Document of The World Bank FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: ICR00004988

IMPLEMENTATION COMPLETION AND RESULTS REPORT TF0A4946

ON A

SMALL GRANT

Public Disclosure Authorized IN THE AMOUNT OF USD 4.90 MILLION

TO THE

The Islamic Republic of Pakistan

FOR

Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463) February 4, 2020 Public Disclosure Authorized Governance Global Practice South Asia Region

Public Disclosure Authorized

Regional Vice President: Hartwig Schafer Country Director: Patchamuthu Illangovan Regional Director: Zoubida Kherous Allaoua Practice Manager: Ismaila B. Ceesay Task Team Leader(s): Charles Victor Blanco, Muhammad Waheed ICR Main Contributor: K. Migara O. De Silva

ABBREVIATIONS AND ACRONYMS

BETF Bank Executed Trust Fund CPS Country Partnership Strategy EAD Economic Affairs Department EFF Extended Fund Facility FBR GDP Gross Domestic Product GoP IMF International Monitory Fund MDTF Multi Donor Trust Fund IP Implementation Progress ISR Implementation Status Report MMIU Market Monitoring and Intervention Unit MoF Ministry of Finance MS Moderately Satisfactory MU Moderately Unsatisfactory PAD Project Appraisal Document PDO Project Development Objective PRR Pakistan Raises Revenue PSDP Public Sector Development program RETF Recipient Executed Trust Fund TAGR Trust Fund for Accelerating Growth and Reforms TARP Tax Administration Reform Project TIU Tax Intelligence Unit TTL Task Team Leader WB World Bank

TABLE OF CONTENTS

DATA SHEET ...... 1 I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ...... 4 II. OUTCOME ...... 7 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ...... 9 IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .... 9 V. LESSONS LEARNED AND RECOMMENDATIONS ...... 10 ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ...... 12 ANNEX 2. PROJECT COST BY COMPONENT ...... 16 ANNEX 3. RECIPIENT, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS ...... 17 ANNEX 4. SUPPORTING DOCUMENTS (IF ANY) ...... 20

The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

DATA SHEET

BASIC INFORMATION

Product Information Project ID Project Name

Strengthening Tax Systems and Building Tax Policy P161463 Analysis Capacity

Country Financing Instrument

Pakistan Investment Project Financing

Original EA Category Revised EA Category

Organizations

Borrower Implementing Agency

The Islamic Republic of Pakistan Federal Board of Revenue

Project Development Objective (PDO)

Original PDO The PDO is to support policy informed decisions in domestic revenue mobilization.

Key Results include 1) Produce annual comprehensive tax expenditure analysis 2) Forecast annual tax revenues of FBR and provincial governments

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

FINANCING

FINANCE_TBL Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$) Donor Financing TF-A4946 4,900,000 4,900,000 4,260,271 Total 4,900,000 4,900,000 4,260,271

Total Project Cost 4,900,000 4,900,000 4,260,271

KEY DATES

Approval Effectiveness Original Closing Actual Closing 28-Apr-2017 02-Aug-2017 30-Apr-2018 31-Aug-2019

RESTRUCTURING AND/OR ADDITIONAL FINANCING

Date(s) Amount Disbursed (US$M) Key Revisions 19-Mar-2018 0.00 Change in Results Framework Change in Loan Closing Date(s) Change in Procurement Change in Implementation Schedule 18-Apr-2019 0.28 Change in Results Framework Change in Loan Closing Date(s) Change in Procurement Change in Implementation Schedule

KEY RATINGS

Outcome Bank Performance M&E Quality Moderately Satisfactory Moderately Satisfactory Modest

RATINGS OF PROJECT PERFORMANCE IN ISRs

Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) 01 19-Sep-2017 Moderately Satisfactory Moderately Satisfactory 0.00

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

Moderately 02 02-Aug-2018 Moderately Unsatisfactory 0.00 Unsatisfactory 03 04-Jun-2019 Moderately Satisfactory Moderately Satisfactory 0.28

ADM STAFF

Role At Approval At ICR

Regional Vice President: Annette Dixon Hartwig Schafer

Country Director: Patchamuthu Illangovan Patchamuthu Illangovan

Director: Deborah L. Wetzel Zoubida Kherous Allaoua

Practice Manager: Alexandre Arrobbio Ismaila B. Ceesay Charles Victor Blanco, Task Team Leader(s): Charles Victor Blanco Muhammad Waheed ICR Contributing Author: K. Migara O. De Silva

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES

Context

1. In Pakistan, domestic revenue mobilization has long been a key objective to financing sustainable development and providing the fiscal space to fund key public expenditures. The Government of Pakistan (GoP) recognizes the need for higher domestic revenue mobilization to ensure fiscal sustainability and fiscal space – as both are important for financing human capital development, infrastructure, health and other key public services. While Pakistan’s overall revenue mobilization has improved in recent years, several tax exemptions targeted towards specific industries and the low levels of tax collection by the provinces, among others, have led to a low tax-to-GDP ratio1. Pakistan’s Federal Board of Revenue (FBR) acknowledges that a tax-to-GDP ratio of 15 percent is achievable in the medium-term but will require a commensurate increase in the buoyancy of provincial tax bases2.

2. Pakistan’s economy grew at only 3.3 percent in Fiscal Year 2019 (FY19), with large financing received to correct fiscal imbalances. In FY18, there was a 5.5 percent consumption-driven growth while registering twin deficits. The exchange rate was then allowed to depreciate, the development budget was cut, and energy prices increased. To bridge the financing gap, the government received financing from the United Kingdom, Saudi Arabia, the United Arab Emirates, and China, in addition to $6 billion from the IMF.

3. Pakistan registered a consolidated fiscal deficit (excluding grants) of 5.0 percent of the GDP, which is an increase of 0.7 percent from last fiscal year. A slowdown in revenue growth and rigidity in recurrent expenditures contributed to the increase in the fiscal deficit. While tax revenues increased by 2.8 percent in July-March FY19, non-tax revenues declined by almost 17 percent, wiping out any noticeable growth in overall revenues3. One of the challenges faced by the Government of Pakistan (GoP) is that its growth in expenditure outpaces the growth in revenue, thereby limiting the fiscal space to make some of the critical public investments in infrastructure, human capital development, health etc. For instance, in FY18, the total revenue registered a lower growth of 5.9 percent compared to the same in FY17 while the expenditure increased by 10.1 percent 4. Consequently, public investment continued to decelerate for the first time since FY115.

4. At the start of the Trust Fund for Accelerating Growth and Reforms (TAGR) project6, the FBR’s analytical and reporting capabilities remained weak while its poor automation and the excessive use of withholding mechanisms, inefficient organizational structure, weak governance and strategic planning, inter alia, challenged the FBR’s ability to operate as an effective tax administration7. TAGR was also set up to support the Government’s economic reform agenda by addressing the knowledge gaps and strengthening the capacity of key institutions to design and implement a reform

1 It remains less than 15 percent of the GDP, a level considered to be minimum for developing countries in order to be able to finance their basic government functions. See: UN Committee of International Experts on International Cooperation in Tax Matters, The Role of Taxation and Domestic Resource Mobilization in the Implementation of the Sustainable Development Goals, October 2018, (page 3); V. Gaspar, L. Jaramillo and P. Wingender; and the IMF Working Paper 16/234, 2016, Tax Capacity and Growth: Is There a Tipping Point? (page 30). 2 Pakistan: Towards a Home-Grown Tax Reform Agenda, Federal Bureau of Revenue (FBR), October 8, 2018. 3 Pakistan Brief. Domestic Revenue Mobilization July 2019, World Bank 4 Provincial recurrent expenditure grew by 20 percent. 5 MDTF for Accelerating Growth and Reforms. Annual Report from July 1, 2018 to June 30, 2019; page 6. 6 TAGR is the Multi-Donor Trust Fund (MDTF) for Accelerating Growth and Reforms. 7 FBR’s HR management also remains a challenging issue, making it difficult to attract and retain high quality staff while its staff turnover remains high especially at the management levels. Due to these weaknesses, implementation of reforms remains challenging (see: Multi-Donor TF Report, December 14, 2018.

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

agenda. It was built on lessons learned from the 2005-11 Tax Administrative Reform Project (TARP; P077306)) which included, among others, the need for responsive IT systems and changes in the FBR’s organization and management to increase efficiency8.

5. From a very low baseline, revenue mobilization substantially increased during TAGR program implementation due to strong support and commitment from the authorities. Tax-to-GDP ratio steadily rose from the 2013-2014 baseline of 10.6 percent of GDP to 12.9 percent in 20189. While this progress is encouraging, Pakistan’s potential tax capacity was initially estimated to be 22.3 percent of GDP10. A recent World Bank (WB) tax gap analysis suggests that Pakistan’s tax revenue collection could reach 26 percent of GDP if tax compliance rose to 75 percent – a level most Middle-Income Countries (MICs) have been able to achieve11.

6. The World Bank Group’s Country Partnership Strategy (CPS) FY15-19 for Pakistan advocates a holistic approach to mobilizing revenue, i.e. the importance of considering both the revenue and expenditure in fiscal policy. Accordingly, the Revenue Mobilization pillar of TAGR adopted a holistic approach to resource mobilization and included both tax policy reforms and tax and customs administrations modernization efforts. This pillar envisaged a series of analytical and advisory activities and placed great emphasis on modernizing IT systems and enabling access to real-time, comprehensive data to facilitate informed decision making. At the time of initiating the TAGR, the existing IT infrastructure capacity was becoming obsolete and unable to fulfill the growing demands12. The FBR, too, recognized the need to update its IT system to enable informed decisions related to domestic revenue mobilization. An enhanced functionality of the IT infrastructure was to facilitate all transactions electronically to significantly improve the transparency and the efficacy of the tax administration – two key requirements necessary to promote greater tax compliance. The project also supported the initial planning and implementation of the Change Management program intended to contribute to increase tax revenue several fold13.

7. The GoP’s efforts to mobilize revenue was supported through technical assistance (TA) provided by several development partners. To sustain the increases, close the tax gap, and to achieve a tax-to-GDP ratio of 14.5 percent by 202014, longer-term tax administration improvements are required, which include improved analytical capacities related to tax expenditure analysis and revenue forecasting.

Figure 1: Theory of Change

INPUT/ACTIVITES OUTPUT OUTCOME LONG-TERM OUTCOME Higher Level Objectives • Improved tax compliance; IT Update Tax 8 ICR of TARP, June 25, 2012. data and Administration Produce annual 9 IMF 12th and Final Review undercomprehensive the Extended Fund Facility (EFF), Table 6b. Pakistan Development Update, Worldsystems Bank, for Data Center to broadening tax October 2018. tax expenditure Enhanced strengthen10 base; and At the time of initiating this MDTFanalysis. policy FBR’s11 capacity accountability Project Appraisal Document (PAD) of Pakistan Raises Revenue, May 21,informed 2019, (page 8), World Bank. in 12IT and For instance, IT infrastructure capacity was insufficient to process the datadecision despite- the IT equipment operating at maximum transparency capacity. Previously FBR infrastructure purchased with the TARP project inmaking 2010 had reached End of Life (EoL) and End of (Government Service (EoS) and as a result, there was an ever-increasing demand for thecapacity FBR to overhaul its IT infrastructure at the data Vision 2025). center. related to 13 • Holistic Project Paper, para 17. domestic 14 approach to The IMF Country Report No. 19/212 on the current Fund Program in Pakistanrevenue estimates tax to GDP ratio of 2019/20 year as domestic 14.2 percent; for 2020/21 year as 15.9 percent; and for 2023/24 year to reachmobilization 17.6 percent. revenue mobilization Page 5 of 20 considering both the revenue and expenditure if fiscal policy (CPF-FY15-19)

The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

Build FBR’s Forecast annual Fiscal Research tax revenue of and Tax Policy FBR and Analysis provincial capacity governments

8. The logic behind the project was to enhance the capacity of the FBR to make informed policy decisions related to domestic revenue mobilization. The underlying assumption was that building IT infrastructure, such as the data center and the capacity to conduct fiscal and tax policy analysis, would contribute to achieving the RETF’s PDO. The project recipient, the FBR, needed an updated data center with enhanced storage, servers, and network equipment, as well as assistance to implement the change management program. The data center was expected to strengthen the simplification and automation of core business processes and was expected to provide information that could be strategically used to make informed decisions (i.e. decisions supported by data). Furthermore, supporting the FBR’s capacity to conduct research on fiscal and tax policy was also assumed to be critical for achieving this objective. As a result, the FBR produced an annual tax expenditure analysis and an annual forecast of federal and provincial tax revenues. These outputs will continue to strengthen its policymaking capacity to achieve increased domestic revenue mobilization and tax compliance. Figure 1 presents the diagrammatic representation of the Theory of Change.

Project Development Objectives (PDOs)

9. The development objective was to support policy informed decisions in domestic revenue mobilization.

Key Expected Outcomes and Outcome Indicators

10. Achievement of the overall development objective was to be assessed through following two PDO level results indicators:

(a) Produce annual comprehensive tax expenditure analysis.

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

(b) Forecast annual tax revenue of FBR and provincial governments.

Components

11. Component 1- Updating Tax Administration data center to strengthen FBR’s IT capacity (allocated amount $4.10 million): This component focused on (i) updating the Data Center including inter alia, storage, servers and network equipment; and (ii) supporting the implementation of the FBR’s change management program. The expected outcome was a well-functioning data center operational by the end of the project. The data center provided information to decisionmakers with specialized tools for centralized monitoring and data management. As a result, the FBR was expected to have the capacity to identify the number of non-compliers and close this gap; deploy better collection methods; have more effective risk-based audit analysis; and an ability to analyze data related to tax payers by identifying common trends and attributes. In sum, the modernization of the FBR’s data center was to have a clear impact on domestic revenue mobilization by enabling cross-data analysis and intelligent reporting to significantly reduce the gap of non-compliers, deploy collection methods, and contribute to other functions such as more effective risk-based audit analysis.15.

12. Component 2 – Build FBR’s Fiscal Research and Tax Policy Analysis capacity (allocated amount $0.8 million): This component was expected to support the establishment of a Tax Intelligence Unit (TIU) and a Market Monitoring and Intervention Unit (MMIU), both of which were intended to further enhance FBR’s capacity to carry out sound tax policy analysis. These units were responsible for designing, organizing, and directing a range of macroeconomic and tax16 analyses and studies. They were also responsible for timely dissemination of research and studies across FBR, which are initiated or prepared in response to requests generated from other FBR units. The component also included a list of activities that both the TIU and the MMIU were to perform while also serving as liaisons between government agencies in furthering the debate on tax issues and disseminating the results on a timely basis. Furthermore, these results were to be incorporated into the FBR’s strategic plan.

II. OUTCOME

Assessment of Achievement of Each Objective/Outcome

13. The early phase of the project experienced implementation delays due, in large part, to staff turnover within the GoP and a time lag before the project could be included in the Government’s Public Sector Development Program (PSDP). This delayed the signing of the Grant Agreement and the initial implementation of the project. The ratings of the Implementation Status Report (ISR) of August 2018, which downgraded both progress towards achieving the PDO and overall Implementation Progress (IP) to “Moderately Unsatisfactory” (MU), clearly indicated the potential impact of the delays on project implementation and the PDO. A Level 2 Project Restructuring was completed on March 21, 2018 in response to a request by the Economic Affairs Department (EAD) of the GoP to restructure the project through an extension

15 The IT enhancement was also expected to benefit PRAL (Pakistan Revenue Automation Limited), which provides revenue automation support to the FBR as its service provider. 16 These include direct, indirect, customs, and trade taxes.

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

of the Project closing date by 14 months from April 30, 2018 to June 30, 201917. Consistent with this request, the project closing date was extended till June 30, 2019. In a second Level 2 Restructuring completed on April 19, 2019, the project closing date was further extended from June 30, 2019 to August 31, 2019. Both Level 2 Restructurings included revisions to the loan closing dates, target dates of the results framework with no changes in substance to the results indicators or targets, disbursement estimates, procurement plan, and implementation schedule however, there were no other substantive changes to the project. As a result, the project restructurings did not affect the Theory of Change.

14. The FBR had initially estimated a 20 percent disbursement during the Government's Financial Year ending on June 30, 2018 while the remaining 80 percent of the budget was included in the budget for FY19. In FY19, the disbursement significantly accelerated within a very short time to reach 93 percent of the total amount when the project was closed on August 31, 2019. The two main contributing factors for this accelerated disbursement were the strong implementation support provided by the Bank team, and the proactive collaboration of the FBR’s TAGR counterpart18 including the establishment of the two units – the TIU and the MMIU in component 2 - during 2019.

15. Both PDO results indicators (mentioned earlier) were achieved despite the above-mentioned delays. The first PDO results indicator involved the preparation of the annual comprehensive tax expenditure analysis. The FBR had already prepared the Pakistan Tax Expenditure Analysis for 2018-2019, thereby successfully meeting the end-of-project target of the result indicator. The establishment of the data center (component 1) further enhanced FBR’s capacity to continue to conduct such analyses in the future.

16. Similarly, the second PDO results indicator on tax revenue estimation and forecasting was also completed by the end of the project. As mentioned earlier, a range of macroeconomic and tax analyses were prepared19 under component 2. These research outputs will continue to provide reliable information on important aspects such as tax compliance gaps and risk- based audits, based on improved data, research findings, and robust simulation models.

Overall Outcome Rating

17. The PDO established at the project design was ambitious. While the two outcome indicators are clear and measurable, it is difficult to see how they could provide an adequate measure of the PDO, which is to “support policy informed decisions in domestic revenue mobilization”. Some procurement activities and hiring of consultants for the tax policy unit were completed towards the end of the project. The client’s capacity to finalize some of the procurement activities needed to be strengthened and as a result, the Bank team had to make a considerable effort to complete these processes closer to the (revised) project closing date. A combination of client’s capacity, and the weak link between the PDO and the outcome indicators, posed a significant challenge to fully achieving the PDO.

18. That said, the project was able to meet the two results indicators. The project indeed supported the FBR to enhance its analytical capacity and institutional strengthening, both of which would likely have a positive long-term impact. The FBR faces significant resource constraints which prevented it from upgrading its technical capacity20 and therefore the support

17 Letter No. 4(3) WB-IV/17 of February 12, 2018. 18 Especially the head of project management and the procurement officer. 19 Pakistan Revenue Collection Performance Bulletins Volume 1, Issue 1 (March 2019), Volume 1, Issue 2 (April 2019); Volume 1, Issue 3 (May 2019); and Volume 1, Issue 4 (June 2019); Tax Revenue Estimation and Forecasting; Pakistan Tax Expenditure 2018-2019. The FBR is expected to assure sustainability of these two important units. 20 Project Appraisal Document, Pakistan Raises Revenue, May 22, 2019, page 11.

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

provided by TAGR helped address some of the immediate capacity constraints, especially related to the ICT. Upgrading the FBR’s data center, along with the establishment of the two units (TIU and MMIU) provided support to further enhance FBR’s analytical capacity. The project effectively leveraged WB’s technical engagement with the FBR in both updating the data center and establishing the two key units. However, these results alone are not adequate to conclude that the project outcomes fully contributed towards strengthening the counterpart’s decision-making process on tax expenditure and domestic revenue mobilization. Nevertheless, the project supported the FBR’s capacity building and institutional strengthening, which, as mentioned above, will have a positive long-term impact on enhancing the decision-making process. Due to reasons above, the ICR proposes a Moderately Satisfactory (MS) rating for the overall outcome of the project.

Other Outcomes and Impacts

19. The project provided an opportunity for the World Bank to engage in several current and future technical discussions with the FBR. TAGR, which supported the capacity enhancements of the FBR, was an important prelude to the new investment project, “Pakistan Raises Revenue” (PRR). The new project will further enhance the sustainability of effective mobilization of domestic revenue by, inter alia, broadening the tax base and facilitating compliance (PDO of the new project). Overall, the availability of an up-to-date data center and IT infrastructure, research findings of the impact of key macroeconomic data on revenue mobilization, enhanced simulation models, will together contribute towards better fiscal and revenue management policies in the medium-to-long run term.

III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME

20. TAGR was implemented in a complex political economy environment and weak institutional capacity of the FBR, thus posing a significant challenge in designing and implementing procurement plans. The project included large procurement packages on IT equipment for upgrading the data center. Given the counterpart’s weak procurement capacity, there were implementation delays at the start of the project, as also noted earlier. In order to mitigate these challenges, the Bank provided extensive TA support. However, it took longer to finalize these packages than was initially expected.

21. There were several factors which positively impacted project implementation. There was close collaboration established between the WB and FBR teams established during both project initiation and implementation. As mentioned earlier, there was a delay in project implementation at the start due mainly to procurement of IT for the data center. Both teams worked diligently and collaboratively to mitigate some of these challenges to achieve the two results indicators by project completion. The FBR team’s commitment to establish the data center and thereby enhance its IT and research capacity was also evident, especially during the latter part of project implementation. Furthermore, both parties remained committed to maintain a long-term relationship to support further deepening of the FBR’s reforms in expenditure and revenue mobilization policies which is reflected in the follow-on operation Pakistan Raises Revenue.

IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

22. While the project implementation met with challenges from the outset, as mentioned earlier due largely to staff turnover within the GoP and a time lag before the project could be included in the PSDP, the Bank team’s frequent assistance and timely restructuring of the project on two occasions enabled the FBR team to deliver the project with the expected outcomes. Ideally, during the project design, the Bank team could have anticipated the potential limitations posed by FBR’s capacity constraints - especially in implementing IT packages, and the complex political economy environment within which the overall project implementation was to be carried out. If such considerations were carefully taken into consideration, some of the implementation delays could have been mitigated. With two restructurings that involved changes to the results indicators, the Bank team could have done more to ensure that the PDO reflected the actual intermediate outcomes for which it could be held accountable. However, regular visits by the Task Team Leader (TTL), and sound technical advice/support provided by the team members – and especially the WB team’s procurement specialist - helped the final phase of the project implementation. Bank team’s proactive approach during this period strengthened the collaboration and trust between the Bank and the counterpart. The TTL also submitted (via ISRs) timely and accurate assessments on implementation status for Bank Management’s review and advice. No safeguard issues were triggered during the implementation and the project had no direct social or environmental impact either. Considering that the rating on Bank performance involves both the quality at entry and quality of supervision, the World Bank team’s overall performance during project preparation/implementation is rated as Moderately Satisfactory (MS).

23. M&E quality at design was modest as the technical design was overambitious and as a result the M&E design was inadequate to allow proper monitoring of progress. The results framework proved insufficient to the task of properly monitoring the achievement of the operation. As mentioned earlier (in para 19), there is weak link between the PDO and the objective-level indicators this has limited the ability to establish a stronger link between the result indicators and the intermediate indicators in the results framework. There were missed opportunities – both at the design and then during the two restructuring- to align the PDO with the results indicators. Due to these reasons, the M&E is rated as Modest.

V. LESSONS LEARNED AND RECOMMENDATIONS

24. A Recipient Executed Trust Fund (RETF) provides several advantages where initially there is limited experience on the part of the counterpart(s) with World Bank procedures. Introduction of a new instrument requires a period of learning and adaptation. While relatively weak institutional capacity of the counterpart could initially pose some challenges, this is easily mitigated when there is a strong commitment to achieve the key reforms that are financed by the TF. Such a commitment was clearly evident by the FBR’s ability to achieve project development results. During the implementation, the counterpart continued to become more familiar with Bank procedures and its implementation support arrangements along with access to the Bank’s vast repository of knowledge based on decades of close engagement with many client countries. The RETF provided an opportunity to address some of the needs identified during TARP implementation such as the need for more responsive IT and organizational changes to increase efficiency. TARP also was helpful during the preparation of the larger project – Pakistan Raises Revenue - with the same counterpart. For instance, the RETF financed consultants to strengthen the FBR’s analytical capacity and the replacement of some of the FBR’s hardware that was at critical risk of failure. TAGR implementation provided important learnings on both the design and implementation to be captured effectively and made available to future teams.

25. It is imperative that the PDO is formulated clearly, indicating a realistic project objective that can be achieved within the scope of the project resources, the existing capacity constraints of the counterpart, and the

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

readiness to implement proposed reforms with the existing political economy environment. In addition, the results indicators chosen should be closely aligned with the PDO. This will help to come up with a stronger Theory of Change and Results Framework as well as to enhance the M&E (Monitoring and Evaluation) quality at entry.

26. A project with a high IT related procurement always carry a considerable risk of implementation delay due to potential failures of bidding. These delays are therefore not necessarily attributable to weak Bank supervision or to client commitment. Several exogenous factors could impact project implementation as a result of such delays. Hence, an a priori assessment of potential mitigating factors and alternatives may be necessary to limit any negative impacts of these unexpected delays as they could constrain both parties’ ability to focus on substantive/technical issues related to institutional strengthening. Hence, the depth of technical expertise and the rigorous monitoring of the achievement of PDO results indicators necessitate more detailed and regular supervisions early on in the project. Additionally, technical assistance provided by other projects through a variety of support interventions in parallel to the RETF increases the opportunity to tap on other resources that ultimately help to achieve the desired goals. For instance, the RETF project was able to achieve positive results largely due to other TA activities and the analytical work conducted in parallel through the TARP – which was a Bank-Executed Trust Fund (BETF).

27. While the establishment of two key units – TIU and MMIU – received the counterpart’s initial endorsement, the sustainability of these units currently remains somewhat uncertain. One possible reason for this is that, at present, the FBR is entrusted with dual responsibilities of tax policy and administration. The common arrangement, however, in most other countries is that the former traditionally lies with the Ministry of Finance while the tax administration is solely delegated to a separate, independent authority. This fusion of responsibilities could pose a challenge for the sustainability of the two units which have been successfully established under TAGR.

28. The FBR team was committed to achieving project development objectives, even in a not-so-conducive environment. As previously mentioned, the staff turnover within the GoP, and a time lag before the project could be included in the Government’s PSDP, delayed the signing of the Grant Agreement and thus the initial implementation. These delays could have had a far more serious impact when implementing a large project with multiple project components and a longer-term implementation horizon. Hence, a successful implementation of a project requires a strong commitment at the top and a “champion of reforms” who plays a critical role during the entire project implementation cycle.

.

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS

A. RESULTS INDICATORS

A.1 PDO Indicators

Objective/Outcome: The development objective was to support policy informed decisions in domestic revenue mobilization. Unit of Formally Revised Actual Achieved at Indicator Name Baseline Original Target Measure Target Completion Produce annual comprehensive Yes/No N Y Y Y tax expenditure analysis 01-Mar-2017 30-Apr-2018 31-Aug-2019 30-Aug-2019

Comments (achievements against targets):

Unit of Formally Revised Actual Achieved at Indicator Name Baseline Original Target Measure Target Completion Forecast annual tax revenues of Yes/No N Y Y Y FBR and provincial governments 01-Mar-2017 30-Apr-2018 31-Aug-2019 30-Aug-2019

Comments (achievements against targets):

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

A.2 Intermediate Results Indicators

Component: Component 1- Updating Tax Administration data center to strengthen FBR’s IT capacity

Unit of Formally Revised Actual Achieved at Indicator Name Baseline Original Target Measure Target Completion Data Center is equipped with Yes/No N Y Y Y Blade Servers, Primary SAN and relevant networks 01-Mar-2018 30-Apr-2018 31-Aug-2019 30-Aug-2019

Comments (achievements against targets):

Unit of Formally Revised Actual Achieved at Indicator Name Baseline Original Target Measure Target Completion Data Center servers and Yes/No N Y Y Y software are virtualized using the cloud 01-Mar-2017 30-Apr-2018 31-Aug-2019 30-Aug-2019

Comments (achievements against targets):

Component: Component 2 - Build FBR’s Fiscal Research and Tax Policy Analysis capacity

Unit of Formally Revised Actual Achieved at Indicator Name Baseline Original Target Measure Target Completion Tax Intelligence Unit and the Yes/No N Y Y Y

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

Market Monitoring and 01-Mar-2017 30-Apr-2018 31-Aug-2019 30-Aug-2019 Intervention Unit offices are fully equipped

Comments (achievements against targets):

Unit of Formally Revised Actual Achieved at Indicator Name Baseline Original Target Measure Target Completion Tax Intelligence Unit and the Number 0.00 0.00 9.00 20.00 Market Monitoring and Intervention Unit are staffed 01-Mar-2017 30-Apr-2018 31-Aug-2019 28-May-2019 with 9 positions supported by the project

Comments (achievements against targets):

Unit of Formally Revised Actual Achieved at Indicator Name Baseline Original Target Measure Target Completion Monthly executive and Yes/No N Y Y Y detailed reports on the performance of revenue 01-Mar-2017 30-Apr-2018 31-Aug-2019 30-Aug-2019 collections

Comments (achievements against targets):

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

. ANNEX 2. PROJECT COST BY COMPONENT

Amount at Approval Actual at Project Percentage of Approval Components (US$M) Closing (US$M) (US$M) Updating Tax Administration data center to strengthen 0 4.10 0 FBRs Capacity in IT Build FBRs Fiscal Research and Tax Policy Analysis 0 .80 0 capacity Total 0.00 4.90 0.00

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

ANNEX 3. RECIPIENT, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS

General Borrower’s Conclusions on RETF of TAGR Project (FBR)

RETF of TAGR project namely Strengthening Tax Systems and Building Tax Policy Analysis Capacity, amounting to USD 4.9 million was approved/signed on August 2, 2017. This Project is a part of Reforms for high performance and innovation in Federal Board of Revenue which is an essential area of activity and is in line with the objectives of the taxation reforms and vision of the Government. This will support policy informed decisions in domestic revenue mobilization. The Project, which is part of the Department for International Development (DFID) - funded Trust Fund for Accelerating Growth and Reform (TAGR), consists of two components: (1) Updating Tax Administration Data Centers to Strengthen the Federal Board of Revenue’s (FBR) Capacity in Information Technology, and (2) Building FBR’s Fiscal Research and Tax Policy Analysis Capacity.

Project activities experienced initial delays due to(i) personnel changes within the Government of Pakistan and (ii) the fact that the Project was initially not included in the Public Sector Development Program (PSDP) 2017-18 at the time of budget approval in June 2017, which effectively put a stop on implementation. Furthermore, Bids for the component-I, which were published on 15.6.2018 were cancelled, mainly for the reason that none of the bids were financially competitive i.e. all were above the funds available. Component wise benefits of the RETF of TAGR project are as under: - Component-I Updating of Data Centre Under Component 1, the Project was forecasted to update the Data Centers, including Storage, Servers and Network Equipment, and support the implementation of a change management program. The expected outcome is an integrated Information and Communications Technology (ICT) data center that effectively conveys tax information to decision makers. As part of its reform and modernization efforts, the FBR is currently in the process of redefining its IT strategic vision, shifting its focus from a process-oriented organization to an analytical driven organization that uses information to achieve its projected business goals. It is vital to give thought to introduce ICT into business processes, which should be integrated into the broader reform efforts. Sophisticated computer applications are not enough to transform organizations. It is also important to address the human/institutional gap that often arises in developing countries and to ensure developments in ICT are fully integrated in the business processes. It was also expected that this project will support the implementation of the Change Management program, which will efficiently increase the Tax revenue. Specifically, the project will modernize Data Centers, including Storage, Servers and Network Equipment, and will support the implementation of the change management program. The expected outcome was an integrated ICT data center that effectively conveys information to decision makers. BENEFITS OF NEWLY PROCURED DATA CENTERS EQUIPMENT FBR has four data centers located one each at FBR House in Islamabad, Software Technology Park in Islamabad, RTO and Customs House Karachi. These are divided as two State of the Art Data Centers along with two Disaster Recovery (DR) sites situated as an alternate backup

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

facility. The two primary State of the Art Data Centers are built around the Tier 3 Data Center Standards. They are capable of redundant power input from different feeders. Data Centers are the hub of FBR IT Operations. Combined, they host 250+ servers, 90+ network devices and 8 SANs. FBR Data Centers are installed with fully automatic FM 200 fire suppression system, fully functional access control system, centralized security camera surveillance and event monitoring system, and paramount infrastructure monitoring system. Previously FBR infrastructure purchased with the TARP project in 2010 had reached EOL (End of Life) and EOS (End of Service). The ever-increasing demand called for FBR to overhaul its IT infrastructure at the data centers expeditiously. In this regard, FBR decided to procure large scale data center equipment in 2018, where it was decided that the procurement is to be carried out in two different phases. The phase one procurement process was completed in early 2019 and equipment was deployed at the data centers in August 2019 accordingly. Process for phase two procurement is under development and it will be concluded by mid-2020. FBR’s focus is to tech- refresh the entire out dated equipment with new architecture which includes network devices, servers, storage devices, software licenses and other data center infrastructure upgrades. Running a data center requires a lot of planning to ensure everything runs properly and long into the future, therefore FBR set to enhance its IT infrastructure towards cloud based Active-Active solution this time. In this regard, FBR in coordination with PRAL decided to opt for Huawei products. It is pertinent to mention that Huawei provided FBR with the cost-effective solution, as compared with other solution providers. Huawei being the largest manufacturer of telecommunications products and equipment in the world, as it serves a diverse client base across multiple industries and business sectors. Furthermore, Huawei is currently the only company in the world that can offer 5G end-to-end products and solutions. With the deployment of newly procured Huawei products, we have redefined our IT strategic vision, shifting the focus from a process-oriented organization to an analytical driven organization that uses information to achieve the projected business goals. Due to this strategy, our current Data Centers are in-course on meeting requirements of the workloads of applications running on the infrastructure. With the new arrival of technology and equipment, FBR has increased the utilization of application without risking application response time, throughput issues and better redundancy approach. The new servers, network and storage devices procured by FBR provides effective virtualizes environment for hardware resources deployed at our data centers. It also provides basic backup and disaster recovery, management of heterogeneous resource pools, lightweight operation, cloud services, infrastructure visualization, performance management, and other capabilities. The new equipment has enhanced functions, improving utilization and operations & management (O&M) efficiency. The newly procured equipment improves the hardware utilization rate from 5 percent– 15 percent up to 60 percent–80 percent, or even higher, without any adverse impact on the existing service performance. With the arrival of the remaining phase two equipment, FBR will enhance its automation process further. The new architecture gives us many advantages from having continuous availability of services to performing maintenance on applications without disrupting service to the user community. The architecture also provides diverse data storage locations assuring that a complete outage of one data center does not disrupt the ability to deliver “always-on and always-available” application services.

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

Component-II Establishment of Research Units The aim of this project was to establish two units, the Tax Intelligence Unit (TIU) and the Market, Monitoring and Intervention Unit (MMI) to help build the capacity within the FBR, to carry out sound tax policy analysis to enable informed decision-making in tax policies and better allocation of the tax administration's scarce resources in order to ensure increased compliance and efficiency. Under Component 2, the Project was expected to support the set-up of a Tax Intelligence Unit (TIU) and a Market Monitoring and Intervention Unit (MMI), whose aim is to develop the Federal Board of Revenue’s (FBR) capacity to carry out sound tax policy analysis and for designing, organizing, and directing a wide range of macroeconomic and tax analyses. BENEFITS OF CONSULTANTS HIRED UNDER COMPONENT-II The consultants hired under the component-II helped the FBR in budget preparation for the financial year 2019-20. Some consultants provided support to the Track & Trace project and helped in finalizing the modalities of the said project. Legal Consultant hired under component-II produced helpful guidance for revamping of the legal provisions of tax laws. Furthermore, some of the consultants were engaged with the Tax Facilitation Wing who helped that Wing for preparation of Communication Strategy, Urdu translation of tax statutes etc. Consultants also supported the Program Office of the new project namely Pakistan Raises Revenue (PRR). Consultants hired in the two Research Units were engaged with the Inland Revenue Policy, Inland Revenue Operations, International Taxes, Strategic Planning, Reforms & Statistics Wings etc., and helped these wings for research analysis and taking policy decisions. These Research Units produced the monthly Revenue Bulletin, Tax Expenditure report, Tax Gap report of some Sectors, Revenue Forecasting Reports etc. Conclusion Overall RETF of TAGR was a very beneficial project for the Federal Board of Revenue (FBR) and it will contribute a lot in the overall improvement in the working of the FBR. At the end Project Director (TAGR), FBR and its team is highly thankful to the executives/officers/consultants of the World Bank who supported the FBR in this RETF--TAGR project on every step and provided valuable support and guidance, as a result of which this project was completed within the given time frame. Furthermore, Federal Board of Revenue (FBR) is also thankful to the DFID (UK) for providing the much-needed financial support to execute and complete this project.

(Aftab Ahmed Razzaqi) Chief (TAGR), Federal Board of Revenue, Islamabad—Pakistan.

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The World Bank Strengthening Tax Systems and Building Tax Policy Analysis Capacity (P161463)

ANNEX 4. SUPPORTING DOCUMENTS (IF ANY)

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