From YOUSAF RAFIQ
Special Correspondent, Islamabad
Dec 20 - 26, 1999

The World Bank's active portfolio in Pakistan, as of August 1, 1999, constitutes 24 projects, with a total net commitment (original loan/credit amount less cancellations) of US $2.3 billion; more than half of this is IDA Credit of US $1.4 billion, while US $880 million is IBRD. Of the total commitment value, US $976 million has been disbursed and US $1.3 billion (57percent) remains undisbursed. The number of projects in the portfolio continue to show a declining trend from 31 projects in FY99 to 24 projects in the current portfolio.

During FY99 two new projects entered the portfolio, while seven projects closed. Of the new projects approved during FY 99, one was adjustment lending operation, the Structural Adjustment Loan worth US $350 million, while the other, Pakistan Poverty Alleviation Fund, was an IDA credit worth US $90 million. The seven projects that closed during the year had a combined net commitment of US $886 million, and an undisbursed balance of US $65 million at closing. In terms of commitment, the energy sector accounts for more than one-third of the portfolio (37 percent), followed by the social sectors (31 percent), agriculture, irrigation and environment sectors (20 percent), and infrastructure (7 percent). However, in terms of number of projects, the social sector portfolio constitutes the highest number of projects (8), followed by agriculture and environment (6), infrastructure (4), energy/telecommunications (4) and finance (1). The average age in the current portfolio is 4 years. There are, however, 6 projects which are more than five years old; all of them are closing by June 30, 2000 (Balochistan Primary Education Project, Family Health I, Family Health III, Fordwah East Sadiqia, Punjab Middle Schooling, and Rural Water and Supply Sanitation). An analysis of age profile of projects during FY 97-99 shows that the number of projects in the portfolio having implementation period beyond the normal average age of 5 years, decreased from 18 in FY97 to 6 in the current portfolio, which is 25 percent of the total portfolio compared to 43 percent in FY97.

Project portfolio is assessed by the Bank on the basis of whether individual projects are achieving their Development Objectives (DO) and/or whether the Implementation Progress (IP) is satisfactory. These indicators cover a broad range of factors including procurement, disbursements, compliance with legal covenants, and overall project performance. Out of a total of 24 projects in the current portfolio, there are 4 "Projects at Risk", with a net commitment at risk (net commitment value of the projects at risk) of US $927 million, or 40 percent of the net commitment value of the entire portfolio. These 4 "Projects at Risk" comprise three actual problem projects which are rated unsatisfactory on either development objectives or implementation progress and one "potential problem project" which could slip into the problem project status due to poor past track record. Almost 90 percent of the associated with "projects at risk" belong to the power sector portfolio (Ghazi Barotha Hydrowpoer, Power Sector Development Programme, and Private Sector Energy Development I Project), where implementation problems are linked to the issues surrounding the overall reform programme including financial problems of cash trapped WAPDA, the IPPs issue.

According to an analysis by the World Bank, weak financial mismanagement and project management, inefficient procurement, shortage of counterpart funds, and non-compliance with safeguard policies have been stated to be as generic issues proving to be stumbling blocks toward improvement in portfolio performance of World Bank aided projects.

A significant part of the portfolio is suffering from wide spread problems of governance, particularly related to financial mismanagement. Of the 139 audit reports reviewed 62 were qualified. In-depth review of financial management practices and special audit, for a few selective projects by GoP auditors and external audit firm, indicates serious irregularities such as misuse of project funds, over invoicing etc. In particular, serious irregularities have been reported in Family Health I and II, and Balochistan Primary Education Projects. In respect of the Family Health I project, the Bank suspended the Special Account in December 1998 and sought refund of US $1.2 million

The Bank's financial management policy requires the borrower and the project implementing entities to maintain adequate financial management systems to ensure submission of accurate and timely information regarding project resources and expenditures. The majority of Bank-financed projects under execution in Pakistan fall short in relation to adherence to this policy. As a result, there are considerable delays in preparation of annual accounts which lead to subsequent delay in audit reports as well.

As per World Bank's requirements acceptable audited financial statements have to be submitted to the Bank within six months of the close of the financial year. Unfortunately, this is not being achieved in a considerable number of cases. Of the 139 audit reports received during FY99, 56 were received on time, 58 after a delay of 1-3 months, 25 after 4-6 months delay. The delay is due to implementing agencies not being able to produce timely financial statements. 65 audit reports were outstanding as of August 1999 of which 19 are overdue by over 13 months. Quality of audit reports has improved significantly over the lasy year. Of the 139 audit reports reviewed 62 were qualified. Misappropriation of assets has been reported in a number of audit reports. As a result, the project suffers adversely since the misappropriated assets are not replenished due to budgetary constraints. It has been observed that none of the project assets are insured as per government's policy.

Inefficient procurement

Procurement issues are by far the most pervasive in their impact on the implementation of projects, and continue to be a serious bottleneck to rapid project implementation and disbursement. Ex-post reviews of 1500 contracts carried out by the Bank indicate numerous deviations from the provisions of the legal agreements and the Bank's Procurement Guidelines. The delay in contract awards affects the implementation, disbursement, achievement of project objectives, and transparency in procurement process. These delays occur due to lack of funds, lack of procurement plans, delays in preparation of bidding documents, bid evaluation (due to capacity/restraints/or vested interests), and signing of contract after completion of evaluation.

Counterpart funds

As part of the economic reform programme, the government has made some progress in reducing the fiscal deficit (from 8 percent of GDP in 1992/93 to an estimated 4.3 percent of GDP in 1998/99). However, the development budget has taken a disproportionately greater brunt of this fiscal adjustment. Due to increasingly tightening of the fiscal constraint, the size of the budgetary Public Sector Development Programme (PSDP) has been squeezed from 5.3 percent of GDP in 1992-93 to 2.9 percent in 1998-99. Furthermore, expenditures on the development programme have consistently fallen below the budget allocations. In real terms, budgetary development expenditures have declined at an average rate of over 5 percent per annum during 1991/92-1998/99. This is partly due to post-budget direct and "indirect" cuts imposed by the government on approved allocations, and partly an outcome of a variety of implementation-related issues that resulted in slower execution of development projects.

Mainly because of large development needs of but also because of balance of payment support that these projects provide, the number of donor-assisted projects in the PSDP has been increasing. As a result, the share of donor financing in the PSDP has also been increasing. This however is partly because the cuts imposed on PSDP allocations are generally on locally-financed PSDP, whereas due to depreciation of rupee the donor component of PSDP had been increasing (in rupee term). For example, the original federal PSDP contained 110 donor-assisted projects to which 63 percent of PSDP funds were allocated. (which because of an 11 percent cut in the budgetary PSDP, the share of donor projects increased to nearly two-thirds of the federal PSDP). The PSDP 1999-2000 contains 135 projects in the federal programme, claiming 58 percent of budgetary PSDP funds. This dominance of donor financing in overall PSDP indicates that there is perhaps very little room in the PSDP to finance additional donor-assisted projects. In fact, local funds for donor-assisted projects have persistently fallen short of the needs, so much so that this shortage of counterpart funds can now be considered as a major systemic problem, which has adversely affected implementation of donor assisted projects over the past some years. Inadequate funds for O&M costs (non-salary items) has also delayed implementation of many projects.

Weak project management

Continuity of Project Directors for the full period of project implementation, and providing them full operational/financial empowerment, while holding them accountable, would strengthen management and improve implementation. ECNEC had taken a decision on Project Directors continuity, but this is neither being consistently applied or enforced nor fully incorporated in civil personnel management policies. Thus 13 projects in the portfolio had more than four Project Directors in the last 3 years. In addition, remuneration packages offered to PDs are inadequate to attract high quality professionals from the private sector, and PDs are not fully empowered with sufficient financial and administrative authority to manage the project efficiently.

Non-compliance with safeguard policies

The government's reluctance to fully agree to Bank's social safeguard policies has affected: (i) timely implementation of ongoing projects e.g. GBPH, where serious problems in the land acquisition and compensation process, as well as the government's inability to adequately establish institutional and monitoring arrangements for social safeguards have had a negative impact on the project; and (ii) preparation/processing of new lending operations, especially in the infrastructure sector. Processing of new projects (especially the Lahore Urban Transport Project and Punjab Municipal Development Fund) have been delayed, partly due to lack of government's commitment to adequately address environmental and social issues.

In relation to Bank's Operational Directive on resettlement, current practices are inadequate in the following aspects. Payment of compensation alone is fraught with difficulties. Budgets are often found to be inadequate during implementation, partly because they are based on inaccurate land records or estimates with no field verification. Projects require earlier and more accurate census data on who is affected and what they are losing in the project planning stage. This will also improve the siting and design of projects, reducing unnecessary displacement. Expensive mistakes in design can be avoided if social criteria are included with technical criteria during project design.

Consultations with affected people avoids impacts before they occur, preventing the need for expensive fixes later. Better documented early census of affected people also prevents later opportunistic squatters. But even better plans will not prevent disputes and grievances over compensation amounts. For that reason, consultation with affected people needs to continue after impact identification and be a feature of both the planning and the monitoring process, to ensure that the process is both fair, and seen to be fair.

The government, in consultation with the Bank, should initiate a wider process of dialogue to prepare a generic national resettlement policy framework, with social and environmental guidelines that would apply to projects across sectors. Similar frameworks are under preparation in both Bangladesh and India. In order to ensure that resettlement standards are more easily achieved and to minimize difficulties for new and ongoing projects in the future, the Bank encourages the government to have a uniform generic policy framework towards resettlement. Rather than continue focusing only on separate project problems, the Bank suggests the government develop generic resettlement policy frame works to be used in all projects. The Bank is willing to assist Pakistan develop its own policy framework by examining resettlement experience to date and beginning a dialogue with practitioners and policy makers, increasing understanding of each other's practical constraints and opportunities and sharing frank views on the best way forward.