Document of The World Bankdocuments.worldbank.org/curated/en/158641498499170231/... · 2017-06-28 · document of the world bank report no: icr00003946 implementation completion and

Document of

The World Bank

Report No: ICR00003946

IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IDA-54400)

ON A

CREDIT

IN THE AMOUNT OF SDR 614.10 MILLION

(US$ 900 MILLION EQUIVALENT)

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR A

FISCALLY SUSTAINABLE AND INCLUSIVE GROWTH

DEVELOPMENT POLICY CREDIT

June 15, 2017

Macroeconomics and Fiscal Policy Management Global Practice

Pakistan Country Management Unit

South Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of 15 June 2017)

Currency Unit = Pakistani Rupee

US$ 1.00 = PKR 104.8391

FISCAL YEAR

1 July – 30 June

ABBREVIATIONS AND ACRONYMS

ABL Allied Bank Limited

ADB Asian Development Bank

BISP Benazir Income Support Program

CCT Conditional Cash Transfers

CPS Country Program Strategy

DFID Department for International Development

DPC Development Policy Credit

DPL Development Policy Lending

EFF Extended Fund Facility

EOBI Employees Old age Benefit Institute

FBR Federal Bureau of Statistics

FDI Foreign Direct Investment

FSAP Financial Sector Assessment Program

FSIG Fiscally Sustainable and Inclusive Growth

FY Financial Year

GDP Gross Domestic Product

GoP Government of Pakistan

GST General Sales Tax

HBL Habib Bank Limited

HEC Higher Education Commission

ICR Implementation Completion Report

IDA International Development Association

IEG Internal Evaluation Group

IMF International Monetary Fund

M&E Monitoring and Evaluation

MoF Ministry of Finance

MSMEs Micro, Small and Medium Enterprises

NFIS National Financial Inclusion Strategy

NGOs Non-Governmental Organizations

NPCC National Power Construction Corporation

OSS One Stop Shop

PA Project Agreement

PBG Performance Based Growth

PDOs Project Development Objectives

PKRs Pakistan Rupees

PPL Pakistan Petroleum Limited

QAG Quality Assurance Group

RDs Regulatory Duties

SBP State Bank of Pakistan

SECP Security and Exchange Commission of Pakistan

SMEs Small and Medium Enterprises

SOEs State Owned Enterprises

SRO Statutory Rules and Orders

TA Technical Assistance

TAGR Trust Fund for Accelerated Growth and Reforms

TF Trust Fund

UBL United Bank Limited

UCT Unconditional Cash Transfers

USAID United States Agency for International Development

VOSS Virtual One Stop Shop

WB World Bank

Senior Global Practice Director: Carlos Felipe Jaramillo

Practice Manager: Manuela Francisco

Project Team Leader: Enrique Blanco Armas/ Jose Lopez Calix

ICR Team Leader: Jeff Chelsky

5

ISLAMIC REPUBLIC OF PAKISTAN

Fiscally Sustainable and Inclusive Growth

Development Policy Credit Series

CONTENTS

Data Sheet

A. Basic Information

B. Key Dates

C. Ratings Summary

D. Sector and Theme Codes

E. Bank Staff

F. Results Framework Analysis

G. Ratings of Program Performance in ISRs

H. Restructuring

1. Program Context, Development Objectives and Design .......................................... 12

2. Key Factors Affecting Implementation and Outcomes ............................................ 16

3. Assessment of Outcomes .......................................................................................... 23

4. Assessment of Risk to Development Outcome ......................................................... 28

5. Assessment of Bank and Borrower Performance ..................................................... 29

6. Lessons Learned........................................................................................................ 31

Annex 1 Policy and Results Matrix……………………………………………...……34

Annex 2. Bank Lending and Implementation Support/Supervision Processes ............. 37

Annex 3. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 39

Annex 4. List of Supporting Documents ...................................................................... 40

6

A. Basic Information

Program 1

Country Pakistan Program Name

PK Fiscally Sustainable

and Inclusive Growth

DPC

Program ID P147557 L/C/TF Number(s) IDA-54400

ICR Date 06/15/2017 ICR Type Core ICR

Lending Instrument DPL Borrower ISLAMIC REPUBLIC

OF PAKISTAN

Original Total

Commitment SDR 258.50M Disbursed Amount SDR 258.50M

Implementing Agencies -- Ministry of Finance, Government of Pakistan

Program 2

Country Pakistan Program Name

PK Fiscally Sustainable

and Inclusive Growth

DPCII

Program ID P151620 L/C/TF Number(s) IDA-56820

ICR Date 06/15/2017 ICR Type Core ICR

Lending Instrument DPL Borrower ISLAMIC REPUBLIC

OF PAKISTAN

Original Total

Commitment SDR 355.60M Disbursed Amount SDR 355.60M

Implementing Agencies -- Ministry of Finance, Government of Pakistan

B. Key Dates

PK Fiscally Sustainable and Inclusive Growth DPC - P147557

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 10/25/2013 Effectiveness:

Appraisal: 03/20/2014 Restructuring(s):

Approval: 05/01/2014 Mid-term Review:

Closing: 06/30/2015 06/30/2015

PK Fiscally Sustainable and Inclusive Growth DPCII - P151620

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 01/28/2015 Effectiveness: 06/26/2015 06/19/2015

Appraisal: 05/04/2015 Restructuring(s):

Approval: 06/18/2015 Mid-term Review:

Closing: 06/30/2016 06/30/2016

7

C. Ratings Summary

C.1 Performance Rating by ICR

Overall Program Rating

Outcomes Moderately Satisfactory

Risk to Development Outcome Substantial

Bank Performance Moderately Satisfactory

Borrower Performance Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR)

Overall Program Rating

Bank Ratings Borrower Ratings

Quality at Entry Satisfactory Government: Moderately Satisfactory

Quality of Supervision: Moderately Satisfactory Implementing

Agency/Agencies: Moderately Satisfactory

Overall Bank

Performance Moderately Satisfactory

Overall Borrower

Performance Moderately Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators


Implementation

Performance Indicators

QAG Assessments

(if any) Rating:

Potential Problem

Program at any time

(Yes/No):

No Quality at Entry

(QEA) None

Problem Program at any

time (Yes/No): No

Quality of

Supervision (QSA) None

DO rating before

Closing/Inactive status


Implementation

Performance Indicators

QAG Assessments

(if any) Rating:

Potential Problem

Program at any time

(Yes/No):

No Quality at Entry

(QEA) None

Problem Program at any

time (Yes/No): No

Quality of

Supervision (QSA) None

DO rating before

Closing/Inactive status Satisfactory

8

D. Sector and Theme Codes


Original Actual

Major Sector

Public Administration

Other Public Administration 13 13

Central Government (Central Agencies) 50 50

Financial Sector

Credit Reporting and Secured Transactions 13 13

Microfinance 12 12

(Historic)Health and other social services

Other social services 12 12

Major Theme/Theme/Sub Theme

Economic Policy

Fiscal Policy 25 25

Tax policy 25 25

Private Sector Development

Business Enabling Environment 25 25

Investment and Business Climate 12 12

Regulation and Competition Policy 13 13

Public Sector Management

Public Administration 13 13

State-owned Enterprise Reform and Privatization 13 13

Public Finance Management 25 25

Domestic Revenue Administration 25 25

Social Development and Protection

Social Protection 12 12

Social Safety Nets 12 12


Original Actual

Major Sector

Public Administration

Other Public Administration 18 18

Central Government (Central Agencies) 55 55

Financial Sector

9

General finance sector 9 9

Microfinance 9 9

(Historic)Health and other social services

Other social services 9 9

Major Theme/Theme/Sub Theme

Economic Policy

Fiscal Policy 25 25

Tax policy 25 25

Private Sector Development

Business Enabling Environment 25 25

Regulation and Competition Policy 13 13

Public Sector Management

Public Administration 13 13

State-owned Enterprise Reform and Privatization 13 13

Public Finance Management 25 25

Domestic Revenue Administration 25 25

Rule of Law 18 18

Legal Institutions for a Market Economy 18 18

Social Development and Protection

Social Protection 12 12

Social Safety Nets 12 12

E. Bank Staff


Positions At ICR At Approval

Vice President: Annette Dixon Philippe H. Le Houerou

Country Director: Patchamuthu Illangovan Rachid Benmessaoud

Practice

Manager/Manager: Deepak K. Mishra Vinaya Swaroop

Task Team Leader: Jose R. Lopez Calix Jose R. Lopez Calix

ICR Team Leader: Jeffrey Allen Chelsky

ICR Primary Author: Jeffrey Allen Chelsky

10


Positions At ICR At Approval

Vice President: Annette Dixon Annette Dixon

Country Director: Patchamuthu Illangovan Rachid Benmessaoud

Practice

Manager/Manager: Deepak K. Mishra Shubham Chaudhuri

Task Team Leader: Jose R. Lopez Calix Jose R. Lopez Calix

ICR Team Leader: Jeffrey Allen Chelsky

ICR Primary Author: Jeffrey Allen Chelsky

F. Results Framework Analysis

Program Development Objectives (from Program Document) The DPC series is structured around two development objectives: (I) fostering private and

financial sector development and (ii) mobilizing revenue and expanding priority social spending.

Indicator(s)


Indicator Baseline

Value

Original Target

Values (from

approval

documents)

Formally

Revised

Target

Values

Actual Value

Achieved at

Completion or

Target Years


Indicator Baseline

Value

Original Target

Values (from

approval

documents)

Formally

Revised

Target

Values

Actual Value

Achieved at

Completion or

Target Years

Indicator 1: At least five entities privatized through strategic equity sale by June 2015

Value

No privatization

transactions took place in

2012/13

At least five entities

privatized through

strategic equity sale

by June 2016.

Equity stakes of

various magnitude

were divested by the

GOP in five entities.

Date achieved 05/01/2014 06/30/2016 06/30/2016

Comments

Share of ownership sold -- UBL 19.6% Jun-14; PPL 5% Jun-14; ABL 11.5%

Dec-14; HBL 42.5% Apr-15; NPCC

11

Indicator 2: Improved system/framework providing availability/coverage/quality of

credit information for consumers and SMEs by June 2016.

Value

No such a system in place

in June 2013

An improved

system/framework

providing

availability/coverag

e/quality of credit

information for

consumers

The Credit bureau

Bill was passed by

the National

Assembly.

Membership in the

Better Than

Cash Alliance

announced in

September 2015.

Date achieved 06/01/2013 06/30/2016 03/23/2016

Comments

Credit Bureaus Bill was subsequently amended by Senate and made

incompatible with PA. However, legislative correction was introduced as a PA in

the subsequent DPC and brought into compliance.

Indicator 3: Simple average statutory tariff rate is at or lower than 12 percent in June

2016.

Value

Simple average statutory

tariff rate is 14.4 percent in

June 2013.

At or lower than 12

percent in June

2016.

Simple average

statutory tariff rate

was 13.4 percent

Date achieved 06/01/2013 06/30/2016 03/29/2016

Comments

Ambition of effort to reduce average tariffs was undermined but continued

reliance on customs revenue to achieve fiscal targets.

Indicator 4: Number of UCT beneficiaries who received full benefits is at least 5.5

million in June 2016.

Value

Number of unconditional

cash transfers (UCT)

beneficiaries who received

full benefits is at 4.4

million in 2012/13.

At least 5.5 million

5.3 million

beneficiaries

Date achieved 06/28/2013 06/30/2016 06/30/2016

Comments

BISP reported that 5.7 million beneficiaries were identified but that only 5.3

million registered for benefits. They consider that the on-registrants may have

been either died or been unable to register because of relocation due to floods or

conflict.

Indicator 5: Overall tax collection is at least 11.5 percent of GDP by end-2015/16 and no

special concessionary exemptions issued through SROs by FBR.

Value

Overall-federal &

provincial-tax collection is

at 9.6 percent of GDP by

end-2012/13.

Overall tax

collection is at least

11.5 percent of

GDP by end-

2015/16

A ratio to GDP of

12.4 percent was

reached, a significant

over performance.

Date achieved 06/28/2013 06/30/2016 06/30/2016

Comments

The authorities were also able to curtail the use of SROs by the FBR except in a

few narrowly defined sectors.

12

G. Ratings of Program Performance in ISRs


No. Date ISR

Archived DO IP

Actual

Disbursements

(USD millions)

1 04/18/2016 Satisfactory Moderately Satisfactory 500.11

1. Program Context, Development Objectives and Design

In May 2013, Pakistan experienced its first peaceful transition from one democratically

elected government to another with the incoming administration possessing a solid reform

mandate. At the time, Pakistan faced a serious economic situation. Unprecedented floods

in 2010 and 2011, coupled with continuing security issues, stalling economic reform,

falling investment and external financial inflows, increased devolution of responsibilities

to the provinces, and fiscal disarray in the run up to elections severely affected

macroeconomic imbalances. By the end of 2012/13 international reserves were below 1.5

months of imports, and the fiscal deficit (excluding grants) had reached 8 percent of GDP,

a very high level for the third year in row. As soon as it took office in mid-June 2013, the

new Government began to articulate an ambitious emergency response to prevent a

balance-of- payments crisis, correct fiscal imbalances and put the economy on the road to

stabilization and rapid recovery. It was against this backdrop that Bank support to the

authorities through a two operation programmatic series of DPCs on Fiscally Sustainable

and Inclusive Growth (FSIG) was conceived.

This Implementation Completion and Results Report (ICR) assesses the achievements of

the expected results of the programmatic series of Fiscally Sustainable and Inclusive

Growth (FSIG) Development Policy Credits (DPCs) to the Islamic Republic of Pakistan.

The series supports the economic pillar (the second of four “E”s – Energy, Economy,

Education and Extremism) of the Government of Pakistan’s (GOP) development agenda,

which sets out the following objectives:

13

Box 1. Key Economic Priorities of the Government’s Program

The government envisages stabilizing the economy, bringing inflation down to the 6–7 percent range, and

achieving growth rate targets of 6–7 percent by 2017/18 or earlier. To do this, it has set the following goals

and comprehensive policy agenda:

Stabilization

Moving to fiscal consolidation. Reducing the fiscal deficit from 8.3 percent of GDP in 2012/13 to 3.5-4 percent

in 2016/17 by increasing revenues by around 3 percent of GDP, eliminating tax exemptions; imposing

austerity in expenditure management, cutting down subsidy outlays; protecting the priority safety net (BISP);

and carrying on active public debt management.

Rebuilding the external position to no less than 3 months of imports and tightening monetary policy. Scaling

back monetary accommodation of fiscal deficits and setting up policy rates to keep positive real interest

rates; strengthening the central bank’s independence; and protecting the external position by repurchasing

reserves to cushion against major shocks.

Main growth-enhancing reforms

Comprehensive power sector reform. Reducing power subsidies; restructuring boards of power distribution and

generation companies; making new investments; strengthening the power sector regulator; and expanding

alternative sources of energy.

Reforming or privatizing SOEs. Privatizing by equity or strategic sales; or if restructuring, then requiring

professional chief executives and board members and their compliance with Public Sector Companies

(Corporate Governance) Rules 2013.

Improving trade competitiveness. Simplifying tariffs, with four slabs and 1–25 percent rates, and phasing out

trade-distortive statutory regulatory orders (SROs) on some 4,000 products.

Expanding trade relations with neighbors. Facilitate regional trade and take full advantage of trade preferences

available from the European Union.

Enhancing the investment climate. Establishing a One Stop Shop for registering limited liability companies; and

strengthening of the BOI in implementing a plan for improving the business environment and investment-

friendly special economic zones.

Expanding access to finance. Developing the SBP’s Financial Inclusion Program to enhance access of SMEs to

financial services through regulatory reforms, product innovation, financial literacy, and consumer

protection.

It is aligned with the four strategic pillars of the Country Partnership Strategy (2014): (i)

Transforming the Energy Sector; (ii) Private Sector Development (strengthening the

business environment, improving trade logistics, and privatizing/restructuring SOEs); (iii)

Reaching out to the underserved, neglected and poor (including MSMEs); and (iv) Service

Delivery (reduce vulnerability to income shocks by expanding coverage of the Benazir

Income Support Program (BISP), accelerate improvements in services, increase revenue to

fund service delivery and increase provincial non-wage spending on education and health).

The series had two broad development objectives: (i) fostering private and financial sector

development to bolster economic growth; and (ii) mobilizing revenue while preserving

priority use of fiscal space. The first of the series (FSIG I) addressed critical institutional

and regulatory changes required to jumpstart the reform process. The second (FSIG II)

was intended to bring continuity and sustainability to most actions of the first phase, while

introducing new inclusion and governance actions. Both operations are linked to several

pillars of the GOP reform program, including: (i) privatization of SOEs; (ii) improving the

investment climate; (iii) mobilizing revenue; and (iv) protecting priority social

expenditures.

14

The design of the series also reflected lessons learned from previous experience as

described in the CPS Completion Report (2010-2014). These included:

Importance of coordinating donor responses

Traditional approaches to capacity building had been only moderately effective given

high staff turnover in public service and therefore there was a need to focus on systems

rather than training

Simpler Results frameworks with fewer outcomes were advisable

There was a need to strengthen attention at provincial level

1.1 Context at Appraisal

In the run up to the May 2013 election, which precipitated the first peaceful transition from

one democratically elected government to another in Pakistan’s history, Pakistan was in a

near-crisis economic situation. Unprecedented floods in 2010 and 2011, coupled with

continuing security issues, stalling economic reform, failing investment and external

financial inflows, and fiscal disarray preceding the elections severely undermined internal

and external macroeconomic balances.

Within months of taking office, the new government had successfully negotiated an

arrangement under the IMF’s Extended Fund Facility (EFF), focused on putting the

economy on the road to macroeconomic stabilization and economic growth. Successful

implementation was slowed-down somewhat by political constraints and unrest. The

response to these developments distracted the GOP somewhat from implementation of their

reform agenda

The measures supported by the FSIG DPCs, alongside the Power Sector Reform DPC,

were an effort to reinvigorate the reform agenda. A programmatic approach was adopted

to support reform momentum while catalyzing the initial outcomes required for further

consolidation and deepening of key inclusive growth enhancing components of the GOP’s

program.

Despite the depth, ambition and trajectory of the authorities’ reform program, the DPC

series that began in 2014 was composed of only two operations. This reflected the

uncertainty associated with a resumption of policy-based lending to Pakistan following

earlier, largely unsuccessful, attempts under previous governments. Previous engagements,

particularly in support of revenue mobilization, were undermined by a lack of political will,

public and private vested interests, and weak institutional capacity.

1.2 Original Program Development Objectives (PDO) and Key Indicators (Annex 1:

Policy and Results Matrix)

Program Development Objectives

1. Fostering Private and Financial Sector Development

15

2. Expanding Social Protection and Mobilizing Revenue

Key Results Indicators

1. At least five entities privatized through strategic or equity sale by June 2016

2. An improved system/framework providing availability/coverage/quality of credit

information for consumers and SMEs by June 2016.

3. Simple average statutory tariff rate is at or lower than 12 percent in June 2016.

4. Number of UCT beneficiaries who received full benefits is at least 5.5 million in June

2016. 5. Overall tax collection is at least 11.5 percent of GDP by end-2015/16 and no special

concessionary exemptions issued through SROs by FBR.

1.3 Revised PDO and Key Indicators and Reasons/Justifications

There were no revisions to the PDOs. Triggers, while supporting the original two pillars,

were adjusted where necessary. Two prior actions were added in FSIG-II to address

inclusion and economic governance concerns and no trigger from the FSIG-I was dropped.

On inclusion, a prior action was added to reflect the GOP’s intention to join the Better than

Cash Alliance and, on the governance front, a prior action was introduced to more clearly

delineate the powers and functions of the BISP management and Board. An additional

capital transaction was added to the prior action on the privatization program to recognize

progress achieved. The floor tariff rate was raised from zero to one percent to ensure that

fiscal targets under the IMF program were reached. Several other prior actions were

reformatted for purposes of clarity.

The only significant change to the results indicators pertained to the availability of credit

information to individuals. The first DPC sought 100% access to credit information by

June 2016 from a baseline where no consumer has access to its own credit information in

June 2013. In DPC II, this was changed to “an improved system/framework providing

availability/coverage/quality of credit information for consumers and SMEs by June

2016.” The DPC I formulation was considered to be overly ambitious and not well linked

to the PA (i.e., approving the credit bureau law and secured transaction law would not

ensure 100% access to credit information). Given that the PA was passage of the Credit

Bureau Act, the DPC II formulation was more realistic.

1.4 Original Policy Areas Supported by the Program (as approved):

In the area of private and financial sector development, the series sought policy reform in

the following areas:

Privatization—Pakistan’s SOEs deliver poor services to the private sector (particularly

in the critical energy sector) and create market distortions, which holds back economic

growth and suppresses private investment. They contribute to a fiscal burden that

crowds out the private sector’s access to finance. The DPCs attempt to kick start the

16

privatization process by supporting equity and strategic sales of SOEs consistent with

the GOP’s identification of 31 priority projects to be privatized in a “phased manner”.

Improving the business environment and investment climate—Improving the

availability and accuracy of credit information, the Program seeks to facilitate access

to credit by the private sector and enhance consumer protection. A step in this direction

is strengthening the regulatory framework for the operation of credit bureaus in the

public and private sector. This is to be achieved through passage of the Credit Bureau

Act. The establishment of a One Stop Shop (OSS) for business registration for

registering limited liability companies is a prior action for the DPCs and is an explicit

part of the GOP’s reform strategy.

Financial sector (insurance) liberalization—Through the Securities and Exchange

Commission (Micro-Insurance) Rules, the DPCs support the GOP’s objectives of

financial sector product innovation and enhancing social protection through the

development of a micro-insurance sector by providing affordable outreach to low-

income people.

Trade policy reform— The complexity of the tariff regime and the level of protection

undermines the quality of the investment climate, undermining competitiveness,

imposing a burden on importers and constraining the ability of firms to innovate.

Reduction in the number of tariffs “slabs” and phasing out of exemptions were

priorities under the GOP’s reform agenda.

In support of expanding social protection and revenue mobilization, policy areas supported

by the DPCs included:

Improving revenue mobilization—By supporting a reduction in the use of SROs to

create tax exemptions and constraining the ability of the FBR to issue new SROs, the

DPCs provide strong support for the GOP’s efforts to achieve fiscal consolidation and

build fiscal space to support expand social spending.

Privatization—In addition to the negative impact of Pakistan’s SOEs on the business

climate mentioned above, they are a major burden on the GOP’s fiscal resources as

many rely on direct subsidies from the GOP or generate large contingent liabilities.

Privatization is intended to reduce the fiscal costs to the GOP thereby opening up fiscal

space to expand social spending.

Expanding Social Protection—By supporting the BISP by raising the level of benefits,

expanding the number of low-income beneficiaries, improving the timeliness of

payments and enlisting the support of the provinces in the delivery of BISP, the DPCs

help the GOP to use the enhanced fiscal space to strengthen the social safety net.

2. Key Factors Affecting Implementation and Outcomes

2.1 Program Performance

DPC Amount Expected

Release Date

Actual Release

Date

Release

FSIG DPC I XDR258.5M May 6, 2014 May 7, 2014 Regular

FSIG DPC II XDR355.6M June 18, 2015 June 19, 2015 Regular

17

All prior actions were met.

List Prior Actions from Legal Agreement/ Program Document


Action 1.1: The Privatization Commission has launched the Privatization Program, including: (a)

taking to market one strategic sale of an SOE, including calling for expressions of interest from

prospective investors; and (b) issuing requests for proposals and calling for expressions of interest in

connection with the procurement of financial advisors to advise on (i) another SOE strategic sale, and

(ii) the offering of equity in three SOEs in domestic and international capital markets.

Action 1.2: The Ministry of Finance has submitted the Credit Bureaus Bill, 2014 to the National

Assembly for approval.

Action 1.3: The Securities and Exchange Commission of Pakistan has approved the Securities and

Exchange Commission (Micro-insurance) Rules, 2014.


Action 1.4: The Ministry of Finance has strengthened the pro-poor orientation of the BISP through: (a)

raising the basic benefit under BISP to PKRs.1,200 per family per month; (b) issuing a notification

guaranteeing timely and full quarterly budget releases to BISP; and (c) obtaining the endorsement of

the Chief Secretaries of the Provinces of memoranda of understanding between BISP and the

Provinces to extend conditional cash transfers for primary education to twenty districts.

Action 1.5:(a) The Ministry of Finance has approved the Federal Board of Revenue (FBR) Strategy

Paper containing a comprehensive tax reform strategy; and consistent with it (b) FBR has refrained,

since July 1, 2013, from issuing statutory regulatory orders granting special tax exemptions.

Action 1.6: The Federal Board of Revenue, as part of the implementation of the FBR Strategy Paper,

has: (a) issued at least seventy thousand (70,000) notices to potential tax evaders to register and file

tax payments; and (b) undertaken provisional tax assessments of at least eight thousand (8,000)

individuals.

Action 1.7:The Federal Board of Revenue, as part of the implementation of the FBR Strategy Paper,

has: (a) launched an information technology-based Taxpayers Audit Monitoring System; (b)

undertaken ballot-based audits of at least five (5) percent of total tax returns filed for tax year 2012;

and (c) completed at least twenty-five (25) percent of such audits.

Action 1.8: The Federal Board of Revenue, as part of the implementation of the FBR Strategy Paper,

has: (a) published the Parliamentarians Tax Directory; and (b) issued national tax numbers to all

members of the Senate, the National Assembly, and the Provincial Assemblies, and disclosed their tax

payments.

DPC II


Action 2.1: As part of the implementation of its Privatization Program, the GOP has completed one

SOE strategic sale and three capital market SOE equity transactions.

18

Action 2.2: The National Assembly has approved the Credit Bureau Act; and the GOP has joined the

Better than Cash Alliance Initiative.

Action 2.3: The Parliament has approved a budget law 2014/15 providing for the application of 6

statutory tariff slabs; and the MoF has approved a Plan to achieve 4 slabs in 3-years, within a range of

1 to 25 percent for all tariff lines, allowing very few exceptions and tariff peaks to address sensitive

goods or special sectors only.

Action 2.4: As part of the implementation of its Plan for improving the business environment, SECP,

FBR and EOBI have established a virtual One-Stop-Shop (OSS) for business registration, and a

physical OSS in Lahore.


Action 2.5: The Parliament has approved a budget law 2014/15 increasing the BISP allocation to

PKRs. 97.15 billion in order to raise the benefit amount to PKRs. 1,500/month per beneficiary, well

above inflation, and start activities to expand CCTs for primary education in no less than 27 districts

with a benefit of PKRs.250 per month per child attending school; and the BISP has reached an

implementation agreement with each provincial/regional government on a cost-sharing arrangement

for CCTs.

Action 2.6: In compliance with BISP Act 2010, the BISP Board has issued internal rules and

regulations delineating the powers and functions of the BISP Management and the BISP Board.

Action 2.7: The Parliament has approved a budget 2014/15 which includes (i) a tax expenditure annex,

(ii) the elimination of a set of tax exemptions and SROs, and (iii) provision of additional tax measures

for a total revenue impact equivalent to at least 0.7 percent of GDP.

Action 2.8: The Government (a) has issued a Presidential Ordinance containing all amendments of the

corresponding tax laws to permanently eliminate the discretion of FBR to issue special tax

exemptions, making any proposed tax exemption subject to parliamentary approval as part of the

annual budget law and/or the corresponding tax legislation; and (b) has submitted to the Parliament

such amendments as part of the Finance Bill for the budget 2015/16.

Action 2.9: FBR has (a) issued 171,000 notices to identified potential tax evaders to register and file

tax payment, and taken administrative and/or legal actions on at least 25 percent of the potential

taxpayers who received notices by 31 December 2014, but failed to respond to them; and (b) selected

at least 7.5percent of non-salary-including large taxpayers (filed for tax year 2013) through ballot- or

risk-based audits, and completed audits for at least 10 percent of those selected cases.

Action 2.10: (a) Two provinces have expanded the scope of their GST on services to increase their

revenue; and (b) the provinces have increased their 2014/15 budget allocations to non-salary education

and health spending by no less than 26 percent.

Action 2.11: (a) The MoF has issued a notification requiring each drawing and disbursing officer to

provide commitments details to the Accountant General within 10 days of the month closure. The

quarterly budget releases to all department and ministries will be contingent on full compliance with

this provision; (b) the Recipient’s Controller General of Accounts has issued a notification to disclose

on its website the annual audited financial statements for the last 5 years, and committing to disclose

future financial statements within 15 days of the date they are laid before the Parliament; and (c) the

MoF has issued a notification to disclose on its website monthly in-year revenue and expenditure

reports of the federal government within 30 days after the month-end.

19

2.2 Major Factors Affecting Implementation:

Design

Sequencing of Reforms – The sequencing of reforms, both across DPCs and with other

development partners (mainly the IMF and its EFF program), put correct focus on

stabilization at the outset, without which the feasibility and impact of other aspects of

the reform agenda would have been significantly diminished. This suggests that, of the

two DOs – (1) Fostering Private and Financial Sector Development and (2) Expanding

Social Protection and Mobilizing Revenue, the latter was clearly of the greatest

importance, with efforts in support of the first objective largely to seed the ground for

subsequent reforms. This hierarchy could have been more clearly articulated in the

DPC to moderate expectations on the growth/structural reform front and ensure a

shared understanding among the GOP, Bank and development partners of the

importance of a more deliberate and explicit strategy for facilitating the shift in

emphasis from stabilization to growth (i.e., structural reform).

Pace of Reform – With the exception of efforts to stabilize the fiscal situation, which

were ambitious and front loaded, the contribution of the program to the growth-

enhancing reforms was more modest. While this could be interpreted as a lack of

ambition, it was more likely the result of: (i) the need to keep GOP attention initially

on the demands of implementing a robust stabilization effort; (ii) a prudent and more

far-sighted effort to build relationships and trust between the Bank and a reform-

minded, albeit new, GOP administration following a prolonged hiatus from policy-

based lending and (iii) the need to develop a shared and deeper understanding of the

structural challenges facing the Pakistan economy before taking a more aggressive

approach to growth oriented reforms.

On the last point, the measured approach to structural reform seems justified by the

need for both the Bank to learn from experience with a relatively new administration

with weak and/or uncertain implementation capacity, and to test the resilience of the

GOP’s commitment to an ambitious reform agenda and assess what was feasible. For

example, neither the National Financial Inclusion Strategy (NFIS) nor the

Development Module of the FSAP was available in 2013 and 2014 when the Bank,

alongside key development partners, was called on to provide coordinated support to

the new GOP. Now, with a significantly improved macroeconomic situation, a track

record of success, and greater trust between the Bank and GOP, and on the basis of

comprehensive analysis, the GOP with the support of the Bank, are better positioned to

articulate and implement a more ambitious, coherent and sustained reform agenda,

particularly for the financial sector. Evidence of this can be seen in the subsequent

Competitiveness and Growth DPF (approved June 2016) and the Finance for Growth

DPC (under preparation).

Regular Monitoring of Reform Implementation – The close attention of development

partners to the implementation of clearly articulated and quantified reforms (e.g., BISP)

20

was seen to have strengthened budgetary discipline in ensuring that timely transfers

were made to support safety net payments to BISP.

Lack of Sufficient Specificity on Prior Actions – Given the length of time since Pakistan

had had its last DPO, and the associated lack of familiarity of some officials with Bank

practice, additional specificity in some prior actions (e.g., with respect to privatization

as well as elimination of FBR discretion to issue tax exemptions) could have helped

avoid misunderstandings on what was required for a prior action to be considered

completed.

Context-specific factors

Strength and Ambition of GOP Commitment—The GOP demonstrated strong

ownership of the reform agenda supported by the DPCs, particularly on the fiscal side,

where major progress was made in stabilization and in curtailing the use of exemptions

through SROs. However, this was less the case for the growth/structural reform aspects

of the program, resulting in less traction during FSIG I and II, particularly on the trade

side (while some simplification of the tariff regime was achieved, efforts to bring down

the overall level of protection fell short). Privatization efforts also fell short of plans,

which were overly ambitious at the outset given the length of time since Pakistan had

last successfully undertaken a privatization transaction. However, in this case, it was

the GOP’s privatization program that was overly ambitious rather than the Bank’s

support for privatization.

Responding to political resistance from vested interests in parliament – As foreseen at

the outset, there was strong parliamentary opposition to several aspects of the reform

program. For example, opposition to elements of the Credit Bureau Act within the

Senate resulted in the Act being modified in such a way as to materially undermine its

effectiveness (a requirement for the Central Bank to review all credit reports was

inserted, although this amendment was subsequently reversed in the context of the

follow-on Competitiveness and Growth DPF). The DPCs’ emphasis on transparency,

particularly on the tax front, was therefore appropriate and prudent given the need to

inform and educate the public about tradeoffs and the extent and nature of opposition

to the program.

Weak capacity and lack of experience within the Privatization Commission – An

inadequately staffed and insufficiently experienced Privatization Commission,

combined with a very ambitious privatization agenda presented challenges to the

implementation of the prior actions. Recognizing the Privatization Commission’s

capacity constraints, development partners, including the Bank, made significant

technical assistance and advisory support available to the Commission. However, this

exceeded the Commission’s absorptive capacity, and the considerable support was

therefore less effective than it might have been otherwise. Moreover, the ambitious

targets for privatization transactions meant that the Commission’s management was

not able to give adequate attention to training and capacity building. The focus on

transactions was not surprising given that privatization transactions figured

21

prominently in the conditionality of the IMF, World Bank and Asian Development

Bank. However, capacity challenges contributed to delays in the privatization process,

contributing to the intensification of public opposition to the privatization program. At

the same time, a lack of familiarity of the Commission with Bank requirements

regarding the completion of prior actions led to miscommunication with Bank staff on

the status of a prior action and subsequently incorrect information was shared with the

Board. In hindsight, initial efforts could have given greater attention to building

capacity at the Privatization Commission, better situating a smaller number of specific

privatizations in the context of sector-specific reform, and implementing a more

aggressive communications strategy alongside privatization efforts. To the extent that

a key constraint to privatization was political rather than technical suggests that future

efforts need to emphasize communication/engagement, rather than more analysis or

technical capability.

Openness of GOP to Technical and Advisory Support from Development Partners –

The authorities clearly appreciated the technical assistance provide by the Bank and

other development partners. While most of the GOP sought, and readily accepted,

technical assistance, other parts (e.g., FBR, Privatization Commission) were initially

somewhat less open to greater engagement. This was the result of a combination of an

initial underestimation of the complexity of the reforms being implemented (e.g., in the

case of privatization), differences of views on TA priorities as well as some suspicion

due to concerns with the scope and relevance of past TA. This last factor eased

significantly over the life of the DPC series as trust and familiarity was developed

between the GOP and WB staff.

Relevance of Risks Identified

FSIG I (2014) identified the following key risks to the operations:

o Political opposition in Senate on tax front

o Social unrest from opposition to measures

o Implementation challenges due to staff turnover, counterparty capacity constraints,

weak policy coordination

o Internal control system weaknesses given no progress on internal audit

o Impact of regional or domestic conflict on FDI

o Terms of trade shocks (oil)

o IMF program could go off track

This was a well-articulated list of risks, with all but the last two negatively impacting the

implementation of the reform program in some form or another. In the case of terms of

trade shocks, the decline in the prices of several commodities Pakistan exports was more

than offset by the decline in world oil prices. The positive net impact on Pakistan’s balance

of payments facilitated the authorities’ ability to implement their reform agenda, with the

resulting decline in inflation contributing to a reduction in domestic interest rates. However,

had prices moved the other way, the ability of the authorities to make progress on key

aspects of the program would have been compromised. The decline in interest rates did

22

provide an additional incentive for domestic banks to seek alternative sources of revenue

and ultimately, contributed to an expansion of credit to the private sector. The IMF

program did face some delays in implementation but none that proved overly lengthy or

that seriously threatened the viability of Bank support through the DPCs.

Social unrest did have an impact on the privatization process and will likely affect the

prospects for subsequent privatizations going forward. In the case of weaknesses in policy

coordination, this appears to have contributed to the more modest progress on the growth

agenda. With the MOF firmly in control of negotiating the DPC, other parts of the

government may not have been fully integrated into the policy dialogue.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization:

One of the lessons from earlier experience was the need for simpler results frameworks

with fewer outcomes. This was acknowledged in the program, with a streamlined set of

prior actions and results indicators, particularly in the first operation in the series.

Among the lessons from an IEG Project Performance Report on four structural adjustment

loans in Pakistan (December 19, 2005) was a call for: “precise definitions of actions and

when they are considered complete are needed to avoid delays or failures to achieve

objectives, and these cannot always be described in the policy matrix alone” (page 12).

Given the authorities lack of familiarity with policy-based lending through DPCs (the

previous attempt by the Bank with policy-based lending to Pakistan had been some time

ago and not successful), a more explicit and detailed description of prior actions and the

evidence required for their implementation was warranted. An interesting example was

privatization for which no definition was provided. The five transactions undertaken

represented a wide range in ambition, from only five percent for PPL to 88 percent of the

NPCC. Since “privatization” is a term for which the Bank has no set definition, the Results

indicator would have been more meaningful (and the outcome perhaps more ambitious),

had some indication been provided of the magnitude of ownership that needed to be

transferred to constitute a “privatization”.

In three cases – the HEC privatization, the elimination of FBR discretion to issue tax

exemptions, and what was required to complete expenditure and review reporting under

Action 2.11 – there was miscommunication between the Bank and authorities as to what

was needed to meet prior actions. In the case of the elimination of FBR discretion, a

misunderstanding on the timing of action to permanently eliminate the discretion of the

FBR to issue special tax exemptions (making any proposed tax exemptions subject to

Parliamentary approval) required a last minute Presidential Ordinance to complete the prior

action1.

1 See “Agreed Minutes of Negotiations Between the Islamic Republic of Pakistan and the

International Development Association Regarding the Second FSIG DPF”, May 13, 2015

23

The HEC privatization, one of the prior actions in the FSIG DPC II, could not be completed

because the check provided by the buyer was not honored. But the documentation

submitted to the Board for approval said that the HEC privatization had been completed,

as informed by the Government. In this case, more could have been done to explain to the

staff at the Privatization Commission how DPCs worked, as well as the implications of

submitting incorrect information to the Board. A better understanding of this on the part of

the GOP could have precipitated an early conversation with the Bank on concerns with the

bidder for HEC and could have avoided a more difficult discussion as to whether or not the

check received for HEC from the bidder was “legal tender”. (Under Pakistan law a check

was “legal tender” and therefore the authorities interpreted its provision by the prospective

buyer as fulfillment of the “letter” of the prior action, despite concern with the credibility

of the bidder). That the check was not honored (and the privatization not completed) came

as a surprise to the Bank. The resulting miscommunication led to a difficult situation for

both the Bank and the authorities that was only resolved through a legal note to the

Executive Board interpreting the precise language of the prior action.

Lastly, in the case of Action 2.11 (c) - MoF notification to disclose on its website monthly

in-year revenue and expenditure reports of the federal government within 30 days after the

month-end.—while the Finance Secretary approved the proposal for disclosure of

provisional monthly revenue and expenditures statements on the website of the Finance

Division, with the Budget Wing responsible for dissemination, there was no subsequent

publication of monthly in-year data on GOP revenue and expenditures. As late as October

2016, only quarterly reporting was available on the MOF website.

The overarching lesson from this experience was the importance, particularly when it

concerns authorities that are unfamiliar with a particular Bank instrument, to ensure close

and clear communication throughout the transaction. This points to the need to have in

place follow on monitoring of implementation to ensure that actions are fulfilled as

anticipated.

2.4 Expected Next Phase/Follow-up Operation:

With FSIG I and II having successfully set a foundation for a more ambitious set of reforms,

a Competitiveness and Growth DPC and PBG which builds on and deepens the reforms

begun under FSIG, was approved by the Board in June 2016. A Finance for Growth DPC

that draws on the GOP’s May 2015 National Financial Inclusion Strategy and the recently

completed FSAP development module is being designed and a fifth DPC that focuses more

directly on constraints to growth, including in the trade sector and business climate, is in

the pipeline.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation



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Overall Rating: Substantial

(a) Relevance of Objectives: High

The overall objectives of the program were and remain highly relevant. Private and

Financial Sector Development remain key to building a diverse and vibrant private sector

that can create jobs, enhance productivity, promote trade, broaden the tax base, and build

support for stability and security, and contribute to poverty reduction and shared prosperity.

Improving revenue mobilization is a critical element of macroeconomic stabilization,

contributing to the development of the formal sector, and reducing corruption. It is also

essential for expanding social protection, which is critical in an environment prone to

economic, political and natural disaster related shocks. However, as noted above, the

second objective was clearly the dominant one, with efforts in support of the first objective

more in the nature of seeding the ground for subsequent substantive measures.

(b) Relevance of Design: Substantial

The design of the program recognized several of the key lessons from previous engagement

in Pakistan, including the need for a focused program with clear priorities and a streamlined

results framework. Policy measures supported by the program and results indicators were

broadly in line with the objectives. Some of the policy measures were central to the

achievement of program objectives. This was particularly the case with respect to fiscal

measures such as those designed to curtail the use of tax exemptions, reduce tax avoidance

or enhance the transparency of fiscal policy. Measures to expand social protection were

also highly relevant, drawing as they did on BISP, an existing and well-targeted social

assistance program. Other program measures, on the other hand, were less central to

program objectives or were not obvious reform priorities in a streamlined program.

That said, at the outset, the GOP’s implementation capacity was uncertain and some major

diagnostic and analytical work was not yet available. The decision to include measures

that were a lower priority from the standpoint of growth or stabilization (such as passage

of the Credit Bureau Act, or tariff simplification rather than reduction), can be seen as part

of an effort to firmly establish these important themes (e.g., trade reform, financial

inclusion, improvements in the business climate) as pillars of the overall Bank-supported

reform agenda. This allowed Bank staff the time to develop a better appreciation of the

political economy challenges in these areas and served as a prelude for more ambition in

subsequent Bank-supported reforms.

(c) Relevance of Implementation: Substantial

Implementation arrangements, with the MOF the main executing agency, were relevant at

the outset given the centrality of the stabilization effort and the close link between revenue

mobilization and many other priority elements of the reform agenda. As the relative

importance of the growth agenda increases, and issues such as trade reform, business

climate and SOE reform take on greater urgency from the standpoint of the sustainability

of the reform agenda, other departments will need to play a greater role. Ambition of

25

privatization objectives2 could have been better calibrated to capacity of Privatization

Commission.

3.2 Achievement of Program Development Objectives

The two PDOs of the DPL series were evaluated using five results indicators.

1. PDO 1: Fostering Private and Financial Sector Development – Modest

Only modest progress was made in achieving this objective during the period of the FSIG

DPCs. Efforts to improve the investment climate did not advance significantly, trade

liberalization was tentative, expansion of credit to the private sector was more related to

external developments than sector reform, and forward momentum on privatization was

not sustained. However, the FSIG DPCs played an important role in getting

privatization/SOE reform and (to a lesser extent) trade reform on the GOP’s public policy

agenda (two of the results indicators). Prior to the first DPC, there was little if any

momentum behind reform in either area. Both are now explicit pillars of the growth agenda

and the FSIG DPCs did help create a foundation for more substantive progress in

subsequent DPCs although trade reform continues to lag.

o At least five entities privatized through strategic or equity sale by June 2016 – While

the target for the results indicator was achieved, the privatizations that were undertaken

were not particularly ambitious and the more ambitious efforts tended not to succeed,

usually due to public or political opposition. However, lessons learned from experience

under the FSIGs DPCs, have led to some rethinking by the GOP of their approach to

privatization, with some evidence of more attention to support broader sector reforms.

o An improved system/framework providing availability/coverage/quality of credit

information for consumers and SMEs by June 2016 – The modality through which this

outcome was achieved was the Credit Bureau Act. However, while the Act was passed

by the National Assembly, subsequent modifications in the Senate undermined the

effectiveness of the measure although this was corrected in the context of the

subsequent Competitiveness and Growth DPF and the measure is now in place as

intended. That said, inclusion of the Credit Bureau Act in the program took advantage

of its readiness for submission to Parliament, despite being a lower priority measure in

support of private and financial sector development. It was, in effect, “low hanging

fruit” (albeit important in the longer-term) pending completion of major diagnostic

work on the financial sector. It also had the benefit of helping to build support among

the GOP for a Bank-supported reform effort.

2 While the DPC’s requirement of five privatizations in two years was not itself overly ambitious,

this needs to be seen in the context of additional privatization ambitions, including the GoP’s

aspiration to privatize 39 entities in three years.

26

o Simple average statutory tariff rate is at or lower than 12 percent by June 2016– High

tariffs (with average rates among the highest in South Asia) shield Pakistan’s domestic

producers from international competition and prevent access to imported inputs. As

such, they represent a major impediment to productivity growth and improved

standards of living. While down somewhat from the baseline of 14.4 percent, the

reduction fell short of the target, reaching only 13.4 percent, well short of the original

target for the simple average tariff of 12 percent by June 2016. However, the program

was able to significantly curtail the use of SROs to grant tax exemptions (SROs

severely distort the tariff structure, decrease transparency and create an uneven playing

field for Pakistani importers). Unfortunately, this progress was partially undermined

by the significant increase in the number of products subject to Regulatory Duties

(RDs). In fact, the number of tariff lines subject to RDs increased from 105 in FY12/13

to 568 in FY14/15, with the share of imports paying RDs increasing from 0.6 percent

to 9.7 percent over the same period.

While not supported by a results indicator, one of the prior actions fell well short of

achieving its objective. For Action 2.4 (SECP, FBR and EOBI will have established (a) a

virtual one stop shop for business registration and (b) a physical OSS in one province),

while both the OSS and VOSS were created, neither has been successful to date. The

authorities reported significant problems with the associated software and, as a result, few

of the links on the VOSS site work. The authorities report that since its establishment, only

four firms have used it to register businesses. That said, the authorities were able to

significantly shorten processing time on the sites of the individual entities responsible for

business registration, but the achievement of this objective cannot be directly attributed to

DPC measures although the DPC may have helped draw the authorities’ attention to the

importance of simplifying and shortening the process for registering a business.

2. PDO 2: Expanding Social Protection and Mobilizing Revenue – High

In contrast to achievement of PDO 1, significant progress was made to expand social

protection and mobilize revenue. The latter, which exceeded its target of 11.5 percent, was

particularly critical given the need to stabilize the Pakistani economy and without which

reliable funding of the expansion of BISP would not have been possible. Moreover, the

efforts of the FSIG DPCs likely contributed to the reduction in the macroeconomic risks,

which, by the time of the Competitiveness and Growth DPC had fallen from “high” to

“substantial”.

Number of UCT beneficiaries who received full benefits is at least 5.5 million in June

2016 – The FSIG DPCs were very successful in expanding both the number of

beneficiaries, the size of benefits and the reliability of benefit payments. The GOP was

also able enlist the support of the provinces in the BISP program though the regular

provision of information on eligibility. The modest short fall in beneficiaries (5.3

million) reflected the fact that not all of the 5.7 million identified beneficiaries

registered for BISP. This is not surprising given displacement from natural disasters

and conflict.

27

Overall tax collection is at least 11.5 percent of GDP by end 2015/16 and no special

concessionary exemptions issued through SROs by FBR -- Revenue to GDP reached

12.4 percent by 2015/16, and the FBR’s power to issue SROs was curtailed and

transferred to parliament, a major achievement.

3.3 Justification of Overall Outcome Rating

Overall Rating – Moderately Satisfactory

While achievement of the first objective was moderately unsatisfactory, the series was

considerably more successful in achieving its second objective, with significant

overshooting of the revenue to GDP target. The overall assessment was on balance positive

given the primacy of the fiscal objective both to underpin macroeconomic stability and to

finance expanded social protection. While progress toward the private and financial sector

objective was moderately unsatisfactory during the program, this agenda is gaining traction

in subsequent DPCs, which have been able to build on the strengthening of the relationship

with the authorities to which the first operation contributed, and the more stable

macroeconomic situation.

2.4 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

The program contributed to macroeconomic stabilization and a gradual acceleration of

growth. The World Bank estimates that poverty, using the US$1.9 in PPP terms poverty

line, has declined from 6.1 percent in 2013 to 5.4 percent in 2016. Growth in Pakistan has

been historically pro-poor, which suggests that reforms that contribute to a gradual

acceleration of growth will also contribute to poverty reduction. In addition, some of the

prior actions had a beneficial impact on poverty reduction. The operation supported an

expansion of BISP, increased generosity of the benefits and improvements in governance

and the regular disbursements of budget allocations. Given the strong performance of the

program’s targeting system, this suggests that significant benefits have accrued to the

poor. BISP cash transfers contribute particularly to Pakistani women’s human capital

development. A significant share of BISP cash transfers is given to women who are heads

of households. Data from the Pakistan Social and Living Standards Measurement survey

and recent evaluations and beneficiary assessments of the BISP program confirm

multiple channels through which this happens:

Households headed by Pakistani women receiving transfers spend significantly more

on human capital development-related outlays than those households headed by men..

As BISP cash transfers require a Computerized National Identity (CNI) card,

registration in the program gives women the right of a citizen (voting, opening a bank

account and the like). From 2009 to 2012, more than 15 million female citizens

obtained a CNI card, largely due to registration with BISP.

BISP payments raise their role in the family and empowerment. About 58 percent of

women BISP cash-recipients reported spending money as they wanted; 75 percent felt

28

their importance in the family had increased; 62 percent took more decisions than

before receiving the transfer; and 72 percent reported increasing their level of

confidence.

The ability of the program to protect BISP from the fiscal consolidation effort implemented

over the past few years was recognized by stakeholders in discussions to prepare this ICR.

The progressivity of the tax system improved with the withdrawal of tax exemptions,

particularly given the fact that the Government retained a number of tax exemptions on

basic goods consumed by the poor.

(b) Institutional Change/Strengthening

Implementing an ambitious set of reforms under a tight timeline can challenge less

established bureaucracies. Pakistan’s bureaucracy is relatively sophisticated, although as

discussed in this report, at times the ambition of reforms was not commensurate with

available capacities. The process of preparing the DPC and following up on the

implementation of agreed reforms evolved over time, with clear signs of a stronger

preparation and monitoring process in place toward the end of the implementation period

of the FSIG DPC series, partly as a result of lessons learned during the process. These

included: (i) regular meetings chaired by the Minister of Finance to assess progress in the

implementation of prior actions; (ii) development of processes to monitor the

implementation of agreed reforms after the approval of the operations, agreed at

negotiations; (iii) the GOP and the World Bank also organized a ‘lessons learned’ session

after the closing of the FSIG series to assess the results achieved through the DPC series

and identify areas in which progress had been less than desired and where further support

was warranted; and (iv) adoption of a time-bound strategy for improving the business

environment with a clear system for allocating responsibilities across tiers of government

and agencies.

As a whole, it seems that the DPC has further strengthened an already capable bureaucracy

to implement a series of priority reforms in a disciplined manner, while improving

monitoring mechanisms over time.

3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

There was no beneficiary survey or stakeholder workshop.

4. Assessment of Risk to Development Outcome

Rating: Substantial

The achievements of the FSIG series have already begun to be reinforced by subsequent

Bank-supported operations. The Competitiveness and Growth DPC and related Policy

Based Guarantee approved in June 2016 build significantly on the reform agenda supported

by FSIG I&II, particularly in further expanding social protection and revenue mobilization.

A Finance for Growth DPC is under preparation to take forward the private and financial

sector development agenda, drawing on the experience of the FSIG DPCs as well as the

29

development module of Pakistan’s FSAP and the National Financial Inclusion Strategy.

With these two major pieces of analysis now complete, a more targeted approach to reform

is planned which should help address the shortcomings in the achievement of the first of

the two development outcomes.

Progress in improving the investment climate will likely continue but this will require more

calibrated priority setting that extends beyond a mechanistic effort to improve Pakistan’s

Doing Business ranking. The fact that the GOP has been able to significantly shorten the

time required to register a business (through pre-existing websites linked between the

relevant agencies) despite the failure of the VOSS and OSS to gain traction suggests that

ownership of this part of the policy agenda is well rooted. On the other hand, recent security

incidents will continue to undermine investor confidence, generating challenging head

winds for the economy.

Ongoing opposition to key pillars of the reform agenda remains substantial, with vested

interests expected to continue to seek preferential treatment through the tax and customs

revenue systems and through ongoing protection of domestic industry. This is likely the

greatest risk to sustainable achievement of the PDOs. In addition, as the reform agenda

moves from macroeconomic stabilization (with the MOF firmly in the driver’s seat), to

growth, it will be important to more directly engage other parts of the GOP, including the

Ministry of Commerce, in setting and building ownership of the policy agenda.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry Ratings: Satisfactory

In anticipation of engagement with a new government, the Bank undertook extensive

analysis of the challenges facing Pakistan (see Pakistan: Finding the Path to Job-Enhancing

Growth, Country Economic Memorandum (2013) and Pakistan: the Transformative Path

(2013)). The latter publication was composed of short, easily digestible, pieces covering a

broad range of policy areas and targeted specifically to a policy maker perspective. These

provided a sound analytical basis on which to begin discussions of Bank-supported

reforms. That said, not all policy makers interviewed for this ICR were aware of the work

suggesting that a more systematic and sustained effort to disseminate the valuable work

could have been useful.

In preparing for the FSIG series, the Bank consulted and coordinated extensively with

major development partners, including by participating in the 2013 London meeting of the

leading development partners (DFID, USAID, IMF, WB and AsDB), created early on to

support the new administration. There was particularly close alignment between the IMF-

supported EFF arrangement, support provided by DFID and this DPC series. The World

Bank and DFID established the Multi-donor Trust Fund for Accelerating Growth and

Reforms (TAGR). TAGR facilitated the provision of technical assistance in four broad

30

areas: (i) taxation; (ii) energy sector; (iii) debt management; and (iv) privatization and SOE

reforms, all areas of focus in the IMF and WB budget support programs. In addition, DFID

provided grant financing to the GOP, linked to the IMF and WB programs, but requiring

achievement of additional results on tax and social protection.

The Bank’s decision to separate out complex reforms in the energy sector and place them

in a parallel DPC series was, in retrospective, a wise one as it helped ensure sufficient focus

and enhanced leverage on critical but complementary reforms. With energy sector reform

essential to achieve fiscal objectives, there was a risk that the focus on some key reforms

could have been diluted if combined into a single MOF-focused DPC.

A notable shortcoming at entry pertained to the adequacy of the capacity of the

Privatization Commission to implement agreed reforms/prior actions and a very ambitious

privatization program. The Bank and other development partners (USAID, ADB, IFC and

DFID) offered significant technical assistance and capacity support but delivery of this

support took some time.

(b) Quality of Supervision Ratings: Moderately Satisfactory

While there was little formal supervision under the series, this was largely compensated

for by an extensive program of technical assistance, supporting most areas of reform

covered by the DPCs (privatization, tax policy and administration, social assistance,

business environment, trade, etc.). The strong in-country presence of Bank staff involved

in the DPC series also ensured close attention to implementation during the regular policy

dialogue between the World Bank and the GOP. While this ensured adequate supervision

in areas covered by ongoing TA and policy dialogue, more minor reforms that were not

part of this dialogue received less attention.

There were two noteworthy shortcomings in supervision that should be noted. The first

pertained to the establishment of the OSS/VOSS to facilitate business registration. From

the outset, there were problems that pointed to the need for a course correction (e.g., the

initial newspaper advertisement announcing the launch of the VOSS did not contain the

web address for the site, VOSS quickly ran into insurmountable software problems and

was left largely inactive by the authorities while they worked on making existing systems

more efficient, only four firms had used the system (of which only one used the OSS in

Lahore)). While Bank staff were aware of the problems in implementation, the VOSS

website and links to it on the relevant agencies’ websites remained active, despite the site

links being largely inactive, negatively impacting the reputation of the VOSS to anyone

who tried to access it.

The second shortcoming was partly related to the absence of related technical assistance or

projects. It pertained to a sub-element of one of the prior actions -- the publication on the

MOF website of monthly in-year reports on expenditures and revenues within 30 days of

month end. While a template of the report was shown to the Bank, there is no evidence that

reports were ever published on the MOF website. While this was admittedly not the most

31

important reform of the DPCs, its inclusion as a prior action implies that shortcomings in

implementation should have been noticed and addressed during the life of the operation or

in the period thereafter.

(c) Justification of Rating for Overall Bank Performance Ratings: Moderately Satisfactory

The overall MS reflects the fact that both of the shortcomings in supervision were relatively

minor or were compensated for in other ways – the authorities were able to achieve a

significant reduction in processing time through pre-existing systems, suggesting that this

prior action might have been better articulated as an objective of reducing the number of

days to register a business rather than as a specific modality (a “one stop shop”). In the

case of the monthly revenue and expenditure reports, the relevant information is available

on the website on a quarterly basis and in a timely manner. On the positive side, the

significant preparation of analytical work in anticipation of engagement with a new

government, as well as the willingness to provide ongoing technical (even if offers were

not always readily accepted) were considerably more significant and impactful

contributions to the success of the FSIG series.

5.2 Borrower Performance

(a) Government Performance – Moderately Satisfactory

The FSIG series represented a significant departure from earlier engagements with the

GOP, which had been fraught with challenges. The fact that this was the first successful

attempt at policy-based lending in almost a decade was a reflection of the broadly held

assessment that the new GOP was demonstrating strong ownership of their reform agenda

and solid commitment to achieving development objectives. It was in this context (which

included a commitment to a credible macroeconomic stabilization program) that the group

of leading development partners agreed to provide substantial and well-coordinated

support.

Not surprisingly, most of the shortcomings were largely a function of the length of the

hiatus from policy based lending from the Bank. Missteps tended to be related to a lack of

familiarity with program requirements or a nascent understanding of the complexity of

some aspects of the reform program (e.g. privatization). When this happened, the GOP

demonstrated credible resolve (e.g., through issuance of Presidential Ordinances) in

responding to problems and both the Bank and GOP adapted their approach in subsequent

DPCs to reflect the lessons learned.

6. Lessons Learned

Experience with the FSIG DPCs both validated the merits of earlier lessons learned and

generated some new ones.

For example, when engaging with a new government for which implementation

capacity and the sustainability of political commitment are uncertain, a more gradual

32

approach can provide an important opportunity to develop the critical relationships

and trust needed to ensure successful and sustained implementation. While there is

often a tendency to seek strong up front demonstration of commitment, unless this is

essential (e.g., where stabilization must be achieved quickly to avoid further erosion of

development progress), ambition should take into account the depth of understanding of

the underlying challenges as well as the context in which reform is being implemented. A

measured pace can, as in the case of Pakistan, lay the basis for a longer term and more

sustained reform effort.

It is important to ensure a shared and clear understanding of the nature and timing

of the evidence and preconditions required to meet prior actions and other

conditionality to avoid last minute misunderstandings. Greater effort in this regard would

have avoided problems such as those experienced with the legislation supporting the

curtailment of SROs and the privatization of HEC. And when misunderstandings such as

those related to the HEC privatizations do arise, there needs to be a clear and timely process

for informing the Bank.

In formulating the results framework, a more satisfactory result can sometime be

achieved by focusing on the substance/objective of what needs to be achieved rather

than a specific modality for achieving it (e.g., a reduction in the number of days required

to register a business versus a requirement to establish a “one-stop-shop”), even when the

modality is considered “best practice”. This would not preclude the adoption of a “best

practice” modality but it would give the authorities flexibility to adapt to evolving

circumstances.

While the Doing Business indicators and rankings provide a valuable instrument for

drawing attention to shortcomings in the business and investment climate, the

reforms that it motivates should be chosen strategically, and not be driven entirely by

the desire to improve ranking. While this may give the impression of significant progress,

reform priorities need to be grounded in a more country-specific assessment of the major

constraints to private-sector growth, avoiding the prioritization of less critical DB reforms

which can sometimes hijack the agenda. The country specific challenges faced by the

private sector environment mean that at times, what matters is not, for example,

establishing a VOSS, but addressing other legal, regulatory and policy level constraints to

proper functioning of markets and the business environment.

In the face of government enthusiasm for an aggressive privatization agenda, combined

with limited administrative capacity, the Bank, rather than focusing on the number of

privatization transactions, should take a more holistic approach, with strategic

selection of privatizations taken in the context of sector-wide reform. Ideally, the

ambition of the GOP’s privatization agenda should have been better calibrated to

implementation capacity and the ability to achieve sector reform preconditions. An

overambitious agenda set the GOP up for failure and may have undermined support for

privatization over the longer term. And while the Bank may find itself under pressure to

maximize the number of privatization transactions (in pursuit of quantifiable targets), a

more strategic and holistic approach, accompanied by time and resources dedicated to

33

communications and outreach to potentially impacted constituencies, could have produced

better results over the longer term.

There is a need to have in place structured monitoring arrangements and clear

responsibilities to monitor on a systematic basis the implementation of prior actions

and other conditions that require ongoing efforts (e.g., VOSS, monthly publication of

reports, etc.). This is particularly relevant for reforms for which no complementary TA/

operation is in place.

Finally, close coordination, communications, and alignment with key development

partners (e.g., IMF and DFID) can create mutual reinforcement as can be seen with

reforms to tax policy and administration and the strong performance of BISP in improving

the pro-poor orientation and timeliness of social support.

34

ANNEX 1: POLICY AND RESULTS MATRIX

Actions Implemented Under DPC I Prior Actions for DPC II Results

PILLAR 1. FOSTERING PRIVATE AND FINANCIAL SECTOR DEVELOPMENT

Action 1.1: The Privatization Commission has

launched the Privatization Program, including: (a)

taking to market one strategic sale of an SOE,

including calling for expressions of interest from

prospective investors; and (b) issuing requests for

proposals and calling for expressions of interest in

connection with the procurement of financial

advisors to advise on (i) another SOE strategic sale,

and (ii) the offering of equity in three SOEs in

domestic and international capital markets.

Action 2.1: As part of the implementation of its Privatization Program,

the GOP has completed one SOE strategic sale and three capital market

SOE equity transactions.

Results indicator: At least

five entities privatized

through strategic or equity

sale by June 2016.

Baseline: No privatization

transactions took place in

2012/13.

Action 1.2: The Ministry of Finance has

submitted the Credit Bureaus Bill, 2014 to the

National Assembly for approval.

Action 1.3: The Securities and Exchange

Commission of Pakistan has approved the

Securities and Exchange Commission (Micro-

insurance) Rules, 2014.

Action 2.2: The National Assembly has approved the Credit Bureau Act;

and the GOP has joined the Better than Cash Alliance Initiative.

Action 2.3: The Parliament has approved a budget law 2014/15

providing for the application of 6 statutory tariff slabs; and the MoF has

approved a Plan to achieve 4 slabs in 3-years, within a range of 1 to 25

percent for all tariff lines, allowing very few exceptions and tariff peaks to

address sensitive goods or special sectors only.

Action 2.4: As part of the implementation of its Plan for improving the

business environment, SECP, FBR and EOBI have established a virtual

One-Stop-Shop (OSS) for business registration, and a physical OSS in

Lahore.

Results indicator: An

improved system/framework

providing

availability/coverage/quality

of credit information for

consumers and SMEs by

June 2016.

Baseline: No such a system

is in place in June 2013.

Results indicator: Simple

average statutory tariff rate is

at or lower than 12 percent in

June 2016.

Baseline: Simple average

statutory tariff rate is 14.4

percent in June 2013.

PILLAR 2. EXPANDING SOCIAL PROTECTION AND MOBILIZING REVENUE

35


Action 1.4: The Ministry of Finance has

strengthened the pro-poor orientation of the BISP

through: (a) raising the basic benefit under BISP to

PKRs.1,200 per family per month; (b) issuing a

notification guaranteeing timely and full quarterly

budget releases to BISP; and (c) obtaining the

endorsement of the Chief Secretaries of the

Provinces of memoranda of understanding between

BISP and the Provinces to extend conditional cash

transfers for primary education to twenty districts.

Action 2.5: The Parliament has approved a budget law 2014/15

increasing the BISP allocation to PKRs. 97.15 billion in order to raise the

benefit amount to PKRs. 1,500/month per beneficiary, well above

inflation, and start activities to expand CCTs for primary education in no

less than 27 districts with a benefit of PKRs.250 per month per child

attending school; and the BISP has reached an implementation agreement

with each provincial/regional government on a cost-sharing arrangement

for CCTs.

Action 2.6: In compliance with BISP Act 2010, the BISP Board has

issued internal rules and regulations delineating the powers and functions

of the BISP Management and the BISP Board.

Results indicator: Number

of UCT beneficiaries who

received full benefits is at

least 5.5 million in June

2016.

Baseline: Number of

unconditional cash transfers

(UCT) beneficiaries who

received full benefits is at 4.4

million in 2012/13.

Action 1.5:(a) The Ministry of Finance has

approved the Federal Board of Revenue (FBR)

Strategy Paper containing a comprehensive tax

reform strategy; and consistent with it (b) FBR has

refrained, since July 1, 2013, from issuing statutory

regulatory orders granting special tax exemptions.

Action 1.6: The Federal Board of Revenue, as

part of the implementation of the FBR Strategy

Paper, has: (a) issued at least seventy thousand

(70,000) notices to potential tax evaders to register

and file tax payments; and (b) undertaken

provisional tax assessments of at least eight

thousand (8,000) individuals.

Action 1.7:The Federal Board of Revenue, as


Paper, has: (a) launched an information

technology-based Taxpayers Audit Monitoring

System; (b) undertaken ballot-based audits of at

least five (5) percent of total tax returns filed for

Action 2.7: The Parliament has approved a budget 2014/15 which

includes (i) a tax expenditure annex, (ii) the elimination of a set of tax

exemptions and SROs, and (iii) provision of additional tax measures for a

total revenue impact equivalent to at least 0.7 percent of GDP.

Action 2.8: The Government (a) has issued a Presidential Ordinance

containing all amendments of the corresponding tax laws to permanently

eliminate the discretion of FBR to issue special tax exemptions, making

any proposed tax exemption subject to parliamentary approval as part of

the annual budget law and/or the corresponding tax legislation; and (b) has

submitted to the Parliament such amendments as part of the Finance Bill

for the budget 2015/16.

Action 2.9: FBR has (a) issued 171,000 notices to identified potential

tax evaders to register and file tax payment, and taken administrative

and/or legal actions on at least 25 percent of the potential taxpayers who

received notices by 31 December 2014, but failed to respond to them; and

(b) selected at least 7.5percent of non-salary-including large taxpayers

(filed for tax year 2013) through ballot- or risk-based audits, and

completed audits for at least 10 percent of those selected cases.

Action 2.10: (a) Two provinces have expanded the scope of their GST

on services to increase their revenue; and (b) the provinces have increased

Results indicator: Overall

tax collection is at least

11.5percent of GDP by end-

2015/16 and no special

concessionary exemptions

issued through SROs by

FBR.

Baseline: Overall-federal &

provincial-tax collection is at

9.6 percent of GDP by end-

2012/13.

36


tax year 2012; and (c) completed at least twenty-

five (25) percent of such audits.

Action 1.8: The Federal Board of Revenue, as


Paper, has: (a) published the Parliamentarians Tax

Directory; and (b) issued national tax numbers to

all members of the Senate, the National Assembly,

and the Provincial Assemblies, and disclosed their

tax payments.

their 2014/15 budget allocations to non-salary education and health

spending by no less than 26 percent.

Action 2.11: (a) The MoF has issued a notification requiring each

drawing and disbursing officer to provide commitments details to the

Accountant General within 10 days of the month closure. The quarterly

budget releases to all department and ministries will be contingent on full

compliance with this provision; (b) the Recipient’s Controller General of

Accounts has issued a notification to disclose on its website the annual

audited financial statements for the last 5 years, and committing to disclose

future financial statements within 15 days of the date they are laid before

the Parliament; and (c) the MoF has issued a notification to disclose on its

website monthly in-year revenue and expenditure reports of the federal

government within 30 days after the month-end.

37

Annex 2 Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

P147557 - PK Fiscally Sustainable and Inclusive Growth DPC

Names Title Unit

Gabi George Afram Program Leader SACPK

Rehan Hyder Senior Procurement Specialist GGO06

Shabnam Naz Program Assistant SACPK

Saadia Refaqat Senior Economist GMF06

Sarmad Ahmed Shaikh Financial Sector Specialist GFM06

Daria Taglioni Lead Economist GTCTC

Muhammad Waheed Senior Economist GMF06

Paul Welton Lead Financial Management Spec GGO24

Jose R Lopez Calix Program Leader AFCW3

Peter J Mousley Program Leader MNC02

Guillermo Carlos Arenas Economist GTCTC

Mehwish Ashraf Economist GMF06

Irum Touqeer Public Sector Specialist GGO18

Mehnaz S Safavian Lead Financial Sector Specialist GFM07

Jeffrey Allen Chelsky Lead Economist GMFDR

Sarwat Aftab Senior Private Sector Specialist GTC06

Kiran Afzal Senior Private Sector Specialist GTC06

Ana Bellver Vazquez-Dodero Senior Public Sector Specialist GGO27

Sunita Kikeri Lead Financial Sector Specialist GFM1B

Sebastian A Molineus Director GFMDR

Gonzalo J Varela Senior Economist GTCTC

Abid Khan Program Assistant SACPK

Aijaz Ahmad Senior Public Private Partnership Specialist GCPPP

P151620 - PK Fiscally Sustainable and Inclusive Growth DPCII

Names Title Unit

Gabi George Afram Program Leader SACPK

Amjad Zafar Khan Sr Social Protection Specialist GSP06

Yasuhiko Matsuda Sr Public Sector Spec. GSP06

Saadia Refaqat Senior Economist GMF06

Sarmad Ahmed Shaikh Financial Sector Specialist GFM06

Daria Taglioni Lead Economist GTCTC

Muhammad Waheed Senior Economist GMF06

Jose R Lopez Calix Program Leader AFCW3

Peter J Mousley Program Leader MNC02

Helene Bertaud Lead Counsel LEGES

Guillermo Carlos Arenas Economist GTCTC

Mehwish Ashraf Economist GMF06

Irum Touqeer Public Sector Specialist GGO18

Antonio Velandia-Rubiano Lead Financial Officer/Sovereign Debt FABDM

Cigdem Aslan Lead Financial Officer/Sovereign Debt FABDM

Mehnaz S Safavian Lead Financial Sector Specialist GFM07

Enrique Fanta Ivanovic Senior Private Sector Specialist GTC04

Jeffrey Allen Chelsky Lead Economist GMFDR

38

Muhammad Shafiq Program Assistant GMF06

Aijaz Ahmad Senior Public Private Partnership Sector Specialist GCPPP

(b) Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only) No. of staff weeks USD Thousands (including

travel and consultant costs) Lending 171.38 555255.55 Total 171.38 555255.55 Supervision/ICR 19.17 116130.61 Total 19.17 116130.61 Grand Total 190.55 671386.16

Fiscal Years

P147557 P151620 LEN SPN LEN SPN

Weeks Amount Weeks Amount Weeks Amount Weeks Amount FY14 108.87 335383.25 3.60 22391.92 0 0 0 0 FY15 17.49 54758.84 0 0 41.81 139613.94 0 0 FY16 3.20 25499.52 0 0 0 0 11.77 71149.40 FY17 0 0 0 0 0 0 3.80 22589.40 Total 129.56 415641.61 3.60 22391.92 41.82 139613.94 15.57 93738.69 Grand Total

438033.53 233352.63

39

Annex 3. Comments on draft ICR

40

Annex 4. List of Supporting Documents

1- PK FSIG-I DPC Growth MOP

2- PK FSIG-I DPC Growth RVP Transmittal to SECPO

3- PK FSIG-I Growth Form 2337

4- PK FSIG-I Growth Signed Minutes of Negotiations

5- PK FSIG-I Data Sheet Program Document

6- PK FSIG-I Growth Program Document Final

7- PK FSIG-II DPC Growth MOP

8- PK FSIG-II DPC Growth RVP Transmittal to SECPO

9- PK FSIG-II Growth Form 2337

10- PK FSIG-II Growth Signed Minutes of Negotiations

11- PK FSIG-II Data Sheet Program Document

12- PK FSIG-II Growth Program Document Final

13- Finding the Path to Job-Enhancing Growth: A Country Economic Memorandum,

Report No 75521-PK, World Bank, 2013

14- Pakistan: The Transformative Path, The World Bank 2013

41