Document of The World Bank Report No. 24193-PAK INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED CREDIT IN THE AMOUNT OF SDR 79.1 MILLION (US$100 MILLION EQUIVALENT) TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR A STRUCTURAL ADJUSTMENT CREDIT FOR THE GOVERNMENT OF SINDH PROVINCE May 28, 2002 Poverty Reduction and Economic Management South Asia Region GOVERNMENT FISCAL YEAR July 1 - June 30 (FY02 = 2001/02) CURRENCY EQUIVALENTS Currency Unit = Pak Rupees (PRs.) US$1 = PKR 60.30 (March 2002 Floating Inter Bank Rate) WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AIT Agriculture Income Tax NFC National Finance Commission AERC Applied Economic Research Center NGOs Non-Govemment Organizations ADB Asian Development Bank NRB National Reconstruction Bureau AWBs Area Water Boards NSS National Saving Schemes CAS Country Assistance Strategy NWFP North West Frontier Province CBR Central Board of Revenue OZT Octroi Zila Tax CCB Citizen Community Boards P&D Planning and Development Department CFAA Country Financial Accountability Assessment PAC Public Accounts Committee CGA Comptroller General of Accounts PAD Pakistan Audit Department CIP Community Infrastructure Project PCA Provincial Controller of Accounts CWD Communications and Works Department PD Project Document DAO District Accounts Office PCOI Provincial Committee on Investment DFID United Kingdom Department for Intemational PERK Program for the Economic Revival of Karachi Development PFC Provincial Finance Commission DoE Department of Education PIFRA Pakistan Improvement of Financial Reporting and EPI Expanded Program of Immunization Auditing ESR Education Sector Reform PPAF Pakistan Poverty Alleviation Fund FMC Fiscal Monitoring Committee PRGF Poverty Reduction Growth Facility FOs Farmer Organizations PRSC Poverty Reduction Support Credit GAVI Global Alliance for Vaccines and Immunization PRSP Poverty Reduction Strategy Paper GoP Govemment of Pakistan PSIA Poverty and Social Impact Analysis GoS Govemment of Sindh SAC Structural Adjustment Credit GPDP Gross Provincial Development Product SAP Social Action Program GST General Sales Tax SASO Sindh Agriculture Supplies Organization IDA Intemational Development Association SBP State Bank of Pakistan IFC International Finance Corporation SEF Sindh Education Foundation IFIs Intemational Financial Institutions SG&AD Services Govemment and Administration IMF Intemational Monetary Fund Department I-PRSP Interim Poverty Reduction Strategy Paper SIDA Sindh Irrigation and Drainage Authority KESC Karachi Electric Supply Corporation SMEDA Small and Medium Enterprise Development KPP Khushal Pakistan Program Authority KWSB Karachi Water Supply Board SPSC Sindh Public Service Commission LGO Local Govemment Ordinances SPC Sindh Privatization Commission LHW Lady Health Worker SSAC Sindh Structural Adjustment Credit MDG Millennium Development Goals TPV Third Party Validation MOP Memorandum of the President UIPT Urban Immovable Property Tax MTFRP Medium-Term Fiscal Restructuring Plan UNDP United Nation Development Program MTBF Medium-Term Budget Framework VRS Voluntary Retirement Scheme NAB National Accountability Bureau WAPDA Water and Power Development Authority Vice President: Mieko Nishimizu, SARVP Country Director: John W. Wall, SACPK Sector Director: Sadiq Ahmed, SASPR Task Team Leaders: Ahmad Ahsan & Hanid Mukhtar, SASPR THE ISLAMIC REPUBLIC OF PAKISTAN SINDH STRUCTURAL ADJUSTMENT CREDIT TABLE OF CONTENTS I. INTRODUCTION ..........................................................1 II. THE COUNTRY CONTEXT ..........................................................2 A. Pakistan's Reform Program and Recent Economic Developments .............................................2 B. The Role of the Provinces and the Devolution Program ..........................................................4 m. SINDH: THE PROVINCIAL CONTEXT .6 A. Poverty and Human Development .7 B. Deterioration in Governance and Economic Management .8 IV. THE GOVERNMENT OF SINDH'S REFORM PROGRAM . . 9 A. Pillar One: Fiscal and Financial Management Reforms .10 Fiscal Management .10 Financial Management .16 B. Pillar Two: Improving Governance of Civil Service and Public Service Delivery . 17 Civil Service Reforms .17 Improving Public Service Delivery: Education ....................................................... 19 Health ......................................................... 21 Rural Drinking Water and Sanitation ....................................................... 22 Urban Services ......................................................... 23 C. Pillar Three: Promoting Private Sector Development and Economic Revival ............................ 23 Regulatory Reforms and Privatization ....................................................... 24 Rehabilitating Sindh 's Road ......................................................... 25 Agriculture and Irrigation ....................................................... 25 V. THE PROPOSED SINDH STRUCTURAL ADJUSTMENT CREDIT . . 27 A. Pakistan Country Assistance Strategy ......................................................... 27 B. The Proposed Credit: Prior Actions and Medium Term Benchmarks ........................................ 29 C. Credit Administration ......................................................... 3 1 D. Monitoring and Evaluation Arrangements ......................................................... 32 VI. BENEFITS AND RISKS .34 A. Benefits .34 B. Risks .34 TABLES Table 1: Pakistan's Social Indicators in Perspective ............................................................2 Table 2: Provincial and Urban Rural Differences in Selected Human Development Indicators (1998-99) ............................................................7 Table 3: Trends in Social Indicators in Sindh ............................................................8 Table 4: Growth Rates in Sindh ............................................................9 Table 5: Sindh - Public Finances, 1999/00 - 2005/06 ........................................................... 14 Table 6: Composition of Expenditures, 1999/00 - 2005/06 ........................................................... 14 Table 7: Monitoring Indicators Under GoS Reform Program ........................................................... 33 FIGURES Figure 1: Sindh: Decreasing Fiscal Space .............................................................8 BOXES Box 1: Education Sector Strategy Targets in Sindh ........................................................... 19 Box 2: Health Sector Strategy Targets in Sindh ........................................................... 21 Box 3: Prior Actions for Disbursement of Sindh Structural Adjustment Credit ........................................ 30 ANNEXES Annex A: Policy Reform Matrix Annex B: Letter of Development Policy Annex C: Poverty and Social Development in Sindh Annex D Devolution and Inter-Governmental Fiscal Framework for Pakistan and Sindh Annex E: Sindh Medium-Term Fiscal Restructuring Plan FY 2002 - FY 2006 Annex F: Public Financial Accountability and Management in Sindh Annex G: Sindh Education and Health Sector Reforms Program Annex H: Regulatory Reforms and Privatization Annex I: Statistical Annex MAP Task Team Task Managers Ahmad Ahsan, Hanid Mukhtar (SASPR) Peer Reviewers Shahrokh Fardoust (Senior Advisor, DECVP); Elizabeth M. King (Lead Economist, DECRG); Gary Reid (Lead Specialist, ECAPS) FiscaUPublic Expenditure Hanid Mukhtar, Shaheen Malik, Ahmad Ahsan (SASPR) Management Financial Management Arif Yaqub, P.K. Subramanian, Hasan Saqib (SARFM) Administrative Reform Nick Manning, Ahmad Ahsan (SASPR) Public Enterprise Reform John S. Speakman (MNSIF), Asya Akhlaque (SARFP) and Deregulation Poverty Monitoring & Ambar Narayan (SASPR) Social Analysis Sectoral Inputs Tahseen Sayed (SASHD), Inaam Haq (SASHD), Amer Zafar Durrani (SASEI), Shahnaz Arshad (SASEI), Raja Rehan Arshad (SASRD), Bala B. K. Naidu (SASPR) Legal Counsel Said Al Habsy, Akhtar Hamid (LEGMS) Procurement Ahsan Ali (SARPS) Program Assistants Shams ur Rehman, Thelma Rutledge PAKISTAN SINDE STRUCTURAL ADJUSTMENT CREDIT Credit and Program Summary Borrower: Islamic Republic of Pakistan Implementing Agency: Department of Finance, Government of Sindh Beneficiary: Province of Sindh Amount: SDR 79.1 million (US$100 million equivalent) Terms: Standard IDA terms; 35 years maturity with 10-year grace period On lend:ng Terms: IDA terms in Pak Rupees equivalent: Standard with 35 years maturity and 10 years grace period Description: The Sindh Structural Adjustment Credit (SSAC) supports the Province of Sindh's economic reform program to reduce human and income poverty in the province. This program has three pillars: (i) fiscal restructuring and financial management reforms; (ii) improving public service delivery through civil service reforms, decentralization, and reforms in health, education, drinking water, and urban services; and (iii) regulatory reforms, privatization and infrastructure improvements. The proposed credit is consistent with the macroeconomic program and the Interim Poverty Reduction Strategy of the Government of Pakistan. Benefits: The implementation of the SSAC supported program of reforms to date represents substantial progress in Sindh's efforts to achieve its reform vision as presented in the Sindh Development Forum, February, 2002 and is consistent with efforts by the Government of Pakistan to stimulate reform in the provinces. The main development goals include creating an environment in the province conducive to accelerating growth, reducing human and income poverty, and making government transparent and accountable. The benefits of this credit will come from poverty reduction and faster human development resulting from the following measures: (i) fiscal restructuring that will provide more resources for poverty reducing expenditures and financial management reforms that will enhance the effectiveness of expenditures; (ii) a better managed civil service and public service delivery systems that are made more accountable to local governments and communities for their perfonnance; (iii) the impact of better public services in education and health leading to greater access to higher quality education and increasing primary enrollment and completion rates, and greater coverage of immunization and preventive health programs; and (iv) regulatory and infrastructure reforms that will support increase in incomes and employment. Monitoring arrangements have been strengthened to identify and track the relevant variables to evaluate the impact of these reforms. Risks: This operation faces essentially three types of risks: continuity risks, implementation capacity risks, and risks from exogenous shocks. Of all the risks, continuity of reforms risk, closely related to political risk, is the most important. Newly elected governments will take office in October 2002, and there is the unavoidable question whether the next government will continue implementing the current reform program. They will likely face political risks such as resistance from politicians and civil servants to loss of opportunity for rent seeking and corruption and the loss of power to local governments. Civil servants and public enterprise employees are likely to resist privatization and rationalization. The GoS however has attempted to mitigate these risks through building consensus around the reform program (e.g. through the Sindh Development Forum which was attended by a wide range of civil society members, development partners, and very importantly, the newly elected District Government heads, the Nazims). In addition, the reforms and the partnerships have been institutionalized in a number of bodies at both the provincial and local levels. Disbursement: SDR 79.1 million (US$ 100 million equivalent), disbursed upon effectiveness to the GoP and the rupee equivalent will then be on-lent to GoS on IDA terms; GoP will bear the foreign exchange risk. Project ID Number: P075810 IDA PROGRAM DOCUMENT FOR A PROPOSED CREDIT TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR A STRUCTURAL ADJUSTMENT CREDIT FOR TBE GOVERNMENT OF SINDH I. INTRODUCTION 1. The proposed IDA credit seeks to support the wide-ranging program of reforms that are being implemented by the Government of Sindh (GoS) province in Pakistan since taking office in April 20001. These reforms, set in a medium-term framework, are improving public finances, governance, public service delivery and the regulatory framework and reversing a decade of poor govemance and decline in the province (see paras. 31 to 34). 2. The reforms in Sindh, led by strong champions in the government, including the Governor of the province, the Cabinet, and committed civil servants, aim to reduce poverty in Pakistan's second largest province and home of 30 million people. Closely complementing the Government of Pakistan's strategy articulated in the Interim-Poverty Reduction Strategy Paper (I-PRSP) issued in November 2001, the objective of the GoS reforns is to reduce poverty through improving public service delivery and stimulating growth. 3. In the short span of two years, the GoS has built up a credible track record in implementation and progress in outcomes is evident in some areas. The provincial fiscal position has improved through significant reforms in tax policy, increase in revenues, and reduction in liabilities. Allocations on critical non-salary expenditures on health and education and development expenditures have increased and the development portfolio has been streamlined and prioritized. An active Public Accounts Committee (the first after 15 years) is reviewing the most current Audit report (FY 00). The autonomy and mandate of the Public Service Commission has been significantly strengthened. There have been appreciable gains in school enrollment and immunization, school management committees led by parents have been formed and given wide powers, and absenteeism is being curtailed. Infrastructure maintenance has improved and the regulatory framework has been streamlined. 4. This proposed Sindh Structural Adjustment Credit (SSAC) follows nearly two years of dialogue between the provincial Governments of Pakistan and the World Bank and is well anchored in the Country Assistance Strategy (see paras 98 to 103). This dialogue with provincial Governments, starting with the discussion on the report Reforming Provincial Finances (World Bank, October 2000), highlighted the need for restructuring of provincial finances and improving governance, public service delivery, and the investment climate in the context of a medium-term reform program. Sindh and NWFP are the first provinces in Pakistan where these reforms and dialogue have matured sufficiently to propose lending operations. The Bank has been providing technical assistance to the Sindh Government to weave its various reform initiatives into an integrated reform program, place it in a medium-term framework, and help implementation. Further, to support continuity of reforms after elected governments take office next October, the GoS is building consensus behind this reform program through consultations with civil society and development partners and building public-private partnerships. A highly successful Sindh Development Forum was held in February 2002 to this end. The proposed credit is fully consistent with the 2002 Pakistan Country Assistance Strategy's support for provincial reforns as a key plank of country assistance. 5. The proposed SSAC and the medium term fiscal restructuring plan that it supports is consistent with Pakistan's medium term macroeconomic program and Pakistan's I-PRSP, the implementation of lThe cwrent Governor, Minister of Finance, and odier key Cabinet rnmenbes were appointed in April 2000. which are supported by the IMF's Poverty Reduction and Growth Facility (PRGF). Thus, the credit will be a part of the overall financing of the agreed fiscal deficit for FY03 under the PRGF program. The credit is consistent with the I-PRSP in terms of supporting specific poverty reduction measures and targets identified in the I-PRSP (see para. 37 and Table 7). II. THE COUNTRY CONTEXT A. Pakistan's Reform Program and Recent Economic Developments 6. In the 1990s, Pakistan's development slowed down markedly. Per capita growth rates fell from 3% in the 1980s to around 1.2% and poverty level and human development remained stagnant and even deteriorated in some cases. Despite structural reforms in the 1990s that liberalized trade, the financial sector and private sector investment in infrastructure, fiscal adjustment remained incomplete and the country's governance and public institutions weakened through corruption and lack of accountability and transparency. Thus, through most of the 1990s, inadequate resource mobilization constrained efforts to reduce fiscal deficits and led to an average fiscal deficit of around 6% of GDP. The financing of these deficits increased the already large public debt, leaving Pakistan in a precarious debt trap with its problems compounded by the shock of the cutoff of external assistance after the nuclear explosion in 1998. 7. Alongside the reversal of economic performance in the 1990s, the other unfortunate part in Pakistan's performance is its persistently poor human development and the resultant social gap: i.e. the gap in human development between Pakistan and Table 1: Pakistan's Social Indicators in Perspective countries with comparable Predicted Values for per capita income (see Indicators Actual Values Countries with Similar Table 1). Thus, even for Pabstan Incomes though Pakistan has grown Child (Under Age 5) Mortality Rate (1998) 120.0 101.0 much faster than most other % of childbirths with low birth-weight (1990s) 25.0 13.4 low-income countries, it has faw-iedoto achuntieve social Public spending on health as % of GDP (1996) failed to achieve social progress commensurate Gross primary enrollment (1990s) 67.3 88.1 with its growth. For For females 42.7 83.2 example, while infant Illiteracy rate (1990s) 59.5 35.1 mortality and female For females 70.0 37.8 illiteracy rates declined by Public spending on education as % of GDP 2.7 4.1 73% and 60 % respectively (1990s) . from 1960 to 1998 in Fertility rate (1998) 4.9 4.3 countries that grew at about Contraceptive prevalence rate 15.0 36.0 the same rate as Pakistan, in Proportion of females in total population (1999) 48.2 50.3 Pakistan the decline was Source: Development Policy Review-the World Bank, 2002. much less, by 43 % and 20 %, respectively. 8. Recognizing the importance of closing the social gap, the GoP launched a concerted effort in the 1990s through the Social Action Program (SAP) with strong donor support. The program had some successes, perhaps most notably in reducing population growth, but its overall outcome was disappointing partly because of a decline in expenditure toward the end of the decade, in the failure of educational enrollments to rise, rising poverty in the second half of the 1990s and most importantly because of governance and public service delivery failures. In general, in addition to inadequate and unstable financing, poor financial management, lack of accountability and transparency in the performance of the -2- civil service and service delivery departments contributed to disappointing outcomes and the persistence of the social gap. 9. Thus, in addition to restoring growth, a key challenge for Pakistan is accelerating human development to close the social gap. This is important both as an end in itself, but also for long-term growth where human capital is at a premium. But addressing this social gap will require focusing on improving economic management and governance in sub-national governments that actually provide social services and key parts of the infrastructure, i.e. Pakistan's provincial governments and the newly formed district governments. This issue is discussed in some detail in Section B, next page. 10. Since taking office.in October 1999, the Federal Government of Pakistan (GoP) has been implementing a bold and comprehensive program of reforms to attack the twin problems of macroeconomic fragility and poor governance. This program, embedded in a comprehensive poverty reduction strategy, was presented in the I-PRSP and discussed in the Boards of the World Bank and the IMF in December 2001. The I-PRSP specified four main goals of policy in the years ahead: engendering growth, reforming governance, creating income generating opportunities (specifically for the poor), improving human development, and reducing vulnerability to shocks (at the microeconomic level). 2 11. The implementation of the I-PRSP strategy is proceeding well. To create a climate conducive for faster growth, the GoP's focus has been on strengthening the macroeconomic framework by improving fiscal and external balances.and reducing the debt burden. In the structural area, GoP has launched reforms to improve the governance of the financial sector and utilities and reducing distortions in pricing. Subsidies are being withdrawn from agricultural products while restrictions on private sector participation have been lifted, and a concerted effort is underway to increase cost recovery to finance irrigation maintenance and provide incentive for more efficient use of water. 12. Governance reforms have focused on increasing the effectiveness of key institutions in the country such as the State Bank of Pakistan, the Central Board of Revenue, the Pakistan Auditor General's Office, the National Accountability Bureau, the Controller General of Accounts' office, Public Service Commissions, Public Accounts Committees and the police and judicial systems. The principle has been to enhance autonomy and authority of these bodies to protect them from politically motivated interference, while increasing the transparency and accountability of their performance. A far-reaching devolution program (see para. 18 and Annex D) has been launched to bring government closer to the people through electing local Governments with the mandate to deliver a wide range of services. 13. The GoP has put in place strategies for improving service delivery in education and health, with a view to accelerating human development. In addition, the GoP is also earmarking greater .public resources for these services while ensuring there is improvement in financial management to increase the effectiveness of these expenditures. To ensure social protection and safety nets for the large number of those Pakistanis whose incomes are clustered around the poverty line and are vulnerable to exogenous shocks, the GoP has also introduced micro-finance and public works programs like the Khushali Bank Limited and the Khushal Pakistan Program (KPP), respectively. Along with the KPP; the Pakistan Poverty Alleviation Fund -a social fund-provides assistance to communities to build infrastructure based on demand by the communities. 14. These reforms, supported by an IMF PRGF and a World Bank adjustment credit have started to show results (See Table I of Annex I for Pakistan's macroeconomic indicators). Despite the most severe drought in recorded history, GDP grew by 2.7 % in FY01 and is expected to grow by 3.3 % in FY 02. Greater exchange-rate flexibility helped to achieve strong export growth (9 %) last year. Manufacturing 2See Paldstan CAS (May 2002), and the MOP for Paldstan SAC n1 for details. -3- sector growth was also strong at about 8 % in FY 01, and for the first time in years, growth was recorded across all industrial groups. For the first time in a decade, an IMF program - the Stand By Program approved in November 2000 - was successfully concluded. The subsequent three-year IMF PRGF supported GoP macroeconomic program envisages a substantial reduction in the fiscal deficit (excluding grants) from 5.7% (in FY 02) to 4.4 % in FY 03. The program also targets a relatively rapid recovery of GDP growth rates from 3.3 % in FY 02 to 5.2 % in FY 04. Growth is predicated on an increase of domestic (public) savings and investment by about 2 % points of GDP each year over the three-year program, and a strong increase in the efficiency of investment. B. The Role of the Provinces and the Devolution Program 15. Pakistan is a federation of 4 provinces3 and 7 tribal areas. While the overall reform leadership is provided at the Federal level, it is recognized that making a significant dent in reducing human and income poverty will require deepening the reform program to the provincial and local government levels. Pakistan's 1973 constitution grants major responsibility to the provinces for providing social services, irrigation, agriculture, and roads infrastructure. Accordingly, provincial expenditures account for 80 percent of total government spending in these areas. Most tax authority, though, is concentrated with the Federal Government, and Federal transfers (based on the awards of the National Finance Commission; see para. 20 and Annex D) account for around 80% of provincial resources4. Total provincial government spending is only around 24% of total government spending reflecting the low resources for basic government services. 16. Pakistan's provinces are now facing a crisis in public finances, civil service performance, and public service delivery. Lack of fiscal space for poverty reducing expenditures, narrow tax bases, a large but mainly unskilled civil service, poor accountability and transparency have resulted in the provinces suffering from deficits (shortfalls of spending and service delivery relative to needs) in the funding and delivery of social services (education, health, rural water supply and sanitation). Similarly, infrastructure deficits (roads, irrigation and drainage, and municipal services) increase the cost of doing business and impose a heavy burden on the economy and the people. Multiple provincial regulatory agencies harass the private sector and discourage entrepreneurship and economic activity. The police is widely perceived as ineffective and corrupt, while the judicial services are subject to long delays and are also seen as sometimes corrupt and out of reach of the average citizen, let alone the poor. In particular, the concentration of powers in remote provincial Governments, lack of accountability of the provincial civil service to service recipients and communities, and feeble local Governments failed to respond to the needs of the people. 17. There is now a major opportunity for the provinces to turn around the performance of their public sectors within the context of multi-tier reforms now taking place. The Federal government is implementing comprehensive reforms to accelerate growth and reduce poverty. Provincial governments have also initiated a number of promising reforms to improve their governance, public finances and public service delivery systems. Finally, Pakistan's devolution plan presents a major opportunity to reverse decades of over-centralization of public sector management by creating more accountable elected local governments, which would be responsible for the provision of local public services. 18. Under Pakistan's radical devolution program5 6,455 new local Governments6 have been elected and given the responsibility of providing a wide range of public services including primary education, 3 Balochistan, NWFP, Punjab and Sindh. 4 This share varies between provinces, with Punjab and Sindh being relatively less dependent on Federal transfers. 5 Formalized by the Local Govemment Ordinances promulgated by the provinces in July 2001. 6 Comprising 96 city /districts govemments, 337 townlTehsil Governments, and 6,022 union Governments. 4- health and sanitation, drinking water, law and order, agricultural extension, and district roads (see Annex D, Table 2 for details). While remarkable progress has been made in FY 02 in holding local government elections, setting up local Governments institutions and departments, clarifying roles and functions, and staffing local Governments (see Annex D), implementation of the devolution plan is still in its early stages. In particular, the province-local govermnent fiscal framework remains to be clarified and implementation is likely to be gradual and a number of issues are still pending (see Para. 52 and Annex D). 19. The provinces will retain a key role even under devolution for two reasons. First, the provinces will continue to be responsible for critical province-wide functions, including managing the consolidated provincial finances and fiscal transfers to local governments; executing provincial development programs; delivering province-wide services such as irrigation, road networks and tertiary services; undertaking monitoring and evaluation; and providing the regulatory framework for the private sector. Second, decentralization will be more effective if key provincial reforms are implemented. These include: fiscal restructuring to provide greater non-salary budgets for local governments, civil service reforms to right- size the civil service and not burden district Governments with excessive staff, improving governance and accountability rules so that these strengthen and not hinder local Governments, setting up good monitoring and evaluation systems to monitor pro-poor expenditures and development objectives, and strengthening local Government capacity. 20. In order to ensure that provincial and district Governments can deliver results, administrative and expenditure assignments will need to be matched effectively with an appropriate fiscal framework. Currently, Pakistan's Federal-Provincial inter-governmental fiscal framework is constitutionally defined and based on the Pakistan's National Finance Commission's (NFC) awards announced every five years. The main source of provincial revenues (around 80%) is a transfer based on a share of federal tax collections that are to be shared (the "divisible pool") and the ratio of the provincial/federal share of the pool; the formula for its distribution to the provinces are fixed once every five years (Constitutional provision) by the NFC.7 The NFC last rendered an Award in 1996, allocating to the provinces 37.5% of the divisible pool with the distribution to the provinces by population (based on the 1981 Census of Population). This divisible pool, which is about Rs. 430 billion in FY 02, is made up of the income tax (35 %), sales tax (42%), revenues from customs (16%), and federal excises, wealth, and capital value taxes (7%). In addition, various other tax transfers and grants are made by the federal government to the provinces. This includes some federally ceded taxes owned by the provinces and referred to as straight transfers, which are returned to the provinces on a derivation basis net of a 2% federal collection charge (e.g., royalties on petroleum and on natural gas, and surcharges and excise on natural gas are all important for Sindh). 21. The provinces' "own" tax base are narrow-less than 1% of the Gross Provincial Development Product (GPDP)8-and lack buoyancy. These taxes consist, in order of their contributions, mainly of stamp duties, motor vehicle taxes, the property tax (which are ceded to the municipalities/Tehsils), the agriculture income taxes and land revenues, registration fees, and other small taxes. Irrigation charges and various administrative fees provide the bulk of non-tax revenues. However, the potential yield of both tax and non-tax instruments is significantly larger than at present, and provinces like NWFP and Sindh are making a concerted effort to increase revenues as part of the provincial reform programs. 7 The NFC members are the federal Finance Minister, the finance ministers of each of the four provinces, plus other members as the President chooses. 'The Gross Provincial Development Product estimates for Sindh are unofficial estimates based on paper by Kaiser Bengali"Regional Accounts of Pakistan 1991-95", 1997 and then estimated for future years using same sectoral growth rates as those for Pakistan 22. Notwithstanding its clarity, the current Federal-provincial fiscal arrangements have led to high vertical imbalance and its implementation has suffered from volatility in Federal revenue coliections. These features, combined with the volatility of federal transfers (with an average shortfall of around 8 to 9% in an average year) and deterioration in governance in the provinces have undermined fiscal management, public service delivery and accountability in Pakistan's provinces. 23. The next National Finance Commission award is now due, but is likely to be delayed by one year with the current formula continuing in the interim. Various possibilities are under study both with respect to the size of the provincial share of the divisible pool and the distribution formula. There are also discussions that more taxes be ceded from the federal government to the provincial governments. At present, only population is used with a 10% addition to the award for backwardness that is provided to Balochistan and NWFP. While not definite, the indications are that provincial shares in revenues will increase to respond to the imbalances between expenditure assignments and resource availability. Discussions are also underway to better link resource allocations with performance. 24. Analogous to the National Finance Commission, a Provincial Finance Commission (PFC) has been constituted in Sindh and other provinces to design mechanisms for fiscal transfers from provinces to district and sub-districts such that the new local Governments have adequate financing to carry out their mandates. At present, except for Tehsil/Town governments who have the property tax and get OZT transfers from the Federal Government, the district and union councils are almost wholly dependent on transfers from the provinces. In FY 2002, most of the provincial to district grants, except for some development and KPP (public works programs) funds, were transferred to the district as tied grants. Together, tied and untied grants to lower tiers of Governments rnade up 35% of provincial expenditures. The PFCs are now considering criteria such as population, backwardness, fiscal effort and performance indicators as factors determining the transfer of provincial funds. In a welcome development, PFCs are also considering setting up tied or conditional grants for districts to link resource allocations to performance. However, given the delay in announcing NFC awards, it is likely that the PFC awards or any other province-district fiscal transfer arrangements for FY 03 is likely to be an interim arrangement. III. SINDH: THE PROVINCIAL CONTEXT 25. Sindh is the home of Karachi, the commercial hub and the gateway of Pakistan. Accordingly, reforms in Sindh will have positive spillover effects for all of Pakistan. It is also the second largest province, the home of 30 million people (23% of Pakistan's population), the most urbanized (with 49% of population living in urban areas), and the producer of around 29% of national GDP. Sindh's economy is relatively industrialized with industry accounting for 28% of the GPDP (with manufacturing accounting for 16%), followed by agriculture (23% of the economy), commerce (17%), and transport and communications (12%). 26. In terms of human development, Sindh is an extremity within Pakistan. Pakistan has a very large rural-urban gap and, as noted, a dramatic social gap in terms of human development. Within Pakistan, Sindh has the largest rural-urban gap and the largest social gap in human development (see Table 2). It has the highest per-capita incomes, but its human development indicators in rural areas were among the worst in Pakistan in FY 99. -6- Table 2: Provincial and Urban Rural Differences in Selected Human Development Indicators (1998-99) Infant Incidence of Pre-natal Ever Use Male Literacy Ferale Mortality (Per Diarrheag Consultation Contraception: Rate Literacy 1000 Live ilren o 8e 5 for Women Married Women of Rate Births) and Below (°/O) Age 15-49 (%/6) Rural: Punjab 50.1 20.0 101.7 13.9 24.6 18.0 Sindh 52.3 11.2 102.7 8.7 19.0 7.9 NWFP 51.5 11.4 58.7 15.6 19.6 13.9 Balochistan 47.2 6.8 75.1 9.9 14.9 5.7 Azad J & K 77.3 37.9 48.0 8.4 32.7 16.0 Urban: Punjab 71.2 53.6 70.6 10.5 57.9 33.9 Sindh 77.5 54.9 67.1 11.7 70.4 36.4 NWFP 65.5 35.2 62.0 11.7 36.0 27.2 Balochistan 70.9 32.5 120.6 10.7 42.5 24.0 Azad J & K 85.2 58.0 63.2 12.8 61.3 40.0 Source: Poverty in Pakistan in the 1990s: An Interim Assessment, South Asia Region, The World Bank, 2001. A. Poverty and Human Development 27. Poverty is pervasive and deep, especially in rural Sindh. Alongside the presence of large manufacturing, finance, and private sectors in Karachi, rural Sindh is characterized by poor social services, large gender disparity, landlessness, and high dependence on the public sector. Whereas 19% of urban Sindhis are poor, as many as 37% of rural Sindhis are poor (which is higher than Pakistan's average of 33%). 28. The poverty profile of Sindh (See Annex C) suggests that the typical poor household in Sindh lives in rural areas, has little assets or land, depends on wage income, and has a significantly larger' household than the non-poor or even compared to the average poor people of Pakistan. The poor also tend to be employed mostly in the informal sector in the urban areas and as agriculture wageworkers in the rural areas. In rural Sindh, the concentration of poor is the highest among households where the head is an unpaid family worker, sharecropper, or owner-cultivator owning less than 2 hectares of land (poverty headcounts of 60%, 50% and 40% respectively). 29. The poor in Sindh suffer from low quality public services, especially in rural areas. They have relatively low access to safe drinking water and sanitation facilities: they are less likely to use closed sources of drinking water, have toilets in the household, and be connected to a drainage system. Availability of all these amenities is also characterized by large rural-urban gaps, which is worse than the rest of Pakistan. For example, while 31% of the population of rural Pakistan is connected to drainage systems, the same is true for only 14% of the population of rural Sindh. More than 55% of Sindh's public elementary schools do not have water connections or toilet facilities. This has the implications, given that rural poverty in Sindh is higher than the country average, that the poor in rural Sindh suffer from especially severe lack of connectivity to critical facilities, which is likely to have strong impact on their health. -7- Table 3: Trends in Social Indicators in Sindh 30. Rural Sindh IS highly dependent on public services. 1990-91 1995496 1998-99 Whereas the private sector is a Percentage of children between 12 and 23 months who are big player in urban Sindh fully Immunized (providing for 40% of primary Overall, both sexes 16 44 38 enrollment and half of medical Male 20 42 42 beds), it has little role in rural Female '12 46 35 Sindh in primary education Rural, both sexes 5 46 27 (private primary enrollment is Male 3 45 31 only 5%) or in preventive Female 6 48 24 health care. Thus, reforms to improvae.pubc, sefrm t Births Attended by Skilled Health Staff 23 28 28 improve pUbliC servisce delivery, along with reforms to Contraceptive Prevalence Rates 8 16 17 stimulate rural growth-that Net Primary Enrollment 39 45 41 can rise agricultural and non- agriculture wages-will be Ratio of Girls to Boys in Primary Schools 54 55 fundamental for reducing Percentage of rural households with access to clean water 74 68 61 poverty in rural Sindh. Source: Sindh: Social Action Program SAPP H Mid-Term Review, PIHS, 1999. B. Deterioration in Governance and Economic Management 31. The deterioration in govemance in Sindh has been severe, with debilitating results. Poverty increased while key human indicators such as net primary school enrollment and access to drinking water declined in the second half of the 1990s (see Table 3 and Annex C). The quality of public services has also been extremely poor. In the education sector, for example, a third of Sindh's elementary schools were shelter less and more than a half lacked water supply or toilet facilities in 200 1. 32. Fiscal and financial mismanagement resulted in decreasing fiscal space (See Fig. 1 below) for high priority expenditures. Between FY 90 and FY 00, the share of operations and maintenance and develdpment expenditures fell from 32% of all expenditures to 15%. Higher expenditures on politically motivated increases in the civil service and development projects in the early 1990s led to large arrears Figure 1: Sindh: Decreasing Fiscal Space Otherdl999/00 4% Development 5% 7% Developmert Pi!nnel Debt Repai~~~Penrmalt 36% ii *II:~~~~~~~~'i.~~~~~, ~PernonrcI Vi Expeunditu.re Ii ~~~~~~Debit Servicing .7 f ~~~~~33% Repair and Debt " :Maintenance a n Savrici Conmodities 5% Commodities Maintenance 28% and Servicas andServices 3% 5% 5% Source: GoS Appropriation Accounts: Note: Federal Government Compensatory OZT transfers to Local Governments have been removed from FY 2000 accounts to make the two years comparable. -8- and overdrafts (more than 2% of GPDP, at end-FYOO) and extensive borrowing from federal loans (equivalent to 60% of provincial tax revenues) in the last three years such borrowing was allowed. But much of these resources were wasted as the quality of public expenditures fell, and accountability eroded as the Public Accounts Committee did not function since 1986. 33. The civil service got bloated as its quality fell. The number of civil servants increased by 56% (between 1987-1995) and support staff of grades 1 to 5, many of whom are illiterate, make up more than 43% of the civil service. Even in the case of teachers, where recruitment was extensive - reaching teacher student ratios of I to 21 - as many as 12,000 of the current teachers are formally rated as unqualified. 34. The burden of poor law and order, complex regulations, and poor governance made the investment climate hostile and manufacturing units migrated from Sindh or closed down.9 Growth rates fell, especially in manufacturing, which decelerated faster in Sindh than the national average. 35. While the agriculture Table 4: Growth Rates in Slndh sector growth increased, it was highly volatile - due to 197172-1989/9O 1989/90-1998/99 dependence on rainfall. As a Pakdstan (compound growth rates) result, the poverty reducing GDP 5.9 4.1 impact was limited. The Manufacturing 7.2 5.3 irrigation infrastructure Agriculture 3.0 4.0 increasingly depreciated due to Sindh lack of repairs and maintenance. GDP 4.9 3.6 Excessive salinity in the Manufacturing 5.7 3.1 province is estimated to reduce Agriculture 2.3 4.2 cropping productivity of its Source: Kaisar Bengali, Background Paper, 1996. main crops-cotton, wheat, sugar cane and irri rice-by around 40%. However, one encouraging trend has been the growing diversity though significant value-added in fisheries and fruit farming. IV. THE GOVERNMENT OF SINDH'S REFORM PROGRAM 36. Cognizant of the urgency to address these issues, the GoS is implementing reforms with the over- arching objective of reducing poverty by promoting growth and accelerating human development. This program, which will be the basis for a more fully developed poverty reduction strategy, has three pillars: (i) fiscal restructuring is the starting point as this will provide more resources for poverty reducing expenditures and infrastructure services within a sustainable fiscal framework and financial management reforms will help to ensure that these resources are spent effectively; (ii) improving public service delivery through civil service reforms, decentralization, and reforms in health, education, drinking water, and urban services will help to accelerate human development and achieve rmillennium development goals; and (iii) regulatory reforms, privatization and infrastructure improvements to stimulate private sector activity and economic revival will help to increase incomes and employment. This section discusses the reform program of the GoS in all these areas. However, the proposed Structural Adjustment Credit will be triggered by a much more selective set of measures as prior actions, as presented in Box 3 in Section IV. 9 World Bank South Asia Region, Punjab Background Note, April 2000. -9- 37. The GoS's reform program is fully consistent with the I-PRSP issued by the GoP in November 2001. This is true both in terms of reform measures that the GoS is implementing and the development objectives of the reform program. Like the I-PRSP, the GoS's reform program undertakes the following measures: fiscal adjustment to increase public savings and increase allocations for poverty reducing expenditures. The reforms improve financial management and civil service accountability. Service delivery is improved through better govemance, rehabilitation of existing facilities, partnerships with communities, NGOs, and parents, controlling absenteeism, and better monitoring and information. It introduces National Education Assessment Schemes to the provinces and it introduces annual third party validation schemes. In addition, both the GoS's reform program and the I-PRSP share a number of common targets such as increasing poverty reducing expenditures. The key GoS's reform target indicators (as defined in Table 7) are consistent with those of the I-PRSP and the millennium development goals. A. Pillar One: Fiscal and Financial Management Reforms Fiscal Management 38. Issues. The Govemment faces five major fiscal issues: (i) lack of fiscal space for poverty reducing expenditures; (ii) a complex tax structure and weak tax administration; (iii) poor composition of expenditures; (iv) designing and implementing fiscal decentralization; and (v) the absence of a medium- term fiscal restructuring plan to address fiscal issues in a comprehensive manner. 39. There is a severe lack of fiscal space (see Figure 1) for high priority expenditures due to rigidities in revenues and expenditures. On the revenue side, the tax base is narrow (0.8% of GPDP) as the Federal Government pre-empts the currently important tax bases - such as the income and sales taxes. Sindh's own tax and non-tax revenues (1.7% of GPDP)'0 provide for only 24% of its resources." Limited resources and inflexible expenditures (wages, pension, debt servicing and amortization account for around 80% of expenditures) cause rigidities on the expenditure side. The lack of fiscal space is causing the under-funding of vital human development and infrastructure expenditures and undermining future growth and poverty reduction prospects. 40. A complex and distortionary provincial tax system with 23 major and minor taxes'2 and a weak tax administration have long prevented the province from reaching even its limited revenue potential (estimated to be roughly 2.7% of GPDP). While impressive progress has been made in rationalizing the provincial structure in the past two years, tax administration is a constraint as it is bifurcated into two departments: the Board of Revenue which collects stamp duties, land and agriculture income taxes and abiana (irrigation charges) and the Excise and Taxation department which collects the property, infrastructure cess, and other taxes. In the case of the Board of Revenue, antiquated land records, lack of computerization, the key role of a lowly paid "tapedar" who exercises wide powers in both assessing and collecting land and agricultural income tax (AIT) prevents this important source of tax from yielding its potential. 41. The composition of public expenditures has been poor. Sindh's expenditures on development and operations and maintenance in FY 00 was only 15% of all expenditures, a sharp fall from a 32% share, 10 years ago. Moreover, though development expenditures fell, the number of projects proliferated, spreading resources thinly, delaying the completion of projects and making the returns to investment fall. The backlog of road rehabilitation expenditures alone is estimated to be around 0.8% of GPDP. Spending 10 Obtained from stamp duties, motor vehicle taxes, property taxes, agriculture income taxes, infiastructure cess, royalty on gas and oil, and user charges. " Note though, Sindh's share of provinces own revenues to al revenues is higher than other provinces. 12 The tax structure has been simplified in FY 01. -10- on education, and health, is oply around 1.7% of the GPDP - compared to 4.5% of GDP spent by Sri Lanka. Further, expenditures on salaries dominate (94% of the current education budget, and 70% of the current health budget). 42. Budget management has been weak in the past. Poor budget preparation, monitoring and implementation also adversely affect expenditure quality as budgets are de-linked from outcomes, and complicated fund release procedures and shortfalls in Federal tax transfers have typically lead to unreliable funding for the social sectors. Outmoded budget classification including the absence of object classification, poor accounts, and lack of monitoring have all resulted in poor development outcomes and large deviations between budgeted and actual expenditures, resulting in shortfalls in social sectors and development expenditures. Further, while provinces have had hard budgets after the cancellation of Federal loan facilities in FY 1999 and borrowing is ostensibly limited to SBP overdraft facilities, in practice provincial deficits have been financed by arrears, financing from surplus receipts of the provincial General Provident Fund and the various public fund accounts held by the province. Thus, the accumulated liability in the General Provident Fund is Rs.16 billion, i.e. more than all provincial revenues. 43. In addition to tackling the above issues, the GoS needs to implement a program of fiscal decentralization to support the devolution plan of Pakistan. This will require the province to set up an inter-governmental fiscal framework between the province and the newly formed district, sub-district and union council governments. Some difficult fiscal issues are pending: uneven distribution of tax bases with district Governments being relatively deprived and lower tier municipalVTaluqa governments faring better. On the other hand, currently, lower tier governments are suffering from the delay in obtaining funds. Further, the roles of the District Councils and the quasi-public Citizen Community Boards in using the development budget are still not fully clarified. 44. Objectives of Reforms: To address the above issues, the GoS's fiscal reforms have the following objectives: (i) creating more fiscal space by raising revenues and reducing future liabilities; (ii) increasing pro-poor expenditures while improving financial management (dealt separately in 'the following section) to make these expenditures more effective; (iii) implementing fiscal decentralization; and (iv) implementing a medium-term fiscal restructuring plan (MTFRP), including administrative reforms, that addresses these goals in a medium-term context. Status of Implementation 45. Reforms by the GoS to increase fiscal space have included tax measures to raise revenues and reducing liabilities. These include: (i) simplifying taxes by reducing the number from 23 to 10; (ii) introducing agriculture income tax in October 2001 for landowners with holdings above 50 acres or with income above Rs. 80,000; and (iii) expanding the base of the Urban Immovable Property Tax (UIPT) by conducting a survey of properties after 32 years, and adding 100,000 new properties to the base and reducing rates; and (iv) rationalizing the number and rates of stamp duties and converting these into ad- valorem rates. These measures helped to increase provincial tax revenues by 27% in FY01 and an estimated'3 15% in FY 02. On the liability side, GoS retired arrears of around 1.1% of GPDP in FY 01 and is retiring 1% this year. GoS is now planning for further liability (such as capitalizing the G.P and pension funds and accelerated repayment of expensive debt) reduction in the medium-term (see para. 56). 46. While significant structural reforms have taken place, the significant potential yield from the AIT-a more than three time increase from its current levels to nearly Rs. 2.0 billion-will require major administrative and legal changes. The GoS's reforms have changed the structure of AIT from a crop- 13Based on end-March numbers and discussions with Departnent of Finance. -11- cum-land-based system to a tax, which is a combination of a farm and income tax. While all farmers are to pay an annual farm tax at the rate of Rs. 200 and Rs. 100 per acre of cultivated area for irrigated and un-irrigated land holdings respectively, all farmers with incomes above Rs. 80,000 would pay an additional income tax in the same manner as applies to non-agricultural income and regardless of land holdings. However, the exemption limit of this tax is twice the level for the non-agricultural income. 47. Serious problems with tax administration in the Board of Revenue (see Para 54) and, more fundamentally, in title registration, however, need to be addressed before significant increase in revenue yields can be obtained. The latter includes the notorious "benami" provision under which, land can be sub-divided to fall below the threshold and then held under fictitious names. However, changes in the "benami law" will require Federal Government intervention. 48. To improve the composition of public expenditures, the GoS has increased allocations for high priority expenditures and increased the focus of development expenditures on implementation. Non- salary provision for the education sector was doubled in the FY 02 budget from last year while for health it has increased by 16%. Around 75% of the FY 02 own-financed annual development program budget was allocated for investment of on-going schemes focused on rural infrastructure, drinking water, and the social sectors. Because of this ongoing focus on implementation, the number of projects in the portfolio has fallen from 1500 in July 2000 to 900 at present, and expected to fall further to less than 700 by July 2002. On the other hand, reversing a long decline, the size of the development budget increased by 66% inFY 02. 49. The GoS is improving budget implementation and fiscal transparency. Overall, budget implementation is expected to be on track in FY 02 and the picture looks more optimistic than a few months ago. The GoS is already posting quarterly fiscal reports in the GoP's website, but these were based on "un-reconciled" accounts. To further strengthen budget implementation and transparency, GoS has started posting quarterly fiscal monitoring reports in the GoS's Finance Department website (www.financedeptsindh.gov.pk) based on improved accounts. To help budget implementation, fund release procedures for high priority sectors have been streamlined by removing the requirements for a second round of clearance (financial release orders) from the P&D and the Finance department. Thus, 100% of the annual social sector non-salary budgets were released by January. 50. Implementation of the budget was difficult in the first half of the current fiscal year but has improved in the recent months. Overall, there has been a shortfall in Federal Government transfers (by 8%) and, earlier in the year, provincial collections (35% of the year target was collected by end-December against the targeted collection of 40%). Continuing drought and tax administration problems resulted in lower agriculture income taxes and irrigation fees collections, and the overall slowdown in economic activity lowered stamp duty collections. However, these shortfalls were largely offset by robust increases in property tax and motor vehicle taxes, and an increase in non-tax revenues due to increase in the leasing rates of public lands, and provincial tax collection is expected to be on target with around 14% growth in FY 03. Significantly, lower spending on subsidies (only 30% of budget in the first 8 months), and administrative expenditures (37%) has allowed the province's overall fiscal position to stay balanced. 51. The pace of current expenditures was slow in the first half of the year mainly due to the start-up problems of new district Governments and setting up of district accounts, but these have been completed now. The full annual social sector non-salary budgets were released by January and have been passed to district Government accounts as appropriate and it is expected that the districts will be able to utilize most of the budgeted expenditures. Subsequently, expenditures on social services and economic services have been 57% and 65% of the budget respectively at end-February (against expected spending of 60%), The pace of spending of development expenditures has been healthy and development spending is expected to be 47% higher than the last year. Mainly owing to the streamlining in fund release procedures, the -12- implementation of the FY 02 expenditures represents a significant improvement over the situation in FY 01 when significant elements of the non-salary expenditures were only released in the last quarter. 52. The GoS has implemented the first phase of fiscal decentralization. It has prepared budgets for district governments by unbundling the provincial FY02 budget and released non-salary funds to the district governments at the beginning of the year for re-appropriation. Sindh is the first province to authorize the District Development Working Party to approve projects costing up to Rs 20 million and has transferred around 733 development schemes, including the Khushal Pakistan Program (KPP, a pro- poor public works program), rural water supply and road schemes to the districts. The Sindh Provincial Finance Commission (SPFC) is preparing formula based mechanisms to distribute funds to districts. However, progress in the work of both NFC and PFC remains behind schedule and difficult issues are still pending (see para 43). It is likely that FY 03 will continue to be a transition year, based on an interim PFC Award some other transfer arrangements as in FY 02: e.g. some parts of the development budget and KPP funds could be transferred as block grants, butimportant parts of the district budget will be prepared and transferred as tied grants, especially in the areas of poverty reducing non-salary expenditures. Medium Term Reforms 53. The GoS faces three major fiscal tasks in the medium term. The first task will be to implement fiscal decentralization as per plans approved under provincial finance commission awards. The aim will be to increase capacity of districts to raise revenues and prepare their own budgets, and implement a transparent formula driven process to provide untied grants to the districts, but also include an adequate system of incentives through conditional and matching grants to achieve national and provincial social development targets, as has been initiated in the current fiscal year. 54. The second task will be to strengthen tax administration. Specifically, the GoS will take measures to integrate the revenue collection responsibilities of the Board of Revenue (responsible for land taxes, the agriculture income tax, abiana/irrigation charges, and stamp duties) and the Excise and Taxation department into a modem, relatively autonomous, revenue department/authority, reporting to the Finance Department. The technical capacity of the revenue department will be strengthened through computerizing of land and property records, using partial satellite imaging and providing greater technical training and incentives for staff. The tasks of collection and assessment of the major taxes will also be separated to avoid conflict of interest. While these measures will be undertaken over the next two years, GoS will also make arrangements in early FY 03 to merge the two revenue departments and bring both the new revenue and Finance departments under the command of a single Minister as in the Federal Government. 55. The third major task will be to implement a medium term fiscal restructuring plan (MTFRP) covering the period from FY 03 to FY 06 (See Table 1 below and Annex E provides details). The focus of this plan will be to create fiscal space for poverty reducing current and development expenditures. The fiscal space is created from three sources significantly higher non-tax revenues (from new oil and gas revenues from production in three new fields in Sindh that are collected by the Federal Government and returned to the province), higher foreign aid (from ADB, other donors, and the Bank), and from increases in provincial tax effort with revenues rising by 15% p.a. 56. Discussions between the Bank and the GoS have been finalized on the MTFRP presented in the next page though this will have to be adjusted to reflect possible new Federal-provincial revenue sharing arrangements that are expected in future years. The plan has been prepared with arrangements for adjustments to possible changes in revenues due to future National Finance Commission and Provincial Finance Commission Awards. However, the plan as presented below is conservative in that it assumes that the continuation of the current NFC formula, whereas the expectation is the new NFC awards will -13- allocate higher revenue shares to the provinces through either greater shares of the provinces in divisible pool or through ceding additional taxes. The proposed plan is for the consolidated provincial finances and is presented in broad economic classifications and readily adaptable to future PFC awards. When the PFC award is known, the task will be to separate out provincial and non-provincial shares of the budget and allocate the non-salary operations and maintenance and development expenditures between the province and the districts. For the districts, depending on the PFC formula or the interim arrangements for FY 03, the transfer will take place through a combination of formula based untied grants and tied grants to allocate development and O&M expenditures (salary expenditures being tied). The salient points of the medium term program are highlighted in Tables 5 and 6 and the discussion below: Table 5: Sindh - Public Finances, 1999/00-2005/06 (Percent of provincial GDP F 1999/00 2000/01 2001/02 Projections Actual Actual P. Estimate 2002/03 2003/04 2004/05 2005/06 Total Revenues and Grants 6.2 6.2 6.8 7.0 7.0 7.2 7.4 Federal Tax Transfers 4.0 4.1 4.4 4.3 4.4 4.5 4.7 Provincial Revenues 1.4 1.6 1.7 2.0 2.0 2.1 2.1 Federal Grants 0.7 0.6 0.7 0.6 0.6 0.6 0.6 Total Expenditures 6.1 6.0 6.9 7.3 7.5 7.6 7.4 Development Expenditures 0.4 0.5 0.8 1.3 1.4 1.3 1.3 Fiscal Balance with Severance Payments 0.0 0.2 -0.1 -0.3 -0.4 -0.4 0.0 Primary Fiscal Balance 1.3 1.3 1.0 0.7 0.5 0.5 0.8 Public Savings 0.5 0.8 0.7 0.9 1.2 1.2 1.3 Table 6: Composition of Expenditures, 1999/00-2005/06 (Percent of Provincial Expenditures) 1999/00 2000/01 2001/02 Projections Actual Actual P. Estinmate 1 2002/03 2003/04 2004/05 2005/06 Share of total expenditures Total Expenditures 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Current Expenditures 92.8 90.9 87.7 82.6 77.6 79.3 82.2 Wages and Pension 46.3 45.8 47.6 48.4 46.1 44.2 43.9 Operations and Maintenance 8.5 9.5 9.3 10.2 9.3 12.5 15.7 InterestPayments 21.1 17.5 15.4 14.0 13.0 11.8 11.2 Subsidies 0.7 6.3 6.4 1.2 0.7 0.5 0.3 Grants to L.G. and Investments 16.2 11.8 9.0 8.8 8.5 10.4 11.1 Provision for Severence Package 3.1 2.8 Development Expenditures 7.2 9.1 12.3 17.4 19.3 17.8 17.8 Share of current expenditures Health and Education Currrent Expenditures 28.2 28.3 33.5 36.7 38.3 37.7 39.0 Share of O&M in Healith and Education 8.9 10.7 11.8 17.7 19.6 22.5 27.3 Source: Department of Finance and Bank Staff Estimates * The first year of the MTFRP will be reflected in the GoS's budget for FY 2002/03 with the following targets: (a) provincial tax revenues collections; (ii) AlT/land taxes, Abiana, and property taxes; (iii) aggregate expenditures ceilings; (iv) wage and establishment costs ceilings; (v) non-salary expenditures in primary education, health, and drinking water; and (vi) operations and maintenance expenditures. Targets for items (v) and (vi) will be adjusted based on resource availability. If NFC and straight transfers based Federal transfers increase, then these expenditures will increase in the same proportion. If Federal transfer or provincial revenues fall then these items will be protected in their Rupee terms. The poverty reducing expenditure targets on health, education, and drinking water will be transferred, as needed, to the district and Tehsil Governments as tied grants (as it is already the case this year with RWSS schemes). In addition to these items, the GoS will also give high priority in allocating additional resources for the maintenance and rehabilitation of rural infrastructure. The implementation of overall revenue and expenditure targets, as well as high priority expenditure targets will be reported in the quarterly fiscal monitoring report. -14- * The fiscal program aims to raise public savings for the province through: (i) revenue measures; (ii) increasing cost recovery; (iii) reducing undirected subsidies; (iv) tbhough investrnent of all G.P. (pension) finds current surpluses; (v) through an accelerated repayment of expensive debt owed to the Federal Government; and (vi) reducing the wage bill through a separation package. Revenues collected by the provinces will increase by 15% per annum and their share in provincial GDP (GPDP) goes up from 1.7% to 2.1%. The program contains a number of tax policy and administrative measures especially relating to the collection of agriculture income tax (using satellite imaging, having independent assessment done by the SIDA/irrigation departments), and water charge collections (abiana, through adjusting water rates to account for scarcity and increasing coverage through the efforts of SIDA and the Area Water Boards). Much of the increase, though, comes from non-tax revenue sources due to higher royalties from production in Sindh's three new gas fields. Specific measures concerning revenues and revenue targets are discussed in detail in Annex E. * The composition of expenditures improves: (i) the wage bill is contained after increasing in FY02 and FY03, due to a pay reform introduced by the Federal Government'4; (ii) the share of development expenditure increases from 12% to 18%; (iii) the share of operations and maintenance expenditure goes up from 9% to 16% by FY06; (iv) share of expenditures on subsidies fall from about 6.4% in FY0 I to less than 0.3% of all expenditures in FY06; (vi) the plan provides for severance packages for close to 25,000 civil servants.'5 * The development budget will continue to emphasize the implementation of ongoing projects with around 75% to 80% of the provinces own annual development expenditures (i.e. non-foreign financed) being earmarked for completing existing projects or for rehabilitation of infrastructure. * Debt and liabilities are reduced: (i) arrears and overdrafts of Rs. 21 billion around 2.1% of Gross Provincial Domestic Product (GPDP) is retired by FY02; (ii) retirement of expensive CDL loans by an additional Rs. 6.8 billion (0.7% of GPDP); and (iii) pension funds/G.P. Funds are capitalized by Rs. 13.3 billion 1.3% of current GPDP - both through capitalization and through transferring all pension fumds curTent surpluses (that currently finance provincial expenditures) to the General Provident Fund. The capitalization, if directed to the G.P. Fund only, will go a long way to meet the R.s. 16 billion liabilities (previous employee contributions) in the Provident fund. * The proposed fiscal program generates transitory fiscal deficits (of around - 0.3% to - 0.4% of GPDP) over the medium term (FY 03 to FY 05). As agreed with GoP and the IMF, these deficits, to be financed by the proposed SSAC will be part of the Pakistan's consolidated fiscal targets and deficit financing agreed to under the PRGF program for FY 03 and FY 04. Public savings will increase from 0.7% of GPDP in FY00 to 1.3% of GPDP. The MTFRP includes expected financing gaps of around $100 million p.a. from FY03 to FY05 that are expected to be filled by annual disbursements of the series of SSACs'6, if implementation of agreed benchmarks are satisfactory. * While the additional fiscal resources will finance permanent increases in poverty reduction expenditure, some of the transitory increase in deficits will finance once-off expenditures with long This had the efect of raising Iota] remuneration by around 50%Mc with the rato of total rmuneration BPS22:BPS1 rmaining at around 9.5:1 and the proportion of allowances in total remunmeion remaining at aromund 270/c. 15 The estimates are based on severance pay of 5 years salary for an assumed 25,000 employees at an average tota) yearly remimeration of Rs. 50,000. Detailed severance costs will be calculated later. 16 The programmatic adjustment credit for this period will cover this financing gap. In the event, that such financing is not available, the accelerated debt repayment, pension fuid capitalization, and funding for severance payments can be lowered to eliminate this gap. term returns by: (i) capitalizing G.P./pension funds; (ii) accelerated repayment of debt; (iii) financing' the large backlog of rehabilitation (not recurrent maintenance) of roads and irrigation infrastructure in poor conditions; and (iv) funding severance payments for civil servants. At the end of the program period these 'once-off expenditures will have created significant fiscal space for the Government and their reduction will not affect normal expenditures. Financial Management 57. Issues. Financial management failures, severe all across Pakistan, were probably the worst in Sindh in the 1990s. Quality of public accounts is poor with large variations, in all four provinces, between departmental accounts, accounts prepared by the Accountant General, and Bank records. Accountability eroded as the Public Accounts Committee did not function between 1985 and 2001. Insufficient monitoring and information on budget implementation and the province's financial position led to poor implementation and accumulation of arrears. Complicated expenditure release procedures prevented timely release of funds for high priority social sector expenditures. A generic problem for Pakistan's provinces is that responsibility for financial management is diffused between the Department of Finance and the Accountant General, who reports directly to the Controller General (Accounts) of the Federal Government, but acts as a Controller for the provincial government. In the case of public procurement, while the GoS has rightly decentralized it to administrative departments, government procurement, which constitutes more than 20% of public expenditures, still suffers from lack of transparency and inefficiency due to outdated rules, contributing to wastage and corruption. 58. Objectives and Strategy: The GoS's financial management reforms objectives are to improve the effectiveness of public expenditures by strengthening transparency and accountability. Based on a preliminary Provincial Financial Accountability Profile, GoS has adopted a Financial Management Reform Program including appointing a Provincial Financial Controller in the Department of Finance to take responsibility for improving financial management (see Annex F). The Bank and GoS will also carry out a modular Provincial Financial Accountability Assessment as part of the Country Financial Accountability Assessment (FY03). The GoS is now implementing reforms to improve; (i) the quality of provincial accounts; (ii) public accountability systems; (iii) budget implementation; and (iv) debt, arrears and quasi-fiscal management. These reforms are intrinsically a component of the national financial management reforms led by the GoP, and are based on the diagnosis and the recommendations of the desk review for the CFAA (FY 01) and agreed with GoP (Annex F provides more details) and technical assistance provided by the Bank through the Pakistan Improvement of Financial Reporting and Auditing (PIFRA) project. 59. Status of Implementation: GoS has implemented the following measures: (i) Improving public accounts markedly under the leadership of the Provincial Fiscal Monitoring Committee (FMC). FY01 accounts were fully reconciled by September 2001 compared to only 6% reconciliation a year ago. For FY02, expenditure and receipts for the first two quarters have been reconciled (on a function wise basis) for 88% and 77% of funds respectively. Last November, the variation between the Accountant General, Sindh, and the State Bank of Pakistan FY 01 records was Rs. 149 million-compared to Rs. 1.2 billion in the previous year. (ii) Strengthening accountability through setting up an effective ad-hoc Public Accounts Committee (PAC) after nearly a decade. The PAC, staffed by highly reputed, retired Government officials and private sector Chartered Accountants, has the completed review of the FY 93 and FY 99 audit reports, and is now reviewing the most recent FY 00 Audit report. The PAC has opened its proceedings to journalists and all interested persons. -16- (iii) Improving arrears, debt and quasi-fiscal management. In addition to paying off arrears, GoS has taken steps to control arrears and other liabilities. It has agreed with WAPDA, and discussing with KESC, arrangements to set up billing dispute resolution mechanism; avoiding future arrears by metering all remaining government sites; and cutting off power to agencies in the event of future arrears. To strengthen quasi-fiscal management, the GoS will launch a review of all off-budget public accounts and of public enterprises and autonomous bodies and identify information gaps that need to be filled. (iv) As part of the provincial Financial Management Reform Program, GoS has decided to appoint a Provincial Financial Controller in the Department of Finance. The appointment will be made by July 31, 2002. The controller's main task will be to implement financial management and public financial accountability reforms. In addition, the Controller will also be responsible for accounting and financial reporting (ointly with Provincial Accountant General), developing provincial capacity to handle accounting and payroll, organization of finance and accounts function of the GoS, staffing and training, internal Controls and internal audit, financial policies and procedures, and respond to audit observations and systemic issues. 60. Medium Term Reform Plans for FY03 and FY04, include: (i) implementation of the Financial Management Reform Program, institutional and personnel reforms to improve financial management capacity and internal controls in provincial departments; and establishment of internal audit unit in each line departments; (ii) strengthening District Government Financial Management and upgrading the level of District Accounts Officers (DAOs) to Grade 18/19 and post qualified personnel in these posts; (iii) computerization of all fiscal accounts up to the district level; (iv) improvements in fiscal transparency by introducing the new Chart of Accounts and New Accounting Model; (v) review and reforms of financial rules to make these consistent with the new accounting model; (vi) improving the tracking of recommendations of the Auditor General and PACs and publication of audit reports in the web page; and (vii) improving in FY03 the legal and regulatory framework for public procurement by revising the procurement rules, standardizing bidding documents, and establishing an effective mechanism to redress complaints from suppliers. The aim is to simplify procurement and ensure more transparency and efficiency. The GoS also plans to enact a procurement law legislating good public procurement principles in FY04 (see Annex F for more details). B. Pfllar Two: Improving Governance Of Civil Service And Public Service Delivery Civil Service Reforms 61. Issues: Improving the effectiveness of public expenditures and public service delivery depends fundamentally on improving performance of Sindh's 459,000 civil servants whose salaries and pension constituted 47% of total expenditures in FY00." Several factors have undermined civil service perfornance. Politically motivated recruitment and excessive transfers, weak enforcement of discipline, and poor salaries eroded merit and professionalism. Lack of accountability to local governments, communities, and beneficiaries provide little incentives for service. Poor human resource management has resulted in a pyramid like composition of the civil service, where 43% of the civil service is in grades I to 5 (who are often functionally illiterate). The absence of good data constrains right-sizing, re- deployment, and pay reforms. Poor performance by the judicial and police departments deprives the people of the province of basic rights of security and access to justice. 17 The share of civil service salaries is further expected to increase furtier to 49% of expenditures, in FY03, as a result of pay increases introduced by the Federal Government as part of pay and pension reforms, but is reduced thereafter under the MTIFRP. -17- 62. Objectives and Strategy. GoS's civil service reforms aim to improve civil service performance through strengthening accountability and management. The strategy has four components: (i) promoting merit and professionalism; (ii) strengthening accountability of civil servants to the newly formed local governments; (iii) improving human resource management; and (iv) rationalizing the civil service. Separately, GoS has also started implementing judicial and police reforms. Status of Implementation 63. GoS is promoting civil service merit and professionalism through three measures. First, it has strengthened independent oversight of civil service recruitment by promulgating the Sindh Public Service Commission Ordinance and the associated rules, which provides the Commissioners with more autonomy and increases the scope of their overview of recruitment in the civil service"8. Second, it is reducing absenteeism through better monitoring and dismissals, and giving local bodies, such as the School Management Committee, powers to report absenteeism in schools and recommend transfers or dismissal of teachers. Existing laws, such as the Sindh Civil Service Act (1973), the associated Government Rules of Business (1986), and the new Removal from Service (Special Powers) Ordinance, 2000 have been used to take actions against more than 600 senior officers. Given that virtually no actions have been taken against senior officials in past years, these actions send a powerful signal. 64. To strengthen accountability of civil servants to local governments and communities, the GoS has organized district governments headed by elected officials with some 270,000 staff now transfeffed to these Governments. Provincial departments have been reorganized at both provincial and district levels for this purpose. To increase accountability to communities, the Education department has introduced school-specific contractual employment. The GoS is now formalizing the introduction contractual appointments for all technical positions within civil service rules and bringing recruitment of contract staff within the PSC's mandate to ensure merit in the recruitment process. 65. To improve human resource management and to right-size the government, the GoS has frozen all recruitment below grade 14, i.e. in grades that are relatively unskilled and overstaffed, and abolished over 12,000 vacant positions. The GoS has started an initial headcount of civil servants that is expected to be completed by June 2002 and provide data on the order of magnitude of errors in the existing payroll data. The headcount will be developed into a complete census over FY 03 to get the actual number and more detailed data on civil servants. The number of provincial departments has been reduced from 28 to 23. Eight Ministers are in charge of these departments compared to cabinets as large as 60 Ministers in the past decade. Around a dozen provincial enterprises and autonomous bodies are being closed down or merged. 66. Judicial and Police Reforms: As part of the nation wide program, the GoS has, with Asian Development Bank assistance, also embarked on a judicial and police reform program with the aim of improving law and order and improving access to justice. These reforms will include: (i) separation of the judiciary from the executive and ensuring that the judiciary is adequately funded; (ii) expediting justice through introducing alternative dispute resolution; (iii) legal empowerment of poor through civil society led legal literacy campaigns, advocacy, and public interest litigation initiatives; and (iv) improving judicial governance by introduction of professional management, and greater transparency and accountability. The implementation of police reforms are also proceeding through measures under which the District Police Officer has been made accountable to the elected District government. At the same time, public safety commissions have been formed to ensure that police officers have recourse against unlawful or politically motivated orders. Now the Commission's nmandate covers all recruitment above grade 11 instead of grade 17 and above as before. -18- 67. Medium Term Reforms: Medium-term actions in civil service reforms will include implementing comprehensive civil service reform program, with World Bank technical assistance, with the following elements: (i) improving human resource management by building a comprehensive human resource data base based on a census conducted over FY03; (ii) using the census to rationalize the civil service by eliminating ghost workers, redeployment, and introducing a voluntary separation schemes for low-skilled staff (grade 1 to 5) starting from FY04; (iii) further extending the autonomy of the Public Service Commission (FY04); (iv) developing district civil service cadres to work under local Governments (FY03 and FY04); (v) preparing for the greater use of contract-based employment in all technical cadres through legal changes to prevent regularization, ensuring robust establishment and budget controls, and extending the overview provided by the PSC; and (vi) implementing judicial and police reforms with ADB assistance. Improving Public Service Delivery: Education 68. Issues: Decades of poor governance have left the Sindh education sector in a state of crisis. While an investment of almost Rs 10 billion has gone to the primary education sector in the 1990s through the Social Action Program, outcomes were disappointing (see Annex G). Factors responsible for poor outcomes include: (i) poor access, as some 5,500 schools, i.e. 13% of the current number, are closed due to lack of teachers or funds; (ii) sheer poverty preventing families from bearing any costs of education; (iii) poor quality of education arising from absent or poorly trained teachers, lack of adequate school supplies, and inadequate infrastructure (35% of elementary schools are shelterless while another 47% schools have less then 2 rooms or less; and 55% of schools are without water and sanitation facilities); (iv) lack of accountability of school management to communities and service users; (v) weak monitoring and evaluation of performance; and (vi) virtual absence of private sector in rural Sindh (only 5% of primary students are enrolled in private schools). 69. Objectives of Reform: The Department of Education (DoE) is implementing a multi-pronged strategy to improve outcomes that include providing adequate resources and improving their utilization, strengthening governance and accountability, ensuring the participation of communities and increasing the role of the private sector. The goal is to ensure that by 2010, 70% of Sindh's primary school age children complete primary school education and graduate with basic primary skills of numeracy and literacy. Other targets are given in Box 1 below: -19- Status of Implementation 70. Implementation is proceeding in the following areas: (i) Preparing a Strategy. The GoS is now implementing a comprehensive Education Sector Reform strategy developed in the current fiscal year. The DoE has signed memoranda of understanding to access additional funds to implement the National Education 'Reform program and the President's School Rehabilitation Program. The province in tum has disbursed these funds to district governments. (ii) Improving access. GoS has launched primary school enrollment drives and expanded incentive programs (free textbook program, incentives for female students). Around 3,796 closed schools have been made operational through redeploying and recruiting teachers, with female teachers being given priority. The incentive programs include distribution of free primary textbooks to girls in rural and urban slum areas, and approximately 340,000 sets of books were distributed in the free textbook program in FY01. Scholarships for deserving female students are being delivered and 10,000 such scholarships were provided in FY 01. There has been a 5% increase in primary enrollment in FY 02, reversing the trend of the 1990s. A compulsory primary education program is being implemented with 15 Talukas and 5 districts covered in FY 02, with all 102 talukas to be covered by FY 04. (iii) Improving quality and accountability. GoS has: (a) expanded the role of parent/citizen community board member chaired School Management Committees to monitor teacher attendance and school budgets; (b) appointed new teachers on contracts, to specific schools; (c) made new teacher recruitments based on merit, with private sector and community involvement; (d) started testing competency of teachers and providing remedial training; and (e) launching a 5 year rolling budget to improve school infrastructure. (iv) Strengthening Monitoring & Evaluation Systems. For the first time, the 2001 School Census includes comprehensive information on teachers and private/NGO education facilities. The Research Monitoring & Evaluation Cell (R,M&E Cell) of the DoE has been set up. It has initiated monitoring of schools through field visits using well-developed tools and is now preparing, with World Bank assistance, to launch the first of annual third party validation (TPV) survey to assess delivery of school level services in districts. A comprehensive Provincial Education Assessment Program will be introduced from FY 03. (v) Implementing Devolution. The DoE has been reorganized to work under district Governments. It has prepared a manual which provide briefings to heads of district Governments on the functions and responsibilities of the district education staff, guidelines on accessing funds and carrying out monitoring responsibilities (district nazims/naib nazims'9 were involved in carrying out the last school census). (vi) Enhancing Public-Private Partnerships. The GoS is implementing a policy to de-nationalize educational institutions nationalized in 1972, sell or lease schools to the private/NGO sector, and encourage the private and NGO sectors to contribute to and participate in managing public schools under the well- known Adopt-a-School Program of Sindh Education Foundation. GoS is finalizing a policy on private education to promote private sector participation. '9 Elected heads of district Governments. -20- 71. Medium Term Reforms: The mediurn-term reform plan will consist of annual implementation of the Education Sector Strategy, which will include: teacher redeployment program, annual enrollment drives, teacher training programs, annual TPV surveys, providing missing facilities to schools, and strengthening monitoring and evaluation capacity. In addition, the medium-term will expand the compulsory education program to all talukas by FY04; improving the secondary education system in line with the provincial education sector strategy; completing the first provincial student assessment to evaluate student learning achievement; training of SMCs and gradually extending SMC powers to hire and fire teachers; and launching capacity building programs for district, Tehsil and taluka officials. Improving Public Service Delivery: Health 72. Issues: The health and fertility indicators of Sindh province lag behind those of many low- income countries. The infant mortality rate (IMR) is about 95/1000 live births and the total fertility rate (TFR) around 5, whereas the corresponding current figures for India and Bangladesh are about 70/1000 for the IMR and about 3 for the TFR. An analysis of the Burden of Disease (BOD) in Pakistan in 1996, generally applicable to Sindh also, suggested that priority should be given to basic preventable and readily treatable diseases, which mainly affect young children and women of reproductive age. Several issues constrain good health outcomes including: (i) the lack of a clear outcomes focused health sector strategy especially with respect to preventable diseases; (ii) poor governance that encouraged absenteeism, excessive transfers and corruption in procurement; and (iii) inadequate use of private sector and NGO participation. 73. Objectives and Strategy: The GoS's reforms are based on a well-targeted medium-term health sector strategy (see Box 2 below) that focuses on preventive and communicable diseases, improving govemance, and promoting private sector participation and strengthening district management capacity. Status of Implementation 74. The Department, of Health (DoH)'s 2 reforms are proceeding in six areas: (i) Sindh is the first province to have adopted *N aeo~oi eotatrue20 a Health sector strategy and n implementation plan-with well-defined d of f targets (see Box 2 and Annex G)-based *A nrae tepretg_ on the new 2001 National Health Policy. at (ii) Reinvigorating the immunization and * e 0% o C tuberclosis (TB) programs. After t 8 f tem in e stagnation in the late 1990s, the coverage b l gYPS strate is increasing under a well-targeted * A q c E program. A third party assessment sefal f E planing an indicates that immunization coverage of fianc m children (12-23 months) and pregnant women is 45% and 48% respectively, increasing from 38% and 40% respectively (in 1998), though most rural districts still have coverage below 40%. The numbers of confirmed Polio cases have decreased from 65 in 2000 to 23 (October) in 2001. In TB, good progress has been made in expanding DOTS strategy to ten districts. The coverage has increased from 8% to 31% with case detection rate of 80% and a cure rate of 75%. The program is on track to expand to 13 districts by end of FY02. The GoS is -21- undertaking supplementary TT campaign in high-risk areas and is redeploying vaccinators to uncovered areas. (iii) Improving Health sector governance. Vigilant monitoring by departmental committees and army monitoring teams is reducing staff absenteeism. More than 350 doctors have been removed as a result. The scrutiny of departmental committees is improving transparency in procurement. Transfers have been reduced and now take place only annually. New management and organizational structures for provincial and district levels have been developed for the health department and most posts have been filled. A medium-term plan for strengthening district health management has been prepared. (iv) Enhancing Monitoring and Evaluation. The DoH has outlined a set of fifteen indicators to measure performance, for self-monitoring and making itself accountable to the community. The EPI Directorate has introduced quarterly monitoring and reporting system using WHO-adapted instruments, with almost 100% reporting. The DoH is now preparing a plan for can-ying out third-party led annual district level TPV surveys to validate departmental information. (v) Promoting public-private partnerships by inviting NGOs and CBOs to take over non-functional health facilities. The newly developed Trauma Center in Karachi is being privatized through the Privatization Commission. The DoH has defined its strategies to be implemented in the medium- term, including explicit policy guidelines for private sector involvement. 75. Medium Term Measures: Medium-term measures will include: (i) expanding the routine immunization program and TB DOTS programs with well-identified targets and measures set out in the Health Sectdr strategy (see Box 2 and Annex G); (ii) broadening public-private partnership under the newly issued strategy; (iii) strengthening local government capacity by implementing detailed plans for capacity development for district managers in management, planning, and financial management; and (iv) further strengthening monitoring and evaluation systems. This will include strengthening the existing Monitoring and Evaluation unit at the provincial level, improving health management information systems; and conducting district level TPV surveys. Improving Public Service Delivery: Rural Drinking Water and Sanitation 76; Issues: The proportion of households with access to clean drinking water actually declined in Sindh in the 1 990s and currently more than a third of rural households have no access to safe water. The main issue is how to increase access to rural drinking water and sanitation (RWSS) on a sustainable basis. GoS's past policy has relied on close consultation and participation by communities in facility maintenance and by June 2001 out of a total of 1771 drinking water or sanitation schemes, 997 had been transferred to the communities. Recently, however, as part of the national Kushal Pakistan Program (KPP), the GoS has also sharply increased rural water supply and sanitations schemes with community consultations, but without clear arrangements for community based maintenance and cost sharing. 77. Objectives and Strategy: The GoS's strategy is still evolving and under discussion with the Bank, partly in the context of the proposed IDA supported Community Infrastructure Project. It is envisaged that the GoS reforms will include: (i) emphasizing the policy of community participation, involvement and cost sharing as the guiding principle for RWSS schemes even under KPP (the pro-poor public works program); (ii) improving governance through devolving the administration of RWSS schemes to a lower sub-district tier of Government (the Taluka governnent) who are in closer contact with beneficiaries; (iii) providing funding for operations and maintenance of RWSS schemes that have been recently constructed with community consultations to the Taluka governments; and (iv) providing adequate.funding for RWSS schemes in the Provincial development programs. The GoS's five-year -22- rolling plan for RWSS schemes doubles the allocation by FY 04, which is considered feasible to implement. Improving Public Service Delivery: Urban Services 78. Issues: Sindh is the most urbanized province with half the population living in urban areas and around 50% of its urban population living in slums. Hence, improving urban conditions is an important priority for GoS. Several issues have constrained the improvement of urban services: (i) weak urban local government institutions that have overlapping responsibilities with provincial departments and City Development Authorities; (ii) poor financial management resulting in inadequate investment in provision and maintenance of urban services; (iii) absence of strategic planning resulting in piecemreal actions and waste of public resources; and (iv) lack of enabling environment for private sector participation. 79. Objectives and Strategy: The GoS's goal is to improve urban life and especially slum conditions. Instruments to achieve these goals will be setting up accountable and responsive city/town governments, improving financial management, inviting greater private sector participation in the provision of services, and strengthening the rights of slum dwellers. 80. Status of Implementation: GoS is improving urban services through the following measures: (i) Setting up well-functioning city Governments under the devolution plan. One city district government in Karachi (comprising of 18 towns), and 16 district governments (comprising of 86 Talukas) have been set up. Overlaps in responsibilities have been removed and all agencies but two have been closed or brought under city Governments; (ii) Upgrading slums and regularizing dweller rights: Sindh has been the national leader here through the internationally recognized work of Sindh Katchi Abadi Authority (SKAA). The SKAA has formally regularized dweller's rights in 929 slums, completed regularization work in 623, and executed development and improvement work in 486. Mainly based on the work of the SKAA, the GoP has recently approved a National Policy on Katchi Abadis, Urban Renewal and Slum Upgradation; and (iii) Promoting participation by Karachi's substantial private sector in urban development. The GoS has constituted the Economic Development Council (EDC) under the chairmanship of the Governor and a 50% private sector representation to facilitate implementation of the GoS's Program for Economic Revival of Karachi (PERK) by cutting across bureaucratic layers and bottlenecks. 81. Medium Term Measures: A substantial medium-term reform agenda exists in the urban sector in Sindh centering around: (i) making city and municipal Governments well functioning by ensuring that urban fiscal and financial management is strengthened to adequately support the provision of services; (ii) improving urban services through the preparation of long overdue master plans and their implementation; and (iii) continuing the work on the improvement of conditions of urban slums and urban poor based on the recently approved National Policy on Urban Renewal and Slum Up-gradation. C. Pillar Three: Promoting Private Sector Development and Economic Revival 82. Issues: A constraint to Sindh's private sector development has been the poor law and order condition, the ethnic conflict that marked Karachi through most of the 1990s and made Sindh's investment climate hostile to the private sector. In addition, macroeconomic instability, a large debt overhang, an inefficient public enterprise sector, infrastructure problems, and discretionary (i.e. a harassing) taxation policy all worked to raise business costs, discourage private sector activity and lower economic growth in the 1990s. Many of the key policies to address growth issues-federal taxation, power, telecommunications, banling, and labor regulations-are primarily the concern of the Federal Government and are being addressed comprehensively at the Federal level. Even so, the improvement of investment climate requires complementary measures at the provincial level. In particular, there is a need -23.- to simplify the numerous and antiquated factory inspections and labor laws and rules that have become a tool for harassing the private sector and rent seeking behavior. Importantly, many of the policies affecting agriculture performance and rural development are also under provincial management. The GoS is also responsible for rehabilitating the poor infrastructure in roads and irrigation that impede economic growth and the functioning of markets. 83. Objectives and Strategy: Reforms to improve law and order, critical for improving the investment climate, has been a key priority for the GoS (see para 66). In addition, GoS's economic revival plan has three components: (i) regulatory reforms to lower business costs; (ii) privatization to promote efficiency, private sector activity and investor confidence; and (iii) rehabilitating key infrastructure such as roads and irrigation that have significant impact in promoting agriculture and rural development, manufacturing, and trade. Regulatory Reforms and Privatization 84. In the regulatory area, the GoS's focus has been on modernizing the antiquated factory inspections system and the large number of labor laws that have traditionally harassed private entrepreneurs. Thus the number of factory inspections has been reduced from 23 to 7 for factories (and to 4 for shops-See Annex H) that will be undertaken in two days. Disciplinary actions have being taken against staff charged with harassment and corruption. In conjunction with the Federal Government, the GoS is now reviewing labor laws to consolidate these from over 27 laws, regulations and ordinances to 6 laws. Three of these laws were finalized in December 2001 and the rest will be finalized by October 2002. 85. Medium-term reforms will focus on further streamlining of regulations and building up the institutional framework. First, once the impact of the current round of reforms has been evaluated, there will be further streamlining of regulations-particularly to increase labor market flexibility. The second major issue will be the deepening of institutional reforms to address private sector development issues through developing more independent and professional regulatory organizations, where the private sector and civil society are well represented. GoS has already taken steps in this regard as discussed below. 86. GoS has been successful in involving Karachi's considerable private sector in public-private partnerships to jointly work to improve the investment climate. Some of the key examples of public- private partnership include: (i) A powerful Provincial Committee on Investment (PCOI)- with 70% private sector membership-has been notified and is meeting regularly to address ways to improve the investment climate; (ii) The Economic Development Council (EDC) has been set-up for the revival of Karachi city. While it is chaired by the Governor, its vice chairman is from the private sector; (iii) The Sindh Privatization Commission is chaired by a private sector individual, and 10 of the 15 members are from the private sector; and (iv) An Information Technology (IT) Board has been set up to promote an IT culture in Sindh and boost software exports. Headed by the Governor, it has a 50% private sector membership all actively involved in designing an IT strategy for the province. 87. Privatization reforms implemented include promulgating a strong privatization law, setting up a well-constituted Sindh Privatization Commission (SPC), and identifying the list of assets and the timetable for privatization. The Commission, headed by one of Pakistan's leading investment bankers, is in place and properly funded. The GoS Cabinet has approved the list of assets to be privatized, including some potentially large-scale transactions: coal mines (with federal government approval), sugar mills, and water treatment plants of the Karachi Water and Sewerage board (See. Annex H for the list of assets and schedule of privatization). In the medium-term, the main task will be to carry out the privatization tasks as per schedule. In the meanwhile, the SPC is building up implementation capacity through appointing -24- qualified consultants to undertake specific transactions and to carry out an inventory of GoS owned assets and enterprises in order to confirm employment, financial position and other pertinent data. Rehabilitating Sindh 's Roads 88. Issues: The roads network in Sindh province is in a critical state of disrepair raising transport costs and adversely affecting the growth of markets, incomes and employment, especially in the rural areas. Close to 70% of the 20,642 kilometers are classified as in poor condition, with only 10% being deemed to be in good condition. The road maintenance budget is less than one third of its requirements and, there is a large backlog of road rehabilitation expenditures (around 0.8% of GPDP). There has been a lack of sustainable funding mechanism for road maintenance. The road management department is overstaffed and maintenance yardsticks are outdated. 89. Objectives and Strategy: GoS's plans to improve its road management program through embarking on a road rehabilitation program that prioritizes maintenance, setting up a Roads Fund with an Oversight Board that has stakeholder participation and involves private contracting. The other main component of its strategy is to implement the process of devolution and decentralization of the management of district roads-which constitute the vast majority of the road network - to district Governments. Finally, the GoS's MTFRP provides the fiscal space to increase allocations for road rehabilitation in both the current and development budgets several fold. 90. Implementation: First, in line with its strategy, the Communications and Works Department (CWD) has shifted its focus to maintenance and rehabilitation of roads and sharply curtailed construction of new roads. To this end, it has prepared a maintenance backlog estimate, a maintenance prioritization plan (under which 70% of its maintenance budget is going to priority roads), updated its yardsticks and has requested increased allocations for maintenance. Second, a public-private Oversight Body has been created to manage the increased maintenance funding for roads and a non-lapsable Roads Fund is being prepared to protect road maintenance funds. The ADB is supporting the setting of the Road Fund. Further, starting this year, 100 % of all maintenance has been contracted out to the private sector. Third, CWD has reorganized itself for devolution. It has absorbed the provincial Education Works Directorate and the Housing and Town Planning department and has devolved its share of the intra-district road network (approximately 16,020 kIn) and half its staff (8,475) to the district govemments. CWD has sent guidelines to district govemments on how to prioritize their share of the maintenance allocation and submit their priorities to be incorporated in the medium-term rolling plan for provincial road expenditures 91. Medium-Term Reform Program: The medium-term reform program in the roads sector will focus on institutional reforns with assistance from the ADB that will include: (i) establishment of a Road Sector Development Directorate (RSDD), whose operations will be guided by the newly created oversight body, and mandated to develop the road master plan and a 5-year rolling plan and design standards and specifications and environmental management manuals, implement the axle load control program and, traffic capacity plans, and publish maintenance and investment program; (ii) other related institutional reformns will include staff rationalization and private sector participation in toll operations and road maintenance, especially through local level maintenance contracts; and (iii) augment resources for the non-lapsable road through fuel levies, cesses, revenues from tolls and surcharges on heavy vehicles. Agriculture and Irrigation 92. Issues: Sindh province, with 26% of Pakistan's cultivated area, contributes 24% of national production of major crops (44% in rice, 31% in sugarcane, 21% in cotton, and 15% in wheat). Though Sindh's agriculture growth increased in the 1990s, it suffered from volatility that reduced its poverty impact as there is a clustering of households around the poverty line. While crop yields in Sindh are -25- higher than national averages, they are lower than their potential. Several factors have constrained Sindh's agriculture performance. Excessive water-logging and salinity due to inefficient use of flood irrigation and the exhaustion of micronutrients by in-appropriate use of mechanization, water, and fertilizer have reduced yield. Water logging and salinity cause as much as 40-60 % reduction in the productivity of major crops in Sindh. In spite of huge public investments, the problems of salinity and sodicity have become more acute in recent years, due to poorly maintained drainage systems and increased tapping of brackish groundwater for irrigation. 93. The deterioration of the irrigation network due to poor maintenance, low water rates and inefficient system of assessment and collection that recover only a third of the recurrent cost of irrigation have lead to enormous wastage of scarce water resources and reduced availability of irrigation. Apart from seasonal water shortages in the canal systems due to highly seasonal river flows and inadequate regulatory structures, Sindh's irrigation system is characterized by (i) low delivery efficiency (only about 35-40%); (ii) distribution inequities (poor and/or untimely supply at the tail ends of the distributaries and watercourses); (iii) wasteful on-farm water uses (due to under pricing of water); and (iv) illegal pumping by head-enders. Highly skewed land distribution and insecure tenancy rights provide poor incentives for investment in land. Inferior services provided by the agricultural extension and the irrigation departments have not helped farmers. Continued restrictions on private sector supply of inputs and large public sector presence have lowered efficiency. 94. Strategy: Sindh is pursuing an agriculture strategy that emphasizes six policy areas: (i) improving the operations and maintenance of the irrigation and drainage system. (ii) reforming agricultural extension servies; (iii) increasing growth-enhancing public investments; (iv) further liberalization of trade and markets, (v) promoting private sector investment, and (vi) developing efficient land markets. To address constraints to efficient operation and management of the irrigation and drainage systems, GoS has adopted a new strategy. The key thrust of this strategy is to foster an institutional, policy and operational framework that is conducive to efficient and self-sustaining operation and management of the irrigation and drainage systems. The strategy is predicated upon: (i) restructuring of the Provincial Irrigation Department into an autonomous Sindh Irrigation and Drainage Authority (SIDA) at the province level, and commercially oriented and autonomous Area Water Boards (AWB) at the canal command levels; (ii) devolving O&M and cost recovery responsibilities to formally organized Farmer Organizations (FOs) at the distributary/minor canal levels; (iii) fostering beneficiary/community/private sector participation in all aspects of operation and management of the irrigation and drainage systems; and (iv) significantly increasing budgetary allocations for irrigation infrastructure rehabilitation under the GoS's medium term fiscal restructuring plan. 95. Status of Implementation: GoS is fully committed to the implementation of the institutional and policy reforms initiated in the irrigation and drainage sector under the National Drainage Program (NDP) project. The reforms have high-level support. The SIDA Act was passed in 1997 to provide legal cover for the reforms. SIDA has already been established with initial jurisdiction over three canal commands. Its organizational structure, staffing, systems, rules and regulations are being developed. Committed and efficient staff is being recruited from the market. The future vision is that SIDA's jurisdiction would be gradually expanded to the whole of Sindh province, with AWBs established on all the 14 canal commands by the end of 2003. Simultaneously, Irrigation Department's jurisdiction and role would gradually diminish, and ultimately it would hold regulatory responsibilities only. Over 40 FOs have already been established within the Nara Canal Command. SIDA and the Nara Canal AWB have already turned over irrigation and drainage management responsibility to over 20 FOs. More FOs are being established. Ultimately over 1200 FOs would be established in the 14 canal commands/AWBs of Sindh. Initial reports suggest that irrigation charges recovery have improved substantially in some of these areas. The GoS's medium-term fiscal restructuring plan also includes an increase in allocations for the rehabilitation of irrigation and increasing water charges to promote efficient use of this scarce resource. 96. To increase the performance of extension services and irrigation maintenance, GoS's primary initiative has been to try to involve farmers in both these activities. In the case of extension workers, monthly salary has been made contingent upon at least five farmers (who are changed every month) certifying their presence and contribution. In addition, GoS is also holding field days and farmer days in villages to make a special effort to disseminate best practice. Finally, the GoS is also continuing its program of land distribution with more than 103,000 acres of land distributed to landless farmers in the last two years. 97. Medium Term Reforms: The GoS's medium-term plan focuses on rationalizing procurement services, reducing public sector and increasing private sector presence, and rehabilitating infrastructure. As part of this, the GoS plans to: (i) remove market barriers by lifting restrictions on the internal movement and imports of agricultural commodities and products; (ii) rationalize procurement prices by setting wheat and cotton prices at the export parity price, while the procurement prices of all other crops will be capped by their market prices; (iii) reduce public sector presence by closing down Sindh Agriculture Supply Organization, its Food Department and the Sindh Seed Corporation, with the staff of these agencies to be assigned to the surplus pool or paid a severance package; (iv) increase access to the private sector under which private seed companies will get access to breeder seed developed by the provincial public sector research institutes (who will get greater administrative and financial autonomy); (v) continue its program of irrigation infrastructure rehabilitation with greater farmer participation and public sector investments; and (vi) improve tenancy and land rights through improving and computerizing land record systems. V. THE PROPOSED SINDH STRUCTURAL ADJUSTMENT CREDIT A. Pakistan Country Assistance Strategy 98. The Government of Pakistan is engaged in fundamental reform for a historical transition of the country to modernity. These reforms cover a broad spectrum-politics, institutions, economic, gender, and social. The main goal of the Bank Group's Assistance Strategy is to support these fundamental reforms for a transition to a modem Islamic State through a program of analytical services, institutional capacity building, and demand driven lending. The triggers underpinning the operationalization of the Bank Group's assistance strategy is based on measurable outcomes, which have the Millennium Development Goals (MDGs) as a frame of reference in alignment with corporate priorities and global public goods. 99. The Pakistan CAS advocates a programmatic approach focused on transfer of knowledge and capacity building first, and resources second, in a flexible pursuit of key development outcomes. Pakistan's I-PRSP sets out the process underlying a sweeping and ambitious reforrn program covering the political, institutional, economic, and social, including gender equity. These reforms are inherently long term in nature as acknowledged by the government and can therefore be more effectively supported by multi-year programs-both at the national, provincial, and district level-hence the need for a programmatic approach for the Bank Group's assistance strategy. The core program of fiscal and governance reforms at both the provincial and district levels is an area for which the Bank's programming approach is best suited: reforms take several years to yield results, and support needs to be flexible and consistent to withstand the uncertainties inherent in such an endeavor. Moving forward with reforms will also require assurance of a reasonable degree of financial support over the medium-term. Hence the Bank's use of a series of adjustment credits to the federal and provincial govermnents will provide a predictable and performnance-based budgetary support to enable both the reforming provinces to restore their financial equilibrium while undertaking the difficult and politically controversial reforms. The -27- approach will also help the Bank manage risks by pacing its assistance with the future government's ability to pursue reforms, and to give assurance of "just in time" support. 100. Self-Activating Entry and Exit Triggers for Bank Assistance to Provinces: As. noted, Pakistan's provinces face a fiscal crisis as the result of past poor governance and economic management, which has crippled their ability to deliver on their mandate. Since a significant volume of the Bank's lending program is linked to structural reforms to increase the provinces' fiscal space and improve their capacity to deliver basic services, the Bank's provincial lending program will be regulated by the following entry criteria: * There is a reforming government at the provincial level with committed "reform champions" at the top and capable reform leaders within the administration. * The provinces would have already initiated a number of reforms to restore good governance and improve their public finances and public service delivery. This includes: (i) Fiscal discipline translated into reduced liabilities and short-term borrowing for deficit financing; (ii) Improved performance of Fiscal Monitoring Committees and PACs in increasing accountability; (iii) Initiation of civil service reform including enhancing efficiency and accountability, pay and provident fund/pension reforms, rightsizing by eliminating positions as per skills requirements at the provincial and in autonomous and semi-autonomous bodies; (iv) Marked improvement in civil service delivery including enforcement of location-specific teacher and health worker contracts, and control of staff absenteeism; and implementation of performance-based remuneration and teacher training programs. Correspondingly, Bank lending to the provinces will be guided by the following exit criteria: * Reappearance of substantial short-term borrowing to finance the budget deficit. * Expansion of public sector contingent liabilities (through off-budget financing of public enterprises and other entities). * Deterioration or reversal of reforms to improve social service and governance improvements. 101. The GoS reform program meets the entry criteria. There is a reforming government at the provincial level with committed "reform champions" at the top and capable reform leaders within the administration. The province has already initiated a range of reforms to restore good governance and improve their public finances and public service delivery. There is significant improvement in the performance of Fiscal Monitoring Committees and PACs over the past year. Civil service reforms have been initiated. There has been an appreciable improvement in service delivery including enforcement of location-specific civil service contracts, control of staff absenteeism, and implementation of performance- based remuneration and teacher training programs. 102. Other Lending Activities: While the proposed SSAC is the main vehicle for Bank assistance to Sindh in support of a comprehensive approach, other Bank projects are also providing key investment and technical assistance. These include projects such as the On Farm Water Management Project, which is helping GoS to organize farmers groups in support of more rational irrigation management and greater cost recovery; the National Drainage program, which is helping Sindh combat excess salinity, and the forthcoming Community and Infrastructure Project that will support community participation in small scale infrastructure development. -28- 103. Analytical Work and Technical Assistance: The proposed credit builds on the following economic work: (i) Reforming Provincial Finances study (FY 00); (ii) the Country Financial Accountability Assessment Desk Review (FY 01) which also assessed provincial fiduciary issues; (iii) diagnostic work done for the Social Action Project in education and health sectors in the 1990s; (iv) the Interim Pakistan Poverty Assessment Report (FY 02); and (v) the preparatory work done on Sindh province by successive Bank missions in FY 01 and 02. A Bank team and consultants have worked closely with GoS counterparts in the areas of fiscal restructuring, civil service reforms, health and education strategies, and privatization. The WBI has been providing assistance in support of fiscal decentralization. In addition, education and health sector units of the Bank are also providing technical assistance to the GoS to implement devolution in their sectors. Technical assistance for the implementation of the medium-term reform program is being provided through the PIRFA I project and will be supplemented by a complementary technical assistance credit that is under preparation. 104. Other Development Partners: In the past two years, the GoS has been able to rebuild a partnership with other international and bilateral development agencies, as it was evident in the Sindh Development Forum held in February 2002. Currently, the most active partner for Sindh is the Asian Development Bank that is providing support for the agriculture sector, roads, and police and judicial reforms. Other donors are providing assistance in health sector (with a special emphasis on women's health), girls' education, water supply and sewerage in Karachi and Hyderabad. UNDF and WHO are helping Sindh to strengthen its impact evaluation capacity in the health sector. B. The Proposed Credit: Prior Actions and Medium Term Benchmarks 105. The Proposed Credit: The GoS's reform program is comprehensive. But the proposed IDA supported structural adjustment credit will be triggered by a selected, critical reform measures as prior actions (see Box 3, next page). The criteria are these reforms are: (i) complementary in their impact on reducing poverty; (ii) focus on achieving quick, visible improvements in public services (e.g. increase in enrollment, schools, immnunization, road maintenance, project implementation, reduction in the number of factory inspections); (iii) existence of strong reform champions and reflect actions that are already underway; and (iv) sustainability. 106. The credit, in an amount of US$ 100, million is expected to be the first in a series of three annual credits that will help GoS to implement reforms over the medium-term. Proposed subsequent operations in support of this reform program will use a combination of implementation benchmarks and outcomes as triggers (See Table 7 and Annex A for the list of prior actions and outcomes). The GoS's medium-term reform program will have the following main benchmarks for implementation to trigger future credits in support of the program in FY 04 and FY 05: (i) satisfactory and continued implementation of prior actions under the first SSAC; (ii) implementation of the agreed fiscal restructuring plan (as per targets in FY 03 and FY 04), which includes meeting specified revenue targets, providing resources to agreed high priority expenditures in the social sectors, especially on non-salary items and rural infrastructure rehabilitation, implementing fiscal decentralization and financial restructuring, and introducing tax administration reforms; (see para 56 and Annex E for more details); (iii) implementation of the Financial Management Reform Program including reconciling liabilities and assets of all public accounts and government financing, strengthening of financial management at the provincial level and in the districts, and implementing procurement reforms to increase transparency and efficiency (Annex F provides more details and benchmarks by years); (iv) deepening civil service reforms by formalizing site specific contractual service and developing a computerized and payroll reconciled human resource data base human resource management and development (FY 03); -29- Box 3: Prior Actions for Disbursement of Sindh Structural Adjustment Credit Prior Action - - Status C Fiscal and Financial Management Reforms GoS has expanded the provincial tax base by (i) introducing agriculture Done in FY 02. (See para 45) Provincial tax revenues income tax; (ii) rationalizing stamp taxes by reducing their number and increased by 27% in FY01 and are expected to increase making them ad-valorem; and (iii) enlarging property tax base by by 14% in FY02. increasing rating areas and adding 100,000 units to the base. The GoS has retired arrears of Rs. 21 billion to owed to Federal Done in FY 01 and 02. Arrears amounting to 2% of the Government agencies, private sector contractors and utilities and reduced GPDP have been retired in FY 01 and FY 02 and past overdraft with State Bank of Pakistan (by more than 90%) and set arrangements to avoid arrears have been made (See para up specific arrangements to avoid such arrears in the future. 56). The GoS has adopted a Medium Term Fiscal Restructuring Plan to Done. The MTFRP has been adopted by the GoS. (See increase provincial revenues, pro-poor expenditures, reduce future para 56). The first-year targets of the plan will be expenditure obligations such as debt servicing, and pension obligations. incorporated in the FY 03 budget. The GoS has made publicly available quarterly Fiscal Monitoring Done. GoS is producing quarterly fiscal monitoring Reports on revenues and expenditures that are based on accounts that are reports presented in the Department of Finance web site more than 75% reconciled with the Accountant General. The GoS has (www.financedeptsindh.gov.pk). implemented agreed revenue and expenditure targets for the first two quarters of FY 02. The GoS has set up the Provincial ad-hoc Public Accounts Committee, PAC has been set up after 15 years and is currently made review of audit reports current, and opened PAC sessions to the reviewing latest FY 00 audit report (See para 57). The press. PAC has made its sessions open to the press and public. Sindh has (a) taken the decision to appoint a professionally qualified GoS has adopted the Financial Management Reform Provincial Finance Controller in its Department of Finance (DF) to lead Program including the appointment of the Controller by financial management reforms; (b) adopted a financial management July 31, 2002 (see para 59). reform program. The GoS has streamlined financing procedures to ensure timely release Done (December 2001). (See para 49). Disbursement of development expenditures and high priority non-salary health and of high priority expenditures has increased significantly. education sector expenditures. Strengthening Governance: Civil Service and Public Service Delivery Re orms The GoS has promulgated the Sindh Public Service Commission Ordinance was promulgated in December (See para 63). Ordinance, which provides the Commission with administrative and Civil service rules have been amended to apply SPSC's financial autonomy, security of tenure, and associated rules which authority from grade 11 and above (January 2002). provide the PSC with control over all appointments of officials over grade I I instead of only over Grade 17 as previously. The GoS has increased accountability, access and quality of education (i) Done; (ii) Department of Educations has made 3,800 through (i) expanding the role of the school management committees, primary schools functional (10% of current schools) chaired by parents/Citizens community Board members, to monitor through redeploying and recruiting teachers under teacher performance and school budget implementation; and (ii) private sector management and community involvement; redeploying and recruiting teachers to make viable schools functional, (iii) Monitoring and Evaluation Cell (MR&E) has been and (iii) set up the M, R&E cell of the DoE and initiated monitoring of set up and it has initiated monitoring of schools. (See schools. para 70). GoS has (i) increased coverage of immunization services based on a GoS is increasing EPI coverage from 39% to 50% and well-targeted program; (ii) strengthened health sector monitoring and TB DOTs coverage from 8% to 31%. Provincial M&E evaluation programs; and (iii) initiated a program of strengthening programs are being set up and district health capacity in district governments. management has been strengthened. (See para 74). Regulatory and Private Sector Development Reforms GoS has streamlined inspections by reducing the number of inspections Done. (See para and Annex H for details). from 23 to 7 to take place in two days. GoS has promulgated the Sindh Privatization Commission Ordinance Done (July 2001 and January 2002 respectively). See providing clear mandate to the Commission to privatize a clearly defined para 84 and Annex H for details. the list of assets. I_I (v) strengthening the role of the communities and parents through further empowering the school management committees to play a role in the hiring and firing of teachers, meeting specified education and health sector (enrollment and immunization) coverage and quality targets, and strengthening -30- monitoring and evaluation including holding annual third party validation surveys to collect district level information; (vi) implementing agreed regulatory reforms and privatization targets as per schedule set by the GoS. C. Credit Administration 107. Borrower and Credit Amount. The borrower is the Islamic Republic of Pakistan who will on lend the money in Pakistan rupee equivalent on IDA terms to the Province of Sindh. The total credit amount of SDR 79.1 (US$100 million), will be disbursed upon effectiveness. The closing date of the Credit is December 31, 2002. 108. Disbursement, Procurement, and Financial Management. The Credit will follow the Bank's simplified disbursement procedures for adjustment operations. * The Credit proceeds will be deposited into a GoP Deposit Account at the State Bank of Pakistan (SBP). * The Pakistani Rupees equivalent (based on the interbank exchange rate on the day of transfer) will be on-lent to the province on IDA terms, which will be repaid in the original Rupee amounts by the province. * The Pakistani rupees will be transferred from the GoP deposit account to GoS's Account No. 1 (non- food) in a single tranche, within two days after the Credit is received by GoP. * IDA will request that the GoP's Deposit Account be audited; this audit will be performed by the SBP independent auditors. * The local currency proceeds in the GoS's Account No. I (non-food) are subject to the usual GoS budget execution and audit policies and procedures, along with all other GoS funds. * The Auditor General of Pakistan will audit the transfer of the local currency equivalent from GoP to GoS; this audit will examine the conversion of the USD Credit proceeds into rupees and the transfer of those rupees to the GoS's Account No. 1 (non-food). * The proceeds will not be used to finance expenditures excluded under Schedule 1 of the Development Credit Agreement. If any portion of the Credit is used for ineligible purposes as defined by the Development Credit Agreement, IDA will require the government either to return that amount to the Deposit Account for use for eligible expenditures or to refund the amount to IDA. * The SBP, on behalf of the GoP, will maintain an appropriate accounting system in accordance with generally acceptable accounting principles. It will provide the required infornation on the receipt and use of the Credit funds and will prepare annual financial statements, up to and including the fiscal year in which the balance in the Deposit Account is zero, in a format agreed at negotiations. 109. Accounts and Audit: While the IMF Safeguards Assessment mission identified several risk factors in the accounts and audit of the SBP, considerable progress has been made in implementing remedies to mitigate the vulnerabilities identified. The government is also implementing a comprehensive program to improve public audit and accounting systems. The financial statements of the Government of Pakistan Deposit Account into which the SSAC is deposited will be audited by SBP appointed independent auditors acceptable to IDA under terms of reference in accordance with acceptable international standards on auditing. The first audited financial statements will be submitted to IDA within six months of the Government's fiscal year ending June 30, 2002. 110. Fiduciary Issues: The GoS has launched a strong program of financial management reforms (see paras. 57-60 and Annex F) that aim to mitigate fiduciary risks and ensure that public expenditures are spent effectively and as intended. The reforms follow the road map of financial management reforms -31- being carried out by the Federal Government and many of the recommendations of the Pakistan Country Financial Accountability Assessment desk review (June 2001), to improve the provincial public accountability framework. The full CFAA (FY 03) will look in-depth into district financial management and accountability issues under Pakistan's devolution program and provide further guidance for medium- term reforms. 111. Environmental Aspects: A national environment impact assessment will be carried out in FY 03 by the South Asia environmental unit to assess compliance with environmental laws and institutional reforms that need to be taken to improve environmental management. This assessment will include Sindh province, including the coastal and riverine areas. In the case of Sindh an environmental safeguard and due diligence will be out for the potential privatization of Karachi Electric Supply Corporation in the power sector to ensure that private operators are in compliance with the environmental laws of Pakistan. Arrangements will also be made for the environmental screening of potential privatization and concession of the coal mines and assets of the Karachi Water Supply Board that are part of the GoS's privatization plan. D. Monitoring and Evaluation Arrangements 112. Monitoring and evaluation arrangements are being set up in Sindh as part of the Federal Govemment's Poverty Reduction Strategy to track (i) public expenditures (e.g. on primary education); (ii) outputs (e.g. trained teachers); and (iii) outcomes (e.g. learning as measured by the proposed educational assessment system, the share of primary schools student graduating). These variables are described in the GoP's I-PRSP. As in other provinces, Sindh's Planning and Development Department will be mainly responsible for coordinating this task and making its report to the Federal Govenmment. 113. The monitoring and evaluation arrangements for the GoS's reform program will extend further to monitor the targets set in Table 7 below and in Annex A, the Policy Matrix. These will include (i) the quarterly fiscal monitoring report; (ii) civil service transfers and the rightsizing of the civil service will be monitored by the Services department; (iii) human development and MDG data identified in Table 7 (including poverty reduction, primary education enrollment and retention, girls education, infant mortality, maternal and reproductive health care, and safe drinking water) will be provided by the monitoring cells of the relevant departments; (iv) district performance indicators and the results of the annual independent third party validation surveys that will be carried out will be regularly monitored by the Departments; and (v) surveys to monitor the implementation of regulatory reforms. 114. The monitoring of the implementation of the reform program is being done at two levels. An inter-Ministerial Committee is providing overall monitoring and guidance to ensure implementation. Second, an Implementation and Monitoring Unit (lMU) will be set up by end of May, at the Finance Department to supervise, monitor and coordinate implementation in all the agencies. This IMU will produce quarterly report consisting of three parts: (i) the quarterly fiscal monitoring reports on the implementation of fiscal and financial management targets (as set out in Tables 1 through 5 of Annex E of this Program Document and tables on the functional breakdown of current and development expenditures); (ii) progress in the implementation of specific measures agreed under the SSAC and the GoS's medium term reform program; (iii) and data on poverty reduction and MDG outcomes from surveys and other sources (identified in Table 7 below) when these will become available. All of the above information will be posted in the Department of Finance, GoS, web site, within 45 days of the end of the quarter. The first report will be presented on August 15. The GoS has identified specific targets and variables to be tracked and the sources and agencies responsible for tracking these. This information is presented in Table 7 below. -32- Table 7: Monitoring Indicators Under GoS Reform Program (* = Corresponding to IPRSP Targets) Indicators (Targets are from latest ear to F'Y 06) Institutional Arrangement for Monitoring Growth* 3.3% to 5.2 % per cent per anawn Overall Monitoring Responsibility Poverty (Basic Needs)* Urban: 19% (1998 PIHS) to 16% (FY04) Planning and Development Departnent; Rural 37% to3l%(FY04) Source forPoverty Data: PIHS Survey every two years Public Finance 15.2% annual growth of revenue Provincial Tax Revenue Growth AIT and irrigation charges collection Quarterly Fiscal Monitoring Reports, Annual growth by 20% p.a. Budget Statements of Department of Finance, and Annual Budgets, produced by the Share of education and health in From 28% of expenditures in FY 01 to Departmnent of Finance current expenditures (functional 39% in FY 06 classification) Quarterly Fiscal Monitoring Reports of the Operations and Maintenance From 9% (in FY 01) to 16% of all Department of Finance (economic classification) expenditures Development Expenditures From 9% (FY 01) to 18% of all (economic classification) expenditures Department of Finance/Accountant General's Timely, comprehensive, reconciled Civil Accounts Reconciliation from 80% Office. Quarterly Fiscal Monitoring Report. fiscal data eventually using modern to 95%. chart of public accounts Identification and reconciliation of all expenditures and public accounts. Education and, Health Gross priuary enrollment rate From 60% to 80% (FY 05) Annual SEMIS, Reports of the R, M, and E cell Gross Female Primary enrollment From 41% to 60% of the Education Department. PIHS rate* Annual Independent Third Party Validation Number of Schools Made* 88% to 100%. Surveys with data collected for district level. Functional 101,000 teachers tested and 12,000 Teacher Competency Testing and trained. SEMIS Training* PIHS Surveys Infant Mortality Rate* 95 to 60 Annual Reports of Immunization Directorates 12 to 23 month Immunization * 49% to 80% Third Party District Annual Assessments. TB Control Access 8% to 100% Births Attended By Trained 28% to 40% Personnel* Third Party Validation Surveys Population with Access to Safe 61% to 80%. Drinking Water* Annual Sindh Katchi Abadi Authority Reports Notified Katcha Abadis (Urban 80% to 90% Slums) Regularized* Infrastructure Annual Reports of CWD, Roads Oversight Proportion of Roads Classified in 70% to 50% Body, Independent Surveys Poor Conditions Kilometers of All Weather Farm to 14000 km to 15200 km by FY 05 Market Roads* Annual Reports of SIDA/Irrigation Department Rehabilitation of Irrigation 1500 Km channels by FY06 Infrastructure* Temporary Employment* Generated From 0.25 million to 0.4 million FY 06 Department of Local Government through KPP civil works. Note: Poverty data based on PIHS (1998/99) survey and its methodology is contested by the Government of Sindh. -33- VI. BENEFITS AND RISKS 115. The proposed credit is a high return/high risk credit. The high return comes from supporting a comprehensive program of reforms implemented by the leadership and the executing agencies of a province that directly affect poverty and welfare of the more than 30 million people of Sindh. This return comes from improving fiscal and financial management so that more and higher quality resources can go to fight poverty, ensuring that public service delivery improves through greater accountability and empowerment of the people, and creating incomes and jobs through specific actions to improve the investment climate for growth. In a short period of time, these reforms are already showing results in terms of greater enrollment, immunization coverage, and improvements in public finances and financial accountability - all of which are reversing decade long trends. Indeed, given the scope and potential impact of this program and the demonstrated commitment of the leadership of the province to this program, withholding support from this credit will undermine the credibility of the Bank after close to a two year long dialogue and discourage future champions of reforms. The high risk comes from the transitory political situation in Pakistan and the coming into office of newly elected provincial governments in October and possible weakening in their commitment to the continuity of the reforms. These risks and their mitigating measures are discussed in some detail below. A. Benefits 116. The benefits of this credit will come from poverty reduction and faster human development as indicated by the monitoring indicators in Table 7 above. These outcomes will come from the following measures. Fiscal restructuring will raise the space for high priority poverty reducing expenditures with a special emphasis on increasing expenditures on goods and services and operations and maintenance. By raising public savings and reducing future liabilities through accelerated payment of expensive debt and pension funds capitalization, the reforms will put provincial finances on a more sustainable basis. Financial management reforms will increase fiscal transparency and accountability and enhance the effectiveness of expenditures. A better disciplined civil service and institutions, transparent and accountable to local Governments and communities will increase incentives for better performance and service delivery. Regulatory and infrastructure reforrs will improve the investment climate and help to increase incomes and employment. Extensive monitoring arrangements have been made and are being strengthened so that it can identify and track the variables to evaluate the impact of these reforms. B. Risks 117. The operation faces essentially three types of risks - continuity risks, implementation capacity risks; and risks from exogenous shocks. Of all the risks, continuity of reforms risk, closely related to political risk, is the most important. Newly elected provincial governments will take office in October 2002, and there is the unavoidable question whether the next government will continue implementing the current reform program. The new Governments will face political risks such as resistance from politicians and civil servants to loss of opportunity for rent seeking and corruption and the loss of power to local Governments. Civil servant and public sector employees will resist privatization and rightsizing. 118. Continuity of reform risk is mitigated by several factors. First, and most important are the efforts of the GoS to build consensus around this home growth program. A recent aspect of this has been to involve some of the newly elected district heads/Nazims -- the bridge to future governments -- in the reform program. As part of this effort, the GoS held a very successful Sindh Development Forum in February where provincial Ministers and some newly elected Nazims explained their reform efforts to a wide cross-section of civil society, politicians and development partners. In general, as noted GoS has done an impressive task of building partnerships with the private sector and civil society in the various reform tasks-as exemplified in the active engagement of the private sector and academia in the -34- Economic Development Council, and the Provincial Committee on Investment. The GoS is planning to build a more systematic communications strategy to explain its reforms and the relatively quick. and visible improvements that are already being obtained to the people of Sindh. The aim will be to raise the political costs of reversing reforms for future governments. 119. The second mitigating factor is GoS's reforms have been institutionalized in bodies such as the newly elected district Governments, the Public Accounts Committee, provincial Fiscal Monitoring Committee, the Provincial Committee on Investment, and at a more micro, but also important, level in the School Management Committees, Farmer's Organizations, and the Road Fund Oversight commnittees. These institutions increase transparency and develop stakeholders in civil society who will offer resistance to reversal of reforms. The third factor is the reforms pursued by the GoS is part of a similar reform program pursued at the Federal level where the President will remain in office, providing an important measure of continuity. Fourth, legal arrangement have also been made to induct technocrats in future provincial Governments. Thus, it is possible that some of the current reformers will continue in their role. Fifth, specific measures will be taken to assist those who are adversely affected by the reforms, e.g. public sector employees who are separated, to defuse their opposition. 120. Implementation capacity risks are also high and stem from the capacity constraints at both the provincial and district levels and the comprehensiveness and significant enhancement in size of programs (especially social sectors) may turn out to be too ambitious. To mitigate this risk, technical assistance is being provided to support the key areas of reform through Bank assistance and a Government of Japan supported PHRD grant. Thus, technical assistance is being provided in all the areas of reforms covered under this credit. Bank assistance is also supplemented by assistance from the ADB in the area of agriculture and irrigation reforms and roads and rural infrastructure. In addition, the GoS has organized itself well to follow up on implementation of reform program (see para 114). The GoS is drawing upon the extensive private sector and research capacity present in Karachi. It has drawn up plans to. use the Applied Economic Research Center, the Social Policy Development Center, Aga Khan University, and the Institute of Chartered Accounts of Pakistan to provide consultancy and implementation assistance. Also, most of the short run reforms proposed' here are ongoing or nearing completion and there has been close World Bank assistance in helping the GoS prepare this program both through staff and by using well qualified local consultants. 121. Finally, the risks from exogenous shocks are also high in Pakistan given that it is still on path of recovery, burdened with high debt, and located in a turbulent region. Specifically, growth may turn out to be less than anticipated because of the impact of a longer than expected global slowdown or protracted border tensions, the consequences of continued uncertainty on investor confidence, and the effects of droughts on agricultural output. Revenue collections and transfers from the Federal Government could decline and affect the medium term fiscal program. To some extent, these risks are national and beyond the control of the GoS province. However, if faced with such events, GoS's main task will be to make necessary adjustment to these shocks through further deepening the fiscal restructuring and governance reform program that it has embarked on. -35- Annex A Page I of 7 GOVERNMENT OF SINDH - POLICY REFORM MATRIX GoS Reforms Implemented by FY02 Medium-Tenm Reform Actions (FY03-FY05) | Outcomes (AcUons in Italhcs Represent Prior Actions for Board) (Actions in llalics are Key Benchmarkes for Future SSACs) - - - A; FISCAL AND FINANCIAL MANAGEMENT REFORMS - - - . . Implement fiscal Tax Reforms Strengthen insitutional framework for provincial revenue Annual provincial lax revenue restrucurng to GoS has expanded the provincial tax base by: (i) introducing agriculture cllection (i computerizing land and tax rcords; fi) using satellite cairane each gear) create more fiscal income tax, (D) rationalizing stamp taxes by reducing their number and imagig to MneaSe agrculure income tax andland revenues (by ve e Y space for poverty making these ad-valorem; and (iii) enlarging property tax base by end FY03); and (iii) integrating Excise & Taxaton Departments More effective public reducing increasing rating areas from 26 to 42 and adding another 100,000 acn Baoft RevenueF0into a r incal Revenue expenditures and properUes.Atoiyatce oteFnneDprmn (by end FY04). expenditures closely linked to improve quality of poverty reduction outcomes expenditures. Expenditure Prioritization * Expenditures were increased for social sectors and infrastructure in FY Deepening of expenditure prioritization based on well targeted ^ Provincial revenues to increase 01 and FY 02 budget. Non-salary expenditures for key education sector and costed sector strategies and a medium-term expenditure by 15.4% p.a. increasing from activities were doubled in FY 02 budgetfrom last year. The current budget framework. 1.7% to 2.1% of GPDP. allocation for health has increased by 16%. The ADP is giving prionty to ^ Share of development budget to completing on-going schemes by allocabng 75% of the ADP. ^ Implementation of the Medium Term Fiscal Restructuring Plan increase from 9% (FY 01) to 18% Retiring of Liabilities and Debt from FY03 with the following benchmarks (FY 06) of all expenditures). * GoS has retired its arrears and over-drafts (2% of GPDP) accumulated - provincial revenue collections, AIT and Abiana collections ^ Operation and Maintenance over the past decade. - ceilings on wage expenditures share to increase from 9% to 16% - 75% allocation of ADP to completing priority expenditures of all expenditures. Fiscal Restructuring - capitalization of GP. fund/pension fuds and use of G.P. fund * Education and Health sector ^ The GoS has adopted a Medium Term Fiscal Restructuring Plan to net receipts for G.P. Fund capitalization share in current expenditures to increase provincial revenues, pro-poor expenditures, reduce future - acceleratedrepaymentofexpensive debt increase from 28% to 39%. expenditure obligations such as debt servicing, and pension obligations on - provision severancepackages a . * Capitalization of GPI Pension a sustainable basis. Funds (Rs. 13.3 billion by FY 05). ^ Accelerated repayment of debt by Rs. 6.8 billion. More reliable, Adopt a public Financial Management Reform Program (FMRP) that ^ Completion of Provinial Financial Accountability Assessment * Improved financial management comprehensive, includes: (a) 100% reconciled provincial and district Public Finandal and preparation of a tme bound Action Plan. in provincial and local timely and accurate Statements (b) elimination of unidentified expenditures and financing (c) govemments. information pertaining institutional strenothening of Distridct Accounts Offices and below (d) ^ Introduction of the NAM and roll out of the PIFRA computerized Detailed targets of the FMRP are to provincial and implementation of NAM and roll out of PIFRA systems and (e) system in all districts provided in Annex F. district govemment computerization of payroll. * Cany out institutional capacity development plan, including financial transactions. upgradation of DAOs, recruitment and training. Fiscal Transparency and Better Accounts: GoS has produced fiscal * Incremental improvement in mconclation of Providenf Fund monitoring reports that present quarterlty statements on revenue accounts, all assets and liabilities to be achieved 100% by collections, and expenditures. These reports are based on improved FY2005. accounts - with 80% reconciliation of civil accounts. ^ Budget Implementation: GoS has streamlined budget-financing procedures to ensure timely release of development expenditures and high pnority non-salary social sector expenditures. Amendment/enactment of appropriate rules for timely ^ Increased credibility of provincial Availability of submission of audit reports to provincial and district Public and local govemment financial govemment financial ^ Provincial Public Accounts Committee has been formed and is Accounts Committees and for Umely review by them. statements with the public and statement information completing the review of the most recent FY00 accounts. The PAC donor community. to the citizens. sessions have been opened to the Press and other interested parties. Annex A Page 2 of 7 GOVERNMENT OF SINDH - POLICY REFORM MATRIX GoS Refonns Implemented by FY02 Medium-Tenn Refonn Acions (FY03-FYO5) Outcomes (Actions in Italics Represent Prior Actions for Board) (Actions in Italics are Key Benchmarks for Future SSACs) * Publication of the annual accounts of the Public Sector More open, productive, and Enterprises, authorities and other autonomous bodies with the answerable govemment. budget document from FY03. * Enhanced oversight role of professionals and dtizens in project planning, implementation, and delivery systems for improved efficiency and value for money (FY03). Improved intemal * Establish Intemal Audit unit for each ministry/department. * Increased deterrence to fraud, control environment * Government adoption of a Financial Management Reformn Program, waste and abuse of public funds including decision to appoint Provincial Financial Controller. *Annual implementation review of PAC and DAC directives (FY03 and investment as indicated by and FY 04). audit reports. * Revision of provincial procurement rules and manuals, Shortened standardizing bidding documents, and establishing. an effective procurement periods mechanism to redress complaints from suppliers, to simplify the Improvement in transparency and and reduction in Procurement reform policy adopted under Finandal Management Reform process, increase transparency and efficiency, and introduce a efficiency in public procurement. irregularities and Program. code of conduct and ethics for public officials handling complaints procurement (FY03). * Enact a Procurement Law legislating the fundamental principles of good public procurement (FY04). Implement fiscal The GoS has unbundled the provincial budget into provindal and 16 * Provincial Finance Commission Awards have been made with a * A transparent (e.g. formula decentralization district budgets. combination of untied grants and conditional grants to provide driven) and certain federal- incentives to meet sectoral expenditure targets. provincial (and then provincial The Provincial Finance Commission has been set up and will prepare a transfers to localities) of federal fiscal award formula for transfers to districts based on population, fscal ' Prepare and implement the fiscal decentralization(plan (FY03 fund s (b FY03). efforts, and backwardness, ~ ~ ~ ~ ~ ~ *Preand anF mpeetYh isaoecn4aiaonpa.(Y0 * An increase in local own-source efforts, and backwardness. and FY 04). ~~~~~~~~~~~~~~~~~~~~~taxation. ^ Strengthen district level fiscal monitofing frameworks. ' At least 66% of disticts, tehsils, and union councils preparing and * Ensure streamlining of funding release procedures to sub- managing own budgets. (AG distic tiers (Taluqas and Union) of Govemments. Reports). *Services delivery indicator improvements (Third Party Validation Survey of indicators) based on indicators. * Progress toward addressing the gender gap in social indicators. Annex A Page 3 of 7 GOVERNMENT OF SINDH - POLICY REFORM MATRIX GoS Reforms Implemented by FY02 Medium-Term Reform Actions (FY03-FY05) Outcomes .________________ (Actions in Italics Represent Pror Actions for Board) (Acons in Italics are Key Benchmarks for Future SSACs) --- . - :- B. IMPI VING GOVERNANCE OF CML SERVICE AND PUBLIC SERVICE DELIVERY - CIV[L SERVICE REFORAMS Promoting * Improving quality at entry: The GoS has promulgated the Sindh Public * Extend the autonomy of the PSC to indude administrative ^ Staff with appropriate Professionalism and Servce Commission Ordinance, which provides the Commission with autonomy, amending its status as an attached department and qualifications in post. Merit administrative and financial autonomy, security of tenure, and associated alloving it to discipline its own staff, removing the option for the rules which provides the PSC with control over all appointments of officials govemor to overtum its decisions and extending its scope to over grade II instead of only over Grade 17 as previously. include contract-based recruitment. * Reducing Transfers: GoS has been reducing transfers and the average ^ Introduce merit promotion arrangements at district govemment tenure for senior officers has increased to 15 months, compared to less level (equivalent of the Public Service Commission for recruitment than 12 months before. and promotion within distridct govemment). (FY03 and 04). . Strengthening Discipline: GoS has enforced the Sindh Civil Service Act * Introduce regular monitoring of transfers of officials to make (1973), the assodated Govemment Rules of Business (1986), and using transparent the numbers of transfers and check progress in Reduction in the frequency of the new Removal from Service (Special Powers) Ordinance, 2000 to redudng transfers. GoS will review Civil Service Act and the transfers of senior civil servants. strengthen disciplinary powers. These powers have been used to take Rules of Business to see how these can be revised to enforce actions against more than 600 senior officers including doctors for existing rules that discourage transfers of civil servants before absenteeism and other charges. three years (FY 03). Strengthening Local ^ Formation of District Govemments and Staffing: District Govemments ' GoS will set up the distric dvil service cadre to work directly ^ District Civil Service Cadre and Accountability have been formed, Provincial and Distric Departments reorganized, and under local Govemments (FY 03 and FY 04) who will have the Service Rules established. GoS has transferred 270,000 staff to the district Govemments (though they authority to hire and fire them. continue to be paid by provincial budgets). Contractual Employment and Reducing Absenteeism: The Department ^ Powers of School Management Committees to be enhanced to ^ Improvements in services as of Education has instituted the use of school-specific contracts in recruiting increase their rote in include hiring and removal of teachers, monitored by indicators. teachers to ensure greater accountability. The Health Department has based on vetting by the appropriate local Govemment (FY 03). implemented measures to stop absenteeism. Some 1500 doctors have been served notice and more than 350 doctors removed from service. Improvements in ^ GoS has frozen vacant positions and abolished 12000 vacant positions ^ Conducting a comprehensive civil service census in FY 03 and Comprehensive human resource Human Resource in FY 01. preparation of human resource data base over FY 04. date base established, Management and . computerized, and regularly Rightsizing the Improved Data for Human Resource Management: The Services and Prepare for the greater use of contract-based employment updated. Govemment General Administration Department has started an initial headcount of dvil through legal changes to prevent regularization, ensuring robust ^ Consistency of personnel and servants expected to be completed by March 2002 providing data on the establishment and budget controls, and extending the overview payroll files. order of magnitude of errors in the existing payroll data. provided by the PSC (FY 03). * Redeployment and rightsizing of civil service. ^ GoS to take actions to eliminate ghost workers, and to develop a VRS scheme, subject to adequate safeguards to prevent adverse selecion and rehiring of retrenched staff. as per the medium term fiscal plan (FY 03 to 06). * Rationalizing Provincial Departments and Agencies: The number of * Right sizing exercises Will be undertaken in all remaining provincial Departments has been reduced from 29 to 23. Three provincial departments as per Cabinet instructions issued earlier departments have been carrying out some right-sizing exercises under (FY 03). which around 831 staff from six departments were moved to the Surplus Pool for redeployment. Around a dozen provincial enterprises and autonomous bodies have been closed down or merged. Annex A Page 4 of 7 GOVERNMENT OF SINDH - POLICY REFORM MATRDX GoS Reforms Implemented by FY02 Medium-Tem Reform Acdons (FY03FY05) l__________ (Acdons in Italics Represent Prior Actions for Board) | (Actions in Italics are Key Benchmarks for Future SSACs) _ IMPROVING PUBLIC SERVICE DELIVERY: EDUCATION Improving Access to GoS has launched two enrollment drives in primary education that will * Launch an awareness campaign for education; * Primary net enrollment rates will Education raise enrollment by 5%. be increased from 60% to 82% by * Annual and bi-annual district wide drives to increase enrollment 2005. The number of out of * It has introduced Free & Compulsory Education in 16 talukas in FY02, and retention in FY031FY04. school children will be reduced and will cover all 102 talukas by FY04. from 2.2 million to 1.1 million by 2005. * The GoS has made 3796 schools fundiona- wifth 1858 stll dosed and to * Provide the missing physical facilities to schools as per targets. * All remaining dosed schools to be made functonal in FY03-FY04, through teacher re-deployment and new be made functional by 2004 (1,858 faclity-based teacher recruitment. . remaining will be made functional). * Ga is rovdingfre texbook toall ura andurba slm feale * Extend free textbook program in 2003 School Year to all *GoS is provicing free textbooks to all rural and urban slum female govemment primary schools. * Free & Compulsory Primary primary students in govemment schools. For the 2002 School Year, GoS * Expand the Free & Compulsory Education policy to all 102 Education covering all 102 talukas has provided free textbooks to all boys as well as gins in pimary schools. talukas by FY04. by end FY04). Improving Quality, 'Approve the education assessment system. * Implementation of Provincial Student Assessment System. * All schools to have school Accountability, and * School Management Committees (SMGCs) have been provided enhanced management committees by FY Govemance powers for monitoring teacher attendance and implementaion of school * Further expand powers of Sd70oo Management Committees to 03. non-salary budgets. indude hiring and firing dedsions (with arrangements for appeal) * All new teachers are being appointed on contracts to specific sdiools, so and strengthen their linkages to the Citzen Community Boards. * Most SMCs trained. that they can be held accountable to the school management committees. (FY03). Recruitments are merit based and transparent, with private sector and community involvement in carryng out competency tests and interviews; * Implement teacher training and re-certification program in FY 03 * All teachers to undergo * GoS has initiated intensive teacher training program for 20,000 teachers and FY04 and continue partnership with IED. Introauce competency testing and remedial and conducting of teacher competency programs. Initiated partnership for Perfomance based incentives for teachers. training as needed. teacher education with lED. Distridct education management has been set up and strengthened. * Continue program to strengthen distridc education administration Manual establishing rules and procedures to danfy the functions and including setting up and monKtodng performance indicators (FY responsibilties of the distrid education staff, guidelines on accessing funds 04). and carrying out monitoring and evaluation responsibilifies issued. . Improve Monitoring * Research, Monitoring and Evaluation Cell of DOE has been set up and it * Strengthen capacity of R&M&E Cell Teacher absenteeism reduced. and Evaluaton has iniffated monitoring of schools. Regular Annual Data Made *Thind Party Validation Surveys by distrtds have been completed Publidy Available on Enrollment, and distrid wise sence delivery benchmaiks established (FY03, Retention and Graduabon Rates; FY04) and publidzed. Proportion of teachers who have passed competency tests; share of women teacers, Schools Made Funcional, Free Texbook and other incentive programs. IMPROVING PUBLUC SEL RVCE DELIVERY: HEALTH Prepare a good Adoption of a Comprehensive Outcome Based Strategy based on * Implement strategy and track progress towards achieving goals * Adequate capacity of district acionable health National Health Policy into strategy note and implementaion plan vwith and targets as presented in (FY 03-FY04). health system specifically for sector strategy with defined targets in seven key areas. management, planning, and dear targets financial management. Annex A Page 5 of 7 GOVERNMENT OF SINDH - POLICY REFORM MATRIX GoS Reforms implemented by FY02 Medium-Term Reform Acions (FY03-FY05) Outcomes (Actions in Italics Represent Prior Actions for Board) (Actions in Italics are Key Benchmarks for Future SSACs) Strengthen and Strengthen the routine immunization program with GAVI support and * Annual District Assessment of Immunization Coverage using 'An increase in immunization expand expand the EPI coverage of 12 to 23 months of children from 39 percent to third party. coverage of children 12-23 months immunization and TB 50 percent. from 39% to 80% by 2005. programs Expansion of DOTS in NGO/prvate sector in urban areas in * No case of Polio reported after * Program for hepatitis B vaccination initiated in 2 districts and NIDS FY03 and FY 04. Dec 2002. and SNIDS undertaken with number of confirmed Polio cases * An increase in immunization dcreasing from 65 in 2000 to 23 in 2001. ^ Capacity building of LHWs, Malaria Supervisors to provide coverage of two doses of TT from * Supplementary imimunization to be undertaken in 16 districts in high- immunization services (FY 03 and FY 04). 48% to 80% by 2005. risk areas. Increase coverage of program * EPI directorate strengthening for monitoring & supervision Continue supplementary TT immunization campaigns annually from 8% to 100% by 2004. Target an increase in immunization coverage of 12-23 month ^ Phased Expansion of TB DOTS strategy: PIoram expanded to five children and two doses of TT * Detect 70% of all cases and districts vith increased coverage from 8% to 31%., strengthening of * FY03 - 55% successfully treat 85% of them. directorate and Quartedy monitoring and reporting system implemented - * FY04 - 65% 100% reporling * FY5 - 80% ^ Expansion of TB DOTS strategy in all districts by 2004 with annual targets - FY03 - 75%; FY04 100%X. Improve access to ^ GoS has developed policy guidelines for public private partnerships and ^ No construction of new facilities. More private sector participation health care services adverised facilities for public prvate partnerships. in health care. by contracting out newly constructed pwmary health care * Contract out facilities to NGOs and private sector (FY 03 and facilities to NGOs FY 04). and orvate sector Improve Heath *DoH is conducting monitoring of absenteeism and 350 doctors have Development of policy guidelines for District Managers. *Improved in quality of service sector Govemance been disrnissed. Implement in-service training program for district managers in delivery and utilization as and District ^ All transfers have been made transparent. management, planning and financial management (FY 03). confirmed by TPV surveys. Management ^ Procurement process is being made more transparent and put under scrutiny. Implement detailed proposal for capadty building (FY 03 and FY 04). Enhance Monitoring ^EPI Directorate strengthened with addiional staff and new monitoring * Strengthen monitoring and evaluation unit at the provincial level ^ Provincial Monitoring Unit and Evaluation techniques. Undertake annual distrid level Third Party Validation Survey strengthened and regular Capacity: (FY 03 and FY 04). monitoring of district facilities __________________________________________________ ________________________________________ surveuyeyd. IMPROVING PUBUC SERVICE DELI ERY: RURAL WATER AND SANITATION Expand and ^ Adoptlreinforce uniform policy of community partcidaion, involvement ^ Implement all RWSS schemes with community participation and * Improvement in Coverage of Rehabilitate Rural and cost sharing as the guiding principle for all RWSS schemes maintenance arrangements. Mobilize communities to share costs Drinking Water from 61% to 80%. Drinking Water and of provision and O& M. Sanitation Schemes ^ Provide Taluka Govemments adequate and timely funds for the on a Sustainable rehabilitation of existing and maintenance of recently built RWSS schemes. ^ Implement five year rolling plan prepared for RWSS schemes Basis that doubles the allocation by FY 04, which is feasible. Annex A Page 6 of 7 GOVERNMENT OF SINDH - POLICY REFORM MATRIK GoS Reforms Implemented by FY02 Medium-Term Reformn Actons (FY03-FY05) Otoe (Actions in talics Represent Prior Actions for Board) (Actions in Hialics are Key Benchmarks for Future SSACs) _ ______________ IMPROVING PUBUC SERVICE DELIVERY: URBAN SERVCES Improve livability of * Establish empowered local government (LG) structures with dearly Strengthen LG capacity through staff rationalization, HRD and 'Empowered LGs in place, urban areas through defined functional responsibilities. Rationalize urban service provision training; development of systems and procedures (FY 03 and FY pursuing high priority development improved efficency, agendes under LGs in 15 common and one City District, remove funcdional 04). programs (F 04 - FY 05). coverage, and quality overlaps; assign dear roles and responsibilities. of basic infrastruture * Continue improvement of urban slums for the shelter-less urban * Urban areas more livable and services in a * Regularize dwellers rights in 929 slums, complete regularization work in poor based on recently approved National Policy on Katchi better managed (FY 04 - FY 05). sustainable manner 623, and execute development and improvement work in 486 urban slums Abadis, Urban Renewal and Slum Upgradation (ongoing). through SKAA. Ensure accountable, * Set up public-private partnership bodies for urban development in the Establish effective policy/regulatory oversight for LGs at * Adequacy & effidency of public transparent & Economic Development Coundl (EDC) under the chaimianship of the provindal level; require LGs to publish & disseminate annual grievance redressal system (FY 04 responsive service Govemor with a 50% prvate sector representaton, to fadlitate reports on perfomiance (FY 03-FY 05). - FY 05). provision instituions implementafion of the GoS's Program for Economic Revival of Karachi and LGs (PERK) by cuting across bureaucratc layers and bottienecks. * Take dedsion regarding future institutional arrangements of * Increased stakeholder KWSB, and required ac00ns towards improved service provision. parUcdpabon in development dedsions. (FY 04 - FY 05). .~~~~~~~~~~~~~~~~~~~~~~~ REGULATO~RY REFORMS__________ Implement * Streamline Factory Inspections: The number of inspections reduced * Over the next six month period to develop a monitoring and * Level of factory and labor Regulatory Reforms from 23 to 7 for facories (and to 4 for shops) with all visits to take place in evaluation system of regulatory reform impact in partnership with inspections does not exceed the to Improve the two days. The number of items checked in inspections has been reduced. Transparency Intemational (FY 03). levels agreed as short-term Business Climate Regulafions lmiting opening hours for shops have been repealed. measures for this crerdi *Further rationalization of regulatory activities and evaluating the * Taking Action Against Harassment and Corruption: Internal impact of the new regulatory regime (FY 03). * Implementation Confimied by management has been strengthened. Disdplinary acdons have been taken independent sources. More against staff for harassment against the private sector. streamlined and modemized * Institonal strengthening of regulatory bodies: (i) Building regulatory framework introduced * Strelining Labor Laws: The number of labor laws is in the process of human resources, professionalizing the operaing environment as monntored by surveys. being reduced from over 27 laws, regulatons and ordinances to 6 laws. and introdudng technology in all aspects of operations; (ii) These laws which have been joinfly developed by the GOS and the intoduction of user fees ftr regulatory services; and (iii) Federal Govemment all require federal ratficaton developing an independent and autonomous regulatory capacty indusive of all businesses (FY 04). Promoting public- The Sindh Prit on Commission has been set up by promulgation * Complefion of prvatization in the following categories of assets Bringing to the point of sale I private partnerships with adequate funding and autonomy in partnership with the private sector (i) lands and other unutilized assets; (ii) state corporations whkh Privatizaton Transactions under and the master list of assets of assets to be prvatized has been approved. in many cases are no longer operating; (b) large enterprises these categories (GoS). (KWSB assets and sugar mill& * Carry out an inventory of the assets and enterpises in order to establish * Implementation of contracing out the functions of the GOS. Bringing at least three pilot the, employment, finandal position, and fiscal impact of privatzabon. transactions to the point of sale. Annex A Page 7 of 7 GOVERNMENT OF SINDH - POLICY REFORM MATRIX GaS Reforms Implemented by FY02 Medium-Term Reform Actions (FY03-FY05) FOtoe (Actions in Italics Represent Prior Actions for Board) (AcUons in Italics are Key Benchmarks for Future SSACs) BUILDING INFRASTRUCTURE: THE ROADS SECTOR Improve retums to * Communication and Works Department's (CWD)'s stocktaking of road * Establish a Road Sector Development Directorate (RSDD) 'Completion of provincial road investment through conditions has been carded out. CWD has prepared maintenance backlog whose operations will be guided by a Steering Committee with the network inventory and condition (i) better road asset estimate and a maintenance prioritization plan. A medium term road assistance of a Citizens Advisory Board (FY 03). surveys (CWD for all roads). inventory; (ii) better maintenance funding plan has been approved under the Fiscal Annual total road maintenance maintenance of roads Restructuring Plan. . * Update a five-year rolling plan, the road condition survey allocations at 65% [or plus] of on a prioritized basis; parameters for provincial highways for prioritkiing the road requirements (iii) updating cost * Expenditure Prioritization: CWD has allocated 70% of its share of the FY maintenance program, FY 03 and FY 04). * Annual Targets for decrease in estimates; and (iv) 2001-02 maintenance budget to priority roads, and has prepared a larger overall road user costs based on better budgeting to prioritized list of roads with associated required maintenance. CWD has * Design standards and specifications, environmental analysis of percent of roads in reducing throw sent the PPRMS plan (road priofitization plan) to district govemments to management manuals (FY 03). Good/Fair/Poor Conditons. forward. use this plan to prioritize. * Share of provincial roads in poor * Setting up of a non-apsable road maintenance fund dedicated conditions decreased from 70% to * Rationalization of Existing Portfolio: CWD will complete the to routine maintenance. The potential sources of funds are 50%. rationalization of its existing Development portfolio (budgeted and expected to include fuel levies, cesses, revenues from tolls and abandoned) with the aim of prioritizing the ADP road expenditures, rapid surcharges on heavy vehicles. Its goveming board will include completion of on-going works, and managing the throw-forward.(Mar- 02). representatives of the private sector to monitor the maintenance. CWD is focusing on completion of 350 on-going schemes. (FY 04). Implement * Implementing Devolution: The CWD has devolved its share of the.intra- ' Prepare a restructuring plan to rafionalize staff skill mix and Devolution of the district road network (approximately 16,020 kmn) and half the staff (8,475) to numbers based on post devolution structure of the Works and Roads Maintenance the district governments' works and services group of offices. The road Services department (FY 03). Program maintenance budget has been separated and CWD has sent guidelines to district govemments on how to prioritize their share of the maintenance allocation and submit their priorities to be incorporated in the medium term rolling plan for provincial road expenditures. AGRICULTURE AND IRRIGATION Increase Agriculture GoS has increased effectveness of agriculture extension services by (i) Rationalize procurement prices by setting wheat and cotton o Higher growth of wheat and Sector Growth and taking measures to reduce absenteeism to In the case of extension prices at the export parity price, while the procurement prices of cotton crops. Yields through workers, monthly salary has been made contingent upon at least five all other crops will be their market prices. improvement in farmers (who are changed every month) certifying their presence and Extension and contribution; (ii) holding field days and farmer days in villages to make a * Reduce public sector presence by closing down Sindh Greater private sector Irrigation Services special effort to disseminate best practice. Agriculture Supply Organization, its Food Department, and the participation in produce, inputs, and Regulatory Sindh Seed Corporation, with the staff of these agencies to be extension services and research. Reforms * GoS has established the Sindh Irrigation Development Authority (SIDA) assigned to the surplus pool or paid a severance package. under which water boards and farmers organizations are being set up to collect higher imngation charges and then take charge of maintenance, with * Contnue program of rrgation infrastrucure rehabilitation with Higher infrastnucture the technical help of SIDA. The GoS's medium term fiscal restructuring greater farmer participation in Area Water Boards under the SIDA rehabilitation and maintenance plan also includes sizeable increase in allocations for the rehabilitation of and public sector investments. with indicators irrigation and increasing water charges to promote more efficient use of this scarce resource. * GoS has removed market barriers by lifting restidctions on the intemal Increase access to the private sector under which private seed Greater commercial viability of movement of agricultural commodities. companies will get access to breeder seed developed by the research institutes indicated by provindal public sector research institutes. oost recovery. Annex B SHAUKAT AZIZ ISLAMABAD Minister for Finance & Economic Affairs May 24, 2002 Mr. James D.Wolfensohn, President, World Bank, Washington, DC 20433 USA Dear Mr. Wolfensohn, Please find attached a Letter of Development Policy, dated 22 May 2002, from the Government of Sind to the Ministry of Finance. The letter delineates the broad and comprehensive reform agenda, through which the Government of Sind proposes to strengthen and consolidate its economic program, and for which it has sought assistance from the International Development Association of SDR 79.1 million (US $ 100 million equivalent). The Government of Pakistan supports this continued initiative and recommends the proposal for consideration of the International Development Association. With regards, Yours sincerely, ftoa: Off. 921209S 9211340 MINSTER FOR FINANCE PLAPNNING & DEVEWPM DEPARTMENT GOVERNMENT OF SINDE Kuiw, da t 22nd MayW2. Dr. Abdul lIateez Shaikh Mr. Shaukat Aziz Minister of Finance Government of Pakistan Letter of Development Policy 1. As you are aware, the present government inherited a legacy of poor govemance, characterized by fiscal stress, a constricted and punctured tax base, rapidly diminishing fiscal space to initiate poverty reduction efforts in a concerted manner, financial indiscipline, rising provincial debt, a huge inventory of unpaid liabilities and a disconnect between the government's expenditure priorities and the investment portfolio. There was a bloated civil service with limited modern skills, presiding over an institutional framework whose efficiency and efficacy was constrained by poorly structured mechanisms for ensuring accountability of service providers to service recipients, institutional and structural arrangements that failed to foster and uphold good govemance practices, appointment systems and procedures driven by non-merit based criteria and lack of transparency in the application of rules and regulations. Resultantly, the inhabitants of the province had to contend with the delivery of poor quality public services in the key social sectors of education, health and rural water supply and sanitation and large deficits in the availability of infrastructure like roads and irrigation and drainage. 2. All these factors contributed to the failure of the government to support growth, to the continuing deficit in the social indicators and to the rising levels of poverty, with the residents of the province faring poorly against those in other parts of the country. The overall incidence of poverty in Sindh has drastically increased in the last decade and according to an Asian Development Bank sponsored study compiled in FY 00 almost 85% population of the five southern districts had income of less than one $ a day. According to another recently completed independent study conducted by Applied Economic Research Institute (AERC) of the Karachi University 35% of the country's poor (falling in the last quartile of development ranking) are in Sindh. The Pakistan Household Integrated Survey (PIHS) 1998 data however shows the poverty level in Sindh to be at 29% compared with 33% for the country as a whole. While the government of Sindh (GoS) has officially disputed these figures as underestimating poverty in Sindh, even this report illustrates that the rural-urban gap in Sindh is the highest at 18% percentage points and that the rural poverty at 37% is higher than the country average of 36%. Further the social indicators are equally disappointing, particularly in the rural areas. Compared with the female literacy rate and the net primary enrollment in Sindh' s rural areas of 11.2% and 24.5% respectively the all Pakistan rates for rural areas are 16.8% and 36.4% respectively. Similarly, whereas 62.5% of the rural population in Sindh has access to any health facility or worker in the village, the indicator for rural Pakistan is almost 71%. 3. Moreover, these reasons combined with complicated, unwieldy and parasitic regulatory structures with overlapping jurisdictions, lack of transparency in government operations and procedures, unclear mandates and liberally distributed discretionary powers burdened the cost of private commercial operations, thereby affecting the efficiency and competitiveness of the manufacturing sector in international and domestic markets. 9211340 MMIS FOR FINANCE PLANNING & DEVELOPMET DEPARTMENT GOVERNMENT OF SIND KUrw*bk 22nd May20 Dr. Abdul {atfeez Shai3c 4. To attend to the protracted neglect of these concerns the Sindh Government launched an intensive dialogue with all stakeholders, including representatives of civil society. The interaction with the civil society was undertaken through economic revival taskforce, a series of development dialogues held in major cities of the province and finally the Sindh development forum organized in early February 2002 where representatives of the government, civil society, diplomatic and international donor community were brought together for a discourse on provincial government's efforts towards reform and economic revival of the province. These exchanges enabled us to embark on far-reaching reform program to address many of the developmental challenges faced by the province to upgrade the quality of lives of its citizens through an improvement in the education and health indicators of the more vulnerable segments of the population and through a general reduction in the incidence of poverty. 5. At the heart of this strong reform agenda lie fiscal, public resource and financial management and governance reforms. These efforts, resource mobilization measures and reduction in the private sector's transaction costs will be central to the endeavors of the provincial government to restore fiscal prudence, re-invigorate growth and achieve a tangible reduction in the rates of poverty. 6. The core objectives of the reform program are to be achieved through better governance, fiscal and financial management, improved public service delivery, a reform of the regulatory framework affecting private sector operations and the wide-ranging exercise for devolution. The latter attempts to reverse decades of over-centralization of the management of the public sector, which in combination with the rationalization and re-prioritization of expenditures to improve the efficiency and the restructuring of institutional policies, arrangements and mechanisms to strengthen the capabilities of local governments to satisfy their statutory obligations is expected to improve the quality and effectiveness of service delivery. Complementary reforms involving the streamlining of the process of timely releases of allocations to high priority poverty reducing areas in the social sectors will help enhance the human development indicators and achieve a perceptible reduction in poverty within the limits of resource constraints, both financial and human. Efforts and resources will focus on facilitating the development of the less developed regions of the province and the less privileged sections of society. 7. The objectives, design and scope of this comprehensive transformation program are consistent with the reforms being undertaken by the Government of Pakistan in partnership with the IMF and the World Bank. In particular it will have a strong linkage with the Pakistan's Interim Poverty Reduction Strategy Paper. The GoS is requesting the International Development Association for a $ 100 million credit for FY 2002-03 in support of these reform programs. 8. The key areas identified for reform, a review of the issues pertaining to each sector, the actions taken by the GoS to date to attend to these weaknesses and the restructuring and transformation planned for implementation over the medium-term are discussed in the subsequent paragraphs. The paper also reflects the actions taken on the prior actions and the benchmarks agreed with the World Bank. Fiscal Management 9. In recent years the key constraints in the area of fiscal management have been: 2 Vban=: Off: 92I95 9111340 MINSTER FOR FINANCE PLANNING A DEVELOM T DEPARTMENT GOVERNMENT OF SINDB KmehSI, ate" 22nd May 31t Dr. Abdul {afeez SMlb a) Lack of fiscal space, partly owing to inflexible expenditures and revenues, for undertaking investments and supplementing maintenance expenditures in priority areas. b) Overdue improvements in the allocations made for non-salary inputs required for enhancing the effectiveness of service providers. c) The lack of a Medium-Term Fiscal Restructuring Plan to mitigate the negative impact of such imbalances and weaknesses. 10. The tax base continues to be narrow primarily because of the highly centralized tax structure that has resulted in the Federal Government having an almost exclusive preserve over all the buoyant taxes. Resultantly, provincial revenues only contribute to 23% of expenditures. Nevertheless, over the years the province had accumulated a host of 23 small low-yielding taxation instruments that were generally inelastic in their revenue generating potential. Moreover, this structure was not only complex and unwieldy to administer but was also distortionary and riddled with discretionary powers exercised by inefficient machinery. 11. An inelastic tax system and political reluctance to employ user charges to cover costs of provision of non-merit goods and services meant that revenues were unable to keep pace with growing obligations on account of salaries, pensions, debt servicing that introduced strong rigidities on the expenditure side, leading to sharp reductions in real terms in expenditures on key physical and social infrastructure, impairing future prospects for growth and poverty reducing investments. One the one hand, salaries absorb in excess of 90% and 74% of the recurrent expenditures in the education and health sectors respectively. On the other hand, the complicated procedures for ensuring the timely release of allocations to service delivery sites are not tied to outcomes. These factors have been instrumental in keeping the efficiency and effectiveness of service provision poor. 12. A decade ago provincial spending on development and operations and maintenance comprised in excess of 30% of total expenditures. This share had deteriorated to under 18% by 2001. Moreover, although capital expenditures were squeezed there was a rapid growth in the number of development projects initiated resulting in the accumulation of a huge portfolio of on-going development schemes. The natural outcome of this sharp escalation in the spillover commitmnents of the past and the elongation of project completion periods were large cost over runs. 13. The dramatic increase in the size of the provincial civil service from 285,042 in FY 90 to 459,000 by FY 01 and the associated salary bill was accompanied by a rapid build-up of provincial debt. Total outstanding liabilities include borrowings, employees GP Fund contributions and accrued pension liabilities and un-availed leaves, while contingent liabilities include guarantees against loans to parastatals, with loans and advances from the Federal government constituting the bulk, 22%, of provincial government liabilities. Debt servicing obligations ballooned from 9.25% of total expenditures to 17.7% at a brisk rate, resulting in the diversion of scarce resources from key priority sectors and services. The present government is firm and unwavering in its commitment to reverse this trend and stabilize and reduce the burden of debt servicing on provincial receipts from 16% to 11%. 14. To address these challenges the GoS has chosen the path of fiscal discipline, a goal to be attained by enhancing revenues, containing unproductive expenditure increases, lowering future liabilities, 3 fbtoi: Off: 9212095 9211340 MINISTER FOR FINANCE PLANNING & DEVEIOPMD DEPARThMNT GOVERNMENT OF SIH ; WWhl, ae S 22nd Dr. Abdul l{afeez SMikh improving financial management and development expenditure efficiency and effectiveness, augmenting and protecting provisions for high priority expenditures on primary health and education services, non- wage outlays and maintenance of public assets and infrastructure, while reducing the share of expenditures on salaries, pensions and debt servicing, and preparing and then executing a medium-term fiscal restructuring strategy to achieve these objectives on a sustainable basis over the next 3 to 4 years. To this end it has initiated several reform measures. Actions Taken 15. To create fiscal space tax systems are being redefined, restructured, rationalized and simplified for administrative convenience to augment revenues, reduce evasion and improve taxpayer compliance. The steps taken include: a) A reduction in their number from 23 to 10, a pruning of exemptions and the broadening of the tax base; b) Revamping of Agriculture Income Tax from a crop cum land-based system to a combination of land and income based system applicable to holdings in excess of 12 acres in irrigated and 24 acres in un-irrigated areas, while making individual incomes in excess of Rs. 80,000 from agricultural activities liable to the higher of the tax on land or income tax; c) Simplification of the structure of property tax through the merger of four related taxes and adoption of a uniform rate, coupled with the widening of the property tax base by launching a massive survey of properties after a gap of 32 years which added 100,000 new properties to the tax base as the number of areas rated for property tax purposes increased from 26 to 42. Most importantly the mode of assessment has been made transparent and the discretion of tax assessing officials greatly reduced; d) The rationalization and consolidation of the number of stamp duties (from close to 70 serials to about half that number) and the replacement of the presently less elastic and administratively cumbersome to monitor structure with one based on ad- valorem rates so as to give much needed buoyancy to the system; 16. The revenue impact of these measures was amply reflected in the revenues collected in the last two years. The provincial taxes are expected to grow by more than 50% from Rs.5335 billion in FY 00 to an estimated Rs. 8163 by FY 02. Liabilities have also been reduced. Debt and deferred liability obligations were lowered by Rs.21 billion in 2 years. And by close of financial year 2002 arrears of Rs. 8 billion on account of the blocked account with the State Bank and Sindh Government's liabilities for domestic and foreign loans would have been settled. GoS plans to make more concerted efforts to discharge these and other debt related obligations and prevent development of arrears in payment in the future. 17. The GoS has also enhanced allocations for high priority expenditures doubling the funding for non-salary items in basic education and 20% in basic health- to ensure the functionality of created assets and service providers- and devoted three-fourths of the development funds in FY 2002 to ensure accelerated completion of viable on-going schemes - particularly in the social sectors and those aimed at the provision and rehabilitation of physical infrastructure in rural areas- and abandonment of low priority 4 fhoux: Off: 921Z095 9111340 'MNISTER FOR FNANCE PLANNING A DEVELOPMOqT DEPARTMENT GOVERNMET OF SINDJ lhl,~ed 22nd May 2 Dr. Abdul Ilafeez Shaikb schemes, so as to reduce the throw forward of the ADP to less than 3 years by the end of FY 2002 and maintain it at this level thereafter. The implementation of these targets has proceeded well and expenditures in key social sector items and development have increased considerably in the current fiscal year. Owing to these measures the number of on-going schemes are programmed to be reduced to less than 700 from in excess of 1500 at the end of FY 2000 and in future new schemes would be selected after a very careful scrutiny. Most importantly the increase in the development budget by more than 75% in the last two years reversed the decline in the development budget. Medium Term Action Plan 18. The GoS will be implementing its Medium-Term Fiscal Re-structuring Plan from FY 03. Two major measures for achieving the objectives associated with the implementation of this plan will be supportive administrative reforms and the broadening of the base of different taxes. 19. Recognizing the need to address weaknesses in tax administration for realizing revenue mobilization targets the GoS plans to strengthen the administrative and technical capacity to levy and secure taxes by hiving off the revenue collection functions of the Board of Revenue (with the mandate to assess and collect land tax, AIT, Abiana and stamp duties) to an essentially autonomous authority/department in which the revenue raising responsibilities of the Excise and Taxation department will be merged. This new authority will function under the authority of the Finance Department. Govemment of Sindh plans to move towards the establishment of a Provincial Revenue Authority by FY04. In the meanwhile during early FY03 arrangements would be made to merge the two revenue departments and bring both revenue and the Finance departments under a unified command of the Finance Minister as in the Federal Government. 20. During FY 03 pilot projects will also be initiated in four districts for introducing modem methods of crop inspection and assessment, aimed at reducing the element of official discretion in the collection of agriculture income and land taxes and in Abiana collection. The system of land records and related transactions will be automated and satellite imaging will be introduced for effecting improvements in the system of crop assessments. The latter recommendation is expected to go a long way in checking corruption, in making the system of abiana and AIT assessment more transparent and in mobilizing additional resources. It will also represent a major shift from the traditional, outmoded revenue assessment and collection system in the rural sector towards the institution of one that is modem and scientifically based. This data will be supplemented by abiana assessments being carried out by the Irrigation Department. In the medium term efforts would be made to attain a sustainable annual growth in AIT based on the achievements made in the restructuring activities being undertaken in FY 03 so that AIT is able to achieve its potential of over one billion by the end of FY 06. 21. The responsibility to collect Abiana will gradually be handed over to Sindh Irrigation and Drainage Authority (SIDA). The sustainability of the restructured and decentralized irrigation system would be strengthened by the efficiencies in cost recovery expected to arise from this institutional arrangement for managing the irrigation system. The GoS plans to increase irrigation water charge collection by 18% in FY 03 and by 20% p.a. over the medium term, to the extent possible through better administration. GoS plans to accelerate the implementation of the institutional reforms envisaged under the National Drainage program, which would enhance cost recovery of irrigated water. 5 fos: OfN: 9212095 92J1340 MfSTE FOR FBIANCN PLANNING & DEVELPKERT DEPAR1TMEN GOVERNMENT OF SINMID rje"K 22nd Dr. Abdul 1{ateez Shikh 22. The Government of Sindh recognizes that although path-breaking work has been carried out in the area of property tax considerable room exists for improvement. Some of the proposals under discussion are to give incentives for compliance while imposing penalties for delays in payment, a review of the exemptions and equity of the newly installed tax system in not fully capturing the element of "pugree" (goodwill) of commercial properties etc. 23. To simplify tax collection, plug leakages and make the Motor Vehicle tax more elastic and buoyant the provincial government desires to change its mode of collection from the present flat rate tax per vehicle to a levy on fuel consumption. The present mode of collection other than being inelastic is ridden with innumerable administrative complications and inefficiencies, including a cumbersome tax collection method involving regular vehicle inspection with high incidence of leakage. The change in the mode of collection would also make the tax more equitable by creating a direct linkage with road usage. This institutional arrangement will also eliminate existing distortions whereby vehicles get registered and pay tax in one province while essentially plying in another. From FY 2003 the Registration rates applicable to different categories of vehicles are being considered to be rationalized. 24. The existing provincial Professional Tax is based on an inelastic, flat rate based, antiquated structure riddled with anomalies in respect of assessee categories and applicable rates. The Government of Sindh recognizes the need, and is determined, to completely overhaul both the structure and system of collection. In this context, a proposal that recommends its linkage to sales/turnover in the case of conmmercial enterprises is under discussion with the Federal Government. 25. From FY 03 urban boundary limits are being extended to include all peri-urban areas to enable land/property earlier classified as agricultural/rural in nature but had acquired urban characteristics to be treated as urban property for purposes of stamp duty levied on property transfers; this measure will bring large residential and commnercial areas into the tax net and assist generation of sizeable additional revenues. Since imposition of stamp duties and registration of documents are closely linked activities and assignments the offices of Stamps and Registration are being integrated by re-designating the Inspector General Stamps as Inspector General Stamps & Registration under Member Registration and Stamps in the Board of Revenue. Moreover, to plug revenue leakages the GoS is planning to appoint qualified personnel as additional stamp inspectors (presently only 3) and upgrading their posts 26. To prevent shifting of potential tax bases discussions have also been initiated with the other provincial governments to institute uniform rates of stamp duties on financial documents and also incorporate penalty provisions in the legislation. Similarly to plug revenue leakages from excise duty on liquor the GoS plans to coordinate with the other provincial governments to harmonize the taxation system by installing a uniform rate structure for all provinces. As an additional measure to check evasion the GoS will also examine the possibility of replacing the existing structure with a presumptive tax regime. 27. Other medium-term reform measures include: a) Renegotiations of rates of land leased out to private businesses. This change is expected to generate a one time additional revenues in excess of Rs. 1 billion during FY 03 along with faster growth in revenue collection; b) Speedy automation of the collection systems for Professional and Property taxes and for the Infrastructure Development Fee; c). 6 ftoua: OM: 9212095 921340 MINSri FOR MNA= PLANNING A DEVELAOPMgNT DEPARthEr GOVERNMENT oF siNDH3 ,mm ddetd z Dr. Abdul Raftez Sbaikl2 The upgrading of skills, the creation of appropriate incentive structures and the computerization of the land and property tax records will help enhance the tax administration capabilities of the revenue generating departments; d) Launching of resource mobilization studies to develop additional proposals for consideration as resource augmentation measures. 28. As a key reform measure GoS is also gearing up to adopt and implement the Medium-Term Fiscal Restructuring Plan covering a 3 to 4-year period starting FY 2002-03 under which revenues are increased and allocations for the social sectors of health and education, overall operations and maintenance and development expenditures are increased (See Table 1, page 8). 29. The focus of the rolling medium-term budgeting and planning program will be to channelize higher provincial revenues, projected to increase by 15% per annum, arising from the various reforms being undertaken, higher royalties and other related incomes from new discoveries of oil and gas, and increased donor assistance to fund activities in poverty reduction areas. Additional fiscal space is expected to be created from revisions in the expenditure mix, from the reduction of debt servicing commitments and from the contraction in other obligations like pensions and the employees GP Fund liabilities utilized in earlier years for financing low productive programs and services. The steps and instruments identified above will improve the equity of the taxation structure and will be supplemented by measures involving taxpayer compliance costs, tightening of loopholes in tax collection and levying of penalties on tax evasion, phasing out of untargeted subsidies, like the subsidy on wheat, strengthening user charges and improved cost recovery mechanisms in respect of non-merit goods and services, examining the potential for outsourcing collections and strengthening the autonomy, efficiency and administrative capability of the revenue generating departments through, among other measures, the establishment of a separate revenue authority, while taking complementary steps to improve the grievance redressal procedures. 30. The key expenditure measures programmed for implementation over the medium-term will include: a) A perceptible enhancement in the allocations for the non-salary and operations and maintenance components of the recurrent budget in the social sectors, drinking water and rural infrastructure and for the development budget, which will include provisions for direct poverty reduction interventions like public works programs (such as the Khushal Pakistan program) and extension of micro- finance through established institutions; b) A significant reduction in debt servicing costs due to accelerated debt retirement and, possibly, through a downward revision in interest rates on the existing stock of debt; c) A phased capitalization of pension fund; d) A re-capitalization of the employees General Provident (GP) Fund by placing net receipts under the head of GP Fund in a dedicated Fund and by transferring Rs. 100 mnillion per month over the next 3 to 4 years to this specifically constituted GP/Pension Fund; and e) Provisions of Rs. 3 billion for each of the years FY 04 and FY 05 to finance severance packages for roughly 5% low skilled employees who may opt to avail it. These would be made available only when appropriate arrangements are in place to prevent re-hiring. 7 ftoma: Off: 9212095 MDMNISTR FOR FINANCZ PLANNING & DEVE:LONNT DEPARTMENT GOVERNMENT OF SINDB Klueh1, dated b 22nd Maya"2. Dr. Abdul 1{afeez S&aikb Table 1: Summary Fiscal Accounts of the Government of Sindh (Rs Million) 1997/00 2000/01 2001/02 Proections Actual Actual P. Estimate 2002/03 2003/04 2004/05 2005/06 Total Revenues and Grants 55,416 61,576 72,859 81,870 89,831 100,115 111,958 Federal Transfers 35,921 40,479 47,599 50,519 55,810 62,807 70,954 Provincial Revenues 12,794 15,621 18,043 23,800 26,015 28,802 31,947 Tax Revenues 5,335 7,147 8,163 9,512 10,913 12,543 14,376 Non-Tax Revenues 7,459 8,474 9,880 14,288 15,103 16,260 17,571 o/w Abiana 576 633 631 788 906 1,042 1,251 Federal grants 6,700 5,476 7,217 7,551 8,006 8,506 9,057 of which KPP grants i/ 949 3,080 3,000 3,000 3,000 3,000 OZT grants 6,700 4,528 4,137 4,551 5,006 5,506 6,057 Total Expenditures 55,000 59,559 73,892 85,703 95,462 105,530 112,614 Current Expenditures 51,055 54,153 64,830 70,767 74,046 83,725 92,545 Wages2 22,006 23,327 30,568 36,210 38,133 39,953 41,855 Pension 3,452 3,970 4,600 5,250 5,898 6,644 7,565 Operations and Maintenance 4,669 5,676 6,896 8,737 8,833 13,160 17,704 Interest Payments 11,595 10,440 11,409 12,015 12,377 12,490 12,611 Subsidies 399 3,729 4,692 999' 692 496 353 Grants to LG and Investments 8,934 7,010 6,665 7,556 8,113 10,982 12,457 Development Expenditures & Inve 3,945 5,407 9,062 14,937 18,416 18,806 20,069 Annual Development Program 2,178 2,685 3,800 4,560 5,472 6,566 8,208 Rehabilitation 1,500 1,800 2,100 2,400 Foreign Project Assistance 1,178 1,519 1,500 3,577 5,844 6,140 6,461 Investment into Pension/G.P. Fund 1,000 1,000 1,000 0 Federal Projecst Incl. DERA & ESR 589 365 600 1,300 1,300 Civil Works from KPP Grants 0 838 3,162 3,000 3,000 3,000 3,000 Payment for Severance Package 3,000 3,000 Fiscal Balance 416 2,016 -1,033 -3,833 -5,630 -5,415 -656 Public Savings 4,361 7,423 8,029 11,104 15,786 16,391 19,413 Primary Fiscal Balance 12,010 12,457 10,375 8,182 6,747 7,075 11,955 Total Expenditures incl. Severance 55,000 59,559 73,892 85,703 98,462 108,530 112,614 Net Financing -416 -2,016 -1,033 3,833 5,630 5,415 656 Memorandum Item 3/ Provident Fund (net) 2103 2172 2389 Receipts 3742 3348 3683 3867 4060 4263 4476 Payments 1639 1176 1294 1423 1565 1722 1894 Changes in stock of payment arrears -5519 -6608 Total Cash Balances -667 5,441 6,401 Projected IDA Adjustment Financinp 6,250 6,438 6,631 "' Starting FY03, these grants may be discontinued by instituting other revenue transfers. 2/ Wages for FY 04 through FY 06 include adjustment for savings from separation 31 Provident Fund Net Receipts are reinvested and not used for budget financing. Source: Department of Finance, GoS and Bank Staff Estimates 8 Phaog: Off: 9212095 9211340 MINISTER FOR FINANCE Pl,ANNING & DEVELOPMF1T DEPARTMENT GOVERNMENT OF SINDH Keachi, dated B 22nd May Dr. Abdul l{afeez Shaikh 31. Although budgetary allocations for salaries and allowances will rise sharply as a result of the 50% wage increase announced by the Federal Government, the absorption of establishment charges will be contained thereafter. The share of development expenditures will increase by 25% per annum, although only 25% of the allocations for development expenditures will be earmarked for new projects or those that can be completed within the financial year. Similarly, allocations for operations and maintenance will double by FY 06, while the share of subsidies will decline from around 5.3% of expenditures in FY 01 to below 1% in FY 06. Financial Management 32. The public accounts in Sindh were poorly maintained with huge un-reconciled differences between departmental accounts and those prepared by the Accountant General's Office and transactions reported by the banking system. 33. Accountability also suffered in the absence of the Public Accounts Committee for almost 16 years until its establishment in 2001. Poorly functioning financial monitoring and reporting systems compromised the quality of financial management and led to the accumulation of arrears. These weaknesses combined with complicated budgetary release procedures that thwarted timely disbursement of funds to service delivery sites meant continued failure to improve the quality of key social services. 34. Conscious of the need to improve financial discipline, the efficiency and effectiveness of government expenditures and the degree of transparency and accountability to overcome the weaknesses in financial management, the GoS has initiated reforms to strengthen the reliability and accuracy of the provincial accounts and the reporting and accountability systems. These reforms are essentially grounded on the financial management reforms being championed by the Federal Government. Actions Taken 35. The reform agenda seeks timely reconciliation of departmental accounts with the figures reported in the Civil Accounts. The provincial Fiscal Monitoring Committee set up in early 2001 had, by September 2001, to produce comprehensive, credible, accurate and transparent quarterly accounts. As a result reconciliation of the accounts for FY 2001 was completed 100% by September 2001 compared to 6% reconciliation in the previous year. For the first two quarters of the current financial year a 97% reconciliation was achieved. These efforts have been reinforced by the adoption of tighter budgetary controls and through expenditure prioritization concentrating, among other measures, on the completion of high priority programs and abandoning of low priority schemes, enhancement of allocations for non salary inputs in the key sectors of education, health and roads to improve the functional effectiveness of the service providers and the installed infrastructure. 36. The Committee has also streamlined the procedures for the timely release of funds so as to ensure implementation of budgetary targets in respect of development and high-priority non-wage social sector recurrent expenditures. In the interest of transparency the quarterly fiscal accounts are also being made 9 Phlam Off: 9212S 92113X0 KMJNSFE FOR FiANM2 PLANNING & DEV"LOIgM D DEPARThSM GOVERNMRJ OF SMo Dr. Abdul ffafeez Sakha2d public, the results being reported on the Website of the GoS (www.deptfinancesindh.gov.pk ) In the future such reports will provide extensive details on Government revenue collections, public expenditures by sectors and by economic classification. 37. In order to enforce financial discipline and enhance accountability GoS established an independent and effective ad-hoc Public Accounts Committee (PAC) after an inordinate gap of a decade and a half. Comprising retired bureaucrats and civil society representatives with professional expertise known for their integrity, it is clearing the backlog of audit reports. The PAC has reviewed the FY 1993 and FY 1999 reports of the Auditor General and nearing completion of this task for FY 2000. To enhance transparency, the proceedings of the PAC have been opened up to the press with effect from the first week of June FY02. 38. The GoS has embarked upon Financial Management Reform Program, which includes establishment of the office of a Provincial Financial Controller for guiding the implementation of the Financial management reformns and towards this end the provincial government has already decided to appoint the Provincial Financial Controller by end July 2002. 39. To settle its arrears and exercise better control in the future, the GoS has established an institutional arrangement for regular reconciliation of WAPDA and KESC bills for electricity with the records of the individual consuming department. The GoS is intent on metering remaining sites and installing a system under which defaulting public agencies will be disconnected. Medium-Term Action Plan 40. In the medium-termn financial management, reliability of financial information and transparency objectives will be realized through improvements in the presentation of the budget documents and fiscal information disclosures, enunciation of relevant rules for ensuring the timely presentation of audit reports to the PAC, adoption of the budgetary classification of the new Chart of Accounts being developed at the Federal level for compilation of accounts under the New Accounting Model (NAM), which will enable the tracking of expenditures at the lowest tier of government, revision of financial rules to ensure their consistency with the new accounting framework and streamline.procedures for releasing funds to sub- district tiers of government. 41. Over the medium-term the GoS will also, under the Financial Management Reform Program: a) Carry out a comrprehensive exercise to determine the actual and contingent liabilities of the provincial govemment; b) Appoint a Provincial Controller of Accounts for guiding the implementation of the Financial Management reforms; c) Strengthen the capability of the offices of the District Accounts Officers (DAO) and the Executive District Officer (EDO) Finance through computerization and training of the staff, with the objective to complete the exercise in all districts by FY 05. These efforts will ensure the accuracy of the accounts and enable the streamlining of the accounting functions of the district govemments. d) Launch a concerted effort to audit PLAs, reconcile the balances in Public Fund Account and develop a system for recording liabilities arising from transactions conducted during the financial year. e) Publish the financial statements of key public sector enterprises getting financial assistance from the provincial government and distribute them with the budget documents. f) Ensure the continuity of the PAC and frequency of its meetings through appropriate amendments in the rules; g) revise the 10 ftoum: Off: 9212095 9211340 MMINSTE FOR IlNANCE PLANNING & DEVEOPMERT DEXPARTMEA GOVERNMENT OF SIH Kmvschl, _ 22nd May ljwbl, defted * Z 9 Dr. Abdul l{feez Shaikh procurement rules, manuals and codes to consolidate and simplify processes, and ensure transparency. The GoS also intends to enact a Procurement law in FY 04 for legislating the fundamental principles of good public procurement practices to promote economy, efficiency and transparency. Civil Service Reforms 42. Improvements in service delivery and the efficacy of public expenditures can only be achieved through better performance of public employees, which has suffered on account of rapid expansion in numbers with little done to upgrade its quality. Non-merit recruitments, frequent transfers, poor enforcement of accountability mechanisms and inadequate efforts to strengthen their capabilities adversely affected their capacity to fulfill their mandates. The composition of the civil service, with 43% of its membership comprising those in grades I to 5, most of whom are functionally illiterate, ill-suited to the changing skill requirements of a domestic market being forced to adjust to a more competitive international environment. The urgently needed task to rationalize, re-deploy and train existing staff and to undertake critical pay reforms is impeded by the lack of data on the size, educational attainments and geographical and functional deployment of the 459,000 employees. Actions Taken 43. To ensure merit-based appointment in future the GoS has strengthened the independence of the Commission members appointed to the Sindh Public Service Commission (SPSC) through legislation. The SPSC will undertake all future recruitments in grades 11 and above. 44. To check absenteeism supervision procedures have been strengthened. In the key social sector of education civil society participation is being proposed as an instrument for enhancing the accountability of service providers to service recipients. Not only have School Management Committees been empowered to report on absenteeism and recommend the transfers or dismissals of recalcitrant and offending teachers, future recruitment of teachers will now be on contract and on institution specific basis. 45. Instruments like the Good Governance Committee and the Review Committee have been set up. Existing statutes and rules have been harnessed to initiate a variety of actions against 600 senior officials. Powers to enforce discipline have been strengthened under a new Ordinance and related procedures are being streamlined. 46. The number of provincial departments has been rationalized from 28 to 23 on the recommendations of 3 sub-committees set up for- functional restructuring provincial government departments. Several departments or public sector enterprises have been identified for re-organizing, disbanding, merger or privatization and overlapping responsibilities between city-based development authorities and mandates of district governments are being removed. 47. About 270,000 personnel have been transferred to the local govermments, in excess of 12,500 vacant sanctioned posts have been abolished and recruitments below grade 14 have been discontinued. Paseu: Off 9212095 ANISNeR I OR FDVE ANCI . ;4 ~~~~~~~~PI,NNING & DEVELOp~q DEPARTMEI GOVYRRNMENT OF SIND 22bd MaY 2 Dr. Abdul Hafeez Sitkb The freeze on recruitment is being continued with specified exceptions for priority activities, essentially to operationalize social service facilities. 48. Transfers of senior provincial government officers are being reduced and the average tenure has increased to 15 months from less than 12 months earlier. The data on deployment of senior personnel, in terms of period of tenure in each post, is also being reported on the website of the (GoS- www.sindh.gov.pk). Medium-Term Action Plan 49. An initial head count of civil servants is nearing completion. A computerized database to result from this effort will be reconciled with the payroll records to identify and remove ghost employees, facilitate the implementation of a strategy for monitoring and managing pension expenditures and enable better planning and deployment and human resource development of staff based on information on skill composition. 50. The regular updates to the database will be based on an initial comprehensive civil service census and the procedural and institutional mechanisms to incorporate in this data base contractual employees, new appointments, promotions and terminations and arrangements for periodic reconciliation with the payroll records will be designed and implemented during FY 03. The exercise will aim to create an accurate, regularly updated, database of employee skills within the public sector and rationalize classification of employees. Towards this end efforts would be made to rationalize the size of the government especially at grade 11 and below through severance packages for which specific allocation would be made as well. Efficiency gains will be realized through the elimination of unnecessary tasks and by closely aligning functions, resources and responsibilities. 51. To reduce the scope for litigation service rules and statutes are being modified to institutionalize and grant requisite sanction to contractual appointments. Other legal reforms will also be undertaken to bring all such appointments within the purview of the SPSC. The autonomy of the SPSC will be deepened, to provide it with further administrative autonomy, as to reduce the scope for challenging SPSC decisions. Education 52. With gross enrollment rates at the primary level of 65%, but high dropout rates access to schooling continues to be poor partly because of poverty and partly because around 13,500 (35%) schools are shelter-less and around 50% schools lack basic facilities like boundary walls, toilets, electricity etc.) and 5,650 were closed owing to lack of teachers or financing. The quality of service delivery has suffered because of rampant absenteeism due to weak accountability systems, inadequately trained teachers, poor provision of consumables to schools and weak supervision of service delivery. The GoS has set itself an objective to ensure that 70% children in Sindh complete the primary education cycle by 2010 and that net enrollment is 80% by 2005. To this end it has launched a comprehensive plan aimed at provision of adequate resources, strengthening of accountability systems, greater community involvement in the provision of schooling and promotion of private sector role in education. 12 ftoum: Off, 9212095 921130 MINSTER FOR FINANCE PLANNING & DEVEWPMENT DEPARTMENT CGOVERNMENT OF SINDH mh4, died 22nd May 9 Dr. Abdul lafeez Shaikh Actions Taken 53. A memorandum of understanding has been signed with the Federal Government to enable GoS to access additional funds to achieve the goals of the National Education Sector Reform Strategy, which has been distributed, to the district governments. 54. To increase school enrollment, improve gender disparities and access of vulnerable groups to education several initiatives have been launched, e.g. enrollment drives, implementation of the legislation relating to compulsory education in 16 talukas, future hiring of female teachers only for primary classes, incentive schemes like 23,000 scholarships for both girls and boys residing in rural and urban areas (Rs.36.4 million allocated for FY 2002), free distribution of textbooks to 1.3 million children (Rs.165 million set aside for FY 2002) and experimentation with a Food Support Program in 21,000 schools. 55. Arounrd 3,800 of the hitherto closed have been operationalized on need/viability basis through a combination of redeployment (of around 5,500 teachers) and fresh recruitment of 3000 teachers. These initiatives have bome fruit and in FY 2002 enrollment increased by 5% over FY 2001. 56. To improve teacher accountability and performance around 2,400 ghost or illegally appointed teachers have been removed from service, while 164 officials were subjected to major or minor penalties 57. To improve quality of schooling and accountability of teachers to service users, school management committees have been functionalized (of which 14,000 have already been trained in these matters) with strong institutionalized involvement of elected local representatives and parents in merit based teacher recruitment (identified on the basis of competency tests administered by an independent third party), monitoring of teacher presence (and requesting the education department for disciplinary action against offending teachers), the utilization of the school budgets in respect of non-salary inputs (totaling Rs.1.3 billion released to SMCs), recruitment of teachers on contract and facility specific basis and testing of teacher competence with the objective to strengthen it through training. 58. An intensive program for training 20,000 teachers in content and pedagogy has been launched in partnership with the IED and NGOs are being inducted to monitor this training program. 59. The GoS is undertaking regular school supervision visits and making preparations initiate an annual third party validation exercise from FY 03 to assess the quality of service delivery at the local level. 60. To create an enabling environment for private sector participation in education and thereby improve the quality of schooling the GoS is de-nationalizing educational institutions (with 165 having already been denationalized), leasing school buildings to the private or inviting civil society, through an Adopt a School Program and Community Supported Schools to take over management of government schools, and deregulating printing of text-books. 13 nhau: Of: 9212095 9211340 KIIM S 0E R NANCE PLANNING & DEYELOP1 Em DEPARTMENT GOVERNMENT OF SINDN Karachi dated 22nd May302, Dr. Abdul I{ateez Shaikh Medium-Term Action Plan 61. The medium-term reform plan will focus on an extensive public awareness campaign on the government's educational sector initiatives, on annual and half-yearly enrollment drives in the remaining talukas based on the compulsory education plan so that number of out-of-school children can be reduced from 2.2 million to 1.1 million by 2005, establishing and training SMCs in all schools and on modifying and expanding these initiatives on the basis of lessons learned and build on the successes achieved, on introducing a technical stream at secondary level education and on periodically conducting independent third party assessments on student learning outcomes. 62. The possibility of providing grants to private schools providing decent quality education in low- income households will also be evaluated. GoS plans to provide buildings to 3,100 shelterless schools between FYs 2002 and 2005, and construct 8,250 additional classrooms for primary and elementary schools, upgrade 1,600 primary schools and provide toilets and drinking water facilities in 4,100 schools and complete training of untrained 12,000 teachers over the same period. 63. Other medium-term reform measures will include: a) Testing of teachers for competency who will then undergo remedial training and re-certification being developed in partnership with [ED; b) Certification of candidates for teaching positions by a Teacher Certification Board. District Governments will henceforth be required to hire teachers below grade 11 from this list for appointments in schools that they manage; c) Empowering SMCs to have a role in hiring and firing of teachers, under the watchful of the respective local government; and d) Annual third party validation surveys on teacher presence, effectiveness of incentive programs like free distribution of text books, scholarships for girls, availability of supplies, etc. Health 64. Sindh has a poor set of health indicators. Until the reforms initiated by this government a strategy had been missing on ways to overcome the debilitating impact of preventable and communicable diseases. At the same time, accountability mechanisms in respect of service providers and institutional arrangements for ensuring continuity of key personnel on appointed positions were weak. Actions Taken 65. After adopting the National Health Policy 2001, GoS set itself clearly defined targets. On the basis of third party assessments, the coverage of the immunization program of children between the ages of I and 2 and of pregnant women has increased from 38% and 48% respectively in 1998 to 48% at the end of 2001. Confirmed polio cases have been reduced from 65 in 2000 to 23 in 2001, the Infant Mortality Rate from 125 to 90, the Fertility Rate from 6 to 5, while contraceptive prevalence has been raised from 8% to 17% and that of deliveries through trained personnel from 18% to 28%. LHW coverage has increased from 33% to 43% and the female health staff in PHCs has touched 65%. The program for hepatitis B vaccination has been initiated in two districts, while the DOTS program has been launched in 5 districts. Resultantly, coverage of DOTS has risen from 8% to 31% in just one year and the program has been extended to 8 districts and being extended to 10 districts. 14 ftosm: o0f 92fl095 921340 MINISTERt FOR FINANCE PrANNING & DEVEWPMDRT GOE DEPARTMENT GCOVRNMENT OF SENDB lAel a8bd 22nd May Dr. Abdul Hafeez Shakh 66. A transparent policy for transfers and promotions has been implemented to address rurallurban imbalances of staff. Vacant sanctioned posts of female paramedic staff have been filled through the relaxation of the recruitment ban. The efforts of the GoS to ensure staff attendance, with the assistance of army monitoring teams, have bome fruit. Moreover, the services of more than 350 doctors have been terminated and around 1,500 have also been penalized with minor punishments. The School Health Service has been abolished and the doctors are being posted to rural areas. New managerial structures are being installed at the provincial and district levels and a medium-term plan for improving the mobility of key paramedic staff, e.g. vaccinators, strengthening the capability of district health planning and financial management structures and information collation systems has been finalized. A set of 15 indicators has been developed to measure performance and regular monitoring and reporting procedures are being institutionalized. Medium-Term Action Plan 67. The medium-term plan of the GoS is to increase the immunization coverage of children and pregnant women to 80% by 2005, expand province-wide coverage of TB DOTS by 2003 to detect 70% of all cases and treat 85% successfully, reduce TB deaths by 50% by 2010, extend coverage of Hepatitis-B vaccination, eradicate polio and neonatal tetanus by 2005, improve access to EPI services, build capacity of LHWs and other staff to provide immunization services and strengthen the capability of local government functionaries to implement plans by conducting in-service training programs for district managers in planning and financial management. 68. For FY 2003 the allocations for non-salary components will be increased by 25% to eventually raise the non-salary budget for primary health care to 30% by 2005 form the present share of 20%. 69. Third party household and facility surveys on staff presence, availability of medicines and other supplies, etc. is also being institutionalized, while private sector and NGO participation is being sought in the management of non-functional recently constructed 400 basic health facilities. Rural Water Supply and Sanitation 70. The GoS continues to pursue a strategy to involve communities in the design and implementation of Rural Water Supply and Sanitation (RWSS) schemes and in contributing towards the cost of construction. Furthermore, the RWSS schemes are being handed over to the Taluka governments for operations. Talukas will be provided adequate funds on a timely basis for the rehabilitation and maintenance of rural water supply and sanitation facilities completed recently on the basis of community participation. To finance these initiatives adequately, the GoS is also planning to increase the funding for such schemes several fold. 15 fhtoa: Off: 9212095 M1NISTER FOR FINANCE PLANNING & DEVELOPMET DEPARTMENT GOVERNMENT OF SINDH ~~ dakd .& 22nd Hay 2. ~~~~~~~~~~~~~~~~lwb1, dat xp L 3 Dr. Abdul Hafeez Shaikb Governance Reforms and Civil Society Participation 71. Several initiatives taken to improve systems of governance include decentralization of administrative and financial powers and the reorientation of the regulatory structures, processes and procedures that influence the operations of the private sector operating within the provincial boundary. The sustainable achievement of the reform agenda will require progress in areas pertaining to civil service reform and further market deregulation and liberalization. To accomplish these goals the GoS is determined in its quest to (a) make the functioning of government simpler, less cumbersome and accountable and responsive to the genuine needs of people; and (b) transform the role of government such that it should not become an impediment to private initiative. 72. Moreover, recognizing the participation of civil society as critical to poverty reduction efforts the GoS is also increasing the social capital by promoting the activities of NGOs and self-help groups in the provision of social services, either directly or in partnership with the GoS, or in the monitoring and supervision of the delivery of social services by the public sector. Promotion of Private Sector 73. The govemment's mission is to become a prudent facilitator of private pursuits through privatization and further deregulation. The GoS plans the restructuring, closure, liquidation and privatization of many enterprises and parastatals. Some are making losses and are being bankrolled from the provincial budget, some are inefficient producers of goods and services, some are providing goods and services that the private sector could provide more competitively and some need to be restructured and reorganized to make their operations more efficient. Actions Taken 74. To improve the climate for investment and promote private sector development the GoS is reforming its regulatory framework that provides government functionaries with opportunities for extracting rent, which raise the private sector's cost of doing business. As major steps, it has fundamentally modified the scope and frequency of rules relating to factory inspections, reducing them from 23 to 7 for factories (and to 4 for retail outlets). It has also decided to reorient the role of government to eliminate intervention in productive activities and reduce the fiscal drain of PEs and has identified several assets including 2 sugar mills, agricultural farms, and real estate for privatization in the short to medium term. 75. A Provincial Committee on Investment, Information Technology Board, Economic Development Council (EDC) and the Sindh Privatization Commission with heavy private sector representation and headed by leading private sector persons have been activated and they are actively engaged in devising policy and procedural reforms for stimulating private investment in the province. 76. The Privatization Commission has adequate funding and autonomy and has started recruiting consulting consultants with requisite expertise to carry out specific transactions and develop an inventory of potential GoS owned assets and parastatals for privatization. The first round of bids have been received 16 ftome: Off: 9210i5 9211340 MINSERFOR FINANClN PlANNING & DEVELOPbM GOVFDEFARTENT EOVRRN N OF SID K dated - 22nd 1ay Dr. Abdul Iafcez Shaikh in April for privatization of the trauma center, some real estate assets which have already been approved by the cabinet committee. Medium-Term Action Plan 77. In partnership with the Federal Government a task to consolidate, rationalize, and streamline 27 labour laws and accompanying regulations, improve the flexibility of the labour market and reflect current developments in it is well underway. The GoS plans to continue with the strengthening of deregulation regime for investment without compromising safety, environmental and other standards. 78. The role of civil society and the private sector is being institutionalized through representation on the Boards of management of many public sector agencies providing utility and other services. The Roads Sector 79. Poor regular maintenance of the road network in Sindh, partly owing to allocations that barely meet one-third of requirement, has caused a deterioration that has seriously impacted on the cost and competitiveness of business operation. Around 70% of the 21,000 kilometers of roads are in urgent need of rehabilitation. 80. Outdated maintenance yardsticks, budgetary allocations, mechanisms that have not kept pace with needs and lack of prioritization of the maintenance program has contributed to a huge backlog of rehabilitation expenditures, estimated at around Rs.9 billion. Medium-Term Action Plan 81. To address the weaknesses identified above and to ensure the development of a meaningful and sustainable reform program the GoS has recently signed a road sector development credit with the Asian Development Bank, under which it plans to enhance allocations for repairs and maintenance, prepare a suitably prioritized road rehabilitation and maintenance program based on generally accepted standards for safeguarding and protecting the economic life of the roads, create a non-lapsable protected fund dedicated to regular maintenance activities, administered by an Oversight Board with appropriate stakeholder participation. Moreover, the intra-district road network of approximately 16,000 kmns. has been transferred to the District Governments with guidelines on the nature and scope of prioritization of the allocations for routine maintenance. 82. The mediun-term strategy for the sector includes the development of a road master plan, a 5 year rolling investment and maintenance program, enforcement of an axle load control program and the revision of design standards, specifications and maintenance yardsticks. Devolution 83. Like other provinces Sindh is making its contribution to fiscal decentralization. The initial phase of the fiscal decentralization plan to support the devolution program has been completed involving the unbundling of the provincial budget into provincial and district budgets. The District Development 17 fhos: Off: 9212095 MInSR FOR FINANC PLANNING & DEVELWOIIT DEPAR1?hENT GOVERNMENT OF SID Krhlb, dated A 22nd Hay 2. Dr. Abdul Hafeez SbAikh Working Parties can now approve projects costing up to Rs. 20 million, while the responsibility for the implementation of more than 700 on-going schemes and projects being executed under the Khushaal Pakistan Program have been mandated to the District Governments. Moreover, District governments have been given autonomy over the utilization of the recurrent non-salary allocations. 84. In the next phase the GoS will be establishing the inter-governmental fiscal relations between the province and the newly created lower formations of government. 85. The Sindh Provincial Finance Commission (PFC) is being re-constituted. Its mandate will be to formulate proposals for transparent, statutorily protected, formula-based vertical and horizontal distribution of resources and conditional and matching grants and the revenue and expenditure assignments of the different levels of government such that provincial and national goals pertaining to the social sectors and poverty reduction are met through appropriately designed fiscal transfer formulas. 86. To ensure the continuity of the reform programs and to protect non-salary expenditures in high priority areas, appropriate allocations will be passed on to the local governments as tied grants. 87. The adoption and implementation of the fiscal decentralization plan, including the institutional arrangements for releasing funds to lower tiers of the local government structure and fiscal monitoring at the district level will begin during FY 03. Rural Development 88. The rural development efforts in Sindh are under taken by multiple agencies like the local govemment department and the local councils (now converted into autonomous governments), the Agriculture and the Irrigation departments. The water supply and sanitation portfolio now stands shifted from the provincial Public Health Engineering Department to the Taluka and Town Administrations. The Government has tried to supplement the rehabilitation of the rural infrastructure through the small public works program titled as the Khushal Pakistan Program with the support of the Federal Government. Since December 2000 more than Rs. 5.5 billion have been released under this program for more than 3000 schemes mostly pertaining to farm to market roads, water supply, sanitation, lining of water channels and rehabilitation of schools and health centers. Approximately 0.25 million people have been able to get temporary employment under this program and it has gone a long way in reversing the deterioration of rural infrastructure. Further the government is negotiating a Sindh Rural Development Project with the Asian Development Bank for poverty reduction activities in the five southern districts of Sindh having strong components of social and infrastructure development. 89. GoS is reforming agricultural extension services, liberalizing the trade and marketing of agricultural produce and improving the irrigation system through the establishment of the Sindh Irrigation and Drainage Authority (SIDA), which has in turn set up area water boards and local farmer organizations for managing secondary and tertiary canals. By the end of 2003 all canals are expected to be transferred to SIDA for operations and maintenance. The government is working on a major irrigation rehabilitation 18 fhcos Off: 9212095 9211340 MRNSER FFOR FINAt !LANN4ING A DEYLPKERT D EPARTMENT GOVERNMENZT OF SIND Karch}i, t _ 2_22nd May Dr. Abdul Hateez Shaikh program to be assisted through a special Federal government grant aimed at a more organized and scientific water management system. Communication Strategy 90. Under the devolution plan the ultimate responsibility for implementing the sectoral reforms, especially relating to social services, will lie with the District Governments. For ensuring ownership and efficient harmonized implementation of the reforms at the local government level the GoS has started holding intensive dissemination workshops on the reforms and the associated related executing mechanisms with the elected representatives of the District Governments and their core functionaries. 91. This letter, setting out the development policy of the GoS, will be posted on the web site of the provincial government. For ensuring wider dissemination and creating greater awareness about this far- reaching reform program this letter will also be translated into Urdu and Sindhi. Monitoring and Evaluation Arrangements 92. The monitoring and evaluation of the reform programme on the basis of target based outcome indicators will be conducted by the Finance Department. Regular monitoring is also being carried out by a committee of key focal persons from each of the departrnents undertaking reforms. A number of targets have also been set to this end and set out in Table 2 below. 93. The monitoring and evaluation arrangements for the GoS's reform program will extend further to monitor the targets set in Table 2 below.. These will include (i) the quarterly fiscal monitoring report will be produced by the Finance Department to report on fiscal implementation and the status of the accounts reconciliation; (ii) civil service transfers and the rationalization of the civil service will be monitored by the Services department; (iii) human development and millennium development goals data will be provided by the monitoring cells of the relevant departments, (iv) district performance indicators, and the results of the annual independent third party validation surveys that will be carried out will be regularly monitored by the Departments; and (v) surveys will be used to check the implementation of regulatory reforms. 19 fomem: Off: 9212095 9211340 MINITE FORt FNANCE Pl,ANNING & DEVELOPMEY DEPARThNFEN GOVERNMENT OF SINDS Karchi, dated* 22nd May 2. Dr. Abdul I{afeez Shaikh Table 2: Monitoring Indicators Under GoS Reform Program (* = Corresponding to IPRSP Targets) Indicators (Targets are from latest ear to FY 06) Institutional Arrangement for Monitoring Growth 3.3% to 5.2 % per cent per annum Overall Monitoring Responsibility- Poverty (Basic Needs)' Urban: 19% (1998 PIHS) to 16% (FY04) Planning and Development Department; Rural 37% to 31% (FY04) Source for Poverty Data: PIHS Survey every two years Public Finance 15.2% annual growth of revenue Provincial Tax Revenue Growth AIT and irrigation charges collection Quarterly Fiscal Monitoring Reports, Annual growth by 20% p.a. Budget Statements of Department of Finance, and Annual Budgets, produced by the Share of education and health in From 28% of expenditures in FY 01 to Department of Finance current expenditures* (functional 39% in FY 06 classification) Quarterly Fiscal Monitoring Reports of the Operations and Maintenance From 9% (in FY 01) to 16% of all Department of Finance (economic classification) expenditures Development Expenditures From 9% (FY 01) to 18% of all (economic classification) expenditures Department of Finance/Accountant General's Timely, comprehensive, reconciled Civil Accounts Reconciliation from 80% Office. Quarterly Fiscal Monitoring Report. fiscal data eventually using modem to 95%. chart of public accounts Identification and reconciliation of all expenditures and public accounts. Education and, Health Gross primary enrollment rate* From 60% to 80% (FY 05) Annual SEMIS, Reports of the R, M, and E cell Gross Female Primary enrollment From 41% to 60% of the Education Department. PIHS rate Annual Independent Third Party Validation Number of Schools Made* 88% to 100%. Surveys with data collected for district level. Functional 101,000 teachers tested and 12,000 Teacher Competency Testing and trained. SEMIS Training* PIHS Surveys Infant Mortality Rate 95 to 60 Annual Reports of Immunization Directorates 12 to 23 month Immunization 49% to 80% Third Party District Annual Assessments. TB Control Access 8% to 100% Births Attended By Trained 28% to 40% Personnel* Third Party Validation Surveys Population with Access to Safe 61% to 80%. Drinking Water* Annual Sindh Katchi Abadi Authority Reports Notified Katcha Abadis (Urban 80% to 90% Slums) Regularized* Infrastructure Annual Reports of CWD, Roads Oversight Proportion of Roads Classified in 70% to 50% Body, Independent Surveys Poor Conditions Kilometers of All Weather Farm to 14000 km to 15200 km by FY 05 Market Roads* Annual Reports of SlDA/lrrigation Department Rehabilitation of Irrigation 1500 Km channels by FY06 Infrastructure* Temporary Employment* Generated From 0.25 million to 0.4 million FY 06 Department of Local Govemment through KPP civil works. 20 ihoaj: Of: 9212095 mULSO FO)R FENANC PLANNING & DEVELOnINq DEOARThIMN GOVERNMENT OF SOM Z , -, 22nd MayW2 Dr. Abdul Hafeez SM4ikh 94. The monitoring of the implementation of the reform program will be done at two levels. An Implementation and Monitoring unit would be established in Finance Department shortly having adequate staffing, powers and resources for providing overall monitoring and guidance to ensure implementation. This unit would be responsible for producing the quarterly and annual monitoring reports and coordination of the implementation of all agreed medium-term benchmarks. Second, a civil servant committee coordinated by the Department of Finance and consisting of senior. civil servants who are acting as focal points for implementing reforms in the relevant agencies, has been set up to provide regular monthly monitoring. As noted, specific monitoring systems in the Departments of Finance, Health and Education have also been considerably strengthened as part of the reform program. 95. The provincial government being deeply committed to the reform program outlined above plans to enter into a Structural Adjustment Credit Agreement with the World Bank, with which it has closely interacted in the formulation of the reform strategy, in sharpening its focus and in designing the mechanisms, instruments and institutional arrangements for ensuring the realization of the objectives associated with the reform program. The discussion on this credit began in November 2000, which was followed by a continuous dialogue and a series of Missions through out 2001 and 2002. Satisfied with the scope, content and phasing of the program the World Bank appraised it in May 2002. The credit from the World Bank will support government of Sindh's reform program and it is expected that similar level of support will be forth coming in following two years to assist the GoS implement the medium term reform program. 96. The GoS is confident of the sustainability of this structural reform program. In our view, the prospects for continuity of these reforms is high since similar policies are being pursued nationally. Secondly, this reform agenda is home grown and developed after a prolonged internal debate and the reform measures are being institutionalized through legislative changes and carried forward through the creation of new institutions, and strengthening of the existing institutions. Thirdly, by taking a number of major steps as prior actions the present government has tried to make reversibility difficult. Fourthly Government of Pakistan has lately made policy pronouncements followed by statutory enactments and institutional settings on devolution and fiscal decentralization, which would greatly facilitate in protecting the public service strengthening measures under this program. Finally, a faithful completion of a program agreed with the World Bank will become the moral obligation of future governments. Dr. Abdul Hafeez Shaikh Minister of Finance Government of Sindh Pakistan 21 Annex C Page I of 8 ANNEX C: POVERTY AND SOcLuL DEVELOPMENT IN SINDH' I. Poverty in Sindh should be understood in the broader context of poverty in Pakistan, which is what this note will attempt, using household survey data from recent years. However, a large part of understanding poverty in Sindh should also be to examine the concentration of poverty within the province across regions and districts, which is limited by the nature of data on which this note is based. This note will thus be restricted to disaggregating poverty at the regional (rural/urban) level within Sindh, recognizing that the important task of analyzing district-level poverty and exploring variations across districts must await the availability of survey data that is representative at the district level. Such district- level poverty analysis will also be important to inform policymakers, by helping identify priority needs and target groups and areas for intervention. 2. The overall incidence of poverty in Sindh is slightly lower than that for the country as a whole (poverty headcount for Sindh is 29%, compared to 33% for Pakistan). Disaggregating poverty between urban and rural areas, as shown in Table 1, rural poverty in Sindh is found to be slightly higher than that for the entire country (poverty headcount for rural Sindh and rural Pakistan are 37%, and 36% respectively), and urban poverty lower than that for the country (urban headcount for Sindh is 19%, compared to 24% for Pakistan).2 Other measures of poverty, namely poverty gap that estimates the depth of poverty, and squared poverty gap that measures the severity of poverty, tell a similar story on how poverty in Sindh compares with that of the country as a whole - depth and severity of rural poverty are 'relatively higher, while those of urban poverty relatively lower in Sindh. Also, consumption levels, measured by average per-capita consumption expenditure are consistent with the poverty estimates for Sindh, vis-a-vis the rest of the country. Inequality in Sindh, as measured by the gini coefficient for per equivalent adult consumption, is very close to the country averages, for rural and urban areas alike. Table 1: Mean Consumptlon, Inequallt and Povert: 1998/99 L_________________________________ Urban Rural Overall 1. Mean per-capita monthly consumption (current Rs) AllPakistan 1193 819 924 Sindh 1202 794 971 2. Inequality (Consunption Gini3) All Pakistan 0.35 0.25 0.31 Sindh 0.33 0.24 0.30 2. Poverty Headcount (%) All Pakistan 24.2 36.0 32.7 Sindh 19 37.1 29.2 3. Poverty Gap All Pakistan 5.0 7.9 7.0 Sindh 3.7 8.4 6.3 4. Severity of poverty (squared poverty gap) All Pakistan 1.5 2.5 2.2 Sindh 1.0 2.8 2.0 'The source for all data, unless otherwise specified, is Pakistan Integrated Household Survey (1998/99). The GoS has officially contested the findings and methodology of the survey as underestimating poverty in Sindh. Accordingly, the Letter of Development Policy also uses other poverty data. 2 Poverty is estimated using a poverty line set at the inflation adjusted cost of achieving a minimum bundle of basic needs, including food, fuel, housing and clothing (for details, see Interim Poverty Assessment Report for Pakistan, 2002). 3Gini coefficient for per equivalent adult consumnption expenditure (equivalence scale: I child = 0.8 adult). Annex C Page 2 of 8 3. The picture of consumption/income poverty in Sindh is thus similar to that of Pakistan as a whole - higher concentration of the poor in rural areas, lower average consumption levels in rural areas, and relatively higher inequality in urban areas. What sets Sindh somewhat apart is the fact that rural-urban gap in poverty incidence, depth and severity, which is considerable for the country as a whole, is even wider for Sindh. In fact, as Table 2 shows, the 18 percentage point rural-urban gap in poverty incidence for Sindh in 1998-99 happened to be the highest among all provinces. While 57% of Sindh's population live in rural areas, these areas account for 72% of the total number of poor people of Sindh. Moreover, comparing with estimates from 1990-91, it appears that the rural-urban gap has expanded for Sindh, as it has done for the country as a whole (Table 2). 4. Table 2 shows how poverty Table 2: Incidence of Poverty by Province and Region in Sindh has changed over the (1998-99) (1990_91) 4 decade. From 1990-91 to 1998-99, Urban Rural Overall Urban Rural Overall urban poverty in Sindh declined Punjab 26.5 34.7 32.4 29.4 38.5 35.9 substantially (by 5 percentage indh 19.0 37.1 29.2 24.1 30.8 27.6 points) - even more than the decline in national urban poverty (by less P 31.2 46.5 44.3 37.0 40.6 40.0 than 4 percentage points). Balochistan 28.4 24.0 24.6 26.7 20.9 22.0 Meanwhile, incidence of poverty in ad I & K 14.5 15.7 15.6 rural Sindh increased by 6 Northern Areas 22.6 37.9 36.5 percentage points over the same FATA . 44.5 44.5 period, although rural poverty National 24.2 36.0 32.7 28.0 36.9 34.0 headcount. for the country actually fell slightly over the same period. The rise in rural poverty in Sindh over the decade was actually the highest among all provinces. Unlike Punjab, the other highly populated province, where rural and urban poverty alike have shown modest declines over the decade, poverty reduction in the 1 990s in Sindh appears to have occurred only in urban areas while rural areas have become poorer on the average. 5. A number of possible factors, including uneven agricultural performance, have been considered as responsible for poverty stagnating in rural Pakistan in the 1990s. In the context of Sindh, where rural poverty has actually worsened over this period, identifying the factors responsible would require closely examining the role played by agriculture, including the impact of shocks like recent droughts on agriculture and the associated rural economy. Characteristics of the Poor 6. While looking at incidence of consumption poverty is useful, understanding the nature of poverty in Sindh requires examining the characteristics of poor households, in urban and rural areas alike. Although the correlations between various factors and consumption poverty discussed here will not be enough to establish a causal relationship, they will help address the question of who the poor are, as well as provide rough indications about asy prohdey are pough indcaton abut Table 3: Average Household Size for Poor and Non-poor (1998-99) why they are poor. Urban Rural Overall 7. Firstly, the poor are more Pakistan Sin& Pakistan Sindh Paistan Sindh likely to live in larger households: Poor 10.3 11.3 9.7 10.0 9.8 10.4 while the average size of a poor household in Sindh is 10.4, that of a Non-poor 7.7 7.6 7.9 7.9 7.8 7.7 non-poor household is 7.7 (Table 3). Overall 8.3 8.3 8.6 8.7 8.5 8.5 Source for 1990-91 figures: Pakistan Poverty Assessment (1995) Annex C Page 3 of 8 Moreover, poverty incidence is found to increase rapidly as household size increases: from a headcount rate of less than 8% for households of size 5 and below, to 37% for those of size 8 to 10, and 45% for those of size 11 and above.5 While this is expected, one interesting fact emerges: although the average household size for Sindh is almost identical to that of the country average, in urban and rural areas alike, the average size of poor households in Sindh is larger than that of poor households.in the rest of the country. 8. Poverty is expected to be strongly associated Table 4: Average Land Owned (Hectares) Per with lack of asset ownership, an important component Household for Poor and Non-poor (1998-99) of which is agricultural land in rural areas. The Rural Overall average size of agricultural land owned by poor Al Sindh All households is 0.6 hectares in rural Sindh, compared to Pakistan Pakistan Sindh 2.8 hectares for the non-poor (Table 4). Poverty Poor 0.4 0.6 0.4 0.5 headcount falls as the size of land holdings increase, from 43% among landless rural households to 28% Non-poor 1.4 2.8 1.1 1.7 among those with 2 to 4 hectares, and 14% among Total 1.1 2.1 0.9 1.4 those with more than 4 hectares of land (Table 5). 9. Distribution of agricultural Table 5: Rural Poverty by Household Land Ownership (1998-99) land is found to be even more skewed in rural Sindh than for rural Palistan Poverty Headcount % of Population in as a whole - 70% of the rural Landholding Category population of Sindh is landless, Category Rural Rural Rural Rural compared to 61% of the rural Pakistan Sindh Pakistan Sindh population of Pakistan (Table 5). No Land Owned 40.3 42.8 61.4 70.2 Consistent with this observation, the >0- 1 hectare 33.8 36.9 18.4 5.5 difference in average landholdings of >I -2 hectare 29.5 28.9 5.9 4.8 the poor and non-poor households in rural Sindh is 2.2 hectares, compared >2-4 hectare 22.4 27.6 7.0 7.0 to I hectare for all rural areas of the >4 hectare 12.8 14.3 7.3 12.5 country (Table 4). Among the number of factors likely to be responsible for the more skewed pattern of land'holdings in Sindh, one could be the relatively low impact of land reforms, especially in comparison to the other large province, Punjab. 6 10. Poverty, as expected, is strongly associated with lack of human capital, measured by the education and literacy status of the head of the household. Poverty headcount among those living in households with literate heads is around 21% in Sindh, compared to 42% for households where the head is not literate. Moreover, poverty headcount in Sindh as well as in the country as a whole declines 5 There is a caveat, however, for these correlations - the fact that the "scale factor" of the household is not taken into account, since consumption is computed on a per equivalent adult basis. In other words, the possibility that larger households enjoy economies of scale in consumption would mean that these may actually be less poor than the calculations here reveal. Adjusting for this kind of bias, however, is difficult, since it will require detailed knowledge of consumption of individual household members - not available from standard household expenditure surveys. 6 In Pakistan, major attempts at land reform occurred in 1959 and 1972. In general, these are considered to not have succeeded' in redistribution, particularly to tenants and landless, and also appear to have been ineffective in ensuring security of tenure. Looking across provinces, while a sizeable number landlords in Punjab were forced to award ownership rights to occupancy tenants, deeply entrenched feudal power in Sindh has weakened implementation of past reforms (Naseem, 2001). Annex C Page 4 of 8 steadily with increase in the education of the head of the household (Table 6). Finally, it appears that for Sindh and the entire country alike, poverty declines more steeply with literacy and increased levels of education in urban areas than in rural areas. This is as expected, since returns to education are likely to be higher in urban areas, where better opportunities to utilize the skills provided by education are likely to exist. 11. Occupational status of the household head is another important factor likely to be associated with poverty (Table 7). In urban Sindh, concentration of poor is higher than average among households whose heads are self-employed, no doubt reflecting the fact that a high proportion of such earners are engaged in elementary occupations in the large informal sector typically found in urban areas. Poverty incidence is lower among households headed by paid employees, who are likely to be engaged in skilled occupations in urban areas, and almost non-existent for those headed by employers who own enterprises. Table 6: Poverty Headcount by Literacy & Education of Household Head (1998-99) Urban Rural Overall All Pakistan Sindh All Pakistan Sindh All Pakistan Sindh Non-literate 39.5 30.5 42.9 44.3 42.3 40.0 Literate 15.4 13.7 25.1 29.1 21.3 21.0 Never attended school 38.8 30.0 43.3 44.8 42.5 40.2 Cl. 1-5 (primary) 26.8 16.7 30.7 32.6 29.6 27.7 Cl. 6-9 (mniddle) 18.7 18.1 25.8 32.4 23.3 23.7 Cl. 10-Il (matric) 13.0 14.0 20.0 21.9 16.8 16.1 Cl. 12 (intermediate) . 8.2 10.3 17.6 19.1 12.1 13.5 College & above 4.5 7.5 6.5 9.4 5.3 8.1 Table 7: Poverty Headcount by Occupation of Household Head (1998-99) Urban Rural Overall Occupation Categories All Pakistan Sindh All Pakistan Sindh All Pakistan Sindh Not working 22.6 16.6 33.9 33.5 30.3 24.5 Employer 4.0 2.1 31.5 7.5 14.9 2.8 Own account 26.9 22.3 41.3 36.2 36.1 29.0 worker/self-employed Unpaid family worker 23.9 . 34.1 59.8 33.5 54.3 Paid employee 25.3 20.0 39.6 33.6 34.0 25.8 Owner Cultivator with 31.6 40.0 less than 2 hec. land Owner Cultivator with 2- 20.7 22.7 4 hec. land. 20727 Owner Cultivator with 13.5 12.0 greater than 4 hec. land . . . . Sharecropper/Contract 40.7 49.6 Cultivator _ . .7 . . Annex C Page 5 of 8 12. In rural Sindh, the concentration of poor is the highest among households where the head is an unpaid family worker, sharecropper, or owner-cultivator owning less than 2 hectares of land (poverty headcounts of 60%, 50% and 40% respectively). Poverty incidence among households headed by owner cultivators declines rapidly as land ownership increases; as in urban areas, the lowest incidence of poverty is among households headed by employers who own enterprises. On thing to note is that households headed by paid employees have a higher incidence of poverty in rural areas than in urban areas, mainly because in rural areas, a large proportion of employees in this category are agricultural wage workers. 13. Comparing rural Sindh with the rest of rural Pakistan, it turns out that incidence of poverty is higher among sharecroppers and unpaid family workers (who are most likely to be found in small, family- run farms or non-farm enterprises) and lower among large landowning cultivators and employers owning enterprises in rural Sindh than in the average for rural Pakistan. The relatively large gap in Sindh in poverty incidence between large cultivators on the one hand and small farmers and the landless on the other, along with the more skewed land distribution in Sindh compared to the country as a whole, suggest the important role of unequal ownership of assets in determining rural poverty in Sindh, which happens to be among the highest in the country (second only to NWFP). Table 8: Access to Amenities, Including Sanitation, Drinking Water, Electricity, etc. (1998/99) (% of Population with Access in Each Case) Closed/Piped Toilet Connected to Connected to Connec- Source for Drinking Facility In Any Drainage Elec ted to Gas Water7 Household System8 Electriciy ted to Gas Sindh Poor 69.5 48.1 32.5 48.4 20.4 Non-poor 78.2 75.3 54.9 66.4 43.8 Rural 64.8 43.8 14.2 41.0 4.3 Urban 89.9 98.0 92.6 87.5 79.5 Overall 75.7 67.3 48.3 61.2 36.9 AlM Pakistan Rural 74.1 39.0 30.7 63.3 3.0 Urban 94.2 94.2 89.1 92.4 60.3 Overall 79.8 54.5 47.1 71.5 19.1 14. The poor in Sindh also suffer from lack of connectivity to a number of services, which has direct implications for their human development. As Table 8 portrays, the poor in Sindh have relatively low access to safe drinking water and sanitation facilities: they are less likely to use closed sources of drinking water, have toilets in the household, and be connected to a drainage system. As expected, the poor are also less likely to be connected to electricity and gas facilities. Availability of all these amenities is also characterized by large rural-urban gaps. While availability is limited in rural areas for the whole of Pakistan, rural areas of Sindh mostly fare worse than that of the country as a whole (Table 8). For example, while 31% of the population of rural Pakistan is connected to drainage systems, the same is true for only 14% of the population of rural Sindh. This has the implication, given that rural poverty in Sindh 7 Includes piped water, and outside, closed water sources. These sources of drinking water are potentially safer than the altemative: "outside, open" source. However, access to potentially safer sources does not guarantee safety of the drinking water from these sources. The proportion of population with using piped/outside open sources is thus merely indicative of the proportion of the population with access to safe drinking water. Includes underground, as well as open drain systems. Annex C Page 6 of 8 is higher than the country average, that the poor in rural Sindh suffer from especially severe lack of connectivity to critical facilities, which is likely to have strong impact on their health. Non-Income Dimensions of Poverty: Human Development 15. Poverty is multi-dimensional, manifested not only in low levels of consumption, but also in low levels of human capital, exacerbated by the inability to undertake investments to improve skills. Exploring the human dimensions of poverty would thus be critical in understanding not only the nature and extent of deprivation in Sindh, but also the extent to which such deprivations translate into lack of capability to enhance future economic opportunities. 16. The poor in Sindh Table 9: Educational Attainment of Poor and Non-Poor in Sindh (1998199) are characterized by relatively low levels of Literacy Rate Net Primary Enrollnent Rate human development, as Rural Urban All Sindh Rural Urban All Sindh indicated by . various Poor 24.8 46.5 31.3 24.2 46.7 29.9 education and health indicators. Table 9 shows on-Poor 36.7 70.8 54.6 43.3 73.9 57.4 thatvin urban and rural areas alike, poor households have lower literacy rates among members (31% of all poor are literate, compared to 55% of the non-poor), and lower net primary enrollment rates (30% among the poor, compared to 57% among the non-poor). Among poor and non-poor alike, large rural-urban gaps in literacy and enrollment rates exist, implying very low spread of education among the poor in rural Sindh (literacy rate of 25%, and net primary enrollment rate of 24% among the rural poor). 17. While overall indicators for Sindh are more or less in par with that for the country as a whole, the rural-urban gap tends to be higher in Sindh, mirroring the pattern seen earlier with consumption poverty rates. Table 10 shows this, for indicators ranging from enrollment and literacy rates to incidence of pre- natal medical consultation among pregnant women and contraception prevalence rate. Pre-natal consultation rate, which is an important proxy for matemal health and mortality, and contraception prevalence rate in rural Sindh are 19% and 8% respectively; not only do they compare poorly with urban Sindh, but also fall below the averages for rural Pakistan (22% and 14% respectively). At the same time, urban Sindh fares better along most dimensions of human development than the urban averages for the country. Table 10: Selected Human DelopmentIndicar-s (1998-99) Male Female Male Net Female Net Pre-natal Ever Use Literacy Literacy Primary Primary Consultation Contraception (% of Rate °0/6) Rate Y0/.) Enrollment Enrollment Rate (% of Married Women of Rate (0) Rate (%) Rate (/0) Rate (%) Pregnancies) Age 15-49) Rural: Sindh 52.3 11.2 44.3 24.5 19.0 7.9 Pakistan 51.0 16.8 53.6 36.4 22.0 14.3 Urban: Sindh 77.5 54.9 72.2 62.1 70.4 36.4 Pakistan 73.2 52.3 68.5 64.6 60.1 34.1 OVERALL SinSl 64.2 31.6 54.6 39.4 Pakistan 58.0 27.2 57.2 43.6 31 19.5 Annex C Page 7 of 8 18. Importantly, human development in Sindh is characterized by large gender gaps. Examples of such gaps can be found in Table 10, by looking at the literacy and enrollment rates by gender in both rural and urban areas. Gender gaps in both primary enrollment and literacy are wider in rural areas than in urban areas of Sindh. Moreover, the gender gaps in rural Sindh are found to be more severe than that for entire rural Pakistan. For instance, while the overall gender gap of 33 percentage point in literacy rates in Sindh is close to that for the whole country (31 percentage points), female and male literacy rates for rural Sindh are 11% and 52% respectively, compared to corresponding rates of 17% and 51% for entire rural Pakistan. In contrast, for urban Sindh, female and male literacy rates are 55% and 78% respectively - a somewhat smaller gap than for urban Pakistan. Further analysis with the data has revealed that gender gaps are equally prevalent for both poor and non-poor households. However, since educational attainment among the poor is generally low in the first place, large gender gaps for the poor necessarily imply that literacy and enrollment rates among poor women are particularly low, with adverse implications for future development of human capital (women's education is known to be especially critical for child health and education). 19. Looking across the spectrum of indicators, a consistent pattern that emerges is one of rural Sindh comparing poorly not only with the urban areas of Sindh, but also with the rest of rural Pakistan. This is true for access to amenities like potable water, sanitation and electric grid, indicators of health and education, as well as gender gaps in educational achievement. At the same time, the same indicators for urban Sindh tend to be higher than those for the entire country. The story in Sindh is thus one of a severe rural-urban gap along all dimensions of human development, to an even greater degree than for the rest of the country - a story that is entirely consistent with that of relatively high incidence of consumption poverty in rural Sindh. Access to Schools and Health Facilities in Rural Sindh 20. Among the number of factors that may be responsible for Table 11: Access to Schools In Rural Areas (% of Rural Population) (1998-99)9 low indicators of human Punjab Sindh NWFP Balochlstan Pakistan development in rural Sindh, access - _ to facilities is potentially Nearest Girls' Primary School important. As Tables 11 and 12 show, rural Sindh suffers from In PSU or<=l kn distancel0 90.2 45.6 91.1 41.3 78.7 poor access to education and health Distance >1 & <6 km 7.2 22.0 5.7 6.1 9.7 facilities alike. For more than 74% Distance >=6 km 2.6 32.4 3.2 52.7 11.6 of the population of rural Sindh, the distance to the nearest primary Nearest Boys' Primary School school for girls is greater than 1 In PSU or <=1 km distance 95.0 94.8 99.6 90.5 95.4 km, compared to 21% of the Distance>1 & <6km 4.0 4.8 0.4 3.5 3.4 population of entire rural Pakistan. Distance >=6 km 1.0 0.4 0.0 5.9 1.1 In terms of access to girls' primary schools, rural Sindh ranks behind the rural region of every province, except for Balochistan. Given that Sindh ranks on par with the rest of Pakistan on access to primary schools for boys, (with around 95% of the rural population living within I km. distance from the nearest school) the gender gap in rural access to schools is wider in Sindh than in most parts of Pakistan, which may help explain why gender gaps in enrollments in rural Sindh are wider than for rural Pakistan as a whole. 9 Access to schools here refers to the presence of any school (public/private/NGO/religious). The proportion of public schools, however, in rural areas is high in the total number, so that the access figures in Table 11 do not change much if only public schools are included. '0 PSU refers to Primary Sampling Unit of the survey, which in rural areas is the village. Annex C Page 8 of 8 21. On access to rural health facilities, the same story prevails (Table 12). By any definition of health facility, rural Sindh ranks behind rural areas of every province except Balochistan. For example, around 63% of the rural population of Sindh live in villages that have at least one kind of medical facility or health worker, compared to 69% of the population of entire rural Pakistan. Access to family planning services also remains low in Sindh, which partly explains the relatively low rate of use of contraception (referred to previously). 22. Finally, it is important to note that the measures described above can Table 12: Access to Health Facilities In Rural Areas by Province only partially represent the access (1 899) % of Rural Population with problems that may exist. Firstly, the Health Facilities in PSU/village % of Rural Popl. with mere presence of a facility is not Hospital, Any Health Famnily Planning Facility enough to guarantee quality, or even Dispensary or Facility or within 3 km. of PSU that the facility is functional. Quality Clinic' Worker'2 problems in education and health Punjab 38.2 70.8 79.6 facilities, according to a number of studies, are rampant in Pakistan, Sindh 36.9 62.5 65.3 including Sindh. Secondly, these NWFP 54.3 75.9 72.1 measures do not account for the exclusion of certain social groups, istan 54.9 60.4 60.9 which are also likely to have high Rural concentration of poverty, from services Pakistan 42.0 69.1 73.5 and facilities. Both these problems can significantly reduce the effectiveness of services for the poor and disadvantaged groups, thereby affecting their potential to develop skills and enhance future economic opportunities. "All public and private hospital, dispensaries and clinics (including BHUs, RHCs, Mother & Child Clinics, and Family Welfare Clinics). I2Includes health workers, private practitioners and nurses Annex D Page I of 7 ANNEX D: DEVOLUTION AND INTER-GOVERNMENTAL FISCAL FRAMEWORK FOR PAKISTAN AND SINDH Inter-governmental Arrangements in Pakistan, 2002: Description and Policy Issues 1. This note presents inter-governmental fiscal arrangements in Pakistan as of April Ist 2002 with particular emphasis on the situation of Sindh. We present the inter-governmental arrangements, divided in three parts: institutional framework, responsibilities/expenditures, and revenues. Institutional Framework 2. Pakistan is a two-tier federal state with 4 provinces (by order of population of provinces, Punjab Sindh North -West Frontier Province Balochistan), various special areas (tribal-FATA, northern) and a federal district (Islamabad). Local governments are created provincially through local government ordinances. A new set of local governments was created under the 2001 LGO, which replaces the 1979 LGO. The changes included: (i) the abolition of three levels of provincial administrative units, divisions, districts and tehsils and of the existing municipal bodies (municipalities and towns); (ii) the creation of three country-wide levels of local governments: districts (called city districts in the four provincial capitals) tehsils/talukas (called towns in the four city districts) and union councils. There are also cantonment boards that administer the civilian part of military cantonments. 3. The three new types of local governments bodies are not in a legal hierarchy to each other but are linked through the political process as follows: * Each Union council is composed of 21 directly elected members elected in a multi-member constituency on a non-party basis * The Nazim and Naib Nazim (mayor and deputy mayor) are elected on a joint ticket. * The Nazim of the Union Council them becomes ex-officio a member of the District council * the Naib Nazim of the Union council becomes ex-officio a member of the Tehsil council The remaining 19 seats on the Union Council are allocated as follows: * 12 muslim seats, 4 of which are reserved for women * 6 seats for peasants and workers of which 2 are reserved for women * 1 seat for minority communities where appropriate 4. The Union Councils councillors are the Electoral College for the District/Tehsil councillors at large and the District (Tehsil) Nazim and Naib Nazim, none of which can be Union Council councillors. District (Tehsil'Town) councils are composed of the Union Council Nazims (Naib Nazims). At large seats have been reserved within District and Tehsils Councils for women such that women represent 33% of the total number of Union Councils in the District, and 33% of the total number of Unions in the Tehsil. In addition, 5% of District and Tehsil seats have been reserved for peasants (countryside)/workers (cities), and 5% for minorities. Thus, overall, District councils and Tehsil councils are made up of about 2/3 directly elected members and 1/3 indirectly elected, including the two most powerful ones, the Nazim (Mayor) and the Naib Nazim (Deputy Mayor). Annex D Page 2 of 7 Elections to Local bodies in Sindh Elections to Union councils took place on four'dates in the followmng districts( number of councils in bracketsj- 1. -December 3! ,20000 lacobadad(49),Larkana(80) and Stiikarpur(471, 2.; March 21' 20001 Ghotki(35),Khairpur(76),Nausbero.Feroze(51),Na%abshah(51 Iand Sukkur(46); '3.. May 3lI: Badmi49).' Dadu(80), Hyderabad(102) Mipurkhas(64), Sanghar(59),Tharpakar(44) and Thalta(55); 4. July2nd: Karachi I 78).ln this case; elections wsere held- for live distncts ( Karachi,-central, east, 'southern west- and Ualir) . hich were then merged together. - ; : . dThev were folloved by election's of couneilors aLtlarge and Nazjii'sfNaib Nazims at the District and tehiil lezels in August.September 2001: The eleciions',were affected by a call foria boycot by' the MQM party. Nor;withsanding this, the 'elections: : ', . * were held in a fair and impartial manner With' little violence ' iiivolved, ' , * were contested by a large number of'newconiers to politics at the;Union Council level, including, women and peasants- wyorkers.'While the signicitc"L'polirical'office of:districE'Nazimi and,Naib Nazim.was invariably held by someone with ', ',..pre'vious political experience, many oftbose,elected as Union councillors were ofien new enitrants lo politics'- many coming from comun1ity and NGO,backgrbunds. ' ... 5. These local politicians are seconded by civil servants who are currently provincial civil servants posted to districts and paid by the province out of a notional district budget wage item. Staff appointed to District governments is drawn from both Federal and provincial cadres. All staff in the civil service expects to move around both geographically and functionally during their careers, although it is fair to say that the greatest movement is in the high grades. The Senior Officer in the District is the District Coordinating Officer (DCO) who replaces the former Deputy Commissioner (DC), and, in a key change, now reports to an elected politician, the Nazim. The majority of DCOs are drawn from the DMG (District Management Group) of the Federal Civil Service. DCOs are likely to move around reasonably frequently. Nazims may request the transfer of a DCO. This has already happened in a small number of districts where DCOs and Nazims found that they could not form a constructive working relationship. Below the DCO is an administrative structure of 10 to 12 Executive District Officers (EDOs), who are responsible for various sectors such as education, health, or literacy. For the EDOs, the key change is that they now report to the DCO and not to the line ministries in the former divisional/provincial hierarchy. Both DCOs and EDOs were posted to Districts by the provincial government (devolution transition team) and thus not selected by their political masters. The effect of this system is to create Districts in which the senior management posts of DCOs and EDOs are held by officers whose employer is not the District where they serve. Responsibilities and Expenditures 6. Responsibilities of the federal govemment and the provinces are set out in the 1973 Constitution of Pakistan under Article 70(4), Fourth Schedule. One finds a list of federal powers (in two parts) and a list of joint powers for the federal and provincial orders of governments. Such a list is called a concurrent list in British type constitutions; in this case the federal govermnent has paramouncy, which means that in case of conflict federal legislation dominates. Provinces have residual powers. There is no list of exclusive provincial powers but some mention of them in the two lists (as exceptions) thus resulting in little powers for the provinces. Table I summarizes constitutional arrangements. There are no special powers (no asymmetry) or spending responsibilities of Sindh as per the constitution of Pakistan. That said, one must note that Sindh has the largest city of Pakistan in its territory and the largest port of the country. This gives it de facto, a different role in economic activity than other provinces. Annex D Page 3 of 7 Table 1. Federal and Provincial Powers ILe;gislative;Resppisibility;l Service Defense External Affairs Posts and Telegraphs Telephones Radio and TV Currency Foreign Exchange Foreign Aid Institutes for Research Nuclear Energy Federal Government \a Ports and Aerodromes Shipping Air Service ; Stock Exchanges National Highways , : Geological Surveys Meteorological Surveys ' , Censuses Railways Mineral Oil & Natural Gas ' Industries ik';k! t.ls t ; < Population Planning Curriculum Development Syllabus Planning Federal & Provincial, Centers of Excellence Governments \b Tourism Social Welfare , Vocational/Technical Training Employment Exchanges Historical Sites and Monuments , Law and Order Justice Tertiary Health Care and Hospitals Highways Provincial'Governments Urban Transport : ^, | , .Secondary and Higher Education* Agricultural Extension Fertilizer and Seeds Distribution Irrigation** Land Reclamation*+ aI According to Federal Legislative List; b According to Concurrent Legislative List; The federal government through the University Grants Commission (UGC) funds University Education, but administrative control is provincial governments. Development of irrigation is a federal subject. Annex D Page 4 of 7 7. The powers of districts, tehsils/talukas and union councils are described in Table 2. It shows that districts are mainly responsible for human capital type services, education and health, while tehsils and, to a lesser extent union councils, are responsible for the provision of municipal type services Table 2. Responsibilities of Districts, Tebsils and Union CouncilsPaklstan,2002 Responsibility District Tehsil Union Council Education Primary and secondary X X education, Literacy Health Dispensaries and local X X hospitals Roads District roads Local roads and street Local streets Water X Water supply systems Wells and Ponds Sewers and Sanitation X Yes X Fire services X Yes X Parks playgrounds X Yes Yes Anirnals X Slaughterhouses, Fairs Cattle pounds and grazing areas Cultural and sport X Fairs, cultural events Libraries services Street services X Street lighting ,signals Street lighting Varia X Register births and deaths Source: Analysis of Local Government Ordinance 2001 .An X indicates no responsibilities 8. The following points are of interest with respect to expenditures of the province and districts of Sindh: * In 2000-2001, social spending accounted for 27% of provincial spending (of which 20% was education and 5% health) followed by interest payments at 18%, and grants and others at 14%. Development spending came in at 9%; * According to ADB data, devolved expenditures to districts account 35% of provincial expenditures; * According to ADB data, the wage bill of districts account for 85% of total spending. Such a number is not surprising since the main spending item of districts is education with 59% of the current budget, followed by health at 13%. Revenues 9. The financing of the various levels of governments in Pakistan is somewhat complex due to the large us made of Inter--governmental transfers. Figure I summarizes the main elements as of 2002: Annex D Page 5 of 7 Figure 1 Inter-governmental Financial Relations in Pakistan, 2002: a Schematic Exposition Federal Revenues Divisible pool revenues Unshared Straight 37.5% 62.5% Revenues transfers of taxes to Provinces Federal provinces Grants to pDrovinces FZT Provincial * Provincial revenues revenues Districts transfers Provincial Current: spending * Salaries Current * non salaries Develop l~ OZT -ment Union ~~~District Council Spending ehsils own Development spning revenues budget Union councils CCB Development budgets project funding Annex D Page 6 of 7 Provincial Revenues 10. The main source of provincial revenues is a transfer based on a share of federal tax collections. The decision on the list of taxes to be shared (the "divisible pool'), the ratio of the provincial/federal share of the pool, and the formula for its distribution to the provinces is to be fixed at least once every five years (Constitutional provision) by the National Finance Commission (NFC). The NFC members are the federal Finance Minister, the finance ministers of each of the four provinces, plus other members as the President chooses. The NFC last rendered an Award in 1996, allocating to the provinces 37.5% of the divisible pool with the distribution to the provinces by population (based on the 1981 Census of Population). 11. This divisible pool, which is about Rs. 430 billion in 2001-2002, is made up of the income tax (Rs. 150 billion), sales tax (Rs. 180 billion), and revenues from customs (Rs.70 billion), federal excises, wealth, and capital value taxes (Rs. 30 billion). In addition, various other tax transfers and grants are also made by the federal government to the provinces. This includes some federally ceded taxes, referred to as straight transfers, that are returned to the provinces on a derivation basis net of a 2% federal collection charge (e.g., royalties on petroleum and on natural gas, surcharges and excise on natural gas. The National Finance Award is now under review. Various possibilities are under study both with respect to the size of the provincial share of the divisible pool (some provinces are lobbying for an increase from 37.5% to 40 %) and the distribution formula. At present, only population and backwardness criteria (for NWFP and Balochistan) is used. District/TebsilWUnion Councils Revenues 12. Districts are entirely funded by the transfers of resources by the provincial government in 2001- 2002. Until devolution, districts were budgetary units of provincial governments and as result, did not have autonomous revenues. Now as then, the Districts rely primarily on provincial funds, then as budget line items, now as accounting/real transfers and thus implicitly on federal-provincial transfers. Indeed, district budgets for 2001-2002 were prepared by the provincial finance departments and then approved by the Zila councils in the fall of 2001. Tehsils have inherited from their various predecessor urban bodies both the Urban hmovable property tax (UPT) and the Octroi/ZilaTax (OZT) replacement grant revenues. Before discussing each in tum, note that Union Councils have little own revenues; and are dependent on development funds granted by the district councils. OZT 13. Until 1999, Urban bodies such as municipal corporation or town committees collected Octroi (import taxes levied by municipal entities at their borders on goods imported for resale) while rural ones collected Zila Export taxes on agricultural goods exported out of rural (then called " Zila") councils. Together, the octroi (collected largely in urban areas) and zila (rural area) taxes accounted for 50% to 60% of autonomous local revenues. While productive of revenues, both taxes (which when combined are referred to as the OZT) were notorious for their inefficiency and as a source of corruption at the point of collection. Accordingly, they were abolished in May 1999 by the Inter- Provincial Coordination Committee (IPCC) as of fiscal 1999-2000 with the agreement that the federal government would come up with a replacement grant to be paid to the urban bodies, now the Tehsils. 14. As of 1999-2000, the federal government implemented a 2.5 % point increase (from 12.5% to a 15%) in the General Sales Tax (GST) in all of Pakistan, thus including Sindh, that was distributed directly to local bodies as a revenue replacement grant (OZTRRG). This amounted to Rs. 19 billion in OZT revenues (provincial un-audited figures). Then, for 2000-2001 and subsequent years, arguing that the 2.5 percent of the GST was generating an amount well in excess of the initial Rs. 19 billion (Rs. 30 billions Annex D Page 7 of 7 in 2000-200 1), the federal government broke the direct link between the OZT and 2.5% points of GST by placing the 2.5% of the GST proceeds in the divisible pool to be then divided between provinces according to the NFC formula. The federal government argues that since 37.5% of the GST surcharge is in the divisible pool, it now becomes responsible for direct grant equal to only of 62.5% of OZT revenues; and the provinces will get the other 37.5% through the NFC Award. Thus the replacement grant to the provinces has fallen to 62.5% of the Rs. 19 billion OZT amount (capped in nominal terms) to the provinces-i.e. Rs. 11.9 billion (19 x .625). The distribution result is that Sindh which collected 45-50% of octroi and zila taxes but which receives only 24 % of the divisible pool, has seen its replacement revenues fall below what it would have collected under OZT 15. According to both discussions with officials and press reports, the Sindh government's argues for treating actual receipts of octroi and zila tax in Karachi and all other local councils in 1998-99 as the benchmark for OZTRRG; and that it should be indexed to the historical trend of annual growth of OZT receipts (15 per cent). The Sindh government has calculated notional OZT at Rs. 7.83 billion in 1999- 2000, Rs. 9.00 billion 2000-01, Rs. 10.35 billion in 2001-02, Rs. 11.91 billion in 2002-03 and Rs. 13.70 billion in 2003-04. The Sindh government has raised a fundamental issue, arguing that the 2.5 per cent of 15 per cent GST is solely the provincial component of OZT and should not be treated as a part of the divisible pool. This proposal is likely to be accepted by the GoP. UIPT 16. Tehsils also have access to (a pre-devolution) Urban Immovable Property tax (UIPT) and various fees and user charges. The UIPT, which contributes only 3% to 5% of total tehsil revenues, is administered and collected by the provinces, with 80.75% of collections remitted to tehsils and the remainder retained by the provinces. The UIPT is levied in rating areas and the tax is levied at a minimum rate, but with tehsil councils then having the authority to add an additional surcharge (piggyback) or levy. To date, no tehsil is yet to levy an additional rate, with the newly elected politicians arguing that the votes will not see a service-for-tax linkage. Devolution is supposed to lead to that tax being generalized to the entire tehsil and not only to some urban areas (rating areas) and to be collected by districts for tehsils, although some suggest that tehsils should collect it themselves. Annex E Page I of 9 ANNEX E: SINDH MEDIUM TERM FiSCAL RESTRUCTURING PLAN FY 2002 - FY 2006 A. Background 1. The province of Sindh has been facing an acute fiscal crisis in recent years due to a combination of past fiscal mis-management, changes made in the federal revenue transfers mechanism in the 1997 National Finance Commission (NFC) Award, the large and the continued shortfalls in federal Government transfers. The fiscal crisis has crowded out resources for delivery of public services and maintenance of provincial infrastructure. 2. Sindh's fiscal problems were particularly adversely affected by the 1997 NFC Award. Sindh, which generates the most revenue for the federal government, on the other hand, was left to the instability of energy-related' "straight transfers" to meet its financial needs. The recurring shortfalls in federal tax collections and the resultant reduction in Federal flows from the "divisible pool" (see Annex D) added to the province's fiscal problems. As a result, Sindh had been facing difficulties in meeting its expenditure obligations and the development and non-salary O&M expenditures have been falling well below the assessed needs, slowing down economic activity in the province and creating a huge backlog of unmet repairs and maintenance and unpaid utility bills and SBP overdrafts. Operation and maintenance and development expenditures have dropped drastically, while that of interest payments on the increasing provincial debt and wages and pensions have been increasing rapidly. 3. A concerted effort has been launched by the current GoS to strengthen province's fiscal position and improve sustainability of its finances. These efforts were formulated in a comprehensive reform program to increase revenues (described below) and prioritize expenditures. The provincial government's resolve to implement this reform program is reflected in the FY 01 and FY 02 budgets which contained a number of tax measures, discharged large provincial deferred liabilities (mainly provincial utility bills, State Bank overdrafts, subsidy payments) and prioritized expenditures with a special emphasis on increasing non-salary budgets of the education, health and roads sectors. B. The Government's Medium-Term Fiscal Reform Program 4. The present government embarked on a fiscal restructuring program since FY 2000/01 to restructure provincial finances and put it on a more sustainable basis. The program is designed to increase fiscal space through revenue measures, retiring liabilities and debt, and increase expenditures in the social sectors, operations and maintenance, infrastructure rehabilitation and development (Tables 1 through 5 present the main targets of this plan). The GoS's new fiscal restructuring plan is extending this program to cover the period from FY2002/03 to FY 2005/06. This note, based on full agreement with the GoS, presents the main targets of this restructuring plan, provincial tax measures that have been and will be taken and the restructuring of provincial expenditures and finances to increase allocations for human development, operations and maintenance. Under certain, generally conservative, assumptions, most importantly on Federal revenue transfers, this note quantifies the financial impact of fiscal restructuring plan, assesses their overall impact, and determines the need for additional financing that will help to implement these measures. These include, Gas Development surcharge, excise duty on natural gas, and royalty of gas and oil. Annex E Page 2 of 9 Table 1: Summary Fiscal Accounts of the Government of Sindh .__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (R s M illion) 1999/pp 2000/01 2001/02 Pro ct ons Actual Actual P. Estimate 2002/03 2003/04 2004/05 2005/06 Total Revenues and Grants 55,416 61,576 72,859 81,870 89,831 100,115 111,958 Federal Transfers 35,921 40,479 47,599 50,519 55,810 62,807 70,954 Provincial Revenues 12,794 15,621 18,043 23,800 26,015 28,802 31,947 Tax Revenues 5,335 7,147 8,163 9,512 10,913 12,543 14,376 Non-Tax Revenues 7,459 8,474 9,880 14,288 15,103 16,260 17,571 o/w Abiana 576 633 631 788 906 1,042 1,251 Federal grants 6,700 5,476 7,217 7,551 8,006 8,506 9,057 of which KPP grants 949 3,080 3,000 3,000 3,000 3,000 OZT grants 6,700 4,528 4,137 4,551 5,006 5,506 6,057 Total Expenditures 55,000 59,559 73,892 85,703 95,462 105,530 112,614 Current Expenditures 51,055 54,153 64,830 70,767 74,046 83,725 92,545 Wages2' 22,006 23,327 30,568 36,210 38,133 39,953 41,855 Pension 3,452 3,970 4,600 5,250 5,898 6,644 7,565 Operations and Maintenance 4,669 5,676 6,896 8,737 8,833 13,160 17,704 Interest Payments 11,595 10,440 11,409 12,015 12,377 12,490 12,611 Subsidies 399 3,729 4,692 999 692 496 353 Grants to LG and Investments 8,934 7,010 6,665 7,556 8,113 10,982 12,457 Development Expenditures & Inve 3,945 5,407 9,062 14,937 18,416 18,806 20,069 Annual Development Program 2,178 2,685 3,800 4,560 5,472 6,566 8,208 Rehabilitation 1,500 1,800 2,100 2,400 Foreign Project Assistance 1,178 1,519 1,500 3,577 5,844 6,140 6,461 Investment into Pension/G.P. Fund 1,000 1,000 1,000 0 Federal Projecst Incl. DERA & ESR 589 365 600 1,300 1,300 Civil Works from KPP Grants 0 838 3,162 3,000 3,000 3,000 3,000 Payment for Severance Package 3,000 3,000 Fiscal Balance 416 2,016 -1,033 -3,833 -5,630 -5,415 -656 Public Savings 4,361 7,423 8,029 11,104 15,786 16,391 19,413 Primary Fiscal Balance 12,010 12,457 10,375 8,182 6,747 7,075 11,955 Total Expenditures incl. Severance 55,000 59,559 73,892 85,703 98,462 108,530 112,614 Net Financing -416 -2,016 -1,033 3,833 5,630 5,415 656 Memorandum Item Provident Fund (net) 2103 2172 2389 Receipts 3742 3348 3683 3867 4060 4263 4476 Payments 1639 1176 1294 1423 1565 1722 1894 Changes in stock of payment arrears -5519 -6608 Total Cash Balances -667 5,441 6,401 Projected IDA Adjustment Financing _ 6,250 6,438 6,631 " Starting FY03, these grants may be discontinued by instituting other revenue transfers. 2a Wages for FY 04 through FY 06 include adjustment for savings from separation 3/ Provident Fund Net Receipts are reinvested and not used for budget financing. Source: Department of Finance, GoS and Bank Staff Estimates Annex E Page 3 of 9 5. Discussions between the Bank and the GoS have been finalized on the MTFRP presented in the next page. The plan has been prepared with adjustors to take possible changes in revenue position due to future National Finance Commission Awards and the Provincial Finance Commission (PFC) Awards. However, the plan as presented below is conservative in that it assumes that the continuation of the current NFC formula, whereas the expectation is the new NFC awards will allocate higher revenues shares to the provinces through either greater shares of the provinces in divisible pool or through ceding additional taxes. Moreover, the proposedplan isfor the consolidatedprovincialfinances and is presented in broad economic classifications and readily adaptable to awards by the PFC. When the PFC award is known, the task will be to separate out provincial and non-provincial shares of the budget and allocate the non-salary operations and maintenance and development expenditures identified for the provincial program. For the districts, depending on the PFC formula, the transfer will take place through a combination of formula based untied grants and tied grants to allocate development and O&M expenditures (salary expenditures being tied). 6. The focus of this plan is to use increases in provincial tax revenues (rising by more than 15% p.a.), significantly higher non-tax revenues (from new oil and gas revenues that are collected by the Federal Government and returned to the province), higher foreign aid (based on specific projections of assistance from ADB and other donors, but with a 25% discount), and the financing by the proposed structural adjustment credit from the World Bank to finance poverty-reducing expenditures in the social sectors especially in critical non-salary items, infrastructure rehabilitation, capitalize pension/General Provident funds, repay expensive Federal debt, and severance packages for civil service rationalization. 7. A key task of the fiscal restructuring plan will be to strengthen and integrate tax and budget administration. Specifically, the GoS will make arrangements at the beginning of the FY 03 fiscal year to have the two revenue departments (the Board of Revenue responsible for land taxes/agriculture income tax, stamp duties and irrigation water charges collection and the Excise and Taxation department), and the Finance department report to a single Minister as in the Federal Government of Pakistan. The technical capacity of the revenue department will be strengthened through computerizing of land and property records, using partial satellite imaging and providing greater technical training and incentives for staff. The tasks of collection and assessment of the major taxes will be separated to avoid conflict of interest. Finally, in FY 04, the two Revenue department will be integrated into a relatively autonomous Provincial Board of Revenue, reporting to the Finance Minister, such that it will increase accountability and enable providing greater performance related incentives for the staff. 8. The salient features of the MTFRP is discussed below and presented in Tables 2 and 3 and the discussions below. * The first year of the MTFRP will be reflected in the GoS's budget for FY 2002/03 with the following targets: (a) provincial tax revenues collections; (ii) AIT/land taxes, Abiana, and property taxes; (iii) aggregate expenditures ceilings; (iv) wage and establishment costs ceilings; (v) total current and non- salary expenditures in primary education, health, and drinking water; and (vi) operation and maintenance expenditures. Targets for items (v) and (vi) will be adjusted based on resource availability. If NFC and straight transfers based Federal transfers increase, then these expenditures will increase in the same proportion. If Federal transfer or provincial revenues fall then these items will be protected in their Rupee terms. The poverty reducing expenditure targets on health, education, and drinking water will be transferred, as needed, to the district and Tehsil Governments as tied grants (as it is already the case this year with RWSS schemes). In addition to these items, the GoS will also give high priority in allocating additional resources for the maintenance and rehabilitation of rural infrastructure. The implementation of overall revenue and expenditure targets, as well as high priority expenditure targets will be reported in the quarterly fiscal monitoring report. Annex E Page 4 of 9 Table 2: Sindh - Public Finances, 1999/00-2005/06 (Percent ofprovincial GDP) 1999/00 2000/01 2001/02 Projectons Actual Actual P. EsHmate I 2002/03 2003104 2004/05 2005/06 Total Revenues and Grants 6.2 6.2 6.8 7.0 7.0 7.2 7.4 FederalTaxTransfers 4.0 4.1 4.4 4.3 4.4 4.5 4.7 Provincial Revenues 1.4 1.6 1.7 2.0 2.0 2.1 2.1 Federal Grants 0.7 0.6 0.7 0.6 0.6 0.6 0.6 Total Expenditures 6.1 6.0 6.9 7.3 7.5 7.6 7.4 Development Expenditures 0.4 0.5 0.8 1.4 1.5 1.5 1.5 Fiscal Balance with Severance Payments 0.0 0.2 -0.1 -0.3 -0.4 -0.4 0.0 Primary Fiscal Balance 1.3 1.3 1.0 0.7 0.5 0.5 0.8 Public Savings 0.5 0.8 0.7 1.0 1.3 1.3 1.4 Table 3: Composition of Expenditures, 1999/00-2005/06 (Percent of Provincial Expenditures) 1999/00 2000/01 2001/02 Projectons Actual Actual P. Estimate | 2002/03 2003/04 2004/05 2005/06 Share of total expenditures Total Expenditures 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Current Expenditures 92.8 90.9 87.7 81.4 76.3 77.5 79.9 Wages and Pension 46.3 45.8 49.1 48.4 46.1 44.2 43.9 Operations and Maintenance 8.5 9.5 9.3 10.3 9.5 12.7 15.9 InterestPayments 21.1 17.5 15.4 14.0 13.0 11.8 11.2 Subsidies 0.7 5.3 2.0 1.1 0.7 0.5 0.3 Grants to L.G. and Investments 16.2 12.7 11.8 7.5 7.0 8.4 8.6 Provision for Severence Package 3.1 2.8 Development Expenditures 7.2 9.1 12.3. 18.6 20.5 19.6 20.1 Share of curfent expenditures Health and Education Currrent Expenditure 28.2 28.3 33.5 37.1 38.7 38.3 39.7 Share of O&M in Health and Education 8.9 10.7 11.8 17.5 19.4 22.2 26.9 Source: Department of Finance and Bank Staff Estimates * The fiscal program aims to raise public savings for the province through (i) revenue measures; (ii) increasing cost recovery; (iii) reducing undirected subsidies; (iv) through investment of all G.P. (pension) funds current surpluses; (v) through an accelerated repayment of expensive debt owed to the Federal Govermment, and (v) reducing the wage bill through a separation package. Revenues collected by the provinces will increase by 15% per annum and their share in provincial GDP (GPDP) goes up from 1.7% to 2.1%. The program contains a number of tax policy and administrative measures especially relating to the collection of agriculture income tax (using satellite imaging, having independent assessment done by the SIDA/irrigation departments), and water charge collections (abiana, through adjusting water rates to account for scarcity and increasing coverage through the efforts of SIDA and the Area Water Boards). Much of the increase comes from non-tax revenue sources due to higher royalties from production in Sindh's three new gas fields. Specific measures and detailed assumptions concerning revenues have been partly discussed above and in more detail below. * The composition of expenditures improves: (i) the wage bill is contained after increasing in FY02 and FY03, due to a pay reforrm introduced by the Federal Governmene; (ii) the share of development increases from 12% to 18%; (iii) the share of operations and maintenance expenditure goes up from 9% to 16% by FY06; (iv) share of expenditures on subsidies falls from about 6.3% in FYO1 to less 2 This had the effect of raising total remuneration by around 50%, with the ratio of total remuneration BPS22:BPSI remaining at around 9.5:1 and the proportion of allowances in total remuneration remaining at around 27%. Annex E Page 5 of 9 than 0.3% of all expenditures in FY06; (vi) the plan provides for severance packages for close to 25,000 civil servants.3 * Debt and liabilities are reduced: (i) arrears and overdrafts of Rs. 21 Billion around 2.1% of Gross Provincial Domestic Product (GPDP) is being retired by FY02; (ii) retirement of expensive CDL loans by Rs. 6.8 billion (0.7% of GPDP); and (iii) pension funds/G.P. Funds are capitalized by Rs. 13.3 billion 1.3% of current GPDP - both through capitalization and through transferring all pension funds current surpluses (that currently finance provincial expenditures) to the General Provident Fund. The capitalization, if directedrto the G.P. Fund only, will go a long way to meet the Rs. 16 billion liabilities (previous employee contributions) in the Provident fund. * The proposed fiscal program generates transitory fiscal deficits (of around - 0.3% to -0.4% of GPDP) over the medium term (FY 03 to FY 05). As agreed with GoP and the LMF, these deficits, to be financed by the proposed SSAC will be part of the Pakistan's consolidated fiscal targets and deficit financing agreed to under the PRGF program for FY 03 and FY 04. Public savings will increase from 0.7% of GPDP in FY00 to 1.3% of GPDP. The MTFRP is expected to have a financing gap of around $100 million p.a. from FY03 to FY05 that is expected to be filled by annual disbursements of the future SSAC4, if implementation of agreed benchmarks are satisfactory. * While the additional fiscal resources will finance permanent increases in poverty reduction expenditure, some of the transitory increase in deficits will finance once-off expenditures with long tern returns by: (i) capitalizing G.P./pension funds; (ii) accelerated repayment of debt (iii) financing the large backlog of rehabilitation (not recurrent maintenance) of roads and irrigation infrastructure in poor conditions; and (iv) funding severance payments for civil servants. At the end of the program period these expenditures will have created significant fiscal space for the Government and their curtailment will not affect normal current expenditures. C Revenues and Financing Federal tax revenue transfer projections 9. Under the fiscal framework agreed under PRGF program, Federal CBR taxes are projected to grow at 10.5% p.a. during FY02-FY06, with direct taxes projected to increase by 9.4% p.a., central excise duties by 11% p.a., and sales taxes by 17% p.a: Revenue from custom duties is expected to remain more or less unchanged. Based on these figures and the assumption that the new NFC Award would not alter the revenue sharing formula between the federal and provincial government on the aggregate, federal divisible pool tax transfers to Sindh are projected to increase by 11.2% p.a. during FYO2-FY06.s Provincial revenue measures 10. Revenue measures will be a key part of the Medium-Term Fiscal Restructuring Plan that will be implemented from FY 03. In general, tax measures will be taken covering all the major taxes including 3 The estimates are based on severance pay of 5 years salary for an assumed 25,000 employees at an average total yearly remuneration of Rs. 50,000 . Detailed severance costs will be calculated later. 4 The programmnatic adjustment credit for this period will cover this financing gap. In the event, that such financing is not available, the accelerated debt repayment, pension fund capitalization, and funding for severance payments can be lowered to eliminate this gap. 5 It is assumed that Sindh's share in divisible pool and the formula for transfer of straight transfers remain the same. In practice, Sindh's share could increase. Annex E Page 6 of 9 property, MVT, registration, professional taxes, ArT, stamp duties and abiana collections. The revenue targets under the MTFRP are presented in Table 4, next page. 11. The Agriculture Income Taxes (AMI)/land revenues and the abiana collection are two major sources of untapped revenue potential in Sindh. In the case of the Agriculture Income Tax and Land tax, the Government of Sindh has adopted the recommendations of the a Task Force to implement the following measures over FY 03: (i) removing the land threshold for agricultural income taxes and instead making it income based (i.e. applicable on all incomes over Rs. 80,000); (ii) computerization of revenue records, collection systems and the crop assessment system starting from the four major districts (in FY 03) to cover all districts by FY 04; (iii) timely issuance of bills of assessment by the Tapedars to the Khatedars; (iv) using partial satellite imaging to make independent assessment of agricultural income tax/land tax potential; and (v) using independent assessments of by the Irrigation department to supplement this assessment. These recommendations are expected to go a long way in checking corruption, in making the system of abiana and AIT assessment more transparent and in mobilizing additional resources. It will also represent a major shift from the traditional, outmoded revenue assessment and collection system in the rural sector towards the institution of one that is modem and scientifically based. 12. In the case of Abiana, or irrigation rate collections, the GoS is gradually extending the authority of the Sindh Irrigation Development Authority (SIDA) and area water boards and farmer organizations under it to increase cost recovery, which is currently only a third of operations and maintenance costs. Farmers organizations are encouraged to set water rates, make assessments and retain cost recovery proceeds. The GoS aims to increase of water charge collections by 20% p.a. through a combination of improved collection and expansionr of base and through rate increases as needed. The improvement in collections and coverage is expected to occur though the efforts of the newly set up Sindh Irrigation Development Authority and the farmer based Area Water Boards and Farmer Organizations who have been given the incentive of retaining a share of the proceeds for the maintenance of their infrastructure. The GoS will review progress in mid FY 02 and adjust water charges as needed to attain this target. 13. The GoS recognizes that although path-breaking work has been carried out in the area of property tax resulting in a large increase in forecasted property tax revenues in FY 02 considerable room exists for improvement. Some of the proposals under discussion are to give incentives for compliance while imposing penalties for delays in payment, a review of the exemptions and equity of the newly installed tax system in not fully capturing the element of "pugree" (goodwill) of commercial properties etc. Annex E Page 7 of 9 Table 4: Sindh - Revenue Receipts, 1995/96 - 2005/06 VIYwU Luu/Ul LWJ1J0 1rojections i-rowtf ('/e p.a. Actual Actual P. Estimate 2U2/03 20U3/04 2004/05 2W5/06 FVyOZ-FY9 11AL(:CURK NIRECEIT'Is 55,416 61,575 72,859 81,870 8Y,831 100,115 111,951 11. TAX RECEEIS 41,257 47,626 55,761 60,031 66,723 75,350 85,330 11.2 Federal tax transfer 35,921 40,479 47,599 50,519 55,810 62,807 70,954 10.5 Direct Taxes 8,949 10,048 11,914 12,335 12,895 14,829 17,054 9.4 Sales tax 9,623 12,932 15,651 18,196 21,870 25,150 28,923 16.6 Custors 5,174 5,272 5,772 5,019 4,954 5,325 5,725 -0.2 Excise duty on Natural Gas 1,762 2,014 2,288 2,460 2,644 2,908 3,199 8.7 Surcharge on Natural Gas/petro.lferti 5,977 6,384 7,600 7,600 7,955 8,552 9,407 5.5 Other Federal Excise Duties 4,436 3,828 4,373 4,909 5,493 6,043 6,647 11.0 Federal Government Grants 6,700 5,476 7,217 7,551 8,006 8,506 9,057 5.8 Federal Non-Developrnent Grants 6,700 4,528 4,137 4,551 5,006 5,506 6,057 10.0 Federal Development Grants 0 948 3,080 3,000 3,000 3,000 3,000 -0.7 Provincial revenue 12,794 15,621 18,043 23,800 26,015 28,802 31,947 15.4 Povincial taxes 5,335 7,147 8,163 9,512 10,913 12,543 14,376 152 Direct taxes 802 1,525 1,972 2,399 2,749 3,159 3,632 16.5 Urbanimrwvableproperiytax 201 421 987 1,185 1,339 1,513 1,710 14.7 AgricultureincomeandLandTax 117 547 540 702 821 969 1,144 20.6 Registration fee 197 257 290 333 383 441 507 15.0 Land reveiue (tax) 146 158 0 0 0 0 0 Taxes on profes,trades, callings 142 143 155 178 205 236 271 15.0 Indirect taxes 4,533 5,622 6,190 7,113 8,164 9,384 10,745 14.8 Motorvehicletax 637 929 981 1,128 1,241 1,365 1,502 11.2 GST on Services 494 642 803 1,003 1,254 26.2 Stamp duties 1,772 1,814 1,841 2,099 2,456 2,873 3,304 15.7 Entertainmen tax 67 60 42 46 49 53 57 7.5 Electricity duties 202 333 315 339 364 391 421 7.5 Hotel tax 91 97 57 61 65 70 76 7.5 Provincial excises 755 691 600 660 726 799 879 10.0 Other(mainlyinfrastructurecess) 1,009 1,697 1,860 2,139 2,459 2,828 3,253 15.0 Provincial non-tax revenue 7,459 8,474 9,880 14,288 15,103 16,260 17,571 15.5 Interest 381 73 15 15 16 17 18 5.0 Dividends 3 3 6 6 7 8 9 10.0 Royality on Natural Gas and Oil 3,689 5,287 6,571 8,708 10,068 10,840 11,673 15.4 Civil Adminstration Receipts 403 192 506 558 618 683 755 10.5 General Administration 53 60 59 65 72 80 88 10.5 Law and Order 350 132 447 493 545 603 667 10.5 User Charges 1,189 1,224 1,268 1,493 1,668 1,865 2,139 14.0 Community Services 99 68 100 108 116 124 134 7.5 Works 42 57 28 30 32 34 37 7.5 Public Health 57 11 72 78 84 90 97 7.5 Social Services 350 314 367 395 424 456 490 7.5 Education 264 213 198 213 229 246 265 7.5 Health 81 94 162 174 187 201 216 7.5 Others 5 8 7 8 8 9 10 7.5 Economic Services 727 842 801 976 1,113 1,269 1,501 17.0 Irrigation (largely water charges) 576 633 631 788 906 1,042 1,251 18.7 Others 151 209 171 188 206 227 250 10.0 Excisedidyonminerals 13 - 0 15 15 15 15 Foreign Grants 19 20 13 1,000 1,000 1,000 1,000 195.2 Owters Landlease, sugarcane cess) 1,775 1,674 1,502 2,508 1,727 1,848 1,977 7.1 14. To simplify tax collection, plug leakages and make the Motor Vehicle tax more elastic and buoyant the provincial government desires to change its mode of collection from the present flat rate tax per vehicle to a levy on fuel consumption. The present mode of collection other than being inelastic is ridden with innumerable administrative complications and inefficiencies, including a cumbersome tax collection method involving regular vehicle inspection with high incidence of leakage. The change in the mode of collection would also make the tax more equitable by creating a direct linkage with road usage. This institutional arrangement will also eliminate existing distortions whereby vehicles get registered and pay tax in one province while essentially plying in another. However, if the MVT is not replaced with a fuel consumption tax, then the existing flat rates will be indexed. 15. From FY 2003 the Registration rates applicable to different categories of vehicles are being raised. Moreover, it is being proposed that penalties be levied for delayed payments of the annual road tax Annex E Page 8 of 9 at graduated rates, with a minimum of 25% of the prescribed rate for arrears of one year and a maximum of four times the rate for periods exceeding three years. 16. The existing provincial Professional Tax is based on an inelastic, flat rate based, antiquated structure riddled with anomalies in respect of assessee categories and applicable rates. The Government of Sindh recognizes the need, and is determined, to completely overhaul both the structure and system of collection. To this end, the present professional tax payable by all Income Tax assesses will be replaced by a tax to be collected with the MWT. This change is expected to result in the quadrupling of the revenue from this source over the program period. Furthermore, a proposal that recommends its linkage to sales/turnover in the case of commercial enterprises is under discussion with the Federal Government. To replace it with a professional ad valorem tax on turn over, the GoS is examining the following options: a) its collection through the CBR's Collectorate for GST; b) for Commercial establishments like shops, retails outlets not currently assessed for GST, the collection could be on the basis of turn over accepted in the most recent Income Tax assessment order of the related enterprise, again collected by the Sales Tax Collectorate; and c) enterprises presently exempted from GST, such as Banks, Schools, and Private Hospitals, to become liable for the professional tax/businesses licensing fees on per branch basis. 17. From FY 03 urban boundary limits are being extended to include all peri-urban areas to enable land/property earlier classified as agricultural/rural in nature but had acquired urban characteristics to be treated as urban property for purposes of stamp duty levied on property transfers; this measure will bring large residential and commercial areas into the tax net and assist generation of sizeable additional revenues. 18. To prevent shiffing of potential tax bases discussions have also been initiated with the other provincial governments to institute uniform rates of stamp duties on financial documents and also incorporate penalty provisions in the legislation. 19. Since imposition of stamp duties and registration of documents are closely linked activities and assignments the offices of Stamps and Registration are being integrated by re-designating the Inspector General Stamps as Inspector General Stamps & Registration under Member Registration and Stamps in the Board of Revenue. Moreover, to plug revenue leakages the GoS is planning to appoint qualified personnel as additional stamp inspectors (presently only 3) and upgrading their posts. 20. To plug revenue leakages from excise duty on liquor the GoS plans to coordinate with the other provincial governments to harnonize the taxation system by installing a uniform rate structure for all provinces. As an additional measure to check evasion the GoS will also examine the possibility of replacing the existing structure with a presumptive tax regime. 21. Other medium-term reform measures include: a) Renegotiations of rates of land leased out to private businesses. This change is expected to generate a one time additional revenues in excess of Rs. I billion during FY 03 along with faster growth in revenue collection; b) Speedy automation of the collection systems for Professional and Property taxes and for the Infrastructure Development.Fee; c) Strengthening of the administrative and technical capability to levy and secure taxes by hiving off the revenue collection functions of the Board of Revenue to an essentially autonomous authority/department in which the revenue raising responsibilities of the Excise and Taxation Department will be merged. This new institution will function under the authority of the Finance Department. The upgrading of skills, the creation of appropriate incentive structures and the computerization of the land and property tax records will help enhance the tax administration capabilities of this agency; d) Launching of resource mobilization studies to develop additional proposals for consideration as resource augmentation measures. Annex E Page 9 of 9 Financing 22. The financing projections for the MTFRP is also presented below in Table 5 below. The key features of financing are the following: (i) there is a significant increase in projected foreign financing (shown under foreign debt), which have been identified in detail but then have been discounted by 25%; (ii) there is an accelerated repayment of Federal CDL loan repayments. In addition to the projection of Rs. 1.4 billion repayment per year, another Rs. 6.7 billion in accelerated debt repayment have been added; (iii) financing from general provident funds receipts or various public accounts and cash balances are stopped, in the latter case from FY 04. This reflects GoS's aim to carry out a full reconciliation of the assets and liabilities of these funds over the next year. Table 5: Sindh - Available Financing (Rs Million) 1999/00 2000/01 2001/02 Projections Actual P. Actual P. Estimate 2002/03 2003/04 2004/05 2005/06 Fiscal Balance 416 2,016 -1,033 -3,833 -5,630 -5,415 -656 Available Financing (net) -416 -2,016 -1,033 3,833 5,630 5,415 656 Public Debt (net) -1,852 -4,110 -3,215 -2,483 -807 -1,216 656 Receipts 6,317 4,022 3,316 3,749 6,034 6,348 6,690 Repayments 8,168 8,132 6,531 6,232 6,841 7,564 6,034 Domestice Debt (net) -1,854 -2,400 -2,944 Receipts Repayments 1,854 2,400 2,944 Federal Debt 3 -1,315 -1,367 -3,555 -3,621 -3,689 -1,368 Receipts Payments 2,645 Repayments 2,642 1,315 1,367 3,555 3,621 3,689 1,368 Floating Debt 0 0 0 0 0 0 0 Receipts 3,672 2,685 150 173 190 209 230 Repayments 3,672 2,685 150 173 190 209 230 Foreign debt -395 1,096 1,072 2,814 2,473 2,024 Receipts 1,337 3,166 3,577 5,844 6,140 6,461 Repayments 1,732 2,070 2,504 3,030 3,667 4,437 State Bank Provident Fund (net) 2,103 2,172 2,389 0 ' 0 0 0 Receipts 3,742 3,348 3,683 3,867 4,060 4,263 4,476 Payments 1,639 1,176 1,294 1,423 1,565 1,722 1,894 Changes in stock of payment arrears -5,519 -6,608 -2,500 Total Cash Balances -667 5,441 6,401 2,566 0 0 0 Net Capital Receipts 1,897 -324 -350 -- - - - Net Receipts from Deposits & Adv. 1,159 3,847 3,500 -- - - - Net Receipts from Remiittances 105 99 200 1,300 -- Net receipts from Departmental Acts. 3 0 -2 - _ _ Net Receipts from Govt. Accounts -58 18 0 - Cash Balance Utilization -3,772 1,802 3,053 1,266 Projected IDA Adjustment Financing _ 6,250 6,438 6,631 0 Annex F Page I of 6 Annex F: Public Financial Accountability and Management in Sindh Province 1. Financial management and accountability issues are at the center of the Sindh Government's reform program. Improvement in fiscal management, quality of public accounts, civil service and public accountability, and procurement are among the key reform targets. 2. A preliminary Provincial Financial Accountability Profile has been prepared for Sindh province and based on its findings, a Reform Program has been agreed with the Government. The desk review as part of the proposed Country Financial Accountability Assessment (CFAA) also reviewed the provincial financial accountability issues and had a special section on the Local Government financial accountability framework. As part of the forthcoming CFAA, a separate modular paper will be prepared in the form and scope of a Provincial Financial Accountability Assessment (PFAA). This assessment will cover accountability issues for all tiers of government in the province. 3. Accountability Framework: * Pakistan's Financial Accountability Framework and accounting and auditing institutions are centralized. The financial rules governing Federal and Provincial Governments described in the Constitution are completely similar, and provinces mostly follow Federal Government budgetary rules. The Federal Government's Controller General of Account's office, attached to the Federal Ministry of Finance, is responsible for the preparation of the Civil Appropriation Accounts of all Governments, from the Federal to the District Governments. The Pakistan Auditor General's office is responsible for auditing the different levels of governments except the smallest tiers of local govermnents (which is audited by the Local Fund Audit Department). * Much of the desk review and analysis for the proposed CFAA and Bank's interventions through the ongoing Project to Improve Financial Accounting and Auditing (PIFRA) and the proposed follow-on project apply to all tiers of provincial and district governments. These factors guided the policy dialogue between GoS and the Bank teams in the preparation of this credit. 4. The main findings of the preliminary Profile and CFAA desk review relevant to provincial government are that: * Public accountability practices have weakened in all areas - budget preparation and implementation, accounting, monitoring and reporting of public expenditures, transparency, auditing, and legislative oversight. Correspondingly, the fiduciary risks are high. While a legal framework for public accountability is in place, it needs modernization as many of the rules are antiquated and do not provide enough incentives for enforcement. * Structural rigidities, civil service overstaffing, vertical revenue-expenditure imbalances in the provinces, lack of fiscal transparency and poor monitoring have undermined both Federal and Provincial budgets as tools of economic policy. Inadequate accountability for public enterprise financial management, lack of monitoring of implicit and contingent liabilities, absence of emphasis on performance and outcomes, and lack of transparency of budgets have all contributed to lowering the effectiveness of public expenditures. There is inadequate intra-year monitoring and reporting of budget implementation. Annex F Page 2 of 6 * Accounting and financial reporting functions have been undermined in their objectives of assuring financial regularity, propriety of expenditures and compliance with budget appropriations through widespread breakdown of established internal controls. Accounts have become unreliable, as these have been prepared in recent years without appropriate reconciliation. The completeness, accuracy and timeliness of accounting information has been hampered by the use of a largely manual, single entry, fully cash based accounting system for maintaining government accounts, with associated high risk of errors and delays in capture of accounting data. * Auditing function has suffered because they were not considered on a timely basis and Public Accounts Committees (PACs) have not reviewed the reports expeditiously, thereby limiting the relevance of the public audit system. The quality of the audit reports needs improvement by reducing the emphasis on irregularities and giving more attention to materiality and significant systemic weaknesses of financial management. The role of the PACs in bringing the principal accounting officers of ministries and departments, and their staff, to account for serious non-compliance with financial policies and procedures has been weakened due to the delay with which audit reports have been dealt with. 5. Another aspect of weak financial management in Sindh is outdated and inadequate procurement regulations that cause delay, lack transparency and is vulnerable to corruption. 6. The CFAA desk review also noted that the GoP had launched a comprehensive program to address these issues. The main challenges are to implement these reforms and extend it to sub-national govermments 7. On-going Reforms: The following components of the ongoing PIFRA project and the proposed follow on project will have a positive impact on the provincial financial accountability and management in terms of improving timeliness and reliability of accounts. * Adoption of the New Accounting Model (NAM) which includes a new Chart of Accounts (CoA) having flexibility to track expenditures up to the lowest tier of govemment. * Computerization of govemment accounting in stages with proposal to cover all the 127 sites in Pakistan. * Development of systems specification and a suitable add on feature for addressing. the accounting and reporting needs of districts and downwards. * Capacity building of the District Accounts Offices 8. GoS has initiated the following actions: * Appointment of Provincial Fiscal Monitoring Committee (PFMC) to improve and oversee the reconciliation of accounts. FY01 accounts were reconciled by September 2001 compared to only 6% reconciliation a year ago. For FY02, expenditure and receipts for the first two quarters have been reconciled (on a function wise basis) for 88% and 77% of funds respectively. The variation between the Accountant General and SBP FY 01 records now is Rs.149 million -- compared to Rs 1.2 billion last year. * Setting up of an effective Ad hoc Public Accounts Committee to strengthening accountability. The PAC, staffed by highly reputed retired Govemment officials and private Annex F Page 3 of 6 sector Chartered Accountants, has completed review of the FY99, FY92 and FY93 audit reports, and is now reviewing the most recent FY 00 Audit report. * Improved Budget Implementation. Implementation of the budget has remained generally on track in FY 02. Streamlining of fund release procedure for development and non- salary funding release for priority sectors have helped to achieve these results'. To further strengthen budget implementation and transparency, GoS is preparing quarterly fiscal reports, based on reconciled accounts that will be made publicly available. * Improved arrear, debt and quasi-fiscal management. In addition to paying off arrears, GoS has taken steps to control arrears and other liabilities. It has agreed with WAPDA and is discussing with KESC the arrangements to set up billing dispute resolution mechanism; avoiding future arrears by metering all remaining government sites; and cutting off power to agencies in the event of future arrears. To strengthen quasi-fiscal management, the GoS is also now undertaking a review of the financial statements of public enterprises and autonomous bodies and identify information gaps that need to be filled. 9. Agreed immediate actions: (please see Attachment 1 for agreed GoS Financial Management Reform Program). * Opening of PAC proceedings to the press. * Appointment of a Provincial Financial Controller (as per the terms of reference agreed with the Bank) to initiate and lead the Sindh financial management improvement program. * Constitution of a Coordination Committee/Task Force to guide development of the financial modernization program. * Carrying out a modular provincial accountability assessment and agree on a detailed time bound financial management improvement program. 10. Medium Term Reform Plans for FY03 and FY04, include: (i) implementation of the Financial Management Reform Program, institutional and personnel reforms to improve financial management capacity and internal controls in provincial departments; establishment of internal audit unit in each line departments; (ii) strengthening District Government Financial Management and upgrading the level of District Accounts Officers (DAOs) to Grade 18/19 and post qualified personnel in these posts; (iii) computerization of all fiscal accounts up to the district level; (iv) improvements in fiscal transparency by introducing the new Chart of Accounts and New Accounting Model; (v) review and reforms of financial rules to make these consistent with the new accounting model; (vi) improving the tracking of recommendations of the Auditor General and PACs; and (vii) publication of audit reports on the web page. Improving the Legal and Regulatory Framework for Procurement 11. While the GoS has taken steps to decentralize procurement to the administrative departments to increase efficiency, the procurement of goods, civil works, and consultants' services is carried out through outdated and ambiguous rules and regulations. The application of these rules is further distorted by the practices that have grown over the years to hinder genuine competition for government business. The current rules, further, allow officials wide latitude in applying, ignoring or misusing the rules resulting in inefficient procurement that provides little assurance of transparency and value for money. ' The requirements for clearance of financial release orders by the P&D department and Finance release orders for high priority sectors have been removed. Annex F Page 4 of 6 The legal and regulatory framework also does not provide an effective means for settling disputes or addressing the grievances of suppliers/contractors/consultants. 12. The Government of Sindh has decided to improve the overall legal and regulatory framework for procurement by taking steps in FY 03 which include (a) revision of the procurement rules, manuals and codes, to consolidate and simplify processes, increase competition and transparency, and introduce a code of ethics applicable to all procurement of goods, works and consultants' services in the province (b) developing and adopting standard bidding documents for procurement of goods, pharmnaceuticals/vaccines, and works; and (c) establishing a fair and effective mechanism for redressal of grievances/complaints from suppliers, contractors and consultants. The GoS also plans to enact a Procurement Law in FY 04 legislating the fundamental principles of good public procurement practices to promote economy, efficiency, and transparency. 13. The Sindh Finance Department will be responsible for implementation of the agreed improvements in the procurement framework through close consultation and coordination with the concerned line departments and agencies. For this purpose, a dedicated and qualified focal person will be appointed in the Finance Department who will be assisted, as required, by qualified government staff deputed from within the Finance Department or from other government agencies, or by short-term consultants engaged from the private sector. 14. To expedite implementation of the procurement reform agenda, the Secretary Finance proposed to review and pick up some of the initiatives that were started by GoS several years ago. The Bank will provide technical advice, if and when required, and share with GoS models/examples of similar reforms that have been successfully implemented in other countries. Annex F Page 5 of 6 Attachment 1- Sindh Financial Management Reform Program Indicators Outcome Performance Benchmark Target Date Baseline (May, Responsibility 2002) 1. A. More reliable, 1. Progressively improved reconciled data in all Improvement in Receipts - 81% FMC and AG comprehensive, accounting units. 95% reconciliation to be achieved each quarter Exp - 92% timely and within three months after the end of the quarter. accurate information 2. Substantial reduction in "unidentified" financing from Improvement in Rs. 6.4 Billion SBP, AG, DF pertaining to the public accounts and deposits. To be confirmed by a each quarter government special audit opinion from an auditor acceptable to the. financial Bank. transactions. 3. Up gradation of the grade levels of DAOs and TAOs Dec.31, 2002 New initiative. CGA, NRB and GoS (Grade 18/19). B. Improved internal 4. Significant increase in the number of DAOs posted in Improvement in New initiative. CGA, NRB and GoS control the revised upper grade with appropriate qualifications each year from environment and experience approved by the CGA. January 1,2003 and to be completed by Dec.2005. C. Increased 5. Progressively increasing percentage of govemment 100 % by Dec.31, Zero % CGA, GoP, GoS and credibility of transactions through computerized accounting (under 2005 AG government PIFRA). financial statements with 6. Establishment of an effective internal audit unit for All Units to be set None GoS, AG and public and the each Ministry and Department. up by Dec.2003 concemed line international ministries donor community 2. Improvement in 1. Appointment of a Provincial Financial Controller July 31, 2002 New initiative GoS/DF financial 2. Constitution of a Coordination Committee July 31, 2002 New initiative GoS/DF management of provincial and local 3. Carry out a provincial financial accountability December 31, New diagnostic GoS with Bank & govemments assessment and agree on a detailed time bound 2002 work other donor support improvement programL Annex F Page 6 of 6 Outcome Performance Benchmark Target Date Baseline (May, Responsibility 2002) 4. Publication of financial reports (half yearly from From first quarter New initiative GoS, DAO, DCO, FY2004 and quarterly from FY2005) along with of FY2003-04 Dt.Nazims and AG annual audited financial statements of District Governments. 3. A. Increased 1. Incorporation of details of actual cash recovery From annual report New initiative GoS, Auditor deterrence to from audit findings due to fraud, waste and abuse relating to FY2003 General and fraud, waste and reported in the Auditor Geneal's annual report Controller abuse of public (subsequent to setting up of a separate head of funds and account and installation of reporting systems for investment. tracking recoveries on account of audit findings). B. More open, 2. Percentage of Auditor General's recommendation Starting from New initiative PAC Secretariat and productive and accepted by the provincial PAC to be tracked recommendations Controller answerable through a Management Information System (MIS). in FY2003 report government. C. Increased 3. Percentage of PAC's recommendations accepted by Starting from New initiative PAC Secretariat and credibility of the Government for implementation to be tracked recommendations Controller government through a Management Infornation System (MIS). in FY2003 report audited financial statements with 4. Posting of audit reports in the web page soon after From reports New initiative Auditor General, public and the PAC discussions relating to FY2002 PAC Secretariat and international Controller donor community. 4. A. Improvement in I. Improvement in the legal and regulatory framework End of FY03 New initiative DF to coordinate Public for public procurement by revising procurement inter-departmental Procurement rules and manuals, standardizing bidding documents, committee. and establishing an effective mechanism to redress complaints from suppliers and contractors. 2. New procurement law legislating good public FY04 New initiative DF to coordinate procurement practices. inter-departmental committee. Annex G Page I of 11 ANNEX G: SINDH EDUCATION AND HEALTH SECTOR REFORMS PROGRAM Background 1. Despite the articulated policy priority to primary education and the large investments (approximately Rs. 10 billion) in the elementary sub-sector in the last decade, close to 70% of Sindh's rural children are out of school. The Government of Sindh continues to face the enormous challenge of bringing a majority of its primary age children, especially girls, into school, ensuring retention and completion of basic education (Class I-VII1) and enhancing learning achievement. During the period 1990-99, the overall gross and net enrollment rates at the primary level in government schools fell from 55 to 48% and 33 to 29% respectively, a trend reflecting a combination of the decline in confidence in the public system of delivery and the inability of the system to cope with and cater to the growing cohort of school-aged children. 2. Participation trends of the past decade reveal: a) a widening urban -rural gap, for rural areas the GER fell from 50 to 47%, while in urban areas it rose from 87 to 94%; b) a modest decrease in the gender gap, but mainly attributable to the decline in rural boys' enrollment rather than any significant increase in girls' enrollment; c) the proportion of children enrolled in government schools declined from 85 to 75%; d) the decline is most acute amongst the rural poor, with the lowest enrollment rates (12% NER) of children from the lowest income quintile households in rural areas; and e) the private sector now accounts for 40% of enrollment in urban areas but rural Sindh is pre-dominantly dependent on public delivery with 95% of enrolled students attending government schools. There are 38,885 government primary schools (both rural and urban), and out of these more than 50% lack basic facilities like water supply, toilets and boundary walls. Key Issues Facing the Education Sector 3. During the decade of nineties, low education outcomes can be attributed to factors within the education delivery system as well as external factors such as rising poverty in rural areas, low expenditures for quality improvements and political instability leading to high levels of politicization of education as manifested in interference in school siting and teacher recruitment. Lack of performance accountability and these chronic governance issues have paralyzed the education system and rendered it incapable of delivering minimal levels of school services. Key issues facing the education sector include: * high teacher absenteeism and lack of accountability * capacity constraints and inadequate attention to regular monitoring and supervision * little or no community oversight and role in school affairs, even though Parent Teacher Associations were established * lack of adequate and timely availability of school supplies and materials, * large number of non-functioning schools (more than 5,000 schools, or 13% of total number of schools, had not been functioning during the past decade due to lack of teachers or sanctioned posts), * lack of accountability of school management to communities and users, * Low utilization of the existing infrastructure due to high teacher vacancies, wrong siting of schools, and missing basic facilities in schools. * Efficiency issues leading to an uneven student teacher ratio: * Poor quality of education due to falling teacher competencies. Annex G Page 2 of 11 Government Reform Program: Objectives and Strategy 4. Seized with the' alarming crisis in the delivery of public sector basic education services, the Department of Education, over the past eighteen months, has been engaged in a serious review and analysis of the status of the sector. Based on the sector review and coupled with intensive consultations with the reform leaders in the province, the Department has developed a medium term reform program to improve and expand the delivery of education, arrest the deterioration in public schools, and rebuild public confidence in the education system. The GoS has developed an Education Sector Reforms program, and an Education Sector Strategy to implement this program. These strategies are contained in the Sindh elementary education strategy document dated'June 11, 2001, and in the overall Education Sector Reform documents dated November 2001. 5. Improving the quality of delivery and access to education, consolidating the physical and human resource base, strengthening public-private partnerships, and improving govemance are the core priorities of the reform program developed by the Department of Education. The goal is to ensure that by 2010, 80% of Sindh's primary school age children are enrolled, complete primary school education (through reduced drop-out rates), and graduate with basic primary skills of numeracy and literacy. Beyond primary education, the GoS is emphasizing technical stream of education in the secondary sector to equip graduates with relevant skills for employment. During FY02, GoS has received additional financing from the federal govemment under the Education Sector Reform (ESR); these funds have been passed on the district governments under a Memorandum of Understanding signed between the Provincial Education Department and each district. The ESR financing is complementing the Sindh Govermnent's reform program. Implementation of Reforms 6. The Department of Education has already taken steps and actions to implement reforms. The program is headed in the right direction though it will take some years before province-wide results are seen due to the large backlog of issues and a long period of neglect in the public delivery system. The progress in' implementation includes: 7. Increasing Access: The Govemment has launched its compulsory primary education program starting with April 2002 academic year, and has begun implementation in 16 talukas with the target of covering one taluka in each district by end FY03, and full coverage by year 2005. Prior to this primary enrollment drives have been initiated and the first one in September 2001 led to about a 5% increase in enrollment with enrollment of 120,000 new students. The Govenmment of Sindh intends to maintain this momentum, and to monitor retention of the newly enrolled children. 8. Reducing Gender disparities: The incentive program through distribution of free primary textbooks has been enhanced from covering only rural girls to girls in urban slum schools, and approximately 340,000 sets of books were distributed in the free textbook program in FY01. In FY02, textbook delivery is underway with the start of the April 2002 academic year covering both boys and girls. Scholarships for deserving female students are being delivered and 10,000 such scholarships were given in FY01. In FY02 funds have been distributed to districts for textbooks (Rs. 172 m), and scholarships (Rs. 64 m). Further, a decision has been taken to appoint female teachers in all primary schools. 9. Improving Quality: To assess current teacher quality, three-month training courses have been initiated, along with pre- and post-training tests to assess levels of competency. This exercise is intended to help improve teaching standards. In service teacher training has been provided to 5284 candidates, and management training of Principals and Supervisors is under proce,ss. A provincial education assessment program to assess student leaming outcomes has been approved with implementation beginning in FY03 Annex G Page 3 of 11 10. Consolidation of Physical Infrastructure and the Human Resource Base: Consolidation of the development program is being pursued with a priority on completing ongoing schemes and reducing carry forward both in primary and secondary sectors. Recognizing that under utilization of the physical infrastructure remains a core issue, the Govermnent has initiated a major redeployment exercise and as a result 5,477 teachers have been re-deployed, making 2,399 schools functional through this process. According to data provided by the Education Department, a total of 3,796 schools have been made functional as a result of the re-deployment and recruitment exercise. 11. Strengthening Public-Private Partnerships: Several actions are underway to for promoting public-private partnership, including: a) leasing school buildings to the private/NGO sector including the buildings constructed under the MNA/MPA scheme are also being offered to the private/NGO sector for purchase or lease; b). Under the Adopt-a-School Program of Sindh Education Foundation about 211 schools have been adopted by private/NGO sector; c) PTAs (renamed as School Management Committees) have been reconstituted and their role reformulated to strengthen their ability to monitor teacher attendance and student enrollment; and d) the Department has started the process of "de- nationalization" of institutions that were nationalized in 1972, by offering them back to the original owners. About 165 institutions have already been returned to their original owners, while about 400 such institutions remain to be handed over. 12. Improving Governance & Monitoring & Evaluation: To introduce greater accountability and better performance, new teacher recruitments will now be facility specific and contract based. A total of 3000 facility-specific and contract-based teachers (700 female) have already been recruited. For the first time, the private sector was inducted in carrying out competency tests and interviews. There have to date been no public complaints of mis-govemance in this process. These teachers have been hired on three- year school specific contracts. As a result of these recruitments, 1,397 schools have been made functional. Actions have been taken to improve teacher attendance and based on field visit reports major penalties have been levied on 174 teachers, minor penalties on 93 teachers, and 179 cases are under process. 13. Data has been collected for the 2001 Annual School Census by SEMIS. This census also includes comprehensive information on human resource base (teachers) and private/NGO education facilities for the first time. The Research, Monitoring & Evaluation Cell of the Department has initiated a system of monitoring schools through field visits using well-developed tools to document the monitoring. Through this effort, monitoring reports have been prepared for four talukas in four districts. These reports monitor teacher attendance, student enrollment, and field verification of functioning of schools. These reports provide useful information and recommendations including assessment of viability of closed schools (if any) in the areas monitored by the teams. The Department has made efforts to collaborate with district nazims/naib nazims through facilitation of meetings, development of a manual, and awareness campaigns for clarifying the functions and responsibilities of the district education staff, and how to access funds: The Department also involved the nazims/naib nazims in the SEMIS annual school census. The World Bank is working with the Department of Education to support the third party validation survey to assess on the ground improvements at the school level, based on the reform measures initiated by the Government. Medium Term Reform Plan 14. The medium term measures for implementing the reform plan are focused on completing the actions on the above-mentioned areas for increasing access, improving quality, consolidating the physical and human resource base, strengthening public-private partnerships, and improving governance. The Government also expects that education outcomes and quality of delivery will improve with full fiscal and administrative decentralization. Key medium term targets are as follows: Annex G Page 4 of 11 * Enrollment to be increased (from current approx. 60% of 5-9 years enrolled, to 82% by 2005). Out of school children to be reduced from 2.2 million to 1.1 million by 2005. * All schools to have SMCs by 2003. * All closed schools to be made functional by 2004 (1,858 remaining that will be made functional). * 12,000 currently untrained teachers to be trained by 2004. * All primary students to be provided free textbooks in the 2003 school year onwards. * 3,100 (out of a total of 13,537 schools) shelterless schools to be provided with physical facilities by 2006. * 20% of schools with missing basic facilities will be provided with missing facilities (toilets, water, boundary walls) by 2006. * Free & Compulsory Primary Education coverage in 15 talukas and 5 Karachi districts in FY02 (done); 40 talukas in FY03; and 42 talukas in FY04 (covering all 102 talukas by end FY04). 15. To achieve these targets, in the medium term (FY03 and FY04) the reform plan is focused on the following areas: Improving Access 16. The teacher redeployment exercise will be completed by FY04 with teacher student ratios maintained for all primary school. The viability of the 1828 closed schools will be determined through field surveys, and resources including sanctioned teacher posts would be provided to those that are viable. By end FY04, all viable schools on the books of the Department would be functional either through teacher recruitment or rationalization. The Government plans to provide missing facilities (boundary walls, water, and toilets) to at least 20% of needy schools covering 820 schools each year from FY02- FY06. Two enrollment drives are planned to be conducted each year, one in September and the second in April, with systems established to monitor retention of newly enrolled pupils. The free textbook program will continue to be implemented through adequate resource allocation and timely publishing and distribution of textbooks to schools. The Government plans to implement the compulsory free education program in 60 talukas by FY03, and in all 102 talukas by FY04. Through these initiatives, the GoS' target is that out of officially estimated 2.2 m out-of-school children (40% of the primary age cohort), 1 m children will be in schools by FY04. The Government will also develop an action plan for improving the secondary education system, in line with the provincial education sector strategy. Improving Quality of Service Delivery 17. The teacher training programs to enhance teaching competency would be continued as per training schedule; and the first provincial student assessment to measure learning achievements will be initiated in FY03, as per the approved program. Strengthening Public-Private Partnerships 18. The restructured and reconstituted School Management Committees are expected to play a role in monitoring school affairs, including teacher attendance. In addition, the SMCs will be responsible for managing the non-salary school budget for minor repairs and classroom consumables. The district governments would be encouraged to provide, on a pilot basis, teacher hiring and firing powers to the SMCs. In addition, non salary funds for minor school repairs and class room consumables will be provided to the SMCs and will used by the SMCs to meet the needs of the schools. Public private partnership will be strengthened through an expansion of the of the adopt-a-school program and other initiatives of the Sindh Education Foundation, with provision of necessary funds. The Sindh Education Foundation will be engaged for assisting in conducting teacher training programs and training programs for SMCs (additional budgetary allocations for SEF would be needed to conduct these activities). Annex G Page 5ofl1 Monitoring and Evaluation 19. The administrative monitoring would be continued through the R,M&E Cell in the Department and provide financing in the budget after FY02. The first round of third party community feedback survey will be initiated in FY02, and the second round in the third quarter of FY03. 20. A capacity building program will be initiated for district and below officials for monitoring service delivery improvements. In line with this, existing district specific baseline data will be validated and district specific baseline outcome indicators will be agreed (for annual monitoring) to assess changes such as enrollments, retention, drop out rates and completion rates, in line with the IPRSP outcome indicators. An awareness building action plan will be developed to disseminate the sector policy and reform program to district, and taluka nazims. Financing 21. The level and composition of the education budget will need to be in line with the activities reflected under the education reform program and the annual targets. Under the medium term-fiscal restructuring plan, the non-salary budget will be significantly enhanced to adequately finance the work program, and for reform activities such as: policy of free textbooks (for both boys and girls), monitoring activities, public-private partnerships, and financing of training programs, etc. Challenges for the Medium Term 22. The Sindh reform program is rightly focused on increasing primary level enrollment and retention of students through a range of reform interventions, with a special focus on governance improvements. Main challenges are highlighted below: a) A key challenge will be to maintain the reform focus and momentum through the district governments. GoS will need to initiate an awareness program for district and below elected and administrative officials to foster ownership for the reform agenda. In addition, a public awareness campaign for promotion of quality' primary education needs to be initiated. While some work began this year through the print media and through public rallies in the districts, a structured program involving the electronic media needs to be prepared. b) As fiscal decentralization begins from FY03, a streamlined system for transfer of funds to the district governments will need to be put in place. An important challenge will be for the district governments to maintain the financing for important activities such as free textbooks, non salary budgets for schools, scholarships for girls, missing facilities in existing functional schools, and resources for making closed schools functional. A system to provide incentives to districts for service delivery and performance improvements will be helpful to maintain the focus on the reform agenda. c) Existing planning, management and monitoring capacity at the district level and below is weak and the DoE will need to assist districts in developing capacity building programs so that the promised education outcomes indeed happen. Some of the weaker districts, and districts with poorer outcomes, may require technical assistance to improve their performance. In addition, the districts would need assistance in monitoring quarterly expenditures as well as their intermediate indicators and outcome indicators, in line with the requirements of the IPRSP. The provincial government's role for information collation will be important in this respect. This is an area where further work is needed. Annex G Page 6 of II d) While public private partnerships is a pillar of the reform agenda, and specific steps are underway, further work is needed to strengthen this partnerships by building mutual trust and confidence including finalization of a policy on private education in full consultation with stakeholders in the private sector. e) As district governments take charge of education services, they would need assistance in developing systems to measure service delivery and outcome improvements, including the development and use of a comprehensive district level database that captures all providers at all levels for facilitating planning, monitoring and evaluation. f) The GoS' strategy for increasing enrollment and retention through enrollment drives and implementation of compulsory primary education program is headed in the right direction. However, the ambitious targets can only be met if these measures lead to increasing public confidence in service delivery. While this remains a challenge, it can happen if there are visible and simple service delivery improvements that parents and children can relate to. These include improved teacher attendance in schools, improved teacher competency, provision of minor resources for providing important missing facilities to schools, and timely availability of teaching materials and textbooks. Health Sector: Reforms and Challenges Background 23. The health and fertility outcomes in Sindh have improved in 1990's, but, the progress has been slow with significant disparities between urban and rural areas. The infant mortality declined from 124/1000 to 95/1000 live births and total fertility has declined from about 5.9 to 5 during the 1990's. The intermediate health indicators are either deteriorating or leveling off. The immunization coverage of children 12-23 months remains low at about 48%, and appears to have declined in rural areas. The tetanus vaccination of pregnant women has improved to 48%. The proportion of deliveries assisted by trained personnel is low at 28%. The CPR has improved from 8% to 17% during the 1990's with very low prevalence of 7% in rural areas. Preventable causes of mortality and morbidity due to communicable diseases and maternal and peri-natal illnesses; nutritional disorders continue to affect children and women of reproductive age. Key issues facing the Health Sector 24. The slow progress in improving health outcomes and deteriorating intermediate indicators can be partially attributed to external factors including increasing levels of poverty, illiteracy, lack of access to safe drinking water and inadequate sanitation. However, factors internal to the health sector contribute significantly to the slow progress. The key issues contributing to this include: * Lack of clear outcome focused health strategy; * Little emphasis to address nutrition problems and lack of clear strategic vision; * Low immunization coverage of children and pregnant women due to restricted mobility of vaccinators, shortage and inappropriate postings of vaccinators; * Increasing burden of TB due to poor compliance with TB treatment and low coverage of TB control using the DOTS strategy; * Issues of governance including staff absenteeism; excessive transfers and lack of-transparency in procurement; * Limited management capacity at the district level; * Low utilization of primary health care facilities and uneven quality of services; Annex G Page 7 of 11 * Inadequate participation of NGO/private sector; * Continued expenditures on infrastructure development of primary health care facilities and; * Low non-salary allocations. Government's Reform Objectives and Strategy 25. The Government of Sindh (GoS) is cognizant of the slow progress in improving health outcomes and uneven quality of public health services. The substantial reform program being implemented by GoS focuses on improving public service delivery in social sectors. In the health sector, these reforms are reflected in the National Health Policy 2001 Implementation Plan; and Restructuring & Reorganization of Health Department, Devolution of Powers and Responsibility to the District Level. Sindh is the first province to translate national priorities outlined in 2001 National Health Policy into an action/implementation plan. The GoS's reform program aims to achieve the following results in medium term: * An increase in immunization coverage of children 12-23 months from 38% to 80% by 2005 * No case of Polio reported after December 2002 * An increase in immunization coverage of two doses of TT from 28% to 80% by 2005 * An increase in population with access to TB Control using DOTS strategy from 8% to 100% by 2003 * Detect 70% of sputum positive TB cases and successfully treat 85% of them in areas covered by DOTS strategy; * Adequate capacity of district health system specifically for management, planning, and financial management 26. The above targets would be achieved by implementing programmatic and organizational reforms, including strengthening of immunization and TB programs; improving governance including building district capacity in line with devolution initiative; strengthening monitoring and evaluation and promoting public private partnerships. In addition, the Government is making an effort to improve availability of female health staff particularly LHVs and nurses to strengthen maternal health services and improving quality of hospital care. Implementation of Reforms 27. The Department of Health has taken a number of actions to implement the reforms, focusing on improving health sector governance and organizing the health sector for devolution. Overall the strategic direction of the reforms especially the focus on governance is appropriate. The progress to dates includes: (i) Health Sector Strategy Note. Sindh is the first province to translate the 2001 National Health Policy into a strategy note and an implementation plan. This is consistent with national priorities and local disease burden. Although, degree of specificity and detail varies, but it outlines the DoH's continued emphasis on priority preventive programs. The strategy note is non- specific how to make health services more pro-poor and outlining strategy to address nutrition problems of women and children. (ii) Strengthening Immunization and TB Programs. The Department has taken a number of steps to improve immunization and TB DOTS coverage. This includes including strengthening of EPI and TB Directorate to improve monitoring, introduction of Hepatitis B vaccination; undertake supplementary TY campaign in high-risk areas and measures to reallocate vaccinators to uncovered areas in two districts; and approval of new project of Rs 621 million for Annex G Page 8 of 11 strengthening immunization program with detailed district micro-plans. The numbers of confirmed Polio cases have decreased from 65 in 2000 to 23 (October) in 2001. The recent third party assessment indicates that immunization coverage of children 12-23 months and pregnant women have increased to 48% (increasing from 1998/99 PIHS 38% and 40% respectively). There is still wide variation among districts (range 16% to 70%), with all rural districts having coverage less than 40% coverage. In TB, good progress has been made in expanding DOTS strategy to five districts. The coverage has increased from 8% to 31% with case detection rate of 80% and a cure rate of 75%. The program is on track to expand to 10 districts by end of FY02. (iii) Improving Health Sector Governance. The actions to improve govemance include: a) implementation of transparent transfers and posting policy including cancellation of detailment and posting against higher grade posts; b) reduce staff absenteeism by vigilant departmental committees and army monitoring - more than 300 doctors have been dismissed from service; c) Reconciliation of posts to determine strength and requirements of various cadre and development of seniority lists staff to maintain merit in postings and promotions; d) improving transparency in procurement by operationalizing various committee's to scrutinize the process at various stages of procurement. There are indications that availability of staff in un-served areas has improved and staff absenteeism reduced, however, no reliable data is available. (iv) The Department of health is being restructured in line with the Devolution Initiative, which is the core organizational reform being implemented across the country. The Department has made good progress in outlining provincial and district roles and responsibilities and developing new management and organizational structures. Drawing and Disbursement powers have been devolved to District Managers and administrative powers are being finalized. The organizational restructuring of Karachi City with merger of Department's of Health of Karachi Municipal Corporation, District Municipal Corporation, District Council and DoH has been completed. Intemal Teadjustment to fill new posts created at the district level is in process. Three posts of Accounts Officer, Audit Officer and Planning and Development Officer critical for improving capacity of district management are being created as the first step to create management capacity at the district level. Actual plans to further develop capacity of local governments to effectively manage are being developed. (v) Enhancing Monitoring and Evaluation. There is an effort to strengthen monitoring and evaluation systems for self-monitoring and making itself accountable to the community. The EPI and TB Directorate have been strengthened by internal readjustment. The TB Directorate has introduced quarterly monitoring and reporting system using WHO-adapted instruments, with almost 100% reporting. The immunization program has introduced third party coverage assessment, which would be annually undertaken as part of the GAVI assisted program. In addition, the DoH has outlined a set of fifteen indicators to measure performance. The DoH is now preparing a plan for carrying out third-party led district level household survey and validation of departmental information to measure the following variables. The process needs to be linked to wider monitoring and evaluation system being developed in the context of PRSP. Variables to be Tracked In Third Party Surveys with Urban-Rural and Gender Breakdown Infant Mortality Rate Immunization covdrage of Children 12-23 month TT Coverage of pregnant women Contraceptive prevalence rate Use of modem contraceptive by source Percentage of deliveries assisted by skilled birth attendants (doctors, Lady Health Visitors, Nurses) Percentage of pregnant women attending antenatal clinics Percentage of population using public/private services in last year | Percentage of population dissatisfied with public services. Annex G Page 9 of 11 (vi) Promoting public-private partnerships. To promote public private partnerships, the DoH is planning a detailed review (using third party) to assess feasibility of large number of facilities, which could be operationalized. The DoH is exploring options to contract out these facilities to NGOs and private sector. The newly developed Trauma Center in Karachi is being privatized through Privatization Commission. The DoH has already invited expression of interest from the private sector to operationalize these facilities to improve access to basic services. (vii) Increasing resource allocation for health: The FY02 current budget allocations have been increased by 16% increase over FY01 expenditures. On the development side, the GoS has ensured adequate allocations for priority preventive programs in line with program requirements in FY02. 28. In addition to the above reforms, the DoH is strengthening other critical areas in the health sector. These include: a) implementation of the Women Health Project in four districts in order to improve essential and emergency obstetrical care; b) Expanded HIV/AIDS program targeting vulnerable populations through non-govemmental organizations and behavior change strategy (part of expanded national response to HIV/AIDS) has been developed; c) reducing expenditures on infrastructure development of primary health care facilities. Medium Term Reform Plans 29. The medium term reform plans aim to further deepen the above reforms. In addition, the GoS is developing plans to improve quality of hospital care and increase resource allocation for the health sector. There is a strong commitment of the GoS to implement these reforms as indicated by actions already taken specifically actions related to govemance. It is envisaged that with decentralized administrative and financial powers to districts and streamlining of financial flows, effective implementation can drastically improve health outcomes in Sindh. The focus of reforms in the medium terms is on the following: (i) Strengthening the Routine Immunization Program. The DoH plans to revitalize immunization program, aiming to increase immunization coverage of children and pregnant women through strengthening of program with GAVI support. The strategies include: (i) expanding the coverage of Hepatitis B vaccination; (ii) strengthening of the routine program with GAVI assistance; and (iii) supplementary TT immunization campaigns. The key activities include: a) improve mobility of vaccinators; b) recruit additional vaccinators on contract basis; c) increase TA/DA of vaccinators; d) improving cold chain; and e) expand EPI centers in public and private sector. (ii) Expanding TB DOTS Program. The phased expansion aims to cover the whole province by 2003, from present DOTS coverage of 31%. The objectives are to detect 70% of sputum positive cases and successfully treat 85% of them. The strategies includes: a) strengthening capacity of Provincial TB Directorate for monitoring and supervision; b) development of referral laboratory; c) introduce DOTS strategy in private and NGO sector in Karachi city; e) acquire support from Global Drug Fund for TB DOTS. (iii) Strengthening local government capacity by implementing detailed plans for capacity development for district managers in management, planning, and financial management. Strengthening local government capacity includes building capacity in management, planning and accounting; training of District health management teams, preparation of comprehensive district health profiles as a basis for identifying priority health problems and interventions, and the development of district health plans. The draft plans are at an early stage of development and need detail work including costing of interventions. Annex G Page 10 of )) (iv) Broadening public-private partnership under the newly issued strategy. The medium term plans include development of explicit policy guidelines for public private partnership and contracting procedures. The GoS envisages that enhanced public-private partnership would increase access to basic health care. The GOS plans also include increasing access to immunization services in the private sector and introduction of TB DOTS strategy in NGO and private sector health care in major. (v) Further strengthening monitoring and evaluation systems. The department has also outlined a set of fifteen indicators to measure its performance of the sector. This includes strengthening Monitoring and Evaluation unit (Planning Cell) at the provincial level; development of community management boards and team, strengthening health management information systems; and conducting annual district level household surveys plans. The plans need to be further detailed out including financing arrangements. The Challenges Ahead 30. The Sindh government's medium term plans are rightly focused on key public health priorities especially on key prevention programs in the area of immunization, reproductive health, child health, and communicable disease control. The programmatic priorities being implemented include updated strategies against Tuberculosis, introduction of Hepatitis B vaccination, improving essential and emergency obstetrical care for women and working with vulnerable population to prevent an HIV/AIDS epidemic. The management reforms in the context of devolution also have the potential to improve governance and service delivery with increased accountability to local communities, if effectively implemented. However, there are gaps and some critical areas that will need to be addressed in the medium-term. These include: (i) In critical areas of refonns like development of public-private partnerships, strengthening of district capacity; and improving reproductive health care strategies are emerging. However, plans are inadequate and need to be further developed. (ii) It is essential to develop strategic direction in three critical areas: a) nutritional problems of women and children; b) health awareness and behavior change; c) human resource development. These areas have traditionally been weak with inadequate attention to look into constraints, which reduce effectiveness of interventions. The health sector would need technical assistance for in- depth constraint analysis and development of high-quality interventions. In nutrition, Sindh could start with few critical interventions and build upon them: a) 100% iodization of salt; b) behavior change communication to change feeding practices especially of pregnant and lactating women. The GoS should also consider phased introduction of Integrated Management of Childhood Illnesses, an established strategy that would help reduce infant and child mortality. (iii)The GoS plans to improve quality of hospital care through hospital up-gradation program. The draft plan is not specific and appears to be rather input oriented plan. It is not clear what health needs and the extensive up-gradation program would address outcomes. The program should focus on key areas like improving 24 hour emergency obstetrical care, child care and emergency care for accidents and injuries, which would reduce child and maternal mortality and mortality due to accidents. (iv) Inadequate managerial capacity at the district level is a key challenge for the DoH. Failure to enhance capacity of the local government for effective implementation may lead to further deterioration in health outcomes. The DoH has outlined broad areas of capacity building including: development of policy guidelines, training in procurement and financial management; strengthening use of information and PC I preparation. The plans are at present are broad and Annex G Page 11 ofJI detail micro-plans including cost estimates need to be worked out. This should also include developing mechanisms to ensure availability of technical assistance to poorly performing districts. 31. In the context of the devolution, it is imperative that District Governments continue to give priority to services that are cost-effective with the greatest potential for improving health outcomes e.g. immunization, family planning etc. This would require close oversight by the provincial government. This should be linked to monitoring system measuring performance of the districts. The districts need to be assisted to make appropriate changes if results are not being achieved. Key areas to monitor include intermediate health outcomes, quality of health care, people's satisfaction and access of the poor to services. The data gathering and analysis system should disseminate the information to all stakeholders. Annex H Page I of 2 ANNEX H: REGULATORY REFORMS AND PRIVATIZATION Table 1: Pre-Reform List Inspections Faced by Industry and Various Laws Name of the Act Frequency of Visits Concerned Dept. 1 Factories Act 1934 Once a year Labor 2 Employment of Children Act 1994 Once a year or on complaint from union Labor or individual 3 Employment Cost of Living Act, 1973 Once a Year or on receipt of complaint Labor 4 Disabled Person Employment & Rehab. Ord. 1981 Once a Year or on receipt of complaint Labor 5 Sindh Factories Adult Exemption Rules, 1990 With application and granting of exemption Labor 6 Standing Orders Ordinance, 1966 Once a year Labor 7 West Pakistan Maternity Benefit Rules, 1961 Whenever the rules are applicable Labor 8 Minimum Wages Ordinance, 1961 On receipt of complaint Labor 9 Payment of Wages Act, 1936 Once a Year or on receipt of complaint Labor 10 Industrial Relations Ordinance, 1969 Once a Year or on receipt of complaint Labor 11 Factories (Record of Services) Act, 1934 Once a year Labor 12 Certifying Surgeon Twice a year Labor 13 Health and Hazards Inspector Once a year Labor 14 Shop and Establishment Inspector Once a year Labor 15 Weight and Measures Inspector Once a year Agri. & Bureau of Prices 16 Minimum Wage Inspection Inspector Once a year Labor 17 Apprenticeship under Apprenticeship Ord., 1962 Once a year Labor 18 Sindh Employees Social Security Institution Once a year Labor 19 Employment and Exchange Inspector Once a year Labor 20 Inspection under the Stamp Act, 1890 Once a year Board of Revenue 21 Civil Defence Inspection under Factories Act, 1934 Once a year Home Dept. 22 Inspection of Boiler under Boiler Act 1975 Once a year (for fitness); & on request Industries For new registr. 23 The Electricity Act, 1917 & Rules 1937 Once a year Industries Table 2: Revised List of Inspections Under the Sindh Reform Program Inspection/Survey Frequency of Visit Depart. Concerned Stream-lining 1) Factories Act 1934 Once a year Directorate of Labor These shall be lumped insPection) together once a year 2) Health & Hazard -do- -do- (Inspection) 3) Shops & -do- -do- Establishment (Inspection) 4) Sind Employees -do- SESSI Social Security Institution Ordinance, 1961 5) Minimum Wage -do- Chairman M.W Board These shall be lumped Board together once a year 6) Apprenticeship -do- Directorate of Ordinance 1962 Manpower and (Inspection) Training 7) Employment -do- -do- Exchange (Survey) Annex H Page 2 of 2 Table 3. List of Assets to Be Privatized and Their Timetable List of Assets to be Privatized by December 2002 Enterprises Dadu Sugar Mill Thatta Sugar Mill Sindh Tourism Development Corp KMC Abbatoir Lands Trauma Center at University Road Stationary Department Hyderabad Forest Dept -lands Police Dept lands SRTC C and W Assets Silos Agricultural Lands BOR Land Vocational Training Land To Be Privatized or Concessioned by December 2003 Large Enterprises KWSB Waste Water Plants (3) Other Assets Schools, colleges Water distribution - Landhi, Korangi Basic Health Units Thar Coal Fields Source: Sindh Privatization Commission Annex I Page I of 15 Annex I: Statistical Annex Table of Contents Table 1. Pakistan: Selected Economic and Financial Indicators, 1998/99-2003/04 Table 2: Sindh at a glance Table 3: Sindh: Key Social & Economic Indicators Table 4: Sindh GDP at current prices Table 5: Sindh GDP at current prices (% shares) Table 6: Sindh GDP at constant prices Table 7: Sindh: Public Finances, 1999/00-2001/02 Table 8: Sindh: Agriculture Sector Table 9: Sindh: Manufacturing Industrial Production and Employment Table 10: Sindh: Census of Manufacturing Industries, 1995-96 Table 11: Sindh: Education Sector, 1998-99 Table 12: Sindh: Health Sector, 1999-2000 Table 13: Sindh: Transport, Communication, Electricity and Mining Table 14: Sindh: Electricity and Natural Gas Consumption, 1999-00 Page2of]i Table 1. Pakistan: Selected Economic and Financial Indicators, 1998/99-2003/04 Projections 1998/°9 1999/00 20/01 2001/02 2002/03 2003/04 Output and prices (Annual changms in percent) Real GODP at factor costs 4.2 3.9 2.7 3.3 4.7 5.2 RFsalODPatnmarketppris 3.7 4.4 3.4 3.4 5.2 5.5 Partnercountrydemend 2.7 4.0 3.2 1 5 2.5 3.8 Consumer prces (p.a.) 5.7 3.6 4.4 3.0 3 9 4.0 Consumer prices (o.o.p.) 3.7 5.1 2.5 3 5 4.0 4.0 Pupoespr U.S. dollar (p.a) 17.0 3.0 128 6.1 Savings and Investment (In percent of GDP) Gross national savings 119 13.5 12.8 15.4 15.4 15.8 Government -3.0 -3.6 -1.8 0.2 0.8 1.4 Non-governrent I/ 15.0 17.2 14.6 15.2 14.6 14.3 ross capitalforrnation 15.6 15.6 14.7 15.2 16.6 17.5 Government 3.7 3.2 2.7 3.4 3.6 3.9 Non-government 1/ 11.9 12.4 120 11.8 * 13.0 13.6 Public financs (In percent of ODP) Budgetaryrevenuo(0xcludinggrants) 16.2 16.5 15.7 16.9 17.3 17.3 Budgetary expenditure 22 23.0 21.0 22.7 21.5 20.6 Budgstuy balance (excluding gants) -6.0 -6.5 -5.3 -5.7 4.2 -3.3 Primnaybalanco 1.3 1.1 1.5 1.2 2.1 2.4 Netpubliodebt2/ 93.6 91.6 100.9 94.2 90.5 83.6 Not domestic public debt 3/ 42.3 429 43.1 41.9 38.4 35.1 Implicit intertsrataonpublicdebt (perent)4/ 8.9 8.8 8.1 7.3 7.3 6.9 Monetary sector (Annual changes in percent of initial stock of broad maney) Net foreign assets 1.6 2.0 5.2 3 3 ... ... Net doosatic assets 4.5 7.4 3.8 5.8 Of whkch: credit to theprivatesector 85 1.4 3.4 5.2 Of which: net credit to govecrnent -3.8 6.1 -3.3 -2.1 Broad noney 6.2 9.4 9.0 9.1 6-monthtrewsurybiUraw (inpaocent,pa) 13.1 86 10.4 ... ... External sector (In percont of CiDP) M rchaudise trade balance -3.6 -2.3 -2.1 -1.4 -1.5 -1.3 Merchaidise exporta 12.8 13.3 15.0 14.9 15.4 15.8 Merchandisei npxrts 16.4 15.6 17.1 16.4 16.9 17.1 Current account excluding official transfers -4.6 -3.6 -3.3 -2 3 -2.7 -2.1 Current account including official transfere -3.6 -2.1 -1.9 0.2 -1.2 -1.7 (In percent of exports of goods and services) External public and publicly gusrated debt 328.1 307.0 302.4 294.1 280.5 259.1 Debtservice5/ 41.7 38.9 32.5 33.9 304 26.8 Irnplicit interest rate (in percent) 6/ 4.0 4.5 4.2 4.3 4.5 4.3 Gross reseavs (nilliums of U.S. dollars) 7/ 1,672 908 1,681 2,317 3,423 4,208 In weeks of next years' inports of goods and services 7.7 3.9 7.5 9.6 13.4 15.7 In percent of short-tneextemnl debt 8/ 35.2 19.2 63.8 73.0 108.7 140.7 Memorandum Items: ICOR, 3-year vmong avsange 4.5 4.7 4.8 4.5 3.6 3.2 Real effective exchange rate (percentage change) -9.1 -0.6 -2.6 -1.6 -2.0 -2.0 Ternoftrade(percentagechange) 4.1 -9.2 -1.6 0.3 3.0 2.6 Realper-capita ODP (pcentageochange) 1.3 2.1 1.1 1.1 2.9 3.1 GODP at markdet pnc (PR billion) 2,938 3,183 3,472 3,695 4,042 4,433 Source: Data provided by the Pakistani authoities; Fund staff and World Economnic Outlook. I/Includes public sector enterprises. 2/ Defined as the sum of not dcmestic public debt and external public and publicly guaranteed debt. 3/Including US. dolar bonds (except for the column Prog. 2001/02) 4/The implicit interest rato on public debt is calculated as interet paymnats in percent of tha end-of-period debt stock of the provious year. 5/ Including interets n short-termn debt 6/ Tho iplicit interest rate on external public debt is calculated as interest payments in percen of the averge stock of dobt of the current and previous fiscal year. 7/ Excluding gld, foreign assets relating to foreign curency depositb contracted after May 1998 (FB25s), and short-term foreign exchange swaps and outright forward sales by the SBP. 8/ Data on shoit-tesn external debt includes public and private short-term at orignal matruity and aniortization paymnmts on public nidiu and long-tenn debt of tho following year. AnnexI Page 3 of15 Table 2: Sindh at a glance SOCIAL INDICATORS Sindh Pakistan Population Growth Rate Population, 2001 (million) 34 141 3.50 - (annual average growth) GSDP/GDP per capita, 2001 (USS) 453 421 3 00 - Average annual growth, 1991-99 2.50 - _ Population (%) 2.9 2.5 2.00 -- 1.50 -- Most recent estimate (latest year available since 1990) 1.00 -. Poverty (% of population below poverty line) GOI estimate 29 33 030 .0 Rural 37 36 0.00 Urban 19 24 1992 1996 2001 Urban population (% of total population) 49 36 Infant mortality (per 1,000 live births) 87 83 =Sidh +- PaPs *tn Literate population (% of total population) 49 43 _ Male 64 58 Female 32 27 Not Primary EnrollmentRatio (%) 47 51 Male 55 57 Female 39 44 STRUCTURE of the STATE ECONOMY 91-95 95-99 1999 2000 2001 Growth rate of output(%) (% of GPDP) Agriculture 22.5 24.1 25.1 24.5 23.2 Industry 26.9 25.0 24.5 24.2 23.9 8.0 Manufactuing 17.8 15.4 14.8 14.3 14.7 Services 50.6 50.9 50.4 51.3 52.9 6.0 - (compound annual real growth) 4 0 - Agriculture 3.9 3.8 2.1 7.0 -3.1 Industry 2.3 2.1 -1.5 1.3 3.7 20 Manufacturing 0.1 2.0 -2.0 -0.2 7.0 Services 3.7 1.6 7.4 4.8 6.5 D.0 Gross Provincial Domestic Prodcuct 2.7 2.2 3.7 4.4 3.4 " " g GPDP per capita 0.3 0.0 0.0 0.0 0.0 ImplicitGPDPDeflator(%) 11.2 10.0 3.3 3.1 5.3 STATE FINANCE 96-99 1998 1999 2000 2001 Gross Flscal Balance (% of GPDP) (% of GPDP) TotalRevesue 6.1 5.4 5.0 6.7 6.9 States Own Revenue 1.4 1.9 1.2 1.5 1.6 0.9 Central Transfers 4.7 3.6 3.8 5.2 5.3 0.6 - - 0.4- Total Expenditure 6.5 6.0 5.5 6.6 6.6 0.2 - - Revenue Expenditure 5.8 5.3 5.1 6.1 6.0 00o- Intrestpayment&debtservicing 1.3 1.5 1.3 1.4 1.1 -0.4 W 0 0 ° ' a0 Capital Expenditure (net) 0.8 0.7 0.5 0.4 0.6 . Revenue Deficit (-)/ Surplus(+) 0.4 0.2 -0.1 0.6 0.9 Gross Fiscal Balance -0.4 -0.6 -0.5 0.2 0.3 GPDP estimates are based on Kaiser Bengali: "Regional Accounts of Pakistan 1991-1995", 1991 and then projected using all Pakistan sector growth rates Sources: Govemment of Sindh; and Staff Estimates. SASPR Annex I Page 4 of 15 Table 3: Sindh: Key Social & Economic Indicators Years Earlier Latest Year Year Social Indicators Education Literacy ratio 1981 / 1998 31 45 Male 40 55 Female 22 35 Primary Enrollment Rate 1971-72 / 1998-99 39 66 Health (per "10,000" persons) 1987 / 1998 Doctors (MBBS) 1.6 2.9 Nurses 0.7 0.9 Para Medical Staff 3.5 3.2 BEDS 7.0 7.7 Population (in million) 1981 / 1998 19.0 30.4 Rural 10.8 15.6 Urban 8.2 14.8 Density (persons per Sq. Krm.) 1981 / 1998 135 216 Area (in Sq. Krm.) 140,914 Aericulture Sector Land use 1972/ 1998-99 Per capita cropped (in hectares) 0.23 0.14 Per capita cultivated (in hectares) 0.37 0.19 Area of Major Crops (in "000" hectares) 1972 /2000 Wheat 797 1120 Rice 688 686 Cotton 453 598 Production of major crops (in "000" M.Tons) 1972 / 2000 Wheat 1,137 2,595 Rice 1,159 1,911 Cotton Lint (in "000" bales) 1,040 2,192 Infrastructure Sector Roads (Per 100 sqkm of area) 1970-71 / 1998-99 Pucca Road 2.8 14.6 Katcha Road 1.0 3.0 T.V Sets (per "000" households) 1970-71 / 1998-99 29 179 Per capita electricity generation (in KWH) 1975-76 / 1998-99 212 616 Percapita Gas Consumption (in "000" cubic feet) 1975-76/ 1998-99 0.8 5.4 Source: Government of Sindh Web site. AmexI Pafe 5 of] 5 Table 4: Sindh GDP at current prices 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 (s Mmilon) Agriculture 60801 76191 78079 95180 113593 129147 156383 178497 194440 204520 210779 Industry 79192 88657 97886 112827 123522 142062 163314 182913 190069 202178 217564 Mining and quanying 2465 2731 3014 3579 3615 4521 4626 5467 5897 6774 8116 Manufacturing 53610 57939 64427 74733 80824 86570 103311 112895 114565 119068 133585 Construction 11651 13552 15609 17543 19611 22787 26408 29239 29170 32156 33017 Electricity, gas and water 11466 14435 14836 16972 19472 28184 28969 35312 40437 44180 42845 Services 138890 162247 186697 214820 249953 286931 333111 362460 390530 427916 480383 Transport, storage & commun. 28630 38208 48440 52615 57701 64415 74601 85493 92395 101104 116819 Commerce 48683 53106 58529 68929 82990 92474 101854 106182 115402 122640 136814 Financial Inst. 12965 14541 16772 22325 25257 31424 37758 36149 39938 44241 49705 Ownership of dwellings 11725 13677 15881 18350 21343 24588 28581 32706 36808 40222 43676 Public administration & defense 19359 20342 21085 21691 24703 30079 32046 34082 36759 42787 48020 Other services 17528 22373 25990 30910 37959 43949 58271 67849 69229 76923 85349 GDP at factor cost 278883 327095 362662 422827 487068 558139 652808 723870 775039 834614 908726 GDP at market prices (EstImte) 313338 367587 405421 470782 543026 606362 702779 781283 s32385 899971 988539 (USS mllion) Agriculture 2718 3066 3008 3156 3682 3875 4040 4166 3878 3960 3619 Industry 3540 3568 3771 3741 4004 4262 4219 4269 3791 3914 3735 Miningand quarying 110 110 116 119 117 136 120 128 118 131 139 Manufacturing 2397 2332 2482 2478 2620 2597 2669 2635 2285 2305 2293 Construction 521 545 601 582 636 684 682 682 582 623 567 Electricity, gas and water 513 581 571 563 631 846 748 824 807 855 736 Services 6209 6529 7192 7123 8102 8609 8605 8459 7790 8285 8247 Transport, storage & commun. 1280 1538 1866 1745 1870 1933 1927 1995 1843 1957 2005 Commerce 2176 2137 2255 2285 2690 2775 2631 2478 2302 2374 2349 Financial Inst. 580 585 646 740 819 943 975 844 797 857 853 Ownership of dwellings 524 550 612 608 692 738 738 763 734 779 750 Public administration & defense 865 819 812 719 801 902 828 795 733 828 824 Other services 784 900 1001 1025 1230 1319 1505 1583 1381 1489 1465 GDP at fictor cost 12467 13163 13970 14019 15787 16746 16864 16893 15460 16159 15600 Memo items Pakistan's GDP (Rs. Million) 1020600 1211385 1341629 1573097 1882071 2120173 2428312 2677656 2938379 3182822 3472149 Pakistan's GDP (US$ Million) 45625 48748 51681 52158 61003 63612 62731 62489 58612 61623 59608 Pakistan GDPfc (Rs. Million) 908374 1077943 1200129 1412858 1688126 1951560 2255649 2480884 2735943 2951680 3191813 Pakistan GDPfc (US$ Million) 40608 43378 46230 46845 54717 58553 58270 57897 54574 57148 54795 ExchangeRate(Rs./US$) 22.37 24.85 25.96 30.16 30.85 33.33 38.71 42.85 50.13 51.65 58.25 Note: Sindh data upto 1994/95 is from Kaiser Bengali (1997) op. cit, remaining years are projected using the Pakistan growth rates. Source: World Bank StaffEstimates. Page6 of JO Table S: Sindh GDP at current prices (% shares) 1990/91 1991/92 1992/93 1993/94 1994/95 1995196 1996/97 1997/98 1999/99 1999/00 2000/01 (Share of SLndh GD) Agrlcultture 21.8 23.3 21.5 22.5 23.3 23.1 24.0 24.7 25.1 24.5 23.2 Industry 28.4 27.1 27.0 26.7 25.4 25.5 25.0 25.3 24.5 24.2 23.9 Mining and quanying 0.9 0.8 0.8 0.8 0.7 0.8 0.7 0.8 0.8 0.8 0.9 Manufacbtzing 19.2 17.7 17.8 17.7 16.6 15.5 15.8 15.6 14.8 14.3 14.7 Constuction 4.2 4.1 4.3 4.1 4.0 4.1 4.0 4.0 3.8 3.9 3.6 Mlectricity, gas and water 4.1 4.4 4.1 4.0 4.0 5.0 4.4 4.9 5.2 5.3 4.7 Services 49.8 49.6 51.5 50.8 51.3 51.4 51.0 50.1 50.4 51.3 52.9 Transport,storage&comimn. 10.3 11.7 13.4 12.4 11.8 11.5 11.4 11.8 11.9 12.1 12.9 Commerce 17.5 16.2 16.1 16.3 17.0 16.6 15.6 14.7 14.9 14.7 15.1 Financil Inst 4.6 4.4 4.6 5.3 5.2 5.6 5.8 5.0 5.2 5.3 5.5 Ownersbip of dwellings 4.2 4.2 4.4 4.3 4.4 4.4 4.4 4.5 4.7 4.8 4.8 Public administmtion & defesse 6.9 6.2 5.8 5.1 5.1 5.4 4.9 4.7 4.7 5.1 5.3 Other services 6.3 6.8 7.2 7.3 7.8 7.9 8.9 9.4 8.9 9.2 9.4 GDP at actor cost 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (Share of Pakistan GDPfc) Agriculture 26.1 27.0 26.2 26.6 26.0 26.3 26.3 26.3 26.3 26.3 26.4 Industry 33.8 32.3 32.3 32.1 29.9 30.5 31.2 31.0 29.3 30.1 29.2 Manufactuing 33.8 31.0 31.1 30.2 28.0 28.0 29.2 28.7 27.1 26.6 27.2 Senices 31.5 31.1 31.2 30.6 29.9 29.5 30.0 29.9 29.0 28.5 29.5 GDP at factor cost 30.7 30.3 30.2 29.9 28.9 28.6 28.9 29.2 28.3 28.3 28.5 Note: Sindh data upto 1994/95 is f*om Kaiser Bengali (1994) paper cited in Table 2; remaining years are projected using the Pakistan growth iats. Source: World Bank Staff Estimates. Annex I Page 7 of 15 Table 6: Sindh GDP at constant prices 1990/91 1991192 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 (Rs. Mtilon) Agriculture 29873 33843 31145 33U2 34795 39084 39195 41032 41900 44846 43437 Industry 37443 38035 40200 41665 41081 42884 43905 46204 45507 46093 47797 Min*ng and quarryng Manufacturing 26025 25340 26839 27328 26094 26838 28034 29460 28879 28820 30852 Construction 5635 6052 6487 6680 6834 7066 7202 7353 7047 7471 7444 Electricity, gas and water 5783 6643 6874 7657 8152 8981 8669 9391 9581 9801 9501 Services 69043 73096 76056 77485 79966 84412 86483 85789 92856 96333 100817 Transport, storage & commun. 15738 17859 19121 18391 18543 18969 19456 20619 21644 21575 22857 Commerco 23500 23493 24293 25052 26448 26636 26580 27081 27170 27061 28088 Financial Inst 4766 4904 5238 5972 6349 7229 8013 6180 6723 7706 7886 Ownership & Dwel1+Other services 25038 26840 27403 28070 28626 31579 32434 31908 37319 39990 41986 GDP at factor cost 136359 144973 147401 152392 155842 166381 169584 173025 180264 187272 192051 (% annual growth) Agriculture 13.3 -8.0 6.7 4.7 12.3 0.3 4.7 2.1 7.0 -3.1 Industry 1.6 5.7 3.6 -1.4 4.4 2.4 5.2 -1.5 1.3 3.7 Mining and quarying Manufactming -2.6 5.9 1.8 -4.5 2.8 4.5 5.1 -2.0 -0.2 7.0 Construction 7.4 7.2 3.0 2.3 3.4 1.9 2.1 *4.2 6.0 -0.4 Electricity, gas and water 14.9 3.5 11.4 6.5 10.2 -3.5 8.3 2.0 2.3 -3.1 Services 5.9 4.0 1.9 3.2 5.6 2.5 -0.8 8.2 3.7 4.7 Transport, storage & commun. 13.5 7.1 -3.8 0.8 2.3 2.6 6.0 5.0 -0.3 5.9 Commerce 0.0 3.4 3.1 5.6 0.7 -0.2 1.9 0.3 -0.4 3.8 Financial Inst 2.9 6.8 14.0 6.3 13.9 10.9 -22.9 8.8 14.6 2.3 Ownership & Dwell+Other services 7.2 2.1 2.4 2.0 10.3 2.7 -1.6 17.0 7.2 5.0 GDP at factor cost 6.3 1.7 3.4 2.3 6.8 1.9 2.0 4.2 3.9 2.6 Memo Item Pakistan's GDP (Rs. Million) 499960 539131 549455 570859 600086 623227 629550 645605 669235 698902 722877 Pakistan's GDP (% annual growth) 7.8 1.9 3.9 5.1 3.9 1.0 2.6 3.7 4.4 3.4 Pakistan's GDPfc (Rs. Million) 446005 480413.0 491325.0 513635.0 540528.0 577080.0 588191.0 600125.0 625233.0 649540.0 666115.0 Pakistan's GDP (% annual growth) 7.7 2.3 4.5 5.2 6.8 1.9 2.0 4.2 3.9 2.6 Note: Sindh data upto 1994/95 is from Kaiser Bengali (1997) paper, remaining years are ptojectod using the Pakistan growth rates. Source: World Bank Staff Estimates. Annex I Page 8 of 15 Table 7: Sindh: Public Finances, 1999/00-2001/02 (Rs Million) 1999/00 2000/01 2001/02 Prov. RE. Total Revenues 55416 61576 72859 Federal Transfers 35921 40479 47599 Provincial Revenues 12794 15621 18043 Tax Revenues 5335 7147 8163 Non-Tax Revenues 7459 8474 9880 of which; Abiana 576 633 631 Federal grants 6700 5476 7217 of which; KPP 949 3080 O&Z 6700 4528 4137 Total Expenditures 55000 59559 73892 Current Expenditures 51055 54153 64830 Wages 22006 23327 31670 Pension 3452 3970 4600 Operations and Maintenance 4669 5676 6896 Interest Payments 11595 10440 11409 Subsidies 399 3178 1500 Grants to LG & others 8934 7562 8755 Development Expenditures & Invest. 3945 5407 9062 Fiscal Balance 416 2016 -1033 Public Savings 4361 7423 8029 Primary Fiscal Balance 12010 12457 10375 Sources: Government of Sindh and World Bank Staff Estimates. Annex I Page 9 of 15 Table 8: Sindh: Agriculture Sector Production "000" million Area "000" hectares tons 1998-99 1999-00 1998-99 1999-00 Major Crops Wheat 1,123.7 1,144.2 2,675.1 3,001.3 Rice 704.1 690.4 1,930.3 2,123.0 Sugarecane 270.8 230.6 17,050.7 14,290.8 Cotton ("000" bales) 630.2 633.5 2,134.1 2,377.4 Jowar 110.3 91.1 64.4 55.9 Bajra 175.0 18.0 73.1 8.9 Maize 10.5 8.6 5.5 4.6 Rape seed & MustSrd 92.4 77.6 73.6 63.9 Gram 89.8 86:4 76.7 70.4 1997-98 1998-99 1999-00 Land Utilization ("000" hectares) Reported area 14,081 14,046 14,051 Total cultivated area 5,685 5,647 5,699 Total cropped area . 3,946 4,111 3,885 Index of agriculture production (1985-86=100) All crops 150.5 150.39 155.81 Food crops 130.3 133.68 144.37 Non-food crops 176.4 171.7 170.41 Water withdrawals (in MAF) 46.47 48.16 45.37 Fertilizer off-take (in "000" M. Tons) 603.96 528.06 528.81 Tractors and Tubeweiss (in numbers) 1975 1984 1994 Tractors 3,908 16,542 23,182 Tubewells 7,995 9,481 16,236 Fisheries/Fish catch (In "000" M. Tons) 1996 1997 1998 Marine 267.84 285.77 295.65 Inland 91.37 91.9 96.4 Source: Government of Sindh Web site. Annex I Page IOof lS Table 9: Sindh: Manufacturing Industrial Production and Employment Employment (in Selected Industries Unit Factories covered Production numbers) 1998-99 Vegitable ghee "000" M.,tons 23 191 1,673 Sugar "000" M. tons 29 1,331 18,969 Cement "000" M. tons 9 1,945 2,715 Fertilizer (Urea) "000" M. tons 2 1,397 1,401 CottonYarn "000" M.tons 81 210 35,392 Cotton Cloth Mn. Sq. Mtrs. 85 Cigarettes Mn. Nos. 2 10,527 875 1999-00 Vegitable ghee "000" M. tons 23 187 1,607 Sugar "000" M. tons 29 959 16,022 Cement "000" M. tons 9 1,915 2,520 Fertilizer (Urea) "000" M. tons 2 1,423 1,391 Cotton Yarn "000" M. tons 81 232 36;548 Cotton Cloth Mn. Sq. Mtrs. 93 Ci-arettes Mn. Nos. 2 10.980 824 Source: Government of Sindh Web site. Annex I Page 11 of 15 Table 10: Sindh: Census of Manufacturing Industries, 1995-96 Average Daily Industries Nos. Value of Production Employment (in Rs. billion) (in "000|) Total 1,528 285.3 202.6 Textile 350 58.5 61.3 Cement 7 7.3 4.9 Fertilizer 2 6.9 1.3 Ghee 15 4.2 1.9 Refined Sugar 23 17.5 15.9 Tobaco (Cigarettes) 2 1.3 0.8 Auto Mobile 45 21.9 4.1 Petroleum Refining 2 29.2 1.3 Industrial Chemical 39 15.3 5.2 Other Chemical Products 60 9.7 4.4 Pharmaceuticals 64 15.7 9.1 Others 919 97.9 92.5 Source: Government of Sindh Web site. Annex I Page 12 of 15 Table 11: Sindh: Education Sector, 1998-99 Institution Number Enrollment Teaching Staff Primary Schools 38,884 2,226,254 101,035 Male 32,909 1,835,374 79,955 Female 5,975 390,880 21,080 Middle Schools 2,073 121,392 8,932 Male 1,475 85,997 6,331 Female 598 35,395 2,601 High Schools 1,449 603,261 30,167 Male 1,042 391,366 21,538 Female 407 211,895 8,629 Intermediate and Degree Coleges 201 251,874 5,239 Male 144,948 3,094 Female 106,926 2,145 Technical Institutions 105 27,921 1,116 Male 25,229 810 Female 2,692 306 1. Enrolment figures include children enrolled in govt. & private primary schools in class I to V. A recent Survey by Federal Bureau of Statistics has esfimated an enrohnent of 0.94 millions in class I to V in schools in Sindhl being run by other than govt. including private schools. 2. Data of schools 1998-99 has been taken from SEMIS report, 1999. The report covers only Govenment Schools Source: Government of Sindh Web site. Annex I Page 13 of 15 Table 12: Sindh: Health Sector, 1999-2000 Type of Institutions 1.1.1999 1.1.2000 Numbers Beds Numbers Beds Hospitals 323 23,356 324 23,768 General, training and other Govt hospitals 86 10,340 86 10,744 Local, Autonomous bodies and other depts. 32 2,869 32 2,869 Private 205 10,147 205 10,147 Dispensaries 1,873 569 1,888 569 Govemment 208 6 221 6 Local, Autonomous bodies and other depts. 921 88 921 88 Private 744 475 744 475 Rural Health Centers 90 1,324 92 1,364 Basic Health Units 687 1,422 701 1,450 Sub-health Centers 9 4 Mother & Child Health Centers 37 12 37 12 Govt. T.B. Clinics 167 .. 169 Source: Govermment of Sindh Web site. Annex I Page 14 of 15 Table 13: Sindh: Transport, Communication, Electricity and Mining 1997-98 1998-99 Transport Vehicles on Road (in number) 888,475 921,798 Motor Cars, Jeeps & Wagons 331,670 338,320 Motor Cycles 403,909 413,950 Taxies 13,873 31,073 Motor Rickshaws 22,446 24,153 Buses/Mini Buses 10,439 10,997 Trucks 11,151 11,802 Tractors 42,009 37,969 Pickups, D.Vans & Others 52,978 53,534 Roads (inn Kms.) Pucca(High Type) 20,186 20,610 Katcha(Low Type) 4,608 4,233 Tele-Communication Services Post offices 1,805 1,872 Radio Licenses 74,923 74,650 Television sets 786,796 900,826 V C.R.V.C.P Sets 70,005 TBRSA Sets 2,966 Electridty Generated (in Mn. KWH) 19,535 18,053 Mineral Production (in "000" Kgs) Clay(Shale) 415,606 331,119 Coal 1,227,175 1,189,398 Lime Stone 2,315,397 2,204,292 Dolomite 74,112 129,817 Source: Goverment of Sindh Web site. Annex I Page 15 of 15 Table 14: Sindh: Electricity and Natural Gas Consumption, 1999-00 Electricity (in Mn. KWH) Natural Gas (in Mn. Cub. Mtrs.) K.E.S.C WAPDA KARACHI INDUS Total 6,430 5,527 3,895 1,259 Domestic 2,457 1,436 893 302 Commercial 541 216 134 34 Industrial 2,431 1,231 2,868 923 Agricultural 28 557 Others 973 2,087 Source: Government of Sindh Web site. MAP SECTION TURKMENISTAN _ / 68- 70O -3;6i iUZEEKISTAN TAIITSTAN\. PAKISTAN SINDH STRUCTURAL ADJUSTMENT CREDIT (SSAC) AFGHANISTAN .62 3 3- TOWNS AND VILLAGES SELECTED ROADS 0 DISTRICTCAPITALS ' ' ' SELECTED RAILROADS - PAKISTAN t PROVINCE CAPITAL - - - DISTRICT BOUNDARIES k PROVINCE BOUNDARIES -2W 1 2S 2- INTERNATIONAL BOUNDARIES SINDH * I 5ro < 4 ~gTo Rojonpur _ To Rhotpo-t JACOB~~~ACO %< P UN JA B BALOCHISTAN T.1 SKondho . ToSoA;qobo.d -28- K^h, 5 ;R 28 - 2B~~~~~~ . -- .~~~~~~~~~~~SHIKR - * Dhohoki 2 B A~~~oin ~~ Mi~~pu~~ Mathelo j Shododhol Roo KK R ,il GHOTKI - \s o' . Kamh~~on,6o K} KHAIRPUR, s S UK KU R \ I.. ~ ~ ~ K. / Noe'obd ToDN.1 d ° d tpi Khon tt onipor PirtWooo4 Kh6oirpOr * lh6j i N.fhon SohPs < 0 g < Thcri Mi-11l / D j FSE*%H /T h KHAIRPUR DADU F d.dZ -260 ! \ t~~~~ S SJo SAOAR GA v2 I.h 8 m;h p o (T 0r / ' 9 i\>S/,~~~~Il N_'_ rotnoA ' , Kolri I' nd o I r2 Noro ANGHAR'4 AToho k THAR PARKAR - 24SANGHAR 249- A,RABIAN SEA \, dJv o~~~~~~~~~~~~~ 20 40 60 80 00Ioo0Kilo Kki 10 20 30 40 0 Miw ~~~~~~~~~~~D . Kh UMEKO .0,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 ..b., eredoneeoroeroofJu 7 M8°ITH70Ia I Kaah East N IMAGING Report No.: 24193 PAK Type: PAD