Completion Report

Project Number: 26479 Loan Number: 1467 December 2008

Pakistan: Bahawalpur Rural Development Project

CURRENCY EQUIVALENTS

Currency Unit – Pakistani rupee (PR)

At Appraisal At Project Completion (15 August 1996) (12 October 2007) PR1.00 = $0.0281 $0.0165 $1.00 = PRs35.619 PRs60.625

ABBREVIATIONS

ADB – Asian Development Bank BME – benefit monitoring and evaluation BRDP – Bahawalpur Rural Development Project CDA – Cholistan Development Authority CWD – Communication and Works Department DOWM – Directorate of On-farm Water Management EIRR – economic internal rate of return FIRR – financial internal rate of return FMR – farm-to-market road IsDB – Islamic Development Bank LGRDD – Local Government and Rural Development Department LSRS – large-scale reconnaissance survey MEPCO – Multan Electric Power Company M&E – monitoring and evaluation NGO – nongovernment organization O&M – operation and maintenance P&DD – Planning and Development Department PCC – project coordination committee PCR – project completion review PMU – project management unit PSC – project steering committee RRP – report and recommendation of the President SDR – special drawing rights SSI – small-scale infrastructure VOC – vehicle operating cost WAPDA – Water and Power Development Authority WDC – women's development center WUA – water users’ association

NOTES

(i) The fiscal year of the Government of Pakistan ends on 30 June.

(ii) In this Report, "$" refers to US dollars.

Vice-President X. Zhao, Operations 1 Director General J. Miranda, Central and West Asia Department (CWRD) Director D. Walton, Officer-in-Charge, Agriculture, Environment and Natural Resources Division, CWRD

Team leader S. Teoh, Natural Resources Economist, CWRD Team member E. de Castro, Associate Project Analyst, CWRD

CONTENTS

Page

BASIC DATA i MAP I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 2 B. Project Outputs 2 C. Project Costs 5 D. Disbursements 6 E. Project Schedule 7 F. Implementation Arrangements 7 G. Conditions and Covenants 7 H. Consultant Recruitment and Procurement 8 I. Performance of Consultants, Contractors, and Suppliers 9 J. Performance of the Borrower and the Executing Agency 9 K. Performance of the Asian Development Bank 10 III. EVALUATION OF PERFORMANCE A. Relevance 10 B. Effectiveness in Achieving Outcome 10 C. Efficiency in Achieving Outcome and Outputs 11 D. Preliminary Assessment of Sustainability 12 E. Impact 12 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 14 B. Lessons Learned 14 C. Recommendations 15

APPENDIXES 1. Performance Indicators and Achievements 17 2. Summary Evaluation of Rural Roads 20 3. Project Costs 24 4. ADB Disbursements by Year 25 5. Project Implementation Schedule / Achievement of Targets by Year 26 6. Status of Compliance with Loan Covenants 28 7. Consultancy Inputs 37 8. List of Equipment and Vehicles 38 9. Summary Financial and Economic Analysis 39

SUPPLEMENTARY APPENDIXES (available upon request) A. Detailed Evaluation of Rural Roads B. Detailed Financial and Economic Analysis

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BASIC DATA

A. Loan Identification

1. Country Pakistan 2. Loan Number 1467 3. Project Title Bahawalpur Rural Development Project 4. Borrower Islamic Republic of Pakistan 5. Executing Agency Planning and Development Department 6. Amount of Loan SDR26,070,000 7. Project Completion Report PCR:PAK 1087 Number

B. Loan Data 1. Appraisal – Date Started 17 June 1996 – Date Completed 2 July 1996

2. Loan Negotiations – Date Started 26 August 1996 – Date Completed 28 August 1996

3. Date of Board Approval 26 September 1996

4. Date of Loan Agreement 8 January 1997

5. Date of Loan Effectiveness – In Loan Agreement 8 April 1997 – Actual 11 June 1997 – Number of Extensions 2

6. Closing Date – In Loan Agreement 30 June 2003 – Actual 12 October 2007 – Number of Extensions 4

7. Terms of Loan – Interest Rate 1% per annum – Maturity (number of years) 35 – Grace Period (number of years) 10

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9. Disbursements a. Dates Initial Disbursement Final Disbursement Time Interval

23 September 1997 12 October 2007 122 months

Effective Date Original Closing Date Time Interval

11 June 1997 30 June 2003 74 months

b. Amount (in SDR ‘000) SDR26,070 US$38,000 Category or Subloan Original Last Revised Amount Amount Allocation Allocation Canceled Disbursed 01A Civil Works - Rural Roads 13,310 12,118 (1,192) 12,118

01B Civil Works— 2,538 3,449 911 3,449 Watercourse Improvement 01C Civil Works—Small-Scale 1,990 2,026 36 2,026 Infrastructure 01D Rural Electrification 2,381 2,381 2,381

02A Institutional 137 145 8 145 Strengthening— Equipment & Vehicles 02B Institutional 480 369 (111) 369 Strengthening—Contract Management Staff 02C Institutional 2,127 579 (1,548) 579 Strengthening—NGOs 02D Institutional 412 996 584 996 Strengthening— Consulting Services 02E Institutional 274 44 (230) 44 Strengthening—Studies 03 Service Charge 1,372 800 (572) 800 04 Unallocated 3,430 (3,430) 99 Imprest Fund Total SDR 26,070 22,906 (3,164) 22,906 Total US$ Equivalent 38,000 31,816 4,709 31,816

10. Local Costs (Financed) - Amount ($ million) 19.5 - Percent of Local Costs 54.3 - Percent of Total Cost 40.5

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C. Project Data

1. Project Cost ($ million)

Cost Appraisal Estimate Actual

Foreign Exchange Cost 16.3 12.3 Local Currency Cost 48.5 35.9 Total 64.8 48.2

2. Financing Plan ($ million)

Cost Appraisal Estimate Actual Implementation Costs Borrower-Financed 9.0 6.0 ADB-Financed 38.0 31.8 Beneficiaries 10.8 5.3 IsDB 7.0 5.1 Total 64.8 48.2 ADB = Asian Development Bank, IsDB = Islamic Development Bank.

3. Cost Breakdown by Project Component ($ million) Component Appraisal Estimate Actual Rural Roads 31.3 21.9 Watercourse Improvement 9.2 8.3 Small-Scale Infrastructure 5.4 4.1 Rural Electrification 2.8 6.5 Institutional Strengthening 5.6 6.3 Total Base Cost 54.3 47.1 Contingencies 7.7 0.0 Service Charge During Construction 2.8 1.1

Total Project Cost 64.8 48.2

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4. Project Schedule Item Appraisal Estimate Actual A. Date of Contract with Consultants Project Implementation Consultants 1998–1999 March 1999 Benefit Monitoring and Evaluation Consultants 1998–1999 March 1999 Contract Agreement Consultant 1998–1999 January 1999 Engineering Design Consultant 1997–1998 May 1999

B. Civil Works 1. Main Road a. Date of Award 1998–1999 February 2001 b. Completion of Work 1999–2000 December 2005 2. Farm-to-Market Road a. Date of Award 1998–1999 August 1999 b. Completion of Work 2002–2003 March 2007 3. Link Road a. Date of Award 1998–1999 January 2000 b. Completion of Work 2002–2003 March 2007 4. Watercourse Improvement a. Date of Award 1998–1999 December 1998 b. Completion of Work 2002–2003 June 2005 5. Rural Electrification a. Date of Award 1998–1999 January 1999 b. Completion of Work 1999–2000 October 2006 6. Small-scale Infrastructure a. Date of Award 1998–1999 December 1998 b. Completion of Work 2002–2003 February 2007

C. Equipment and Supplies 1. First Procurement 1997–1998 September 1997 2. Last Procurement 1997–1998 February 2007

D. Vehicles 1. First Procurement 1997–1998 September 1997 2. Last Procurement 1997–1998 October 2003

E. Other Milestones Reallocation of Loan Proceeds a. First September 2002 b. Second March 2004

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5. Project Performance Report Ratings Ratings

Development Implementation Implementation Period Objectives Progress From June 1998 to December 1998 Satisfactory Satisfactory From January 1999 to December 1999 Satisfactory Satisfactory From January 2000 to December 2000 Partly Satisfactory Satisfactory From January 2001 to December 2001 Satisfactory Satisfactory From January 2002 to December 2002 Satisfactory Satisfactory From January 2003 to December 2003 Satisfactory Satisfactory From January 2004 to December 2004 Satisfactory Satisfactory From January 2005 to December 2005 Satisfactory Satisfactory From January 2006 to December 2006 Satisfactory Satisfactory From January 2007 to October 2007 Satisfactory Satisfactory

D. Data on Asian Development Bank Missions No. of No. of Specialization Name of Mission Date Persons Person-Days of Members Loan Fact-Finding Mission 7–19 Apr 1996 5 65 a, b, c, d, e Appraisal Mission 17 Jun–2 Jul 1996 5 80 a, f, g, h, i Inception Mission 9–15 Jul 1997 2 14 j, i Review Mission 1 23 Mar–1 Apr 1998 2 20 a, k Review Mission 2 19–25 Nov 1998 2 14 a, l Special Administration Mission 22–23 & 27 Jul 1999 2 6 m, k Special Administration Mission 3–12 Apr 2000 1 10 m Midterm Review Mission 9–24 Nov 2000 2 32 m, l Review Mission 3 14–20 Sep 2001 1 7 m Review Mission 4 5–12 May 2003 1 8 m Review Mission 5 22–30 Nov 2004 2 18 m, k Special Administration Mission 5–6 Jul 2005 1 2 m Review Mission 6 20 Feb–2 Mar 2007 3 33 n, k, o, Project Completion Review 7–21 July 2008 4 58 p, k, q, r Mission a = senior project economist, b = social development specialist, c = young professional, d = civil engineer (consultant), e = rural development planner (consultant), f = project specialist, g = programs officer, h = senior counsel, i = project implementation officer, j = project administration unit head, k = project analyst, l = economist, m = senior project specialist, n = rural development specialist, o = disbursement analyst , p = natural resources economist, q = rural roads engineer (consultant), r = economist/financial analyst (consultant).

o o o 63 00'E 73 00'E 71 00'E 73 o 00'E

NORTH-WEST FRONTIER PAKISTAN Tarbela 35 o 00'N Dam 35 o 00'N BAHAWALPUR RURAL DEVELOPMENT PROJECT ISLAMABAD Peshawar Mangla (as completed) Dam AFGHANISTAN . R . R s lum Jhelum u he . d J R n b I na Sargodha he C Lahore P U N J A B R. vi Minchinabad Ra Multan Laleka Quetta o o j R tle 30 00'N Akuke 30 00'N Su Bahawalnagar PAKISTAN Bahawalpur

IRAN B A L O C H I S T A N . P U N J A B R r R Chistian Mandi s e ej u v tl d PROJECT LOCATION i u n R S I s . u BAHAWALNAGAR R o S I N D H o d Hasilpur 26 00'N 26 00'N n m I u Khairpur l Lodhran e h Harunabad INDIA J Hyderabad Faqirwali Karachi Bahawalpur Chak ARABIAN SEA Samasata o Uch Sharif 63 00'E 73o 00'E I N D I A Quraish

Yazman Ahmadpur East Chak Marot Fort Abbas Gaddul Khan Bela Daihri Mirgah Lianquatpur Nagra B A L O C H I S T A N Chacharan Nawankot Newly Settled Area r ive s R Serdargarh Firoza National Capital du In Derawar Fort Dhori Provincial Capital Miawali ed Khanpur er B Riv District Capital Rajanpur kra BAHAWALPUR Ha Kot Samabad City/Town Rahimyar Khan Khairgarh Fort Rahimabad Village Sadiqabad Mithra Rural Electrification Schemes Sanjarpur Khangarh Rukanpur Bhagla Nawa Kot Small Scale Infrastructure Schemes S I N D H Water Course Improvement Schemes Walhar Ranhal o 28 o 00'N RAHIMYAR KHAN Ahmadpur East-Yazman 28 00'N Miruwali Main Road Upgrading Bijnot Rural Road (Link Road and Farm to Market Road) N Islagarh River District Boundary 0 10 20 30 40 50 Provincial Boundary

0 International Boundary 8 - 2 Kilometers 6 Boundaries are not necessarily authoritative. 8 2

H o 73 o 00'E R 71 00'E

I. PROJECT DESCRIPTION

1. The Bahawalpur Rural Development Project was designed for the now defunct 1 Bahawalpur Division of Punjab Province. At appraisal, this Division was considered one of the least developed divisions in Pakistan, with more than 50% of the population living below the poverty line.2 The Project intended to target poor communities in newly settled areas within the division that were least served by infrastructure services and most isolated from social services. The poverty level in the newly settled areas was much higher—approximately 80%—and therefore needed urgent investment. The expected impact of the Project was poverty reduction in the project area. The expected outcome was increased rural incomes, employment, and quality of life through improvements in infrastructure services, agricultural production, and economic/market activities. The project scope, components, and targets in the report and recommendation of the President (RRP) were as follows: (i) Rural roads: improvement of about 100 existing roads totaling an estimated 400 kilometers (km), with emphasis on roads linking agricultural areas with markets. Targets were the widening of about 60 km of the existing road from Ahmadpur East Town to Yazman Town from a single-lane to a double-lane paved carriageway, upgrading of 10 existing farm-to-market roads (FMR), and upgrading of 90 existing link roads or tracks; (ii) Watercourse improvement: organization of about 480 water users’ associations (WUA), and improvement of 1,440 km of watercourses with an irrigated area of about 52,800 hectares (ha); (iii) Small-scale infrastructure (SSI): implementation of an estimated 450 works 3 identified by the communities; (iv) Rural electrification: connection of about 150 selected villages to existing transmission lines; and (v) Institutional strengthening: capacity building and institutional strengthening of government agencies and community organizations of project beneficiaries to (a) prepare an investment program based on participatory approaches, (b) implement the Project, (c) update and maintain databases relevant to the monitoring and evaluation (M&E) of the Project, and (d) establish an M&E system.

2. The Project was approved on 26 September 1996 for the amount of SDR26,070,000. It became effective on 11 June 1997. At appraisal, the total project cost was estimated at $64.8 million, of which Asian Development Bank (ADB) funding covered $38.0 million and an estimated $7.0 million was in parallel cofinancing from the Islamic Development Bank (IsDB). The IsDB cofinancing was to support the widening of the main road from Ahmadpur East Town to Yazman Town, and rural electrification activities. The planned closing date was 30 June 2003 and the actual closing date was 12 October 2007. Four extensions were requested by the Government and granted by ADB.

1 The "Division" level of administration was abolished during the local government reforms of 2001. Administrative powers at the division level were devolved to the district governments. There are three districts in the defunct Bahawalpur Division: Bahawalpur District, Bahawalnagar District, and Rahim Yar Khan District. 2 ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Pakistan for the Bahawalpur Rural Development Project. Manila. 3 Such as community buildings, simple drinking water systems, wells, tube-wells, ponds, feed processing units, small flour mills, oil pressing units, saw mills, fruit and forest nurseries, road drainage structures, and social facilities.

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II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

3. At appraisal, the Project’s design in terms of expected impact (then goal) and outcome (then purpose), as stated in para. 1, was consistent with ADB’s strategy in Pakistan and with the Government’s objectives on rural poverty reduction. The location of the Project within Bahawalpur Division appears to have been appropriate as the poverty incidence for the Punjab Cotton/Wheat Zone, within which the project area falls, was 56%—the second highest in the country.4 In particular, the RRP made the case for targeting newly settled areas (primarily in Bahawalpur and Rahim Yar Khan Districts) between the more settled area adjacent to the Sutlej River to the north and the Cholistan Desert to the south.5 However, there was also only limited analysis of the proposed investment mix and the extent to which investments would contribute toward the expected poverty reduction impact.6

4. Targeting. At the start of project implementation, the project management unit (PMU), in consultation with the Executing Agency, the Planning and Development Department (P&DD) of the Government of Punjab, concluded that targeting the newly settled areas was not necessary as the poverty levels in the newly settled areas did not significantly differ from the division average poverty level of approximately 55%.7 Therefore, the PMU did not specifically focus its activities on the newly settled areas.

5. Lessons. The RRP comprehensively documented lessons from similar agricultural and rural development projects and incorporated them into the design of the Project, especially lessons on beneficiary participation and operation and maintenance (O&M).

B. Project Outputs

6. Project output achievements and indicators are presented in Appendix 1 using the project monitoring and development framework in the RRP as a basis for comparing planned and actual achievements. ADB revised the output targets twice, in September 2002 and in June 2003. The Government also revised output targets twice. The first revised Proforma-I 8 was approved in October 2000 and the second in December 2004. In most areas, physical project targets were surpassed. Details of outputs at completion, broken down by component, are as follows:

1. Rural Roads

7. The rural roads component upgraded 126 individual roads, with a total length of 574 km9 against a planned total of 400 km. This comprised 89 (268 km) link roads, 36 (246 km) FMRs,

4 Household Consumption-Expenditure Survey of May 2004. 5 As defined in Article 1 of the Loan Agreement dated 8 January 1997. 6 For example, there is little discussion on the poverty reduction rationale for including a significant cost item in the Project, the widening of the 60 km existing farm-to-market road (FMR) from a single-lane to double-lane road. 7 PMU communication during Project Completion Review (PCR) Mission. No official ADB documentation records ADB concurrence to the change in targeting approach. 8 Proforma I of the Planning Commission of the Government of Pakistan approved by the Executive Committee of the Government of Pakistan’s National Economic Council for the Project. 9 Discrepancies appear in the project management unit (PMU) PCR in respect of the total length of road constructed. Appendix 2 therein refers to the length of roads for which contracts were awarded as 586.2 km, and Appendix 9 (Table 13) uses 587 km. However, the actual construction specified in Appendix 1 indicates that 574 km were completed.

3 and the widening of one (60 km) main road (between Yazman Town and Ahmadpur East Town) from one lane to two lanes. The largest number of upgraded roads were in Bahawalpur District (46), followed by Bahawalnagar District (43) and Rahim Yar Khan District (37). The main road is located in Bahawalpur District. Community organizations were formed only for link roads. 10 Requests from communities for an additional 93 roads were rejected because of problems with land acquisition (20 roads), the need to fell a large number of trees (7 roads), or insufficient poor households living in the subproject area (the selection criteria established at appraisal required 66% of households to be poor). Systematic analysis of poverty level of households is not available. Documentation to show consistent application of the selection criteria and systematic poverty targeting across all target villages is limited.11

8. The quality of both link roads and FMRs built under the Project is considered superior to those built by other government agencies. Appendix 2 contains a summary of the rural roads evaluation, which includes technical observations on the quality of the road. 12 Farmers interviewed during the project completion review (PCR) Mission field visits reported tangible and intangible benefits from the road construction. No impact evaluation was carried out for the main road. A key aspect of the component that has not been accomplished is road maintenance. Neither routine nor periodic maintenance has taken place.

2. Watercourse Improvement

9. The Project improved 684 watercourses and established 684 WUAs, against the original target of 480. A total of 301 watercourses (44%) were in Bahawalpur District, 189 (28%) were in Bahawalnagar District, and 194 (28%) were in Rahim Yar Khan District.

10. Targeting and selection of watercourse improvement schemes, as with other schemes, was not done as rigorously as originally intended. However, for this component each scheme application prepared by the WUA showed a breakdown of WUA members by landholding size, which gave a general indication of the distribution of households. However, available data does not link poverty to landholding size.13 Poverty data specific to the project area was not available and no assessment was made of the breakdown of WUA households by income. The PMU rejected 111 applications for watercourse improvement (representing 14% of all applications). The reasons for rejection included: (i) too few—i.e., less than 66%—potential beneficiaries were "smallholders" with less than 12.5 acres of land, (ii) the WUA failed to deposit the required share of construction costs, and (iii) the watercourse concerned was already lined and the application was for an extension.14

11. The PCR Mission observed farmers reporting increases in yields and switching to higher-value crops such as sugarcane as a result of the investment. Most farmers interviewed still rely on other water sources, such as tube-wells. There is no routine O&M. The PMU views the watercourse improvement as successful, in particular with regard to the implementation

10 The widening of the main road was funded by the Islamic Development Bank. 11 Anecdotal evidence suggests that political connections partly influenced some of the selection of rural roads investment; however, there is no documentation to substantiate this. 12 Supplementary Appendix A contains the full evaluation and accompanying photo-documentation. 13 Farm income depends on several factors other than landholding size alone, including the landholding's proximity to reliable irrigation, soil fertility, drainage, and proximity to roads and markets. Use of 12.5 acres as poverty-based selection criteria is too large a landholding, and therefore more households would be considered poor. 14 However, the PCR Mission noted examples where project-improved watercourses successfully applied for extensions of watercourse improvements already carried out under the Project.

4 approach,15 which ensured construction quality. This approach has since been adopted as the modus operandi of the National Program of Improvement of Watercourses in Pakistan.

3. Small-scale Infrastructure

12. A total of 564 SSI schemes were established against a planned target of 450. A total of 236 schemes (42%) were in Bahawalpur District, 148 (26%) were in Bahawalnagar District, and 180 (32%) were in Rahim Yar Khan District. Investments under the SSI component were largely commercially-oriented enterprises owned, managed, and operated by the community. These include agroprocessing, agricultural production, engineering workshops, and small-scale factories engaged in the manufacture of products such as leather goods and household goods. Together, these enterprises and manufacturing units number 400 (71%) of the 564 SSI schemes developed under the Project. The second major category of scheme is women's development centers (WDCs), which account for 19% of all schemes. WDCs provide skills training to community women mainly in sewing and embroidery, and operate on a commercial basis in the production and marketing of clothing, carpets, and other products. Schemes categorized as infrastructure by the PMU (water supply, culverts, and bridges) account for 10% of all schemes.

13. SSI selection criteria were: (i) majority of beneficiaries willing to form a formal community organization, (ii) community organization to agree in writing to contribute to the cost of the improvement and to carry out all subsequent O&M, and (iii) at least two thirds of the beneficiaries with incomes below the rural poverty line. The PMU rejected 2,425 of the scheme applications submitted for appraisal. Of those, 228 were rejected on technical grounds, and 2,197 were rejected on "social" grounds. As noted in paras. 8 and 11 above, there is inadequate documentation to show that the poverty criterion was consistently applied. In contrast to the selection criteria of the first two components (rural roads and watercourse improvement), there is no environment-related criterion.

14. The benefits from this component are varied, given the diverse nature of SSI schemes. Most schemes appear to be operated as small-scale enterprises, with the exception of the infrastructure schemes. Each of the enterprise-like SSIs has a limited number of active community organization members. Profits are shared amongst the community organization members. The main clients appear to be neighboring farmers and communities. A few of the WDCs have been successful (some through middlemen, some directly) in reaching markets in Lahore or Karachi for their products.

4. Rural Electrification

15. Under this component, 428 villages or settlements were electrified, against an initial target of 150 villages. This component was cofinanced by IsDB. The component electrified 168 villages in Bahawalpur District, 110 villages in Bahawalnagar District, and 150 villages in Rahim Yar Khan District. Electrification was carried out in two main phases, the first from 1999–2001 and the second from 2003 to the end of the Project. These subprojects were carried out by the Multan Electric Power Company (MEPCO). The PMU rejected 78 applications for rural electrification on the basis that the households concerned were scattered or numbered less than

15 The disbursement of funds for watercourse improvement took place through installments tied to assessments of ongoing construction quality. The PMU also retained 10% of the total watercourse improvement cost until final certification of satisfactory construction by field teams. This system is considered to have adequately addressed the problems of poor construction quality in previous on-farm water management projects identified in the lessons learned at appraisal.

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25. No villages appear to have been rejected for failing to meet the poverty criteria. It appears that poverty targeting for this component was not carried out effectively. The PMU coordinated with MEPCO to ensure that villages that had an opportunity to be electrified from government or other sources of funds would not be covered under the Project. In this way, the PMU deduced that the villages ultimately electrified through the Project did meet the poverty criteria.

16. One of the main benefits from electrification cited by communities visited 16 was the increase in the level of household comfort brought about by the use of electric fans, refrigerators, and kitchen appliances.17 Electric lighting made it possible for some women to work longer hours outside the home during the day in addition to doing household chores in the evening. 18 Other benefits include extended hours for children’s studies, extended use of productive machines such as fodder-cutting machines, and increased security in the villages. Communities visited by the PCR Mission showed a high level of appreciation for the subprojects as many settlements had been waiting a long time for electrification.19

5. Institutional Strengthening

17. Institutional strengthening appears to have received the least attention of all the components. As originally envisaged, this component was supposed to build the capacity of government agencies and community-based organizations at the divisional and village levels to (i) prepare an investment program based on participatory approaches, (ii) implement the Project, (iii) update and maintain databases relevant to project M&E, and (iv) establish an M&E system. These activities were largely in the scope of work of the contracted nongovernment organization20 (NGO). After the termination of the NGO's contract in June 2001 21 , the PMU took over the majority of these tasks.

18. An estimated total of 25,21522 beneficiaries at the village and community organization levels were trained under the Project. Institutional strengthening of government line agencies was limited. In Bahawalnagar district, the Project provided training to Communications and Works Department (CWD) staff in laboratory and site testing. There is little evidence that the institutional strengthening component has enabled villages to prepare investment programs and access financing, as originally envisaged in the RRP. Output under this component is not considered satisfactory.

C. Project Costs

19. The actual final cost of the Project was $48.2 million, compared with $64.8 million estimated during appraisal. The total cost comprised $12.3 million in foreign currency cost (compared with $16.3 million estimated at appraisal) and $35.9 million equivalent in local currency cost (against $48.5 million at appraisal).

16 PCR Mission in July 2008. 17 The degree to which such appliances are used depends largely on income levels and the availability of funds to purchase relevant household appliances. 18 This suggests an increase in women’s workloads. There is insufficient data to conclude whether women were better or worse off as a result of the extended work hours. 19 Villagers interviewed were generally of the view that larger villages in the constituency of influential persons were usually given priority for electrification. 20 The NGO contracted was the National Rural Support Program. 21 See para 34. 22 Approximately 1,215 trainees were trained in more formal courses; approximately 5,000 as part of community organization mobilization, and approximately 19,000 women were trained either directly by the Project or indirectly by master trainers trained by the Project. (PMU estimates).

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20. In spite of the increase in component costs resulting from the expansion of project output targets of rural road construction, watercourse improvement, SSI, and rural electrification, the project cost at completion remains lower than the appraisal cost estimates. This was due to: (i) the depreciation of the Pakistan rupee (PR) against the US dollar ($) as shown in Table 1 below; (ii) a decrease in the beneficiary contribution by 50% because the communities were not requested to provide unpaid labor to help with the construction of the roads; and (iii) cancellation by ADB of potential loan savings of $3.0 million in 2004, and $1.7 million upon closure of the loan account in October 2007.

Table 1: $:PR Exchange Rate during Project Implementation

15 Aug 96 (Appraisal) Sep 2002 Jun 2003 Apr 2004 Oct 2007 (Completion) $1.00 = PRs35.62 PRs60.15 PRs57.8 PRs57.315 PRs60.71 Source: Asian Development Bank estimates.

21. Loan proceeds were reallocated in September 2002 because of increases in (i) the length of link roads from 180 km to 230 km, (ii) the number of villages for rural electrification from 150 to 350, and (iii) the number of watercourses from 480 to 600. Another reallocation was done in March 2004 as the amounts of awarded contracts had exceeded the allocated amounts for two categories, rural electrification and consulting services. The actual costs by project component are compared to the cost estimate at appraisal in Appendix 3.

D. Disbursements

22. Total loan disbursements were $31.8 million, or 84% of the approved loan amount. The undisbursed balance of $1.7 million at the loan closing date was cancelled on 12 October 2007. The foreign currency amount disbursed was $12.3 million, and the local currency amount disbursed was $19.5 million. The breakdown of ADB's yearly disbursements is in Appendix 4.

23. An imprest account was established at the National Bank of Pakistan with an initial advance of $1.2 million. The imprest account ceiling was increased to $2.2 million in November 1998, then reduced to $1.5 million in January 2001 and increased again to $2.0 million in September 2002. The turnover ratio measuring the imprest account’s utilization reached an average of 3.09 in 2002. The imprest account was liquidated before loan closing.

24. A change in ADB financing percentages for the civil works' components (Rural Roads, Watercourse Improvement, and SSI) and Rural Electrification was approved in October 2002 to make them consistent with the project implementation arrangements and Government-approved financing in Proforma-I.

25. According to the Government project completion report,23 the average length of time between the sending of a withdrawal application and ADB replenishment was 62 days; in six cases the interval was more than 3 months. One delay lasted 606 days. There were 3 months where the imprest account balance was negative and 8 months where it was less than $100,000. ADB records show that the delayed replenishment of the funds was caused by incomplete documentation accompanying the submitted withdrawal applications, such as summary sheets, supporting documents, bank statements, and reconciliation statements.

23 PMU Project Completion Report, para 10.

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E. Project Schedule

26. The loan was approved on 26 September 1996 and became effective on 11 June 1997. It was designed as a 6-year project and was originally due for closure on 30 June 2003. Progress during the initial implementation stage in 1998 and 1999 was slow. This was mainly due to the delayed staffing of the PMU; delayed recruitment of consultants; and inconsistencies found in the original Proforma-I documents, which necessitated a revision and resubmission of the Proforma-I. Four loan extensions were requested by the Government and approved by ADB.24 The actual implementation period was 8 years and 9 months. See Appendix 5 for the implementation schedule.

F. Implementation Arrangements

27. Implementation arrangements at design are described in paras. 51 to 63 of the RRP. The PMU was established in Bahawalpur with the appointment of the project director in June 1997. The PMU established project offices in Bahawalnagar and Rahim Yar Khan. P&DD authorized the Project Director to use the power of Administrative Secretary. The PMU dealt directly with P&DD and was relatively isolated from other local government departments. This was viewed by PMU in a positive light as it facilitated efficient implementation of the Project. However, this meant that line agencies were only marginally involved, with the exception of the District’s Department of On-farm Water Management, which was involved in the watercourse component.

28. In 2001, the Punjab Local Government Ordinance came into effect and devolved administrative, political, and fiscal powers to the grassroots level.25 The immediate effect of the Ordinance on the Project was that the divisional administration led by the commissioner disappeared. The Project had to coordinate with the three new district governments separately. The Project remained operated centrally, in very close coordination with the district administrations.26

29. Changes in implementation arrangements. Work on rural roads, the largest component of the Project, could not start until changes to the original implementation arrangements were made. The three implementing agencies specified—i.e. CWD, the Cholistan Development Authority, and the Local Government and Rural Development Department (LGRDD)—were unable to fulfill their specified roles. This, plus the failure to negotiate consulting packages for rural roads design and supervision (see para. 33 below), led to the establishment of the Mini-Highways Division within the PMU in February 1999, which thereafter undertook the functions of road design and supervision of the contractors. Other changes to implementation arrangements were necessitated by the termination of the main implementing NGO’s contract.

G. Conditions and Covenants

30. Most covenants of the Loan Agreement have been complied with in a timely manner (see Appendix 6 for the status of compliance) with the exception of the following:

24 The four extensions were granted on 31 June 2003, 2 April 2004, 17 February 2005, and 15 March 2006. 25 Under this modality, the roles and responsibilities of different local actors changed and new functions, structures, and hierarchies were created in which local political aspirations were represented through the locally elected representatives. 26 Communication from ADB project officer.

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(i) Late compliance. Appointment of agreed PMU staff took place after the targeted deadline of within 6 months of the effective date. The submission of the PCR which was due on 30 September 2007 was also late as it was only received by ADB in 27 May 2008; (ii) Partial compliance. Key covenants that were partly complied with relate to: (a) the steering committee which did not meet at least two times per year; (b) changes affecting contract management staff without prior concurrence of ADB as required; (c) incomplete submission of reports and Benefit Monitoring and Evaluation (BME) surveys after the departure of the BME consultant in 2005; and (d) the incomplete application of selection criteria of rural roads, watercourses, rural electrification, and SSI schemes; and (e) the implementation of the institutional strengthening without the assistance of the NGOs. With regard to the reporting requirements, the annual report for FY2005/2006 and quarterly and monthly reports for 2006 were not submitted. The PMU made efforts to apply selection criteria for the schemes, but the process is not sufficiently documented and seems to have been based more on a subjective reasoning than on objective targeting.27 (iii) Non-compliance. The covenants pertaining to the establishment of the project coordination committee, and the maintenance of rural roads were not complied with. The project coordination committee was established but it never met. Budgetary funds were not allocated for the O&M of the roads. The only exception is found in 2002–2003, when the district CWD received an allocation for this purpose. However, according to the PMU, the funds were not used for the maintenance of rural roads constructed under the Project. Non-compliance of the road maintenance covenant has a direct impact on the sustainability and life of the rural roads constructed.28 No maintenance has been carried out to date.

H. Consultant Recruitment and Procurement

31. At appraisal, 840 person-months of domestic NGO inputs were to provide services in community organizations, institutional strengthening, and training. A summary of consultancy inputs is provided in Appendix 7.

32. In addition, about 124 person-months of domestic consulting packages for rural roads design and supervision, implementation, and BME were envisaged at appraisal, and a package to prepare simple standard contract agreements was also envisaged. A major problem in the recruitment of the rural roads design and supervision consultants was that the appraisal cost estimate was too low. The short-listed firms all submitted cost proposals three to five times greater than the cost allocation, and contract negotiations failed to lower these proposed costs. In September 1999, a change in implementation arrangements was approved to recruit individual consultants. The Mini-Highways Division created within the PMU was staffed with full- time individual consultants.29

33. Vehicles, equipment, and materials were procured by direct purchase in packages not exceeding $50,000. The NGO contract provided for the procurement of seven jeeps, which were procured through international shopping procedures. Vehicles and equipment procured through

27 The PMU and Planning and Development Department maintain that, in spite of the political pressure in terms of the selection of some schemes, the selection criteria have been consistently and objectively applied. 28 The reduction of the economic life of rural roads has been factored into the economic analysis (see Appendix 9). 29 Total of 470 person-months.

9 the NGO contract were turned over to the PMU after termination of the contract. Civil works for rural roads were awarded on the basis of local competitive bidding from among prequalified local contractors. The list of equipment and vehicles procured is in Appendix 8.

I. Performance of Consultants, Contractors, and Suppliers

34. The services rendered by the domestic NGO were deemed unsatisfactory by the PMU, mainly because of differences in opinion on the approach for community mobilization. The contract was terminated in June 2001. The PMU’s community development cell took over the training of village volunteers. However, it is not clear if the PMU had the capacity to take over all aspects of the NGO’s original scope of work, particularly in respect of poverty targeting, application of selection criteria, and the formation of effective, sustainable community organizations.

35. The work done by the consultants staffing the PMU Mini-Highways Department is considered highly satisfactory. The work surpassed physical targets of rural road construction and the roads constructed were of superior quality.

36. Of the 44 contractors involved in the construction of 127 roads, 16 performed satisfactorily, 21 performed partly satisfactorily, and 7 performed unsatisfactorily. Nine contracts awarded to five contractors were terminated for various reasons. These contracts were re- tendered. Work on watercourses carried out by the District’s Department of On-farm Water Management staff was satisfactory. MEPCO’s performance was satisfactory.

J. Performance of the Borrower and the Executing Agency

37. Supervision of P&DD relied on the mechanism of project steering committee (PSC) meetings in Lahore. Over the course of the Project, P&DD chaired eight PSC meetings.30 PSC guidance focused on the physical outputs and financial management aspects of the Project. P&DD carried out a field visit in 2004 for project evaluation. All ADB review missions had interactions with P&DD in Lahore.

38. One of the few differences in ADB's otherwise smooth relationship with P&DD concerned the employment status of the senior contract management staff. Termination of the first project director in September 2001 and appointment of his successor was not done in consultation with ADB, and ADB duly registered its concerns as this was in violation of the Loan Agreement (see para. 31 above). The problems associated with selection and contract arrangements of senior contract management staff continued into 2002. This caused ADB in June 2002 to consider suspending the loan—the only time during loan implementation that ADB considered such a step. However, it cannot be said conclusively that progress in achieving project outputs suffered because of these frequent senior staff changes.

39. The performance of the Executing Agency is rated "partly satisfactory" as a result of non-compliance or partial compliance of pertinent loan covenants, especially the covenant on the maintenance of rural roads. The performance of the PMU is rated "highly satisfactory" based on four out of five project components surpassing physical output targets.

30 PSC meetings were held on annual basis with the exception of 2004, when no meeting was held, and 2006, when the committee met twice.

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K. Performance of the Asian Development Bank

40. Eleven ADB review missions were carried out during project implementation, starting from the inception mission in July 1997 to the review focusing on loan closure in February– March 2007. Review missions focused on charting the progress of physical output targets and solving PMU implementation issues. The PMU recorded high appreciation of ADB review missions and ADB actions to solve problems encountered by the PMU. It seems that ADB's tracking of physical targets was effective, but it paid insufficient attention to the quality of the poverty targeting, subproject selection process and implementation, and the component on institutional strengthening. Notably, there was little mention of oversight on safeguard issues and limited investigation on the eventual poverty impact of the Project. Consistent scrutiny of compliance with loan covenants, especially in application of scheme selection criteria and O&M of rural roads, was not demonstrated.

41. The overall performance of ADB is rated "partly satisfactory", mainly because of ADB's failure to address and resolve non- or partial compliance with some pertinent loan covenants, including the maintenance of rural roads.

III. EVALUATION OF PERFORMANCE

A. Relevance

42. The Project is considered relevant. At completion, the Project’s expected impact of rural poverty reduction is still relevant. However, the modality and approach of the Project would need to be revisited. Continuous grant-based livelihood projects, without adequate attention to markets, may encourage rural communities to continue to rely on the government’s hand-outs rather than creating opportunities to participate in private sector growth. When both Government and ADB strategies in Pakistan are emphasizing increased participation of the private sector in infrastructure delivery and cost recovery from beneficiaries, the use of grant financing for between 80% and 100% of project investments with no subsequent cost recovery would likely be considered an unsustainable strategy.

B. Effectiveness in Achieving Outcome

43. Overall the Project has been effective. The outcome (formerly “purpose”) statement is to increase rural incomes, employment, and quality of life through improvements in infrastructure services, agricultural production, and economic/market activities. The main investment category of the Project was civil works. The agriculture production improvement and economic and market activities appear to have been rather sparsely and sporadically covered under the Project.

44. Targeting.31 As described in para. 4, the Project did not narrow its focus on the newly settled areas. The PMU delegated responsibility for the selection of villages to the NGO responsible for community mobilization. The NGO focused on the 1,082 villages that had been covered by the large-scale reconnaissance survey (LSRS), 32 and for which the PMU had already obtained basic data including the number of households, existing infrastructure, farming

31 Since the Project was designed to target poor communities that were least served by infrastructure services and most isolated from social services, a discussion of the outcome also needs to include an analysis of the effectiveness in terms of targeting. 32 Assumed to be the poorer villages.

11 activities, and perceived community needs. At project completion, only 209 (31%) of the total of 684 watercourse improvement projects, 68 (16%) of 428 rural electrification schemes, and 115 (20%) of 564 SSI schemes were located in the LSRS villages. The location of schemes outside the LSRS villages was determined according to formal applications received by the PMU from villagers, resulting from the dissemination of information on the Project by the PMU's media campaign and word of mouth. There is an indication that some villages were selected on the basis of personal recommendation of local influential people and political representatives, but there is no documented evidence supporting these views. All non-LSRS villages were, however, assessed for eligibility by the PMU. There is a concern that some poorer communities may not have been aware of the Project at all (and hence did not make an application for a scheme) because of their isolation, lack of information, or lack of political connections. Hence, even if the selection criteria were applied by the PMU, there was no clear and consistent poverty targeting strategy.

45. Contribution of outputs to achieving the outcome. In general, the outputs contributed to the outcome. The rationale for widening a 60-km section of the Yazman to Ahmadpur East road is unclear from a poverty perspective.33 While transport operator savings from link and FMRs may be passed on to the users of their services in the form of increased output and lower input prices and/or costs, the likelihood of the savings resulting from the upgrading of this main road being passed on is low. The road also appears to serve a relatively small section of the project area.34 Women's groups involved in carpet making and sewing visited by the Mission reported a daily take-home income from the activity from PRs100 to PRs150.35 While some marketing links have been established, the women are clearly in a disadvantageous position. They have limited capacity to negotiate a better rate with the middlemen. In spite of this, the clean, dignified working conditions (the workshop building was financed from the Project funds), and the social aspect of working together are clearly non-tangible benefits.

C. Efficiency in Achieving Outcome and Outputs

46. The Project is efficient. The analysis of the Project as a whole is based on the estimation of the weighted average of the economic internal rate of return (EIRR) of individual components. The weighting is based on the proportion of each component's economic costs within total project economic costs. The result is shown in Table 2.

Table 2: Overall Project EIRR (%) Component EIRR (%) Rural Roads 15.8 Watercourse Improvement 14.8 Small Scale Infrastructure 8.8 Rural Electrification 12.9 EIRR (weighted average) 14.5 EIRR = economic internal rate of return. Source: Asian Development Bank estimates.

33 The PMU maintains that the widening of the main road has had a poverty impact, but it does not have any impact analysis to demonstrate this. PMU states that the main road generated a lot of economic opportunities and is being served for easy transport of agriculture inputs and outputs 34 Based on PMU Project Completion Report estimates of an average cost of PRs2.1 million per km of link road and FMR, the funds allocated to the widening of this main road could have financed the construction of approximately 115 km of additional roads. This represents an increase of 22% over the total length of link roads and FMRs completed under the Project, and is equivalent to a further 28 roads. 35 As a comparison, the average daily unskilled agricultural daily wage for men is approximately PRs200-250. However, the PMU highlights that many women in this area do not have many opportunities or permission from the male members of the household for outside wage labor employment besides the cotton picking season.

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47. The 20-year EIRR of the Project is 14.5%, against the EIRR estimated at appraisal of 15.7%. 36 All individual components show EIRRs above 12% with the exception of the SSI component.37 The economic life for the individual rural roads and watercourse schemes has been reduced from 20 to 15 years because of the lack of maintenance. With proper maintenance, the EIRRs of these two components would have been higher. If the project economic life is extended to 35 years to capture the full economic benefits of the schemes that were delayed and constructed late in the project life, the overall project EIRR rises to 16.3%.

D. Preliminary Assessment of Sustainability

48. Overall, project sustainability is likely. It is less likely for the rural roads component because of the lack of maintenance, as discussed above and in Appendix 2. It is unlikely for institutional strengthening because of the relatively limited attention given this component during project implementation. The lack of an exit strategy appears to be another factor reducing the sustainability of the institutional strengthening component. 38 The tradeoff between quick achievement of targets and longer-term institutional strengthening is a delicate one. Ideally, the line agencies should have been able to incorporate the positive aspects of the Project and streamline them into their routine programs. A significant exception is the scaling up of the project concept for implementation of watercourse improvement for the National Programme for Improvement of Watercourses in Pakistan.

49. In terms of the community organizations, sustainability is less likely. The Project appeared to focus more on the quantity of schemes developed at the expense of establishing mature, viable community organizations with the potential to promote further development within their communities. The PMU reports that 108 community organizations have evolved into multipurpose units.39 However, in the majority of cases community organizations appear to have been formed for the express purpose of obtaining project grant funding and did not subsequently collaborate as cohesive community groups.

50. Therefore, while sustainability is considered likely, in terms of the three components (rural electrification, watercourse improvement, SSI) there are risks given the: (i) apparent weakness of the community organizations formed, (ii) lack of project achievement on strengthening local line agencies to provide basic services, (iii) limited links with markets and the private sector, (iv) limited demonstration of O&M of watercourses, and (v) scattered nature of project interventions.

E. Impact

51. Poverty and socioeconomic impact. The assessment of the poverty impact of the Project is difficult given that insufficient data exists on project beneficiary household income levels prior to participation in project-financed schemes, and that no impact survey was conducted at project completion. The poverty impact, therefore, cannot be objectively verified.

36 Supplementary Appendix B provides more details on the economic and financial analysis, including a discussion on the divergence between the methodology and results of the PCR analysis and those of previous analyses undertaken. 37 However, no economic analysis of this component was undertaken at appraisal. 38 The PMU considers its exit strategy the continuation of the Bahawalpur Rural Development Phase 2 Project with support from ADB. As ADB support will not be available to replicate the Project, the Executing Agency is seeking support from other donors as it does not wish to lose the capacity and experience gained in the PMU. 39 Types of activities include: health promotion, social activities, market linkages, capacity building, and nonformal education.

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From the PCR Mission observations, in many cases relatively better-off villagers benefited more from the rural infrastructure investments.

52. The impacts of the individual components were studied by the PMU BME consultant as presented in reports from 2001–2005. For rural roads, the primary financial benefit was reported to be a substantial saving in vehicle operating costs, which ranged from 45% to 50% for various types of vehicles. For watercourse improvement, benefits in terms of time savings were assessed to range between 0.92 hours and 1.38 hours per hectare; increases in cropping intensity were assessed to range between 7% and 11%; increases in yields of major crops were assessed to range between 10% and 16%; and decreases in water losses were assessed to range between 28% and 32%. For SSIs, there is a wide range of types of schemes, but the main benefits were commercial benefits and benefits derived from household savings. For rural electrification, incremental savings accrued to both household and non-household establishments as a result of the conversion from electricity substitutes (such as kerosene and batteries) to electricity.

53. Impact on institutions. The impact on institutions is limited. Project design had envisaged a component on institutional strengthening as reflected in the NGO’s terms of reference; however, this does not seem to have been adequately carried out.

54. Environment. The Project was considered at the time of appraisal as Category “B”. Environment considerations are incorporated into the scheme selection criteria but there was no capacity in the PMU to apply the criteria. Potential environmental risks to the quantity and quality of groundwater could be linked to the tube-well development40 and the increased use of fertilizers and pesticides. The BME consultant included a descriptive section on the environment in the impact studies carried out from 2001 to 2005, but there was no clear analysis of the environmental impact. While the overall environmental impact was assumed to be insignificant, the actual environmental impact of project investments in this area is not known.

55. Land acquisition. For the rural roads component, land acquisition was necessary as the tracks were widened to include 2 meters of shoulders on each side of the existing track. ADB review missions reported that the land needed for the extension of the right-of-way was generally obtained through donations. 41 There were some disputes, which were apparently either resolved at the community or local government level or taken to the courts. According to the PMU, all the cases brought to the courts were dismissed and road construction proceeded. However, there is no documentation available recording the total amount of land acquired, the process of donation, nor the legal process followed. In practice, the start of road construction was sometimes delayed as these disputes were being resolved. In addition, the PMU reported having rejected applications for 20 roads due to land acquisition problems.

40 There was no prior assessment of the environmental impacts of the tube-well installations. The PCR Mission observed that in one site that received a tube-well from the Project, beneficiaries brought up the fact that in the last 5 years (roughly since the time of the tube-well installation) the water level has been steadily dropping. The PMU also drew attention to at least one tube-well that was no longer functioning because water extracted had become brackish. It is not possible to conclude whether these problems were a consequence of the tube-well construction and increased water consumption. However, it is clear that there was no available information on groundwater levels that the PMU could have accessed when approving schemes, and that the PMU had no environment expertise. 41 ADB. 2003. Aide Memoire of Loan Review Mission for the Asian Development Bank. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Islamic Republic of Pakistan for the Bahawalpur Rural Development Project. Manila (2 June, para. 4).

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IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

56. Overall, the Project is rated as successful based on four out of five project components achieving physical targets. However, the Project would probably have been more effective in terms of impact had the targeting been improved and the process of delivering project interventions strengthened with respect to their contribution to poverty reduction. The abandonment of the initial project area targeting as planned at design seems to have led to scattered, small interventions over a large area. It is not known for certain how this scattering has affected the Project’s impact, although it can be assumed that the impact has been spatially diluted and that the wide project coverage area stretched the capacity of the PMU. While an efficiently managed grant-based program of free or partially free schemes can deliver rapid results to some communities, as was the case with the Project, the sustainability of such an approach is questionable in that it may increase the dependency of beneficiaries on external project funding. An externally-funded intervention such as this Project is not a continuous substitute for longer-term government and private sector solutions for reducing poverty and enhancing rural development.

B. Lessons Learned

57. Major lessons learned include: (i) Project approach. Agriculture and rural development investments contribute to growth in rural areas, especially if a more focused rural development approach and agency implementation coordination is used to increase the links between the various project components. It is also necessary to design and implement interventions that will ensure wider and longer-term benefits beyond the initial investment. This may include initiatives to increase agricultural productivity and improve links to private sector value chains, and reforms to improve the accountability of district governments; (ii) Rural infrastructure. Without coherently designed measures to complement rural infrastructure development—for example on-farm improvement, technology transfer, and marketing links—the impact of the infrastructure investment is limited. Furthermore, without such supporting initiatives there is more risk that better-off communities will benefit faster and more from rural infrastructure development, leaving poorer communities even further behind; (iii) Physical targets. The achievement of physical targets should not be at the cost of community mobilization, capacity development, and institutional building. Many community organizations visited by the PCR Mission had clearly only the aim of obtaining the project scheme and were not intended to continue or be sustainable. Given the participatory nature of this Project as designed, the process of targeting, scheme selection, and community organization development should have been given more consideration during implementation; (iv) Project implementation. While there is sometimes justification for externally- funded projects to create new project management structures, this should be time-bound with a clear exit strategy, and not operate at the cost of strengthening government agencies. M&E functions should be independent of implementation functions; (v) Project review. ADB and the Executing Agency should carry out, at critical junctures, more rigorous economic, financial, and technical analysis of project

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performance. Scrutiny of covenant compliance should be done in a timely manner.

C. Recommendations

1. Project Related

58. Future monitoring. One aspect of the Project that requires immediate attention is the maintenance of the rural roads constructed.42 It is suggested that the Executing Agency monitor not only the budgetary allocation for maintenance but also that the maintenance is actually carried out by CWD and the district governments. The Executing Agency was in agreement with this recommendation.43

59. Covenants. Following from para 59, the covenant on road maintenance should be complied with. Moreover, while most of the partially complied with covenants did not seem to have a significant adverse impact on the achievement of the project outcome, the partially complied with covenants on the selection criteria of subprojects limited the potential impact on poverty reduction. In the future, ADB needs to monitor compliance with such covenants closely during subproject selection.

60. Further action or follow-up. In connection with para 59 on future monitoring, follow up action on maintenance of rural roads is recommended. P&DD is in agreement. As of May 2008, maintenance of roads is now mandatory for district governments.

61. Additional assistance. New project preparatory technical assistance44 was approved in December 2005 to prepare a Phase 2 project closely following the components of the Project. The concept of replicating the Project was eventually not pursued, as ADB and P&DD adopted the view that grant-based livelihood generation, without adequate attention to markets, may encourage rural communities to continue to rely on the government’s hand-outs rather than integrate into increasingly vibrant, private sector-led vertical chains. 45 Currently, no ADB assistance to replicate the Project is envisaged.

62. Timing of the project performance evaluation report. The Project is ready for a performance evaluation review.

2. General

63. The following are initial recommendations for the design and implementation of future projects: (i) Give adequate attention to institutional strengthening, and not only to physical targets, to ensure the poverty impact and sustainability of interventions; (ii) Ensure that targets in the design and monitoring framework are well defined and when percentages are used for targets the baseline should be clearly defined; (iii) Introduce an element of cost recovery in schemes;

42 See Appendix 2—Summary Evaluation of Rural Roads—and Appendix 6—Status of Compliance with Loan Covenants. 43 As noted during the wrap-up meeting on 19 July 2008. 44 ADB. 2005. Technical Assistance to Pakistan for Preparing the Bahawalpur Rural Development Project, Phase II. Manila. 45 ADB. 2006. Pakistan. Preparing the Bahawalpur Rural Development Project, Phase II. Major Change in Scope and Increase in Technical Assistance Amount. Manila.

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(iv) Ensure adequate financial and technical resources are available to implement environment, social and resettlement safeguards, including proper documentation of the land acquisition or land donation process; (v) Design project implementation arrangements that do not create institutions in isolation of government agencies; (vi) Clearly define the roles and responsibilities of community organizations, the nature of their involvement and (cash or in-kind) financing of contributions, and their commitment to long-term community development; (vii) Ensure separation of implementation and monitoring responsibilities within the PMU; and (viii) Clarify and monitor process-related covenants.

Appendix 1 17

PERFORMANCE INDICATORS AND ACHIEVEMENTS Design Performance Revised Targets Achievements at Project Summary Indicators/Targets during Implementation Completion Impact

Poverty reduction in the At least two thirds of the No comprehensive poverty project area. beneficiaries will be below impact assessment carried out the poverty line. As a result at project completion. Therefore of the Project, their unable to verify if the target was incomes and quality of life met. will be increased to reach or exceed the poverty threshold.

Community organizations Not known. A total of 874 are active in more than community organizations are 50% of the communities in assumed by PMU to still be the project area. active.

The original target of 50% of the project area is no longer valid as the project area at completion had been expanded to cover all 14 tehsils of the 3 districts 2.0 Purpose/ Objectives

2.1 Increase rural incomes, Access to basic Exact number not known. 1,802 employment, and infrastructure services is subprojects provided (including quality of life through provided to more than 50% non-infrastructure projects). improvements in of the communities. However, some villages received infrastructure services, multiple subprojects. agricultural production, and economic and Note: the term “communities” is market activities. not adequately defined in the original target and hence, it is not possible to calculate an accurate percentage. However, given that the Government’s project completion report mentions that only 27% of inhabitants in the project area benefited directly or indirectly from the Project, it is safe to say that the 50% target has not been reached. This is not a reflection of the efficiency of the PMU but of the fact that the project area was expanded to cover the entire Division.

Participating communities The PMU states that are actively involved in the communities have been actively selection, planning, involved, but in different ways implementation, and depending on the nature of the ongoing O&M of their subproject. subprojects.

18 Appendix 1

Design Performance Revised Targets Achievements at Project Summary Indicators/Targets during Implementation Completion

Active training programs Training programs were carried established to provide out by external institutions for skills necessary to 1,215 trainees. increase production, operate small enterprises, and provide ongoing O&M Training was carried out by the for subproject investments. National Rural Support Program and PMU to community organizations. No exact number available but PMU estimates approximately 5,000 persons trained.

Approximately 19,000 women trained, directly or indirectly, through master trainers. 3.0 Project Components/ Outputs

3.1 Rehabilitate selected roads in project area. Improve about 180 km of 230 km of link roads 267.88 km improved. small link roads.

Upgrade about 160 km of 200 km of FMRs 246.09 km upgraded. FMRs and widen about 60 km of the FMR linking Yazman and Ahmadpur East towns.

Establish road Rural roads handed over to maintenance mechanisms district governments upon through CWD and/or completion. No maintenance private contractors to undertaken to date. maintain rural roads.

Form about 90 mixed- Community organizations gender community responsible for O&M of road organizations, and train shoulders. community organizations in O&M of small link roads. No mixed-gender community organizations formed. 3.2 Strengthen agricultural Form about 480 WUAs, 600 WUAs to be formed 684 WUAs formed. production through improve about 480 watercourse watercourses, and line improvement. about 480 km of watercourse length. Train farmers in O&M. No training provided.

Introduce alternate crops Introduction of said crops not to farmers, including salt- carried out. General training on tolerant crops, fodder, and farm management provided to tree crops. 202 trainees.

Appendix 1 19

Design Performance Revised Targets Achievements at Project Summary Indicators/Targets during Implementation Completion 3.3 Improve small-scale Form about 450 560 community organizations 564 community organizations infrastructure. community organizations to be formed. formed. (including mixed-gender

and women-only community organizations), and improve about 450 560 small-scale infrastructure 564 subcomponents small-scale infrastructure subcomponents to be implemented. subcomponents that have implemented. been identified and requested by community organizations.

Train community Training in O&M; 25 community organizations in O&M and organization office bearers in the development of trained in financial management. small enterprises.

3.4 Provide rural Provide electricity to an Electrification of 350 villages. 428 villages electrified. electrification to estimated 150 villages, villages and make provide about 450 km of Minimum of 80% of households necessary household 11 kV lines, and connect a connected. connections. minimum of 25% of the total households in these villages. 3.5 Institutional Establish PMU to PMU established. strengthening of coordinate the establishment of priorities, implementing select subprojects, and agencies, community coordinate project plans organizations, and and assignment of WUAs. resources for project implementation.

Establish BME BME mechanisms established. mechanisms and effective No BME reports produced after coordination systems. departure of BME consultant. Provide training to Original target is not well increase capacities to defined, therefore it is not participate in the Project. possible to compare achievement at completion. BME = benefit and monitoring evaluation, FMR = farm-to-market road, kV = kilovolt, O&M = operation and maintenance, PMU = project management unit, tehsil = administrative subdivision in Pakistan (subdistrict), WUA = water users’ association.

20 Appendix 2

SUMMARY EVALUATION OF RURAL ROADS

A. General

1. The rural roads component constructed 126 individual roads, with a total length of 574 kilometers (km),1 against a planned total of 400 km. This comprised the construction of 89 (268 km) link roads, 36 (246 km) farm-to-market roads, and the widening of one (60 km) main road (between Yazman and Ahmadpur East towns) from one lane to two lanes. The largest number of roads were constructed in Bahawalpur District (46), followed by Bahawalnagar District (43) and Rahim Yar Khan District (37). The main road is located in Bahawalpur. 2 Community organizations were formed only for link roads. Applications from communities for an additional 93 roads were rejected because of problems with land acquisition (20 roads), the need to fell a large number of trees (7 roads), or insufficient poor households living in the subproject area (the selection criteria established at appraisal required 66% of households to be poor).

2. The quality of both link roads and farm-to-market roads constructed under the Project is considered superior to those constructed by other government agencies. Farmers interviewed during the project completion review (PCR) Mission field visits reported tangible and intangible benefits from the road construction. No impact evaluation was carried out for the main road.

3. The physical output targets of the rural roads component were surpassed. However, the implementation of the component was not carried out as envisaged at project design. In the original project design, local communities were to be involved in the process of selecting the roads to be upgraded or constructed under the Project. They were to provide labor for road construction and be eventually responsible for road maintenance.

B. Summary of Key Findings

4. Selection. During the field visits, the PCR Mission observed that a significant proportion of the roads visited seemed to have been selected for political reasons and/or owing to the influence of certain persons.

5. Implementation arrangements. Work on roads could not start until changes in the implementation arrangements were made because the original arrangements were impractical. The Communications and Works Department (CWD), the Cholistan Development Authority, and the Local Government and Rural Development Department, the implementing agencies, were unable fulfill their specified roles, leading to the formation of a Mini-Highways Division within the project management unit (PMU) in February 1999, which thereafter undertook the functions of road designs and supervision of the contractors. There was no transfer of knowledge or skills to the government implementing agencies, which could have encouraged them to make high- quality roads under their jurisdiction in the future.

6. Community participation. According to the project design, communities that stood to benefit from the construction of link roads were to provide unskilled, unpaid labor for construction, and were also to undertake routine maintenance of these link roads. However, in the case of rural roads this has not actually happened. The link roads were to be provided to

1 Discrepancies appear in the project management unit project completion report in respect of the total length of road constructed. Appendix 2 therein refers to the length of roads for which contracts were awarded as 586.2 km, and Appendix 9 (Table 13) uses 587 km. However, the actual construction specified in Appendix 1 indicates that 574 km were completed. 2 The widening of the main road was funded by the Islamic Development Bank.

Appendix 2 21 communities after the formation of community organizations, which were to assume responsibility for routine maintenance of the roads. The Mission observed during its field visits that many community organizations were formed only to fulfill project requirements, and as soon as the construction started and the roads were completed they continued to exist in name only.

7. Land acquisition. Land acquisition was necessary as the tracks were widened to include 2 meters of shoulders on each side of the existing track. ADB review missions reported that the land needed for the extension of the right-of-way was obtained through donations.3 There were some disputes, which were apparently either resolved at the community or local government level or taken to the courts. According to the PMU, all the cases brought to the courts were dismissed and road construction proceeded. However, there is no documentation available recording the total amount of land acquired, the process of donation, or the legal process followed. In practice, the start of road construction was sometimes delayed as these disputes were being resolved. In addition, as noted in para.1 above, the PMU reported having rejected applications for 20 roads due to land acquisition problems.

8. Operation and maintenance. It was unreasonable to give the responsibility of the operation and maintenance to the communities, as per the project design. As such, this did not happen and no maintenance of the roads is being done either by the community or by the district government departments.4

C. Overall Technical Assessment of Roads Constructed and Upgraded

9. Standards. The design standards used for the construction of the rural roads fulfill the minimum standards required by any international design criterion. Materials and specifications used for the construction of these roads also meet international construction standards. The National Highway Authority of Pakistan specifications are used for the construction of these roads. In all the current ADB rural roads projects in Pakistan, National Highway Authority specifications are being used.

10. Construction design and quality. The engineering designs were carried out to meet future traffic demand in the area. Design recommendations as contained in Road Note 315 are used for the pavement design. Triple Surface Treatment6 has been used for road surfacing. No geometric improvements were carried out; therefore the paved road design followed the existing tracks. In some cases, the PCR Mission observed sharp curves (as much as 90°) given the lack of geometric improvement. The PMU reports that such improvements were not possible under the Project because they would have necessitated more land acquisition beyond the extension of the right-of-way. Project design did not anticipate this and thus no budget was allocated for compensation for such land acquisition.

3 ADB. 2003. Aide Memoire of Loan Review Mission for the Asian Development Bank. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Islamic Republic of Pakistan for the Bahawalpur Rural Development Project. Manila (2 June, para. 4). 4 The farm-to-market roads and link roads were handed over to the district governments in 2001. 5 Road Note 31, issued by the Transport Research Laboratory of the United Kingdom, gives recommendations for the structural design of pavements with a bituminous surfacing. 6 A bituminous material application that is covered with a specified size aggregate followed by subsequent applications of bituminous material that are covered with successively smaller size nominal aggregates. (Asawa, G L. 2005. Irrigation and Water Resources Engineering. New Age Publishers.).

22 Appendix 2

11. Embankments were provided according to requirements of the terrain and cross- drainage structures.7 The designs are based upon the California bearing ratio8 of the existing soils and proper designs and thickness were provided. The average range of the California bearing ratio used for the subgrade is 8–15% (indicating a relatively good subgrade) and depending upon the subgrade strength thickness of water-bound macadam and granular subbase has been provided. In contrast, roads constructed by government departments are not based upon any design criteria and thus have a short lifespan. In addition, for the project roads proper ramps to other roads have been constructed, along with junctions and widening of curves. These elements are missing in roads constructed by government departments.

12. It is standard practice to use hand-broken stones in water-bound macadam; however, the PMU Mini-Highways Division ensured that construction material crushed to the required specifications was used for the construction of the roads. Proper compaction of each layer was carried out in line with international standards. Local material was not allowed in construction of the road. Proper borrow material9 suitable for road construction was used for the construction of the embankments. Culverts constructed on the watercourses used standard designs and the best available material.

D. Observations of the Roads Visited by the PCR Mission

13. During the PCR Mission, 14 roads were visited. All were in need of routine maintenance but overall were in good condition. One of the rural roads visited had a few pot holes that required immediate attention. The shoulder edges of nearly all of the roads were depressed and required immediate maintenance. Another major distress noticed on these roads was rain cuts in the earthen shoulders, which also required immediate maintenance.

14. The main road is also in good condition except for the stretch from km 22 to km 32, which has begun to deteriorate. This section of the road was completed in 2005. No routine maintenance has been carried out on the main road, nor did it appear to contain any traffic safety elements, such as traffic signs or pavement markings. The origin of the road is linked with three other roads that are in very poor condition—they are narrow (3-m wide pavement) and lack proper junctions with the main road. Local communities have expressed concerns that accidents are very frequent on the roads near the origin of the main road. The responsible CWD should improve the condition of the road leading toward the start point of main road.

15. The PCR Mission field visits observed that the roads lacked road safety elements (e.g., traffic signs). Such safety elements are all the more important given that these roads followed existing tracks, resulting in sharp curves that could not have been avoided in the design. The Mini-Highways Division explained that road signs were provided at the initial stage; however, most were stolen by the local communities. As a result the Mini-Highways Division stopped providing signs.

16. All of the roads visited had experienced substantial delays in the completion of the construction. The length of the roads visited varied from only 2 to 8 km; however, delays of more than 2 years were noted in one instance. The reasons for the delays included slow work

7 Cross drainage structures are constructed to negotiate an aligned channel over, below, or at the same level of a stream (Asawa, G L. 2005. Irrigation and Water Resources Engineering. New Age Publishers.). 8 The California bearing ratio is used for estimating the strength of the materials. 9 Fill material which was obtained from other locations.

Appendix 2 23 pace, low capacity of the contractors, the awarding of multiple roads to a single contractor, and land acquisition problems. The average delay was 14 months, with a variance of 3 to 33 months.

17. In the case of all roads visited, the completion cost was less than the contract cost. The reasons being reported is that excess quantities of earthwork were taken in the initial estimate on which the contract cost was based. On average, the costs of the roads visited were overestimated by 13%.

18. The overall construction quality is found to be satisfactory. The roads visited are intact even after 5-6 years of completion without any routine maintenance. This is because of the provision of good quality materials and pavement designs for the future estimated traffic.

19. The rural road component has had a clear impact on the people living near the project roads. Land prices have reportedly increased not only along the roads but also in areas located relatively far away from the roads. Other major impacts include: increased employment opportunities, easier access to nearby markets, an expansion of mechanized agriculture (and consequently higher crop yields), and a more robust livestock business. Significant social impacts include improved access to medical care and education, increased mobility, and better quality of life in the project areas.

E. Key Recommendations

20. Adequate financial and technical resources should be available to implement land acquisition and resettlement safeguards, including proper documentation of the land acquisition process.

21. Traffic safety features should be included in the project design along with environmentally-friendly activities like plantation of trees in the project corridor. In this regard, engineering road consultants should be engaged at the start of the Project to devise the terms of reference and design the rural road construction standards.

22. Government agencies need to carry out maintenance activities after the construction of roads. The general practice of ignoring routine maintenance activities should be discouraged and the concept of asset management should be an integral part of the projects.

23. Measures should be taken to avoid delays in the completion of rural roads. In cases where the same contractor has to be awarded more than one contract, that contractor should be carefully scrutinized to ensure it has sufficient resources and capability to complete the works in the stipulated time frame.

24. Capacity building and institutional development of government departments should be given due attention. At the moment, laboratory and survey equipment procured under the Project are still under the ownership of the PMU and Mini-Highways Division. It is strongly recommended that CWD staff be trained in using the said equipment in the field of material testing for road construction.

24 Appendix 3

PROJECT COSTS ($ million)

Appraisal Estimate Actual Component Foreign Local Total Foreign Local Total

I. Investment Costs A. Civil Works Rural Roads 7.50 22.30 29.80 6.10 15.80 21.90 Watercourse Improvement 1.80 5.20 7.00 1.30 7.00 8.30 Small-Scale Infrastructure 1.10 1.50 2.60 1.30 2.80 4.10 Rural Electrification 1.30 3.70 5.00 2.30 4.20 6.50

Subtotal 11.70 32.70 44.40 11.00 29.80 40.80

B. Vehicles 0.10 0.10 0.20 0.13 - 0.13 C. Office Equipment 0.10 - 0.10 0.07 - 0.07 D. Contract Management Staff - 0.70 0.70 0.51 0.51 E. NGO Support Services - 3.00 3.00 - 0.80 0.80

F. Domestic Consulting Services Implementation and BME Consultants - 0.30 0.30 - 0.22 0.22 Engineering Design Consultants - 0.30 0.30 - 1.10 1.10 Contract Agreement Consultants - - - - 0.06 0.06

Subtotal 0.20 4.40 4.60 0.20 2.69 2.89

G. Baseline and Impact Studies - 0.40 0.40 - 0.06 0.06

Total Investment Costs 11.90 37.50 49.40 11.20 32.55 43.75

II. Incremental Administrative Costs A. Salaries & Allowances - 0.70 0.70 - - B. Watercourse Survey and Design - 1.00 1.00 - 1.27 1.27 C. Office Overhead - 0.80 0.80 - - D. Vehicle Operating Cost - 0.50 0.50 - 1.84 1.84 E. Increment O&M - 1.90 1.90 - 0.22 0.22

Total Incremental Administration Costs - 4.90 4.90 - 3.33 3.33

Total Baseline Costs 11.90 42.40 54.30 11.20 35.88 47.08 Contingencies 1.70 6.00 7.70 - - -

Total Baseline Costs and Contingencies 13.60 48.40 62.00 11.20 35.88 47.08 Service Charge During Construction 2.80 - 2.80 1.10 - 1.10

Total Project Cost 16.40 48.40 64.80 12.30 35.88 48.18 BME = benefit monitoring and evaluation, NGO = nongovernment organization, O&M = operation and maintenance. Sources: Asian Development Bank and Project Management Unit data.

ADB DISBURSEMENTS BY YEAR ($)

a Category 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

01A 218,980 768,752 - 732,296 2,411,467 3,410,684 2,576,223 2,967,231 2,979,194 620,954 85,265 01B 246,208 149,940 - 278,974 750,537 1,168,025 1,044,625 659,851 380,248 13,142 31,997 01C 245,739 31,187 - 227,219 343,458 538,186 459,611 543,013 240,253 62,288 108,816 01D ------2,080,394 780,344 581,626 - - 02A 24,705 137,850 - - 10,045 - 21,533 - - 2,295 - 02B 90,362 97,668 - 35,911 56,570 28,027 28,758 36,092 95,130 38,706 367 02C 244,728 99,794 - 107,522 56,151 84,980 50,087 45,639 70,143 29,589 - 02D 117,508 21,602 - 82,448 216,352 211,263 203,372 182,266 188,428 153,622 - 02E 25,825 25,859 - - 8,357 ------03 - 9,989 22,793 27,880 47,257 80,884 141,057 215,950 282,985 305,676 14,779 04 ------99 ------

Total 1,214,055 1,342,641 22,793 1,492,250 3,900,195 5,522,049 6,605,660 5,430,386 4,818,008 1,226,272 241,224 01A = Civil Works: Rural Roads, 01B = Civil Works: Watercourse Improvement, 01C = Civil Works: Small-Scale Infrastructure, 01D = Rural Electrification, 02A = Institutional Strengthening: Equipment and Vehicle, 02B = Institutional Strengthening: Contract Management Staff, 02C = Institutional Strengthening: 4 Appendix nongovernment organizations, 02D = Institutional Strengthening: Consulting Services, 02E = Institutional Strengthening: Studies, 03 = Service Charge, 04 = Unallocated, 99 = Imprest Fund. a Due to an increase in the volume of construction work, an additional advance of $1.0 million was requested by the EA in November 1998. ADB approved the additional advance thereby increasing the balance advances to the imprest account to $2.2 million. To maintain the imprest account ceiling of at $1.2 million, to the imprest account, ADB liquidated withdrawal applications submitted in 1999. This was the reason why disbursements in 1999 were only for service charges. Source: Asian Development Bank.

25

26 Appe PROJECT IMPLEMENTATION SCHEDULE 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 ndix 5 Activities by Component 12341234123412341234123412 3412341234123 1234

A. Institutional Strengthening 1. Recruitment of Consultants/Employees of NGOs

2. Procurement of Equipment and Vehicles

3. Baseline Survey

4. Establishment and Operation of BME system

5. Organizing and Strengthening of COs and WUAs

B. Rural Roads 1. Design by PMU and Consultants

2. Road construction contracts through tendering

3. Construction/Improvement of Farm-to-Market Roads

4. Community based link road construction and O&M

5. Supervisions by CWD, CDA, LGRDD, PMU and Consultants

C. Watercourse Improvement 1. Strengthening of WUAs by Participation and Guidance

2. Watercourse improvement and lining program

3. Supervision and guidance by DOWM and PMU

D. Small-scale Infrastructure Improvement 1. Strengthening of COs by Participation and Guidance

2. Construction/Improvement of Village Infrastructures

3. Supervision and Guidance by CDA, LGRDD and PMU

E. Rural Electrification 1. Village Electrification and Household Connections

2. Supervision by WAPDA and PMU

Legend: Appraisal Actual BME = benefit monitoring and evaluation, CDA = Cholistan Development Authority, CO = community organization, CWD = Communication and Works Department, DOWM = Directorate of On-farm Water Management, LGRDD = Local Government and Rural Development Department, NGO = nongovernment organization, O&M = operation and maintenance, PMU = project management unit, WUA = water users’ association, WAPDA = Water and Power Development Authority. Source: PMU.

ACHIEVEMENT OF TARGETS BY YEAR

Year Unit 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 Total

Actual Progress

Rural Roads Main Road km - - - 8.85 22.65 10.70 13.15 4.65 - 60.00

Farm-to-Market Road km - 5.40 26.60 35.02 29.23 29.50 46.76 55.23 18.35 246.09 Link Road km - - 33.40 37.77 52.17 46.37 56.92 27.27 13.98 267.88

Watercourse Improvement nos. - 55.00 142.00 105.00 183.00 115.00 84.00 - - 684.00

Rural Electrification villages - 28.00 72.00 50.00 - 80.00 137.00 46.00 15.00 428.00

Small- Scale Infr as tr uc ture nos. - 98.00 74.00 92.00 114.00 92.00 80.00 14.00 - 564.00

Source: Government’s Project Completion Report. June 2008.

5 Appendix

27

28 Appendix 6

STATUS OF COMPLIANCE WITH LOAN COVENANTS (As of 21 July 2008)

Loan Covenants Reference Status of Compliance

Project Management Unit (PMU) Loan Complied with. The three key positions (a) Prior to Effective Date, the Province of Punjab Agreement were filled in June 1997. shall appoint on a contract basis a full-time Project (LA) Director, with qualifications acceptable to the Bank, Schedule 6, as head of the PMU; and two, Deputy Project para. 2 Directors, one in charged of an Implementation, Planning and Monitoring Unit (PMU), and the other heading the Management and Contracts Unit. The Project Director and two Deputy Project Directors, which constitute the Contract Management Staff, shall reside in the Project Area for the duration of the Project and shall have proper qualifications and experience.

Within six months of the Effective Date, Complied with. PMU had recruited 4 Punjab shall also appoint agreed upon staff for the Assistant Directors, 12 Research PMU, including the three assistant directors for the Offices, 2 Computer Programmers, and implementation Planning and Monitoring Unit, and an 1 Account Officer and other staff assistant director for the Management and Contracts required in the Project implementation. Unit, during Project Implementation, Punjab shall The appointment was not completed permit any member of the Contract Management within 6 months. Staff to be replaced only with Bank concurrence. Partly complied with. Punjab did not consistently seek Bank concurrence before replacing Contract Management Staff.

(b) Punjab shall cause the PMU to be LA Complied with. NGO and consultants responsible for the selection of the NGO and Schedule 6, were recruited. However, the NGO consulting services described in paragraph 1 of para. 2 contract was terminated in May 2001 Schedule 5 to this LA, for the procurement of vehicles due to unsatisfactory performance. The and office equipment for PMU operations, for the number of vehicles (7 jeeps, 1 car and 6 approval of subprojects pursuant to paragraph 12 (iii) motorcycles) procured for the PMU of this Schedule and for ensuring that the selection were sufficient for Project criteria in paragraph 12(i), (ii) and (iv) of this Implementation. Schedule have been satisfied.

(c) The PMU shall ensure that (i) the NGO LA Complied with. At the start of the selected for the Project engages and trains village Schedule 6, Project the NGOs carried out the volunteers as social mobilizers to head the para. 3 training of village volunteers. Upon the community organizations and assists with training termination of the NGO, PMU’s and community mobilization and in preparing cost Community Development Cell took over sharing arrangements; (ii) women social mobilizers training of village volunteers. for the Project are trained; and (iii) women’s participation in all Project activities through women’s only and mixed-gender community organizations form an essential part of the institutional strengthening component.

(d) The PMU shall be responsible for the LA Complied with. Baseline survey

Appendix 6 29

Loan Covenants Reference Status of Compliance establishment of a benefit monitoring and evaluation Schedule 6, completed in August 1999 and draft system. The design and supervision of activities Para. 3 report prepared in March 2000; the final under the rural roads component, the preparation of report has been received in November standard contracts and agreements between 2000 by the Midterm Review (MTR) representatives of the Borrower and community mission. The BME surveys were carried organizations and water users’ association (WUAs) out in 2001-02, 2002-03, 2003-04 and for Project implementation and operation and 2004-05. maintenance (O&M) activities of each Project component. The PMU shall cause a baseline survey to be undertaken in the Project Area.

Project Steering Committee (PSC) LA Partly complied with. PSC was Schedule 6, established in October 1999 but did not Within three months of the Effective Date, Para. 5 meet at least 2 times a year. PSC, Punjab shall establish the Steering Committee to be headed by the Chairman, P&DD, chaired by Chairperson of Planning and Development membership includes the Secretaries Department (P&DD) or the designee of the for Finance, Agriculture, Chairperson, and to consist of representatives of Communication & Works, Local Punjab from relevant line departments as appointed Government & Rural Development, by Punjab; Punjab may also appoint senior members (Member (Engineering) P&DD, Chief of NGOs or members of other organizations to the Engineer (Rural Electrification) Water Steering Committee. The PSC shall be responsible and Power Development Authority for approving work plans on a yearly and half-yearly (WAPDA), Representatives of basis and shall meet at least twice a year. WUAs/beneficiaries and Project Director/BRDP.

Project Coordination Committee (PCC) LA Not complied with. The PCC was Schedule 6, established in September 1997 but did Within three months of Effective Date, Punjab Para. 6 not meet. shall establish the PCC and appoint as Chairperson the Commissioner of the Bahawalpur Division, and as members/officers of the Divisional, government from relevant line departments having a role in the implementation of the Project. The Commissioner of the Bahawalpur Division may select representatives of other private and public entities with a role in the Project to be members of the PCC. The Secretary of PCC shall be the Project Director of the PMU. The PCC shall review plans and coordination issues, identify and resolve obstacles in implementation, and meet at least quarterly.

Project Components

Rural Roads LA Complied with. However, The Communications and Works Department Schedule 6, implementation arrangements were (CWD), the Cholistan Development Authority (CDA) Para. 7 modified as agreed with ADB in and the Local Government and Rural Development February 1999. The PMU formed its Department (LGRDD) shall (i) conduct feasibility own Mini-Highways Division and they studies and prepare detailed designs, quantities, and implemented the Rural Roads cost estimates, (ii) select prequalified local component. contractors through local competitive bidding, and (iii) supervise contractors during implementation. The PMU may allocation CWD or CDA implementation of farm-to-market roads in the newly settled area. The

30 Appendix 6

Loan Covenants Reference Status of Compliance PMU shall cause domestic consultants to assist CWD in monitoring design standards and in providing construction supervision.

Planning and Development Department Not complied with. Covenant was (P&DD) shall cause CWD, CDA and LGRDD to considered not appropriate given local ensure that communities benefiting, from link roads conditions but no official communication provide (i) unskilled labor for construction without documents agreement on this aspect. payment; and (ii) a commitment to undertake agreed upon routine maintenance, providing labor and raising necessary funds to finance repairs. Where link roads serve rural markets. P&DD shall cause CWD, CDA and LGRDD to require market management committees to finance necessary and subsequent routine O&M. P&DD, acting through PMU, shall ensure that CWD, CDA and LGRDD, with the assistance of domestic consultants monitor design standards and ensure the effectiveness of construction supervision of rural roads improved under the Project.

Watercourse Improvement LA Complied with. The Directorate of On-Farm Water Schedule 6, Management (DOWM) shall, working with WUAs, Para. 8 implement the watercourse improvement component. DOWM shall register WUAs at the district level and verify to the PMU that each WUA has opened a joint bank account and deposited its contribution, equivalent to 20% of the cost of materials, in advance, and completed the rehabilitation of the unlined or earthern sections of the watercourse, after which the PMU shall deposit the matching funds, equivalent to 80% of the cost of materials. DOWM shall verify with the PMU that each WUA has procured necessary materials and maintain records of accounts, installed concrete outlet structures, and constructed lining along and technical guidance provided by DOWM field teams. Each DOWM field team shall consist of six officers, including four engineers, a water management specialist, a water management officer and five support staff.

Small-scale Infrastructure LA Complied with. However, it was taken In cooperation with community organizations, Schedule 6, over by the PMU. Community P&DD shall ensure that CDA and LGRDD implement Para. 9 organizations could not be registered the small-scale infrastructure component, requiring a with Social Welfare Development as community contribution in advance of 10% of the cost only those communities engaged in of materials. Punjab shall ensure that the Social non-income generating activities are Welfare Department at the Divisional level registers registered with them. the community organizations, CDA, and LGRDD requires that (i) the maximum cost for each individual infrastructure subproject shall not exceed the equivalent of $20,000 in constant 1996 prices, unless a proposal for a larger subproject has been reviewed

Appendix 6 31

Loan Covenants Reference Status of Compliance by the PMU and submitted to the Bank for approval prior to implementation; (ii) the minimum cost for each subproject shall be the equivalent of $1,000 and benefit no fewer than ten households; and (iii) the estimated implementation period for each subproject shall be six to nine months, with a maximum 12 months. P&DD shall ensure that CDA and LGRDD shall give priority for subprojects supported by communities that mobilize more than 10% of the total cost of materials and costing more than the average of the equivalent of $10,000 in 1996 prices.

Rural Electrification LA Complied with. Multan Electric Power The Borrower shall ensure that the Water and Schedule 6, Company (MEPCO), a corporatized Power Development Authority (WAPDA) is Para. 10 body of the former Multan Area responsible for the implementation of the rural Electricity Board of WAPDA, took over electrification component that WAPDA (i) carries out responsibility of this component and the required detailed designs, and determining the WAPDA itself is still jointly responsible estimates of quantities required and costs, and (ii) for implementation of the component. undertakes the works utilizing its own staff and The meter/connection charges had equipment. The Borrower shall ensure that WAPDA been revised from PRs2,500 per requires advance payment of connection charges of household to PRs3,200 per household. 2,500 rupees per household for at least 25% of the households in a given village in the Project Area.

Institutional Strengthening LA Partly complied with. In May 2001, the The PMU, with the assistance of the NGOs, Schedule 6, contract with the NGO was terminated shall implement the institutional strengthening Para. 11 due to poor performance. PMU carried component, which is developed to (i) assist out institutional strengthening of communities in identifying suitable activities for their community organizations, however, the participation in the Project; (ii) organize communities training of staff of implementing to participate in planning, implementation and O&M of agencies and provision of agricultural these activities; (iii) estimate the economic internal support services was limited. rates of return for the rural roads and watercourse improvement subcomponents; (iv) facilitate interaction between communities’ and line agencies during the planning, implementation, and O&M of related activities; (v) train staff of the implementing agencies with beneficiaries; and (vi) assist in the provision of agricultural support services.

P&DD shall ensure that the PMU, in Complied with. A change in consultation with the implementing agencies, implementation arrangement was engages the domestic consultants, described in approved in September 1999 to recruit paragraph 1 to Schedule 5 to this LA, to assist with individual consultants instead of firms. Project implementation, including establishing a BME system and undertaking other agreed upon activities.

Selection Criteria LA Schedule 6 Except as the Bank otherwise agrees, P&DD shall Para. 12 ensure that the following criteria are satisfied:

Rural Roads Partly complied with. Efforts were made Except for the Yazman to Ahmadpur East farm-to- by the PMU to apply the selection

32 Appendix 6

Loan Covenants Reference Status of Compliance market road, each farm-to-market and link road shall criteria; however, this is not consistently (i) have an internal economic rate of return of at least documented and appears to have been 12% confirmed by the PMU, (ii) benefit villages which done in a subjective manner. do not have an existing or planned road within five km of the village center, (iii) serve villages which have at least two-thirds of the households with incomes below the rural poverty line, and (iv) not cause any direct or indirect threat to ecologically sensitive areas, such as national parks, wildlife sanctuaries, or wetlands of international significance, wetlands of international significance, or to areas with significant, historical, archeological, or cultural value. In addition, each small link road shall connect at least one or more villages, each of which shall not have less than 200 people, to an existing all-weather road, and the community within each such village shall contractually agree to assume routine O&M of the improved link road. Concerning the Yazman to Ahmadpur East farm-to-market road, P&DD shall ensure that agreed upon criteria have been satisfied.

Watercourse Improvement: Each watercourse to be improved shall (i) have an Partly complied with. Efforts were made internal economic rate of return of at least 12% by the PMU to apply the selection confirmed by the PMU, (ii) have a contract between criteria; however, this is not consistently P&DD, acting through the PMU, and each WUA, (iii) documented and appears to have been have at least two-thirds of the Beneficiaries with done in a subjective manner. incomes below the national rural poverty line, and (iv) not cause direct or indirect threat to ecologically sensitive areas, such as national parks, wildlife sanctuaries, or wetlands of international significance, or to areas with significance historical, archeological, or cultural value.

Small-scale Infrastructure: Each small-scale infrastructure subproject shall have Partly complied with. Efforts were made (i) a majority of the Beneficiaries willing to form a by the PMU to apply the selection formal CO, if none is operational, and have each CO criteria; however, this is not consistently agree in writing to contribute to the cost of the documented and appears to have been improvement and to carry out all subsequent O&M, done in a subjective manner. and (ii) at least two-thirds of the Beneficiaries with incomes below the rural poverty line.

Rural Electrification Each village qualifying for rural electrification shall Partly complied with. Efforts were made satisfy the following criteria: (i) be located within six by the PMU to apply the selection km of an existing 11 KV line, (ii) have a population of criteria; however, this is not consistently at least 200 inhabitants and not less than 25 documented and appears to have been households and (iii) have at least two-thirds of its done in a subjective manner. households below the rural poverty line.

Appendix 6 33

Loan Covenants Reference Status of Compliance Operation and Maintenance

Rural Roads LA Not complied with. O&M allocation for (a) Punjab shall ensure that an adequate Schedule 6, 2002/2003 was transferred to CWD; amount of budgetary resources, equivalent to about Para. 13 however, the allocation was not used rupees 20,000 in constant 1996 rupees per km of for maintaining project-funded roads. rural roads pavement, are allocated and disbursed 13 annually to maintain rural roads.

(b) P&DD shall ensure that CWD, CDA and LA Not complied with. No O&M has been LGRDD undertake periodic road maintenance for Schedule 6, carried out. rural roads improved under the Project through Para. 13 contracts with local contractors. P&DD, acting through 13 the PMU, shall ensure that each CO representing beneficiaries agrees in writing to provide before commencement of implementation unskilled labor and raise necessary funds for the routine maintenance of link roads with technical supervision, provided by CDA, CWA or LGRDD. Where link roads serve rural markets, P&DD shall ensure that relevant market management committees are required to raise funds to finance cost of labor and subsequent routine maintenance.

Watercourse Improvement LA Complied with. P&DD, acting through the PMU, shall ensure Schedule 6, pursuant to a written agreement, that each WUA is Para. 14 fully responsible for O&M of the watercourse improved.

Small Scale Infrastructure LA Complied with. P&DD, acting through the PMU, shall ensure Schedule 6, that, pursuant to the written agreement, each CO is Para. 15 fully responsible for the maintenance of each small- scale infrastructure.

Rural Electrification LA Complied with. MEPCO is responsible P&DD shall ensure that WAPDA is Schedule 6, for O&M of this component. responsible for O&M of Project rural electrification Para. 16 infrastructure.

Budgetary Allocations

The Borrower shall ensure (i) that Punjab LA Complied with. starting in FY1997/1998 makes budgetary allocations Schedule 6, for the Project in its Annual Development Program; Para. 17 (ii) that within 6 months of the Effective Date, the Bank is furnished with a copy of a detailed, costed plan for the Project, acceptable to the Bank for the period from 1996 to 2002; (iii) that incremental recurrent costs of staff and O&M costs are met as required, particularly after the Loan closing date; (iv) that a draft Project financing and work plan, indicating cost and sources of funds to pay for Project operating costs are gradually, transferred to the revenue budget

34 Appendix 6

Loan Covenants Reference Status of Compliance in increasing amounts during Project implementation and entirely upon Project completion.

Benefit Monitoring and Evaluation (BME) Partly complied with. No brief annual (a) PMU, with the assistance of Project LA evaluation report on Project Benefits consultants described in paragraph 1 of Schedule 5 Schedule 6, received after 2004. to this LA, shall establish in a manner consistent with Para. 18 the guidelines specified in the Bank’s Handbook on Benefit Monitoring and Evaluation and BME system to monitor progress in Project implementation using the set of indicators and Project monitoring mechanisms shown in the agreed upon Project Framework. For this purpose, PMU shall cause a baseline survey to be conducted in the first year of Project implementation and furnish the Bank a brief evaluation report on Project Benefits at the end of each year of Project implementation.

(b) The findings and supporting data of the first LA Complied with. survey referred to in subparagraph (a) of this Schedule 6 paragraph will be incorporated in the Project- Para. 18 completion report referred to in Section 2.08(c) of the Project Agreement.

Reporting LA Partly complied with. Annual Report for Without limiting the generality of the Schedule 6 2003/04 and 2004/05 was received. No provisions of Section 2.08 of the Project Agreement, Para. 19 annual report was submitted to ADB for P&DD shall submit to the Bank consolidated annual 2005/06 and 2006/07. reports on the implementation of the Project and the O&M of the facilities.

Environment

(a) P&DD shall ensure that adverse LA Complied with. environmental impacts are mitigated and appropriate Schedule 6 environmental safeguards adopted in relation to Para. 20 noise, dust, air pollution, safety standards, and sanitation measures.

(b) P&DD shall ensure that problems related to LA Complied with. the environment, such as drainage, landslides and Schedule 6 erosion, as well as related damaged-prevention Para. 20 activities are appropriately addressed during the construction of the Project roads and O&M of the Project facilities, all in accordance with the Bank’s environmental guidelines.

Midterm Review LA Complied with. Each year during implementation, the Schedule 6 Borrower shall ensure that P&DD conducts, in Para 20 consultation with representative of the Bank, an annual review of the Project to ensure that a participatory and demand-driven approach is being

Appendix 6 35

Loan Covenants Reference Status of Compliance utilized for each component. The Borrower shall also ensure that P&DD conducts, in cooperation with the Bank and pursuant to agreed upon terms of reference, a midterm review of the Project at the end of the second year of implementation.

Procurement Project Complied with. Agreement All goods and services to be financed out of (PA) Section the proceeds of the Loan shall be procured in 2.03(b) accordance with the provisions of Agreement Schedule 4 and Schedule 5 to the Loan Agreement. The Bank may reduce to finance a contract where goods or services have not been procured under procedures substantially in accordance with those agreed between the Borrower and the Bank or where the terms and conditions of the contract are not satisfactory to, the Bank.

Project Management PA Section Complied with. 2.04 Punjab shall carry out the Project in accordance with plans; design standards, specifications, work schedules, and construction methods acceptable to the Bank, Punjab shall furnish or caused to be furnished to the Bank promptly after their preparation, such plans, design standards, specifications and work schedules, and any materials modifications subsequently made therein, such detail as the Bank shall reasonably request.

Punjab shall maintain, or cause to be PA Section Complied with. This is according to the maintained, records and accounts adequate to 2.04 unqualified opinion of the auditors. identify the goods and services and other items of expenditure financed out of the proceeds of the Loan, to disclose the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, its operations and financial conditions.

Reporting PA Section Partly complied with. No quarterly nor 2.08(b) monthly report was submitted for 2006 PMU furnishes the Bank, through Punjab, and 2007. consolidated quarterly reports on the execution of the Project and on the operation and management of the Project facilities. Such reports shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter.

36 Appendix 6

Loan Covenants Reference Status of Compliance Promptly after physical completion of the PA Section Complied late. Project completion report Project but in any event not later than 3 months 2.08(c) submitted on 27 June 2008. thereafter or such alter date as the Bank may agree for this purpose, Punjab shall ensure that PMU furnishes the Bank a report on the execution and initial operation of the Project, including its cost, the performance by the Punjab, assessing in particular the socioeconomic impact of the Project on the beneficiaries, progress in reducing poverty in the Project Area and utilization of the Loan proceeds.

Punjab shall ensure that P&DD and the PA Section Complied with. implementing agencies (i) maintain separate 2.08(c) accounts for the Project and for their overall operations; (ii) have such accounts and related financial statements (balance sheet, statement of income and expenses and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to the Bank; and (iii) furnish to the PMU promptly after their preparation but in any event not later than twelve months after the close of the fiscal year to which they relate, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditor’s opinion on the use of the Loan proceeds and compliance with the covenants of this Loan Agreement as well as on the use of the procedures for imprest account and statement of expenditures) all in the English language. Punjab shall furnish to the Bank such further information concerning such accounts and financial statements and the audit thereof as the Bank shall reasonably request.

Appendix 7 37

CONSULTANCY INPUTS (in person-months) Change of Consulting service Appraisal Implementationa Actual at completion Rural roads designb Design engineering 16 Construction supervision 48 Senior project engineer 48 98 Design engineer 36 49 Junior design engineer 48 Construction supervision 21 Design specialist 6 Resident engineers (5) 323 Subtotal 64 159 470 Implementation and BMEb Implementation consultant 24 24 8 BME consultant – for PMU 24 24 65 BME consultant – for P&DD 6 6 0c Subtotal 54 54 73 Legal contract agreements 6 6 5 Nongovernment organizationd 84 840 Unknown TOTAL 95 1,053 At least 548 BME = benefit monitoring and evaluation, P&DD= Planning and Development Department of Punjab, PMU = project management unit.

a 1999. b Recruitment arrangements changed in 1999 from a firm to individual consultants. c No documentation on why the BME consultant for P&DD was not mobilized or why the PMU BME consultant did not provide the 6 months’ of consultancy for P&DD. d Contract with National Rural Support Program, the selected nongovernment organization, was signed on 6 August 1998. Contract period was 5 years. It was however terminated in June 2001 by the PMU. No records are available in PMU on the number of person-months mobilized up to the point of contract termination. Source: Asian Development Bank estimates based on PMU data.

38 Appendix 8

LIST OF EQUIPMENT AND VEHICLES

Original as per Actually Mode of Item Unit Appraisal Purchased Procurement Current Usage

Vehicles Small Pickup trucks no. 12 Vans no. 12 1 DP PMU Jeeps no. 7 IS 2 Bahawalnagar 6 DP 2 Rahimyar Khan 1 Bahawalpur Engineering Office 8 PMU Car 1 PMU Motorcycle 12 10 PMU ( 2 stolen)

Equipment Computers no. 11 9 DP PMU Printers no. 8 6 DP PMU UPS 1 DP PMU Computer software lumpsum 1 DP PMU Data storage/backup media 1 DP PMU Voltage regulator (5 kva) 8 DP PMU Voltage stabilizer (1 kva) 11 DP PMU Scanner 1 DP PMU Fax machine no. 1 1 DP PMU Photocopier no. 1 1 DP PMU Spiral binding machine 1 DP PMU Air Conditioners no. 7 DP PMU Desert Cooler 15 DP PMU Electric water Cooler 1 DP PMU Overhead Projector no. 1 DP PMU Projector screen no. 1 DP PMU Steno sets 4 DP PMU Multimedia 1 DP PMU VCR no. 1 DP PMU Television set no. 1 DP PMU Video Camera no. 1 DP PMU Handy Camera 1 DP PMU Electric typewriter no. DP PMU Other Equipment lumpsum 1 DP PMU Furniture lumpsum 1 DP PMU Level set 7 DP PMU Staff rods 7 DP PMU Laboratory Equipment lumpsum 3 DP PMU DP = direct purchase, IS = international shopping, PMU = project management unit, UPS = uninterruptible power supply, VCR = videocassette recorder. Note: Includes vehicles and equipment procured by National Rural Support Program under their contract and by on-farm water management. These were turned over to PMU upon completion of the Project. Source: PMU.

Appendix 9 39

SUMMARY FINANCIAL AND ECONOMIC ANALYSIS

A. Methodology

1. The financial and economic reevaluation undertaken for the Bahawalpur Rural Development Project (BRDP) project completion report draws upon a variety of data sources. Data on physical inputs and outputs and related variables are derived from: (i) data collected by the project management unit (PMU) as part of its own project completion report, which consists of data collected by the PMU itself while preparing the project completion report, and data presented in analyses prepared by the benefit monitoring and evaluation (BME) consultant for the final BME report in 2005; and (ii) the evaluation of the Project conducted in 2006.1 This evaluation is referred to as the Phase 1 evaluation. Agricultural price data was derived from ADB's project completion report for the Dera Ghazi Khan Rural Development Project,2 which was undertaken in 2007. Data from the Dera Ghazi Khan project completion report is considered appropriate in that the area borders the BRDP project area and has similar socioeconomic characteristics, the projects have similar components, and it uses the same base year (2007) for the analysis. Where data for specific prices was not available from the Dera Ghazi Khan project completion report, it has been derived from the PMU project completion report or the Phase 1 evaluation, and updated to 2007 prices. No BME report was prepared after 2005, nor was an impact survey undertaken at the end of the Project. In addition, time constraints facing the current Project Completion Review (PCR) Mission mean that representative data for an in-depth assessment of the impact of the Project are not available. However, PCR Mission field investigations and discussions with PMU staff have been used to review data from other sources and the findings of previous evaluations and, if appropriate, to make adjustments to those data.

2. The detailed financial and economic analysis is presented in Supplementary Appendix B, which also includes a review of the methodologies used in the appraisal and previous financial and economic evaluations of the Project and all supporting tables for the reevaluation at project completion.

3. Assumptions relating to specific project components are presented in the sections relevant to those components. The key general features of this PCR evaluation methodology are presented below:

(i) The use of the domestic price numeraire; (ii) Constant 2007 prices and the Pakistani rupee as the unit of account; (iii) A standard conversion factor of 0.9, in common with other project economic appraisals and evaluations undertaken in Pakistan; (iv) A shadow wage rate factor for unskilled labor of 0.8; (v) In determining constant price cost estimates, costs are separated into foreign and local cost components to which escalation factors based on the World Bank manufactures unit value index and the Pakistan gross domestic product deflator, respectively, are applied.3 Where necessary, input and output prices have been updated to 2007 prices in the same manner;

1 The evaluation was conducted under ADB. 2005. Technical Assistance to Pakistan for Preparing the Bahawalpur Rural Development Project, Phase II. Manila. 2 ADB. 2007. Project Completion Report on the Dera Ghazi Khan Rural Development Project in Pakistan. Manila. 3 The manufactures unit value index is taken from World Bank. 2008. Manufactures Unit Value Index. Washington. The Pakistan gross domestic product deflator from Government of Pakistan, 2007. Pakistan Statistical Yearbook 2007. Islamabad.

40 Appendix 9

(vi) Economic prices of traded inputs and outputs (for watercourse improvement schemes) are based on import and export parity prices estimated from World Bank commodity price forecasts, adjusted for international shipping and handling costs, domestic transport and handling costs, and taxes and duties, to arrive at project area price estimates. Based on PCR Mission field investigations, sugarcane and rice have been included in the list of traded outputs; (vii) Inputs and outputs of all other project schemes are assumed to be non-traded; (viii) For all project-financed schemes, the range of crops, enterprises, and benefits analyzed have been expanded as far as possible (depending on the availability of representative data) from previous analyses to reflect PCR Mission field investigations and data provided by and discussions with the PMU; (ix) Final project cost estimates of individual schemes have been adjusted to reflect the PCR Mission finding that for the most part maintenance expenditures have not been made. This is reflected in a reduced economic life assumed for each rural road and watercourse scheme (15 years rather than the 20-year norm applied in previous analyses); (x) For rural electrification schemes, final cost figures do not include the cost of household internal wiring, which PCR Mission investigations indicate is between 30% and 50% of the cost of the household connection. Scheme costs have been increased accordingly; (xi) In the absence of data required to derive a poverty line specific to the project area, the poverty line used to determine household poverty impact is based on the Pakistan Planning Commission's national poverty line of PRs748.56 per month per adult, estimated in 2000/01 and based on a daily intake of 2,350 calories.4 This has been updated to 2007 prices, using the consumer price index, to PRs1,060 per adult per month—equivalent to PRs38,240 per adult per year; and (xii) For the purpose of the analysis it assumed that rural households comprise seven persons, including three adults.

B. Rural Roads

3. Economic Analysis of an Improved Road

4. An economic analysis has been undertaken for a single road improved under the Project (road No. 11617), including a comparison with an unimproved road of a similar type and in a similar locality.5 The roads selected were also analyzed in the Phase 1 evaluation and, as such, they are the only roads for which sufficient data exists to undertake a detailed analysis. The roads were also visited during the PCR Mission to verify and refine Phase 1 evaluation findings as appropriate. Daytime traffic counts on both roads indicate a significantly higher traffic volume on the improved road. The number of motorized vehicles is almost six times higher (237 on the improved road compared with 41 on the unimproved road), and the number of non-motorized vehicles almost 12 times higher (256 on the improved road compared with 22 on the unimproved road).

5. The difference in traffic volume between the two roads is used as the basis for the estimation of incremental benefits derived from road improvement under the Project. In the

4 Government of Pakistan. 2005. Economic Survey 2004-05. Islamabad. 5 The roads analyzed were road No. 11617 with a length of 1.5 km, and the unimproved Tokamukhian road of 2.5 km. Three daytime traffic counts were planned during the Phase 1 evaluation but only one completed.

Appendix 9 41

absence of adequate data to estimate incremental agricultural production, reduced farm input costs, reduced farm output marketing costs, and increased non-farm business activity generated by the road improvement, the economic analysis uses savings in vehicle operating costs (VOCs) and passenger time savings as the benefits from road improvement. VOCs are based on estimates of the international roughness index and the reduction in costs associated with improvements in road surface.6 An average journey distance of 75% of the road length has been assumed. Additional benefits accrue in the form of passenger and transport operator time savings resulting from shorter journey times compared with the unimproved road. Time saving is valued at the prevailing 2007 daily wage for unskilled labor (PRs200), adjusted by the shadow wage rate factor of 0.8.

6. An economic cash flow has been derived from the vehicle operating cost (VOC) and passenger time-saving benefits and costs of road construction. In the base case, routine and periodic maintenance have not been included, and the cash flow has been analyzed over a 15- year period from project start-up. Incremental traffic and associated benefits are assumed to be phased in over the first 3 years at rates of 85%, 90%, and 100%. Thereafter, traffic benefits are assumed to increase at an annual rate of 5%. Road investment costs have been updated to 2007 prices from the time of construction in 2002, resulting in a total cost of PRs4.2 million.7 The analysis does not account for possible opportunity costs of land acquired for road improvement, given that the type, extent, and value of previous land use was not documented and hence cannot be determined. PCR Mission investigations indicate that, for the roads visited, cultivation prior to road construction abutted existing tracks in certain places. However, due to lack of documentation, the cumulative impact of production foregone as a result of the acquisition of land as shoulders for widened roads could not be estimated.

7. The results of the economic analysis for road 11617 are presented in Table A9.1.

Table A9.1: Economic Analysis of Road 11617 Item EIRR (%) Variable Switching Value (%) Base case 19.0 Benefits 29 Full maintenance—20 year life 21.9 Investment cost 44 No maintenance—12 year life 17.9 Maintenance cost 540 EIRR = economic internal rate of return. Source: Asian Development Bank estimates.

8. The economic internal rate of return (EIRR) is 19.0% on the assumption that there will continue to be no maintenance and the useful life of the road will be limited to 15 years. This compares with the EIRR estimated by the Phase 1 evaluation at 16.0% after a project overhead cost of 7% is added to costs, or 18.1% without the overhead. Sensitivity analysis indicates that the EIRR is robust with respect to both a reduction in benefits and an increase in costs, with switching values of 29% for benefits, and 44% for investment costs. To ensure a 20-year road life, routine (annual) maintenance costs would amount to PRs42,790, and periodic (5 yearly)

6 These, and costs at various International Roughness Index levels are from World Bank. 1994. Estimating Vehicle Operating Costs Technical Paper 234. Washington. VOCs have been updated to 2007 prices using the manufactures unit value index and Pakistan gross domestic product deflator respectively, assuming 30% foreign and 70% local currency costs. Foreign costs have been converted to economic cost using the shadow exchange rate factor. 7 A discrepancy exists between the investment cost indicated by the PMU (PRs2.94 million) and that used in the Phase 1 evaluation (PRs3.43 million) in 2002 prices. The PMU figure derives from the road profile sheet provided to the project completion review (PCR) Mission. For the purposes of the PCR analysis, the PMU figure has been used.

42 Appendix 9

maintenance costs would amount to PRs51,350 at 2007 prices.8 Including maintenance costs and assuming a 20-year life would raise the EIRR to 21.9%. However, in the event that the life of the road was to fall to 12 years, the EIRR would fall to 17.9%.

9. The estimation of benefits based on VOC and time savings fails to capture the full benefits of road improvement.9 PCR Mission investigations indicate that the improvement of road 11617 has had a significant impact on agricultural production in the form of a shift in cropping pattern toward higher-value crops such as sugarcane, the marketing of which was previously difficult. Prior to road improvement, farmers were unable to transport such crops to nearby processing facilities and dealers were less willing to travel to collect produce at the farm gate and paid lower prices when they did. Discussions with community organization members in the villages served by the road suggest additional benefits in the form of: (i) the opening of new businesses such as shops and workshops; (ii) improved access to the village for tradesmen and agricultural produce dealers; (iii) increased prices of farm outputs (for instance, there is a premium of 5% to 10% on the price paid for wheat for farmers close to the road, and following the opening of a milk collection point by the road the price received for milk more than doubled); and (iv) the return of former village residents who had migrated to other villages. There has also been an increase in the value of land in the vicinity of the road. Land at the roadside has reportedly increased from PRs150,000 to PRs300,000 per acre. Land values decline with distance from the road at an approximate rate of PRs50,000 per 300 meters (equivalent to the width of a 5-acre holding).

10. The community organization reports that within the area of influence of road 11617 (considered to be 1.5 kilometers [km] on either side of the road), 50% of households are landless. Benefits from crop transport and increasing land values clearly have had less impact upon the landless. Nonetheless, there are significant benefits to landless households in the form of: (i) employment opportunities in businesses opened since road improvement; (ii) business opportunities in the provision of transport services using animal carts and motorcycle rickshaws; (iii) reduced travel time to work enabling longer working hours and increased income; (iv) the ability to live within the village and travel to work in neighboring areas rather than having to live close to work; (v) greater ease of travel for animal cart owners; and (vi) improved access to health, education, and other social and cultural services.

4. Component Economic Analysis

11. The economic analysis of the rural roads component as a whole is based on the use of the net economic benefits of road 11617 as a proxy for all roads. The cash flow for the individual road is applied to the number of roads completed each year during the life of the Project. This provides a net economic cash flow for all of the link and farm-to-market roads (FMR) within the component as a whole. An important caveat in this respect is that road 11617 is located reasonably close to Bahawalpur and is well connected to other parts of the district. The area's agricultural land is also well supplied with irrigation and, therefore, relatively more productive. The area is also well populated. The application of the economic benefits of a road in such an area to all roads constructed under the Project may overstate the level of benefits derived from roads that are in less populated areas, that are less well connected to the main road network,

8 Based on estimates of PRs30,000 for routine maintenance and PRs36,000 for periodic maintenance at 2002 prices provided by the PMU Mini-Highways Division for the Phase 1 evaluation. 9 The lack of adequate data from the BME system and a project completion survey together with the limited scope of the PCR Mission mean that it has not been possible to estimate the full benefit of individual roads or the rural roads component as a whole.

Appendix 9 43

and that are in areas having less productive agriculture. In this context, the analysis of the component as a whole is indicative.

12. No impact analysis has been undertaken on the Ahmadpur East to Yazman 60-km main road to determine economic benefits. In the absence of such data, an assumption has been made that the potential benefits per km of the main road would be similar to that of road 11617. The costs of the road (PRs243.9 million), which account for 14% of the total cost of the rural roads component, have been included in the analysis for the component as a whole. In addition, the costs of institutional strengthening have been included. The share of the rural roads component in institutional strengthening costs is 55%, amounting to PRs91.54 million. This cost has been allocated according to annual build-up of road construction, starting 1 year prior (1998/99) to the first year in which road construction began (1999/2000).

13. The EIRR for the rural roads component is 15.8% on the basis of a 15-year life for each road and an economic cash flow starting at project start-up. This, however, fails to capture the full economic benefit of roads that were constructed late in the Project. If the cash flow is extended to include a 15-year life for all roads, the EIRR rises to 17.5%. The EIRR for the component as a whole is lower than that of road 11617 alone because: (i) the phasing of component costs and benefits, in which institutional strengthening costs are assumed to have started in the second year but road construction did not commence until the third year; (ii) the delay in the attainment of positive net economic benefits until the 10th year after the start of the Project (since significant construction costs were still being incurred in the later years of the Project); and (iii) the allocation of significant institutional strengthening costs (55% of the total).

5. Poverty Targeting and Impact

14. There does not appear to have been any systematic poverty targeting of rural road development. There also appears from PCR Mission investigations to have been in a number of cases influences external to the Project (personal, political, or commercial interests) to promote applications for road construction. However, the PMU has confirmed that all such applications were reviewed to assess poverty in the village or settlement concerned, and that selection criteria established at appraisal were adhered to.

15. In the context of targeting, the poverty reduction rationale for the 60-km main road is questionable given its location, width, function (joining two relatively sizeable towns), and potential beneficiaries, who are likely to be produce traders and transport operators rather than poor communities. Based on PMU project completion report estimates of an average cost of PRs2.1 million per km of link and FMR, the funds allocated to the main road could have financed the construction of approximately 115 km of additional roads. This represents an increase of 22% over the total length of link and FMRs completed under the Project, and is equivalent to an additional 28 roads.10

16. PCR Mission discussions with beneficiary communities suggest that the major direct beneficiaries of road improvement are better-off farmers who benefit proportionately more from higher output and lower input prices and lower produce transport costs given the greater marketable surpluses they produce on their larger landholdings. Farmers with land closer to the

10 The total cost of the rural roads component according to the PMU project completion report (Appendix 6), excluding the main road, was PRs1.088 billion for a total length of 514 km, equivalent to PRs2.12 million per km. The average road length is 4.11 km, based on totals of 514 km (excluding the 60-km main road) and 125 individual roads.

44 Appendix 9

roadside also benefit from relatively higher increases in the value of land following road improvement. Transport operators also benefit from increased volume of activity. Farmers with smaller holdings benefit less in respect to agricultural impacts. The landless tend to benefit indirectly from increased employment opportunities generated by increased agricultural output. All households within the area of influence benefit from improved access to health, education, and other social and cultural facilities and services.

17. Quantification of the poverty impact of the roads component is difficult given that the distribution of benefits has not been studied through an in-depth impact survey. The total annual benefits accruing from road 11617 are estimated at PRs671,750 from VOC savings and PRs95,300 from time savings. The PMU project completion report estimates that on average road improvement directly benefits 150 households per km. The number of households within the area of influence of road 11617 is around 225, and total savings per household amount to about PRs3,400 per year. However, such benefits will accrue in greater proportion to regular road users and to those with greater need for personal travel or to transport farm produce and inputs and other goods. This excludes many poor farmers, who have smaller surpluses of marketable farm outputs, and landless laborers.

18. The construction of rural roads had a significant one-off employment impact over the life of the Project. For a typical road construction contract, labor accounts for 15% of costs. Unskilled labor accounts for an estimated 80% of total labor costs. As an example, based on a 6.6-km road costing PRs15.9 million, the cost of unskilled labor amounted to PRs1.9 million. Assuming an average daily unskilled labor rate of PRs200, that equates to 9,500 unskilled person-days, equivalent to an estimated 1,440 person-days per km.11 For the entire 574 km of rural roads constructed under the Project, the total unskilled employment generated is estimated to be approximately 830,000 person-days.

C. Watercourse Improvement

1. Introduction

19. Under the Project, skilled masons were employed to ensure higher quality construction. The PMU also monitored construction through six field teams, each with four qualified engineers, supervised by a director in the PMU. This helped address some of the problems that have afflicted previous watercourse improvement programs, where poor quality construction and materials have reduced the life of watercourses. On this basis, the PMU believes that, if properly maintained, watercourses improved under the Project should have a life of 20–25 years, and that no major repairs should be necessary before 10 years. However, it appears from PCR Mission investigations and discussions with PMU staff that watercourse maintenance is, at best, ad hoc, consisting of minor repairs or de-silting undertaken by the members of water users’ associations (WUA). Any cash costs required are covered by contributions from affected WUA members. The lack of routine maintenance and an effective system of accumulating contributions for such maintenance or major repairs suggests that the economic life of watercourses may be lower than 20 to 25 years.

20. The improvement of watercourses does not seem to have been systematically linked to the provision of extension services or advice to WUA members that would enable them to improve cultivation practices in light of an increased supply of irrigation water. The Project

11 A rule of thumb in Pakistan assumes the construction of 0.6 km of road per month, equivalent to 50 days per km. This indicates a team of around 30 workers necessary for 2,420 person-days per km.

Appendix 9 45

engaged four extension officers for this purpose. However, their outreach can only have been limited. While farmers in the area have lots of experience growing traditional crops such as wheat and cotton, and PCR Mission investigations indicate that many farmers shifted cropping patterns toward more water-dependent (and higher value or lower risk) crops such as sugarcane and rice, there appears to have been limited diversification into minor, high-value crops such as vegetables. Such diversification may have occurred to a greater extent had farmers received the necessary extension services.

2. Crop and Farm Budgets

21. The analysis of watercourse improvement schemes is based on the estimation of crop budgets for the major crops grown on watercourse command areas before and after improvement. The benefits of watercourse improvement derive from increased crop yields and increased cropping intensity made possible by the increased supply of irrigation water. PCR Mission investigations indicate that there has also been a shift in cropping patterns toward more water dependent, higher-value crops such as sugarcane and rice and away from cotton, which is perceived as both more costly to cultivate (as it requires more for inputs—especially pesticides) and more risky because of frequent pest infestation.

22. One-hectare (ha) crop budgets have been prepared for wheat, cotton, sugarcane, rice, and fodder. Yield increases used in the analysis derive from average yields estimated in the PMU project completion report. They range from 5% to 11%. There is a wide variation in the level of yields for each crop amongst various data sources relevant to the project area.

23. Input and output prices have been estimated from a variety of data sources relating to the Project and from ADB's project completion report for the Dera Ghazi Khan Rural Development Project, which was conducted in 2007. Dera Ghazi Khan District borders the project area and has similar agricultural characteristics. Prices were also representative of those of the project area in 2007. For the economic analysis, prices for traded farm outputs and inputs have been estimated from export parity prices for wheat, cotton, and rice, and import parity prices for wheat, sugarcane, urea, and diammonium phosphate. With respect to wheat, Pakistan in recent years has fluctuated between being a net exporter and net importer of wheat and has at times banned wheat exports to preserve domestic stocks. In the face of instability in world markets, this situation is expected to continue. On this basis, the economic price of wheat has been estimated as the average of its export and import parity prices.

24. Financial gross margins per ha after watercourse improvement range from PRs5,130 for rice to PRs23,680 for sugarcane. Corresponding gross margins prior to watercourse improvement were PRs4,130 for rice and PRs19,410 for sugarcane. Economic gross margins for cotton and sugarcane both before and after watercourse improvement are negative, resulting from lower economic output prices compared with financial output prices, and significantly higher economic prices for urea and diammonium phosphate compared with financial prices. However, incremental economic gross margins for both cotton and sugarcane are positive because crop yields increased following watercourse improvement.

46 Appendix 9

25. It is assumed that cropping intensity 12 increased from 134% to 143% following watercourse improvement. This is based on the PMU analysis of a sample of schemes undertaken for the PMU project completion report. These cropping intensities are below those assumed by the Phase 1 evaluation at 160% before and 165% after watercourse improvement. However, both figures are significantly greater than the levels assumed at appraisal, which were 97% and 106%.

26. The assessment of the impact of watercourse improvement at the household level is based on an analysis of farm budgets for two representative farm sizes: a medium-sized farm of 12.5 acres (5 ha) and a small farm of 5 acres (2 ha). The farm budgets incorporate increases in crop yields, an increase in cropping intensity from 134% to 143%, and diversification in the cropping pattern. It is assumed that the cropping pattern will remain unchanged in the winter (rabi) season, reflecting the need for farmers to ensure a supply of the staple crop wheat and rabi fodder for livestock. Changes in cropping pattern in the summer (kharif) season reflect a shift away from cotton in favor of sugarcane and rice.

27. The analysis of the 12.5-acre medium-sized farm indicates an increase in net farm income from PRs63,794 before watercourse improvement to PRs90,610 after improvement. These equate to PRs1,770 per adult per month before watercourse improvement, and PRs2,520 after watercourse improvement. For the 5-acre small farm, net farm income before watercourse improvement is PRs25,050 (PRs695 per adult per month). This rises to PRs35,810 (PRs995 per adult per month) after watercourse improvement. This analysis is based only on income from crop farming. It does not include income from livestock or off-farm income.

3. Component Economic Analysis

28. Incremental economic gross margins have been used as the basis for the economic analysis of the watercourse improvement component as a whole. The total area under each crop has been estimated on the basis of the cumulative number of watercourse improvement schemes developed each year and an average of 144 ha of cultivated area per watercourse command area. 13 The overall cropping pattern and cropping intensity are based on the weighted average cropping patterns of the two farms analyzed.

29. Watercourse improvement investment costs have been derived from PMU estimates converted to economic values and updated to 2007 prices. The costs of institutional strengthening relevant to watercourse improvement have been included in investment costs according to the share of the watercourse improvement component in total project costs (excluding institutional strengthening costs).

30. The EIRR of the component as a whole is 14.8%, assuming maintenance does not take place as required. If the analysis is extended to include a 15-year period for all schemes, rather than 15 years from the start of the Project, the EIRR rises to 15.5%. Although watercourse improvement was reported to be of high quality compared with previous on-farm water

12 Cropping intensity (CI) refers to the frequency or intensity with which a piece of land is used for growing crops in succession within a period, usually a year. A CI of 100% means that the piece of land is cropped only once, whereas as CI of 200% means that it is cropped twice. A CI below 100% means that not the entire piece of land is cropped. A CI of 134% means that a part (but not all) of the piece of land was cropped more than once as a result of water course improvement. 13 The average watercourse area is based on the estimated area covered by the 684 schemes. PMU PCR Appendix 9, Table 9.

Appendix 9 47

management programs, the continued lack of maintenance noted during the PCR Mission will adversely affect watercourse life and, therefore, the sustainability of economic benefits.

4. Poverty Targeting and Impact

31. Of the 684 watercourse improvement schemes, 209 (31%) were located in villages covered by the large scale reconnaissance survey (LSRS).14 Such villages were deemed to be poor villages, which qualified them for the survey. Although no ex ante assessment was made of the household distribution of income in villages where schemes were located, an assessment of the distribution of landholding is possible using PMU data for a sample of 60 schemes (Table A9.8). This indicates that 73% of households benefiting from watercourse improvement schemes had landholdings of less than 5 acres, and may be regarded as poor according to landholding criteria. In its application of selection criteria for watercourse schemes, the PMU used an area of 12.5 acres as the criterion by which it assessed whether 66% of households qualified as being below the poverty line. By this definition of poverty, 95% of households could be considered poor based on the landholding distribution in Table A9.2.15

Table A9.2: Distribution of Watercourse Scheme Households by Landholding

Percentage of Households by Landholding (acre) Households in District WUA <= 5.5 5.6 to 12.5 12.6 to 25.0 > 25.0 Total Bahawalpur 868 71 21 6 1 100 Bahawalnagar 1,365 66 29 5 0 100 Rahim Yar Khan 1,442 79 16 4 0 100 Total 3,675 73 22 5 0 100 WUA = water users' association. Source: PMU watercourse improvement project profiles - 60 projects (9%) sample. 32. The contribution of watercourse improvement beneficiaries to their scheme averaged PRs1,530 based on a sample of 60 schemes provided to the PCR Mission by the PMU. This equates to PRs2,100 at 2007 prices. Actual contributions differed according to landholding size, but contributions were considered affordable even for farmers with smaller landholdings, as the average contribution of PRs2,100 represents only 5% of the annual poverty line income in 2007 prices (PRs38,240).

33. The analysis for the 5-acre farm suggests that, on the basis of income from crops alone, net farm income per household per year of PRs25,050 prior to watercourse improvement was equivalent to only 66% of the household poverty line income of PRs38,240. Although watercourse improvement results in a 43% increase in net farm income (to PRs35,815), that figure remains below the poverty line figure (equivalent to 94%). Research into the sources of rural income in Pakistan indicates that agriculture is not the most significant source of income for rural households. 16 Non-farm income (unskilled labor, self-employment, or government employment) accounts for 30% to 34% of rural per capita household income. Agricultural

14 Two large scale reconnaissance surveys were conducted in 1998 and in 2001. The data on scheme location provided by the PMU is assumed to derive from the first survey. 15 This distribution differs from that resulting from the May 2000 baseline survey, in which 46% of households were either landless or had 5 acres or less, and 78% were landless or had 12.5 acres or less. This is discussed further in Section G. 16 Adams, Richard Jr. H. and Jane H Je. 1995. Sources of Income Inequality and Poverty in Rural Pakistan, International Food Policy Research Institute, Research Report 102. Washington.

48 Appendix 9

income is the second most important, accounting for between 23% and 27%. For poor households, the significance of farm income is even lower. The International Food Policy Research Institute (IFPRI) report (see footnote 16) states that 50% of income is derived from non-farm sources, and that non-farm income for poor households is seven times larger than income derived from crop agriculture. Income from livestock accounts for 25% of the income of poor households.

34. The analysis for the 12.5-acre farm indicates that net farm income before watercourse improvement of PRs63,795 exceeded the poverty line income by 67%. Following watercourse improvement, net farm income rises to PRs90,610, equivalent to 2.4 times the poverty line income. This suggests that farmers with larger landholdings are better able to survive on crop income alone and, unlike small farmers with 5 acres or less, do not need to rely as much on livestock and off-farm income to sustain their household.

35. PCR Mission discussions with farmers indicated a perception that recent (2008) increases in prices of inputs such as urea (from PRs10.6 per kg in 2007 to PRs12.0 per kg in 2008) and diammonium phosphate (from PRs22.6 per kg in 2007 to PRs32.5 per kg in 2008) following the removal of subsidies had not been adequately compensated for through corresponding increases in the floor procurement price of outputs such as wheat (from PRs10.5 per kg in 2007 to PRs15.75 per kg in 2008). Farmers claimed that this had resulted in less fertilizer use, lower yields, and lower incomes. This is not, however, borne out by the analysis. If these prices are used in the farm budget analysis, the farm income for the 5-acre farm after watercourse improvement rises above the poverty line income, to a level of 125% compared with 94% using 2007 price levels. Nonetheless, small farmers remain vulnerable to price shocks and similar shocks.

D. Small-Scale Infrastructure

1. Introduction

36. A total of 564 small-scale infrastructure (SSI) schemes were established under the Project. Of these, 236 (42%) were in Bahawalpur District, 148 (26%) in Bahawalnagar District, and 76 (32%) in Rahim Yar Khan District. Investments under the SSI component largely went to establish commercially-oriented enterprises based on community ownership, management, and operation. These include agroprocessing and agricultural production enterprises, engineering workshops, and small-scale factories engaged in the manufacture of leather goods and household goods. Together these enterprises and manufacturing units account for 400 (71%) of the 564 schemes developed under the Project. The second major category of scheme is women's development centers (WDCs), which account for 19% of all schemes. WDCs provide skills training to community women mainly in sewing and embroidery, and operate on a commercial basis in the production and marketing of clothing and related products. Schemes categorized as infrastructure by the PMU (water supply, culverts, and bridges) account for 10% of all schemes. For the purposes of the PCR evaluation, SSI schemes have been grouped into seven categories as shown in Table A9.3.

Appendix 9 49

Table A9.3: Small Scale Infrastructure Schemes by Category Scheme Category Number of Schemes % of Total Agroprocessing 35 6 Agricultural mechanization (implements) 36 6 Agricultural production 151 27 Engineering workshops 5 1 Community enterprises manufacturing 173 31 Women's Development Centers 108 19 Non-productive infrastructure 56 10 Total 564 100 Note: Allocation of schemes to categories as shown in Supplementary Appendix B, Table A9.A2.17. Source: BRDP PMU Project Completion Report, Appendix 5.

2. Financial and Economic Analysis of Sample Schemes

37. Six SSI schemes representing each major scheme category have been evaluated in Table A9.3 to determine their financial and economic viability. Four of these schemes were also evaluated as part of the Phase 1 evaluation (a multi-purpose agroprocessing center, a goat- breeding enterprise, a melamine dishware enterprise, and a WDC). Two additional schemes (an agricultural engineering workshop and an agricultural mechanization [implements] service enterprise) have been evaluated for the project completion report. For the project completion report, all costs and revenues have been updated to 2007 prices to derive net cash flows from which financial and economic internal rates of return have been estimated. These are compared with analyses undertaken during the Phase 1 evaluation in Table A9.4.

Table A9.4: Small-Scale Infrastructure Schemes’ FIRRs and EIRRs Phase 1 PCR Evaluation Scheme FIRR EIRR FIRR EIRR Agroprocessing center 16.2 13.6 17.3 14.7 Goat enterprise 25.8 22.2 24.0 22.0 Melamine dishware 9.7 8.7 10.7 9.8 Women's Development Center 9.2 7.5 9.8 4.3 Agricultural engineering workshop 11.4 10.4 n/a n/a Agricultural mechanization (implements) 14.7 14.1 n/a n/a EIRR = economic internal rate of return, FIRR = financial internal rate of return, PCR = project completion review. Note: The Phase 1 evaluation covered only the first four schemes. Source: Asian Development Bank estimates

38. The results of the PCR evaluation compare with those of the Phase 1 evaluation. Three schemes are shown to have acceptable FIRRs and could, potentially, sustain debt or equity financing for future expansion or major asset replacement, as opposed to the original predominantly grant financing. However, even for the agroprocessing center and the agricultural mechanization enterprise, switching values for revenue are less than 10%, suggesting that they are sensitive to adverse changes in output volume or prices. The results cast some doubt over the viability of the melamine dishware enterprise, the WDC and, to a lesser degree, the agricultural engineering workshop. The Phase 1 evaluation undertook assessments of the melamine dishware enterprise and the WDC. For the melamine dishware enterprise, the evaluation was conducted 3 years after the start of operations and pointed to the need for continued expansion in output comparable with expansion during the first 3 years for returns to improve. However, the scope for such expansion may be limited by market competition, as

50 Appendix 9

noted. The Phase 1 evaluation also pointed out that in terms of training, the WDC may have reached the saturation point within its local community. This may also be true of other WDCs, given that 108 such centers have been developed throughout the project area. While this may point to a potential oversupply of WDC products, the market for such products is significantly larger. WDCs visited during the PCR Mission had initiated marketing campaigns in major urban centers, including Lahore and Karachi, through local dealers or directly through community organization members (managers). However, such marketing options may not be available to all WDCs. The analysis of the agricultural engineering workshop is based on data presented in the scheme profile that supported its financing application. This indicated an EIRR of more than 12%. However, the profile appeared to omit key cost data, including raw materials (steel) for producing machinery parts. The PCR analysis has included missing data based on the field visit to the unit. However, the analysis is not comprehensive in this respect and is considered indicative only. Based on discussions with community organization members, monthly net profits range from PRs1,500 to PRs2,000, rising to PRs3,500–4,000 at peak periods.

39. EIRRs are consistently lower than FIRRs as a result of including the value of land and unskilled labor in the economic analysis. For consistency and to facilitate comparison with the Phase 1 evaluation, value of land and unskilled labor have been excluded from the PCR financial analysis on the basis that they are contributed free of charge, except where community organization members work in the scheme and are paid accordingly. In the economic analysis, unskilled labor has been valued by converting financial values by the shadow wage rate factor. Land has been included at its value assessed in the original project profile (updated to 2007 prices), which is assumed to correspond to its market value. However, this may overstate its value, as some enterprises visited by the PCR Mission appear to have been constructed on land that was not in full-time productive use, for which the opportunity cost may be low. EIRRs may therefore be considered conservative, although the contribution of land to total scheme costs is generally low.

40. The exclusion of land and unskilled labor from the financial analysis raises doubts about enterprise viability and sustainability under normal market conditions where grant financing would not be available. No analysis has been undertaken on the viability of enterprises to withstand market-based debt financing from local financial institutions, or to provide acceptable returns to equity financing, but it appears questionable based on the analysis that has been conducted for both the Phase 1 evaluation and the PCR.

3. Component Economic Analysis

41. The economic analysis of the SSI component as a whole is based on using the economic analysis of each individual scheme as a proxy for the categories of schemes identified in Table A9.3. The multipurpose agroprocessing center is used as a proxy for all agroprocessing schemes, the goat enterprise for all agricultural production schemes, the melamine dishware enterprise for all community enterprise and factory schemes, the WDC scheme for all WDC schemes, the agricultural mechanization scheme for all mechanization and implements schemes, and the agricultural engineering scheme for all engineering workshops. The net economic cash flow of each analyzed scheme is applied to the annual number and phasing of schemes grouped by category.

42. The analysis is undertaken over 20 years from the start of the Project, which thereby excludes the later years of the cash flows for schemes that began late in the project life. Included in the net economic cash flow are the costs of the institutional strengthening component. These have been allocated to each of the four main components on the basis of the

Appendix 9 51

proportion of each component in total project costs (excluding institutional strengthening costs). For the SSI analysis, the resulting costs have been spread out in accordance with the development of schemes over the project life.

43. The project completion report EIRR estimate of 8.8% reflects both phasing and the weighting of each type of scheme. It also includes allocations of institutional strengthening costs and the costs of non-productive infrastructure schemes. The latter have been allocated as the proportion of such costs in total costs (10%), spread out in accordance with the annual development of schemes. If institutional strengthening costs are excluded, the EIRR rises to 9.5%. If the costs of non-productive infrastructure schemes are excluded, the EIRR rises to 9.6%. If both are excluded, the EIRR is 10.3%. The overall EIRR is lower than the EIRRs of individual schemes because it covers only 20 years from the start of the Project, rather than the full 20 years for each scheme. If a full 20-year cash flow is analyzed for all schemes, irrespective of when during the Project they were started, the EIRR rises to 10.4%. Although the analysis can only be considered indicative, given the limited scope of the analysis and the use of a sample of schemes as a proxy for the whole component, the analysis does cast doubt on the overall economic viability of the SSI component.

4. Poverty Targeting and Impact

44. The poverty impact of the SSI component is uncertain. Targeting appears, from PCR Mission investigations and discussions with the PMU, to have been largely subjective. Of the 564 SSI schemes, only 115 (20%) were located in villages covered by the LSRS, which were deemed to be poor villages. This does not imply that the remaining villages were not poor, but there is insufficient evidence to make an assessment.

45. A total of 2,197 out of 2,989 (74%) schemes were rejected on social grounds but these grounds are not defined and while it may be assumed that they refer to ineligibility on the basis of an assessment of poverty level, it cannot be confirmed.

46. Schemes developed were based on community organizations with 15–20 members acting as owner/operators. There has been limited employment generation and employees tend to originate from within the community organization membership. Community organization members not directly engaged in day-to-day activities generally participate in decision making and draw an income based on monthly net returns. Community organization member cash contributions to the investment costs of the schemes analyzed ranged from PRs20,200 to PRs49,200, with individual member contributions ranging from PRs1,120 to PRs2,770 (in 2007 prices). The highest level of contributions required from community organization members for the schemes analyzed represents about 7% of the updated 2007 poverty line estimate of PRs38,240 per year. This is considered to have been affordable even for poor members. Annual net revenues per community organization member ranged from PRs2,550 to PRs11,730, equivalent to 7% and 31%, respectively, of the annual poverty line income. With the exception of the WDCs, for which annual net revenues were PRs2,550, most schemes provide a significant level of income compared to the poverty line income. The PCR Mission field investigations supported this analysis' conclusion that WDCs showed lower levels of returns. The field investigations indicated that many women employed in WDCs (both community organization members and non-members) earn only PRs100–150 per day, which is less than the average daily wage for unskilled labor, estimated to be PRs200. However, this does not take into account the significant unquantifiable social benefits enjoyed by women who use such centers.

52 Appendix 9

47. In conclusion, although member contributions may have been affordable for the poor, opportunities to participate, in the Project, in particular in more commercially oriented enterprises, may have been limited. The poverty impact of SSI schemes is also considered doubtful given the small number of community organization members in each scheme, which resulted in benefits being narrowly distributed. Some additional benefits accrue to users of SSI scheme services, but the nature and scale of such benefits cannot be determined. However, for many schemes the products and services offered (such as farm mechanization, manufactured goods, embroidered clothing, and carpets) are more relevant to better-off members of local communities, as may be expected for commercially oriented enterprises.

E. Rural Electrification

1. Financial and Economic Analysis of Sample Scheme

48. Economic analysis has been conducted for a single scheme (No. 98) to determine the viability of village electrification. Benefits accruing from electrification included in the analysis are savings over existing costs of previous forms of home energy (including kerosene for lighting and fans, and batteries for radios, flashlights and other devices), and usage of electricity that is generated as a result of ready access to an alternative energy source. Access to electricity promotes extended hours of household lighting, facilitating longer work hours and the use of electrical equipment such as kitchen appliances, water pumps, fans, entertainment systems, and computers. The degree to which such appliances are used depends largely on income levels, but may also be influenced by social and peer pressure.17

49. The estimate of benefits from savings in energy use over pre-electrification levels is based on the use of electric lighting from two 40-watt florescent tubes for an average of 4 hours per day, equal to 9.6 kilowatt-hours (kWh) per month. Including the cost of the florescent lamp and tubes adjusted to a monthly basis and the average cost of electricity at PRs2.59 per kWh (adjusted to 2007 prices) results in a monthly cost for electric lighting of PRs50, compared with PRs130 for kerosene.18 The energy use related to lighting represents only 8% of the estimated average monthly household consumption of 120 kWh. The balance of electricity consumption is derived from generated demand rather than from replacement of previous energy sources, and represents household consumer surplus.19 The price used for generated demand is calculated as half of the difference between: (i) the pre-electrification cost [PRs130.15 per kWh] of previous sources for the same level of energy [ie., kerosene] divided by the electricity required for an equivalent volume of energy [9.6 kWh], which amounts to PRs13.56, and (ii) the prevailing "with" electrification price of PRs2.59 per kWh. This results in a generated electricity value of PRs5.48 per kWh. The resulting combined benefit in terms of energy savings and consumer surplus is estimated at PRs685 per month, or about PRs8,220 per household per year. This equates to an annual benefit for the scheme as a whole, covering 60 households, of PRs493,200.

17 During PCR Mission field visits, one village had seen a significantly smaller number of television sets purchased since electrification. This was attributed to the desire on the part of village elders to maintain cultural traditions and limit exposure to external influences. 18 Data relating to rural electrification is derived from the Phase 1 evaluation, the only source of detailed, representative data for a rural electrification scheme. 19 Consumer surplus is calculated as half of the difference between the with- and without-project commodity prices multiplied by the quantity of incremental output (ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila.).

Appendix 9 53

50. The investment costs of rural electrification schemes comprise the exterior (non- household) infrastructure including poles and accessories, two 50-kilovolt-ampere (kVA) transformers, skilled and unskilled labor, and an overhead charge levied by Multan Electric Power Company (MEPCO) of 10% of other investment costs. Costs at the household level include a meter, connection charges, and internal wiring. The total cost for exterior infrastructure is PRs1.74 million, which accounts for 81% of the scheme total of PRs2.16 million. The total cost for household connection and wiring is PRs0.42 million, which accounts for 19% of the scheme total. The Phase 1 evaluation estimated the 2006 equivalent cost per household at PRs6,570. 20 PCR Mission investigations indicate that the cost of a household meter and connections was fixed at PRs3,200, and that the cost of household wiring ranged from PRs1,000 to PRs1,500 (31% to 47% of the meter and connection charge). Updating these costs to 2007 prices results in a total cost of PRs6,200 to PRs6,930 per household. The higher cost has been used in the analysis. Annual maintenance costs are estimated at 1.5% of exterior (non-household) scheme investment costs of PRs1.75 million, amounting to PRs26,228. The attainment of the full level of benefits is assumed to be phased over 3 years, rising from 70% in the first year to 85% in the second year and 100% in the third year. The attainment of full benefits depends on the extent to which businesses and households are able to afford the additional investment in fixed assets and electrical appliances to fully access electricity.

51. The EIRR of the individual scheme is 15.2%. Sensitivity analysis indicates that the cash flow is not sensitive to adverse movements in either benefits or costs, with a switching value for benefits of 17%, and switching values for investment and maintenance costs of 22% and more than 100%, respectively. Operation and maintenance of exterior infrastructure is the responsibility of MEPCO, but it is not clear whether routine maintenance is actually being carried out. On the assumption that there is no maintenance being carried out, the EIRR falls to 15.0% based on a 15-year life, and to 12.8% based on a 12-year life.

52. The EIRR estimated in the Phase 1 evaluation is 18.0%. However, the analysis appears to omit the MEPCO overhead costs of 10% of the exterior infrastructure investment cost. If the analysis is reworked to include these costs, the EIRR falls to 16.7%, which is comparable with that of this project completion report. The PMU project completion report does not provide an analysis of an individual scheme.

2. Component Economic Analysis

53. The economic analysis of the component as a whole is based on the assumption that scheme No. 98 is representative of all schemes developed under the Project. The net economic cash flow is then applied to all schemes in accordance with the phasing of their development. The costs of institutional strengthening allocated to the rural electrification component are PRs23.84 million, representing 14.4% of total institutional strengthening costs. For the purposes of the analysis, institutional strengthening for the component is assumed to commence in the year prior to the development of the first schemes, rather than the first year of the Project. This improves the EIRR by deferring such costs, but does not compensate for the delay in the start- up of rural electrification schemes until the third year of the Project, which negatively affects the EIRR.

20 This included the cost of household internal wiring at 10% of the household meter and connections charges, which it estimated at PRs4,500 per household in 2001 prices (PRs5,970 updated to 2006 at the time of the Phase 1 evaluation analysis).

54 Appendix 9

54. The EIRR is estimated at 12.9% based on a 20-year cash flow from the start of the Project. If the cash flow is extended to include a 20-year period for all schemes, the EIRR rises to 14.3%. The PMU project completion report estimates the EIRR of the entire component to be 17.8%. The analysis incorporates benefits to small enterprises of savings in switching from diesel power to electricity. However, it does not appear to include the additional capital cost of replacing diesel engines with electric motors. Nor does it include an allocation of institutional strengthening costs. As such, the analysis overestimates the EIRR. The Phase 1 evaluation assumes that the EIRR for the component as a whole is the same as that of the single scheme analyzed. This fails to take into account the delay in start-up and phasing of schemes or overhead costs of institutional strengthening. All EIRRs are significantly above the estimate made at appraisal. The low level of EIRR found at appraisal is not explained in the project report and recommendation of the President (RRP). However, the RRP does state that, in light of the numerous unquantifiable indirect benefits of electrification, the appraised component EIRR was considered acceptable.

3. Poverty Targeting and Impact

55. Of the 428 rural electrification schemes, only 68 (16%) were located in villages covered by the LSRS, which were deemed to be poor villages. In general, targeting appears to have been subjective rather than systematically based on village assessments. There appears to have been external influences in the promotion of scheme applications, but the PMU confirms that it applied the selection criteria established at appraisal in the assessment of all schemes.

56. The household contribution to rural electrification consists of the meter and connection charge at PRs4,270, and internal household wiring at PRs2,210, totaling PRs6,480 in 2007 prices. This represents 17% of the 2007 equivalent poverty line of PRs38,240 per household per year. This represents a significant proportion of the income of a household at or below the poverty line. This in part explains the need for many households to have to borrow from friends and relatives or sell livestock to finance their share of electrification investment costs. However, to fully benefit from electrification, households need to invest in more than just wiring and meters. They also need to buy various electrical appliances that significantly increase overall investment costs. Such extra investments are beyond the reach of many poor families, at least until they are able to save sufficient funds to meet these additional costs. Therefore, many poor households are unable to attain the full level of benefits of electrification in the short term.

57. In terms of financial benefits, the savings on converting from kerosene to electricity for lighting and other purposes are relatively small, at around PRs950 per household per year. The major benefits derive from induced electricity consumption, amounts to PRs7,260 per year per household. Together, the total benefit of PRs8,210 represents 21% of the annual household poverty line income. If, in accordance with selection criteria, 66% of village households were at or below the poverty line, and assuming that poor households had equal access to electrification (which is indicated by the number of households willing to sell assets to finance the investment), the rural electrification component will have had a significant impact. The exact nature of the impact is difficult to quantify in the absence of both an ex ante assessment of household incomes prior to electrification and a detailed impact survey. However, indications are that the returns from investment in electrification are high. This is confirmed by a strong perception amongst villagers visited during the PCR Mission that there are wide-ranging benefits of access to electricity beyond the purely financial.

58. In addition to the direct household-level benefits of electrification, there are direct benefits at the village level, including an increase in business activity and the supply of goods

Appendix 9 55

and services, and increased land values. In one village visited during the PCR Mission, 35 to 40 new businesses had been started since electrification, and the hours of operation of businesses specializing in activities such as carpet weaving, embroidery, woodworking, and flour milling had been extended. Demand for labor had also increased. One unemployed person who started a woodworking furniture business with an investment of PRs50,000 now earns a net monthly income of PRs5,500 to PRs8,000 and employs five people from the village. It was estimated that land values had risen from PRs60,000 in 2002 (PRs85,600 in 2007 prices) to PRs200,000 per acre.

59. Indirect village-level benefits include improved security thanks to better lighting at night, more time for study and relaxation at home, and an improved perception of the village amongst neighboring villages.21 Electrification may also lead to a population increase as families move to the village from unelectrified villages. The PCR Mission visited one village that originally had 80 households, of which 60 were electrified under the Project. By the time of the PCR Mission visit, the village had expanded to 160 households, of which 150 were electrified (partially thanks to the addition of non-household infrastructure [poles, wires, etc.] financed by a local politician).

F. Overall Project Economic Analysis

60. The analysis of the Project as a whole is based on the estimation of the weighted average of the EIRRs of individual components. The weighting is based on the proportion of each component's economic costs within total project economic costs. The result is shown in Table A9.5.

Table A9.5: Overall Project EIRR Component EIRR (%) Rural Roads 15.8 Watercourse Improvement 14.8 Small-Scale Infrastructure 8.8 Rural Electrification 12.9 EIRR (weighted average) 14.5 EIRR = economic internal rate of return Source: Asian Development Bank estimates.

61. The EIRR of the Project is 14.5%, against the EIRR estimated at appraisal of 15.7%.22 All individual components show EIRRs above 12% with the exception of the SSI component.23 The economic life for rural roads and watercourses has been reduced from 20 to 15 years because of the lack of maintenance. With proper effective maintenance, the EIRRs of these two components would have been higher.

62. A comparison of project EIRRs estimated by previous analyses is presented in Table A9.6.

21 In this respect, PCR Mission investigations indicate that electrified villages become more attractive to families from outside the village as a source of potential marriage partners for their children. This was cited in a number of villages as a significant benefit of electrification (and road improvement). 22 Supplementary Appendix B provides more details on the economic and financial analysis, including a discussion of the divergence between the methodology used by the PCR analysis and the methodology used by previous analyses. 23 There is no economic analysis of this component at appraisal; therefore, it is not possible to compare the EIRR calculated at PCR stage with the analysis at appraisal.

56 Appendix 9

Table A9.6: Comparison of Project EIRRs Source EIRR (%) Appraisal 15.7 Phase 1 evaluation 17.3 PMU project completion report 19.8 ADB project completion report 14.5 ADB = Asian Development Bank, EIRR = economic rate of return, PMU = project management unit. Sources: PMU project completion report – Appendix 9, Table 29, and Phase 1 evaluation – Appendix 12.

63. The PCR analysis shows a lower EIRR than previous analyses. Supplementary Appendix B includes details of the difference in EIRR estimates undertaken at the various stages, broken down by component.

G. Poverty Impact

1. Poverty Assessment and Targeting

64. As noted in the component discussions, only limited poverty assessment of villages prior to their selection appears to have taken place. The approach adopted was not systematic and was largely subjective.

65. At the start of the Project, a number of surveys were conducted to determine the poverty line and the distribution of project area households by income and landholding. The LSRS conducted in 1998 estimated that 73% of project area households were below the poverty line, which it estimated to be about PRs43,700 per household per year.24 A subsequent baseline survey conducted in 2000 by the PMU assessed the poverty line to be PRs50,000. It too estimated that 73% of project area households were below the poverty line. The baseline survey estimate of the poverty line was subsequently reassessed to be PRs30,000. By this definition, 54% of households were considered to be below the poverty line.

66. Poverty assessment was also approached from the point of view of landholding. Table A9.8, based on data provided by the PMU during the PCR Mission, indicates that 73% of households had less than 5 acres. The assessment of landholding made for the baseline survey provides a different distribution of households, as indicated in Table A9.7. This suggests that 46% of households are landless or have less than 5 acres.

Table A9.7: Distribution of Project Area Households by Landholding Greater Than or Less Than or Equal Households (%) Cumulative (%) Equal To (acre) To (acre) Landless 12 12 0.1 5.0 34 46 5.1 12.5 32 78 12.6 25.0 14 92 25.1 - 8 100 Source: Bahawalpur Rural Development Project baseline survey, May 2000.

67. The PMU used a landholding of 12.5 acres as a proxy for the criterion for selection of watercourse improvement schemes that required that 66% of households that would benefit

24 The LSRS covered 1,082 of the 3,212 villages in Bahawalpur Division. The LSRS estimate of poverty line is based on the Eighth Five-Year Plan figure of PRs280 per capita per month, updated to 1997/98 prices giving PRs520 per capita per month at the time of project start-up, based on seven persons per household.

Appendix 9 57

from a scheme had to be poor. By this definition, the PMU estimate suggests that 95% of households were poor, while the baseline survey suggests that 78% were poor.

68. Poverty assessments based on income distribution and landholding put the percentage of households below the poverty line at 54–95%—significantly higher than the figures reported by the official Household Consumption-Expenditure Survey of May 2004, which assessed the level of poverty for the country as a whole to be 32% in 2000. The poverty line figures estimated for the Project overstate the incidence of poverty (even for Bahawalpur, which has a slightly higher level of poverty than the national average). This would have undermined the Project's poverty targeting by assessing many more potential beneficiaries as being poor than was probably the case.

69. Another related concern in respect to poverty targeting was the decision to abandon the geographic focus on the newly settled areas as proposed at appraisal. The reason for this decision was that the incidence of poverty in the newly settled areas was no greater than the average poverty incidence in the three districts comprising the then Bahawalpur Division; therefore, expanding the project area would not adversely affect targeting. No data is available to verify whether the incidence of poverty in the newly settled areas was any worse than in the Division as a whole. However, the use of such high poverty estimates, and the largely subjective approach to village selection based on those estimates, meant that some of the poverty focus was inevitably lost.

70. A final issue related to poverty targeting has to do with the size of contributions required from community organization members to participate in the schemes. For most schemes, individual community organization member contributions appear to have been affordable when judged against the estimated poverty line level of income. For watercourse improvement schemes, contributions averaged PRs2,100 in 2007 prices, representing 5% of the poverty income level of PRs38,240. Member contributions to SSI schemes ranged from PRs1,120 to PRs4,540 for schemes visited by the PCR Mission. Larger contributions tended to be for more commercially-oriented enterprises, which also provided the highest level of returns. However, the higher contribution of PRs4,540 is equivalent to 12% of the poverty line income, suggesting that such schemes, and the higher potential returns, may have been beyond the reach of poorer community members. More commercially-oriented schemes were also focused more narrowly on a small number of community organization members. For rural electrification, the costs of household connection and internal wiring amounted to PRs6,480, equivalent to 17% of the poverty line income. This suggests that electrification may have been beyond poorer households in the beneficiary communities. PCR Mission investigations indicate that many households borrowed or sold animals in order to pay for electrification. While this suggests a perception of the benefits of electrification within communities, the sale of livestock may have left poorer families more vulnerable in terms of income.

2. Project Beneficiaries

71. PMU-provided estimates of the number of beneficiaries are shown in Table A9.8. Total direct beneficiaries amount to 154,000 households. This is slightly below the estimate of 155,700 households made by the Phase 1 evaluation.

58 Appendix 9

Table A9.8: Project Beneficiaries

Beneficiary Households Number per Unit Total Beneficiary Households Total Beneficiaries Component Unit of Units Direct Indirect Direct Indirect Total Direct Indirect Total Rural roads km 587 150 64 88,050 37,568 125,618 616,350 262,976 879,326 Watercourse improvement watercourse 684 49 15 33,516 10,260 43,776 234,612 71,820 306,432 SSI scheme 564 15 30 8,460 16,920 25,380 59,220 118,440 177,660 Rural electrification scheme 428 56 28 23,968 11,984 35,952 167,776 83,888 251,664 Total 153,994 76,732 230,726 1,077,958 537,124 1,615,082 PMU = project management unit, SSI = small-scale infrastructure. Note: Based on a 5% sample of project schemes/roads. Assumed beneficiaries per household equals 7. Source: Bahawalpur Rural Development Project PMU estimates.

72. The PMU estimates in Table A9.8 of indirect beneficiaries for each component include: (i) for rural roads, indirect beneficiaries are defined as households that do not lie within the road area of influence but use the road nonetheless, in addition to direct beneficiaries who live within the area of influence; (ii) for watercourse improvement, households that obtain land with the command area on lease or work as sharecroppers; (iii) for SSI, indirect beneficiaries are people who use the services of the enterprises established or have been trained through SSI schemes; and (iv) for rural electrification, indirect beneficiaries include electricians engaged in internal wiring of electrified households, farmers receiving lower-cost tube-well irrigation (compared with the cost of diesel-operated tube-wells), and people benefiting from new or increased availability of electricity-powered services within their village or locality (such as tailoring, woodworking, welding and agroprocessing).

73. Estimating the number of indirect beneficiaries is difficult but the PMU estimates appear rather high, ranging between 31% and 200% of the number of direct beneficiaries of the four components. The estimate of indirect beneficiaries for each watercourse improvement scheme may overstate the actual number. Since there was, according to PCR Mission investigations, limited increases in the area cropped in watercourse command areas (although cropping intensity increased) the opportunity for new farmers to obtain land in the command area seems limited. Without such an increase in cropped area, in order for new farmers to lease land other farmers must have given up land or at least part of their land. This seems unlikely, except in the case of larger landholders, whose numbers would be limited if, as required by selection criteria, at least 66% of potential beneficiaries were poor. The estimate that indirect beneficiaries per scheme (15) amounted to one third of direct beneficiaries per scheme (i.e., members of the WUA) is questionable.

74. In addition to the difficulty of estimating the number of indirect beneficiaries for other components, it is difficult to estimate the extent to which indirect beneficiaries benefit. Like direct beneficiaries, they will enjoy a variety of savings in time and money from using services provided by project schemes. Estimating the level of this benefit and its potential impact on poverty reduction has not been attempted, but the poverty impact is considered to be low for indirect beneficiaries.

3. Poverty Impact

75. The poverty impact of the Project is difficult to ascertain given that insufficient data exists on project beneficiary household income levels prior to households' participation in project- financed schemes, and that no impact survey has been conducted. The Phase 1 evaluation

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estimated that 6,365 households (equivalent to 51,000 people)25 were lifted out of poverty by participation in the various schemes. This was broken down by component as follows: rural roads benefited 1,093 households, watercourse improvement benefited 2,328 households, SSI benefited 508 households, and rural electrification benefited 2,435 households. These estimates are based on the assumption that households benefiting from each component are distributed in terms of income in the same proportions as those estimated by the baseline survey. Given the concerns related to poverty targeting and the selection of villages for participation (whereby a much higher poverty level was assumed in the selection process), the assumption that beneficiary households were distributed according to the findings of the baseline survey is questionable. The baseline survey overstates the number of poor households within project villages and, therefore, the number of poor households benefiting from the Project.

76. The only component for which an approximate estimate of poverty impact can be made is watercourse improvement. In this case, the current PCR analysis assesses farm incomes before and after watercourse improvement. The analysis of the 12.5-acre farm indicates that farmers with this size of landholding were above the poverty line prior to watercourse improvement,26 and their income increased from PRs63,800 to PRs90,610 per year, equivalent to 167% and 237% respectively of the estimated poverty line income of PRs38,240. For a 5- acre farm, the analysis indicates that annual farm income rose from PRs25,050 (66% of the poverty line income) to PRs35,810 (94% of the poverty line income). It is noted that these income figures relate only to farm income from crops affected by watercourse improvement and, though important, the incremental income from crops accruing to farmers with 5 acres or less only complements other sources of income. In reality, as indicated by the IFPRI study on rural poverty in Pakistan, rural poor households derive the bulk of their income from non-farm sources and from livestock. This raises two related issues. First, since income from crops before watercourse improvement was equivalent to 66% of the poverty line income figure and since income from crops constituted a minor portion of poor households' income, it is possible that many farmers with landholdings of 5 acres or less were actually not below the poverty line in terms of their total household income. Second, this calls into question the validity of using watercourse improvement investments as a means of addressing rural poverty since, according to the IFPRI study, rural poor households derive only one seventh of their income from crop agriculture.

25 The Phase 1 evaluation uses a figure of 8 persons per household whereas the current PCR uses 7 persons per household, a figure confirmed by the PMU. 26 This suggests that the use of the 12.5 acre landholding as a poverty criterion used by the PMU in the selection of villages was inappropriate.