Document of The World Bank Group

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No. 28391

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED IDA CREDIT Public Disclosure Authorized Public Disclosure Authorized IN THE AMOUNT OF SDR 36.9 MILLION (US$55.0 MILLIONEQUIVALENT)

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR A

PAKISTAN PUBLIC SECTOR CAPACITY BUILDING PROJECT Public Disclosure Authorized Public Disclosure Authorized

April 20,2004

Finance and Private Sector Development Public Disclosure Authorized Public Disclosure Authorized South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective April 20,2004)

Currency Unit = Pakistani Rupee (PRs) PRs57.30 = US$1 US$.O17 = PRs 1

FISCAL YEAR July 1 -- June 30

ABBREVIATIONS AND ACRONYMS

ABS- Annual Budget Statement I-- ACR- Annual Confidential Report.

ADB- Asian Development Bank ' AG- Auditor General APUG- All Pakistan Unified Grades BPS- Basic Pay Scale BS- Basic Scale CAS- Country Assistance Strategy CBR- Central Board of Revenue CCB- Citizen Community Boards CDWP- Central Development Working Party CF- Corporate Finance CFAA- Country Financial Accountability Assessment CGA- Controller General of Accounts CSA- Civil Services Academy CSO- Civil Society Organization CSR- Civil Service Reform CSRU- Civil Service Reform Unit CSS- Central Superior Services DFIs- Development Finance Institutions DFID- Department for Intemational Development DMG- District Management Group DPCO- Debt Policy Coordination Office DPR- Development Policy Reveiw EAD- Economic Affairs Division ECNEC- Executive Committee of the National Economic Council EDP- Executive Development Program EIP- Entity Improvement Plan FAB- Frequency Allocation Board FBS- Federal Bureau of Statistics FD- Finance Division FMC- Financial Management Coordiantor FPSC- Federal Public Services Commission FUG- Federal Unified Grades FMR- Financial Management Reveiw GoP- Governmnet of Pakistan FOR OFFICIAL USE ONLY

GPN- General Porcurement Notice HEC- Higher Education Commission IBA- Institute of Business Administration ICA- Investment Climate Assessment ICB- International Competitive Bidding IDA- International Development Assistance IMF- International Monetary Fund JS- Joint Secretary KESC- Karachi Electricity Supply Corporation LDI- Long Distance and International LGO- Local Government Ordinance LL- Local Loop LRMC- Long Run Marginal Cost LTU- Large Taxpayer Unit LUMS- Lahore University ofManagement Sciences MoC- Ministry of Commerce MoF- Ministry of Finance MoW&P- Ministry ofWater and Power MP- Management Pay Scales MTBF- Medium Term Budget Framework MTU- Medium Taxpayer Unit NAB- National Accountability Bureau NEPRA- National Electric Power RegulatoIy Authority NGO- Non Government Organization NIPA- National Institute ofPublic Administration NOW-Norwegian Agency for Development NRB- National Reconstruction Bureau NSCC- National Steering and Coordination Committee NSPP- National School ofPublic Policy NUST- National University of Science and Technology OED- Operations Evaluation Department OGRA- Oil and Gas Regulatory Authority OMG- Office Management Group PAC- Public Accounts Committee PASC- Pakistan Administrative Staff College PC- Project Coordinator PCS- Provincial Civil Services PCU- Project Coordination Unit PDEV- Professional Development Program PHRD- Professional Human Resource Development PIFRA- Project for Improvement in Financial Reporting and Auditing PIU- Project Implementing Unit PPER- Pakistan Public Expenditure Reveiw PPF- Project Preparation Facility PPMI- Pakistan Planning & Management Institute PPRA- Public Procurement Regulatory Authority PPSC- Provincial Public Services Commission PRSC- Poverty Reduction Structural Credit PRSP- Poverty Reduction Strategy Paper This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. PSCBP- Public Sector Capacity Building Project PTA- Pakistan Telecommunications Authority PTCL- Pakistan Telecommunications Company Limited SA- Special Account SAC- Structural Adjustmnet Credit SBP- State Bank ofPakistan SOE- Statement of Expenditures STARR- Sales Tax Automated Refund Repository TA- Technical Assistance TFC- Taxpayer Facilitation Centres UNCTAD- United Nations Conference on Trade and Development UNDB- UnitedNations Development Business .- USAS- Universal Self Assessment Scheme .-- USAID- United States Agency for Intemational Development USO- Universal Service Obligation USOA- Universal System ofAccounts WAPDA- Water and Power Development Authority WB- World Bank WHO- World Health Organization WTO- World Trade Organization ZTB- Zarai Traqqiati Bank

Vice President: Praful C. Pate1 Country Managermirector: John W. Wall Sector Managermirector: Joseph Del Mar Pernia Task Team LeadertTask Manager: Asya Akhlaquel Shabana Khawar (Co-Task Leader) PAKISTAN PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT

CONTENTS

A. Project Development Objective Page

1. Projsct development objective .-- 2 2. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 5 2. Main sector issues and Government strategy 5 3. Sector issues to be addressed by the project and strategic choices 13

C. Project Description Summary

1. Project components 15 2. Key policy and institutional reforms supported by the project 22 3. Benefits and target population 22 4. Institutional and implementation arrangements 23

D. Project Rationale

1. Project alternatives considered and reasons for rejection 24 2. Major related projects financed by the Bank andor other development agencies 25 3. Lessons learned and reflected in the project design 28 4. Indications ofborrower commitment and ownership 29 5. Value added of Bank support in this project 29

E. Summary Project Analysis

1. Economic 29 2. Financial 30 3. Technical 30 4. Institutional 30 5. Environmental 31 6. Social 32 7. Safeguard Policies 33 F. Sustainability and Risks

1. Sustainability 33 2. Critical risks 33 3. Possible controversial aspects 35

G. Main Loan Conditions

1. Effectiveness Condition 35 2. Other 35

H. Readipess for Implementation .-- 36

I. Compliance with Bank Policies 37

Annexes

Annex 1: Project Design Summary 38 Annex 2: Detailed Project Description 46 Annex 3: Estimated Project Costs 59 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 60 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 61 Annex 6: (A) Procurement Arrangements 62 (B) Financial Management and Disbursement Arrangements 68 Annex 7: Project Processing Schedule 75 Annex 8: Documents in the Project File 76 Annex 9: Statement of Loans and Credits 77 Annex 10: Country at a Glance 79 Annex 11 : Detailed Cost Table 81 Pakistan: Public Sector Capacity Building Project (P083370)

PAKISTAN PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT Project Appraisal Document South Asia Regional Office SASFP

Date: Team Leader: Asya Akhlaque

Sector ManagerIDirector: Joseph Del Mar Pernia Sector(s): Central Government Administration (76%), Sub- Country ManagerIDirector: John W. Wall national government administration (1 5%), Tertiary Project ID: PO83370 education (9%) Lending Instrument: Technical Assistance Loan (TAL) Theme(s): Administrative and civil service reform (P), Regulation and competition policy (P), Debt management and fiscal sustainability (S), Tax policy and administration (S), Public expenditure, financial management and procurement (S)

Project Financing Data [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Amount (US$m):

Proposed Terms (IDA): Standard Credit Grace period (years): 10 Years to maturity: 35 Commitment fee: 0.00-0.50% Service charge: 0.75% Financing Plan (US$m): Source Local Foreign Total BORROWER 6.00 0.00 6.00

IDA

Total: Borrower: GOVERNMENT OF PAKISTAN

Responsible agency: FINANCE DIVISION, GOVERNMENT OF PAKISTAN Address: 424, Q Block, Pak Secretariat, Islamabad Contact Person: Mr.Ismai1 Qureshi, Additional Secretary, Finance Division (External Finance & Policy), Finance Division Tel : 0092-5 1-9206367 Fax: 0092-5 1 - 921 4629 Email: Iqminfin(dhotmail.com Contact Person: Mr Abdul Wajid Rana, Joint Secretary, Finance Division (External Finance & Policy) Tel: 0092-5 1-92 1 197 1 Fax: Email: [email protected] Estimated Disbursements ( Bank FYIUS$m): FY 2005 2006 2007 2008 2009 2010 Annual 12.00 1 1.oo 10.00 12.00 8.00 2.00 Curnulati 12.00 23.00 3 3 ..OO 45.00 53.00 55.00 ve Project implementation period: Five Years Expected effectiveness date: 0713012004 Expected closing date: 1 113012009

Revised PAD Datasheet A. Project Development Objective

1. Project development objective: (see Annex 1) The overarching goal of the proposed Public Sector Capacity Building Project (PSCBP) is to improve Government of Pakistan's (GoPs) capacity to implement its on-going Economic Reform program. Focusing on strategic areas, the project will have the following three distinct capacity building objectives: (i)broad-based professional development ofpublic sector officers; (ii)capacity enhancement in key ministriedagencies which are in the forefront of design, implementation and monitoring ofpolicy reforms; and (iii)strengthening of regulatory agencies.

Using an incremental approach, the project also aims to strengthen government capacity to facilitate complementary broad-based civil service reforms (CSR). It is expected that the project initiatives will lead to improvement in the overall quality ofpolicy formulation, reform implementation, service delivery, and human resource management of the public sector.

This would be achieved through (i)high quality advanced and specialized training; (ii)accessing international and local expertise and advisory services for capacity building; and (iii)procuring goods and equipment to support capacity building ofparticipating agencies.

2. Key performance indicators: (see Annex 1) By their very nature, institutional and civil service reform outcomes and benefits are difficult to quantify and measure. Nonetheless, several input, process and output indicators have been developed to help track the success of project interventions over the five year period. Different types of performance indicators have been identified for each of the components of the project and are reflected below (and also in Annex-I).

0 Overall at an aggregate project level: 0 Approximately 250-300 civil servants including ex-cadre (grade 17- 19 or equivalent) acquire Masters degrees in specific areas where capacity is lacking by 2009 -- 50 by 2006; 150 by 2007; 250-300 by 2009; 0 Around 200 civil servants including ex-cadre (grade 20-21 or equivalent) undertake executive short-term (6 weeks) training by 2009 -- 100 by 2006; 200 by 2009; 0 Completion of technical studies and implementation of capacity building programs, as per Entity Improvement Plans (EIPs).

0 For the first professional development component of the project, primarily input indicators have been developed. The underlying assumption is that increasing inputs to build capacity in some specific areas will, over time, lead to better public sector performance. These indicators would broadly focus on number of public officials trained, hiring of core faculty for training institutions, and number of domestic training programs designed. Specific indicators include: 0 Implementation of PDev/EDP training programs; 0 Core faculty for National School ofPublic Policy (NSPP) recruited by 2006; 0 Twinning relationship ofNSPP with world class training institution established by 2006; 0 Federal Public Service Commission's (FPSC) entry level CSS Competitive examination process reviewed by 2006; 0 FPSC Restructuring Report completed by 2006. 0 With regard to the second component, capacity development of key agencies, predominantly process indicators have been developed for each of the participating agencies. The underlying assumption behind using these indicators is that changing some key processes, within the core government ministriedagencies serving cross-cutting functions, will lead to better performance. Specific process indicators for each of the participating agencies under this component include: (a) Ministry ofFinance (MoF): (i)DPCO: 0 Debt Policy Coordination Office functional by 2004; 0 Preparation of Annual Debt Policy Statement by 2005, after approval of the fiscal responsibility bill; to be laid before the National Assembly; 0 Formulation of an improved Fiscal Policy by 2005, after approval of the fiscal responsibility bill, to be laid before the National Assembly; 0 Preparation and regular updating of an improved and comprehensive macro-economic framework. (ii)Corporate Finance: 0 Regular monitoring of SOEs financial position & balance sheet analysis, starting with at least 2(WAPDA/!SC), by 2005, and eventually expanding to the majority of public corporate sector by 2008. (iii)Policy Wing: 0 Monitoring and reporting (by posting on MOF website) of PRSP indicators on quarterly basis starting 2004; 0 Preparation of Public Expenditure Review starting 2005. (b) CBR: 0 1 LTU in Lahore and 5 MTUs in Karachi, Quetta, Peshawar, Faisalabad and Rawalpindi operational by 2004; 0 Sales Tax Automated Refund Repository (STARR), second phase implemented by 2004; 0 Customs Pilot Project, involving development & implementation of re-engineered procedures for clearance of imports and exports, implemented by 2004; 0 Universal Self Assessment Scheme implemented by 2004; 0 7 Taxpayers Facilitation Centres established by 2004. (c) Ministry of Commerce (MoC): 0 Legal Advisory Cell established by 2005 for expert advice and guidance to the business community; 0 Data CelVDigital Library established by 2006; 0 At least 30-40 officials shall receive specialized short-term training by 2006. (d) Economic Affairs Division (EAD): 0 Improved MIS to be implemented by 2005. 0 At least 40-45 middle-level staff receive specialized training by 2007. (e) Establishment Division (CSRU): 0 A Civil Service Reform Unit (CSRU) established within the Establishment Division and operational by 2004; 0 A technical study on compensation issues and options completed in conjunction with MoF by 2005. (f) Planning & Development Division (P&DD): 0 Macro-model functional by 2005; 0 Research library digitized by 2005; 0 First batch of 10 case studies completed by 2005; 0 First batch of 39 officers receive specialized short-term training by 2005.

-3- (g) Pakistan Procurement Regulatory Authority (PPRA): 0 Public procurement rules to be finalized for notification by the Federal Government by 2004. 0 At least 20 staff will receive specialized training by 2008.

0 For the third component, focusing on strengthening capacity of the Regulatoiy Agencies, primarily output indicators have been proposed. The impact, thus, will be measured in terms of sector-specific outputs. Some of the output indicators for each of the regulators include: (a) NEPRA: 0 Cost of capital and cost of service identified by 2006; 0 Performance and environmental standards notified by 2005; 0 Congestion costs for pricing decisions identified by 2006; 0 Framework for targetted and direct subsidies developed by 2005; 0 Framework for direct sale by Generators to Bulk Power Consumers (Single Buyer + model) adopted from 2004. (b) OGRA: 0 Framework for performance standards, competition, optimizing production and other operational aspects of the oil & gas sector developed, by 2006; e Technical/financial and other performance standards for the oil and gas sector developed and notified, by 2005; 0 Framework and Rules for open access and common carrier regime in Pakistan prepared by 2005. (c) PTA: 0 Award one LDI and at least three LL (fixed telephony licenses) by 2004; 0 Framework formulation for US0 will be devised by 2005; 0 Formulation of Quality of Service parameters for telecom services by 2005; 0 Framework for determination of interconnection charges on cost-based convention by 2005; 0 At least 45 staff will receive specialized training by 2008.

To further strengthen the linkage between the overall reform program and the agency/entity reform agenda, concerted efforts have been made to align the above indicators with key PRSP indicators, through consultation with the PRSC team. The performance indicators will be regularly monitored by the government, and assessed by the Bank team during supervision. Over the long haul, provided broad based civil service reforms and professional skills development are continued, progress in these indicators are expected to lead to the following CAS level outcomes: 0 improved quality ofpublic sector reflected in better design and implementation ofpolicies; 0 improved public expenditure management practices; e improved regulatory functions; 0 timely and effective monitoring and evaluation ofpublic expenditure and reform program etc.; 0 Increased competition and private sector participation; 0 Improved public service delivery; 0 More accountable public service.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 24399-PAK Date of latest CAS discussion: June 24,2002 The proposed project is hlly consistent and well-aligned with the overall CAS objectives. Ofthe three main pillars of CAS, it specifically supports "strengthening macroeconomic stability and government

-4- effectiveness". The goal of improving government effectiveness at federal, provincial, district levels, 'remains at the heart of the Bank's assistance strategy' and program priority. The project will support key aspects of civil service reform, focusing primarily on professional training of civil servants.

The conceptualization and design ofthe project has benefitted from the considerable amount of analytical work undertaken on the public sector, governance and CS reforms in Pakistan and globally. Most recent work, undertaken by the GoP and the Bank, includes the following: Pakistan Public Expenditure Review (PPER): Strengthening the Civil Service, World Bank 2003a Pakistan Investment Climate Assessment (ICA), World Bank, 2003b Pakistan Development Policy Review: A New Dawn? (DPR),World Bank 2002 Report of the Committee on Restructuring and Rightsizing of the Federal Ministries/Divisions (chaired by Dr. Shahid Amjad Chaudhry), Government of Pakistan, April 2001 Civil Service Reform, A Review of World Bank Assistance, OED, World Bank, Aug 1999 Report of the Commission on Administrative Restructuring on Re-engineering of the Federal Government Organizations (chaired by Dr. Hafiz Pasha), Government of Pakistan, February 1999 A Frameworkfor Civil Service Reform in Pakistan, World Bank, 1998 The State in A Changing World, WDR, 1997

The CSR related work on Pakistan clearly acknowledges the deterioration ofthe country's civil service over time, hampering government's policymaking capacity, operational efficiency and public service responsiveness. In the proposed project design, lessons have been incorporated from the latest OED review of Bank assistance in the area of CSRs over the 1980-97 period. Based on its support for CSR in 32 client countries, the Bank has identified three stylized forms of 'bureaucratic dysfunction' which attempt to 'unbundle' the complex rubric of civil service reforms; they include: (i)endemic overstaffing accompanied by unsustainable wage bills; (ii)a combination of misaligned organizational structures, poor human resources, and weakened administrative capacity to carry out core government functions; and (iii) credibility and accountability of state institutions because of cumbersome rules, political interference and cultures of nonperformance (World Bank 1999).

As part of GoP's evolving overall civil service reform vision, the proposed project supports the strategy of improving government effectiveness, through increased professional human resource development and enhanced capacity in key ministries and regulatory agencies. Using an incremental approach, the project also aims to strengthen government capacity to facilitate other complementary institutional and broad-based civil service reforms mentioned above. It is expected that the project will lead to substantial improvement in the overall quality ofpolicy formulation, reform implementation, and human resource management.

2. Main sector issues and Government strategy: In Pakistan, the capacity and quality of public institutions has been declining over time. Although the civil service has pockets of excellence, collectively its performance leaves a lot to be desired. A quantum leap in efficiency and management culture of the government is needed if Pakistan has to accelerate and sustain growth, reduce poverty, anticipate the opportunities and challenges ofthe future, and enable its enterprising citizens and private sector to realize their full potential and compete in a fiercely competitive global market. Successful implementation of GOP's on-going reform program - both at federal and provincial levels - is inseparably linked with the capacity of government institutions and the quality of civil service (ICA, World Bank 2003b).

-5- I Key Aspects of Civil Service in Pakistan a) Structure: Total public sector employment is about 2.6 million, which is around 2 percent of Pakistan’s population. Federal employment is about 32 percent of total public employment reflecting the federal character of the government. Public sector employees are drawn from central superior services (CSS), provincial civil services (PCS), professions (ex-cadre group), and administrative and support staff. The distribution is as follows: (i)The Central Superior Services (CSS): CSS officers (Grade 17-22) occupy the bulk of positions responsible for implementation, policy making and policy analysis in the government machinery at the federal, provincial and district levels. Drawn from the 14 occupational groups of the CSS, they serve across different ministries and attached departments at both federal and provincial levels. The 14 occupational groups include: District Management (DMG); Office Management (OMG); Police; Secretariat; Customs & Excise; Income Tax; Commerce & Trade; Audits & Accounts; Foreign Service; Information; Economists; Military Land and Cantonment; Postal; and Railways. DMG, Police and the Secretariat Group comprise the All Pakistan Unified Grades (APUG), whilst all other groups make up the Federal Unified Grades (FUG).

CSS officers occupying middle to senior level positions in economic and policy making ministries in grades 17-22 are around 5,000 (excluding ex-cadre officers); of these around 800 are serving in the provinces. Grade 17 is the entry level officer grade, and by the time the officer reaches grade 21, he/she still has, on average, about 6-7 years of service left.

(ii)Provincial Civil Services (PCS): PCS officers (Grade 17-22) occupy positions at the provincial and district level, largely in administrative and field implementation. Grade 17 is also the entry level grade for PCS officers but promotions above grade 20 are less common compared to CSS officers.

(iii)Professional level Ex-Cadre: Ex-Cadre group includes technical staff (e.g. statisticians, engineers and doctors etc.) working predominantly in attached departments (such as the Federal Bureau of Statistics (FBS), and autonomous bodies (Regulatory agencies such as the National Electric Power Regulatory Authority (NEPRA) and Oil & Gas Regulatory Authority (OGRA)). There are approximately 19,000 ex-cadre officers working within the Federal Government.

iv) Administrative and Support Staff (Grade 1-16): These staff work at administrative and support positions at the Federal and Provincial level. Staff in grades 1-11 are primarily support level; whereas those in grades 12-16 occupy technical positions in departments of education, health, irrigation, etc. (such as teachers, health workers, etc.). b) Recruitment: The CSS selection procedure is overseen by the Federal Public Services Commission (FPSC), and comprises a written examination, a psychological test and an interview. The process is highly competitive; around 8000-10,000 applications are received for a batch of 170-175 positions every year. The PCS selection procedure for each province is overseen by its Provincial Public Services Commission (PPSC). It also comprises a competitive examination and interview process similar to the one used by the FPSC. Ex-cadre officers (grade 17-22) are selected by the FPSC at the federal level and by the PPSC at the provincial level. Since ex-cadre positions are more area-specific, specialized degree holders are encouraged to apply and the tests taken are geared to the requirements of the position advertised. As for the administrative and support group (grades 1- 16), respective ministries, departments and autonomous bodies are given the power by the government to recruit people when required. They generally advertise posts or call for nominations. In most cases, officers in grades 11-16 are selected after conducting written tests and interviews of applicants.

-6- c) Career Management: Once recruited, the Establishment Division thereafter manages and monitors the progress of CSS officers throughout their service, including their placements, transfers, promotions and career management. The Services & General Administration Departments in each province are the managing agencies for PCS officers. Most officers usually stay in their stream for their entire career, but may also rotate starting mid-career. d) Training: Pre-Service: Each CSS occupational stream receives pre-service training - ranging from 1-2 years - divided into (a) general/ common training, at the Civil Services Academy (CSA), and later (b) specialized training in their area of expertise, at specialized training institutes (DMG; Police; Accounts; Customs etc.). PCS officers are provided a one year pre-service training in their provincial training institutes. PCS Executive officers, who serve at the district level, also receive specialized training at the Rural Development Academy in Peshawar.

In-Service: This includes training at: (a) the four National Institutes of Public Administration (NIPA)- one each in the four provincial capitals (Karachi, Lahore, Peshawar and Quetta); and (b) the Pakistan Administrative Staff College (PASC) in Lahore, for both Federal (CSS) and Provincial (PCS) officers. The thrust of in-service training is broad spectrum as a civil service officer is expected to get rotated across different ministries at the federal/provincial level and serve in wide-ranging areas of specialization. Training at NIPA is mandatory for promotion from grade 19 to 20; and at PASC for promotion from grade 20 to 21.

I1 Key Issues in the Civil Service

Based on the analytical work undertaken on civil service reform (CSR) in Pakistan, along with stakeholder consultations, the following key issues have been identified that constrain the government from assuming new and more complex roles needed in the context ofbroader structural reforms that are currently being implemented:

(i) Weak Technical and Managerial Skills: The technical competence of civil servants has been declining over the past couple of decades. Human resource development in the public sector has not been given adequate resources, leading to a steady erosion in capacity and technical skills of civil servants. Estimates made by the Committee on Civil Service Reforms indicate that during the last two decades annual expenditures on civil service training have been less than 0.5 percent of the compensation of civil servants. At the same time, the quality of Pakistan’s higher education institutions has declined significantly, resulting in an overall deterioration in quality of entry level civil servants. Mirroring the trend of underinvestment in civil service training, the higher education (in public sector) expenditure as a percentage of total education expenditure has declined from nearly 17% in 1987/88 to around 12% in 2001/02. This introduces the burden of redressing these inadequacies during pre-service and in-service training. Over time, the quality of the civil service training institutions - like the public sector universities - has deteriorated. Most of the training programs within the civil service institutions are routine training on government procedures and have become inappropriate for the task of building a new development management culture and a changed role of the government as a facilitator and regulator. Majority of civil servants entering the service do not have advanced professional degrees; this, together with routine in-service training, has led to poor professional skills capacity. At the same time, access to foreign training has been very limited; the percentage of officers in Grades 17-19 who have obtained foreign Masters degrees (and above) varies from 2% to 8%, depending on the occupational group (many acquired this under the USAID overseas training program during the 1980s). Challenges in the present system of higher

-7- education and training in Pakistan range from weak faculty capacity to out-dated syllabi. Hence, the successful transformation of the public service, requires a paradigm shift in public service training programs.

As a result ofthese weaknesses: (i)capacity for policy work and management is generally limited; (ii)there is excessive reliance on foreigdlocal consultants for routine policy and implementation work, and even in these situations, consultants’ output is generally not effectively utilized either because of inability to understand andor ineffective management of the work; and (iii)approach to problem solving is narrow and outdated as officers are unable to bring in cross-country experience and best-practice knowledge to development challenges facing the country. The bulk of officers are simply not trained for managing Pakistan in a globalized world of tomorrow or effectively administering the country’s finite resources in the face ofincreasing scarcity. Most of the officers end up focusing on routine work only.

(ii) Recruitment, Promotion, Placements and Transfers Process Recruitment: As noted above, the recruitment in the civil service is overseen by the FederaWrovincial Public Service Commission (FPSC/PPSC). Although the examination process is rigorous and competitive, there are wide ranging issues/challenges in the system, such as outdated exam curriculdsyllabi, and inappropriate criteria for applying (for instance, minimum qualification for initial recruitment requires a Bachelors degree, equivalent to 14 years of education). This, along with declining standards of higher education, has directly affected the quality of entry level civil servants. Promotion: Promotion policies depend on performance evaluation, seniority, performance during training, and the quality of work experience. These criteria, nonetheless, are often perceived not to be fully adhered. According to some analysts, promotions are becoming more subjective, particularly, as the Central Selection Board reserves judgment of what constitutes ‘merit’ in different scenarios and in this way exercises considerable authority and autonomy in promotion matters. Additionally, promotions predominantly occur in vacancies in an occupational group, rather than vacancies in the departments officers are working in - which highlights the vertically separated nature of occupational groups. Placements and Transfers: There are no systematic policies or mechanisms for placements and transfers. In many cases, the process of placements/transfers lacks professional and technical basis, leading to a mismatch between skills and placement. An important issue in the context ofplacements is the de facto reservation of certain posts for officers from the APUG (Le. DMG, Police and the Secretariat Groups). The distribution of working positions in BS-17 to BS-22, in terms of the total number of civil servants belonging to the FUG and the APUG is skewed significantly in favour of the APUG. The most striking feature of the distribution is that as the number of posts shrink with the upward movement ofpay scale, so does the proportion of FUG. This de facto reservation emphasizes the fact that the occupational group an officer belongs to influences hidher career growth prospects, to a great extent.

(iii) ‘Bottom Heavy’ Employment: While public sector employment in Pakistan may not be exceptionally large in the inter-country comparison, it is certainly excessive in relation to its productivity and service delivery performance (PPER, World Bank, 2003a). In addition, employment is heavily skewed towards lower grades (about 85 % of the total public employees are in support level grades 1-11), reflecting the productivity levels; around 10 % are in grades 12-16 which occupy the bulk of positions as teachers, health workers etc; and only about 5% occupy grades 17-22 (i.e. middle-senior level policy analysts, and decision makers).

(iv) Mismatch Between Skills & Compensation has become increasingly insufficient to attract managerial and technical talent at the higher levels but may be too generous at lower levels. The salary compression

-8- ratio is 1:lO. There is substantial evidence that the real compensation gap between public and private salaries and emoluments has steadily increased. As an illustration, for the highest grade (BPS-22), the nominal salary and monetav allowances have increased from Rs.3,000 per month in 1950 to Rs.38,000 per month at present, while consumer prices have risen thirty-fold over the period. Real total compensation for the highest civil servants probably decreased over the last half century by at least one-third. Meanwhile, real incomes in the private sector have at least doubled reflecting the general increase in per capita incomes. Lateral induction on fixed term contracts has recently been introduced (MP Grade System) to attract talent from the private sector and academia (of the current batch of 42 APUG, BS-22 officers, 19 were lateral entrants at different levels). The increasing use of MP grades, originally meant for top managerial positions in the public corporations and approximating more closely to private sector pay, to attract managerial and technical skills to government indicates the inadequacy of present levels of compensation at higher levels. Finally, the fact that there has been a historical decline of the pay compression estimated at 1:46 in 1962, also indicates that lower level compensation has increased significantly over time while it has increased slowly at the higher levels (PPER, World Bank, 2003a).

(v) Structural Rigidities: There are structural rigidities in the federal and provincial administrations due to strong vertical orientation of the occupational groups. Lateral movement within cadres is rare. Inter-cadre rivalries significantly determine the shape of federal divisions and attached departments, as structures are created to meet the needs of the various groups and cadres for promotion opportunities - rather than on the basis ofpolicy priorities or operational needs (PPER, World Bank, 2003a).

(vi) Devolution: To help redress the problems resulting from an unresponsive and unaccountable civil service, the government completed its first phase of the devolution initiative by holding elections in August 2001. If the difficult step from political to fiscal decentralization can be made, and the requisite implementation and monitoring capacity developed, the system has the potential to deliver better local services (DPR, World Bank 2002).

I11 Government's Evolving Civil Service Reform Strategy

The overall aim of GoP's civil service reform is to create a more qualified, innovative and efficient civil service which is responsive to the needs of the public, and professionally trained to adapt to changing global and national challenges.

The Civil Service reform process was started in 1999 and has been going on under the overall supervision of the Cabinet Committee on Civil Service Reforms. Devolution, Police, Judicial, Tax Administration, Public Financial Management and Procurement reforms have been launched. Several important policy decisions on recruitment, promotion, posting, compensation and professional development have been taken. To ensure meaningful implementation and deepen the reforms, follow up activities are under review.

While several key structural reforms are on-going, given the complexity and political economy issues, implementation will take time. The key initiated reforms are in the following areas:

(i)Professional development To address the weak technical and managerial skills gap in the civil service, the government's strategy revolves around 0 Supporting a broad based professional development program of the civil service to upgrade their skill levels through advanced training. This program is already underway in a number of key economic management institutions, such as the SBP, the CBR, the AG, and the CGA. The government now intends to extend this further across the entire civil service (federal/provincial);

-9- 0 Reforms of domestic public sector training institutions. The government has recently embarked upon major reforms to revitalize and upgrade Pakistan’s civil service training by: strengthening capacity of the training institutions; revising curricula; improving teaching methodology; building staff capacity; and improving connectivity within and among training institutes. The broad set of initiatives that are currently underway include: (a) faculty upgrade through training of key faculty (this includes sending a select group at leading intemational institutions, such as Harvard etc.), as well as hiring of new faculty from the local and intemational market; (b) improving/ revising curricula of the existing training institutions (PASC, NIPAs, etc.) and introducing case study methodologies; and (c) facility upgrade of PASC and other training institutions including IT connectivitity. In addition, the Government has recently announced establishment of a National School of Public Policy (NSPP). The ordinance for NSPP has already been passed and formal notification is expected soon. This new institution would merge the Pakistan Administrative Staff College and National Institute ofPublic Administration Lahore. The school would would serve as the premier training institution for civil servants. It would work to improve curricula and content of short courses offered to public officials and will become a degree-awarding institution in the medium to long term.

(ii) Recruitment reforms In order to institutionalize merit based and transparent appointments ensuring de-politicization of civil service, the Government has amended the Federal Public Service Commission (FPSC) Ordinance so as to enhance FPSC’s independence, increase its financial autonomy, extend its role in the recruitment ofpublic servants, and limit and define the posts which are outside its purview. The enhanced role of the FPSC has been protected under law, rather than in rules. FPSC has reduced the maximum age limit for entry into the govemment service from 30 to 28 years. The FPSC (Amendment) Ordinance 2000 which, inter-alia, provides security of tenure to FPSC members with no provision of an extension ensures that the members of the Commission exercise their judgement without fear or favour.

(iii) Promotion reforms Following key measures have been undertaken: 0 To make evaluation of officers more objective, the Performance Evaluation System has been revised. Under this system, the evaluation is made job specific, against pre-determined targets while grading is comparative; 0 In order to improve career management ofofficers, a system ofmonitoring, appraisal and evaluation and computerization of PERs has been developed in the Establishment Division; 0 An exercise for formulating job descriptions ofposts in the Federal Secretariat has been initiated to ensure posting of officers on posts matching their experience, qualification and training; 0 To ensure transparency in promotion ofofficers against selection posts (BS-19 and above), the Central Selection Board has been made broad-based and more representative, and is now chaired by the Chairman FPSC; 0 Successful completion ofmandatory 12 days concept/skill mix training ofthe civil servants in BS-17, 18 and 19, at various civil service training institutions, is linked to promotion to higher grades in BS-18,19 and 20.

- 10- (iv) Accountability and Clientfocus In order to enforce accountability within due process of law and rules, a legal framework has been developed to undertake an exercise to weed out in-efficient and corrupt government servants. A key enactment includes Removal from Service (Special Powers) Ordinance, 2000. The exercise to review the cases of government officers who have ceased to be efficient and have completed 20 years of service has been initiated and 2165 cases have been recommended for compulsory retirement by the Review Committee.

Under the new setup, the National Accountability Bureau (NAB), and other anti-corruption agencies in the federal and provincial governments, have become active. The federal, provincial and district Ombudsman’s Office, Police Complaint Authority and District Public Safety Commissions are playing an active role towards redressal ofpublic grievances.

(v) Pay and Pension Reforms In 2000 the government established a Committee to review Pay and Benefits Reforms. The first phase of the pay and pension reform scheme for the federal government’s civil and military personnel was implemented in late 2000 through (a) the revised pay scale; (b) the rationalization of pension benefits. All federal civil services including the military have been provided the option of accessing a new pay scale in conjunction with revisions in pension benefits. The revised pay-scales restore about 75 % of the lost purchasing power of wages (which had not been increased since 1994), decompress the salary scale for every grade and subsume all ad-hoc salary increases obtained by some services between 1994-2000.

This pay and pension reform was complemented by a program to right-size the federal work-force which was approved by the Cabinet in June, 2001. As part of the second phase of the pay and pension reforms, a Special Relief Allowance @ 15% of the basic pay p.m. to all the civilian employees in BS-1 to BS-22 of the Federal Government as well as the civilians paid from Defence Estimates, and to all the Armed Forces Personnel/Civil Armed Forces Personnel, has been sanctioned and is effective from July 1, 2003. This has improved compensation somewhat, but the wage structure remains severely compressed. The compression ratio (from top to bottom salaries) is 1: 10. It was 1:46 in the 1960’s. The higher echelons ofpublic servants have significantly lower compensation than their comparators in the private sector. This in an important issue under review.

(vi) Devolution Devolution was launched in August 200 1, through promulgation of the comprehensive Local Government Ordinance (LGO) in each of the four provinces. Prior to the introduction of the Devolution plan, Pakistan had a highly centralized political and fiscal system dominated with elements of patronage. The LGO clearly defines the role of three different tiers of local government and spells out a fiscal framework, including taxing authority. Drawing from the experience of other countries, the LGO sets up a system of financial controls based on hard budget constraints and extends to the local government level the public financial management and accountability systems that operate at the federal and provincial levels. The LGO also prescribes additional systems of checks and balances to prevent capture of the local governments by elites. Local service delivery has been set to depend on the interplay between the District Councils and grass-root Citizen Community Boards (CCBs) who will determine the allocations of 50 percent of total development expenditure at the district level and below. On the political side, significant steps have been taken to ensure broad representation. Seats are not only reserved for women but the quota system also extends to peasants, workers and religious minorities.

With more than one hundred thousand new councilors at different levels of local government, training programs for their new role are essential and form part of the kture agenda. With political decentralization

-11 - launched, the next and more time-intensive step of fiscal decentralization is under development. The provinces, districts and NRB are jointly designing a system of intergovemmental fiscal relations with a view to secure transparency, to maintain hard local budget constraints and to give local governments the opportunity to raise additional resources. A next key area of reform will be the effective devolution of the civil service to District cadres. This is also under discussion. Finally, for effective devolution, the districts soon need to do their own budget preparation and management with appropriate mechanisms for provincial monitoring starting with the next fiscal year 2004 budgets. Capacity build-up for this is underway.

(vii) Governance reforms in key instititions The Tax Administration Reform is the comerstone of the economic reform program. In the absence of improved tax administsation leading to substantial increase in revenue, it will be impossible to exit the debt trap and implement the poverty reduction strategy. It is envisioned that a modern tax system and broad based taxes with improved tax collections through a modem and honest tax administration agency, will reduce collection costs and the burden of poor govemance on taxpayers. After a process of consultations, fundamental restructuring of CBR has been launched aimed at significant changes in human resource management, business processes and use of technology.

Comprehensive reforms are also being implemented to have a modem public accounting and integrated financial management system at the federal, provincial and district levels, to modemize the public audit function and to establish more effective external oversight through Public Accounts Committees and public access to information. The public accounting and audit functions have been separated and the Office of the Controller General of Accounts (CGA) was established. External oversight has been significantly strengthened through the combined work of the Auditor General and the functioning of the federal Public Accounts Committee (PAC). For the first time in years, the PAC is now reviewing the actions of a government in office and is open to press.

To manage the implementation of on-going reforms, and help catalyze the GoP’s comprehensive civil service reform strategy, a Civil Service Reform Unit (CSRU) is being established within the Establishment Division. The CSRU will report to the Establishment Secretary, although the implementation and on-going evolution of the strategy will be under the overall guidance ofthe Cabinet Committeefor Civil Service Reform. Specifically, the CSRU will support the following areas of civil service reform:

Devolution: including completion of devolution, developing consensus on additional reforms and maintaining an active dialouge with counterparts; Recruitment and Promotion Reforms: focusing on modemizing the cadre system, reforming the system of occupational groups and merit protection; Pay and Pension Reforms: providing support for deepening the pay and pension reforms; Professional Development: improving the quality of training and professional development available to

serving staff; c Monitoring and Evaluation: monitoring implementation ofalready initiated reforms, evaluating reforms, preparing reports and conducting tracer studies; and Coordination: serving as Secretariat for the Cabinet Committee on Civil Service Reform.

- 12- 3. Sector issues to be addressed by the project and strategic choices: Pakistan's civil service, like that of many other low-income countries, manifests the different forms of 'bureaucratic dysfunction.' Indeed, the problems of poor human resources, weakened administrative capacity, compressed pay scales, the excess of unskilled lower level employees relative to senior staff, are found in many settings. However, some of Pakistan's administrative reform challenges as discussed above are distinct - as are the opportunities that are available for addressing them. The government finds itself in the fortuitous position of having: some consensus on restructuring of civil service; the fiscal space to afford pay reforms; and a well developed but incomplete devolution agenda. By seizing the 'low-hanging fruits' that these provide, government can set in motion some movement towards a longer-term reform agenda. Other steps can be taken that will achieve short-term efficiency gains and send significant signals at no political cost.

This project notes that there is little advantage in the elaborate specification, ex ante, of an ambitious set of civil service reform proposals. Efforts are still on-going to develop an overall vision of civil service although selective changes in key areas are occurring on the ground. Part of the CSR program - particularly devolution agenda and restructuring of occupational groups - is still in flux, and requires much more preparatory work. Before these elements of the CSR program can be finalized, consensus building within the different levels of the government (federal, provincial and districts) and across different stakeholders in civil society is needed.

The project's main strategic focus is on professional development and capacity building. Successful implementation of GOP's on-going reform program - both at federal and provincial levels - is highly dependent on the capacity and quality of civil service. Lack of skills and capacity in government has been a key recurring constraint that the Bank has identified in its structural adjustment support programs at both federal and provincial levels (Sindh and NWFP). The project will also support - through analytical work and stakeholder consensus-building - the overall civil service reform, harnessing these opportunities pragmatically.

The government's strategy for public sector professional development is anchored on the following beliefs: (i)Creating 'champions of change', at the senior levels, who would engender reforms, lead the process of policy formulation and implementation, and provide a nurturing environment for high quality work and highly trained people. (ii) Developing a 'critical mass' of internationally trained policy analysts, decision-makers and implementors across key government ministries and departments through high quality training programs, thus improving policy formulation and implementation. With several hundred highly trained people in key policy and managerial positions, there will be a paradigm shift in the way the country is governed and managed. At present, well-trained officers are too few in number and far too dispersed, thereby preventing the formation of the 'critical mass' necessary to bring about sustained change. This program is essentially a deferred, long overdue investment, and would represent a 'catching up' process to address the backlog in training. The government realizes that this 'big bang' approach is necessary for changing the exisiting public sector systems and quality of service. The government intends to pursue the above strategy as follows: 0 Focusing on predominantly overseas training, in the short-medium term, and developing in-country training capacity, in the medium to long run. The rationale for overseas training is that at present, domestic public and most private sector education and training institutions do not meet the international standards for advanced degrees, and are not geared towards filling the needed skills gap, such as infusion of new ideas, cutting edge knowledge and cross country experiences. The government recognizes that, generally those who have received quality training and education are

- 13- more supportive of reforms. The proposed overseas training is expected to gradually reduce, in 5-7 years, as the public universities and in-service training institutions are strengthened (as explained below). This training program differs from past initiatives which were largely ad-hoc in nature, and so thinly spread out that the idea of developing the critical mass of change champions never materialized. The present program is expected to yield the desired results since it is part of the overall civil service reform program and it focuses on creating the "critical mass" to engender change and sustain quality. 0 Ensuring merit-based selection in the overseas training program. As this will be a large public sector investment, the government's criteria for selection is very rigorous and only those officers will be eligible who are: 0 in the top quantile; below 37 years ofage and occupy middle level policy and managerial positions; 0 able to obtain minimum scores on GRE/GMAT screening (prior to final selection); once selected by meeting the above requirements, are able to get admission in one of the top 20, pre-selected, international universities, from USA, UK, Australia, Europe and Singapore. (Admittance to the pre-selected top universities, by itself, would act as a high quality filter); and willing to serve the govemment for at least five years upon return (through the signing of a bond). 0 Strengthening the 'bond' system to ensure return and retention of trained officers. The government's existing system, whereby public officials going on overseas degree training are bound to serve for at least a minimum of 5 years upon their return or pay the full cost ofthe training, is quite effective in ensuring that 'leakage' of trained officers is minimum. Recent examples of overseas training undertaken by some of the key institutions (CBR, Auditor General, State Bank) indicate that most of these officers (almost 90 %) have retumed and are serving in their respective departments. Nevertheless, the government is aiming to strengthen its "bond" system, over the short to medium term, by addressing loopholes in its implementation, such as deletion of discretionary clauses and waivers, increasing the minimum serving period, and enhancing penalties for non-compliance. Over the long run, as the broader civil service reforms take hold, providing a more competitive public sector compensation and environment, the bond system could be made flexible to allow well trained, productive civil servants, the flexibility to move out (and also come back).

(iii)Strengthening domestic education and training institutions in the medium to long run for producing professionally trained and technically competent public officials. This is envisaged to be achieved through: 0 Reforms of in-service and pre-service training capacity by restructuring of existing training institutions, improving faculty and curricula, enhancing infrastructure and IT connectivity, as well as twinning with international institutions. This program is already underway in all of the civil service training institutions, with an aim to establish the National School of Public Policy (NSPP) in the medium to long term; and 0 Higher education reforms to fix the public sector education system-- the govemment has already embarked upon this program. The Higher Education Commission (HEC) has been set up as an autonomous body, through an ordinance, with the charter to facilitate development of Pakistani universities to be world class centers of education, research and development. The government has stimulated a national reform dialogue in higher education, combining representative views of the public sector, private sector, civil society and academia in extensive consultations over several years. The reforms proposed for fixing the higher education system include: strengthening the governance and management capacity of individual public institutions so that these institutions become more autonomous, transparent and accountable; and improving quality through enhancing faculty capacity, institutional capacity and encouraging a shift to performance based funding and

-14- tenure.

The sequencing of the above strategy is critical. The broader civil service reforms will take time, so will the reforms of higher education and in-country training. Until that time, a 'big push' is required to address the backlog, as well as building the critical mass of well educated and reform-minded public officials who are critically placed in the civil service to make a significant change in the existing system.

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): A: Proiect Desim In support ofthe government's CSR strategy, the focus of the proposed capacity building project will be on the following three strategic areas : (i)Broad-based professional development; (ii)Strengthening capacity of key ministries/agencies that are in the vanguard of policy reforms and implementation; (iii)Strengthening the regulatory agencies.

Specifically, the project will have the following three components :

(i)Professional Development This component will address the capacity and technical skills gap in the civil service, and will largely focus on the professional development of federal and provincial civil service and ex-cadre officers. It will be undertaken through the following: (al) Professional training program (degree and non-degree) for middle to senior level officers: Under this sub-component, the Establishment Division will manage and implement two training programs for civil servants: an Executive Development Program (EDP) for senior (grade 20 and 21) civil servants to create a community of reform champions in the upper echelons of the civil service; e a Professional Development Program (PDev) for younger (grade 17- 19) civil servants to significantly enhance their technical capabilities as policy analysts and implementors. This program will be open to all federal, provincial, and ex-cadre officers. Total cost of the above two programs is around US$ 17 million. Criteria for selection of officers under the two programs is outlined in Annex 2.

(a2) Professional training program (degree and non-degree)for middle to senior level staff of regulatory agencies. Under this component, the regulators will manage professional training programs for their officers. Staff will be sent on two types of training programs: 0 Degree-level programs 0 Short-term trainings Criteria and process of selection of officers, courses and programs will be in accordance with the EIPs of the respective regulatory agencies.

(b) Strengthening in-country training capacity through support of training institutions (CSA, NIPAs, PASC/ NSPP): This sub-component comprises up-gradation of civil service training institutions including: building faculty capacity; improvinglrevising curricula; enhancing infrastructure and IT connectivity; twinning with international institutions; and support for establishment ofa National School of Public Policy (NSPP). Total cost is around US$ 5 million.

-15- (c) Improving the civil service recruitment process through support of the Federal Public Service Commission (FPSC): Some key areas of support would include strengthening the entry level examination process including improving syllabi and system of competitive examination, skills enhancement, and upgradation of FPSC to an automated computerized environment. Total cost is around US$ 1 million. ii) Strengthening Economic Policy and Management: The second project component will focus on capacity building of key federal and provincial ministries and divisions that are in the vanguard of design and implementation of GOP’s reform agenda. This will include Finance, Central Board ofRevenue, Establishment Division, Commerce, etc.

(a) Ministry of Finance (MoF): The Project aims at building the capacity of various wings and agencies of the Ministry of Finance dealing with policy formulation, budget, expenditure, financial and cash management. This is expected to help these wings and agencies of MoF to better discharge their functions, which will result in better formulation, coordination, implementation and evaluation of economic and fiscal policies of the Government. The Project will support an integrated medium-term program comprising: professional training of staff (through degree - to be covered under PDev - and non-degree programs, short-term specialized training in areas such as pension reforms, debt management, public expenditure management, etc.); providing short- and medium-term consultants not only for undertaking specialized analytical work and policy reform programs, but also to provide hands-on training to MoF staff in these critical areas; and to finance infrastructure and IT facilities. Individual wings and agencies of the MoF have prepared an integrated proposal, totaling around US$4 million. These include: 0 Debt Management: Strengthening the newly established Debt Policy Coordination Office (DPCO) to monitor the country’s debt situation and develop debt strategy in consultation with other agencies in order to bring it to a sustainable path and contribute to sustaining fiscal and financial discipline. Corporate Finance (CF), Banking and Investment Wings: Strengthening their monitoring capacity to evaluate the performance and progress of the key public sector enterprises; privatization process, especially of the state owned commercial banks; banking sector and capital markets; and facilitate private sector participation in key areas. Effective management of financial aspects of state owned enterprises is expected to lead to financial discipline, reduction in subsidy and improved utilization of resources. External Finance Wing: Strengthening capacity in key areas of extemal finance, external debt management, balance ofpayment, trade, and monetary policy. Policy Wing: Strengthening capacity in policy-related areas related to fiscal analysis; building expertise in development of a macroeconomic framework and in the formulation of a human development strategy, undertake Public Expenditure Reviews, formulate, update and monitor Poverty Reduction Strategy including Poverty Reduction Support Credit, assist the MoF in policy formulation and analysis in key areas, and overall monitoring ofbroad-based structural reforms.

(b) Central Board of Revenue: This sub-component is part of CBR’s overall tax administration reform strategy, to be supported under a larger Tax Administration Reform Project, that is currently under preparation with Bank assistance through a Project Preparation Facility (PPF). In addition to preparation of a comprehensive reform plan, CBR has also undertaken a few reform initiatives under the PPF including, establishment of LargeMedium Tax Payers Units, sales tax

-16- STARR project, a customs pilot project and others. The PPF funds are already committed, and the larger program support may not be effective before the next 6-8 months. As it is critical to continue with the short-term initiatives without delay so that the reform program does not lose its gained momentum, it has been agreed to include some immediate reform initiatives under this project, and bridge the financing gap while the larger program is being prepared. The initiatives proposed to be supported under this sub-component include: extension of the Large Taxpayer Unit (LTU) and the Medium Taxpayer Unit (MTU), customs reform initiative, a central database for the automated sales tax refund program, support for implementation of the universal self assessment scheme, human resource management and associated training and staff development, and setting up dispute resolution centers. Total cost ofUS$6 million is estimated.

(c) Ministry of Commerce: to strengthen capacity of the ministry to play an increased role in trade promotion, coordination, facilitation and policy analysis in the emerging global environment. The initiatives proposed include specialized training on trade and WTO related areas, analytical and technical studies, and infrastructure and IT support. Total cost is around US$2 million.

(d) Establishment Division: to strengthen the capacity to manage the broader CSR program, a Civil Service Reform Unit (CSRU) will be established. Its charter will be to oversee GOP’s comprehensive civil service reform program. Specifically, it will support the following areas of civil service reform: Devolution: completion of devolution, with responsibilities and staff assignments moved from the federal to the provincial level, and from the provincial to the district levels, with less cross management of staff between levels of government; organizing seminars/workshops of provincial and national level stakeholders to develop consensus on additional reforms regarding restructuring, compensation issues and investment in professional development; maintaining an active dialogue with counterparts. Recruitment and Promotion Reforms: modernizing the cadre system and reforming the system of occupational groups so that internal mobility within the public sector is increased, and lateral entry from the private sector for skilled staff is encouraged, including the creation of a national executive service or equivalent broad-based staff grouping at senior levels and strengthening of merit protection. Pay and Pension Reforms: providing support for deepening the Pay and Pension reforms (including monetization of benefits) which provide for more attractive and more transparent packages of total compensation at senior levels, within fiscal constraints. Professional Development: improving the quality of training and professional development available to serving staff. This will include managing the Executive Development program (EDP) and Professional Development program (PDev). Monitoring and Evaluation: monitoring implementation of already initiated governance, structural and policy reforms; maintaining updated databases of civil service employment totals at all levels of government; developing appropriate human resource management information systems so that the federal, provincial and district governments are able to plan their human resource management on the basis of actual staff and identified skills, and not just sanctioned positions; carrying out evaluation of reforms; generating periodic reports for submission to the Secretary, Establishment Division and the Cabinet Committee on Civil Services Reforms; and canyng out tracer studies for the returnees of the EDP and PDev Programs Coordination: serving as Secretariat work for the Cabinet Committee on Civil Service Reform; maintaining a close liaison with CSR units established in other MinistriesDivisions; making concrete proposals for aligning donor initiatives -

- 17- particularly between the ADB, WB and DfID. A total ofUS$2 million would be allocated to the CSRU.

(e) Planning & Development Division (P&DD): Strengthening P&DD’s capacity in areas of economic planning. This involves capacity building to plan, design, appraise, implement, monitor and evaluate development plans, programs and projects. The allocated sum will also be used to strengthen project management practices besides preparing overall sectoral policies and planning framework over the medium and long term. Total cost of US$ 5.4 million is estimated.

(f) Economic Affairs Division (EAD): to strengthen capacity in coordination and monitoring of relationship with donors and donor funded projects. This entails development of technical and managerial capacity of the Division in the management of loan portfolios, streamlining of its procedures and operations and effective monitoring of the donor funded projects.Tota1 estimated cost is US$ 1 million.

(g) Public Procurement Regulatory Authority (PPRA): strengthening the PPRA to monitor and regulate public procurement in the country through developing a modem transparent and cost effective public procurement system and putting in place an effective monitoring system. Total estimated cost is US$ 1 million

Note: Entities (h) to 0) mentioned below are in the process ofpreparing their EIPs; funds will be allocated once they arefully developed and reviewed;

(h) Ministry of Water and Power: to support the initial institutional reform and capacity building needs in the power sector.

(i)Statistics (FBS): to enhance the skills and knowledge of technical staff to effectively manage information collection and accurate reporting of key country statistics, conducting various surveys including Pakistan Integrated Household Survey, Household Income and Expenditure Survey, their comprehensive analysis including poverty assessment methodology as well as effective and accurate collection ofinformation for national accounts.

(‘j)Provincial Finance and Planning: to strengthen the provincial government’s capacity in the areas of provincial reform formulation, implementation, evaluation and monitoring. The funds will also be used to improve budget, expenditure management, poverty expenditure monitoring and develop medium term budgetary framework planning, project design, and implementation at the Provincial as well as district levels and civil service reforms.

iii) Strengthening of Regulatory Function The third component will support capacity-building ofthe Regulatory Agencies (National Electric & Power Regulatory Authority (NEPRA), Oil & Gas Development Authority (OGRA) and Pakistan Telecommunication Authority (PTA). Specifically this component will support the following agencies:

(a) NEPRA: to strengthen NEPRA’s capacity to regulate the natural monopoly aspects of the electric power sector, develop a competitive structure for electric power generation and supply and ensure the reliability and adequate supply of electric power. Skill development and development of regulatory institutions are to be key areas of focus. Total cost is US$ 2 million.

(b) OGRA: to strengthen OGRA’s capacity to improve its ability to foster competition, encourage

-18- private investment and ownership in the sector and deal with challenges arising from the proposed restructuring of the gas sector. Total cost estimated around US$ 2 million.

(c) PTA: To strengthen capacity to regulate the telecommunications sector and implement the telecom deregulation policy which will open all market segments within the industry to private investors. Total cost estimated US$ 1.6 million.

The total cost of the project is estimated to be US$ 61 million. Of this, about 61% is for training; around 22% for consultancies (16% for institutional development and 6% for specific studies predominantly for the regulatory agencies and MoC) and 15% is for procurement of goods and services.

A: Professional Development: 37.7 21.06 38.3 (a) EDP/PDev: US$ 17 m (b) NSPP: US$5 m (c) FPSC: US$ 1 m B: Economic policy & management 2 1.40 35.1 18.76 34.1 (a) Finance: US$4 m (b) CBR: US$6 m (c) Commerce: US$2 m (d) Estab./CSRU: US$2 m (e)P&DD: US$ 5.4 m (f) EAD: US$ lm (g) PPRA: US$ lm C: Regulatory agencies 5.60 9.2 5.28 9.6 (a) NEPRA: US$2 m (b) OGRA: US$2 m (c) PTA: US$ 1.6 m D: Unallocated 11.00 18.0 9.90 18.0 (a) Ministry of Water & Power (MoW&P) (b) Statistics (FBS); (c) Provincial Finance/Planning; Others (unidentified) Total Project Costs 61.00 100.0 55.00 100.0 Total Financing Required 61.00 100.0 55.00 100.0

Retroactive financing to the extent of US$ 5 million equivalent has been included for various project preparation and start-up expenditures incurred after August 31,2003.

- 19- Table: Project Cost by Category

Category Total Cost- US$ Million YOof Total A: Training 37.5 61% B: Consultancy 13.5 22% i.Institutional Development 9.5 16% ii.Studies 4 6% C: GoodsNlTorks 9 15% D. Other-Miscellaneous 1 2% TOTAL PROJECT COST 61 100%

B: Proiect Readiness:

Of the total proposed US$ 61 million, nearly 80% is clearly defined, with sub-components filly developed and costed and strong leadership in place for implementation. These components have already been appraised. About 10% are preliminary proposals from a few agencies (MoW&P, Statistics) that are under different stages of preparation and are expected to be ready within the next 8-12 months. The remaining 10% is ‘un-allocated’ and will be available, on a demand-driven basis, to new agency proposals which, during the 5 years of project implementation, will meet the criteria for inclusion. The status ofreadiness of the various components is presented below:

(a) Professional development: The key components of this program; Le. the Professional Development and Executive Development Programs (PDev & EDP), are clearly defined and are at a stage where the government can begin the process of selection of officers for degree and non-degree programs. Key actions already taken include (i)selection criteria for candidates has been established; (ii)broad areas for degree programs identified; (iii)a preliminary list of universities has been drawn; and (iv) estimated program costs have been worked out. In addition, steps have been initiated (such as hiring of international faculty) to strengthen in-country civil service training institutions’ capacity (NIPAsPASC), as well as improving the civil service recruitment process and system (FPSC). The estimated cost of this program is US$ 23 million. Details ofindividual proposals are attached in Annex 2.

(b) Regulatory agencies: This component is also filly developed. The capacity building needs for the first phase of the regulatory agencies’ program (NEPWOGWPTA) have been identified, and the scope ofwork/TORs for analytical workhechnical studies have been developed. Specifically: 0 NEPRA has prepared clear proposals with respect to the various elements of the requested package. These are consistent and appear to address the underlying capacity issues that the regulatory agency is facing. A procurement plan has been prepared to ensure prompt delivery of the required services. This coupled with the internal procurement resources of the agency should ensure a rapid utilization ofthe project funds. Total estimated cost is US$ 2 million. 0 OGRA’s proposal comprises of activities related to analytical work, and training of its members and professional staff. Detailed procurement plans and TORS have been developed for hiring individual consultants and for undertaking the key studies. Total estimated cost is US$ 2 million. 0 Assistance to PTA is estimated at about $1.6 million consisting of the following: (a) educatiodtraining for capacity building, and (b) consultantladvisory services. Of the total,

- 20 - about a third of this program, comprising short term training and the consultancies, will be ready for implementation during the first year. Total estimated cost of this component is US$ 5.6 million.

(c) Strengthening economic policy & management: Most of the key government ministrieslagencies that are part ofthis component have clearly defined capacity building programs. Specifically: The Central Board of Revenue (CBR) has a well developed program with detailed costs worked out, along with timelines for procurement of goodslworks and consultancies prepared. A contract for design and refurbishment ofthe LTU, MTU, CARE pilot, Taxpayer Facilitation Centers and Dispute Resolution Center has already been awarded under Bank procurement procedures and will be financed retroactively. For the remaining contracts its is expected that shortlisting of firms and RFP issuance will be completed by negotiation; Proposals from Ministry of Finance (Debt Management, Corporate Finance, Policy Wing) are also well developed and have been appraised. The costs have been brought down, from an initial US $ 8 million to US $ 4 million, in line with the implementation capacity of the MoF. TORs for key consultancies and procurement plans have been completed; Proposal of Establishment Division for setting up of the CSRU is developed, along with its TORS and staffing needs. The head of the CSRU has been appointed. Work has been initiated including drafting of TORs, etc., for some ofthe technical studies to be undertaken in the first year. This component is also ready to roll out as soon as project becomes effective Planning & Development Division's (P&DD) capacity building proposal comprises: strengthening of its planning, monitoring and evaluation capacity; improving macro modeling and building up research facilities; skills development; strengthening of the Pakistan Planning and Management Institute (PPMI); etc. The proposal is well developed and consistent with overall project objectives with strong leadership in place for implementation. The Commission has a fairly well developed procurement plan for the entire duration of the project and have drafted TORs for main consultancies Ministry of Commerce (MOC) is committed to strengthen and enhance its capacity to play an increased role in the emerging global environment. The initiatives proposed in this regards are a first step toward the required reorganization and restructuring of MOC. The MOC has now submitted a revised capacity building proposal- as agreed during appraisal- which is well developed and consistent with project objectives. Since the TORs for the consultancies would be taken up as part of the institutional restructuring exercise, the targetted timeframe for the consultancies would be in the second year ofthe project; Economic Affairs Division (EAD) is seeking assistance to enhance its capacity to coordinate and negotiate government's loan portfolio with donors and liason with government and donor agencies for smooth implementation. The proposal comprises specialized training and managerial skills enhancement in the above noted areas, and improvements in database management and information systems. The proposal has been revised in line with EAD's implementation capacity. Therefore, EAD has been included in the 'allocated' category; Public Procurement Regulatory Authority's (PPRA) proposal comprises specialized training and skills enhancement in procurement related areas and improvements in its management informations systems. PPRA has already drafted public procurement rules - - a preliminary review has been undertaken, and the proposed rules found satisfactory. Given that the agency is well advanced in finalizing the rules, it has been agreed to include PPRA under the 'allocated' category ofthe project. Total estimated cost ofthis component is US$ 2 1.4 million

-21 - 2. Key policy and institutional reforms supported by the project: Public Sector's capacity enhancement through high quality training programs (domestic and foreign) coupled with specialized consultant support for technicaYanalytica1 work would result in significant improvement in the overall quality of policy formulation, public service delivery, and human resource management. Analytical work in support of broader Civil Service Reforms under the aegis of the Civil Service Reform Unit (CSRU) will enable the government to accelerate implementation in areas such as pay & pension reforms, promotion policies, recruitment policies, etc. A major institutional outcome sought is the development and enhancement of domestic public sector training capacity through upgradation of the civil service training institutions (NIPAs/PASCletc.) and eventually leading towards establishment of the National School of Public Policy (NSPP); the NSPP, in the medium to longer run, will serve as a premier public sector training institution for the civil servants of the country. Regulatory agencies' capacity will be enhanced which will result in a redefined role of the government as a facilitator, and will improve transparency in regulatory policy decisions, leading to greater investor confidence and contributing towards accelerated reforms and privatization. Finally, key economic ministries, who are in the forefront of design and implementation of reforms, will be strengthened, thus ensuring that on-going reforms are effectively implemented and future reforms are adequately designed.

3. Benefits and target population: The target group comprises: (a) Grade 17 to 2 1 civil service officers (federal; provincial) plus professional level ex-cadre officers; (b) Key federal ministries including Finance, Planning, CBR, Commerce, Establishment, and some key provincial economic ministries etc. (c) Key regulatory agencies, including NEPRA, OGRA and PTA.

Benefits:

The project is expected to yield significant benefits to the public sector, in the medium to long term. Broad-based professional development would result in building a 'critical mass' of reform champions and significant improvement of the technical skills at all levels of the government. With over 500 persons trained, each key ministrylagency would have a critical number of trained personnel which will engender a demand for quality within service. This, coupled with enhancement of domestic recruitment and training institutions, would lead to raising the overall quality of policy formulation, public service delivery, and human resource management. Further, capacity building of key economic ministries and departments will support more effective and timely implementation of GOP's reform program, along with more innovative design of future reforms. Capacity building of regulatory institutions would contribute to improved tariff-decisions, and balancing ofthe interests of different stake-holders.

The overall benefits and impact of the project are expected to continue beyond the project. The strengthening of domestic public sector training institutions (including establishment of NSPP) will substantiallly improve the quality of public sector training and education over the medium to long run. Similarly, strengthening of key institutions, such as the FPSC/Establishment Division will enhance the civil service entry/recruitment, and placement processes. Most importantly, the work under the CSRU will facilitate implementation of the overall civil service reforms. Over the long haul, the aggregate benefits of this project are expected to be substantial, provided broad-based civil service reforms and professional skills development continues.

- 22 - 4. Institutional and implementation arrangements: In order to streamline project implementation, the following implementation arrangements are being envisaged by the Government.

A National Steering and Coordination Committee (NSCC) comprising Secretaries of Finance, Establishment, Economic Affairs, and Planning Division plus one independent academic (or a key civil society representative), will oversee implementation of the project and review new proposals for inclusion in the program. Specifically, the NSCC will perform the following functions: 0 Overall monitoring of the project, including a comprehensive mid-term review of the entire program; 0 Reviewinghetting of new capacity building proposals, from the ‘un-allocated’ portion ofthe credit; and 0 Reviewinghetting of re-allocation among sub-projects of the un-utilized funds.

The project will be implemented by the Finance Division (FD). A small facilitation and coordination unit has been established in the FD, the Project Coordination Unit (PCU), headed by a Project Coordinator (PC), which will include two professionals (one Procurement Specialist & one Finance Manager) and two accounting assistants (accounts officer and assistant accounts officer). The PCU would report to the Additional Secretary, Ministry of Finance (Policy Wing) and would be responsible for: 0 facilitating the participating agencies with procurement and financial management processing issues; 0 assisting agencies with preparation of new proposals, in line with the overall project development objectives; 0 acting as a secretariat for the National Steering h Coordination Committee (NSCC); 0 preparing quarterly project progress reports for the NSCC and the Bank.

As for the mechanism for flow of funds, Finance will maintain a special account. There shall be 5 other implementing entities (Establishment Division, Planning & Development Division (P&DD) NEPRA, OGRA & PTA) which will each have their own Special Account and accounting staff to manage the accounting and reporting processes. The special account to be maintained by the PCU at the FD shall cater for the funding needs of the other agencieslministries which do not have special accounts (such as EAD, Commerce, CBR, etc.).

Each agency would be responsible for its own procurement (such as goods, consultants, works). The procurement specialists in the PCU would assist the individual agencies under the project in carrying out procurement (such as preparing bidding documents contract award), but the financial management would be carried out by the individual implementinghub-implementing agencies managing the special accounts. Each agency operating as a beneficiary in an implementinglsub-implementing entity will assign a focal person for procurement and financial management. Contracts would be finalized and signed by the individual agencies.

Three assignment accounts would be opened at the Finance, Planning, and Establishment Divisions for payment of counterpart funding. Regulators would use their existing accounts for payment of counterpart funds. The detailed financial management assessment is provided in Annex 6B.

Goods and works under the Project will be procured in accordance with the Bank’s Procurement Guidelines, and Consultants’ services in accordance with the Consultants’ Guidelines. The procurement capacity assessment and applicable procurement procedures are provided in Annex 6A.

- 23 - An umbrella PC-1 has been prepared (by the PCU) which includes individual components and an un-allocated amount. Individual components will be managed and executed entirely by respective ministries and agencies.

Approval Process for New Proposals The criteria for allowing new agency proposals would include: (i)full alignment to project objectives and with the agency's overall strategic visiodplan; (ii)an entity improvement plan (EIP) along with indicators for monitoring progress of the institutional strengthening program; (iii)clearly defined proposals with timelines of activities and fully costed components; and (v) agencies having their first year's program ready for implementation.

Interested agencieslministries would prepare their capacity building proposals along with an Entity Improvement Plan (EIP) in consultation with the PCU/PC. These EIPs would be prepared in line with agreed criteria (as noted above) and will be shared with the Bank for review before submission to the NSCC through their respective SecretariedAgency heads. The proposals would then be submitted to the NSCC for consideration and approval. Once approved, the individual PC-1s would then be submitted to the Planning Commission for CDWP approval. Following the CDWP approval, PCUPC will allocate resources from the un-allocated amount to the new participating agency.

D. Project Rationale 1. Project alternatives considered and reasons for rejection: The proposed project is aimed at broad-based capacity building and the alternatives considered are essentially about options and balance. Specifically:

(i)Consultancy vs. Training: In the past, hundreds of millions of dollors have been spent on consultancy support in Pakistan without any real benefits to society. Traditionally capacity building projects are heavily dependent on external consultants who fly-in for short periods, provide immediate technical and analytical support, and leave without establishing any in-house or residual capacity in the system. Further, as the capacity within the government institutions is weak, they are unable to utilize the consultants effectively. As a result there has been a huge backlash, within government and civil society, against reliance on consultants. This project addresses the above issues: by focusing on developing local capacity through training and professional development -- around 60-70% of project funds will be channelled towards this component; and providing very limited and focused consultant support, mainly for highly technical and specialized analytical work to be undertaken by key agencies, such as the Regulatory agencies and Ministries of Finance, Commerce, Information Technology etc.

(ii)Domestic vs. Foreign Training: The option of predominantly using domestic modes of training for professional development was considered and rejected due to the fact that, at present, the quality and capacity of domestic training institutions is weak (as highlighted earlier). The aim is to address and bridge the skills gap that currently exists in the middle-level civil servants who occupy bulk of policy levevmanagerial positions. This could only be achieved through exposing them to world class/ top notch institutions so as to inculcate new ideas, cutting edge knowledge, and cross country experiences. These officers are expected to form the 'critical mass' within the civil service and are expected to lead the reforms. The government recognizes that, generally those who have been trained overseas are more supportive of reforms, and perform better in terms ofpolicy analysis and implementation. In the Bank's own work across

- 24 - different agencies, this linkage between advanced professional training and quality of civil servants is very evident. Not withstanding the above, the project will, in parallel, focus on strengthening domestic training institutions, with the aim of bringing them in line with international standards. Thus, foreign training is expected to reduce over time (over 5-7 years), as domestic training institutions are strengthened.

(iii)Scope of Project and Target Population: There was a wide discussion about the scope of this project and the target population i.e. (i)who should be included: whether all or selected agencies; (ii)distribution between federal and provincial civil servants; inclusion or exclusion of provincial ministries etc. Also, under consideration was complexity in project design. Balancing the various factors, the project is optimally targetted at those agencies and officers whose capacity building will produce a positive impact to the existing system. These include: civil servants at middle-senior level (federal/provincial) occupying bulk of key managerial and policy level positions (about 500-600); key economic management and regulatory agencies (8-10); and key domestic public sector training institutions (3-5). All project activities compliment each other i.e. professional training of middle-senior level civil servants, who are in the fore-front of economic management and implementation, will create a 'critical mass' in the system which will, in tum, lead to improved design and implementation of future policies. As the domestic training capacity is enhanced, the size ofthis 'critical mass' will fiirther increase. Over the long haul, there will be a large pool of professionally competent, well- trained public officials, thus improving the overall quality of public sector delivery.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). WORLD BANK Closed Projects Indonesia: Professional Human Resource Development Project: The most relevant projects financed by the Bank in the area of professional development are the two projects undertaken in Indonesia during the 1990s, namely the Professional Human Resource Development Project (PHRDP-I & PHRDP-11), funded through IBRD Loans. Total Bank commitment under PHRD-I was US$ 116 million; and PHRD-I1 was US$ 70 million. The objectives of PHRDP-I were to improve human resource policy making; and quality of professional, technical and managerial staff. One of the major components of this project was professional and managerial staff development, which included overseas training and fellowship programs. More than 75% of project costs went into overseas training (largely in degree programs); over 2,500 staff were sent abroad for degree and non-degree training, largely to US universities. These programs effectively served as a source of high level professional and mangerial manpower. The project was immediately succeeded by PHRDP-11. Evaluation of this program indicated that there was almost no "brain drain" and the success rate of fellowship participants was very high; the training made positive impacts on each ministry in terms of the returnees' contribution towards implementation of the country's development strategy. Pakistan: Technical Assistance Credit-I & 11 & 111: The objectives of the technical assistance credits were primarily to support Government's efforts on policy reforms related to macro-economy, and in industry, energy, agriculture, transport and urban sectors. These projects were designed to finance specialized studies in the above areas, mostly through consultant support. There was some limited training provided under the TA-111, whereby few of the Auditor General's Department staff were sent abroad for training. Support under this component further led to a bigger project for the Auditor General (described below). Although the TAs were assessed as satisfactory in meeting the desired project objectives ofpolicy reforms, they were largely consultant focused, and did not have a lasting impact on in-house capacity. In particular, the TA-I11 while most successful in achieving its macroeconomic and sectoral objectives, only achieved partial sucsess

- 25 - in enhancing policy formulation and implementation capacity of the government. The latter was attributed, to some extent, to cumbersone and inflexible rules and procedures governing the implementation of the TA-111.

Pakistan: Telecommunications Regulation and Privatisation Support Project: The objectives ofthe Project was to assist the government in (a) implementing the program of reforms and efficient development ofthe Pakistan telecommunication sector by implementing a suitable regulatory framework for both private and public telecommunication operators and the efficient allocation and use of the radio spectrum; (b) assist in establishing Pakistan Telecommunications Authority (PTA)and Frquency Allocation Board (FAB); (c) Assisting PTA in building capacity for and in promoting competition in the provision of telecommunications services and increasing private sector participation; (d) Supporting FAJ3 in efficient management and allocation of radio frequency spectrum for public and private use; (e) Supporting PTCL privatization process. The project has been implemented satisfactorily, achieving most of its objectives. It closed on June 30,2003. An important outcome is adoption of a positive Telecommunications Liberalisation Policy. PTA is responsible for implementing this policy and has requested the Bank's further asistance under the proposed Public Sector Capacity Building Project.

Ongoing Projects in Pakistan The on-going capacity building programs undertaken by some ofthe key economic management agencies, such as the Central Board of Revenue, AudiUAccounting Departments and the State Bank of Pakistan, have so far been successful in yielding immediate benefits to these organizations (most of these reforms are being supported under Bank projects--PIFRA, Banking Sector TA) . The Project for Improvement in Financial Reporting and Auditing (PIFRA) has been successful in building capacity of the staff of the Auditor General and Controller General of Accounts, to better align their practices with international accounting and auditing standards. Under a component of this project, about sixty staff have undertaken professional training abroad and within the country (Masters and above) in the areas of Finance and Accounting. Over 90% of these officers have returned and are serving in their respective departments. Of these, about 15% are women. A second phase of this project is under preparation which aims to deepen and broaden the financial management reforms, and extend the capacity building initiatives by upgrading government financial processes and systems with rigorous internal controls and fully trained and qualified staff. The Central Board of Revenue (CBR), as part ofits restructuring and reforms process, has sent [over 70 officers abroad to be confirmed] during the last five years for specialized training. Of these, 90% have returned and are being utilized in the CBR. The Bank is currently working with CBR to prepare a US$ 100-150 million Tax Administration Reform project. This project will include, among other things, major institutional and capacity building component; some of these initiatives are already being financed under the proposed "Public Sector Capacity Building Project". The State Bank of Pakistan is also undergoing major systems and skills improvement of its staff. The Bank has extended its support through (i)Financial Sector Deepening -TA project, which closed in FYO1; and (ii)the on-going Banking Sector Technical Assistance project.

ADB and DFID

Closed Projects

Pakistan: Fiscal Decentralization Technical Assistance: This ADB-DFID co-financed TA comprised of: three main components: revenue management, expenditure management and training in Pakistan. The

- 26 - output ofthe TA provided critical inputs for the Decentralization Support Program (DSP) described below.

Pakistan: Technical Assistance for Support to the Implementation of Decentralization: The primary objective of this ADB TA was to provide interim support to the Government’s implementation of decentralization reforms. Its main components included assisting implementation agencies and supporting the monitoring and evaluation system for decentralization.

On Going Projects

Pakistan: Decentralization Support Program: The broad program objective is improved local government representation, accountability, and efficiency resulting in improved service delivery. This objective will be achieved through reforms in three main areas; a) policies, laws and regulation; b) institutional strengthening and capacity building and; c) fiscal restructuring and budgetary measures. Key federal, provincial and local government institutions come under the purview of the project.

Pakistan: Local Government Performance Enhancement Technical Assistance: This TA loan is aimed at assisting federal, provincial and local implementing agencies to build capacities in core planning, finance management, procurement and audit functions necessary for efficient and equitable service delivery.

- 27 - CANADIAN INTERNATIONAL DEVELOPMENT AGENCY (CIDA)

Ongoing Projects Pakistan: Democratic Governance Program: This program aims to support processes leading to the devolution of power, the decentralization of administration and the participation of citizens in local govemance. Funds are being allocated to activities in cooperation with organizations such as DFID, NORAD etc. Expected results include improved local govemance policies and administration and more effective local democratic institutions.

Latest Si iervision Sector Issue Project (PSR) atings (Bank-finance1 projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Accounts and Auditing PIFRA-I (CreditCR292 1-PAK) S S Development Planning, Energy, Technical Assistance Project Agriculture and Industry (CreditCR1256-PAK) Development Planning, Energy, 2nd Technical Assistance Agriculture and Industry Project (CreditCR 1480-PAK) Development Planning, Energy, 3rd Technical Assistance Agriculture and Industry Project (CreditCR 175 5-PAK) Banking Financial Sector Deepening and S S Intermediation (LoanLN3808-PAK) Banking Banking Sector Technical S S Assistance (CreditCR3688-PAK) Public Sector Capacity Building Professional Human Resource S S Development Project (LoanLN3 134-IND) Public Sector Capacity Building Second Professional Human S S Resource Development Project (LoanLN3 825-IND) Telecom Telecom Regulation and S S Privatisation (Loan LN39500-PAK) Other development agencies I P/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), k (Highly Unsatis tctory)

3. Lessons learned and reflected in the project design: The key lessons from similar projects in Pakistan, Indonesia, Eritrea and from experience world-wide with public sector institutional reforms include: i) The rules and procedures goveming the implementation of TA operations should be simple and streamlined to reduce transaction cost and speedy implementation; ii) For effective management of any TA project, Project Director should have greater authority to decide on most matters relating to the award of contracts for studies, disbursements and other administrative matters; iii)A key recommendation of the ICR ofthe PK TA-111, regarding design of future TAs underlined that

- 28 - focus should be on economic reform issues, in particular building capacity of key economic agencies like MOF, EAD and Planning Division; iv) Excessive complexity in terms of institutional participation should be avoided. In addition, it is important that all complementary institutions are directly or indirectly included as participants and beneficiaries. Without this, sustainable gains in institutional capabilities are not achieved; v) Sustainable capacity building requires that broader civil service reform issues (incentive, compensation, etc.) be addressed and that consensus building among stakeholders should be undetaken. This is important in order to sustain the benefits to the organizational capacity through investments in training and education; vi) Consultants for short term analytical support should be minimized, and staff trainindeducation maximized if sustainable institutional capacity is the desired goal.

While designing the project, the team tried to incorporate the above lessons. Focus of the project is only on key government agencies including complementary institutions (NSPP; Regulators). Analytical work in support of overall civil service reforms is being supported through the establishment of the Civil Service Reform unit. The size of the direct target population is sufficiently large to form a critical mass so that it can perform a catalytic role and leverage benefits to the indirect beneficiaries of this project. The focus of the proposed project is on sustainability through maximization of investment in staff trainindeducation, using a combination of foreign (declining importance over the project disbursement period) and domestic (increasing role over project life) educational and training institutions.

4. Indications of borrower commitment and ownership: The interest elicited in the proposed capacity building facility so far by the government and the respective ministries, divisions and agencies represents substantial commitment. The proposed project builds on nearly one and a half years of dialogue between the government and the Bank. The components that will be supported under the project are central to the success of the implementation of the broad Economic Policy Reforms that the GOP has already initiated. The Finance Minister is leading this process. There are also strong champions at the political and agency level, particularly from the heads of the relevant participating agencies (Establishment, MoF, CBR, Planning). The project has been endorsed by the Finance Minister. Each participating agency has submitted an Entity Improvement Plan (EIP) approved by the agency head. The umbrella PC-1 for the entire project has been cleared by CDWP on 24 January 2004.

5. Value added of Bank support in this project: By strengthening public sector capacity and enhancing quality of civil service, the Bank will significantly contribute towards successful and timely implementation of GOP’s on-going structural reform program at the federal and provincial levels. The Bank’s experience with institutional reforms and global experience in public sector management places it in an advantageous position to assist GOP in achieving the intended capacity building outcomes. There is a critical need for well trained and qualified professional, technical and management officers in the civil service to successfully implement the Government’s program of poverty reduction, economic growth and human development.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): 0 Cost benefit NPV=US$ million; ERR = % (see Annex 4) 0 Cost effectiveness 0 Other (specify) Not Applicable. There is no economic evaluation methodology for technical assistance projects. This is

- 29 - primarily a capacity building and training program. However, further strengthening of government's capacity to support the implementation ofits on-going economic reform is likely to have a positive effect on general business environment, public sector accountability and expenditure, regulatory functions and public service delivery.

2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Not Applicable. Same as above.

Fiscal Impact: Not Applicable. Same as above.

3. Technical: In Pakistan, the capacity and quality ofpublic institutions has been declining over time. Although the civil service has pockets of excellence, collectively its performance leaves a lot to be desired. A quantum leap in efficiency and management culture of the government is needed if Pakistan has to accelerate and sustain growth, reduce poverty, anticipate the opportunities and challenges of the future, and enable its enterprising citizens and private sector to realize their full potential and compete in a fiercely competitive global market. Successful implementation of GOP's on-going reform program - both at federal and provincial levels - is inseparably linked with the capacity ofgovernment institutions and the quality ofcivil service.

The technical analysis underpinning the design of this project has already been reflected in the section titled "Key aspects ofCivil Service" (pl. refer to section B - Strategic Context).

4. Institutional: The project will be implemented by the Finance Division. However, individual participating agencies would be responsible for implementing their own sub-projects. (For detailed implementation arrangements, see sections 4.1-4.4). 4.1 Executing agencies: a. Ministry of Finance b. CBR C. Establishment Division d. Ministry of Commerce e. NEPRA f. OGRA €5 PTA h. Planning & Development Division 1. PPRA j. EAD

In addition to the above, all those agencies that will qualijjfor inclusion in the project during the implementation phase. 4.2 Project management: Following implementation arrangements are being envisaged by the Government: A National Steering and Coordination Committee (nSCC) comprising Secretaries of Finance, Establishment, Economic Affairs, and Planning Divisions and one independent academic (or a key civil

- 30 - society representative), will oversee implementation of the project and review new proposals for inclusion in the program. Specifically, the NSCC will perform the following functions: 0 Overall monitoring of the project, including a comprehensive mid-term review of the entire program; 0 Reviewinghetting of new capacity building proposals from the ‘un-allocated’ portion of the credit; and 0 Reviewinghetting of re-allocation among proposals of un-utilized funds.

The project will be implemented by the Finance Division (FD). There will be a small facilitation and coordination unit in FD, the Project Coordination Unit (PCU), headed by a Project Coordinator (PC), which will include two professionals (one Procurement Specialist & one Finance Manager) and two accounting assistants (accounts officer and assistant accounts officer). The PCU would report to the Additional Secretary, Ministry of Finance (Policy Wing) and would be responsible for: 0 facilitating the participating agencies with procurement and financial management processing issues; 0 assisting agencies with preparation of new proposals, in line with the overall project development objectives; 0 acting as a secretariat for the National Steering & Coordination Committee (NSCC); 0 preparing quarterly project progress reports for the NSCC and the Bank. 4.3 Procurement issues: Goods and works under the Project will be procured in accordance with the Bank’s Procurement Guidelines, and Consultants’ services in accordance with the Consultants’ Guidelines. The procurement capacity assessment and applicable procurement procedures are provided in Annex 6A. 4.4 Financial management issues: The project will be implemented at central level. Finance Division (FD) will maintain one special account. In addition, there shall be 5 other implementing entities (Establishment Division, Planning, NEPRA, OGRA & PTA) which will each have their own Special Account and accounting staff to manage the accounting and reporting processes.The special accounts to be maintained by the FD and ED shall cater for the funding needs of the other agencies/ministries which do not have special accounts (such as CBR, EAD etc.). Financial management would be carried out by the individual implementinglsub-implementing agencies managing the special accounts. Three assignment accounts would be opened at the Finance, Planning and Establishment Divisions for payment of counterpart funding. Regulators would use their own intemal resources for payment of their respective counterpart hnds.The detailed financial management assessment is provided in Annex 6B. 5. Environmental: Environmental Category: C (Not Required) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. None 5.2 What are the main features of the EMP and are they adequate? NIA 5.3 For Category A and B projects, timeline and status ofEA: Date ofreceipt of final draA: N/A

-31 - 5.4 How have stakeholders been consulted at the stage of(a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted?

5.5 What mechanisms have been established to monitor and evaluate the impact ofthe project on the environment? Dothe indicators reflect the objectives and results of the EMP? This is primarily a capacity building and training project, and is not expected to have any negative impact on the environment. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. Better trained staff leading to improved quality of policy-making and implementation is a social development outcome. The issues that emanate from this outcome are the criteria of selection of staff, and retention of trained staff. A second set of social issues is the poor quality of output from Pakistan's higher education system and the need for higher education reforms since the potential civil service officers are taken from this system. Thus the project's emphasis in improving local training capacity along with foreign training for capacity building.

The project's intervention is geared to address the above noted key social issues. 6.2 Participatory Approach: How are key stakeholders participating in the project? The implementing agency will hold consultations with the participating ministries and agencies who are the key stakeholders. Based on these consultations, the programs of the participating agencies will be developedfinalized. In addition, key stakeholders within federal, provincial and district governments will also be consulted in the overall restructuring process ofthe civil service. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Since this is essentially capacity building of the government, collaboratiodconsultation with NGOs/CSOs is not envisaged; however, where required it will be undertaken. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Since the social development outcome is also the project development outcome, therefore, the institutional arrangement is the same as that of the project, and is laid out in Section C. 6.5 How will the project monitor performance in terms of social development outcomes? Monitoring mechanisms will be established at various levels. They include: (i)A National Streering Coordination Committee (NSCC); (ii)Project Coordination Unit within the implementing agency; and (iii) the Civil Service Reform Unit under Establishment Division. For details refer to Section C.

- 32 - 7. Safeguard Policies:

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. NIA

F. Sustainability and Risks 1. Sustainability: The focus ofthe proposed project is on sustainability through maximization of investment in staff training and education using a combination of foreign (declining over time) and domestic (increasing over medium term) institutions.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): This is a high risk and high return project. The broad-based professional development would result in: (a) significant improvement of the technical skills at key levels of the government; and (b) building a critical mass of reform champions - thus raising the overall quality of policy formulation, public service delivery, and human resource management. With over 500 persons trained, each key ministrylagency would have a critical number of trained personnel who will, in turn, engender a demand for quality within service. Further, capacity building of key economic ministries and departments will ensure that the government’s Economic Reform Program is effectively implemented and that future reforms are appropriately designed.

Notwithstanding the above benefits, following risks need to be flagged:

Risk Risk Rating I Risk Mitigation Measure From Outputs to Objective Slow implementation of the broad-based S The government has introduced broad based civil service reforms, such as Pay and reforms. Nevertheless, the pace of these reforms Pension, Merit-based Recruitment & could be slow, given the nature ofreforms, Promotions, Rightsizing, etc availablility of fiscal space, political dimesnsions, etc. Also, some components ofthe CSR agenda are still at an early stage of implementation. Nevertheless, the FederaVProvincial Governments are building consensus and indications are that the GOP will continue to move on this front. The Government

- 33 - has set up a Civil Service Reform Unit (CSRU) under this project which will: (i)manage the professional development program including monitoring progress, tracking staff placements after return, monitoring the bond implementation, carrying a comprehensive mid-term review of the program etc; and (ii) carry out analytical work such as Pay and Pension Study, PromotiodTransfer Policies etc. to support and strengthen overall civil service reform efforts. Further, given that it will take at least 2-3 years before the professional development program will begin to show results, one needs to start the process now so that the various components ofthe civil service reform (including professional development) work in tandem Program not yielding desired S There will be a comprehensive mid-term review, results/outcomes, such as delays in middle ofthird year ofimplementation, when implementation of training programs, several cohorts ofthe EDP, two cohorts of returnees not placed in relevant areas, etc. PDev would have returned back. The mid-term review will assess the effectiveness ofthe I program and make 'mid-course' corrections based on emerging lessons. In addition, the CSRU will closely track and monitor placements of officers upon their return to ensure that most of these officers are placed in the relevant areadagencies From Components to Outputs Component (i):Professional Development M (a) Given that these officers are being drawn (a) Sending away key policy level officers from a diversified pool, covering federal and in large numbers ( 100 per year) might provincial officers, both cadre and non-cadre slow down government functioning at categories, the risk is not substantial, and could various levels be managed by placement of good quality second tier officers across these agencies 3) Govemance issue in the selection of M (b) The target group for the foreign degree ifficers for training, especially overseas program are middle-senior level officers (grades legree programs. 17-19) with age limit of no more than 37 years. These officers will apply in a relevant area, from a pre-identified list of disciplines, and to a university, from a pre-determined list ofreputed universities. The selection ofthe staff will be done through an objective process, including rigorous pre-screening and later through admission criteria of overseas universities. This process will ensure transparency and merit-based selection. (c) Leakage oftrained officers M (c) The past record with foreign training

- 34 - programs indicates that this risk may not be significant; more than 80% of officers sent on degree programs by CBR and the Auditor General of Pakistan in the recent past have returned and are fully utilizing their training. Moreover, the professional training program has been designed to target a large number of officers; notwithstanding some ‘leakage’, there is a high probability that a critical mass will remain within the system. Also, the officers will be signing a ‘bond‘ with GOP to serve for at least 5 years upon return. Lastly, the current international environment seems to be reversing the trend ofbrain-drain ofPakistanis abroad. Component (ii)and (iii):Strengthening M (a) By focusing on developing local capacity key economic ministries and regulatory through training and professional development, agencies: this risk will be directly addressed and (a) Implementation risk: Traditionally mitigated; around 60-65 percent of the project capacity building is perceived to be funds have been allocated to training, and only consultant driven with little ownership limited amount for consultancies; thus ensuring within government agencies to implement sustained in house capacity building rather than short term external support (b) Leakage of trained officers M (b) Same explanation as above {in (i)(c)) Overall Risk Rating S Risk Rating - H (High Risk), S (Substantial Ri: ), M (Modest Risk), N(Negligib1e or Low Risk)

3. Possible Controversial Aspects: None

G. Main Loan Conditions 1. Effectiveness Condition

0 Standard Conditions will apply

2. Other [classify according to covenant types used in the Legal Agreements,] A: General 0 MoF shall ensure that the National Steering and Coordination committee (NSSC), and the Project Coordination Unit (PCU), shall be maintained throughout the project implementation period, with terms ofreference and composition satisfactory to the IDA; 0 All Participating Agencies shall ensure implementation of their Entity Improvement Plans (EIPs) as agreed with the Bank; 0 The Borrower shall annually review with the IDA the CSR Agenda and progress in carrying it out, and, thereafter, take all measures required to ensure its efficient future implementation and completion and achievement ofits objectives, taking into account the IDA’Sviews on the matter; 0 The Borrower shall ensure that all EIPs and progress in carrying them out will be reviewed annually with the Association, and, thereafter, all such measures will be taken as are required to ensure their

- 35 - efficient future implementation and completion and achievement of their objectives, taking into account the Association's views on the matter. candidates for EDP and PDev will be required to be: (i)eligible under criteria, (ii)selected in accordance with procedures, (iii)bonded in a manner, and (iv) placed in pre-selected courses at pre-selected universities, all satisfactory to the Association; EDP and PDev and progress in carrying them out will be reviewed annually with the Association, and, thereafter, all such measures will be taken as are required to ensure their efficient future implementation and completion and achievement of their objectives, taking into account the Association's views on the matter. The Borrower undertakes that, unless the Association shall otherwise agree, no EIP proposed by a Participating Agency will be included unless: (a) establishes that the activities to be carried out under it are consistent with the objectives of the Project, and with the overall strategic visiodplan of the Participating Agency concerned; (b) sets out with respect to such activities: timelines; progress monitoring indicators; full costs; and a program for the first year ready for implementation; and (c) has been: prepared in consultation with the PCU/PC; reviewed by the Bank; and approved by the NSCC. The MoF shall prepare and provide to IDA in a form acceptable to IDA: 0 starting December 3 1 2004, quarterly progress reports, including progress achieved in the implementation of the various components of the project, identifying any problems encountered and suggested remedial actions to ensure the efficient implementation ofthe project and the achievement of the objectives thereof during the period following such date 0 by September 30 2006, a mid-term report assessing the project progress and outcomes.

B: Covenants related to Financial Management 0 The MoF and all Implementing Agencies shall: 0 maintain a financial management system, including records and accounts, and prepare financial statements in accordance with accounting standards acceptable to IDA to reflect their operations and financial condition and to register separately the operations, resources and expenditures related to the project; 0 have their records, accounts and financial statements (statements ofincome and expenses and related statements) for each fiscal year audited, in accordance with auditing standards acceptable to IDA, consistently applied, by independent auditors acceptable to IDA; 0 furnish to IDA, as soon as available, but in any case not later than six months after the end ofeach such year, excepting 3 1 December 2004: (i)certified copies of the financial statements for such year as so audited, and (ii)an opinion on such financial statements, records and accounts and a report of such audit by said auditors, of such scope and in such detail as IDA shall have reasonably requested; and 0 furnish to IDA such other information concerning said records, accounts and financial statements and the audit thereof as IDA shall from time to time reasonably request.

H. Readiness for Implementation 0 1. a) The engineering design documents for the first year's activities are complete and ready for the start ofproject implementation. [xi 1. b) Not applicable.

[xi 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation.

- 36 - Kl 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 0 4. The following items are lacking and are discussed under loan conditions (Section G):

Note: In place of PIP, we have Entity Improvement Plans for each participating agency. Kindly note PIP is no longer required under the new guidelines)

1. Compliance with Bank Policies Ixi 1. This project complies with all applicable Bank policies. 0 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies.

KyaMlaque Team Leader Sector ManagerlDirector

- 37 - Annex 1: Project Design Summary PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT Data Collection Strategy Critical Assumptions Sector-related CAS Goal: jector Indicators: iectorl country reports: :Tom Goal to Bank Mission) mproving Government 0 Improved quality of 0 Bank's supervision of 0 Macro-economic situation :ffectiveness in public sector public sector policy federal/ provincial SAC stays stable nanagement formulation and programs 0 Broad based Civil Service implementation 0 Bank's PER Report Reforms are implemented 0 Improved public service 0 Gov.'s Economic Report to achieve competence, delivery 0 PRSP outcomes. transparency & 0 Improved public sector 0 Bank's sectoral reviews, accountability ofpublic accountability e.g. Investment Climate sector 0 Improved public Assessment; Power, Oil 0 Continued demand by the expenditure management & Gas Review, Telecom, public for improved 0 Improved regulatory etc. public sector performance functions 0 Sectoral reforms 0 Increased competition implemented and private sector participation

'roject Development htcome I Impact 'roject reports: from Objective to Goal) 3bjective: ndicators: To support GoP's efforts in 1. Professional 0 Civil Service Reform 0 The GOP will move he implementation ofits Development: Unit's (CSRU) progress forward with its Civil In-going Economic Reform 0 Grade 17+ staff reports (tracking of Service Reforms agenda, 'rogram by: occupying key policy returnees, placements). especially in the areas of 1. Enhancing the skills of level positions in the 0 PCU Quarterly CS structure, pay & public sector officials Government are Monitoring Report. pension through broad based professionally 0 PCU Mid-Term Review 0 Increasing inputs in some professional development qualifiedtrained in and Final Evaluation specific areas will, over 2. Strengthening capacity of relevant areas. (after completion) time, lead to better public key ministries/agencies 0 Quality ofdomestic 0 Bank reports on broader sector performance. which are in the forefront public sector training civil service reform 0 Changing some key ofdesign, meet international implementation processes within the key implementation and standards agencies will lead to monitoring ofreforms; better performance. 3. Strengthening capacity of 0 Sector specific outputs independent regulatory would lead to certain institutions in effectively reforms. regulating their respective sectors

!. Economic Ministries: 0 PCU/Agency Quarterly 0 Adequate in-house Monitoring Report. capacity to perform 0 PCU Mid-Term Review key economic and Final Evaluation functions (measured (after completion) by MTBF, PER, Deb1 Policy, Tax Administration) and

- 38 - improved fiscal and financial mgmt. 0 Improved agency processes; less reliance on external consultants; reduction in overheads

, Regulatory Agencies: 0 PCU /Agency Quarterly 0 Enhanced capacity in Monitoring Report. NEPRA, OGRA, 0 PCU Mid-Term Review PTA to regulate/ and Final Evaluation monitor performance (after completion) of the utilities, measured by annual tariff hearings and enforcement of licence conditions. 0 Improved climate for private investment and participation; and privatization of one generation and one distribution business by FY06 0 Enhanced competition in the sector, through open accesstcommon carrier regime, manifested by direct producer and consumer contracts. 0 Regulatory regime is sufficiently developed to foster privatization, as measured by investors broad agreement on regulatory principles through privatization transactions . 0 Telelcom service providers meet quality standards

- 39 - Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions htput from each Output Indicators: 'roject reports: 'rom Outputs to Objective) :omponent: : Professional Development 0 Overall at an aggregate Ley Assumptions: 0 Overseas degree and project level: 0 PCU Quarterly 0 Reforms based purely on non-degree training 1. Approximately 250-300 Monitoring Report. professional assessments programs implemented. civil servants including 0 PCU Mid-Term Review that increasing inputs in 0 NSPP operationalized ex-cadre (grade 17-19 or and Final Evaluation some specific areas will, (after completion) over time, lead to better 0 Civil Service Reform public sector Unit's (CSRU) performance. monitoring reports (tracking of returnees, Ssk-mitigation: placements). 0 Ensure full professional debate; 0 Ensure that training is a contribution to structural reforms in the civil service; 0 Monitor return rate and adjust bonding arrangements if necessary; 0 Regularly monitor progress in inputs over project life

0 Input Indicators: 1. Implementation of PDev/EDP training programs 2. Core faculty for NSPP recruited by 2006; 3. NSPP-twinning relationship established with world class institution, by 2006; 4. Federal Public Service Commission's (FPSC) entry level CSS Competitive examination process reviewedby 2006; 5. FPSC Restructuring Report completed by 2006.

- 40 - 2: Economic ManaPement 'rocess Indicators a PCUlAgency Quarterly ;ey Assumptions: Monitoring Reports. a Changing some key a Finance: Enhanced L. Debt Policy & a PCU Mid-Term Review processes within the key capacity to effectively Coordination Unit: formulate, coordinate and and Final Evaluation agencies will lead to a DPCOllly (after completion) better performance. implement economic and functional by 2004. fiscal policies including a Preparation of tax policy and reforms. Annual Debt Policy 5sk-mitigation: Statement by 2005, Aligning with key PRSP after approval of the indicators to strengthen fiscal responsibility linkage between overall bill; to be laid before reform and agency level the National reform program Assembly. a Formulation of an improved Fiscal Policy by 2005 after approval of the fiscal responsibility bill; to be laid before the National Assembly. a Preparation and regular updating of an improved and comprehensive macro-economic framework. Z. Corporate Finance: a Regular monitoring of SOEs financial position & balance sheet analyses, starting with atleast 2 ( WAPDA/KESC), by 2005, and eventually expanding to the majority of public corporate sector by 2008. 3. Policy Wing: a Monitoring & reporting (by posting on MOF website) oi PRSP indicators on quarterly basis! starting 2004. a Preparation of Public Expenditure Review, starting 2005.

-41 - 8 1. 1 LTU in Lahore and CBR: Improved taxpayer 5 0 PCU/Agency Quarterly services. MTUs in Karcahi, Monitoring Report. Quetta, Peshawar, 0 PCU Mid-Term Review Faisalabad and and Final Evaluation Rawalpindi operational (after completion) by 2004. 0 Published documents 2. Sales Tax Automated from individual units. Refimd Repository (STARR), second phase implemented by 2004. 3. Customs Pilot Project involving development & implementationof re-engineered procedure for clearance of imports and exports implemented by 2004.

$# Universal Self Assessment Scheme (USAS) implemented by 2004. 5. 7 Taxpayers Facilitation Centers (TFCs) established by 2004.

I. Legal Advisory Cell 0 Commerce: Enhanced 0 PCU/Agency Quarterly capacity to deal with established by 2005 foi Monitoring Report expert advice & guidance trade issues and WTO 0 PCU Mid-Term Review related matters. to the business and Final Evaluation community. (after completion) Data Cell/Digital Libra0 z. 0 Quarterly Report on trade established by 2006 performance, major trade 3, At least 30-40 officials initiatives and trade shall receive specialized policy implementation short-term training bj 2006.

0 Establishment Division 1. CSRU operational by 0 PCU/Agency Quarterly (CSRU): Enhanced Monitoring Report. capacity on key civil 2004. I. A technical study on 0 Civil Service Reform service reform (CSR) Unit's (CSRU) areas. compensation issues and options completed in monitoring reports conjunction with MoF by 0 Progress reports on 2005. broader civil service reform implementation 0 PCUIAgency Quarterly Monitoring Report. 0 PCU Mid-Term Review and Final Evaluation (after completion)

-42 - 1. Improved MIS to be PCUIAgency Quarterly Economic Affairs implemented by 2005. Monitoring Report. Division (EAD): 2. At least 40-45 PCU Mid-Term Review Enhanced capacity to middle-level staff receive and Final Evaluation manage donor funded specialized training by (after completion) projects. 2007.

B Planning: Enhanced 1. Complete macro-model PCUIAgency Quarterly capacity in economic functional by 2005 Monitoring Report. planning & monitoring 2. Research library digitized PCU Mid-Term Review by 2005 and Final Evaluation 3. First batch of 10 case (after completion) studies completed by 2005 1. First batch of 39 officers receive specialized short-term training by 2005

Public Procurement 1. Public procurement rules PCUIAgency Quarterly Regulatory Authority under preparation to bc Monitoring Report. (PPRA): Enhanced finalized for notificatior PCU Mid-Term Review capacity to implement by the federal governmen and Final Evaluation public procurement by 2004. (after completion) 2. Atleast 20 staff will receive specialized training by 2008,

!: Regulatory Function 3utput Indicators: Key Assumptions: hhanced capacity to deal vith regulatory issues. NEPRA: Strengthen 1. Cost of capital and cost o ProjectJAgency Quarterly 3overnment commitment to capacity to regulate service identified, by Monitoring Report. md support for reforms is the electric poweI 2006. Project Mid-Term Revievr naintained; and reform sector and develop a 2. Performance and and Final Evaluation irograms are implemented (ai competitive structure environment standards (after completion) 3er CAS High/Base case ?) for generation and notified, by 2005. Gov. publications and survey reports. supply. 3. Congestion costs for Reforms measured in terms oj pricing decisions sector specific outputs identified,by 2006. 4. Framework for targetted and direct subsidies Risk-mitigation: developed, by 2005. Close monitoring of sectoral 5. Framework for direct sale reforms and deliverables by Generators to Bulk Power Consumers (Singlc Bank maintains policy Buyer + model) adopted, dialogue and support from 2004.

-43 - 0 OGRA: Strengther 1. Framework for 0 ProjecUAgency Quarterly Key Assumptions: capacity to foste performance standards, Monitoring Report. 3overnment commitment to competition and dea competition, optimizing Project Mid-Term Review md support for reforms is with the challenge! production and other and Final Evaluation naintained; and reform arising from tht operational aspects ofoil (after completion) irograms are implemented (as proposed & gas sector developed, Gov. publications and ier CAS HigWBase case ?) restructuring of tht by 2006. survey reports. Zeforms measured in tenns of gas sector. 2. Technicallfinancial and iector specific outputs other performance standards for the oil and Risk-mitigation: gas sectors developed and :lose monitoring of sectoral notified, by 2005. .eforms and deliverables. 3. Framework and Rules for 3ank maintains policy open access and common iialogue and support carrier regime in Pakistan prepared by 2005.

0 PTA: Stregthen I, Award ofLD and LL ProjecdAgency Quarterly Key Assumptions: capacity tc (fixed telephone licenses) Monitoring Reports. 3overnment commitment to implement the by 2004; 0 Project Mid-Term Review md support for reforms is telecom deregulation l. Framework formulation and Final Evaluation naintained; and reform policy. for US0 will be devised (after completion) irograms are implemented (as by 2005; Gov. publications and )er CAS HigWBase case ?) 1. Formulation ofQuality of survey reports. Service parameters for 0 ITUreports Zeforms measured in terms of telecom services by 2005; Periodic surveys to ;ector specific outputs I. Framework for compare tariffs with other determination of developing countries Risk-mitigation: interconnection charges lose monitoring of sectoral on cost based convention .efonns and deliverables. by 2005. I, Atleast 45 staff will 3ank maintains policy receive specialized jialogue and support training by 2008.

- 44 - Key Performance Data Collection Strategy Indicators Critical AssumDtions nputs: (budget for each roject reports: rom Components to Sub-components: :omponent) 1utputs) 1: Professional Development 623 million (a) Training Programs abroad a Quarterly project (degree & non-degree) monitoring and (i)PDev $13 million supervision reports (ii)EDP $4 million 0 CSRU progress reporting Project Mid-Term Review (b) Domestic Training $5 million and Final Evaluation Institutions - PASC/NSPP/ (after completion) NIPAS/CSNetc.

(c) Federal Public Service 61 million Commission (FPSC)

2: Economic Policv and Management 6 21.4 million a Quarterly project (a) Finance E4 million monitoring and (b) CBR E6 million supervision reports (c) Commerce 62 million 0 Project Mid-Term Revieu (d) CSRU 62 million and Final Evaluation (e) Planning 65.4 million (after completion) (f) EAD El million , (g) PPRA E1 million

3: Regulatory Function E 5.6 million a Quarterly project (a) NEPRA E2 million monitoring and CO) OGRA E2 million supervision reports (c) PTA E 1.6 million a Project Mid-Term Reviev and Final Evaluation (after completion)

4: Un-allocated 911 million (a) Ministy of Water & Power (b) Statistics-FBS (c) Provincial Fin.& Planning (d) Others/Un-identified

- 45 - Annex 2: Detailed Project Description PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT

By Component: Project Component Professional Development - US$23.00 million Restructuring of the Civil Service is one of the significant administrative features of the Civil Service Reforms under the Economic Revival Program of 1999. This component of the PSCBP will address the capacity and technical skills gap in the civil service, and will largely focus on the professional development of federal and provincial civil service and ex-cadre officers. It will be undertaken through the following:

(al) Professional Training Program (degree and non-degree) for middle to senior level officers (US!$17 million): The Establishment Division will manage and implement two training programs for civil servants under this sub-component. These are: (i) an Executive Development Program (EDP) for senior (BPS 20 and 21) civil servants to create a community ofreform champions in the upper echelons of the civil service. (ii)a Professional Development Program (PDev) for younger (BPS17-19) civil servants to enhance their technical capabilities as policy analysts and implementers. The program will be open to all federal and provincial officers on competitive basis.

(i)Executive Development Program (EDP) (US$4 million): The Establishment Division will manage an external short-term (5-6 weeks) training program targeting senior federal and provincial civil servants in grades 20 and 21- both federallprovincial and ex-cadre. Selection Criteria: 0 The proposed criteria of selection for EDP includes: 0 Rank in top quintile i.e. have received 'very good' (this represents the highest category in ACRs), for the last 5 years of service performance record; 0 Likely to be promoted shortly after return; 0 No more than 55 years of age.

Cohorts: 0 Each cohort will comprise 50 officers and not more than 200 officers will be trained during the project period starting first batch in fall 2004. Gender diversity will be maintained to the extent possible.

SelectiodManagement Committee: 0 Final Selection will be made by a Management Committee, headed by Secretary Establishment and representatives of Finance (Additional Secretary), Establishment (JS Training), and prominant and 1-2 prominent and independent senior level people, from acadamic and government.

(ii) Professional Development Program (PDev) (US$13 million): Under this, the Establishment Division will undertake an external degree educational program (foreign and domestic) targeting federal and provincial civil servants in grades 17- 19 - both federal/ provincial and ex-cadre.

Selection Criteria: 0 The proposed criteria of selection includes: 0 Grades 17 to 19 officers; only those Grade 17 with minimum of 5 years of service;

- 46 - 0 No more than 37 years of age (+ two years as exceptions only); 0 Only those who have a domestic Master's Degree or 16 years of education (MBBS, BE etc.) with First Division in at least two of the three Degrees ((FNFSc., Bachelor and Masters); 0 Do not already have a foreign Master's Degree; 0 Rank in CS Academy on Graduation for CSS officers, and equivalent ranking for ex-cadre officers. Those who qualify on the above criteria will have to pass the GREI GMAT-type screening exam, conducted by an independent institution (such as IBA, LUMS, etc). However, for the first year of the program, candidates will not be pre-tested through GREIGMAT -type screening exam. This is to ensure that some individuals can benefit from the PDev program during the first year. Potential candidates, meeting the entry criteria (grade, age, division, rank, etc.), will be encouraged, through an advertisement, to apply directly to pre-selected universities within the pre-specified areas of study (as indicated below). Final Selection for PDev will be made by a Selection Board Committee, headed by Additional Secretary Establishment Division, and representatives of Finance (Additional Secretary), Establishment (JS Training), and 1-2 prominent and independent senior level people, from acadamic and government. Those finally selected should be authorized to apply to ONLY selected set of universities, and in selected areas/ core subjects (a "tentative" list of proposed institutions and subjects is indicated below -Table 1852).

Cohorts: 0 In order to manage the evolution of the program, and taking into account delays envisaged in finalizing the pre-testing arrangements, the initial group would be small (say 50) for first academic year, 2005106; followed by 75 each, in 2006107 and 2007108 respectively, and finally 100 in 2007108. A total of 300 civil servants are expected to benefit from this program. 0 To ensure gender diversity, a minimum (say 20%) could be female participants; this proposed distribution should be applied to the full 300 participants rather than on each of the four individual cohort.

Information Sharing: 0 Newspaper announcements supplemented by formal paper and electronic communications from the Establishment Division would ensure wide awareness and transparency of the proposed degree program and its criteria for selection. Establishment Division would also provide secretariat support staff for management of the program such as screening, support to selection committee, etc.

Post-Degree Responsibility: 0 To minimize leakage, the participating civil servant would sign a government bond which would commit herhim to continue to serve the government for a minimum of (5 years) in the ministry1 departmentlorganization in which he or she has obtained the training. If, for some reason, the civil servant would want to leave government service, the expenditure on hisher education should become a loan to be fully repaid before exit.

-47 - Table-1: LIST OF UNIVERSITIES FOR DEGREE PROGRAM

USA Canada UK Harvard Business School McGill Oxford 1Australian Nationa Harvard Toronto Cambridge Kennedy School McMaster LSE MIT Royal Institute of Public Columbia Administration Yale Economic Center of Bath Stanford University Chicago London University Pennsylvania Michigan Ann Arbor George Town North Westem Williams College Singapore France Pakistan Civil Service College INSEAD LUMS, IBA, NUST bational Universitv

Table-2: PRIORITY AREAS FOR DEGREE PROGRAMS

i) Economics Fiscal, Monetary; Trade; Industrial Economics; Public Finance; Regulation; Agricultural Economics; Education Economics; Health Economics

ii) MBA Finance, Banking; Accounts

iii) Public Policy & Public Administration Policy, Planning and Management; Monitoring and Evaluation

iv) Regulation of Public Monopolies and Public Utilities Utility Management

v) Governance Devolution and Decentralization; Fiscal Decentra1ization;Fiscal Federalism; Local Government Administration

vi) Law Regulatory Economics; Intemational Water Law, Financial and Economic Law; Trade and technical law;

vii) Social Sector Development Education Planning, Policy and Management; Health Planning, Policy and Management; Population Planning, Policy and Management; Gender Development & Management

viii) Irrigationmatural Resource Management

- 48 - e.g. Water Resources Planning, Policy and Management; Watershed Management; Groundwater Management ix) Infrastructure Infrastructure Planning, Policy and Management;

(a2) Professional Training Program (degree and non-degree) for middle to senior level staff of regulatory agencies; Under this, the regulators will select relevant courses for short and long term training. The selection criteria will be in accordance with regulator's EIPs.

(b) Strengthening In-Country Training Capacity through support of Training Institutions (PASC/NSPP; NIPAs, CSA, etc.). Total Cost US$ 5 million. This sub-component comprises up-gradation of civil service training institutions (PASClNSPP, CSA & NIPAs) including: building faculty capacity; improving/revising curricula; enhancing infrastructure and IT connectivity; and twinning with international institutions. The component will also support establishment of the National School of Public Policy (NSPP). Following initial activities are envisaged under the NSPP: (i) Hiring of core faculty which is driven by a strategic choice for the niche that NSPP would like to fill in the firmament of educational institutions; (ii) Hiring a Publications Manager, Business & Marketing Manager and an Information System's Manager; (iii) Needs Analysis for curriculum reform (Pre-service; In-service; Degree Program); (iv) Evaluate and Improve pre-service (CS Academy) and in-service (NIPA; PASC) training programs; (v) Work towards becoming a Graduate Degree granting institution, over three to five years, i.e. first set of students begin in 2006 for graduation one year later; (vi) Develop by competing with private and public sector universities to provide short term training programs for Civil Servants in various areas including: 0 Statistical Analysis (For Federal Bureau of Statistics, Statistics Division, Economic Advisor Wing) 0 Regulatory Issues (Economics; Tariff Setting experiences elsewhere) for Regulatory Agencies) 0 Human Resources Development Program (Federal, Provincial Departments); 0 Change Management Program (Federal, Provincial Departments); 0 Monitoring & Evaluation (Federal; Provincial Departments); e Public sector procurement; 0 Information Technology (Federal, Provincial Departments) 0 Library development and link with IT Department. The above is an illustrative list and would be subject to the results of Needs Analysis. Over the medium to long term, this will put NSPP among one of the key suppliers of domestic training and education competing with the private sector.

(c) Improving Civil Service Recruitment process through support of Federal Public Service Commission (FPSC) The key areas of support will include strengthening of entry level examination process including improving syllabi and system of competitive examination, management of promotion examinations, handling of promotions, curriculum development skills enhancement, and upgradation of FPSC to an automated computerized environment. Total cost is around US$ 1 million.

Project Component Strengthening Economic Policy and Management - US$21.40 million Capacity building of key federal and provincial ministries and divisions, including Finance, Planning, Commerce, Central Board of Revenue, Establishment, etc., who are in the vanguard of design and implementation of GOP's reform agenda. More specifically, this component will assist:

-49- (i)Ministry of Finance (MoF) to build capacity of its various wings dealing with Policy Formulation; Budget & Expenditure Management; Debt Management; External Finance; Corporate Finance; and Internal Finance, to enable them to effectively coordinate implementaion of economic and fiscal policies and reforms of the Government. The project will support an integrated medium term program comprising: professional training of staff (degree and non-degree-- short term specialized training in areas such as pension reforms, debt manamgement, public expenditure management); short and long term consultant support for specialized analytical work and policy reform programs; and infrastructure and IT facilities upgrade. Individual wings of MoF have prepared integrated proposals, which add up to a total of around US$4 million. These include:

0 Debt Management: Strengthening the newly established Debt Policy and Coordination Office (DPCO) to monitor the country’s debt situation. This office will serve as a Secretariat to achieve the objectives envisaged in the Fiscal Responsibility and Debt Limitation Ordinance 2003 and prepare a ten year debt reduction path. These activities are expected to bring the country’s debt situation to a sustainable path and contribute to sustaining financial discipline. Specifically, the DPCO will: a) Present the Annual Debt Policy Statement included in the ABS before the National Assembly; b) Coordinate the preparation and regular updating of a comprehensive macro-economic framework. c) Submit an annual report on the implementation of agreed debt strategy. d) Provide leadership on debt data questions to all concerned parts of the government and ensure compliance with agreed reporting requirements. e) Give policy advice on external borrowing and internal borrowing strategies and make recommendations on reducing the cost of borrowing. f) Monitor the implementation of contingency management arrangements, which should be located in the Budget Wing. g) Submit annual debt policy statement on trends in public and external debt and the implementing of adopted debt reduction goals as well as suggesting adjustments in the Government’s overall debt strategy. e Corporate Finance, Banking and Investment Wings: to improve their monitoring capacity to evaluate key public sector enterprises, process of privatization, banking, and capital markets and facilitate private sector participation in key areas. Effective management of financial aspects of state owned enterprises is expected to lead to financial discipline, reduction in subsidy and improved utilization of resources. As a result of the reforms in the areas of financial sector liberalization, institutional strengthening, domestic debt, monetary management, banking laws, foreign exchange and capital market, which began in the 199Os, the role of the Finance Division has become more critical. It now has to perform the following broad categories of fimctions as well:- a) Institutional Monitoring: b) Financial Sector Monitoring and Reforms and Maintaining Database: c) Privatization and Restructuring of Public Sector Enterprises, Banks and DFIs e External Finance Wing (Budget, Credit & IFR): Strengthening capacity in the key areas of public finance, expenditure management and monetary policy. Building expertise in the key areas of external finance, external debt management, balance of payment, trade, WTO related issues, management of multilateral debt, matters relating to bond issues, international capital markets and monetary policy. Finance Division intends to build capacity of the officers working in External Finance Wing through training in reputable international and domestic institutions on modem techniques of managing external financeshesources, overall financial management and policy analysis. The Finance Division also intends to increase their capacity by using information technology in day-to-day business ofthe Ministry. The use of IT can be enhanced through training in the field of IT from local and international institutions and installation of necessary equipmentlsoftware.

- 50 - Policy Wing: Strengthening capacity in policy areas related to fiscal analysis including revenue projections, tax policy dialogue with CBR, building expertise in development of a macroeconomic framework and in formulation of a human development strategy, Public Expenditure Review, formulation, updating, and monitoring of Poverty Reduction Strategy Paper, preparation of Poverty Reduction Strategy Credit, assist the MoF in Policy formulation and analysis in key areas , and overall monitoring of broad based structural reforms under IMF, the World Bank programs and the Asian Development Bank program loans. Internal Finance Wing: Although, GoP is off-loading its majority share to the private sector in most ofthe nationalized commercial banks, yet MOF is represented on the Board of Directors of all Nationalized Commercial Banks. Therefore expertise to evaluate balance sheets of the banks and proper monitoring and tracking oftheir performance is required to avoid build-up of contingent liabilities as happened in the past. In addition, there is need to build capacity for monitoring trends in financial markets domestically and international1y.

(ii) Central Board of Revenue: This sub-component is part of CBR's overall tax administration reform strategy, to be supported under a larger Tax Administration Reform Project that is currently under preparation with Bank assistance through a Project Preparation Facility (PPF). In addition to preparation of a comprehensive reform plan, CBR has also undertaken a few reform initiatives under the PPF including, establishment of Large/Medium Tax Payers Units -LTU/ MTU, sales tax STARR project, a customs pilot and others. The PPF funds are already committed, and the larger program support is unlikely to be effective before the next 6-8 months. As it is critical to continue with the short term initiatives without delay and so as the reform program does not lose its gained momentum, it has been agreed to include some immediate reform initiatives under this project, and bridge the financing gap while the larger program is prepared. The initiatives proposed to be supported under this sub-component include:

Capacity Building and Training of CBR Employees; In order to properly manage the reform process of the CBR as well as making the CBR capable to meet hture challenges, training and capacity building of the officers and officials have become imperative, to steer along the reforms agenda of the organization. The training will be imparted at different locations/institutions like IBA, LUMs, NUST, CBM and Training Directorate of Customs and Income Tax. Change Management Workshops and Communication; In order to accustom the workforce with the changed culture and administrative changes it is necessary that a system be evolved wherein the employees are taken into confidence on the reform initiatives. Change management workshops, seminars and newsletter would effectively serve this purpose. Large Taxpayers Unit (L TU), Lahore; Many tax administration around the world have realized the need and importance of handling large taxpayers through focused institutional arrangements viz. Large Taxpayers Units (LTUs). While such an arrangement provides quality service for the taxpayer at a single access point, the tax administration is able to improve the surveillance of the relatively small number of taxpayers contributing a bulk of the revezue. In the first phase CBR has already established a Large Taxpayers Unit (LTU) at Karachi. In the second phase, CBR intends to establish another Large Taxpayers Unit at Lahore. Medium Taxpayer Units (MTUs); A Model Medium Taxpayers Unit has already started working in Lahore w.e.f. October 01, 2002. CBR plans to establish MTUs at Karachi, Quetta, Peshawar, Rawlapindi and Faisalabad. The objective of the Medium Taxpayer Units (MTUs) is to establish a modem, integrated, effective and efficient units of Tax Administration for Income Tax in Pakistan which promotes mutual trust and satisfaction both for the taxpayers and the collectors. Dispute Resolution Complex, Karachi; At present the offices of Adjudicating officers for Indirect Taxes are located at various sites at Karachi. A pilot dispute resolution complex is planned to be established in the present Sales Tax (East), Collectorate, Karachi and all Adjudicating Officers dealing with Customs,

- 51 - Excise and Sales Tax cases will be, shifted there after suitable alteration and up-gradation of the building. This institution will ensure effective central monitoring of adjudication set-up with better management control and evaluation. STARR (Sales Tax Automated Refund Repository); The re-engineering and automation of Sales Tax Refund System has been identified as an essential component ofthe reform of Sales Tax in all the reform strategy documents. Towards this objective STARR (Sales Tax Automated Refund Repository) project was initiated by the CBR. The project involves automating the whole process from filing of a refund claim to its sanction. A major component of the project is to create and maintain a central database comprising Customs and Sales Tax information for the whole country, which will allow online verification ofthe documents forming the basis of the refund claim. Establishment ofTaxpayer Education and Facilitation Centers; Taxpayers in Pakistan lack knowledge of their tax obligations. Under the newly introduced Universal Self-Assessment Scheme the onus of declaration of true particulars of income rests on the taxpayer relieving thereby the tax administration to focus on high risk taxpayers. This requires establishment oftax education and facilitation centres to serve as intermediary between the taxpayer and tax administration. Customs Pilot Project; This Pilot Project is designed to modernize Pakistan Customs into an efficient organization. It is an ideal mix of trade facilitation and customs controls as per best international practices. The project is designed to reduce the period required for completion of customs formalities at the port from days to hours. Universal Self-Assessment Scheme; This is a new concept that is being introduced in Pakistan with the start of new Income Tax law operation from 15th July, 2002. Universal Self-Assessment Scheme envisages that all the taxpayers’ returns would automatically qualify for Self-Assessment. The Universal Self-Assessment Scheme will help to minimize direct contract between the officers and taxpayers. According to the scheme it is now the taxpayer himself and not the taxation officer who will determine a person’s income. Total cost of this component is around US$ 6 million.

(iii) Ministry of Commerce: To strengthen MoC’s capacity to modernize and improve Pakistan’s trading regime and practices, deal with technicalities of international trade and deal with WTO related matters of implementation and negotiation. This will include strengthening research, analysis and information management in the public and private sector. The aim is to build the ministry’s capacity to play an increased role in trade promotion, coordination, facilitation and policy analysis in the emerging global environment. Total cost is around US$ 2 million. Under the Public Sector Capacity Building Project (PSCBP), the MoC will undertake the following activities:

0 Hire consultants for formulating hture work plans ofthe restructured Wings of the Ministry. 0 508 officers and officials working in the Ministry & its attached Departments and other relevant private sector personnel will be imparted short/ medium term training in their respective fields of responsibilities. Through these trainings they would attain required knowledge and state-of-the-art skills to deal with the new challenges in international trade. 0 Set up a data cell/digital library. Availability of backup support data and documents is essential for any research or analysis activity. This necessitates development of a resource and reference center, where the relevant documents are properly organized so that their quick retrieval is ensured. The documents should be made available in the form of hard copies as well as soft versions. In addition to this, the documents should be available online through an internal networking arrangement. The Data Cell/ Digital Library, housed within the Ministry will fulfill these roles. To establish this digital library, the services of experts in Trade Issues, Library Sciences and Information Technology will be required. All the documents will be indexed and a system for their classification and arrangement will be developed. WTO and UNCTAD will also be requested to

- 52 - extend technical assistance. 0 Set up a Legal Advisory Cell primarily to arrange expert advice and guidance to the business community in cases where they are facing action under trade remedy laws or where they need to resort to action under these laws to defend their legitimate commercial interests. It has been proposed that the Cell may be housed within WTO Wing of the Ministry of Commerce., 0 Launch a Stakeholder’s Awareness Program through intensive, frequent and regular interaction with all stakeholders in the foreign trade sector. This programme is designed to keep them updated about developments at international level and measures being taken by the govemment to face new challenges & opportunities. This will also help the government to adjust its policies in the light of inputs received through this inter-action.

(iv) Establishment Division: To strengthen Establishment Division’s capacity to address the broader civil service reform program, through a Civil Service Reform Unit (CSRU). Under this US$ 2 million would be allocated to the CSRU. Its charter will be to oversee GOP’s comprehensive civil service reform program. Specifically, it will support the following pillars ofcivil service reform:

Devolution Completion of devolution, with responsibilities and staff assignments moved from the federal to the provincial level, and from the provincial to the district levels, with less cross management of staff between levels of govemment. Organizing SeminarsiWorkshops of provincial and national level stakeholders to develop consensus on additional reforms regarding restructuring, compensation issues and investment in professional development. Maintaining an active dialogue with counterparts. Recruitment and Promotion Reforms

1 Modemizing the cadre system and reforming the system of occupational groups so that internal mobility within the public sector is increased, and lateral entry from the private sector for skilled staff is encouraged, including the creation of a national executive service or equivalent broad-based staff grouping at senior levels. Strengthening of merit protection, ensuring that the federal and provincial Public Service Commissions have appropriate competence to oversee merit in recruitment for senior grades. Pay and Pension Reforms Providing support for deepening the Pay and pension reforms (including monetization ofbenefits) which provide for more attractive and more transparent packages of total compensation at senior levels, within fiscal constraints. Professional Development * Improving the quality of training and professional development available to serving staff. This will include managing the Executive Development program (EDP) and Professional Development program (PDev). Monitoring and Evaluation - Monitoring implementation ofalready initiated governance, structural and policy reforms. . Maintaining updated databases of civil service employment totals at all levels ofgovernment Developing appropriate human resource management information systems so that the federal, provincial and district governments are able to plan their human resource management on the basis of actual staff and identified skills, and not just sanctioned positions. Carrying out evaluation ofreforms * Generating periodic reports for submission to the Secretary, Establishment Division and the Cabinet Committee on Civil Services Reforms. Carrying out tracer studies for the returnees ofthe EDP and PDev Programs.

- 53 - 0 Coordination Serving as Secretariat for the Cabinet Committee on Civil Service Reforms

* Maintaining a close liaison with CSR units established in other MinistriedDivisions . Making concrete proposals for aligning donor initiatives - particularly between the ADB, WB and DfID.

(v) Planning & Development Division (P&DD): strengthening P&DD's capacity as a planning and monitoring agency. This involves capacity building to plan, design, appraise, implement, monitor and evaluate development projects. The allocated sum will also be used to stengthen project management practices besides preparing overall sectoral policies and planning framework over the medium and long term. Total cost is around US$5.4 million.

The major issues which are hindering the P&DD's performance include; ageing of P&DD's Officers (only 10 officers out of 15 1 are in the age bracket of 20-40 years), 0 lack of good trainers and other training facilities at the Pakistan Planning and Management Institute (PPMI) and provision oflocalized training only, 0 lack ofprofessional resources for economic policy formulation and analysis 0 inadequate and under-qualified human stock to work on the social, infrastructure and service sectors.

P&DD intends to improve and strengthen economic management through adequate staffing with knowledgable and professionally competent officers. More specifically it intends to; Strengthen economic policy formulation and analysis through improved macro modeling and building up of researcwlibrary facilities. The present facilities of modelling require improvement in terms of equipment and training. Strengthen evaluation & monitoring of development projects through capacity building of the Projects Wing. Strengthen the Pakistan Planning & Management Institute (PPMI) through twinning with reputed intrenational training institutions to impart most modem and relevant training in economic management.This is crucial for the professionalization of the national planning process. The institution would confine its training to project related activities, including proper project planning and implementation, preparation of PC-I forms etc. Develop human resources in the P&DD through skill development, induction of young professionals, senior managers and consultants. Improve work-environment through provision of administrative facilities (machinery, equipment and furtures) and introduction ofhuman resources management systems.

(vi) Economic Affairs Division (EAD): To strengthen EAD's capacity in coordination and monitoring of relationship with donors and donor funded projects. This entails development of technical and managerial capacity of the Division in the management of loan portfolios, streamlining of all procedures and operations and effective monitoring of the donor sponsored projects. Total cost is US$lmillion.Under its EIP the EAD will be strengthened through the following activities: 0 building capacity ofofficers via long and short term training improving procedures through development of standard operating procedures for each wing, improving MIS, clarification of roles and job description and transition towards computerized environment in practice. establishing a monitoring cell for overseeing aid utilization and disbursements of donor funded projects.

- 54 - (vii) Public Procurement Regulatory Authority (PPRA): Strengthening the newly established PPRA to regulate public sector procurements, develop a modem transparent and cost effective public procurement system and put in place an effective procuremnet monitoring system. To acheive this, there arises the broad need for capacity building through training of existing/future workforce of PPRA (both locally as well as abroad) in areas of specialization in their own respective feilds inorder to meet present requirements and future challenges.

The returning trainees shall be appointed in posts relating to their respective areas of specialization so that they can make coordinated efforts for development of a dynamic and cost effective public procurement system. The returning trainees shall also train concerned officials of public sector organizations as well as officials of the Auditor General of Pakistan so that they rae familiar with teh revised procurement regulations and procedures and able to implement these procedures.

Under the PSCBP, a comprehensive Management Information System (MIS) for monitoring public procurement shall also. be established with a veiw to monitor the adherence to revised procurement procedures and practices. Total cost US$ 1 million.

Project Component Strengthening the Regulatory Function - US$ 5.60 million This will support capacity-building of the newly established Regulatory Agencies through: (a) specialized training of officers (including under the PDev/EDP programs as outlined in component; (b) specialized technical consultancies for undertaking analytical studies (such as Guidelines and Standards for Power Acquisition Programs; the Commercial Code; Licensing of Operators in the Telecom Sector; Universal Service Obligation); and (c) procurement of equipment and related materials. Total cost of this component is around US$5.6 million.

(i)National Electric Power Regulatory Authority (NEPRA): To strengthen NEPRA’s capacity to regulate the natural monopoly aspects of the electric power sector, develop a competitive structure for electric power generation and supply and ensure the reliability and adequate supply of electric power. NEPRA has broadly identified three areas of assistance namely skill development, technical studies and consultant services. With no history of infrastructure regulation there is dearth of trained professionals with the capability to address the complex issues of electricity regulation. The present activities of NEPRA have remained confined to licensing and tariff formulation. There is an urgent need to up grade the skills of the NEPRA staff to deal with issues of electricity regulation. Skill development will consist of degree training in the areas of regulatory economics and finance, attendance at seminars and study tours (for senior management) and training in data management and public relations (for support staff). Trained professionals would be better equipped to supervise international consultants and appreciate the services of the consultants. Additionally, NEPRA intends to form a unit of the trained professionals to implement regulation and manage esential task of information dissemination and management.

NEPRA intends to conduct technical studies in two main areas; cost of service to develop tariffs for regulated utilities on the basis of long run marginal cost (LRMC) and incentive tariff to develop a tariff model that lays down the rules for formulating incentive based tariff.

Consultant services are required in the areas of standards, tariff and compliance. The ideal approach suggested by NEPRA would be teh provision of a senior level expatriate industry professional with experience in the three identified areas for six to nine months. NEPRA staff would assist this consultant who would reveiw the work of incumbents in teh groups, select new staff members, identify resources and lay down procedures for undertaking of assignments within these groups. The consultant would be a division head with an under study who would take over as the division head aRer hidher departure. With a combination ofcase studies, seminars,

- 55 - advisory and management services, the consultant wuld be expected to equip NEPRA with adequate knowledge to manage Standards, Tariff and Compliances departments. Other consultants would also be required to prescribe standards for Uniform System of Accounts (USOA), Commercial sub code and Power acquisition programs.

All these capacity building measures will increase effectiveness of sectoral reforms that are contingent on independent and effective regulation. Total cost is US$ 2 million.

(ii) Oil & Gas Development Authority (OGRA): To strengthen OGRA’s capacity to improve its ability to foster competition, encourage private investment and ownership and deal with challenges arising from the proposed restructuring of the gas sector. OGRA has identified studies pertaining to key regulatory activities and relevant degree and non-degree training for support under the PSCBP. Total cost is US$2 million.

Various studies pertaining to key regulated activities will be undertaken to enable OGRA to regulate the oil and gas sector. They include: 0 Study on development and enforcement of technical and performance standards relating to LPG 0 Study on development and enforcement of technical and performance standards relating to CNG. 0 Study on ensuring effective competition in teh oil marketing sector. 0 Study on quality control issues in the petroleum products trade and their addressal. 0 Studies to develop rules/regulations. 0 Study on development ofopen access and common carrier regime. 0 Study on reveiw for Human Resource requirements of OGRA by independent consultants. 0 Study on optimization ofrefineries production with reference to the competition and efficiency issues. 0 Studies pertaining to other operational aspects ofoil&gas related provisions in the OGRA ordinance.

OGRA has proposed an extensive professional development programme for its officers under the Capacity Building Programme, in which younger professionals would be sent for degree programmes pertaining to regulatory affairs in leading intemationaUloca1 universities. Moreover, middle and senior level managers will be sent on various professional development programmes, including scondment with regulatory authorities operating in different parts of the world.

Various measures including implementation of Uniform System of accounts, are being undertaken, to develop capacity to regulate the natural gas sector in unbundled form.

(iii) Pakistan Telecommunication Authority (PTA): To strengthen capacity to regulate the telecommunications sector and implement the telecom deregulation policy which will open all market segments within the industry to private investors. Total cost is US$ 1.6 million. PTA is gearing up to respond to regulatory challenges arising out of various options pertaining to implementation of the deregulation policy already announced by the Ministry of Information Technology & Telecommunications. It has cultivated expertise to regulate the sector in the existing integrated form. Various measures including unbundling, USO, tariff-rebalancing, interconnection, drafting of licenses, etc are being undertaken, to develop capacity to regulate the more competitive telecommunication sector. Inorder to successfully implemnet these measures, PTA is seeking support rom the PSCBP in the following activities: 0 Professional Development: This component involves education of younger (grade 17-19) officers of PTA from reputed universities ofthe world at graduate/post graduate level to significantly enhance their technical capabilities as policy analysts and implementers. The specialised fields identified are telecom regulation, telecommunication policy, financial and tariff analysis and telecommunications technologies. 0 Short Term Training; This includes capacity building for framing the policies and regulatory framework in the country through short term training courses/ visits in specialised fields of various duration for

- 56 - PTA officers at various levels in relevant institutions. Participation in intemational and regional meetings, conferences, workshops, symposia, seminars and exhibitions would also be included. USTTI standard courses every semester would be utilised and efforts would be made to get training courses tailored for the Pakistani Students where possible. 0 Consultancy and Advisory Services; PTA needs at this stage consultant services for various studies to assist in discharge of its responsibilities for ensuring level playing field for various operators, ensuring competition, consumer protection and services to various segments of business and the society in general. There is also a need for in-house advisory service and concluding twinning anangements with appropriate organization(s) of advanced counties. While, additional consultancies would also be identified during project implementation, the first phase requirements are for consultancies in the following areas: (a) Ongoing Consultancy on Telecom deregulation Policy (Phase-11) (b) Cost and Regulatory Accounting Framework (c) Universal Service Obligation (USO) Framework (d) Quality ofService Monitoring Framework

Project Component Unallocated - US$11.00 million

This unallocated amount will be disbursed to interested ministries/agencies once their individual proposals are approved by the NSCC.

The criteria for allowing new agency proposals would include: (i)full alignment to project objectives and with the agency's overall strategic visiodplan; (ii)a Entity Improvement Plan (EIP) along with indicators for monitoring progress of the professional development program; (iii)clearly defined proposals with timelines of activities and fully costed components; and (iv) agencies having their first year's program ready for implementation.

Interested agencies/ministries would prepare their capacity building proposals along with an Entity Improvement Plan (EIP) in consultation with the PCU/PC. These EIPs would be prepared in line with agreed criteria (as noted above) and will be shared with the Bank for review before submission to the NSCC through their respective SecretariesIAgency heads. The proposals would then be submitted to the NSCC for consideration and approval. Once approved by the NSCC, the individual PC-1s would be submitted to the Planning Commission for CDWP approval. Following the CDWP approval, PCUPC will allocate resources from the un-allocated amount to the new participating agency.

Some of the proposals under this component are already being developed. These include: (i) Ministry of Water & Power: to support the initial institutional reform and capacity building needs in the power sector.

(ii) Federal Bureau of Statistics: to enhance the skills and knowledge of technical staff to effectively manage information collection and accurate reporting of key country statistics, conducting various surveys including Pakistan Integrated Household Survey, Household Income and Expenditure Survey, their comprehensive analysis including poverty assessment methodology as well as effective and accurate collection of information for national accounts.This is to be acheived through short term specialized training, specialized consultancy, and IT support, in areas such as data collection techniques, analysis, etc.

(iii) Provincial Finance and Planning: to strengthen the provincial government's capacity in the areas of provincial reform formulation, implementation, evaluation and monitoring. The allocated sum will also be

- 57 - used to improve budget, expenditure management, poverty expenditure monitoring and develop medium term budgetary framework planning, project design, and implementation at the Provincial as well as district levels and civil service reforms.

- 58 - Annex 3: Estimated Project Costs PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT

Local Foreign Total Project Cost By Component US $million US $million US $million Professional Development I 5.00 I 18.00 I 23.00 Economic Policy and Management 12.00 9.40 2 1.40 Regulatory Function 1.60 4.00 5.60 Unallocated 3 .OO 8.00 11.00 Total Baseline Cost 21.60 39.40 61.00 Physical Contingencies 0.00 0.00 0.00 Price Contingencies 0.00 0.00 0.00 Total Proiect Cost: 2 1.60 39.40 61.00 ~~ Total Financing Required 21.60 39.40 61.00

~~ Local Foreign Total Project Cost By Category US $million US $million US $million Goods 3.90 0.10 4.00 Works 4.30 0.70 5.00 Services 9.50 4.00 13 SO Training 3 .OO 34.50 37.50 Other- Miscellaneous 0.90 0.10 1.oo Total Project Cost: 21.60 39.40 61.00 Total Financing Required 21.60 39.40 61 .OO

I Identifiable taxes and duties are 0 (US$m) and the total project cost, net of taxes, is 61 (US$m). Therefore, the project cost sharing ratio is 90.16% of total project cost net of taxes.

- 59 - Annex 4 PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT Not applicable as this is a TA project. PI. refer to section E - Summary Project Analysis.

- 60 - Annex 5: Financial Summary PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT Years Ending

IMPLEMENTATIONPERIOD 1 1 Year1 1 Year2 I Year3 I Year4 I Year5 I Year6 I Year 7 Total Financing Required Project Costs Investment Costs 12.0 13.0 13.0 12.0 10.0 0.0 0.0 Recurrent Costs 0.2 0.2 0.2 0.2 0.2 0.0 0.0 Total Project Costs 12.2 13.2 13.2 12.2 10.2 0.0 0.0 Total Financing 12.2 13.2 13.2 12.2 10.2 0.0 0.0

IBRDllDA 11.0 11.9 11.9 11.0 9.2 0.0 0.0 Government 1.2 1.3 1.3 1.2 1.o 0.0 0.0 Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Jser FeeslBeneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 12.2 13.2 13.2 12.2 10.2 0.0 0.0 Main assumptions: The project will be implemented over a five year period starting from FY05 and ending in FY09

-61 - Annex 6(A): Procurement Arrangements PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT

Procurement

Procurement Capacity An assessment of the Implementing Agencies‘ procurement capacity was carried out by a Procurement Accredited Staff (PAS) during appraisal. The main findings are as follows:

Ministry of Finance will be primary responsible and accountable for implementation of the project including carrying out procurement, within each agency’s respective jurisdiction. Although MOF has been WB’s main counterpart it has not been directly involved in implementing a Bank financed project. The project components will be implemented through Participating Agencies such as Central Board of Revenue (CBR), Ministry of Commerce(MOC), Oil and Gas Regulatory Authority(0GRA). National Electric and Power Authority (NEPRA), Establishment Division, FPSC, PPRA. Among the Participating agencies only Central Board of Revenue (CBR), Oil and Gas Regulatory Authority(OGRA), National Electric and Power Authority (NEPRA) have implemented Bank financed projects. Though these agencies are familiar with the Bank procedures, the staff involved may not be necessarily the same staff who has implemented Bank financed projects earlier. None of the above agencies have staff dedicated exclusively for procurement and there is a general lack of expertise in the Bank’s procurement procedures, particularly procurement of goods and services. Most of the proposed assistance is focussed on staff development programs. Though there will be very few ICB contracts under goods, a considerable amount of consulting services are to be financed under the credit. In order to strengthen the procurement capacity, Govemment of Pakistan has agreed to engage at least one individual procurement consultant initially. This procurement consultant will be engaged by the Ministry of Finance(M0F) and will be based in MOF’s Project Coordination Unit. The consultant will provide procurement advice to MOF as well as all other Participating Agencies who will be responsible for carrying out their own respective procurement.

Procurement Methods Goods and Works to be financed under the project shall be procured in accordance with the Guidelines for Procurement under IBRD Loans and IDA Credits, January 1995, revised January 1999. Consultants Services financed under the project shall be procured in accordance with IDA’s Guidelines for Selection and Employment of Consultants by World Bank Borrowers, January 1997, revised May 2002. IDA’s standard bidding documents for procurement under Intemational Competitive Bidding (ICB), and sample bidding documents for procurement under National Competitive Bidding (NCB) which are already being used on other Bank financed projects in Pakistan, will be used for procurement of Goods and Works under the project. The Bank’s Standard Request for Proposal document will be used in the selection of Consulting firms.

All expected procurement of goods, works and consultants’ services will be listed in the project’s General Procurement Notice (GPN). The GPN will be published in the United Nations Development Business (UNDB). All ICB contracts will be published on UNDB on line independent ofthe value

Civil Works (US$Sm): Civil works generally comprise small value contracts for new and upgrading of existing buildings, and are not expected to attract the interest of foreign contractors. Accordingly, all civil works under the project will be procured through National Competitive Bidding (NCB) procedures acceptable to IDA.

- 62 - However, if foreign firms wish to participate in these contracts, they will be permitted

Goods (US$4m): Goods under the Project would generally include computers, office equipment, motor vehicles, fumiture, proprietary software.

International Competitive Bidding (ICB) procedures will be followed for each Goods contract estimated to cost more than US$200,000 equivalent. Domestic Preference will be allowed to local manufacturers on ICB contracts. Goods estimated to cost between US$25,000 equivalent and US$200,000 per contract will be procured through National Competitive Bidding (NCB) procedures acceptable to IDA. Small value off-the-shelf goods estimated to cost US$25,000 equivalent or less per contract are expected to be procured following NationaVInternational Shopping procedures in accordance with the Procurement Guidelines.

Improvement of Bidding Procedures under National Competitive Bidding The following improvements in bidding procedures will apply to all procurement of Goods and Works under National Competitive Bidding, in order to ensure economy, efficiency, transparency and broad consistency with the provisions of Section 1 of the Guidelines: 0 Invitation to bid shall be advertised in at least one national newspaper with a wide circulation, at least 30 days prior to the deadline for the submission ofbids; 0 bid documents shall be made available, by mail or in person, to all who are willing to pay the required fee; 0 foreign bidders shall not be precluded from bidding and no preference of any kind shall be given to national bidders in the bidding process; 0 bidding shall not be restricted to pre-registered firms; 0 qualification criteria shall be stated in the bidding documents; 0 bids shall be opened in public, immediately after the deadline for submission ofbids; 0 bids shall not be rejected merely on the basis of a comparison with an official estimate without the prior concurrence of the Association; 0 before rejecting all bids and soliciting new bids, the Association’s prior concurrence shall be obtained; 0 bids shall be solicited and contracts shall be awarded on the basis of unit prices and not on the basis of a composite schedule of rates; 0 contracts shall not be awarded on the basis of nationally negotiated rates; 0 contracts shall be awarded to the lowest evaluated and qualified bidder; and 0 post-bidding negotiations shall not be allowed with the lowest evaluated or any other bidders.

Consultants’ Services (US$13.5m): The credit will finance several consultancy assignments and short and long term nationalhtemational individuals for the implementation agencies for management advice in policy reforms, studies, etc.

Contracts with consulting firms estimated to cost more than $100,000 per contract will be procured in accordance with Quality and Cost Based Selection procedures. Contracts estimated to cost less than $100,000 per contract may be procured through the method of Selection Based on Consultants’ Qualifications. For contracts with consulting firms estimated to cost less than $500,000 equivalent per contract, the shortlist of consultants may comprise entirely national consultants in accordance with the provisions of paragraphs 2.7 and footnote 8 of the Consultant Guidelines. Contracts with individual consultants will be procured in accordance with the provisions ofparagraphs 5.1 to 5.4 in Section V of

- 63 - the Consultants Guidelines. In view of some specialized training that may be needed by a few agencies, the services ofuniversities/ institutions to impart this training may be procured through ‘single source selection’ in accordance with the provisions of paragraghs 3.8 to 3.1 1 of the Consultants Guidelines.

Training and Workshops (US$ 37.5 m): The credit will finance long term and short term staff development programs both local and foreign for the staff of the participating agencies. In addition there will be a series of national workshop conducted by the participating agencies to enhance the capacity of staff. A list of national and international universities, institutes and training establishments have already being identified based on their qualifications and experience to conduct.

Procurement Planning Procurement under the project will be carried out in accordance with the agreed procurement plans. Procurement plans will be closely monitored and updated every six months.

Review of Procurement by the Bank (Table B) Prior Review: 0 The first NCB contract for Goods of the each Participating agency, irrespective of value, and thereafter each contract for Goods estimated to cost US$200,000 equivalent or more. 0 The first NCB contract for works of the each Participating agency, irrespective of value, and thereafter each contract for Works estimated to cost US$200,000 equivalent or more. The first Consultants’ Services contract with consulting firms of the each Participating agency, irrespective of value, and the first consulting services contract with individual consultants of the each Participating agency, irrespective of value, and thereafter all contracts with firms estimated to cost US$lOO,OOO equivalent or more, and with individuals estimated to cost US$ 50,000 equivalent or more.

All other contracts will be subject to Post-Review by IDA. Each Participating Agency will send to IDA on a quarterly basis, a list of all contracts subject to post-review.

Procurement Information and documentation Procurement information will be recorded and reported as follows by each Participating Agency: (a) Complete procurement documentation for each contract, including bidding documents, advertisements, bids received, bid evaluations, letters of acceptance, contract agreements, securities, related correspondence etc., will be maintained by each implementing agency in an orderly manner so as to readily available for audit. (b) Contract award information will be promptly recorded and contract rosters, in the IDA’S sample format, maintained by each Participating Agency. (c) Comprehensive quarterly reports by each Participating Agency indicating: (i) revised cost estimates, where applicable, for each contract; (ii) status of on-going procurement, including a comparison of originally planned and actual dates of the procurement actions, including preparation of bidding documents, advertising, bidding, evaluation, contract award and completion time for each contract; and (iii) updated procurement plans, including revised dates, where applicable, for the procurement actions.

- 64 - Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements (US$ million equivalent)

I Procurement Method Expenditure Category ICB NCB Other2 N.B.F. Total Cost 1. Works I 0.00 I 5.00 I 0.00 I 0.00 I 5.00 (0.00) (4.50) (0.00) (0.00) (4.50) 2. Goods 1.oo 1.50 1.50 0.00 4.00 (1 .OO) (1.20) (1.20) (0.00) (3.40) 3. Services 0.00 0.00 13.50 0.00 13.50 (0.00) (0.00) (12.00) (0.00) (12.00) 4. Training and Workshops 0.00 0.00 37.50 0.00 37.50 (0.00) (0.00) (34.30) (0.00) (34.3 0) 4. Miscellaneous 0.00 0.00 1.oo 0.00 1.oo (0.00) (0.00) (0.80) (0.00) (0.80) Total 1.oo 6.50 53.50 0.00 61.00 (1 .OO) (5.70) (48.30) (0.00) (55.00)

I’ Figures in parentheses are the amounts to be financed by the IDA Credit. All costs include contingencies. Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i)managing the project, and (ii)re-lending project funds to local government units.

- 65 - Table AI: Consultant Selection Arrangements (optional) (US$ million equivalent)

Selection Method Consultant Services Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. Total cosd A. Firms 4.30 0.00 0.00 0.00 4.10 0.00 0.00 8.40 (3.60) (0.00) (0.00) (0.00) (3.50) (0.00) (0.00) (7.10) B. Individuals 0.00 0.00 0.00 0.00 0.00 5.10 0.00 .5.10 (0.00) (0.00) (0.00) (0.00) (0.00) (4.90) (0.00) (4.90) Total 4.30 0.00 0.00 0.00 4.10 5.10 0.00 13.50 (3.60) (0.00) (0.00) (0.00) (3.50) (4.90) (0.00) (12.00)

" Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Credit.

- 66 - Prior review thresholds (Table 6)

Table B: Thresholds for Procurement Methods and Prior Review'

Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ millions) 1. Works >200,000 ICB All <200,000 NCB First NCB Contract from each participating agency 2. Goods > 200,000 ICB All 25,000-200,000 NCB First NCB Contract from each participating agency <25,000 NS None

Consulting Firms > 100,000 QCBS All <100,000 SBCQ First SBCQ Contract from each participating agency Individual Consultants > 50,000 Section V-CG All <50,000 -do First IC Contract from each participating agency 4. Miscellaneous 5. Miscellaneous 6. Miscellaneous

Total value of contracts subject to prior review: 8 million Overall Procurement Risk Assessment: High Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits)

"Thresholds generally differ by country and project. Consult "Assessment of Agency's Capacity to Implement Procurement'' and contact the Regional Procurement Adviser for guidance.

- 67 - Annex 6(B): Financial Management and Disbursement Arrangements PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT

Financial Management 1. Summary of the Financial Management Assessment

Executive Summary The project will be implemented at the Central level. The main implementing agencies (IAs) have had no prior experience of directly implementing Bank-financed projects. For this reason, a Financial Management Coordinator (FMC) will be hired at the Project Coordination Unit (PCU) level in the Ministry of Finance. The FMC will be responsible for training of the accounting staff of the implementing agencies, and for the consolidation of FMRs and annual accounts received from the various Project Implementing Units (PIUs).

The accounts of the implementing agencies and for the project as a whole shall be maintained on cash basis. To facilitate flow of funds, Special Accounts would be opened by Finance Division, Establishment Division, Planning & Development Division and each of the 3 Regulatory Institutions (NEGRA, OGRA, and PTA). Each Implementing Agency shall produce quarterly FMRs for submission to the Bank. The PCU, located at the Ministry of Finance, would also receive quarterly FMRs from each of the implementing agencies, consolidate them for the entire project and submit to the Bank within 45 days after the end of the quarter. In respect of the project counterpart funds, each Government implementing agency shall establish an Assignment Account against which government contributions shall be paid. In respect of the three Regulatory agencies however, counterpart funds shall be provided directly from their own resources.

The individual implementing agencies maintaining Special Accounts shall each cany out their own withdrawal application processes and their annual accounts audited by the Auditor General of Pakistan. The consolidated accounts of the project, comprising the individual accounts of the six implementing agencies shall be opined on by the Auditor General of Pakistan. The operation and maintenance of the books of accounts and other records of the project shall also remain the responsibility of the individual implementing agencies nominated to operate the Special Accounts.

Each of the six implementing agencies will identify one qualified and experienced Accountant and one Accounting Assistant to manage the financial aspects of its operations under the project. The FMC shall provide induction training to, and overall arms-length supervision of, the nominated financial management staff of the implementing agencies of the project.

Notwithstanding the lack of prior experience of the implementing agencies in executing Bank-financed projects, the risk rating of the project is set at ‘Moderate’ for the following reasons: (a) the project shall employ or be assigned qualified financial management personnel, acceptable to the Bank, to manage the financial activities at all six implementing agencies; this will be Wher reinforced by the recruitment ofa qualified FMC at the PCU to oversee the financial operations at each of the implementing agencies as well as for the consolidation of project accounts; (b) the project is a non-complex one with defined deliverables in the capacity building arena; there are less complicated procurement obligations in the project than would otherwise be found in traditional investment lending projects.

- 68 - Country Issues Pakistan is finalizing its reactions to the findings in the Country Financial Accountability Assessment (CFAA) and is poised to embracing the reform measures contained therein. In addition, the ‘Project to Improve Financial Reporting and Auditing’ (PIFRA) is achieving satisfactory progress despite its slow pace of implementation. The government has demonstrated, by its support for the project and its developmental objectives, its commitment to enhancing public accountability and financial transparency.-

Risk Rating This is a less complex project with a rationalized design of number of implementing agencies. The implementing agencies, through mitigating measures, shall each be endowed with qualified financial management staff, with qualifications acceptable to the Bank, to manage their financial activities. From the risk rating perspective, the project is rated as ‘Medium’ risk.

Strengths and Weaknesses The core implementing agencies (Finance, Establishment, and Planning Divisions) have no direct prior experience of financial managing of World Bank projects. This is an inhibiting factor in the proficient management of the financial resources of the project. However, mitigating measures as defined in the ‘Agreed Action Plan’ as well as the demonstrated commitment received at the highest level at the Ministry of Finance in support of the fiduciary control measures to be put in place for this project, the project is expected to perform well in rendering its financial management deliverables in a timely manner.

Implementing Entities Public Sector Capacity Building Project (PSCBP) will be implemented by multiple agencies inclusive of Government Ministries and Autonomous bodies with different accounting systems. A National Steering and Coordination Committee (NSCC) comprising Secretaries of Finance, Establishment, Economic Affairs and Planning Divisions and one independent academic (or a key civil society representative) would oversee the project implementation and review new proposals for inclusion in PSCBP.

A small Project Coordination Unit (PCU) would be set up at the Ministry of Finance. The PCU shall be headed by a Project Coordinator and the Unit shall include a Financial Management Coordinator (FMC) for the entire project. The FMC will be responsible for training of the accounting staff of the implementing agencies, and for the consolidation of the quarterly FMRs and annual accounts received from the various Project Implementing Units (PIUs).

Funds Flow The project will be budgeted in Government’s ADP budget. There shall be six core implementing agencies for the project as follows: Finance and Establishment Divisions, Planning & Development Division, NEPRA, OGRA, PTA. For the IDA’Sshare of financing, six Special Accounts shall be set up - one for each implementing agency. The borrower’s share of financing would be paid through three separate Assignment Accounts (one for each PIU) to be opened at the Finance and Establishment Divisions, and Planning & Development Division. Each Special Account would be operated by two joint signatories to be nominated by the Additional Secretary of each Division. In respect of the three Regulatory institutions maintaining Special Accounts, no assignment accounts shall be established since the individual agencies shall meet their counterpart funding from their own resources. All IDA funds shall be transferred to the nominated Special Accounts of the implementing agencies held with the National Bank of Pakistan through the State Bank ofPakistan.

It may be noted that the participating agencies eligible for funding under the special accounts of the

- 69 - government implementing agencies (Finance and Establishment Divisions) are as follows:

0 Finance Division: Finance (FD), Economic Affairs (EAD), Commerce (MOC), Central Board of Revenue (CBR), and Federal Bureau of Statistics (FBS) 0 Establishment Division: Establishment Division (ED), Civil Service Reform Unit (CSRU), Federal Public service Commission (FPSC), National School of Public Policy (NSPP) and Associated training Institutions.

The rest of the implementing agencies shall be ‘stand-alones’ as concerns the participatory agencies accessing funds under the project.

Staffing The PCU, to be located at the Ministry of Finance, would be headed by a Project Coordinator and supported by a Financial Management Coordinator, who would, inter alia: (a) coordinate the overall FM aspects of the project; (b) provide training for the staff of implementing agencies on the maintenance of accounts and production of FMRs; and (c) consolidate the information received from implementing agencies for submission to the Project Steering Committee (NSCC) and the Bank. The six implementing agencies maintaining Special Accounts shall appoint or nominate qualified personnel (One Accountant and One Accounting Assistant), with qualifications acceptable to the Bank, to keep their books of account, furnish periodic (quarterly) financial management reports to the Bank and the FMC,. and prepare final annual accounts for audit. The FMC of the project at the PCU shall be an experienced accountant, with qualifications acceptable to the Bank. The draft TOR for FMC was provided to MOF on September 19, 2003.

Accounting Policies and Procedures The Government’s financial rules, chart of classification and delegation of powers are used by the MinistriesDivisions, whereas the Regulators have their own financial rules and accounting policies. The cash basis of accounting shall however be adopted for the purposes of reporting to the Bank

The FMC at the PCU will develop financial management procedures for the project and shall include the prescribed formats of reports required by the Bank.

2. Audit Arrangements

Implementing Agency Audit /Special Opinion Date of Receipt FD, ED, P&DD, NEPRA, Project Accounts of Implementing 3 1 December of each year, OGRA, PTA Agency - Financial Statement excepting 3 1 December 2004 Audit MoF ( FMC) Overall Project Accounts 3 1 December ofeach year, (Consolidated) - Special Opinion excepting 3 1 December 2004

- 70 - Reporting and Monitoring Financial Monitoring Reports (FMRs): The FMR requirement would include financial statements, physical progress reports and procurement reports for project monitoring. Each Implementing agency holding a Special Account shall prepare quarterly reports for separate delivery to the Bank. A copy ofsuch quarterly reports should also be made available to the PCU who will consolidate the information from all implementing agencies and submit the consolidated report on the project to the Bank within 45 days aRer the end of each quarter. In essence the following shall constitute the quarterly FMR reports to be submitted to the Bank:

1. Sources and Uses ofFunds by Components 2. Uses offunds by Component and Project Activity 3. Output Monitoring Report (linking financial and physical progress)

Information System: The project shall maintain books of accounts using manual systems and on the cash basis. Excel spreadsheets shall be used for FMR reporting. In respect of the Regulatory Institutions serving as implementing agencies, their mainstream accounting processes shall be used, except that the specific reporting requirements of the project shall be met as a by-product of those processes.

Agreed Action Plan

Agreed Action DivisiodAgency Completion I No* I Deadline 1. Financial Management Finance Division (AS I 3 1 March 2004 I Coordinator (FMC) at PCU Fin.) to be selected and Bank notified. 2. Qualified Accounting staff to Finance, Establishment 20 March 2004 be identified for each Division, Planning & of the Develop. Division, ImplementingAgencies NEPRA. OGRA. PTA 3. Setting up of accounting procedures for the Project 4. Training to be provided to all the accounting staff and

Coordinators I I

1. The Federal Government shall ensure that all project implementing agencies maintain, for the duration of the project, a comprehensive financial management system managed by suitable staff with qualification and experience satisfactory to the IDA; 2. The Federal Government shall ensure that only qualifying participating agencies access the funds under the Project 3. The Federal Govemment shall ensure, through the Project Coordinator, and the project Financial Coordinator, that, not later than 3 1 December, each year, excepting 3 1 December 2004, audited accounts of each ofthe six project implementing agencies as well as audited opinion on the

- 71 - consolidated audited accounts, both for each fiscal year, are submitted to the IDA, along with an action plan to address any audit issues.

Supervision Plan Except for the first supervision period during which more intensive supervision shall be conducted to ensure compliance with the proposed systems and staffing improvement as outline in this assessment, the Bank's normal supervision procedures will suffice.

3. Disbursement Arrangements

The proposed Credit amount of USD 55 million is expected to be disbursed over a period of five years and would cover about 90% of the project cost. The withdrawals from the IDA Credit would be under traditional transaction based disbursement systems.

The allocation of the Credit proceeds by disbursement category and percentage to be financed are show in the table below. 100% withdrawals, where applicable, would be net of taxes and duties:

Allocation of credit proceeds (Table C) '

Expenditure Category 1) Expenditures in respect of rofessional development .omponent: (a) Civil Works 2.8 I 90% (b) Goods 0.74 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and 80% of local expenditures for othei items procured locally (c) Consultants' Services 1.33 98% of expenditures for consultants domiciled within the Borrower's territory and 88% of expenditures for other

(d) Scholarships/Training 16.17 100% (e) Incremental Aministrative 0.02 80% for FY04 and FY05; and Operating Costs 60% for FY06 and FY07; and 40% thereafter 2) Expenditures in respect of 3conomic Policy Making and danagement Capacity (a) Civil Works (b) Goods 100% of local expenditures (ex-factory cost) and 80% of local expenditures for othe items procured locally

- 72 - (c) Consultants' Services 5.64 98% of expenditures for consultants domiciled within the Borrower's territory and 88% of expenditures for other consultants (d) Scholarships/Training 6.73 100% (e) Incremental Administrative 0.89 80% for FY04 and FY05; and Operating Costs 60% for FY06 and FY07; and 40% thereafter 3) Expenditures in respect of Legulatory Capacity (a) Goods 0.02 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and ,80% of local expenditures for othei items procured locally (b) Consultants' Services 3.11 98% ofexpenditures for

consultants (c) Scholarships/Training 2.15 100% 4) Unallocated 9.9 'otal Bank Financing 55.00 :otal Project Costs with Bank 61.00 Financing

Use of statements of expenditures (SOEs): Withdrawals (Documented and under Statement of Expenditures); Disbursement would be fully documented except for those expenditures: (a) under contracts not exceeding the equivalent of (i)US$ 200,000 for works; (ii)US$25,000 each for goods; (ii)US$ 100,000 for services for consulting fms; (iii)US$ 50,000 for services of individual consultants; (iv) scholarships not exceeding US$20,000; (v) training and (vi) incremental operating costs of PCU. Such disbursement would be made against Statement of Expenditures (SOEs), the documentation for which would not be submitted to IDA but retained by the respective accounts maintaining DivisiodAgency and made available during the course of project supervision.

Special account: To facilitate disbursement, six Special Accounts would be established for Establishment Division (Professional Development, NSPP and FPSC), Finance Division (Finance Wings and all other agencies) Planning & Development Division, and the three Regulators (NEPRA, OGRA and PTA) in the National Bank of Pakistan on the terms and conditions acceptable to IDA. The Special Accounts would be opened and maintained by PIUs and would be used for payments for all the eligible foreign and local expenditures. The Special Accounts would be replenished on a monthly basis or whenever 20% of the account has been utilized, whichever occurs first. The Special Accounts, having following

- 73 - authorized allocations for advances, would be used for IDA’S share of financing of project expenditures (equivalent to requirement for about 4 months estimated expenditures):

Establishment Division : USD 2.00 million Finance Division USD 1.OO million P&DD USD 0.30 million OGRA USD 0.10 million NEPRA USD 0.14 million PTA USD 0.10 million

Retroactive Finance: Retroactive financing upto an amount of USD 5 million would cover eligible expenditrures for Project activities after August 3 1,2003.

- 74 - Annex 7: Project Processing Schedule PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT

1 Appraisal mission departure I 11/07/2003 I 11/17/2003 I Negotiations 02/23/2004 0212ma4 Planned Date of Effectiveness O1/3 012004

Prepared by: GOP and Individual MinistriedAgencies

Preparation assistance: GOP's own resources

Bank staff who worked on the projecl included: Name Speciality Fsya Akhlaque, Task team leader PSD Specialist (Institutional/Industrial Economist) Shabana Khawar, Co-task-leader Operations (Finance) Nick Manning Public sector specialist Hanid Mukhtar Macroeconomics, Finance, Planning Zareen Naqvi Trade and public economics Rashid Aziz Eneregy Specialist; regulatoly issues Waqar Haider Oil & gas; regulation; PSD specialist Mudassir Khan Finance specialist Ahsan Ali Procurement specialist Hassan Masood Mirza Procurement specialist Ismaila Ceesay FMspecialist Riaz Mahmud FMspecialist Akhtar Hamid Legal A. H. Qureshi Telecom specialist, consultant Tanq Husain Civil service specialist, consultant Ambreen Malik consultant Zia A1 Jalalay Social Development specialist Farah Imran Team assistant I

- 75 - Annex 8: Documents in the Project File* PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT

A. Project Implementation Plan 1. Establishment Division's Civil Service Reform Agenda 2. Entity Improvement Plans (EIPs) for each participating agency.

B. Bank Staff Assessments

0 Procurement/ FM assessments .

C. Other

*Including electronic files

- 76 - Annex 9: Statement of Loans and Credits PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT 30-Mar-2004 Dierence between expected and actual Oriainal Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO10556 2004 HIGHWAYS REHAB 50.00 150.00 0.00 0.00 205.61 -0.52 0.00 PO82977 2004 Second Poverty Alleviation Fund Project 0.00 238.00 0.00 0.00 246.19 13.72 0.00 PO83228 2004 Punjab Education Reform Program 0.00 100,oo 0.00 0.00 103.89 0.00 0.00 PO71454 2003 AJK Community Infrastructure 8 Services 0.00 20.00 0.00 0.00 21.15 4.67 0.00 PO74797 2003 Banking Sector Technical Assistance 0.00 26.50 0.00 0.00 26.85 13.38 0.00 P0 7 4 85 6 2003 HIV/AIDS Prevention Project 0.00 27.83 0.00 0.00 39.94 6.48 0.00 PO81909 2003 Partnership for Polio Eradication 0.00 20.00 0.00 0.00 0.90 -1.29 0.00 P0 7 7 2 88 2003 National Education Assessment System 0.00 3.63 0.00 0.00 3.86 0.1 1 0.00 PO55292 2002 BSRPP 0.00 300.00 0.00 0.00 111.37 -204.62 0.00 PO71092 2001 NWFP ON-FARM WATER MANAGEMENT f 'ROJECT 0.00 21.35 0.00 0.00 21.80 -2.44 0.00 PO56213 2001 TRADE &TRANSPORT 0.00 3.00 0.00 0.00 0.95 0.57 0.00 P0 3 5 82 3 2001 GEF-Protected Areas Management Project 0.00 0.00 10.06 0.00 10.96 1.04 0.00 PO49791 1999 POVERTY ALLEVIATION FUND 0.00 90.00 0.00 0.00 13.00 -23.54 0.00 PO10500 1998 NATIONAL DRAINAGE PR 0.00 285.00 0.00 0.24 82.90 65.07 25.18 PO36015 1997 IMPR FIN REP 8 AUDIT 0.00 26.80 0.00 0.00 15.28 15.45 10.24

Total: 50.00 1314.11 10.08 0.24 904.66 -91.92 35.42

- 77 - PAKISTAN STATEMENT OF IFC's Held and Disbursed Portfolio Feb 29 - 2004 In Millions US Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1995 ABN AMRO PAK 15.00 0.00 0.00 0.00 15.00 0.00 0.00 1996 AES La1 Pir 23.73 9.50 0.00 0.00 23.73 9.50 0.00 0.00 1995 AES Pak Gen 13.46 9.50 0.00 18.78 13.46 9.50 0.00 18.78 1991 Abamco Mgmt 0.00 0.29 0.00 0.00 0.00 0.29 0.00 0.00 1995104 Askari Bank 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 1993 BRRIL 0.00 0.24 0.00 0.00 0.00 0.24 0.00 0.00 1993197101 BRRIM 0.00 0.76 0.00 0.00 0.00 0.76 0.00 0.00 2003 BSJS Fund 0.00 0.60 0.00 0.00 0.00 0.60 0.00 0.00 1991 CDCPL 0.00 0.16 0.00 0.00 0.00 0.16 0.00 0.00 1996 Crescent Bahuman 7.50 0.00 0.00 1.50 7.40 0.00 0.00 1.50 200 1 Dewan Salman 30.00 1.oo 4.00 0.00 30.00 0.00 4.00 0.00 1990192196 Engro Chemical 0.00 3.90 0.00 0.00 0.00 3.90 0.00 0.00 2002 Engro Vopak 4.23 0.00 0.00 2.32 4.23 0.00 0.00 2.32 1995 Eni Pakistan 27.00 0.00 0.00 0.00 27.00 0.00 0.00 0.00 1996 FIIB 0.77 0.00 0.00 0.00 0.77 0.00 0.00 0.00 2003 Fauji Cement 15.59 0.00 0.00 0.00 15.19 0.00 0.00 0.00 1995 First UDL 0.00 0.00 6.67 0.00 0.00 0.00 6.67 0.00 1994/97/00 Gul Ahmed 14.85 4.10 0.00 14.84 14.85 4.10 0.00 14.84 2002 KCT 7.75 0.00 1.50 0.00 7.75 0.00 1.50 0.00 2002 Kohinoor 12.50 6.30 0.00 12.20 12.50 6.30 0.00 12.20 1994 Maple Leaf 11.72 0.00 0.00 0.00 11.60 0.00 0.00 0.00 1994 Metropolitan Bnk 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 1983102 Micro Bank 0.00 2.71 0.00 0.00 0.00 2.71 0.00 0.00 1965187191/94/95 Network Leasing 2.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 Orix Finance 0.00 0.58 0.00 0.00 0.00 0.58 0.00 0.00 200 1 PI&CL 0.3 1 0.00 0.00 0.00 0.3 1 0.00 0.00 0.00 1996 PPL 0.00 6.63 0.00 0.00 0.00 6.63 0.00 0.00 Packages 0.00 0.26 0.00 0.00 0.00 0.26 0.00 0.00 Regent Knitwear 8.66 0.00 0.00 2.80 8.66 0.00 0.00 2.80 Sarah Textiles 1.60 0.00 0.00 0.00 1.60 0.00 0.00 0.00 Sonen Bank 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 Uch Power 54.05 0.00 0.00 59.18 43.96 0.00 0.00 44.14 Union Bank - PAK 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 Total Portfolio: 264.75 46.53 12.17 111.62 252.01 45.53 12.17 96.58

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

- 78 - Annex IO: Country at a Glance PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT

POVERTY and SOCIAL South Low- Pakistan Asia income 3eveiopment diamond* 2003 Population, mid-year (millions) 148.4 1,401 2,495 Life expectancy GNi per capita (Atlas method, US$) 470 460 430 GNI (Atlas method, US$ billions) 69.2 640 1,072 Average annual growth, 1997-03 T Population I%) 2.4 1.8 1.9 3NI Gross Labor force (%) 3.2 2.3 2.3 Jer primary Most recent estimate (latest year available, 1997-03) :apita enrollment Poverty (% of population below national povertv line) 33 Urban population (% of total population) 34 28 30 Life expectancy at birth (years) 64 63 59 i Infant mortality (per 7,000 live births) 84 71 ai Child malnutrition (% of children under 5) Access to improved water source Access to an improved water source (% of populationf 90 84 76 Illiteracy (% ofpopulation age 15+) 54 44 37 -Pakistan Gross primary enrollment (% of school-age populationl 74 97 95 Male 93 108 103 Low-income amup Female 54 89 87

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983 1993 2002 2003 Economic ratios. GDP (US$ billions) 28.7 51.7 59.2 68.8 Gross domestic investmenffGDP 18.8 20.8 14.7 15.5 Trade Exports of goods and servicedGDP 11.9 16.3 18.7 20.5 Gross domestic savingslGDP 7.7 14.7 14.4 15.6 Gross national savingslGDP 17.0 20.6 22.8 29.9 T Current account baiance/GDP -0.6 -6.4 2.7 6.1 interest paymentslGDP (on external debt) 1.1 1.4 1.7 0.9 Total external debffGDP 41.9 45.8 55.3 47.4 Total debt servicelexports 20.9 30.8 32.2 25.8 Present value of debffGDP 42.6 38.4 228.5 193.3 Present value of debffexpotts indebtedness 1983-93 1993-03 2002 2003 2003-07 (average annual growth) -Pakistan GDP 5.8 3.4 2.8 5.8 5.6 ~ Low-lncome group GDP oer caoita 3.1 0.9 0.4 3.3 3.1

STRUCTURE of the ECONOMY 1983 1993 2002 2003 Growth of investment and GDP (“h) (% of GDP) Agriculture 30.3 25.0 23.2 23.3 2o T Industry 22.1 24.7 23.3 23.5 Manufacturing 15.3 16.7 16.1 16.4 Services 47.7 50.3 53.5 53.2 Private consumption 80.8 72.2 74.4 72.7 General government consumption 11.4 13.1 11.3 11.7 -GDI +GDP imports of goods and services 23.0 22.4 19.0 20.4 1-21-

1983-93 1993-03 2002 2003 Growth of exports and imports (Oh) (average annual growth) Agriculture 4.4 3.5 -0.1 4.1 I industry 7.1 3.6 5.4 5.4 30 Manufacturing 6.6 4.1 5.0 7.7 20 Services 5.7 4.1 4.1 5.3 10 0 Private consumption 4.3 3.5 1.4 -0.6 General government consumption 6.6 1.3 13.5 10.4 -10 Gross domestic investment 4.9 0.7 -3.0 10.5 imports of goods and sewices 3.2 0.0 4.5 13.9 Pakistan

PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Domestic prices (% change) Consumer prices 9.8 2.7 3.1 implicit GDP deflator 5.3 8.7 3.1 4.6 Government finance (% of GDP, includes current grants) Current revenue 18.1 19.5 20.8 Current budget balance -2.4 0.2 -0.4 -GDP deflator -CPI Overall SurDlusldeficit -8.1 -4.4 -1.7 I

TRADE 1983 1993 2002 2003 Export and Import levels (US$ mlll.) (US$ millions) Total exports (fob) 2,694 6,782 9,140 10,889 I conon 271 18 49

Rice 317 448 555 10,000 Manufactures 1,881 3,723 5,368 6,653 Total imports (cif) 10,049 9,432 11,333 Food 1,290 413 587 5,000 Fuel and energy 1,578 2,864 3,098 Capital goods 3,409 2,594 3,392 0 97 98 99 w 01 02 Export price index (1995=100) 88 80 89 Exports Imports Import price index (1995=100) 96 90 101 O3 Terms of trade (1995=100) 92 89 88 I I

BALANCE of PAYMENTS 1983 1993 2002 2003 Current account balance to GDP (“A) (US$ millions) I Exports of goods and services 3,420 8,339 11,056 13,686 Imports of goods and services 6,593 12,856 11,646 14,047 Resource balance -3,173 -4,517 -590 -361 1”T Net income -421 -1,498 -2,319 -2,210 Net current transfers 3,416 2,688 4,500 6,775 Current account balance -178 -3,326 1,591 4,204 Financing items (net) 2,682 1,685 1,475 Changes in net reserves 644 -3,276 -5,679 Memo: Reserves including gold (US$ millions) 2,758 1,369 4,997 9,630 Conversion rate @€C, local/US$J 12.7 25.8 61.3 58.4

EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) Compositionof 2003 debt (US$ mill.) Total debt outstanding and disbursed 12,026 23,712 32,769 32,608 IBRD 351 2,557 2,943 2,813 IDA 1,145 2,585 5,097 5,604 Total debt service 1,343 2,383 3,755 3,621 IBRD 63 325 367 367 IDA 14 43 101 122 Composition of net resource flows Official grants 0 0 0 0 Official creditors 350 1,011 758 Private creditors -87 710 -389 Foreign direct investment 28 306 368 612 Portfolio equity 0 270 -491 -394 World Bank program Commitments 255 429 800 297 A. IBRD E. Bilateral Disbursements 144 537 869 356 B - IDA D ~ Other multilateral F - Private Principal repayments 34 166 310 335 C - IMF G -Short-term Net flows 110 371 559 21 Interest payments 42 202 159 154 Net transfers 88 168 400 -1 34

Development tconomics 4/1/04

- 80 - Additional Annex 11 : Detailed Cost Table PAKISTAN: PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT

Participating Agency-ComponentICategory Wise Allocations (US Dollar Millions) - Total Economic Policy Making and Man1 nent Capacity 'rofessional Dev. Regulatory Capa Y -~Uocatioi -FD -CSRU -CBR -MOC EAD PPRA P&DD -Total EDlNSPP FPSC -Total YEPRA OGRA -PTA

Economic Policy Making & Management Capacity (I)Civil Works 2.48 2.48 2.48 (2) Goods 3.02 0.35 0.06 1.52 0.25 0.19 0.15 0.50 3.02 (3) Consultants' services 5.64 1.47 1.50 0.42 0.75 0.30 - 1.20 5.64 a. Institutional Development 4.16 1.39 0.60 0.42 0.30 0.30 - 1.15 4.16 b. Studies 1.48 0.08 0.90 0.45 0.05 1.48 (4) ScholarhsipsiTraining 6.73 0.73 0.18 1.oo 0.80 0.42 0.80 2.80 6.73 (5) Incremental Operating Cost -0.89 -0.47 -0.42 -0.89 Sub-total: -18.76 -3.02 0.91 0.95 -4.92 -18.76 -

Professional Development (1) Civil Works 2.80 2.80 2.80 (2) Goods 0.74 0.3 1 0.43 0.74 (3) Consultants' services 1.33 1.05 0.28 1.33 a. Institutional Development 1.33 1.05 0.28 1.33 b. Studies (4) Scholarhsipflraining 16.17 16.00 0.17 16.17 (5) Incremental Operating Cost -0.02 - - - -0.02 -0.02 - Sub-total: -21.06 - - - -20.18 -0.88 -21.06 -

Regulatory Capacity (1) Goods 0.02 0.02 ~ 0.0 (2) Consultants' services 3.11 0.77 135 0.9s 3.1 a. Institutional Development 1.68 0.67 0.2( 0.81 1.6 b. Studies 1.43 0.10 1.1: 0.18 1.4 (3) ScholarhsipsiTraining -2.15 1.13 0.54 -0.5; -2.1 Sub-total: -5.28 - - 1.92 1.8: -1.51 -5.2 Unallocated: 9.90 GoP Share -6.00 - - - - Total: -61.00 0.91 0.95 -18.47 -0.88 -2 1.oc 1.92 l.8! -1.51 -5.2

Note: The participating agencies would be meeting their logistical costs and taxes (where IDA finances at 100%) from about 10% GOP's share of financing for the project. Logistical costs include all olfce operating costs, salaries of any standeputed to the project, all local travel costs including training. The incremental administrative and operating costs indicated under para 2(e) of Schedule 1 to DCA are meant for PCU at FD, PMUat PC and ED.

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MAP SECTION