Updated Project Information Document (PID) Report No: AB154

Project Name PAKISTAN - PAKISTAN- PUBLIC SECTOR CAPACITY BUILDING PROJECT Public Disclosure Authorized Region South Asia Regional Office Sector Central government administration (76%); Sub-national government administration (15%); Tertiary education (9%) Theme Administrative and civil service reform (P); Regulation and competition policy (P); Debt management and fiscal substainability (S); Tax policy and administration (S); Public expenditure, financial management and procurement (S) Project P083370 Borrower(s) GOVERNMENT OF PAKISTAN Implementing Agency(ies) FINANCE DIVISION, GOVERNMENT OF PAKISTAN Address: 424, Q Block, Pak Secretariat, Islamabad Contact Person: Ismail Qureshi, Additional Secretary, Finance Division (Policy Wing) Tel: 0092-51-9206367 Fax: 0092-51- 9214629 Email: Public Disclosure Authorized Environment Category C (Not Required) Date PID Prepared January 16, 2004 Auth Appr/Negs Date October 27, 2003 Bank Approval Date May 20, 2004

1. Country and Sector Background 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. If Pakistan has to accelerate growth, reduce poverty, and enable private sector to realize their full potential in a competitive global market, a substantial improvement is needed in efficiency and management culture of the government. 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 Public Disclosure Authorized (ICA, World Bank 2003b).

I 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 of broader 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

Public Disclosure Authorized 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. This introduces the burden of redressing these inadequacies during pre-service and in-service training – a task not being done well by the existing civil service training institutes. As a result of these weaknesses: (i) capacity for policy work and 2 PID management is generally limited; (ii) there is excessive reliance on foreign/local 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 and/or 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.

(ii) Recruitment, Promotion, Placements and Transfers Process l Recruitment: As noted above, the recruitment in the civil service is overseen by the Federal/Provincial 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 curricula/syllabi, 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. l Promotion: Promotion policies are generally systematic depending on performance evaluation, seniority, performance during training, and the quality of work experience. These criteria, nonetheless, are often perceived to be inadequate. Additionally, promotions always 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. l 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 of placements is the de facto reservation of certain posts for officers from the APUG (i.e. 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.

(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 (PPEM, World Bank, 2003a). In addition, employment is heavily skewed towards lower grades, reflecting the productivity levels.

(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 ratio is 1:10. There is substantial evidence that the real compensation gap between public and private salaries and emoluments has steadily increased. 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 (PPEM, 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 of policy 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). 3 PID

II 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 (ii) Recruitment reforms (iii) Promotion reforms (iv) Accountability and Client focus (v) Pay and Pension Reforms (vi) Devolution (vii) Governance reforms in key institutions

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.

2. Objectives The overarching goal of the proposed Public Sector Capacity Building Project (PSCBP) is to support Government of Pakistan's (GoPs) efforts in the implementation of 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 of public sector officers; (ii) capacity enhancement in key ministries/agencies which are in the forefront of design, implementation and monitoring of policy 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 of policy 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 of participating agencies. 4 PID

3. Rationale for Bank's Involvement 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 federal, provincial and district 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.

4. Description A: Project Design

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, including district officers. It will be undertaken through the following:

(a) 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: l 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; l 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/district, and ex-cadre officers.

(b) Strengthening in-country training capacity through support of training institutions (PASC, NIPAs, NSPP): This sub-component comprises up-gradation of civil service training institutions including: building faculty capacity; improving/revising curricula; enhancing infrastructure and IT connectivity; twinning with international institutions; and support for establishment of a National School of Public Policy (NSPP).

Estimated cost of sub-components (a) and (b) US$ 22 million.

(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. Estimated cost 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 of Revenue, Establishment Division, Planning 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 5 PID

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. Estimated cost US$ 4 million.

(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 Large/Medium Tax Payers Units, sales tax 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. Estimated cost US$5 million.

(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. Estimated cost US$ 2 million (EIP under review).

(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: l Devolution: completion of devolution; organizing seminars/workshops of provincial and national level stakeholders to develop consensus on additional reforms; and maintaining an active dialogue with counterparts. l Recruitment and Promotion Reforms: modernizing the cadre system and reforming the system of occupational groups; and strengthening of merit protection. l 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. l 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). l 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 6 PID

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 carryng out tracer studies for the returnees of the EDP and PDEV Programs l Coordination: serving as Secretariat work for the Cabinet Committee on Civil Service Reform; maintaining a close liaison with CSR units established in other Ministries/Divisions; making concrete proposals for aligning donor initiatives - particularly between the ADB, WB and DfID. Estimated cost US$2 million.

(e) Planning Commission: Strengthening Planning Commission’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. Estimated cost US$ 5 million.

(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 all procedures and operations and effective monitoring of the donor sponsored projects. Estimated cost US$ 1 million. (EIP under review).

(g) Public Procurement Regulatory Authority (PPRA): strengthening the newly established PPRA to monitor and regulate public procurement in the country through developing a modern transparent and cost effective public procurement system and putting in place an effective monitoring system (EIP under review).

iii) Strengthening of Regulatory Function The third component will support capacity-building of the 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: Estimated cost US$ 7 million. (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. (b) OGRA: to strengthen OGRA’s capacity to improve its ability to foster competition, encourage private investment and ownership in the sector and deal with challenges arising from the proposed restructuring of the gas sector. (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.

The total cost of the project is estimated to be US$ 58 million. Of this, about 60-70% is for training; around 20-25% for specialized technical consultancies - bulk of which pertains to the specific studies of the regulatory agencies; and the remaining 10% is for procurement of goods and services. 7 PID

5. Financing Source (Total ( US$m)) BORROWER ($6.00) IDA ($52.00) Total Project Cost: $58.00

6. Implementation The following implementation arrangements are 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.

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).

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 vision/plan; (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 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 Secretaries/Agency heads. The proposals would then be submitted to the NSCC for consideration and approval. The proposals, once reviewed by the Bank and approved by the NSCC, would not require any further approval by the Planning Commission as the total 'un-allocated' amount would have already been approved under the umbrella PC-1 by the CDWP and ECNEC. Once approved, the PCU/PC will allocate resources from the un-allocated amount to the new participating agency.

7. Sustainability The focus of the 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.

8. Lessons learned from past operations in the country/sector The key lessons from similar projects in Pakistan, Indonesia, Eritrea and from experience world-wide with public sector institutional reforms include: i) Excessive complexity in terms of institutional participation should be avoided i.e. keep the number of participating institutions manageable. While institutional complexity should be minimized, it is important that all complementary institutions are directly or indirectly included as participants and 8 PID

beneficiaries. Without this, sustainable gains in institutional capabilities are not achieved; ii) Sustainable capacity building requires that broader civil service reform issues (incentive, compensation, etc.) be addressed and that consensus building among stakeholders should be undertaken. This is important in order to sustain the benefits to the organizational capacity through investments in training and education; iv) Consultants for short term analytical support should be minimized, and staff training/education 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 (PASC/NIPAs; 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 training/education, using a combination of foreign (declining importance over the project disbursement period) and domestic (increasing role over project life) educational and training institutions.

9. Environment Aspects (including any public consultation) Issues : None

10. List of factual technical documents: l Pakistan Public Expenditure Management (PPER): Strengthening the Civil Service, World Bank 2003 l Pakistan Development Policy Review: A New Dawn? (DPR),World Bank 2002 l Report on the Committee on Restructuring and Rightsizing of the Federal Ministries/Divisions (chaired by Dr. Shahid Amjad Chaudhry), Government of Pakistan, April 2001 l Civil Service Reform, A review of World Bank Assistance, OED, World Bank, August 1999 l 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

l A Framework for Civil Service Reform in Pakistan, World Bank, 1998 l The State in A Changing World, WDR, 1997.

11. Contact Point:

Task Manager Asya Akhlaque The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 92-51-2279641/6 Fax: 92-51-2279648/9

12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 9 PID

Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop

Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.