.899 /d As per sugar recovery rate (percent) 17

Table –A5: Economic Price Derivation of Urea ECONOMIC PRICES FOR USE IN ISLAM BARRAGE PROJECT PUNJAB Economic Price of Urea - Import Parity

Description Urea

Urea (Varying Origin), Bagged, FOB W Europe (US$/M.Ton)/a 252.7 Freight and insurance 39.6 CIF Karachi, constant US$ per metric ton 292.3 Exchange rate /c 158.0 CIF Karachi, Rs per metric ton 46189.1 Handling and Transp. between port and market adjusted by SCF/c 2178.6

Local market price 48367.7 Handling and Transp. between farmgate and market adjusted by SCF. 237.6

Farmgate price. 48605.3 Price per metric ton of nutrient (0.46) 105663.7

Rs.Per Nutrient Kg. 105.66

/a World Bank Commodity Price Data May, 2019 /c US$ 1 = Rs.158 as on Aug 2019 /c Adjusted by SCF of 0.899 18

Table –A6: Economic Price Derivation of DAP ECONOMIC PRICES FOR USE IN ISLAM BARRAGE PROJECT PUNJAB Economic Price of DAP - Import Parity

Description DAP

Diammonium, Phosphate, Bulk, FOB (US$/M.Ton) Gulf /a 340.0

Freight and insurance 39.6 CIF Karachi, constant US$ per metric ton 379.6 Exchange rate /c 158.0 CIF Karachi, constant Rs per metric tons 59,982.5 Handling and Transp. between port and market adjusted by SCF/c 2,178.6

Local market price 62,161.1 Handling and Transp. between farmgate and market adjusted by SCF. 237.6

Farmgate price. 62,398.7

Price per metric ton of nutrient (0.46) 135,649.4

Rs.Per Nutrient Kg. 135.6

/a World Bank Commodity Price Data May, 2019 /c US$ 1 = Rs.158 as on Aug 2019 /c Adjusted by SCF of 0.899

19

Table –A7: Economic Price Derivation of Potash ECONOMIC PRICES FOR USE IN ISLAM BARRAGE PROJECT PUNJAB Economic Price of Potash - Import Parity

Description Pota sh

Muriate of Potash, Bulk, FOB Vancouver (US$/M.Ton) /a 326.0

Freight and insurance 32.8 CIF Karachi, constant US$ per metric ton 358.8 Exchange rate /b 115.59 CIF Karachi, constant Rs per metric tons 41,469 Handling and transportation between port and market adjusted by SCF. /c 2176.065085

Local market price 43,645 Handling and transportation between farmgate and market adjusted by SCF. 236.437

Farmgate price. 43,881 Price per metric ton of nutrient (0.50) 87,762 Rs.Per Nutrient Kg. 87.76

/a World Bank Commodity Price Data June, 2018 /c US$ 1 = Rs.115.585 as on May, 2018 (Manila) /c Adjusted by SCF of 0.899 20

Annex B – Derivation of Standard Conversion Factor Table –B1: Standard Conversion Costs

Derivation of Standard Conversion Factor (SCF) (Rs. Million) Description/Years 2012-13 2013-14 2014-15 2015-16 Average 1 Total Imports* 4,349,879 4,630,521 4,644,152 4,658,749 4,570,825 2 Total Exports* 2,366,478 2,583,463 2,397,513 2,166,846 2,378,575 3 Import Duties** 239,459 242,810 306,220 404,572 298,265 4 Sales Tax on Imports** 429,842 495,351 553,085 678,419 539,174 5 Subsidies on Imports*** 53,380 56,955 57,123 57,303 56,190 6 Export Duties** 10,362 8,732 9,091 11,994 10,045 7 Export Rebates** 7,886 7,931 8,243 10,456 8,629

Standard Conversion Factor [M+X / (M+Tm)+(X-Tx)] = Tm= 781,249 Where; Tx= 1,416 M= CIF value of imports X= FOB value of exports M + X= 6,949,400 Tm= Net value of taxes on imports M+Tm= 5,352,074 Tx= Net value of taxes on exports X-Tx= 2,377,159 SCF= 0.899 Sources: * Economic Survey 2017-18 ** Year Book, 2015-16, FBR Islamabad *** Ministry of Finance, Islamabad; (figures not avialable are estimated on the basis of average ratio of import subsidies to total imports.

Annex C Project Costs 21 Table C1: Yearwise Phasing of Project Costs

Note:-All costs are in Million Pak.Rupees 2019-2020 2020-21 2021-22 2222-23 Total Sr. # Components Local FEC Total Local FEC Total Local FEC Total Local FEC Total Local FEC Total

1 Civil Works 0.00 0.00 0.00 488.99 0.00 488.99 733.48 0.00 733.48 0.00 0.00 0.00 1222.47 0.00 1222.47

2 Mechanical & Electrical Works 0.00 0.00 0.00 129.50 302.16 431.66 194.25 453.25 647.50 0.00 0.00 0.00 323.75 755.41 1079.16

3 Resettlment Cost 0.00 0.00 0.00 19.29 0.00 19.29 0.00 0.00 0.00 0.00 0.00 0.00 19.29 0.00 19.29

4 Consultancy Services 5.00 0.00 5.00 105.30 0.00 105.30 105.30 0.00 105.30 52.65 0.00 52.65 268.26 0.00 268.26

5 Training & Workshops 0.00 0.00 0.00 1.02 0.00 1.02 1.02 0.00 1.02 0.51 0.00 0.51 2.56 0.00 2.56

6 Project Management Office Cost 0.00 0.00 0.00 41.72 0.00 41.72 41.72 0.00 41.72 20.86 0.00 20.86 104.31 0.00 104.31

7 Sub Total (1+2+3+4+5+6) 5.00 0.00 5.00 785.83 302.16 1087.99 1075.78 453.25 1529.03 74.03 0.00 74.03 1940.64 755.41 2696.05

8 Physical Contingencies @ 3% 0.00 0.00 0.00 23.29 9.06 32.35 23.29 13.60 36.89 11.64 0.00 11.64 58.22 22.66 80.88

9 Sub Total (7+8) 5.00 0.00 5.00 809.12 311.23 1120.35 1099.07 466.84 1565.92 85.67 0.00 85.67 1998.86 778.07 2776.93

10 Security Arrangements @ 1% 0.00 0.00 0.00 11.11 0.00 11.11 11.11 0.00 11.11 5.55 0.00 5.55 27.77 0.00 27.77

11 Total Base Cost (9+10) 5.00 0.00 5.00 820.23 311.23 1131.45 1110.18 466.84 1577.02 91.22 0.00 91.22 2026.63 778.07 2804.70

Import duties @ 12.5% on Foreign 12 0.00 0.00 0.00 0.00 38.90 38.90 0.00 58.36 58.36 0.00 0.00 0.00 0.00 97.26 97.26 Cost

13 Sub Total (11+12) 5.00 0.00 5.00 820.23 350.13 1170.36 1110.18 525.20 1635.38 91.22 0.00 91.22 2026.63 875.33 2901.96

Price Escalation for Local @ 6.5% 14 & 2.5% on Foreign Component 0.00 0.00 0.00 0.00 0.00 0.00 72.16 13.13 85.29 5.93 0.00 5.93 78.09 13.13 91.22 excluding first year cost.

15 Sub Total (13+14) 5.00 0.00 5.00 820.23 350.13 1170.36 1182.34 538.33 1720.67 97.15 0.00 97.15 2104.72 888.46 2993.18

IDC (9.23% on local and 5% on 16 foreign)

17 Total Project Cost (Rs.Million) 5.00 0.00 5.00 820.23 350.13 1170.36 1182.34 538.33 1720.67 97.15 0.00 97.15 2104.72 888.46 2993.18

18 Total Project Cost (US$.Million) 0.03 0.00 0.03 5.19 2.22 7.41 7.48 3.41 10.89 0.61 0.00 0.61 13.32 5.62 18.94 Note: 1US$=158 PKR

22

Table C-2: Derivation of Project Economic Costs PKR million i) Project Base Costs including Physical Contingency 2886 ii) Foreign Currency Component 888 iii) Local Currency Component 1997 iv) Less Duty & Taxes etc. 479 v) Net Local Currency Component 1518 vi) Adjusted Local Component(as given below) 1576

Economic Cost (ii)+(vi) 2465

Local Currency Component At Market Conversion Economic Prices Factor Costs I. Materials

Cement 725 0.61 442 Steel 505 0.88 445 Others 178 0.900 160 Total 1408 1047 II. Labour Skilled 318 1.00 318 Un-Skilled 272 0.78 212 Total 589 529 III . Total Local Currency Component 1997 1576