TA 4578 – PAK: Mega Development Project FINAL REPORT AUGUST 2005 VOLUME 1 FR Main File 1 TA 4578 – PAK: Mega Development Project FR Main File ii TA 4578 – PAK: Mega Development Project CURRENCY EQUIVALENTS Currency Unit = Rupee (PKR) For the purpose of this document, a rate of US$1.00 = 59.730 Rs. has been used, which was the approximate rate at the time of the preparation of the Draft Final Report. GLOSSARY OF TERMS ADB Asian Development Bank ADP Annual Development Program ADF Asian Development Fund ARV Annual rental Value BOO Build Operate Own BOT Build Operate Transfer CBP Capacity Building Programme CCB Citizens Community Boards CDGK City District Government of Karachi CDS City Development Strategy CSP Country Strategy and Program CSPU Country Program and Strategy Update CWS Cities Without Slums DBO Design Build Operate DCO District Coordination Officer DDO Deputy District Officer DFV District Financing Vehicle DO District Officer E&IP Enterprise and Investment Promotion EA Executing Agency EDO Executive District Officer FY Financial Year GDP Gross Domestic Product GIS Geographic Information System GKWSS Greater Karachi Bulk Water Supply Scheme GoS Government of Sindh GRP Regional Product GST General Sales Tax HDI Human Development Index HRD Human Resource Development HRM Human Resource Management IA Implementing Agency IFI International Financing Institution IPP Independent Power Provider IUCN International Union for Conservation of Nature JBIC Japan Bank for International Cooperation JETRO Japan External Trade Organization JICA Japan Aid Organization FR Main File iii TA 4578 – PAK: Mega Development Project KCR Karachi Circular Railway KDA Karachi Development Authority KESC Karachi Electricity Supply Corporation KMC Karachi Municipal Authority KUDP Karachi Urban Development Project KWSB Karachi Water Supply and Sewerage Board KWSIP Karachi Water Supply Improvement Project LDA Layari Development Authority LITE Layari Industrial Trading Estate lpcpd Liters per capita per day MC Metropolitan Corporation MD Municipal District MDA Malir Development Authority Mgd Million gallons per day MICS Income Survey MMIS Municipal Management Information System MNA Member of National Assembly MOF Ministry of Finance MPA Member of Provincial Assembly MTDF Medium-term Development Framework Plan MW Mega Watt NEPRA National Electric Power Regulatory Authority NFC National Finance Commission NGO Non-government Organization Nox Oxides of Nitrogen NWFP North West Frontier Province OCR Ordinary Capital Reserves OPP Orangi Pilot Project OZT Octroi & Zila Tax PBME Project Benefit Monitoring and Evaluation PC1 Planning Commission Pro-forma 1 PD Project Director PDF Pakistan Development Forum PFC Provincial Finance Commission PPIFF Private Infrastructure Finance Facility PLGO2001 Pakistan Local Government Ordinance 2001 PMU Project Management Unit PPP Private Public Partnership PPS Public Perception Survey PRSP Poverty Reduction Strategy Paper PSC Project steering Committee RfPs Requests for Proposals Rs Rupees SITE Sindh Industrial Trading Estate SLG Sindh Local Government SLGO Sindh Local Government Ordinance SMEs Small and Medium Enterprises SOEs State Owned Infrastructure Entities FR Main File iv TA 4578 – PAK: Mega Development Project Sox Oxides of Sulphur SPM Suspended Particulate Matter T&D Transmission and Distribution TMA Tehsil Municipal Administration TTF Technical Task Force UA Urban Administration UFW Unaccounted for Water Ug/m3 Microgrammes per cubic meter UNCHS United Nations Centre for Human Settlements UNDP United Nations Development Programme URC Urban Research Centre FR Main File v TA 4578 – PAK: Mega Development Project TABLE OF CONTENTS Page EXECUTIVE SUMMARY Ix I. INTRODUCTION/PROPOSAL 1 II. BACKGROUND AND SITUATION ANALYSIS 2 A. Demography and Economy 2 1. Recent Overall Economic Performance 2 2. GDP and Sector Growth 2 3. Outlook for FY 2006 3 4. Sindh Province and Karachi Economic Activity 3 5. Population 4 6. Karachi 1998 Population Census 4 B. Poverty and Katchi Abadis 5 1. Introduction 5 2. Incidence of Poverty in Karachi 5 3. Incidence of Poverty in Katchi Abadis 6 C. Megacity Development Trends and Environment 8 D. Spatial Planning and Development 9 E. Existing Infrastructure 10 1. Water Supply 10 2. Wastewater Management 12 3. Solid Waste Management 12 4. Stormwater Drainage 13 5. Roads 13 6. Traffic and Transport 14 7. Electricity – Generation and Distribution 15 8. Fire Services 15 F. Priority Projects to be Financed under Future Megacity Loans 15 G. The Urban Environment 16 H. Institutional, Governance and Legal Arrangements 17 1. Existing Situation 17 2. Recommendations for Institutional Improvements 19 FR Main File vi TA 4578 – PAK: Mega Development Project I. Urban Finance Sources 22 1. Introduction 22 2. Federal NFC Allocations 23 3. Deficiencies in the Federal Transfer System 23 4. Sindh Government Own Sources of Revenues 24 5. Sindh – Recent Tax Reforms 24 6. Provincial Transfers to Local Government 25 7. District Government Revenues and Expenditure 26 8. OZT Transfers to TMAs 26 9. Deficiencies in the Provincial Transfer System 27 10. Karachi City District Government (CDGK) Revenues 27 11. Town and Union Councils Funding and Expenditure Revenue 29 Sources 12. TMA Expenditure Heads 30 13. Union Council Revenues and Expenditures 30 J. Karachi Water Supply and Sewerage Board (KWSB) 30 1. KSWB Financial Management and Accounting Systems 32 K. Improvement in Local Government Revenue Receipts 32 1. Federal Divisible Pool, Provincial Allocations, Accountability and 33 Efficiency 2. Provincial Divisible Pool, District Shares and Local Government 33 Revenue Generation 3. Provincial Government Revenue Generation 34 4. CDGK and TMA Revenue Generation 34 5. User Charges for Water and Sewerage 36 L. Financial Management Reforms 38 M. Local Financing of Urban Infrastructure 39 III. PROJECT RATIONALE 40 A. Introduction 40 B. External Assistance to the Sector 41 C. Lessons Learned 42 D. Government Infrastructure and Urban Sector Strategy 42 E. Tameer-e-Karachi Program 45 F. Private Financing of Infrastructure – Lack of Supportive Legal, 46 Regulatory and Policy Framework for PP G. ADB Urban Sector Strategy 47 H. City Development Framework 48 I. Project Rationale 51 FR Main File vii TA 4578 – PAK: Mega Development Project J. Project Rationale for the Financial Intermediary 52 IV. THE PROJECT 54 A. Objectives 54 B. Policy Dialogue 55 1. Institutional Development 55 2. Human Resources Management Function 55 3. Municipal Finance 56 4. Land and Planning 56 5. Service Delivery 58 6. Policy Dialogue on Financial Intermediary 58 7. Design of the Financial Intermediary 61 C. Project Components and Outputs 61 1. Part A: Project Management Support 62 2. Part B: Institutional and Policy Reform 65 3. Part C: Feasibility Studies for Priority Projects 69 4. Part D: Development of Financial Intermediary 74 D. Cost Estimates 77 E. Financing Plan 77 F. Implementation Arrangements Project Management and 79 Coordination 1. Component Specific Implementation Arrangements 79 2. Subproject Selection Criteria 82 3. Implementation Schedule and Period 82 4. Consulting Services 83 5. Disbursement Arrangements 84 6. Project Performance Monitoring and Evaluation Reports 84 7. Reports 84 8. Evaluation of Feasibility Reports and Final Consultant Reports 84 9. Project Review and Accounts and Audit 85 V. PROJECT BENEFITS, IMPACTS AND RISKS 88 VI. ASSURANCES 89 A. Specific Assurances 89 B. Conditions for Loan Effectiveness and Disbursement 89 Annex 1 Bibliography 90 Annex 2 List of Persons Met 94 FR Main File viii TA 4578 – PAK: Mega Development Project LIST OF APPENDICES Appendix 1 Design and Monitoring Framework Appendix 2 Demography and Economy Appendix 3 Poverty Profile Appendix 4 Infrastructure and the Environment Appendix 5 Institutions, Governance, Legal and Regulatory Appendix 6 Spatial Planning and Development Appendix 7 Urban Finance Appendix 8 External Assistance to the Sector Appendix 9 City Development Framework Appendix 10 Katchi Abadis Appendix 11 Components and Outputs Appendix 12 Cost Estimates and Financing Plan Appendix 13 The Karachi Infrastructure Fund, FI Appendix 14 Outline Terms of Reference Appendix 15 Subproject Proposal Form FR Main File ix TA 4578 – PAK: Mega Development Project EXECUTIVE SUMMARY KARACHI MEGACITIES PREPARATION PROJECT A. The Economy, Population and Urban Institutions Pakistan is in the midst of an economic upturn. Wide-ranging structural reforms, prudent macroeconomic policies, fiscal discipline, and consistency and continuity in policies have transformed Pakistan into a stable and resurgent economy. Karachi, the capital of Sindh Province, is the commercial hub and the gateway of Pakistan. The city handles 95% of Pakistan’s foreign trade, contributes 30% to Pakistan’s manufacturing sector, and almost 90% of the head offices of the banks, financial institutions and multinational companies operate from Karachi. The country’s largest stock exchange is Karachi-based, making it the financial and commercial center of the country. Karachi contributes 20% of GDP, adds 45% of the national value-added, retains 40% of the total national employment in large scale-manufacturing, holds 50% of bank deposits and contributes 25% of national revenues and 40% of provincial revenues. To sustain the momentum of economic growth is a major challenge, and is dependant on continued job creation and poverty alleviation, which is in turn dependant upon strengthening the management efficiency of Karachi, and supporting improvements in