ReportNo. 32764-PK Pakistan North West Frontier Province Economic Report Accelerating Growth and Improving Public Service Delivery in the NWFP: The Way Forward December 2005 Poverty Reduction and Economic Management Sector Unit South Asia Region CURRENCY EQUIVALENTS Currency Unit = Pakistan Rupee (PKRs) US$1 =PKRs 60.15 (December 14,2005) GOVERNMENTFISCAL YEAR July 1 -June 30 ACRONYMSAND ABBREVIATIONS ADP Annual DevelopmentPlan LGO Local Governance Ordinance AJK Azad Jamrnu Kashmir LHW Lady Health Workers AIT Agricultural IncomeTax M&E Monitoringand Evaluation BHU Basic Health Unit MDG MillenniumDevelopment Goals CCB Citizen CommunityBoard MITI Ministryof Trade and Industry CCC Concept ClearanceCommittee MPA Member of Provincial Assembly CDGP City District Governmentof Peshawar MTBF Medium-Term Budget Framework CDMD City Development and MunicipalDepartment NEPRA The NationalElectric Power RegulatoryAuthority CPR Contraceptive Prevalence Rate NFC National Finance Commission CSR Composite Schedule of Rates NGO Non-GovernmentalOrganization C W Q Core Welfare Indicators Questionnaire NHP Net Hydel Profit DCO District Coordination Officer NTDC NationalTransmission and Dispatch Company DDO District DevelopmentOfficer NWFP North West Frontier Province DHQ District Headquarter O&M Operationand Maintenance ED0 Executive District Officer P&D Planning and Development EEF Elementary Education Foundation PATA Provincial Administered Tribal Area EMIS Education ManagementInformationSystem PESCO Peshawar Electric Supply Company FAR Floor Area Ratio PFC Provincial Finance Commission FBS Federal Bureau of Statistics PGDP Provincial Gross Domestic Product FEF Frontier EducationFoundation PHC Primary Health Care FHA Frontier Highways Authority PHED Public Health and EngineeringDepartment GDP Gross Domestic Product PHP Project for Horticultural Promotion GER Gross Enrolment Rate PIHS Pakistan Integrated Household Survey GoNWFP Government of North West FrontierProvince PSD Private Sector Development HIES Household Income and ExpenditureSurvey PSLMS Pakistan Social and Living Standards IEC Information, Education and Communication MeasurementSurvey IF1 International Financial Institution PTA Parent Teacher Association HIES Household Income and ExpenditureSurvey PRSP Poverty Reduction Strategy Paper LED Local EconomicDevelopment SAC Structural Adjustment Credit LFS Labor Force Survey SDA Sarhad Development Authority Vice President: Praful Patel, SARVP country Director: John W. Wall, SACPK Sector Director: Sadiq Ahrned, SASPR Sector Manager: Ijaz Nabi, SASPR Task Managers: Paul Wade , Zareen Naqvi, SASPR,Khalid Ikram, Consultant TABLE OF CONTENTS PREFACE AND ACKNOWLEDGEMENTS ............................................................................................. i THE OCTOBER EARTHQUAKE AND ITS LIKELY CONSEQUENCES ......................................iii EXECUTIW SUMMARY ......................................................................................................................... v CHAPTER 1: CHALLENGESAND STRATEGY .................................................................................. 1 A.THE POVERTY CHALLENGE.................................................................................................................. 1 B.THE EMPLOYMENTCHALLENGE .......................................................................................................... 4 C.REMITTANCESAS AN OPPORTUNITY.................................................................................................... 6 D.A STRATEGYTOMEETTHE POVERTY ANDEMPLOYMENTCHALLENGES...........................................8 CHAPTER 2: AGRICULTUREANDNATURAL RESOURCEMANAGEMENT ..........................14 A.RECENTAGRICULTURALPERFORMANCE...........................................................................................14 B.MAJOR ISSUES .................................................................................................................................... 20 C. BROADSTRATEGY AND KEY COMMENDATIONS ........................................................................... 31 D. POSTSCRIPT: RECENTAGRICULTURALPOLICYCHANGES............................................................... 34 CHAPTER 3: PRIVATESECTOR DEVELOPMENT ........................................................................35 A.THE CHALLENGEAND THE OPPORTUNITY.........................................................................................35 B.IMPROVINGTHE INVESTMENTCLIMATE............................................................................................37 C. IMPROVINGPERFORMANCEOF KEY INDUSTRIES:SECTORGOVERNANCEISSUES ............................ 46 D.CREATINGLINKAGES AND DEEPENINGSUPPLY CHAINS...................................................................50 E.TAPPINGTHE ECONOMICPOTENTIALOF CITIES................................................................................. 53 F.RECOMMENDATIONS...........................................................................................................................54 ANNEX 3.1: PSD: CROSS-SECTORALRECOMMENDATIONS.................................................................. 60 CHAPTER 4: IMPROVINGSERVICEDELIVERY AND EKMAN DEVELOPMENT OUTCOMES ...................................................................................................................64 A.THESTATEOFEDUCATION AND HEALTH IN THEM P...................................................................65 B.SYSTEMICISSUESIN PUBLICSERVICEDELIVERY..............................................................................70 C.SECTORSPECIFICISSUES................................................................................................................... -7% CHAPTER 5: REFORMS WITHIN A SUSTAINABLEFISCALFRAMEWORK, CONCLUSIONS AND PROSPECTS ........................................................................... 90 A.MOBILIZINGADDITIONALPUBLIC RESOURCES................................................................................. 91 B.IMPROVING THECOMPOSITIONAND EFFICIENCY OF PUBLICSPENDING ........................................... 94 c.BETTER MANAGINGPUBLIC INVESTMENTPROJECTS ...................................1................................... 96 D.FURTHERINGFISCAL DECENTRALIZATION.......................................................................................-97 ANNEX 5.1: MEDIUM-TERM ECONOMICFRAMEWORK.................................................................1 0 3 ANNEX 5.2: IMPLICATIONSOF A STRATEGY FOR RATIONALIZINGPROVINCE-~~ISTRICT TRANSFERSIN THE NWFP ......................................................................................... 106 APPENDICES .........................................................................................................................................111 APPENDIX 1:PROPOSED SEQUENCINGOF RECOMMENDEDPOLICY ACTIONS...................................... 111 APPENDIX2: TECHNICALASSISTANCEREQUIREMENTS................................................................... 118 APPENDIX3: NOTEON ESTIMATIONOFPROVINCIALGDP: 1990/91-2004/05.8................................... 125 APPENDIX 4:STATISTICALTABLES ...................................................................................................... 136 APPENDIX 5:PREPARINGFOR NATURAL DISASTERS:STRATEGY AND RECOM~ENDATIONS FOR THE PROVINCIAL GOVERNMENT..........................................................................172 TABLES Table 1.1: PovertyTrends in the Larger Provinces(World Bank Poverty Lines)...................................2 Table 1.2: Composition of Employment, 2001102 ..................................................................................5 Table 1.3: Average Earnings by Province,2001/02.............................................................................5 Table 1.4: Remittances in the NWFP and Palustan,2001102............................................................7 Table 2.1: Yields of Key AgriculturalProducts,2002 ........................................................................ 14 Table 2.2: Composition and Recent Growth Rates of AgriculturalGDP, 1980181-2002103..............15 Table 2.3: Patternsof Poverty and Agricultural Characteristics............................................................20 Table 2.4: Suggested DivisionbetweenPublic and Private Sector Roles.............................................24 Table 3.1: TaxesImposed on a Typical Business, 2005........................................................................41 Table 3.2: Percentage of Waste from MarbleMiningand Processing,2003104...................................51 Table 3.3: Summary of Issues Facing Key Industries..........................................................................52 Table 4.1: Selected Social Indicators, the NWFP and Overall Palastan,2001102 ................................64 Table 4.2: Literacy and Enrolmentin the NWFP and South Asia.........................................................65 Table 4.3: Education Indicators in the NWFP, 1998199- 2001102......................................................66 Table 4.4: Pakistan: Health Indicatorsby Provinces, 1998199- 2001102.............................................67 Table 4.5: Pakistan: Educationand Health Indicators and Access, 2001102.........................................68 Table 4.6: Lack of Transport Access and Service Availability in Rural Pakistan, 2001102..................68 Table 4.7: Administrative Authoritiesof District Government Officials..............................................72 Table 4.8: Pre- and Post-DevolutionAdministrativePowers of Local GovernmentOfficers ..............72 Table 4.9: Accessto Schools in Rural NWFP, 2001102......................................................................78 Table 4.10: Net Primary School EnrolmentRate by Public and PrivateSchools 1998199 and 2001102 ..................................................................................................................8 0 Table 4.11: NWFP: Structureof EducationExpenditurein Schools, 2001102-2003104......................82 Table 4.12: NWFP: Expendituresin Public Schoolsand Colleges, 2001102- 2003104.........................82 Table 5.1: NWFP: Medium-TermFiscal Projections under the ReformScenario................................91 Table 5.2: Projected Employment,Investmentand Fiscal Outcomes...................................................92 Table 5.3: Comparison of District Annual DevelopmentProgram in the NWFP and the Punjab.......100 Figure 1.1: PovertyTrends in the NWFP and Pakistan (World Bank Poverty Lines)..............................2 Figure 1.2: Average Earnings by Professionin NWFP and Rest of Pakistan. 2001102............................6 Figure 1.3: Share of NWFP's PopulationReceiving Remittances. 2000101 ............................................7 ~igure1.4: Average AmountReceived in Remittances in the NWFP. 2000101.......................................8 Figure 2.1: Area under Cereal Production. 1985/86- 2002103............................................................15 Figure 2.2: Fruit Production in the NWFP. 1985186- 2002103........................................................... 16 Figure 2.3: VegetableProductionin the NWFP. 1985186- 2002/03..................................................17 Figure 2.4: Area under Cultivation of Various Crops. Average 2000101-2002103..............................18 Figure 2.5: Farm Households Engaged in Livestock Production. 2000.................................................19 Figure 2.6: Public Expenditures in Agnculture .....................................................................................21 Figure 2.7: Trends in AgricultureSector Spending ................................................................................21 Figure 2.8: Poverty Ranlung and Expenditure per Agricultural Household. 2002103............................22 Figure 2.9: Salaried and Sanctioned Posts in Provincial Level. Departmentof Agriculture. 2004105 Budget ....................................................................................................................27 Figure 2.10: StaffingProfileat District Level..........................................................................................28 Figure 3.1: Annual Firm Registration in NWFP, 2000-2005................................................................36 Figure 3.2: Pakistan's Exports & Imports with Afghanistan and Central Asian Republics 1990191 - 2003104................................................................................................................36 Figure 3.3: Obstacles to Growthin NWFP Compared with the Punjab,2004 .......................................38 Figure 3.4: Perceptionsof the Investment Climate. 2004........................................................................38 Figure 3.5: Cost of Starting a Business,2004.........................................................................................40 Figure 3.6: Time to Start a Business,2004 ............................................................................................ 40 Figure 3.7: Cost of TransportingMarble, 2004 .....................................................................................42 Figure 3.8: Cost of Enforcinga Contract, 2004 .....................................................................................43 Figure 3.9: Legal Creditor Rights Index, 2004.......................................................................................44 Figure 3.10: Costs of Creating a Collateral Agreement,2004..................................................................45 Figure 3.11: ConstructionIndustry.......................................................................................................... -47 Figure 3.12: Value Chain for MarbleProduction in the NWFP, 2005 .....................................................51 Figure 3.13: Value Chain for Apple Productionin the NWFP, 2005 ....................................................... 52 Figure 4.1: Total Fertility Rate, 2003 ..................................................................................................... 66 Figure 4.2: Percentageof Children Fully Immunizedby Province, 2001/02 .........................................67 Figure 4.3: Road Access in Rural Areas in the NWFP, by Quintile (2001102PMS).............................69 Figure 4.4: Primary Net Enrolment Rate and All-WeatherMotorableRoads........................................ 69 Figure 4.5: Average Number of QualifiedWomen in Rural Communities, 20011'02.............................79 Figure 4.6: Health Spendingas Percent of Total GovernmentExpenditure,1990-2004........................83 Figure 4.7: Basic Health Unit OutpatientVisits in R.Y. Khan District Before and After N W Management................................................................................................................ 86 Figure 5.1: NWFP Fiscal Transfers, FY04105........................................................................................98 Figure 5.2: District per Capita Wage Budgets, FY04105......................................................................99 BOXES Box 2.1: The 'Ladder' of Diversification.................................................................................................. 16 Box 2.2. Perceived Constraintsto Cost Recovery..................................................................................... 26 Box 3.1: Rural Road Investment. Poverty and Growth............................................................................. 42 Box 3.2. Three Examples of Fora for Private-Public Dialogue.................................................................56 PREFACE AND ACKNOWLEDGEMENTS 'This report is the joint product of a team from the Government of the North West Frontier Province and the World Bank, and its preparation has benefited from generous financial support from the U.K. Department for International Development (DFID). In September 2004, the Government of the P constituted a countenpart team who were closely involved in the report's preparation. This team was headed by Mr. Siraj ul Haq, Senior Minister, and included the Chairman of the Planning and Development Board, and the Secretaries of Finance, Planning, Communication & Works, Education, Health, Lzgation, hdustries, and Agriculture Departments and also a representative from the private sector. The report was prepared by Paul Wade, Khalid Ikram and Zareen Naqvi in the Poverty Reduction and Economic Management (PREM) unit of the World Bank's South Asia Region, under the guidance of Manuela Ferro, Lead Economist, Ijaz Nabi, Sector Manager, and John Wall, Country Director. The peer reviewers were Sudarshan Gooptu, Ron Hood, and Rocio Castro (World Bank), and Farid Rahman as external peer reviewer. The report draws upon significant contributions from Rasmus Heltberg and Ambar Narayan (poverty, employment), Shaheen Malik (provincial GDP estimates), Derek Byerlee, Chris Jackson, Sajidin Hussain, Ambreen Malik and Tekola Dejene (agriculture), Magdi Amin and Isfandyar Khan (Private Sector Develvpment), Shahnaz Arshad (urban growth centers), Zahid Hasnain (administrative and hctional devolution), Kai Kaiser (fiscal devolution), Mohammed Essakali (transport), Naveed Naqvi (education), Shahaz Kazi (health), Raja Rehan Arshad (water supply and sanitation) and Zareen Naqvl (fiscal). Arlene Reyes, Muhammad Shafiq, and Shahnaz Rana provided invaluable assistance in handliag all logstical arrangements for the mission and withprocessingthe report. The repat team benefited greatly from collaborative work with the province's counterpart team during two preparation missions (December 2004 and FebruaryIMarch 2005). The counterpart team coordinated all government and private sector inputs, provided comments, feedback, and guidance to the study team at all stages of the analysis and report preparation, and helped facilitate interaction with other line departments. The draft report was submittedto the government in June 2005 and discussionswith the governmegt concluded on October 7, before a powerful earthquake struck the NWFP and other areas in northern Palastan. While the main report was prepared before the earthquake, a brief section on its likely consequences and an appendix on lessons for disaster preparedness, management and mitigation have been added. The authorities have started to release new data on social outcomes. When the complete data set is available, a supplementarynote will be issued updating relevant sectionsof this report. THE OCTOBER EARTHQUAKEAND ITS LIKELY CONSEQUENCES Just as this report was being finalized for the press, a powerful earthquake measuring 7.6 on the Richter scale struck the northern areas of Pakistan on October 8. Five districts in the NWFP- Abbottabad, Batagram, Kohistan, Mansehra, and Shangla-were severely affected. These five districts account for nearly a quarter of the province's geographical area and 17 percent of its population. A Damage and Needs Assessment mission fiomthe World Bank and the Asian Development Bank (October 2005) reported that the share of the affected districts in the social and physical infrastructure of the province was higher than their share in population, because of the lower population density and the more scattered sektlementsin the affected districts. It estimated that of the totals in the province, the affected districts accounted for 22 percent of the stock of private housing, 26 percent of schools, 22 percent of health institutions, 25 percent of villages and electricity, 21 percent of households with potable water, and 19 percent of the road network. The total output generated in the five districts is estimated at $1.5 billion in 2003104. It is too early to attempt a definitive estimateof the cost of the earthquake to the province and the GoNWFB. Indeed, it is not even clear what "definitive" in this context means, because the final calculation will involve a large number of subjective judgments. The latter include questions such as: how much of the infrastructure and the damagedJdestroyedprivate property will be rebuilth-epaired;what quality standards will this rebuilding aspire to; in what time period is this reconstruction to be completed; what compensation or support will be offered to the affected groups merely to help them survive until such time as their means of earning a livelihood are restored; how much of the required amounts will be provided by the government, how much by private philanthropy, and how much fiom foreign donors; and SO on. A preliminary approximationof total losses and reconstructioncosts puts the direct damage to the districts of the NWFP at about $1 billion, with indirect losses at nearly $300 million.' Reconstruction costs-valued at an improved standard replacement rate, which includes the cost of rebuilding to a quality that responds to local conditions and risks from future earthquakes-are put at over $1.5 billion. In addition there are costs associated with compensating families for loss and injury and relief for survivors. These preliminary estimates of reconstructing the assets directly damaged by the earthquake take no account of human losses or of the cost of providing relief to the survivors. It is clear that the NWFP has suffered a very serious blow. Even with fairly generous donor support, the bulk of the requirements will have to be met from Palustan's own resources. The NWFP's budget will not be able to accommodate a significant share of the relief and reconstructioneffort, although the province will no doubt be expected to do its best. Depending on how much of the costs of relief and reconstruction will be borne by the GQNWFPthis may require adjustments in consumption expenditure in the budget, reprioritization of investment and other expenditures, the postponement of some projects, a larger effort at mobilizing resources from within the province, and perhaps additional borrowing from abroad. It is also evident that the reconstruction effort will be spread over time. The NWFP will have to think in terms of the long run, because of limits on the implementation capacity of government institutions, because of the time that will be required to clear the debris of the destroyed buildings, and because the impending onset of winter wiill require the government to focus its energieson questions of survival and defer that of reconstruction. Indirect losses comprise reductions in the flow of goods and services, and other economic consequences-such as increased expenses, curtailed production,and diminished revenue-that arise from the direct damage to production capacity and social and economic infrastructure. Apart from requiring a greater financial outlay, the earthquake will have consequences for the government in other areas. The authorities will have to pay particular attention to the pnces of items the demand for which will have increased because of the earthquake. These include basic food items, construction materials, and household goods, such as blankets, sheets, etc. Another possible consequence of the earthquake and the loss of livelihood in the affected areas is that substantial numbers of people might migrateto other parts of the province. This will create additional pressurk on the infrastructureand on jobs in those areas, while the emergenceof slums could create problems of hygieneand sanitation. Since the authorities' investigations into the effects of the earthquake are still continuing and the judgments of major observers remain very fluid, it is too early at this time to provide a quantitative discussion of the effects of the earthquakeon the economy of the NWFP. When more firm judgments are reached on the issues mentioned above, and as more detailed assessments of the damage and loss are completed, a supplementarynote on the budgetary consequencesof the earthquake will be issued. EXECUTIVE SUMMARY 1. The North West Frontier Province is home to citizens famed for their sense of honor, bravery and hard work. This is borne out by their achievements in Pakistani metropolises and abroad. Yet, contrary to the true potentialof its citizens, the NWFP is one of the poorest provinces in Pakistan. 2. The key to unleashing the NWFP7spossibilities and to improving the lives of its citizens is strengthening the governance and policy environment in the province for both the private and the public sectors, and investing in the provinces' most valuable resource -its people. Reforms and efforts in the past few years have already started to translate into higher growth, improved incomes, and better living conditions for the citizens of the NWFP. This report outlines a strategy that builds on these successes and recommends policies to accelerate developmentin the province. The Challenge 3. Geography, the fallout from international tensions, insufficient investment in human capital, and a policy environment unsupportive of the private sector have made the NWFP one of Pakistan's poorest provinces. Poverty in the NWFP is widespread, in particular in nual areas. Estimated per capita provincial GDP in 2002103 was only 60 percent of the average for the country. As a result of lack of jobs in the province, workers find it necessary to migrate in search of better opportunities to the urban metropolises of the richer provinces (especially Karachi) and to other countries (especially in the Gulf). Remittances from migrants benefit nearly 40 percent of all households in the NWFP, helping many escape poverty. 4. The province's achievements in education and health are also below the national average. The literacyrate (10 years and older) in the NWFF' was only 38 percentin 2001/02 compared to 45 percent for Pakistan and 61 percent in India. The infant mortality rate in the NWFPis high by internationalstandards, but is the lowest in Pakistan at 56 per 1000 births. Estimates of maternal mortality are unavailable but improvements are likely to be modest given the persistence of high fertility, limited changes in the practice of deliveries at home, and the small proportion of births that are attended by skilled personnel. Only 58 percent of households in the NWFP have access to safe water, cgmpared to 86 percent in Pakistan. And there is relentless population pressure driven by the high fertility rate of 4.3, compared to the Palustan national averageof 4.1,3.2 in India and 3.1 in Bangladesh. The contraceptive prevalencerate is 30 percent, compared with 32 percent for Pakistan and far below the rates for [ndia and Bangladesh. 5 . The figures on health and education are provincial averages that mask vast disparities between men and women. Literacy and school enrolment rates for females in the NWFP are among the lowest in the country, whereas the corresponding ones for males are closer to (or sometimes higher) than the national average. Large gender gaps exist also in health outcomes and suggest low access to (and perhaps low demand for) preventive and curative medical care. Women's participation in economic activity (17 percent) is very limited, contributing to the province's low per capita incomes. 6. Poor education and health translate into low living standards, and have important economic consequences. Poor health of the household head is associated with lack of employment and the likely pauperization of the household. And children of households whose head is uneducated will often be illiterate themselves, trapping householdsin poverty across generations. These poor social indicators and the large gendergap hold back the provincial government's efforts to raise incomes and reduce poverty. 7. These unsatisfactory outcomes have to be seen against the backdrop of a pervasive view in the province that only the government can solve citizens' problems, both with regard to service delivery as well as employment and income generation. The pnvate sector in the NWFP thus is weak and does not play the role that it does in the Punjab and in Sindh. The M P : Features and Constraints 8. A development strategy for the NWFP should, of course, be shaped by the province's main featuresand constraints. Whilesome of these constraintscannot be eliminated,many can be addressed by the Government of the NWFP and others by the national government. This report alludes to actions required from the national government, but emphasizes policies that are the provincial government's responsibility. Four characteristics of the NWFP merit special mention: > Distance from seaports. The deep inland location of the NWFP translates into high transport costs, which increase prices for inputs and undermines the competitiveness of the NWFP's exports to countries other than neighboring Afghanistan. This suggests that the province's growth strategy should focus on production of products with a high share of raw materialsthat are indigenous to the province, that are light-weight and high-value, or that can be exported to countriesthat are physically close to the NWFP. > A front-line state. The NWFP served as a front-line state and hosted more than three million refugees during the eleven-year war in Afghanistan and also for the period of the civil war that followed. Instability and security problems ensued, which discouraged private investment; and the inflow of refugees placed stress on the province's economic and social infrastructure. > Limitedprivate sector presence. While elsewhere in Pakistan there is a vibrantprivate sector that is responding quickly to the country's emerging economic opportunities,private enterprise in the NWFP remains anemic and well below its potential. A survey of perceptions of businessmen places Peshawar at the bottom of the list of major cities of Pakistan. The main reasons for this poor showing were perceptions (both of businesses based in NWFP and elsewhere) of greater policy uncertaintyin the NWFP, weaknessesin tax administrationand electricity shortages.This translates into limited job opportunities for the citizens of the NWFP, who find it necessary to migrate in search of employment. > Uneducated workforce. The NWFP's rapidly-growing workforce is largely illiterate and unskilled. This translates into lower productivity of labor and discourages businesses from locatingin the NWFP and creatingjobs in the province.The flip side is that poorly skilledNWFP migrant workers are unable to secure more skilled, better paying jobs in Pakistani metropolises and the Gulf. A DEVELOPMENTSTRATEGY FOR THE NWFP 9. The first step towards providing a better life for the citizens of the NWFP is to increase their incomes. Increases in income are largely brought about by a rapidly growing provincial economy. In a modern economy, it is a vibrant private sector that provides productive employment to the labor force. If current trends in the labor force growth and the elasticity of employment with respect to real GDP are maintained, then the NWFP's real GDP will have to grow at a rate of about 6 percent annually for an extended period just to absorb the new entrants into the labor force. Reducing unemployment and emigration from the province below current levels will require economic growth of 7-7.5 percent per annum. 10. The poor in the NWFP are clustered around the poverty line, thus even small increases in their household incomes can translate into large changes in poverty incidence. This means that a strategy that succeeds in generating a reasonable rate of growth in real per capita incomes can lift large numbers of households above the poverty line. 11. A strategy for growth and poverty reduction will require action on four fronts. The authorities will have to: > Sustain rapid economic growth, dnven by a vibrant private sector. A,'higherrate of provincial GDP grovdh is the most effectiveway to increaseincomes and reduce poverty. > Accelerate improvements in the indicators of education and health, so as to allow the poor to contribute to and benefit from economic growth. In addition to directly improving welfare,better educated and healthier workers are more productive. A key element of the strategy should be a specific plan to improve the education and health status of girls and @omen,and to reduce the province's hgh fertility rate. > Strengthen social safety nets so that those families that, for reasons of health or other negative shocks, are unable to participate in economic activities are protectegl from extreme poverty. Provincial policies with regard to social safety nets should complemdnt or strengthen existing federally-sponsoredsafety net programs. > Develop and implement a specific development plan for the more bacbvard areas of the NWFP, such as the mountainousregions. 12. Elements of the development strategy are beginning to be put in place in1the economic and social reforms of the past few years, and this is now beginning to bear fruit. ~ e c e itrends, revealed by the t recent FBS' 2004105 Palustan Social and Living Standards Measurement Survey, indicate that key social indicators are beginning to improve, and that some progress has been made $ bridging the gender gap. This early success now needs to be ratcheted up by deepening and broadeningthe development strategy and strengthening implementation. 13. This report argues that achieving the NWFP's developm~ntobjectives 1- particularly the central one of poverty reduction and job creation via rapid economic growth- will kequire that the provincial government focus scarce administrative and financial resources on its core functions, i.e., the provision of basic public goods (roads, irrigation infrastructure, water and 'sanitation, education and health, and research), the design and implementation of modem regulation t opromote competition, the facilitation of the entry of new firmsinto the NWFP as well as the exit of thosq that cannot compete, and the protection of property rights (through land registration, policing contraqts, and an efficient legal system). Focusing on the core functionsmeans that the provincial government Fust step back from many activities it is currently engaged in, so as to create space for the private sector. This will allow the private sector to mature into the main source of employment and an active p a d m in the delivery of many services(educationand health, infrastructure, etc). The Driversof Growth 14. The developmentof a vigorous private sector that plays the same dynamic role in the NWFP as it does in Sindh and the Punjab starts with a credible dialogue between the government and the private sector to clarify their respective roles in the economy, with the government focusing on its core functions (as outlined above) and the private sector engaged in the direct production of goods and services. A private sector-driven growth strategy requires the creation of trust between the parties that the new vii strategy is here to stay, and that it will not fizzle out as in the past. To convey this signal, the NWFP government must disengage from activities such as the financial services, transport, and construction. To that end, the government must consider: > privatizing the Bank of Khyber, the largest bank in the province; > allowing industrial estates, currently under SDA, to be privately managed; and > permitting the private sector to provide maintenance for infrastructure. These actions will provide concrete evidence that a new relationship is emerging. In addition to maintaining an over-arching dialogue with the private sector, the authorities should also help to address the critical issues in specificactivities in which the NWFP is likely to be competitive. Some of these areas are discussed below. 15. Manufacturing based on materials that are indigenous to the province is a sector that offers the potential for considerable growth that needs to be fully tapped. Especially important in this context are marble, granite, and construction materials, the latter particularly for Afghanistan's reconstruction. The NWFP possesses considerable resources of marble, which could form the basis of a flourishingindustry. However, an analysis of the value chain for marble carried out for this report revealed that the developmentof this industryis currently constrained by a number of factors. These include (i) ambiguous ownership rights, which limit access to finance; (ii) inefficient technological practices, such as the use of blasting as the most common extraction method that destroys much of the material and produces low value blocks; and (iii) scarcity of skills to finish and polish the stone. Moreover, the poor state of the province's roads means that the cost of transporting marble from the mines to places where the stone is polished andlor exported is higher than those in competingnations. As a result, much of the value of this resource is lost to the NWFP. Reaping the potential offered by this subsector will require significant intervention by the government. 16. The construction industry merits particular attention by the government, because of its vertical and horizontal links with other industries, and because it is an activity that generates considerable employment. An important part of the demand for the provincial construction industry is provincial government contracts for public works projects. However, there are frequent problems of collusion, cost overruns, low quality, and corruption, which hamper the development of a competitive private sector. Introducing a standard set of contracts used by all agencies that hire construction firms for civil works, and simplified, unified registration would help eliminate some of these problems. The provincial government should also implement a system to monitor performance of private contractors with new contractsawarded only to contractors with a record of high performance. 17. Energy. The NWFP also does not take full advantage of its hydel potential. Two broad possibilities are raised. First, the province can earn revenue by selling electricity on the national grid. Second, the province can set up electricity stations that, while covering their costs, could sell power within the NWFP at a lower rate - subject to that these suggestions are implemented in line with the National Energy policy, and to NEPRA's tariff determination and wheeling and distribution charges- than the power provided on the national grid. The lower price for electricity could help to offset some of the transportdisadvantagesarising from the province's geographical location that affect competitiveness. 18. Tourism. In the long run,tourism offers a source of employment and income generation. Given the unsettled regional situation, the immediate prospects for international tourism are limited. However, it is worth exploring the prospects for attracting domestic tourists to the Northern Areas, which so far have not been affected by the law and order situation. The provincemust develop a comprehensive policy for tourism and strengthen the institutional structure for tourism. The provincial government needs to develop, in consultation with the private sector, a strategy to guide investments in promotion, skill development,infrastructure,and environmentalprotection. 19. An important element in the development strategy should be the use of urban centers to stimulate the growth process. The potential for growth in urban centers arises from the concentration of skills in a relatively small area, which facilitates specialization and the division of labor. Additionally, conglomerations of large populations create markets, which can be economically served by the specialized skills. The other side of the coin is that large population agglomerations can be politically quite vocal and thus would require, inter alia, a more rapid and satisfactory delivery of at least the basic services. The use of urban centers as growth engnes in the NWFP must begin with Peshawar's economic potential and by solving its management problems. Much of what constrains Peshawar from developing arises fromthe multiplicityof agenciesresponsible for different functionsin the city. The authoritiesmust therefore improve the coordination of planning and implementation of develop~mentschemes between these agencies by establishing an apex agency, and strengthen the technical capacity of the different agencies to plan and manage developmentprojects by hiring suitably qualified personnel frolm the market. 20. Land markets. The poor functioning of land markets in the NWFP ties up a large amount of resources in litigation between citizens and also between private persons and the government. Moreover, so long as a clear title of ownershipis not established,it is very difficult to offer the property as collateral for borrowing that could be used in investment. The most formidable constraint to the efficient functioning of urban land markets is the failure of land management systems to establish ownership of urban properties. The most important requirement to make land markets function opti~mallyis to put in place a system that determines title conclusively. Other measures to improve the functioning of land markets would include: > disposing of provincial and local government land in prime commercial locations that is used for less productive purposes, or presently leased out for a nominal rent; > consolidatingthe responsibility for determining title in one department; > makangit compulsory to register transactions related to properties; > raising the land non-utilization fee on plots that remain vacant in hqusing schemes after the associated infrastructure has been provided; > enactinglegislation to abolish the benami holding of property; and > narrowing the differential in property tax paid by rented and owner-occubiedproperties. 21. Growth in agriculture will play a central part in the NWFP's groM.1 and poverty reduction strategy, in light of its economic potential and because the majority of the poor live off agriculture. The strategy recommended for agriculture is to move away from an emphasis on food self-sufficiency in cereals towards food security and rural income growth. This will require e/nploying the province's scarcest resource, irrigated land, in activities that provide the highest re-s, and using the funds generated thereby for the purchase of cereals and other commodities in which tlhe NWFP has no obvious comparativeadvantage. The proposed strategy does not of course mean that the province should abandon the production of cereals altogether. Rather, it means that the best way to generate growth and employment in agriculture is to encourage the movement of farmers towards high value activities, such as livestock (the production of which is already increasingly rapidly in the province) and horticulture. In order to assist the move towards high value activities,the government will have to: 9 establish key public infrastructure, such as transport links and cold storage facilities, to reduce post-harvest losses of high-valueproducts; 9 create a research system that undertakes best-practice research of relevance to all farmers in the province; this research systemcould focus on introducingvarieties of sheep for high-qualitywool production in the high mountain areas and breeds of goats suitable for rearing in the southern districts; improving fodder and grazing techniques to improve for livestock productivity; developing varieties of high-value horticulture of particular interest to the southern districts (e.g., olives, berries, dates); 9 strengthen the linkages between agricultural research, extension and farmers to ensure that researchand extension prioritiescorrespondwith farmers'needs and market trends; > develop partnership with farmer organizationsand the private sector to improve input and output market information through the use of media and extension services; and > build the capacity of small farmers through the development of farmer organizations, including by revising the remit and expanding the coverage of Farmers' Service Centers. Farmer organizations are essential to capture scale economies, and to ensure the provision of services with common property or public good characteristics (e.g., irrigation;market intelligence for sub- groups of producers) as well as to provide the interface between extension service providers and farmers. 22. The NWFP is home to some of the most important natural resources in Pakistan, particularly forests. Hence, the government should pay special attention to conservingthese resources, by constructing a policy environment that supports active forest management for sustainable harvesting of timber. This would require: 9 providing incentivesto communitiesfor the sustainable management of their natural resourcesby establishing ownership andforuser rights that encourage jointmanagement; > strengthening institutional capacities for rangeland management, particularly in the southern rangeland; and > supporting provincial research in natural resource management, particularly relating to forest conservationand range management. Delivery of Public Services 23. Accelerating economic growth and poverty reduction in theNWFP will require major investment in human capital. Education and health are often the only assets of the poor, so improving them is required not only for improving the quality of life of the poor directly, but also for providing businesses with an educated, productive, and consequently well remunerated workforce. The education and health status of the populationin the NWFP, while improving, still lags that of more developed areas of Pakistan and is well below that of neighboring countries, such as India, Bangladesh, and Sri Lanka. The most salient feature of health and education outcomes in the NWFP is that they are particularly weak for women. 24. The challengesfor sustained, rapid human developmentare formidable,but achievable if the root causes of the poor public service delivery are identified and addressed effectively. At the root of the NWFP's poor social outcomes lie deficiencies in the delivery of health, education and WSS services by the public sector, some of which are systemic, some sector specific. Systemic problems affect service delivery in health, education, and water and sanitation in similar ways and include (i) inadequate implementation of devolution (administrative, functional and fiscal) to local governments; (ii) weak management information systems, and poor alignment of policies and resources with results on the ground; and (iii) poor transport accessibility in rural areas. In order to effectively address the systemic problemsthat attend on poor service delivery, the authoritieswill have to: 25. (i) Devolve administrativeandficalpowers to local governments. The devolution initiative of 2001 opened possibilities for improved accountability and strengthened managerial authority of local governments and community involvement in service delivery. However, the steps necessary for malang devolution effective have yet to be implemented in the NWFP, and consequently administrative, functional, and fiscal devolution are far from complete. This produces wealk accountability, both of policymakers to citizens for poor service delivery and of service-providing staff to policymaker. As a result of limited local control over staff and unclear roles and responsibilities between different levels of government, local elected policy makers do not have sufficient managerial authority over their staff to hold them accountable for failure to improve services. It is therefore hardly surprising that government teachers, nurses, and doctors are frequently absent from duty and that basic health units and clinics are often without medicines and other necessary supplies. 26. Acute staff shortages and lack of adequate skillsin district govemments and TMAs also constrain service delivery. The skills deficiency is worst in the TMAs, where inadequate devolution of requisite staff has led to weaker technical capacity. Reflecting a mismatch between grade levels, responsibilities and required skills, key planning and service delivery positions are often manned by very junior and under-skilled staff, which lacks the capacity to perform these functions. The main issues to be addressed include: 9 Increasing local authority over recruitment and career management. Devolution in the NWFP has ironically led to a high degree of administrative and financial centralizationwithin the district government. This centralization in the context of dual authority has undermined efficiency of the district administration and has hampered budget execution, in particular that of the development budget, in a number of districts. In addition, while in theory local governments can create and eliminate sanctioned posts, the provincial govemment retains defacto control over establishment decisions. As a short-run solution, the provincial government could give the Public Service Commission oversight over recruitment of district staff to ensure merit and transparency, particularly for key service delivery staff. It could also involve the Public Service Commission in vetting requests of transferring senior staff in less than the three years as set out in the Rules (as was the practice in the past). The provincial government should also start worlang on developing a local district service, which would ensure that all staff in the distrilcts is managed only from within the district. 9 Completingfunctional devolution.Overlap in functional responsibilitiesis considerable. In the water supply and sanitation sector, for instance, lack of effective managerial authority has resulted in a lack of functional devolution. This has led to an overlap of mandates between different levels of government, with confusion in the roles and responsibilities for service provision. The TMAs have the legal mandate but lack the requisite staff, and the districts do not have the legal mandate but have the staff and in fact provide these services. This institutional misalignment has compromised the planning and implementation of WSS, with major adverse implications for the sustainability of the WSS systems. The provincial government should devolve the responsibility for the delivery of water and sanitation services to the TMAs (as per the LGO), accompanied by the requisitetransfer of PHED staff. 9 Strengthening community involvement to reduce staff absenteeism. Weaknesses in the institutional mechanisms for community involvement in service delivery (such as monitoring committees of local councils, PTAs, etc.) limit the degree of citizens' control in the management and oversight of service providers. Also, since the provincial government continues to wield its authority over educationand health personnel located in the districts, monitoring committees and PTAs are unable to elicit a response from the district bureaucracy on their recommendationsfor disciplinary actions against excessively absent staff, and are therefore rendered ineffective. Addressing some of these problems would involve monitoring committees formally in the budget process in a consultative role; provide them with adequate resources for facility inspections; and make civil servants' reporting responsibilitiesto them clear. 9 Furthering fiscal devolution. Local governmentsdo not have sufficientresourcesto adequately implement their mandate. The provincial government should increase transfers to local governmentsthrough the PFC mechanism. A new NFC award that would transfer a hgher share of the divisible pool to provincial governments could help alleviate some of the financial pressureson the provincial government. 27. (ii) Improve access to transpovt in rural areas. Road accessibilityis a prerequisite for receiving education and health services. Improving the provincial road transport system and infrastructure can also contribute to faster economic growth by lowering production costs. Transport costs act as one of the major competitive barriersfor firmsin the province, and are high because of the poor quality of service. 28. Poor road accessibility, especially in remote areas, reflects a number of underlying problems. The province lacks a transport sector policy for identifying priorities and setting out the government's strategy to address them. Funding for road maintenance and repairs is inadequate and unpredictable. Priority is given to new developments, as opposed to maintenance of the existing ineastructure. This results in long delays in completing projects (the current project completion time is 14 years) and causes huge economic lossesfor the province. The prioritiesto be addressed in the transportsector thus include: > Developing a provincial transport policy and strategy. The policy should take into account the new roles of the various levels of government after devolution. It should place a high priority on improving the rural population's physicalaccess and mobility. > Rationalizing the road investment program and giving priority to road maintenance. Expenditures on roads could yield better value for money by improved planning and prioritizing of road maintenance and rationalization of the road investment program. Measures for road maintenance could be made more robust by shifting some of the burden of financing the costs of infrastructuremaintenance and preservationto road users. > Putting in place incentives to promote better and more participatory planning and accountability. Road users should have a say in ensuring that their contribution is used efficiently by having representatives in FHA board, and by involving communities in designing and implementingrural access and mobilityimprovementschemes. 9 Putthg in place a monitoring and evaluation systemto assess the impact of sector policies and provide a feedback to planners, decision-makers,and stakeholders. xii 29. (iii) Improve the reliabiliq, timeliness, and credibiliq of government monitoring systems; make better use of these data sources, as well as of independent data to monitor performance. Systems of service delivery can only be improved if their performance can be monitored quickly and the reasons for any unsatisfactory execution rapidly analyzed. The Health Management Information System (HMIS) and the Education Management Information System (EMIS) need to become real time information tools for provincial managers to get timely and accurate information for management decisions. In addition, the provincial government could make better use of existing national-level data collected by the Federal Bureau of Statistics, such as the Pakistan Integrated Household Survey (PIHS) and the Labor Force Survey. Also, the 2004/05 PSLM-CWIQ can provide very recent provincial and district level data on key health and education outcomes and underlying factors, as well as on satisfaction levels with other government-provided services. These data sources could be used to inform the direction of future policies and decisions (e.g., the Provincial Finance Commission Awards) and identify the districts where more focused attention by the government is needed. EducationServices 30. The Government should set feasible but ambitious education and health goals for itself as an integral part of a provincial development strategy. It should aim for universal primary education and a doubling of secondary school enrolment over the next decade; doubling the average years of schooling of the labor force to narrow the gap with competitor provinces and countries. It should also aim to improve the quality of college education and orient it to the needsof the private sector. 31. Meeting these goals requires focusing on three major challenges: (i) low overall school attendance compared with neighboring countries; (ii) a wide gender gap - i.e., particularly low school attendance for girls; and (iii) a wide rural-urban gap, with particularly low school attendance for girls in rural areas. There is also wide variation across districts in NWFP, with distri~ctnet primary enrolment rates rangng from 80 to 16 percent and the gender gap in net enrolment varying from 2 to 23 percent. The low school attendance reflectsproblems in two broad areas: accessto educationand poor quality of public education. 32. Factors that constrain access to education in the NWFP are the cost of schooling, the distance to nearest schools and schooling availability, cultural factors such as parents' concerns about security for their daughters and a preference for female teachers, and total education supply including both the private and public sector. The central causes of the poor quality of public education are widespread governance problems that result in low teacher attendance, school closures, often poorly-qualified teachers, and a serious shortage of schools in rural areas. Finally, allocated non-salary budget h d s often do not reach the intended local school but are illicitly diverted. 33. As a result of these deficiencies, 1.9 million children (of which 1.1 million are girls) in the 5-9 years age bracket are left out of school with an overall Net Enrolment Ratio (NER) of 47 percent. The government should aim at increasing overall enrolment by at least 6 percent annually and female enrolment by 8 percentannually.This would mean that annual enrolment for 5-9 year olds would increase from 1,7 million students (0.7 million girls) in 2004/05 to 2.3 million students (1 million girls) in 2010 and to 3.0million by 2015 (1.5 million grls). The overall NER would improve to 66 percent by 2015.' In order to achieve this, the governmentwill have to enlarge access to education and improve its quality. The Nztional Institute of Population Studies is in the process of revising its population projections for 2015. Accordingto the projectionsavailable in the spring of 2005 while preparing this reportthe 5-9 year old cohort in 2015 would consistof 4.7 million children.The new revised projection is 2.7 million 5-9 year olds in 2015. The new cohort figures are significantly less than the previousprojectionsand will mean amuch smaller supply side constraint faced by the school age children in the coming years. 34. The government's strategy to expand access to education should reduce the cost of schooling for households; address parents' concerns for the safety and security of girls; scale up education suppIy by engagng the private sector; and focus efforts on districts (and areas within districts) that lag behind. To this effect, the report recommends that the government: 9 Reduce households' cost of education by introducing stipends for students, whether they attend public or private institutions; 9 Raise demand for girls' education by providing missing facilities to all secondary schools for females, consider subsidizing travel costs for female teachers in rural areas, and increasing stipends for female students; 9 Engage the private sector by making the two Education Foundations autonomous organizations that act as apex bodies whose role should be to support private initiatives in providingeducation; 9 Focus government's attention on the most underdeveloped districts. These could also include constraints outside the education sector with a bearing on education outcomes, such as lack of access to transport inremote areas. 35. The strategy to improve the quality of public education should, as a minimum, ensure the presence of qualified teachers; both formal and community supervision of teaching practices and stronger accountability; competition amongst schools; and ensure that allocated non-salary funds reach the schools.To this effect the report recommends that the government: 9 Ensure better teacher attendance by the following measures: (i) making all new teacher appointments school specific; (ii) enabling more frequent supervision at the schools by education officials through increased fundingfor monitoring of schools and reducing the number of schools assigned to each ADEO; and (iii) empowering PTAs to recommend and monitor disciplinary actions beyond transfers of negligent teachers. 9 Strengthenteacher management by supporting the separation of teachingand management cadres and provide professional development plans and training support for both cadres. Ensure school- specific budgets for primary schools and transparency of budget information to the public to check leakages of school funds. 9 Encourage competition among schools by providing school vouchers to low-income families aimed at picking up the tuition and other expenses of educationat public and private schools. 9 Contract out the management of chosen public schoolsto a reputable NGO. 36. Strengthening secondary and higher education at the province level (colleges up to grade 14) is also important for economic growth and poverty reduction. Monitoring of outcomes and provision of management information is particularly weak for higher education. The govemment should speed up development of an EMIS for higher education. The college sub-sector should have a direct link to private employers in order to identify the set of qualificationsthat are in high demand in the provincial economy, and redirect the teaching resourcesaccordingly. Skilled workers are in higher demand and are more likely to migrate. Hence the province needs to significantly increase the education level both of potential migrant workers and of the work force that will remain and drive its economy. Upgrading the skills of the work force must start with improved primary and secondary schooling. Health Services 37. The state of public health in the I)is poor. The share of children$stween !2 a ~ 23 ; ~ x ~ T ? I ~ s d that have received full immunization (the immunization rate) is only 60.5 percent. rnus, eune!:tTy 650,000 children of this age are left without i~munizationeach year. The Co~ihaceptivePrevalence Rate (CPR) at 30 percent lags behind the national average of 32 percent and is far below cc~a.~arab%erates for India and Bangladesh. About 2.5 million mamed femalesaged 1444years are not covered, 38. The govement should aim at raising the immization rate for chaldren 12-23 months to 50 percent by 2015. This means that the number of children to be mmmmz3d sachyex would r,sc 5-or?_0 YP rnill~onin 2004 to 1.3 million in 2010 and 't-6million in 2015. The pronncial g o v e ~ m asEonld - ~ t E a 2: raising the contraceptive prevalence rate to 40 percent by 2010 and 6-8 percerl by 2085. hI;.ie+ c - a rapid growth of population, even withthese efforts the nunber of' ~narned:tmales 3 3 r ~ V C - e Pb7 ' decline only to 2.4 million by 2010 and 2.3 million by 2015. 39. Why is the public system for primary care services so inadequate? The answe~is to be fomd in weak management, inadequate staff motivation,and little emphasis 0x1r n e a s g results. Management at the district level lacks strategic orientation and management sklls are limited. Staff is ur?accsunt~ble, barely supervised, with little or no incentives for:performance; conse%;~mt"ry,absenteeisn7 am.ongdoctcrs and other health personnel is high and widespread. h addition, t11e poor E-hepIth outcs~~,ss rcnect low public expenditures on health services (amongst the lowest in the world) zfid $YN quaBit=yof the S ~ S ~ ~ ~ C S S provided. The latter leads to Bow demand for peripheral sen-ices f o prknary caremThe fzct that ".f-,cse ~ services are underutilized is a core issue in health care deliv~ryin hW?. ?~leas~remerr"L;-~,sv,l.ts of is episodic, and there is no incentive to use the data that exist. Little systematic pmitoring and evaluation (M&E) is performed by the provincial government. 40. A strategy for improving delivery of health services must encompass geveral elements. TFhejkd element is a willingness to undertake bold reforms and t e s ~ innoragons, Progress in prsb~mc'a? ~ g health outcomes requires significant improvement in the deliveqr of p~F/~il'iciy-fina~sai! y-~~;e-(;r~e, promotive, and curative services. A few high pnority actions shodd be selectee, base:! s- gszd ev:rc - #. or ngorous pilot-testing. The pilots should be independently evaluated so thd: Iessors .3~.'711'1h, - - c r and applied to futureefforts. 41. The second element in the government's strategy should be to best co.ern@acPing-i~ masyage,mentof gripnay health carefacilities. The government should consider splitting the financing and provision of health services, whlch could be done by contracting out the management of health services. It shotild quickly begin a large-scale pilot in a few districts by contracting with &nNNGQ to mansge p5~1a-y heagtl: care infrastructure (RHCs, B4WJs, aad LHWs). Thrs approach builds cn t?[- expererlce I - 3 ~ b ~ Khan Disrnct in the Pmjab where the &strict governen: co~tractedsr Ned3 I?.in ~ $' 3~' 1 -3TY. 42. nird, the government sh~bildmake behc system smrc ~~e4~2&3-03,3?fed ai z . GL :YzI, J E ~ measure results. The government should establish an mdependent Momtormg and EvaSasaQzonIira~:.llnis unit should have the analytical skills to assess the pdomance of the healtu system by analyzing data from household surveys, facility assessments, and management infomatiod system. Better M&E is likely to improve performance by increasing accountability. 43. Fourth, the government should play its role m ensuriag that the qaeli@ ofc6a,.e ik the private sector ina1gar@ve;. As rneasrxes to ensure that t3e quality osf cae i? the 7-vate sector ~mproves,the government shoasld begin pCot testmg paelcipatony appreaches. 2.:: 21 c 3 ~ l dr -,!ipde:(I) work~ng w~thNGBs and " , T ~ ~ ~ S S ~ C::~Z-I--~:.~RS ' T F *iP~k -ITL~JSS; ., L~IZ-LTXJV~ 7rC: ,?$ 1 1:2gemen8 a ~ o n g private previders, (ii) f~ster!.nga nos2ita; accreditat~onsystem ;?monk~ : v 2 t e-:q-:i3; mind (iii) kitiabng a participatory approach to pharmacy regulation, including NGOs, academics, government, and pharmacists. 44. Fqth, test real autonomy for DHQ/THQ hospitals. In the short term, conduct an independent and detailed evaluation of the experience of the NWFP's hospitals with autonomy. On the basis of this review, the GoNWFPshould design a pilot to test "real" autonomy in some 10 DHQ and THQ hospitals to be implemented in the,medium term. Independent hospital assessments, including the use of control hospitals, should be carried out to determine objective measures of performance. Based on an independent evaluation of results, the government should make a decision on whether and how to expand the approach. Water Supply and Sanitation 45. Only two-thirds of the NWFP's population has access to clean drinking water, 69 percent access to toilets, and 38 percent access to sewerage. These deficiencies contribute to the high infant and child mortality rates in the province. The government should aim at raising the coveragerate for clean drinlung water from 66 percent to at least 76 percent in 2010 and 83 percent in 2015. This requires extending the supply to 18 million persons in 2010, up from the present 13 million, and further to 21 million in 2015. The government should also aim at increasingaccess to toilets to 78 percent of the population in 2010 and to 85 percent in 2015. This would increase access from 14 million persons at present to 18 million in 2010 and to 22 million in 2015. Access to sewerage should increase from 7 % million persons to 10 millionin 2010 and further to 12 !4 millionin 2015. 46. These challenges can only be met if the govemment overcomes two sector-specificproblems that limit WSS coverage. First, questions of accountability between levels of government must be resolved; otherwise there is a significant risk that the WSS systems will fall into disrepair, compromising even the service level that existed prior to devolution. TMAs are reluctant to accept responsibility for WSS systems previously managed by the districts Public Health Engineering Departments for two main 7 reasons: (i) funds for Operationand Maintenance (O&M) of these systems are not being transferred to the TMAs; (ii) there are huge outstandingliabilities against the WSS systems (particularly electricity arrears to WAPDA) that were accumulated prior to the establishment of district governments by predecessor agencies. The question of which level of government should shoulder these liabilities is still unresolved. The TMAs cannot bear this financial burden; their capacity to adequately finance O&M of own WSS systems through user charges and own source revenues is also limited. Second, since TMAs are heavily dependent on transfers of Urban Immoveable Property Tax (UIPT) revenue from higher levels of government, persistently delayed UlPT transfers hurt WSS operations in all TMAs. Relatively backward TMAs are particularly hard hit since they are heavily dependent on the UlPT transfers to maintain their day-to-dayaffairs. 47. Both the federal and provincial governments have a responsibility to ensure that TMAs have the administrative and fiscal space to deliver water and sanitation services. The report recommends that the provincial government: 9 Provide TMAs with an incentive to take over the operation and maintenance (O&M) of WSS systems constructed by PHED. The O&M funds that the PHED receives from the provincial government could be such an incentive, which could be phased out in a time period agreed at the time of the transfer of the systemsto the TMAs. 9 Assume all pre-devolution liabilities relating to the existing functional rural water supplylsanitation systems and ensure that all funds allocated for O&M of these systems be transferred to the respective TMAs. The systems should be transferred to TMAs under agreements laying down all understandings, rights, obligations, roles, and responsibilities of all the concernedparties for subsequent O&M. P Collect UPT in a transparent, documented manner, in coordination with the respective TMAs. The amount due to the TMAs should be transferred in accordance with an agreed, predictable schedule. > Assist TMAs in identifyingand generatingown funds. A Fiscal Framework for the NWFP's DevelopmentStrategy 48. As discussed above, setting the W P on a rapid development path requires sustaining a rapid rate of economic growth (7-7.5 percent per annum) and stepping up investment in human capital. It is estimated that growth at these levels would create an additional 1.2 million jobs by 2010, which added to the 4.7 million employed in 2005 would cause unemployment to fall to 9.6 percent of the labor force (from 13 percent in 2005). A strategy that will most effectively attain these ends will require that the provincial government abandon some of the activities it currently performs, focus its efforts on the core functions of government -providing public goods and services, formulating and enforcing regulations, and strengthening the basic institutions of a market economy such as the police, the judicial system, etc.) -andperformthosefunctionsbetter. 49, The high-investment/high-growth strategy proposed in this report will have important developrne~trewards, but it will require additional public resources. Stepping up the delivery of roads, irrigation, energy, and other infrastructure requires that both provincial and local governments increase the level of, and the returns to, public investment. In order to improve the delivery of social services, increased expenditures must be combined with sector-specific actions in education, health, and water and sanitation and complemented by measures of fiscal decentralization that would give service providers (local governments) the wherewithal with which to deliver the semices. Thus, setting the M P on a more rapid growth and poverty reduction path will have important implicationsfor provincial and local govments and, since much of the finance will have to be provided by the national exchequer, there will be significant implicationsat the national level as well. 50. Additionzl resources can be mobilized mainly from three sources: (i) pwn provincial and local government resources; (ii) transfers from the federal government; and (iii) bo$owing. The NWFP will have to be active in tapping each of these possibilities. P Enhanced own resource mobilization.Renewed revenue reforms to enhancethe mobilizationof own resources should help raise the provincial own revenue ratio fro* 0.7 percent of GDP in 2004 to at least 0.8 percent of GDP during 2005-2010. In order to attdin this, the province will need to step up its efforts to improve tax administration, remove exemp(ions, expand the tax base 1 by bringing in hitherto untaxed areas, harmonize tax rates by coo dinating with other tax j~risdictions,abolish taxes with little yield, and avoid using reguatory taxes for revenue purposes. Other measures could include reviewing options for auction4ease of high-value state- owned lands for urban development; and privatizingpublic assets. P Larger federal transfers through a new NFC award, with a higher share of the divisible pool going to the provinces. While the bulk of service delivery responsibilities and expenditure assignments rest with provincial and local governments, most of the revenue in Pakistan is collected at the national level. The current NFC formula provides insufficient resources to fund the expansion in public investmentand the improvement in social services that is required by the xvii province. A higher award of the divisible pool to the provinces would reduce the stress on provincial finances. 9 Hydel payments from WAPDNfederal government. Because of WAPDA's poor financial health, the transfer from the central government for Net Hydel Profits (NHP) has been capped at Rs 6 billion since 1991192. In the context of the continuingprice inflation, the real value of these payments has eroded by more than 60 percent between 1991192 and 2004105. > Prudent borrowing. If the provincial government's reforms succeed in initiating a high-growth scenario, it is likely that the internationalfinancial institutions (IFIs) would offer to support these efforts. This financing should provide a significant amount of support to the budget. However, in order to ensure the sustainability of the GoNWFP's debt, the government should prioritize grants over borrowing,and borrow on the most concessionalterms available. 51. Accelerating growth requires not only increasing the overall level of expenditures, but also improving the composition and efficiency of public expenditures. This means that the provincial government should emphasize investment and operations and maintenance rather than consumption, and direct attention to the better management of investment projects. For growth to accelerate to 7-7.5 percent, the projections indicate that development spending must rise from an average of 1.8 percent of GDP in FY02-04 to an average of at least 2.2 percent of GDP in FY05-10. Spending on Operations and Maintenance (O&M) of infrastructure should increase from 0.9 percent of GDP in 2004 to at least 1.1 percent of GDP by 2010. Public consumption (excluding O&M and non-salary transfers to districts) should be contained to a maximum of 4.9 percent of GDP on average over the next three years; thereafter it should decline and not exceed 4.7 percent of GDP by 2010. 52. The latter estimate reflectsefforts to contain growth in the wage bill (in current prices) of the civil service. The projections include a general civil service pay increase of 18 percent in FY06 plus the regular annual wage creep of 3-7 percent, but assume that growth in the real wage bill will be contained to no more than 6 percent a year subsequently. 53. There is considerable scope for improving the efficiency of public expenditures. Public investment projects in the NWFP do not reap the 111benefit from this use of scarce public funds. The management of public investment expenditures suffers from deficiencies at each stage, including project planning, selection, implementation,and monitoring and supervision. Since public expenditures form the bedrock of the government's efforts to stimulate growth and reduce poverty (including through their role in "crowding in" private investment), it is essential to examine the reasons why their impact has been inadequateand to tryto rectify these deficiencies. 9 First,the public investment program is not aligned with the goals and targets of growth, poverty reduction and human and social development set by the province. The government should start implementing a rolling medium-term budget framework (MTBF) that is closely focused on the foregoing goals. The effectiveness of this as a planning tool would be heightened and the disconnect between policy goals and the expenditure profile more effectively addressed,if regular consultation with major shareholders were made a part of the process. > Second, the allocation of funds for O&M is inadequate and not in tune with the public investment program.The government sho~lldprovide adequateoverall O&M funding for each projectover its lifetime,and revise upwards the present obsolete yardstick for allocating O&M funds. > Third, the quality of the project portfolio is compromised by problems of selection and cost. These embrace the inclusion of projects not approved by the Provincial Assembly, poor initial cost estimates, and frequent cost escalation. A lack of consistent criteria for project selection has led to ADP funds being spread thinly and to a high throw-forward of development projects. Moreover, projects are frequently subject to amendments in the scope of work, thereby creating opportunitiesfor leakages. It is recommended that projects be considered for inclusion only after being cleared by a representativeand adequatelyempowered Concept Clearance Committee(CCC). This Committee would be responsible for developing and implementing transparent criteria on the basis of which, projects would be selectedand prioritized. Low priority projects should be weeded out, fol~lowing a review of the existing project portfolio. It is also recommended that the current practice of allowing a 10 percent buffer in the cost between project approval and grant of technical sanction should be reduced in order to encourage more accurate cost estimates from the very beginning of the project cycle. > Fourth, time and cost overruns are widespread. Implementation is protracted, because of the slow preparation of project approval documents (PC-1s) andfor funding that is inadequate in relation to the project's funding schedule. It is therefore essential that planning and budgetary procedures ensure the timely preparationof PC-1s and that fundsare provided in accordance with the phasing in the PC-1. P F$h, in spite of the 2003 Procurement Law, procedures and practices continue to obstruct competitionin the selection of contractors and the procurement of goods and services. In order to ensure transparency and competitiveness,the government should align ths law with international best practice and insure the enforcementof the law and Standard Bidding Documents in all public procurement. > Sixth, projects are insufficiently monitored and supenised. This reflects inadequate funding, lack of qualified staff, and deficiencies in institutional capacity in the provincial and district governments for monitoring and evaluation (M&E). The government must recognize that M&E activities are essential to ensuring the effectivenessof public expenditures and that therefore they should be adequatelyfunded and conductedby qualified personnel. 54. Accelerating delivery of public education,health and water and sanitation services requires a higher level of transfers to local governments and more appropriate criteria for allocating these transfers among districts. Four years after devolution, the fiscal system pravides few opportunities or incentives for local officials(such as nazims and DCOs) to rationalize local expenditures, or to steer more resources to where they are needed. Several factors undermine the potential for more effective semce delivery by local governments. While the province is highly dependent on resource transfers fjromthe federal government, there is an even higher dependence of the districts on transfers fiom the provincial government. However, since these transfers are based on opaque criteria,the transfer system is perceived as creating ~nequitiesbetween districts. Own source revenues at the disttict and TNA levels are negligible, and thus cannot compensate for shortfalls in resource transfers fiom the provincial government. This raises issues of the des~gnof the transfers and lack of incenlivesfor local governments to mobilize own revenues. 55. The vast majority of funds transferred to local governments are governed by criteria that could be more transparent. Only transfers for development and non-salary expenditures (a small share of total transferred funds) are allocated on the basis of an explicit formula. All other transfers are based on existing establishmentcosts (e.g., wages and electricityallocations),estimates based on outdated revenue- xix raising estimates(such as Zila and Octroi offsets), and estimates of recent revenue collection (e.g., UIPT shares). Current staffing allocations across districts show significant inter-district inequities in per capita wage expenditures. The provincial government can take several steps to address these problems. For example, it could: (i) pass on the wage bill of devolved departments through Account IV (as a first step); (ii) enhance transparency by developing a suitable formula for devolving the salary bill; (iii) coordinate reforms in fiscal transfers with movements in administrativedevolution. 56. Local governments need more autonomy in spending decision. About 80 percent of the transfers to districts consist of funds earmarked for salary payments; the rest are formula-driven allocations for non-salary and district development expenditures. This leaves districts with limited spending autonomy, no incentives to strive for efficiency gains, and no leeway to change the salary and non-salary mix in expenditures.The provincial government may consider giving incentives to districts to retain savings in wages, non-salary and development expenditures,and allowingdistrictsto retain savings if sanctionedposts are abolished. 57. To increase resources available for local governments, the provincial government could provide district governments with a stronger revenue base and should ensure that the present system does not discourage own revenue mobilization. For this purpose, the provincial government could allow districts to retain collection of user charges, e.g., in health, user fees for agricultural implementsand veterinary services, etc. It could also devolve the agriculturalincome tax and improve the design of the matchinggrants system for addtional revenue collection. 58. The province will need to improve its monitoring and evaluation system for decentralized policy making, starting with key fiscal and socio-economic indicators at the local level. Efforts to strengthen fiscal decentralization are hampered by limited data and information on the district development budgets, district level monitoring indicators; and M&E of development projects in districts. The capacity to collect and analyze data and information and to undertake M&E in districts is also limited. These shortcomings should be addressed by building capacity in the relevant agencies, with technical assistance being provided to the Planning and Development Department and to line departments. Development Prospectsand Risks 59. The central message of the report is unambiguous. The improved outcomes of the past few years indicate that there is considerable scope for accelerating development in the NWFP and for taking full advantage of the work ethic and enterprise of its citizens. It is the role of the provincial government to unleash this potential. The strategy advocated in this report focuses on: (i) expanding the private sector and the role of NGOs in the economy by implementing policies that are more supportive of the private sector policy and by reducing the presence of the public sector; and (ii) undertaking policy and institutional reforms to enhance growth and to improve public service delivery. Financing this higher growth strategy will require tapping a number of sources. On the fiscal side, it will require a higher level of transfersfrom the Federal governmentthrough a new NFC Award (expected to take effect from FY07), revised hydel payments, and increased efforts to mobilize own revenue by the province. The implementation of this strategy is also likely to be supported by foreign assistance on concessional terms from bilateral donors and from international financial institutions. CHAPTER 1: CHALLENGES AND STRATEGY 1.1 The NWFP is well endowed with natural resources and is home to citizens known for their hard work, sense of honor and dignity. And yet, along with Balochistan the NWFP is the poorest province of Palustan. Poverty is extensive, and is compounded by frequent natural disasters and health problems. There are too few jobs, and they pay too little. Most workers are self-empl~oyedin low-productivity infonnal activities. Public safety nets are inadequately funded and cover too few of the poor. The challenge for the NWFP is to break out of these circumstances and to embark on a sustained improvement in the life of its citizens. 1.2 The challenge has been created by the province's GDP consistently growing more slowly than that required to reduce the incidence of poverty.Between 19901913and 2004105, the NWFP's real GDP is estimated to have grown at an annual rate of about 4% percent a year. Given an average population growth of 2.8 percent a year, per capita incomesincreased by just 1?4percent annually. Trends in Consumption, Inequality,and Poverty in the NWFP 1.3 The evidence on poverty and its correlates is largely drawn from Pakistan Integrated Household Survey (PMS) data for different years (1998199 and 2002); and poverty trends over a longer period have been constructed using a series of Household Income and Expenditure Survgy (HES) from the 1990s using poverty lines that represent a constant level of welfare over time. 1.4 It is important to clarify that the poverty estimates presented here are npt official, but derive from World Bank staffs calculationsusing three HIES rounds during the 1990s an4 PMS rounds of 1998199 and 2001102.~The estimates are founded on a standard methodology and provide a consistent measure based on a poverty line held constant in real terms from the early 1990s to 2001102, the latest year for which data are available. 1.5 The main messages from the analysis can be summarized as follows. 1.6 Using the Basic Needs poverty line described above, the poverty headcount for the NWFP increased between 1990191 and 2001102 (Figure 1.1). In 1990191, an estjmated 37 percent of the population belonged to households that were below the poverty line; in 20011Q2the figure was virtually the same, at 35 percent. However, because the population had increased substahtially, the actual numbers of the poor were higher in the latter year. 1.7 While urban poverty declined marginally (by about 2 percentage pointb), rural poverty registered a sharp increase (of almost 8 percentage points), significantly widening the rural-urban gap over the decade. Both rural and urban poverty appear to have declined during the first pbof the decAde, and risen Fiscal year and national accounts year run fromJuly 1 to June 30; e.g., FY04 =July 1,2003 to June 30,2004. This report refers to a FY, say that ending in June 2004, as FY04 or 2003104. The unofficialBasic Needs povertyline (developed by World Bank) used here amount to Rs 68/0and Rs 767 for rural and urban areas respectivelyper equivalent adult per month (at constant 1998199 Rs). Recently, the govembnent of Pakistan has adopted an official poverty line, the rupee value of which (Rs 674 per month per equivalent adult male En 1998199 Rs) is arrived at by estimating an expenditure level that is required to attain a minimum threshold of calorie donsumption (2350 calories per equivalent adult per day). However, a few methodological issues surroundingthe measurement of poverty using this line remain to be settled, and there is no consensus yet on the provincial poverty estimates (the government's PRSP (published in 2004) contains no province level estimatesof poverty incidence). during the later part. The increase in poverty that occurred between 1993194 and 1998199 continued until 2001102 -the last year for which data are available. Figure 1.1: Poverty Trendsin the NWFP and Pakistan(World Bank Poverty Lines) rp N w Pakistan - L__ - - - - - Urban-tRural&Overall - - -+- -Urban Rmal O v e r a l l Source: HIES/PIHS. 1.8 Throughout 1990191to 2001102,levels of poverty in the NWFP remained persistentlyhigher than for the countryas a whole, in both urban and rural areas-the NWFP remained the poorest of the larger provinces of Pakistan (Table 1.1). The trends in poverty headcounts for the NWFP largely mirror the trends for the country,suggestingthat macroeconomicfactors that affect poverty levels all over Pahstan also play a large role for poverty in the NWFP. In spite of some convergence in recent years with the rest of the country, the poverty challenge in the NWFP remains considerable- in absolute terms as well as relative to the rest of the country. Table 1.1: Poverty Trends in the Larger Provinces (World Bank Poverty Line) (Percentof Population) I I I I I Urban Rural Overall Provinces 1990191 1993194 1998199 2001102 1990191 1993194 1998199 2001102 1990191 1993194 1998199 2001i02 Thepunjab 29 18 27 27 39 32 35 37 36 28 32 34 Sin& 24 14 19 24 31 32 37 51 28 23 29 40 The NWFP 37 27 31 35 41 40 47 48 40 38 44 46 I Source:World Bank 2002b,Annex. 1.9 In the NWFP, poverty in the rural areas is significantly worse than in the urban. In 2001102, about 48 percent of the population in rural areas belonged to households below the World Bank poverty line, compared with 35 percent in urban areas. This disparity continues to stimulate migration to urban areas, as well as to regions outside the province. 1.10 A large proportion of the NWFP's population is concentrated around the poverty line. In 2001/02 about 57 percent of the province's population was situated in a small range of between 0.75 and 1.25 times the World BankBasic Needs poverty line. This clusteringmeans that relativelysmall increases in income can lift substantialnumbers of persons above the poverty line, or drop them below it if incomes fall. 1.11 Inequality in consumption declined in recent years but remained greater in urban than in rural areas. Inequality in consumption declined between 1998199 and 2001102 as measured by the Gini index that fell from 0.28 to 0.24. Poverty increased, but the poorest groups registered some gains. Consumption inequality in the urban areas was greater than in the rural. Between 1998199 and 2001102 consumption inequality declined in both areas, with a somewhat larger decline in the urban areas. Extreme poverty accounts for a relatively small share of the poor. About 13 percent were individuals with consumption below 75 percent of the poverty line. 1.12 The main constraint on reducing poverty in the NWFP in the years up to 2001102 was lack of economic growth, in both rural and urban areas. An instructive illustration of the importance of economic growth is provided by the period between 1998199 and 2001102. Even though the distribution of consumption improved during these years and resulted in a small drop in the depth and severity of poverty, the decline in per capita expenditure implied that, on balance, no gains were made in terms of reducing the proportion of the population below the poverty line. The Correlatesof Poverty: What Characterizesthe Poor? 1.13 Examining the correlates of consumption poverty serves the dual purpose of understanding the multi-dimensional nature of poverty -beyond deprivation in consumption alone- and identifying the characteristics that perpetuate the cycle of low earning potential and low capabi'llity. The most important correlates examined are the following. 1.14 Lack of ownership of agricultural land is closely associatedwith poverty in rural areas. The incidence of poverty declined sharply for households owning 1 hectare of land or more, falling to almost zero for households with more than 4 hectares. While individuals with no land constitute about 58 percent of the rural population,they account for about 70 percent of the population in the poorest quintile. 1.15 Paucity of jobs and poor pay constitute an important correlate of poverty in urban areas. This is hscussed further below. Poverty and Human Development 1.16 The modem view of poverty regards it not simply as a shortfall in income or consumption, but rather as a deprivation of those capabilities that enable an individual to pursue a life that she considers worthwhile. Poverty is thus also characterized by low levels of human capability, manifested, for example, by lack of educationor poor health. 1.17 The province's achievements in education and health are below the national average. The literacy rate (10 years and older) in the NWFP was 38 percent in 2001102 compared to 45 percent for Pakistan. Nearly 58 percent of households in the NWFP had access to safe water (Palustan: 86 percent). The contraceptive prevalence rate is 30 percent compared to 32 percent for Pakistan and far below the rates for India and Bangladesh. 1.18 The education level of the household head and the incidence of poverty are strongly correlated. Poverty declines with higher levels of education. About 30 percent of individuals living in households whose head has never been to school belong to the bottom quintile; this falls to 20 percent when helshe has finished school. Households whose head has never attended school constitute62 percent of the population of the NWFP, but account for 71 percent of the bottom quintile; whereas households whose head has had education of matriculation level or above constitute 16 percent of the population but 11 percent of the poorest quintile. 1.19 Since education is strongly correlated with income and economic status later in life, the education attainment of children is a critical indicator for households'future ability to climb out of poverty. In this context, the wide rich-poor gaps seen in school enrolmentsfor the NWFP are a significant source of concern. In 2001102, there was a gap of 38 percentage points in primary Gross Enrolment Rate (GER) and 50 percentage points for secondary GER between the top and bottom quintiles. A significant rich-poor divide also exists in terms of where children are enrolled: private schools account for 13 percent of primary enrolment, but 43 percent of the enrolment of the 5thquintile and just 3 percent for that of the 1" quintile. The poor thus rely overwhelmingly on public education, which brings into sharp focus the need for quality public schoolingto improve education attainmentamong poor children. 1.20 Poverty is also strongly associated with lack of access to critical health services and poor health outcomes. In 2001102 for instance, pre-natal consultation rate was 15 percent in 2001102 for the bottom quintile and 43 percent for the top quintile; and 20 percent in rural areas compared to 36 percent in urban areas. Qualitative evidence suggests health shocks are an important cause of poverty; moreover, since the poor often do not seek or receive treatment for their health issues, it is not uncommon for relativelyminor conditions to escalate into chronic,debilitating major problems of serious consequences. 1.21 Access to safe drinking water and sanitation are important determinantsof health, and a strong association between these indicators and consumption poverty indicates the health challengesfaced by poor households In 2001102, about 51 percent of households in the bottom quintile relied on potentially unsafe open sources for dnnking water, 68 percent had no access to drains and 34 percent did not have toilet facilities inside their homes. These proportions fell progressively for higher quintiles,to 18,43and 9 percent respectivelyfor the top quintile. 1.22 Poverty is commonly associated with a lack of voice in influencing decisions at community and policy makinglevels In the Pakistan Poverty Assessment for the NWFpS,lack of empowerment was articulated as a fundamental experience of the poor in all spheres of their social, cultural and economic lives. 1.23 While macroeconomic growth is a must for reducing poverty, its impact on poverty is critically affected by conditions in the labor market. In order to be pro-poor, growth must generate employment and gains in productivity that lead to rising wages, particularly in sectors in which the poor are more likely to be engaged. The analysis of labor markets in the NWFP thus focuses on the quartet of labor participation, employment, productivity, and earnings. It will be seen that an important part of the challenge of alleviating poverty in the NWFP involves the development of a modem labor force in the province. 1.24 The open unemploymentrate of 13 percent of the labor force in the NWFP in 2001102 was the highest of any province of Pakistan. In addition, the labor force contains a very substantialnumber of underemployed workers (defined as "employed, but available for more work and actively looking for more jobs"). In 2001102, the combined unemploymentand underemploymentrate amounted to nearly 15 percentof the province's labor force. Part of the Pakistan Poverty Assessment (PPA), 2002. Table 1.2: Compositionof Employment, 2001102 Source: Labor Force Survey (LFS), 2001102. 1.25 The bulk of employment in the NWFP is rural, self-employed in family businesses, ancl male. Paid employment is very scarce and regular"salaried" jobs even more sa This emerges as a key causal factor behind high poverty. 1.26 More than three-quarters of the NWFPYsworkers are males employed in rural areas. Sixteen percent of workers are in urban areas; only 7.5 percent of the work force is female. The vast majority of workers in the NWFP (92 percent of males and 83 percent of women) work in enterprisescontaining 5 or fewer workers; only 1 percent of workers are in f m s with more than 20 workers. Only 18 and 21 percent of male and female workers, respectively,are salaried; the rest are either self-employed(62 or 72 percent of men and women, respectively),or casually employed. 1.27 With law and falling participation rates and rising unemplopment, the employment challenge is growing. Labor participation rates in the NWFP are substantially lower than in the rest of Pakistan and even these low rates declined between 1993194 and 2001102. The combination of low participation rates and rising unemployment means that the magnitude of the bmployment challenge has increased over time: in 2001102 less than 40 percent of adults in the NWFP were employed, compared with more than 45 percent in 1993194. 1.28 The labor force in the M P is less educated than in the restof Pakistan. While low educational outcomes are a common phenomenon across Palustan, the NWFP fares particularly badly. It is estimated that 51 percent of the workforcein the NWFP has no formal educdtion, compared with about 46 percent in the rest of Pakistan. This is likely to have a serious adverse effect on the labor force's productivity in the NWFP. 1.29 Average job earnings in the NWFP for male workers are lower than in the other provinces of Pakistan. This can be seen from Table 1.3, which compares the job earnings of workers in salaried or casual employment.6 Average annual earnings in the NWFP are Rs 40,000 per year, corresponding to US$700 at current exchangerates. Men in the NWFP earn on average 30 percent more than women. Table 1.3: Average Earnings by Province,2001102 (Rs Per Year, Current Prices) I Male Female Total Puniab 41,051 21.758 37.408 ~ i n i h NWFP Balochistan Total 45,039 25,064 #2,316 1 Source: LFS, 2001/02. No information is availablefrom the Labor Force Surveyon the earningsof the self-employed. 2.30 Average real earnings in the W F P declined between 1993194 and 2001102. Correcting job earnings for price inflation reveals a decline in average real earnings in the M P of 4 percent over the period 1993194 to 2001182. 'This decline is equl for men and women and is comparable to the development inlabor markets in the rest of the country. It means that already low earnings graduallywere eroded during much of the 1990s while consumption poverty was on the rise. The decline in real earnings was more severe in the rural than in the wban sector. 1.3% The reasoPa for lower-than-nationahverage earnings in the NWFP is to be found in lower earnings for any given job. Figure 1.2 shows that most professions earn less in the NWFP than elsewherein Pakistan. Figare1.2: Average Earnings by Profession in NWFP and Rest of Pakistan, 2001/02 (Rs Per Year, Current Prices) 1 - Rest of Pakiq;l( - Source: LFS, 2001/02 Given that earnings generally reflect productivity, this suggests that productivity in the NWFP in a given profession is below the national average.The low level of educationof the NWFP's labor force obviously contribtites to low productivity and earnings. Further analyses also show that for women, returns to education aypear to be substantially lower in the M P compared with the rest of Pakistan. For the M P ' s male workers, retms to educationare only slightlylower than for Pakistan as a whole. 6.R@MPTTANcES AS AN OPPORTUNITY 1.32 Re~%ncesplay a vital role in the economy of the NWFP. There is a long tradition of workers from the P migrating to other parts of Pakistan or overseas searching for work. This migration is Ixgely caused by the absence of employment opportunitiesin the province. The money remitted by these workers contributes in a sigzificant mmaer to household income, consumption, and investment. Almost 30 percent of households in the PBWTFP receive remittances fiom someone in Pakistan, while 8 percent receive workers overseas, often in the Gulf; these shares are double the national average. Transfers are subs'mtial: average annuz! transfers (for those that receive them) are Rs 30,000 for domestic and Rs 71,000 for international remittances. Winen these transfers are averaged over all households in the NWFP (receivers and non-receivers), they constitute Rs 15,000 per year per household, corresponding to 18 percent of annual household consumption. Table 1.4: Remittancesin the NWFP and Pakistan, 2001102 (Rs and Percent) NWFP Pakistan Average domestic remittance(all households(HHs)) 9,039 3,989 Average international remittance(all households) 6,015 2,998 Average domestic remittancefor receivers 30,410 29,135 Average international remittance for receivers 71,215 72,859 Share receiving domestic remittances(%) 29.7 13.7 Share receiving remittances from abroad(%) 8.4 4.1 Average domestic remittance(all HHs) as %of HH expenditures 11.2 4.6 Average international remittance (all HHs) as %of HH expenditures 7.4 3.4 Average domestic remittance for receivers as % of HH expenditures 37.7 33.3 Average international remittance for receiversas % of HH expenditures 88.2 83.3 Source: PIHS 2001102. 1.33 Rural households are more likely to receive remittances and receive larger amounts on average than urban households, reflecting a rural tradition for migrating out of the province. As can be seen fiom Figures 1.3 and 1.4, householdsin the upper quintiles are normally more likely to receive remittances, and on average receive larger money amounts, than poorer households; of course, to some extent households become better-off as a result of remittances. However, it should be emphasized that remittances tend to make the income distribution more, not less, unequal. The fact that the NWFP has a strong tradition for remittances thus does not remove the need for safety nets and other poverty-targetedinterventions. Figure 1.3: Share of NWFP's Population Receiving Remittances, 2000101 (Region and Quintile) r 1 Urban 1 ( Total NWFP 1 1 1 2 3 4 5 Quintile (for NWFP) - Source: PTHS 2001102. Figure 1.4: Average Amount Received in Remittancesin the NWFP, 2000/01 (Region and Quintile) p i 0 0 0 Urban71 I 1 2 3 4 5 Quintile (for NWFP) L Note: Average isfir all households,includingboth receivers and non-receivers. Source: PIHS 2001102. 1.34 From the available data, it is hard to say much about the use to which remittances are put by the receivers. In all likelihood,remittances contribute to higher consumption and benefit the development of the province through multiplier effects and other links. PIHS data shows that school enrolment rates for children from households in the NWFP that receive remittances are larger than for those householdsthat do not receive them (by some 5 percentage points). This difference in schooling investments, which is larger in rural than in urban areas, is also found when comparison is made quintile-forquintileand thus does not merely reflect an income effect. It suggests remittances contribute to higher human capital among recipients, possibly encouraged by the relatively stable nature of remittance income or by the closer contact with out-of-province labor markets in which returns to schooling may well be higher than in the NWFP itself. Another use of remittancesis larger and better houses. Data from the PIHS suggest that households receiving remittances have larger houses than households that do not receive remittances (this difference is also found when comparisonis made quintile-for-quintile). D. ASTRATEGYTOMEETTHE POVERTYANDEMPLOYMENTCHALLENGES 1.35 The previous sections outlined the dimensions of the challenge of alleviating poverty in the NWFP, and identified the creationof productive employmentas the main element of the solution. 1.36 How can more jobs be created? The creation of employment requires an increase in the demand for labor, and this generally comes about with an expansion of the GDP. How much faster should the GDP of the NWFP grow in order to absorb the additionsto labor force and to make a dent in the ranks of the previously unemployed? The long-term elasticity of employment with respect to real GDP growth works out to approximately0.55. The labor force is presently growing at about 3.2 percent a year, so this implies a growth rate of 6 percent a year for the real GDP to absorb the additional workers entering the labor force. However,the real GDP growth rate will have to be higher in order to provide employmentto workers who are in the labor force but are at present unemployed. Thus, a target growth rate for the province will probably have to be 7 - 7.5 percent a year in real terms.' 1.37 What can be regarded as the potential growth rate for the NWFP? The estimation of a potential growth rate can be approached in a number of ways. First, the potential growth of GDP is the sum of the growth of the labor force and of labor productivity. The labor force is currently growing at about 3.2 percent a year. Unfortunately, the available data on employment raise serious questions and make calculations of labor productivity extremely problematical. Some very rough calculations and evidence from other countries suggests that a likely rate for the growth of labor productivity could be in the range of 1.5-2.0 percent a year. Second, the poor quality of the data makes it poi~~tlessto use any serious econometric technique to factor out short-term fluctuations and arrive at the underlying trend. Third, one may regard the real growthattainedby the province over a long period as a proxy for the potential growth rate. Over the last 14 years (FY91-FY05), the GDP of the NWFP grew at a rate of 4.6 percent a year; in the last 7 years the growth rate averaged 4.4 percent. Thus, whichever number one picks, it is clear that the potential rate, given the NWFF"s existing institutional and technoIogica1base, is insufficient to attain the government's objectives. This means that a prionty for the authorities must be to strengthen the institutional base and to upgrade technologes in the province. 1.38 What would be the main elements in a development strategy for the NWFP that sought to attain such a growth rate? The steadily increasing pressure on the cultivable land requires the NWFP to develop policies that would maximize returns fiom the cultivable area and at the same time emphasize activities that are not intensive in the use of cultivable land. The same pressure increases migrationfrom the ma1to the urban areas, which creates its own set of problems and opportunities. The problems, of course, arise from the concentration of population in urban areas, which requires the provision of jobs and an expansion of services. The opportunities reflect the other side of the same coin. The concentrationof' skills and the enlargement of the market in urban areas offer the prospect of reaping the benefits of specialization and the division of labor, and hold out the possibility of the urban centers' acting as engnes of growth. 1.39 In broad terms, this means that the strategy for the NWFP would be to enlarge the cultivable area by expanding the irrigation network, while also moving the agricultural sector increasingly towards higher value crops, such as horticulture. Outside agriculture, the strategy would be to develop those activities in which the province is likely to have a comparative advantage. A broad range of activities could meet this criterion. 1.40 In manufacturing, the province is likely to possess a healthy comparative advantage in the extractionand polishing of marble, of gemstones, and of construction materials for export to Afghanistan. The province also possesses a strong comparative advantage in the generation of electricity from hydel sources. If this power could be made available to local industry at prices lower than those charged by the National Grid, it is likely that some other manufacturing activities could also become competitive. We return to this point later in the report. 'There are no official GDP figuresfor the NWFP.The estimates presented in this report have been prepared by world Bank staff and represent only a first approximation. The figures are based, as far as possible, on the methodology used by the Federal Bureau of Statistics for estimating the national GDP series and are consistent with the estimates for the Punjab and Sin& in the World Bank's economic reportsfor those provinces.The procedures underlying the Bank's estimtitesfor the NWFP are described in an appendix to this report. It is hoped that the NWFP government will issue a more refined and official set of calculationsthat could be used in subsequentwork. 1.41 Another potential sector for generating incomes is tourism. It is apparent that tourism assets- such as high mountains, scenic valleys, exotic cultures, historic sites - abound in the province. However, under the existing law and order conditions (and perceptions), it is unlikely that foreign tourism would play a significant part; such possibilities as exist, therefore, must come from domestic tourism. But questionsremain of the extent of the domestic demand to visit these assets, and the costs of providing safe and convenient access. While tourism must undoubtedly figure as an element in the long-term development of the province,its role in the immediatefuture requires fiu-therinvestigation. 1.42 An area that appears to offer considerable possibilities is the generation of hydel power. The NWFP currently generates 3,767 megawatts but these are sold to WAPDA which then sells them to consumers (including in the NWFP) at a higher price. But sale to WAPDA is not the only option available to the province. It is possible to establish (small) units that provide so-called "captive"power at a price different from that charged by WAPDA. Representatives of the private sector argued that if this power were priced less than that charged by WAPDA, for a number of industries it would offset the higher transport charges occasioned by the province's distance from seaports. Expanded generation of hydel power, therefore, could provide resources to the government both directly by sale to WAPDA, and indirectly by giving a fillip to industry in the province,which would lead to greater employment and thus to higher incomes and tax revenues. 1.43 In developing a growth strategy for the NWFP, it is important to emphasize that the main thrust must come from the private sector. This is necessary both in order to ensure greater efficiency by stimulating competition and thereby encouraging f m s to move to the "best practice" technological frontier, and also because the provincial budget cannot bear the strain of continually financing loss- malung activities in the public sector. However, the organized private sector in the NWFP is small. A crucial element in the development strategy, therefore, is the expansion of the private sector. This, in turn, will require improvements in the working of various institutions, particularly the bureaucracy, the commercial judicial system, the taxation system, the financial sector, and the systems of education and labor training. 1.44 Recent developments in international affairs should encourage the NWFP to "think outside the box" in formulating a development strategy. The most important development has been the end of hostilities in Afghanistan and the commencement of a vigorous reconstruction program in that country. As a result of history and culture, the NWFP is well placed to participate in this rebuilding effort through the export both of commodities and of skills. An important part of the province's development strategy, therefore, should be to encourage activities that would take advantage of the NWFP's links with Afghanistan. Officialtrade between theNWFP and Afghanistan is alreadyincreasing quite rapidly-the estimates for 2002/03 put exports £tom the NWFP at US$ 125 million, but this is almost certainly an underestimate. There has historicallybeen significantinformal trade between AfghanistanandNWFP,in the form of re-exports from Afghanistan and leakage from the Afghan Transit Trade (ATT) facility provided to land-locked Afghanistan by Pakistan. The informal trade (including ATT) was estimated to be close to US$ one billion in 2000.~Current indications are that the informal trade may have increased after 9111 (2001). There has been a 17 percent average annual increase in ATT (from US$220 million in FY02 to US$370 million in FY05 (preliminary estimates)) of which about 85-90 percent leaks back into Pakistan as unofficial re-exports. Unofficial cross-border trade between Afghanistan and Pakistan is even hgher. Although reliable figures are hard to come by in this field, an attempt at assessing the dimensions of the NWFP-Afghanistantrade is made in the chapteron private sector development. The World Bank and UNDP, "Afghanistan's International Trade Relations with Neighboring Countries", a report prepared under the Afghanistan WatchingBrief project, 2001. 1.45 There has been considerable attention in recent years to develop the Federally Administered Tribal Areas (FATA) bordering the NWFP and Afghanistan, which could have positive spillover effects in NWFP. FATA (particularly South Waziristan) has made headlines because of military action since 2004 against alleged A1 Queda terrorist and training camps. The seven FATA agencies9 and 6 frontier regions (FR)" are administered by the Federal Government and the NWFP Governor. FATA comprises approximately 2 percent of Pakistan's population and is considered one of the poorest (60 percent of the population is below the poverty line according to the FATA Secretariat's estimates) and least economically developed parts of Pakistan. The economy is largely pastoral with some agriculture in the region's few fertile valleys. Historically, these areas were a major center of opium production but the opium cultivation and trade has been much reduced over the years. Due to its special status and also because of limited employment options, FATA has been a major conduit of the smuggling via Afghanistan. To reduce the influence of terrorist organizations and illegal activities (drugs, arms, smuggling) and to eventually mainstream FATA with the rest of Pakistan, there has been considerable focus on economic development in FATA in recent years. The FATA development budget which stood at Rs 1.1 billion in FY02 increased to Rs 5 billion in FY05 and is expected to increase to Rs 45 billion over the FY05-10 period. The focus is on building roads, water conservationresources,imgation channels,and provision of social services and reducing gender disparities. These positive developments in FATA are likely to reduce pressures on social services in NWFP. It would provide job opportunities for residents of the NWFP in tribal areas, thus reversing the labor migration from FATA into NWFP. Economic development leading to an improved law and order situation in FATA would help in further improving the investmentclimate in the province. 1.46 The concentration on mining, manufacturing, hydel power generation, tburism, and su>on should not blind one to the fact that agriculture will remain the backbone of the economy. However, in the future agriculture will have to diverge from many of its traditional activities, such as cereal production, and move increasingly towards activities, for example horticulture and livestock, iin which the returns are higher. 1.47 The public safety nets available to the poor in the NWFP are the same as elsewhere in Pakistan and are plagued by similarissues of under-fundingand under coverage of the poor. Big gaps in the mix of safety net programs include the lack of programs designed to help build human capital of the poor, and the lack of workfare programs for the working-age poor. Therefore, as part of an expanding anti-poverty saategy, the NWFP could consider piloting demand-side interventions to promote better health and education outcomes among the poor, using conditional transfers or school feeding programs, or both. Labor intensive public works could also be considered to help provide employment and income to poor and underemployed rural workers; such programs also help build and maintain essential rural infrastructure that can play a role in reducing poverty and vulnerability. Moreover, it would seem appropriate to review the disaster prevention, mitigation, and management capblcity of the firovince,to ensure disaster managementprogramsare in place. 1.48 The provincial development strategy will be shaped by constraints, such as an inadequate infrastructureor limited financialresources, which are generic to the country as a whole. But in additionit will have to deal with constraints and characteristicsthat are either specific to the: NWFP or that apply to that province with special force. The following merit special mention. The agencies are: Khyber, Kurrum, Bajur, Mohrnand, Orakzai, North Waziristan and South Waziristan. loFR Kohat, FR Peshawar,FR Bannu, FR Lakki, FR Tank and FR D. I. Khan. 11 > Distance from seaports: The deep inland location of the NWFP means that the cost of imported inputs for the province's productive activities is significantly higher than for those in the other provinces, and that exports ffom the province (except to immediately neighboringcountries, such as Afghanistan) are also correspondingly more expensive. Thus, in the absence of some strong offsetting factors, the province's competitive edge is blunted. It also suggests that the province's industrial strategy will more or less be compelled to concentrate on products that use large amounts of raw materials that are indigenous to the province, that are light-weight and high- value, or that can be exported to countries that are physically closer to the NWFP than to the other provinces of Pakistan. > The effects of being a front-line state. The NWFP served as a front-line state and acted as a host to more than three million refugees during the eleven-year war in Afghanistan and also for the period of the civil war that followed. According to a recent survey, there are still 1.9 million Afghan rehgees living in the NWFP (approximately 9 percent of NWFP's population). The bulk of them are "old" refugees who have been in the NWFP for twenty years or more and have assimilated well in the province. There have been both positive and negative effects of hosting a large refugee population in NWFP. During the 1980s and early-1990s the flow of foreign assistance and Government of Pakistan's development programs helped the local economy by building infrastructure such as roads, irrigation channels, and was also spent on housing, schools and health facilities for the Afghan refugees. Cheap labor provided by Afghan refugees was instrumental in reducing labor costs in general, and particularly in the transport, construction and ago-based industries. Refugee assistance started petering out by the mid-1990s with the rise of the Taliban in Afghanistan.On the negative side, the two principal long-term consequences were that: (a) the resulting instability discouraged private investment; and (b) the economic and social infrastructure of the province was seriouslyoverused and run down. > Remittances as social safety net. As noted above, it is considerably more common in the NWFP than other provinces that households receive remittances from family members working in other parts of Pakistan or in foreign countries. These flows of income play a significant role in alleviating poverty in the province. However, a sustainable development strategy cannot be based simply on the export of labor, if for no other reason than that such a policy is vulnerable to actions by governments over which the NWFP has little influence, and it leads to a continuing hemorrhage of skills that are required within the province for its development. A more stable development skategy, therefore, would be to maintain the flow of remittances, while at the same time enlarging and strengthening economic activities withn the NWFP that would generate incomes in a more stable manner and at the same time make available the labor skills to the province. In order to maintain or even increase the returns from migration the strategy would have these policy implications. Education policy will need to consider the skillsrequired in labor markets outside the NWFP and even outside Palastan. Workers with higher and technical educations are likely to be in strong demand, as are workers with vocational training. Policy makers should also recognize the fact that to the extent workers migrate out of the NWFP and earn more than workers who remain in the province, analysis based on returns to education inside the NWFP would underestimate the true expected returns to education. It would be useful to formulate a strategy for skills improvement of potential migrant workers, and to find ways to maximize the benefits to the province of its migrant workers; these benefits include remittances, investment, and occasionally return migrants bringing skills and capital acquired elsewhere. The key to maximizing benefits from this large group of people will be to maintain contact and links and encourage flows of people, information, and money between the province and the places of residence of the migrants. I k The treatment of hydel power. A problemwith analyzingthe growthpotential of provinces is that the ability to develop their natural resources might be restricted by powers that are legally allocated to a central authority. To an extent, therefore, a province might not be master of its own development fate. While the constitutional allocation of powers between the center and the provinces regardingnatural resource development is uniformbetween all provinces, the impact of such legislation on small provinces with a narrow resource base can be much stronger than on largerregions. The chief resource of the NWFP is the potential for generating hydroelectricity. Under the rules of business of the Government of Palustan, power plants above a certain size fall under the purview of WMDA and all tariffs are determined by NEPRA. Thus, decisions regarding the development of hydroelectric resources, investment in these facilities, and the pricing of electricity are taken by the central government,even though these matters impact crucially on the province's main resource. The province has two broad possibilities for converting its hydroelectric potential into hgher incomes. First, the province can earn revenue by selling electricity to WMDA. Second, it can set up hydel plants with a capacity below 50MW that, while covering their costs, could sell power within the NWFP at a lower rate - subject to NEPRA's tariff determination- than the power provided by WAF'DA on the national grid. The lower price for electricity could help to offset some of the transport cost disadvantages arising fromthe province's geogaphical location. 1.49 In the last few years a number of important changes have taken place in the political and administrative structures of the provinces. The most far-reaching of such changes is the devolution of power to the districts and local governments. These agencies play a vital role irl the delivery of essential services, and are closest to the final consumer of such services. It is therefore necessary to examine how the devolution sf power in the NWFP is worlang in practice, how the devolution affects, for better or for ill, the delivery of services, and how this performancecan be improved. 1.50 Finally, it should be reiterated that the present report is only the first in a continuing review of the economic potential of the NWFP and of the measures required to realize this potential. Being the first attempt to systematically explore such subjects, it is inevitable that it would be; faced with shortcomings of data and information in a number of areas. The report highlights these areas and makes recommendationsfor improvement. It also describes the methodalogythat it used to fill in the lacunae. It is expected that as more detailed and more securely-based data become available, they will be used in subsequent investigations and in revisions to the findings of this report. CHAPTER 2: AGRICULTURE AND NATURAL RESOURCE MANAGEMENT 2.1 Agriculture has been the backbone of the economy of the NWFP - in 2002103 it contributed about 20 percent of the provincial GDP and provided employment for an estimated 44 percent of the labor force - and will continue to be crucial in the medium-term." However, as part of the strategy to accelerate growth in the province, the relative size and composition of the sector will have to undergo changes. Land is the binding constraint on the NWFP's agnculture. Only 30 percent of the land in the province is cultivable, and additions to the cultivable area through irrigation or to the cropped areal2 through increases in cropping intensity have not kept pace with the growth of the population. If agnculture is to make its due contribution to the growth of the province's economy, the structure of the sector will have to change. 2.2 While agriculturaloutput has expanded over the years, yields in the NWFP remain low relativeto other agricultural producers(see Table 2.1). Table 2.1: Yieldsof Key AgriculturalProducts, 2002 (Tonnes per Hectare) Crop NWFP Pakistani Punjab Indian Punjab Egypt Wheat 4.5 6.2 Irrigated Un-irrigated Rice-fine (paddy) Rice-coarse (paddy) Cotton(phutti) Sugarcane Maize Gram Rape & mustard Tomato Potato I Apple 12.3 9.0 Source:Government of Pakistan, Crops Area Production (2004), Punjab Agricultural Report (2004). Note: Data for NWFP is annual average over 2000101 - 2002103. The NWFP cotton yield reported at 5.92 bales1ha. 2.3 Overall growth rates in agriculture have been low, and occasionally negative, reflecting the dependence on rains (and the drought of the late 1990s). The composition of growth within the agricultural sector slowly changed over the last two decades. The contribution of crops to GDP has decreased, particularly for major crops (i.e. cereals), while that of livestockhas increased. See Table 2.2. l1 Agricultural statistics are a$ailable, but their reliability must always be assessed. Official estimates of provincial GDP are not available. The data quoted here and used throughout the report is derived l%oma GDP estimation exercise involving officials and Bank staff. Crop production and yleld statistics, taken from provincial and national sources are also subject to discrepancies, and the data should be treated as suggestive. '*The cultivable area times the cropping intensity. Table 2.2: Composition and Recent Growth Rates of Agricultural GDP, 1980181-2002103 (Percent) 1990191 1995196 2002103 8 + Pakistan NWl?P Pakistan N W P o Pakistan NWFP "Agriculture 25.8 23.6 26.1 21.8 23.6 20.6 major crops 12.3 8.4 10.9 6.6 9.6 4.7 8 minor crops 4.5 3.7 4.7 3.3 1.8 0 livestock 7.7 10.8 9.5 11.5 9.2 3.8 12.5 1995196 2000101 2002103 A 2 NWFP NWFP NWFP Agriculture -1.1 -3.1 2.9 e, major crops -5.2 -17.7 6.7 8 minor crops 1.9 -11.2 -0.2 livestock 9.5 3.8 2.3 Source: World Bank Staff estimates. 2.4 The NWFP benefited from the Green Revolutionalong familiar lines: new varieties together with fertilizer and imgation led to significant increases in yields of both wheat and maize. Farmers responded by shifhng out of traditional crops (e.g., sorghum, barley and pulses) and increasing the cultivated area. Consequently, the area under wheat and maize cultivation increased significantly until 1997198, when the province was hit by a severe drought. This impacted particularly severely on the non-imgated regions of the province, in which wheat yields fell by 10 percent a year until 2001102, Fanners responded by reducing the sowing of wheat in these regions, with the result that the area unde cereal productionin the province fell significantly after 1997198(Figure 2.1). Figure 2.1: Area under Cereal Production,* 1985186-2b02103 (Thousand Hectares) 1sum of wheat, maize, barley, rice and millet (baiura) Source: NWFP Agricultural Statistics. 2.5 The 1970s and 1980s were periods of agricultural intensification. Total cultivated area was largely unchanged.13However, irrigation opened opportunities for double-cropping -in the fifteen years to 2001102, the area sown more than once increased by over 40 percent. This compares with the Punjab, where the cultivated land increased 5 percent over the same period, and the atea to be double-cropped increased by almost three-quarters. l3From 1984/85to 2001/02total cultivated area increased by only 2 percent. 2.6 Irrigation was key to farmers' ability to utilize advancesin technology and to maintain production and hence incomes in periods of drought. Yet the extent of imgation varies significantly across the NWFP, worsening the already severe regional differentials in agricultural livelihoods. In half of the districts more than 50 percent of their agricultural land remains uninigated. 2.7 Across the province, fruit production has Box 2.1: The'Ladder' of Diversification increased significantly up to 2002103, largely due to support in research, extension and marketing There is a systematic progression within provided by the Swiss-funded Project for horticulture with farmers initially divemiQing into Horticultural Promotion (PHP)'~.Apple production apples, with more sophisticated h i t growing was already significant in the NWFP, but increased following thereafter as more experience is gained. further during the decade to 2002103 at an annual Discussions with growers suggested that fanners rate of over 4 percent of which yield growth and who moved first into apple orchards axe the first movers into peaches, suggesting a particularly acreage contributed about equal shares. Peach strong opportunity not onlyfor these farmersbut for production has grown by an average of over 14 others to *lace them in a 'ladder of percent p.a. over the period, with spectacular diversification'. increases in recent years (Figure 2.2).15 There is a clear sequence to diversification (Box 1). Figure 2.2: FruitProduction in the NWFP, 1985186-2002103 (ThousandTonnes) ~ & -m- pear - - - - plum - +- peach +apple - 1 apricot Source: NWFP AgriculturalStatistics. 2.8 Farmers in the NWFP have also diversified into vegetable production. As shown in Figure 2.3, production of vegetables increased consistently over the decade after 1985/86.16Again, the increase in production is driven largely by an increase in area sown, rather than yield growth. The exception is onions, where acreage grew by 6 percent a year while production increased by 11 percent per annum. l4The Project for HorticulturalPromotion (PHP) was a Swiss-hnded agriculturaldiversificationproject that worked primarily in the Swat Valley. Most stakeholdersattributed the growth of horticulturein the region to project interventions. Of the remaining h i t products, apricot productionhas grown ay 2.48 percent p.a., pear at 0.05 percent p.a., and plum by 1.05 percent. l6 We suspect the fall in 1995 to be a statistical revision.These data need to be treated with some caution. Figure 23: VegetableProduction in the NWFP, 1985186- 2002103 (Thousand Tonnes) ~ ~b ~m ~. ~c em et e e e e s s s e a a a a w b a ~ m o - ~ m - = t m w r - a m o - ~ r n m w m O - u - m , m 0 F N m a Jm mm mmmmm m m m m m m m m m 0 0 0 m m m m m m m m m m m o o o I - +- tomato - - S - .garlic -+vegetable - -X -onion - +potato( Source: NWFP AgriculturalStatistics. Note: We suspect the sudden drop in 1995196 to be a statisticalrevision. 2.9 The impact of this diversification on rural incomes appears to have be71 significant, particularly when set against a backdrop of falling real wages in the NWFP: Average dailywages in the agricultural sector have fallen from Rs126 to Rs80 over 1998199 - 2001102 (in 2001102 prices). In discussions with farmers it was indicated that converting from cereals to horticulture providesjiive times the income per hectare. Horticulture also requires up to five times as much labor input, thewby providing important opportunities for land-less laborers and under-employed farm household^.'^ On the demand side, it is probably providing nutritional benefits to farm families. While diversification into fruits and vegetables has undoubtedly had positive impacts, these have been lo~alized'~ -the NUS]FP remains essentiallya cereal producer (Figure 2.4), with the lack of comparative advantage compensajed by a supp~rtivepolicy framework. Production is concentratedin the Irrigated Plains, primarily in the cqntre of the piovince. l g l7Wage incomes are important for the poor of Pakistan. For the bottom quintile only 17 percent of household incomes originate directlyfrom crop production,while37 percent is wage income. (The bulk of this would be off-farm employment.) IBFor instance, over two-thirds of the province's apple production comes from Swat District. ''We distinguish between three main agro-climatic zones: (1) the Irrigated Plains consist of the central districts of Charsadda, Peshawar, Mardan, Nowshera, Haripur and Swabi, along with Lakki Marwat, Bannu and D.I. Khan; (2) Arid Plains and Mountains of Kohat, Hango, Karak and Tank; and (3) the Northern Mountains of Chitral, Kohistan, Upper and Lower Dir, Malakand Agency, Swat, Buner, Shangla,Manshera, Battagramand Abbotabad. Figure 2.4: Area under Cultivationof VariousCrops, Average 2000101-2002103 (Percent) 1 fruits vegetables cereals irrigated - cereals non- - irrigated Source: NWFP Agricultural Statistics. 2.10 Livestock farming (principally cattle and goats) is important in the NWFP, and accordingly demand from urban consumers has increased. According to official statistics its contribution to provincial GDP is greater than that of crops.20Commercial production has taken over from small-scale poultry farming, particularly in the central Irrigated Plains and Hazarra (Manshera, Abbottabad and Haripur) which have good access to markets. Buffaloes -mainly brought from the Punjab -remain important for dairy production. The sale of dairy products and live animals to urban households provide an important flow of cash income to rural areas. The extensive pasture land in the high mountains allows herdersto maintain large herds of small ruminants (sheep and goats).21 2.11 Livestock farming is a major source of livelihoods in the Arid Plains and Mountains regon of southern NWFP, with around three-quarters of f m households involved in goat and cattle rearing (see Figure 2.5), providing about 10 percent of the provincial market. Small ruminants are also especially important. Again, little investmentin livestock research, high quality breeds and improvementsin fodder has kept productivity low. In the absence of high quality fodder crops (including processed animal feed), grazing depends on the extensive rangelands (2.1 million ha throughout the NWFP-about one third of total area) although increasing pressure is leading to environmental concerns. For example, about 80 percentof the total grazing lands in the provinceare highly degraded. 20The rise in livestock reported by the officialstatistics may be in part due to an improvement in the data gathering. Of total the NWFP production, Chitral and Kohistan cumulatively provide 37 percent and 25 percent share of sheep and goats respectively. Figure 2.5: Farm Households Engaged in LivestockProduction,2000 (Percentof Farm Households) I sheep goats cattle buffalo EIrrigatedPlains Northern Mountains ElArid Plains and Nlountains I Source: Agricultural Census 2000. 2.12 An increasing number of farmers are also engaging in agro-forestry. Tree nurseries are being encouraged through reforestation efforts, and a number of private nurseries have been established to meet the demand for saplings. Similarly, the high demand for timber, particularly from match producers, is encouraging farm forestry. In Mardan and Swat, for instance, farm forestry involving the planting of poplars on the edges of fields and along water courses is providing as much as 20 - 40 percent of total farm income. 2.13 Agricultural growth is probably the most effective mechanism for poverty reduction, and increasing yields is likely to be a major driver in the NWFP as elsewhere in the region.22Yield differences between the regions are stark: yields of the Arid Plains and Mountains are only half that of the Irrigated Plains in wheat, and two-thirds for maize. Available data suggests a correlation between poverty levels across the three agro-climatic regions and agricultural characteristics(Table 2.3).23 22Across South Asia as a whole the elasticityof povertyreductionto changes in yield is estimatedto be 0.48 (Thirtle et nl, 2002). 23These figures shouldbe considered as indicative only. 19 Table 2.3: Patterns of Poverty and Agricultural Characteristics - Mean per capita Gini Coefficient Population consumption, of Per Capita Median Average Density, 2001102 ~onsum~tion, Altitude (~eters) 199912000 (Rs per month) 2001102 (persons/ sq km) Imgated Plains 835.9 0.27 328 465 Arid Plains and Mountains 817.9 0.24 560 189 Northern Mountains 780.7 0.21 1,082 162 CultivableArea, Cultivated Area, Percent of ReportedArea, 199912000 199912000 Provincial 199912000 (percent of (percent of Forests, (ha) reportedarea) reported area) 199912000 1 Imgated Plains 2,056,265 74 44 12 Arid Plains and Mountains 861,515 40 22 12 NorthernMountains 2,705,349 30 20 76 Percentageof cultivatedland that is... tube-well other method non-irrigated canal irrigated irrigated irrigated land Irrigated Plains 50 5 1 44 Arid Plains and Mountains 16 3 0 80 NorthernMountains 37 4 8 50 Source: NWFP AgriculturalStatistics. 2.14 The province needs to address several major issues in order to realize the potential of the agricultural sector within a framework af sustainable natural resource use. These issues include public expenditures, government research and extension, pricing policies, land markets, water management and irrigation, and management of forest resources and rangelands. 2.15 There are a number of issues regarding the level, management, and composition of public expenditures. First, public action to correct market failures and provide public goods is warranted in the agricultural sector, but spending on agriculture-related functions has been falling steadily since the mid-1990s. The sector receives the lowest per capita allocations, even though it has a higher proportion of poor people dependingon agriculture for their livelihood^.^^ Total expenditure on the sector is low by international standards (Figure 2.6). Total spending to agnculture and irrigation increased in nominal and real terms fiom the mid-1980s to the early 1990s, but has since been falling consistently. Over the decade to FY02 spending has fallen by about 7 percent per annum, and is now only half that of the peak allocations in the 1990s (Figure 2.7). 2.16 Development spending has suffered most, particularly for agnculture with irrigation investments having returned to the average for the 1980s after the growth of the 1990s. The development budget allocated to the Ministry of Agriculture increased to Rs 135 million in FY05, up from around Rs 90 million in the previous two years, although it remains significantly below allocations in the mid-1990s (e.g., in 1994/95 development spending amounted to Rs 208 million).25By some estimates the sum of Provincial and District Annual Development Plans (ADPs) amounts to only about one-fifth of aggregate 24The NWFP accountsfor 12 percent of the population but commandsonly 10 percent of total national spending for the sector. 25Note that these figuresdo not correspond exactly with the functional classification used earlier. spending.26Agriculture appears to have a low priority particularly at the District level, receiving at most token allocation^.^' Figure 2.6: Public Expenditures in Agriculture (Percentof Agricultural GDP) 7 I 14 12 10 Nepal 8 QAll Pakistan ElBangladesh 6 ElIndia 4 HThailand 2 0 Source: Fan and Rao (2003) and World Bank Staff estimates. Expenditures include irrigation. Figure 2.7: Trends in AgricultureSector Spending (Constant1981Prices and Percent) I I /1+ ~ o t a l Agriculture Spending (1981 Rs million) Left-hand scale I-- + - -TotalAgriculture Spending (% of Public Expenditure)Right-hand scale I I Source: World Bank Staff estimates. Data excludes irrigation. - 26Sectoral breakdowns of individual district ADPs are not published. The analysis was derived from a sub-sample of three districts for which such data were provided to the Mission. 27There was virtual unanimity of view among District-based officials consulted by the Mission. 2.17 In an environment of constrainedfiscal space, it is unlikely that a large increase in resources fiom government to the sector is realistic; moreover a significant agenda already exists in improving the effectiveness of existing resources. Maximizing the impact of public expenditure requires howledge of the prospective returns to alternative investments, and underscores the important of monitoring and evaluation (M&E) systems in providing the ongoing evidence base for measuring outputs and outcomes.28 A major review of the composition of the overall resource envelope is necessary before reallocations can be suggested,but it is clear that the current inefficiencies impose a high opportunity cost on the province. For instance, funds currently allocated under the Surplus Pool could finance the expansion of Farm Service Centers to includean additional26,000 farmers.Moreover, current allocations do not appear to be correlated with need (as measured by poverty). Figure 2.8 ranks Districtsaccording to their income levels and illustratesactual salary and non-salaryexpenditure on agriculture and livestockper farm household.29 If extension services were based on need, one would expect to see increasing bars as one moves from the richer Districts on the left-hand side to the right-this suggests scope for a geographical redistributionof funds in favor of the poorer Districts. (The different shadings indicate whether the District is in the Arid Plains and Mountains e.g. Kohat, the Northern Mountains e.g. Buner, or the Irrigated Plains e.g. ~ a r i ~ u r . ) ~ ' Figure 2.8: PovertyRanking and Expenditureper Agricultural Household, 2002103 I I Rank by income (decreasing left-to-right) I I I Source: Government of the NWFP (GoNWFP) PRSP; 2000 Agricultural Census and data obtained from GoNWFP. Data unavailablefor Malakand and Battagram. 28 It is evident that the Province publishes extensive agricultural statistics, but it remains a concern to the extent to which these are used in policy-making. It would seem that the infrastructure exists for a more effective M&E effort should the GoNWFP be willing to do so. 29 The District ranking comes from an exercise undertaken as part of the Province's PRSP exercise. Expenditure data for 2002103 is from the Accountant General's office. Farm household data is from the 2000 Census. 30 Note that by some measures, such as physical access, Bannu and Lakki Marwat are more akin to the other Southern Districts that make up {he Arid Plains and Mountains, and this helps explain their position as relatively poor Districts. 2.18 Second, the budgetary and expenditure control systems suffer from weaknesses. These deficiencies are common to many countries and not unique to the agricultural sector (see Chapter 5). The GoNWFP has started to address these through a reform program that will help introduce technical improvements to the public financial management regme. However, a number of inefficiencies are behavioral,rather than technical (e.g. robust budget ceilings), and it is essential 'to provide strong political commitment to expenditure control and efficient allocation. 2.19 Faced with political pressure to 'do more' budgets are often over-ambitious. Ths leads to mid- term corrections,creating inefficiencieswith redundant staff lackingresources to undertake activities (e.g. salaries cannot be cut and thus the burden often falls on operations and maintenance (O&M) e~~enditures).~'Cash management can slow expenditure releases, delaying activities. The Mission learned of instances where the allocations for agricultural extension demonstration plots were so delayed that they missed the plantingseason, thus rendering this intervention useless. 0:Ftenlessons are not learnt, and subsequent years' allocations remain unrealistic while revised budget figures continue to fall short of allocati~ns.~~The volatility in actual releases creates uncertainty and limits both strategic and operational planning. 2.20 Third, expenditures remain highly centralized, and salaries take rrp a large proportion of expenditures. Under the 2001 the NWFP Local Government Ordinance (LGO), responsibility for apculture, amongst other sectors, was devolved to the province's 24 districts. Yet the provincial government retains control of a large share of expenditure; for example, the share of provincial-level expenditure was 57 percent and 41 percent in the Agriculture and Livestock departmenti respectively. Further analysis suggests that these figures exaggerate the extent of managerial devolution to the district. First, resources barely cover establishment costs. Staff implements activities for which complementary O&M resources are available, but these tend to be centrally managed. Subtracting the transfers to the Agricultural University, salaries and allowances account for 44 percent of the total Regular budget of the Agriculture Department, and 64 percent of the Livestock Department. Second, a major source of establishment costs is the Provincial ADP. As such, the ADP allocations overstate the extent of investment spending in the sector. 2.21 Moreover, the data for three districts provided to the Mission suggest that salaries take up a large proportionof expenditures and that very little remains for O&M (in the case of the Regular budget) or for investment (in the case of ADPs). m l e international benchmarks suggest a ratio of salary to operational expenditure of 60:40 (i.e. 1.5:1), data from the Accountant General on actual expenditures by district for FY03 shows ratios for salary to non-salary costs of at least 3:l and up to 321 for the Agriculture and Livestock departments.33 2.22 In view of the province's limited resources, the mix between public gmd private koles needs to be reexamined and redefined. With limited fiscal space, and salaries and allowancestakmg such a high proportion of Regular Budget, it is particularly important to allocate public funding toward services justified on genuine public good grounds, with remaining functions left to the private or NGO sector. Table 2.4 provides a guide as to those activities warranting public intervention (&ding andlor implementation)and others for whch the government should play a facilitatingrole. 3'For example, during FY03104 District allocationsin the Department of Forestry to some distrilctswere cut by 86 percent, while other districtshad their allocations increased by more than half. 32For example: the Revolving Fund to Animal Husbandry was allocated Rs 5 million in FY2003104 yet received nothing. Again, in FY 2004105 its allocation reverted to Rs 5 million. A similar outturnis expected. 33Technically this is different to the benchmark ratio, since non-salary costs provided by the Accountant General include capital goods. In which case the ratios are even further om the international standards! Table 2.4: Suggested Division between Public and Private Sector Roles Main Main Delivery Mechanism Main Financing Mechanism Service 1Type of Good Public Privatea Public Privatea Farm advisory services Public Yes Yes, if contracted Yes No (generic) 1 1 Yes, for small Farm advisory services Private Yes Yes, preferred (farm specific) co-financing I I I =Fing Toll Yes Yes I 1 Integrated pest I I 1 1 Public Yes Yes, if contracted Yes 1 1 1 management advice No Market price information Toll No Yes Yes (individualized service) 1 1 1 Public Yes Yes, if contracted Yes informationservices I I I 1 Irrigation water Common Yes, farmer organization 1 Yes, if co- Yes management Advice Pool Yes preferred financed Farmer organization Common Yes Yes Yes Yes development assistance Pool Advice on control of major contagious Public Yes No Yes No 1 diseases Product quality certification for export Private Yes Yes Yes, preferred markets Product quality Private Yes Yes Yes Yes, preferred certification of inputs Source: World Bank (2004). Notes: (a) includes farmer organizations. 2.23 One major project is seed production. Following the abolition of the Agriculture Development Authority, the GoNWFP continues to intervene in seed markets through the replacement Sarhad Seed Authority. Undoubtedly, the provision of high quality seed to the farmers of the province remains a significant concern, particularly in the more sparsely populated remote Districts. However, this does not justify the current state intervention, which remains poorly targeted and ineffective. The existing policy environment deters private providers from entering the market, even though in fact the public sector is able to supply less than 10 percent of market demand. Most farmers are forced to retain seed from previous harvests or purchase locally.34The GoNWFP should play the role of facilitator and regulator to ensure qualitystandardsinstead of being directly involved in the procurementand production of seed. 34Discussionwith GoNWFP, private seed traders, and farmers. 2.24 More generally, the emphasis on the provision of seed is a symptom of a wider preoccupation within Government on the supply of agricultural inputs. Commodity provision by the public sector is a major drain on Government finances. This accounts for about one-fifth of the regular expenditures in agriculture and in livestock. It also occupies staff resources which could be better utilized elsewhere. This is detrimental to agricultural growth because a clear statement of intent by Government of public intervention deters private sector involvement. Fiscal constraints subsequently prevent these intentions being met, resulting in supply shortfalls with farmers facing no alternative sources for these inputs. This hinders both crop and livestock sectors.35 2.25 Research and extension services have generally failed to live up to expectations. A large hierarchical set-up of agricultural extension exists in the province under the Dqartment of Agriculture. The approach of agncultural extension has remained top-down, focusing on crop-oriented high-yielding production technologies, mainly for traditional food crops such as wheat and maize. These production technologies have rarely benefited the predominantly resource-poor small farmers, particularly in the rain-fed districts. Even in the in-igated districts in the Northern Mountains and Irrigated Plains, farmers have &versified into high value horticultureand the focus on traditional cropsis no longer relevant. 2.26 The current agricultural and livestock research system fails to deliver a relevant, science based lmowledgeoutcomesfor the sector. The existing institutionalarrangementsresult in ambiguity in terms of overall responsibilityfor research, and frustration on the part of scientists, whose promotion is limited by the availabilityof suitable posts, and who are often at lower level than university professors of equivalent experience and qualifications. And even in the university system, promotion is based on seniority rather than performance, shortages of operating funds and appointment of research leaders based on seniority is stifling the creativity of the system. Although all stakeholders agree that .the existing situation is untenable, returning agriculturalresearch to the Department of Agriculture is not an option. 2.27 Such a solution should promote external contact with the global scientific community. Use of the internet and access to scientific literature is extremely limited, particularly at the field research stations and results in use of obsolescent science and technology in an age where access to modem technology is the basis for agncultural competitiveness.For example, tissue culture is now widely used in research and production of many h i t s and vegetables, and molecular markers and molecular characterizationare used in bree&ng research. Only tissue culture is used in the NWFP and only for pota~toes.The existing stocks of plant genomesheld by the research institutes are severelydepletedand out of date. 2.28 It must also forge greater linkages between knowledge generation and knowledge dissemination, and between dissemination mechanisms and farmers. Internationalbest practice in agricultural extension (including livestock) emphasizes lmowledge management and the importance of different and innovative mechanisms for knowledge transfer (including mass media and the internet).Yet with half the agncultural extension budget going on commodities and the other half on salaries, there is little left to fund such activities. International best practice also illustrates the importance of extension being responsive to farmers needs, yet there is evidence that public officials remain out of touch with the real constraints faced by 35The Government's veterinary service meets only 10 percent of demand for key vaccines, including the four main bacterial diseases and one viral disease of economic significance. The shortfall at Provincial level noted in the previdus paragraph is replicated at District level. For instance, in Karak District, the Government farm produced only 0.6 tonnes of wheat providing less than 1 percent of District demand. 36This evidence comes from the reports of a stakeholder workshop funded by the EU's Strengthening of Livestock Services project held in 2004. Five groups of stakeholders - farmers, field vets, research scientists, project development representatives and senior officers of the L&DD - were asked to identify constraints. There is a remarkable lack of consistency on the issues raised by each group. The one area of agreement was in the poor interaction between farmers and the Department. In general, 2.29 Remedial action requires continued funding to update and maintain stocks of plant genomes to maintain the scientific asset base. In efforts to maximize the efficiency of research efforts, some counties have established competitive research grants overseen by a (semi-) autonomous institution. Successful approaches ensure that the needs of farmers are effectivelyrepresented in these evaluations to ensure that the research effort is relevant. And links are forged between the research community and extension service to provide for an integrated'knowledge management' approach to researchand extension. , ,?//2.30 The absence of (even partial) cost recovery denies opportunities for Box 2.2: Perceived Constraints to Cost Recovery revenue generation that Discussions with stakeholders suggested the possible contribute to financial sustainability. Public ,hy private sector involvement was not more delivery of some extension services may be prevalent: justified with a degree of cost-sbring- Cost A strong perceptionamongstfanners that thestate has a recovery has the benefit of: (i) avoiding responsibility to undertake specific functions (in part over-consumption typically associated with borne of a deep mistrust of the private sector) often free goods; and (ii) strengthening the matched witha sense of entitlementto such services; financial foundations of service provision, The relevant public institutions lack the capacity to while at the same time freeing up resources provide the services, even on a cost-recoverybasis, and for use elsewhere in the sector. There are a even potentially viable enterprises require significant start-upinvestments; number of reasons why cost recovery is A concern that the governance environment is not currently viewed with some skepticism in sufficientlyrobust to encouragedevolved responsibility the NWFP (Box 2.2). forfiscal management. 2.31 Departmental revenue generation is deterred by existing financial regulations which require that all revenues generated by government activities be surrendered to the Ministry of Finance. Were departments permitted to retain at least a portion of revenues, this would create an internal incentive to increase revenue effort. This might apply at the sector level (for instance, the existing Forest Development Fund established under the new provincial forest policy) or at the level of each service unit (e.g. commercially-oriented artificial insemination centers that are run on similar lines to the already established autonomoushospitals under the Ministry of Health). 2.32 With appropriateincentives, cost recovery could lead to significant revenues. At present, receipts of the Animal Health Services in 2002103 amounted to 17 percent of this year's budget of the Livestock and Dairy Development ~epartrnent.~~The Animal Husbandry in-service training generates revenues equivalent to 8 percent of its budget from training and other husbandry services.38Cost sharing for services-as well as commodities-would help increase coverage as well as be a source of revenue for the ~overnment.~~ 2.33 The institutional framework is insufficiently robust to support effective government intervention and support in the agricultural sector. The Ministry of Agriculture, Livestock and Cooperation is responsible for agricultural policy and public interventions in the sector. Effective public support to the agricultural sector requires a robust institutional framework. In particular, there needs to be an efficient civil service with appropriate incentives for staff, including merit-based appointment and promotion systems,and the right balance between managerial, technical and administrativestaff. public officials maintained a top-down and patronizing perspective, while farmers expressed frustration with the absence of a few non-market inputs includingtechnical information upon which to base decisions. 37Tile total recurrent budget of L&DD Department, excluding the grant to the University and veterinary research and disease investigation, amounts to Rs 35 million. Revenues amounted to Rs6 million. 38In FY03/04 revenues of Rs 0.24 million were obtained against a budget allocation of Rs 3.48 million. 39Artificial inseminationextension services only reach 10 percent of the current head of cattle. 2.34 The current staffing profile in the NWFP suffers problems in all these areas. First, while salary compression does not appear to be a major disincentive to the clustered staffing profile limits opportunities for promotion,and it is common for staff to remain at the same grade for mafiy years, particularly the more senior staff above BPS (Grade) 15. There is also an excess of lower-grade administrativestaff (Figure 2.9). Figure 2.9: Salaried and Sanctioned Posts in Provincia!Level, Department of Agricdture, 2004105 Budget I I Grade - - Source: Data provided by the GoNWFP. 2.35 A similar pattern emerges at the District level (Figure 2.10). Since devolution, the 2,637 field- based staff of the Agricultural Department now report to the District. The majority of staff comprises Field Workers (BPS 1) and Field Assistants (BPS 5 and BPS 6).Professionaland Managerial level staff is limited in number (only 241 staff above BPS 15) - roughly ten per district4' -- to mazage 2,400jzm~or staff, and an excess of support staff. Many staff are f~lrmdedfrom the S.arplcs ~ 0 0 -~staff xa?F~ese 1 ~ positions were not absorbed by the districts under devolution but who provide na fcrnx: pro~*?i~ i ! fictions. Tbs situation needs to be resolved urgently. 2.36 There are few incentives for delivering a quality service. %here is limited scope for managers ti^ reward good performance and few sanctions against poor staff, except rotation to another district. Disb-ist staff suggested they did have some scope for performance management, such as the witholding of staff bonuses etc, but ultimately poor performance is dealt with through staff rotation. The absence of a tranparent posting systems is a source of rent-seeking by staff as they seek more favourable postings. Related, certain posts are more or less popular to staff (e.g. districts close tq Peshawar are particularly attrastive) and postings to remote disticts are often cited as a sanctionmechanism for ~ripopAarstaff. 43Theratio of salanesfor the fop- and bottom grdes is PO 1. 41Data for Swat D~stnctgives I 1staff at BPS 12 or above. "The Surplus Pool 1s a separate blidget allocataon At present over one-fifth of the Departmen; ,;~ r ~ cires l .... establishment costs ISconsumed by the SurplusPool, of which most1sstaff of the former Brectorats of Agncult~ra,bng~ceerang (the remainder under Agricultural Extens~on). Figure 2.10: Staffing Profile at District Level Number of Staff at District Level of AgriculturalExtensionDepartment, 2004105 .c -o Nc @ o Jc ~o m c W o c o c o .c -o m c o - ? ~ ? ~ ~ - - N b 0 3 ~ a a a a a a a a a c o c o c o c o c o c o c n c o c n m m m m m m m m m a a a ~ Q a a a a m m m m m m * m O m i m O l I I Source: Data provided by the GoNWFP. Pricing Policies 2.37 A small number of existingprice support policies have important effects on the agricultural sector in the NWFP and need to be remedied. 2.38 Wheat Policy and the NWFP: Wheat policy is the responsibility of the Federal government,with both Federal and Provincial procurement to maintain minimum prices. This price support sustains extensive wheat production in the province, and compensates for a lack of comparative advantage caused in part by small land holdings and relatively costly irrigation compared to other provinces. Even so, the NWFP produces only half of its wheat requirements (and this is declining as farmers diversify into horticulture). The remainder is imported from other provinces or from abroad. Imports from other provinces (in practice, mainly Punjab) provide a significant fiscal transfer fiom other provinces to the NWFP. The NWFP depends on the fiee movement of wheat into the province. However, this movement was disrupted in 2004, when the Punjab unilaterally imposed a ban on shipment of wheat out of the Punjab in efforts to meet its procurement target, despite the fact that wheat policy is a federal subject. Thlsban had serious consequencesfor the NWFP. The GoNWFP should seek concrete guarantees, agreed by all provinces, on the free movement of wheat acrossProvincial boundaries. 2.39 Sugarcane Pricing: The price of sugarcane and sugar beet is set by the GoNWFP through annual negotiations with the sugar mills and the growers. This price becomes a contract price for delivery to the mills. Since the price is set in terms of total sugarcane weight without regard to sugar content, it provides incentives for farmers to maximize total biomass through practices such as late application of nitrogen fertilizer, and reduces sugar yields to 8-9 percent of total cane biomass, well below world averages of about 11-12 percent. Although the technology exists to assess sugar content at delivery and is widely used in other developing countries, it has not been adopted in the NWFP (or elsewhere in Pakistan) despite years of discussion.This results in considerableinefficiency and waste in the sugar industry. The GoNWFP should urgently resolve the long standing discussion on pricing of sugarcane on the basis of sugar content, and require the testing of sugarcane quality at the mills. 2.40 Agricultural prices remain politically charged and negative price movements - high prices for consumers, low prices for producers - lead to loud protestationsand demands for public action. Continued public intervention in even a small number of markets lends legitimacy to claims for intervention elsewhere, and the GoNWFP needs to establish a credible commitment to minimizing direct market interventions. For instance, wheat procurement should be constrained to the need to replenish strategic reserves. International experienceshows that legitimate welfare objectives can be better achieved through alternative mechanisms (such as social safety-net programs to maintain nutritional consumption). Moreover, price controls are incompatible with other policy objectives. It is claimed that new market opportunitiesin neighboringcountriesare pushing up prices within the province,often on a very localized basis.43These effects are best managed through efforts to improve the functioning of markets, assisting the price transmission mechanism and reducing transport and marketing costs. Other weaknesses in the market structure exist and will be remedied by recommendationsmade elsewhere in this report pertaining to increasing scope for value adding in the sector through private sector investment. For instance, the small number of sugarcane millers (only five in the NWFP) and tobacco processors (less than twenty, math two companies accounting for 96 percent of the market) reinforces the perception that markets are manipulated to the disadvantage of farmers.44The increasing use of contract farming arrangements is evidence of a new, more equitable and mutually beneficial arrangement between many small-scale producers and commercialprocessors, and their applicabilityin the NWFP warrants greater attention. Land Markets, WaterManagementand Irrigation 2.41 Constraints in land markets and in the availability of irrigation result in small holdings, poor access to credit and farmers remaining vulnerable to the vagaries of the weather. According to World Bank staff estimates, 57 percent of the population is close to the poverty indicating severe vulnerability of the non-poor falling into poverty and precarious position who do manage to make it above the poverty line. Coping with risk - especially weather-induced risk - is therefore a major preoccupation of the NWFP7srural population. Although statistics vary significantly across Districts, in general the availability of irrigation is low. Although public irrigation schemes charge a user fee (abiana) which is high by regonal standards, revenues are decreasing46and many schemes continue to fall into disrepair though insufficient maintenance. Recent expenditure on irrigation has put too much emphasis on new schemes with insufficient attention to the recment financing of O&M. (Of particular concern is the O&M of the lift irrigation system, which is exceptionally high and requires far greater subsidy than i l the other systems.) As the irrigation systems get older the demand for O&M will increasefurther, limiting resources for an expansion of the system to the 4.33 million acres that remain rpin-fed - exthsion that is essential to increase productivity of cereals and permit diversification into higher value products. 2.42 The efficiency of water management is low. In areas irrigated by government and civil canals, close to 60 percent of the water available at the canal heads is lost to evaporation,theft or seepage before it reaches the crops in the fanners7fields. Although fiesh ground water seepages could in principle be recoveredthrough tube-well irrigation, in practicethis could be difficultbecause (i) of contaminationwith saline water and (ii) it may be uneconomic to pump, as ground water is being depleted due to the unregulated use of tube wells. Areas that use flow irrigation seem to have more than adequate water and there is no effort to limit irrigation methods and practices that are wasteful. Practices such as flood irrigation are contributing to serious drainage problems and water logging. Modem technologiesthat are used to conserve water are rarely applied, nor are practices that improve distribution efficiency and --- -~ 43 For example, it is estimated that up to 1 million tons of flour already flow to Afghanistan. For example, since processing of sugar must occur a short time after harvesting, it is believed that s u g s millers delay the start of processing to ensure farmers are desperate to sell there harvest at low prices. 45Defined as within 75 percent and 125 percent of the Basic Needs poverty line. 46 The ratio of abiana collections to assessed rates fell from 75 percent in 1999100 to 50 perceflt in 2002103, although this has recovered marginally since. conserve water. Although the National Drainage Program (NDP) is closed, the direction of reform initiated by this program needs to be maintained. Both Punjab and Sindh are doing so by moving forward on institutional reforms to Area Water Boards (AWBs)and to their provincial inigation departments,and GoNWFP should consider following suit. In addition, fanner organizations should take increasing responsibility for inigation through Drainage Management Transfer Agreements. This function could be incorporated into the revised remit of Farmer Service Centers. The Water Sector Task Force to be establishedlater this year will be important to set out the medium-termdirection of change. 2.43 Land holdings are in general small (79 percent of farms are of less than 5 acres), and an inefficient land market prevents expansion and consolidation of these holdings into larger units.47The land administration system lacks transparency, resulting in greater bureaucratic intervention and legal impediments to the sale and purchase of land. Officials responsible for land records (known as patwaris) maintain control over informationthrough the use of peculiar numbering, signs, and symbols system they employ which make it difficultfor outsiders to read land documents. Ineffective monitoring and control of the land registrationand administrationsystem encourages manipulationof the records, particularly, at the patwar circle level. And the increasing workload resulting from increasing subdivision of holdings and population growth has made revenue records unmanageable. GoNWFP is improving land titling and these efforts need to continue. 2.44 Lack of tenure security constrains not only the land markets but also the use of land as collateral to access credit. Existing land records do not provide conclusive proof of ownership. Illegal annotations are possible, making room for exploitation and bribery. Nor are records unambiguously correlated with spatial data to perfectly identify the plot. The existing legal framework governing land transactions restricts speedy resolutionof disputes. 2.45 Social conventions such as inheritance practices and the social status provided by being a landowner encourage land fragmentation. The social value of landholding exceeds the economic value, resulting in inefficiencies. As in many low-income countries, previousefforts at land consolidation in the past have failed. The lack of efficient land markets restricts land consolidation through land purchases, particularly if h s is to be funded by borrowing. Recent data suggests that a degree of land consolidation has occurred since 1998199 and 2000101, although there is evidence that this was motivated by distress sales due to This shift in land holdings has been associated with rising poverty, further emphasizingthat the nexus of land holding,agricultural efficiency and poverty is a complex one. 2.46 The province lacks a coherent policy for managing its forest resources and rangelands.The NWFP contains 40 percent of Palustan's forests (of which three-quartersare in the Northern Mountains) and about 2.1 million hectares of rangelands. However, the policy framework for the conservation and sustainable exploitation of these resources lacks coherence. Monopoly control by government over protected areas, poor land use rights and insufficient institutional arrangements and capacities are the main constraints to natural resource conservationin mountain areas. 2.47 The national-levelforest policy environmentlacks clarity regarding functions and responsibilities of national, provincial, local governments and particularly communities in planning, implementing and enforcinglaws on natural resource utilizationand conservation. Forest policies and laws introduced in the nineteenth century are still in place today. These policies focus on centralized management operations, emphasizing natural forests for timber harvesting and advocating government control over local needs. While several revisions were made after the first forest policy in 1955, these revisions still focused on 47However,recent data suggestssome land agglomeration. 48For example, the 58 percent of the population of the NWFP with no land accounted for 70 percent of the population in the bottom quintile of income. The proportion of the population with holdings of less than 1 ha fell, while those with no land, and holdingsabove 1 ha, both rose. technical forest protection and productivity, with little regard for the rights and participation of local people). 2.48 The National Conservation Strategy (NCS) has helped put in place a more suitable institutional framework and created awarenesson natural resource conservation.The NCS has also helped in initiating consultative processes for achievingits goal of sustainable natural resource management at various levels, including the development of a provincial conservation strategy for the NWFIP. However, the NCS has not been very effective in reaching the grass roots level in order to implement sustainable development and participatorymanagementof naturalresources. 2.49 Rangelands have been neglected in government policy. Responsibility for rangelands currently falls to the forestry department. The few public interventions that have occurred have failed to fully integrate the competing demands of conservation on the one hand, with the need to develop an economic asset to promote sustainable livestock grazing on the other. The result is that the sustainable management of range lands receives low priority; what is required is an effectivepolicy process in which trade-offs can be made between these competing demands. C.BROADSTRATEGY AND KEYRECOMMENDATIONS 2.50 The NWFIP needs to move away from an emphasis on food self-sufficiency towards one that ensures consistent and secure access to food for its population. In view of the recent history of interruption of wheat movements from other provinces, the NWFP must seek iron-clad guarantees from the Federal governmentthat such actions will not recur. This does not imply that theNWFP needs to meet all domestic cereal needs. Rather, that the most effectivestrategy for the province would be to concentrate on using its most scarce resource, namely land (particularly irrigated land), in activities that provide the highest returns and use the funds generated thereby to import cereals and other commodities in which the NWFP has no obvious comparative advantage. 2.51 This does not mean that the province should or will stop depending on cereals as a major crop over the medium term - cereals account for around three-quarters of agricultural activity (measured by land usage). But gven the limited fiscal space, and the existing evidence of potentially high returns from diversification, it is clear that the best strategy for the use of constrained public investments in support of the agricultural sector is to encouragethe movement towardshigh value produats. 2.52 The climate and geographicalposition of the NWFP provide it with excellentprospects to expand the production of horticulture and other high-value products for the domeistic market as well as for exports. Within Palastan the demand for fruits and vegetables is growing, while the value of traditional agricultural exports is declining. Global export markets are growing at 7 perpent a year in value terms. Capturing the potential of these markets will require lengthening the marketing season, diversifying export markets beyond the Gulf States,exploring marketsfor new products, and increasing the processing of fresh products. 2.53 The N W P has considerable growth potential in many other high value and specialty products, such as seeds and seedlings (e.g., onions, fruit seedlings), floriculture, ago-forestry, non-timber forest products (such as mushrooms), medicinal products, milk, sheep and goat meat, Kashrmri wool, honey, and others. The production of these items should be encouraged, particularly as several of these have potential in the more marginal areas of the province. Under this strategic priority, the followingmajor objectivescan be identified: i. Improving the overall business environment in order to promote value-added processing in the NWFP. Agriculture (includmglivestock) is the privatesector of the province. Consequently,the most significant contribution the GoNWFP can make to promote agriculture is to improve the environment for business, including household businesses. This issue is dealt with in more detail in the next chapter (on private sector development), as the generic recommendations for PSD would affect ago-processing as well. Improving transport infrastructure is particularly important for the economically viable shipment of agricultural products, which typically have low value-to-weight ratios. While this is necessary for the long-term more immediate interventions that will directly benefit the private sector include support for small-scale ago-processing industries (e.g., h i t drymg, the production of jams and fruit juices) by farm households and small businessesthrough technologytransfer and assistance with start-up costs. ii. Maintaining the momentum from recent successes in stimulating new sources of growth in high-value products by building on and scaling up the successes. To do so will require the government to: (a) internalize and sustain the impact of donor-fundedprojects (particularly the PHP) with these have a track record of success; (b) replicate this approach, where appropriate throughout the remainder of the province; (c) create a research system that undertakes best-practice scientific research of relevance to all farmers in the province; (d) strengthen the linkages between agricultural research, extension and the farmers to ensure that research and extension priorities correspond with farmers' needs and market trends; (e) introduce new varieties of sheep for high-quality wool production, particularly in the high mountain areas, and improved breeds of goats suitable for rearing in the southern districts; (f) develop further varieties of high-value horticulture of particular interest to the southern districts (e.g. olives, berries, dates); promote private milk processing plants, particularly in the central plains; (g) construct a policy environment that supports active forest management for sustainable harvesting of timber, and the developmentof associatedprocessingindustries, such as furniture and sports goods. iii. Broadening and deepening input and output markets by improving market efficiency and promoting new export opportunities. The NWFP can increase its market share in domestic consumption of high-value horticultural products, and develop new opportunities for exports beyond the Gulf States. This will require the government to: (a) work in partnership with farmers and the private sector to improve input and output market information through the use of media and extension services; (b) reduce the transaction costs in the marketing of outputs, particularly for small farmers; (c) withdraw fiom direct intervention in input markets and act as facilitator and regulator for ensuring quality standards and efficient and timely distribution of key inputs;49(d) establish key public infrastructure, such as transport links and cold storage facilities, to reduce post-harvest losses of high-value products; and (e) diversify export markets beyond the present narrow range of products and small number of destinations, by providing the privatesectorwith market intelligence and information on new varieties/standardsthat meet consumerpreferences. iv. Building the capacity of small farmers through the development of farmer organizations. With over one million farms in the NWFP solving the coordination problem associated with small farm size requires an institutional foundation of farmer organizations. This is essential to capture scale economies of input and output markets and to ensure the provision of services with common property or public good characteristics (e.g., irrigation; market intelligence for sub-groups of producers). Moreover, farmer organizations can provide the interface between extension service providers and farmers, by articulating farm-specificneeds, mobilizing effective demand for services, and organizing their delivery. They are the linchpin of an effective dialogue between farmers and the public research and extension 49For example,the Seed CertificationScheme establishedby the Federal Seed Certificationand Regishation Department(in Islamabad) and the Provincialauthoritiespresents apromising example for the future. system. Revising the remit and expandingthe coverage of Farmer's Service Centers could be an effective interventionin this regard.'' v. Raising incomes of subsktence farmers. For the majority of agricultural households in the NWFP, particularly the poorest, land and labor will continue to be employed in traditional agricultural products, such as wheat, maize, and pulses. Grains, pulses, and livestock are especially important for small farmers in more marginal areas, and the Government will have to pay continued attention to these crops in order to reduce income inequalities that may be generated through an exclusive focus on high- value products. The long-term objective is for farmers in the southern districts to take advantage of the market opportunities in cereals created by the diversification of better-off farms into horticulture. However, in the short- to medium-term, government interventions will be necessary to sustain the nutritional intake of subsistence farm households. To achieve this, the government needs to share the benefits of agricultural growth across the NWFP so as to maximize the poverty-reducing impact of growth and reduce risk and vulnerability. This is especially critical fiom an equity perspective and to maintain viable populations in the more remote regions of the province. Such an agenda would include: (a) continued development of new varieties of plants and animals by the local research and extension systems to reflect prevailing agro-climatic conditions in the marginal lands; (b) expansion of irrigation systems, particularly through water harvesting techniques in the southern districts; (c) improved rangeland management practices through better alternatives to grazing (i.e., improved fodder crops) and the reintroduction of traditional management systems in communal lands. In the longer run, the province should plan to move towardsinstituting a system of crop insurance. vi. Creating the right institutional framework Achieving the objectives set out above will require an appropriate legislative and institutional framework, as well as political commitment at the highest level. This requires: (a) GoNWFP deployingavailable financial and human resourcesin a manner that is consistent with established policy priorities; (b) a review of existing organizational structures with the objective of making the public institutions fit for purpose; (c) improved human resource management in order to create a revised incentive frameworkfor a professional cadre of stafc and (d) a more open and accountable Government which gives stakeholders a greater voice in decision-making. Critical areas for immediate attention include the following: On irrigation, the GoNWFP needs to continue to transfer responsibility for irrigationto farmer organizationsthrough Irrigation and Drainage Management Transfer Agreements. In addition, the NWFP should continue reforms initiated under the Natianal Drainage Program to Area Water Boards and Provincial irrigation department, following experience in Sindh and Punjab. In agricultural and livestock, the pilot project to introduce perfi~rmancebased budgeting provides an important entry point to public expenditure reforms. Similarly, major efforts are required to address the institutional weaknesses in research and extension services, and a critical first $tepis a more thorough diagnosis of existing institutional arrangements and a process esqblished for implementing subsequent recommendations. vii. Conserving natural resources. The growth strategy adopted by the province must give due regard to environmental sustainability, recognizing the intrinsic as well as commercial value of the province's unique natural resource base. The authorities must recognize the competing demands 011 environmental resources and provide a mechanism whereby these conflicts caq be resolved in a way that balances these competing demands. Local communities- the primary stakeholders of natural resources -mustbeatthecenterofthisprocess.Thiswillrequirethegovernmentto:(a)clarifyincentivesfor communities for sustainable managementof their natural resources by establishingownership andlor user rights that encourage joint management approaches and use traditional struotures that are likely to be community-specific;(b) strengthen institutional capacities for rangeland management, particularly in the The GoNWFP has also recently established District Agriculture Coordination Forums to support, inter alia, district-level planningin the sector. southern rangeland upon which the poorest depend for resourcesfor grazing, fuel, and fodder; (c) support provincial research in natural resources management in general and forest conservation and range management in particular, through provincial efforts and the federally-administered Pakistan Forest Institute; and (d) promote eco-tourism by providing direct socio-economic benefits to local communities so as to provide them the incentive for nature conservationin their area. 2.54 Recognizing the issues and challenges highlighted above and its unique climate and geographic position, the GoNWFP has recently issued a policy document - Agricultural Policy 2005 (AP05). This policy document was written and finalized around the same time as this economic report. The policy document identifies the major constraints to rapid growth in agriculture, sets a vision for the future of the sector and formulates both short-and medium-termpolicies and strateges for key sub-sectors. The AP05 is focused on those sub-sectors that are likely to have much more immediate impact on growth and poverty reduction and for laying the foundation for a robust agricultural growth. The government vision for the agriculture and irrigation sector in this policy document is to develop a modem, competitive, sustainable and productive agricultural system that is aimed at improving incomes of the farming population in a relatively short time. 2.55 Given the nature of challenges and issues facing the sector, the successes achieved so far and the existing evidence of potentially high returns from diversification, the strategy is to encourage the movementtowards high value products for both domestic and international markets. 2.56 The GoNWFP strategy is focused on fully exploiting the considerable growth potential NWFP has in many high value and specialty products, such as seeds and seedlings (e.g., onions, fruit seedlings), floriculture, ago-forestry, non-timber forest products (such as mushrooms), medicinal products, milk, sheep and goat meat, Kashrniri wool, honey, and others. The GoNWFP therefore intends to encourage production of these commo&ties, as several of them have potential also in the more marginal areas of the province. Under this strategic priority, the government will carry out policy and institutionalreforms, as well as investment programs in several areas including, (i) improving the overall business environment for private sector participation, particularly, on interventions that will directly benefit the private sector and support small-scale agro-processingindustries through technology transfer and assistance with start- up costs; (ii) maintaining the momentum from recent successes in stimulating new sources of growth in high-value products by building on, and scaling up, the activities of successful interventions; (iii) broadening and deepening input and output markets by improving market efficiency and promoting new export opportunities; (iv) forming farmer organizations/associationsto capture scale economies of input and output markets and to ensure the provision of services with common property or public good characteristics (e.g. imgation; market intelligence for sub-groups of producers); and also to provide the interface between extension seniceproviders and farmers, by articulating farm-specificneeds, mobilizing effective demand for services, and organizing their delivery; (v) creating supporting institutional framework by reviewing existing organizational structures and the legal framework; (vi) removing barriers in the market chain and reinforcing production-market linkages including investment in physical infrastructure such as roads, rural electrification and communications systems; supporting effective sub- contracting systems, quality inspection; strengthening the information and communication technology to enable real-time access to information on agricultural market prices and, (vii) giving due regard to environmental sustainability recognizing the intrinsic as well as commercial value of the Province's unique natural resource base, as well as the competingdemandson environmental resources. 2.57 Many of the specific policies recommended in this policy document are in line with the broad strategy and key recommendations highlighted in the drafts of the agricultural chapter shared with the government during the preparationof this report. CHAPTER 3: PRIVATE SECTOR DEVELOPMENT A. THE CHALLENGEAND THE OPPORTUNITY 3.1 As discussed in Chapter 1, it will not be possible to reduce poverty in the NWFP without accelerating the growth of the province's GDP, and this growth must come primarily from the private sector. Growth at a pace that will significantly improve the unemployment and poverty situations will require a major increase in investment or an increase in productivity. But constraints on the provincial government's budget will limit the expansion of public sector investment. Thus it is unlikely that public sector effortsalone will be able to lift the investment/GDP ratio to the level necessary to generate growth that will produce the requisite number of jobs. The private sector will have to step in with the additional investment. 3.2 In addition to broad-based growth, the NWFP needs urgently to increase employment and wages. This will require increasing productivity levels. The key determinant of GDP peir capita among countries is their level of labor productivity. Higher levels of output per employee enable higher wages. In developing countries, manufacturing typically entails far higher productivity levels that either agriculture or services, but in the NWFT only 7.3 percent of workers are employed in manufacturing. Furthermore, the productivity of firms in the NWFP is low relative to international comparators, and relative to other Pakistani provinces. The Investment Climate Assessment revealed that Pakistan as a whole lags China and India in total factor productivityby over 40 and 20 percent, respectively. Relative to China, India and Bangladesh, value added per worker is lower, sales growth is slower, the rate of net fixed capital investment is lower, and as a result, the private sector's contribution to poverty reduction is lower. The need for reform is urgent. 3.3 This chapter identifies some of the major policies that the Government of the NWFP must improve in order to increase opportunities for private-led growth in the province, Increases in growth and income can come from increases in productivity and in investment. A key lesson of international experience is that investors' decisions to invest "depend largely on the way government policies and behaviors shape the investment climate ... the location specific factors that shdpe the opportunities and incentivesfor firms to invest productively, create jobs and expand."5' The chapter focuses on identifying policy obstacles to increasedinvestment and productivity. 3.4 As was noted in Chapter 1, the bulk of the economic growth and employment generation will have to come in urban areas. In order to stimulate the growth process, an effort in making the NWFP cities - where trade, commerce, manufacturing, and services are predominantly looated - work better would also be needed, by developing policies and strategies focusing 041 tapping their economic potential and turning them into engines of growth. Section E of this chapter looks at issues in tapping the growth potential of urban centers in the province. 3.5 Should the government adopt a policy program that improves the investment climate, the potentialfor private sector development in the NWFP is significant. The numbel:of new firmsregistering has increased each year since the recovery of 2002. Currently, over 800 new finm register per year with the provincial government (Partnership Act of 1932). Significant growth has emerged in the light engineering,construction,retail trade and transportsectors. *'World Development Report 2005: A Better Investment Climate for Everyone.(Washington, DC:World Bank, 2004). 35 Figure3.1: Annual Firm Registrationin NWFP, 2000-2005 (Number of Firms) 1 ! Partnership Act of 1932 I 2000 2001 2002 2003 2004 (Projection) I I Source: Government of the NWFP. > Opportunities for regional trade are expanding. Afghanistan is emerging from its period of conflict, and its Ministry of Economy recently predicted 11 percent growth for 2005. Some of the more important growth sectors for investment include construction and electricity. From Pakistan's standpoint, as one of two main trade partners for Afghanistan, this presents both a trade and an investment opportunity. The share of Pakistan's exports that go to Afghanistan has risen rapidly from 0.2 percent in 2000 to nearly 4 percent in 2004, or nearly $500 million. The average annual growth rate in this period was 61 percent. In the last three years, imports have doubled to $47 million in 2004. Moreover, there has been sizable informal trade between Pakistan and Afghanistan-by some estimates 4-5 times the formal trade. Current indications are that this informal trade has also been growing rapidly.52Growth in trade with Afghanistan opens up potential avenues for trade with the entire Central Asian region. Figure 3.2: Pakistan's Exports & Importswith Afghanistan and Central Asian Republics 1990191-2003104 Shareof Pakistan'sExportsand Importsin Afghanistan and CARS -9. E z ?5 +E qAfghan8CAS +Exq *- CAS _1_1J7b- ~ 4 - ImpAfghana U S Imp CAs l3 3 - f I I Source: Government of the NWFP. > The present growth in the economy and the projection for development in thefitture has created a huge demand for construction services from both the public and private sectors. There are 925 construction firms repstered in the NWFP, comprising some 9.29 percent of total employment. The federal government has approveda budgetary allocation of Rs 2,080 billion for infrastructure development over the next five years (2005-2010) and is planning additional projects including District Development programs and schemes for the Karachi Port Trust, Pakistan Steel, Port Qasim Authority and the Gawadar port. The total public-sector market for construction is 52 The Afghan Transit Trade facility is an important, though not the only, source through which informal trade takes place between Pakistan and Afghanistan. Transit goods fiom Pakistani ports are sealed and sent to Afghanistan of which an estimated 85-90 percent of the va111eof Afghan Transit Trade leaks back, largely via NWFP. The Afghan Transit Trade has also expanded rapidly fromUS220 million in FY02 to about US$370 million in FY05. estimated to be Rs 2,500 billion. This will create demand for construction labor from the NWFP as workers fromthe province enjoy a wage premium throughout the country. P The NWFP has substantial mineral resource wealth, and opportunities for private investment, in gemstones (primarily topaz, also including emerald), precious metals in~cludinggold, dimensional stones including marble and granite, and a number of industrial materials including feldspar, phosphates, coal, rock salt, chromites, and silica. P The hydropower generation potential in the NWFP is large and most of the existing major hydell stations (Tarbela, Warsak, Dargai and Malakand) are located in the province, connected to the national gnd and are operated by the Pakistan Water and Power Development Authority (WAPDA). Out of 6,595 MW of installed capacity of hydel plants in Pakistan, 3,767 M W of existing plants are located in NWFP. The Sarhad Hydel Development Organization (SHYDO) has identified hydel potential of more than 6,500 MW and has completed feasibility studies of several hydel projectsranging from 8 MW to 125 MW. P The N W P is the richest in tourism assets amongst all the provinces of Pakistan. It possesses three-fourths of the country's potential tourist assets with sites representing cultural heritage of historical and religious significance, as well as natural, scenic beauty. These significant assets present opportunitiesto build a tourism industryfocused in the short run on domestic tourists, and in the long run on visitors from Asian countriessuch as Japan, China a d Korea who are &awn to explore the historicalroots of Buddhism. Similarly the city of Peshawpr was founded over 2,000 years ago; its Walled City still boasts of a concentration of historic urban fabric as well as individual buildings and monuments with significantpotential for culturaltourism. B.IMPROVINGTHE INVESTMENTCLIMATE 3.6 While a number of the policies that affect the investment climate fall under the remit of the central government, many of the issues facing the private sector in the WNFP are those in which provincial authoritiesmust take the lead. The methodology for illustratingareas where the NWFP should act is through comparing the NWFP with better-performing Provinces. As indicated in Figure 3.3, the recent Investment Climate Survey highlighted a number of areas where the NWFP lags behind the Punjab. These include the lingering impact of regional instability, high administrative barriers, particularly tax administration, transportationand corruption. Underlying these perceptions is the state's role as an economic operator in competition with the private sector, sector governanceand weak property rights. Figure 3.3: Obstaclesto Growth in NWFP compared with the Punjab,2004 (Percent of Respondents) I 1 Obstacles to Growth -NWFP vs. Punjab Transportation I Punjab Crime, theft and I NWFP disorder Access to finance Corruption Electricity I Tax administration Policy uncertainty I I 0% 20% 40% 60% Share of respondents identifying factor as major or severe obstacles to growth I Source: InvestmentClimate Survey. 3.7 These issues contribute to the perception among investors that Peshawar is one of the least attractive cities to invest, as ranked by firms outsideof Peshawar (see Figure 3.4). Figure 3.4: Perceptionsof the InvestmentClimate,2004 (Rankingsby FirmsOutside the City) Ranking InvestmentClimates: Perceptionsof Firms Outs~dethe City Percent 11 Best 1Peshawar, ~ ~ ~ ~ b S~akot, ~ j Kamhi -1 S i u - m a d Gukanwala Fdsahbad Lahore L I Source: InvestmentClimate Survey. Repositioningthe State to Empower Markets 3.8 A key challenge for policymakers will be to gradually withdraw fiom roles that are in direct competition with the private sector. In contrast to the government's stated policy of involving the private sector in activities trahtionally ascribed to the public sector, the Government is involved in many a~~vities have long been privatized in other developingcountries, ranging fiom financial services to that transport and construction. The state, through the National Logistics Cell, a military company, is a large third-party logistics provider. A state-owned bank, the Bank of Khyber, is the largest bank. The largest industrial estate, SDA, is state managed. Some industrial estates have been privatized, but the policy has only been applied as a form of loss mitigationrather than as a matter of principle. Similarly, it is not at all clear why the N\;lrFP needs to retain state ownership in other areas such as tourism (parks, motels and cable cars). 3.9 In part, the legacy of state ownership is a national issue. The Palustan Industrial Development Corporation was tasked with the industrializationof laggng regions.In the NWFP it invested in a number of fields, including sugar, paper, biogas, fertilizer and textiles. Most of these sectors are now primarily private. But the existence of any state firm in a sector has the effect of tilting the playing field and discouraging private investors who may be concerned about competitors who may have more privileged access to public resources (including land, licenses, utilities), lack hard budget constraints or have superior capacity to resolve disputes and enforce commitments. The SDA has, fclr example, attempted to sell some of its industrial estates while maintaining larger, more successfbl ones. SDA management readily admits that being in the public sector makes the very difficult task of obtaining land, resolving land disputes, and obtaining utility connections-core processes for an industrial estate -vastly easier. Under such circumstances,it would be extremely difficult for private operators to compete with the level of services provided by the state, and are understandably not expressing great interest in the assets. But this not only underminesthe competitionthat will improve servicesin the long run, it also underminesthe ability of the NWFP to attract private estate operators who have been extremely successful in other regionsand could play a key role in attractingForeignDirect Investment (FDT). 3.10 While the role of the state is excessive in areas where the private sector is capable of contributing, the role of the state is insufficientin the provision of essential public goods -particularlyin policy and regulatory functions that are necessary to support a competitive private-led growth strategy. Effective governance, in a private sector standpoint, refers to the use of the state's power, policies, institutions and investments in a manner that promotes competition and growth. Well-governedprivate sectors that have experiencedgrowth are typically governed in a manner that is transparent, predictableand fair. This often requires highly capable, sufficiently rewarded civil servants. In contrast, sector analysis in the NWFP revealed a number of governance issues that prevent fair competition, are less than transparent, or are somewhat unpredictable. Improving Security 3.11 Improving security is also very important for a better investment climate in the province. The long wars of Afghan liberation,in which the NWFP was the fkont-linestate, created a number of tensions and at the same time flooded the province with arms. There is a lingering perception of regional insecurity, and a number of countriesretain warnings or restrictions on travel to the NWFP. The Palustan Investment Climate survey, on the other hand, indicates that crime and theft are less significant problems in the NWFP than in other provincesof Pakistan. Reducing AdministrativeBarriers 3.12 The worlung of the administrative apparatus needs to be scrutinized and in some important areas made more efficient. Relative to the Punjab, the investment climate in the PhVFp was perceived as relatively unfriendly in terms of policy uncertainty, tax administration, electricity shortages, and corruption. Access to finance and the level of crimeltheft and disorder were seep as greater obstacles in the NWFP than in the Punjab. Two other issues that are important are taxation and the process of registering a business, in which the record of the NWFP is mixed. There is a recognition however that federal polices play a significantrole in the cost of doing business and there is need for harmonization of provincial and federal policies. 3.13 Business registration. The process of registering a business, in contrast with tax administration, appears efficient. The 2005 Doing Business Report (World Bank) compared registration in the NWFP with other provinces and found that it was relatively efficient -taking only 24 days. It is also relatively low cost compared with the rest of Pakistan, and only Sialkot in the Punjab has a less expensive business registration process. Figure 3.5: Cost of Startinga Business,2004 (Percentof GNI Per Caoita) I I C o s t to Start a B u s i n e s s (% o f GNlpc) 1 Sindh (Karachi) 1 " ' Punjob (Sialkol) NWFP (Porharar) Punjab (Lahora) Punjab (Fairislebad) ' Source: World BanknFCDoing Business Database 2005. 3.14 Despite this relative simplicity, relatively few firms are actually registered. The incentives to formalize in the NWFP do not appear strong, since property rights are weak and access to finance is limited. Formalization of companies is an important contributor to the investment climate, since it enables f m s to enter into contractual relationships, strengthens access to finance and allows public policy to be made more accurately. Figure3.6: Time to Start a Business, 2004 (Dalvs) I T i m e to S t a r t a B u s i n e s s (Days) I NWFP (Parhawor) Slndh (Karachi) Punjeb (Lahore) Punlab (Folrolobad] Punlab (Slolhol) Source: World B&FC DoingBusinessDatabase 2005. 3.15 Tax administration. While entry regulations are not a significant obstacle, the World Bank Investment Climate Assessment indicates that taxation is among the most serious obstacles to growth. Despite past measures, firms in the NWFP face a punishing array of taxes, mostly federal in nature, that make it entirely understandablewhy so many firms choose to remain informal and why the tax base is so low. Compared with a typical range of 3 4 taxes in more competitive East Asian countries (a VAT in the range of 10 percent, a social security tax or provident fund of 3 percent, property taxes and an income tax of 20-25 percent) for a typical hotel in the tourism industry, the followingtaxes are imposed:53 Table 3.1: Taxes Imposed on a Typical Business, 2005 Tax Rate / Explanation Sales Tax _ 15 percent of gross receipts _ . _ PropertyTax 20 percent of assessed valueof property -_ ....... ............................................................ Income Tax Approximately 15 percent of pre-tax profit depending on income bracket -__ " " " Import Duties ....._. As required for hqorted supjlies ._____.-_ ProfessionalTax Professional tax is a yearly tax and is paid just for existence Iirrespective of paid up capital or turnover in smaller companies. I The scale goes up with the increase in t&se two. It may range from Rs 5,0001- to 100,000/-depending on the province of regisbation and other criteria. _ - Social Security 7 percent of wages up to Rs 3,000 per month. This is a provincial tax on em&oEri, -. incorlporatedor not. -..- Workers' Welfare Fund The workers welfare fund at 2.5 percent is charged at the time of the income tax assessment-e income+tax departmebt. I Workers' Children(Education)O r b n c e Provincial tax of one hundred rupees pier worker per annuna, used /I for~ovidingfiee educationto two childrenof every_..._f--._._..____ worker. ...-------.-----" --..-~-...-.,-.....--. Employees Old-Age Benefits From 1st day of July 2001, an insured person is required to pay his personalcontributionat tbe rate of Rs Source: Government of the N W . IncreasingInfrastructureService Delivery 3.16 Inadequate infi-astructure inhibits private sector development in tlie province. The main deficienciesin infrastructure identified by the private sector were the road network (see Box 3.1 for the links to economic growth and a more detailed discussion in Chapter 4), and the delays in obtaining and the price paid for an often unreliable power supply. Transportation costs are a higher share of delivered costs for products originating in NWFP. An exampleis provided by the transport costs for marble. Figure 3.7 shows the cost of transportation as a percentage of the total cost of the production of marble and related stones, comparing 4 countries. Pakistan has the highest percentage cost for several reasons: i) the mines and processors analyzed for this report are in the NWFP,whichis 1,300 hlometers from the port in Karachi; ii) the roads along this route are in generally poor condition, as are many of the trucks; iii) a number of special payments and fees are required to move the block stone frorn the mining areas to the processors, increasing transport costs. 3.17 Manufacturing industries in the province currently do not get reliable and high quality infrastructure services (power, basic utilities, telecommunications, drainage and sanitation, effluent treatment, quick access to banking services and transportation networks) that are necessary inputs for their production. This adds to their costs and hurts their competitiveness.The province needs to have a framework in place that ensures reliable, cost effective provisionof high quality infrastructureservices to industries at full cost recovery. This would entail efficiently run industrial estates with private sector management, and joint public-private ventures with the objective of eventually privatizing industrial estate development. 3.18 The availability of good roads is also important for tourism. The development of roads and their maintenance in the tourist destination areas, the provision of land at non-commercial rates, the supply of "Mostofthesetaxeswouldbecommontoallbusinessesorwouldvaryslightly. Anaccountingfirm-wouldmostlikelyleaseits premises and not pay a property tax, but would pay a Professional Tax. 41 water and power and the development of telecommunication facilities is vital to the development and promotion of tourism. The infrastructure needs have not been taken into account seriously by the government. The STC and the department of tourism have not coordinated with the relevant departments to undertake the task of providing the infrastructure.In the absence of these basic requisites private sector initiative did not grow. Box 3.1: Rural Road Investment,Poverty and Growth There is a considerable body of evidence that demonstrates the links between rural road investment, poverty and growth. In India for example,' in an empirical study of 85 randomly drawn districts, it was found that road investment contributed directly to the growth to agriculture output, increased use of fertilizer, and commercial bank expansion. Another recent study in India using state-level data over two decadeson the effectiveness of various governmentexpendituresfoundthatgovernmentspending on rural roads had the largest impact on rural poverty as well as a significant impact on productivity growth. Similarly, a study in ~ada~asca?found significantly higher productivity and crop yields for three major staple items in non-isolated relative to isolated areas. Finally, a case study of accessibilityin Sumatra3 found that householdsin more remoterural villagesaverage appreciablylowerlevelsof expenditures, and when isolated fiom sub regional market and trade centers, consumption levels fall dramatically. It also showed that the average value of farm produce increases with road quality, frequency of bus service, and close proximity of commercial centers. The same study found that off-farm earnings h a m e when migranthouseholds have access to bothmotorcycles and bicycles. World Ba& 2002. Stifelet.al., 2003. Cervera, 1990. Figure 3.7: Cost of TransportingMarble, 2004 percent of Total Production Cost) 30 25 M 15 10 5 0 Paldstan Lesotho Source:Global Development Solutions, LLC; American University of Cairo; Stone World. IncreasingAccessto Finance 3.19 Well-functioning financial markets help mobilize savings and allocate resources to the most efficient firms, thereby enabling their growth. In NWFP, the banking sector is one of the few formal sources of finance (with most of the commercial banks having operations in the province) since there is no equity or bond market, and one of the few local ways of storing savings outside of real property. In Pakistan as a whole over 37 percent of firms reported major or severe problems obtaining access to finance. The World Bank has found that a lack of access to credit has significantly reduced farm-level productivity in Pakistan, and small and rural f m s in the NWFP report significant difficulties obtaining access to credit. The lack of access to finance is not a result of a lack of available savings to lend. As of June 30, 2004, lending (advances) by the Bank of Khyber represented only Rs 6 billion of its Rs 20.8 billion balance sheet, with a nearly equal amount in cash or liquid investments. Rather, there is lack of awareness amongst potential clients on requirements for gaining access to finance. 3.20 The mortgage to GDP ratio in Palastan is only 0.5 percent compared to 2 percent for India and 15-20 percent for South East Asian countries. The penetration level of mortgages is miniscule when compared with the shortage of housing units and the mortgage market is fragmented with the unorganized sector playing a dominant role. Sweeping fiscal incentives have been introduced in the federal budget 2003/04 to encouragemortgage finance.Current macro-economic conditions such as reduced goveniment borrowings, increased liquidity, and rising inflows from foreign remittances have encouraged a low interest rate regime and banks are actively looking at alternate lending opportunities. Total formal mortgage lending is estimated to be Rs 22 billion. A number of specialized development finance institutions serve niche markets such as Small and Medium-sized Enterprises (SMEs). This limits the ability of the private sector to enter theseniche markets profitably. The market is dominated by the House Building Finance Corporation (HBFC), a public sector housing finance company with 82 percent market share and direct funding by the statebank of Pakistan. 3.21 Lending to the construction sector is low and considered high-risk: because of a general propensity to delays in project receivables and instances of clients canceling projects after commencement and contractors abandoning loss making contracts. Private banlgs. and leasing institutions service the construction industry but the sector is perceived to be highly politicized and its credibility compromised by a wide-spread culture of unofficial payments and commissions. Credit requirements are stringent and the use of construction finance is limited to large contractors with access to abundant fixed collateral. Limited access to financial facilities limits the capability of small and medim-sized construction companies to post bid and perfonnance bonds and acquire capital equipment access. This prevents them from competing effectively and affects growth. 3.22 Contributing to the inability of the banlang sector to lend is the high cost of enforcing contracts. The World Bank study, 2005 Doing Business, found that the cost in the M P relative to per capita national income was the highest of all the provinces of Pakistan, and almost twice that of the most efficientprovince. Indeed, the burden would appear even heavier if the comparislon were performed using the per capita income of the province. Figure 3.8: Cost of Enforcing a Contract, 2004 (Percentof GNI Per Ca~itab I I Cost to Enforcea Contract(Percent of GNIpc) Source: World BankIIFCDoing Business Database 2005. 3.23 Aa insti&tion;al weakness that stunts the ability of the private sector f;o make rts due conts.iburion to deveXqmerat is the pmr d w u m e n b ~ aand~weak mfor~ernentrrf'property rights, f%opertyrights are ~ rhuse rights that confaon their hctldm $herigkt to use, enjoy or claim an asset within the faamwo3rk of tkc law. 'X%is entails either ourright ownership or use nghts that art: cctntraceualfy conl'cveci, such as a lease. Strong property rights give ln~gitstctxstlzeconfidence akey need to undertake lot~g-tminvestments, to protect land make improvements to the ass& to ensure sus&inabitityof its use. Wtzm such rights are assim~blac ~tran~fmkle,%ewdmfying asset caa be used to pledge as ~oIlatersfsineeit can be marketed . or .wid u)repay f m s that are in &fault. Whm p p e q fights are not secure, investors QpicdXy engpge in shari-tcmprofit taking wrth a minimum ofcapibl investment. 3.24 'Eke amhigwity of gros,erty nights lade t.Q aberrant khavirn. in mny activities In which the NWFP pcrssesses a ~ctwwderaklegrm41potential. kt esample, because rrto%t. of the pms.rnceYsquality marble mines are in l;A'l'A, where t k e is wbik~fgi,extra-legal enforccmeart of ~ o p rightsyon much ~ of the iand suitable formining. the industry uses low-yield, urncatt~oltedblasting to cxwact marble, This wastes as much as 90 percent of the marble, and prolsu~esblocks &at are much smI1er required in the intcmatiojnat marketplace. F'i@~es3.8 to 3.10 display sowe indicator%sf w e 3 contractual and propertyrights. 3 2 5 Wedmetises in p f i ~ ~ r lrig,;k&also impact with particular sevwity an the hancial sector. y Withnut seurity, c;ltsmer~iaibanks l d Irttlle heyont3 shod-tern, ~el~liqurdatiaay, trade finance, thereby Icaving a g ~ ira pmvisicm of medium-tt)-lmg-tern fanding, 'I'wa gavernance issuss seem ta be at ptay, p Firhit, there are a large n u m h nf de\relupmcnt E m c e institutioxxs (DFlz;) which may have c:r~gimIly served to satdpe gcituth of an undlmmd segment but now eRective1y crowd oui develrlpxr~ntaf private mluiions,These come in addition to the state oimership of Bank ofKhyber, The second issue is a kgal regime fbr secured lending &at is char4tete~zedby lengthy processes of obtaining a judgment ti) execute on a coblateml pledge, due to excessive avenues for appeal relative to well-funceioning secured lending system. The uncertain caflectian period and potentially high tiale md court fees ustdmines the value of any eallatemt pledge and effectively rnakcs all lending unsectired. i;urt11emore, as is well known, the tidmg system in ml 1)akir;tanis imffective, and rural property is not accq&d as calfateral by commmci;xlb&nks. Figure3.9: XdcgalCrcdffnr Rights Xndcx,2004 Sts~redWorld RmkilFC Doing Rus~ncssDar&a$c 2fXI.S. Figure 3.10: Costs ofCreating a Collateral Agreement, 2004 (Percent of Secured Property) I I " , I Sindh (Mrabli) 'Punjab (Fairalabad) Punjab(Lahore) NYIFP (Peshawar) ' Punjab(Sialkb) ' Source: World Bank/IFC Doing BusinessDatabase 2005 Improving Land Markets 3.26 The efficient functioning of land markets plays a key role in an economy, particularly that of urban areas. Realizing the growth potential of urban centers in the NWFP wjll require addressing the factors that currently impede the development of an enabling environment for efficient management of urban 3.27 The high and rising price of land raises the cost of doing business in the province and acts as a disincentive to investment. Urban land markets in the provinceare inefficient and with rigiditiesthat limit supply of land. A more efficient urban land market will enable more effectiveeconomic and social use of land and improve its supply for development 3.28 The most formidable constraint to the efficient functioning of land markets in Peshawar is the failure of urban lmd management systems in establishing ownership in urban properties. The system of maintenance of land records is riddled with ambiguity and multiplicity of authorities, with each agency trynng to absolve itself of the responsibility and with its own systems and procedures for determining title or regulating property transactions. Not only are there overlapping responsibilities and a high degree of duplication of infomation, there is also limited cooperation and interactionbetween the differentagencies maintaining the databases and records of rights in land. Resultantly, there is mismatch between the property ownershipfrights to land records maintained by various agencieq and there are multiple documents that can be construed as evidence of ownership. Determiningtitle to property with any degree of certitude can therefore take a fair amount of time and investigation.In fact the inadequacies of the legal framework and procedures frequently lead to costly and lengthy civil liiigation. This deters the development of a large number of properties of prime commercial value ahd slows local economic growth. 3.29 The lack of secure property rights also undermines the effectivenefs of land being used as collateral in accessingcredit. In most cases the property currently represents ''d~adcapital". A key factor conskaining the efficient functioning of land markets is the slow colonizatioq of the housing schemes, even when all associated infrastructure has been provided. As a result, not only is the investment on municipal services being under-utilized, the assets created deterioratedue to lack.of use. Raisingthe non- 54This section is based on a study of urban land markets in Peshawar but the findings are of relevance also for other urban centers. utilization fees on plots lying vacant could discourage speculation, encourage colonization, and release developed land for productive use. Increasing Access to Skilled Personnel 3.30 With a population of 20 million and high unemployment, the labor supply in the NWFP is abundant. However, the slalls base of the labor force in the province is in general poor and does not meet the needs of a dynamic growing private sector. The average years of schooling in the province is very low and far behnd competitor countries as well as behind other provinces. Labor skills demanded by the market frequently do not match those produced by the NWFP's education and training systems. The increasing demand is for middle level managers and for what might be tenned "second-tier" mechanical skills,such as those possessedby mechanics, machinists,fitters, and so on. Representativesof the private sector averred that these skills were in short supply and were not being produced in sufficient quantities. According to these representatives, the technical institutions in the province were disproportionately weighted towards the production of fully qualified engineers, for whom the current demand was limited. 3.31 Skill shortages vary by sector. Considered hardworkingand, given the right circumstances, more productive than construction labor in other parts of the country, the NWFP labor works for a premium outside the home-province. According to the survey results, both slalled and unskilled labor is easily available although almost 50 percent of the workers are seasonal. An estimated 36 percent of the unemployed workforcein the provincehas previous constructionexperience. 3.32 An important element of the province's growth strategy is therefore to increase the availability of skilled labor to meet the future growing demands in the industrial and service sectors. The strategy to develop a more skilledlabor force would need to (i) expand the pool of future trainable workers through the ongoing provincial refonns in basic education to raise the average years of schooling and quality of schoolingsubstantially(see Chapter4 for more detail); (ii) establish and implement a mechanism to assist f m s in developing firm-specific skills; and (iii) implement refonns in the provincial higher education system (colleges, through year 14) to improve quality and market-orientation as well as increase the supply of well-qualified students. Th~swould supplement the national strategy for higher education refom at universitiesand polytechnicschools to enhance the supply of highly-skilled professionals. Construction 3.33 Construction contributes a large share of GDP in both developed and developing economies and has forward and backward linkages to a number of industries. The construction industry in Palustan however has been ignored to the extent of driving some of the most successll firms in the country to closure. Local firms are also increasingly losing ground to foreign construction companies competing for large public sector projects in the domestic market. The government has taken note of the situation and several budgetary and non-budgetarymeasures have been instituted recently to revive the industry. As a result, the sector has shown progress in the past two years. Despite price hikes in major material inputs, the sector grew by 7.9 percent in FY04 against a target of 5.4 percent and the market for construction services during the next five years (FYs 06-10) is expected to be Rs 5,145 Billion. 3.34 'Ihc conwtszlctlon industry in tile NWFP lags kh:hlnd Pur.tl'ab's in bath labor C :unsiruet~c>nand 'X'ask p~aductavity) and f'apltal Ixrc.idtact1%2ty. Aggregate labor prc,ductrvity tn the NWFP is atmost 550 pexcsnt: lawcr tfian the Pmjab wwhile &sk v-otlu~tivity shows mixed &cflGj$; mlws '$FC hi811 in the WWIiP fbr concreting actwilieba, comparable for girder steel-fixing and mlzwxy d Iuw for slab stel-fixrag and shihutthng, C:agi&l produetivit>l in thc NWP? is low mrt35s the bard. Other perfi3mance indicators fus prtt.otPdhrlify,quality rand growth also indicake a better srttlintian in the Punjab where ettnsmc~inncclmpanies have grown at twice the rate and exexute twice &%may pr~fjectsoutsidetheir homeprovince then cornpantesIn the NWET. 3.35 In~p~\o.bdng ~ f o t g n a sf~currstructiibmct>mpaniesin the NWPP to the level of fim in r n s ~ the n devefepecip a ~ ofsB & I s ~is hence a crucial first step in reallzing the ptegttial of Phe setor ari a key ~ dt~vm the:provincial e@9Pzo%a4yS of '2%erc:are a numbersf govmance issues that prevent fair cctmpetitim or arc. Ie~,sthan m s p a m t . The ~v.leine;ialgovernment agencies that regulateand guide the cunstfuction sector in the NWFP BY also the industry" bblggcst source: of demand. The effectiveness sf them organizatians is resMcted hy i~tnsdltusiona1mknesses md financial, technics1 and human re~uurcx det"lcienctes.me key issues ia the sectur: Wcok r'r~~fitutio~as. Public sector client organiatiolt.l$ axe plagued by regulathlera)s,includirag !he lack of mobilimtionadvances, funds for works in prows$,and payn~estrlidelay6 arp cornon. i. /ae$c:ie~t.f pm+ureaeftipr>fi<:de4.se ' I h prtwu~~aenat sefvices is agecled by rnaccumk project at' costtng, restrictive contractor scgistratton md pre-yualifnatioxr prupdures, collusion and underbidding, and contractual issue, According to a survey csatdu~kedbbr this report, the contractor reg1:lstrationprocess in the NWFP and a lack of fairness mil @msparency in the pre- ytlali%~atiunprocess iireidmtified as zwjr9r issues and o'ilstacles to grawh in the sector. In ;1tlJition mst public sector clients lase uuedated Sckcdufes of b k s to Set pees and assess tke cos~of a p j a t . 'II'ke actual cU6t5;during exccutiun am mueh higher than antieipsrtea by clients s of the euzzmct usually leave the e.un@dctcrt.Iiclkle for cog6 over-runs. inaccurate project costing using obm'tete Sckdules of I-Ssxtes, ovwlmiw eontmctcrr registration, unbatitndardi~dpracesm and lack of mnspareacy contrihutx: b a lclek of fair competition and ~iltimatelysu'ks-tafadardwwk, Ir i,~xctka$ sf~~t~tber~iiz~iif~rf 4oc.irmertls urzrl regisfralmn. Altkousffivocurernmt m1es b,;f*mnlr(8wf have. ken fomulated If%CYsStandad F3itfding I3wurnents) these have adopted the Weaknes.ws msnifest in the existing grtxuremttnt system and do ncat attempt to make the prcauuremcnt cycle fair, balanced, efficient and market oriented. Moreover, most of the relevant public servants are not aware of these rules and continue to use their own contracts. Public sector clients also enforce unique registration systems that duplicate the purpose and functionality of the PEC License. About 67 percent of all respondents identified the registration system as a major obstacle. The terms of most of these departmental contracts are flawed and give the client an unfair advantage,entirely overloolung the interest of the contractor. Escalation and arbitration for instance are not accommodated as a rule and arbitration initiated by a contractor leads to almost immediate black-listing of the company by all public sector clients. Contract enforcement is also weak and deviationsf?om contractsoccur frequently. 9 High Unoficialcosts. Unofficial costs, including 'acceptance money', commission on payments and fudging of quantities and work during execution originate from inadequate compensation in client departments,systemic wealmessesand lack of accountability. HydroelectricPower 3.36 As previously described, the NWFP is blessed with significant hydroelectric potential, and therefore the considerable advantage of being able to base its growth on a renewable, environmentally friendly energy source. To promote this resource, the provincial government announced a Hydel policy for small-scale plants (up to 20 MW), which is currently being revised. Not withstanding this policy, however, there may still be lack of understanding among potential investors on different issues such as tariff, identity of the buyer, guarantees,lease price and transfer of sites at the end of concession period. 3.37 Hydro plants with installed capacity less than 50 MW do not come under the purview of the Private Power and Inf?ashucture Board (PPIB)- the federal government's facilitation agency for private investments in the power sector. The role of National Electric Power Regulatory Authority (NEPRA) in the regulation of power sector is also clearly established through the law, rules and regulations. Investor confidence may, however, have been affected by inconsistent application of the policies, rules and regulations. For example, previously, Malakand IIIwas initially offered by the Government of the NWFP to private investors but was withdrawn and implemented in the public sector. Such policy reversals undermine the confidence of private sector that shy away from investing in feasibility studies for prospective sites as these investors are not certain about future policy decisions of the government. Lack of consistent implementation on policy issues, high hidden costs in setting up business in the NWFP and bureaucratic procedures have also been cited as the main problems experienced by private sector in setting up hydel plants with capacity below 50 MW. Unlike Azad Jammu and Kashmir (AJK)which has successfully attracted private sector interest as two plants are already under implementation, such interest from the private sector has been missing in the case of the NWFP despite far greater economic potential. Delay in setting up of Matiltan, a private sector project in NWFP, due to its on-going dispute with WAPDA is not an encouragingexample either for the private sector. 3.38 Development of wheeling charges has the potential of opening up the electricity market in the future as generation companies, which in the case of hydel are located in difficult terrain where industrial estates can not be set up, can enter into negotiations with different industrial sites for sale of electricity through the transmission and distribution network of National Transmission and Dispatch Company (NTDC), the main transmission grid company, and distribution companies, respectively. According to NEPRA's rules and NTDC's license conditions and approved tariff, wheeling charges from a generation company for transmitting electricity to a desired site through its transmission network are provided for. NEPRA is encouraging generating companies to enter into direct agreement with buyers which can be distribution companies or bulk consumers(industrial sites). In the case of on-grid sales, generation plants have the options of selling electricity to NTDC, Peshawar Electric Supply Company (PESCO) or bulk consumers. In case the plant decides to sell electricity to a bulk consumer within the province, it is required to pay distribution charges to PESCO for the use of its network for supplying electricity to the desired bulk consumer. In case NTDC's transmission network is also used for transmission to a distribution company, wheeling charges have to be paid to NTDC in addition to distribution charges to the distribution company for delivering electricity to a desired industrial site. The framework is clear, although incorporating the wheeling and distribution charges for delivering electricity may impact the attractivenessof existing plants(such as Malakand III), and also a number of potential future investments, including in plants with capacity below 50 MW. There is a need for consensus and coordination among different stakeholdersincludinginvestors in generation,provincial government, TrSEPRA, NTDC, PESCO and representatives of industryand estates on how costshave to be borne. 3.39 For plants below 50 MW, the Sarhad Hydel Development Organization (SHYDO) is fully empowered to facilitate potential investors. For this building policy capacity of SHYDO is required. In the case of off-grid hydel plants being run by SHYDO, bill collection and enforcement is a problem, but this has been substantially improved. Tourism 3.40 Tourism organizations around the world use policies, investments and institutions to ensure that tourism is managed in a sustainable manner. Tourism has become an extremely important source of jobs in many countries, with international tourism revenues predicted to continue to expand." The Sarhad Tourism Corporation (STC) was established as a key institution for public private collaboration, safeguarding ecotourism in the province, and establishing tourism facilities in the province. The following key issues in tourismwere identified: 9 Government has set out a major role of STC to develop and maintain all necessaly tourism related infrastructure in the province.However, tourism is a highly capital intensiveindustry and also involves high maintenance costs. It is not possible for STC alone to fund such investments from its own resources, neither is it desirable, and the private sector should be invited for investments. STC should only exercise a monitoring and regulatory role instead of managing and operating the lodging facilities and tourism development projects. Its existing mandate should therefore be revised to reflect these priorities. 9 STC's role in sector governance. Notwithstanding its economic potqmtial, tourism can have a negative cultural, environmental and social impact if it is not responsibly planned, managed and monitored. STC has not fulfilled its critical role of governancein these areas. 9 A lack of information on which to set strategies and priorities. The W P contains a wealth of cultural and physical assets on which a tourism strategy can be based. There is significant potential for adventure tourism, ecotourism, cultural tourism, and, mountain climbing. The sustainable development of each of these requires a different approach and substantialresources. Critical choices will need to be made. However, there is very little accurate data, on either the market (tourist arrivals, spending, visits, etc.) or assetsas the basis for decisions. 9 Weak inteflace with state institutions. Effective governance also reqhires coordinption between agencies that affect tourism, such as the Frontier Highway Authority. :Road accessis sporadic to some of the key sites, particularly in Chitral, due to the seasonal nature (ofthe LowariPassand the ''Tourism in NWFP must be seen as a medium-term prospect. While the regional security situation has improved, travel advisories rernain that have contributed to a dramatic decline in tourist arrivals, including 90 percent for Chitral. Withcontinued improvements in security, these advisories will be reassessed. 49 entry to Swat through the Malakand Pass. Improving the roads in these areas would help in promoting tourism further. > Environmental regulation and protection. Unmanaged tourism development can quickly spoil natural beauty in places such as Swat and Naran-Kaghan. A combination of regulatory standards and awareness usinglocal organizationsand NGOs can stem this problem. An example is Hunza where local NGOs have made people aware of the importance of tourism and keeping the local environmentclean. > A lack of institutional representation of the private sector. The private sector is a major investor/stakeholder in the travel, tourism and hospitality industry in the NWFP. It owns as much as 90 percent of the industry and specificallyhotel and transport sector in the province but is shy to invest in the other major tourismrelated projects. When the private sector is invited to invest, it faces unnecessary bureaucratic delays and outdated policies and procedures. The private sector does not have any representation in policy mahng. In the case of the Punjab the Board of Directorsof TDCP includes three members from the private sector. > A lack of community participation. It has increasingly become clear that tourism development cannot be sustained without the participation of the local communities. Unfortunately in the NWFP the local community is ignored and is not given the sense of ownership. Lack of community participation and awareness can result in depleted tourism assets, security and safety concerns, polluted and unhygenic living conditions and limited and poor infrastructure. It is therefore commonly recognized that the community plays a significant role in the sustainable success of many projects, either as owner, user or facilitator. Major areas for community participation in tourism development include security, hospitality, human resource and environmentalconservationand a host of tourism support services. > The absence of promotion. A comprehensive and integrated campaign both at intensive and extensive scales is an essential prerequisite for the success of the tourism industry. Due to the absence of a Marketing Department, STC has not played an instrumental role for the marketing and promotion of its rich tourism assets and activities something the Provincial Tourism Policy and STC's Memorandumand Articles of Associationconsider one of its prime responsibilities. D. CREATINGLINKAGES AND DEEPENINGSUPPLYCHAINS 3.41 As a result of many of the constraints cited above, the economy lacks linkages between stages of the value chain. Policymakers and the Bankhave come to understand that the effectivenessof the private sector depends not only on a conducive enabling environment, but also on how the private sector is organized (includingthe presence of support institutions) to maximize productivity along the entire chain of activity from raw materials to final goods. Since businesses do not operate in isolation but within networks that include service providers, suppliers and buyers, understanding the characteristics and inefficiencies of specific value chains can be extremely influential in (a) targeting policy interventions more specifically on the areas in the enabling environment which impact the domestic productivity, (b) understanding the linkages between foreign investors and domestic suppliers in order to increase the poverty impact of an open economy, and (c) help policymakers understand regional integration more thoroughly, since domestic producers may actually participate in cross-bordersupply chains. Value chain analysis follows the product flow and hence cost components in the value chain of the selected commodities from the initial point of production to the h a 1 market destination. This identifies and quantifies significant cost disadvantages which can be linked to specific policy distortions andor administrative and regulatory hurdles. Comparing the findings across several products can provide useful informationabout cross-cuttingconstraintsto growth. 3.42 integrated value chain analysis (IVC'A) In the NWFP was conducted on the nt;ixble and apple sectors. According to tlic IVCA, 26 percent of tstrtl costs5' in marble production came frtm polishing, foflowcd by packaging and distri'nutrun at 23 p:rcmr and stant; extraction at 21 prcent {secand bm in I:igitsc: 3,32)." Each stage revealed a number of crtgss-cutting issues. I'ota property rights at the extraction stage create weak incentives to crerntc thc type of investment tl'rst might inereast: atae yield of high-value blocks. 'T'nereslatt i s a chain that has exeessivc mnsporl costs at the c:xtractim stage and extra polishing cc~ssts.Bntrepsmcurs in BPtc marble sector also contend with high electricity costs. Due to the nattlre of stoneextraction and the poor techniques and technology used by industry participants, industrial waste in marble exwition and processing is higher En Pakistan than other major mqetiaag comlries. 'Fable3.2: Pereerttage of Wastefrom Marble Mining znd Proces~ssf~ng? 2063/04 3.43 In lhe apple seetor, despite having a signi&cant apple crop, there 1s no apple juice fhcbry in NWFI". 'Ihe use of middlemen with ~ibqiikftr?tbargaining power decreases the ability of producers to invest in da%tas&eamprocessing activities that might raise the value of locally-pmbuced itch. A lack of effective extension services nacans that f m e r s are contending with trees that are severely tvrought with dlseases (cuddlingmath, various fungi, and rnttes), requiring as many as I 0 sprays ~EI- seaon. 'I'ke result is that far me^ in Swat are switching to peach 'freesbecause they have fkwm diseases to fight (at present), <"l'h~u inctudcs ictilrn on capttal, hmee total costs syual yaks prtcc "in both iisurcs the second, long chart?stioivs the total cast or value addieiorl fur the product 'Ibe other bars sknw further cost hreakiiowr?of seiccled c t ~items to Ji111 down the cndcriyingprt>b!etn: c.8, l iki the case of rnarbfe produciton, a very large share of stone extrnetmil cost cons1sXsoftransporXatrem ctjsts that reflect cxccsstrcwaste in the miningstage (blm~slin~ rocks) that nwds 'lobe transprtcd tothc sttc of storlc reititng. atbktmglz peachcs are less profitable than apples. 'fklack uf dlscase fie, sot Srec. disease rcjslstsnt roclt and tree stcxk has severelydecreased apple farm ineo~nes. 3.44 Afi depicted in Figure 3.13, torat apple pn~ductio~~casts (stctmd bar) are driven up by faciors slrae operate throughout the value chain, including high c.hertts'ecsin~ldsprczyipig r'OStS, high packing material costs and high m%f cost%for qtnpment, in~ludinga lack t ~postable rau'inp equlpmcnt, and a tack ot f tmp in%ldmnce.2-figba mifcostsfor eier:f~"id~iIy bateto8 Sackof iravestment contfi 117.cold stomge fa11 itlcs, which might enable pre-d.oolingand export, well as a. ~cliaetimin the estimated 15-26 percent post- hamerat losses. As lam as wpptychairas remain fragmented,farmer income will xrnaln low, Power E.TAPPING THEECONOMICPOTENTIAL OFCITIES 3.45 The Governmentof the NWFP needs to invest in developing a vision and strategy on how to turn the cities in the NWFP into engines of economic growth to explore and optimally tap their inherent economic potential. For cities to contribute efficientlyto development, they must harness their resources in the direction of their comparative advantage. When appropriately developed, a vision and strategy can assist cities to not only attract investment and corporate business, but also higher income residents. However, to date there has been no effort towards doing so. 3.46 Peshawar is the provincial capital and the largest city in the province with a population of 2.2 million. The devolution of powers in end-2001 resulted in fundamental restructuring of institutions of development planning and urban management. The Municipal Corporation Peshawar (MCP) was abolished and replaced by the City District Government of Peshawar (CDGP) anld four autonomous Town Municipal Administrations (TMAs). The Peshawar Development Authority (PDA) was abolished, and the City Development and Municipal Department (CDMD), was created for management of macro- municipal ~ c t i o mat the district level. s 3.47 The authoritiesneed to addressthese key issues: > There is also an absence of a clear mandate for Local Economic Development (LED). No ministryldepartmentlagencyat any level of government has the responsibility to either formulate policies or implementation strategies for maximizing the LED potential of urban areas. Local governments, including the CDGP, only have a limited role in such policy formulation. On the other hand, federal and provincial policies and regulations on for example irhproving the investment climate or attracting tourism which are to be implemented at the local level, are formulated without involving or talungthe views of the local governmerlt into accoupt. > Integrated strategic and action planning, which are a norm internationally, remain absent in the country generally and in the NWFP particularly. Antiquated concepts of Master/Stmcture Plans are still in vogue. These tend to be land-use plans at best, and take so long to finalize that they are outdated even before they can be implemented. And in cities such as Peshawar that have a recently formulated Master Plan, even the institutional mechanisms for implementing its recommendations remain unclear. > There are multiple agencies undertaking development activities in the cities. Each of them has its own jurisdiction, development priorities, byelaws, and regulations. There is no coordination between these agencies, and development activities continue on a piecemeal basis. Uncoordinated investment decisions and fragmentation of funds into pllecemeal investments lead to sub-optimal use of scarce public resources. Planning at the local level remains limited to annual development plans, which are driven by budget allocations for projects, which in turn are generally pnoritized on an ad hoc basis. Excessive fragmentation of funds leads to very small projects that at best have union-level priority with little impact for the city district. Moreover, development allocations are uncoordinated and not based on an integrated development framework with buy-in from all key players. Unfortunately they are made based on political expediencies without correlating their relationship with the city's potential for local economic development; involving stakeholders particularly of the business/trader community to establish investment pnorities; or undertaking an analysis of the competitike advantage of the c~ty. Moreover,the timeframe for all development planning is limited to only one year, with no mulb- year rolling plans. 9 Within the jurisdiction of CDGP, urban management remains weak due to capacity constraints. Effective management of the city of over 2 million requires professional expertise that is not available in the public sector, and hiring from the market remains an issue. The most technically well-endowed agency in Peshawar has been the CDMD. However, it has turned into an implementing agency for major projects,and is at the risk of fast losing its planning capability if its expertise is not put to constructive use. Responsibilitiesof integrated services like water and sewerage, building regulation, and development control have been devolved to the 4 TMAs, which do not have the capacity to manage them. Indications of severe deterioration in these servicesare already apparent. Moreover, these services require consistency of policy frameworks and implementationprocesses, which can only be achieved by retaining them at the distict level. For City Districts, this is also in line with the LGO provisions. 9 The regulatory framework of Peshawar, including zoning, floor-area ratios (FARs), and building control regulations, is completely outdated, severely restrictive, and far from international standards. Since it does not respond to the market forces, it resultsin discouraging investmentsin the city. Moreover, the CDGP, CDMD, and Cantonment Boards each administers its own non- uniform building byelaws with little coordination with the others. Within the CDGP, the enforcement of these regulations has been devolved to the 4 TMAs, which have little capacity to enforce. These factors have given rise to land and building mafias, which are behind the proliferationof katchi abadis and building violations. 9 Absence of an enabling environment discourages private sector participation, particularly for commercially viable services like water supply, transport, or solid waste management. As a result of the above factors, the coverage and quality of infrastructureand servicesis worsening while the population of the city continues to increase at a rapidpace. 3.48 The private sector in the NWFP must be developed on a new foundation of governance that builds on macroeconomic stability with low entry barriers, a clearly defined role of the state, and the rule of law. The development of regulatoryframeworksthat promote competition and transparency for a large number of sectors is within the scope of provincial authority. Such a foundation can lead to the desired outcomes of its private sector vision -a larger formal sector, higher levels of productivity, higher value employment,and therefore poverty reduction. 3.49 Any strategy must go beyond vision; it must involve strateac choice. A strategic shift toward private sector development will not occur unless the government makes a concerted effort to reposition the role of the state, radically reduce the administrative burden on firms in order to encourage formalizationand increase the tax base. Beyond this, the Government of the NWFP needs to make reform a continuous process. Most importantly, relationships of mutual trust and respect need to develop between these three stakeholders in line with the true spirit of private sector development and local governance. The focus of reform should be on: 9 strengthening the capacityof the government to execute public-private partnerships; > repositioning the role of the state away from operational roles (such as exist in tourism, construction,logisticsand banking) and toward the provisionof effective sectorregulation; 9 enhancingpropertyrights, clearly defining jurisdiction and enforcement in PATA; P strengthening sector governance; P focusing on selected infrastructureimprovements, such as cold storageand logistics; and P streamlining tax administration and other administrative barriers for all enterprises (rather than creating fiscal incentives). These are elaborated below. 3.50 Strengthening public-privatedialogue. This report recommends that the public-private sector committees that exist on paper set up a regular schedule of meetings to which they rigorously adhere (it appears that many of these committees have not met for periods of up to two years). At the same time, an umbrella Government-Private Sector Forum modeled after similar fora opaating in many of the East Asian countriescan be established (see Box 3.2). 3.51 Recent PSD Policy Changes. It should be noted that in the spring of 2005 there has been a substantial shift in the orientation of the government towards the private sector as reflected in concrete actions and several of the recommendationsthat the joint Bank-Government team had been discussing in the preparation of this report have been implemented. Recent measuresinclude: Establishment of an Investor Facilitation Council under the chairmanship of the Chief Minister and an Investor Facilitation Committee with the Chief Secretary as chairman. Both high level committees have equal representationby the private and the public sdctor. P Handing over of management of Industrial Estates to the private sector. k Establishment of Central Management Committees to govern public techniqal schools and vocational training centers. There is equal representation by the priiate and the pbblic sector and the Chairperson is from the private sector. k Drafting of new concession rules for mining addressing deficiencies mentioned inthis report. k Exemption from labor inspection after compliance with labor lads thus reducing government interface. 3.52 The critical challenge remains sustained implementation of these steps to ensure that the initiatives are effective in facilitating PSD. Though the government has taken the impoitant decision of partnering with the private sector it is now a joint responsibility of both sidelsto showcasecooperation to continue to refine the province's strategy for PSD and economic growth. Box 3.2: Three Examplesof Pora for Private-PublicDialogue These examples are taken fiom the World Bank, The East Asian Miracle -Economic Growth and Public Policy.Oxford: Oxford University Press, 1993. 1. Japan: "Japan's effortsto establish fora for public-private dialogue are the most widely recognized and had been the most thorough. Since the beginning of the post-war period, the Japanese government and privateindustry had engaged in serious policy deliberationsthrough deliberationcouncils of two types. The first is organized along functional or thematic lines, the second is organized according to industry. Each councilprovides a forumof governmentofficialsand representatives fiom the private sector-business, labor, consumers, academia, and the press in order to discuss policy and market trends and generally to exchange information. Consensus is encouraged. [A showcase example is] the process of fornubiting a poli~yat the Ministry of Trade and Industry (MITI). MITI officials first invite interested parties to a sedes of hearings, the results of which are forwarded to a MITI research group. The research group prepares a report for the appropriate deliberative council, where policy negotiations may take place. On the basis of feedback f?om the council,the group revises the report and releasesit to the public explainthe objectivesofthenew policy. Final approval by the Diet is usually routine. Without consensus fiom the relevant deliberative council, however, a MITI policystands little chanceof success" (pp. 181-2). 2. Singapore: "Public-privateconsultationis most explicit in Singapore. The private sector participates in policymaking in many ways. For example, private citizens serve as directors on government statutory boards and as members of ad hoc government advisory committees. In both capacities, they review policies and programs and make recommendationsfor official consideration. In addition, the government regularly invites chambers of commerce, trade associations, and professional societies to submit their views on specific issues."... The Singapore government's efforts $0manage the economy are most fully apparent in the National Wages Council which includes representativesfi-omgovemmqnt,business, and labor. Because of this tripartite structure, the NWC fhHs several coordination hctions, simultaneously furthering the government's guidanceof businessand of labor, as well as business-laborcooperatioti" @. 184). 3. Malaysia: "Malaysia's experience with public-private cooperation through deliberative councils has particular relevance for developing economies. U@ke .Japan,.., Malaysia is a multi-ethnic society, and unlike Singapore it has a relatively large populationsmdrland area. Thus Malaysia is in many ways more typical of a developing economy than are the high-performing economies of North-East Asia. ...In Malaysia, officials have applied this concept to their quest for ~owth with equity, a particularlyimportant goal in a multi-ethnicsociety. ... [The deliberative councils] would be hamstrung without an efficient and reputable civil service bureaucracy. The government recognizes this and is Qyhg to increase the burmcracy's efficiency, eliminate corruption, and educate civil servants on the value of cooperating with the private sector" (pp. 186-7). Infrastructure Services 3.53 Ensure reliable, cost effective provision of high quality infrastructure services to manufacturing industriesat full cost recovery: > run industrial estates with private sector management > establish joint public-private ventures to introduce privateindustrial estate development Improving LandMarkets 3.54 The most important requirement to make the land markets function optimally is a system that determines title conclusively. There is a need to consolidate title determining responsibility with one department. A centralized land registry system in the form of a central register of land title should be established with one central agency. The Excise and Taxation (E&T) Department is the best candidate as it has the most complete and accurate record of urban properties in the province, and is most suited to fulfill this exclusive mandate to determine title. Furthermore, there should be no overlapping jurisdictions. Thus in areas brought within the ambit of urban immoveable property tax, revenue authorities andpatwaris should be required to not maintain parallel records of ownership. 3.55 The empowerment of the E&T Department can only be a long-term go'al. In the meantime, the government should: (a) update the existing records, especially of vacant land, of the other departments involved in administering urban land; (b) ensure that all future transactions are through registered documents; (c) computerize the Registrar's Department so the electronically based land registration system can produce a property index register relating to all transactions in a property quickly and in a transparent manner; and (d) lower stamp duties as incentiveto register transaction documents. 3.56 Compulsory Registration of All Transactions Related to Properties is vital. A system of registering deeds can provide the platform on which a system of registering titles can eventually be built. Hence, the registration of all property transaction related documents should be compulsory, and the Registration Act and the Stamp Duty Act should be amended accordingly. 3.57 Additional reforms that can help improve the utilization of urban land could be reducing the cost of investment by raising the land non-utilization fee on plots lying vacant and enacting legislation to abolish benami holding of property by narrowing M e r the differential in property tax paid by rented and owner-occupiedproperties;and revise the Rent RestrictionOrdinanceto reduce the pro-tenant bias. 3.58 Dispose of land in prime commercial locations owned by the provinaial and local governments and used for less productive purposes, or presentlyleased out to the private sector for a nominal rent. In this regard the NWFP Local Government Ordinance @GO) 2001, that curbs the local governments from placingtheir properties to more efficient and productive use, also needs amendment. Accessto SkilledPersonnel 3.59 The strategy to develop a more skilled labor force would need to: 9 expand the pool of future trainable workers through the ongoing provincial reforms in basic education; 9 implement reforms in provincial colleges to improve quality and market-orientation as well as increase the supply of well-qualifiedstudents(see Chapter4 for more d.etai1);and P establish and implement a mechanismto assist f m s in developing firm-specific skills. Improving Performancein the ConstructionIndustry 3.60 Enable a better business environment and enhance the performance of the private contractors by: P Improving Procurement rules. Procurement rules may be revised to rnake them fairer and more balanced. Single bid should not be reason for rejection, composite schedule of rates should be replaced by market rates and there should be a system of appeals. Clearer and more detailed consultancyrules should also be formulated and adopted. P Improving and standardizing contracts. Implementing the PEC Standard Bidding Documents across all client agencies and accommodating escalation in the price of construction inputs, arbitration of disputes and payment/billingschedules in the contract terms. P Improving the procurement process. Pre-registrationshould be abolished;there should be no post bid negotiations. Adjustments to bondingand guarantee requirementsaccordingto the guidelines of the PEC. P Centralized contractor performance monitoring. A system to monitor performance of private contractors, defined and pilot tested within a sample of contracts and refined for provincial rollout. P Capacity development of public sector clients. Adequatelystaffed (right-sized), professionalized and properly equipped departments, with hiring, salary and promotion based primarily on performance and merit. Cost of capacity-building will be realized through savings from reduced escalationand rework of projects. Improving Performancein the HydroelectricPower Sector P Remove inconsistencies between the two policy frameworksof SHYDO and the Pakistan Private Power and InfrastructureBoard, respectively. P Strengthen SHYDO's institutional capability on policy issues and on dealing with domestic and international private investors. ImprovingPerformance of Tourism P Restructure STC. Revise STC's mandate to reflect that it should only exercise a monitoring and regulatory role instead of managing and operating the lodging facilities and tourism development projects. P Strengthen STC's capacity for marketingand promotionof tourism in the province. P Invite the private sector for investmentsin tourism related infrastructure such as lodging facilities and tourism developmentprojects. P Include private sector representationin sector policy making, e.g., in STC's Board of Directors. P Facilitate local community participationin tourism development. Tappingthe Economic Potentialof Cities P Establish an Apex Steering Committee (SC) with membership of all stakeholders including MPAs, provincial and local government agencies, Cantonment Boards, utility agencies, Chamber of Commerce, academia, intellectuals, and sector experts; chaired by the Chief Minister. The SC should be responsiblefor: (a) developing a vision and policy on tappingthe economic potential of the cities in the NWFP; (b) ensuring the development of a strategic plan for each city based on them; and (c) providing implementation oversight so that investments undertaken in each city are aligned to the plan. It should also get the requisite authority to mobilize all stakeholdersinvolved to participatein the developmentdecisions of their cities, starting with Peshawar. 9 Establish an Urban Development unit housed in the provincial Planning and Development (P&D) department to act as the Secretariat for the Steering Committee. A comprehensivevision and policy for urban developmentin the province require underpinningsin research, experience, and expert technical advice. This unit would therefore need to have close linkages with various institutions that are involved in such pursuits like the proposed Institute of Urban Infrastructure Planning sf University of Engineering and Technology (UET), as well as experts and subject specialists. In many countries, Associations of Local Governments have also proved to be an effective vehicle, particularlyfor experiencesharing and capacity building. 9 Develop an Appropriate Structure and Mandate for CDMD. The CDMD needs to be fundamentally restructured and provided with a mandate to develop integrated strategic and action plans for Peshawar, tahng into account local economic sppom~ities,means Bbss optimally exploit them, existing constraints and how to effectively mitigate them. Simultaneously, there is a need to undertake a hctional review of the multiple institutions responsible for urban development & municipal service provision at provincial and local levels in light of experience post-devolution;remove overlaps and gaps, rationalize mandates at appropriate levels, and bddl appropriate technical and management capacity. 9 Modernize Building Byelaws and Regulations, starting with Peshawar, to make them a: par with international standards, and based on the integrated strategrc p?an for the citjl. In their revision, the multiple urban management agencies and key sbkeh~lbe~smust participate, to ensure buy-in and1their uniformapplication and enforcement across the city. It is also crucial that once in place; the new regulations are reviewed, and revised as needed, on a continuousbasis to respond to the emergmg needs of a growing metropolis. Similarly, the arbitxary restrictionson FARs and heightsof buildingsneed to be reviewed, and be linked to emerging market demands. 9 Ensure that all development funds to be invested in the PeshawarDistrict are based on the integrated strategic and action plans, developed with the consensus of all stakeholders *under the guidance of the Steering Committee. 9 Retain the responsibiPi%grof neltwgarkedmunicipal service provision, building reguPatBon, and development contr~lat the CDGP level, rather than devolGngthem to the TMAs. 9 Encourageprivate sector participationin municipal service delivery throughpublic-private partnerships to enhance local government capacity. This would involve: (a) idbntification of commercially viable services; @I) provision of an enabling envirpnment for private sector participation; and (c) outsourcing delivery and management of identified services to the private sector while retaining oversight on their performance. 3.61 Hnitide anPnformdian, Education,and Communica~on@C) Campaign: While devcluxt~r, has delegated responsibility and authority to local levels, it has not been aabk to ~rrSu~cieat:i&,dz; z.zd mindsets, a crucial factor for its success. The IEC Campaign should educate local politicians on the authority and the responsibility that the LGO has vested in them; educate the local government bureaucracyon its role as the executive arm of the local government responsiblie for meetingperformance and service delivery targets; and educate the citizens about the voice they have been provided through the LGO to get their needs fulfilled, to hold local governments accountable for the targets they have undertaken to achieve and to minimize politically motivated decisions. But they also need to understand theirC ~ M C responsibilitiesof paying taxes and user charges for the servicesthqr get. ANNEX 3.1: PSD: CROSS-SECTORALRECOMMENDATIONS Issues Addressed Results Sought Steps Needed 1. GOVERNMENT-PRIVATE SECTOR FORUM Bureaucracy's Private Sector Development vision A Government-Private Step 1: Define Working Groups lacks systematic public-private dialogue Sector Forum, a bi-annual Step 2: Define Government and Private Sector Co-Chairs Strategies so far have not included good stakeholder Cabinet-level meeting with Step 3: Define Working Group members (to include key stakeholders, analysis; Public sector needs greater understanding of the private sector, industry associations, customers of industry etc. Balance the private sector and its beneficiaries to reinforce supported by working between public and private sector representatives) mutual interests: groups to define and Step 4: Define Working Group Agenda o Profitable private sector to enhance tax resolve specific problems. revenue base Step 5: Propose Forum structure to Chief Secretary o Increased employment at wage levels that Step 6: Hold initial meeting to endorse Structure reduce poverty o Public service delivery and high quality Responsible: Chamber of Commerce & Secretary of Industry products Support: World Bank to provide sample structures at Forum's request Need to reduce Trust I Confidence gap Perceived lack of interest to take into account private sector's concerns and issues. I I 2. INCREASE BUSINESS REGISTRATION The NWFP Provincial mining policy framework has That the vast majority of been streamlined, but does not extend to tribal areas. firms are registered, and National policy recognizes resource as government registration data are property, and grants the right to exploit the mine on computerized, enabling leaselconcession. information sharing. Without legal status, mines are vulnerable to security issues as well as arbitrary closure by local officials. Unofficial costs of Rs 7,000 per truck are common ConstructionSector 1 1Results Issues Addressed Sought Steps Needed -- 3. IMPROVEMENT AND STANDARDIZATION OF CONSTRUCTION CONTRACTS Contracts are one-sided and discriminatory and not Implementation of the Step 1: Review PEC Standard Contract documents. enforced properly. PEC Standard Bidding Step 2: Seek consensus on escalation and arbitration. Contract must enable arbitration, accommodate Documents (including Step 3: Seek approval of Secretary of Law and escalation of input prices and define maximum terms for Escalation, Secretary of Finance on adoption of standardized period of contract payment for better financial 'Arbitration and Payment management. Schedules) across all PEC contract. Lack of standardization in contracts (different agencies that hire contracts are used across agencies). construction firms Delay in adopting the PEC Standard Bidding Documents 4. IMPROVEMENT O F THE PROCUREMENT PROCESS INCLUDING UNIFIED REGISTRATION Construction firms are required to register with Simplified, unified Step 1: Initiate discussion of harmonization of procurement multiple client agencies and the PEC. This leads to registration preferably processes with the PEC duplication of effort and resource wastage for both under the auspices of the Step 2: Seek consensus on escalation and arbitration. the client agencies and construction firms PEC Step 3: Seek approval of Secretary of Law and Secretary of Finance on adoption of contract. Step 4: Initiate discussion of harmonization of procurement processes with donors (not time-limited). Step 5: Create single registration system shared across agencies. / 5. CONTRACTOR PERFORMANCE MONITORING SYSTEM Collusion in prequalification and tendering A system to monitor Step 1: Initiate discussion with PEC and provincial client agency to determine roles and division of responsibilities. Frequent budget overruns performance of private defined and Step 2: Define performance criteria (productivity in terms of output No incentive to construction firms for competition pilot tested within a based on capability. and deviation from schedule and budget; quality etc.) sample of contracts and Step3: Selectplottolamch performance monitoring refined for Provincial rollout Step 4: Assign internal personnel Step 5: Establish database Step 6: Discuss monitoring system design across agencies Step 7: Test pilot Step 8: Create link to new contractor selection Step 9: Refine pilot, scale up through Planning & Development Department Responsible: Director, FHA Support: World Bank to support through consultant - Issues Addressed Results Sought Steps Needed 6. STRENGTHENING CAPACITY OF CLIENT DEPARTMENTS Weak public sector capacity to manage contracts Adequately staffed (right- Step 1: Define Performance Criteria. and monitor the quality of construction. sized), professionalized Step 2: Define measurement system. Inappropriate staffing and skills and properly equipped Step 3: Assign internal personnel 1strengthen planning and Unofficial costs resulting from inappropriate departments, with hiring, monitoring compensation and control structures salary and promotion cells based primarily on Need for stronger incentives to public sector for performance and merit. Step 4: Define salary levels for reaching goals. increasing institutional performance. Cost of institution will be Step 5: Initiate Pilot. realized through savings - reduced escalation and Responsible: Director Planning & Monitoring, rework of projects. Works & Services Department, NWFP Support: World Bank to support through consultant Tourism C Issues Addressed Results Sought Steps Needed 17. DEVELOP A JOINT GOVERNMENT-PRIVATE PROVINCIAL TOURISM STRATEGY I Issues: A medium-term provincial Step 1: Agree on outline for joint sector strategy. A lack of awareness of tourism potential, and no strategy to guide Step 2: Conduct research on potential NWFP "products" investments in promotion, Archeological Sites, tangible built heritage and antiquities - image building activity skill development, Wildlife and natural resources No NWFP tourism policy infrastructure and Artistic heritage including performance arts and festivals Investment proposals raised by STC in the past 1environmental protection. Agriculture and Cuisine beyond government's means, suggesting need for Handicrafts prioritization Step 3: Conduct research on market segments: State maintains dual role as operator and Demographic data policymaker Market size - Many policies are obsolete and require renewal, Surveys which requires better research and development Step 4: Community-level awareness building and research A lack of direction for tourisminvestments and policies Interviews of tribal leaders to promote understanding of I tourism Responsible: Tourism Working Group committed to developing outline, World Bank to support through consultant. I Issues Addressed Results Soueht Steas Needed 8. REFORM THE STC TO CREATE A HIGH-PERFORMING INSTITUTIONAL STRUCTURE FOR TOURISM = Sec Tourism and STC directly responsible for a An efficient organization Consultant report ongoing. small share of issues that impact tourism. that (a) enables policy Need stronger coordination with security, coordination across transportation, agriculture, wildlife, archeology, relevant agencies; (b) zoning, water and sanitation. empowers private sector Need to better leverage private sector. and local communities; (c) implements the defined Top-down Federal role prevents community strategy. empowerment. Federal government has neglected the NWFP tourism assets. = STC organizational resources are extremely limited. Marble and GemstoneMining Issues Addressed Results Sought Steps Needed 9. STRENGTHEN PROPERTY RIGHTS FOR MINING The NWFP Provincial mining policy framework has Legal recognition of the been streamlined, but does not extend to tribal areas. status of mines throughout National policy recognizes resource as government NWFP, and the extension property, and grants the right to exploit the mine on of provincial policy to lease/concession. those mines. Without legal status, mines are vulnerable to security issues as well as arbitrary closure by local officials. Unofficial costs of Rs 7,000 per truck are common CHAPTER 4: IMPROVING SERVICE DELIVERY AND HUMAN DEVELOPMENT OUTCOMES 4.1 Sustained and broad-based private-sector led economic growth is the most powerful driver of poverty reduction. However, investment in human developmentis also required for a sustained reduction in poverty. Education and health are often the only assets of the poor; they must be enhanced not only to improve the quality of life of the poor directly, but also to provide businesses with an educated, productive, and consequentlywell remunerated workforce. Better availability and quality of basic public services, including education, health, clean drinkingwater and sanitation is therefore the second pillar of the provincial government'sstrategy for improvingthe life of its citizens. 4.2 At the root of the NWFPYspoor social outcomes lie deficiencies in the delivery of health, education and water supply and sanitation (WSS) services by the public sector, some of which are systemic, some sector specific. Systemic problems affect service delivery in health,education, and water and sanitation in similar ways and include: (i) inadequate implementation of devolution (administrative, functional and fiscal) to local governments; (ii) weak management information systems, and poor alignment of policies and resources with results on the ground; and (iii) poor access to transport in rural areas. Table 4.1: Selected Social Indicators, the NWFP and Overall Pakistan,2001102 11 (Percent) Indicator The NWFP Pakistan Urban Rural Overall Urban Rural Overall Literacy Rate (population10 years and older) Male 70 55 57 72 51 58 Female 41 16 20 56 21 32 Overall 56 35 38 64 36 45 Net EnrolmentRateatPrimary Level (Age 5-9) Male 59 47 48 57 43 46 Female 51 31 33 54 33 38 Overall 55 39 41 56 38 42 Dropout Rate 21 Male 9 12 12 13 19 15 Female 12 28 24 8 18 15 Overall 10 18 16 11 19 15 Total Fertility Rate 31 - -- 4.3 - - 4.1 Contraceptive Prevalence Rate 31 -- -- 30 -- -- 32 Pre-natalconsultations 45 19 22 63 26 35 Tetanus Toxoid Immunizations 53 29 32 64 34 41 Post-natalconsultations 8 4 4 16 9 Birthsdeliveredathome 69 86 83 54 84 78 Births assisted by trainedbirth attendant 18 12 13 13 20 18 Immunizationrate for children 12-23months 70 55 57 70 46 53 Households(%) with access toclean drinking water 83 53 58 95 80 85 0 64 69 95 41 57 11Source:PIHS 2001102. Z Percentshareof10-18 yearold studentr;who leftschoolbeforecompletingprimary level. 31 NationalInstitute ofPopulationStudies survey, 2003. A. THESTATEOFEDUCATIONAND HEALTH IN THE M P 4.3 Social indicators in the NWFP in general lag those of the rest of Pakistan (Table 4.1). There is a substantial gender gap in the NWFP along several dimensions as well as a substantial rural-urban divide in education and health indicators. While the state of education for males is broadly the same in the NWFP as in Pakistan overall, education indicators for females are significantly worse as shown by literacy and drop-out rates. This gender gap also shows up in the poorer health indicators for females in the province compared with Pakistan as a whole. Common factors behind the gender gap are limited mobility and access by women to service delivery because of cultural norms as well as security concerns. This limited mobility and access by women also constrain their opportunity to participate in the labor market; a factor over and above the more limited opportunities they have in building human capital through education. This also leads to lower average earnings by women and lower return on education than men. 4.4 The situation may be starting to improve. Results from the recent Pakistan Social and Living Standards Measurement Survey (PSLMS), conducted in 2004105, suggest sulxtantial improvements in gross enrolment and maternal health indicators in the NWFP and for all of Palcistan. These data are new and await further analysis, especially to understand the underlying factors that explain the positive trends. The discussion that follows is based on PIHS (2001102) and PRHFPS (20103) and provides a more detailedpicture of trendsand patterns in education, healthand water supply andsanitation. 4.5 Overview of education status. Table 4.2 shows that as of 2001102, the NWFP's literacyrate and gross enrolment rate were substantially lower than those of other countries in the region. Compared to the overall national rate gross enrolment in the NWFP was marginally higher whereas adult literacy was lower. However, these averages mask the enormous gender gaps in the NWFP -e.g., while male gross enrolment rate (GER) is the best in the country (97 percent in 2001102) the female GER of only 56 percent yields the largest gender gap in the country of over 40 percentagepoints (Table 4.3). Table 4.2: Literacyand Enrolmentin the NWFP and South Asia (Percent) Adult Literacy Gross Primary EnrolmentRate (amongthose >15 years of age) The NWFP 11 35 Pakistan 11 43 India 21 61 Bangladesh 21 41 98 Sri Lanka 21 92 110 I/ Source: PIHS 2001102. 2/ Source: World DevelopmentIndicators. 4.6 A limited set of data based on the 2004105 PSLMS suggests that fernaleGER has increased in the last three years to 65 while the male GER has fallen fkom 97 to 93 -a narrowing of the gender gap by nearly 12 percentage points. This intriguingpattern of declining male enrolmqmnts is only rqorted for the NWFP and warrants further analysis. Despite the reported progress in gross and net enrolment ratios (NER) since the mid-nineties (NER rose from 35 percent in 1995196 to 47 pmcent in 2004105) there are still 1.9 millionchildren (5-9 years old) left out of school; 1.1 millionof these are girls. 4.7 The NWFP's rural areas fare conspicuously worse than the urban. Enrolment rates, literacy rates, and the correspondmg gender gap vary widely across the 24 districts of ithe NWFP. Net primary enrolment rates in Kohistan at 16 percent (10 percent for girls) compare very poorly with those for Abbottabadat 81 percent (80 percent for girls)(data fiom PIHS 2001102). Table 43: EducationIndicators in the NWFP,1998199- 2001102 1998/99PIHS 2001/02 PIHS Province Male Female Both Male Female Both Literacy rate (percent of population 10 years and older) Pakistan 59 31 45 58 32 45 NWFP 56 20 37 57 20 38 Gross Enrolment Rate at the Primary Level (Age 5:9) I Pakistan 61 71 83 61 72 NWFP 84 54 70 97 56 77 Net Enrolment Rate at the Primary Level (Age 5-9) Pakistan 47 37 42 46 38 42 NWFP 47 30 39 48 33 41 Net enrolment rate at the matric level (Age 14-15) Pakistan 21 13 17 20 14 17 NWFP 21 6 13 21 10 15 Sources:PIHS 1998199 and 2001/02. 4.8 Overview of health status: Key health and population outcomes Figure 4.1: Total Fertility Rate, 2003 (Unit) improved steadily over the nineties. I and about 35 percent higher than in Source: National Institute of Population Studies Survey, 2003. Bangladeshand India (Figure 4.1). 4.9 The contraceptive prevalence rate was 30 percent in 2003, lower than the national average of 32 percent and far below the rates for India and Bangladesh of 48 and 54 percent, respectively. The unmet need for contraception in the NWFP is high -at 35 percent it is the highest of all provinces. It leads to a large number of unwanted pregnancies and a high rate of induced abortions (often from untrained and unqualified personnel, resulting in high morbidity). Maternal and child health are greatly influenced by the quality of care during pregnancy, delivery, and after delivery. This is especially important under conditionsof repeated childbearingby women who are in poor general health. PIHS 2001102 data indicate that the proportion of women receiving good maternal care has risen slowly since the 1980s,but is far from adequate. The PIHS 2001102 data also indicate large inter-provincial differences in the coverage of maternalcare services (Table 4.4). Table 4.4: Pakistan: Health Indicators by Provinces, 1998199 2001/02 - 1998199 PIHS 2001/02PlHS Province Urban Rural Overall Urban Rural Overall Immunization rate for children 12-23 months Pakistan 64 55 49 70 46 53 NWFP 77 51 54 70 55 57 Punjab 64 52 55 76 51 57 Sindh 60 27 38 64 33 45 Balochistan 51 32 34 36 22 24 Prenatal consultations for pregnant women visiting health facility (%) Pakistan 60 22 31 63 26 35 NWFP 36 20 22 45 19 22 Punjab 58 25 33 64 31 40 Sindh 70 19 37 68 22 1 1 38 Balochistan 43 15 18 45 16 21 , :: ::: Post-natal consultationsfor women within6 weeks after delivery (%) Pakistan rz: 9 ;o :o Sindh 19 19 6 10 Balochistan 13 4 16 5 7 Sources:PIHS 1998/99and 2001102. 4.10 As immunization coverage increased in Pakistan during the 1990s, the gender gap in immunization coverage narrowed. Substantial gender gaps remain only in rural Sindh and urban NWFP (see Figure 4.2). Figure 4.2: Percentage of Children Fully Immunized by Province, 2001102 u - - 5 Urban l l Boys Girls Source:Pakistan Demographicand HealthSurvey1990191and Pakistan Integrated HouseholdSurvey2001/02. Note:The percentagesrefer to children aged 12-23 monthswho have completed immunizations. Polio3 and DPT 3 refer to last doseof the respective immunizations. 4.11 There are also substantial gaps in the availability of clean drinlung water and sanitation, which influence the health status in the province. The recent PSLMS data indicate that only 66 percent of households have access to drinking water (84 percent for the whole country). About 76 percent of households have access to toilets (national average: 74). The NWFP had the sllowest improvement of all provinces since FY02, possibly linked to the lack of functional devolution of WSS to TMAs discussed below. About 38 percentof households have access to sewerage. 4.12 Transport access and the state of human development in the province. In rural NWFP, low human development is associated with lack of access to transport and consequently poor mobility. Limited availability of transport infrastructure in remote areas in the NWFP is a major constraint to improvingaccess to income generation and basic social services (Table 4.5). Table4.5: Pakistan: Education and Health Indicatorsand Access, 2001102 Rural Communities Rural Communitieswith Indicator (mean) without all-weather all-weather motorable motorableroads(percent) roads (percent) Rural Rural Rural Rural Pakistan NWFP Pakistan NWFP Literacyrate(10 years and above) 29 28 38 36 Primary school net enrolment rate (6-10 year 38 42 49 50 olds) Immunization coverage(12-23 month olds) 46 46 54 64 Contraceptive prevalencerate (married 12 8 17 22 ( women age 15-49) I Source:PIHS 2001102. [i] 6-10 year olds enrolled in primaryschool [ii] fully immunized 12-23 months based on recall and record [iii] percentof married women of age 15-49 whoever used contraception 4.13 The NWFP's rural population has very low physical access to the transport network and services, lower than for Pakistan as a whole. One in every five rural residentshas no access to an all- weather motorable road, which means that some three million people are not connected all year round to the rest of the country. Moreover, two out of every five persons in rural areas do not have passenger transport services in their villages, making it difficult for some six million rural people to move outside their communities. Accessibilityin the NWFP is lower than the national average. (Table4.6). Table 4.6: Lack of TransportAccess and Semce Availability in Rural Pakistan, 2001102 Percent share of Percent share of Percent share of Percent share of rural population rural population rural population population withoutmotorable without all- without paved without access weather access buslwagon stop motorableaccess within village Punjab 5 9 24 34 Sindh 14 16 37 16 NWFP 14 20. 32 38 Balochistan 14 28 73 26 Pakistan 9 15 32 . 30 Source:PIHS 2001102. 4.14 Physical accessibility in rural NWFP is even lower for the poor. Access to roads is limited and biased against the poor. Disaggregated data from the PIHS show significant disparities between expenditure quintiles (Figure 4.3). Poor people and poor communities are less likely to have access to transport infrastructure and services, which in turn limits their opportunities and their access to other services. For instance, 22 percent of the people in the first quintile lack access to all-weather motorable roads, more than two times that of the highest quintile. Figure 4.3: Road Access in Rural Areas Figure 4.4: Primary Net Enrolment Rate in the NWFP, by Quintile (2001102 PIHS) and MI-WeatherMotorable Roads Girls Primary Education Net Enrollment Rates (PIHS 2001-02) Villages wth all-weather motorableaccess El Villages without all-weather molorable access Boys Primary Educalion Net Enrollment Rates (PIHS 2001-02) 4.15 The lack of accessibility in rural NWFP is IVilbgeswithall-weathermotorableaccess Villages withoutall-weathermotorable access associated with lower human development indicators Education indicators are low in communities with low transport access. In rural NWFP, according to PIHS data, communities with similar degree of school availability have different primary net enrolment rates depending on their degree of endowment of all-weather motorableroads. The impact is particularly large for girls (Figure 4.4) but also significant for boys. In addition, improved health PSVor <=I km distance indicators such as more fi-equent pre-natal medical consultation for women, more child births attended by skilled personnel, higher incidence of post-natal consultation, and fewer births at home, are associated with the presence of all-weather motorable access in addition to the availability of health facilities in the village. 4.16 The foregoing state of affairs can only be corrected if the Governmentsets itself reasonably ambitiousgoals for human development outcomes over the medium and long term. The strategy for achieving this should be an integral part of the province's growth strategy. Raising the skills level of labor over the medium to long term and improving health conditions are essential for faster long-term productivity growth. The Government should aim for: raising the net enrolmentratio in priqary education fiom 47 percent in FY05 to 66 percent by 2015; substantial increases in seconclaryschool knrolment and average years of schooling; and improved quality of vocational training and college education, linked to the needs of the private sector. In terms of primary education the mentioned goal means that annual net enrolment for 5-9 year olds will need to increase fiom 1.7 millionstudents in FTf05to 2.3 dillion in 2010 and to 3.0 million by 2015. 4.17 In health, the Government should raise the immunization rate for chllldren 12-23 months to 80 percent by 2015 (from 57 percent in 2001102). This implies that the number of children to be immunized each year would need to rise from 0.99 million in 2004 to 1.3 million in 2010 and 1.6 million in 2015. It should also aim at raising the contraceptive prevalence rate to 40 percent by 2010 and 48 percent by 2015. Given the rate of population growth, even with these efforts the number of mamed females not covered will only decline fiom 2.5 million to 2.4 million by 2010 and to 2.3 million by 2015. 4.18 In water supply and sanitation (WSS), the Government should aim at raising the coverage rate for clean drinking water from the current 66 percent to at least 76 percent in 2010 and 83 percent in 2015. This implies that it needs to expand supply to 18 million persons in 2010, up from currently 13 million persons, and further to 21 million persons in 2015. It should also aim at increasing access to toilets to 78 percent of the population in 2010 and to 85 percent in 2015, or 18 and 22 million persons, respectively, up from cunently 14 million. Access to sewerage should increase fiom currently 7 % million persons to 10 million in 2010 and further to 12 %million in 2015. B.1. Incomplete Administrativeand Functional Devolution 4.19 Devolution in the NWFP, as in the rest of Palustan, has been a radical change, with the main responsibility for the delivery of education, health, water and sanitation, roads and transport, and agriculture services devolved to district, tehsil,and union governments. New political structures for local governments and new arrangements for intergovernmental sharing of resources have been established, large numbers of staff have been transferred fiom provincial to local governments, and an entire new administrative system has been set up at the local level. 4.20 The link between devolution and improved service delivery is not obvious, and cross-national evidence suggests that devolution is neither necessary nor sufficient for improvements in services. In the Pakistan context, however, given the failures of the past, the question is whether or not devolution provides a better alternative to more centralizedefforts at improvingservices. The effect of devolutionon service delivery depends on three factors. 4.21 First, local policy-makers, in particular nazims, must have a greater incentive to improve the services of citizens as compared with provincial and national policy-makers. The main logic of devolution is that bringing government closer to the people increases the accountability of elected policy- makers to the public, and creates the necessary incentives for these policy-makers to act on the public's demands for improved service delivery (citizens' voice). However, it is unclear whether this has banslated into incentives for improving services in the province. Local politicians are subject to the same pressures of patronageas their provincial and national counterparts and pressures for politically-motivated recruitment and for constructinglocal infrastructureprojectsremain strong. 4.22 Second, for this increased voice to be effective, policy-makers must also have sufficient managerial authority over their staff, and must be able to hold them accountable for failures to improve services. In many ways, managerial problems, such as staff absenteeism, are the critical constraints to improving services in Pakistan. These are likely to worsen if there are unclear lines of accountability between local service providers and local policy-makers, including those caused by competition between local and provincialpolicy-makers-reflectingpolitical tension--overcontrol over personnel. 4.23 Bird,servicedelivery can be improved by giving citizens greater control in the management and oversight of service providers ('short route of accountability' or 'client power'). This approach can at times be more effective than efforts to make service providers more accountable to policymakers and policymakers,in turn, to citizens.The LGO and the Police Order provide for community involvement in service delivery through Citizen CommunityBoards (CCBs)and Public Safety Commissions. 4.24 This section explores the two key aspects of administrative devolution in the NWFP: (i) the limited managerial authority of local governments,and (ii) the limited community involvement in service delivery;and evaluatesthe degree of defacto administrativedevoluti~n.~~ 59 i. Limited managerial authority of local governments 4.25 In the NWFP, duality of administrative control by the provincial and local governments over local staff - with regard to recruitment and transfers and postings; centralization of administrative powers within the districts; and limited devolution of water and sanitation services - combined with weak monitoring mechanisms have reduced the ability of policy-makers to hold front-line service providers (teachers, nurses, doctors and WSS staff)to account, thus reducing the effectivenessof service deliveryin education,health and water supply and sanitation. 4.26 The provincial and local governments both have de facto administrative control over local staff, resulting in dual accountabilities that undermine incentives for performance. Although the authority over recruitment and career management of staff in grades 1-16 has been formally transferred from the provincial to the local governments, the provincial government continues to exercise considerable authority in this area over personnel located in the districts. This duality of control undermines the reporting relationship in the district managerial structure and thereby reduces the accountability of teachers, nurses, doctors and other front-line service providers to the district government.60 4.27 The limited managerial authority of local governments is most clearly evident in the high frequency of staff transfers. The service rules specify that staff should remkin in their posts for a minimum period of three years. However, in practice staff transfers are endemic, both in the provincial and local governments, reflecting political pressures. In districts in which local govmments are controlled by parties in opposition to the provincial govemment -such as Kohat, Tank, and particularly Bannu - politically-motivated staff appointments and transfers were a commonly cited problem as undermining local control in personnel management. The majority of these were iintra-districttransfers of staff in grades 1-16, instigated by senior district staff under pressure from theprovincial government. There were also numerouscases of senior &strict staff being transferred without spy consultation with the district nazim, as required under the Rules at the time. 4.28 Devolutionin the NWFP has, ironically, led to a high degree of admiaistrativeand financial centralization within the district government. This undermines the eff~ciiefunctioning of the district administrationand impacts budget execution and service delivery negatively. In the NWFP, the authority over appointments,postings and transfers (APT) of personnel is now much more centralized than in Punjab and Sindh (Table 4.7). In the NWFP, the APT authority rests &lmostentirely with the DCO, who remains part of the provincial service (or the federal DMG). Moreover, the current set-up is much more centralized than the pre-devolution arrangements (Table 4.8). Given that the human resource management capacity of the DCOYsoffice is very limited, the DCO does not have adequate resources to handle APT cases on a timely basis, and results in considerabledelays, for instdce in disciplinary cases 58The evaluation is based on detailed fieldwork iYom three districts (Kohat, Bannu, and Tank) and a selection of tehsils within them. 59The reason for this focus is that political incentives of local policy-makers are unlikely to change much over the medium term, and that managerial authorityand client power are likely to have a more significant impact on service delivery than citizen voice. 60For instance, while the DCO reports to the nazim at the district level, he or she remains part of tha federal District Management Group or the provincial administrative service. Thus, his or her promotion and transfers are w a g e d outside of the district. Similarly, while the EDOs report (formally) to the DCO, their promotion and transfers are determined at the provincial level. against teachers showing excessive absenteeism. The DCO is also burdened with a host of petty human resourcematters that detract himher from devotingsufficienttime to more urgent policy matters. Table 4.7: Administrative Authorities of District Government Officials District Appointment Authorities District Posting and Transfer Authorities NWFP I Punjab I Sindh NWFP /Punjab I Sindh i k DDO None ( None 1 Grades 1 -2 None (None 1 Grades 1-2 None None Grades 3-5 None None Grades 3-5 None IGradesl-10 Grades6-8 INone Gradesl-10 iGrades6-11 Grades 1-15 Grades11-15 Grades 9-11 Grades 1-16* Grades 11-18 Grades12-15 )Nazim 1None I None I Grades12-15 1None IGrade 19** 1 Grades16 -17 * ED0 in consultation with the DCO, with this consultationbeingmandatory ** Except EDOs and DOs Source: Government of the NWFP, District Government Rules of Business. 4.29 In certain sectors, in particular water supply and sewerage, lack of effective managerial control has effectively resultedin a lack of functional devolution. The LGO specifies that in districts other than city districts, TMAs are responsible for the delivery of municipal services, including water supply, sanitation, and solid waste disposal. It was envisaged that the staff of the Public Health and Engineering Department (PHED) would be devolved to the TMAs to provide them the necessary capacity to perform these functions. However, in the NWFP the PHED staff was not devolved to TMAs, but was instead merged with the district Works and Services department. TMAs were left with only the staff of the erstwhile urban councils, and therefore have the capacity to only initiate small urban schemes. Hence, while the TMAs have the legal mandate, they lack the requisitestaff, and the districts, which do not have the legal mandate, now have the staff and are de facto providing these services. This confusion in roles and responsibilitieshas compromised the planning and implementationof WSS services and has in some cases resulted in the duplicationof services. 4.30 Ensuring merit-based recruitment of district personnel also remains a key challenge in the devolved set-up. Incentives for patronage are the underlying political reasons for the decline in the quality of public administration in general, and for the tensions between the provincial and local governments regarding managerial authority over local govenunent staff. The fieldwork revealed numerous cases where recruitment was being carried out without following established administrative procedures. The need to ensure merit and transparency could be addressed by giving the Public Service Commissionoversight over recruitment of district staff. Table 4.8: Pre- and Post-DevolutionAdministrativePowersof LocalGovernmentOfficers Pre-devolution Post-devolution Appointmentauthorityfor staff in grades . 1 -4 . 5-9 ..DistrictEducationOfficer Schoolprincipal(grade17-18) ..DCO(grade19 (grade 19-20) 10-15 DCO -20 .(grade18 -19) DivisionalDirector(grade 20) .DCO (grade19-20) Postingsand transfersof grade 1-16 District EducationOfficer ED0 to recommend;approval by DCO required Postingsand transfersof grade17 and Provincialgovernment* aboveposted inthedistrict LeaveSanctionAuthority Same as appointing authority Same as appointingauthority Disbursementof RetirementBenefits Same asappointing authority Same as appointingauthority Authorityfor DisciplinaryAction Same as appointing authority Same as appointingauthority * Initially,these required consultation with the district nuzirn. In 2003, the Rules of Business were amended and consultation is now no longer required. Source: Government of the NWFP, District Government Rules of Business. 4.31 Institutional mechanisms for monitoring service providers are largely non-functional. Monitoring committees are subcommittees of the district, tehsil, and union councils provided in the LGO for the political oversight of service providers at the service facilitylevel. On the whole these institutional mechanismsare not performing as envisaged, and therefore are not effectivein reducing staff absenteeism and improving service delivery. As a result of the provincial government's continued authority over personnel located in the districts, monitoring committees are unable to elicit any response from the local bureaucracy on their recommendations to reduce the serious problem of staff absenteeism (teachers, nurses, doctors et~.).~'This has made them largely non-functional. ii. Limited community involvementin service delivery 4.32 Service delivery can also be improved by strengthening the direct linkage between citizens and service providers, or by increasing client power. While the LGO provides for a number of institutional mechanisms for community involvement in service delivery, to date these have had limited effectiveness in giving citizens control in the managementand oversight of service providers (aswell as in planning and executing development schemes. Citizen Community Boards (CCBs) have yet to achieve the degree of functionality envisaged in the LGO, and while in the NWFP over 3000 CCBs have been regstered to date, very few have received funds. A major reason for this non-functionalityis there is a question mark around the local political leadership's ownership of the concept of CCBs, with nazims and councilors often viewing CCBs as competitors for scarce development funds. Similarly, there are also weak mechanisms for involvement by other community-based groups such as Parent Teacher Associations (PTAs); District Public Safety Commissions @PSCs); road users; and user groups for other public services. 4.33 As a result of weak mechanisms for monitoringservice providers through monitoring committees and limited community involvement in monitoring and in consultation on investment planning, the quality and access to health and education services suffers, in particular in rural areas. Absenteeism of service personnel (teachers, nurses and doctors) in the public sector is prevqlent and persistent. Basic health units and clinics are often withoutmedicines and other necessary supplies. iii. Capacity constraints 4.34 Even if the proper incentive structure is put in place -as in (i) and (ii) above - the lack of capacity in district govemments and TMAs will constrain the ability to act on these incentives. There are acute staff shortages and lack of skills in the districts and TMAs. The skillsdeficiency is worst in the TMAs where inadequate devolution of requisite staff has led to weaker technical capacity, and has a special bearing on WSS service delivery. 1 Against this background,the followingactionsfor devolutionare recomme/ndedfor the near term: 4.35 The government should decentralize administrative and finanqial powers ,of key local officers. Appointing, promotion, and transfer authorities should be as folloTs: DDODO: grades 1-5; EDO: grades 6-11; and DCO: grades 12-15/16. In order to impf'ovethe efficiency of budget execution, financial powers of the key district officers should be restored to their prh-devolution levels: EDO: CategoryI; DO: Category 11;and DDO: Category ILI. For example, the education monitoring committee in Kohat had prepared an elaborate program for the detailment and relocation of teachers so as to situate them closer to their villages, thereby reducing incentivesfor seeking traqsfers. Ilowever, there had been no response from the ED0 Education on this plan. Committee members also complained that the respective EDOs never attended the districtcouncil sessions when the committeereportedits findings. The committee had also developeda systematic procedureof school inspections,but was fixstratedby the lack of action on its recommendations. 4.36 The Public Service Commission should be given oversight over recruitment of district staff to ensure merit and transparency, particularly for key service delivery staff, with commensurate strengthening in capacity. In the short term, district staff in grades 11-15 should be recruited through the Service Commission. In the medium term (3-4 years), the Commission could be given oversight in the recruitment of key service delivery personnel, such as primary school teachers, where pressures for patronage are particularly hgh. 4.37 Empower monitoring committees and community-based organizations to strengthen their involvement in monitoring of service providers and in planning of investments. While monitoring committees shall not have any executive powers, the Government could still involve them formally in the budget process; provide them with adequate resources for facility inspections; and require government hctionaries to regularly report to monitoring committees. Regarding community involvement in education, empower PTAs to recommend other disciplinary actions in addition to transfers of negligent teachers, and build capacity and awareness of PTA members. In the road sector, involve beneficiaries in road-related decisions by including road user representatives in the Frontier Highways Authority (FHA) board, and involving communities in designing and implementingrural access and mobility improvement schemes. Recommendationsfor DevolutionActions over the Medium Term 4.38 Reduce staff transfers through oversight by the Public Service Commission. Involve the PSC in vetting requests of transferring senior staff in less than the three years as set out in the Service Rules. It should be noted that in the past, service commissions in Pakistan were indeed involved in postings and transfers of officers, in addtion to their role in re~ruitment.~~ 4.39 Complete province-local governmentfunctional devolution.The provincial government needs to decide whether TMAs or districts will deliver water and sanitation services, and then provide that tier with the resources and the staff to deliver these services. Ideally, this responsibility should rest with the TMAs, accompaniedby the requisite transfer of PHED staff. 4.40 Create a local government service. Over the medium term, effective administrative devolution will require the creation of a local government service. The most appropriate structure of the service would likely be in two parts where one part would provide the senior staff in the district with the reassurance that they have both security and career prospects, while ensuring that all staff in the districts, senior and junior, are managed only from within the district. One method for achieving this is to create a distinctLocal Government Careerservice, for which the district governmentis the employer and assumes responsibility for preparing the salary budget, recruitment, career management and performance management for junior staff. The Public Service Commissions would oversee the quality of the recruitment processes, but would not be involved directly in the recruitment. Salaries of these staff would be paid through Account 4, with the districts able to retain savings that accrue fromthe abolition of posts. 4.41 In parallel, provincial staff in grades 17-20 could apply to join a Provincial Local Government Service and serve in a specific district for fixed-term appointments while retaining their substantive appointmentwith the province. 62In the past, service commissions handled the career planning functions bastings, transfers, and promotions) that presently are under the purview of the Establishment DivisionlDepartment, as well as the judicial hearings (e.g., in the case of disciplinary matters) now under the ServicesTribunal. 4.42 Increasingcitizen voice. As discussed above, sustainableimprovements in service delivery will require a change in incentives for patronage, which in turn will be dependent on increasing the accountability of policy-makersto citizens. International experienceshows that making more information available to citizens about government service delivery, can have a significant impact on increasing citizen pressures for improving services. 63 64 4.43 There are a number of district-level data sources that the Government of the NWFP can use to increase public awareness of the quality of service delivery and thereby generate pressures to improve services and reduce staff absenteeism. These include (i) regular ClET Social Audit surveys which measure citizen satisfaction with a number of services, such as education, health, water supply, and police;6s(ii) the Core Welfare Indicators Questio~lnaire(CWIQ) survey when regular provision of these intermediate and outcome social indicators is well established; and (iii) if Monitoring Committees are strengthened, their reports could be used to increase citizen awarenessof facility l~evelperfomlance. B.2. Weak MonitoringandEvaluationSystems 4.44 Monitoringand evaluation systems in the NWFP are weak, and there is much scope for aligning policies and resources better with the government's stated policy objectives. Policymakers need good, reliabledata on the state of outputs and outcomesin the health and education sectors to measure progress, and a good analysis of causality between policy measure and results to understand which specific policy measures work best in the specific circumstances of the province - cultural or other - that may vary between provinces. The government needs not only to ensure that it is doing the right things, but also that it does them well -i.e., that implementationis effective. 4.45 The provincial government's management information systems (the Health Management Information System (HMIS) and the Education Management Information Systylm (EMIS)) do not meet the mentioned requirements for policyrnakers. They are not real time informaltion tools for provincial managers and do not provide accurate, reliable and timely information to inf~rmpolicy decisions. In addition, the govemment is limited in its capacity to analyze availabledata and derive the relevant policy implications. 4.46 The lack of systematic monitoring and evaluation likely reflects three facts: (i) that line departments and the govemment have not made improvedoutcomes(enrolment rates, immunizationrates, matemal mortality rates, etc) the focus of their job. Instead, the authorities have emphasized,inputs such as expenditures, frnancial resources, and processes; (ii) that there are no specialized staff to analyze or contract out the analysis of existing data; and (iii) that the line departments have a conflict of interest in that they do not want to make known any informationthat would reflect poorly onl their effort$. Recommendations 4.47 The Government needs to strengthen the HMIS and EMIS and turn phem into real time and accurate information tools for provincial management decision-making. It should strengthen the MIS units that can assess education and health system performance and provide feedback to, high level decision-makers, line departments, district governments, and the public at lkge. Such qnits should analyze various types of data coming from household surveys, facility assessmnents, and management 63The World Bank (2003) provides a number of examples of the impact of increased information. 64 For example, use of Citizen Report Cards and Public Expenditure Tracking Surveys, and publicizing these results, have had some success in countries such as India, Uganda, Philippines, and Ukraine in building the public awareness that was necessary for buildinggreaterpoliticalcommitmentto improve services. I 65Examplesfromother countries includethe Citizen Report Cards used in India (World Bank, 2003). @) information systems to spot problems and track changes. Better monitoring and evaluation by itself will likely improve performance by increasing accountability. The unit should be headed by a technically competent person. In order to be effective, the unit would need to have regular access to high level decision makers to keep them properly informed. 4.48 The unit should carry out a number of activities including: (i) regularly disseminating to the public "league tables" of performance by district; (ii) helping district governments analyze the performance of their own facilities (schools, clinics, hospitals etc.) to see where weaknesses lie; and (iii) ensuring that monitoringand evaluationof the new policy initiatives is carried out systematicallyand the results used to modify programs or policies. 4.49 In addition, the provincial government could make better use of existing national-level data collected by the Federal Bureau of Statistics, such as the Pakistan Integrated Household Survey (PIEIS) and the Labor Force Survey. It should also aim at using the PTHS data and the PSLM-CWIQ data to provide a check on the quality of the outcomes data reported in the MIS and establish incentivestructures in MIS to improve the reliability of the data and minimize the gaps with independentsurveys. The PSLM- CWIQ provides very recent (2004105) provincial and district level data on key health and education outcomes, as well as on satisfactionlevels with other government-providedservices. This data set will be useful to establish the baseline for a number of district-level social indicators and intermediate service delivery outcomes. m s could be used to improve the basis for the Provincial Finance Commission Awards formula with more updated information. It would also identifjr the districts where more focused attention by the government is needed. It is expected that PSLM-CWIQ data on service delivery at the district level will be provided on a regular basis. While this should improve the quality of the monitoring data, additional monitoring data is also needed-in the case of education,one example would be data on learning achievements by each school. B.3. Lack of Access to Transportin Rural Areas 4.50 Another systemic cause of poor service delivery in the province is the lack of access to transport in rural areas that limits access to education, health, and other basic services. Road accessibility is a prerequisite for receiving these services, and therefore the sparse road network acts as a constraint on service delivery to potential recipients in remote areas. Improving the provincial road transport system and infrastructure can also contribute to faster economic growth by reducing transport costs-a major competitive barrier for firms in the province. 4.51 The poor road accessibilityreflects several underlying problems in the transport sector. (i) There is no clear unified governmentpolicy regardingthe transport sector. The sector's legal framework comprises several laws and regulations, including federal legal fi-amework for civil aviation, railways, and national highways.66 Responsibilities, funding, and capacities are misaligned between levels of government. With devolution, planning and provision of local transport infrastructure and services are now the responsibility of local governments, whose priorities may not be aligned with those of provincial or national governments. Furthermore, local governments' technical, financial and managerial capacity has not been strengthened in line with their increased responsibilities and prerogatives. While policy 66 At the provincial level, the Motor Vehicle Ordinance of 1965 regulates motor vehicles registration and creates Provincial Transport Authority(section 46(l)(i)). NWFP Ordinance XIX of 2001 establishes the Frontier Highway Authority (FHA). The NWFP Local GovernmentsOrdinance No. XIV of 2001 provides for the extensive devolution and decentralization of powers to local governments:districts,tehsils, and unions. decisions are supposed to reflect the real needs of the population, this has not yet materialized, mainly because of the mentioned capacity constraints. The effect is already seen in the deterioration of district roads because of inadequatemaintenancein recent years. (ElThe funding for maintenance and repairs of roads is inadequate and unpredictable. Funding of road infrastructure maintenance and repairs has varied considerably in the past and declined severely in 2001/82 and 2002/03 to an alarmingly low level. Works and Services Department and FHA estimate that the backlog of maintenance and preservation needs is approximately Rs 500 million annuallyover the next fiveyears. In particular, district roads have received little h d s for maintenance- less than Rs 18million on average in the past two years and well short of the economically justified road expenditureneeds. (iv) New start-asps proliferate and priority is given to new developm~entsover maintenance and preservations of efisting infrastructure.The 2004/05 annual development program comprises 249 ongoing projects and 25 new ones. The large number of projects exceedsthe capacity for implementation and the availability of public investment finds; hence both resources are very thinly spread. The ADP throw-fomard ratio in the roads sector is very high (14); meaning that if the utilization of the ADP's allocations continues at the current average levels, the province will require 14 years to implement this portfolio. Such delays cause huge economic losses for the province in the form of higher fiscal costs and lost economic growth. (v) Resonrse mobilization from road users is inadequate and ~ o used to fund road t maintenance and preservation. The proceeds fromroad-related taxes are treated as general tax revenue and are not all allocated for funding the road programs. As a result, road funding is insufficitmt, uneven, and unpredictableand depends on general budgetresources in competition with other sectors. 4.52 Against this backgouad it is recommended that the government's agenda for improving the transport sector's performance include the following: P Develop a provincial transport policy and strategy. The policy shovld take into account the new roles of various levels of govement after devolution. The provincial govement, through a set of incentives to districts, could support programs with spillover effects or externalities beyond district boundaries. Improving transport access and mobility in rural areas should be given top priority to improve their access to social services and bring them into Qe economic mainstream. The objectives for rural transport should target areas with high levels of lpovertyand emyhasize labor-based construction methods as a means to generate employment. Transport sewices should be regulated in a way that even when the market functiotnsinefficiently in remote areas, the poor rural population is not deprived of the services. P Improve transport planning at d l levels of governmeots, and for horizontal and vertical cosrdha&isnin order to improve the quality of public expen~litureson rdads and the balance between road maintenance,preservation, and improvement. P Make funds for road maintenance and preservation sustainable and predictable, by establishing a road asset management system and dedicated road inaintenancc! fund with increased contributionsby road users. > Put in place incentives to promote better and more participatory planning and accountability.Road users should have a say in ensuring their contribution is used efficiently by having representatives in the FHA board, and by involving communities in designing and implementingrural access and mobility improvement schemes. > Implement quality standardsfor trucking services including by more effective enforcement of vehicle loading limits. Improve the efficiency of road infrastructure use further in urban areas through improved traffic management, public transport licensing policies and control of roadside activities. > Put in place a monitoring and evaluation system to assess the impact of sector policies and provide a feedbackto planners, decision-makers,and stakeholders. Further analysisshould also be carried out to assess the performanceof the freight sector, urban transport and their effect on trade and growth. Education 4.53 The chief reason for the unsatisfactory state of education in the NWFP is that too few children, especially girls, attend school. School attendance in rural areas is much worse than in urban, with the lowest attendance being that of girls in rural areas. These problems are further exacerbated by very high drop-out rates. Meeting the medium- and long-term targets for enrolment that the province has set for itself is a considerabletask. The central issuesare: > How can the province meet its primary school enrolment targets (see section A) by improving access to and the quality of education? How can the provincemake the educational system moreaccountable both to the government and to the community? 4.54 Access to education is constrained by a number of factors: Long distances to the nearest school influence school attendance in remote areas in the NWFP, in particular of girls. The limited number of secondary schools (116~~the number of primary schools) limits the share of students that continue their studies fiom grade 5 to 6. This is particularly severe for ~ r l s .Table 4.9 shows that the gender difference is particularlystark regardingthe availabilityof public middle schools. Girls' restricted mobility makes proximity to schools and reliable transport critical for increasing their enrolment. This is even more crucial for enrolment of adolescent girls. Families report much higher travel expendituresfor girls who are 13 or older and probably enrolled in middle school and beyond-even after controlling for distance to school (Palustan Country Gender Assessment, World Bank 2005). As girls reach middle- school age, the direct cost of sending a girl to school seems to increase sharply. The rise in travel expenditures does not appear to occur for boys of middle-school age. Parents may pay higher transportationcosts for middle or highschool-agedaughters in order to ensure safe passage. Table 4.9: Access to Schools in Rural NWFP, 2001102 (Percent) I Within ( 1-2 kmsfrom ( 3-5 kms fromI>5 kms fromI I community I community ( community ] community Public primaryschools for girls 1 79 8 5 8 Public primary schools for boys 92 2.5 0.8 4.3 Public middleschools for girls 22 15 28 35 Public middleschoolsfor boys 43 15 23 19 Note:The tableshows, on average, distance in kilometers fiomcommunityto schools. Source:World Bank staff calculationsusingthe rural communitysurveyfromPlHS 2001102. 4.55 Although the government has substantially reduced the monetary cost of schooling in recent years, in particular at the primary level, the opportunity cost of the children's time from schooling might still deter poor families fiom sending their children for primary education. This could be addressed by cash transfers to the poorest that are contingent on their children attending school. Parents also have specific concerns, mostly related to security and facilities at the schools, with particular importance for girls' schooling. 4.56 The avanability of qualified Figure 4.5: AverageNumber of QualifiedWomenin teachers is a factor both regarding the Rural Communities, :2001/02 supply of and demand for girls' education. Government schools (and most private schools) for girls require female teachers. In addition, private co- educational schools overwhelmingly hire female teachers (due to lower wages for equivalently educated women). Currently, there simply are not enough educated women in many villages in the province to staff a school re for -@rls 4.5). Significant Wnjab Sindh W Bab$hiitan barriers to female mobility prevent educated women from relocating or 81 CwrpletedGrade 8 CompletedGrade10 commuting to localities with teaching jobs. lt is therefore necessary to Note: "Qualified women denotes women between ages 18 and 50 who have completed at least Grade 8(middleschool) or Grade 101(high school). a sufficient of qualified Source: PIHS 2001/02household data. teachers fiom the local community to expand school access at the primary level. Achieving this will require complementary public investments in mddle and high schools for girls as well as incentive mechanisms that ease school access. It also requires one to be sensitive to the time-lags that will necessarily be involved in building up the requisite cadre of qualified female teachers. Hiring and retaining female teachers thus will remain a pqoblem, and ironically this problemwill be at its worstin preciselythose areas that are poorly served at prekent. 4.57 The Government can only reach the goal of education for all by fa4iilitating private sector provision of education to overcome the capacity constraint of public supply. The private sector already accounts for almost a third of total primary school enrolment, reflecpng widespr$ad lack of satisfaction with the quality of government education. The NWFP's private sector still has considerable scope for providing additional schooling. In 2001102, the net primary school eprolment rate in private schools was only 8 percent compared with 15 percent in the Punjab (Table 4.10). The provinciial Frontier Education Foundation (FEF) and Elementary Education Foundation (EEF) were s ~up t to facilitate private education. However, they are involved in direct provision of education by settirig up and m i n g new schools (EEF) and women colleges (FEF) themselves. There is no clear exit strategy. Their stated objective of developing the private sector in school supply is regarded as a low prionty. Household expenditureon education in private schools is much higher than in government qchools @EX$ 2001102). While the majority of children fiom households m the top income quintiles go to private scljools at the primary level, the vast majority of children in the three lowest income quintiles go to public schools for affordabillty reasons. For the same reasons, the potential for increasing private schooling for lower income groups without specific policy measuresin this area is limited. Table 4.10: Net PrimarySchool Enrolment Rate by Public and Private Schools, 1998199and 2001102 (percent) 11 1998199 PIHS 2001102 PIHS Govt 1 Private I Total Govt I Private ( Total Schools Schools Schools Schools P Pakistan 12 42 30 12 42 Punjab 15 44 30 15 45 Sindh 12 41 30 10 40 M P 6 39 33 8 41 ( Balochistan ( 35 1 1 36 30 2 32 I1Aee 5 - 9.ExcludingKatchi Class. ~ourL: PIHS 199819~2001102. 4.58 The Government can improveaccess to educationby: 9 expanding the number of secondary schools to meet the increased demand from students completingprimary schools; 9 introducinga pilot stipend scheme to students in both public and private schools; 9 providing missing facilitiesto the remaining secondaryschoolsfor females; 9 subsidizing secure travel arrangements for female teachers and students in remote areas and increasingstipends for femalestudents; and P tailoring interventions to the specific binding constraints that vary between districts including lack of access to transport in remote areas. It can improve private provision of education services by making the two provincial Education Foundations autonomous apex organizationsthat assist private educationalinstitutions through grants and concessionalloans and students through capped School Vouchers. These Foundations should not provide education services directlyand should be financiallysustainable. 4.59 The quality of public education in the NWFP has great potential for improvement. The central cause of the poor quality of education in the NWFP is flawed governance. This results in inadequate accountability by school management and teachers, low teacher attendance, school closures, poorly qualified teachers and/or long periods when schools are without a teacher because of slow recruitment,and a serious shortage of schools in rural areas. Moreover, allocated non-salarybudgetfunds, including PTA funds on instructional material, often do not reach the intended local school owing to leakages. All this takes place within a framework that lacks reliable monitoring indicators and good analysis to inform policy makers about educational outcomes as well as the problems that schools and communities face in providingeducational services. 4.60 A successful strategy to improve quality of education needs as a minimumto ensure: (i) that schools are made accountable for their education results and that teachers are accountable for being present at school and teaching; (ii) that qualified teachers are available; (iii) that potential providers compete against each other; (iv) that indicators on educational outcomes, teacher attendance, etc., are reliably monitored;and (v) that allocatednon-salary funds reach the schools. 4.61 In order to ensure better teacher attendance and qualified teachers the Government could take the following actions (in addition to the accountabilitymeasures in the devolution section above). 4.62 In other provinces of Pakistan, teacher absenteeism is an important contributor to lower quality of education and high dropout rates. In the case of the NWFP, further work is necessary to identify whether teacher absenteeismis a major problem. The data set fiom the PSLM survey 'can help to ascertain the extent of the problem, as well as other factors, such as the lack of text books and other teaching aids. In the meantime, improvements withn the government structure could be achieved by making all new teacher appointmentsschool-specific,and improving incentives for better perfdrmance by malung contract renewals contingent on performance. Allowing contract teachers to be transferred instead, as recently done, would make themless accountable. 4.63 Improving monitoring of teacher attendance. Particularly in remote areas, schools are rarely monitored, especially regarding the attendance of teachers- surveys show that some schools have not been visited by government officials even once over a two-year period. The Government can address this by increasing funding for monitoring and reducing the number of schools assigned to each ADEO. This would enable education officials to supervise each school more frequently. Furthermore, facilitating stronger involvement by parents and the local community through PTAs can empower communities to recommend other disciplinary actions in addition to transfers of negligent teachers. The Government could also build capacity and awareness of PTAs to all districts through targeted training programs; distribute PTA school funds for repair and maintenance on the basis of enrolment and give PTASmore flexibilityin using these funds; and ensure school specific budget for primary schools and transparency of budget information to the public to check leakagesof school h d s . Over the long term, when the capacity of PTAs has been substantially strengthened the Government could also make the schools even more accountable to the communityby giving parents the right to hire and fire teachersthrough the PTAs. 4.64 Ensuring qualified teachers and improving school management. The process of appointing teachers should be streamlined to minimize periods when schools are without a teacher (currently recruitment takes 6-9 months). The Government could make postings in remote areas more attractivefor female teachers by offering substantial salary and training incentives, allaying security cbncerns by subsidizing secure travel arrangements and providing security guards at the school as well as adequate school facilities. The Government should implement the intended separation of the teaching and management cadres in spiteof some patronage-motivatedopposition. Both cadres should be supportedby strategic professional development plans and training. School management should be made qccountable for poor performance, including for excessive absenteeism of staff. The Govern~nentshould implement the intended teacher rationalization in an equitable manner in consultation with stakeholders to ensure politicalbacking at all levels. 4.65 The government can also encouragecompetitionas a meansto improve quality.Encouraging competition among potential suppliers would involve providing low-income families with the means to choose whether to send their children to a private school or a public school. These means could be provided in the form of school vouchers to cover tuition and other expenses of education. This would provideincentives to private schools to vie for new students, raising enrolment and providingcompetition to poor public schools. Given the limited student mass in rural villages with typically only one school, competition between different schools would primarily be in urban areas. The management of chosen public schools could be contracted out to an NGO for a management fee (as in a current scheme in the Punjab). Competition could also be facilitated by providing transport subsidies to studentp in remote areas to reach schools further away. Facilitating competition through increased involvement by the non- governmentsector should be a central part of the remit of the two provincial educ,ationfoundations (FEF, EEF) rather than directly providing education services themselves. 4.66 Adequacy of public education spending. There has been a robust increase in education spending in recent years. The share of education spending in total provincial spending increased from 22 percent in 2001102 to 28 percent in 2003104. The share of development spending in education went up from 0.5 percent to 4.5 percent. Table 4.11 shows robust increases over this period in non-salary recurrent expenditures as a share of total government expenditures in schools. Table 4.12 shows very rapid increases in nominal development expenditure to both schools and colleges in the same period, more so to schools. However, survey evidence and discussions with stakeholders suggest considerable uncertainty associated with the disbursement of non-salary funds to schools, and funds earmarked for supervision of schools are utterly inadequate. Table4.11: NWFP: Structure of EducationExpendituresin Public Schools, 2001102- 2003104 Current Expenditure DevelopmentExpenditure Salary Non-Salary Infrastructure Non-Infrastructure Percent Percent Percent Percent Percent Percent Percent Percent of Total of GDP of Total of GDP ofTotal of GDP of Total of GDP Years I Exp. Exp. Exp. GDP Exp. 2001102 1 22.8 2.51 1.1 0.12 0.1 0.01 0.03 0.00 2002103 22.6 2.44 1.2 0.13 1.4 0.15 0.46 0.05 2003104 20.2 1.3 2.4 0.90 Source:Governmentof the NWFP. Table 4.12: NWFP: Expendituresin Public Schools and Colleges, 2001102-2003104 Schools College Current Development Current Development Million Percent Percent Percent Percent Rs of GDP Rs of GDP Rs of GDP Rs of GDP 2001102 9,476 2.6 56 0.02 520 0.14 19 0.01 2002103 10,113 2.6 802 0.20 670 0.17 216 0.05 1 2003104 ( 101528 1,638 1 695 361 Source:Governmentof the NWFP. 4.67 However, the increase in public spending on education has so far not improved educational indicators much. According to data from the 2001102 PIHS and the recent 2004105 PSLM survey, gross enrolment in government primary schools during FY02-FY05 grew only from 63 percent to 64 percent. These figures indicate very limited effectivenessof the increased spending.67While increasing education spending is necessary for improving outcomes, the spending must be more carefully targeted and its quality improved. Implementing the set of education sector reforms and cross-cutting reforms described in this chapter should enhance the effectivenessof public spending on education. 4.68 Migration: Implications for Education Policy in the NWFP. Upgrading the skills of the work force is a long-term endeavor that must start with improved primary and secondary schooling, since untrained and illiterate workers do not benefit much from training later in life. The college sub-sector should be linked directly to private employers in order to identify the qualifications that are in high demand in the provincial economy, and strategically redirect the teaching resources accordingly. Slulled workers are in higher demand and are more likely to migrate. Hence the province needs to significantly increase the education level of its workforce, both of potential migrant workersand of the work force that will remain and drive its economy. This must start with improved primary and secondary schooling. 67 Data currently available show that gross enrolment in government schools over FY02 - FY04 stagnated at 27 percent for middle schools, and decreased From 23 percent to 21 percent for high schools. NWFP EMIS data @p. 2-3) collected by the NWFP Government are used here, and are at variance with the PIHS data collected by the Federal Bureau of Statistics. The discrepancybetween the two sources ofdata needsto be resolved. In general the PIHSdata are considered more reliable. Health 4.69 Improving healthsector outcomes in the provinceis crucial to any long-termstrategy for reducing poverty. In addition to the systemic issues that affect service delivery generally (discussed earlier in this chapter), several mattersimpactspecificallyon the health sector and are covered in this section. 4.70 Low public expenditures and need for improving expenditure compositioli: Countrywide, public expenditure on health constitutes about 0.5-0.7 percent of GDP, amongst the lowest in the world. During 2001-04 public health spending increased significantly at an annual growth rate of 13 percent largely due to a sharp increase in development expenditures. However, the share of health expenditures in total provincial spending has remained fairly constant over the last decade, fluctuating around an average of 6.5 percent, below comparable figures for the Punjab (but higher than Sindh) (Figure 4.6). Public expenditure in the NWFP on family planning has averaged 0.4 percent of total provincial expenditures, which is similar to the level in other provinces, but represents only a tiny inveqtrnent in an area that has serious long-term repercussions for the province. This contrasts with the large expenditures on hospitals, which represents nearly 5 percent of total provincial spending and more than 80 percent of all health expenditures by the Government. These spending prioritiesshould be changed. The breakdown of expenditure by category in the NWFP is very similar to that seen in other provinces, and indicates a lackof commitment to ensuring delivery of primary healthcare services in the community. 4.71 A more detailed assessmentof the composition of public spending was constrained by the lack of information on key sub-components of health expenditures, including district level data on spending by different categories which are not compiled in a systematic and accessible manner. To determine whether funds are flowing to priority areas or to assess the implications of increased spending on the quality of services, it is essential to have timely data on expenditures by levels of care and disaggregated by salary and non-salary expenditures. At the same time, ensuringthat national prioritiesare reflected at the district level is a major challenge of the devolution process. As a first step this necessitates sound information systems to monitor progress of the reforms and adequate and timely data on expenditures a$ the earliest indication of the direction and prioritiesat the districtlevel. Figure 4.6: HealthSpending as Percentof Total GovernmentExpenditure,1990-2004 I I IF--- NWFP Health as % of total 1 I Source:Government of Pakistan. 4.72 As noted above, total fertility rates remain high in the NWFP. This has a number of serious socio-economic consequences. In addition to the direct impact on women's and children's health and welfare,it is worth noting that no country has ever achieved sustained and rapid economic growth without a preceding and large decline in fertility rates - a decline often aided by effective family planning programs. In the NWFP, differentials in fertility rates by urban-rural residence,education of women, and income level persist. High fertility is associated with closely spaced births and high parity births and is directly linked with neonatal, infant, child and maternal health and mortality. Women's status, in particular female education, is associated with lower fertility attributable to its influence on family size norms, better knowledge and use of contraception and higher age at marriage. Evidence for Pakistan further indicates that maternal education has a positive and significant impact on survival, nutrition, and schooling of children. It is clear that improving access to education for females (as discussed in the educationsection) will have a multiplier effect by also contributing to reducingtotal fertilityrates. 4.73 The health sector has an important role to play in decreasing fertility. Not only is the contraceptive prevalence rate (CPR) low, but there is also a large unmet need for contraception. The unmet need in the NWFP, at 35 percent, is larger than of any other province, and the evidence suggests that the main reason is limited availability and inadequate quality of family planning services. The Government should take steps to increase access and quality of family planning services, in particular by (i) ensuring that all BHUs and RHCs have adequate supplies of contraceptives; (ii) ensuring that female health workers are in place in all first-level care facilities and are appropriately trained, particularly in counseling sblls, and supervised; (iii) increasing the number of RHCs, l X Q and DHQ hospitals that can provide surgical contraception; (iv) ensuring that lady health workers (LHWs) have a full range of contraceptivesto deliver to the doorstep; v) explicitly include improvementin family planningservices as a key objective of the pilot for contracting out managementof primary health service facilities to NGOs; and v) promote involvement of men who are the key decision makers to be more supportive of contraceptive use through use of male motivators and targeting awareness campaigns, social marketing efforts and other interventionsto both men and women. 4.74 Management, Motivation, and Measurement: A core issue in health care delivery in the NWFP as elsewhere is the underutilization of peripheral services for primary care. While the W P has extensive physical infr-astructureof first-level care facilities,the system is inefficient and underutilized by the public. The low level of utilization is partly attributable to the perceived poor quality of services. The main reasons for dissatisfaction have been identified as ineffective treatment, lack of medicines, poor conditionof the facilities, poor treatment by staff, and the absence of doctors. The ineffectivefunctioning of the system is due to "the 3Ms": weak management, inadequate staff motivation, and little emphasis on measurement of results. Management at the district level is limited by lack of strategic orientation and weak management skills. Staff is unaccountable, barely supervised, with little or no incentives for performance, with the result that absenteeism of doctors and other health personnel is high and widespread. Measurement of results is episodic and there is no incentive to use the data that exist. Currently, the provincial government undertakes little systematic monitoring and evaluation.This likely reflects two facts: (a) that the Government has focused primarily on inputs such as financial resources, rather than outputs; and (b)that the provincial line departments, historically the service providers until the recent devolution, have had a conflict of interestin that they are reluctant to reveal informationthat would reflect poorly on their efforts. While more resources for health spending are needed, the bigger issue relatesto the 3Ms. 4.75 Role of the Private Sector: The for-profit private sector is little studied, virtually un-regulated, and provides an unknown quality of care, although it is widely used by all classes of society. The private sector could play a role in achieving the Millennium Development Goals in partnership with the public sector. While the public sector provides about 90 percent of immunizations, the private sector accounts for more than 50 percent of contraceptiveprevalence. It could play an important part in ensuring control of tuberculosis at no additional cost to the Government, as experience in India and other countries workng with private practitionersthrough NGOs has shown. 4.76 A strategy for improving delivery of health services must encompass several elements, with special attention to the following: 4.77 Thefirst element is a willingnessto pilot innovationsand improve implementationcapacity: Progress in provincial health outcomes requires significant improvement in the delivery of publicly- financed preventive, promotive, and curative services. This implies that the top priority of the GoNWFP should be to implement bold reforms and test innovations that can make a rapid difference in public sector performance. As mentioned earlier, the NWFP's fairly elaborate draft health strategy has not been formally approved nor effectively implemented-this for a variety of reasons, i~~cludingtrylng to do too much at once. There is a need to choose a few high priority actions and ensure that these are implemented successhlly. 4.78 There are many refoms that could potentially make a difference, but in order to have a chance of being implemented successfully the Government will need to make some strategic choices. Two reforms that should be implemented on a priority basis in the short term are: (i) contmcting-in management of government-financed primary health care (PHC) facilities (as has been done )in the Rahim Yar Khan District of the Punjab); and (ii) improving the monitoring and evaluation (M&E).Wtion of the provincial government in the health and education sectors through an independent M&E unit. A medium term, but compelling, challenge for the GoNWFPis to more creativelyand effectively influepce the large private health sector so that quality of care is improved. It would also be worthwhile pilot-testing autonomy in a sample of DHQ and THQ hospitals, after having conducted an evaluation of existing hospitalautonomy efforts. 4.79 Second, pilot test of contracting-in management of primary health Care facilities: A number of governments in developing countries have started to experiment with splittiilg the finanking and the provision of health services by contracting out the management of health sqlrvices. The Government should quickly begin a large-scale pilot test in a few districts of contracting wiDh an NGO td manage the primary health care infrastructure (RMCs, BHUs, and LHWs). By carefully evaluating such ii large-scale pilot, the effectivenessof the approach could be determined in the NWFP contpxt. This approach builds on the experience in Rahirn Yar Khan (RYK) District,where the district govemnknent gave a management contract to the Punjab Rural Support Program to run all 104 BIPUs. 4.80 Considerable autonomy was given to the Punjab Rural Support Program to implemerit changes in organization and management. It was also provided the same amount of budget as had prei-iously been allocated for the BHUs. Under this strategy, a number of innovations were quickly introduced.To address the shortage of doctors and high rates of absenteeism, the salaries of selected ddctors were idcreased 150 percent, andthey had to cover three different BHUs insteadof one. The NGO a140 improved the supply of drugs available in the BHUs. As a result of these changes, the number of out-patient visiys more than tripled (see Figure 4.7) and the approach has spread to seven other districts in the Punjab. The program succeeded because of: (i) the relative autonomy of management that enabledl innovation and greater flexibility in spending; (ii) the recruitment of capable managers who were well motivated arid well paid; (iii) the increased accountability whereby staff could be fired for non-performance; and (iv) the measurementand careful trackingof outputs. Figure 4.7: BasicHealth Unit Outpatient Visits in R.Y. Khan District Before and After NGO Management 30,,0 ....................................................................................................................................................... 4.81 Third, work with the private sector to improve quality of care: In order to achieve the long- term goal of improving quality of care in the private sector, the government should begn pilot-testing creative and participatory approaches. These pilots could include: (i) working with NGOs and professional organizations to improve tuberculosis and ARI case management among private providers; (ii) helping to foster a hospital accreditation system among private hospitals; and (iii) adopting a broadly participatory approach to pharmacy regulation that would include NGOs, academics, government officials,and pharmacists. The pilots should be independentlyevaluated so that proper lessons could be learned and applied to future efforts. 4.82 The government currently relies on a fairly traditional approach to regulation in which it sets standards and then tries to enforce them through inspection. Private pharmacies, for example, are supposed to meet certain standardsand are visited by government inspectors. As has been found in other countries, there are a number of problems with this approach: (i) it can easily create red-tape that distorts the economy; (ii) it often leads to serious levels of corruption; (iii) it is often expensive; and (iv) it often fails in improving the quality of care. An alternative approach that is more likely to have the desired effect is to use a broad, participatory process where the government plays a less dominant role. For example, in improving the performance of the private pharmacy sector, it would be worthwhile establishing an independent commission with broad representatives from consumer groups, other interested NGOs, the pharmaceuticalindustry, private pharmacists, academics and government (no group should dominate, so it would be usell for representation to be as diverse as possible). The commission would agree on desired outcomes, determine how these would be evaluated, agree on a joint approach to regulation,and jointly implement the agreed-upon approach. 4.83 Fourth, test real autonomy for DHQITHQ hospitals: The NWFP has invested considerable resources in DHQ hospitals. Past experience in the province and from elsewhere indicates that improvements in infrastructurealone without managerial reforms have limited impact on quality of care or utilization. The experience with hospital autonomy in the NWFP and the Punjab has been mixed. In this context, an essential starting point is to conduct an independent and dletailed evaluation of the experience of the NWFP with hospital autonomy and compare it with experiences in the Punjab and in other countries. This needs to be done in the short tern, since on the basis of the findings of the review, the GoNWFP should design a pilot test of "real" autonomy in some 10 DHQ and THQ hospitals to be implemented in the medium term. The pilot should be rigorously evaluated using experimental and control hospitals matched for overall baseline performance.Baseline and follo~w-uphospital assessments would be carried out independently using objective measures of performance. After about 18 months of implementation, the entire pilot should be formally and independently evaluated, and the Government should make a decision on whether and how to expand the approach based on the resultsachieved. Water Supply and Sanitation 4.84 The challenges outlined above in expanding the coverage of clean drirking water and sanitation are considerable. In order to meet them, the government needs to improve and expand its operations substantially to provide the required infrastructure and improve WSS services in both rural and urban areas of the NWFP. This will require addressing the following key service delivery problem, in addition to dealing with the systemic issues in decentralizationdiscussed above: 4.85 Capacity: Prior to devolution, the Sub-Divisional Officer (SDO) of the PHED wds responsible for WSS services in a tehsil area. Contrary to LGO 2001, the SDOs of PHED were not devolved to the TMA in order to maintain the capacity of this level of local government. This is now acting as a serious constraint on the ability of the latter to deliver WSS services because of the absence of requisite staff. Senior PHED staff (above division) should form a pool to provide technical assistanci to TMAs if requested.This problemis more acute in areas such as that of technicalsanctions, which only senior level staff (grade 18 and above) have the authority to accord. Furthermore, the PHGD is being $sked with the implementation of large WSS systems as well as systems being funded by district governments and other sources, e.g., MPA discretionary funds and Khushal Palostan Program (KF'P) funds. These completed systems are expected to be operated and maintained by the respective TMAs. As the latter have not been involved in the planning and implementation of these systems, they are reluctant to take over the O&M responsibility. I 4.86 In addition to the foregoing inadequate technical capacity, the TMAs' capacity to plan (both for development and spatial purposes), budget, financially manage, regulate, and facilitate Citizen Community Boards (CCBs) is weak. Consequently, land-use planning and zoning is lhgely absent; annual planning is being done on an ad hoc basis; there is no multi-year development visibn; and CCBs are not being formed, with the result the funds allocated for CCB projects are accumulating. 4.87 Fhancing: Urban Immoveable Property Tax (UIPT) is the major contributor todards the Own Source Revenue (OSR) of the TMAs. Currently, UIPT revenue is collected by the provincial Excise and Taxation department and transferred to district governments (net of certain deductions). They subsequently transfer the funds to TMAs-however, with long and unnecessarydelays. *le the delays hurt operations in all tehsils, they hit relatively backward TMAs particularly had, since these are heavily dependent on the UIPT transfers. 4.88 The issue of outstanding liabilitiesof predecessor agencies (particularlyelectricity charges due to WAPDA), and which level of government is to shoulder them, is still unresolved in many instances. These include liabilities accrued by: (a) the provincial government on behalf of the defunct urban local councils;and (b) the defunct PHED on systems it managed. 4.89 Operation and Maintenance (O&M) Financing: Funds for O&M of WSS systems previously managed by the PHEDs are not being transferred to the TMAs, who therefore do not accept responsibility for such systems. This increases the potentialfor the systems to fall into disrepair. The capacity of TMAs to finance O&M of own WSS systemsthrough user charges and own source revenues is also limited. Recommendations 4.90 Capacity Building of TMAs: In order to strengthen the capacity of TMAs, the federal and provincial governmentsshould: > Launch capacity building initiatives for the TMAs with built-in performance-based fiscal incentives. Conditional grants should be made available to TMAs that achieve pre-agreed performancecriteria. > Strengthen dissemination and training related to existing systems. New systems should be developed and introduced where required. Preparationof long-, medium-,and short-termtraining plans should become part of the regular activities of all local government tiers. These plans should guide investment decisions. > Develop a legal framework for TMAs enabling them to contract NGOs without requiring higher level clearance. It is vital for TMA as a body corporate to be able to engage resources as needed for the implementation of its programs, while NGOs represent a very important group that possessesthe skillsand experience to interacteffectivelywith communities. > Provide TMAs with incentives to take over the operation and maintenance of WSS systems constructed by PHED. The O&M funds that the PHED receives from the provincial government could be such an incentive, which could be phased out in a time period agreed at the time of the transfer of the systems to the TMAs. > Support TMAs particularly in the implementation of water quality monitoring, hygiene promotion,and benchmarkingsystems. 4.91 Financing: In order to strengthen the financial capacity of the TMAs, the federal and provincial authoritiesshould: > Assist TMAs in identifyingand generatihg their own funds. Federal and provincial governments should provide funds to TMAs as part of their international commitment to MDGs and to meet the national and provincial development goals. > Aid TMAs to evaluate the existing O&M commitments and to rationalizethem. > Ensure that UIPT collections are transparent and properly documented and carried out in coordination with the respectiveTMAs. The full amount due to the TMAs should be provided to them promptly in accordance with an agreed schedule. The financial health of the TMAs can be fiuther assured by the provincialgovernment's assuming all pre-devolution liabilities relating to the existing functional rural water supplylsanitation systems (as the Government of the Punjab has done), and transferring all funds allocated for the operations and maintenance of these systems to the respectiveTMAs. The systems should be transferred to TMAs under agreements laying down all understandings, rights, obligations, roles, and responsibilities of all parties concerned for subsequent operationsand maintenance. CHAPTER 5: REFORMS WITHIN A SUSTAINABLE FISCAL FRAMEWORK, CONCLUSIONS AND PROSPECTS 5.1 If the NWFP is to rapidly diminish poverty and enhance human development, it must sustain a substantially higher rate of economic growth than in the past and step up investment in human capital. This chapter outlines the fiscal policy framework that will be necessary to realize the high-growth development strategy discussed in previous chapters, and illustrates the strategy with medium-term projections. In addition, it discusses two scenarios (low and intermediate growth). The low growth scenario assumes that the Government of the NWFP will not implement the reform package recommended in this report, and will also be resource-constrained by a continuation of the current NFC award. The intermediate scenario assumes that the provincial government does implement many of the reforms recommended in this report, but is constrained in important ways by the continuation of the current NFC award. FINANCING A S W T E G YFOR HIGH GROWTH 5.2 Higher growth will result in faster job creation in the private sector, leading to declining unemployment and poverty levels. As discussed in earlier chapters, this strategy requires that the provincial government abandon some of the activities it currently performs, focus its efforts on the core functions of government (public goods and services, regulation, and the basic institutions of a market economy - police, judiciary, etc), and perform those functions better. Key outcomes are: real GDP growth rises to 7-7.5 percent over a five-year period, the number of jobs in the private sector rises from 4.7 million in 2005 to 5.9 million in 2010 and unemployment falls to 9.6 percent from 13 percent in 2005 (Tables 5.1 and 5.2). These economic outcomes would lead to a substantial reduction in poverty in the province. Central components of the scenario are covered in the discussion below; additional detail and assumptions are presented in Annex 5.1. Key to raising the rate of economic growth in the province is raising total investment-bothpublic and private -as well as improving efficiencyand prioritizationof public investments. 5.3 The high-growth scenario requires a substantial increase in total investment, primarily by the private sector, but also by complementary public investment in improving infrastructure and in other activities. Simulation analysis indicates that total investment would need to rise steadily to nearly 20 percent of Provincial GDP (PGDP) by FY 2010, up from an average of 16 percent in FYs 04-05. This increase in investment, combined with the structural reforms discussed in previous chapters, is likely to involve a rise in private sector investment to 15 percent of PGDP, up from 12 percent in FYs 04-05 (see Table 5.2). 5.4 The high-investmenthigh-growth strategy proposed in this report will have important development rewards; but it will also require additional public resources (section A). Stepping up the delivery of roads, irrigation, energy, and other infrastructure requires that both provincial and local governments increase the level of and returns to public investment (section C). Moreover, the better delivery of social services and improved efficiency of spending (section B) require that increased public expenditures-combinedwith sector-specific measures in education, health, and water and sanitation- be complemented by measures offiscal decentralization (section D), so as to give service providers(local governments) additional resources. In short, setting the NWFP on a more rapid growth and poverty reduction path will have significant resource implications for provincial and local government fmances and, by implication, at the national level. Provincially collectedrevmues Tax Revenues Non-tax Revenues Federal and Foreigo grants Total Expenditures Current Expenditures Non-Wage O&M Transfer payment5to LG DevelopmentErpenditwes Fiscal Balance Fcdcral Debt (CDL) State Bank Ov~drafls Foreign Debt, Net (ind. SAC) Foreign Project Assistance Change in cash balances and Other Financing Memorandum Ifems Real GDP Growth rates % Non-interest, non-pensionspending olw Social sector spending 31 Non-social secmspending Real 76 YoY changein social sectorspending Real %YoY changein non-social sectorsp. Percent of Taro1Expenditure Interest Payments Developmmt Expenditure I Source: GoNWFPFiscal tables and Bank staffprojections I 11 Tha scenario azswnesthe provinces' share in the federaldivisiblepool will be 47% nartingin FY07,and NWFP's shareamong provinces equal to 15%. NHP of ?.s 6 billion and no subventions. I 21 What subsidy. I 31 lnclud~tola1 spmding on social sectors including foreign assistance I 41 Interestand normal paymentofprincipa:. 5.5 There are large vertical fiscal imbalances in Pakistan, because much of the revenue collection is carried out at the federal level, but the bulk of expenditures on service delivery are provincial and local. The NWFP dependsfor 90 percent of its revenues on transfers fiom the federal divisiblepo*, subvention grants from the federal government,natural-resource based payments (Net lF4ydlel Profits) fiorrt W N D A (a company of the Government of Pahstm), and federal gove ent and foreip grants; only 10 pexe~t. of the revenues come from its o-m resource mobilization. Stepping up public expe~dituesi r ~the hR'YP will require additional own resource mobi!ization, but will also require sr~ppsrtfrom the felcral government and external development partners. En brief, therefore, the province can abt& fmds from the following sources: (i) own provincial and local government resources (i-e., "own resources"); (ii) transfers.from the federal government; (iii) payment of Net Hydel Profits by the federal government; (iv) borrowing(both domestic and foreign);and (v) foreign grants. Table 5.2: Projected Employment, Investment and Fiscal Outcomes FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FYI0 Actuals Actuals Actuals Proj. Proj. Proj. Proj. Proj. Proj. Reform Scenario Real GDP growth rate (%) 5.4 4.6 5.6 6.3 6.6 6.9 7.2 7.5 7.5 Unemployment rate (%) 13.1 12.9 13.0 12.8 12.4 11.9 11.2 10.4 9.6 Percent of PGDP Gross Investment 14.3 14.2 15.4 16.6 17.9 19.1 19.6 19.5 19.3 Private Investment 11.0 10.3 11.7 12.5 13.7 14.7 15.2 14.9 14.7 Public Investment 3.3 3.9 3.7 4.1 4.2 4.3 4.4 4.5 4.5 I O/WProvincial ADP 1.8 1.7 1.9 2.0 2.1 2.1 2.1 2.2 2.21 Source:Bank Staff Estimates. i Stepping up own resource mobilization 5.6 A key requisite of the high-growth strategy is a sustained emphasis on revenue reforms and greater efforts at mobilizing the province's own resources,so that the latter rises from 0.7 percent of GDP in 2004 and is maintained at least at 0.8 percent to GDP during 2005-2010; this works out to a 13-15.5 percent nominal annual increase in own revenues. 5.7 In order to mobilize more of its own resources, the Government of the NWFP will have to improve its tax policy and tax administration.A number of recently completed policy studies indicate that there is considerable potential to generate higher own revenues over the mediumterm -by as much as 2.3 times the current level, in real terms.68 There is even greater scope for increasing taxes such as Motor Vehicle Tax, Stamp Duty, Professional Tax and Urban Immovable Property Tax to 2.5-3.0 times the FY04 level by FY09. This entails a thorough review of tax structure and exemptions. For instance, although the NWFP government took a bold step of imposing the Agricultural Income Tax (AIT) on all farmers, irrespective of farm size, to-date AIT is levied in only 5 of the 24 districts in the province. This requires an immediate correction, as it not only reduces the base of the tax considerably,but also creates fiscal inequitiesw i h the province. Similarly, considerableUIPT revenueis lost due to the government's reluctanceto declare additional rating areas despite considerable urban development and poor assessment of property values. Also, the ongoing conflict between the provincial government and the Cantonment Boards is adversely affecting revenue from the Profession and Calling ax.^^ The province also needs to improve tax administration to increase collections within the existing tax statutes, adjust tax rates to remove exemptions and make them more equitable, expand the tax base by bringing in hitherto non-taxed areas under the tax base,"create a better tax climate by opening Tax Facilitation Centers (with support from the private sector) in order to facilitate tax payments, abolishing taxes with little yield, and avoid using regulatory taxes for revenue purposes. The NWFP should also recognize that - despite the view These included studies on Reform of Agriculture Income Tax (AIT) and Land Tax in NWFP (2003), Tax Potential in NWFP (2004),and Refonn of Tax Administrationin NWFP (2004). 69While the Professionand CallingTax is a provincial tax, the LGO specifies a profession and calling fee which could be Ievied by the local government. Levying a tax which is more or less similar in character not only creates the perception of double taxation, but can lead to significant collection inefficiencies. It would therefore be more appropriate if the profession fee could be subsumed in the profession tax (to be collected by the provincial E&T department) while the revenue accruing from the fee be transferredto the local governments. 70Beside the FederallyAdministeredTribal Areas (FATA), which yield no revenue to the provincial government but utilizesome of the provincial services, six out of twenty four districts in the provinces (Malakand, Chitral, Lower Dir, Upper Dir, Kohistan and ~ a i a ~ a are m )still "non-settled"i.e., are beyond the jurisdiction of tax authorities. This exemption provides major incentives for tax evasion in NWFP. manifested in the 2005 Industrial ~ o l i c ~ " fiscal concessionsand tax exemptions are not in themselves - likely to prove an effective way to invite new investment into the province. Experience from around the world has shown that the focus should be on having a sound tax policy and an effective and comption- free tax administration. 5.8 In addition to taxation measures, the provincial government should also find innovative ways to raise more resources for growth. In this regard, the GoNWFP should review its own role in the economy. This could include relying on the private sector for many activities and leasing outfselling assets. This will not only contribute to private sector development but will also strengthen public finances by reducing spending and raising revenues. Examples of activities that could be better perf~medby the private sector include: tourism services (encouraged by leasing state-owned land to the private sector to develop the tourism industry); hydel electricitydevelopment (supported by a sound policy environment to take on Build-Own-Operate (BOO) options in this sector and in other areas of infrastructure development); and tertiary education, health services, and the provision of water and sanitation services. Moreover, the provincial government should find ways in which it can raise resources by auctioning/leasing high-value state-owned lands for urban development. It should make efforts to privatize public assets that have been on the privatization list for a long time; by making sure that the Privatization Committee plays a more active role and, if necessary, enlist the assistance of the federal privatization commission. ii. Earger federal tramfers 5.9 Efforts of the Government of the NWFP to increase its own revenues will help, but will be insufficient to fund the accelerated development program proposed in this re:port. Increased resource transfers though a new NFC Award that devotes a higher share of the divisiblepool to the pfovinces will also be necessary to complement the provincial government's own efforts. A higher award of the divisiblepool to the provinces would reduce the stress on provincial financesand allow for a larger share sf resources to be transferred to local governments. A purely illustrative high-growth scenario that assumes a new NFC Award from FY07 onwards with revenue shares of 47 percent to the provinces and 15 percent of this going to NWFP is displayedin Table 5.1. i Higher natural resource basedpayments (net hydel profits) 5.10 Quarterly payments of net hydel profits have often been irregular and the amount has been capped at Ws 6 billion since 1991192. This implies that there has been an erosion in its real value by more than 60 percent between 1991192 and 2004105. As a minimum, the province should get timqly payments of at least the capped amount. iv. Prudent debt management 5.111 If the provincial government continues to implement reforms, the high-growth scenario could encompass continued budget support fiom IFIs with amounts similar to those of recent years,. In order to ensure the sustainabilityof the GoNWFP's debt, the government should prioritize grants ovur borrowing, and borrow on the most concessional terms available. "ThemainfiscalconcessionsintheNWFPIndustrialPolicy2005are:a)exemptionfrompropeeytaxesforexistingunitsinthe industrial estates and for new industries for 5 years; b) exemption from Education Cess; c) a tiered policy on Employees' Social Security Insurance (ESSI) contributions; d) 25 percent rebate on electricity usage for a period1 of 3 years far selected new industries (the eligibility for rebate to be determined by a committee); and e) provision of 10 MW cheap elechcity fram the provincial Malakand Hydel Power Project 111to be provided to selected industrial units set up in the Malakand Indhstrial Estate. 5.12 The government should continue to follow a strategic debt management policy to create fiscal space and reduce the debt servicing burden.It is expected that the public debt stock,which stood at Rs 67 billion at the end of FY02, would reach Rs 97 billion by FY10; most of the new debt build-up would comprise concessional foreign loans. The high-growth scenario estimates that, over the medium term, the public debt-to-PGDP ratio would decline from 17 percent (in FY01-03) to 9 percent by end- FY10. The authoritieshave already retired Rs 10.1 billion worth of expensive loans during FY03-05 and have created a cumulative fiscal space of Rs 1.9 billion. The governmenthas alsoformulated a provincial "Debt ManagementStrategy"with the objectiveof creating more fiscal space by prematureretirementof remaining Cash Development Loans (CDLs) (worth Rs 25 billion by end FY05) and/or renegotiating the terms of the existing loans with the federal government. The GoNWFP should pursue its debt reduction strategy by retiring expensive CDLs (if accepted by the creditor-the federal government) and creating fiscal space whenever it has available cash balances, budget support credits, or better-than-projected federal transfers. With judicious debt management the share of interest payments in total expenditures under the reform scenario would continue to fall sharply from an averageof 17.6 percent in FYO1-03 to 9 percent by FY06 and to around 6 percent by FY10. 5.13 The high-growth scenario also assumes continued budget support from international financial institutions (IFIS)with similar amounts as in recent years. Medium-tern projections for this scenario indicate that the NWFP will have adequate available financing to sustain its economic growth and povertyreduction program. With a higher NFC Award, the fiscal deficit is projectedto range between 0.4-1.4 percent of PGDP during FYs06-10. Deficits of this magnitude can be adequately financed with concessional foreign credits already in the pipeline. It should be stressed that the reform scenario does assume a continuedstrong reformeffort, which will be a requirementfor securing concessionalcredits. B.IMPROVINGTHE COMPOSITION AND EFFICIENCYOFPUBLICSPENDING 5.14 Accelerating growth requires not only increasing the overall level of public expenditures, but also improving the composition and efficiency of these expenditures. This will imply relatively more emphasis on investment and Operations and Maintenance, less on consumption, and better management of investment projects. The government should: (i) increase development spending from an average of 1.8 percent of GDP in FY02-04 to 2.2 percent of GDP by FY09-10. It is expected that a share higher than 6 percent of development funds (the share in recent years, see Table 5.3) would be available to district governments for development purposes; (ii) increase spending on Operations and Maintenance to preserve the value and productivity of public capital stock with a benefit both for past and future investments. Spendingon O&M should be raised from 0.9 percent of GDP in 2004 to 1.l percent of GDP during FYs 05-10. Both provincial and district governments are expected to benefit from easing the constraints on O&M finds; (iii) contain public consumption (excluding O&M and non-salary transfers to districts,which is roughly half of the total transfersto districts) to 4.9 percent of GDP on average over the mediumterm (firstthree years), graduallydecliningto 4.7 percent of GDP by 2010. 5.15 It is vital that the provincial government not lose the gains from recent fiscal and civil service reforms by expanding the size of public employment or significantly expanding wages and pensions in the province. A necessary condition for the good development outcomes discussed in this high-growth scenario is that the wage bill will stay around 4.0-4.1 percent of PDGP (45-47 percent of total expenditures), and pension expenditures will be 0.5-0.6 percent of PGDP during FYs05-10. The latter estimate reflects effortsto contain growth in the wage bill (in current prices)of the civil service, but additional pension reforms could be introduced that would limit this liability further. The projections incorporate a general civil service pay increase in FY06 in line with that of the federal government, but rely on growth in the real wage bill to be contained to 3-7 percent per year over the medium term to cover normal increments,permit a small wage increase, and allow small increasesin staffing. It also includes an annual increase in pensionexpendituresby'lO-12 percent in nominal terms and an average of 3-5 percent in real terms. 5.16 The government will have to continue with other reforms to contain less productive current expenditures. I[t is expected that the government will continue to limit the wheat subsidy to that necessaryonly to maintain strategic stocks; to keep strict controls on current administrativeexpenditures; to reduce the remaining contingent liabilities; and to improve management of the deferred liabilities (i.e., the Pension Fund and the GeneralProvident Fund). 5.17 To contribute to economic growth in the province and support private investment, both the level and the compositionof provincial public investmentshas to improve. The government will have to invest between 1.9-2.2 percent of provincial GDP at both the provincial and district levels to engender the higher growth under the reform scenario. These investments will have to create public infrastructure, such as roads, imgation networks, as well as facilities for education, health, and water supply and sanitation. It is estimated that during the medium tenn, expenditures on the social sectors will be around 3.7 percent of PGDP (up fiom 3.4 percent in recent years), and on infrastructure sectors kill be about 4 percent of PGDP, up from3.6-3.7 percentin recent years. 5.18 More public investment will be needed in a number of priority areas. A particular weakness of the province's infrastructureis a shortage of roads, particularly of district roads; however, the total cost of rectifying this deficiency has not yet been fully estimated. In the irrigation sector, constructingsmall dams in the southern districts has been suggested as the most appropriate strategy; tHis will cost an additional Rs 400-1,000million annually over the medium term. In the educs,tionsector, knore secondary schools (and also primary schools in certain areas) have to be provided. The additional requirements for setting up new primary and secondary schools are estimated at Rs 1000-1200 million anhually,which is expected to come partly from provincial resources and partly fiom additional donor bding. Higher public resources will also be needed to expand water supply and sanitation s~nricesin thq province under the responsibility of TMAs. Moreover, public fimds are required in the agricultural crops and the livestock sectors to enhance productivity and to improve marketing. Public funds will also be needed to provide better social safety nets, such as labor-intensive public works programs, w d s for disaster mitigation, and developing specla1 programs for mountainous areas whege there are deep pockets of poverty. The fiscal frameworkbroadly incorporatesthe additional need for resources reqdiredto carry out public investments in these priority areas. It is recommended to undertake a more detailqd costing of the sector-specific reforms in the coming months to come up with more precise estimates of provincial resources needed for growth and to integrate this exercise with the revisioq of the rolling Medium-Term Budget Framework (MTBF). 5.19 As noted, this scenario assumes that the set of refonns recommended in this report is implemented. The expanded spending envelope in this scenario is more than sufficient tp incorporate the additional spending over and above the baseline associated with implementing the recommended measures. For example, real development spending increases by 10 percent on average every year over the projection period FY06-10. This leaves enough room for the recornrnen~dedadditiowl investments in education, health, roads, irrigation, agriculture, and water supply and sanitation sectors. This report emphasizes the need to enhance O&M budgets for the various sectors, and stresses' that improving the quality of investment spendng is perhapseven more importantthan increasingits quantiw. 5.20 There is considerable scope for improving the efficiency of public expenditures. Higher efficiency in current spending will largely come from implementing the reforms covered in Chapter 4 in the discussion on improving service delivery. The NWFP also needs to increase the efficiency of development spending, as public investment projects in the province do not reap the full benefitof the use of these scarce funds. Better management of public investments is therefore essential and is discussed in the following section. C. BETTERMANAGING PUBLICINVESTMENTPROJECTS 5.21 The profile of provincial public expenditures and the public investment program needs to be better aligned with the goals of growth and poverty reduction set by the province. Better alignment requires developing a strategic thrust and ensuring the buy-in of various stakeholders. Developing a medium-term budgetary framework (MTBF) could help align expenditure priorities with policy goals. In addition, the Chief Secretary, Finance, P&D and Local Government Departments could help broaden awareness and ownership of the reform program in the provincial line departments and district governments. Project Planning and Selection 5.22 The efficiency of public investments is reduced because of deficiencies at each stage in the management of publicinvestmentexpenditures,including project planning and selection,implementation, and monitoring and supervision. Increasing the allocation of funds for O&M in tune with the public investment program is necessary to maintain the province's infrastructure. Past neglect has eroded the existing public infrastructure and experience would suggest that in the hture public infrastructure will also be poorly maintained. The recurrent and the developmentbudgets therefore must be better integrated to ensure adequate allocations for O&M. It would also help line departments to strategize, plan, and .prioritizethe utilizationof resources if information on the concept of the MTBF and the tentative sector- and department-wiseallocations were widely disseminated. 5.23 Improve the selection of projects and avoid post-approval escalation of costs. The project portfolio has been afflicted with selection problems. Unapproved schemes have been made part of the ADP program, which has also been overloaded with projects in which political considerations played an unduly heavy role. To overcome these problems and ensure consistency with the objectives of the provincial reform program, projects should be considered for inclusion in the ADP only after obtaining concept clearance. It is recommendedthat a representativeand adequatelyempowered Concept Clearance Committee (CCC) should be established to approve and vet projects. This committee should also ensure that only projects with detailed cost estimates are considered. The current practice, where 10 percent buffer is allowed in the cost between project approval and grant of technical sanction, should be reduced to close to half this level in order to ensure more accurate cost estimatesfrom the very beginning of the project cycle. 5.24 In addition, funds are in general poorly prioritized at the planningstage, including the practice of making large blockallocations without well-establishedcriteria for projectselection. 72 Thisresults in the available ADP funds being spread thinly over a large number of projects, which in turn delays the completion of projects and produces a high "throw-forward". Formulating clear priorities for the development program requires the use of transparent criteria for selecting projects. Developing and implementing these criteria, and reviewing the existing portfolio of projects in the light of these considerations,mustalso fall underthe remit of a strong Concept Clearance Committee. 72For instance, in 2003104 most districts did not formulate schemes as given in the ADP, instead block allocations were distributedamongstthe Union Councils. Project Implementation 5.25 Improvetimeliness of fundingduring the implementationstage. Projectsdo not receive funds adequately according to the project's funding schedule. This leads to time and cost over-runs. I'lanning and budgetaryproceduresneed to ensure provision of fimds in accordancewith the phasing in the PC-1. 5.26 The province's new Procurement Law requires more rapid implementation and revision. The implementation of this law has been slow, and the former procedures and practices continue to be used for the procurement of works, goods, and services. The province must push for the wider implementation of the new Procurement Law and Standard Bidding Documents. Specifically, the government should use open market competition for contracts above a certain level (e.g., Rs 5 million); regularly revise the Composite Schedule of Rates (CSR) on the basis of market prices; open the bidding process to all qualified contractors in line with the evaluation criteria laid out in the bidding documents; abolish post bid negotiations; and reduce the tendency for procurement, unless in emergencies, based on Gallop tenders. Moreover, the government needs to invest in capacity building of the relevant ofhers to make the best use of the procurement rules. Rules for Consultancy Services should also be made more specific and in consonance with internationalbest practice. Monitoringand Supervision 5.27 Improve monitoring and supervision. Traditionally, the government has shown limited awareness of the importance of project monitoring and has allocated limitedresources for monitoringand evaluation (M&E) activities in the Planning and Development department (PBLD),the line departments, and district governments.This must change. Higher budgets for staff, equipment, and mobility are needed for more direct monitoring. Testing laboratories are needed in the province for roads and design structures. Staff and institutional capacity for supervision are inadequate. The P&D department and particularly the district governments are poorly equipped to plan, execute, and monitor development projects. There is a critical need to build skills and staff capacity for project design, appraisal and M&E both in the provincial P&D department, in the line departments and in the district governments. This capacitycan be built with more local as well as donor resourcesand the use of local academic ins1:itutions with requisite expertise. 5.28 Improving coordination between local stakeholders and the government can help in M&E. For instance, public and private sector academic institutions can help in conducting third party validation surveys and other field-based M&E activities. Local private sector consultancy f m s can help with M&E of projects related to private sector development. The NWFP Engineering University is well placed to helpthe provincialgovernmentin M&E of physical infrastructure. 5.29 In order to improve delivery of social services, the administrative and functional devolution measures and sector-specific measures discussed in Chapter 4 need to be complemented with corresponding measures in fiscal decentralization. This is necessary to give service providers (local governments) additional resources to deliver and expand their authority to make spending decisions and have incentivesfor making efficiency gains. 5.30 To increase resources for local governments, the provincial government could provide district governments with a stronger revenue base and should ensure that the.-presentsystem does not discourage own revenue mobilization. The NWFP 2001 Local Government Ordinance (LGO) extended wide-rangingresponsibilities over basic service delivery education, health, and infrastructure to 5.37 Improve use of development transfers and related issues:Development transfers are currently fomula-based. However, they are small (less than five percent of total transfers to local governments) and for large parts remain undisbursed. Moreover, the district developmentfunds are fragmented because of the practice of distributing these funds equally between elected members. Typical district development schemes are of Rs 30,000-40,000 (US$500-670); 80 percent of the district development schemes are under Rs 500,000 (US$8,300).The current requirement in the 2004105 PFC Award to use 40 percent of the funds for major schemes is not working. Development funds have so far been underutilizedin districts as a result of their limited capacity and other transitional issues. To this effect, the report recommends that the provincial government: provide incentive grants to reduce the backlog of underutilized funds, promote redistribution where utilization is better, and implement targeted capacity-buildingprograms in districts to help improvebudget preparation, execution and its overall utilization. 5.38 Develop an effective strategy to strengthen fiscal decentralization arrangements. Although the NWFP's budgeted transfer of funds to local governments in FY05 at 32 percent is almost the same percentage of budgeted allocations to local government as in the Punjab, the bulk of the funds in the NWFP is for current expenditures, mainly salaries. The share of local government budgeted development expenditures in the Punjab is 16 percent (in FY05) of the development budget, while the comparable share in the NWFP is only 6 percent (Table 5.3). The NWFP lags behind other provinces, such as the Punjab, in taking advantage of the potential gains from the devolution reforms -a notable example is that the NWFP does not allow districtsto retain savings in salary payments from unfilled positions, which is unlike the practice of the Punjab. Table5.3: Comparisonof DistrictAnnualDevelopmentProgram in the NWFP and the Punjab N W P Punjab 2003104Revised Total ADP (Rs million) 12884 39446 District ADP (Rsmillion) 963.4 6809 District as % of total (%) 7.5 17.3 2004/05 Budget Total ADP (Rsmillion) 16195 43440 District ADP (Rsmillion) 963.4 6809 District as %of total (%) 5.9 15.7 Source: NWFP and Punjab Annual Budget Statements2004105. 5.39 This report argues that reformsin the recurrent transfer systems (e.g., wages, electricity transfers, O&M offset grants) represent the most immediate priorities. However, all these measures need to be embedded in a medium-tern strategy centered on supporting improved outcomes in areas such as education, health, and local infrastructure by providing incentivesto local governments. The provincialto local government transfer system could consist of a block grant for the lion's share, topped up with a conditional grant linked to progress in outcomes. Such measures may provide one option to shift away from free-standing vertical programs in the provincial ADP in key areas such as water, sanitation, and district roads, and could prove to be a more effectivemeans of realizing provincial sectoralpriorities. 5.40 Rnally, the province will need to improve its monitoring and evaluation system for decentralized policy making, starting with key fiscal and socio-economic indicators at the local level. A beginning can be made with better generation and use of indicators on key fiscal and socio- economic indicators at the local level. Efforts to strengthen fiscal decentralization are hampered by limited data and informationon the district developmentbudgets, district-levelmonitoring indicators, and indicators for the implementation of development projects in districts. The capacity of districts to collect and analyze data and information is also very limited. It is recommended that capacity be built up for collecting district-level data; this may require technical assistance to P&D department, and line departments. The PSLM survey of the Federal Bureau of Statistics could provide the baseline data for district level outcome indicatorsfor the social sectors. 5.41 To summarize, it is clear that the GoNWFP does have the opportunity to set the stage for higher economic growth, employment generation and poverty reduction by undertaking the structuraipolicies discussed in previous chaptersof this report and the fiscal measures discassedin this section. Success in these areas will also require a higher NFC Award. On the other hancl, if the provincial government does not step up the pace of reform andlor if it is resource-constrained,living conditions in the NWFP will be slow to improve, and migration will continue to be the only option for many of its citizens. SCENARIOS: LOW AND INTERMEDIATE 5.42 The low case scenario assumes that the provincial government does not accelerate the pace of refom an$ fails to implement the actions suggested in the previous sectionsof this report. It also assumes that there will be no new, higher NFC Award for the provinces, and hence the provincial government will be resource-constrained.Compared with the high-growth reform scenario, this will translate into lower private investment (mainly because of the absence of structural reforms); lower public spending on infrastructure,both operation and maintenance and new investment,since less resources will be available and relatively more of them will be spent on public consumption (in particular on civil service salaries); and more limited investment in human capital. Because of slow reform implementation,improvementsin the effectivenessof government spending, governance, and implementation capacity will be more limited. As a result, productivity of public capital stock and human capital will be lower. The economy will continue to grow and social indcators to progress, but much more slowly and far behind the outcomes in the high-growth scenario. The annual real GDP growth rate can be expected to stay within Ithe 4-5 percent range, which in per capita terrns and in the absence of significant reductions in fertility rates will translate into near stagnation of per capita incomes. 5.43 An intermediate scenario would rest on the assumption that the provincial government implements the structural reforms discussed in previous chapters of this report, but that it remains resource-constrained (because the current NFC Award is continued, hydel profits remain limited, or significant external resources are not mobilized). In this scenario, public spending will be constrained. This is of particular concern as the wage bill is likely to increase, following increases at the federal level. The resulting compression of real expenditures - particularly for O&M and development - would imply lower public investment, and this in turn would make it more difficult to attract private investment. A continuationof the current NFC ward'^ would imply a revenue shortfall of 0.5-0.6 percent of PGDP, as compared with the high-growth scenario. Economic growth in this "intennediate scenario" could be expected to average between 5.5-5.75 percent over the medium term. This would translate into fewer jobs created and slower povertyreduction than in the high-growth scenario, but of course better than in the low case, no-reform scenario. Net job creation would be about 0.94 million by 2010 (1.2 million in the high growth scenario). The unemployment rate would remain in the 12.5-13 percent range, because of Ithe inability of the slow-growing economy to absorb available workers, compared to falling to 9.5 percent under the reform scenario. Thus, also the intermediate growth scenario results in a significant loss of income and economic opportunitiescompared with the high-growth scenario. 73This distributes 37.5 percent of the Divisible Pool to provinces, gives 13.8 percent to the NWFP based on the 1998 share of population, provides subvention grants to the NWFP, and 2.5 percent of GST as Octroi Zila replacement grants and a capped level of NHP at Rs 6 billion. ANNEX 5.2: IMPLICATIONS OF A STRATEGY FOR RATIONALIZING PROVINCE-DISTRICT TRANSFERS IN THE NWFP I. Streamlining how fiscal transfersare made to local governments can help address some of the rigidities that are undermining equitable and effective decentralized service delivery in NWFP. Only fiscal transfersfor development are presentlyallocated on a formula basis in NWFP. These account for less than five percent of total overall local government budgets. All other resources are based on existing establishmentcosts (e.g., wages and electricity allocations), estimates based on outdated revenue raisingestimates(Zila and Octroi offsets), arid estimates of recent revenue collection (e.g., UIPT shares). 2. Moving to a larger formula basedallocationof fiscal transfers wiU enhance transparencyof the existing system and over time help promote the effective use of public resources at the local level. Increased transparency in the overall transfer systembeyond the fi-actionallocated for development will focus attention on some of the major the inequities of the current systems.76Allocatingmonies based on existing local establishment sizes and anachronistic measures of revenue mobilization (i.e., Zila and Octroi) makes for a poor match with existing expenditure needs. This system provides few opportunities of incentives for local officials (e.g., nazims and DCOs) to rationalize local expenditures, while steering more resources to where they are really needed. Moreover, the extremely limited base for own local revenues conspires with the current transfer system to marginalize own resource mobilizationat the local level. 3. The district allocation simulations presented in this annex are meant to alert policy makers in the NWFP to the issues that must be addressed now to make progress over time to achieve a better fiscal transfer system. One starting point is that reaping the benefits of a more rational transfer allocation will require thinkingnow about what type of formula design to choose, and how these compare to current allocations. Critically our simulations underscore that any commitment to rationalize the fiscal transfer system will entail a transition strategy. If one compares current fiscal allocations to individual districts with what they should be receiving on a formula basis, it is clear that making these changesfrom one budget year to the next would be too drastic and unrealistic, potentially disrupting service delivery and providing political unviable. However, if changes are not made in the context of a medium-tennplan (e.g., 3-5 year horizon), the risk is that outmoded and ineffective allocation will linger over time, underminingpublic service delivery in the m. 76 This annex seeks to further illuminate the previous discussions in the second World Bank Structural Adjustment Credit to the NWFP that suggested that NWFP should move incrementally towards a formula based allocation of the district salary bill. Within five years, the formula should allow for "employment levels based on similar per capita ratios, with some allowance for the diseconomiesfaced by small districts and remote rural districts." Figure A-1: CurrentPer Capita Wage Expenditures by District PerCapita DistrictWage Bill 1400 1 Figure A-2: CurrentPer CapitaEducationWage Expenditures by District r I I Per Capita EducationWage Bin I A B P~ " m p.+ ~ $ g~ g ~p r ~- z ~. p h- - + ~-' 2 Z ~ P ~ F g p ~ g i $ g z S g & a r : - a F q - . O : : S s r 3 e?: = earr2 e f g a s 3 $ $3 w 5 P g a 4. Comparing illustrative formula allocations with existing allocaltions unded.scores the NWFP's reform challenge in this area. Figure A-1 shows the current per capita wage qocation of individual districts. Kohistan and Shangla, two remote districts, rank among the lowest iq per capita budgeted wage allocations. The large urban district of Peshawar also ranks among the lowest. We attempted to get actual realizations of wage expenditures. Regrettably, despite repeated requests to the NWFP Accountant General's Office (AGO), these were not forthcoming. However, field visits suggested that in districts such as Shangla a significant portion of positions were unfilled, and hencethat budget realizations were actually lower. Under current arrangements, districts are not able to aliocate these "savings'toother purposes. 7 5. Figure A-2 presents per capita wages for education only. The graph highlights the i6ortance of the education sector in district recurrent expenditures. These typically account for well qver half of district wage expenditures. For comparison, we calculated how much each district would rekeive of the overall wage budget (estimated Rs 14.4 billion) based on the three formulas below. The spelcificchoice of formulas would need to be subject to further analysis and discussion, and hence the ac$al formula should be seen as illustrativeonly. A. PFC Award Formula (50 percent Population, 25 percent Backwardness, 25 percent Infrastructure) B. Population only C. 75 percent Population, 10 percent Backwardness, 10 percent Inverse Population Density, 5 percent Equal Lump Sum Figure A-3: Actual DistrictBudgetedversus Formula Wage Allocations I eviationsof Current Budgeted Wage Bill(FY04105)to PotentialFormula Based Allocations -kwith formula . ActITrans 1 (PFC Form) ActITrans 2(Population) Act/Trans 3 (Alternative Variation) 6. The current wage allocations of Abbottabad are higher than they would be under any of the three formula allocations. Under a pure formula allocation, the district would over time receive less under a formula. In contrast,Kohistan and Shangla are two districts that currently have allocations far lower than a hypothetical formula allocation. The reality of this situation may be worse if realizations are actually far lower than budgets in these remote districts. The choice of formula however matters. The first two formulas would suggest that Chitral is receiving too many wage allocations. However, it is under- resourced by these standards under the third formula, which gives increased weight to remoteness and area. 7. The most appropriatechoice of formula will need to be catered to the specificcontext of the NWFP. For example, a district such as Peshawar may benefit fiom economies of scale in service provision. Alternatively, the NWFP's policy makers will need to discuss whether there are really special needs in districts such as Abbottabad or Karak that merit the relatively high wage budgets compared to these illustrativeformula standards. 8. Finding consensus concerning district allocation formulais a prerequisiteto a medium-term implementationstrategy. Given a managed adjustment strategy, how fast andor for how long would relative wage bills in different districts need to be adjusted to ensure a more equitable distribution? Zn other words, how would increases in Kohistan need to be managed against steady or decreasing allocations for Abbottabad? 9. Tsble A-l provides some indicativeestimates. Assuming an annual real increase or decreaseof 3 or 5 percent per year, we estimated how many years it would take to reach the formula baseline allocation." If we were to choose a formula based on population only formula (B), we would need seven years for Abbottabad to reach the formula level with an annual decline of 3 percent and four years with five percent. Kohistan would take 14 and 9 years of increasesrespectively to reach benchmark levels. 10. An alternative perspective calculates the annual rates of change in the district wage bill necessary to reach the formula benchmark in five or ten years.78While most district scenarios require adjustments of less then ten percent per year, other like Kohistan deviate so much fi-om formula benchmarks that they would require more dramatic adjustment trajectories in the medium term. While the simulations underscore the extent of h s challenge for certain districts, they also appear to suggest significant degree of resource misallocation, or certainly inequities,presently confi-ontingdistricts. 11. More equitable wage allocations across districts can be managed in a number of ways, and need not entail mechanistic cuts or additions to transfers in individual districts. The simulations assume no nominal growth in the overall wage pool. Given a certain growth in the overall allocation to wages, certain currently over-endowed districts may simply have to be subject to zero nominal growth in their wage allocations, rather than actual decreases. At the same time, those districts falling well below the benchmark formula allocation would receive the bulk of any nominal increases. An alternative strategy might be to simply bring the real outliers in a more tolerable band fi-om the benchmarks (e.g., +/- 18 percent). The key in any such exercise would be to make an appropriate allocation mote systematic and transparent through the adoption of a formula. Given the importance of the education sector, a sub- component formula could be tailored to that sector. Any such allocation would need to cater to covering existing costs for enrolled students, as well as extending education to those groups currently not enrolled. While conditional grants can play an important role in intergovernmental fiscal systems, the key for the NWFB will be to fm basic allocations while progressively granting them autonomy over a tangible part of those resources. Our simulations suggest that there are currently signific~timbalances in recurrent expenditures. These imbalances have emerged and persisted in the context of a highly centralized system. h e of the potential benefits of decentralization is that it will make these types of differences more transparent. 12. Conditional grants are seen as a way of ensuring that the priorities of a higher level of government are reflected in local expenditures. For example, matching grants will further ltverage local expenditures though more limited specific transfers. However, these require a basic degree of local autonomy to be effective, and may themselves be hard to monitor. Before increasing the oornplexity of the current system, the priority in the NWFP should be to rationalize the current basic allocations over the medium-term. 77 T**= in(Ll/Lo)1Annual change*where Ll and Loare relative levels at the end and beginning period, and T is the number of years. For our simulations, Lois the ratio of the actual to formula allocation, whereas L, is 100. If LI>Lo,the adjustment rate will be negative. ''Annual changee*= I ~ ( L ~ / L ~ )where~Tis the number of years assumed. / T * Table A-1: NWFP: PotentialTransition Paths of Current District Wage Bills to Formula Based Allocation A. PFC Formula B. Population Formula C Alternative Variation Baseline (% A. B. C. II. Annual Percent II. Annual Percent II. Annual Percent Formula PFC Population Further L Years with Fixed Change with Limited I. Years with Fixed Change with Limited I. Years with Fired Change with Limited Allocation) Formula Formula Variation Annual Change Number of Years Annual Change Number of Years Annual Change Number of Years District Percent (+I3%) - (+I- 5%) (5Years) (10Years) (+I-3%) (+I- 5%) (5Years) (10Years) (+I- 3%) (+I-5%) (5 Years) (10 Years) Abbottabad 100 41 23 41 (11) (7) -7 -3 (7) (4) -4 -2 (11) (7) -7 -3 Bannu 100 6 8 5 (2) (1) -1 -1 (3) (2) -2 -1 (2) (I) -1 -1 Battagram 100 -35 2 -22 14 9 9 4 (1) (0) 0 0 8 5 5 2 Buner 100 -25 -14 -18 9 6 6 3 5 3 3 2 7 4 4 2 Charsadda 100 -3 -15 -2 1 1 1 0 6 3 3 2 I 0 0 0 Chitral 100 19 64 -39 (6) (3) -3 -2 (16) (10) -10 -5 17 10 10 5 D.I.Khan 100 21 17 15 (6) (4) -4 -2 (5) (3) -3 -2 (5) (3) -3 -1 Dir (Lower) 100 34 29 38 (10) (6) -6 -3 (8) (5) -5 -3 (11) (6) -6 -3 Dir (Upper) 100 -31 -16 -25 12 7 7 4 6 4 4 2 10 6 6 3 Hangu 100 -43 -20 -33 19 11 11 6 8 5 5 2 14 8 8 4 Haripur 100 23 13 24 (7) (4) -4 -2 (4) (2) -2 -1 (7) (4) -4 -2 Karak 100 26 54 28 (8) (5) -5 -2 (14) (9) -9 -4 (8) (5) -5 -2 Kohat 100 12 16 12 (4) (2) -2 -1 (5) (3) -3 -1 (4) (2) -2 -1 Kohistan 100 -62 -35 -59 32 19 19 10 14 9 9 4 29 18 18 9 Lakki 100 0 23 8 (0) (0) 0 0 (7) (4) -4 -2 (2) (1) -1 -1 Malakand 100 19 28 27 (6) (3) -3 -2 (8) (5) -5 -2 (8) (5) -5 -2 Mansehra 100 25 5 18 (7) (4) -4 -2 (2) (1) -1 0 (3) -3 -2 Mardan 100 18 -7 13 (6) (3) -3 -2 2 1 I 1 (6) (4) (3) -3 -1 Nowshera 100 3 -7 5 (1) (1) -I 0 3 2 2 1 (1 1 (1) -1 0 Peshawar 100 -9 -27 -9 3 2 2 1 11 6 6 3 3 2 2 1 Shangla 100 -46 -21 -34 20 12 12 6 8 5 5 2 14 8 8 4 Swabi 100 6 -8 6 -1 -1 (2) (1) -1 3 2 2 1 (2) (1) -1 Swat I00 4 -12 -2 (1) (1) -1 0 4 3 3 1 1 0 0 0 Tank 100 -40 11 -30 17 10 10 5 -1 (4) (2) -2 12 7 7 4 - 1 1 l ~ a t(%)/Years e 5 10 3.0 5.0 5 1O] - - 3.0 5.0 5 10 3.0 5.0 - HighestReduction (1 1) (7) -7 (16) (lo) I 0 (11) (7) -7 -3 HighestIncrease 32 19 19 10 14 9 9 -51 4 29 18 18 9 APPENDICES APPENDIX 1:PROPOSED SEQUENCING OF RECOMMENDED POLICY ACTIONS Policy Actions Near Term: 1 Year 7 Medium Term: 3-5 Years Agriculture and Rural Development AgriculturalExtension Develop strategy for restructuring of extension services placing Implementstrategy. provincial extension functions (i) under the responsibility of local authorities1farmers organizations (e.g., Farm Service Centers (FSCs)); (ii) in the context of multiple non-state providers of extension services (e.g., NGOs, private sector); and (iii) focus on extension for the marginalized areas. ICost recovery Seek agreement from Finance Department for service delivery Pilot cost-sharingand revenue retention among a I-- units to retain revenue under own management (with sufficient number of service delivery units (e.g., veterinary governance controls). facilities). Export promotion Establish cold storage facilities at Peshawar Airport on Handover cold storage facilities to private operator. commercialbasis. More strategic use of the GoP's Export Promotion Bureau. Initiate system of grades and standards for agricultural Develop internationalstandard testing and products. Establish SPS the laboratory at Tarnab Institute. verificationsystems for plant and animal health. Agriculture research Resolve institutional uncertainty over responsibility for staff of Review funding mechanism for agricultural the Agricultural University. research, and introduce system of competitivegrants available to public and private research institutes. Establish research agenda for agriculturaland livestockdiversification which includes private sector participation. Contract private consultancy to generate market analysis for key agricbltural products. Establish system for disseminating . - - market inteiiijjencTTokey siak~hcjl~rs. Community management of Mainstream principles of community management into natural resources GoNWFP approaches to natural resource management (e.g., expand the role of VDCs). ? Private Sector Development Strengthenthe government's Establish a PPP policy framework. Establish a PPP law that defines the roles of all capacity to execute public- relevant units (rather than establishing a central I privatepartnerships (PPP) I unit). I Policy Actions Near Term: 1 Year MediumTerm:3-5 Years Increase businessregistration Establisha simple database of registered businesses. Enable sole proprietorshipsto be registered at the provinciallevel; automateregistration process. Provincialtourism strategy and Convene public-privateteam and completebaseline Community-level awarenessbuilding of tribal improved governance structure assessment,includingtourism assets and developa tourism leaders to promote understandingof tourism. for tourism, buildingon STC strategy. Define a mechanismthat (a) enables policy Implement organizationalrestructuring to carry out coordinationacross relevant agencies;(b) empowers private tourismsector reforms sector and local communities;(c) monitorstourismindicators. Strengthenproperty rights for Identify mechanisms to extend legal recognitionof the status of Make mining land use rights transferable. mining mines throughout NWFP, and the extension of provincial policy to mines in PATA. Urban Management Apex coordinationmechanism Establishan Apex Steering Committee(SC) with member-ship Ensure the development of a Strategic Plan for each for policy and strategy of all stakeholderschaired by the Chief Minister.Developa major city based on Vision and Policy. formulation, and supporting comprehensive Vision and Policy for tapping the economic Provide implementationoversight so that Secretariat potentialof the NWFP cities. Establishan Urban Development investmentsundertakenin each City are aligned to unit housed in the provincialPlanning and Development the Plan. Ensurethat all developmentfunds to be department to act as the Secretariatfor the SC. invested in Cities, starting with PeshawarDistrict, are based on the integrated strategic and action plans. Develop an appropriatestructure Undertake detailed assessment of the mandate and structure of Requirerestructuredinstitution to develop a and mandate for CDMD, and CDMD and the mentioned institutions,and restructure per consultativeStrategicPlan for Peshawaras an revise and strengtheninstitutions identifiedneeds. Rationalize mandates, and build technicaland integrateddevelopment framework, taking into responsible for urban management capacity.Revert responsibilityof networked accountmeans to exploit local economic development and municipal municipal service provision, building regulation,and opportunitiesand mitigateexisting constraints. service provision development control at the CDGP level, rather than devolving Develop ActionPlans based on it. them to the TMAs. Require updating of building Require updating of Building Byelaws and Regulations, Ensure review and revisionof new regulationson byelawsand regulations s t d g with Peshawar, to make them at par with international continuousbasis, to respond to the emergingneeds standards,and based on the integratedstrategic plan for the of a growing metropolis. city. Encouragepublic private Develop enablingenvironmentfor private sector participation Identify commercially viable services, &require partnerships in municipal service provision. outsourcingof their delivery & management with LG oversight. Initiate an IEC campaign Undertake an Information,Education, and Communication Continueon an on-going basis. Campaign targeted towards the citizens, government officials, and politicians. r -- policy ~ ~ t i o o s Near Term: 1 Year Medium Term: 3-5 Years Land Markets Consolidate title determining Update existingland records of CDGP and PDA; computerize Develop & enforce legal framework to provide responsibility with one Registrar's Department. authority for title award to E&T Department only; department move RegistrationDepartmentfrom BOR to E&T; remove overlavaing mandates. A. w Compulsoryregistrationof Require all future transactionsbe through registered transactions related to properties documents; lower stamp duty to incentivizeregistration. Incentives to improve utilization Increase land non-utilizationfee; further narrow UIPT of urban land differentialbetween rented & owner-occupied properties;revise Rent RestrictionOrdinance to remove pro-tenantbias. Social Safety Nets Social protectionand disaster Pilot labor intensivepublic works targeted in seasons of low Design, implement, and fund a comprehensive management wages and areas of high poverty.Rely on self-targetingthrough social protectionstrategy.Set up a comprehensive low wages. Pilot a fund for dealing with emergenciesand for disastermanagement system with clear roles for small rural works designed to prevent or mitigatedisasters. public, private, and NGO sectors. Consider contractingwith NGOs to implement both public works and disaster management fund with good fiduciary controls. transfers to the poorest that are contingent on their childrenattendingschool. Education Free textbooks Streamlinedelivery of fiee books to primary school students to Expand freetextbook provision to higher classes. preventdelays. in low enrolment districts a stipend program aimed at Expansion to the entire province. girls in grades 6-8. Increasing capacity of secondary Providemissing facilities to all existing secondary schools girls' schools, and increase share of schools upgraded from primary to secondary.Build more new secondaryschools. ----- - - -- - ~- ~ ~ Incentivesfor female teachers Pilot incentiveschemes such as subsidiied travel, s e ~ ~ ~ t y Expansiontoentire province. ~ ~ L-- arrangements, and enhanced pay in remote areas. Policy Actions Near Term: 1 Year MediumTerm: 3-5 Years Encouragingprivate sector Pilots in low enrolment districts on school vouchers, public Expansion of successfully piloted schemes to entire participationin education financing of private education, NGO managementof public province. delivery schools. Ensuringaccountabilityand Empower PTAs to take disciplinary actions against negligent Expand monitoring and evaluation capacity of PTAs capacity of PTAs teachers.Impart Training to PTAs. and of the Education Administration at the Provincial and district levels. Separation of teacher and Implementthe planned separation of the two Cadres in Implement the Professional Development Plans. managementcadre Education. Develop a strategy for professional development of each Cadre. Health Improve Primary Health Care Initiate a large-scalepilot for contracting in NGOs in Implement a program of contracting out PHCs. (PHC) facilities managementof government financed PHC facility,along the lines of the Rahimyar Khan model. Build on public private Pilot test participatory approaches for improving health care. Establish participatory approaches based on the partnershipand participatory For example, working with NGOs and professional results of the pilot. approaches organizationsto improve TB and AM cases, fosteringan accreditationsystem for private hospitals and broadly participatoryapproaches to pharmacy regulation. Expand hospitalautonomy Conduct an independentevaluation of the NWFP hospital Initially pilot a hospitalautonomy program in 10 autonomyexperience. DHQ and THQ hospitals.Implement the program based on the results of the pilot. Water Supply and Sanitation (WSS) Improve trainingfor planning Initiate disseminationand training related to the existing Prepare medium and long term plans to guide systems and begin preparation of plans to guide short term investment decisions in integrated WSS systems and WSS investments. local small-scaleinfrastructure. Improving functional Revise the role of PHED to be a service provider to TMAs. Initiate administrative changes and incentives for responsibilitiesof TMAs ~nitiatetransfer of WSS systems to TMAs under agreements TMAs to take over O&M and associated funds from laying down clear rights, obligations, roles and responsibilities the PHED in a phased manner; TMAs to approve for subsequent O&M. Provincial governmentshould assume all O&M arrangements regardless of the funding pre-devolutionliabilities relating to the existing functional rural source. water supply1sanitation systems. Improvingfinancing of TMAs Provide UIPT to TMAs promptly and as per agreed schedule. Federal and provincialgovernment to assist TMAs to identify and generate own funds as well as provide hnds to TMAs to meet the O&M requirements. Policy Actions Near Term: 1 Year Medium Term: 3-5 Years Administrative Devolution Expanding the role of the Public Establish PSC oversight over recruitment of district staff in Involve PSC in oversight of recruitment of key service omm mission (PSC) and grades 11-15 to enswe merit and transparency.Establish four service delivery sectors e.g., school teachers. Build build its capacity. satellite PSC offices to cover all districts. Provide small number capacity of the PSC to be able to provide oversight of staff and transport facilities for meeting the requirementof of service delivery personnel by providingstaff, the expandedrole of the PSC. transport and office automation facilities. Decentralizationof the Bestow administrative powers, appointing,promotion, and Involve PSC in vetting requests of transferring appointment, promotion and transfer authority to DDOIDO for grades 1-5; ED0 for grades senior staff. transfer authority 6-11; and DCO for grades 12-15/16. Decentralizationof financial Restore financial powers of the key district officers to their pre- powers devolutionlevels e.g., EDOs, DOs, and DDOs should be categoryI, category 11,and category I11level officers respectively. Strengthenthe role of the Formally involve monitoring committees in the budget process; monitoring committees provide them with adequate resources to conduct inspection visits; require EDOs to regularly report to monitoring committees; and include their specific role in the Rules of Business. Creation of a Local Government Initiate discussion on formation of a LGS. Create a two-partLGS with responsibilityfor Service(LGS) preparing the salary budget, recruitment, career management and performance managementfor staff in grades 1-16; staff in grades 17-20 could be part of the provincial LGS. Fiscal Sustainability Increase own revenueslresources Implement tax policies and tax administrativereforms Continue with reforms in tax policy and tax recommendedin policy-basedstudies. Agree on the administration.Find innovative ways to raise more consolidationof individual taxes with the private sector. resources for growth e.g., by reviewingoptions for Compkre study on ownsource revenues options for District auctiodlease of high-valuestate-owned lands for governments,with specific emphasis on implementation urban deveiopment;privatizarionofpubiic assets modalitiesand allow some retention of user fees to etc. Implement pilots to devolve revenue collection, DistrictsITMAs . administration,rate serting (e.g., UIPT) to districts. Consider further devolution of other tax basis (e.g., AIT); deepedextent local revenue mobilization reforms. Short Term MediumTerm Agricultureand Natural ResourceManagement Improving researchand extension Provide assistance to GoNWFP to develop a 'vision' for TA for developing a sustainable researchfunding system services the research and extensionservice in the Province. (e.g., a system of competitive grants, ways to mobilizeand generate own financial resources, tapping from federal Resolve institutionalissues that are hampering progress sources of funding and links to federal research institutes in research and development etc). TA to help with implementing the vision, including institutionalreform. Institutionalstrengtheningfor TA to help refine the role and function of Farm Service TA to work out the details of the development of FSCs and agriculture Centers (FSCs); develop system for use of facilities how it can gradually be farmer- managed organizationand such as revolvingcredit schemes; developing links self-financing; with input suppliers for efficient delivery to farmers Moving veterinary services to a more commercial footing that use FSCs. throughcost sharing and revenue retention. Improvingagriculturalmarketing Feasibility studies for the establishment of cold storage TA to establisha system of market intelligence with public facilities. Identify options for public-private finance and private provision, such as a consultancy fm partnerships in the provision of cold-storage and providing the market information and GoNWFP paying for logistics infrastructurefocused on horticulturalexports. it and taking responsibility for dissemination. Introduction of IFC, MIGA and other resources to seek private investment. TA for preparing specific projects aimed at promotingthe productionand marketing of high value crops and proposals for infrastructurerequirements. Natural resource management TA to develop an integrated development strategy and Support the forestry sector developmentand the rangelands also a study that will address rangelands management developmentthrough an investment lending program from issue with a view to strengthen the livestock industry. the World Bank, based on the studies. Private Sector Development Private sector forum Establishmentand launch of Government-Private Ongoing technical assistance to working groups in Sector Forum, leveraginginternational experience. investigatingkey issues in preparationfor discussion at Forum, as well as in coordination, througha secretariat function. 79 This set of technicalassistance requirementsis based on the issues covered and recommendationspresented in this report. The areas covered here are a subset of the GoNWFP's broader policy agenda. Hence there are likely technical assistanceneeds also in other areas. - - - Short Term MediumTerm Constructionprocurement and Establishmentof a system to monitor performance of Increased capacity to manage construction and civil works, management reform private contractors,defined and pilot tested within a including (a) adequately staffed, professionalizedand sample of contracts and refined for Provincial rollout. properly equipped departments, with hiring, salary and promotion based primarily on performance and merit (b) unified registration; (c) standardization of contractsaround PEC model. Private participationin Building Government capacity to manage public- Technical assistance in the design and execution of infrastructure private partnerships in infrastructure, focusing on competitiveprocesses for hydroelectric concessions. hydroelectricpower (SHYDO). Tax administrationreform Further consolidation of provincial tax collection to streamline administration and reduce the number of uni~ue interactions as well as tax forms. Tourismstrategy and institutional The development, consultation and disseminationof a Institutional reform of the Sarhad Tourism Council .(STC). reform provincial tourism strategy building on cultural to execute strategy, including mechanisms to monitor and heritage of NWFP. publish sector data, incorporate private participation, carry out a promotionalstrategy, and enhance horizontal coordination across agencies (including transport, environmentaland security functions) as well as vertical coordination with District and community levels. Improving access to finance TA to conduct a detailed household and enterprise TA to conduct a detailed household and enterprise survey in survey in urban and semi-urban areas to better rural areas to better understand the demand side issues understand the demand side issues related to access to related to access to finance. finance. Hire consultantslfm to raise awareness about the availability of financial services in urban and rural areas through organized workshops, media, billboards and to encourage financial institutions to expand their small-scale and microfinanceprograms. Mining property rights Identify mechanism to extend legal recognitionof the Identify mechanisms to guarantee the sanctity of mining stabts of mjnes throughout NWFP, and the extension of lease rights, and ensure the transferability of lease contracts. provincial policy to those mines in PATA. Business registration Enable registration of sole proprietorships at the Development of a computerized relational database for provinciallevel. business registration to enable sharing of registration information with Federal government, eventually scalable to - - - - - - - - - - - - - - - - - - - - -- - - - - - - an online registrationsystem. Urban Issues and Land Markets ?olicyand strategy formulation Develop a comprehensive Vision and Policy for Developmentof a Strategic Plan for each major city based tapping the economic potential of the NWFP cities. on Vision and Policy. Entity to provide implementation oversight so that investments undertaken in each City are aligned to the Plan. Short Term Medium Term Structure and mandate for CDMD Undertake detailedassessment of the mandate & Developa consultativeStrategic Plan for Peshawar as an structureof CDMD. integrateddevelopment framework,taking into account local economicopportunities,means to optimally exploit them, existing constraintsand how to effectivelymitigate them and develop Action Plans based on it. Capacity building in urban sectors Initiate capacity-building of appropriate technical and Build appropriatetechnicaland management capacity of management capacity of institutionsresponsiblefor institutionsresponsiblefor urban development& municipal urban development & municipalservices. serviceprovision at provincial & local levels. Updating of building byelaws & TA for updating of BuildingByelaws and Regulations, Review and revision of new regulations on continuous regulations starting with Peshawar, to make them at par with basis, to respond to the emergingneeds of a growing internationalstandards, and based on the integrated metropolis. strategicplan for the city. IEC campaign InitiateTA to undertake an Information, Education, Expand Information, Education,and Communication and Communication Campaigntargeted towards the Campaign for citizens, governmentofficials, & politicians. citizens, government officials, & politicians. Land records TA to updateexisting land records of CDGP and PDA; Expansion of the TA to develop & enforce legal framework computerize Registrar's Department. to provide authorityfor title award to E&T Department only; move RegistrationDepartmentfrom BOR to E&T and to remove overlappingmandates. Transport Policyand strategy Rural TransportSpecialist to help define needs and A consulting fmto develop detailed implementationplans. develop draft rural transportpolicies and strategies(6 man-months). Institutional and legal framework Civil Service ReformSpecialistto help align sector legislationwith the laws on devolution(12 man- months). Capacity Building Human and InstitutionalDevelopment Specialist to help build technical capacity of local governmentsto handle expanded road sector responsibilities(12 man- months). Resource Mobilization TransportEconomist help set up a Road Fund financed fromroad user charges(9 man-months). AdministrativeDevolution Strengthening of the Public Capacity building of the NWFP Public Service ServiceCommission Commission by strengtheningautomationand streamliningprocessesto reduce the time taken for new recruitments. Short Term Medium Term Establishing an M&E Unit Assistance in conceptualizingthe functions, TORSwith On going technical support as identified in the concept considerablefocus on disse2nation and use of note-this could include expertisein M&E, public health, information, institutionaldesign and linkages with information/communications relevant sectors/agencies,skill requirements, medium tedlong term TA requirements, and financial implications Piloting Autonomy for District and A comprehensive externalassessment of the existing Ongoing assistance on technical, administrative and Tehsil hospitals autonomous hospitals. financial aspects as required. Based on the assessment and lessons from international Implementation of external M&E. experience, design of hospital autonomy pilots including the administrative and financialframework, technical aspects of quality of care and M&E plan including hospitalMIS and external M&E. Working with private sector to Assessment of existing i) regulatory mechanisms and TA for development of pilots in all 3 areas: i) hospital improve quality of care ii) informal initiativesby NGOs andlor professional accreditation; ii) working with NGOs/professional organizationsto improve quality of care. organizations to improve TB and ARI case management Review of internationalexperience, particularlyAsian, among private providers;iii) participatoryapproach in the areas identifiedto improve qualityof care and including NGOs/Govt./academics/pharmaciststo pharmacy lessons and applicationsfor Pakistan. regulation. Water Suoolv and Sanitation - ~ -- ~ ~ Capacity Building of TMAs TMAs to be able to contract NGOs (annual cost Rs 60- TA to map existinginfrastructure& socio-economic 70 million approx.) information, demographicpatterns, lack of services, etc. Training in multi-year planning, corresponding medium- term expenditure frameworks,budgeting, participatory planning & development, financial management, simplified contracting in and out of works and services, etc. TA to strengthendisseminationand training related to existing systems and develop and introduce new systems where required. TA to prepare short, medium and long term training plans as part of the regular activitiesof all LG tiers. Designand introduce incentivesfor TMAs to take over O&M of WSS systems constructed by PHED. Short Term MediumTerm Functional responsibilities TA to revise the role of PHED to provide support to the TMAs. TA to introduceprocedures introduced to ensure that TMAs approve d l WSS projects/schemes & their 0&M arrangements regardless of funding source and management status TA to strengthen coordination between City District -Government -- Peshawar and ToMAs -- - - Introduce procedures ensuring p~~perlydocumented Assist TMAs in identifiing and generatingown funds. and transparentUIPT collection in coordination with Assist TMAs in evaluating the existing O&M commitments TMAs with full amount due to the TMAs provided and rationalize them as well as in implement such aspects promptly im accordance with an agreed schedule. as water quality monitoring, hygiene promotion, and benchmarkine systems. TA to do a detailed analysis of provincial contingent Implement measures to reduce contingent liabilities. liabilities,including pension liabilities. Costing of reforms Detailed costing of sectoral reforms suggested in the Review and revise the cost estimates aligning it with the Report. sectoral budgets and provincial MDGs as part of the rolling b MTBF. Mediumtermbudgetframework Raise awareness about the MTBF among provincial- Capacity building and awareness to improve the Medium stakeholders(e.g., Provincial Line Departments, Term Budget Frameilvork(MTBF). District and Tehsil Nazims, DCOs, EDOs, etc). /Raising provincialown revenues Studies that build on existing work to help provincial md the district governments to raise own revenues. - - r ~ t ensure that there is a smooth and equitable o ransfer of wages fromaccount I to account 1V. --- Iqrove fi.scaltransfers [ntegratethe TA activities with the on-going AsDB- TA to look into the use of fiscal space in case there is a Funded TA activities to strengthen fiscal devolution. generous NFC Award. ---.. TA to help the province design appropriate csnnditionand incentive grants to reduce fragmentation of funds and to ensure better social and service delivery outcoxles, -- - Short Term Medium Term Management of Public Investment Projects Improving procurement TA to remove anomalies in the ProcurementLaw to TA for capacity buildingfor full implementationof the new ensurewider implementationof the law and the and revisedprocurementand procedures in provincial line departmentsand in districts. Improving projectdesign and Capacity buildingfor projectdesign PC-1 preparation, planning and appraisal in provincialline departments and in districts. Improving project Monitoring and TA to raise awareness of M&E activities and for Capacity building for M&E of public investmentprojects Evaluation (M&E) establishingrelevant M&E indicators for public and for evaluating social and economic outcomes in projectsand programs. provincial line departmentsand in districts. TA to assess monitoringinstruments that the NWFP can develop on its own to monitor progress on social and economicoutcomeson a regular basis (e.g.,Third Party Validationsurveys, social audits, etc). North West Frontier Pra~ince 1 . 'I'he North West Fra~t~er Pnfvince (NWFP) is the largest province of Pakistan, w~thia populstioat of 17.94 miIlicm accr~rdingto the IYf8 Chsus; pruvinei; wotaiined 11.4percmt af the country's populatigm. b terms of m a it is the smallest m n c d uiOl wly 74521 square kilomters or '3.36 pcrccnt of the total m a of Pakistan, "IheNWFP is perbps %Me mst s&ategiaaliylocakdprovinceof the country. as it shares boundsries with Afghsnistan, Azad lr+u and Kaslwnir, the Punjab, and the Federally Administered Areas. The smeegtlo location offersthe ptoviatce cumidable p$titntialfor Wdt and cotlm~e~cft, especially with Afghstnism, i[m,md the CkemlAsian States. An unknown ssmuunt of trade @kesplace througb sr~lugg1ir;leacross1kpr,rous bozelws; thi is net captured in the nationat income aceotinb, even though ;bitmight makea sigifisant cantribtrtimto ittcmes, Figlare f: Pakistan and &theNWFP: ~o~irilotiob Area, 3998 and 2. 'Re pmvlnce is alsomdatved with ~ichmineml rewurces/, hut Ihe exglofatinn arad development of thcse resources has been ttmited becauseof ptmraccessibility t the mountainousarmsand heca~useof we&nesses in the government dqartments. '!he NWFP adso h q a very varied landscspo and drmate, which offers considerable potential fur sqpwting diverse a*cullural cmps and,in the Ionyet term, far taunsrn, 3. The economtc analysis uf the prsvi~ce,as that of the o virmces, is seric>usiycomprclmisd by the non-svaiIabiIity of rcgiom8 accaurmfs. While the F r d d sf Shtis~cs(FBS) c u ~ w l m the natlonn'l %counts of Pakistm, mly cummy c@~rts timte regional accounts. I3ifticulties in nbtaining data have made it difficult for in researchm tcz construct their own senesof provinc~ataccuu~tsli.~.,provinciaf G13P or value his note cmkines tkre mctht~clology used by the f;RS and rbz, c,% i n d ~ d m~searchmin t te the rnovincial acaturats of the hWFf" Jx~sh~~ubcd nzaele clear that the present effbrrz i hmt cut at copisertactinga m e s and does not carry an offictal in~xrplmtatur,It uses t h mke$what we consider to be plausible assumptions where hard data are not availabl &is note is to make Wansparent the assi~mptnnrtsarrd the pweduses employed in the c vineial alca~unrsused in this rcgt)rtso hat subsequent efTortscan mprove upon the: Methodology 4. The construction of a series for provincial GDP, i.e., value added in the province, is a complex undertaking, requiringdisaggregated data for a large number of province-specific variables. The exercise is also extremely time-intensive, as a large volume of data must be analyzed to derive consistent and robust estimates. Given the time constraintson the preparation of the present report and the inadequacies of data for the NWFP, as an interim measure this report relied upon calculating the NWFP's share in the national value added of various economic sectors using some broad "allocators" or national-GDP apportioning factors. Where data were available in a suitably disaggregated form, value added was estimated by a methodology similar to that used by the FBS to estimate national GDP. However, such information at the regional level was not available for all sectors and activities. Even the national data published by the FBS appear with a considerable time lag, while a number of key surveys are not conducted at regular intervals; this leaves significant data gaps in the national series. We must therefore emphasize the approximate nature of our calculations, and stress that the provincial GDP estimates derived in this report should be used as broad indications of trends rather than as precise estimates for a given year. 5. In the present exercise, the provincial GDP has been estimated using a combination of the three traditional approaches - production, expenditure, and income. More specifically, wherever detailed provincial data were available -for example, in agriculture, mining and quarrying, and manufacturing -sectoralvalueaddedwasestimatedusingtheproductionapproach.Theexpenditureapproachwasused to compute value added of the construction, ownership of dwellings, electricity and gas.distribution, and public administration and defense sub-sectors. A variant of the income approach was applied to estimate value added in the transport, storage and communications, banking and insurance, and services sub- sectors. In almost all these instances,the direct and indirect methods were combined to compute sectoral value added by apportioning the national income to the province using appropriate allocators. While these allocators were applied only where data at the provincial level were not available, it is clear that the present exercise represents a "second-best"approach to estimating sectoral value added at the provincial level. In what follows below, we provide a brief sector-by-sector description of the methodology and techniques used to estimate the GDP of the NWFP. 6. Revision of the national accounts base by the Federal Bureau of Statistics from 1980181 to 7 1999100 presents an additional complication for estimating the provincial accounts. As the national accounts series based on the new base is available only for the period 1999100-2004105, deriving provincial accounts fiom the new national accounts series does not provide a long enough time series of provincial accountsto do a meaningful analysis of growth trends. This problem was resolved by assuming that for the period prior to 1999100, the value added of new economic activities included in national accounts, had the same growth as those of activities included in the old series. In other words, prior to 1999100, the new series had the same growth as the old series. The provincial accounts were therefore estimated on the bases of both the old and new definition of national accounts. The provincial accounts on the new definition were then extrapolated backwards on the basis of growth rates calculated fiom old series to get a time series of provincial accounts from1990191 to 2004105. 7. Agriculture: Value added in agriculture has been estimated by applying provincial allocators to the estimates of national value added for this sub-sector. Overall, the computation of value added in crop agriculture is based on 12 major crops and 23 minor crops. The crop output data for the NWFP and for Pakistan were obtained from published sources.80 Owing to the non-availability of input costs of - - -- - The data are obtained fiom various issues of the Pakistan Statistical Yearbook, Agriculture Statistics of Pakistan, NWFP DcvelopinentStatistics, Economic Survey, Agricultural Crops and Livestock Products - Long-Term Trends, and Support Price Policy Issues of Major Crops. agriculture, production allocators were used to estimate value added for the crop sub-sector.The WWFP's share of total crop production in national output was assumed to remain the same as its share of total national value added of these crops.These output shares (allocatbrs) were used to estimate value added of wheat, rice, cottonseed, sugarcane, maize, gram, barley, jawar, bajra, rapeseed & mustard, sesame seed and tobacco for major crops for the years 1990191 to 2004105. The simple addition of the value added of each crop represents the total value added of major crops. Similarly, value