Report No. 40345-PK Pakistan Balochistan Economic Report From Periphery to Core (In Two Volumes) Volume I: Summary Report May 2008 The World Bank The Asian Development Bank The Government of Balochistan Document of the World Bank TABLEOFCONTENTS PART 1: FROMPEFUPHERYTO CORE ........................................................................................ 1 1 1.2 Roadmap ...................................................................................................................................... 1.1 Setting the Stage .......................................................................................................................... 3 1.3 Taking Stock ................................................................................................................................ 7 PART2: GENERATINGGROWTH ............................................................................................... 11 2.1 Tapping Mineral Deposits.......................................................................................................... 13 2.2 RevitalizingPetroleum............................................................................................................... . . . 14 2.3 Gwadar's Potential..................................................................................................................... 15 2.4 BeyondGwadar: Coastal Development..................................................................................... 17 2.5 LinkingEnterprises .................................................................................................................... 17 2.6 The RuralEconomy ................................................................................................................... 19 2.7 Livestock and Rangelands ......................................................................................................... 20 2.8 Crops and Fruits......................................................................................................................... 21 2.9 The Water Crisis ........................................................................................................................ 22 PART3: DELIVERINGSERVICES ................................................................................................ 24 3.1 Towards an Effective and Accountable State............................................................................ 24 3.2 Gaining an Educational Future.................................................................................................. 25 3.3 Making Health Services ReachPoor People ............................................................................. 26 3.5 AssistingPoor People Through Cash Transfers ........................................................................ 3.4 Securing HealthThrough ImprovedWater Sources.................................................................. 27 28 PART4: FINANCINGDEVELOPMENT ....................................................................................... 31 4.1 FiscalRecovery.......................................................................................................................... 31 TABLES Table 1.1: Balochistan's stock taking o f challenges and opportunities across four dimensions ..........10 Table 2.1: Balochistan's growth pillars. sectors and areas.................................................................. 12 23 Table 3.1: Instrumentsfor Delivering Services .................................................................................... Table 2.2: Instrumentsfor Generating Growth..................................................................................... Table 4.1:Instrumentsfor Financing Development ............................................................................. 30 33 FIGURES Figure 1.1: Pakistan's Province ofBalochistan.................................................................................... 1 Figure 1.2: Balochistan as share o f Pakistan along three dimensions.................................................. 2 Figure 1.3: Framework ofthe Balochistan Economic Rep0rt.............................................................. 3 Figure 1.4: Balochistanhas the weakest long-term growth record, but the ongoing recovery i s broad- based .................................................................................................................................. 7 Figure 1.5: Balochistan's workers are less productive than workers o fthe other provinces, butjob creation increasednoticeably inthis decade...................................................................... 8 i Figure 1.6: Balochistan's poor people inrural areas have not yet benefitedfrom the economic recovery.............................................................................................................................. 8 Figure 1.7: Balochistan's social and gender indicators are low but improving................................... 9 Figure 2.1: Balochistan's 29 districts ................................................................................................. 13 Figure 2.2: Balochistan's miningsector has a long way to go........................................................... 14 Figure 2.3: Balochistan's gas fields are becoming less plentiful....................................................... 15 Figure2.4: The projected port traffic i s likely to exceed the available capacity at Karachi and Qasim within thenextdecade..................................................................................................... 16 Figure 2.5: Productionand exports o f fishery products has stagnated............................................... 17 Figure 2.6: Balochistan's enterprises are few in-between, as Quetta's ranks 114" among 194 cites worldwide incost o f doing business, muchworse than other cities inPakistan............. 18 Figure 2.7: Balochistan i s still recovering from a long drought, which contributed to a shift from livestock to minor crops................................................................................................... 19 Figure 2.8: Drought and overgrazing lead to a loss o f livestock and a degradation o frangeland .....20 Figure2.9: Balochistan's crop production andyieldsare low after the drought ............................... 21 Figure2.10: Balochistan utilizes only two-fifth o fits water resources, andthe growth insubsidized electric tubewellsdepletes the groundwater.................................................................... 22 Figure 3.1: Balochistan's bureaucracy is biased towards low grades, and secretaries transfer frequently ......................................................................................................................... 25 Figure3.2: Balochistan's private primary schools are few in-between and distance to schools is far inruralareas..................................................................................................................... 26 Figure3.3: Balochistan's childandmother service indicators have improved since the late 1990s, butvacancies andabsenteeism remainhighinruralareas .............................................. 27 Figure 3.4: Balochistan's improved water access lags far behindthe other provinces, and TMAs, with the legalresponsibility for municipalservices, are grossly under-funded ..............28 Figure3.5: Poverty among Balochistan's children increasedmore than among Balochistan's adults, yet social assistanceremains small inreach.................................................................... 29 Figure 4.1: Balochistan's public expenditures have increasedin the last few years, but some o f the rise was debt-financed...................................................................................................... 31 ListofBackgroundNotes Prepared For The BalochistanEconomicReport ............................... 34 .. 11 PREFACEAND ACKNOWLEDGEMENTS This report i s ajoint product of a team from the Government o f Balochistan, the World Bank and the Asian Development Bank. In April 2006, the Balochistan Government constituted a counterpart team o f government officials, who were closely involved inthe Report's preparation. This team was headedby Mr. K. B. Rind, former Chief Secretary and Mr. Qayyum Nazar Changezi, former Additional Chief Secretary (Development), Government o f Balochistan, and included Mr. Ghulam Muhayuddin Mam, Chief Economist andMr.Zulfiqar Durrani,Chief o f Section (Foreign Aid). The task team also benefitedfrom the considerable support of the Secretaries o f Planning and Development, Finance, Excise & Taxation, Local Government and Rural Development, Services and General Administration, Education, Health, Population Welfare, Livestock, Agriculture, Fisheries, Mines and Minerals, Irrigation and Power, Transport, Communication and Works, and Industries Departments and the Balochistan Public Service Commission, Provincial Public Accounts Committee, Accountant General, Bureau o f Statistics, Provincial Environment Protection Agency, Mining Association o f Pakistan, Small and Medium Enterprise Development Association, Balochistan Coastal Development Authority, Balochistan Development Authority, Gwadar Development Authority, Gwadar Port Authority, National Highway Authority, Geological Survey o f Pakistan, Arid Zone Research Centre, Water and Sanitation Agency, Water and Power Development Authority, Balochistan Resource Management Program, Quetta Chamber o f Commerce and Trade Association, Port QasimAuthority, Karachi Chamber o f Commerce andIndustry and many other institutes. The report was prepared by Kaspar Rxhter and Zahid Hasnain in the Poverty Reduction and Economic Management (PREM) unit o f the World Bank's South Asia Region, under the guidance o f Satu Kahkonen, Lead Economist, Manuela Ferro, former Lead Economist, Ijaz Nabi, Sector Manager, Yusupha Crookes, Country Director, John Wall, former Country Director, Ernesto May, Sector Director, and Sadiq Ahmad, former Sector Director. The World Bank peer reviewers were Farrukh Iqbal and Mark Thomas. The team from the Asian Development Bank comprised Safdar Parvez, Madiha Ahmed and FarzanaNoshab. Khalid Ikramprovided overall guidance for the report. The report draws upon contributions from Anjum Ahmad and Madiha Ahmed (Private Sector Development), Shahid Ahmed (Water Resource Management), Shahid Amjad (Fisheries), Asif Ali (Procurement Systems Performance Assessment), Ismaila Ceesay (Public Financial Management and Accountability Assessment), Raja Rehan Arshad, Nadir Abbas, Kevin Crockford and Ambreen Malik (Water Supply and Sanitation), Agnes Couffinhal and InaamHaq (Health), Mohammad Farooque Chaudhry (Development of Gwadar Port and Coastline), Richard Damania (Livestock and Rangelands), Haris Gazdar (Social Structures and Migration), Zahid Hasnain (Governance and Decentralization), Roland White (Local Government System), Marc Heitner and Waqar Haidar (Oil and Gas), Rasmus Heltberg and Neils Lund (Social Protection), Sadaqat Hanjra (Livestock), Khalid Ikram (A Vision for Balochistan), C. Bert Kruk and Bradley Christopher Julian (Container Terminal Facilities in the Arabian Sea Region), Hanid Mukhtar (Fiscal Situation and Issues), ShaheenMalik (Gross Domestic Product), Eric Manes and Tilahun Temasgen (Business Constraints to Growth), Naveed Naqvi (Education), Zafar Iqbal Raja (Transport), Rashed-U1- Qayyum (Crops and Horticulture), Michael Stanley and Ekaterina Koryukin (Mineral Sector), and Syed Sayem Ali, Martin Cumpa and Nusrat Chaudhry (Data Analysis). Irum Touqeer and Arlene D. Reyes provided invaluable assistance in handling all logistical arrangementsfor the mission, and with processing the report. The report team benefitedgreatly from collaborative work with the Government o f Balochistan counterpart team during three preparation missions (May and December 2006 and January 2007). The counterpart team coordinated all government inputs, and provided comments, feedback, and guidance to the study team at all stages o fthe analysis andreportpreparation, and helpedfacilitate interaction withother line departments. PART 1:FROMPERIPHERYTO CORE 1.1 SETTINGTHE STAGE 1.1 Balochistan offers some o f the best assets for development. Balochistan i s generously bestowed with naturalandlocational resources. Itpossessesthe largest landarea of any province of Pakistan, proving vast rangelandfor goats, sheep, buffaloes, cattle, camels and other livestock. Its southern border makes up about two thirds o f the national coastline, giving access to a large pool o f fishery resources. As a frontier province, it i s ideally situated for trade with Iran, Afghanistan, Central Asia andthe Persian Gulf countries. Over the last four decades, it supplied cheap natural gas to Pakistan's economic centers, supporting the country's industrialization. The province also claims large deposits o f coal, copper, lead, gold and other minerals. Figure1.1: Pakistan'sProvinceofBalochistan Source: World Bank 1.2 And yet, Balochistan's economy has not done well (Figure 1.2). The province has Pakistan's most anaemic growth record, worst infrastructure, worst water crisis, andweakest fiscal base. The poor economic performance leads to poor living standards. Balochistanhas the highest poverty-along with NWFP, lowest social indicators, and, inparts o f the province, the weakest state institutions. Last but not least, newspapers cany almost daily headlines about internal conflicts in this frontier province. All this has earned Balochistan a reputation o f beinga backward regon, far distant from Pakistan's economic hubs, with a life burdenedby the toils of the field and rangelandandtribal disputes rather than a hub o f activity surrounding world-class miningexplorations, modemtrade links, sustainable agriculture andan empowered community. L Figure 1.2: Balochistan as share of Pakistan along three dimensions ProvincialShamsinh a . Popuhtionand GDP (%over the four Provlncer) 2 0 M 5 w Source: PopulationCensus 1998 1.3 Many developing countries have well-recognized areas where poverty has been persistently hgh and economic growth has not kept up with other regions. The western provinces o f China, the Northeast o f India, the Southern States o f Mexico, the West o f Argentina, the Northeast o f Thailand andthe Northeast o f Brazil are just few examples o f such "lagging regions". Similarly, developed nations, such as the Canada, Italy, or the USA also have regions with chronically low incomes compared to national averages. Economic geography, a branch ineconomics developed inthe 1990s, is all about where economic activity takes place. It offers two concepts that are important in understanding lagging regions (Krugman 1998). First, differences in economic development across locations can emerge from underlying, inherent differences in those locations, such as climate, sea access and geography. Second, such initial disadvantages embedded in geography, climate, policy biases or cumulative outcomes o f historic accidents, can lead to regions failing to develop a self-enforcing economic dynamism. Thin markets with little backward and forward linkages, l o w purchasing power, weak skills o f the labor force and o f local adrmnistrations combine to make them unattractive for business. The challenge o f such regions is to grow and converge with the other regions in the country. 1.4 In many ways, Balochistan is a prime example for the relevance o f these ideas. Inherent geographical weaknesses led over the centuries to l o w population density. The modernization process, which transformed the country from a poor rural nation into a semi-industrialized economy, has not benefited all provinces equally. Pakistan's growth poles developed along the Indus Rwer, leaving the other parts o f the country as apcultural hmterland. A diversified economy inKarachi and Punjab's urban centers coexists with a less developed and more rural economy in the rest o f the country. Combined with political neglect, this destined Balochistanto theperiphery o f economic and institutional development. 1.5 As Balochistan was at the fringes o f the development process for far too long, knowledge about the province's assets, challenges, and national contributions remains partial and cast in preconceptions. As a result, there is little appreciation about the other, equally important, Balochistan that inmany ways i s at the core o f Pakistan's growth strategy. The province i s embracing the window o f opportunity arising from national economic reforms and global integration to leverage its formidable resources and meet the challenge o f development. First, Balochistan has unleashed reform due to the strong leadership as well as the tough lessons learnt from an eight-year drought and two-year fiscal crisis. Second, the good performance o f the national economy has boosted public investments in the province to record levels. The provincial and federal governments have launched major uplift initiatives in economic and social sectors, 2 invested in infrastructure to improve connectivity and initiated administrated change across all layers o f government. Third, just as Balochistan's Sui gas fuelled Pakistan's industrialization in the second half o f the 20* century, its trade and energy ties with Iran, the Middle East and the rest o f the world are supporting Pakistan's economic expansion today. Inparticular, boosting energy supply depends to a large degree on pipelines andtransmission lines from Iran, Middle East, and Central Asia that pass through Balochistan; and scaling up national trade hinges largely on turning Gwadar into a viable, well connected port, as well as transforming Balochistan's natural riches in mining, fisheries, and ago-products into profitable exports. Combined with the admirable resilience and resourcefulness o f Balochistan's people, these programs and projects can overcome the impediments that have heldback provincial prosperity for decades. 1.2 ROADMAP 1.6 This report offers an empirical analysis o f provincial economic development andthe ways inwhich the provincial and federal governments, supported by donors, can help to foster it. It i s organized around three topics: the stock taking o f economic outcomes over the last decades; the Strategies for inclusive economic development o f generating growth, deliveringservices, and financing development in the future; and the instruments for today's economic policies to bring about the required changes. Specifically, the report (Figure 1.3): (a) takes stock o f Balochistan's outcomes on growth, employment, poverty and social development; (b) conducts a thorough analysis o f the three strategies o f generating growth, delivering services, and financing development; and (c) provides the four instruments o f investment, innovation, integration, and institutions to bringabout the requiredeconomic policy changesacrossthe three strategies. Figure 1.3: Framework ofthe Balochistan Economic Report -\ FinancingDevelopment/. 2 INSTRUMENTS Investment Innovation Integration Institutions 1.7 The five main findings o f the report are as follows. First, there are good reasons to be optimistic about Balochistan's development. Provincial and federal reforms, the synergies between Balochistan's and Pakistan's development agenda in the areas o f energy and trade, and the strong performance o f the national economy present a unique opportunity to move Balochistan from the periphery to the core o f economic development to the benefit o f its people. Second, in order to overcome the challenges that held back provincial development for many decades, Balochistan should pursue a development agenda around generating growth, delivering services, and financing development. This approach can make sure that Balochistan's development path is inclusive, where the gains are shared across regions and population groups. Third, generating growth requires leveraging Balochistan's resource and locational advantages, deepening its capacity for value-addition, and strengthening the foundations for business activity. Fourth, deliveringservices depends on improvingthe public administration, makingdevolution more effective and scaling-up o f basic services with innovative approaches involving the private sector and communities. 3 Finally, financing development relies on a prudent management o f provincial expenditures, strengthening the capacity for revenue collection, and advancing fiscal devolution 1.8 The three strategies reflect three broad lessons from the development experience around the world. TheJirst strategy "Generating Growth" is about fundamental change ineconomic structures, the movement o f resources out o f agriculture to services and industry, and about transformations in trade and technology. Since the most powerful and the central force for economic growth i s the private sector, the creation o f a good investment climate---one that encourages firms, both small and large, to invest, create jobs, and increase productivity-is at the center o f this strategy. The strategy lays out a way for Balochistan to share Pakistan's ambition o f sustaining growth around 7 percent per year. This requires developing the provincial economy around four thematic thrusts: (i) exploiting the diverse natural resource base; (ii) developing the location advantage; (iii) upgrading the value chains associated with (i) and (ii); (iv) strengthening the and foundations o f business activity. The fourth pillar includes law and order. Security issues are a direct obstacle primarily for the exploration and exploitation activities in natural gas. But these problems in selected districts affect the perceptions o f potential investors for the entire province and thereby lower investments in other sectors as well. Skill development is another dimension o f business activities, as Balochistan's labor force requires human capital to embrace economic opportunities. Among the 2.3 million provincial workers, some 1.4 million have no schooling at all, and only 70,000 practice crafts and related trades. 1.9 The second strategy "Delivering Services" is about changes to social life - in health and life expectancy, in education and literacy (to develops skdls in support o f growth), in population size and structure, ingender relations, and in social relations. For example, improvements inthe status o f women is essential to progress in a number o f areas, including child well-being, family planning, labor force participation, and community empowerment. The challenge to policy is to help release and guide these forces o f change. The strategy proposes measures to improve the effectiveness o f the public administration at the provincial and local levels, to scale upbasic services ineducation, health, water supply and sanitation, and social assistance to people, and to foster mechanisms for accountability. Social development will also require involving the private sector and communities inthe delivery o f services. One crucial aspect i s social mobilization by creating agency and voice for poor people to become part o f the development process. 1.10 Generating growth and delivering services require resources. Yet, public spending absorbs scarce domestic resources and imposes an excess burden o f taxation that can get in the way o f economic growth. While foreign aid flows are an essential cheap source o f finance for developing economies, they are often small and can delay much needed policy change. Since Balochistan's development needs will always outstrip its revenues, the third strategy "Financing Development" emphasizes a carefid prioritization and an effective management o f provincial public expenditures as well as providing the fiscal space for local governments. It also highlightsthe need for upgrading the system o f revenue collection as Balochistan's tax base expands with economic growth. These efforts will help to ensure sustainable fiscal positions which in turn are crucial to give confidence to firms inmaking risky production decisions. They will also promote local accountability by raising the discretion o f local governments to respond to local needs. 1.I The three strategies jointly will help to make sure that Balochistan's development path is inclusive 1 and the benefits o f growth are shared across regions and population groups. This is not an automatic process, nor is it a process o f "trickle down". It is not enough simply to assume that everyone will eventually gain ifthe economy continues to grow. A farmer who lacks access to a navigable road will go o n struggling-untildecision-makers act to rehabilitate the feeder roads andprovide access to market centers. A girl who spends her days working at home rather than learning to read will have little to show for her country's economic expansion -until a school is setup inher village that gives children the opportunity to 4 become literate. As the farmer and the girl gain the tools to participate in the economy, they can go o n to contribute to and extend the country's growthrun. 1.12 The strategy o f generating growth contributes to inclusive development intwo ways. I t argues for the parallel development o f Balochistan's diverse resource and locational assets for the benefit o f different regions and occupations. And it makes the case for lifting rural livelihoods in support o f the four-fifths o f the population residing in villages by highlighting the need for connectivity, infrastructure and services in support of the rural economy. Similarly, the strategy o f delivering services makes two contributions to inclusive development. Itdraws attention to the urgency o f buildinghumancapital, which is linked to better family health and participation in society, higher productivity o f farmers, workers and small-business owners alike, and thus higher growth. Human capital also endows people with the ability to gain well- enumeratedjobs elsewhere and support the economy at home through remittances. Inaddition, the strategy also underlines the need to reach remote areas o f the province through community-based modes o f providing education, health, and other services that reflect Balochistan's geographic, demographic and social realities. Finally, the strategy o f financing development argues in favor o f advancing fiscal devolution through a transparent transfer o f provincial resources to lower levels. Just as the National Financial Commission Award is essential to ensure the delivery o f basic public services across all provinces o f Pakistan, an enhanced Provincial Financial Commission Award is vital to ensure the delivery o f basic public services across all districts inBalochistan. 1.13 Implementing the three development strategies will require differentiation o f policies andprograms across the different regions o f the province. This report focuses on a sectoral approach, which matches roughly the structure o f policy makingo f provincial government andthereby tends to understate differences across regions. The report leaves the task o f developing sub-provincial development strategies for future work. It remedies this weakness by highlighting,whenever relevant, geographic differences. This will be especially important for the discussion o f growth andrural livelihoods inPart 2. 1.14 To mitigate this concern, the three strategies are informed by four instruments to good economic policies. First, investment i s at the heart o f the development process, as higher living standards come about with the accumulation o f physical and human capital. Public investment is required in areas such as floodwater irrigation and drought mitigation, primary education and rural roads, where the private sector would undersupply services due to lack o f funds or inclination. Such investments, if done well, will not only be equitable, but can also crowd-in private investments, that is, make feasible fresh private investment inplaceswhere itearlier was not. Privateinvestorsareunlikelyto gointoareaswithoutroads, electricity, or credit facilities. However, if done poorly and in the wrong places, public investment - whether by the federal or provincial governments -can also crowd-out private investment by pre-empting scarce domestic savings and imposing administrative control. It then becomes a tax on private entrepreneurship as the engine for growth, jobs, and household income. And the private sector is essential for Balochistan's development prospects, as it allocates resources typically more efficiently than the public sector and helps to reduce the demands on an already overstretched public sector. 1.15 Second, the success o f such investments depends on strong and practical innovation. Development is about the generation and application o f good ideas, about what works and what does not under local circumstances (Stern 2002). Balochistan covers nearly half o f the land area o f Pakistan, yet accounts only a twentieth of the country's population andone twenty-fifth o f the country's economy. Development policies have to be adjusted to Balochistan's defining characteristics o f remoteness and geographical diversity. Whilst there are basic principles of development strategy, n o one size fits all. Models and plans developed for Pakistan's other provinces, be it the emphasis o f canal irrigation inthe water sector or the infrastructure and staff intensive structure o f health care delivery, have to be modified to fully reflect these conditions. Innovation requires openness to new ideas andinstruments, and going beyond activities that have succeeded 5 inthe past. One area of innovation is public-privatepartnerships. Whenprocuringnew infrastructure, such as roads or public buildings, the government has a choice between public and private financing-that is, betweenpaying for the investment itself and choosing a private company that pays for investment inreturn for payments from infrastructure users or the government. If the public-private partnership between the government and the firm is well designed, private financing may lower costs or increase revenue. The Government o f Pakistan is seeking to increase the role that public-private partnerships play, for example as part o f the programs to improve the National Trade Corridor. Another area o f innovation i s service delivery. Publicly funded government provision is only one o f many modes of service delivery, and inmany cases not the best one. Fortunately, as we will highlight in this report, the Government o f Balochistan has already embraced innovative initiatives inservice delivery and other areas. 1.16 Third, moving from periphery to core requires integration both internally within the province, as well as externally with Balochistan's neighboring provinces and countries. Remoteness increases transport cost, which inturn segments markets and reduces the economies o f scale and specialization for the private and public sectors. Since problems arising from remoteness are mediated mostly through transport, Balochistanhas inrecent years rightly paid special attention to this sector. These investments can also help inbringing about urbanization by facilitating mobility. Cities are an important driver of development, as they offer a shlled labor force, access to finance, close proximity to the public administration and policy makers, and, most importantly, powerful agglomeration economies through strong forward and backward linkages to input and output markets. Last but not least, improvements in cross-provincial and cross-border infrastructure can facilitate private trade as an engine o f growth. Pakistanopened its trade borders to the world inthe 1990s and shifted away from import-substituting strategies. Balochistan can now leverage its strategic location to become a trading center linkingPakistan's industrial hubs with the energy rich regions o f Iranandthe Middle East as well as Central Asia. 1.17 Fourth, another important lesson o f the global development experience i s the essential role o f institutions. The state is not a substitute for the market, but a critical complement. Government action i s crucial to foster an environment where contracts are enforced and markets can function, basic infrastructure works, adequate health, education and social protection are provided, and people are able to participate in decisions which affect their lives. The failures o f economic and social policies inBalochistan and elsewhere underscore the need to strengthen the institutional accountability between users, providers, and policymakers (World Bank 2003). For example, when faced with disappointing education and health outcomes, it is tempting to recommend a technical solution that addresses the proximate cause o f the problem. Why not give vitamin A supplements, de-worm schoolchildren, and train teachers to be more effective? Why not develop a "minimum package" o f health interventions for everybody? Although each suggestion has merit, simply recommending them does not address fundamental institutional problems that preclude their adoption. Adopting appropriate solutions and adapting them to local conditions can involve two types o f measures: building capacity and designing institutions that underpin accountability and participation; as well as changing incentives facing policymakers, providers, and citizens. Rgorous monitoring and evaluation o f innovations or experiments are part o f the latter category. They lead to more precise and effective lessons and strong evidence to convince others to follow success. In t h s way, the power o f evidence becomes an agent for change (Stem 2002). 1.18 These four instruments o f investment, innovation, integration, and institutions form the basis for the policy responses to overcome old, long-lasting challenges as well as to embrace new opportunities for Balochistan's development. 6 1.3 TAKINGSTOCK 1.19 The principal strengths of Balochistan's economy are natural resource based: mines and minerals, h i t and crops, livestock andfishing. Whde the economy lacks diversificationat the locallevel, the distinct ecological systems in different areas -flood-plains, uplands, and deserts to the coastal area -lead to a considerable variety at the provincial level. Balochistan's agriculture focuses on non-staple and high-value products, suitable for the water-scarce hgh-altitude environment, inaddition to crop cultivation inthe canal- irrigated districts inthe northeast close to the IndusBasin. The northern area specializes inhorticulture; the central and western districts engage foremost inlivestock rearing, and the coastal belt relies on fishery. In addition, richmineral deposits, such as coal, copper, gold to natural gas, are scatteredaround the province. 1.20 Balochistan has the weakest long-term growth performance o f all provinces. From 1972173 to 2004105, the economy expanded 2.7 times in Balochistan, 3.6 times inNWFP and Sindh, and 4.0 times in Punjab (Figure 1.4). The growth divergence has widened historic income differences and Balochistan's per capita income level o f $400 in2004 was only two-third o f Pakistan's level. Balochistan's rate o f structural change and urbanization was also lower than elsewhere. Yet, Pakistan's five-year economic recovery has improved Balochistan's growth prospects. Its recent upswing is broad-based, and the economic uplift initiatives and transport investments are accelerating the process o f urbanization (paragraphs o f the main report (PMR) 1.25 to 1.33). 1.21 The quality of employmentis worse inBalochistanthan inother provinces. Workers produce about one quarter less than workers in NWFP and Punjab, and over one third less than workers in Sindh (Figure 1S). The labor market is marked by duality, as less than one infive workers holds a regularlysalaried job, o f which the private sector supplies just one in four. And while the job quality i s worse than elsewhere, workers inBalochistanmigrate less other workers. The projected increase o f Balochistan's population from 7.8 million in 2005 to 11.1 million in 2025 poses major challenges for policymakers in tenns o f providing education and employment opportunities. However, Balochistan's labor market is already improving noticeably. The economic recovery was labor-intensive, generating 900,000 jobs inthe last eight years, and the share o f workers with some education increased by 7 percent from 199912000 to 2005106. Wage increases have benefitedworkers on regular jobs, are likely to spill over to irregularjobs due to rising labor demandfrom constructionprojects and agriculture. Inaddition, labor reforms hold the promise o freducing barriers to regular jobs. Improved connectivity will also facilitate mobility of labor. The demographics suggest that the labor force could rise from 4.1 million in 2005 to 7.2 million in2025. Basedon the historic 7 employment elasticities, creating an additional 158,000 jobs annually for these workers should be well within reach with economic growth o f at least 6.5 percent. As the schooling o f the future labor force is likely to be more egalitarian, a rising labor force participation rate could become an important force for provincia1 convergence (PMR 1.34 to 1.43). Figure 1.5: Balochistan's workers are less productive than workers of the other provinces, but job creation increased noticeably in this decade. ProvincialLsbw Produchuity(46d PakistanAmge). 2W105 ~mpioyment (rssnisss-iw).1997~~8zwme m 170 1W Bmloshirten 1% 0NWFP 110 130 0Punjab 1Lo 110 OSindh 108 w 0 20 10 100 120 1997lW m i m z 2 0 W 4 2oeyog Source. LaborForce Survey 1.22 The number o f poor people of rural Balochistan increased from 1.5 million people in 1998/99to 2.1 million people in 2004/05. While poverty rose in rural areas, it declined in urban areas (Figure 1.6). Manufacturing, government spending and services, Balochistan's main drivers o f the economic recovery, have generated incomes in cities, but less so invillages. The principal challenge going forward is to ensure that rural households share inthe growth experience, as inthe other three provinces. And there is a reason for optimism. Most importantly, the drought, which depressed economic activity in rural Balochistan, finally ended in 2005. This supported the sharp rise inlabor force participation in rural areas from 2003/04 to 2005106. More public resources, combined with greater efficiency and equity o f spending, should further contribute to lower poverty (PMR 1.44 to 1SO). Figure 1.6: Balochistan's poor people in rural areas have not yet benefited from the economic recovery. Prn"i"CI.i PWmyseusri*. 1998fJ9to 2004105 275 L 2.25 n 2.00 Source: PSLM 8 1.23 Inacountry knownfor its social gap, Balochistan stands out as the province withthe weakest social development. It scores lowest key indicators for education, literacy, health, water and sanitation for 2006/07. For example, two infive children aged 5 to 9 are enrolled inprimary school (Figure 1.7). It also stands out as the province with the worst record on gender equality. Yet, Balochistan has succeeded in narrowing the social gap from 2001/02 to 2006107. Enrolment, literacy and immunization rates improved, as has access to tap water and flush toilets. The gender gap also narrowed from 2001/02 to 2006/07. For example, the number o f girls of primary school age enrolled inprimary school as a share o f the number o f boys increased by 3 percent over the five years. Progress extended to the labor market. Female employment grew by from 70,000 in200112 to 260,000 in2005/06, mostly due to the rebound inagnculture (PMR 1.5 1to 1.55). Figure 1.7: Balochistan's social and gender indicators are low but improving. PmYincialSoculiand Genderii?dicL)!ors 1%).2 W 0 7 1w 1 'O WFP i Prim- NER ~Middle NER 1.24 The quest for Balochistan's economic development is challenging. We need to look no further than the province's own record on growth, employment, poverty reduction, and social development to appreciate the scale o f the challenge. Yet, today's prospects offer the best opportunity in many decades to put the province on a path towards prosperity (Table 1.1). One reason for optimism is the province's own reform initiatives in areas o f subnational responsibilities, which include the services for mines and minerals, labor regulation, agriculture, irrigation, intra-provincial transport, education, health, water supply and sanitation. Another reason i s the improved design and implementation o f policies corning from Islamabad, which have a large bearingon Balochistan's economic and social performance. Over the last four years, a goodnational economy has ledto a greater resource flow through the NFC Award from the center to the province, as well as scaled-up central investments, such as in Gwadar port, the expansion of the national highway network, the proposed construction o f the Iran-Pakistan-India pipeline, or the Kachhi canal irrigation project. In addition, national trade policies have contributed to closer ties between Pakistan, Iran and Afghanistan. Finally, as Palustan's prospects have improved overall, there is a better chance for progress on a third set o f issues that have to be tackledjointly by the federal and provincial government. They include the sharing o f nationalwater resources andthe inter-governmental fiscal relations. 9 isions Challenge Opportunity Growth 1. Growth Low growth Improvedoutlook 2. Convergence Divergencefrom other provinces Growing economic linkages 3. Structural Change Slowstructuralchange Broad-based economic recovery 4. Urbanization Low urbanization Agglomorationthrough economic initiatives Employment 1. Productivity Low labor productivity Labor-intensiverecovery I 2. Quality Low qualityjobs Risingskill levels 3. Duality Scarce wagejobs and abundant informaljobs Risingformal sector wages 4. Migration Low migration inthe past Greaterconnectivityin future 5. Demography Large populationgrowth Large laborforce growth Poverty Worsening poverty Check is inthe mail Social Indicators 1. Social gap Worst social indicators Decliningsocial gap 2. Gender gap Worst gender indicators Declininggender gap 10 PART2: GENERATINGGROWTH 2.1 Balochistan is by and large a labor-scarce economy with little crop production (apart from the irrigatedKachhi plains), almost no industry (apart from the Hub region near Karachi), and services catering almost entirely to local demand. By contrast, Pakistan is a labor-abundant economy with growth modes in intensive agriculture, domestic manufacturing as well as banlung, energy and telecommunications. Furthermore, the fact that Balochistan covers nearly half o f the landarea o f Pakistan while accounting for only a twentieth o f the country's population is a stark enough reminder that any understanding o f the province's economic development will need to pay attention to its geographical and demographic peculiarities. Indeed, remoteness and geographical diversity might be viewed as defining the context o f development in the province. But Balochistan geography and locality are also its main economic resource. The low population density implies that the province enjoys potentially highvalue o f natural resources per person. The forbidding topography i s home to richmineral andpetroleum deposits, much o f which have not yet been put to economic use. The long coastline is a possible site o f trade and travel, as well as a gatekeeper o f rich marine resources. Last but not least, Balochistan's land mass endows Pakistan with a strategic space that might shorten trade andtravel costs betweenemergmgeconomic regions. 2.2 Inview of these disparities, Balochistan's growthhas to take a different trajectory than the growth paths followed inother provinces. l k s report proposes that Balochistan's economic development should be based on four thematic thrusts: (i) exploiting the diverse natural resource base; (ii) developing the location advantage; (iii) upgrading the value chains associated with (i)and (ii); and (iv) strengthening the foundations o f business activity. They support growth which occurs whenever people take resources and rearrange them in ways that are more valuable. Every generation has perceived the limits to growth that finite resources would pose ifno new ideas were discovered. And every generation has underestimated the potential for findingnew ideas. Possibilities do not merely add up; they multiply. 2.3 First, in the short run Balochistan's growth is likely to come most from economic activities that draw on its diverse natural resource base. Since the province's marked geographic and environmental diversity supports a varied economy, there is a need to pursue parallel efforts, benefitingmultiple sectors and regons at the same time. Balochlstan's 22,000 settlements are scattered across flood-plains, uplands, deserts, and the coastal area. Horticulture dominates in the high-altitude environment o f the north, crop production in the canal-irrigated areas o f the east, livestock rearing in the central and western districts, and fishery in the coastal belts. In addition, rich mineral and petroleum deposits are scattered around the province, although only few o f them are currently being exploited. Finally, some industry clusters have emerged on Balochistan's side of the border near Karachi. Such internal heterogeneity across a poorly connected, large landmass indicates that no single project or program will be sufficient to transform the provincial economy. 2.4 Second, Balochistan's advantageous location is the other core asset. The province i s on the cultural and geographical crossroads of South Asia, Central Asia andthe MiddleEast, makingit a possible hub for inter-regional transport andtrade. Balochistan lies opposite to the Straits o f Hormuz, which marks the entry into the Persian Gulf where nearly 17 million barrels o f oil pass daily. Straddled by the 900 km western border with Iran, Balochistan opens access to these mineral rich areas. In addition, Balochistan shares a 1,200 kmborder with Afghanistan, providing its north-western neighbor as well as Central Asian countries with sea access. The development of the deep-sea port of Gwadar creates opportunities for trade connections for the resource-rich landlockedprovinces o f Punjab andNWFP. Finally, Balochstan is also a transit andtransport route of gas pipelines, includingthe $4billionIran-Pakistan-India gas pipeline, with an approximate length o f 3000 km, as well as the 1,700 km Turkmenistan-Pakistan gas pipeline. Backward 11 linkages from the import and export at the port, and multiplier effects from the highways connecting it to different regions within and outside the province can spur economic development and population clustering across large parts o f the province. This, combined with a fiscal redistribution o f a share o f the provincial own-source revenues insupport o f local services, will help to make growth spatially more inclusive. 2.5 Third, while Balochistan's natural andlocation resources will be the base for the provincial growth, usingthese endowments to move up the value chain will make such growth sustainable. This highlightsthe importance o f downstream small-scale processing industries, such as for seafood products at Gwadar, or mineral products at Marble city, as well as small-scale engineering, such as repair and maintenance o f machinery andequipment. 2.6 Fourth, Balochistan lacks currently the endowments o f technology, infrastructure andmanpower for the establishment o f modem industries. This suggests that long-term economic development should be centered on fostering the foundations that support business activity. Transport connectivity, education, knowledge, information, and transparent and light business regulations are all crucial. Transport connectivity helps to overcome segmentation and remoteness and increases multiplier effects; Skill development ensures that Balochistan's labor force is ready to embrace economic opportunities; 0 Generating knowledge about the potential o f minerals, the fishing stock, or trade integration encourages entrepreneurship and innovation; and 0 Transparent and light business regulation ensures that companies can reap such opportunities. 2.7 Economic affluence i s associated with prosperous enterprises, and enterprises locate where they expect the highest profitability. Firms will only invest in Balochistan if resources, markets and business climate are favorable for their products. The following discussion shows how Balochistan can develop through leveraging its natural resources (minerals, natural gas, livestock, major crops, minor corps, and fisheries), location (national, cross-border and transit trade), value-addition (industry hubs, support services), and business environment (transport, education, information, and investment climate) (Table 2.1 and Figure 2.1). Table 2.2 at the end o f this part summarizes the instruments for generating growth across these sectors. Table 2.1: Balochistan's growth pillars, sectors and areas Pillar Sector Area (District) Chapter A. NaturalResources Minerals Copper/Goid - Saindak- andRekodiq (Chaghai) Minerals Coal Quetta Minerals Marble - Hub (Lasbela) Minerals Naturalgas Dera Bugtiand Kohlu Petroleum Livestock Northern and central districts Rural,Livestock,Water Majorcrops Jaffarabad and Nasirabad Rural,Crops, Water Minorcrops North-easternand south-westerndistricts Rural,Crops,Water Fisheries Gwadar,Pasni,Jiwani, Ormara and Sonmiani (Gwadarand Lasbela) CoastalDevelopment 8.Location Nationaltrade Gwadar and transport routes Gwadat`s Potential Cross-border,transit trade Chaman(Killa Abduliah), Mandmurbat (Kech), Gwadar LinkingEnterprises C. Value-Addition Industryhubs Hub (Lasbela),Quetta LinkingEnterprises Support services Urbanareas LinkingEnterprises D. BusinessEnvironment Transport Province LinkingEnterprises Education Province EducationalFuture Information Province Minerals,Petroleum,Coastal Investmentclimate Province LinkingEnterprises 12 Figure 2.1: Balochistan's 29 districts 2.1 TAPPINGMINERAL DEPOSITS 2.8 Inspite o fglobally risingmineralprices, Balochistanhas not yet been able to exploit adequately its geological potential. According to the estimates o f the Geological Survey of Pakistan Balochistan has more than half o f the national prospective geology for minerals, yet it contributes just over one-fifth to national mining GDP, and leads only inthe production of coals. To date, enterprises exploit only 39 out of the 50 minerals under some 1,080 licenses, only nine o f which account for over 95 percent o f the total volume. The miningsector is heldback by low funds and low productivity. Overcoming these deficiencies requires Balochistan to respond to an array o f complex issues facing mineral industries, including improving the regulatory environment, creating sound institutions that respect the rule o f mining law, and establishing a stable, transparent process in which local affected communities have a voice in resource decisions (PMR 2.26). They require a recognition that exploration for minerals is highrisk and highreward -for example, only about one in every hundred metallic mineral prospects explored proceeds to production - and therefore higher returns are needed tojustify investment inexploration. With these reforms, Balochistan has a potential to accelerate up the exploration curve to levels comparable with Argentina and thereafter climb the mineral production curve to matchproducer states such as Mexico (Figure 2.2). Based on the historical trend, significant increase inmineral productionwould be expected five-to-ten years after the beginning of reforms (PMR 2.34). 2.9 The objective for the sector is to create jobs, stimulate spin-off industries, contribute to local infrastructure development in mining areas, as well as to provide substantial tax and royalty revenues to central andlocal governments. Harnessing the potential o fthe miningsector requires a number of initiatives (PMR 2.52 and 2.53). 13 Investment: Promote scientific and geological investigation into the nature and extent o f Balochistan's mineral resources and to make such information available to potential investors. Innovation: create administrative capacity to manage well provincial stakes in large-scale miningprojects. Integration: Promote the need for better understanding of the distribution o f impacts and benefits o f the mining sector on local populations and the implementation o f policies and programs for the sustainable management o fmineral resources. 0 Institutions: o Incentives: harmonize the legal and fiscal framework with international practices; o Capacity: improve transparency and efficiency o f public mining institutions, including cadastre services, mines inspection, health and safety issues, environmental matters, commodity certification and quality control, andlaboratory services. Figure 2.2: Balochistan's miningsector has a longway to go. Trends in MiningSector Reforminthe 1990'slandthe olacementof Time Macro EconomicReform _* _* InitialReformingSkge ReformedStage Source: World Bank 2.2 REVITALIZING PETROLEUM 2.10 As Balochistan's minerals sector is gearing up, its natural gas sector is wearing down. In 1994195, Balochistan produced 355 billion cubic feet (bcf) and accounted for nearly 56 percent o f Pakistan's total output. A decade later, the province produced 336 b c f and contributed only 25 percent to national output (Figure 2.3). As Balochistan's gas supplies are exhausting, Pakistan is also running out o f usable energy. About half o f its energy needs are covered by natural gas reserves, which will decline inthe absence of new discoveries. The supply shortage results in expensive imports o f petroleum and petroleum products, worsening Pakistan's trade deficit. This chapter argues that Balochistan's downward trend in gas production is not the result o f a deterioration in the perceived prospectivity. Instead, it is a direct consequence o f lack of investment in exploration and development due to security concerns. Companies prefer to invest inthe Sindh portion o f the Indus basin, just east of Balochistan's major production fields in Loti, Pirkoh and Sui (PMR 2.56 to 2.59). 14 Figure 2.3: Balochistan's gas fields are becoming less plentiful. UsedandRmahins Gas R e 6 e ~ 1of BslochistsnITCR Produdion of Gar FieldsLBiliion CubicFeet1 Source: World Bank 2.11 While petroleum and natural gas are a responsibility o f the federal government, the provincial government has an important role as facilitator. Increasing exploration and exploitation will require coordinated actions at both levels (PMR 2.69 to 2.72). e Integration: Increase transparency in the sharing o f the benefits from the use o f the hydrocarbons with the local population; for example, the government could prepare for the public an annual report on the production of hydrocarbons and the distribution of oil and gas rents, including taxes; the report could lay out the funding from oil and gas companies as well as the public sector allocated to programs in areas where exploration and exploitation activities take place. 0 Institutions (Capacity): Deepen the provincial oil and gas expertise and provide facilitation for private investors; the Balochistan government has taken the welcome step of setting up an Oil and Gas Cell inthe Minerals Department; incollaboration with the federal Directorate General o f Petroleum Concessions, this cell can help to provide information to oil and gas companies and support the provision o f security from the Home Department; such dialogue would help the provincial government to actively address concerns on security, infrastructure, and other issues inhibitingthe exploration andproductionactivities ofcompanies. 2.3 GWADAR'S POTENTIAL 2.12 While Balochistan's natural resources are valuable assets o f national importance, its coastline presents a window to the rest o f the world. Most o f the discussion on Gwadar has focused on transshipment and on transit trade with Central Asia. This chapter argues that the medium to long term potential rests primarilywith national exports and imports. IfPalustan's trade volumes continue to grow at a healthy rate over the next ten to fifteen years, then the capacity constraints at Karachi and Qasim will generate substantial businessfor Gwadar (Figure 2.4). Evenunder conservative assumptions, the shortfall relative to today's combined capacity at Karachi and Qasim by 2026 could be over 100 percent for container traffic and close to 60 percent for dry cargo. Furthermore, Gwadar is located near the entrance o f the Straits o f Hormuz in the Persian Gulf, which holds close to three-fifth o f the world's crude oil reserves and almost half of the world's proven gas reserves (PMR 2.85 to 2.87). Additional economic activity may well arise through transit energy trade with China as well as industrial development (PMR 2.8 I), but these prospects are less certain. 15 Figure 2.4: The projectedport traffic is likely to exceed the available capacity at Karachi and Qasim within the next decade. ContsinortnMc moursnd TEUs) Dry cswo M l c (ThoupandTom) lfW0 10wo IO00 IO00 4004 1,000 0 mO6 ZWI) 1010 2011 1014 2016 2016 2020 2027, 1024 2026 10116 2008 1010 2012 2014 2016 2 O U 2020 2022 2024 2026 Source: WorldBank 2.13 Inorder to prepare Gwadar to make the most ofemerging opportunities, considerable investmentsin hardware andsoftware are needed. Gwadar port's current capacity i s only approximateIy 3.5 million tons of traffic compared to Karachi port's capacity o f 40 million tons, and faces a tough competition from other national and regional ports. While much o f the investments in infrastructure will need to be borne by the federal government, given that ports are a federal responsibility, the provincial government will remain an important stakeholder inensuring that the policy and regulatory environment is attractive to investors (PMR 2.91 to 2.97). Investment: Make substantial investments in port facilities as well as electricity and water; the total amount required in port infrastructure over the next two decades or so would be in the order o f US$1.2 billion, or about five times the sum invested to date; these investments would have to phased in line with the emerging traffic flows, and financed in partnership with the private port operator. Innovation: Follow through with landport model which grants Port o f Singapore Authority a share inport revenues in return for the management o f port operations and marine services as well as substantial investments. Integration: Prioritize the road connection to the National Trade corridor through the extension o f the N-85 inview o f the importance o f export-import traffic for Gwadar port; inaddition, link N-40 andN-85, possibly from Dalbandin to Basima, to connect Gwadar to the mineral areas. Institutions (Capacity): Enable Gwadar Port Authority to be an effective regulator o f the private port operator by strengthening its capacity o f development planning, finance, tariff and rates management, marketing, and performance monitoring; improve coordination among the several federal andprovincialagencies involvedincoastal development generally, and Gwadar port and city development specifically-the Gwadar Port Authority, the Gwadar Port Implementation Authority, the Gwadar Development Authority, the Balochistan Development Authority, the BalochistanCoastal Development Authority, and the district government o f Gwadar. 16 2.4 BEYONDGWADAR: COASTAL DEVELOPMENT 2.14 Balochistan covers 790 km o f the 1,100 km national coastline and contains rich fishmg grounds for tuna and mackerel, sardines andherrings, catfish and croakers, and shnmps, squid andcrab. Yet, its coastal and marine resources remain largely untapped, as Balochistan contributes no more than one sixth o f the national fisheries value added (Figure 2.5). The principal reason for the weak performance is low productivity along the entire value chain (PMR 2.104 to 2.109). Fishermen operate small and dilapidated vessels unable to reach many fishing grounds and yielding only a low catch; harbors and auction halls are congested and fail international health and safety standards; andprocessing units lack modem preservation and packaging techniques. Since fish is a highly perishable commodity, any weakness in one o f these elements lowers the value ofthe final product. Figure 2.5: Production and exports of fishery products has stagnated. Pal.tan's FishPicduction(MetricTons) 700.w0, , m.wo ~ M B 0 ~ 7m-7~1s- 1 1 8 9 6 1 ~ zwoiui m i m z mum m o m mu05 1986107 1997ma1 ~ 9 ~ 1 i1s w o z0w11lt 2~1102 mm3 mm m o w Z W M ~ Sources: Marine and Fisheries Department, andFederal Bureau o f Statistics 2.15 The principal thrust o f the government's strategy should be on using scarce public resource to encourage much-needed private sector investment (PMR 2.110to 2.123). Investment: Modernize the existing harbor facilities at Gwadar and Pasni; improve the fishing capacity o f local fishermen through provision of echo-sounders to locate fish and investing in on-board rehgerated fish-holds; conduct a fish stock assessment to generate and disseminate the information on fishing potential to encourage private investment, including in shrimp farming. Innovation: Encourage, through the provision o f concessional land, the clustering o f ice plants, cold storage facilities, andprocessing andpackagingunits at Gwadar. Integration: Construct new harbors in some o f the other fishing settlements, such as Jiwani, Ormara, and Sonmiani. Institutions (Capacity): improve capacity for monitoring and coordination in concerned departmentsto enforce fishmglicenses andcompliance with hygiene standards. 2.5 LINKINGENTERPRISES 2.16 Balochistan's private sector has not been able to make good the vast opportunities offered by its natural resources and coastline. A small population dispersed over a very large, poorly connected land surface leads to hghly segmented factor and output markets, a preponderance o f small enterprises, and 17 limitedbusiness opportunities (PMR 2.125 and 2.126). Balochistan accounts for just 2 percent o f Pakistan's enterprise population; more than 98 percent o f the enterprises are own-account businesses; and out o f the 2.1 jobs per enterprise, one half is taken up by the enterprise owner, another quarter by unpaid family workers, leaving only 0.56 jobs for paid employees (Figure 2.6). Business regulations affect directly the productivity o f investment and economic activity o f micro to large enterprises. A worldwide comparison points to six areas o f concern where Quetta ranks in the bottom 30 percent o f the global distribution: dealing with licenses, registering property, trading across borders, paying taxes, employing workers, and enforcing contracts (PMR 2.128 to 2.134). Balochistan's past experience with industnal estates has also been mixed due to problems of lack o f infrastructure, high cost o f land, and poor location with lack o f easy access to skilled manpower, raw materials and markets. The province's present concentration o f industrial estates in the district o f Lasbela is more promising due to its close proximity to Pakistan's leading commercial hub o f Karachi, and improved management under the Lasbela Industnal Estate Development Authority (PMR 2.135 and 2.136). Figure 2.6: Balochistan's enterprises are few in-between, as Quetta's ranks 114thamong 194 cites worldwide in cost of doing business, much worse than other cities in Pakistan Number of Entemn- Per Po!mlation bv Prwincsand Aree Sources: EconomicCensus 2001-2003 andWorldBankDoingBusiness2006 2.17 The experience of Pakistan as well as o f other countries shows that subsidy packages to pull industries up inremote areas rarely work well. Instead, a strategy for private sector growth should comprise these broad elements (PMR 2.155 to 2.161): Investment: Facilitate activities around Balochistan's economic and locational assets, such as minerals, gas, fisheries and coastal development, trade, livestock, and crops through improvements in the regulatory environment, in particular the licensing and property registration regime, and support to industrial estates with utilities and one-window business services. Innovation: Promote cross-border trade with Iran and Afghanistan through investments in physical transport infrastructure, trade facilitation through streamlining the rebate system and reducing corruption, and addressing security concerns. Integration: Upgrade Balochstan's road network to mitigate the disadvantages associated with remoteness and segmentation; specifically, develop a medium-term plan for upgrading national highways in Balochistan to proper 2-lane international design standards; improve provincial roads through prioritizing completion o f ongoing projects, initiating a substantially enhanced rolling periodic maintenance program, and capacity building o f the Community and Works Department; and reduce rural remoteness through extending motorized access to un-served communities by limiting the growth of paved roads to a core district network, constructing earthen and gravel roads to the more remote locations, supporting transport connectivity through 18 modifications in transport service regulation by allowing buses and wagons to ply on multiple routes, exploring packaging o f sparsely population routes with high demand routes to enhance commercial viability, andprovidingwell targeted subsidies for ruraltransport services. Institutions: o Capacity: Resolve law and order situation as security problems in a few districts create perceptions o f security concerns for the entire province; o Incentives: Provide an environment where private enterprises are able to conduct their business at low costs. 2.6 THERURAL ECONOMY 2.18 Bringingprosperity to Balochistan's villages is both essential and difficult. It is essential for three reasons. Four-fifths o f the populationresides inrural areas, their living standards lag far behindthose o f the one-fifth in urban areas; and livestock rearing and crop farming are two important sectors o f Balochistan's economy. It is difficult for principally one reason. In the water-stressed country o f Pakistan, Balochistan stands out as the most water-scarce province. Building rural livelihoods means foremost raising the efficiency o f water use. The rural economy is still recovering from the impact o f a drought lasting from 1998 to 2005, where annual rainfall was some 56 percent below the pre-drought level (Figure 2.7). Household consumption in 2004/05 was still some 14 percent below the level in 1998/99 (PMR 2.163 to 2.165). The drought has also affected the composition o f agriculture. Since the early 2000s, the contribution o f minor crops to agricultural GDP increased, while the contribution o f livestock declined as the animal flocks are being rebuilt after the drought. In 2004/05, the leading sector was minor crops (40 percent), includinghorticulture, followedby Iivestock (33 percent), major crops (23 percent), such as wheat, rice and cotton, and fisheries and forestry (4 percent). As the population adopted livelihood systems closely tied to local environmental systems, there is a large variation in economic activities across agro-ecological zones. While crop and fruit farming as well as livestock rearingas the major occupations inthe province, over one thirdofBalochistan's ruralpopulationas well as ruralpoorpopulationrely on activities outside the field and rangeland as their main source o f income (PMR 2.167 to 2.171). Figure 2.7: Balochistan is stiif recovering from a long drought, which contributed to a shift from Iivestockto minor crops Amud A m 1 binfall m Bslachirtsndunngthe DroUgM(blllioncubs meter), CompoMtbnd Bslochistan'sAgnsununl GDP 1997tOZW5 (1990191to 2004105, Porssnt) 70 twx PnDmwht 1 w - 31. 90% \ 30% ' 10% 0% 0 2 2 s m7 ma 1998 moo mot 2oa2 2w8 2oa4 zws s2 5 c . m L +M , ;, g , , g, g , , t , z" " "sif t 3 l ; Source: World Bank 2.19 Inorder to reverse the decline inrural livelihoods, Balochistan needsa coherent rural development policy that promotes growth inthe farm and non-farm sectors. The subsequent sections discuss in detail the 19 livestock, crop and water sectors. For the rural non-farm economy, the agenda comprises improvements in infrastructure, the rural investment climate, and access to finance (PMR 2.172 to 2.175). * Investment: Continue to pursue alternative energy sources for rural electrification, building upon the present initiative under the Roshan Pakistan Program in which 300 villages in the province are being supplied with solar-powered electricity, with the aim o f eventually expanding to 7000 villages. * Institutions: o Capacity: Improve land titling and registration to increase access to credit through learning from Punjab's efforts incomputerizing land records; o Incentives: Promote programs o f bank loans to rural and small town entrepreneurs through the use o f alternative forms o f collateral that are acceptable to banks and more flexible loanrepayment schedules. 2.7 LIVESTOCK RANGELANDS AND 2.20 Some two in three rural households engage at least part time in animal husbandry, as large parts o f the province are arid and unsuited for intensive arable agriculture. Higher living standards and urbanization have boosted its commercial potential. For example, Pakistan's demandfor milkproduction could rise from around 30 million tons in 2003 to 100 million tons 2020, while Pakistan's supply is projected to increase only fromjust under 30 million tons to over 40 million tons (PMR 2.176). Yet, the bulk o f the production systems remain subsistence-oriented. For centuries, migration across micro-climatic zones (transhumance) and common property grazing developed as response against localized droughts. But the impact of the prolonged drought, growing human and livestock populations, influx o f refugees, the tragedy o f the commons (PMR 2.177 to 2.184), and changes in land-use patterns due to urbanization have reduced the common property resourcesacrossthe rangelands (Figure 2.8). Figure 2.8: Drought and overgrazing lead to a degradation of rangeland Convoreionof Rangeland to Dlyland from 3992 to 2WI Degraded snd NondegmdedRangeland 1995 (hhllmin b m r e O*(dZB5Mll,onHk(aisRangrenda1992) Soyrco tIFR442004 (OWHenam Cutof28 5 MliiianH-ohgeindin 1992) Source FA01999 Dyland NWFP 0 2 N d . p r d d u ( en) alphiNWFP 7M Wnd.6SMh ZSDe R.md.nd Northrn & AIK. 2.0 AJK.04 dplnNortknn 705 Dwmded Bdoch1.W 11674 Sources: NFRAA 2004 and Foodand AgricultureOrganization 1999 2.21 Overall, there are three key obstacles to improving conditions on the rangelands: low land productivity which is a consequence o f both natural and anthropogenic factors, poor integration into global and national markets and inadequate support and extension services. These problems have emerged over several decades o f overgrazingand underinvestment,so instant solutions and quick-wins will remain elusive (PMR 2.193 to 2.200). Investment: Increase flexibility in responses through community-based systems that facilitate rapid and financially viable de-stocking to meet grazing capacity in case o f droughts, provide 20 non-excessive fiscal incentives that help such adjustments without leading to over-stocking duringgoodyears. Innovation: Engage communities in sustainable rangeland management and set up public- private milk collection andmarketingsystems. Integration: Promote integration into global and national markets through better access conditions and establishment of agro-livestock centers at key locations such as hkni, Quetta, Chamman, Dalbandim andLasbela. Institutions: o Capacity: Improveinformation systemsfor pasturemanagement; o Incentives: Promote grading systemsthat rewardquality ofproduce. 2.8 CROPSAND FRUITS 2.22 The drought had also a detrimental impact on fruit and crop farming. Production volumes declined by about 7 percent annually between 1998199 and 2002/03 (Figure 2.9). With the exception o f rice, the production o fthe major crops and fruits is still below pre-drought levels. Beyond the fluctuating availability of water, inefficient use of water, lack of infrastructure, lack of certified and pure seeds, and the slow adoption o f technology all contribute to low yields compared to other provinces and countries (PMR 2.204 to 2.212). These factors lead to a small agricultural enterprise sector. According to the 2001/03 Economic Census, out o f Pakistan's 46,378 agricultural companies, only 305 resided in Balochistan, and only 80 in ruralBalochistan. Figure 2.9: Balochistan's crop production and yields are low after the drought Balc.=hI*tm'S crop Pr0d"dk.n (Rs Million. '1992193Con-nt Pric*s). 1992193to 2wzMJ 50 40 35 a- u. 30 3.3- 25 20 15 10 5 0 198UQ3 109M5 mw3 Sources: BalochistanDevelopment Statistics and the World Bank 2.23 Raising agricultural productivity in a way that is consistent with water availability and environmental conditions 1s crucial for lowering rural poverty. While the government has already liberalized agricultural markets, key policy reforms are needed in the areas of water resources, research and extension, market development, andhuman capital (PMR 2.213 to 2.217). Investment: Increase funding of green-revolution technology and agricultural research on water- efficient crops, and expandvocational training centers at strategic locations. Innovation: Establish public-private partnerships for one-window agro-service centers. Institutions (Capacity): Improve capacity to meet food safety and animal and plant health measuresof importing countries. 21 2.9 THEWATERCRISIS 2.24 Water is the single most important constraint to developing rural Balochistan. In the past, expansions in irrigated agriculture through increases in canal-commanded areas and the spread o f tubewells dominated Balochistan's agricultural development. While this strategy has achieved notable successes, such as the growth o f highvalue horticulture and increased yields, it favored one small part o f the province over the rest, and is no longer sustainable. While some 87 percent o f Pakistan's total available water is found in the river system o f the Indus basin, only 5 percent o f Balochistan's landmass is connected to the Indus basin, and the remaining 95 percent rely on non-perennial sources (Figure 2.10) (PMR 2.220 to 2.223). Excessive mining o f groundwater has reduced the water table, as farmers are now pumping commonly beyond the depth o f 250m. This has resulted in water deficits in some o f the major basins with severe environmental consequences (PMR 2.224 to 2.226). Figure 2.10: Balochistan utilizes only two-fifth of its water resources, and the growth in subsidized electric tubewells depletes the groundwater. 2.25 Balochistan is inurgent need for a new water strategy. Since 97 percent o f Balochistan's water use i s by agriculture, any strategy to deal with the water shortage has to put this sector center stage. Balochistan's water strategy should (PMR 2.234 to 2.248): Investment: Phase out tubewell subsidy, promote sailaba agriculture, high-efficiency irrigation systems, and construct storage dams to capture the presently unutilized floodwater; Innovation: Initiate pilot schemes for micro-irrigation techniques and encourage farmers to switch to water-efficient crops; Integration: Promote structural change and urbanization to shift water use away from agriculture; Institutions: o Capacity: Launch integrated water resource management through a sound watershed management plan with the medium-tern objective o f setting-up a Water Resource Management Authonty; o Incentives: Increase abiana assessments and cost recovery, establish water entitlements for the 13 large basins. 22 I Table2.2: Instrumentsfor GeneratingGrowth Investment innovation Integration Institutions ling sharing and industry Regulatory Refon Pursue Fiscal and I Drivateinvestment companies clusters Promotesecurity and Oil and Gas Make use of gas rent transparent engage provincial-level oil and gas cell Gwadar Turn Gwadar into fully- Strengthen regulation fledged port Pursue landport model $ ~ ~coordination~ ~ ~ $and throuah GPA Invest in value chain and conduct fish stack assessment to encourage private Set up fish-processing Developnew fishing manage common pool Buildcapacity to investments;Launch city at Gwadar ports shrimp farming as resource public-private partnership Consolidatenational highway network; Promote sectors with Facilitate cross-border Improveprovincial Resolve law and order Linking Enterprises comparative advantage trade with Afghanistan roadsthrough 3-point and reducecost of doins and Iran agendaandexpand business transport & trade infrastructure Promoteoff-farm incomegeneration and Promote programs Of basic motorized bank loans to rural and to underserved small town communities enterpreneurs nr, aer up ate integrarion LullGLtlun and agro-livestoc Increasefunding of green-revolution technology and Establish public-private Improve capacity to Agriculture agricultural research on partnershipsfor one- meet sanitary and phyto water-efficient crops; window agro-service sanitary standards of Expandvocational centers importing countries traning centers at strategic locations Phase out tubewell Increase abiana subsidy; Invest in assessments and cost sailaba agriculture and Initiate pilot schemes Promotestructural recovery; Establish a high-efficiency for micro-irrigation change and water entitlements for Water z:rg:r irrigation systems; techniques; Encourage urbanizationto shifl the 13 large basins; farmers to switch to water use away from I-aunch integrated watei In;lOe::k water-eficient crops agriculture resource management drought mitigation through a watershed management plan 23 PART3: DELIVERINGSERVICES 3.1 Service delivery is at the center o f Balochistan's development agenda. Ensuring access to quality basic services improves living standards and makes sure the population is well-prepared for economic opportunities. It will involve greater transfers o f resources for service delivery by government, donors, and communities alike. While it is difficult to calculate the required funding levels, it is certain that policy and institutional reforms are needed to ensure that the money is well spent. Inmany villages and communities around Balochistan, the government i s falling short on its obligations inensuring basic education andhealth outcomes, especially to poor people. This includes children who remain illiterate because they do not have a functioning school in their village. It also includes the expectant mother who does not receive prenatal care because she cannot afford the time or the fare to reach the nearest health center or because she considers it a waste o f time based on the quality o f services she receives. To meet this responsibility, governments and citizens need to make education, health, water, sanitation, energy, transport work for poor people (Table 3.1). 3.2 This chapter is organized as follows. The next section analyzes cross-cutting issues that limit the ability o f Balochistan's public administration to deliver good services, and the steps required to make the state an effective and accountable service provider. We then turn attention to education, and outline a strategy for improving educational outcomes through constructing more public schools, expanding private schools, improving school infrastructure and teacher qualifications, encouraging enrolment o f girls, and boosting school accountability to parents and children. The fourth section looks at the health o f Balochistan's population, especially o f children and mothers, and argues that sustained improvements in health outcomes will require addressing the low utilization o f public health services, the lack o f resources, the low coverage o f essential services in remote areas, the lack o f skilled women, weak governance, and incomplete devolution. Water supply and sanitation are also critical for family and environmental health, which requires resolving the present institutional confusion over service provision, and the piloting o f alternative service delivery models and innovative community-based systems. Finally, social assistance programs can help households in Balochistan to deal with poverty through improved coverage, targeting, andadministration. 3.1 TOWARDS EFFECTIVE ACCOUNTABLE AN AND STATE 3.3 In2004105, provincial user satisfaction with public services was worst inBalochistan insix out o f seven services, and second-worst in the seventh. A number o f cross-cutting issues limit the ability o f Balochistan's public administration to deliver good services, including the size and structure o f the bureaucracy, the extent o f merit-based recruitment, the quality o f career management, the degree o f administrative devolution, political fragmentation and tribal identity (PMR 3.9 to 3.17). For example, some 28 percent o f the sanctioned posts in2005 were o f basic pay scale 1, indicative o f the l o w skill-level o f the bureaucracy, and the tenure o f many secretaries is far below the recommended 3 years, suggesting a hgh degree o fpoliticization o f the civil service (Figure 3.1). 24 Figure3.1: Balochistan's bureaucracy is biased towards low grades, and secretaries transfer frequently Source: Provincial Services Departments 3.4 The Government o f Balochistan can take some practical steps to make the state an effective and accountable service provider (PMR 3.29 to 3.36). 0 Innovation: Publicize service utilization, quality, and satisfaction indicators to increase the incentives o f policy-makers for better public goods provision, and vest post and transfer authority to high-ranking committee as pilot basis ineducation department. Integration: Provide monetary and career incentives to serve inremote districts. * Institutions: o Capacity: Enhance capacity o f key line departments through policy cells; improve human resource managementthrough HRMIS; o Incentives: Institutionalize merit-based recruitment; devolve APT powers for grade 1 to 15/16; install deputation system for grade 17or hgher. 3.2 GAININGAN EDUCATIONALFUTURE 3.5 Balochistan's education system i s failing when some 700,000 out o f 1,100,000 primary-school age chldren are not gettinga chance to learn how to read andwrite. Chldrenfrom rural areas make up only 70 percent o f the children aged 5 to 9 attending school, but 87 percent of those not attending school. T h ~ low s enrolment reflects low access indisadvantaged backgrounds, as well as the small number o f private schools (PMR 3.42 and 3.43). Only 2 percent of households in cities commutedmore than 30 minutes to get to the nearest school, similar to the share inother provinces. By contrast, invillages, it was one infive households in Balochistan, compared to less than one in ten in Punjab or NWFP. And almost one in ten rural households inBalochistancommuted for more than one hour (Figure 3.2). While the private sector enrolled in2004/05 from 12percent to 20 percent of the 5 to 9 year-old inthe other provinces, it accounted for only 3 percent inBalochistan. 25 Figure 3.2: Balochistan's private primary schools are few in-between and distance to schools is far in rural areas Pertent of 5-9 YssrOld ChildrenAttendinsPrwateP m a School ~ Minutes Scent Wdkvw to Next PnmalvSchool Sources: PIHS 1998 and 200U02, and PSLM2004/05 3.6 The principle challenge for the province is to enhance the quality of education, while at the same time making sure that all children complete primary school. The strategy involves multipleresponses, many o f whxh are also relevant for post-primary education (PMR 3.61 to 3.71): Investment: Provide missing facilities to existing schools and open new schools according to specified criteria such as the population in the catchment area and the distance to the nearest facility; Innovation: Provide strong legal framework, competitive selection o f implementation partners, and well-specified performance indicators for Balochistan Education Foundation, and pilot monthly stipends for girls enrolled inschools drawing on, for example, the successful model o f the Punjab; Integration: Encourage coeducational schooling to improve the utilizationo f the limited school infrastructure, provide financial incentives and secure housing for female teacher recruitment from outside the communities; Institutions: o Capacity: Improve human resource management through BEMIS, and upgrade teacher training; o Incentives: Make teacher appointments school-specific and merit-based, as for example in the contract teacher recruitment policies o f Punjab and Sindh; institute a monitoring system o f teacher performance. 3.3 b'fAKTNGHEALTH SERVICESREACHPOOR PEOPLE 3.7 While data weaknesses make an accurate assessment difficult, there is no doubt that Balochistan's health and population outcomes are poor and improved at best slightly since the 1990s. For example, the 2003/04 infant and under-fivemortality rates were 158 and 104per 1,000 live births, similar to the levels of the mid-1990s. They also lagbehindPakistan's, which inturnis among the worst performers inSouth Asia. While Balochistan's health outcomes are unsatisfactory, increases in the coverage o f essential health services from 2001/02 to 2006107 suggest that improvements might be in the making (PMR 3.78 to 3.83). Inparticular, the full immunization rate of children aged 12 to 23 months increased from 24 percent in 2001/02 to 54 percent in 2006/07, and the share of pregnant women receiving pre-natal consultations increased from 21 percent to 31percent. Inaddition, the gap between urban andruralareas declined (Figure 26 3.3). Higher funding supported t h s performance. Federal expenditure inthe province in2006107 was twice as high as in 2001102, and remained adequately focused on the programmatic interventions. However, the other provinces have seen similar improvements, and Balochistan's health outcomes and service coverage still lack behmdthe rest o f country, let alone the targets o f the Millennium Development Goals (PMR 3.84). Figure 3.3: Balochistan's child and mother service indicators have improved since the late 1990s' but vacancies and absenteeismremain high in ruraI areas Sources: PIHS 1998/99and 2001/02, PSLM2004/05 and2006107, and World Bank BalochistanFacility Survey 2006 3.8 Sustained improvements in health outcomes will require addressing a long list o f structural weaknesses, including the low utilization o f public health services, the lack o f resources, the l o w coverage o f essential services in remote areas, the lack o f skilled women, weak governance, and incomplete devolution (PMR 3.101 to 3.107). Investment: Define basic benefit package available across all health centers. Innovation: Pilot innovative modes o f service delivery in remote districts such as the use o f mobile units to deliver services; or a hub-and-spoke system with rural health centers serving as a hub for four to five basic health units that are managed by paramedical staff with regular supervision by physicians stationed at the hub; build public-private partnerships for health care delivery in areas such as provision o f obstetrical services in remote districts, improving tuberculosis and acute respiratory infection case management, and contracting out hospital management to the private sector. Integration:ExpandPresident's health initiative to underperforming districts. Institutions (Incentives): Strengthen merit-based recruitment along the lines o f the NWFP model, and increase decision makingpowers o f district managers. 3.4 SECURINGHEALTH THROUGH IMPROVED WATER SOURCES 3.9 Water supply and sanitation play a crucial role in family and environmental health. Balochistan's access to improved drinlung water sources and sanitation has increased since the late 1990s. The share of households with drinking water from pipes and pumps rose from 33 percent in 1998199 to 46 percent in 2006107, and with flush toilets increased from 10 percent in 1998/99to 25 percent in2006107. The modest advances have not come cheaply (PMR 3.1 11). For the last six years, Balochistan outspent the other provinces on water supply and sanitation, as might be expected inview o f the higher cost of service delivery due to remoteness and arid terrain. Whatever the progress, Balochistan lags far behind the other provinces inthe access to and quality of improved water sources, andthere are large gap incoverage between urban and rural areas, and non-poor and poor households (Figure 3.4). Problems o f low quality in water and 27 sanitation services are compounded by the poor management o f these scarce resources due to weak accountabilitybetween citizens, policy-makers, and service delivery staff (PMR 3.1 13 to 3.119). Figure 3.4: Balochistan's improvedwater access lags far behind the other provinces, and TMAs, with the legal responsibility for municipal services, are grossly under-funded HwssholdA- to ImprovedSDUIUU of DrinkingWatw and Santtntbon Amount of Granhfrm the ProyInsmIComol~dstedFund(RsMillion) IPers~ntISowu, 2006107 PSLM Sur- ZOOEM7Bvdgel I eo! I Tap w.br md pumpi Fluhl0U.t. Source: PSLM2006107 andBudget 2006107 3.10 The provincial government needs to establish clear institutional arrangements for water supply and sanitation services, and could consider piloting alternative service delivery models and innovative community-based systems for water and sanitation services (PMR 3.120 to 3.123). Innovation: Pilot community-based service delivery models, along the lines o f the LodhranPilot Project in which communities and local governments are jointly involved in the planning and design o f schemes, and share the responsibilities for operation and maintenance. * Institutions (Capacity): Establish clear institutional arrangements for delivery o f water supply and sanitation by ideally transferring this responsibility to TMAs, in accordance with the provisions o f the Local Government Ordinance; set up a management information system for the sector, drawing on the existing systems for education andhealth. 3.5 ASSISTING POORPEOPLETHROUGH CASH TRANSFERS 3.11 Some groups are excluded from the benefits o f economic developments. For example, children, the disabled, and ethnic minorities are often found to be vulnerable as economic, social, cultural and institutional barriers result in low living standards. Social assistance programs make some contribution in helping households in Balochistan to deal with poverty, but their impact is diminished due to low coverage, poor targeting and poor implementation. For example, only some 8 percent o f households benefited from Zakat or Bait-ul M a l according to a 2004/05 World Bank Social Safety Net Survey (Figure 3.5), even though more than one quarter o f Balochistan's households are poor (PMR 3.125 to 3.127). 28 Figure 3.5: Poverty among Balochistan's children increased more than among Balochistan's adults, yet social assistance remains small in reach 20 1s t.5 1.3 I.o 0.8 0.5 0.3 1 0.0 0 Source: PIHS 1998/99,2001/02,PSLM2004/05 and Pakistan Social Safety Net Survey 2004/05 3.12 Social assistance programs, which complement other pro-poor policies such as health, education, micro finance, and rural infrastructure, can help making growth more sustainable and more equitable. Priorityreforms include the following (PMR 3.128 to 3.130): Innovation: Evaluate, and scale-up in case o f success, Bait-ul Mal's cash transfer pilot which provides additional support to existing food support program beneficiaries conditional on their children regularlyattending school; Institutions: o Capacity: Improve administrative efficiency through setting up o f a management information system tracking applicants, beneficiaries, andpayments; o Incentives: Pilot improvements oftargeting throughproxy means testing. 29 Tabte3.1:Instruments for DeliveringServices fnvestment Innovation Integration Institutions Disseminateservice utilization,quality, and Improve human resource satisfactionindicators management through Provide monetary and HRMIS; Institutionalizemer Effective and Enhancecapacity of to service users;Vest career incentivesto APT powersfor grades 1tc based recruitment; Devolvf key line departments post andtransfer serve in remote Accountab'e State through policy cells authorityto high- rankingcommitteeas districts 15/16; Installdeputation pilot basis in education system for grade 17 or department higher Providestrong legal framework, competitive selection of implementation Increasegirls' access Improve human resource Provide missing partners, and well- to education; Provide management through facilities to existing specified performance financial incentives and housing for BEMIS; Make teacher appointments school- Education schools; Open new indicatorsfor schools according to BalochistanEducation recruitment from female teacher specific; Institute monitorin transparent criteria Foundation;Pilot system of teacher monthlystipendsfor communities outside the performance; Upscale girls enrolled in primary teacher training or middleschools, in line with Punjab model Pilotinnovative modes Define basic benefit of service delivery in Expand President's recruitmentalongthe lines Strengthen merit-based Health packageavailable remotedistricts; Build health initiativeto of the NWFP model; across all health public-private centers partnershipsfor health underperforming districts Increase decision making care delivery powers of district manager Establish clear institutioni Water and Pilot community-based arrangements for delivery < Sanitation servicedelivery models water supply and sanitatiot Set up management information system Evaluate, and scale-up in case of success, Bait, Improve administrative ul Mal's cash transfer efficiency through setting L pilot for children of management informatio attending school system and better targetin 30 PART4: FINANCINGDEVELOPMENT 4.1 Development is far more than resources, but there is no development without resources. Part 2 and Part 3 have highlighted large financing needs in the economic, rural, and social areas. This section looks the capacity o f Balochistan's public sector to mobilize the fiinding and execute the programs to meet these needs. Since the beginning o f this decade, public spending increased strongly, and budgetary resources are now in excess o f the levels during the 1990s (PMR 4.7 and 4.8). Compared to the trough o f 1996197, Balochistan's per capita expenditures increased by 40 percent in real terms to Rs. 5,100 per capita in 2005/06 (Figure 4.1). Development spending also rose sharply, especially once federal development spending is taken into account. Public spending rose in all provinces, but Balochistan's expenditure premium inper capita terms compared to the rest o f the country remained. As part o f this spending increase was based o n expensive borrowing, Balochistan is now undergoing a difficult fiscal consolidation to lower the costs o f debt servicing (PMR 4.13 to 4.15). Figure 4.1: Balochistan's public expenditures have increased inthe last few years, but some of the rise was debt-financed. Real PerCapita ProvlncislTotal Exponditurns ( R u m . ZWSIOBConstantPric~a).Sour- PmnncliAsmunts Jun97 Jun9)l JunlR JunQQ JunQl JunQZ JunQ3 Jun44 Jun45 Jun46 Source: ProvincialAccounts 4.1 FISCAL RECOVERY 4.2 There are four challenges in terms o f leveraging Balochistan's resources for economic development (Table 4.1). The province has already made good progress in a number o f these areas. The first area is public expenditure management (PMR 4.16 to 4.18). While higher revenues funded a part of the spending increases, Balochistan has run fiscal deficits since 2002103 as the rise in expenditures exceeded the rise in revenues. The province failed to reign in spending as federal transfers declined due lower gas-related payments. Balochistan covered the shortfall mostly through expensive borrowing from the State Bank of Pahstan, which in turn compromised its public debt management strategy by increasing debt servicing costs. Fortunately, the province began in 2006/07 to take a number o f bold steps to exit the fiscal crisis, such as introducing no new schemes in the public sector development program and capping non-essential expenditures. The immediate priority remains to continue on this path. In addition, part o f the fiscal strategy is to prioritize expenditures carefully. This involves loohng at the sectoral allocation. Sectors like education, health and rural development, which are at the center o f improving living standards for the bulk o f the population, have benefited far less from the expenditure spree than sectors like transport and irrigation. Ensuring a close alignment o f spending allocations with development priority is an important 31 priority going forward. Furthermore, the rise inbudget envelopes brings to the fore structural weaknesses in budget processes and public sector capacity that undermine the effectiveness o f public spending. They include an oversized development portfolio with many new schemes and a large throwfonvard, l o w expenditures on operations andmaintenance (PMR 4.32 to 4.34). Investment: Review the size and composition o f provincial PSDP, limit the number o f new schemes, rationalize the tubewell and wheat subsidy, and continue to replace expensive Cash Development Loans with relatively inexpensive foreign loans; 0 Innovation: Leverage public-private partnershp to alleviate scarce public resources and improve efficiency; Institutions (Incentives): Improve systems for output and outcome monitoring and evaluation; all projects above a certain threshold size (e.g. Rs.10 million) be evaluated prior to implenientation by external agencies, with funding for this evaluation earmarked inthe project plan. 4.3 Second, weaknesses in public expenditures are compounded by deficiencies in public financial management andprocurement, often linked to poor infrastmcture (PMR 4.19 to 4.23). For example, only one o f Balochistan's 29 districts has a district account office. With donor assistance, the government has begun to implement reforms in the core areas o f the budget process as well as in the oversight areas o f external audit and legislative scrutiny (PMR 4.35). Institutions (Capacity): Set-up district account offices in all districts as well as the public procurement regulatory agency, and encourage public accounts committee to review audit reports on the basis o f last-in-first-out. 4.4 Third, Pakistan's fiscal devolution was launched with objective o f improving service delivery through greater accountability o f policymakers (PMR 4.24 to 4.29). Local governments encounter significant difficulties due to incomplete fiscal devolution, leading to sometimes visible tensions between distnct leaders and provmcial politician. Much o f the agenda for completing fiscal devolution rests with the provincial government. Balochistan has already announced, as Pakistan's first province, a three-year Provincial Finance Commission Award, and launched an innovative performance grants scheme to districts and tehsil municipal administrations. The province should build on these initiatives to expand the fiscal space of local governments for meeting local development priorities (PMR 4.36 and 4.37). 0 Investment: Give single-line transfers to districts, TMAs and unions; Innovation: Scale up performance grants to ensure alignment o f local spending with provincial and nationalpriorities; Institutions (Incentives): Devolve development budget under the PFC Award. 4.5 Fourth, careful expenditure management is one side o f the coin. The other side is to increase provincial revenues. Transfers from the federal level have increased already through the 2006 amendment o f the 1997 National Finance Award, as well as the rise in federal tax collection on the back of Pakistan's economic growth. In addition, as Balochistan's private sector expands with the ongoing uplift initiatives, the province has to continue improving its own-source collection. This will help to diversify Balochistan's revenue base and send a strong signal about its prudent fiscal policies (PMR 4.38 and 4.39). 0 Investment: Mobilize revenues from four main provincial taxes (AIT, UIPT, MVT and stamp duties); 0 Innovation: Encourage peer learning about UIPT and stamp duties from Sindh and Punjab and MVT from NWFP. 32 Table 4.1: Instrumentsfor FinancingDevelopment Investment Innovation Institutions Reviewsize and composition of provincial PSDP; Limit Public schemes; Rationalize Leverage public-privateImprove number of new output and Expenditures outcome monitoring tubewell and wheat partnerships and evaluation subsidy; Replace expensivewith inexpensiveloans Pursue public financial management and procurement reform, including: set-up distric account offices in all Financial districts; set-up public Management procurement regulator) agency; and encouragc public accounts committee to review audit reports on the basis of last-in-first-oui Scale up peformance Give single-line grants to ensure Devolvedevelopment Fiscal Devolution transfers to districts, alignment of local spending with budget under the PFC TMAs and provincialand national Award priorities Mobilize revenuesfrom Encouragepeer OwnSource four main provincial learning on UlPT and Revenues stamp duties from taxes (AIT, UIPT, and stamp duties)MVT Sindh and punjab and MVTfrom NWFP 4.6 Inconclusion, there are goodreasons to be optimistic for Balochistan's development. While much remains to be done, the province i s already transforming for the better, and these changes will bring about tomorrows improvements in the lives o f the population. The crucial challenge n o w is to learn from the successes and failures o f the past decades, draw clear lessons, and improve policies to move Balochistan once and for all fi-omthe periphery to the core o f economic development to the benefit o f its people. 33 LISTOFBACKGROUND NOTES PREPAREDFORTHEBALOCHISTANECONOMIC REPORT 1. Ahmad, Anjum andMadiha Ahmed. "Private Sector Development". 2. Ahmed, Shahid. "Water ResourceManagement." 3. Ali, Asif. "Procurement SystemsPerformance Assessment." 4. Amjad, Shahid. "Fisheries Sector BackgroundPaper." 5. Arshad, Raja Rehan, Nadir Abbas, KevinCrockford, and Ambreen Malik. "Water Supply and Sanitation." 6. Ceesay, Ismaila. "Public Financial Management andAccountability Assessment." 7. Chaudhry, Mohammad Farooque. "Development o f Gwadar Port and Coastline." 8. Couffinhal, Agnes and InaamHaq. "Health Sector Background Paper." 9. Damania, Richard. "Livestock andRangelands." 10. Gazdar, Haris. "Background Paper on Social Structures and Migration." 11. Hasnain, Zahid. "Governance and Decentralization." 12. Hanjra, Sadaqat. "Agriculture andNatural Resource Management: Livestock Sector." 13. Heitner, Marc and Waqar Haidar. "Oil and Gas Aspects." 14. Heltberg,Rasmus andNeils Lund. "Social ProtectioninBalochistan." 15. Ikram,Khalid. "A Vision for Balochistan." 16. Kruk,C. Bert andBradley Christopher Julian. "Status and Developments o f Container Terminal Facilities inthe Arabian Sea Region." 17. Mal&, Shaheen. "A Note on Estimation of Balochstan's Gross Domestic Product." 18. Manes, Eric and TilahunTemasgen, "Perception Indicators- Top Business Constraints to Growth". 19. Mukhtar, Hanid. "Fiscal Situation and Issues." 20. Naqvi, Naveed. "Is Poor EducationService Delivery a Critical Constraint to Balochistan's Development.,' 21. Raja, Zafar Iqbal. "The Transport Sector." 22. Rashed-U1-Qayyum. "Agriculture andNatural Resource Management: Major Crops and Horticulture." 23. Stanley, Michael and EkaterinaKoryukin. "Mineral Sector BackgroundPaper." 24. White, Roland. "Technical Notes on the Local Government System inBalochistan." 34