Pakistan Public Expenditure Management, Volume II

Home , Akhori Dam, Gomal Zam Dam, Hingol Dam

Report No. 25665-PK

PAKISTAN Public Expenditure Management Accelerated Development of Water Resources and Irrigated Agriculture

VOLUME II

January 28, 2004

Environment and Social Development Sector Unit Rural Development Sector Unit South Asia Region

Document of the World Bank

CURRENCY EQUIVALENTS

Currency Unit = Pakistan Rupee US $1 = PKR 57.8

FISCAL YEAR July 1-June 30

ACRONYMS AND ABBREVIATIONS

ADB Asian Development Bank MIS Management information system ADP Annual Development Plan MOWP Ministry of Water and Power AWB Area Water Board MTEF Medium Term Expenditure Framework BCM Billion cubic meters MTIP Medium Term Investment Plan CCA Canal command area NDP National Drainage Program DMP Drainage Master Plan NDS National Drainage System EFR Environmental Flow Requirement NSDS National System Drainage Study EIRR Economic internal rate of return NWFP North West Frontier Province FATA Federally Administered Tribal Areas NWP National Water Policy FGW Fresh groundwater OFWM On-farm water management FO Farmer organization O&M Operations and Maintenance GDP Gross development product PIDA Provincial Irrigation and Drainage Authority GIS Geographic Information System POE Panel of Experts GOP Government of Pakistan PRHS Pakistan Rural Household Survey HYV High yielding variety PSDP Public Sector Development Program IBIS Indus basin irrigation system PV Present Value IDA International Development Association RAP Revised Action Plan IPPs Independent Power Producers RBOD Right Bank Outfall Drain IRSA Indus River System Authority SCARP Salinity control and reclamation program ISRP Irrigation System Rehabilitation Project TYPP Ten Year Perspective Plan IWRM Integrated water resource management WAPDA Water and Power Development Authority KESC Karachi Electricity Supply Company WMO Water Management Ordinance LBOD Left Bank Outfall Drain WSIPS Water Sector Investment Planning Study Mac Million acres WSS Water Sector Strategy Study MAF Million acre-feet WUA Water user association

TERMS Abiana Water charge for canal irrigation service assessed on the basis of “matured crop” acreage, crop, and canal command Kharif Summer growing season (mid-April to mid-October) Rabi Winter growing season (mid-October to mid-April) UNITS 2.54 acres = 1 hectare 1 MAF/month = 16,850 cfs = 477.2 m3/sec 1 acre foot/day = 0.5 cfs = 14.3 liters/second 1 million acre feet = 1.235 billion cubic meters

Vice President: Praful Patel, SARVP Country Director: John W. Wall, SACPK Sector Director: Sadiq Ahmed, SASPR Sector Manager: Ijaz Nabi, SASPR Task Managers: Paul Wade, SASPR; Hanid Mukhtar, SASPR Parvez Hasan, Consultant

TABLE OF CONTENTS

EXECUTIVE SUMMARY...... i

1. Introduction...... 1

2. Background: Achievements and Issues...... 3 Role of Agriculture in the Pakistan Economy ...... 3 The Ultimate Threat to Sustainability – Water Logging and Salinity ...... 5 Water Resources and Agriculture...... 8 The Inter-Provincial Water Apportionment Accord...... 11 Environment Flow Requirements in the Lower Indus River...... 15 Poverty, Water Availability, and Agricultural Productivity...... 16

3. Public Sector Development Programs ...... 21 Trends in Public Expenditure for Water and Agriculture ...... 21 Investment Programs from the 1960s to the 1990s ...... 21 The Emergence of a Program of Governance Reforms in the 1990s ...... 22

4. Operations and Maintenance Expenditures and Performance ...... 29 Provincial Operations and Maintenance Budgets...... 29 Cost Recovery...... 32 Changes in the Structure of Water Pricing and the Flow of Revenues...... 35

5. Water Disputes and Strategy Debate: Policy and Strategy Formulation...... 40 The Challenges at the Close of the 1990s ...... 40 The Government’s Responses to Water Shortages...... 40 Water Resource Development Challenges ...... 43 Strategic Questions and Issues...... 45 A Framework for Formulating a Strategy ...... 60 Changing the Paradigm to Water Management ...... 62

6. Proposed Water Sector Investment Plans ...... 64

7. Federal & Provincial Investment Trends and Options ...... 69 Key Issues in the Emerging Portfolio ...... 70 Comparison of the Federal FY03 and FY04 PSDP...... 72 Extension of the FY04 PSDP Portfolio over the MTEF Period...... 75 Investment Trends and Options ...... 77

8. The Way Forward...... 83 Key Water Policy Responses...... 83 Addressing Strategic Questions and Issues ...... 84 What needs to be done ...... 86

Annex A: A Note on “Canal Basin Water Management Plans” Annex B : Provincial Investment Plans, Federal PSDP and Provincial ADPs Annex C: Review of Projects in the Core and Non-Core Portfolios

TABLES Table 2.1: Average Water Balance of the Indus River System ...... 9 Table 2.2: Water Availability at the Farm Head in the Indus Basin System...... 9 Table 2.3: Inter-Provincial Water Accord Allocations ...... 11 Table 2.4 Shortfall in Meeting the Accord Allocations ...... 13 Table 4.1: Irrigation Department Budgets Since 1992 ...... 29 Table 4.2: Abiana Assessment and Recovery Performance (Rs. million) ...... 33 Table 5.1: Summary of MOWP Water Sector Strategy Proposed Investments...... 42 Table 5.2: Sub-Sector Investments in the MOWP Water Sector Strategy...... 43 Table 5.3: Water Resources Available to Meet Future Development Needs ...... 47 Table 5.4: Summary of Incremental and Projected Water Requirements...... 49 Table 5.5: Present Power Generating Capacity ...... 50 Table 5.6: Cost and Economic Returns for Proposed Major Investment Projects...... 57 Table 5.7: Potential Water Savings from Improved Efficiencies...... 59 Table 5.8: Watercourse Improvement Program Needs...... 60 Table 6.1: TYPP Objectives for Water Resources and Agriculture ...... 65 Table 6.2: TYPP Strategy for Water Resources Development (2001-2011)...... 67 Table 6.3: Common Features of Proposed Investment Plans (MTEF Period) ...... 68 Table 7.1: Emerging Water Sector Portfolio During the MTEF Period (FY03-07)...... 69 Table 7.2: Summary of Resource Allocation in the Emerging Portfolio ...... 70 Table 7.3: Comparison of FY03 and FY04 PSDPs...... 72 Table 7.4: Comparison of FY03 and FY04 PSDP Resource Allocations ...... 73 Table 7.5: PSDP FY 2003-04 Portfolio Projected over the MTEF Period ...... 74 Table 7.6: Projection of Total PSDP Allocation ...... 76 Table 7.7: Summary of MOWP’s Medium Term Investment Plan (MTIP) 2003-07 ...... 76 Table 7.8: PSDP 2003-07 Portfolio by Major Category of Investment...... 78 Table 7.9: Alternative Paths for PSDP Growth ...... 80

FIGURES Figure 2.1: Per-capita GDP, Food Production and Total Population ...... 3 Figure 2.2: Pakistan Comparative Trends: Population, Water Use and Productivity...... 4 Figure 2.3: Annual Indus River Flow, Diversion, and “Escapage to the Sea” ...... 8 Figure 3.1: Public Sector Expenditures...... 21 Figure 4.1: O&M Budgets (in current terms) ...... 30 Figure 4.2: Comparison of Revenue and Expenditures in Punjab (in current terms)...... 33 Figure 4.3: Abiana Assessment and Recovery in Punjab (in current Rs) ...... 34 Figure 4.4: Concept of Water Revenue Flows in the Future ...... 37 Figure 5.1: Variation in Average Monthly Hydropower Generating Capability ...... 51 Figure 5.2: Average Capacity Utilization of Main Hydropower Plants...... 52 Figure 5.3: Variation of Annual Hydropower Energy ...... 52 Figure 5.4: Existing and Incremental Diversion and Flow below Kotri Barrage...... 52 Figure 5.5: Probability of Satisfying Target EFRs...... 53 Figure 5.6: Probability that Incremental Storage Capacity Fills ...... 54 Figure 5.7: Storage Depletion Due to Sedimentation ...... 55 Figure 7.1: Comparison of FY03 and FY04 PSDPs...... 73 Figure 7.2: Comparison of Emerging Portfolio with PSDP Trends ...... 74 Figure 7.3: Comparison of Total MTEF Expenditures ...... 75 Figure 7.4: Alternate PSDP Growth Paths ...... 80 Figure 8.1: Concept of Water Revenue Flows in the Future ...... 84

ACKNOWLEDGEMENTS

This review was undertaken by Usman Qamar1 (Task Leader) and Walter Garvey2 as a part of the Pakistan Public Expenditure led by Parvez Hasan. The review is based primarily on the Ten-Year Perspective Plan (September 2001) of the Pakistan Planning Commission, the four reports that constitute the Water Resources Strategy Study (WSS), completed in October 2002 by the Ministry of Water and Power (MOWP) with the assistance of the Asian Development Bank (ADB), and the draft National Water Policy reports completed in September 2002 (final draft) by MOWP under the ongoing National Drainage Project (NDP) supported by the World Bank. In addition, the review was informed by a comprehensive working paper, “Pakistan Public Expenditure Review: Working Paper on Irrigation, Drainage and Water Resources Development (April 2003)”, prepared by M. Aslam Rasheed and Muhammad Ehsan, World Bank Consultants.

The review has also drawn upon extensive discussions with Sakwa Bunyasi, Nagaraja Rao Harshadeep, Aziz Bouzaher, Qazi Azmat Isa, and Vaqar Zakaria, as well as the sage and thoughtful advice of Parvez Hasan (PER Team Leader). Saeed Rana and Aftab Raza commented on early drafts. Shams Ul Mulk, Hans Binswanger, and Tariq Husain provided Peer Review. Written comments were also received from Aslam Saleem Khan, Member - NWFP, Indus River System Authority (IRSA), Mazhar Ali, Advisor, Irrigation and Power Dept., Government of Punjab, and from Mohammad Ismail Qureshi, Federal Ministry of Finance.

The draft Report was discussed with IRSA in May 2003, with the Planning Commission, Ministry of Water and Power, WAPDA, IRSA, and representatives of the four Provinces on July 2-4, 2003, and with the Secretary, Planning and Development Division and Planning Commission staff on September 11, 2003.

1 Senior Irrigation Specialist, Rural Development Sector Unit, South Asia Region, World Bank Islamabad Office. 2 Senior Water Resources Advisor, South Asia Region, World Bank, Washington.

PAKISTAN PUBLIC EXPENDITURE MANAGEMENT Accelerated Development of Water Resources and Irrigated Agriculture

VOLUME II

EXECUTIVE SUMMARY

1. In Pakistan today, agriculture is a major part of the economy and one of the key engines of overall economic growth. Agriculture today is estimated to contribute about 25% of GDP, employ nearly 50% of the rural labor force, and to be responsible directly or indirectly for 60-70% of exports. Within the agriculture sector, crop production (principally wheat, cotton, sugarcane and rice) accounts for about 59% of value added and livestock about 38%. Increases in water resources available for irrigation and expansion of irrigated area have played a central role in agriculture growth since the 1960s. Agriculture now uses an estimated 95% of available water resources, and irrigated land is responsible for about 80% of agricultural production. Total irrigated area in Pakistan is about 46 Mac, about 82% of the irrigable area. Nearly 97% of this irrigated area is in the Indus Basin.

2. As Table 1 indicates, average surface water availability to the Indus Basin irrigation system has changed little since the late 1970s when Tarbela Dam was completed, but the growth in groundwater use has been explosive – growing from just 8% of water available to farmers in 1960 to over 40% in the late 1980s -- after which time it appears to have changed very little. The recent drought amply demonstrated the importance groundwater has played in expandin g and stabilizing irrigation water supplies. However, one critical consequence of this growth is that because drainage and evacuation of salt from the basin is inadequate, increasing amounts of salt are circulating vertically in the system, progressively poisoning the soil.

Table 1: Water Availability at the Farmhead in the Indus Basin System Water Availability at Farm Head MAF Irrigated Area Year Canal Water Groundwater Total MAc Acre-ft/ Acre 1960-61 48.4 4.2 52.5 25.7 2.04 1967-68 56.8 11.7 68.5 30.9 2.22 1977-78 61.6 27.8 89.4 35.1 2.55 1985-87 61.4 40.9 102.3 39.8 2.57 1990-91 65.0 41.0 106.0 41.9 2.53 1999-2000 61.5 41.6 103.1 44.0 2.34 Source: GWP, Water Vision 2025 Country Report.

The Problem of Sustaining Growth

3. Should Investment in Water Resources and Irrigation be Accelerated? Post Tarbela, the Government tried to recapture the momentum of the Indus Basin Program of the 1960s and early 1970s. A major planning program was launched in 1979 (RAP) and again in 1990 (WSIPS), but the required actions could not be taken and the investments could not be made. Investments in the mobilization of additional water supplies for irrigation and expansion of irrigated area have been neglected for over twenty years. Forecasts of widespread ncreasesi in cropping intensity and productivity have not materialized. Despite efforts to improve operation and maintenance of irrigation infrastructure since the

1980s, modest ad hoc investments in rehabilitation have failed to stem the deterioration of infrastructure, service has remained unreliable and inequitable, and no investments in modernization and remodeling to serve future needs have been undertaken. The recent drought exposed the vulnerability of the vast Indus Basin irrigation system and the environmental conditions in the lower river and estuary, and focused attention on the need for additional storage to improve and increase supply and provide greater operating flexibility and assurance. There is little doubt that water sector investment must increase substantially, and that the need for investment in modernization and improvement at all levels of the Indus Basin irrigation system including the addition of new storage is great, but this comes just at the time when fiscal space is limited and the challenges and needs are great.

4. Water Supply Expansion. Water availability has been a key engine of Figure 1: Annual Indus River Flow, Diversion and "Escapage to Sea" agriculture growth, but supply options are increasingly costly and approaching their 200 physical limits, and managing demand 150 (efficiency, productivity, pricing, water entitlements, etc.) has received too little 100 50 attention. Total storage and diversion of Flow in MAF Indus River flow has remained relatively 0 constant at about 103-104 MAF (Figure 1), 1975-76 1980-81 1985-86 1990-91 1995-96 2000-01 and there remains a large but highly variable flow that is unused except in the Existing Storage and Diversion "Escapage to the Sea" lower Indus River and estuary. At present the limited storage available (about 12.8 MAF) is fully utilized, and canal head diversions can increase only during very high flow years (a maximum of about 10% of the average) at some risk to the canal system because of the high sediment loads. Hence, although there appears to be significant scope for additional surface water resources development in Figure 1, this is limited if additional storage is not developed. Assuming optimistically that two new storage reservoirs could be built on the Indus River over the next 25 years, these would add at most about 8 to 12% to the total water supply to the Indus basin irrigation system. But, as the aggregate amount of annual storage and diversion increases, security or reliability of supply will diminish, management challenges will greatly increase, and there may be increased and possibly irreversible environmental impacts in the lower Indus River and its estuary. Among alternative supply options, groundwater development is already nearing its practical limit, and water conservation may be able to add only about 5% to total supply.

5. Security and Environmental Flow Requirements. The aim of expanding storage capacity is not only to increase supply but also to increase security or reliability of supply. Figures 2 and 3 show two important ways in which aggregate water supply reliability may decline as total system storage and diversion on the Indus River are increased. These charts are based on a rough and simplified simulation using the annual flows of the Indus Basin (Figure 1) and current total diversion as reported in the Ministry of Water and Power’s Water Sector Strategy (WSS). They assume that all the incremental aggregate storage is operated in the same manner as is presently done (all storage is released and diverted in the rabi season. If some of this storage were carried over to the succeeding kharif season then the performance shown in Figure 2 might be somewhat better. The actual performance of the enhanced system can only be determined using a detailed hydrologic simulation model of the Indus Basin and all its irrigation and water use infrastructure.

6. Figure 2 shows the variation of the probability of meeting targets for Environmental Flow Requirements (EFR) in Sindh in the lower Indus River below the Kotri Barrage at different levels of total incremental aggregate storage and diversion from 10 MAF to 25 MAF (the latter is just above the WSS target of 22.5 MAF). Up to about 20 MAF the EFR is available in roughly 3 out of 4 years and more

frequently at lower levels of incremental Figure 2: Probability of Satisfying Target EFRs storage and diversion. But, above 20

MAF the availability of the target EFRs 90% drops quickly below 3 out of 4 years. At present this EFR target could only be met 80% in the kharif season, since there is no river 70% EFR=5MAF EFR=9MAF flow or reservoir storage that is not already 60% EFR=10MAF allocated to irrigation in the Accord (if 50% some of the incremental storage were 40% carried over to the succeeding kharif Percent of Years Available 10 15 20 25 season to make up the current Accord Incremental Storage and Diversion (MAF) Deficit, then the level of performance shown in Figure 2 may improve).

7. Presumably one objective of both the MOWP’s WSS proposals to increase Figure 3: Probability That Incremental Storage Capacity Fills storage capacity by 22.5 MAF is to (Flood Canal Diversion = 5 MAF) improve water supply reliability (in response the recent drought experience) as 80.0% well as availability. However, Figure 3 60.0% suggests that as the aggregate level of 40.0% EFR=10MAF storage and diversion is increased to the EFR=5MAF levels proposed by both the WSS and Storage Fills 20.0%

WAPDA, supply reliability will decline, Percentage of Years 0.0% particularly at higher EFR target levels. 10 15 20 25 Even at significantly reduced EFR target Total Incremental Storage Capacity (MAF) levels, say 5 MAF instead of the 10 MAF that has been discussed, storage efficiency drops below 75% at the 15 MAF level, and to about 65% at 20 MAF. In the specific case of the proposed raising of Mangla Dam, a similar problem of diminished water supply reliability will occur after the dam is raised. The current reservoir has filled in 28 out of the 34 years of record (82% of the time), but the incremental reservoir storage of 2.9 MAF that will be created when the dam is raised 30 ft. will have a reliability of just 72%.

8. Balancing Future Water Supply Table 2: Water Resources Available to Meet Future and Demand. Table 2 summarizes the Development Needs average flow of the Indus River to the sea, Source (MAF) Kharif Rabi Total and the remaining potential for groundwater development and savings Average Annual Flow to the Sea 35.6 2.4 38.0 from water conservation measures. Additional Groundwater 1-2 Nearly the entire rabi season (dry season) Savings from Water Conservation 5-10 flow of the Indus River is utilized. In fact, Total 44-50 the rabi season flow plus nearly all the storage of Indus River flow in the previous kharif season in existing reservoirs (currently about 12.8 MAF at Tarbela and Mangla), is fully allocated in the Accord during the rabi season. The average flow to the sea in Table 2 represents the potential amount of surface water remaining to be developed and used. Only a small, uncertain amount of additional groundwater is available (1-2 MAF) and savings from water conservation over the long-term may be between 5 and 9 MAF.

iii

9. Table 3 summarizes the projected future Table 3: Summary of Incremental and Projected requirements. The low end of the range would Water Requirements bring total development to a level nearly equal Demand Volume (MAF) to the annual average flow of the Indus River, Environmental Flow Requirements 10 almost certainly not an economically viable Disposal of Salts and Pollutants ? proposition in Pakistan. All these future demands cannot be met – some important Urban domestic and industrial demand 9 tradeoffs are going to be required, expectations Accord Deficit 11 lowered, policies changed especially in regard Increase in Irrigation Water Demand 5-30 to water prices and energy prices for System Losses 5-10 groundwater use for agriculture, and changes in Estimated Total 40-70 the way water is managed and used implemented. This does not mean that Pakistan must give up on food security and export goals, poverty reduction goals, or the Millennium Development Goals (MDG). It does seem to mean that if these goals are to be achieved, water has to be used much more productively and efficiently, and above all, its quantity and quality managed more wisely and well.

10. Water Demand Management. The Government’s main focus has been on solving water problems by focusing primarily on the supply side of the equation. The demand side – water delivery and use efficiency, governance, water pricing, rehabilitation and modernization of infrastructure and improved O&M, incentives for wise and more productive use of water – has been recognized as important but receives comparatively less investment attention in the TYPP, though it features more prominently in the MOWP’s Water Strategy Study. This is in part due to the division of responsibility between the Provinces and the Federal Government in terms of primary responsibilities for investment finance since much of the responsibility for demand side investment and irrigation water distribution lies with the Provinces. Moreover, given the relatively small Provincial ADPs (Annex B), it is hard to see how these issues will be adequately addressed without direct Federal financial assistance. Nevertheless, the question arises as to whether, without greater attention to these demand side issues and constraints, Federal expenditures on major system level infrastructure (dams and new canals) can have the desired economic impact.

11. Modernization and Rehabilitation of Water Distribution. Pakistan’s irrigation distribution system was designed to distribute water with minimum human interference, and at low operation costs with minimum information and communications. There are few structures to regulate flow, no escapes to remove excess flows, and for example, outlets run whenever the distributary or minor is running. These design and operation principles were suitable for low cropping intensity (the original intent) but are now constraints on water management to maximize crop production and productivity. Moreover, while many common principles were used in the design of the Indus Basin canal system, there are important physical, social and economic differences between and within canal commands. The growth and extent of private groundwater use and progressive water logging and soil salinization are just two examples. Others have only emerged as constraints or problems over the intervening years of development and use. These differences strongly influence the approach that should be used for the modernization of each individual canal to improve and increase its physical and economic performance. The selection of canal reaches to be lined is another important example of a highly area specific issue that requires an integrated approach. In the past, sporadic efforts have been made to rehabilitate parts of the canal network, or to improve drainage here and there, but in the absence of a comprehensive and integrated approach, effective farmer participation, and other changes upstream and downstream including improvements in O&M, these efforts have not led to overall improvements in either physical or economic performance. The current dilapidated state of the irrigation system bears witness that the expected improvements have not materialized, and there is ample evidence that it has worsened. Regardless whether additional water is made available at the canal head in the future or not, the imperative will remain to make optimal use of all

water resources, both surface and groundwater, within the canal command, or more appropriately within the “canal basin” (the combination of the canal command area and the drainage area).

12. Control and Management of Salinity and Waterlogging. The expansion of irrigated agriculture in the Indus plain has resulted in a progressive rise of the groundwater table and the buildup of salts in the soil and groundwater from surface water inflow for irrigation, overuse of irrigation water, and mobilization of salts from groundwater. Continuous addition of salts to agricultural soils, groundwater aquifers, and some water bodies is a major productivity and environmental risk that ultimately threatens the viability of irrigation in the Indus Basin. Research in Punjab, for example, has found that the substantial positive effect on crop sector productivity growth in four different major cropping systems stemming from technological change (change in cropping intensity – directly attributable to increased irrigation supply - and percent area in modern varieties of wheat) and public investment (roads and literacy) were partially offset (by 57 to 74%) or completely offset (in the case of the wheat-rice cropping system) over the period 1971-94 by the negative impact of soil and water quality degradation.

13. Curative measures will be needed to control and reverse the effects of severe water logging and soil salinity on nearly 7 Mac of land. These may include lining of canals in some saline ground water areas, improvement of watercourses and introduction of on-farm drainage and land-leveling, improvement of existing and creation of new drains including a trunk or spinal drain in the upper and middle basin, and conjunctive management of canal water and groundwater. But these very large investments that would be carried out over a long timeframe may not be able to arrest or even keep up with the pace of soil and water quality degradation if there is not a balanced commitment to preventive measures including adjustment of canal allowances, promotion of changes in irrigation practices to eliminate over-irrigation and increase efficiency, better on-farm water management, changes in water pricing, and better groundwater monitoring and management.

14. Groundwater Management. Groundwater use in the Indus basin has more or less reached the upper limit and there is very little potential for a further increase. While estimates of total availability vary over a significant range, regardless which estimate one subscribes to the difficulty of approaching the limit in the presence of saline water adjacent or below the freshwater zone when nearly all groundwater is developed pr ivately requires that planning assumptions be very conservative and limited to perhaps just 1-2 MAF or less given today’s limited knowledge and information base and the lack of a management system. Because of the presence of highly saline water in the aquifer over large areas including below the fresh water in some cases, there is a very grave risk of rapidly increased water quality deterioration and soil degradation as the safe limits of development are approached, and in some areas there is a risk of a reversal and loss of this valuable source of water because of salinity. The greatest threat may come form fast growing cities and industries looking for large increases in water supply that can be developed rapidly. In fact, rather than looking to groundwater for additional development by, for example, increasing power subsidies or tubewell subsidies (since groundwater development is largely private at present), Pakistan must urgently intensify its efforts to monitor and manage this source of water (its critical regulatory function in what has become a public -private partnership). The Government’s most important tool in this regard is to properly price water and power in the agriculture sector. It should gradually withdraw all subsidies for fuel and power use, as well as for tubewells, for groundwater abstraction for irrigation.

15. What is The Role and Scope for Water Conservation? Water conservation and increases in the productivity or value of water are not an alternative so much as an imperative, since no amount of infrastructure investment is likely to make Pakistan or the Indus Basin system “water abundant”. Any sensible strategy for Pakistan would include water conservation just as it would some level of expanded and more reliable water supply in response to the issues and problems outlined earlier. However, various estimates put the potential savings from current supply at about 4.7 MAF, just 5% of the current average

availability of surface water in the Indus basin, primarily by lining of watercourses and land leveling under the On-Farm Water Management (OFWM) programs of the Provinces.

16. Moreover, water conservation is strongly linked to efforts to solve the chronic problem of the low productivity of water – these two initiatives – water conservation and productivity enhancement -- should be seen as two complimentary components of a single program that closely coordinates and carefully sequences agricultural investment and policy, investments upstream in the canal network for modernization and improvement, with watercourse improvements. Unfortunately while there is considerable experience already in Pakistan with the core elements of water conservation – watercourse lining and land leveling – progress and experience on raising the productivity of water use, improving watercourse maintenance, organizing sustainable WUAs, or introducing water saving irrigation technology and crops is seriously deficient. Water conservation and efficiency gains are achievable provided that farmers, who must share in the cost of these measures, benefit from the savings – not only because equity is improved and previously un-served farmers now get water, but also because all farmers in the improved canal command are able to decide how to use the saved water to increase their production and income. This suggests that rationalization of water rights between the provinces and in the canal networks down to the level of the farmer organization should be a policy priority.

The Future of Water Management will be different from the past in important ways 17. The response of the Government to the recent drought and political conflicts over water has been to propose a huge investment program in water resources development (nearly US$8 billion over the next ten years, and over US$30 billion by 2025). More than three-fourths of this investment would be for new storage dams, hydropower capacity, and for new canals. In the 1960s planners were faced with some of the same challenges the country faces today – including what was the best strategy to restore and sustain a sufficiently high agricultural growth rate, whether to add surface water storage to the system and how much should be added, how would groundwater be used in conjunction with surface water and what parts of the canal network should be remodeled, how to integrate salinity and waterlogging control into the overall program, and what operating policy should be adopted to maximize the benefits from power and irrigation.

18. Today, Pakistan is again facing some of the same challenges and is approaching the limits of its water resources development potential. The Government’s main focus has been on solving water problems by focusing primarily on the supply side of the equation where there is clearly the physical potential for development; i.e., there is water that can be developed and there is land on which it can be used, and there are ample numbers of poor farmers who would benefit from additional water supplies. But the outcomes the Government is seeking in terms of both poverty alleviation and development of the rural economy can be achieved in a number of different ways that have different costs and different risks.

19. The combination of high population growth, persistent poverty, lagging growth in the rural sector, and the looming constraints on water resources and irrigation development outlined in this Report suggests that water resources development and management in the next 40 years will be and must be by design substantially different than the past 40 years. The strategy going forward must:

§ Better integrate irrigation, hydropower and agricultural development investment and policy § Modernize both the water infrastructure and the institutional and governance arrangements for water management § Balance near-term and long terms benefits, investments in both water infrastructure and water management, and in both supply management and demand management

§ Reflect a more rigorous economic, social and environmental analysis to ensure that project priorities and plans make the best use of the limited resource and fiscal space § Be supported by a new consensus on water management and development that avoids the costly political conflicts of the past

20. The counterpart to a balanced approach to supply and demand management is a balanced approach to investment in water infrastructure and water management.

Modernizing Irrigation and Water Management Institutions and Governance

21. By the mid-1980s the Government recognized that maintaining the vast irrigation system that had been created was a problem, and by the early 1990s it was generally accepted that ad hoc rehabilitation was not the answer. Instead, it was agreed that fundamental institutional reforms, coupled with investment to improve the efficiency and performance of the physical system, were necessary to address institutional weaknesses that were manifested in the continuing lack of effective and efficient O&M, low cost recovery, low water delivery and application efficiency, inequitable water distribution, and threats to the long term sustainability of irrigated agriculture. In response, the Government conceived an ambitious and far reaching reform program based on three principles: decentralization, participation and management transfer. The program of governance reforms was intended to foster the development of an institutional, policy and operational framework conducive to efficient and self-sustaining operation and management of the irrigation system, and provide a governance framework that would enable and promote improved equity and more efficie nt and productive use of water.

22. The Federal Government has sustained a commitment, at least in policy and spirit, to the governance reform program, but it is essentially a Provincial matter since they are entirely responsible for the irrigation systems and irrigation services within the province. Nevertheless, the Federal Government has a vital interest in the outcomes of the reform process since these outcomes are essential to achieving its long term social and economic objectives in the rural sector (assuming this continues to depend to a large extent on an increasingly productive irrigated agriculture sector) for which the Federal Government is proposing a huge increase in public expenditure for inter-provincial water resources infrastructure (new dams and canals, and eventually drainage). On the other hand, the Provinces are and will continue to be increasingly dependent on the Federal Government to underwrite an increasing share of their essential water sector investment programs (on the order of 200 to 600 billion Rs through 2025). Hence, neither party can afford to remain at arms length from the reform process, implying that, in effect, it is something that only concerns the other.

23. Despite the controversy surrounding the reforms, and the slow and uneven progress, the imperative is to sustain the reform process. In the context of a renewed commitment to the core principles and outcomes of the reform process, the aim should be to recast the program by building on the lessons learned (especially the need to identify, promote and support champions) and experience gained so far, deepening knowledge of factors and issues that have been exposed through that experience. Gaps and problems in the NDP program (social mobilization, farmer organization, train ing and capacity building, and monitoring) and the ongoing reform program in each province need to be overcome by making changes and piloting adaptations and innovations, and restructuring the program and approach of the NDP project to ensure that progress towards these outcomes is steady and can be sustained and accelerated where that is possible. One way to renew this commitment and to formulate the next phase of the program would be through a Government “White Paper”, or policy and program paper, jointly prepared by the Federal and Provincial Governments.

vii

The Challenges of the Current Investment Portfolio

24. Table 4 (on the following page) shows the FY 04 Public Sector Development Plan (PSDP) extended or projected over the remaining MTEF period, 2004-5 to 2006-7, beginning with the actual FY 03 & 04 PSDP. The various investment projects in the PSDP have been rearranged into major investment categories or programs. The funding levels in the period 2005-7 are based on the PER Working Paper and the MOWP MTIP. They are at best indicative of where the FY 03-04 trend leads. In the scenario presented in Table 4, all the projects ongoing in FY 03-04 are completed during the MTEF period except for Greater Thal Canal. Seventy two percent of the incremental expenditure over the FY 05-07 period is allocated to projects started in FY 03 & 04, but the throw-forward is only reduced by 38%, leaving a commitment of about Rs 214 billion for the next five year period.

25. Figure 4 compares the annual investment required by the MOWP’s MTIP, Figure 4: Comparison of Emerging Porfolio with PSDP Trends the composite Emerging Portfolio, (the 120,000 TYPP and other recently proposed projects), 100,000 the annual investment required by the FY04 Projected PSDP Expenditure (40% per Yr) 80,000 PSDP extended or projected over the MTEF FY 04 Portfolio Projected to 2007 period, 2003-07 (Table 4), and a projection 60,000 Emerging Porttfolio of PSDP expenditures if the present growth Rs Million 40,000 trend of total PSDP allocation to water MTIP (2003-07) resources and irrigation is sustained (Table 20,000

5). The increase in total PSDP allocation 0 between FY03 and FY04 was 36%. 2002-3 2003-4 2004-5 2005-6 2006-7 Assuming a sustained increase of about 40% per year beyond FY04, the total PSDP allocation for water resources and irrigation would grow to Rs. 109 billion. Even with this substantial increase in water sector financing (Table 5), the available funds fall far short (about 30%) of what is required to sustain the FY04 PSDP over the MTEF period, and just 55% of what is needed by the MTIP over the same period. The result of the mismatch between funding and proposed investment will be substantial delays in project implementation, low rates of timely project completion, increased project cost, and deferred benefits.

viii

Table 4: PSDP 2003-07 Portfolio By Major Category of Investment

Up To Current Projected Total Throw Project Total Past 2002-3 2002 2003-4 2003-7 Forward 2004-5 2005-6 2006-7 SUSTAINABILITY AND PRODUCTIVITY 0 Upper Rechna Remain 1,040 762 200 78 278 Fordwah Sadiqia Remain (Ph I) 3,482 2,636 1 300 300 245 846 0 RBOD II 14,000 405 1,000 1,000 4,000 4,100 3,495 13,595 0 LBOD I 25,431 23,512 600 500 500 319 1,919 0 RBOD I 4,395 3,095 400 300 500 100 1,300 0 NDP I 31,400 5,647 700 1,500 5,000 3,000 10,200 15,553 Saifullah Magsi Drain 1,000 100 200 200 200 700 300 Lining of Channels-Punjab 31,240 100 200 200 200 700 30,540 Lining of Channels-Sindh 25,000 100 200 200 200 700 24,300 Lining of Channels-NWFP 5,000 100 200 200 200 700 4,300 Lining of Channels-Balochistan 5,000 100 200 200 200 700 4,300 Sub-total 146,988 36,057 2,201 3,300 7,878 10,764 7,495 31,638 79,293 MANAGEMENT AND MODERNIZATION Emergency Floods 425 0 75 350 425 0 Hill Torrents Marri Bugti 150 65 30 55 85 0 FPSPII 4,614 500 275 1,000 1,500 1,339 4,114 0 IBS Telemetric System 450 150 300 300 0 Balochistan Groundwater 437 67 50 100 100 100 20 370 0 Mangla Watershed Man. 169 0 30 38 40 40 21 169 0 Other Ongoing Projects 341 156 53 63 50 19 185 0 Irrigation Rehab Sindh-I 12,963 0 1,400 1,000 1,800 1,800 2,000 8,000 4,963 Irrigation Rehab Punjab-I 20,823 0 300 500 1,000 2,500 3,000 7,300 13,523 Modern. of Barrages Punjab-I 30,000 0 375 300 1,000 2,500 3,000 7,175 22,825 Sub-total 70,372 938 2,613 2,681 4,990 8,459 9,380 28,123 41,311 IRRIGATION SYSTEM EXPANSION Greater Thal Canal 30,467 330 1,200 1,000 3,000 3,000 3,250 11,450 18,687 CRBC I+II+III 17,097 16,037 600 460 1,060 0 Rainee Canal 17,947 300 500 1,000 1,500 3,300 14,647 Pat Feeder Canal Ext. 3,000 1,000 1,000 1,000 3,000 0 Kirther Canal 10,000 200 300 500 500 1,500 8,500 Kachhi Canal 32,450 0 300 1,000 2,200 3,300 3,500 10,300 22,150 Sub-total 110,961 16,367 2,100 3,500 7,460 8,800 8,750 30,610 63,984 SUPPLY SYSTEM EXPANSION Gomal Zam 12,829 759 1,200 800 2,400 3,441 4,229 12,070 0 Mirani Dam 5,861 692 1,200 800 1,500 1,669 5,169 0 Kurram Tangi Dam 12,827 0 300 10 500 1,000 2,000 3,810 9,017 Satpara Dam 2,090 0 150 200 600 600 540 2,090 0 Sabakzai Dam 1,103 0 150 500 453 1,103 0 Mangla Raising-Prelim Works 1,100 100 1,000 1,000 0 Raising Mangla Dam 62,553 3,000 7,000 15,000 17,000 42,000 20,553

Sut=total 98,363 1,551 4,000 5,310 12,453 21,710 23,769 67,242 29,570 TOTALS 426,684 54,913 10,914 14,791 32,781 49,733 49,394 157,613 214,158

Table 5: Projection of Total PSDP 2002Allocation-3 2003-4 2004-5 2005-6 2006-7 2003-7

Projected PSDP Allocations 10,914 14,791 20,045 27,166 36,816 109,732 26. Even if the more modest but substantially increased funding in Table 5 materializes, the Government would have to make some hard choices among the projects in the projected PSDP (Table 4) in order to speed implementation and ensure timely benefits – essentially it would have to reduce planned expenditures by about Rs. 50 billion by removing and deferring projects. The question is, how can this portfolio be scaled back to fit the projection of PSDP resources (Table 5) or even lower levels of funding, or expanded to take advantage of higher levels of funding should they materialize for water resources and

irrigation? To have an adequate basis for making these choices, the overall PSDP has to be tightened and more rigorously appraised. It has already been noted that the current analytical underpinnings of the sector would make these choices of which projects should be given priority very difficult. Briefly, some of the key options and issues to be considered include:

§ First, RBOD will be completed, but there is no provision in this portfolio for major improvements in the drainage system, including a follow-up to NDP. Hence, no funds are provided for on-farm drainage, upgrading the drainage network, or for larger branch and spinal drains should they prove to be an essential part of the Master Drainage Plan. The canal lining projects (which aim to both conserve freshwater and control waterlogging and salinity) should be dropped and integrated with canal modernization, remodeling, and rehabilitation investments. § Second, the irrigation rehabilitation projects and the canal lining projects could be integrated together with canal system modernization, groundwater management and governance improvements, to create a series of highly divisible investment projects or programs (perhaps “Integrated Irrigation Water Distribution and Management Projects”, another name for the integrated canal basin approach suggested in the Report). These programs that could be phased and expanded, depending on both performance and the availability of funds. This would be a jointly financed program of the Federal and Provincial Governments. § Third, the Pat Feeder Canal Extension would be completed in the MTEF period. A substantial reduction in portfolio cost could be achieved by slowing and limiting canal expansion, concentrating during the MTEF on the completion of one canal to an extent just sufficient to pilot a new approach to modern highly productive irrigated agriculture and water management (inclu ding new institutional and governance arrangements) tailored to conditions in Pakistan. This would provide a new and tested model for the phased completion of these expensive and questionable projects. § Fourth, three projects in the Portfolio -- Gomal Zam (17 MW), Kuram Tangi (58 MW) and Raising Mangla Dam (180 MW) -- will add hydropower capacity, but there is no other provision for hydropower. The MTIP identified nine priority hydropower projects that would add about 1832 MW at a total cost of Rs 109 billion. These are mainly low-head run-of-the-river sites, in some cases developed by adding a powerhouse to an existing dam or barrage. In general these sites would add little operational storage to the total Indus Basin system, but may provide locally important seasonal regulation benefits. There may be provision elsewhere in the PSDP for these hydropower investments, but if not, the portfolio in Table 4 would have to be adjusted to accommodate the steady expansion of hydropower capacity. § Fifth, each of the other three categories of investment discussed above – sustainability and productivity, management and system modernization, and system expansion - are to varying degrees divisible and can be scaled to fit the availability of funds (keeping in mind the principle of allocating sufficient funds to achieve timely implementation), but the addition of new storage dams to the system posses more difficult problems because of the large, lumpy character of these investments (the same could be said for hydropower, but the next group of these projects that use existing dams might be looked at differently in terms of attracting private sector investment and financing). The ongoing Gomal Zam and Mirani Dams can be completed in the MTEF period. Kurram Tangi Dam is just being started, and Satpara and Sabakzai have been limited to studies and preparation – so in effect, these latter three projects could easily be dropped or deferred. Raising Mangla Dam is by far the largest project in the entire portfolio, requiring nearly 27% of the entire MTEF expenditure (Table 4). It should be noted that the schedule of expenditure shown in Table 4 for Raising Mangla Dam is lower and more conservative than either the MTIP or the TYPP, even though the cost of the project has increased about 19% over the estimate given in the TYPP. In any case, once this project is begun it must be fully funded to ensure that there is

not a substantial increase in construction cost caused by low levels of project financing. The Basha Dam feasibility report is not expected to be completed for another 2-3 years, but the feasibility report for Kalabagh was done in the early 1990s. Kalabagh could be ready for implementation and financing within this timeframe or sooner if the project is reviewed, updated, inter-provincial and local issues resolved, and appraised on an urgent basis. However, WAPDA recently reported in a briefing to the press that this project would cost about Rs. 300 billion (and Basha a similar amount) far above any likely PSDP funding scenario. There seems to be two main choices:

q Continue to start-up implementation of Raising Mangla Dam, waiting until increased resources become available to decide whether to start a second dam at Kalabagh or Basha. This would commit the PSDP to finish Mangla on time and within cost estimates (in 2008 or 2009), and force the severe scaling back of investments in drainage, canal modernization, and canal expansion, as well as the other three smaller storage projects on which little progress has been made (studies and research would not have to be forgone). The decision on a second dam would not come until completion of Mangla is assured.

q A more prudent and attractive option would be to defer the Raising Mangla project until at least Kalabagh is appraised and the two investments can be compared (Basha may be sufficiently ready to be placed on the table as well). This decision would not be made until 2006 or 2007 and financing within the Government’s framework for fiscal management is assured. Under this option, Kurram Tangi, and possibly other comparatively small projects could be accelerated and completed between 2003-07, and the other components of the Portfolio accelerated or scaled up. 27. One problem with these two approaches is that there is still no pr ovision for scaling up investment in drainage to control water logging and salinity, though canal modernization, if scaled up and carried out as a phased integrated program, would provide substantial water logging and salinity control benefits through better water management, reduction of over-irrigation and drainable surplus, as well as direct investment in the drainage network. Depending on what agreements and investment needs emerge from a consensus on the Master Drainage Plan and Drainage Accord, this suggests that when Mangla is compared with Kalabagh in the preferred second option, that a major drainage program should be ready and on the table for consideration as well. As one might expect the choices are not simply between this dam or that one.

28. Financing Major Water Infrastructure Projects Outside the PSDP. Some have argued that since increased investment in water is such a high priority, the mega projects should be financed outside (or in addition to) the PSDP. Volume I of the PER proposes that PSDP allocations to water resources and irrigation be increased to 0.50% of GDP, a total of about Rs. 250 billion over the period 2003-07. The difference between the projected PSDP expenditure (Table 5) and this higher level of expenditure, about Rs. 140 million, could be used in a number of ways, but it is by no means assured that either the continued increases in PSDP allocations for water resources and irrigation as in Table 5, or a higher level of funding approaching the target of 0.5% of GDP would become available. This additional or incremental level of water sector financing could be allocated to one or more mega projects (or programs, e.g., integrated canal modernization), but it cannot be outside the PSDP, and by no means off-budget. The decision would be made to commit this major block of funding in the context of the criteria established by the Finance Ministry for stable overall macro-economic and fiscal management, and trends in the growth performance of the economy (as well as competing priorities).

29. What is the difference whether selected major projects (Kalabagh or Mangla, for example) are considered in the PSDP or not? The difference is that, by holding them separate, one does not squeeze out good, high priority investments in the overall Indus Basin system while waiting to see if financing for

the projects will materialize (including Mangla Dam in the current PSDP is a good example). So long as they are in the PSDP (and there is great pressure to show commitment by putting them there) they will inevitably just drain resources from other priority projects without reaching the level of assured financing required for cost-effective and timely implementation. This is akin to the suggestion that in the near to mid-term the Government concentrate on raising the value of water, bringing in other major investments as fiscal space materializes. The funds, when Government is in a position to commit them, are probably best allocated to one or a few major, highly visible projects for which special management and monitoring arrangements can be established – for example, new storage or a major drainage program such as an inter-provincial drain. While there is not uniform agreement that the major increase in funds available for water sector investment as forecast and proposed in Vol. I of the PER will actually materialize, there is some optimism, and this suggests that waiting 2-3 years to make a decision on which dams (including Mangla) to build or whether and what to invest in drainage as suggested above, is a prudent and possibly optimal strategy.

The Way Forward

30. The Range of Possible Policy Responses. The Government has two important and inter-related sets or groups of policy choices to make:

§ First, investment policy in terms of not only how much new water supply to develop, but also which of its key strategic problems it will tackle first and what the longer term sequence of investment and development should be. Should it for example solve the problem of fully and reliably implementing the Accord, close the early kharif deficit, modernize the existing irrigation system, or expand irrigation into new areas, and in this context what would be the best sequence in which to develop additional storage and how should this storage be allocated and these reservoirs be operated? At present, only the slow pace of project preparation and the PSDP’s limited resource envelope are the only thing dictating the sequence and priority of development. § Second, policies that affect incentives to use water more efficiently and productively, and to achieve sustainable and effective O&M. These policies include the principles and institutional arrangements on which irrigation water distribution between the canal head and the farmer’s field channel will be based; water pricing and the flow of revenues, especially retention of revenues within the FO’s canal network; electricity pricing in the agriculture sector – this may be the best and most efficient way to begin managing and regulating the use of groundwater since an informal groundwater market is already functioning; water rights or entitlements to empower FOs and farmers to use their water more efficiently and productively and reduce inter- and intra- provincial water conflicts.

31. As noted earlier, progress has been slow on fundamental governance reforms, and because of this both the Federal and Provincial Governments have lost sight of the basic policy framework on which these reforms are based. The Report urges the Federal and Provincial Governments to jointly review that basic policy framework and recast and renew the program in a “White Paper”. The Report also points out the problems with water rights, both inter- and intra-provincial, that are fast becoming both a constraint to a broad consensus on water resources development and management and on governance reform. A phased, well thought out revision of water rights policy, with accompanying legislation, is urgently needed.

32. Water pricing and water rights policies are bound to be controversial, and the Government has been moving in the perverse direction of increasing electricity subsidies in agriculture combined with the accelerated expansion of electricity distribution to promote greater tubewell use. Among these three policy issues, fundamental changes in water pricing policy seem most likely to move forward in the near term if the governance reform program moves ahead (however slowly). As the governance reform

xii

program progressed over the past few years, there has been often heated discussion of abiana (we have used the terms abiana , water charges and water prices interchangeably – all basically aim to recover O&M costs) assessment, collection and where the revenues go, but very little about the fundamental principles and elements of a policy on the objectives of water prices, what water prices should comprise, or how they should be established or regulated. One of the great weaknesses of the present system is the politicization of water prices that has resulted in their being frozen and disconnected from any sensible or logical basis, even the simple one of O&M costs. Abiana is largely treated as a rate without any basis except the perception of what might be accepted without too much controversy or political pain.

33. The principle of collection and retention of water Figure 5. Concept of Water Revenue Flows charge revenues within the system for its operation, in the Future maintenance and improvement (with limited and declining Federal Indus Basin Services cost sharing by Government) that has been at least an Budget IRSA, WAPDA implicit part of the governance reform program is a huge Expenditure step, but there is no clarity yet as to what the water pricing policy objectives are, and what water prices encompass Provincial overall, i.e., what services (and their associated cost) are to Budget PIDA be included in determining the rate, the extent to which Expenditure capital costs will be included in the rate base (or which ? ? capital costs), by whom and how will prices be Current Arrangements AWB periodically adjusted, or the extent to which certain costs – in the future the FO would will be shared between the farmers and the treasury and in set its own assessment 60% what proportion, etc. The emerging conceptual framework rate, and pay for water charges and revenue flows and retention as well a regulated FO currently collects bulk water Abiana as cost sharing is outlined in Figure 5, including provincial service rate to Retains 40% and federal budget expenditure extended to include all the AWB levels of Indus Basin water resources management and irrigation services. Each arrow represents the flow of funds derived either from water charges paid by farmers through their FO (single line) or provincial and federal budget expenditures (double line) – in both cases (with the exception of federal expenditures) based on bulk water service.

34. Strategic Questions and Issues The response of the main water agencies at both Federal and Provincial levels has been to propose a large number of investment projects collected from their unfinanced portfolios, or that seem most important and immediate from their perspective on the problems – WAPDA on new dams and canals, and the provinces on canal and barrage rehabilitation and modernization (as well as canal lining) and for projects that would enable them to utilize their share of Indus Basin water as allocated in the Accord. This creates a special problem for the Government at a time of fiscal discipline and the high demands for funds to support poverty reduction, the social sectors (education and health), and the devolution reforms. The problem is to know whether this growing mountain of projects contains the right projects, and to select projects for implementation with the right priority and in the right sequence. To answer these questions requires that another set of strategic questions be answered with adequate confidence. Among the questions the Government should be asking are:

§ Can future incremental water supply and demand be balanced? What fundamental changes in sector policy (water rights water allocation and operations, water pricing and revenue sharing, electricity pricing in the agriculture sector, etc.) would be needed? § Should irrigated area and irrigation water supplies be expanded? How much? Should another major shift in cropping pattern be considered in planning? What changes will be needed in

xiii

irrigated agriculture and water management (infrastructure, incentives, governance, etc.) to insure higher efficiency and productivity? § How much should water supplies be expanded? How should these new supplies be allocated and distributed? Can the related threat to sustainability from water logging and salinity be resolved cost effectively? How can privately developed groundwater be integrated with water logging and salinity control and increased canal flows? § Is additional storage needed? How much storage should be built and in what sequence? Should operating policies be changed? Can irrigation and hydropower policies be better integrated? · What happens as the limits of water resources are approached? What should the target level of water security and reliability? Should different levels of security be associated with different water rights? How can environmental and social impacts on the lower Indus River and estuary of increased water resources development be mitigated? § What is the role and scope of water conservation? What new policy and legislative framework is needed for effective groundwater management? What regulatory and monitoring mechanisms should be put in place? § What are the long-term consequences of continued storage depletion? § Are economic returns commensurate with the cost of water?

35. Can These Strategic Questions be Answered Today? In general the answer is no. Not only has investment in water sector infrastructure been neglected since the 1980s, but so has the analytical capacity for strategic planning in the sector. No institution in the sector today is willing to take ownership of the analytical challenges posed by these questions, and the capacity built in the 1960s and early 1980s to do this has largely been allowed to dissipate. There is little or no ongoing investigation, planning or study apart from individual project feasibility studies that would help to answer questions about how much additional water supply and irrigation makes economic or social sense in Pakistan, in what sequence these developments make the most sense, or how and in what ways the rural economy will develop to accommodate the huge increases in population that are foreseen, which would in turn indicate where and how much water is needed. No sector institution has been will, or seen the need to build the knowledge base, collect the data, and develop the modern information systems and analytical tools (e.g. models, GIS, etc.) needed to not only resolve these questions but also manage the investment program and the water resources of the Indus Basin. The capacity and professionalism of the private sector has grown, in particular to carry out project feasibility studies to a reasonable standard. It may hold the capacity to do sector level analytical work as well, but mobilizing this capacity requires public institutions that see the problems and are willing to seek solutions. There are two institutional issues to be addressed:

xiv

§ Second the Government needs to create a critical mass of technical talent to take responsibility for strategic resource and policy planning for the water sector, including developing a modern, shared information system, enhancing the knowledge base, and provision of planning support and assistance to the Provinces. Such an entity has to be structured to attract the “best and the brightest”, and to be seen as neutral and fair by all stakeholders. A tall order today in Pakistan, but given the scope and magnitude of investment being contemplated by the Government, the country deserves no less.

What Needs to be Done

36. The challenges in the next 3-5 years are to address the disconnect between the key strategic issues in the sector, its current strategy and its investment portfolio. This is essential not only to ensure that the sector is on an optimal and sustainable development path but to mobilize the resources required to implement the strategy and investment plan. The seven imperatives on which actions are needed include:

37. Resolve the debates over plans to develop storage. Proposing to build all the storage sites available is not a response to the key question of the sequence in which storage should be added to the system, the levels of storage capacity to be added to the system over time, and what the new operating policy and water allocation should be. Kalabagh is the best and most well prepared site, but it is not a part of the debate as it should be. Very large sums are at stake, and the earliest projects should be sele cted to have the greatest impact on system operating performance (for both irrigation and hydropower) and on the implementation of the Accord (Mangla Raising is too small and ill positioned not to invite even more intense controversy – in fact just about every site and project that is proposed will have the same result because they are all proposed in isolation), and on the security, reliability, level and value of water supply. Credible, alternative, comprehensive and long-term plans that focus on both the level and sequence of storage development, and alternative integrated operating policies, need to be prepared, evaluated and compared for both their short-term and long-term impacts including on the environment of the lower Indus, and discussed with all stakeholders. This is an urgent exercise quite separate from the feasibility studies of individual sites that is closely linked to the process of building a new consensus on water.

38. Develop more detailed plans for the new canals. Notwithstanding the polit ical commitments associated with the proposed new canals, including the extent to which they help the Provinces to implement the Accord, their economic, social and poverty impact appear to be marginally unattractive at best. Even though the new areas seem highly questionable as attractive sites for new irrigation development, the problem today is the lack of in-depth planning through which the projects might be reformulated and phased to overcome these problems and result in projects that make both economic and social sense if that is at all possible. In fact, since these are essentially “green field” areas, they present a unique opportunity to develop them with a completely new concept of participatory water management including new governance arrangements that maximizes efficiency, sustainability and high value agriculture – essentially as models of how the Indus Basin system should evolve and look in the future.

39. Develop a strategic plan and investment program for system modernization jointly with the Provinces. Modernization of the Indus irrigation system should be an essential and priority element of the Government’s strategy. Somewhere between 200 and 600 billion Rs will be needed to modernize and remodel existing canal networks, rehabilitate and redesign structures including the older barrages, line canals in saline groundwater areas, and complete water course improvements. These measures are critically important to the improved efficiency and increased productivity of existing and new water supplies. Current proposals are ad hoc and engineering oriented because there is at present no integrated and strategic planning process that would enable the Federal and Provincial Governments to set priorities and sequence the needed investments over time.

40. The modernization strategy should not be based on simplistic, one-size-fits-all solutions and investment proposals (such as the major canal lining program in the current PSDP). It should be based on a more holistic (developed for each sub-basin or canal command) and integrated approach consisting of both curative and preventives measures. A new approach should be undertaken to develop a comprehensive integrated strategy and plan for infrastructure modernization and water management in each “canal basin”. By integrated we mean that surface water distribution, water logging and salinity control, groundwater use and management, social issues, and agricultural productivity are addressed in an integrated manner in each canal command or basin, i.e., the plan would include measures that take into account both the inter-linkages between these issues as well as ensure that each is improved as required. The intended result is an overall optimal and sustainable plan for modernization that can be readily developed into a phased investment program. The Federal and Provincial Governments should jointly launch this planning program on an accelerated basis, and the resulting long-term, phased investment program should be jointly financed.

41. Tackle the key management issues.

§ Governance and policy reforms. Reforms of the system of governance remain core priority issues as discussed in Chapter 3, and the three principles on which the reform program are based remain valid. Based on the experience gained so far, a new consensus within the Provinces, and between the Provinces and the Federal Government, on the way forward is needed that would essentially re-launch the program. This new consensus should focus on lessons learned so far (paragraph 3.11), deepening knowledge of conditions and constraints on the ground, and the critical steps to be taken and on piloting and monitoring a variety of approaches within each pilot canal command over a definite time period. Efforts should also be made to seek, promote, and support reform champions. § Water conservation and productivity enhancement. Develop a broader, integrated approach to water conservation and productivity enhancement built on a greatly accelerated OFWM program and linked wherever possible to the governance reform program. This will require greater integration of agriculture and water sector programs, and the fostering of innovation and experimentation. § Planning and system management. Whether one agrees or not with this assessment of the sector and the Government’s investment program, the importance and the consequences of the lack of good planning, and data and analytical tools, in the sector are evident. The Government should look closely at the Ministry’s proposal outlined in the Water Sector Strategy for a new sector planning framework – a concept note based on more detailed evaluation of needs and an analysis of alternatives would be a positive first step. § Groundwater management. Groundwater has become a vital and major part of the overall Indus Basin irrigation system. As the limits to its development are approached, an effective monitoring and regulatory system that encourages the continued private management of this water source, but ensures that it is sustainable, is urgently needed. The Government’s most important management instrument for groundwater, apart from a greatly improved knowledge base and information system to support better monitoring, is to properly price water and power in the agriculture sector. It should gradually withdraw all subsidies for fuel and power use, as well as for tubewells, for groundwater abstraction for irrigation.

42. Build a new consensus on water management and development. While most of the debate has been about which major investments should be undertaken, perhaps the greatest challenge – the extent of political conflict over water and the breakdown of the last vestiges of a consensus on water, have received little effective attention. The Water Accord does not appear to work at all in the eyes of most

xvi

stakeholders, and new accords on drainage, environmental flow requirements in the lower Indus River and estuary, and reservoir operating policy and water allocation including integration of irrigation and hydropower policies, need to be developed. This is extremely unfortunate at a time when the Government must commit to a major, costly long-term investment strategy, some elements of which have already engendered angry debate and protest. Just as sound and transparent technical analysis is essential for timely political economy decisions, it is also essential to the process of developing a new consensus on water resources.

43. O&M regimes require fundamental changes. While the ongoing institutional reforms would ultimately address issues of accountability, staffing and lack of farmer participation, immediate action is needed to stem the deterioration of the irrigation and drainage system. A well designed program is needed to:

§ Establish realistic funding requirements through an independent evaluation. § Rationalize fund allocation to meet priority needs in accordance with detailed O&M plans and priorities. § Initiate benchmarking, and O&M performance audits: q Develop monitoring indicators (e.g. number of days in each irrigation seasons a given canal carries authorized discharge, record of breaches, equity in water distribution, tail shortages, problematic structures and failure of irrigation and drainage structures). q Improve effectiveness of expenditures and enforce accountability. q Ensure channels are operated on authorized discharges or remodeled where necessary. § Rationalize abiana rates and improve assessment and recovery; empower farmer organizations to not only operate and maintain their canals but also to collect abiana and retain a sufficient portion of the recovered funds to meet their needs would be a key incentive for increased cost recovery. § Reduce management costs (including privatization of remaining public tubewells in FGW areas and rationalize staffing levels).

44. Remove the barriers to timely and effective project implementation. In sharp contrast to the outstanding track record of the Indus Basin Replacements Works -- a major implementation feat -- today, implementation of water sector projects in Pakistan is characterized by inefficiencies, slow progress, completion delays, time and cost overruns, and sometimes unsatisfactory outcomes. Factors that affect implementation include: weak implementation planning and management, weak construction industry, litigation related to land acquisition, non-compliance with agreed resettlement and rehabilitation programs, lack of attention to environmental issues, delays in procurement, delays in preparation of accounts and audits, and lack of preparations for the transition from construction to O&M. While some of these issues arise from poor project preparation and lack of commitment to project objectives, others arise due to the lack of a policy environment conducive to efficient implementation. Policies and procedures need to be modernized and mainstreamed to meet prevailing international standards and requirements – the size and scope of the Government’s proposed investment program over the next 25 years deserves adherence to a much higher standard of planning and project preparation than prevails today.

45. A New Model of Technical Cooperation is Needed. The Government is going to need technical help to take on these imperatives and challenges. This will require a new level of collaboration between the Provinces and the Federal Government, between government and expertise and centers of excellence

xvii

in the country in all fields and disciplines, and between the Government and donors. The World Bank for its part is prepared to fully engage with the Government to address these challenges. But a new model for technical assistance is clearly needed that is free from the current bureaucratic straight-jacket that limits the effectiveness of technical assistance. It is worth recalling, for example, that the RAP process was based on domestic leadership, supported by world class and multi-disciplinary technical assistance, state of the art models to analyze options, and extensive field investigation. The Government must establish more effective and appropriate institutional arrangements that can utilize technical assistance and collaborate more effectively with the Provinces and other experts in Pakistan to address the challenges to be faced. Current institutional arrangements, organizations and skills are better suited to project implementation than to the kinds of planning, study, analytical and process tasks that lie ahead.

xviii

1. INTRODUCTION

1.1 Pakistan is entering a new phase of investment in water resources development. Investments in the mobilization of additional water supplies to intensify irrigation and expand irrigated area as well as other purposes such as hydropower have been neglected for over twenty years. Forecasts of extensive increases in cropping intensity and productivity in major water sector planning studies in the early 1960s, 1980s and 1990s have not materialized. Despite efforts to mprovei operation and maintenance of irrigation infrastructure since the 1980s, modest investments in rehabilitation have failed to stem the deterioration of infrastructure, watercourse improvement programs to increase efficiency and equity have not been sustained, service has remained unreliable and inequitable, and no investments in modernization and remodeling to serve future needs have been undertaken. The recent drought exposed the vulnerability of the vast Indus Basin irrigation system and the environmental conditions in the lower river and estuary, and focused attention on the need for additional storage to improve security and increase supply and provide greater operating flexibility and assurance. At the same time, with the anticipated completion of the National Drainage Master Plan and inter-Provincial Drainage Accord, new demands will emerge for major investment in drainage to counter the continuing threat that water logging and salinity are to the long-term sustainability of the Indus Basin irrigation system. But the debate over future strategy and investment priorities has been framed in a way that misses important strategic challenges.

1.2 A business-as-usual approach that relies on investing exclusively in more infrastructure, particularly costly storage or irrigation expansion, seems no longer sufficient to address the multiple challenges and threats the Government faces in the water sector. In 2001 Pakistan issued a Ten-Year Perspective Plan (TYPP) that included a major increase in investment in water resources and expansion of irrigation. The TYPP was accompanied by a three year rolling plan. In the water sector, this rolling plan has been primarily financing the completion of the large on-going project portfolio as well as the start of several major irrigation expansion and storage projects. Beginning in 2003, Pakistan faces a number of key choices on the relative emphasis to be given to different issues and elements of its strategy over the mid-term, and how it should prioritize and phase proposed investments such that the impact of these investments on growth, poverty alleviation, and revenues is maximized and is sustainable. The short to medium term impact of these choices is especially important because of the competition for limited fiscal and donor resources for investment that is likely to prevail until a period of solid growth yields increased revenues.

1.3 This Report3 focuses almost exclusively on the Indus River basin 4. It is based in part on a limited review of the Pakistan Plannin g Commission’s current Public Sector Development Program (PSDP), and the more strategic investment plans that constitute the Planning Commission’s Ten-Year Perspective Plan (TYPP) for Water Resources Development, the Ministry of Water and Power’s Water Sector Strategy,

3 This report is based in part on a consolidation and analysis of the extensive data and information contained in the MOWP WSS and other reports, and as presented in the Working Paper, Pakistan Public Expenditure Review: Working Paper on Irrigation, Drainage and Water Resources Development, by M. Aslam Rasheed and Muhammad Ehsan, World Bank Consultants, April, 2003. 4 This is quite reasonable for this initial review since the Indus Basin in the focus of most of the proposed long-term public expenditure program, and because its vast irrigation system is the backbone of Pakistan’s economically important agriculture sector. Nevertheless, the large rainfed or barani areas (that encompass isolated and small irrigated farming areas) found to varying extents in each of the Provinces (but about 97% of Balochistan) deserve expanded attention because of their unique water scarcity problems, their high concentration of poverty, and the consequences of unsustainable exploitation of natural resources in these areas (e.g., groundwater, rangeland, forests), and should be the subject of a special review.

and Medium Term Investment Plan (MTIP)5, and the Vision 2025 Investment Program of WAPDA6. The aim of this Report, which covers the period 2003-2007 (referred to herein as the Medium-Term Expenditure Framework, MTEF), is to assess the broad elements and direction of the Government’s proposed strategy, to identify key problems and issues Pakistan’s policy makers and planners need to address in shaping the future direction of water policy and the PSDP and the design of the program and projects through which it will implement its strategy, and to suggest ways in which priority investment needs can be accommodated within the limited fiscal space available.

5 The MTIP covers the period 2001-2011 and was prepared as a part of the preparation of a Water Resource Strategy (2001- 2025) by the Ministry of Water and Power. The overall study included reports on the Strategy, the MTIP, and a National Water Sector Profile. 6 A 25-year investment program in new storage (64 MAF), hydropower capacity (27,000 MW), drainage, and expansion of irrigated area.

2. BACKGROUND: ACHIEVEMENTS AND ISSUES

Role of Agriculture in the Pakistan Economy

2.1 Despite the prevailing arid and semi-arid climate that characterizes most of the country, Pakistan has been traditionally an agrarian society based on livestock, and food and forage crops dependent on scant and highly variable rainfall. The landscape is dominated by mountainous and hilly terrain (about 50%) and the vast Indus River plain (25%). Flow in the Indus River and its tributaries, the only major river in the country, is also highly seasonal with flows associated mainly with glacier and snow melt and summer rains. The earliest canal irrigation developments in the Indus valley were essentially protective, intended to provide a supplemental water supply7 to compensate for the uncertain rain, and involved considerable colonization as the margins of these irrigated areas were extended by new canals.

2.2 After the creation of Pakistan and up to the late 1950s, agricultural growth was sluggish (about 1.4%) and less than half the population growth rate. To avoid a food grain crisis that could seriously harm the new nation, major investments were planned to increase the capacity to divert the natural flow of the Indus River and its principal tributaries into an expanded network of canals to increase irrigation. The menace of salinity and water logging and the need to provide drainage in many parts of the Indus plain was also recognized at this time. In response to these strategic threats, a public program using tubewells and some surface drains was also launched to lower the water table and reclaim saline soils.

2.3 Today, agriculture is a major Figure 2.1: Per capita GDP, Food Production, and Total Population part of Pakistan’s economy, is one of (1961=100) the key engines of overall economic growth, and there has been no major food grain crisis (Figure 2.1). 160.00 Agriculture today is estimated to 140.00 contribute about 25% of GDP, employ 120.00 nearly 50% of the rural labor force, 100.00 and to be responsible directly or 80.00 indirectly for 60-70% of exports. 60.00 Within the agriculture sector, crop 40.00 production (principally wheat, cotton, 20.00 sugarcane and rice) accounts for about Drought - 59% of value added and livestock 196 196 196 197 197 197 197 198 198 198 199 199 199 200 1 4 7 0 3 6 9 2 5 8 1 4 7 0 about 38%. This enormous GDP per capita (constant 1995 US$) Food production index (1989-91 = 100) Population, total achievement was based on three major initiatives:

§ From the late 1960s through 1975 river diversion capacity was expanded from 67 MAF at independence to an annual average of nearly 104 MAF today; the Tarbela and Mangla storage reservoirs were constructed; and the Indus Replacement Works, foreseen in the Indus Treaty signed with India in 1960, were completed. This investment program expanded the Indus basin irrigation system, increased hydropower generation capacity, and increased cropping intensity on the Indus plain.

7 The design intensities vary but are generally low and were intended to serve a limited part of the command area. For example, the design intensity of the Nara Canal in Sindh is about 53% in kharif season, and about 28% in rabi season. The construction of Tarbela and Mangla Dams were in part intended to increase rabi season cropping intensity.

§ Despite under-investment in research and development, pricing and subsidy policies set the stage for the introduction of improved and high yielding varieties of seed from the late 1960s as both fertilizer and irrigation water availability expanded (the “green revolution”) – From 1970 to 1994/95 the value of wheat production, the staple crop, nearly doubled. § In the 1980s new varieties of cottonseed were introduced and insecticide availability expanded. Between 1970 and 1994/5 the value of cotton production increased over four times.

2.4 The Question Today is Figure 2.2: Pakistan Comparative Trends: Population, Whether Sustained Agriculture Sector Water Use & Productivity Growth At The Rates Required Is

Sustainable. Figure 2.2 below shows 400 the trends in population growth, water Input Intensification Post Green Revolution use and productivity (using wheat as a 350 Green Revolution surrogate). Emerging issues include: 300 250 Pre-Green Revolution § Yields and the productivity of 200 water, as well as they can be 150 estimated, are flat and lag well 100 below countries with comparable 50 8 agro-climatic conditions ; several 0 studies have suggested that resource 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 degradation - primarily water and Population Wheat Yield (PAK) Total Irrigated soil quality – are major factors limiting yields 9, while others suggest that under-investment in research and development and extension, underperformance of rural factor markets, the distribution of land ownership and other farm assets, and the unreliability of irrigation water services are also major contributors10. § Important constraints to increased agricultural productivity have not been solved especially improved agricultural support services, technology development, adaptation and dissemination, rural infrastructure and education provision, incentives to use water more productively and efficiently, and distortions in the land market11.

8 As reported in the MOWP WSS, average wheat yield in Egypt where agricultural conditions in the Nile Delta are similar (but not absolutely the same) to those in the Indus valley in Pakistan was 2.4 t/ac compared with 0.9 t/ac in Pakistan Punjab. Average wheat yields in Indian Punjab are more than double those in Pakistan Punjab even though at independence they were roughly equal. See also Productivity Growth and Sustainability in Post-Green Revolution Agriculture: The Case of the Indian and Pakistan Punjabs, Rinku Murgai, Mubarik Ali, and Derek Byerlee, World Bank Research Observer, Vol. 16, No 2, (Fall 2001). 9 See for example, Productivity Growth and Resource Degradation in Pakistan’s Punjab: A Decomposition Analysis. Mubarik Ali and Derek Byerlee, Policy Research Working Paper No. 2480, Rural Development Department, World Bank, November, 2000. 10 Notwithstanding the effects of salinity and waterlogging, some have suggested that the current low average yields may be the best that can be achieved with the current irrigation system as it is presently managed and maintained. While that may have some validity in the aggregate, it begs the question of what distinguishes so called progressive or high performing farmers, and whether there is a way to replicate or scale up this better performance. Moreover, in 2002 when water supplies were 40-50% of normal, Punjab wheat production declined only about 10% - clearly this is a demonstration of the importance of groundwater in Indus basin irrigation today, but it may also indicate the extent of over-irrigation in better years and its possible effect of suppressing yields. 11 Structural and Policy Reforms for Agriculture Growth: The Case of Pakistan; Rashid Faruqee, World Bank, Agriculture and Natural Resources Division, South Asia Department, 1995.

§ Diversification into new, higher value crops and the use of new and more efficient irrigation technology has appeared in isolated pockets, but programs to promote and foster an expansion or scaling up of these trends have not emerged; possible areas for intensive work through new public -private partnerships include market infrastructure, market information, supply and distribution, quality control and value addition, mobilizing farmer organizations to facilitate market access, etc.. These are well known, but have received too little attention12. § Water availability has been a key engine of agriculture growth, but current supply is less than estimated present demand13, and supply expansion options are increasingly costly and approaching their physical limits. Managing demand (efficiency, pricing, water entitlements, research and development, etc.) has received too little attention. Among the supply options, groundwater development is already nearing its practical limit, water conservation may be able to add only about 5% to total supply, and surface water resources development is approaching the overall limit - increased storage of flood flows in the Indus River over the next 25 years would add at most about 8-15% to the total water supply to the Indus system depending on how many major reservoirs can be built, but with diminished reliability, increased and possibly irreversible environmental impacts in the lower Indus River and its estuary, and greatly increased management challenges.

The Ultimate Threat to Sustainability - Water Logging And Salinity 2.5 The expansion of irrigated agriculture in the Indus plain has resulted in a progressive rise of the groundwater table and the buildup of salts from surface water inflow for irrigation, overuse of irrigation water, and mobilization of salts from groundwater. Unlike the Indus Basin irrigation system, the drainage network in Pakistan is not contiguous and integrated. While parts of Sindh on the left bank of the lower Indus River are drained by the existing Left Bank Outfall Drain (LBOD) into the Arabian sea, and the ongoing construction of the Right Bank Outfall Drain (RBOD) will similarly connect drainage basins on the right bank of the lower Indus to the sea, surface and sub-surface drainage systems in the rest of the country are inadequate, resulting in much of the drainage effluent including salts and untreated domestic and industrial wastewater, being either retained in the basin (in evaporation ponds, the soil, or in the groundwater) or disposed of in rivers and canals to be diverted and used again downstream. Continuous addition of salts to agricultural soils, groundwater aquifers, and some water bodies is a major productivity and environmental risk that ultimately threatens the viability of irrigation in the Indus Basin. Ali and Byerlee found, for example, that the substantial positive effect on crop sector productivity growth in four different major cropping systems in Punjab stemming from technological change (change in cropping intensity and percent area in modern varieties of wheat) and public investment (roads and literacy) were partially offset (by 57 to 74%) or completely offset (in the case of the wheat-rice cropping system) over the period 1971-94 by the negative impact of soil and water quality degradation14.

12 See for example, Pakistan Provincial Agricultural Development Plans: A Review of Opportunities and Challenges; FAO, Report No. 01/073 CP-PAK, September 2001. See also Pakistan Development Policy Review – A New Dawn?, World Bank Report N0. 23916-PAK, April 2002 for a discussion of promoting private sector investment, and growth enhancing public investment. 13 The MOWP’s WSS (Vol. III) gives an admittedly rough and uncertain estimate of canal head requirements in 2000-01, 2010- 11, and 2024-25 (a significant part of this uncertainty stemming from the estimates of the net amount of groundwater available for crop consumption in the command areas). In 2000-01, these figures show an average shortfall in water supply to meet current crop demand of 12.6 MAF. The report points out that it is hard to reconcile this large shortfall with widely reported over-irrigation, but this may actually be a further demonstration of the extreme inequities in water distribution. 14 Productivity Growth and Resource Degradation in Pakistan’s Punjab: A Decomposition Analysis; Mubarik Ali and Derek Byerlee; World Bank Policy Research Working Paper No. 2480; November 2000. The exception was the wheat-cotton

2.6 The Extent of Salinity and Waterlogging Problems. Surface water supplies bring an estimated 28.3 million tons of salt each year into the irrigated areas of the Indus plain, and a further estimated 28.2 million tons are added from groundwater by tubewells. Since in an average year only about 16 million tons of salt are carried out of the basin by the Indus River below Kotri Barrage or through LBOD in Sindh, about 40.5 million tons of salt are added to the Indus basin every year15 either to the upper soil layers, or added to the quantity of salt circulating vertically in the Indus groundwater system,. About 2.5 Mac of irrigated land is reported to be affected by severe salinity. An estimated 40% of irrigated lands are reported to be waterlogged16 (with a water table depth less than 10ft), and about 9% are reported to be badly waterlogged (water table depth less than 5ft). Water logging stems from several causes, including seepage from canals and fields (basin flood irrigation is the predominant mode of irrigation), over-use of water (over-irrigation), possibly excessive canal allowances and indents, and perennial operation of canals that were never intended to be perennial. Nearly two-fifths of the canal command areas have been affected by water logging and salinity and this has been estimated to depress the yields of major crops by 25-30% and by as much as 40-60% in Sindh17.

2.7 Curative and Preventive Measures. Curative measures will thus be needed to control and reverse the effects of severe water logging and soil salinity on nearly 7 Mac of land. These may include lining of canals in some saline ground water areas, improvement of watercourses and introduction of on- farm drainage and land-leveling, improvement of existing and creation of new drains including a trunk or spinal drain in the upper and middle basin, and conjunctive management of canal water and groundwater. But these very large investments that would be carried out over a long timeframe may not be able to arrest or even keep up with the pace of soil and water quality degradation if there is not a balanced commitment to preventive measures including adjustment of canal allowances, promotion of changes in irrigation practices to eliminate over-irrigation and increase efficiency, better on-farm water management, changes in water pricing, and better groundwater monitoring and management.

2.8 Seepage Losses and Soil and Water Quality Degradation. One frequently sees tabulations of water “losses” in the Indus irrigation system predominately in the form of seepage from canals, watercourses and fields, that prompt calls for the reduction of these losses to be the first priority. Since the efficiency of Indus irrigation canals from headworks to farmers fields is variously reported to be 35- 40%, these losses, which total about 62-66 MAF based on the average total diversion, are indeed very large. But one must keep in mind that these “losses” caused by seepage from canals, distributaries, minors, watercourses and fields where they occur in fresh groundwater areas are the principle source of groundwater in the Indus Basin. Since roughly about 40% of the command area18 is now irrigated from groundwater, a strategy to minimize these “losses” must be based on a deeper understanding of what are and what are not “losses” in both water quantity and quality terms, and in economic terms. Canal lining would tend to reduce seepage and water quality degradation in both saline (real loses) and fresh

cropping system where the total effect of changes in soil and water quality was positive, contributing instead to productivity growth. 15 Panel Of Experts (POE) estimate based on review of the draft National System Drainage Study (NSDS), October, 2002. 16 Of the 40% of land effected by waterlogging 22.8% is in Sindh, 15.3% is in Punjab, 0.9% is in NWFP, and about 1% is in Balochistan. 17 Staff Appraisal Report. National Drainage Project. Rural Development Sector Unit, South Asia Region, World Bank. 1997. 18 Note that the extent of area irrigated with groundwater would be much lower in Sindh (where the extent of saline groundwater is very high) than in Punjab, resulting in different strategies in each Province, indeed, one would expect strategies to vary even by canal command.

groundwater areas19, and increase canal water supply to downstream farmers including tailenders without access to groundwater, but canal lining is expensive and the water savings are not large in some canals. Moreover, the cost of not lining in non-saline areas in terms of allowing a small decrease in water quality may be well worth it since the value of groundwater despite its higher cost may be substantially higher than canal water because of better timing, water control and reliability.

2.9 Such a strategy should clearly not just be a determination of where to and where not to line canals, and it may differ substantially from canal command to canal command. The strategy also cannot be based on simplistic, one-size-fits-all solutions and investment proposals. It should be based on a more holistic (developed for each sub-basin or canal command) and integrated approach consisting of both curative and preventives measures. A new approach should be undertaken to develop a comprehensive integrated strategy and plan for infrastructure modernization and water management in each “canal basin”. By integrated we mean that surface water distribution, water logging and salinity control, groundwater use and management, governance and social issues, and agricultural productivity are addressed in an integrated manner in each canal command or basin, i.e., the plan would be tailor-made for each canal command or basin, and include measures that take into account both the inter-linkages between these issues as well as ensure that each is improved as required. The objectives would shift away from narrow engineering objectives, such as rehabilitation and remodeling of existing infrastructure towards sustainable economic growth and social development. The intended result is an overall optimal and sustainable plan for modernization that can be readily developed into a phased investment program. A crucial part of this planning process is the assembly and upgrading of the information system (e.g., GIS, models) and knowledge base essential to support diagnosis of the problems and their inter-linkages, and formulation and evaluation of alternative strategies and plans (the groundwork for this seems to be nearly in place for parts of Punjab).

2.10 Efforts to Prepare a Master Drainage Plan. Ultimately it seems likely that a significant proportion of this salt has to be evacuated to the Arabian sea through a system of trunk drains often referred to as the “drainage superhighway”. The ongoing National System Drainage Study (NSDS) is investigating a wide range of alternative measures to dispose of salt from the basin. But the 2002 international POE review recommended in consultation with the provinces and the Ministry that efforts be re-channeled towards completion of the Drainage Master Plan (DMP) forgoing the plan to prepare feasibility studies of the NSDS proposals at this time. Uncertainty regarding what will emerge for the medium and long term, and what it will cost, is high at this time - the Master Plan is not complete (and in fact has not progressed very far, and reviewers have already pointed out numerous data gaps) and hence feasibility studies for a National Drainage System (NDS) cannot be started. An Inter-Provincial Drainage Accord would have to be negotiated between the upper and lower riparian provinces based on Drainage Master Plan options in order to launch implementation of the critical elements of the NDS.

2.11 The Way Ahead -- Investment and Strategy Development. Given the seriousness of this problem, can the Government accelerate investment without a coherent, least-cost strategy and plan that is based on the ground-truth realities that differ significantly between canal commands? A coherent and least-cost interim strategy and investment plan has not emerged to guide investment, and neither the Provinces nor the Federal government has as yet allocated the technical resources or assigned an appropriate urgency to developing such a plan. The basin-wide Master Plan is essential to deciding on the macro elements of the system (e.g., spinal drains) but it is not a substitute for integrated canal basin and sub-basin investment and management plans for each canal command in the Indus Basin system. Projects are being pushed by all the provinces especially canal lining, but given the tightness of funding, the

19 One cannot assume as a general principle or rule that seepage in fresh groundwater areas that is later pumped to the surface for irrigation, does not involve a quantum of water quality degradation, nor that this process will not be some cases be progressive.

government should insist upon a clearer picture of which investments can yield sound, substantial, and sustainable benefits today while the long-term strategy is being developed including the Drainage Master Plan. 2.12 The scope for substantial investment in on-farm drainage and other tertiary drain appears to be limited without the main branch and trunk drains whose layout is a part of the Drainage Master Plan and NSDS. Reducing the drainable surplus based on improvements in the canal system and water management could be accelerated. And a major effort to improve groundwater management and monitoring could suggest further ways to both decrease water logging and improve soil salinity. Investment financing has been quite modest, in part because of the lack of a clear consensus on a Master Drainage Plan, and severe implementation problems with the NDP project (including the lack of a coherent and consistent strategy based on curative and preventive measures). Only about 9% of the total allocation in the TYPP was for drainage (of which only 5% was to complete ongoing projects), and over the period 2001-11, the allocation was just under 10% of the total. Drainage investments (mainly RBOD II and LBOD I) were about 88% of the FY 03 PSDP portfolio cost, but only about 19% of the fund allocation. In the FY 04 PSDP, both commitments (20% of the total plan, a substantial increase mainly for canal lining) and fund allocation (20%, a substantial increase in nominal terms since the overall sector allocation increased by 36%). Notwithstanding the time it may take to complete the required studies and negotiations, a workable interim strategy and program is urgently needed, perhaps based on greater emphasis on reducing the drainable surplus and the interim suggestions for salt disposal made by the NSDS Panel of Experts. Such a strategy would have to be formulated so that it could be readily dovetailed with environmental flow requirements in the lower Indus River and whatever Drainage Master Plan eventually emerges from the ongoing planning process and the future negotiations on a Drainage Accord, but it may create the opportunity to begin increasing cost-effective investment in this vital area.

Water Resources and Agriculture 2.13 Irrigation And Agriculture Production. Increases in water resources available for irrigation, and expansion of irrigated area have played a central role in agriculture growth since the 1960s. Agriculture now uses an estimated 95% of available water resources, and irrigated land is responsible for about 80% of agricultural production. Total irrigated area in Pakistan is about 46 MAc, about 70% of the irrigable area. Over 90% of this irrigated area is in the Indus Basin.

2.14 Surface Water Availability For Figure 2.3: Annual Indus River Flow, Diversion and “Escapage to Sea” Irrigation. An overall balance of surface water resources for the Indus 200 Basin is summarized in Table 2.1. 180 Figure 2.3 shows total annual Indus 160 River flow, and both the canal diversion 140 from the Indus River and the total flow 120 100 below the Kotri barrage (the last barrage 80

on the Indus River) over the period Million AF 60 1975-76 to 2000-01. Total flow varies 40 widely between 70 and 120% of the 20 0 mean value, but canal diversions vary 1975-76 1980-81 1985-86 1990-91 1995-96 2000-01 somewhat less, between 78 to 107% of the long-term average value of 103.85 Existing Storage and Diversion "Escapage to the Sea" MAF.

Table 2.1: Average Water Balance of the Indus River System Item Annual Volume MAF BCM INFLOW Western Rivers 143.18 176.54

Eastern Rivers 8.4 10.36

Total Inflow 151.58 186.9

OUTFLOW Indus Treaty Allocation to India 8.4 10.36 Average Canal Diversions 103.84 128.03 System Losses 9.9 12.21 Surplus flow to lower River and Estuary 29.44 36.3 Total Outflow 151.58 186.9

2.15 As Table 2.2 indicates, surface water availability has changed little since the late 1970s when Tarbela was completed, but the growth in groundwater use has been explosive – growing from just 8% of water available in 1960 to over 40% in the late 1980s, after which time it appears to have changed very little. This large growth in groundwater use (Table 2.2) was stimulated in part by the use of tubewells for vertical drainage and water table control under the Salinity Control and Reclamation Projects (SCARPs), which are now being gradually turned over to communities and WUAs, as well as by the large spurt in farm mechanization in the 1980s and the availability of inexpensive tubewell technology in the market. However, one critical consequence of this growth is that increasing amounts of salt are circulating vertically in the system, progressively poisoning the soil because drainage and evacuation of salt from the basin is inadequate.

Table 2.2: Water Availability at the Farm Head in the Indus Basin System Water Availability at Farmhead MAF Acre-ft per Irrigated Area Year Canal Water Groundwater Total Mac Acre

1960-61 48.4 4.2 52.5 25.7 2.04 1967-68 56.8 11.7 68.5 30.9 2.22 1977-78 61.6 27.8 89.4 35.1 2.55 1985-87 61.4 40.9 102.3 39.8 2.57 1990-91 65.0 41.0 106.0 41.9 2.53 1999-2000 61.5 41.6 103.1 44.0 2.34

2.16 Groundwater Availability. The Indus plain is underlain by an extensive and deep alluvial aquifer. Because rainfall is extremely limited, recharge under natural conditio ns is very low and stems mainly from inflow from the basin margins (the rivers, especially during the flood season, and the upper watershed). In the last century the water table in this aquifer was at considerable depth, but it has steadily risen, nearing the surface over large areas as canal irrigation expanded. Water quality in this aquifer varies widely from fresh to very saline, with many large saline areas contiguous to freshwater zones,

especially in the lower basin in Sindh20. There are large areas of fresh groundwater in Punjab (about 79% of the area), but much less so in Sindh (about 28% of the area – resulting in severe drinking water supply problems in many areas). In the absence of farmer and community participation in a groundwater management system, and good information systems and monitoring, its very likely that groundwater quality is progressively deteriorating in many areas because of the intensity of its development, and hence, these fresh groundwater areas are probably shrinking.

2.17 Outside the Indus plain, groundwater is very limited except in the hilly and mountainous valleys where the alluvium is deep21. Groundwater in these valleys is an important water source for domestic use, livestock and for irrigation, but even in areas where rainfall is relatively high the typically steep slopes and rapid runoff requires that recharge of these valley aquifers increasingly must be managed as demand and development have accelerated.

2.18 Estimates of groundwater recharge in the Indus plain vary widely from levels close to current estimated use, 40-42 MAF, to a high of 55 MAF. The 1990 Water Sector Investment Planning Study estimated total recharge to be 45.6 MAF, 83% of which was estimated to result from seepage from canals, water courses and fields. Hence, in fresh groundwater areas, canal and field seepage that is commonly misconceived as large seepage losses are an increasingly important source of irrigation water (they are indeed losses in saline groundwater areas). Some would argue that even seepage in fresh groundwater areas should be avoided to reduce the opportunity for additional water quality degradation, or that not reducing this seepage essentially reallocates water from those downstream who only have access to canal water, but the cost of lining is prohibitive in fresh groundwater areas, especially where the risks of further water quality degradation are low. Moreover, since conjunctive use of canal water and groundwater to control water logging and salinity has been a key principle underlying the overall irrigation development strategy since the 1960s, one cannot look at either canal water or groundwater in isolation in the Indus Basin system. Because of the large difference in the availability of fresh groundwater, the circumstances, and consequently the opportunities, are dramatically different in Sindh and Punjab.

2.19 Regardless which estimate of groundwater availability one subscribes to, the difficulty of approaching the limit in the presence of saline water adjacent or below the freshwater zone when nearly all groundwater is developed privately requires that planning assumptions about incremental water availability for development be very conservative and limited to perhaps just 1-2 MAF or less given today’s limited knowledge and information base and the lack of a management system. More intensive monitoring, analysis using mathematical models, and participatory management may eventually increase the total volume that can safely be developed.

20 These areas have been mapped, and the recently completed IDA Punjab Private Groundwater Project developed an initial design for a GIS system to support groundwater management. Work is on-going to add all available data to the GIS to provide a model for a national information system, but more importantly, a provincial model of an information system on both surface water and groundwater that could support the analytical tools (surface and groundwater mathematical models) that would, in turn enable a beginning on developing an integrated and comprehensive groundwater monitoring and management system, and support the development of an integrated strategy for water logging and salinity control. 21 A unique and traditional method of groundwater abstraction found outside the Indus basin, especially in Balochistan and parts of NWFP, is the kereze, which consists of a long tunnel dug in the mountain slope until it reaches the water table. Water flows down the tunnel and is used for drinking water and for irrigation. A great many of these traditional systems are reported to have dried up due to a combination of drought, excessive groundwater abstraction by tubewells, and the loss of community financial capacity to maintain them.

The Inter-Provincial Water Apportionment Accord

2.20 The Long Search for an Agreement on Inter-Provincial Water Allocation. The Indus basin touches every province in Pakistan including the Federally Administered Tribal Areas (FATA) in the Northwest, so each province has some claim on its water resources. After the creation of Pakistan, ad hoc arrangements were made for sharing the waters of the Indus between the provinces. A number of committees and commissions were appointed to allocate the water of the Indus River and its tributaries to the provinces. These included the Water Allocation and Rates Committee, also known as Akhtar Hussain Committee (1968-70), the Justice Fazle Akbar Committee (1970-71) and a Commission of Chief Justices of the Provinces headed by the Chief Justice of Pakistan (1977). No formula for water distribution was formally agreed until March 1991, when the present Water Apportionment Accord was signed. The Provincial Allocations agreed in the 1991 Water Apportionment Accord are as shown in Table 2.3.

Table 2.3: Inter-Provincial Water Accord Allocations Seasonal Water Allocation in MAF Kharif Rabi Total Punjab 37.07 18.87 55.94 Sindh 33.94 14.82 48.76 NWFP 3.48 2.3 5.78 Balochistan 2.85 1.02 3.87 Sub-total 77.34 37.01 114.35 Civil Canals in NWFPa 1.8 1.2 3.0 Total Allocation 79.14 38.21 117.35 a Ungauged canals above the rim stations (built and operated privately or by communities with long-standing water rights)

2.21 Other significant provisions of the Accord include:

§ The balance river supplies including flood supplies and future storages [water not already allocated in the accord] shall be distributed between the provinces according to the following proportions: Punjab Sindh NWFP Balochistan 37% 37% 14% 12% § Industrial and urban water supplies for metropolitan cities for which there were sanctioned allocations will be accorded priority. § The need for storage, wherever feasible on the Indus and other rivers was admitted and recognized by the participants for planned future agricultural development. § The need for certain minimum “escapages” to the sea below Kotri to check sea intrusion was recognized. Sindh held the view that the optimum level was 10 MAF, which was discussed at length, while other studies indicated lower or higher figures. It was, therefore, decided that further studies would be undertaken to establish the minimal “escapage” needs downstream of Kotri Barrage. § There would be no restrictions on the provinces to undertake new projects within their agreed shares. § The existing reservoirs would be operated with priority for the irrigation uses of the provinces.

§ No restrictions are placed on several possible developments in the basin: small schemes not exceeding 5,000 acres above elevation 1,200 ft. SPD; irrigation uses in the Kurram, Gomal, and Kohat basins [tributaries of the Indus in NWFP] so long as these developments did not adversely affect existing uses; and Indus right bank tributaries flowing through Balochistan. § The requirements of LBOD will be met out of the flood supplies in accordance with the agreed formula [see above].

2.22 Apart the overall allocation of Indus River waters in Article 2 (Table 2.3), two of the most important Articles are 4 and 14. Article 4 indicates the proportionate provincial shares of the unallocated balance of river supplies (including flood supplies and future storages), whereas Article 14 provides a means of adjusting allocations to accommodate shortages and surpluses and sets priorities for reservoir operation. Article 14 prescribes that a system-wise allocation be worked out based on existing uses for the period 1977-1982, separately on ten-daily basis, and attached to the agreement as “part and parcel of it”. The table so attached provides a province wise ten-daily allocation of Indus waters that total to the figures given in Table 2.3 – effectively establishing a water entitlement or right based solely on existing use22, but without reference to security or reliability and based implicitly on the physical configuration of the system and water use at that time since, for example, the requirements for LBOD were not well known at that time. These allocations were not made for each canal head, but for the major sub-systems within a province (e.g., the Jhelum-Chenab in Punjab, and systems below the rim-stations in NWFP) or for the province as a whole (e.g., Sindh and Balochistan). Hence the Accord confers a water entitlement or right to the province, but not to the individual canals and hence not to the farmers on that canal.

2.23 Article 14 further provides that the record of actual usage for the period 1977-82 (post Tarbela) would form the guideline for developing the future regulation pattern, and that these ten-daily uses would be adjusted pro-rata to correspond to the indicated seasonal allocations and form the basis for sharing shortages and surpluses on all Pakistan basis. Article 14 also provides that existing reservoirs would be operated with priority for irrigation uses of the provinces, the provinces are free within their allocations to modify system-wise and period wise uses (placing a premium on provincial water management planning, and underscoring the importance of canal indents for system level operation planning by IRSA) and that any surpluses may be used by another province but his would not establish any rights to such use. This last provision means that the provincial water rights created under the Accord are not tradable water rights.

2.24 The Indus River System Authority. The Accord explicitly recognized the need to establish an Indus River System Authority (Article 13) to ensure implementation of the Accord, and IRSA was established under a Federal Act in 1992. IRSA has five members, one nominated by the Federal government and one each nominated by the respective Provinces. The Chairman (whose term is one year) is nominated in turn by the Federal Government and each Province. Members have a term of three years. The statutory powers and duties of IRSA include establishing the basis for regulation and distribution of surface waters amongst the Provinces according to the allocations spelled out in the Accord; reviewing and specifying reservoir operation patterns; coordinating and regulating the activities of WAPDA in exchange of data between Provinces in connection with gauging and recording surface water flows; determining priorities for river and reservoir operation for irrigation and hydropower requirements; compiling and reviewing canal indents as received from the Provinces and issuing consolidated operational directives to WAPDA for making such releases from reservoirs as the Authority considers appropriate or consistent with the Accord; settling any questions that may arise between two or more

22 With the single exception that projects under execution in NWFP and Balochistan were provided their “authorized quota” of water as existing uses (Article 3).

Provinces in respect of distribution of river and reservoir waters; and considering and making recommendations on the availability of water against allocated shares within three months of receipt of fully substantiated water accounts for all new water projects. The Act provides that IRSA may employ officers and other staff, experts, and consultants as it may consider necessary for the performance of its functions and prescribe the procedure for appointment, terms and conditions of service of staff, experts and consultants. Finally, the Act authorizes IRSA to make regulations to implement the provisions of the Act.

2.25 Shortfalls in Actual Allocation. Since 1991, a diversion equal to the total allocation of 114.35 MAF has never been achieved (Table 2.4). The Accord Allocation of 114.35 MAF (excluding the allocation for Civil Canals in NWFP) is about 9-10% higher than the average historic use of the Indus Basin prior to the Accord, about 103-104 MAF. Between 1991-92 and 2000-2001, annual canal diversions have averaged 102.6 MAF but have ranged between 81.07 to 111.11 MAF. One can see in Table 2.4 in the rabi season the benefit of present storage capacity, presently an estimated 12.8 MAF at Tarbela and Mangla Dams. The Allocations were fixed at a higher level on the assumption that further storage and canal diversion capacity would be built, but these projects and investments never materialized.

Table 2.4: Shortfall in Meeting the Accord Allocations Flow in MAF Kharif Rabi Total Average Annual Indus River Flow 117.5 25.7 143.2 Average Diversion 66.8 37.0 103.8 Total Allocation 77.3 37.0 114.4 Shortage 10.5 0 10.6

2.26 Apart from the recent drought that produced historically low Indus River flows and the present limited availability of storage capacity, there are several reasons for this shortfall; first, the Indus River high flow season is relatively short with very high peak flow rates and sediment loads making it difficult to maximize the diversion with fixed canal head capacities and limited storage facilities; second, flow in the Indus River during the early Kharif season (mid-April to mid-June when the shortfall generally occurs) is normally very low since this is the very end of the dry season before any substantial summer rains and when the existing storage reservoirs are nearly empty. Sufficient reservoir capacity has not been built to carry over surplus flood flows from the previous late Kharif season to augment these low flows (all the current reservoir storage at Tarbela and Mangla, which is normally filled during this late Kharif season, is released during the intervening Rabi low flow season).

2.27 Effectiveness of the Accord. The 1991 Accord is the present basis for distribution of water among the provinces and attempts are made to enforce its rules quite rigidly. The Accord has worked in the sense that the waters of the Indus River are divided among the provinces each season, but it has not worked well as a framework for inter-provincial cooperation and planning, particularly for new storages or canals, as a mechanism for sharing either water surpluses or deficits, or as a mechanism for enhance transparency and information sharing. From an admittedly simplified perspective, there appears to be several reasons for this. First, since the Provinces are not receiving their “full allocation” and the system is characterized by shortages even when there is not a drought, the operations of IRSA have been hampered by political interference and controversy among the Provinces. Second, there does not seem to be sufficient transparency or timely and credible information about the location and timing of flows and volumes of water in the system to build adequate trust that water allocations and withdrawals are in accordance with the rules of the Accord; and third, the system of storage and diversion works is not adequate to manage the river in a way that would ensure that the Accord can be fully implemented if there

is sufficient water in the basin in a particular year. These latter two issues were well known at the time of the agreement on the Accord, but the required action could not be taken and investments could not be made.

2.28 Revision of the Accord and the Enabling Legislation. However, building more inter-provincial infrastructure will only deal with part of the problems of the Accord. The Accord is presently an ad hoc quasi-legal framework for dividing a portion of Indus River flows based on existing water use by the Provinces in the late 1970s. While the Accord nominally allocates a fixed portion of Indus River flow (including its tributaries), it actually is meant to preserve access and use at it was more than twenty years ago, and the amount divided varies depending on individual Provincial actions in operating their head works (including unilateral actions to increase diversion) and by the natural conditions in the river. Even if the nominal total shares of annual Indus Basin water availability (regardless whether it is in a reservoir of the river, since total storage is a small fraction of annual flow) remain equivalent to what they are today (without reference to “surplus flows”, and worked out by combining the original flow allocation and the provision in Article 4), the original Accord should be overhauled and replaced by a formal legal system of secure, tradeable water rights based on the total availability of water in the basin, and including mechanisms for dispute resolution, recourse to the justice system, and mechanisms for adjustments to account for seasonal and annual variability of supply (sometimes referred to as quotas). Such a shift to sharing the waters of the basin would not endanger customary diversions at canal headworks particularly on Indus tributaries, but would give IRSA greater operating flexibility in allocating flows to ensure that all seasonal water quotas are fulfilled on time durin g each season. This would put a premium on good planning and water management in the Provinces and on effective collaboration between the Provinces and IRSA – but based on experience in Pakistan, IRSA’s powers, authority and autonomy would have to be strengthened significantly for this to work effectively.

2.29 These changes could be implemented by amending the IRSA legislation to add provisions that would provide Pakistan with a clear system of water rights and their regulation, both inter-provincial and intra-provincial. 23 The latter are best administered and regulated by the Provinces themselves within the broader policy framework provided by the national legislation. In any case, the amended legislation should provide for the rights of domestic use of water every where (not just in “Metropolitan Cities”, and for environmental flows in the lower Indus River below Kotri Barrage (and implicitly the environmental and other productive and domestic uses in this un-regulated portion of the River – uses both within the River and outside the River). In revising the legislation, IRSA should be given the necessary responsibilities, functions and powers to administer this water rights system, regulate inter-provincial water use, and operate the inter-provincial infrastructure. In terms of regulatory authority and operating authority, the present legislation needs to be clarified and sharpened to minimize ambiguity and conflict. In making these changes particular care should be given to revising IRSA’s governance structure to ensure both its autonomy and independence as well as its responsiveness to the political leadership and civil society.

2.30 A Significant Step to Improve Information Flows and Transparency. WAPDA and IRSA have recently begun the installation and calibration of a Telemetric System for data collection and transmission

23 The very great extent of land tenancy in Pakistan is a major barrier to extending water rights beyond the Provincial canal head gates. Regardless which legal principles would be proposed, many large land owners would oppose them out of fear that tenants could gain water rights. Granting bulk water rights or entitlements to FOs offer a possible solution (administered and regulated by a new Provincial Regulatory Authority), though some would argue that this approach would exacerbate the tendency and risk that large land owners and other local elites would capture and control FO to the detriment of the broader membership. In any case, the legislation and regulations enabling farmer organizations and governing their operations, rights and obligations would have to be revised to accommodate these new rights.

at selected dams and barrages in the Indus Basin system to provide more timely data on the position of gates and flows. Timely, credible and trustworthy data on storage and flows at all control points in the Indus Basin system could have major impacts not only on the implementation of the Accord, but on how effectively and efficiently water is managed and used by the provinces and farmers. Information and knowledge are as vital as infrastructure to optimal development of the Indus Basin. In this digital age of low cost telecommunications and access to computers, whose availability, benefits and capability are rapidly expanding throughout Pakistan, there is no reason why IRSA, the major infrastructure operators, provincial authorities, the Area Water Boards (AWBs), and Farmer Organizations at distributary level (there are already examples of so called “farmer information kiosks” elsewhere in South Asia), do not have continuous access to timely and accurate data (in fact, to an integrated and comprehensive information system) that provides, among other things, data on the status of the system storage and flows, current allocations, delivery schedules, and other data that would help them function better and make efficient, benefit maximizing decisions. IRSA and the provinces ought to be developing an integrated and comprehensive concept for an information management system to meet multiple needs and objectives for managing water and making good decisions on water use “from the mountain tops to the root zone” that can be implemented urgently, but perhaps in a phased manner.

Environmental Flow Requirements in the Lower Indus River 2.31 Changes in Environmental Values and Concerns. At the time of the development of the Indus basin in the 1960s and 1970s, little weight was given to possible negative environmental and social impacts of major water resource development works that constitute the Indus Basin Program. In part that reflected knowledge and sensitivities of that time, and in part it reflected the consensus that the country’s growth and perhaps survival depended on these developments, and although there may be real costs, these could be borne in the national interest. Since then values and concerns about the environment, and more broadly about sustainable development and the many dimensions this concept has, have changed substantially in Pakistan and the rest of the world based on hard lessons. These changes are reflected in Pakistan, not only in the body of environmental legislation and the related institutions created since that time, but in the emergence and growth of a large body of civil society organizations and NGOs through which these values have found loud and insistent expression.

2.32 The Controversy over the Impacts of Water Development and EFRs. The extent to which the framers of the Accord were focused solely on apportioning Indus waters among the provinces for the irrigation canals (which it should be remembered, deliver water for municipal and industrial use as well), is reflected in the fact that no other water use was mentioned (except for “Metropolitan City” for which sanctioned allocations existed) particularly those water uses and needs on the lower Indus where there are no major canals. The only reference to the lower Indus River below the last barrage at Kotri is in terms of “escapage to sea”. While the need for a “certain minimum escapage” was recognized explicitly, there is no mention or indication that rights or entitlements should be established for areas or uses in this part of the basin without canals on an equal footing to those established in the Accord for the Provinces for irrigation canal water.

2.33 The upper riparians would prefer that no flow, or “escapage” as it is termed in the Accord, be allocated below Kotri, i.e., that all the flow of the Indus should be captured and used for development (generally without mention of cost or economic benefit)– for both hydropower, irrigation, and domestic and industrial use, but mainly for irrigation. If it was necessary to allocate a certain minimal flow below Kotri, they felt that the only important purpose was to control salt water intrusion, a hydraulic problem once the level and location of the salinity gradient was agreed based on narrowly drawn or limited criteria. Sindh, on the other hand, held the view that the economic, social and environmental damages of

reduced flow and changes in hydrologic regime in the lower Indus River and estuary are extensive and a very great cost to Sindh24, and that sufficient flow must be made available to prevent or mitigate these damages and costs – an estimated 10 MAF, nearly one-third of the undeveloped flow of the Indus River (this estimate dates from the time of the negotiations). Substantial flow has occurred in the kharif season in most years (Figure 2.3) because of the lack of capacity to store or divert surplus flood flows. But Indus river flow, which in the winter dry season is naturally low, is now practically zero with the growth in importance of the Rabi crop. Summer flow has also been at or near zero during the last 3-4 years because of a major drought. This has served to intensify impacts and concerns as well as emotions in Sindh. Unfortunately the upstream Provinces still have not agreed with Sindh’s estimates of flow required below Kotri or any other specific amount.

2.34 In the Accord, it was agreed that a certain volume of flow is required in the lower Indus River and estuary, but agreement could not be reached on what level of flow was required nor what the primary purpose of such flows were. But it is fortunate that as a part of the Accord it was agreed that further studies would be carried out. Roughly ten years later, two studies have recently been initiated jointly by IRSA and the MOWP under the NDP project - one focusing on the issues from the perspective of Sindh, and the second from the point of view of Punjab. The results are expected in early 2004.

Poverty, Water Availability, and Agricultural Productivity

2.35 Investment in Water Resources and Poverty Alleviation. Claims have been made for many of the recently proposed major water resources development investments that they will among other things alleviate poverty. The claim is based on the assumption that a substantial or at least significant portion of additional water supplies will go to small farmers, tenants and tailenders in both existing and new canal command areas (who along with the landless that would benefit from increased agricultural and off-farm employment, constitute the great majority of the poor), and that increased irrigation more broadly promotes growth that positively impacts on the rural poor. These assumptions might have some validity if the availability of water to small farmers, tenants and tailenders actually increases, the level (opportunity) and quality (wages) of agricultural employment increases, and the benefits of growth are broadly distributed particularly in its impact on off-farm income opportunities. But, since these recent investment proposals (e.g., the Thal and other new canals, and dams without related distribution infrastructure improvements) do not suggest any change in how irrigation water is managed or in the productivity of irrigation water -- the proposed new canals seem to look just like the existing ones, not only physically but also in terms of how water management is organized, and it appears the aim of new storage development proposals are mainly to push more water into the existing canal system -- it is important to test whether any of these assumptions hold for the existing irrigation system. The most recent analysis that offers some insight into these issues is the Pakistan Poverty Assessment.

2.36 The Pakistan Poverty Assessment. Work towards a new and updated Assessment of Poverty in Pakistan was undertaken by the Government and the World Bank and completed in September 2002. The

24 Sindh believes that reduced flows in the lower Indus River and estuary have already resulted in significant social, economic and environmental damages and costs from sea water intrusion, including saline drinking water supplies, soil salinity, inundation of cultivable land by sea water (it is claimed to be nearly 1 million acres at present), reduced fishery (reduced catch and loss of economically important species), loss of livelihoods because of the reduction in freshwater available to the formerly extensive Indus flood plain forests, and biodiversity losses including increased threats to the extensive mangrove belt (reductions in coverage on the order of 40% and over 60% of the tree species) that not only provides protection from severe monsoon storms, but also has considerable economic importance both to local livelihoods and as a critical habitat and nursery in the estuary for the fishery.

Assessment is based on the Pakistan Rural Household Survey (PRHS 2001) 25 – a nationally representative, multi-topic rural household survey – and a Qualitative Survey of Poverty of six villages intended to enrich and inform the analysis of the PRHS data. The results of this Assessment, though controversial because of arguments over the interpretation of the data and its findings, are nonetheless quite important to the water sector because they begin to explain on a sound analytical basis many of the critical linkages and constraints operating within the canal system and at farm level as they relate to access to water and water availability or irrigation water service26.

2.37 Poverty in Rural Pakistan. The Poverty Assessment indicates that about one-third of the Pakistan population is poor, and two-thirds are found in rural areas. Poverty in rural Pakistan is deeper and more severe than in urban areas. The study shows that there has been little change in the extent of Poverty between 1990-91 and 1998-99 – though urban poverty fell over this period, rural poverty held at about 36% widening the urban-rural gap. More than half of the rural population in Pakistan are landless. While over 40% of the landless are poor, and constitute70% of the rural poor, only 3% of those owning 10 acres or more are poor.

2.38 Most rural livelihoods depend directly or indirectly on agriculture, yet during the 1990s when value-added in agriculture grew at about 4.2%, larger than the population growth rate of 2.5%, rural poverty remained unchanged at 36%. While the Poverty Assessment Report argues that the volatility of growth during the 1990s was an important factor in this outcome, it also argues that low agriculture productivity was also an important factor. The long drought and its effects on livelihoods also may have contributed substantially to this.

2.39 Poverty And Agricultural Productivity. While many factors contributing to low agriculture productivity in Pakistan have been identified and studied27, the major theme of the findings of the Poverty Assessment is the role played by unequal asset ownership in undermining agriculture productivity and water availability – particularly the ownership of land. The highly skewed distribution of land ownership in rural Pakistan has a substantial negative impact on agricultural productivity and an indirect effect on the agriculture resource base. The Assessment points out that among the mechanisms at work are:

§ Inefficient land purchase and leasing markets contribute to the translation of unequal land ownership per household into unequal operated area, and since larger operated areas have lower cropping intensity, land inequality leads directly to low overall productivity (though not necessarily per unit of land irrigated since as the Assessment argues owners of large land areas have greater access to assured water supplies, and possibly groundwater in fresh groundwater areas, and may choose to cultivate or operate only a part of this holding because of water scarcity or other reasons – more detailed data on the behavior of large land holders should be analyzed in the planned follow-up assessment28).

25 The PHRS survey covered 2700 households in 16 districts. Since the data were collected at plot level, the sample includes 1500 irrigated plots on about 400 watercourses (in Rabi 2000-2001, and Kharif 2000). Unfortunately the study team were not able to collect data on flow in a sample of these watercourses, nor did it have access to Department data on flows in the corresponding distributaries and minors. A follow-up study planned for later this year will try to add this key data to the analysis. 26 A small ongoing World Bank study of the impacts of drought on three villages located in three different agro-ecological zones is also expected to shed some light on these issues. 27 “Strategic Reforms for Agriculture Growth in Pakistan” Edited by Rashid Faruqee, WBI Learning Resources Series, World Bank, 1999. 28 Many large landowners are absentee, and engaged in various professions in the cities often giving them greater access to information and investment capital. Regardless, some large land owners may be a part of the solution as well. They are

§ Land inequality, because of the prevalence of tenancy, can also lower incentives to invest in land – one important consequence of this is the lack of investment in short and long-term measures to combat soil degradation, soil salinity and water logging conditions that are so pervasive in Pakistan. A second consequence may be a reluctance to invest in new water management practices and water saving irrigation technology as well as new cropping systems. Both of these consequences contribute to the persistence of low agricultural productivity. § Inequities in access to canal irrigation water are reinforced by land inequality since larger land owners are more able to influence officials to enable them to skew water allocations along a distributary or minor canal, or to obtain sanction for an illegal outlet or for illegal direct pumping from canals. The resulting uncertain or low water supplies available to tenants, small farmers, particularly tail-enders, contributes directly to low productivity.

2.40 Poverty And Water Availability. Most rural livelihoods depend directly or indirectly on agriculture, and as we have pointed out earlier, agriculture productivity depends importantly on the availability of water for irrigation – specifically the public provision of canal water. Despite the growth of groundwater as an additional source of water for irrigation, and its sale and distribution in local informal water markets, canal water remains the critical and most important source of water for irrigation on the Indus plain. In this regard the Assessment found that:

§ Ownership of a plot within a watercourse command area confers access to irrigation water, but does not guarantee canal water availability § Water use appears to vary systematically with the location of the watercourse along the main channel (distributary or minor) as well as the location of the farmer’s plot on the water course command area – specifically, water availability decreases significantly if the watercourse is located near the tail of the distributary or minor, and/or if the plot is located near the tail end of the watercourse. 2.41 This location effect is well known, but the Assessment suggests that the interplay of at least two factors appears to be important in affecting water availability:

§ The first is the deteriorated condition of many distributaries, minors and watercourses, and their related structures such as gates and outlets – seepage losses along these canals are often high and their hydraulic performance low with the result that the system does not function as it was designed or intended, i.e., plots in different parts of the command area but especially near the tail of these canals would receive less water than was intended. § Second, the Assessment found that when the data are controlled for plot location, the availability of canal water increases significantly where farmers reported informal payments for water; where there is less inequality of land ownership, and where the land holdings of the three largest cultivators on the watercourse is high. The Assessment notes that since larger landowners are likely to be able to lobby more effectively with irrigation officials and politicians, this latter finding suggests that water availability depends to some extent on the ability of cultivators to influence irrigation officials.

among the most advanced and productive farmers in Pakistan, using groundwater in conjunction with canal water, as well as the most modern agronomic and irrigation practices, in some cases operating mainly through tenants. Much could be learned about more effective and more productive use of water from these farmers, if the lessons learned could be disseminated, other barriers removed, and innovation scaled up.

2.42 The Assessment found hard evidence for three key findings:

§ A significant percentage of small farmers and tailenders actually get less water than their share § Per-acre water delivered to these farmers is significantly lower than that delivered to large, upstream farmers § There is widespread lack of transparency in water allocation.

2.43 The lack of transparency in water allocation is important, and stems largely from the long- standing lack of participation of farmers in water management decisions combined with the tendency of the departments over time to centralize management decisions such as water allocation. These two factors over time have the effect of greatly diminishing transparency and information access. Farmers generally understand the natural variability of their main source of water supply, the Indus River (an important reason why groundwater has become so important since it provides an opportunity to smooth water availability by reducing the unreliability of supply and overcome water shortages, as well as improve irrigation timing), but want to know what their share is and when it will be delivered – with this information they can make good or at least informed and lower risk decisions on how best to use both the water and their land (and possibly respond more appropriately to incentives). Because of the characteristics of the hydrology of the Indus River and the limited storage available, availability of water for irrigation often varies during the season (despite efforts to improve forecasts, there are no guarantees), but this variability and uncertainty does not seem to be the primary issue with farmers -- transparency and timely information, participation in decisions about what to do when there are shortages, and delivery on whatever is agreed, are the more important issues.

2.44 What should we conclude? The Poverty Assessment provides new insight into the factors that influence canal water availability, and the benefits of investment to increase water availability as opposed to access to water (which depends only on the location of the farm plot), from which one can draw some tentative conclusions. First, that substantial poverty benefits, and to an extent the economic benefits since productivity may continue to stagnate, claimed for new water resources development investments will be very difficult to achieve unless there is substantial investment to improve the performance of the irrigation system and its governance. Second, the large and pervasive effects of unequal land ownership may severely limit these benefits and possibly their hopes for broader impact on rural economy. Although the problems created by unequal land ownership are formidable, the challenge is to develop a new system of governance for water management that to the maximum extent possible overcomes the negative effects of unequal land ownership on water availability (for example, the tendency for local elites to capture FOs, and problems with existing land leasing and tenancy arrangements). Third, traditional public sector thinking in Pakistan would presume that overcoming these constraints is an important role of the departments (i.e., they are there not only to construct these systems but to operate them in the farmer’s and the public’s interest), but cumulative experience in Pakistan and the evidence from the Poverty Assessment suggests that this role today is in many cases less effective than it once was, and in some cases, may act perversely to reinforce the mal-distribution of water29. Overcoming these two problems is one of the several important aims of the current institutional and governance reform process.

29 A striking example is the existence of a large number of uncontrolled direct outlets (DOs) in the Nara Canal in Sindh. These are outlets, which draw water directly from the main canals that often have no outlet control (gates for example, and where these exist they are not easily controlled by the ID). These types of outlets are illegal under the 1873 Irrigation Act, but have been permitted and a majority have been accorded official sanction over the years. The cumulative effect of the steady increase in these DOs has been to increase the command area of the Nara Canal by more than 30% making it impossible to distribute water to large areas in the tail portion of the canal command area without a major increase in diversion and a change

2.45 Research and studies currently available including the Poverty Assessment30 suggests that investments in additional water supply and improvements in irrigation service that increase equity, cropping intensity or cropped area, and improve supply reliability are essential but not enough for there to be a substantial effect of water investment on poverty in rural Pakistan. Ali and Byerlee’s31 decomposition of crop sector productivity growth in Punjab from 1971-94 showed that on average about half of the positive contribution of technological change (cropping intensity and new crop varieties) and public investment (roads and literacy) was offset by soil and water quality degradation. Water resource development would contribute directly to increases in cropping intensity, and hence would appear to be a key factor in crop sector productivity in Pakistan. But without governance reforms that improve water availability to poor and marginal farmers, and a coherent and effective strategy to reverse soil and water quality degradation, the poverty and economic benefits could be greatly reduced.

2.46 Research in India 32 has consistently shown that rural poverty alleviation is strongly dependent on total factor productivity growth, and that this growth is most strongly influenced by technology research and development (R&D) in addition to rural infrastructure and education (literacy). What is missing in the research in Pakistan so far is an assessment of the importance of R&D, long neglected in Pakistan, on both resource quality and productivity. Moreover, to ensure that farmers are able to respond to policy incentives and R&D, the Government should look more deeply into the composition of the governance reforms, especially the flow of information and secure and tradable water entitlements or rights, two critical aspects that have been overshadowed by the struggle over the process of farmer organization (FO) formation and training, and the relation of these FOs to the departments, i.e., the degree to which FOs will be empowered to manage water (the third critical element , that together with timely information and water rights form an important part of the incentive framework).

to a rotational method of water distribution among the distributaries since outlet discharges become unreliable if the flow in the canal is outside the range of about 70-110% of design discharge. 30 Further follow-up to the Poverty Assessment including more detailed studies of these factors and related issues is needed and is being initiated (importantly, data on actual canal flows and water availability, and the state and performance of the relevant portions of the canal network would need to be introduced into the study). The study of the performance of factors markets (land, labor, and water) recently initiated by the Bank and GOP will also provide insight into the complex web of relationships and factors that influence the incentives and disincentives farmers face, and the broader economic and poverty impacts of water resources development and irrigated agriculture in the Indus basin. 31 Productivity Growth and Resource Degradation in Pakistan’s Punjab: A Decomposition Analysis; Mubarik Ali and Derek Byerlee; World Bank Policy Research Working Paper No. 2480; November 2000. 32 Government Spending, Growth and Poverty in Rural India, Shenggen Fan, Peter Hazell, and Sukhadeo Thorat; Amer. J. Agr. Econ. 82(4) November 2000.

3. PUBLIC SECTOR DEVELOPMENT PROGRAMS

Trends in Public Expenditure for Water and Agriculture

3.1 Sector Share of Public Investment. In the Figure 3.1: Public Sector Expenditures 1960s, total water and power investments exceeded

US$1.5 billion accounting for more than 50% of the Public Sector Expenditures total public spending33. Half of this represented the 20,000 Water Agriculture Indus Basin Replacement works. Investment trends Water & Agriculture have changed significantly since then (see Figure 15,000

3.1). Investments in the irrigated agriculture sector 10,000 (water and agriculture) have been steadily declining Million Rs. 5,000 both as a percentage of the total public spending and as a percentage of GDP. In 2003 the total allocation 0 for agriculture and water represents only about 0.5% 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 of GDP. Public Sector Expenditures as % of GDP 3.0 Investment Programs from the 1960s to the 1990s Water 2.5 Agriculture Water & Agriculture 3.2 The major investment programs, policies, 2.0 trends and performance in the water sector between 1.5 1.0 the 1960s and 1990s are outlined in the following Percent of GDP paragraphs. 0.5 0.0

3.3 In the 1960s, the focus of investment was 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 on meeting the water requirements of areas that were earlier served by the eastern tributaries of the Public Sector Expenditures as % of total PSDP 35.0 Indus River (Beas, Ravi and Sutlej) whose waters Water 30.0 Agriculture were allocated to India as part of the Indus Waters Water & Agriculture Treaty. The 1960s saw the construction of major 25.0 20.0

Replacement Works including the Mangla dam, and 15.0 a network of barrages and inter-river link canals. 10.0 Percent of total PSDP The 1960s also witnessed the beginning of the 5.0 Salinity Control and Reclamation (SCARP) 0.0 program, which addressed localized water logging 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 and salinity problems mainly through the installation of some 12,000 public tubewells and some surface drains. The demonstrative effect of SCARPs and introduction of low cost simple technology for tubewells and diesel prime movers also launched a boom in private tubewells. The 1960s might be termed the “hay day” of the water sector when massive investments in the sector coupled with the introduction of high yielding varieties (HYV) of wheat heralded the Green revolution.

3.4 The 1970s. The Indus Replacements Works and the SCARP program were continued in the 1970s including the completion of Tarbela Dam and substantial investments in SCARP. Major remedial works to address problems faced during the commissioning and early operation of Tarbela dam were also initiated during this period. Unfortunately, during this period there was a stagnation of abiana rates (water charges) and recoveries. Until the early 1970s abiana proceeds covered the full operation and

33 Parvez Hasan: Pakistan’s Economy at the Crossroads- Past Policies And Present Imperatives, 1998.

maintenance (O&M) cost and a small percentage of capital cost. However, abiana rates were not increased during this period even in nominal terms and recoveries fell far below O&M expenditures. Low abiana recoveries, rising SCARP tubewell O&M costs, inflation and pay commission awards resulted in major neglect of the surface irrigation system. Deferred maintenance began to accumulate and institutional weaknesses, manifested by poor quality of service delivery, also began to become apparent.

3.5 To begin the 1980s, a comprehensive sector study was completed by WAPDA in 1979 – the Revised Action Program (RAP) for Irrigated Agriculture. The RAP was intended to guide policy and investment in the 1980s, and recommended, inter alia, better coordination between agriculture and water policies, improved water management at the farm and command area levels, discontinuation of new public investments in fresh ground water areas and privatization of public tubewells, and system rehabilitation. On the investment front, the RAP emphasized short gestation high payoff investments. The main recommendations of RAP were adopted in the National Agriculture Policy issued in 1980. A modest start was made on improving water management (OFWM) at the watercourse and distributary canal levels. Several OFWM (watercourse improvement) and command water management projects were undertaken and the need for giving greater voice to farmers in decision making at the watercourse level was recognized. Supporting legislation in the form of Water User Association Acts was promulgated in all provinces. By this time, accumulated deferred maintenance had reached unsustainable levels. Two successive nationwide projects were undertaken to rehabilitate parts of the system. At the same time O&M funding was substantially increased with the help of grants from GOP. However, institutional and policy changes required to sustain O&M levels and improve O&M planning and effectiveness remained lacking. By late 1980s, several SCARP projects (Mardan, Khairpur II, Panjnad Abassia, etc.) were also completed and construction of the first trunk drain in Sindh (the Left Bank Outfall Drain, LBOD Stage-I) to carry saline drainage effluent to the sea was started. A program for “SCARP Transition” (disinvesting public tubewells in fresh groundwater areas) was also successfully started on a pilot basis in Punjab to reduce the public sector O&M burden. In the 1980s feasibility and detailed design studies for Kalabagh Dam, the storage project planned to follow construction of Tarbela Dam, were also started.

3.6 The 1990s. The beginning of the 1990s was marked by the conclusion of a long overdue Water Accord for sharing the Indus waters amongst the four provinces in 1991. A Water Sector Investment Planning Study (WSIPS) was also completed in 1990 to update the RAP recommendations and prioritize investments. The WSIPS emphasized the need for establishing a comprehensive and reliable Data Bank Network for water resources, agriculture, soils, etc. to guide investment planning; revitalizing institutional capacity in the provinces for investment planning; establishing a sector MIS; improving project approval and review processes; modernizing procurement processes; strengthening the local construction and consulting industries; and a training program for institutionalizing integrated comprehensive management of water resources. On the investment front, several localized drainage projects in Punjab, Sindh and NWFP and the LBOD Stage I were completed. Punjab successfully completed two SCARP transition projects (privatizing over 6,000 SCARP and irrigation tubewells), which provided substantial relief to its O&M burden. Two major irrigation extension projects (Chasma Right Bank Canal phase I, II and III and the Pehur high level canal) were started and substantially completed. Although the preparation of the Kalabagh Dam was substantially completed, implementation did not start because of environmental and political controversy.

The Emergence of a Program of Governance Reforms in the 1990s

3.7 Three Core Principles. By the mid-1980s the Government recognized that maintaining the vast irrigation system that had been created was a problem, and by the early 1990s it was generally accepted that ad hoc rehabilitation was not the answer. Instead, it was agreed that fundamental institutional reforms, coupled with investment to improve the efficiency and performance of the physical system, were necessary to address institutional weaknesses that were manifested in the continuing lack of effective and

efficient O&M, low cost recovery, low water delivery and application efficiency, inequitable water distribution, and threats to the long term sustainability of irrigated agriculture. Essentially similar findings and recommendations on an approach emerged from two independent studies34, one sponsored by the Ministry of Water and Power and the second undertaken by the Bank as part of its sector work. In response, the Government conceived an ambitious and far reaching reform program based on three principles: decentralization, participation and management transfer.

3.8 Basic Elements of the Program of Water Management Governance Reforms. The program of governance reforms, - packaged and supported under the National Drainage Program (NDP) project35 - was intended to foster the development of an institutional, policy and operational framework conducive to efficient and self-sustaining operation and management of the irrigation system, and provide a governance framework that would enable and promote improved equity and more efficient and productive use of water. The new governance framework would involve decentralization and transfer of management of the irrigation and drainage system from the Irrigation Departments to a multi-tier system of autonomous institutions (created with the staff of the departments or from the market place), with clearly defined roles, responsibilities and accountabilities within the system. O&M subsidies would be phased out over a 7 to 10 years pilot period reaching a point where costs of irrigation service are acceptably shared between the public sector and the private sector (farmer organizations). During this period the details of specific reforms including cost sharing, and abiana assessment, collection and retention, would be piloted and adapted to conditions on the ground. The key elements of the reforms, and the hierarchy of the new institutions, and their respective roles and responsibilities, were envisaged as follows:

§ Conversion of the Irrigation Departments into autonomous Provincial Irrigation and Drainage Authorities (PIDA), with responsibility for intra-provincial aspects of the system, including O&M of barrages and main canal headworks, and management of intra-province bulk water transfers, including bulk water deliveries at the head of main canals and management of drainage effluent in main drains that extend across canal commands; § Establishment of self-governing, commercially oriented, client responsive and financially sustainable area water boards (AWBs) – essentially public utilities with a substantial number of board seats allocated to farmer organization representatives -- on a pilot basis in one main canal in each province -- responsible for operating and maintaining the irrigation and drainage system within the main canal command up to the head of the distributary canals, and for bulk water deliveries to these distributary canals; and § Establishment of farmer organizations (FOs), owned and managed by farmers, and responsible for O&M of the irrigation and drainage system within the command area of distributary and minor canals, and assessment and collection of water charges (abiana). Once sufficient number of FOs is established, they would have representation on the Board of Directors of the AWBs.

3.9 Under this governance framework, Government (Irrigation Departments) would phase itself out of the role of service delivery (operation and maintenance, water distribution and abiana collection), retaining only a policy role and the role of regulator of the autonomous entities and utilities created. As PIDAs become operational they would enter into contracts for bulk supply of irrigation water and receipt of the drainage effluent generated within the limits of the AWBs. The AWBs would enter into similar contracts with FOs for bulk supply of water at the head of the distributary canals. The FOs would collect

34 Institutional Reforms to Accelerate Irrigated Agriculture, John Mellor Associates and Asianics Agro-DeV. International (pvt) Ltd., Ministry of Water and Power, 1993; and, Pakistan Irrigation and Drainage: Issues and Options Report No. 11884- PAK, Agriculture Operations Division, South Asia Region, World Bank, March 1994. 35 Co-financed by the World Bank, Asian Development Bank, and the Japan Bank for International Cooperation.

abiana, retain a part of it to finance their functions and pass on the remaining proceeds to AWBs for operation and maintenance of the main canals. The AWBs would in turn pass on a portion of the amounts received to PIDAs for the O&M of the system under the latter's jurisdiction. It was envisaged that the reforms would lead to PIDAs and AWBs that develop into respons ive and technically strong autonomous bodies responsible to their customers (the FOs) and capable of improved management and O&M of the upper tiers of the irrigation system – the benefits would include improved and sustainable operations, higher water delivery efficiency, better scheduling of canal deliveries reflecting more closely the irrigation requirements in canal commands. Similarly, establishment of FOs would lead to more equitable distribution of water among watercourses, improved and cost effective maintenance, and more efficient collection of abiana.

3.10 Slow and Uneven Progress of the Reform Program. However, due to uneven commitment and political support, especially the lack of ownership of the reform programs by the irrigation departments, progress on the reforms has been mixed so far.

§ Sindh. The governance reform process is well underway on the Nara Canal where the pilot AWB is located. The process of FO formation is nearly complete, with 163 out of a total of 165 FOs having been formed. The Nara canal AWB has formed branch level Water Allocation Committees comprising representatives of FOs and canal officers to jointly assess problems, and monitor water allocation and flows to enable more equitable distribution of water. The FOs are collecting the abiana, retaining 40%, and transferring the remaining 60% of the assessment to the AWB. The Government of Sindh has indicated that the management of the Guddu Barrage (from where the Nara Canal off-takes) would be transferred to the Sindh Irrigation and Drainage Authority (SIDA). Sindh has already notified two additional AWBs on Ghotki and the Left Bank canals – these are expected to join the reform process shortly. The future challenge in Sindh is to improve the water service delivery to consolidate and expand the reforms. § North West Frontier Province. The pilot AWB has been established in the Swat Canal, the Board is holding regular meetings, and 13 FO’s have been formed. Initial results of these efforts are visible, and the Government of NWFP; has indicated that the technical personnel and material resources for the completion of the program with be deployed. The Swat Canal provides opportunities to substantially improve water distribution because, unlike the canals in Punjab and Sindh, the system is designed to deliver water “on demand” on a volumetric basis. NWFP needs to take advantage of the important opportunity this difference affords to improve the efficiency of water distribution to better match service to crop water requirements. The challenge ahead in NWFP is to organize FOs in the programmed 127 minors and distributary, and to fully organize the corresponding AWBs with full participation of the farmers. § Punjab. After four years of reflection the Department of Irrigation has taken in itial steps to support the reform process. A higher level of support for a reform program at the political and policy levels is apparent, a factor that was critical for the takeoff in Sindh. The present use of Khal and Nehri Panchayats as proxies for water course associations and FOs respectively could prove successful if Irrigation Management Transfer (IMT) agreements clearly specify responsibilities and functions between PIDA, the AWB and the FOs, and in particular, ensure the effective empowerment of FOs removing the present arrangements which make them an extension of the department. The Government of Punjab has indicated that it will make the necessary changes in the financial regulations to allow FOs to retain their share of abiana to enable them to finance the operation and maintenance activities at the minor and distributary canal level for which they are responsible. The challenge for Punjab is to develop a crash program of FO mobilization, training and capacity building to consolidate progress and deepen the pilot reforms.

§ Balochistan. Balochistan had for a time opted out of NDP for a number of reasons, but very recently has indicated that it will be re-activating its participation in the program. Balochistan will have to assess the status of actions it had taken, and develop a plan to move forward on both the reforms and investment. Balochistan is one of the key beneficiaries of the Federal Governments plans to invest in new canals (the Kachi Canal). This new canal would enable Balochistan to fully utilize its current Accord allocation and divert flood season flows that currently cannot be used. It is therefore very opportune for Balochistan to gain experience with the governance reform program before the construction of this canal advances to the stage of operation .

3.11 Three Lessons That Emerge From The Institutional Reform Experience So Far:

§ Reforms require champions who have high-level political support. § Notwithstanding the presence of an empowered champion, changing the traditional culture of Pakistan’s water departments and agencies requires an effective internal process of change management and capacity building to overcome the barriers to change – such a process should be designed to help the leadership and staff of the department see the need for change, to define what changes should be made, and to take ownership and leadership of the transformation and renewal of the organization. § Long-term success will depend on how well and how timely training and capacity building programs for farmer organizations and department staff are implemented, and how effective monitoring and evaluation programs are. From the beginning the Provincial Governments saw the reform program as a pilot that would extend over a 7-10 year period during which the basic model outlined above, alongside various alternatives and variations, would be tested and necessary adaptations and changes made as required so that at the end of this period a new and more efficient and effective system of governance was in place. But these pilots got off to a slow and shaky start36 engendering increased resistance to change and a general feeling in the departments and more broadly within government that the reforms were unsuitable and would not work, though in fact they had not yet been fairly piloted and evaluated.

3.12 The Rapid Emergence of Second Generation Issues and the Associated Risks. The rapid emergence of important second-generation issues in the governance reform program is becoming apparent even though progress has been limited except in Sindh. These issues carry important risks.

§ The provinces have not used NDP resources to systematically rehabilitate and modernize37 distributaries, minors and watercourses in a program coordinated with the mobilization of FOs and with the full participation of the FOs and their members. Experience elsewhere has amply demonstrated that management transfer to FOs is generally unsuccessful if the deferred maintenance is not eliminated, the canals are not turned over in fully functioning order to the satisfaction of the FOs, and the benefits of improved service and farmer management are not realized. In fact in some cases, the work has been sub-contracted to the FOs to manage in order to reduce costs and ensure their satisfaction. This issue is becoming very critical in Sindh where there is a full compliment of FOs on the Nara Canal, and they have begun to participate in the

36 The capacity for social mobilization of farmer organization on the scale required did not exist within the government, and was seen as expensive to procure from consultants or NGOs; the training and capacity building program has taken an interminably long time to initiate and is seen as not delivering what is needed at present; and neither good baselines and monitoring programs, or change management processes, are in place. 37 Apart from improvements in design that lead to better service, modernization would include measures to enable rotational distribution among distributaries, and installation of water measurement devices.

activities of the AWB. In Punjab, the Khal and Nari Panchayats are demanding canal improvements as a first priority. The deficiencies in the canal network and the structures, and the problems this is causing for the effective functioning of the FOs is becoming apparent. The very grave risk is that if such a program of rehabilitation and modernization (including, for example the installation of water measurement devices) is not developed on a crash basis with the full participation of the FOs, the reforms are likely to unravel, or at least, grind to a halt with the substantial loss of benefits. § The present process of social mobilization and formation of FOs has included a minimum level of training and capacity building. An accelerated, continuous, long-term and carefully designed program of training and capacity building for elected FO office holders and farmer members that encompasses everything from awareness building, developing basic business skills, to basic skills needed to carry out different functions related to water management, is urgently needed. Anecdotal evidence exists in all the provinces of frustration on the part of farmers and FO office holders brought about by their lack of capability and know-how. The risk is that if the provinces do not move urgently to fill this gap with a sense urgency, the FOs already formed may deteriorate and perhaps disintegrate, leaving farmers with the perception that the reforms will not work and will not benefit them. § The core issue in each of the provinces has been the mobilization and formation of FOs and management transfer – these processes have consumed everyone’s energy and attention, and because of the shifts in power associated with this restructuring of roles, have caused a large measure of the controversies and resistance to reform. However, as the number of FOs in each canal increases beyond some threshold (say, for example, completion of farmer mobilization on one or more branches) it becomes more critical for the AWB to transform itself from a “canal circle” accountable to the ID into an AWB accountable to the FOs and the farmers (and to the PIDA). No AWBs have been fully established. Moreover as the FOs increase their participation and try to begin carrying out their functions, they are beginning to demand more leadership and services from the provincial PIDAs. But so far the provinces have seriously understaffed the PIDAs curtailing their effectiveness, and have not move to relinquish direct control of the AWBs significantly inhibiting the change process in both the AWBs and the IDs. The provinces need to move the reforms forward at all three levels in a coordinated manner to avoid creating bottlenecks, unnecessary controversy, and risks that the entire process could be undermined and the reforms unravel.

3.13 In Whose Interest Is Governance Reform? The Federal Government has sustained a commitment, at least in policy and spirit, to the governance reform program, but it is essentially a Provincial matter since they are entirely responsible for the irrigation systems and irrigation services within the province. Nevertheless, the Federal Government has a vital interest in the outcomes of the reform process since these outcomes are essential to achieving its long term social and economic objectives in the rural sector (assuming this continues to depend to a large extent on an increasingly productive irrigated agriculture sector) for which it is proposing a huge increase in public expenditure for inter-provincial water resources development. On the other hand, the Provinces are and will continue to be increasingly dependent on the Federal Government to underwrite an increasing share of their essential water sector investment programs 38. Hence, neither party can afford to remain at arms length from the reform process.

38 The Provinces will need resources in the neighborhood of $10 billion (about 615 billion Rs) over the next 25 years (the Ministry’s MTIP indicates that the aggregate provincial needs are about 201 billion Rs for ongoing projects and 414 billion Rs for planned projects) for drainage, canal lining in saline groundwater areas, remodeling and modernization of the canal network, rehabilitation and safety of the barrages, small dams in the barani areas, and On-Farm Water Management programs.

3.14 The Way Forward. Despite the controversy and the slow and uneven progress, the imperative is to sustain the reform process. This is emphatically not the same as continuing to implement the NDP project, which because it has provided the bulk of the financial support the process needs, has become synonymous with both the failings and successes of the process. In the context of a renewed commitment to the core principles and outcomes of the reform process, the urgent and immediate aim should be to recast the program by building on the lessons and experience gained so far, deepening knowledge of factors and issues that have been exposed through that experience, overcoming gaps and problems in the NDP program and the ongoing reform program in each province by incorporating lessons learned, making changes and piloting adaptations and innovations, and restructuring the program and approach of the NDP project to ensure that progress towards these outcomes is steady, albeit gradual, and can be sustained and accelerated where that is possible.

3.15 The Need for a New Policy Paper on Irrigation Institutional and Governance Reform. One way to renew this commitment and to formulate the next phase of the program would be through a Government “White Paper”, or policy and program paper, jointly prepared by the Federal and Provincial Governments. This may take some time because it requires planning, probably some targeted field studies and assessments involving third parties, and open and possibly lengthy consultations (participation is just as important in the preparation as in the implementation, perhaps more so because of the overriding need for ownership and commitment). But there is time within the remaining period of the NDP project to use that facility for the modest resources needed to launch and support such a process. Success would also be enhanced by setting a definite time frame, and establishing a joint high-level working group to coordinate and manage the preparation of the “White Paper”. The Bank and other donors would no doubt be interested in supporting this process.

3.16 Issues that should be addressed. In preparing the “White Paper” the joint high level working group would need to carry out a number of investigations and studies involving a wide range of expertise mainly from within the country but also including selected international expertise. It would also be useful to update what is known of experience elsewhere in South Asia and in other developing countries with water sector and irrigation governance reform programs. One important insight to be gained from such an exercise is the nature of the transformation and the evolution of both the farmer’s and the department’s roles, responsibilities and accountabilities under different models and approaches. Other areas of study might include:

§ Benchmarking and auditing of irrigation water service, O&M and other irrigation department operations. § Pricing and the cost of water including the performance of informal water markets for canal water and groundwater, affordability of water charges; incentives and disincentives to pay water charges, alternative mechanisms for determining and regulating water charges, and for assessment and collection, and experience with the transition to bulk water supply and the installation of water measurement devices. § Modalities for farmer participation in water management, organizational arrangements, roles and responsibilities, capacity building needs, outcomes and measures of effectiveness. § Economic and social incentives for more efficient and productive use of water, including issues in technology development (R&D) and dissemination, benefits of farmer participation and empowerment in technology uptake and better use of water.

These needs are about seven times the total Provincial ADP budgets (87.5 billion Rs) that are likely to be available without substantial changes in financing mechanisms based on their estimate for the next five years (17.5 billion Rs).

§ Modernization of canal networks, not only of the physical layout but also operating modalities in view of the present waribandi system of water distribution under conditions in which there is a substantial change from the original design in the scope of water availability, operating requirements and cropping systems. § Alternative modalities for modernization of institutional arrangements for irrigation water management, particularly ways to increase accountability and accommodate greater farmer participation and decision making. § Alternative approaches and key success factors for institutional change management processes.

4. OPERATIONS AND MAINTENANCE EXPENDITURES AND PERFORMANCE

Provincial Operations and Maintenance Budgets

4.1 Following major real increases in O&M budgets in the mid 1980s that accompanied a nation wide Irrigation System Rehabilitation Project (ISRP 1) it was generally accepted that the levels of O&M funding attained in 1988 were “adequate”. At that time an attempt was also made to institutionalize systematic planning, prioritization and effective supervision of routine and preventive maintenance. It was also expected that resources released as result of the SCARP Transition Program (privatization of public tubewells in fresh groundwater (FGW) areas) would provide a steady flow of funds for improved O&M of the surface irrigation and drainage system and reduce the need for government subsidy. However, the current dilapidated state of the irrigation system bears witness that the expected improvements have not materialized. Indeed, the situation has worsened. Initially, drains, flood protection facilities, and the distribution channels were the most neglected. Now, however, the larger channels and numerous important structures (including barrages) are also reported to be in distress. Current estimates of system rehabilitation (essentially accumulated deferred maintenance) and remodeling costs exceed Rs 200 billion39.

4.2 Unfortunately, O&M continues to receive inadequate budget allocations, major portion of which goes to establishment costs. This is evident from Table 4.1 and Figure 4.1, which show the O&M budgets of the irrigation departments since 1992.

Table 4.1: Irrigation Department Budgets Since 1992

Punjab Sindh NWFP Balochistan Total M&R Estab Total M&R Estab Total M&R Estab Total M&R Estab Total M&R Estab Total FY92 2,841 2079 4,920 692 568 1260 391 147 538 67 96 163 3,991 2,890 6,881 FY93 1,822 2293 4,115 791 712 1503 418 160 578 59 119 178 3,090 3,284 6,374 FY94 1,511 2282 3,793 877 713 1590 396 170 566 54 129 183 2,838 3,294 6,132 FY95 2,370 2263 4,633 972 882 1854 441 203 644 54 151 205 3,837 3,499 7,336 FY96 2,412 2322 4,734 2050 1053 3103 458 230 688 62 150 212 4,982 3,755 8,737 FY97 2,246 2691 4,937 2051 982 3033 123 238 361 77 153 230 4,497 4,064 8,561 FY98 2,455 2230 4,685 1029 1215 2244 429 262 691 51 153 204 3,964 3,860 7,824 FY99 2,653 1721 4,374 938 1497 2435 531 261 792 58 153 211 4,180 3,632 7,812 FY00 2,579 1902 4,481 1102 1530 2632 425 272 697 50 153 203 4,156 3,857 8,013 FY01 2,261 2003 4,264 1514 1637 3151 353 278 631 65 153 218 4,193 4,071 8,264 FY02 1,618 2275 3,893 2348 1826 4174 450 293 743 72 153 225 4,488 4,547 9,035 Establishment cost as % of total 58 44 39 68 50

39 PER consultants estimate.

Figure 4.1: O&M Budgets (in current terms)

10,0 9,0

8,0 7,0

Punjab 6,0 Sindh 5,0 NWFP Baloch

4,0 All Provinces 3,0 2,0

1,0 0 FY9 FY9 FY9 FY9 FY9 FY9 FY9 FY9 FY0 FY FY0 Fiscal

4.3 Some Major Issues and Observations

§ In nominal terms, between FY92 and FY02, Sindh’s O&M budget has increased more than two-fold; NWFP’s and Balochistan’s have remained constant, while Punjab’s budget has declined. In real terms, O&M budgets have been declining. The increase in Sindh reflects the additional O&M requirement for LBOD, while the decline in Punjab is due to the privatization of SCARP tubewells (somehow, money saved from pr ivatization was not diverted to meet shortfalls in O&M funding for canals and drains). It is worth noting that Sindh’s O&M budget now exceeds Punjab’s O&M budget whose irrigations system is more than twice the size of Sindh. § Overall establishment cost (staff salaries) represent 50% of the total O&M budget, ranging from 39% in NWFP to 68% in Balochistan. In Punjab salaries of staff who assess abiana (“special revenue staff”) is over Rs 400 million which is equivalent to about a third of total abiana receipts. The decline of maintenance and repairs budgets in real terms has made establishment cost more prominent. It is important to note that about 30% of the establishment costs are on account of staff deployed for O&M of the distributary and minor canals. This amount represents potential cost reductions that can be achieved if the distributaries are turned over to farmer organizations. § A closer look at non-salary costs (not shown separately in the table) reveals that:

q NWFP spends over 70% of the total O&M budget on the electricity cost of lift- irrigation schemes (to some extent a consequence of the Province’s unfavorable topography) leaving little space for preventive and routine maintenance & repair (M&R).

q Punjab spends less than 20% on drains and flood protection facilities, explaining why drains 40 are the worst maintained.

40 In FY02 Punjab used funds from NDP to enhance allocation for flood protection and drains spending nearly three fold.

q Sindh spends nearly 75% of its total O&M budget on tubewells, pumps and drains, highlighting the need for privatization of public tubewells in fresh groundwater (FGW) areas (though their extent is much less in Sindh than in Punjab).

§ O&M budgets are supposed to be prepared on the basis of approved “Yardsticks” which in theory are to be updated periodically. However, the current situation is that Punjab is still using yardsticks prepared in 1992 without any updating; Sindh prepares budgets on the basis of fund availability indicated by its Finance Department – although yardsticks were updated in 1995 they are still not approved; NWFP does not use yardsticks (the basis for budget allocation is unclear); Balochistan updates yardsticks each year on the basis of revised capital costs of irrigation schemes. Due to fiscal difficulties, the allocations by the provincial governments are generally made based on allocations made in previous years without regard to ground conditions or increased costs due to inflation: The actual budget releases depend upon the availability of funds and seldom match the allocation let alone the requirements. § Few serious attempts have been made to determine realistic O&M needs. In general, the irrigation departments have failed to convince the finance departments what the realistic needs are for several reasons including:

q Absence of systematic O&M planning, prioritization, supervision, bench marking, accountability, independent evaluation and performance audits. The general perception is that O&M funds are not well spent.

q Lack of farmer participation in identifying O&M priorities and decision making.

q Lack of linkage between abiana collections, quality of service delivery and allocation of funds.

q Governance issues in identification of priorities, allocation of funds, planning, execution and quality & quantity control.

4.4 Recommendations . O&M regimes require fundamental changes. While the ongoing institutional reforms would ultimately address issues of accountability, staffing and lack of farmer participation, immediate action is needed to stem the deterioration of the irrigation and drainage system. A well designed program is needed to:

§ Establish realistic funding requirements through an independent evaluation. § Rationalize fund allocation to meet priority needs. § Initiate benchmarking, and O&M performance audits:

q Develop monitoring indicators (e.g. number of days in each irrigation seasons a given canal carries authorized discharge, record of breaches, equity in water distribution, tail shortages, problematic structures and failure of irrigation and drainage structures).

q Improve effectiveness of expenditures and enforce accountability.

q Ensure channels are operated on authorized discharges or remodeled where necessary. § Rationalize abiana rates and improve assessment and recovery; empower farmer organizations to not only operate and maintain their canals but also to collect abiana and retain a sufficient portion of the recovered funds to meet their needs would be a key incentive for increased cost recovery; § Reduce management costs (including privatization of remaining public tubewells in FGW areas and rationalize staffing levels);

Cost Recovery

4.5 Currently, abiana and drainage cess (the latter applies to Sindh only) are the principal means of sharing and recovering O&M cost41. Abiana is assessed on the basis of “matured crop” acreage. Unit rates vary by crop and canal commands. In Punjab and NWFP, abiana is assessed by the Irrigation Departments while actual collection is made by the Revenue Departments. In Sindh and Balochistan both assessment and collection of water charges are done by the Revenue Department. Abiana proceeds go directly to the Provincial Treasuries and there is no direct linkage between recoveries and budget allocations for O&M and other system improvements.

4.6 The prevailing system of assessment has been in place since pre-independence time, and apart from a few across the board revisions in the rates and the recognition of non-agricultural uses of the irrigation water, there have virtually been no improvements in the system. The system of assessment is complicated and non-transparent. Even after being in place for more than a century it is fully understood only by the assessment staff. Crops have been divided into as many as 49 groups and the abiana rates are applied in accordance with the staff’s subjective assessment of the crop extent and performance. Besides being complicated, the system is also cumbersome. It requires six visits by a Patwari in a single cropping season followed by extensive paper work before the demand statement or the Khatauni can be finalized. The system is subjective and is prone to leakages.

4.7 Table 4.2 shows the overall pattern of abiana assessment and collection for all provinces. A study carried out by the Ministry of Water and Power in early 1990s indicated that leakages to the tune of 30% or more occur at the stage of assessment and a similar amount occurs during the actual colle ction. Nevertheless, as can be seen in Figure 4.2 that until the early 1970s in Punjab, the recoveries from abiana exceeded O&M expenditures indicating that abiana included an element of capital cost recovery. However, due to stagnation of abiana rates, recoveries fell and the gap between O&M and recoveries gradually widened (Figure 4.3).

4.8 Revisions in abiana have been sporadic and insufficient. Between 1975-76 and 1999-00, the price level in the country (GDP deflator) increased by 641 percent while in comparison the increase in abiana was only 439 percent. The assessed amounts and the actual recoveries remained more or less the same for the period between 1982-83 and 1991-92. This is rather surprising, as during this period agricultural production grew at an average annual growth rate of about 4.1 percent in real terms. Since 1993-94 when a policy of annual revision of the water charges was implemented, both assessments and recoveries increased. However, recoveries have not kept pace with assessments and the gap has widened. Between 1993-94 and 2001-02, the gap has increased ten fold. In real terms, both assessment and actual recoveries show a sharp decline between 1982-83 and 1992-93.

41 Farmers pay a share of the capital cost of water course lining (up to 50%) and land leveling (80%).

Table 4.2: Abiana Assessment & Recovery Performance (Rs Million)

FY Punjab Sindh NWFP Balochistan Total A R R/A % A R R/A % A R R/A % A R R/A % A R R/A % FY83 711 628 88 FY84 638 548 86 FY85 718 632 88 FY86 695 610 88 FY87 704 611 87 FY88 713 595 83 FY89 731 601 82 FY90 733 498 68 FY91 739 575 78 FY92 771 592 77 43 35 82 FY93 615 526 86 45 32 72 13 2 18 FY94 812 643 79 188 247 132 57 37 65 16 2 14 1073 930 87 FY95 964 765 79 445 194 44 74 42 56 15 1 6 1498 1002 67 FY96 1,091 798 73 480 368 77 93 68 73 23 6 24 1687 1239 73 FY97 1,343 949 71 591 472 80 117 65 56 30 3 12 2081 1490 72 FY98 1,528 1,088 71 597 517 87 148 98 66 34 8 23 2307 1711 74 FY99 1,793 1,252 70 649 558 86 185 139 75 38 25 66 2665 1974 74 FY00 1,917 1346 70 746 421 56 228 172 75 40 11 28 2932 1951 67

FY01 2,260 1357 60 801 633 79 238 190 80 45 16 35 3343 2195 66 FY02 2,155 1211 56 508 650 128 254 152 60 53 6 12 2970 2020 68

Legend: A = Amount Assessed, R = Amount Recovered. Blanks indicate data not available.

Figure 4.2: Comparison of Revenue and Expenditures (in current terms) in Punjab

Revenue Expenditure 6,000

5,000

4,000

3,000 million Rs.

2,000

1,000

Figure 4.3: Abiana Assessment and Recovery in Punjab (in current terms)

Shortfall Actual Recovery Assessed Amount 2,500

2,000

1,500

1,000

500

02 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 ------82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 2001

4.9 Issues and Recommendations:

§ Recoveries from abiana fall short of even the present inadequate level of O&M expenditures. § Increases in abiana have led to a widening gap between assessments and collections, highlighting the weaknesses of the system and the need for improving the quality of irrigation service delivery and greater participation by farmers. § The current system of abiana assessment and collection are archaic and do not provide incentives for improving efficiency of water use. Punjab is contemplating replacing the present crop based system with a “Flat Rate” of abiana that would be assessed on the basis of canal commanded area held by farmers. In theory this system would be easie r to administer and less subjective. However, it raises equity issues as farmers would be charged abiana regardless of whether or not they receive any water, or timely and adequate irrigation supply. The incentives for misappropriation of water and illegal pumping would increase. § A volume based water charge may be the answer, whereby abiana is based on the water volume actually supplied. However, it would require investments in flow measurement and metering devices and structures and a decentralized institutional set-up involving FOs and AWBs for assessment and collection. Although there is as yet limited experience with the impact of the ongoing institutional reforms on abiana collection performance, the initial findings from Sindh, where the responsibility for O&M and abiana assessment and collection has been transferred to some 60 FOs, is that both assessments and collection performance has substantially improved as compared to the pre-turnover years. § Studies carried out in the context of the Nara Canal AWB estimated the potential for a 30% reduction in O&M costs if O&M responsibility is handed over to FOs.

Changes in the Structure of Water Pricing and the Flow of Revenues

4.10 Traditionally in Pakistan the abiana or water charge was considered a part of general land revenues and flowed directly to the provincial treasury. The Revenue Departments played a central role in assessment in some provinces (Sindh and Balochistan), and in collection in all provinces. So long as these revenues were not retained by the ID and used to fund O&M and possibly improvements, and instead went to the treasury, they became gradually disconnected from the question of funding needs and budget allocation for O&M and system improvement, and from the incentive framework that would encourage payment of the abiana as well as more efficient and productive use of water. Once under the control of the Revenue Department and the Treasury, these revenues were generally a part of the overall revenue target of the district revenue department even though they were nominally an irrigation charge. An argument could be made that the treasury should be able to recover a portion of its investment and recurrent expenditure from the direct beneficiaries42, i.e., the farmers who are receiving water, but the consequence of the treasury receiving all of the revenue from water charges is that farmers had little incentive to pay their abiana, especially once they began to see little direct benefit from doing so as O&M and irrigation service in general began to deteriorate. The result was that revenue recovery inevitably became an inequitable process of bureaucratic coercion.

4.11 Lack of a Clear Policy on Water Pricing. As the governance reform program progressed over the past few years, there has be en often heated discussion of abiana43 assessment, collection and where the revenues go, but very little about the fundamental principles and elements of a policy on the objectives of water prices, what water prices should comprise, or how they should be established or regulated. One of the great weaknesses of the present system is the politicization of water prices that has resulted in their being frozen and disconnected from any sensible or logical basis, even the simple one of O&M costs. Abiana is large ly treated as a rate without any basis except the perception of what might be accepted without too much controversy or political pain. The principle of collection and retention of water charge revenues within the system for its operation, maintenance and improvement that has been at least an implicit part of the governance reform program is a huge step, but there is no clarity yet as to what the water pricing policy objectives are, and what water prices encompass overall, i.e., what services (and their associated cost) are to be included in determining the rate, the extent to which capital costs will be included in the rate base (or which capital costs), by whom and how will prices be periodically adjusted, or the extent to which certain costs will be shared between the farmers and the treasury and in what proportion, etc.

4.12 Recent Proposals to Introduce Flat Rate Per Acre Charges. Recent proposals to shift from the current system of abiana to a flat charge for each acre a farmer owns in the canal command area would simplify collection and would by some estimates significantly increase revenues, but would miss the whole point of both water pricing and the key intent of the governance reform program to increase accountability for irrigation services. Such a charge would be very inequitable in light of the finding of the Poverty Assessment that documented the disconnect between water availability (actually receiving water) and access to water (owning land within the command area), and the differential in services associated with highly uneven land ownership. It would remove any incentive water prices and hence water costs have to improve efficiency and conserve water, and it would reinforce the de-linking of payments by the farmer from maintenance and investment in the system, further reducing the accountability of the PIDA and AWB to the FOs and the farmers. Higher revenues are not the sole or

42 And conversely, that the indirect beneficiaries (consumers) ought to be willing to pay a portion of these costs through their taxes since they receive a substantial benefit because of increased production and lower food prices. 43 In the paragraphs that follow, we have used the terms abiana , water charges and water prices interchangeably.

even the most important reason for reforming the abiana system, though revenues would increase if the farmers have the right incentives to pay.

4.13 Emerging Changes in the Structure of Assessment and Collection. The ongoing program of governance reforms have provided an important opportunity to begin to change the structure of water pricing (abiana) for irrigation services and the flow of revenues. Sindh is already piloting these changes, and the Government of Punjab has indicated that it will soon implement new financial regulations that would enable this approach to be piloted. The two principle changes that emerge in the interim within the governance reform program include:

§ First, in the interim, the AWBs is responsible for abiana assessment (a major change in Sindh), and since they will be accountable to the FOs and the farmers (when they are fully established and the FOs have substantial representation on their Boards), as well as the PIDA, one can expect the assessment to be more understandable and transparent in the long-run. The provinces would have a choice in the future as to whether to sustain this AWB role, or to devolve assessment responsibility to the FOs. However, note that if the structure of water pricing changes as outlined below this issue would be moot since the AWBs would assess each FO for bulk water services depending on the amounts of water delivered, and the FOs would in turn assess their members both the bulk water charge and their internally approved budget expenditures. § Second, the FO is responsible for collection, and importantly, is to retain 40% of the revenue to fund its own operations and responsibilities, paying the remaining 60% to the AWB for services on the main canals and the headworks. This concept of proportional division of a single inclusive water charge will inevitably be replaced once the shift to bulk water service is possible, and the capacity of the FOs to plan and manage budgets and funds improves.

4.14 Assessment Issues. A second major problem area in which change has been too slow is in the assessment of what is due. Not only is the current system expensive, but traditionally the ID, or revenue department as the case may be, determined an assessment for each farmer. Today where FOs have been mobilized and formed, such an approach is not appropriate where the farmer’s organization (FO) has responsibility for collection of funds and the allocation and expenditure of a significant share of those funds for its operation, maintenance and other activities as defined in a budget that is approved annually by the FO membership.

4.15 Even where the AWBs have become more actively involved in assessment as in Sindh, there has been little change in assessment procedure or in the basis for assessment because this process, if made more objective and transparent and tied to actual cropped area and water use (assuming there were adequate water measurement devices present in the canal network), would most likely cause a sudden change in water charges for many farmers, and uncover advantages gained by many vested interests in the past causing changes that at present are even more difficult to accept. This is unfortunate because, for example, very good remote sensing capability exits in the country to utilize the high resolution satellite technology available today to provide a relatively accurate and very objective assessment of irrigated areas and cropping patterns44. Alternatively and for the time being, Sindh has opted for negotiation with the FOs where substantial changes are needed to gradually adjust assessments to conform more closely to

44 In many areas the conjunctive use of groundwater and canal water by farmers, or the intermingling of groundwater and canal water use within a command area, would pose a problem in interpreting these data (where they are used together in the same season). However, as the groundwater monitoring program, and the information system that supports it, improves over time, this difficulty would greatly diminish. In any case, whether or not remotely sensed data becomes an official part of the assessment procedure, the approach would have considerable value as a reality check and as a systematic source of detailed data for problem diagnosis, planning and water management.

what available data or anecdotal information indicates they should be. This initial approach also has the advantage of not creating controversy that could prematurely undermine and derail the reform program needlessly. But this alternative approach of negotiating adjustments to assessments places a premium on improved service (especially rehabilitation and modernization of the FO canal system) if the negotiations are to have any credibility at all.

4.16 The Emerging Pattern of Revenue Flow. Figure 4.4: Concept of Water Revenue Figure 4.4 depicts a concept of water charge revenue Flows in the Future flow, and provincial and federal budget expenditure, as it is gradually emerging under the governance reforms, but extended to include all levels of Indus Basin water Indus Basin Services Federal resources management and irrigation services. Each Budget IRSA, WAPDA

Expenditure arrow represents the flow of funds derived either from water charges paid by farmers through their FO (single line) or provincial and federal budget expenditures (double line) – in both cases (with the exception of Provincial Budget PIDA federal expenditures) based on bulk water service. The Expenditure general concept of cost sharing depicted in Fig ure 4.4 ? doesn’t reflect or suggest the basis for cost sharing, i.e., ? Current what costs, whether recurrent or capital costs, are being Arrangements– AWB shared or in what proportion. Instead it is intended to in the future the FO would depict some fundamental principles as outlined below. set its own 60% assessment rate, and pay a § First is the principle of retention, i.e., revenue from regulated bulk FO currently collects water service Abiana abiana, or more appropriately from the FO’s Retains 40% rate to the AWB collections, are retained within the farmer’s own system, which is defined in Figure 4.4 to include or extend from the distributary and downstream canals and watercourses (the FO’s direct domain) to the AWB (main and branch canal operation and maintenance, improvement) and to the PIDA (head works operation and maintenance) – this leaves open the question of even a nominal contribution of FO water charges to the system level cost of provision of water at the canal headgate. § Second, the revenues flowing to the AWB and the PIDA are based on a bulk water service charge assessed each FO for the quantity of water delivered. This would provide not only a consistent basis for water charges or prices everywhere in the system, but also make a clear connection between water cost and water use, as well as between water price and water service. § Third, irrigation and water management services involve a mixture of public and private goods (or at least quasi-private goods) -- as one advances upstream in the system, services have a greater proportion of public goods. Hence, as one moves upstream the public share of the cost (establishment, operation, maintenance, improvement, replacement, modernization, etc.) becomes greater, and conversely, as one moves downstream a portion of the abiana or water charge (including the bulk water service charge) collected by the FO pays for a greater share of the costs, reflecting also the part of the system where the farmer has the largest participation in decision making and where there is the greatest direct accountability. § Fourth, the provinces, from budget resources and through the PIDA, share in the cost of provision of basin level services that insure delivery of the province’s water entitlement, including services provided by IRSA (forecasting and operations planning, water allocation, operations, monitoring, data collection and information dissemination) and WAPDA (operation and maintenance of intra- provincial infrastructure, improvement and modernization, new infrastructure); as well as a share of the cost of PIDA operations and activities and a part of the AWB’s costs.

4.17 Cost Sharing. The concept outlined above, which includes the important principles of revenue retention, of cost sharing and bulk water service pricing places considerable emphasis for its effective and equitable implementation on two fundamental requirements: first, the modernization of the canal network including the installation of relia ble water measurement devices; and second, on rigorous cost allocation, accounting and financial management, as well as transparency, at each level of the system and within the respective agencies. Neither of these conditions prevail today, but there is no insurmountable impediment to overcoming either one over time. The modernization of the canal network including the distributaries and minors to enable easily monitorable and reliable bulk water service would be costly, and an in-depth study of alternative operation and design concepts as well as water pricing mechanisms would be needed before such a commitment is made.

4.18 Cost sharing between farmers and the provincial treasury for irrigation services is not new to Pakistan. Though the focus of arguments over the level of abiana in recent years has been primarily about the extent that it covers “full” O&M cost, capital cost recovery has been an integral part of several programs including investments under NDP and OFWM projects as well as infrastructure projects supported by the Punjab Rural Support Program and the Pakistan Poverty Alleviation Fund. However, there has not been any consistent policy on which costs are to be shared (for example, skilled and unskilled labor, materials, etc.), in what proportion (percentages vary widely between cost components and between programs), and how these might vary depending on the part of the infrastructure network in which costs are incurred (watercourse, distributary and minor, main and branch canals, headworks, etc). A second source of confusion has been about how the policy would apply to routine O&M works, replacement, deferred maintenance works, and capital improvements (remodeling and modernization, for example, to enable more effective and efficient operation or increase capacity to improve service), especially the latter two since the distinction is often blurred by how rehabilitation programs are formulated and implemented at present. In general, the principle applied is that the farmers should not cost share for deferred maintenance or O&M works – especially since the latter two (OM&R), should be covered by the bulk water charge (these costs within the FO network are covered by the FO assessment). This latter distinction between rehabilitation and modernization or improvement will become increasingly important since, as the governance reform program progresses, the canal system will have to be rehabilitated to insure that the assets turned over to FOs are fully functional and the larger system will operate as agreed. The third, and perhaps most complex issue affecting cost sharing policy, such as it is today, concerns affordability on which little reliable and up-to-date data exists.

4.19 The Future Structure of Water Charges at the FO Level. As these policies evolve, one can easily foresee that the annual operating budget of the FO would have two broad elements: first, the bulk water service charge due to the AWB; and second, the planned activities and expenditures to be undertaken within the FO’s canal network, inc luding expenditures for operation and maintenance, overhead costs of general operations, possible distribution of funds to watercourse associations, planned capital improvements, and payments to reserves, among other things. Once this type of business pla nning and operation becomes the normal mode of FO functioning, the concept of retaining a fixed percentage of a water charge and paying the balance to the AWB is no longer needed or sensible. The water price is the bulk water price for deliveries from the AWB (adjusted of course during the season or subsequently for variations in the volume actually delivered). The second part of the assessment is the amount the FO assesses each member for its services and planned expenditures. The more efficient the FO is, and the more the membership contributes in-kind services, the lower the FO assessment would be, but the bulk water service charge would depend solely on the amount of water demanded and delivered.

4.20 Of course, this also means that ultimately the installation of reliable and sustainable water measurement devices in the canal network now becomes an essential and high priority investment in the modernization and improvement investment program. Nevertheless, in the interim or during the transition from the present system to a new policy framework, workable and equitable mechanisms can be

developed that support gradual evolution towards full implementation of the policy framework. If each province were to adopt a clear policy framework for water pricing, then an independent regulatory body could be established within the province to regulate prices, assessment, collection, and retention, and hence guide this evolution through a series of changes consistent with the adopted policy framework that would begin to put the sector on a sound and equitable financial footing and promote improved service, efficient resource use and higher productivity.

4.21 The Way Forward. More generally, the federal and provincial government need to reach a consensus on the overall polic y framework for water pricing and cost sharing (possibly as depicted in Figure 4.4), begin systematically to implement that policy through independent regulatory bodies perhaps initially in the pilot canal commands, build the needed capacity and work out administrative procedures step-by-step. To launch this process a thorough, in-depth study of the three pilot canal commands (Nara in Sindh, Swat in NWFP, and LCC (East) in Punjab) could be carried out to understand fully the costs and affordability, and to formulate alternative policy frameworks and mechanisms.

4.22 The crucial first step is to make the lowest tier of the system (AWBs and FOs) function properly, equitably and transparently, and to then gradually implement the full water pricing policy framework. However, it would be comparatively simple for the provinces, PIDAs and the federal government to agree on how such a policy would work at the upper-most tiers in the system and implement it quickly.

5. WATER DISPUTES AND STRATEGY DEBATE: POLICY AND STRATEGY FORMULATION

The Challenges at the Close of the 1990s

5.1 With the high rate of population growth that is being projected45, the competition for water is and will become increasingly intense and disruptive among upper and lower riparia n provinces and across the varied needs for water for irrigation, hydropower, industrial and domestic use, flood control and the environment. Moreover, allocations in the Water Accord have never been fulfilled, and since 1999 there has been widespread shortages of water due to drought and inadequate storage and canal capacity. Water shortages of the order of 40% to 50% were experienced during the 2002 rabi and early kharif crop seasons. This created a strong sense of crisis – it mobilized sector authorities to an extent that other persistent problems such as deteriorating performance of infrastructure, inequitable irrigation service, low productivity or persistent poverty were unable to do. There was, and there continues to be, intense debate within and outside government about what direction water policy and strategy should go, how to overcome water shortages, and how to meet the future food and fiber requirement of the growing population and increase exports. The debate was whether the highest priority should be given to investment in new dams and reservoirs or to conserving water and improving efficiency. This difficult debate was exacerbated by inter-provincial disputes over implementation of the Water Accord and water allocations, environmental flow requirements, and how vital drainage problems should be solved. This was an unfortunate and invalid way to frame the debate, not only with respect to the choices but the time frames and sequencing of investments as well.

The Government’s Responses to Water Shortages 5.2 In response to the political hue and cry over water shortages, the Federal Government’s major water sector organizations – WAPDA, the Ministry of Water and Power (MOWP), and the Planning Commission -- scrambled to formulate solutions to the problem, dusting off old feasibility and planning studies, launching new feasibility studies, and undertaking a major new study of the sector organized and managed by the MOWP with ADB’s assistance.

5.3 WAPDA Vision 2025. WAPDA was the first of the key sector organizations to prepare and present a proposal – a water resources development strategy document called “Vision 2025” (2001) that calls for huge investments in multi-purpose storage reservoirs (irrigation, hydropower and flood control), several new canals to expand irrigation during the period 2000-2025, as well as canal lining and drainage. The goal of the proposal is to address the problems of water scarcity, the flow of flood water to the sea unutilized, safe disposal of drainage effluent to the sea, tapping of groundwater, and reducing seepage loses in the country’s existing irrigation system. The proposal would develop about 64 MAF of storage and 27,000 MW of additional power generation capacity from hydropower and coal. “Vision 2025” envisages investing US$50 billion over the next 25 years – clearly the most ambitious and biggest development scheme in Pakistan’s history. The proposal is basically the summation of nearly every known project with feasibility studies planned or requiring updating, each one individually evaluated

45 Pakistan’s population is projected to grow from an estimated 144.3 million in 2002 to about 221 million in 2025 (this figure, used by the Ministry in its Water Sector Strategy Study, is considerably below the UN Population Division’s estimate made before the 1998 census). By 2010, population is projected to grow by nearly 23% to 173.3 million. Rural population is estimated to be about 65% of total population in 2002, but is projected to decline to 48% in 2025 despite an increase in absolute terms of 12.9 million. Importantly, urban population is projected to grow from 50.7 million (35%) in 2002 to about 114.5 million (nearly 52%) in 2025.

(some dating from the 1970s and 1980s), ignoring a key lesson from water sector planning done in Pakistan as far back as the 1960s -- that the sector is dominated by the competition for scarce resources including water, capital and human resources.

5.4 The Planning Commission’s TYPP. Partly due to the sense of urgency created by drought, and the lack of investment in developing new water resources after Tarbela (in major part due to the political impasse over the Kalabagh Dam), the Government approved Vision 2025 in principle, and its main elements were, by and large, included in the Planning Commission’s Ten-Year Perspective Development Plan (FY01-11) published in 2001. However, the TYPP does include a more comprehensive assessment of the issues faced by the sector than Vision 2025, and it establishes objectives and physical targets for the sector. The TYPP physical targets include increased storage of 6.3 MAF, water savings of 6 MAF, new irrigated area of 2.4 Mac and 4.09 Mac benefited by rehabilitation and remodeling of canals, and 75,000 watercourses improved. Total planned expenditure for the period 2001-11 is Rs. 425 billion (less than 3% of which was for completion of ongoing projects).

5.5 Some of the major projects included in the TYPP were taken from Vision 2025 and have been added to the Public Sector Development Program (PSDP) in 2003 and 2004. While the TYPP presents an interesting framework for the sector, it was not supported or derived from in-depth analysis of sector issues or based on a widely discussed integrated long-term plan. As a consequence it offers little guidance on priorities and the sequencing of investments (across sectors and provinces), and largely ignores the financial requirements of the provinces since their investment plans are an essential compliment to the proposed federal investments if the TYPP objectives are to be achieved. The proposed new irrigation expansion projects are primarily driven by the desire of provinces to utilize their respective shares allocated under the Water Accord. Some of these new canal projects are politically controversial and their economic feasibility is questionable, considering that until more storage is built they will receive non-perennial supplies for only 75 to 90 days during the kharif season and two of them will serve areas with sandy soils.

5.6 National Water Policy. With support from the World Bank assisted NDP project, the Ministry of Water and Power prepared a draft National Water Policy (NWP). The intent was to develop a framework of policy directions and principles, whose adoption would provide the basis for formulating a new legal code for the water sector. The Vision Statement in the draft NWP is as follows:

“Pakistan plans to have adequate water available, through proper conservation and development, to 2025 and beyond. Water supplies should be of good quality, equitably distributed and meet the needs of all users through an efficient management, institutional and legal system that would ensure a sustainable utilization of water resources and support economic and social development with due consideration to the environment, quality of life, economic value of resources, ability to pay and participation of all stakeholders.”

5.7 Given the difficulty of change in the sector and the problems of achieving consensus on such a policy document today in Pakistan, the draft NWP is comprehensive but does not try to push the envelope. It does propose a major change in institutional arrangements in the sector, including a new policy level National Water Council (NWC), and the consolidation of planning capability into a new apex body that would support the NWC and carry out the sector and basin wide planning studies that will be required. But the background report on which the draft is based does not explore alternative institutional arrangements in sufficient depth to bring the needed clarity to how the functions, roles and responsibilities will be reallocated to result in a more efficient and responsive system for water management.

5.8 The draft NWP points out the problems caused by the lack of a legal system of water entitlements, but focuses only on how the existing provincial water rights established in the Accord can be strengthened, and makes the weak declaration that all citizens should be assured equitable right of access to clean water and sanitation facilities. It does not address the problem of farmer water entitlements (or more correctly, farmer organization (FO) bulk water entitlements) in the Indus irrigation system, perhaps because this would assert a policy principal that the political class in the provinces are not prepared for (giving up the assumed or traditional right of politicians to decide water allocations and water problems). Unfortunately the draft NWP and its background reports do not explore alternative or new relationships and roles for the federal and provincial governments within an overall national policy and legal framework, nor the nature of decentralized responsibilities at provincial and canal levels within this alternative framework. Its unfortunate because, such an analysis could have developed sound proposals on how the provinces could develop and administer a provincial level system of secure water entitlements without the federal government imposing a system administered from the center, something the provinces would not stand for in the water sector.

5.9 The Ministry of Water and Power’s Water Sector Strategy. The Ministry of Water and Power opted for a less hurried and more analytical and comprehensive approach. With support from the Asian Development Bank (ADB), the Ministry of Water and Power prepared a Water Sector Strategy (WSS) in 2002, including a Medium Term Investment Plan (MTIP) with a planning horizon of 2025 and a prioritized list of investments up to 2012. The scope of the planned WSS investments over this period are summarized in Table 5.1. This investment program would increase surface water storage by about 22.5 MAF, and add 2 Mac of new irrigated area. The planned investments for the water resources development sub-sector, and for irrigation and drainage sub-sector are summarized in Table 5.2.

Table 5.1: Summary of MOWP Water Sector Strategy Proposed Investments

Cost Sub-Sector Percent ($US million) Water Resources Development 10,000. 29.7 Urban Water Supply and Sanitation 5,066. 15.1 Rural Water Supply and Sanitation 2,173. 6.5 Industrial Water Supply and Pollution 253. <1.0 Control Irrigation and Drainage 11,099. 33.0 Hydropower 4,500. 13.4 Environment 113. <1.0 Flood Protection 418. 1.2 Estimated Total 33,622 a Saving 4.7 MAF by water conservation would reduce the storage required to 17.7 MAF and the cost to US$10,000.

5.10 The WSS and the draft NWP are closely coordinated, and the WSS includes in its short-term plan a number of important analytical and planning studies, and institutional restructuring and capacity building measures required to set the stage for most of the proposed investment program. However, the WSS and MTIP have not yet been formally endorsed by GOP and the provinces. The difference between the reception received from the federal and provincial governments by the WSS and Vision 2025 can be attributed to many important factors, but it clearly reflects the extent to which projects and project investment, particularly for new infrastructure, dominates thinking in Pakistan today. The WSS is a much greater challenge to absorb, is frank about the number and scope of studies and planning the investment program would require, and entails more wide ranging commitments by all concerned including significant changes from business-as-usual. The WSS recognizes the essential importance of early efforts

to develop coherent and integrated plans for storage expansion, sustaining and accelerating the governance reform program, and the need to place appropriate emphasis on essential provincial investments to improve irrigation service.

Table 5.2: Sub-Sector Investments in the MOWP Water Sector Strategy

Cost Percent of Sub-Sector (US$ million) Sub-Sector Cost Water Resources Development Planning Studies and related activities 15. <1. Storage (22.5 MAF) & Hydropower (9500 14,353. >99. MW)a Irrigation and Drainage Studies 151. 1.4 Drainage 1,145. 10.3 Conservation of Water 1,660. 14.9 New Irrigation 4,596. 41.4 Small Storages including Hill Torrents 1,337. 12.0 Rehabilitation, Modernization, Sustainability 2,210. 19.9

5.11 On-Going Preparation of a Drainage Master Plan and Inter-provincial Drainage Accord. WAPDA is also preparing a Drainage Master Plan (DMP) for the country. In parallel the Ministry of Water and Power is preparing a pre-feasibility study for the National Surface Drainage System (NSDS)— “drainage superhighway”. These two studies are intended to provide the basis for an inter-provincial “Drainage Accord” on the style of the Water Accord. The Accord would pave the way for passage of saline drainage effluent from Punjab and Balochistan to the sea through Sindh. The Ministry of Water and Power recently convened a Panel of Experts (POE) comprising world class international and national experts in agricultural drainage to review the draft pre-feasibility report of the NSDS. The POE recommended further analysis and studies, including the impact of the recent droughts on the estimated saline effluent to be disposed of, making projections for future scenarios, identifying sources and levels of pollution (quantity and quality) in the river system, assessing realistic costs of O&M, checking several engineering aspects, and identifying gaps in current knowledge base. The POE’s consultations with GOP and provinces led to a consensus that there is no immediate need to move towards a full fledged feasibility and design of NSDS before developing a DMP, which defines alternative options for the future needs of agricultural drainage as an integrated component of water management in the Indus basin. The POE recommended broadening the scope of the DMP, including Salt Balance Studies and the development of a River Salinity Model.

Water Resource Development Challenges 5.12 Is A Major Program Of Water Resources Development And Irrigation Expansion Possible? The response of the Government to the recent drought and political conflicts over water has been to propose a huge investment program in water resources development (nearly US$8 billion over the next ten years, and over US$30 billion by 2025). More than three-fourths of this investment would be for new storage dams, hydropower capacity, and for new canals. In the 1960s planners were faced with some of the same challenges the country faces today – including what was the best strategy to restore and sustain a sufficiently high agricultural growth rate, whether to add surface water storage to the system and how much, how would groundwater be used in conjunction with surface water and what parts of the canal network should be remodeled, how to integrate salinity and waterlogging control into the overall program, and what operating policy should be adopted to maximize the benefits from power and irrigation. At that time, the World Bank and the Government mobilized several large international and national technical teams in a closely coordinated effort to analyze alternative development strategies and reach consensus on

a definite program of investment in agriculture, irrigation, storage and hydropower for the period 1965- 1975. The final program proposal was estimated to cost Rs. 22.7 billion in 1965 (about US$4.77 billion at that time) and more importantly, just over 40% of the total expenditure for the Third and Fourth Plans (an extraordinary commitment at that time).

5.13 Today, Pakistan is again facing some of the same challenges and is approaching the limits of its water resources development potential. The Government’s main focus has been on solving water problems by focusing primarily on the supply side of the equation where there is clearly the physical potential for development; i.e., there is water that can be developed and there is land on which it can be used, and there are ample numbers of poor farmers who would benefit from additional water supplies. But the outcomes the Government is seeking in terms of both poverty alleviation and development of the rural economy, can be achieved in a number of different ways that have different costs and different risks. For example, while it is possible to remodel the canals and increase the flow of canal water (with or without new storage) so that water reaches poorly served farmers, the extent to which these increased flows and their timing increase water logging or soil salinity, particularly if improved drainage is not in place or groundwater use is not coordinated with the timing of these increased flows, creates risks that could overwhelm and offset the benefits and threaten the sustainability of the system.

5.14 In the present rush to solve the drought problem there is too little attention to drainage, water management and to the demand side of the supply-demand equation – water delivery and use efficiency, governance, rehabilitation and modernization of infrastructure and improved O&M, incentives for wise and more productive use of water. These issues have been recognized as important but have received comparatively less policy and investment attention in the TYPP, though it features more prominently in the MOWP’s Water Strategy Study. Both the WSS and TYPP recognize the importance of increasing the development of Pakistan’s agriculture, but the proposed strategies and plans are not linked to or phased with a strategy for agriculture growth (in terms of both crop production, cropping pattern and value added), and the thinking in the agriculture sector (as expressed in the TYPP) seems oddly divorced from the major investment proposals in the water sector. These issues are in part due to the division of responsibility between the Provinces and the Federal Government in terms of primary responsibilities for investment finance, since as we have already noted, much of the responsibility for demand side investment, agriculture development and water management lies with the Provinces (though the federal government plays a key leadership and fiscal role through economic and fiscal policy including subsidies).

5.15 Nevertheless, the question arises as to whether Federal expenditures on a major program of water resources development including new system level infrastructure can have the desired economic impact without greater attention to the linkages with a comprehensive strategy for agriculture development, the control and management of salinity and waterlogging, and to these demand side issues and constraints. Good studies and analytical work are lacking in this area, but present evidence suggests that the federal government cannot assume that the economic returns will be commensurate with the rising marginal cost of water in many cases. Moreover, given the relatively small Provincial ADPs (Annex A) it is hard to see that these issues will be adequately addressed by the Provinces without direct Federal assistance.

5.16 Is Enough Attention Being Given to the Barani Areas of Pakistan? The problem is somewhat different in the extensive barani or rainfed areas of Pakistan. Water scarcity in these areas is extreme and has led to unsustainable exploitation of groundwater, rangeland and forests. Small dams on perennial and non-perennial streams to capture seasonal runoff, especially flood flows, has been an important means of water harvesting and water development in the barani or rainfed areas of Pakistan for many years. Water stored in the reservoir is used principally in two ways: first, seepage from the reservoir adds to the natural recharge of groundwater increasing water supplies for both irrigation or drinking water; and second, water can be drawn directly from the reservoir by a canal or pipe to supply these same purposes. When

conditions are favorable the reservoir is also a potentially valuable fishery and small-scale source of hydropower 46.

5.17 There is a long history of constructing these types of dams and water harvesting structures in Pakistan and the demand for them on the part of local farmers and villagers in barani areas is high. There appears to be few options for water development in these areas other than to capture the annual though highly variable flood flows. Groundwater is used for village water supply and for limited irrigation, but overuse in many areas where it is available has resulted in a precipitous decline in the water table and steadily rising cost of pumping. These projects are seen as contributing significantly to groundwater recharge47, and if the site is favorable, introducing a new source of surface water for farmers and villagers

5.18 An informal Bank study48 done in connection with the Drought Emergency Recovery Project and shared with the Provinces showed that the cost of water is extremely high in these projects and that very little attention has been given to command areas development that would raise benefits in relation to these costs resulting in a huge government subsidy. Many in Pakistan would argue that because there are so few development options in these areas a Government subsidy is not only warranted but obligatory. But the point of the study was not that subsidies should not be given or the project should not be implemented. On the contrary, the conclusion was that the Government should insist on a much higher standard for the planning, design and implementation of these projects to minimize whatever subsidy is required and maximize the real benefits people receive.

Strategic Questions and Issues

5.19 The response of the main water agencies at both Federal and Provincial levels has been to propose a large number of investment projects that seem most important and immediate from their perspective on the problems – WAPDA on new dams and canals, and the provinces on canal rehabilitation and lining. This creates a special problem for the Government at a time of fiscal discipline and the high demands for funds to support poverty reduction, the social sectors (education and health), and the devolution reforms. The problem is to know whether this growing mountain of projects contains the right projects, and to select projects for implementation with the right priority and in the right sequence. To answer these questions requires that another set of strategic questions be answered with adequate confidence, namely:

46 For example, if rainfall is higher, streamflow may extend over several months in addition to the relatively short duration flood flows, in which case proportionately more water can be stored for a longer period if the site has sufficient reservoir capacity. However, since the prevailing conditions over most of the year are arid to semi-arid, there must always be a concern for the higher evapotranspiration losses that stem from storage of water in an open reservoir. 47 There appears to be little systematic study and analytical results on which to base estimates of the amount of recharge possible or the extent of its influence at a particular site. The Japanese have reportedly made an extensive survey of the performance of delay action dams in Balochistan, but these results are not referred to in any of the proposals received from Balochistan. 48 A note on Planning of Small Dam Projects under DERA (draft,); Walter Garvey, Environment and Social Development Sector Unit, World Bank 2002.

§ How much should water supplies be expanded? How should these new supplies be allocated and distributed? Can the related threat to sustainability from water logging and salinity be resolved cost effectively? How can privately developed groundwater be integrated with water logging and salinity control and increased canal flows? § Is additional storage needed? How much storage should be built and in what sequence? Should operating policies be changed? Can irrigation and hydropower policies be better integrated? § What happens as the limits of water resources are approached? What should be the target level of water security and reliability? Should different levels of security be associated with different water rights? How can environmental and social impacts on the lower Indus River and estuary of increased water resources development be mitigated? § What is the role and scope of water conservation? What new policy and legislative framework is needed for effective groundwater management? What regulatory and monitoring mechanisms should be put in place? § What are the long-term consequences of continued storage depletion? § Are economic returns commensurate with the cost of water?

5.20 The Government has important choices to make in terms of not only how much new water supply to develop, but also which of its key strategic problems it will tackle first and what the longer term sequence of investment and development should be. Should it for example solve the problem of fully and reliably implementing the Accord, close the early kharif deficit, modernize the existing system, or expand irrigation into new areas, and in this context what would be the best sequence in which to develop additional storage and how should this storage be allocated and these reservoirs be operated?

5.21 The logic of the argument for increased storage capacity is compelling. In the Indus basin, the recent drought demonstrated the vulnerability and the limitations of a system that is so dependent on run- of-the-river diversion capacity for irrigation water supply (water shortages of 40 to 50% were experienced during the 2002 rabi and early kharif crop seasons). Additional storage and increased diversion capacity would provide not only additional hydropower capacity, operating flexibility and additional drought security, but also potentially help improve implementation of the Accord, overcome the water shortage in the critically important early kharif season when the main summer crops are sown. These investments are extremely large, an order of magnitude greater than public investment in the entire sector, and hence, they need to be decided upon after careful analysis and thought that goes beyond individual project feasibility study.

5.22 How to answer these questions? Unfortunately, there is little or no ongoing investigation, planning or study apart from individual project feasibility studies that would help to answer questions about priorities for intervention in the sector, how much additional water supply and irrigation makes economic or social sense in Pakistan, in what sequence these developments make the most sense, or how and in what ways the rural economy will develop to accommodate the huge increases in population that are foreseen, which would in turn indicate where and how much water is needed. The water bureaucracy is quick to argue that expanding water supply and irrigation is the answer, but the argument is practically devoid of any data or economic rationale that demonstrates how much water or capacity should be developed and in what sequence and time frame -- the Ministry proposes to spend over US$30 billion between now and 2025, and WAPDA US$50 billion for storage, new irrigation and hydropower over the same period. The slow pace of project preparation and the PSDP’s limited resource envelope are today the only thing dictating the sequence and priority of development.

5.23 Balancing the Supply and Demand for Water over the next 25 years. Table 5.3 summarizes the average flow of the Indus River to the sea, and the remaining potential for groundwater development and

savings from water conservation measures. Nearly the entire rabi season (dry season) flow of the Indus River is utilized. In fact, as shown earlier in Table 2.4, the rabi season flow plus nearly all the storage of kharif flow in existing reservoirs49, is fully allocated in the Accord during the rabi season. The average flow to the sea in Table 5.3 represents the potential amount of surface water remaining to be developed and used. We have already noted that only a small, uncertain amount of additional groundwater is available (1-2 MAF) and savings from water conservation over the long-term may be between 5 and 9 MAF.

Table 5.3: Water Resources Available to Meet Future Development Needs

Source (MAF) Kharif Rabi Total Average Annual Flow to the Sea 35.6 2.4 38.0 Additional Groundwater 1-2 Savings from Water Conservation 5-10 Total 44-50

5.24 These resources are not nearly as large as they seem when future “demands” for water are considered. It is not possible in this report to estimate demand for water for agriculture because there has been so little recent detailed analysis to support such estimates. Nevertheless, the willingness of farmers to pay for tubewells, or to buy water in the informal groundwater market, indicates the value and demand for canal water is high. Water demand is also likely to be equally high if not higher in urban areas because of the low quality of present service – only 60% coverage of piped water supply, intermittent service, etc. (though estimates of domestic water demand could be questioned because of the low tariffs at present). Given the Government’s intent to raise industrial growth rates one could expect industrial water demand to be high in the future as well50. The MOWP’s WSS reports have given rough projections of incremental future water requirements that are summarized below:

§ The environmental flow requirements in the lower Indus River and estuary – estimated by Sindh to be about 10 MAF, but subject to revision based on the results of the ongoing studies and further negotiations among the provinces. § An unknown additional quantity of water needed to transport excess salts and pollutants51 out of the basin. The Accord provides that flows in the LBOD are to be taken from excess Indus flood flows52, whereas as a general rule, these flows ` should be an integral part of the allocation to the

49 The live or active storage at Tarbela and Mangla is estimated to be about 12.8 MAF at present. 50 The Government is trying to promote higher rates of industrial growth and private investment. Given the scarcity and value of water in all sectors, the Government should be vigorously pursuing policies that encourage (indeed, perhaps insist upon) the use of water saving and low water use, water reuse, and low waste generating technology in all new industrial investments. It should in particular insist that foreign investors and their domestic partners introduce and use the best technology available in respect of water use, water conservation and water quality. 51 In Pakistan, both urban and industrial wastewater including toxic chemicals, as well as urban storm water runoff, are commonly disposed of untreated in drains, canals and rivers. Excess agro-chemicals and fertilizer also find their way into the drains and canals. 52 To the extent that LBOD flows originates as canal water, they should normally be counted as a part of the flow allocated to the respective canal whose command areas are drained by LBOD (in this case a part of the Accord allocation to Sindh). LBOD also carries the discharge of tubewells installed to lower the water table in saline groundwater areas. This is one of the important and troublesome ambiguities created in the present formulation of the Accord, which was based on existing uses in 1977-82. In any case the leaching requirement for successful irrigation in the very saline areas of Sindh or any other province should be included as an integral part of the water entitlement of the respective canal, and in turn the water entitlement of the respective province under the Accord.

respective canals within the framework of the Accord. Moreover, it can’t be assumed at this point that the EFR allocation to the lower Indus to be agreed among the provinces will necessarily do double duty as transporter of these salts and pollutants since that flow will have water quality constraints if it is to meet its primary functions. § The increase in urban domestic drinking water demand and industrial demand between 2002 and 2025 (the consequences of the projected high urban growth – from 35% to 52% of the total projected population of 221 million in 2025). The Ministry’s Water Sector Strategy Study estimates the incremental urban domestic water demand by 2025 to be 8.9 MAF53; increases in industrial water demand are expected to be substantial but there appears to be little basis on which to project future demand. § Additional irrigation water supplies, especially in the early kharif season54, to fully implement the Accord. This additional demand is 10.5 MAF from Table 2.4. § Irrigation water requirements could increase in three additional ways:

q First, there is possibly substantial scope to increase rabi season cropping intensity -- assuming salinity and water logging can be controlled and managed, and groundwater and surface water can be used conjunctively -- for which additional storage would be needed since at present there is little or no flow in the Indus River in this season.

q Second, there are areas within the existing canal commands that have always been poorly served55 and some areas that the present system cannot serve56 without additional water supply and perhaps major rehabilitation and remodeling of the existing canal network and related structures including some barrages.

q Third, three new canals are proposed in the TYPP to serve an estimated 2.6 Mac. This represents an entirely new irrigation water demand of about 5 MAF that is to be supplied by diverting “surplus” flood flows (i.e., flows not allocated in the Accord) during the 70- 90 day late kharif period when such flows occur.

§ System losses must also be accounted for, including evaporation, seepage and spills during floods – ultimately somewhere between 5 and 10 MAF. Current water balances as in Table 2.1 give a figure close to the upper end of this range, but given the proportion of this volume of water, closer management scrutiny will need to be given in the future to minimize these “losses”).

5.25 Table 5.4 summarizes these projected requirements. The low end of the range would bring total development to a level nearly equal to the annual average flow of the Indus River, almost certainly not an

53 Note that increased use of groundwater by cities and towns will simply decrease groundwater available for irrigation and increase surface water demand for irrigation – worse, since an adequate groundwater monitoring and management system is not in place such a scenario (in which cities and towns, and industries, begin using groundwater to meet rising demand) could lead to excessive withdrawals and decreased groundwater quality before anyone notices or can do anything about it, and real disaster for farms, villages and cities, and industries in localized but possibly extensive areas. 54 If one overlays the cropping pattern with the hydrologic regime, there are two particularly critical periods – the early kharif planting season from mid-April to mid-June, and the transition from kharif to rabi in October when kharif crops are maturing and rabi crops are being planted. 55 Anecdotal evidence from farmers suggests there are major differences in cropping intensity depending on access to fresh groundwater, and location, particularly differences between the upper and middle main canal reaches, and the lower and tailend areas. 56 For example, Punjab has identified four projects to remodel and expand existing canal commands to serve about 1.23 Mac (some in kharif , and some in both kharif and rabi seasons), and Sindh has proposed a major new barrage and related canal works to improve service to the lower Nara and Rohri canal command areas.

economically viable proposition in Pakistan. All these future demands cannot be met – some important tradeoffs are going to be required, expectations lowered, policies changed especially in regard to water prices and energy prices for groundwater use for agriculture, and changes in the way water is managed and used implemented. This does not mean that Pakistan must give up on food security and export goals, poverty reduction goals, or the Millennium Development Goals (MDG). It does seem to mean that if these goals are to be achieved, water has to be used much more productively and efficiently, and above all, its quantity and quality managed more wisely and well.

Table 5.4: Summary of Incremental and Projected Water Requirements

Demand or Requirement Volume (MAF) Environmental Flow Requirements 10 Disposal of Salts and Pollutants ? Urban domestic and industrial demand 9 Accord Deficit 11 Increase in Irrigation Water Demand 5-30 System Losses 5-10 Estimated Total 40-70

5.26 Should Irrigation Water Supplies be expanded? Is there demand for more water for more irrigation? Real demand for additional water supplies might be known or better estimated if farmers paid a reasonable price for water that reflected the full O&M cost and a substantial share of the capital cost of works, at least the cost of works within their distributary or minor. The willingness of farmers to pay for new tubewells, or to pay for more expensive groundwater in the local informal water market (as well as to make informal payments for canal water) is an important indication of the high value of water and water demand. But present estimates of future irrigation water requirements, such as those used in the Ministry’s Water Sector Strategy Study, are based on production requirements derived from estimated food demands based on assumed nutrition requirements and population projections, and on assumptions about crop yields and cropping patterns. This approach, which is essentially static since it ignores policy changes (for example, changes in water and energy prices, changes in output subsidy prices and indirect subsidies, and changes in market conditions and signals), often leads to over-investment.

5.27 The persistent low cropping intensity in both rabi and kharif seasons, the inability to adequately serve many tailend areas, the high proportion of landless and very small farmers in rural areas who might benefit from irrigation expansion or intensification (either from improved availability of water57 or increased demand for agricultural labor), and the high rate of population growth suggest that water supplies, irrigated area and the productivity of scarce water supplies should grow.

5.28 The TYPP portfolio implies an increase of roughly 4 to 5 Mac. Volume IV of the Ministry’s Water Sector Strategy Study estimated that the irrigated areas in the Indus basin would need to increase by 4.5 Mac by 2025 under its “low demand scenario” to satisfy its estimate of food security requirements. The Report translates this into an increase in canal head diversion requirement of nearly 18 MAF assuming overall irrigation efficiency increases to 45%. Current canal head requirements (estimated in the WSS to be 116.4 MAF) are not met by current diversions (103.85 MAF) so the actual incremental canal head requirement is estimated to be about 30 MAF.

57 Assuming of course there is diminished inequality of land ownership, land tenancy terms and arrangements are improved to favor small farmers and landless, and water distribution equity is improved.

5.29 Little can be said about these figures except that they may represent an estimate of the least upper bound on the potential or requirement for additional development, but they hardly represent the basis for a multi-billion dollar investment program. Three times in the past there have been major technical efforts to prepare water and agriculture development strategies and investment programs for the Indus Basin – the 1965 Indus Basin Program, the 1979 Revised Action Plan (RAP), and the 1990 Water Sector Investment Planning Study. At each of these milestones, the Government faced major policy and investment decisions as it does today. These planning programs undertook a detailed study of the water- land-agriculture system of the Indus basin at canal sub-command level in the context of the resources and infrastructure that existed at that time, and the development options available, and evaluated alternative strategies and projects (including storage) using new and updated data for the canal and sub-canal commands and simulation and economic optimization models. These were truly major technical programs for which the best available international and national expertise was mobilized. Some would argue that it is not necessary to do this for a fourth time. But, perhaps counter-intuitively, it is actually essential at this time for at least two reasons: first, the water-land-agriculture system in the Indus Basin is not static – it is a very complex, dynamic system that must be monitored and studied in-depth periodically if there is to be any hope of managing its growth sustainably; and second, at each of these major milestones, and again today, the perspective, imperatives and development priorities looking forward 20- 25 years were and are different, and as a consequence, the way in which alternatives and tradeoffs are weighed were and are different.

5.30 Expansion of Hydropower Capacity. While there is clearly a drum beat in Pakistan for more storage for more irrigation, an economically more powerful argument can be made for more storage (or at least more dams) to expand hydropower capacity. Table 5.5 summarizes the current generating capacity of the Pakistan Power system. This total capacity is projected to meet power demand through 2004-2005. The present hydro-thermal mix is just 28:72, in general terms the reverse of what it should be for the power system to have its most favorable cost structure. The country is projected (draft PRSP) to need an additional 9,040 MW of power by 2011 to be added with a shift in the hydro-thermal mix to 39:61. This target implies adding an additional 3,525 MW of hydropower capacity in the next eight years, and shifting the overal hydro-thermal mix to about 32:68 by 2011. 58

Table 5.5: Present Power Generating Capacity Capacity in MW Entity Hydro Thermal Total WAPDA 5012 4750 9762 IPPs (WAPDA System) 30 5680 5710 KESC 1756 1756 IPPs (KESC System) 262 262 Nuclear 462 462 Total 5042 12910 17952

5.31 Eighty nine percent of existing hydro capacity is installed at Tarbela Dam (3478 MW) and Mangla Dam (1000 MW). Both Tarbela and Mangla have large storage reservoirs, but most other hydropower developments have little or no storage and are essentia lly run-of-the-river including Chasma

58 The draft PRSP is somewhat ambiguous about these plans, but we have assumed that the target hydro-thermal mix of 39:61 applies to the incremental power and not to the overall power systems in 2011. Since to assume otherwise implies the addition of 5,485 MW of hydropower by 2011, an impossibility unless either Kalabagh or Basha Dam projects are completed and commissioned in the next eight years.

(187 MW) and the soon to be completed Ghazi Barotha project (1450 MW)59 both of which are located on the Indus River downstream of Tarbela. Additional hydro capacity of 9498 MW would be installed at the ten dams proposed for implementation in the MOWP Water Sector Strategy – 73% of this additional capacity would be installed at two sites with large storage reservoirs: Basha Diamer Dam (3360 MW) above Tarbela on the Indus River, and Kalabagh Dam (3600 MW) below Tarbela on the Indus. The remainder would be developed at small storage sites that would operate primarily as run-of-the-river plants. The proposed raising of Mangla dam by 30 ft. will increase both head and storage capacity (2.9 MAF) and increase generating capacity by 180 MW (about 772 GWH). Although the feasibility study, designs and tender documents for the Kalabagh project have been completed, intense controversy over the environmental impacts, water allocations, and the allocation of royalties and financia l returns from this project has so far prevented its implementation.

5.32 At present Pakistan must rely primarily on expensive public and IPP oil-fired thermal power. Major increases in gas reserves have recently been discovered in Pakistan, and large coal reserves are being studied. While a large increase in hydro capacity is important to improve Pakistan’s generation mix and overall cost of power, the new gas and coals reserves, and recent developments in gas-combined cycle and coal-fired generation technology increases the number and variety of attractive options for Pakistan to improve its generation mix and overall power cost picture comparatively quickly, making it less clear how much incremental hydro capacity is needed and when it should be built since the gestation period for hydropower developments is much longer than for these alternative technologies. Nevertheless, the cost of the planned hydropower capacity would appear to be attractive – an average of about $692/kw at the major dams at Kalabagh, Basha and Mangla 60.

5.33 All of Pakistan’s dams and barrages are multi-purpose, and first Figure 5.1: Variation in Average Monthly Hydro Generating priority in the allocation of reservoir Capability storage and releases is given to irrigation 6000 under the current Accord and water policy. 5000 Both irrigation releases and flood releases 4000 3000 Other Hydro produce power, but there is no re- MW regulation capacity in the storage system 2000 Mangla to accommodate different operating 1000 Tarbela 0 policies at present. This means that hydro J A S O N D J F M A M J generating capability follows closely the Months annual hydrograph and the inter-seasonal and monthly pattern of irrigation demand. Hence, as shown in Figure 5.1, current actual hydropower capability varies between 5100 MW in September in the late kharif season when flows are high in the Indus and reservoirs are nearly full, to a low of 2550 MW in May at the end of the Rabi or dry season when Indus flows are extremely low and reservoirs are nearly empty. The variation in annual average capacity utilization at the two main hydropower plants is shown in Figure 5.2. The average annual capacity utilization of the entire hydropower system from 1991 to 2000 was just under 59%. In addition, the small size of the Indus reservoirs means that hydro energy production is significantly effected by major droughts. This effect can be seen in Figure 5.3. Energy production in 2001, the second year of the drought, was 20% below that produced in 1996, a significant shortfall that had to be made up by importing oil. Note that the full commissioning and operation of Ghazi Barotha is expected by 2006 to

59 These projects benefit from upstream flow regulation at Tarbela. 60 Assuming about 70% of the project’s cost is allocated to the hydropower facilities (MOWP’s Water Sector Strategy).

add about 25% to the 1996 level of hydro energy production, quite comparable to the energy shortfall caused by the drought in 2001.

Figure 5.2: Average Capacity Utilization of Main Figure 5.3: Variation of Annual Hydro Energy Hydropower Plants 25000 90 80 20000 70 60 15000 50 Tarbela Others 40 Mangla GWH 10000 Mangla 30 Percentage Tarbela 20 5000 10 0 0 1996 1997 1998 1999 2000 2001 1996 1997 1998 1999 2000 2001 Years Years (ending June 30)

5.34 The present water and hydropower policy and operating mode depresses the value of hydro production because of the reduction in firm capacity and energy. So far water sector planners have assumed that any and all hydro capacity, whether primary or firm capacity and energy, or lower value secondary capacity and energy, is needed and worth the investment. Not only does firm power have a much higher value in the power system, but hydropower offers high value spinning and maintenance reserve as well as peaking capacity (though new gas plants might offer stiff competition in this regard).

5.35 In general water sector planners must think much more holistically about how different water demands can be met and what the economic tradeoffs exist among these alternatives, i.e., about better economic integration of irrigation and power policy. Kalabagh is a critical reservoir in the Pakistan system since it offers the opportunity for re-regulation of the main stem of the Indus River of power releases designed to maximize hydropower value while meeting downstream irrigation demand schedules. Water sector planners must work much more closely with power sector planners, must look at the economic value of a wider range of operating and water and hydropower policy options, and at the economic cost of different tradeoffs between these policy options. This will clearly have important implications for the sequencing of dam and reservoir investments, and it will require greater use of simulation and economic models, as was the case in the past.

5.36 What Happens as the Figure 5.4: Existing and incremental Diversion and Flow Limits on Water Resources are below Kotri Barrage Approached? One can see more clearly the potential effects of 200

incremental increases in water 150 supply when resource limits are 100 Flow to Lower Indus approached by using the annual Incremental Div 50 average flow data in Figure 2.3 to Existing Div Flow in MAF make a rough and simple simulation. 0 Figure 5.4 is such a simplified -50 simulation of a scenario in which 1975-76 1980-81 1985-86 1990-91 1995-96 2000-01 only the three new canals (5 MAF) and three storage reservoirs totaling about 15 MAF are built, increasing the total water use and diversion by 20 MAF, assuming that the reservoirs are operated for irrigation and power as at present, and that there is no short term flood event that prevents the full diversion from being made if there is water to divert. The simulation shows that during the 26 year historical flow record (1975-76 to 2000-2001) the environmental flow requirement (EFR) of 10 MAF

claimed by Sindh for the Indus River and estuary below Kotri Barrage would be available in only 14 of the 23 years (54% of the time) and the total incremental diversion of 20 MAF would be available in only 20 of the 23 years (77% of the time).

5.37 Figure 5.5 shows the variation of the probability of Figure 5.5: Probability of Satisfying Target EFRs meeting EFR targets at different 90% levels of incremental storage and diversion from 10 MAF to 25 80% MAF (the latter is just above the 70% EFR=5MAF WSS target of 22.5 MAF). Up to EFR=9MAF 60% EFR=10MAF about 20 MAF the EFR is available in roughly 3 out of 4 50% Percent of Years Available years and more frequently at lower 40% levels of incremental storage and 10 15 20 25 diversion. But, above 20 MAF the Incremental Storage and Diversion (MAF) availability of the target EFRs drops quickly below 3 out of 4 years. At present these EFR targets could only be met in the kharif season, since there is no river flow or reservoir storage that is not already allocated to irrigation in the Accord.

5.38 In general, these crude simulations of different scenarios indicate that when increased diversion and new storage are combined, significant problems are likely to occur as water resource limits are approached - diminished water security and reliability, environmental damage 61 (sea water intrusion, fisheries losses, and threats to the protective mangrove belt, for example) and a much more complex management, information and operating regime. Overall, therefore, the water management problem faced by Pakistan in the future will be much more difficult and substantially different than the past 40 years. And this suggests that a detailed hydrologic simulation model of the entire Indus River system is needed to analyze and evaluate alternative plans on which project selection, design and sequencing would in part be based.

5.39 The Problem of Low Storage Efficiency and Supply Reliability. Low or diminished water supply reliability has been a problem largely ignored in Pakistan (and elsewhere) – irrigation designs are often based on 75% availability (i.e., water available in 3 out of 4 years) and sometimes lower when water is extremely scarce and equity is a major political concern. But this lower reliability can have significant development and economic costs (including the disincentive to invest) as well as create tradeoffs with efforts to increase equitable access to water that should be explicitly considered. For example, the MOWP Water Sector Strategy Study points out that, ignoring the unfulfilled Accord allocations, present diversions are not sufficient to meet present calculated crop water requirements – therefore, present supply is in effect already being rationed.

61 One of the tasks in the ongoing IRSA/MOWP study of lower Indus River Environmental Flow Requirements (EFRs) will determine the economic value of these losses and impacts. Note that these values should be added as negative benefits or additional costs to upstream project proposals that would affect these EFRs.

5.40 Presumably one objective of the WSS proposal to increase storage Figure 5.6: Probability That Incremental Storage Capacity Fills (Flood Canal Diversion = 5 MAF) capacity by 22.5 MAF is to improve water supply security and reliability (in response the recent drought 80.0% experience) as well as availability. 60.0% However, Figure 5.6 suggests that as the level of storage and diversion is 40.0% EFR=10MAF EFR=5MAF increased to the le vels proposed by Storage Fills 20.0% both the WSS and WAPDA, aggregate supply reliability will decline, Percentage of Years 0.0% particularly at higher EFR target 10 15 20 25 levels. Even at significantly reduced Total Incremental Storage Capacity (MAF) EFR target levels, say 5 MAF instead of the 10 MAF that has been discussed, storage efficiency drops below 75% at the 15 MAF level, and to about 65% at 20 MAF. In the specific case of Raising Mangla Dam, a similar problem of diminished water supply reliability will occur after the dam is raised. The current reservoir has filled in 28 out of the 34 years of record (82% of the time), but the incremental reservoir storage of 2.9 MAF that will be created when the dam is raised 30 ft. will have a reliability of just 72%.

5.41 These data suggest that the Government should limit its target for increased storage to less than 10 MAF – at most two major storage dams over the next 15-20 years, or until such time that model studies demonstrate that system can be operated at an acceptable and favorable level of security. However, this crude simulation is in no way adequate to analyze either the reliability of EFR targets, storage efficiency, or irrigation water supply reliability. This requires a very good, well calibrated and verified hydrologic simulation model of the entire system with which various alternatives could be studied at much smaller time steps (monthly or 10-daily). But this simple analysis has shown that ignoring these issues and neglecting to do the detailed basin studies that are needed may very well have significant economic consequences. Certainly one cannot commit to financing the major projects that have been proposed without having done these studies and determining what the planning assumptions and parameters should be and what operating conditions will be.

5.42 Planning assumptions of low water supply reliability do not cause serious problems so long as planners assume that irrigated agriculture remains at low-value or even subsistence levels. But this assumption is likely to become increasingly problematic and non-viable in Pakistan if there is some success in raising productivity, particularly if higher value crops including perennial crops such as fruit, nuts, and grapes, etc., are expanded on a significant scale. Building this scenario into the planning and design of the proposed three new canal command areas is probably mandatory on a large scale from the beginning (using high value crops and new water saving irrigation technology such as drip and sprinkler irrigation, for example) just to bring the economic returns on these investments in line with the high cost of water in these projects. In general then, at a time when Pakistan’s agriculture should be moving towards higher productivity and higher value cropping systems that requires better and more assured water supply and control, Pakistan’s water planners are proposing major investments that stretch the system in the direction of decreased reliability and more difficult management just to meet the varied demands on the system. This is not an argument against expanding water supplies or again st equitable access and service as an important objective – it is an argument in favor of better and sounder strategic water sector and project planning based on more rigorous economic analysis of tradeoffs, holistic and integrated system planning studies particularly of alternative operating and allocation policies, and the careful sequencing of decisions on policy and investment the country must make over the next 10 years.

5.43 Storage Depletion. Sediment loads in the Indus River are extremely high and have led to rapid siltation of the Tarbela Reservoir (as was anticipated). Efforts to reduce this siltation, or to manage the sediment load have so far proven not to be cost-effective. The primary causes of these high sediment loads appears to be related to the geology of the upper basin. Glacial action is still active in the upper most reaches, and earlier glacial action and landslides have left huge quantities of soil and rock debris in the narrow river valley where it is scoured and carried away during flo od flows. The Jhelum River where Mangla Dam is located has a much lower sediment load and its watershed is much more suceptiable to watershed conservation measures and erosion control since a higher proportion of the sediment is the result of human activity.

5.44 The consequences of these Figure 5.7: Storage Depletion Due to Sedimentation conditions are displayed in Figure 25 Addition of Basha or 5.7. The storage capacity in the Khalabagh Dam 6.0 MAF existing reservoirs has declined from Original Capacity of 20 15.6 MAF to about 12.8 MAF today. Tarbela, Mangla and Raising of Mangla Dam Chasma 15.6 MAF 2.9 MAF 18 MAF If the rates of storage depletion 15 remain roughly the same as they are 15.6 MAF 10 10. 4 MAF MAF estimated to be today, the addition Present storage capacity

Storage in MAF 12.8 MAF of new storage at Mangla (2.9 MAF) 5 around 2010 or later, and subsequently the addition of new 0 storage at Basha or Kalabagh (say 6 1975 1985 1995 2005 2015 2025 Years MAF) around 2017 or later, will result in a net total increase in system storage of 7.6 MAF62 in 2020 to a total of about 18 MAF.

5.45 The Problem of Water Rights or Entitlements. As noted earlier (Chapter 2) there are several important defects in the present Accord and the IRSA legislation concerning water rights – they are not secure or tradable, their relia bility is not specified. Present water rights (to the extent they are defined in the Accord) to Indus Basin water are held by each Province and not by canal command, hence these rights do not readily or transparently translate into bulk water rights or entitlements at the branch or distributary level to farmer organizations (i.e., to FOs). Within the canal network, if the present system of waribandi water distribution were disciplined and strictly adhered to, the outlets and canals operated efficiently, and there are no illegal outlets or tampering, then each farmer has a right to a specific quantity of water while the watercourse is flowing based on the number of acres the farmer owns in the command area. Even in the ideal waribandi case, the farmer or his organization does not have a secure property right or entitlement to water except when it appears at the outlet. In this system, Provincial authorities are able to decide to shift water supplies among different canals (to the extent this is physically possible) and between different time periods. Their intention is to improve equity by balancing water availability, but these and other considerations have led to excessive canal allowances, water logging, and counter- intuitively, poor water service to tailend areas. Moreover, there is a more fundamental principal at issue here -- should the farmer be empowered through his organization (FO) to decide whether and how to use his water right, and to collectively decide to use, or trade all or a portion of the FO’s entitlement to another FO, or should a central bureaucracy make these decisions without accountability or transparency based on limited data. Empowering FOs through a secure system of water entitlements to manage water is a critical part of the incentive framework needed to improve both water efficiency and productivity.

62 The addition of Kalabagh may be somewhat more favorable in this regard since this reservoir may benefit significantly from the trapping of sediments upstream in Tarbela, a process that would be improved further by the existence of Basha upstream of Tarbela. This important technical detail deserves a special study and assessment when comparing alternative sequences of development for the storage system.

5.46 Secure and tradeable water rights should be an integral part of the Government’s policy framework and strategy to encourage more productive and efficient use of water. However, these two policy objectives – productivity and efficiency – could be undermined by the Government’s own proposed investment if water rights issues are not addressed:

§ People in the existing Indus Basin system will not want to give up existing customary water entitlements, or their hard earned water savings from conservation investments (water conservation investments such as watercourse lining or land leveling require cost sharing on the part of farmers – so it is a particularly perverse incentive to reallocate these water savings) or the possibility of increased kharif water supplies to accommodate expansion of irrigation into new areas or to meet other demands without some form of compensation (substantially better more assured irrigation service and more assured water availability might be seen by some farmer organizations as an acceptable tradeoff or form of compensation); and § People in the newly developed areas are unlikely to be satisfied with low cropping intensity and high supply uncertainty (which is what they will get based on present plans) and will no doubt create political pressure to change water allocations to improve their supply in both the kharif and Rabi seasons – they will no doubt see this as a right or entitlement since that is what other farmers are getting.

5.47 In both the MOWP’s Water Sector Strategy and several Provincial proposals, the assumption is made that water saved through water conservation programs can be reallocated to meet the demand for water in new canal command areas, to improve service in existing areas, or to meet other demands. Its doubtful that anyone has really thought through the legal implications or the practical difficulties in doing this. One of the Background reports for the National Water Policy Study provides a general survey of water rights in Pakistan, but does not analyze the gaps and failures of the present situation, nor suggest alternatives in terms of what new policy and legal framework may be needed for the future.

5.48 Economic Returns and the Rising Marginal Cost of Water. Table 5.6 summarizes available data from several sources on the status, cost, estimated EIRR and other project characteristics for several of the major projects proposed in the TYPP and the MOWP’s MTIP and by WAPDA. Figures shown for area irrigated in Italics are derived or calculated from values for water available from the project. These data are in a state of flux as feasibility studies are just being started on some of these projects, and data is often only available from updated estimates based on old feaibility studies, PC Is or PC IIs, and the assumptions vary widely among these various sources. Both the MOWP’s Water Strategy Study and the PER Working Paper attempted to summarize these data and update figures but with widely varying success.

5.49 Estimates of economic return vary over a broad range, from about 10-12 % for several projects to between 25 and 30%, but the costs and estimated EIRR for a number of these projects have already undergone substantial change after scrutiny including updating and detailed review of the feasibility studies. A number, especially the new canals, did not include all important costs such as command area development. If we consider only the projects in Table 5.6 for which the estimate of the volume of water is available (those not shaded in Table 5.6) the average cost per AF is 16,822 Rs. The PER Working Paper quotes a return per AF based on the recent Mangla Dam feasibility study of Rs 2038/AF in Rabi , and Rs 1535/AF in kharif. The net present value of this return (to 0.6 AF in Rabi and 0.4 AF in kharif) over 20 years at 10% is Rs 15,638 Rs/AF, about 7% below the average cost of water in Table 5.6. Note however that the cost per AF varies considerably, and several projects exceed the value of Rs 16,739 per acre foot -- in 8 of the 13 projects the cost of water is more than the PV of economic returns, and in 4 cases the cost per AF is more than double the PV or economic returns.

Table 5.6: Costs and Economic Returns for Proposed Major Investment Projects.

Area Volume of Cost of Project Location Status Total Est Cost Irrigated Power Water Water Est EIRR billion Rs. Ac MW MAF Rs/AF % Gomal Zam Dam NWFP Under Constr. 12 163,086 17 0.892 13,453 12 Mirani Dam Balochistan Under Constr. 5.86 33,200 0.152 38,553 12 Munda Dam IBIS TYPP 12.5 112,000 740 0.7 17,857 ? Basha Dam IBIS TYPP 100 912,000 3,400 5.7 17,544 TBD Kalabagh Dam IBIS TYPP 83.3 976,000 3,600 6.1 13,656 ? Satpara Dam IBIS 2003 Start 2.09 20,000 11 0.045 46,444 27.8 Kurram Tangi Dam NWFP Completion 13.24 363,000 58 0.83 15,952 12.4 Raising Mangla Dam IBIS 2004 Start 59.45 464,000 180 2.9 20,500 19.8 Sanjwal & Akhori IBIS MTIP 40 576,000 TBD 3.6 11,111 TBD Greater Thal Canal Punjab TYPP 41.75 1,500,000 2.496 16,727 18.5 Rainee-Thar Canal Sindh TYPP 13.3 412,400 1.28 10,391 16.9 Kachi Canal Balochistan TYPP 36.45 713,000 0.96 37,969 TBD Chasma RBC -1st Lift NWFP TYPP 19.2 285,000 0.45 42,667 10.3 Punjab ISI Project- LCC (East) Punjab TYPP 5.2 1,670,000 25.6 Punjab ISI Project - LBDC Punjab TYPP 5.4 1,246,000 18.8 Irrigation Rehabilitation in Sindh Sindh MTIP 13 343,000 TBD Sehwan Barrage Complex Sindh TYPP 37.7 ? 10.1 Punjab Barrage Modernization Punjab TYPP 52 TBD 552 9,788,686 8,006 26.1

Total Cost in billion Rs (Excluding projects for which there is no estimate of water available) 439

Average cost of water (Rs/AF) 16,822

Present value per AF @ 10% of returns to 0.6 AF in Rabi and 0.4 AF in Kharif seasons 15,638 ( (0.6*2038+0.4*1535=1837 Rs/AF).

5.50 However, especially for the dam projects, this comparison tells only part of the story:

§ The majority of these projects are multi-purpose for which all costs and benefits should be included, and costs should be allocated to each purpose in order to assess the EIRR of each purpose and to get the full picture of the economic impact of the project and the value of water (for example, if the present value of estimated incremental power benefits at Mangla Dam, 2,088 million Rs/year or Rs 720/AF, is added to the present value of water used in irrigation, the total 23,485 Rs/AF becomes greater than the cost per AF); § As we have pointed out earlier the value of water for hydropower generation under different system operating policies, especially if storage system expansion is planned such that there is sufficient re-regulation capacity as could be provided by the Kalabagh dam and reservoir, for example, may compare very favorably to the value of water in irrigation. In the evaluation of Tarbela in the 1960s, this was not the case (the value of an AF left in the reservoir to increase power output was only about one-fourth of its value release for irrigation). But much has changed including the prices of both different sources of energy and agricultural outputs. § Several of these projects also provide urban and industrial water supplies, which are also much higher value than for irrigation (even to many villages whose livelihoods depend on irrigated agriculture).

5.51 The present basis for prioritizing investments on the basis of economic impact is shaky at best. Widely differing assumptions are used on efficiency, productivity, cropping systems, costs and prices. The MOWP’s team preparing the WSS and MTIP attempted to review the economic evaluations that existed for all the projects in the potential portfolio in an effort to assess both the assumptions and the prices. They were partly successful but the lack of data made the task difficult. Even though the ultimate choices and priorities may be based on a number of different and possibly non-commensurate criteria, the Government should insist on far greater consistency and rigor in evaluating individual projects and the

overall investment plan. Not only would this improve the planning and design of individual projects (the reassessment of the new canal proposals is one example), but it would give the Government a consistent picture of the economic impact of alternative investment priorities. Reassessing the economic underpinnings of water resources and irrigation investment proposals should be a high priority of the Government. One way to achieve this is for the Planning Commission and ECNEC to issue guidelines for project appraisal on which PC-Is are to be based, including specific guidance on methodology, assumptions, criteria, and various parameters to be used. This has probably already been done some years ago, but it has not been enforced nor regularly updated.

5.52 Can Additional Groundwater be tapped? Groundwater use has more or less reached the upper limit and there is very little potential for a further increase in groundwater availability. The exception might be the areas served by new canals not previously irrigated, where seepage from the canals, watercourses and farmer fields may over time create a substantial source of fresh groundwater for drinking, livestock and irrigation – of course, some of those areas may have saline soil deposits at depth or saline groundwater, in which case an easily developed fresh groundwater source will not generally be created. More generally, because of the presence of highly saline water in the aquifer over large areas including below the fresh water in some cases, there is a very grave risk of rapidly increased water quality deterioration and soil degradation as the safe limits of development are approached, and in some areas there is a risk of a reversal and loss of this valuable source of water because of salinity. In fact, rather than looking to groundwater for additional development by, for example, increasing power subsidies or tubewell subsidies (since groundwater development is largely private at present), Pakistan must urgently intensify its efforts to monitor and manage this source of water (its critical regulatory function in what has become a public -private partnership). The Government’s most important tool in this regard is to properly price water and power in the agriculture sector. It should gradually withdraw all subsidies for fuel and power use, as well as for tubewells, for groundwater abstraction for irrigation (contrary to what some irrigation officials have been urging).

5.53 What Is The Potential Role and Scope of Water Conservation? Water conservation and increases in the productivity or value of water are not an alternative so much as an imperative, since no amount of infrastructure investment is likely to make Pakistan or the Indus Basin system “water abundant”. Any sensible strategy for Pakistan would include water conservation just as it would some level of expanded and more reliable water supply in response to the issues and problems outlined earlier. Moreover, water conservation is strongly linked to efforts to solve the chronic problem of the low productivity of water – these two initiatives should be seen as two complimentary components of a single program. Unfortunately while there is considerable experience already in Pakistan with the core elements of water conservation – watercourse lining and land leveling – progress and experience on raising the productivity of water use, improving watercourse maintenance, organizing sustainable WUAs, or introducing water saving irrigation technology and crops is seriously deficient.

§ Current canal water distribution is wasteful –- 60% to 65% of the water available at the canal head is lost to evaporation, transpiration by plants, theft or seepage before it reaches the root zone in the intended farmer’s field. Note, however, that seepage in fresh groundwater areas is not a loss. Rather it is the main source of water for critically important tubewell irrigation. § Current irrigation methods and practices (mainly flood irrigation) are wasteful, and there has been little progress in introducing modern technology (low pressure pipe, and drip and sprinkler systems). Only sporadic progress has been made on land leveling --an important approach to improving efficiency -- though it was found to be the most desired measure by farmers surveyed. Farmers have demonstrated an appreciation for the need to conserve water and improve distribution efficiency and equity, not only by their interest to cost-share land leveling but also

their willingness to cost-share the lining and improvement of water courses (if there is some assurance of water supply). § The price of canal water is extremely low63, encouraging wasteful use of water, and excessive use of water - farmers will take water even if it is not needed, partly because of its extremely low cost, and partly as “insurance” because of the uncertainty that water will materialize at scheduled waterings.

5.54 Farmers, or their organizations on a distributary, minor or watercourse do not have a legal water entitlement or right – hence water markets that would help farmers decide on the best use of their water and land when water is scarce, and tend to fairly and equitably reallocate water at least seasonally and raise agricultural productivity benefiting all farmers, do not function (with the limited exception of groundwater markets where an estimated 30% of tubewell water is sold to farmers who do not have a tubewell).

5.55 Various estimates put the potential savings from the current supply at about 4.7 MAF (Table 5.7), just under 5% of the current average availability of surface water in the Indus Basin -- primarily by lining of watercourses and land leveling under the On-Farm Water Management (OFWM) projects of the Provinces. The savings estimated in Table 5.7 are based on a shift from 40 to 45% efficiency. Some reports have suggested that the average efficiency of large area of the system may be lower and closer to 35%. The saving from going from 35 to 45% would be close to 9 MAF, so it is likely that the maximum saving lies somewhere between these two figures.

Table 5.7: Potential Water Savings from Improved Efficiencies Volume of Water in MAF Current Situation Improved Situation Availability Losses Availability Losses Canal Head Diversion 103.8 103.8 Loss in Canal System 10.4 10.4 Distributaries/Minors Head 93.5 93.5 Loss in Distributaries/Minors 14.0 14.0 Watercourse Head 79.4 79.4 Loss in Watercourses 17.9 15.9 Field Application 59.6 63.6 Loss in the Fields 19.9 17.2 Crop Use 41.7 46.4 Efficiency % 40.0 45.0 Total Loss 62.1 57.5 Water Saved 4.7

5.56 In any case, the challenges of achieving these savings and efficiency gains are daunting – as shown in Table 5.8 (from the TYPP) only about 32% of all watercourses have received some form of

63 The Bank Report on Irrigation and Drainage Options (Report No. 11884-PAK) in 1994 quotes an earlier report by Shams Ul Mulk and Khalid Mohtadullah (1991) that water charges are only about 5% of the total cost of agriculture inputs, and about 5% of net farm income. It would be very useful to update these figures though as indicated in Chapter 4 there have been few significant changes in abiana. It would be useful in such a study to document the true cost of water to the farmer by including informal payments.

investment in renovation. Anecdotal evidence suggests that most of the WUAs formed as a part of this earlier program are no longer functioning, and hence that many of these watercourses have since deteriorated because of the consequent la ck of maintenance attention –so the program may be much larger than Table 5.8 indicates.

Table 5.8: Watercourse Improvement Program Needs

Punjab Sindh Balochistan NWFP Total Watercourses 54,501 40,364 19,566 20,409 134,840 Watercourses that have been 28,415 6,704 2,411 6,248 43,778 renovated Total Remaining 26,086 33,660 17,155 14,161 91,062

5.57 Water conservation and efficiency gains are achievable provided that farmers, who must share in the cost of these measures, benefit from the savings – not only because equity is improved and previously un-served farmers now get water, but also because all farmers in the improved canal command are able to decide how to use the saved water to increase their production and income. The later benefit is not the current practice, indeed, Provincial plans for irrigation expansion depend in part on the reallocation of these saved waters to new areas creating a perverse incentive. Hence there are important issues of water rights and entitlements involved in water conservation, that are made more problematic by excessive canal allowances. Many have pointed out the need to rationalize canal allowances, but it would appear that this is a much more complex decision than it may have been in the past if improved efficiency and productivity of water use is an important objective and there is a substantial investment program to achieve this.

5.58 As noted earlier in Chapter 2, additional constraints are present that impact on the effectiveness of present water conservation programs including problems with incentives associated with highly skewed land ownership, inefficient land purchase and leasing markets, misappropriation of water by large landowners and politically influential people. A third issue stems from the National Surface Drainage Study and the Drainage Master Plan under preparation whose aim is environmentally safe disposal of surplus drainage water out of the Indus Basin. While one of the two goals of the National Drainage Program is to reduce the drainable surplus, an as yet unknown quantity of water will nevertheless be needed to transport these salts and pollutants out of the Basin to the Arabian sea in an environmentally safe manner. This will impose practical limits on how much water can be conserved and saved, i.e., an upper limit on efficiency improvement, at least at the basin or canal command level. The challenge for the Government is therefore not only to increase its commitment to water conservation, but to add to that effort programs to raise productivity and measures to address the complex web of negative incentives and issues that constrain these efforts (among which governance reforms play a vital role).

A Framework for Formulating a Strategy

5.59 One way to describe the problem of formulating a sector investment strategy, and selecting projects from the broader portfolio of options, to present it as a simplified optimization problem (“Pakistan’s Conundrum”):

Maximize Total Benefits of policy w1 * Supply Expansion (Storage expansion-Mangla, Basha, Kalabagh and other reform and investment = new dams; small dams, improvements in diversion capacity and function, improvements in overall system (MAcro) operation, water conservation and efficiency improvements)

+ w2 * System Expansion (External expansion - 3 canals + Internal expansion by remodeling and extension of existing CCAs)

+ w3 * Management (OFWM interventions-watercourse lining and land leveling for example, supply management-rehabilitation & modernization, flood protection, improvements in operations and maintenance versus new investments , improved water allocations and scheduling, improved equity at system and distribution levels, groundwater management, incentives, introduction of new agriculture and irrigation technology, effective access to markets, knowledge and information, human resource development and research)

+ w4 * Sustainability & Environment (Water logging and salinity, reducing drainable surplus, water quality, safeguarding ecology below the Kotri barrage )

+ w5 * Productivity (Cropping Patterns, Water Rights and Markets, water pricing)

+ w6 * Governance and Institutional Reform (improved public service and accountability, cost reduction, decentralization, empowerment of users, )

Subject to budget, water and other resource constraints.

5.60 The Importance of Using This Framework to Test Alternative Strategies. The above framework, or something similar to it, is both an important conceptual tool and problem-solving instrument. The decision or preference weights, wi , and the choice of interventions within each component of the model outlined above, are not determined solely on the basis of economic welfare or efficiency, or a general notion of equity - they are also strongly influenced by political economy considerations as well as the time frame in which each investment yields benefits (short, medium and long term). Limitations of total water resource availability and financial resource envelope available for the sector, and the large, lumpy character of some key investments, make trade-offs difficult but also consideration of alternative phasing and sequencing of investments critical for the overall success of the strategy. Success for the Government means how well a particular choice of interventions and weights achie ves its multiple social and economic objectives in an acceptable timeframe. What the Government should be seeking is a mixed strategy that provides a balanced response to each way of looking at and evaluating different choices:

§ Its multiple social and economic objectives as outlined in the TYPP – in general terms, economic growth, equity and political economy, security, sustainability and poverty alleviation. § The “system management” problem outlined below (managing water from the “mountain tops to the root zone”), i.e., does the strategy leave critical constraints un-addressed that undermine other parts of the strategy -- e.g., what good is increased storage if one cannot allocate and manage the supply without disruptive political conflict and one cannot insure that it reaches the root zone equitably or reliably? § The considerations of political economy the Government sees as important in a particular time frame.

5.61 The Effects of Political Conflict and a Weak Knowledge Base. The degree to which political conflict and rivalry among the provinces and other groups has entered upon the dialogue in the sector makes it especially difficult to weigh alternative weights and choices from both a political economy and multi-objective perspective. Nevertheless, sound planning and technical analysis are essential to enable effective and timely political economy decisions. Moreover, quite apart from the political conflicts and the complexity of the problem, the extremely weak state of economic analysis, and measurement and research in general, in the water sector in Pakistan today will make even a simplified attempt to solve this

planning problem from a welfare or efficiency point of view almost futile. This has not always been true. Good economic studies were a part of the RAP (1979) and the Water Sector Investment Planning Study (1990), and the Indus Basin Model was at one time the state of the art in analytical tools for water sector planning. Like the sector’s infrastructure this vitally important analytical tool has suffered from inattention and disuse. Two initiatives are therefore needed:

§ A renewal of serious effort to underpin planning in the sector with sound economic and social understanding, a greatly improved knowledge base, data, and good analytical tools and information systems -- this is a critical initiative on which much depends – this task and the necessary resources could be given, for example, to the sector Apex Body proposed by MOWP64. § A new mechanism for consensus building among all stakeholders that rests on this strengthened knowledge and planning base.

Changing the Paradigm to Water Management 5.62 Managing Water from the “Mountain Tops to the Root Zone”. Another way to look at this “framework for formulating an investment strategy” is to look at the relationship between infrastructure and management. Infrastructure improvements and expansion, including new storage reservoirs, plays an important but not exclusive role in achieving the economic and social impacts the Government is seeking. How new and existing water supplies are managed, allocated, conserved, delivered and used is equally important. The “water management problem” in the Indus basin can be described in terms of four tiers or parts of an integrated system:

§ Managing water resources in the upper basin, or “mountain tops” – this involves better management of the supply in terms of both increased storage, reservoir operations, and monitoring the upper basin hydrology to improve both the predictability of supplies and the management of reservoirs. § Managing the allocation and diversion of water from the river and reservoir systems to each of the canal heads and in the lower river below Kotri to improve the transparency and reliability of supply, and avoid economic losses and environmental damages. § Managing the performance of the canal network and the reliability of bulk water deliveries to the distributary and minor canal commands, monitoring and managing groundwater recharge and use, and managing drainage effluents. § Managing water in the distributary and minor canal commands, and within the watercourse network and on-farm to improve equity, efficiency and productivity.

5.63 There are major problems, constraints and opportunities at each level or tier of this system of management, and the strategy in Pakistan should aim to relieve priority constraints at each level in ways that maximize the overall performance and efficiency of the. Pakistan is in theory organized to deal with each of the management issues outlined above (WAPDA, MOWP at the federal level, IRSA at the inter- provincial level, and the Provincial Irrigation Departments at the Provincial level), but there are serious problems and constraints to the effective functioning at each of these levels of management, and within these key organizations. For example, the MOWP’s Water Sector Strategy proposes a new Apex Body

64 One should not be anxious to promote the creation of new institutions especially when a key part of the problem is the lack of capacity and when fiscal resources are limited, but the agenda is large and important, and it may be a more effective strategy to assemble the needed skills from existing institutions and the market to make a new start with a “critical mass” of technical capacity and skills to fill these critical gaps.

for the Sector to undertake strategic planning and analysis, knowledge management, and consensus building; IRSA has proposed major improvements in its monitoring network but needs to go further to ensure that clear information on the water availability as the season progresses, water allocations and operations, and the status of water at all critical points in the system are available in nearly real time to not only department officials, but to AWBs, and farmers as well. What is more important is the question whether the Government’s strategy in the short, medium and long-term in the sector, when overlaid on this framework, addresses the key priority issues (including the institutional and governance issues). When the respective management issues are analyzed it is apparent that improvements depend not only on new and even better performing infrastructure, but also the policy framework, institutional arrangements for different key functions, knowledge and information, and human resources.

6. PROPOSED WATER SECTOR INVESTMENT PLANS

6.1 Neither WAPDA’s Vision 2025 nor the Ministry’s Water Sector Strategy and MTIP have official status as “the sector investment plan”, nor do they enjoy universal acceptance within the federal or provincial governments. There is really no macro institutional planning framework within the country with sufficient professional staff, knowledge and information and related analytical tools, and credibility to forge broad strategic consensus on issues, strategies and plans. There seems to be no sector strategic planning going on in the Provinces65, and the federal institutions operate in isolation and mainly in a crisis, project driven mode 66. The Planning Commission’s TYPP and rolling public sector development plans (PSDPs) are the closest thing to an official sector plan – at least in the sense that it frames the annual PSDP. Nonetheless, there is considerable commonality among the Planning Commission, MOWP and WAPDA plans in terms of specific investment projects (not too surprising since each tends to include everything to satisfy everyone, and the project universe is not so large). The specific proposals that constitute each of these plans are outlined below.

6.2 WAPDA Vision 2025 focuses on development of storage, hydroelectric projects, new canals and a spinal drain. It envisages a mega program including development of 64 MAF of storage capacity and 27,000 MW of additional power generation capacity with an investment of about $50 billion over the next 25 years. The program is to be implemented in three phases. § Phase I comprises fast track projects to be completed in the first 5-7 years (2002-2006), including construction of Gomal Zam Dam, Mirani Dam, Greater Thal Canal, Kacchi Canal, Rainee Canal, Raising of Mangla Dam, Satpara Dam. These projects would add storage capacity of about 5 MAF and bring more than 1.9 million acres of land under cultivation, besides generating 332 MW of power. Feasibility studies for the Basha Dam, Kurram Tangi Dam, Akhori Dam. Detailed design of Sehwan Barrage and the Chashma 1st Lift Project would also been started. § Phase II includes: Basha Dam on the Indus River, with a storage capacity of 5.70 MAF and generating capacity of 3,360 MW; Sehwan Barrage on the Indus River in Sindh, with a storage capacity of 0.65 MAF; Phase II of the Thar-Rainee Canals in Sindh; Phase II of the Greater Thal Canal in Punjab and a high Dhok Pathan and combined storage from Sanjwal and Akhori Dams in Punjab67. § Phase III would include: Kalabagh Dam on the Indus River, with a storage capacity of 6.10 MAF; Yugo Dam on the Syhok River in the Northern Areas, with a storage capacity of 4.82 MAF; Skardu Dam on the Indus River in the Northern Areas, with a storage capacity of 15.52 MAF); and Kalam Dam on the Swat River.

6.3 The Ministry’s MTIP -- Water Resources, Irrigation, and Drainage. The Medium Term Investment Plan (MTIP) of the Ministry of Water and Power, completed in October 2002, a year after the TYPP was completed, sets out objectives for both Water Resources Development and Irrigation and Drainage separately, and divides the strategy in each instance between short-term (2003-2004), medium-

65 The Punjab Irrigation Department has prepared a lengthy set of development matrices that suggests a vision and strategy of the future, but this process does not seem to have progressed beyond the initial brainstorming. Sindh is discussing with the Bank the TOR for an exercise to prepare its “Vision 2025” for water management. 66 The MOWP’s Water Sector Strategy Study may herald a fundamental change in direction in this regard if it is followed up and the required institutional and policy changes put in place. 67 Recent studies have indicated that Sanjwal Dam has serious environmental impacts. The present proposal is to construct a high Akhori Dam and a low Dhok Pathan Dam; Sanjwal Dam will be abandoned.

term (2005-2011) and long-term (2012-2025). The total estimated cost through 2025 of the plan is about 2020 Billion Rs, which includes the development of 22.5 MAF of storage and hydropower. The MTIP also includes investment needs for water supply and sanitation (10%), environment (4.5%), Flood Protection (1%) and supporting activities (0.1%). The Federal share of the MTIP is 64%, and new projects constitute 74% of the MTIP.

6.4 The MTIP is a broader look at the sector that incorporates Provincial priorities and project plans, as well as overall sector management needs. Its timeframe extends to 2025 mainly to incorporate the full program of storage development suggested in the WAPDA Vision 2025. The MTIP consist of the remaining parts of ongoing projects and new projects estimated to cost Rs 461.4 billion in the first phase up to 2011. The ongoing projects are estimated to need Rs 201.2 billion. The total costs of the new projects recommended in the MTIP is Rs 456.2 billion, of which Rs 260.2 billion are expected to be spent during the MTIP period (2001-2011). The remaining part will constitute the ongoing projects during the period after 2011. Because the MTIP is divided between water resources development and irrigation and drainage, and initiatives are phased over the short-, medium- and long-term, it is more detailed than the TYPP strategy in the sense that it includes the series of steps required to implement more complex programs such as water conservation and institutional reform, including for example pilot projects and studies. However, the major aspects of the two strategies and the associated programs are very similar.

6.5 While the Ministry’s Water Sector Strategy and MTIP are quite comprehensive and take a relatively more balanced approach to the water sector issues and proposed measures, they do not include a critical review of the major projects included in the Vision 2025 and the TYPP, and take them as a given. The ranking of investments is based on the current state of preparation of these projects, with higher scores given to those at a more advanced stage.

6.6 The Planning Commission’s Ten-Year Perspective Plan (TYPP). The TYPP, issued in September 2001, was an important milestone for Pakistan in many ways, not the least being that it followed a period of intensive efforts to achieve economic stabilization through a consistent, credible and transparent set of tight fiscal and monetary policies. Having essentially achieved that short-term goal, this was the first occasion for the Government to shift its focus to visualizing long-term macro-economic and sectoral growth strategies that would rest on the platform created. Accordingly, the TYPP sets out the objectives summarized in Table 6.1.

Table 6.1: TYPP Objectives for Water Resources and Agriculture

TYPP Objectives TYPP Objectives for Water Resources TYPP Objectives for Agriculture Development · Accelerate GDP growth, reduce · Overcoming of scarcity of water through · To achieve self-reliance in agricultural unemployment, and alleviate poverty augmentation and conservation. commodities and provide food security. · Finance growth increasingly from · Restoring productivity of agricultural land through · To provide export orientation by Pakistan’s own resources control of water logging, salinity and floods. promoting the production of high value · Improve competitiveness by · Managing quantity and quality of drainage effluent in crops, fruits and vegetables. promoting productivity, efficiency, an environmentally safe manner. · To promote import substitution by and quality · Groundwater management through tube well increasing the production of tea, milk and · Build human a human capital base for transition, aquifer monitoring and management, etc. dairy products. long-term self-reliant growth · Implementing integrated flood control and · To improve productivity of crops, · Institutionalize social capital management program. livestock, and fisheries conducive to sustainable · Promoting beneficiary participation in development development initiatives. · Enhancing performance of water sector institutions and implementing effective O&M mechanism through institutional reforms, private sector participation and capacity building.

6.7 The TYPP and Water Resources Development. The sector perspective and strategy for Water Resources Development (which encompasses irrigation, drainage and flood control) in the TYPP is summarized in Table 6.2. Total cost of the plan, including completion of on going projects, is 426 Billion Rs. Since the TYPP was prepared, several major water projects that were in the original plan have been committed and launched. Hence while 95% of the original plan consisted of new projects, today just 51% of the TYPP portfolio will be new projects.

6.8 The TYPP does not include projects in the Provincial ADPs. However, important elements of the strategy outlined in Table 6.1 and on the following page would be Provincial responsibilities including on-farm water management, modernization of barrages and remodeling of canals, water conservation, most of the drainage system, and institutional and governance reform. The Federal Government normally would be responsible only for projects that provide inter-provincial services such as new dams, inter provincial canals and spinal drains. In addition the Federal Government may assume responsibility or provide substantial funding for major projects that have national interest.

6.9 The Common Features of All Three Plans. All three strategy/planning documents have several common features in terms of proposed investment. The major investments envisaged in the Vision 2025, TYPP and MTIP during the short and medium terms are summarized in Table 6.3.

Table 6.2: TYPP Strategy for Water Resources Development (2001-2011) Federal Resources (Rs million) Sector Issues Objectives Strategy Projects & Programs Shortage of Water Overcome scarcity through Build consensus on major storage projects and initiate required studies Raising Mangla dam 53,000. augmentation of water supplies and implementation Other med/sm dams (12) 76,300. and water conservation Make efficient use of stored water by construction of new irrigation New major canal schemes 99,000. Groundwater management Groundwater table monitoring and implement of artificial recharge Other irrigation schemes 129,600. OFWM schemes will be implemented (canal and watercourse 357,900. rehabilitation, remodeling, lining, land leveling) Poor provision of Irrigation Services Promote beneficiary participation Modernization of barrages Modernization of barrages 29,000. · Deteriorating infrastructure and in development initiatives Rehabilitation and remodeling of canals Rehab and remodeling of canals 32,000. inadequate O&M Implement effective O&M Ensure equitable distribution using real time information on flows in 61,000. mechanism through · Lack of equity in water channels and rivers distribution institutional reforms, PSP and capacity building · Absence of enabling environment for water efficient irrigation Increased Waterlogging and Salinity Restore productivity of land by Adopt and Implement National Drainage Strategy [and Drainage Master Complete on-going projects 16,400. · Excessive seepage and controlling waterlogging and Plan] RBOD-II 14,000. salinity inadequate drainage Construct RBOD-II; complete LBOD and NDP -I Inter-Prov spinal drain 14,000. Manage the quantity and quality · Excessive GW pumping - Complete transitioning of public SCARP tubewells to farmers and Other drainage schemes 11,200. secondary salinization of drainage effluent communities; enhance water table control Survey, Invest, Res. 430. Groundwater management Farmer Organizations (FOs) construct on-farm drainage works with cost - sharing by GOP 56,030. Institutional and Governance Enhanced performance of water Institutional reforms introduced in all irrigation and drainage agencies - NDP (Institutional Component) ? · Deteriorating Inst capacity sector institutions PIDAs, AWBs, and FOs · Lack of coordination between Agric, Water and RD · Lack of attention to poverty · Insufficient use of Info tech · Irrelevant and fragmented research · Lack of an IWRM · Water pollution Fragmented implementation of Implement an integrated flood Thorough review of on-going flood control program National Flood Protection Plan III flood control schemes control and management New flood protection schemes Flood Protection projects 12,600. program

Table 6.3: Common Features of Proposed Investment Plans (MTEF Period)

Vision 2025 TYPP MTIP

Project Type Cost Start Year Cost Start Year Cost Start Year RBOD II Drainage 0 0- 14,000 2001 13,100 Ongoing Inter-provincial Spinal Drainage 0 0 30,000 2006 0 2006 Drain Small Drainage Drainage 0 0 10,000 2006 0 0 Schemes Flood Protection II Flood 0 0 0 0 1,500 0 Protect. Flood Protection III Flood 0 0 10,000 2006 10,000 2006 Protect. Greater Thal Canal New Irrig. 30,500 2001 25,000 2001 34,750 Ongoing Rainee Canal New Irrig. 10,000 2002 30,000 2002 30,000 Ongoing Kachhi Canal New Irrig. 31,000 2002 44,000 2002 28,000 Ongoing Chashma Lift New Irrig. 38,000 2004 19,200 2006 19200 2009 Harnessing Hill Poverty 0 0 10,000 2006 1,488 2005 Torrents NDP II Reform & 0 0 0 0 25,000 2006 Drainage NDP I Reforms & 0 0 25,115 Ongoing 25,115 Ongoing Drainage Irrigation Rehab. 0 0 32,000 2005 19,406 2006 Improvement Punjab

Irrigation Rehab. 0 0 0 0 44,525 2005 Improvement Sindh Rehabilitation of Rehab. 0 0 50,012 2005 30,000 2007 Barrages Gomal Zam Dam Storage 8,800 2001 12,829 2001 6,000 Ongoing Mirani Dam Storage 5,800 2001 7,100 2001 5,500 Ongoing Mangla Dam Raising Storage 59,400 2002 53,000 2001 53,000 2003 Satpara Dam Storage 2,090 2002 450 2005 2,090 2005 Kurram Tangi Dam Storage 9,200 2002 12,827 2,006 Sehwan Barrage Storage Complex 42,000 2003 113,000 2006 37,701 2005 Akhori Dam Storage 99,134 2005 30,000 2005 0 0 Dhok Pathan Dam Storage 18,005 2004 10,000 2005 0 0 Sabak Zai Dam Storage 1,000 2003 0 0 0 0 Small Dams in Punjab Storage 0 0 20,000 2006 2,800 2006

Total 354,929 558,533 389,175

7. FEDERAL & PROVINCIAL INVESTMENT TRENDS AND OPTIONS

7.1 Table 7.1 summarizes what we have referred to as the “Emerging” investment portfolio in the Water Resources and Irrigation Sectors. It is based on the FY03 and FY04 Public Sector Development Program (PSDP), and projects in the Planning Commission’s TYPP, WAPDA’s Vision 2025 and the Ministry of Water and Power’s MTIP. These are projects that the respective federal agencies and the Provinces have indicated are a priority and they strongly wish to start during the MTEF period. Not all of these agencies agree on either the priorities or the sequence in which investments should be made; hence this is intended as a composite overview, a comparator for the PSDPs and for alternative investment options. But it also reflects quite reasonably the essentially un-feasible result of everyone pushing hard through every channel for their projects and their point of view. As we have already noted, there is little analytical basis for deciding what should be in and what should be out, though the MOWP’s WSS tries to make the most reasoned argument.

Table 7.1: Emerging Water Sector Portfolio During the MTEF Period (FY03-07) (Rs Million)

Type Resp. Project Total Upto 2002 2002-3 2003-4 2004-5 2005-6 2006-7 2003-7 Throwforward ONGOING PROJECTS D F Upper Rechna Remain 1,040 762 200 78 0 0 0 278 0 D F RBOD II 14,000 405 1000 5,000 4,100 3,495 0 13,595 0 D P LBOD I 33,442 28,910 600 600 0 0 0 1,200 ? D F RBOD I 4,395 3,095 400 400 500 0 0 1,300 0 F P Emergency Floods 2550 0 75 100 300 300 300 1,075 1,475 F P Hill Torrents Marri Bugti 125 65 30 30 0 0 0 60 0 I F Greater Thal Canal 30,467 330 1,200 6,900 9,500 6,700 3,500 27,800 2,337 I P CRBC I+II+III 17,099 16,037 600 462 0 0 0 1,062 0 M F IBS Telemetric System 450 150 300 0 0 0 0 300 0 M P Balochistan Groundwater 437 67 50 70 70 80 100 370 0 M P Mangla Watershed Man. 169 0 30 30 30 40 39 169 0 O F Other Ongoing Projects 340 156 54 60 70 0 0 184 0 S/I F Gomal Zam 8,800 759 1,200 1,000 2,400 3,441 0 8,041 0 S/I F Mirani 5,861 692 1,200 2,000 1,500 469 0 5,169 0 S/I F Mangla Raising-Prel 1,100 100 1,000 0 0 0 0 1,000 0 Total Ongoing Projects 120,275 51,528 7,939 16,730 18,470 14,525 3,939 61,603 3,812 NEW COMMITMENTS AND PLANNED STARTS FY 2003 I F Kachhi Canal 32,450 0 300 3,200 2,100 7,000 11,000 23,600 8,850 I P Irrigation Rehab Sindh-I 5,000 0 1,400 1,400 1,400 800 0 5,000 0 I P Irrigation Rehab Punjab-I 5,000 0 300 1,400 1,500 1,800 0 5,000 0 I P Modern. of Barrages Punjab-I 5,000 0 375 500 1,500 1,375 1,250 5,000 0 S/I F Kurram Tangi Dam 9,250 0 300 2,000 2,000 2,000 2,950 9,250 0 S/I F Satpara Dam 2,090 0 150 250 600 600 490 2,090 0 S/I P Sabakzai Dam 150 0 150 0 0 0 0 150 0 F Total New Commitments 58,940 0 2,975 8,750 9,100 13,575 15,690 50,090 8,850 F Total Federal PSDP 179,215 51,528 10,914 25,480 27,570 28,100 19,629 111,693 12,662 OTHER ONGOING PROJECTS -- NOT INCLUDED IN THE 2002-03 PSDP D P NDP I 25,048 5,647 1500 5,000 3,000 0 9,500 9,901 F F FPSPII 4,500 500 0 1,000 1,500 1,500 0 4,000 0 Total Other Ongoing 29,548 6,147 1,500 6,000 4,500 1,500 0 13,500 9,901 TOTAL PSDP + ONGOING 208,763 57,675 12,414 31,480 32,070 29,600 19,629 125,193 22,563 NEW PROJECTS PLANNED TO START BEYOND 2003 ( From TYPP PORTFOLIO) D F NDP II ? D F/P ON-FARM DRAINAGE ? I F Rainee Canal 10,000 0 300 1,000 2,000 3,000 3,000 9,300 700 I P Chashma Lift 38,000 0 0 5,000 10,000 12,000 27,000 11,000 I P Sehwan Barrage Complex 42,000 0 5,000 9,000 10,000 10,000 34,000 8,000 S F Raising Mangla Dam 59,400 0 0 17,000 17,000 17,000 8,400 59,400 0 S/I F Akhori Dam 99,134 0 0 0 10,000 20,000 30,000 69,134 S/I F Dhok Pathan Dam 18,005 0 3,000 6,000 6,000 15,000 3,005 Total New Project Starts 266,539 0 300 23,000 36,000 56,000 59,400 174,700 91,839 CAD WORKS FOR NEW CANAL PROJECTS (ESSENTIAL BUT NOT IN TYPP) I P Thal Canal CAD 30,000 0 2,000 9,000 9,000 10,000 30,000 0 I P Kachhi Canal CAD 15,000 0 0 5,000 5,000 5,000 15,000 0 I P Rainee Canal CAD 8,000 0 0 2,000 3,000 3,000 8,000 0 Total CAD works 53,000 0 0 2,000 16,000 17,000 18,000 53,000 0 TOTAL EMERGING INVESTMENT PORTFOLIO TOTAL 528,302 57,675 12,714 56,480 84,070 102,600 97,029 352,893 114,402

PROVINCIAL Provincial ADPs 2,200 3,500 3,500 4,000 4,000 17,200 Provincial NDB - Punjab 4,000 4,260 4,537 4,832 5,146 22,775 Provincial NDB - Sindh 4,321 4,602 4,901 5,220 5,559 24,602 Provincial NDB - NWFP 750 799 851 906 965 4,270 Provincial NDB - Balochistan 320 341 363 387 412 1,822 TOTAL PROVINCIAL 11,591 13,501 14,152 15,344 16,081 70,669

GRAND TOTAL 528,302 57,675 24,305 69,981 98,222 117,944 113,110 423,562 114,402 Legend P= Provincial, F= Federal, S=Storage, I= Irrigation Extension, D= Drainage, F=Flood Protection,M=Management, R=Reforms NDB=Non-Development Budget ADP=Annual Development Plan

7.2 The portfolio totals about Rs. 528 billion. Estimates of the Provincial Annual Development Plans (ADPs) and the the Provincial Non-Development Budgets (NDBs) have been added at the end of the table to give a more complete picture of estimated planned public expenditure on water resources and irrigation during the MTEF period. Total expenditure for the period 2003-7 would be about Rs. 424 billion of which federal investment would be an estimated Rs. 353 billion. The “throw-forward” (expenditure required to complete projects ongoing during the MTEF period) would be about Rs. 114 billion plus the future Provincial ADPs and NDBs. Given that the Provinces are responsible for everything except inter- provincial infrastructure, especially irrigation water distribution and management, the low level of ADP resources is alarming, just 5% of the “Emerging” MTEF portfolio cost. Hence, it seem clear that a balanced investment program that addresses the issues and problems in the system “from the mountain tops to the root zone”, and yields substantial growth and economic benefits in the mid-term, will require substantial joint Federal-Provincial financing of key investments.

Key Issues in the Emerging Portfolio

7.3 The Apparent Allocation of Resources. The allocation of resources implied by this portfolio is summarized in Table 7.2. The choice of weights in the parlance of paragraph 5.58 is quite clear – storage and expansion, with little attention to the infrastructure and other investment needs in relation to the management of water, or ensuring improved irrigation service, governance, productivity or sustainability. This imbala nce creates a disconnect between the emerging portfolio and the TYPP objectives both in terms of the mix of investments and the expectations from the sector in terms of short, medium and long term benefits.

Table 7.2: Summary of Resource Allocation in the Emerging Portfolio

Expenditure during Expenditure as % of Total Cost Cost as % of Total Type of Investment MTEF (FY03/07) total expenditure Rs Million Portfolio Cost Rs Million during MTEF

Supply Expansion · New Storage 245,790 45 164,100 37

System Expansion · Remodelling & 5000 <1 5000 1 Modernization · New Canals 128,016 23 88,762 20 · Required CAD investments for new 53,000 10 53,000 12 canals Management · Flood Protection 7175 1 5153 1 · Water Conservation 0 0 0 0 · Rehabilitation · Other measures 10,000 <1 10,000 2 839 <1 839 <1 Sustainability · Drainage 77,925 14 25,873 6 Productivity 0 0 0 0

Institutional Reforms 0 0 0 0

7.4 Summary Review of the Portfolio. The key features of the emerging portfolio and related issues are summarized below (A more detailed discussion of specific projects is given in Annex C):

§ The portfolio includes several projects (e.g. Kachhi Canal, Rainee Canal, Akhori Dam) for which feasibility studies are only now being initiated or are on-going and remain to be completed. Inserting such early and pre-mature “place holders” into the Portfolio only complicates and confounds efforts by the Government to formulate and implement an efficient and cost-effective investment program. § Storage and irrigation expansion investments, which are of a medium to long term nature, dominate, accounting for 78 % of total cost of the portfolio and 70% of the investments during the MTEF framework (2003-07). Only the Gomal Zam and Mirani Dams would be completed and yield benefits towards the end of the MTEF period. Benefits in the short to medium-term would remain elusive. § Drainage is only 14% of the portfolio with a share of just 6% during the MTEF. No investments are envisaged in on-farm drainage or strategic long-term drainage (e.g. NSDS). Despite its high priority, uncertainty regarding this program is high at this time – the Master Plan is not complete and hence feasibility studies for a National Drainage System (NDS) cannot be started, and an Inter-Provincial Drainage Accord would have to be negotiated based on the Master Plan options in order to launch implementation of the critical inter-provincial elements of the NDS. Even if the scope of actual investment priorities and projects are not known and won’t emerge for perhaps 2-3 years, some provision for a major drainage investment program has to be made during the MTEF and the succeeding five year period to avoid making commitments that preclude priority drainage investments. § No funds are allocated for water conservation or institutional reforms. This may be because they are seen as Provincial responsibilities (particularly OFWM programs, land leveling, etc.). However they are an integral part of the TYPP strategy and the Federal Government has a major interest in these programs (as it does in drainage) – the question is to what extent more aggressive Federal leadership and financial support is needed to ensure that these critical Provincial programs receive an adequate implementation priority. § No complementary investments are included in the PSDP or the provincial ADPs for supporting activities (for example, CAD works in the new canals) required to reap benefits of large investments in irrigation expansion projects. § No investments are envisaged for institutional reforms and projects or activities that would increase cost recovery (the exception being privatization of public tubewells envisaged under the NDP, although PSDP funds remain to be allocated during the current fiscal year) I. An important TYPP goal is to rely to an increasing extent on own resources and reduce O&M cost burdens. Chapter 8 discusses possible policy options in this regard as does Chapter 4, but the overall investment strategy reflected in the portfolio should also include the essential and complementary investments in modernization of irrigation services and improved governance to ensure that there are adequate incentives for these policies to be effective. § Federally implemented projects dominate the portfolio. Provincial ADPs are likely to be only 5% of total investments during the MTEF. As a consequence, the fiscal space and budget for water sector investment would be extremely limited, especially for water conservation, groundwater monitoring and regulation, rehabilitation of canals and related structures including barrages, remodeling and modernization of canal systems, irrigation expansion (intra-provincial), provincial components of Federal programs and projects, and poverty targeted investments (e.g. small dams in barani areas).

§ The sheer size of the program is overly ambitious and well beyond the most optimistic resource envelope likely to be available to the sector. This would result in projects languishing uncompleted for a long time in the portfolio, increased costs, and benefits pushed far into the future greatly diminishing economic returns.

Comparison of the Federal FY03 & FY04 PSDP

7.5 The FY 03 and FY 04 Federal PSDPs are compared below in Table 7.3 and in Figure 7.1. While the total allocation of funds for water resources and irrigation increased between FY 03 and FY 04 by nearly 36%, the total portfolio cost jumped by 105% and the throw-forward to 2005 and beyond by 75%.

Table 7.3: Comparison of FY 03 & 04 Federal PSDPs

PSDP FY 2002-03 PSDP FY 2003-04 Project Total Upto 2002 2002-3 Total Upto 2003 Throw 2003-4 Throw Forward Throw

Type Resp. forward from '03 forward ONGOING PROJECTS D F Upper Rechna Remain 1,040 762 200 78 0 D F Fordwah Sadiqia Remain (Ph I) 2,054 1 2,053 3482 2636 847 300 546 D F RBOD II 14,000 405 1000 12,595 14,000 1,005 12,995 1000 11,995 D P LBOD I 33,472 28,910 600 3,962 25,431 24,112 1,319 500 819 D F RBOD I 4,395 3,095 400 900 4395 4120 275 300 -25 F P Emergency Floods 100 0 75 25 350 0 0 350 0 F P Hill Torrents Marri Bugti 125 65 30 30 125 71 54 54 0 I F Greater Thal Canal 30,467 330 1,200 28,937 30,467 1,341 29,126 1,000 28,126 I P CRBC I+II+III 17,097 16,037 600 460 0 M F IBS Telemetric System 450 150 300 0 0 M P Balochistan Groundwater 437 67 50 320 437 77 360 100 260 M P Mangla Watershed Man. 169 0 30 139 169 30 139 38 101 O F Other Ongoing Projects 342 156 53 133 341 186 155 63 92 S/I F Gomal Zam 12,829 759 1,200 10,870 12,829 1,102 11,728 800 10,927 S/I F Mirani Dam 5,861 692 1,200 3,969 5,861 1470 4391 800 3,591 S/I F Mangla Raising-Prelim Works 1,100 100 1,000 0 Total Ongoing Projects 123,938 51,528 7,939 64,471 97,887 36,150 61,389 5,305 56,432 NEW COMMITMENTS AND PLANNED STARTS (FY 2003) I F Kachhi Canal 18,000 0 300 17,700 32,450 300 32,150 1,000 31,150 I P Irrigation Rehab Sindh-I 5,000 0 1,400 3,600 12,963 624 12,339 1,000 11,339 I P Irrigation Rehab Punjab-I 5,000 0 300 4,700 20,823 0 0 500 20,323 I P Modern. of Barrages Punjab-I 5,000 0 375 4,625 30,000 0 0 300 29,700 S/I F Kurram Tangi Dam 9,250 0 300 8,950 12,827 0 0 10 12,817 S/I F Satpara Dam 2,090 0 150 1,940 2090 150 1940 200 1,740 S/I P Sabakzai Dam 150 0 150 0 1103 50 1053 500 553 F Total New Commitments 44,490 0 2,975 41,515 112,256 1,124 47,482 3,510 107,622 OTHER ONGOING PROJECTS -- NOT INCLUDED IN THE 2002-03 PSDP D P NDP I 25,048 5,647 19,401 31,400 8,111 23,289 700 22,589 F F FPSPII 4,614 500 4,114 4,614 842 3,773 275 3,497 Total Other Ongoing 29,662 6,147 0 23,515 36,014 8,953 27,062 975 26,086 OTHER NEW PROJECTS STARTS (FY 2004) D F Saifullah Magsi Drain 1,000 0 0 100 900 D/I P Lining of Channels-Punjab 31,240 0 0 100 31,140 D/I P Lining of Channels-Sindh 25,000 0 0 100 24,900 D/I P Lining of Channels-NWFP 5,000 0 0 100 4,900 D/I P Lining of Channels-Balochistan 5,000 0 0 100 4,900 I F Rainee Canal 17,947 0 0 300 17,647 I F Pat Feeder Canal Ext. 3,000 0 0 1,000 2,000 I F Kirther Canal 10,000 0 0 200 9,800 S F Raising Mangla Dam 62,553 1,009 61,544 3,000 58,544 Total Other New Starts 0 0 0 0 160,740 1,009 61,544 5,000 154,731 TOTALS 198,090 57,675 10,914 129,501 406,897 47,236 197,477 14,790 344,871 Legend P= Provincial, F= Federal, S=Storage, I= Irrigation Extension, D= Drainage, F=Flood Protection,M=Management, R=Reforms

7.6 What Changes Have Been Made Between FY 03 and FY 04? Table 7.4 is based on a reordering of the portfolio in Table 7.3 to assess how resources are allocated among the five major categories outlined in paragraph 5.57 (in a manner similar to that shown in Table 7.2). These data indicate that there has been a major shift to a more balanced investment program from the “Emerging

Portfolio” (Table 7.2). Beyond the obvious major increase in the size and scope of the program, a closer look at Table 7.3 indicates several important changes.

Figure 7.1: Comparison of the FY03 and FY04 PSDPs

450,000

400,000 350,000 300,000 250,000 200,000 PSDP FY03

RS Million PSDP FY04 150,000 100,000 50,000 0 Portfolio Cost Current Throw Forward Allocation

Table 7.4: Comparison of FY03 & FY04 PSDP Resource Allocations

Total Cost Percent of FY Percent of Percent of Percent of Percent of FY 2004 2003 2003 Throw- FY 04 2004 Throw- Total Cost Portfolio Allocation Forward Allocation Forward

Supply Expansion 97,263 24% 37% 41% 36% 26%

Irrigation System Expansion 93,864 23% 19% 31% 24% 26%

Management 69,822 17% 24% 9% 18% 19%

Sustainability and Productivity 145,948 36% 20% 20% 22% 30%

Institutional Reforms 0 0% 0% 0% 0% 0%

TOTAL 406,897 100% 100% 100% 100% 100%

7.7 First new starts, including those projects nominally started in FY 03 (but given only very small allocations), increased in FY04 to 67% of total portfolio cost compared with 22% in FY03. This would make good sense if the aim was to complete ongoing projects in FY03 in preparation for a major shift to a new portfolio, but completion of only two small projects in FY 03 is indicated. Second, while the overall portfolio appears to have expanded, only two new starts (Raising Mangla Dam and the Pat Feeder Canal Extension) out of the total of twelve new starts in FY 04 account for 27% of the FY 04 allocation and all of the increase in planned expenditure between FY03 and FY04. There are no other significant changes between FY03 and 04, and the largest allocations are to the same group of projects – RBOD II, Greater Thal Canal, and Irrigation Rehabilitation in Sindh. The Exception is Kachi canal, which was started in FY03 and received a major increase in funding in FY04. The other additions to the portfolio including the remaining projects begun in FY03 received only small allocations. This indicates that projects are

entering the portfolio well before they are ready for implementation, and that the Planning Commission continues to expand the project portfolio far beyond what can be financed, stretching out project implementation and completion, increasing project costs, and deferring benefits far into the future.

Table 7.5: PSDP FY 2003-04 PORTFOLIO PROJECTED OVER THE MTEF PERIOD

Projected Current Throw Project Total Up To 2002 Past 2002-3 Total 2003-7 2003-4 Forward 2004-5 2005-6 2006-7

ONGOING PROJECTS 0 Upper Rechna Remain 1,040 762 200 78 278 0 Fordwah Sadiqia Remain (Ph I) 3482 2636 1 300 300 245 846 RBOD II 14,000 405 1000 1000 4000 4100 3495 13,595 0 LBOD I 25,431 23,512 600 500 500 319 1,919 0 RBOD I 4395 3,095 400 300 500 100 1,300 0 Emergency Floods 425 0 75 350 425 0 Hill Torrents Marri Bugti 150 65 30 55 85 0 Greater Thal Canal 30,467 330 1,200 1,000 3,000 3,000 3,250 11,450 18,687 CRBC I+II+III 17097 16,037 600 460 1,060 0 IBS Telemetric System 450 150 300 300 0 Balochistan Groundwater 437 67 50 100 100 100 20 370 0 Mangla Watershed Man. 169 0 30 38 40 40 21 169 0 Other Ongoing Projects 341 156 53 63 50 19 185 0 Gomal Zam 12,829 759 1,200 800 2,400 3,441 4229 12,070 0 Mirani Dam 5,861 692 1,200 800 1,500 1669 5,169 0 Mangla Raising-Prelim Works 1100 100 1,000 1,000 0 Total Ongoing Projects 117,674 48,766 7,939 5,306 12,928 13,033 11,015 50,221 18,687 NEW COMMITMENTS AND PLANNED STARTS (FY 2003) Kachhi Canal 32,450 0 300 1,000 2,200 3,300 3,500 10,300.00 22,150 Irrigation Rehab Sindh-I 12,963 0 1,400 1,000 1,800 1,800 2,000 8,000.00 4,963 Irrigation Rehab Punjab-I 20,823 0 300 500 1,000 2,500 3,000 7,300.00 13,523 Modern. of Barrages Punjab-I 30,000 0 375 300 1,000 2,500 3,000 7,175.00 22,825 Kurram Tangi Dam 12,827 0 300 10 500 1,000 2,000 3,810.00 9,017 Satpara Dam 2090 0 150 200 600 600 540 2,090.00 0 Sabakzai Dam 1103 0 150 500 453 1,103.00 0 Total New Commitments 112,256 0 2,975 3,510 7,553 11,700 14,040 39,778 72,478 OTHER ONGOING PROJECTS -- NOT INCLUDED IN THE 2002-03 PSDP NDP I 31,400 5,647 700 1500 5000 3000 10,200 15,553 FPSPII 4,614 500 275 1000 1500 1339 4,114 0 Total Other Ongoing 36,014 6,147 0 975 2,500 6,500 4,339 14,314 15,553 OTHER NEW PROJECTS STARTS (FY 2004) Raising Mangla Dam 62,553 3,000 7,000 15,000 17,000 42,000 20,553 Rainee Canal 17,947 300 500 1,000 1,500 3,300 14,647 Pat Feeder Canal Ext. 3,000 1,000 1,000 1,000 3,000 0 Kirther Canal 10,000 200 300 500 500 1,500 8,500 Saifullah Magsi Drain 1,000 100 200 200 200 700 300 Lining of Channels-Punjab 31,240 100 200 200 200 700 30,540 Lining of Channels-Sindh 25,000 100 200 200 200 700 24,300 Lining of Channels-NWFP 5,000 100 200 200 200 700 4,300 Lining of Channels-Balochistan 5,000 100 200 200 200 700 4,300 Total Other New Starts 160,740 0 0 5,000 9,800 18,500 20,000 53,300 107,440

TOTALS 426,684 54,913 10,914 14,791 32,781 49,733 49,394 157,613 214,158

Figure 7.2: Comparison of Emerging Porfolio with PSDP Trends

120,000

100,000 Projected PSDP Expenditure (40% per Yr) 80,000 FY 04 Portfolio Projected to 2007 60,000 Emerging Porttfolio Rs Million 40,000 MTIP (2003-07)

20,000

0 2002-3 2003-4 2004-5 2005-6 2006-7

7.8 In FY04 there is a major change in portfolio cost for Irrigation Rehabilitation in Sindh and Punjab and for Modernization of Barrages in Punjab, which may indicate that the Government is going to put greater emphasis on modernization of the existing irrigation distribution systems and improvement in irrigation service delivery, but the level of commitment so far in terms of funding is very small (perhaps indicating again that these projects are not ready to enter the portfolio). A second major change in portfolio cost is the addition of four canal lining projects, one in each province, that account for 32% of the increase in portfolio cost, but again the allocation of funding to these new projects, which were in the TYPP, is minimal (they appear to be merely “place holders”). However, these changes suggest a new opportunity -- if one combines the increased priority being given to salinity and water logging control (the canal lining projects), modernization and rehabilitation of the irrigation distribution system and improvement of service delivery (as well as reduction of the drainable surplus of canal water), with greater attention to groundwater management (not yet a Federal priority), then we have the ingredients for an integrated approach to “canal basin management” as a major pillar of the Federal PSDP (as noted in paragraph 2.9 and outlined in Annex A). Isolated canal lining projects would make no sense at all as an investment priority since they would ignore the inter-relationship between canal flows, groundwater use, and water logging and salinity, and displace or even preclude opportunities to make more efficient and cost effective investments that take into account these inter-relationships. Even selecting which canal reaches to line is not a simple problem of measuring groundwater salinity. In some saline groundwater areas farmers are skimming fresh groundwater during the rabi season that originates as seepage or recharge in the kharif season. Selection of the canal reach to be lined depends not only on the tradeoff between cost of lining and the economic gains from reduced canal seepage and water quality degradation, but on how the whole soil-water-infrastructure system of canal and groundwater irrigation operates, functions and performs in the basin formed by that canal reach command and its associated drainage basin. Hence, formulating and financing a series of “integrated and comprehensive canal basin modernization projects” may make far greater economic and social sense.

Extension of the FY 04 PSDP Portfolio over the METF Period

7.9 Table 7.5 (on the previous page) shows the FY 04 Portfolio extended or projected over the remain ing MTEF period, 2004-5 to 2006-7, beginning with the actual FY 03 & 04 PSDP. The funding levels in the period 2005-7 are based on Table 7.1, the PER Working Paper and the MOWP MTIP. They are at best indicative of where the FY 03-04 trend leads. In Table 7.5, all the projects ongoing in FY 03- 04 are completed during the MTEF period except for Greater Thal Canal. Seventy two percent of the incremental portfolio over the FY 05-07 period is allocated to projects started in FY 03 & 04, but the throw-forward is only reduced by 38%, leaving about Rs 214 billion for the next five year period.

7.10 Figure 7.2 compares the annual investment required by the MOWP’s Figure 7.3: Comparison of Total MTEF Expenditure MTIP (Table 7.6), the Emerging Portfolio (Table 7.3), the annual investment required 500,000 Emerging Portfolio 2003- 400,000 by the FY 04 Portfolio extended or 07 projected over the MTEF period, 2003-07 300,000 PSDP FY 04 Portfolio Projected to 2007 (Table 7.5), and a projection of PSDP 200,000 expenditures if the present growth trend of Rs Million PSDP Expenditure total PSDP allocation to water resources 100,000 Projected to 2007 0 MTIP (2003-07) and irrigation is sustained (Table 7.6). The MTEF Throw Forward increase in total PSDP allocation between Expenditure FY 03 and FY 04 was 36%. Assuming a sustained increase of about 40% per year beyond FY 04, the total PSDP allocation for water resources and irrigation would grow to Rs. 109 billion. Even with this substantial increase in water sector financing (Table 7.6), the available funds fall far short (about 30%) of what is required to sustain the FY 04 PSDP

over the MTEF period, and just 55% of what is needed by the MTIP over the same period. Figure 7.3 compares total planned MTEF expenditures and throw-forward. The result of this mismatch between funding and proposed investment will be substantial delays in project implementation, low rates of timely project completion, and deferred benefits.

Table 7.6: Projection of Total PSDP Allocation 2002-3 2003-4 2004-5 2005-6 2006-7 2003-7

Projected PSDP Allocations 10,914 14,791 20,045 27,166 36,816 109,732

7.11 Comparison of the Projected PSDP with the MOWP’s MTIP. Table 7.7 Summarizes the MOWP’s proposed Medium Term Investment Plan, which encompasses both Federal and Provincial investment priorities and plans in a way that is much clearer than the PSDP. Four projects in the original Federal MTIP have been shifted from “On-going” to “New Starts in Table 7.7 – Raising Mangla Dam, and the three new canal expansion projects, Thal, Rainee and Kacchi – to make Table 7.7 and 7.5 more comparable. Both the MTIP total funding for the period 2003-07 and the throw-forward are larger than the projected PSDP (Figure 7.3).

Table 7.7: Summary of MOWP's Medium Term Investment Plan (MTIP) 2003-2007

Throw Total Cost 2003 2004 2005 2006 2007 2003-7 Forward ONGOING PROJECTS Federal 30,202 6,409 8,129 6,991 4,893 3,780 30,202 Punjab 4,291 4,470 3,020 0 0 11,781 Sindh 3,991 3,437 2,578 0 0 10,006 NWFP 808 1,077 808 0 0 2,693 Balochistan 104 138 104 0 0 346 Provincial Sub-total 9,194 9,122 6,510 0 0 24,826 Ongoing Sub-total 30,202 15,603 17,251 13,501 4,893 3,780 55,028

NEW STARTS Federal 182,127 4,728 20,728 31,086 30,086 31,086 117,714 64,413 Punjab 95,983 200 200 200 5,349 8,622 14,571 81,412 Sindh 60,756 214 500 1,223 1,402 1,363 4,702 56,054 NWFP 83,954 247 247 247 1,226 1,289 3,256 80,698 Balochistan 11,178 50 50 1,055 1,350 1,115 3,620 7,558 Provincial Sub-total 251,871 711 997 2,725 9,327 12,389 26,149 225,722 New Starts Sub-total 433,998 5,439 21,725 33,811 39,413 43,475 143,863 290,135 TOTAL 464,200 21,042 38,976 47,312 44,306 47,255 198,891 290,135 7.12 Implications of the MTIP’s Provincial Investment Needs and Priorities Table 7.7 shows the scope of proposed new provincial investment and underscores the importance of adding provincial ADPs and NDBs to the end of Table 7.1. Proposed provincial investments in new projects is 58% of the total value of new starts proposed in the MTIP, and their throw-forward is nearly 78% of the MTIP total. However, most importantly, one can see the effect of Federal commitments to the four new starts mentioned in the previous paragraph (Raising Mangla and three new canals) – there are few resources to fund the proposed provincial investment portfolio until sometime after 2007, barely more than 10% of the total investment cost is available during the period 2003-07. The projected Provincial ADPs for the period 2003-2007 in Table 7.1 are even less than the expenditures shown Table 7.6, and there is extraordinary pressure on these resources that would normally cause them to be spread over a large number of small projects in addition to the major investments summarized in Table 7.6, so one might expect even less to be available from the Provincial ADPs for these new provincial investments. If the Federal Government were to commit to constructing a second dam around 2005 or 2006, and/or to a

major drainage investment program to implement the Master Drainage Plan and Drainage Accord at that time or a bit later, then the same level of very low funding for the provincial portfolio would likely prevail until well after 2010 and more likely close to 2015. Unfortunately these Provincial portfolios for new project starts encompass key priorities – OFWM, irrigation system modernization, barrage modernization, and water logging and salinity control investments. While allocations in the Federal PSDP were significantly increased for some of these investments in FY 04, bringing greater balance to the Federal portfolio, this trend needs to be sustained and talk of new commitments to inter-provincial mega-projects approached very cautiously.

Investment Trends and Options

7.13 Volume I of the PER proposes that PSDP allocations to water resources and irrigation be increased to 0.50% of GDP, a total of about Rs. 250 billion over the MTEF period 2003-07. The difference between the projected PSDP expenditure (Table 7.6) and this higher level of expenditure, about Rs. 140 million, could be used in a number of ways, but it is by no means assured that either the continued increases in PSDP allocations for water resources and irrigation as in Table 7.6, or the higher level of funding over and above the increases projected in Table 7.6 would become available. Even at the more modest but substantially increased funding in Table 7.6, the Government would have to make some hard choices among the projects in the Projected Portfolio (Table 7.5) in order to speed implementation and ensure timely benefits – essentially it would have to reduce planned expenditures by about Rs. 50 billion by removing and deferring projects. Overall the PSDP has to be tightened and more rigorously appraised. It has already been noted that the current analytical underpinnings of the sector would make these choices of which projects should be given priority very difficult.

7.14 Planning Challenges and Options. Table 7.8 displays the FY 04 PSDP (Table 7.5) projected over the MTEF period 2003-7, but with the various investment projects rearranged into major investment categories or program components (as in Chapter 5). The question is, how can this portfolio be scaled back to fit the projection of PSDP resources (Table 7.6) or even lower levels of funding, or expanded to take advantage of higher levels of funding should they materialize for water resources and irrigation? Briefly, some of the key options and issues to be considered include:

§ First, RBOD will be completed, but there is no provision in this portfolio for major improvements in the rest of the drainage system, including a follow-up to NDP, and hence, no funds for on-farm drainage, upgrading the drainage network, or for larger branch and spinal drains should they prove to be an essential part of the Master Drainage Plan. As was suggested earlier, the canal lining projects (which aim to both conserve freshwater and control waterlogging and salinity) should be dropped as stand-alone projects and integrated with new integrated canal modernization investments. § Second, the irrigation rehabilitation projects and the canal lining projects could be integrated together with canal system modernization, groundwater management and governance improvements, to create a series of highly divisible investment projects (perhaps “Integrated Irrigation Water Distribution and Management Projects”, another name for the integrated canal basin approach suggested earlier) that could be phased, and expanded, depending on both performance and the availability of funds. This would be a jointly financed program of the Federal and Provincial Governments. § Third, the Pat Feeder Canal Extension would be completed in the MTEF period. A substantial reduction in portfolio cost could be achieved by slowing and limiting canal expansion, concentrating during the MTEF on the completion of one canal to an extent just sufficient to pilot a new approach to modern highly productive irrigated agriculture tailored to conditions in Pakistan.

§ Fourth, three projects in the Portfolio -- Gomal Zam (17 MW), Kuram Tangi (58 MW) and Raising Mangla Dam (180 MW) -- will add hydropower capacity, but there is no other provision for additional hydropower. The MTIP identified nine priority hydropower projects that would add about 1832 MW at a total cost of Rs 109 billion. These are mainly low-head run-of-the-river sites (much more attractive to the private sector, if they are financially viable, than the large multi-purpose storage sites), in some cases developed by adding a powerhouse to an existing dam or barrage. In general these sites would add little operational storage to the system. There may be provision elsewhere in the PSDP for these hydropower investments, but if not, the portfolio in Table 7.8 would have to be adjusted to accommodate the steady expansion of hydropower capacity.

Table 7.8: PSDP 2003-07 Portfolio By Major Category of Investment

Up To Current Projected Total 2003- Throw Project Total Past 2002-3 2002 2003-4 7 Forward 2004-5 2005-6 2006-7 SUSTAINABILITY AND PRODUCTIVITY 0 Upper Rechna Remain 1,040 762 200 78 278 Fordwah Sadiqia Remain (Ph I) 3,482 2,636 1 300 300 245 846 0 RBOD II 14,000 405 1,000 1,000 4,000 4,100 3,495 13,595 0 LBOD I 25,431 23,512 600 500 500 319 1,919 0 RBOD I 4,395 3,095 400 300 500 100 1,300 0 NDP I 31,400 5,647 700 1,500 5,000 3,000 10,200 15,553 Saifullah Magsi Drain 1,000 100 200 200 200 700 300 Lining of Channels-Punjab 31,240 100 200 200 200 700 30,540 Lining of Channels-Sindh 25,000 100 200 200 200 700 24,300 Lining of Channels-NWFP 5,000 100 200 200 200 700 4,300 Lining of Channels-Balochistan 5,000 100 200 200 200 700 4,300 Sub-total 146,988 36,057 2,201 3,300 7,878 10,764 7,495 31,638 79,293 MANAGEMENT AND MODERNIZATION Emergency Floods 425 0 75 350 425 0 Hill Torrents Marri Bugti 150 65 30 55 85 0 FPSPII 4,614 500 275 1,000 1,500 1,339 4,114 0 IBS Telemetric System 450 150 300 300 0 Balochistan Groundwater 437 67 50 100 100 100 20 370 0 Mangla Watershed Man. 169 0 30 38 40 40 21 169 0 Other Ongoing Projects 341 156 53 63 50 19 185 0 Irrigation Rehab Sindh-I 12,963 0 1,400 1,000 1,800 1,800 2,000 8,000 4,963 Irrigation Rehab Punjab-I 20,823 0 300 500 1,000 2,500 3,000 7,300 13,523 Modern. of Barrages Punjab-I 30,000 0 375 300 1,000 2,500 3,000 7,175 22,825 Sub-total 70,372 938 2,613 2,681 4,990 8,459 9,380 28,123 41,311 IRRIGATION SYSTEM EXPANSION Greater Thal Canal 30,467 330 1,200 1,000 3,000 3,000 3,250 11,450 18,687 CRBC I+II+III 17,097 16,037 600 460 1,060 0 Rainee Canal 17,947 300 500 1,000 1,500 3,300 14,647 Pat Feeder Canal Ext. 3,000 1,000 1,000 1,000 3,000 0 Kirther Canal 10,000 200 300 500 500 1,500 8,500 Kachhi Canal 32,450 0 300 1,000 2,200 3,300 3,500 10,300 22,150 Sub-total 110,961 16,367 2,100 3,500 7,460 8,800 8,750 30,610 63,984 SUPPLY SYSTEM EXPANSION Gomal Zam 12,829 759 1,200 800 2,400 3,441 4,229 12,070 0 Mirani Dam 5,861 692 1,200 800 1,500 1,669 5,169 0 Kurram Tangi Dam 12,827 0 300 10 500 1,000 2,000 3,810 9,017 Satpara Dam 2,090 0 150 200 600 600 540 2,090 0 Sabakzai Dam 1,103 0 150 500 453 1,103 0 Mangla Raising-Prelim Works 1,100 100 1,000 1,000 0 Raising Mangla Dam 62,553 3,000 7,000 15,000 17,000 42,000 20,553

Sut=total 98,363 1,551 4,000 5,310 12,453 21,710 23,769 67,242 29,570 TOTALS 426,684 54,913 10,914 14,791 32,781 49,733 49,394 157,613 214,158

§ Fifth, each of the other three categories of investment discussed above – sustainability and productivity, management and system modernization, and system expansion - are to varying degrees divisible and can be scaled to fit the availability of funds (keeping in mind the principle of allocating sufficient funds to achieve timely implementation), but the addition of new storage dams to the system posses more difficult problems because of the large, lumpy character of these investments (the same could be said for hydropower, but the next group of these projects can be looked at differently if they use existing dams). The ongoing Gomal Zam and Mirani Dams can be completed in the MTEF period. Kurram Tangi Dam is just being started, and Satpara and Sabakzai have been limited to studies and preparation – so in effect, these latter three projects could easily be dropped or deferred. Raising Mangla Dam is by far the largest project in the entire portfolio, requiring nearly 27% of the entire MTEF expenditure (Table 7.8). It should be noted that the schedule of expenditure shown in Table 7.8 for Raising Mangla Dam is lower and more conservative than either the MTIP or the TYPP, even though the cost of the project has increased about 19% over the estimate given in the TYPP. In any case, once this project is begun it must be fully funded to ensure that there is not a substantial increase in construction cost caused by low levels of project financing. The Basha Dam feasibility report is not expected to be completed for another 2-3 years, but the feasibility report for Kalabagh was done in the early 1990s. Kala bagh could be ready for implementation and financing within this timeframe or sooner if the project is reviewed, updated, issues resolved, and appraised on an urgent basis. However, WAPDA recently reported in a briefing to the press that this project would cost about Rs. 300 billion (and Basha a similar amount) far above any likely PSDP funding scenario. There seem to be two main choices:

q Continue to start-up implementation of Raising Mangla Dam, waiting until increased resources become available to decide whether to start a second dam at Kalabagh or Basha. This would commit the PSDP to finish Mangla on time and within cost estimates (in 2008 or 2009), and force the scaling back of investments in drainage, canal modernization, and canal expansion, as well as the other three smaller storage projects on which little progress has been made (studies and research would not have to be forgone). The decision on a second dam would not come until completion of Mangla is assured.

q Defer Raising Mangla until at least Kalabagh is appraised and the two investments can be compared (Basha may be sufficiently ready to placed on the table as well). Under this option, Kurram Tangi could be accelerated and completed between 2003 and 2007, and the other components of the Portfolio accelerated or scaled up. Moreover, this short delay would provide the time the Government vitally needs to make a more rational and rigorous comparison of its alternatives – at present Raising Mangla appears to be more of an opportunistic choice rather than a strategic and economic choice of its next major investment in water storage.

7.15 One problem with these two approaches is that there is still no provision for scaling up investment in inter-provincial drainage infrastructure to control water logging and salinity, though canal modernization, if carried out as an integrated program, would provide substantial water logging and salinity control benefits through better water management, reduction of over-irrigation or drainable surplus, as well as direct investment in the drainage network. Depending on what agreements and investment needs emerge from a consensus on the Master Drainage Plan, this suggests that when Mangla is compared with Kalabagh in the second option, that a major drainage program should be ready and on the table for consideration as well. As one might expect the choices are not simply between this dam or that one.

7.16 Financing Contingencies. In essence, the Planning Commission needs to create a new concept of the PSDP for water resources and irrigation and how it is used. At present the PSDP combines at least

two distinct portfolios: a core portfolio of commitments that must be fully funded to ensure cost-efficient and timely implementation, and whose financing is relatively assured; and a second, more speculative portfolio that could be financed if funds prove to be more ample (at present small amounts of funds are allocated to keep these projects alive). Including the second portfolio with the first is of course politically attractive, but by combining these two portfolios into a single PSDP, priorities are obscured and funds are spread over a large number of projects most of which have no chance of timely implementation.

7.17 The nature of the planning Figure 7.4: Alternative PSDP Growth Paths problem can be seen in Figure 7.4. This Figure is based on the three alternative 90,000 funding scenarios (among many that 80,000 could be formulated) given in Table 7.9. 70,000 The first, called BAU, is based on PSDP 60,000 BAU 50,000 growth of about 20% per year, PSDP Growth of 40% 40,000 considerably less than what occurred Higher PSDP Growth between FY03 and FY04, and hence Rs. Million 30,000 probably a more assured level of 20,000 funding. The second scenario is the 10,000 0 same as was shown earlier in Table 7.6 2002-3 2003-4 2004-5 2005-6 2006-7 (40% growth beyond FY 04). The third scenario is based on a growth rate in funding twice that used in Table 7.6 (60% in FY 05, and 80% thereafter). In part because of the low funding base in FY03 and FY04, it seems highly problematic to increase PSDP funding for the water sector to the 0.5% of GDP target. In any case, the problem for the Planning Commission is to stage and sequence investments depending on which scenario materializes, much as one would do in planning capacity expansion in response to a rising demand curve, as for example, one does in electric power systems.

Table 7.9: Alternative Paths for PSDP Growth 2002-3 2003-4 2004-5 2005-6 2006-7 2003-7 Business as Usual (BAU) 10,914 14,791 17,749 21,299 25,559 90,312 PSDP Growth of 40% beyond 2004 10,914 14,791 20,045 27,166 36,816 109,732 PSDP Growth towards 0.5% of GDP 10,914 14,791 23,666 42,598 76,677 168,645

7.18 Separating the PSDP from Decisions on Financing Major Water Projects. There is an alternative to just working with these different funding scenarios to prepare a “contingent plan” that is sufficiently flexible to not over-commit the PSDP but able respond to more favorable funding circumstances. That is, to consider the proposed increase in funding to meet the sector financing target of 0.5% of GDP to be outside the PSDP, but not off-budget. The amount is at least Rs 140 billion if one assumes the base funding for the water sector PSDP is that shown in Table 7.8 (the middle curve in Figure 7.4) materializes and is fully allocated to the PSDP (this need not be the case). The decision to commit a major block of funding to the water sector that is in addition to the normal PSDP must still be made within the broader budget and fiscal framework established by the Finance Ministry. Given the cost of the mega-projects this suggests they be considered outside the PSDP until their full funding is committed. What is the difference whether these projects (Kalabagh or Raising Mangla for example) are considered in the PSDP or not? The difference is that, by holding them separate, one does not squeeze out good, high priority investments in the overall system while waiting to see if financing for these major projects will materialize (sitting in the PSDP they will inevitably just drain resources from other priority projects). This is akin to the suggestion that in the near to mid-term the Government concentrate on raising the value of water, bringing in other major investments as fiscal space materializes. The funds, when Government is in a position to commit them, are probably best allocated to one or a few major, highly visible projects for which special management and monitoring arrangements can be established –

for example, new storage, a new canal, or a major drainage program such as an inter-provincial drain. While there is not uniform agreement that the major increase in funds available for water sector investment as forecast and proposed in Volume I of the PER will actually materialize, there is some optimism, and this suggests that waiting 2-3 years to make a decision on which dams (including Raising Mangla) to build or whether and what to invest in drainage as suggested above, is a prudent and possibly optimal strategy.

7.19 Additional Principles On Which The Portfolio Assessment Should Be Based. Apart from more rigorous project appraisal criteria, and strengthening the analytical underpinnings of the sector as discussed in Chapter 5, the Planning Commission should take into account the following principles:

§ More resources should be committed to the sector than in the past both for new investments as well as for vastly improved O&M. Volume I of the PER suggests that the total PSDP share of the sector (including O&M budgets) should grow to Rs 250-270 billion during the MTEF period (2003-2007). § Investment in improved O&M of the existing system should have first call on available resources. There is no point in creating new assets if the existing ones are poorly maintained and don’t yield their potential benefits. New assets would inevitably and quickly suffer the same fate. § No investment should proceed without preparation of feasibility studies and rigorous scrutiny and appraisal, including assurance that critical complimentary investments in both the water and agriculture sectors, and at Federal and Provincial levels, are programmed and funded with appropriate priority. Appreciation for how much time and resources should be committed to preparation of major investments (several of the proposed investments range from 0.5 to over US$1 billion) to ensure one has a least cost solution that maximizes benefits and minimizes risk, seems to have been lost because of the long period in the water sector without major investment. Preparatio n and the quality and extent of primary data collected should be commensurate with the scale of investment and the types of risks to be addressed. Dusting off old feasibility studies and PC-Is (by multiplying old figures by indexes and factors) will not suffice to give the Government the most cost-effective projects with a highest likelihood of high performance. § The portfolio needs to be balanced in terms of short to medium-term high pay-off investments and long term strategic investments. While investments in storage have been long neglected, Pakistan cannot meet the expectations from the sector by investing in dams alone. While these large, long gestation projects are planned, designed and implemented, the platform for improved water management and sustained growth needs to be put in place, real progress on poverty alleviation achieved, and increased revenues realized. For example, water conservation and improved productivity have high payoff in the short to medium-term, and drainage is critical for long-term sustainability. A great deal can be accomplished in the short-term to improve management from the “mountain top to the root zone” that would diminish political controversy, improve transparency, and create the enabling conditions for optimal use of the new system of storage that will be coming online gradually over the next 25 years and longer. § Viable ongoing and new Projects should receive adequate funds to ensure timely completion. Both the Federal and Provincial Governments must try to break out of the politically appealing budget strategy of starting and supporting many more projects than they can effectively finance and complete in-time. Stretching scarce resources in this way over a large portfolio results in higher costs and lower overall economic and poverty impact. § Agricultural and water policies, institutions and investments need to be complementary and well coordinated to achieve improved productivity. Coordination seems to only work where no real decisions are needed because there is already coherence except at the margins. The alignment of

both federal and provincial priorities and strategies, and water and agriculture investment priorities and programs is important. Perhaps it is time for the Federal and Provincial Governments to establish a joint water and agriculture working group empowered to plan and monitor, restructure sector portfolios as required, and to present proposals for policy change and other actions when these are required. § Even if broader land reform is not possible at this time, greater attention needs to be given to the lessons and insights provided by the Poverty Assessment and other similar studies such as the ongoing study of factor market performance on the impact of unequal land ownership to find mechanisms and measures that improve the equitable availability of water to small farmers and tenants – by for example improving the laws and regulations under which land leasing and tenancy assure more equitable sharing of benefits and promote investment in improved productivity. § Improvements in water use efficiency and productivity require a combination of measures, including:

q Improving Policies, e.g. (i) water pricing that rewards efficient users and penalizes inefficient ones); (ii) assigning secure water entitlements and legalizing water markets; (iii) rationalizing distorted canal allowances. q Supporting Investments: Canal network rehabilitation and modernization, watercourse improvements, land leveling, other water conservation technologies. q Promoting the Role of Private Sector in improving small farmer access to technology (e.g. precision land leveling, more efficient irrigation methods and practices, etc.), access to agriculture support services (extension), knowledge, particularly on how to access markets. A break through similar to that of thrasher for wheat, and technology for small tubewell is needed.

§ Concerted efforts should be made to de-politicize water sector investments. Water shares under the provincial Water Accord should be strictly adhered to, and the system operated with greater transparency. This will require granting IRSA a greater degree of independence and autonomy, possible revising its governance structure, and strengthening its technical capacity, especially the use of modern information systems and models. § The Federal Government needs to use its leverage (or create leverage, in terms of the allocation of additional resources) to reward provinces that pursue reforms, rationalize investment priorities, improve planning, and improve implementation. § The Government should support one of the most far reaching and strategic proposals in the MOWP’s Water Sector Strategy i.e., the proposal to create an apex water resources planning entity that would consolidate all water resources planning responsibility, provide policy advice to both the Federal and Provincial Governments, expand data gathering and monitoring capability, coordinate and support research and knowledge building, establish modern information management systems to enhance both planning and policy analysis as well as access to and dissemination of information and data by all stakeholders. Clearly this must be done in a new and innovative way that ensures the inclusion of stakeholders (especially the Provinces who must see this entity as neutral, fair, supportive of their efforts, and highly professional). The presence of so many large, long gestation projects in the portfolio presents an important and large opportunity, because there is ample time to refine and improve these project and program proposals as they are being developed and implemented.

8. THE WAY FORWARD

Key Water Policy Responses

8.1 The Government has two important and inter-related sets or groups of policy choices to make:

§ First, investment policy in terms of not only how much new water supply to develop, but also which of its key strategic problems it will tackle first and what the longer term sequence of investment and development should be. Should it for example solve the problem of fully and reliably implementing the Accord, close the early kharif deficit, modernize the existing system, or expand irrigation into new areas, and in this context what would be the best sequence in which to develop additional storage and how should this storage be allocated and these reservoirs be operated? At present, only the slow pace of project preparation and the PSDP’s limited resource envelope projections are the only thing dictating the sequence and priority of development. § Second, policies that affect incentives to use water more effic iently and productively, and to achieve sustainable and effective O&M. These policies include the principles and institutional arrangements on which irrigation water distribution between the canal head and the farmer’s field channel will be based; water pricing and the flow of revenues, especially retention of revenues within the FO’s canal network; electricity pricing in the agriculture sector – this may be the best and most efficient way to begin managing and regulating the use of groundwater since an informal groundwater market is already functioning; water rights or entitlements to empower FOs and farmers to use their water more efficiently and productively and reduce inter- and intra- provincial water conflicts.

8.2 As noted earlier, progress has been slow on fundamental governance reforms, and because of this both the Federal and Provincial Governments have lost sight of the basic policy framework on which these reforms are based. The Report urges the Federal and Provincial Governments to jointly review that basic policy framework and recast and renew the program in a “White Paper”. The Report also points out the problems with water rights, both inter- and inter-provincial, that are fast becoming both a constraint to a broad consensus on water resources development and management and on governance reform. A phased, well thought out revision of water rights policy, with accompanying legislation, is urgently needed.

8.3 Water pricing and water rights policies are bound to be controversial, and the Government has been moving in the perverse direction of increasing electricity subsidies in agriculture combined with the accelerated expansion of electricity distribution to promote greater tubewell use. Among these three, fundamental changes in water pricing policy seem most likely to move forward in the near term if the governance reform program moves ahead (however, slowly). As the governance reform program progressed over the past few years, there has been often heated discussion of abiana (we have used the terms abiana , water charges and water prices interchangeably – all basically aim to recover O&M costs) assessment, collection and where the revenues go, but very little about the fundamental principles and elements of a policy on the objectives of water prices, what water prices should comprise, or how they should be established or regulated. One of the great weaknesses of the present system is the politicization of water prices that has resulted in their being frozen and disconnected from any sensible or logical basis, even the simple one of O&M costs. Abiana is largely treated as a rate without any basis except the perception of what might be accepted without too much controversy or political pain.

8.4 The principle of collection and retention of water charge revenues within the system for its operation, Figure 8.1: Concept of Water Revenue Flows maintenance and improvement (with limited and declining in the Future cost sharing by Government) that has been at least an implicit part of the governance reform program is a huge Indus Basin Services step, but there is no clarity yet as to what the water pricing Federal Budget IRSA, WAPDA policy objectives are, and what water prices encompass Expenditure overall, i.e., what services (and their associated cost) are to be included in determining the rate, the extent to which capital costs will be included in the rate base (or which Provincial capital costs), by whom and how will prices be Budget PIDA periodically adjusted, or the extent to which certain costs Expenditure will be shared between the farmers and the treasury and in ? ? what proportion, etc. The emerging conceptual framework Current Arrangements– AWB for water charges and revenue flows and retention as well in the future as cost sharing is outlined in Figure 8.1, including the FO would set its own 60% provincial and federal budget expenditure extended to assessment include all levels of Indus Basin water resources rate, and pay a regulated bulk FO currently collects management and irrigation services. Each arrow represents water service Abiana Retains 40% rate to the AWB the flow of funds derived either from water charges paid by farmers through their FO (single line) or provincial and federal budget expenditures (double line) – in both cases (with the exception of federal expenditures) based on bulk water service.

Addressing Strategic Questions and Issues

8.5 The response of the main water agencies at both Federal and Provincial levels has been to propose a large number of investment projects that seem most important and immediate from their perspective on the problems – WAPDA on new dams and canals, and the provinces on canal and barrage rehabilitation and modernization (as well as canal lining) and for projects that would enable them to utilize their Indus Basin water allocated in the Accord. This creates a special problem for the Government at a time of fiscal discipline and the high demands for funds to support poverty reduction, the social sectors (education and health), and the devolution reforms. The problem is to know whether this growing mountain of projects contains the right projects, and to select projects for implementation with the right priority and in the right sequence. To answer these questions requires that another set of strategic questions be answered with adequate confidence. Among the questions the Government should be asking are:

§ Can future incremental water supply and demand be balanced? What fundamental changes in sector policy (water rights, water allocation and operations, water pricing and revenue sharing, electricity pricing in the agriculture sector, etc.) would be needed? § Should irrigated area and irrigation water supplies be expanded? How much? Should another major shift in cropping pattern be considered in planning? What changes will be needed in irrigated agriculture and water management (infrastructure, incentives, governance, etc.) to insure higher efficiency and productivity? § How much should water supplies be expanded? How should these new supplies be allocated and distributed? Can the related threat to sustainability from water logging and salinity be resolved cost effectively? How can privately developed groundwater be integrated with water logging and salinity control and increased canal flows?

§ Is additional storage needed? How much storage should be built and in what sequence? Should operating polic ies be changed? Can irrigation and hydropower policies be better integrated? What happens as the limits of water resources are approached? What should be the target level of water security and reliability? Should different levels of security be associated with different water rights? How can environmental and social impacts on the lower Indus River and estuary of increased water resources development be mitigated? § What is the role and scope of water conservation? What new policy and legislative framework is needed for effective groundwater management? What regulatory and monitoring mechanisms should be put in place? § What are the long-term consequences of continued storage depletion?

Are economic returns commensurate with the cost of water?

8.6 Can These Strategic Questions be Answered Today? In general the answer is no. Not only has investment in water sector infrastructure been neglected since the 1980s, but so has the analytical capacity for strategic planning in the sector. No institution in the sector today is willing to take ownership of the analytical challenges posed by these questions, and the capacity built in the 1960s and early 1980s to do this has largely been allowed to dissipate. There is little or no ongoing investigation, planning or study apart from individual project feasibility studies that would help to answer questions about how much additional water supply and irrigation makes economic or social sense in Pakistan, in what sequence these developments make the most sense, or how and in what ways the rural economy will develop to accommodate the huge increases in population that are foreseen, which would in turn indicate where and how much water is needed. No sector institution has been will, or seen the need to build the knowledge base, collect the data, and develop the modern information systems and analytical tools (e.g., GIS, models) needed to not only resolve these questions but also manage the investment program and the water resources of the Indus Basin. The capacity and professionalism of the private sector has grown, in particular to carry out project feasibility studies to a reasonable standard. It may hold the capacity to do sector level analytical work as well, but mobilizing this capacity requires public institutions that see the problems and are willing to seek solutions. There are three major institutional issues to be addressed:

§ First, IRSA plays a key role since the legislation under which it was established essentially legalizes the Accord. The original Accord should be overhauled and replaced by a formal legal system of secure, tradable water rights based on the total availability of water in the basin, and including mechanisms for dispute resolution, recourse to the justice system, and mechanisms for adjustments to account for seasonal and annual variability of supply (sometimes referred to as quotas). Such a shift to sharing the waters of the basin would not endanger customary diversions at canal headworks particularly on Indus tributaries, but would give IRSA greater operating flexibility in allocating flows to ensure that all seasonal water quotas are fulfilled on time during each season. This would put a premium on good planning and water management in the Provinces and on effective collaboration between the Provinces and IRSA. IRSA’s powers, authority and autonomy, and especially its technical capacity, would have to be strengthened significantly for this to work effectively. § Second the Government needs to create a critical mass of technical talent to take responsibility for strategic and policy planning for the water sector, including developing a modern, shared information system, enhancing the knowledge base, and provision of planning support and assistance to the Provinces. Such an entity has to be structured to attract the “best and the brightest”, and to be seen as neutral and fair by all stakeholders. A tall order today in Pakistan, but given the scope and magnitude of investment being contemplated by the Government, the country deserves no less.

§ Third, reform and restructuring the roles and functions of the irrigation departments is at the heart of the irrigation governance reform program. Assuming the Government remains committed to the governance reform policy, it is essential that the process of reform and restructuring of the irrigation departments be accelerated. This has been neglected, and it has become the most important constraint and impediment to sustaining the broader governance reform program and ensuring its benefits. As the Report outlines in Chapter 3, this must be led from within, but it cannot be achieved without a renewed commitment to the overall policy framework, to implementation and if need be changes in the existing legislation, and to providing the necessary support to the process.

What Needs to be Done 8.7 The challenges in the next 3-5 years are to address the disconnect between the key strategic issues in the sector, its current strategy and its investment portfolio. This is essential not only to ensure that the sector is on an optima l and sustainable development path but to mobilize the resources required to implement the strategy and investment plan. The five imperatives on which actions are needed include:

(a) Resolve the debates over plans to develop storage. Proposing to build all the storage sites available is not a response to the key question of the sequence in which storage should be added to the system, the levels of storage capacity to be added to the system over time, the target levels of water security or reliability, and what the new operating policy and water allocation should be. Kalabagh is the best and most well prepared site, but it is not a part of the debate as it should be. Feasibility studies for the other sites have not been completed (Basha and Mangla raising are underway). Very large sums are at stake, and the earliest projects should be selected to have the greatest economic impact and impact on system operating performance (for both irrigation and hydropower) and on the implementation of the Accord (Mangla Raising is too small and ill positioned not to invite even more intense controversy – in fact just about every site and project that is proposed will have the same result because they are all proposed in isolation), and positive impact on the security, reliability, level and value of water supply. Credible, alternative, comprehensive and long-term plans that focus on both the level and sequence of storage development, and alternative integrated operating policies, need to be prepared, evaluated and compared for both their short-term and long- term impacts including on the environment of the lower Indus, and discussed with all stakeholders. This is an urgent exercise that is quite separate from the feasibility studies of individual sites, and is closely linked to the process of building a new consensus on water.

(b) Develop more detailed plans for the new canals. Notwithstanding the political commitments associated with the proposed new canals, including the extent to which they help the Provinces to implement the Accord, their economic, social and poverty impact appear to be marginally unattractive at best. Even though the new areas seem highly questionable as attractive sites for new irrigation development, the problem today is the lack of in-depth planning through which the projects might be reformulated and phased to overcome these problems and result in projects that make both economic and social sense if that is at all possible. In fact, since these are essentially “green field” areas, they present a unique opportunity to develop them with a completely new concept of participatory water management including new governance arrangements that maximizes efficiency, sustainability and high value agriculture – essentially as models of how the Indus Basin system should evolve and look in the future.

(c) Develop a strategic plan and investment program for system modernization jointly with the Provinces. Modernization of the Indus irrigation system should be an essential and priority element of the Government’s strategy. Somewhere between 200 and 600 billion Rs will be needed to modernize and remodel existing canal networks, rehabilitate and redesign structures including

the older barrages, line canals in saline groundwater areas, and complete water course improvements. These measures are critically important to the improved efficiency and increased productivity of existing and new water supplies. Individual investments need to be phased and sequenced with institutional and governance reforms, and with complimentary agr iculture development programs. Current proposals are ad hoc and engineering oriented because there is at present no integrated and strategic planning process that would enable the Federal and Provincial Governments to set priorities and sequence the needed investments over time. Hence, the Federal and Provincial government should undertake a joint program to develop the required integrated and strategic plans.

(d) Tackle the key management issues.

§ Governance and policy reforms. Reforms of the system of governance remain core priority issues as discussed in Chapter 3, and the three principles on which the reform program are based remain valid. Based on the experience gained so far, a new consensus within the Provinces, and between the Provinces and the Federal Government, on the way forward is needed that would essentially re-launch the program. This new consensus should focus on lessons learned so far (paragraph 3.11), deepening knowledge of conditions and constraints on the ground, and the critical steps to be taken and on piloting and monitoring a variety of approaches within each pilot canal command over a definite time period. Efforts should also be made to seek, promote, and support reform champions. § Water conservation and productivity enhancement. Develop a broader, integrated approach to water conservation and productivity enhancement built on a greatly accelerated OFWM program and linked wherever possible to the governance reform program. This will require greater integration of agriculture and water sector programs, and the fostering of innovation and experimentation. § Planning and system management. Whether one agrees or not with this assessment of the sector and the Government’s investment program, the importance and the consequences of the la ck of good planning, and data and analytical tools, in the sector are evident. The Government should look closely at the Ministry’s proposal outlined in the Water Sector Strategy for a new sector planning framework – a concept note based on more detailed evaluation of needs and an analysis of alternatives would be a positive first step. § Groundwater management. Groundwater has become a vital and major part of the overall Indus Basin irrigation system. As the limits to its development are approached, an effective monitoring and regulatory system that encourages the continued private management of this water source, but ensures that it is sustainable, is urgently needed. The Government’s most important management instrument for groundwater, apart from a greatly improved knowledge base and information system to support better monitoring, is to properly price water and power in the agriculture sector. It should gradually withdraw all subsidies for fuel and power use, as well as for tubewells, for groundwater abstraction for irrigation. (e) Build a new consensus on water management and development. While most of the debate has been about which major investments should be undertaken, perhaps the greatest challenge – the extent of political conflict over water and the breakdown of the last vestiges of a consensus on water, have received little effective attention. The Water Accord does not appear to work at all in the eyes of most stakeholders, and new accords on drainage, environmental flow requirements in the lower Indus River and estuary, and reservoir operating policy and water allocation including integrated irrigation and hydropower policies, need to be developed. This is extremely unfortunate at a time when the Government must commit to a major, costly long-term investment strategy, some elements of which have already engendered angry debate and protest. Just as sound and

transparent technical analysis is essential for timely political economy decisions, it is also essential to the process of developing a new consensus on water resources.

(f) O&M regimes require fundamental changes. While the ongoing institutional reforms would ultimately address issues of accountability, staffing and lack of farmer participation, immediate action is needed to stem the deterioration of the irrigation and drainage system. A well designed program is needed to:

§ Establish realistic funding requirements through an independent evaluation § Rationalize fund allocation to meet priority needs in accordance with detailed O&M plans and prior ities § Initiate benchmarking, and O&M performance audits:

q Improve effectiveness of expenditures and enforce accountability

q Ensure channels are operated on authorized discharges or remodeled where necessary § Rationalize abiana rates and improve assessment and recovery; empower farmer organizations to not only operate and maintain their canals but also to collect abiana and retain a sufficient portion of the recovered funds to meet their needs would be a key incentive for increased cost recovery § Reduce management costs (including privatization of remaining public tubewells in FGW areas and rationalize staffing levels)

(g) Remove the barriers to timely and effective project implementation. In sharp contrast to the outstanding track record of the Indus Basin Replacements Works -- a major implementation feat -- today, implementation of water sector projects in Pakistan is characterized by inefficiencies, slow progress, completion delays, time and cost overruns, and sometimes unsatisfactory outcomes. Factors that affect implementation include: weak implementation planning and management, weak construction industry, litigation related to land acquisition, non-compliance with agreed resettlement and rehabilitation programs, lack of attention to environmental issues, delays in procurement, delays in preparation of accounts and audits, and lack of preparations for the transition from construction to O&M. While some of these issues arise from poor project preparation and lack of commitment to project objectives, others arise due to the lack of a policy environment conducive to efficient implementation. Policies and procedures need to be modernized and mainstreamed to meet prevailing international standards and requirements – the size and scope of the Government’s proposed investment program over the next 25 years deserves adherence to a much higher standard of planning and project preparation than prevails today.

8.8 A New Model of Technical Cooperation is Needed. The Government is going to need technical help to take on these imperatives and challenges. This will require a new level of collaboration between the Provinces and the Federal Government, between government and expertise and centers of excellence in the country in all fields and disciplines, and between the Government and donors. The World Bank for its part is prepared to fully engage with the Government to address these challenges. But a new model for technical assistance is clearly needed that is free from the current bureaucratic straight-jacket that limits the effectiveness of technical assistance. It is worth recalling, for example, that the RAP process was

based on domestic leadership, supported by world class and multi-disciplinary technical assistance, state of the art models to analyze options, and extensive field investigation. The Government must establish more effective and appropriate institutional arrangements that can utilize technical assistance and collaborate more effectively with the Provinces and other experts in Pakistan to address the challenges to be faced. Current institutional arrangements, organizations and skills are better suited to project implementation than to the kinds of planning, study, analytical and process tasks that lie ahead.

89 Annex A Page 1 of 2

A NOTE ON “CANAL BASIN WATER MANAGEMENT PLANS”

1. Pakistan’s irrigation distribution system was designed to distribute water with minimum human interference, and at low operation costs with minimum information and communications. There are few structures to regulate flow, no escapes to remove excess flows, and for example, outlets run whenever the distributary or minor is running. These design and operation principles were suitable for low cropping intensity (the original intent) but are now constraints on water management for to maximize crop production and productivity. Moreover, while many common principles were used in the design of the Indus Basin canal system, there are important physical, social and economic differences between and within canal commands many of which have only emerged as constraints or problems over the intervening years of development and use. These differences strongly influence the approach that should be used for the modernization of each individual canal to improve and increase its physical and economic performance. The growth and extent of private groundwater use and progressive water logging and soil salinization are just two examples. The selection of canal reaches to be lined is another important example of a highly area specific issue that requires an integrated approach.

2. In the past, sporadic efforts have been made to rehabilitate parts of the canal network, or to improve drainage here and there, but in the absence of a comprehensive and integrated approach, effective farmer participation, and other changes upstream and downstream including improvements in O&M, these efforts have not led to overall improvements in either physical or economic performance. The current dilapidated state of the irrigation system bears witness that the expected improvements have not materialized, and there is ample evidence that it has worsened. Regardless whether additional water is made available at the canal head in the future or not, the imperative will remain to make optimal use of all water resources, both surface and groundwater, within the canal command, or more appropriately within the “canal basin” (the combination of the canal command area and the drainage area).

3. Regardless whether additional water is made available at the canal head in the future or not, the imperative will remain to make optimal use of all water resources, both surface and groundwater, within the canal command, or more appropriately within the “canal basin”. The latter area is larger than the command area and includes the drainage area associated with the canal network and the command area. Taking this larger area as the focus of planning and investment enables one to develop an integrated and comprehensive plan for optimal and sustainable use and management of the water resources. The fragmented approach to groundwater, drainage, salinity, watercourse improvement, agriculture productivity, and rehabilitation, for example, needs to be replaced with an integrated approach that addresses all the key issues and factors that affect and constrain the most effic ient and productive use of water in the “canal basin” recognizing the increased role of the private sector (farmers) particularly in groundwater management. Partial solutions and initiative have led to less than partial and unsustainable outcomes in the past.

The First Step

4. The first step in this new approach is to develop a comprehensive integrated strategy and plan for “redevelopment”, infrastructure modernization and water management in each “canal basin”. By integrated we mean that surface water distribution, water logging and salinity control, groundwater use and management, social issues, and agricultural productivity are addressed in an integrated manner, i.e., the plan would include measures that take into account both the inter-linkages between these issues as well as ensure that each is improved as required. The intended result is an overall optimal and sustainable plan for “redevelopment” and modernization. A crucial part of this planning process is the assembly and upgrading of the information system (e.g., GIS, models) and knowledge base essential to support

Annex A Page 2 of 2

diagnosis of the problems and their inter-linkages, and formulation and evaluation of alternative strategies and plans.

The Second Step

5. The second step would be to turn this plan into an investment portfolio by undertaking pre- feasibility studies in sufficient detail in-terms of measures, costs and economic returns, to evaluate alternative projects and decide on a specific portfolio of investments projects, phased and sequenced as appropriate.

The Third Step 6. The Third step would be to undertake feasibility studies of the priority projects in order to provide a basis for both project financing and final design and tender documents.

Institutional Arrangements 7. Preparing such a plan, managin g the follow-on feasibility studies, implementing the investment projects, and managing the water resources of the “Canal Basin” in a participatory manner is not a routine task – it is quite unlike the way in which the department has operated in the past. The intent of the ongoing reform program outlined in the PIDA Act was to establish a professionally managed, service and customer oriented organization (the Area Water Board) for each canal (very much along the lines of a regulated public utility). This model is highly suited to undertake and implement this new approach to canal modernization.

The Way Forward 8. An approach could be to select one or two canals, establish a professionally managed AWB with a sound technical staff oriented towards this new approach, arrange for financing to enable it undertake the studies outlined above by outsourcing, and launch the program. The AWB would also be responsible for facilitating farmer awareness, participation, and creation of FOs including capacity building.

Annex B Page 1 of 3

PROVINCIAL INVESTMENT PLANS

1. The provincial plans prepared as part of the Water Sector Strategy and MTIP include an elaborate list of provincial investments prepared in collaboration with provincial working groups. However, these priorities and portfolios have not been formally endorsed by the provinces. Besides the provincial MTIPs, some provinces have prepared their own investment plans as well.

§ While Punjab has not prepared a water sector development program, its ADP for FY03 indicates that it intends to invest in: ( i) Survey, Investigations & Research, including preparation of feasibility studies for Remodeling of Barrages and Design/ Review of Kalabagh Dam (Rs. 627.195 million); (ii) Remodeling of Thal Canal, Jalalpur Canal Project, Dajal Branch Extension Project, and several schemes involving remodeling/rehabilitation and improvement of existing irrigation systems (Rs. 8,324.048 million); (iii) Small Dams (Rs. 83.115 million); (iv) Drainage & Reclamation (Rs. 125.125 million); (v) Flood Works (Rs. 362.542 million); (vi) Foreign Aided Projects (Rs. 11,768.854 million). Excluding the foreign aided projects, the total cost of the envisaged project is Rs. 9,522. 025. Considering the size of past ADPs these envisaged development schemes may require 7-8 years for implementation. Based on the past trend and assuming some increase in the size of the ADP, the total ADP for Punjab in the MTEF period is expected to be of the order of Rs 6–7 billion. § Sindh’s Five Year Rolling Plan (2002-2007). Sindh has prepared a Five Year Rolling Plan for FY02-07. It includes completion of 12 on-going schemes, including a scheme for assuring water supply to Karachi by upgrading the Kinjhar Lake System. In addition there are 55 new schemes with an estimated expenditure of Rs. 7.13 billion. The annual planned expenditures during the period 2002-2007 are shown in Fig. 2.7. The provision for on-going schemes also includes the counterpart funding required for NDP Project. In addition to many small-assorted schemes, new schemes include the Mole Dam, Khar Dam, Malir Weir III, Gaj Dam and Lining of Canals in Sindh. Based on the past trend as well as assuming some increase in the size of the ADP, the total ADP for Sindh in the MTEF period is expected to be of the order of Rs 3-4 billion. § NWFP’s Ten Years Perspective Plan (2001-2011). NWFP has prepared a Ten-Year Perspective Development Plan for 2001-2011. It includes completion of 15 on-going schemes, with total expenditure of Rs. 1.6 billion. In addition there are 41 new schemes on which a total expenditure of Rs. 29.3 billion is envisaged. The annual planned expenditures during the period 2001-2011 are shown below. The most significant feature of the TYPP is the uneven annual provisions, which range from the lowest of Rs. 322 million in FY11 to a high of Rs. 5891 million in FY05/06. The annual provisions made in the last three FY08/09, FY09/10 & FY10/11 are about one tenth of the annual provisions made during the period FY02-08. The high annual provisions during the period FY02 to FY08 are due to the proposed construction of high cost schemes 1st CRBC Lift Canal (total cost Rs. 19.2 billion) and part of 2nd CRBC Lift Canal (total cost Rs. 16.7 billion) in D. I. Khan, which will develop new areas of 285,700 acres and 248,000 acres respectively. The construction of 2nd CRBC Lift Canal will spill over to period beyond FY 2010/11. The remaining investments are for construction of small dams, development of small irrigation schemes and lining of canals in NWFP. The Gomal Zam Dam (on-going) and other major projects like Kurram Tangi Dam, Munda Dam, FPSP II, Emergent Flood Protection Works and Drainage works in NWFP are not included in the provincial TYPP and are envisaged to be funded through the federal PSDP. Based on the past trend as well as assuming some increase in the size of the ADP, the total ADP for NWFP in the MTEF period is expected to be of the order of Rs 2 billion. § Balochistan has not prepared a formal perspective program. However, the Balochistan Provincial Irrigation Department has a list of several water sector development projects for which either the

Annex B Page 2 of 3

feasibilities or pre-feasibilities have been prepared. The total estimated cost of these projects is of the order of Rs. 65 billion. The Government of Balochistan intends to seek federal assistance for implementing this program. Of the projects included in the list, two projects: Mirani Dam Project and Kachhi Canal Project are already included in WAPDA’s Vision 2025. The list also includes Extensio n of Pat Feeder Canal for utilizing the surplus Kharif flows amounting to 0.84 MAF, which cannot be utilized due to capacity constraints. This Project is in conflict with the Kachhi Canal Project, which is also based on using the same unutilized flows in addition to surplus flood flows from Balochistan’s share in flood supplies and from future storage reservoirs. Another project included in the list is the Hingol Dam. The Government has recently decided to not go ahead with this Project to avoid adverse implications for the Hingol National Park. After taking out the cost of Pat Feeder Extension Project, Hingol Dam Project and the ongoing Mirani Dam and Kachhi Canal Projects under Vision 2025, the total portfolio of future water resources development Projects for next 10 years in Balochistan reduces to Rs16.85 billion. Based on the past trend as well as assuming some increase in the size of the ADP, the total ADP for Balochistan in the MTEF period is expected to be of the order of Rs 1.5-2 billion.

FEDERAL PSDP AND PROVINCIAL ADPS

2. Federal Public Sector Development Program (PSDP) for FY03. The total PSDP for 2003 is Rs 11 billion, with the following water and irrigation sector component shares: Storage (42%), Water Management (including rehabilitation - 23%), Irrigation expansion (19%) , Drainage (15%), and Flood Protection (1%). It reflects a substantial shift towards investments in storage. Because of lack of consensus on large dams on the Indus, several small to medium storage dams (Gomal Zam Dam, Mirani Dam) have been started in addition to the start of preliminary work on the raising of the Mangla Dam. Feasibility studies for the proposed Basha-Diamer Dam, Satpara Dam, and Akhori Dam have been started with funding provided from the Power Sector budget. Currently there is no allocation for the on-going NDP project, which supports reforms and investments in drainage. However, the Planning Commission intends to allocate approximately Rs 1,500 million for this project during the mid-year review of the PSDP through re-appropriation within the sector.

3. Provincial ADPs for FY03. Allocations for water in the FY03 Provincial ADPs are as follows:

Provincial 2003 ADPs (Rs Million)

Agriculture Irrigation Department Total Department (OFWM) Punjab 1,010 329 1,339 Sindh 375 32 407 NWFP 331 358 689 Balochistan 1,312 0.1 1,312 Total: 3,028 719 3,747

4. A substantial portion (20% to 40%) of the total investment in the sector is channeled through the Provincial ADPs. The provincial ADPs are supposed to reflect provincial and local priorities. They include provincially funded projects as well as the irrigation components of federally funded integrated irrigation/drainage projects, for which funds are allocated under the Irrigation Departments’ ADPs. However, on-farm water management investments are funded through the Agriculture Departments’ ADPs. The Provincial ADPs are in general characterized by: (i) a large number of small projects, many of which are of the nature of deferred O&M; (ii) under-funding and consequently long implementation periods, making some projects nonviable; and (iii) lack of attention to financial sustainability and to

Annex B Page 3 of 3 reducing O&M cost (e.g. ADPs include schemes for lift-irrigation that are potentially non-sustainable financially). It is unclear whether the Provincial ADPs indeed reflect well considered overall sector priorities. A careful review and cleanup of the provincial portfolios appears warranted to prioritize investments and foreclose some projects to release resources for priority investments.

5. Worrisome features of the FY03 provincial ADPs, which together constitute over 25% of the total allocation for the sector, are:

§ Only NWFP and Punjab have significant allocations for On-Farm Water Management (OFWM) investments; § While the NWFP ADP includes complementary investments to support ongoing irrigation expansion projects (command area development for CRBC), Punjab, Sindh and Balochistan have not yet included any preparations (surveys, social mobilization, CAD preparation) to support the pla nned irrigation expansion projects (e.g. Greater Thal canal) already appearing in the federal PSDP. This could develop into a major disconnect. § Most small dams as well as minor irrigation projects are planned without adequate attention to, or funding for, command area development, farmer participation and other complementary investments that are essential to reap their benefits. These projects are especially important from a social and political perspective in the Barani areas where water scarcity constraints are severe. The very best of these projects are economically marginal and most have a negative economic rate of return under the most optimistic assumptions. The Government may consider this to be a acceptable subsidy for these areas where poverty is high and opportunity low – but it should not accept the record of poor planning and implementation of these projects that has in the past greatly reduced benefits and poverty impact.

Annex C Page 1 of 10

REVIEW OF PROJECTS IN THE CORE AND NON-CORE PORTFOLIOS

1. Ongoing and Proposed Irrigation Expansion Projects. Long gestation and high cost irrigation expansion investments are questionable in the best of circumstances. This is more so when water supplies are not assured, command areas comprise sandy soils, and high pay-off short-term investments compete for resources. This is true for the three new canals projects (Greater Thal, Kachhi and Rainee canals). Specific issues relating to the projects are:

§ These projects have yet to be subjected to rigorous feasibility preparation and critical analysis. § Together these 3 canals would account for over 4.6 MAF of water for their Kharif requirements only -- nearly twice the additional capacity that would be created by the raising of Mangla Dam. There are uncertain prospects of supplying water to these canals during Rabi until additional storage becomes available. Reallocating water from other canals during Rabi, though theoretically possible, would be hard to actually implement given existing “customary or historical rights” and the lack of real attention to water conservation. In the Greater Thal Canal area, while a fresh groundwater reservoir may ultimately develop, detailed hydro-geological studies are needed to forecast a time frame, water quality and aquifer capacity. Moreover the cost of private tubewells and pumping cost would need to be factored in the economic analysis. § These canals would receive water for a period of 75-90 days in a year (during July to September). Non-availability of water during April-June (the Kharif sowing season) would affect cropping patterns and yields. Also, there would be periods during these 75-90 days, when high sediment load in the river may restrict actual diversions without causing rapid sedimentation. § The command areas include depressions and sand dunes and large areas with low population. Thus water losses would be high and agricultural development would take place very slowly as colonization and command area development (CAD) take place. § As currently proposed the projects do not provide funds for command area development without which project benefits would remain elusive. § It is unclear whether detailed social and environmental assessments have been carried out to determine canal alignments that would explicitly target the poorest areas and small land holders. § Given the sandy nature of soils, the estimated ERR for the Thal Canal (over 18%) appears overly optimistic 68. If the additional cost of colonization, CAD (which are of the same order of magnitude as the cost of main canal works) are added, the ERRs would become unacceptable. § As proposed the projects would not be completed during the MTEF period and thus not yield even the low level of benefits in the short term. § The projects would add substantial burden to the already strained O&M budgets.

Canal Estimated Annual O&M Cost (Rs million) Greater Thal 141 Rainee 91 Kachhi 289

68 The ERR of CRBC Stage 1 (not a desert area) at completion was estimated to be 10%.

Annex C Page 2 of 10

Recommendation. The feasibility studies of these projects need to critically reviewed with a view to either dropping, deferring or curtaining their scope. If the projects have reached a point of no return (due to political commitment and/or compelling poverty reasons), consideration should be given to implementing them in a phased manner while ensuring that complementary investments are carried out concurrently to ensure that benefits would actually accrue. Detailed social and environmental assessments ought to be an integral part of the analysis and guide canal alignments to ensure equity and poverty targeting.

Without pre-judging the completion of feasibility studies and detailed appraisal, these projects provide an exceptional opportunity to establish a decentralized and farmer managed system right from the start. Instead of expanding the existing irrigation departments into the new command areas with their traditional modes of O&M and implementation (we are not referring to construction, but the phase benefit development phase of implementation). Concerted efforts should be made to establish FOs through a program of social mobilization and capacity building. This should be followed by establishment of area water board. The Ministry of Water and Power is considering a “modular approach” for implementing these projects in a phased manner. This may be a way forward on these projects that will move toward satisfying both the political commitments and the TYPP objectives as well as providing a highly visible demonstration of the new future of irrigated agriculture in the Indus Basin.

2. Sehwan Barrage Complex. The project envisages a Barrage Complex on the river Indus, about half way between the Sukkur and Kotri barrages in Sindh Province close to Manchar Lake. A feasibility study for the Project was carried out in 1993 and consultants are being hired for detailed design and preparation of tender documents. The project seeks to improve water supply to an area of 2.4 million acres currently commanded by the lower and eastern reaches of Nara and Rohri canals by providing a direct supply from proposed barrage on the Indus. Manchar Lake will be used to store 0.65 MAF for Indus water, which would also improve its important fishery. The project also envisages drainage and flood protection works. Expected benefits include increase in cropping intensity form 85% to 125%, and increase in fish production in Manchar Lake with significant positive impact on poverty (the lake would be converted from a saline to a fresh water). The updated costs are Rs 42,000 million. The Water Sector Strategy estimated the ERR at 10.1% using lower cost figures than are now estimated. The construction period is estimated at 7 years. Construction is envisaged to start in FY04.

Recommendation. Given its marginal economics, if a lower cost scheme with higher benefits cannot be found after further detailed planning and analysis, it is proposed that the project be deferred for reconsideration after the MTEF period.

3. Chashma Right Bank Canal 1st Lift Irrigation Project. The project is part of the larger Chashma Right Bank Irrigation Project, which consists of three gravity phases and this lift Irrigation component. The gravity phases have been completed with financial assistance from ADB. The command area to be served is about 285,000 acres through lift irrigation consists of the higher elevation Indus Flood Plain along the foothills of the Suleiman mountain range measuring. Construction is planned in two phases. Phase I will take 4 years and complete Irrigation facilities for 67,000 acres. Phase II will take 3 years and complete the facilities for the remaining area. Consultants have been fielded in February 2002 to carry out detailed design. The estimated cost is Rs 19,200 million. The Water Sector Strategy estimated the ERR at 10.3%. Increase in crop cultivation is slated to create some 24,600 full time jobs. The value of farm and residential land is expected to increase sharply due to the project. Big landowners

Annex C Page 3 of 10 will benefit most from this increase. Income disparities between large and small landowners and landless labor are likely to increase.

Recommendation. Given the low ERR and high O&M cost associated with lift- irrigation schemes, it is recommended that the decision whether or not to go ahead with the project should be deferred till a full and rigorous evaluation of the project feasibility has been made, and mechanisms to increase cost recovery for O&M are agreed with beneficiaries (which may involve consideration of higher value cropping patterns, more efficient irrigation technologies than are traditionally considered or assumed in this area, more secure water entitlements and service).

4. Akhori Dam, Dhok Pathan Dam, and Sabak Zai Dam. WAPDA plans to start a number of dams in Punjab and NWFP, including Akhori Dam, Dhok Pathan Dam and Sabak Zai Dam. Little information is available on these projects except that Akhori and Dhok Pathan Dams will be major multipurpose dams whereas the Sabak Zai Dam is a small dam. WAPDA has invited proposals for the feasibility study of Akhori dam. The study will be of 24 months duration. For the other two dams the studies have not yet been started. Firm estimates of costs are not available at this time. In the TYPP the combined total cost of Akhori, Dhok Pathan and Sabak Zai Dam is shown as Rs 40,000 million, which seems low. A provision of Rs 17,100 million has been made in the TYPP for the three dams from 2004-5 to 2010-11. WAPDA’s estimates are much higher. For Akhori Dam WAPDA has indicated a cost of Rs 99,134 million, for Dhok Pathan Rs18,005 million, and for Sabak Zai Dam Rs 1,000 million. Projected cash flow requirements of the three dams are shown below. At present no data is available for an economic evaluation of these projects.

Rs Million Total Project 2001-3 2003-4 2004-5 2005-6 2006-7 2003-7 Cost Akhori 99,134 0 0 0 10,000 20,000 30,000 Dhok Pathan 18,005 0 3,000 6,000 6,000 15,000 Sabak Zai 1,000 150 500 250 100 0 850 TOTAL 118,139 150 500 3250 16,100 26,000 45,850

Recommendation: Since feasibility studies have still to be carried out, a decision about these projects should be deferred till their feasibility has been established. Implementation should be deferred until after the MTEF period.

5. On-going Projects For Which Funds Need to be Allocated Currently there is no allocation for NDP1 and the Second Flood Protection Sector (FPSII) Projects in the FY03 PSDP, although allocations for NDP1 exist in the provincial ADPs. The Planning Commission has indicated that it will allocate funds for NDP1 through re-appropriation within the sector allocation during the mid-year review of the PSDP. Since NDP1 is the only project in the portfolio that provides resources for institutional reforms and critical sector planning and policy studies, it is recommended that adequate funds be allocated for it during and beyond FY03. Besides rehabilitation of drains, NDP resources should be utilized to complete privatization of remaining public tubewells in fresh groundwater areas, support pilots for introducing groundwater regulation and institutionalize groundwater monitoring and the nascent water sector environmental monitoring program. As regards flood protection, although the prevailing drought has pushed this subsector to the background, it would be prudent to continue investments that prepare the country for future floods. It is recommended that funds be allocated for the restructured FPSII during and beyond FY03.

Annex C Page 4 of 10

6. Projects or Complementary Investments Missing from the Portfolio As indicated above, the proposed irrigation extension projects (Greater Thal, Rainee and Kachhi Canals) do not include the cost of Command Area Development (CAD) works (the construction of the watercourses, land leveling and farm roads, etc.), which have been assumed to be undertaken by farmers using MAchinery provided by the Agriculture Department at subsidized rates. Parts of the command area of the Greater Thal and Rainee canals comprise sand dunes and depressions. The public sector share of the estimated cost of complementary investments in CAD is as follows:

Rs Million Canal System Total 2003-4 2004-5 2005-6 2006-7 2003-7

Thal Canal 30,000 2,000 9,000 9,000 10,000 30,000 Rainee Canal 8,000 0 2,000 3,000 3,000 8,000 Kachhi Canal 15,000 0 5,000 5,000 5,000 15,000

Should the Government decide to continue with these projects (even in a phased manner), funds for CAD works would need to be provided either in the PSDP or the provincial ADPs and necessary institutional arrangements made for planning and implementation. It extremely difficult to estimate these costs since available recent experience seems to give greatly different values. Detailed studies of what will be needed should either be included in the feasibility studies or undertaken separately as soon as possible so that total costs of the projects can be estimated, ADPs adjusted, and programs planned. Note that these studies would have to be well coordinated with the social and environmental assessments suggested earlier for these projects.

7. Priority Investments Missing from the Portfolio The portfolio emerging during the MTEF period does not explicitly include funds for (i) water conservation (OFWM), (ii) on-farm and priority off-farm drainage, including the NSDS, and (iii) institutional reforms (follow-up to NDP1).

§ Water Conservation. While some funding for OFWM investments may be included in the provincial ADPs for the Agriculture sector, this is by no means assured, given the likely small size of the ADPs. As mentioned earlier, water conservation interventions are vital and have the potential to yield 4.7 MAF of water savings, 50% of which is permanently lost each year in SGW areas. It is, therefore, critical that the Federal Government support these priority investments by explicitly allocating funds in the PSDP so that these investments could proceed on a larger scale and at a faster pace compared to the past. A total investment of Rs 10 billion is recommended for OFWM during the MTEF period. § Drainage. The Drainage Master Plan and inter-provincial Drainage Accord are expected to be completed by the end of year 2004 and would pave the way for new drainage investments. Given that NDP1, which, in the meanwhile, is supporting primarily rehabilitation investments in drainage, would close in December 2004, it would be essential to make space in the portfolio for drainage investments, comprising on-farm drainage (surface and sub-surface), as well as off-farm drainage, including funds for an inter-provincial spinal drain and other elements of the National Surface Drainage System. It is recommended that an amount of Rs 12.5 billion be allocated for these investments during the MTEF period. § Institutional Reforms. The ongoing institutional reforms, notwithstanding the mixed performance so far, are essential for overall sector efficiency and growth. Being essentially long term in nature, the reforms will require continued support and funding well beyond the life of

Annex C Page 5 of 10

NDP1, which is currently the principal source of support. While the federal Government has repeatedly expressed its unequivocal support for the reforms, the emerging portfolio of investments does not include an explicit provision for the reforms, although an NDPII is proposed by the WSS and included in the MTIP. Without uninterrupted and continued support the modest achievements in institutional reforms made so far would be lost. It is, therefore, critical that a substantial amount of resources be explicitly allocated for the reforms as a follow-up to the NDP1. It is recommended that an amount of Rs 5 billion be specifically allocated for the reforms for establishment of FOs and strengthening of AWBs and PIDAs. § Program for Improving Effectiveness of O&M. Chronic shortfalls in O&M funding and institutional neglect have taken their toll on the overall irrigation and drainage system and its performance. This is reflected in current dilapidated state of the system, poor service delivery and looming risk of failure of major structures. While O&M performance is expected to improve as institutional reforms and cost reduction measures (e.g. privatization of remaining public tubewells) are implemented, a special program for enhancing O&M performance through increased budgets and improved planning, prioritization, implementation supervision, bench marking, and performance audits is urgently needed. This program could be undertaken either as part of recurrent budgets or as an explicit item in the PSDP or ADPs. An amount of Rs 10 billion is recommended for this program during the MTEF period.

SPECIFIC COMMENTS AND RECOMMENDATIONS ON SELECTED PROJECTS

8. Punjab Barrage Rehabilitation. The project aims to ensure the continued safe functioning of 14 barrages and the main canal systems in Punjab. Some of these structures were constructed as far back as 1887, and have suffered from deferred maintenance, rendering them prone to catastrophic damage. Preliminary studies have indicated the need for rehabilitation of eight barrages. A two-phase program costing Rs 32 billion was included in the TYPP. Detailed studies, however, remain to be carried out.

Recommendation. Feasibility Studies and detailed designs of the remedial works for each barrage must be prepared before the Project is undertaken. In the meantime, monitoring and safety programs for the barrages need to be strengthened. Some of the barrages are reported to have problems of approach on the upstream side, which result in uneven flow distribution and reduced discharge capacity. There are also retrogression problems on some of the barrages, which affect safety of the structures. These problems need to be solved. The following are immediately warranted, for which a provision of Rs 5.5 billion is recommended during the MTEF period:

§ Condition survey of major structures. § Review of available instrumentation and installation of new instrumentation where necessary. § Identification of safety problems and evaluation of technical and economic feasibility for proposed interventions on each barrage, including a risk analysis of different options. § Implementation of remedial measures that would make the structures safe e.g. the Punjab Irrigation Department plans to undertake the repairs of downstream friction blocks on Jinnah Barrage, which are damaged. Similar interventions may be needed on other barrages to improve their safety.

9. Punjab Irrigation System Improvement Project. The proposed project would rehabilitate and remodel old and dilapidated irrigation infrastructure in various canal commands. The TYPP includes a

Annex C Page 6 of 10 block provision of Rs 32 billion for this purpose. The Punjab Irrigation and Drainage Authority (PIDA) prepared a Concept Paper for the Project in April 2001, which included three canal commands at a cost of 23.409 billion to be implemented in three phases. Two canal systems, the LBDC and LCC East Canal Commands, have been studied in some detail but a full feasibility study remains to be completed. An Area Water Board is proposed to be set up in the LCC East Canal as part of the institutional reforms supported under the NDP project, but is not yet operational. The updated costs for the LCC (East) project amount is Rs 4,422 million. The ERR is estimated at 18.8%

Recommendation: The Project appears to be economically viable but a comprehensive feasibility must be first completed. A more detailed feasibility study of the LBDC canal command exists, which could be updated quickly. However, these projects will make sense only if they are accompanied by institutional reforms that establish empowered FOs and AWBs to carry out effective operation and maintenance of the rehabilitated and remodeled canal systems. The project should also be used as a vehicle to rationalize canal water allocations

10. Irrigation System Rehabilitation Project in Sindh. A “special” allocation of Rs 10 billion has been made for the Project and funds have been included in the FY03 PSDP. Lining of distributaries and minors is part of the plan and expected to yield a total water saving of 118 cusecs. The WSS estimated the ERR at 3.8% as compared to 27% in the PCI. One of the reasons for the low ERR, was the 30 to 33 percent decrease in international prices of major agricultural commodities since the time the original study was undertaken.

Recommendation. While rehabilitation in general has high returns, investments in lining should be confined to only those channels that have high seepage losses in SGW area. It is recommended that physical measurement of seepage losses be carried out and ERRs estimated for each sub-project for lining. Furthermore, given the good progress on institutional reforms in Sindh, priority should be given to canal commands where reforms are proceeding and planning and implementation of project works should be carried out in close consultation with, and collaboration of, AWBs and FOs. Finally, the project should be used as a vehicle to rationalize canal water allocations.

11. Mangla Dam Raising. Given the inter-provincial issues surrounding the Kalabagh Dam, raising of Mangla appears to be the only option available to the government in the next five to seven years to replace part of the storage capacity lost to sedimentation (see figure below for the past and projected depletion of storage capacity and the planned augmentation). Given this situation and the reasonable probability (71%) of filling the increased Mangla storage each year, there seems to a case for moving ahead with this project.

However, completion of a social and environmental assessment according to prevailing international norms and best practices and diligent implementation of resettlement and environmental management plans would be pre-requisites for smooth project implementation. Further studies and analysis to identify the optimum use of the increased capacity are warranted. The options of using the 2.9 MAF of extra capacity for meeting water shortages in early Kharif or during Rabi, and/or using this capacity as a buffer stock for drought need to be studied. Institutional Issues

Annex C Page 7 of 10

INSTITUTIONAL ISSUES

12. While the PER has not attempted a detailed assessment of the water sector institutions, some information on existing staffing pattern of the provincial Irrigation and Power Departments, included in the Feasibility Study of National Drainage Program (1995) is summarized below.

Staffing Pattern of Irrigation Departments (1995)

Designation Punjab Sindh NWFP Balochistan I. ENGINEERING AND ALLIED STAFF Secretary 1 1 1 1 Chief Engineers 12 7 3 2 Superintending 42 24 12 7 Engineers/Eqv XENs 137 107 33 21 SDOs/Eqv 350 315 91 58 Sub Engineers 1514 745 190 153 Sub-total I 2056 1199 330 242 II. REVENUE STAFF Canal Collectors 5 Deputy Collectors 45

Zilladars 500 Patwaris 5017 Sub-total II 5567 - - -

III. Others Drawing 751 Details Not Details Not Details Not Admin 3333 Available Available Available

Mechanical 12729 Civil 33054 Sub-total III 49867 28852 6674 3533

57490 30051 7004 3775

TOTAL

13. While some changes would have taken place since 1995, the overall staffing pattern remains essentially the same. It is evident that a relatively small proportion of professionally qualified staff oversees the activities of a large number of lower cadre staff. Degree-holding engineers start from level of Sub-Divisional Officers (SDOs) or Assistant Executive Engineers (AENs). Experienced diploma- holding engineers (sub-engineers or overseers) are also promoted to the positions of SDO/XEN. The day- to-day executive responsibilities lie with the XENs and SDOs. Thus it would be a fair statement that the system is essentially run by a technical cadre representing about 1% of total staff in the Punjab, 1.5% in Sindh, 2% in NWFP and 2.4% in Balochistan. The remaining are support staff, such as clerks, drivers, cooks, beldars, tapedars, telephone operators, watchmen, gauge readers, chainmen, etc., as well as more specialized staff such as machine operators, mechanics, survey helpers, tracers, general accounts staff. It

Annex C Page 8 of 10 is clear that there is huge overstaffing, particularly in the lower cadres. It is pertinent to mention here that staff rendered redundant as a result of privatization of public tubewells in Punjab is still on the government rolls. A severance package was prepared but not implemented.

14. Another significant feature is that almost all senior positions are occupied by civil engineers -- only some of whom have qualifications in water resources management. There are practically no staff with expertise in agronomy, economic analysis, finance, environment and soc ial sciences. Similarly, there are few staff with expertise in M&E, social and environmental assessment and legal matters. A modest move towards multidisciplinary staffing has been made as part of the Institutional reforms. PIDAs and AWBs have recruited some professionals from the market on contract basis.

15. Monitoring and Evaluation (M&E) capacity in the Irrigation Departments is practically non- existent or ineffective. In the system below the main canals, flow gauging devices and structures are either missing (and where they exist they are seldom calibrated), making water distribution non- transparent. Groundwater monitoring has been particularly weak. While WAPDA’s SCARP Monitoring (SMO) carries out groundwater monitoring, its past program has been confined to SCARP areas and subject to availability of funds channeled through specific projects. A groundwater monitoring program was developed for Punjab as part of the Punjab Private Sector Groundwater Development Project but appears to be dwindling down after the closure of that project. A draft groundwater regulatory framework was also prepared under this project but has not moved beyond pilot testing. There is an urgent need for institutionalizing a monitoring program supported by a steady flow of resources. A Water Sector Environmental Management Program started as part of the NDP, envisages a comprehensive package comprising compilation of an environmental baseline; Environmental Assessment and a Management Plan; a Wet land Management Plan; Groundwater Regulatory Framework; Urban and Industrial pollution control; an Environmental Data Management System; and an Awareness Program. Both federal and provincial agencies are involved in its formulation and implementation. This program needs to be supported.

16. WAPDA’s Role in the Sector. As part of the institutional reforms supported under the NDP, it was foreseen that WAPDA would focus on basin-wide planning and monitoring of the Indus River Basin and phase itself out of the role of implementing irrigation and drainage projects on behalf of the Provinces, except those involving new water resources development and projects of an inter-provincial nature. While good progress was initially made in this regard, recently there has been some reversal of this policy. For example, WAPDA is implementing the Greater Thal Canal Project, which is an irrigation extension project involving only one province. This development is perhaps contributing to lack of coordination (a major disconnect) between the main canal civil works and the CAD works, which would fall under the responsibility of provincial departments.

17. Project Review & Approval Process and Institutions. The Planning Commission has instituted clear processes and responsibilities for the planning, preparation and approval of investment projects. Projects are prepared within the framework of perspective plans, five-year plans, or three year rolling plans. Small projects up to a cost limit (Rs 10 million) can be approved by Departmental Development or Ministerial Working Parties. Larger provincially initiated projects are subject to review and clearance by the Provincial Development Working Parties (PDWPs) who have the final authority to approve projects up to a cost ceiling of Rs 200 million (check?). Federally initiated projects and larger provincial projects are subject to clearance by the Central Development Working Party (CDWP) which is composed of representatives of concerned federal ministries as well as representatives of all four provinces. The CDWP is chaired by the Deputy Chairman Planning and acts as the technical clearing house for all projects costing more than Rs 200 million. Technical issues and detailed appraisal is supposed to be responsibility of the PDWPs and CDWP. Project costing more than Rs 200 million require approval of the Executive Committee of the National Economic Council (ECNEC), which includes the provincial

Annex C Page 9 of 10 chief executives and is chaired by the Federal Finance Minister. Water projects involving additional water diversion also require clearance of the Indus River System Authority (IRSA), which is responsible for matters concerning inter-provincial water allocations in accordance with the Water Accord.

18. Issues and Recommendations. The review and approval system is well designed and suited to the federal nature of Constitution of Pakistan. It provides mechanism for scrutiny of overall project feasibility, and adherence to country norms and standards. Unfortunately, however, the processes and procedures prescribed in the system are not always followed in letter in spirit. Several projects by-pass procedures (at least initially) and are subjected to the review process only on an ex-post basis, thus undermining the system. The technical wings of the provincial and federal Planning and Development Departments who are responsible for ensuring quality control, scrutiny of feasibility studies are generally weak, short staffed and over loaded. Consequently, the quality of PDWP and CDWP reviews could be compromised. Strong project sponsor ing agencies sometimes overwhelm the PDWP and CDWP reviews and questionable projects slip through. Another issue is that while PDWPs and CDWP can ask for revisions and changes in project concept and substance, they have no leverage to ensure that complementary investments get prepared and implemented. Clearly there is a need to firmly adhere to the prescribed processes and procedures without exception, other than in emergency situations. The PDWPs and CDWP need strengthening, including induction of professionals form the market, training and exposure to modern project appraisal techniques and practices. For large and complex projects inputs should ideally be sought from panels of experts. While this would require additional resources, it would have high returns. The recommendations made in the Ministry of Water and Power’s Water Sector Strategy to establish: (i) an Inter-Ministerial, Inter-Provincial National Water Council as a the major policy and decision making body in the water sector, and (ii) a Water Resources Apex Body responsible for planning, development and management of water resources are worth pursuing.

PROJECT IMPLEMENTATION: POLICY ENVIRONMENT

19. In sharp contrast to the outstanding track record of Indus Basin Replacements works --a major implementation feat—today, implementation of water sector projects in Pakistan is characterized by inefficiencies, slow progress, completion delays, time and cost overruns, and sometimes unsatisfactory outcomes. Factors that affect implementation include: weak implementation planning and management, weak construction industry, litigation related to land acquisition, non-compliance with agreed resettlement and rehabilitation programs, lack of attention to environmental issues, delays in procurement, delays in preparation of accounts and audits, and lack of preparations for the transition from construction to O&M. While some of these issues arise from poor project preparation and lack of commitment to project objectives, others arise due to the lack of a polic y environment conducive to efficient implementation. Projects involving external financing need to comply with international standards, policies and practices (including “safeguards”) that advocate a “do no harm” approach in dealing with social and environmental issues. Projects involving land acquisition and resettlement face problems due to conflicts between the existing land acquisition law and the project specific resettlement plans that go beyond the provisions of the law. Policies and procedures that need to be modernized and mainstreamed to meet prevailing international standards and requirements, include policies, procedures and practices relating to:

§ Land acquisition, resettlement and rehabilitation § Procurement of works, goods, and services § Financial management § Social and environmental assessment as the basis of project design and implementation § Greater use of Rural Support Programs and NGOs to enhance implementation capacity, particularly for poverty targeted projects involving community or farmer participation and social mobilization.

Annex C Page 10 of 10

SURVEYS , RESEARCH, ANALYTICAL WORK, AND HUMAN RESOURCE DEVELOPMENT

20. Availability of reliable primary data and research and analytical work are key for good strategic sector planning and investment project preparation. Unfortunately, investments on primary data collection have been few and sporadic. Systematic collection of primary data on a sample of watercourse representing the main agro-climatic zones of Pakistan was first carried out in late 1970s as part of the preparation of the Revised Action Program for Irrigated Agriculture. This data provided a wealth of fundamental information on system performance and irrigated agriculture and was also used in optimization models, including the Indus Basin Model. The next update of this data was not made until the preparation of the Water Sector Investment Planning Study in 1990. Since then there have been few and limited updates. Lack of operational funds for research and development and human resources development has seriously impaired Pakistan’s capacity to keep at the cutting edge of new technology and adoption of systems required to modernize the sector. In recent years, the Fordwah Eastern Sadiqia Irrigation and Drainage Project and NDP have been the main source of resources for capacity building and specific irrigation and drainage research. A steady supply of resources for research is, however, lacking. Given the fundamental importance of reliable primary data and need for research and analytical sector work to underpin sector planning and detailed project preparation, Pakistan needs to invest in strengthening institutions and programs to continue surveys, research and analytical work pertinent to the sector needs. Adequate attention and funds also need to be provided for water faculties to help Pakistan meet the challenges of the 21st century.